DOD Procurement: Use and Administration of DOD's Voluntary Disclosure Program
Released: 1996-02-14T00:00:00

Letter

Background

In 1986, a report to the President on defense management concluded that the defense industry needed to promote principles of ethical business conduct, detect acts of procurement fraud through self-governance, and voluntarily report potential fraud to the government. The report noted that DOD awarded contracts worth about $164 billion in 1985, 70 percent of which went to a group of 100 contractors. Twenty-five contractors reportedly did business of $1 billion or more, 147 contractors did $100 million or more, and almost 6,000 contractors did $1 million or more. In fiscal year 1994, the number of contractors doing business with DOD did not substantially change. Total DOD contracting for goods and services over $25,000 in fiscal year 1994 amounted to $118 billion.

In response to the 1986 report, a number of defense contractors established self-governance programs that included monitoring compliance with federal procurement laws and voluntarily disclosing violations to government authorities. These efforts became known as the Defense Industry Initiative on Business Ethics and Conduct.

To facilitate contractor self-governance and to encourage contractors to adopt a voluntary disclosure policy, DOD established the Voluntary Disclosure Program in July 1986. This program provides general guidelines, policy, and processes to enable DOD and its contractors to address matters of wrongdoing the contractors discover. At the time, DOD recognized that there was a need for a process to deal in a consistent manner with matters disclosed by contractors. In return for voluntarily disclosing potential wrongdoing and cooperating in any government audit and investigation, the government generally allows a contractor to conduct its own investigation, which the government then attempts to verify expeditiously.

Upon receipt of an initial contractor disclosure, the DOD Inspector General’s office (1) makes a preliminary determination as to whether the disclosure satisfies the program’s requirements, (2) coordinates the execution of the standard voluntary disclosure agreement, (3) assigns the disclosure to a DOD criminal investigative organization for verification and to a suspension and debarment authority, and (4) coordinates the disclosure with the Justice Department for potential civil and criminal action.

The Justice Department reviews all voluntary disclosures. It conducts, either through its Defense Procurement Fraud Unit or through referral to the appropriate U.S. Attorney’s Office, a preliminary inquiry to determine if there is credible evidence suggesting prosecutable violation of federal laws. The Justice Department has sole responsibility to initiate or decline prosecution. It also has an opportunity to concur in the voluntary disclosure agreement between the contractor and DOD.

Acceptance of a voluntary disclosure into the program by DOD is based on four criteria. The contractor voluntarily disclosing the potential fraudulent action must (1) not be motivated by the recognition of imminent detection, (2) have status as a business entity, (3) take prompt and complete corrective actions, and (4) fully cooperate with the government in any ensuing investigation or audit.

Defense Contractor Participation in the Program

The number of voluntary disclosures under the program has been relatively small and the dollar recoveries have been modest. From its inception in 1986 through September 1994, DOD reported that 138 defense contractors made 325 voluntary disclosures of potential procurement fraud, of which 129 have been closed. According to DOD, 48 of the top 100 defense contractors made 222 disclosures. The remaining 103 disclosures were made by 90 contractors from among the more than 32,000 contractors doing business with DOD. Many contractors were one-time users, but one large contractor accounted for 23 of the closed cases. Figure 1 shows the annual number of disclosures reported since the program’s inception.

Acceptance into the program has its benefits for contractors. For example, a contractor can expect (1) its liability in general to be less than treble damages, (2) action on any suspension to be deferred until after the disclosure is investigated, (3) the overall settlement to be coordinated with government agencies, (4) the disruption from adversarial government investigations to be reduced, and (5) the information may be kept confidential to the extent permitted by law and regulation.

The program also benefits the government. For example, DOD commented that the existence of a structured format for addressing contractual and legal violations encourages contractor ethics and internal review programs. The Justice Department pointed out that the program promotes corporate compliance with laws and regulations.

DOD/Justice Department Disagree on Some Admissions Into Program

According to DOD, the key to deciding if a disclosure is voluntary is whether a contractor was aware of information the government possessed or was about to discover, thus motivating the contractor to make a disclosure. In a 1992 DOD review of the program, DOD noted cases in which it had determined that contractors’ disclosures were eligible for admission into the program, but the Justice Department disagreed and recommended that the disclosures not be admitted into the program.

In 1992, when this disagreement was noted, the Justice Department proposed that it and DOD establish a working group to resolve the issue. To date, we were told, this has not occurred.

