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The U.S. government is the world's largest consumer. It spends more than
$200 billion annually on goods and services, for everything from jet fighters
to food services.
The Federal Acquisition Regulation (FAR) prescribes that these taxpayer
dollars only be awarded to "responsible" contractors that have a satisfactory
record of "integrity and business ethics," but frequently this regulation
is honored in the breach.
The top 43 contractors of fiscal year 1999 received over 45 percent
of all contract dollars awarded that year. In a year-long investigation,
the Project on Government Oversight (POGO) compiled administrative, civil
and criminal violations and alleged violations for these companies, using
a wide variety of sources, and including cases and settlements where a
company was found to be a responsible party, as defined under the Superfund
legislation, for the cleanup of hazardous substances at Superfund sites.
(Alleged misconduct here includes government claims against a company
resulting in a consent decree or other settlement without admission of
guilt or wrongdoing; it does not include allegations which did not result
in such final agreements. In all, the investigation documents over 400
instances of misconduct and alleged misconduct committed by these contractors.
POGO found that, since 1990, fine/penalty, restitution, settlement and
Superfund clean-up costs for the 43 top contractors totaled approximately
$3.4 billion. Sixteen of the 43 contractors have been convicted of a total
of 28 criminal violations; four of the top 10 have at least two criminal
convictions. Only one of the 43 contractors has been suspended or debarred
from doing business with the government. This suspension action, against
General Electric's Aircraft Division, lasted only five days after the
company pled guilty to diverting millions of dollars from the U.S. Foreign
Military Aid Program to finance the sale of F-16 engines to Israel.
These findings almost certainly understate the extent of contractor
misconduct, both because there is no comprehensive centralized database
of corporate crime and misconduct, and because the government has in the
last decade become much less aggressive in enforcing laws and regulations.
Criminal enforcement of administrative referrals for federal procurement
fraud, for example, fell from over 306 referrals in 1992 to only 102 in
1998. Prosecutions fell as well, with 36 percent of referrals prosecuted
in 1992 and only 28 percent prosecuted in 1998, according to data compiled
by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.
The number of referrals for civil actions from federal agencies to the
Department of Justice fell from over 35,000 in 1992 to only 6,324 in 1999,
according to TRAC.
The Department of Housing and Urban Development referred 2,945 civil
enforcement actions to the Department of Justice in fiscal year 1995,
but only 69 in fiscal year 1999. The Department of Defense referred 489
civil enforcement actions to the Department of Justice in fiscal year
1995, but only 98 in fiscal year 1999.
Rolling back Responsibility
In July 1999, the Clinton administration proposed a "contractor responsibility"
rule to address the issue of lawbreakers receiving federal contracts.
The rule would have:
- required contracting officers to consider a prospective contractor's
business record when awarding a contract;
- clarified that one element of a "satisfactory record of integrity
and business ethics," according to the FAR, is compliance with the law;
and
- required contractors to certify if they had been convicted of any
felonies within the past three years, or had any felony charges currently
pending against them, or had otherwise been found liable in a civil
proceeding.
The proposed rule met with strident corporate opposition. "This rule
gave government agents blanket discretion to blacklist federal contractors
based on subjective and arbitrary notions of satisfactory compliance with
any federal, state or even foreign law," says Randy Johnson, U.S. Chamber
of Commerce vice president for labor, immigration and employee benefits.
Elaine Guth of the Manufacturers Alliance/MAPI, echoed this line, arguing
that the rule was "overreaching, unconstitutional and failed to give due
process to contractors."
As a result of intense lobbying by the business industry, the contractor
responsibility rule had only a fleeting existence. Finally adopted by
the Clinton administration on its last day in office, January 19, 2001,
it was temporarily suspended by the Bush administration on January 20,
suspended again on January 31, and then permanently repealed on December
27, 2001 [see "Controlling Corporate Scofflaws or Blacklisting?" Multinational
Monitor, July/August 1999 and "Defending Contractor Irresponsibility,"
Multinational Monitor, May 2001.]
Bigger and Badder
Although public interest groups welcomed the contractor responsibility
rule, current regulations provide the government with the needed authority
to deny contracts to lawbreaking companies, even without the rule. This
authority is lodged in both the general federal acquisition regulations,
and in specific procurement and agency rules which authorize government
officials to put irresponsible companies on a list of entities ineligible
to receive government contracts.
The federal government annually takes suspension and debarment actions
against hundreds of contractors and individuals. Some of these actions
are taken against contractors for reasons other than a criminal conviction
or civil judgment, such as civil settlements or default on a student loan.
The one thing that these hundreds of suspension and debarment actions
have in common is that they are almost always taken against small contractors.
Large contractors enjoy an unfair advantage over smaller contractors
in navigating the federal government's suspension and debarment system.
Larger contractors have the financial means, plus high-priced attorneys,
that enable them to avoid suspension and debarment.
"Many of these large companies which continue to violate ethical and
criminal laws possess the legal manpower and expertise to avoid serious
penalties," says Rep. Albert Wynn, D-Maryland. "It is my concern that
while these companies continue to contract with the federal government,
small businesses who lack the funds and the �legal eagles' are put at
a disadvantage when competing for federal contracts."
