War in Afghanistan and Iraq

Published — April 1, 2009 Updated — May 19, 2014 at 12:19 pm ET

Fraud cases fell while Pentagon contracts surged

Procurement experts say more investigators are required


The number of defense contracting fraud and corruption cases sent by government investigators to prosecutors dropped precipitously under the Bush administration, even as contracting by the Defense Department almost doubled.

Defense contracting grew from about $200 billion in fiscal year 1993 at the start of the Clinton presidency to nearly $400 billion in FY 2008 at the end of President George W. Bush’s administration (1993 dollars adjusted for inflation to 2008 dollars). But Defense Department investigators during the Bush administration sent 76 percent fewer contracting fraud and corruption cases to the Justice Department for potential criminal prosecution than were referred under Clinton, according to Justice Department data analyzed by the Center for Public Integrity.

“No one is minding the store,” said William G. Dupree, a former director of the Defense Criminal Investigative Service (DCIS), which investigates contracting fraud. “Someone needs to address that.”

The FBI, which is also involved in such probes, sent 55 percent fewer government-wide contracting fraud and corruption cases to prosecutors for the same time periods reviewed. These cases cut across all agencies, but the Defense Department was responsible for more than 65 percent of federal contracting during the Bush administration. And FBI statistics requested by the Center focusing just on the Pentagon document a similar trend. In 2001, the Bureau referred 213 Defense Department procurement fraud cases to Justice Department prosecutors; by 2008, the total had fallen to 86.

The data analyzed by the Center were obtained from the Justice Department by the Syracuse University-based Transactional Records Access Clearinghouse, a respected 20-year-old research center focusing on federal law enforcement staffing and spending. Federal officials disputed the TRAC data, but were unable to provide numbers of their own. Richard D. Beltz, director of investigative operations with the Defense Criminal Investigative Service, said he did not believe case referrals from his agency were down, but could not provide any data to support his claim. Ian McCaleb, a Justice Department spokesman, said the agency was “unable to verify data provided by TRAC as it routinely differs from data and statistics reflected in” other Justice Department reports.

Despite the dispute over the data, a Defense Department Office of Inspector General report to Congress in March 2008 states that investigation of contracting fraud is one area of many “that have dropped in priority and have largely been neglected.” It is an area “in need of additional DCIS commitment.” “Defective pricing, cost and labor mischarging, product substitution, and other economic crimes,” the report states, listing types of contracting fraud, “threaten DoD’s financial well-being and endanger lives.”

This steep drop in enforcement has occurred at a time when the Pentagon has grown increasingly reliant on contractors for goods and services. Traditional defense contractors such as Lockheed Martin and Boeing have for decades built aircraft, ground vehicles, and other advanced weapons systems. Beginning in the 1990s, though, contractors sharply expanded from manufacturing into services, often into areas once filled by government employees. Services include a broad swath of activities from logistics to providing translators in Iraq and Afghanistan to providing high-level policy and intelligence analysis.

In March, President Obama expressed concern about fraud and waste in defense and other contracts, while two new Congressional efforts to examine defense contracting have recently begun. But some of those who have long been involved in the problem are expressing acute concern about the current enforcement environment.

“You’ve got less referrals of any kind. Less discovery of any irregularities,” said former DCIS Chief Dupree, who left the government in 1998.

A Skeleton Crew of Overseers

The drop in prosecutions appears to be the result of shifting priorities and declining manpower and expertise. One reason why DCIS has dropped the ball on contracting fraud, according to the March 2008 inspector general’s report: “DCIS requires additional personnel to detect, investigate, prosecute, and deter criminal activity impacting DoD.”

Pentagon data provided to the Center show that the number of DCIS agents dropped (see table) from the mid-1990s to 2003. The total has rebounded some since, but remains below what it was in 1995 — while the value of Pentagon contracts has soared.

“Their ability to conduct good investigations to a resolution has been hampered by large cutbacks in personnel that started in the 1990s,” said Robert Bauman, a former DCIS agent and a certified fraud examiner. “Some agencies, like DCIS, are just now trying to catch up in personnel numbers and training.”

