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Department of JusticeDepartment of JusticeDepartment of JusticeDepartment of Justice

Private Sector Outreach CommitteePrivate Sector Outreach CommitteeCo-Chairs: Eric Feldman, National Reconnaissance Office IG Co-Chairs: Eric Feldman, National Reconnaissance Office IG

Eric Thorson, Small Business Administration IG Eric Thorson, Small Business Administration IG

National Procurement Fraud Task ForceNational Procurement Fraud Task Force

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OverviewOverview

• Background on NPFTF

• Private Sector Outreach Committee

• Fraud in the Workplace

• Ethics, Compliance & Sarbanes-Oxley

• Benefits of Public/Private Partnership

• Summary

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BackgroundBackground

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 McNultyDeputy Attorney General

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NPFTF GoalsNPFTF GoalsNPFTF GoalsNPFTF 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

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NPFTF GoalsNPFTF GoalsNPFTF GoalsNPFTF 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. FisherAssistant Attorney General

Criminal Division

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NPFTF StructureNPFTF StructureNPFTF StructureNPFTF Structure

ChairAlice S. Fisher

Vice-ChairBrian Miller, GSA IG

Director

Steve Linick, DoJ

Intelligence CommitteeNed McGuire, ODNI IGPeter Usowski, NGA IG

Iraq/InternationalCommittee

Ken Kaiser, FBI AssistantDirector CID

Grant Fraud CommitteeGlenn Fine, DoJ IG

Information SharingCommittee

Brian Miller, GSA IG

Legislative CommitteeBrian Miller, GSA IG

Richard Skinner, DHS IG

Private Sector OutreachCommittee

Eric Feldman, NRO IGEric Thorson, SBA IG

Training CommitteeDave Williams, USPS IG

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Private Sector Outreach CommitteePrivate Sector Outreach CommitteePrivate Sector Outreach CommitteePrivate 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

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Private Sector Outreach CommitteePrivate Sector Outreach CommitteePrivate Sector Outreach CommitteePrivate 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

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Is Workplace Fraud a Serious Problem?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

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How is Fraud Detected?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

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Private Sector Workplace ResultsPrivate 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

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What are the Most Common EthicalWhat are the Most Common EthicalViolations in the Business Sector?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%)

• Misreporting Hours Worked (17%)

• Internet Abuse (16%)

“Top 5”

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Why is Unethical Conduct Not Why is Unethical Conduct Not Reported?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

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Government Workplace StatisticsGovernment 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)

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What are the Most Common EthicalWhat are the Most Common EthicalViolations in the Government Sector?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”

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Why is Unethical Conduct Not Reported?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

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What are the Most Frequent Frauds onWhat are the Most Frequent Frauds onGovernment Contracts?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.

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Why is This Important to Your Company?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 WatkinsFormer Enron Vice President

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What Steps Can Companies Take?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

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The Private Sector WorkplaceThe 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

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Ethics Program Best PracticesEthics 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!

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Ethics Program Best PracticesEthics 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”

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““Tone at the Top”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

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

• Credibility with Customer

• Sarbanes-Oxley Compliance

• False Claims Act

• Charging Principles

• Federal Sentencing Guidelines

• Contracting with the Government

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Credibility with CustomerCredibility 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

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Sarbanes-OxleySarbanes-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

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SOX and EthicsSOX 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

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SOX and EthicsSOX 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

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False Claims ActFalse 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

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Charging PrinciplesCharging 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

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Charging PrinciplesCharging 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

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Federal Sentencing GuidelinesFederal Sentencing Guidelines (§8B2) (§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

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Federal Sentencing GuidelinesFederal Sentencing Guidelines(§8B2)(§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.

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Federal Sentencing GuidelinesFederal Sentencing Guidelines(§8B2)(§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 Conference, 1 March 2006, Chantilly, VA

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Contracting with the GovernmentContracting 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

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Status of Task Force’s Status of Task Force’s FAR ProposalsFAR 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.

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Status of Task Force’s Status of Task Force’s FAR ProposalsFAR 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.

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Why is a Partnership Why is a Partnership in our Mutual Interest?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

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Oversight is a Oversight is a Shared ResponsibilityShared 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

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SummarySummary

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

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QUESTIONS?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

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Charging PrinciplesCharging 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