DOD Procurement Fraud: Fraud by an Air Force Contracting Official (Letter
Report, 09/23/1998, GAO/OSI-98-15).
This report examines the two fraud cases cited in the preceding report
and testimony. GAO reviews the actions of Mark J. Krenik, a former
civilian employee of the Air Force, who was convicted of submitting
false invoices and fictitious receiving reports for contractor services
and materials. GAO (1) provides detailed information on the schemes that
Mr. Krenik used to commit fraud, including the level of involvement by
contractor staff, and (2) summarizes internal fraud cases involving the
Defense Finance and Accounting Service.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: OSI-98-15
TITLE: DOD Procurement Fraud: Fraud by an Air Force Contracting
Official
DATE: 09/23/1998
SUBJECT: Embezzlement
Civilian employees
Air Force procurement
Department of Defense contractors
White collar crime
Larceny
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GAO/OSI-98-15
Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Administrative Oversight and
the Courts, Committee on the Judiciary,
U.S. Senate
September 1998
DOD PROCUREMENT FRAUD - FRAUD BY
AN AIR FORCE CONTRACTING OFFICIAL
GAO/OSI-98-15
DOD Procurement Fraud
(600450)
Abbreviations
=============================================================== ABBREV
AIMD - Accounting and Information Management Division
AQS - Applied Quantitative Systems
DFAS - Defense Finance and Accounting Service
GAO - General Accounting Office
OSI - Office of Special Investigations
Letter
=============================================================== LETTER
B-280720
September 23, 1998
The Honorable Charles E. Grassley
Chairman, Subcommittee on Administrative
Oversight and the Courts
Committee on the Judiciary
United States Senate
Dear Mr. Chairman:
This report responds to your request that we review the actions of
Mark J. Krenik, a former civilian employee of the U. S. Air Force,
7th Communications Group, the Pentagon, who was convicted of
submitting false invoices and fictitious receiving reports for
contractor services and materials.\1 Specifically, you asked us to
provide detailed information on the scheme or schemes that Mr.
Krenik used to commit fraud, including the level of involvement by
contractor staff. Mr. Krenik did not consent to our request for an
interview. Accordingly, the information contained in this report is
based on the testimony of others and an examination of pertinent
records. We agreed to also provide you a summary of internal fraud
cases involving the Defense Finance and Accounting Service (DFAS).\2
The summary is included as appendix I.
In a separate report, GAO's Accounting and Information Management
Division will (1) provide information on the history of the two
contracts associated with the schemes that Mr. Krenik used and (2)
discuss examples of internal control weaknesses that contributed to
Mr. Krenik's, and similar instances of Defense-related financial
theft.
--------------------
\1 In 1996, Mr. Krenik pleaded guilty to three counts of submitting
false claims to the United States, was sentenced to 3 years
probation, and was required to pay restitution.
\2 DFAS--established to improve Department of Defense financial
management through the consolidation, standardization, and
integration of finance and accounting operations--took over
responsibility for 332 military installation finance and accounting
offices in December 1992. Prior to this, the Air Force District of
Washington/Accounting and Finance Office processed invoices under the
contracts discussed in this report.
BACKGROUND
------------------------------------------------------------ Letter :1
Hughes STX had a contract with the Air Force to provide office
automation hardware, software, maintenance, training, and contractor
support services.\3 The July 30, 1986, contract award, in the amount
of $49.6 million, included options and modifications that extended
performance until December 31, 1991.
Effective January 3, 1992, the work performed by Hughes STX continued
under a separate contract. This contract required delivery of
hardware and software maintenance, technical support, and training;
it resulted in approximately $8 million in obligations through
September 1996.
Mr. Krenik was the Contracting Officer's Technical Representative\4
on both Hughes STX contracts. He was authorized, among other
functions, to interpret the statement of work, direct the performance
of contractor efforts within the scope of the statement of work,
accept deliverables, control all government technical interface with
the contractor, and monitor contractor performance. A Technical
Representative is authorized to perform these functions only when
they are exercised in a manner consistent with the statement of work,
terms and conditions of the contract, and any delivery orders issued
under the contract.
