Fraud Involving SBA Programs. Presentation to the SBA Southern California 8(a) and Small Business Conference Irvine, CA April 12, 2017

Transcription

1 Fraud Involving SBA Programs Presentation to the SBA Southern California 8(a) and Small Business Conference Irvine, CA April 12, 2017

2 Office of Inspector General Discover and curb fraud, waste and abuse in SBA s Programs and Operations Conduct Investigations to prove/disprove allegations of fraud by contractors, borrowers, sellers, brokers, lenders, outside third parties, and/or employees. o o o Law Enforcement Officers in same job classification as FBI, USSS, NCIS, etc. Take complaints, conduct interviews, serve search and arrest warrants, testify in court, conduct financial and information analyses, etc. Seek to deter crime against the SBA, through publicizing prosecutions and improving regulations and procedures. Conduct Audits designed to evaluate and make improvements to agency programs and operations, discover and reduce fraud, and achieve recoveries for the agency. Review Agency Policies, approve 912 s, make Suspension and Debarment Recommendations, advise agency on various issues, etc. Also determine program weaknesses and recommend improvements.

3 SBA Office of Inspector General Investigations Field Office Territories Within the United States Note: The Western Regional Office also covers Guam, American Samoa, and Saipan. The Eastern Regional Office also covers Puerto Rico and the Virgin Islands. Western Regional Office Kari Overson, Special Agent-in-Charge, th Avenue South, Suite 210, Federal Way, WA 98003, Tel (253) Fax (253) Kari.Overson@sba.gov Central Regional Office T.J. Gaylor, Special Agent-in-Charge, Leland Federal Building, 1919 Smith Street, Suite 23066, Houston, TX 77002, Tel (832) Fax (202) Talmadge.Gaylor@sba.gov Eastern Regional Office Kevin Kupperbusch, Special Agent-in-Charge, 233 Peachtree Street, N.E., Room 1802, Atlanta, GA 30303, Tel (404) Fax (202) Kevin.Kupperbusch@sba.gov

4 Profile of SBA Business loan portfolio of $118.8 billion and a disaster assistance loan portfolio of $5.3 billion as of Fiscal Year (FY) 2016; Administered procurement assistance programs to help small businesses receive $90.7 billion in U.S. Government contracts as of FY 2015; and Workforce of 1,940 regular employees and 1,162 disaster employees as of FY 2016.

5 Investigations Division Statistical Accomplishments Year Indictments Convictions Recoveries Total Investigative Return (Including Asset Forfeitures) FY $71,707,848 $141,538,695 FY $61,002,352 $118,803,452 FY $32,426,370 $76,176,095 FY $92,917,594 $305,361,070

6 Categories of Contracting Fraud Schemes Pass Through or Front Company o Company qualifies o Passes all work to larger or otherwise unqualified firm Unqualified Firm o Does not meet program requirements

7 Small Business Based on NAICS Size Program Annual Receipts or Employees Size Determinations Affiliation Ability to control If NAICS wrong on the contract, SBA corrects the NAICS and bases determination on correct one Protest Apply for Determination Representations in SAM Representations on bids

8 Size/Affiliation Case Study: En Pointe Gov., Inc. Several companies affiliated through common ownership Subsidiary submitted GovK bids.

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10 8(a) Business Development Program Socially disadvantaged Economically disadvantaged At least 51% owned Initial Application Annual Recertification/Reviews Invoices Verbal/written statements to Gov t

11 8(a) Business Development Program False Statements re: Ownership Control Death of NDI Net worth Citizenship Criminal History

12 8(a) Fraud Marcon - Idaho case involving an 8(a) applicant who provided false information showing a reduced net worth so she could get into the 8(a) Program. Once in the program, she provided falsified tax returns that showed her net worth was below the required limit. If she had disclosed her true assets and net worth, she would not have been allowed into the program, nor allowed to stay in the program from which she obtained over $40 million in contracts. She received 58 months in prison for the contract fraud.

