The Loophole That Allows Local Government To Use Fed Funds On Banned PRC Products

School districts are breaking the law by spending Federal funds on banned Hikvision products. When called out on violations, districts paper over the purchases with a questionable accounting loophole, while keeping the Federal money and the equipment.

Inside this note, we examine 3 California and 1 Minnesota purchases, potential 800+ other situations, and why one sales expert called this practice 'shenanigans'.

Executive Summary

School districts have illegally used federal funds to buy NDAA banned products, when questioned, 4 districts 'recoded' the purchases to non-federal funds. Minimally, this violates the spirit if not the letter of the law, with one expert calling it 'shenanigans' and IPVM having reported it to the Federal government.

IPVM found 800+ purchases of NDAA-banned products, for a total of $2.5 million after the funding ban went into effect. Many of them are likely to have used federal funds.

Hesperia Unified School District

In November 2020, California's Hesperia Unified School District (HUSD) executed the largest (known) government contract for banned equipment since the NDAA came into effect, spending $271,745.50 for 56 Hikvision thermal cameras.

A school board presentation identified the funding source as Federal CARES Act aid, which HUSD Superintendent David Olney confirmed to IPVM. However, he disagreed at first that a violation had occurred:

The Hesperia Unified School District used Elementary and Secondary School Emergency Relief (“ESSER”) Funds provided under the federal Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to purchase thermal cameras to screen student temperatures because these devices capture temperatures quickly and provide the health information necessary to facilitate public health guidance to help keep staff and students healthy. The cameras take temperature readings only; they do not capture facial recognition or collect any personal data. The District believes it complied with the CARES Act and use of ESSER Funds to help facilitate the safe return to in-person instruction. [emphasis added]

We provided Mr. Olney with information on the law. He later changed his position, telling IPVM they “switched” the funding source:

I would like to inform you that we have switched funding for this purchase; it is no longer being funded out of CARES Act, or any other federal funds.

Rocori School District

On August 17th, 2020 - 4 days after the ban came into effect - Rocori School District in Cold Spring, MN, purchased $40,288.96 of Hikvision thermal cameras and tablets, per GovSpend:

Beth Bertram, Rocori's Director of Business, confirmed they used Federal CARES Act funds. Bertram said the school was aware of the NDAA ban, but believed it did not apply since they did not buy from Hikvision directly, telling IPVM:

Yes, we were aware. We had our tech person and our vendor look into that to make sure we followed the rules, and I believe we did follow the rules.

The NDAA applies to all purchases of Hikvision or Dahua, irrespective of the seller. We asked Superintendent Brad Kelvington how they determined if the purchase was legal:

I have spoken with our Business Manager, Beth Bertram and we moved this purchase out of CARES Act funding revenue. [Your question] is no longer relevant.

Mr. Kelvington later added:

At the initial time of the purchase order, we were not aware that the purchase didn’t meet the allowable use of the funds. We knew there were restrictions, but we did not realize the cameras fell under that umbrella.

He refused to clarify further what Rocori knew or was told about the legality of buying Hikvision with Federal funds.

Mountain View School District

Mountain View School District (MVSD), in Ontario, CA, bought $40,045.23 of Hikvision thermal cameras and kiosks. The Superintendent's office initially confirmed over the phone that Federal funds were used, even explicitly referring to the CARES Act by name. However, Superintendent Dr. Douglas Moss later reversed over email:

The items in question were purchased from BDJTech in El Segundo, California. I have asked for the item to be pulled and reviewed by our Chief Financial Officer. The review indicated that Federal funds were not used for purchase of equipment. Any previous confirmation would have been in error. Thank you for your inquiry. [emphasis added]

He added:

We had never heard of Hikvision nor were we made aware of any connections to anything. We made the purchase from BDJTech. Nothing was disclosed to us about any issues.

We asked if the purchase originally drew from Federal funds, and had been switched after our inquiry. Dr. Moss refused to respond.

Likely a Larger Problem

State and local agencies have executed 800+ contracts for covered equipment entities since the August 13, 2020 effective date of the NDAA Federal funding ban, according to GovSpend. This is without accounting for any relabelled products. Given substantial disbursements of Federal funds to these agencies over the same period, there are likely many other violating purchases.

Modesto Bus

In March, Modesto City Schools made the same recoding regarding their purchase of Hikvision temperature screening with Federal funds.

Problem Likely Much Larger

State and local agencies have made 800+ purchases for covered equipment entities since the August 13, 2020 effective date of the NDAA Federal funding ban, according to GovSpend.

This is without accounting for any relabelled products. Given substantial disbursements of Federal funds to these agencies over the same period, there are likely many other violating purchases.

"Shenanigans" Says Sales Expert

Jason Eatmon, an expert in local government sales, explained this concept as reformatting how the purchases are logged in their accounting systems. It does not mean money was returned to the Federal government.

Eatmon described this as "shenanigans", saying "If I rob Peter to pay Paul but then repay Peter later by robbing Paul, that's recoding."

Eatmon believes it does not change the fact that Federal funds were used, as schools have different checking accounts for different funding sources. "They already wrote the check out of their Federal funds. Recoding still means the money they spent directly was Federal."

Moreover, part of the funding application process is to submit a plan explaining how Federal money will be spent. "The spirit of [the rules] is that your plan is what you execute with the Federal funds," Eatmon said, "but the spirit of that isn't upheld. There's no entity that checks for that. There's no precedents that they're going to be held accountable."

Fever Performance Risks

Besides violating federal law, these 2020 purchases were most typically for fever screening devices that IPVM testing and a peer-reviewed study published in the Journal of Biomedical Optics have found to have significant performance risks. This increases the risk that the money was wasted while increasing risk to public safety.

School Districts Risk Losing Federal Funds

Violators risk being blacklisted from Federal funds in the future.. The implementing rule for the NDAA’s Prohibition on Loan and Grant Funds states any Federal award “recipients and subrecipients” cannot “procure or obtain”, “extend or renew a contract to procure or obtain”, and “enter into a contract […] to procure or obtain” covered equipment/services.

IPVM Reached Out to Federal Authorities

IPVM reached out to federal authorities in the last month to alert them of this practice and to request they review it. If or when any response or action is taken, we will update this reporting.