Army Reconsiders, Reconfirms FMTV Award to Oshkosh
Our latest report
on the on-going saga of the Army’s Family of Medium Tactical Vehicles
(FMTV) award indicated the areas of protest—both the areas sustained
and those denied by the GAO. At that time, we predicted, “unless the
Army seriously misevaluated the offers, or seriously misled the GAO, we
don't think the original award to Oshkosh will be changed.” Looks like our prediction was spot-on.
On February 12, 2010 the Army announced that it had completed its “re-evaluation” and, as a result—
Oshkosh
Corp. has been awarded a competitive, five-year requirements contract
for production of up to 12,415 trucks, 10,926 trailers, and associated
support and engineering services. The total estimated contract value at award was $3.023 billion.
The official announcement notes that a peer-review of the re-evaluation was performed by the Office of the Secretary of Defense.
This is bad news for BAE Systems, whose Sealy, Texas subsidiary was the FMTV incumbent contractor. According to this report by the Wall Street Journal—
With
confirmation of this decision the group will include in its 2009
accounts an impairment of goodwill and other intangible assets
amounting to GBP592 million relating to the Armor Holdings Inc.
transaction and specifically the FMTV product line. [Currency conversion: US$ 927.2 million.]
Predictably, Texas politicians were unhappy at the outcome. One “gentleman” from Texas had this to say—
For
nearly two decades, Sealy, Texas, has been the manufacturing home of
the Army’s FMTV truck. There, thousands of proud Texans have
contributed countless hours to the production of world-class vehicles
for our troops, who deserve – and have received – nothing less than the
best. The Army’s decision to discard this important and valuable asset
is ill-informed, and it makes no sense.
Naturally, Oshkosh was “very pleased” by the outcome. Life is sweet in Wisconsin these days, if a bit chilly.
Possible Changes to Business Conduct/Ethics Programs and Related Internal Controls
Most
readers know that in late 2008 the FAR was revised to require
“mandatory disclosure” of suspected employee violations of certain laws
connected with the award or performance of a Federal contract to agency
Inspector Generals. We wrote about the mandatory “contractor
disclosure” program here, and you can visit the Defense Department IG website for such disclosures at this link. Less well known, but just as important, was that the same FAR revisions implemented requirements for “an
effective internal control system” that will—“(A) Establish standards
and procedures to facilitate timely discovery of improper conduct in
connection with Government contracts; and (B) Ensure corrective
measures are promptly instituted and carried out.” (See the contract clause at FAR 52.203-13 (Dec. 2008).)
The
FAR provides details regarding what constitutes an effective ethics
program internal control system, saying that “at a minimum, the
Contractor’s internal control system shall provide for the following:”
- Assignment
of responsibility at a sufficiently high level and adequate resources
to ensure effectiveness of the business ethics awareness and compliance
program and internal control system.
- Reasonable
efforts not to include an individual as a principal, whom due diligence
would have exposed as having engaged in conduct that is in conflict
with the Contractor’s code of business ethics and conduct.
- Periodic
reviews of company business practices, procedures, policies, and
internal controls for compliance with the Contractor’s code of business
ethics and conduct and the special requirements of Government
contracting, including—
o Monitoring and auditing to detect criminal conduct;
o Periodic
evaluation of the effectiveness of the business ethics awareness and
compliance program and internal control system, especially if criminal
conduct has been detected; and
o Periodic
assessment of the risk of criminal conduct, with appropriate steps to
design, implement, or modify the business ethics awareness and
compliance program and the internal control system as necessary to
reduce the risk of criminal conduct identified through this process.
- An
internal reporting mechanism, such as a hotline, which allows for
anonymity or confidentiality, by which employees may report suspected
instances of improper conduct, and instructions that encourage
employees to make such reports.
- Disciplinary action for improper conduct or for failing to take reasonable steps to prevent or detect improper conduct.
