JULY/AUGUST 1999 · VOLUME 20· NUMBER 7 & 8

Danielle Brian directs the Project on Government Oversight (POGO), a non-partisan, non-profit government watchdog whose mission is to investigate, expose and remedy waste, abuses of power and fraud committed by government agencies and contractors. Originally focused on military spending abuses, since 1990 POGO has also exposed fraud in other government departments. POGO often works with whistleblowers and government investigators and auditors whose findings receive little attention.

Multinational Monitor: What is the oil royalty dispute?
Danielle Brian: The major oil companies have leases to produce oil on public land. For that right, the companies pay the government a royalty based on the value of the oil.

At the end of 1993, we first looked at the state of California, where we found that the companies were undervaluing the oil produced on state land. Since the royalty is a percentage of the value, their royalties were therefore underpaid.

We began checking if this was true at the federal level. We found quite a bit of evidence that the government was aware of a problem; there were some whistleblowers who were aware there was a problem. But because it was such massive fraud, no one wanted to deal with it.

MM: Don't the companies have to pay based on the market rate?
Brian: While the leases require the companies to pay royalties no less than the fair market value of the oil, instead the companies have been relying on what is called "posted prices," which are essentially arbitrary prices that the companies set. When you compare the posted price to the publicly available market price, there's a difference. The major companies use complicated schemes to hide the real value of the oil. When they exchange the oil down the line, they pay each other more than they had claimed it was worth when they reported to the government.

MM: Has this been taking place throughout the industry?
Brian: It is only possible for the major companies that are integrated -- meaning that they are both producers and refiners. The major companies -- Shell, Conoco and the others -- have the ability to make up the profits later in the refining chain after declaring a low price to the government.

The independent producers can't benefit from the fraud because they have to sell the oil they produce to the majors, who then refine it. They too receive a lower price from the majors than the oil is really worth. There's nothing they can do about it because the majors dominate the market.

MM: At least among the majors, this appears to be a conspiracy.
Brian: That's a legal term that is very hard to prove. But it certainly is an industry-wide practice.

MM: Do you believe that there is concerted activity among the companies?
Brian: We have evidence that they talk to each other and maintain "overall balancing agreements" that relate to state taxes, royalties to private land owners, as well as federal royalties. What we have found in discovery are actual copies of overall balancing arrangements where the companies say, "We need to now pay each other back for the real value of the oil," because it's understood that they weren't reporting the real value in the beginning.

MM: What's been the scale of this fraud?
Brian: In the billions of dollars. The lawsuit itself only goes as far back as 1988, because of the way the False Claims Act is designed. But the fraud has been going on for decades. The State of California has been litigating a related case for about 30 years.

MM: What is the basis for your lawsuit?
Brian: We filed the suit under the False Claims Act. After working on this issue for about three years we thought we had hit a dead end. We issued several reports and had some Congressional interest, but no one was really doing anything about it. As a last ditch effort we filed the False Claims case in mid-1996 against 15 oil companies.

In January 1998, the Justice Department announced that they were joining in on four of the companies. Now they have intervened against nine. (The False Claims Act allows whistleblowers and other citizens to sue private companies that have allegedly defrauded the government. The government has the right to join the suits if it chooses. If the citizen wins the case, he or she is entitled to a percentage of the amount recovered from the contractor.)

MM: Have you settled any cases so far?
Brian: Mobil settled for $45 million. In the last couple of months Occidental settled for a little over $7 million. Chevron is about to settle for nearly $100 million and Conoco is also settling for about $30 million. They're all starting to settle. The states that filed suit have already collected approximately $5 billion for this fraud. 

MM: Your settlement with Mobil generated quite a bit of controversy in Congress.
Brian: Before we filed our lawsuit, we went to two whistleblowers who had tried from the inside to get the government to do the right thing for about a decade before we began working on this issue. We invited them to join us in this lawsuit. They thought the suit was unlikely to go anywhere and that they would face a substantial risk of retaliation in putting their names on such a lawsuit. So they chose not to join us. POGO decided that in the unlikely event that we did receive money as a result of the suit we would still share it with these two courageous individuals.

In the Mobil case we received a reward of over $1 million. We decided to stay true to our conviction, so we shared it with the whistleblowers. We shared it equally -- each of us received approximately $380,000.

The oil-friendly members of Congress then tried to suggest that we were paying off federal employees to promote our "extreme agenda," including making changes in the regulations on oil royalties. That's ridiculous.

The whistleblowers had been trying unsuccessfully to get the regulations changed for 10 years prior to our involvement; it's hardly as though we needed to pay them to do something they had been trying to do all along. Their whistleblowing rendered them powerless in the bureaucracy, where they had nothing to do with the later rule changes.

The Department of Interior has repeatedly refuted the Congressional accusations, but it made great headlines for those oil-friendly members of Congress in the Washington Times, so they kept pursuing it for a while.

We had told the Justice Department we were going to share the money with the two whistleblowers in October 1998, before we did it. However, in Spring 1999, when these members of Congress started making a big deal about it, the Justice Department said they were going to look into the propriety of our having shared the money with these two men. There's an ongoing investigation. They haven't yet asked to speak with us.

MM: What happened with the rules?
Brian: The Interior Department finally decided to change the regulations to make it easier for the government to catch the cheating.

However, beginning three years ago, members of Congress such as Texas Senator Kay Bailey Hutchison, started using "riders" on unrelated legislation to prevent any federal money from being spent to implement the new regulations. She kept attaching them to legislation that had to pass, such as hurricane relief spending bills and Kosovo spending bills.

It reached a fevered pitch of attention when a moratorium implemented through these riders was running out. Hutchison won by only a slim margin in the Senate to extend the moratorium.

Now we're waiting for the Appropriations conference committee to see what happens. But the White House has said that it would likely veto any bill with this moratorium.

We're talking about an estimated $66 million that would be paid to the federal government annually.

Frankly, I don't understand why there has been such a giant fight over $66 million. It seems like they're fighting on a matter of principle -- they don't want to let public-interest-minded Members of Congress and organizations beat them. That seems more important than what it's going to cost -- considering the 40 affected companies reported profits of $8.4 billion in the first half of 1999.

MM: You recently put out a report suggesting that defense procurement fraud is getting worse.
Brian: In the 1980s we were focused entirely on defense fraud. You may remember the old cartoons with then-Secretary of Defense Casper Weinberger with a toilet seat around his neck.

As a result of the publicity focused on defense fraud, a lot of important legislative reforms were implemented to protect the government from cheating by defense contractors.

Unfortunately, the combination of a very industry-friendly Congress and the Clinton administration's reinventing government campaign has enabled the defense industry to undermine many of those reforms.

The reinventing government campaign removed some of the essential oversight by the government over industry.

It was designed to promote a more trusting relationship, remove a lot of red tape and get the government to try to become more of a commercial consumer, relying on the prices set by the market. The problem is that, for the vast majority of high-priced items in defense spending, there is no market and we're relying on the companies to tell us what something is worth.

Now we're finding the $76 screw again. In our report ("Defense Waste & Fraud Camouflaged as Reinventing Government") we list a number of parts -- the Pentagon is spending 1,500 percent more for the same part now than it spent just a few years ago under the old reforms.

MM: What are you recommending by way of re-reforms?
Brian: The first people who have been cut in the effort to reduce the size of government are the auditors and investigators and people providing oversight at agencies like the Cost Accounting Standards Board, the Inspector General's Office and the Defense Contract Audit Agency. The work these people do is very important; those agencies actually save the government 10 times what they cost.

MM: If there is no market, as there isn't for a lot of these defense-related systems, are there other structural solutions to deal with the problem?
Brian: For a long time we've taken the position that the government should rely on an accounting method called "should cost." Let's say the Pentagon is going to buy the newest follow-on to item X, X plus 2. Rather than saying "we paid $500 last time so next year we'll pay $700," the Pentagon should look at the contractor's cost data. This is what happens in the commercial world.

One of the fundamental legislative changes was to make it almost impossible, in many cases, for government auditors to require cost data from the contractors.

MM: How has consolidation in the defense sector affected these issues?
Brian: With all of the recent mergers, there are now just a handful of companies, each with their own niche -- for example in electronics or aircraft. You have even less ability to grasp costs and prices, because there's no competition.

There used to be a number of contractors who bid for a contract. At some level they had at least a small incentive to keep the cost down to try to get the contract. That doesn't happen anymore.

MM: What's your sense of the culture of an industry that charges $76 for a screw?
Brian: I expect people on the commercial side to try to make as much money as they can, because that's what they're all about. But, we do expect some level of corporate accountability. We should also expect the government to fulfill its responsibility to protect the public from that natural level of greed. I really place the blame on the government for abdicating that responsibility.

MM: It's one thing to say that companies are greedy and they exist to make a profit. Isn't it something different if they are engaging in fraud?
Brian: The problem is these high prices often are not fraud. That's really the heart of the problem. When you eliminate any legal barriers to charging outrageous prices, it is not illegal anymore, so why shouldn't they do it?

The question then becomes: who are Members of Congress and members of the administration really working for when they pave the way for these rip-offs?

MM: In the 1980s the Pentagon seemed in league with the perpetrators of fraud. Does that exist now or is this a different kind of situation?
Brian: There's something of a dichotomy. At the higher levels of the Pentagon acquisition universe, there is the sense that they're all a team working with industry against the bad guys, who are, in their eyes, the auditor types. The auditors are desperate for someone to pay attention to them, because they see things as being as bad as they have ever been -- which is, of course, what makes them unpopular.

MM: What kind of response did you get to the defense report?
Brian: The press really doesn't care anymore. We've gotten a lot of calls from people in different nooks and crannies of the government who say they've heard about this report. It's exciting for us to see it working its way through the government; we hope it will prove useful from that perspective.

We're not seeing any interest in the Congress yet. We hope to get more attention, because that is where we need to repair some of the legislative damage that has been done.

MM: Is it the rule that, in general, companies will cheat the government if they can?
Brian: I've come to expect that. Maybe I'm unfair or cynical, but that's certainly what we've seen.

MM: Does that happen as well against commercial buyers?
Brian: I don't think it does with such abandon. When there is fraud committed against commercial consumers, the company is sued and loses future business. The government, on the other hand, regularly rolls over and hands out another plum contract to the same scofflaw who had just been caught cheating.

MM: What's different about the government versus a commercial buyer?
Brian: I think the difference is that commercial buyers look out for the best deal for the price. The bureaucratic incentive system in the Pentagon doesn't reward those who save money or cancel systems. There isn't a sense of accountability, that someone from Iowa is going to call and tell you we don't need this weapon system you bought.

Also, the decision-making process is so dispersed that there isn't a person that you could point to who is at fault for a bad purchasing decision.

In addition, when you're talking about hundreds of millions or even billions of dollars, the amounts of money become so staggering that you don't get a feel for how much could have been saved. It almost becomes pretend money.

MM: What are the remedies?
Brian: I think the fundamental idea in Gore's reinventing government was a good one. You reward people for cutting costs.

The problem is that the emphasis in streamlining has been in the wrong direction, and the contractors have taken advantage of that. You can't point to a single weapons system that this administration has bought that is cheaper than what was bought before. Not one.

Another thing is something that Senator Charles Grassley, R-Iowa, has tried to do: hold people accountable when there's a system that is failing.

Whoever the top person is in that department, you hold up their nomination for a higher position, or hold up their promotion to a higher rank and make a point about their responsibility. That will send a message to other people who have equivalent programs under them.

We've made a joke about how when you find a general lying to Congress, that's usually how they get their next star.

Years ago I wrote an article for a law review called "Lying Generals." We looked at four or five cases where generals and admirals knowingly lied to Congress. Every time they got rewarded with promotions. The reverse should be taking place. Someone at the highest level should fire someone for that and give the message that they actually appreciate Congressional or outside oversight.

MM: What has been the effect of the False Claims Act in fostering government accountability?
Brian: I think that's been the single most important tool for fighting fraud in the last 10 years. It finally rewards whistleblowers, giving them an incentive to expose fraud.

In the past, the only thing a whistleblower would have to look forward to was retaliation, probably job loss, and being essentially ignored.

Now, through the False Claims Act, when you have evidence of real fraud, you have the ability to actually get something done, and you might even get a little reward for that.

It has been a fabulous success. Just in the last few years, the Justice Department collected several billion dollars. Not only are we talking about real dollars that wouldn't be collected were it not for the law, but it also deters would-be defrauders. With the False Claims Act, there's not just the financial penalty but also the bad publicity that comes from successfully prosecuted cases.

MM: Is there anything you'd recommend to strengthen the law?
Brian: The whistleblower protections need to be expanded to protect not only government employees but also contractor employees.

One of the more dangerous tendencies has been that courts are allowing companies to use the government acquiescence defense -- that someone in the government knew about the fraud and therefore it was "approved."

When you're talking about the number of layers involved in government purchasing, there's often someone who knew about it and didn't do anything -- but that can't be acceptable as a defense.