By: Paul Emanuelli
This article is an extract from the 5th edition of Government Procurement.
In its September 2019 decision in R. v. Ross and Dawson, the Nova Scotia Supreme Court found that two government employees, along with a supplier operating under different companies, conspired to defraud the government through a long-running contact-splitting and bid-rigging scheme. That scheme resulted in the award of hundreds of contracts to the same supplier, often at inflated prices. In turn, that supplier gave one of the government employees his company bank card, so that the government employee could make repeat cash withdrawals.
The case involved the procurement of equipment parts to support heating facility maintenance at the Shearwater military base in Nova Scotia. The Court found that the purchasing clerk responsible for ordering parts repeatedly divided the required equipment parts into small orders, a practice referred to as “contract-splitting”, so that the procurements never reached the contract value that would require open tendering through the federal government’s centralized procurement procedures. These smaller purchases then proceeded according to the local invitational purchasing process, where local purchasing staff could directly invite contractors to provide quotes without an open public tendering process. This allowed the purchasing clerk to direct all of the invitations to companies controlled by the same supplier, who then submitted multiple bids under different companies (a practice referred to as “cover bidding”) to ensure that it would win the contract, even if the supplier bid inflated prices.
As the Crown prosecutors summarized, this scheme resulted in the Canadian government being defrauded of $2 million in the award of 640 small contracts to that same supplier, often at significantly inflated prices:
The Crown relies on R. v. Théroux, [1993] 2 SCR 5 in asserting that the two accused defrauded the federal government of approximately two million dollars ($2,000,000.00) between the 1st day of April, 2008, and the 9th day of May, 2012.
The Crown alleges that Mr. Ross and Mr. Dawson conspired to funnel contracts for expensive parts for the heating plant at CFB Shearwater to four companies connected to Mr. Dawson. Rather than following the rules and polices which ensure competition among various unrelated businesses, the Crown says, both Mr. Ross and Mr. Langille – who were friends of Mr. Dawson – “colluded to manipulate the contract process by awarding 640 contracts to Mr. Dawson’s companies”. During the relevant time period, the Crown says, hardly any other companies were awarded contracts in relation to the Shearwater heating plant. The prosecution adds that several of the parts sold by Mr. Dawson’s companies were significantly marked-up in price.
The Court noted that the supplier had submitted faxed bids from the same telephone number, which provided clear evidence of common authorship across what were supposed to be independently prepared competing bids, which should have alerted those overseeing the process of the bid-rigging practices. The Court also found a series of cash withdrawals made from the supplier’s account using a bank machine at a local tavern and, after finding no credible explanation for those transactions, determined that those payments were bribes from the supplier to the purchasing clerk’s supervisor.
As the Court summarized, Crown prosecutors provided evidence showing that the government was charged excessive mark-ups on the parts, especially during the annual budget year-end period (a period referred to as “March Madness”) where government departments rush to spend their remaining budgets allocations. In fact, the accused supplier admitted to inflating his prices, especially during March Madness:
Mr. Dawson was shown a series of documents demonstrating that his companies charged DND over three and four times what they paid for selected heating plant parts. While admitting that his competitors charged 20 to 40 percent mark-up (except for one example of a 100 percent mark-up with Mr. Quigley), Mr. Dawson attempted to justify the Dawson Companies’ profit margins (at times) of 200 or 300 percent. He initially denied knowing that his companies were often the only businesses bidding, but later said he had an “inkling” of this.
Mr. Dawson was shown a purchase order Colonial received where they were paid $4,102.50 for ball valves, representing a charge of 15 times what he paid for them. He described this as a “hassle order”. He agreed that the only other bidder was Atlantic, and then allowed, “It was March so I marked it up good, yeah”.
The Court found all three defendants guilty of fraud and found the supplier had bribed the government employees.
In considering the evidence, the Court found that the purchasing clerk engaged in wilful blindness to allow the bid-rigging scheme to continue over a prolonged period and had facilitated that scheme through his daily contract-splitting practices:
When I consider all of the evidence it is clear that federal government policy, particularly in the wake of the sponsorship scandal, is designed to protect the Canadian taxpayer. The contracts officer training ensures that fundamentally, procurement involves a transparent and open bidding process. On the evidence I find that Mr. Ross turned a blind eye to what he must have known were the built-in protections for the public.
It is not an answer to suggest, as Mr. Ross attempted to, that emergencies at the old heating plant required him to regularly deviate from the rules and regulations. The evidence of the plant personnel confirms that emergencies (requiring the plant to shut down) were essentially non-existent. Accordingly, parts would have rarely been required on an urgent basis.
Mr. Ross’ rationale for contract splitting fails to pass muster. The overriding evidence is that it was a fundamental rule that the contracts had to be bundled. The evidence led through Ms. McGuinness clearly shows that Mr. Ross split contracts on an almost daily basis.
Mr. Ross attempted to explain that there was non-responsive bidding from competitive companies; however, it is my finding that because he did not follow the rules, non-Dawson Companies did not have an opportunity to submit competitive bids.
In considering all of the evidence it is clear that Mr. Ross knew the Dawson Companies had common ownership. He knew his friend Harold Dawson had an interest and he favoured these companies over competitors. By his own admission he tried out three of the four Dawson Companies merely because business cards were left on his desk. The evidence showed that he continued to patronize these companies absent any real contact. This is to be contrasted with his evidence about building relationships with competitor companies.
