2. Construct with Caution: Beware of Fraud
2017 Business & Financial Conference
September 18, 2017 | Nashville, TN

3. Presenters Reena Panchal Senior Manager (312) 879-5491
Carlos Zapata
Manager
(914)
18 September 2017
Mitigating Fraud During Construction

4. Agenda Why is this important? Prevalence of fraud in construction
Construction is often funded by external sources
Prevention and detection are possible
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Mitigating Fraud During Construction

5. Prevalence of fraud in construction
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Mitigating Fraud During Construction

6. Construction industry fraud schemes
Percent of Cases
Corruption
36.00%
Billing
27.90%
Non-Cash
22.10%
Expense Reimbursements
20.90%
Financial Statement Fraud
17.40%
Payroll
16.30%
Skimming
15.10%
Check Tampering
10.50%
Cash Larceny
8.10%
Cash on Hand
7.00%
Register Disbursements
1.20%
Source: ACFE 2016 Report to the Nations on Occupational Fraud and Abuse
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Mitigating Fraud During Construction

7. Factors leading to fraud
Economic pressure and project overruns
Lack of internal controls
Lengthy process for permits / licenses
Joint-ventures and other forms of partnerships
Factors leading to fraud
Project financing
Use of contractors and consultants or agents
Changing conditions
Material procurement
Management of labor force
Complex payment process
Competition for contracts
Bid
Plan
Design
Procure
Build
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Mitigating Fraud During Construction

8. Top construction fraud schemes
Bribery and corruption
False representations including financial statement fraud
Top construction fraud schemes
Phantom subcontractors or vendors
Falsifying payment applications
Diverting purchases or stealing / substituting material
Overbilling
Change order manipulation
Payroll and labor fraud
Manipulating SOV and contingency accounts
Diverting lump-sum cost to time and material cost
Bid rigging and collusion
Bid rigging and collusion
Bid
Plan
Design
Procure
Build
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Mitigating Fraud During Construction

9. Case study – Skanska
Overview: A subsidiary of one of the nation’s largest construction companies paid $19.6 million to settle criminal allegations that it committed fraud against government programs on more than a decade’s worth of public works projects.
Investigation: The Skanska investigation was conducted by the inspectors general from the Metropolitan Transportation Authority, the Port Authority of New York and New Jersey, the federal Transportation Department’s Office of Inspector General and the federal Labor Department’s Office of Labor Racketeering and Fraud Investigation.
Findings: While Skanska and other companies paid an MWBE subcontractor tens of millions of dollars, the subcontractor had no employees or equipment and did no work. The actual work was performed either by the general contractor or third-party companies. Skanska was the general contractor on 10 projects, and six other Metropolitan Transportation Authority projects for which it hired Environmental Energy Associates to evade the minority requirements.
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Mitigating Fraud During Construction

10. Case study – ABC Cooperative
Overview: An electrical contractor, his wife and the General Manager of a Utility company were sentenced to federal prison and fined for an attempt to siphon off FEMA disaster relief funding. In 2005, ABC Cooperative (ABC) received a FEMA Public Assistance grant totaling $2.9 million for straightening damaged utility poles following Hurricane Wilma. ABC then sole sourced with Utilities Services, Inc. (USI), a company it owned, to complete the utility work. The General Manager of USI subcontracted the work to a local company owned by his relatives.
Investigation: The investigation was conducted by United States Attorney for the Southern District of Florida, Internal Revenue Service Criminal Investigation Division, Department of Homeland Security Office of Inspector General and the Highlands County Sheriff’s Office.
Findings: The DHS OIG discovered that the General Manager and his relatives had agreed to a kickback scheme for the sole-sourced work. As the relatives received payments totaling $992,700 for the FEMA work, they paid the General Manager over $200,000 in kickbacks.
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Mitigating Fraud During Construction

11. Construction is often funded by external sources
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Mitigating Fraud During Construction

12. Financial Recovery Funding Sources
Commercial Property Insurance
FEMA Public Assistance
Other (HUD CDBG-DR, FEMA 404 etc.)
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Mitigating Fraud During Construction

13. Property Insurance
Building, Equipment, Supplies, Leased/ Consigned Items, Employee Property
- Replacement vs ACV
Extra Expense
Business Interruption
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Mitigating Fraud During Construction

14. FEMA Public Assistance
Governed by Stafford Act
Property only
Same “design, function, and capacity”
Grantee (State) and Subgrantee relationship
Pays only after Insurance
Project worksheets
Procurement considerations
Force account labor and equipment
Oversight – OIG audits
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Mitigating Fraud During Construction

15. Key risks
Large amounts of recovery work not reimbursed through insurance or Federal grants
Temporary withholding of cash payments and severe cash flow issues
Deobligation of funding
State and federal investigations
Negative publicity
Mistrust with constituents
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Mitigating Fraud During Construction

16. Top Audit Issues Duplication of billings
Reconciliation of billings not performed (incorrect rates for equipment, labor, and benefits)
Questionable costs
Ineligible expenses, work performed, claimed
Ineligible contract method used
Failure to follow procurement procedures
Cost/price analysis not performed
Did not clearly define required services or performance standards of contractor
Did not document the basis for the contract award
Use of non-capped time and material contracts for extended period of time without proper justification
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Mitigating Fraud During Construction

17. Case study – City of San Diego
Overview: The DHS OIG recommended that FEMA disallow $1.2 million of $6 million in Public Assistance Program Grant Funds awarded to the City of San Diego
Investigation: Audited $4 million of the $6 million of FEMA Public Assistance Grant Funds awarded to the City of San Diego for damages resulting from heavy rainfall and flooding
Findings:
$654,348 in excessive landfill costs
Misclassified the debris as a type for which the City’s landfill charges a higher rate
$393,704 in fees unrelated to the disaster
Ineligible recycling fees
$112,279 in costs related to preexisting damages
$2,894 in excessive equipment costs
Used higher rates without documenting/explaining why rates were more appropriate
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Mitigating Fraud During Construction

18. Prevention and detection are possible
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Mitigating Fraud During Construction

19. Controls/Best Practices - Procurement
Segregation of duties for bidding and evaluation processes
Fair and open procurement (for FEMA grants)
Clear scope of work
Independent price/cost estimate
Clear bid evaluation criteria
Documentation and monitoring of authorization procedures for purchase orders, invoicing, and payments
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Mitigating Fraud During Construction

20. Controls/Best Practices – Accounting & Documentation
Segregation of duties for:
Bidding and evaluation processes
Invoice review and approval processes
Payroll processes
Contemporaneous review of invoices
Reconciliation of invoices to contractual documents
Reconciliation of invoices to underlying support (timesheets, receipts)
Processes to identify duplicate invoices and purchase order numbers
Documentation and monitoring of authorization procedures for purchase orders, invoicing, and payments
Bank reconciliation and review procedures to check for out-of-place vendors and endorsements
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Mitigating Fraud During Construction

21. Best practices – Grant & Insurance Recovery
Have policies and procedures in place to handle federal grant funding and insurance recovery requirements
Provide relevant training to all departments which could potentially be involved in the recovery process
Ensure that the final claim made for each project is supported by amounts recorded in the accounting system
Ensure that each expenditure is recorded in the accounting books and is referenced to supporting source documentation (checks, invoices, etc.) that can be readily retrieved
Ensure that expenditures claimed under the FEMA project are reasonable and necessary, are authorized under the scope of work, and directly benefit the project
Ensure that required records are retained for three years after closeout of the disaster
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Mitigating Fraud During Construction

22. Questions?
18 September 2017
Mitigating Fraud During Construction