New Federal Rule Requires Contractors to Report Overcharges, Bribes & Fraud

Finally, the Feds seem to start getting it in reducing fraud and corruption in Federal spending like procurement programs and construction.  They just issued a new "rule" revision that specifically mandates that Contractors must report violations of contract and other oversight provisions.  This is the first step, because now if they don't report it, the Feds have a rule in the contract that backs them up.  Why does this sound unimportant, but isn't?

This rule expands an earlier rule that EXCLUDED contractors in foreign countries from reporting wrongdoing, thus that exception was removed.  There is no good reason to let US contractors providing services in Iraq or other foreign countries from disclosing bribery and other crimes they uncovered.  But, to really put teeth in this, they should have the Audit Director and the CFO of each contractor specifically initial the contract provision that specifies this rule.  Don't let them off the reporting hook.

When I worked at Nissan Motor Corp as an Audit Director many years ago (before the French took over a controlling interest in Nissan), there was a separate dealer audit group that audited marketing programs.  Nissan had a $600-million incentive payment program that was basically a huge sales contest fund for dealers.  But, there were also monetary rewards for "good dealer service ratings" as defined by a research firm that called customers who had their car serviced at the dealer.  The customers would be called and asked to rank the dealer's service attitude, etc. and if a dealer got high scores, they could earn thousands or hundred's of thousands of dollars.   Then the dealer audit group found that two of the largest Nissan dealers in LA were writing their own staff phone numbers on the customer forms rather than the actual customer phone number.  Thus, the research firm called the staff's home number, asked questions, and the dealer always got VERY good scores.  

Upon meeting with the dealers and their attorneys to get the funds back, Nissan found 1) the dealer contracts had no provision that a dealer couldn't cheat on status reports, and 2) the contracts for the contests didn't specify the conditions when contest money should be returned to Nissan.  As a consequence, they couldn't do anything legally about the cheating.   Management was averse to conflict, but I would have just slowed delivery of any cars to those dealers until they returned the money, but they didn't do that.  Management only relied upon a possible legal situation involving attorneys, but I personally would have cutoff their supply of parts and cars until they returned the funds.

Additionally, the marketing department ran the $600-million contest system and a young marketing assistant always messed up the contest specifications, and many dealers would get contest winnings when they were NOT in the contest area (such as the Southwest region).  But hardly ever did a dealer refund the unearned money until ONE dealer did so voluntarily, and we (internal audit) found up to $12-million in duplicate or unearned contest payments that had been made.  And, of course, the Nissan dealer contract didn't include sanctions for NOT returning un-earned funds.

Thus you can see why back in the early 1990's Nissan deserved to be taken over by the French (Renault).

So, you need strict, specific rules in contracts on "don't cheat" , and also self reporting systems and specify sanctions.  And now, the feds are doing it, and this new revision of the rule included contractors in foreign countries receiving US funds.
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Here is an excerpt from the Close the Contractor Fraud Loophole Act published June 30, 2008:

( You can find the whole Act HERE )

On June 30, 2008, the Close the Contractor Fraud Loophole Act (Pub. L.110–252, Title VI, Chapter 1) was enacted as part of the Supplemental Appropriations Act, 2008. This Act requires revision to the FAR within 180 days of enactment, pursuant to 2007– 006, ‘‘or any follow-on FAR case to include provisions that require timely notification by Federal contractors of violations of Federal criminal law or overpayments in connection with the award or performance of covered contracts or subcontracts, including those performed outside the United States and those for commercial items.’’ The statute also defines a covered contract to mean ‘‘any contract in anamount greater than $5,000,000 and
more than 120 days in duration.’’

from
http://www.federaltimes.com/index.php?S=3817608

New rule requires contractors to report wrongdoing
By ELISE CASTELLI
November 12, 2008
Starting February, contractors that discover they have overcharged the government must tell on themselves or face suspension or debarment, under a final rule published in the Federal Register today.

Failure of company executives to disclose to agency inspectors general evidence that a company violated fraud, bribery, conflict-of-interest, false claims or gratuity statutes will also provide cause for agencies to pursue suspension or debarment from federal contracting. The rule will apply to government contracts performed in the U.S. and overseas.

An earlier version of the rule sparked controversy on Capitol Hill because it excluded contracts performed in other countries, such as those that support military operations or Iraq reconstruction, from the risk of suspension or debarment if they did not disclose wrongdoing.