Corporate Governance

CONSTRUCTION FIRMS: Targets for Enforcement Initiatives (Part 3)


This article is a continuation of our most recent corporate governance series. If you missed part 2, you can read it online here: Construction Firms Part 2

The Iraq war.

The Office of the Special Inspector General for Iraq Reconstruction (SIGIR) is the successor to the Coalition Provisional Authority Office of Inspector General, a temporary organization created by Congress in 2004. SIGIR has the responsibility for overseeing the use, and potential misuse, of funds for reconstruction and rehabilitation activities in Iraq. SIGIR is a member of the National Procurement Fraud Task Force and regularly collaborates and shares information with the Army's Major Procurement Fraud Unit, the Department of State Inspector General Criminal Investigations Directorate, the U.S. Agency for International Development Inspector General, the Defense Criminal Investigative Service, and the FBI.

SIGIR currently has 50 auditors, inspectors, and investigators in Iraq. During the first quarter of 2007, SIGIR produced four audits, nine project assessments, and worked on 79 investigations into allegations of fraud, waste, and abuse involving reconstruction funds, 28 of which await prosecution by the Department of Justice.9 During the past three years, SIGIR has produced 86 audits and completed 94 inspections. SIGIR has opened over 300 criminal and civil investigations, resulting in 10 arrests, a 25-count indictment of five persons, five convictions, three imprisonments, $3.6 million in restitution orders, and more than $9 million recovered.10 Investigations have also resulted in 19 suspensions, 16 proposed debarments, and nine debarments.11

In its quarterly report, SIGIR noted that Congress is considering new legislation to strengthen efforts to punish fraud, waste, and abuse of funds in Iraq and elsewhere. The following bills are in the early stages of the legislative process and may undergo significant changes in markup sessions. The House of Representatives has proposed the War Funding Accountability Act, which may subject government contractors engaging in fraud or war profiteering to criminal, civil, or administrative proceedings or investigations. The Senate has proposed the War Profiteering Prevention Act, which may make it a criminal violation to profiteer or commit fraud in connection with a war, a military action, or reconstruction activities. The criminal violation would arise from making materially false statements or materially overvaluing any good or service with the specific intent to make excessive profit. Penalties for violations may include up to 20 years' imprisonment and a fine of the greater of $1 million or twice the gross profits or other proceeds. Property traceable to a violation may be forfeited, or seized by the government. In addition, any transactions involving such property or proceeds would be subject to further charges under the Money Laundering Control Act. If enacted, these laws will subject contractors to additional liability, particularly longer jail terms.

The big concern for honest contractors is that terms such as "materially false statements" and "excessive profit" are relative concepts that are open to a broad range of interpretation. In the context of government investigations, it is ultimately the enforcement agencies and prosecutors that make the ultimate decision on whether a particular action or statement is accurate or false and whether it was taken or made with honest intent, reckless disregard of requirements, or intentionally false. As discussed below, one of the most effective ways for companies to persuade enforcement officials that their intentions were honest is to have implemented a comprehensive compliance and ethics program.

Hurricane Katrina.

The specially designated Hurricane Katrina Fraud Task Force works out of the Department of Justice. The Task Force members include many of the same members as the National Procurement Fraud Task Force. It also includes the Internal Revenue Service Criminal Investigation Division, the U.S. Postal Inspection Service, the U.S. Secret Service, the Department of Homeland Security, the Federal Trade Commission, the Securities and Exchange Commission, and representatives of state and local law enforcement. The Katrina Task Force's mission is to deter, detect, and prosecute instances of fraud related to the Hurricane Katrina disaster.

In 2006, the Katrina Task Force reported that within one year of Hurricane Katrina's landfall, the Task Force's Joint Command Center reviewed and analyzed more than 6,000 fraud-related tips and complaints.12 At that time, the Department of Homeland Security Office of the Inspector General also had over 2,000 open hurricane-related fraud investigations, with 206 arrests and 229 indictments relating to the hurricane. Other agencies were also conducting numerous audits to oversee hurricane-relating spending. In 2007, over 600 individuals have been indicted, charged, and sentenced for fraud relating to Hurricane Katrina.13 CBS News reported that "[t]he frauds range in value from a few thousand dollars to more than $700,000."14

