Upholding the Public Trust
An interview with USDOT's Inspector General highlights efforts to protect the integrity of taxpayer dollars.
With passage of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), the U.S. Congress and President George W. Bush provided funding for highways, highway safety, and public transportation totaling $244.1 billion — the largest surface transportation investment in the Nation's history. Along with this major investment in transportation comes an even greater responsibility to use those taxpayer funds wisely and uphold the public trust.
Today, the highway transportation community faces significant pressures to handle more challenges with fewer resources due to stretched budgets, reduced staff, the cumulative demands of maintaining an ever-growing infrastructure, and a host of other factors. To accomplish their missions, most transportation agencies rely on contract services and products for which they have oversight accountability.
"Public employees who work to ensure we get what we pay for are the eyes and ears of the taxpayer," said Mary J. Richards, president of the Massachusetts Organization of State Engineers and Scientists, at the 2004 National Fraud Awareness Conference cosponsored by the U.S. Department of Transportation's (USDOT) Office of Inspector General (OIG), the American Association of State Highway and Transportation Officials (AASHTO), and others. "Their duties involve the verification that work performed by private contractors meets the required specifications, both in materials used and in construction practices rendered. The number of these professionals has been drastically reduced, and the ranks of private contractors [have] been increased so dramatically that the lack of oversight on public construction projects has spawned an even greater potential for the waste, fraud, and abuse of tax dollars."
Transportation agencies need to be concerned because the consequence of fraud, waste, and abuse is that less money is available to meet program objectives, not to mention that public confidence in transportation programs is compromised. This is especially critical at a time when infrastructure needs are increasing and the Nation's fiscal resources are struggling to meet these growing demands.
Fraud in highway construction projects is more common than one might think, is increasingly sophisticated, and crosses geographical boundaries. USDOT's OIG currently is investigating 228 contract and grant fraud cases across the country, compared with 158 investigations that were underway 5 years ago. The surge in investigations suggests that transportation managers need to be increasingly vigilant.
One challenge OIG recently cited in Congressional testimony is an example of the funding that might be made more available if the transportation community could be more vigilant and collectively reduce fraud, waste, and abuse by only 1 percent. This would net an additional $8 billion for critically needed transportation projects (based on $800 billion invested by the Federal Government and States in highway projects over the last 6 years). That is enough money to fund 16 new major highway projects or, put another way, might represent an additional $160 million per State.
Types of Contract Improprieties
Bid Rigging. In bid rigging, conspiring competitors raise prices to purchasers — often Federal, State, or local governments — who have solicited competing bids in order to acquire goods or services. Essentially, competitors agree in advance who will submit the winning bid on a contract that is being let through a competitive bidding process. Bid rigging includes colluding for bid suppression (agreement among bidders to withdraw or suppress bidding), complementary bidding (courtesy bidding purposely high), bid rotation (where bidders take turns being the low bidder), and subcontracting (a low bidder will agree to withdraw its bid in favor of the next low bidder in exchange for a lucrative subcontract that divides between them the illegally obtained higher price).
Price Fixing. In price fixing, competitors agree to raise, fix, or otherwise maintain the price at which their goods or services are sold. It is not necessary that the competitors agree to charge exactly the same price or that every competitor in a given industry join the conspiracy. Price fixing includes actions that establish or adhere to price discounts; hold prices firm; eliminate or reduce discounts; adopt a standard formula for computing prices; maintain certain price differentials between different types, sizes, or quantities of products; adhere to a minimum fee or price schedule; and fix credit terms.
Product Substitution. Product substitution involves the introduction of counterfeit and/or substandard material or other forms of unauthorized product substitution, when one product or service is purchased, but the actual product or service delivered is misrepresented or contains undisclosed substitutions.
Bribery. Bribery occurs when a person or company directly or indirectly gives, offers, or promises anything of value to any public official or person who has been selected to be a public official or offers or promises any public official or any person who has been selected to be a public official to give anything of value to any other person or entity, with intent. Bribery involves influencing any official act; influencing a public official to commit or aid in committing, colluding in, or allowing any fraud; creating an opportunity for the commission of any fraud on the United States; or inducing a public official to do or omit to do any act in violation of the lawful duty of such official or person.
Kickback. A kickback is money paid for referral of business for a contract — without the knowledge of a customer and without the customer's best interests in mind.
Conflicts of Interest. A conflict of interest occurs when an employee in a decisionmaking position has a direct or indirect interest, particularly a substantial financial interest, that influences the individual's ability to perform job duties and fulfill responsibilities. A conflict of interest occurs in a situation where an official's private interests may benefit from his or her public actions.
False Claim. A false claim is an act of knowingly making, using, or causing to be made or used a false record or statement that results in payment or approval by a Federal, State, or local government.
Labor and Materials Overbilling. An invoice submitted for work not performed is known as overbilling.