--------------------
\3 The contractor providing services for the Air Force's Air Staff
Automation Systems changed over time. In July 1986, the contract was
awarded to SASC Technologies, Inc., which later became ST Systems
Corporation (STX). When Hughes Aircraft (owned by General Motors
Corporation) acquired STX in October 1991, it became known as Hughes
STX. Since the December 1997 merger of Raytheon and Hughes Aircraft,
the company has been referred to as Raytheon STX.
\4 The Technical Representative is not authorized to modify any
contract terms nor to approve expenditures beyond the funded amount
of the delivery order.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
In the fall of 1992, Mr. Krenik successfully encouraged certain
Hughes STX employees to bill the government over $300,000 for
services that were not rendered. He then attempted to obtain these
funds by directing Hughes STX to pay a nonexistent subcontractor\5
for consulting services based on a bogus subcontractor invoice that
he supplied.\6 Had this scheme worked, the government would have paid
Hughes STX for work "performed" by the fictitious subcontractor; and
Hughes STX would have "reimbursed" the subcontractor by sending the
money to a post office box controlled by Mr. Krenik.
When Hughes STX contract administration personnel learned of the
participation of Hughes STX employees in the billing incident, they
conducted an internal investigation and returned the government
checks, which the company had not negotiated, for the over $300,000
that had been billed. However, they did not notify government
authorities of either the extent of the company's involvement in the
billing incident or the bogus subcontractor invoice.
After Hughes STX employees refused to participate in the scheme
involving the bogus subcontractor invoice, Mr. Krenik executed
another plan in December 1992, without Hughes STX involvement, by
which he created and submitted 11 bogus invoices totaling over
$500,000. In January 1993, the Air Force issued payment checks for
the invoices and mailed them, unwittingly, to a post office box that
Mr. Krenik had opened in December 1992. Mr. Krenik's theft was
detected after officials of the bank in which he had deposited the
checks became suspicious of what they considered to be unusually
large transactions and reported them to the U.S. Secret Service.
--------------------
\5 Mr. Krenik told Hughes STX employees that the government had
failed to pay the contractor for consulting services and that Hughes
STX would act merely as a conduit for reimbursement to the
contractor. At the time, Hughes STX employees were unaware that the
contractor did not exist.
\6 Mr. Krenik and Hughes STX staff were investigated by the U.S.
Attorney, Eastern District of Virginia, but were not charged in this
scheme.
MR. KRENIK ATTEMPTED TO
DEFRAUD THE GOVERNMENT
------------------------------------------------------------ Letter :3
CONTRACTOR EMPLOYEES
PREPARED/SUBMITTED FALSE
INVOICES AND RECEIVING
REPORTS
---------------------------------------------------------- Letter :3.1
According to current and former contractor employees, in September
1992 Mr. Krenik asked Hughes STX management staff to bill the
government for work not yet performed by the company so that
unobligated funds could be used before the end of the fiscal year.\7
On October 14, 1992, using specific instructions provided by Mr.
Krenik, the Hughes STX Contract Administrator\8 --the individual
responsible for invoicing--prepared five false invoices, totaling
$342,832.\9
The five sequentially numbered Hughes STX invoices were dated October
14, 1992, and provided the following details (see table 1) for the
product or services purportedly rendered and billed.
Table 1
False Hughes STX Invoices Dated October
14, 1992
Invoice
number Description Price
------------ -------------------------------------------- ----------
921036 Principal programmer - $67,100
$61/hour
Parts 31,393
Hourly maintenance 30,000
Maintenance PPM 700
921037 Training 27,412
921038 Principal programmer - 102,419
$61/hour
Parts 33,008
Hourly maintenance 30,000
921039 Technical assistance 10,400
921040 Technical assistance 10,400
======================================================================
Total $342,832
----------------------------------------------------------------------
Source: Hughes Aircraft
On October 20, 1992, the Hughes STX Project Manager\10 signed a
DD-250\11 --the Material Inspection and Receiving Report--for each
invoice, falsely indicating that Hughes STX had provided to the
government the materials/services itemized on the invoices. On the
same date, Mr. Krenik picked up the invoices and DD-250s at the
Hughes STX office in Vienna, Virginia.
