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					FRAUD AND INTERNAL
 CONTROL ISSUES IN
   CONTRACTING


  DCIS


          Defense Criminal Investigative Service
Defense Criminal Investigative Service

Mission
• Protect America’s Warfighters by conducting
 investigations in support of crucial National Defense
 priorities.
Vision
• Remain established as a premier investigative
 organization, demonstrating excellence in all aspects of
 our operations.


                                  Defense Criminal Investigative Service
                    DCIS Mission

   Is the law enforcement arm of the OIG, DoD

   Has statutory law enforcement authority

   Derives its authority from Public Law 97-252,
    DoD Directive 5106.1, and Title 10 Section 1585a

   Investigates allegations of criminal violations

                                    Defense Criminal Investigative Service
                 Investigative Priorities

    DCIS devotes most of its investigative resources to:

    Terrorism
    Substituted/Non-conforming Products
    Computer Crimes
    Illegal Technology Transfer
    Public Corruption




                                  Defense Criminal Investigative Service
                                          Organizational Chart
                                                                                                         Sh aro n Wo o ds
                                                                                                             D irector


                                                                                                            Vacant
                                                                                                         Deputy Director


                                               Rich ard Beltz                                                                                                     An n a Gers h m an
                                                  Director                                                                                                              D ire cto r
                                   Investigative Operations Directorate                                                                                   In te rna l Op e ra tio n s D ire cto ra te


                           K eith D ixon                             Jim Ives                                                                                             Inspections
                 Deputy Director / CIFA Liaison           Deputy Director, INV-OPS


 National Security                         Special Operations                   Ec o n o m ic Crim es                  Technical Operations                                 In fo rm a tio n An a lys is

                                                                                                                                                                            Inquiries
H o m e la n d Se c u rity/T e rro rism       Undercover Operations                   Pro d u ct Su b stitu tion              T e ch n ica l Se rvic es


    Technology Protection                      Criminal Intelligence                    Public Corruption                          Polygraph                             Information Management
                                                    Operational
                                                                                                                                                                       Training Division
       C o m p u te r C rim es                 Criminal Intelligence                     F in ancial Crim es                                                                FLETC
                                                     Strategic

    Joint Task Force-GNO                       Criminal Intelligence                     Iraq Task Force                                                                            Training
    L EC IC Re p re se n ta tive                Analytical Support                   Jo in t Operatio ns Cen ter
                                                                                                                                                                       D e fen s ive T a c tic s /We lln e ss
                                                                                         Asset Fo rfeitu re
                                                                                                                                                                                   Firearms




                                                                                                                            Defense Criminal Investigative Service
                                       Office Locations
                   Seattle


                  Portland                                                                            Lester
                                                                                                           Syracuse
                                                                        Minneapolis                                          Boston
                                                    Sioux Falls               Milwaukee                  Buffalo
                                                                                                 Cleveland
                                                                                                                            Hartford
                                                                                                                           New York

           San Francisco   Salt Lake
                                                                    Rock Island       Chicago             Harrisburg
                                                                                                    Pittsburgh            New Jersey
                                                                                                   Columbus              Baltimore
Monterey                                                                            Indianapolis
                 Sacramento City           Denver                                               Dayton                  Arlington
                                                        Kansas City                                                     Richmond
                           Las Vegas                      Wichita       St. Louis                 Roanoke                Norfolk

                                                                                        Nashville
Long Beach        Woodland Hills                                                                                               Wiesbaden,
                                                                Tulsa                                     Raleigh              Germany
  Mission Viejo            Phoenix        Albuquerque
                  San Diego
Hawaii                                                                              Huntsville
                                                                                                 Smyrna      Charleston
                                                                                                                            Camp Victory
                                       El Paso
                                                    Arlington
                                                                                                          Glynco/FLETC                Iraq
                                                       Austin                                               Jacksonville
     DCIS                                                 Houston                     Pensacola
                                                                                           Tampa                                       Kuwait City
           Field Office                                                     New Orleans                       Orlando
                                                 San Antonio                               Bay
           Resident Agency                                                                                       Ft. Lauderdale
           Post of Duty




                                                                                     Defense Criminal Investigative Service
         DCIS Investigative Programs

   Economic Crime Programs
    – Product Substitution (includes environmental crimes).
    – Public Corruption (includes health care fraud).
    – Financial Crimes.
    – International Contract Corruption Task Force/Joint
      Operations Center.
    – Asset Forfeiture.



                                     Defense Criminal Investigative Service
       Fraud Vulnerability Reports (FVR)
   Fraud Vulnerability Reports address:
    – fraud vulnerability(s) identified during an
      investigation.
    – typically involve internal control breakdowns.
    – normally issued after judicial proceedings or at
      conclusion of case.
    – intended to inform management of potential fraud
      vulnerabilities within their system.
    – responses are coordinated with DCIS Field Office
      directing investigation.

