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US: Unjust Rewards

by Ken SilversteinMother Jones
May 1st, 2002

IN 1989, AN EXPLOSION RIPPED through a Phillips Petroleum chemical plant in Pasadena, Texas, killing 23 workers and injuring more than 100. Federal officials fined the company $4 million, citing "clear evidence that the explosion was avoidable had recognized safety practices been followed." In 1999 and 2000, two more explosions at the plant left another 3 workers dead and 73 injured. Phillips was hit with an additional $2.3 million in fines for ignoring safety hazards.

In 1994, a worker was killed in an explosion at an Arizona factory run by TRW, the nation's leading maker of air bags. The company, which had a record of violating workplace laws at the plant, settled criminal charges in the case for $1.7 million. Officials later discovered that TRW, in a move "clearly approved by management," was illegally dumping chemical waste from the plant at landfills in three states. Last year, the company paid a record $24 million in civil and criminal penalties.

In 1999, a jury found Koch Industries guilty of negligence in the deaths of two teenagers killed in a fire caused by a corroded pipeline. The following year, the Kansas-based energy giant paid $30 million--the largest civil penalty in the history of the Clean Water Act--for illegally discharging 3 million gallons of crude oil in six states. Last year, Koch paid $25 million to settle charges that it lied about how much oil it was pumping out of federal lands, cheating the government in nearly 25,000 separate transactions.

Phillips, TRW, and Koch have more in common than a history of repeatedly violating workplace and environmental laws. They also rank among the nation's largest government contractors. Between 1995 and 2000, the three corporations received a combined total of $10.4 billion in federal business-at the same time that regulatory agencies and federal courts were citing the companies for jeopardizing the safety of their employees, polluting the nation's air and water, and even defrauding the government.

That's not supposed to happen. Federal contracting officers are charged with reviewing the record of companies that do business with the government and barring those that fail to demonstrate "a satisfactory record of integrity and business ethics." But officials are given no guidelines to follow in making such decisions, and there's no centralized system they can consult to inform them of corporate wrongdoing. As a result, a government report concluded in 2000, those responsible for awarding federal contracts are "extremely reluctant" to take action, even when they are aware of violations. And in the rare instances when the rule is enforced, it is almost always employed against small companies with little clout in Washington.

Shortly before leaving office, President Clinton issued a new order to provide clear guidelines for deciding which firms share in the roughly $200 billion in federal contracts awarded each year. The new "contractor responsibility rule"--championed by Vice President Al Gore and developed after two years of congressional testimony and public hearings--specified that federal officials should weigh "evidence of repeated, pervasive, or significant violations of the law." Officials were told to consider whether a company has cheated on prior contracts or violated laws involving the environment, workplace safety, labor rights, consumer protection, or antitrust activities.

The measure was never implemented. In one of his first acts as president, George W. Bush put the rule on hold after only 11 days in office, saying the issue needed further study. With big business suing to block the new guidelines, Bush revoked the rule 11 months later.

Some 80,000 contractors do at least $25,000 in business with the federal government each year, and the great majority comply with the law. But a six-month investigation by Mother Jones of the nation's 200 largest contractors found that the government continues to award lucrative contracts to dozens of companies that it has repeatedly cited for serious violations of workplace and environmental laws. The government's own database of contractors was matched with lists of the worst violations documented by the Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA) between 1995 and 2000. Among the findings:

* Forty-six of the biggest contractors were prosecuted by the Justice Department and ordered to pay cleanup costs after they refused to take responsibility for dumping hazardous waste and other environmental violations. General Electric--which received nearly $9.8 billion from the government, making it the nation's 10th-largest contractor--topped the list with 27 cases of pollution for which it was held solely or jointly liable.

* Fifty-five of the top contractors were cited for a total of 1,375 violations of workplace safety law that posed a risk of death or serious physical harm to workers. Ford Motor, which ranks 177th among contractors with $442 million in federal business, led the OSHA list with 292 violations deemed "serious" by federal officials. In 1999, six workers were killed and dozens injured when a boiler exploded at Ford's River Rouge Complex in Dearborn, Michigan. The company was hit with a $1.5 million fine after an internal memo revealed that Ford had decided not to replace safety equipment on the aging boilers because it would then have to fully upgrade them to meet "all present safety standards."

