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Prevent, Detect, Respond:

Proactively Combating

Procurement Fraud Issues

American Society of Military Comptrollers

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54. Prevent, Detect, Respond: Proactively Combating Procurement Fraud Issues

Laura Odell, Partner, US Global Department of Defense, KPMG

Russell J. Geoffrey, Director, Contract Integrity Center, DCMA

David Jacques Graff, CAPT, SC, USN, Commander-DCMA International

Frances Lynn McCormick, Special Agent, DODIG, Investigative Policy and Oversight, Contractor Disclosure Program

Ken Jones, Director – Fraud Risk Management, KPMG

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TOPICS

Recent Changes Impacting Procurement Fraud

Contractor Self-reporting

The Impact on Operations

Steps to Prevent, Detect and Respond to Procurement Fraud

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Improper Payments Information Act (IPIA) of 2002

The Improper Payments Information Act (IPIA) of 2002,

- requires annual estimates of improper payments

- helped frame the issue and the magnitude of the problem

The ensuing efforts to improve the tracking of improper payments and subsequent findings of significant and growing levels of estimated improper payments in turn led to the Presidential Executive Order.

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Federal Requirements for Reducing Improper PaymentsExecutive Order – Reducing IP and Eliminating Waste in Federal Programs (11/20/09)

Purpose of the Executive Order to Reduce Improper Payments

Comprehensive set of policies, including transparency and public scrutiny

Identifying and eliminating the highest improper payments

Accountability for reducing improper payments

Federal, State and Local Coordination

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Improper Payments Executive OrderHighlights

Establish a Senate Confirmed Accountable Official for each Agency that has High Priority Programs

Focus on Improving ability to identify and recover improper payments and to coordinate at the Federal, State and Local level.

Establish an Internet-based public reporting of improper payments

Establish and report on reduction targets

Establish working groups to recommend improving the ability to detect / recovery IP through single audit reporting, State and Local coordination, Data Sharing, enhancing eligibility verification, prepayment scrutiny, forensic accounting and auditing

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Recent Changes Impacting Procurement Fraud

A Brief History of the False Claims Act:

The False Claims Act dates back to the Civil War when, in 1863, President Abraham Lincoln and the Congress enacted this law to combat “defense procurement fraud.”

Unscrupulous defense contractors were billing the Union Army for:

- dead mules,

- boots with soles that had been glued on, rather than stitched (and were coming apart in the rain and mud),

- gunpowder that had been salted down with sawdust.

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Fraud Enforcement and Recovery Act (FERA) of 2009

Signed into law by President Obama in May of 2009

Increased law enforcement personnel/budget for fraud investigations

Expanded the provisions of the False Claims Act

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Fraud Enforcement and Recovery Act (FERA) of 2009

Increased Funding for False Claim Act Investigations

• $330 million over 2 years to DOJ

• $40 million over 2 years to SEC

• $60 million over 2 years to Postal Inspection Service

• $40 million over 2 years to Secret Service

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FERA enhancements to the False Claims Act

FERA expanded liability to virtually every recipient of federal funding (contractors, sub-contractors, any recipient)

FERA expanded the protection of whistle blowers (not just employees, but contractors, competitors, etc.)

FERA allows whistle blowers access to information gained from government subpoenas

FERA expands the statute of limitations for FCA actions, specifying that government complaints "relate back" to earlier whistleblower complaints.

Earlier FCA Provisions Still in Effect:Qui Tam RelatorsTreble Damages

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Contractor Disclosure Program and Overpayments

Russell J. Geoffrey, Director, Contract Integrity Center, DCMA

Frances Lynn McCormick, Special Agent, DODIG, Investigative Policy and Oversight, Contractor Disclosure Program

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Increased Attention - Fraud WILL be Uncovered

•Government Agency Focus on Improper Payments

•Contractor Disclosure and Overpayment Requirements

•Increased Funding for Law Enforcement

•More People Can Become Whistleblowers

•Expanded Protection for Whistleblowers

•Qui Tam Relators (Whistleblowers)

- 15% to 25% of rewards from cases that are accepted by the Department of Justice

- 25% - 30% If the Department of Justice does not go forward with a case. A whistleblower can go forward on his own, in some cases with the assistance of a qui tam attorney.

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The Impact on Military Operations

Missing equipment and supplies

Shortages

Cost over-runs

Reputational Damage to DoD when operations don’t run as smoothly due to above issues

Potential corruption issues

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Combating Improper Payments

There is no silver bullet that will reduce improper payments. Also, it will likely never be cost effective or feasible to completely eliminate improper payments.

The Executive Order talks in terms of reducing improper payments, not of eliminating them, by intensifying efforts by federal agencies to combat improper payments.

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GAO Recommended Model for Anti-Fraud Programs and Controls

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The GAO Improper Payments Executive Guide discusses:

The Control Environment: Instilling a Culture of Accountability

Risk Assessment: Determining the Extent and Nature of the Problem

Control Activities: Taking Action to Address Identified Risk Areas

Information and Communications: Using and Sharing Knowledge to Manage Improper Payments

Monitoring: Tracking the Success of Improvement Initiatives

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The KPMG Government Institute

The Executive Order on Improper Payments:

A Practical Look at What Government Agencies Can Do to Address This Presidential Call for Action

Jeffrey Steinhoff, CGFM, CPA, CFE,

is the executive director of the KPMG Government Institute and KPMG´s executive fellow to the Federal CFO Academy at

the National Defense University.

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Combating Improper Payments – Will Require:

1. Commitment of the senior agency management

2. Hard work and partnerships across the agency

3. Probably significant changes in practices and processes for some federal programs

4. Improved internal control

5. Better leveraging of technology

6. The application of techniques, such as continuous monitoring, that have a proven track record of success

7. More and better communications and data sharing among federal agencies, state and local governments and other stakeholders that administer federal funds

8. The adoption of an agency-wide, comprehensive fraud risk management program aligned with the expectations in the Executive Order to help provide a focus on fraud, waste, and abuse that can result in improper payments.

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Fraud Risk Management

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PREVENTION

•Fraud and misconduct risk assessment

•Code of conduct and related standards

•Employee and third-party due diligence

•Communication and training

•Process-specific fraud risk controls

•Proactive forensic data analysis

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DETECTION

•Hotlines and whistleblower mechanisms

•Auditing and monitoring

•Retrospective forensic data analysis

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RESPONSE

•Internal and external investigations

•Established investigative protocols

•Enforcement and accountability protocols

•Disclosure protocols

•Remedial action protocols

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CONCLUSIONS

Changes in the law, funds to investigative agencies, encouraging whistle-blowers, etc. will certainly increase the number of Procurement and Contractor Frauds identified.

Defense agencies should make every attempt to internally reduce fraud and other improper payments.