Disadvantaged Business Enterprise (DBE) Fraud: DBE fraud is the act of a business to misrepresent its standing as a DBE to win contract awards.
Corruption of Public Officials: Corruption involves the lack of integrity or honesty and the use of a position of public trust for dishonest personal gain.
Proactive and effective fraud prevention, detection, and prosecution are achievable only through a well-coordinated, multidisciplinary, intergovernmental approach. The Federal Highway Administration (FHWA), OIG, State departments of transportation (DOTs), and industry partners must work together to protect highway projects from fraud and maintain public confidence in the integrity of the Nation's transportation system.
To help transportation agencies recognize and prevent fraud, some of the most prevalent fraud types were discussed with USDOT Inspector General Calvin L. Scovel III. Inspector General Scovel provided tips for detecting fraud schemes and described some of OIG's efforts to educate contracting officers, project managers, and others. (For examples of specific fraud schemes and ways to detect them, see a companion article in this issue of Public Roads, "Is Your Construction Project a Victim of Crime?")
What exactly is fraud?
Simply put, fraud is an intentional misrepresentation for personal or corporate gain involving deception to gain an unfair advantage over another. In an actual scenario I have encountered (see "Actual Scenario: A Fraud Example" on the left), contractors misrepresented that they were bidding competitively for State DOT contracts, when in fact they were cooperating unfairly to increase job profits by driving up prices.
What kinds of fraud are you finding in highway construction?
Highway fraud cases can involve a whole host of schemes. They typically include bid rigging, price fixing, product substitution, bribery and kickbacks, conflicts of interest, false statements and claims, labor and materials overbilling, Disadvantaged Business Enterprise (DBE) fraud, and corruption of public officials.
One example is a product substitution scheme in which a State concrete manufacturer falsely certified that concrete catch basins used on a major highway project met contract specifications. A State inspector noted that a concrete supplier had delivered a truckload of precast basins only a day after the custom design, including a framework of reinforcing steel, was approved. Precast concrete structures normally must cure for at least a week before shipment. In addition, handwritten markings on one of the catch basins indicated that the basin was standard stock, not a custom product. The manufacturer subsequently pled guilty and was forced to pay a fine and restitution totaling half a million dollars.
In another case, a manufacturing representative for a paint company that offers highway striping services paid more than $840,000 in restitution for his role in bribing State officials to use his company's products exclusively on all of that State's DOT projects. We were able to develop this case based on a tip received from a Federal Bureau of Investigation (FBI) confidential informant.
Yet another investigation resulted in the owner of a sham "false front" DBE firm being convicted on 22 charges of racketeering (includes various illegal activities such as bribery, mail and wire fraud, and extortion) and fraud, sentenced to more than 7 years in prison, and ordered to forfeit the contract and make restitution of $652,000.
Additional examples of the instances of fraud we have helped to uncover and prosecute can be found on our Web site at www.oig.dot.gov.
Are there any recent trends in contract fraud cases?
OIG is starting to see an increase in quality control testing fraud, which involves a contractor's misrepresentation of quality control test results to earn contract incentives, avoid contract disincentives, or avoid production shutdown or required removal of deficient material in order to limit costs or increase profits. To leverage scarce State oversight resources, many State DOTs partner with industry and directly perform quality assurance materials testing only to the extent needed to confirm more extensive quality control testing by contractors.
OIG recently has investigated cases in which contract employees manipulated results from quality control tests to falsely earn contract incentives or avoid potentially costly project delays. In one such case, a contract State paving crew foreman discarded poor quality asphalt test cores from designated quality control locations and replaced them with test cores known to be of high quality in order to maximize quality-incentive payments. This case was initiated when a member of the contract asphalt-paving crew tipped off a State resident engineer who in turn contacted OIG. Five contract employees lost their jobs as a result of the fraud, and the company paid $200,000 to settle a civil complaint with the U.S. Attorney's Office.
How big of a problem is highway construction fraud?
No one knows for certain; however, according to research conducted by the Association of Certified Fraud Examiners, U.S. organizations lose an estimated 5 percent of annual revenues to fraud. Although we cannot say this percentage translates directly to highway construction fraud, we know from experience that the risks of fraud, waste, and abuse increase substantially when large sums of money are involved.
I believe the problem is bigger than ever before, if only because transportation spending is higher than ever before. For example, SAFETEA-LU, signed into law in 2005, provided for more than $244 billion in transportation projects over 6 years — the largest surface transportation reauthorization in the Nation's history — and this does not consider what the States spend on transportation.
Actual Scenario: A Fraud Example
Shortly before the deadline for submitting electronic bids for several contracts, representatives of three paving contractors divided the market and agreed which of them would be the low bidder on each contract. They shared their "winning bids" and needed only to ensure that their "unsuccessful bids" were higher than the winning bid. The contractors' goal was to rotate preselected winning bids with comfortable profit margins, while at the same time creating the appearance of open competition. Following a Federal investigation resulting in criminal indictments, the contractors pled guilty to fraud-related charges and were jailed, and their companies were ordered to pay $3 million in restitution.
Were there any clues that might help contracting officers detect bid rigging as in the above scenario? Yes, although bid rigging, price fixing, and other collusion can be difficult to detect.
Collusive agreements usually are reached in secret, with only the participants having knowledge of the scheme. Suspicions may be aroused, however, by unusual bidding or pricing patterns or something a vendor says or does. According to the U.S. Department of Justice's An Antitrust Primer for Federal Law Enforcement Personnel, several clues might make a contracting official suspect collusion, such as bid or price patterns that seem at odds with a competitive market:
How important are State DOTs in preventing or uncovering contract fraud?
State DOTs are critically important, as they are the first line of defense in preventing contract and grant fraud. They are where the rubber meets the road, so to speak. The Federal Government generally provides funding, but the States actually award contracts and perform the detailed oversight. States ensure that claims are valid, internal controls are in place, and irregularities are detected and addressed promptly. In fact, the States certify that they have the necessary controls in place, and the Federal Government and others rely heavily on these certifications. In other words, preventing or uncovering contract fraud depends, to a great extent, on the integrity and strength of State programs.
Can you provide any specifics on steps that transportation oversight providers at State and local levels can take as a more effective deterrent to contracting fraud?
OIG recommends requiring contract, grant, and cooperative agreement recipients to certify periodically that they are aware of and have complied with all applicable contract and Federal requirements, as appropriate. For example, recipients might be required to certify that labor costs, material quantity and quality, and travel and overhead costs are accurate and comply with contract provisions on each invoice submitted for government payment.
Currently, the use of certifications varies greatly depending on the level of government (Federal, State, or local) and type of procurement involved. Identifying false statements related to certifications such as these can assist greatly in deterring fraud and in the pursuit of criminal prosecutions and civil false claims actions.
How does OIG learn about potential fraud?
OIG learns about fraud in a variety of ways, most often by receiving a tip. Anyone who wants to report suspected fraud to OIG can call our hotline at 800-424-9071, use the online complaint form found at www.oig.dot.gov/hotlineform.jsp, or send an e-mail to email@example.com. Individuals who contact OIG are encouraged to identify themselves so OIG can work with them in case additional questions arise as we evaluate or pursue the allegations; however, they are not required to do so and can remain completely anonymous.
OIG works carefully to understand the motives of individuals who supply information and to screen the tips we receive to determine which merit further inquiry. Not all tips will result in an inquiry or investigation; however, OIG appreciates every tip we receive. DOT employees and employees of DOT contractors who report fraud are entitled by Federal law to whistleblower protection from employer attempts at reprisal. Many States provide similar protections at the State level. (For more information, see the U.S. Office of Special Counsel's Web site at www.osc.gov.)
Other ways of learning about fraud include audit reviews and notification from other law enforcement agencies.
How do OIG investigators prove fraud?
Fraud investigations use both overt and covert techniques to obtain evidence. Regardless of the fraud scheme, essential steps to proving a crime include interviews, document examinations, and observations. OIG special agents sometimes employ technical equipment and sophisticated techniques to capture and document critical information via covert photographic and video surveillance, clandestine electronic monitoring and recording, and vehicle tracking. Many techniques are particularly effective when fraud is ongoing and subjects are unaware of any investigation. If the "bad guys" had advance warning of a criminal investigation, they might destroy documents, purge electronic records, and "get their stories straight" — actions that could easily derail an investigation. An example of more overt investigative techniques includes compelling the production of documents and electronic data using subpoenas and search warrants.
OIG special agents receive their basic training at the Federal Law Enforcement Training Center in Glynco, GA, and continue to receive refresher training throughout their careers. They are authorized to make arrests without warrants, and they routinely carry firearms.
What is OIG doing to detect and deter fraud in highway construction?
During fiscal year 2006, OIG's nearly 100 criminal investigators spent just over 40 percent of their time on contract and grant fraud cases. Many of these investigations were conducted with the FBI, State law enforcement agencies, and others. To foster these working relationships, OIG has cohosted nationwide biennial conferences on fraud awareness since 2000 and has participated in numerous other outreach and liaison activities. For example, OIG special agents frequently present briefings on highway construction fraud at FHWA and industry conferences. The briefings heighten awareness of illegal construction fraud activity and help ensure that Federal and State contracting officers and project managers and contractors know about mechanisms available for reporting suspected fraud and the consequences of fraud. In addition, OIG auditors continually look for fraud indicators, such as the absence of effective management controls, for referral to investigators. Auditors make recommendations to strengthen lax controls when found and follow up, as appropriate, to determine whether corrective actions were taken and, if so, whether they were effective.