                                      Defense Criminal Investigative Service
                      Internal Controls

   What’s at Stake?
    – Responsible Use of Entrusted Taxpayer Dollars.
   What’s at Risk?
    – Insufficient resources to support DoD mission.
   Measures to:
    – encourage adherence to policies and procedures
    – promote operational efficiency and effectiveness
    – safeguard assets and ensure the reliability of
    accounting data.

                                       Defense Criminal Investigative Service
                    Internal Controls
   Internal controls encompass both internal administrative
    controls and internal accounting controls.

   Performance and accountability “speed bumps.”

    – what gets measured gets done.

    – what gets counted gets recorded.

   To disregard any one internal control within a system
    creates a fundamental weakness to be exploited.



                                       Defense Criminal Investigative Service
    CASES STUDIES:
WHEN INTERNAL CONTROLS
      BREAK DOWN




             Defense Criminal Investigative Service
Case Study A




        Defense Criminal Investigative Service
                      Case Study A
   Director, Graphics and Presentations Division, Real
    Estate & Facilities Division, Washington Headquarters
    Services (WHS), suspected of misusing Government
    Purchase Card (GPC) to purchase personal use items.

   Deputy Director also suspected in scheme.

   Director used name of co-workers as requestors on
    fraudulent transactions for Information Technology
    services from a sham company created by her brother.



                                     Defense Criminal Investigative Service
                      Case Study A

   Scheme netted over $3 million.

   Co-worker of Director provided “suspicious”
    documents to DoD IG.

   OIG Auditing requested Director provide supporting
    documentation; Director delayed.

   Data Mining support to OIG Auditing on documentation
    identified questionable charges.



                                       Defense Criminal Investigative Service
                      Case Study A
   Computer analysis revealed fraudulent invoices, some

    created minutes apart, on the Director’s computer.

   Director & brother email discussions.

    – how much to charge and still avoid detection.

    – agreement to split 2/3 of proceeds; 1/3 for taxes.




                                     Defense Criminal Investigative Service
                       Case Study A

   Search warrants executed on premises of Director,
    brother’s residences, and WHS offices of Director and
    Deputy Director.

   On the weekend after the searches, Deputy Director and
    husband attempted to enter items fraudulently purchased
    with GPC into the WHS inventory to avoid detection.




                                     Defense Criminal Investigative Service
                       Case Study A
   Director:
    – guilty plea to Theft of Government Property.
    – sentenced to 37 months incarceration.
    – three years supervised release.
    – paid $1.7 million in restitution.
   Deputy Director:
    – guilty plea to Theft of Government Property.
    – sentenced to three years probation, including six
       months home detention.

                                        Defense Criminal Investigative Service
                      Case Study A
   Director’s brother:
    – established a false identity and moved to Phoenix to
      elude law enforcement.
    – arrested and admitted involvement.
    – guilty plea of Theft of Government Property
    – sentenced to 48 months incarceration.
    – paid $1.6 million in restitution.
   Director and Deputy Director debarred from doing
    business with the Government.


                                      Defense Criminal Investigative Service
                       Case Study A


   Weakness

    – WHS management failed to review Subjects’ GPC
      monthly transactions/reports

    – Lack of oversight allowed Subjects to carry out scheme




                                      Defense Criminal Investigative Service
                     Case Study A

   Remedy:
    – DoD IG issued guidance in 2002 as result of
      investigation and DoD Charge Card Task Force
      recommendations:
       • Notification of supervisors and security managers
         when cardholder under investigation for charge
         card misuse.
       • DCIO or DoD element must notify subject’s
         commander or second-line supervisor and security
         manager.

                                    Defense Criminal Investigative Service
Case Study B




        Defense Criminal Investigative Service
                       Case Study B

   The Office of Small and Disadvantaged Business
    Utilization (SADBU) - chief administrator of
    acquisition preference programs within DoD.
   Former SADBU Director (SES-5) and his Executive
    Assistant used positions to leverage bribes and gratuities
    & extort those doing business with DoD and GSA.
   Coordinated their activities by working together as
    partners.



                                      Defense Criminal Investigative Service
                      Case Study B

   Conspired in scheme to launder proceeds through
    nominee companies, offshore bank accounts, and multi-
    layered sham transactions.
   Conspired to embezzle U.S. funds and launder over
    $800,000 in proceeds of specified unlawful activity.
   Shell company bank account amassed laundered money
    and was repository for bribes and extortion money.




