Department of Justice
National Procurement Fraud Task Force
Private Sector Outreach Committee
Co-Chairs: Eric Feldman, National Reconnaissance Office IG
Eric Thorson, Small Business Administration IG
1
Overview
• Background on NPFTF
• Private Sector Outreach Committee
• Fraud in the Workplace
• Ethics, Compliance & Sarbanes-Oxley
• Benefits of Public/Private Partnership
• Summary
2
Background
Created on 10 October 2006 by Deputy Attorney
General Paul McNulty
• Promote the prevention, early detection and prosecution
of procurement fraud
• Chaired by Assistant Attorney General for the Criminal
Division Alice Fisher
• Includes Federal IGs, FBI, defense investigative agencies,
US Attorneys nation-wide, as well as DoJ Criminal, Civil,
Tax, Antitrust and National Security Divisions
“At a time of heightened concern for our nation’s security, every
tax dollar is precious. We simply cannot tolerate fraud and abuse
in government contracting.”
Paul McNulty
Deputy Attorney General
3
NPFTF Goals
• Increase coordination & strengthen
partnerships among IGs, law enforcement, and
DoJ to more effectively fight procurement fraud
• Assess existing government-wide efforts to
combat procurement fraud
• Increase & accelerate civil and criminal
prosecutions/administrative actions, to recover
ill-gotten gains resulting from procurement
fraud
4
NPFTF Goals
• Educate & inform public about procurement
fraud
• Identify and remove barriers to preventing,
detecting, and prosecuting procurement fraud
• Encourage greater private sector participation
in the prevention and detection of procurement
fraud
“The public needs to have faith in the integrity of the procurement
system and know that anyone who is cheating the system will be
held accountable.”
Alice S. Fisher
Assistant Attorney General
Criminal Division
5
NPFTF Structure
Chair
Alice S. Fisher
Vice-Chair
Brian Miller, GSA IG
Director
Steve Linick, DoJ
Grant Fraud Committee
Glenn Fine, DoJ IG
Information Sharing
Committee
Brian Miller, GSA IG
Legislative Committee
Brian Miller, GSA IG
Richard Skinner, DHS IG
Intelligence Committee
Ned McGuire, ODNI IG
Peter Usowski, NGA IG
Private Sector Outreach
Committee
Eric Feldman, NRO IG
Eric Thorson, SBA IG
Iraq/International
Committee
Ken Kaiser, FBI Assistant
Director CID
Training Committee
Dave Williams, USPS IG
6
Private Sector Outreach Committee
Mission: Enlist private sector
participation in prevention & detection of
procurement fraud by creating &
communicating opportunities, incentives
and requirements for early disclosure of
fraudulent activity on US government
contracts to IG community
7
Private Sector Outreach Committee
Goals
• Communicate merits of active private sector participation
in preventing, detecting & reporting fraud on government
contracts
• Leverage appropriate media & professional publications
to communicate message
• Develop & use conferences/symposia to stimulate
public/private sector interaction with corporate business
ethics community on procurement fraud prevention &
detection activities
• Communicate goals & objectives of NPFTF and solicit
support from professional organizations actively
engaged in fraud prevention & detection
8
Is Workplace Fraud a Serious Problem?
2006 Association of Certified Fraud Examiners
(ACFE) Report to the Nation:
•
•
U.S. organizations lose 5% of annual revenue to fraud
Applied to the estimated 2006 U.S. GDP:
approximately $653 billion in fraud losses
Applied to 2004 federal spending with top 10
contractors: approximately $5.8 billion in fraud
losses
Median workplace loss to fraud was $159,000
•
•
•
•
Nearly 25% of the cases caused at least a $1 million in
losses
Average scheme length was 18 months
9
How is Fraud Detected?
•
•
Workplace fraud schemes are difficult to detect
Small businesses (< 100 employees) suffer higher
•
disproportional losses
Attributable to a lack of proactive detection methods
•
•
Frauds are more likely to be detected by tips
Organizations with anonymous fraud hotlines --
•
median loss of $100,000
Organizations without hotlines -- median loss of
$200,000
10
Private Sector Workplace Results
2007 Ethics Resource Center (ERC) National
Business Ethics Survey:
•
•
•
•
56% of employees have observed misconduct
36% fear retaliation
54% are skeptical that a report would matter
Management may not be aware of misconduct
since 42% of employees who observe
misconduct have not reported it
11
What are the Most Common Ethical
Violations in the Business Sector?
