Sure Fraud Happens... But Not Here ISACA North Texas Chapter Meeting

Transcription

1 Sure Fraud Happens... But Not Here ISACA North Texas Chapter Meeting Presented By: Joseph S. Satagaj, Jr. Associate Counsel DCMA Contract Integrity Center October 13, 2011 Revision 1, October 2011

2 Introduction and Overview DCMA and DCMA Contract Integrity Center (CIC) Information. What is FRAUD? Why does fraud occur? Who commits fraud? Types of fraud. Indicators/RED FLAGS. Remedies relating to fraud Fraud on your company; fraud by your company. GOVT Contractors reporting requirements. Proactive steps - What should your company do? What should you do? It happened, now what?

3 Sophisticated Weapons Platforms! 3

4 Secret Weapons! 4

5 High-speed Amphibious Assault! 5

6 General Information About DCMA The Defense Contract Management Agency (DCMA) is the Department of Defense (DoD) component that works directly with Defense suppliers to help ensure that DoD, Federal, and allied government supplies and services are delivered on time, at projected cost, and meet all performance requirements. DCMA professionals serve as "information brokers" and in-plant representatives for military, Federal, and allied government buying agencies both during the initial stages of the acquisition cycle and throughout the life of the resulting contracts. Before contract award, DCMA provides advice and services to help construct effective solicitations, identify potential risks, select the most capable contractors, and write contracts that meet the needs of our customers in DoD, Federal and allied government agencies. After contract award, DCMA monitors contractors' performance and management systems to ensure that cost, product performance, and delivery schedules are in compliance with the terms and conditions of the contracts.

7 Perhaps You Have Seen This?

8 Some Things You Don t See! USS SAN ANTONIO (LPD-17) USS NEW YORK (LPD-21) A force-projection platform, it is designed and equipped to operate with maximum stealth and tactical flexibility. Her components include... the V-22 tilt-rotor Osprey aircraft, three types of helicopters and 14 expeditionary fighting vehicles (EFVs) and/or several air-cushioned landing craft (LCACs) for across-thebeach deployments of U.S. Marine Corps and Special Forces personnel. Her bow stem includes seven and a half tons of steel recovered from the World Trade Center's twin towers Ship's motto: 'Strength forged through sacrifice. Never forget.'

9 Contract Integrity Center Objectives: Minimize fraud Efficiently investigate allegations of fraud Facilitate contract administration Help improve processes - Maximize remedies when fraud is substantiated - Eliminate nonresponsible contractors

10 WHAT IS FRAUD? Fraud comprises all intentional acts, omissions and concealments involving a breach of a legal or equitable duty and resulting in damage to another. This could include anything calculated to deceive, whether it be a single act or combination of circumstances, whether the suppression of truth or the suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or by silence, by word of mouth or by look or gesture. Similar to Statement on Auditing Standards 99?

11 We Are OK Don t Worry!

12 Why Does Fraud Occur? 12

13 Plain GREED? Enough is never enough! *** Distinguishable from NEED ***

14 14 A Mistake? Did someone forget a fastener?

15 Opportunity? Challenge?

16 DALLAS MORNING NEWS, 09/27/11 16 A Very Important But, Separate Focus

17 Who Commits Fraud? People do! They could be employees or management but remember - companies are held responsible for actions of their employees and managers.

18 Types of DoD Contract Fraud Bribery/Kickbacks/Gratuities Bid Rigging Defective Pricing Cost Mischarging Progress/Performance Payment Fraud Theft/Embezzlement Non-conforming Product, Defective Product or Product Substitution *Most serious due to possible bodily injury or threat to national security

19 19 A Local Theft Example The AN/PAS-13 Thermal Weapon Sight (TWS) family enables the Soldier to detect and engage targets, day or night, in all weather and visibility obscured conditions. Ray Dean Young 2008 FBI Investigation (he stole 7-10 TWS and re-sold them); Indicted (02/03/09), 18 USC 641 (Theft); Convicted (09/29/09), 180 days Home Confinement, 2-Year Probation, Restitution $18,456; Debarred (01/08/10), US Army, 3-Year Period.

20 Profile of the Typical Offender Company does not exceed 120 employees Machine shop or electronics manufacturer/assembler Annual sales range between $1 - $3 million Management structure made up of 1 to 3 executives with decision making authority

21 Number 1 DoD Fraud Concern NON-CONFORMING PARTS SCHEMES Inferior quality raw materials Process substitution or elimination Counterfeit/non-qualified parts and labeling Sale of surplus or used parts as new Foreign made v. domestic products Use of unqualified or inexperienced personnel Non-testing/inspection of items Falsified test or service records