* Thirty-four leading contractors were penalized for violating both environmental and workplace safety rules. The firms were hit with a total of $12.6 million in EPA penalties and $5.9 million in OSHA fines--costs more than covered by the $229 billion in federal contracts they were awarded during the same period.

"It is clear that, in many cases, the government continues to do business with contractors who violate laws, sometimes repeatedly," concludes a 2000 report by the Federal Acquisition Regulatory Council, the agency that oversees federal contractors. Others put it more bluntly. "Government should not do business with crooks," says Rep. George Miller (D-Calif.), who has demanded that the White House make public any closed-door meetings it had with corporate lobbyists to discuss killing the contractor responsibility rule. Bush's decision, Miller says, "sends a message to contractors that the government doesn't care if you underpay your workers, or expose them to toxic hazards, or destroy the public lands--the government will do business with you anyway."

DURING BILL CLINTON'S second term in office, a coalition of labor, civil rights, and consumer groups lobbied the government to crack down on contractor misconduct. Backed by Miller and other congressional allies, they pointed to numerous studies documenting the extent of the problem. A 1995 report by the Government Accounting Office revealed that 80 major federal contractors had violated the National Labor Relations Act by seeking to suppress unions. Another GAO report found that in 1994 alone, OSHA imposed fines of $15,000 or more on each of 261 companies that had received a combined $38 billion in federal contracts. Noting that some contractors place workers "at substantial risk of injury or illness," the report added that the "prospect of debarment or suspension can provide impetus for a contractor to undertake remedial measures to improve working conditions."

In July 1999, Clinton declared his support for the reform coalition and announced plans to revise the rule. What emerged over the next two years was a set of specific guidelines for federal contracting officers to follow in determining a company's eligibility. The new rule created a hierarchy of violations to be considered, topped by convictions for contract fraud. It stipulated that only repeated and serious wrongdoing, not administrative complaints, should be weighed. And it acknowledged a need for flexibility, noting that companies with serious violations might continue to receive contracts if they "correct the conditions that led to the misconduct."

"We view this fundamentally as empowering the government to do what every business in the world does, which is not to be forced to do business with people it doesn't trust," said Joshua Gotbaum, who helped draft the rule as controller of the Office of Management and Budget.

Clinton's move generated a fast and furious reaction from business and industry. The Business Roundtable, the U.S. Chamber of Commerce, and the National Association of Manufacturers launched a fierce lobbying campaign against the new rule. Despite a provision stating that only a pattern of "pervasive" and "significant" abuses would be considered, business opponents argued that the guidelines gave contracting officers excessive discretion to arbitrarily torpedo a contractor. "The proposed rules would allow contract officers to blacklist firms without regard to the number, nature, or severity of violations," said the National Center for Policy Analysis, a business-backed think tank. "Suspicions raised by rivals or disgruntled employees could cost firms millions, if not billions, of dollars."

To fight the measure, the business coalition hired Linda Fuselier of the Capitol Group, a high-powered lobbyist who had previously helped insurance firms avoid cleanup costs at Superfund waste sites. Opponents flooded officials with hundreds of comments opposing the guidelines. And when Clinton formally issued the new rule in December 2000, they went to federal court seeking to get the provision thrown out.

The court never had to decide the issue. A month later, when Bush took office, he immediately moved to postpone the rule. On January 31, 2001, federal agencies were quietly ordered to delay implementing it for six months--without issuing a public notice or soliciting comment. The Congressional Research Service issued an opinion concluding that the secret suspension of the rule was probably illegal, but the move went virtually unreported in the media. When Bush finally revoked the rule while vacationing at his Texas ranch last December, corporate executives and their allies in Congress hailed the decision. "There was never any rational basis or need for additional standards, since existing regulations already ensure the government does not do business with unethical companies," declared Rep. Thomas Davis III, a Republican from Virginia.

In reality, the government makes little effort to review contractors' records--and even the most diligent contracting officer would find it almost impossible to do so. The government does not maintain a central database to store information on contractors' records of compliance with the law. The EPA and OSHA maintain their own lists of corporate violations, but parent companies are not linked to their subsidiaries, which can number in the hundreds. OSHA makes some of its records available online, but the EPA and many other agencies do not. "There's no process built into the review system," says Gary Bass, executive director of OMB Watch, a Washington-based advocate of government accountability. "Just finding the right information is complicated and time-consuming."

