Introduction: The Pentagon's Contractor Fraud Findings
In January, the DoD created a stir when it released its Report to Congress on Contracting Fraud, which examined the extent to which the Pentagon awarded contracts to companies that defrauded the government. The report found that, from Fiscal Year 2007 to Fiscal Year (FY) 2009, the DoD awarded almost $270 billion in contracts to 91 contractors found liable in civil fraud cases, and $682 million to 30 contractors convicted of criminal fraud. It also found that companies barred from federal contracting continued to receive millions of taxpayer dollars in contracts.
What was most astonishing about the report was its relatively unconcerned tone. The report did not recommend any significant reforms, concluding that “existing remedies with respect to contractor wrongdoing are sufficient.”
Some people begged to differ. Sen. Bernie Sanders (I-Vermont), who ordered the report through a provision he added to last year's defense spending bill, released a public statement in which he urged the DoD to adopt a more “vigorous” approach to dealing with contractor fraud.
Meanwhile, this interesting tidbit appeared near the beginning of the report:
Because there is no central repository for this data, the Department faced a number of challenges in developing this report.
This statement is significant for two reasons. First, it casts doubt on the thoroughness of the report. To its credit, DoD acknowledged this and promises to produce a more comprehensive follow-up report. Second and more importantly, it helps explain why the government keeps doing business with contractors that cheat the government or otherwise have spotty records of responsibility, integrity, business ethics and performance.
Databases Help Take a “Byte” Out of Contracting Fraud
The government currently has several data repositories that are supposed to help weed out risky contractors. The Past Performance Information Retrieval System (PPIRS) (pronounced “peepers”) provides information about contractors' performance on current or completed contracts, and the Excluded Parties List System (EPLS) contains the names of suspended and debarred companies and individuals. Unfortunately, both databases are plagued with glitches that hamper their effectiveness. In addition, PPIRS is off limits to the public, a situation that can be likened to a parent not being allowed to see their child's report card.
A third data repository became operational in April 2010, a centralized database called the Federal Awardee Performance and Integrity Information System (FAPIIS). The FAPIIS database tracks the integrity and performance of federal contractors and grantees. It brings together various sources of information compiled in other government databases, including PPIRS and EPLS, along with a growing array of new data.
FAPIIS will have a positive impact on contractor accountability, but it has several major shortcomings. The first is that the public can't currently access it, although that's about to change. When it was created, FAPIIS was off limits to all but federal contracting officials and select members of Congress. That changed on July 29, 2010, when President Obama signed a spending bill that included a provision (also sponsored by Senator Sanders) requiring the government to post all FAPIIS information, except past performance reviews, on a publicly available web site. The public rollout of FAPIIS is supposed to happen on or after April 15, but it may take several months before the full range of data become publicly available.
The second shortcoming is that it includes a relatively narrow range of misconduct data. FAPIIS was based on the FCMD created by the nonprofit watchdog POGO. The FCMD tracks the misconduct histories of the federal government's largest contractors. Instead of following POGO's example of including misconduct of all stripes, FAPIIS only contains misconduct pertaining to federal or state contracts or grants, and only if the misconduct resulted in a conviction or a finding of fault. This means that, if a company such as BP is found responsible for causing a major environmental catastrophe, it would not be included in FAPIIS. Even if the incident happened during the performance of a contract (BP was awarded over $1 billion in federal contracts in FY2010), the incident would not be reported in FAPIIS if it settled out of court without an admission or finding of guilt or liability.
Third, FAPIIS only includes misconduct from the past five years. After five years, plus one additional year for archiving, the misconduct incident will be expunged from FAPIIS. This is unfortunate, because misconduct occurring more than five years ago can still be useful in determining a contractor's culture of responsibility and integrity. A longer time span allows government contracting officials to spot long-term patterns of misbehavior. POGO's database, which includes instances dating back to 1995, reveals many interesting patterns. For example, Boeing Company has six instances of export law violations since 1998 for which it has paid the federal government over $40 million in penalties. KBR has six instances of government contract fraud since 2002, including three guilty pleas, for which the company has paid nearly $59 million.
