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“SK Case Illustrates DOJ Focus On Procurement Fraud”

Law360 By: Hector J. Diaz

On June 10, SK Engineering & Construction Co. Ltd., a large South Korean engineering firm, pleaded guilty to one count of wire fraud in connection with a multimillion-dollar scheme to defraud the U.S. Army.[1]

The guilty plea signals a renewed focus by the Fraud Section of the U.S. Department of Justice's Criminal Division on bringing criminal charges for schemes to defraud involving government procurement and contracts. Last October, at the Global Investigations Review meeting, Assistant Attorney General Brian A. Benczkowski announced the reorganization of the Securities and Financial Fraud Unit within the Fraud Section.

The unit was renamed the "Market Integrity and Major Frauds Unit," designed to capture the "broad range of fraud enforcement work that its prosecutors actually perform." The rebranded Market Integrity and Major Frauds Unit vowed to increase specialization with teams dedicated to: (1) securities fraud, (2) commodities fraud, (3) government procurement fraud, (4) fraud on financial institutions, and (5) consumer fraud, regulatory deceit, and investor schemes.

SK Engineering's guilty plea is proof of the Fraud Section's Market Integrity and Major Frauds Unit making good on Benczkowski's promise.

SK Engineering

In 2009, the U.S. Army Corps of Engineers, Far East District (part of the U.S. Department of Defense), awarded SK Engineering a $400 million land development contract to expand part of the Army's base at Camp Humphreys in South Korea. Due to the Army's demands, the value of the contract increased to approximately $700 million in the following years.[2]

While performing under the contract, SK Engineering subcontracted with S&Teoul, with the understanding that S&Teoul would not actually perform any of the work.[3] Instead, SK Engineering and other contractors completed the work subcontracted to S&Teoul.[4]

Beginning in October 2010, SK Engineering submitted monthly activity reports to the federal government that included S&Teoul, giving S&Teoul the appearance of a legitimate subcontractor performing work under the contract.[5] The scheme continued until 2017, resulting in $32,889,423.54 in fraudulent payments to SK Engineering.[6]

The scheme involved more than submitting falsified documents for payment. SK Engineering also admitted that: (1) it bribed contracting officials in furtherance of the scheme; (2) its employees burned documents related to its U.S. Army contracts to obstruct U.S. and Korean investigators in April 2015: and (3) its employees attempted to persuade an unnamed individual not to cooperate with U.S. investigators in fall of 2017.

These factors greatly affected how the U.S. resolved the matter, including noting SK Engineering's failure discipline employees perpetrating the fraud or take other corrective action.[7]

In the plea agreement, SK Engineering stipulated to the facts as alleged in the information, pleaded guilty to one count of wire fraud and agreed to pay a fine of approximately $68.4 million.[8] The fine consists of a statutory penalty of approximately $65.78 million — or twice the amount gained through the scheme — and approximately $2.6 in restitution to the U.S. Army.[9]

The fine will be offset by up to $5.2 million — the punitive portion of a civil settlement that SK Engineering paid pursuant to a settlement agreement with the DOJ Civil Division for False Claims Act violations.[10] SK Engineering has also been suspended from participating in federal procurement and nonprocurement activities pursuant to Section 9.4 of the Federal Acquisition Regulation and likely faces debarment.[11]

Look Ahead

The structural reorganization and SK Engineering guilty plea demonstrate that the Fraud Section is making its mark on the criminal prosecution of government procurement fraud, dedicating time, resources and attention to an area historically shared with other Criminal Division components.

Increased Criminal Procurement Fraud Matters

While investigations involving the Foreign Corrupt Practices Act continue to be a Fraud Section mainstay, look for an increase in investigations and cases, like SK Engineering, involving both foreign and domestic companies involved in government procurement fraud.

