United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Administrative Oversight and the

Courts, Committee on the Judiciary,

U.S. Senate

September 1998 DOD PROCUREMENT

FRAUD

Fraud by an Air Force

Contracting Official

GAO/OSI-98-15

GAO United States

General Accounting Office

Washington, D.C. 20548

Office of Special Investigations

B-280720 

September 23, 1998

The Honorable Charles E. Grassley

Chairman, Subcommittee on Administrative

 Oversight and the Courts

Committee on the Judiciary

United States Senate

Dear Mr. Chairman:

This report responds to your request that we review the actions of Mark J.

Krenik, a former civilian employee of the U. S. Air Force, 7th

Communications Group, the Pentagon, who was convicted of submitting

false invoices and fictitious receiving reports for contractor services and

materials.1

 Specifically, you asked us to provide detailed information on

the scheme or schemes that Mr. Krenik used to commit fraud, including

the level of involvement by contractor staff. Mr. Krenik did not consent to

our request for an interview. Accordingly, the information contained in

this report is based on the testimony of others and an examination of

pertinent records. We agreed to also provide you a summary of internal

fraud cases involving the Defense Finance and Accounting Service (DFAS).2

The summary is included as appendix I.

In a separate report, GAO’s Accounting and Information Management

Division will (1) provide information on the history of the two contracts

associated with the schemes that Mr. Krenik used and (2) discuss

examples of internal control weaknesses that contributed to Mr. Krenik’s,

and similar instances of Defense-related financial theft.

Background Hughes STX had a contract with the Air Force to provide office

automation hardware, software, maintenance, training, and contractor

support services.3

 The July 30, 1986, contract award, in the amount of

1

In 1996, Mr. Krenik pleaded guilty to three counts of submitting false claims to the United States, was

sentenced to 3 years probation, and was required to pay restitution.

2

DFAS—established to improve Department of Defense financial management through the

consolidation, standardization, and integration of finance and accounting operations—took over

responsibility for 332 military installation finance and accounting offices in December 1992. Prior to

this, the Air Force District of Washington/Accounting and Finance Office processed invoices under the

contracts discussed in this report.

3

The contractor providing services for the Air Force’s Air Staff Automation Systems changed over

time. In July 1986, the contract was awarded to SASC Technologies, Inc., which later became ST

Systems Corporation (STX). When Hughes Aircraft (owned by General Motors Corporation) acquired

STX in October 1991, it became known as Hughes STX. Since the December 1997 merger of Raytheon

and Hughes Aircraft, the company has been referred to as Raytheon STX.

Page 1 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

$49.6 million, included options and modifications that extended

performance until December 31, 1991.

Effective January 3, 1992, the work performed by Hughes STX continued

under a separate contract. This contract required delivery of hardware and

software maintenance, technical support, and training; it resulted in

approximately $8 million in obligations through September 1996.

Mr. Krenik was the Contracting Officer’s Technical Representative4

 on

both Hughes STX contracts. He was authorized, among other functions, to

interpret the statement of work, direct the performance of contractor

efforts within the scope of the statement of work, accept deliverables,

control all government technical interface with the contractor, and

monitor contractor performance. A Technical Representative is authorized

to perform these functions only when they are exercised in a manner

consistent with the statement of work, terms and conditions of the

contract, and any delivery orders issued under the contract.

Results in Brief In the fall of 1992, Mr. Krenik successfully encouraged certain Hughes STX

employees to bill the government over $300,000 for services that were not

rendered. He then attempted to obtain these funds by directing Hughes

STX to pay a nonexistent subcontractor5

 for consulting services based on

a bogus subcontractor invoice that he supplied.6

 Had this scheme worked,

the government would have paid Hughes STX for work “performed” by the

fictitious subcontractor; and Hughes STX would have “reimbursed” the

subcontractor by sending the money to a post office box controlled by Mr.

Krenik.

When Hughes STX contract administration personnel learned of the

participation of Hughes STX employees in the billing incident, they

conducted an internal investigation and returned the government checks,

which the company had not negotiated, for the over $300,000 that had

been billed. However, they did not notify government authorities of either

4

The Technical Representative is not authorized to modify any contract terms nor to approve

expenditures beyond the funded amount of the delivery order.

