Acquisition IntegrityProtecting the Process – Let us help!

Acquisition Integrity Division Acquisition Integrity Division

AFMC LO/JAFAFMC LO/JAF

WPAFB OHWPAFB OH

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Who Suffers from Fraud?

National Security Suffers Failure of a part or system creates advantages for

adversaries, both on the battlefield and at home Assets devoted to pursuing and prosecuting fraud

cannot be used for other missions

USAF End Users / Warfighters Suffer Safety issues Adverse mission impact due to unreliable systems

Contractors and their Employees Suffer Contracts lost to irresponsible contractors and unfair

competition

We Taxpayers

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Simple Definition of Fraud

Four Simple Elements to the Legal Definition of Fraud:

1) Misrepresentation

2) of a Material Fact

3) with the Intent to Deceive

4) to Obtain a BenefitIncludes:

Deliberate omission of material facts False or misleading statements or actions Single act or combination Innuendo, silence, look or gesture

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Who Commits Fraud?

People do!They could be:

Employees and/or Management Contractor Personnel and/or Government

Employees Prime and/or Sub Contractors Military and/or Civilian

• Companies can be held responsible for actions of their employees and managers, and vice versa

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Who Reports Fraud?

Contracting PersonnelContractor Employee (“Whistleblower”)

May be come to light as part of a Qui Tam lawsuit

Other AF or other DoD employees Affirmative duty to report; required by E.O. 12674

New FAR reporting requirement for ContractorsA call to the Fraud, Waste and Abuse HotlineReports are received by:

AF OSI or other Law Enforcement Agencies Inspector General Staff Judge Advocate Installation Procurement Fraud Counsel Installation Procurement Fraud Working Group members AFMCLO/JAF Procurement Fraud Branch (WPAFB) SAF/GCR

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• Contractor or Subcontractor:• Machine shop, electronics manufacturer/assembler• Annual sales range between $1 - $3 million• Management structure made up of 1 to 3 executives with

decision making authority

• Government Employee:• Has little or no supervision • Works in the same area for an extended period of time • Has extensive contacts with contractors that he or she

oversees

The “Typical” Offender

Darleen Druyun, former Principal Deputy

Assistant Secretary for Air Force Acquisition and Management –

Plead Guilty to Fraud and Corruption in air refueling tanker lease

program, and Imprisoned

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Suspension and DebarmentAn Additional Remedy

Administrative measures used to help ensure that the Government does business only with responsible contractors

Protects the integrity of the procurement process by ensuring that the Government receives safe, reliable, goods and services

Based on a finding that the contractor is “Not Presently Responsible” Can result from fraudulent or other illegal activity or from poor contract

performance

FAR 9.403 defines “Contractor” as any individual or other legal entity that may reasonably be expected to submit offers or be awarded Government contracts

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Suspension and Debarment

Suspensions are for a maximum of one year unless extended due to criminal or civil proceedings

Debarments are for the time period specified by the SDO and are generally three years in length

Suspended or Debarred contractors are not eligible for award of new (future) Government contracts

Contractors are obligated to complete previously awarded contracts Contracting Officers order minimum amounts necessary in IDIQ

Contracts Contract Options are not exercised

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New FAR Contractor Disclosure Requirement

 FAR 52.203-13 – Contractor Code of Business Ethics and Conduct (Dec 2008)

 

(3) (i) The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract there under, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed—

 

(A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or

(B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733).

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A “Blended Family”

Types of Procurement Fraud, Sample Fraud Indicators and Trends

A “Blended Family”

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Main Types of Contract Fraud

Defective PricingCost Mischarging

Direct/Indirect Costs Unallowable Costs Cost Shifting Between Projects Cost Inflation Labor Mischarging

Progress/Performance Payment FraudProduct SubstitutionFalse CertificationQuality Control DeficienciesBribery / Kickbacks / GratuitiesPrice-Fixing / Bid RiggingOutright Theft / Embezzlement

Iraq prison ate up $40 millionDeep Background: Desert prison stands out as 'worst project' in investigation of

mismanagement and waste.

