The Project On Government Oversight (POGO) Blog

New Legislation Closes Tax Loophole for Federal Contractors

A new law will bring an end to a tax loophole that allowed some federal contractors to evade federal taxes even while technically following the law.  Part of the Heroes Earnings Assistance and Relief Tax Act of 2008, signed into law on Tuesday by President Bush, requires foreign subsidiaries of federal contractors to be treated as American companies for tax purposes.  In May, POGO co-signed a letter to the leaders of the Senate Finance Committee expressing support for this legislation.

Some contractors have been creating subsidiary companies in jurisdictions with advantageous tax laws, such as the Cayman Islands, without even conducting any operations there. American workers are technically employed by these subsidiaries, allowing the contractor to avoid paying payroll taxes.  These taxes are used to fund programs such as Social Security and Medicare, so other taxpayers end up assuming the burden. The Joint Committee on Taxation estimated that closing this loophole will bring in about $850 million in tax revenues over the next 10 years.

While this law is a step in the right direction, there is still room for improvement.  A 2007 GAO report found that regulations for awarding contracts do not take into account contractors' tax debt even though federal contractors as a whole owe billions of dollars in taxes.  Current policy is fair to neither American taxpayers nor honest contractors who have lost bids to companies that are able to offer lower prices thanks to delinquent tax debts.

And while no federal contractor will be able to evade taxes through suspicious foreign subsidiaries, private corporations still can and do engage in similar practices; the Senate Finance Committee estimates that thousands of companies have registered in the Cayman Islands to avoid taxes.  In one particularly suspicious case, 12,748 companies are registered in one five-story building in the Caymans.

-- John Cappel

Hostile Work Environment & E-Discovery: OSC Gives On-the-job Lessons

A retreat next week for the staff of the Office of Special Counsel at the Hotel Monaco in Alexandria, VA looks like it's going to be a doozy. Most curiously, according to the agenda, it seems Special Counsel Scott Bloch thinks his staff needs training on a "hostile work environment" (11:00-12:00) and the practice of e-discovery (13:05-14:30).

A little background first. Bloch's office was raided by two dozen FBI agents last month. Their raid was precipitated by allegations that Bloch destroyed evidence sought by investigators when he hired Geeks on Call to conduct a seven-level wipe of his laptop computer. The evidence was being sought by the Office of Personnel Management, which has had an open investigation since 2005 into the hostile work environment Bloch created with retaliation, illegal gag orders, and flouting of personnel rules, among many other things.

According to one web definition, e-discovery is:

"Electronic discovery (also called e-discovery or ediscovery) refers to any process in which electronic data is sought, located, secured, and searched with the intent of using it as evidence in a civil or criminal legal case."

It's a little ironic that the Justice Department, which just raided Bloch's office, home and person, is now training the OSC staff in e-discovery. It's a bizarre choice for the staff during a particularly dark time for them. Some 17 employees have been subpoenaed to testify before the Grand Jury considering evidence about Bloch's e-discovery obstruction. Yet Bloch still manages them every day. Few members of Congress, with the notable exception of House Oversight and Reform ranking member Tom Davis (R-VA), have stepped forward to make the reasonable assertion that Bloch be removed from his position. Having watched this for three years now, it seems the list of bizarre and potentially illegal behavior never ends. The most recent installment we learned of this week, when Bloch ordered employees to post propaganda about his performance anonymously on websites.

For more on the OSC debacle, visit POGO's OSC compendium page, which has copies of complaints and more.

Tip of the hat to our friends at TPM Muckraker, who blogged on this earlier and made excellent and very true points about the unhappiness of the OSC employees.

-- Beth Daley

Tanker Contract: The Ball's in the Air Force's Court

What's the Air Force's move?  Yesterday, the Government Accountability Office (GAO) just upheld Boeing's protest of the Air Force's refueling tanker contract award to a partnership between Los Angeles-based Northrop Grummand and the European Aeronautic Defence and Space Company (EADS; includes Boeing's number one commercial rival, Airbus).

