The Insidious Threat of Pay to Play

News that a former FEMA administrator was arrested recently for taking bribes from a contractor—one who landed $1.8 billion in federal contracts to repair Puerto Rico’s electrical grid after Hurricane Maria—was hardly surprising to those of us who work in fraud risk management.

Why? Because, unfortunately, the government contracting world is deeply vulnerable to fraud. Given the huge amounts of money at stake and the power that federal officials have in deciding winners and losers among contractors, this dynamic can lead to a “pay to play” scenario among the less ethical on both sides of the contracting relationship.

The volume and similarity of government corruption cases are striking. In the most recent FEMA case, the contractor provided the government official with helicopter rides, hotel accommodations, first-class airfare, and the use of a credit card in exchange for choosing his company to repair Puerto Rico’s electrical grid. Last year, charges were brought against the defense contractors who allegedly provided Navy officials with gifts and luxury items that included cash, checks, retail gift cards and flat-screen televisions in return for $6 million in government contracts.

In one of the most notorious cases, the so-called “Fat Leonard Scandal,” Leonard Francis doled out half a million dollars in cash, luxury items, and prostitutes to a large number of U.S. Naval officers who in turn gave him classified material about the movements of U.S. ships and submarines, confidential contracting information, and information about active law enforcement investigations into Francis’ company.

Contracting fraud is not just a collection of anecdotal stories. It is a systemic, insidious threat to the integrity of government. According to a December 2018 report to Congress, the Defense Department between 2013 and 2017 experienced 1,059 criminal cases of defense contracting fraud, resulting in the conviction of 1,087 defendants, including 409 businesses. There were another 443 fraud-related civil cases resulting in judgments against 546 defendants. And during that same period, Defense entered into more than 15 million contracts—valued at more than $334 billion—with contractors who had been indicted, fined, and/or convicted of fraud, or who reached settlement agreements.

The Government Accountability Office in 2015 issued a framework for managing the risk of fraud. This framework identifies four key areas of fraud risk management: establishing a culture that is conducive to managing the risk of fraud; comprehensively assessing the risks to fraud; establishing controls to detect and prevent fraud; and monitoring fraud detection and prevention efforts as fraud schemes evolve.

Collusion is the most difficult type of fraud to prevent, as those inside the organization leverage their knowledge of the organization and how to pull the right levers to circumvent processes or controls. Therefore, agency culture is paramount to addressing this risk. The “Fat Leonard Scandal” involved indictments of 16 naval officers, but many others who accepted bribes were not indicted. When agency staff observe others participating in a wide-ranging scandal without consequence, they are more likely to join in.

Agencies can take proactive steps to strengthen a culture of ethical behavior and raise awareness about the fraud threat by sharing fraud schemes with staff to educate them about the issue, as well as developing and disseminating an employee code of conduct. Agency leadership must embody the ethical values the agency espouses and communicate their importance regularly. Agencies also may benefit from conducting an environmental survey to gauge the effectiveness of its fraud reporting mechanisms, the feelings and attitudes of agency staff about reporting potential fraud, and the degree to which potential whistleblowers would be protected after reporting fraud.

Data analytics can be used to identify areas for increased monitoring. High-risk factors include sole-source contract vehicles, contracts where the same vendor has been selected for an unusually long period of time, and solicitations with an unusually low number of responses. Social networking analysis can be used to identify the existence of relationships between agency and contractor staff. Exploring data on contract types, vendors and contracting officers can yield insights such as irregular contracting practices and departments with excessive high-risk factors.

The insidious threat of pay to play schemes in the government contracting world continues to be very real and something agencies must be vigilant about detecting and rooting out. With a goal of fraud prevention, agencies that closely adhere to the GAO framework will be ahead of the game.

Linda Miller is a Principal at Grant Thornton, LLP, where she leads the Fraud Risk Mitigation practice. She previously worked at the Government Accountability Office, where she led the development of GAO’s Framework for Managing Fraud Risks in Federal Programs.