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Who’s watching the watch dogs?

A hybrid anti-fraud approach could have saved millions for US taxpayers

Fraud victimizes every taxpayer. It wastes billions of tax dollars and erodes public confidence. Citizens have the right to expect their public employees to be people of integritynot self-serving criminals.” ~ Kirk Greffen, Acting Special Agent in Charge, Naval Criminal Investigative Service (NCIS), Northeast Field Office, Newport, RI

Veteran fraud fighter and former US Secret Service agent, Earl Devaney, looked directly at the Congressional Oversight Panel in front of him and delivered the stark news: Expect to see between $40 billion to $55 billion of taxpayer money evaporate.1 Devaney, the hard-nosed Inspector General of the Department of Interior, was selected to be the chairman of a new government board designed to function as a super watchdog over the distribution of precious taxpayer funds appropriated during the near collapse of the US financial system in late 2008 and early 2009.  A $587 billion federal economic stimulus package was passed to help restart the sputtering economy.  The funds, which later grew to almost $800 billion, would be distributed through 28 different federal agencies in the form of grants, government contracts and social programs.  Each of the 28 agencies has its own inspector general, separate IT systems, and individualized methods of oversight.  To manage the inevitable waste, fraud and abuse, this new board was created and named the “Recovery, Accountability and Transparency Board,” affectionately known as the “RAT” Board. 

In an unusual moment of candidness and clarity, Devaney laid bare the harsh realities of government procurement and acquisition.  He explained that there’s a complex system of endless laws and regulations governing literally thousands of government programs, involving hundreds of agencies with oversight from only a relative handful of watchdogs whose own “siloed” data, austere budgets and manual processes inhibit systematic means of detecting and preventing fraudulent behavior.  This methodology – and its emphasis on recovery – is purely reactive.2 He believed that taxpayers would be better served with an additional focus on proactive, prevention-oriented approaches that harness the incredible power of data analytics. 

Human weakness at play

But the high rate of fraud, waste and abuse are only partly the result of an unwieldy and unmanageable system. Greed combined with opportunism, collusion and outright corruption have led experts to estimate that 5-7 percent of all taxpayer-funded projects will be lost to fraud, outright theft and abuse.  Unfortunately, the world of government procurement is an honor system that those without honor can easily exploit.

As government spending on contracting, employee travel reimbursements and grants has exploded over the last five years, the level of fraud and other contracting malfeasance has more than kept pace.3 And as always, taxpayers pick up the tab - from bid rigging, illegal kickbacks and bribery, to abuse of official charge cards, the losses are staggering. Massive agencies such as the Department of Defense, Homeland Security and the General Services Administration are under such pressure to deliver on their critical missions that contracting activities run well ahead of antifraud measures, resulting in procurement systems that are ripe for abuse.4

For example, a March 2008 GAO report exposed that 41 percent of government purchase card transactions were not properly authorized, leading to abuses such as a Forest Service employee who wrote convenience checks to her boyfriend on her purchase card account, resulting in the embezzlement of $642,000 over six years.  The money “was used for personal expenditures, such as gambling, car loan and mortgage payments and other retail purchases,” according to the report.  Other federal government employees spent millions of dollars of taxpayer money using their government purchase cards to pay for questionable items such as Internet dating services, Brooks Brothers suits, expensive steak dinners, personalized iPods® and computers.

Some of the most egregious frauds show up in the following areas:

  • Contracts bid rigging.
  • Grants.
  • Travel cards.
  • Small-acquisition purchase cards.
  • Procurement and acquisitions.

Broken fences

Each of these areas presents unique challenges for those responsible for detecting suspicious activities and preventing losses.  In theory, there are multiple layers of safeguards built into the government acquisition system.  The first line of defense is trained and certified contracting officers, their supervisors and compliance officers. The second line consists of internal auditors who review contracts, conduct periodic audits, and employ rudimentary analysis looking for notable deviations from standard practices. And third, each agency has an Inspector General who audits programs and investigates allegations of fraud, waste and abuse. 