What is the purpose of fraud awareness conferences, and who attends?
The purpose of our biennial conference is to provide information about how to detect, prevent, and deter fraud and to foster relationships among agencies. A typical agenda includes discussion of topics such as oversight; stewardship; fraud, waste, and abuse prevention; detection; investigations; and prosecutions. Our overall goals for these conferences are to (1) sharpen awareness of fraud schemes, (2) share best practices, and (3) strengthen all- important working relationships. The next conference is scheduled for July 28-31, 2008, in Chicago, IL.
The last biennial fraud awareness conference was cosponsored with AASHTO, FHWA, and others in Orlando, FL, in 2006. About 350 transportation professionals from 45 States attended, including Federal, State, and local officials from a variety of disciplines: auditors, accountants, engineers, analysts, attorneys, investigators, contracting officers, and project managers. In addition, many industry representatives were in the audience or spoke at the podium.
The Transportation Oversight Providers Network (TOPnet) was developed as an outgrowth of the 2004 fraud awareness conference. What is TOPnet?
TOPnet, a Web-based tool found at www.TOPnet.gov, is the creation of a diverse group of Federal, State, and local transportation oversight providers who decided to take action based on discussions at the 2004 conference held in Seattle, WA. Their discussions highlighted the need for greater and more effective interagency interaction in combating the increasingly complex fraud, waste, and abuse faced by transportation professionals today at all levels of government. The vision is to work collaboratively among all levels of government to share information and enhance interagency communication for the purpose of strengthening oversight.
TOPnet features three distinct modules containing publicly available information in an easy-to-use format: (1) a national directory of contact information for approximately 750 oversight providers at all levels of government; (2) a searchable database of suspended or debarred companies and individuals and other judicial actions in transportation-related matters at all levels of government; and (3) a reading room for member organizations to post press releases concerning investigations and audits, as well as other transportation-related news and events.
We are currently working with AASHTO to enhance the Web site and transition its day-to-day management to AASHTO. We expect to complete these initiatives sometime this spring.
What thoughts do you have about USDOT's updated suspension and debarment order now that it has been out for over 2 years?
The goal of the suspension and debarment order "Governmentwide Debarment, Suspension, and Ineligibility," issued by former USDOT Secretary Norman Y. Mineta in June 2005, was to strengthen procedures to ensure that only responsible persons participate in USDOT procurement and nonprocurement programs. The order imposes a 45-day time limit on making decisions about suspensions and debarments. It also requires that if a decision is made not to suspend or debar, then a written explanation with reference to a specified list of mitigating factors and remedial measures must be provided. (See www.dot.gov/ost/m60/grant/DOT_Order_4200.5D.pdf to view the order.)
Since publication, the new order has increased accountability and led to more indicted or convicted parties being referred to operating administrations for suspension and debarment actions. These are important changes. Taking away the ability to bid on contracts is an appropriate action to protect the government from contractors who have demonstrated through their fraudulent acts that they cannot act responsibly when working for the taxpayer.
In a perfect world, transportation professionals would not have to worry about fraud, waste, or abuse, and perhaps there would be no need for vigilant stewardship and oversight. One only has to look at the headlines on the evening news, however, to be reminded that the world is not perfect.
No program, at any level of government, is immune to fraud, waste, or abuse. Fraud in highway construction projects results in fewer resources for important transportation projects and cannot be tolerated. All those in the transportation community must be knowledgeable about the various types of fraud schemes and be willing to take the necessary actions to mitigate the negative consequences caused by those who commit these crimes.
The public relies on professionals such as construction managers, resident engineers, inspectors, contractors, and auditors to do the right thing every day in conducting the public's business. Continued vigilance, in conjunction with effective internal controls and oversight mechanisms, are essential to mitigating the extent to which fraud and abuse cheat American taxpayers and erode public confidence in the integrity of our transportation system and those who build, operate, and maintain it.
Jim H. Crumpacker is OIG's director for National Investigative Programs and Operations. In this position, he leads a staff responsible for monitoring and focusing on nationwide safety (including aviation, motor carrier, and hazardous materials) and contract procurement and grant fraud investigative efforts and supporting investigative operations. He also manages OIG's Computer Crimes Unit. He previously served as a director in OIG's surface transportation and maritime audit group (2003-2005) and as the Inspector General's representative to the U.S. Department of Homeland Security to work relief and recovery oversight issues in the aftermath of the 2005 Gulf Coast hurricanes. Crumpacker holds a bachelor's degree in business administration in finance and a master's of science degree in public administration. He also is a Certified Internal Auditor and a Certified Fraud Examiner.
For more information, see www.oig.dot.gov or contact Jim H. Crumpacker at 202-366-1420 or firstname.lastname@example.org.