Procurement Fraud and Grant Fraud enforcement programs are likely to be revitalized by the Trump Administration.

It’s no shock that a political change in the Executive Branch leads to an increase in grant fraud and procurement fraud enforcement. The reason? There is low risk in scrutinizing grants and contracts awarded by the outgoing administration. Whatever shenanigans are discovered by a new Administration will have occurred during the term of the previous administration and any negative economic impacts from pulling a grant or imposing a fine, will only impact the grant recipient and, potentially, its subcontractors, who are often presumed by an incoming Administration to have stronger ties to its predecessor.

Imagine you are a high-level Department of Justice official in a new administration positioned to deploy resources toward matters you believe most merit investigation and possible prosecution.  You will need to work on accomplishing the new Administrations mission as well as continue to satisfy your existing management chain with positive results.  What is the best way to move forward in this environment.

The most obvious way is to go after the low-hanging fruit: to aim the enforcement initiative at situations in which there is a high risk/reward ratio. Nowhere in white collar enforcement, is this ratio more favorable than in the realm of grant fraud and procurement fraud enforcement (GFPFE). Contributing to the richness of this area from an enforcement standpoint is that since 2009 the enforcement apparatus adopted a rigid prevention model, decreased the number of federal agents developing cases, increased barriers between the investigations and audit components of the Office of Inspector Generals (OIG’s) and made it more difficult to engage in aggressive or effective GFPFE.[1] This shift away from effective GFPFE in 2009 coincided with the largest spending increase in government history so it stands to reason there will be plenty of cases worth developing.

A Quick History of Procurement and Grant Fraud Enforcement

In October 2006, in the wake of news accounts of fraud and corruption in warzone contracting, the National Procurement Fraud Task Force (NPFTF) was formed by the US Department of Justice.  The reporting chain topped out at the Assistant Attorney General level at the Criminal Division and it quickly began integrating the work of the investigative agencies in a national program and began the process of expanding prosecutorial offices that were willing to adopt such cases.  Developing GFPFE cases can be time consuming and they require greater collaboration between investigative and prosecutorial assets during investigation and development phases.  Assistant United States Attorneys who have too many cases and are more likely to be constrained by Speedy Trial Act, often justifiably find it difficult to pick up undeveloped GFPFE matters.  For these and other reasons, in 2006 GFPFE investigations that had the most potential found their way to the Antitrust Division and the Public Integrity Section of the Criminal Division that both had begun developing an international enforcement model with the FBI, DOD enforcement agencies, and with USDOJ’s Office of International Affairs.  With the formation of NPFTF, the Bush Administration made GFPFE a clear priority speaking, through the Department of Justice, with a clear voice and the GFPFE message began to be received by the entire Department of Justice.  Rather than engage in the usual turf warfare, NPFTF and USDOJ leadership implemented policies and procedures that stretched, leveraged and enhanced existing resources to support the GFPFE mission.  NPFTF created an investigations incubator in the Antitrust Division and supported it in adopting hard to make cases, it encouraged collaboration between the audit and investigative components within OIG’s, it incentivized interagency cooperation, it significantly advanced the international enforcement methods, it got audit and procurement to actively become the “eyes and ears” of investigators and it developed a number of initiatives to engage the private sector.  They also courted active participation by the Civil Division and arm twisted criminal prosecutors to adapt their practices to maximize appropriate collaboration with civil enforcers.

By late 2008 the program was firing on all cylinders.  While NPFTF and DOJ management had started laying groundwork to link up NPFTF resources with the agencies like the Naval Criminal Investigative Service and the US Air Force Office of Special Investigations, it had started to develop initiatives to link up with and reinvigorate the State Department OIG and Embassy Rule of Law structures.  The idea was to use select Embassies as hubs of enforcement activity and create a GFPFE structure that was as developed and integrated using the State Department similar to how we had made use of DOD.

President Obama’s initial economic stimulus package, passed as the American Recovery and Reinvestment Act (“ARRA”), was approved by Congress in February 2009. The $787 billion plan allocated $275 billion of the total for federal contracts, grants and loans to create jobs. By the end of FY 2009 (September 30, 2009), the Obama Administration had managed to spend $62.6 billion of stimulus funds for job creation contracts, grants or loans.[2]  As of early 2009, the county had unprecedented GFPFE enforcement under NPFTF whose accomplishments had expanded beyond warzone matters to government contracting and grants generally.  But during the transition from the Bush to the Obama administration, even prior to the confirmation of Justice officials, the Obama Administration began to dismantle the GFPFE by reorienting investigative agencies and prosecutorial agencies around anti-fraud training instead of prosecution. The GFPFE effort became almost exclusively a prevention model under the rubric of the Financial Fraud Enforcement Task Force, chaired at the Attorney General level, where the metric of success became the raw number of trainings performed and the investigations and prosecutions that were prevented from having to be opened due to training.  To some observers the goal seemed to be to orient the enforcement apparatus away from ARRA, administered by the Obama Administration, that would include many years of follow-on spending of trillions and point that array of OIG and investigative assets at TARP, administered by the Bush Administration.[3] This new enforcement model, that declared success in advance, was explained in the Attorney General’s First Year Financial Fraud Enforcement Task Force Report.[4]

