Contractor Charged for Selling Chinese-Made Body Armor to Federal Agencies

Arthur Morgan got himself a GSA (General Services Administration) contract to supply ballistic vests, helmets, riot gear, and other items to the military and to law enforcement agencies. All GSA contracts are subject to the Trade Agreements Act which requires that all products listed on GSA contracts must be manufactured domestically or in a designated country. China is one of many countries not on the "designated country" list.

Various agencies placed orders with Mr. Morgan, nine orders in fact totaling $640 thousand. The Navy was one of those agencies that bought helmets from Mr. Morgan. The problem however was that Mr. Morgan was not manufacturing the helmets nor was he purchasing them from domestic suppliers or from suppliers in a designated country. He was purchasing them from China.

In a series of email exchanges with the Navy over meeting agreed upon delivery schedules, Mr. Morgan falsely advised the Navy that he had a factory in southern Virginia, that the helmets for the order were in production there and the the delays were due to a back-order of materials need for helmet production. However, on the same day that the Navy sent Morgan a partial payment of $127 thousand, Morgan made a payment to a Chinese company that manufactures the exact same helmet as Morgan ultimately delivered to the Navy in the amount of $68 thousand. Now that's a nice profit - based on just the partial payment amount, Morgan earned nearly 100 percent profit. We wonder what the profit percentage amounted to after the Navy made the full payment.

The scheme finally unraveled but the Justice Department is not saying how. Mr. Morgan has been criminally charged and is currently under house arrest (perhaps a flight risk?). Criminal charges do not mean he is guilty. A trial or plea agreement will determine his guilt or innocence at a later date.

The Justice Department press release on this matter can be read or downloaded here.

Man Gets 78 Months in Prison for Fraudulently Obtaining Small Business Set Aside Contracts

This is an update to a posting from last year where we reported a Federal Grand Jury indictment of a Government contractor who used companies with "straw owners" who qualified as disadvantaged individual or as a service-disabled veteran but who did not actually control the companies. See Large Contractor Awarded $200 Million in Contracts Set Aside for Small Businesses. Brian Ganos operated three construction companies with straw owners and was able to fraudulently obtain small business program certifications to with more than $260 million (up from the $200 million previously reported) in contracts to which they were not entitled.

Mr. Ganos was just sentenced to six and a half years in federal prison for his role in the scheme. The sentencing also involved fines, restitution, and supervised release after he serves prison time. See Wisconsin Man Sentenced to 78 Months for Fraud Scheme Involving Over $260 Million in Small Business Contracts.

The scheme went on for a long time - about 12 years. During the investigation, Mr. Ganos and his co-conspirators also actively engaged in efforts to conceal the scheme and obstruct investigators. Five of those co-conspirators, four individuals and one corporation, have also pleaded guilty to felony charges in connection with Ganos's scheme.

As a result of the scheme, Ganos undermined the small business programs and deprived honest small businesses of opportunities to become established. Additionally, Ganos used various means to launder proceeds of the fraud to enrich himself. He agreed to forfeiture of $2 million, a ski condo, an office building, two timeshares, and five classic cars.

$100 Thousand Overpayment Resulting from 'Alleged' Timecard Fraud

There are two fundamental ways of engaging in timecard fraud. One method is charging hours to something other than is actually being worked. This isn't that uncommon, unfortunately. It usually involves the cooperation of management at some level and a breakdown in internal controls designed to keep that from happening. Having employees charge time to a cost-type contract when they are really working on a fixed-price contract is one example.

The second type of timecard fraud is charging time but not showing up for work, or arriving late, or leaving early. One well documented case involved a Government contractor who's employees charged overtime on their timesheets but were no where to be found at the work site. The increasing trend to allow employees to work at home is concerning here and employers (contractors) need to ensure robust internal controls and ways to measure performance (remember, 'trust' is not an internal control).

