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The call of the whistle-blower.

CUTTING CORNERS ON DEFENSE, contracts and hoping not to get caught is an increasingly risky proposition. For the six-month period ending March 31, 1990, procurement fraud investigations by Department of Defense (DoD) criminal investigative organizations resulted in 281 indictments by the Department of Justice (DoJ) and 274 convictions.

Fines and forfeitures amounted to $75.4 million; and restitutions resulting from administrative actions totaled $9.4 million. One hundred thirty-nine civil settlements and judgments amounted to $92.6 million, and 458 contractors were debarred and 187 suspended.

As sobering as those statistics are, a more troubling trend for white-collar offenders is the growing tendency to impose jail sentences and orders to pay for the cost of government investigations. During the same six-month period, 103 defendants, including senior company officials, were sent to prison for convictions on product substitution, commercial kickbacks, bribery, bid rigging, and making false statements and claims.

What recourse does a defense contractor have upon discovering a possible procurement fraud violation? DoD encourages contractors to voluntarily disclose suspected criminal or civil fraud that affects their contractual relationship. Voluntary disclosure is a central part of corporate self-governance and enhances contractor responsibility under the Federal Acquisition Regulation.

In 1986, DoD formally adopted the Voluntary Disclosure Program under the direction of the Office of Inspector General in response to a recommendation by the President's Blue Ribbon Commission on Defense Management. Simultaneously, several large DoD contractors adopted a similar policy. The purpose of both initiatives was improving business ethics and conduct, which included aggressive self-investigation, disclosure of potential civil or criminal fraud to the government, and initiation of corrective actions.

To encourage disclosures exposing a contractor to liability under federal statutes, DoD permits the contractor to complete its own internal investigation, which DoD promises to verify promptly. DoD also agrees not to initiate administrative actions such as suspension or debarment until it completes a verification inquiry.

DoD decisions on administrative actions are based on judgments regarding a contractor's "current responsibility." According to DoD regulations, whether a contractor is "currently responsible" is determined by whether it

* possesses effective internal controls,

* discloses violations and cooperates with investigations,

* implements proper corrective measures,

* makes restitution, and

* establishes and implements a code of disciplinary sanctions.

The Voluntary Disclosure Program is not a vehicle for amnesty or immunity and applies strictly to corporations, not to individuals. With regard to criminal and civil prosecution, DoJ's stated policy is that "the DoJ objective in the defense procurement fraud area is to bring prosecutions that will have a deterrent effect while at the same time make prosecutive judgments that encourage contractors to initiate compliance programs Contractors that make serious and responsible efforts to comply with the law and to disclose misconduct promptly and forthrightly should not be discouraged from those practices by prosecutive policies."

Furthermore, the Defense Procurement Fraud Unit in Washington, DC, reviews all proposed prosecutions of voluntary disclosure cases by the various US Attorneys' offices. That review ensures that prosecutors familiar with the program and the procurement fraud investigations themselves help decide whether to prosecute.

The foregoing may seem to present limited incentive for DoD contractors to disclose wrongdoing voluntarily. The program's benefits are more obvious, however, if the following factors are considered.

A common denominator in many procurement fraud incidents, such as mischarging costs, failing to test as required, and manufacturing a defective product, is that at least some - and perhaps several-employees knew or suspected that the corporation defrauded the government. The DoD Office of Inspector General operates a well publicized and efficient toll-free hotline that many corporate employees have used to disclose fraud schemes.

Moreover, the Major Fraud Act (P.L. 101-123) provides significant financial rewards for individuals who furnish information leading to convictions for major fraud against the United States. The 1986 Amendments to the False Claims Act (P.L. 99-562) expand the provision under which a private citizen, even a contractor employee, may bring civil suits on behalf of the United States to redress government fraud.

These suits, known as qui tam suits, permit the person bringing the suit to share in the monetary recovery. As a result, a contractor may be better off voluntarily reporting problems than risking the consequences of an employee informing the government through a qui tam suit.

A contractor may also benefit financially from timely voluntary disclosure. The 1986 False Claims Act Amendments permit the reduction of allowable civil liability from treble to double the amount of the claim if the contractor discloses the fraud within 30 days of discovery.

Thus, if corporate leadership learns its employees have violated the law while performing DoD contracts, disclosing those violations to the government as soon as possible, initiating an internal investigation, and taking corrective action to prevent the problem's recurrence are in the corporation's long-term best interest. A most important factor in the DoD policy is that "the disclosure must not be triggered by the contractor's recognition that the underlying facts are about to be discovered by the government through audit, investigation, or contract administration efforts or reported to the government by third parties." The contractor must initiate such disclosures to receive the benefits and protection of the Voluntary Disclosure Program.

Since the program began, about 80 defense contractors have made 170 separate disclosures to DoD's Office of Inspector General. While DoD makes no promises that contractors making voluntary disclosures will not be subjected to administrative actions, to date none have been suspended or debarred.

One contractor has been prosecuted and convicted and one has been indicted as a result of voluntary disclosures. The government contends that those prosecutive actions were initiated because of the egregious facts and circumstances surrounding those cases.

The importance of a skillful and expeditious internal investigation is highlighted by the complicated and highly regulated world in which government contractors must compete. A corporation must assess allegations of misconduct quickly and accurately so it can take corrective action.

While restitution and fines are unavoidable consequences of improper actions, suspension and debarment are avoidable if a proper response is initiated as soon as a violation is discovered. Such a response requires a thorough, timely, and professionally conducted internal investigation.

About the Author . . . Daniel R. Foley, certified fraud examiner, is a senior consultant with The Fairfax Group Ltd., a management consulting firm in Falls Church, VA. He formerly managed the DoD Voluntary Disclosure Program and also served as deputy director of the DoD Defense Criminal Investigative Service from 1985 to 1989.
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Title Annotation:voluntarily disclosing procurement fraud and conducting a prompt internal investigation may save defense contractors from suspension or debarment
Author:Foley, Daniel R.
Publication:Security Management
Date:Nov 1, 1990
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