2007 ERC National Business Ethics Study
found:
• Conflicts of Interest (putting own interests ahead of
the organization (23%)
• Abusive Behavior (21%)
• Lying to Employees (20%)
“Top 5”
• Misreporting Hours Worked (17%)
• Internet Abuse (16%)
12
Why is Unethical Conduct Not
Reported?
“The only thing necessary for the triumph of evil is for
good men to do nothing.”
Edmund Burke, British political writer
and statesman in the late 1700s
13
Government Workplace Statistics
2007 Ethics Resource Center (ERC) National
Government Ethics Survey:
•
On average, 57% of government employees have
observed violations of standards, policy or law in
last year
–
–
–
•
Federal: 52% observed misconduct
State: 57% observed misconduct (80% of the respondents
who observed misconduct witnessed multiple instances)
Local: 63% observed misconduct
30% of misconduct across the government goes
unreported to management (vs. 42% in the private
sector)
14
What are the Most Common Ethical
Violations in the Government Sector?
2007 ERC National Government Ethics Study
found:
• Lying to Employees, Customers, Vendors or the Public
(28%)
• Conflicts of Interest (putting own interests ahead of the
organization (27%)
• Abusive or Intimidating Behavior (25%)
• Misreporting Hours Worked (17%) -- Same percentage
as the private sector
• Discrimination (15%)
“Top 5”
15
Why is Unethical Conduct Not Reported?
According to the 2007 ERC studies, the top
reasons individuals do not report suspected
misconduct are:
• Perception that no corrective action will
be taken
• Concern with confidentiality
• Fear of retaliation by superiors and
coworkers
• Unsure of whom to contact
16
What are the Most Frequent Frauds on
Government Contracts?
•
False claims
•
False Statements
•
Cost Mischarging
•
Bribes & Gratuities
•
Kickbacks
Many cases involve aberrant employees who deceive both the
company and the government. The company often benefits
from cooperating with procurement fraud investigations.
17
Why is This Important to Your Company?
• Find and remove “bad actors” BEFORE they engage
in major frauds
• Maintain good reputation of company; avoid “bad
press”
• Self-reporting known instances of procurement
fraud and an effective compliance program can
mitigate company’s civil and criminal liability
“I think when a company has committed fraud, its most
meaningful chance of survival is to find it, disclose it, and
fix it themselves.”
Sherron Watkins
Former Enron Vice President
18
What Steps Can Companies Take?
• Senior leadership “tone at the top”
• Work with IGs to strengthen internal ethics program
and improve fraud prevention & detection
• Aggressively pursue allegations of fraud
–
Coordinate with federal agency IGs where appropriate
–
Investigate and quickly determine validity of allegations
–
Make the government whole and take appropriate
disciplinary action
–
Identify causes and systemic weaknesses
–
Strengthen controls to prevent recurrences
19
The Private Sector Workplace
2007 Ethics Resource Center Surveys revealed:
•
•
Few companies have comprehensive ethics and
compliance programs (most programs stress reactive
steps vs proactive solutions)
Only one in four companies have a well-implemented
ethics & compliance program where employees:
– Willingly seek advice about ethics questions
– Feel prepared to handle situations that could lead to
misconduct
– Are rewarded for ethical behavior
– Their company does not reward success obtained
through questionable means
– Feel positively about their company
20
Ethics Program Best Practices
Corporations with effective fraud prevention &
detection programs have some of the following
characteristics:
•
Invest time and resources to proactively prevent
AND detect misconduct
•
Identify corporate vulnerabilities and tailor
detection and prevention to those areas
•
Establish trusted reporting methods including
anonymous hotlines
Tone at the Top is critical!
21
Ethics Program Best Practices
• Carefully screen job applicants
• Mandate anti-fraud & ethics training
–
Training should inform employees about most common
acts & omissions prohibited by law, and company tools
to help them avoid situations leading to criminal
conduct
• Implement effective disciplinary measures
• Establish whistleblower policy/Prevent reprisals
• Promote effective internal controls
• Create a culture of “doing the right thing”
22
“Tone at the Top”
How management can prevent fraud:
•
Communicate expectations
•
Lead by example
•
Provide safe mechanism for reporting violations
•
Reward integrity
– Reward employees not only for meeting
financial goals, but also for ethical behavior
•
Continuously communicate the message
23
Why is an Ethics & Compliance Program
Important to Companies?