                                      Defense Criminal Investigative Service
                       Case Study B

   Investigation proved subjects accepted:
    – $70,000 cash.
    – Rolex watches.
    – travel expenses (airfare, hotel, limousine).
    – Las Vegas Heavyweight boxing title match seats.
    – $200,000 in third-party payments for their benefit.
   Residences searched; subjects arrested.



                                      Defense Criminal Investigative Service
                      Case Study B

   Both subjects originally sentenced:

    – 292 months incarceration.

    – 3 years supervised release.

    – Ordered to pay $1.7 million restitution within 60
       days of release.

   Subjects re-sentenced upon appeal to 108 months and
    96 months imprisonment.



                                     Defense Criminal Investigative Service
                      Case Study B
   Both subjects forfeited $1 million and debarred for 27
    years by U.S. Air Force.
   Several other co-conspirators were prosecuted by DoJ
    and debarred by the U.S. Air Force for varying terms.
   Civil settlement with DoD contractor whose employee
    was involved in the scheme:
    – paid the U.S. $300,000 to avoid civil litigation.
    – debarred for a period of nine months.




                                      Defense Criminal Investigative Service
                       Case Study B


   Weakness
    – Lack of management oversight of SADBU program
      allowed Subjects to carry out scheme
   Remedy
    – Successful criminal prosecution
    – Significant press coverage served as deterrence




                                        Defense Criminal Investigative Service
Case Study C




         Defense Criminal Investigative Service
                       Case Study C

   Allegations that former USAF official (SES-6):
    – steered acquisition contracts to The Boeing Company
       (Boeing).
    – negotiated employment with a Boeing official while
       still employed with USAF.
    – released a competitor’s proprietary financial
       information to Boeing during negotiations of KC-767
       tanker lease.


                                     Defense Criminal Investigative Service
                      Case Study C

   Investigation found:
    – USAF official used her position to influence 28
       contracts related to various USAF programs between
       1993 and 2002, including the Evolved Expendable
       Launch Vehicle (EELV) program.
    – While still employed with the USAF, she negotiated
       employment with a Boeing official for herself, her
       daughter, and son-in-law.



                                      Defense Criminal Investigative Service
                       Case Study C

   USAF Official:
     – guilty plea of conspiracy to commit acts affecting
       personal financial interest by negotiating
       employment with Boeing.
     – sentenced to nine months confinement and seven
       months community confinement
     – three years supervised release.
     – 150 hours community service.
     – fined $5,000.


                                         Defense Criminal Investigative Service
                        Case Study C

   Boeing Official:
    – guilty plea to aiding and abetting acts affecting
      personal financial interest for his involvement.
    – sentenced to four months imprisonment and two years
      supervised release.
    – 200 hours community service.
    – fined $250,000.




                                      Defense Criminal Investigative Service
                       Case Study C

   USAF and Boeing officials debarred by USAF for a
    period of six years to expire February 2010.

   A global settlement resulted in Boeing agreeing to pay
    the Government $615 million to resolve the conflict of
    interest and EELV scandals at the company.




                                      Defense Criminal Investigative Service
                      Case Study C

   An OIG Auditing review:

     – USAF relied on DoD’s Appropriations Act, Sect.
       8159 – did not consult OMB circular and the FAR to
       justify its acquisition strategy to lease 100 Boeing
       KC-767A tanker aircraft over another aircraft.

     – USAF neither “demonstrated…best practices nor
       prudent acquisition procedures to provide sufficient
       accountability for…$23.5 billion for the KC-767A
       tanker program.”

                                      Defense Criminal Investigative Service
                        Case Study C


   Weakness
    – USAF official’s time in position
    – No one challenged her decisions, which allowed for
      abuse of power
    – Lack of management oversight of USAF official’s
      decision making




                                         Defense Criminal Investigative Service
                       Case Study C


   Remedy
    – Successful criminal prosecution
    – Significant press coverage served as deterrence
    – OIG Auditing review




                                        Defense Criminal Investigative Service
Case Study D




         Defense Criminal Investigative Service
                       Case Study D

   Health care provider in the Philippines allegedly:

     – billed TRICARE’s Overseas Program (TOP) for
       services not rendered and inflated claims billed to
       TRICARE.

     – engaged in kickback scheme with other medical
       providers in the Republic of the Philippines.

     – inflated bills of other providers by 100% before
       submitting to U.S. Government for payment.


                                       Defense Criminal Investigative Service
                      Case Study D

   Allegations continued:
     – created a sham insurance program to pay
       beneficiaries deductibles and co-payments.
     – circumvented TRICARE’s controls.

     – submitted fictitious and fraudulent TRICARE claims
       that beneficiaries were hospitalized and received
       services when they had not.