An example of a case involving the second type of timecard fraud was reported by the Justice Department yesterday in one of their press releases. The case involves a subcontractor employee who worked in a sensitive compartmented information facility (SCIF). On several occassions over a two-year period, this subcontractor employee reported to her employer that she was working inside the SCIF. However, the badge reader to gain access to the SCIF showed that she was not where she said she was. As a result, investigators estimate that the Government was overcharged by more that $100 thousand. That figure is likely significantly understated.

The unusual aspect of this case is that the indictment was handed down by a Federal grand jury. Hundred thousand dollar fraud does not usually involve a grand jury. Perhaps there is some national security implications involved here. The fact that the employee was also detained pending a detention hearing also suggests that there is more involved here than just timecard fraud.

Contractor Pays $110 Thousand to Resolve Billing System Deficiencies

Eagle Alliance, a partnership involving Northrop Grumman, has paid $110 thousand to resolve FCA (False Claims Act) allegations that it improperly billed the Government for computer hardware. In doing so, the Company did not admit liability - the settlement only resolved some outstanding allegations.

Eagle Alliance had (has?) a contract to provide new computer hardware to NSA (National Security Agency). According to the settlement agreement, in 2012 and 2013, Eagle Alliance billed the Government twice for the same equipment. Moreover, investigations alleged that Eagle Alliance had billed the Government for used computer equipment as if they were new.

These allegations were filed by a former Eagle Alliance employee under the qui tam (whistleblower) provisions of the FCA. Those provisions permit private individuals with knowledge of fraud to sue on behalf of the Government for false claims and share in any recoveries. The former employee will receive nearly $19 thousand of the settlement.

As fraud cases go, this is a very small one and it seems to us like it was a billing issue rather than a scheme to defraud the Government. After all, no individual person benefited, it didn't go on for years and years, and what is $110 thousand to Northrop Grumman?

This case does illustrate the importance of maintaining an adequate billing system, especially for companies in the Government contracting environment. It also illustrates that fact that employees are aware of the qui tam provisions of the FCA and are constantly looking for transgressions that can yield a bit payday for themselves.

$18.8 Million Settlement for Winning a Contract Under False Pretense

The U.S. sells defense articles and services to foreign countries when the President finds that to do so will strengthen the security of the U.S. and promote world peace. These are called Foreign military sales or FMS for short. FMS contracts require prime contractors to be American companies and also, requires that the American companies perform a substantial portion of the work.

ABS Development Corporation is a Delaware corporation based in New York. It is also a subsidiary of Ashtrom International, Ltd. of Israel. The Army awarded an FMS contract to ABS for renovation of the Haifa shipyard in Israel without realizing that ABS was not American owned but instead owned by an Israeli conglomerate. It fact, ABS when out of its way to hide its true ownership.

To exacerbate matters, ABS didn't perform any of the work, allowing its parent company, Ashtrom, to do it all.

When the allegation of foreign ownership surfaced, investigators from DCIS (Defense Criminal Investigative Service) and from the Army CIC (Criminal Investigation Command) initiated investigations

As a result of these investigations, ABS agreed to pay $2.8 million and forgo $16 million in potential administrative claims to settle allegations it violated the False Claims Act by fraudulently obtaining FMS contracts. ABS agreed to the $18.8 million settlement without admitting liability.

More information on this case is available through the Justice Department press release.

Three Guilty Pleas in Bribery Scheme

Here's a guy that both paid and accepted bribes.

Last September, John Winslett, a construction manager for an unnamed contractor performing work at Schofield Barracks (Hawaii) pleaded guilty to paying bribes totaling more than $100,000 to two Army contracting officials in exchange in order to steer more than $19 million in contracts to his company. He also pleaded guilty to accepting $723 thousand in kickbacks from a subcontractor in exchange for assigning work to that subcontractor (online source).

The two Army contracting officials got nailed as well. Last May, an Army civilian at Schofield Barracks pleaded guilty to accepting "tens of thousands" of dollars in bribes from Mr. Winslett. in exchange for sensitive internal DoD procurement information and otherwise use his position to benefit Mr. Winslett's company (online source).