•
Credibility with Customer
•
Sarbanes-Oxley Compliance
•
False Claims Act
•
Charging Principles
•
Federal Sentencing Guidelines
•
Contracting with the Government
24
Credibility with Customer
• Recent high profile contract fraud cases increase
attention on procurement integrity
–
Boeing
–
MZM Corp/Duke Cunningham (DoD and CIA)
–
Abramoff
–
Washington DC Property Tax Refund Scam
–
Iraq/other public corruption cases
• Dwindling defense budgets; Increased Congressional
oversight
• National Procurement Fraud Initiative
25
Sarbanes-Oxley
A result of Enron, WorldCom, Tyco, HealthSouth,
Adelphia, et al
• Clarifies what existing laws & regulations mean
• Seeks to codify “best practices” in corporate
governance, internal controls & financial transparency
• Calls for culture change within companies—to a culture
that attempts to live by the spirit of existing laws &
regulations and away from a culture of form-oversubstance compliance
26
SOX and Ethics
SOX and SEC Rules apply to publicly held
companies
•
•
•
•
More difficult to conceal corporate fraud
Mandates corporate oversight & internal controls
Complete and accurate accounting and financial
disclosures
Establishes clarity on responsibilities, reporting,
audits, and penalties
27
SOX and Ethics
•
Internal Control Report
•
•
•
•
•
Responsibility of management to
establish/maintain controls for financial reporting
MUST establish “hotline”
Assessment of the effectiveness of the internal
controls
Code of Ethics
Fraud Risk Assessment
“A company’s system of internal controls is not supposed to be
bulletproof. It should expose ethically challenged employees so you
can fire them. If a company does not have a zero tolerance policy
for unethical employees then its internal controls system will
eventually be worthless.”
Sherron Watkins
Former Enron Vice President
28
False Claims Act
•
False Claims Act enacted to address frauds against
the government
•
Definition of fraud under statute is broad, proof
does not require a finding of a specific intent to
defraud—proof of willful ignorance is sufficient
•
Most comprehensive whistleblower protection law
in U.S.
•
Qui Tam can be filed by anyone
•
Government is entitled to treble damages
•
Relator entitled to 15 - 30% of total recovery
29
Charging Principles
20 January 2003 – Thompson Memo required
consideration of nine factors:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Nature and seriousness of offense
Pervasiveness of wrongdoing
Corporation’s history of wrongdoing
Timely and voluntary disclosure and cooperation
Pre-existing compliance program
Company’s remedial actions
Collateral consequences
Adequacy of prosecution of individuals
Adequacy of other remedies
30
Charging Principles
• Thompson Memo came under fire by
criminal defense lawyers, former DoJ
officials and business groups
• Legislation was proposed that would have
contradicted the Thompson memo
• 12 December 2006 – McNulty Memo
reaffirms commitment to prosecuting
corporate fraud and other White Collar
Crime
31
Federal Sentencing Guidelines
(§8B2)
The two factors that mitigate the ultimate punishment of an
organization are: (i) the existence of an effective compliance
and ethics program; and (ii) self-reporting cooperation, or
acceptance of responsibility. (§8)
•
Applies to public, private and non-profit organizations
•
Articulates the seven minimum requirements for a compliance
and ethics program to be considered effective (for the
purposes of evaluating culpability and fines) (§8B2)
•
Effective 1 November 1991--amended effective 1 November
2004. Key in the 2004 amendment is the switch in
responsibility for overseeing adherence to compliance and
ethics programs from staff supervisors to board members
32
Federal Sentencing Guidelines
(§8B2)
1.
Establish standards and procedures to prevent and detect
criminal conduct
2.
Governing authority is knowledgeable about program content
and operation; oversees implementation and effectiveness
3.
Communicate periodically standards and procedures,
including conducting effective training programs
4.
Exclude persons who have engaged in illegal activities or
other compliance / ethical misconduct from management
5.
Ensure adherence (including monitoring and auditing to
detect criminal conduct); periodically evaluate effectiveness;
have and publicize a system, whereby employees and agents
may report or seek guidance regarding potential or actual
criminal conduct without fear of retaliation.
33
Federal Sentencing Guidelines
(§8B2)
6.
Promote & consistently enforce the program through
incentives to comply and disciplinary measures for engaging
in/failing to take reasonable steps to prevent or detect criminal
conduct
7.
