Procurement ethics: investigators band together against contracting fraud.

When a scandal involving the manipulation of a $20 billion contract for Air Force refueling tankers emerged, it inspired more than guilty pleas by two former Boeing executives. The case also served as an impetus for greater coordination between the enforcers charged with ensuring these deals are done aboveboard.

Enter U.S. Attorney Paul McNulty, of the Eastern District of Virginia. In February. he announced the formation of the Procurement Fraud Working Group, an interagency effort to police government deals for abuse and conflicts of interest.

"If we didn't do it, I didn't see anyone else doing it," McNulty told National Defense. "I don't expect every federal district to be as concerned about procurement fraud as we are."

More than 20 federal agencies are involved, and that list is growing at a rate of one or two a week as word spreads, he said. The initiative includes representatives from the FBI, Defense Criminal Investigation Service and Naval Criminal Investigative Service, as well as each respective inspector general office at the departments of Homeland Security, State and Transportation.

"We want to sort of be a clearinghouse for procurement fraud," McNulty said. The group's first meeting was conducted in March, and another occurred at the end of June.

The group will meet every three months to go over cases, review methods and strategies, trade information on promising leads and see if any investigations overlap.

"Historically, the FBI has had the lead on procurement fraud through their white-collar crime program," McNulty said. "Post 9/11, they had to streamline those resources to expand their anti-terrorism efforts ... There was a shift in primary responsibility."

According to a 2004 report from the Government Accountability Office, the FBI's personnel shuffling in response to the 2001 attacks has moved 674 field agent positions permanently from the drug, white-collar and violent crime program areas to counterterrorism and counterintelligence. Even though the bulk of these positions were drawn from anti-narcotics staffs, the number of newly opened FBI white-collar crime investigations declined between 2001 and 2004.

Of all the federal agencies and departments, the FBI refers the greatest number of white-collar crime matters to U.S. attorneys for prosecution. These FBI referrals decreased about 23 percent, from 6,941 in 2001 to 5,331 in 2003, the GAO reported. At the same time, white-collar crime referrals by all other agencies increased by about 15 percent, according to the GAO.

As the onus shifted onto the inspectors general within each federal department, McNulty saw the Eastern District of Virginia was in a perfect position--literally and metaphorically--to organize a more concerted effort.

McNulty's jurisdiction sits in the heart of the defense industry. As such, there is virtually no contract issued without the Eastern District claiming oversight, either through contractor business offices, the Pentagon or subcontractors. The area also encompasses the Norfolk Naval Base, the largest such facility in the world.

McNulty said that because of its location, the Eastern District staff will prosecute the bulk of the cases. "There's a lot of ways for us to get in," he said.

The Procurement Fraud Working Group was formed initially with defense and homeland security contracts in mind. However, because all procurement oversight officers share the same problems and difficulties, other agencies outside the national security apparatus are expressing interest in the program.

But in an age of war and terrorism, the atmosphere is ripe for abuse in defense and homeland security. McNulty said he has to assume there is more procurement fraud in these areas because the money invested in them is increasing.

Just as a rising tide lifts all boats, the total amount of money lost to fraud also logically will rise with a sudden influx of funding, especially when it is tied to time-sensitive wartime or national security purchases, McNulty said.

Manning the front line of the effort is Jack Hanly, the Eastern District's fraud chief. Hanly is a veteran of defense procurement prosecutions, having won most of the roughly 70 convictions related to 1988's "Operation III Wind."

In that two-year effort, more than a dozen major defense contractors, consultants and government officials were charged with malfeasance. The highest-ranking government officials snared were an assistant secretary of the Navy, a deputy assistant secretary of the Navy and a deputy assistant secretary of the Air Force.

McNulty said he hopes the working group will inspire more of an effort within the participating agencies, whose internal investigators he said often are left frustrated by their perception of "slack" in their agencies' internal oversight systems.

McNulty advised officials within the Pentagon and other agencies to keep a close eye on procurement integrity and not short change in-house investigators. "As they see procurement changing ... they need to make sure they are adequately staffed to compensate for that growth," he said.

Training is the key to strengthening investigators by helping them better allocate their limited resources, adopt fresh techniques--like using software programs to spot suspicious activity in reams of raw data--and keep abreast of emerging schemes and trends.

One novel idea is the group's placement of agency investigators within major procurement offices, to work directly with employees involved with contract negotiations.

Called "embeds," these investigators would gain familiarity with the purchasing operations by spending months within the offices that handle them. This idea has caused some nervousness because the procurement office workers may have the idea that they are targets, McNulty said, but that was not the intent of the embed program.

"This isn't a case of the federal government being part of a big witch hunt," he said.

The structure and emphasis of the Procurement Fraud Working Group is unique. There is seldom such a concerted effort to craft an interagency cooperative assembled against a broad form of criminal wrongdoing, McNulty noted.

Other task forces combine localized assets, like anti-drug task forces, or are aimed at a particular crisis, such as the group of Dallas-based investigators tasked with unraveling the chaos of the savings-and-loan collapses of the 1980s.

But the procurement fraud working group's mandate is broader than these other precedents, reflecting the many forms procurement fraud can take and the assortment of agencies seeking to thwart them.

The crimes, premeditation of those who commit them and the complexity of prosecuting them vary as well.

McNulty outlined several aspects, starting with "classic conflict of interest cases" such as the recent Boeing Company refueling tanker scandal. Air Force principal deputy assistant secretary Darlene Druyun is serving a nine-month sentence in federal prison for illegally negotiating a lucrative job with Boeing as she supervised the lease negotiations. A senior Boeing official, Michael Sears, is also in prison for his role in the hiring of Druyun.

Another common fraud in procurement is kickbacks, where a government official receives money or gifts in exchange for an edge in contracting.

McNulty described kickbacks as relatively easy to investigate and prosecute. Cases involving fraudulent billing, which demand heavy investigations through stacks of paperwork, are harder to pursue, he said. In these cases, bending the rules in a highly competitive business environment escalates into breaking the law.

Other cases, particularly those surrounding illegal sales to foreign nations, involve unraveling intricate plots. "Through their temptation and greed, they concoct some scheme," he said. "There's where you'll see more of your conspiracies."

Minority set-asides--contracts solely reserved for minority-owned firms--also have bred fraud, McNulty said. "There have been a lot of problems in that area," he noted.

Until recently, the Defense Department assigned these contracts based on the companies' declarations alone, but now requires more information to deter false or solely cosmetic claims.

As for defense contractors, McNulty noted. "It's in their self-interest to cooperate and self-police.

"In the end, this is about public support," he said. "The public will not be as supportive if there's opportunism and overreaching at the expense of taxpayer money ... We're hoping contractors will be supportive of the enforcement effort so we can strengthen the integrity of the system."