Then, most recently, a third person involved in this scheme also pleased guilty to accepting more than $100 thousand in bribes from Mr. Winslett consisting of automobiles, cash, and firearms, in exchange for favorable treatment toward the contractor (online source).

Do you know what your employees are up to? How much autonomy do you give employees to carry out the purposes of your company? Is there any accountability? Is there any oversight? Too often, company representatives that are "bringing in the business" are left alone and even heralded. Later, some of them are exposed for their less than honest dealings, like Mr. Winslett was.

The Government has similar problems - employees who accept 'gifts' or even outright bribes in exchange for steering work to a certain contractor and usually, these schemes flourish because of a lack of oversight.

Contractor Settles Overpayment Allegations for (an additional) $6.4 Million

The Air Force awarded CH2M Hill Inc two A&E (Architectural and Engineering) contracts to support construction efforts at multiple Air Force installations across the continental United States. These were T&M (Time and Material) contracts where labor costs are billed as work progresses at pre-determined billing rates. As is the nature of T&M contracts, individuals billed for various labor categories must meet minimum educational and/or experience requirements for the position being billed.

In 2014, DCAA (Defense Contract Audit Agency) conducted an audit of CH2M Hill's 2008 billings on these contracts and found that at least eight engineering employees did not meet labor qualification requirements. That prompted CH2M Hill to conduct its own internal audit where they discovered the problem was much more significant than just eight employees. Internal audit discovered more than 300 instances of unqualified labor billed against the two contracts.

In 2015, CH2M Hill notified the Defense Department through a mandatory contractor disclosure program that an external review of its billing system identified weaknesses in validating their employee's qualification requirements when billing the Air Force for work performed. An investigation ensued and ultimately, CH2M Hill voluntarily repaid $10.5 million (of which $2.2 represented interest) to the Air Force.

That wasn't the end of the story. The Justice Department kept the case open because CH2M Hill failed to notify the Government of the billing issue when it first became aware of them.

The issue was finally settled last week when CH2M Hill agreed to pay an additional $6.4 million to settle the issue once and for all. According to the Justice Department press release, CH2M Hill knew of the overpayment as early as 2011, but attempted to keep the information secret by claiming that an audit of its labor practices was privileged information. That argument didn't hold up well. While CH2M Hill did not admit to any wrongdoing , it did agree to pay the additional $6.4 million to resolve all Government claims.

Contractors are reminded that they have a contractual obligation to timely disclose to the Government in connection with the award, performance, or closeout of a Government contract or subcontract, credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations or violations of the False Claims Act and remit any significant overpayment amount.

Fines and Prison for Contractor Employee Accepting Kickbacks

How well do you know your employees? Can you vouch for their honesty and integrity? Do you have adequate internal controls to detect and prevent employees receiving kickbacks from suppliers and subcontractors? Do you have sufficient controls to ensure that employees do not have conflicts of interest with suppliers and subcontractors? Here's a case where deficient internal controls led to known losses of $1.4 million and perhaps much more.

A construction company with contracts at Picatinny Arsenal and Ft. Dix employed James Conway as a regional manager to oversee those contracts. Mr. Conway also (secretly) owned his own company, Walsh Construction. For six years up until 2015, Mr. Conway steered subcontracts to Walsh Construction. To conceal his ownership of Walsh Construction, Conway signed the subcontracts as Keith Walsh, the purported owner and vice president of Walsh Construction. There was, in fact, no person by that name who owned or was the vice president of Walsh Construction.

Conway used Walsh Construction to obtain payments from his employer by submitting invoices and bills on behalf of Walsh Construction. Many of the bills included charges for work that Walsh Construction only partially completed or for work not performed by Walsh at all.

Conway, according to the Justice Department press release covering this investigation, also accepted kickbacks totaling $180 thousand from four other subcontractors, knowing that the subcontractors expected, in return, to obtain favorable treatment from Conway.

