In April Oben Cabalceta pleaded guilty to defrauding the U.S. Department of Defense (DoD) out of $1.8 million by providing the wrong or incorrect military equipment parts. The New Jersey resident also admitted to illegally accessing sensitive, technical information despite not even being an American citizen.

Cabalceta, who is a native and citizen of the Republic of Costa Rica and was not lawfully in the United States, pleaded guilty to one count of wire fraud and one count of conspiracy for violating the Arms Control Act. He reportedly owns two manufacturing companies in Berlin, and obtained DoD contracts whereby he would provide parts that would be exactly the same as those authorized by the manufacturers, and these included parts that were critical application items for military equipment.

This was hardly an isolated case.

In May, another foreign national, Ferdi Murat Gul of Turkey, who also owned a New Jersey-based contracting business, was charged on six counts of wire fraud, a single count of conspiracy to commit wire fraud and conspiracy to violate the arms export control act. He allegedly defrauded the U.S. government out of $7 million by also misrepresenting where key parts were manufactured.

In this second case Gul and his co-conspirators submitted forged certifications and presented false information to the DoD that parts were made in the United States, when in fact the parts – also for crucial systems – were made in Turkey.

criminal contract fraud cases

Those two cases involving fraudulent parts were among more than 1,000 other cases of defense contracting fraud that occurred during a five year period, according to new data from a DoD report to Congress from last December. From 2013-2017 there were 1,059 criminal cases of defense contracting fraud resulting in the conviction of 1,087 defendants. The cases reported involved 678 defendants as individual persons and 409 defendants as business entities. In addition, there were 443 fraud-related civil cases that resulted in judgments against 546 defendants.

The report noted that as a result of the criminal convictions, a total of $368.6 million was recovered in fines and penalties; while $370.1 million was recovered through restitution; and $53.3 million was recovered through forfeiture of property.

In total, 168 contractors have been convicted of procurement fraud, while the total number of actions was 15,963,513 with a total value of contract obligations equal to $334.3 million.

Senator Bernie Sanders (I-Vermont), who is currently running for president, has been a vocal critic of DoD waste. Sanders called for the report in the FY2018 defense authorization act. The report was subsequently released under the Freedom of Information Act.

Types of contract Fraud

Not all contractor fraud is the same. There are several different varieties of fraud, but all cost taxpayers.

Cross charging is one of the more complicated types of fraud – and it typically involves a contractor working simultaneously on two different types of contracts where one is a cost-plus contract. This allows the contractor to get paid for production costs, and fraud is committed when the production costs of another contract are billed to the cost-plus contract.

Failure to comply is when contractors fail to meet budget or schedule requirements. This can also involve cutting corners in production, or failing to comply with contract specifications – and this could include the requirement that items are produced items in the USA only to be outsourced to another country.

Product substitution is another type of fraud whereby contractors substitute cheaper parts than the contract specifies; while improper cost allocation is when contractors shift business expenses from civilian projects to a government project. Such fraud allows a contractor to get better deals to market-driven civilian clients at the expense of a government contract.

There is also the Truth in Negotiations Act (TINA) Violation, which requires contractors to disclose all cost information to the government. When that information is altered or simply withheld then fraud has been committed by the contractor. This one is especially problematic, as many weapons systems and equipment used by the U.S. military can be highly specialized and complex. In some cases there may be one company in the world producing a system, and this creates a single-source supplier, so the government may not know what is, in fact, a fair price. TINA is meant to prevent this problem, but all too often single-source defense contractors can inflate the costs of goods and services.

Reporting Fraud

The most traditional way that fraud is reported is simply by employees bringing potential misdeeds to superiors and hoping it is resolved. However, in cases where management is involved this may not rectify the problem. In these cases employees can bring the fraud to the attention of federal contracting officers or directly to the DoD.

Employees who have evidence can report fraud without fear of reprisal from their employer. In fact, the False Claims Act – or Lincoln Law as it is also known – is a federal law that provides whistleblowers with specific protections and even compensation for coming forward with claims of defense contractor fraud.

While fraud shouldn’t be reported simply to make a buck, it is worth noting that some compensation packages offered to whistleblowers can be in the millions of dollars. This reward system was put in place to encourage those with knowledge that fraud is being committed to come forward and save the government money. The compensation is generally 15 to 25% of the money saved.

Fraud cases against defense contractors are typically considered “qui tam” cases – qui tam coming from the Latin phrase meaning a legal suit for both the king and the individual, and based on English common law from the 14th century. In these cases a private individual who assists the prosecution can receive part of a penalty imposed.

Given the stakes involved it is easy to see why whistleblowers would be rewarded for their service.

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Peter Suciu is a freelance writer who covers business technology and cyber security. He currently lives in Michigan and can be reached at petersuciu@gmail.com.