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USA: Are Corporations Too Big to Debar?

Inquiry into Boeing Raises the Question1310of Corporation Size in Federal Discipline

by Anne Marie SqueoThe Wall Street Journal
June 10th, 2003

WASHINGTON -- Federal inquiries into whether Boeing Co. illegally won a multibillion-dollar military contract are sparking debate here about whether rules to ban companies that run afoul of the law from doing government work are ineffective in policing corporate behemoths.

The Justice Department and the Air Force are investigating whether Boeing wrongly possessed or used documents from rival Lockheed Martin Corp. to win a 1998 competition to build the military's next-generation rocket. Boeing officials say they are cooperating with federal officials. In an advertisement Monday in national newspapers, Boeing Chairman Phil Condit defended its work on the rocket program but conceded the company "is not always perfect" and "there have been mistakes." Also coming under scrutiny is telecommunications company MCI, formerly known as WorldCom Inc., which has won a handful of major government contracts in recent months despite having committed one of the largest corporate frauds ever uncovered.

But penalizing either company is complicated by the fact that both are among the few major players in their respective industries, and critics fear that could result in lenient treatment. Legislators, special-interest groups and industry officials say the rules could be clarified so there is a concise set of criteria that determine whether a company should be suspended or barred from government work. Such decisions often are made by lower-level government employees on an agency-by-agency basis. Also, an independent body could be set up that not only would share information but would actually review agency determinations to ensure unanimity in the process.

The government awards contracts worth hundreds of billions of dollars annually to thousands of companies providing everything from telephone service to toilet paper. Under the Federal Acquisition Regulation, officials are required, among other things, to grant contracts only to "responsible sources" with a "satisfactory record of integrity and business ethics." If a company fails to meet this standard, it is supposed to lose out to a rival bidder or be temporarily or permanently suspended from work on existing contracts.

A federal database on the Internet that lists those companies and individuals that have been banned -- either permanently or temporarily -- from government work shows hundreds of people and small firms are cut off each year. But major corporations, which get the most money from federal contracts, rarely meet a similar fate.

IN THE HOT SEAT

An investigation by the Project on Government Oversight cites these 10 federal contractors as having committed or allegedly committed the most violations since 1990:

CONTRACTOR NUMBER OF VIOLATIONS/ALLEGED VIOLATIONS TOTAL FINES, PENALTIES, RESTITUTION, SETTLEMENTS (Millions)
General Electric        63    $982.90
TRW             16    389.5
Boeing           36    358
Lockheed Martin           63    231.9
United Technologies  18    214.8
Unisys           12    182.2
Raytheon       24    128.7
Northrop Grumman       21    87.9
Fluor            19    70
AT&T           14    16.1

Source: Project on Government Oversight

"From a government-credibility standpoint, public trust is always compromised when there are two sets of rules," says Steven Schooner, co-director of the Government Procurement Law Program at George Washington University Law School in Washington. "There is a regimen for enforcement, but it's not true because we only debar or suspend irritating little firms who aren't major players."

A May 2002 study by the Project on Government Oversight, a nonprofit watchdog group, found 43 of the government's top contractors paid about $3.4 billion in fines and settlements since 1990 for violating federal laws. But only one was banned from government work: General Electric Co., the worst offender, which had 63 alleged or actual violations and paid the government nearly $983 million. And the ban -- resulting from one infraction -- affected only GE's aircraft-engine division for five days. The Bush administration did take the unprecedented step of debarring Enron Corp. and accounting firm Arthur Andersen after they became embroiled in a fraud scandal, though the debarment didn't stem from work for the government.

A major reason for the dichotomy in debarring big and small companies has been the rash of mergers and acquisitions that swept across most industries -- including defense, health care and telecommunications -- in the 1990s. Where there used to be several options for obtaining a product or service, now there are perhaps just two, three at most. Government officials say cutting one of these companies off -- even temporarily -- hinders competition and innovation and provides the firm's rivals with increased pricing clout. Nor is the agency doing the debarring the only one affected: A company cut off from one federal agency is cut off from all the rest.

That is a big deal when an industry is highly consolidated. In Boeing's case, for example, the company is one of the Pentagon's biggest suppliers and works for a number of different agencies. It makes fighter jets for the U.S. Navy, builds spy satellites for the National Reconnaissance Office and is the lead contractor on a national missile-defense system that the Bush administration has said will initially be in place by late 2004, among other things. If the Air Force were to cut the company off from work as a result of its investigation into the rocket competition, all these government initiatives would be hindered.

"You don't want these companies screwing up," says Edward "Pete" Aldridge, who recently stepped down as the Pentagon acquisitions chief. "But we have to take into account the national-security interest."

Industry officials contend that debarring or suspending a contractor isn't necessarily fair either, given that pockets of bad behavior are inevitable in multibillion-dollar businesses that employ tens of thousands. "Every once in a while there is a bad apple out there," says Richard Bednar, senior counsel at law firm Crowell & Moring in Washington and the chairman of the Defense Industry Initiative on Business Ethics and Conduct. "No large company is blemish-free, but we deal with it by owning up to the problem, addressing it and taking appropriate disciplinary action."

The Clinton administration attempted to clarify the business-ethics standard in its waning days by adding specific criteria for agencies to follow in deciding whether to take action against companies or individuals. But business leaders complained and the Bush administration scrapped the revised rule. The issue has resurfaced in recent months because of the Boeing and MCI situations.

The investigation of Boeing , based in Chicago, remains unresolved. In the case of MCI, the company last month agreed to pay a $1.5 billion fine to settle charges of widespread fraud -- none of it related to federal work. Nevertheless, MCI has won numerous federal contracts, including an extension to an existing $750 million contract with the General Services Administration for long-distance services and a 10-year, $360 million contract for communications services for the State Department.

"There is a fundamental question about whether or not the federal government should be doing business with a large corporation that has been found to commit a serious wrong," says Sen. Susan Collins, a Maine Republican who heads the Senate Committee on Governmental Affairs. Her panel expects to hold hearings on the matter in the next few months. "The current system is flawed," she says, noting that scrutinizing the MCI situation may lead to ways to fix the process.

An MCI spokesman said, "Our performance over the past year, and the steps we've taken to address the misdeeds of former executives, proves the government's faith in us was not misplaced."

While there is an Interagency Committee on Debarment and Suspension that reports to the Office of Management and Budget, this group tends to meet once a month to share information and discuss rule changes, not to review decisions by individual agencies. Also, while it may be unlikely that a major contractor will be banned from all government work at this point, rivals competing for a particular contract could be given extra points, so to speak, for having a cleaner legal record, government and industry officials contend.





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