Yesterday we published a primer on performance bonds as they relate to construction contracts awarded by the Federal Government. Click here to read it. One point we made is that a performance bond (or surety bond) on any construction contract over $100 thousand is absolutely required and must be approved by the contacting officer. The Treasury Department maintains a listing of certified sureties. If you stick with one of these, you probably won't get burned. However, the fraudsters are out there trying to peddle instruments that are not from approved sureties.
Here's a case in point. Earlier this week, the Justice Department posted a news release announcing that an individual had been sentenced to more than four years in prison for operating a multi-million dollar surety bond fraud scheme. This scheme resulted in financial losses, created delays in construction projects, and compromised bids allowing some contracts to be awarded to unqualified construction companies. You can read the press release here.
The defendant lied to contractors and Government agencies about his qualifications to issue surety bonds. For about a year up until July 2013, the defendant used several corporations to sell fraudulent surety bonds on construction projects. He held himself out to contractors and government agencies as having the authority to execute or issue surety bonds on behalf of the Federal Insurance Company and Pacific Indemnity Company (both Treasury approved sureties). He created fraudulent surety bonds, embossed the bonds using a counterfeit seal and forged the signatures of individuals from legitimate companies. Ultimately, he issued bonds with a face value of more than $100 million and received premium payments of more than $2.2 million.
In one instance, the defendant sent a letter on forged Pacific INdemnity letterhead and had a telephone conversation confirming validity of the Pacific Indemnity bonds with a Navy contracting officer. The Navy approved the bonds based on the forged letters and conversation with Campbell. That one bond netted him a $374 thousand premium. Not a bad payday for fake letter and a 10 minute phone call.
It is unlikely that any of the defrauded contractors will be able to collect damages. Most surety con artists simply pick up and move to other locations and other markets or change their names or company names and stay in business.
For contractors trying to cut costs, it might be tempting to respond to internet offers of cheap premiums. But beware of the risks. You might be better off by soliciting quotes from several of the "approved" sureties that are certified by the Treasury Department..