Mr. Krenik signed the five DD-250s dated October 26, 1992, falsely
certifying the Air Force's receipt of the materials and services, and
submitted the paperwork for payment. The government subsequently
processed the paperwork for all five invoices and paid three of them.
The accounting classification codes on the affiliated government
vouchers indicate that the funds used were from 1991 and 1992
appropriations.
--------------------
\7 An appropriation cannot be used to purchase services or supplies
that are not needed until after the appropriation expires. A fiscal
year appropriation may generally be obligated only to meet a
legitimate, or bona fide, need arising in the fiscal year for which
the appropriation is made. The government's fiscal year ends on
September 30.
\8 In other documentation, this position was also referred to as
Program Administrator.
\9 Former Hughes STX employees who were involved in this transaction
told us that they were following Mr. Krenik's specific instructions
and did not realize at the time that preparation of these invoices
was illegal.
\10 In other documentation, this position was also referred to as
Program Manager.
\11 By signing this document, the contractor certifies that the items
listed have been provided and are ready for the government's use.
The government representative's signature on the DD-250 certifies
that the items have been received from the contractor.
MR. KRENIK ATTEMPTED TO
OBTAIN THE MONEY FROM HUGHES
STX
---------------------------------------------------------- Letter :3.2
Having caused the government to begin payment to Hughes STX for
services that it had not rendered, Mr. Krenik instructed Hughes STX
employees to make payment to a fictitious subcontractor, "Applied
Quantitative Systems" (AQS), for entirely different services.
On October 20, 1992, Mr. Krenik opened a McLean, Virginia, post
office box in the name of AQS.
Hughes STX received a memorandum dated October 14, 1992, (see fig.
1) from Mr. Krenik, instructing Hughes STX to order $500,000 in
consulting services from AQS and to bill $125,000 for "markup"
(administrative handling). Appended to the memorandum was the bogus
AQS invoice (see fig. 2). According to the former Hughes STX
Project Manager, Mr. Krenik told him that he wanted to apply work
performed by AQS to the contract. The former Project Manager told us
that the incentive for Hughes STX to participate in this was Mr.
Krenik's proposed 25-percent markup, i.e., $125,000.\12
Specifically, Hughes STX was to bill the Air Force $342,832 for these
consulting services, using Hughes STX invoice numbers 921036 through
921040 (the same invoice numbers and the same dollar amounts as shown
in table 1, but for different services). Hughes STX was to bill the
Air Force the balance of the $625,000--$282,168--later in fiscal year
1993, after determining a delivery order number.
As a result of Mr. Krenik's October 14, 1992, memorandum and
discussions with Hughes STX management, the staff asked the company's
Contract Administrator in early November 1992 to prepare an invoice
to the Air Force for the services purportedly provided by AQS. The
Contract Administrator prepared the invoice\13
and subsequently advised the Hughes STX Group Business Manager.\14
Figure 1: October 14, 1992,
Memorandum for AQS Services
(See figure in printed
edition.)
Figure 2: Bogus AQS Invoice
Dated October 1, 1992
(See figure in printed
edition.)
--------------------
\12 The then Project Manager and the then General Manager met to
discuss the AQS invoice proposal, decided that the proposed markup
was too "steep," and discussed lowering the markup amount.
\13 According to the Contract Administrator, the invoice was later
destroyed.
\14 In other documentation, this position was also referred to as
Manager, Contracts and Pricing.
HUGHES STX MANAGEMENT
DISCOVERED AND CANCELED THE
TRANSACTIONS
---------------------------------------------------------- Letter :3.3
The Hughes STX Group Business Manager became concerned about the AQS
invoice, which Mr. Krenik had attached to his October 14, 1992,
memorandum, because it appeared to be outside the scope of the
contract.\15 Therefore, the Group Business Manager contacted the
Director of Contracting in Lanham, Maryland, and, on November 9,
1992, sent Mr. Krenik's October memorandum, along with the AQS
invoice, to the Director via facsimile. The following day, the
Director of Contracting visited Hughes STX in Vienna, Virginia, to
discuss the AQS invoice. While there, the Director learned of the
billing for services not rendered (the five false invoices),
determining that the AQS invoice and the invoices for services not
rendered were improper and that corrective action was necessary.\16
Over the next 2 weeks, Hughes STX senior management met to discuss
the false invoices.\17 They determined that the Air Force had already
processed three (totaling $322,032) of the five invoices for payment.