In addition, since 9/11, intelligence and counter-terrorism became greater priorities for law enforcement, including both DCIS and the FBI. Many investigative agencies cooperate in local Joint Terrorism Task Forces. “Our DCIS JTTF agents play a significant and key role in many terrorism investigations,” Beltz said. The inspector general report states that “DCIS’ traditional areas of concentration (major procurement fraud, substitution of substandard and defective products, healthcare fraud, and public corruption) were expanded to include anti-terrorism operations and technology transfer investigations.”

At the FBI, many investigators were transferred to focus on terrorism. “After 9/11, [white-collar crime] agents were diverted from criminal matters to address the terrorist threat,” said FBI spokesman William Carter. “Over the years since, the number of cases and agents working government fraud matters has continued to decrease as the priority in criminal matters focused on corruption.” Carter maintained, however, that “the number of high profile and more significant DOD procurement fraud cases has increased and have yielded significant results.” He cited as one example last October’s guilty plea by former Army captain and defense contractor Lee William Dubois to participating in a scheme to steal some $39.6 million worth of fuel from the Army in Iraq.

The increase in the number of missions that criminal investigators are supposed to cover, without a corresponding increase in the number of investigators, may also be stretching investigators, particularly in the complex area of contracting fraud. According to Dupree, the learning curve for fraud investigations is steep. Bauman agreed. “It can take years to master fraud investigations. Many never learn,” Bauman said, adding that “technological advances and more sophistication of contractors have made [fraud] more complex and difficult to prove.”

Criminal investigators are not the only ones who appear to be outgunned. Auditors and contracting personnel are often the first to detect fraud and provide a source of leads for investigators. But like criminal investigators, auditors, contracting and acquisition personnel have also experienced workload increases, personnel cuts, and changes in marching orders. Auditors inside the Defense Department Office of Inspector General now review three times the dollars they did a decade ago. “In FY97, there was one DoD IG auditor for each $642 million in DoD contracts,” according to the inspector general’s report from March 2008, “By 2007, the ratio had declined to one DoD IG auditor for each $2.03 billion in DoD contracts.” Concluded the report: “Oversight of DoD contracts needs to be strengthened.”

The Defense Contract Audit Agency — considered the front line for ensuring that contractors do not bilk taxpayers — has seen massive staffing cuts. From 1993 to January 2009, the DCAA’s staff shrank from 5,616 to 4,084 employees, according to personnel reports compiled by the Pentagon. “The continual degradation of audit resources that is occurring at a time when the DoD budget is growing larger leaves the Department more vulnerable to fraud, waste, and abuse and undermines the Department’s mission,” according to the inspector general’s report.

The number of referrals of suspected irregular conduct that the DCAA sends to the Pentagon’s criminal investigators to examine has dropped considerably since the late 1980s and early 1990s. In fiscal year 1986, there were 325 referrals to DCIS, according to a Government Accountability Office report from 1988. By 1999, there were only 18 suspected irregular conduct cases sent to Defense Department criminal investigators. That number had climbed to 68 by 2008, according to Darryn James, a Pentagon spokesman, but that was still just a fraction of the total from two decades earlier.

Starting in the 1990s, the DCAA became less aggressive in helping to detect fraud, Dupree said, because its personnel were put in “integrated product teams” — in other words, the auditors became part of management. A July 2008 GAO report found that DCAA’s independence had been eroded because of its participation on these teams. Last September, April G. Stephenson, director of the DCAA, testified that the agency has “ceased participation in all” integrated product teams in response to the GAO’s criticism.

In February and March, new guidelines were issued by DCAA headquarters that eliminated some barriers for auditors to send investigators information about suspected fraud after it came to light that DCAA managers were stifling some suspected fraud referrals. “You wipe out the investigators. And then you decimate DCAA and then you make them part of the team,” Dupree said. “When you start adding it all up, you find you don’t have anyone focusing on” what is happening to taxpayer money.

Beyond questions of the DCAA’s effectiveness, the agency has been cut out of auditing certain contracts because of laws passed in the 1990s. These laws resulted in less information being available to the government from contractors, “which in turn impacted the number of audit requests DCAA received from contracting officers,” Pentagon spokesman James said. “Without cost or pricing data, DCAA is generally not involved in auditing the prices,” he said.

