Defense Contractor Fraud and Procurement Schemes

Defense contractors receive hundreds of billions of dollars every year to provide important products and services to the US government. The contracts for these items can involve millions of different products delivered over several years.

There are so many transactions involved in defense contracts that adequate auditing is rarely possible.

When it is possible, decades may pass between the time that the contract is signed and the time that a full accounting of the delivered items is made. In the past, contractors have taken advantage of the complexities of contracts to avoid delivering ordered products and services.

While it is difficult for non-delivered items to be separated from items lost in the supply chain or sent to the wrong place, whistleblowers can help. Whistleblowers with access to financial records have been able to reveal when missing items were absorbed as profits for the contractor.

Defense contracts can be generous, paying contractors well above market rates to ensure a large supply and excellent quality.

In some cases, these parts may be produced by contractors because the consumer market doesn’t produce them at the correct strength. This is often the case when the parts are intended for severe environments like deserts or the artic.

These parts can be expensive for contractors to produce but producing them at poor quality in order to save money is considered to be a type of fraud against the government. This is, in fact, the original type of fraud that inspired the FCA. The law that Lincoln passed was intended to be used against those providing substandard equipment to the Union Army.

While whistleblowers can be helpful when proving intent, this type of fraud can easily be detected by the government. This type of fraud can lead to public outrage, inspiring prosecutors to be vigorous when investigating and charging those responsible. Whistleblowers should move quickly when they have knowledge of the production of worthless or defective parts.

Not all defective products are the result of intentional cost-cutting. Sometimes, in the production of custom-made parts, defects can be accidentally introduced.

This is a common part of the production process, and while defects may result in contract penalties, it is not considered fraud unless there are other factors. However, any contractor who becomes aware of defects (or who is aware that a part cannot withstand the stress that it will be placed under) is responsible for reporting it.

Failing to report known defects can be considered fraud, especially if steps are taken to conceal the defect or prevent internal testers from reporting it. When defects are concealed, whistleblowers may be able to save lives by reporting it in time.

Many US government personnel work in dangerous situations, including search and rescue, where equipment failures can endanger rescuers and victims. In addition to saving lives, whistleblowers can collect a portion of funds recovered.

Cross-charging fraud occurs when defense contractors with multiple contracts shift expenses from one project to another. This is most often done in cases where the contractor has both of the following types of contract:

The scheme works by moving expenses involved in the fixed-price contracts to the cost-plus contracts. This is often done by altering records to make research, production, and workforce costs appear as if they were generated through the cost-plus project.

It is very difficult for regulators to detect this type of fraud. They rely heavily on the work of whistleblowers who are willing to report that they were ordered to alter records. Anyone who can come forward with proof of requests to alter records may be able to get a case started and to claim the rewards.

Mechanical requirements for military hardware are often very precise and for good reason. Certain parts must be expected to work in the most extreme environments and work conditions.

Contracts are often awarded on the basis that the contractor can deliver parts made of certain materials that are more effective for certain conditions. It is fraud for a contractor to win a contract on the basis of promising one type of material, and then to provide a different one when the products are delivered. Part substitutions can endanger servicemembers and lead to unpredictable part failure in the field.

Whistleblowers are often needed to detect this type of fraud. When parts are illicitly replaced, they are often parts that would not be noticed unless the delivered device was completely dismantled. When this problem can be caught with records from the manufacturing stage, whistleblowers may be able to save lives.

The US military rarely has the time to submit ordered equipment to a rigorous testing process.

They rely on contractors to perform the testing and inspections that are necessary to determine if the parts are in good condition and ready for use.

If manufacturing standards are already high, it can be a simple matter for contractors to skip inspections (while reporting that they were performed) until there is a serious problem. This involves falsifying records and is considered to be a type of fraud. The government relies on whistleblowers to report when inspections are not being performed. Without whistleblowers, the failure to inspect can quickly end in injury.

MPRI was involved in the rebuilding of the local defense sector after the war in Afghanistan.

In that role, they were responsible for a series of responsibilities, including the implementation of core systems. ​They were found to have submitted a series of false invoices​ for various labor costs.

The fraud, in this case, was revealed by a whistleblower. He was a former finance officer working for the company. With the case settled for nearly $3.3 million, he is expected to receive $567,000 from recovered funds. ^[1]

VPSI recently agreed to a settlement to resolve claims that they had ​inflated invoices that they produced for US Navy contracts​ over several years from 2005-2009. As part of the case, the government accused VSPI of improperly including costs for which it had already been paid and charging for costs that were never incurred.

The alleged fraud was brought to light by a whistleblower. The case settled for $6.5 million, and the whistleblower is expected to receive nearly $1.3 million. ^[2]

Atlantic Diving Supply, now known simply as ADS, recently agreed to a settlement to resolve claims that they had ​committed fraud as part of the competitive contract bidding process​. ^[3]

In this case, they were accused of falsely representing themselves as a small business.

They did not meet the requirements to be eligible for contracts designed for small businesses.

As a result of the settlement, they were not required to admit any liability. At $16 million, the settlement they agreed to was one of the largest in recent years.

The fraud was revealed by a whistleblower, who will claim a portion of the large settlement. The whistleblower is expected to receive almost $3 million for bringing the fraud to light.