Procurement Fraud Enforcement

Each year, the federal government spends several hundred billion dollars to obtain goods and services from corporations and other nongovernmental entities. Under the critical eye of the nation's taxpayers, the federal government has amplified its own scrutiny of the ethics and integrity of its procurement officers and those companies with which it contracts. Via new national legislation and investigative initiatives, the attention of Capitol Hill and federal law enforcement offices across the nation is keenly focused on the prevention, detection and punishment of procurement fraud. It is a brand new day ' and a potentially dark one for the unwary governmental contractor.

Recent Scandals and Prosecutions

Several recent highly publicized investigations have fueled the federal government's heightened efforts to crack down on schemes involving conflicts of interest, defective pricing, bid-rigging, product substitution, accounting fraud, grant fraud, misuse of classified or other sensitive information, and other ethical breaches. Among them was the manipulation of a federal contract for the leasing of 100 Air Force refueling tankers worth over $20 billion. Darleen Druyun, the Air Force's former principal deputy assistant secretary for acquisition and management, supervised the lease negotiations and other Boeing contracts only to retire and begin working at Boeing. Not only did Druyun give Boeing special treatment, she agreed to higher pricing and negotiated lucrative jobs for herself and family members. In October 2004, she pled guilty to conflict of interest violations and conspiracy to defraud the government, and was sentenced to nine months in a federal prison. See Merle, Renae: 'Long Fall for Pentagon Star: Druyun Doled Out Favors by the Millions.' The Washington Post, Nov. 14, 2004. For his role in the company's improper job talks with Druyun, Boeing's chief financial officer Michael Sears also pled guilty to conflict of interest violations and was sentenced to four months in prison. See 'Former Boeing CFO Sears Sentenced to Prison, Fined.' St. Louis Business Journal, Feb. 18, 2005. Significantly, Boeing was fined $615 million, the largest sum in a federal procurement fraud matter. See Tomasko, Catherine: 'Boeing Pays Record $615 Million to End Fraud Charges.' Andrews Publications (Jul. 14, 2006).

More recently, a multiple agency probe into the improper dealings of former lobbyist Jack Abramoff prompted the loss of job and liberty for a top White House procurement officer who set the government's purchasing policy. The investigation focused on the advice and aid that former General Services Administration Chief of Staff David Safavian offered his former co-worker Abramoff in his effort to obtain GSA-controlled property. Safavian was also among those Abramoff treated to a Scottish golf outing in violation of GSA ethics rules banning the receipt of a gift from anyone having official business before GSA. In September 2005, Safavian resigned from his post as a top official at the Office of Management and Budget. In June 2006, he was convicted of making false statements to investigators about his dealings with Abramoff and obstruction of a GSA proceeding. Last fall, Safavian was sentenced to 18 months in a federal prison. See Schmidt, Susan: 'Official in Abramoff Case Sentenced to 18 Months.' The Washington Post, Oct. 28, 2006.

Coordination of Criminal Fraud Investigations and Prosecutions

A wide range of provisions are used in the criminal prosecution of those allegedly involved in procurement fraud, including false claims, 18 U.S.C. ' 287, Major Fraud Act, 18 U.S.C. ' 1031, fraud and false statement provisions, 18 U.S.C. ' 1001, bribery, 18 U.S.C. ' 201, conspiracy, 18 U.S.C. ' 371, and the Procurement Integrity Act, 41 U.S.C. ' 423. Broadly interpreted, these and other industry-specific rules, regulations and provisions have been used in charging instruments against government officials, lobbyists, lawyers, contracting companies, and their employees.

