Sat Feb 16 2013 1229 AM Response to Matthew Crosby ( GAO Sr Attorney )

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Keven Barnes

From: Keven Barnes [[email protected]]Sent: Saturday, February 16, 2013 12:29 AMTo: '[email protected]'; '[email protected]'Subject: FW: B-407972; Protest of Latvian Connection LLC; Motion to Dismiss (UNCLASSIFIED)

)))))))))))))))) RESPONSE AND OBJECTION TO CANCELLATION TO AVOID RESOLUTION OF PROTEST (((((((((((((((

Attachments: Bid Protest GAO W912D1-13-R-0003 28 JAN 2013 (CORRECTED COPY ).pdf; GAOHQ-#6109636-v1-B-407972_1__LATVIAN_CONNECTION__LLC__ACK_CONF_PACKAGE_WITHOUT_PROTECTIVE_ORDER.pdf; Request to Dismiss Protest - Cancellation of Solicitation - B-407972.pdf.pdf; KO Memo - B-407972.pdf.pdf; FRAUD TRIANGLE.pdf; hearing2011-04-25_transcript.pdf

BY REGISTERED EMAIL Keven L. Barnes CEO MSgt (USAF) Ret.

United States 530 999 3322 Mobile ( Kuwait ) 00 965 501 22 072 [email protected] www.LatvianConnectionLLC.com CAGE: SGM59 DUNS: 534749622 CALIFORNIA DUNS 830587791 CAGE 5GLB3

From: Keven Barnes [mailto:[email protected]] Sent: Saturday, February 16, 2013 12:26 AM To: '[email protected]'; '[email protected]' Cc: 'Scuteri, Michael F LTC USARMY (US)'; 'Schiavetti, Anthony F CPT USARMY HQDA OTJAG (US)'; 'Wilder, Charles J II CIV (US)'; 'Davis, Patrick L MAJ USARMY 408 CONTR SPT BDE (US)'; 'Mann Eyester, Laura' Subject: RE: B-407972; Protest of Latvian Connection LLC; Motion to Dismiss (UNCLASSIFIED) )))))))))))))))) RESPONSE AND OBJECTION TO CANCELLATION TO AVOID RESOLUTION OF PROTEST ((((((((((((((( Mr. Crosby, Latvian Connection LLC asserts that the cancellation decision lacked credibility and was a "pretext" to avoid having to make award to Latvian Connection and to "avoid resolution of the protest." Cycad Corp., B‐255870, Apr. 12, 1994, 94‐1 CPD para. 253 at 5. When a procuring agency takes corrective action in response to a protest, the GAO may recommend reimbursement of protest costs if, based on the circumstances of the case, and it is clear that the agency unduly delayed taking corrective action in the face of a clearly meritorious protest. 4 C.F.R. sect. 21.8(e) (2009); AAR Aircraft Servs.‐‐Costs, B‐291670.6, May 12, 2003, 2003 CPD para. 100 at 6. A protest is clearly meritorious where a reasonable agency inquiry into the protest allegations would have shown facts disclosing the absence of

a defensible legal position. Core Tech Int'l Corp.‐‐Costs, B-400047.2, Mar. 11, 2009, 2009

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CPD para. 59 at 6. The Agency could not defend the conduct of the contracting officer or her commander on solicitation W912D1‐13‐R‐0003. Camp Arifjan Contracting Officer and it's contracting Commander, LTC Michael Scuteri, cancelled the solicitation as a pretext to avoid resolution of a protest.(197) 197/ Gonzales‐McCaulley Inv. Group, Inc.,Comp. Gen. Dec. B‐299936.2, 2007 CPD ¶ 192, 49 GC ¶ 451. That cancellation was made within 28 hours of the GAO's request for a Report from the Agency. LTC Colonel Scuteri acted in bad faith against Veteran Owned Business, Latvian Connection LLC for filing a protest about a solicitation, so poorly written, administered, and posted, that the only way the solicitation was going to be corrected after unresponsiveness of his contracting officers and Legal Team, was by the filing of a GAO Level Protest to illicit some professional contracting actions that resembled what is expected under the Federal Acquisition Regulations. This solicitation is an example of the level of Procurement Professionalism originating in 2013 from the 408th Contracting under the leadership of LTC Scuteri and BG Theodore C. Harrison’s that, unlike what BG Harrison states in http://www.army.mil/ecc/, The 408th located at Camp Arifjan, Kuwait are continuing to deliver substandard solicitations and this is just another in a series of unprofessional solicitations that are more designed to mislead, that to comply with FAR Part 5. However, with the continued biased assistance of the GAO, and attorneys like Mr. Crosby, Veteran Owned businesses like Latvian Connection LLC will be prejudiced and mislead by the ongoing contracting irregularities that was identified in both the Gansler report and a report on Camp Arifjan called the Fraud Triangle, by Army MAJ Amanda

Flint in what is described as a case study into Procurement Integrity in Contingency Operations. This solicitation demonstrates that the fundamentals of conducting a simple solicitation still have not been achieved 4 years after the creation of the Army Contracting Command, even with that paid assistance of Contractor CACI working in the Camp Arifjan’s contracting office.

On Pg 4 of the Congressional Hearing in 2011, Dr. Gansler stated: “ Writing requirements and issuing contracts, clearly these are inherently governmental functions; to acquire services is more difficult and requires high-quality, experienced government contracting and program-management personnel. “ Dr. Gansler also said “Investigation and conviction rates indicate that Army CCOs are involved in the commission of fraud by a significantly higher percentage in comparison to contracting officers in the other Services, despite being the minority of contracting personnel in theater (Gansler et al., 2007). Yet, GAO Protest of W912D1-13-R-0003; a disorganized solicitation where, the wrong solicitation was posted, SF30 Forms were not utilized for amendments and a charade of a site visit was staged only to cancel the

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solicitation in bad faith, shows that the Army Contracting Command is no further forward now, than in 2007 when Dr. Gansler first made his observations public regarding the contracting office of Camp Arifjan. Mr. Crosby, and the other GAO attorneys are facilitators of the Army as an Agency in continuing to support what has been identified by the Wall Street Journal as “ an on-going criminal investigation.” by accepting that this cancellation was anything other than a pretext for "avoid resolution of the protest." Cycad Corp., B‐255870, Apr. 12, 1994, 94‐1 CPD para. 253 at 5.

Dr. Gansler further stated “On the other hand, on a positive note, in the three years since our study, the department has made noteworthy progress, for example, growing the depleted acquisition workforce, funding growth of its civilian acquisition corps through the Defense Acquisition Workforce Development Fund, and Congress added billets for 10 general flag officers in acquisition positions. And, of course, the Army established the Army Contracting Command, and now the contracting field in the Army has the benefit of four new general officers. This solicitation Mr. Crosby is an example of the Army Contracting Command’s “noteworthy progress” that Brig Gen Harrison, General Joe Bass, and 2 other Flag Officers have to show for 4 years worth of investment into the Army Contracting Command. And you will sit there at the GAO, as a Senior Attorney, and accept that this solicitation was not cancelled on pretext 28 hours after you had GAOHQ.#61096636-v1-B-407972 delivered to the Army, then you are further facilitating the lack of professionally conducted solicitations which prejudices the Veteran Owned Business, Latvian Connection LLC. Latvian Connection LLC seeks to be reimbursed for its time in writing and filing this GAO Level protest that was cancelled as a pretext to avoid resolution of the protest. Keven L. Barnes CEO MSgt (USAF) Ret. United States 530 999 3322 Mobile ( Kuwait ) 00 965 501 22 072 [email protected] www.LatvianConnectionLLC.com CAGE: SGM59 DUNS: 534749622 CALIFORNIA DUNS 830587791 CAGE 5GLB3 ‐‐‐‐‐Original Message‐‐‐‐‐ From: Schiavetti, Anthony F CPT USARMY HQDA OTJAG (US) [mailto:[email protected]] Sent: Wednesday, February 13, 2013 10:04 PM To: [email protected] Cc: [email protected]; [email protected]; Schiavetti, Anthony F CPT USARMY HQDA OTJAG (US) Subject: B‐407972; Protest of Latvian Connection LLC; Motion to Dismiss (UNCLASSIFIED) Classification: UNCLASSIFIED Caveats: NONE Dear Mr. Crosby:

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Attached please find the Army's request to dismiss the protest of Latvian Connection LLC, B‐407972, because the Army has cancelled the solicitation that is the subject of the protest. The Army believes the cancellation renders the protest academic. Attached to this email are two documents: the Army's request and a statement from the contracting officer (KO Memo). Neither this e‐mail nor the attachments contain protected material. Please let me know if you have any questions. Very Respectfully, Anthony F. Schiavetti Captain, U.S. Army Trial Attorney Trial Team III Contract & Fiscal Law Division U.S. Army Legal Services Agency 9275 Gunston Road Fort Belvoir, VA 22060‐5546 E‐mail: [email protected] Tele: (703) 693‐1223 DSN 312‐223‐1223 Fax : (703) 806‐0655 This e‐mail, and any attachments thereto, is intended only for use by the addressee(s) named herein and may contain legally privileged and/or confidential information. If you are not the intended recipient of this e‐mail, you are notified that any dissemination, distribution or copying of this e‐mail, and any attachments thereto, is strictly prohibited. If you have received this e‐mail in error, please notify me by telephone and permanently delete any printout of the message, the original and any copy of the e‐mail. Attorney‐Client Privilege, Attorney Work Product, Do Not Copy, Do Not Forward, Do Not Release Under FOIA. Classification: UNCLASSIFIED Caveats: NONE

United States Government Accountability Office Washington, DC 20548

January 31, 2013 Keven Barnes Latvian Connection, LLC File: B-407972

Protester: Latvian Connection, LLC

Agency: Department of the Army

Solicitation No.: W912D1-13-R-0003

Report Due: 02/27/2013 Decision Due: 05/08/2013

GAO Attorney: Matthew T. Crosby Phone: 202-512-6837

Official Fax: 202-512-9749 Case Status: 202-512-5436

ACKNOWLEDGMENT OF PROTEST We have received your protest concerning the referenced procurement. The contracting agency is required to file a report in response to the protest by the Report Due date indicated above. Under our Bid Protest Regulations, 4 C.F.R. § 21.3(i), you are required to submit written comments in response to the report. Written comments must be received in our Office within 10 calendar days of your receipt of the report--otherwise, we will dismiss your protest. For purposes of determining when your response to the agency report must be submitted, we will assume that you received the report by the Report Due date unless you notify us otherwise at that time. Also, the agency has been advised that if you have filed a request for specific documents, the agency should provide to all parties and GAO, at least 5 days prior to the Report Due date, a list of those documents, or portions of documents, that the agency has released to the protester or intends to produce in the report, and of the documents that the agency intends to withhold and the reasons for the proposed withholding. You are requested to object to the scope of the agency’s proposed disclosure or nondisclosure with GAO and the other parties within 2 days of receipt of the list.

Bid protests, and subsequent associated filings, may be filed using the following methods. Our Office hours are 8:30 a.m. until 5:30 p.m. eastern time, Monday through Friday.

Facsimile: When filing with our Office, parties should rely on the use of facsimiles as much as possible. Facsimile transmitted documents are considered filed upon receipt of the entire text of the filing. Correspondence received, and transmissions completed, after our Office hours will be considered filed on the next business day. When filing a document by facsimile, it is not necessary to file a duplicate original. If a duplicate original is provided, please indicate on the face of the duplicate original that it previously has been telecopied. Please refrain from sending voluminous transmissions or lengthy exhibits. These exhibits should be hand delivered, or sent by mail or commercial carrier (e.g., UPS or FedEx).

E-mail: Protest filings may be submitted to [email protected] (see the Legal Products section of our web site, www.gao.gov, for more information).

Hand Delivery: Please note the following changes for hand-deliveries. Effective March 3, 2008, the filing window at GAO’s Headquarters Building will no longer accept deliveries. All packages must be delivered to GAO’s new mail center located on the 4th street side of the GAO building. Anyone attempting to pick up or deliver packages will need to walk up to the door and ring the door bell in order to be let in to the Courier Reception Desk.

The new GAO mail center will accept deliveries for GAO’s Bid Protest forum from 7:30 am to 5:30 pm. Packages MUST have one of the following labels:

“Procurement Law Control Group,”

“Bid Protest,” “PLCG,”

“Name of GAO attorney,” or “Contract Appeals Board”

Packages will be scanned and may be opened and searched. After inspection, packages will be time/date stamped. Senders must leave enough time for timely delivery. Please, be advised that it may take some time for packages to be processed. Timeliness will be measured by the time/date-stamp. GAO employees will not meet couriers outside of the GAO building to accept packages. The window closes promptly at 5:30 p.m.; packages cannot be left after that time.

mailto:[email protected]

http://www.gao.gov/

Regular Mail or Commercial Carrier (e.g., UPS or FedEx): Documents transmitted using these methods are considered filed when time/date-stamped at GAO. Regular mail should not be used for time-sensitive filings.

GAO bid protest decisions not subject to protective orders are distributed via the GAO Worldwide Web Internet site (www.gao.gov), and in most cases are available within 1 business day of the decision date. We will provide you or your representative e-mail notice of the availability of the decision on this protest upon issuance if you furnish us the e-mail address. Please refer to our file number in all future correspondence regarding the protest. --For the Managing Associate General Counsel

United States Government Accountability Office Washington, DC 20548

January 31, 2013 Scott Flesch, Esq. Department of the Army File: B-407972

Protester: Latvian Connection, LLC

Agency: Department of the Army

Solicitation No.: W912D1-13-R-0003

Report Due: 02/27/2013 Decision Due: 05/08/2013

GAO Attorney: Matthew T. Crosby Phone: 202-512-6837

Official Fax: 202-512-9749 Case Status: 202-512-5436

CONFIRMATION OF REPORT REQUIREMENT

This confirms our telephonic notice of the protest and report due date indicated above. Please advise us immediately of the individual(s) that will be representing the agency in the protest, including name, address (and Internet e-mail address, if any), and the telephone and fax numbers. You should notify all intervenors that this protest has been filed and to communicate directly with us in connection with the protest. Copies of the report must be furnished to the protester and all intervenors not later than the date indicated above. Please advise the protester of its obligation to submit comments or request a decision on the existing record within 10 days of its receipt of the agency report. Please also advise all parties of their right to submit comments on the report to GAO within 10 days of its receipt. You should refer to our file number and the GAO attorney assigned in all future correspondence regarding the protest. Any request for dismissal should be filed as soon as practicable after receipt of this notice if the agency seeks resolution of the request by our Office prior to the stated report due date. For your convenience, following is a list of the type of information to be included in your agency report: --the contracting officer's statement of the relevant facts;

--a best estimate of the contract value; --whether a statutory stay or suspension of performance is in place; --a memorandum of law; --a copy of all relevant documents, or portions of documents, not previously produced, including, as appropriate, any agency-level protest and decision, the bid or proposal submitted by the protester, the bid or proposal of the firm being considered for award or whose bid or proposal is being protested, all evaluation documents, the solicitation (with specifications), and the abstract of bids or offers; and --an index identifying the contents of the report and the location of each document or enclosure. Where portions of the report have been redacted for any party (or where the agency has omitted certain documents from a party's report), please indicate which redactions or omissions apply to each party. Agency reports must be organized through the use of pagination, tabs, and binders, as appropriate. If the protester has filed a request for specific documents, please provide to all parties and GAO, at least 5 days prior to the report due date, a list of those documents, or portions of documents, that you have released to the protester or intend to produce in your report, and of the documents you intend to withhold and the reasons for the withholding. GAO bid protest decisions not subject to protective orders are distributed via the GAO Worldwide Web Internet site (www.gao.gov), and in most cases are available within 1 business day of the decision date. We will provide you or your representative e-mail notice of the availability of the decision on this protest upon issuance if you furnish us the e-mail address. --For the Managing Associate General Counsel

Latvian Connection LLC Shareefa Complex 5th Floor Kuwait City, Kuwait Tel: 001 965 950 50 775 January 28, 2013

BY REGISTERED EMAIL

General Counsel Government Accounting Office 441 G Street, NW Washington DC 20548 Email: [email protected] Attn: Procurement Law Control Group, Room 1139 RE: Pre-Award Protest against the Department of the Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-

KUWAIT’s Solicitation W912D1-13-R-0003 Dear Procurement Law Group: Latvian Connection General Trading and Construction LLC, (“ LC LLC”) A Veteran Owned Business, Shareefa Complex, 5th Floor, Kuwait City, Kuwait, tel: [001 965 5012 2074]. Email: [[email protected]]¹ , ( DUNS 534749622 and CAGE SGM59, submits this Pre- Award Protest against the 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT, Department of the Army which is located at Camp Arifjan, Kuwait against Solicitation W912D1-13-R-0013 was posted on January 17, 2013 ( Exhibit 3 ), while the SF1449 solicitation states that the solicitation was posted on January 9, 2013 ( Exhibit 1 ) was solicitation, W912D1-13-T-0003 ( Exhibit 1 ). The Contracting Command is under LTC MICHAEL F. SCUTERI, and the contracting officer in charge of the solicitation is Ms. Nazneen Fakera, [email protected], GS CIV USA USA USARCENT 408th. Ms. Fakera is conducting a construction solicitation ( Exhibit 7) and Camp Arifjan contracting officers have had site visits conducted in prior Video Wall solicitation W912D1-13-R-0002 that Camp Arifjan subsequently cancelled November 17, 2012 ( Exhibit 4). Solicitation W912D1-13-R-0002 had a site visit, Questions and Answers, and Amendments while Video Wall W912D1-13-R-0003 had only one document posted under a site that appears to be taken down, but is being used to conceal the solicitation and not give any site visit, Questions and Answers or Amendments and the bid is due in the VERY FIRST MINUTE of January 29,2013 at 1200AM. Latvian Connection LLC, a Veteran Owned Business that operates an office in Kuwait has once again been prejudiced by Camp Arifjan’s contracting officers using the commercial website www.usmilitarycontracting.com instead of the Federal Acquisition Regulation’s only recognized GPE ( Government Point of Entry ) www.fbo.gov which date and time stamps postings. This prejudices Latvian Connection LLC’s opportunity at bidding on this solicitation in a fair and open competition. The correct solicitation, W912D1-13-R-0003 was substituted for the incorrect W912D1-13-T-0003 under a broken PDF JPG logo only on January 25, 2013. The solicitation was amended without the use of a SF30 and has not had Questions and Answers posted which prejudices all prospective bidders. The website www.usmilitarycontracting.com appears to be inactive except for this convoluted Video Wall while giving documents for a Furniture solicitation and has unresponsive contracting officers; unresponsive Contracting Commander; and unresponsive Legal Counsel. Latvian Connection requests that the solicitation be cancelled and recompeted on www.fbo.gov and have a site visit, drawings and specifications and be conducted for a reasonable amount of time that allows 7 days to obtain base access paperwork for the site visit – it should be conducted for 30 days at a minimum. Latvian Connection LLC requests that the contracting officer facilitate the paperwork necessary so that an informed bid may be made. Latvian Connection LLC requests that at least 3 visitors be allowed to attend the site visit so that Latvian Connection LLC’s teaming partner’s can attend to assist with the estimation of the solicitation ( FAR 9.601 ) _____________________________ ¹In accordance with 4 C.F.R. § 21.1 (c ) (1), the relevant electronic mail address for this protest is [email protected] ( Representative for the Protester Latvian Connection General Trading and Construction LLC) ²The Contracting Officer for this procurement is Ms. Nazeen Fakera, GS CIV USA USA USARCENT 408th CSB PARC, Camp Arifjan, Kuwait, APO AE 09366. Ms.Nazneen’s telephone number is 001- +965 2389 2135, and her email is [email protected] www.usmilitarycontracting.com Solicitation W912D1-13-T-0003]

CORRECTED COPY PRE-AWARD PROTEST OF W912D1-13-R-0003

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2 | P a g e The General Counsel U.S. Government Accountability Office January 28, 2013 Per FAR 33.103 Protests to the agency (2) Latvian Connection LLC Shareefa Complex Kuwait City, Kuwait Representative of Protester: Keven Barnes, CEO Email – [email protected]

The U.S. Government Accountability Office (“GAO”) should sustain this protest, stay the performance of the Contract, and direct the Department of the Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT to repair the defects in Solicitation and post the solicitation to www.fbo.gov for a minimum of 30 days. Latvian Connection LLC is a U.S. Registered Small Business with a headquarters in California and as a Small Business expects to see the solicitation posted on FEDBIZOPPS, the Federal Acquisition Regulations only recognized GPE ( Government Point of Entry ) and the GAO direct the Department of the Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT’s Solicitation to accurately post their solicitations W912D1-13-R-0003 and use date and time stamps. The GAO should recommend that the Army cease using the commercial website that is paid for and hosted by a non-contracting official ( Exhibit 6), which is paid with private funds of Chadd Cobb, and who is not associated with Camp Arifjan, the Army Contracting Command, or the 408th ACC-SWA-Kuwait . This site is not an Official U.S. Government website and the Army Contracting Command should be directed to utilize the only Official website that is authorized and recognized by the Federal Acquisition Regulations. Latvian Connection LLC is a U.S. Registered Small Business with a headquarters of Healdsburg, California, DUNS 830587791 and CAGE 5GLB3. Latvian Connection LLC, being a Veteran Owned Business needs to see the solicitations from Camp Arifjan, 408th, ACC-SWA-KU post their solicitations on www.fbo.gov and abide by the Federal Acquisition Regulations for posting of all solicitations greater than $ 25,000.00 . The Contracting Commander,

5.201 General. (a) As required by the Small Business Act (15 U.S.C. 637(e)) and the Office of Federal Procurement Policy Act

(41 U.S.C. 416), agencies must make notices of proposed contract actions available as specified in paragraph

(b)(1) For acquisitions of supplies and services, other than those covered by the exceptions in

(b) of this section.

5.202 and the special situations in 5.205, the contracting officer must transmit a notice to the GPE, for each proposed—

(i) Contract action meeting the threshold in 5.101(a)(1); (ii) Modification to an existing contract for additional supplies or services that meets the threshold in 5.101(a)(1);

or (iii) Contract action in any amount when advantageous to the Government.

(2) When transmitting notices using electronic commerce, contracting officers must ensure the notice is forwarded to the GPE.

(c) The primary purposes of the notice are to improve small business access to acquisition information and enhance competition by identifying contracting and subcontracting opportunities.

(d) The GPE may be accessed via the Internet at http://www.fedbizopps.gov.

INTERESTED PARTY STATUS As discussed below LC LLC seeks to compete for the contract that the proposed RFP

(Exhibit 1). Latvian Connection LLC incorporates all the below facts and (Exhibits) into this “Interested Party Status” section. Further, if this protest is sustained and Department of the Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT evaluates Latvian Connection’s timely proposal, LC LLC, a responsible offeror – will have a reasonable chance of winning the Contract. Therefore, Latvian Connection LLC is an actual offeror whose direct economic interest is affected by the award of the Contract and hence, an interested party. 31 U.S.C. § 3551 (2000); FAR 33.101; 4 C.F.R. § 21.0(a)(2006); Designer Assoc. , Inc.,B-293226, FEB 12, 2004 C.P.D. ¶ 114 at 2.





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W912D1-13-R-0003

3 | P a g e The General Counsel U.S. Government Accountability Office January 28 , 2013

TIMELINESS OF THIS PROTEST

The Pre-Award protest against the Department of the Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT’s Solicitation s timely if: § 21.2 Time for filing.(a)(1) Protests based upon alleged improprieties in a solicitation which are apparent prior to bid opening or the time set for receipt of initial proposals shall be filed prior to bid opening or the time set for receipt of initial proposals. In procurements where proposals are requested, alleged improprieties which do not exist in the initial solicitation but which are subsequently incorporated into the solicitation must be protested not later than the next closing time for receipt of proposals following the incorporation. This is a pre-award protest and is filed before the bid due in time of 12:00 AM Local Kuwait time on January 29, 2013.

FACTUAL GROUNDS OF THE PROTEST

1. The RFP

The Department of the Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT issued the RFP on 18 SEP 2012. (Exhibit 1) electronically by posting it on the commercial website, www.usmilitarycontracting.com under the section Kuwait, http://www.usmilitarycontracting.com . The site appears to have been taken down as of January 25, 2013 because all JPG images have been removed. All links appear to be dead links and the POC of the solicitation IS a non functional link ( Exhibit 7) The bid due in date is January 29, 2013 at 12:00 AM Local Kuwait time. The solicitation is for construction of a video wall, room construction, and furniture installation on Camp Arifjan. Quotes were to include pictures, technical data and specifications. The quotation was to be evaluated under FAR 52.212-2 Commercial

The solicitation shown under the posting on January 15, 2013 was being conducted by Contracting Officer Ms Ronnie Keys. Both Ms. Keys and SSgt Long were contacted by Latvian Connection to say that the solicitation did not appear on January 15, 2013 as they posted on www.usmilitarycontracting.com ( Exhibit 3 – Posting on www.usmilitarycontracting.com). While the document that was linked was solicitation No. W912D1-13-T-0003 ( Exhibit 1 )






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The correct solicitation was posted on www.usmilitarycontracting.com on January 25, 2013 and a bid due in date of January 29, 2013 at 12:00 AM. ( that is ONE MINUTE AFTER MIDNIGHT January 29, 2013 ) Exhibit 7 and all the JPG Logos and Images of www.usmilitarycontracting.com were removed including the PDF logo.

Both the contracting officer, Ms. Ronnie Keys ([email protected] ) and the 408th’s Legal Counsel, Mr. Charles Wilder were written on January 20, 2013 to ask for a clarification about the erroneous posting ( Exhibit 10 ). Neither Ms. Ronnie Keys or Mr. Wilder wrote Latvian Connection LLC back. On January 25, 2013, www.usmilitarycontracting.com appeared to be taken down as all the JPGs and Logos were removed. All PDF symbols stopped being visible as if the link failed to work. There was no link to POC of Jemel Hogen. ( Exhibit 8 ) In the past there has been links to POCs ( Exhibit 9 ) ON JANUARY 25, 2013, THE SITE www.usmilitarycontracting.com appeared to look like this:








As of January 25, 2013, under the X that was have been the PDF logo for solicitation W912D1-13-R-0003, appeared a SF1449 that has been changed at the direction of Camp Arifjan Contracting Officers and their counsel Charles Wilder, but no 2nd PDF is posted – only a substitution of the correct solicitation for the incorrect W912D1-13-T-0003. It is possible that the owner of www.usmilitarycontracting.com , Chad Cobb posted the correct document ( Exhibit 6). There is no Questions and Answers, no site visits, no drawings and there are not 7 PDFs as there was for Video Wall W912D1-13-R-0002.( Exhibit 16) Latvian Connection LLC requested a site visit on January 21, 2013. ( Exhibit 11 ) and that email was responded to by SSgt Long who stated that the solicitation W912D1-13-T-0003 had been awarded already and did not respond to the request for a site visit and CC’d the contracting officer, Ms. Ronnie Keys. ( Exhibit 12 )



6 | P a g e The General Counsel U.S. Government Accountability Office January 28 , 2013 In the email of my request for a site visit, I had Print Screens of the posted solicitation on www.usmilitarycontracting.com

Inside of the email that went to the contracting officer and their Legal Counsel, Charles Wilder, there is no doubt which solicitation that Latvian Connection LLC is requesting a site visit for( Exhibit 11).

End of Print Screen

The solicitation was not posted on the GPE that is required by the Small Business Act ( 15 U.S.C. 637 (e) and the Office of Federal Procurement Policy Act ( 41 U.S.C. 416 )

5.201 General.

(a) As required by the Small Business Act (15 U.S.C. 637(e)) and the Office of Federal Procurement Policy Act (41 U.S.C. 416), agencies must make notices of proposed contract actions available as specified in paragraph (b) of this section.

the contracting officer must transmit a notice to the GPE, for each proposed—

(i) Contract action meeting the threshold in 5.101(a)(1);

(ii) Modification to an existing contract for additional supplies or services that meets the threshold in 5.101(a)(1); or

(iii) Contract action in any amount when advantageous to the Government.

(2) When transmitting notices using electronic commerce, contracting officers must


ensure the notice is forwarded to the GPE.


The solicitation posting on January 25, 2013 was a contract modification and a SF30 Amendment was not posted, only a revised solicitation. (Exhibit 7)








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II.

Latvian Connection LLC’s Proposal

Latvian Connection LLC, a Small Business Administration registered company that is a Veteran-Owned Business, ( Exhibit 14 ) is a company that would like the opportunity to bid in a fair and open competition on this RFP and to be evaluated based on a solicitation that is posted for a reasonable length of time. The solicitation has now been posted for only 3 days and doesn’t have any drawings, specifications or an offered site visit. The solicitation has unresponsive contracting officers that are deceitfully using a website that appears to be defunct and taken down to post solicitation

( Exhibit 8 ). Latvian Connection LLC will be using a Teaming Partner to work with under FAR 9.601. The solicitation was not accurately posted on January 15, 2013 and even less time that the charade of the contracting officers posting the actual solicitation on January 25, 2013 and not posting any amendments, drawings, specifications, or an offered site visit is not fair to Latvian Connection LLC as it cannot make an informed bid based on the information currently being supplied.

Request of a ruling by the Comptroller General of the United States

Latvian Connection LLC specifically requests that a ruling be made about the Pre-Award protest of Solicitation and ask the Department of the Army’s 408th’s U.S. ARMY CONTRACTING

COMMAND SWA-KUWAIT, LTC MICHAEL F. SCUTERI - CAMP ARIFJAN CONTRACTING COMMANDER to take corrective action and start posting their solicitations on www.fbo.gov and to either extend this solicitation by 30 calendar days, post drawings and specifications and to hold a site visit, or cancel the solicitation and re-compete the solicitation on the GPE that is the only Government Point of Entry recognized by the Federal Acquisition Regulations. Latvian Connection LLC further requests that Camp Arifjan contracting officers recognize that Latvian Connection LLC is a U.S. registered and Veteran-Owned Business that is recognized by the Small Business Administration, and post all solicitation that are greater than $ 25,000 in value on the Federal Acquisition Regulations only recognized GPE, www.fbo.gov.

REQUEST FOR HEARING OR CONFERENCE AND PROTECTIVE ORDER

If the issues in this case cannot be resolved on the basis of the documents requested, then Latvian Connection LLC requests a hearing on all of the matters set forth above. 4 C.F.R. § 21.1 (d)(2008). LC LLC

does not request a protective order.

LEGAL GROUNDS OF PROTEST

I. There is Overwhelming Evidence of Latvian Connection LLC requested the correct solicitation be posted not only to the contracting officer, but to the Legal Department and that request, January 20, 2013 ( Exhibit 11) was not answered. Latvian Connection LLC requested a site visit that was afforded the Video Wall bidders on the cancelled Camp Arifjan solicitation W912D1-13-R-0002 ( Exhibit 16)




Keven

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W912D1-13-R-0003

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II. The Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT has a fundamental obligation to have procedures not only to receive offers and quotations, but to also give a reasonable amount of time, drawings, specifications, and site visits so that bidders can make an educated bid based on the solicitation materials. East West Research Inc., B-239565, B-239566, Aug. 21, 1990, 90-2 CPD ¶ 147 at 4, aff'd, Defense Logistics Agency--Recon., B-239565.2, B-239566.2, Mar. 19, 1991, 91-1 CPD ¶ 298 at 2-3. Latvian Connection LLC was prejudiced by the contracting officer and by 408th Contracting Commander LTC MICHAEL F. SCUTERI by not allowing enough time to conduct a construction-type solicitation that clearly could not be conducted in 4 days with only 1 SF1449 document. LTC Scuteri was requested on January 25, 2013 for any and all solicitations not electronically posted ( Exhibit 17) and he didn’t respond. He did not ensure that Amendments corrected the wrongly posted solicitation on www.usmilitarycontracting.com and he didn’t ensure that the bidding materials and site visit was made available, and he didn’t ensure that contracting officers and POCs for solicitation W912D1-13-R-003 gave a reasonable amount of time for the solicitation to run as directed by FAR Part 5, 5.203 Publicizing and response time

5.203 Publicizing and response time.

Whenever agencies are required to publicize notice of proposed contract actions under 5.201, they must proceed as follows:

(a) An agency must transmit a notice of proposed contract action to the GPE (see 5.201). All publicizing and response times are calculated based on the date of publication. The publication date is the date the notice appears on the GPE. The notice must be published at least 15 days before issuance of a solicitation, or a proposed contract action the Government intends to solicit and negotiate with only one source under the authority of 6.302, except that, for acquisitions of commercial items, the contracting officer may—

(1) Establish a shorter period for issuance of the solicitation; or

(2) Use the combined synopsis and solicitation procedure (see 12.603).

(b) The contracting officer must establish a solicitation response time that will afford potential offerors a reasonable opportunity to respond to each proposed contract action, (including actions where the notice of proposed contract action and solicitation information is accessible through the GPE), in an amount estimated to be greater than $25,000, but not greater than the simplified acquisition threshold; or each contract action for the acquisition of commercial items in an amount estimated to be greater than $25,000. The contracting officer should consider the circumstances of the individual acquisition, such as the complexity, commerciality, availability, and urgency, when establishing the solicitation response time.

(c) Except for the acquisition of commercial items (see 5.203(b)), agencies shall allow at least a 30-day response time for receipt of bids or proposals from the date of issuance of a solicitation, if the proposed contract action is expected to exceed the simplified acquisition threshold. (This solicitation was expected to exceed the Simplified Acquisition Threshold)



https://www.acquisition.gov/far/current/html/Subpart%205_2.html#wp1107981�





9 | P a g e The General Counsel U.S. Government Accountability Office January 28, 2013

III. The Small Business Act does apply overseas. ( From a SBA legal opinion November 8, 2012 - Exhibit 18)

Discount Machinery & Equipment Inc.

As evidenced by the language of the Small Business Act, Congress intended the SBA to have broad review authority where an American small business concern is involved. In this regard, the Small Business Act, 15 U.S.C. § 637(d)(1), expresses its intended coverage in broad terms, as follows: It is the Policy of the United States that small business concerns …. Shall have the maximum practicable opportunity to participate in the performance of contracts let by any Federal agency….’ ( Emphasis added). The Small Business Act also adopts the Administrative Procedure Act’s definition of ‘federal agency’; accordingly, the Act applies to ‘each authority of the Government of the United States’ excluding ‘the Congress.’ See 5 U.S.C. § 551(1)(1988); 15 U.S.C. § 632(b). The Act and the COC program it authorizes apply generally to agencies within the executive branch of government.

70 Comp. Gen 108, B-240525, 90-2 CPD ¶ 420 (1990) (emphasis added ). Interestingly, the GAO further states that it believes the Small Business Act applies to agencies located outside of the United States.

Fry Communications, Inc., 62 Comp.Gen. 164 (1983), 83-1 CPD ¶ 109. The Commission is an executive branch agency. See

Since the Small Business Act evidences an intent to implement a government wide policy American small business interests, and since the Panama Canal Commission is an executive agency within the meaning of the Act, we see no basis to conclude that the Commission’s procurements are exempted from the Act’s coverage merely because the agency is physically located in the Panama Canal Zone.

22 U.S.C. § 3611 (1988). With regard specifically to the COC procedures, the Small Business Act again defines its application broadly, stating that SBA determinations of a small business concern’s responsibility are binding upon ‘Government procurement officers.’ See 15 U.S.C. § 637(b)(7)(A).

IV. SET ASIDES valued above SAT (

Exhibit 19 )

Citing from the Fax Memo to the GAO: With respect to acquisition valued above the SAT, both the SBA’s regulations and the FAR provide that the “contracting officer shall set aside any acquisition over $ 150,000 for small business participation when there is a reasonable expectation that ( 1) (o)ffers will be obtained from at least two responsible small business concerns offering the products of different small business concerns…; and (2) (a)ward will be made at fair market prices.” 48 C.F.R. § 19.502-2(b); 13 C.F.R. § 125.2(f). Again, the burden is placed in the contracting officer – not the small businss- to determine whether the procuring agency will obtain offers from competitive small businesses. This would at the very least indicate that the Small Business Administration can review the requirement that the Army post all of its solicitations greater than $ 25,000 on FAR’s only recognized GPE, www.fbo.gov And Latvian Connection LLC would like this GAO level protest to be referred to the Small Business Administration for their review of FAR 5.201 and posting of solicitations..

5.201 General.

(a) As required by the Small Business Act (15 U.S.C. 637(e)) and the Office of Federal Procurement Policy Act (41 U.S.C. 416), agencies must make notices of proposed contract actions available as specified in paragraph (b) of this section.

the contracting officer must transmit a notice to the GPE, for each proposed—

(i) Contract action meeting the threshold in 5.101(a)(1);







(ii) Modification to an existing contract for additional supplies or services that meets the threshold in 5.101(a)(1); or

(iii) Contract action in any amount when advantageous to the Government.

(2) When transmitting notices using electronic commerce, contracting officers must


ensure the notice is forwarded to the GPE.


This solicitation demonstrates that the Army should not be posting solicitations to www.usmilitarycontracting.com because they can too easily manipulate their postings and the postings are not date and time stamped. Small Businesses such as Latvian Connection LLC depend upon teaming agreements under FAR 9.601 and www.fbo.gov has an Interested Bidders tab that would help Latvian Connection LLC locate other interested bidders to partner with. An example of an interested bidders tab that also shows other Small Business Concerns is ( Exibit 20 and Exhibit 20a ) which is Camp Arifjan’s fellow contracting officers from the Defense Logistics Agency which have an operation on Camp Arifjan and are holding a solicitation that was posted on www.fbo.gov called SP4510-13-R-0002 DLA Disposition Service and that solicitation was conducted for performance at Camp Arifjan.

By Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT, LTC MICHAEL F. SCUTERI - CAMP ARIFJAN CONTRACTING COMMANDER and his Contracting Officer Nazneen Fakera purposefully not allowing a site visit, concealing this solicitation under what appears to be a defunct and abandoned website that is still being used by the 408th Contracting Command of the Army Contracting Command has once again prejudiced Latvian Connection LLCs chances of fair and open competition. By Camp Arifjan again posting a solicitation for effectively only 3 days and requiring the bid to be in one minute after midnight on January 29, 2013 is nothing less than disingenuous. For the Legal Counsel of Camp Arifjan to continue to support such actions really invites an Inspector General’s investigation into the continued concealment and manipulation of solicitations in order to mislead U.S. Registered Veteran Owned businesses that want to bid on solicitations in Kuwait.

V.

Latvian Connection LLC Has Been Prejudiced

Prejudice requires a reasonable likeliehood that Latvian Connection LLC would have been awarded the Contract if we had been allowed the opportunity of a reasonable amount of time, drawings, specifications, and site visits afforded to contractors who have a conflict of interest relationship with Camp Arifjan’s contracting officers that would allow a competitive advantage to other bidders over a U.S. Registered Veteran Owned business. Such a determination is not susceptible to a precise mathematical calculation; rather, prejudice requires only that “but for the agency’s actions, the protestors would have had a reasonable chance of receiving the award. Anthem Alliance for Health, Inc., TRICARE Management Activity – Reconsideration, B-278189.5, July 13, 1998, 98-2 CPD 66. A








reasonable possibility of prejudice therefore is sufficient to sustain the protest. United Int’l. Eng’g., Inc., B-245448.3, Jan 29, 1992, 92-1 C.P.D. ¶ 122. Europe Displays, Inc., B-297099.