Many of the largest federal government contractors have a record of
repeat misconduct and alleged misconduct, yet the government continues
to award them billions of dollars in contracts. The top 10 repeat offenders
identified through POGO's investigation covering the period since 1990
are: General Electric, with 63 instances of misconduct and alleged misconduct
and fines, penalties, restitution, settlements and clean-up costs totaling
$982,859,555; Lockheed Martin with 63 instances of misconduct or alleged
misconduct and $231,872,404 in payments; Boeing, 36 and $357,973,000;
Raytheon, 24 and $128,652,919; Northrop Grumman, 21 and $87,876,581; Fluor,
19 and $70,016,614; United Technologies, 18 and $214,836,860; TRW, 16
and $389,484,000; AT&T, 14 and $16,090,000; and Unisys, 12 and $182,245,692
in payments.
On rare occasions, the federal government does suspend large contractors.
The Navy suspended General Dynamics twice in 1985 for procurement fraud.
The first suspension lasted five months and the second lasted two months.
Also in 1985, the Air Force suspended General Electric for five months
as a result of procurement fraud.
But inaction is the norm. A few years after GE's five month suspension,
the Defense Department established an office specifically to handle GE
violations because the Pentagon believed General Electric was violating
laws at such a high rate. At the request of the Department of Defense
Inspector General, the Philadelphia Remedies Unit was established within
the Defense Contract Management Agency's Mid-Atlantic District on June
1, 1990. During the three-year existence of this unit, 163 investigative
and 147 administrative matters were resolved, resulting in the government
recovering a total of $221.7 million from General Electric on noncompliance
matters.
Regarding suspension and debarment, the Unit's report states: "None
of the recommendations made for action against a corporate entity of the
General Electric Company were approved by the debarring officials at DLA
[Defense Logistics Agency] or the Army who reviewed these recommendations.
In the only matter involving a GE entity which resulted in administrative
action, the DLA debarring official issued a suspension against the Aircraft
Engine Group and lifted it five days later. The result of these efforts
make it fairly clear that, at least in the case of the General Electric
Company and probably other major contractors, administrative action is
not a threatening remedy."
The report concluded, "Without a real possibility of the issuance of
administrative action, the government loses an important remedial tool
to force compliance."
The Administrative Agreement Out
A major problem in enforcement of contractor responsibility and debarment
rules is that, especially in the defense sector, the government frequently
relies on a single contractor, or just a few contractors, to provide big
ticket items such as major weapons systems. A wave of corporate mergers
in the defense industry over the past 10 years -- supported by the Pentagon
-- has exacerbated the situation. As a result, procurement officials often
find themselves constrained by the fact that the government is wholly
reliant on certain companies for specific projects.
The contractors' preferred alternative to suspension or debarment is
an administrative agreement. The goal of these agreements is to change
the corporate culture of a company, to make it a responsible and ethical
company, through implementation of a corporate ethics program.
There is reason to doubt whether these agreements foster ethical behavior,
however. For instance, in January 1995, Lockheed Martin pled guilty to
bribing an Egyptian official. In addition to paying a $24.8 million fine,
Lockheed Martin entered an administrative agreement with the Air Force.
Since implementing the agreement, Lockheed Martin and its subsidiaries
have been accused of at least eight violations -- related to procurement
fraud, environmental pollution, employment discrimination, shareholder
fraud, nuclear safety violations and violations of the Arms Export Control
Act -- and have paid approximately $7 million in fines/penalties and settlements.
Similarly, Litton Industries paid $82 million to settle allegations
of procurement fraud and entered into an administrative agreement with
the Navy in January of 1995. Since implementing the 1995 agreement, two
Litton subsidiaries pled guilty to two criminal violations for making
false statements and paid approximately $17.8 million in fines.
Despite these examples suggesting that administrative agreements do
not adequately protect the government's interests, the government tends
to rely on these agreements as the preferred tool to deal with large contractors.
An alternative approach to deter companies from breaking the law is
to actually suspend and debar them. The leverage of the federal government's
enormous buying power can be used both to protect taxpayers from unethical
corporations whose record suggests they are likely to deliver shoddy goods
and services, mistreat workers or defraud the government, and to serve
the broader public policy goal of instilling respect for the law among
large corporations. States and local governments can take similar measures,
with similar impact.
There are few administrative difficulties in pursuing such a course.
The challenge is only one of generating sufficient political will.
Creating a centralized database of information on corporate misconduct
would enable federal procurement officials to make informed contracting
decisions, and enable debarment officials to make informed suspension
and debarment decisions as well.
To ensure procurement officers and debarment officials are fully informed,
contractors should be required to disclose current suspensions or debarments,
litigation initiated against them on either the federal or state level
in the past three years, and any administrative agreements they are currently
implementing.
Armed with adequate information, debarment officials should use suspension
and debarment actions equally against large and small contractors.
And to ensure the even-handed and more rigorous application of relevant
regulations, suspension or debarment should be mandatory for a contractor
who is criminally convicted or has had a major civil judgment rendered
against it more than once in a three-year period.
Seth Morris is a research assistant with the Project
on Government Oversight.
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