CPE for Government Auditors

Little frauds are a big deal in government.

Please enjoy Chapter 1 of An Auditor’s Responsibilities for Fraud in the Government Environment, available at Yellowbook-CPE.com.


  • Differentiate between auditing for fraud in the government environment and auditing for fraud in the commercial environment

Fraud – it’s a costly thing! Whether it is committed in the government environment or the commercial environment, those who practice it leave victims in their wake and rob taxpayers and businesses of their money.

You’ve heard the stories about the small town sheriff who used prisoners to landscape his backyard. Or the court clerk who takes bribes to dismiss traffic tickets. Or the school lunch lady who takes home a portion of the kids’ lunch money every day.  Cities are going bankrupt because their leaders rewarded themselves with huge salaries, perks, and pension benefits.  These stories of fraud crop up every day in the press and make us think badly of our government leaders.

But we also see similar stories in business.  Let’s not fool ourselves into believing that corporations are any better than the government at running things. I have had the privilege of working at a dozen or so Fortune 500 companies and they all have their quirks, and all have suffered from employee fraud.

Maybe it is just the people with whom I hang out, but most dinner conversations eventually include a few criticisms of our government.  And the tacit agreement among most of my friends and family is that corporations operate more effectively and efficiently than government.  But I think they are wrong.  I think both corporations and governments are flawed.  I have never encountered a perfect organization.  Have you?

My husband recently treated me to an Apple laptop – which I love by the way. And I was curious about how Apple had created such great products so I watched a MSNBC business documentary about Apple. It turns out that Apple folks argue, and fail, and torment each other while creating products.  Time is wasted, people get their feelings hurt, and the company loses massive amounts of money. But, they create a great product in the end, don’t they?

Governments, with all of their faults, create great products and services for us, too.  They pick up our trash, fix our roads, educate our children, and respond to emergencies.  Even the tiniest cities are responsible for a wide range of services, from police and fire protection to courts, water and sewer, garbage disposal, inter‑government relations, health programs, parks and recreation, bus systems, and airports. No wonder things get out of hand every so often.  The more stuff there is to manage, the more opportunities for fraud to be committed.

Fraud Defined

Unfortunately, leaders and managers of government programs and of businesses engage in bad behaviors such as fraud, illegal acts, violations of contracts, abuse, and unethical behavior. This text focuses on fraud that occurs in government: more specifically, what you should do when you detect fraud in government.

In this text, I hope to give you the ability to discern between fraud and other bad behaviors in government.  I also hope that you will be able to recognize fraud when you see it and know what your professional responsibilities are regarding fraud.

So, first you need to know what fraud is.

According to the dictionary[1], fraud is: “deceit, trickery; specifically: intentional perversion of truth in order to induce another to part with something of value from someone else or to surrender a legal right.

This is how the Government Accountability Office (GAO) defines fraud in the Yellow Book:

8.73     …Fraud involves obtaining something of value through willful misrepresentation. …

Basically, fraud is a willful act in order to gain something for personal use. In super simple terms, fraud is lying, cheating, and stealing. When it happens in business it is bad. When you have fraud in government it is often much, much worse.

Victims of Fraud in Government

When a bookkeeper steals money from a businessman, it is ugly and wrong.  But how much nastier is it when a bookkeeper takes monies destined to feed impoverished children? The elderly? War veterans?  Take your pick of disadvantaged or deserving groups, and the government probably helps them in some way.  When fraud occurs in the government, there are many helpless victims, and it is a crying shame.  It is one thing for business owners or corporations to lose their resources but another when fraud consumes the resources that are destined to become school lunches, infant formula, military armor, or low-income housing.

When I was in public accounting, auditing a car parts manufacturer in Eagle Pass, Texas, my ultimate customer was the owner of the business or the banker who used the audit report.  But when I audit a HUD project, a low-income apartment complex, whom is my ultimate customer?

Yes, HUD, the feds, the state, the city, the management of the housing project all are involved and concerned about the project.  But my ultimate customer is a 3 year-old toddler living in the complex with her single mother who works two jobs to keep the family together.