5

Mr. Krenik told Hughes STX employees that the government had failed to pay the contractor for

consulting services and that Hughes STX would act merely as a conduit for reimbursement to the

contractor. At the time, Hughes STX employees were unaware that the contractor did not exist.

6

Mr. Krenik and Hughes STX staff were investigated by the U.S. Attorney, Eastern District of Virginia,

but were not charged in this scheme.

Page 2 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

the extent of the company’s involvement in the billing incident or the

bogus subcontractor invoice.

After Hughes STX employees refused to participate in the scheme

involving the bogus subcontractor invoice, Mr. Krenik executed another

plan in December 1992, without Hughes STX involvement, by which he

created and submitted 11 bogus invoices totaling over $500,000. In

January 1993, the Air Force issued payment checks for the invoices and

mailed them, unwittingly, to a post office box that Mr. Krenik had opened

in December 1992. Mr. Krenik’s theft was detected after officials of the

bank in which he had deposited the checks became suspicious of what

they considered to be unusually large transactions and reported them to

the U.S. Secret Service.

Mr. Krenik Attempted

to Defraud the

Government

Contractor Employees

Prepared/Submitted False

Invoices and Receiving

Reports

According to current and former contractor employees, in September 1992

Mr. Krenik asked Hughes STX management staff to bill the government for

work not yet performed by the company so that unobligated funds could

be used before the end of the fiscal year.7

 On October 14, 1992, using

specific instructions provided by Mr. Krenik, the Hughes STX Contract

Administrator8

—the individual responsible for invoicing—prepared five

false invoices, totaling $342,832.9

The five sequentially numbered Hughes STX invoices were dated

October 14, 1992, and provided the following details (see table 1) for the

product or services purportedly rendered and billed.

7

An appropriation cannot be used to purchase services or supplies that are not needed until after the

appropriation expires. A fiscal year appropriation may generally be obligated only to meet a legitimate,

or bona fide, need arising in the fiscal year for which the appropriation is made. The government’s

fiscal year ends on September 30.

8

In other documentation, this position was also referred to as Program Administrator.

9

Former Hughes STX employees who were involved in this transaction told us that they were following

Mr. Krenik’s specific instructions and did not realize at the time that preparation of these invoices was

illegal.

Page 3 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

Table 1: False Hughes STX Invoices

Dated October 14, 1992 Invoice number Description Price

921036 Principal programmer - 1,100 hours

@ $61/hour $67,100

Parts 31,393

Hourly maintenance 30,000

Maintenance PPM 700

921037 Training 27,412

921038 Principal programmer - 1,679 hours @ $61/hour 102,419

Parts 33,008

Hourly maintenance 30,000

921039 Technical assistance 10,400

921040 Technical assistance 10,400

Total $342,832

Source: Hughes Aircraft

On October 20, 1992, the Hughes STX Project Manager10 signed a DD-25011

—the Material Inspection and Receiving Report—for each invoice, falsely

indicating that Hughes STX had provided to the government the

materials/services itemized on the invoices. On the same date, Mr. Krenik

picked up the invoices and DD-250s at the Hughes STX office in Vienna,

Virginia.

Mr. Krenik signed the five DD-250s dated October 26, 1992, falsely

certifying the Air Force’s receipt of the materials and services, and

submitted the paperwork for payment. The government subsequently

processed the paperwork for all five invoices and paid three of them. The

accounting classification codes on the affiliated government vouchers

indicate that the funds used were from 1991 and 1992 appropriations.

Mr. Krenik Attempted to

Obtain the Money From

Hughes STX

Having caused the government to begin payment to Hughes STX for

services that it had not rendered, Mr. Krenik instructed Hughes STX

employees to make payment to a fictitious subcontractor, “Applied

Quantitative Systems” (AQS), for entirely different services.

10In other documentation, this position was also referred to as Program Manager.

11By signing this document, the contractor certifies that the items listed have been provided and are

ready for the government’s use. The government representative’s signature on the DD-250 certifies that

the items have been received from the contractor.

