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Working as a team to detect and prosecute fraud: a case study: contracting in Kuwait: members of the Army Audit Agency catch the "bad guys" in a contracting case in Kuwait.

To detect, develop, and prosecute a fraud case requires a team approach that includes the skills of auditors, investigators, and prosecutors. In the Army, the Army Audit Agency works closely with the Major Procurement Fraud Unit (MPFU) of the United States Army Criminal Investigation Command (CID) and U.S. Attorneys to develop and prosecute fraud cases.


The Auditor's Role

Fraud is defined by Generally Accepted Government Auditing Standards (GAGAS) as "a type of illegal act involving the obtaining of something of value through willful misrepresentation." Fraud can be detected through various means to include audits, crime prevention surveys, inspections, or hotline allegations. By far the most common way that fraud is detected is through tips from individuals. Executive Order 12731, "Code of Ethics Principles for Ethical Conduct for Government Officers and Employees," and Department of Defense (DoD) policy require DoD employees to disclose any known fraud to appropriate DoD officials. DoD personnel who report instances of fraud are protected under the Notification and Federal Employee Antidiscrimination and Retaliation Act.

The role of the auditor in detecting and developing a fraud case is two-fold. The first is detecting indicators of fraud during the normal course of an audit. The second is supporting the investigators and U.S. Attorneys with analytical support during the investigative and prosecutorial processes.

GAGAS require auditors to assess the risk that fraud has occurred. To do this, the auditor early in the initial planning stage of the audit is required to identify and assess any fraud risk factors that could be related to the organization, its environment, and type of audit. The auditor then designs audit steps to address any risk factors identified as being material or significant to the audit scope, subject matter, or objectives.

There are numerous potential fraud indicators. While auditors must assess the risk that fraud has occurred, they also need to use professional judgment to determine when sufficient indications are present to warrant referral to the investigators. A referral is not an accusation that fraud has occurred but rather that key internal controls were not in place, and suspicious activity appears to have occurred. When auditors conclude that a potential fraud may have occurred, they are required to notify the appropriate investigative organization. In the Army, we do this following a procedure laid out in a Memorandum of Agreement between the Army Audit Agency and the CID.

Referrals should detail the fraud indicators and provide a description of the documents or analysis that led the auditors to suspect the incidence of fraud, along with the actual or estimated loss or impact to the Federal Government. In the Army, referrals are reviewed by the Army Audit Agency Office of Counsel and approved by the Principal Deputy Auditor General before being forwarded to the CID.

Once the CID receives a referral, investigators conduct a preliminary investigation to assess whether there appears to be sufficient evidence to warrant further investigation. If the investigators decide to do a full-fledged investigation, they and the auditors team up to build a case. The investigators take the lead; the auditors play a support role. During the investigation, investigators will take sworn statements, collect records, and gather other evidence. The auditor's role is primarily to analyze the data gathered to quantify the full extent of the fraud and work with the audited activity to correct the internal control weaknesses that allowed the fraud to occur.

If CID investigators determine that they have sufficient evidence for prosecution, they then turn the case over to a U.S. Attorney. If the U.S. Attorney accepts the case, he or she becomes the lead, and the auditors and investigators play a supporting role. As the U.S. Attorney builds his or her case, the auditor's working papers become a critical piece of evidence. In many instances, auditors will have to testify to explain and support their analyses and conclusions.

The Kuwait Contracting Case

To demonstrate how this teamwork works in a real-world situation, I have selected a case described in the following paragraphs. It involves a contract where fraud indicators were detected by the auditors, an investigation was completed by the investigators, and the case was presented to a U.S. Attorney for prosecution.

Identification of Fraud Indicators

During early 2006, the Army Audit Agency conducted an audit evaluating the cost effectiveness of transitioning work performed under a theater-wide logistics support contract to individual contractors. Agency auditors identified significant fraud indicators related to the award of a contract to provide logistical support services at base _ camps in Kuwait. In particular, the auditors were concerned over the following potential fraud indicators:

* Award to Highest Bidder. The contract was awarded to the highest of five competing bidders without adequate documentation in the contract file to justify why this had occurred. Available documentation showed that the contracting officer made the selection based on the contractor's having newer equipment and a good record of working with the Army. This rationale, however, seemed unusual because the criteria for source selection made no reference to the age of equipment the contractor would use, and all other bidders had previous experience contracting with the Army and there was no documentation indicating that their past performances had ever been less than acceptable.

