Monday, November 14, 2016

"Pay to Play" Schemes

Back in the 1980s, the Government brought down a huge "pay to play" enterprise in the San Francisco bay area. Buyers (purchasing agents) for several large defense contractors required prospective subcontractors (in this case, machine shop proprietors) to pay up if they expected to get any business from these primes. The machine shops had to invite the buyers over for friendly neighborhood poker games and were expected to lose large sums of money to the buyer. The size of subsequent machining orders were based on the size of their poker losses. "Do you play poker" became the code word for the buyers' expectations. One machine shop decided not to play and blew the whistle to Government investigators. The Government was never able to calculate the full impact of the scheme but cost-type contracts were increased by millions of dollars.

We don't know how often these "pay to play" schemes occur. We read about them from time to time. Government contractors should be aware that rogue elements within their organization can engage in such activities. If contract costs were increased as a result, the contractors are responsible to reimburse the Government for the impact. The chances of recovering anything from the perpetrators is slim.

Last week, the Justice Department announced a conviction in a pay to play scheme. Here's how it worked.

Tony Belcourt (a former Congressman from Montanna) had control of $85 million in federal funds. Belcourt and other tribal officials required contractors to pay kickbacks and bribes to tribal officials in order to receive contracts and contract payments for work on an Indian reservation. Belcourt was caught and is now serving a seven year sentence in Federal prison.

One of the companies that paid bribes to Mr. Belcourt, CMG Construction and its owner, was also convicted by a federal jury for wire fraud and bribery. CMG funneled more than $1 million to Belcourt through various enterprises - often labeled as donations.

Contractors must realize that, when it comes to purchasing materials and awarding subcontracts, strong internal controls are paramount. Without robust controls, contractors are relying on their employees' integrity. Trust, as we've said many times, is not an internal control.

You can read the full Justice Department press release here.

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