Procurement Fraud s Anatomy By Tom Caulfield CFE/CIG/CIGI
LEARNING OBJECTIVES 1. Identify statutes, regulations, and key personnel associated with the contracting process. 2. Identify the primary acquisition methods and types of contracts. 3. Identify the contracting stages and fraud schemes associated with each stage. 4. Identify criminal, civil, and administrative remedies applicable to contract fraud investigations. 5. Introduce you to the mindset of the Fraudster. 6. End with some fun!
Fraud Fraud What is it?
Fraud Contract Fraud
Operational Knowledge The connection of the fraudster can stem from a person providing services or products under the contract, a person marketing the contract, a person overseeing the performance/delivery of the contractor, or the person negotiating the contract price.
Contractors Subcontractors WHO ARE WE TALKING ABOUT? Contracting Officers Contracting officer s technical representatives Designed to improperly Enrich! Procurement staff Source selection committee members Suppliers Others?
PROCUREMENT POLICIES Federal Acquisition Regulation Defense Federal Acquisition Regulation Agency supplement Agency Policies State, County, City Legislation
PROCUREMENT OR CONTRACT One of the most common of all white-collar crimes. Increasingly more sophisticated. Many times being technology driven. Saddles the public and the private sectors with costs to reputations and balance sheets. Most distressingly, it undermines confidence in the organizational structure and its management.
Procurement fraud often starts out under the radar screen with a systematic abuse of trust sometimes combined with flawed internal controls. If discovered, the tendency may be to characterize it as isolated instance when a more thorough examination would uncover a pattern.
Depending on the organization being victimized; the consequences of procurement fraud will always involve the loss of money, but may also put at risk - personal safety, if the scheme involves defective products; counterfeit parts; or product substitution.
ACFE U.S. organizations up to 5 7 % of their revenues each year. 66% run for more than a year before they were detected. 13% ran for five years or longer before they were detected.
ACFE FRAUD PREVENTION Robust set of Internal Controls. Increasing the perception of detection. Identifying high value targets. Effective polices and procedures that proscribe deviant behavior. 12
Procurement fraud is slightly less likely to be driven by senior management then financial statement fraud or accounting system fraud. Procurement fraud is more likely to be found in organizations with weaker controls, culture and/or morale.
The search for procurement fraud can be difficult at times, as on the surface, it generally only leaves faint clues to be discovered. Clues that can be, and are being, dismissed as administrative oversights when found in documentation; or assumed inaccurate when either observed, or over heard.
Unlike crimes against persons and property, which are clear from the beginning what the crime is, procurement fraud is not so clear, What was the true scheme? false statement in the bid, false claims through double billing, bribery, kickbacks, conflict of interest.
The perpetrator's identity is usually known, which is unlike traditional property crimes. In a bank robbery for example, the issue is not whether a crime was committed, but rather who committed the crime not true in most fraud cases.
DOES THAT MAKE IT EASIER? The perpetrator's identity is usually known, which is unlike traditional property crimes. In a bank robbery for example, the issue is not whether a crime was committed, but rather who committed the crime not true in most fraud cases.
Adding to procurement fraud s detection difficulty is the veil of trust the fraudster normally carries with the employees of the organization being victimized, as the fraudster is usually connected to the procurement in some way, and therefore is interacting at some level with the organizational employees.
As you can see, because of this veil of trust, the fraudster is often considered to be a trusted agent by the same people for whom the fraudster has breached the trust of. This trusted agent status highlights the peculiar dichotomy of procurement fraud: these crimes cannot succeed without trust, but neither can business. Dichotomy of Procurement Fraud
MOST COMMENT DEFENSE Allowed by the contract. Government authorized. Mistake and therefore a breach of contract. Civil. Never Criminal 20
My observations have found there appears to be three types of fraudsters: 1. the situational opportunist, 2. the deviant opportunist and 3. the business opportunist.
DONALD CRESSEY Opportunity Fraud Triangle Pressure Rationalization
The situational opportunist is the fraudster that seems to be frustrated at work; who has rationalized his/her right to an illegal enrichment; and simply perpetrates the fraud scheme when the right occasion occurs; normally because of a weak internal control. This is the employee when caught that witnesses in the company will never be surprised that the person was involved in the fraud.
The deviant opportunist is more proactive; possibly perceived as one of the company s hardest workers; but this person is always on the alert for opportunities to corrupt the system. This fraudster will have a strong group of company advocates who will deny any assertion that the fraudster was involved with any wrongdoing. This type fraudster is also the employee that takes only a few days of leave each year; is the employee who seems to have their hand in every process related to their business sector.
Of the two, the situational opportunist is far more prevalent in any contract, but losses are far less However, if the deviant opportunist can bribe a contracting official to allow fraudulent billing submissions, or a corporation can employ a fraudulent cost accounting scheme, the losses can be in the millions.