REQUEST FOR DOCUMENTS

Latvian Connection LLC requests that the following materials be included in the agency report, pursuant to 4 C.F.R. § 21.1(d)(2008):

• All Question posted by all bidders that refer this RFP. • The Answers give to those bidders. • The Contract as proposed • All drawings as proposed • All documents that refer or relate to the efforts to obtain competition from U.S. Registered Small

Businesses in Kuwait. • All documents that refer or relate to the efforts to increase competition • All documents that refer or relate to the Contracting Officer’s Market Research • The Bid Abstract and Evaluations

REQUEST FOR RELIEF AND CONCLUSION

Latvian Connection LLC respectfully asks the GAO to forward this Protest to the Small Business Administration for their review. Latvian Connection LLC requests that the agency cancel the solicitation and run the solicitation on www.fbo.gov for at least 30 days or transfer the solicitation to www.fbo.gov and extend the solicitation 30 days, post all drawings, specifications similar to the cancelled solicitation of W912D1-13-R-0002 and hold a site visit that allows enough time for paperwork to access Camp Arifjan’s barrier to entrance to U.S. Veteran Owned business owners. Latvian Connection LLC requests that this solicitation be conducted as a Set-Aside for Veteran-Owned business that the Department of the Army instruct the Army’s 408th’s U.S. ARMY CONTRACTING COMMAND SWA-KUWAIT to fulfill the requirement that 23 % of all dollars they spend in Kuwait is with U.S. Registered Small Businesses and specifically Veteran-Owned businesses. We also request that Latvian Connection LLC be reimbursed the costs of filing and pursuing its protest, including reasonable protest preparation fees. Bid Protest Regulations 4 C.F.R. § 21.8(d)(1) (2010).

Respectfully submitted,

__________________________ Keven L. Barnes

CEO Latvian Connection LLC


http://www.wifcon.com/cgen/297099.pdf�



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- W912D1-13-R-0003

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DEPARTMENT OF THE ARMY

UNITED STATES ARMY CONTRACTING COMMAND SOUTHWEST ASIA – KUWAIT APO AE 09366

REPLY TO

ATTENTION

OF

MEMORANDUM FOR RECORD 13 February 2013 SUBJECT: Cancellation of Solicitation W912D1-13-R-0003

1. After careful consideration and consultation with legal counsel, I have determined that it is in the best interest of the United States Army Contracting Command Southwest Asia – Kuwait (“the Army”) to cancel Solicitation number W912D-13-R-0003.

2. On 13 Feb 2013, I cancelled the solicitation. The Army intends to evaluate its requirements and possibly issue a new solicitation to accurately reflect its needs.

3. The point of contact for this memorandum is the undersigned.

Respectfully,

Fakera Nazneen

Contracting Officer

1

IMPLEMENTING IMPROVEMENTS TO DEFENSE WARTIME CONTRACTING

MONDAY, APRIL 25, 2011

Commission on Wartime Contracting

Washington, D.C.

The Committee met, pursuant to notice, at 09:30 a.m., in Room 216, Hart Senate Office

Building, Hon. Michael Thibault, Co-Chairman of the Commission, presiding.

Present: Commissioners Shays, Ervin, Green, Schinasi, Tiefer.

THIBAULT:

Good morning. Welcome to all.

My name's Mike Thibault, and I'm the co-chairman of the Commission on Wartime Contracting

in Iraq and Afghanistan.

The other commissioners at the dais are my fellow co-chair, Christopher Shays, and

Commissioners Clark Kent Ervin, Grant Green, Katherine Schinasi, and Charles Tiefer.

We have two other commissioners, Robert Henke and Dov Zakheim that are not with us today.

We have distinguished guests at this hearing. We have a former undersecretary of defense, now a

public-policy professor, a senior official of the Government Accountability Office, or the GAO,

the nation's premier watchdog agency, and three inspectors general. I'll introduce them all

shortly.

Our conversation with these witnesses will focus on waste, change, and judgment. Like the

commissioners, our eyewitnesses have spent a great deal of their professional time identifying

and combating waste and its siblings, fraud and abuse.

This is really important work. Our warfighters, diplomats, development officials and taxpayers

all suffer when funds designated for contingency operations are spent needlessly or ineffectively

or are stolen or misdirected for personal advantage.

The commission's authorizing statute directs it to assess the extent of waste, fraud, and abuse in

contingency contracts in Iraq and Afghanistan. As part of our work on that task we have asked

our IG witnesses to update us on their work in the field and to give us their best current estimate

of the extent of waste, fraud, and abuse in the theaters of operation.

We also solicit their evaluations of these shortcomings. For example, what are the relative

contributions of poorly defined requirements, duplication of effort, poor management, lack of

2

coordination, and un-sustainability in producing waste? What are the most glaring opportunities

for fraud? What kinds of people or positions, government and private, are most likely to engage

in bribes, kickbacks, favoritism, and other abuse?

Besides combating waste, fraud, and abuse our witnesses are all working for change. They may

do this through the deterrent effect of identifying wrongdoing and referring its perpetrators to

administrators or prosecutors for punishment.

Or they may pursue change by offering recommendations for improvements in contracting. For

example, the Office of the Inspector General in the Department of Defense produced an excellent

report in May 2010, "Contingency Contracting: A Framework for Reform." And Dr. Jacques

Gansler, one of our first witnesses, has led reform-writing panels for both the Army and the

Defense Science Board.

The commission has also pressed for change. Our second interim report to Congress, filed in

February 2011, made 32 recommendations, and our four special reports to date have made 13.

The commission's final report to Congress, due in late July, will offer many more

recommendations. All of us are pursuing change.

We hope to engage our witnesses today on three kinds of judgments related to change. First, we

will explore their various recommendations, including the background, testimony, and data

behind these recommendations.

Second, we're interested in their views on the obstacles they have encountered with regard to

their own recommendations—inertia, organizational culture, fear of change, turf protection,

personal vanity, or whatever—and what tactics they've used to overcome these barriers.

Third, the commissioners are keen to hear our witnesses' opinions of the recommendations we

made in our second interim report. We'll be reviewing new research and events to check whether

any of them need to be revised before we issue our final report.

Hearing the opinions of the experts assembled here today will be very helpful in that process. We

have two panels of witnesses today. Our first panel consists of Dr. Jacques Gansler, former

undersecretary of defense and chairman of the Army panel known as the Gansler Commission,

now a professor at the University of Maryland's School of Public Policy; and Paul Francis,

managing director, acquisition and sourcing management, with the Government Accountability

Office, or the GAO.

Panel two has three members. Stuart Bowen, special inspector general for Iraq reconstruction,

Daniel Blair, DoD deputy inspector general for auditing, and Herbert Richardson, acting special

inspector general for Afghanistan reconstruction.

I would note that two of our witnesses are veterans of our proceedings. We consulted with Dr.

Gansler early in the commission's life and welcomed him as a witness last September. Stuart

Bowen, the special inspector general for Iraq reconstruction, was a witness at our very first

hearing, in February 2009, and has been back since. We are very pleased to see them both again

and to welcome our new witnesses.

Thanks to all of you.

3

We have asked our witnesses to offer five-minute summaries of their testimony. The full text of

the written statements will be entered into the hearing record and posted on the commission's

website. We also ask that witnesses provide within 15 days responses to any questions for the

record and any additional information they may offer to provide.

Now, if our witnesses, Dr. Gansler and Mr. Francis, will please rise and raise their right hands I'll

swear you in. Do you solemnly swear or affirm that the testimony you will give in this hearing is

the truth, the whole truth, and nothing but the truth?

Let the record reflect that both of them answered in the affirmative.

Dr. Gansler, please begin.

GANSLER:

Thank you for this opportunity to appear before the commission and discuss implementing

improvements to defense wartime contracting. As you pointed out, my testimony is based on my

chairmanship of the secretary of Army's Commission on Army Acquisition and Program

Management in Expeditionary Operations, and on the congressionally mandated Defense

Science Board Task Force on Improvements to Services Contracting, as well as, of course, my

own many years of experience in the defense industry and the government as undersecretary for

acquisition, technology, and logistics from '97 to 2001.

You asked me to comment on these two independent studies that I've led, as well as your own

commission's recent interim publication, and during the opening statement here I will highlight a

few topics in each of these categories, and my written statement contains far more detail.

I'll start with the more recent Defense Science Board (DSB) effort on buying services, because

essentially all of the approximately 270,000 contractors in Iraq and Afghanistan are performing

services. The DSB task force found that overall the DoD buys more services than supplies. In

2010, for example, 57 percent of all the acquisitions in terms of dollars were services.

By their very nature, services are different from buying weapons systems. Services do not follow

an incremental sequential process, are measured by a wide variety of differing standards, and

may require continuous performance so that they're not subject to amenable breaks in contracts

for possibly re-competition.

Historic data clearly show that government personnel should always carry out inherently

governmental functions, and that non-inherently governmental functions are best competed,

either among commercial providers or between government and industry.

If the DoD automatically in-sources non-inherently governmental functions, it loses both

performance and cost benefits. For example, a Congressional Budget Office study determined

that for equipment maintenance, wrench-turning if you will, using Army military units would

cost roughly 90 percent more—90 percent more—than using contractors. And, of course,

wrench-turning is not inherently governmental, it's not in the Constitution anywhere.

4

Writing requirements and issuing contracts, clearly these are inherently governmental functions;

to acquire services is more difficult and requires high-quality, experienced government

contracting and program-management personnel. Additionally, after the award, trained and ready

resources must monitor and ensure that the contractor is performing and providing the desired

services.

These government-workforce demands are only compounded in a contingency environment

where the accelerated operations—the tempo—mandates faster response times, flexible

approaches and experienced personnel.

Our DSB task force recommended that the secretary of defense make improvements in four

areas: policies and processes related to services, leadership and organization related to services,

people with experience in services, and contingency contracting as a special case.

The specific recommendations to improve management and oversight of contingency contracting

included developing a single playbook for contingencies, modifying the federal procurement-

data system to provide better visibility into contingency operations, and granting limited

acquisition and contracting authority to the geographic combat command.

In addition, we recommended that all military departments and defense agencies conduct

realistic exercises and training that account for services contracting and the role of contractors

during contingency operations.

Now, let me shift to the Army commission, which predated the DSB effort. Our key findings

here include the observation that the DoD has an extremely dedicated core of acquisition people,

but they are understaffed, overworked, undertrained, under-supported, and particularly, they are

undervalued. Further, the military leadership for this dwindling community had also diminished

dramatically.

On the other hand, on a positive note, in the three years since our study, the department has made

noteworthy progress, for example, growing the depleted acquisition workforce, funding growth

of its civilian acquisition corps through the Defense Acquisition Workforce Development Fund,

and Congress added billets for 10 general flag officers in acquisition positions.

And, of course, the Army established the Army Contracting Command, and now the contracting

field in the Army has the benefit of four new general officers.

A key remaining area of concern is the need for contingency contract administration services.

Right now, Defense Contract Management Agency (DCMA) fills this function in theater, while

the Army grows its workforce. This puts a strain on DCMA's own mission.

A further concern is the need for contracting officer’s representatives, the CORs, for contract

oversight. We believe that the department should be examining the role the reserve components

might play in providing continuity and professionalism.

The importance of contract administration cannot be overstated and we need a cadre of

professionals to give it the attention it deserves.

I am pleased to see that your commission also sees the importance of this function.

5

Finally, I read with great interest your report and its 32 recommendations. Clearly you have

taken on a very important topic that needs attention, and your focus, therefore, can be of great

value.

You requested my feedback on your report, so I offer the following thoughts, starting with the

report's title and the message it conveys.

The main title rightly identifies risk as a considerable issue, but the subtitle is open to very

significant misinterpretation. The statement about, quote, "correcting over-reliance on

contractors in contingency operations," unquote, conveys an impression that the DoD should

reduce the role of contractors.

In reality, contractors play an essential role in contingency operations. The government's focus

should not be on decreasing contractors, but instead on assuring that they are performing the

appropriate functions and are being properly managed.

My opinion on the title reflects my general comments on your second interim report which fall in

the two areas of concern regarding contractors.

First, the focus on punishments, like suspension and debarment, comes at the expense or the

neglect of positive incentives. Missing is a discussion of creating incentives to reward

outstanding performance, such as awarding contractors with follow-on work if they achieve

higher performance at lower costs.

I strongly believe in the value of competition to get higher performance at lower costs, but if the

threat or option of future competition is enough to get those desired results, then competition

should not always be mandated. Rather, it should be required if the desired results are not

achieved.

The greatest incentive for a contractor in achieving the desired results is the follow-on award.

Second, I grant the need for significantly more emphasis on government acquisition management

of contracts and contractors. These are inherently governmental functions.

But, concomitant with this, I assert the importance of limiting organic capability to only

inherently governmental functions which much be filled by government employees with relevant

management experience, not providing public-sector monopolies for non-inherently

governmental work that can be competitively awarded in the private sector. The over . . .

THIBAULT:

. . . Gansler, can I get you to wrap up?

GANSLER:

I am on my last paragraph.

6

THIBAULT:

Great. Thank you, sir.

GANSLER:

The over-reliance concern should not sweep so broadly that it pulls in efforts at best performance

at lower cost by our industry partners. The government gains great value from the use of

contractors for most contingency functions.

In my prepared remarks, I suggested explicit rewordings of your recommendations in this area.

So in closing I encourage your commission to shift the focus in your final report toward rewards

and recognition versus punishment and sub-optimization. I believe this will go a long way

toward creating the systemic improvements our troops deserve.

Contractors are an important force multiplier, but we must build the government capability and

infrastructure to manage this reality. Clearly there are many actions—legislative, regulatory,

policy, practice, and so forth—where your commission can play a very valuable role.

In any of these actions, I see the key issues as getting the right people, government and industry,

and in creating positive incentives for these individuals to get what the warfighter needs, when

they're needed, with outstanding performance and at low cost.

I believe this can be done, and it must be done. The men and women serving in our nation in

harm's way deserve no less.

Thank you, and I welcome your comments.

THIBAULT:

Thank you, Dr. Gansler.

I consciously allowed that because you put your suggestions to us near the end, so split the

difference with you and went ahead and asked you to complete what you had. Thank you.

Mr. Francis, please proceed.

FRANCIS:

Thank you. Chairman Thibault, Chairman Shays, commissioners, good morning. And I

appreciate the opportunity to engage in the discussion of operational contractor support, or OCS,

today.

7

As we know it today, OCS has been a reactive, ad hoc phenomenon. It's been the sum of

thousands of decisions; it has not been a managed outcome.

And I think the goal is not necessarily to accept this as the new normal and to codify it, but rather

to practically define what should be and trying to make that happen.

I think the challenge before us is not necessarily to look at this as something broken that has to

be fixed, but rather that something that has an inertia to it. It's been in place now for a number of

years. I would say it's in a state of equilibrium that's going to take more energy to change.

Dr. Gansler talks about services acquisitions, and I think the distinction between services and

products is very important. One very important distinction is dollars are not a good proxy for risk

in gauging services acquisitions. It works for weapons, but not for services.

Moreover, decisions on services are made by numbers of organizations and people at the local

level. And that, I don't think, is going to change. So I think our aim point here ought to be how to

put the people at a local level in a better position to succeed.

So, turning to recommendations, I think of recommendations and actions as occurring on the

strategic level and the local level.

At the strategic level, I think there's a fair consensus that we do need cultural change here. OCS

does need to be integrated into plans, education, and exercises.

We do need a strategy for defining roles, functions, and responsibilities. We need to define that

mixed force and plan for it. We need to incorporate lessons learned and think about how to right-

size this support.

The strategic level, I do think, sets the context for those who manage at the local level. Indeed, it

creates the culture for making local decisions.

At the local level, I think we have to understand that this is where requirements are set, this is

where source selections are made, statements of work are written, contracts are let, and oversight

takes place.

So along those lines, I think it's really essential that we have that cadre of expert, experienced,

and deployable contracting officers and CORs.

Similarly, we need to train and educate and prepare our non-acquisition workforce, really the

combat units, because they are the ones with the requirements. They have to work with the

contracting officers in developing statements of work. And they will be ultimately responsible

for monitoring execution.

So, going forward, I'd like to think in terms of enact, enable, and empower.

And in enacting, I kind of throw together laws, policies, regulations, directives. I think that's

been largely done, more could always be done there, but I think Secretary Gates's January memo

puts kind of a cap on that.

8

I think the commission put this very well that many initiatives are in policy, many are in

planning, but few are in action. And the real question is: Why? There's been enough out there,

but we haven't done it yet.

I think, in enabling we do have a lot of work to do yet. And there, we've talked about the need

for planning at the strategic level, but I think we need a normative view, some vision of what

ought to be in terms of integrating OCS into plans. We need to think about scenarios, phases,

maybe some ratios; start to get some ideas out there.

We can't wait for perfect information. As an auditor, we kind of do that. We're still trying to

measure the number of people who are in theater right now. But we can't wait for perfect

information. It has to be good enough to act. We have to get some chalk marks on the board.

The hard part is the imperative. And I've been struggling with that. A couple of weeks ago,

Admiral Mullen made a comment, in a press conference, that I think was really insightful. He

said, "You have to realize that over the past decade we've doubled our budgets. And in so doing,

we've lost the ability to prioritize."

And I kind of think that's what's at the heart of the problem here. We haven't prioritized. And I

think the commission has recognized that we've been enabled by unconstrained resources. And I

think that's something that really has to change.

So my last point is: How to enforce? And I think we have to start doing something with the

budget. And we have to start getting in front of the problem. So for example, if we want this

planning to be done in and OCS to be integrated, maybe we need to budget for it and hold people

accountable for executing that budget.

Similarly, services acquisitions are very hard to find in the budget. There's no line items, really,

for them. I think we have to change that as well, especially for contingency operations. We have

to bring some budget visibility to services acquisitions and then hold people at the strategic and

local level accountable for managing efficiencies. Make it an imperative.

And I'll close with this thought. We will be leaving Iraq militarily at the end of the year. We have

a timetable for leaving Afghanistan. So I think the work the commission is doing will mostly

likely be able to affect future military operations. But the agencies that could benefit most right

now will be State and USAID. They are more dependent on contractors and have less organic

capability to manage them, and they're in there for the long haul.

So with that, I'll close and entertain any questions.

THIBAULT:

Thank you, Mr. Francis.

The process we're going to use is two rounds this morning. We're going to begin with my co-

chair, Commissioner Shays.

Commissioner, please?

9

SHAYS:

Thank you.

Mr. Francis, you talked about accountability. And that has the concept of rewarding for doing

well and excluding those who aren't doing well. Would you agree with that?

FRANCIS:

Yes.

SHAYS:

So it's both sides of the equation.

Dr. Gansler, I am hard-pressed over 10 years of seeing how we've held contractors accountable,

and those who oversee contractors accountable, when services are not done well. You focus 99

percent on reward. Are you pretty comfortable that we've held people accountable when they

haven't done their job?

GANSLER:

Well, first of all, let me comment. I didn't feel that my percent distribution was 98 percent, I

think. It was more than 50 percent on the quality and the oversight provided by the government

workforce. I think that is absolutely essential and we have neglected that. We've undervalued it.

And when that is there, then we will have a lot less mistakes being made.

As far as the concept of debarment, suspension from a company for something that one

employee happens to do that the company may or may not even have had any visibility into, I

think that may be an extreme.

SHAYS:

We would agree. I mean that . . .

GANSLER:

Well, that's not what your report says. That's why I'm objecting.

10

SHAYS:

No, no. With all due respect, that's I think a false interpretation.

GANSLER:

But it's easily taken.

SHAYS:

No, I don't think so. And the reason I don't think so is I can't name on my hand in 10 years, in

spite of the fact that estimates are that 10 percent is wasted through waste, fraud, and abuse, I

can't name five companies that have been debarred for false service. I can tell you companies

where we've renewed the contract because we didn't have anyone else to take their place.

Can you give me five companies that have been debarred?

GANSLER:

I'll give you an example of what I considered to have been an abuse. A number of years ago, this

was General Electric, was . . .

SHAYS:

No, I'm just talking on the . . .

GANSLER:

This is a very good example because they were accused of having overpriced light bulbs.

SHAYS:

That's not my question. My question is, can you tell me—and if you can't, you can't. I can't name

five companies that have been debarred for bad service in spite of bad service, not just by one

employee, but by over-billing and so on. Can you name any? I mean, if you can . . .

GANSLER:

11

Well, let me distinguish between fraud and waste. Waste, fraud, and abuse sometimes in the

press is considered one word.

SHAYS:

That's not my question. I only have eight minutes. And you are the star of stars. And so I have

nothing but respect for you and I . . .

GANSLER:

But if it's fraud, or when you say "not performing," which do you mean?

SHAYS:

Can you name me any companies, much less five, that have been debarred for bad service?

GANSLER:

No, but I can name companies that have not gotten follow-on contracts for bad service and it

seems to me that's the big incentive.

SHAYS:

OK, I would agree. Name me them. Who would they be?

GANSLER:

Oh, every time there's a re-competition recently, the incumbent has been losing. The fact that the

word out in industry is that it's not good to be an incumbent.

SHAYS:

Well, but it's not necessarily because they did bad service. It's because someone else has bid on

price and so on.

See, one of the problems we have is you can't say 10 percent and that number, and then come to

look at the facts and realize that nobody's ever paid the responsibility of being debarred. And

that's . . .

12

GANSLER:

I think you raise a very important question, and I agree with you totally on the importance of past

performance.

SHAYS:

OK, exactly. And that was their emphasis. So while you have given emphasis to one of 32

recommendations, I think your focus on it is extreme, in my judgment. We're just saying, you

know, there's got to be some past performance and there needs to be the willingness on the part

of the government to debar someone when the service isn't provided right. And we don't see that.

That's all it was. Nothing more than that.

Can you tell me what we wrestle with. We had a hearing on the whole thing of the QDR

(Quadrennial Defense Review) and we did not see hardly any focus in the QDR on the thing that

you rightfully work so hard on, and that is service contracting. Can you, one, tell me: Is it there

and we missed it? And if it's not there, what's your view of it?

GANSLER:

I think it's not there. And as Mr. Francis said, that is a cultural problem. People don't now

recognize in many cases within the DoD the fact that 50 percent, in some cases more than 50

percent, of their total force are contractors. They aren't recognizing the value of contractors in a

contingency environment. They're not training with them. They're not doing the planning for it.

They're not doing the procedures and so forth.

So that's why it wasn't in the QDR.

SHAYS:

OK, so just letting you know where kind of our head is, or at least some of us on the

commission, as you rightfully point out, half of our effort are contractors, and they aren't

integrated in. They are not considered important.

GANSLER:

Right.

SHAYS:

13

And so we then began to say, we were aware you were, but we're not there, some of us, now

because we said, you know, "Oh, it's an issue of managing it better, of doing . . ."

Well, if the Department of Defense doesn't get that they are hugely important and should be part

of the QDR, maybe it's not just a management problem. Maybe they're incapable of coming to

grips of it and therefore, maybe we are; if we can't oversee them well, maybe we have too many

of them.

And we aren't overseeing them well. And that's kind of what we're wrestling with. Isn't there

some reason to that concept? I mean, what is the point of hiring more contractors when we're not

going to oversee them well?

GANSLER:

Well, I fully agree with you that we have to manage them. This is not so much a problem of

fraud as much as it is a problem of waste.

SHAYS:

It's a huge waste.

GANSLER:

And therefore, we need to focus on the government management of the services contract.

SHAYS:

And if the government isn't even willing to recognize that they're so important to put in the QDR,

why do you even think for a second that they're capable of managing half of our personnel

overseas when they're not even in the QDR? What gives you . . .

GANSLER:

That has to be changed. There's no question about that. But that's not the contractor's fault. That's

the government's fault.

SHAYS:

Well . . .

14

GANSLER:

The government has to make that change and Congress can help that.

SHAYS:

But, so, then, what we wrestle with is, if the government isn't willing to, then maybe we

shouldn't be doing them as to the extent. Maybe we should—maybe—and asking you to consider

this, maybe we should only hire the contractors that we can properly oversee so that we don't

have this extraordinary waste. That's what we wrestle . . .

GANSLER:

And you wouldn't get the work done. I mean, what these people are doing—logistics,

maintenance, food service—all of those functions have to be done. Otherwise, you don't have a

viable force. Your choice isn't cutting them in half. Your choice is managing them better.

SHAYS:

And that choice isn't being made, and you rightfully agree. So what calls the question?

GANSLER:

What?

SHAYS:

What calls the question? This will continue. As important as you are, you have not, and as hard

as we've worked, we are not seeing that cultural change.

So my last question to you is what gets the cultural change?

GANSLER:

Well, all the literature in culture change is very clear: You don't put out a directive, you don't

write a memo. In takes time. It takes effort. And particularly what it takes in all cases of real

culture change is taking leadership with a vision, a strategy, a set of actions, and a set of metrics

that get measured.

15

We have to have that vision, that strategy—that set of actions. And I think the way to do it is not

to say get rid of the contractors, but to manage the contractors and to have the government

workforce recognize they have to bring people in. Maybe it's bringing in experienced services

managers from industry for a while. There's ways you could short-term that and try to manage . .

.

SHAYS:

Well, let me just say, my time has run out, but that's what we're wrestling with and that's what we

would love some guidance before we do our final report.

Thank you very much.

THIBAULT:

Thanks, Commissioner.

Commissioner Ervin, please?

ERVIN:

Thank you very much, Mr. Chairman.

Dr. Gansler, Mr. Francis, thank you both very much for being here. I very much appreciate it, as

we all do.

Dr. Gansler, I thought that your statement was thoughtful and incisive. I agree with about 95, 99

percent perhaps, of it.

GANSLER:

Thank you.

ERVIN:

Even the part I didn't agree with, I thought was thoughtful and incisive.

But I did have some bones to pick with you, and that's what I intend to spend my time in this

round with. And I intended to get into the issue that Mr. Shays got into with you later, but since

he began with it, let me begin with it, too.

In your oral summary of your written statement you were stronger and more emphatic on the

need, in your view, for positive incentives for contractors than you were in the statement. And I

have to tell you, like he, I'm troubled by that for two or three reasons.

16

First of all, it seems to me that thousands of years of human history show, and common sense

shows, that human beings need two things in order to act properly. They need carrots and sticks.

That's the first thing.

And then secondly, as you well know, as you know better than we given your expertise in this

area, there are incentives for good performance contractors. They're called award fees. And later

in the panel we're going to get some stories about how that process has been abused over the

course of our time in Iraq and Afghanistan. And, again, you're very familiar with that.

GANSLER:

Yes.

ERVIN:

And the third thing is, the way you put it, I wish I had the transcript in front of me and I don't

now, of course, but the way you put it toward the end, it was almost a plea for positive incentives

for contractors to do the right thing.

And it seems to me that the very fact that these contractors—and I don't mean to paint

contractors with a broad brush. Many, as you say, many of them, and I'm not going to get into

this, are performing critical functions. Many of them have risked their lives. Many of them have

lost their lives. So I am not reflexively anti-contractor.

But for you to say in response to that, that, you know, well, there's some examples of one

employee, you know, a bad apple that a contractor, that a company doesn't know about, you

know that there are many, many examples of that.

Isn't incentive enough that these contractors are spending taxpayer money and that they are doing

what they're doing in support of the war effort? Isn't that incentive to perform effectively and

efficiently and economically, in your view?

GANSLER:

Well, they still have, you know, the stockholders incentives and the over-pressure for making a

profit.

ERVIN:

Right.

17

GANSLER:

And the question is, how do they do that? Is it through higher performance, as Mr. Shays said, or

is it simply by doing something lackadaisical and wasting? And we have to create the incentive

and the management oversight that assures that they're focused on the things we want.

ERVIN:

Yeah. No one would disagree with you here about the need for management oversight, and

there's no question but that the government has a huge, huge responsibility here that it's not

exercised.

But there have been egregious examples repeatedly in Iraq and Afghanistan of contractor

irresponsibility. And so I just don't understand your focus here.

And further, what you said just a second ago to me is a good segue into what I intended to begin

with, and that's this whole notion of inherently governmental. As you say, unlike the

government, contractors do have to pay attention to their stockholders, at least those that are

public companies, and government doesn't.

So that leads me to the second question, again, that I intended to focus on. That is I could not

agree with you more—this gets back to the 95 percent of the statement that I agree with—that

OMB's attempt to define inherently governmental was inapt. It was essentially tautological.

Basically, what it says is something is inherently governmental if contractors shouldn't do it.

And I also agree with you, which further proves to me that I'm not reflexively anti-contractor,

that in those instances where it cannot just be asserted but can be proved that contractors can

perform a given function cheaper and just as effectively or more effectively, than government,

than contractors ought to perform that service.

But to me all that begs the question here and the question is: what, in your view, what functions

should be inherently governmental? What functions should only government perform?

Now, we have some notions among ourselves about that, but I'd be interested in your views on it.

And I'm going to ask you the same question, Mr. Francis.

GANSLER:

I think clearly it's the management. It's the oversight. It's the decision-making. It's the budgeting.

It's the contracting.

ERVIN:

Have you seen examples of all that being performed by contractors over . . .

18

GANSLER:

No.

ERVIN:

. . . the course of Iraq. You haven't seen a single . . .

GANSLER:

No. I've seen examples of contractors in support of those functions and that's a big difference.

ERVIN:

Right.

GANSLER:

I mean, the analysis that supports a decision, for example, could maybe in some cases be better

done by a contractor with experience in that field.

ERVIN:

Right.

GANSLER:

But the decision-making should be and to my knowledge usually is. I don't have the specific

cases.

There are going to be some illegal actions, no question about that. I mean, that's why we have

jails. If everybody behaved we wouldn't need jails. But occasionally we are going to have some

abuses.

ERVIN:

19

All right. Let's stipulate to that. Contractors essentially carrying out management functions: I

think everybody would agree with that.

Are there any other functions that you would argue ought to be performed only by government

personnel?

GANSLER:

Contracting, budgeting, decision-making of all sorts. Oh, I would argue the most important one

is warfighting. That's inherently governmental.

ERVIN:

How about security then? I mean, people talk about fine lines.

GANSLER:

There are various forms of security, and that's on the gray area, I have to admit, because there are

functions that, in fact, separate studies have been done on the security forces, being done in

terms of economics and also functions. But I think that's one that you have to look at individually

in terms of the case studies. I don't want to comment on that generically.

ERVIN:

Do you have any views about that at all? Is there any aspect of security . . .

GANSLER:

Yeah, I think there are many areas where we have security people now in fixed installations that

are doing their jobs. And that seems to work effectively.

ERVIN:

Mr. Francis, how about you? You didn't raise this issue in your statement, to be fair, but I

presume there's been some GAO work on this or that you have your own thoughts about it.

Are there functions, in your view, that ought to be performed only by government in addition, of

course, to what everybody would agree with, namely management functions?

20

FRANCIS:

I would agree with many of the things that Dr. Gansler mentioned, particularly, you know, I

think about budgeting and those strategic decisions about what we are going to support.

I think that in the area of personal security contractors, I think that does have to be situational.

And I think what has happened and what we've reported on is sometimes volume gets away from

us.

So I think OMB has made a policy statement about what functions would be inherently

governmental. But there are those functions that are also closely supporting. And I think when

they gain in volume then the government can lose control over that function. I think that's the

hardest area to decide on.

So for PSCs, it may be you can make some good decisions in individually cases, but if it grows

too much in a contracted area, one could argue maybe the government has given away too much.

ERVIN:

All right.

Dr. Gansler, you raise on page 12 of your testimony a couple of examples. You cite a

Congressional Budget Office report from October 2005 in footnote 11 and a GAO report from

March of 2010 for the assertion for the claim that there are at least certain functions that

contractors can perform more cheaply than government.

Those are two examples. Are you suggesting that that's always the case, Dr. Gansler?

GANSLER:

Well, first of all . . .

ERVIN:

And one is six years old, of course.

GANSLER:

. . . Those were independent studies of non-inherently governmental functions. That's really the

important point here, because we have even found when we have government people doing non-

inherently governmental functions today, when we run A-76 competitions (in which government

employees compete with the private sector), that even when the government wins—and

21

sometimes they often do— there's huge cost savings as a result of the presence of competition. I

mean, if you believe that's the American way, you know.

And what we find on the A-76 competitions, over 30 percent cost savings and improved

performance, particularly when it's monitored afterwards and followed up.

ERVIN:

All right.

Well, let me ask you a follow-up—and I'll get to you if there's time, Mr. Francis—let me just ask

this final question, if I may.

That's a very good segue to another question I intended to ask. You just argued, eloquently it

seems to me, for competition, for the notion of competition.

On the other hand, in your statement, you seem a little jaundiced about competition. And I want

to probe that a little bit.

You say requiring competition on all awards has significantly reduced the incentive to submit

new ideas as unsolicited proposals. And I didn't really understand that. It seems to me you must

be saying that the reason that that would discourage people from submitting new ideas as

unsolicited proposals is because you'll have to compete it and otherwise, if you don't submit it,

you might get it as a sole source, it seems to me what you must be saying.

And, to me, if that is what you're saying, if you can do it better and cheaper, then you'll get the

award if it's competed, and if you can't do it better and cheaper, then you shouldn't get the award.

So I don't understand . . .

GANSLER:

The old idea of unsolicited proposals was for innovative new ideas that haven't been thought of

by the government, that industry is suggesting.

And in the old days, they would say, "Well, we’ll, give you a demonstration contract, then we'll

compete it after we see whether it works or not," this new idea.

Today, they're saying, "Well, we have to worry about our score card on competition. So thanks

for your great new idea. We'll put it out for competition and see if anyone else wants to bid lower

on it."

Well, that's a real discouragement for giving them some new idea. And that's all I meant by that

one.

THIBAULT:

22

Thank you. Thank you, Commissioner.

I might ask you, Dr. Gansler, or I might make the statement. I doubt if, and you talked in your

own statement about critical need, that there's a lot of room for demonstration contracts in a

contingency operation akin to the way we've done it in the past in OCONUS (outside the

continental United States). I just share that as food for thought.

Commissioner Green, please.

GREEN:

Thank you.

And thank you both for being here.

Dr. Gansler, I concur with Commissioner Ervin. I agreed with the majority of what you laid out

in your written statement.

I'd like to talk a little about something that Co-chairman Thibault mentioned in his opening

statement, and that is inertia and culture.

I recently went through the Army posture statement for 2011. And I see very few or no

references in there by senior leadership about services contracting. And I'd like your feeling on

whether it gives sufficient attention to this, what we all believe is an important subject, and then

I've got a follow-on.

GANSLER:

Well, that's what we found with the Defense Science Board study—by the way, that report

should come out this week. And I have some early charts on it, but the main conclusion was that

all of the rules, all the practices, all the policies, most of the legislation, et cetera, are all focused

on buying things, goods. We don't do any training.

When I was undersecretary, I paid for 100 case studies to be written for the Defense Acquisition

University. They all came out to be on products. No case studies on services.

Well, the people are being trained on buying products, all the rules are written around that. And

certainly, as Mr. Francis mentioned, the field commanders don't have any education, training

about the fact that they're going to have all these people doing services for them, of 50 percent of

their work force. That has to be part of the exercises, part of the rules, part of the practices, and,

as you point out properly, part of the culture.

The emphasis has to shift in their policy statements and their QDRs and elsewhere on the

importance of services when more than 50 percent of what they buy today are services.

23

GREEN:

Thank you.

We all acknowledge the fact that there has been a lot of progress made and people are working

hard. You mentioned some of them—the standing up the Army Contracting Command and

Expeditionary Contracting Command, the commitment by the secretary of defense to grow the

acquisition workforce by 10,000 or so, the new general flag-officer positions that have been

created.

Also, some negatives. You mentioned one, the DAU (Defense Acquisition University) and the

little emphasis on services in our principal and primary education facility for contracting.

In the recent DSP study that you did, that you headed, one of your findings, and I quote this,

"senior leadership still pays little attention to services contracting."

I would re-enforce that with a couple quotes here from your organization, Mr. Francis, a June

2010 report said that cultural change emphasizing awareness of operational contract support

throughout DoD is needed, and a more recent GAO study in April 2011, that sustained DoD

leadership committed to this are needed to ensure that policies and consistency are put into

practice.

I contend that without senior leadership, and I mean at the most senior level, without senior

leadership paying attention to this, we will not change the culture and we will not institutionalize

many of these recommendations that all of us are concerned with.

I'd like your comments.

GANSLER:

Culture change starts with the leadership. And that's what you're suggesting and that's what all

the literature says. And clearly, that's the way to change an organization is through leadership.

The one observation I would make on your statement that I want to amplify, and that is when

you said they are talking about hiring in-house acquisition workforce. I think they need to

distinguish there between acquisition functions that are inherently governmental and those that

aren't, because acquisition is encompassing in terms of even logistics. For example, truck driving

is not an inherently governmental function. Maintenance is not inherently governmental.

So you want to make sure that when you're hiring the acquisition workforce, it's for those

inherently governmental functions.

GREEN:

What is your confidence level, on a scale of 1 to 10, with 10 being great, that senior leadership

will get it?

24

GANSLER:

Oh, I don't know. Maybe six and a half.

GREEN:

With the . . .

GANSLER:

It's hard to overcome cultural inertia.

GREEN:

No, I understand that.

FRANCIS:

Mr. Green, if I may, I had two thoughts on Secretary Gates's memo in January. One is, gee, it's

about time that this got this kind of recognition, but, at the same time, at the same time, it's like

are we coming to this point for the first time, eight years into it? So that's a concern.

I think one of the things about culture is you have forces that say the status quo is OK. And I

think part of that has to be there's been money to enable people not to be too concerned about

managing services.

GREEN:

I agree with you. I agree with you.

But, you know, as we look down the road, and if we look at the budgets that we're all going to be

facing in the federal government, and the pressure that currently exists with groups like us and

SIGIR and SIGAR and others, when that goes away, and troops come home, is anybody going to

give a darn about this?

GANSLER:

I think that what you've just highlighted will be the driving function, namely, less dollars.

25

When the supplementals disappear, when the budget declines, clearly the people are going to

have to start paying more attention to what things cost and how well they're managed. And if

they accept the fact that 50 percent of it is services, they're going to have to figure out how to

address the management of services.

GREEN:

But there's very little constituency for services things. I think we've got a real challenge ahead of

us to not just change the culture at the senior level, but to get operational folks to pay attention to

this.

Because I strongly believe this is the way we're going to war. We're going to go to war with

contractors. It may not be one-to-one, as it is today, and particularly with the decrease in budgets,

more and more of the old combat service-support stuff that we're used to having, that we were

used to having done within the services is going away. And we either down-size the mission,

which nobody wants to do—we salute and say, "Yes, sir, three bags full, we can do it."

But that may be something that we have to look at and just literally bite the bullet.

GANSLER:

In the commission that I ran, we were all very surprised at the fact that all of the training courses

for the combatant commander portion of it, and as Mr. Francis mentioned, didn't even mention

the role of contractors, when they are more than 50 percent of the workforce. That that has to

change. They have to realize how important that is to their overall function, and that has to be

part of the education process and it has to be part of the exercises. Contractors should be taking

part in the field exercises.

GREEN:

Well, my time is up, but they have started, but it's maintaining that that I have concerns about.


THIBAULT:

Thank you, Commissioner Green.

Commissioner Tiefer, you're up, sir.

TIEFER:

26

Thank you, Mr. Chairman.

And I just want to express my gratitude to you for leading this effort. Dr. Gansler, as has been

mentioned, has been before us before. I remember he was at one of the very, very first of our

early briefings, and we have a panel of inspectors general on our second panel, which we also

had on as our very, very first hearing.

