PRACTICES TO HELP PROTECT AGAINST SBIR FRAUD AND ABUSE HHS OIG’s Perspective Office of Evaluation and Inspections: Jaime Stewart Office of Audit Services: Sheri Denkensohn Office of Investigations: Lindsay Walford

HHS OIG Overview 5 components within the Office of Inspector General OEI conducts evaluations of HHS programs OAS conducts audits of HHS providers and grant and contract recipients OI conducts investigations of allegations of fraud, waste, and abuse

HHS OIG Authority The IG Act of 1978, (Public Law 94-505), provides four primary criteria: an independent and objective OIG direct /unrestricted access to agency records & information subpoena authority for information and documents outside the agency semiannual reporting to Congress

Why should you care about FWA? Without understanding what fraud, waste, or abuse “looks” like, you may inadvertently commit it and be on our radar. Fraudsters utilize SBIR funds that may otherwise be given to legitimate awardees, so in essence they are stealing from all of us.

HHS SBIR Program HHS is consistently one of the top SBIR funding agencies, behind DoD HHS awarded $648.5 million in FY2012 95% grants, 5% contracts Most grants/contracts are from NIH Other funding offices are CDC, FDA, and ACF

OEI Report to HHS* What we did: Reviewed HHS policies and procedures for ensuring that Awardees are eligible (primary employment, size, US, for-profit) Awards are not duplicative The program is meeting is goals Verified the eligibility of a sample of SBIR awardees *Available online: https://oig.hhs.gov/oei/reports/oei-04-11-00530.asp In line with these new requirements, OEI issued a report to HHS on its oversight of the HHS program. We reviewed HHS policies and procedures for overseeing the SBIR/STTR program. Specifically, we looked at policies and procedures concerning ensuring that: awardees are eligible, awards are not duplicative, and that the program is meeting its goals. We also pulled a sample of SBIR awardees and attempted to verify their eligibility using the Lexis/Nexis Accurint database, social media sites like Manta and LinkedIn, the companies’ own Web sites, and State business registration Web sites.

Common Eligibility Issues Identified PI Employment The awardee must be the PI’s primary employer We found indications that PIs had full-time employment at other companies Example: A PI listed 3 other positions on LinkedIn, including a full-time position with a university In our review, we identified some awardees that may not have met eligibility requirements. The most common eligibility requirement that awardees appeared not to meet is the requirement that PIs be primarily employed by the awardee. For several awardees, we found indications that the PI had full-time employment at another company. For example, the PI for one award listed 3 other positions on his LinkedIn profile, including a full-time position with a university. Other searches corroborated that the PI was in fact employed by other companies.

Common Eligibility Issues Identified Awardee company size Awardee must have fewer than 500 employees, including its affiliates We found indications that companies were affiliated with very large organizations Example: One awardee company was owned by a larger company with over 7,000 employees We also identified some awardees that appeared not to meet the SBIR size requirements. Awardees must have fewer than 500 employees, including affiliates. SBA’s definition of affiliates does leave some room for interpretation, but it considers factors like ownership, management, and contractual relationships in determining whether affiliation exists. We found some awardees that we determined were affiliated with organizations much larger than 500 employees. For example, one awardee company that was itself well under the 500-employee limit, was owned by a larger company that had over 7,000 employees.

OEI Recommendations to HHS Alerted HHS to issues in oversight of the program and made recommendations to: Collect information to track and assess the commercialization of projects Ensure compliance with eligibility requirements Improve procedures to check for duplicative awards Where we found vulnerabilities, we made recommendations and expect to see some increased oversight in these areas. We recommended that HHS OpDivs: Collect information to track and assess the commercialization of projects. SBA’s most recent Policy Directive requires all agencies to maintain data on commercialization and requires awardees to update commercialization data for certain awards. Once these processes are fully implemented, we expect that HHS will be able to use this data to identify awardees with poor commercialization records and consider them higher-risk awardees. Ensure compliance with eligibility requirements. We recommended that HHS OpDivs take additional actions to ensure that awardees meet eligibility requirements at the time of the award. So, we can expect to see some additional scrutiny on eligibility before an award is made. Improve procedures to check for duplicative awards. We also recommended that HHS strengthen its checks for duplicative awards, so we may some changes to this process that will prevent awardees from receiving funds for duplicative work from multiple agencies or from the same agency in multiple years. * Here, I think we have the option to: 1) turn it over to Lindsay and let her include our conclusion points in one overall conclusion at the end, or 2) do a short conclusion that includes the point that these eligibility issues may not have even been intentional, but if they have a questionable situation, they should ask; that if other awardees are breaking the rules, that’s less money for good applicants and awardees that play by the rules; so, they should report these to the hotline and give hotline information