Reportedly, at the request of Hughes STX, Mr. Krenik had the Air
Force withdraw the remaining two invoices (totaling $20,800). Had
Hughes STX followed through on Mr. Krenik's instructions, it would
have eventually billed the government $625,000; sent AQS (Mr.
Krenik) $500,000; and kept $125,000 as markup.
On November 24, 1992, Hughes STX voided four U.S. Treasury checks
(in payment of three of the five invoices) totaling $322,032. On
December 4, 1992, the Hughes STX Director of Contracting forwarded
the four voided checks to the Air Force. The memorandum (see fig.
3) accompanying the returned checks indicated "that invoices . . .
were prepared and submitted improperly." Hughes STX did not provide
details to the government about the AQS/advance billing issues or Mr.
Krenik's involvement.
Figure 3: December 4, 1992,
Hughes STX Memorandum
Concerning the Voided Checks
(See figure in printed
edition.)
--------------------
\15 The AQS invoice was purportedly a bill to the Air Force District
of Washington/Accounting and Finance Office in the amount of $500,000
for "renewal subscription for legislative consulting and analysis."
The Hughes STX contract called for the delivery of hardware and
software maintenance, technical support, and training.
\16 Hughes STX staff attempted to verify the existence of AQS with
the telephone company and were advised that there was no such
listing.
\17 Mr. Krenik attended at least one of these meetings.
MR. KRENIK DEFRAUDED THE
GOVERNMENT
------------------------------------------------------------ Letter :4
In a separate scheme, Mr. Krenik, without contractor involvement,
falsely invoiced the government for $504,941.19; received checks at
his personal post office box for the amount invoiced; deposited the
moneys into accounts he controlled; and attempted to withdraw the
funds. Suspicious bank officials notified the Secret Service. After
being contacted by the Secret Service and in an attempt to conceal
the fraud, Mr. Krenik wrote two checks and forged a contracting
official's signature to an accompanying letter, stating that the
invoices had been the result of billing errors.
On December 15, 1992, Mr. Krenik opened post office box 215 in
Vienna, Virginia, in his own name. On December 24, 1992, Mr. Krenik
delivered to the Air Force Finance Office 11 bogus invoices totaling
$504,941.19. Accompanying the invoices were the respective DD-250s,
on which Mr. Krenik had falsely certified that work had been
performed and deliveries made. Special instructions included on the
invoices directed that payments be remitted to ST Systems Corporation
at the Vienna, Virginia, post office box. The 11 invoices, the
majority of which were dated October 22, 1992, provided the following
information (see table 2) for the products or services purportedly
rendered and billed.
Table 2
Mr. Krenik's 11 False Invoices
Invoice
number Description (quantity ordered) Price
------------ ---------------------------------------------- --------
921051 Technical assistance $
10,400.0
0
921052 Technical assistance 10,400.0
0
921053 Tempest serial mouse (23) 9,361.00
921054 Tempest serial mouse (4) 1,628.00
25-foot Tempest serial cable 142.00
921055 Tempest color monitor (2) 5,130.00
Tempest 386 CPU (2) 19,800.0
0
140 MB hard drive (2) 4,066.00
LIM EMS 4.0 (7) 252.00
Technical assistance 101.19
921056 Power 6/32 disk controller (1) 3,993.00
Installation 500.00
921058 Maintenance PPM 700.00
Hourly maintenance 19,000.0
0
Parts 5,835.00
921059 Training 27,250.0
0
921060 Principal programmer -490 29,890.0
0
$61/hour
Hourly maintenance 24,800.0
0
Parts 29,275.0
0
921105 Technical support 28,600.0
0
Hourly maintenance 24,960.0
0
Parts 21,144.0
0
921106 Technical support 199,899.
00
Hourly maintenance 13,954.0
0
Parts 13,861.0
0
======================================================================
Total $504,941
.19
----------------------------------------------------------------------
Source: U.S. Air Force
On January 19, 1993, the Finance Office approved the 11 invoices for
payment; and 3 days later, the checks were issued and mailed to post
office box 215.\18 On February 4, 1993, Mr. Krenik deposited the
$504,941.19 into two Maryland National Bank accounts he had opened
using the corporate names, Hughes STX and ST Systems.