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Sample Indicators of Bribery, Kickbacks and Gratuities

• Contractor offers monetary payment or other compensation in exchange for favorable consideration in contract award or oversight

• REALLY obvious Red Flag

• Contractor Entertains Purchasers

• Frequent use of Contractor despite Quality, Cost or Performance Problems

• Excessive Use of a Single Contractor in a Competitive Field

• Apparent Favoritism of Contractor by the Buyer/PCO/PM

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Price-Fixing and/or Bid-Rigging

Agreements Among Contractors to: Adhere to Published Price Lists

Raise Prices by a Specified Amount

Establish, Adhere to or Eliminate Discounts

Not to Advertise Prices

Maintain Specified Price Differentials Based on Quantity, Type or Size of Product

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Cost and Pricing Fraud Indicators

• Nonpayment of subcontractors and suppliers

• Requests for payment that are inconsistent with earlier cost reports

• Contractor bills costs that are not part of or required for contract performance

• Contractor makes little or no physical progress on the contract even though significant costs have been billed

• History of frequent invoice/voucher errors, poor documentation, & claiming unallowable costs

• Double counting costs as both direct and indirect

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Quality Control Fraud Indicators

Altered Test Reports/Certifications Minor discrepancies in typeface, “whited out”

sections, handwritten portions of typed documents, other alterations

Non-Operating Test Equipment “It works, just not today”

“Pre-Signed” Certification or Receipt Forms Indication that actual verification was not performed

as these should not be signed until actual verification of facts have taken place

Commingled Tested and Untested Items Tested items should be stored separately to prevent

accidental use of untested items

“Salting” the Lots Does that Contractor have “sample” parts prepared

and waiting for inspection?

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Quality Control Fraud Indicators

Substituting Generic for Brand-Name Parts

Check to ensure packaging matches

Questionable Testing Claims Examples: Two tests at the same time using

the same machine; 72-hour tests over 2 days (48-hours)

Parts Failures After “100% Inspection and Testing”

Subsequent Test and Inspection Failures on Products in Performance-Based Contracts

Rush Jobs (End of Month or Fiscal Year)

Example of subtle differences between authentic and fake

packaging

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Quality Control Fraud Indicators

Limited Government Access to Production and Storage Facilities

Unwillingness to Mark or Seal in the Presence of a Government Representative

Major Work Schedule Changes without Notice

Contractor Efforts to Hide Records

Poor Reproduction of Certifications, Illegible or Incomplete Documentation

Use of Lesser Skilled Labor than Originally Anticipated

Substitution of Foreign Parts for Domestic Items

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Product Substitution Fraud

• Use of Inferior Quality Raw Materials• Substitution of Products or Services

Counterfeit/non-qualified parts Sale of surplus or used parts as new Foreign made v. domestic products Remarking/Repackaging

False Certificates of Conformance Provided by Contractor to Affirmatively State that the Product meets

Contract RequirementsUse of Unqualified Personnel in Services ContractsLack of Required and/or Falsified Quality Control Testing

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Largest group of cases prosecuted involve false test certificates

Largest commodity affected is fungible parts such as fasteners, electronics, wire & cable

Trends

• Growing number of cases with 2nd and 3rd tier subcontractors

• Potential fraud is greatest where DoD heavily relies on contractor integrity (trust in our partners)

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What Should You Do?

• Know the Contract Requirements!

• Be alert for indications of fraud• Recognize undisclosed non-conformances,

defective or substituted items• Recognize irregularities

• Ask Questions

• Follow-up on Notices of Potentially Defective Products

• Report Wrongdoing• Do not wait for proof – Investigators are there to collect evidence and

conduct investigations• Delayed reporting can hinder the investigators / benefit the wrongdoers

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REPORT suspicions of Procurement Fraud promptly!

DON’T WAIT FOR PROOFContact Your Supervisor, Local Fraud Counsel, Law Enforcement, Legal Office, Inspector General or a Fraud Hotline

And REMEMBER….

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Susan TheodorelosAcquisition Fraud Counsel

Wright-Patterson Air Force Base, OH

937 904 5757Susan.theodorelos@wpafb.af.mil

QUESTIONS????

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YOU can help detect and prevent fraud!

Protect the Process…Who knows…the life you save may be

your own.