Rewards for Reporting Fraud

Underpaying Royalties

The United States owns large tracks of land and significant water rights, including miles out to sea from U.S. boarders. These federal properties contain valuable minerals, oil, gas, or timber. Generally the government sells the right to extract these items from federal lands in the form of royalty contracts. Basically the contractor is entitled to remove an item, such as oil, in exchange for a promise to pay a royalty when it is sold. Assuming that the royalty rate for onshore production of oil is 1/8, the oil company would pay the government 1/8 of the price it received from each arm's length transaction of oil sold.

Fraudulent schemes abound in this area of federal contracting to cheat the government out of its royalties. Simple forms of fraud include concealing the true volume or price of the item. More sophisticated schemes involve creating one or more subsidiary company to buy the goods at below market prices. The related entity ends up making a substantial profit on the resale because it received a sweetheart deal from its related entity at the expense of the government.

In a case Mr. Hesch had worked on while at DOJ, the government recovered $430 million from 16 major oil companies for underpaying oil royalties and over million was paid out in whistleblower rewards. These companies have also been forced to repay hundreds of millions of dollars for underpaying royalties for natural gas.