As a result, even contractors that commit the most obvious violations are never suspended or debarred. One GAO study found that the government continues to award business to defense contractors that have committed fraud on prior contracts. General Dynamics, the nation's fifth-largest contractor, paid the government nearly $2 million in 1995 to resolve charges that it falsified employee time cards to bill the Pentagon for thousands of hours that were never worked on a contract for testing F-16 fighters. Northrop Grumman, the nation's fourth-largest contractor, paid nearly $6.7 million in 2000 to settle two separate cases in which it was charged with inflating the costs of parts and materials for warplanes. Yet the two defense giants continue to receive federal contracts, collecting a combined total of $38 billion between 1995 and 2000.

Opponents argue that the government already has the power to force contractors to clean up their act, without cutting them off from federal business. In addition, some contractors can be difficult to replace. The Pentagon, for example, maintains that it cannot afford to ban large defense contractors who provide specialized services and products, and the government is reluctant to take away contracts from nursing homes that commit Medicare fraud, fearing that patients will be hurt. "Debarment and suspension isn't practical," says Steven Schooner, a lawyer in the Office of Federal Procurement Policy under Clinton. "If the government needs the goods they produce, it's the only one that loses."

But while big contractors are all but immune from scrutiny, the government has no qualms about denying business to smaller operations that violate the law. Some 24,000 contractors are currently barred from government work, and almost all are small firms or individuals like Kenneth Hansen, a Kansas dentist banned from receiving federal funds to provide care for low-income patients because he defaulted on $164,800 in student loans. "We never take down the big guys," concedes Schooner, now a government-contracts law professor at George Washington University.

THE REVIEW OF environmental and workplace violations by Mother Jones reveals that many big contractors could have been forced to forfeit federal business had Bush not interceded on their behalf. Consider the record of ExxonMobil, which became the nation's 43rd-largest contractor when the two oil giants merged in 1999. Between 1995 and 2000, the firms received a total of $2.2 billion from the government for everything from renting fuel storage space to the Pentagon to selling oil to the Commerce Department. At the same time, they were openly disregarding the law. ExxonMobil has been held liable, either on its own or with other companies, in 20 cases in which it refused to clean up Superfund sites or take responsibility for air and water violations. The company is a partner in Colonial Pipeline, an Atlanta-based firm that the Justice Department sued in 2000 for multiple spills in nine states. In one incident, a pipeline rupture poured 950,000 gallons of diesel fuel into the Reedy River in South Carolina, killing 35,000 fish and other wildlife. In 1995, Mobil was hit with a $98,500 fine for its failure to inspect equipment at a refinery in Torrance, California, where 28 workers were injured in an explosion. In 1999, authorities discovered that Exxon had knowingly contaminated water supplies near a refinery in Benicia, California, with benzene and toluene, both of which cause cancer and birth defects.

One of the federal contractors with the worst record of workplace violations is Avondale Industries, which builds ships for the Navy. Between 1990 and 1996, nine workers died at Avondale's shipyard outside New Orleans, a death rate nearly three times that at other Navy shipyards. In 1999, OSHA inspectors uncovered hundreds of violations of safety and health standards, including Avondale's failure to provide safe scaffolding or training for employees who work at dangerous heights. OSHA hit the company with $717,000 in fines, among the largest ever imposed on a shipbuilder. "The stiff penalties are warranted," said then-Secretary of Labor Alexis Herman. "Workers should not have to risk their lives for their livelihood."

Yet just a month after the fines, the government awarded Avondale $22 million to work on amphibious assault ships at the New Orleans yard. The following year, three more workers were killed in accidents at the Avondale yard. One of the victims, 33-year-old Faustino Mendoza, died of head injuries when he fell 80 feet from scaffolding that lacked required safety features--the same problem that had been found during the most recent inspection. OSHA fined Avondale $49,000 for the "repeat" violation, but the penalty amounted to a tiny fraction of the $1.3 billion the firm received in federal business between 1995 and 2000. (Last year, Avondale became a subsidiary of Northrop Grumman.)

