Congress Adds Teeth to Foreign Corrupt Practices Act
The
Foreign Corrupt Practices Act (FCPA) has two main provisions—(1)
anti-bribery, and (2) books-and-records. The anti-bribery provision is
enforced by the Department of Justice (DOJ), and the books-and-records
provision is enforced by the Securities Exchange Commission (SEC). See
our previous article on the topic here.
As we told you, the FCPA originated from public revelations of corrupt
payments made by Lockheed (now known as Lockheed Martin) in order to
induce foreign governments to purchase its planes. So the
inter-relationship between aerospace/defense companies and the FCPA goes
back to the beginning.
Military services contractor Blackwater (now known as Xe Services LLC) was accused of committing bribery (but not violations of the FCPA) in April, 2010. Here’s a blog post that explores the allegations against the company. It states that several company executives—
--were
charged with 15 counts of conspiracy to violate firearms laws, making
false statements and representations on federally licensed firearms
dealers' records, possession of machine guns, possession of other
firearms (short-barrelled shotguns) not registered in the National
Firearms and Registration and Transfer Record, and aiding and abetting
The blog post linked to a November, 2009 article
by the New York Times alleging that senior Blackwater executives
“authorized secret payments of about $1 million to Iraqi officials that
were intended to silence their criticism and buy their support after a
September 2007 episode in which Blackwater security guards fatally shot
17 Iraqi civilians in Baghdad, according to former company officials.”
The blog post summed-up the situation thusly—
Four former employees the Times
interviewed for the November story claimed the payments were approved
by the company's president and money was wired to Iraq from accounts in
Jordan. The employees didn't know if the payments were actually made.
The [Times] report said ‘Blackwater’s strategy of buying off the
government officials, which would have been illegal under American law,
created a deep rift inside the company, according to the former
executives.’
A report by the Times Friday said,
‘While the indictment is somewhat limited in scope, it could be the
government’s opening salvo in a broader offensive to bring criminal
charges against the company. They could include charges for bribery and
export violations, according to officials familiar with the case,
perhaps under a strategy of turning former and current executives of the
company against one another.’
From
Lockheed to Blackwater, defense contractors have been caught up in the
apparent need to offer illegal inducements to foreign officials, in
order to secure favorable treatment. But a recent law aims to add teeth
to the U.S. enforcement mechanisms.
This GovExec.com story by Robert Brodsky reported that the U.S. House of Representatives had passed the 2010 Overseas Contractor Reform Act (H.R. 5366). Mr. Brodsky’s story reported that the law (if passed and signed) “would
require agencies to debar companies and individuals found in violation
of the 1977 Foreign Corrupt Practices Act, and sever their existing
government contracts and grants.”
The
proposed bill contains a provision for an agency head to waive the
penalty. In addition—as Mr. Brodsky notes—many contractors have been
able to craft artful settlement agreements with the DOJ “that allowed
them to admit wrongdoing, but not necessarily confess to bribery.” Thus,
companies such as Halliburton and BAE Systems, that have paid millions
of dollars in FCPA settlement agreements, might escape the bill’s
intent.
This article at Corporate Compliance Insights noted some other issues—
Because
most FCPA enforcement actions are settled through a non-prosecution
agreement (NPA) or deferred prosecution agreements (DPA) … the bill may
need some tweaking if it is to be effective.
Among
other issues will be: is a company that agrees to an NPA or DPA to
resolve an FCPA case ‘found to be in violation of the FCPA.’ Likely not.
Also,
the bill defines ‘final judgment’ as when ‘all appeals of the judgment
have been finally determined, or all time for filing such appeals has
expired.’ Again, this assumes that all FCPA enforcement actions are
resolved through actual judicial proceedings – which is not how FCPA
enforcement works in many cases.
