Value for the Money? The Defense Budget Blackhole

Near the end of a recent piece by Fred Kaplan, he wrote in Slate that:

The United States has the world's most powerful military. This military consumes more money (adjusting for inflation) than it did at the height of the Cold War. Not counting the costs of the two wars, it spends as much on the military as the rest of the world's countries combined. And yet, despite all this money and global reach, the U.S. Army finds itself unable to sustain more than 150,000 or so troops in Iraq and Afghanistan.

Pentagon leaders want us to spend even more, but as Kaplan makes clear, even with our current grotesquely large defense budget, we're having trouble fighting wars against relatively low-tech insurgencies in two medium-sized countries (both Iraq and Afghanistan have populations of around 30 million).  God forbid if we actually have to fight a real war against a near peer (which is being touted as China which has 1.3 billion people and high-tech).  More money is not the answer. 

Some of the problem is what we're buying (i.e. do we have the appropriate military for the conflicts we're in and likely to face?) and how we're buying (i.e. the acquisition process which includes contracting) and how efficiently the contractors we pay with taxpayer dollars develop and produce weapons.  The former two issues are well worn, the third is taken for granted, but shouldn't be.  In the commercial world, industry constantly delivers higher quality products at significantly reduced prices.  In the defense industry, the opposite is true.  It is easy to argue that we pay much more even relative to the increase in quality. 

Winslow Wheeler at the Center for Defense Information describes what may be the pre-eminent case study of this.  In Defense News, Wheeler wrote:

...if we adjust for inflation, weapons today should cost — very roughly — what they cost in 1945, at most 30 percent more. Of course, the advance in technology should bring a vast improvement in performance.
   
    Now, let’s run the price comparison for fighter aircraft. The newest thing in 1945 was the Lockheed P-80 jet, the most ex­pensive fighter Harry Truman could buy. In 1945, the P-80 cost $110,000. Using the OMB index to convert the dollars, we get $1,309,000.
   
    Today’s F-22 is a little pricier.
   
    The 184 F-22s the Air Force is now buying will cost $65.3 billion in contemporary dollars. That’s $355 million per copy. That’s not exactly in the price neighborhood of the inflation-adjusted P-80. In fact, it’s in a whole different universe. It’s a multiple of 273.
   
    We should not pretend that free market inflation and technology improvement is an excuse for to day’s huge defense budgets. While commercial prices have barely grown in inflation-adjusted terms and brought gigantic performance improvements, military prices have grown astronomically.
   
    A defense process so grossly in efficient that it can run up weapon costs 273 times faster than inflation reeks not of the commercial market but of socialism and bureaucracies that breed incestuously ad infinitum.
   
    And what about performance improvements? Does the cost of the F-22, even if astronomical, really help the Air Force win? A 273 fold improvement in capability is unreasonable to expect, but is it worth buying?
   
    On the purely technical level, the F-22 can fly more than three times the speed of the P-80 and al most twice as high. It has other special characteristics (a reduced signature against some radars at some angles and long-range sen sors and missiles, and more) that the P-80’s creators were incapable of designing.

One major reason we're paying so much more is the lack of competition in the defense industry due to mergers.  Another is the government often does not bargain well with its contractors.  Funding instability and massive billion-dollar projects which are sold on rosy, snake oil claims of cheap, easy leaps in technology play a major role too.  The political game of spreading out defense contract work to facilities and subcontractors in as many political districts as possible both politically protects defense programs and makes them more expensive (i.e. it is harder to coordinate hundreds or thousands of subcontractors dispersed over a vast geographical expanse, also each company has to take its cut in profit).

With the money the U.S. is spending we should demand better.  But it's more than about money; if we don't clean up the defense budget mess, we may not even be able to afford to fight wars anymore even if we need to.

-- Nick Schwellenbach

Do As I Say, Not As I Purchase

Loyal readers of this blog might recall a recent Government Accountability Office (GAO) audit that found widespread abuses of the purchase card program throughout the federal government (e.g., the luxurious steak-and-cocktail dinner hosted by U.S. Postal Service employees that cost taxpayers over $13,000).  But if the GAO report didn't convince you that federal agencies need to do more to strengthen accountability in their purchase card programs, maybe this week's headlines will change your mind.

One of the more ironic stories of purchase card abuse comes to us from Milwaukee, Wisconsin, where a U.S. Forest Service employee, Suzanne Poetz, has pleaded guilty to stealing $300,000 from her agency's program.  As part of her plea, Poetz admitted to over 150 instances of theft.  But the best part of all?  In 1998, Poetz received a Hammer Award from Vice President Al Gore--for developing the Agriculture Department's purchase card program.  (The Hammer Awards were given to federal employees whose work "resulted in a government that works better and costs less").

Another example of purchase card abuse was highlighted in the Houston Chronicle over the weekend.  A review by the Chronicle showed that NASA employees have used their purchase cards to pay for iPods, video games, jewelry, karate gear, and even clothes from the agency's headquarters.  In addition, some agency employees may have broken the law by not holding competitive bids for larger purchases.  As POGO's Scott Amey pointed out, "You have to ask: is somebody trying to get around competitive requirements?"