Also around this time, IG’s had found it difficult to open new GFPF investigations. Inspector Generals who had mission oriented around the financial or housing markets received less discouragement from opening and filing cases.  The Criminal Division adjusted its priorities to pursue things like health care fraud and the Antitrust Division was ordered to close down investigations that were not strictly per se Sherman Act offenses, such as price-fixing, and focus on housing auction cases.  In one year, 160 open grand jury investigations were reduced to 59 and because career employees in the Antitrust Division did not act fast enough to close investigations, four Antitrust Division field offices were shuttered in Atlanta, Cleveland, Dallas and Philadelphia.[5]  This took place during the height of stimulus spending which negatively impacted  deterrence because the Antitrust Division was unique in that most of its grand jury investigations involved multiple corporate subjects and focused on procurement fraud that affected the bidding process.  It also had investigations that were declined by USAO’s (providing an important agent service function) as well as investigations into green industries and recipients of ARRA funds generally.  When the lack of filed cases became too conspicuous, the NPFTF website was taken off line and eventually Recovery.Gov was removed as well.

The lack of resulting prosecutions that were actively discouraged was touted as a lack of fraud[6].  Predictably, GFPFE plummeted and the false reality of a fraud free environment touted by Vice President Biden never drew a connection to disappearing millions in grant funds to fraud, waste and abuse, nor were a host of companies properly investigated that went bankrupt after receiving grants.[7]  Conveniently, comparative analysis is made difficult because the press releases that were meticulously tracked and stored on the NPFTF website was flushed down the memory hole sometime in 2012[8] and the ARRA contract and grants data—that was touted as being so crucial for transparency along with deputizing common Americans to be watchdog fraud preventers—was taken off-line in 2014.[9]

Where do we go from here?

Procurement Fraud and Grant Fraud enforcement programs are likely to be revitalized by the Trump Administration for because there has been a transition of power, but also because it is likely that new enforcement leadership will see opportunity in eight years of drastically diminished GFPFE.  While much of the “stimulus” spending occurred between 2009 and 2014 on initial impression puts some illicit conduct outside most statutes of limitations theories that are usually five years, there are a number of legal theories for tolling.  First, spending on government procurements and grants takes place over a period of years and there are likely to be payments theories available.  Second, for criminal offenses there is always the rarely used the Wartime Suspension of Limitations which, if interpreted consistent with its plain language, means that the statutes of limitations have not even started running.[10]  There are other theories that are likely to emerge based on the facts and evidence of each investigation.

The Trump Administration will likely recover ARRA grants and contracts information from Dow Jones for investigative use, if not by a funding an archaeological effort to unearth it in its entirety, by having individual investigative staffs serve Dow Jones with individual grand jury and IG subpoenas.  Perceptions by OIG agents now about how enforcement priorities are likely to develop later upon additions of IG’s later in the year is already stimulating agent activity now and will likely to encourage a number of basic GFPFE initiatives on a grass roots level.  Investigative agents are likely once again to reach out to audit components, procurement components and grant components to identify fruitful leads for development–an activity that was previously discouraged.  The ordinary dynamics affecting a new Administration and the Trump Administration’s stated focus on “vigorously eliminating waste, fraud and abuse in the Federal government” [11] are likely to make procurement related prosecutions a priority.
Government contractors and grantees would be well served to consider this eventuality and respond accordingly.

 

FOOTNOTES

[1] http://www.usatoday.com/story/news/politics/2014/02/16/recovery-act-stimulus-fraud-convictions/5400705/

[2] See https://www.thebalance.com/what-was-obama-s-stimulus-package-3305625 (visited Feb. 16, 2017). Although it was a ten-year package, $720 billion, or 91.5%, was budgeted for the first three fiscal years. In FY 2012, additional funding was approved, raising the total to $840 billion. By December 31, 2013, $261.2 billion in contracts, grants or loans had been expended. Id.

 

[3] Although Congress initially authorized $700 billion for TARP in October 2008, that authority was reduced to $475 billion by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).Of that, the following amounts were committed through TARP’s five program areas:

  • Approximately $250 billion was committed in programs to stabilize banking institutions ($5 billion of which was ultimately cancelled).
  • Approximately $27 billion was committed through programs to restart credit markets.
  • Approximately $82 billion was committed to stabilize the U.S. auto industry ($2 billion of which was ultimately cancelled).
  • Approximately $70 billion was committed to stabilize American International Group (AIG) ($2 billion of which was ultimately cancelled).
  • Approximately $46 billion was committed for programs to help struggling families avoid foreclosure, with these expenditures being made over time.

