Background investigation fraud case against USIS moved to DC court

Wednesday - 5/7/2014, 3:28pm EDT

The false claims case against embattled background-check firm USIS is inching forward.

On April 25, a judge approved the transfer of the case from the middle district of Alabama — where a former USIS employee filed a whistleblower suit in 2011 accusing the company of cutting corners in its reviews of background investigations supplied to the government — to Washington, D.C. Both the Office of Personnel Management, which oversees the background-investigation process and is a victim of the alleged fraud, and the Falls Church, Virginia-based company are headquartered in the area.

The Justice Department, which joined the civil case in October, alleges the company signed off on at least 665,000 background investigations over a 4 1/2 year period that had never been properly vetted in a scheme to maximize profits.

USIS now has until June 4 to respond to the government's allegations, according to court documents filed last week.

The company, which is the largest provider of background investigations for the federal government, was thrust into the spotlight last year when it was revealed it performed background investigations of both National Security Agency contractor Edward Snowden and Navy Yard shooter Aaron Alexis. The government requires federal employees and contractors seeking security clearances to first undergo background investigations. DOJ's complaint alleging incomplete reviews of investigations is unrelated to the investigations of either.

In the first part of Federal News Radio's special report, Questioning Clearances, we re-examine the allegations of fraud lobbed against the company by the Justice Department as well as the Office of Personnel Management's response to reforms the company says it's put in place since the investigation came to light.

USIS declined multiple requests to interview company officials for this article.

In a statement, the company said the activity alleged in the government's complaint "is inconsistent with our company values, culture and tradition of outstanding service to our government customers."

USIS has installed new leadership, put in place ethical reforms and is cooperating with the government's investigation, a spokeswoman said.

Click to see the full-size timeline.

Whistleblower says he refused to 'dump' cases

The roots of the government's case stretch back almost three years and nearly 800 miles from Washington.

In early 2011, Blake Percival was working as a director of fieldwork services for USIS in Alabama. He oversaw about 350 employees whose job it was to make sure field investigators' reports were complete and met OPM's quality standards.

USIS employs some 6,500 field investigators, quality reviewers and other employees nationwide, and performs hundreds of thousands of background investigations for agencies every year under its contract with the Office of Personnel Management.

Soon after taking on the new position, Percival says he learned his job duties would also consist of "dumping" cases — releasing investigators' reports to OPM that were never reviewed by the company. That's according to a lawsuit he filed in July 2011 that also alleges he was fired for refusing to dump cases.

The court kept Percival's suit secret, as is typical in federal whistleblower cases, to give the government time to investigate his claims. And when DOJ filed its complaint in January 2014, it claimed senior executives at the company at levels far higher than Percival's immediate supervisors had directed employees to dump cases.

The DOJ complaint accuses the company of skipping the required quality reviews of thousands of investigations between March 2008 and September 2012 in order to maximize the company's revenues and profits. The quicker the company transmitted a case to OPM — even ones that hadn't undergone quality reviews — the faster the government paid them, according to the suit.

USIS senior management was "fully aware of and, in fact, directed the dumping practices," the government's complaint says. In one undated internal document cited by DOJ, an employee indicated cases were typically dumped "when word comes from above," such as from the president of the Investigative Services Division or the president and CEO of the company. In the past, these officials "have told us to clear out our shelves in order to hit revenue," the document stated.

Investigation remains ongoing

The DOJ complaint largely centered on findings uncovered by OPM's inspector general, according to the IG's spokeswoman, Susan Ruge. The IG began looking into potential fraud committed by the company once Percival filed his complaint in the summer of 2011, she said. That investigation remains ongoing.

But even earlier than that, OPM officials began to have suspicions about the large number of cases transmitted to OPM by a handful of USIS quality reviewers, Merton Miller, director of OPM's Federal Investigative Services, told Federal News Radio in an interview this week.

Thanks to a new tool, the agency discovered that user IDs associated with just four USIS employees were responsible for reviewing and releasing more than 13,000 cases in the span of a week — an average of more than 3,200 cases per reviewer.

A review of the metadata revealed that in some cases, the files transmitted to OPM hadn't even been opened by reviewers.

OPM officials wrote to USIS in April 2011 seeking an explanation. "We said, 'Explain this anomaly, it doesn't make any sense to us,'" Miller said. "It was the first time, really, that we had used this tool. And that's when we said, 'It appears there's an issue here. Let's see what kind of result we get back.'"

In a follow-up letter sent a few weeks later, USIS' vice president of field operations blamed the issues on software glitches, according to the DOJ complaint.

Later, in an interview with members of the House Oversight and Government Reform Committee, Miller said it appeared the company also used other means to conceal its dumping practices from OPM. Under a separate $288 million support-services contract with the agency, USIS worked alongside government reviewers doing final quality reviews of closed investigations — including, in some cases, its own.

Miller told the committee it appeared USIS used that secondary contract to obtain information about OPM's oversight efforts in order to evade detection of its dumping pratices.