The FBI has traditionally taken the lead in the criminal investigation of procurement fraud matters. However, the tragic events of 9/11 redirected the FBI's attention more toward national security and terrorism. To coordinate the continued efforts of the FBI and the many agencies that have assumed a greater role in detecting and punishing procurement fraud, in October 2006, Deputy Attorney General Paul J. McNulty announced the formation of the National Procurement Fraud Task Force ('Task Force'). Chaired by DOJ Criminal Division head Alice Fisher, the Task Force combines the might of the FBI, Inspectors Generals for the Department of Defense, CIA, NASA and General Services Administration, among other agencies, as well as the government's defense-related investigative agencies. Its stated purpose is to root out 'defective pricing or other irregularities in the pricing and formation of contracts, product substitution, misuse or classified and procurement sensitive information, false claims, grant fraud, labor mischarging, accounting fraud, fraud involving foreign military sales, ethics and conflict of interest violations, and public corruption associated with procurement fraud.' See 'Combating Procurement Fraud: A National Initiative to Increase Prevention and Prosecution of Fraud in the Federal Procurement Process' (Oct. 10, 2006), available at www.usdoj.gov/criminal/npftf/pr/speeches/2006/oct/10-10-06npftfinitiative.pdf.

The initiative is similar to the Procurement Fraud Working Group that McNulty spearheaded while serving as U.S. Attorney for the Eastern District of Virginia. See DOJ Press Release 'Combating Procurement Fraud,' Feb. 18, 2005, available at washingtondc.fbi.gov/dojpressrel/ pressrel05/fraud021805.htm. That initiative, which came on the heels of that office's prosecution of the Druyun case and other high-profile procurement fraud cases, highlighted the exchange of information among several law enforcement agencies.

Increase in Civil False Claims Act Qui Tam Cases

The vast array of criminal penalties are not the sole weapons against procurement fraud. Increasingly, investigations are resulting in civil penalties under the False Claims Act, 31 U.S.C. ' 3729 et seq. The act provides for treble damages and a monetary penalty against contractors and others who knowingly submit or cause to be submitted a false or fraudulent claim to the federal government. Significantly, the act uniquely encourages action on the part of persons with knowledge of false claims for payment against the government. Under the act's qui tam enforcement provision, a private citizen ('relator') can file a sealed complaint against government contractors and others. Brought on behalf of the federal government, the suit enticingly offers a bounty in the form of a percentage of the money recovered. Amendments to the False Claims Act made in 1986 have resulted in an increase in qui tam suits. In the 20 years ending on Sept. 30, 2006, the DOJ had recovered more than $18 billion, with $3.1 billion recovered in fiscal year 2006 alone. See DOJ Press Release, Nov. 21, 2006, available at www.usdoj. gov/opa/pr/2006/November/06_ civ_783.html. In that year, relators walked away with $190 million.

Increased Congressional Oversight

Congressional oversight has increased in the procurement fraud area as well. With the stated purpose of increasing transparency and accountability in federal contracting, and protecting the integrity of the acquisition workforce, several pieces of key legislation are in various stages of the legislative process. Many players are being called before or required to answer to investigative committees.

For instance, in the wake of Boeing's firing of Druyun and Sears, Sen. John Warner (R-VA), chairman of the Senate Armed Services Committee, asked Defense Secretary Donald H. Rumsfeld for regular updates on the Pentagon's own review of the tanker lease deal. See Eisman, Dale: 'Warner to Review Aircraft Lease Plan.' The Virginian Pilot, Nov. 27, 2003. Sen. John McCain (R-AZ), in particular, was a vocal opponent of the deal throughout. See Weinberger, Sharon: 'McCain Blasts Pentagon for Withholding Tanker Documents.' Defense Daily, Feb. 1, 2005.

This past February, House Oversight and Government Reform Committee Chairman Henry Waxman and Ranking Minority Member Tom Davis introduced the Executive Branch Reform Act of 2007, H.R. 984, which amends the Ethics in Government Act of 1978. The measure requires executive branch officials to record and file with the Office of Government Ethics information about any significant contact between the official and any private party relating to an official government action. The proposed act also heightens restrictions placed on federal procurement officials who leave the government for private-sector employment. Specifically, it establishes a cooling-off period in which former federal agency contracting officials cannot accept rewards, inappropriate compensation or any compensation for legal or lobbying work performed on behalf of a government contractor. It also proposes a corresponding cooling-off period before a former employee, lobbyist or attorney of a contractor can participate in the award or administration of a contract to that contractor. Further, current contracting officers would have to disclose job offers made on behalf of relatives.

