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US: Wages Of Sin - Why Lawbreakers Still Win Government Contracts

by Christopher H. SchmittU.S. News & World Report
May 13th, 2002

In the mid-1970s, Lockheed Aircraft Corp. was center stage in a scorching bribery scandal. Millions in secret payments were slipped to public officials and political parties around the globe, to curry favor and win government contracts.
 
Stung by the blowback, the company promised stringent reforms. Two decades later, Lockheed was again in the spotlight, pleading guilty to paying off an Egyptian official to win a deal for C-130 cargo planes. Once more, the company was contrite. Standing before a federal judge in 1995, a top executive pledged Lockheed's "commitment to the highest ethical standards of conduct."
 
In the years since, however, Lockheed's troubles have only grown. The company has been named in at least 33 more cases covering overcharges on government contracts, improper technology transfer to China, falsifying results of nuclear safety tests, job discrimination, environmental pollution, and more.
 
These cases, some of which were in motion before the 1995 conviction, have produced at least $145.3 million in penalties, settlements, and restitution. And at least 13 more cases are pending.
 
Lockheed Martin, as the company is known today, says it has a vigorous ethics and compliance program. And, it turns out, says it has a vigorous ethics and compliance program. And, it turns out, that promise is good enough for the Pentagon. Last October, despite the company's record, the federal government awarded Lockheed the richest military contract in history - a deal to build the nation's next generation jet. The project, the F-35 Joint Strike Fighter, could be worth as much as $200 billion over several decades.
 
Lockheed Martin is not the only big federal contractor that continues to do business with Washington despite repeated contract difficulties and other legal and regulatory trouble. In the past dozen years, 30 of the 43 largest federal contractors have racked up more than 400 enforcement cases, resulting in at least 28 criminal convictions, 286 civil settlements, and 88 administrative settlements, mostly involving their government contracts, according to data from the Project on Government Oversight, a nonprofit Washington, D.C., group that investigates government activities, and additional research by U.S. News.
 
The companies have breached environmental, labor, and securities regulations as well, For their difficulties, the analysis shows, they have paid at least $3.4 billion in fines, penalties, and restitution.
 
Injuries
 
The cases cover a wide swath, including price fixing, bogus testing, polluting, overcharging, hiding product defects, violating export laws, and withholding financial data from the government.
 
They also represent more than accounting quibbles: Company workers have been killed and seriously injured and national security potentially put at risk. Yet, together, these firms have corralled more than 4 of every 10 federal procurement dollars. "If it was a food-stamp recipient, they'd go to jail," says Rep Peter DeFazio, an Oregon Democrat, who complains about repeat offenders. "If it was a student-loan recipient who wasn't paying, they'd have their wages garnished. It's an extraordinary double standard."
 
The government actually has a process for cutting off wayward contractors from future work, but in practice, purchasing officers focus on getting projects done, not holding firms accountable for past behavior. And other officials responsible for barring firms can't legally use punishment as a motive, says Robert Meunier, head of a committee of those officials.
 
"We're here to protect the government's business interest," he says. Even if a current contractor is prevented from doing future business, the company could continue to do billions of dollars' worth of government work under existing agreements. As best as can be determined, the government has cut off only one of the 30 big contractors with problems - General Electric Co. - and, even then, suspended the company for just a few days.
 
If federal agencies wanted to crack down on offending contractors, they couldn't.
 
The U.S. government is the biggest shopper on the planet, buying some $235 billion worth of goods and services last year - everything from military hardware to management of nuclear laboratories to food for school lunches. But the reasons of cost, bureaucracy, and plain indifference, it doesn't keep tabs on the behavior of its vendors. Contracting officers don't know, for instance, if a company has already agreed with other agencies to clean up its act, and several agencies - including the General Services Administration - can't even produce a list of whom they have suspended or barred from further contracts.
 
In effect, contractors have no official history when they line up for government work.
 