POGO has long argued that inadequate oversight in the purchase card program exposes federal agencies to wasteful and fraudulent expenditures.  We've also issued a number of recommendations for improving oversight and accountability in the program.  Hopefully these latest scandals will serve as yet another wakeup call for agency officials throughout the government.      

-- Michael Smallberg

Say 'NYET!' to Mergers

In an important Washington Post op-ed today, former senior Department of Defense officials Dov S. Zakheim and Lt. Gen. Ronald T. Kadish (Ret.) point out that the lack of competition in the Pentagon's buying has led it to become a Soviet-style system:

The Government Accountability Office reported last month on how things are going with nearly 100 major U.S. defense systems. Not well, it seems. They have exceeded their original budgets and are, on average, almost two years behind schedule.

The GAO report lays bare a festering problem in our nation's military procurement system: Competition barely exists in the defense industry and is growing weaker by the day.

It was a different story just two decades ago. In the 1980s, 20 or more prime contractors competed for most defense contracts. Today, the Pentagon relies primarily on six main contractors to build our nation's aircraft, missiles, ships and other weapons systems.

It is a system that largely forgoes competition on price, delivery and performance and replaces it with a kind of "design bureau" competition, similar to what the Soviet Union used--hardly a recipe for success.

With less competition, contractors have few incentives to keep costs down and performance high. In essence, we are left with a few super-sized contractors that are holding all of the cards. As witnessed by the Air Force tanker deal and the recent IBM suspension, the government has few places to turn--it has, in effect, handcuffed itself.

The Pentagon pushed a policy in the mid-90s to consolidate the defense industry, which has led to the situation we have today. Zakheim and Kadish describe a fateful Clinton Administration "Last Supper" meeting that precipitated the mergers.

Even worse, however, was that the federal government paid for the defense contractor mergers under a policy which its opponents, including POGO, called "payoffs for layoffs." At the behest of defense contractors, the Pentagon and its friends in Congress paid the contractors billions of dollars to merge. At the time, POGO noted:

These mergers contain an even more fundamental problem: even if there are short-term savings for the government, in the long run any lower prices are likely to be offset by the effects of reduced competition from excessive corporate merging. The Pentagon has not yet fully examined the long-term government costs of reduced competition from the tremendous concentration currently underway in the defense industry.

The health care, homeland security, and IT industries are also following a similar path toward merger-mania. In some instances, new companies are being gobbled up by the large DoD contractors. Too much power, influence, and control over the government marketplace is not good for taxpayers. POGO agrees with Zakheim and Kadish--more oversight isn’t going to fix the problem. The government has to do something to increase competition and bring in the many small and mid-sized firms that can help the government meet its needs.

-- Beth Daley and Scott Amey

An "A" for Contracting Accountability

April has been a busy month for improving contracting accountability in the federal government.

On the eve of tax day, the House passed a bill to prevent contractor tax cheats from receiving large federal contracts and grants (H.R. 4881). The following day, the House Oversight Subcommittee on Government Management, Organization, and Procurement held a hearing on H.R. 5712, which would require all contractors--including those working overseas--to report criminal violations. Failure to do so would result in suspension or debarment from future government contracts. Although regulatory efforts are also being considered to close the reporting loopholes for overseas and commercial contracts, the Hill decided it might have to force such action.

After the GAO released its 17th report since 2001 detailing vulnerabilities in the government's purchase card program, the Office of Federal Procurement Policy issued a memo reminding agencies to reduce the risk of waste, fraud, and abuse, and to discipline employees for charge card misuse. There is also legislation pending, so let's hope that taxpayers will no longer have to foot the bill for trips to Vegas, dinners at posh restaurants, or cosmetic surgery. An organization can hope, ya know!

Recently, we also saw EPA officials go blow for blow with critics who questioned the agency's decision to suspend IBM from federal contracting. Although the suspension only lasted seven days, the EPA concluded that it had all of the evidence it needed to protect taxpayers against contractor misconduct. Interestingly, some of the same critics who questioned the EPA's actions have also accused POGO and others of demoralizing federal workers when we question government activities. Not a sermon, just a thought.

One release that received little attention was the PCIE/ECIE report to the President, which revealed that Inspectors General activities in 2007 saved taxpayers $16.5 billion and led to more than 10,000 successful criminal prosecutions and civil actions.

Of course, you'll have a tough time finding information on these accountability efforts at smartcontracting.org, a new site created by the Professional Services Council, a national trade association representing the government professional and technical services industry. The site is meant to "communicate the benefits and clear up the major misperceptions about contracting" and to serve as a "clearinghouse for reliable information on these important issues." But seeing as the site doesn't include much information on the reports mentioned above or the recent actions to improve the contracting system, it would appear that PSC is only interested in showing the world of contracting from the eyes of its very interested members.

H.R. 3033: you're on deck for the contracting hot seat.

-- Scott Amey

Flawed Thunderbirds Contract Tainted with Improper Influence

Back in May 2006, POGO posted a blog entry about the Air Force improperly steering a $50 million contract to produce large-scale video shows during Thunderbirds Air Demonstration Squadron performances to a company connected to senior Air Force officers. POGO noted that the Department of Defense Inspector General and FBI were investigating the contract, which the Air Force voluntarily terminated after a competing bidder filed a protest.

