The Federal Government Renewed Focus on Procurement Fraud
June 19, 2007
Richard O. Duvall- Northern Virginia
The DoJ’s Procurement Fraud Initiative
Last fall, Deputy Attorney General Paul J. McNulty announced the start of the Department of Justice’s National Procurement Fraud Initiative.1 The initiative is now up and running and is designed to promote the early detection, prevention and prosecution of procurement fraud by companies doing business with the federal government. In addition to enforcement actions, the initiative participants will consider potential regulatory and legislative changes to enhance prosecutorial efforts in the area of procurement fraud.
Primary implementation of the initiative will be effected through the National Procurement Fraud Task Force, chaired by Assistant Attorney General Alice S. Fisher of the Criminal Division. The scope and seriousness of the Task Force effort is reflected in its participants, which include the FBI, all defense-related investigative agencies, the Special Inspector General for Iraq Reconstruction, and the Offices of Inspector General for 20 federal agencies, including DoD, CIA, GSA and the Department of Justice. The Task Force also includes federal prosecutors from United States Attorneys’ offices across the country, as well as the Criminal, Civil, Antitrust and Tax Division of the Department of Justice.
The Task Force’s emphasis will be on the following:
• defective pricing
• product substitution
• misuse of classified and procurement-sensitive information
• false claims
• grant fraud
• labor mischarging
• fraud involving foreign military sales
• ethics and conflict of interest violations
• public corruption associated with procurement fraud
The Task Force is modeled after DoJ’s successful effort in combating fraud in the aftermath of Hurricane Katrina,2 and a similar effort initiated in 2005 by the U.S. Attorney’s Office for the Eastern District of Virginia.
The Task Force has a worldwide focus on procurement fraud. A subgroup of the Task Force – the International Contract Corruption Task Force – has been created for the investigation and prosecution of procurement fraud and public corruption outside the United States, including fraud related to government reconstruction efforts in Iraq and Afghanistan.3
Federal contractors today are also receiving an increased level of scrutiny by Congress. Both the House and Senate have plainly signaled their intent to provide new oversight for defense contractors and other federal contracting activities by examining procurements and providing a more transparent environment in which business is conducted. The primary actors will be the House Committee on Oversight and Government Reform, the Senate and House Armed Services Committees, the Senate Committee on Homeland Security and Government Affairs, and the Senate Permanent Sub-committee on Investigations.
Last year, the federal government recovered $3.1 billion in cases involving fraud against the government.4 But even this astonishing figure may soon be surpassed if preliminary indicators hold. According to Task Force press releases, for the period from October 2006 through May 18, 2007, there have been 215 arrests, indictments, guilty pleas and sentencings for procurement fraud. Federal investigators are focusing more than ever on how the government’s money is being spent. Contractors must be aware of their responsibilities and conduct their business operations accordingly.
Protecting Your Company From Procurement Fraud
Federal procurement laws are interpreted broadly and this new era of oversight and enforcement requires that contractors ensure that every facet of their contracting efforts is free from any questionable activity. Under the False Claims Act,5 which will remain one of the primary tools for enforcement activities, the government need not prove that a contractor acted with actual intent to defraud. Violation of the FCA only requires proof that a contractor either knowingly, or recklessly, or with deliberate indifference, made a false statement connected in a reasonably direct way to contract requirements. This knowledge requirement is lower than the standard necessary to prove common law fraud.
Even if a federal contractor is confident in the integrity of its procurement process, the broad focus of the procurement initiative requires it to be fully cognizant of the risk of liability that can arise from the activities of its officers, directors, employees and agents. A company can be held criminally liable for the illegal acts of its officers and directors, and for those of its employees and agents, where such illegal acts were within the scope of the actor’s duties, and were intended, at least in part, to benefit the company. Potential penalties include the imposition of severe monetary fines, suspension or debarment from future government contracts, and collateral consequences resulting from negative publicity, diminished share value and damage to business reputation, good will and future business viability. A company’s liability for the actions of its employees can exist even where the employee acted contrary to company policy with no company benefit from the fraud.6
Even in the absence of conscious wrongdoing by a company’s employees or agents, inadvertent errors in the pricing and billing can cause the government to launch an investigation, raising the specter of civil litigation under the FCA, or possible suspension or disbarment. Proactive measures should be undertaken to ensure the establishment, adequacy and continuous enforcement of an effective internal compliance and ethics program, and to prevent and detect potential procurement issues. The existence of a program can be an important factor in attempting to persuade a prosecutor not to charge a company based on an employee’s conduct or, if charges are filed, can be a mitigating factor that can help facilitate an acceptable outcome.7
An effective compliance and ethics program is not only a prudent protective measure and good business practice, but it may soon become a requirement for many federal contractors and a powerful governmental suggestion for all. The Federal Register for February 16, 2007 (Vol. 72, No. 32) solicited comments on a proposal by the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council to amend the FAR to add Subpart 3.10, entitled “Contractor Code of Ethics and Business Conduct.” The proposal mirrors regulations that already govern contractors with DoD,8 the VA and the EPA, in requiring contractors with significant government contracts (awards in excess of $5 million) to develop a written code of ethics and business conduct supplementing training programs and internal control systems, and to display the procuring agency’s OIG fraud hotline posters. If proposed FAR Subpart 3.10 goes into effect, contractor compliance programs would be required, regardless of the procuring agency. Proposed FAR Subpart 3.10 would also include a policy that all contractors, not only those with significant government contracts, “must conduct themselves with the highest degree of integrity and honesty,” and “should have a code of ethics and business conduct.”