Page 4 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

On October 20, 1992, Mr. Krenik opened a McLean, Virginia, post office

box in the name of AQS.

Hughes STX received a memorandum dated October 14, 1992, (see fig.

1) from Mr. Krenik, instructing Hughes STX to order $500,000 in consulting

services from AQS and to bill $125,000 for “markup” (administrative

handling). Appended to the memorandum was the bogus AQS invoice (see

fig. 2). According to the former Hughes STX Project Manager, Mr. Krenik

told him that he wanted to apply work performed by AQS to the contract.

The former Project Manager told us that the incentive for Hughes STX to

participate in this was Mr. Krenik’s proposed 25-percent markup, i.e.,

$125,000.12

Specifically, Hughes STX was to bill the Air Force $342,832 for these

consulting services, using Hughes STX invoice numbers 921036 through

921040 (the same invoice numbers and the same dollar amounts as shown

in table 1, but for different services). Hughes STX was to bill the Air Force

the balance of the $625,000—$282,168—later in fiscal year 1993, after

determining a delivery order number.

As a result of Mr. Krenik’s October 14, 1992, memorandum and discussions

with Hughes STX management, the staff asked the company’s Contract

Administrator in early November 1992 to prepare an invoice to the Air

Force for the services purportedly provided by AQS. The Contract

Administrator prepared the invoice13 and subsequently advised the Hughes

STX Group Business Manager.14

12The then Project Manager and the then General Manager met to discuss the AQS invoice proposal,

decided that the proposed markup was too “steep,” and discussed lowering the markup amount.

13According to the Contract Administrator, the invoice was later destroyed.

14In other documentation, this position was also referred to as Manager, Contracts and Pricing.

Page 5 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

Figure 1: October 14, 1992, Memorandum for AQS Services

Page 6 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

Figure 2: Bogus AQS Invoice Dated October 1, 1992

Page 7 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

Hughes STX Management

Discovered and Canceled

the Transactions

The Hughes STX Group Business Manager became concerned about the

AQS invoice, which Mr. Krenik had attached to his October 14, 1992,

memorandum, because it appeared to be outside the scope of the

contract.15 Therefore, the Group Business Manager contacted the Director

of Contracting in Lanham, Maryland, and, on November 9, 1992, sent Mr.

Krenik’s October memorandum, along with the AQS invoice, to the Director

via facsimile. The following day, the Director of Contracting visited

Hughes STX in Vienna, Virginia, to discuss the AQS invoice. While there, the

Director learned of the billing for services not rendered (the five false

invoices), determining that the AQS invoice and the invoices for services

not rendered were improper and that corrective action was necessary.16

Over the next 2 weeks, Hughes STX senior management met to discuss the

false invoices.17 They determined that the Air Force had already processed

three (totaling $322,032) of the five invoices for payment. Reportedly, at

the request of Hughes STX, Mr. Krenik had the Air Force withdraw the

remaining two invoices (totaling $20,800). Had Hughes STX followed

through on Mr. Krenik’s instructions, it would have eventually billed the

government $625,000; sent AQS (Mr. Krenik) $500,000; and kept $125,000 as

markup.

On November 24, 1992, Hughes STX voided four U.S. Treasury checks (in

payment of three of the five invoices) totaling $322,032. On December 4,

1992, the Hughes STX Director of Contracting forwarded the four voided

checks to the Air Force. The memorandum (see fig. 3) accompanying the

returned checks indicated “that invoices . . . were prepared and submitted

improperly.” Hughes STX did not provide details to the government about

the AQS/advance billing issues or Mr. Krenik’s involvement.

15The AQS invoice was purportedly a bill to the Air Force District of Washington/Accounting and

Finance Office in the amount of $500,000 for “renewal subscription for legislative consulting and

analysis.” The Hughes STX contract called for the delivery of hardware and software maintenance,

technical support, and training.

16Hughes STX staff attempted to verify the existence of AQS with the telephone company and were

advised that there was no such listing.

17Mr. Krenik attended at least one of these meetings.