Mr. Conway has been ordered to pay restitution of $1.4 million and will be spending the next 28 months in prison.

How could this have been avoided? A couple of easy things for starters. Someone should have been reviewing Mr. Conway's purchase order requests and verifying that the work was necessary and that the negotiated prices were reasonable and based on competitive procurements. Second, someone at the construction sites should have been reviewing invoices to validate that the services were indeed rendered. Third, the accounts payable department should have been performing three-way matches; purchase orders, invoices, and evidence of services rendered.

Obviously in this case, Mr. Conway, the regional manager, was given a lot of latitude and very little oversight in carrying out his responsibilities.

Another Government Agency Finds Deficiencies in its Internal Controls over Employee Travel Card Usage

Do you give out credit cards and travel cards to your employees? If so, how confident are you that your internal controls are working, if you have any internal controls at all? If you're like most small firms, your policies are largely based on trust. But, as you no doubt know, 'trust' is not an internal control. Trust is important in any organization, but it is not an internal control.

The Government is a major user of travel cards but audit after audit show that the Government, with all of its controls and oversight (approvers checking the travelers, managers checking the approvers, and auditors checking the managers) they still have issues and deficiencies in managing their credit/travel card programs.

The Government Charge Card Abuse Prevention Act of 2012 requires OIGs (Office of Inspector Generals) of agencies with more than $10 million in travel card spending to conduct period audits of reviews of travel card programs to analyze risks of illegal, improper or erroneous purchases and payments.

The EPA (Environmental Protection Agency) Office of Inspector General (OIG) recently completed a risk assessment of the Agency's travel card program and decided there was enough risk to merit a full audit. The OIG found employees who had been separated from service with active travel cards. They found irreconcilable differences between transactions and bank records (Citibank records in this case). The OIG found reports with 'blank' columns where data should be listed. They also found that they couldn't determine how much 'credit' was remaining on travel cards.

You might want to read how one highly trusted contractor employee used a company issued credit card to embezzle $825 thousand from his company.

You might also be interested in our article on how to improve controls over credit card usage.

Contractor Settles Double Billing Discovery for $1 Million

FAR (Federal Acquisition Regulations) limit the amount of rent or lease costs paid to related parties that Government contractors can claim under their contracts. FAR 31.205-36(b)(3) states that:

Charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control, to the extent that they do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance, are allowable.

We've written extensively on these limitations in past postings. See, for example, Rent Paid to Related Parties but we continue to find and hear about examples where contractors use bases other than cost of ownership when applying related party rental/lease payments to their Government contracts.

Earlier this month, the Justice Department announced a settlement wherein a Michigan Government contractor (and two of its employees) will pay back $1 million to resolve allegations that it did not comply with this related party rent/lease limitation. In addition, the Contractor and two of its employees are prevented from bidding on federal awards and contracts for the next three years. The company is also required to maintain an ethics and compliance program and retain a Corporate Ethics Monitor to review and report on the company's compliance with Government contracting requirements.

According to the Justice Department, GS Engineering, Inc. (GSE) double-billed the Government by fully depreciating certain data acquisition equipment, charging that depreciation to Government contracts, then transferring the same equipment to a related company at lease rates that exceeded the cost of ownership. A significant cost of ownership on most leased equipment is depreciation. GSE did this for eight years before a DCAA (Defense Contract Audit Agency) audit disclosed the practice and brought it to a halt.

This area is one in which DCAA has identified as a high audit risk area. If you are claiming rental/lease payments on your Government contracts, expect auditor queries into such payments.

Honest Services Fraud

"Honest services fraud" is a relatively new criminal statute added to the federal mail and wire fraud statute in 1988. Persons convicted of honest services fraud have been convicted of a scheme or artifice to deprive another of the intangible right of honest services.