First, the Air Force was recently decapitated: Secretary Michael Wynne and Chief of Staff Buzz Moseley were canned several weeks ago by Defense Secretary Bob Gates.  An experienced team with particular sensitivities to the tanker issue is on route to replace them, but they're jumping into a political firestorm.

Second, the GAO's recommendations are not binding.  The Air Force does not have to do anything.  But it will.  Why?  Because Boeing's congressional allies will cruxify the already heavily-bashed military service if it thumbs its nose at the GAO's findings which conclude that the acquisition process was riddled with errors that misled Boeing.  Also, the House Armed Services Committee has included a provision in its version of the defense authorization bill that would mandate consideration of the industrial base when choosing the winner of competitions -- clearly this was written with the Air Force's tanker decision in mind.  Whether or not this makes it into the final version of the bill sent to the President is uncertain.  Without a doubt it is an attempt to exercise pressure on Defense Department leaders to go with Boeing.  Boeing public relations and lobbyists are on overdrive and will utilize the GAO's ruling to the max.  The Air Force can't wiggle out of this without some sort of response.

So what will the Air Force do?  My bet is that the Air Force will try - and may not succeed - in narrowing the scope of a "recompetition" as much as possible.  That would involve trying to simply "clarify" the parts of the evaluation of which the GAO found problems.  The Air Force may even try to keep the bidders from modifying their bid proposals; more likely they'll try to minimize the modification allowed to just the parts of the offerers' bids responsive to the changed draft RFP.  If this happens, we'll know for sure by the time the Air Force issues what is called a draft amendment to its request for proposals (RFP).  It's likely in Northrop-EADS' best interest to go along with this narrow scope approach if it happens.  But Northrop-EADS doesn't want to be seen as too cozy with the Air Force either.

My belief is that Boeing will want to roll the competition back as much as possible.  Now they have a better idea of what Northrop-EADS has offered and what the Air Force wants and they want to win.  So that means they will probably want to significantly alter their bid -- maybe even what plane they want to offer.  There's no guarantee Boeing will stick with the 767 platform -- they could go with a 777 or 747 even.

Narrow or wide--those are the Air Force's options.  The Air Force wants these planes sooner not later, so rolling the competition back to an earlier stage means a longer process.  But if it chooses the narrow road of modifications to the RFP, then it risks further protests, a prolonged fight with Congress or who knows -- all of those unknowns can delay the program as well. 

-- Nick Schwellenbach

GAO Upholds Boeing Tanker Protest

UPDATE: Here's the GAO press release on the decision (pdf).

“Our review of the record led us to conclude that the Air Force had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman. We therefore sustained Boeing’s protest,” said Michael R. Golden, the GAO’s managing associate general counsel for procurement law. “We also denied a number of Boeing’s challenges to the award to Northrop Grumman, because we found that the record did not provide us with a basis to conclude that the agency had violated the legal requirements with respect to those challenges.”
...

The GAO decision should not be read to reflect a view as to the merits of the firms’ respective aircraft.

The specific reasons GAO cites for upholding Boeing's protest are here.

Before we got a hold of the GAO release, I wrote: "In a June 18, 2008, decision, the Government Accountability Office’s comptroller general sustains Boeing's protest of an Air Force airborne refueling tanker contract awarded to Northrop Grumman," InsideDefense.com has just reported.

POGO stated earlier this year that "A bid protest has been filed with the Government Accountability Office, and POGO looks forward to the results."  Now we look forward to seeing on what basis the GAO sustained Boeing's protest.  A redacted version of part that protest submission is here (pdf).

As Stephen Trimble of Flight International previously pointed out, Boeing's protest claimed, among other things, that "the US Air Force's actions show that it altogether failed to comprehend the inherent manufacturing genius of the 767 bid." 