And at the time, I had my doubts about these, and you reassured me that these would be great

briefings and hearings, partly, both because they were and partly because you said, "Well, we

can have them in in a while to see what's happened." So that's what today is: the fulfillment of

your prophecy.

Dr. Gansler, one of your own classic issues has been the overuse of cost-type contracts in

situations where we could just as well have fixed-price contracts and by doing so we would

allow a broader range of companies to come in and compete for them and maybe get lower

prices because we wouldn't have to depend on fancy accounting practices and contractors who

can function that way. And you also mentioned today that there is a danger that if we narrow our

choice of companies too much, we can end up with monopolies.

I want to ask you, if I have an example, I think I do, but it's one that's quite important to us. In

LOGCAP, we have cost-type contractors at the top. In the past, it was KBR. Now, it's DynCorp

and Fluor. But under them, we have fixed-price or fixed-rate subcontractors. The main example

is Tamimi, which does dining facilities. And they can't do cost-type contracts. They don't have a

segment that can do the accounting and so forth.

And we have speculated that it would be possible to break out some of these activities like dining

facilities that could themselves be competed, and instead of having them under cost-type

contracts, have them be direct fixed-price contracts.

Do you see promise in approaches like that?

GANSLER:

No. And my reason is that those subcontractors need to be managed and one of the functions that

the prime contractor provides is subcontractor management of these smaller firms, in many cases

even not U.S. firms.

What I do think is important about your comment, and I certainly fully agree with it, is the fact

that one of the things we want to bring into the services sector are a lot of commercial firms.

TIEFER:

OK, let me . . .

GANSLER:

27

And those don't have the cost-accounting ability.

TIEFER:

. . . all right. I have my answer. Let me go on to Mr. Francis.

I'm drawing on your relatively current report, it's not that, it's pretty recent, "Improvements

Needed in Management of Contractors Supporting Contract and Grant Administration in Iraq

and Afghanistan." And if I understood the way the punctuation marks would go in there, we have

a problem similar to what was mentioned in previous questions about contractors managing

contractors, or contractors working closely supporting the management of contracting.

Now, you found 223 contracts worth $900 million—is that right—for the performance of

administrative functions for other contracts in Iraq and Afghanistan?

FRANCIS:

Yes, 900, or maybe it was 990. Yes.

TIEFER:

OK. And you think that amount has stayed up at that pretty high level? I mean, these are not

contractors who are out there digging ditches or riding shotgun or something. They're just

helping manage other contractors.

FRANCIS:

That's correct.

TIEFER:

Wow. And I see that you looked at what is a favorite example for this commission, the Aegis

Company was manning the ACOD, the Armed Contractor Oversight Division, which supervises

in Afghanistan all the personal security contracts and they were also going to compete for some

of those personal security contracts. And I remember when Commissioner Thibault came back

rather excited from Afghanistan, one of his early trips, he dug this up. It's like he'd brought home

an animal he'd shot, and he said, "I'm not sure what species this is, but it's nothing you see in the

United States."

(LAUGHTER)

I think I'm making trouble for myself here.

28

But to go on, what was your view at GAO of the ACOD contractor who was doing this, they had

an organizational conflict of interest?

FRANCIS:

Yes. I think, as we reported, that would have clearly been an organizational conflict of interest

because they were both going to oversee and possibly bid on that contract. Now, it was caught

eventually and they did not get the oversight contract I think because they were making plenty of

money providing the service itself.

But I think what's illustrative here is these situations, I think, are going to occur and it's

incumbent on the government, which I think is what Dr. Gansler had mentioned, to be able to

provide oversight and do those kind of checks so the government can protect its own interests.

And I think this situation is illustrative of a situation where contracting officers have so much to

do and such high volume, these are the types of things that get missed in those situations.

TIEFER:

And am I right, it was preached to us that mitigation plans and other prophylactic steps can solve

these problems. Was it the sense that the ACOD problem of Aegis could be solved by mitigation

plans?

FRANCIS:

In many cases, they can, but I think this was a situation where I don't see how a mitigation plan

could have alleviated the risk of somebody overseeing a contract and then also being part of that

contract.

TIEFER:

I'm praying for extra time on the second panel, so I'll yield back now.

THIBAULT:

Thank you, Commissioner, I appreciate it.

Commissioner Schinasi, please.

SCHINASI:

29

Thank you.

And good morning and thanks for being here and thanks for your service, both of you. I know

you've been at this quite a while.

I think I would agree with the concerns that you both raised about focusing on hardware instead

of services in terms of the way we look at buying it. But I think you probably even understate the

problem. One of the examples that has been brought to our attention recently is trying to get

radios in a contingency. And because there was not enough procurement money to buy radios,

we're now paying a contractor for communications services and we're leasing those radios, so

we're paying for them over and over and over. So I think it's even worse than you've pointed out.

I don't share your confidence, I don't think, in getting change here. You've both said it can be

done. Yes, it can be done. Will it be done? I think we need to talk more radically maybe about

how change occurs. We talked about taking the money away. We saw the peace dividend. Have

we seen any change in the way the military develops weapons and buys weapons? I don't think

so. If anything, it's gotten worse.

We have had in the last administration a focus on the business side of government agencies with

the president's management agenda. This administration—the president came in calling out

particularly government contracting as something that we need to pay attention to; all the work

that you all have done. You know, I'm just not sure what it's going to take.

But I would like to think about it not so much as diminishing waste, but maybe diminishing

expense. And you both have raised the issue of local requirement-setting processes and the need

to get people more attuned to the fact that if they spend money in one place, it's not available

someplace else.

Let me ask you about incentives. How do you incentivize the commanders in the field to

understand that they can't have everything that they think they want? I'll start with you, Mr.

Francis.

FRANCIS:

Sure. I think today the situation is obviously, the commanders have warfighting on their mind

and that's their primary obligation. They don't necessarily have a good feel for what the

contracting process is and what it takes to set requirements and translate them into a statement of

work.

Nor is there, I think, a good enough relationship between the commander and the contracting

officer because the contracting officer does know how to do that. Our work in the past has found

that once a contract is let and once something is in motion, then a preference, if you will, for

incumbency can take place. In this case the commander is happy with the service and not so

concerned with the cost, because that's not what he or she has to worry about.

So I really do think that can bring pressure on the contracting officer just to get it done, and I

think the default position is to get it done the way it's been done.

30

SCHINASI:

So you require a budget? You require the commander to stick to a budget?

FRANCIS:

I would say so. At least at some level there has to be a reason to manage differently. And I think

that's kind of what we've been talking about with the policies. As long as there's no downside

consequence, as long as we can pay our way out of it, I don't see the imperative to do something

different.

SCHINASI:

Dr. Gansler?

GANSLER:

Well, I think, as Mr. Francis pointed out, the main thing that the combatant commander is

interested in is urgent needs for military operations. And he has to work very closely with the

contracting officers on the local services that he asked for.

If the combatant commander said, "I want three meals a day," the contractor officer knows

enough to ask him, "Sir, do you mean steak and lobsters or meals ready to eat?" you know. And

there's a big difference here in terms of what he gets. And that's the requirements process, if you

will.

I do think it would help a great deal for a closer linkage there, and I think it would help a good

deal if you had the contracts capability and the funding for it, for these local needs and services

for the combatant commanders.

In other words, if he had some authority, as Special Forces does, for example. Special Forces has

both the contracting and the funding to do this. The former Joint Forces Command also had that

authority. But the other combatant commanders don't have that authority and should have some,

I think, additional authority. And that forcing function of resource constraints would then decide

what you really need versus what you'd like to have.

SCHINASI:

But the contracting authority is not going to be a forcing function because putting the contracting

authority in the hands of the commander, there's no reason to say he won't say steak . . .

31

GANSLER:

No, one of the requirements has to be cost or price, you know. If in the future we're going to be

writing our requirements, I think, because I agree with the statements that were made by other

members of the commission, that we're going to be resource constrained, which we haven't been

for the last decade—and that's the loudest, to not worry about how much something costs, but

what do I like to have.

In the future we will have cost as a requirement. We've done that before in the past. The JDAM

missile, for example, you know, it had only three requirements. It should hit the target. It should

work. It should cost $40,000 each. Now it hits the target, it works, and costs $17,000 'cause cost

was a requirement.

Well, we can put that on services.

SCHINASI:

If you could give me more examples of a JDAM I would feel more confident, but I take your

point.

GANSLER:

I would, too. And we've tried doing that with things like the Joint Strike Fighter, but in the last

decade we've lost sight of it. We tried doing Global Hawk and lost sight of it.

SCHINASI:

Right.

GANSLER:

I can give you lots of examples where in the rich man's world of the last decade we haven't paid

attention to cost.

SCHINASI:

Right.

32

GANSLER:

We now have to start doing it.

SCHINASI:

Is there something in . . .

THIBAULT:

Commissioner, can I please?

You know, the only comment I'd make in this, just for my reference, is you're providing all these

examples, Dr. Gansler, and they're all platforms. And yet you're the one in your testimony that

says this is about services in terms of the dollar and the volume of the contractor support and all

that. So I'd just share that and . . .

GANSLER:

You're absolutely right. We haven't done it for services, and I would argue we should.

SCHINASI:

I was just gonna ask, is that kind of change, does that require a change in the Goldwater-Nichols

legislation, what you're talking about, giving contracting authority to the commanders? Have you

looked at that?

GANSLER:

No, I don't believe so, because the fact is that two of them have it. And therefore, if that's the

case, why couldn't all of them have it?

GANSLER:

I don't think it requires a change in law.

SCHINASI:

OK.

33

GANSLER:

But I do think we have to say what is an affordable price and a reasonable price, not simply put

price as the only consideration.

One of the things that scares me now that's happening is a lot of the contracting is shifting to low

bid, technically acceptable, you know. I'm sure none of you drive a Yugo. You know, that's low

bid, technically-acceptable car.

We don't do business that way ourselves. We don't certainly buy our heart surgeon's services on

the basis of low bid. We look for quality and low bid . . .

SCHINASI:

We're on the record supporting that as well. So thank you. Thanks.

THIBAULT:

Thank you, Commissioner. You actually segued into my third item, but I'm going save LPTA,

low price, technically acceptable, till then.

In your testimony and in your 2007 report, Dr. Gansler, you mentioned, you know, in the

importance of following up on them, 90 cases of fraud.

GANSLER:

Yes.

THIBAULT:

And you do it in the testimony. We've got a witness, and that was through 2007. We've got a

witness coming up, 2003 to 2007. That was your time frame.

GANSLER:

Yes, but those 90 were under investigation.

THIBAULT:

34

No, I understand they weren't convictions.

GANSLER:

Right.

THIBAULT:

All right. Now, we got a witness coming up here from the deputy inspector general for auditing

from the DoD IG, you know, that fields those just for defense through his area. And his

testimony says the time frame, 2003 to 2010, the number is 398.

Now, I accept both your numbers. But are you concerned that the first five years it was 90 and

the last three years it's added 308 through the simple math of both your—that seems like a pretty

significant increase. Observation?

GANSLER:

I don't have any insight into what has caused that. I know the 90 was the number that the

secretary of the Army gave me when I did the commission.

THIBAULT:

Right.

GANSLER:

And what has happened since then, I don't know. If we had more people checking on it we might

find more possible cases . . .

THIBAULT:

Well, I think I'll explore that, but the point I wanted to make is, that wouldn't fit your reward and

recognition but it certainly would fit your point about you have to have oversight and

enforcement, kind of Commissioner Ervin...

GANSLER:

My reward and recognition would be the ones that weren't on that list.

35

THIBAULT:

Well, I understand that. But if you're got 300, and it's interesting, and another point I wanted to

make quickly. All the examples that come forward, it seems there's a disproportionate number,

and I guess its appeal in the country, maybe people think it's the reader, on military cases, you

know, Major So and So, Captain So and So?

Well, I want to share with you that in that data there were 11 Article 32s under investigation out

of the 398. I think it's real important to say that because it's more in the two-point-something

percent that are Article 32s, meaning the military. And so the vast majority, the 97-plus-point

percent, you know, there may be a few government employees in there, but that's why there's a

need for oversight, and I'll make that observation.

Dr. Gansler, you talked about the importance of senior leadership, which I couldn't agree with

more. In my way of thinking, based on experience and talking to an awful lot of individuals such

as yourself, I think of the Pentagon senior leadership as—personally, and I'm going to ask

whether you two agree—as general officers, Senior Executive Service individuals, and political

appointees. When we get into theater the political appointees work from back here and so there

are general officers and there are SES, Senior Executive Service. Does that fit your definition of

senior leadership?

GANSLER:

Well, clearly—by the way, those SESes are all volunteers and . . .

THIBAULT:

Well, I understand all that.

GANSLER:

. . . and they aren't being recognized . . .

THIBAULT:

And, again, my question is, does that kind of fit your definition?

GANSLER:

Well, certainly. And that's the reason that the . . .

36

THIBAULT:

OK.

GANSLER:

The Washington people set the policies. The people over there I think . . .

THIBAULT:

We all know that.

GANSLER:

. . . should be in uniform.

THIBAULT:

We all know that. I just wanted to define it because I got a point to make in a second.

GANSLER:

OK.

THIBAULT:

Do you see that any different, Mr. Francis?

FRANCIS;

No, I agree with that definition.

THIBAULT:

OK. My point I want to make, though, then, Dr. Gansler is in your testimony, which I kind of

share with you, and it builds on Commissioner Green's comment that for senior leadership there's

37

a problem. And that's a lack of training, your words, lack of experience, your words, and a lack

of management strategy. And therefore they reward compliance over performance and they stifle

creativity and effectiveness.

Are we talking about this—you know, I got to be right to the point—are we talking about the

lack of training, experience, and management strategy—senior leadership, General Petraeus,

General Caldwell, who runs the training mission—is it ultimately their responsibility to turn this

around?

GANSLER:

I certainly think they would be major players in it.

THIBAULT:

So you . . .

GANSLER:

But not exclusively. I think the secretary can do it. I think the undersecretaries can do it.

THIBAULT:

But in theater, you know, and I bring that up . . .

GANSLER:

In theater it requires the military officers.

THIBAULT:

. . . because I couldn't agree with you more, but to me it's alarming, and I'm really glad you said

it, they lack training, experience, and management strategy. Because I couldn't agree with you

more, and that supports . . .

GANSLER:

In my commission I was shocked to find that the five general officers the Army had had in 1990

with contracting background. They had zero.

38

THIBAULT:

OK. Fair enough.

You talked about my third item, LPTA, lowest price, technically acceptable. You try somehow to

figure out what works, you know, can they do the job, and then you rip the envelopes open and

you give it to the low price.

Are both of you familiar with Afghan First?

GANSLER:

Somewhat.

THIBAULT:

Afghan First is driving very substantial billions and billions of dollars, and because they don't,

these are Afghanistan firms, have the kind of accounting system someone talked about, they rip

the envelope open—they have to decide can they do security on bases, for example, and they rip

it open.

You said sort of. Do you have a view . . .

GANSLER:

Well, yes, my view is that . . .

THIBAULT:

Is it working? That's my question.

GANSLER:

The concept makes sense from the viewpoint of getting them off the streets and getting them

from being insurgents. But if you want them to do a good job, you've got to be able to have some

quality, not just low bids.

THIBAULT:

39

Here's where I'm going to ultimately be talking about the importance of contractors, but also the

importance of best value. Do you have a particular view on how Afghan First is working or not

working?

FRANCIS:

No, I'm familiar with the program, but we have not done any work on how well it's working.

THIBAULT:

Let me give you all an example of something that we ran into last month in a trip. We've taken a

lot of trips, and we make a point of going out to forward bases. And we were briefed at the

organization that owned several forward bases.

One forward base—and at the end, I'm going to ask you, you know, what's your view—but one

forward base had a situation, they call them health-and-welfare inspections, but the idea is to

make sure these Afghanistan employees on the base, security guards, they're guarding the

perimeter, they're saving American lives, supposedly, if there's an attack on the perimeter.

And there's 400 forward bases, and about 200 have Afghan guards. That's the general math that's

accurate.

And they found within the living confines in one that they briefed us on—these are the military

security officers on that FOB, along with the base commander—that they briefed us on that they

found pressure plates, electronic wire-ways, batteries and other devices that would make IEDs.

They found a full-blown Marine Corps colonel officer uniform pressed, and they found an

Afghani equivalent officer uniform pressed. Meaning you could kind of go around and get access

on that base.

They were on the base. They were approved. Supposedly they were technically acceptable.

Their solution was three individuals, they said, the company said, left real quick, and they were

sure all the other 160-some guards were loyal. It was a Taliban hotbed. They hired local.

Now, those are facts.

They went to another base, the base we were actually on, and they did a health-and-welfare. And

they found four kilos of drugs, which, again, I'm supposed to be knowledgeable, but, you know, I

said, "What's a kilo?"

And they said, "Well, it's kind of like a brick."

And I said, "OK, four kilos."

And they found about half of the employees with some form of recreational drugs with them.

40

And that company, I said, "So you got rid of them right away?"

And they said, "No, their contractor expires in the end of May. We've talked to the CENTCOM

Contracting Command people, and we'll take that into consideration then."

You know, we're talking about lowest-priced technically acceptable for American military troop

lives, perimeter guards.

I know you have some concern about LPTA. Is that a triple-A example of what's wrong with

LPTAs, Dr. Gansler?

GANSLER:

I think that's what's wrong with not doing security on those people. The lowest-price technically

acceptable is probably the wrong thing to be using, period. But I think you also need to do

security on these foreign hires as well.

But clearly you don't want that to make that on the basis of no information on past performance

of the company, of their record, of their employees, of the security that we would do on a U.S.

company. Why would we do it on a U.S. company and not on a foreign company?

THIBAULT:

Well, you know, again, Mr. Francis, are you . . .

FRANCIS:

Yes. We've actually done some work in that area. And one of the things that we've found out is

screening contractors, particularly in Afghanistan, has not really been guided by policy. It really

goes by what the local commander does. So the policies have not been consistent.

We've currently gotten work under way looking at the vetting of PSCs. But I think one of the

issues that comes up here with the Afghan First is what's in the government's best interest?

And there's a policy dimension to, obviously, that program, which I think we understand. But

you're hitting an issue where there's got to be a line between policy and then the safety and

security of the unit.

THIBAULT:

Right, right. Go ahead, whoever is doing my time. I'm going to lead into the second round and

take my time there, so put about four minutes on that clock. And we'll expire downhill from

there.

41

I would propose to you that in a war where in Iraq we didn't have Iraqis guarding the perimeter.

We used third-country nationals.

I would propose to you that in a war where they try to hire local, if you're anywhere, in a lot of

the countries, a hotbed, if you're hiring people that are in a hot-bed area, locals, and everybody

certifies they're anti-Taliban, good luck.

And I would propose to you that it would probably cost about three times as much to do best-

value, third-country national, which is a proven concept 'cause they've got no loyalty at all to the

Taliban, you know, and your risk is reduced.

But when we were over there, we were told, "Well, no, we have to use Afghan First, because

that's the big program and we're counting numbers of people."

And I'd just propose to you there have been too many examples of soldiers already—we read the

papers, four, five, six examples where they've been shot by either military or guards, and I share

that with you.

Dr. Gansler, should contractors—quality assurance, big complex system—should contractors

inspect other contractors where they're both large firms and they're competitors between each

other?

GANSLER:

The point that was raised earlier about avoiding conflict of interest is a very important one.

THIBAULT:

But my question is, does that make sense?

GANSLER:

If they're independent contractors who don't compete with their people they're investigating, then

it does make sense. If they're not independent and they have conflicts of that sort, where . . .

THIBAULT:

No, they compete with each other. They put in . . .

GANSLER:

42

Well, no, you hypothesized a case, and I agree with you with for hypothesis, it doesn't make any

. . .

THIBAULT:

All right, let me be specific.

GANSLER:

Other contractors could do it.

THIBAULT:

We've been briefed by the J-6 folks, the ITT world, multiple location. ITT does an exceptional

job. They say they are a force enabler and they couldn't get it done without it, because they don't

have the capability to build these complex communication systems.

So they get good grades, but the good grades they get are from a firm called GDIT, General

Dynamics Information Technology, that is very active and a bidder also.

And I share that with you, because you give specifics of hiring generals and things like that, and

I couldn't agree with you more. But I think we have to stop and say, if we're doing an $800

million cost-type contract, and, oh, by the way, the inspection's a cost-type contract, you know, is

that in the best interest?

I'll also ask because this is near and dear to me, for obvious reasons. My history is as an auditor.

I share data that I obtained last Friday, you know, this is about properly staffing resources. And

the Defense Contract Audit Agency is a third.

There's a procurement organization, there's DCMA, which you've rightfully mentioned, and

there's DCAA that do the audits.

Their end strength had, the good news was that it had been sitting at about 100 increase for a

couple of years, and the good news was from 2009 to 2010, they added an end-strength of 4,328

to 4,725, or 397 auditors.

It takes an auditor two, three, four years to get effective. You know that, Doctor.

The interesting news is this year, because of funding limitations and other justifications, they're

targeting 21. So this year they're going to have a net plus-up of 21.

Now, I share that because the next slide that they presented is their backlog now is over $400

billion that's unaudited. And that's because they haven't been doing incurred-cost audits.

43

Now, contractors are faced with a five- and six-year backlog that increased their risk, because if

you find something in 2007 or '06, the first thing a good auditor says is how long has this been

going on?

And the word that I heard in a briefing was that if the auditor strength doesn't come up, the

workload's going to explode, get out of control.

First Mr. Francis, observation?

FRANCIS:

Sure. We're actually looking at the close-out of contracts in Iraq now. And, obviously, the

backlog is huge. And part of the issue is when the auditors go in, they find a lot of the things that

should have been done for contract oversight when the contract was let wasn't done, so they have

to go back and reconstruct the case, if you will.

I also think that numbers are a bit of a problem for us, because it's something we gravitate to, in-

sourcing, outsourcing, we kind of start with a solution and then work inward.

But I think the example you gave earlier in the ITT world is really illustrative because I think at

the heart of the problem was the government did not have the expertise to oversight the prime

contractor.

THIBAULT:

Exactly, exactly.

FRANCIS:

So then, it has to act in its own interest and buy that expertise. Well, now you're off to the races.

Now, you're getting yourself into a risky situation.

So I think all of that creates additional workload for the audit community, but I think it goes back

to how we set up and administer the contracts because that's where we're creating the risks.

THIBAULT:

Total agreement. And the secretary rightfully has a plan to increase 10,000 people. I don't have

time to go into the letter, the March letter that's pretty nebulous about all the approval levels if

you go over ceiling.

My time is up. And I do want to say, both Dr. Gansler and Mr. Francis, that Dr. Gansler don't—

sorry, Mr. Francis . . .

44

FRANCIS:

I'm not offended.

THIBAULT:

. . . For me personally, this was the best statement that's been brought up here. And you know,

simply because you engender discussion, and for that I thank you for your service. I thank you

for your service.

Now, I'm turning this over to Commissioner Shays because in the spirit of limping out of here

into the sunlight, I'm getting an operation on my toe, and my toe right now is pretty important to

me. So I thank you all for your service.

And Commissioner Shays, I'm confident he's right here, thank you, sir.

SHAYS:

Thank you. I'm tempted to say something funny, but I won't.

We'll go with Mr. Ervin.

ERVIN:

Thank you, Mr. Shays.

Dr. Gansler, you made a comment at the conclusion of the last round that you and I had together

that I wanted to focus on, and you said this in passing. You said that kind of the scuttlebutt in

industry circles now is that it's bad to be an incumbent because the likelihood is that an

incumbent will lose when a contract is re-competed.

And I want to ask you about that because you said that as if that were ipso facto a bad thing. If an

incumbent loses competition by virtue of having been bested by somebody who can provide it at

a better price, a cheaper price, and, of course, equal or better quality, isn't that a good thing?

GANSLER:

Surely. The reason that I made the observation is exactly the point that Mr. Thibault was pointing

out, which is too frequently now what we're doing is giving it away to a low bidder, you know,

somebody who simply is knowing how much it has cost in the past is simply low-balling it in

order to get the contract; not worrying about the quality.

45

And what I would argue is that when you're an incumbent, and this is a point that Mr. Shays

raised earlier, that if you're an incumbent and not doing a good job, you don't deserve to follow

on. But if you're an incumbent who's doing a really outstanding job and improving performance

and getting lower cost, I would say that they deserve the follow-on on a sole-source basis under

that condition.

But it's performance and cost that we should be evaluating, and too often we've been moving to

this low-bid, technically acceptable, and not using prior performance at all.

ERVIN:

OK. I don't want to get too detailed about these different contract types, but I just feel obliged to

talk about it a little bit. You wouldn't argue that there isn't a role at all for a low-bid, technically

acceptable? Because there are, it seems to be, certain things that . . .

GANSLER:

For buying towels and bread and things . . .

. . . Yes, not for engineers; I mean, the idea that you buy an engineer who has a degree because

he got it off the back of a match box and his temperature is 98.6, that's all that matters, and take

the low hourly rate for an engineer?

ERVIN:

Completely agree. Secondly, one of the issues that you raised in your statement is, in your view,

the need to incentivize DoD civilian people to participate in the war zone. And that troubles me a

little bit. You know, we're in two wars now, and if you include Libya, we're in three.

GANSLER:

Right.

ERVIN:

And it seems to me that we shouldn't have to incentivize people who are paid by DoD to go to

the war zone.

GANSLER:

46

People don't like to be shot at. And you know, the military do get hazardous-duty pay. The

contractors do get extra pay. What we found in the commission was that the civilian volunteers

were not getting major medical, long-term medical costs. They were not getting their life

insurance adjusted for acts of war, which most life insurance doesn't cover. You know, things of

this sort. And special compensation for going, for example, tax waivers, which others get, but

they weren't getting.

So we proposed a set of things to encourage people, the top people, to take these jobs. They also

were being discouraged by their own bosses to go because they felt they were too important to

leave. But on the other hand, I was surprised to find that when this was proposed through OMB,

they didn't want to do it because it would raise costs.

ERVIN:

Right. Given the exigencies of war, and that's only going to increase as time goes by because we

apparently are not ratcheting down our commitments overseas and at the same time

concomitantly our budget's going down, shouldn't we think about making some time in the war

zone for civilians in DoD a condition of employment in the same way that spending time

overseas is a condition of employment for diplomats?

GANSLER:

I think we can do it through volunteer, but plan for it. I mean, the thing that we weren't doing

was planning for it. And there are now efforts underway to try to have a contingency group. And

certainly the concept of using the reserves for that function might be another way of doing it.

ERVIN:

Let me just ask a couple other questions, since Mr. Thibault exceeded his time.

One of the things you raised, Dr. Gansler, on page 6, page 13, actually, of your testimony, you

called for recognizing a beneficial segment of a contractor market, namely non-traditional

government contractors. What did you mean by that term "non-traditional"?

GANSLER:

Commercial, the ones who were, I mean, part of the problem here is that services are often listed

in the Yellow Pages, you know, the kinds of service, truck driving or, you know, things of that

sort, or even maintenance-type of things for commercial aircraft or military aircraft. There's a lot

of services functions, food service, as an example.

And these are people who are not traditionally defense suppliers because of things like cost-

accounting standards, intellectual property rights, export controls—all of the barriers to

47

commercial firms doing defense business. If those were removed, we could get some of the

companies who have the experience and low cost as a result of commercial competitions.

ERVIN:

Thank you. And my final question goes to both you, Dr. Gansler, and to you, Mr. Francis. It's

really kind of an uber question. On page 16 of your testimony, Dr. Gansler, you lay out three of

what I think are just no-brainer common-sense recommendations: establishing a single playbook

for contingency service contracting; requesting a modification to the federal procurement data

system to create a separate tracking element for each contingency operation; granting limited

acquisition-contracting authority to the geographic combatant commander.

It's so commonsensical, and then later in your testimony you explain, you know, where DoD is

with each of these and the short-hand way of summing it up is, you know, some progress, but not

enough, even though it's commonsensical.

And then you raised at the end of one of your rounds, Mr. Francis, kind of the question that's

hanging over everything, it seems to me, that we're exploring here today, and that is: Why?

You know, you mentioned in passing that here we are eight years in Iraq, 10 years going in

Afghanistan, and we still are trying to measure the number of contractors in theater in both

places. So why are we where we are with regard to these issues, both of you?

FRANCIS:

Well, I think one thing is services themselves are not well understood. You can't label them. You

know, a JSF (Joint Strike Fighter) you can see. A JDAM (Joint Direct Attack Munition) you can

see. But services are just that multitude of things that people don't want to know. They're the

housekeeping chores. And obviously that's not an accurate representation, but it's not something

that people worry about.

If you look at the budgets for services, they're in O&M accounts. You're very hard-pressed from

an auditor's standpoint to find where the money is and to hold people accountable. And I think

we've been able to kind of buy our way out of it. We haven't had to worry about it because if we

didn't do something right, there's money to do it over again.

I do worry about the point Mr. Green brought up, is that when these operations do scale down

and things return to some kind of normal, I think the imperative, if there's any right now, is going

to go away and we're going to go back to situation normal, which is if you go back in time and

look at how we've budgeted for these activities in peacetime, the same problems have existed in

peacetime. They've gotten worse in wartime. I think we'll just go back to the old way of doing

business.

ERVIN:

48

Thank you. That's very helpful.

And if you could just give me a short answer, Dr. Gansler.

GANSLER:

Same answer. People object to change and when they have a lot of money, they don't have to

change. I think they will recognize that they need to change. I mean, keeping track of how many

people we have and what they're doing and the categories, I mean, it's silly. LOGCAP, for

example, is in one category, you know, and yet we do thousands of different things under that

category. Some people drive trucks. Some people do maintenance, et cetera, et cetera.

We need to be able to know what they're doing and be able to track it. And that's a change.

ERVIN:

Thank you both.

SHAYS:

Thank you.

I'd just remind the commission members, we had said that this was such an important panel that

we would allow the members to go eight minutes instead of five, so if the clock would just give

Mr. Green eight minutes, if he doesn't want to use it, he does not have to. He has the floor.

GREEN:

Thank you.

Dr. Gansler, you indicated a degree of satisfaction with the fact that the Defense Department has

added 10 general flag officers to the force. But you also indicated disappointment that, at least in

the case of the Army, that those were acquisition general officers as opposed to contracting

general officers. And you made some reference to that in one of your responses to another

question.

The Army has created an Acquisition Corps, and we have heard from a number of people who

have an interest in this area that that's not enough and that maybe we ought to look at a

contracting branch, whether it's within that Acquisition Corps or a separate branch.

I'd like your comments on that?

49

GANSLER:

In our commission we recommended that there be more professionalization of that, which is

consistent with what you're suggesting.

It is clear that the general category of acquisition is so broad that you can put somebody who's

been a logistician all his life, for example, and give him that charge of contracting. You have a

learning process that has to go on. It would be much better if you had someone who had that

particular background.

I think the professionalization of the acquisition senior people is something that, in fact, starts

with the Packard Commission. When we were on the Packard Commission we found that the

Army, for example, in that case had had four people in charge, four-star generals in charge of our

Army Materiel Command who had never been in acquisition before. I mean that just is

inexcusable.

So we wrote rules that you have to have some background in order to get into those positions,

like program management and so forth. I think we have the same requirements for these new

general officers, but it's going to take time. And it's important that we start promoting people. I

mean, if you're a young major trying to go into a field for the Army and you want to say, "How

do I get promoted?" and if there's no general officers with a contracting background, you're not

going to pick contracting.

So we need to have that potential for them to get promoted into those positions and we need

people with experience in those positions.

GREEN:

Would you advocate a separate branch for contracting?

GANSLER:

I think there's some distinct advantages to doing that. And we certainly recommended that for

promotion reviews and so forth, promotion boards.

GREEN:

OK. Fine. Thank you.

GANSLER:

I might point out, by the way, that even the Goldwater-Nichols bill is being violated every day in

terms of the ratio of promotions. I used to have to send, when I was undersecretary, send letters

50

to the service secretary saying, "You're violating the law." But that didn't do much good. They

said thank you for my interest in national security.

(LAUGHTER)

GREEN:

Yeah. Well, that's the way a lot of those letters get answered.

You've been a participant, as we all know, and in many cases the chair of numerous studies and

boards and commissions, and we certainly respect your service and what you have to say, not

only today but in the past.

As I recall in the Gansler report, somebody said that, what, 21 of 22 of the recommendations had

been, and correct me if I'm wrong, had been adopted or addressed, I'm sure, you know, different

degrees of success.

What process do you use, or have you used in ensuring that progress continues to be made? And

I ask that because we as a commission are going to face exactly that same problem, and I'm

going to ask this same question to the next panel.

We've got a challenge with following up on whatever findings and recommendations that we

have. And so I would welcome any thoughts that either one of you have on the best way or a way

for us to do that, so that we do as much as we can to ensure that our final report and previous

reports don't, like so many, end up on the shelf gathering dust.

GANSLER:

This is a lesson I learned from Dave Packard and the Packard Commission. Dave said make sure

that the law says we'll come back in a year and find out if they got implemented.

And, fortunately, when I mentioned that to Secretary Geren with the commission, he said, "I'll do

it." And we did have, and that's where your numbers come from, that at least they took some

action, sometimes not full action, and sometimes even disagreeing action, but at least they did

address each of them when we came back a year later to review it.

And I think that you're going to have to do something of that sort. There has to be some way of

following up.

GREEN:

Oh, I agree.

I'm done.

51

SHAYS:

I thank the gentleman.

Mr. Tiefer?

TIEFER:


Mr. Francis, going back to the report we talked about earlier, which are the conflict-of-interest

protections in situations where you have contractors overseeing or managing other contractors.

We talked about organizational conflicts of interest. I want to talk a little about personal conflicts

of interest.

We have focused in on this, but we did not make a recommendation yet. So we still have to

decide whether to. And if you can't answer some of this question, just take it for the record.

I think the goal has been that if the contractor is, in effect, sitting next to a federal employee in

managing a contract that the same ethical requirements that you apply to the federal employee

should apply to the contractor. Is that a generalization that we look for?

FRANCIS:

I think that would be generally correct.

TIEFER:

OK. But with respect to financial disclosure forms, my understanding is that there's this sharp

difference between a senior federal contract-management employee, who has the same

constraints on him that I do as a senior federal employee or that all the members of Congress in

the buildings that we hold this hearing in have on them that's different.

Went I do a financial disclosure form, I sign it under express warning that the penalties of 18

USC 1001 apply, which is effectively as if it were signed under penalty of perjury. I don't believe

contractor employees are put under that penalty, are they?

FRANCIS:

That I'd have to take for the record Mr. Tiefer. There is a distinction between a personal services

contractor, obviously, where the rules are somewhat different and the legal authorities are. So

there may be a distinction between that and a regular contractor.

52

TIEFER:

OK. I think the next one, though, the other thing is that even if they do, even if this contractor

employee sitting next to me does a financial disclosure form, it isn't made public the way mine

is, the way every member of Congress is. It's just circulated internally. Isn't that right?

FRANCIS:

I'm not sure.

TIEFER:

Have you ever seen a public one?

FRANCIS:

Well, I haven't.

TIEFER:

Have you ever heard of a public?

FRANCIS:

Well I haven’t.

TIEFER:

Ever seen one?

FRANCIS:

For the contractors themselves . . .

TIEFER:

53

Yeah.

FRANCIS:

. . . I have not.

TIEFER:

No, no. And so I just make this observation that the way in which conflicts of interest are policed

at my level in the Executive Service or among members of Congress, is that the press looks at

them and checks up and says, "Well, wait a second, you owned a piece of land? Well, that

particular piece of land turned out to be a pretty good deal, didn't it?" They catch you. They're

not going to catch this among contractor managers.

Suppose it turns out that, as you and I suspect, these aren't public contractor-employee financial

disclosure forms. Aren't we missing a safeguard on them that we have for government employee

disclosure forms?

FRANCIS:

I'm not so sure that they would have to be public to get that kind of scrutiny. Again, I would put

the burden on the government. It's the government's responsibility to look for those conflicts and

be aware of that, again, coming back to managing risk.

So I don't think we should rely on the media, for example, to perform that function for us.

TIEFER:

OK. Would it be a supplement, though, if we're going to say that if we're going to put the same

restrictions on the employee sitting next to the federal employee, the contractor sitting next to the

federal employee, if we're going to put the same restrictions on then they would have to be the

same restrictions, including how a disclosure form is looked at?

FRANCIS:

I guess we'd have to look at what the other consequences are of that. If we had that kind of

restriction, if you will, or possibility for publication, then I don't know what that would do to the

pool of contractors we'd have available to us. So, again, we have to look at what's in the broader

government interest.

So I don't have an easy answer for you there. I think it's a complicated question.

54

TIEFER:

I'll take the rest of it for the record. And I'll yield the balance of my time.

SHAYS:


Ms. Schinasi?

SCHINASI:

Thank you.

Dr. Gansler, you made reference earlier to the Congress and the Congress having a role in some

of this. I was reminded of a former chairman of the House Armed Services Committee who said,

you know, we would not have an army of shoppers larger than the Marine Corps.

You could agree with that statement but, unfortunately, it was interpreted to mean the acquisition

workforce in the department, not everyone, and that's what led to, as you know, the dramatic

cutbacks that we saw in the acquisition workforce.

GANSLER:

Twenty-five percent cut, that's by law by Congress.

SCHINASI:

With a lot of the problems I think today resulting from some of that.

But could you care to comment on how Congress is complicit in the problems that we're seeing

today?

You know, we talked about services. They've had laws about better management of services on

the books for several years now. Doesn't seem to have had the intended effect.

Are there other things that come to mind as to how we can make them part of the solution or . . .

GANSLER:

55

Well, Mr. Ervin raised the very important point in terms of bringing in other contractors, the

commercial world, who have the experience and the low cost, but are, in a sense, presented with

barriers to entry by legislation that exists currently, the things such as the cost-accounting

standards, the export-control laws, things of that sort. And so that's an area that warrants looking

at.

We give speeches about the desirability of bringing commercial firms in, and then we pass laws

that would prohibit them in effect. They're barriers. Other . . .

SCHINASI:

We did have the Federal Acquisition Streamlining Act, which . . .

GANSLER:

Right.

SCHINASI:

. . . addressed a lot of those problems.

GANSLER:

That was the extent.

SCHINASI:

But that was about 20 years ago.

GANSLER:

No, and each of the areas there are examples where Congress can help. Unfortunately,

sometimes we get unintended consequences, and that's the fear.

You know, that's the reason I made the comment about the title of the report, you know, you

don't want to scare away contractors from doing defense work, especially the ones with high

quality, low cost.

SCHINASI:

56

Since you brought up that title again, I'll just want to go on the record to say that there are too

many contractors in a number of areas.

One, the Army came before us and said, yes, it had identified several-thousand positions that

were inherently governmental positions that were being filled by contractors.

So maybe they'd get around to bringing those in-house, but maybe they wouldn't be able to do

that because of funding constraints, and it looks like they're moving even further away. So

they're there.

The other is too many because we're not managing properly and, you know, we've got too many

people doing too much that we don't actually need being done. So, just to . . .

GANSLER:

I agree with both those.

SCHINASI:

. . . clarify your understanding on the over-reliance, that was how we defined it.

Let me ask you both about training. One of the things that we've read, reported, both in the GAO

reports and, Dr. Gansler, in your statement, too, was the lack of training for acquisition

reasons—I won't just say the workforce but I will say acquisition reasons.