Page 8 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

Figure 3: December 4, 1992, Hughes STX Memorandum Concerning the Voided Checks

Mr. Krenik Defrauded

the Government

In a separate scheme, Mr. Krenik, without contractor involvement, falsely

invoiced the government for $504,941.19; received checks at his personal

post office box for the amount invoiced; deposited the moneys into

Page 9 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

accounts he controlled; and attempted to withdraw the funds. Suspicious

bank officials notified the Secret Service. After being contacted by the

Secret Service and in an attempt to conceal the fraud, Mr. Krenik wrote

two checks and forged a contracting official’s signature to an

accompanying letter, stating that the invoices had been the result of billing

errors.

On December 15, 1992, Mr. Krenik opened post office box 215 in Vienna,

Virginia, in his own name. On December 24, 1992, Mr. Krenik delivered to

the Air Force Finance Office 11 bogus invoices totaling $504,941.19.

Accompanying the invoices were the respective DD-250s, on which Mr.

Krenik had falsely certified that work had been performed and deliveries

made. Special instructions included on the invoices directed that

payments be remitted to ST Systems Corporation at the Vienna, Virginia,

post office box. The 11 invoices, the majority of which were dated

October 22, 1992, provided the following information (see table 2) for the

products or services purportedly rendered and billed.

Page 10 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

Table 2: Mr. Krenik’s 11 False Invoices

Invoice number Description (quantity ordered) Price

921051 Technical assistance $ 10,400.00

921052 Technical assistance 10,400.00

921053 Tempest serial mouse (23) 9,361.00

921054 Tempest serial mouse (4) 1,628.00

25-foot Tempest serial cable 142.00

921055 Tempest color monitor (2) 5,130.00

Tempest 386 CPU (2) 19,800.00

140 MB hard drive (2) 4,066.00

LIM EMS 4.0 (7) 252.00

Technical assistance 101.19

921056 Power 6/32 disk controller (1) 3,993.00

Installation 500.00

921058 Maintenance PPM 700.00

Hourly maintenance 19,000.00

Parts 5,835.00

921059 Training 27,250.00

921060 Principal programmer - 490 hours @ $61/hour 29,890.00

Hourly maintenance 24,800.00

Parts 29,275.00

921105 Technical support 28,600.00

Hourly maintenance 24,960.00

Parts 21,144.00

921106 Technical support 199,899.00

Hourly maintenance 13,954.00

Parts 13,861.00

Total $504,941.19

Source: U.S. Air Force

On January 19, 1993, the Finance Office approved the 11 invoices for

payment; and 3 days later, the checks were issued and mailed to post

office box 215.18 On February 4, 1993, Mr. Krenik deposited the $504,941.19

into two Maryland National Bank accounts he had opened using the

corporate names, Hughes STX and ST Systems.

18According to the accounting and finance certifying officer, it was policy at the time to make

payments to the company and address indicated on an invoice (regardless of what the computer

system indicated as the contractor’s address). In addition, the accounting technician who prepared the

payment packages told us that, at the time, many staff members had open access to the payment

system and were able to alter payment addresses.

Page 11 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

When Mr. Krenik attempted to withdraw $50,000 from one of the accounts

on February 8, 1993, the bank teller became suspicious and notified her

supervisor.19 Mr. Krenik was told that the recently deposited checks had

not cleared and he was allowed to withdraw only $500. The next day, he

tried to withdraw $503,000 from the accounts at another Maryland

National Bank branch and was advised that funds would be available in 2

days, on February 11, 1993.

On February 10, 1993, Maryland National Bank officials reported to the

Secret Service their suspicions of possible fraudulent negotiation of U.S.

Treasury checks. On February 11, 1993, in an interview conducted by the

Secret Service, the Hughes STX Vice President of Finance disavowed all

knowledge of the 11 invoices Mr. Krenik had submitted to the Air Force.

On February 12, 1993, investigators from the Secret Service and the Air

Force Office of Special Investigations (AFOSI)20 interviewed Mr. Krenik, at

which time he admitted to having received 11 Treasury checks at his post

office box and opening two accounts at Maryland National Bank from

which he attempted to withdraw the funds he had deposited. Finally, Mr.

