Senator Rand Paul Releases Fall 2019 Edition of "The Waste Report"

Late last month, Senator Rand Paul, who is also the chairman of the Federal Spending Oversight and Emergency Management Subcommittee for the Homeland Security and Governmental Affairs Committee, released the Fall 2019 edition of "The Waste Report". This periodic report looks at how the Government spends taxpayer dollars and identifies eight examples of wasteful spending totaling $230 million. Outside of salaries and wages, social security, medicare, and other social program payments, the primary vehicle for the Government's spending is through contracts and grants. The eight examples of wasteful spending in this current report are rooted in Government contracts and grants. Here's a couple of examples.

The Government purchased textbooks for Afghan schoolchildren to develop, implement, and scale up a nationwide early grade reading curriculum and instruction program. An audit by the Office of Inspector General for Afghan Reconstruction found that the textbooks had significant quality deficiencies, such as loose or blank pages, misspellings, and low-quality paper. A few hundred thousand were still sitting in warehouses but the OIG learned that there were no plans to distribute them. Moreover, many schools reported that because of the poor quality, the books were no longer in usable condition. The grantee responsible for printing and distributing the books blamed parents, students, and school officials for the problem of books falling apart.

The NIH (National Institute of Health) has spent $4.6 million studying the connection between drinking alcohol and winding up in the emergency room. The connection between drinking and driving should be common sense but NIH doesn't trust common sense and doled out money to study the connection between drinking alcohol, hurting yourself or somebody else, and winding up in the ER. So what have scientists concluded? That there is a correlation between drinking and getting hurt. Who in the Government thought that spending $4.6 million for this study was an good use of taxpayer dollars?

The Waste Report is only 16 pages and makes some interesting reading. Don't blame the contractors though. They're just providing a service for what the Government wants to buy.

Federal Fumbles - 5th Edition

Oklahoma Senator James Lankkford has released the fifth volume in his Federal Fumbles series. These publications report on specific examples of wasteful federal spending and regulations that lead to wasteful spending.

This particular edition gives a lot of coverage to the "broken budget process" and the need to end Government shutdowns once and for all. That would be a goal that any Government contractor can endorse as Government shutdowns and the threat of shutdowns play havoc with the orderly conduct of contract performance.

Not every example in Volume 5 is related to wasteful contract spending. A lot of it relates to grants for questionable research (like $1.7 million to Russia to study the Steller seal lion in Russia or $114 thousand to study corporations that existed in Russia prior to the 1917 revolution). Some of the identified waste is not exactly spending but tax loopholes where the alcohol industry, racehorses, movies, and NASCAR have tax breaks written into the tax code. And then there's the Puerto Rican death scam where beneficiaries of social security recipients keep receiving social security payments after the recipient has died because Puerto Rico will not share death information with the Social Security Administration.

On the contracting side of wasteful spending, the report identifies a number of issues related to the Government's propensity to buy COTS (commercial off-the-shelf) items. In a number of cases COTS are lower priced but also lower quality and not equipped to do their intended jobs. The report sites one example where NSSA (National Nuclear Security Agency) purchased $5 capacitors for its nuclear weapon modernization program before finding they didn't meed quality control standards. The fix? Replacing the $5 capacitor in 370 nuclear weapons at a cost of $725 million. Also cited in the report is the Air Force expenditures related to keeping decades-old aircraft flying. Many parts are not longer in production so the Air Force needed to re-engineer those parts at significant cost.

FEMA (Federal Emergency Management Agency) gets special coverage for its "promptness over integrity" behavior. Just because FEMA is efficient in getting money out the door in the aftermath of disasters, doesn't mean that the money is being spent efficiently, effectively, or economically. This report recommends more training be given to FEMA employees on ways to detect fraud, wast, abuse, and how to reduce improper payments.

You can read this latest edition of Federal Fumbles as well as the four previous editions here.

Federal Fumbles - 4th Edition

Oklahoma Senator James Lankford has released the fourth volume in his Federal Fumbles series which focus on Government waste. This edition however focuses more on examples of Government policy that prevents the Government from working for the taxpayer - or, in the case of the longest shutdown in American history, working at all - than it does on examples of wasteful Government spending.

Here are just a few examples wasteful spending chronicled in the book:

• $50 thousand to a professor to study the Russian wine industry
• $725 thousand to teach kids how to play mariachi instruments
• $1.7 million to the City of Los Angeles for a series on "Craft in America" featuring Christmas decorations at the largest privately owned home in the US.
• $8.8 billion designated for telecommunication infrastructure in poorly connected, mostly rural areas that were instead, used to add 'features' to already existing infrastructure.

