Defense-Contracting Fraud: Taxpayers Wiped Clean from $14,000 Toilet Seats
In 2018, Senator Charles Grassley (R-Iowa) penned an op-ed for the New York Times, decrying such wasteful Pentagon spending as $14,000 for individual 3-D printed toilet seat lids, cups costing $1,280, $436 for hammers, $117 soap dish covers and $999 pliers. As Senator Grassley – father of the modern False Claims Act and a tireless advocate for whistleblowers – wrote at the time, the Pentagon’s convoluted accounting processes create “the perfect environment for waste, fraud and abuse. … Taxpayers pay billions of dollars annually to fund Pentagon programs that are supposed to increase battle readiness, support military personnel and protect national security,” but fraud in the system “weakens America’s military might and takes resources away from our men and women in uniform and their families.”
Unfortunately, little has changed since Senator Grassley wrote in 2018. The United States spends approximately $553 billion per year in national defense. Most of that spending is done through contracts with private businesses here and around the world, and a significant portion of that is infected by fraud. Many billions of dollars have already been recovered from defense contractors, largely thanks to qui tam whistleblowers acting under the Federal False Claims Act. Some common defense-contracting fraud schemes include:
- • Cross-Charging: In a “fixed-price” contract, the government pays a set price for the delivery of a weapons system or other item, no matter how much it costs the contractor to produce. In a “cost-plus” contract, the government pays a set price plus a percentage of the contractor’s costs. Contractors who have both types of contracts have a strong incentive to “cross-charge,” or to shift costs from the “fixed-price” contract to the “cost-plus” contract, and thereby maximize their profits. This illegal cross-charging is frequently accomplished by altering records to shift employee hours and raw-material or equipment costs.
- • Improper Product Substitution: Defense contracts frequently specify a particular grade, type or quality of product or parts. There are often additional requirements that the parts be new (as opposed to used or refurbished), and that those parts be made in America. Defense contractors can often save costs and maximize profits by illegally substituting cheaper parts that don’t meet these specifications.
- • Improper Cost Allocation: Contractors who provide products and services to the United States military may also sell to other governments and private businesses around the world. One way that some defense contractors have attempted to secure lucrative contracts from private businesses or governments outside the United States is to improperly allocate or shift costs from those contracts onto the “cost-plus” contracts they have with our government, making the United States – that is, the taxpayers – pay for the costs that should be paid by these private businesses or foreign governments.
- • Worthless or Substandard Products or Services: The government relies on contractors to provide items that perform as promised. If a contractor knows or should know that its products will not perform as promised this can, in certain circumstances, violate the False Claims Act.
- • Inflation of Costs and Charges: Contractors sometimes improperly inflate their costs and charges to increase the revenue the company earns from the government. This form of fraud is often accomplished through inflated time records, inflated equipment and materials costs and fake purchase orders.
- • Violations of the Truth-In-Negotiations Act: Many weapons systems and other equipment are produced by only one company, meaning the government can’t solicit competitive bids – there literally are no competitors. In these circumstances the government has no way of knowing if it is paying a fair price. The Truth in Negotiations Act (“TINA”) attempts to prevent this problem by requiring defense contractors to honestly disclose all relevant information about its costs to the government in these types of single-source, no-bid contracts. Despite the requirement of TINA, single-source defense contractors will sometimes inflate their costs and expenses because they know it is difficult for the government to discover the fraud. This is often a violation of the Federal False Claims Act.
- • False Certification as a Small, Women-Owned, Minority-Owned, or Veteran-Owned Business: Federal law creates certain preferences and set-asides for small businesses that are owned by members of traditionally disadvantaged communities or groups. For instance, some government agencies including the Department of Defense are required to let a certain percentage of their contracts to such small businesses, sometimes even when they are not the lowest bidder. Businesses sometimes install “figureheads” as sham owners, or falsify documents to make it appear that they qualify for small-business preferences and set-asides. Such fraud is often a violation of the False Claims Act.
The False Claims Act was originally passed during the Civil War because Congress was concerned that contractors were defrauding the Union Army. Today, the immense amounts of money involved in defense and other government contracting make this a realm that is still particularly ripe for fraud. If you’re aware of a company committing government-contracting fraud, speak with the experienced whistleblower attorneys at Brown, LLC today.