Federal Contractor Misconduct: Failures of the Suspension and Debarment System

Contractor Misconduct

"What we're saying is, basically, no matter what one of these defense contractors does, whether it is criminal, whether it is a systemic failure in terms of systems engineering, failure to monitor the subcontractor, we're simply not going to take one of these contracts away from them. I think that just makes a mockery out of the procurement system."

-- Congressman Ron Wyden (D-OR), Committee On Energy and
Commerce Subcommittee on Oversight and Investigations Hearing, October 9, 1990.

The Federal Acquisition Regulation clearly states that civil judgements and criminal convictions are grounds for suspension or debarment. The following are more examples of contractor misconduct and alleged misconduct that did not result in suspension or debarment. Click here for more examples in the complete database.

National Security

• 2000: Lockheed Martin was charged with 30 violations of the Arms Export Control Act and the International Traffic in Arms Regulations. The violations were regarding the transfer of space launch assistance technologies to China. Lockheed Martin paid a civil penalty of $13 million.
  
  
• 2000: Boeing was charged with 110 violations regarding the Arms Export Control Act and the International Traffic in Arms Regulations. The charges pertained to munitions and defense articles (i.e., technical data) exported to Australia, Singapore, Malaysia, Turkey, Spain, and Italy. Boeing paid a civil penalty of $4.2 million.
  
  
• 1998: IBM East Europe/Asia Ltd., a subsidiary of IBM, pled guilty to violations of the International Emergency Economic Powers Act and the Export Administration Regulations relating to the unlawful export of computers to a Russian nuclear weapons laboratory. The company paid a $8.5 million criminal fine.
  
  
• 1998: Boeing was charged with 207 violations of the Arms Export Control Act and the International Traffic in Arms Regulations. Boeing allegedly unlawfully exported defense articles to Russia, Ukraine, and Norway. The company paid a $10 million civil penalty.
  
  
• 1995: Lockheed Martin pled guilty to violating the Foreign Corrupt Practices Act for paying bribes to officials of the Egyptian Government. They paid a criminal fine of $24.8 million.

Fraud and Abuse

• 2000: According to a Department of Defense Inspector General press release, Northrop Grumman "intentionally overestimated the cost to purchase B-2 bomber instruction and repair manuals from subcontractors." The company settled with the government for $1.4 million.
  
  
• 1999: Two Litton Industries subsidiaries, Litton Applied Technology Division and Litton Systems Canada, each pled guilty to conspiracies to defraud the United States and Taiwan in connection with military sales to Taiwan and Greece. The two subsidiaries paid a criminal fine of $16 million and an additional $2 million for restitution and the cost of the investigation.
  
  
• 1998: General Electric Capital Corporation (GE Capital) and its wholly-owned subsidiary Montgomery Ward Credit Corporation, allegedly induced consumers, who filed for bankruptcy protection, to pay debts they did not legally owe. GE Capital agreed to a $97 million settlement.
  
  
• 1997: Northrop Grumman allegedly overbilled the government on a Low Rate Initial Production contract for the B-2 Bomber. They reached a settlement with the government worth $34.8 million.
  
  
• 1996: Archer Daniels Midland (ADM) pled guilty for its role in two international conspiracies to fix prices to eliminate competition and allocate sales in the lysine and citric acid markets worldwide. ADM paid a criminal fine of $100 million, the largest criminal antitrust fine ever.

Putting Our Troops At Risk

• 1997: Air Force Academy cadet Pace Weber and Captain Glen Comeaux were killed when the engine in their aircraft failed. This was caused by an improperly designed fuel delivery system. Northrop Grumman paid part of a $4 million verdict.
  
  
• 1993: An Army Blackhawk helicopter crashed killing Colonel William Densberger, Colonel Robert Kelly, Specialist Gary Rhodes, Jr., and Major General Jarrett Robertson and seriously injured two others. Evidence revealed that Sikorsky Aircraft had found serious controllability problems with asymmetric fuel, but had failed to warn the Army. As a result, United Technologies, the parent company of Sikorsky Aircraft, paid a $22 million verdict.
  
  
• 1988, 1991, 1993: Three Army Chinook helicopter accidents occurred resulting in five deaths and two injuries. Boeing allegedly placed defective gears in the helicopters and then sold the aircraft to the Army. On August 3, 2000, Boeing agreed to pay the government $54 million in a settlement agreement.
  
