Proposal to curb government contract waste would not apply to overseas work

WASHINGTON -- A Bush administration plan to crack down on contract fraud has a multibillion-dollar loophole: The proposal to force companies to report abuse of taxpayer money will not apply to work overseas, including projects to secure and rebuild Iraq and Afghanistan.

For decades, contractors have been asked to report internal fraud or overpayment on government-funded projects. Compliance has been voluntary, and over the past 15 years the number of company-reported fraud cases has declined steadily.

Now, the Justice Department wants to force companies to notify the government if they find evidence of contract abuse of more than $5 million. Failure to comply could make a company ineligible for future government work.

The proposed rules, which are in the final approval stages, specifically exempt "contracts to be performed outside the United States," according to a notice published last month in the Federal Register.

Critics, including the watchdog group Taxpayers Against Fraud, said the overseas exemption raises suspicions.

"I hate to sound cynical, but what lobbyist working for a contractor in Iraq wanted this get-out-of-jail card?" asked Patrick Burns, spokesman for the government watchdog group.

"I'm not saying that's the way it went -- I'm just suggesting that's the most logical line to draw," Burns said. "I think somebody's got some explaining to do."

The Justice Department, which pushed for the self-reporting requirement, called the overseas exemption a mistake that should be fixed before the plan becomes final.

"We do not agree with also excluding contracts performed entirely outside the United States," Assistant Attorney General Alice Fisher wrote Jan. 14 in a letter otherwise supporting the new rules.

"These types of contracts, which in many cases support our efforts to fight the global war on terror, need greater contractor vigilance because they are performed overseas where U.S. government resources and remedies are more limited," Fisher wrote.

A spokeswoman for the White House Office of Management and Budget, which oversees federal procurement policy, declined to answer questions about the planned exemption of overseas contractors from the beefed-up requirements for reporting fraud.

"This is a proposed rule," OMB spokeswoman Jane Lee said. "We are currently reviewing the public comments that were submitted."

Following the U.S.-led invasions of Afghanistan and Iraq, the United States poured billions of dollars into projects to secure and rebuild the two nations. With the money came the fraud. At least $14 million has been lost in bribes alone over the last five years in Iraq and Afghanistan.

The Justice Department so far has charged 44 people with bribery, conspiracy, money laundering and other contract fraud crimes related to the government's wartime spending. Some of those cases came from the Office of the Special Inspector General for Iraq Reconstruction, which has 52 investigations ongoing into bribes, false billing, contract fraud, kickbacks and theft. The Army Criminal Investigation Command has 90 criminal investigations underway into alleged contract fraud in Iraq, Kuwait and Afghanistan.

An estimated $350 billion is spent on government contracts annually, according to the White House office of Federal Procurement Policy. With money going to contractors and subcontractors, both foreign and based in the United States, experts say it's nearly impossible to pinpoint how much of it is spent overseas.

Studies by the Center for Public Integrity estimate that at least $102 billion has been spent since 2003 on postwar contracts in Iraq and Afghanistan. The study says spending to secure and rebuild the two nations has grown by more than 50 percent each year.

Meanwhile, the number of companies reporting internal fraud in their handling of government contracts has declined sharply. In 1987, contractors voluntarily reported 44 instances of fraud or abuse to the Justice Department. By 2002, the number had dropped to eight. Last year, contractors reported three instances of fraud.

The more notorious recent cases of overseas contract fraud involve:

--Bribes of jewelry, computers, cigars and sexual favors for military personnel by Philip H. Bloom, a U.S. businessman living in Romania whose companies made more than $8 million in Iraqi reconstruction money. Three U.S. Army Reserve officers were later indicted or accused of steering contracts to Bloom between 2003 and 2005 in return for an estimated $1 million in cash and gifts.

--Anthony J. Martin of Houston, a former manager for Kellogg, Brown & Root Services Inc., who pleaded guilty to accepting $10,000 in kickbacks for awarding a $4.67 million project to a Kuwaiti subcontractor in 2003.

--John Allen Rivard, a retired U.S. Army Reserve officer from central Texas who pleaded guilty to conspiracy and bribery after helping steer $21 million worth of contracts for tractor-trailers in Iraq to a government contractor. He admitted taking $220,000 in bribes.

--Terry Hall, a caterer from Rex, Ga., who has been charged with bribing an Army major to help secure contracts worth $20 million for supplies, including bottled water, to military forces in Kuwait.

Contractors oppose the stricter regulations, saying they will have to spend tens of thousands of dollars -- if not hundreds of thousands -- to hire auditors and conduct additional internal reviews in search of fraud.

"We're talking a complete revamping of their internal systems," said Chris Braddock, director of procurement policy for the U.S. Chamber of Commerce. "The more companies hear about this, the more worried they get. Any company doing business with the government is going to be affected by this."

Braddock said the voluntary system in place has "been fairly successful."

Steve Linick, director of the National Procurement Fraud Task Force, said he had been told the exemption for overseas contracts was a mistake and would be dropped.

Overseas contracts must be included, Linick said, adding that otherwise "it doesn't make any sense."

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On the Net:

Justice Department's National Procurement Fraud Task Force:

http://www.usdoj.gov/criminal/npftf/

Office of Fed Procurement Policy:

http://www.whitehouse.gov/omb/procurement/index.html

Taxpayers Against Fraud:

http://www.taf.org/home.htm

The Center for Public Integrity:

http://www.publicintegrity.org/default.aspx