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					            Department of Justice
   National Procurement Fraud Task Force




            Private Sector Outreach Committee
Co-Chairs: Eric Feldman, National Reconnaissance Office IG
      Eric Thorson, Small Business Administration IG      1
              Overview

• Background on NPFTF
• Private Sector Outreach Committee
• Fraud in the Workplace
• Ethics, Compliance & Sarbanes-Oxley
• Benefits of Public/Private Partnership
• Summary


                                           2
                      Background
  Created on 10 October 2006 by Deputy Attorney
  General Paul McNulty
   • Promote the prevention, early detection and prosecution
     of procurement fraud
   • Chaired by Assistant Attorney General for the Criminal
     Division Alice Fisher
   • Includes Federal IGs, FBI, defense investigative agencies,
     US Attorneys nation-wide, as well as DoJ Criminal, Civil,
     Tax, Antitrust and National Security Divisions
“At a time of heightened concern for our nation’s security, every
tax dollar is precious. We simply cannot tolerate fraud and abuse
in government contracting.”
                                                       Paul McNulty
                                            Deputy Attorney General   3
              NPFTF Goals

• Increase coordination & strengthen
  partnerships among IGs, law enforcement, and
  DoJ to more effectively fight procurement fraud
• Assess existing government-wide efforts to
  combat procurement fraud
• Increase & accelerate civil and criminal
  prosecutions/administrative actions, to recover
  ill-gotten gains resulting from procurement
  fraud

                                                    4
                      NPFTF Goals

  • Educate & inform public about procurement
    fraud
  • Identify and remove barriers to preventing,
    detecting, and prosecuting procurement fraud
  • Encourage greater private sector participation
    in the prevention and detection of procurement
    fraud
“The public needs to have faith in the integrity of the procurement
system and know that anyone who is cheating the system will be
held accountable.”
                                                        Alice S. Fisher
                                           Assistant Attorney General
                                                      Criminal Division   5
                               NPFTF Structure
                                                          Chair
                                                      Alice S. Fisher
                                                    Vice-Chair
                                                Brian Miller, GSA IG
                                                         Director
                                                 Steve Linick, DoJ


                                                                                                     Iraq/International
                               Information Sharing                  Intelligence Committee
Grant Fraud Committee                                                                                    Committee
                                    Committee                       Ned McGuire, ODNI IG
  Glenn Fine, DoJ IG                                                                              Ken Kaiser, FBI Assistant
                               Brian Miller, GSA IG                 Peter Usowski, NGA IG               Director CID




                                                 Private Sector Outreach
               Legislative Committee
                                                        Committee                    Training Committee
                Brian Miller, GSA IG
                                                  Eric Feldman, NRO IG              Dave Williams, USPS IG
              Richard Skinner, DHS IG
                                                  Eric Thorson, SBA IG

                                                                                                                              6
    Private Sector Outreach Committee


Mission: Enlist private sector
participation in prevention & detection of
procurement fraud by creating &
communicating opportunities, incentives
and requirements for early disclosure of
fraudulent activity on US government
contracts to IG community


                                             7
        Private Sector Outreach Committee

Goals
• Communicate merits of active private sector participation
  in preventing, detecting & reporting fraud on government
  contracts
• Leverage appropriate media & professional publications
  to communicate message
• Develop & use conferences/symposia to stimulate
  public/private sector interaction with corporate business
  ethics community on procurement fraud prevention &
  detection activities
• Communicate goals & objectives of NPFTF and solicit
  support from professional organizations actively
  engaged in fraud prevention & detection
                                                              8
         Is Workplace Fraud a Serious Problem?

2006 Association of Certified Fraud Examiners
   (ACFE) Report to the Nation:
•       U.S. organizations lose 5% of annual revenue to fraud
•       Applied to the estimated 2006 U.S. GDP:
        approximately $653 billion in fraud losses
•       Applied to 2004 federal spending with top 10
        contractors: approximately $5.8 billion in fraud
        losses
•       Median workplace loss to fraud was $159,000
    •     Nearly 25% of the cases caused at least a $1 million in
          losses
    •     Average scheme length was 18 months
                                                                    9
              How is Fraud Detected?