Almost two years later, the DoD IG has finally released its findings in a redacted 251-page report. The report concludes that Air Force Maj. Gen. Stephen M. Goldfein and others went to improper lengths to steer the contract to Strategic Message Solutions (SMS), an inexperienced and ill-equipped company that tendered a bid twice as expensive as a competing vendor's. SMS also had close contacts with senior Air Force officers and members of the Thunderbirds. The report highlights an Air Force contracting process fraught with improper influence, irregular procedures, glaring conflicts of interest, and an award decision that "did not represent the best value for the Air Force." As it happened, the Thunderbirds fiasco occurred shortly after another major procurement scandal that sent Air Force acquisition chief Darleen Druyun to prison.

The U.S. Attorney's Office in Nevada, home of Nellis Air Force Base and the Thunderbirds, declined to prosecute the case. Goldfein, who is now Vice Director of the Pentagon's Joint Staff, and four other officers not named in the report received administrative punishments.

There has been talk around Washington that IGs, Congress, the GAO, and watchdogs have demoralized government employees and are causing them to leave government service. It's funny that POGO hears from many government employees who support our efforts, who state that their frustration results from government scandals rather than the reporting of them, and who have tried to fix the system from within only to be labeled as troublemakers and the enemy (where is Bunny Greenhouse now?). Taxpayers are also demoralized and many see the federal government transforming into nothing more than a corporate machine that protects special interests rather than the public's interest. The award of the Thunderbirds contract highlights many problems--actual and apparent conflicts of interest, concerns with the revolving door, improper influence in contracting, flawed deals, and wasted money. I would love to see how anyone can blame the DoD IG for conducting its investigation and exposing a deal that wasn't benefiting taxpayers.

-- Neil Gordon and Scott Amey

22-Year-Old Arms Dealer Scandal Exposes Flaws in Federal Contracting

The news has recently been abuzz with the story of Efraim Diveroli, the 22-year-old self-described "super nice guy" from Miami Beach who was caught supplying the Afghan government with unreliable and obsolete munitions under a $300 million U.S. Army contract. Diveroli and his company, AEY Inc., are also believed to have dealt with illegal arms traffickers and covered up the fact that tens of millions of the rifle and machine gun cartridges he supplied were illegally obtained from China.

The Army awarded the contract to AEY early last year. According to an investigation published Thursday in the New York Times, problems with the munitions began cropping up last fall. In January, American officers in Afghanistan became concerned enough to suggest terminating the contract. A month later, Army contracting officials met with AEY and imposed more rigorous packaging standards. Yet the company again supplied another shipment of substandard cartridges.

This week, the Army suspended AEY from all future federal contracts. Neither Diveroli nor his company will be allowed to bid on any future government work until the allegations are resolved, but will still be allowed to provide ammunition already on order under the contract. AEY is also facing investigations by the Department of Defense’s inspector general and Immigration and Customs Enforcement.

How did a relatively new company run by a twenty-something land such a lucrative contract in such a vital national security area? The Times found a host of systemic problems. In 2006, Army contracting officials were under intense pressure to supply munitions to Afghan forces. They did not carefully vet the bidding companies. By 2006, AEY had landed a few security and defense-related contracts, but, according to contracting officials quoted anonymously in the Times story, AEY had already earned a reputation for unreliability. Diveroli also had a series of run-ins with the Dade County authorities in 2005 and 2006. Nevertheless, the Army was satisfied with AEY’s bid proposal and awarded it the contract in January 2007.

That contract, however, was vaguely worded and had few quality assurance restrictions. It lacked rigorous standards regulating the quality, packaging, transportation and storage of munitions. Without such restrictions, AEY was free to conduct its business in a way that maximized its profits, which meant dealing with shadowy "middlemen" and vast, unregulated stockpiles of unsafe munitions in former Soviet Bloc countries and elsewhere.

Unfortunately, debacles like this are becoming all too common. In fighting the global war on terror, the Pentagon is handing out billions of dollars in hastily drafted contracts to poorly vetted companies like AEY. The contractor takes advantage of the loophole-ridden contract, the government drops the ball on oversight, and the pursuers of Al Qaeda are left with defective bullets. This time, a team of tenacious reporters at the New York Times pushed the government into action. Whether or not this will lead to meaningful reforms in the federal contracting system remains to be seen.

-- Neil Gordon

Troubled Waters

Yesterday, in the Washington Times, David Axe reported that deployment of the Coast Guard's National Security Cutters will be delayed by six months because the ship's radios are not waterproof. That article sent the Coast Guard into a frenzy yesterday to challenge what they said were inaccuracies, according to CGBlog.org. Navy Times reports that the Coast Guard has demanded a retraction of the front page article. We'll be watching do see how the details work themselves out.

The Cutters are part of the troubled $24 billion Deepwater program which has been plagued by delivery delays, failures and scandal. Former Lockheed Martin engineer Mike DeKort blew the whistle early on the fact that the Coast Guard failed to ensure weather durability of external equipment in the program such as the radios.

Last week, the Navy Times reported that an internal Coast Guard report recommended ditching production of two National Security Cutters in favor of other alternatives. The article noted "the risk of 'connectivity problems' among Coast Guard assets and between it and other agencies."

