Conflict of Interest in Awarding Government Contracts

The Natural Resources Conservation Service (NRCS) is a small agency of the Department of Agriculture that provides technical assistance to farmers and other private landowners and managers to improve, protect, and conserve natural resources on private lands through a cooperative partnership with state and local agencies.

Mr. Dunkin was a contracting officer for the NRCS office in Little Rock, AR when he, according to the Department of Justice, awarded a contract (perhaps two contracts according to one source) to a company in which his wife had a direct financial interest. It didn't take much to raise suspicion. His wife's company, Young Enterprises, LLC, had the same address as the home where he and his wife lived.

Yesterday, Mr. Dunkin plead guilty to knowingly and wilfully awarding a contract to Young Enterprises, LLC, where multiple records showed that she was a part-owner of the company. When the contract was completed, the Agriculture Department transferred  money into a bank account jointly owned by Dunkin and his wife.

Mr. Dunkin is being charged with "Acts Affecting a Personal Financial Interest, more commonly known as "conflict of interest". When sentenced at a later date, Mr. Dunkin faces up to five years imprisonment, three years of supervised release and a fine up to $250 thousand. The actual sentencing will be significantly less. Regardless, its a sad ending to a career in Government service. Additionally, it will be the end of Government contracts for Young Enterprises LLC.

There is no indication that the work required by the contract was not adequately performed. The case seems to be a simple matter where the contracting officer found a way to enrich himself.

The DoJ Press Release did not specify how the "conflict of interest" was disclosed. Often times these cases are the result of concerns raised by whistleblowers or calls to a hotline.

Retired General Goes to Work for Contractor - Gets Nailed for Conflict of Interest

Government employees, including military service members, often develop experience and expertise that makes the attractive to companies in the private sector. If an employee is seeking post-Government employment and the employee's Government work offers the opportunity to benefit a potential employer, the public may be concerned that the employee will do that work in a way that favors the prospective employer. After leaving Government, a former government employee could make unfair use of prior Government employment to influence Government action on behalf of another person or organization.

Accordingly, the U.S. Office of Government Ethics has published extensive rules, regulations, and guidance for Executive Branch employees seeking post-Government employment and former employees engaging in certain activities after leaving Government service.

An Executive Branch employee (including military) may be affected by conflict of interest restrictions after leaving Government service. There are several legal authorities that address post-Government employment, and certain authorities contain more than one restriction. One of those restrictions applies to all former Government employees:

A former employee may be prohibited from having contact with an employee of any Federal agency or court, on behalf of another person or entity, concerning an official matter with which the former employee was involved as a Government employee.

All of this is background to an announcement yesterday from the Justice Department that a retired Air Force General agreed to pay $125 thousand to settle allegations that he engaged in conflict of interest activities after retiring.

The General retired in October 2010 and became CEO of a contractor with Air Force contracts the following February. From June 2011 to July 2012, while serving as the contractor CEO, the retired General engaged in communications and appearances on behalf of the contractor, before US officer regarding a military defense program, a program that he participated in "personally and substantially" while he was with the Air Force.

The retired General agreed to pay $125 thousand to resolve the allegations that his conduct violated conflict of interest prohibitions under federal law. The Government claims were allegations only and there was no determination of liability. Nevertheless, the guy is out $125 thousand plus plenty of legal fees.

This case is similar to one we wrote about in 2013 involving an auditor who left the Government for contractor employment and proceeded to represent the contractor in matters she was involved in during her Government employment (or so it was alleged). She settled for a paltry $5 thousand.

Government contractors, as well as the former Government employees they hire, need to know and understand these conflict of interest rules.

Personal Conflict of Interest Rules to Apply to More Contractor Employees

Back in 2010, a section was added to FAR that addressed PCIs or Personal Conflicts of Interest. At the time, we wrote fairly extensive analysis of the new provision. See for example, here and here and here. Government employees engaged in the acquisition process are bound by all kinds of regulations to help prevent personal conflicts of interest. There was great concern however that since existing regulations didn't extend to contractor personnel performing the same or similar acquisition functions, there existed an internal control weakness that might allow personal conflicts of interest to influence Government acquisitions.

So, the Government developed some regulations pertaining only to contractor employees that were, in some manner, associated with Government acquisitions. These regulations required covered employees to prepare financial disclosure statements, rules regarding prevention, training, internal audits to test compliance, disciplinary actions, and reporting.

Recently, the FAR committees issued proposed regulations to significantly expand the number of employees covered by the PCI (Personal Conflict of Interest) regulations from those engaged in procurement related activities to anyone engaged in activities that are inherently governmental. Those inherently governmental positions are listed in FAR 7.5 which contains a listing of functions considered to be inherently governmental functions or which shall be treated as such. The regulations warn that the listing is not all inclusive meaning they're giving themselves a bit of wiggle room should they decide that it is in their best interest to call a function inherently governmental. This is an extensive listing, containing 20 functions that are by definition, inherently governmental.

This expansion of an existing regulation will have a significant impact on contractors because it will greatly increase the number of personnel required to prepare financial disclosures and go through indoctrination and training. It will also increase the number of employees that contractors need to monitor though their internal audit processes and other oversight.