Krenik gave written consent for investigators to search his vehicle.

Incriminating evidence was discovered during the search, and Mr. Krenik

declined to answer further questions.

On February 18, 1993, the 7th Communications Group, U.S. Air Force

received two checks totaling $504,941.19 (see fig. 4) and dated

February 11, 1993, to be drawn from Mr. Krenik’s corporate accounts at

Maryland National Bank.21 The letter (see fig. 5) accompanying the checks

(also dated February 11, 1993, and purportedly written by the Hughes STX

“Director of Contracting”) noted that the funds were being returned

because a review of past invoices had revealed overbilling errors. Mr.

Krenik, in an effort to conceal the fraud, had written the letter and forged

the Hughes STX Group Business Manager’s signature.

19The teller recognized Mr. Krenik as a long-time customer at that bank. She became suspicious

because previously he had never had that much money in his accounts.

20Because Mr. Krenik was a civilian employee of the Air Force, the Secret Service brought AFOSI into

the matter.

21These checks were not cashed. The moneys were returned to the U.S. Treasury after the case against

Mr. Krenik was adjudicated in 1996.

Page 12 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

Figure 4: Checks Dated February 11, 1993, Sent to U.S. Air Force by Mr. Krenik

Page 13 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

Figure 5: Bogus Letter Dated February 11, 1993, Accompanying the Checks

Corporate Internal

Investigation

After contact by the Secret Service, Hughes and its parent, General Motors

Corporation, conducted an internal investigation. We were advised that

the internal investigation of the Krenik matter revealed that Hughes STX

was not timely in notifying government officials regarding Mr. Krenik’s

bogus AQS invoice and the improper billing for services not rendered.

General Motors also determined that Hughes STX had been deficient in

providing its employees required ethics training, which includes

instruction on the prompt reporting of questionable or improper activities.

Methodology We conducted our investigation from October 1997 to August 1998. We

interviewed Air Force personnel and contractor staff who had knowledge

of the circumstances surrounding the Krenik matter. In addition, we

reviewed records maintained by the Department of Defense (Air Force

Page 14 GAO/OSI-98-15 DOD Procurement Fraud
B-280720 

contracting, AFOSI, and the Air Force Audit Agency); Hughes STX (now

Raytheon STX); the Department of the Treasury (U.S. Secret Service); and

the Department of Justice, Office of the U. S. Attorney, Eastern District of

Virginia. Mr. Krenik declined our request for an interview. During the

course of our investigation, we referred irregularities that we uncovered

regarding the Hughes STX contracts to the Defense Contract Audit Agency

and the Office of Inspector General, Department of Defense.

As agreed with your office, unless you announce its contents earlier, we

plan no further distribution of this report until 30 days after the date of

this letter. At that time, we will send copies of the report to interested

parties and make copies available to others upon request. If you have any

questions concerning this report, please contact me or Assistant Director

David Buckley at (202) 512-6722. Major contributors to this report are

listed in appendix II.

Sincerely yours,

Eljay B. Bowron

Assistant Comptroller General

 for Special Investigations

Page 15 GAO/OSI-98-15 DOD Procurement Fraud
Contents

Letter 1

Appendix I 

Examples of Fraud

Cases Involving the

Defense Finance and

Accounting Service

Between 1991 and

1998

18

Appendix II 

Major Contributors to

This Report

23

Tables Table 1: False Hughes STX Invoices Dated October 14, 1992 4

Table 2: Mr. Krenik’s 11 False Invoices 11

Figures Figure 1: October 14, 1992, Memorandum for AQS Services 6

Figure 2: Bogus AQS Invoice Dated October 1, 1992 7

Figure 3: December 4, 1992, Hughes STX Memorandum

Concerning the Voided Checks

9

Figure 4: Checks Dated February 11, 1993, Sent to U.S. Air Force

by Mr. Krenik

13

Figure 5: Bogus Letter Dated February 11, 1993, Accompanying

the Checks

14

Abbreviations

AIMD Accounting and Information Management Division

AQS Applied Quantitative Systems

DFAS Defense Finance and Accounting Service

GAO General Accounting Office

OSI Office of Special Investigations

Page 16 GAO/OSI-98-15 DOD Procurement Fraud
Page 17 GAO/OSI-98-15 DOD Procurement Fraud
Appendix I 