The authority to make new financial commitments under TARP ended on October 3, 2010.

 

[4] “The Task Force is conducting outreach to the public, victims, financial institutions, nonprofit organizations, state and local governments and agencies, and other interested partners to enhance detection and prevention of financial fraud schemes. Understanding that our most powerful tool in combating financial fraud is an informed public, the Task Force has engaged in training and outreach efforts spanning every type of financial fraud and reaching every level of consumer, including government officials, business professionals and private citizens. In the Recovery Act area alone, the Task Force conducted one of the largest anti-fraud training efforts in history in order to help safeguard Recovery Act funds from fraud, waste and abuse. The Task Force has prioritized victim assistance and launched a website that serves as a “one-stop-shop” for the public to report fraud and to obtain information on how to avoid becoming victims.( http://grantfraud.com/wp-content/uploads/2017/02/FFETF-Report-LR.pdf )                                                 *          *          *

Because it was established at a stage when stimulus funds had yet to be distributed in significant quantities, the working group focused its early efforts on fraud prevention. Perhaps the most influential work done by the working group to date is the group’s fraud prevention and detection training effort. At the close of 2010, more than 100,000 professionals responsible for awarding and overseeing Recovery Act funds, including inspectors, agents and prosecutors, were trained as part of this effort, and these numbers are only continuing to grow. This targeted fraud prevention and detection effort is one of the largest in history. These efforts were punctuated by a flagship training event for agents, auditors and procurement and grant officers, entitled “Focus on Recovery,” which was held on November 15­ 17, 2010, in Philadelphia. The Conference included speakers from the highest levels of the Justice Department and inspectors general community, as well as elected officials, including the Vice President of the United States. The conference was a tremendous success, attracting well over 500 attendees. (Id. at 3.6.)”

At that conference that occurred in Philadelphia, the Vice President made the following remarks suggesting the total elimination of fraud:

 

“As of September 30, 2010, the Recovery Board and the federal Inspectors General have received a total of 4,809 complaints of wrongdoing associated with Recovery funds. 577 are currently open as active investigations. To put these numbers in context, with the 210,107 prime and sub-recipients posted on Recovery.gov those 577 represent less than point-three percent of the number of total Recovery Act awards in Recovery.gov. And, the fraud and abuse we do catch—so far it’s been small. Of the non-tax cases that have been charged as of September 30th, less than three million dollars of Recovery-related awards were involved. Thus far, this is a surprisingly low figure. That’s only point-zero-one percent of the money that’s gone out. Now, don’t get me wrong—any and all fraud is unacceptable. That number should be zero. (FWA Conference, Philadelphia, PA, November 16, 2010.”  The only way I could summon a record of this event is to place the following link into the way back machine. http://www.recovery.gov/News/featured/Documents/Vice%20President%20Bidens%20Speech%20to%20Fraud%20Conference%20Nov%202010.pdf)

 

[5] Although DOJ claimed that the closures was a cost cutting exercise, inside sources within the Executive Office of the Antitrust Division told me that there were no cost savings.

[6] http://www.cnsnews.com/news/article/biden-claims-600-billion-stimulus-funds-spent-we-re-building-government-delivers-more

[7] By September 2012, CNN had estimated that 8% of green energy grantees had been bankrupted.

[8] GFPFE cases filed by NPFTF hit a peak in 2008 and then started to drastically fall off after the 2008 election.  When the lack of case filings became conspicuous the website was removed.  September 2008 (25 cases),  October, 2008 (34 cases),  November 2008 (23 cases),  December, 2008 (17 cases), January 2009 (18 cases) , November 2009 (12 cases), December 2009 (9 cases), January 2010 (8 cases),  February 2010 (three cases).

[9] “Data on $800 billion in stimulus spending will disappear this year. Here is why,” Washington Post, September 9, 2014. I have spoken to agents in multiple OIG’s who see the resurrection of this data as being an important fraud, waste and abuse enforcement tool and contractors and grantees should assume that this message will eventually work its way up to new OIG and DOJ management.  In the meantime, it is information this information should be accessible by grand jury subpoenas or inspector general subpoenas.

[10] In Kellogg Brown & Root Services, Inc. v. United States ex rel Carter (KBR), No. 12-1497, __ S. Ct. __ (2015), the Supreme Court unanimously held that (1) the Wartime Suspension of Limitations Act (WSLA) only applies to criminal offenses and therefore does not toll the limitations period for civil fraud claims under the False Claims Act.

[11] Procurement Fraud and Grant Fraud enforcement programs are likely to be revitalized by the Trump Administration.https://www.politiplatform.com/trump/government/388

For government contractors and grantees, now is a good time to take a fresh look at the award and administration of contracts and grants because there is a very real possibility they will be receiving renewed scrutiny.

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