Other
potential shortcomings with the bill is that it only applies to
violations of the FCPA’s antibribery provisions. Thus, the bill would
not be triggered by the recent ‘bribery, yet no bribery’ cases (Daimler,
BAE, and Siemens) … In these cases, despite DOJ allegations that would
seem to establish that the company violated the FCPA’s antibribery
provisions, none of these companies were charged with violating the
FCPA’s antibribery provisions. Instead, non-FCPA charges or FCPA books
and records and internal controls violations were charged in an attempt
to avoid application of the European Union debarment provisions. …
The
big picture flaw with H.R. 5366 (as currently drafted) is it assumes
all FCPA enforcement actions are resolved through judicial proceedings
and it assumes all FCPA enforcement actions are resolved with charges
that actually fit the facts.
Neither of these assumptions are accurate ….
So
perhaps H.R. 5366 is not the giant-killer its drafters hoped it would
be. The biggest targets will likely continue to skate around the FCPA
rocks without tripping. But for other (smaller) companies, it might be
the “death penalty” as they lose the ability to be awarded new U.S.
Government contracts, based on a poorly crafted settlement agreement.
Pentagon Unveils Tactics to Drive Affordability in Defense Acquisitions
In
May, 2010, Secretary of Defense Gates unveiled his initiative to drive
down the cost of weapon systems and reduce Pentagon bureaucracy. Calling
for long-term savings of nearly $102 billion, he said—
The
goal is to cut our overhead costs and to transfer those savings to
force structure and modernization within the programmed budget. In other
words, to convert sufficient ‘tail’ to ‘tooth’ to provide the
equivalent of the roughly two to three percent real growth – resources
needed to sustain our combat power at a time of war and make investments
to prepare for an uncertain future. Simply taking a few percent off the
top of everything on a one-time basis will not do. These savings must
stem from root-and-branch changes that can be sustained and added to
over time.
Undersecretary
of Defense (Acquisition, Technology & Logistics) Dr. Ashton Carter
quickly responded to his leader’s call for action. On June 28, 2010, he
met with defense industry leaders and called for savings of $66.3
billion over five years, to be found on current programs and activities.
He said—
We
need to restore affordability to our programs and activities … by
identifying and eliminating unproductive or low-value-added overhead; in
effect, doing more without more. … The guidance will focus on getting
better outcomes, not on our bureaucratic structures. … Most of the rest
of the economy exhibits productivity growth, meaning that every year
the buyer gets more for the same amount of money. So it should be in
the defense economy.
At
that time, Dr. Carter issued a Memorandum addressed to Defense
acquisition professionals. Entitled “Better Buying Power: Mandate for
Restoring Affordability and Productivity in Defense Spending,” the Memo
called for “delivering better value to the taxpayer and improving the
way the [Defense] Department does business.”
We wrote about the new initiatives here.
Despite
some initial confusion over terms, what have emerged are two distinct
lines of attack: (1) the drive to reduce waste, bureaucracy, and
inefficiency within the Pentagon, and (2) the drive to reduce the costs
of goods and services by focusing on reducing contract prices. To
clarify, we call them the “efficiency” and the “affordability”
initiatives. We explored the two lines of attack in this article.
The drive for Pentagon efficiency seems to be led by SecDef Gates,
while the drive for contractor affordability seems to be led by USD
(AT&L) Dr. Carter. In our latest article,
we focused on SecDef Gates’ August 9, 2010, press conference and his
“series of initiatives designed to reduce overhead, duplication, and
excess in the Department of Defense, and, over time, instill a culture
of savings and restraint in America’s defense institutions.”
Today’s
article focuses on the other initiative, Dr. Carter’s quest to create
billions of dollars of acquisition savings through driving down the
prices paid by the Pentagon for weapon systems and services. On
September 14, 2010, Dr. Carter unveiled the tactics he will employ in
his attack on acquisition costs. We will discuss two documents: (1) a
single-page “Guidance Roadmap” that provides plans on five specific
areas of attack, and (2) a new “Better Buying Power” Memorandum for
Acquisition Professionals.