Little guys
 
The military tops the government's buying list - with contracts for $156.5 billion last year. Not surprisingly, some of the worst offenders are military contractors.
 
But while the government may be reluctant to move against its biggest suppliers, federal agencies don't have the same qualms about cracking down on small firms. Officials maintain that federal rules are written evenhandedly, but they acknowledge that larger companies can naigate them more successfully.
 
Take James Verlander, a Houston-area researcher who in early 1990s got tangled up in Operation Lightning Strike, a federal sting operation targeting NASA suppliers. Federal agents drew Verlander and several others into a scheme revolving around a bogus medical device that supposedly could improve monitoring of space-station astronauts.
 
Threatened with a heavy prison sentence, he pleaded guilty to having accepted $2,000 as part of an effort to win approval and funding for the device, says his attorney, Charles Portz. Barred from government work ever since, Verlander suffered a nervous breakdown and has since become a medical technician.
 
By contrast, two big contractors that came under scrutiny in the affair - Martin Marietta and General Electric - settled their involvement by paying $1 million to defray the government's expenses.
 
"They didn't want to make arrests of the higher-up people because it would damage the space program," says Portz, "so they busted a bunch of little people.""They're pretty willing to settle it to stay in business," says Jacques Ganaler, former undersecretary of defense for acquisition, technology, and logistics, who is now a professor of public affairs at the University of Maryland.
 
Oversight of military and other federal spending has been kneecapped in recent years - through budget cuts and under the banner of streamlining regulation - and new proposals would weaken it further. Reflecting those developments and changing priorities, federal prosecution of contract fraud has fallen sharply in recent years, as have attempts by federal agencies themselves to rein in abuse, according to government data obtained by the Transactional Records access Clearinghouse at Syracuse University.
 
Many expect enforcement efforts to suffer further still as homeland defense comes to the fore. U.S. Department of Justice officials did not respond to requests for comment.
 
Corporate crime
 
Even in extreme situations, the biggest firms don't face contracting's version of the death penalty.
 
Take behemoth General Electric. In the early 1990s, problems including bribery and mispricing became so pervasive that the Pentagon's Defense Contract Manage
 
Small fry get nailed more often because it's more likely that senior executives were involved in any wrongdoing, say those familiar with the issue. And large contractors have more financial juice to make a case go away - to hire pricey legal talent, create compliance programs, or pay settlements.
 
ment Agency took the unusual step of setting up a special investigations office just for GE. The office produced 22 criminal indictments of the company, its sub-contractors, and employees, and recovered $221.7 million.
 
Although individuals were booted from future government work, the company was not, despite recommendations from frustrated investigators. Not barring the firm "is clearly a disincentive to forcing a major contractor to institute [change]," they said at the time.
 
"Other remedial actions, including criminal prosecutions, did not seem to be effective."
 
Since then, GE has been named in new cases, involving both its military and civilian businesses. GE spokesman Gary Sheffer says that the earlier cases involved a small number of people and that the company used the experience to tghten an already strong compliance program....
 
Big Contracts, Repeat Offenders
 
In the past dozen years, 30 of the federal government's biggest contractors have accumulated more than 400 enforcement cases, resulting in at least $3.4 billion in penalties, settlements, and restitution.
 
The top 10 firms:
 
GENERAL ELECTRIC ... $982.9 million for 63 cases
 
TRW ... $389.5 million for 17 cases
 
BOEING ... $358.0 million for 36 cases
 
LOCKHEED MARTIN ... $231.9 million for 63 cases
 
UNITED TECHNOLOGIES ... $214.8 million for 18 cases
 
ARCHER DANIELS MIDLAND ... $208.2 million for 8 cases
 
UNISYS ... $182.2 million for 12 cases
 
RAYTHEON ... $128.7 million for 24 cases
 
LITTON * ... $111.5 million for 8 cases
 
CARGILL ... $102 million for 8 cases
 
* Acquired by Northrup Grumman



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