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Office of Inspector General
WHEN GOOD
MONEY GOES BAD
True Stories of Contract Fraud at EPA
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www.epa.gov/oig
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
Office of Inspector General
"Catalyst for Improving the Environment"
WHO WE ARE
The Office of Inspector General is an independent office within EPA that helps the Agency protect the
environment in a more efficient and cost effective manner. We consist of auditors, program analysts,
investigators, and others with extensive expertise.
WHAT WE DO
We perform audits, evaluations, and investigations of EPA and its contractors, grantees, and recipients
of other Federal funds to promote economy and efficiency, and to prevent and detect fraud, waste, and
abuse. We also maintain the DIG Hotline.
WHY WE DO IT
We strive to serve as a catalyst for improving the environment. By helping the Agency operate more
economically, effectively, and efficiently, we contribute to improved environmental quality and human
health. We strive to provide solutions to problems that ultimately result in making America a cleaner
and healthier place.
OUR MISSION
Add value by promoting economy, efficiency, and effectiveness within EPA and the delivery of environ-
mental programs. Inspire public confidence by preventing and detecting fraud, waste, and abuse in
Agency operations and protecting the integrity of EPA programs.
"There is no kind of dishonesty into which otherwise good people more
easily and frequently fall than that of defrauding the government."
Benjamin Franklin
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WHEN GOOD
MONEY GOES BAD
True Stories of Contract Fraud at EPA
Introduction
In an effort to provide you with tools to identify areas that may be of
concern or worth looking into, this booklet was designed to provide an
overview of general fraud indicators as well as highlight some specific
indicators related to contract fraud. To put a face to what is often seen as
a victimless crime and to highlight the impact of fraud, included are some
real-world examples of contract fraud investigations conducted by the U.S.
Environmental Protection Agency, Office of Inspector General, Office of
Investigations.
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WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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What Can I Do to Avoid Trouble ?
Report any irregularities early.
Correct any audit findings promptly.
Have a system of checks and balances.
Create and follow established procedures.
If you are a federal employee, you are duty bound to report Fraud, Waste, Abuse, and Corruption under the
Code of Federal Regulations (CFR).
"Employees Shall Disclose Waste, Fraud, Abuse, and Corruption to Appropriate Authorities" 5 CFR 2635.101(b)(l 1)
We are here to assist you. We want you to succeed.
General Fraud Indicators
General fraud indictors are applicable to many areas and not exclusively tied to contracts. The list presented below
is not meant to be all-inclusive and should not limit the consideration of other factors. Rememberif it doesn't
pass the "smell" test, something may be amiss.
Q Missing, weak, or inadequate internal controls
Q Management override of key internal controls
Q Lack of written policies and procedures
Q Overly complex organizational structure
Q High turnover rate
Q Reassignment of personnel
Q Termination of key personnel
Q "Missing" files, reports, data, and invoices (both electronic and paper)
Q Photocopies of documents where it is difficult to detect alterations
Q Missing approval signatures
Q Lack of separation of duties
Q Discrepancies in handwriting
Q Delays in production of requested documentation
WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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Cost Mischarging and Defective Pricing Schemes
Definition:
Improper allocation of costs to a contract or charging items at a higher rate than allowed.
Indicators:
Labor or materials costs inconsistent with the progress being made on the contract
Timecards completed by someone other than the employee
Failure to update cost and pricing data when costs have decreased
Indications of falsification or alteration of supporting data
FRAUD CASE STUDIES
Contractor Enters into $6.5 Million Settlement
A Cambridge, Massachusetts, contractor entered into a $6.5 million settlement agreement with the U.S. Attorney's
Office for the District of Massachusetts, Civil Division, to settle claims that they overtoiled the federal government on
its contracts.
For a period of 10 years, the company inflated costs it charged to the federal government contracts by improperly
shifting costs uniquely associated with its commercial contracts onto federal contracts. The Defense Contract Audit
Agency conducted an analysis of the costs charged to federal contracts and estimated $13.9 million was overbilled to
numerous government agencies, including EPA, the Department of Defense, and the Department of Energy. The EPA
work involved Superfund and engineering activities.
This investigation was conducted jointly with the Defense Criminal Investigative Service.
WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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FRAUD CASE STUDIES
Contractor Agrees to Pay $424,270 to Settle Mischarging Allegations
While admitting no wrongdoing, a Fairfax, Virginia, contractor agreed with the U.S. Attorney's Office, Civil Division, to pay
$424,270 to settle allegations that it overtoiled costs on its Government contracts.
The investigation found indications that for approximately 8 years, the company overtoiled for computer services and
reproduction cost to numerous federal contracts awarded by EPA, the Department of Defense, and the Department of
Energy. This overtoiling occurred because the company billed estimated rates that were in excess of the actual costs for
computer services and reproduction costs.