This past March, the House passed the 'Accountability in Contracting Act, H.R. 1362, which increases the cooling-off period in which contracting officials are barred from taking jobs with firms they have supervised as a government employee, and establishes a two-year cooling-off period before procurement officials can award or oversee contracts involving a former employer. It also extended the ban on lobbying and consulting for government contractors, and prohibits contracting officials from negotiating employment for their relatives.

Even more recently, the Civilian Agency Acquisition Council and Defense Acquisition Regulations Council solicited comments on a proposed amendment to the Federal Acquisition Regulation ('FAR'). The amendment would require contractors receiving federal contracts worth more than $5 million that have performance periods of 120 days or more to implement a written code of ethics and business conduct. It would also require the contractor to establish a compliance training program, an internal control system, and display fraud hotline posters produced by DOJ's Office of the Inspector General (Federal Register, Feb. 16, 2007, at page 7588).

Strengthening Compliance Programs to Meet New Challenges

Clearly, legislators and law enforcement officials have placed procurement fraud and related improprieties on the front burner. Corporations that contract with the government must do so as well or risk immense criminal and civil penalties, loss of business opportunities, debarment-related penalties, and inevitable damage to the organization's reputation. An effective compliance program is the first line of defense in this era of increased scrutiny and penalties. There are several steps that corporate compliance officers can take to ensure that the organization, its agents and employees are complying with the law or, in the event they are not, to minimize the negative consequences for the company.

• Ensure transparent procurement and compliance standards and expectations. Educate employees and consultants about what activities and actions violate the laws, as well as the organization's code of ethics and conduct. Identify the red flags that signal others' misconduct and make known the individual responsibility to report suspicious activity via proper channels. Also, set clear expectations regarding confidentiality and opportunities for feedback should they follow the company's established protocol.
• Foster top-down leadership on compliance. Adherence to ethical procurement procedures must be a visibly important part of the business culture. This message should be communicated early and often. Top executives must fully understand the law's requirements and recognize adherence as a core value of the organization. As the message is relayed within in the organization, leadership's tone must be constant and consistent.
• Review and update procurement operations, if needed. Federal procurement is a fluid regulatory environment and recent legislative provisions may even require an overhaul of several processes. The company, its agents, consultants and employees must be adaptable to change.
• Review and update compliance and ethics policies, if needed. It is imperative that regular updated guidance be provided to management and employees about ethics and professionalism. An effective corporate compliance program not only provides guideposts for conduct, but a communicated process for investigating possible violations and prompt and remedial actions, where appropriate.
• Contractors should conduct regular self-audits of procurement controls and procedures.

Procurement compliance cannot function effectively on 'auto pilot.' Rather, under the compliance officer's guidance, a compliance audit should be performed for signs of misconduct and to identify areas in which the company is at risk. A robust audit should uncover opportunities that exist for compromising the organization's internal controls and procedures. Should any suggestion of wrongdoing arise, a thorough investigation must follow. Results must be reported up to the company's leadership team. They must be made aware of the weaknesses in the controls and policies and provided concrete recommendations to shore them up. Full awareness and understanding will also help prepare for any eventual government-initiated investigation. The voluntary self-reporting of procurement fraud is often rewarded and should be considered.

Conclusion

Our nation's legislators and law enforcement officials have zeroed in on procurement fraud. Fueled by recent scandals, new legislation and initiatives have been rolled out to prevent, detect, and punish a wide array of conduct. A harried, ineffectual response to investigation, an inadequate defense to prosecution or civil suit and consequential damage to corporate reputation all await the unwary governmental contractor. An updated and robust compliance program that enables company-wide understanding of and adherence to the many criminal, civil, and administrative provisions provides the best armor in this targeted area.

Paul Clinton Harris, Sr. is a partner in the Washington, DC, office of Shook, Hardy & Bacon, and is a member of the Government Enforcement and Compliance group. A former Deputy Associate U.S. Attorney General and Virginia legislator, Harris was Senior Counsel and Director of Enterprise Compliance at Raytheon Company prior to joining the law firm. He conducts corporate internal investigations and counsels clients in regulatory enforcement actions.

