Identifying Fraud & Administration Federal Aviation Abuse · 2011-08-03 · Federal Aviation 2...

Federal AviationAdministrationIdentifying Fraud &

AbuseTraining Presentation

Presented by: AGC-500

Date: Summer 2011

2Federal AviationAdministration

Fraud and AbuseAGC-500

Information That Will Be Covered in This Presentation• The False Claims Act (“FCA”)• Types of false claims• Damages for FCA violations • Whistleblower or qui tam provisions• Who to consult if you suspect fraudulent claims



Introduction to the False Claims Act• The False Claims Act, 31 U.S.C. §§ 3729-

3733, was enacted to prevent contractors from defrauding the government.

– The FCA seeks to prevent fraud in government-funded programs.

– The FCA also encourages whistleblowers to report fraud by providing potential monetary rewards



Introduction to the False Claims Act

• The Department of Justice is responsible for prosecuting FCA violations. FCA settlements and convictions are often very public and costly for companies.

• The FCA is the federal government's principal weapon in battling fraud.



False Claims Statutes

Federal law provides remedies against any person who file false claims. These remedies include:

• Civil penalties and remedies• Criminal penalties• Administrative remedies:

– Contractor Debarment– Forfeiture of Claims



How Does the FCA Apply to the FAA?• The FCA is incorporated into the AMS Guidance and is applicable to all procurements.

• Preventing fraud and abuse in acquisitions is a priority for the FAA.

• Any potential violation of the FCA must be referred to Agency counsel



What Does the FCA Prohibit?• The Basic elements of the Act prohibits and

establishes liability for anyone who knowingly:

– presents a false or fraudulent claim for payment or approval, or

– makes, a false record or statement to get a false claim paid or approved, or

– conspires to defraud the government



How Does the FCA Define “Knowing”?

The FCA defines three types of mental states that are necessary to determine if a contractor may be liable under the statute:

The individual submitting the claim:– has actual knowledge that the claim is false,or– submits in deliberate ignorance of the truth, or– submits in reckless disregard of the truth



Examples of FraudConsider the following examples and identify which type false claims they may be:

• Intentional billing for goods and services that werenever delivered or rendered. – actual knowledge of submitting a false claim for payment

• Intentional billing for marketing, lobbying or othernon-contract related corporate activities. – actual knowledge of submitting a false claim for payment



Examples of Fraud

• Submitting false service records or samples in order to show better-than-actual performance.

– actual knowledge of creating and submitting a false record.

• Presenting broken or untested equipment as operational and tested.

– actual knowledge of a false claim and conspiracy to defraud the Government.



Examples of Fraud - Continued• False certification that a contract falls within

certain guidelines (i.e. the contractor is a minority or veteran)

– Actual knowledge of a false record

– Winning a contract through kickbacks or bribes. – actual knowledge of conspiracy to defraud the

Government

– Billing for work or tests not performed. – actual knowledge of a false claim for payment



Examples of Fraud Continued• Certifying that something has passed a test, when in

fact it has not, or falsifying research data

– actual knowledge of a false statement

• Charging more than once for the same goods or services.

– actual knowledge of a false statement and actual knowledge of a false record

• Being overpaid by the government for sale of a good or service, and then not reporting that overpayment.

– knowing conspiracy to defraud the Government



Damages under the FCA

• Criminal Penalties

–Up to five years imprisonment

• Civil Penalties

–A defendant may be liable for up to three times the amount of damages the government sustains plus penalties between $5,000 and $10,000 per claim.



• Fraudulent Claims against the government are forfeited according to 28 U.S.C. § 2514:– Any money made as a result of a false claim will be forfeited to

the government

• The standard is high for forfeiture:To warrant forfeiture of a claim the Government must show by clear and convincing evidence that the claimant has committed the fraud alleged and must prove that the claimant knew the claim to be false and intended to deceive the Government by submitting it. McCarthy vs. U. S., 670 F.2d 996 (Ct. Cl. 1982).

Damages under the FCA - Continued



What is a Qui Tam?• Whistleblower provisions that are designed to

encourage people to report fraud.

• These individuals are called “realtors” under the FCA.

• The FCA allows realtors to collect a percentage of the amount that the government fines the contractor.



Qui Tam in Action• If the Department of Justice (DOJ) does not

intervene the realtor will recover about 35% of the penalty, but must prosecute and incur the cost of the case themselves

• If the Department of Justice decides to prosecute the Qui Tam the realtor will recover a smaller percentage of the total penalty, but the DOJ has taken over the burden of pursuing the case from the realtor.