- Timely
disclosure, in writing, to the agency OIG, with a copy to the
Contracting Officer, whenever, in connection with the award,
performance, or closeout of any Government contract performed by the
Contractor or a subcontractor thereunder,
the Contractor has credible evidence that a principal, employee, agent,
or subcontractor of the Contractor has committed a violation of Federal
criminal law involving fraud, conflict of interest, bribery, or
gratuity violations found in Title 18 U.S.C. or a violation of the
civil False Claims Act (31 U.S.C. 3729–3733).
- Full cooperation with any Government agencies responsible for audits, investigations, or corrective actions.
Much of the language regarding the elements of an effective ethics program internal control system come from the United States Sentencing Guidelines (USSG) of the United States Sentencing Commission (USSC), as the FAR Councils openly admitted when they promulgated the rules.
So when the USSC proposes revisions to the USSG, it’s worth noting—as
such changes may have downstream impacts to contractors’ internal
control systems.
On
January 21, 2010, the USSC published proposed amendments to the USSG.
The entire set of proposed changes (a lengthy read primarily of interest to attorneys) can be found here. The area of most relevance to this topic is §B2.1. (“Effective Compliance and Ethics Program”). The 2010 proposed amendments in this area include the following sentencing notes—
Both high-level personnel and substantial authority personnel should be aware of the organization’s document retention policies and conform any such policy to meet the goals of an effective compliance program under the guidelines and to reduce the risk of liability under the law (e.g. 18 U.S.C. § 1519; 18 U.S.C. § 1512(c)).
The seventh minimal requirement for an effective compliance and ethics program provides guidance on the reasonable steps that an organization should take after detection of criminal conduct. First, the organization should respond appropriately to the criminal conduct. In the event the criminal conduct has an identifiable victim or victims the organization should take reasonable steps to provide restitution and otherwise remedy the harm resulting from the criminal conduct. Other appropriate responses may include self-reporting, cooperation with authorities, and other forms of remediation. Second, to prevent further similar criminal conduct, the organization should assess the compliance and ethics program and make modifications necessary to ensure the program is more effective. The organization may take the additional step of retaining an independent monitor to ensure adequate assessment and implementation of the modifications.
The nature and operations of the organization with regard to particular ethics and compliance functions. For example, all employees should be aware of the organization’s document retention policies and conform any such policy to meet the goals of an effective compliance program under the guidelines and to reduce the risk of liability under the law (e.g. 18 U.S.C. § 1519; 18 U.S.C. § 1512(c)).
At §BD1.4.
(“Recommended Conditions of Probation – Organizations”), the USSC makes
several policy statements regarding conditions to be imposed on
organizations that are on probation. Among those statements is a
discussion of court-ordered third-party monitors. When a court orders
such a compliance monitor, “The independent corporate monitor must have
appropriate qualifications and no conflict of interest in the case. The
scope of the independent corporate monitor’s role shall be approved by
the court. Compensation to and costs of any independent corporate monitor shall be paid by the organization.”
For organizations on probation, periodic reports must be made to the court. Among other things, those reports “shall
disclose any criminal prosecution, civil litigation, or administrative
proceeding commenced against the organization, or any investigation or
formal inquiry by governmental authorities of which the organization
learned since its last report.” In addition, the organization must
immediately notify the court (or its probation officer) “upon learning
of (A) any material adverse change in its business or financial
condition or prospects, or (B) the commencement of any bankruptcy
proceeding, major civil litigation, criminal prosecution, or
administrative proceeding against the organization, or any
investigation or formal inquiry by governmental authorities regarding the organization.” These organizations must also submit to a “reasonable number of regular or unannounced examinations of facilities.”
The
foregoing may seem a bit onerous, but somebody on TV once said, “Don’t
do the crime if you can’t do the time.” In any case, the foregoing
proposed changes help inform compliance practitioners of the
expectations of the Federal government.
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Researching DOD’s QDR and FY 2011 Budget Request
Thanks to the National Defense Industrial
Association (NDIA) for making the latest DOD Quadrennial Defense
Review (QDR) and its FY 2001 Budget request easy to research. We
previously wrote about DARPA’s FY 2011 Budget Request, and
provided some highlights gleaned from its 500+ pages of
discussion. That’s a lot of
information to get through, and DARPA is small potatoes compared to the
entire Defense Department.
