DOJ Warns of Fraud and Collusion in Procuring Economic Recovery Funds

Kelley Drye Client Advisory

On April 13, 2009, the United States Department of Justice (DOJ) Antitrust Division issued a note on its web site warning of the potential for fraud and collusion among vendors applying for the over $500 billion in funds to be provided by the American Recovery and Reinvestment Act of 2009 (ARRA).

The ARRA, signed into law by President Obama in February 2009, aims to revitalize the national economy by allocating funds to be granted to private procurement vendors through a competitive application process. The DOJ has issued a reminder that it is a crime to make false statements in applications or to work with other vendors to fill out applications for funds, and has called upon federal agency procurement and grant officers, as well as agency auditors and investigators, to help identify and report such misconduct. In addition, the DOJ has established a Citizen Complaint Center, whose contact information is on the DOJ web site, to enable people to contact DOJ regarding suspected collusion.

To assist agency employees, auditors, and investigators in spotting collusive behavior, the DOJ has published resources including a list titled Red Flags of Collusion” that identifies the following possible indicators of collusion:

1)     Market Participants:

  • small number of vendors
  • small group of major vendors make up a large market share
  • the good or service is standardized so that the award turns on price rather than other factors (e.g. design, quality, service)

2)     Applications or Proposals of Vendors are Similar:
  • similar handwriting, typographical errors, or math errors
  • mailed from the same postal address, email address, fax, or overnight courier number
  • same last minute changes whited-out or crossed-out to change price quotes
  • same vendor created or edited the document, as shown by electronic document properties

3)     Patterns in Awards Repeated Over Time:
  • competing vendors rotate over time (i.e. each vendor gets a turn to win)
  • each competing vendor continues winning similar amounts of work
  • one vendor continues to win, regardless of how much competition the vendor faces
  • winning vendor subcontracts work to a losing vendor or to a company which refrained from competing for funds or dropped out of the competition
  • number of competing vendors decreases after an award

4)     Suspicious Behavior:
  • vendor proposes providing a good or service you know they cannot provide
  • a single vendor submits more than one proposal or brings more than one proposal to an in-person procurement or grant process
  • vendor makes statements implying knowledge of a competitor’s likelihood of winning an award or advance knowledge of a competitor’s prices

Procurement vendors should also bear in mind that one vendor’s invitation to another vendor to collude may be a criminal action, even if the second vendor does not accept the invitation and thereby reach an agreement. The DOJ has previously brought antitrust and mail and wire fraud charges against companies in such circumstances. For example, American Airlines was found to have asked Braniff Airlines to raise prices at the same time American did. See United States v. American Airlines, 743 F.2d 1114 (5th Cir. 1984), cert. dismissed, 474 U.S. 1001 (1985). Braniff tape-recorded the conversation and blew the whistle” on American. The court found American guilty of attempting to monopolize their market by inviting Braniff to collude.

Implications for Vendors

Vendors should compete independently for ARRA funds rather than pooling their efforts with other vendors. A vendor who receives an invitation from another to collude should reject the overture, and memorialize its rejection. It may be tempting to cooperate with other companies in these tough economic times, but the DOJ has signaled its seriousness in preventing collusion so that our economy can benefit from vigorous competition among vendors. Vendors seeking to procure ARRA grant awards should ensure that employees responsible for the grant applications are trained to avoid the red flags identified by the DOJ. In addition, vendors contemplating the formation of joint ventures to procure funds should consult with antitrust counsel.

Kelley Drye & Warren LLP

Kelley Drye is recognized as a premier antitrust and competition firm. Our national reputation stems from our proven track record of successfully representing clients in complex competition issues arising under federal and state antitrust laws. Our professionals include officials from the ABA Antitrust Section, and former officials of the United States Department of Justice Antitrust Division and the FTC. Our firm is also supported by Georgetown Economic Services, an economic consulting firm.

For more information about this Client Advisory, please contact:

William C. MacLeod
(202) 342-8811