Government Fraud: Schemes and the Legal Issues

Jacob Parks, J.D., CFE Associate General Counsel, ACFE ®2013 Association of Certified Fraud Examiners, Inc. ®2013 Association of Certified Fraud Examiners, Inc.

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Government Fraud

Government fraud refers to:  intentional acts  designed to deprive the government of funds  by deception  or other unfair means.

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Types of Government Fraud There are thousands of ways to defraud the government. A few of the most significant types of government fraud include:   

Public corruption Procurement fraud Entitlement schemes

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Public Corruption

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Corruption Corruption occurs in various forms, including:  Bribes and kickbacks  Illegal gratuities  Economic extortion  Collusion  Conflicts of interest

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Corruption Tony Mack, former mayor of Trenton, NJ: 

Sale of downtown real estate to build a parking garage

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Assessed at $271,000

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Agreed price $100,000, with a $100,000 bribe

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Procurement Fraud

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Procurement Fraud Four basic stages of procurement process:  The presolicitation phase  The solicitation phase  The bid evaluation and award phase  The post-award and administration phase

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Types of Procurement Fraud While there are many types of procurement fraud schemes, they can be broken down into three groups:  Collusion among contractors  Collusion between contractors and employees  Performance schemes

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Collusion Among Contractors The most common forms of collusion between competitors involve:  Complementary bidding  Bid rotation  Bid suppression  Market division

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Collusion Between Contractors and Employees      

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Need recognition schemes Bid tailoring Bid manipulation Unbalanced bidding Leaking bid data Bid splitting Unjustified sole source awards

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Performance Schemes       

Progress payment fraud False or inflated invoices Duplicate invoices Non-conforming goods or services Change order abuse Cost mischarging Commingling of contracts

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Entitlement Schemes

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Entitlement Programs 

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Entitlement programs guarantee aid to anyone who qualifies. Programs include: Medicare, Medicaid, CHIP, state health care programs, Social Security, welfare, unemployment, veteran programs, and agricultural price support programs. Fraud vs. waste & abuse

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Entitlement Programs

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Key Government Fraud Laws

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General Elements for Fraud 

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Criminal • A false representation or material omission • Intended to defraud another Common law (civil) • A false representation or material omission • Defendant knew of the falsehood • Defendant intended for plaintiff to rely on it • Plaintiff did rely on it, resulting in actual harm ®2013 Association of Certified Fraud Examiners, Inc.

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Texas Government Fraud Laws 

Texas Penal Code Title 7 Chapter 32—Fraud Forgery – a forged writing intended to defraud another • Deceptive business practices • False statements to obtain credit • Destruction/concealment of documents intended to defraud another • Using another’s identification information to defraud annoter •

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Texas Government Fraud Laws 

Title 7 Chapter 33—Computer Crimes Offense to “knowingly accesses a computer, computer network, or computer system without the effective consent of the owner.” • Online impersonation to defraud another •

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Title 8 Chapter 36—Bribery and Corrupt Influence •

Can apply to “any benefit” designed to corruptly influence a public servant’s official capacity

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Texas Government Fraud Laws 

Government Code Chapter 2155—Barring vendors from state contracts •

Substandard performance • Material misrepresentation in bidding • Fraud • Breach of contract

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Conspiracy There are various conspiracy laws at the state and federal level. In general, the elements of conspiracy are:  An agreement  Between two or more people  To commit an illegal act  Some action to carry out the act

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False Statements 18 U.S.C. 1001 The elements of a typical 18 U.S.C. § 1001 violation are set forth below:  The defendant knowingly made a false statement (or used a false document).  The statement was material.  The statement concerned a matter within the jurisdiction of any agency of the United States.

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Other Government Fraud Violations 

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Criminal False Claims Act (18, U.S.C. 287) makes it illegal to present or make any false, fictitious, or fraudulent claim against any agency or department of the United States. Civil False Claims Act (31, U.S.C. 3729 et seq.) provides a separate civil cause of action. Texas FCA (THRC 36.001 et seq.) Bribery of public officials—(18 U.S.C. 201) Mail and Wire Fraud (18 U.S.C. 1341, 1343) ®2013 Association of Certified Fraud Examiners, Inc.

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Whistleblower Laws The following are among the most important actions and protections available to government-fraud whistleblowers:  Qui tam suits under federal and state False Claims Acts  Tax fraud whistleblower programs

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Qui Tam Suits 

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Qui tam suits under Civil False Claims Act • Who can file: A “person” – includes organizations and (sometimes) government employees • Requires non-public information, unless relator is the original source • Rewards • Without government, 25-30% • With government, 10-25% Texas FCA: Medicaid only ®2013 Association of Certified Fraud Examiners, Inc.

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Tax Fraud Whistleblower Programs  

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Bradley Birkenfeld, UBS 14,000 wealthy tax evaders participated in IRS amnesty program $104 million award for estimated $5 billion recovery

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Conclusion    

Assess risk of schemes at your organization or clients Cultivate reporting Implement transaction monitoring to search for abnormal patterns Proactive audit to make sure procurement rules and controls are followed

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