Civilian Acquisitions: Selected Agencies' Use of Criminal Background
Checks on Contractor Principals to Prevent Fraud (Correspondence,
09/28/2000, GAO/GGD-00-194R).

Pursuant to a congressional request, GAO provided information on
selected agencies' use of criminal background checks to help prevent
contractor fraud, focusing on: (1) policies and practices for making
contractor responsibility determinations and conducting criminal
background checks on contractor principals; (2) efforts to suspend,
debar, or otherwise prevent firms or contractor principals that have
violated relevant federal laws and regulations from receiving government
contracts; and (3) Office of Inspector General (OIG) completed
contractor fraud investigations involving principals and whether the
principals who committed fraud had criminal histories.

GAO noted that: (1) the Federal Acquisition Regulation (FAR) sets forth
seven general standards that agencies' contracting officers are required
to use in determining whether prospective contractors are responsible;
(2) these standards require prospective contractors to have adequate
financial resources to perform the contract, the ability to comply with
contract schedules, satisfactory performance records, and satisfactory
records of integrity and business ethics; (3) although FAR does not
specifically require criminal background checks on contractor
principals, agencies are not prohibited from performing such checks and
may do so when they believe it is necessary or appropriate; (4) the
Department of Housing and Urban Development (HUD), the Department
Treasury, and General Services Administration (GSA) have acquisition
regulations and guidance that implement and supplement the FAR
requirements concerning the information that contracting officers are
expected to obtain when making contractor responsibility determinations;
(5) HUD's practices for making contractor responsibility determinations
appeared consistent with the FAR and the HUD procurement handbook; (6)
according to HUD acquisition officials, HUD's responsibility
determinations do not include criminal background checks on contractor
principals; (7) GAO found no evidence that criminal background checks
were done; (8) according to Treasury and GSA officials, their
contracting officers rely on certain types and sources of information to
make responsibility determinations; (9) Treasury and GSA officials said
that such determinations do not include criminal background checks on
contractor principals; (10) as of March 2000, HUD was among the top five
agencies regarding debarments; (11) according to HUD officials, most of
these debarments were not related to acquisition activities; (12) the
Department of Health and Human Services (HHS) and Office of Personnel
Management (OPM) accounted for about 70 percent of debarments
governmentwide; (13) like HUD, most of HHS' and OPM's debarments were
not related to acquisitions; (14) rather, their debarments involved
health care providers, such as doctors and nursing homes; (15) during
fiscal years 1997 through 1999, the OIGs at the Departments of
Agriculture, HUD, Justice, Transportation, Veterans Administration, and
at GSA investigated a total of 151 contractor principals for allegedly
committing fraud; (16) of these principals, 56, or 37 percent, were
found to have committed fraud; and (17) eight of the 56 principals who
committed fraud had criminal histories.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-00-194R
     TITLE:  Civilian Acquisitions: Selected Agencies' Use of Criminal
	     Background Checks on Contractor Principals to
	     Prevent Fraud
      DATE:  09/28/2000
   SUBJECT:  Fraud
	     Federal procurement
	     Federal procurement policy
	     Investigations by federal agencies
	     Contractors
	     Internal controls
	     Procurement regulations

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GAO/GGD-00-194R

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B-285059

Page 2GAO/GGD-00-194R Criminal Background Checks on Contractor
Principals

B-285059

September 28, 2000

The Honorable John L. Mica
Chairman, Subcommittee on Criminal
   Justice, Drug Policy and Human Resources
Committee on Government Reform
House of Representatives

Subject: Civilian Acquisitions: Selected Agencies' Use of
Criminal Background Checks on Contractor Principals to Prevent
Fraud

Dear Mr. Chairman:

This letter and its enclosures respond to your request for
information on executive agencies' utilization of criminal
background checks to help prevent fraud by federal
contractors.1 You requested this information because of your
continued concern about the potential vulnerability of federal
funds to fraud by contractors. This letter is the last in a
series of products addressed to you on this topic. 2

On the basis of discussions with your office, our objectives
were to provide information on selected agencies' use of
criminal background checks to help prevent contractor fraud.
Specifically, we provide information on selected agencies' (1)
policies and practices for making contractor responsibility
determinations and conducting criminal background checks on
contractor principals;3 (2) efforts to suspend, debar, or
otherwise prevent firms or contractor principals that have
violated relevant federal laws and regulations from receiving
government contracts; and (3) Office of Inspector General
(OIG) completed contractor fraud investigations involving
principals and whether the principals who committed fraud had
criminal histories.