Quick Recap: The FCA in a Nutshell

Knowingly:• Presented a false or fraudulent claim for payment or

approval, or

• Made a false record or statement to get a false claim paid or approved, or

To identify a violation of the False Claims Act, askwhether the individual submitting a claim to thegovernment:



To identify a violation of the False Claims Act, ask whether the individual submitting a claim to the government:

Knowingly:

• Conspired to defraud the government to get a claim allowed or paid

Quick Recap - Continued



The False Claims Act – Scenario 1

Acme Co. was awarded a Cost Plus contract to provide flight tracking technology for the FAA.

During contract performance, Acme decided to use substandard parts in the control system, to try to reduce costs to the FAA. However, for the network array, the bulk of the contract, Acme purchased parts it thought met the FAA’s specifications.

Unbeknownst to Acme, its supplier Made in America, Inc., had opened a new plant in the Galápagos Islands and manufactured all of the parts there.



Scenario 1: Knowledge Check

Acme has sought payment for the control system parts it purchased. Did Acme commit a violation of the FCA?

A. Yes, Acme utilized, without the FAA’s knowledge, parts thatwere manufactured in the Galápagos Islands.

B. Yes, Acme utilized, without the FAA’s knowledge, substandardparts that failed to meet the contract’s requirements.

C. No, Acme’s desire to reduce costs to the FAA was for theFAA’s benefit and not Acme’s benefit and Acme believed thatthe parts were manufactured domestically.

D. No violation occurred.



Scenario 1: Knowledge Check Review

Answer B is correct.

• Acme’s knowing use of substandard parts in violation of the contract’s requirements is a violation of the FCA.

• Acme, by submitting invoices for noncompliant parts, was knowingly presenting to the FAA a false or fraudulent claim for payment.



• However, Acme did not violate the FCA by using foreign parts because it did not actually know the parts were foreign and no facts were presented that showed that Acme acted in deliberate ignorance or reckless disregard of the truth.

Knowledge Check Review Continued



Acme received an invoice for $2 million for the network array parts. Subsequently, Acme and its supplier disagreed on whether the network array equipment met specifications and whether Acme would eventually owe its supplier $2.3 million for a fully compliant network array equipment package.

Genuinely believing that it would eventually owe its supplier $2.3 million, Acme altered the submitted invoice to the FAA to show $2.3 million instead of $2 million

After the FAA paid Acme for both invoices, the supplier did replace the network array equipment and issue Acme a new invoice for $2.3 million.

The False Claims Act: Scenario 2



Scenario 2: Knowledge CheckDid Acme commit a violation of the FCA?

A. No, even though Acme altered the invoice it submitted to the FAA, Acme genuinely believed that it would, and it eventually did, owe its supplier $2.3 million.

B. No, there was a genuine disagreement between Acme and its supplier as to whether the equipment was compliant, which affects whether the equipment costs $2 million or $2.3 million. On a Cost Plus contract, Acme was entitled to receive what it thought its costs would be.

C. Yes, Acme altered the invoice it submitted to the FAA. Submitting an altered invoice by itself is enough to violate the FCA.

D. Yes, Acme altered the invoice it submitted to the FAA. It does not matter that Acme believed that it would eventually owe its supplier $2.3 million or that Acme eventually did receive a new invoice for $2.3 million.



Answers C and D are correct, but D is the better choice.

• Acme violated the FCA by knowingly submitting a false record or statement to get paid.

• At the time Acme submitted its invoice for payment, its disagreement with its supplier had not yet been resolved, and a new supplier invoice had not been issued.




• Despite the fact that Acme ultimately was correct in its assessment that the equipment would be $2.3 million, it only owed its supplier $2 million at the time

• Answer C is correct that there is a FCA violation, but it makes too broad a statement that any altered invoice is enough to violate the FCA




The False Claims Act – Scenario 3Acme is located in the town of Force Majeure, which sits astride Vapor Lake. A year into its contract with the FAA, a limnic eruption occurs, with C02 suddenly erupting from Vapor Lake and causing a massive tide of water to level Acme’s accounting records repository.

With the destruction of its repository, Acme was forced to attempt to reconstruct records related to the FAA’s flight tracking technology contract.

Despite its best efforts to reconstruct its records, Acme inadvertently submitted inflated time records, equipment, and material costs and mistakenly submitted incorrect purchase orders.



Scenario 3: Knowledge CheckDid Acme commit a violation of the FCA?

