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Chapter 28
Procurement Fraud

2014 ContractAttomeys Deskbook

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+13%
C. ontractor “Mandato Disclosure" Reortin: The FAR requires contractors
to disclose “credible evidence" ofcriminal and/or civil fraud. Prior to 2008.
there was a voluntary reporting regime.

l. —p—_________[_____Contractor
Disclosure to Avoid Susension or charmcnt FAR
and
3:
___1_)_L__)_(_)_13.1003a
2 This requirement applies to all contractors and
subcontractors. in all current and future government contracts and
r‘E/iiains a cause afar-{ion for suspension and/or debarment until 3
years a er nal payment on a contract

a FAR 3.1003(a)(2): A contractor may be suspended and/or

debarred ifa “principal”6 ofthe contractor knowingly fails to
timely disclose to the Govemment (in connection with the
award, performance, or closeout of a Government contract,
pte/o'rmed by [he contractor or one oft/mi snhmn[rut/ms)
credible evidence of:

(l) a violation ot‘tc‘dcral criminal law involving tr‘aud.

conflict ofinterest. bribery. or gratuity violations of
Title 18. US Code: or

(2) a violation ofthe Civil False Claims Act (31 U.SiCi §§

3729-3733).

bi Violations of FAR 3.1003(a)(2) remain a cause for suspension

and/or debarment for three (3) years a er the nal payment on
a contract.

c. FAR 3.1003(a)(3): A contractor may be suspended and/or

debarred it‘a principal ofthe contractor knowingly tails to
timely disclose to the Government (in connection with the
award, performance. or closeout ofa Govemment contract.
performed by the contractor or one oft/121Tsubroutrucloz.‘r)
credible evidence ofsigni cant overpayments ofa contract.

D—q—3%isclosures
Reuired for Certam' Contractors b Contract Clause:7
2.
This is prescribed in FAR 3.1004(a) for when the value of the contract

"
FAR 2. 101. De nitions (“Principal" mcans an o iccr. dir'ector. owner. panncr. or a person having primary
management or supervisory rcsponsibilitics within a business entity). Also found at FAR 52.203-13la).
FAR 52203-13. Conlrur‘mr Cor/y of Bil.\'i'nu\1\' EI/mn‘ uml Com/m I. applics if FAR 3.1004 thresholds are met.

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is to exceed SS million and will have a perto‘rmance period of 120 days

or more. FAR 52.203»l3(b)(3) reqqu'es the contractor shall timely
disclose in‘ writing to the agency Inspector General (with a copy to the
contracting oilicer) credible evidence that a principal. employee.
agent. or subcontractor has committed:

"L a violation ot‘te‘deral criminal law involving lr‘aud. con ict of

interest. bribery. or gatuity violations ot‘Title 18. US Code; or

b. a violation ot‘the Citil False Claims Act (31 U.S.C. §§ 3729-

3733).

B—tu—g—usiness
(Montml
3. Ethics. Awareness and Comliancc Protram and Internal
Svstcin Rcuircd b Contract Clause FAR 51203-13 c :

Unless the contractor holds itselfoul as a small busines concern to

obtain contract award. or unless the contract is for acquisition ofa
commercial item. FAR clause 52.203-13(c) applies to contracts that
exceed 55.000.000 and the period ofperformance is 120 days or
more.“ lfthe FAR 3.1004 threshold (35 million [20 days) is met. then
the small bustn'ess and commercial item exemptions do not apply to
the other sections ofSZlOS-IS. such as 52.203. 13(b).

a. FAR 52.203-13(b)t 1) requires the contractor to:

(1) within' 30 days ofcontract award. have a written

business code ofethics: and

(2) make available this code of ethics to each employee

engaged in' the perto‘rmance of the contract.

b. FAR 52.203»13(c) requir'es contractors. within 90 days of

award. to establish:

1
I) an ongoing Business Ethics Awareness and Compliance
Program that periodically trains the contractor's
principals. employees. and if appropriate. its agents and
subcontractors. on the standards and procedures of the
contractor‘s business ethics awareness and complianee
program; and

(3) an Internal Control System that facilitates the timely

discovery of improper conduct related to the
contractor's Government contracts. ensures the
corrective measures are promptly inst itutcd and carried
out. Amongr other minimum requirements. the Internal

‘
FAR 5 3
lltdt requires that contractors incorporate the prousions of FAR 51203-13 In all suhconlrzlcis
Ihat hme a value of more than 55 million and a period ot‘pert‘ormance nt‘more than 120 days.