* Unreasonably High Prices. Unit prices for services performed under the contract appeared to be unreasonably high. For the two types of services that represented the majority of work performed under the contract, the contractor was charging unit prices that were more than 10 times higher than what it had charged while providing the same services as a subcontractor under the the-ater-wide logistics support contract. These unit prices also appeared excessive when compared to the prices that other offerors proposed. Overall, we estimated the annual cost of this contract to be about $7.4 million--more than $3 million more than the second highest proposal, and over $6.5 million more than the lowest-priced proposal. Despite these large variances, there was no indication that a cost/price analysis was conducted on the five proposals that the Army had received for this work.

* Limited Competition. The solicitation for services wasn't open to full competition. Rather, the contracting officer provided the solicitation to only five contractors that had provided similar services in the past.

The contracting officer who awarded the contract was no longer in theater, and on-site contracting personnel couldn't explain why the contract had been awarded to the highest bidder--other than a suggestion that the contracting officer may have been too busy to adequately evaluate the five proposals.

Coordination with Criminal Investigators

Since no one within the command could provide a reasonable explanation concerning these fraud indicators, the auditors contacted CID's MPFU in Kuwait to discuss the issues surrounding the contract.

The criminal investigators were very receptive to the issues uncovered for several reasons. First, the fraud indicators were significant and involved a multi-million-dollar contract. Second, the investigators were currently investigating the contractor in response to an allegation that the MPFU had received from a government employee involving fraudulent contractor performance under another contract. Specifically, while removing sewage from an installation, the contractor was observed leaving and reentering the installation without emptying the sewage it had previously collected. Instead, the driver would just drive off post, park, and then return a short time later without disposing of the sewage it had previously collected. Since the contractor was paid based on the number of gallons of sewage removed, this practice appeared to indicate the contractor was over-billing the Army by overstating the amount of sewage removal. Third, the MPFU was in the midst of conducting a large-scale, theater-wide, contract fraud investigation involving similar-type contracts as well as some of the same participants meaning our audit results could have a bearing on the CID's theater-wide investigation.


Initiation of Investigative Support

Based on discussions with the criminal investigators, the Agency and the investigators agreed on a two-prong approach for audit support. First, in relation to the contractor in question, the Agency agreed to perform two analyses on the contractor's current and past contracts. The purpose of these analyses was to estimate the amount we believed the contractor overcharged the government in terms of both high unit prices and unreasonable quantities billed. Second, the Agency agreed to perform an audit of the contracting office to determine whether sufficient internal controls were in place over the office's operations and whether significant fraud indicators existed for other contracts awarded by that office. Based on our review, other contracts were referred.

Our first analysis was straightforward in that it involved comparing actual costs paid under the contract with unit costs we estimated to be reasonable. We determined price reasonableness based on what the current and other contractors had charged (or were charging) for similar services in Kuwait. From this analysis, we estimated that the contractor overcharged the Army by about $15.4 million by charging unreasonably high unit prices on two separate contracts for removing waste water and providing potable water to our base camps in Kuwait.

The second analysis addressed the fraudulent activity reported to the CID and involved estimating the amount we believed the contractor overcharged the Army by overstating the gallons of sewage it had removed from the installation. The auditors performed this analysis by first estimating the quantity of sewage (in gallons) the contractor would be expected to remove based on the installation's population and Army-developed engineering estimates, and then comparing this amount to the actual quantity billed (in gallons). This analysis showed that the contractor removed about 40 million gallons of sewage more than the auditors believed was reasonable, at a cost of about $1.9 million. Interestingly, as shown in the accompanying chart, the analysis indicated that the daily quantity of sewage removed decreased significantly once the contractor became aware that it was under investigation for overstating the amount of sewage it had removed.


We presented the results of these analyses to the investigators in the form of a written report. The investigators used this information together with their work to develop results that they shared with a U.S. Attorney to determine appropriate action to take against the contractor and to consider how the results could be used in CID's larger overall investigation of contract corruption within the theater.