Dr. Carter’s Guidance Roadmap listed five specific areas of attack in the drive to reduce Defense acquisition costs. These areas included:
-
Target Affordability and Control Cost Growth
-
Incentivize Productivity & Innovation in Industry
-
Promote Real Competition
-
Improve Tradecraft in Services Acquisition
-
Reduce Non-Productive Processes and Bureaucracy
The
Guidance Roadmap document can be found via the link, above. Note it
included specific sub-bullet points beneath each of the five lines of
attack listed above.
The
accompanying Memo, entitled “Better Buying Power: Guidance for
Obtaining Greater Efficiency and Productivity in Defense Spending,”
provided details on specific tactics Dr. Carter intends for his
acquisition corps to deploy. There are 23 “principal actions to improve
efficiency” linked to the five lines of attack listed above. Here is the
9/14/2010 Memo, and it is definitely worth reviewing in considerable detail.
We
will not go through every word of the 17-page Memo, or review each of
the 23 individual “principal actions”. What we want to do is to
highlight some of the significant (and dare we say controversial?)
tactics the Pentagon has been directed to utilize in the fight against
acquisition costs. Here are some of the interesting aspects of Dr.
Carter’s affordability initiative—
-
Reward
contractors for successful supply chain and indirect expense
management. This involves rewarding performance through setting
appropriate profit levels. “Higher profit should be awarded to
management of higher-risk subcontracts, and higher profit should be
given when the prime succeeds in driving down subcontractor costs every
year.” The Director of Defense Procurement and Acquisition Policy (DPAP)
will “review the Weighted Guidelines … with the aim of emphasizing the
tie between profit and performance.” Dr. Carter emphasized, however,
that this was not simply an exercise in cost-cutting. He said—
-
It
is important to note that the savings to be expected from this
direction will be in cost, not in profit. Savings are not expected in
profit per se since in some instances profit will increase to reward
risk management and performance. But if profit policy incentivizes
reduction in program cost, the overall price to the taxpayer (cost plus
profit) will be less.
-
Reverse
a decade of practice and restore DOD’s preference for using customary
progress payments based on cost incurred, with other contract financing
options being agreed-upon only with a commensurate reduction in
contractor profit, based on increased cash flow.
-
Use
Forward Pricing Rate Recommendations (FPRRs) in lieu of Forward Pricing
Rate Agreements (FPRAs). In particular, “where DCAA has completed an
audit of a particular contractor’s rates, DCMA shall adopt the DCAA
recommended rates as the Department’s position with regard to those
rates.”
While
some of Dr. Carter’s plans seem like good ideas, others disappoint us
and strike us as counter-productive. For instance, we are disappointed
to see the end of DOD’s regulatory preference for Performance-Based
Payments and the return of customary progress payments. The debacle of
the A-12 program taught many that progress payments had little to do
with actually making progress, and everything to do with the ability to
spend money. It looks to us like that lesson has been forgotten.
The
substitution of DCAA audit findings for DCMA discretion and negotiation
ability strikes us as a spectacularly bad idea, one that further
shrinks the regulatory role of the Contracting Officer in favor of
findings from an agency that has, in recent years, generated audit
reports of poor quality that were, at the same time, dramatically
untimely. We have reported many times on problems with recent DCAA audit
guidance, and we see no indication that Dr. Carter’s direction will do
anything other than cause financial problems for the defense industrial
base.
As always, stay tuned for further developments.
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The Wheels of Justice Continue to Roll and Contractors Feel the Pressure
It’s
hard to keep from shaking the head and saying, “Tsk, tsk,” when we keep
reading stories about contractors who fail at government contracting.
Or as their attorneys might argue, “who find themselves in a difference
of opinion with the Department of Justice regarding the propriety of
certain contract-related billings.” Let’s remember that all contractors
are innocent until proven guilty in a court of law—or until they reach a
negotiated settlement with the DOJ.