Examples of Fraud Cases Involving the

Defense Finance and Accounting Service

Between 1991 and 1998

Following are summaries of 13 cases of fraud involving the Defense

Finance and Accounting Service (DFAS). These case summaries from the

Defense Criminal Investigative Service, Air Force Office of Special

Investigations, and Naval Criminal Investigative Service exemplify the

types of internal crimes that have beset various Department of Defense

financial systems. The schemes usually entailed creating or altering

documents (e.g., claims, travel vouchers, invoices); forging signatures; or

establishing false accounts for fictitious people or companies. For the

most part, the perpetrators were able to receive funds by having checks

sent to post office boxes or street addresses the perpetrators controlled or

by having checks sent electronically to controlled bank accounts. In the

examples discussed, just over half of the crimes were discovered by

coworkers or other internal sources. Others were uncovered by external

sources and through internal control systems.

1. A military clerk in an accounting and finance office at Hanscom Air

Force Base (AFB), Massachusetts, embezzled more than $316,000 by

altering previously paid contractor claims and resubmitting them for

payment. The clerk obtained a fictitious business license and opened a

business bank account under the fictitious business name on the claim

forms. He had the claims checks sent to a post office box from which he

retrieved them and deposited them into the fictitious business bank

account. The clerk’s wife discovered the scheme and threatened to report

the theft. The clerk later confessed the embezzlement scheme to a

coworker. In September 1996, the clerk was convicted at a general

court-martial, receiving a dishonorable discharge and a 6-year prison term.

He was also fined $296,000.

2. A retired Navy chief petty officer and former Civil Service merchant

mariner served as a supply officer aboard Military Sealift Command ships.

Between January 1989 and December 1992, he defrauded the U.S. Navy of

over $3 million. He filed bogus invoices for materials allegedly supplied to

the Military Sealift Command by a company that did not exist. DFAS mailed

payments to a Norfolk, Virginia, post office box. His fraud was uncovered

when someone noted that shipments and services were going to

decommissioned ships. Indicted on 430 counts in 1994, he was sentenced

to 87 months in prison (without parole) and 180 months probation. He was

also ordered to pay $3,025,000 in restitution and $250 in a special

assessment.

3. A civilian accounting technician at Bolling AFB, Washington, D.C.,

embezzled approximately $32,000 by altering authentic travel vouchers.

Page 18 GAO/OSI-98-15 DOD Procurement Fraud
Appendix I 

Examples of Fraud Cases Involving the

Defense Finance and Accounting Service

Between 1991 and 1998

She changed the names and Social Security numbers (SSN) slightly, then

electronically transferred the funds to her personal bank account.

Individuals who had not been paid resubmitted their vouchers and were

paid, since records with the actual names and SSNs indicated

nonpayment. The scheme was discovered when an employee called to

complain about nonpayment of his travel voucher. Another technician saw

the similar name and SSN, connected the transaction to the perpetrator,

and informed law enforcement. When authorities investigated the

perpetrator’s transactions, they found a pattern of similar payments. In

December 1996, the accounting technician was convicted in federal court

and received 5 years probation. She made restitution amounting to $29,325

and voluntarily resigned her position.

4. On three occasions at the Air National Guard Station, Birmingham,

Alabama, a military comptroller fabricated payment vouchers using

fictitious contract numbers and fictitious contractor names, resulting in

$118,000 being sent to a bank account that the comptroller controlled. An

accounting technician uncovered the scheme when he noted a discrepancy

in the records. In January 1996, the comptroller was convicted in federal

court, ordered to pay $128,000 in restitution, and sentenced to 18 months

in prison.