I have had the opportunity to work for a variety of governmental audit organizations including federal, state, and local government audit organizations. The stories I hear about and witness regarding governmental waste, fraud, and abuse are numerous and sad.

A Higher Purpose

When government works well, it is a wonderful thing.  And our job, as government auditors, is to make the government work better.

The 2018 version of the Yellow Book contains an introductory statement letter from Gene Dedaro, the Comptroller General of the GAO.  He said, in part:

Given the current challenges facing governments and their programs, the oversight provided by auditing is more critical than ever. Government auditing provides the objective analysis and information needed to make the decisions necessary to help create a better future.

The Yellow Book itself states:

1.07     Engagements performed in accordance with GAGAS provide information used for oversight, accountability, transparency, and improvements of government programs and operations.

One city auditor has a personal mission that transcends the day-to-day work of auditing.  He believes his ultimate goal is to make sure that the city’s resources are directed to those who don’t have a voice, to those who are disenfranchised and in need of help.  Bravo! I am glad to know he is on the job.

3.08     A distinguishing mark of an auditor is acceptance of responsibility to serve the public interest. This responsibility is critical when auditing in the government environment. GAGAS embodies the concept of accountability for public resources, which is fundamental to serving the public interest.


Little Misbehaviors can be a Big Deal in Government

If you have not worked in government before, I need to warn you that little things can easily become a big deal.

One of my buddies got a job as a city manager of an east Texas town.  Early in his tenure, a scandal rocked his office.  His executive assistant used the city’s stamp machine to mail her Christmas cards.  The local press went wild over the whopping $60 in postage and painted his office as wasteful and out of control.  He had to let her go to save his job and the jobs of others in his department.

This boils down to for whom we work when we work for the government: the citizens.  Citizens own the government.  They work hard, pay their taxes, and choose lawmakers to create programs to do very specific things – such as build a library, feed low-income children, or clean up the beach.  It really upsets and angers them when their money is misspent or flat out stolen.

Materiality in Government

And that brings us to the topic of materiality.  Materiality is a term used in auditing to indicate the importance of a matter in relationship to other matters.  Risk-based auditing requires auditors to delineate between important or risky matters and insignificant matters. The auditor cannot and should not look under every rock for problems, examine every transaction, or consider every risk because they will never finish the audit project!

You may hear an auditor saying something like, “That is not material.”  And what he is really saying is, “I am not going to look at that because I don’t care as much about that as I do something else.”  For instance, an auditor may not examine a petty cash account of $200 but will examine equipment worth $70,000.

One wise auditor in a class I held in California pointed out that many of his corporate clients are high-flying, incredibly busy executives who could care less about a small fraud.  Small frauds could be managed by front line managers and do not warrant inclusion in the audit report.

In a corporation, access to the stamp machine, the copy machine, goodies, cake, and spa retreats are all perks of the job.  Remember when AIG spent $500K on a spa retreat for executives one week after the feds bailed them out?  The public was outraged, and AIG simply said, “Oh, we always do that. What’s the big deal?”

But in government, expectations for what is acceptable behavior are different. One federal inspector general for whom I work forbids his employees from holding birthday celebrations or eating in the office on government time. He does not want to be perceived as wasting taxpayer dollars.  When I work for a government, I have a hard time finding a cup of coffee, much less a pastry or a massage!

Once I attended the annual picnic at a state audit organization where they gave out awards for the most stupid finding of the year.  A guy named Jesse won the award for writing up a finding for a questioned cost of 52 cents.  Yep.  The federal grantor had told the state auditor they wanted to know about everything they had found. Jesse was just doing his job, literally!

While the AICPA (American Institute of Certified Public Accountants) standards are primarily written for audits of financial statements of commercial entities, the GAO (Government Accountability Office) standards are written for audits of governments.  The GAO counsels us – but doesn’t require us – to set a lower materiality level on government engagements than on engagements following AICPA standards. Here is their reasoning:

6.03     …Additional considerations may apply to GAGAS financial audits of government entities or entities that receive government awards. For example, in audits performed in accordance with GAGAS, auditors may find it appropriate to use lower materiality levels as compared with the materiality levels used in non-GAGAS audits because of the public accountability of government entities and entities receiving government funding, various legal and regulatory requirements, and the visibility and sensitivity of government programs.