That news followed a statement from the Coast Guard that suggested problems were brewing with the Cutters' classified communications system which involved "some risk" to the delivery schedule. That statement reaffirmed concerns raised by the disclosures of a second whistleblower, Coast Guard engineer Anthony D'Armiento. The statement outlined what has been called by some an unknown process for testing and deployment (Interim Authority to Operate) of the Cutters. The statement raised the specter that the Coast Guard would prematurely accept the Cutters from contractors Lockheed Martin and Northrop Grumman before major problems were resolved with the ships' communications system. The Coast Guard made this same mistake when it accepted eight 123-foot Deepwater boats despite numerous flaws in those boats, which were later taken out of service with plans to be scrapped. According to some reports, the Coast Guard has denied that it will sign the contract Form DD 250s acceptance forms until the Cutters until the problems are resolved. The Coast Guard will lose important leverage to compel Lockheed Martin and Northrop Grumman to fix serious communications problems if it accepts the National Security Cutters before they are ready.

D'Armiento has been on administrative leave for more than 5 months after he leaked pages from a document which exposed that the Cutters were at high risk for not meeting contract requirements for TEMPEST and Information Assurance. While the Department of Homeland Security Inspector General ostensibly investigates him for leaking this document, the Coast Guard released a full unredacted version of the document to POGO. In 2005, POGO criticized the Department of Homeland Security for issuing a management directive which prohibits the disclosure of information that may be obtainable under the Freedom of Information Act (FOIA), raising the specter that whistleblowers like D'Armiento would be retaliated against for releasing information which Congress intended to make available to the public.

-- Beth Daley

UPDATE: David Axe provides a point by point response to the Coast Guard's full out attack on his blog. He also helpfully wrote in to our blog to clarify some points regarding the Troubled Waters blog entry (see comments below).

Who's Preying on the Taxpayer?

The commentary is from a POGO friend on an Inside the Pentagon article today that leads with the following paragraph:

If the Air Force uses F-22A Raptor funding designated to shut down the production line to instead extend production past fiscal year 2009, the service would need $3.8 billion in FY-10 to fully fund a new 20-plane buy, a top service budget official tells Inside the Pentagon. 

The $3.8 billion needed to procure 20 F-22s in FY 2010 requires an additional $526 million in long-lead funding in FY 2009. That makes for a total of $4.326 billion to buy the 20 aircraft, resulting in an average unit procurement cost of $216.3 million. This compares to the $125 - 135 million average unit procurement costs alleged for the previous two lots of 20 F-22s. Am I missing something here? It’s bad enough to advocate buying a $200+ million fighter at any time but to go along with a 66% increase in unit cost in the space of one year is too much to bear. What are these guys smoking?

Hired Guns: Government Oversight Weak

You know things are bad when even the enemy of real accountability and oversight says they are. This week, the trade association that represents private mercenary armies (including Blackwater until it resigned earlier this month) issued a report through what appears to be a nonprofit front organization noting that "Massive increases in defense service contracting have outpaced the government's ability to adequately conduct oversight of defense contracts," even noting "the need to strengthen depleted oversight organizations such as the Defense Contract Management Agency and the Defense Contract Audit Agency."

But don't be seduced by their crocodile tears over the government's failures to hold big contractors accountable. After pouting about the dire state of affairs, they put forward their so-called solutions which include "find genuine possibilities for teamwork" (LET'S BE FRIENDS!). For example, its a good idea for contractor personnel to be embedded in the government. Of course it is! While they are embedded, the contractors can also, just by coincidence, keep a close eye on their paramount interest in landing the next big contract.

Well, we'd like to suggest that the so-called "International Peace Operations Association" take their members up to the Hill and lobby to roll back the massive spending cuts imposed on the Defense Contract Management Agency and, to a lesser extent, the Defense Contract Audit Agency.

House appropriators discussed the very real problem of the shredded government oversight system in their recent FY 2008 defense budget report: "It is clear that DoD currently lacks the means to provide proper oversight of its service contracts, in part because of an insufficient number of contract oversight personnel. While the spending for contracted services has grown, the size of DoD's workforce, including its contracting and acquisition workforce, has been decreased significantly."

The Committee goes on to note: "For example, the Defense Contract Management Agency's (DCMA) workforce has been reduced by over 50 percent between the period 2000 to 2005, making it more difficult for DCMA to provide thorough and meaningful oversight of the Department's increasing reliance on contracted services." In other words, the DCMA was shrunk to half its size during a period of time when the dollar amounts of government contracts roughly doubled from $200 billion to $400 billion.

The Defense Contract Audit Agency also suffered a modest cut of 5% between FY 2000 (4,256 staff) and 2006 (4,051staff), during a time when their budget probably should have been doubled.

The House sensibly attempted to give the DCMA a much-needed additional $17 million and the DCAA $12 million for FY 2008. Unfortunately, Senate appropriators didn't see eye to eye on the increases. So, will we see those hired guns on the Hill lobbying for DCAA and DCMA funding? Don't count on it.