Because the laws now require less of contractors, “fewer referrals can be made,” said Richard Loeb, an adjunct professor of government contract law at the University of Baltimore. “My sense is that DCAA is doing what it can, but the cupboard is bare.”

In addition, the acquisition workforce shrank greatly during the 1990s. This workforce includes contracting specialists, engineers and quality assurance experts — the people who determine how well contractors are performing. In fiscal year 1990, the DoD acquisition workforce, as defined by Congress, was 460,516. As of fiscal year 2004, the number was 206,653.

The lack of oversight was particularly acute in Iraq, where for a time there were few auditors and investigators minding the store.

“In the first year of the reconstruction experience in Iraq, weak or absent oversight permitted unscrupulous individuals to commit fraud and other crimes,” according to a February report on Iraq reconstruction efforts. The report was issued by the Special Inspector General for Iraq Reconstruction, which was created to monitor how funding from the U.S. is used in the reconstruction of Iraq.

“This hard lesson underscores the need to ensure that future contingency operations include strong oversight from their outset,” the report states, “so that U.S. taxpayers’ dollars are kept as safe as possible from criminal abuse, and that when crimes do occur, the perpetrators are caught and brought to justice.”

Reforming the System

Against this troubled backdrop, there are several initiatives aimed at improving the government’s efforts to ride herd on Pentagon contracting fraud and corruption. The Justice Department set up the National Procurement Fraud Task Force in 2006 to “fight procurement fraud more effectively,” according to the department’s website.

The Task Force was created in the wake of the Air Force’s Darleen Druyun contracting fraud scandal, which led to the largest defense fraud settlement in history, a bright spot in defense fraud enforcement this decade. Once the number two Air Force acquisition official, Druyun pleaded guilty in 2004 to one count of conspiracy for having negotiated a job for herself at Boeing while offering the company preferential treatment when she was still a government employee. Notably, she helped to arrange a $30 billion refueling tanker aircraft lease deal with Boeing, a deal that was eventually scuttled.

Among the task force’s accomplishments, according to a December 2008 progress report: improved coordination among government investigators, specialized training for agents and prosecutors on procurement fraud, and creation of an operations center at a secure FBI facility to serve as a clearinghouse for intelligence on fraud related to funding for the wars in Iraq and Afghanistan.

But there’s an acknowledgment as well that more tools are needed. The Task Force issued a set of legislative recommendations in a white paper in 2008, obtained and made public by the nonprofit Project On Government Oversight. One set of their recommendations is for improvements in the government’s ability to detect contracting fraud.

There are also some fresh efforts on Capitol Hill. The congressionally-created Commission on Wartime Contracting held its first public hearing in February 2009, at which several government inspectors general testified about their challenges in pursuing fraud. Clark Irwin, a spokesman for the Commission, told the Center that the group plans to examine the government’s work in combating fraud to determine whether it has been sufficient to catch and deter wrongdoing. The Commission’s preliminary findings will be described in an interim report this spring. In the Senate, Missouri Democratic Sen. Claire McCaskill has been named chair of a new subcommittee on government contracting. Referring to the dropoff in Defense Department fraud referrals, McCaskill said in a Senate confirmation hearing in January, “This defies common sense. We’ve had a massive explosion of procurement during the conflict in Iraq.”

At that January hearing, McCaskill asked Jeh C. Johnson, now the Defense Department general counsel, about the drop off in cases. “Given the growth of procurement dollars, that a dramatic fall-off like that — I’m an optimist in life, but I tend to doubt that it’s because… there’s so far less procurement fraud out there,” said Johnson. “This is obviously a very important area and I certainly would make that a priority.” According to the Government Accountability Office, Johnson’s office plays a key role in implementing “policies relating to prosecution of identified instances of fraud.”

President Obama has also made it clear he intends to keep a close eye on defense contracting. In a news conference in March, as he announced a review of government contracting rules, Obama said “the days of giving defense contractors a blank check are over… Far too often, the spending is plagued by massive cost overruns, outright fraud, and the absence of oversight and accountability.”

Defense procurement veterans no doubt agreed with the new president’s assessment of the problem. But a solution may require more cops on the beat.

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