To address the first objective, we obtained information from
the Departments of Housing and Urban Development (HUD) and the
Treasury, and the General Services Administration (GSA). We
selected these three agencies because they were among the
leading civilian agencies involved with acquisition and
physical security issues. For the second objective, we
obtained information from the Department of Health and Human
Services (HHS), HUD, and the Office of Personnel Management
(OPM). We selected these agencies because they were among the
top five agencies regarding debarments. For the third
objective, we obtained statistics from the OIGs at the
Departments of Agriculture, HUD, Justice, Transportation, and
Veterans Affairs (VA) and from GSA. We selected these 6
agencies because they were among the top 15 civilian agencies
that obligated funds for procurement during fiscal year 1999.

In June 2000, we briefed your office on the information we
gathered during our preliminary work, the results of which are
included in enclosure I. This letter summarizes and updates
the information presented at that briefing. The additional
information that your office requested regarding new contracts
awarded and funds obligated by the six selected agencies
during fiscal years 1997 through 1999 is included in enclosure
II.4

Background

The Federal Acquisition Regulation (FAR) generally governs all
acquisitions by executive agencies and along with agencies'
implementing and supplemental regulations makes up the Federal
Acquisition Regulations System. The FAR in general provides
agencies' contracting officers with guidance on how to award
and administer contracts for the goods and services that their
agencies need. The FAR is issued and maintained jointly by the
Secretary of Defense; the Administrator of GSA; and the
Administrator of the National Aeronautics and Space
Administration under the Office of Federal Procurement Policy
Act.5

Before government contracts are awarded, the FAR requires that
agencies determine whether prospective contractors are
responsible. The purpose of the contractor responsibility
determination is to help ensure that the government does
business only with contractors that are found to be reliable,
dependable, and capable of performing the work required under
the terms of the contract. The FAR provides that no contract
shall be awarded unless the contracting officer makes an
affirmative determination of responsibility.

Under the FAR, agencies may debar or suspend contractors for
various fraudulent or criminal offenses associated with
government contracts, such as embezzlement, theft, or bribery.
Also, agencies may debar or suspend contractors for any
serious or compelling reason that affects the responsibility
of a government contractor, such as failure to comply with the
requirements of the Drug-Free Workplace Act of 1988.6
Debarment precludes a contractor from receiving further
government contracts or assistance from any federal agency for
a specified period of time, generally not to exceed 3 years.
Suspension temporarily disqualifies a contractor from doing
business with the federal government for up to 18 months
unless legal proceedings are initiated during that period.

Summary of Findings

The FAR sets forth seven general standards that agencies'
contracting officers are required to use in determining
whether prospective contractors are responsible. Among other
things, these standards require prospective contractors to
have adequate financial resources to perform the contract, the
ability to comply with contract schedules, satisfactory
performance records, and satisfactory records of integrity and
business ethics. Although the FAR does not specifically
require criminal background checks on contractor principals,
agencies are not prohibited from performing such checks and
may do so when they believe it is necessary or appropriate.
For example, in one case, a contracting officer found a
prospective contractor nonresponsible for lack of integrity
based on information in a criminal investigation report.7

HUD, Treasury, and GSA have acquisition regulations and
guidance that implement and supplement the FAR requirements
concerning the information that contracting officers are
expected to obtain when making contractor responsibility
determinations. For example, HUD's Handbook on Procurement
Policies and Procedures requires that contracting officers,
when making responsibility determinations, are to check with
the HUD OIG regarding information from its completed audits
and investigations that could adversely affect affirmative
determinations of responsibility for prospective contractors.
Also, Treasury's acquisition regulations discuss obtaining
information on credit reports on prospective contractors.
Finally, GSA's acquisition manual includes procedures for
obtaining information on prospective contractors from
appropriate activities within GSA, such as legal counsel,
contract management, and OIG.

HUD's practices for making contractor responsibility
determinations appeared consistent with the FAR and the HUD
Handbook. According to HUD acquisition officials, HUD's
responsibility determinations do not include criminal
background checks on contractor principals. Our review of two
major HUD contract awards showed that the requisite
responsibility determinations were based on the types and
sources of information identified in the FAR and the HUD
Handbook. We found no evidence that criminal background checks
were done. According to Treasury and GSA officials, their
contracting officers rely on similar types and sources of
information to make responsibility determinations. Treasury
and GSA officials said that such determinations do not include
criminal background checks on contractor principals.