You know, the thing that strikes me is that we really do have a different set of incentives when

we bring the private sector into a business deal. And those are more business-based incentives.

So did you come across any training? You said you didn't see a lot of it, but did you see training

that really would talk about a new business model, that would talk about making sure that when

you're sitting on the other side of a negotiating table, you understand what is driving that

contractor's behavior and what is driving not just DCAA coming in and doing pre-award audit,

but really an understanding of the business arrangements that these commands . . .

GANSLER:

I think that there are two types of training in that regard. The one that you're talking about is

where the people who are negotiating the contracts, are writing the requirements, are managing

the programs really need to understand how industry works and what are their incentives . . .

SCHINASI:

Exactly.

57

GANSLER:

. . . so they can apply them.

Then there's the problem of the other side, which is the combatant commanders who get

oversight and requirements in the field, who need to also understand a little bit. And we found

that wasn't even being introduced to their courses at all.

But both of those areas of training I think are very important when you recognize we have a

mixed force.

SCHINASI:

Right.

Mr. Francis?

FRANCIS:

Yes, a couple of points. One is the NAVAIR's (Naval Air Systems Command) cost department

has, I think, excellent insights about what industry's interests are versus the government, and

they're not.

So I think training on that kind of awareness is very important for people at the negotiating table.

The other thing is, we did work years ago looking at best practices for training.

One of the differences we found in commercial industry versus government was if one, they

identified what was important. You can't have 100 training initiatives. You might have 10.

And the important ones, you take to the factory floor, or, in the case here, to the front. You don't

put them in the schoolhouse and make people access websites. So you take the training to where

it needs to be done.

And the other thing, I was thinking about the comment Mr. Green made, there's an appeal to

having a separate organization for contracting, but that then makes it something separate,

something that you don't bring into the negotiation.

And I can speak from experience in our own organization. We've had people work acquisitions

and people work contracting. And we have found that it's very hard to separate the two. And if

you do, you lose some synergy there.

GANSLER:

58

In fact, you want the cross-training for that reason.

FRANCIS:

Yes.

GANSLER:

You want the contracting people to understand program management, the program management

people to understand contracting.

SCHINASI:

Um-hum. And I'm particularly interested in the requirement setters, because they're the ones . . .

GANSLER:

Absolutely.

SCHINASI:

. . . that drive the cost and everything that . . .

GANSLER:

They're the ones that have any exposure . . .

SCHINASI:

Yeah.

GANSLER:

. . . because they're, quote, "warfighters," they don't have to worry about it.

SCHINASI:

59

Right. And I would just note that the training question also falls on what Mr. Tiefer was just

talking about, the conflict of interest.

I mean, there are areas where you have a different set of incentives than the person sitting across

the table from you, and you better understand what those are in order to try and . . .

GANSLER:

One lesson I might point out, that I got from a senator, actually, Senator Proxmire once told me,

he said, "Don't tell me theory; give me a case study. Give me an example."

Well if we wrote case studies on buying services that covered both sides of the story, that would

be a good training tool.

SCHINASI:

Thank you.

SHAYS:

Mr. Green?

GREEN:

Yeah, let me just follow up to Mr. Francis, your comment on the question that I posed earlier on

a separate contracting branch or something.

I don't know what the formula is, but what we need to get to, and I understand the synergy, but

what we need to get to is a way that we incentivize these contracting people that they see ahead

of them career opportunities, promotion opportunities.

And whether that is a subset of the acquisition corps, or whether it's something that's separate,

you know, we've got to figure out a way. Because you know, that's a part of this whole equation,

is not making it so attractive that an acquisition person always migrates to program management

'cause that's the sexy stuff, and they don't pay attention to the contracting.

SHAYS:

Thanks gentleman.

60

Dr. Gansler, I kind of feel in a way, and I want to say this, you're at the top of the pyramid, and

we're eating the crumbs off of your table.

But, as a result, I tend to judge you a little harder than I would judge others, because if you don't

get what we're saying, then we're in deep trouble.

And when you said that the title of this report—"Correcting over-reliance on contracting in

contingency operations"—that we don't want to scare away contractors, I just had to laugh.

I mean, the likelihood of our scaring away contractors is like one out of a billion. You know, you

can scare them away if you have absurd regulations and requirements. Those things, you can.

But to state that maybe we're over-relying on it, and it's the view of the commission in our report

that contractors become the default option. And it's triggered in this way.

This is your quote: "When they have a lot of money, they don't have to change," referring to

DoD.

And we want them to change. And we are concerned that, well, heck, we'll just hire a contractor

because it comes out of the supplemental. The supplemental's free.

And, by the way, I'm going to say it, because it's true, if a few contractors get killed, nobody

seems to care. Because it's not on that list that the press puts out about how many soldiers we

lost. So they're expendable.

That's a gross thing to say, because they aren't, but that's the way it's viewed.

And so it's a view I hold, and I won't attribute it to any other member in the commission, that we

have over-relied on contractors because they're, like, free.

They're in the supplemental, it's not in the military budget. They get killed, nobody writes about

it.

And your comment, though, "when we have a lot of money, they don't have to change," do you

pretty much feel comfortable with that statement you made?

GANSLER:

No, I think that the leadership must make the changes, even with money, that that's a requirement

that they have.

SHAYS:

Yeah, but what gets into . . .

GANSLER:

61

Well . . .

SHAYS:

And I'm just making this point: We would like DoD not to think there is a bottomless pit of

contractors, that if you can't manage them well, then maybe you shouldn't be hiring them.

Now, then you come back and say, "Well, you know, they're the cheapest and all that, and they

perform essential functions."

They do. But with all due respect, we're getting into the nation-building side where we hire

contractors to do nation building and there is a view: Is that essential for the military to

accomplish their task? Just to give you a sense of what we're wrestling with.

GANSLER:

I think the terminology matters, what you say, and if you say, "Contractors are only a default

option" or "We have over- reliance on contractors," and if that isn't balanced by the essential

nature of the work that they do and the importance of it to the mission and other things.

And I would agree with you, by the way, last week, by coincidence, I talked to the Department of

Defense person who publishes the weekly listing of people killed that week. And I insisted that

they also list the contractors, because there have been more of them many times than there have

been people in uniform.

I think we under-value, and we have to be very careful about how we word the report, to not

under-value that half of the total force that are the contractors, and yet we still need to manage

them better . . .

SHAYS:

Well, we don't under-value them. What we do believe, though, it's an outrage if the government

is going to hire contractors and not oversee them, given that they're 50 percent.

GANSLER:

That's the government's fault, not the contractor's fault.

SHAYS:

Fine. That's true. DoD is not auditable, and there's a reason why, because they don't have to be

because we're not going to shut them down. So that if they were in the private sector, they would

62

all go to jail because if you're not auditable, you're breaking the law. But DoD doesn't have to.

No, a private sector, if their company is not auditable, something's wrong. Well, DoD is not

auditable. What gets them to be auditable? Nothing: because we're not going to shut them down.

We want to eliminate waste, fraud, and abuse. So the challenge is: What do we do to get this

cultural change? And one of them may be to say that contractors aren't just this unlimited list that

you can hire, especially when it's in the nation-building side.

Let me ask you, you basically picked three out of 31 that you had some concern with. It's

coincidentally the same concern DoD has. Past performance; I mean, I've had conversations with

folks in DoD that say past performance in the end isn't going to decide who we get. And then it's

the whole issue of debarment—suspension, debarment. And so you focused on that. They

generally say they agree with all the other recommendations in varying degrees, which, you

know, is helpful, but it's not helpful.

Let me ask you specifically about one, and that is recommendation eight. And in

recommendation eight, we want to establish a contingency-contracting directorate in the Office

of the Joint Chiefs of Staff. Right now, you have service contracting in J4, logistics. Can you see

value—and I'll ask you this, Mr. Francis, as well—can you see value in getting the military to

recognize that if half their effort in terms of personnel are contractors, that they should have a

separate joint category, and that would be a J10?

Mr. Francis?

FRANCIS:

I do agree that we have to give visibility to that, particularly in the military. This is one way of

doing it. My concern in general about organizational solutions is when we set something up

separate, does it then in effect become separate? So would that become a separate activity which

we then have to integrate into planning?

So I think if we go back to what we talked about in the beginning, we didn't really plan this on an

integrated basis. And so the test I would hold for this solution is: Will this get us there? And I'm

not sure yet that a separate organization would do it.

GANSLER:

I think it gets to the question of how it gets defined and what the role is. And if it's just, quote,

"contracting," as contrasted to concern about the mixed force and how it gets utilized and the

benefits of it, and trying to plan for the exercises, for example, which would be very valuable, I

think. So I can see some significantly positive benefits that could come from this as to how it

gets defined.

If it ends up being the job of that person to be responsible for policy in contracting, no.

63

SHAYS:

Well, right now, contracting is handled in the J-4 by a colonel; 50 percent of our manpower.

Let me just quickly ask you this question. You used "inherently government" a lot. We're not

finding it a helpful term because it can mean what anyone wants it to mean. And so my question

is, there are some of us who think that we need to say what is appropriate for government to do

and what isn't appropriate for government to do. Because "inherently governmental," you can

legally do anything you want.

Would you agree with that comment or not Mr. Francis?

FRANCIS:

I don't know if I'd go as far as to say legally you can do what you want, but I do agree that the

definition we're using isn't always helpful because you have to act in the government's best

interests. So for example, we're talking about contractors overseeing contractors. You might say

oversight is inherently governmental, but if you're doing construction in Afghanistan and you

need oversight there, and putting somebody from the U.S. there puts them at risk, you may have

to use somebody else.

So I do think we have to think about what's in the government's best interest, but I do think what

does hurt us is we don't gauge those risks. We don't gauge the things that put the government in a

disadvantaged position in the long term. And so it gets away from us, in my view.

SHAYS:

Thank you.

Dr. Gansler, and then we're going to close here.

GANSLER:

No, I agree with that statement. I think we do need to focus more on a definition that at least

gives some guidance to which functions do and do not fit as inherently governmental. I think the

general statement like "all acquisition is inherently governmental" just is wrong. But on the other

hand, trying to then sit down and define it or saying "everything that's important" or "everything

that's critical" or "everything that's in support of the government" is inherently governmental,

again that's wrong.

But now we have to be more specific in order to be able to define it. And I think most of the

functions that I understand are being done, the vast majority—there are some functions that

are—where contractors are filling in and doing things they shouldn't be doing. And that's what

you're trying to address. But the vast majority of what those 200,000 people over there are doing

things that should be done by contractors.

64

SHAYS:

Let me just have you both end by making any comment you want before we get to our next

panel. Is there any comment that you'd like to make before we close?

FRANCIS:

Well, I think I'll come back to the issue of cultural change. And I don't think we get there by

setting targets like in-sourcing, out-sourcing, and numbers. And that's what I get concerned with

the administration. I've seen those numbers put out there and then energy is lost.

For cultural change, you really need to sustain energy and I think we have to get at: What are the

skill sets? What are the roles? How do we need to perform this function if we want to call it

services acquisition in peacetime and in the future? And how do you sustain and hold people

accountable in the long term? Short term doesn't work.

SHAYS:

Thank you.

Dr. Gansler?

GANSLER:

I've made the same note. I was going to say numbers isn't the right answer. It worries me that

we're going to have a bunch of people with no experience simply filling in the categories because

we hired 10,000 of them. And I even was scared by the fact that the Air Force thought they were

making a 40 percent cost savings by bringing in people to do wrench-turning. And I made the

observation to someone at the Pentagon that maybe they're going to have to sit out on the grass

because there's no overhead associated with that assumption. That's just direct labor versus

loaded overhead in the industry side.

You know, we need to do honest comparisons of what things can best be done by the contractors;

what things can best be done by the government. There's no question about the oversight and the

management and the decision-making and the budgeting and all of those things that have to be

done by experienced, skilled government people, well-trained. And we've got to focus on that.

And we have to focus on the difference between services and buying products, which we clearly

have a cultural problem with.

And my summary statement is that I think you people have the opportunity to have a very

significant impact on that culture. And I, you know, I encourage you to do that in a very positive

way, rather than simply as a threat that they might be subpoenaed and debarred.

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SHAYS:

Thank you, Dr. Gansler and Mr. Francis. I know on behalf of all the commissioners, we really

value your work and we appreciated your testimony today. Thank you very much.

And we're going to get right to the next panel.

FRANCIS:

Thank you.

SHAYS:

You know what? We're going to have a five-minute break, which could be a 10-minute break,

but we'll try to make it as close to five as possible.

(RECESS)

SHAYS:

Calling this hearing to order, we have the Honorable Stuart Bowen, Office of the Special

Inspector General for Iraq Reconstruction. We have the Honorable Daniel R. Blair, deputy

inspector general for auditing, Department of Defense, Office of the Inspector General, and the

Honorable Herbert Richardson, Acting Special Inspector General, Office of the Special Inspector

General for Afghan Reconstruction.

And we welcome all three of you. You're sitting down, and I should have warned you, we need

to have you stand to swear you in.

Raising your right hand, do you solemnly swear or affirm, that the testimony you will give

before this commission is the truth, the whole truth and nothing but the truth.

Note for the record, our witnesses have responded in the affirmative.

And we'll start with you, Mr. Bowen, and then Mr. Blair and then Mr. Richardson.

And we welcome you and thank you for your patience in waiting to testify.

BOWEN:

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Thank you, Chairman Shays, members of the commission for inviting me this morning to testify

on a matter that I think is central to the very purpose for which this commission was

established—implementing improvements to defense wartime contracting.

That, if achieved through the course of the life of this commission and the implementation of its

recommendations, will be an enormous boon to how the United States carries out stabilization

and reconstruction operations in the future.

The fact that those elements of contracting necessary to successful contingency operations were

not in place in 2003 led to significant waste, as my statement points out.

We estimate that waste to be upwards of $5 billion, $5 billion to $6 billion, calculated out over

the life of the program, $1.7 million per day, just to jar your senses about what happened to

taxpayer dollars in Iraq.

Why did that happen?

Because, as we've identified, there was not a risk-based approach to analyzing and undertaking

the enormous reconstruction operation in Iraq.

This is the largest overseas rebuilding program in U.S. history. And there was, because of the

amount of money poured into a system that wasn't ready to execute it, a rush to spend that led to

the kind of waste that we've identified in over 350 audits and inspections.

The missing piece at the outset, of course, and was discussed by Dr. Gansler and has been

addressed repeatedly by this commission—the lack of personnel, contracting personnel, capable

of carrying out the rapid and significant work necessary to executing the stabilization and

reconstruction operation in Iraq.

What are those pieces, though, that have to be corrected for the implementation of contracting

reform?

I describe them as five. One: requirements. You have to adequately nail down what the contract

needs, what is required on the ground, in-country, so that you can frame a specific outline for

executing the project, that is, developing a good statement of work.

That requires consulting with the host country. That was not done well in Iraq.

Two, you need the right vehicle. We used cost-plus contracts at the outset, and those were, as

I've described, open-shut books, and generated significant waste until they were terminated in

2005 and 2006 and removed to a more fixed-price approach.

Three, the award process: too much use of no-bid or limited competition, certainly in IRRF-1

(Iraq Relief and Reconstruction Fund), and it continued thereafter, more than we'd like. The

focus on open competition is essential to protect taxpayers' interest.

Contract management: you need the people to do it; we didn't have it.

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And oversight: you need a quality-assurance program and a quality-control program. Quality

assurance executed by the government that's visiting sites, ensuring that a contractor has a

quality-control program that is overseeing their subcontractors.

Subcontractor issue, a big matter addressed by this commission and, as yet, inadequately covered

by current law.

The fact is, subcontractors repeatedly failed in Iraq, and taxpayer dollars were wasted.

We have suggested in our lessons-learned contracting report and Hard Lessons and other reports

several improvements that are echoed commonly in the commission's report, "At what risk.”

Our overarching one is that that the Departments of Defense and State should develop a set of

contracting rules for use in contingency operations that all entities would use. Not as the situation

we currently have, where each department implements its own amended version of the FAR

(Federal Acquisition Regulation), difficult for contractors to understand, difficult for contracting

officers to manage, difficult for overseers to assess.

Second, strengthen the capacity of contractors to carry out reconstruction work, echoing the

organic-capacity recommendation of the commission, commission recommendation one, there

needs to be more talented individuals doing contracting in the stabilization and reconstruction

arena, and that requires growing the capacity within the agencies.

Include contracting personnel in exercises, commission recommendation six, we agree with.

Avoid using sole-source and limited competition, commission recommendations 15 and 19,

agree with those as well. Develop deployable systems that are usable in stabilization operations.

Commission recommendation two addresses that. And, finally, create an integrated structure

that's capable of managing this kind of operation. We don't have that today. The commission

wisely recommends in recommendation 19 that a special office be created to provide oversight.

We concur with that.

And with that I will conclude my statement and look forward to your questions. Thank you.

SHAYS:

Thank you, Mr. Bowen. Mr. Blair?

BLAIR:

Good morning, Chairman Shays, and distinguished members of the commission. Thank you for

this opportunity to discuss our work on contingency contracting and DoD's challenges in this

area.

Effective contracting for goods and services, as you've noted, is a key element to our success in

Southwest Asia, and many in the department have been working long and hard to improve

contingency contracting. However, we continue to find the same problems.

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Simply stated, DoD needs to get it right in the beginning and then have effective oversight to

ensure that it gets what it pays for. In order to get it right in the beginning, DoD needs to do four

things correctly, consistently.

First, ensure that contract requirements are fully defined and that they meet a mission need.

Second, select the appropriate type of contract. Third, properly compete these contracts. And,

fourth, determine fair and reasonable prices. However, too often we find that these key steps are

not consistently performed.

DoD also needs to have effective oversight of all of these contracts to verify that the goods and

services are actually delivered according to the contract terms. A detailed quality-assurance plan

in the hands of a well-qualified contracting officer representative is a powerful oversight tool.

However, we find too often that the department continues to struggle in this area. These

recurring problems are why we developed this report, "Contingency Contracting: A Framework

for Reform."

This report highlights some of the challenges that DoD must overcome and ways to improve

contingency contracting. We're pleased to report that commanders and contracting officers in the

field have started using it on a daily basis. Since our last testimony before the commission in

May 2010, we've issued 42 audit and inspection reports related to contingency operations.

In Iraq we are reviewing asset accountability, base closures, and contractor demobilization. In

Afghanistan we focus on a wide variety of issues, including safety and protection of forces,

training and equipping the Afghan National Army and police, and the department's execution of

over $14 billion designated for Afghan security forces over the past two years.

Our recent audit of the prime vendor-subsistence contract shows what can happen when DoD

does not get it right in the beginning. The contract grew significantly through verbal change

orders, and the department has paid over $3 billion without establishing all the contract

requirements.

DoD recently extended this contract for an additional two years without competition. We found

that the department overpaid potentially $124 million for transportation and Tri-Wall costs and

paid about $455 million to airlift fruit and vegetables into Afghanistan without incorporating

these airlift requirements into the terms of the contract.

Another audit, the Defense Reutilization Marketing Office in Kuwait, highlighted what can

happen when there's inadequate contract oversight. Contractors allowed large quantities of

potentially reusable equipment to be exposed to the elements and destroyed.

I'd like to direct your attention to the two large photographs that I have here. The first one here to

my right shows the large number of boxes. As you can see, these boxes over here are uncovered,

and some of them have collapsed. What has happened is the contents of the boxes were exposed

to the elements in Kuwait.

The second picture over here shows what happens after this long-term exposure. This box

contained unused boots that were designed to protect our warfighters from contamination, and as

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you can see, the boots are no longer usable. We examined one box and found that the acquisition

value of its content was about $39,000.

Our investigators have over 230 ongoing investigations related to contingency operations. These

investigations have resulted in 12 indictments, 19 criminal informations, 34 convictions,

monetary recoveries of over $42 million, and restitution totaling more than $90 million.

In addition, those convicted were collectively sentenced to more than 50 years in prison, and

there were 21 debarments from future contracting activities.

One of the most significant challenges that the department must address in contingency

contracting is to ensure that our recommendations are more broadly implemented to proactively

assess and determine what improvements need to be made to properly establish the requirements,

compete the contracts, determine a fair and reasonable price, and properly oversee the contracts

would be transformational.

Oversight of U.S. contingency operations in Southwest Asia continues to be a top priority of the

DoD Office of the Inspector General. We will continue to identify and deter fraud, waste, and

abuse and make recommendations to help ensure that the men and women serving in theater are

well-equipped and well-supported.

The department and taxpayers cannot afford inefficient and costly contracting practices. I thank

you for the opportunity to testify this morning and look forward to answering your questions.

SHAYS:

Thank you, Mr. Blair.

Mr. Richardson?

RICHARDSON:

Chairman Shays and members of the commission, thank you for inviting me to discuss

implementing improvements to defense wartime contracting.

Let me begin by noting that, under its mandate, SIGAR has limited oversight of Department of

Defense contingency contracts. This oversight represents 13 percent of the $154 billion obligated

from fiscal years 2002 to 2010.

Almost all can be found in three specific areas, first, the Afghan Security Forces Fund; second,

the Commanders' Emergency Response Fund and, thirdly, the Defense Department Drug

Interdiction and Counterdrug Program.

SIGAR's work has largely focused on construction projects paid for by the Afghan Security

Forces Fund and the Commanders' Emergency Response Fund.

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We have issued 11 audit reports which examine 15 construction contracts paid through the

Security Forces Fund totaling $363.9 million and 70 contracts paid through the Commanders'

Emergency Response Fund totaling $54.7 million.

In addition, we have looked at $11.4 billion planned expenditure of the combined security-

transition command build of 884 facilities for the Afghan national security forces, which we

discussed in our last hearing with you.

Since SIGAR's last testimony before this commission, we've issued two additional reports on

activities funded by the Afghan Security Forces Fund.

One audit questions the capability of Afghan Ministry of Interior to account for and pay the

Afghan national police. As you know, this is a key issue as we approach transition to full Afghan

control.

The other is an audit of infrastructure contracts that discusses weaknesses in contract oversight,

which is a key issue to preventing cost overruns and costly contract delays.

In addition, SIGAR has two ongoing audits of large infrastructure projects funded through the

Afghan Security Forces Fund and being implemented by the United States Air Force

Engineering Center.

We are also planning, in coordination with the Department of Defense inspector general to

conduct an audit of two U.S. Army Corps of Engineers contracts with ITT Corporation. These

contracts provide operations and maintenance for Afghan national security force facilities.

As our work has shown, our audits continue to identify challenges that place U.S. funds at risk,

primarily in three areas, inadequate oversight, lack of sustainability and insufficient planning.

To address these and other weaknesses, we have made specific recommendations to the effective

agencies, and we closely monitor their implementation.

In doing so, we ask for specific details about follow-up actions as well as confirmation that these

actions have been successfully completed. To this end, SIGAR has made 35 recommendations to

the Department of Defense during years 2009 and 2010. The Defense Department has concurred

with 28 of these recommendations and partially concurred with the remaining seven.

We have identified corrective actions taken by the Defense Department in about 75 percent of

these recommendations. We've also made 14 recommendations to the Defense Department

during the current fiscal year and are now awaiting their response.

Let me add that a critical step in our audit process is to ensure we coordinate SIGAR's work with

other IGs. As a courtesy, SIGAR will vet all notification letters with other IGs to ensure that we

are not duplicating their efforts.

And, as appropriate, we will also discuss potential outcomes with the commanders in theater to

ensure corrective cost-saving measures are taken as soon as possible.

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In conclusion, let me assure you that SIGAR is moving forward with a robust audit plan to

examine Department of Defense, Department of State, and USAID grants, contracts, and

cooperative agreements.

Examining billions of dollars of taxpayers' money being spent on foreign soil is a complex and

difficult assignment. SIGAR recognizes the critical nature of this mission and is deploying the

skills and the resources necessary to follow the money, generate a greater return for our

taxpayers, building critical investigative cases assigned, resulting in fines, recoveries, and

prosecutions, and ensure U.S. objectives are being met.

Again, thank you for this opportunity to testify before you today, and I am prepared to answer

any questions you may have.

SHAYS:

Thank you, Mr. Richardson.

I'm swapping my time with Ms. Schinasi, and so she's going first. I will go last. So the order is

Commissioner Schinasi, Ervin, Green, Tiefer, and then myself.

And we'll start with you.

SCHINASI:

Thank you, Chairman Shays.

Thank you, gentlemen, for being here this morning, and thanks for all the good work that you

and your staffs have done in pursuit of learning and better expenditure, more effective

expenditure of taxpayer dollars.

I'd like to start a little bit, maybe, with a question that you're not given very often, and that is

what's going right. I think many of us would agree that in a contingency, by the very nature of it,

you can expect waste when you go into a contingency. We don't know a lot about what we're

going to face, we're not really good at setting requirements, we don't have all the people there at

the beginning to help.

But my question goes a little bit to the cultural issue that we were dealing with the last panel, and

have you seen any recognition on the part of the departments that you work with, and let's start

with the Department of Defense, that we really need to change the way we do business, not just

with respect to waste, but with respect to cost more generally. Are we getting better at being

more effective in the way we spend taxpayer dollars?

I'll just start with you, Mr. Bowen. And if there are specific examples you have, I would

appreciate that.

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BOWEN:

Yes, we do have a specific example in an audit that we are releasing this week concerning the

U.S. Army Corps of Engineers.

Eighteen months ago we issued a review of the asset-transfer process, and we found that

hundreds of projects were being unilaterally transferred and, thus not being adequately sustained.

As the commission has addressed, as we've repeatedly said, significant waste can occur if

projects that we properly build are not effectively sustained by the Iraqis.

The audit that we will issue finds that the Corps has dramatically improved its asset-transfer

process and has a system now functioning in Iraq that will ensure that the remainder of it projects

will be effectively transferred to Iraqi control. There is the continuing challenge, though,

regarding whether the Iraqis will sustain.

SCHINASI:

Mr. Blair?

BLAIR:

One of the things that we noted in some of the work that we did in Iraq was related to the area of

asset accountability. And I know that's not really the cost issue that you're asking about, but with

the asset accountability we found that there was a good handle on some of the equipment.

But one of the things that comes to mind in the whole idea of a transforming of culture in DoD

and as was discussed a lot at the last panel, once a culture is in place, it's very difficult to change.

We are seeing some discussion now, more than before, of cost. No longer are we seeing first and

foremost, "I've got the money, I want it on contract, I want it now."

But I was at a program-management review a couple weeks ago with CSTC-A(Combined

Security Transition Command-Afghanistan) and there was some discussion, not just about

getting the items on contract immediately, but also some discussion about the idea that the funds

that we once had are going to be more limited in the future than they were before.

So that's encouraging. It's encouraging to hear that discussion takes place. I'm not ready to say

that I've seen positive change yet. I think that's going to take several years to put in place.

SCHINASI:

How do you make sure that that discussion you heard actually is carried through and spreads?

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BLAIR:

We do discuss this in our audits. We bring it up, "How are you particularly going to focus on

costs?" When we do our audit work, we do focus on whether the contract is the appropriate type

and whether they're using a contracting vehicle that puts the appropriate amount of risk on the

contractor and the government so that there is a preference to the cost—or not the cost, a

preference to not time-and-materials and not cost, but a firm fixed price.

SCHINASI:

But besides contract type, I know in many cases the auditors are discouraged from asking about

whether a need is really a need or a want. Do you question whether or not a need is a need or a

want?

BLAIR:

When we look at the contracts in the requirements determination, we want to see that link

between the requirements and the mission requirements, the contract requirements and the

mission requirements. We haven't got into the detailed question that you're talking about, that's

something that I think we could include in some of our work going forward, to the commanders,

"How do you distinguish some of the prioritization, how do you distinguish what you need now

versus what you want for later?"

SCHINASI:

It seems to me if we do pursue what particularly Dr. Gansler was talking about and what we've

advocated about commanders having more responsibility for the money they spend, the audit

community could be a really important supportive mechanism in that case as well.

Mr. Richardson, I guess my question to you would be lessons learned from Iraq transferring to

Afghanistan. Are there things that you have seen or that you have discussed with your colleagues

about cultural change that's being incorporated by the military units themselves?

RICHARDSON:

The major lesson learned from Iraq is the sustainment issue. In Afghanistan the issue is whether

or not the facilities being built, the roads being built, the systems being put in place, the money

being spent on the Afghan national police and the Afghan national army are going to be worth it

from the standpoint of the ability of the Afghan government to sustain these operations.

And what we are finding from a cultural standpoint is that while this is a very complex issue,

things are being put in place based on a number of recommendations that we have made over

time, the last couple of years, to try to shore up these avenues.

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SCHINASI:

I think, if my colleagues don't pursue that sustainment question with you, I will come back to it

in my second round, but I would say that's probably one of the lessons that has not been learned

from Iraq to Afghanistan, given the waste we'd seen in sustainment there.

But let me turn to another question both for you, Mr. Bowen, and you, Mr. Richardson, with

respect to the State Department. We haven't talked a lot about State yet. But you both make

reference either in your statements or in reports about the difficulty in getting information out of

the State Department with respect to their programs.

I guess, Mr. Richardson, you talk about a review you're doing of the State's transaction data

related to Afghan reconstruction, that you've made a request in August last year for some

information that you haven't gotten yet.

And, Mr. Bowen, you make reference to a similar request for information about embassy

numbers that you haven't been able to get.

Is the State Department a harder agency to deal with, is this acceptable that we don't know what's

going on with respect to the State Department's operations?

BOWEN:

No, it's not acceptable that we don't know, because it's essential that we get the information

necessary to do our mission so the Congress is informed about how the taxpayers' money is

being used.

It's a development that's evolved over the last nine months. We've written about it in our

quarterly reports. And it concerns a reinterpretation at the State Department about who's actually

involved in reconstruction activity.

And they said two quarters ago that only 10 individuals were involved at the embassy in

reconstruction, which is not plausible. And we pressed back to get more information about

funding used to support the PRTs, for example, 14 still operating in the fields, and we're

somewhat stymied.

This was addressed at a hearing before in-house in March, and we did not see an appreciable

improvement this quarter regarding that matter.

SCHINASI:

Is that because your portfolio is limited to reconstruction? Is that why who is involved in the

reconstruction . . .

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BOWEN:

Actually, our portfolio covers all funding for Iraq. It's very broadly defined, not just hard

reconstruction, but it's the Iraq Security Forces Fund, it's the Economic Support Fund, it's the

Iraq Relief and Reconstruction Fund, it's the Commander's Emergency Response Program, and

it's the INL (Bureau of International Narcotics and Law Enforcement Affairs) fund.

SCHINASI:

OK.

BOWEN:

And that's what we're not getting enough on.

SCHINASI:

Mr. Richardson, do you care to comment on that?

RICHARDSON:

Yes.

We are at the present time coordinating conversations with the State Department. We are having

the same levels of difficulty with respect to getting the information, but we are making progress.

And let me back up one thing on the sustainment issue. My understanding of your question was

whether or not what we at SIGAR have learned from SIGIR, OK?

SCHINASI:

Oh, OK. Yes.

RICHARDSON:

And based on that is what my response was.

SCHINASI:

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That helps. Thank you.

SHAYS:

Thank you, Commissioner Schinasi.

Commissioner Ervin?

ERVIN:


I want to likewise thank three of you for being here today. Thank you for your service and that of

your staffs.

To varying degrees, I found each of your statements really to be profoundly disturbing. That's

not a criticism of you or your staffs. You all accurately laid out the state of affairs in Iraq, in

Afghanistan, all these many years after we entered these conflicts.

And perhaps I think you put it best, Mr. Blair, in your statement when you said that "We

continue to find the same contracting problems occurring. The department continues"—you're

talking about DoD, but it's true of State, it's true of AID—"the department continues to struggle

to get it right in the beginning and ensure it actually gets what it pays for."

And you had a number, I think, of very helpful examples. You gave an example of a cost-plus

percentage-of-cost contract. You know, and the reaction to that is, of course, that's a bad deal for

the taxpayer so that ought to be banned. Well, it is banned. It is prohibited, and notwithstanding,

you give an example of such contracts continually being used or at least continuing to be used.

You talk about the need for full and open competition, and yet you gave an example where it was

insisted upon that there be a sole-source contract awarded. And we know there are lots of

examples of that.

And then I found particularly interesting your example of this chain that you trace back to Kabul

airport, I think it was, of a price survey. You traced it back five or six times and there actually

wasn't a survey of cost-reasonableness at the beginning, so it was a house of sand really that was

built on here.

And so, you know, it leads to the question of why? And to me, the real problem here is lack of

accountability, lack of accountability on the part of contractors and lack of accountability on the

part of the government to oversee the contractors.

And that's why I spent so much time, and the rest of us did to varying degrees, talking to Dr.

Gansler about at least one accountability mechanism, namely suspension and debarment. It

seems to me there are plenty of incentives for contractors to get it right. The vast amount of

money available is incentive enough for the contractors, it seems to me, to perform. Where we

seem to be lacking is on the accountability side.

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Now, you mentioned the investigative work that you do, but that deals only with fraud. Can you

talk a little bit about the need for accountability with regard to waste, both on the contractor side

and on the government side?

I'll start with you, Mr. Blair, and just quick comments, if I could, from Mr. Bowen and Mr.

Richardson also?

BLAIR:

Well, Commissioner Ervin, your report talks about the idea of incentives, as well as the idea of

the carrot and the stick that was mentioned before. And I think that is something that we need to

have a balance in. There has to be more accountability in the government to ensure that we do all

of the steps correctly. There has to be more accountability for the contractors through

suspensions, debarments. And these actions have to happen rapidly so that as soon as we become

aware of the issues, that we can step in and shut them down as quickly as possible, and avoid

doing more work with those firms or those individuals in the future.

ERVIN:

Before I get a comment from Mr. Bowen or Mr. Richardson, let me just follow up and just ask

another question. In this last example that I mentioned, the one of the price-reasonableness

survey, the level that you dealt with, apparently, is the executive director of the Army

Contracting Command. And the action that was taken was that ACC agreed that they were going

to do a program-management review. And they're going to pursue some administrative action

against the contracting officers, if that's appropriate. To me, that seems like a very weak rag.

So please, I'm going to ask a quick follow-up question, then, as I say, I'll get to you two.

What level do you generally deal with at DoD? Do you deal directly with the secretary of

defense, the under secretary, the deputy secretary of defense, under secretaries, assistant

secretaries? Or is it generally at this level that you and your staff are dealing?

BLAIR:

We generally deal at the level that you described there. We do brief the deputy secretary. I've

briefed him on several occasions on the results of some of our work. But generally, we try to

address our recommendations to the lowest appropriate level, to give that person the opportunity

to effect the change in their organization.

ERVIN:

But that appears from your own testimony that really leads to my question, not to be that

effective. I'm trying to gauge from you to what extent the issues that we're here today to talk

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about and the issues that the commission was created to address receive top level attention at the

Department of Defense.

I had carte blanche. You know, I was the inspector general at the State Department at the

beginning of the Bush administration. I had carte blanche to access to the secretary of state, the

deputy secretary of state, the under secretary for management, who is sitting here on this

commission. Does DoD IG have that kind of access?

BLAIR:

We do have that type of access. On our day-to-day audit work, though, we tend to work at the

lower levels.

ERVIN:

Right, but as I say, the working on the day-to-day level at these levels suggests that you're not

getting the kind of action that's needed here. I'll just leave it at that.

Mr. Bowen, Mr. Richardson, do you have comments about this?

BOWEN:

Yes. To reduce waste in contingencies, you have to have systems and a plan in place before the

contingency begins, specifically, well-identified, agreed-to contracting regulations; well-trained

personnel; and a recognition that you're not going to pursue large-scale rebuilding when in an

insecure environment. All of these elements, these principles were violated in Iraq.

But the waste that occurred throughout, in periods of insecurity, periods of greater security,

stemmed chiefly from the lack of good quality-assurance program implementation. That is

individuals that get out and visit sites and ensure that contractors and subcontractors are doing

what they're supposed to be doing.

ERVIN:

Right. We agree with all that. But the question is: Why haven't people been held accountable for

not having done that all these many years in Iraq?

BOWEN:

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Well, we have held many accountable. We have 110 debarments that we list in our quarterly

report and we have 50 convictions of individuals that did violate the standards that were

required.

But ultimately implementing lessons learned is the most crucial long-term form of

accountability. We've got to achieve greater transparency and greater accountability in how the

United States executes and uses taxpayer dollars in contingency operations. We don't have that

now because the overall system has not been sufficiently amended to ensure reasonable

insurance that the taxpayer dollars will be well spent.

ERVIN:

Mr. Richardson?

RICHARDSON:

Let me first speak to your issue of accountability.

It is a problem in Afghanistan. The issue at hand, obviously, is that we are in a war zone infested

by insurgents, so security plays a very large part. Getting people out to those sites to provide the

necessary oversight becomes critical. Having a number of qualified people on board to do the

oversight is critical. The fact that we've moved toward hiring Afghan nationals to provide

oversight of their own work is an issue and we're looking at that.

The fact that we have individuals who have the title, but not the skills to provide the correct

oversight is an issue and we're looking at that. We are encouraged by the idea that organizations

currently on the ground, the Corps of Engineers, are taking a very aggressive approach to

accountability and have laid out plans to try to increase the level of oversight, and have taken the

position that they will no longer leave a construction project ongoing at a high-risk area. Where

they can't get oversight out there, they will shut it down and move to a different location or

provide the security to do it.

We're encouraged by General Petraeus's statement that he's increased the number of debarment

actions that's he’s moving forward with. We ourselves have recently proposed 26 debarments on

individuals and five different companies. So from the accountability standpoint, we're moving

forward.

ERVIN:


Could I just ask one other quick question, and I'll close on this.

Mr. Richardson, I wanted to ask about your view of the recommendation in our report, you

mentioned it in your prepared statement, about having a special inspector general for

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contingency operations. Mr. Bowen is on the record as supporting that notion, as I understand it.

And I'll ask you this, Mr. Blair, if there's time. If not, I'll do it in a second round.

But you, Mr. Richardson, objected to that notion. You said you generally object to adding extra

layers of oversight and duplication, and you think that there are mechanisms in place that could

already handle this, namely the Council of Inspectors General on Integrity and Efficiency—kind

of the consortium of inspectors general.

The reason we made that recommendation is that, as I'm sure you know, the statutory inspectors

general for DoD and for State and AID have jurisdiction only with regard to their agencies.

They're not cross-jurisdictional like SIGIR is like you are with regard to those two contingencies.

Which leads to the second point, you two are just related to those contingencies, and chances are

we'll be involved in future contingencies. In fact, we're already in one right now.

So I don't . . .

SHAYS:

So why don't we do this: why don't we have this be part of that second round because this is

going to be a long answer and I don't want to rush the answer.

ERVIN:

OK.

SHAY:

Mr. Green?

GREEN:

Thank you.

Mr. Blair, what, if anything, happened to the responsible commander in these two cases?

BLAIR:

The commander on the ground?

GREEN:

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Yeah. Because whoever the hell was responsible for this?

BLAIR:

I honestly don't know the answer to that question. I'd have to take that one for the record to get

back with you specifically . . .

GREEN:

Would you? Would you?

BLAIR:

Yes.

GREEN:

Because I'd have relieved their butts. I mean, this is inexcusable, even if it's only $39,000, which

in the grand scheme of things ain't a lot of money.

But that is a commander's responsibility, whether it's in Kuwait, Afghanistan, or Iraq. And,

obviously, you felt it was important enough that you had these big fancy charts made to bring in

here.

Which leads me to my concern. And I mentioned it with the last panel, and I said that I would

ask you guys the same question: What mechanisms and process do you use to follow up?