13 8(a) Fraud Okland Construction, based in Utah, paid the U.S. Government $928,000 to resolve allegations it made false statements and submitted false claims to the Government. The company entered into a Mentor-Protégé Agreement with Saiz Construction. Okland prepared the bids for the 8(a) contracts and its employees served as project managers, submitted invoices and performed payroll and extensive performance of the contract while misrepresenting to the Government its employees were the small business employees. Okland also paid Saiz s attorney fees.

14 Bribery - Kickback Mountain Two prime contractors in the SBA s 8(a) Program in San Diego solicited and received kickbacks from subcontractors in order to award them subcontracts at Camp Pendleton. One principal received over $539,000 in kickbacks to himself, his son or his daughter; the other received over $94,000. The investigation also uncovered bribery payments to two public officials. The Navy contracting official, self-described as the godfather of Camp Pendleton, accepted over $100,000 in bribes from the two 8(a) contractors, including remodeling work on his property. A GSA contracting official demanded $120,000 in exchange for an 8(a) contract. He received $42,000 through controlled and monitored actions, was arrested and pled guilty to Conspiracy to Commit Bribery and False Tax Returns. Worked with FBI, IRS-CI, GSA-OIG, DCIS, NCIS

15 HUBZone Program Principal place of business Where majority of the work is performed (aside from contract locations) Employee residency percentage Don t dip below 35% Notify SBA if do cannot bid on or receive contracts during this time Initial Application Recertification/Reviews Invoices Certifications in SAM and to KO

16 HUBZone Case Study In March 2012, in the U.S. District Court, District of Idaho, two Boise companies pled guilty to fraud relating to the SBA HUBZone program. Michael D. McDonald Sr., president of McDonald Roofing and Construction Inc. (MRC), pled guilty on behalf of MRC to one count of wire fraud. Lisa A. Hatch, president of Construction Service Corporation (CSC), pled guilty on behalf of CSC to one count of wire fraud and one count of false statements pertaining to the GSA s Surplus Property Program through which SBA 8(a) companies can obtain surplus property. Both companies submitted fraudulent HUBZone applications to the SBA that stated their principal places of business were located in HUBZones and that each had two employees who resided in HUBZones. The investigation revealed that neither of the companies was located in a HUBZone and none of the employees resided in a HUBZone. The companies received a combined total of over $1.6 million in contracts based on the false HUBZone certifications. The investigation also found that CSC obtained over $1million of property (original value) as an SBA certified 8(a) company under the GSA s Surplus Property Program and immediately sold or transferred that property to a non-8(a) entity. Worked with DOI-OIG, GSA-OIG, VA-OIG, USDA-OIG, IRS-CI, Army CID

17 WOSB/EDWOSB Programs 51% Owned by one or more women Controlled by one or more women Upload documents into Certify.gov Third Party Certification KO has to verify documents in Certify.gov Representations in SAM Representations on bids

18 Case Study: UFC Aerospace UFC certified to Lockheed/Boeing that it was Woman-Owned. Lockheed/Boeing certified to Air Force that it was awarding subcontracting dollars to WOSBs Qui Tam investigation reveals Doug and John Davis control Trusts which own UFC o Power to Remove Wife and Daughter Owners o s reveal no control/decision-making by women

19 Case Study: UFC Aerospace (continued) Violations: ocontrol of Firm by non-woman Owner Result: $20 Million Settlement (S.D.N.Y.) Administrative Agreement reached

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21 SDVOSB Program Firm must be Small Owned and Controlled at least 51% by one or more Service-Disabled Veterans SDV status determined by VA VA requires SDV hold highest officer position and have managerial experience to run the firm SBA s Program covers all non-va contracts Representations in SAM Representations on bids Ownership Control

22 Fraudulent SDVOSB Concern Several individuals conspired to defraud the Government to obtain SDVOSB contracts. The owner of the SDVOSB company made false statements regarding his SDV status. He was never classified as an SDV. He was sentenced to 51 months imprisonment and 3 years of supervised release. He was also ordered to pay a $30,000 monetary judgment. The majority owner of another construction firm falsely claimed to have worked for the SDVOSB company and conspired to use that company as a pass-through for his own business. The SDVOSB company obtained more than $6.7 million in SDVOSB set-aside contracts from the VA and approximately $748,000 from the DOD before the scheme unraveled.