Each year, the federal government spends several hundred billion dollars to obtain goods and services from corporations and other nongovernmental entities. Under the critical eye of the nation's taxpayers, the federal government has amplified its own scrutiny of the ethics and integrity of its procurement officers and those companies with which it contracts. Via new national legislation and investigative initiatives, the attention of Capitol Hill and federal law enforcement offices across the nation is keenly focused on the prevention, detection and punishment of procurement fraud. It is a brand new day ' and a potentially dark one for the unwary governmental contractor.

Recent Scandals and Prosecutions

Several recent highly publicized investigations have fueled the federal government's heightened efforts to crack down on schemes involving conflicts of interest, defective pricing, bid-rigging, product substitution, accounting fraud, grant fraud, misuse of classified or other sensitive information, and other ethical breaches. Among them was the manipulation of a federal contract for the leasing of 100 Air Force refueling tankers worth over $20 billion. Darleen Druyun, the Air Force's former principal deputy assistant secretary for acquisition and management, supervised the lease negotiations and other Boeing contracts only to retire and begin working at Boeing. Not only did Druyun give Boeing special treatment, she agreed to higher pricing and negotiated lucrative jobs for herself and family members. In October 2004, she pled guilty to conflict of interest violations and conspiracy to defraud the government, and was sentenced to nine months in a federal prison. See Merle, Renae: 'Long Fall for Pentagon Star: Druyun Doled Out Favors by the Millions.' The Washington Post, Nov. 14, 2004. For his role in the company's improper job talks with Druyun, Boeing's chief financial officer Michael Sears also pled guilty to conflict of interest violations and was sentenced to four months in prison. See 'Former Boeing CFO Sears Sentenced to Prison, Fined.' St. Louis Business Journal, Feb. 18, 2005. Significantly, Boeing was fined $615 million, the largest sum in a federal procurement fraud matter. See Tomasko, Catherine: 'Boeing Pays Record $615 Million to End Fraud Charges.' Andrews Publications (Jul. 14, 2006).

More recently, a multiple agency probe into the improper dealings of former lobbyist Jack Abramoff prompted the loss of job and liberty for a top White House procurement officer who set the government's purchasing policy. The investigation focused on the advice and aid that former General Services Administration Chief of Staff David Safavian offered his former co-worker Abramoff in his effort to obtain GSA-controlled property. Safavian was also among those Abramoff treated to a Scottish golf outing in violation of GSA ethics rules banning the receipt of a gift from anyone having official business before GSA. In September 2005, Safavian resigned from his post as a top official at the Office of Management and Budget. In June 2006, he was convicted of making false statements to investigators about his dealings with Abramoff and obstruction of a GSA proceeding. Last fall, Safavian was sentenced to 18 months in a federal prison. See Schmidt, Susan: 'Official in Abramoff Case Sentenced to 18 Months.' The Washington Post, Oct. 28, 2006.

Coordination of Criminal Fraud Investigations and Prosecutions

A wide range of provisions are used in the criminal prosecution of those allegedly involved in procurement fraud, including false claims, 18 U.S.C. ' 287, Major Fraud Act, 18 U.S.C. ' 1031, fraud and false statement provisions, 18 U.S.C. ' 1001, bribery, 18 U.S.C. ' 201, conspiracy, 18 U.S.C. ' 371, and the Procurement Integrity Act, 41 U.S.C. ' 423. Broadly interpreted, these and other industry-specific rules, regulations and provisions have been used in charging instruments against government officials, lobbyists, lawyers, contracting companies, and their employees.

