Tag Archives: Fraud and Abuse

Taking Washington’s Revolving Door To A Criminal Extreme

Standard
(Illustration: CJ Ostrosky / POGO)

THE PROJECT ON GOVERNMENT OVERSIGHT (POGO)

The Public Company Accounting Oversight Board (PCAOB) was created after accounting scandals at major companies such as Enron and WorldCom wiped out thousands of jobs and cost investors billions of dollars.

The supposedly independent regulator is inextricably tied to the industry it oversees, a Project On Government Oversight (POGO) investigation found.

______________________________________________________________________________

“On a spring day in 2015, his last day on the job at the board that oversees corporate auditors, Brian Sweet stuffed an external hard drive containing confidential board records into his computer bag along with hard copies of other confidential board documents.

Then Sweet said goodbye to his life as a regulator inspecting the big accounting firm KPMG and walked through the revolving door to a new job at KPMG’s Park Avenue offices in New York. The partnership at KPMG came with pay of $525,000, more than double the approximately $240,000 he had been getting at the oversight board.

Only a thin, porous border separates the auditing regulator from the auditing industry.

As Sweet would later testify, his bosses at KPMG soon made clear how they expected him to earn it.

KPMG had been performing disastrously on inspections conducted by the Public Company Accounting Oversight Board (PCAOB), and it was under pressure to improve. In the annual inspections, the oversight board scrutinizes a sample of the audits that major accounting firms perform on companies listed on U.S. stock markets. Advance word of which audits the PCAOB planned to inspect would give KPMG an edge.

On Sweet’s first day at the firm, over lunch at a posh Mediterranean restaurant, KPMG brass pumped him for information on the PCAOB’s inspection plans. His second day on the job, in a tête-à-tête in an executive conference room, as Sweet recalled, his boss’s boss referred to the uneasiness Sweet had shown divulging such information and told him he needed to remember where his paycheck came from. His fourth day on the job, while Sweet and his new boss, Thomas Whittle, walked back to the office from lunch at a Chinese restaurant, Sweet told Whittle that he knew which audits the oversight board planned to inspect that year—and that he had taken PCAOB documents with him.

That evening, “Thomas Whittle came by my office where I was sitting and he leaned against the door and asked me to give him the list,” Sweet testified.

Ties That Bind

Brian Sweet was part of a pipeline that funneled confidential information from KPMG’s prime regulator to KPMG. 

The conspiracy took Washington’s notorious revolving door to a criminal extreme. According to the Justice Department, KPMG partners hired PCAOB employees, pumped them for inside information on the oversight board’s plans, and then exploited it to cheat on inspections. Meanwhile, PCAOB employees angled for jobs at KPMG and divulged regulatory secrets to the audit firm.

The case laid bare inner workings of the revolving door in detail seldom seen.

The case has led to a series of convictions and guilty pleas—and a $50 million administrative fine against KPMG. It also laid bare inner workings of the revolving door in detail seldom seen.

Beyond the conduct labeled as criminal, in little-noticed testimony the case revealed a series of side contacts between senior KPMG partners and top officials of the PCAOB—one, or in some cases two, members of its five-member governing board. The low-profile meetings at locations such as the Capital Hilton, which is steps from the PCAOB’s Washington headquarters, gave KPMG leaders a preview of questioning they would later face at periodic meetings with the full board.

But all of that is just part of a larger picture: The supposedly independent regulator is inextricably tied to the industry it oversees, a Project On Government Oversight (POGO) investigation found.

Hundreds Pass Through Revolving Door

Based on an analysis of profiles from the professional networking site LinkedIn, as of November 2019, it appeared that more than 40% of PCAOB employees had worked for the so-called Big Four audit firms—Deloitte & Touche, Ernst & Young (EY), KPMG, and PricewaterhouseCoopers (PwC), POGO found. The Big Four overwhelmingly dominate auditing of the biggest corporations.

A search of LinkedIn turned up more than 340 people whose profiles said that they were currently employed at the PCAOB and that they previously worked for at least one of the Big Four. The oversight board’s budget for 2019 included a staff of 838.

At the same time, LinkedIn profiles showed more than 160 people working for the Big Four who had previously worked for the PCAOB. Scores have gone back and forth.