28-9

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CHAPTER 28

PROCUREMENT FRAUD

I. INTRODUCTION.
A. “Corruption \vln's not more than honesty.” (Shakespeare, Henr VIII
Act 3, Scene 2. Line 444: Cardm‘al Wolsey‘s concessionary speech to Lord
K4_y_,m'
Thomas Cromwell. after the King expresses his displeasure with Wolsey).

B. “The United States does not stand on the same footing as an individual in a
suit to annul a deed or lease obtained from him by fraud The nancial . . .

element in the transaction is not the mic or principle thing involved. This suit
was brought to vindicate the policy ofthe Government. The petitioners . . .

stand as wrongdoers. and no equity arises in their favor to prevent granting the

—p_Pan
reliefsought by the United States." Am. Petroleum and Trans. v.
United States. 273 US. 456. 509 (1927).

C. Fraud is defined as “[a]ny intentional deception . including attempts and

. .

conspiracies to effect such deception for the purpose ofinducing action or . . .

reliance on that deception Such practices include bid—rigging. making or

. , ,

submitting false statements. submission of false claims adulterating or

. , .

substituting materials. or conspiring to use any ofthese devices.“ Army

Regulation (AR) 27-40, Legal Services, Section 11, Terms.

D. Understanding ’aud is important as restrictions on funds have now been

implemented to prohibit fundm‘g ofthose contractors convicted of fraud and
officially suspended from irther participation in contracting. This afte‘cts
funding from the 2014 Department ofDefense Appropriations Act (Division
C of Public Law 13-76). See Memorandum ofthe Undersecretary of Defense
1

for Acquisition. Technology. and Logistics. SUBJECT: Class Deviation 7

Prohibition Against Using Fiscal Year 2014 Funds to Contract with Entities
Convicted of Fraud Against the Federal Government (dated March 20. 2014)
found at http.'//www.acq.osd.miL dpap/dars/elassideviations.htinl.

II. IDENTIFYING FRAUD.

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II. IDENTIFYING FRAUD.
A. Fraud Before Contract Award: These types of fraud may occur prior to
contract award. More than one type of fraud. however, may be present in one
case, and at any time within the same acquisition. This is not an all-inclusive
list.

l
Sm AR 2740, Chuptcr
IFor additional possible indicators ut'tr‘uud. lhc Army‘s Indicators nt'Frzmd are laid
X

out in AR-27-40. tigurc 8-1 alum Auditor Fraud Resources Sccnurms and Illdiculnrs. amt/ult/u ul
hup: V1 wwdodigmil rcsnu ruud ’sccnai rushlml

l. Bribery. Public Corruption. and Con icts oflnterest.

a. The breach ofan employee's duty of loyalty. S_ee, _g_e.., United

States V. Carter. 217 LS. 386 (1910); United States V.
Brewster. 408 US. 501 (1972). In these twes offraud.
government emp10\_ees collude \\ ith one or more contractors to
effectuate the tr‘aud. The breach ot‘the government employee‘s
duty ofconfidentiality may occur as a result ofa direct quid
pm qua bribe. or an indirect conflict ofinterest.
b. I’ussiblc indicators ot‘Brtbcr). Public (‘orruptimt and Con icts
ot‘lntcrcst.

(l) U juslilicd lhwrnblc lt'camtcnl to a contractor.

(2) Acceptance of low quality goods. nonconformance to

contract speci cations, and/or unjustifiably late
delivery ofgoods or services

(3) An unusually high volume ot‘purchases tr‘om the same

contractor or set of contractors.

