Stimulus 'fraud will occur'

NEW YORK (CNNMoney.com) -- Kentucky construction magnate Leonard Lawson is on trial this week in Lexington federal court for allegedly bribing the state's Transportation secretary during the past decade to win big highway and road projects. But that didn't stop Lawson family companies from winning $24-million dollars in federal Recovery Act contracts!

Though Leonard Lawson pled not guilty, companies with ties to Lawson should have been suspended from bidding for stimulus work within 45 days of his indictment on bribery, theft and obstruction of justice charges, according to a Department of Transportation rule. But, it took the Transportation Department 10-months to act -- after the Lawson firms had won the contracts.

"I really think that's a shame and a disgrace," said Rep. Edolphus Towns, D-N.Y., chairman of the House Oversight & Government Reform Committee. "When people see folks getting away and getting contracts even after they've been indicted, that to me does not help in terms of us to get rid of waste fraud and abuse."

Such slow action in suspending or debarring bidders as Washington is quickly doling out billions in Recovery Act dollars creates "a 'perfect storm' for contractors intent on defrauding the government," warns the Department of Transportation's Office of Inspector General in an audit released earlier this month.

"Change is underway," responded Assistant Transportation Secretary Linda Washington in a memo to the DOT Office of Inspector General, "to expedite the handling of suspension and debarment cases."

(The Kentucky Transportation Cabinet told CNN it ensures, "no federally funded contract is awarded to anyone on the list of those barred by the Federal Highway Administration.")

Already, federal investigators are finding evidence of bid rigging in Recovery Act contracts for the Department of Transportation's Federal Highway Administration, CNN has learned. Prosecutors are examining cases where contractors appear to have been colluding with each other to win road improvement jobs - repaving and expanding streets and highways.

No criminal charges have been filed yet. But, the Department of Transportation Inspector General has 25 criminal investigations underway, a dozen of which have been referred to the Department of Justice for prosecution, said people with knowledge of the cases.

Other potential fraud that is appearing involves what the government calls "Disadvantaged Business Enterprise" fraud: companies owned by minorities or women winning contracts, then, after taking a cut, passing the work and most of the funding to a non-qualified contractor.

"The Disadvantaged Business Enterprise acts like a shell," said a person familiar with the investigations.

Inspectors general at all federal departments and agencies are aggressively searching for stimulus fraud, certain that corruption will infect Recovery Act spending.

"Fraud will occur," said Wayne McElrath, Environmental Protection Agency acting assistant inspector general. "Typically we see false statements, false claims, briberies, gratuities, conflict of interest, anti-trust violations."

The Recovery Accountability and Transparency Board (called the RAT Board within federal Government circles), in charge of Recovery Act oversight, counts 470 audits, 106 active investigations and 25 cases accepted for prosecutorial review, as of November 30, the latest available data.

And government monitors say they're only just beginning.

"There are lots of eyes watching this money," said one investigator.

In fact, 55,000 people at all levels of government and in the private sector have received training in administering Recovery Act funds, according to the Recovery Accountability and Transparency Board. Many of those are being trained in fraud detection because the Board anticipates corrupt contractors will view Recovery Act funds as a potential goldmine.