Regardless of the merit of that claim, I doubt that's why the reason GAO sustained the protest.  Typically the GAO sustains bid protests on fairly narrow, legalistic grounds.  More specifically, there must have been an inconsistency in how the Air Force claimed it was going to evaluate the bids and how it actually did so -- this  is one of the points Boeing has been making publically in its ad campaign.

Again, here are the specific reasons GAO upheld the protest:

Court Orders IRS to Comply with 30-Year-Old FOIA Request

In 1976, Judge Walter McGovern ordered the Internal Revenue Service (IRS) to turn over data on the agency's audits, collections, and other enforcement activities.  Now, more than thirty years later, his ruling might finally become a reality.

The motion against the IRS was originally filed under the Freedom of Information Act (FOIA) by a statistician named Susan Long, who is now a professor at Syracuse University's Martin J. Whitman School of Management and a co-director--along with POGO board member David Burnham--of the Transactional Records Access Clearinghouse (TRAC).  TRAC compiles data obtained in part through FOIA requests to provide the public with "comprehensive information about staffing, spending, and enforcement activities" of the IRS and other federal agencies.

For many years, the IRS more or less complied with Judge McGovern's order.  However, under the current administration, the IRS has defied the court order by withholding huge amounts of information.  In 2006, Long was forced to file another motion.  This time, U.S. District Judge Marsha Pechman ordered the agency to turn over the requested information within fourteen days, and awarded Long more than $45,000 in attorney fees.

But the IRS has still not complied with the court orders.  On Friday, Judge Pechman ruled once again that the IRS must provide Long with all the data she originally requested more than three decades ago.  The court order also instructed the IRS to release its data to Long on a monthly basis.

It is simply astonishing that the IRS has been able to defy the court order for such a long period of time, withholding information of great interest to the general public.  "The IRS is, in some ways, the largest and most powerful enforcement agency in the federal government," Burnham told the Syracuse Post-Standard.  "This refusal to let the public see what's going on is outrageous."

-- Michael Smallberg

Bypassing the DCAA - Serco and KBR's Iraq Contracts

Congressional investigators would be well-advised to turn their sights on this part of Army whistleblower Charles M. Smith's story on how the Army refused to hold KBR accountable and then did an endrun on the Defense Contract Audit Agency (DCAA), which had found significant problems with KBR, by privatizing oversight of KBR:

Soon after Mr. Smith was replaced, the Army hired a contractor, RCI Holding Corporation, to review KBR’s costs. “They came up with estimates, using very weak data from KBR,” Mr. Smith said. “They ignored D.C.A.A.’s auditors,” he said, referring to the Defense Contract Audit Agency.

Lt. Col. Brian Maka, a Pentagon spokesman, disputed that. He said in a statement that the Army auditing agency “does not believe that RCI was used to circumvent” the Army audits.

Paul Heagen, a spokesman for RCI’s parent company, the Serco Group, said his firm had insisted on working with the Army auditors. While KBR did not provide all of the data Mr. Smith had been seeking, Mr. Heagen said his company had used “best practices” and sound methodology to determine KBR’s costs.

Bob Bauman, a former Pentagon fraud investigator and contracting expert, said that was unusual. “I have never seen a contractor given that position, of estimating costs and scrubbing D.C.A.A.’s numbers,” he said. “I believe they are treading on dangerous ground.”

The Army also convened boards that awarded KBR high performance bonuses, according to Mr. Smith.

High grades on its work in Iraq also allowed KBR to win more work from the Pentagon, and this spring, KBR was awarded a share in the new 10-year contract. The Army also announced that Serco, RCI’s parent, will help oversee the Army’s new contract with KBR.

-- Nick Schwellenbach

Double Slam on KBR Today

On two separate issues, the New York Times and the Pentagon's top watchdog (pdf) slam KBR for overcharging and poor accounting. 