Over and over, the GAO’s Government Auditing Standards distinguish between the purpose of their standards and the AICPA’s purpose for their standards.  And here the GAO says that government programs are more visible and sensitive.  In other words, little things matter in government! And what do we know about government? They care about it all!  Little, big, all of it!  So, a broader range of bad behaviors is reportable in this realm.

Do you think the federal grantor who doesn’t want employees eating cake on government time would care about the stamp machine incident?
Probably.   So while you might not report a small fraud for a business owner, you probably should in government.

The 2018 version of the Yellow Book identifies several methods by which you can report fraud depending on its significance or materiality.

If the fraud is material, then the auditor must write a finding and include it in the audit report. This language is excerpted from the financial audit standard, but the performance audit standards say something similar:

6.41 Auditors should include in their report on internal control or compliance the relevant information about noncompliance and fraud when auditors, based on sufficient, appropriate evidence, identify or suspect … 2 fraud that is material, either quantitatively or qualitatively, to the financial statements or other financial data significant to the audit objectives. 

And if the fraud is not material, but still warrants the attention of management, the auditor should communicate with management in writing:

6.44 Auditors should communicate in writing to audited entity officials when …b. the auditor has obtained evidence of identified or suspected instances of fraud that have an effect on the financial statements or other financial data significant to the audit objectives that are less than material but warrant the attention of those charged with governance. 

Accountability is an Ideal for Which We Strive

The GAO likes the concept of accountability so much that they changed their name from the General Accounting Office to the Government Accountability Office.  They even refer to auditors in their literature as “accountability professionals.”

Because we citizens are the owners of our government, we have a right to see where our money goes. Good governments seek transparency in their actions and their financial information. And if we know what the government does because they are transparent, we can hold those working for the government accountable for their actions.  That is the theory, anyway.

1.02 The concept of accountability for use of public resources and government authority is key to our nation’s governing processes.1.03 As reflected in applicable laws, regulations, agreements, and standards, management and officials of government programs are responsible for providing reliable, useful, and timely information for transparency and accountability of these programs and their operations.Legislators, oversight bodies, those charged with governance,and the public need to know whether (1) management and officials manage government resources and use their authority properly and in compliance with laws and regulations; (2) government programs are achieving their objectives and desired outcomes; and (3) government services are provided effectively, efficiently, economically, ethically, and equitably.

But accountability can be hard attribute to any one person in government.  Because of the complexity of government and the vast array of services the government offers to its citizens, losses due to fraud, waste, and abuse in government are often absorbed into the complex bureaucracy, and no one is held accountable.

When my children were small, we visited my aunt in Jefferson County, Alabama. My aunt lives  just outside of Birmingham, and she warned my children not to get in or touch the pretty lake on which she live because it was contaminated. In 1993, Jefferson County, Alabama was prosecuted for contaminating local creeks with raw sewage.

To fix the contamination problem, the county issued bonds to finance water treatment facilities.  The project has been plagued with corruption and the county commissioner was jailed in 2010 for accepting bribes.

And to add insult to injury, an unscrupulous Florida investment banker talked the county into defeasing the bonds using a complicated swap.  Then the county suffered from low tax collections in 2008, and had to lay off 1400 workers.  For a time, it appeared that the county would go bankrupt and default on the bonds.

No one, including the state of Alabama, wants the county to go bankrupt! Birmingham is the state’s most vibrant city. A failure there would make Alabama look less appealing to investors and industry. So the initial $3 billion dollars in bond debt was renegotiated and reduced to less than $1.4 billion.

Is anyone in government in jail for these poor decisions regarding the bonds? Did anyone responsible lose his or her jobs? And who ate the other $1.6 billion?  These mysteries may never be solved because so many were involved in the decisions.[2]But the citizens of Jefferson County deserve better.


Fraud occurs in both corporations and governments. Government auditors have a higher purpose, and that is to protect the recipients of government programs and citizens from fraud, waste, and abuse of their resources.