When Mr. Krenik attempted to withdraw $50,000 from one of the
accounts on February 8, 1993, the bank teller became suspicious and
notified her supervisor.\19
Mr. Krenik was told that the recently deposited checks had not
cleared and he was allowed to withdraw only $500. The next day, he
tried to withdraw $503,000 from the accounts at another Maryland
National Bank branch and was advised that funds would be available in
2 days, on February 11, 1993.
On February 10, 1993, Maryland National Bank officials reported to
the Secret Service their suspicions of possible fraudulent
negotiation of U.S. Treasury checks. On February 11, 1993, in an
interview conducted by the Secret Service, the Hughes STX Vice
President of Finance disavowed all knowledge of the 11 invoices Mr.
Krenik had submitted to the Air Force.
On February 12, 1993, investigators from the Secret Service and the
Air Force Office of Special Investigations (AFOSI)\20 interviewed Mr.
Krenik, at which time he admitted to having received 11 Treasury
checks at his post office box and opening two accounts at Maryland
National Bank from which he attempted to withdraw the funds he had
deposited. Finally, Mr. Krenik gave written consent for
investigators to search his vehicle. Incriminating evidence was
discovered during the search, and Mr. Krenik declined to answer
further questions.
On February 18, 1993, the 7th Communications Group, U.S. Air Force
received two checks totaling $504,941.19 (see fig. 4) and dated
February 11, 1993, to be drawn from Mr. Krenik's corporate accounts
at Maryland National Bank.\21 The letter (see fig. 5) accompanying
the checks (also dated February 11, 1993, and purportedly written by
the Hughes STX "Director of Contracting") noted that the funds were
being returned because a review of past invoices had revealed
overbilling errors. Mr. Krenik, in an effort to conceal the fraud,
had written the letter and forged the Hughes STX Group Business
Manager's signature.
Figure 4: Checks Dated
February 11, 1993, Sent to U.S.
Air Force by Mr. Krenik
(See figure in printed
edition.)
Figure 5: Bogus Letter Dated
February 11, 1993, Accompanying
the Checks
(See figure in printed
edition.)
--------------------
\18 According to the accounting and finance certifying officer, it
was policy at the time to make payments to the company and address
indicated on an invoice (regardless of what the computer system
indicated as the contractor's address). In addition, the accounting
technician who prepared the payment packages told us that, at the
time, many staff members had open access to the payment system and
were able to alter payment addresses.
\19 The teller recognized Mr. Krenik as a long-time customer at that
bank. She became suspicious because previously he had never had that
much money in his accounts.
\20 Because Mr. Krenik was a civilian employee of the Air Force, the
Secret Service brought AFOSI into the matter.
\21 These checks were not cashed. The moneys were returned to the
U.S. Treasury after the case against Mr. Krenik was adjudicated in
1996.
CORPORATE INTERNAL
INVESTIGATION
------------------------------------------------------------ Letter :5
After contact by the Secret Service, Hughes and its parent, General
Motors Corporation, conducted an internal investigation. We were
advised that the internal investigation of the Krenik matter revealed
that Hughes STX was not timely in notifying government officials
regarding Mr. Krenik's bogus AQS invoice and the improper billing
for services not rendered. General Motors also determined that
Hughes STX had been deficient in providing its employees required
ethics training, which includes instruction on the prompt reporting
of questionable or improper activities.