These defenses have one thing in common: They rely on cumbersome manual processes; inadequate, siloed data; and audits, tips and whistleblowers to uncover fraud. In other words, they learn about it after the fact. Agencies rarely analyze rich data available from public and government sources such as criminal convictions, lawsuits, tax liens, bankruptcies, risky financial deals, and suspension and debarment proceedings; this data can be mined for early indications of fraud, waste or abuse.  Unfortunately, there is no single database that contains a list of all contractors who have engaged in misconduct involving federal contracts – only individual lists that could be mined to uncover potential risk when combined with other relevant data.

Consider the case of John R. Brock, a budget analyst with the DOD’s Armed Forces Institute of Pathology Brock admitted to submitting 99 false travel vouchers through the defense travel system from 2008 through 2011. Although his scheme was relatively unsophisticated, he made away with almost $500,000 of taxpayer funds by creating false travel vouchers that set up payments (in the name of a former employee) to bank accounts owned by his sister and others. Eventually, his activities became so brazen that he had payments for travelers made to his own accounts, which were also receiving his government salary payments. Shockingly, it was not learned until his sentencing that he had been fired from his position at NATO for exactly the same conduct in 2003 and deported from the United Kingdom.

As another example, in 2002, Eduardo Blanchet and Daniel Guillan, owners of the small business B.I.B. Consultants, were awarded a five-year, $50 million contract with the Special Operations Command (SOCOM) to provide foreign language instruction to the military’s Special Forces. As a result of the award, B.I.B. Consultants grew into a large business, and neither B.I.B. Consultants nor any of its affiliated companies were eligible to bid on any subsequent small business contracts with the military. Knowing this, Blanchet and Guillan formed another entity, MiLanguages Corporation, and recruited a sham owner to appear as the owner of MiLanguages on legal documents. At Blanchet and Guillan’s direction, MiLanguages fraudulently bid on, and was subsequently awarded, a five-year, $100 million small-business set aside contract in 2007 to teach foreign languages to the military. Despite the fact that they maintained themselves as signatories on the MiLanguages bank accounts, thus establishing a key common link between the two companies, the scheme were not detected until there was a bid protest filed.

A final example is Ralph Mariano and Advanced Solutions for Tomorrow (ASFT) Mariano, a civilian program manager and senior systems engineer with NAVSEA, and Anjan Dutta-Gupta, the founder and president of ASFT, participated in a kickback and bribery scheme.  Dutta-Gupta funneled approximately $10 million to Mariano, Mariano’s relatives and Mariano’s associates in return for Mariano’s role in the funding of naval contracts to ASFT.  According to the affidavit, approximately $13.5 million in funding from the Navy was sent by ASFT to a subcontractor, mostly for work that was not performed. Over a period of years, the subcontractor allegedly kicked back a approximately $10 million to Mariano, Mariano’s relatives and associates, and back to entities controlled by Dutta-Gupta.

Continue reading How a Hybrid Anti-Fraud Approach Could Have Detected and Prevented Fraud in Government Acquisition Programs – and Saved Millions of Taxpayer Dollars.  This is a free white paper that explores how a law enforcement or government agency leverage multiple analytical methods to proactively identify fraud schemes in their infancy – and spare federal taxpayers billions of dollars in benefit payouts each year.

1 Devaney was assuming a fraud rate of 5-7 percent based on a 2009 study
conducted by the International Association of Certified Fraud Examiners.
2 Since 2009 the US Department of Justice (DOJ) has recovered more than $8 billion in taxpayer funds by way of False Claims Act cases, which are often originally filed by individual whistleblowers and adopted by DOJ. For example, former Oracle employee Paul Frascella filed a false claims action against his former employer for inflating prices on equipment provided to the government over a 10-year period that resulted in a $199 million settlement in 2011. Frascella was awarded $40 million pursuant to the sharing provisions of the federal False Claims Act. In 2006, Oracle Corporation paid the US $98.5 million to settle another false claims case for defective pricing disclosures made by PeopleSoft Inc. (PeopleSoft) during the negotiation of a contract under the General Services Administration (GSA) Multiple Award Schedule (MAS) program.
3 The Office of Management and Budget recently reported that despite efforts to reduce improper payments, federal agencies reported an estimated $125 billion in improper payments for FY 2010.
4 The GSA Inspector General’s office, with a total staff of only 300 employees, oversees an agency that last year managed 370.2 million square feet of federal office space, helped agencies buy at least $39 billion in products and services through the multiple-award schedules, and ran contracts for governmentwide purchases.
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