•   Workplace fraud schemes are difficult to detect
•   Small businesses (< 100 employees) suffer higher
    disproportional losses
•   Attributable to a lack of proactive detection methods
•   Frauds are more likely to be detected by tips
•   Organizations with anonymous fraud hotlines --
    median loss of $100,000
•   Organizations without hotlines -- median loss of
    $200,000

                                                            10
      Private Sector Workplace Results

2007 Ethics Resource Center (ERC) National
   Business Ethics Survey:

•   56% of employees have observed misconduct
•   36% fear retaliation
•   54% are skeptical that a report would matter
•   Management may not be aware of misconduct
    since 42% of employees who observe
    misconduct have not reported it


                                                   11
        What are the Most Common Ethical
        Violations in the Business Sector?

2007 ERC National Business Ethics Study
  found:
• Conflicts of Interest (putting own interests ahead of
  the organization (23%)
• Abusive Behavior (21%)
• Lying to Employees (20%)
                                         ―Top 5‖
• Misreporting Hours Worked (17%)
• Internet Abuse (16%)

                                                          12
           Why is Unethical Conduct Not
                    Reported?



―The only thing necessary for the triumph of evil is for
  good men to do nothing.‖

             Edmund Burke, British political writer
                 and statesman in the late 1700s



                                                           13
         Government Workplace Statistics
2007 Ethics Resource Center (ERC) National
   Government Ethics Survey:
•       On average, 57% of government employees have
        observed violations of standards, policy or law in
        last year
    –     Federal: 52% observed misconduct
    –     State: 57% observed misconduct (80% of the respondents
          who observed misconduct witnessed multiple instances)
    –     Local: 63% observed misconduct
•       30% of misconduct across the government goes
        unreported to management (vs. 42% in the private
        sector)

                                                                   14
      What are the Most Common Ethical
     Violations in the Government Sector?

2007 ERC National Government Ethics Study
  found:
• Lying to Employees, Customers, Vendors or the Public
  (28%)
• Conflicts of Interest (putting own interests ahead of the
  organization (27%)
• Abusive or Intimidating Behavior (25%)
• Misreporting Hours Worked (17%) -- Same percentage
  as the private sector
• Discrimination (15%)                     ―Top 5‖
                                                              15
    Why is Unethical Conduct Not Reported?

According to the 2007 ERC studies, the top
reasons individuals do not report suspected
misconduct are:
• Perception that no corrective action will
  be taken
• Concern with confidentiality
• Fear of retaliation by superiors and
  coworkers
• Unsure of whom to contact
                                              16
         What are the Most Frequent Frauds on
               Government Contracts?

  •   False claims
  •   False Statements
  •   Cost Mischarging
  •   Bribes & Gratuities
  •   Kickbacks
Many cases involve aberrant employees who deceive both the
company and the government. The company often benefits
from cooperating with procurement fraud investigations.
                                                             17
         Why is This Important to Your Company?

  • Find and remove ―bad actors‖ BEFORE they engage
    in major frauds
  • Maintain good reputation of company; avoid ―bad
    press‖
  • Self-reporting known instances of procurement
    fraud and an effective compliance program can
    mitigate company’s civil and criminal liability
“I think when a company has committed fraud, its most
meaningful chance of survival is to find it, disclose it, and
fix it themselves.”
                                               Sherron Watkins
                                 Former Enron Vice President
                                                                 18
       What Steps Can Companies Take?

• Senior leadership ―tone at the top‖
• Work with IGs to strengthen internal ethics program
  and improve fraud prevention & detection
• Aggressively pursue allegations of fraud
   –   Coordinate with federal agency IGs where appropriate
   –   Investigate and quickly determine validity of allegations
   –   Make the government whole and take appropriate
       disciplinary action
   –   Identify causes and systemic weaknesses
   –   Strengthen controls to prevent recurrences

                                                                   19
           The Private Sector Workplace
2007 Ethics Resource Center Surveys revealed:
•    Few companies have comprehensive ethics and
     compliance programs (most programs stress reactive
     steps vs proactive solutions)
•    Only one in four companies have a well-implemented
     ethics & compliance program where employees:
    – Willingly seek advice about ethics questions
    – Feel prepared to handle situations that could lead to
        misconduct
    – Are rewarded for ethical behavior
    – Their company does not reward success obtained
        through questionable means
    – Feel positively about their company

                                                              20
        Ethics Program Best Practices

Corporations with effective fraud prevention &
detection programs have some of the following
characteristics:
•   Invest time and resources to proactively prevent
    AND detect misconduct
•   Identify corporate vulnerabilities and tailor
    detection and prevention to those areas
•   Establish trusted reporting methods including
    anonymous hotlines
             Tone at the Top is critical!
                                                       21
       Ethics Program Best Practices
• Carefully screen job applicants
• Mandate anti-fraud & ethics training
   –   Training should inform employees about most common
       acts & omissions prohibited by law, and company tools
       to help them avoid situations leading to criminal
       conduct
• Implement effective disciplinary measures
• Establish whistleblower policy/Prevent reprisals
• Promote effective internal controls
• Create a culture of ―doing the right thing‖
                                                           22
               ―Tone at the Top‖

How management can prevent fraud:
•   Communicate expectations
•   Lead by example
•   Provide safe mechanism for reporting violations
•   Reward integrity
         – Reward employees not only for meeting
           financial goals, but also for ethical behavior
•   Continuously communicate the message