This statute has been most often applied by federal prosecutors in cases of public corruption. The statute is limited to "fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who has not been deceived. The traditional mail fraud and wire fraud statutes are limited to schemes that defraud victims of tangible property, including money. Congress added the 'honest services' provision in 1988 to included defrauding victims of honest services. Generally, there are two main areas of honest service fraud; bribery (either direct or indirect) and failure to disclose a conflict of interest resulting in personal gain.

Anthony Daguanno was recently sentenced to a year in prison after pleading guilty to 'honest services fraud'.

The Treasury Department gives cities with blighted areas, money each year to demolish vacant houses. Detroit hired a company called Adamo to help administer the program. Specifically, Adamo assembled bid packages in response to RFPs issed by the City, communicated with subcontractors and kept track of bids submitted. Mr. Daguanno worked for Adamo and was primarily responsible for these tasks.

On numerous occasions, 'Contractor A' paid Daguanno money for disclosing confidential information about competitors' bid; information such as the lowest competitor bid which allowed Contractor A to submit a lower bid, ensuring that it got the contract. Over an eight year period, Daguanno accepted more than $372 thousand in bribes and kickbacks on 71 occasions.

As part of the sentencing, Mr. Daguanno must forfeit the $372 thousand in bribes and pay a $10 thousand fine. Read more about the case in the Justice Department press release.

Contractor Pays $500 Thousand to Resolve Allegations It Misrepresented its HUBZone Status

HUBZone (Historically Under-utilized Business Zones) is a SBA (Small Business Program) for small businesses that operate it and employ workers living (mostly) in historically under-utilized business zones. To be more specific, HUBZones are metropolitan and rural areas with low income, high poverty rates, and high unemployment rates. The program is now a little more than 20 years old. There are about 2,500 designated HUBZones in the United States. The best way to view them is with SBA's HUBZone Map. HUBZones are periodically added and subtracted from the list.

Other than being a 'small business' with majority ownership by U.S. Citizens, businesses eligible to participate in the HUBZone program must meet two important criteria.

1. the firm's principal office (the location where the greatest number of employees perform their work, excluding contract sites) must be in a HUBZone, and
2. 35 percent of the firm's total workforce must reside in a HUBZone.

The Government targets three percent of contracting be set aside for HUBZone qualified contractors. This works out to about $2 billion per year. Based on a study performed a few years back, this program has not had significant economic impact on HUBZone areas (counties, census tracts, and Indian reservations).

Most of the contracts awarded to HUBZone contractors are 'set-aside' by SBA for that purpose and often awarded on a sole-source basis. For companies operating in the HUBZone environment, getting a non-competitively awarded contract offers unique financial opportunities.

But there are some companies that have abused the system. MASS Service and Supply is one that recently came under scrutiny for falsifying records to show that at least 35 percent of its workforce resided in a HUBZone. Before the falsification of employee residences was discovered, MASS had been awarded several HUBZone set-aside contracts. MASS even went so far as to falsify spreadsheets to show fictitious employee addresses to give to Federal investigators. That wasn't too smart as it would not be particularly challenging for an investigator to confirm employee addresses.

MASS agreed to pay $500 thousand to resolve the False Claims Act (FCA) allegations that the company misrepresented its HUBZone status and lied to Federal investigators. That probably wiped out most of the company's profits earned under the HUBZone contracts. 

Prison Time for Selling Non-Conforming Parts to the Government

The owner of two companies with defense contracts will now spend the next three years in Federal prison and must also pay $8 million in restitution for selling non-conforming parts to the military for use on fighter jets and helicopters. Mr. Sobrado was convicted of a number of charges including conspiracy to commit wire fraud, conspiracy to violate the Arms Export Control Act, and income tax evasion but the root cause that precipitated all of these charges was selling non-conforming parts to the Government and certifying that they met contractual requirements.

