U.S.-based businesses (see 15 U.S.C. 78dd-1, 78dd-2). The FCPA was enacted by the Congress without a dissenting vote and became effective on December 19, 1977. The Criminal Division established a Multinational Fraud Branch within the Fraud Section in 1977 to direct FCPA investigation and prosecution efforts. The Branch works very closely with the Securities and Exchange Commission, the Customs Service, the FBI, and the Postal Inspection Service in the development of these very significant cases. Recently the Department announced the FCPA Review Procedure which allows businessmen and attorneys to seek guidance about the meaning and application of the antibribery provisions. Due to the centralized nature of federal law enforcement efforts against bribery of foreign government officials and the special treatment and attention currently being given to this area by the Criminal Division as well as the SEC, the Cus toms Service, the FBI, and the Postal Inspection Service, it is unnecessary and inappropriate to designate bribery of foreign government officials as an area for nationwide law enforcement attention. This area, however, will continue to receive special emphasis by the Department's Criminal Division. Conclusion In this category of white collar crime, the following national priorities are adopted: 1. Corruption of federal employees and officials in connection with federal procurement of goods and services. 2. Corruption of federal employees and officials in connection with federal programs, including but not limited to programs conferring grants, loans, guarantees, subsidies, cash or other benefits. 3. Corruption involving federal law enforcement officials, including but not limited to employees of the Department of Justice and other law enforcement agencies. 4. Corruption of any other federal employees and officials, including but not limited to elected officials, members of the judiciary, regulatory agency officials, and others. 5. Corruption involving major state government officials, elected, appointed or civil service, including but not limited to governors, legislators, department or agency heads, court officials, law enforcement officials at policymaking or managerial levels, and their staffs, or corruption of other state employees, including regulatory commission or board members, where such corruption is systemic. 6. Corruption involving major local government officials, elected, appointed or civil service, including but not limited to mayors, city council members or equivalents, city managers or equivalents, department or agency heads, court officials, law enforcement officials at policymaking or managerial level, and their staffs, or corruption of other local employees, including regulatory commission or board members, where such corruption is systemic. B. Criminal Activity Defrauding the Government, Reducing the Effectiveness of This category of white collar crime includes the following types of illegal activity: 1. Criminal tax violations 2. Procurement-related fraud 3. Program-related fraud 4. Counterfeiting of U.S. currency or securities 5. Customs violations Procurement-related and program-related fraud involving corrupt government officials was discussed in part in the previous category of white collar crime threatening the integrity of government institutions and processes. The focus of that discussion was on the institutional effects of corruption. By contrast, the focus of this discussion is on the monetary impact of fraud and abuse on government and taxpayer costs. 1. Criminal tax violations This type of illegal activity includes kickbacks to tax collectors in exchange for non-payment of merchant or manufacturing taxes, bribes to underestimate taxes due, the filing of false tax returns, and other forms of tax evasion. It also includes cigarette smuggling to avoid taxes, which was reported separately by a number of respondents. Tax fraud was identified as a priority area by ATF offices in Chicago, Cleveland, Boston, Philadelphia, and St. Louis, Customs Service offices in several cities, Secret Service offices in Boston, St. Louis, Philadelphia and Honolulu, and Economic Crime Units in Alexandria, San Diego, Miami, and Los Angeles, as well as a few FBI offices. The Internal Revenue Service and the Department have recognized that tax fraud, in its various forms, is a white collar crime problem of significant proportions. Various estimates of its costs to government and legitimate taxpayers have been given. By any estimate, the amounts of money involved are significant. The perpetrators of tax fraud run the gamut from business enterprises, investment brokers, and financial institutions to private entrepreneurs and individual citizens. Cigarette smuggling is a particular type of tax fraud involving the movement of cigarettes from low tax, typically tobacco growing, states to higher tax states. Federal jurisdiction arises due to the interstate trafficking of contraband. This type of illegal activity was reported by a number of ATF offices, mainly on the East Coast, but also in Texas and Arizona. Cigarette smuggling involves, at the very least, millions of dollars each year, and is very often connected with organized crime elements. The immediate victim of all forms of tax fraud is the tax-levying governmental entity. The ultimate victims are honest taxpayers, who end up paying more than their fair share of the tax burden, and potential beneficiaries of government services who receive fewer services than they would otherwise. Tax fraud also causes an erosion of public faith in the fairness of the tax system and thus encourages more widespread tax evasion. The Department's Tax Division reports that progress is being made in working with the Internal Revenue Service on the types of cases that are presented for prosecution. It is our conclusion that including criminal tax violations as a national white collar crime priority would have further salutary effects on the types of cases investigated and prosecuted by the federal government. It would, by itself, indicate to the public the resolve of the federal law enforcement community to deal with this serious type of crime and thereby discourage perhaps a large number of potential offenders. Interstate trafficking of contraband cigarettes involving large tax revenue losses will also be considered a national priority. 