One area of government contracts fraud that can quickly leech thousands from a business and taxpayers is procurement fraud. Procurement fraud can be difficult to detect and even harder to prove by outside eyes. However, suppliers and employees in logistics, fulfillment, and accounting can all play an important role in reporting procurement fraud as a whistleblower.
Government contracts fraud whistleblowers can earn themselves a percentage of a successful recovery of stolen taxpayer funds by reporting their information through a qui tam law firm. Federal procurement fraud whistleblowers are also protected by law against retaliation by their employers.
Procurement Fraud Definition
Procurement fraud is an attempt to unlawfully manipulate the system by which contracts are fulfilled or goods or services are acquired. Procurement fraud often looks like bid rigging, price fixing, or other kinds of market manipulation to reduce competition and secure an unfair advantage. At other times, government procurement fraud may be undertaken by suppliers and employees who collude to drain funds from a project or fulfillment process. Finally, procurement fraud may also look like contractors performing shoddy work, swapping out specified materials for less expensive dupes, or failing to follow environmental or safety regulations.
Procurement Fraud Statistics
A global study of over 2,000 business leaders revealed that 24% of organizations surveyed reported experiencing fraud between their employees and suppliers. Additionally, 23% reported collusion among suppliers. Fraud is more damaging the higher up the corporate ladder it stems from. The study found that executives who engaged in fraud cost their companies around 10 times more than fraud perpetrated by lower-level employees. Finally, the analyzed businesses were shown to have lost around 5% of their revenue per year to procurement fraud schemes, waste, and abuse. Annual losses ranged from $10,000 to $150,000.
These statistics are alarming, but there are investigatory mechanisms in place. In the United States, since April 2020 the Department of Justice’s Market Integrity and Major Frauds Unit (MIMF) has charged more than 185 defendants in at least 120 instances of procurement fraud across the country related to Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL) schemes. Over $76 million has been frozen due to allegations of procurement fraud.
Examples of Procurement Fraud
The following are common methods by which contract and procurement fraud takes place:
- Bid rigging: Bid rigging happens when contractors collude in order to determine who will win the bidding process. Often in bid rigging, the winning contractor then subcontracts the agreed-upon work out to other bidders. The Sherman Anti-Trust Act has outlawed bid rigging in the United States since 1890.
- Price fixing: In price fixing, several contractors may decide together to offer artificially high prices, or refuse discounts for a bid. This effectively raises the cost of a government project and eliminates market competition.
- Kickbacks, bribery, and collusion: When employees accept bribes or other kinds of kickbacks from suppliers they may create a culture of cronyism, or partake in other kinds of procurement fraud. Additionally, government officials in charge of awarding contracts may partake in procurement fraud when they accept payments, gifts, and bribes during the bidding process.
- Creating fake companies: A less common but still deceptive technique in procurement fraud is the creation of fake companies. Bidders may form phantom companies that then bid on contracts with no ability or intention of fulfilling the job, and then disappear with government funds. Additionally, employees may form a shadow company and submit a steady trickle of invoices from this entity, pocketing the profits.
- Inflated pricing: A supplier may charge a company a wrongfully higher price. The difference is often pocketed by employees.
- False invoicing: When invoice numbers are inflated, additional units are added or subtracted, or other kinds of false invoicing takes place it can cost companies and the US taxpayer millions of dollars.
- Failing to meet quality controls: Unfortunately, plenty of procurement fraud involves delivering inadequate results. Defective or non-conforming material may be used in manufacturing, construction may not follow specific terms, dangerous or environmentally destructive materials may be used, or deliverables may never arrive.
- Specifications fraud: Specifications fraud involves wording a request for bids or statement of work with input and coordination from a pre-selected contractor. Other viable offers are squeezed out in this kind of collusion that often involves inflated pricing or subpar delivery.
- Exclusion: During solicitation or the pre-solicitation phase, only one contractor will be identified as an option, or the process will wrongfully exclude qualified options. Often this kind of tactic is done as a result of cronyism, racial or gender bias, or conflicts of interest that are not disclosed. At times, other qualified contractor options may be excluded who would offer the same or better result at a lower price.
- Withdrawal during bidding: When one bidder withdraws in order to become a subcontractor to a higher bidder, this is an example of bid rigging during the selections process.
- Misrepresentation of costs: Contractors may purposefully misrepresent expenses like labor, supplies, cleanup, and more during the contract negotiations phase in order to artificially inflate their bid from the beginning.
- Changing orders: A contractor may win a bid by offering an unrealistically low price, and then submit a change order once the contract has been secured.
- Mischarging costs: Charging for unallowable costs, additional materials, labor payments not attached to the project, outside investments and more are all examples of procurement fraud under the mischarged costs umbrella.
- Miscertification fraud: Many government contractors may miscertify that they successfully followed required standards, such as EPA protocols during the completion of a project. When they do so, they cheat the taxpayer out of payments for shoddy work that often induces extra cost and danger to their communities.