  
• 1991: Mechanic Michael Booth was killed and Lieutenant Philip Erickson was seriously injured when the aircraft they were in crashed due to a missing flight control mechanism. The DynCorp company was found solely and legally responsible for this missing part which caused the crash. DynCorp agreed to pay a $1.6 million settlement.
  
  
• 1990: An Army Blackhawk helicopter crashed, allegedly due to fractured lock washers in the helicopter's tail rotor assembly. As a result, five soldiers died and eight were injured. Sikorsky Aircraft, a subsidiary of United Technologies, paid a $9.74 million civil settlement and took steps to prevent this from happening in 1,500 Army, Navy, and Air Force aircraft containing the same lock washers.

Environment

• 2001: TRW Vehicle Safety Systems, a subsidiary of TRW, pled guilty to criminal charges of violating the Resource Conservation and Recovery Act by improperly storing and disposing of waste containing sodium azide. The subsidiary paid a criminal fine of $12 million; in a related civil action the company paid a civil penalty of $5.6 million and a total of $7.2 million for cleanup and corrective measures.
  
  
• 2001: The Environmental Protection Agency ruled, in accordance with the Comprehensive Environmental Response, Compensation, and Liability Act, that General Electric is required to comprehensively clean-up PCB contamination in the Hudson River. The estimated clean-up cost is $460 million. In 1998, EPA Administrator Carol Browner testified before the New York State Assembly that "General Electric Corporation discharged more than 1 million pounds of toxic waste known as P.C.B.s into the Hudson River. Two hundred miles of poisoned fish habitat, two hundred miles of contamination that we still live with." Browner further stated that,"GE is a responsible party at 76 [Superfund (hazardous waste)] sites, more than any other large company in the United States."²⁸
  
  
• 2000: Hughes Aircraft, a subsidiary of Raytheon, allegedly contaminated the drinking water of Tucson, Arizona, residents as the result of the dumping of TCE, a toxin. The company agreed to a settlement of approximately $13 million which included a medical monitoring program for residents
  
  
• 1999: General Electric entered into a settlement with the U.S., Massachusetts, and Connecticut in which they agreed to spend $250 million to cleanup PCB contamination in the Housatonic River at their Pittsfield plant and at other sites in Berkshire County, Massachusetts, including a school and several commercial properties.
  
  

Repeat Offenders

"For the federal government to continue to do business with a private company that has a documented record of defrauding the government and abusing taxpayer money is unconscionable."

-- Congressman Bob Barr (R-GA), August 23, 2001.

Many of the contractors POGO examined in this investigation have a documented record of misconduct and alleged misconduct against the government and the taxpayers. However, this has not stopped the government from awarding billions of dollars in contracts to these companies. POGO's investigation documents over 400 instances of misconduct and alleged misconduct of the top contractors, since 1990. The top 10 repeat offenders identified through POGO's investigation are listed below:

In the late 1980s the government believed General Electric was violating laws at such a rate that it established an office specifically to handle GE violations of defense contracts. The Philadelphia Remedies Unit was established within the Defense Contract Management Agency's Mid-Atlantic District on June 1, 1990, at the request of the Department of Defense Inspector General. During the three year existence of this Unit, 183 investigative matters and 212 administrative matters were opened. By the end of the three years, 163 investigative and 147 administrative matters were resolved, resulting in the government recovering a total of $221.7 million from General Electric on noncompliance matters.²⁹ Regarding suspension and debarment, the Unit's report states:
"[N]one of the recommendations made for action against a corporate entity of the General Electric Company were approved by the Debarring Officials at DLA [Defense Logistics Agency] or the Army who reviewed these recommendations. In the only matter involving a GE entity which resulted in administrative action, the DLA Debarring Official issued a suspension against the Aircraft Engine Group and lifted it five days later. The result of these efforts make it fairly clear that, at least in the case of the General Electric Company and probably other major contractors, administrative action is not a threatening remedy." ³⁰
The report went on to state, "Without a real possibility of the issuance of administrative action, the Government loses an important remedial tool to force compliance."³¹
This track record mirrors a larger trend: the government is less aggressive at enforcing laws and regulations than in the past. Criminal enforcement of administrative referrals, for example federal procurement fraud, fell from over 306 referrals in 1992 to only 102 in 1998. Prosecutions fell as well, with 36% of referrals prosecuted in 1992 and only 28% prosecuted in 1998. The number of referrals for civil actions from federal agencies to the Department of Justice fell from over 35,000 referrals in 1992 to only 6,324 in 1999. For example, the Department of Housing and Urban Development referred 2,945 civil enforcement actions to the Department of Justice in fiscal year 1995, but only referred 69 in fiscal year 1999. Moreover, the Department of Defense referred 489 civil enforcement actions to the Department of Justice in fiscal year 1995, but only 98 in fiscal year 1999.³²


Uneven Playing Field

"[T]he Government can suspend or debar a company from future Government business. This power is exercised constantly against small companies, but has almost never been exercised against major Defense contractors."