                                                            23
       Why is an Ethics & Compliance Program
              Important to Companies?

•   Credibility with Customer
•   Sarbanes-Oxley Compliance
•   False Claims Act
•   Charging Principles
•   Federal Sentencing Guidelines
•   Contracting with the Government
                                               24
           Credibility with Customer

• Recent high profile contract fraud cases increase
  attention on procurement integrity
   –   Boeing
   –   MZM Corp/Duke Cunningham (DoD and CIA)
   –   Abramoff
   –   Washington DC Property Tax Refund Scam
   –   Iraq/other public corruption cases

• Dwindling defense budgets; Increased Congressional
  oversight
• National Procurement Fraud Initiative
                                                       25
               Sarbanes-Oxley

A result of Enron, WorldCom, Tyco, HealthSouth,
  Adelphia, et al

• Clarifies what existing laws & regulations mean
• Seeks to codify ―best practices‖ in corporate
  governance, internal controls & financial transparency
• Calls for culture change within companies—to a culture
  that attempts to live by the spirit of existing laws &
  regulations and away from a culture of form-over-
  substance compliance


                                                       26
                   SOX and Ethics

SOX and SEC Rules apply to publicly held
companies
•   More difficult to conceal corporate fraud
•   Mandates corporate oversight & internal controls
•   Complete and accurate accounting and financial
    disclosures
•   Establishes clarity on responsibilities, reporting,
    audits, and penalties




                                                          27
                    SOX and Ethics
  •    Internal Control Report
          •   Responsibility of management to
              establish/maintain controls for financial reporting
          •   MUST establish ―hotline‖
          •   Assessment of the effectiveness of the internal
              controls
  •    Code of Ethics
  •    Fraud Risk Assessment
“A company’s system of internal controls is not supposed to be
bulletproof. It should expose ethically challenged employees so you
can fire them. If a company does not have a zero tolerance policy
for unethical employees then its internal controls system will
eventually be worthless.”                             Sherron Watkins
                                           Former Enron Vice President   28
               False Claims Act

•   False Claims Act enacted to address frauds against
    the government
•   Definition of fraud under statute is broad, proof
    does not require a finding of a specific intent to
    defraud—proof of willful ignorance is sufficient
•   Most comprehensive whistleblower protection law
    in U.S.
•   Qui Tam can be filed by anyone
•   Government is entitled to treble damages
•   Relator entitled to 15 - 30% of total recovery
                                                         29
             Charging Principles

20 January 2003 – Thompson Memo required
consideration of nine factors:
 1.   Nature and seriousness of offense
 2.   Pervasiveness of wrongdoing
 3.   Corporation’s history of wrongdoing
 4.   Timely and voluntary disclosure and cooperation
 5.   Pre-existing compliance program
 6.   Company’s remedial actions
 7.   Collateral consequences
 8.   Adequacy of prosecution of individuals
 9.   Adequacy of other remedies
                                                        30
         Charging Principles

• Thompson Memo came under fire by
  criminal defense lawyers, former DoJ
  officials and business groups
• Legislation was proposed that would have
  contradicted the Thompson memo
• 12 December 2006 – McNulty Memo
  reaffirms commitment to prosecuting
  corporate fraud and other White Collar
  Crime
                                             31
         Federal Sentencing Guidelines
                     (§8B2)
The two factors that mitigate the ultimate punishment of an
organization are: (i) the existence of an effective compliance
and ethics program; and (ii) self-reporting cooperation, or
acceptance of responsibility. (§8)
•   Applies to public, private and non-profit organizations
•   Articulates the seven minimum requirements for a compliance
    and ethics program to be considered effective (for the
    purposes of evaluating culpability and fines) (§8B2)
•   Effective 1 November 1991--amended effective 1 November
    2004. Key in the 2004 amendment is the switch in
    responsibility for overseeing adherence to compliance and
    ethics programs from staff supervisors to board members


                                                                  32
          Federal Sentencing Guidelines
                     (§8B2)
1.   Establish standards and procedures to prevent and detect
     criminal conduct
2.   Governing authority is knowledgeable about program content
     and operation; oversees implementation and effectiveness
3.   Communicate periodically standards and procedures,
     including conducting effective training programs
4.   Exclude persons who have engaged in illegal activities or
     other compliance / ethical misconduct from management
5.   Ensure adherence (including monitoring and auditing to
     detect criminal conduct); periodically evaluate effectiveness;
     have and publicize a system, whereby employees and agents
     may report or seek guidance regarding potential or actual
     criminal conduct without fear of retaliation.
                                                                      33
               Federal Sentencing Guidelines
                          (§8B2)
  6.    Promote & consistently enforce the program through
        incentives to comply and disciplinary measures for engaging
        in/failing to take reasonable steps to prevent or detect criminal
        conduct
  7.    Respond appropriately to criminal conduct detected to
        prevent further similar criminal conduct, including making
        any necessary modifications to the program; periodically
        assess the risk of criminal conduct and take appropriate
        steps to design, implement, or modify the program to reduce
        the risk of criminal conduct identified through this process
March 2006: Deputy Attorney General stated that companies who
work with the IGs on proactive procurement fraud prevention and
detection efforts, and report suspected fraud to federal IGs, will be
viewed more favorably under these guidelines.*
*Paul McNulty’s address at the NRO OIG Corporate Business Ethics & Compliance   34
Conference, 1 March 2006, Chantilly, VA
       Contracting with the Government