(4) Procurement of cials fail to tile nancial disclosure

forms (this may occur when a procurement of cial
remains directly involved in a procurement in which
he/she has a substantial nancial stake in).

(5) Procurement of cial has tiunily members n In» .irc

cmploycd b) contractors \\ lucli \\crc awarded a
government contrucr

(6) Purchasing unncccssarv or inannrnnriatc goods or

Q
a. Unoer rne anerman AC1. 1) U.D.L. g 1, [ejvery contract,
combination in the form of trust or otherwise. or consniracv. in

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2. Bid—Rigging.

a. Under the Sherman Act. 15 U.S.C. § 1. “[e]very contract.

combination in the form of trust or otherwise, or conspiracy, in
restraint of trade of commerce among the several States, or
with foreign nations, is declared to be illegal.” Circumvents
competition. which increases cost to the government. and
deprives it ofthc most reliable measure ofwhat price should
be. The measure of damages is “the diftc‘n'cncc between what
the government actually paid on the lr‘audulent claim and \\ hat
it would have paid had there been lair. open and competitive
bidding.”
—g_United
States v. Killouh, 848 F.2d 1523,. 1532 (11‘h
Cir'. 1988); see also Brown v. United States, 524 F.2d 693, 706
(1975); United States v. Porat, 17 F.3d 660 (3rd Cir'. 1993).

28-2

Possible indicators ofBid Rigging.

(1) The winning bid price seems to be much higher than the
independent government estimate (IGE) or industry
averages.

(2) There is a pattern of winning bidders.

(3) The losing bidder(s) typically become the subcontractor

ofthe winning bidder.

(4) The solicitations and or speci cations are written in an

overly restrictive way (i.e. only one contractor could
possibly provide the destr'ed product).

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4. Fraudulent Sole Sourcing.

a. Occurs when procurement of cials co llude \\'ith a contractor to

unjusti abh direct a contract to a contractor without “hill and
open" competition (and at a higher price than the government
would hme paid it‘the requirement was properly competed).
FAR Subpart 6.". (Full and ()pen Competition Alter Exclusion
ol‘Sourccs) and FAR Subpart 6.3 (Other Than Full and ()pen
Competition) provide the limited situations in which contracts
may be awarded without m“ and open competition Each ofthe
Subparts pro\idesjustitication criteria for \\ hen full and open
competition can be waived. A procurement that cannot meet
this criterion may be suspect and indicative of tr‘aud.

28-3

b. Possible indicators o‘t'l‘raudulent Sole Sourcing.

(1) Speci cations so tailored that it appears as if only one

contractor could satist)" the requirement.

(2) The required J&A (Justi cation and Approval) to

approve the sole source acquisition is vague and or
incomplete

(3) The required _l&.-\ (Justi cation and Approval) to

appro\e the sole source acquisition is just belou a
threshold that “onld require the J&A to be approved by
a higher»le\ el procurement ofti al. The J&A for a sole
source acquisition whose price is $650,000 or less, for
example. requires approval of the contracting of cer
{unless agency rules reqqu'e higher-level approval).
while those greater than 5650.000 require the approval
ot‘the Competition Advocate. the head ofthe procuring
activity. or the senior procurement executive ot‘the
agency. See FAR 6.304.

(4) Previously the requirement being sole-sourced has

successtL'tll) procured \\ ith full and open COIHPCIHIUIL

(5) One purchase is unjustifiabl)‘ split into multiple

purchases sunpl) to a\ oid competition (i.e. using
simpli ed acquisition procedures).

Q
a. Product substitution is “deliverv to the government ol‘a

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Lé—L‘ontmctor
C. "Mandator Disclosure" Reorting: The FAR requires contractors
to disclose “credible evidence" ofcriminal and or civil fraud. Prior to 2008.
there was a volzmmlj' reporttn'g regime.

