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Procurement Fraud
Procurement fraud includes, but is not limited to, defective pricing, defective parts, price fixing and bid rigging, inflating the price cost or labor, and product substitution. The victim of procurement fraud is, more often than not, the federal government, and one of the most common sources of fraud involves the issuing of military and defense contracts to private corporations. In response to a rise in the number of cases, the federal government created the National Procurement Fraud Task Force (NPFTF) in 2006 to promote the prevention, early detection, and prosecution of procurement and grant fraud.
The department was created not a moment too soon. Over $200 billion has already been injected into the economy through the passage of the 2009 Recover Act, which means that opportunities for defrauding the government are greater than ever. Through new incentives for whistleblowers passed as part of the 2010 financial overall bill, the government is asking its citizens now more than ever to assist it in its effort to combat the misuse of Recovery Act funds meant to stimulate the economy. If you believe you have any information regarding such waste, abuse of fraud, the federal government has provided an easy process by which you can make your concerns heard.
One of the biggest victims is the U.S. military, which recovered over $1 billion in fiscal year 2009 from its efforts to stop procurement fraud.
The following information was obtained from the Office of the Naval Inspector General. Listed below are descriptions of the various types of procurement fraud.
Cost/labor mischarging. Schemes by contractors on cost-type contracts to fraudulently inflate the cost of labor or materials.
Defective pricing. Occurs when a contractor does not submit or disclose to the government cost or pricing data that is accurate, complete, and current prior to reaching a price agreement.
Defective parts. A defect in design, specification, material, manufacturing and workmanship, which may cause death, injury or severe occupational illness; would cause loss of major or minor capabilities of the using organization or which would result in a production line stoppage.
Price fixing and bid rigging. Bid rigging is any activity to suppress and eliminate competition on contracts funded by the United States that reasonably restricts trade and commerce in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. The Sherman Act, Enacted in 1890, prohibits any agreement among competitors to fix prices, rig bids, or engage in other anticompetitive activity. Bid-rigging and price-fixing conspiracies prohibited by the Sherman Act are subject to a five-year statute of limitations. The competitive process works when competitors set prices honestly and independently. When competitors collude, prices are inflated and the customer is cheated. Increased costs are passed on to the public. Price fixing and bid-rigging is an agreement where, in response to a call or request for bids or tenders, one or more bidders agree not to submit a bid, or two or more bidders agree to submit bids that have been prearranged among themselves. Price fixing and bid-rigging is an agreement where, in response to a call or request for bids or tenders, one or more bidders agree not to submit a bid, or two or more bidders agree to submit bids that have been prearranged among themselves. They usually fall into one or more of the following categories:
Bid Suppression: One or more competitors who otherwise would be expected to bid, or who have previously bid, agree to refrain from bidding or withdraw a previously submitted bid so that the designated winning competitor’s bid will be accepted.
Complementary Bidding: Complementary bidding (also known as “cover” or “courtesy” bidding) occurs when some competitors agree to submit bids that either are too high to be accepted or contain special terms that will not be acceptable to the buyer. Such bids are not intended to secure the buyer’s acceptance, but are merely designed to give the appearance of genuine competitive bidding. Complementary bidding schemes are the most frequently occurring forms of bid rigging, and they defraud purchasers by creating the appearance of competition to conceal secretly inflated prices.
Bid Rotation: In bid rotation schemes, all conspirators submit bids but take turns being the low bidder. The terms of the rotation may vary; for example, competitors may take turns on contracts according to the size of the contract, allocating equal amounts to each conspirator or allocating volumes that correspond to the size of each conspirator company. A strict bid rotation pattern defies the law of chance and suggests collusion is taking place.
Subcontracting: Subcontracting arrangements are often part of a bid-rigging scheme. Competitors who agree not to bid or to submit a losing bid frequently receive subcontracts or supply contracts in exchange from the successful low bidder. In some schemes, a low bidder will agree to withdraw its bid in favor of the next low bidder in exchange for a lucrative subcontract that divides the illegally obtained higher price between them. Almost all forms of bid-rigging schemes have one thing in common: an agreement among some or all of the bidders, which predetermines the winning bidder and limits or eliminates competition.
Market Division: Market division or allocation schemes are agreements in which competitors divide markets among themselves. In such schemes, competing firms allocate specific customers or types of customers, products, or territories among them-selves. For example, one competitor will be allowed to sell to, or bid on contracts let by, certain customers or types of customers. In return, he or she will not sell to, or bid on contracts let by, customers allocated to the other competitors. In other schemes, competitors agree to sell only to customers in certain geographic areas and refuse to sell to, or quote intentionally high prices to, customers in geographic areas allocated to conspirator companies.
Product substitution: The introduction of counterfeit and/or substandard material and other forms of unauthorized product substitution into the procurement system. An area of increased emphasis is readiness enhancement through vigorous detection and investigation of defective or substituted products that involve military readiness.
Spare parts overpricing. Navy IG will either accept a complaint of overpriced spare parts or we will refer you to the appropriate Defense Logistics Agency (DLA) supply center, dependent on the spare part in question. At a minimum, we will need the National Stock Numbers (NSN) in order to assist you with overpricing problems. The DLA uses codes established in the Defense Logistics Management Standards (DLMS). Each item in the Federal Supply System is assigned to a specific Source of Supply (SOS) for management. Federal Stock Codes (FSC) indicate that either DLA or GSA has been designated as the integrated material manager at the wholesale level for one or more consumable items of supply in the FSC. The SOS must be determined for individual NSN to obtain information on that specific item.