The business opportunist commits an act of fraud that on its face seems to only benefit the company. However, in reality is done by the fraudster to increase his/her standing in the company as someone who can increase business and therefore generate revenues. This type fraudster is looking for their finical gains in yearly bonuses; awards or incentive pay. This fraudster will inappropriately shift cost between contracts to make his/her sector appear better managed then it really is; or will cancel quality control steps to ensure more timely deliverables.
WHAT IS IT?
Basically = a mutual agreement between two or more parties (government and prime contractor), which must be of lawful subject matter or objective, provide legal considerations, and results in mutual promises and obligations.
Overall there are eight steps to most procurements : 1. Need/Justification (why we want it) 2. Solicitation (what we want) 3. Evaluation (what will it cost) 4. Negotiation (can we change your mind) 5. Award (wording of the contract) 6. Deliverable (getting what we asked for) 7. Administration/Monitoring (paperwork/evaluations/feedback) 8. Closeout or Termination (who still owes who money)
Each one of these steps can be corrupted & each corruption can take on one of a thousand different forms; within basically twenty-four generally recognized fraud schemes; and is only limited to the imagination of the fraudster, and the type of access the fraudster has to the procurement process.
Adding to its detection difficulty is also the fact that either the contractor alone or the procurement official alone can perform some of these schemes, or they can conspire together and commit the fraud. Clearly, the most difficult of the procurement fraud schemes to detect are those that involve the collusion of the contractor and the procurement official.
C o n t r a c t T y p e s CONTRACT TYPES AND RISKS Government CPFF Level of Effort Risk CPFF LOE Time and Materials T&M Cost Plus Fixed Fee CPFF Cost Plus Award Fee CPAF Cost Plus Incentive Fee CPIF Cost No Fee CNF Cost Sharing CS Fixed Price Award Fee FPAF Fixed Price Incentive FPI Firm Fixed Price w/epa FFP Firm Fixed Price w/epa Contractor Risk FFP
SORRY ITS NOT A FRAUD Contract provisions are a notorious area in which auditors and investigators believe they have clear evidence of theft only to discover that the money was taken in compliance with a provision of the contract that the auditor or investigator failed to study and understand. 33
At first glance, the procurement process can be overwhelming to most and somewhat intimidating. However, for the purpose of fraud detection it can be reduced down into four basic parts: 1. The Requirements and Justification; 2. The Selection/Award; 3. The Delivery or Services; and 4. The Payment
Requirements Selection - Award Delivery Payment 35
Requirements Justification RFP Evaluation of RFPs Negotiation/Award Selection - Award Delivery Payment 36
Requirements Justification RFP Evaluation of RFPs Negotiation/Award Selection - Award Delivery Payment Program Office/COTR C- Officer/SS C - Auditor C - Auditor Prime Contractor 37
Requirements Justification RFP Evaluation of RFPs Negotiation/Award Selection Delivery Payment Kickbacks/Bribery/Conflict of Interest Bid Rigging False Claims Defective Pricing Product Substitution
Requirements Justification RFP Evaluation of RFPs Negotiation/Award Selection Delivery Payment
COMMON FRAUD SCHEMES Bribery & Kickbacks Conflicts of Interest Rigged Specifications Collusive Bidding Excluding Qualified Bidders Unbalanced Bidding Leaking Bid Data Manipulation of Bids Unjustified Sole Source Defective Pricing Cost Mischarging Co-mingling of Contracts Failure to Meet Contract Specifications Product Substitution Purchase for Personal Use Phantom Vendor False Statements & Claims 40
CHALLENGES INVESTIGATING CONTRACT FRAUD NOT CLEARLY EVIDENT SUCH AS A GENERAL CRIME USUALLY IS NOT EVERY INSTANCE OF NON-COMPLIANCE IS A FRAUD - SPECIFIC INTENT OFTEN INVOLVES PROCESSES WE ARE UNFAMILIAR WITH DEMONSTRATING DAMAGE MAY BE DIFFICULT SOPHISTICATED / CORPORATE SUBJECT(S) EXTENDED INVESTIGATIONS
ALL IS NOT WICKED All contracts are not tainted by fraud and Most fraud indicators do not denote fraud. However, I believe that by looking for fraud indicators in the most efficient way, and properly assessing them, we are taking the appropriate steps to uncovering fraudulent acts, expose the fraudster, and thereby, protecting our organizational resources and fulfilling our professional requirements.
CORE BELIEF THERE IS NO GREATER TOOL IN THE DETECTION OF PROCUREMENT FRAUD THAN KNOWLEDGEABLE GOVERNMENT AND CONTRACTOR EMPLOYEES, LOOKING FOR, AND REPORTING, POTENTIAL PROCUREMENT FRAUD INDICATORS TO AUDITORS, INVESTIGATORS AND/OR PROPER ORGANIZATIONAL MANAGEMENT. GOOD LUCK AND HAPPY HUNTING!
ANY QUESTIONS? Tom.Caulfield@cigie.gov