Case Study: Overseas Contractor Bribed Official to Defraud the U.S. Government

GUEST BLOGGER

Eduardo Cuyos, CPA, CICA, DCFM3

A few years ago, I worked overseas as the director of internal audit and investigation. The organization’s headquarters had seven other support organizations to protect U.S. territory and resources. The director of the moral, welfare, and recreation (MWR) received funding from the federal government to take care of soldiers, civilian employees and their families for all recreational and morale booster activities. One of the latest programs was the Warrior Adventure Quest (WAQ) Program. WAQ was developed by the Army Medical Department; it is an Army RESET training tool designed to introduce soldiers to activities that serve as alternatives to aberrant behaviors often associated with accidents involving recently re-deployed soldiers. This tool presents coping outlets to help soldiers realize their own new level of normalcy after deployment and move on with their lives.

An investigation into fraudulent activities was turned over to me after three other independent investigators did not satisfy the leadership of the results. A joint team from the Defense Criminal Investigative Service (DCIS) and the Department of Defense Inspector General (DODIG) conducted the previous investigation prior to my involvement. The DCIS and DODIG did not pursue the investigation, as they only calculated a $25,000 fraud committed, which was below their threshold of $100,000. The DCIS and DODIG started their investigation in April 2015 up to the end of the fiscal year on September 30, 2015. A whistleblower came forward in March 2015 by one of the employees who worked side by side with the contractor and his staff in the same office at the MWR Director’s building.

How my team calculated $611K loss due to fraud

My team and I conducted research of the program and found out it started overseas in January 2013.  I requested information from the MWR director, a primary POC for the investigation, and the chief of finance and accounting department, whose office was in the headquarters. I requested three years (January 1, 2013–September 30, 2015) of computer/system-generated GPC purchases; all key supporting documents (KSDs), including vendors’ invoices and WAQ attendance rosters; and three years of GPC purchase journals from six geographically separated GPC cardholders. Boxes and boxes of KSDs arrived in our office and I distributed each year of transactions to three members of my auditor staff. I tasked them to examine each day of purchases and KSDs, then note discrepancies and suspicious transactions, and reconcile their Excel worksheets with the computer-generated printout and the journals from the six cardholders.

Data analytics is of utmost importance in any financial fraud investigation. Here were the major red flags:

Collusion and bribery between the MWR outdoor activities chief and the contractor were the major causes of fraud.

·        $110,024.93: In 2013, MWR chief of outdoor activities requested funding from San Antonio HQs in Texas for the paintball equipment and supplies in the amount of $110,024.93 EFT to the contractor’s local bank account. Upon examination of the contract, the contractor was personally responsible for the equipment set up and supplies.

·        $240,385.00: Group discount for WAQ outdoor activities typically costs $40 per sport and $50 for other sports. These sports included rock-climbing, bungie jumping, ATV, zipline, white water rafting, skiing and paintball. The contractor charged $60 and $70 per soldier attendee. Group discounts collected by the contractor for the three-year period totaled $240,385.00.

·        $168,595.95: The contractor and his staff were provided access to the soldiers’ database for all military, families, and Department of the Army (DA) civilian employees and their families. The contractor and his staff inflated attendees, forged signatures, or provided copies of attendance rosters and changed the dates of events, amounting to $168,595.95.

·        $73,351.01: GPC requests for payment that did not have any signed rosters totaled $73,351.01.

·        $18,959.52: Uncovering a number of ghost outdoor bus trips was the result of meeting a retired soldier, who was in the same building as our office, during a smoke break. I learned that for geographical bachelors (senior and junior enlisted soldiers without family with them and lived in the barracks), they cannot drive locally. So, the only transportation that is available is two MWR tour buses; the chief of transportation was directed to provide MWR trips for these soldiers. We received 257 PDF files, converted those files into 42 Excel pages , sorted by days and months, and reconciled that data with the Excel payments worksheet. A total of $18,959.52 in fake attendance rosters were paid, but there were no outdoor activities that took place on those dates.

A total of $611,316.41 in fraudulent payments was made to the contractor, which was way above the $25,000 calculated by the joint team of the DCIS and DoDIG, and far exceeded the $100,000 threshold.

Non-financial information (NFI) is as crucial as the financial information in fraud detection.

Here is some of the financial information that was crucial and highly contributed to the success of the investigation:

·        Location Set-Up: The chief of the MWR Outdoor Activities office was on the second level of the building. He had three staffers, and their office was on the first level. The contractor and his three staff were also located at the first level and worked side by side, so there was no segregation of duties and accountabilities.

·        The Appearance of Same Team: The contractor bought Starbucks coffee and breakfast pastries for all, treated all lunches occasionally and bought matching winter outfits for everyone.

·        MWR Chief Approved All GPC Requests for Payment: The contractor had all GPC requests approved by the chief. He had a handheld card reader and would go to all the different local national (LN) GPC cardholders and collect payments. LN cardholders had no choice but to pay the contractor as all GPC requests were already signed/approved by the chief. LNs did not question their authority.

·        Christmas Holidays: Most of the soldiers went home to their families during Christmas. However, the attendance rosters presented were the same number as during the summertime.

·        Summer vs. Winter: ATVs, white water rafting, zipline, and other sports are popular in summertime but not normally happening during wintertime. However, they were shown to have “occurred” during unusual times.

·        Trends and Patterns: We plugged in the fraud trend that started within three months of the program in 2013, which increased through the end of 2013, and peaked in 2014. Fraud significantly declined after the whistleblowing in March 2015. The joint investigation conducted by the DCIS and DoDIG teams covered the investigation after the whistleblower and did not start from the inception of the WQA program in January 2013.

In the above case, the detailed analysis of each financial transaction, the trend and pattern of the fraud activities, the time or season of the year for those outdoor activities, and the discovery of ghost bus outdoor movements from casual conversations were critical in the detection of fraud committed. The long hours of interviews with the whistleblower, employees, other MWR chiefs and the MWR director, as well as the help of the accounting and finance department staff and my team made it all a successful fraud investigation.

Eduardo “Ed” Cuyos, CPA, CICA, DCFM3, is an author of Principles of Financial Accounting Textbook, a 36-Year DoD Employee, who served 24 years of active duty in the military, 12 years as a DoD internal auditor and investigator. Formerly a full-time college accounting instructor and an adjunct faculty in the graduate school with the University of Phoenix.

SOURCE: ACFE Insights – A Publication of the Association of Certified Fraud Examiners