March 9, 2018

Prime contractors are responsible for negligence in the selection of subcontractors. In one fraud perpetuated against the U.S. Department of Interior’s Fish and Wildlife Service, two individuals were engaged in a series of transactions that were intended to hide the involvement of one of them from the government.

How Prohibited Involvement Was Concealed From the Government in One Case
A federal jury found two Hawaii men guilty of multiple wire fraud and mail fraud offenses involving the award and performance of contracts for work at a federal wildlife refuge. In the 2010 case, the jury also found one of the men guilty of a conflict of interest offense arising out of the same transactions.

Details of the case: Kevyn Paik, 47, was employed as an engineering equipment operator for the U.S. Department of Interior’s Fish and Wildlife Service. His duties included maintaining the Hanalei Wildlife Refuge, a federally owned property. The Service sought to hire contractors to perform wetland restoration work at various refuge ponds. Paik was prohibited by federal regulations from obtaining such contracts, since the work was related to his employment.

According to court documents and the FBI, Paik conspired with James Alan Duarte in order to conceal his involvement in a contract. Duarte agreed to solicit and perform work under two subcontracts, while concealing the Paik’s involvement. Among other things, Duarte obtained a Kauai contractor’s permission to use the contractor’s license number in return for a portion of the subcontract amount. Paik then prepared a bid document purportedly from the contractor, but which contained the contact information of Duarte.

Duarte and Paik then performed the work, while making it appear as if it had been done by the Kauai contractor. The two men received the bulk of the proceeds paid by the government for the work.

The government also presented evidence that Paik participated personally and substantially in the contract as a government employee, without disclosing the fact that he had a personal financial interest in the contract.

Following a 13-day trial, the jury found Paik guilty of four counts of mail and wire fraud, and one count involving a criminal conflict of interest. Duarte was found guilty of four counts of mail and wire fraud.

Of course, many government contractors depend on subcontractors to deliver goods or services to fulfill a contract. The case described in the right-hand box involves a primary contractor, but the same type of scheme could be engaged in at the subcontractor level.

Depending on the government agency, a contractor may be required to submit information regarding its subcontractors during the bidding process. Alternatively, a contractor may be required to submit information regarding subcontractors as they are engaged. Regardless, gathering information about subcontractors not only ensures compliance and provides information that is often needed during the bidding process, it can also help your company learn about potential business partners.

Ask the following questions when conducting subcontractor due diligence:

1. In the last five years, have potential subcontractors been involved in lawsuits or government enforcement actions? Have they been cited for violations of federal, state or local laws or regulations? If so, how were the violations resolved?2. Does your subcontractor have an employee code of conduct? Do they require that all employees sign the code?

3. Does the subcontractor have a whistleblower employee hotline?

4. Is the subcontractor financially stable?

  • Depending on the subcontractor’s role and importance to the overall contract, consider requesting approval from the subcontractor to contact the company’s CPA firm directly to receive copies of financial statements

5. Has the subcontractor been mentioned in news coverage in a negative light? (You can find this out with an Internet search.) If so, how did their management respond when asked about the coverage?

6. Have you considered requiring subcontractors to fill out a due diligence form? These documents ask for information such as: when the company was formed, a description of services, number of employees, locations, customer base, a copy of the company’s most recent annual report, audited financial statements, revenue and expense forecasts, a business plan, customer references and a Dun & Bradsheet company analysis.

7. Have you requested a list of the subcontractor’s executive management members, including their resumes?

  • Often, companies will post senior management resumes and biographical information on their websites. In addition, consider cross-checking the resumes posted on a company’s website against the resume posted on professional networking sites such as LinkedIn.
  • If discrepancies regarding the executive management are uncovered, consider engaging a third party to conduct a formal background check.

8. Does your subcontractor carry the appropriate insurance coverage?

This is not exhaustive list and the number and type of questions you should ask varies according to the size, type and complexity of the government contract being pursued.

In addition, there are statutory provisions governing post-government employment for federal employees that should be factored into your hiring decisions, as well as those of your subcontractors.

Here are the three types of restrictions:

Lifetime ban – If a federal government employee is involved in a specific contract, he or she may go to work for the contractor, but he or she can never act as a negotiator before any agency for the lifetime of that particular contract.Two-year ban – If a federal government employee is involved in a specific contract during the last year of his or her tenure with the government, he or she may go to work for a contractor, but he or she cannot act as a negotiator before any agency for two years on that particular contract.

One-year (no contact) ban – “Senior employees” may not appear or communicate with any employees of their former agency on behalf of the contractor.

There are also certain restrictions on compensation after an employee leaves the government based on representations made while he or she was employed. Your attorney can provide information on restrictions, as well as the definition of “senior employees” as it relates to the one-year ban.

© 2018