Newer OIG Requirements for the SBIR/STTR Programs Establish fraud detection indicators Review agency regulations and operating procedures Coordinate information sharing between agencies Improve the education and training of SBIR administrators, applicants, and awardees The 2011 SBIR Reauthorization Act requires agency OIGs to cooperate in preventing fraud, waste, and abuse by: Establishing fraud detection indicators Reviewing agency regulations and operating procedures Coordinating information sharing between agencies, and Improving the education and training of SBIR administrators, applicants, and awardees. So, our responsibility now goes beyond investigating and prosecuting when fraud occurs. We also have to ensure that HHS is doing everything it can to prevent fraud before an awardee ever receives any money.

HHS’s Improved Oversight Responsive to recent requirements: Regular calls between HHS and our office Better coordination among agencies that issue SBIR funds HHS activities to respond to our report’s recommendations

HHS OIG Office of Audit Services Sheri N. Denkensohn Senior Advisor for Public Health Oversight U.S. Department of Health & Human Services Office of Inspector General Office of Audit Services

Internal Controls Protect Federal funds from fraud, waste, and abuse Safeguard assets against theft and unauthorized use, acquisition, or disposal Ensure accurate accounting data and reliable financial reporting Ensure effective and efficient program operations Ensure compliance with policies, procedures, and applicable laws and regulations

Control Environment and Activities Tone at the top/management style and expectations Activities Specific policies and procedures management uses to achieve objectives

Effective Accounting System Account for funds separately Maintain source documentation Regardless of whether you are operating under a grant or contract, and are subject to either grant rules (CFR) or contract rules (FAR) you must have good accounting procedures in place to protect against allegations of fraud and be good stewards of government dollars.

Manage Time Allocation By Funding Source Personnel costs are usually the largest cost associated with grants Individual effort allocated to a project has to be recorded For employees working on multiple projects, they must track the time spent on each project

Segregation of Duties Different individuals assigned responsibility for different elements of related activities Authorization Custody Recordkeeping

Adequate Documents and Records Adequate recordkeeping Evidence that financial statements are accurate Maintain documents in a format that is easy to use and understand

Federal Regulations Uniform Grant Guidance 45 CFR 75 Applicable to Institutions of Higher Education, Hospitals, Other Nonprofit Organizations, and Commercial Organizations FAR- Contract Cost Principles and Procedures 48 CFR 31 Applicable to for profit organizations other than a hospital or organization listed in 2 CFR 230 as not subject to that part

Additional Federal Guidance Grants Policy Statement Notice of Award includes specific terms and conditions Contracts subject to FAR principles Some grants incorporate FAR provisions

HHS OIG Office of Investigations Lindsay Walford Special Agent U.S. Department of Health & Human Services Office of Inspector General Office of Investigations

The OI Mission OI’s mission is to protect the integrity of HHS programs. OI conducts investigations of fraud and misconduct: Criminal Civil Administrative   OI provides protective services to the HHS Secretary The IG is appointed by the President with Senate confirmation. http://oig.hhs.gov/about-oig/about-us/index.asp HHS-OIG has statutory law enforcement authority from Congress.

Where Does OIG Get Referrals? SENIOR MEDICARE PATROL INDUSTRY HOTLINES LAW ENFORCEMENT PARTNERS

Common Sense Use the grant money for what you said it would be used for – no more, no less - and there won’t be a problem.

Investigative Avenues No need to be hesitant to call OIG and report suspicious activity. OI investigates thoroughly and covertly – if there is something there, the report was justified. If there is no fraudulent activity, the case is closed.

Protection of Program Funds IG contact in most instances is an effort to gather evidence in furtherance of the investigation Communication with the subject or target is normally the last step in the investigation Contact with the subject/target is out last step because in many instances, we can use evidence collected via other avenues – a lot of times without contacting anyone outside the government – to disprove an allegation and close the case. If our first few steps in an investigation suggest the allegations have merit, then we will continue looking into the matter until we have enough evidence to prove a crime has been committed. If the evidence isn’t there, we close the case. Investigative and prosecutorial discretion play a role in our cases.

