A series of indictments, the most recent in August, remind government contractors of the increased scrutiny on the industry and the very real risk of employee fraud and abuse. Government contractors are encouraged to heed the warning and to make sure they have effective compliance programs in place and that those programs are strictly enforced.
On August 23, 2012, the United States District Court for the Southern District of California unsealed an indictment charging Robert Ehnow, the owner and President of L&N Industrial Tool & Supply, Inc. (“L&N”); Joanne Loehr, the owner and operator of Centerline Industrial Inc. (“Centerline”); and Centerline itself with conspiring with Navy officials to commit bribery, wire fraud, and money laundering at the Naval Air Station North Island (“NAS North Island”), in Coronado, California. L&N and Centerline are both defense contractors.
According to the indictment, L&N and Centerline provided certain civil Navy officials with over $1 million in personal benefits, including cash, checks, retail gift cards, flat screen television sets, luxury massage chairs, home furniture and appliances, bicycles, model airplanes, and home remodeling services. In return, the Navy officials placed millions of dollars in government orders with the defense contractors. The indictment alleges that Ehnow and Loehr conspired with their sales managers, with Navy officials, and with others, to engage in this conspiracy. Both contractors allegedly prepared and submitted fraudulent invoices to the Department of Defense, making it appear that they were billing the Department for goods and services within the scope of legitimate government contracts. In reality, the Defense Department was allegedly unknowingly paying for, among other things, the cost of the bribes to the Navy officials. During the course of the alleged conspiracy, the Department paid L&N over $3 million, while Centerline received over $1 million.
In March 2012, seven individuals admitted their involvement in the fraudulent scheme, pleading guilty to all charges in an indictment. Of the seven defendants, four were Navy officials who admitted to receiving a collective total of more than $1 million in cash, goods and services, all fraudulently charged to and paid for by the Department of Defense. The remaining three defendants who pled guilty were owners or employees of various defense contractors, including L&N and Centerline, that provided goods or services for NAS North Island.
According to the United States Attorney for the Southern District of California, the investigation and eventual indictments were initiated on the basis of citizen complaints. Following a July 2009 indictment of six individuals on fraud and corruption charges centered at the Space and Naval Warfare Systems Command (SPAWAR), the government announced a hotline dedicated to the reporting of possible waste, fraud and abuse related to government and military contracts. Calls to the hotline provided information related to the alleged NAS North Island fraudulent scheme, directly resulting in the two indictments.
Representatives of the FBI, Defense Criminal Investigative Service, IRS-Criminal Investigation and NCIS have all commented that putting an end to fraud by government officials and defense contractors is a “number one criminal priority” and that law enforcement will continue to encourage, and rely upon, information provided by the public.
What Government Contractors Can, And Should, Do
Given the rising cost of fraud to the government, it is not surprising that government contractors are more heavily scrutinized now than ever before. The risk to government contractors of employee fraud is significant: criminal liability and suspension or disbarment from government contracting are all possibilities. The combined reality of increasing fraud and heightened scrutiny make it critical that even the smallest of companies create, implement and enforce an effective ethics and compliance program.
The first step in developing an ethics and compliance program is to understand the rules and regulations that govern the company’s business and to determine the areas within the company facing the highest compliance risks. After identifying high-risk areas, a company should implement a training program targeted at employees whose job responsibilities intersect with those risks. Training should be repeated and reiterated to remind employees of the rules governing their, and the company’s, conduct. Finally, because misconduct can rarely be completely eliminated, companies must establish effective means to monitor compliance, including, for example, establishing a system for reporting suspected abuse and assigning a high-level employee to oversee and examine compliance issues. If misconduct does occur, immediate disciplinary action should be taken and corrective measures implemented to prevent recurrence.