So we are pleased to acknowledge NDIA’s recent
“Legislative and Federal Issues Update,” which contains several tools
that can be used to facilitate research.
· QDR
documents can be found here.
· Don’t
know what the QDR is and why it’s important to the future of DOD’s
program prioritization (and therefore funding prioritization)? Go
here
first.
In addition, NDIA provides several resources
covering DOD’s FY 2011 Budget request. These include:
· Program Costs by Weapon System, an overview of
each major acquisition program. It can be found here.
· The FY 2011 Defense Budget “Fact
Sheet” available
here.
· Defense Budget Overview Book,
available here.
Finally, the DOD’s FY 2011 Defense
Budget Briefing Charts can be found
here.
Companies of all sizes that sell
goods and services to the Pentagon should become members of industry
advocacy groups. Not only do the groups advocate on behalf of the
entire industry and often have access to legislative committee staff
members, but such groups are an excellent way to network with other
contractors and to get access to information such as that noted above.
Want to join NDIA? Then go here.
Bribery, Conspiracy, and Espionage: Business as Usual in the Defense Industry?
This
just in—some people are just crooked, and all the business conduct
policies and ethics awareness programs in the world won’t do a thing to
stop these pieces of out-of-spec humanity from their wrongdoing. Think
we exaggerate? Read on.
- Michael
Wheeler, a former Lieutenant Colonel in the U.S. Army Reserve, was
sentenced in January 2010 to 42 months in prison for “his participation
in a wide-ranging bribery conspiracy involving the U.S. government, the
Republic of Iraq and the Coalition Provisional Authority - South
Central Region (CPA-SC) in Al-Hillah, Iraq,” according to this press release by the Department of Justice. According to the DOJ—
Wheeler, along with Whiteford
and Harrison, conspired from December 2003 to December 2005 with at
least three others—Robert Stein, at the time the comptroller and
funding officer for the CPA-SC; Philip H. Bloom, a U.S. citizen who
owned and operated several companies in Iraq and Romania; and former
U.S. Army Lt. Col. Bruce D. Hopfengardner—to
rig the bids on contracts being awarded by the CPA-SC so that more than
20 contracts were awarded to Bloom. In total, Bloom received
approximately $8 million in rigged contracts. … Bloom, in return,
provided Whiteford, Harrison, Wheeler, Stein, Hopfengardner
and others with more than $1 million in cash, SUVs, sports cars, a
motorcycle, jewelry, computers, business class airline tickets, liquor,
promise of future employment with Bloom and other items of value.
Bloom admitted he laundered more than $2 million in currency that Whiteford, Harrison, Wheeler, Hopfengardner,
Stein and others stole from the CPA-SC that had been designated for the
reconstruction of Iraq. Bloom then used his foreign bank accounts in
Iraq, Romania and Switzerland to send some of the stolen money to
Harrison, Stein, Hopfengardner and other Army officials in return for them awarding contracts to Bloom and his companies.
… On Jan. 29, 2007, co-conspirator Stein was sentenced to nine years in
prison for related charges of conspiracy, bribery and money laundering,
as well as weapons possession charges … Stein was also ordered to forfeit $3.6 million …
On Feb. 16, 2007, co-conspirator Bloom was sentenced to 46 months in
prison for related charges of conspiracy, bribery and money laundering [and] was also ordered to forfeit $3.6 million … On June 25, 2007, Hopfengardner was sentenced to 21 months in prison for conspiracy and money laundering related to this scheme. Hopfengardner was also ordered to forfeit $144,500. On Dec. 8, 2009, Whiteford was sentenced to 60 months in prison for conspiring to commit bribery and ITSP [Interstate Transportation of Stolen Property]. He was also ordered to forfeit the things of value he received from Stein and others, including a Breitling watch, a Toshiba laptop computer and $10,000 in cash. On June 4, 2009, Harrison was sentenced to 30 months in prison and ordered to pay $366,640
in restitution. Harrison pleaded guilty on July 28, 2008, admitting
that she took more than $300,000 from the CPA-SC while she was deployed
there …
Harrison also admitted that she received a Cadillac Escalade from Bloom
and that she helped to move unregistered firearms from a hotel in North
Carolina to Stein’s home. On Dec. 10, 2009, Driver was sentenced to
six months home confinement and ordered to pay $36,000 in restitution
for his role in laundering portions of stolen CPA money brought from
Iraq back into the United States by Harrison, his wife.