The numbers may not be complete; they include only people on LinkedIn whose profiles POGO could locate and access.

For current employees who went directly from the Big Four to the PCAOB or vice versa, half of the LinkedIn profiles indicated they did so with a gap of two months or less.

Ties like those may help explain why a supposedly strong and independent regulator has a history of bending to industry.

How an Agency You’ve Never Heard of Is Leaving the Economy at Risk

A federal watchdog you’ve probably never heard of is supposed to be protecting your financial security. But in key respects it’s been doing a feeble job.Read More

For example, as POGO has documented, the accounting oversight board has a weak record of disciplining Big Four auditors for apparent violations identified by its own staff. When it does take disciplinary action, it has shielded auditors and their clients from public scrutiny by withholding key information from public records.

Though Congress empowered the oversight board to write new rules for auditors, the PCAOB has to a significant extent preserved the industry-written rules it inherited—rules that can make it difficult to hold auditors accountable. Recently, it has watered down rules meant to keep auditors relatively independent from the companies they audit.

In addition, the oversight board has ultimately refrained from adopting some of the most far-reaching reforms it has considered, such as requiring companies to periodically change audit firms. That would assure that, from time to time, new firms would step in with a strong incentive to expose any fraud or error their predecessors condoned or overlooked—lest they become liable for those problems themselves.

PCAOB spokesperson Torrie Matous did not respond to questions for this story.

Promises Unfulfilled

The PCAOB was created after accounting scandals at major companies such as Enron and WorldCom wiped out thousands of jobs and cost investors billions of dollars. Its mission is to protect investors, including anyone who is depending on a pension fund, 401(k) account, or individual retirement account to support them in retirement. It oversees the audit firms that certify corporate financial statements. More specifically, it is responsible for writing, checking compliance with, and enforcing auditing rules. The goal is to reduce the danger that companies will cook their books or otherwise mislead investors.

The Public Company Accounting Oversight Board, Explained:

When Congress designed the oversight board in 2002, lawmakers said it would provide an independent check on corporate auditors. They said it would end a system in which corporate auditors largely regulated themselves.

“This legislation establishes a strong independent accounting oversight board, thereby bringing to an end the system of self-regulation in the accounting profession which, regrettably, has not only failed to protect investors, as we have seen in recent months, but which has in effect abused the confidence in the markets,” Paul Sarbanes (D-MD), the chairman of the Senate Banking Committee at the time and chief author of the legislation, said on the Senate floor.

“This legislation builds a strong and independent board to oversee the accounting industry,” echoed Senator Mike Enzi (R-WY). “It will eliminate the climate of self-regulation that has historically guided accounting.”

As the connections between the regulators and the regulated illustrate, the promises of independence were overstated.

Swamped

The revolving door is hardly unique to the PCAOB. It’s endemic to Washington, and it’s one of the reasons federal Washington is known as a swamp. Though the revolving door is subject to various ethics rules, it’s not inherently illegal.

It can infuse regulatory agencies with knowledge of industry and expertise. It also comes with risks. Will revolvers use regulatory power to serve the public interest or to advance the private agendas of once and future employers in the private sector? Can regulators who come from industry escape the culture, values, and world view of the firms that shaped them?

When they move from agencies to industry, will they use the knowledge and relationships they developed working as regulators to help their employers game the system and gain an unfair advantage? Fundamentally, will the regulatory agency be captured by the industry it regulates?

Captured: Financial Regulator At Risk

The revolving door between the Big Four audit firms and their regulator, the Public Company Accounting Oversight Board, spins in many troubling ways.Read the related story

To some extent, it may be unsurprising that people who oversee corporate auditors have a background in corporate auditing, and that people who leave the regulatory agency go on to earn livelihoods that draw upon their professional knowledge and experience.

“It is essential that regulatory bodies understand market developments and that firms incorporate regulators’ views when implementing new technologies and techniques,” Julie Bell Lindsay, executive director of Center for Audit Quality, an industry-funded advocacy group for audit firms, said in an unsolicited statement for this story. Lindsay was responding to inquiries POGO had made to audit firms.

Ernst & Young spokesperson John La Place expressed a similar view.