And to quote some of your testimony, Mr. Blair, which has already been acknowledged by

Commissioner Ervin, you acknowledged the difficulty in ensuring corrective action, recurring

problems.

So what do you do? Well, they didn't fix it, we'll go back in next year, we'll inspect 'em again,

and we'll give 'em probably the same report.

Mr. Richardson, in the previous testimony by your predecessor, General Fields, he expressed

considerable concern, and you've addressed it today to some degree, about the $11.4 billion

planned construction for Afghan national security forces, which may go up to 400,000 if you

believe all these numbers.

You made some recommendations to CSTC-A to develop a long-range maintenance plan for

these facilities. And, essentially, their response was, "Well, we don't have any plans on the

number and the size and location of these places. Gee, long-term construction is hard."

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They agreed on the need for a long-term operation-and-maintenance plan. And their solution was

to ask for more resources. Which is fine, but they probably won't get 'em.

Again, what do you guys do? Because, listen, we're going to go away. The two gentlemen on the

end at some point will go away or go to a different job. What do we do to follow up?

RICHARDSON:

You hold hearings, sir.

GREEN:

We won’t be here.

RICHARDSON:

You give the hammer back to the people who hold the hammer. That would be this commission,

it would be Congress.

We follow up, yes, we do. Do we go back in? Yes, we will. Do we make additional

recommendations? Yes, we do.

But if nothing happens, do we go to the Hill, do we discuss it, do we try to encourage hearings in

order to make changes? That's a part of our mission to do that.

But do we have the hammer?

No, sir, you have the hammer. The . . .

GREEN:

No. We're not going to be here, I said.

RICHARDSON:

Well, whoever your predecessor is. Or your . . .

GREEN:

You know, to me, and, Mr. Blair, you alluded to it, to me it just shows a lack of focus and a lack

of interest from senior leadership.

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BLAIR:

Commissioner Green, one of the things that we find consistently is that if we identify a specific

problem, the department will go and they'll correct that one specific problem.

And one of the things that we see that they don't do very well is generalize the problem to the

entire population. And they don't try to get proactive and to broaden that.

And one of the things that we're going to start doing more of, you talked about—you know, we

can go back, and we can re-audit and all of that stuff. But what we're trying to do now is to

increase our level of outreach at the higher levels in DoD.

I'm going to hold a round-table discussion with senior leaders in the procurement area, Shay

Assad, for example, to talk with him about our recurring problems.

Because one of the things that I want them to do is to start generalizing and to start looking at the

the broad universe of contracts that they have and to stop fixing the onesies and twosies.

And, as Mr. Richardson noted, we do not have the hammer. We have the recommendation. We

can reach out to the department. We can tell them these are the things that we think . . .

GREEN:

The senior people have the hammer.

BLAIR:

Yes, sir.

GREEN:

If they care, they have the hammer.

Mr. Bowen, comments?

BOWEN:

Yes. We are carrying out three audits on exactly this issue, looking at recommendations and

follow-up. One will be issued this week, in the next couple of days, finding that USAID has

implemented almost all of our recommendations, so that's a good audit.

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Our audits on the Defense Department and the State Department will not be as positive. I expect

one out in July and the other out before October.

We also have an ongoing recommendation-monitoring process that looks at this every quarter as

well and pushes for follow-up.

So we've seen some response out of one of our oversight agencies, and that's good.

But to correct the institutional shortfalls that are there, I think, ultimately will require

congressional action.

GREEN:

Thank you. I'm . . .

SHAYS:

Thank you gentlemen.

Mr. Tiefer?

TIEFER:

Thank you.

Mr. Bowen, your testimony was to me a very striking statement, the written testimony.

Waste in Iraq reconstruction amounted to about 10 percent of total spending or between $5

billion and $6 billion.

Now, it struck me particularly because we're in the midst of discussions as to whether we can

find a total figure that would include both what you did for Iraq and Afghanistan.

I wanted to know can we build on that figure? Do you think it's a figure we can build at as we

look at the waste in both theaters?

And does it cover not just buildings, but does it cover stuff like the Iraqi police, the soft stuff,

because I'm going to be asking some questions about the Afghan police to your co-panel

members.

But tell us about the scale of waste.

BOWEN:

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Well, as I point out in the statement, it's difficult or virtually impossible to accurately nail down a

total waste figure, just because by definition it's beyond view. It's in the shadows. And also it's

subject to different interpretations.

The fact is, in the Iraq program, there were multiple course changes. As I said in my statement, it

really is tantamount to eight one-year programs, rather than an eight-year program, with the

constant personnel and policy changes.

But through 350 audits, we've been able to identify significant waste, specific examples of it.

And my auditors have estimated from that a waste figure of about 10 percent, which is between

$5 billion and $6 billion. How that translates to Afghanistan, I can't comment on.

But, as I also said in my statement, the real waste figure is probably higher, because of the

sustainment issue that the commission's talked about that I mentioned in my statement.

The reality is that a number of significant projects, expensive projects that we've transferred to

the Iraqis have not been well maintained.

We issued an evaluation last fall of the Nasiriyah water treatment system, the single most

expensive project that the United States executed in Iraq, $400 million, being used at less than 15

percent. That is waste, frankly. It's not working.

And can you yellow-book that out to an exact number? No. But I think it supports my

observation that the factual waste is something significantly higher than the $5 billion to $6

billion I'm willing to estimate today.

TIEFER:

OK. Let me go on.

Mr. Blair, I thank you. You, personally, with your team on this subject, the team had Colonel

Emil Kabban brief me and others at the commission about the study that you just finished last

month of the Afghan National Police and the continuing observations you're doing on both the

police and the Afghan national army.

Before I get into the details of that report, the most stunning sum-up comment I heard from

Colonel Kabban, and I just want to check this with you, did he say that it would be eight to 10

years before we can turn over to the Afghan security forces the accountability for their own

logistics? Do I understand that?

BLAIR:

Commissioner Tiefer, what he was relaying to you was a discussion that he had had with

members who were in theater at the time, and he was relaying their comment to you. So that's

not our observation, it's not our estimate.

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TIEFER:

I understand.

BLAIR:

That was a comment that was made from a colonel in the theater.

TIEFER:

But this is the most sophisticated and elaborate analysts there are on this subject.

What is the problem? The logistical system for the Afghan police—which I won't go into at this

point—but we built the physical facilities for them.

It's not that we don't have the buildings. What is the reason that it's projected that it could take

many years before they can stand up their own logistical system?

BLAIR:

In talking with the people who focused on that report, one of the things that they relayed to me

was that a big challenge was to get the logistics operations up and running, and it hasn't been a

primary emphasis in Afghanistan until recently.

And so the development of a logistics system lagged behind the need to have warfighters in the

theater and to execute combat operations. And so that was part of the problem is it started later.

TIEFER:

Well, isn't the problem that, and by logistics, we're talking about things including munitions,

small arms, light machine guns, I think I heard him say rocket-propelled grenades. This is not

your average small-town police force in the United States giving out parking tickets.

If I understand what your report on this subject said, without such a system, first of all, we're

going to face, am I correct, waste, fraud, and abuse because of what flows through the system

happens to be valuable?

BLAIR:

Yes.

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TIEFER:

OK. But, secondly, will we be able to have operational forces, remembering that this is how the

police are half of the security forces? In the clear, hold, and build effort we're making, they're the

ones who are supposed to hold the areas. We're going to send them into these Taliban areas as

soon as we clear the Taliban out, and they're supposed to hold them.

How long will the ANSF last without an operational logistics system of this kind? I think

Colonel Kabban had a rather dramatic statement, but you tell me.

BLAIR:

I don't recall what his statement was.

TIEFER:

OK. This isn't a closed-book test. He said it would be about three days if they didn't have

logistics going. I'll leave it at that. But my point is, it's both waste, fraud, and abuse and that they

need the support to operate in the field? Am I right there, they need . . .

BLAIR:

Yes, that is correct. They need that operational support.

TIEFER:

OK. Another aspect of it, a March 2010 Newsweek story, which did a thorough survey of the

police, said, quote, "Crooked Afghan cops supply much of the ammunition used by the Taliban,"

according to Saleh Mohammed, an insurgent commander in Helmand province. "The bullets and

rocket-propelled grenades sold by the cops are cheaper and of better quality than the ammo at

local markets," he says.

Is there a danger that we will continue supplying the enemy if we don't have a functioning

logistics system to do oversight?

BLAIR:

Commissioner Tiefer, I'm not aware of us directly supplying the enemy at this point. I know that

there is a need to put a logistics force in place, and processes in place, as soon as possible, and a

sustainable logistics process at that.

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TIEFER:

OK. One quick question to SIGAR: You have an Afghan national police study, which, I believe,

becomes final almost this very minute. Will we be able to discuss that in the next round?

RICHARDSON:

Certainly.

TIEFER:

Thank you.

SHAYS:

Thank you, Mr. Tiefer.

I'll yield myself my eight minutes and yield for the follow-up to Mr. Ervin's question. Do you

want to just, basically, repeat and I'll look for brief answers since it's my time.

ERVIN:

Sure. You know, my question to you, Mr. Richardson, was you seem not to support the notion of

a special inspector general for future contingency operations a permanent one, and you said the

reason was that you didn't want to add an extra layer when, in fact, you're going to be going

away at some point; Mr. Bowen is going to be going away at some point; and you didn't want to

add a duplicative layer, whereas this PCIA really is not relevant here. So I didn't understand your

opposition to the notion.

RICHARDSON:

My position is based on my understanding of the role of that position. My understanding of that

position is that it would provide the continuity between existing Iraq, Afghan and whatever other

war zones come online, where everyone would essentially report to that particular component.

And that component will provide some level of continuity between the multiple war zones.

In order to do that, that component will have to be stood up, staffed, and funded. I see that as

another layer and another cost to the taxpayers when the issue isn't so much continuity but

collaboration.

And I felt that collaboration could be achieved in the existing framework of the Council of

Inspector Generals for Efficiency and Effectiveness, the way it was done when the request went

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in for them to look at the issue in Katrina, the way it was done when the request went in to say,

let's look at the . . .

ERVIN:

And, Mr. Bowen, you support the notion, and can you explain why?

BOWEN:

Yes. I think you articulated it well. A special inspector general's office would have cross-

jurisdictional capacity. Second, we don't know when these contingencies happen, and so they

occur suddenly. One may be unfolding now in North Africa. And are the resources already in

place for execution of rapid oversight of whatever substantial aid we might provide there? And

no they're not. It would have to come out of hide.

The lesson learned from Iraq and, sadly, not quite from Afghanistan, since the oversight didn't

start until a couple of years ago, is that you have to have that oversight there from the beginning

to ensure compliance with the regulatory requirements. More importantly, it promotes more

efficient execution of the program and improves the likelihood of success and protection of

national security interests.

ERVIN:

Thank you. Can I just get Mr. Blair's view on that since he's the statutory inspector general?

BLAIR:

I tend to agree with Mr. Richardson's observations that the implementation of another layer of

bureaucracy or oversight rather than maximizing the cooperation between the existing inspector

generals. I'm not convinced that we needed to go to that step yet.

SHAYS:

OK, let me reclaim my time.

We set up a special prosecutor because the inspector generals were not doing their job. I was on

the government oversight committee and we did it.

And, frankly, Mr. Bowen, you did your job brilliantly, maybe too brilliantly because you became

too much of a force and too much of a contrast for the other inspector generals. And, frankly,

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you became a target. I don't understand for the life of me why Congress didn't give Mr.

Richardson's SIGAR element the same powers that you had. You had broader reach, correct?

BOWEN:

I think he did get the same powers. He didn't get the same funding at the outset. That was the

challenge.

SHAYS:

And the challenge is that it took you a little bit to get set up because you started, and we, kind of,

judged Mr. Fields on instant replay. There was a sense that somehow how come he wasn't

producing what SIGIR was right away. But it did take you a little bit of time to get started,

correct?

BOWEN:

Well, we were told to shut down three months after opening, and so we were shutting down. And

then we were told to start up again. And so that first year was a challenge.

SHAYS:

Well, my work on government oversight committee, where we had jurisdiction over Defense and

State Department, the synergies, and USAID, were fabulous. And, Mr. Blair, you're only DoD,

and you're only a certain part. You can't look at USAID, State, and DoD in the same way,

correct? You didn't, I mean, you can . . .

RICHARDSON:

Our mandate does give us authority . . .

SHAYS:

Right. I'm sorry. I said it incorrectly. You do have the ability, but the DoD folks and the USAID,

they're just the tunnel. And there's sometimes the need to go in two different directions.

And, frankly, my own view is a little competition doesn't hurt, you know? What was so

interesting when Mr. Bowen went into this effort was we then said, how come DoD and State

and other inspector generals didn't do what he was doing? And then they started to.

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So there's two sides to this equation here. You've been a long time with the inspector generals’

offices?

RICHARDSON:

Sixteen years with the Department of Energy, sir.

SHAYS:

OK. And thank you for that service.

The question I would like to ask you, Mr. Bowen—I may be just incorrect, and we may need to

redo this. I need you to define to me the whole concept of debarments.

You're basically saying, if you were in the chair when I had asked Mr. Gansler, give me five

cases of debarments, he should have, you know I didn't want to trick him, but you, obviously,

have a long list.

Are these recommended debarments or actual debarments and were they small companies or big

companies?

BOWEN:

Actual debarments. Some were operating on large contracts in Iraq. Global Business Services,

Philip Bloom's company, had many, many contracts when we caught him in massive fraud, and

he did four years . . .

SHAYS:

And so the company was shut down or he . . .

BOWEN:

Yes. It was debarred, and then the company went bankrupt.

SHAYS:

OK.

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BOWEN:

Lee Dynamics, another one doing massive logistics work with PWC; Allied Armor, another one

that ultimately was shut down because of the debarment. Custer Battles was debarred, shut down

because of their manifestly flagrantly violent conduct.

SHAYS:

So you would take issues with our concept on debarments?

BOWEN:

Well, no, I think your February 28th hearing was extremely telling and maybe the most

compelling argument for reform regarding the imposition of a better suspension-and-debarment

program.

The colloquies that occurred during that few hours exposed significant weaknesses that have to

be repaired. The interagency piece isn't working. No reporting was happening.

The Army has done a decent job, but has State and AID? No. AID wasn't doing anything until

2007 until the IG got on them for it. Has State been able to strengthen that? The answers you got

didn't provide much confidence about that. But . . .

SHAYS:

So let me just, so I can ask Mr. Blair and Mr. Richardson, you would take issue with my

describing there haven't been many. Your issue would be there have been, but there are still

weaknesses in the system. And that would be a better line for me to look at than saying it's just

not happening enough.

BOWEN:

Yes, exactly right. Yes, sir.

SHAYS:

Thank you.

Mr. Blair?

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BLAIR:

I would agree with what Mr. Bowen just said, that there have been some debarments. But I think

the departments needs to increase the attention in that area.

SHAYS:

Mr. Richardson?

RICHARDSON:

Well, I can only speak for Afghanistan.

SHAYS:

Right.

RICHARDSON:

In Afghanistan, I think that we've only recently started down that road. Probably should have

started two years ago. But since we started down that road, as I indicated, we have debarred 26

individuals and five companies. I know that the military has also. . . .

SHAYS:

Let me just clarify. Is that a recommendation or actually they've been debarred? Do you have the

authority to debar them . . .

RICHARDSON:

No.

SHAYS:

. . . without DoD accepting it?

RICHARDSON:

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No. We proposed it to DoD. DoD has the final authority.

SHAYS:

Have they accepted it?

RICHARDSON:

I'm not sure.

SHAYS:

Yeah. See, I don't want to mix these, your recommendations versus what happened.

RICHARDSON:

Right.

SHAYS:

OK.

So my time has expired. And I'll get the second round.

And we'll go back to you . . .

RICHARDSON:

We have four out of five have been accepted.

SHAYS:

OK. Thank you for that.

Ms. Schinasi?

SCHINASI:

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Thank you, Chairman Shays.

Mr. Blair, I'd like to turn to a couple of reports that your office issued on, and these are time-and

-materials contracts in Southwest Asia, one you did for the Army and one you did for the Air

Force.

A couple of findings in there caught my attention—happy that you're looking at T&M contracts.

Those are obviously the worst ones to be using.

But in your findings for the Air Force you talked about faulty construction work and other

serious engineering and construction issues that resulted in fires in barracks, for example, pretty

serious. You also talked about $24.3 million in costs that we had to pay for that we didn't agree

to. You know, I would put that in the category of waste.

For the Army side you talked about similar wasted money. But I think the issue that struck me is

in the response from the agencies to your findings, and it sounds like they don't think there's a

problem here.

Two questions that come to mind: One, are these areas where we shouldn't have contractors if

the agencies themselves don't think it's important to manage them and get fair value for what we

spend? And number two, am I reading this correctly, that they really aren't interested in

recovering the money, they don't believe that the government should do that?

BLAIR:

Well, to answer your first question, time-and-materials contracts are the riskiest ones, and we

should be using those types of contracts only when the department is going to put the appropriate

level of oversight in place. And the work showed that that oversight was not in place.

So to say that we shouldn't be using contractors at all I think is a bit extreme, but to say that the

department needs to step up the level of oversight for those contracts is definitely the case, and

that oversight has to be appropriate. You can't have the people in the United States providing

oversight for T&M contracts that are in Southwest Asia. That's just not effective.

SCHINASI:

And the $30 million or so that we saw in overcharges, that's not worth going after?

BLAIR:

That seems to be their position. We would disagree. $30 million is a lot of money.

SCHINASI:

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I would agree with that, too, and I think most people, certainly outside of this room, would as

well.

In another report that you did on training and equipping, well, let me follow up. So what are you

going to do about that?

BLAIR:

We're in the process right now of planning our next year's work and identifying those reports that

we want to follow up on. We want to get a mixture of reports that we will do the follow-up that

have ongoing activity going forward so that we can see that not only did we collect from the sins

of the past, but that we can correct things going forward.

So we're trying to get a mixture of the two and we're in the process of identifying, now, which

ones of those contracts we're going to follow up on.

SCHINASI:

But can you go after a budget that somebody has, the Air Force or the Army, and take that $30

million out of what they're going to have to spend in the future.

BLAIR:

No, we do not have that authority.

SCHINASI:

Would you like to have that authority? Would you like to have that authority?

BLAIR:

I'll have to take that one for the record.

(LAUGHTER)

SCHINASI:

You also had a report in March of this year on the Afghan national police, and in there you talk

about, again, the need for more people to oversee this contract, that this is arguably the most

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important contract we have in Afghanistan and the department has not been willing to put people

in place.

I think in that report you say you did get a better response from the vice chairman, I guess, who

has said, "Yes, we need to do it." But we've seen this in the past. Requests have gone forward for

more personnel and they're not forthcoming. And I think, as you've maybe heard some of us say

a couple of times this morning, it's only going to get harder to get these kind of people in times

of budgetary decreases.

What are you going to do about that?

BLAIR:

One of the things that I want to make sure, we don't just focus on numbers. It's not just that there

aren't enough people. It's even to the point where the people that are there aren't being used as

effectively as they should.

When they don't have a detailed quality-assurance plan that they can use to really do a detailed

evaluation of the contract's performance; and when we award award fees or incentive fees

without doing the appropriate oversight to determine that the contractor actually earned those

fees for performing above the minimum, those are the types of examples that give me the idea

that it's not just a numbers game.

It's the utilization of the contractors and the contract oversight in theater that has to be both

together.

SCHINASI:

Do you ever get the feeling you're writing the same report over and over and over?

BLAIR:

Yes, ma'am, we do.

SCHINASI:

I sympathize with that.

Mr. Richardson, I want to take on one of your reports, looking at the Commanders’ Emergency

Response Program, for some of the same issues. You talked about the fact that in this case the

U.S. Forces-Afghanistan accepted your recommendations, but they said, "We can accept what

you're recommending for us," but really the intended recipients don't have the dollars to maintain

these facilities or don't have the skills to operate 'em.

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Is this a case where we shouldn't be spending that money in the first place?

RICHARDSON:

Well, it can be looked at two ways, either we shouldn't be spending the money or increased

appropriations should be considered in order to address it. And that becomes problematic

because we continue to pour more money behind bad money.

SCHINASI:

So it sounds like we shouldn't be doing it in the first place?

RICHARDSON:

That's a political decision.

SCHINASI:

It sounds like we shouldn't be doing it in the first place, how's that, then?

That's my time, thank you.

SHAYS:

Thank you.

Mr. Ervin?

ERVIN:

Thank you, Mr. Chairman. I'll be very brief this round.

I'll start with you, Mr. Bowen. As usual, I thought your statement was terrific.

BOWEN:

Thank you.

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ERVIN:

I agreed with 99 percent of it. And I thought a number of comments that you made were

especially well said, like the comment that there really wasn't one eight-year program in Iraq but

eight one-year programs. I think that's quite accurate and very telling.

But there was one thing in your statement that did surprise me. You said on page 2 of your

statement that outsourcing management to contractors should be limited because it complicates

lines of authority in contingency reconstruction operations.

I would have thought your position, like mine, would be that outsourcing management to

contractors should never occur. I can't conceive of any circumstances under which that's

appropriate. Could you just explain what you meant there?

BOWEN:

Yeah, perhaps, Commissioner Ervin, you've got a more exact analysis, and I think we are in

general agreement on this point. There may be particular narrow circumstances where

outsourcing may be appropriate.

However, our work supports the general principle and your position in your reporting that the

management of contractors needs to be done by government officials.

For example, you know, during the CPA (Coalition Provisional Authority) the government hired

AECOM to oversee the 12 design-build contractors. AECOM was also bidding on other

contracts in Iraq. That problem was alluded to in the previous panel. It was present, you know,

front and center . . .

ERVIN:

So we generally agree.

BOWEN:

Yeah, I do. I think the principle articulated is exactly right, that contractors should not be

overseeing contractors in a larger management sense. We have it already and it's a problem with

primes and subs, and the law needs to address that.

ERVIN:

OK. And, just quickly, Mr. Richardson, Mr. Bowen gave us an estimate of waste, $5 billion to $6

billion. And I think he quite rightly said, you know, necessarily, you can't have an exact figure.

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And I think he's also quite right to say that whatever the figure is, it's going to be higher because

of this whole sustainment issue.

But I don't see a SIGAR effort to ascertain a degree of waste to this point. Have you done any

work in this regard? Do you have anything to say about that at this point?

RICHARDSON:

We have a number of individual audits that have reflected waste that over the entire scheme of

the total budget process isn't great. It shows, you know, $5 million, $20 million, $50 million.

The problem is not so much whether or not we did cost overruns of $10 million on this project or

couldn't buy a generator for that power plant that cost us another $10 million.

The problem is the sustainment. OK? And if we do not meet the requirements that are necessary

to sustain this operation, then we're talking billions of dollars at waste.

ERVIN:

Right.

RICHARDSON:

And when we get to the point where Mr. Bowen is, eight years, seven years, six years into the

process, then I'll be able to come here and I'll be able to give you a figure.

ERVIN:

Finally, Mr. Bowen, back to you, I was particularly struck in your statement by your pointing out

that there's no United States government program now to review the fate of projects after we turn

them over to Iraq when we leave at the end of this year.

BOWEN:

Right. That's right.

ERVIN:

I was really struck by that. And could you elaborate on that? I presume that you at least tried to

bring that fact to the attention of senior leadership at DoD and State and AID.

101

BOWEN:

Yes, in our asset-transfer and sustainment audits, we have urged that a coordinated effort for

improved asset transfer and can Iraqi buy-in, I'll call it, on sustainment be implemented.

The next level, though that I'm alluding to there is that beyond just ensuring their buy-in and the

proper transfer of asset is what we did in our evaluation last fall: Go back two years later and

find out what's going on with that huge project?

And when you looked at the Erbil water treatment plant, we looked at the Nasiriyah plant,

number one and number four in total cost in projects, and it, itself is an interesting case study.

ERVIN:

So have these three agencies agreed to do that?

BOWEN:

Oh, no. No. I think there's just a missing element within the oversight community or within the

agency community to do evaluations of work, and the entire evaluations area should be

expanded.

SHAYS:

Would the gentleman yield, just quickly?

ERVIN:

I'm done, actually. Thank you.

SHAYS:

With the Erbil project, that's a Kurdish project.

BOWEN:

Right, and it's good.

102

SHAYS:

Yeah. I remember seeing it. I would be surprised if you wouldn't find it being run pretty well.

BOWEN:

Right. Operating at 95 percent. The Kurds love it. They're adding to it. Everyone's using it. It's a

study itself in the nature of the Iraq reconstruction program. There was one up in Kurdistan and

there was one in the south. And the Kurdish projects usually turned out well.

SHAYS:

Got you. OK, thank you.

So I think it's Mr. Green.

GREEN:

Thank you.

If I heard you correctly, Mr. Blair, Mr. Richardson, to go back to this contingency special IG, I

think you both may have characterized it as extra layers, detrimental, et cetera.

I can understand, Mr. Blair, where you may be coming from, because, you know, these guys may

get into your rice bowl every once in a while, and you may feel, hey, I'm doing that, you know,

go away.

But, Mr. Richardson, to you, do you feel that SIGAR operations today are a layer and

detrimental to the operation? Because if you do, I don't know why you're in business.

RICHARDSON:

Mr. Green, Commissioner Green, I'm not saying that SIGAR is a layer. I'm saying if you put a

layer above SIGAR for contingency planning then that creates a drain of additional resources.

GREEN:

Yeah. I don't think that's what we're thinking about. What we're thinking about, when and if you

two guys go out of business, we need to have a plan when the next balloon goes up.

103

That's all I'm saying. I'm not saying put somebody in over you guys and I don't think anybody on

the commission is headed in that direction. And if that was implied in any way, that is not the

case.

RICHARDSON:

OK. Well, let me take that into consideration, and say that . . .

GREEN:

You now support it?

RICHARDSON:

No, no, no.

(LAUGHTER)

It makes more sense. OK?

GREEN:

OK.

RICHARDSON:

But, at the same time, I would say that are we sending a signal that we intend from here on out . .

.

GREEN:

I've heard that argument or, excuse me, but that's the same as saying, let's not plan for any

contingencies. DoD, let's not have any contingency plans on the shelf. So I don't buy that

argument.

RICHARDSON:

Well, that argument only does not count if you did not have a Council for Inspector Generals

currently in place that can fulfill the role. And that's all I'm saying . . .

104

GREEN:

OK, let me . . .

RICHARDSON:

. . . turn to the group that you have in place.

GREEN:

OK, let me quickly go, Mr. Blair: Commissioner Ervin's comment about when he was IG at

State, and I was there at the same time, he did have access to the secretary, the deputy. If he

failed there, I would carry his water to them.

What if you had a dedicated time, 30 minutes a month, with the deputy, where you could raise

the two or three most important issues confronting you? Would that be useful?

BLAIR:

Commissioner Green, I don't mean to imply that we don't have access to the senior leadership in

the department. I just wanted to clarify that. Most of our day-to-day work is done at lower levels.

GREEN:

But I want . . .

BLAIR:

Would a 30-minute dedicated time? I would enjoy that. I think that would be a good use of my

time, a good use of their time. I oftentimes go with the inspector general to brief the deputy

secretary and participate as part of his recurring meetings.

GREEN:

Well, 30 minutes of time ain't a lot, even for the deputy.

Last question, pretty simple: You know, we've talked throughout this hearing and in the panel

before about follow-through. And we all acknowledge, recognize we're going away at some

point.

105

How do we as a commission, you heard from Jacques Gansler, how do we as a commission

maximize follow-through on whatever recommendations, whatever findings that we may

ultimately feel are worth pursuing?

Stuart?

BOWEN:

Commissioner Green, I think, first of all, Dr. Gansler's recommendation to get buy-in from the

Congress to implement in law recommendations that are targeted toward statutory change.

So when you draft your report, I might include as appendices certain statutory amendments or

laws that would implement specific recommendations.

So help them do their job. Give them a road map to statutory change, rather than just a principle

to implement.

Second, I would take those proposed pieces of legislation, and perhaps before you even publish,

and vet them with the departments. You know, sit down with leadership that are familiar with the

kinds of changes you're proposing, and see if they can incrementally improve it through advice

and interest.

GREEN:

Thank you.

Mr. Blair?

BLAIR:

I actually tend to agree with what Mr. Bowen just said that the idea of establishing some follow-

on recommendations with responsibility for somebody to actually assess the level of

implementation of those recommendations is a very good way to make sure that there is some

change.

GREEN:

Well, as Jacques Gansler said, he came back a year later and said, Army, you're succeeding or

you're failing in these particular areas.

Mr. Richardson?

106

RICHARDSON:

You do what you've been telling us to do. You call the heads of the agencies here. You put them

at this table. And you put out your recommendations, and you make them respond to them. And

get your 30 minutes right here at the table and make them take action for implementation on

those recommendations. Either that, or develop a contingency plan so you have somebody over

you.

GREEN:

OK, thank you.

SHAYS:

I'm just going to say, Mr. Richardson, we're going to come back. I'm going to give you a little

warning because you talked on both sides of the answer. So you think of a better answer . . .

RICHARDSON:

OK.

SHAYS:

. . . when it's my turn.

Mr. Tiefer?

Mr. Tiefer is getting eight minutes. He yielded back a lot on this first round. I mean on the first

panel.

TIEFER:

Mr. Richardson, today, my understanding is we've just been discussing for some time, you are

releasing a new, and I might say path-breaking and much-awaited report on the Afghan National

Police payroll and workforce system.

I understand that'll be posted on your website today.

RICHARDSON:

That's correct.

107

TIEFER:

Let me ask you, your written testimony today says that "its personnel," I'm quoting, "Its

personnel system provides little assurance that only ANP personnel who work are paid. The

Afghan government has taken many steps to address ANP accountability but significant risks of

fraud, waste, and abuse of donors' funds will continue.”

Now, can you tell me what are those significant risks of fraud, waste, and abuse? And do they

include things that have been commented upon in the past to the ANP like AWOL police,

absentee police, ghost employees, things like that? What's the beef?

RICHARDSON:

The risk of that we are finding, first of all, is that there is no centralized automated system put in

place by the ministry of interior to identify the Afghan national police who are actually on the

rolls and who are being paid. Without that type of system in place, they cannot specifically and

they have not specifically been able to tell us where the money is actually going.

What does that mean? That means you can have ghost employees. It means you can have AWOL

employees. It means you can have individuals who are under multiple names collecting

paychecks. And there's no way to account for it.

So therein lies a very significant problem now and down the road, and we need to get our hands

around it.

TIEFER:

Good. I mean, that's a good start for discussion. Let me take you a step further. Your statement

said, and I heard you say, that this was one of the, this was a, quote, "key issue as we approach

the hand-over," unquote.

And I think by that, you're referring to the fact that in 2014, we hope to be able to hand over

security throughout Afghanistan to their security forces so that in 2015, we can substantially

bring home our people.

The figures—I was in Afghanistan with Chairman Thibault last month, and the figures we heard

were that the previous goal of 134,000 police by October was now being likely supplanted by a

new goal of 170,000 police by 2012. Why is the problem that we don't know who's working

among the police, among those who are paid, a key issue as we approach the hand-over?

RICHARDSON:

108

Well, it's somewhat obvious. If you don't know who you're paying and you don't know who's

there, then how can the numbers actually be accurate? Simple mathematics.

The other question arises is if we're paying ghost employees, or are we paying employees who

go AWOL with equipment, weapons, materiel, and then come back with nothing and have to be

re-stocked, what happened to that materiel and supplies that they took with them? Are they

supplying insurgents?

The question is evolving. So for them to say that we will have X number of thousands of

personnel on the ground at a certain date, until we can specifically identify that these individuals

are actually there on the payroll and being paid, and doing what we have tasked them to do, then

those numbers for all practical purposes become somewhat fictitious.

TIEFER:

Wow. Let me come back to you. After the observation that there's an overlap between what the

DoD IG, Mr. Blair, said earlier about the weak logistical system for the police, and what you're

saying about the weak personnel system. As you said, when they go AWOL, they can take their

materiel with them, their weapons with them, things like that. That's where the leakage is in the

logistical system, at the district level.

They know what's coming in at the top, but they don't know what's walking away at the bottom,

and that's what you're pointing out.

Let me ask about this. I mentioned this. A year ago when Newsweek did its report about the

Afghan police, they said, "The fact is that no one is quite sure how many Afghan police there

really are. The Americans are only now in the process of trying to create a database that will

positively identify and track recruits. Without such data, it's more than difficult to catch ghost

troops who exist only as names on the payroll, not to mention possible Taliban infiltrators."

Now, that database was held out to us a year ago as the thing that was going to be a panacea,

cure the problems. Are there still problems with the database? Why don't we have a working

database there? Why isn't it good enough?

RICHARDSON:

I'm not in a position to answer that. I don't think we've done any work to examine or follow up

on what was reported in Newsweek.

TIEFER:

Fair enough. They need to do a new story on this. I quite agree. But I look forward to reading the

copy. You people have really guarded this. I was not allowed to see a copy of this report and I'm

eager to do so.

109

Mr. Bowen, we've been somewhat beaten around the head and shoulders about our

recommendation that suspension-debarment be taken seriously. Now, the leading case we looked

at for where it's not being used was one that you're very familiar with. It was the Louis Berger

conviction of two top people, which your office worked hard on, its CEO, its CFO. It's a billion-

dollar company. AID fought us and said, "No, they were right; there didn't need to be one day of

suspension or debarment." They insisted to us that was unnecessary.

Are we off-base on this? Or was there some reason that suspension-debarment should be

strengthened a little?

BOWEN:

No, you're not off base. As I said, your February 28th hearing fully substantiates that you're right

on base, Commissioner Tiefer, and that this is a critical area that needs to be strengthened across

agencies. The reality is, as that hearing exposed, AID has not done a good job with its own

suspension-and-debarment process. As a matter of fact, it's done a miserable job.

And part of the problem, I think, that allowed Berger to engage in these criminal practices, that's

what they were, false billings, for so long, was because of weak oversight in Afghanistan. It's not

for lack of people raising red flags. Senator Coburn repeatedly issued statements about his

concerns regarding Louis Berger's conduct or lack of work or effective work.

Let me cut to the chase, though. When a company is convicted, they should be debarred. I'm not

aware of another circumstance in our experience where a convicted company was not debarred.

It certainly serves as a basis for debarment. I don't know other than to speculate that it was part

of the Department of Justice plea agreements with the company to avoid debarment. And I think

it underscores an interesting fact that companies fear debarment more than conviction.

TIEFER:

Thank you.

SHAYS:


Mr. Richardson, I don't want to spend a lot of time on this, but based on your opposition to a

special inspector general for contingencies, and given that SIGAR is a special inspector general

for a contingency, Afghanistan, should we get rid of SIGAR?

RICHARDSON:

No sir.

110

SHAYS:

OK. Let me ask you, Mr. Bowen, well, let me ask all of you.

Do you have any closing comments that you'd like to make?

BOWEN:

Yes. First, thank you for having me to testify. And as I said in my statement, I think the

commission's report is full of crucial recommendations that should be implemented at law. I

think our previous colloquy on that would be useful.

Change will come. Lessons will be applied. Lessons learned will be lessons applied when the

law changes. The department's just getting followed-up with a year later—that might not be

enough. Changing the law changes behavior.

And I think that from a larger perspective, as you know, we still don't know who's really in

charge of contingency relief and reconstruction operations. Who plans them? Who executes

them? Who's accountable? That's part of the continuing problem over these many years

regarding Iraq and Afghanistan. And we proposed in our statement a solution.

And there's something new that we proposed in it is identifying that those elements that would

fall under the U.S. Office of Contingency Operations themselves were all reactions to

stabilization and reconstruction operations over the last 20 years.

OTI, Office of Transition Initiatives, at AID, was created in 1994. And in Commissioner

Zakheim's colloquy with Administration Shah on April 1st, he pointed out that there are only six

government employees there. I think you have a delegation problem there regarding SROs that

needs to be fixed.

SHAYS:

Thank you.

Mr. Blair?

BLAIR:

Chairman Shays, the only thing I wanted to do in closing was to thank my panel members.

Thank you for this oversight hearing. I think it's this type of rich discussion exploring the

concepts in depth, getting different views. Those types of conversations will result in better

solutions than just a one-sided view.

111

I think the department has a long way to go in order to get it right and in order to put the

effective oversight that it needs in place in order to determine that they're actually getting what

they pay for.

We're in it for the long haul. We will be here doing the same type of work year after year. I

would, you know, welcome the opportunity to engage at the most senior levels, and I do. And we

will continue to make those recommendations because contracting is an integral part to our

operations in Southwest Asia. Thank you.

SHAYS:

Thank you.

Mr. Richardson?

RICHARDSON:

I just want to take an opportunity to thank the commission for the opportunity to be here. I want

to re-emphasize the three key areas that I'm find is a problem in Afghanistan, which is planning,

oversight, and sustainment. Planning will cost the taxpayers money if it's not done correctly.

Oversight will cost more money if it's not done correctly. But if we blow sustainment, then we've

lost everything.

So I just want to put special emphasis on the fact that we need to focus in those areas and put

additional emphasis on the area of sustainment.

SHAYS:

Thank you.

And let me just close by saying, Mr. Bowen, you have been in business for a long time now and

you have done, I think, a superb job.

Mr. Blair, I know you have been working real hard. I'm not as familiar with your work as I am

with Mr. Bowen's, and I do know, though, that you're, you know, finding things that need to be

found and making a difference.

And, Mr. Richardson, I think SIGAR has made its biggest contribution in the whole issue of

sustainability because I think you all are rightfully pointing out there are just too many projects

that, even if they're done well, they just aren't going to be sustainable. And I hope you really, you

know, continue to speak loudly about this because, whatever the sustainability problem is in Iraq,

I think it's many fold more in Afghanistan.

So we thank all three of you very much. And with that, we'll close this hearing.

NAVAL POSTGRADUATE

SCHOOL

MONTEREY, CALIFORNIA

MBA PROFESSIONAL REPORT

Procurement Integrity in Contingency Operations:

A Case Study of Army Contracting Officer Corruption in Operations Iraqi and Enduring Freedom Utilizing Occupational Fraud Theory

By: Amanda H. Flint,

December 2011

Advisors: Max V. Kidalov, and E. Cory Yoder

Approved for public release; distribution is unlimited

THIS PAGE INTENTIONALLY LEFT BLANK

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REPORT DOCUMENTATION PAGE Form Approved OMB No. 0704-0188 Public reporting burden for this collection of information is estimated to average 1 hour per response, including the time for reviewing instruction, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188) Washington DC 20503.

1. AGENCY USE ONLY (Leave blank)

2. REPORT DATE December 2011

3. REPORT TYPE AND DATES COVERED MBA Professional Report

4. TITLE AND SUBTITLE Procurement Integrity in Contingency Operations: A Case Study of Army Contracting Officer Corruption in Operations Iraqi and Enduring Freedom Utilizing Occupational Fraud Theory

6. AUTHOR(S) Amanda H. Flint

5. FUNDING NUMBERS

7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) Naval Postgraduate School Monterey, CA 93943-5000

8. PERFORMING ORGANIZATION REPORT NUMBER

9. SPONSORING /MONITORING AGENCY NAME(S) AND ADDRESS(ES) N/A

10. SPONSORING/MONITORING AGENCY REPORT NUMBER

11. SUPPLEMENTARY NOTES The views expressed in this thesis are those of the author and do not reflect the official policy or position of the Department of Defense or the U.S. Government. IRB Protocol number ______N/A________.