-- Beth Daley

Remembering John Berthoud

What a shock we at POGO had yesterday when we learned that our colleague John Berthoud, the Executive Director of the National Taxpayers Union, died unexpectedly last week.  At only 45, he had accomplished so much. NTU is a powerhouse voice for the taxpayers. I know many of the coalition efforts in which POGO has participated – from open government initiatives to whistleblower protections -- have been significantly boosted by NTU’s involvement.  Just this summer, I spoke on a panel at the NTU annual conference – and John was so gracious and welcoming. We talked about pursuing new partnerships in the future. It is hard to believe our community has lost this outstanding colleague in such an untimely death.  Our heartfelt condolences go out to our friends at NTU during this very sad time.

-- Danielle Brian

Sen. Webb Demands Truman-style Committee

Hundreds of billions of dollars have been allocated to contractors for reconstruction and stabilization efforts in Iraq and Afghanistan.  Correspondingly, there have been repeated allegations of war profiteering in these countries, including corruption, waste, and mismanagement of wartime contracts.  POGO investigator Nick Schwellenbach has posed the question “Will Congress create a new 'Truman Committee?” 

The answer may soon be yes. In July 2007, Senator James H. Webb and his freshman Senator cosponsors introduced a bill, entitled “Commission on Wartime Contracting Act.” (S.1825), which would mirror the objectives of the Truman Committee. Yesterday, Sen. Webb re-submitted the legislation as an amendment (No. 2999) to the Defense Authorization Bill (pdf) now before the Senate.  On Wednesday, POGO sent a letter to Senators Webb and McCaskill strongly endorsing the Sen. Webb’s legislation.

Congressional approval of this legislation will be a phenomenal step towards holding wartime contractors in Iraq and Afghanistan contractors accountable for rampant instances of fraud, abuse, and mismanagement.  It would also provide useful recommendations for future wartime contract procurement. 

Today’s New York Times underscored the dire need for more wartime contract oversight and accountability:   

Military officials said Thursday that contracts worth $6 billion to provide essential supplies to American troops in Kuwait, Iraq and Afghanistan — including food, water and shelter — were under review by criminal investigators, double the amount the Pentagon had previously disclosed. 

In addition, $88 billion in contracts and programs, including those for body armor for American soldiers and matériel for Iraqi and Afghan security forces, are being audited for financial irregularities, the officials said.

Although the Pentagon alleged that these instances of corruption are the work of isolated individuals, many members of the House Armed Services Committee disagreed. Democratic Representative Ike Skelton, the chairman of the committee, even went as far as to say “The problems were so severe that I fear they could represent a culture of corruption.”

This alleged “culture of corruption” is inexcusable. Especially, when as Dina Rasor writes:

We are losing billions of dollars to waste in Iraq and this waste comes at the expense of our troops. We are spending two billion dollars a week with little oversight and controls and the war service industry companies are taking advantage of this desperate war situation.

Senator McCaskill echoed those sentiments in a press release today on amendment No.2999, stating, “As a former auditor, I’ve seen waste before. But I don’t think I’ve ever seen anything as outrageous as what’s happening in Iraq and Afghanistan in terms of contracting.”

In light of what may very well be a systemic problem, Congress should approve Sen. Webb’s amendment to ensure that it’s corrected.

-- Jake Wiens

Legislation to Boost False Claims Act Introduced

The fraud-fighting False Claims Act got a boost yesterday when Senator Charles Grassley (R-IA), Senator Richard Durbin D-IL), Senator Patrick Leahy (D-VT), and Senator Arlen Specter (R-PA) introduced legislation to close several loopholes in the Act. Below is their release and floor statements by Senators Grassley and Durbin. Companion legislation will reportedly be introduced in the House of Representatives by Rep. Howard Berman. Senator Grassley, who has been the leading light on this issue expressed his concerns about the state of the False Claims Act back in July, 2007 when he made a floor statement.

POGO commends the Senators and Representative Berman for their leadership on addressing the loopholes which have unnecessarily resulted in tens, if not hundreds, of millions of dollars being lost to the government.

Among improvements proposed, the Act will clarify that government employees can have standing to sue. This issue has inexplicably perplexed the courts, despite the plain language of the act which says that any "person" can file such suits. Some courts have bought the tired line that government employees should not have standing from lawyers representing those corporations who are the target of False Claims Act lawsuits as well as a Department of Justice which takes a ridiculously hostile approach to government employee fraud suits.

For example, in January 2007, a former Department of Interior Minerals Management Service auditor Bobby Maxwell prevailed in a lawsuit against Kerr-McGee with a jury trial finding the company underpaid by $7.5 million to the federal government in oil drilling fees, a verdict that could ultimately bring as much as $40 million when penalties are included. The Department of Justice (DOJ) refused to intervene in the case which is now floundering on a technicality. DOJ has also refused to intervene in the lawsuits filed by three additional Minerals Management Service auditors who documented an estimated $20 million in underpayments by oil giants including Shell. An independent investigative report is expected imminently which will likely vindicate the concerns raised by the whistleblowers filing these suits. Still, DOJ is sitting on the sidelines, putting the taxpayers' recoveries of tens of millions of dollars at grave risk.