It's not certain that the government will ever fix these shortcomings, either. Contractors and their advocacy groups are doing everything they can to impede progress on FAPIIS. Ever since the concept of a government-wide contractor responsibility database was first proposed, contractors have been trying to throw cold water on it by relentlessly lobbying Congress and the White House. As a result, the whole process of getting FAPIIS operational and posted on a public web site has been frustratingly tentative, slow moving and secretive.
First, contractors were successful in scaling back the scope of FAPIIS and making it off limits to the public. Although Congress eventually eliminated the latter restriction, contractors have badgered them into limiting the amount of information we will get to see. As of now, the government is withholding past performance information, even though you can often find this information published in Government Accountability Office bid protest decisions, and it has been reported that information related to pending litigation will be excluded, too.
Suspension and Debarment: “Time Out” for Misbehaving Contractors
When contractors break the law, are accused of breaking the law or do not perform as promised, the government can suspend or debar companies or individuals from receiving new contracts. Suspension and debarment are not considered punishment; contracting regulations require them to be imposed “only in the public interest for the government's protection.” In this context, “protection” means keeping taxpayer money out of the hands of risky or unscrupulous contractors.
The Pentagon found that some of its contractors continued to receive federal funds after they had been suspended or debarred. Considering that suspended and debarred contractors can continue working on existing contracts, this doesn't come as a surprise. But the report failed to indicate if those funds were disbursed on existing contracts or contracts awarded after the suspension or debarment was imposed. The government can award a suspended or debarred entity a new contract if it has a “compelling reason” to do so, but occasionally this happens due to a bureaucratic error. In 2009, the Government Accountability Officefound 25 instances in which unidentified companies and individuals suspended or debarred for committing serious offenses were inadvertently awarded new contracts. (POGO was able to track down their names and posted them here.) Contracting officials either failed to check the EPLS database before awarding the contract, or, if they did check it, the clunky EPLS search engine failed to turn up the name of the suspended or debarred entity.
In fact, the government is very reluctant to suspend or debar the largest contractors, even when they commit egregious misconduct. POGO's federal contractor misconduct database reveals that only a handful of the largest contractors have been suspended in the last 16 years, and most of the suspensions lasted only a few days. Some large contractors possess the legal muscle to bargain their way out of trouble; some are so indispensible to the government that suspension or debarment is simply impractical.
In the case of Boeing, the Air Force suspended a unit of Boeing for almost two years, but awarded the unit new contracts during its suspension due to a compelling national security need. Last year, the Air Force suspended a unit of L-3 Communications for allegedly spying on emails, but lifted the suspension less than two months later despite an ongoing criminal probe. L-3 had over $7.6 billion in contracts in FY2009, almost all with the DoD. British oil giant BP had been on thin ice with suspension and debarment officials even before last year's massive oil spill in the Gulf of Mexico due to safety and environmental compliance problems. The Environmental Protection Agency (EPA) considered debarring BP in 2009, but pressure from the DoD caused the EPA to back off. BP is one of the main suppliers of fuel to the US military. Even after the Gulf oil spill, it's been business as usual for BP.
Boeing, L-3 Communications and BP are vital Pentagon suppliers – too vital, apparently, to be put on contracting “time out” even when doubts arise about their responsibility. In a way, Boeing, L-3, BP and the dozens of other federal contractors in POGO's database are “too big to fail.” At a time when misconduct among the big contractors is increasing, there seems to be a decreased willingness to suspend or debar them. This situation will only get worse over time as the largest contractors grow larger and the government grows more reliant on them.
Let's Make a Deal: Civil, Criminal and Administrative Actions
As with suspension and debarment actions, large contractors bring their substantial legal resources to bear in criminal, civil and administrative proceedings. It can mean the difference between the maximum penalty and a lesser sanction that allows the company to keep doing business with the federal government.
According to federal contracting regulations, a conviction or civil judgment for any offense indicating a lack of business integrity or business honesty may be grounds for suspension or debarment. Not surprisingly, contractors in legal jeopardy seek to resolve cases in ways that avoid a conviction or a formal finding of fault or liability, which helps explain why so few large contractors are ever suspended or debarred.