2. Procurement-related fraud The information provided regarding federal procurement fraud encompassed both procurement-related fraud involving the corruption of government officials, and procurement-related fraud by outsiders, acting without the help or collusion of government insiders. This distinction, however, is of some importance in the way we think about the significance of procurement-related fraud and, consequently, how we define priorities. The presence of corrupt activity makes such fraud significant, and arguably a priority, regardless of the amounts of dollars involved. Without such corruption, procurement-related fraud becomes significant only when large sums are involved. Procurement fraud involves, among other things, the following kinds of activity: 1) inflated payrolls and other costs; 2) substitution of inferior goods; 3) collusion among contractors, developers and suppliers resulting in rigged-bidding or overbilling; 4) non-performance of contracted services; 5) exaggerated weights and measures; and 6) diversion of federal funds to personal use. Practically every government agency and department procures goods and services and all seem to be victims of procurement-related fraud. Of course, the ultimate victims of this type of crime are taxpayers who pay more for fewer goods and services, along with the intended recipients of government benefits who receive reduced or substandard benefits and honest contractors who lose business because they do not engage in fraudulent activity. The amounts of dollars lost due to this type of crime are substantial. The Department of Defense alone spent over $25 billion in FY 1979 on procurement and will spend $28 to $30 billion annually over the next two fiscal years.13 These sums are for procurement narrowly defined, i.e., not including all contracts for research and development, housing and other constructions and other multi-billion dollar items. Total federal government procurement costs easily exceed $100 billion. No precise estimate of the magnitude of procurement fraud losses is possible, but it is obvious that even if such fraud involves only a small percentage of total procurement costs, the losses are great. And most observers appear to agree that more than a small percentage of total procurement expenditures are involved. The responses to the Department's Information Request identified procurement-related fraud as a priority white collar crime area in all parts of the country. Construction and service contract fraud was designated as a problem area by numerous FBI offices, Inspectors General offices in GSA, Department of Energy, HUD, and EPA and by the Economic Crime Units in San Diego and Denver. Procurement fraud against the Department of Defense was cited as a priority area by the Defense Department's Investigation Office, by the Navy, Air Force, Economic Crime Units in Alexandria, Philadelphia and Los Angeles, and by a number of FBI field offices. NASA identified procurement fraud relating to its activities as the number one white collar crime problem. All of the Postal Inspection Service's regional offices listed procurement fraud against the Postal Service as a priority area. The perpetrators of procurement fraud include general contractors, subcontractors, architectural and engineering firms, materials suppliers, consultants and other suppliers of goods and services. Procurement fraud is usually independent of other criminal activity, although there is some indication that organized crime elements are involved in procurement fraud by certain industries, including waste disposal and food services. Given its immensity, and the lack of local and state jurisdiction and/or resources to deal with it, federal procurement fraud obviously should be considered a national law enforcement priority. Where corruption is not involved, however, there should be substantial amounts of losses involved before these kinds of cases are priorities. 13 The Budget of the United States Government, 1981, Office of Management and Budget, p. 100. 3. Program-related fraud This type of white collar crime includes all the various schemes that are used in order to divert federal grants, loans, subsidies, and other benefits from their intended uses to the personal use of the perpetrators. The schemes used are myriad. They involve, among others, the following kinds of illegal acts: 1) false applications for grants, loans, and other benefits; 2) embezzlement and improper diversion of funds by program administrators who may be employed by the government, non-profit corporations or private contractors; 3) false reports on work done, costs incurred or other aspects of government supported activity; 4) use of federally-paid employees for political or other personal purposes; and 5) outright theft or counterfeiting of government property. The perpetrators include individual entrepreneurs, business enterprises, and government officials at all levels. In some instances, organized crime elements are involved in program fraud and abuse. In a number of cases, the same perpetrators are or have been involved in fraud involving more than one