23 SBA Programs Small Business Subcontracting Subcontractor s self-certification of status in SAM.gov Certifications to Primes Primes certs in invoices, bids to the Government Remember earlier example of UFC Aerospace?

24 SBIR/STTR Company must be small U.S. principal place of business >51% owned by individuals within 2 levels Maximum 500 employees Principal Investigator s primary employment is with the company (not a university) Representations in SAM Representations on proposals

25 SBIR Fraud Case Study A firm in Vancouver, WA made false claims regarding its eligibility for SBIR Contracts. The firm obtained about $14 million in SBIR contracts over several years. The firm was not eligible because it was owned by a VC firm that was not owned 51% by an individual(s). The firm reported its errors when a Dept. of Energy contracting officer caught the eligibility issue and denied a contract. The firm settled civilly with the Government and paid an agreed upon amount.

26 Surety Bond Guarantee Program The SBA s surety bond program guarantees 70% of the surety company s losses on bonded jobs the SBA has guaranteed. False statements re: financial situation contracts past experience paying subs Mail or Wire Fraud False Statements to agency working for

27 Surety Bond Case Study Hawley, owner of PBI Construction made false statements: To the owners of the public works contracts by falsely stating he had paid subcontractors and suppliers when he had not; Via U.S. Mail to the surety company that PBI was out of funds, which forced ICW to pay contract owners on defaulted jobs, when, in fact, he had diverted and was continuing to divert contract proceeds of approximately $87,000 to his personal use instead; To a federally-insured financial institution for a mortgage loan; and To the SBA to obtain two guarantees on surety bonds by falsely stating that he had not defaulted on prior surety bonds. The SBA suffered a loss of over $500,000 due to PBI s defaults on several contracts.

28 Surety Bond Case Study Charged with 18 USC 1001, False Statements; 18 USC 1014 False Statements on a Loan Application; and 18 USC 1341, Mail Fraud. Hawley was sentenced to 30 days in a residential reentry center, 90 days home confinement, and 5 years supervised release. He was also ordered to pay a special assessment of $ and restitution to the U.S. Small Business Administration of $197, Hawley and PBI were debarred for a period of three years from participation in Federal procurement transactions, and financial and non-financial assistance programs.

29 Criminal Statutes 18 U.S.C. 286 Conspiracy to Submit False Claims Entering into an agreement, combination, or conspiracy to defraud the U.S., or any department or agency thereof, by obtaining or aiding to obtain the payment or allowance of false, fictitious or fraudulent claims. 18 U.S.C. 287 False, Fictitious or Fraudulent Claims Whoever makes or presents to the U.S. Government any claim knowing it to be false, fictitious, or fraudulent. 18 U.S.C False Statements: Prohibits false statements to the Government, whether in oral or written form; includes false statements to the investigating agent(s). 18 U.S.C Mail Fraud and 1343 Wire Fraud: Prohibit using the mails and/or interstate wire communications to defraud another of money or property. Includes the use of overnight carriers. 18 U.S.C Major Fraud Against the U.S.: Prohibits the use of fraudulent schemes to obtain over $1,000,000 from the U.S. Applies to grants, contracts, subcontracts, loans, guarantees, subsidies, etc.

30 Criminal Statutes 18 U.S.C. 201 Bribery Whoever - 1) directly or indirectly gives, offers, or promises anything of value to any public official with intent to (A) Influence an official act; or (B) Influence the official to commit or aid in committing or allow fraud; or (C) Induce the official to do or omit to do any act in violation of the lawful duty of the official 2) being a public official, corruptly demands, seeks, receives, accepts, or agrees to receive or accept anything of value personally or for another, in return for: (A) being influenced in the performance of any official act; (B) being influenced to commit or aid in committing, or to collude in, or allow, any fraud, or make opportunity for the commission of any fraud, on the United States; or (C) being induced to do or omit to do any act in violation of the official duty of such official or person;