The last decade has seen a shift in tactics in the government's handling of corporate and white collar crime. Criminal charging and formal findings of guilt or liability are eliminated in favor of out-of-court settlements. If charges are filed, they are limited to a few “bad apple” employees. Federal prosecutors are using new tools such as deferred prosecution agreements and non-prosecution agreements, which are basically probation for corporate offenders.
Out of 1,041 misconduct instances since 1995 in POGO's FCMD, there have been only two convictions, 50 guilty pleas and 105 adverse civil judgments. By contrast, 575 instances (55 percent of the total) are civil, criminal or administrative settlements, most of which included provisions allowing the contractor to categorically deny any liability or wrongdoing. There have been only five company-wide suspensions and no debarments.
Some settlement agreements allow contractors to admit to certain misconduct with the stipulation that these admissions cannot be used in a future suspension or debarment proceeding. Others may include a promise by the agency or department to intervene on the contractor's behalf in suspension and debarment proceedings. These practices not only make it more difficult for the government to bar problematic contractors, they provide no incentive for these contractors to behave responsibly.
According to USAspending.gov, the government spent over $535 billion on contracts in FY2010. Despite improvements in recent years as a result of various pro-accountability and transparency regulations, policies and practices, billions of federal dollars are still ending up in the hands of risky contractors. Completely eliminating waste, fraud and abuse is impossible, but it could be greatly reduced by implementing a few relatively modest reforms.
First, there must be greater transparency. The world of federal contracting is a great unknown to the vast majority of the public, even though contractors perform innumerable services on our behalf with our taxes. The entire contracting process needs to be brought into the open.
Contracting data must be made public. All paperwork produced during the contracting process, except that which contains legitimately proprietary and confidential commercial or financial information, should be posted on a public web site. Making this information public will curtail contractor misconduct while holding down the cost of and improving the quality of the goods and services purchased by the government.
Currently, the public can obtain contracting data through the Freedom of Information Act (FOIA) or from government-maintained web sites such as USAspending.gov. But these web sites only provide summaries of the data, not the actual documentation and FOIA requests, if they are even answered, and sometimes take years to process. The government should immediately make use of the powerful and user-friendly USAspending.gov web site to serve as a one-stop shop for contracting documentation and information.
FAPIIS holds great promise as a one-stop shop for contractor responsibility data, but it should include a broader array of misconduct information, it should retain it longer and all of it should be made available to the public as soon as possible. The government must ensure that FAPIIS data – which is input both by the government and by contractors and grantees – is timely and accurate and is checked by contract and grant officials at all agencies before funds are awarded. To supplement their pre-award reviews, these officials should also be encouraged to check other resources, such as POGO's FCMD. Above all, if any of these resources raise red flags about a prospective contractor or grantee, the government must be willing to avoid doing business with them.
Second, there must be greater oversight. Congress and the administration should provide the agencies with tools designed to prevent waste, fraud and abuse in contracting in the first place, including more frequent pre-award and post-award audits. More robust auditing practices would help keep contractors in check and save money.
Finally, there must be a greater willingness to sanction contractors when they break the law or do not perform as promised. Although prosecutions and civil and administrative enforcement actions often result in the recovery of federal funds – the Department of Justice recovers billions of dollars in False Claims Act cases every year – they amount to little more than a slap on the wrist if the contractor can continue doing business with the federal government.
We would do well to heed the warning of former Sen. Russell Feingold (D-Wisconsin), who last year used the term “agency capture” to describe the government's growing subservience to the companies it does business with or regulates:
An agency should never be in a position where it is so dependent on a contractor to perform certain functions that it cannot take appropriate actions to suspend or debar that contractor…. I do not believe we should let corporations become “too big to fail,” and I think the same should be true for our contractors. If they can't be trusted to run their businesses with integrity and to use U.S. taxpayer dollars honestly, then they should not be eligible to receive new contracts. We need to hold government contractors to a high standard.