• According to the GSA Excluded Parties List System
  (EPLS), over 5700 entities (corporations, individuals,
  etc.) were debarred from doing business with the federal
  government in Calendar Year 2006
• In deciding whether to debar, debarment officials
  consider:
   – Whether the contractor had effective standards of conduct
     and internal control systems in place
   – Whether the contractor brought the cause for debarment to
     the government’s attention in a timely manner
   – Whether the contractor has instituted or agreed to institute
     new or revised review and control procedures and ethics
     training programs

                                                                    35
                   Status of Task Force’s
                       FAR Proposals
• In May 2007, the Task Force submitted letters of support to the
  Civilian Agency Acquisition Council and the Defense Acquisition
  Regulations Council for a regulation that requires all contracts over
  $5 million, with the exception of commercial contracts, to require the
  contractor to have a ―written code of business ethics and conduct‖ and
  an ―ethics and compliance training program‖ for its employees.
  Additionally, the Task Force suggested that the US Sentencing
  Guidelines serve as a basis for a contractor’s code of business and
  ethics conduct.
• On 23 Nov 2007, the Federal Register contained a notice of a Final
  Rule adopting the Federal Acquisition Regulation (FAR) provision:
  effective date - 24 Dec 2007.
• Currently, the FAR Councils are still considering the Task Force’s
  suggestion that the Guidelines serve as a basis for any code of
  conduct and have sought public opinion.

                                                                           36
                   Status of Task Force’s
                       FAR Proposals
• Additionally, in May 2007, the Task Force proposed some
  modifications to the FAR to the Office of Federal Procurement Policy
  which would require, among other things, that contractors notify the
  government whenever they become aware of a material contract
  overpayment or fraud, rather than wait for the contract overpayment or
  fraud to be discovered by the government.
• On 14 Nov 2007, the FAR Councils published a proposed rule
  substantially incorporating the Task Force’s requested changes to the
  FAR and solicited comments from the general public until 14 Jan
  2008.
• A total of 17 public comments were submitted in support of the Task
  Force’s position and 14 were submitted in opposition.
• Currently, the FAR Councils are still considering the Task Force’s
  suggestion that the contractors notify the Inspector General whenever
  they become aware of material contract overpayment or fraud.

                                                                           37
                  Why is a Partnership
                 in our Mutual Interest?
• Prevent waste of taxpayer funds—essentially OUR money
• Improve government and corporate efficiency by identifying
  and managing unethical employees
• Protect and enhance corporate credibility & perception of
  integrity
• Protect the interests of corporate shareholders
• Protect the corporation from costly legal proceedings
• Avoid diminishing public confidence in both government &
  contractors’ ability to manage precious resources in a
  declining budget environment

                                                               38
                Oversight is a
             Shared Responsibility
• Government and its contractors are mission
  partners in serving the nation
• Both government and contractor personnel
  are responsible for contributing to mission
  success by:
  – Cooperating fully and providing candid and complete
    responses during the course of audits, inspections, or
    investigations
  – Providing complete and timely access to personnel,
    programs, records & materials

                                                             39
                    Summary

Shared Goals
  • Maintain the public trust
  • Prevent & detect instances of fraudulent employee
    behavior that can undermine that trust through
    cooperative public/private activities
  • Swiftly resolve procurement fraud cases through
    appropriate personnel actions & financial
    adjustments
  • Enhance organizational credibility at time of
    increased scrutiny & decreased budgets
                                                        40
               QUESTIONS?

Private Sector Outreach Committee Co-Chairs:

Eric Feldman, IG, National Reconnaissance Office
   Eric.Feldman@nro.mil (703) 808-1832 (Virginia)

          (310) 416-7405 (Los Angeles)


 Eric Thorson, IG, Small Business Administration
      Eric.Thorson@sba.gov (202) 205-6586

                                                    41
             Charging Principles
McNulty Memo primarily changes two areas:
• Attorney-client privilege waiver
   – Requests require different levels of approval
   – ―Purely Factual Information‖ – Corporation’s
     response may be considered by prosecutor in
     assessing cooperation
   – ―Legal Advice‖ – Corporation’s response may
     not be considered by prosecutor in assessing
     cooperation
• Payment of attorney fees should not be taken
  into consideration
                                                     42

				
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