Contractor Settles Civil Action for $15,OOO Regarding False Claims Case
A DeSoto, Texas, company and its owners entered into a settlement agreement with the U.S. Attorney's Office for the
Northern District of Texas in which they agreed to pay $15,000 to settle a civil false claims case.
The government contended that the company submitted a $6,200 invoice to EPA for work that was not authorized by EPA
nor performed by the company. EPA subsequently paid the invoice. Prior to reaching this settlement, the company and its
owners were debarred from government contracting for 3 years.
In addition to the civil settlement reached with the federal government, both owners were indicted by the State of Texas.
For defrauding EPA of $6,200, they were each charged with theft, a felony under Texas law.
Bribery and Kickback Schemes
Definition:
Giving or receiving a thing of value for the sole purpose of influencing an official act or a business
decision.
Indicators:
An overly friendly relationship between government employees and contractors and/or among
contractors who may otherwise be considered competitors.
Excessive, new-found wealth may also be a clue that a bribe or kickback has been accepted.
Contracting employee has an undisclosed business.
WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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FRAUD CASE STUDIES
Subcontractor Kickback Scheme
The president, a former project manager, and a former site
foreman of a subcontractorwere sentenced in U.S. District
Court for the Eastern District of Pennsylvania on a con-
spiracy charge. The president of the subcontractor was
sentenced to 60 months of probation, the first 6 months
to be served under house arrest, and ordered to pay a
$5,000 fine. The former project manager was sentenced to
6 months in prison,followed by Gyears supervised release,
and was ordered to pay a $32,382 fine. The former site fore-
man was sentenced to 60 months of probation and ordered
to pay a $32,382 fine.
A contractor was awarded a contract by EPA to serve as
the prime contractor in the clean up of the Berkley Prod-
ucts Superfund site in Denver, Pennsylvania. The prime
contractor awarded a subcontract for the construction
of a landfill cap at the Berkley Products site. The project
manager for the prime contractor was responsible for
overseeing the work performed by the subcontractor. The
project manager solicited kickbacks in the amount of ap-
proximately $129,531 fromthe president of the subcontrac-
tor, in exchange for his certifying that the work performed
by the subcontractorwas completed in a satisfactory man-
ner. The project manager for the prime contractor, in turn,
kicked back approximately half of all money he received
to the former project manager for the subcontractor, who,
in turn, provided half of that money to the former site fore-
man of the subcontractor. They each received $32,382 of
the kickback money. The project manager for the prime
contractor provided the subcontractor with phony invoic-
es in the amount of the kickbacks to disguise the illegal
payments. For his part in the scheme, the project manager
was sentenced to 33 months in prison, followed by 3 years
supervised release, and was ordered to pay a $64,766 fine
and $30,536 in restitution.
Previously, each individual pled guilty to one count of
conspiracy to violate the Anti-Kickback Statute and one
count of conspiracy to defraud the Internal Revenue Ser-
vice (IRS). In addition to the sentences imposed above, the
subcontractor paid $113,711 to the IRS, which represented
amounts due because the subcontractor had previously
deducted the kickback payments as business expenses.
The subcontract project manager paid $12,177 to the IRS
because he failed to report the income he had received
fromthe kickback payments. The subcontract site foreman
also paid $21,527 to the IRS for having under reported his
income.
WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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FRAUD CASE STUDIES
U.S. Virgin Islands Officials found Guilty in $1.4 million
Bribery and Kickback Scheme
Following a 2-week trial, a federal jury in St. Thomas
found a former Commissioner of the U.S. Virgin Islands
Department of Planning and Natural Resources (DPNR)
guilty of demanding and accepting bribes and obstructing
justice. The same jury also found a former Commissioner
of the Department of Property and Procurement guilty of
demanding and accepting bribes in a $1.4 million bribery
and kickback scheme.
The former commissioners were charged with demanding
and accepting a series of bribes and kickbacks in
exchange for awarding approximately $1.4 million in
government contracts and then authorizing more than $1
million in payments on these contracts, despite little or
no work having been performed. They were also charged
with obstructing justice, stemming from attempts to thwart
the criminal investigation into the underlying bribery and
kickback scheme. One commissioner was sentenced to
9 years in prison to be followed by 3 years of probation.
He was ordered to be held liable, along with several other
defendants, for a monetary judgment in the approximate
amount of $1.1 million. The other commissioner was
sentenced to 7 years in prison to be followed by 3 years
of probation. He was also ordered to be held liable, along
with several other defendants, for a monetary judgment in
the amount of $960,482.
