The government relies heavily on private sector companies to perform functions, acquire supplies, complete projects, etc. Government procurement involves the process by which governments acquire goods, services, and works from third parties.
This complex process typically involves awarding contracts based on bids. Strict regulations and transparency requirements govern it to ensure fairness, competitiveness, and the best value for taxpayer money. Unfortunately, the intricacies of procurement procedures can also provide opportunities for fraudulent activities.
Simply put, procurement fraud is the unlawful manipulation of a procurement process to acquire contracts, goods, or services or to obtain an unfair advantage.
Many schemes for procurement fraud include price fixing, defective pricing, bid rigging, kickbacks, collusion between bidders, false claims, and fraud during bid evaluation or contact negotiations.
Post-contact procurement fraud includes false invoicing, cost mischarging, accounting fraud, certification fraud, and manufacturing fraud, such as nonconforming material and missing volumes of material.
These schemes may affect the bidding process and the awarding of a contract or include fraud after a contract is awarded.
Fraudulent behavior by a vendor might result in the buyer not receiving the product or service intended or at the agreed price. When government contracts are at issue, fraud might preclude the fairness of the process to other vendors.
Procurement fraud can occur before or after a contract is awarded. Perpetrators could include the vendor, an employee, or a group of vendors and employees working together.
Government procurement fraud is a serious offense that carries significant legal consequences. Unlike other types of fraud, it pertains explicitly to fraudulent activities related to the government's procurement of goods, services, or construction works. Let's look at the most common ways procurement fraud can occur.
Bid Rigging
Bid rigging, one of the most common forms of procurement fraud, occurs when businesses conspire to control the competitive bidding process. Bid-rigging is a fraudulent scheme to collude and change the pricing of bids governments receive. This can manifest in several ways, including:
- Collusive bidding: Competitors who will win the bid agree in advance, often rotating the winner to appear fair while maintaining inflated prices.
- Bid suppression: Some parties agree not to bid or to withdraw their bid to ensure a specific bidder wins.
- Complementary bidding: Companies intentionally submit high bids to make a pre-selected bid more attractive.
Bid rigging not only undermines the integrity of the procurement process (often robbing other companies of the chance to bid fairly) but also leads to increased costs for the government and, by extension, the taxpayers.
Price Fixing
Price fixing is another collusion in which businesses agree to set their prices at a certain level, often above market value. This can occur with or without a formal agreement and is particularly concerning in government procurement, where competition is supposed to drive prices down.
Simply put, price-fixing is a type of collusion between parties that affects the pricing of a good or service. Vendors or contractors can use price-fixing to raise the price governments and, thus, taxpayers pay for public goods.
Price fixing can result in inflated contract costs for the government, which can lead to the waste and misuse of taxpayer funds. Common examples of price fixing include:
- Competing contractors agree to increase their prices or eliminate discounts.
- Contractors agree to freeze prices at certain thresholds.
- Agreement among contractors to follow the same pricing criteria.
False Claims
Submitting false claims involves making dishonest statements or representations about a product or service's quality, origin, or price. This fraud can lead to the government purchasing substandard goods or services or paying more than it should. Examples of false claims include:
- Overcharging: Billing for more than the provided goods or services are worth or billing for premium goods but providing inferior substitutes.
- Charging for undelivered services: Billing for services not rendered or goods not supplied.
- Misrepresenting costs: Falsely inflating costs or expenses to increase the contract value.
Conflicts of Interest
Conflicts of interest in government procurement can lead to unfair advantages and compromised integrity in the bidding process. This type of fraud occurs when an individual involved in the procurement process (e.g., a government official) has a personal stake in a bidding company or stands to gain personally from the contract award. Examples include:
- Undisclosed relationships: Failure to disclose a personal relationship or financial interest in a company bidding for a contract.
- Favoritism: Biased decision-making that benefits a particular contractor with whom the official has ties, often at the expense of the government or other bidders.
Kickbacks and Bribery
Kickbacks and bribery involve offering, giving, receiving, or soliciting something of value to influence the actions of an official in the procurement process. Examples include the following:
- Kickbacks: A portion of the contract value is returned to a government official in exchange for favoritism in the contract award process.
- Bribery: The contractor or an individual makes direct or indirect offers of money, gifts, or services to government officials to influence procurement decisions.
Both practices distort fair market competition and result in suboptimal outcomes for the government and its citizens.
Product Substitution
This type of fraud occurs when a supplier delivers goods that are inferior to those specified in the contract. Simply put, product substitution fraud is the willful substitution with the purchaser's knowledge of an inferior, used, or counterfeit product that does not meet contract specifications.
Product substitution costs state and local governments billions to replace inferior goods. Product substitution can include:
- Inferior quality: Delivering goods of a lower quality than those agreed upon may not meet the required standards or specifications.
- Counterfeit products: Supplying fake products that are often of inferior quality and can pose safety risks.
- Unauthorized substitution: Replacing specified products with cheaper alternatives without government approval.
Product substitution undermines the value and integrity of government contracts and can have serious safety implications.
What Are the Legal Consequences and Proceedings?
Individuals and companies accused of government procurement fraud face potentially serious legal consequences, including hefty fines, restitution, and sometimes criminal charges.
The severity of these penalties depends on the nature and extent of the fraud, the individual's involvement, and whether the individual has any prior convictions.
Suppose you or your company is accused of one of the above types of government procurement fraud. In that case, the best way to combat the allegations and minimize the damage is by hiring an experienced federal criminal defense attorney with experience in these types of cases. Contact our law firm for more information. Eisner Gorin LLP has offices in Los Angeles, California.
Related Content:
