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April 14, 2008
Contract Fraud Loophole Eliminated
By THE ASSOCIATED PRESS
Filed at 6:52 p.m. ET
WASHINGTON (AP) -- A multibillion-dollar loophole that would have helped
conceal abuse of overseas contracts has been eliminated from a Bush
administration proposal to protect taxpayer dollars, according to documents
obtained Monday by The Associated Press.
Reversing itself after months of criticism, the administration closed the
loophole that was quietly slipped last year into a proposed Justice
Department crackdown on government contract fraud.
The loophole specifically exempted contractors from reporting evidence of
fraud or abuse in overseas work that cost taxpayers at least $5 million. An
updated version of the proposal, drafted April 4, requires reporting on all
contracts -- whether at home or abroad.
The government has spent more than $102 billion since 2003 on contracts in
Iraq and Afghanistan alone.
''This change would result in making the clause requirements for a
contractor code of business ethics and conduct, business ethics awareness
and compliance program, and internal control system applicable to contracts
performed outside the United States,'' the new draft rule states.
Government policywriters said the original rule was drawn up quickly, and
chided the Justice Department for not explicitly making sure that overseas
contracts should be included in the crackdown. ''It was only after
publication of the proposed rule ... that DoJ and other respondents
expressed concern about the overseas exemption,'' the draft states.
The draft has not been publicly released. It was provided to the AP on the
eve of a hearing by a House panel investigating whether the loophole was
slipped into the crackdown at the request of lobbyists who represent giant
global government contractors.
The draft is still tentative, and the regulations requiring the contract
reporting are not expected to become final until later this year. The
Democratic congressman who called for the House inquiry, Rep. Peter Welch,
D-Vt., vowed Monday to ''close this multibillion-dollar loophole'' for good.
''This investigation proves why oversight works,'' said Welch, who is
sponsoring legislation to eliminate the overseas exemption whether or not
the Bush administration does so on its own. ''The question is why it
required a congressional investigation to prevent the Bush administration
from giving overseas contractors a free pass to defraud taxpayers.''
Numerous business groups, including the U.S. Chamber of Commerce, oppose the
overall crackdown that will force companies to spend at least tens of
thousands of dollars to hire auditors and conduct internal reviews in search
of fraud. They say companies need to have some discretion in determining
whether internal accounting errors are intentional or honest mistakes.
The tale of the loophole, first reported by the AP two months ago, provides
a look into the complex and often murky world of government contracting.
The government spends an estimated $350 billion a year on contracts. For
decades, contractors have been asked to voluntarily report internal fraud or
overpayment on government-funded projects.
But over the last 15 years, the number of company-reported fraud cases has
declined steadily, according to Justice Department data. And since the start
of the so-called war on terror, prosecutors have charged 44 people in
investigations into kickbacks, bribes and other abuses of taxpayer money in
Iraq and Afghanistan.
The increased violations led the Justice Department in May to ask for
regulations that would 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 loophole showed up in the final draft of the regulations when they were
published in the Federal Register last November. It led to bipartisan
criticism in Congress and by Bush administration inspectors general fearing
it would undercut government efforts to curb waste, fraud and abuse in
contracts.
A Bush administration official on Monday called the loophole ''a drafting
error'' that happened when policywriters merely cut and pasted a 20-year-old
Defense Department regulation into the contracting crackdown. As required
under government guidelines, the updated draft calls for public comment
about the new effort to close the loophole.
Business groups opposing the crackdown say companies generally have been
diligent about voluntarily reporting abuse to the government. For example,
the number of export violations reported to the State Department increased
from 216 in 1999 to 394 in 2004, according to data provided Monday by the
Arlington, Va.-based Professional Services Council.
Many U.S. firms are required under the terms of their contracts to
subcontract out work to foreign businesses -- particularly in third-world
nations where U.S. contracts would provide an economic boost, said PSC
President and CEO Stan Z. Soloway. Without the exemption, U.S. firms could
be unfairly held liable for abuse that they have little or no way of
preventing, he said.
The PSC represents more than 300 government contractors and other
businesses, including Blackwater USA, KBR Inc., Boeing Co., CACI
International Inc. and Lockheed Martin.
''It's impractical, and it raises a severe challenge for the U.S. government
trying to assist developing countries,'' Soloway said.
Contract Fraud Loophole Eliminated
By THE ASSOCIATED PRESS
Filed at 6:52 p.m. ET
WASHINGTON (AP) -- A multibillion-dollar loophole that would have helped
conceal abuse of overseas contracts has been eliminated from a Bush
administration proposal to protect taxpayer dollars, according to documents
obtained Monday by The Associated Press.
Reversing itself after months of criticism, the administration closed the
loophole that was quietly slipped last year into a proposed Justice
Department crackdown on government contract fraud.
The loophole specifically exempted contractors from reporting evidence of
fraud or abuse in overseas work that cost taxpayers at least $5 million. An
updated version of the proposal, drafted April 4, requires reporting on all
contracts -- whether at home or abroad.
The government has spent more than $102 billion since 2003 on contracts in
Iraq and Afghanistan alone.
''This change would result in making the clause requirements for a
contractor code of business ethics and conduct, business ethics awareness
and compliance program, and internal control system applicable to contracts
performed outside the United States,'' the new draft rule states.
Government policywriters said the original rule was drawn up quickly, and
chided the Justice Department for not explicitly making sure that overseas
contracts should be included in the crackdown. ''It was only after
publication of the proposed rule ... that DoJ and other respondents
expressed concern about the overseas exemption,'' the draft states.
The draft has not been publicly released. It was provided to the AP on the
eve of a hearing by a House panel investigating whether the loophole was
slipped into the crackdown at the request of lobbyists who represent giant
global government contractors.
The draft is still tentative, and the regulations requiring the contract
reporting are not expected to become final until later this year. The
Democratic congressman who called for the House inquiry, Rep. Peter Welch,
D-Vt., vowed Monday to ''close this multibillion-dollar loophole'' for good.
''This investigation proves why oversight works,'' said Welch, who is
sponsoring legislation to eliminate the overseas exemption whether or not
the Bush administration does so on its own. ''The question is why it
required a congressional investigation to prevent the Bush administration
from giving overseas contractors a free pass to defraud taxpayers.''
Numerous business groups, including the U.S. Chamber of Commerce, oppose the
overall crackdown that will force companies to spend at least tens of
thousands of dollars to hire auditors and conduct internal reviews in search
of fraud. They say companies need to have some discretion in determining
whether internal accounting errors are intentional or honest mistakes.
The tale of the loophole, first reported by the AP two months ago, provides
a look into the complex and often murky world of government contracting.
The government spends an estimated $350 billion a year on contracts. For
decades, contractors have been asked to voluntarily report internal fraud or
overpayment on government-funded projects.
But over the last 15 years, the number of company-reported fraud cases has
declined steadily, according to Justice Department data. And since the start
of the so-called war on terror, prosecutors have charged 44 people in
investigations into kickbacks, bribes and other abuses of taxpayer money in
Iraq and Afghanistan.
The increased violations led the Justice Department in May to ask for
regulations that would 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 loophole showed up in the final draft of the regulations when they were
published in the Federal Register last November. It led to bipartisan
criticism in Congress and by Bush administration inspectors general fearing
it would undercut government efforts to curb waste, fraud and abuse in
contracts.
A Bush administration official on Monday called the loophole ''a drafting
error'' that happened when policywriters merely cut and pasted a 20-year-old
Defense Department regulation into the contracting crackdown. As required
under government guidelines, the updated draft calls for public comment
about the new effort to close the loophole.
Business groups opposing the crackdown say companies generally have been
diligent about voluntarily reporting abuse to the government. For example,
the number of export violations reported to the State Department increased
from 216 in 1999 to 394 in 2004, according to data provided Monday by the
Arlington, Va.-based Professional Services Council.
Many U.S. firms are required under the terms of their contracts to
subcontract out work to foreign businesses -- particularly in third-world
nations where U.S. contracts would provide an economic boost, said PSC
President and CEO Stan Z. Soloway. Without the exemption, U.S. firms could
be unfairly held liable for abuse that they have little or no way of
preventing, he said.
The PSC represents more than 300 government contractors and other
businesses, including Blackwater USA, KBR Inc., Boeing Co., CACI
International Inc. and Lockheed Martin.
''It's impractical, and it raises a severe challenge for the U.S. government
trying to assist developing countries,'' Soloway said.
