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Crooked government contractors, beware. Federal agencies, led by the Justice Dept., are forming a national procurement task force to investigate, prosecute, and seek civil penalties from businesses and executives that pad their prices, sell faulty goods, or otherwise illicitly profit when doing business with the U.S. government.
A run-up in spending on outside contractors for the war in Iraq and federal disaster cleanup has translated into "an increase in opportunity for fraud, misuse of funds, waste and corruption," Deputy Attorney General Paul McNulty said in announcing the group on Oct. 10. He estimated that 5% of all federal spending in 2005 was lost to fraud, citing defense contracting and Iraq reconstruction efforts as key problem areas.
Some $270 billion of the $377 billion in federal outsourcing last year was purchased by the Defense Dept. Federal law enforcement officials have recovered a record amount of civil and criminal penalties from contractors in recent years, including a $615 million settlement with Boeing (BA) in May—the largest penalty ever against a military contractor. The company paid the fine to avoid criminal prosecution for, among other things, hiring a top Air Force contracting official, her daughter, and her future son-in-law in an alleged conspiracy that steered billions of dollars in contracts to Boeing. The Special Inspector General for Iraq Reconstruction has identified hundreds of millions of dollars in waste, fraud, and abuse in Iraq rebuilding contracts held by major U.S. corporations such as Halliburton (HAL), Parsons Global Services, Bechtel National, and others.
ORACLE SETTLEMENT. The announcement comes on the heels of a defense bill awaiting President George W. Bush’s signature that shuts down within a year the Iraq Inspector General, which has referred 25 cases of contracting abuse in Iraq to Justice for criminal prosecution and has roughly 89 open criminal investigations.
McNulty simultaneously announced a $98.5 million settlement with software giant Oracle (ORCL). The deal resolves allegations that PeopleSoft, which Oracle acquired last year, charged "vastly inflated prices" in providing financial and human resource management software and support services to some 60 federal agencies from 1997 through late 2005. Whistleblower James Hicks, a former PeopleSoft employee, will get $17.7 million of that settlement under the False Claims Act. A spokeswoman for Oracle says the company didn't know about the case when it bought PeopleSoft and cooperated fully with the federal government's investigation.
The new task force will pull prosecutors from Justice's civil, criminal, public integrity, and money-laundering sections as well as the U.S. Attorneys from the District of Columbia, Maryland, and the Eastern District of Virginia. The FBI, the Defense Dept. Inspector General's Defense Criminal Investigative Service, the Naval Criminal Investigative Service, the U.S. Army Criminal Investigative Command, and the Air Force Office of Special Investigations fill out the investigative side of the task force, along with the Iraq Inspector General and Inspectors General from roughly 20 other federal agencies—including NASA, the CIA, Homeland Security, the Nuclear Regulatory Commission, the Government Services Administration, and the Office of the Director of National Intelligence.
HURRICANE-RELATED FRAUD. McNulty appointed Assistant Attorney General Alice Fisher, who chairs Justice's Hurricane Katrina Task Force, to also lead the National Procurement Fraud Initiative along with prosecutor Steve Linick. Linick ran a regional procurement fraud task force that McNulty established last year when he was the U.S. Attorney for the Eastern District of Virginia. The national group is modeled on the regional fraud task force.
Under Fisher, prosecutors have charged some 400 individuals with fraud related to hurricane recovery efforts. "Procurement fraud is a crime that threatens the integrity of the process by which the federal government awards contracts and for which it purchases goods and services," Fisher says. "It is essentially stealing from the American taxpayer. It is an illegal distortion of the process."
Kopecki is a correspondent in BusinessWeek's Washington bureau
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