One area that should be of interest to Government contractors is the Government hiring process. This impacts many agencies that contractors interact with including contract procurement, administration, and oversight. According to the study, it takes an average of 106 days to hire a federal employee. This, of course, makes it difficult to attract, recruit, and hire the necessary talent for agencies to perform its mission. Most qualified candidates are not going to wait around four months without a paycheck. They'll find someplace else to work. By comparison, the average length of time it takes to hire 'professionals' in the private sector is just 23 days.

Here's an example that should put one particular contractor to shame. The VA (Veterans Administration) paid a contractor $30 million for IT upgrades that ultimately failed to solve whatever problem it was designed to cure. The upgrade failed but the contractor netted a tidy profit on the work.

Although significantly fewer regulations are being issued now than under previous administrations, the Federal Register is still 61,000 confusing pages. One recent Interior Department regulation took 2,500 words to say that the federal law for hinting on national park land in Alaska should be the same as the current State law.

You can read this latest edition of Federal Fumbles as well as the three previous editions here.

Inspector General Finds Billing Irregularities at EPA

The Office of Inspector General (OIG) for the Environmental Protection Agency (EPA) received a hotline complaint regarding possible irregularities with contract invoicing and payments on a particular contract that provided EPA with a broad range of information technology and information management technical and professional services (Task Order 12). This was a large cost plus fixed fee task order that grew from $100 million to over $1.2 billion by the time it ended in 2017.

 As a result of the hotline tip, the OIG conducted an audit to determine whether Task Order 12 had effective controls over billing and funding to prevent fraud, waste and abuse. The audit found a number of deficiencies including:

• Required contractor performance reports were not finalized
• There were no official contract or task order modifications for some of the Contracting Officer (CO) and Contracting Officer Representative (COR) changes
• COR appointment memorandums were missing
• COs did not perform required periodic invoice reviews.

The last cited deficiency, failure to perform invoice reviews, gets the most attention and has the highest potential for overbilling the Government. FAR and EPA regulations require that invoices be thoroughly reviewed prior to payment. Despite this requirement, there was not documentation to show that invoices were adequately reviewed prior to payment. As a result, the OIG concluded that EPA did not have reasonable assurance that costs or fee billed under Task Order 12 were allowable, allocable and reasonable. In fact, in its limited sampling, the OIG found more than $5 million in overbilling. Some of the overbilling issues would have been caught had EPA done its required invoice reviews such as where fee was billed at eight percent when the contract limited fee to six percent.

The OIG made seven obvious recommendations (e.g. do a better job, follow regulations, etc) to which the EPA concurred (obviously). The full OIG audit report is available here.

Product Substitution Case is Settled

Ten years ago, the Treasury Department created TARP (Troubled Asset Relief Program) to help stabilize the economy during a financial crisis. Eight years ago, the Treasury Department created the BEP (Blight Elimination Program), one of several TARP programs. The BEP funded the demolition of abandoned and blighted residential properties in certain cities, including Fort Wayne, Indiana.

The City of Fort Wayne was a BEP program partner, using Federal funds to demolish houses in blighted areas of the city. One of the contractors hired to perform the demolition work was a company called Martin Enterprise, Inc.

Under the terms of the contract, Martin was required to fill in excavation sites with clean fill dirt. Instead of using clean fill dirt, Martin figured that it could save a lot of money by filling the excavation sites with construction debris. That was a problem. First of all, construction debris might contain hazardous materials which of course, public safety would be jeopardized. Secondly, the Government paid for clean fill dirt, not construction debris.

Somehow Martin got caught. The Justice Department press release on the matter did not disclose how Martin was caught. It could have been a site inspector (highly likely) or a whistleblower (less likely, in this case).

In order to settle False Claims charges for fraudulently submitting claims for work not performed properly, Martin agreed to pay the Government $61 thousand.

The Government had a lot of choice words for Martin:

• dishonest
• ill-gotten gains
• put residents and communities at risk
• fleecing taxpayers
• seek to enrich themselves

To read the full Justice Department press release, click here.

AFCE's 2018 Report on Fraud

Frequent disclosures of fraud, waste, and abuse in Federal Government contracting tend to make headlines but certainly those nefarious activities are not limited to the Federal Government. States, municipalities, counties, and essentially every organization with fiduciary responsibility for public funds have their share of scandals. While such scandals might make a local news site, they rarely rise to the level of national interest. What makes a better story, the Air Force ordering two refrigerators for Air Force One for $24 million (since cancelled) or a city manager in Topeka taking an unauthorized trip to Wichita or a contractor in Twin Falls being the victim of embezzlement.

The ACFE (Association of Certified Fraud Examiners) periodically publishes an analysis of occupational fraud. Its not comprehensive because it is based on information that comes from its members who were involved in the investigations of the cases. Even with this limited population, the 2018 report covers nearly 2,700 investigations conducted between January 2016 and October 2017. Here are some highlights.