Federal contractors must conduct regular audits of procurement practices and procedures to detect any irregularities or problems in those practices and procedures, and take immediate corrective action if any such irregularities or problems are discovered. Contractors also should implement and conduct effective educational and training programs for all personnel on the company’s standards of conduct, and the procedures for reporting deviations.
The Eastern District of Virginia
Virginia is divided into two judicial districts that determine where federal court cases are filed and investigative agencies staffed. The Eastern District of Virginia – home of the “Rocket Docket” and a U.S. Attorney’s Office with a national reputation for combating procurement fraud – includes Alexandria, Richmond, Newport News and Norfolk. The district is home to many of the government’s contracting agencies and national security assets. The Pentagon and the Norfolk Naval Base are located here. The Eastern District of Virginia sits in the heart of the defense industry,9 and the district claims oversight of a significant number of all government contracts issued.10
Federal contractors doing business with a federal agency located in the Eastern District of Virginia may fall under the scrutiny of investigators here, particularly since the DoJ has identified the U.S. Attorney’s Office for the Eastern District of Virginia as one of the three key offices upon which the successful implementation of the National Procurement Fraud Initiative and Task Force will depend.11 It is therefore likely that the District will be the venue for many procurement fraud cases, both criminal and civil.
For more information, e-mail Richard O. Duvall or John P. Rowley III at richard.duvall@hklaw.com or john.rowley@hklaw.com, respectively, or call toll free, 1-888-688-8500.
Richard Duvall is Chairman of Holland & Knight’s Litigation Section and Practice Leader for the firm’s Government Contracts Group. John Rowley is a Holland & Knight litigation Partner and formerly served as an Assistant U.S. Attorney for the Eastern District of Virginia. Mr. Duvall and Mr. Rowley practice in the area of procurement litigation and are resident in Holland & Knight’s Northern Virginia office.
The firm’s Government Contracts lawyers represent federal contractors that may become the focus of an investigation by the National Procurement Fraud Task Force (of the Attorney General’s Office). The attorneys in our white collar litigation and government contracts practice groups have substantial experience assisting clients in the defense of cases involving procurement fraud, the False Claims Act, suspension and disbarment matters, internal corporate investigations, corporate compliance and ethics programs, and related matters.
1 See U.S. Department of Justice Criminal Division White Paper of October 10, 2006, “Combating Procurement Fraud: A National Initiative to Increase Prevention and Prosecution of Fraud in the Federal Procurement Process.”
2 The Hurricane Katrina Fraud Task Force was formed in September 2005 and has prosecuted more than 600 defendants in cases filed in 22 states. The GAO has referred more than 22,000 potential cases of fraud to the task force. See Sharon Cohen, More Than 600 Accused of Katrina Fraud, Canton Rep.com (April 2007).
3 The DoJ has filed criminal charges against 25 individuals for public corruption and fraud relating to the Global War on Terrorism, including cases stemming from Iraq, Afghanistan and Kuwait, obtaining 16 convictions. See March 20, 2007 Statement of Barry M. Sabin, Deputy Assistant Attorney General, Criminal Division, Department of Justice, Before the Senate Judiciary Committee.
4 See Cohen, n.3.
5 31 U.S. Code §§ 3729 et seq.
6 Such liability is predicated upon the legal doctrines of respondeat superior and corporate collective knowledge. See Thomas O. Miler, Corporate Liability: Beware of Rogues and Ostriches, National Defense (Ethics Corner) (March 2006).
7 The mitigating effort of an existing and adequate compliance and ethics program is addressed in both the Department of Justice guidelines on the prosecution of corporations, and the U.S. Sentencing Guidelines.
8 See, e.g., DFARS 203.7000(1).
9 In 2005, the Eastern District of Virginia received over $20 billion in procurement dollars, the third largest amount in the country, behind only the states of California and Texas. See Federal Bar Association, Government Contracts Section (on-line), Recent Events: June 30, 2005 (available at http://www.fedbar.org/govtcontracts_section.html).
10 See Joe Pappalard, Investigators Bond Together Against Contracting Fraud, National Defense (Feature Article) (August 2005).
11 The other two are the U.S. Attorneys’ offices for the District of Columbia and the District of Maryland.
Related Practices