                                     Defense Criminal Investigative Service
                      Case Study D

   Primary subject indicted and charged:
    – 32 counts Mail Fraud.
    – 41 counts Filing a False Claim.
    – a single count of Conspiracy.
    – a single forfeiture count seeking over $900,000.




                                      Defense Criminal Investigative Service
                       Case Study D

   Subject deported from the Philippines:

    – arrested in Guam.

    – transported to Madison, WI (location of TRICARE
       TOP fiscal intermediary).

    – trial pending.

   Corporation charged and also pending trial




                                     Defense Criminal Investigative Service
                      Case Study D

   Potential Outcome:

    – conspiracy and false claims carry a maximum sentence
       of five years imprisonment and $250,000 fine.

    – subject’s company, a corporation, subject to a
       $500,000 fine on each count, or alternatively,
       potentially two times the amount of gain to the
       defendant or two times the loss to the Government.




                                      Defense Criminal Investigative Service
                       Case Study D

   Forum established to curtail TOP fraud in the Philippines.
     – U.S. Attorney’s Office & DCIS
     – ASD (Health Affairs)
     – TRICARE Management Agency & TOP Fiscal
       Intermediary
   DCIS teamed with OIG Auditing to conduct TOP Audit,
    and partnered with NCIS and U.S. Postal Inspection
    Service in this investigation.



                                      Defense Criminal Investigative Service
                       Case Study D


   Weakness
   FVR issued to ASD (Health Affairs)
    – No existing policy limiting amount provider can charge
      for medical service
    – No enforcement of existing policy 32 CFR 199.4
      requiring beneficiaries to pay 25% cost share




                                      Defense Criminal Investigative Service
                       Case Study D


   Remedy

    – Meeting held with ASD (Health Affairs)

    – ASD (Health Affairs) directed his staff to follow-up on
      identified weaknesses




                                       Defense Criminal Investigative Service
Case Study E




         Defense Criminal Investigative Service
                         Case Study E


   Senator Charles E. Grassley’s interest:

     Examine fraudulent charges made with Government
       Purchase Card (GPC) and Government Travel Card
       (GTC) held by Navy employee

     Review employee’s security clearance issues




                                        Defense Criminal Investigative Service
                    Case Study E


– Fraudulent charges to Government credit cards totaled
  $12,631
– Employee admitted using GPC and GTC to purchase
  airline tickets and rent a vehicle totaling $1,079
– Denied involvement in remaining $11,551 in fraudulent
  GPC charges




                                    Defense Criminal Investigative Service
                    Case Study E


– Employee’s husband and sister in-law developed as
  additional suspects in scheme
– Husband confessed to receiving items illegally
  purchased with employee’s GPC
– Husband implicated employee and his sister as co-
  conspirators in making illegal purchases
– Sister-in-law refused to cooperate



                                   Defense Criminal Investigative Service
                           Case Study E


   U.S. Attorney’s Office declined prosecution

     Statute of Limitations expired

     No loss to Government as credit card companies
       suffered the loss




                                       Defense Criminal Investigative Service
                        Case Study E


   Security Clearance Concerns
     Army “informally” suspended employee’s security
       clearance during investigation based on allegations of
       fraud
     Despite the suspended security clearance, employee
       moved through a series of DoD jobs requiring security
       clearances



                                        Defense Criminal Investigative Service
                   Case Study E


 Two DoD employers made offers of employment prior
  to verifying security clearance status
 Employee failed to communicate suspension of
  security clearance to hiring commands




                                   Defense Criminal Investigative Service
                       Case Study E


   Weakness
    – FVR issued to responsible hiring and security
      adjudication authorities
    – Recommendations to DoD employers
       • Security clearances verified or adjudicated prior to
         employment
       • Position descriptions (PD) should clearly state
         employment is or is not contingent on clearance


                                       Defense Criminal Investigative Service
                    Case Study E


 DoD Security Office notifies supervisor of suspended
  or revoked clearances
 Clear line of responsibility in DoD to notify acquiring
  organization of suspended clearances
 Human Resources Office notifies Security Office prior
  to offering employment




                                   Defense Criminal Investigative Service
                         Case Study E


   Remedy
     – Management Responses/Corrective Action
        • Security checks completed prior to offers of
          employment
        • Develop tracking to ensure compliance with
          regulations and controls
        • Security clearance requirements clearly stated in
          PD’s
        • Full use of JPAS will preclude breakdown in
          communication

                                        Defense Criminal Investigative Service
                   Case Study E


– GPC Procedural Changes
   • Decrease number of cardholders
   • Reduce number of cardholders per approving
     officials
   • Reduce monthly credit limits
   • Establish and monitor independent receipt and
     acceptance controls
   • Provide more training




                                 Defense Criminal Investigative Service

				
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