Criminal Embezzlement and Theft of Public Money 18 USC 641 Knowingly converting funds or items to your use without authority to do so Federal grant money is still the property of the U.S. government, even after it has been deposited in the grantee’s bank account The government must prove it is an intentional act Criminal Penalties – Prison, Fines, Restitution There is a difference between mistakenly using grant money for a personal purchase once or twice and using it to buy groceries for 6 months. We know this. 18 USC 641 punishments: Theft/embezzlement over $1,000 = prison up to 10 years or fines or both. Less than $1,000, up to 1 year in prision OR fines, not both. Also Wire Fraud – 18 USC 1343: Fraud by Wire, Radio or Television – because of electronic draw downs through the Payment Mgmt System. Up to 20 years prison, plus fines.

Civil False Claims Act 31 USC 3729 Causing false claim for payment Triple Damages plus between $5,500 to $11,000 per offense Actual Knowledge, Reckless disregard for the truth or deliberate ignorance Government does not need to prove fraudulent intent Preponderance of Evidence $250,000 grant that is found to be fraud can equal $750,000 in fines (trebles) and if 10 draw downs were made (i.e. claims for payment), then that could be up to an additional $110,000 in fines (per offense). In other words, a $250,000 grant can cost $860,000 at sentencing if there is fraud.

Administrative Remedies Suspension A temporary exclusion from new awards pending an ongoing investigation or admin action Debarment Action taken at the completion of proceedings that renders an entity/person ineligible from receiving awards for specific period of time – usually 3 years There are 2 types – fact-based and evidence-based suspension/debarments. Fact-based is when a case is complete, i.e. a subject has pled guilty or found guilty following trial and been sentenced. Evidence-based is when a great deal of evidence has been found during an investigation that supports a fraud case but the case is not complete yet. This one is used to protect the program and prevent further misuse of federal money until the case can be concluded and requires A LOT more evidence to support.

Exclusions Social Security Act, Sections 1128 and 1156 HHS OIG has the unique authority to exclude individuals and entities from Federal Health Care Programs Over 51,000 individuals are currently excluded Mandatory (convictions) and Permissive (board actions, financial integrity) The IG is appointed by the President with Senate confirmation. http://oig.hhs.gov/about-oig/about-us/index.asp

We cannot arrest/prosecute our way out of the issue of fraud in our programs We need to start catching it on the front end – which is why the new OIG requirements for SBIR/STTR programs are so critical. Working together with other OIGs to identify fraudulent applications for SBIR/STTR grants, knowing the fraud trends and knowing what the fraud indicators are means less misuse of government money and more availability of SBIR/STTR funds to those small businesses who ARE doing the right thing.

Case Examples FL couple convicted of theft of $10 million in SBIR grants in March 2015. Conduct included using their residence as the company’s address and NOT having a lab to do the work outlined in the grant. PA couple indicted in March 2015 – 10 counts of wire fraud. Conduct included having all work done by students, not the company. FL Couple – This was a case worked by the Dept. of Defense – DCIS. Not worked by HHS-OIG. This couple spent a lot of time in France at the same time they said they were working on the grant aims, fabricated endorsement letters using scientists who had passed away and used other’s names in endorsement letters who had supported past work but were not involved in the current work. Also had identity theft charges because this couple used people‘s names without their permission or knowledge. PA Couple – NASA/DCIS/US Air Force Office of Special Investigations SBIR case. Claimed they would do the work at their business and subcontract out some to a lab at the man’s university, but really he had students in his lab do all the work because the business had no facilities/lab. He and his wife kept the money for themselves. Submitted invoices for a total of $560,000 in work. Based on a proposal submitted by the couple to NASA in 2009. RI case – discuss in general. Use of residence without a lab, use of SBIR grant funds to renovate house, using grant money for personal purchases – groceries, lawn care items, gas, home and car repairs, vacations (ski resorts, overseas) etc.

Report Suspected Fraud, Waste or Abuse to HHS OIG Reporting suspected fraud to OIG Hotline Operations does not result in a prosecution the next day. A Hotline complaint is an allegation. Hotline complaints are treated with privacy and discretion. OI conducts independent investigations and hotline complaints can provide helpful information. Our cases are very detail intensive and often take years to complete.

Bottom Line Know about and comply with SBIR requirements If you have questions, contact your program officer and/or grant officer Do what you said you’d do with the money – don’t lie, steal, or cheat Don’t pocket unused money at end of grant period Have good internal controls (timekeeping, accounting, documentation, separation of personnel) If you see fraud, waste, or abuse, contact OIG Separation of personnel – in other words, one person shouldn’t hold all positions/titles in the company.

OIG website: http://oig.hhs.gov/ HHS OIG Hotline 1-800-HHS-TIPS or OIG website: http://oig.hhs.gov/

Questions?