(—i—L_‘ontractor
l. Disclosure to A\oid Susx‘nsion or Debarmcnt FAR

M1001: a2 an This requirement applies to all contractors and

subcontractors. in‘ all current and future government contracts and
remains (I came of union lbr suspension and. or debarmcnt until 3
years a er nal payment on a contract.

a. FAR 3.1003(a)(2): A contractor may be suspended and or

debarTed it‘a "principal"h ofthe contractor knowingly ta‘ils to
timely disclose to the Govemment (in connection with the
award. performance, or closeout of a Govemment contract,
performed by the contractor or one oftheir .vubcolzlraclt)!1r)
credible evidence of:

(l) a violation of federal criminal law involving tr‘aud,

conllict ot‘intercst. bribery. or gratuity violations of
Title IX. US Code: or

(2) a violation ofthe Civil False Claims Act (31 U.S.C. §§

3729-3733).

b. Violations ofFAR 3.1003(a)(2) remam' a cause to‘r suspension

and/or debarment for three (3) years after the nal payment on
a contract.

c. FAR 3.1003(a)(3): A contractor may be suspended and/or

debarred ifa principal ofthe contractor knowingly ta‘ils to
timely disclose to the Government (in connection with the
award, performance. or closeout ot‘a Government contract.
[It‘lf‘bl‘lnez/ by [he ('wtll‘uclm‘ 01‘ any of limit uht'unll‘at loltv)
credible evidence ofsigni cant ovcrpaytnents ofa contract.

—1⸺Dl"sclosures Retuired for Certain Contractors by Contract Clause.“

[u

This is prescribed in l-‘AR 3.1004tat tor \\ hen the \alue of the contract

"
FAR 2,101. De nitions ("Principal‘ means an ot'ti"cer. director. owner. partner. or a person hming primary
m_anagement or supervisory responsibilities within a busLn'ess entinv'l. Also found at FAR 5_"._"0.1‘-l3tal.
FAR 52.203-13. COIN/UL tor Cody 0/ Bin‘inuxv Erln’ts tunl Com/ml. applies if FAR 3.1004 thresholds are met.

38%

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agent. or subcontractor has cotnmitte .

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is to exceed $5 million and will have a performance period of 120 days

or more. FAR 52.203-13(b)(3) requires the contractor shall timely
disclose in writing to the agency Inspector General (with a copy to the
contracting of cer) credible evidence that a principal employee.
agent. or subcontractor has committed:

a. a violation ot‘te‘dcral criminal law involving fraud. con ict of

interest. bribery, or gratuity violations ot'Titlc 18. US Code: or

b. a violation ofthe Civil False Claims Act (31 U.S.C. §§ 3729-

3733).

—p—e—Business
3. Ethics A“ areness and Comliance Procram and lntemal

⸺c|—(—(_)_)Control
System Reuir'ed bv Contract Clause FAR 3 103-136:
Unless the contractor holds itselI‘out as a small business concern to
obtain contract a\\ ardr or unless the contract is io‘r acquisition ot‘a
commercial item. FAR clause 52.203-13(c) applies to contracts that
exceed 55000000 and the period ot‘pertbrmance is 120 days or
more.x
lftht: FAR 3.1004 threshold ($5 million 120 days) is met, then
the small business and commercial item exemptions do not apply to
the other sections ot‘52.203-l3. such as 5-203. 13(b).

a. FAR 52.203-l3(b)(l) requires the contractor to:

(
1) within 30 days of contract award. have a written
business code of ethics: and

(2) make a\ailable this code ot‘ethics to each employee

engaged in the perio‘rmance ot‘the contract.

b. FAR 52.203-l3(c) requires contractors. within 90 days of

award to establish:
( l )
an ongoing Business Ethics Awareness and Compliance
Program that periodically trams the contractor‘s
principals. employees, and if appropriate. its agents and
subcontractors, on the standards and procedures of the
contractor‘s business ethics awareness and compliance
program; and

(2) an lntemal Control System that ta‘cilitatcs the timely

discovery ot‘ improper conduct related to the
contractor‘s Govemmcnt contracts ensures the
corrective measures are promptly instituted and carried
out. Among other minimum requirements. the Internal