When auditing for fraud in the government, you need to be aware that:

  • Victims of fraud in government are ultimately the individuals that government intends to help.
  • You should reduce your materiality level when auditing governments.
  • Citizens want and deserve government leaders to be held accountable (and for every penny) for fraudulent activities.

[1]“Fraud.” Online Merriam-Webster Dictionary. April 10, 2012.
[2]Matthew Bigg. “Alabama’s Jefferson county sees hope for debt deal.” Reuters[London]. April 9, 2010.

Defining Corruption per the CFE’s Fraud Tree

More in the series on getting to know the fraud tree better.  To get a better sense of where we are on the fraud tree and which branch we are talking about in this newsletter,  please see the entire fraud tree at http://www.acfe.com/fraud-tree.aspx.


  • Distinguish between the four major types of corruption and their subcategories

Corruption is the broad title for any behavior on the part of a person in a position of authority to further her own interests, forgetting her responsibilities to the people she serves.  In other words, corruption is when a powerful person acts selfish and greedy. This bad stuff has been going on since the beginning of time!  Was the apple offered by the serpent in the Garden of Eden a bribe?

Corrupt in the dictionary is defined as, “The act of corrupting or making putrid, or state of being corrupt or putrid; decomposition or disorganization, in the process of putrefaction” or “The act of corrupting or of impairing integrity, virtue, or moral principle; the state of being corrupted or debased; loss of purity or integrity; depravity; wickedness; impurity; bribery.”

Corruption is when a fraudster uses his influence in a business transaction to procure some benefit for himself or another person contrary to his duty to his employer (in our case, the citizen or taxpayer) or the rights of another.

For those of you who already work in the government environment, you will appreciate the references that follow.  For the rest of you, put on your red or blue taxpayer hat, this is going to get political!

When a public servant is corrupt, she forgets her duty to serve the public, as the GAO’s Yellow Book calls us to do, and instead serves herself.

2.07     A distinguishing mark of an auditor is acceptance of responsibility to serve the public interest.

Have you seen the corruption index?  A group called Transparency International ranks the corruption of the world’s countries on its website: http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results.  America is ranked #22. Denmark is ranked number one as the least corrupt country?

The Association of Certified Fraud Examiners has divided the corruption section of the fraud tree into four parts:

  1. Conflicts of interest
  2. Bribery
  3. Illegal gratuities
  4. Extortion

3-9-1 Conflicts of Interest

Conflicts of interest arise when a fiduciary, agent, or employee does not act in good faith, with full disclosure, in the best interest of the principal but instead is serving other interests.

Conflicts of interest occur when persons in power have interests outside of their job and sway their decisions to benefit these interests.

In auditing, a conflict of interest threatens your independence and objectivity. The Yellow Book reminds you to stay clean and avoid corruption:

3.07     Auditors participating on an audit assignment must be free from personal impairments to independence. Personal impairments of auditors result from relationships or beliefs that might cause auditors to limit the extent of the inquiry, limit disclosure, or weaken or slant audit findings in any way.

In a small town, conflict of interest is a constant threat.  If you know everyone in town, how do you keep your objectivity?

The mayor of the City of Brandon says he was not in a conflict of interest when he voted along with City Council to allow a local developer to purchase $812,000 in land from the city.  This local developer was one of the mayor’s campaign volunteers.

“I don’t gain personally from anything to do with the applicant or any of the other applicants as well,” he told the Sun. “Of the five applicants (for the land), I know every single one of them.”

The Municipal Council Conflict of Interest Act states that a conflict of interest exists where a person stands to either directly or indirectly financially benefit from a decision of council.1

3-9-1A Purchases Schemes

Purchasing professionals have a lot of power that may go unchecked.  When I work for a government entity, they usually make me jump through hoop after hoop after hoop to prove that they were objective in their choice, although usually we both know that I am their first choice.

I frequently get requests for bids from governments with which I have no relationship.  But, I know they are usually just going through the motions.  I am not going to waste my time bidding on a job that I know someone else has locked in. And, unfortunately, a lot of people’s time is wasted in the process, especially when the bidding documents are 20 pages long!  But looks can be everything when it comes to purchasing. Is this the ideal?  No. True? Yes.