The Times recounts the story of an Army official who was canned after he refused partial payments for $1 billion in questionable costs submitted by the Vice President Cheney-connected company.  KBR is the largest contractor in Iraq and is responsible for Army logistics and oil infrastructure reconstruction.  The Army would not allow payments to be cut to KBR, which the Army feared would lead to a reduction in services to troops -- essentially a work stoppage and a major reason why privatizing a vast extent of critical logistics support in a war zone is a dangerous and foolhardy idea.  The Times reports:

The official, Charles M. Smith, was the senior civilian overseeing the multibillion-dollar contract with KBR during the first two years of the war. Speaking out for the first time, Mr. Smith said that he was forced from his job in 2004 after informing KBR officials that the Army would impose escalating financial penalties if they failed to improve their chaotic Iraqi operations.

Army auditors had determined that KBR lacked credible data or records for more than $1 billion in spending, so Mr. Smith refused to sign off on the payments to the company. “They had a gigantic amount of costs they couldn’t justify,” he said in an interview. “Ultimately, the money that was going to KBR was money being taken away from the troops, and I wasn’t going to do that.”

But he was suddenly replaced, he said, and his successors — after taking the unusual step of hiring an outside contractor to consider KBR’s claims — approved most of the payments he had tried to block.

Army officials denied that Mr. Smith had been removed because of the dispute, but confirmed that they had reversed his decision, arguing that blocking the payments to KBR would have eroded basic services to troops. They said that KBR had warned that if it was not paid, it would reduce payments to subcontractors, which in turn would cut back on services.

Under the helm of Chairman Henry Waxman, the House Oversight and Government Reform Committee has been on the heels of KBR and Halliburton for years.   For example, Waxman made it public that the Defense Contract Audit Agency (DCAA) - to no avail - recommended (pdf; see page 19) that Army withhold partial payment to KBR until the logistics company straighted out its various internal controls for tracking costs.

Also, released this morning, the Defense Department Inspector General found (pdf) that KBR also overcharged in a report on Navy contracts on support services in the aftermath of Hurricane Katrina.  According to Bloomberg News, which was the first to report on the IG audit:

KBR overcharged the U.S. Navy for providing meals to workers and service personnel in the aftermath of Hurricane Katrina, according to a Pentagon audit.

The Pentagon Inspector General said he could find no documentation in Navy contracting files to back up KBR claims it paid fair and reasonable prices to subcontractors that served meals in New Orleans.

"The prices KBR agreed to pay were greatly inflated," the 86-page audit said.

"The Navy paid approximately $4.1 million for meals and services we calculate should have cost $1.7 million, more than a $2.3 million difference," said the audit, signed by Assistant Inspector General for Acquisition Management Richard Jolliffe.

KBR paid for 227,500 meals over a 34-day period, yet the subcontractors served only 113,654, fewer than half, and the remaining meals were discarded, the audit said. It recommended the Navy demand a refund from KBR of at least $1.4 million.

The overcharges were one element of mismanagement by Houston-based KBR, of three Navy contracts valued at $229 million for cleanup and restoration of Navy facilities damaged after Hurricane Ivan in 2004 and Katrina in 2005, the audit said.

Altogether, the audit requested that the Navy seek refunds of at least $8.5 million for "inappropriate" payments to KBR.

-- Nick Schwellenbach

KBR Whistleblower Comes Forward

Today we learn about yet another story of a government employee who was retaliated against for doing his job honestly. Charles Smith, a senior civilian official at the Pentagon, was removed from his position and reassigned after he attempted to hold defense contractor KBR accountable for failing to substantiate $1 billion in spending. His astonishing story told in today's New York Times follows the experience of so many other whistleblowers who have been retaliated against in recent years, including:

• Kim Farrington, Mike Cole, Peter Nesbit, and other Federal Aviation Administration whistleblowers, who have come forward with disturbing tales of retaliation since testimony by Bobby Boutris and Douglas Peters before Congress about lax safety oversight led to hundreds of airplane groundings.