“In the ordinary course of its business, EY hires qualified professionals who have prior experience at government entities,” he said by email in response to questions from POGO. “These individuals contribute valuable insights and diverse perspectives that enhance the firm’s quality of service to clients in addition to addressing risks, complying with regulations and upholding our values and commitment to independence.”

But in the depth and breadth of its ties to four huge firms that wield highly concentrated power, the accounting oversight board appears to take the revolving door to an unusual extreme.

The agency and any agency employees contemplating future private-sector careers related to auditing are exceptionally dependent on the very oligopoly they are responsible for overseeing.

Combined with the PCAOB’s extreme lack of transparency and public accountability—it operates largely in secret, makes limited public disclosures, and is immune from the Freedom of Information Act—it’s a recipe for trouble.

Pumped

By the end of 2014, KPMG was in deep trouble with its overseers. That year, the firm failed 54% of its inspections.

At a December 2014 meeting with the PCAOB’s governing board, KPMG leaders were sharply rebuked.

Looking back on it from the witness stand, a senior KPMG partner named Thomas Whittle remembered the meeting as “sort of a punch in the gut.”

Whittle shared managerial responsibility for improving the firm’s inspection results, and his turnaround strategy included recruiting a PCAOB employee named Brian Sweet. Sweet understood KPMG’s problems better than most, because he was one of the people assigned to inspect the firm.

To welcome Sweet to the firm, several KPMG partners, including David Middendorf, the head of the firm’s national office, took him to lunch at Avra, a Greek restaurant near KPMG’s Manhattan executive offices where the current fare includes octopus carpaccio and tuna tartare. By Sweet’s sworn account, the conversation moved far beyond pleasantries. As they sat in a curved booth, Sweet testified, Middendorf and another partner asked him about the PCAOB’s still secret inspection plans for the year.

In Sweet’s telling, he acknowledged that he knew which audits the oversight board planned to inspect. They asked if a company called Stonegate Mortgage was one of them. Sweet recalled that he “confirmed it to them without trying to just come right out and say yes.” Middendorf asked if a big block of time the PCAOB had already indicated it had reserved for an inspection in San Francisco was for Wells Fargo.

Botched Audits: Big Four Accounting Firms Fail Many Inspections

In the most recent annual inspections of the U.S. arms of the Big Four for which the oversight board has reported results, inspectors found that each firm botched at least 20% of their audits.Read More

“I remember kind of shrugging my shoulders and indicating, ‘Well, could it be anyone else?’” Sweet testified.

As Sweet recalled, Middendorf slapped the table and exclaimed, “I knew it.”

Why didn’t Sweet just say yes? “Because I knew that by directly answering ‘yes’ was a very clear violation of the PCAOB’s ethics code because it was such confidential information,” Sweet testified when Middendorf went on trial last year for his role in the affair.

Testifying in his own defense, Middendorf described the lunch in more benign terms. He testified that he told Sweet, “I only want you to share what you’re allowed to share.” He added that he did not feel he pressured Sweet.

The day after the lunch, Sweet met with Middendorf in an executive conference room. Middendorf was Whittle’s boss. As Sweet recalled, Middendorf referenced Sweet’s uneasiness confirming Stonegate Mortgage and indicated “that while I might have felt that that was a gray area, that I was there at the firm to share insight and add value wherever I could and that was his expectation of me.” Middendorf urged him to maintain strong contacts with his former colleagues at the PCAOB, Sweet testified.

“I remember that David Middendorf also indicated or told me that I needed to remember where my paycheck came from and that I was now a partner at KPMG,” Sweet testified.

According to the Justice Department, KPMG partners hired PCAOB employees, pumped them for inside information on the oversight board’s plans, and then exploited it to cheat on inspections.

By Sweet’s account, he got the message.

Later that week, as Sweet and his immediate supervisor, Whittle, walked back to the office from lunch at a Chinese restaurant, Sweet told Whittle that, not only did he know the PCAOB’s inspection plans for the year, but also he had taken PCAOB documents with him. That evening, “Thomas Whittle came by my office where I was sitting and he leaned against the door and asked me to give him the list,” Sweet testified.