METHODOLOGY
------------------------------------------------------------ Letter :6
We conducted our investigation from October 1997 to August 1998. We
interviewed Air Force personnel and contractor staff who had
knowledge of the circumstances surrounding the Krenik matter. In
addition, we reviewed records maintained by the Department of Defense
(Air Force contracting, AFOSI, and the Air Force Audit Agency);
Hughes STX (now Raytheon STX); the Department of the Treasury (U.S.
Secret Service); and the Department of Justice, Office of the U. S.
Attorney, Eastern District of Virginia. Mr. Krenik declined our
request for an interview. During the course of our investigation, we
referred irregularities that we uncovered regarding the Hughes STX
contracts to the Defense Contract Audit Agency and the Office of
Inspector General, Department of Defense.
---------------------------------------------------------- Letter :6.1
As agreed with your office, unless you announce its contents earlier,
we plan no further distribution of this report until 30 days after
the date of this letter. At that time, we will send copies of the
report to interested parties and make copies available to others upon
request. If you have any questions concerning this report, please
contact me or Assistant Director David Buckley at (202) 512-6722.
Major contributors to this report are listed in appendix II.
Sincerely yours,
Eljay B. Bowron
Assistant Comptroller General
for Special Investigations
EXAMPLES OF FRAUD CASES INVOLVING
THE DEFENSE FINANCE AND ACCOUNTING
SERVICE BETWEEN 1991 AND 1998
=========================================================== Appendix I
Following are summaries of 13 cases of fraud involving the Defense
Finance and Accounting Service (DFAS). These case summaries from the
Defense Criminal Investigative Service, Air Force Office of Special
Investigations, and Naval Criminal Investigative Service exemplify
the types of internal crimes that have beset various Department of
Defense financial systems. The schemes usually entailed creating or
altering documents (e.g., claims, travel vouchers, invoices); forging
signatures; or establishing false accounts for fictitious people or
companies. For the most part, the perpetrators were able to receive
funds by having checks sent to post office boxes or street addresses
the perpetrators controlled or by having checks sent electronically
to controlled bank accounts. In the examples discussed, just over
half of the crimes were discovered by coworkers or other internal
sources. Others were uncovered by external sources and through
internal control systems.
1. A military clerk in an accounting and finance office at Hanscom
Air Force Base (AFB), Massachusetts, embezzled more than $316,000 by
altering previously paid contractor claims and resubmitting them for
payment. The clerk obtained a fictitious business license and opened
a business bank account under the fictitious business name on the
claim forms. He had the claims checks sent to a post office box from
which he retrieved them and deposited them into the fictitious
business bank account. The clerk's wife discovered the scheme and
threatened to report the theft. The clerk later confessed the
embezzlement scheme to a coworker. In September 1996, the clerk was
convicted at a general court-martial, receiving a dishonorable
discharge and a 6-year prison term. He was also fined $296,000.
2. A retired Navy chief petty officer and former Civil Service
merchant mariner served as a supply officer aboard Military Sealift
Command ships. Between January 1989 and December 1992, he defrauded
the U.S. Navy of over $3 million. He filed bogus invoices for
materials allegedly supplied to the Military Sealift Command by a
company that did not exist. DFAS mailed payments to a Norfolk,
Virginia, post office box. His fraud was uncovered when someone
noted that shipments and services were going to decommissioned ships.
Indicted on 430 counts in 1994, he was sentenced to 87 months in
prison (without parole) and 180 months probation. He was also
ordered to pay $3,025,000 in restitution and $250 in a special
assessment.
3. A civilian accounting technician at Bolling AFB, Washington,
D.C., embezzled approximately $32,000 by altering authentic travel
vouchers. She changed the names and Social Security numbers (SSN)
slightly, then electronically transferred the funds to her personal
bank account. Individuals who had not been paid resubmitted their
vouchers and were paid, since records with the actual names and SSNs
indicated nonpayment. The scheme was discovered when an employee
called to complain about nonpayment of his travel voucher. Another
technician saw the similar name and SSN, connected the transaction to
the perpetrator, and informed law enforcement. When authorities
investigated the perpetrator's transactions, they found a pattern of
similar payments. In December 1996, the accounting technician was
convicted in federal court and received 5 years probation. She made
restitution amounting to $29,325 and voluntarily resigned her
position.
