Acquisition Integrity Protecting the Process – Let us help!

1. Acquisition IntegrityProtecting the Process – Let us help! Acquisition Integrity Division AFMC LO/JAF WPAFB OH 1

2. Who Suffers from Fraud? • National Security Suffers • Failure of a part or system creates advantages for adversaries, both on the battlefield and at home • Assets devoted to pursuing and prosecuting fraud cannot be used for other missions • USAF End Users / Warfighters Suffer • Safety issues • Adverse mission impact due to unreliable systems • Contractors and theirEmployees Suffer • Contracts lost to irresponsible contractors and unfair competition • We Taxpayers 2

3. Simple Definition of Fraud • Four Simple Elements to the Legal Definition of Fraud: 1) Misrepresentation 2) of a Material Fact 3) with the Intent to Deceive 4) to Obtain a Benefit • Includes: • Deliberate omission of material facts • False or misleading statements or actions • Single act or combination • Innuendo, silence, look or gesture 3

4. Who Commits Fraud? • People do! • They could be: • Employees and/or Management • Contractor Personnel and/or Government Employees • Prime and/or Sub Contractors • Military and/or Civilian • Companies can be held responsible for actions of their employees and managers, and vice versa 4

5. Who Reports Fraud? • Contracting Personnel • Contractor Employee (“Whistleblower”) • May be come to light as part of a Qui Tam lawsuit • Other AF or other DoD employees • Affirmative duty to report; required by E.O. 12674 • New FAR reporting requirement for Contractors • A call to the Fraud, Waste and Abuse Hotline • Reports are received by: • AF OSI or other Law Enforcement Agencies • Inspector General • Staff Judge Advocate • Installation Procurement Fraud Counsel • Installation Procurement Fraud Working Group members • AFMCLO/JAF Procurement Fraud Branch (WPAFB) • SAF/GCR 5

6. The “Typical” Offender • Contractor or Subcontractor: • Machine shop, electronics manufacturer/assembler • Annual sales range between $1 - $3 million • Management structure made up of 1 to 3 executives with decision making authority • Government Employee: • Has little or no supervision • Works in the same area for an extended period of time • Has extensive contacts with contractors that he or she oversees Darleen Druyun, former Principal Deputy Assistant Secretary for Air Force Acquisition and Management – Plead Guilty to Fraud and Corruption in air refueling tanker lease program, and Imprisoned 6

7. Suspension and DebarmentAn Additional Remedy • Administrative measures used to help ensure that the Government does business only with responsible contractors • Protects the integrity of the procurement process by ensuring that the Government receives safe, reliable, goods and services • Based on a finding that the contractor is “Not Presently Responsible” • Can result from fraudulent or other illegal activity or from poor contract performance • FAR 9.403 defines “Contractor” as any individual or other legal entity that may reasonably be expected to submit offers or be awarded Government contracts 7

8. Suspension and Debarment • Suspensions are for a maximum of one year unless extended due to criminal or civil proceedings • Debarments are for the time period specified by the SDO and are generally three years in length • Suspended or Debarred contractors are not eligible for award of new (future) Government contracts • Contractors are obligated to complete previously awarded contracts • Contracting Officers order minimum amounts necessary in IDIQ Contracts • Contract Options are not exercised 8

9. New FAR Contractor Disclosure Requirement  FAR 52.203-13 – Contractor Code of Business Ethics and Conduct (Dec 2008) (3) (i) The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract there under, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed— (A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or (B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733). 9

10. Types of Procurement Fraud, Sample Fraud Indicators and Trends A “Blended Family” A “Blended Family” 10

11. Main Types of Contract Fraud • Defective Pricing • Cost Mischarging • Direct/Indirect Costs • Unallowable Costs • Cost Shifting Between Projects • Cost Inflation • Labor Mischarging • Progress/Performance Payment Fraud • Product Substitution • False Certification • Quality Control Deficiencies • Bribery / Kickbacks / Gratuities • Price-Fixing / Bid Rigging • Outright Theft / Embezzlement Iraq prison ate up $40 million Deep Background: Desert prison stands out as 'worst project' in investigation of mismanagement and waste. 11