A. No, Acme was not at fault for the lost of its records and it made its best efforts to submit accurate, reconstructed documents for payment.

B. Yes, Acme knew that its reconstructed documents could have been inaccurate and these documents were in fact incorrect.

C. Yes, Acme knew that its accounting records were potentially vulnerable to a natural disaster and failed to have sufficient contingency plans to safeguard its records, thereby causing it to have to submit reconstructed documents that turned out to be incorrect.

D. No, natural disasters are considered acts beyond the control of contractors and there are bound to be mistakes made when trying to recover from such a disaster.




A is the correct answer.

• The FCA does not punish for merely submitting inaccurate documents.

• The FCA requires knowledge of a falsehood or fraud.

• Here, Acme made its best efforts to accurately reconstruct its documents for payment for the FAA.




• The fact that the documents turned out to be incorrect does not change Acme’s innocent intentions.

• Generally, and without more extreme facts, Acme’s preparation for and response to the limnic eruption does not affect this analysis.



Besides Spotting FCA Violations, How Could the FCA Affect My Procurement?

In addition to identifying fraud, the FCA may impact your procurement in other ways:

• Suspension or debarment of the Contractor

• Costs associated with an FCA investigation may be unallowable

• Termination of the contract



Who investigates Fraud within theFAA ?• FAA Lines of Business report suspected fraud,

waste, and abuse to the Investigations Division of ASH (AEO-500).

• Investigations may then be referred on to DOT’s Office of the Inspector General (OIG).

• When a contractor discloses an FCA violation it should notify the contracting officer and DOT’s OIG.



• Filing of complaint is followed by full Administrative Trial

• Appeals are directed to the DOT Associate Secretary for Budget & Programs.

• The Department of Justice can also conduct an investigation. DOJ has authority to impose criminal penalties.

Who investigates Fraud within theFAA? Continued



Civil Penalties Under the FCA?

• Title 31 US Code §3801 authorizes agencies to assess civil penalties against persons who make, submit, present or cause to be made false, fictitious or fraudulent claims or written statements in support of requests for property or funds in connection with Federal programs.

• DOT has promulgated a detailed procedure for assessment of such civil penalties. Title 31 CFR Part 31: Program Fraud Civil Penalties



What Claim Irregularities Should I Be Aware of to Help Identify Fraud?There are an infinite number of possible ways that someone could try to defraud the government with false claims.

The usual suspects include:

• Inflation of costs or labor hours

• Substitution of less costly or lower quality materials



• Overstating labor categories (e.g., civil engineer labor is claimed where general laborer is appropriate or performs the work)

• False certification of payments to subcontractors when payments are not made

• False statements in monthly invoices or progress payment requests

What Claim Irregularities Should I Be Aware of to Help Identify Fraud? Cont’d



Scenario 4Contracting Officer Chris is assigned to a newprocurement for aviation safety-related services. The SIRputs offerors on notice that required certifications arematerial matters of bidder responsibility, and that falsecertifications may result in criminal prosecutions.

Section K includes a clause that requires the contractor to certify as follows:

“The offeror certifies to the best of its knowledge and belief, that the offeror has [ ] has not [ ] within a 3-year period proceeding this offer, had one or more contracts terminated for default by any Federal agency.”



Scenario 4 Continued

Offeror, Willey Contracting, completed the form for this certification by handwriting an “X” in the bracket indicating that Willey Contracting had not been terminated for default within the prior 3-year period on any Federal contract.

Contrary to this certification, Willey Contracting now admits it had a previous aviation safety-related services contract with the Southwest Region that was terminated by Default 6 months before the proposal due date for this procurement.




Willey Contracting argues that the default was not justified because it had never commenced performance when it received a letter of notification that its contract had been terminated for default.

Although Willey Contracting submits the lowest priced offer, the second-lowest priced offer is selected for award because Contracting Officer Chris decides to reject Willey Contracting’s proposal based on false certification.



Scenario 4 – Knowledge Check

A. No, because Willey Contracting did not believe that its contract had actually been terminated for default.

B. Yes, because termination by default on a former contract automatically disqualifies a contractor from competing for other contracts at the FAA.

C. Yes, because the fact that Willey Contracting disagreed with the basis for the default termination did not excuse Willey Contracting from the clear obligation to divulge the fact of the termination within its Proposal.

Will the ODRA uphold the Contracting OfficerChris’s decision to reject Willey Contracting’s bid?



