DND scammed out of millions in hardware fraud

The Department of National Defence (DND) in Ottawa has reportedly been taken for millions of dollars in a computer contract scheme, a contract originally held by Compaq Canada and later by Hewlett-Packard Co. when it acquired Compaq in 2001.

No one can say how much money has been lost at this point, said Doug Drever, a spokesperson for the DND, but he added that the department is demanding HP to remit $159 million or documentation to substantiate that goods and services for that amount were delivered to the DND.

“The secondary figure is the total number of billings from HP to us since 1991 which is $366 million of which the $159 million is part. And we have asked them for all their records related to that entire contracting period,” Drever added.

He said that as of yet the DND hasn’t received an official response to its demands from HP, but that the two parties have been involved in ongoing discussions regarding the issue.

“…the Minister [of defence] said in the House today [that HP was] co-operating and have been co-operating. Obviously it has changed somewhat in the sense that they have indicated in public that they are in disagreement with our claim,” Drever explained.

The DND said it realized there was a problem during an audit which occurred at the expiration of a contract in Sept. 2003. The audit, according to Drever, highlighted “some irregularities of the contracting process, which caused further investigation and audits.”

Due to the findings of the audit, Drever confirmed that a DND employee with contract oversight responsibilities was fired. Drever also stated that the department has given its findings over to the RCMP for review.

When asked if the department was concerned that this sort of fraudulent activity had happened before but went undetected, Drever said that because the DND’s auditing processes are broad, the department has no reason to believe that the “situation goes beyond the individuals and the contracts involved” in other areas of the DND.

Commenting on behalf of the Auditor-General, spokesperson Julie Hebert said the office is fully aware of the problem and is monitoring the investigation and the management of the situation by the DND.

In a statement released by HP on March 9, HP said it was engaged in sub-contracting activities with a variety of supplier companies at the request of the DND in regards to its contract as a supplier of hardware and services to the department.

HP states that the DND’s instructions were to process invoices for these suppliers although the nature of the work being performed was, in many instances, never disclosed to the DND. HP said that it repeatedly requested the particulars of the work being provided but was informed by the DND that the work was confidential and that in the interest of national security, HP was not entitled to the information.

Within HP’s own investigation, the company said it has revealed the potential that an employee of the DND and others unknown to HP engaged in fraudulent activity, but continued to say that it sees no merit in the DND demand that it remit $159 million to the department, and would “defend vigorously any claim, if brought.”

It is very difficult for companies to protect themselves against “skillful and bloody-minded people” that have their sights set on defrauding an organization, said Paul Lalonde, a partner at Heenan Blaikie LLP in Toronto.

“You can put all the checks and balances you want in place but at the end of the day, unless you put in systems that are so onerous that you can’t actually get anything done because you spend all your time providing verification for everything…you are reliant on the honesty and the integrity of the people that work for you,” Lalonde added.

There are various things a company can do to try to protect itself from this sort of thing from happening, Lalonde said, including double checking expenses over a certain dollar amount, “but if someone is going to lie and fabricate documents, it can be hard to stop that kind of thing. It often does come out like this, when you finally get around to doing audits.”