In 2009, the United States government filed a formal claim against Lockheed Martin and Northrop Grumman — two major defense contractors — in U.S. District Court for the Northern District of Texas in regard to alleged violations of the False Claims Act, according to leaked court documents.
The Integrated Deepwater System Program (IDS Program or Deepwater) is a $24 billion, 25-year program that would replace the whole of the U.S. Coast Guard’s infrastructure, including logistics, command and control systems, helicopter and fixed-wings aircraft fleets, cutters and patrol boats. A new unmanned aerial vehicle (popularly known as drones) fleet is expected to be integrated, and the system is expected to be linked into the national security infrastructure through Command, Control, Communications and Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) systems.
In 2006, Michael De Kort, an engineer for Lockheed Martin, released a YouTube video exposing serious security flaws to a fleet of patrol boats that were being refurbished under Deepwater. De Kort pointed out that there were blind spots in the ship’s security cameras, equipment malfunctions in cold weather and other design flaws. The contractors called the accusations meritless.
“It may be very hard for you to believe that our government and the largest defense contractor in the world [are] capable of such alarming incompetence and can make ethical compromises as glaring as what I am going to describe,” De Kort says in the video.
Prior to releasing the video, De Kort attempted to bring this issue to the attention of Lockheed Martin management, including the chief executive officer of the company and the board of directors. Ultimately, his protests cost him his job. It was only then that he posted the YouTube video — a final chance to bring attention to an issue that everyone seemed to want to ignore. Ultimately, a congressional hearing was held on Deepwater, the boats were taken out of commission and a settlement was reached in regard to the electronics failures. The U.S. Coast Guard now manages all elements of the Deepwater project and the Department of Justice is currently seeking damages for other issues detected on the ships, including buckled hulls.
First as tragedy…
This is problematic on multiple fronts. First, the Deepwater situation was not the only time the Department of Justice had to sue Lockheed Martin for false claims. In 2012, Lockheed Martin agreed to pay the DOJ $15,850,000 on allegations that it mischarged perishable tools on a number of government contracts. This was part of a seven-year pricing scheme on tools used on military fighter jets, including the F-22 and the F-35. Todd B. Loftis, president of the Lockheed Martin sub-contractor Tools & Metals Inc., was sentenced to seven years in prison in connection with the scheme.
“It is troubling that a large defense contractor with long-established contractual ties with the United States failed to undertake appropriate measures to ensure the integrity and validity of the costs it submitted to the United States,” said Stuart F. Delery, acting Assistant Attorney General for the Justice Department’s Civil Division.
“This settlement demonstrates the government’s commitment to devoting the necessary resources to protect taxpayer funds from the most complex mischarging schemes,” stated Sarah R. Saldaña, U.S. Attorney for the Northern District of Texas.
This brings up the second problem: The U.S. government continues to do business with Lockheed Martin. Two months after the DOJ announced this settlement, the DOJ contracted Lockheed Martin to overhaul the computer infrastructure for the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) and the U.S. Marshals Service. The contract is for seven years with a final cost not to exceed $496 million. No additional oversight, precautions or project supervision was announced for this project.
Procurement fraud is a major draw on the nation’s resources and budget. According to a 2011 press release from the office of Sen. Bernie Sanders (I-Vt.), in the last past decade, more than $1.1 trillion has been defrauded from the military.
“The ugly truth is that virtually all of the major defense contractors in this country for years have been engaged in systemic fraudulent behavior, while receiving hundreds of billions of dollars of taxpayer money,” said Sanders. “With the country running a nearly $15 trillion national debt, my goal is to provide as much transparency as possible about what is happening with taxpayer money.”
According to a 2011 report prepared by Sanders, the Pentagon has awarded $573.7 billion over the past decade (2001-2011) to more than 300 companies that were involved in civil fraud cases that concluded with judgments of $1 million or more, $398 billion of which was awarded after the settlement of judgment of fraud. An additional $255 million went to contractors convicted of criminal fraud, with $33 million going to companies after their conviction.
The usual suspects
The Project on Government Oversight (POGO) has maintained a database of the largest corporate instances of procurement misconduct. Among the largest violators is Lockheed Martin, which in 2011 received $42 billion in federal contracts and has been proven to have defrauded the federal government 59 times at a total monetary penalty of $606 million; Boeing, which received $22 billion in 2011, defrauded the government 46 times since 1995 and has penalties of $1 billion to the government; GlaxoSmithKline, which received $512 million in procurement in 2011, but — with 33 instances of fraud — resulted in nearly $9 billion in penalties; and British Petroleum (BP), which received $1.4 billion from the federal government in 2011, but — with more than 63 instances of fraud — holds the record for the largest culmative misconduct penalty by a single company at nearly $15 billion.
According to POGO, the top 100 federal contractors — based on 2011 contract spending data from the Federal Procurement Data System — have amassed 932 separate acts of procurement misconduct resulting in $41 billion in monetary penalties.