Our first story today concerns the company, U.S. Foodservice. The company is based in Rosemont, Illinois, and was formerly owned by Royal
Ahold NV, a giant supermarket conglomerate based in Europe. In 2007,
the company was sold to private equity firms Clayton Dubilier & Rice
Inc. and Kohlberg Kravis Roberts & Co. for $7.1 billion.
According to this story at Bloomberg Businessweek, U.S. Foodservice agreed to pay the U.S.
Government $30 million in order to “settle a fraud lawsuit claiming it
used shell companies to overcharge the Defense Department and the
Department of Veterans Affairs for products at military bases.”
The
article reported that U.S. Foodservice was awarded multiple contracts
from 2000 through 2005 to supply military installations. The article
reported these were “cost-based contracts,” but also reported that
“under the contracts, U.S. Foodservice was only allowed to charge the
price it paid for acquiring each product the government ordered, plus a
pre-determined ‘add-on fee.’” Given that cost-plus-percentage-of-cost
contracts are illegal, it’s not exactly clear what the contractual
billing arrangement was supposed to be.
Apparently, something very like the requirements of FAR 31.205-26(e) were in place. Readers may remember our previous story
about Bell Textron, who in May, 2010, agreed to pay the U.S. Government
$16.6 million for overcharging the government from improperly billing
its affiliated entities.
According to the Bloomberg story (which quoted the DoJ press release)—
U.S.
Foodservice created shell companies, which were known within the
company as ‘third-party billing entities’ and later called ‘value-added
service providers,’ or ‘VASPs.’ … At U.S. Foodservice’s direction, the
VASPs were told to ‘resell’ the same goods to the company and the
government was billed for the higher amount shown on VASP invoices… The
shell companies passed back to U.S. Foodservice the difference between
the actual cost of the food products and the inflated amount they
charged the government...
The Bloomberg article noted that—
More
than a dozen people were charged in a related criminal case brought by
the U.S. Attorney’s office in Manhattan. They included U.S.
Foodservice’s former finance chief, Michael Resnick, who pleaded guilty
to conspiracy and was sentenced to six months of house arrest.
According to this article at the Wall Street Journal—
U.S.
Foodservice was previously at the center of a fraud case that alleged
the company overstated the amount it was receiving in supplier rebates,
known as promotional allowances. The company allegedly overstated those
rebates by hundreds of millions of dollars to meet income targets.
That same article noted that—
In
2004, Ahold settled U.S. Securities & Exchange Commission charges
that accounting issues led it to overstate net sales by about $30
billion from fiscal 2000 through fiscal 2002, including artificially
inflating payments to U.S. Foodservice by vendors. Ahold cooperated with
the SEC and wasn't fined.
In 2005, Ahold agreed to pay $1.1 billion to shareholders to settle a separate civil lawsuit in the U.S. over its accounting.
In 2007, Ahold agreed to sell U.S. Foodservice to a group of private-equity investors.
We should note that the company has its own view of the situation. The Bloomberg article reported that—
U.S.
Foodservice said in an e-mailed statement that it fully cooperated in
the probe. ‘We deny any wrongdoing and stand behind our pricing policies
and practices, which have always been consistent with the terms of our
federal government contracts and industry standards,’ the company said.
‘We settled because we want to close this chapter in our past.’
In
somewhat related news, a couple of former Department of Energy
contractors are in the process of learning about the wheels of justice,
first-hand. This DOJ announcement reported—
… a
scientist and his wife, who both previously worked as contractors at
the Los Alamos National Laboratory (LANL) in New Mexico, have been
indicted on charges of communicating classified nuclear weapons data to a
person they believed to be a Venezuelan government official and
conspiring to participate in the development of an atomic weapon for
Venezuela, among other violations.
The 22-count indictment … charges
the defendants with conspiring to communicate and communicating
‘Restricted Data’ to an individual with the intent to injure the United
States and secure an advantage to a foreign nation. They are also
charged with conspiring to and attempting to participate in the
development of an atomic weapon, as well as conspiring to convey and
conveying classified ‘Restricted Data.’ The indictment further charges
Mascheroni with concealing and retaining U.S. records with the intent to
convert them to his own use and gain, as well as six counts of making
false statements. Roxby Mascheroni is also charged with seven counts of
making false statements.