According to a Justice Department press release announcing this sentencing, the particular contracts specified that the parts in question were critical application items for military equipment, including fighter jets and helicopters. Additionally, the contract required that these parts be purchased from one of a small group of 'authorized manufacturers'. Mr. Sobrano found local manufacturers to supply non-conforming parts at significantly reduced cost. As a result, Mr. Sobrano made windfall profits, some of which was not reported for income tax purposes.

Another aspect to this case was Mr. Sobrano's application to DoD for access to export controlled drawings and technical data on behalf of a family member's company. Access was to be restricted to U.S. Citizens and to those lawfully in the United States. The family member in question was in the United States illegally but was able to access and download hundreds of drawings that were sensitive in nature and that required special access.

Sloppy Contracting or Wasted Money?

An article appearing in the Washington Times last week questioned some of the Pentagon's contracting processes, accusing it of wasting millions.

The Pentagon's Office of Net Assessment (ONA) awarded four fixed-price contracts worth more than $1 million to Stefan Halper, a foreign policy scholar and Senior Fellow at the University of Cambridge, to study relations among the U.S., Russia, China, and India.

Based on a request by Senator Grassley to look into a whistleblower complaint that the research performed under these contracts were shoddy, the DoD's Office of Inspector General (OIG) opened an investigation of the charges.

Under these contracts, Mr. Haler would travel to various countries, interview prominent people and organize round table discussions. The problem that the OIG found was that there was no evidence that Mr. Halper did any of this. That's not to say he didn't but that there was no evidence that he did.

The reports were characterized by some as 'derivative', 'college-level', and based heavily on secondary sources. One of the studies was literally cut and pasted from a World Bank report. One of the reports listed 43 contributors, many of who denied that they contributed to the report, had been interviewed by Mr. Halper, or even knew of him. Neither Mr. Halper nor the ONA could provide evidence that he even traveled to the locations he said he did. For example, the OIG reports states:

None of the 348 footnotes in the deliverables attributed source material to an interview conducted by (Halper). ONA personnel could not provide us with evidence to show that any of these high-ranking officials contributed to Professor Halper's ... study.

The OIG audit revealed significant flaws in ONG's contract management and oversight process. The OIG criticized ONA for not following the FAR (Federal Acquisition Regulations) in awarding and administering Mr. Halper's contracts. ONA, for its part, concurred with the OIG findings and promised to have corrective actions in place by October.

By the way, Professor Halper is the same person that's been in the news lately as the FBI informant hired to spy on the Trump campaign.

The full Washington Post article can be accessed here.

American Airlines to Pay $22 Million to Resolve False Claims Allegations

It doesn't matter how big or small the company, contract fraud happens.

The U.S. Postal Service (USPS) contracts with commercial airlines for the safeguarding and timely delivery of U.S. Mail to foreign posts, including the mail sent to deployed military. American Airlines is one of those USPS contractors. USPS contracted with American Airlines to "take possession of receptacles of United States mail at six locations in the United States or at various Department of Defense and State Department locations abroad, and then deliver that mail to numerous international and domestic destinations."

To receive payment under the contract, American Airlines was required to submit electronic scans of the mail receptacles to USPS reporting the time the mail was delivered at the specified destinations. If the mail was delivered late or delivered to the wrong location, American Airlines would be penalized.

Yesterday, the Justice Department announced a settlement to a long-running investigation into American Airlines performance under the contract. The USPS's Office of Inspector General's (OIG) investigation disclosed widespread falsification of the dates and times that American Airlines said that it transferred possession of US Mail to intended recipients. Based on this investigation, the Justice Department charged American Airlines with fraud under the False Claims Act.

Under the terms of the settlement, American Airlines agreed to pay $22.1 million to resolve its alleged liability under the False Claims Act. The Government's claims are allegations only, and there has been no determination of liability.

Prison Time for Construction Equipment 'Flipper'

Here's a type of contract fraud you don't see too often.

The Federal Surplus Property Donation Program allows qualifying non-profits, municipal agencies, and disadvantaged businesses to acquire Government surplus at special below-market rates. Sometimes surplus items are free. Recipients are required to demonstrate a legitimate need for the surplus, and they must agree not to sell, lease, or rent it.