Excluding instances of fraud, POGO argues that the military’s insistence to contract out so much of its procedural operations and supply-line may be one of the reasons the military budget is so bloated.
“POGO’s study analyzed the total compensation paid to federal and private sector employees and the annual billing rates for contractor employees across 35 occupational classifications covering more than 550 service activities. POGO found that the government pays billions of dollars more annually to hire contractors than it would cost to hire federal employees to perform comparable services. Specifically, the federal government approves service contract billing rates — deemed fair and reasonable — that pay contractors 1.83 times more than the government pays federal employees in total compensation (including benefits), and more than 2 times the total compensation paid in the private sector for comparable services.”
In conversation with Mint Press News, Neil Gordon — an investigator with POGO focusing on federal contractor misconduct — argues that fraud in procurement contracts come from the government’s over-reliance on known vendors and vendors with personal relationships with high-level officials.
“I don’t think the government writes off fraud as a cost of doing business — unlike some of the contractors,” Gordon said. “Instead, I think the government relies too much on certain contractors, especially in national security areas. There is also a big problem with the ‘revolving door’ and conflicts of interest. Just as there is a situation of ‘too big to jail’ in the financial sector, there is a similar principle of ‘too big to debar’ in federal contracting. Contracting law requires the government to only do business with “responsible” contractors. That is, the contractor must have a satisfactory record of integrity and business ethics, among other conditions.
“To maintain a stronger grip on its contracts — including defense contracts — and prevent fraud, the government needs an adequate number of well-trained contracting personnel, a robust auditing process and a more streamlined suspension and debarment system,” Gordon continued. “Stronger ethics laws … greater transparency and whistleblower protections would help too. Federal contractors are subject to a mandatory reporting requirement, by which they are required to notify the government when they have ‘credible evidence’ of fraud or other misconduct. They must also report past fraud or misconduct incidents in a database called the Federal Awardee Performance and Integrity Information System (FAPIIS). The FAPIIS database — at least what the public can see — has many problems, the most serious of which are that it is extremely difficult to use and lacks data. POGO thinks they should also post contractor past performance reviews on the public FAPIIS site. Greater transparency will reduce waste, fraud, and abuse.”
Greed comes in all shapes and sizes
Procurement fraud, however, is not simply just a case of corporate malpractice. Some of the most grievous incidents of fraud were done by individuals. In December 2012, Raul Borcuta, 34, of Chicago, Ill., pleaded guilty to one count of wire fraud, and former Army Staff Sergeants (E-6) Zachary Taylor, 42, of Ft. Belvoir, Va., and Jarrod Close, 43, of St. Paul, Minn., pleaded guilty to one count of receiving a gratuity. Federal employees are forbidden by law from receiving tips or presents in the line of duty.
According to a press release from the FBI, Taylor and Close — members of the Provincial Reconstruction Team in Afghanistan -—awarded Borcuta a $200,000 contract to provide the U.S. military with two armored vehicles to be used by the governor of Farah Province, in defense of possible Taliban attacks. Borcuta paid Taylor and Close $10,000 each for the contract, and ultimately failed to deliver the vehicles.
In August 2012, David Young, 49, an Army reservist lieutenant colonel from Hernando Beach, Fla., was accused of leaking bid information for procurement contracts that allowed himself and two former Special Forces soldiers — Michael Taylor, 51, of Boston, Mass., and Christopher Harrie, 48, of Lake Havasu, Ariz. — to pocket $20 million of the $54 million that was awarded. The government seized $6 million in cash, 20 houses in Florida, Arizona, Utah and New Hampshire, luxury vehicles including a Jaguar and a Hummer, hundreds of gold coins, an airplane and a boat — all bought with the procurement funds.
In March 2012, Harold Babb, 60, plead guilty to charges of bribery and unlawful kickbacks in federal court. As director of contracts at Eyak Technology, he paid more than $7 million in bribes to Army Corps of Engineers officials for preferential treatment on contracts and subcontracts with the Corps. In return, Babb received more than a million dollars in kickbacks from Nova Datacom’s — an EyakTek subcontractor — chief technology officer, Alex Cho. The scheme costed the military $28 million.
The famous bank robber, Willie Sutton, when asked why did he robbed banks is credited with saying, “Because that’s where the money is.” For many, procurement fraud offers ample opportunities to score easy money, mostly due to the difficulties the federal government has in tracking and verifying contract fulfillment, and in part due to the patronage system in place for awarding contracts.
Not too long ago, the Army boasted about its self-reliance. It made claims of being the world’s largest “all-in-one” shop, in which it produced everything it needed to perform in-house without the need of outside contractors. Today, budget considerations and manpower reductions have forced the Army and the rest of the Defense Department to seek others to do what they once did with pride. If this outward-reliance is the new normal, there must be a vigilance taken to ensure that contracts are awarded to ethical contractors, that the work is done correctly and in compliance of the contract and that there is an actual savings to having the work done in-house.
Ultimately, if you leave your front door open and unattended, you cannot claim surprise if you end up being robbed.