The legislation introduced yesterday will also seek to address issues raised by the Custer Battles False Claims Act case. Like the Maxwell case, DOJ also dropped the ball on the much publicized Custer Battles case when it failed to intervene. A jury verdict found a total award of $10 million in the case. Then, in a technical dodge, the Judge threw the case out by finding that the Coalition Provisional Authority was not part of the U.S. Government and so therefore could not be sued under the False Claims Act.

-- Beth Daley

                   

For Immediate Release

September 12th, 2007

GRASSLEY, DURBIN, LEAHY, SPECTER SPONSOR LEGISLATION TO FORTIFY TAXPAYERS AGAINST FRAUD

WASHINGTON --- Sens. Chuck Grassley and Dick Durbin are sponsoring new legislation in response to recent federal court decisions that threaten to limit the scope and applicability intended by Congress with its highly successful 1986 update of the False Claims Act, which has recovered $20 billion for the U.S. Treasury that would otherwise be lost to fraud. The False Claims Act Correction Act of 2007 has the support and cosponsorship of Judiciary Committee Chairman Patrick Leahy and Ranking Member Arlen Specter. Companion legislation will be introduced in the U.S. House of Representatives by Rep. Howard Berman. Grassley and Berman were the sponsors of the 1986 amendments to the False Claims Act. Those amendments breathed new life into what is known as Lincoln 's Law by empowering qui tam relators to act as private attorneys general and file suit against those who defraud the federal government. "It's been proven time and again that without the courage and willingness of these individual citizen whistleblowers, the federal government would not have known what was going on or been able to pursue successful cases against those who defrauded the government, including contractors and state and local governments. These settlements have returned tens of billions of dollars that would otherwise be lost and gone forever," Grassley said. "Our new legislation works to make sure recent court decisions won't weaken the government's ability to recover tax dollars lost to fraud, whether its in health care, defense or another areas of spending." "President Lincoln signed the False Claims Act into law in 1863 to prevent war profiteers and others from defrauding the government and the nation's taxpayers.  Sadly, 144 years later, ' Lincoln 's Law' is still needed," Durbin said.  "This bipartisan bill modernizes and strengthens the False Claims Act, and will help "Lincoln's Law" continue to serve as an effective tool against fraud." "This bipartisan bill strengthens and restores the False Claims Act as one of our most powerful and effective tools for combating fraud, waste, and abuse in government," said Senator Leahy. "These protections are more important than ever as unscrupulous contractors in Iraq and elsewhere have defrauded American taxpayers of billions of dollars and undermined our troops fighting overseas."  "This legislation is as important today as it was when it was enacted during the Civil War in 1863," stated Senator Specter.  "We must continue to combat fraud and abuse of government programs and waste of taxpayer dollars.  One way to do that is to encourage and protect employees who step forward to identify fraud.  This legislation would ensure that the law continues to do both.  President Abraham Lincoln sought the False Claims Act during the Civil War in response to war profiteering that defrauded taxpayers. The 1986 updates to the law are today the government's most effective weapon against fraud. The False Claims Act Correction Act of 2007 would make the following corrections to the False Claims Act. · Makes corrections to 31 U.S.C § 3729 removing the requirement that false claims be presented to a government employee. This section corrects longstanding problems with the requirement that false claims be presented directly to government employees, instead applying liability directly to any false claim regarding government money or property. This correction ensures that any government money lost to fraud, waste, or abuse can be recovered using the FCA regardless of whether the individual making the false claim directly represents such a claim to a government employee. This problem arose following the D.C. Circuit Court of Appeals decision in U.S. ex rel. Totten v. Bombardier Corp, 380 F.3d 488 (2004) which held that false claims to government grantees (here Amtrak) were not "presented" to a government employee and barred government recovery of government funds lost to fraud. · Amends the FCA to clarify the dismissal of parasitic claims filed based upon publicly disclosed information. Commonly referred to as the public disclosure bar, the FCA currently allows for the dismissal of FCA cases brought based upon publicly disclosed information unless the relator is the "original source" of the public information. This complex area of FCA law was further complicated when the Supreme Court decided Rockwell Int'l Corp. et al. v. United States, 549 ___ (2007). This decision held that the public disclosure bar requires a qui tam relator to be an original source for all claims that are ultimately settled or upon which a verdict is rendered. Absent this original source, a relator is barred from recovery. This decision dramatically limits the FCA by restricting legitimate qui tam relators who often bring fraud to the attention of DOJ with information DOJ expands and ultimately settles on other grounds. This correction also clarifies it is the exclusive right of DOJ to dismiss relator claims on public disclosure grounds, and not a jurisdictional defense of those who defraud the government. · Clarifies that false or fraudulent claims against non-U.S. Government funds under the trust and control of the U.S. Government are subject to recovery under the FCA. This clarification would ensure funds administered by the U.S. Government on behalf of third party nations or other entities are protected from fraud, waste, or abuse by extending FCA liability to those funds. This clarification addresses concerns raised by the Federal District Court for the Eastern District of Virginia in United States ex rel. DRC, Inc. v. Custer Battles, LLC, 2006 WL 2388790 (E.D. Va. Aug. 16, 2006), dismissing a jury verdict finding FCA violations for funds allocated to contractors operating on Iraqi funds administered by the U.S. Government. · Clarifies a split between Circuit Courts of Appeal as to when a government employee may act as a qui tam relator