As of March 2000, HUD was among the top five agencies
regarding debarments. According to HUD officials, most of
these debarments were not related to acquisition activities.
HUD's debarments primarily involved loans, grants, subsidies,
and insurance. HHS and OPM accounted for about 70 percent of
debarments governmentwide. Like HUD, most of HHS' and OPM's
debarments were not related to acquisitions. Rather, their
debarments involved health care providers, such as doctors and
nursing homes.

During fiscal years 1997 through 1999, the OIGs at the
Departments of Agriculture, HUD, Justice, Transportation, and
VA and at GSA investigated a total of 151 contractor
principals for allegedly committing fraud. Of these
principals, 56, or 37 percent, were found to have committed
fraud. Eight of the 56 principals who committed fraud had
criminal histories.

Scope and Methodology

In developing the information for this letter, we (1) reviewed
the appropriate sections of the FAR as well as HUD, Treasury,
and GSA supplemental contracting guidance; (2) researched
relevant Comptroller General decisions; (3) examined
documentation related to HUD's responsibility determinations
for two major contracts; (4) discussed responsibility
determinations, debarment, and background checks with
cognizant HHS, HUD, OPM, Treasury, and GSA officials; (5)
obtained statistics on completed OIG contractor fraud
investigations from the OIGs at the Departments of
Agriculture, HUD, Justice, Transportation, and VA and at GSA;
and (6) analyzed the Federal Procurement Data System to
identify new contracts awarded and funds obligated by six
selected agencies during fiscal years 1997 through 1999.

We performed our work in Washington, D.C., and Philadelphia,
PA, from March through July 2000, in accordance with generally
accepted government auditing standards. We requested comments
on a draft of this letter and its enclosures from the
Secretary of HUD. We also provided officials from the
Departments of Agriculture, HHS, Justice, Transportation, the
Treasury, and VA, as well as GSA and OPM copies or relevant
portions of the draft to confirm the accuracy of our
presentation of the information we obtained from them.

Agency Comments and
Our Evaluation

In August and September 2000, we obtained comments on a draft
of this letter and its enclosures from HUD officials,
including the Chief Procurement Officer. The officials
concurred with the information we presented on the results of
our work. The Chief Procurement Officer also provided
additional perspective on the results of our work related to
HUD's (1) practices for making contractor responsibility
determinations and (2) possible use of criminal background
checks on principals to prevent contractor default. With
regard to contractor responsibility determinations, the Chief
Procurement Officer said that the HUD OIG's checks of its
completed audits and investigations related to prospective
contractors exceeded FAR requirements. He said that although
these checks were very useful, the HUD OIG has decided to
discontinue making such checks. Regarding criminal background
checks, he indicated that such checks would not have prevented
HUD from awarding some of its Management and Marketing
contracts to a firm that subsequently had to be terminated for
default. Rather, he said that the best way to ensure
compliance with HUD contracts is to strictly enforce them and
terminate the contracts if contractors fail to perform. He
said that by suspending the firm and initiating debarment
proceedings against it, HUD sent a clear message to
contractors that poor performance will not be tolerated and
that poor prior performance will affect responsibility
determinations for these contractors in the future. Also, the
officials suggested some minor clarifications, which we
incorporated where appropriate.

In addition, during August and September 2000, officials from
the Departments of Agriculture, HHS, Justice, Transportation,
the Treasury, and VA, as well as GSA and OPM, provided
comments on those portions of the draft that presented
information we obtained from them.8 The officials agreed with
our characterization of their information and suggested a few
technical changes. We made their suggested changes where
appropriate.

We are sending copies of this letter and the enclosures to
Representative Patsy T. Mink, Ranking Minority Member of your
Subcommittee. We are also sending copies to Representative Dan
Burton, Chairman, and Representative Henry A. Waxman, Ranking
Minority Member, of the House Committee on Government Reform;
and Senator Fred Thompson, Chairman, and Senator Joseph I.
Lieberman, Ranking Minority Member, of the Senate Committee on
Governmental Affairs; and other interested congressional
members. In addition, we are sending copies to the Honorable
Andrew M. Cuomo, Secretary of HUD, and will make copies
available to others upon request.

Major contributors to this letter included Gerald P. Barnes,
Anne Hilleary, and Geraldine Beard. If you have any questions
about this letter or the enclosed slides, please contact Mr.
Barnes of my staff or me on (202) 512-8387.