Scenario 4 – Knowledge Check Review

The answer is C, Yes, because the fact that Willey Contracting disagreed with the basis for the default termination did not excuse Willey Contracting from the clear obligation to divulge the fact of the termination within its Proposal.



Scenario 5Carl Contractor works for SuperDuperGov, Inc. on a cost type contract with the FAA for ongoing services in natural disasters. SDG typically uses a number of subcontractors to perform the assigned tasks.

During an emergency, Contracting Officer Fed Fred assigns Contractor Carl a task of such magnitude that SDG would have to pay out a substantial sum of money to retain its subcontractors. Because of the magnitude of the costs involved, SDG asks Fed Fred for help.




Fed Fred gets along well with Contractor Carl because of their shared work ethic and enthusiasm for the Washington Capitals Hockey Team. Contractor Carl decides that Fed Fred has a valid request that is in the best interests of both the contractor and the government to ensure that the mission is accomplished without undue risk to the contractor, an advance payment to SDG would be permitted under the AMS.

However, Fed Fred has never used that particular option, and is unsure how to proceed. So, instead of processing the matter as an advance payment, Fred processes it as a partial payment.




As part of the partial-payment processing, Fed Fred endorses Contractor Carl’s invoice with a certification that the invoice is for services already performed. However, the invoice is not for services performed, but rather for services estimated as required to fulfill the mission.

A partial payment is made to SDG. Ultimately, SDG will actually provide services of a total value far exceeding the amount of the partial payment.



Scenario 5: Knowledge Check

Who has violated the False Claims Act in this hypothetical scenario?

A. Fed Fred

B. Contractor Carl

C. Both

The answer is C, Both.



Scenario 5: Knowledge Check 2True or False:

When Fed Fred created a false invoice, it was not a violation of the False Claims Act because he knew that SDG would eventually provide services for an amount far greater than the amount of the invoice.

Answer:

False. It is a violation because Fred knowingly made a false claim in order to receive payment. It makes no difference that he had “good” intentions.



Scenario 5: Knowledge Check 3True or False:

There was no conspiracy to defraud the government as defined in the False Claims Act because Fred and Carl both acted in the best interest of the Government.

Answer:

False. No matter how good their intentions were, the parties knowingly made a false claim.



Scenario 5: Knowledge Check 4

True or False:

Fed Fred is not guilty of creating a False Record because he created the record only because he did not know how to process an advance payment under the AMS.

Answer:

False. Carl was responsible for processing an advance payment according to the AMS.



Recap — How did Carl and Fredviolate the FCA?• Contractor Carl and Fed Fred violated the FCA

because

– Fred approved an invoice that he knew to be incorrect

– Contractor Carl submitted a false claim for the purpose of receiving payment from the government.

– Both Carl and Fred conspired to defraud the government when they worked together to concoct a plan for making a false claim for payment.



Scenario 5: Knowledge Check 5What is the punishment Fred might face?

A. Prison time.

B. Payment of treble damages under the False Claims Act.

C. A request for debarment proceedings.

D. All of the above.

ANSWER:

The answer is D, All of the above.



Scenario 5: A Few Months LaterContractor Carl has been working extra hard on his contract with the FAA. Carl decides to bill for 40 hours instead of the 30 hours of work he actually performed on a given week.

He rationalizes that this is not cheating because he is super efficient, and also, he knows for a fact that a contractor who performs similar work bills for time spent checking up on his Facebook friends.

To cover his tracks, Carl decides to alter invoices and payroll records with white-out. Newly appointed Contracting Officer Fed Frieda notices the suspicious markings and reports the suspected fraud to the IG.



A Few Months Later: KnowledgeCheck 1

Did Contractor Carl violate the False Claims Act?

Answer:

Yes! Because he submitted a false claim to receive payment for 40 hours of work when he actually performed 30 hours of work.



What are the Penalties that Carl might face?A. PrisonB. Payment of treble damages under the False Claims

ActC. Debarment and/or Suspension proceedingsD. All of the Above

Answer:

The answer is D, All of the Above.

A Few Months Later: KnowledgeCheck 2



Final Summary of the FCA• To identify a violation of the False Claims Act, ask

whether the individual submitting a claim to the government knowingly presented a false claim, a false record or conspired to defraud the government.

• Stiff criminal and civil penalties apply to violators of the FCA.

• Be aware that inaccurate billing invoices, false records, kickbacks, and conspiracies to defraud the government may be may be subject to criminal penalties.

• If you suspect fraud, contact Agency counsel.



Congratulations!

You have successfully completed this course.

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