According to officials from the two departments, disagreements continue over whether some disclosures should be admitted into the program. In fact, two of the three cases that were the basis of the concerns reflected in the 1992 review remain in the program as open cases, and the Justice Department still has not concurred with DOD’s acceptance of these disclosures into the program. The disagreement between the two departments revolves around whether disclosures were triggered by knowledge of imminent discovery by the government. In this regard, DOD believes that it is its prerogative, not the Justice Department’s, to accept or reject a contractor’s voluntary disclosure.

DOD stated that it did not always agree with the Justice Department on whether a company should be admitted into the program. However, DOD stated that it and the Justice Department have worked well together in resolving the questions on a factual basis and that this cooperation has grown significantly over the last 2 years. DOD stated that the DOD Inspector General staff and representatives of the Defense Procurement Fraud Unit meet every 6 weeks to discuss the status of disclosures. During our review, we were told that these meetings were to resolve cases that had been open for an extended period, not to address whether disclosures should be accepted into the program.

DOD-Reported Recoveries Overstated

Through September 1994, DOD reported recoveries from the program of about $290 million, of which about 38 percent is associated with cases that are still open. The $290 million represents about 17 percent of the Justice Department’s $1.7 billion in reported settlements on DOD procurement fraud cases between fiscal years 1987 and 1994.

While the value of the voluntary disclosure program may well extend beyond the amount of dollar recoveries, we note that most disclosures did not result in significant dollar recoveries for the government. Of 129 closed cases, 81 cases, or about 63 percent, had reported recoveries of less than $100,000, of which 52 cases, or 40 percent, had no dollar recoveries. Forty-eight cases had reported recoveries of $100,000 or more, of which 15 cases had reported recoveries of $2 million or more. Figure 2 shows the distribution of DOD-reported dollar recoveries for closed cases.

The $290 million attributable to the program is overstated because it includes an amount that should not be considered a recovery from the program, as well as amounts related to disclosures made prior to the formal initiation of the program. The reported recoveries include (1) $75 million representing a contractor’s premature billings of progress payments and (2) recoveries from voluntary disclosure cases that predated the beginning of the program by up to 2 years. One case was closed before the program began.

With regard to the progress payments, both the contractor’s disclosure report and the government’s subsequent investigative report showed the contractor prematurely billed the government by about $75 million. The Justice Department commented that the contractor then withheld approximately $75 million in billings at the time of the voluntary disclosure to rectify the premature billings. However, since DOD subsequently paid the contractor in full the amounts due under the contract, we believe the $75 million should not be claimed as a program recovery.

DOD considers the submission of a claim for unearned progress payment to be a false claim and thus appropriate for reporting under the program. The Justice Department commented that there was no “recovery” of $75 million and that the government was damaged by the interest lost on the premature payments, the amount of which was included in the final settlement with the contractor. In our view, a recovery properly attributable to the voluntary disclosure program would be the interest cost on the $75 million premature payment.

For 14 cases that predated the program, the DOD official responsible for the program told us that in 8 cases, although the disclosures predated the program announcement letter to industry, agreements were signed after the announcement and recoveries were resolved under the program. He said recoveries were made in three other cases after the program began. The DOD official believes, therefore, that these 11 cases were appropriately included in the program. However, he agreed that recoveries related to the three remaining cases should not be attributed to the program and indicated that DOD would reduce its reported recoveries—about $900,000—for these three cases.

Voluntary Disclosures Take an Average of 2.8 Years to Complete

For closed cases, DOD records show that it took an average of 2.8 years to complete a voluntary disclosure case, with about 25 percent taking over 4 years. DOD records also show that the contractors’ investigation took about 21 percent of the time and that the federal audit/investigation took about 52 percent of the time. Figure 3 shows the time to complete the closed cases.

More than half the disclosures made since the program began are still reported as open. As of September 30, 1994, there were 173 open cases that have been open an average of 3.5 years. Twenty-nine of 44 cases disclosed in fiscal year 1990 and 13 cases disclosed in fiscal year 1987, the first full year of the program, were still reported as open. Further, the open case load is growing. The number of open cases at the end of fiscal year 1994 was greater than it was at the end of fiscal year 1990, despite a decline in the number of disclosures over the past 4 fiscal years. A Justice Department official suggested that some open cases may have been completed but not shown as closed in DOD’s records. Between October 1994 and the end of June 1995, only 2 cases were closed while 15 were accepted into the program.

Contractor Cooperation May Be a Problem in Some Cases

A Justice Department official responsible for the program commented that not all contractors fully cooperate with the government and that this is one factor that makes investigations a time-consuming process and delays settlements. The official stated that few companies provide the government all its witness interview memoranda and that fewer still agree to provide the government a “road map” of the cases, believing that they are not obliged to serve as the government’s investigator. According to this official, companies making voluntary disclosures tend to provide more assistance in a government investigation when the potential business and legal risks to the contractor are greater or when they want to give the impression that the company is turning over “a new leaf.”