Four individuals, including three other former U.S. Virgin
Islands government officials, pleaded guilty to violating
the federal bribery statute, honest services mail fraud,
and structuring currency transactions in furtherance of
the underlying bribery and kickback scheme. The three
defendants were sentenced to prison - ranging from 21
months to 4 years - and ordered to pay restitution in the
approximate amount of $1.1 million. In addition, a former
DPNR Director of Permits pleaded guilty to conspiring to
obstruct the criminal investigation into the bribery and
kickback scheme.
The four individuals and others formed a sham business
and used the entity, as well as other companies, to seek
and be awarded at least seven government contracts
valued at approximately $1.4 million. The contracts were
authorized and awarded by the former commissioner.
Once the contract proceeds were negotiated, the officials
kept a portion of the illicit proceeds for themselves and
paid cash bribes and kickbacks totaling between $300,000
and $350,000 to various government officials.
This investigation was conducted jointly with the Federal Bureau of
Investigation, the Internal Revenue Service Criminal Investigation
Division, the U.S. Postal Inspection Service, and the U.S. Virgin Islands
Inspector General.
WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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FRAUD CASE STUDIES
Pleas Entered in Bid Rigging Case
(This case is an example of both a kickback and mischarging scheme.)
In U.S. District Courtforthe District of New Jersey, a Laurel
Springs, New Jersey company, as well as its owner and
a former employee of a prime contractor, were charged
and pled guilty in a bid-rigging scheme in connection
with subcontracts for wastewater treatment supplies
and services at two Superfund sites in New Jersey.
A Canadian company was also charged and pled guilty for
its role in the scheme.
The New Jersey company and its owner pled guilty to
rigging bids at the Federal Creosote Superfund site in
Manville, New Jersey. The owner also pled guilty to one
count of conspiracy to defraud EPAatthe Federal Creosote
site and to defraud another company atthe Diamond Alkali
Superfund site in Newark, New Jersey. As part of the
conspiracy, the owner participated in a false invoicing and
kickback scheme. He also pled guilty to filing false income
tax returns.
A former employee of a prime contractor pled guilty to
rigging bids atthe Federal Creosote site. In addition, he
pled guilty to one count of conspiracy to defraud EPA at
the Federal Creosote site and to defraud another company
at the Diamond Alkali Superfund site by participating in a
false invoicing and kickbackscheme. He also pled guilty to
one count of aiding the New Jersey company's owner in
filing a false income tax return.
The co-conspirators thwarted the competitive bidding
process and defrauded EPA. The owners of the New Jersey
company provided more than $26,000 in kickbacks to an
employee of a prime contractor and more than $385,000 to
his former supervisor in exchange for their assistance in
allocating certain subcontracts to the Canadian company.
The kickbacks were in the form of checks, cash, cruises,
home renovations, boat trailers, and airline tickets. In
addition, the employee and a former supervisor inflated
invoices and accepted kickbacks from three other
subcontractors atthe Superfund sites.
The Canadian company pled guilty to conspiracy to defraud
EPA atthe Federal Creosote site by inflating the prices it
charged to a prime contractor and paying kickbacks to
employees of that contractor. The company was given
confidential bid information that it used to inflate invoices
to cover almost $1.3 million in kickbacks to employees of
the prime contractor in exchange for their assistance in
steering subcontracts to them. The kickbacks were in the
form of money wire transfers, cruises for senior officials,
various entertainment tickets, and home entertainment
electronics. As part of the fraudulent scheme, this
company and its co-conspirators also included amounts it
kept for itself in the inflated invoices.
This case was conducted with the Internal Revenue Service Criminal
Investigation Division.
WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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What to do if You Suspect Fraudulent Activity,
Waste, or Abuse
v DO contact the OIG Hotline.
v DO discuss your concerns with the OIG.
v DO seek answers to your questions in the normal course of business.
v DO cooperate with the OIG and expect to be contacted and involved.
A DON'T "tip off" subjects of actual or pending investigation.
A DON'T feel compelled to "prove" a case or intent.
A DON'T "stop" your normal course of business unless otherwise directed.
WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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Report Suspected Fraud Activity to Our Office
You can Place a Telephone Call to Our 24-hour Hotline
(888) 546-8740
You Can Mail Us
U.S. Environmental Protection Agency
Office of Inspector General Hotline (2443)
1200 Pennsylvania Avenue, NW
Washington, DC 20460
You Can E-mail Us
OIG_Hotline@epa.gov
Or You Can Contact Our Offices Directly
Northeastern Resource Center
Arlington, VA
(703) 347-8740
Eastern Resource Center
Atlanta, GA
(404)562-9857
Central Resource Center
Chicago, IL
(312)353-2507
Western Resource Center
San Francisco, CA
(415) 947-4507
WHEN GOOD MONEY GOES BAD TRUE STORIES OF CONTRACT FRAUD AT EPA
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