22 Example of Improper Heat Treating? 22

23 We MUST Protect the Warfighter! 23

24 Other DoD Fraud Schemes Contractor Cost or Pricing TINA (Defective Cost or Pricing Data) Mischarging (Labor, Overheads, Unallowable cost) Theft or Misuse of Government Property Payment Irregularities Progress Payments Billing for non-delivered supplies or services Small Business Innovative Research Contracts (SBIR) Bribery/Anti-Kickback

25 How do These Matters Surface? Equipment or System * FAILURE * - Reported by the USER - Reported by a company employee - Reported by a subcontractor employee - Reported to an investigative agency - A call to a Hotline - Civil Litigation/Qui Tam - Voluntary Disclosure - Search Warrant/Grand Jury Subpoena/DoD IG Subpoena

26 What Are Some of the Remedies? Criminal Remedies imprisonment/probation, fine, order of restitution Civil Remedies payment of up to 3X damages plus a civil penalty up to $11,000 for each false claim (Note: There is a provision that allows for individuals reporting fraud to share in a percentage of the damages recovered.) Contract Remedies default, single damages, effect on future awards Administrative Remedies loss of license, certification, standing OR your ability to contract with the Federal Government (debarment, which is also widely recognized by State Governments)

27 Some of the Consequences? To the USER To NATIONAL SECURITY To a COMPANY To a company EMPLOYEE

28 Counterfeit = Fraud! Accenture Pays $ million to settle False Claims Act allegations involving kickbacks, bid rigging relating to Information Technology Services (9/12/11 DoJ Press Release) Chun-Yu Zhao (VA), sentenced (09/09/11), 60-months in prison, 3-years probation, $2,709,238 restitution, $17,500 fine, for selling counterfeit Ciscobranded computer networking equipment. She also forfeited $2.6 million in property and $1.6 million in bank accounts. Todd Alan Cook (TX), sentenced (10/29/10), 18-months in prison, 3-years probation, $599,771 restitution, $17,500 fine, for selling more than $1 million worth of pirated computer software. Jian Jimmy Wang (NY), sentenced (08/11/10), 37-months in prison, for trafficking in more than 1.4 million counterfeit Trojan condoms, Church & Dwight Co., maker of Trojan condoms, was awarded $92.3 million in damages against 36 defendants (including Wang) in a civil action.

29 More, Through Joint Task Force Efforts Operation Network Raider ICE, CBP and FBI initiative ( ) resulted in 30 felony convictions and more than 700 seizures of counterfeit Cisco network hardware and labels with an estimated retail value of more than $143 million. Ehab Ashoor (TX), sentenced (05/06/10), 51-months in prison, 3-years probation, $119,400 restitution; doing business as CDS Federal, Inc., he purchased counterfeit Cisco Gigabit Interface Converters from an online vendor in China with the intention of selling them to the DoD (USMC troops in Iraq were to use them to transmit troop movements, relay intelligence and maintain base security). Yongcai Li (CA), sentenced (01/25/10), 30-months in prison, $790,683 restitution; a resident of China doing business as Gaoyi Tech., he shipped counterfeit Cisco products to the US (he was arrested while visiting Las Vegas, NV) Operation Cisco Raider ICE, CBP, FBI initiative ( ) seized more than 74,000 counterfeit cisco network components and labels with an estimated retail value of more than $73 million. Todd Richard (GA), sentenced (02/14/08), 36-months in prison, $208,440 restitution. Mark Thomas Geis (TX), sentenced (04/17/07), 5-years in prison, $1.5 million restitution (doing business as VARGlobal he conspired to traffic in approximately $4.2 million of counterfeit Cisco hardware. Robert Edman (TX), sentenced (09/07/10), 30-months in prison, 3-years probation, $31,541 restitution; doing business as Syren Technology, he caused a loss of approximately $1.46 million; he imported counterfeit Cisco products (network cards), customers included the USMC, USAF, FBI, FAA and DOE, Michael Edman has also plead guilty (sentencing information is not available). 29

30 Government Oversight?

31 Criminal Prosecution False Statements (18 USC 1001) Prohibits making any materially false statement, concealing any material fact, or knowingly making or using any false document in any matter within the jurisdiction of the United States Major Fraud Against the U.S. (18 USC 1031) Prohibits false statements or claims on contracts >$1 million Fraud Involving Aircraft or Space Parts (18 USC 36) Prohibits false statements or claims concerning any aircraft or space parts Conspiracy (18 USC 286 & 371) Mail & Wire Fraud (18 USC 1341 & 1343) - Penalty up to 20 yrs Bribery of Public Officials (18 USC 201) Anti-Kickback (41 USC 52 & 53) 31 10/12/2011

32 GOVT Contractors REQUIRED to Report Fraud FAR (2) and : require contractors to make a timely disclosure to the DoD IG, with a copy to the contracting officer, when... the contractor has credible evidence of a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations; or a violation of the civil False Claims Act. If you are contacted by a contractor attempting to make a disclosure you should advise them that disclosures must be in writing and can be made by disclosures@dodig.mil, fax: (703) , or by mail: Office of the Department of Defense Inspector General, Investigative Policy and Oversight, Contractor Disclosure Program, 400 Army-Navy Drive, Room 1051, Arlington, VA