Our review identified two instances of less than full contractor cooperation. In one case, the company official destroyed records related to its disclosure. According to DOD, this company was successfully criminally prosecuted and fined, the official was sentenced to jail, and the company was debarred. The government’s investigation took 13 months, according to DOD information. In the other case, the contractor denied documents to government investigators, and the DOD Inspector General ultimately issued a subpoena to obtain the information. The government’s investigation took about 5 years, according to DOD information. The Justice Department said that the investigation included not only the disclosure but an additional series of allegations made in the related qui tam case, which was filed almost simultaneously with the company’s report. DOD officials considered removing this contractor from the program due to lack of cooperation but did not.

The DOD official responsible for the program, however, stated that while there have been instances of less than total, or in a few cases very little, cooperation, they have been the exception rather than the rule. He added that disclosing a wrongdoing, conducting an internal investigation, and providing an internal investigative report without resorting to subpoenas or grand juries, were far more cooperative than would be present in any adversarial investigation.

Case Management Is a Low Priority

To ensure that each case is processed adequately and expeditiously, DOD guidelines require the investigative agencies to prepare a case progress report every 90 days summarizing the ongoing investigation and discussing case management issues, such as the status of the investigation and the level of contractor cooperation, and to forward the report to the DOD program manager. DOD also requires the investigative agencies to schedule a meeting with other appropriate program officials, such as those from the Justice Department and other DOD criminal investigative agencies, within 14 days of the progress report. The purpose of the meeting is to review the status of the case and determine what more needs to be done on each open investigation.

According to the DOD program manager, investigative agencies are not systematically sending in the progress reports, and, in some cases, the reports that are submitted do not meet the program’s reporting requirements. Further, he told us that the meetings are not taking place because staffing is limited and priority is given to new cases over open cases. He also said DOD had not been following up to ensure that the DOD requirements were met and cases were handled expeditiously.

Most Disclosures Were for Contract Mischarging and Product Substitution

According to DOD data, the most frequent violation types disclosed were for contract mischarging and product substitution. Contract mischarging is applying material or labor charges to the wrong contract; product substitution is delivering products other than those specified in the contract. Other disclosures dealt with violations relating to overpricing of contracts negotiated under the Truth in Negotiations Act, false claims or statements, and excessive progress payment. Table 1 shows the number and types of violations disclosed for the closed cases.

Little Overlap Exists Between Qui Tam Actions and Voluntary Disclosures

In 1986, the False Claims Act was amended to increase the qui tam relator’s share of recovery in fraud settlements. Since that time, DOD procurement-related qui tam actions have steadily increased, while voluntary disclosures have decreased. Figure 4 shows the number of DOD-related qui tam actions filed and the number of DOD voluntary disclosures made since 1987. While the increase in qui tam actions may be related to the increase in a relator’s share of the recovery, we found no data to explain the decrease in disclosures.

There is little overlap between voluntary disclosures and related qui tam actions. For the 129 voluntary disclosure cases closed since the program began, only 4 involved qui tam actions. In one case we examined, the government benefited because the qui tam action (1) provided a road map essential to the government’s case, (2) identified additional fraudulent activity, and (3) increased the amount of money recovered by the government.

According to a DOD official, some contractors claim that the threat of a qui tam action might discourage voluntary disclosures because the company’s investigation creates potential qui tam relators as more employees become aware of the potential fraud. He added that a contractor runs the risk of an employee filing a qui tam action before it can complete its investigation or even adequately define the issue to make a sufficiently complete voluntary disclosure for acceptance into the program. On the other hand, this DOD official remarked that other contractors indicated they would make disclosures in spite of possible qui tam actions. Other reasons cited for a contractor not making a voluntary disclosure include (1) contractor management conflicts between disclosing potential fraud to the government and the contractor’s perceived duty to protect stockholder value; (2) contractor uncertainty of prosecution outcome from disclosing potential fraud; (3) the high cost of internal investigations, which is usually stipulated to be an unallowable cost for government reimbursement purposes; and (4) differences between contractor disclosure policies and its practices.

According to an official in the DOD Inspector General’s office, voluntary disclosures and qui tam actions complement each other and qui tams act as a “check and balance” to the program and contractor honesty.