• 40 percent of corruption cases were detected b y a tip. For organizations with a hotline, 46 percent of cases were detected by a tip. For those without a hotline, only 30 percent came from tips. Organizations must make a point of establishing mechanisms that encourage employees to come forward. Hotlines and guaranteed anonymity are good starting points.
• Internal control weaknesses were responsible for nearly half of frauds. Now you Government contractors understand the Government's emphasis on strong internal controls.
• Median losses are far greater when fraudsters collude.
• Small businesses lost almost twice as much per scheme to fraud than large businesses ($104 thousand per scheme for large businesses vs $200 thousand per scheme for small businesses. This is not surprising as small business have fewer resources to invest in internal controls.
• 85 percent of fraudsters displayed at least one behavioral red flag of fraud.
• A majority of the victims recovered nothing.
• Only four percent of perpetrators had a prior fraud conviction.

 If you're not taking the prospect of fraud within your organization seriously, you are at risk of financial loss. Can you afford a $200 thousand loss - the average loss for small businesses covered by this survey? The full report can be found here.

Steganography Used to Steal Trade Secrets

Steganography is the practice of concealing a file, message, image, or video within another file, message, image, or video. It includes the concealment of information within computer files. In digital steganography, electronic communications may include steganographic coding inside of a transport layer, such as a document file, image file, program or protocol. Media files are ideal for steganographic transmission because of their large size. For example, a sender might start with an innocuous image file and adjust the color of every hundredth pixel to correspond to a letter in the alphabet. The change is so subtle that someone who is not specifically looking for it is unlikely to notice the change.

Steganography software is readily available and usually free. So is software for extracting the hidden files. But, as Mr. Zheng found out, software for detecting the presence of hidden files is readily available.

The Justice Department announced yesterday that a criminal complaint was filed and an arrest made in connection with a steganography case. According to the complaint, Mr Xiaoqing Zheng, an engineer employed by General Electric, used steganographic tools to remove files containing GE trade secrets involving its turbine technologies. Specifically, Zheng hid these data files into innocuous looking digital picture of a sunset and then emailed the digital picture, which contained the GE files, to himself at his private email account.

Mr. Zheng, if convicted of these crimes, faces up to 10 years prison, fines, and supervised releases. Of course sentencing is rarely meted out at maximums. He certainly lost his job and is probably not employable in any position of trust it the future.

The Justice Department did not disclose how the hidden file was detected but it doesn't take too much imagination to think that GE utilizes steganography detection tools on incoming and outgoing email traffic.

Cities and Municipalities Have Contracting Problems Too

We tend to focus our blog writings on Federal Government procurement but states, counties, and municipalities and their contractors face pretty much the same contracting challenges as the Feds. In some respects, they face even more challenges since many do not have contracting professionals nor adequate resources for contract oversight. While they're not buying major weapon systems (we hope), contracted services represent a significant portion of cities' budgets.  Purchasing decisions often rest with a single person with little, if any, internal controls or checks and balances to prevent or deter fraud, waste, or abuse. The vesting of responsibility with just a few individuals and the lack of adequate oversight is why cronyism tends to fester in many localities. Here's an example of what we're talking about.

The City of San Diego has a living wage ordinance that took effect back in 2006. It requires employers working within City limits to pay a "living wage" that is adjusted annually based on inflation. The current living wage is $14.95 per hour.

Prizm Janitorial Services was pretty successful in getting Government contracts. Since 2010, the firm had been paid $3.4 million by various Government agencies and municipalities for cleaning offices, rest rooms, etc. Based on hotline complaints, the Government conducted a couple of audits in 2014 and 2016. These audits disclosed a number of repeated violations of San Diego's living wage ordinance and other labor laws, including:

1. Prizm violated the living wage law by making all of its workers independent contractors rather than employees.
2. Prizm paid some employees in cash with handmade receipts. It didn't provide itemized pay stubs as required by state labor laws
3. Prizm claimed it didn't know or employ many workers whose name were listed on signup sheets as those doing work for Prizm.
4. Prizm failed to provide requested records inviolation of a city code and interfered with the investigation.
5. Prizm's address is a mailbox at PostalAnnex.

Prizm repaid back wages and social security liabilities, refunded the City for overpayments, and paid State required sick leave.

Despite all of these issues, another city close to San Diego, the City of Carlsbad, just awarded Prizm a $2.7 million contract over six years to clean city facilities and park restrooms. When asked about the San Diego problems, Carlsbad spokesperson declined to comment. Why? San Diego reported that it does not routinely share its problems with other cities. Why? From an audit and investigative standpoint, this situation certainly raises red flags. Could there be more here than meets the eye?

Now That's a Lot of Copy Toner

Accenture is a pretty big company. It is a professional services company providing a range of services like strategy, consulting, digital, technology and operations. It has more than 400,000 employees throughout the world and its sales exceeds $30 billion annually. Among its customers are various components of the U.S. Government.