agency or one program. The vulnerability of various programs to fraud appears to be affected by a number of variables including: 1) the type of benefit being conferred (e.g., cash, guarantees, subsidies, loans, or services); 2) the organizational structure and procedures used in administering the program (e.g., centralized or decentralized, organization auditing and reporting procedures, involvement of private contractors and administrators); and 3) the resources and expertise available to investigate and oversee the use of program funds. We have not attempted to perform a comprehensive vulnerability assessment of federal programs. Numerous Inspector General offices are conducting, or have conducted, such studies. Our review of the large quantity of information on the occurrence of program fraud indicates several things. First, there seems to be no government program unaffected. Second, while there are some differences in impact, the ultimate burden of program fraud and abuse falls on: 1) the honest and legitimate benefit recipients who receive reduced or no benefits; 2) the taxpayer whose money does not serve its intended purpose and who may be called upon to provide more funds; and 3) the agencies and programs whose images are tarnished and whose effectiveness may be reduced. Our basic conclusion that, for purposes of defining national white collar crime law enforcement priorities, it is best to have an all-inclusive program fraud priority, with appropriate dollar amount minimums where corruption is not involved.14 District priorities, which are to be "within the national priorities," "15 may appropriately focus on particular programs or agencies that are problems in a particular geographic region. We find no useful or obvious way to single out certain programs or agencies for national attention, and also feel that doing so may be too restrictive on investigators and prosecutors in the field, and counter-productive in inhibiting program fraud and abuse. Nevertheless, we summarize below the information gathered on each of the major federal program areas. a. CETA funds This is one of the most widespread and frequently reported program fraud problem areas. It involves misuse and embezzlement of CETA funds, padded payrolls, dummy corporations, CETA employees used for personal political campaigns, and funds used for city debts and non-CETA 14 This does not mean, however, that separate offense codes for each major agency or program area for reporting purposes are not appropriate. In fact, in order to implement and evaluate district priorities, separate offense codes are probably a necessity. programs. Corruption of local government officials s often nvolved. Seventeen FBI offices. three ATP offices five Secret Service offices. the Department of Labor Inspector General, and four Economic Crime Units (New Haven. Boston. Cincago and New Orleans) (dentified CETA fraud as a priority area in their responses to the Department's Information Request. Twenty-three (38%) of the FBI held offices designated CETA fraud is i gnificant problem area in the February 1980 survey. This program fisbursed over $1 billion in FY 1979 and is budgeted for similar amounts in FY 1980 and FY 1981* 5. Department of Transportation grants and loans Fraud and buse nvolving DCT funds was dentified is the number one priority area by the DOT Inspector General office and was mentioned is a problem area by several investigative agency field offices. This type of fraud involves improper material, bidrigging, kickbacks, gratuities, and systematic short-weighting of materials in connection with federally-funded mass transit and highway projects. The perpetrators include engineering and road-building firms, concrete and asphalt suppliers, and state, county and city officials. The funds devoted to highway and mass transit projects exceeded $9 billion in FY 1979 and are projected to be close to $10 bulion for FY 1980 and FY 1981. c. SBA loans and financial assistance programs This area of fraud and abuse includes false statements and other forms of fraud in connection with SBA loans and financial assistance programs, including bribes and kickbacks to SBA officials. Misrepresentation of an applicant's unencumbered private capital is frequent. Misuse of funds received under the Small Business Investment Company (SBIC) Program appears to occur with some frequency. In many cases, once SBA funds are obtained, they are diverted to other purposes. SBA-related fraud was identified as a priority area by several FBI field offices and Economic Crime Units in Detroit, Columbia, Philadelphia and Los Angeles, in addition to the SBA's Inspector General office. SBA loans of up to $500.000 can be made. Funds provided to SBIC's usually involve millions of dollars. The SBA loan program granted new loans totailing $471 million in FY 1979, and is budgeted to increase to over $600 million in FY 1981. d. Minority Contracts Minority contract fraud involves firms falsely representing that they are qualified for preferences under Section 8(a) of the amended SBA Act. Perpetrators arrange to have an apparently eligible person "front" as the head of a firm in order to receive preferential treatment, when the person in fact does nothing for or with the firm, other than signing the papers to apply for the SBA sponsored contract. This type of fraud was identified as a priority area by the NASA Inspector General office and by several FBI field offices. The primary victims are legitimate minority or disadvantaged enterprises that qualify for preferential treatment. 16 Unless otherwise indicated, the budget figures cited in this section of this report are taken from The Budget of the United States Government, 1981, Office of Management and Budget. |