Mark Jackson and his construction company Kingridge Enterprises, Inc. were accepted into the program by falsely claiming his disadvantaged nephew owned and operated Kingridge. However, the nephew never worked for Kentridge, drew no salary, exercised no operational control, and lived more than 100 miles from the office.

Once in the program, GSA (General Services Administration) who administers it, doesn't ask too many questions. Jackson took advantage of this lapse in oversight to acquire more than $1 million in surplus property that he in turn, sold at significant profits.

Jackson gave false justifications to acquire surplus property - mostly construction equipment. One example included a CAT 621B scraper that Jackson purchased for $12,000 and sold to an out-of-state equipment dealer for $18,500. Jackson claimed he needed the scraper for a Corps of Engineers contract he had been awarded. In a four-year period, Jackson flipped more than 100 items, netting him more than $1 million in the process.

In some cases, he had his buyers sign 'sham' joint venture agreements so conceal the fraud.

Mr. Jackson has now been sentenced to fie years in prison for his flipping scheme, ordered to forfeit his million dollar profit and pay an additional $350 thousand to settle related tax deficiencies.

The full Justice Department press release can be accessed here.

Defense Contractor Pays $4 Million to Settle Overbilling Charges

Employees of civilian contractors in support of U.S. military forces stationed in Iraq and Afghanistan are normally entitled to 'uplifts' to their salaries in the form of danger pay and hazardous duty pay. Without such incentives, contractors would find it extremely difficult to meet staffing requirements in those areas - their compensation plans would not be competitive with those who do offer such benefits. Typically these uplifts are based on DSSR (Department of State Standardized Regulations) criteria (e.g. 25 percent for workers in Iraq) but in other cases, the rates are contract specific. Most of these types of contracts are cost-reimbursable so whatever allowable, allocable, and reasonable costs a contractor expends is reimbursed by the Government.

Mission First is a company providing program management, systems engineering, and information technology and communications services to the U.S. Military in Iraq and Afghanistan. Its contracts allowed the company to pay and get reimbursed for 'uplift' premiums paid to its employees stationed in those countries. As the contracts progressed, Mission First did indeed bill the Government for uplifts. However, as a subsequent audit disclosed, Mission First did not make those uplift payments to its employees.

After an investigation into the matter by the DCIS (Defense Criminal Investigative Services) and the Army CID (Criminal Investigation Division), Mission First agreed to reimburse the Government $4 million to resolve those allegations of improper billings. That amount also includes FICA (i.e. Social Security) that was billed for amounts that exceeded the statutory compensation cap for FICA calculations.

The Justice Department press release on this settlement can be viewed here.

Another "Rent-a-Vet" Scheme Discovered

In the context of Government contracting, "Rent-a-Vet" schemes are those contractors who certify that they are owned and controlled by a service-disabled veteran when they are not. The incentive to deceive is monetary - companies owned and controlled by non-service-disabled obtaining contracts that are set aside for companies that are owned by service-disabled veterans. These contracts are often thought to be lucrative since there are fewer qualified bidders but Congress knew that might be the outcome when they passed enabling legislation.

The Justice Department has prosecuted many contractors posing as service-disabled veteran owed and surprisingly, it still happens. Its got to be one of the easiest crime to uncover and prosecute. There are too many interested parties willing to blow the whistle. For one, employees know who is really running operations and some see a big payday in their futures through whistleblower actions. Competitors also know who is and is not a service-disabled veteran and a couple of bid opportunities lost to non-qualified contractor will send them to the Hotline. Government employees quickly catch on who is really in charge of a project. Contract administration, inspectors, and other oversight agencies soon catch on who is really controlling the company.