The Justice Department just announced that one of Accenture's segments, Accenture Federal Services LLC has agreed to pay $1.7 million to settle overcharges billed to a GSA (General Services Administration) multiple award schedule contract and more specifically, to the U.S. Army Contracting Command who purchased those services under the GSA schedule.

This agreement follows a self-disclosure by Accenture to the Army Contracting Command. Accenture's internal investigation found that it had overcharged the Government because of unauthorized purchases of copy toner that had been surreptitiously made by a subcontractor on the contract.

Accenture's disclosure to the Army was made pursuant to Accenture's Contractor Code of Business Ethics and Conduct, a requirement of FAR (Federal Acquisition Regulations). During the investigation by the Army's Criminal Investigation Command, Accenture provided assistance, as also required by FAR.

For more information on the Government Contractor Disclosure Program and to understand the requirements, click here. These requirements apply to Government contracts greater than $5 million. If your unsure about its applicability, search your contract for FAR Clause 52.203.11, Contractor Code of Business Ethics and Conduct.

What is "Waste and Abuse"?

We here the term "fraud, waste, and abuse" frequently and we ourselves use it often on these pages. The word "fraud" is well understood but what about the other two elements of this triad; waste and abuse? The GAO's (Government Accountability Office) Yellow Book (i.e. Government Auditing Standards) includes the following definitions for Waste and Abuse.

Waste is the act of using or expending resources carelessly, extravagantly, or to no purpose. Waste involves the taxpayers not receiving reasonable value for money in connection with any government-funded activities because of an inappropriate act or omission by parties with control over or access to government resources. Importantly, waste can include activities that do not include abuse and does not necessarily involve a violation of law. Rather, waste relates primarily to mismanagement, inappropriate actions, and inadequate oversight.

Abuse is behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances, but excludes fraud and noncompliance with provisions of laws, regulations, contracts, and grant agreements. Abuse also includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate. Because the determination of abuse is subjective, auditors are not required to perform procedures to detect abuse in financial audits. Auditors may discover that abuse is indicative of fraud or noncompliance with provisions of laws, regulations, contracts, and grant agreements.

You can see that there is a fair amount of subjectivity in determining whether waste or abuse exists, more so for abuse than waste. That is why there is no specific reporting requirement for Government auditors for situations involving abuse unless that abuse also involves fraud or noncompliances with laws, regulations, and contracts. The reporting requirements for instances of waste however is another matter.

The 2017 Exposure Draft for the Yellow Book update will require that auditors perform audit procedures to ascertain the potential effect on the audit objectives if they become aware of waste that could be quantitatively or qualitatively significant to the audit objectives.

Then, based on these expanded audit procedures, the audit is required to report findings of waste when they conclude, based on sufficient, appropriate evidence that instances of waste have occurred. If the waste is not significant to the audit objective, the auditor is still required to communicate the information back to the contractor person charged with governance.

Since contract auditors will now have an affirmative duty to design audit procedures to determine whether "waste" exists, once the Exposure Draft becomes final, Government contractors will no doubt experience a significant uptick in the efforts by contract auditors to determine whether waste exists and, if so, whether it is significant. It will be interesting to see how DCAA (Defense Contract Audit Agency) or other contract auditors will implement this new requirement.

Federal Fumbles - Vol. 3

Oklahoma Senator James Lankford just released "Federal Fumbles Vol  3, One Hundred Ways the Government Dropped the Ball". This represents his third annual edition of this football themed publication. You can read our coverage of Volumes 1 and 2 by clicking here for the 2015 version and here for the 2016 edition. To download all three editions, visit Senator Lankford's dedicated webpage..

The latest publication documents 100 new examples of wasteful, duplicative, and inefficient use of tax dollars. Many, perhaps most of the examples are rooted in wasteful contracts and grants because those are the mechanisms for spending Government funds. But as in past years, Lankford is not necessarily calling out Government contractors and grantees for wasteful spending, the root problem lies in the layers of Congress and bureaucracy making the decisions that certain things would be a wise use of taxpayer funds. Many of the 100 fumbles boarder on the humorous and would be if it weren't for the realization that these are monies that could be spent on real needs of the country.

Here are just a few examples of what you can find in this report.

1. A NSF (National Science Foundation) project to determine the public services provided by the Icelandic government to the 600 Syrian refugees arriving in their country.
2. In 2007, the Air Force began a project to upgrade its Air Operations Center. After delays and cost overruns, the Air Force terminated the uncompleted project after spending $745 million. The Inspector General blamed the problem on the contractor.
3. The National Archives decided to digitize 250 hours of video taken at a New York theater in the 1970s. The cost came to more than $400 per hour of film digitized.
4. The Department of Energy paid an employee $138,000 to pursue a law degree (unrelated to his job) whereupon he immediately left for a job in the private sector.
5. The NIH spent $1.6 million on research to discover that people paid to lose weight tend to lose more weight than those not paid to lose weight.
6. The IRS spent $12 million to upgrade its email system. The upgrade never worked and was subsequently trashed.
7. The Navajo Nation has received $803 million in block grants over the past 10 years to build homes for their members. They've built 1,110 homes which works out to $720,000 per house.
8. The Federal Government spent $91 million in 2015 to administer the federal grazing program but collected only $14.5 million in grazing fees. They charge a fraction of what states charge.