Misbilling
the U.S. Government is one thing. Corporations can settle with the U.S.
Government; CFOs can receive six months of house arrest. But selling
secrets can be an entirely different issue, as these two individuals are
about to learn.
DOD Oversight Wars Continue: Inspector General Faces Criticism
DCAA is in the process of publishing new audit guidance that we can’t wait
to share with you. But in the meantime, the Pentagon is facing renewed
criticism, including allegations of oversight failures by the DOD
Inspector General (IG). As readers may recall,
the DOD IG has not hesitated to point a finger at the failings of the
DCAA—so it seems apt justice that they start to feel some of the heat as
well.
DOD Inspector General “Does Less with More”
On September 9, 2010, Robert Brodsky reported at GovExec.com that Senator Charles Grassley (R-Iowa) released a report
that was highly critical of the DOD IG. Mr. Brodsky reported that
Senator Grassley accused the DOD IG of failing to pursue any oversight
reviews of any major weapon system or contractor in FY 2009, “leaving
that mission to the DCAA.” As the GovExec article reported—
‘As
the [Office of Inspector General] has drifted away from its core
mission of conducting contract audits, it chose to move in an
ill-advised direction,’ the 73-page report said. ‘Today, the majority of
audits appear to be nothing more than quasi-academic reviews of DoD
policies and procedures. The DoD OIG has become the department's 'policy
police.' ‘ …
Overall,
the 765-person audit office issued just 113 reports in fiscal 2009, its
lowest total in two decades. In 1995, when the office had 717 auditors,
the IG published 264 reports, the Senate staffers said. …
And
despite conducting less labor-intensive contract audits, the office is
averaging 18 months to issue reports, Grassley's staff found. Some
audits have dragged on longer than three years, and others have taken so
long the IG eventually scrapped them.
Not content with issuing the report, Senator Grassley also sent a letter to Secretary of Defense Gates, calling for “significant audit reforms” to the Office of the IG, according to Brodsky.
We
spent some time looking at the Grassley report. There was plenty of
criticism for all facets of DOD IG operations, ranging from an inability
to audit DOD accounting data because of system limitations, to poor
morale, to looming problems with financial statement audits of DOD
components. But to us, the most interesting portion of the report was
the portion devoted to “Acquisition and Contract Management (ACM).”
The
Grassley report stated, “ACM has 162 auditors assigned to 26 branches
spread across 9 divisions. There are an additional 11 persons assigned
to the Front Office, including one SES executive, three senior auditors,
one contract specialist, and 6 administrative personnel.” In Government
Fiscal Year 2009, ACM’s auditors “produced a total of 28 reports.”
According to Senator Grassley’s staff, that worked out to “an average of
.173 audits per auditor per year.”
The
Grassley report noted that, given the name and mission, one might think
the ACM auditors focused on auditing contract payments. According to
the report, one would be wrong to make that assumption.
ACM
senior management repeatedly stated that ‘we don’t examine contract
payments, and we don’t rely on DCAA to do it, either.’ They also said:
‘it’s impossible to audit contracts … We can’t do it …..It’s too hard to
find transaction-level data, or it just doesn’t exist.’ They can’t do
contracts, they said, because of ‘missing documentation and no audit
trails.’ They indicated that ‘we used to do big weapons contracts but we
lack the right skill sets – or experienced staff – to do it today.’ A
top Audit Office official said they could ‘cobble together such an audit
team to look at one of the big Category I weapons systems,’ but doing
that would ‘deplete resources needed to meet other priorities.’
The
Grassley report opined that, “De-coupling payments from contracts, as
is the ACM practice, greatly reduces the probability of detecting and
reporting fraud. In fact, it just about eliminates that possibility
altogether.”