State criminal investigators are looking at efforts by the Oregon Department of Energy to steer federal money to a company run by the Governor of Oregon’s girlfriend after her firm lost the bid on a state contract. The winner of the bid was encouraged by the Department of Energy to include the girlfriend in the contract. The girlfriend was eventually employed as a subcontractor.  Three Energy Department officials happened to be on leave during the investigation.2

3-9-1B Sales Schemes

If you watch Fox News, you are familiar with Goldline Commercials.  In mid-2010, Congress formally opened an investigation of Goldline following an exposé on ABC News which detailed Goldline’s business model.3

Goldline employs several conservative pundits including Glenn Beck, Mike Huckabee, Laura Ingraham, and Fred Thompson to sell gold coins on the air. By feeding public fears during the recession, conservative pundits encourage their listeners to invest in gold.

Glenn Beck, for example, has dedicated entire segments of his program to explaining why the U.S. money supply is destined for hyperinflation with Barack Obama as president. He often promotes the purchase of gold as the only safe investment alternative for consumers who want to safeguard their livelihoods. When the show cuts to commercial break, viewers are treated to an advertisement from Goldline.

Goldline marks up its coins an average of 90% over the melt value of the coin.  The largest markup on any coin was 208% above the melt value. By selling gold at twice the melt value, the price of gold would need to double for consumers to break even on their “investment.” However, since Goldline is not licensed as an investment advisor, they have no responsibility to advise their clients.

Paul Harvey, the radio newsman whom my grandmother listened to on country radio, used to use a similar sales scheme. He’d talk about a snowstorm in Montana and, before you know it, you were being pitched some sort of miracle skin lotion. He was smooth. But I remember all of his ads as being relatively benign and for products that cost under $100.  I could be wrong.

3-9-1C Other Schemes

Wouldn’t it be great to create the rules you later have to follow?  Should consultants on government contracts draft the rules regarding those contracts?

Science Applications International Corporation served as an advisor to the Nuclear Regulator Commission to develop rules for recycling radioactive materials released from nuclear facilities.  At the same time, they entered into a partnership with another corporation, British Nuclear Fuels, to perform the recycling.

In a 2008 decision, a federal jury concluded that the firm’s executives knowingly concealed business interests that stood to benefit from its consulting role at the NRC. It found that SAIC had made 17 false statements and 60 false claims under the Federal False Claims Act.4

That story reminds me of a friend of mine who ran an internal audit shop at a state agency.  She hired an experienced CPA from inside the agency as a senior auditor.  Not until after she hired her and tried to assign her to projects did she realize her mistake.

The CPA had worked for the agency for five years in a variety of capacities. She was also married to one of the division directors and socialized with most of the others.  She was useless as an auditor because she was not independent of the audit subjects. Interestingly enough, my friend became a director of one of the divisions, and the administration decided to promote the less-than-objective CPA to director of audit.  Hmm.

3-9-2 Bribery

Bribery is when a person pays an official to make a decision in his favor.  The person in need offers or gives something of value to influence the action of an official in the discharge of his public duties.

Contractors for the federal government frequently appear in the news for bribing federal officials in hopes of landing lucrative contracts.

What follows is a portion of a press release from the
Department of Justice regarding one of our honorable congressmen:

Former Congressman William J. Jefferson Convicted of Bribery, Racketeering, Money Laundering, and Other Related Charges5In August, 2009, after a month of testimony in a federal court, a jury found former Congressman William J. Jefferson guilty on 11 charged counts, including solicitation of bribes, honest services wire fraud, money laundering, racketeering, and conspiracy.“We have been reminded today that we are a nation of laws, and not men,” said Dana J. Boente, U.S. Attorney for the Eastern District of Virginia. “It should be a clear signal that no public official – and certainly not a U.S. Congressman – can put their office up for sale and betray that office. It cannot be tolerated. It cannot just be another cost of doing business. And today, a jury of his peers held Congressman Jefferson accountable for his actions.”

“Trust and integrity in public officials is at the heart of our democracy,” said Joseph Persichini Jr., Assistant Director of the Washington Field Office of the FBI. “What a better way to ensure those virtues, than to expose those who breach that trust.”