Senator Lankford say's that he is hopeful that Agencies be forced to make more responsible decisions. We don't know if that will ever happen but the report does make some fun reading. Print out a copy and put it where you keep your copy of "Chicken Soup for the Soul".

Fraud Friday - Government Employee Solicited and Accepted Bribes from Contractor

Now they're both in a heap of trouble.

There is not that much different in the relationship between a Government contracting officer and his contractor and that of a purchasing agent and his suppliers. In both cases, management places a great deal of trust that the person will act with integrity in carrying out his duties - namely buying at the best possible prices and terms. Trust is crucial but is not a substitute for good internal controls.

One reason we discuss allegations of contract fraud on these pages is to examine what went wrong in a given situation, what internal controls were nonexistent or were not adequate to prevent. We know from research that within a five year period, most small businesses will be affected by occupational fraud. And we also know that where there is a financial need, an opportunity, and rationalization, fraud is more likely to occur. So one way to prevent (or reduce) the occurrence of fraud is to take away the opportunity and that means implementing a robust system of internal controls.

So consider the recent Justice Department press release announcing the arraignment of Elvis, a supervisor with the U.S. Food and Drug Administration (FDA) and a business owner named Ivan on charges of bribery and kickbacks. Although this occurred at the FDA, it could have occurred in any governmental or contractor organization.

Elvis was the senior facilities officer at FDA's Atlanta field office and in that role, influenced the selection of businesses that perform building maintenance work. Ivan was the owner of P&E Management, a firm that performed building maintenance work. Ivan need work to sustain his company and Elvis was there ready to give him work ... for a price.

According to the press release, Ivan gave Elvis a debit card tied to Ivan's bank. Elvis used this card for shopping sprees, vacations, and dining out. On one occasion, Elvis used the card to pay for official government business trip and later sought reimbursement from the Government for that trip. To top it off, Ivan bought Elvis a Cadillac Escalade worth somewhere in the neighborhood of $80 thousand.

This bribery/kickback scheme went on for six years before it was discovered. We don't know how it was discovered - whether someone blew the whistle or perhaps an internal audit review. For the same firm to win contracts time after time over an extended period of time is inherently a red flag. But we know that there was a massive breakdown in internal controls that allowed this to happen and to persist for such a long time. It seems that Elvis had the ability to spend the Government's money without any oversight at all. And, if we've come to understand Government procurement regulations at all, we know that is not the way procurement is supposed to be done. Government procurement is characterized by market research, solicitations, evaluations, selections, negotiations, review and approvals accompanied by mountains of paperwork. For one person to wield so much power and influence to circumvent all of these controls suggests an internal control breakdown.

So how did Elvis circumvent the controls? Elvis always kept his purchases of building maintenance services under the micro-purchase threshold (currently set at $5,000) where speed and efficiency can streamline the procurement process but can also be easily exploited by persons such as Elvis.

You can read the entire Justice Department press release here.

Memo to Employees: Save All Information Related to Time Charging

The Department of Energy is building a $17 billion vitrification plant at its Hanford site in order to turn 56 million gallons of radioactive waste into a stable glass form. The waste is left from the cold war production of plutonium for America's nuclear weapons program. The contract is cost reimbursable and projected costs have grown significantly over its initial budget.

A recent article appearing in the hometown newspaper, the Tri-City Herald, stated that the paper had obtained copies of emails sent to workers at the vitrification plant instructing them to preserve all information and emails regarding charging for labor, recording time worked, overtime and related matters. The article went on to not that the preservation request was related to a civil investigative demand issued by the Justice Department to the prime contractor on the project, Bechtel National (see Feds may be investigating timecard issues at Hanford vit plant for the complete article). We're not sure what types of timekeeping records might exist. The company uses an electronic timekeeping system and employees do not normally retain paper.

This sounds serious though. Another email from a Bechtel attorney instructed employees that if they were contract by federal investigators they could speak with them, they could decline to speak with them, they had a right to have their attorney present, or could request that a Bechtel attorney be present.

The Justice Department, the Department of Energy, and Bechtel all declined comment on the matter (of course).

There have been serious timecard problems among contractors at Hanford. In 2013, one contractor paid $18.5 million to resolve civil and criminal allegations of defrauding taxpayers through timecard fraud. Earlier this year, another contractor forked over $5.3 million to settle allegations of timecard fraud.