-- Congressman John Dingell (D-MI), Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations Hearing, July 27, 1990.

The way in which the Federal Acquisition Regulation is currently enforced gives large contractors an unfair advantage over smaller contractors. The companies that are suspended or debarred are nearly exclusively small contractors, as can be seen on the General Service Administration's List of Parties Excluded from Federal Procurement and Nonprocurement Programs ("GSA List"). One reason is that larger contractors have the financial means, plus high-priced attorneys, that enable them to work with the government on an alternative to suspension or debarment.
Another problem is that the government typically relies on a single contractor to provide big ticket items, for example, major weapons systems. This particular situation has been exacerbated by a wave of corporate mergers in the defense industry over the past 10 years. Some of the most significant mergers that have occurred include Lockheed and Martin Marietta, Boeing and McDonnell Douglas, Northrop and Grumman, and Honeywell and Allied Signal. Since December 21, 2000, Northrop Grumman has acquired Litton Industries and Newport News Shipbuilding and is currently attempting a hostile takeover of TRW. Government officials are constrained by the fact that the government is wholly reliant on certain companies when it comes to specific projects. Therefore, suspension and debarment become nearly impossible.
The reality is that, as the Philadelphia Remedies discovered, large contractors do not view suspension and debarment as a realistic threat. The contractors' preferred alternative to suspension or debarment is an Administrative Agreement and the government nearly always agrees to this alternative. Some agencies refer to them as Compliance Agreements or Corporate Integrity Agreements. The goal of an Administrative Agreement is to change the corporate culture of a company, to make them a responsible and ethical company. Administrative Agreements are negotiated on a case-by-case basis with the involved federal agency and generally require a company to implement an ethics code; a compliance program or other internal controls; remove alleged wrongdoers; submit progress reports to the agency; and allow ongoing monitoring by the agency. The implementation of Administrative Agreements tends to be very costly; as a result, Administrative Agreements are often not an option for small contractors.
For more than a decade, corporations have been conducting various types of corporate ethics and integrity training seminars for their employees and producing vast amounts of literature on the subject. Many of the government's top contractors have their own internal ethics programs in addition to membership in different corporate ethics associations, such as the Ethics Officer Association, the Coalition for Ethics and Compliance Initiatives, and the Defense Industry Initiative (DII). DII includes almost all the top 20 defense contractors. The Defense Federal Acquisition Regulation Supplement (DFARS) Subpart 203.7001(a)(2)³³ requires a written code of business ethics and conduct including employee training.
According to the Defense Industry Initiative, their goal is "to create a heightened standard of ethical conduct by every employee in the defense industry." If this is the goal of DII, the corporate ethics associations mentioned above, and is a federal requirement, POGO's investigation suggests that contractors have yet to achieve this goal.
Large contractors often enter into Administrative Agreements in lieu of a suspension or debarment. However, if that contractor continues to break the law, thereby defaulting on their agreement, the government usually does not take a suspension or debarment action in response to the broken agreement. In fact, a large contractor can even administer multiple ethics programs concurrently. For example, a contractor could institute an Administrative Agreement that the Army has imposed on them for alleged procurement fraud, while concurrently administering an Administrative Agreement rendered against them by the EPA for an alleged environmental misconduct.
For example, in January of 1995 Lockheed Martin, a member of DII, pled guilty to bribing an Egyptian official. In addition to paying a $24.8 million fine, the Air Force imposed an Administrative Agreement on Lockheed Martin. Since implementing the Administrative Agreement, Lockheed Martin and its subsidiaries have been accused of at least eight violations and have paid approximately $7 million in fines/penalties and settlements.
In another example, Litton Industries, another member of DII, entered into an Administrative Agreement with the Navy for alleged procurement fraud in January of 1995; they settled the case for $82 million. Since implementing the 1995 Agreement, two Litton subsidiaries pled guilty to two criminal violations and paid approximately $17.8 million in fines.
Despite these examples suggesting that Administrative Agreements don't adequately protect the government's interests, the government tends to rely on these agreements as the preferred tool to deal with large contractors.
When an Administrative Agreement is imposed on a contractor and it does not specifically state in the agreement that the contractor bears the sole financial responsibility for executing the agreement, then the contractor can legally charge this cost to a government contract.


