As Uncle Sam increasingly contracts out government work to private companies, federal managers can draw valuable lessons from the discovery of widespread fraud in Navy and Transportation Department ship maintenance contracts.
Last week, the Federal Bureau of Investigation announced that criminal charges have been filed against 21 individuals and two companies after an intense undercover operation revealed fraud, kickbacks and false claims on federal contracts. The ongoing investigation has lasted more than four years and has involved at least six federal agencies-signs of how difficult it is to uncover criminal activity in government contracts.
Acting on a tip from a source in the ship maintenance industry, the FBI began its "Operation Octanova" investigation in late 1994, with the help of the Defense Criminal Investigative Service and the Naval Criminal Investigative Service. The investigation was eventually widened to include the Transportation Department, the Internal Revenue Service and the Labor Department.
The joint investigation team included an undercover crew that posed as a subcontractor to Bay Ship Management Inc., the Englewood Cliffs, N.J.-based ship management firm that was the focus of the investigation. The company managed a five-year, $200 million contract to maintain eight Navy ships, each of them named for a star (hence the name of the investigation, Octanova). Fraudulent activity uncovered in the investigation included:
- Bay Ship employees instructed undercover agents posing as subcontractors to inflate the dollar amounts of contracts to cover "gratuities." The government ended up paying for gratuities including dinners, golf outings, country club dues, televisions, pianos, boats, private school tuition and trips to the Belmont Stakes. The employees also pocketed cash.
- To cover the gratuities, the contractor either inflated prices or charged the Navy for work that was never done. The contractor would submit invoices for unnecessary work-emergency repairs, for example.
- To steer work to subcontractors involved in the fraud, Bay Ship employees instructed certain subcontractors to submit bids higher than a favored vendor or informed subcontractors of competing bids so they could submit lower bids.
- Two employees of the Transportation Department's Maritime Administration accepted bribes to steer contracts to certain companies.
The fraud was difficult to uncover, investigators said, because the invoices appeared reasonable and were submitted in such a way that the numbers in accounting books balanced.
Thomas Pickard, assistant director of the FBI's Criminal Investigative Division, said the FBI doesn't know how widespread this kind of fraud is.
"We're continuing our investigation to look for other avenues of fraud that are committed in these types of arenas," Pickard said. "But there's no way to quantify it. Fraud is very difficult to uncover unless you use creative techniques such as" the undercover operation, he said.
Special Agent Mark Johnson said federal employees overseeing contracts should be on the look out for out-of-the-ordinary events, such as numerous invoices for repairs of items that don't normally need to be repaired frequently. Criminals also use emergencies as opportunities to pass fraudulent claims through the system, Johnson said. In the ship maintenance case, people submitted fraudulent claims using the excuse of extensive testing when ships were docked and switched from internal power sources to shore-based power.
"You have to make sure individuals who are supervising a contract know what is actually supposed to be taking place," said an investigator with the Defense Criminal Investigative Service, who asked not to be named. "They need to make sure they're getting what they're paying for. When we set up contracts, we try to make them written well enough to make sure people who are supervising and dealing with them know what is appropriate or not.
"Individuals have to use common sense. If it's going to be a troop ship, then they need to make sure contractors are not putting rosewood all over the ship," the investigator said.
Todd Zinser, assistant inspector general for investigations at the Transportation Department, said his office is developing a report recommending ways to reduce the opportunities for such fraud.
"We hope cases like Octanova have a strong deterrent effect," Zinser said.
Federal agencies are looking to contractors to perform more government work. NASA and the Defense Department, for example, are in the midst of major efforts to shed more of their operations into the private sector.
But Mark Gable, legislative director for the Federal Managers Association, warns that accountability is harder to maintain in heavily contracted-out operations.
"One of the problems inherent in contracting out is it's more difficult to oversee contract employees than it is to oversee federal employees," Gable said. "This fraud case highlights one of the shortcomings of contracting out. These things happen."
Investigators urge people to use inspector general fraud hotlines to report allegations of criminal conduct. Calls to the hotlines are anonymous. Last year more than 7,100 individuals and firms were barred from doing business with the federal government as a result of IG investigations.
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