5. A military supply clerk at the Norfolk, Virginia, Naval Station submitted

false claims to the Navy for supplies or services under the names of four

legitimate companies and one that he had registered for the purpose of his

fraud. All invoices were bogus, as no materials or services were ordered or

delivered. He was discovered when the Norfolk Police Department, which

was investigating him concerning the sale and/or possession of narcotics,

seized his computer and found bogus invoices. The Norfolk police

reported the matter to the Naval Criminal Investigative Service as a

possible fraud. In May 1997, the clerk was sentenced to 13 months

confinement and 2 years supervised-release probation. He was also

ordered to make full restitution of $83,576.63 to the Navy and to pay a $50

special assessment fee.

6. A military travel pay technician embezzled more than $17,000 on each of

three occasions at Kadena Air Base, Japan, for a total of approximately

$51,000. He obtained permanent change-of-station advances under a false

name by altering authentic travel orders, thus generating standard travel

advance requests. The technician possessed the necessary passwords to

authorize each advance and have them sent electronically to the

technician’s bank account. A civilian technician discovered the false travel

Page 19 GAO/OSI-98-15 DOD Procurement Fraud
Appendix I 

Examples of Fraud Cases Involving the

Defense Finance and Accounting Service

Between 1991 and 1998

orders, and the matter was referred to law enforcement. A review of

documents at the military technician’s former duty station disclosed that

the technician had committed fraud at that location as well. In June 1996,

the technician was convicted at a general court-martial and received a

dishonorable discharge. He was sentenced to 36 months in prison, was

reduced in rank, and paid $10,000 in fines and $48,000 in forfeiture.

7. It is alleged that a finance office technician—at Bolling AFB—attempted

to embezzle at least $22,800 by filing a fraudulent travel voucher under a

fictitious name and having the funds sent to the technician’s bank account.

The technician asked a coworker to input the voucher. The coworker

thought the request was strange and reported it to a supervisor. The

supervisor failed to recognize the voucher’s fraudulent nature and

proceeded with its processing. DFAS rejected the voucher due to an error in

the electronic filing transfer address. The supervisor sent two letters to the

address on the voucher to notify the claimant of the problem. Both letters

were returned, marked “Return to Sender, No Such Street.” The supervisor

forwarded the voucher to DFAS twice more; DFAS finally processed a check

for payment and attempted to send it to the address with the same results

as above. A source notified law enforcement of the unusual transaction.

The case is pending adjudication.

8. Between December 1991 and August 1993, sixty-two unauthorized

payments, totaling approximately $271,000, were fraudulently issued and

cashed by two employees of the DFAS Indianapolis, Indiana, Center.

Checks were issued in the names of various U.S. military retirees but were

sent to addresses controlled by the two perpetrators. The checks were

forged and negotiated using false identification at various check-cashing

establishments. Subsequently, the two employees recruited others to

participate in the fraud scheme. The checks made payable to the recruited

individuals were negotiated at banks, and the recruits received a

percentage of the proceeds. A complaint from a retiree who questioned

the income amounts that the military had reported to the Internal Revenue

Service triggered a review of payment operations. The investigation

resulted in the conviction of 12 individuals for theft of government funds.

The sentences ranged from probation to 18 months incarceration.

Approximately $80,115 was recovered.

9. Between 1994 and 1997, a military member and a private citizen

allegedly embezzled approximately $938,000 from the DFAS Dayton, Ohio,

Center. The military member was a supervisor of data entry personnel in

the vendor pay section and allegedly created fraudulent invoices and

Page 20 GAO/OSI-98-15 DOD Procurement Fraud
Appendix I 

Examples of Fraud Cases Involving the

Defense Finance and Accounting Service

Between 1991 and 1998

checks made payable to the private citizen. They then allegedly divided the

proceeds. A technician who had no part in the scheme noticed a check

made out to the private citizen for $210,000 when she was trying to

discover the source of an automated input error. The check was

suspicious, as it was for a large amount made payable to an individual

rather than a business and the transaction did not match a valid contract.

The private citizen pleaded guilty to one count of conspiracy to steal

government funds, but no sentencing date has been set. The military

member was found guilty of attempted larceny, conspiracy, and violation

of Article 134 of the Uniformed Code of Military Justice and was sentenced

to 12 years in prison.