• Department of Interior auditor Bobby Maxwell, who lost his job in a one person "reorganization" after he blew the whistle on federal drilling fees that Kerr-McGee oil company had shortchanged the government. A jury later ruled that Kerr-McGee owed the government $7.5 million.

• Edgar Domenech, Bureau of Alcohol, Tobacco and Firearms Deputy Director, who was demoted after raising concerns about the director of his agency to higher-ups at the Justice Department. That director resigned "while under investigation for alleged financial mismanagement," and Domenech's allegations were substantiated.

• Jack Spadaro, the former head of the National Mine Health and Safety Academy, who lost his job after he blew the whistle on a government cover-up of a 300 million gallon coal mining slurry spill in Kentucky and West Virginia.

• [redacted], a Coast Guard whistleblower who has been on administrative leave since October 1, 2007, after he disclosed a document to the public revealing the Coast Guard's complicity in allowing Lockheed Martin to bilk the taxpayers on the $24 billion Deepwater contract. The Coast Guard later gave POGO a full version of the document in question in response to a FOIA request. Yet, it appears [redacted] is being subjected to a retaliatory investigation for disclosing the document.

• Federal Air Marshal Frank Terreri, who raised concerns about the ability of the Marshals to protect the public from terrorist hijacks and has, as a result, been the target of numerous retaliatory investigations.  Among the concerns he raised, the Department of Homeland Security changed its dress policy so that the Marshals would no longer be easily identified.

• Federal Air Marshal Robert MacLean, who blew the whistle on plans to reduce coverage of "high-risk" flights and was fired as a result. MacLean's exposures led to an immediate reversal of the faulty plan.

• Mike German, a successful undercover FBI agent who reported serious misconduct in a terrorism case, and ultimately chose to resign from the FBI rather than face continuing retaliation.

• Bunnatine Greenhouse, a senior Army Corps of Engineers contracting official who was demoted for questioning the award of a no-bid $7 billion contract to defense contractor KBR.

• Richard Levernier, a DOE security whistleblower who documented lax security at the nation's nuclear labs, only to be rewarded with having his security clearance taken away, substantively ending his career. DOE overhauled its security, implementing some of the reforms Levernier pointed out. Levernier later said: "Given my experience, I would not do it again, even though I truly believe it was the right thing to do."

Meanwhile, legislation to improve the laws that protect these whistleblowers is stalled on Capitol Hill.  Enough is enough: let your member of Congress know that it's time to pass the whistleblower protection legislation by sending a letter here.

-- Beth Daley

More Suspicious OSC Comments?

This morning we wrote about a CongressDaily story which revealed that Special Counsel Scott Bloch has repeatedly ordered his staff to post favorable comments about him on blogs and online news stories.  As Rep. Tom Davis (R-VA) and others point out, the story raises serious questions about an agency official spending taxpayer dollars on a secretive effort to counteract negative publicity.      

Since the story ran, we've tracked down a few more suspicious comments.  In response to a Washington Post article that was re-posted on the website of a newspaper from Lawrence, Kansas--where Bloch went to college and practiced law--about a hearing where it was revealed that Bloch had used his personal email during work hours to discuss agency business, an anonymous commenter named "M79-GI" wrote the following:

I have a friend that Bloch's OSC helped through USERRA, a law that protects jobs for folks in the army. I'm not seeing anything about this reported about this hearing, which supposedly was all about the agency. This is a VERY important issue for troops coming back from Iraq and elsewhere. Where is the coverage of this important issue? My friend was stuck trying to get help from the Labor Department for a year and they sucked. OSC did a great job - I don't know if it was Bloch personally, but it needs coverage. I don't really care what emails this guy sent, but I do know that people better start talking about USERRA. - a combat vet

Just a few weeks later, an anonymous commenter going by the exact same username posted the following response to a blog commenter who suggested that Bloch should be sent to jail:

Hey Dr. Fudd, Why don't you leave the politics to the pros? It is evident by your discourse (or lack thereof) that you are not prepared to discuss this issue. Please try to refrain from leaving moronic comments.