12a. DISTRIBUTION / AVAILABILITY STATEMENT Approved for public release; distribution is unlimited

12b. DISTRIBUTION CODE A

13. ABSTRACT (maximum 200 words) The purpose of this project is to analyze the conditions that enabled corruption of Army Contingency Contracting Officers (CCOs) during Operations Iraqi Freedom and Enduring Freedom (OIF/OEF) by applying occupational fraud theory, specifically the classic sociological/criminological Fraud Triangle model (Cressey, 1953), to determine its validity in a contingency operation. By examining the contracting environment in OIF and OEF and utilizing the conceptual framework of occupational fraud theory, I identify the distinctive situational elements of a contingency operation that influence an individual’s decision to commit fraud and thus affect the probability of fraud occurring in contingency operations. By analyzing the procurement fraud environment in OIF and OEF using an occupational fraud model, I provide the foundation for understanding why fraud occurs in the context of contingency operations with the intent of preventing future procurement integrity violations. Reducing instances of fraud directly impacts the appropriate utilization of taxpayer funding and the operational readiness of the warfighter, as well as enhances the reputation and standing of the Army CCO Corps.

15. NUMBER OF PAGES

97

14. SUBJECT TERMS Contingency Contracting, Fraud, Corruption, Occupational Fraud Theory, Fraud Triangle, Operation Iraqi Freedom, Operation Enduring Freedom

16. PRICE CODE

17. SECURITY CLASSIFICATION OF REPORT

Unclassified

18. SECURITY CLASSIFICATION OF THIS PAGE

Unclassified

19. SECURITY CLASSIFICATION OF ABSTRACT

Unclassified

20. LIMITATION OF ABSTRACT

UU

NSN 7540-01-280-5500 Standard Form 298 (Rev. 2-89) Prescribed by ANSI Std. 239-18

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Approved for public release; distribution is unlimited

PROCUREMENT INTEGRITY IN CONTINGENCY OPERATIONS: A CASE STUDY OF ARMY CONTRACTING OFFICER CORRUPTION IN OPERATIONS IRAQI AND ENDURING FREEDOM UTILIZING

OCCUPATIONAL FRAUD THEORY

Amanda H. Flint, Major, United States Army

Submitted in partial fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION

from the

NAVAL POSTGRADUATE SCHOOL December 2011

Authors: _____________________________________

Amanda H. Flint Approved by: _____________________________________

Max V. Kidalov, J.D., Lead Advisor _____________________________________ E. Cory Yoder, Support Advisor _____________________________________ William R. Gates, Dean

Graduate School of Business and Public Policy

iv


v

PROCUREMENT INTEGRITY IN CONTINGENCY OPERATIONS: A CASE STUDY OF ARMY CONTRACTING OFFICER

CORRUPTION IN OPERATIONS IRAQI AND ENDURING FREEDOM UTILIZING OCCUPATIONAL FRAUD THEORY

ABSTRACT

The purpose of this project is to analyze the conditions that enabled corruption of Army

Contingency Contracting Officers (CCOs) during Operations Iraqi Freedom and

Enduring Freedom (OIF/OEF) by applying occupational fraud theory, specifically the

classic sociological/criminological Fraud Triangle model (Cressey, 1953), to determine

its validity in a contingency operation. By examining the contracting environment in OIF

and OEF and utilizing the conceptual framework of occupational fraud theory, I identify

the distinctive situational elements of a contingency operation that influence an

individual’s decision to commit fraud and thus affect the probability of fraud occurring in

contingency operations. By analyzing the procurement fraud environment in OIF and

OEF using an occupational fraud model, I provide the foundation for understanding why

fraud occurs in the context of contingency operations with the intent of preventing future

procurement integrity violations. Reducing instances of fraud directly impacts the

appropriate utilization of taxpayer funding and the operational readiness of the

warfighter, as well as enhances the reputation and standing of the Army CCO Corps.

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TABLE OF CONTENTS

I. INTRODUCTION........................................................................................................1 A. BACKGROUND ..............................................................................................1 B. PURPOSE.........................................................................................................3 C. RESEARCH QUESTION ...............................................................................4 D. SCOPE ..............................................................................................................4 E. LIMITATIONS AND ASSUMPTIONS ........................................................6 F. RESEARCH METHODOLOGY ...................................................................8 G. ORGANIZATION OF THE REPORT..........................................................9 H. SUMMARY ....................................................................................................10

II. OCCUPATIONAL FRAUD THEORY ...................................................................11 A. BACKGROUND ............................................................................................11 B. CRESSEY’S FRAUD TRIANGLE ..............................................................13

1. Non-Shareable Financial Pressures..................................................15 2. Opportunity ........................................................................................16 3. Rationalization ...................................................................................17

C. WOLFE AND HERMANSON’S FRAUD DIAMOND..............................19 D. ALBRECHT’S FRAUD SCALE ..................................................................22 E. HOLLINGER AND CLARK........................................................................24 F. SUMMARY ....................................................................................................25

III. ANALYSIS OF THE CONTRACTING ENVIRONMENT UTILIZING OCCUPATIONAL FRAUD THEORY ...................................................................27 A. BACKGROUND ............................................................................................27

1. Contingency Contracting ..................................................................27 2. Army CCO Corruption in OIF and OEF........................................29 3. The DoD’s Contract Management Designation as High-Risk .......30

B. PROBLEMATIC DOD PROCUREMENT TRENDS PRIOR TO OIF/OEF .........................................................................................................33 1. Increasing Reliance on Contractors .................................................33 2. Insufficient Number of Trained Acquisition Personnel .................36 3. Increasing Complexity of Contract Actions ....................................37 4. Inadequate Audit and Investigative Assets......................................39 5. Institutional Challenges Specific to the Army.................................39

C. CHARACTERISTICS OF THE CONTINGENCY CONTRACTING ENVIRONMENT IN OIF/OEF CONDUCIVE TO FRAUD ....................41 1. Environment Issues............................................................................41

a. Operational Tempo .................................................................41 b. Pressure to Award Procurements Faster ...............................42 c. Cultural Norms Regarding Corruption..................................43 d. Less Sophisticated Local Business Practices/Contractors ....45

2. Procedural ..........................................................................................45 a. Waived Contracting Officer Appointment Standards............45

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b. Cash-Based Business Practices ..............................................46 c. Utilization of Manual Contracting Methods..........................47

3. Personnel Issues .................................................................................48 a. Deployment May Exacerbate Personal and Financial

Hardships ................................................................................48 b. Insufficient Skills, Inadequate Staffing, and Rapid

Personnel Turnover ................................................................49 4. Control Mechanisms..........................................................................50

a. Insufficient Internal Controls and Oversight ........................50 b. Lack of Formal Investigative Procedures/Protocols and

Resources.................................................................................51 D. SUMMARY ....................................................................................................51

IV. CONCLUSION AND RECOMMENDATIONS.....................................................53 A. CONCLUSIONS ............................................................................................53

1. Answer to Research Question...........................................................55 B. RECOMMENDATIONS BASED ON OCCUPATIONAL FRAUD

THEORY ........................................................................................................56 1. Internal Controls................................................................................57

a. Stricter Deployment and Warranting Procedures .................57 b. Proactive Fraud Auditing .......................................................57 c. Deployable Automated Procurement System.........................58

2. Creating a Culture of Honesty and Ethics.......................................59 a. Personnel.................................................................................59 b. Ethics Training .......................................................................60 c. Training For and By Senior Contracting Officials ...............62 d. Assistance Program.................................................................62 e. Established Relationships With Investigative Agencies ........63 f. Expectation of Punishment ....................................................63 g. Comprehensive Anti-Fraud Program ....................................64

C. SUMMARY ....................................................................................................65

APPENDIX A: ASSOCIATION OF CERTIFIED FRAUD EXAMINERS FRAUD CLASSIFICATION MODEL...................................................................................67

APPENDIX B: OCCUPATIONAL FRAUD RED FLAGS ...............................................69

LIST OF REFERENCES......................................................................................................71

INITIAL DISTRIBUTION LIST .........................................................................................79

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LIST OF FIGURES

Figure 1. Fraud Triangle (From: Wells, 1997, p. 11)......................................................15 Figure 2. Fraud Diamond (From: Wolfe & Hermanson, 2004, p. 38) ............................20 Figure 3. Fraud Scale (From: Albrecht, Howe, & Romney, 1984, p. 6).........................24 Figure 4. Evolution of Contracted Support in U.S. Military Operations (From:

Thibault et al., 2009, p. 21)..............................................................................35 Figure 5. DoD Acquisition Workforce Trends (From: Defense Acquisition

University, 2007, pp. 3–8) ...............................................................................36 Figure 6. Cumulative Obligations on Contracts and Grants (in $ billions) Performed

in Iraq, Afghanistan, Bahrain, Kuwait, and Qatar (From: Thibault et al., 2011a, p. 6) ......................................................................................................42

Figure 7. Fraud Triangle for Army CCOs in OIF and OEF............................................52 Figure 8. SIGIR Investigations: Criminal and Monetary Results (From: Special

Inspector General for Iraq Reconstruction, 2011, p. 117) ...............................54 Figure 9. Comparison of Organizational Fraud Approaches (After: Albrecht et al.,

2006, pp. 110–111) ..........................................................................................56

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LIST OF TABLES

Table 1. Army CCO Convictions (From: Special Inspector General for Iraq Reconstruction, 2011, pp. 142–146) ................................................................29

Table 2. Year Areas Were Designated High-Risk (After: Government Accountability Office, 2011a, p. 173) .............................................................31

Table 3. OEF and OIF Related Reports and Testimonies (FY2003–2007) (From: Department of Defense, Inspector General, 2008a, p. 3).................................32

Table 4. Changes in the DoD’s Use of Service Contracts, Fiscal Years 1996 to 2005 (From: Abusive Practices in DoD Contracting, 2007, p. 15) .................38

Table 5. 2010 Corruption Perceptions Index (After: Transparency International, 2011) ................................................................................................................44

Table 6. Deficiencies Identified by SIGIR During Contract Review, Iraq 2005 (From: Special Inspector General for Iraq Reconstruction, 2005, p. 7) ..........48

Table 7. Status of Investigative Activities of Other U.S. Agencies, as of 9/30/2011 (From: Special Inspector General for Iraq Reconstruction, 2011, p. 138) ......54

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LIST OF ACRONYMS AND ABBREVIATIONS

ACC Army Contracting Command ACC Army Acquisition Corps ACFE Association of Certified Fraud Examiners AFN Armed Forces Network ASC American Society of Criminology CCO Contingency contracting officer CENTCOM U.S. Central Command CID Criminal Investigative Division CJCS Chairman of the Joint Chiefs of Staff CWC Commission on Wartime Contracting DBSAE Defense Business Systems Acquisition Executive DCIS Defense Criminal Investigative Services DFARS Defense Federal Acquisition Regulation Supplement DoD Department of Defense DoDIG Department of Defense Inspector General DPAP Defense Procurement and Acquisition Policy FAR Federal Acquisition Regulation FBI Federal Bureau of Investigation FERRET Forensic Evaluation, Research, Recovery and Enforcement Team FINCEN Financial Crimes Enforcement Network GAO Government Accountability Office HQDA Headquarters, Department of the Army ICCTF International Contract Corruption Task Force JCC-I Joint Contracting Command–Iraq JCC-I/A Joint Contracting Command–Iraq/Afghanistan MPFU Major Procurement Fraud Unit MOS Military Occupational Specialty NATO North Atlantic Treaty Organization NCO Noncommissioned Officer OEF Operation Enduring Freedom OIF Operation Iraqi Freedom

xiv

PD2 Procurement Desktop Defense SAS Statement of Auditing Standards SFC Sergeant First Class SIGAR Special Inspector General for Afghanistan Reconstruction SIGIR Special Inspector General for Iraq Reconstruction USAID United States Agency for International

xv

ACKNOWLEDGMENTS

I would like to acknowledge the outstanding support and expertise provided by

my advisors, Professor Max V. Kidalov, J.D., and Professor E. Cory Yoder during this

project.

I would also like to thank my family, especially my husband, for their patience

and encouragement.

xvi


1

I. INTRODUCTION

In this chapter, I present the purpose, research question, and methodology for the

analysis of the corruption of Army contracting officers in Operations Iraqi Freedom and

Enduring Freedom through the application of occupational fraud theory. I also discuss

this report’s scope and organization.

A. BACKGROUND

Army contingency contracting officers (CCOs) have been providing critical

contracting support to forces in Iraq and Afghanistan for nearly a decade. They, along

with other Department of Defense (DoD) contracting officers, enabled the obligation of

more than $206 billion on contracts for equipment, supplies, and services from 2002

through 2011 in support of Operation Iraqi Freedom (OIF) and Operation Enduring

Freedom (OEF) (Thibault et al., 2011b, p. 2). Unfortunately, a small but growing number

of CCOs chose personal enrichment over public good and eclipsed the outstanding efforts

and integrity of the majority of CCOs; in the process, this minority of Army CCOs broke

the law, betrayed Army values1, and violated their country’s trust. Investigation and

conviction rates indicate that Army CCOs are involved in the commission of fraud by a

significantly higher percentage in comparison to contracting officers in the other

Services, despite being the minority of contracting personnel in theater (Gansler et al.,

2007).

The most well-known case of CCO corruption in OIF is that of Major John

Cockerham, an Army CCO who was sentenced to 17.5 years in jail after admitting to

taking more than $9 million in bribes for awarding contracts at Camp Arifijan, Kuwait, in

2004 and 2005 (Department of Justice, 2009). More than a simple bribery case, Major

Cockerham’s case involved a complex conspiracy that as of July 2011 involved 17

individuals who had pled or been found guilty, as well as four other individuals pending

trial (Department of Justice, 2011). Of the 17 convicted, three individuals, in addition to

1 The seven core Army values are Loyalty, Duty, Respect, Selfless Service, Honor, Integrity, and

Personal Courage (U.S. Army, 2011).

2

Cockerham, were Army CCOs (Majors Momon, Murray, and Pressley), while another

(Major Davis) committed suicide after confessing to an Army investigator that she had

accepted bribes (Schmitt & Glanz, 2007). A fifth CCO (Sergeant First Class [SFC]

Evick) is currently awaiting trial. Although the dollar value and number of personnel

involved in this case may represent an anomaly, Army CCO fraud commission is

unfortunately too common.

Several years into operations in Iraq and Afghanistan, corruption in the Army

CCO Corps joined other contract-related incidents (e.g., Abu-Ghraib, Nisoor Square),2

garnering media attention, causing public outrage, and sparking congressional interest.

These high-profile events reflected fundamental vulnerabilities in the Army’s contracting

system, many of which existed well before the commencement of operations in Iraq and

Afghanistan, as documented in numerous government agencies’ reports (Government

Accountability Office, 2011b; Commission on Army Acquisition and Program

Management in Expeditionary Operations, 2007; Commission on Wartime Contracting,

2010). The scandals, however, compelled the federal government to acknowledge the

systemic issues relating to contracting, specifically contingency contracting, and confront

them.

An early initiative was the creation in 2008 of an independent and bipartisan

commission to review contingency contracting and provide recommendations to

Congress. Known as the Commission on Wartime Contracting (CWC) in Iraq and

Afghanistan, it has issued several interim and special reports assessing contracting for

reconstruction, logistics, and security, as well as documenting the extent of fraud, waste,

and abuse. In its final report to Congress, released in August 2011, the CWC reported that

between $10.3 and $18.5 billion has been lost to fraud associated with contracts in these

operations (Thibault et al., 2011b, p. 90). This dollar amount represents 5% to 9% of the

$206 billion spent thus far in contingency contracts in OIF and OEF.

2 Abu Ghraib: The Army utilized an existing Department of the Interior Blanket Purchase Agreement

for Information Technology to sole-source its prisoner interrogation requirement, later determined out of scope (Department of the Interior, 2004); Nisoor Square: Blackwater contractor personnel performing private security are accused of killing 14 unarmed Iraqi civilians and wounding 18 others (Raghavan, 2007).

3

The staggering sums in the CWC report made national headlines, prompting

renewed calls for increased oversight and regulatory reforms in federal contracting,

specifically in contingency contracting. Senator Claire McCaskill, who, along with

Senator Jim Webb, had championed the commission’s charter, called the findings

“disgusting” and “shocking” (McCaskill, 2011). The extent of the fraud in OIF and OEF

is certainly distressing and shameful, but is it surprising? The CWC implied otherwise

when noting that its fraud estimate was consistent with the statistics the Association of

Certified Fraud Examiners (ACFE) had reported. The ACFE, the world’s largest anti-

fraud organization, has conducted numerous studies and surveys regarding the size and

scope of occupational fraud, finding that the typical U.S. organization loses 7% of its

revenues to fraud annually (Association of Certified Fraud Examiners, 2008). If the

percentage of fraud in OIF and OEF is consistent with the general occupational fraud

rate, then I hypothesize that classic occupational fraud theory can explain the occurrence

of fraud in OIF and OEF and, by extrapolation, fraud by contracting personnel in a

generic contingency operation.

B. PURPOSE

The purpose of this project is to analyze the conditions that enabled corruption of

Army CCOs during OIF and OEF by applying occupational fraud theory, specifically the

classic sociological/criminological Fraud Triangle model (Cressey, 1953), to determine

its validity in a contingency operation. By examining the contracting environment in OIF

and OEF and utilizing the conceptual framework of occupational fraud theory, I identify

the distinctive situational elements of a contingency operation that influence an

individual’s decision to commit fraud and thus affect the probability of fraud occurring in

contingency operations.

By analyzing the procurement fraud environment in OIF and OEF using an

occupational fraud model, I provide the foundation for understanding why fraud occurs in

the context of contingency operations with the intent of preventing future procurement

4

integrity violations. Reducing instances of fraud directly impacts the appropriate

utilization of taxpayer funding and the operational readiness of the warfighter, as well as

enhances the reputation and standing of the Army CCO Corps.

C. RESEARCH QUESTION

The primary objective of this research project is to answer the following question:

How does occupational fraud theory account for the corruption of Army CCOs in OIF

and OEF? Understanding what motivates a CCO’s corrupt behavior in a contingency

operation and identifying the enabling characteristics of the contracting environment is

critical in preventing and deterring fraud in future contingency operations. Through a

holistic analysis of CCO corruption in a contingency operation, the Army will be better

postured to implement an effective and comprehensive anti-fraud program for its

deployed contracting organizations.

D. SCOPE

I have limited this report to corruption, substantiated through criminal conviction

for fraud, of deployed Army CCOs supporting operations in Iraq and Afghanistan.

Inherent in the scope of this report is terminology that requires further definition. Fraud

is a generic term, and thus there are many definitions and classifications. In essence,

however, fraud always entails deception or willful misrepresentation. In this report, I

focus on occupational fraud, and specifically corruption, which is the most common fraud

scheme. The ACFE defines occupational fraud as “the use of one’s occupation for

personal enrichment through the deliberate misuse or misapplication of the employing

organization’s resources or assets” (Association of Certified Fraud Examiners, 2008, p.

6). This definition is very broad and covers a wide range of activities, everything from

stealing pens to sophisticated financial accounting schemes; this definition also applies to

a variety of perpetrators, including employees, managers, and executives. Thus, the

ACFE further classifies occupational fraud into three major categories: Asset

misappropriations, corruption, and fraudulent statements. The Association of Certified

Fraud Examiners (2008) defines corruption as

5

schemes in which fraudsters use their influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves or someone else. For example, employees might receive or offer bribes, extort funds from third parties, or engage in conflicts of interest. (p. 10)

A complete breakdown of the ACFE’s Occupational Fraud and Abuse

Classification System appears at Appendix A. The DoD (2003) defines fraud from its

own perspective and provides additional examples in its guide for investigators, Criminal

Investigations of Fraud Offenses:

Any intentional deception designed to deprive the United States unlawfully of something of value or to secure from the United States a benefit, privilege, allowance, or consideration to which he or she is not entitled. Such practices include

• Offering payment or accepting bribes or gratuities.

• Making false statements.

• Submitting false claims.

• Using false weights or measures.

• Evading or corrupting inspectors or other officials.

• Deceiving either by suppressing the truth or misrepresenting material fact.

• Adulterating or substituting materials.

• Falsifying records and books of accounts.

• Arranging for secret profits, kickbacks, or commissions or conspiring to use any of these devices.

• Conflict of interest cases, criminal irregularities, and the unauthorized disclosure of official information relating to procurement. (p. 7)

However, this definition encompasses fraud by both government employees and

external parties (e.g., private contractors). Because in this report I focus on corruption, I

am concerned solely with the government employee, the Army CCO, and thus I do not

address the contractor participation in fraud.

For the purposes of this report, the term CCO refers to Army Acquisition Corps

(AAC) military personnel, either active or reserve components, assigned to a position

with the responsibility of awarding contracts and coded as a 51C, Contracting and

6

Industrial Management, one of five career specializations within the AAC. According to

the Department of the Army’s (2010) pamphlet on officer career management, the 51C is

assigned to provide contracting support worldwide to expeditionary operations

throughout the entire spectrum of military operations. These officers will lead

contingency contracting teams, contracting efforts for installations, military construction

and weapon systems procurement offices. They execute contract awards and contract

administration management and industrial management/oversight at contractor facilities

worldwide. Officers coordinate with warfighters and program managers for requirement

determination. These officers are responsible for making determinations on contracts

awards and developing contracting support plans (p. 391). A CCO can also be a

noncommissioned officer (NCO), performing the same function and with the same

responsibilities as the 51C officer. The Army established the Military Occupational

Specialty (MOS) 51C, Acquisition, Logistics, and Technology (AL&T) Contracting

NCO, in December 2006 (United States Army, 2011b).3

The scope of this report comprises the contingency operations of OIF and OEF,

which refer to U.S. military operations in Iraq and Afghanistan, respectively. I provide

more information on contingency operations in Chapter III. Although OIF transitioned to

Operation New Dawn on October 1, 2010, to mark the end of the U.S. forces’ combat

operations in Iraq and to emphasize stability operations, I utilize the nomenclature of OIF

throughout for continuity purposes. Some contracting support for OIF and OEF took

place outside of Iraq and Afghanistan, notably in Kuwait. In this report, I include fraud

by CCOs who were forward deployed to provide contracting support in OIF and OEF,

even if they were not actually operating within the geographic boundaries of Iraq and

Afghanistan.

E. LIMITATIONS AND ASSUMPTIONS

Inherent in the covert nature of fraud is that it is difficult to accurately identify

and measure. Thus, although there have been numerous investigations and prosecutions

3 Prior to this date, MOS92 series (Logistics) NCOs were utilized to fill 51C positions, and contracting

was not a permanent NCO career track.

7

of Army CCOs, the true extent of Army CCO fraud is unknown. Realistically, many

instances may go undetected, thus preventing the Army from determining or definitively

quantifying the true extent of CCO corruption. This limitation becomes even more

pronounced considering the current constrained resource environment, which could limit

investigation and prosecution, in addition to the obvious stake of corrupt parties to

prevent their exposure. Despite the challenges associated with identifying Army CCOs as

perpetrators of fraud and holding them accountable, numerous Army CCOs are serving

prison sentences for their crimes. These cases, like that of Major Cockerham and his

accomplices, represent the existence of corruption, which is one category of occupational

fraud and which contributed to the potential loss of upwards of $18 billion in OIF and

OEF. The fact that this fraud occurred in a contingency operation provides a unique

element in the application of classic occupational fraud models to understanding why and

how the fraud took place.

Although the models I utilize in this report have existed for decades and fraud

examiners have adopted them as standard methodology, I do not claim that they are

perfect tools; no model can adequately predict or explain every single occurrence of

fraud. Additionally, I do not attempt to address every theory regarding occupational

fraud. The field of research encompassing occupational fraud continues to evolve, and

researchers have identified and will continue to identify weaknesses inherent in the

existing models by conducting follow-on studies and proposing new models. Although

there is not a one-size-fits-all approach to occupational fraud, my research objective is to

determine how the classic Fraud Triangle model explains corruption of Army CCOs in

OIF and OEF and, indirectly, other contingency operations.

I did not conduct any personal interviews with investigators or convicted

fraudsters; instead, I relied on publicly available accounts of their cases, obtaining most

of the data from government reports, publically available legal documents, and other

media sources. The CCOs prosecuted for fraud offenses have, for the most part, kept the

motivation for their actions private. It would be pure conjecture to attempt to provide

motivations for the fraudsters in specific cases; therefore, in this report I suggest

generalized motivations based on findings from previous occupational fraud research and

8

the conditions relevant to the cases. Some may contend that an in-depth analysis of the

environment is unnecessary because fraud is solely the byproduct of greed. Although

greed is certainly a factor in occupational fraud, it is too simplistic an explanation for the

phenomenon of CCO corruption in OIF and OEF. Joseph Wells (1997), founder of the

ACFE and a notable examiner and researcher of fraud, observed that greed as a motive

for fraud is subjective, and in turn problematic, in terms of providing a metric to predict

behavior. He concluded, “there is little we can say about greed as a motive that will help

us detect or deter occupational fraud” (p. 514).

Although I focus on CCOs, other Army uniformed personnel committed the

majority of fraud in OIF and OEF via their indirect involvement in the contracting

process (i.e., acting as project purchasing officers, field ordering officers, and contracting

officer representatives). Although committing fraud was a clear violation of their duty as

government employees, the significant difference for the purposes of this report is that

these individuals were not acquisition professionals, and procurement was not their

primary duty; rather, they were tasked to perform additional duties by, and on behalf of, a

non-contracting parent organization. I assume, however, that my findings are applicable

to personnel in these positions to some degree, as well as to other Service and agency

contracting officers to a much greater degree.

Similarly, although OIF and OEF are presented as case studies for the application

of occupational fraud theory to explain the corruption of CCOs in contingency

operations, I utilize these operations to allow for generalizations with any contingency

operation. Although each contingency operation is unique based on mission, location,

duration, and other operational dynamics, there are characteristics that are potentially

present in a contingency operation that could affect an individual’s propensity to commit

fraud based on a variety of perceived pressures, opportunities, and rationalizations.

F. RESEARCH METHODOLOGY

In my research for this project, I undertook a literature review of contingency

contracting with a narrower focus on procurement fraud in contingency environments,

specifically fraud that occurred in support of operations in Iraq and Afghanistan. In the

9

literature review, I include applicable government reports and testimony from the GAO,

the DoD and special Inspectors General, the CWC, and the Commission on Army

Acquisition and Program Management in Expeditionary Operations (commonly referred

to as the Gansler Report). I obtained fraud case information and data regarding the

number of ongoing investigations and prosecutions involving Army CCOs from the

public records of the Department of Justice and supporting investigative agencies.

In the literature review, I also include an examination of occupational fraud

theory, including the research of Sutherland (1949), Cressey (1953); Wolfe and

Hermanson (2004); Albrecht, Howe, and Romney (1984); and Hollinger and Clark

(1983). Occupational fraud theory provides the explanatory models enabling an

understanding of the motivation(s) behind fraud in order to better assess organizational

risk and identify effective prevention and detection mechanisms.

Starting from the data on CCO fraud commission provided by the Department of

Justice and Special Inspector Generals and utilizing the framework provided by the

occupational fraud models, I analyze the contracting environment prior to and during

operations in Iraq and Afghanistan to identify elements that influenced pressures,

opportunities, and rationalizations which led to Army CCO corruption. The Army’s

Criminal Investigative Division’s (CID) Major Procurement Fraud Unit (MPFU)

conducted an assessment of the contracting environment in Iraq over a several-month–

long period in 2005 and identified various significant conditions that were conducive to

fraud (Ethridge, Greenway, & Kilgore, 2007). Many of these elements are likely to exist

in any contingency operation and therefore provide a relevant basis for the application of

the fraud theory to account for CCO corruption.

G. ORGANIZATION OF THE REPORT

I have organized this report into four chapters. In Chapter I, Introduction, I

provide a brief background regarding fraud in operations in Iraq and Afghanistan to

establish that occupational fraud was a widespread and costly problem in OIF and OEF as

contingency operations. I then present the research question and methodology for

conducting the research, as well as identify the scope, limitations, and assumptions that

10

impact the research conclusions. In Chapter II, I present a consolidated review of

occupational fraud theory and include prominent fraud models, notably Cressey’s Fraud

Triangle, to provide the foundation for addressing the problem of fraud in contingencies.

In Chapter III, I provide an overview of contingency contracting and then utilize the

framework I presented in Chapter II to examine how the contracting environment prior to

OIF and OEF, as well as the attributes of OIF and OEF as contingency operations,

enabled fraud. In Chapter IV, I present the conclusions and propose areas for further

research.

H. SUMMARY

In this chapter, I provided an overview of the body of the research of this report. I

presented the research question, scope, and methodology of the research. Finally, I

provided a general outline of the report.

In the next chapter, I provide the basic theoretical framework of occupational

fraud by presenting notable research and the explanatory models originating from it. My

overview of occupational fraud theory serves as an informed foundation for Chapter III,

in which I analyze the contracting environment, both prior to and during OIF and OEF, to

identify the characteristics of these recent contingency operations that enabled the

corruption of U.S. Army CCOs. In order to do so, I present the various explanations of

fraud causation, which are fundamental to understanding this corruption.

11

II. OCCUPATIONAL FRAUD THEORY

In this chapter, I present an overview of occupational fraud theory from the

conceptualization of the white-collar criminal to subsequent seminal research studies,

from which the most widely accepted explanatory model of financially motivated crime,

the Fraud Triangle, originated. In the majority of recent studies, researchers have focused

on revisions and expansions of the Fraud Triangle in an attempt to provide a more

comprehensive representation of occupational fraud in today’s complex and

technological society.

A. BACKGROUND

Despite the enormous economic and social impact caused by occupational fraud,

relatively little research in the area has been conducted (Wells, 1997). With a recent spate

of financial crimes fresh in the public’s conscience, however, occupational fraud as a

field of study has been garnering considerable attention. Theories are proving relevant in

accounting for the commission of crimes making front-page news, ranging from Bernard

Madoff’s investment fraud to insider trading by the hedge fund Galleon Group’s founder,

Raj Rajaratnam. With the massive size and scope of potential fraud based on the highly

networked, computerized, and global characteristics of financial systems today,

understanding the enablers of fraud is more important than ever.

Occupational fraud, as a separate field of research, developed out of

criminological and sociological studies in the early 1900s. Up to that time, most research

regarding crime had focused on violent offenders, such as murderers and rapists.

Research on financially motivated crime was minimal and limited primarily to theft and

burglary. Edwin H. Sutherland, a sociologist and university professor, was one of the first

to undertake a systematic study of financial crimes and fraud perpetrators. In doing so,

Sutherland repudiated the commonly held theories of the early 20th century regarding the

origins of criminal behavior: notably, that criminal behavior is caused by genetics, which

12

is exacerbated by environmental conditions like poverty. Sutherland (1983) proposed a

contrary thesis that “social and personal pathologies are not an adequate explanation of

criminal behavior” (p. 5).

Based on the research he conducted, much of it on the upper class and business

elite, Sutherland concluded that criminal behavior is learned. This learning takes place

through social interaction and communication with others and thus is largely dependent

upon the environment. He postulated a hypothesis of differential association in which he

described criminal behavior as

learned in association with those who define such criminal behavior favorably and in isolation from those who define it unfavorably, and that a person in an appropriate situation engages in such criminal behavior if and only if the weight of the favorable definitions exceeds the weight of the unfavorable definitions. (Sutherland, 1983, p. 240)

In the textbook Sutherland co-authored with Cressey and Luckenbill (1992),

Principles of Criminology, which remains standard course reading for criminology

students to this day, Sutherland further expanded the theory of differential association by

outlining its nine essential points:

• Criminal behavior is learned.

• Criminal behavior is learned while interacting with other persons in a process of communication.

• The principal part of the learning of criminal behavior occurs within intimate personal groups.

• When criminal behavior is learned, the learning includes techniques of committing the crime, which are sometimes very complicated, sometimes simple, and the specific direction of motives, drives, rationalizations, and attitudes.

• The specific direction of motives and drives is learned from definitions of the legal codes as favorable or unfavorable.

• A person becomes delinquent because of an excess of definitions favorable to violation of the law over definitions unfavorable to violation of the law.

• Differential associations may vary in frequency, duration, priority, and intensity.

13

• The process of learning criminal behavior by association with criminal and anti-criminal patterns involves all of the mechanisms that are involved in any other learning.

• Although criminal behavior is an expression of general needs and values, it is not explained by those needs and values, because non-criminal behavior is an expression of the same needs and values. (pp. 88–91)

In shifting the focus away from social and economic determinants (i.e.,

personal/family background and poverty/wealth levels), the theory of differential

association represented a new paradigm in the field of criminology. In his research,

Sutherland also provided an impetus for researchers to conduct additional studies of

crimes that members of the upper echelons of society, as well as corporations, had

committed. In fact, Sutherland is responsible for coining the term white-collar crime in

1939 (Wells, 1997, p. 9). In his book White Collar Crime, published 10 years later,4

Sutherland (1983) described the term “principally to refer to businessmen and

executives” (p. 265). The term has since come to encompass virtually all economic and

financial crimes.

The impact of Sutherland’s research on the field of criminology is far-reaching;

the American Society of Criminology’s premier award recognizing exceptional

contribution to theory or research is named in his honor, the Edwin H. Sutherland award

(American Society of Criminology, 2011). Sutherland and his theory of differential

association, with its focus on the “drives, rationalizations, and motives” (Wells, 1997, p.

9) of criminals, directly influenced subsequent research on occupational fraud. Much of

the current literature in the area of occupational fraud is predicated on Sutherland’s

groundbreaking studies of crimes businesspeople, managers, and corporations have

committed.

B. CRESSEY’S FRAUD TRIANGLE

Perhaps unsurprisingly, one of the premier figures in the field of occupational

fraud theory was a student of Sutherland’s, Donald R. Cressey. Upon his passing in 1987,

The New York Times lauded Cressey as one of the “nation’s leading experts on the

4 For this research, I utilized the 1983 publication version, a new edition of the original work.

14

sociology of crime” and noted that he was the author of “several highly regarded books

on the causes and prevention of crime” (“Prof. Donald R. Cressey,” 1987). Cressey

incorporated Sutherland’s differential association theory while researching a wide variety

of areas, including organized crime and criminal rehabilitation.

An early research undertaking, however, ultimately became a landmark study and

generated the classic Fraud Triangle model for which Cressey is best known. While

Sutherland focused on high-level corporate executives who committed fraud against the

public or company shareholders, Cressey focused his efforts on low-level embezzlers,

interviewing more than 200 inmates at Midwest prisons (Wells, 1997). He published his

research findings in Other People’s Money: A Study in the Social Psychology of

Embezzlement. In it, he referred to an embezzler as a trust violator, someone who had

earned a position of trust in an organization but later violated this trust when exposed to a

given pressure. Cressey’s (1953) hypothesis was that

trusted persons become trust violators when they conceive of themselves as having a financial problem that is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property. (p. 30)

Central to this hypothesis are these three elements: the non-shareable financial

problem or pressure that provides the incentive to act, the rationalization that enables an

individual to believe the criminal act is justified, and the opportunity, including the skill

and information, to commit the act. Over time, Cressey’s hypothesis became known as

the Fraud Triangle, with each of the three elements representing a leg of the triangle, as

shown in Figure 1.

15

Figure 1. Fraud Triangle (From: Wells, 1997, p. 11)

Importantly, Cressey (1953) believed that all three elements had to be present, a

conjuncture of events, in order for the fraud to occur: “The absence of any one or all of

the events in the process will preclude the criminal violation of financial trust, together

with other information, that when the entire process takes place trust violation results”

(p. 34).

1. Non-Shareable Financial Pressures

The first leg of the triangle, the non-shareable financial pressure, provides a

critical differentiation in terms of the fraud commission relative to why an individual has

not previously violated the trust of his or her employer. The existence of this pressure

explains the responses of the research subjects—the inmates incarcerated for fraud

offenses—when asked why they had refrained from fraud at an earlier time: They said,

“There was no need for it like there was this time”; “The idea never entered my head”;

and “I thought it was dishonest then, but this time it didn’t seem dishonest at first”

(Cressey, 1953, p. 33). The pressure serves as a catalyst, of which Cressey (1953)

identified six types:

• violation of ascribed obligations,

• problems resulting from personal failure,

• business reversals,

• physical isolation,

• status gaining, and

• employer–employee relations.

16

Violation of ascribed obligations refers to an individual’s inability to pay a debt,

compounded by the feeling that revealing the situation would make it worse or lead to

additional feelings of guilt and shame. Thus, the individual feels that he or she cannot

admit his or her problem to another party, even one in a position to help. Frequently, this

inability to ask for help has to do with the position of trust the individual holds, at work

or home, which is accompanied by expectations from the organization (employer and

employees), family (spouse and child), or society in general. Thus, as Cressey (1953)

explained, “admission of the loss would amount to an admission of unworthiness” (p.

41). Problems resulting from personal failures can arise from gambling, drug use, credit

card abuse, or poor investment decisions, as examples. The individual feels that the

problem is a “consequence of his ‘own bad judgment,’ ‘own fault,’ or ‘own stupidity’

(Cressey, 1953, p. 42). Cressey differentiated the third type, business reversals, from

personal failures to reflect an individual’s belief that business-related financial problems

are beyond his or her control and are purely the result of external factors, such as poor

market conditions or high interest rates. The fourth category, physical isolation, refers to

an individual’s belief that no one can understand his or her problem or assist in solving it;

this belief is independent of feelings of fear or shame that would preclude admission. An

individual incurs problems related to status-gaining when he or she aspires to status or

social standing, a keeping-up-with-the-Joneses mentality. The final category refers to

problems associated with the employer-employee relationship. In these cases, an

individual may feel that he or she is not being treated fairly, compensated appropriately,

or appreciated for his or her contributions. The individual does not believe that he or she

can share his or her feelings without retribution or negative impact. In all these categories

of non-shareable pressures exists the motivation for the trust violation: embezzlement in

Cressey’s research, but inclusive of other occupational fraud schemes as well.

2. Opportunity

According to Cressey, there are two prerequisites that make up the second leg of

the triangle, perceived opportunity: the individual must possess general information, as

well as the technical knowledge to execute the fraud secretly. The first part, general

information, is basically the individual’s recognition that the trust can be violated (i.e.,

17

the individual recognizes his or her fiduciary capability to execute the fraud). These

individuals recognize that their position provides the potential to alleviate their non-

shareable problem. Technical knowledge is also often tied to the position; the same skills

required to gain and keep the position can be used to commit the fraud. Cressey (1953)

noted that “persons trained to carry on the routine duties of a position of trust have at the

same time been trained at whatever skills are necessary for the violation of that position”

(p. 82). Thus, in execution of his or her crime, an individual does not deviate much from

his or her typical occupational routine (i.e., the one in which he or she is skilled). Cressey

(1953) observed, “Accountants use checks which they have been entrusted to dispose of,

sales clerks withhold receipts, bankers manipulate seldom-used accounts or withhold

deposits, real estate men use deposits entrusted to them, and so on” (p. 84). It is not,

however, until the opportunity and non-shareable problem are accompanied by

rationalization, that an individual will commit fraud.

