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How State Department was duped in $60M fraud scheme

Contractor allegedly crossed line into 'inherently governmental' work

May. 19, 2013 - 06:00AM   |  
By JIM McELHATTON   |   Comments

A federal investigation of former State Department contracting specialist Kathleen McGrade has uncovered a treasure trove of luxuries allegedly acquired with the proceeds of a multimillion-dollar contracting scam: a Steinway piano; sculptures; sapphire, emerald and diamond jewelry; and a 41-foot yacht bearing the name of the company she and her husband formed, Sterling Royale.

As prosecutors see it, McGrade, 64, steered heating, ventilation and air conditioning work at embassies around the world to the Sterling Royale Group (SRG), all while keeping her relationship with her husband secret from co-workers.

Along with her husband, Brian Collinsworth, 46, she pleaded not guilty May 3 to conspiracy, wire fraud and other felony charges, which carry penalties of up to 20 years in prison.

Aside from the nearly $60 million in contracts involved, what makes McGrade’s case stand out from other major procurement fraud scandals is that she wasn’t a federal employee but a contractor. Barred from performing “inherently governmental” functions, she wasn’t supposed to be in a position to influence government spending.

But prosecutors say she did more than just influence co-workers: “McGrade was involved in nearly every stage of the contracting process on the HVAC contract with SRG, including approving invoices, and attended nearly every meeting that involved SRG,” prosecutors said in a recent court filing.

Federal acquisition rules, however, deem the approval of contractual documents an inherently governmental function.

As a contractor, McGrade wasn’t required to fill out the disclosure forms required of federal workers, who must report on family relationships, assets, income sources and outside positions.

“The government left itself vulnerable here,” said Kathleen Clark, a law professor at Washington University in St. Louis who in 2011 wrote a report on contractor ethics for the Administrative Conference of the United States, an agency that recommends ways to improve federal administrative processes.

The government delegated decisions to someone it did not vet for conflicts of interest, she said in an interview. “It never asked her whether she had a conflict of interest, when they would ask an employee that question.”

In 2011, Clark issued a report for ACUS that found that if a federal employee makes a recommendation on a matter that could affect her financial interest, she could be subject to administrative discipline and criminal prosecution. But in most cases, a contractor employee with the same financial interest who makes that same recommendation isn’t subject to any consequences, Clark found.

Months after her report, following recommendations from ACUS, the Federal Acquisition Regulation Council published a rule amending the FAR so contractors involved in government acquisition are screened for personal conflicts of interest.

Stan Wood, executive vice president at Arlington, Va.-based ATSG, where McGrade worked, confirmed she had been fired. But he said while the contracting company monitored her hours and wrote her paychecks, McGrade reported to the State Department.

“Work activities are monitored and controlled by the Department of State,” he said in an interview.

The State Department declined to discuss the McGrade case or answer general questions about its own use of contractor personnel in its contracting office. A lawyer for McGrade also declined to comment.

Dan Gordon, a law professor at George Washington University who served as President Obama’s administrator for federal procurement policy from 2009 to 2011, said he didn’t think the State Department did anything wrong so much as it was duped.

Gordon said contracting specialists can be contracted positions, but contracting officers can only be federal employees.

“The State Department didn’t allow her to cross the line,” Gordon surmised. “She fooled them into believing she was a contracting officer.”

Still, Gordon added, the fact that somebody could get away with such an alleged misrepresentation reflects just how “blurred the lines” have become between contractors and federal employees.

It’s the same description Obama used in a memo to agencies a few weeks into his first term. Outlining a host of contracting reforms, Obama said the line between “inherently governmental activities that should not be outsourced and commercial activities that may be subject to private sector competition has been blurred and inadequately defined.”

McGrade and Collinsworth were indicted in U.S. District Court in Alexandria, Va., on April 25. They remain free on $50,000 bond. They’re set to go to trial in October.

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