Respond appropriately to criminal conduct detected to
prevent further similar criminal conduct, including making
any necessary modifications to the program; periodically
assess the risk of criminal conduct and take appropriate
steps to design, implement, or modify the program to reduce
the risk of criminal conduct identified through this process
March 2006: Deputy Attorney General stated that companies who
work with the IGs on proactive procurement fraud prevention and
detection efforts, and report suspected fraud to federal IGs, will be
viewed more favorably under these guidelines.*
*Paul McNulty’s address at the NRO OIG Corporate Business Ethics & Compliance
Conference, 1 March 2006, Chantilly, VA
34
Contracting with the Government
• According to the GSA Excluded Parties List System
(EPLS), over 5700 entities (corporations, individuals,
etc.) were debarred from doing business with the federal
government in Calendar Year 2006
• In deciding whether to debar, debarment officials
consider:
– Whether the contractor had effective standards of conduct
and internal control systems in place
– Whether the contractor brought the cause for debarment to
the government’s attention in a timely manner
– Whether the contractor has instituted or agreed to institute
new or revised review and control procedures and ethics
training programs
35
Status of Task Force’s
FAR Proposals
• In May 2007, the Task Force submitted letters of support to the
Civilian Agency Acquisition Council and the Defense Acquisition
Regulations Council for a regulation that requires all contracts over
$5 million, with the exception of commercial contracts, to require the
contractor to have a “written code of business ethics and conduct” and
an “ethics and compliance training program” for its employees.
Additionally, the Task Force suggested that the US Sentencing
Guidelines serve as a basis for a contractor’s code of business and
ethics conduct.
• On 23 Nov 2007, the Federal Register contained a notice of a Final
Rule adopting the Federal Acquisition Regulation (FAR) provision:
effective date - 24 Dec 2007.
• Currently, the FAR Councils are still considering the Task Force’s
suggestion that the Guidelines serve as a basis for any code of
conduct and have sought public opinion.
36
Status of Task Force’s
FAR Proposals
• Additionally, in May 2007, the Task Force proposed some
modifications to the FAR to the Office of Federal Procurement Policy
which would require, among other things, that contractors notify the
government whenever they become aware of a material contract
overpayment or fraud, rather than wait for the contract overpayment or
fraud to be discovered by the government.
• On 14 Nov 2007, the FAR Councils published a proposed rule
substantially incorporating the Task Force’s requested changes to the
FAR and solicited comments from the general public until 14 Jan
2008.
• A total of 17 public comments were submitted in support of the Task
Force’s position and 14 were submitted in opposition.
• Currently, the FAR Councils are still considering the Task Force’s
suggestion that the contractors notify the Inspector General whenever
they become aware of material contract overpayment or fraud.
37
Why is a Partnership
in our Mutual Interest?
• Prevent waste of taxpayer funds—essentially OUR money
• Improve government and corporate efficiency by identifying
and managing unethical employees
• Protect and enhance corporate credibility & perception of
integrity
• Protect the interests of corporate shareholders
• Protect the corporation from costly legal proceedings
• Avoid diminishing public confidence in both government &
contractors’ ability to manage precious resources in a
declining budget environment
38
Oversight is a
Shared Responsibility
• Government and its contractors are mission
partners in serving the nation
• Both government and contractor personnel
are responsible for contributing to mission
success by:
– Cooperating fully and providing candid and complete
responses during the course of audits, inspections, or
investigations
– Providing complete and timely access to personnel,
programs, records & materials
39
Summary
Shared Goals
• Maintain the public trust
• Prevent & detect instances of fraudulent employee
behavior that can undermine that trust through
cooperative public/private activities
• Swiftly resolve procurement fraud cases through
appropriate personnel actions & financial
adjustments
• Enhance organizational credibility at time of
increased scrutiny & decreased budgets
40
QUESTIONS?
Private Sector Outreach Committee Co-Chairs:
Eric Feldman, IG, National Reconnaissance Office
Eric.Feldman@nro.mil (703) 808-1832 (Virginia)
(310) 416-7405 (Los Angeles)
Eric Thorson, IG, Small Business Administration
Eric.Thorson@sba.gov (202) 205-6586
41
Charging Principles
McNulty Memo primarily changes two areas:
• Attorney-client privilege waiver
– Requests require different levels of approval
– “Purely Factual Information” – Corporation’s
response may be considered by prosecutor in
assessing cooperation
– “Legal Advice” – Corporation’s response may no
be considered by prosecutor in assessing
cooperation
• Payment of attorney fees should not be taken
into consideration
42