3. Rationalization

The third leg of the triangle is rationalization, or as Cressey (1953) also referred

to it, the “vocabulary of adjustment” (p. 93). This is the process by which an individual

convinces himself that the fraud being committed is “(a) non-criminal, (b) justified, or (c)

as a part of a general irresponsibility for which he is not completely accountable”

(Cressey, 1953, p. 93). This rationalization happens prior to the execution of the fraud

and is part of the motivation, allowing the trust violator to frame his or her action in such

a way as to make it acceptable behavior. The rationalizations are unique and dependent

on the individual and the crime. Cressey, however, delineated three types of offenders

with their own rationalizations: independent businesspeople, long-term violators, and

absconders.

Common excuses that independent businesspeople who had misused client funds

adopted include “(a) that they were merely borrowing the money which they converted,

or (b) that the funds entrusted to them were really theirs” (Cressey, 1953, p. 102). These

individuals have a much easier time justifying their actions by using the terminology of

borrowing versus stealing, even when they have no intent of actually returning the

18

money. For some businesspeople, committing fraud is made easier by the fact it is a

rational extension of how their business is conducted. Additionally, because these

individuals are still performing their normal, legitimate duties, they avoid seeing their act

as criminal.

Long-term violators also incorporate the rationalization of borrowing, but because

their crimes occur over extended periods, additional rationalizations are also common.

Examples of supplemental rationalizations include that they embezzled “to keep their

families from shame, disgrace, or poverty, that theirs was a case of ‘necessity,’ that their

employers were cheating them and were dishonest, so that trust violation seemed

justified” (Cressey, 1953, p. 114). Cressey noted that the long-term violators have

difficulty justifying their actions as time goes on, as they start to think about the potential

consequences of their actions and the possibility of a prison sentence or other penalties.

Many ultimately acknowledge that all they had done was trade one non-shareable

problem (the catalyst) for another (the embezzlement).

The final group of offenders is the absconders, those who take the money and run.

Cressey found that physical isolation is a common theme among this type of offender.

This group has fewer family ties and less meaningful group associations. They tend to be

in positions of lower status (e.g., clerks or drivers) versus an executive or accountant.

These characteristics influence the decision to flee but also affect the type of

rationalizations that absconders utilize. The absconders justify their behavior by telling

themselves they do not care what happens to them, that living honestly is impossible, and

that the criminality intrinsic in all people had come out in them. While independent

businesspeople keep working and convincing themselves that they are normal and it is

the situation that is bad, the absconder believes it is himself that is bad, blaming a

personal defect instead of an external situation. However, both are rationalizations for

socially unacceptable behavior, just with different sources.

Regardless of the type of rationalization, Cressey found it occurs before the crime

takes place versus afterwards. In fact, many offenders abandon their previously held

rationalization after the act, finding that the more they engaged in the fraud, the easier it

19

becomes and the less necessary it becomes to provide a reason for doing so. Wells (1997)

later cited this phenomenon as a hallmark of occupational fraud, noting that once an

offender crosses the line, “the illegal acts become more or less continuous” (p. 17).

Sutherland’s and Cressey’s seminal efforts in occupational fraud research provide

the foundation for what is known regarding the causal factors of fraud. Although Cressey

himself did not refer to his hypothesis as the Fraud Triangle, his findings have become

ingrained in both academia and the private sector. The auditing profession formally

adopted the concept, which appears in the Statement of Auditing Standards (SAS) 99:

Consideration of Fraud in a Financial Statement Audit, as follows:

Three conditions generally are present when fraud occurs. First, management or other employees have an incentive or are under pressure, which provides a reason to commit fraud. Second, circumstances exist—for example, the absence of controls, ineffective controls, or the ability of management to override controls—that provide an opportunity for a fraud to be perpetrated. Third, those involved are able to rationalize committing a fraudulent act. Some individuals possess an attitude, character, or set of ethical values that allow them to knowingly and intentionally commit a dishonest act. However, even otherwise honest individuals can commit fraud in an environment that imposes sufficient pressure on them. The greater the incentive or pressure, the more likely an individual will be able to rationalize the acceptability of committing fraud. (American Institute of CPAs, 2011, p. 170)

Cressey’s contribution to the study of fraud through the formulation of the Fraud

Triangle, with its straightforward and easily understandable explanation of why fraud

occurs and how good people make bad decisions, is virtually unmatched. Since its

introduction more than 60 years ago, it has undergone modifications and expansions as

researchers have identified weaknesses and conducted additional studies. Subsequent

research findings have incrementally increased the collective knowledge regarding the

perpetration of fraud.

C. WOLFE AND HERMANSON’S FRAUD DIAMOND

One later development was the inclusion of a fourth element, converting the

Fraud Triangle into the Fraud Diamond (see Figure 2). In addition to incentive,

opportunity, and rationalization, David T. Wolfe and Dana R. Hermanson, a CPA and

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professor of accounting, respectively, added a fourth consideration: an individual’s

capability. Wolfe and Hermanson (2004) believed that an individual’s personal traits and

abilities, in addition to the other three factors, play a significant role in whether fraud

occurs.

Figure 2. Fraud Diamond (From: Wolfe & Hermanson, 2004, p. 38)

Based on their extensive experience investigating fraud, Wolfe and Hermanson

(2004) identified several essential personality traits regarding fraud commission, usually

evident in fraud schemes that involve large sums of money or that take place over a

prolonged period. The following are what Wolfe and Hermanson (2004) referred to as the

components of capability:

• position/function,

• brains,

• confidence/ego,

• coercion skills,

• effective lying, and

• immunity to stress.

Clearly, not all these attributes are inherently bad. Being intelligent, confident,

and persuasive are the characteristics that most likely contributed to the individual’s

success in gaining a position of trust at the organization in the first place. It is when the

individual decides to utilize these attributes against the company, being at the same time

armed with the other capabilities, including the ability to lie effectively and deal with the

stress of committing the fraud, that they become extremely dangerous and detrimental to

21

the organization. Recently discovered fraud schemes highlight perpetrators with the

capabilities Wolfe and Hermanson described; Bernie Madoff serves as an excellent

example. Wolfe and Hermanson (2004) contended that “today’s largest frauds are

committed by intelligent, experienced, creative people, with a solid grasp of company

controls and vulnerabilities” (p. 40).

While acknowledging overlap in the four areas (e.g., position as a capability also

serves as opportunity), Wolfe and Hermanson contended that an individual’s capabilities

should be evaluated as a separate element in an assessment of fraud risk. Additionally,

they advised that assessing the capabilities of employees, particularly senior

management, is critical and should not be a one-time effort. People can acquire

professional capabilities and hone skills over time. Furthermore, internal processes and

technologies are constantly changing, providing new opportunities for someone not

previously recognized as a possessing the requisite characteristics to exploit. Wolfe and

Hermanson (2004) provided specific recommendations for dealing with personal

capability when assessing fraud risk: performing routine background checks; spending

time with the person, both at and outside of the workplace; and paying attention to the

little things, like someone who consistently takes shortcuts or cheats at sports (p. 39).

It is the Fraud Diamond’s inclusion of the personal characteristics that separates it

from the Fraud Triangle, and its major contribution to the occupational fraud canon is its

view of fraud opportunity that goes beyond purely environmental and situational

dynamics. It clearly owes its origins to Cressey’s Fraud Triangle but is arguably a better

explanatory model for certain types of fraud, such as financial statement fraud versus

corruption or employee asset misappropriation. Another benefit associated with the Fraud

Diamond is that capability is a more observable attribute than rationalization or pressure,

which are attributes that an individual can keep private. In this manner, the Fraud

Diamond enhances the Fraud Triangle by addressing a weakness of its predecessor.

Although the Fraud Triangle is a theoretically sound model, brilliant in its simplicity, it

is, by itself, an inadequate mechanism for deterring, preventing, and detecting fraud

because two of its three elements (pressure and rationalization) are hidden.

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D. ALBRECHT’S FRAUD SCALE

Another pioneer researcher in the field of occupational fraud was Steve Albrecht,

who, along with colleagues Keith Howe and Marshall Romney, studied corporate fraud

through surveying internal auditors of companies that had been victims of fraud. Their

work culminated in the publication of Deterring Fraud: The Internal Auditor’s

Perspective (1984). In one facet of the study, Albrecht, Howe, and Romney focused on

the motivations of the fraud perpetrators; they provided the auditors with a list of 25

motivating factors to identify those most commonly dealt with. The following 10 are the

most frequently cited factors:

• the condition of living beyond one’s means,

• an overwhelming desire for personal gain,

• a high personal debt,

• a close association with customers,

• the perception that pay was incommensurate with duties,

• a “wheeler–dealer” attitude,

• the condition of feeling challenged to beat the system,

• excessive gambling habits,

• undue family or peer pressure, and

• no recognition for job performance. (Albrecht, Howe, and Romney, 1984, p. 48)

Although many of these duplicated Cressey’s findings with regard to the non-

shareable financial pressures, Albrecht, Howe, and Romney highlighted some interesting

associations between the offenders and the characteristics of the fraud they committed.

They observed that perpetrators of large frauds were more likely to use the funds to buy

expensive houses and automobiles than perpetrators of small frauds. Another interesting

finding was that those motivated by beating the system committed larger frauds.

In addition to identifying personal characteristics, Albrecht, Howe, and Romney

also noted environmental conditions. I provide a complete list of both, referred to as Red

Flags, in Appendix B. Albrecht, Romney, and Howe (1984) used the same methodology

to identify the most prevalent environmental factors:

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• placing too much trust in key employees,

• lacking proper procedures for authorization of transactions,

• inadequately disclosing personal investments and incomes,

• not separating authorization of transactions from the custody of related assets,

• lacking independent checks on performance,

• giving inadequate attention to details,

• not separating custody of assets from the accounting for those assets,

• not separating duties between accounting functions,

• lacking clear lines of authority and responsibility, and

• internal auditors not frequently reviewing the department.

These environmental conditions provide opportunity. Thus, in identifying

personal characteristics, Albrecht, Howe, and Romney found the source of pressure in the

environmental conditions and opportunity, as did Cressey. Similarly, Albrecht, Howe,

and Romney (1984) concluded there are three elements involved in occupational fraud:

a situational pressure (a non-shareable financial pressure), a perceived opportunity to commit and conceal the dishonest act (a way to secretly resolve the dishonest act or the lack of deterrence by management), and some way to rationalize (verbalize) the act as either being inconsistent with one’s personal level of integrity or justifiable. (p. 5)

While incorporating pressure (although encompassing a wider range of what

qualifies as a pressure) and opportunity, Albrecht, Howe, and Romney substituted

personal integrity for rationalization. A benefit associated with the inclusion of integrity

is that it can be a more easily observed feature than rationalization. This feature provides

the same benefit that the capabilities element of the Fraud Diamond provides; and

although an individual’s integrity certainly impacts his or her process of rationalization,

rationalization is an internal process, whereas integrity has observable outputs. An

individual’s commitment to ethical decision-making can be judged by observing both a

person’s decisions and his or her decision-making process (Dominey, Fleming,

Kranacher, & Riley, 2010).

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Providing a model to explain the concept, Albrecht, Howe, and Romney

introduced the Fraud Scale, as seen in Figure 3.

Figure 3. Fraud Scale (From: Albrecht, Howe, & Romney, 1984, p. 6)

The Fraud Scale illustrates how the interaction of the three criteria (pressure,

opportunity, and integrity) determine the degree of fraud risk. If everything is balanced,

then the fraud risk is neutral; but when personal integrity is low and situational pressures

and perceived opportunities are high, fraud is more likely to occur. The Fraud Scale, like

the Fraud Diamond, supports the Fraud Triangle and attempts to enhance it. While the

Fraud Diamond amends the opportunity component of the Triangle, the Fraud Scale

amends the rationalization component. Both models are therefore considered model

extensions of the Fraud Triangle.

E. HOLLINGER AND CLARK

While Albrecht, Howe, and Romney surveyed auditors, Hollinger and Clark

(1983) conducted a survey of 10,000 workers in the retail, hospital, and manufacturing

sectors as part of their research regarding employee deviance, which the Department of

Justice funded. Investigating the validity of multiple hypotheses, they concluded that

employees steal primarily because of workplace conditions. Job dissatisfaction is the

primary cause of employee theft. Although not necessarily a non-shareable financial

problem, Cressey did acknowledge employee dissatisfaction in the employer–employee

relations as a problem in the pressure construct of the Fraud Triangle.

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In addition to the relationship between job dissatisfaction and theft, Hollinger and

Clark looked for correlations between other various attributes, including position and

organizational controls. While confirming a direct relationship between an employee’s

position and the level of the theft, they noted that because dissatisfaction was the primary

motivator, the employee’s position only affected the method and amount of the theft after

a decision to commit the crime had already been made.

Hollinger and Clark recommended that management pay attention to four aspects

of policy development: (1) a clear understanding regarding theft behavior, (2) continuous

dissemination of positive information reflective of the company’s policies, (3)

enforcement of sanctions, and (4) publicizing the sanctions. Hollinger and Clark (1984)

concluded that the most important policy implication

is that theft and workplace deviance are in large part a reflection of how management at all levels of the organization is perceived by the employee. Specifically, if the employee is permitted to conclude that his or her contribution to the workplace is not appreciated or that the organization does not seem to care about the theft of its property, we expect to find greater involvement. In conclusion, a lowered prevalence of employee theft may be one valuable consequence of a management team that is responsive to the current perceptions and attitudes of its workforce. (p. 146)

Although focused on employee theft, their conclusions are applicable to other

forms of occupational fraud, including corruption. Although Hollinger and Clark did not

create a new fraud model, and although they did not attempt to modify the Fraud Triangle

model, their work regarding the employee theft motivation significantly impacted the

field of occupational fraud. Most important, their research findings and recommendations

impacted theories and practices regarding the best way for organizations to address

employee deviance.

F. SUMMARY

In this chapter, I provided an overview of the evolution of occupational fraud

theory and introduced the field’s conceptual models, including the benchmark model, the

Fraud Triangle, and subsequent model extensions. I presented Sutherland’s study of

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white-collar criminals and Cressey’s study of trust violators as seminal works in the field

now known as occupational fraud. The Fraud Triangle represents a groundbreaking

model in understanding how fraud occurs. Since its introduction more than 60 years ago,

it has undergone revisions and expansions, including the insights provided by the Fraud

Diamond and the Fraud Scale; nevertheless, the Fraud Triangle remains the standard

framework for explaining the necessary conditions under which fraud occurs. Having

established the critical tenets of occupational fraud theory, in which I have included a

sufficient explanation of the fraud models, in the next chapter I operationalize the theory

by applying the Fraud Triangle Model to the contracting environment and instances of

Army CCO corruption in OIF and OEF.

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III. ANALYSIS OF THE CONTRACTING ENVIRONMENT UTILIZING OCCUPATIONAL FRAUD THEORY

There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government

Benjamin Franklin in Poor Richard’s Almanac

A. BACKGROUND

In this chapter, I provide a brief overview of contingency contracting and Army

CCO fraud in OIF and OEF, then address elements of the DoD’s contracting environment

prior to these contingency operations that subsequently contributed to the Army’s fraud

problems in theater. Next, I address the elements that created or stressed weaknesses in

the OIF and OEF contingency contracting operation that contracting officers themselves

exploited purposefully, or inadvertently allowed other contracting personnel the

opportunity to do so. For both periods, prior to and during OIF and OEF, I approach the

elements utilizing the construct of the Fraud Triangle model by examining how they

could affect the pressures, opportunities, and rationalizations experienced by Army CCOs

that ultimately could lead to a decision to commit fraud.

1. Contingency Contracting

A contingency is an event that requires the deployment of military forces in

response to natural disasters, terrorist or subversive activities, collapse of law and order,

political instability, or other military operations (Headquarters, Department of the Army

[HQDA], 1999, p. 1-2). In accordance with 10 U.S.C. §101(a)(13), a declared

contingency operation of the Department of Defense (DoD) may be

• Designated by the Secretary of Defense when members of the armed forces become involved in military actions against an enemy of the United States and/or

• Declared by the President or the Congress when members of the uniformed forces are called to active duty (a reserve component mobilization) under Title 10 U.S.C., or any provision of law during a declared war or national emergency. (Director, Defense Procurement and Acquisition Policy, 2010, p. 78)

28

Joint Publication 4-10, Operational Contract Support, defines contingency

contracting as “the process of obtaining goods, services, and construction from

commercial sources via contracting means in support of contingency operations”

(Chairman of the Joint Chiefs of Staff, 2008, p. I-2). The Defense Contingency

Contracting Handbook defines contingency contracting as “direct contracting support to

tactical and operational forces engaged in the full spectrum of armed conflict and

noncombat contingency operations, both domestic and overseas” (Director, Defense

Procurement and Acquisition Policy, 2010, p. 77). In 2010, the Army conducted 108

contingency contracting missions in 39 countries, including combat support in OIF and

OEF, as well as humanitarian relief in Haiti and Pakistan (Phillips, 2011).

Contingency contracting is inherently complex as it takes place in an environment

that is often hostile. CCOs face challenges associated with not only their physical

security, but also a fragile business and financial environment. All of these problems

were, and to some extent still are, present in the contingency contracting environments of

Iraq and Afghanistan. In the fall of 2001, as operations got underway in Afghanistan, the

deploying contracting personnel faced a variety of issues: a lack of a contracting

organizational structure, inefficient resource allocation, and minimal training to the

incoming CCOs (D’angelo, Houglan, & Ruckwardt, 2008). Contracting organization,

staffing, and coordination were also problems in Iraq. The Iraq Program Management

Office was the first contracting agency established in theater in January 2003 to provide

support for both reconstruction and coalition forces as early as January 2003. Within

months, there were numerous contracting agencies operating in country, each

functionally independent of one another with little coordination taking place. The various

contracting agencies included the following:

the Coalition Joint Task Force, 24 military contracting personnel supporting 120,000 U.S. forces; the CPA’s Project and Contracting Office, focusing on Iraq’s reconstruction contracting effort; the U.S. Army Corps of Engineers, working construction and civil engineering projects; the Defense Contract Management Agency, coordinating Logistics Civil Augmentation Program support; and Special Operations contracting teams, working various missions throughout the country. (Houglan, 2006, p. 23)

29

After almost two years of enduring disjointed, ad-hoc contracting processes in

theater, U.S. Central Command (CENTCOM) created the Joint Contracting Command–

Iraq (JCC–I)5 in November 2004 to alleviate the absence of any central coordinating

authority managing contracting (Special Inspector General for Iraqi Reconstruction,

2006). In July 2005, CENTCOM ordered contracting in Afghanistan to fall under JCC–I

contracting authority, with the organization renamed Joint Contracting Command–

Iraq/Afghanistan (Joint Contracting Command Iraq/Afghanistan, 2009; Houglan, 2006).

While JCC–I/A made progress addressing some of the internal and structural contracting

problems, the issue of corruption, both internal and external to the contracting

organization, remains.

2. Army CCO Corruption in OIF and OEF

From Department of Justice conviction information available in SIGIR reports, I

was able to compile the following data regarding Army CCO prosecutions for fraud in

OIF and OEF, presented in Table 1.

Table 1. Army CCO Convictions (From: Special Inspector General for Iraq Reconstruction, 2011, pp. 142–146)

NAME RANK CHARGES LOCATIONDATE

CONVICTEDPRISON

SENTENCE

MONETARY AMOUNT OF

CRIME

PRESSLEY, EDDIE MAJBribery, Conspiracy, Money Laundering KUWAIT 3/1/2011 Pending 2,800,000.00$

SANCHEZ, RODERICK MAJ Bribery KUWAIT 10/27/2010 60 months 216,000.00$ SUBLETT, CHARLES MAJ False statements IRAQ 7/7/2010 21 months 122,000.00$ RUSSELL, THERESA SSG Money laundering IRAQ 1/28/2010 5 yrs Probation 30,000.00$

MURRAY, CHRISTOPHER MAJBribery, False statements KUWAIT 1/8/2009 57 months 245,000.00$

BAKER, THERESA MAJ Bribery, conspiracy IRAQ 12/22/2008 70 months 400,000.00$ MOMON, JAMES MAJ Bribery, conspiracy KUWAIT 8/13/2008 Pending 5,800,000.00$

COCKERHAM, JOHN MAJBribery, Conspiracy, Money Laundering KUWAIT 6/24/2008 210 months 9,600,000.00$

RIVARD, JOHN MAJBribery, Conspiracy Money laundering IRAQ 7/23/2007 120 months 220,000.00$

5 In 2010, JCC–I/A transitioned to the U.S. Central Command Joint Theater Support Contracting Command (C–JTSCC).

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From court records and public accounts, these CCOs appear to fit the

occupational fraud profile described by Cressey. Prior to the commission of the crimes

that led to their convictions, these CCOs were military members in good standing,

respected by seniors and subordinates alike. For instance, during his career, Major

Sanchez “received 28 medals, including a Bronze Star, and was named Army Contracting

Officer of the Year in 2004” (Ensslin, 2011). Major Pressley’s leadership in Kuwait gave

him an excellent Officer Evaluation Report (OER), rating him in the top 10% of all

Majors and recommending him for early promotion and future battalion command based

on “his stalwart belief in the Army values” (U.S.A. v. Eddie Pressley, 2011, p. A-5).

During the sentencing hearing for Major Cockerham, the Judge told him the following:

Mr. Cockerham, let me say that there is so much about your life that’s been good. You’ve really brought yourself up by your shoestrings, by your boot straps, and you had an impressive career in the Army. You’ve fought for a good education. You’ve been a good family man, and after this has happened you have worked very hard to make amends, to make it up, to work with the Government. All those things I understand. And it makes this case all the more tragic, that somebody whose record indicates such goodness could have done something that was so wrong. (U.S.A. v. John Cockerham, Jr., 2009, pp. 74–75)

These CCO profiles support the tenet that virtually anyone may commit fraud

under a certain set of circumstances and that most fraudsters have “profiles that look

exactly like their honest counterpart’s profiles” (Albrecht, Wernz, & Williams, 1995, p.

7). The conditions enabling all three legs of the Fraud Triangle to exist and fraud to

manifest itself through the actions of these CCOs were established through a combination

of systemic contracting environment issues and elements attributable to virtually any

contingency contracting operation, all of which culminated in a “perfect storm” (Gansler

et al., 2007, p. 17) for the Army and its contracting community.

3. The DoD’s Contract Management Designation as High-Risk

Problems associated with the DoD’s procurement and related functions are not

unique to contingency operations. The DoD faced systemic problems in the field of

contracting, as well as in the interrelated fields of financial and property management,

that predated the operations in Iraq and Afghanistan (Government Accountability Office,

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2011a). Over a two-decade period, the GAO and other oversight agencies documented

shortcomings spanning the entire procurement continuum from requirements

identification, contracting, payment and funds control, and equipment receipt and

property accountability.

The GAO began formally reporting on areas classified as high-risk to reduce or

eliminate vulnerabilities in government operations that were susceptible to fraud, waste,

and abuse or mismanagement. Table 2 shows that the GAO has identified these DoD

areas as high-risk virtually since the creation of the list in 1990.

Table 2. Year Areas Were Designated High-Risk (After: Government Accountability Office, 2011a, p. 173)

Area Year designated high-risk

DoD Contract Management 1992

DoD Financial Management 1995

DoD Supply Chain Management 1990

Note. I took the information in this table from a lengthier table found in Government Accountability Office, 2011a.

To be considered high-risk, the GAO evaluates government programs and

functions to consider whether the risk involved qualifies, among other criteria, as an

inherent problem, such as may arise when the nature of a program creates susceptibility to fraud, waste, and abuse…and could result in significantly impaired service, program failure, injury or loss of life, or significantly reduced economy efficiency or effectiveness…and exposure to loss in monetary or other quantitative terms. (Government Accountability Office, 2011a, p. 174)

Published annually, the High-Risk List identifies risk elements and provides

recommendations for improvement; removal from the report is the ultimate goal. As the

largest buyer of goods and services in the world (Department of Defense, Inspector

General, 2010), the federal government has an obvious stake in ensuring that its

32

procurement, payment, and accountability processes are operating effectively, thereby

providing maximum cost savings. The magnitude and complexity of these functions,

however, provide substantial challenges, as supported by sustained appearances on the

High-Risk report for almost two decades.

The GAO uses contract management as an umbrella term to cover various facets

of federal contracting, both pre and post award, as distinguished from the more narrowly

construed definition commonly applied in the contracting community that associates

contract management with actions occurring after a contract award, also referred to as

contract administration. While the areas GAO chooses to highlight as high-risk in the

area of contract management vary from year to year, several are reoccurring: the size and

capabilities of the acquisition workforce, the proper utilization of contract vehicles, and

adequate contractor oversight (Government Accountability Office, 2011a).

The challenges involved in the effective management of contract management,

financial management, and property management are not only present in the contingency

environment but are heightened. The DoD Inspector General (DoDIG) reports that GAO

and other DoD oversight groups issued 302 unclassified reports and testimonies

highlighting issues regarding these functions in support of OEF and OIF (Department of

Defense, Inspector General, 2008a, p. 3). Table 3 shows the number of reports and

recommendations compiled by the DoD Inspector General.

Table 3. OEF and OIF Related Reports and Testimonies (FY2003–2007) (From: Department of Defense, Inspector General, 2008a, p. 3)

Area Number of Reports &

Testimonies Recommendations

Contract Management 103 302

Logistics 119 332

Financial Management 133 264

Other 73 119

Note. The total will exceed 302 because reports and testimonies cover multiple functional areas.

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In addition to inheriting the problems present in traditional operational

contracting, contingency contracting provides unique challenges, such as the

accountability of contractor personnel in theater, increased requirement complexity

including security and reconstruction operations, and the training of a vast number of

non-acquisition personnel to perform oversight functions. These issues are compounded

by the lack of reliable information technology and communication systems in a highly

distributed and hostile environment, as well as a rapid contracting personnel turnover and

operational tempo. In part C of this chapter, I discuss how these and other environmental

elements can impact the CCO’s decision to commit fraud.

B. PROBLEMATIC DOD PROCUREMENT TRENDS PRIOR TO OIF/OEF

In the years prior to the operations in Iraq and Afghanistan, several trends

emerged which compromised the DoD’s ability to properly manage the acquisition of

goods and services and, in turn, directly and indirectly impacted the likelihood of fraud.

Thus, many of the challenges encountered in Iraq and Afghanistan can be linked to pre-

existing conditions that the DoD failed to manage effectively. First was the increasing

contract workload, both in terms of number of contract actions and dollars, necessitated

by an increasing reliance on contractors to perform services previously done by both

government civilian and military personnel. Second was the concurrent decrease in the

number of contracting personnel to handle the workload. Third was the increasing

complexity of contract actions and requisite administration. Fourth was the failure to

ensure that adequate audit and investigative assets kept pace with the value of DoD

contracts. Finally, several institutional aspects, particularly characteristic of the Army,

negatively affected the organization’s ability to recognize and address the previous

issues.

1. Increasing Reliance on Contractors

Although the military has always, to some extent, augmented organic assets with

contracted support, several factors culminated to radically alter the scale of contractor

support post–Cold War: a reduction in the overall size of the military along with the

34

implementation of the all-volunteer force, an increase in the number of operations, and

the adoption of sophisticated weapons systems (Government Accountability Office,

2008).

The federal government, particularly the DoD, recognizes numerous benefits with

outsourcing. The use of contractors provides the military with flexibility, surge capacity,

and access to a pool of talent in specialized fields otherwise unobtainable. While some

debate the cost benefits, they acknowledge the utility of contractors. However, the

positives are offset by risks that must be managed to ensure proper oversight, the

avoidance of contractor performance of inherently governmental functions and, what is

now being identified as an “over-reliance” on contracted support, especially in

contingency operations (Thiebault et al., 2009).

While the questions of contractor support appropriateness and over-reliance are

outside the scope of this report, what is clear by reviewing the data is that DoD reliance

on contractors prior to OIF/OEF had been steadily increasing over time, reaching a one-

to-one uniformed personnel to contractor ratio in the Balkans. Figure 4 shows the

increasing complexity of contracted services over time and the ratio of contractors to

military personnel during each conflict.

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Figure 4. Evolution of Contracted Support in U.S. Military Operations (From: Thibault et al., 2009, p. 21)

Failing to keep pace was the DoD’s doctrine to incorporate contractor support, as

well as the size and capability of its acquisition workforce required to effectively manage

contracts. Additionally, the growing reliance on contractors to perform service

requirements necessitated increased auditing and investigative assets, which did not

materialize.

The increasing reliance on contractors led to a vast growth in the number of

contract actions. The sheer quantity and dollar volume provides greater opportunity for

kickbacks, bribery, and other procurement crimes. When increased reliance on contracted

support carries over to a contingency environment, “the opportunity and motive exist to

illegally and opportunistically make a fortune in a short period of time” (Ethridge et al.,

2007, p. 37).

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2. Insufficient Number of Trained Acquisition Personnel

The acquisition workforce shrinkage occurred in part due to the post–Cold War

drawdown, as well as a general negative perception resulting from high-profile scandals

during the Reagan era leading to a consensus that the DoD acquisition workforce

“underperformed and was too large” (Gates, 2009, p. 7). Additionally, a major

acquisition reform movement during the 1990s encouraged the belief that the increased

use of technology and more efficient contracting vehicles, including the use of the

purchase card, could translate to a smaller acquisition workforce (Special Inspector

General for Iraq Reconstruction, 2006).

Of particular relevance was the GS-1102, the civilian contracting series, which

since 1987 has undergone a 15% reduction in personnel at the same time that contract

actions started to increase sharply. Figure 5 shows the substantial reduction that began in

the early 1990s.

Figure 5. DoD Acquisition Workforce Trends (From: Defense Acquisition University, 2007, pp. 3–8)

37

Because of their shrinking numbers and the concurrent increase in contract

actions, the contracting personnel had to assume additional responsibilities and deal with

greater expectations regarding required skills to perform their job, as described in a GAO

report:

Over the last decade, the federal acquisition workforce has had to adapt to changes in staffing levels, workloads, and the need for new skill sets. Procurement reforms have placed unprecedented demands on the acquisition workforce. For example, contracting specialists are required to have a greater knowledge of market conditions, industry trends, and the technical details of the commodities and services they procure. (General Accounting Office, 2003, p. 20)

Exacerbating the problem, the remaining acquisition personnel had to deal with

budgetary cuts to training programs which made it more difficult for them “to adapt to

the increasingly complex and demanding environment in which they were called upon to

function” (Acquisition Advisory Panel, 2007, p. 336). These factors influence potential

work-related pressures that could influence an individual to commit fraud. While other

pressures include those of a financial nature (i.e., living beyond one’s means, high

personal debt) or vices (i.e., gambling or drugs), work-related pressures include factors

such as “getting little recognition for job performance, having a feeling of job

dissatisfaction, … and feeling underpaid” (Albrecht et al., 1995, p. 24).

3. Increasing Complexity of Contract Actions

The capability gap of the federal contracting workforce was further widened by

the increasing complexity of contract actions that resulted from the tremendous

expansion of service contracts, as shown in Table 4, which are more time-intensive and

require significant surveillance resources, as well as the move towards performance-

based acquisition and the best-value evaluation approach, which require greater skill and

sophistication to execute in comparison to a lowest-price award basis.

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Table 4. Changes in the DoD’s Use of Service Contracts, Fiscal Years 1996 to 2005 (From: Abusive Practices in DoD Contracting, 2007, p. 15)

Service obligations Fiscal Year

Service Category

1996 2005

Percentage of service

Obligations, Fiscal Year 2005

Percentage change,

Fiscal Years 1996 to 2005

Professional, admin & mgmt

$10.8 $28.3 20.0 161

Construction of facilities 7.3 11.7 8.3 62 Maintenance & repair 6.6 11.4 8.1 74 Information technology 4.9 10.3 7.3 110 Medical services 1.6 8.0 5.6 412 Transportation, Travel 2.4 6.2 4.4 154 Housekeeping services 2.4 4.8 3.4 98 All other services, excl R&D

22.7 23.6 16.7 4

Research & Development 23.7 37.0 26.2 56 Total, all service contracts $82.3 $141.2 100.0 72 Note. Fiscal Year 2005 Dollars in Billions.

Even measures implemented to streamline the government contracting process

often had the opposite effect when fully realized. While the institution of simplified

acquisition procedures was intended to “promote efficiency and economy in contracting;

and avoid unnecessary burdens for agencies and contractors,” (Federal Acquisition

Regulation, 2005, §13.002) in some instances the unintended consequence was an

increase in workload, that is, the implementation and oversight of the Government

Purchase Card program.

The increased use of contractors to provide services would continue in OIF and

OEF where 66% of overall contract spending is for services (Thibault et al., 2011b, p. 7).

The greater technical knowledge required to award and administer contracts for services

is part of the prerequisite in the opportunity leg of the Fraud Triangle. While CCOs are

sufficiently trained to carry out their duties in their positions of trust, they are

simultaneously receiving the training they need to violate those positions of trust.

Additionally, because technical certification guidelines in contracting require a

Baccalaureate degree and at least 24 semester hours in areas encompassing accounting,

39

law, business, finance, contracts, purchasing, and economics, the CCO is postured to take

advantage of this knowledge to circumvent the system. The conspiracy scheme in Kuwait

is an example of CCOs utilizing a sophisticated system to defraud the government:

Pressley “established three shell companies to launder money, produced false documents

to camouflage money transfers, and enlisted family member to serve as nominal owner of

one of the shell companies” and “engaged in ‘layering,’ i.e., two or more wire transfers

involving criminally derived funds that were intended to appear legitimate” (U.S.A. v.

Eddie Pressley, 2011, p. 11).

4. Inadequate Audit and Investigative Assets

DoD auditors and investigators faced the same predicament as contracting

professionals with capabilities and resources failing to keep pace with the unprecedented

growth in the number and value of contract actions. The ratio of DoDIG auditors to the

Defense budget had declined significantly so that by 2007, there was one DoDIG auditor

for each $657 million of the Defense budget. The DoDIG reported that contracting fraud

investigation is one area of many that has “dropped in priority” and “largely been

neglected” (Department of Defense, Inspector General, 2008b, p. 21). This shift is due in

part to the new focus on intelligence and terrorism and a corresponding shift in resources

which led the DoDIG to conclude its “coverage of high risk area and Defense priorities is

weakened and will continue to weaken by insufficient personnel to accomplish our

statutory duties” (Department of Defense, Inspector General, 2008b, p. 11).

This diminished capability negatively affected the DoD’s ability to prevent and

detect fraud, as the lack of adequate audit and investigative assets provide a fraudster

both opportunity and easier rationalization to commit a crime.

5. Institutional Challenges Specific to the Army

While the DoD as a whole struggled with the challenges associated with the

evolving procurement environment, the Army as an institution had cultural characteristics

that contributed to contract support problems in OIF/OEF. One was the existence of a

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warfighter-centric culture that had little regard for its contracting workforce and the value

it provided, and which, in turn, prevented a meaningful acknowledgment of the

requirement to institutionalize operational contract support.

A persistent challenge faced by the Army, that in part explains the historical

mismanagement of its acquisition workforce, is a culture that fundamentally lacks an

understanding of the tremendous value its procurement community provides, as well as

the inherent complexity involved in contracting for goods and services. Dr. Jacques

Gansler, who served as Under Secretary of Defense (Acquisition, Technology, and

Logistics) from 1997 to 2001, explained.

Army “culture” is focused on warfighting and thus neither recognizes the critical

and complex nature of contracting nor rewards people in the contracting community.

Contracting personnel incorrectly have been characterized as “shoppers,” by some both

inside and outside of the Army (and, consequently, reduced in both quantity and stature)

as opposed to being viewed as true professionals (Gansler et al., 2007, p. 29). Its sister

Services also struggled to adapt, but the Army was notably further behind in several key

areas according to a Center for Naval Analysis report issued in 2001 (as cited in Gansler

et al., 2007). The result was an Army contracting workforce that was “understaffed,

overworked, under-trained, under-supported, and … most importantly, under-valued”

(Gansler et al., 2007, p. 3). The Army failed to recognize the importance of CCOs and

their contributions to the contingency mission as reflected in their personnel numbers and

projected career path. When operations in Iraq and Afghanistan commenced, military

personnel made up only 3% of the Army’s contracting workforce and only half had the

requisite certification for their current positions (Gansler et al., 2007, p. 24). Additionally,

the Army offered a stunted career path in contracting by preventing officers from

beginning their contracting careers earlier than eight years after commissioning and with

no contracting general officer positions, limiting upward career mobility and longevity.

While the inability to receive a promotion to general officer may not have

motivated any CCO to commit fraud, these policies did not contribute to an overall

positive work environment. Research indicates that having positive personnel and

operating policies are important factors in contributing to high- or low-fraud

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environments (Albrecht, Albrecht, & Albrecht, 2006). As previously noted, limited

promotion opportunities, job dissatisfaction, and lack of recognition for job performance

can be factors in motivating fraud.

C. CHARACTERISTICS OF THE CONTINGENCY CONTRACTING ENVIRONMENT IN OIF/OEF CONDUCIVE TO FRAUD

While integrity can be an issue regardless of the contracting environment, there

are elements associated with contingency contracting that make it uniquely susceptible to

fraud, either by introducing unconventional components into the contracting equation or

by exacerbating existing systemic weaknesses. After a comprehensive review of reports

documenting procurement fraud in OIF and OEF, I compiled the salient factors and

categorized them into the following topic areas: Environment, Procedures, Personnel, and

Control Mechanisms. I do mean to represent this categorization as an all-inclusive list,

but instead it reflects the most frequently cited factors by investigators that make

contingency contracting operations highly conducive to fraud. These factors can clearly

overlap, be interrelated, or work in concert, and not all characteristics will be present in

every contingency as they are dependent on the mission, location, duration, and other

operational dynamics. Additionally, some characteristics of a contingency contracting

environment may contribute to its overall complexity or otherwise distinguish it from a

non-emergency situation but not necessarily affect the likelihood of fraud.

1. Environment Issues

a. Operational Tempo

Operational tempo—characterized by a high workload ratio or volume,

and an extremely demanding customer base with urgent life, health, and safety

requirements—can singularly or collectively influence a CCO to take a variety of

shortcuts. The shortcuts can, in turn, increase the government’s risk and create

vulnerabilities to fraud, waste, or abuse. A run-away workload also means less oversight

by senior contracting personnel and chiefs, which enables opportunities for fraud by other

CCOs and contractors. Lieutenant General N. Ross Thompson III, the Military Deputy to

the Assistant Secretary of the Army for Acquisition, Logistics, and Technology, in his

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testimony before Congress, noted that the fraud which occurred in OIF and OEF was in

large part due to “the lack of oversight and being overworked, a small office with just too

many contracts to manage, too many contracts to cut” (DoD Appropriations, 2009, p. 24).

Figure 6 depicts the enormous increase in contract obligations in OIF and OEF.