31 Criminal Statutes Anti-Kickback Act - Title Prohibited conduct (1) to provide, attempt to provide, or offer to provide any kickback; (2) to solicit, accept, or attempt to accept any kickback; or (3) to include, directly or indirectly, the amount of any kickback prohibited by clause (1) or (2) in the contract price charged by a subcontractor to a prime contractor or a higher tier subcontractor or in the contract price charged by a prime contractor to the United States. 54. Criminal penalties Any person who knowingly and willfully engages in conduct prohibited by section 3 [41 USC 53] shall be imprisoned for not more than 10 years or shall be subject to a fine in accordance with title 18, United States Code, or both. 55. Civil actions (1) The United States may, in a civil action, recover a civil penalty from any person who knowingly engages in conduct prohibited by section 3 [41 USC 53]. The amount of such civil penalty shall be-- (A) twice the amount of each kickback involved in the violation; and (B) not more than $ 10,000 for each occurrence of prohibited conduct. (2) The United States may, in a civil action, recover a civil penalty from any person whose employee, subcontractor or subcontractor employee violates section 3 [41 USC 53] by providing, accepting, or charging a kickback. The amount of such civil penalty shall be the amount of that kickback.

32 Civil Statutes 31 U.S.C : False Claims Act (Civil) $5,000-$11,000 per false claim Up to treble damages

33 SBA Statutes 15 U.S.C. 645(a): False Statements Whoever makes any statement knowing it to be false, or for the purpose of influencing in any way the action of the SBA $5,000 fine, two years imprisonment 15 U.S.C. 645 (d): Misrepresentation of Status as SBC; HUBZone SBC, an SBC owned or controlled by socially and economically disadvantaged individuals, or an SBC owned and controlled by women in order to obtain a prime contract or subcontract. $500,000 fine, ten years imprisonment

34 Rule for Small Business Fraud Damages In every contract which is set aside for award to small business concerns, there shall be a presumption of loss to the United States based on the total amount expended on the contract whenever it is established that a business concern other than a small business concern willfully sought and received the award by misrepresentation. Submission of a bid or proposal for a Federal contract set aside for award to small business concerns; or Registration on any Federal electronic database (e.g., SAM) for the purpose of being considered for award of a Federal contract as a small business concern shall be deemed affirmative, willful, and intentional certifications of small business size and status. 15 U.S.C. 632(w), Small Business Jobs Act

35 Avoiding Problems Know what you are certifying Review all certifications in the FAR Report in SAM prior to submitting Correct as soon as you know there is an error and notify the CO/KO Ensure only the owner or principal of the business is making the representations (so you know what your company is submitting) Keep close watch on your percentage of work and that you are receiving the proper profit Keep an eye on subcontractors or JV team members to ensure they re living up to the agreements

36 What you can do Document important discussions If a larger firm is contacting you to consider a Joint Venture, MPA, etc., ensure you document discussions, representations, etc., and get the JV, MPA, or teaming agreement in writing to know what each company will perform. Do your due diligence on the other company. Protest contracts if you know/believe the successful offerer is Other Than Small If protest dates have passed, or in addition to filing a protest, contact law enforcement authorities. Report fraud to the contracting agency s OIG and/or SBA- OIG Report suspected requests for bribes/kickbacks immediately CONTACT US!

37 Duty to Disclose FAR provisions require every contractor to disclose to an Office of Inspector General ( OIG ) all credible evidence related to a government contract of: (1) violations of criminal law involving fraud, conflict of interest, or bribery; (2) violations of the civil False Claims Act; or (3) significant overpayments.

38 SBA Employees Duties 13 C.F.R Duty to report irregularities. Every employee shall immediately report to the SBA Inspector General any acts of malfeasance or misfeasance or other irregularities, either actual or suspected, arising in connection with the performance by SBA of any of its official functions.

39 SBA-OIG Contacts SBA-OIG HOTLINE Western Regional Office (covers Regions 8, 9, and 10) th Ave. S., #210, Federal Way, WA fax: (253) Special Agent in Charge Kari Overson (253) ; fax to (202) kari.overson@sba.gov Assistant Special Agent in Charge Sandra Mazzoni (562) ; fax to (202) sandra.mazzoni@sba.gov