Government contracting: An example of cheating and the solutions

[caption id=”attachment_16915” align=”alignnone” width=”800”] Photo: House Oversight and Reform Committee[/caption]

As discussed in the previous post, there have been some issues in the U.S. government lately with government contracting.

Due to businesses misrepresenting their sizes, there have been several protests filed by the businesses that should have been awarded the contracts. The Small Business Administration is so backlogged, though, that they are having trouble keeping up with the number of complaints.

Ahead is a case of recent government contracting fraud along with the solutions that will soon be implemented in order to keep it from happening again.

The problem

One of the more famous instances of government contracting fraud is a case against Strong Castle, Inc., a government IT solutions company. The Committee on Oversight and Government Reform reported that a series of contracts adding up to $500 million were awarded to Strong Castle on less than trustworthy grounds.

The contracts were being awarded by the Internal Revenue Service who spends $2 billion annually on informational technology. Due to this huge amount of money being invested in IT, the competition among federal vendors for the IRS’s IT contracts is high.

The owner of Strong Castle, Braulio Castillo, claims his company certifies for woman and minority-owned (SWAM), a Service-Disabled Veteran-Owned (SDVOSB), and that their central quarters are located in the Chinatown district of Washington, D.C. (a certified HUBZone). The first claim is true, the second is questionable at best, and the third is a flat-out lie.

The set-aside contracts mentioned above are designed to help disadvantaged business or businesses owned by the economically disadvantaged compete in the federal market place.

So, in order to qualify for the small business set-aside contracts, Castillo committed fraud. Castillo was able to get away with most of this fraud because he had an insider relationship with the IRS Deputy Director for IT Acquisition, Greg Roseman. This relationship expedited an otherwise lengthy contracting process while favoring Castillo for the awards.

Because Castillo “qualified” for these set-aside contracts, his company was able to easily access and win contracts that were meant for small businesses that actually need them. According to the Committee on Oversight and Government Reform, Strong Castle took advantage of “weaknesses in the certification processes.”

Castillo took advantage of the loopholes by setting up an office in Chinatown and calling it the central office, in accordance with HUBZone regulations that the central office of a business must be located in an underutilized business zone. The problem is, Castillo and his wife – also an executive at Strong Castle – worked out of a house in a wealthy Virginia neighborhood.

HUBZone regulations also require that employees working in the HUBZone live in the HUBZone. To circumvent this regulation, Castillo hired full-time university students to work in the office who lived in the HUBZone, which might have been fine, but it turned out that the students didn’t actually live in the HUBZone. Castillo tried to get the students to move to HUBZone by threatening to fire the students if they didn’t.

The worst part is how Castillo qualified for SDVOSB status. Castillo injured his foot during football while he was at the U.S. Military Academy in 1984. He was the Academy for a year before he transferred to a university in Southern California where he continued to play football. Castillo claims that this foot injury gives him service-disabled veteran status.

He also later changed his story during the certification process to say that he received the foot injury during a school orientation to make it seem like he was injured while on duty. When he moved to Southern California he had several successful years of playing football with no problems.

The solutions: What’s being done, how is fraud being prevented

Outside of the government and the federal vendors, companies like BidSync are consolidating the whole procurement process, inadvertently preventing fraud: from soliciting vendors, receiving bid notifications, to requesting purchases. The product manager of BidSync, Adam Magalei, firmly believes there is more to the procurement process than just purchasing.

Government-wise, the in-depth report from the Committee on Oversight and Government Reform – from which the details on Castillo’s dealings were gathered – claims to be a deterrent to any federal contractor who may or may not consider getting involved in contracting fraud or abuse. While this may not be the end all solution, it is certainly a step in the right direction to keep federal contractors and government agencies honest in their work.

Truly, Castillo is very upset about the report, stating that it cost him “contracting partners, lines of credit, and goodwill among [their] important government customers.” View his full statement here. Any company who reads how much it cost Castillo’s business will think twice before attempting any unsavory contracting practices.

Because the set-aside contracting programs are so easy to manipulate the government is attempting to reform the weaknesses found within them. The programs are self-certifying, so anybody can apply and register under them, but it’s going to take a considerable amount of regulations in order to make sure everyone is staying honest when they are self-certifying, which is one of the reasons that the government is unifying contracts into an “open-book” format.

Even more so, contracting officials within the IRS and other agencies need to have more training when it comes to recognizing fraud, conflicts of interest, and other attempts to game the system. It’s important for officials to recognize when a company is attempting to acquire a contract that they don’t qualify, especially since that contract is set-aside for populations that really need it. The IRS is deemed at fault almost as much as Castillo in this case.

Conclusion

While there are businesses that attempt to dupe the system and take advantage of programs set-aside for disadvantaged populations, and sometimes get away with it, there are steps being taken in the right direction so that government contracting fraud, especially according to business size and qualifications, happens less often. There will be businesses that always try, but in the coming years they are less likely to succeed.