Concurrently with the preceding effort, the Agency conducted a separate audit of operations at the contracting office that awarded the contract. This audit identified numerous control weaknesses that created an environment that made contracting operations highly susceptible to fraud, waste, and abuse. This audit was beneficial to the criminal investigators for several reasons. First, it gave the investigators an overall picture of contracting operations in Kuwait. Second, and more importantly, it provided the investigators on-site audit services to support their leads originating from the on-going theater-wide investigation focused on contract corruption. This support included obtaining receiving reports and invoices to substantiate contract payments, identifying and quantifying contracting actions performed by selected individuals, and reviewing individual contracts that were of specific interest to the investigators. The audit

was also beneficial to the Army in that it identified internal control weaknesses that allowed fraud to occur and resulted in the government's paying more for goods and services even when fraud wasn't involved because the Army wasn't getting best value. We provided recommendations needed to improve the efficiency and effectiveness of operations at the contracting office in Kuwait.

Fixing the Internal Control Environment

The work of the auditors and investigators led to significant changes that improved the internal control environment over contracting operations throughout the Army. During February 2007, and shortly after MPFU personnel briefed the Secretary of the Army on the problems associated with contracting operations in Iraq and Kuwait, the Secretary tasked the Assistant Secretary of the Army (Acquisition, Logistics and Technology) to assess contracting activities throughout U.S. Central Command and to implement a contracting action plan to improve operations. Shortly thereafter, the Assistant Secretary began implementing an action plan that reorganized the Kuwait contracting office, installed new leadership, and implemented several other actions that led to significant improvements in contracting office operations.

In addition, during August 2007, the Secretary of the Army directed the establishment of an Army internal task force to look intensively at the Army's overall structure of contracting operations and immediately implement reforms and corrections. At the same time, the Secretary established an independent Commission on Army Acquisition and Program Management in Expeditionary Operations (Gansler Commission) to examine current operations as well as to ensure that future contracting operations in a contingency environment are more efficient and transparent. The results of the task force and the commission were significant in that they led to substantial increases in the contracting workforce and major changes in how that workforce is organized, managed, and trained.

Prosecution of Case

In December 2009, U.S. Attorneys successfully prosecuted a case against a former U.S. Army major who served as a contracting officer in Kuwait. The former officer, his wife, sister, and niece were sentenced for their participation in a bribery and money-laundering scheme related to the contracts awarded in Kuwait for logistical support services. The former officer was sentenced to 17 years and ordered to pay $9.6 million in restitution. U.S. officials anticipate more arrests in the case, as well as the sentencing of other co-conspirators in the case.


Overall, work on this Kuwait case was very rewarding to the auditors and provided a solid foundation for continued cooperation between the auditors and the investigators in theater. Rather than just reporting on fraud indicators or the existence of internal control weaknesses, the auditors were able see how their work supported the successful prosecution of cases involving criminal activity.

In 2006, the combined talents of DoD and Department of Justice investigative agencies were brought together to form the International Contract Corruption Task Force (Task Force) to harmonize efforts in combating contract fraud in Southwest Asia (SWA). Member organizations of the Task Force include the Army's MPFU, the Naval Criminal Investigative Service, the Air Force Office of Special Investigations, the DoD Defense Criminal Investigative Service, and the Federal Bureau of Investigation. As of October 2009, the Task Force had about 55 agents working in SWA, of which 15 are assigned to the Army's MPFU. Since December 2005, MPFU personnel have investigated 241 U.S. government personnel (military and civilian employees) and prepared 301 reports of investigations. As of October 2009, these investigations had led to indictments of 96 government and nongovernment personnel and the recovery of about $35.3 million in fines and restitution. At the same time, the Army Audit Agency has about 40 auditors working in SWA. Although most of our auditors are focused on improving the efficiency and effectiveness of operations, the Agency continues, on a regular basis, to provide audit support to the Task Force in its pursuit of contract fraud.


The author thanks John Vollbracht, Nina Murphy, and Timothy Glad-ding from the Army Audit Agency and James Scheel from the Major Procurement Fraud Unit of the Criminal Investigation Command for their contributions to this article.


Benjamin Piccolo is the Pnncipa Deputy Auditor General of the Army He serves as the principal advisor to the Auditor General, US, Army, on all matters related fo audit. He is a member of ASMC's Potomac Chapter

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Author:Piccolo, Benjamin
Publication:Armed Forces Comptroller
Article Type:Case study
Geographic Code:7KUWA
Date:Jan 1, 2010
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