Millions Flow to Pentagon's Banned Contractors Via a Back Door
August 8, 2018
Sam Skolnik / Bloomberg Government
Some of the world's largest companies have benefited from a little-known law that lets the Defense Department override decisions barring contractors accused or convicted of bribery, fraud, theft, and other crimes from doing business with the government. Companies receiving waivers included some accused or convicted of major fraud, wire fraud, conspiracy, ethical bidding violations, and in the case of fuel-seller BP, an overall "lack of business integrity."
Millions Flow to Pentagon's
Banned Contractors Via a Back Door
Sam Skolnik / Bloomberg Government
(August 5, 2018) -- Some of the world's largest companies have benefited from a little-known law that lets the Defense Department override decisions barring contractors accused or convicted of bribery, fraud, theft, and other crimes from doing business with the government.
International Business Machines Corp., Boeing Co., BP Plc, and several other contractors have received special dispensation to fulfill multimillion-dollar government contracts through "compelling reason determinations." That process allows the Defense Department in rare cases to determine that the need to fulfill certain contracts justifies doing business with companies that have been suspended from government work.
The 22 determinations were released by the General Services Administration at the request of Bloomberg Government, allowing for the first collective examination of the cases and the system that allowed them.
The determinations, also referred to as waivers or overrides, included contracts to provide food services for Defense Department personnel at an Army base in Afghanistan, "vital" web-hosting services for an agency that serves the Pentagon and the US intelligence community, and aviation fuel sold to the Defense Logistics Agency.
In some instances, contracting officials said the overrides were matters of life or death. Companies receiving waivers included some accused or convicted of major fraud, wire fraud, conspiracy, ethical bidding violations, and in the case of fuel-seller BP, an overall "lack of business integrity."
In the most recent waiver case -- issued just several weeks ago -- an affiliate of one of South Korea's largest conglomerates was suspended for allegedly bribing an Army contracting official and another man to deliver a $420 million contract involving expansion of a US base south of Seoul.
Despite indictments on charges of wire fraud and bribery and the resulting suspension, SK Engineering & Construction Co. urged that its contract be extended -- and the Army agreed, stating that delays in finding a new contractor would result in slower ambulance response times to the base.
The law requires officials issuing such waivers to notify the GSA so the agency can maintain the notices on a "publicly accessible website to the maximum extent practicable." Pentagon officials sometimes have not followed that requirement until scolded by the Government Accountability Office -- and on occasion even that hasn't been enough. Details surrounding four waivers by the Army and another four by the Air Force dating back more than 14 years still haven't been provided to GSA.
"The law is not being properly enforced, and there's a definite lack of transparency," Neil Gordon, an investigator with the Project on Government Oversight, a Washington ethics watchdog group, told Bloomberg Government. "These are risky companies accused of serious crimes. It's a real problem."
'A Contractor's Lifeblood'
Compelling reason determinations are issued rarely -- Bloomberg Government confirmed just 30 since the law was passed in 1981, including the 22 provided to the GSA that were issued between 2008 and last month plus the eight earlier waivers noted by the GAO in a 2005 report.
While in effect, "exclusion" actions -- which include suspensions, temporary measures with 12-month limits, debarments that typically don't exceed three years, and proposals for debarment -- block companies from bidding on future federal contracts or winning extensions of existing contracts.
One reason for the small number of waivers is that exclusions often can be resolved fairly quickly when contractors are committed to addressing the government's concerns, Richard Arnholt, a member of the law firm Bass, Berry & Sims in Washington told Bloomberg Government. Contractors are usually eager to put a suspension or proposed debarment behind them, said Arnholt, because a contractor's lifeblood is cut off when the government goes down that path.
"It really can become an existential issue," he said.
The Pentagon uses waivers to maintain urgent or sensitive contracted services, often in wartime settings.
"Approval of this request directly supports saving the lives of our Soldiers, Sailors, Airmen, Marines, and Civilians currently deployed," Kelvin Owens, a colonel with the Army Medical Materiel Center, Europe, wrote in support of a 2008 waiver. That exception allowed National Air Cargo Holdings Inc. to continue for 60 days as primary shipper of medical supplies to US troops in the Middle East until the Army could find a suitable replacement.
For more than six years, the company had engaged in a scheme to defraud the government by agreeing to ship freight overnight by air and billing the government for that higher rate, while actually making the shipments by surface transport and pocketing the difference, according to the waiver paperwork provided by the GSA. The contractor pleaded guilty and agreed to pay the government $28 million in fines and restitution.
After the guilty plea, NACH, its subsidiary companies, and certain corporate officers were proposed for debarment by the Air Force. Yet the following year, CEO Christopher Alf claimed in a lawsuit that his debarment violated the Administrative Procedure Act. A federal judge agreed and found that the underlying decision to debar him was "logically flawed" for several reasons.
Seven waivers each from the Army and the Defense Logistics Agency stemmed from a November 2009 suspension of a Kuwaiti logistics company now called Agility Public Warehousing Company K.S.C.P., or Agility, which shipped food, water and supplies to US soldiers in Kuwait and Iraq. Agility was suspended after being charged with manipulating food prices. In one "compelling reason" example in that case, the Army said a waiver was needed to "prevent a gap in food services" at Sather Air Base in Iraq. A company official could not be reached for comment.
