CH2M Hill Hanford Group: Purchase Cards, Spouse-Owned Vendors and Missing Goods

CH2M Hill Hanford Group agreed to pay $1.5 million to resolve fraud and kickback allegations involving purchase cards, spouse-owned vendors and missing goods on its Department of Energy contract at Hanford. The government’s account puts the purchasing employees’ family businesses inside the supply chain and repeated internal audit warnings inside the contractor.

In its September 2011 settlement announcement, the Justice Department identified CH2M Hill Hanford Group Inc., a subsidiary of Colorado-based CH2M Hill Companies Ltd., as the Department of Energy’s prime contractor responsible for management, maintenance and cleanup of the Tank Farms at the Hanford Nuclear Site in Washington. More than 170 underground tanks held mixed radioactive and hazardous waste. The purchasing employees’ job was to buy supplies for that work.

The government alleged that two employees made more than 200 improper purchases from companies owned and run by their spouses between 2003 and 2005, then charged the costs to the Department of Energy. In the government’s account, taxpayers funding a radioactive-waste cleanup paid inflated prices for some goods and paid for other goods that the vendor never supplied.

How the Purchase-Card Schemes Worked

The alleged schemes used the employees’ purchasing responsibilities to send government-funded business through companies they owned with their spouses. One route inserted an intermediary into purchases of real supplies. The other charged for goods without supplying them.

Supplies Marked up Through an Intermediary

One CH2M employee allegedly routed purchases through Kennewick Industrial and Electric Supply under an arrangement with a salesperson there. The government identified Detloff Industrial, owned by the employee and his wife, as another company involved in those purchases. According to the Justice Department, both Detloff Industrial and Kennewick Industrial and Electric Supply substantially marked up the goods, leaving the government paying more than twice what they were worth.

The Justice Department also reported guilty pleas to fraud charges in the criminal case, including from the CH2M buyer who owned Detloff Industrial and the Kennewick Industrial salesperson.

The supplier relationship is central to that account. A purchase could pass through an outside business while still benefiting the purchasing employee’s household. We would want to connect the person placing the order, the businesses through which it passed and the prices charged along the way.

For an insider, this is where knowledge of the purchasing arrangement matters. The question is how the family-owned business entered the transaction and how its charge reached the government’s bill. A receiving record can establish that supplies arrived while leaving the price and the purchasing employee’s financial interest unexplained.

AMG Marketing and the Missing Goods

The government alleged that the other purchasing employee used AMG Marketing, a business he owned with his wife, to charge the Department of Energy for purchases while supplying no goods for those transactions.

Here the decisive comparison is between the purchase that was charged and the delivery that should support it. Someone familiar with receiving or supply use may therefore see a contradiction that is invisible in a payment total.

The distinction between the routes matters to how we examine them. In the intermediary arrangement, the government said it paid an inflated price for actual goods. In the AMG arrangement, the allegation was that the vendor supplied nothing.

Internal Audits Had Already Flagged the Weaknesses

The Justice Department alleged that CH2M’s internal audits identified weaknesses in its purchase-card controls in repeated reviews. The Justice Department said the company failed to address those weaknesses, allowing the schemes to continue undetected.

We see the absurdity in the government’s account: year after year, CH2M documented weaknesses but allegedly left the purchasing schemes room to run. Warnings on file. Family vendors still in business.

The 2019 Journal of Forensic and Investigative Accounting study Unique Characteristics of Management Override Fraud Cases compared occupational fraud cases involving missing controls with cases involving managers bypassing controls already in place. It found that internal audits, independent financial statement audits, anti-fraud policies and codes of conduct were more closely associated with frauds in which managers bypassed controls than with frauds where controls were missing.

The paper recommends testing whether controls work in practice, including whether people actually keep separate the duties assigned to them. At CH2M, the government’s allegation was that identified purchase-card weaknesses remained uncorrected. The useful question for someone who saw those warnings is what changed in purchasing afterward. We examine that response alongside the transactions the warning concerned.

What Are the Indicators of Government Procurement Fraud?

The indicators in the government’s account were the purchasing employees’ interests in the vendors, the price charged through the intermediary, the absence of goods from AMG Marketing and repeated warnings about purchase-card controls. The value of an insider’s account lies in connecting those pieces to particular purchases.

The billing evidence connects what was bought, who supplied it, what arrived and what the Department of Energy was charged. We examine the price charged through each business alongside what the order says was being bought.

Those comparisons also explain why different people may hold different parts of a case. A purchasing employee may know why a vendor was selected. A receiving employee may know whether the order arrived. An accountant may recognize the charges, while an internal auditor may know that the same control weakness was raised before. We work with the connection your knowledge makes between the transaction and the government’s money.

The Civil Settlement Reached the Contractor

The resolution covered allegations under the False Claims Act and the Anti-Kickback Act against CH2M Hill Hanford Group. The investigation was conducted by the Justice Department’s Civil Division, the U.S. Attorney’s Office for the Eastern District of Washington and the Department of Energy Office of Inspector General.

The Justice Department described the CH2M agreement as the third civil settlement in a series of Hanford purchase-card cases. Compared with CH2M’s $1.5 million agreement, Fluor Hanford, another contractor at the site, had agreed to pay $4 million in June 2011 over the alleged Kennewick Industrial and AMG Marketing schemes and two others. Kennewick Industrial and Electric Supply separately agreed to pay $515,000 in July 2011.

Those resolutions put both the purchasing contractor and the intermediary into the same account of government-funded buying. In CH2M’s case, the government also pointed to the company’s response to its own audits.

A whistleblower case under the False Claims Act can pay the person who brings it 15% to 30% of what the government recovers.

The Separate Hanford Timecard Case

CH2M Hill Hanford Group’s later Hanford resolution concerned inflated timecards and labor billing. The Justice Department’s March 2013 announcement described allegations involving regular and overtime hours, with supervisors and management allegedly condoning the conduct.

The purchase-card case turns on supplies, vendor ownership, prices and deliveries. The timecard case turns on hours charged for work.

You Know the Purchase Behind the Charge

If you saw a buyer steer orders to a family business, goods charged but never delivered, or audit warnings left unanswered, speak with our whistleblower experts about those purchases. We connect your knowledge of the purchasing operation to your strongest government procurement fraud case and bring in whistleblower lawyers who understand contractor kickbacks and false billing. We stay beside you as the case moves from the transactions you know to the recovery you help pursue.