4. On three occasions at the Air National Guard Station, Birmingham,
Alabama, a military comptroller fabricated payment vouchers using
fictitious contract numbers and fictitious contractor names,
resulting in $118,000 being sent to a bank account that the
comptroller controlled. An accounting technician uncovered the
scheme when he noted a discrepancy in the records. In January 1996,
the comptroller was convicted in federal court, ordered to pay
$128,000 in restitution, and sentenced to 18 months in prison.
5. A military supply clerk at the Norfolk, Virginia, Naval Station
submitted false claims to the Navy for supplies or services under the
names of four legitimate companies and one that he had registered for
the purpose of his fraud. All invoices were bogus, as no materials
or services were ordered or delivered. He was discovered when the
Norfolk Police Department, which was investigating him concerning the
sale and/or possession of narcotics, seized his computer and found
bogus invoices. The Norfolk police reported the matter to the Naval
Criminal Investigative Service as a possible fraud. In May 1997, the
clerk was sentenced to 13 months confinement and 2 years
supervised-release probation. He was also ordered to make full
restitution of $83,576.63 to the Navy and to pay a $50 special
assessment fee.
6. A military travel pay technician embezzled more than $17,000 on
each of three occasions at Kadena Air Base, Japan, for a total of
approximately $51,000. He obtained permanent change-of-station
advances under a false name by altering authentic travel orders, thus
generating standard travel advance requests. The technician
possessed the necessary passwords to authorize each advance and have
them sent electronically to the technician's bank account. A
civilian technician discovered the false travel orders, and the
matter was referred to law enforcement. A review of documents at the
military technician's former duty station disclosed that the
technician had committed fraud at that location as well. In June
1996, the technician was convicted at a general court-martial and
received a dishonorable discharge. He was sentenced to 36 months in
prison, was reduced in rank, and paid $10,000 in fines and $48,000 in
forfeiture.
7. It is alleged that a finance office technician--at Bolling
AFB--attempted to embezzle at least $22,800 by filing a fraudulent
travel voucher under a fictitious name and having the funds sent to
the technician's bank account. The technician asked a coworker to
input the voucher. The coworker thought the request was strange and
reported it to a supervisor. The supervisor failed to recognize the
voucher's fraudulent nature and proceeded with its processing. DFAS
rejected the voucher due to an error in the electronic filing
transfer address. The supervisor sent two letters to the address on
the voucher to notify the claimant of the problem. Both letters were
returned, marked "Return to Sender, No Such Street." The supervisor
forwarded the voucher to DFAS twice more; DFAS finally processed a
check for payment and attempted to send it to the address with the
same results as above. A source notified law enforcement of the
unusual transaction. The case is pending adjudication.
8. Between December 1991 and August 1993, sixty-two unauthorized
payments, totaling approximately $271,000, were fraudulently issued
and cashed by two employees of the DFAS Indianapolis, Indiana,
Center. Checks were issued in the names of various U.S. military
retirees but were sent to addresses controlled by the two
perpetrators. The checks were forged and negotiated using false
identification at various check-cashing establishments.
Subsequently, the two employees recruited others to participate in
the fraud scheme. The checks made payable to the recruited
individuals were negotiated at banks, and the recruits received a
percentage of the proceeds. A complaint from a retiree who
questioned the income amounts that the military had reported to the
Internal Revenue Service triggered a review of payment operations.
The investigation resulted in the conviction of 12 individuals for
theft of government funds. The sentences ranged from probation to 18
months incarceration. Approximately $80,115 was recovered.
9. Between 1994 and 1997, a military member and a private citizen
allegedly embezzled approximately $938,000 from the DFAS Dayton,
Ohio, Center. The military member was a supervisor of data entry
personnel in the vendor pay section and allegedly created fraudulent
invoices and checks made payable to the private citizen. They then
allegedly divided the proceeds. A technician who had no part in the
scheme noticed a check made out to the private citizen for $210,000
when she was trying to discover the source of an automated input
error. The check was suspicious, as it was for a large amount made
payable to an individual rather than a business and the transaction
did not match a valid contract. The private citizen pleaded guilty
to one count of conspiracy to steal government funds, but no
sentencing date has been set. The military member was found guilty
of attempted larceny, conspiracy, and violation of Article 134 of the
Uniformed Code of Military Justice and was sentenced to 12 years in
prison.