Coincidence? 

-- Michael Smallberg

Waxman: "Potentially Thousands of Criminal Cases Involving Fraudulent Contracts in Iraq"

A letter (pdf) from House Oversight and Government Reform Committee chairman Henry Waxman (D-Cali.) states that there may be "potentially thousands of criminal cases involving fraudulent contracts in Iraq."  Chairman Waxman's letter to Pentagon Inspector General Claude Kicklighter is based on an audit by the DoD IG that found that 4% of 702 transactions examined in a sample worth $1.5 billion "appeared to involve criminal misuse of taxpayer funds."  Waxman's staff extrapolated this to the entire pool of 180,000 transactions.  Thus, "there may be more than 7,000 potential criminal cases involving more than $190 million in federal spending that have not been identified." He added, "This is an astounding amount of potential criminal fraud."

Waxman requests that the DoD IG spend further resources and dig in to find and prosecute the full extent of the actual fraud.  However, unless the DoD IG, Army Criminal Investigation Command and others are fully staffed and empowered to pursue procurement fraud, Waxman's request may be impossible to fully achieve.

-- Nick Schwellenbach

Bloch Watch

As a result of the negative publicity he has encountered during his term, Special Counsel Scott Bloch has ordered his subordinates to run defense for him.

As reported on Friday in CongressDaily, Bloch has repeatedly instructed OSC employees to post favorable comments about their dear boss on blogs and online news stories that portray him in a negative light.  According to the article, two former employees describe Bloch as "thin-skinned and 'obsessed' with his press coverage."

Bloch's latest misstep elicited a strong response from Rep. Tom Davis (R-VA):

"A public official should be accountable to the public." Davis said in a statement. "To secretly use the resources and personnel of his office--on government time--to comment on negative press reports is improper and deprives the public of accountability."

"If true, this could constitute an unlawful use of appropriated funds to publish covert propaganda," Davis said. "This is further evidence that Scott Bloch is unfit for his office and should resign, be fired or at least be placed on administrative leave."

-- Abby Evans

Ebullient Soul, Stewart Mott, Dies at Age 70

POGO deeply regrets the recent passing of one of our founding supporters, Stewart Mott.  Stewart died last night after a hard battle with cancer.

Stewart was more than just a funder; he was also a friend.  A very colorful, vibrant friend who forever changed the Washington landscape. As has been said many a time in an attempt to describe this ebullient soul, "In the grey-flannel world of philanthropy, Stewart Mott is a red sombrero." While he had a quick business mind that could catch even the smallest errors in a spreadsheet, he was also likely to giggle gleefully at a successful effort to expose government malfeasance.

Stewart's effectiveness as a political philanthropist earned him a spot on Richard Nixon's original “enemies list” in 1971.  A few years later, he provided the original financial backing for a lawsuit that forced former Vice President Spiro Agnew to repay the bribes and kickbacks he allegedly received when he was governor of Maryland.  Around the same time, Stewart joined several prominent conservatives in a fight against a campaign finance law that placed federal limits on campaign contributions and spending.  He eventually served as a plaintiff in Buckley v. Valeo, a widely influential case before the Supreme Court, arguing that the campaign finance law was in violation of the First Amendment.

Stewart's family's motto is Spectemur Agendo, "Let Us Be Known by Our Deeds," and he has without question fulfilled that motto. But to define Stewart only through his deeds is inadequate. There was simply no-one else like him.

Our hearts and prayers go out to his family and friends.

-- Danielle Brian, Keith Rutter, and the Staff at POGO

UPDATE: The Washington Post and Sam Smith, editor of the Progressive Review, each wrote touching pieces about Stewart Mott over the weekend.  The New York Times also created a wonderful video about Stewart's life, including clips from a recent interview with him.