The
Grassley report focused on one audit performed by the DOD IG ACM staff
in FY 2009 as an example of what worked and didn’t work. The report
(D-2009-108) was entitled ““U.S.
Air Forces Central War Reserve Material Contract” and it documented the
audit of a cost-plus-award-fee contract awarded to DynCorp for managing
pre-positioned war reserve materials (WRM) at storage sites in
Southwest Asia. The Grassley report summarizes the DOD IG audit report
as follows—
The most troublesome findings were buried deep in the body of the report. These are as follows:
-
The contract arrangement with DynCorp was prohibited by 10USC2306[a];
-
Once
Operation Enduring Freedom caused a major surge in WRM requirements far
beyond the scope of the existing contract, that contract should have
been terminated in FY 2002-03 and re-competed;
-
Missing
documentation resulted in either no audit trail or one so complex that
accountability was questionable; The lack of internal controls created
an environment with “high risk” for fraud;
-
DynCorp
was authorized to submit vouchers directly to DFAS under the Direct
Billing program; DCAA was required to test and sample those transactions
periodically but failed to do so;
-
$161.1 million was obligated without a written, binding agreement in violation of 31USC1501…
The Grassley report continued—
The
[DOD IG audit] report appears to imply that the vouchers, for the most
part, could not be matched with the contract modification documents
because the language in those documents did not specify what goods and
services had to be delivered. If a payment/contract match-up was not
feasible, this could be a violation of 31 USC § 1501. That law requires
that a financial obligation be supported by a written, binding agreement
(contractual document) that specifies what goods and services are to be
delivered. Without that kind of specificity, a contract would be the
equivalent of a blank check. The report stated: the “government
did not know what it was paying for … The government may have paid for
services DynCorp did not perform. … It may have overpaid for services.”
In other words, the government did not know what it had ordered, what
was delivered, or what it was actually buying or paying for.
To conclude, Grassley’s staffers offered the following summary—
All
of this taken together appears to suggest that DynCorp may have
received $161.1 million in unauthorized and/or improper or even
fraudulent payments. But the report’s findings are inconclusive.
The
OIG recommended that DCAA go back and examine this DynCorp contract.
However, bucking this audit back to DCAA made no sense whatsoever. To
begin with, the report gave DCAA very poor grades for failing to
watchdog DynCorp on this contract from the get-go. The DOD IG should
finish the audit that it started.
Whew. That sounds bad.
What did the DOD Inspector General say in response to such criticism?
On September 13, 2010, DOD Inspector General Gordon S. Heddell issued a response to Senator Grassley’s criticisms. In his letter to Senator Grassley, Mr. Heddell stated—
I
believe that your report presents valid concerns and is an opportunity
to enhance the mission of the Department of Defense Inspector General
(DoD IG) in regard to detecting and reporting fraud. Therefore, I have
directed the Deputy Inspector General for Auditing and her staff to make
concrete and specific proposals on how your report can be used to improve the timeliness, focus, and relevance of audit reports. Furthermore, I
have directed that these proposals, to be completed no later than
October 15, 2010, are supplemented by a detailed plan listing specific
initiatives to be implemented at the earliest
possible date. The recommendations in your report will be an important
tool in the transformation I have initiated since being confirmed as
Inspector General.
The
letter included more detailed responses to each of the 12 criticisms
found in the Grassley report. And by “more detailed responses” we mean
such detailed responses as the following—
As
noted in the response to recommendation 2, "end-to-end" contract
performance and payout audits involve an extensive amount of resources
and time to complete and which, by the very nature of their wide scope,
could exacerbate the very issues the report highlights involving
timeliness. Instead, we provide audit coverage of the contract process
through a series of audits based on the risks associated with the
specific contract segment.
To
further strengthen this approach, the DoD IG focus on finance and
accounting systems has been expanded to include oversight of plans and
programs to acquire new accounting systems and efforts to modernize the
existing systems.
Well, that
response really ought to placate Senator Grassley and his staffers, who
think the DOD IG is failing at its oversight mission. Right?
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