Figure 6. Cumulative Obligations on Contracts and Grants (in $ billions) Performed in Iraq, Afghanistan, Bahrain, Kuwait, and Qatar (From: Thibault et al., 2011a, p. 6)

The DoD and the Army have had significant challenges resourcing

contracting personnel to keep pace with the workload in OIF and OEF. As late as 2010,

despite the enormous amount of attention contingency contracting received from

Congress and DoD leadership, CCO billets in JCC–I/A had a fill rate of only 88% (DoD

Contingency Contracting Initiatives, 2010, p. 5).

b. Pressure to Award Procurements Faster

Efforts to meet urgent needs in a combat or other high-threat environment

can lead to “less than prudent contracting practices,” (Department of Defense, Inspector

General, 2010, p. 1) such as the use of unclear or out-of-scope requirements, the

inappropriate use of inter-agency contract vehicles or contract type (time and materials,

cost-reimbursement), or lack of file documentation. These practices can subsequently

43

lead to undesirable outcomes including higher costs, schedule delays or rework, and,

ultimately, unmet requirements which jeopardize the overall mission. The stress of

operating in a contingency environment with constant pressure from customers for

expedited contract awards can also negatively affect a CCO’s morale, in turn feeding

general job dissatisfaction and feelings of not being appreciated. This mindset can

provide the rationalization to commit fraud.

c. Cultural Norms Regarding Corruption

“Most crimes uncovered by U.S. investigators in the two war zones

include bribery, kickbacks and theft, inspired in part by the deep and pervasive cultures

of corruption indigenous to the countries themselves” (Jelinek, 2011). The cultural norms

of the host country in which a contingency operation takes place may influence a CCO to

engage in corrupt activities if continually exposed to offers of gratuities or kickbacks,

which from the offerer's perspective may be considered legitimate or accepted business

practices. Local contractors may not understand or may choose to ignore U.S.

government procurement laws that govern improper business practices and, since

corruption can be deeply embedded in the cultural psyche, it can be a difficult force to

overcome. In fact, Stuart W. Bowen, Special Inspector General for Iraq Reconstruction

(SIGIR), referred to corruption as “the second insurgency” in Iraq (Assessing the State of

Iraqi Corruption, 2007) and compared it to a cancer that had overtaken the country. Both

Iraq and Afghanistan were countries in which government corruption was the norm prior

to the arrival of U.S. forces. In fact, both countries still rank near the bottom of 178

countries rated on a scale on which zero is the most corrupt and ten is the least corrupt, as

shown in Table 5.

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Table 5. 2010 Corruption Perceptions Index (After: Transparency International, 2011)

Rank Country Score

1 Denmark 9.3

1 New Zealand 9.3

1 Singapore 9.3

175 Iraq 1.5

176 Afghanistan 1.4

Note. I took the information in this table from a lengthier table found at the Transparency International website (Transparency International, 2011).

Of course, CCOs operating in the U.S. (which ranks 22nd) are not immune

from similar temptations. Hurricane Katrina is an example of a U.S. contingency that was

in no way immune from fraud; the Department of Justice set up an entire task force to

deal with Katrina fraud. However, during the course of executing contracts in countries

where corruption is a way of life, the CCO may have an easier time rationalizing

complicit behavior. Several CCOs tried to defend their actions in court on the basis that

bribery is common in the Middle East. Major Pressley claimed that the contractors who

paid him bribes were “more than glad to do so” (U.S.A. v. Eddie Pressley, 2011, p. 17).

Major Cockerham and his lawyer even attempted to provide a religious characterization

of the bribes received as “blessings” from Muslim contractors. The courts rejected this

argument. As Judge Ferguson explained in sentencing John Cockerham,

You know, I don’t think it makes any difference what words you use, a bribe is a bribe and, of course. I mean we—we know we’re fighting two wars, we’re fighting a war in Afghanistan where you just have to read the papers to know that one of the great concerns in that war is the corruption of high level officials in Afghanistan and, you know, people just need to tell people, “No, that’s not the way we do business. We don’t take these kind of blessings.” We just don’t do that; this is the United States of America. (U.S.A. v. John Cockerham, Jr., 2009, pp. 34–35)

45

These instances show how cultural norms regarding corruption affect both

the opportunity and rationalization sides of the Fraud Triangle.

d. Less Sophisticated Local Business Practices/Contractors

Contingency operations executed in foreign countries provide inherent

challenges such as language barriers and contractors unfamiliar with U.S. contracting

procedures. In lesser-developed areas, the business environment may be extremely

immature, causing the CCO to do business with contractors who are illiterate, or who are

accustomed to completing transactions via verbal agreements. In such instances, it can be

easier for a CCO to take advantage of a contractor seeking to do business with the U.S.

government because of the contractor’s naiveté regarding the contracting process or their

trust in the CCO as a representative of the U.S. government. A contractor may not be

aware of the fact that they do not have to pay a fee to request a solicitation or submit an

offer, or that bribes and kickbacks are illegal. A deputy contracting chief in Afghanistan

astutely summarized the environmental factors at work in OEF: “Afghan business

practices are challenged in several areas, such as ethics, technical capability, and links to

criminal patronage networks” (Center, 2011, p. 109). Thus, the degree of the contracting

environment’s maturity and the local contractor’s familiarity with U.S. contracting

procedures can impact a CCO’s opportunity to commit fraud by creating opportunities to

take advantage of contractors and commit economic extortion,6 which the contractor may

not even recognize as such.

2. Procedural

a. Waived Contracting Officer Appointment Standards

The Defense supplement to the Federal Acquisition Regulation (DFARS)

waives the education, training, and certification requirements for contracting officer

appointment if supporting a contingency contracting force (Defense Federal Acquisition

Regulation Supplement, 2010, §201.603.2(2)(ii)). The regulation’s intent is to provide

maximum flexibility by relaxing the prerequisites involved in obtaining a contracting

6 Economic extortion is a form of corruption in which “an employee demands a payment from a vendor in order to make a decision in that vendor's favor” (Albrecht et al., 2006, p.529).

46

warrant to meet the urgent need of a contingency operation. However, the flexibility must

be tempered with the recognition that the requirements exist as safeguards to prevent

inexperienced and potentially unqualified personnel from having authority that exceeds

their capabilities. Injudicious application can provide an opportunity for personal

enrichment through corrupt practices by an unscrupulous CCO. Unfortunately, even an

ethical CCO or contracting chief, if lacking the necessary knowledge, skills, and abilities

to carry out his or her duties, can enable fraud by other parties, including other CCOs

taking advantage of a perceived weakness. As the United States Agency for International

Development’s (USAID) Guide to Fraud Awareness points out,

The manager, auditor, or investigator must know the industry, the system, or the field and must establish what are accepted practices. It is hard to spot an aberration when you don’t know the norm. It is difficult, if not almost impossible, to detect a well designed fraud if you do not know what you are looking for. (United States Agency for International Development, p. 2)

Waived contracting officer appointment standards and less than judicious

vetting of contracting authority increase the likelihood of unethical personnel placed into

positions of authority and, presented with opportunities, taking advantage of their

newfound trust. However, it also increases the likelihood of ethical, but untrained or

unprepared, individuals assigned responsibilities that they are ill equipped to handle. In

this regard, the waiver of standards affects the opportunity for personnel, CCOs included,

to commit fraud.

b. Cash-Based Business Practices

In addition to the risks associated with the provision of procurement

authority to inexperienced personnel in contingency operations, cash-based contractor

payment procedures create risk through inherently weaker accountability protocols. In

many operations, the austere environment does not lend itself to electronic commerce,

specifically electronic fund transfer, whether resulting from a lack of infrastructure, a

constrained information technology platform (lack of bandwidth, connectivity issues), or

contractor distrust of public institutions. While standard operating procedures typically

prevent a CCO from making payments to avoid a conflict of interest, other government

47

personnel in close proximity such as field ordering officers/pay agents, project

purchasing officers, and finance personnel have access. The influx of cash in close

proximity to military personnel, many with little prior exposure to large sums of money,

can present a strong enticement to commit fraud. Mr. Quinn, the Chief of Staff for Army

Criminal Investigation Command noted, “It was just so much money, and a lot of it in

cash, that bribery is the number one issue we have looked at” (DoD Appropriations,

2009, p. 19).

Audit trails for cash payments can be difficult to maintain, which

reinforces the likelihood of fraud. The prosecuting attorney in the case against Major

Cockerham observed that he was smart because he kept all the money in cash, noting,

“It’s very hard for the Government to trace money in cash. There are no wire transfers,

there’s no bank receipts, there’s no means by which to trace the flow of funds, absent

ledgers that people make” (U.S.A. v. John Cockerham, Jr., 2009, p. 40). The issues with

utilizing cash are systemic. Numerous assessments from various agencies including the

GAO, the DoDIG, and the SIGIR “reveal a lack of accountability for large sums of

money spent for Iraq contracts” (Grasso, 2010, p. 12). As of June 13, 2011, $6.6 billion

in cash was still unaccounted for, prompting the SIGIR to state that the missing money

could be “… the largest theft of funds in national history” (Richter, 2011).

c. Utilization of Manual Contracting Methods

Similarly, manual contracting methods provide further opportunity to

circumvent controls inherent in an automated procurement system. Procurement Desktop

Defense (PD2), an application of the Standard Procurement System, is the standard

automated contracting system in the DoD (Defense Business Systems Acquisition

Executive, 2010). It prevents the accidental or purposeful duplication of procurement

instrument identification numbers (i.e., contract numbers) and computational errors in

contract amounts. PD2 also provides an electronic repository of contracts accessible to

personnel with permissions, thereby providing transparency. Another benefit the system

provides is the capability to run reports identifying the status of various contract actions

48

enabling workload analysis, funding information, and critical tools for contract

administration. Findings from an early SIGIR report, as shown in Table 6, highlight the

problems associated with manual contracting methods.

Table 6. Deficiencies Identified by SIGIR During Contract Review, Iraq 2005 (From: Special Inspector General for Iraq Reconstruction, 2005, p. 7)

Area Finding

Contract Files

The PCO did not effectively maintain contract files to ensure that contract execution was monitored for performance and payment. During our initial review, PCO personnel in 3 of 4 PCO regions could not locate contract files for 13 contracts, valued at $7,568,565.

Contract Funding

The PCO could not accurately identify the total value of contracts funded by the DFI. Our review showed that six contracts, valued at $25,418 were funded by U.S. Government appropriated funds but were erroneously presented as DFI liabilities in Comptroller/PCO summary records.

Contract Numbering

The PCO did not maintain adequate administrative control over contract numbering. Our review showed that the Comptroller/PCO listing indicated the PCO issued 34 contracts, valued at $54,343,349 but used only 14 different contract numbers. Contract values totaled $27,660,981 for contracts that used the same contract number two or more times.

Contract Payments

The PCO did not always properly review contract files prior to making contract payments to ensure that the correct amount was paid. Our review showed that one contract in the South–Central Region was overpaid by $40,000.

Note. PCO is the Project and Contracting Office; DFI is the Development Fund for Iraq.

As manual methods promote and enable file manipulation, as well as often

lead to an irreversible lack of an audit trail, they create an opportunity-providing factor.

No accountability exists without documents and “without accountability, it is much easier

to perpetrate a fraud and not get caught” (Albrecht et al., 1995, p. 35).

3. Personnel Issues

a. Deployment May Exacerbate Personal and Financial Hardships

A long-term deployment has the potential to cause or intensify existing

personal and financial problems experienced by a CCO. Multiple and/or lengthy

deployments can trigger considerable stress and lead to low morale, making the CCO

49

susceptible to the perceived benefits of fraudulent activity. Some Reserve and National

Guard CCOs7 may incur a substantial decrease in salary resulting from activation; 28%

of activated reservists experience a loss in earnings according to a 2005-Rand report, and

DoD reports place the number as high as 51% (Klerman, Loughran, & Martin, 2005).

This financial pressure, coupled with extended separation from family, can provide

motivation to engage in corrupt activities. CCOs may rationalize their actions in the

belief that the Army “owes” them, or they may feel compelled by financial hardships

back home. A CCO may resent the Army, and the act of fraud represents an opportunity

to “get even.” The demanding, and frequently dangerous, environment that a CCO is

exposed to may further impair judgment and, in conjunction with other contingency

unique factors, impact a CCO’s proclivity to engage in corrupt behavior.

b. Insufficient Skills, Inadequate Staffing, and Rapid Personnel Turnover

The SIGIR observed that acquisition numbers and skills were a challenge

for all contracting agencies operating in Iraq, but the DoD, in particular, suffered from

insufficient contracting personnel in theater, as well as problems ensuring that contracting

personnel possessed the requisite skills to operate in a contingency contracting

environment (Special Inspector General for Iraq Reconstruction, 2006). The SIGIR report

noted that the DoD’s contracting staff lacked experience in large construction contracts, a

critical component of a contingency focused on reconstruction. The report quoted an

official from the Joint Contracting Command–Iraq (JCC–I) who believed that

deployment of contracting personnel was tied to the need to “have a warm body” and not

necessarily to skills (Special Inspector General for Iraq Reconstruction, 2006, p. 108).

The Gansler Report emphasizes, “Contracting personnel sent into a theater of operations

need to be highly skilled, adequately trained, and prepared for the challenging, fast-paced

demands of expeditionary operations” (Gansler et al., 2007, p. 6). It further concluded

that the Army, even after six years enduring less than optimal contracting outcomes in

theater, was failing to support its mission in Iraq and Afghanistan:

7 Three of the convicted CCOs were Army Reservists, although their civilian salary information is

unknown.

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There are far too few Army contracting personnel in-theater. According to the JCC–I/A Commander, even those that are there are not adequately qualified for their responsibilities: only 38 percent of the total Army Acquisition/Contracting Workforce in-theater are certified for the positions held; and, overall, Army contracting people mostly are not certified for the position occupied. (Gansler et al., 2007, p. 28)

Personnel issues were compounded by high turnover, among not only

contracting personnel, but also legal support. A senior DoD contracting official observed,

“many of the lawyers did not have contracting backgrounds or the temperament and

experience to work in a war zone. Instead, they were all trying to learn on the job”

(Special Inspector General for Iraq Reconstruction, 2006, p. 108). High personnel

turnover can impact a CCO’s rationalization process. They may believe that due to the

continuous change out of personnel, it is less likely they will be caught. Additionally,

CCOs may feel less accountable and, therefore, less obligated to act ethically due to the

short-term nature of the relationships formed between themselves and senior leadership

or peers.

4. Control Mechanisms

a. Insufficient Internal Controls and Oversight

Numerous reports cite poor oversight, of both contractor and contracting

personnel, as the most significant factor leading to fraud, waste, and abuse in OIF and

OEF. The shortage of contracting personnel and the shortage of supporting staff

functions, including legal and auditing personnel, contributed to the perception of, if not

actual, weak or nonexistent internal controls. Additionally, distributed operations,

coupled with transportation challenges and security concerns, weakened supervision by

senior contracting personnel and inspectors. CCOs, presented with the real or perceived

autonomy provided by remote locations and poor communication systems, were

presented with an increased opportunity for fraud. The massive contracting fraud

involving multiple CCOs in Kuwait, for instance, occurred in an environment in which

contracts were “awarded by a small group of officers who seemed to be barely supervised

by senior officers” (Millman, 2009).

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b. Lack of Formal Investigative Procedures/Protocols and Resources

When the Army CID’s MPFU conducted its assessment of the contracting

environment in Iraq in 2005, it found the fraud threat high for a variety of reasons,

including the lack of a formal structure for reporting and investigating allegations of

procurement fraud (Ethridge et al., 2007). Contracting operations had been taking place

for more than three years before the MPFU established a fraud investigation office in Iraq

in December 2005. While the office was manned with trained special agents, most had

never previously worked in a combat environment. As the increased requirement for

investigative assets became known, the Army subsequently opened offices in

Afghanistan and Kuwait, as well as an additional office in Iraq.

Ultimately, the extent of fraud in theater necessitated the creation of a

joint investigative task force, the International Contract Corruption Task Force (ICCTF),

whose purpose was to coordinate efforts, share resources, and expand capabilities

(Ethridge et al., 2007). Members from the Army CID, Defense Criminal Investigative

Services (DCIS), SIGIR, and the Federal Bureau of Investigation (FBI) made up the

ICCTF. The establishment of the MPFU and later, the ICCTF, was a critical, if belated,

step in ensuring appropriate investigative resources were available in theater. The

presence of these organizations in theater was an integral step in implementing formal

protocols for reporting fraud, as well as potentially preventing fraud from occurring in the

first place. As Colonel Joe Ethridge of the Army CID notes regarding special agents in a

contingency operation,

First, their mere visible presence will tend to deter procurement fraud. Second, they can work with procurement officials to identify weaknesses in contracting procedures and enhance awareness of fraud indicators before the situation gets out of hand. (Ethridge et al., 2007, p. 40)

D. SUMMARY

By examining the contracting environment in OIF and OEF utilizing the

conceptual framework of occupational fraud theory, specifically Cressey’s Fraud

Triangle, I was able to identify distinctive situational elements that influence a CCO’s

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decision to commit fraud and thus affect the probability of fraud occurring in contingency

operations. My research indicates that the Fraud Triangle provides an efficient conceptual

model to explain the Army CCO corruption in OIF and OEF. Figure 7 provides a

summation of my findings regarding the various factors influencing a CCO’s

opportunities, pressures, and rationalizations.

Figure 7. Fraud Triangle for Army CCOs in OIF and OEF

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IV. CONCLUSION AND RECOMMENDATIONS

In this chapter, I provide my research conclusions and recommend actions that the

Army can take in an effort to prevent fraud, utilizing proven private sector methods with

a basis in occupational fraud theory. While the complete elimination of fraud in

contingency operations may not be possible, taking a proactive approach and

implementing a comprehensive anti-fraud program is the most effective way for the

Army to decrease fraud occurrence by its CCOs.

A. CONCLUSIONS

Fraud has been, and continues to be, a real and widespread problem in OIF and

OEF, as evidenced by the CWC’s estimate of $10.3–$18.5 billion estimate. But the price

tag only tells part of the story. More importantly, it reveals the corruption of a system

designed to be fair, accountable, and transparent—a contracting system that enables

mission critical operations to occur and, when compromised, risks soldiers’ lives and,

ultimately, national security. The North Atlantic Treaty Organization (NATO) recognizes

the pernicious effects of corruption, noting it “hinders the development and undermines

the security of modern societies and decreases trust in public institutions” (Tagarev,

2010, p. 3). Procurement fraud, including CCO corruption, has been a problem in OIF

and OEF from the beginning. Yet even as operations in Iraq wind down, the number of

people indicted and convicted for bribery and theft, among other crimes, continues to

rise, as seen in Figure 8.

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Figure 8. SIGIR Investigations: Criminal and Monetary Results (From: Special Inspector General for Iraq Reconstruction, 2011, p. 117)

The SIGIR is just one of several agencies investigating fraud and criminal

activities in theater. Table 7 shows that there are 376 open cases in Iraq and Kuwait for

all investigative agencies as of September 30, 2011.

Table 7. Status of Investigative Activities of Other U.S. Agencies, as of 9/30/2011 (From: Special Inspector General for Iraq Reconstruction, 2011, p. 138)

In Afghanistan, there are 111 open cases, of which about 61% involve contract

fraud and 27% involve corruption and bribery (Special Inspector General for Afghanistan

Reconstruction, 2011, p. 24). However, the statistics regarding ongoing investigations do

not provide a breakdown of how many personnel are Army CCOs. However, my research

indicates that the Department of Justice has successfully prosecuted at least nine Army

CCOs for fraud, with one CCO still pending trial. The current open case statistics indicate

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the persistent nature of fraud in OIF and OEF. While the Army and the DoD are

obtaining improved metrics in fraud investigations, fraud prevention remains the greater

and more cost-effective goal.

1. Answer to Research Question

The primary objective of this research project was to answer the following

question: How does occupational fraud theory account for the corruption of Army CCOs

in OIF and OEF? My hypothesis was that Occupational Fraud Theory could account for

CCO corruption in OIF and OEF and could therefore offer insight in effective prevention

methods. Based on my literature review identifying the fraud-influencing elements of the

contingency contracting environment, and the application of the Fraud Triangle, I

concluded that occupational fraud theory provides a valid explanation of CCO corruption

in OIF and OEF.

During the course of my research, I identified 14 unique elements of the

contingency contracting environment

• waived contracting officer appointment standards,

• less sophisticated local business practices/contractors,

• cultural norms,

• increased reliance on contractors,

• cash-based business practices,

• insufficient internal controls and oversight,

• operational tempo,

• increasing contract complexity,

• utilization of manual contract methods,

• pressure to award procurements faster,

• insufficient number of trained personnel,

• contracting not valued by the Army,

• personal/financial hardships caused by deployment,

• high personnel turnover.

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These elements represent the perceived opportunities, pressures, and

rationalizations—the Fraud Triangle’s three legs. Some of these elements are applicable

to more than one characterization; however, in aggregate they represent the most

frequently cited factors of procurement fraud in OIF and OEF. The findings lead me to

believe that many of the factors are not specific to OIF and OEF, and therefore could be

present in future contingency operations. With this in mind, I provide a variety of

possible courses of action for the Army to take in countering future potential fraud. These

recommendations support a proactive fraud prevention approach, which addresses all

elements of the Fraud Triangle more effectively than the traditional, reactive-based

approach. A comparison of the two approaches is shown in Figure 9.

Note. I created these graphics based on graphics found in Albrecht et al., 2006.

Figure 9. Comparison of Organizational Fraud Approaches (After: Albrecht et al., 2006, pp. 110–111)

B. RECOMMENDATIONS BASED ON OCCUPATIONAL FRAUD THEORY

Occupational Fraud Theory recognizes that numerous factors must work in

congruence in order for organizations to be successful in their efforts to prevent fraud.

Fraud prevention encompasses two fundamental activities: assessing the risk for fraud in

order to eliminate opportunities via internal controls, and creating and maintaining a

culture of honesty and ethics.

Proactive Approach to Fraud

Traditional Approach to Fraud

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1. Internal Controls

In regards to limiting a fraudster’s opportunity, an organization must establish

strong internal controls and, just as importantly, must enforce those controls. Some

examples of internal controls include the following (Albrecht et al., 1995, p. 31):

• segregation of duties, or dual custody,

• system of authorizations,

• independent checks,

• physical safeguards, and

• documents and records.

a. Stricter Deployment and Warranting Procedures

In February 2011, the Army instituted a policy mandating that a CCO

have at least one year of operational contracting experience before deploying to ensure a

minimum level of contracting proficiency (Director, Acquisition Career Management,

2011). This is a step in the right direction and implements the Gansler commission’s

recommendation that expeditionary contracting should never be a first assignment

(Gansler et al., 2007, p. 6). JCC–I/A now also has minimum warranting guidelines, based

on contracting authority on education, certification, and experience (Joint Contracting

Command Iraq/Afghanistan, 2009). Other possible courses of action include formal

warranting interviews or warrant boards. This provides the contracting leadership with an

opportunity to assess firsthand a CCO’s technical competence, as well as a CCO’s ethical

decision-making process.

b. Proactive Fraud Auditing

Organizations are rarely proactive in their audits for fraud and instead

investigate fraud only if reported or otherwise discovered (Albrecht et al., 1995).

However, organizations that undertake a proactive approach to fraud raise employee

awareness that, at any time, their work is subject to review, which increases the fear (and

probability) of getting caught. This response, in turn, decreases the likelihood of

fraudulent behavior. The Army should establish routine procurement fraud assessments

in addition to procurement management reviews for its contracting organizations, focused

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on identifying weaknesses in contracting procedures and recognizing fraud indicators. In

addition to revealing potential gaps, such assessments also serve to determine whether

systems function as designed and whether organizations are enforcing existing controls.

Since contracting is a data rich environment, it is ideal for continuous

monitoring applications. The Army should optimize the use of available forensic tools

and data-mining techniques to identify contracting fraud. New automated programs can

quickly identify irregular transactions and anomalies that are indicators of potential fraud

instead of waiting for an audit to occur or a tip to come across a hotline. One example of

such technological advances in proactive fraud auditing is the FERRET program, an

acronym for Forensic Evaluation, Research, Recovery and Enforcement Team. FERRET

is a program developed by the SIGIR that utilizes “investigative and audit techniques

combining sophisticated data analysis with traditional investigative technique and

coordination with organizations such as the Financial Crimes Enforcement Network, or

FINCEN, within the Department of Treasury” (Commission on Wartime Contracting in

Iraq and Afghanistan, 2010, p. 14). Utilizing this tool enabled the SIGIR to open 45 new

investigations involving 60 subjects.

c. Deployable Automated Procurement System

The SIGIR in its report, Iraq Reconstruction: Lessons in Contracting and

Procurement, recommended that the DoD develop deployable contracting and

procurement systems before mobilizing for post-conflict efforts and test them to ensure

that they can be effectively implemented in contingency situations (Special Inspector

General for Iraq Reconstruction, 2006). After reconstruction operations began in Iraq,

contracting entities developed ad hoc operating systems and procedures for monitoring

contracts and maintaining contracting and procurement histories; this limited contracting

efficiency and led to inconsistent documentation of contracting actions.

The Gansler Report also noted the lack of eBusiness tools and found that

existing contract writing systems were “insufficient and not standardized, negatively

impacting the ability to accomplish the mission. Information systems to track contractor

personnel, assets, and performance are critical but lacking” (Gansler et al., 2007, p. 7).

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Implementing a more effective suite of contracting program tools will not only improve

contracting operations but also eliminate the possibility of manual system manipulation

and facilitate data reporting in fraud audits.

2. Creating a Culture of Honesty and Ethics

While controls are important, the organization’s culture is also critical in

preventing fraud by creating an environment of honesty and openness. Five factors

essential to realizing such an environment are as follows (Albrecht et al., 1995, p. 255):

• hiring honest people and the provision of fraud awareness training,

• creating a positive work environment,

• having a well understood and respected code of ethics,

• providing an employee assistance program that helps employees deal with personal pressures, and

• creating an expectation that dishonesty will be punished.

These elements can affect an individual’s reactions to pressures and affect their

rationalizations.

a. Personnel

One of the issues noted in the Gansler Report was that the Army lacked a

defined and well-developed career path for military contracting professionals. In stark

contrast to the Air Force, the Army does not allow officers or soldiers to enter the

contracting field upon entering the Service. As a result, they are “not prepared to act as

mentors; nor are they able to oversee and work on the more complex and high-dollar

contract actions ... and do not have technical experience to command a contracting

operation” (Gansler et al., 2007, p. 33). To address these problems, the Gansler Report

recommended that the Army establish a separate, centrally managed Contracting Corps

and conduct separate Army Contracting Promotion boards.

The Army, however, did not implement either of these recommendations.

Rather than creating a separate corps, the Army decided that its needs would be best met

by ensuring that contracting expertise is shared across all Acquisition Corps disciplines

(DoD Task Force, 2008, p. 25). Regarding separate promotion boards, the Army

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countered that the intent could more effectively be met with special instructions to

existing promotion boards, as it saw no added benefit to conducting separate boards since

public law8 already required that the Army promote acquisition personnel at rates

commensurate with the overall promotion rates. However, the Army did institute a policy

to accelerate accession by two to three years.

The Army asserts a cross-functional Acquisition Corps is beneficial

because officers move in and out of the contracting field and, in a sense, cross-pollinate

the organization with contracting knowledge. In a recent interview, almost four years

after the initial report, Gansler still advocated for a separate contracting corps, arguing

that program management and contracting personnel are not interchangeable. He also

expressed concern that major weapon systems procurement issues dilute the contracting

command’s focus on contingency/expeditionary contracting (Army Contracting

Command, 2011, p. 14). I recommend a reevaluation of Gansler’s recommended course

of action in light of his concerns, and taking into consideration that the Army experienced

a much higher incidence of CCOs committing fraud in OIF and OEF than other Services

did, notably the Air Force. I recommend further research be conducted regarding the

differences in the career paths, training, and ethical decision-making between the

Services.

b. Ethics Training

The National Defense Authorization Act for 2007 directed the DoD to

establish a Panel on Contracting Integrity. This panel, made up of senior leadership

across the DoD, was given the mandate to conduct an assessment of the DoD’s progress

to eliminate fraud, waste, and abuse by eliminating vulnerabilities in the contracting

process. The panel created a subcommittee to review integrity in a combat/contingent

environment. The subcommittee found that

the annual DoD mandatory ethics training is not sufficiently tailored to the integrity issues found in a combat/contingent environment and that DoD should increase the quality, availability, and frequency of contracting integrity training provided prior to and during deployment in a

8 Goldwater–Nichols DoD Reorganization Act of 1986 Public Law 99-433.

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combat/contingent environment. ... Finally, the subcommittee found that deployed contracting personnel do not always train as they fight, and are not all adequately prepared with the appropriate skill-sets to perform effectively. (Department of Defense, 2007, p. 31)

The Joint Ethics Regulation provides the DoD’s written policy

establishing its ethics program (Department of Defense, 1996). The purpose of the DoD’s

ethics program is to emphasize “training and counseling to raise awareness of standards

of ethical behavior and to prevent misconduct” (Government Accountability Office,

2005, p. 4). It focuses primarily on post-government employee restrictions, financial

disclosure requirements, and conflict-of-interest issues, and not necessarily situations that

CCOs will find themselves confronting in a contingency environment. Tailoring ethics

training toward contingency contracting operations is one way to improve. The Army

should also keep in mind key features of effective training programs, which are based on

the practices of 41 leading, U.S.-based, multinational companies, including the following

(Ponemon, 1996, p. 66):

• live instruction,

• small class sizes,

• decision-based focus,

• use of a professional trainer,

• powerful senior executive message,

• realistic case materials, and

• significant group interaction.

An effective training program is the first line of defense in fraud

awareness and prevention. The Gansler Report, in explaining the much higher ratio of

Army contracting personnel involved in fraud vice Air Force personnel, suggested that

“focused, in-depth training given U.S. Air Force personnel on Government contracting

helps to prevent opportunistic, fraudulent behavior” (Gansler et al., 2007, p. 23). Even if

the training offered fails to deter the fraudster, it may raise a team member’s or office

mate’s awareness of fraud indicators and reporting procedures, increasing the probability

that they will be able to identify and report the crime.

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c. Training For and By Senior Contracting Officials

In addition to the recommendation that the Army should expand and

improve its ethics training regarding contingency environments, the Army should also

ensure it provides focused training for its senior contracting officials, including CCO

team leaders and contracting battalion commanders. It is employees and managers, not

auditors, who detect most frauds (Albrecht et al., 2006). Therefore, it behooves an

organization to provide instruction on how to recognize the signs, or red flags, of fraud.

The Army should also consider having contracting leadership personally

instruct ethics and fraud prevention training. The legal staff, in their capacity as ethics

advisors, traditionally do this task. If the contracting leadership provided the training,

however, it would reinforce appropriate modeling, commonly referred to in the Army as

the command climate or the tone at the top. Showing by example that fraud prevention

and ethics training is important sends a clear message of expectations and standards.

d. Assistance Program

The stresses of multiple deployments and other military hardships,

including frequent moves, can cause a CCO or family members to adopt negative coping

mechanisms including drug and alcohol abuse, gambling, excessive spending, and

domestic violence. These behaviors, in turn, can provide the pressure to commit fraud.

While there are already programs, including chaplains and mental health counseling, in

place to assist service members with various personal issues, contracting leadership and

the routine pre- and post-deployment training should reinforce the availability of these

services.

Additionally, contracting leaders whom build a strong relationship with

their CCOs are better positioned to notice changes in a CCO’s behavior resulting from

dealing with a pressure. Increased awareness and monitoring of personal situations could

result in a leader ensuring that a CCO with a “nonsharable” problem receives appropriate

assistance. This awareness would prevent leadership from putting a CCO in a position in

which the three elements of the Fraud Triangle are present and thus increasing the

probability that a crime such as fraud is committed. The restructuring of Army

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contracting to mirror traditional Army units should facilitate this by enabling closer

proximity between CCO’s and their leadership, and potentially creating a closer bond

between them as well.

e. Established Relationships With Investigative Agencies

From its experience with fraud, including the corruption of CCOs in OIF

and OEF, Army leadership has since realized the value in having auditors and criminal

investigators present at the beginning of a contingency operation. According to General

Thompson, the Army is considering including auditors and criminal investigators “as part

of the deployable structure, both to have that presence there from the beginning, and also

to act as a deterrent” (DoD Appropriations, 2009, p. 23).

Another recommendation is to establish a permanent office of the

inspector general for contingency operations. While departments like the DoD and the

Department of State have their own respective IGs, their authority is limited. The

temporary special inspectors general, SIGIR and SIGAR, are similarly restricted by time

and function. According to the CWC, which supports the establishment of a permanent

office,

Having a small, but expandable, permanent inspector-general staff devoted to contingency operations would provide critical monitoring from the onset of a contingency, permit collaboration with agency inspectors general to regularly assess the adequacy of agency planning and coordination for contingencies, and provide a logical center for developing and coordinating needed training among agencies. (Thibault, 2011b, p. 9)

f. Expectation of Punishment

Despite the growing number of investigations, few cases of wartime-

contracting fraud are actually prosecuted. Many cases are simply closed due to a lack of

evidence, the difficulty investigating them, and the cost of prosecution (Thibault et al.,

2011b). While prosecution can be time consuming and expensive, not prosecuting a

corrupt CCO or other government personnel sends the wrong message—that fraud is

tolerated. The lack of prosecution can give other CCOs “a ‘perceived opportunity’ that

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when combined with pressure and rationalization, will result in additional frauds”

(Albrecht et al., 1995, p. 39). Opportunity is removed when perpetrators believe they will

be punished, not just discovered.

Having a strong policy of punishment can also help overcome a CCO’s

rationalizations. To send the message that fraud will be prosecuted, the Army should

consider creating a multi-faceted media campaign, and include the actual cases of CCOs

prosecuted and convicted in ethics and other training, in order to “communicate

consistent expectations about punishment of violators” (Albrecht et al., 2006, p. 68).

Examples of initiatives include the expanded use of public service announcements on the

Armed Forces Network (AFN), which was available in Iraq and Afghanistan, and posters

and hotline information posted near key target-population areas, such as dining facilities

and contracting offices.

g. Comprehensive Anti-Fraud Program

As there are many factors involved in preventing fraud, an organization

must address fraud prevention in a holistic manner. Focusing on one factor alone,

ensuring adequate internal controls, for instance, is not enough. To be successful, an

organization should understand the elements of the Fraud Triangle and implement

measures addressing all three. While ensuring adequate internal controls is a necessary

step in eliminating opportunities, an organization should also focus on the pressures

motivating fraud and on the rationalizations of the perpetrators, although these are

potentially more difficult to identify and address. Since the Army discovered massive

fraud in its CCO ranks, it has implemented much more stringent contracting controls,

including mandatory peer, management, policy, and legal reviews. In some cases, it has

removed contracting authority from CCOs completely; for example, the Army transferred

the award and administration of large-dollar contracts from Kuwait to the U.S. Army

Sustainment Command in Rock Island, IL (DoD Appropriations, 2009, p. 9).

In an effort to improve support, as well as to establish oversight through

the chain of command, the Army also reorganized its contracting structure, creating an

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Expeditionary Contracting Command with contracting brigades, battalions, and teams. It

has also expanded its CCO ranks in an effort to address the personnel shortage. These

efforts should positively affect the fraud environment during a contingency operation. In

other regards, however, the DoD has taken a short-term, piece-meal approach to dealing

with fraud. Publishing an article, developing a web-cast, and holding a conference are all

examples of actions that the Panel on Contracting Integrity touted as accomplishments in

2009 (Department of Defense, 2009). It is doubtful these efforts, while praise-worthy,

will have any significant, long-term effect on preventing fraud in future contingencies.

Similarly, the GAO observed that while the DoD has announced various new policies,

guidance, and training initiatives, to alleviate problems in contingency contracting, not all

have been implemented and for real and lasting change to occur sustained leadership and

commitment is required (Government Accountability Office, 2011b, p. 7).

C. SUMMARY

Acts of fraud and abuse, especially if they go unpunished, erode morale, invite cynicism, encourage others to cheat, and undermine America's standing among allies and host nations.

Commission on Wartime Contracting, 2010, p. 2

The purpose of this report was to analyze the conditions that enabled corruption

of Army CCOs during OIF and OEF by applying occupational fraud theory, specifically

the classic sociological/criminological Fraud Triangle model (Cressey, 1953), to

determine its validity in a contingency operation. From my research, I conclude the Fraud

Triangle model does provide a valid framework in accounting for CCO corruption based

on the unique pressures, opportunities, and rationalizations that contracting in a

contingency environment creates.

By examining the contracting environment in OIF and OEF and utilizing the

conceptual framework of occupational fraud theory, I identified the distinctive situational

elements of a contingency operation that influence an individual’s decision to commit

fraud and thus affect the probability of fraud occurring in contingency operations. My

intent in analyzing the procurement fraud environment in OIF and OEF using an

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occupational fraud model was to provide a foundation for understanding why fraud

occurs in the context of contingency operations in order to prevent procurement integrity

violations in the future. While corruption is virtually inevitable to some extent in any

contingency environment, much of the contingency-contract waste and fraud in OIF and

OEF could have been avoided, according to the CWC (Thibault et al., 2011b).

Understanding the factors involved in how and why a CCO may decide to commit fraud

is critical to preventing fraud in future contingency operations.

Establishing a comprehensive anti-fraud program, including the implementation

of appropriate prevention and detection measures, is the most effective way to reduce

instances of fraud by CCOs. The Army’s failure to do so essentially constitutes a breach

of the fiduciary duty to manage its resources, both people and money. Reducing CCO

corruption is necessary if the Army wants to reestablish and maintain public confidence

in its contingency contracting personnel’s abilities to spend taxpayer money legally and

wisely. To this end, I have provided various recommendations to help the Army address

the issue of CCO corruption. Applying appropriate counter-fraud measures will also

positively affect the Army’s ability to accomplish its mission at all levels—tactical,

operational, and strategic—in contingency operations.

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APPENDIX A: ASSOCIATION OF CERTIFIED FRAUD EXAMINERS FRAUD CLASSIFICATION MODEL

Corruption Asset Misappropriation

Fraudulent Statements

68


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APPENDIX B: OCCUPATIONAL FRAUD RED FLAGS

Personal Characteristics Organizational Environment

1. Unusually high personal debts 26. A department that lacks competent personnel

2. Severe personal financial losses 27. A department that does not enforce clear lines of authority and responsibility

3. Living beyond one’s means 28. A department that does not enforce proper procedures for authorization of transactions

4. Extensive involvement in speculative investments

29. A department that lacks adequate documents and records

5. Excessive gambling habits 30. A department that internal auditors do not frequently review

6. Alcohol problems 31. Lack of independent checks (other than internal auditor)

7. Drug problems 32. No separation of custody of assets from accounting for those assets

8. Undue family or peer pressure to succeed 33. No separation of authorization of transactions from the custody of related assets

9. Feeling of being underpaid 34. No separation of duties between accounting functions

10. Dissatisfaction or frustration with job 35. Inadequate physical security in the employee’s department, such as locks, safes, fences, guards, etc.

11. Feeling of insufficient recognition for job performance

36. No explicit and uniform personnel policies

12. Continuous threats to quit 37. Failure to maintain accurate personnel records of disciplinary actions

13. Overwhelming desire for personal gain 38. Inadequate disclosures of personal investments and incomes

14. Belief that job is in jeopardy 39. Operating on a crisis basis

15. Close associations with suppliers 40. Inadequate attention to details

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Personal Characteristics Organizational Environment

16. Close associations with customers 41. Not operating under a budget

17. Poor credit rating 42. Lack of budget review or justification

18. Consistent rationalization of poor performance

43. Placing too much trust in key employees

19. Wheeler-dealer attitude 44. Unrealistic productivity expectations

20. Lack of personal stability; frequent job/residence changes

45. Pay levels not commensurate with the level of responsibility assigned

21. Intellectual challenge to “beat the system” 46. Inadequate staffing

22. Unreliable communications and reports 47. Failure to discipline violators of company policy

23. Criminal record 48. Not adequately informing employees about rules of discipline or codes of conduct within the firm

24. Defendant in a civil suit (other than divorce) 49. Not requiring employees to complete conflict-of-interest questionnaires

25. Not taking vacations of more than two or three days

50. Not adequately checking background before offering employment

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