"I'm not splitting hairs, but they knew how we were auditing," Miller said in a Jan. 8 interview with committee staff. "They knew what kind of reports we generated to oversee that they were actually performing the activities."

OPM weighs suspension: 'You're innocent until proven guilty'

When it learned of the allegations against the company in the summer of 2011, OPM took steps to "hold bad actors accountable and to ensure such practices never happen again," the agency's director, Katherine Archuleta, said in a statement earlier this year.

To prevent dumping in the future, OPM staffed up its internal oversight personnel, increased more on-site inspections and ran more frequent audits of USIS cases. In addition, OPM directly suspended from working on the contract any USIS officials who were involved in the alleged misconduct.

The agency also ended the practice of allowing USIS — or any contractor — to perform final quality reviews of its own work. That step of the process was "fully federalized" in February, Archuleta said.

What OPM hasn't made up its mind about is whether it will suspend or debar the company based on the allegations. When asked by Federal News Radio why OPM held off on taking stronger action immediately, Miller said it was important for the agency to wait until the investigation is completed.

"You're innocent until proven guilty and there's still an ongoing investigation. ... Honestly, OPM has not yet received a final, closed investigation regarding the circumstances of the fraud," he said.

Charles Tiefer, a law professor at the University of Baltimore and former member of the Commission on Wartime Contracting, said OPM's response is not uncommon in the federal government, where agencies are often reluctant to suspend contractors unilaterally.

"The answer is usually: 'We wait until the investigation is done,'" Tiefer said. "It's a bad idea to have suspension wait, but it's typical," he said, citing the government's suspension of oil giant BP in November 2012. In that case, he explained, it took more than two years after the 2010 Gulf oil spill — and the company pleading guilty to criminal charges — before the government moved to temporarily suspend BP from federal contracts.

USIS cleans house

Miller also pointed out that, in his opinion, USIS has taken strong steps to correct problems internally.

"USIS moved out, in my mind, very proactively to put remedies in place, to remove staff who were knowledgeable or involved in the fraud and to ensure it wouldn't happen again," he said.

That's the same case the company has made since the allegations first came to light.

"Since first learning of these allegations two years ago, the company has acted decisively to ensure the quality of USIS's work and compliance with OPM requirements," current CEO Sterling Phillips testified before the House Oversight committee in February. "New leadership has been installed, oversight has been enhanced and internal controls strengthened."

Phillips joined the company as CEO in January 2013, well after the alleged fraud ended, according to DOJ's suit.

A USIS spokeswoman said all employees who were involved in the alleged misconduct are no longer with the company, although she declined to discuss the conditions of their departures.

Former president and CEO Bill Mixon resigned from the company at the end of 2011 — more than a month before the company learned of the OPM IG investigation.

Until last month, Mixon was the president and CEO of a medical-device company in Minnesota. According to Securities and Exchange Commission filings, Mixon and the company parted ways in April. Mixon did not respond to messages to his personal email account seeking comment.

Shortly after the company received the subpoena for records in January 2012, USIS hired an outside private firm to conduct an internal investigation. At that point, according to a source close to the company, the company was being managed day-to- day by Sharon Rowlands, the CEO of Altegrity, USIS' parent company.

According to the DOJ complaint, the dumping continued for at least another nine months, until September 2012. The source said internal investigations of this sort often take a while to root out potential misconduct and put remedies in place.

The president of the company's Investigative Services Division — one of the key positions cited in the DOJ complaint as being aware of and directing the dumping of cases — left the company in or around October 2012, according to executive profiles on archived versions of the company's website. The company's chief financial officer, another official involved in the dumping, also left around that time.

The USIS spokeswoman declined Federal News Radio's repeated requests for an on- the-record interview with company officials about the reforms put in place by the company. The reforms have been shared with OPM, she said.

The DOJ complaint cited no misconduct by any officials at Altegrity. In fact, it didn't mention USIS's holding company at all.

But a report published in February by Rep. Elijah Cummings (D-Md.), the ranking member of the oversight committee, pointed out that annual incentive awards earned by USIS executives during the course of the alleged fraud were meted out under an Altegrity bonus policy.

Mixon earned more than $1 million in stock and bonuses during that time. Other top officials earned hundreds of thousands of dollars. Meanwhile under its contract with OPM, the company, which was closing out more cases than ever, earned at least $13 million in annual incentive awards during the same time period.

"The bonus payments received by USIS executives raise questions about the extent of potential knowledge or complicity in the alleged fraud by executives at USIS's parent holding company, Altegrity," Cummings' report stated.

After the hearing, per standard practice, committee members sent follow-up questions to USIS, including requests for more information about its relationship between Altegrity. USIS has so far declined to provide answers, according to a committee staffer with knowledge of the matter but who was not authorized to speak publicly.

In part two of Questioning Clearances, Federal News Radio on Friday examines why more and more background investigators are being criminally prosecuted and serving jail time. Available Friday May 9.

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