33 Will Companies Report FRAUD?

34 Should Your Company Report? Think about it do you want to be last on the ladder?

35 DCMA Proactive Efforts Fraud Awareness Training Purpose of training is to learn how to recognize and report suspected fraud Understand what actions that you should take and what actions you should not take when a fraud investigation is in progress All DCMA acquisition personnel are required to receive fraud awareness training on an annual basis 35 10/12/2011

36 RED FLAGS What, exactly, is a fraud indicator? Fraud indicators are signs or clues that a contractor may be engaging in fraudulent conduct. Sometimes an indicator is obvious, such as, A subcontractor mentions that he gets awards because he has a special arrangement with a particular buyer. Most of the time, however, fraud indicators are subtle. Fraud detection is particularly difficult with DCMA s role of reviewing policies, procedures and systems rather than inspecting product. Occasionally, however, an alert employee may notice suspicious circumstances or actions that raise the red flag that a contractor may be engaging in fraudulent conduct.

37 Will You RECOGNIZE it?

38 More on RED FLAGS Altered Test Reports/Certifications Non-Operating Test Equipment Pre-Signed Certification or Receipt Forms QUALITY ASSURANCE Non-Availability of Basic Information Commingled tested and untested items Substituting Generic for Name Brand Parts Parts Failures after 100% Inspection and Testing Subsequent test and inspection failures on products for which performance based payments were made Limited Government Access to Production and Storage Facilities Rush Job (end of the Month) Unwillingness to mark, ship or seal in your presence 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 Substituting foreign made products for domestic items Frequent complaints by users of supplies or services Inadequate traceability of parts

39 You Might Also Call This a Red Flag

40 Six-Percent Failure Rate is OK? PRC-112CF Survival Radio PRC-90 Survival Radio Scott O'Grady, a former Air Force Captain, was in the spotlight in 1995 when the F-16 jet he was piloting was shot down over Bosnia. He escaped capture for six days before being rescued by U.S. Marines. He survived for almost six days by eating leaves, grass and ants, avoiding Serb Patrols while trying to make radio contact.

41 Are YOU looking? You must be Proactive!

42 What Should Your Company Do? - ANALYZE BUSINESS/COMPANY/SUPPLY CHAIN - IDENTIFY HIGH RISK AREAS/POSITIONS/SUPPLIES - DEVELOP REPORTING PROTOCOL - DEVELOP A PLAN OF ACTION ( WHAT IF? ) - DEVELOP AREA SPECIFIC RED FLAGS - DEVELOP AREA SPECIFIC TRAINING - TRAIN RECOGNIZE INDICATORS REPORT - PLAN OF ACTION SHOULD INCLUDE: - - LEGAL; ACCOUNTING; IT EXPERTISE - - COOPERATION WITH AUTHORITIES - - PRESERVATION OF RECORDS

43 A Thorough Analysis Is REQUIRED!

44 You Can Talk to Attorneys!

45 What Should YOU Do? - THE RIGHT THING - BE AWARE OF CONTRACT REQUIREMENTS - RECOGNIZE NONCONFORMANCES, DEFECTIVE OR SUBSTITUTED ITEMS - RECOGNIZE IRREGULARITIES - ASK DISCREET QUESTIONS - REPORT POTENTIAL WRONGDOING (DO NOT WAIT FOR PROOF) - COOPERATE WITH INVESTIGATORS/LEGAL - DOCUMENT, DOCUMENT, DOCUMENT - DO NOT DISCUSS WITH OTHERS

46 46 You Want ME to Report Fraud? I have more important things to do!

47 You Want Me to do -- WHAT?

48 It Is Really NOT That Difficult!

49 GOVT Considerations on Responsibility FAR (a) Were effective standards of conduct and internal controls in place? Did the company bring the matter to our attention? Did the company conduct (and disclose) a complete investigation? Did the company cooperate with authorities? Has the company paid or agreed to pay (fines, penalties, restitution)? Has the company taken appropriate disciplinary action? Has the company implemented remedial measures? Has the company implemented new or revised controls (prevention)? Has the company had sufficient time to eliminate the cause? Has Management recognized the seriousness of the misconduct?

50 50 Contract Integrity Center (CIC) DCMA CIC Website DCMA CIC Brochure DCMA CIC Focus on Fraud Newsletters DCMA CIC Red Flags (Indicators) (214) (214) (FAX) DCMA CONTRACT INTEGRITY CENTER ATTN:DCMAC-Y/ J. SATAGAJ 600 N. PEARL STREET, SUITE 1630 DALLAS, TX 75201

51 I KNOW These People, Don t You?

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79 Quote for the Day Always do right. This will gratify some people and astonish the rest. Mark Twain