In Aftermath of Hurricane Maria, Puerto Rico Passes Whistleblower Statute

As reported in an October 1, 2018  Miami Herald article  by Mary Inman, in the aftermath of Hurricane Maria, Puerto Rico passed a False Claim Act (FCA) statute modeled on the federal FCA.  Like the federal statute, this new legislation allows individual whistleblowers to bring lawsuits in the name of the government to recover public funds lost to fraud.  Whistleblowers can receive as much as 15 percent to 30 percent of the funds recovered.  These cases are generally handled on a contingency fee basis so that the whistleblower doesn’t incur attorney fees unless an award is made.

The article states:

Puerto Rico relies largely on federal aid for repairing the estimated $100 billion in damage inflicted by Maria. After past disasters, including Hurricane Katrina in 2005 and Hurricane Sandy in 2012, fraud and corruption siphoned off public resources meant for recovery efforts. The Hurricane Katrina Task Force reported bringing federal charges against at least 907 individuals for trying to take advantage of victim assistance and rebuilding efforts in the three years after that catastrophic event. Fraudsters co-opted an estimated $1 billion in relief.

One of the most common forms of corruption in public contract bidding, especially emergency rebuilding contracts, is bid rigging.  Bid rigging is a generic term that encompasses many different schemes.  When I was with the Department of Justice, we generally referred to bid rigging broadly as “corruption of the bidding process.”

A.      Collusion Among Bidders

Bid rigging is an antitrust term that refers to when bidders on a contract form an agreement to limit or eliminate competition for a contract.  Knowing that the bid is rigged, the winner will inflate his bid.  The losing bidders will make sure their bids are higher.  There is generally a quid pro quo involved: the designated contract winner pays off the intentionally losing bidders with something for their (illegal) troubles.  The payoff is often letting the losers on Contract 1 take turns winning on future contracts.  Sometimes the payoff will be subcontracts at inflated prices.  Occasionally the pay off is simply cash.  The common thread is that the government is ripped off by paying rigged prices and the overcharges are split among the crooked vendors in various ways.

A key component of bid rigging schemes is the “complementary bid.”  This is an intentionally high bid submitted by agreement among the  losing vendors who rigged the bid.  The complementary bids are important to deceive the government into thinking there was competition for the bid.  Sometimes losing bidders will simply agree with the winner to not bid.  But, if only the company designated to win submitted a bid, the government likely would not accept the bid because there was no competition.  The complementary bids create the false appearance of competition.  It is important to note that simply submitting a high bid that you think probably isn’t going to be successful is not collusion.  A company may bid high because they have plenty of work and are not that interested in the job–but would do it if they got their price.  There may be other reasons a company may submit a high bid it doesn’t expect to be successful. If a company submits a bid making an independent decision, it is not collusion regardless of how high the bid may be.  But, if a company submits a bid by agreement with another bidder, it can be collusion no matter what the price is.

For further information, please see a primer I helped write when I was with the Antitrust Division:

B.      Corruption of the Bidding Process 

Bid rigging broadly, or corruption of the bidding process, can take many other forms:

  • A payoff to a government insider to write the job specs a certain way; exclude certain competitors, sole source the project, etc.  Paying off a government insider is bid rigging in the broad sense.  The goal is the same: inflate the bid.  Only the form of the scheme is slightly different.
  • Often contracts are set aside as Small Business Contracts; Minority, Women Owned or Veterans’ Contracts.  Unscrupulous contractors can bid when they in fact are not qualified, have a qualified company bid as a front, or set up a sham company to bid as a front.  Any of these schemes can be illegal, defraud the government and lead to a recovery if they are exposed.

C.     Conclusion

The above are general observations and not legal advice for any specific situation.  As a former Antitrust Division prosecutor, I spent a career talking to businesses and investigating possible bid rigging. It is my opinion that by far most business owners are hard working and honest.  But, the temptation to collude is real–especially in disaster rebuilding when there may be less scrutiny given the need to move quickly.  Bid rigging schemes of any sort are secret agreements intended to deceive the government.  Often, someone with inside information (a whistleblower) is the only way to expose this fraud.  Whistleblower legislation, like the federal False Claims Act and the recently passed Puerto Rico False Claims Act (and states haveFalse Claims Act equivalents), are good public policy to reward those who come forward.

If you have questions or a situation you’d like to discuss, feel free to contact me.

Thanks for reading.

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