Beware Rogue Employees with a Taste for Fraud

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Stinson - Government Contracting Matters

As if more evidence were needed, a recent Department of Justice (DOJ) indictment provides another reminder of the importance of an effective compliance program—and the potential costs to contractors if their program doesn’t prevent fraudulent actions by individual employees.

Last week, the DOJ announced it has entered into a non-prosecution agreement (NPA) with Alutiiq International Solutions LLC (AIS), a subsidiary of Afognak Native Corporation (Afognak) and an Alaskan Native Corporation. AIS has agreed to pay over $1.25 million to resolve an investigation into a kickback and fraud scheme perpetrated by a former AIS manager on a U.S. government contract administered by the General Services Administration (GSA). In addition, AIS and Afognak have agreed to cooperate with the government’s ongoing investigation and prosecution of individuals, and to report to the department evidence of allegations of violations of U.S. fraud, anti-corruption, procurement integrity, and anti-kickback laws. They have also committed to enhance their compliance program and internal controls, where necessary and appropriate, to ensure they are designed to detect and deter, among other things, fraud and kickbacks in connection with U.S. federal government contracts.

According to AIS’s admissions contained in the NPA, Elmer Baker, the AIS project manager assigned to a multi-million dollar GSA contract to modernize the Harry S. Truman Federal Building in Washington, D.C. began receiving kickbacks from a subcontractor on the project in exchange for steering work to the subcontractor. These kickbacks, originally paid in June of 2010, initially came in the form of meals, vacations, and other things of value. By 2015, however, Mr. Baker had set his sights higher and began demanding cash kickbacks equivalent to 10 percent of the value of contract modifications that were being awarded to the subcontractor. Apparently not content with his kickback scheme, he also falsely and fraudulently billed the GSA for services purportedly provided by an on-site superintendent when no superintendent was on site, causing the GSA to pay $568,800 to AIS that it should not have paid. Additionally, when making contract modification requests to the GSA, Mr. Baker illegally inflated the estimated costs that AIS received from its subcontractor, resulting in GSA’s paying an additional $690,644 to AIS.

The response of AIS and Afognak to learning of the kickback and fraud schemes contributed to the DOJ’s criminal resolution with AIS. For example, AIS fully and completely cooperated with the investigation from the moment it became aware of the conduct—and committed to paying full restitution to compensate for the GSA’s losses. As soon as AIS and Afognak learned of the misconduct, the companies engaged in extensive remedial measures, including enhancing their compliance program and internal controls by, among other things: revising their policies and procedures to complete the separation of the contract procurement and contract execution functions; conducting annual risk assessments related to government contracting; conducting regular audits of a sampling of all procurement files and reviewing all procurements over certain cost thresholds; introducing additional management controls for prime contracts, subcontracts, and government projects that includes requiring higher levels of management to approve contract awards and budget changes; requiring additional trainings specific to the Anti-Kickback Act, including training quizzes, ethics publications, and additions to the annual Code of Conduct training; and tracking all compliance reports received through a third-party hotline and email accounts. The DOJ also found relevant the fact that AIS, at the time of the offense conduct, provided its profits from the relevant contracts to Afognak, which uses these profits to support Afognak’s Alaskan Native shareholders, who are members of severely economically disadvantaged villages.

In May 2019, a federal grand jury in the District of Columbia returned an indictment charging Mr. Baker with conspiracy to violate the Anti-Kickback Act, and four counts of wire fraud. Trial is currently scheduled for Dec. 7, 2020, before U.S. District Court Judge Amy Berman Jackson.

The takeaway for government contractors is clear: Take compliance seriously and establish and implement a compliance program that will maximize your chances to prevent misconduct like kickbacks and fraud (among many other issues) in the first place and to quickly identify and put an end to any employee wrongdoing that does occur.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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