According to evidence at trial, from August 2000 to August 2005 Jefferson used his position as an elected member of the U.S. House of Representatives to corruptly seek, solicit and direct that things of value be paid to himself and his family members in exchange for his performance of official acts to advance the interests of people and businesses who offered him the bribes. The things of value, according to evidence at trial, included hundreds of thousands of dollars worth of bribes in the form of payments from monthly fees or retainers, consulting fees, percentage shares of revenues and profits, flat fees for items sold, and stock ownership in the companies seeking his official assistance.

Evidence at trial showed that Jefferson performed a wide range of official acts in return for things of value, including leading official business delegations to Africa, corresponding with U.S. and foreign government officials, and utilizing congressional staff members to promote businesses and businesspersons. The business ventures that Jefferson sought to promote included telecommunications deals in Nigeria, Ghana, and elsewhere; oil concessions in Equatorial Guinea; satellite transmission contracts in Botswana, Equatorial Guinea and the Republic of Congo; and development of different plants and facilities in Nigeria.

Siemens pays huge fine
In 2008, the German engineering conglomerate Siemens paid an $800 million dollar fine to the Securities and Exchange Commission and the Department of Justice for widespread bribery of government officials. Among the billions authorities accuse Siemens of paying out to government officials is a $2.6 million payout to former Argentinean president Carlos Menem in order to win a bid to manufacture national ID cards for the country. Other allegations include a $55 million bribe to Russian officials for a medical devices contract, and $22 million to China for a metro trains contract.6

Chinese Officials Love Gucci!
Our fascination with China continues. They have really good taste, after all.

China seems to be the fastest growing country in every category, and now we can add fastest growing luxury market to the list.  Gifts to government officials are prohibited in China, but who can resist a Swiss watch?  Especially a $30,000 diamond studded one? It is just one little watch!

Bain & Company, a global consulting firm, estimated luxury sales of $7.6 million in 2008.  Industry experts say gifts to government officials make up close to 50% of that figure.  During the Communist Party meetings in March of 2009, sales of luxury goods in Beijing spiked.

One snobby land confiscation official in Chongqing was sentenced to 13 years in prison for accepting kickbacks.
Chinese officials confiscated 200 pairs of luxury shoes, 100 luxury suits, and a luxury car.  He even had the nerve to tell his female trial lawyer that she needed to polish her low quality shoes. I wonder what sort of shoes they will issue him in prison. Gucci?

China is countering this corruption with talk of creating a national registry to track the assets of government officials. 7

3-9-2A Invoice Kickbacks

Invoice kickbacks cause a client to be overcharged while the vendor and their fraudster friends share in the proceeds!

You wouldn’t steal food from a kid, would you?
What about stealing money that was intended to pay for kids’ lunches? Sodexo, the world’s largest food purchaser, had received rebates from food suppliers that it failed to pass on to the districts.

In order to continue to do business with the state, Sodexo paid a $15M fine to the state of New York for overcharging New York School district cafeterias. The organization also agreed to disclose rebates in writing to clients, establish a hotline for clients and whistleblowers, and pay for an independent audit of their compliance with rebate provisions of their contracts.8

3-9-2B Bid Rigging

Will I ever feel good about banks and Wall Street again?  I don’t think so.  I am afraid our business schools are churning out opportunistic financiers looking for a quick buck!  And unsophisticated governments are easy targets with lots of money.

Local governments beware of big banks offering investments!
Local governments often hire brokers to help them find investment contracts so that the government earns interest on millions of bond proceeds set aside for long-term projects. The U.S. Treasury requires that these contracts be bid on competitively to maintain the tax-exempt status of the proceeds.

Bank of America, however, decided in advance which bank would be the winner of certain contracts. They did their best to cover their tracks.  They occasionally submitted intentionally losing bids so that the bidding would look legitimate. As a result of bid manipulation, the Justice Department said Bank of America won investment contracts at “artificially determined price levels, which deprived municipal issuers of money and property.”  And, as of this writing, the investigation has only just begun.  On June 22, 2012, Moody’s downgraded Bank of America’s public finance obligations.