- Also in January 2010, Ryan Scott McMonigle
pleaded guilty to “one count of aiding and abetting the solicitation of
a kickback” in connection with the award of subcontracts under a US
Agency for International Development (US AID) prime contract to restore infrastructure in Afghanistan, according to this DOJ press release. The DOJ reported that—
McMonigle
admitted that he assisted others in the solicitation of a kickback from
a private security vendor in return for favorable treatment for this
potential bidder in connection with the award of one or more
subcontracts. According to court documents, the subcontracts provided
for private security services to protect USAID personnel and
contractors in Afghanistan operating under the AIRP contract. The
charge of aiding and abetting the solicitation of a kickback carries a
maximum penalty of 10 years in prison and a $250,000 fine. The maximum
fine may be increased to twice the gain derived from the crime or twice
the loss suffered by the victims of the crime, if either of those
amounts is greater than the statutory maximum. McMonigle is scheduled to be sentenced on Nov. 5, 2010. Bryan
Lee Borrows, who was also employed in Kabul by Civilian Police
International, pleaded guilty on Sept. 2, 2009, to conspiring with
others to solicit kickbacks from private security vendors in return for
favorable treatment for those potential bidders in connection with the
award of one or more subcontracts. Burrows was sentenced on Dec. 19, 2009, to 12 months and one day in prison for his role in the scheme. In
addition, Scott Anthony Walker, of Australia, pleaded guilty on Nov.
16, 2009, to one count of conspiracy to solicit a kickback, related to
his role in the scheme. Walker was arrested in the United States on
Nov. 11, 2009, and is scheduled to be sentenced on Feb. 5, 2010.
- Finally, on February 10, 2010, Dongfan
“Greg” Chung (age 73) was sentenced to 15 years in Federal prison for
“six counts of economic espionage and acting as an unregistered foreign
agent of the People’s Republic of China (PRC), for whom the engineer
stole Boeing trade secrets related to several aerospace programs,
including the Space Shuttle,” according to this article.
Chung was employed by Rockwell International from 1973 until the
company was acquired by Boeing in 1996. He was employed by Boeing
until he retired in 2002, but returned as a consultant from 2003 until
2006. Chung was a naturalized U.S. citizen and held a Secret
clearance. The
indictment alleged that, in addition to trying to sell technology
related to the Space Shuttle, Chang also tried to sell “trade secrets”
related to the C-17 and the Delta IV rocket. The article stated: “Individuals
in the Chinese aviation industry began sending Chung “tasking” letters
as early as 1979. Over the years, the letters directed Chung to collect
specific technological information, including data related to the Space
Shuttle and various military and civilian aircraft. Chung responded in
one letter indicating a desire to contribute to the ‘motherland.’” The
article reported that: “In various letters to his handlers in the PRC,
Chung referenced engineering manuals he had collected and sent to the
PRC, including 24 manuals relating to the B-1 Bomber … between
1985 and 2003, Chung made multiple trips to the PRC to deliver lectures
on technology involving the Space Shuttle and other programs, and
during those trips he met with officials and agents of the PRC
government. Chung and PRC officials exchanged letters that discussed
cover stories for Chung’s travel to China and recommended methods for
passing information….” According
to the article, Chung “begged the court for a lenient sentence, stating
he had taken the information to write a book.” The Judge was not
impressed and handed out a long sentence to “provide a strong deterrent
to the PRC not to send its agents here to steal American military
secrets.”
Most
individuals in the defense industry are good people dedicated to doing
the right thing at all times, often motivated by patriotism and a sense
of public service. We don’t want to suggest otherwise. But these
three stories, coming essentially on top of one another, and put in
context of other articles we’ve posted recently about fraud and corruption,
should remind readers that there is enough wrongdoing to justify all
the many auditors and law enforcement officials we encounter in this
highly regulated industry.
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