Agency Comments

In commenting on a draft of this report, DOD emphasized that the program generates positive results and is clearly in the government’s best interest. DOD’s comments are presented in their entirety in appendix I, along with our evaluation of them.

The Justice Department said that it is committed to the program and that the program has been remarkably effective in nurturing business honesty and integrity and in bringing good new cases to the government’s attention. It believes the program to be a model for government voluntary disclosure programs. The Justice Department’s comments are presented in their entirety in appendix II, along with our evaluation of them.

Scope and Methodology

We reviewed overall statistical information on the program’s accomplishments, as well as information on qui tam actions and their relationship to voluntary disclosures. We also reviewed limited information on one of four qui tam cases. In addition, we talked to experts inside and outside of the government on the program’s merits and on its relationship to qui tam actions. We performed limited tests of the data reviewed and found some inaccuracies. Thus, while we have concerns about the reliability of the data, it represents the only source of comprehensive information on the program’s accomplishments other than individual case files.

DOD and Justice Department policies and practices prevented our access to open voluntary disclosure case files. Our access to closed case file information was also limited when, according to Justice Department officials, it contained information covered by rule 6(e) of the Federal Rules of Criminal Procedure, which governs secrecy requirements of grand jury proceedings. As a result, the Justice Department would not provide us with the bulk of several closed case files we initially selected for review. Furthermore, according to the Justice Department, some of the documents in two of three closed cases we selected for initial review were unavailable because of a court-imposed protective order in one case and a confidentiality agreement between the U.S. Attorney’s Office and the company in the other case. We conducted our review from May 1994 to July 1995 in accordance with generally accepted government accounting and auditing standards.

Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the Secretary of Defense; the Attorney General, Department of Justice; the Director, Office of Management and Budget; and other interested congressional committees. Copies will also be made available to others upon request.

Please contact me at (202) 512-4587 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix III.

Comments From the Department of Defense

The following are GAO’s comments on the Department of Defense’s (DOD) letter dated October 13, 1995.

GAO Comments

“The number of current investigative cases and resulting recoveries of money to the Government and convictions of defense contractors being conducted by the Defense Criminal Investigative Service shows that fraud is still increasing. The Federal Bureau of Investigations statistics shown for the United States substantiate the same trend. Losses due to fraud are approximately $200 billion a year.”

Although our report notes that the program represented about 17 percent of the Justice Department’s $1.7 billion in reported settlements on DOD procurement fraud cases between fiscal years 1987 and 1994, actual program recoveries were a matter of disagreement. 3. We modified the report’s text to incorporate DOD’s comments. 4. We continue to disagree with DOD on reporting the $75 million in premature progress payments as a recovery of the program since the amount was ultimately paid to the contractor. 5. We modified the report’s text to incorporate DOD’s comments. 6. We modified the report’s text to incorporate DOD’s comments. 7. We modified the report’s text to incorporate DOD’s comments.

Comments From the Department of Justice

The following are GAO’s comments on the Department of Justice’s letter dated October 11, 1995.

GAO Comments

1. We do not make the conclusion that the Voluntary Disclosure Program is not a useful or effective means of identifying or combatting fraud. 2. We agree that statistics alone do not tell the whole picture of the potential contribution of the program. We recognize that the program’s value may extend beyond that which can be measured by available statistics and that corporate compliance that comes out of voluntary disclosures can have long-term effects on business honesty and integrity. 3. DOD continues to report two open cases in which the Justice Department did not concur because it believed the contractor was motivated by recognition of imminent detection. 4. While we attempted to work with the Justice Department in obtaining information from closed case files, the length of time it took to obtain information did not allow us to complete our audit in a timely manner. Further, without knowledge of the information withdrawn from the files, we could not effectively evaluate the administration of the program. 5. We have deleted this sentence based on the Justice Department’s comments. 6. For purposes of background and brevity, we summarized the criteria for program acceptance. A full presentation of the criteria does not, in our view, add to the background presentation. 7. We have modified the report based on the Justice Department’s comments. 8. We have modified the report based on the Justice Department’s comments. 9. We have modified the report based on the Justice Department’s comments. 10. Although the government was damaged by the amount of lost interest on the premature payment to the contractor, the $75 million represents the amount of the progress payment and does not include interest lost. 11. We have modified the report based on the Justice Department’s comments. 12. We have modified the report based on the Justice Department’s comments. 13. We have modified the report based on the Justice Department’s comments. 14. We have modified the report based on the Justice Department’s comments.

Major Contributors to This Report

National Security and International Affairs Division, Washington, D.C.

Office of General Counsel, Washington, D.C.

Dallas Regional Office

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