White Paper: Government Vendor Fraud — Is Prevention the Ultimate Cure?

Topics: Criminal Enforcement, Financial Crime, Fraud, Government, Government Fraud, Government Regulation, Reports & White Papers, Thomson Reuters

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A new white paper, Government Vendor Fraud — Is Prevention the Ultimate Cure?, demonstrates that people and technology must work together to prevent government fraud.

For as long as there have been governments, the paper — published by Thomson Reuters Legal — points out there have also been people seeking to defraud the system for personal gain.

In ancient Rome, for example, construction contractors discovered they could profit more by using low-quality, pitted marble for buildings and charging the government for premium, high-quality marble. And during the Civil War, the federal government passed the False Claims Act (FCA) as part of an effort to prevent opportunists from selling lame horses, broken rifles, and spoiled provisions to the army.

Indeed, the FCA was strengthened in 1986, when reports of the government paying exorbitant sums for everyday items ($600 for a toilet seat, $400 apiece for hammers) came to symbolize government “waste.” Yet fraud, waste, and abuse still happen today.

You can read the full white paper, Government Vendor Fraud — Is Prevention the Ultimate Cure?, here.

Since 1986, the U.S. Department of Justice has recovered $56 billion from prosecutions stemming from the False Claims Act, with $3.7 billion recovered in 2017 alone. And that’s just at the federal level. State and local municipalities lose millions every year to various types of vendor and contractor fraud, despite the rigorous processes and safeguards intended to prevent it.

One of the greatest challenges for governments of all types is that most fraud is discovered after a crime has already been committed, the paper contends. Preventing fraud before it happens — by, for example, not hiring illegitimate contractors in the first place — is sometimes difficult because surface appearances can be (and in fact are meant to be) deceiving. Fraudsters are highly adept at presenting themselves as legitimate service providers, precisely because their con depends on it.

The paper describes how in Missouri, an owner of a construction company recently pleaded guilty to a scheme in which he pretended his company was being run by a disabled veteran, which gave it preferential consideration for $13.8 million in contracts the company otherwise would not have qualified for. And in El Paso, $3.2 million in funds for a downtown streetcar project were diverted into the bogus bank accounts of a front company posing as a legitimate vendor.

Identifying potentially fraudulent vendors before they are hired is not always possible, of course. As the paper points out, many types of vendor fraud involve billing schemes that manipulate invoices or under-report the true cost of services in order to skim a larger profit. These scams are often crimes of opportunity that exploit loopholes in the invoicing and payment process.

Other methods of vendor fraud require the cooperation of a government employee, one who somehow feels justified in exploiting the power of their position for personal gain. If those involved are respected businesses (at least on paper) or trusted employees, it can take years to identify a pattern of malfeasance.

Financial audits, compliance controls, and tips from whistleblowers are how many such scams are discovered — but again, these require the crimes to have already been committed, and for the fraudulent activity itself to be well established.