Sweet told Whittle he needed a few minutes. In part, he needed time to think. Then, he fished out one of the documents he had taken with him from the PCAOB, a partial list. “I went over to Tom’s office and went to his desk and handed him the list.”

Sweet described taking the document back and then returning to his hotel room for the night.

Whittle remembered those events somewhat differently. According his testimony, as best he could recall, the list didn’t come up until he stopped by Sweet’s office, and he initially balked at accepting it. Before taking such a serious step—a step he thought was wrong—he wanted to check with Middendorf, he testified. According to Whittle, Middendorf told him to get the list.

There’s no dispute over what happened the following morning. By email, Whittle asked Sweet to give the list to his executive assistant. “Brian, could you have Lisa scan and send me the banking selection list? Thanks,” Whittle wrote.

Sweet gave Whittle’s assistant more than just the list of bank audits the PCAOB planned to inspect.

“I’d appreciate the team’s discretion to make sure it isn’t too widely disseminated.”

BRIAN SWEET IN AN EMAIL TO THOMAS WHITTLES

“Just so you know, it is actually the full list of anticipated inspections (including non-banks),” Sweet told Whittle by email. “I’d appreciate the team’s discretion to make sure it isn’t too widely disseminated,” he added.

“Brian, got it and understand the sensitivity,” Whittle replied. “Have … a great weekend. Enjoy your DOM.”

The “DOM,” Sweet explained, was a bottle of Dom Perignon champagne the firm had sent to welcome him as a newly minted partner.

But, during Sweet’s early days at the firm, Whittle also offered a warning, Sweet testified. “I remember him telling me that I was most valuable to him the first day that I joined KPMG and effectively that I had less value as time went on.” In other words, “That my usefulness was only because of the role that I played in the PCAOB and that the utility of what I knew, the benefit that the firm got from what I knew would decline over time.”

Whittle recounted that conversation in similar terms.

“I told him that he was of most value because he had just come from the PCAOB and knew how they operated and knew what their issues were, but over time that information will be less relevant as they make changes in personnel and they come up with new issues,” Whittle testified.

Whittle also said he wanted to make sure that, as time passed, Sweet was “seen as adding value to the firm in other ways.”

Sweet and Whittle pleaded guilty to federal charges and testified for the prosecution as cooperating witnesses when Middendorf stood trial in early 2019. The case offered a view of the revolving door’s inner workings and showed that only a porous border separated the auditing regulator from the auditing industry.

“Anonymous Email”

Sweet was part of an expanding network that connected KPMG to the PCAOB, according to his testimony and other evidence presented in court.

When Sweet decided to leave the PCAOB for a partnership at KPMG in 2015, he recalled, he shared the news with a PCAOB colleague named Cynthia Holder, who, like him, worked on inspections of KPMG.

“She was very happy for me but also told me that if the firm, KPMG were hiring other people, that she also wanted to leave the PCAOB and would love to join KPMG,” Sweet recalled.

During his first days at the firm, Sweet called Holder and requested a favor. Could she remind him about some information that he had helped draft for a report the PCAOB was preparing about KPMG?

“She was very happy for me but also told me that if the firm, KPMG were hiring other people, that she also wanted to leave the PCAOB and would love to join KPMG.”

TESTIMONY OF BRIAN SWEET

Less than two weeks after Sweet arrived at KPMG, he got an email from Holder’s personal AOL email account. The subject line: “Anonymous Email.” The body of the email contained only a smiley face. But attached was the information Sweet had requested.

It was, he testified, “very valuable” to KPMG.

Within several weeks of arriving at KPMG, Sweet testified, he got a call from Holder on a different matter. Holder was working on a PCAOB inspection of a KPMG audit, and she wanted Sweet’s advice. She was considering citing a potential problem with the audit, and she wanted his opinion, Sweet testified.

Sweet said he advised her not to write it up. He testified that she agreed, saying, “OK, yeah, that’s what I thought too.”

Later that year, Sweet testified, he helped Holder get a job at KPMG. Following his example, he said, she brought confidential PCAOB records with her.

KPMG made a concerted effort to recruit others from the oversight board, and the firm tapped Sweet to identify candidates, Sweet and Whittle testified. Like Holder, some were involved in inspecting KPMG and had expressed an interest in joining the firm.