under the FCA. This clarification would explicitly state in statute the original legislative intent of the 1986 amendments to the FCA allowing government employees to act as qui tam relators in limited circumstances when they have reported activities up the chain of command, to the Inspector General, to the Attorney General, and only if no action was taken after 12 months. · Makes technical and clarifying amendments to the statute of limitations in FCA cases, as well as technical edits to the Civil Investigative Demands authorized under the current FCA. Grassley and Durbin are senior members of the Judiciary Committee. The text of the floor statements they delivered today marking introduction of the False Claims Act Correction Act of 2007 follows here. False Claims Act Correction Act (as introduced) with hand written edits Floor Statement of U.S. Senator Chuck Grassley of Iowa Introduction of the False Claims Act Correction Act of 2007 Tuesday, September 11, 2007      Mr. President, for 27 years I have come to the Senate floor to discuss legislation that will help the Federal government run efficiently and effectively.  I've been an outspoken advocate for whistleblowers who, in good faith, bring forth information about waste, fraud, and abuse of taxpayer dollars.  I have championed oversight efforts and have spent my time in the Senate asking the tough questions of government bureaucrats in order to expose problems.  One thing that I've learned from oversight is that no matter how engaged the Congress may be, there are just not enough hands to find all the waste, fraud, or abuse in government programs.  Instead, we must rely on courageous individuals who speak out and blow the whistle when a government program is not working and taxpayer dollars are being lost. By sticking their necks out, these individuals often risk everything to fix problems with our government, and for doing so they are as welcome as a skunk at a picnic.  However, pointing out fraud is one thing, getting results, fixing the problem, and recouping taxpayer money lost to fraud, waste, and abuse is another.  The key to recouping these lost funds is ensuring we have effective laws on the books.  One such law is the federal False Claims Act.  The False Claims Act, which is also known as " Lincoln 's Law," was originally passed by Congress to combat war profiteering by government contractors during the Civil War.  The FCA allowed individual citizen whistleblowers to go to court to collect government money that was lost to unscrupulous contractors who were selling false or fraudulent goods to Union troops.  This legal mechanism, known as qui tam, is the key component to the False Claims Act, allowing individual citizens to act as private Attorneys Generals to help unearth fraud and recover lost money.  However, following World War II, the FCA was weakened by an act of Congress which lowered the penalties limiting the money the government could recover from fraud.  This remained the state of the FCA until 1986, when I authored amendments to the Act which restored the teeth and breathed new life into a law that was designed to protect all American taxpayers.  I'm happy to report that in the 20 years since I introduced and Congress passed the 1986 amendments, the Federal government has used the FCA to recover over $20 billion from those who defraud the government.  That's $20 billion that would otherwise be lost and gone forever.  More importantly, this $20 billion serves as a deterrent reminder to those who wish to steal from the government.  Today, the FCA again faces a situation where it may not be as effective as intended.  Recent decisions by federal courts have limited the FCA in a way that was not envisioned when I authored the 1986 amendments. These decisions threaten to undermine both the spirit and intent of the 1986 amendments to the FCA.  The first case ex rel. Totten v. Bombardier Corp, held that false claims presented to government grantees, in this case employees at Amtrak, were not actually presented to the federal government.  As a result, the government was precluded from recovering money lost to fraud and abuse perpetrated against Amtrak.  The second case, Rockwell International Corp. et al. v. United States, was decided earlier this year by the U.S. Supreme Court.  In this case, the court interpreted an area of the False Claims Act, known as the "public disclosure bar," which prohibits a FCA case from moving forward if the case was based upon publicly disclosed information, such as a government report, unless the whistleblower filing the case was the "original source" of the information.  Here, the Supreme Court held that a qui tam whistleblower was barred from receiving a share in any money recovered unless they were the "original source" of all claims ultimately settled.  This may not sound like a troublesome decision.  However, the impact is that often times a case is brought by a whistleblower on a certain set of facts and then expanded by the Department of Justice who ultimately settles on other grounds.  As a result, this case creates a disincentive for a whistleblower to bring forth information about fraud as they may not get to share in any part of the recovery. Finally, the third case that challenges the intent of the FCA is ex rel. DRC, Inc. v. Custer Battles, LLC, decided in 2006.  In this case, a jury found that a defense contractor in had defrauded the government of $10 million.  However, the judge overturned the jury verdict finding that the money lost was not U.S. Taxpayer money, but was instead Iraqi money under the control of the U.S. Government.  As a result of this case, the U.S. Government may not recover for any fraud committed against the U.S. Government if the funds are not American funds, even if the U.S. Government has been entrusted with the management of those funds. Mr. President, these decisions are contrary to the spirit and intent of 1986 amendments.  So today, I am here, joined by Senator Durbin as the lead cosponsor along with Senators Leahy and Specter to introduce the False Claims Act Correction Act of 2007.  This bill seeks to correct these judicial interpretations damaging the FCA and is narrowly tailored to ensure that the intent of Congress in the 1986 amendments is upheld. The False Claims Act Correction Act would correct these three judicial interpretations in addition to making technical and correcting amendments.  First, the bill would address the Totten decision by removing the requirement that false claims be directly presented to the government official, instead tying the liability directly to government money and property.  