- Substituted products: Some common examples include contracts that specify materials must be made in America. When corners are cut and substituted products are put in place (such as components manufactured in other countries) it is an example of government contracts fraud.
Indicators of Procurement Fraud
Criminologist Donald R. Cressley identified the Fraud Triangle, three conditions that often preclude organizational fraud, as:
- Opportunity: When companies and employees are presented with an opportunity for wrongdoing, such as offered a kickback, or when structures do not allow for sufficient oversight and accountability.
- Pressure: Financial motivation, mounting debts, or chronic under-compensation can all add fuel to the fire.
- Rationalization: “They’ll never miss it” or other kinds of rationalizations that make the fraudulent action seem in line with a person’s values.
These three factors play out again and again in instances of procurement fraud, waste, abuse of funds, and other kinds of contractor fraud.
Some common warning signs that procurement fraud schemes may be taking place might include:
- Shadow bank accounts or companies
- Collusion or conflicts of interest
- Lack of oversight or accountability during bid selection
- Lack of internal controls, audits, or authorizations on purchases
- Environmental threats or local citizen complaints during fulfillment
Recent Procurement Fraud Cases
- $48.5 Million Settlement in Procurement Fraud for Small Business Contracts Intended for Service-Disabled Veterans: Certain government contract funds are earmarked for specific recipients in order to support opportunities for sector growth. In this case, funds were set aside to contract with small businesses owned by service-disabled veterans. Instead, TriMark USA, LLC, a larger corporation, secured government contract funds by going through smaller businesses that met program requirements. The company’s marketing department would identify federal set-aside contract opportunities, targeted qualifying businesses, and then instruct them on their bids and pricing. The marketing arm of the corporation even “ghostwrote” emails for those companies to send to government officials. This kind of procurement fraud reduced genuine opportunities for service-disabled veteran businesses to grow, while funneling taxpayer funds to a larger corporation.
- $377.45 Million Settlement from Booz Allen for Improper Billing: In order to resolve allegations of improper billing under the False Claims Act, military contractor Booz Allen was ordered to pay a $377.45 million settlement. Only certain costs are considered appropriate to bill the US taxpayer for while conducting contracted work. While indirect costs are applicable, such as those that will benefit the contracted work as well as other projects, Booz Allen improperly charged costs associated with its international and commercial clients. This settlement is one of the largest procurement fraud cases in history, and was brought to the attention of the Department of Justice by a former Booz Allen employee.
- $7.7 Million Settlement for Procurement Fraud under SBA 8(a): The Small Business Administration’s 8(a) business development program earmarks funds for small businesses owned by socially and economically disadvantaged individuals. Several Florida contractors misrepresented their qualifying status to the program in order to secure 8(a) contracts with NASA, the U.S. Army, and the U.S. Air Force. In addition, payments and distributions were sent to the contractors’ family members, concealing disqualifying assets. The whistleblower in this case, another contractor filing as Vantage Systems, received $1,357,964 for reporting.
How to Report Procurement Fraud
Whistleblowers can receive significant payouts when they report procurement fraud in government contracts. To report anonymously, contact a qui tam attorney today. Our procurement fraud attorneys can advise you about what kinds of documents, files, and data are necessary in order to prove your claim. We can file your qui tam lawsuit with the Department of Justice, and should your case be denied, even represent your interests in court. By working with our experienced and well-respected team of whistleblower lawyers, we guarantee the strongest possible showing for your case before DOJ investigators.
Speaking up as soon as possible and collaborating fully with investigators is the best way to ensure the highest possible percentage payout from your procurement fraud qui tam case. It is also important to do so as soon as possible to prevent your reward from being claimed by another whistleblower, as well as to insulate your own professional reputation against fraud and abuse of funds.
Procurement Fraud Whistleblower Protections
Procurement fraud whistleblowers are eligible for federal protections against discrimination by employers. Instances of prohibited retaliation include firing, demotion, reduction of hours, reduction of pay, harassment, threats, and any other intimidation tactics. Whistleblowers can be granted up to double back pay with interest and re-hired should their employer discriminate against them because of their protected disclosure.
Contact a Procurement Fraud Attorney
If you have proof of procurement fraud, the right thing to do is to report it. Many employees report fears of being harassed, retaliated against, or ostracized because of a disclosure. However, procurement fraud is not a victimless crime. If you pay taxes in the United States, it is your own money that is being stolen when companies or contractors line their pockets through procurement fraud.
Procurement fraud results in shoddy work, missed opportunities for those who deserve it, reduced competition, misspent funds, environmental harm, and more. If you can speak up, do so with the law firm of Tycko & Zavareei LLP today. Our expert procurement fraud lawyers can protect your professional reputation and help you win the maximum whistleblower reward while doing the right thing. Our offices are available for a complimentary and confidential consultation.