“This ongoing investigation has helped to expose widespread corruption in the municipal reinvestment industry,” said Robert Khuzami, director of enforcement at the SEC, one of the agencies in the probe. “The conduct was egregious – in return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper.”

As a result, four federal agencies and 20 states received a sweeping $137 million in their settlement with Bank of America for its role in a bid-rigging scheme that ripped off state agencies, cities, towns, and not-for-profits seeking to invest yet unspent bond proceeds.9

Here is a press release from the Department of Justice in a related case.

Former Agent Of Financial Products And Services Company Pleads Guilty For Role In Fraud Conspiracies Involving Proceeds OfMunicipal Bonds10A former agent of a financial products and services company pleaded guilty today for his participation in fraud conspiracies related to contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced.According to plea proceedings today in U.S. District Court in New York City, Adrian Scott-Jones, a resident of Morriston, Fla., pleaded guilty to participating in two separate fraud conspiracies with companies that provide a type of contract, known as an investment agreement, to public entities throughout the United States, such as state, county and local governments and agencies. These public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they issued to raise money for, among other things, public projects. Scott-Jones also pleaded guilty to one count of wire fraud. According to the plea agreement, Scott-Jones has agreed to cooperate with the ongoing investigation.

The department said in court documents that Scott-Jones’ former company, located in North Palm Beach and Ocala, Fla., marketed financial products and services, including services as a broker or advisor to various public entities that issue municipal bonds. Public entities typically hire a broker to conduct a competitive bidding process for the award of investment agreements. Major financial institutions, including banks, investment banks, insurance companies and financial services companies, are among the providers of investment agreements and other related municipal finance contracts. Competitive bidding for these agreements is the subject of regulations issued by the U.S. Department of the Treasury and is related to the tax-exempt status of the bonds.

According to court documents, Scott-Jones participated in one fraud conspiracy from as early as September 2001 until at least November 2006, and in a second fraud conspiracy from as early as August 1999 until at least November 2006. In each conspiracy, Scott-Jones gave co-conspirator providers information about the prices, price levels or conditions in competitors’ bids, a practice known as a “last look,” which is explicitly prohibited by U.S. Treasury regulations. Scott-Jones also solicited and received intentionally losing bids for certain investment agreements and other municipal finance contracts. As a result of the bid manipulation, the co-conspirator providers won contracts at artificially determined price levels, which deprived municipal issuers of money and property.

The court documents also charge that Scott-Jones and co-conspirators misrepresented to municipal issuers or their bond counsel that the bidding process was in compliance with U.S. Treasury regulations. This caused the municipal issuers to award investment agreements and other municipal finance contracts to providers that otherwise would not have been awarded the contracts if the issuers had true and accurate information regarding the bidding process. Such conduct caused municipal issuers to file inaccurate reports with the Internal Revenue Service (IRS) and thus placed the tax-exempt status of the underlying bonds in jeopardy.

Each of the fraud conspiracies for which Scott-Jones is charged carries a maximum penalty of five years in prison and a $250,000 fine. The wire fraud charge carries a maximum penalty of 20 years in prison and a $250,000 fine. The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

This is the sixth guilty plea to arise from an ongoing investigation into the municipal bonds industry, which is being conducted by the Antitrust Division’s New York Field Office, the FBI and IRS Criminal Investigation. The department is coordinating its investigation with the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.

Three former employees of Rubin/Chambers, Dunhill Insurance Services Inc., also known as CDR Financial Products, a Beverly Hills, Calif.-based financial products and services firm that acted as a broker of investment agreements and other municipal finance agreements, have pleaded guilty to bid-rigging and fraud conspiracies in relation to the ongoing investigation. Two other individuals have also pleaded guilty to charges related to the ongoing investigation.

As a result of the ongoing investigation, three former financial services executives were indicted on July 27, 2010, for participating in fraud schemes and conspiracies related to the bidding for investment agreements. In addition, CDR, two of its employees and one former employee were charged in October 2009 for participating in bid-rigging and fraud conspiracies and related crimes. The CDR trial is scheduled to begin on Sept. 12, 2011.