I further find that Mr. Ross actively participated in fraud on the Canadian government by attempting to camouflage his actions. For example, he sent emails and faxes purporting to be in relation to four different companies when he knew very well that they were most often going to the same location.
The Crown led considerable evidence to establish that Mr. Ross and Mr. Dawson regularly lunched together, and that on one occasion, Mr. Dawson picked Mr. and Mrs. Ross up at the airport. Even if I were to accept the most relaxed reading of the conflict of interest rules, this is not an answer to the pattern of behaviour. For example, the evidence reflects that for the roughly 650 purchase orders, there was an infinitesimal percentage awarded to true competitor companies. Given this evidence, I have to be skeptical about the alleged benign nature of Mr. Ross’ and Mr. Dawson’s lunches and their regular weekly meetings. Close friends or family tend to pick one another up at the airport.
In consideration of all of the evidence it is my finding beyond a reasonable doubt that Mr. Ross and Mr. Dawson enjoyed a close relationship and that together they intentionally perpetrated a fraud on the Canadian government. This fraud resulted in anything but a competitive bidding process. In fact, the end result was a monopoly situation where the Dawson Companies received the vast majority of the contracts Mr. Ross had charge over during the impugned time. While not acknowledging and, in fact, attempting to cover up what he knew, Bry’n Ross favoured his good friend Harold Dawson.
The Court also determined that the evidence showed that the supplier charged inflated prices since he knew that no other suppliers would be submitting bids:
With respect to Mr. Dawson, he admitted that he initiated his sole proprietorships so that he could give DND their required number of bids. Upon scrutiny it is clear that Mr. Dawson knew the Dawson Companies’ bids were not legitimate. After all, he admitted to coming up with the pricing and knowing that his lowest quote would win the day over his other (purposely higher) bids.
…
While Mr. Dawson went to great lengths to emphasize his right to charge what he wanted in a free market, this evidence ignores the fact that he did this in an artificial market. The market was artificial because of his manipulation which excluded true competitors. This resulted in a true monetary loss to the government. In the result, when Mr. Dawson acknowledged charging up to 15 times what he paid (wholesale) for a part, this amounts to more than an extremely high profit. It represents a stark example of the deprivation to the government. When the contracts are scrutinized along with the quotes (and the prices the Dawson Companies received the parts for), it is easy to conclude the loss was far greater than $5,000.00.
Further, the Court found that the prosecution had proved that the supplier made cash payments to the second government employee as bribes and kickbacks in connection with the bid-rigging scheme:
Ms. Shea’s evidence confirms that Mr. Dawson took approximately $1 million out of his companies over the course of the four years. In and of itself there would be nothing wrong with this; however, given the totality of my findings, I am of the view that much of this is attributable to Mr. Dawson’s fraud and the benefit he gave to Mr. Langille. I have discussed the former at length. As for the latter, below I have assessed the evidence regarding the second count.
The benefits Harold Dawson provided to Mr. Langille took several forms. As discussed above, I find that Mr. Dawson provided Mr. Langille with a Harbourside debit card which Langille (with Mr. Dawson’s knowledge) used to regularly withdraw cash from the Mic Mac Tavern ATM. The debit card was also used to pay Mr. Langille’s expenses, including bills from his insurer, Eastlink, Blue Wave and Wonder Auto. Mr. Dawson used cheques from Atlantic’s HSBC bank account and his Visa card to pay for new windows and doors to be installed at Mr. Langille’s residence. I find that Mr. Dawson intended to confer these benefits on Mr. Langille with respect to Mr. Dawson’s dealings with DND. In other words, I find that Mr. Dawson had the mens rea required for a conviction under s. 121(1)(b). Consistent with Justice Doherty’s observation in R. v. Greenwood, the evidence that Mr. Dawson had dealings with DND and bestowed a benefit on Mr. Langille, an employee of DND, during the currency of those dealings, reasonably suggests a connection in Mr. Dawson’s mind between the benefit and the dealings. It is, as Lamer J. noted in Starr v. Ontario (Commissioner of Inquiry), an “almost irresistible” inference. In this case, it is the only reasonable inference available on the totality of the evidence. The benefits in this case went far beyond the kinds of gifts that one close friend might reasonably give to another. In addition, most of the benefits were connected to two of Mr. Dawson’s companies that had dealings with DND. The debit card was in the name of Harbourside, while the cheques for the windows and doors were drawn from Atlantic’s HSBC account.
As this case illustrates, artificial contract-splitting can be used as a means to avoid open tendering procedures and could lead to fraudulent activities, since procurements falling under the contract value thresholds are typically awarded based on inviting three quotes from companies that can be selected by the same individual who is splitting the contracts within the organization. This creates a situation that is ripe for fraud and collusion between internal contract-splitters looking for kickbacks and external contractors who are willing to defraud the government to win rigged bids. Purchasing institutions should therefore put institutional governance practices in place to ensure proper oversight and control over their smaller purchases since those small contracts can add up to significant sums stolen from the taxpayer through bid-manipulation and kickback schemes.