10. Between October 1994 and April 1997, a military pay supervisor
and a private citizen at Fort Myer, Virginia, schemed to embezzle
approximately $169,000 of government funds. The supervisor
established a payroll account in the name of a fictitious military
member. The supervisor used the ghost payroll account\22 as a basis
for issuing 57 electronic fund transfers to bank accounts controlled
by the perpetrators. Sources outside DFAS reported the scheme. The
supervisor pleaded guilty to theft of government funds and was
sentenced to 21 months incarceration, 3 years probation, and $168,872
in restitution. According to the Department of Defense's Inspector
General report, had responsible DFAS employees followed established
procedures by comparing payroll information to personnel data on a
monthly basis, they could have detected the fraud themselves.
11. In late 1995, a civilian employee of the DFAS Cleveland, Ohio,
Center diverted $11,000 by using electronic funds transfers to a bank
account controlled by the employee and an accomplice. The employee
diverted military retirement benefits by issuing two separate
"one-time credit" allotments, thus triggering the electronic
transfer. The employee withdrew the diverted funds. The fraud was
discovered as a result of a DFAS internal control that automatically
generated reports on payments over a predetermined amount. When the
report was reviewed, DFAS personnel questioned the payments. The
employee was convicted of embezzlement and making false statements
and was sentenced to 1 year and 1 day incarceration, 3 years
probation, restitution of $6,520, and a special assessment of $100.
The accomplice pleaded guilty to aiding and abetting the theft of
government funds and was sentenced to 6 months home confinement, 3
years probation, restitution of $1,200, and a special assessment of
$50.
12. Between October 1994 and January 1996, a civilian DFAS
accounting technician embezzled $28,940 in funds from DFAS - Tinker
AFB, Oklahoma. The technician falsified educational expense vouchers
using his wife's name as the payee and his own mailing address. The
technician attached used copies of supporting documents from
legitimate vouchers to support the fraudulent vouchers, knowing the
certification official would not verify the expenses or the identity
of the claimant. The technician cashed the checks and used the
proceeds to pay debts. The scheme was discovered after a
confidential source provided information to law enforcement. The
technician pleaded guilty to one count of mail fraud and was
sentenced to 90 days incarceration and 5 years probation. He was
required to pay $29,990 in restitution and a special assessment.
13. In 1991, two military members assigned to the DFAS Indianapolis
Center conspired with seven individuals to receive approximately
$37,000 in fraudulent benefits paid to beneficiaries of military
personnel killed during Operation Desert Storm. One military member
created the necessary paperwork within DFAS to issue a check against
the accounts of deceased U.S. service members. The other military
member recruited seven individuals to receive the fraudulent checks.
These seven individuals each received a minimal portion of the
proceeds for facilitating the embezzlement. The scheme was
discovered as a result of an anonymous call to law enforcement. Four
members of the scheme, including the two military members, were
indicted and convicted of theft of government funds and sentenced to
up to 6 months "community confinement" and 3 years probation. They
were ordered to pay up to $16,350 in restitution and special
assessments. The remaining participants who had been implicated in
the scheme were not prosecuted in exchange for their cooperation.
--------------------
\22 In July 1993, we testified that the Department of Defense had not
responded effectively to many long-standing problems, including those
involving ghost employees. (Financial Management: DOD Has Not
Responded Effectively to Serious, Long-standing Problems,
GAO/T-AIMD-93-1, July 1, 1993)
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
OFFICE OF SPECIAL INVESTIGATIONS,
WASHINGTON, D.C.
David B. Buckley, Assistant Director for Defense and National
Security Investigations
Richard C. Newbold, Senior Special Agent
Jim Locraft, Special Agent
Karen Coles, Special Agent
Barbara W. Alsip, Communications Analyst
M. Jane Hunt, Senior Communications Analyst
OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.
Barbara C. Coles, Senior Attorney
*** End of document ***