Let’s get the ball rolling here with a clichéd look at procurement fraud. Most government contractors firmly believe that as long as they knuckle down and keep their nose to the grindstone, they will earn their stripes and eventually make a King’s ransom in the contracting game. Occasionally though, a contractor may try to cut corners and will push the envelope and go against the grain in order to get a leg up on the competition.

While in the short term that may lead to the contractor making money hand over fist, all that glitters is not gold and eventually the long arm of the law will catch up to the scheme and make a federal case out of it. At that point, the contractor will certainly find themselves in hot water. Typically, the federal government will likely hold all the cards, and have the contractor over a barrel.

But even contractors that try to go by the book may find themselves with their feet to the fire due to actions of an employee. A chain is only as strong as its weakest link, and one bad egg employee can really be a fly in the ointment for an otherwise law-abiding government contractor.

A recent indictment, on August 4, 2015, of an employee of a federal contractor provides a good example. The contractor in question—”Company A”—held a prime contract with a federal agency that required the utilization of subcontractors. According to the indictment, one employee of the contractor—”Employee A”—was apparently caught with his hand in the cookie jar, allegedly performing a “shake-down” of a subcontractor working on Company A’s prime contract.

It appears Employee A approached the owner of the subcontractor and gave him two options: either (1) Employee A would bad mouth the subcontractor and ruin the subcontractor’s chances of receiving work under the prime contract; or (2) the subcontractor could pay a kickback to Employee A and Employee A would make sure the subcontractor received additional work under Company A’s prime contract. Apparently, the subcontractor chose door number 2, paying Employee A more than $1.9 million during a five year period.

The indictment kept anonymous the names of Company A and the subcontractor, as well as possible co-conspirators. This typically suggests that the government’s investigation is ongoing and additional indictments may be forthcoming. Thus, Company A, and possibly others involved, are waiting for the other shoe to drop to see if they may get hung out to dry by Employee A’s scheme. Either way, the outlook is not great for Company A:

  • Worst-case scenario, the government determines that Company A is culpable for its employee’s actions and will have to face the music with its own indictment. Or, perhaps Employee A’s conduct caused the company to submit false statements to the government which would open it up to potential liability under the False Claim Act and potential suspension and debarment proceedings.
  • Best-case scenario, the government determines that Employee A was nothing more than a rogue, opportunistic employee and decides not to pursue any separate claims against Company A. Of course, this best case would only occur after a lengthy and costly investigation.

Neither result is one that any company’s bottom-line or reputation wants to endure.

While we wait to see the fate of Company A, the subcontractor, and any others that were involved, the allegations against Employee A should serve as a reminder to all government contractors that it is important to create a strong culture of compliance within their companies. After all, an ounce of prevention is worth a pound of cure. Creating a culture of compliance can help to quickly identify similar misconduct so that appropriate corrective action can be taken, or better yet, prevent the misconduct from occurring in the first place. While there is no one-size-fits-all method for creating a culture of compliance, a good rule of thumb would be to:

  • Develop clear and concise standards, policies, and procedures applicable to all employees;
  • Implement methods to effectively train employees about standards, policies, and procedures;
  • Provide employees an avenue to anonymously report compliance concerns or possible misconduct; and
  • Ensure that management at all levels sets the proper tone by supporting adherence to all policies and procedures.

It may be somewhat cliché, but one bad apple can truly spoil a barrel. Creating a strong culture of compliance within a company can certainly help a contractor avoid the bad apples and other procurement potholes on the road to success.