Sincerely yours,

JayEtta Hecker
Associate Director, Government
   Business Operations Issues

_______________________________
1 For purposes of this letter, a contractor may be an
individual or entity, such as a company, firm, or business.
2 We also issued two other products that responded to your
request: Medicare: Contractors Screen Employees but Extent of
Screening Varies (GAO/HEHS-00-135R); and a May 31, 2000,
letter in which we provided you information on various issues
associated with agency background checks on contractors (B-
285059).
3 The Federal Acquisition Regulation defines principals as
officers, directors, owners, partners, and persons having
primary management or supervisory responsibilities within a
business entity, such as general managers, plant managers, and
heads of subsidiaries.
4 The six agencies included the Departments of Agriculture,
HUD, Justice, Transportation, and VA and GSA.
5 41 U.S.C.  405, 421.
6 Public Law 100-690.
7 Becker and Schwindenhammer. GmbH, B-225396, Mar. 2, 1987, 87-
1 CPD  235.
8 The officials who provided comments included (1)
Agriculture's Supervisory Law Enforcement Analyst, Program
Investigations Division, OIG; (2) HHS' Procurement Analyst,
Office of Acquisition Management; and Assistant Inspector
General for Legal Affairs, OIG; (3) Justice's Assistant
Special Agent-in-Charge of Operations, Investigations
Division, OIG; (4) Transportation's Special Agent-in-Charge of
Headquarters Operations, OIG; (5) Treasury's Director, Office
of Procurement; (6) VA's Director, Analysis and Oversight
Division, Office of Investigations, OIG; (7) GSA's Deputy
Associate Administrator for Acquisition Policy; Special
Assistant for Contractor Integrity, Office of Acquisition
Policy, Office of Governmentwide Policy; and Deputy Assistant
Inspector General for Investigations, Office of
Investigations, OIG; and (8) OPM's Chief, Contracting
Division, Office of Contracting and Administrative Services;
and the Debarring Official, OIG.

Enclosure I
Selected Agencies' Use of Criminal Background
Checks on Contractor Principals to Prevent Fraud
Page 18GAO/GGD-00-194R Criminal Background Checks
on Contractor Principals

Source: Departments of Agriculture, HUD, Justice,
Transportation, and VA and GSA OIGs.

Source: Departments of Agriculture, HUD, Justice,
Transportation, and VA and GSA OIGs.

Source: Departments of Agriculture, HUD, Justice,
Transportation, and VA and GSA OIGs.

Source: Departments of Agriculture, HUD, Justice,
Transportation, and VA and GSA OIGs.

Source: Departments of Agriculture, HUD, Justice,
Transportation, and VA and GSA OIGs.

Source: Departments of Agriculture, HUD, Justice,
Transportation, and VA and GSA OIGs.

Source: Departments of Agriculture, HUD, Justice,
Transportation, and VA and GSA OIGs.

Source: Departments of Agriculture, HUD, Justice,
Transportation, and VA and GSA OIGs.

Enclosure II
New Contracts Awarded and Funds Obligated for
Acquisitions Above $100,000 by Six Selected
Agencies for Fiscal Years 19
Page 32GAO/GGD-00-194R Criminal Background Checks
on Contractor Principals

 New contracts awarded      Funds obligated by fiscal year (in   Total funds
                                       thousands)                obligated
                               (in constant FY99 dollars)           (in
                                                                 thousands)
                                                                     (in
                                                                  constant
                                                                    FY99
                                                                  dollars)
Fiscal year      Number        FY 1997      FY 1998     FY 1999     FYs 1997-
                                                                       1999
1997              5,932     $6,182,334     $809,463    $568,871   $7,560,668
1998              6,499            ---    5,747,320     796,214    6,543,534
1999              5,836            ---          ---   6,379,657    6,379,657
Total            18,267     $6,182,334   $6,556,783  $7,744,742  $20,483,859
Note:  We did our analysis based on contract
purchases above $100,000 because FAR permits
purchases at $100,000 or below to use simplified
acquisition procedures that are less complex and
eliminate various requirements compared to
acquisition procedures used for contracts above
$100,000.

aThe six selected agencies were the Departments of
Agriculture, HUD, Justice, Transportation, and VA
and GSA.

Source:  GAO analysis of data obtained from
Federal Procurement Data System.

*** End of Document ***