The Justice Department just announced a civil settlement reached with a New Jersey company who posed as a service-disabled veteran and was awarded millions of dollars in Government contracts. The settlement against the company's owner, Daniel Hernandez, and the company Regiment Construction Corporation, was for $2.4 million. Hernandez improperly represented that Regiment was eligible to bid on contracts set aside for companies owned and controlled by service-disabled veterans when in fact, Hernandez was not a veteran and the veteran to whom ownership and control was attributed had no ownership or control of the company.

The Justice Department press release announcing this settlement can be accessed here.

Employee Falsifies Timecard - Government is Overbilled by $220 Thousand

Here's an example of what can happen when Government contractors and subcontractors do not effectively oversee work performed by their employees. The Justice Department press release on which this post is based, pins blame on the employee who charged the Government for more hours than he actually worked. We believe that his employer is also to blame for not implementing adequate internal controls over timekeeping. This story gets a little convoluted because the Government agency involved, NSA (National Security Agency) doesn't want to name its contractors and subcontractors.

NSA awarded two contracts to a contractor (Contractor A) for information technology (IT) services. Contractor A, in turn, awarded two subcontracts, one for each of their prime contracts. These were awarded to Subcontractor 1 and Subcontractor 2. Kyle Smego was an employee of both subcontractors 1 and 2. That's a little peculiar but not unheard of. Someone may work full time for one employer and 'moonlight' with another. The problem here is that Mr. Smego wasn't working the number of hours that he claimed to be working for either subcontractor.

The subject matter of these subcontracts involved classified information and required that Mr. Smego be physically present at his assigned duty location to perform his work. Between February 2016 and May 2018, Mr. Smego reported to Subcontractor 1 that he worked 3,289 hours on their subcontract and reported to Subcontractor 2 that he had worked 797 hours on their subcontract. What Mr. Smego failed to realize however that since the work had to be performed within classified work locations, it was an easy matter to correlate timecard information with key card information. And that's what NSA did. They compared Mr. Smego's timecards with key card information and found major discrepancies - 40 percent of the hours charged were not supported by access records and he did not even show up for 119 days in which he claimed to work an average of 8 hours per day.

These 'falsified' hours were billed by Subcontractors 1 and 2 to Contract A, who in turn billed NSA. The impact was calculated at $220 thousand. Once presented with the evidence, Mr. Smego plead guilty to submitting false claims and agreed to pay restitution and forfeit any assets derived from or traceable to the offense. He also faces a possibility of prison when sentencing occurs this coming October.

There should be more to this story. What about Mr. Smego's supervisor who signed off on the timecard? What about the two subcontractors who passed the charges on to the prime contractor? Where were their internal controls over timekeeping, labor distribution, and billing?

Contractor Pays $4.2 Million to Settle False Claims Allegations

Vance Air Force Base is located in Oklahoma about an hour and a half drive north of Oklahoma City. It is and always has been since it opened in 1941 a base for training Air Force pilots. Base support activities including aircraft maintenance, airfield management, aircrew life support and base operating support is contracted out. From 2009 to 2014, PAE Applied Technologies, LLC (PAE) held the contract on a cost-reimbursable/award fee basis.

The Government has alleged that during the time it held the contract, PAE systematically overcharged the Government for work performed by claiming worker wages in excess of the wage caps specified in the contract. This, according to the Government, amounted to false claims.

The Government got wind of the alleged fraud when a former whistleblower filed a lawsuit under the qui tam, or whistleblower, provisions of the False Claims Act. Qui Tam actions permit private individuals to sue on behalf of the United States for false claims and to share in the recovery. The Act also allows the government to intervene in the lawsuit. In this case, the Government intervened. The hope of most whistleblowers is that the Government will intervene. To pursue the suit privately would be cost prohibitive.

The Government and PAE reached a settlement without having the matter go to trial. Under the terms of the agreement, PAE will pay $4.2 million to settle the civil claims arising from the allegations. In reaching this settlement, PAE did not admit its liability, and the United States did not concede that its claims lack merit. The agreement allows both parties to avoid the delay, expense, inconvenience, and uncertainty of litigating the case.