Its probably not possible at this point to head off the new regulation as the requirement is statutory (i.e. it is based on the 2013 National Defense Authorization Act). Nevertheless, interested parties, and that's every contractor that is potentially affected by the expansion, have the opportunity to study it and provide comments to rule making authorities.

For more information on the proposed regulation including instructions on how to comment, click here.

Department of Justice Settles Conflict of Interest Case

Here's an update to our post from March 4th of this year. In that post, we reported that the Department of Justice had indicted a former DCAA auditor for violating conflict of interest laws. According to the Department of Justice, this auditor left DCAA and went to work for Alaska Aerospace. While with Alaska Aerospace, she represented the company in a matter that she was personally involved in as a Government auditor.

Yesterday, the Alaska Daily News reported on how the case was settled.  The news article states:

An Anchorage woman, who is a former auditor for the Defense Department, was sentenced to two years' probation and ordered to pay a $5,000 fine for violating conflict of interest laws.

Jodi Ann Andres, 48, was sentenced in federal court on Monday, according to a media release from U.S. Attorney Karen L. Loeffler.

Andres broke a federal law by representing a contractor on issues she previously handled for the government.

Officials say Andres was an auditor with the Department of Defense from January 2003 to September 2006. She was the primary auditor of cost proposals, labor rates and claims for the Missile Defense Agency. But in September 2006, Andres left the DCAA to work for Alaska Aerospace as its controller.

In July 2008, Andres represented Alaska Aerospace during communications and negotiations with the DCAA about the same Missile Defense Agency contract she had previously audited. Prosecutors say this was a violation of a lifetime restriction that barred such communications.

Sounds to us like both sides of the issue wanted to close this case as quickly as possible. Two years probation and a $5 thousand fine is not all that significant, in the scheme of things.

Impairments to Independence

A number of years ago, DCAA assigned a supervisor to audit a particular contractor. The supervisor informed the Agency that he had a brother who worked for the contractor. Upon review, it was determined that there was no real or perceived conflict of interest - the brother worked for a commercial division in another city. Later, the brother was reassigned to the same division being audited by the supervisor. The contractor cam forth and challenged the propriety of the supervisor's involvement in the audit.

The first reaction was that the contractor transferred the brother purposefully as part of a scheme to have a particularly effective supervisor transferred away from his current engagement. DCAA even suggested that the contractor re-reassign the brother. Ultimately, the Agency blinked first and had to reassign its supervisor.

This is not a particularly isolated incident. Spouses, children, and other family members need jobs too and often times, find employment with government contractors. DCAA has quite a rigorous program to avoid even the appearance of a lack of independence. Auditors are required to self-disclose any real or perceived conflicts.

The Agency recently issued guidance on how to proceed when contractors lodge complaints about circumstances or behavior that indicate, or appear to indicate, auditor bias, which in turn may indicate a threat to independence.

First, the Agency must determine the credibility of the complaint. Disagreements between auditors and contractor personnel over audit issues can and do occur during audits. Such disagreements do not indicate bias or lack of objectivity. However, if the complaint is about inappropriate behavior, close relationships with contractor employees, or any of the other myriad ways in which independence could be impaired, the Agency will make an "inquiry". If, based on the inquiry there is some merit to the complaint, the Agency will initiate an investigation and temporarily, at least, remove the auditor from the affected audits.

If no significant threat to independence exists, the auditor will be returned to his/her position. If independence is impaired, either actual or in appearance, management will eliminate the threat - most likely by reassigning the auditor to another engagement.

Contractors should never hesitate to bring up potential impairments to independence to DCAA or DCMA or any other type of Government oversight to appropriate levels. Ultimately, it will help these Agencies perform their jobs efficiently and effectively.

Former DCAA Auditor Indicted for Conflict of Interest

Last week, the U.S. Attorney's office in Anchorage, AK issued a press release, announcing that an Anchorage woman was indicted by the federal grand jury in Anchorage for violating conflict of interest laws.

According to the indictment, the woman was an auditor with the Department of Defense's Defense Contract Audit Agency (DCAA) from January 2003 to September 2006. During that time, she was the primary auditor of cost proposals, labor rates and claims for the Missile Defense Agency (MDA). The MDA is the agency that develops, tests, and fields the ballistic missile defense system for the U.S.

In September 2006, the auditor left DCAA and whet to work for Alaska Aerospace Corporation (AAC) as its controller. AAC was established in 1991 by the State of Alaska to develop a high technology aerospace industry in the state. AAC became a contractor for MDA in 2003 with a five year contract to provide support for launches from the Kodiak Launch Complex in Kodiak, Alaska.

The indictment alleges that in July 2008, the former auditor represented AAC during communications and negotiations with her former Government employer, DCAA, about the same MDA contract she had previously audited, with the intent to influence DCAA about that contract. This representation, according to the indictment, was a violation of a lifetime restriction which barred such communications.

The maximum penalty for violating the conflict of interest statute, which imposes a permanent restriction against communicating on behalf of another on a matter in which the person participated personaly and substantially as a government employee is up to five years in prison and a $250 thousand fine. An arraignment date has been set for later this month.

An indictment is only a charge and is not evidence of guilt. A defendant is presumed innocent and is entitled to a fair trial at which the Government must prove guilt beyond a reasonable doubt.

You can read the full press release here.