3-9-3 Illegal Gratuities

When someone gives a public official a gift that isn’t necessarily tied to any particular favor, it is probably intended to influence the official’s future decisions.

Imagine a government official who encourages corporations to fund his campaign.  The corporations and the official understand that the corporations will experience preferential treatment.  Sound like some remote South American banana republic?  Unfortunately, this is how our ‘system’ works in America.

If a lobbyist gives a government official a significant campaign contribution and helps her raise more money for her campaign while at the same time explaining his position on, let’s say, health insurance, is that bribery, extortion, or illegal gratuities?  Or is the congresswoman suffering from conflict of interest?  The behavior of our U.S. Congresswoman might be considered all three at once.

I got in hot water a few years ago with one of my government clients. One of my last names is Hart, and so I thought it would be cute to send out Valentine’s gifts to my clients instead of Christmas presents. Get it? Hart, Valentines?  So, I sent a small heart-shaped dish full of dove chocolate to one of my legislative audit clients.  And they promptly sent it back to me with a scolding letter from their lawyer admonishing me never to give them a gift again.  I guess they thought an $8 gift would make them hire me for the next decade.  I wish it were that easy to get business!

3-9-4 Extortion

Some people mistakenly call bribery “extortion” and extortion “bribery.” The difference between bribery and extortion is in who makes the first move.  The person wanting a favor from a powerful person initiates bribery.  And the person in power initiates extortion: in extortion the public official asks for goodies instead of being offered goodies.

One contractor conveyed that the head of the purchasing department for a large city always held a meeting with the bidders on a project before the project was awarded.  The experienced contractors realized that he was asking for gifts when he said things like, “My car is so filthy.  It needs a detailing!” “Or, my lawnmower sure is getting tired.” Whichever contractor took care of his car or his lawnmower got the job.

David Letterman was in the news in 2009 because the boyfriend of the woman with whom he was having an affair threatened to expose his infidelities to the public unless David Letterman paid the boyfriend several million dollars.  David Letterman decided to fess up on the air, but he turned the boyfriend into the authorities first.  What an interesting turn of events for the boyfriend.  He is broke, girlfriendless, and in prison for extortion.

If you have the power, you can demand the money!
Broward County Public School Board member Beverly Gallager, was arrested for extortion, wire fraud, and bribery after undercover FBI agents passed $12,500 to her in return for her awarding construction contracts.  U.S. Representative, Debbie Wasserman Shultz, was appalled saying, “It shakes the confidence of the public in their elected leaders.”11

1 Allison Dowd. “Mayor says decision didn’t put him into conflict of interest.” The Brandon Sun. September 29, 2010.
2 Brent Walth and Michelle Cole. “Department of Energy officials promoted firm run by ex-Gov. John Kitzhaber’s girlfriend for project.” The Oregonian [Portland]. August 23, 2010.
3 Matthew Mosk. “Exclusive: Glenn Beck’s Golden Advertiser Under Investigation.” ABC Nightline. ABC. July 19, 2010. Television.
4 Robert O’Harrow Jr. “Potential for Conflict Grows With Government’s Use of Contractors.” Washington Post. August 18, 2008.
5 United States. Department of Justice. Former Congressman William J. Jefferson Convicted of Bribery, Racketeering, Money Laundering, and Other Related Charges. FBI. August 5, 2009.
6 “Siemens Pays out $800M in Fraud Settlement.” National Association of Corporate Directors Directorship. Web. December 15, 2008.
7 David Barboza. “For Bribing Officials, Chinese Give the Best.” The New York Times. March 13, 2009.
8 Lucy Komisar. “Sodexo, exposed by Komisar for kickbacks, agrees to $20m settlement.” The Komisar Scoop. Web. July 21, 2010.
9 Rick Rothacker. ”Bank of America reaches bid-rigging settlement.” Charlotte Observer.  December 7, 2010.
10 United States. Department of Justice. Former Agent of Financial Products And Services Company Pleads Guilty For Role In Fraud Conspiracies Involving Proceeds Of Municipal Bonds. Press release. Washington, D.C. September 8, 2010.
11 “Broward County School Board member arrested.” Sunshine Review Gazette. September 24, 2009.
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