One sent Sweet a copy of his résumé—and then cut KPMG slack on an inspection, Sweet testified.

The recruitment effort yielded 10 or more hires, Sweet estimated.

“Stealth” Cleanup

At KPMG, Holder maintained a running dialogue with a colleague of hers still at the PCAOB named Jeffrey Wada, who fed her information, Sweet testified.

On March 28, 2016, Holder texted Sweet to phone her as soon as he could, “with three exclamation points,” Sweet recounted. When they connected, Holder told him that Wada had given her the names of the KPMG bank clients whose audits the PCAOB would inspect in 2016.

“She explained to me that Jeff had gone into the PCAOB’s IIS system [Inspections Information System] and had accessed the planning information for the PCAOB’s KPMG inspection team and had specifically gone into the schedule,” Sweet testified.

Sweet said he understood that the audits on the list had already been completed but were still in the 45-day window when KPMG could revise or augment the audit documentation without flagging the changes.

What ensued was an urgent, “stealth” effort by KPMG personnel to scrutinize the records of the audits on the list that had the highest stakes, Sweet testified.

“I remember Tom Whittle specifically saying that we needed to maintain a circle of trust, that only the people in that room were to know the real reason for why we were doing these rereviews,” Sweet said.

“This was confidential information that had been stolen from the PCAOB, and rather than report it back, we were deciding to take action to do things to improve, potentially manipulate the PCAOB’s inspection results.”

TESTIMONY OF BRIAN SWEET

“This was confidential information that had been stolen from the PCAOB, and rather than report it back, we were deciding to take action to do things to improve, potentially manipulate the PCAOB’s inspection results,” Sweet said.

As part of the effort, Sweet recalled proposing changes to audit records.

The review of one audit uncovered “very significant audit deficiencies,” prompting KPMG to change the conclusion of its audit, Sweet said. By preemptively flagging problems at that company, KPMG deterred the oversight board from inspecting that audit.

The covert program succeeded, Sweet said. Generally, inspections of the audits subject to the “stealth rereviews” showed “significant improvement,” Sweet said.

In a presentation KPMG prepared for a meeting with the PCAOB, the audit firm attributed the improvement to its internal quality control efforts. The results, the presentation said, had been “terrific.”

But Whittle worried that the success might be hard to repeat. “On the one hand, I was very pleased that our inspection results were so—were so good, but also concerned that if we didn’t have that same information in a subsequent period, that we could see a return of deficiencies that would be difficult to explain,” he testified.

“Sell Myself to KPMG”

The following year, Holder again obtained inside information.

On January 9, 2017, Holder told Sweet that Wada had given her a list of audits the PCAOB was likely to inspect that year, and she conveyed the information.

After midnight that night, Wada poured out his hopes and frustrations in an email to Holder.

“I am now trying to sell myself to KPMG,” Wada typed.

The email included a copy of his résumé and brought into sharp relief what a tangled web connects the oversight board and the industry it oversees.

Wada had gone from the big audit firm Deloitte to the PCAOB, and said he dreamed of moving to a new job at KPMG.

“It’s funny how I was on the fast track to partner and clearly recognized for my talents at Deloitte and then I ended up at this effin place with all the BS politicking that I loath [sic] and now I can’t get a GD promotion to save my life just because I refuse to kiss people’s asses and spread the political rhetoric,” Wada wrote. “God, this place sucks.”

As potential references, Wada cited KPMG auditors whose work he had inspected—people over whom he had served in a watchdog role.

“I can give you a list of names of the partners I inspected over there in Tokyo. One of the senior partners on the Honda Engagement Team really liked my style and respected my approach,” Wada wrote.

In the late-night email, Wada asked, “Please let me know what else you need from me.”

Weeks later, Wada texted Holder, “Okay, I have the grocery list.” Then, a minute later, “All the things you’ll need for the year.”

The next day, in a 48-minute phone call, Wada read Holder the complete confidential list of KPMG audits to be inspected by the PCAOB in 2017, according to an indictment.

Barbecued Evidence

Then it all unraveled.