Lack of Information

"We found that OASAM [Office of Assistant Secretary of Administration and Management] has not developed a uniform approach to address issues related to debarment and suspension. There is a lack of information sharing between agencies which can ultimately have a negative impact on DOL."

- -Evaluation of the Department of Labor's Policies and Procedures to Debar or Suspend Federal Contractors, Office of Inspector General Department of Labor Assistant Secretary for Administration and Management Report, September 2000.

It is essential that Debarment Officials have pertinent information including all civil, criminal, and administrative actions in which a contractor has been involved, including past suspensions and debarments, terminated contracts due to poor performance, and administrative agreements the contractor has entered into with the government. Surprisingly, this important information is often unavailable to the officials charged with making decisions regarding suspension and debarment on behalf of the government.
In interviews with POGO researchers, Debarment Officials have stated that the lack of information is a major obstacle in making suspension and debarment decisions. There is no centralized comprehensive database containing this information. Realistically, the only way to obtain this information is through contractor disclosure. Contractors are already required to disclose detailed financial information, plus various other information requirements in application forms, disclosure of misconduct and alleged misconducts could easily be included in these forms. This lack of information compromises the government's ability to make informed decisions regarding suspensions and debarment.


Recommendations

1. Create a centralized database of information. A single federal agency, possibly the Federal Procurement Data Center, the General Service Administration, or the Department of Justice, should maintain the database which Contracting Officers and Debarment Officials could consult before awarding a contract or making a suspension or debarment decision regarding a contractor.

The database should include the following information:

a. All civil judgements, criminal convictions, settlements, fines, and Superfund cleanup costs imposed on contractors by federal and state governments. There should be brief descriptions of all cases, including any monetary amounts the contractor paid to the government. The database should cover at least the past three years and be accessible to government officials as well as the public.

b. A listing of all cases where a contract was terminated due to poor performance.

c. All Administrative Agreements, past and present, into which a contractor has entered. The Department of Health and Human Services (HHS) currently lists this information for their contractors on their web site. (http://www.oig.hhs.gov/fraud/cias.html)

2. Contractor Disclosure. Include in government contract solicitations a provision in which bidders are required to disclose any current suspensions or debarments, any litigation initiated against them on either the federal or state level that is either pending or has closed in the past three years, and any Administrative Agreements they are currently implementing. New York City government currently requires this information in their contract solicitations.³⁴ Furthermore, it should be a requirement for government contractors to report all new litigation matters to the government agency or agencies with which they are currently contracting.

3. Fair and Equal Application of the Federal Acquisition Regulation. Debarment Officials need to protect the government's interests by using suspension and debarment actions equally against large and small contractors that break the law. If it is deemed necessary to conduct business with an unethical company for a specific project, then the department or agency head must justify in writing the compelling reasons, as required by the Federal Acquisition Regulation (FAR) Subpart 9.405-2, 9.406-1(c), 9.407-1(d), and 23.506(e) and the Defense Federal Acquisition Regulation Supplement (DFARS) Subpart 209.45.

4. Amend the Federal Acquisition Regulation. The FAR should be amended to specifically state that a suspension or debarment is mandatory for a contractor who is criminally convicted or has had civil judgments rendered against them more than once in a three year period. In the case of repeat civil settlements, fines, and penalties; consent decrees; administrative actions; and poor contractor performance over a three year period, a suspension or debarment action should be decided upon by the leadership of the Interagency Committee on Debarment and Suspension, along with the appropriate agency Debarment Official.

5. Empower the Interagency Committee on Debarment and Suspension. The chair of this committee should have the authority to coordinate which federal agency takes the leadership role in a suspension or debarment case, based on the jurisdiction of the agency. The committee should also be required to submit semiannual reports to Congress regarding the suspension and debarment system, e.g., number of referrals Debarment Officials receive, action that was taken, names of contractors along with descriptions of misconducts or alleged misconducts committed. Ideally, the reports would be similar to Inspectors General Semiannual Reports to Congress. This would ultimately lead to more transparency and accountability in the suspension and debarment system.

6. Improve the General Service Administration's List of Parties Excluded from Federal Procurement and Nonprocurement Programs ("GSA List"). Require the "GSA List," which only lists presently suspended or debarred contractors, to archive past suspensions and debarments on their online database.

Additional Information: Endnotes & Appendices