Another contractor with a pattern of workplace abuses is Tyson Foods, which received more than $163 million between 1995 and 2000, mostly for supplying poultry to government agencies. In 1999, seven workers died at plants run by Tyson or its independent operators. One of the victims was a 15-year-old boy--hired in violation of child-labor laws--who was electrocuted at a Tyson plant in Arkansas. The company has also attempted to buy influence with federal officials. In 1997, Tyson pleaded guilty to giving former Agriculture Secretary Michael Espy more than $12,000 in "gratuities" while the firm had issues before his department.

Even though the current federal rule requires contractors like Tyson, Avondale, and ExxonMobil to demonstrate "integrity and business ethics," they are in no danger of being barred from receiving federal business under the current standard. Indeed, the government continues to award major contracts to companies that have both defrauded the government and violated environmental and workplace laws.

TRW, the nation's ninth-largest contractor, supplies the government with everything from military satellites and spacecraft to auto parts and hand tools. Yet the company's subsidiaries have been cited for cheating the government on defense contracts, and last year it settled two cases in which it forced its employees to work off the clock and mishandled pension payments. In 1997, TRW was also listed in a "rogues' gallery" of OSHA violators in a study by Business and Management Practices. In just two years, the magazine found, the company racked up 67 violations and $113,202 in fines. In a single inspection in December 1999, OSHA cited TRW for 43 serious and repeat violations at an auto-parts plant in Michigan.

Some of TRW'S most egregious offenses took place at two air-bag plants that lie at the foot of the Superstition Mountains near Mesa, Arizona. Within two years after they opened in 1989, the factories had experienced dozens of fires and explosions, and were the target of at least six investigations by state regulators. "There were explosions so big that they felt like earthquakes," says Bunny Bertleson, who lives less than two miles from one of the plants. "Then clouds would come blowing out of the stacks."

The cause of the blasts was sodium azide, a highly volatile chemical that triggers the explosion that inflates air bags upon impact. Sodium azide is also highly toxic. It can damage the heart, kidneys, and nervous system if it is inhaled or comes into contact with the skin or eyes. Acute exposure can cause death.

A string of injuries suffered by workers at the Mesa plants drew the attention of state regulators. Employees frequently reported feeling queasy and dizzy, a condition they dubbed the "azide buzz," but say the company failed to address the problem. "There was constant pressure to get the production numbers up," recalls Felipe Chavez, a former employee. "That was the only priority." TRW insists that such exposure is rare, and that employee safety is "our highest priority." But in 1994, a spark detonated a small quantity of sodium azide, killing one worker and injuring six. The following year, the Mesa fire chief shut down one of the plants for two days, calling it an "imminent threat to both life and property."

The Arizona attorney general's office had already taken TRW to court and won consent orders requiring it to halt the fires, which were releasing sodium azide into the air, and to properly manage hazardous waste at the plants. In 1995, after the company failed to take safety steps it had promised to make to settle prior charges, a state superior court ordered TRW to pay $1.7 million--the largest corporate criminal consent judgment in state history.

But neither court-ordered fines nor injuries to workers prompted TRW to clean up its act. In 1997, an anonymous caller informed a state environmental agency that TRW was illegally storing wastewater laced with sodium azide at one of its Mesa plants. Following up on the tip, state investigators discovered that the company had illegally disposed of hundreds of thousands of gallons of chemical wastewater at landfills in Arizona, Utah, and California. The Arizona attorney general's office determined that the dumping was not "the work of low-level employees" but involved the "approval or acquiescence" of management.

Given the scope of the illegal dumping and TRW's history of breaking its promises, the state pressed criminal charges against the company. In a statement, TRW said that "the errors that occurred did not result in harm to the environment, local residents, or our employees." But last year, the company agreed to pay $24 million to the government for the illegal dumping--the largest such consent agreement in history.

Yet the company's pattern of lawbreaking has not harmed its ability to do business with the government. Between 1995 and 2000, when most of the illegal dumping and other abuses took place, TRW received nearly $10.3 billion in federal contracts--more than 400 times the amount it agreed to pay for its environmental crimes. After the company was caught dumping sodium azide, federal officials reviewed its violations and decided that it should remain eligible to work for the government. Last year, TRW received another $2.5 billion in federal contracts.





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