In February 2017, as he moved to exploit the extraordinary information, Sweet got careless. Going outside the tight circle of trust, he told members of KPMG audit teams that their audits were slated for inspection. One was appalled that the firm had acquired and planned to act on inside information. As she reported it up her chain of command and word spread, others were similarly outraged. KPMG initiated an internal investigation.

Holder, a former FBI agent with experience in organized crime cases, coached Sweet on how to carry out a cover-up, Sweet recalled. “Cindy suggested that we get burner phones. Cindy and I talked about using Instagram as a code that if either of us posted a picture, like a direct message in Instagram of a college football team picture, that that would be a code to then dial into a conference call number,” Sweet testified.

“I was trying to cover my tracks.”

TESTIMONY OF BRIAN SWEET

Holder claimed to have hidden confidential PCAOB information in an electrical socket, Sweet said.

Sweet resorted to more basic tradecraft. After being questioned by a KPMG lawyer, he burned some of the evidence in his backyard barbecue.

“I was trying to cover my tracks,” he testified.

Cooperating

“KPMG immediately notified regulators and took decisive action to separate partners and personnel who behaved inappropriately from the firm, and cooperated with the government and our regulators to investigate and remediate this matter,” KPMG spokesperson Andrew Wilson said in a statement to POGO. “We learned from this experience and we are a stronger firm today due to the steps taken to strengthen our culture, governance and compliance program.”

Firms typically settle enforcement actions brought by the Securities and Exchange Commission (SEC) without admitting or denying wrongdoing. Extraordinarily, in 2019, when KPMG agreed to pay $50 million to settle the SEC’s administrative case, the accounting firm admitted the facts laid out by the SEC. KPMG also acknowledged that its conduct violated a rule requiring it “to maintain integrity” and “to comply with ethics standards,” the SEC enforcement order said.

It appears that, in reaction to the scandal, KPMG has changed its hiring practices.

“We do not recruit directly from our regulatory agencies, nor directly hire anyone who worked on KPMG matters in a regulatory capacity,” Wilson told POGO by email. “In the rare instances when we hire professionals with regulatory experience for our Audit practice, our goal is to ensure that our firm and our clients are up to speed on the latest professional standards and regulations so that we can continue to deliver high quality audits that the capital markets can rely upon.”

Wilson wouldn’t say when or why KPMG adopted that approach to hiring.

Lawyers for Sweet, Holder, and Whittle did not respond to emails for this story.

Airport Rendezvous

KPMG had another special channel to the PCAOB. It went straight to the oversight board’s governing board.

There’s no suggestion it involved any criminality, though when it came up in court there were questions about how it comported with the PCAOB’s ethics code.

In 2015, the two seats on the PCAOB governing board reserved for accountants were held by Jay Hanson and Jeanette Franzel. Franzel was formerly a government auditor; she had worked at the Government Accountability Office. Hanson had spent more than three decades at the accounting firm McGladrey & Pullen, now known as RSM, where he rose to the position of national director of accounting.

Called as a witness for the defense when KPMG’s Middendorf went on trial, Hanson was asked about a series of contacts he had with Middendorf and other senior KPMG partners. Those contacts preceded periodic meetings at which KPMG leaders faced questioning by the PCAOB’s full governing board.

Hanson said he invited the contacts. “Sometime after I started with the board in 2011, I was approached by a member of leadership of another firm with just a request that they wondered if I would be willing to meet with them before their scheduled meeting with the board to share my personal views on what I thought was most important to get out of the meeting,” Hanson testified. “And after having several meetings like that with other firms, I made it known to all firms that I could that if anybody wanted to talk to me before the meeting, phone call or meeting, I would be willing to do that.”

Hanson said he believed that the so-called “preboard” meetings would help KPMG be better prepared for the actual board meetings. He said he generally reviewed the agenda with Middendorf for the upcoming board meeting.

Under questioning, Hanson said Franzel sometimes accompanied him to the preboard meetings.

“Generally other than Ms. Franzel, I did not make it a habit of telling my fellow board members about the meetings,” Hanson said.

One meeting took place at the Capital Hilton, about a block from the oversight board’s Washington headquarters. Another took place at the elegant Hay-Adams hotel, just north of the White House and only slightly farther from the PCAOB.