Increased False Claims Act Matters and FAR Debarment

The effect of this shift will likely ripple into other agencies. There will be increased cooperation with the DOJ Civil Division's Fraud Section to recoup monies through parallel FCA matters. Also look for an increase in administrative proceedings involving suspension and debarment under the FAR[12] and the Nonprocurement Common Rule.[13]

Partnership with Nontraditional Law Enforcement Partners

SK Engineering involved the participation of the Federal Bureau of Investigation, but future similar cases will likely involve partnership with nontraditional law enforcement partners like the Army Criminal Investigation Command, the Defense Criminal Investigative Service, the Special Inspector General for Afghanistan Reconstruction and other criminal investigative services from various armed forces branches.[14]

Tailoring Compliance and Ethics Programs

As part of its plea agreement, SK Engineering agreed to continue implementing a compliance and ethics program designed to effectively detect and deter violations of U.S. federal law throughout its operations. This may become a standard plea agreement condition for similar violations in the future.[15] This will place a greater burden on compliance professionals to identify vulnerable areas to ensure that company compliance programs are effective.

Individual Employees Open to Prosecution

The DOJ's renewed focus is not limited to companies. SK Engineering was related to a November 2018 indictment of two SK Engineering employees, Hyeong-won Lee and Dong-Guel Lee, indicted in the U.S. District Court for the Western District of Tennessee on charges of conspiracy, major fraud against the U.S., wire fraud, money laundering conspiracy, and obstruction of justice for their alleged roles in the scheme.[16]

At the announcement of SK Engineering's guilty plea, Assistant Attorney General Jody Hunt of the DOJ Civil Division stated that the case "demonstrates our commitment to root out corrupt practices that harm our military and American taxpayers, and to hold contractors accountable for their corruption."[17]

Benczkowski added even stronger words:

Today's guilty plea and substantial criminal penalty sends a clear message: companies who voluntarily self-disclose misconduct, cooperate, and remediate will receive appropriate credit for their efforts. But companies like SK — which withheld and destroyed documents, attempted to persuade a witness not to cooperate, and failed to discipline any responsible employees — will pay a price.[18]

Disclosing to and Cooperating With the DOJ

In the plea agreement, the U.S. refused to credit SK Engineering with cooperating in the investigation due to the several steps the firm took to frustrate the DOJ's efforts, including withholding and destroying documentation and interfering with witnesses.[19] Companies that choose to cooperate with the DOJ should do so fulsomely and in good faith to garner as much cooperation credit as possible under the U.S. Sentencing Guidelines and the Justice Manual.

SK Engineering and the related individual employee prosecutions are harbingers for not only future criminal prosecutions involving government procurement and fraud, but attendant civil and administrative debarment actions. In 2019, the DOJ Criminal Division's Fraud Section charged 478 individuals and obtained 256 individual convictions.[20] The DOJ also obtained 15 corporate resolutions.[21] These numbers could increase significantly once the pandemic abates, due to the DOJ's targeted focus and investment of resources in government procurement fraud prosecutions.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See South Korean Engineering Company Pleads Guilty to Defrauding U.S. Army, Agrees to Pay $68.4 Million, U.S. Department of Justice (June 10, 2020) (hereinafter "DOJ Press Release").

[2] Information, at 2 ¶¶ 9-10, U.S. v. SK Engineering & Construction Co. Ltd., No. 20-20099 (W.D. Tenn. June 10, 2020), ECF No. 1.

[3] Id. at 2 ¶ 11.

[4] Id. at 2 ¶ 13.

[5] Id. at 2 ¶ 14.

[6] Id. at 2 ¶¶ 16, 20.

[7] Plea Agreement, at 4-5 ¶¶ 6d-g, U.S. v. SK Engineering & Construction Co. Ltd., No. 20-20099 (W.D. Tenn. June 10, 2020), ECF No. 4; see also DOJ Press Release.

[8] See generally Plea Agreement, U.S. v. SK Engineering & Construction Co. Ltd.

[9] Id. at 16 ¶¶ 19a-b.

[10] Id. at 16 ¶ 19b.

[11] Id. at 4 ¶ 6c.

[12] 48 C.F.R. § 9.4.

[13] 2 C.F.R. Part 180.

[14] See DOJ Press Release.

[15] Plea Agreement, at 5 ¶ 6h, U.S. v. SK Engineering & Construction Co. Ltd.

[16] DOJ Press Release.

[17] Id.

[18] Id.

[19] Plea Agreement, at 4-5 ¶¶ 6d-g, U.S. v. SK Engineering & Construction Co. Ltd.

[20] Fraud Section - Year in Review, 2019, at 4, U.S. Department of Justice (2000).

[21] Id. at 5.

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