The FBI has traditionally taken the lead in the criminal investigation of procurement fraud matters. However, the tragic events of 9/11 redirected the FBI's attention more toward national security and terrorism. To coordinate the continued efforts of the FBI and the many agencies that have assumed a greater role in detecting and punishing procurement fraud, in October 2006, Deputy Attorney General Paul J. McNulty announced the formation of the National Procurement Fraud Task Force ('Task Force'). Chaired by DOJ Criminal Division head Alice Fisher, the Task Force combines the might of the FBI, Inspectors Generals for the Department of Defense, CIA, NASA and General Services Administration, among other agencies, as well as the government's defense-related investigative agencies. Its stated purpose is to root out 'defective pricing or other irregularities in the pricing and formation of contracts, product substitution, misuse or classified and procurement sensitive information, false claims, grant fraud, labor mischarging, accounting fraud, fraud involving foreign military sales, ethics and conflict of interest violations, and public corruption associated with procurement fraud.' See 'Combating Procurement Fraud: A National Initiative to Increase Prevention and Prosecution of Fraud in the Federal Procurement Process' (Oct. 10, 2006), available at www.usdoj.gov/criminal/npftf/pr/speeches/2006/oct/10-10-06npftfinitiative.pdf.

The initiative is similar to the Procurement Fraud Working Group that McNulty spearheaded while serving as U.S. Attorney for the Eastern District of Virginia. See DOJ Press Release 'Combating Procurement Fraud,' Feb. 18, 2005, available at washingtondc.fbi.gov/dojpressrel/ pressrel05/fraud021805.htm. That initiative, which came on the heels of that office's prosecution of the Druyun case and other high-profile procurement fraud cases, highlighted the exchange of information among several law enforcement agencies.

Increase in Civil False Claims Act Qui Tam Cases

The vast array of criminal penalties are not the sole weapons against procurement fraud. Increasingly, investigations are resulting in civil penalties under the False Claims Act, 31 U.S.C. ' 3729 et seq. The act provides for treble damages and a monetary penalty against contractors and others who knowingly submit or cause to be submitted a false or fraudulent claim to the federal government. Significantly, the act uniquely encourages action on the part of persons with knowledge of false claims for payment against the government. Under the act's qui tam enforcement provision, a private citizen ('relator') can file a sealed complaint against government contractors and others. Brought on behalf of the federal government, the suit enticingly offers a bounty in the form of a percentage of the money recovered. Amendments to the False Claims Act made in 1986 have resulted in an increase in qui tam suits. In the 20 years ending on Sept. 30, 2006, the DOJ had recovered more than $18 billion, with $3.1 billion recovered in fiscal year 2006 alone. See DOJ Press Release, Nov. 21, 2006, available at www.usdoj. gov/opa/pr/2006/November/06_ civ_783.html. In that year, relators walked away with $190 million.

Increased Congressional Oversight

Congressional oversight has increased in the procurement fraud area as well. With the stated purpose of increasing transparency and accountability in federal contracting, and protecting the integrity of the acquisition workforce, several pieces of key legislation are in various stages of the legislative process. Many players are being called before or required to answer to investigative committees.

For instance, in the wake of Boeing's firing of Druyun and Sears, Sen. John Warner (R-VA), chairman of the Senate Armed Services Committee, asked Defense Secretary Donald H. Rumsfeld for regular updates on the Pentagon's own review of the tanker lease deal. See Eisman, Dale: 'Warner to Review Aircraft Lease Plan.' The Virginian Pilot, Nov. 27, 2003. Sen. John McCain (R-AZ), in particular, was a vocal opponent of the deal throughout. See Weinberger, Sharon: 'McCain Blasts Pentagon for Withholding Tanker Documents.' Defense Daily, Feb. 1, 2005.

This past February, House Oversight and Government Reform Committee Chairman Henry Waxman and Ranking Minority Member Tom Davis introduced the Executive Branch Reform Act of 2007, H.R. 984, which amends the Ethics in Government Act of 1978. The measure requires executive branch officials to record and file with the Office of Government Ethics information about any significant contact between the official and any private party relating to an official government action. The proposed act also heightens restrictions placed on federal procurement officials who leave the government for private-sector employment. Specifically, it establishes a cooling-off period in which former federal agency contracting officials cannot accept rewards, inappropriate compensation or any compensation for legal or lobbying work performed on behalf of a government contractor. It also proposes a corresponding cooling-off period before a former employee, lobbyist or attorney of a contractor can participate in the award or administration of a contract to that contractor. Further, current contracting officers would have to disclose job offers made on behalf of relatives.