10. Between October 1994 and April 1997, a military pay supervisor and a

private citizen at Fort Myer, Virginia, schemed to embezzle approximately

$169,000 of government funds. The supervisor established a payroll

account in the name of a fictitious military member. The supervisor used

the ghost payroll account22 as a basis for issuing 57 electronic fund

transfers to bank accounts controlled by the perpetrators. Sources outside

DFAS reported the scheme. The supervisor pleaded guilty to theft of

government funds and was sentenced to 21 months incarceration, 3 years

probation, and $168,872 in restitution. According to the Department of

Defense’s Inspector General report, had responsible DFAS employees

followed established procedures by comparing payroll information to

personnel data on a monthly basis, they could have detected the fraud

themselves.

11. In late 1995, a civilian employee of the DFAS Cleveland, Ohio, Center

diverted $11,000 by using electronic funds transfers to a bank account

controlled by the employee and an accomplice. The employee diverted

military retirement benefits by issuing two separate “one-time credit”

allotments, thus triggering the electronic transfer. The employee withdrew

the diverted funds. The fraud was discovered as a result of a DFAS internal

control that automatically generated reports on payments over a

predetermined amount. When the report was reviewed, DFAS personnel

questioned the payments. The employee was convicted of embezzlement

and making false statements and was sentenced to 1 year and 1 day

incarceration, 3 years probation, restitution of $6,520, and a special

assessment of $100. The accomplice pleaded guilty to aiding and abetting

the theft of government funds and was sentenced to 6 months home

22In July 1993, we testified that the Department of Defense had not responded effectively to many

long-standing problems, including those involving ghost employees. (Financial Management: DOD Has

Not Responded Effectively to Serious, Long-standing Problems, GAO/T-AIMD-93-1, July 1, 1993)

Page 21 GAO/OSI-98-15 DOD Procurement Fraud
Appendix I 

Examples of Fraud Cases Involving the

Defense Finance and Accounting Service

Between 1991 and 1998

confinement, 3 years probation, restitution of $1,200, and a special

assessment of $50.

12. Between October 1994 and January 1996, a civilian DFAS accounting

technician embezzled $28,940 in funds from DFAS - Tinker AFB, Oklahoma.

The technician falsified educational expense vouchers using his wife’s

name as the payee and his own mailing address. The technician attached

used copies of supporting documents from legitimate vouchers to support

the fraudulent vouchers, knowing the certification official would not verify

the expenses or the identity of the claimant. The technician cashed the

checks and used the proceeds to pay debts. The scheme was discovered

after a confidential source provided information to law enforcement. The

technician pleaded guilty to one count of mail fraud and was sentenced to

90 days incarceration and 5 years probation. He was required to pay

$29,990 in restitution and a special assessment.

13. In 1991, two military members assigned to the DFAS Indianapolis Center

conspired with seven individuals to receive approximately $37,000 in

fraudulent benefits paid to beneficiaries of military personnel killed during

Operation Desert Storm. One military member created the necessary

paperwork within DFAS to issue a check against the accounts of deceased

U.S. service members. The other military member recruited seven

individuals to receive the fraudulent checks. These seven individuals each

received a minimal portion of the proceeds for facilitating the

embezzlement. The scheme was discovered as a result of an anonymous

call to law enforcement. Four members of the scheme, including the two

military members, were indicted and convicted of theft of government

funds and sentenced to up to 6 months “community confinement” and 3

years probation. They were ordered to pay up to $16,350 in restitution and

special assessments. The remaining participants who had been implicated

in the scheme were not prosecuted in exchange for their cooperation.

Page 22 GAO/OSI-98-15 DOD Procurement Fraud
Appendix II 

Major Contributors to This Report

Office of Special

Investigations,

Washington, D.C.

David B. Buckley, Assistant Director for Defense and National

 Security Investigations

Richard C. Newbold, Senior Special Agent

Jim Locraft, Special Agent

Karen Coles, Special Agent

Barbara W. Alsip, Communications Analyst

M. Jane Hunt, Senior Communications Analyst

Office of the General

Counsel, Washington,

D.C.

Barbara C. Coles, Senior Attorney

(600450) Page 23 GAO/OSI-98-15 DOD Procurement Fraud
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