Next, the bill would address the Rockwell decision by requiring the Attorney General to file a timely motion to dismiss claims that violate the public disclosure bar.  By allowing the Attorney General to present to the court information about public disclosures up front in a case, the bill would eliminate procedural uncertainties that exist now by allowing public disclosures to be addressed at any time in the case.  The False Claims Act Correction Act also clarifies that non-taxpayer funds under the trust and administration of the U.S. Government subject to fraud are actionable under the FCA.  Thus, monies directly under the control of the U.S. Government subject to fraud that are currently outside the scope of the FCA would now be covered.  This would correct the problems that have arisen following the decision in ex rel. DRC, Inc. v. Custer Battles, LLC. Additionally, the bill clarifies a split between Federal Circuit Courts of Appeal that currently exists regarding whether a government employee may file a FCA case.  More specifically, the bill provides that a government employee would be able to bring a FCA case based upon information learned in the course of their employment, only when the employee: (1) discloses the fraud to their supervisors, (2) discloses the fraud to the Inspector General of their agency, (3) discloses the fraud to the Attorney General, and then waits 12 months without the government acting.  After these conditions are met, then and only then, may a government employee act as qui tam whistleblowers.  Finally, the bill makes two technical corrections to the FCA.  The first is a technical correcting amendment that clarifies the statute of limitations.  The second is a technical amendment to the Civil Investigative Demands that the Department of Justice is already authorized to issue.  These technical corrections will streamline the procedures for filing and prosecuting FCA cases by both qui tam whistleblowers and the Department of Justice.  Mr. President, the False Claims Act Correction Act is a narrowly tailored bill that seeks to ensure that the legislative intent of the 1986 amendments is truly understood.  This is not a Democrat or Republican issue.  This is an American taxpayer issue.  And I'm proud to say that this bill has strong bipartisan support, as I am joined by Senator Durbin as the lead Democratic cosponsor along with Senators Leahy and Specter as other original cosponsors.  I'm glad we have a bipartisan coalition ready to work to fix the FCA with these narrowly tailored corrections.  But I encourage my colleagues to not bow to special interests groups who have worked to weaken the #1 tool for recovering government dollars lost to fraud.  American taxpayers deserve a law that detects, prevents, and recovers money lost to fraud.  The FCA works and has recovered $20 billion in the last 20 years.  However, the FCA can work better.  The False Claims Act Correction Act will provide necessary, narrowly tailored corrections to ensure that the FCA works to protect taxpayer dollars into the future. I urge all my colleagues to support this important legislation.  Mr. President, I yield the floor.   Floor Statement of Sen. Richard Durbin of Illinois Introduction of the False Claims Act Correction Act of 2007 Tuesday, September 11, 2007   Mr. DURBIN. I am pleased to join my colleague Senator Grassley in introducing the False Claims Act Correction Act of 2007. This bipartisan legislation takes important steps to modernize and strengthen the federal False Claims Act and will help protect the government and taxpayers from waste, fraud and abuse of government funds.    During the Civil War, President Abraham Lincoln saw the need for a law that would prevent war profiteers and other unscrupulous government contractors from defrauding the government and the nation's taxpayers.  Lincoln urged the passage of legislation that would allow the government to seek damages and penalties against perpetrators of fraud, and that would permit whistleblowers with information about false or fraudulent claims to file qui tam lawsuits on the government's behalf in exchange for a share of the recovered funds. In 1863, Congress heeded Lincoln's call and enacted the federal False Claims Act (FCA), which became known as " Lincoln 's Law."   Lincoln 's Law is still in effect today and it is still much-needed. In recent years, there have been alarming reports of waste, fraud and abuse of government funds in the war and reconstruction effort, in the recovery from Hurricane Katrina and other disasters, in military and homeland security procurement contracts, and in federal healthcare programs. We need strong laws that can expose and root out such fraudulent practices.     The last major update of the FCA took place in 1986, when Senator Grassley and Congressman Berman sponsored amendments that revitalized the FCA and its qui tam provisions in response to widespread reports of defense contractor fraud. Since 1986, the federal government and qui tam relators have worked together to recover over $20 billion in monies that would otherwise have been lost to fraud, waste or abuse in government programs. The recovery of this enormous sum is a victory for taxpayers, and a demonstration of the success of the FCA and its qui tam model.     It has now been twenty-one years since the enactment of the 1986 FCA amendments, and during that time changes in the interpretation of the Act and in the nature of government contracting have threatened to limit the FCA's effectiveness. In particular, several recent court decisions have weakened the intent and application of Senator Grassley's 1986 amendments to the FCA and have limited the FCA's ability to reach certain types of fraud and abuse involving government programs.    The False Claims Act Correction Act seeks to correct these court decisions and to ensure the FCA's utility as an effective tool against fraud. It does so in several ways.     First, the False Claims Act Correction Act clarifies the "presentment requirement" in the FCA. In 2004, the D.C. Circuit Court of Appeals held that liability under the FCA can only be found if the allegedly fraudulent claim is "presented to an officer or employee of the United States Government." This interpretation has been used by courts to dismiss a number of FCA cases where abuses of federal government funds were clearly evident but where the false claims were submitted to grantees or agents of the federal government (such a