There has been a rule on the books now for more than ten years. It’s called the mandatory disclosure rule. And it requires federal contractors to timely disclose credible evidence of a law violation involving fraud, conflict of interest, or bribery, a violation of the False Claims Act, or a significant overpayment in connection with a contact.
Thousands of these mandatory disclosures are made every year to federal enforcement officials. And yet there is no central database of them. And they are not publicly available.
To find out more about the mandatory disclosure rule and its impact on procurement fraud, we checked in with David Robbins.
Robbins is a partner at Crowell & Moring and he is the author of the recently published The Procurement Fraud Guidebook (American Bar Association, 2019).
Before joining Crowell & Moring, Robbins was with the Air Force first as remedies director then as a suspending and debarring official.
When we started Corporate Crime Reporter more than 30 years ago, defense procurement fraud dominated the news cycle in corporate crime. These were major American corporations. Now, it’s rarely seen. Why is that?
“Big corporate procurement fraud has fallen off because the ethical standards have changed in large part due to the stories you talk about and the pressure they generated,” Robbins told Corporate Crime Reporter in an interview last week. “The mandatory disclosure rule, which is now just ten years old, requires disclosure of credible evidence of certain types of violations. We are in a system where companies just can’t keep secrets. You are supposed to be up front with your customers about what happened. In fact, it’s mandatory to disclose or you risk debarment and suspension from government contracts.”
“If you are in an arena where you can’t keep secrets, why try? Larger companies are much more forthright and open. Here is the problem we saw, here is how we fixed it, here is what we are giving back to you monetarily if appropriate or with more goods and services to make up for it and here is why it will never happen again.”
“That has become the nature of the communication rather than something that can be kept quiet and fester for a number of years and lead to a tremendously large recovery. That doesn’t mean out and out criminal fraud doesn’t happen. It sure does. But it is far less likely in the larger companies with dedicated resources and efforts poured into their ethics and compliance programs.” Is there a centralized database where one can go to see all of the disclosures?
“There is no database you can go to. Part of the reason I wrote the book is I was on the inside in the government and saw the operations. I saw every mandatory disclosure submitted to the Department of Defense for a couple of years simply because that is the process.”
“The mandatory disclosures are submitted to the relevant Inspector General and the relevant contracting officer. The standard for disclosure is adequate evidence – some basic credible evidence that might warrant a look. So I understand why there is some secrecy behind it. If you are going to come clean with the government about even some reasonable suspicion, I’m not sure those disclosures need to be made completely public. You are not going to be able to find a database.”
“Frances Lynn McCormick ran the Defense Department disclosure program for the first eight to ten years of its life. In her public remarks, you might be able to find online some statistics about the program.”
“The vast majority of the disclosures are time mischarging. If I’m supposed to give eight hours a day to the government, instead I’m surfing the internet, I might come to work late and charge my time in full. That was my perspective on what the bulk of them are.”
“There are some that have higher dollar amounts associated and are a little more meaty. There you can look at the Defense Department Inspector General’s semiannual reports to Congress. You can find full summaries of what has been submitted under the disclosure rule.”
But the reports are not public?
“In light of recent FOIA decisions, you would have a hard time getting them.”
Your explanation for the decline of prosecutions against major defense contractors is that the companies have come into compliance?
“Because they have come into compliance, yes. There is more of a focus on ethics and compliance in reaction to the Ill Wind scandals and the like. These companies over time have become a lot tighter in that regard. There are still some missteps. But they are more likely to be dealt with at the front end and sooner before they can get very large.”
Is it true that major defense contracting companies are too big to debar?
“The short answer is no, they are not too big to debar because there is a safety valve for the government in the form of a compelling need waiver that the agency head has to grant on a case by case basis. There is a database on when those waivers are granted. I believe the Interagency Suspension and Debarment Committee has a link to it on their website now. It doesn’t happen often. But if a debarring official finds a company lacks appropriate business integrity to debar but their goods are still needed for the massive weapons system of the day – the Joint Strike Fighter or you name it – there is still a way around it.”
“The on the ground reality is that before taking action against a company of real heft, a debarring official is going to be coordinating with their agency head, making sure that everybody knows what is happening and can be ready for the aftereffects.”
“I was personally present and actively involved in several of those coordinations and I was never once was told not to do what I was taught was right. I believed I had the authority and permission to do what I deemed necessary when I was an acting debarring official. I share all of that to say – no, there are no companies that are too big to be debarred.”
“But there is also the question of resource allocation. If you take action against a company that big, litigation may ensue and the entire office may be bogged down in dealing with that action for a significant period of time. Individual debarring officials need to make a decision about how much of their time and energy they want to spend on something like that.”
You have a fascinating chart in your book about the percentage of debarred companies that are small – a few million dollars a year in revenue. And almost 100 percent of the debarred companies are small companies or individuals. Have there been any cases of major American corporations that have been debarred because of procurement fraud?