Former Contracting Officer Accused of Accepting $3 Million in Bribes

For the past 10 years, the U.S. Army has been upgrading Camp Humphreys to be its new flagship installation in South Korea. The bulk of U.S. forces and civilians stationed in South Korea, including those stationed at the current Eighth U.S. Army Headquarters in Yongson (Seoul) will be relocated to Camp Humphreys once the upgrades are completed. This will allow U.S. Forces to consolidate its footprint from more than 100 installations throughout South Korea to less than 50. Camp Humphreys has the added benefit of being located beyond the range of most of North Korea's 14,000 artillery pieces.

To call this project an upgrade significantly understates the scope of what is happening. The cost has been publicly acknowledged at  $13 billion but probably exceeds that by a significant amount. Its size exceeds that of Washington D.C. It will house 36,000 service members, dependents, civilian employees and contractors. It's an entire city with hospitals, schools, shopping, and recreation facilities including a golf course.

With a cost projected at $13 billion there are plenty of opportunities for fraud, waste, and abuse in and among contractors working on the project and the Army Corps of Engineers in charge of the project and related contracts. The Justice Department just announced charges in one case.

A former contracting officer for the Army Corps of Engineers and a former officer in the Korean Ministry of Defense were indicted for their roles in a scheme to direct over $400 million in DoD construction contracts to a South Korean construction company in exchange for $3 million in bribes. One has to believe that the expected profit on $400 million had to be significant in order to offset more than $3 million in bribes.

The former Corps of Engineers contracting officer, currently living the good life in Hawaii, has been charged in a nine-count indictment with mail and wire conspiracy, bribery, wire fraud, conspiracy to commit money laundering, and making false statements.

Between 2008 and 2012, the contracting officer solicited bribes from a large Korean engineering and construction company in exchange for directing contracts to the company related to the relocation and expansion of Camp Humphreys.

The former COE contracting officer hid the bribe money by purchasing real estate and putting it in bank accounts in the names of others, including two girlfriends. He quit his job with the Corps in 2012 and began lobbying the DoD for construction projects on behalf of the company that paid him the bribes.

You can read more in the Justice Department press release here.

The Bonus for Cost Cutters Act of 2017

A Bill that would authorize the head of a federal agency to pay a cash award to federal employees who identify unnecessary expenses (i.e. waste, fraud, and abuse) resulting in cost savings for the agency has been introduced in the House and referred to the Committee on Oversight and Government Reform. The maximum amount of the bonus would be $20,000 and certain Government employees would not be eligible including (i) an officer serving in a position at Level I of the Executive Schedule, (ii) the head of an agency, (iii) anyone employed by the Office of the Inspector General, and (iv) a commissioner, board member, or other voting member of an independent establishment.

The Congressional Budget Office (CBO) issued its report on this legislation, noting that there would be no significant additional cost to implement the bill since there are many tools at the Government's disposal under current law to report waste and mismanagement of funds. However, the CBO also said that it wouldn't do much to help reduce wasteful spending because there would be no significant reduction in federal spending because of increased identification of wasteful or fraudulent spending as a result of enacting the bill. The CBO is probably correct. The Government has a lot of priorities and if funds are not spent somewhere, they'll be spent somewhere else. The CBO failed to note however that money spent on wasteful projects means that something else will not get funding.

In the context of this bill, the term "unnecessary expense" means amounts identified by an employee as unnecessary that the CFO of the agency determines are not required for the purpose for which the amounts were made available and the rescission of which would not be detrimental to the full execution of the purposes for which the amounts were made available.

The "unnecessary expenses" would be deposited in the Federal Treasury to reduce the Federal deficit. The agency can retain up to 10 percent of the funds to pay for the cash awards or for other uses of the agency (consistent with other provisions of the law).

There is some concern that this bill, if enacted, could affect contract awards and contract funding - especially funds remaining at year end when the Government slips into its annual "spend it or lose it" ritual - where the Government will spend money on anything as long as it gets spent on something. Many of the "wasted" projects lambasted by Senator Flake in "Porkemon Go" or Senator McCain in "America's Most Wasted" or Senator Lankford in "Federal Fumbles - 2016 Edition" may not have received funding had a bonus incentive been in place at the time someone in the Government decided it was worthwhile to spend money to see if dinosaurs were able to sing.

$2 Million Settlement in Small Business Subcontracting Fraud

The Department of Justice (DOJ) announced last Friday a partial settlement in a case involving questionable subcontracting practices by an Energy Department contractor and one of its subcontractors. The investigation is ongoing but one of the parties agreed to pay $2 million to resolve its part of the case.

The DOJ press release can be found here while a newspaper article with more detail can be read here.

Government contracts and subcontracts contain small business subcontracting goals. Although in most cases, contractors make diligent attempts to meet those goals, there is no real penalty for not meeting them. Except in the case of some DOE contracts. DOE is known to base a portion of award fees on contractors' successes in meeting those goals.Therefore in those cases, failure to meet those goals has a direct impact on profits.