This past March, the House passed the 'Accountability in Contracting Act, H.R. 1362, which increases the cooling-off period in which contracting officials are barred from taking jobs with firms they have supervised as a government employee, and establishes a two-year cooling-off period before procurement officials can award or oversee contracts involving a former employer. It also extended the ban on lobbying and consulting for government contractors, and prohibits contracting officials from negotiating employment for their relatives.

Even more recently, the Civilian Agency Acquisition Council and Defense Acquisition Regulations Council solicited comments on a proposed amendment to the Federal Acquisition Regulation ('FAR'). The amendment would require contractors receiving federal contracts worth more than $5 million that have performance periods of 120 days or more to implement a written code of ethics and business conduct. It would also require the contractor to establish a compliance training program, an internal control system, and display fraud hotline posters produced by DOJ's Office of the Inspector General (Federal Register, Feb. 16, 2007, at page 7588).

Strengthening Compliance Programs to Meet New Challenges

Clearly, legislators and law enforcement officials have placed procurement fraud and related improprieties on the front burner. Corporations that contract with the government must do so as well or risk immense criminal and civil penalties, loss of business opportunities, debarment-related penalties, and inevitable damage to the organization's reputation. An effective compliance program is the first line of defense in this era of increased scrutiny and penalties. There are several steps that corporate compliance officers can take to ensure that the organization, its agents and employees are complying with the law or, in the event they are not, to minimize the negative consequences for the company.

• Ensure transparent procurement and compliance standards and expectations. Educate employees and consultants about what activities and actions violate the laws, as well as the organization's code of ethics and conduct. Identify the red flags that signal others' misconduct and make known the individual responsibility to report suspicious activity via proper channels. Also, set clear expectations regarding confidentiality and opportunities for feedback should they follow the company's established protocol.
• Foster top-down leadership on compliance. Adherence to ethical procurement procedures must be a visibly important part of the business culture. This message should be communicated early and often. Top executives must fully understand the law's requirements and recognize adherence as a core value of the organization. As the message is relayed within in the organization, leadership's tone must be constant and consistent.
• Review and update procurement operations, if needed. Federal procurement is a fluid regulatory environment and recent legislative provisions may even require an overhaul of several processes. The company, its agents, consultants and employees must be adaptable to change.
• Review and update compliance and ethics policies, if needed. It is imperative that regular updated guidance be provided to management and employees about ethics and professionalism. An effective corporate compliance program not only provides guideposts for conduct, but a communicated process for investigating possible violations and prompt and remedial actions, where appropriate.
• Contractors should conduct regular self-audits of procurement controls and procedures.

Procurement compliance cannot function effectively on 'auto pilot.' Rather, under the compliance officer's guidance, a compliance audit should be performed for signs of misconduct and to identify areas in which the company is at risk. A robust audit should uncover opportunities that exist for compromising the organization's internal controls and procedures. Should any suggestion of wrongdoing arise, a thorough investigation must follow. Results must be reported up to the company's leadership team. They must be made aware of the weaknesses in the controls and policies and provided concrete recommendations to shore them up. Full awareness and understanding will also help prepare for any eventual government-initiated investigation. The voluntary self-reporting of procurement fraud is often rewarded and should be considered.

Conclusion

Our nation's legislators and law enforcement officials have zeroed in on procurement fraud. Fueled by recent scandals, new legislation and initiatives have been rolled out to prevent, detect, and punish a wide array of conduct. A harried, ineffectual response to investigation, an inadequate defense to prosecution or civil suit and consequential damage to corporate reputation all await the unwary governmental contractor. An updated and robust compliance program that enables company-wide understanding of and adherence to the many criminal, civil, and administrative provisions provides the best armor in this targeted area.

Paul Clinton Harris, Sr. is a partner in the Washington, DC, office of Shook, Hardy & Bacon, and is a member of the Government Enforcement and Compliance group. A former Deputy Associate U.S. Attorney General and Virginia legislator, Harris was Senior Counsel and Director of Enterprise Compliance at Raytheon Company prior to joining the law firm. He conducts corporate internal investigations and counsels clients in regulatory enforcement actions.