Contractors that have benefited from determinations include household names:
* BP, the world's third-biggest publicly traded oil company, was temporarily blocked from seeking new government contracts in late 2012 over a "lack of business integrity" during the 2010 Deepwater Horizon oil spill.
Two weeks later, the Defense Logistics Agency issued its first of two waivers for a BP affiliate to sell fuel at commercial airports "when no other refueling option will meet the mission requirements." A company official could not be reached for comment.
* IBM was suspended in March 2008 from new or extended federal contracts because of an Environmental Protection Agency investigation into possible bidding violations. Two days later, the top procurement officer for the National Geospatial-Intelligence Agency issued IBM a nine-month waiver, contending that losing IBM web-hosting services would "prevent timely support to disaster recoveries or homeland security incidents.
Sharon Parish, the agency's procurement and contracting head, said "a loss of these services for any duration would severely impact the United States' ability to respond to a national emergency." An IBM spokeswoman declined comment.
* Fewer details are known about the waivers issued for Boeing, ranked second on the BGov 200 list of the largest government contractors in fiscal 2017. According to public accounts, Air Force officials announced in 2003 that Boeing possessed thousands of pages of proprietary documents from rival Lockheed Martin Corp.
The Air Force suspended three Boeing Integrated Defense System business units and three former employees. During the suspension, which was lifted in 2005, the government issued three separate waivers that allowed Boeing to receive three rocket launch contracts worth more than $100 million. A Boeing spokesman declined comment.
$3 Million in Bribes
Tens of millions of contracting dollars also have been in play in the most recent waiver case, involving SK Engineering & Construction Co.'s work on behalf of the Army's relocation of a South Korea base from Seoul to US Army Garrison Humphreys, 40 miles south.
A former contracting officer for the US Army Corps of Engineers and a former Korean defense ministry official were indicted last September on charges of scheming to direct $420 million in Pentagon construction and infrastructure contracts to SK in return for $3 million in bribes.
Army suspension and debarment official Mortimer Shea Jr. suspended the two officials and the company two months later. On June 6, Shea waived the suspensions, agreeing with two Army officials who had argued that bringing in another contractor to complete the work would significantly affect ambulance emergency response time, "impacting the well being of service members and their families." A company official at SK could not be reached for comment.
A Necessary 'Safety Valve'
Rodney Grandon, the Air Force's suspending and debarring official from 2012-2017, told Bloomberg Government that he couldn't recall issuing any waivers or being asked to do so during his tenure. He said the Air Force acquisition community "was just not willing to go there. The leadership wouldn't let them -- there's no tolerance for that."
The priority to deny business to excluded companies needed to stick, he said. "That decision's been made," said Grandon, currently managing director of government services for Affiliated Monitors, an integrity monitoring and assessment services company.
Another former Air Force acquisition official said the compelling reason law serves several purposes.
"This function is what lets everyone do their jobs," David Robbins, a partner with Crowell & Moring in Washington told Bloomberg Government.
"Industry benefits by still supporting government missions, even if things go sideways" in the underlying contract, he said. For the government, the option to continue working with a proven contractor relieves different pain points, Robbins said -- including political pressures to complete a contract's requirements.
Waivers "are a safety valve, and a necessary one," he said.
National Defense Requirement
The scope of federal contracting fraud is sobering. A 2011 Pentagon report requested by Sen. Bernie Sanders (I-Vt.) found that 54 defense contractors were criminally charged with "fraudulent practices" in the preceding 10 years. Those contractors collectively were awarded Pentagon contracts worth $255 million in the same period -- including $33 million awarded subsequent to their convictions.
Last year, Sanders asked the Defense Department to issue an updated report, which it has promised to deliver by the end of September.
Currently, compelling reason determination notices sent to the GSA are electronically stored in the agency's internal files, according to a spokeswoman. The agency is in the process of making the documents publicly available online, she said.
One of the regulations stemming from the law, in the Defense Federal Acquisition Regulation Supplement, provides examples of four compelling reasons why waivers may be appropriate. Overrides are OK, for example, when only the debarred or suspended contractor can provide the supplies or services and when the national defense requires continued dealings with the company.
According to a 2012 GAO report, the Army and the Defense Logistics Agency issued 14 waivers between them during the previous three fiscal years -- but the agencies failed to notify the GSA in each instance. Those 14 are among the 22 that the GSA provided to Bloomberg Government.
Looking forward, watchdogs say, Defense Department units should continue to notify the GSA each time they issue a waiver. At the same time, waivers should only be issued when truly needed, they say.
The GAO took note of the sometimes sticky balancing act in its 2012 report.
The availability of compelling reason determinations is important not just to ensure public transparency, the GAO found, but to demonstrate that waivers "are carefully considered and used only when necessary."
Sam Skolnik is a senior reporter for Bloomberg Government, covering federal procurement policy. Sam has been in the journalism business for more than two decades. He's reported for the Seattle Post-Intelligencer. Jorge Uquillas in Washington also contributed to this story.
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