Insights & Reports > Kroll Global Fraud Report

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V.J. Bustos

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Recent incidents of fraud in public contracting in the United States have shown that concerns over corruption are often justified. April 2009, for example, saw corruption and conflicts of interest being unmasked at a rapid rate:

• On April 2, in the most prominent example, the official federal indictment of former Illinois Governor Rod Blagojevich on sixteen counts of racketeering, fraud, and extortion was issued.
• On April 7, former Tulsa, Oklahoma Public Works Department employee Larry Wayne Baker admitted that he paid a US$9,000 bribe to a department manager to influence the awarding of an inspection contract.
• On April 21, federal charges were filed against Brian F. Dunn, a longtime Wilkes-Barre, Pennsylvania School District board member. Dunn allegedly accepted tens of thousands of dollars in kickbacks in exchange for his clout in awarding contracts and hiring teachers.
• On April 26, the Chicago Tribune reported that Southern Illinois University trustees would approve a new conflict of interest policy after it was discovered that Roger Tedrick, the university’s board chairman, had voted to approve twenty contracts above US$250,000 to construction companies that purchased insurance from him.

This may be only the beginning: the combination of a significant recession and the federal government stimulus program to fund public projects create ideal conditions for contracting corruption. Even with anti-fraud provisions in the American Recovery and Reinvestment Act of 2009, such as whistleblower protection for employees of government contractors, the potential for corruption remains high. In particular, consumer groups and lawmakers have expressed their concerns about the large amount of stimulus funding directed to state and local governments. Some states have established watchdog agencies specifically dedicated to providing oversight of this money.

Companies with public contracting business must be vigilant to ensure that they are participating in a legitimate, competitive bidding process free of conflicts of interest. If they have concerns about this, there are remedies that they can pursue.

In one instance, a client came to Kroll after losing a major local contract. The company had successfully won and performed contracts with a particular government agency in previous years, and became suspicious after learning that its proposed total fee for a multi-year renewal was just one cent more than that of the winner’s bid. It expressed its concerns to the agency itself, but needed to demonstrate a reason for suspicion of fraud in order to get the decision overturned. The client therefore sought Kroll’s assistance in determining how the winner had come up with the fees in its bid.

Determining whether a payoff had occurred, or if the winning bidder had received inside information, constituted a challenging task. Kroll used the state’s open records law and its Freedom of Information Act to request hundreds of pages of documents related to the bidding process. These papers helped create a profile of the decision makers at the government agency, and of the individuals behind the company that had “stolen” the client’s contract. Other tactics included source inquiries with both industry trade publications and local media. The investigation eventually identified loose connections between a particular government official and an executive of the winning bidder. While the evidence may not have been strong enough to prove that the bidding had been corrupted, Kroll’s work helped the client raise more questions about the process and prepare a challenge to the award.

Government spending has always drawn fraudsters, and the current wave of stimulus spending will only add to the attraction. Companies with concerns over the contracting process, however, should not feel helpless. There are multiple avenues to pursue and agencies with which to consult in order to address any suspicions of fraud. The only alternative to taking action is to let the cheaters win.

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V.J. Bustos is an analyst in Kroll's San Francisco office. Prior to joining Kroll, he served as research director for a political consulting firm. He holds a B.A. in Political Science from the University of Chicago.

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