As typically found after a major disaster, many of the initial Hurricane Katrina fraud cases arose from charity-fraud schemes or emergency-assistance schemes. Once the federal government made funding available for reconstruction, the Katrina Task Force began to discover more instances of procurement fraud, such as contractors allegedly falsifying debris removal load slips.15 Currently, the Katrina Task Force is concentrating its efforts in two areas: government-contract and procurement issues in situations where the government has spent funds on repairing and restoring the affected region; and public corruption, which generally includes situations in which public officials allegedly received kickbacks or bribes, or they were involved in extortion, or fraud schemes. Enforcement agencies believe that public corruption often accompanies procurement fraud, because contractors engaging in fraudulent schemes sometimes seek to bribe or compromise the public employees and officials who oversee the contractor's project.

CBS News has reported that "complaints are still pouring in and several thousand possible cases are in the pipeline.enough work to keep authorities busy for five to eight years, maybe more."16 Construction companies should anticipate that the government will be looking at their actions in hindsight. This means that well-meaning contractors who responded vigorously to the urgency of the situation and the pressure put on them by the contracting agencies, and bent some of the procurement rules in the interest of getting the project in the door and completed, may face government inquiries by different agencies that don't feel the urgency and have a very different agenda. Such contractors would be wise to assess the status of their compliance and ethics programs and anticipate possible government inquiries.

IN NEXT WEEK'S ARTICLE, WE'LL CONTINUE THIS TOPIC BY DISCUSSING PROTECTIONS FROM COMPLIANCE AND ETHICS PROGRAMS...

Construction Firms - Part 4

Our thanks to this article's authors, Christopher Myers and Allison Feierabend of Holland & Knight.

Holland & Knight is a global law firm with more than 1,150 lawyers in 17 U.S. offices. Other offices around the world are located in Beijing and Mexico City, with representative offices in Caracas and Tel Aviv. Holland & Knight is among the world's 18 largest firms, providing representation in litigation, business, real estate and governmental law. Our interdisciplinary practice groups and industry-based teams ensure clients have access to attorneys throughout the firm, regardless of location. www.hklaw.com

Christopher A. Myers is chair of Holland & Knight's Compliance Services Team and a member of the firm's White Collar Defense Team. He is a former federal prosecutor and has experience in a broad range of complex matters affecting heavily regulated industries, including health care, government contracts, financial institutions, real estate, securities and other companies. He has represented clients with respect to matters involving civil and criminal fraud investigations, corporate governance, anti-money laundering, design and implementation of compliance programs, and administrative litigation. Mr. Myers is certified as an Anti-Money Laundering Specialist and as a Certified Compliance & Ethics Professional. chris.myers@hklaw.com

Allison V. Feierabend practices in the areas of government contracts and business litigation. Her government contracts experience includes bid protests, contract disputes, contractor claims, and counseling clients on diverse government contracts issues. Ms. Feierabend's protest experience includes a wide array of military and civilian agency procurements before the Government Accountability Office and United States Court of Federal Claims. Ms. Feierabend counsels large and small government prime contractors and subcontractors on a wide variety of procurement law issues including intellectual property and technical data rights, organizational conflicts of interest, Freedom of Information Act (FOIA) requests, the Berry Amendment, and flow-down clauses. allison.feierabend@hklaw.com

DISCLAIMER: This Corporate Governance article is provided as an informational resource and does not constitute legal advice. The information provided in this article is based on the laws in effect at the time the article was published. Laws related to this article's topics may change over the course of time. Visitors to this website should not rely upon or act upon this information without seeking professional legal counsel.

9 April 2007 Quarterly Report, Stuart W. Bowen, Jr., Inspector General (April 30, 2007), available at http://www.sigir.mil/reports/quarterlyreports/Apr07/Default.aspx
10 See id.
11 Id.
12 Hurricane Katrina Fraud Task Force, First Year Report to the Attorney General, September 2006, page 4.
13 See DOJ Press Releases available at http://trina/Katrina_Fraud/pr/press_releases/http://trina/Katrina_Fraud/pr/press_releases/; Thousands Suspected of Katrina Fraud, CBS News (April 2, 2007).
14 Thousands Suspected of Katrina Fraud, CBS News (April 2, 2007).
15 Hurricane Katrina Fraud Task Force, First Year Report to the Attorney General, September 2006, pages 5, 14.
16 Id.

 

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