“Debarred I don’t know. Suspended yes. Typically you will pick up these cases at the suspension stage – ongoing investigations that are so significant and serious as to require a time out from government contracting. And there have been large significant corporations that have been suspended. And they typically end up with an administrative agreement, a compliance agreement.”
If it is one of the major defense contractors, how does that work out?
“It gets very hard to purchase from them. And that’s where the compelling needs waiver comes in – if it is something that is desperately necessary when the suspension occurs.”
“Suspensions and debarments shut off the flow of new contacts. It is not to punish. That is the job of the Department of Justice. Ongoing work continues. It is just the new stuff that stops. You have stopgap efforts to continue on with the contracts you have in question.”
“It has been my experience that a lot of companies feel they are so central that they will absolutely get these waivers. If you look at the list – there are a dozen or two dozen given in history. There are not a lot. It does shut off the flow of new contracts and provides an intense incentive for these companies to remedy the misconduct, remove bad actors, institute ethics and compliance programs and policies and new oversight, generally picking up a corporate monitor for a period of time and getting themselves an administrative agreement, a compliance agreement to end the restriction. There are real effects.”
“Back to the question – have any of these major companies been fully and finally debarred – which by the way, is for a period of three years – I don’t know off the top of my head. But plenty have been suspended.”
You would know. You wrote the book on it. You would know if Lockheed Martin, or BAE Systems or Raytheon or General Dynamics were debarred – it would be headlines all over the world. We haven’t seen that have we?
“I am not sure that we have seen that. We have seen plenty of suspensions and a number of them have resulted in headlines, including companies on your list. There are plenty that have had proposed debarments and suspensions, even if they are resolved before they are fully and finally debarred.”
Health care fraud recoveries are so much larger than defense procurement fraud recoveries. You say it’s because defense companies are more compliant. But could it be that something is askew, that it’s just a failure of enforcement on the procurement fraud side?
The evidence counters that narrative. The mandatory disclosure rule has been in effect for ten plus years. Assuming – and we have to – that companies are disclosing as required under that rule – credible evidence of criminal law violations, False Claims Act and the like – the government should be armed with plenty of information about procurement fraud over the last decade and should be able to get those numbers up if the violations were indeed ongoing and serious.
“The hole in that is – how do we know that they are disclosing what they should be? And that’s unknowable.”
We don’t even know what they are disclosing because it’s not public?
“I do. I have a couple of years of a snapshot from being at the Air Force. I know what my clients are disclosing now. But your observation is a fair one.”
Compared to health care fraud, there have been relatively few procurement fraud recoveries under the False Claims Act. Why is that?
“It’s not even in the same ballpark. It’s not even in the same order of magnitude. We are talking about tens of millions to low hundreds of millions in recoveries versus billions of dollars in recoveries for health care fraud.”
You write this about soft skills and emotional intelligence:
“Emotional intelligence and a firm understanding of organizational behavior of the other side are essential both to address fraud allegations and to defend against them.”
What do you mean by that?
“From the government side, there are all of these different silos with different incentives. People work very hard and are true believers, but they haven’t seen the other side very much. Getting them to see the value in the entire remedy spectrum – whether contractual remedies, incarceration, suspension and debarment or somewhere in between, that requires a lot of cajoling. You don’t have command authority to dictate to people – thou shalt do this and we will have a coordinated effort. It relies on your power to persuade. That is where the people skills come in.”
“And the only evidence I can point to that that works is when I headed the Air Force procurement program’s remedies office. I drew pretty heavily on my MBA education, but also spending a year meeting regularly with these stakeholders. Recoveries went up – a lot. Thirty million to half a billion a year. Other agencies have seen similar results.”
“On the defense side, understanding the silos and organizational behavior, you understand where the disincentives are. You understand how much extra work it is to deal with procurement problems. You are not going to tell a company not to disclose when there is an obligation to disclose. I don’t think any of us on this side would have any problem saying – intentional criminal fraud deserves to be punished. There is no place for it in the acquisition system. We all get that.”
“But it is the business mistakes and misunderstandings that you can frame with proactive outreach, by communicating with the stakeholders and communicating with the contracts officer in moving toward a contractual remedy — making things go away sooner, preventing the escalation to the office of inspector general or the Department of Justice. Or you can frame issues, once they are there, to make it seem like a lower dollar problem than a higher dollar problem. Keep criminal out. Seek an early settlement. Those are all soft skills and understanding of human behavior and the organizational dynamics of the system.”
“The bulk of these operating instructions are hard to find unless you have lived it. My caseload was 1,000 a year when I was with the government. Unless you have lived that, you don’t really know how the system works.”
“Part of this book is to bring that forward.”
[For the complete q/a format Interview with David Robbins, see 33 Corporate Crime Reporter 42(11), Monday November 4, 2019, print edition only.]