In this case, the prime contractor was Washington Closure Hanford (WCH). The Federal case against that company continues. One of its subcontractors was Federal Engineers & Constructors (FE&C). Although admitting no liability, FE&C settled with the Government for $2 million to resolve its part in the affair.

FE&C, in turn, awarded two subcontracts totaling $19.5 million to a third company called Sage Tec cleanup work at DOE's Hanford site. Sage Tec is a small, woman-owned business and awarding $20 million worth of subcontract to a small woman-owned business counted significantly toward both WCH and FE&C meeting their small-business goals.

Things began to unravel when another woman-owned small business, Savage Logistics, called foul. Its owner, Salina Savage, filed a whistleblower suit claiming that Sage Tech was a front company and had no relevant experience, no equipment, and no employees other than its owner.

Turns out that was true. When FE&C awarded the first subcontract to Sage Tec, Sage Tec had no experience, equipment, or employees. When it awarded the second subcontract three years later, Sage Tec still had no employees or equipment although by then it must have had a little bit of experience.

So how did Sage Tec pull off $20 million worth of subcontracting without any equipment or employees? Easy, it "rented" trucks from its prime contractor, FE&C, and used FE&C employees to drive those trucks. So, Sage Tec certainly looks like a front company. It probably doesn't seem helpful to know that the owner of Sage Tec was also the wife of an FE&C Vice President.

For her part in blowing the whistle, Salina Savage gets $470,000 of the $2 million settlement. Also, FE&C agreed to reimburse her for $100,000 in attorney fees.

Debarred But Still Selling Under Shell Companies

Company and company president get debarred from Government contracting for selling defective parts to the Air Force. Then, the president promptly sets up several new companies, obscures his involvement/ownership and keeps on selling defective parts. How often does this happen? Probably more often than we think and certainly more often than we know about.

For 10 years, from 2003 to 2013, Aerospec, Inc. sold fasteners (e.g. rivets) to the Air Force. Somewhere along the line, the company started selling fasteners that did not meet specifications. Given that these fasteners were used on B-52s and C-5s, specifications are a big deal and consequently, there is a big price difference between parts that meet spec and those that don't.

Eventually, the company got caught selling these defective parts to the Government and was debarred from further Government contracts. Poor Mr. Skiscim, the President of Aerospec finds himself without the means to keep up his lifestyle including his yacht club membership. So what's he going to do?

No problem, he reasons. He'll just start up some new companies and sell the same old nonconforming parts. So he set up Sun Tech Air Parts, Aerocon Corp, and Specialty Components. But he couldn't use his own name showing ownership because he was already on file as a debarred person. So he used the names of family members as owners of these companies (and fictitious persons, according to the Department of Justice).

Now it would have been one thing if, after his initial debarment, Mr. Skiscim got honest and started selling conforming parts to the Air Force. But he didn't. He continued to sell defective components from his new companies. Then he gets caught again. .Not too surprising, really, given that the Government performs QC testing on what it buys.

This time, Mr. Skiscim doesn't get off so lightly. He has just been sentenced to 26 months in Federal prison for fraud for selling nonconforming parts through his shell companies. He is also required to pay the Government $1 million.

You can read the entire Justice Department press release here.

Government To Tighten Up Controls over Purchase and Travel Card Use and Abuse

The term "data analytics" refers to qualitative and quantitative techniques and processes used to enhance productivity, business gain, and very importantly, to detect and prevent fraudulent activity. Perhaps you've received calls from your credit card company asking you to confirm certain recent charges to your card. How did thy pick you? How did they pick particular charges? Well, somehow, those charges were outside the norm for you. How do they know that? Through the use of "data analytics". Or, you might have noticed that when accessing a website, you see advertising for an item that you just read up on. You might have been reading about all the wonderful features of the latest Ford or GM model then you browse headlines on CNN and find advertising for Ford or GM. How do they do that? Through the use of "data analytics".

Industry has been using and refining data analytics for quite some time. The Government, not so much. And to a certain extent, that's understandable. Credit card companies for example are liable for fraudulent charges. Someone steals and card and makes unauthorized charges, the credit card company is ultimately liable, not the card holder. In the Government's case however, losses or unauthorized purchases are simply passed on to the taxpayer. Or take the case of advertising. GM and Ford need to sell vehicles for business gain. The Government doesn't need to sell anything. There is no inherent business gain in anything the Government does.

The Government's disinterest in "data analytics" may be changing. The Senate just passed Senate Bill 1099, Saving Federal Dollars Through Better Use of Government Purchase and Travel Cards Act of 2017. This bill is intended to provide for the identification and prevention of improper payments and the identification of strategic sourcing opportunities by reviewing and analyzing the use of Federal agency charge cards.