“
FAR 52.203-13(d) requires that contractors incorporate the prm isions ofFAR 52.103-[3 in all
that have a \alue of more than 55 million and a period of performance of more than 120 days. we Vl‘lll'"l\

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Ve vc , . -V ‘77,",V v cc v, ..V_, 7,, and
corrective measures are promptly instituted r". carried
_._

out. Among other minimum requirements, the Internal

(d) requires that contractors incorporate the provisions of FAR 52.203-13 in all subcontracts
3f more than $5 million and a period of performance of more than 120 days.

28-9

Control System must provide for the timely disclosure,

in writing, to the agency Inspector General (1G),
whenever the contractor has “credible evidence” that a
principal, employee, agent, or a subcontractor has
committed:

(a) a violation of federal criminal law involving

fraud, con ict of interest, bribery, or gratuity
violations ofTitle 18, US Code; or

(b) aviolation ofthe Civil False Claims Act (31

U.S.C, §§ 3729-3733).

C. FAR 42.302(a)(71) requir'es contract adrnm'istrators to ensure

that contractors are complyln'g with the requlr'ements of FAR
52.203-13.

Reortin:
v____p_gidual

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FOR IMMEDIATE RELEASE Thursday, August 10, 2017

Defense Contractor ADS Inc. Agrees to Pay $16

Million to Settle False Claims Act Allegations
Concerning Fraudulently Obtained Small
Business Contracts
Virginia Beach, Virginia-based contractor ADS Inc. and its
subsidiaries have agreed to pay the United States $16
million to settle allegations that they violated the False
Claims Act by knowingly conspiring with and causing
purported small businesses to submit false claims for
payment in connection with fraudulently obtained small
business contracts, the Department of Justice announced
today. The settlement further resolves allegations that ADS
engaged in improper bid rigging relating to certain of the
fraudulently obtained contracts. The settlement with ADS
ranks as one of the largest recoveries involving alleged
fraud in connection with small business contracting
eligibility.

“Small or disadvantaged businesses serve as important

engines of economic growth, and the United States utilizes
small business set-aside contracts to aide those businesses in
their development,” said Acting Assistant Attorney General
Chad A. Readler of the Justice Department’s Civil Division.
“When ineligible companies improperly obtain set-aside
contracts, they prevent the small business community from
“”
r"“"“"“” """""‘“““ that Congress intended.”
A
.mall business, companies must
_

meet de ned Plioihilitv criteria inr‘lndino rennirempntq

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In order to qualify small business, companies must

as a
meet de ned eligibility criteria, including requirements
concerning size, ownership, and operational control. The
settlement with ADS resolves allegations that ADS,
together with several purported small businesses that it
controlled. fraudulently induced the govermnent to award
certain small business set-aside contracts by
misrepresenting eligibility t‘CO‘Hiremr‘ . The purported
small bum” “Minded \\ an ADS include Mythics Inc.,
London nudge Trading Co. Ltd, as well as MJL
Enterprises LLC, which falsely claimed to be an eligible
service—disabled veteran—owned company, and SEK
Solutions LLC and Karda Systems LLC, both of which
falsely claimed to qualify as socially or economically
disadvantaged businesses under the Small Business
Administration’s 8(a) Business Development Program. ADS
and its af liates allegedly concealed the companies’
af liations with ADS and knowingly made
misrepresentations concerning the size of the businesses and
their eligibility as service-disabled or 8(a) qualified
businesses. Finally, the settlement resolves allegations that
ADS engaged in illegal bid rigging schemes that in ated or
distorted prices charged to the government under certain
contracts.

“This settlement re ects the government’s commitment to

ensure that its business partners are truthful in their dealings
with the United States,” said US. Attorney Channing D.
W " " W 3f Columbia. “Contractors who
' ' '

Ha
Q Iisrepresent themselves to obtain
.- r_,___Jte small
and disadvantaged
h.--" n"-
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