12. Sample Indicators of Bribery, Kickbacks and Gratuities • Contractor offers monetary payment or other compensation in exchange for favorable consideration in contract award or oversight • REALLY obvious Red Flag • Contractor Entertains Purchasers • Frequent use of Contractor despite Quality, Cost or Performance Problems • Excessive Use of a Single Contractor in a Competitive Field • Apparent Favoritism of Contractor by the Buyer/PCO/PM 12

13. Price-Fixing and/or Bid-Rigging • Agreements Among Contractors to: • Adhere to Published Price Lists • Raise Prices by a Specified Amount • Establish, Adhere to or Eliminate Discounts • Not to Advertise Prices • Maintain Specified Price Differentials Based on Quantity, Type or Size of Product 13

14. Cost and Pricing Fraud Indicators • Nonpayment of subcontractors and suppliers • Requests for payment that are inconsistent with earlier cost reports • Contractor bills costs that are not part of or required for contract performance • Contractor makes little or no physical progress on the contract even though significant costs have been billed • History of frequent invoice/voucher errors, poor documentation, & claiming unallowable costs • Double counting costs as both direct and indirect 14

15. Quality Control Fraud Indicators • Altered Test Reports/Certifications • Minor discrepancies in typeface, “whited out” sections, handwritten portions of typed documents, other alterations • Non-Operating Test Equipment • “It works, just not today” • “Pre-Signed” Certification or Receipt Forms • Indication that actual verification was not performed as these should not be signed until actual verification of facts have taken place • Commingled Tested and Untested Items • Tested items should be stored separately to prevent accidental use of untested items • “Salting” the Lots • Does that Contractor have “sample” parts prepared and waiting for inspection? 15

16. Quality Control Fraud Indicators • Substituting Generic for Brand-Name Parts • Check to ensure packaging matches • Questionable Testing Claims • Examples: Two tests at the same time using the same machine; 72-hour tests over 2 days (48-hours) • Parts Failures After “100% Inspection and Testing” • Subsequent Test and Inspection Failures on Products in Performance-Based Contracts • Rush Jobs (End of Month or Fiscal Year) Example of subtle differences between authentic and fake packaging 16

17. Quality Control Fraud Indicators • Limited Government Access to Production and Storage Facilities • Unwillingness to Mark or Seal in the Presence of a Government Representative • Major Work Schedule Changes without Notice • Contractor Efforts to Hide Records • Poor Reproduction of Certifications, Illegible or Incomplete Documentation • Use of Lesser Skilled Labor than Originally Anticipated • Substitution of Foreign Parts for Domestic Items 17

18. Product Substitution Fraud • Use of Inferior Quality Raw Materials • Substitution of Products or Services • Counterfeit/non-qualified parts • Sale of surplus or used parts as new • Foreign made v. domestic products • Remarking/Repackaging • False Certificates of Conformance • Provided by Contractor to Affirmatively State that the Product meets Contract Requirements • Use ofUnqualified Personnel in Services Contracts • Lack of Required and/or Falsified Quality Control Testing 18

19. Trends • Largest group of cases prosecuted involve false test certificates • Largest commodity affected is fungible partssuch as fasteners, electronics, wire & cable • Growing number of cases with 2nd and 3rd tier subcontractors • Potential fraud is greatest where DoD heavily relies on contractor integrity (trust in our partners) 19

20. What Should You Do? • Know the Contract Requirements! • Be alert for indications of fraud • Recognize undisclosed non-conformances, defective or substituted items • Recognize irregularities • Ask Questions • Follow-up on Notices of Potentially Defective Products • Report Wrongdoing • Do not wait for proof – Investigators are there to collect evidence and conduct investigations • Delayed reporting can hinder the investigators / benefit the wrongdoers 20

21. And REMEMBER…. REPORTsuspicions of Procurement Fraud promptly! DON’T WAIT FOR PROOF Contact Your Supervisor, Local Fraud Counsel, Law Enforcement, Legal Office, Inspector General or a Fraud Hotline 21

22. QUESTIONS???? YOU can help detect and prevent fraud! Protect the Process… Who knows…the life you save may be your own. Susan Theodorelos Acquisition Fraud Counsel Wright-Patterson Air Force Base, OH 937 904 5757 Susan.theodorelos@wpafb.af.mil 22