Specifically, this Bill will require OMB and GSA to develop a strategy to expand the use of data analytics in managing government purchase and travel charge card programs. These analytics may employ existing GSA capabilities (which are probably negligible), and may be in conjunction with agencies' capabilities, for the purpose of

1. identifying examples or patters of questionable transactions and developing enhanced tools and methods for agency use in 
• identifying questionable purchase and travel card transactions; and
• recovering improper payments made with purchase and travel cards
2. Identifying potential opportunities for agencies to further leverage administrative process streamlining and cost reduction from purchase and travel card use, including additional agency opportunities for card-based strategic sourcing
3. developing a set of purchase and travel card metrics and benchmarks for high-risk activities, which shall assist agencies in identifying potential emphasis areas for their purchase and travel card management and oversight activities, including those required by the Government Charge Card Abuse Prevention Act of 2012
4. Developing a plan, which may be based on existing capabilities, to create a library of analytics tools and data sources for use by Federal agencies (including inspectors general of those agencies).

The misuse of Government purchase and travel cards are significant and widespread and the costs have been essentially born by the taxpayers. Perhaps this Bill will help reduce the number of occurrences of misuse or stop the activities before they become significant. 

Government contractors might want to follow these developments to see if there is something that can be adapted to their own internal control systems.

Would Anyone Question Pink Uniforms for the Afghan Military?

You have probably heard the news that broke last week concerning the Pentagon's waste of $28 million buying uniforms for the Afghan National Army with a woodland camouflage pattern appropriate for two percent of the country.

The Afghan Defense Minister picked the pricey, privately owned "forest" pattern over the free camouflage schemes owned by the U.S. Government because he liked the design and color. The Inspector General mused that what if he had liked pink or purple? Would the Pentagon have bought them pink uniforms without asking any questions?

This is simply stupid on its face. We wasted $28 million of taxpayers money in the name of fashion because the defense minister thought that the pattern was pretty. So if he thought pink or chartreuse was it, would we have done that?

Of course, Congress jumped all over the inspector general's report. Sen Grassley stated that

"... the Defense Department gave up control of the purchase and spend an extra $28 million on the wrong pattern just because someone in Afghanistan liked it. It's embarrassing and an affront to U.S. taxpayers. Those who wasted money on the wrong camouflage uniforms seem to have lost sight of their common sense.

The Secretary of Defense came down strong on the lack of stewardship by military procurement.

 Buying uniforms for our Afghan partners, and doing so in a way that may have wasted tens of millions of taxpayer dollars over a ten-year period, must not be seen as inconsequential in the grand scheme of the Department's responsibilities and budget. To the contrary, these actions connect directly to our mission budget situation. The purpose of equipping the Afghan National Army is to bolster the Afghan Government's capacity to provide for its own security, and ultimately, to help defend our country from terrorist attack.

The ... report ... serves as an example of a complacent mode of thinking. The report is an indication of a frame of mind - an attitude that can affect any of us at the Pentagon or across the Department of Defense - showing how those of us entrusted with supporting and equipping troops on the battlefield, if we let down our guard, can lose focus on ensuring their safety and lethality against the enemy.

As is often the case with these kinds of reports, we will probably be hearing about more examples of waste and abuse once Congress has a chance to schedule hearings.

Executive Order on Cutting Federal Waste - Will Offer Public Input

The President issued an Executive Order yesterday that requires every executive agency to conduct an internal review of how their funds are being wasted or abused and to recommend changes they can pursue to operate more efficiently. According to the President, "There is duplication and redundancy everywhere. Billions and billions of dollars are being wasted on activities that are not delivering results."

Sound familiar? It should. Back in 2011, President Obama issued an EO (No. 13589) to Promote Efficient Spending, citing the Administration's commitment to cutting waste in Federal Government Spending and identifying opportunities to promote efficient and effective spending. At the time, each Executive Agency was required to establish a plan for reducing the costs of travel, information technology, printing, motor vehicle fleets, and promotional items. No word on how that exercise went.

This latest audit or review is a little bit different from earlier reviews however. This will be spearheaded by the OMB (Office of Management and Budget) and will invite public input. We don't ever recall such a study that utilized public input but we're sure that there will be many. For starters, three Senators; Lankford from Oklahoma, McCain from Arizona, and Flake, also from Airizona, have published books on Government waste (see Federal Fumbles, America's Most Wasted (which doesn't refer to drug addictions), and PORKemon Go). It is unknown how and at what point in the process, public input will be solicited.

On a related note, the President's budget proposal expected this week will seek significant reductions in the Federal workforce (source) with housing, foreign assistance, environmental programs, public broadcasting, and research expected to take the most significant hits. The Energy Department cuts could impact many contractors as the department that funds research on LED light bulbs, electric trucks, advanced batteries and bio-fuels, is looking at a 30% cut.

Hang on. This could be Mr. Toad's Wild Ride.