On a third occasion, the men from KPMG met Hanson outside Terminal B at Washington’s Reagan National Airport, at a spot called Cibo Bistro & Wine Bar. “I recall that they flew in to meet with me,” Hanson testified.

At each of those preview meetings, Hanson—or Hanson and Franzel—“handed us a draft agenda of the meeting with the PCAOB board that would take place sometime after,” Middendorf later stated.

There was also a preview by phone, the result of a request Middendorf made by email on September 6, 2016.

“Jay, I hope you had a great Labor Day weekend,” Middendorf wrote. “I wanted to reach out and see if you and Jeanette would have some time to meet with Scott Marcello [of KPMG] and myself before the meeting with the board to help us prepare and get some idea of what may be on the agenda.”

“We have not had our internal prep meeting yet and I can’t find that it has been scheduled,” Hanson replied. “However, let’s get something on the calendar to talk.”

KPMG was officially given copies of the agendas shortly before the board meetings. The meetings with Hanson gave KPMG more time to prepare, Middendorf testified.

“I don’t believe what I did was wrong. I thought it was probably stretching the limits in a gray area, but not something that I did wrong.”

TESTIMONY OF DAVID MIDDENDORF, THE FORMER HEAD OF KPMG’S NATIONAL OFFICE

Hanson testified that he didn’t “recall specifically” whether at any of the preboard meetings he gave draft agendas to Middendorf.

“My general practice was meeting with the firm when they had the agenda in their hands, and sometimes just for pure logistics to get something on the calendar . . . expecting that by the time I came, the firm would have the agenda from the board—or from the staff . . . as a basis for the discussion,” Hanson said.

“I do recall a meeting where, to my surprise, the agenda had not been provided to the firm yet and I used my personal copy of the draft agenda with my views of what the agenda should be,” Hanson said.

With supporting exhibits, Middendorf described returning to New York with the fruits of encounters with Hanson and Franzel and promptly meeting with KPMG executives such as the CEO, the chief operating officer, and a vice chair to go over the information. He recounted that, after one of his trips to Washington, KPMG executives sprang into action to prepare for their upcoming meeting with the full PCAOB board. He said they wrote a script.

In a similar vein, Whittle said he recalled “at least one time we did get a draft or something through one of the board members.” Whittle said KPMG used it “as if it was the actual agenda, and we tried to prepare remarks that would be responsive to it.”

Section EC9 of the PCAOB’s ethics code says: “Unless authorized by the Board, no Board member or staff shall disseminate or otherwise disclose any information obtained in the course and scope of his or her employment, and which has not been released, announced, or otherwise made available publicly.”

At Middendorf’s trial, Hanson was asked if he violated that rule during the meeting where he acknowledged using his copy of the draft agenda.

“No,” he answered.

“Why is that?” he was asked.

“I had the draft that I believed should be the agenda and discussed my views on that but did not represent it as a board agenda, represented it as my personal agenda,” he said.

Pressed as to whether he actually told Middendorf that he was merely expressing his personal view, Hanson waffled.

“I don’t recall explicitly doing that,” he said.

Hanson abruptly resigned from the PCAOB on December 23, 2016. When he testified in March 2019 during Middendorf’s trial, he described himself as retired.

During the trial, at a sidebar conference with lawyers in the case, the judge said that information that might have been used to impeach Hanson—in other words, to challenge his credibility—was filed under seal. “I can say it relates to the terms of Mr. Hanson’s separation from the PCAOB. Beyond that, I don’t think I can go into it,” the judge said.

POGO tried unsuccessfully to contact Hanson via telephone, LinkedIn, and FedEx.

Interviewed for this story, Franzel declined to discuss the preboard contacts in any detail. “As a regulator I had contact with the firms because we regulated the firms,” she said. “And it was always in the context of my regulatory role and responsibilities.”

Since leaving the PCAOB governing board in 2018, Franzel has joined an advisory board of the Center for Audit Quality. That group describes itself as an advocacy organization for audit firms. The advisory board offers “a forum for dialogue and a source of guidance” for a program on research grants, the group’s executive director, Lindsay, said in a statement.

Franzel also became an adviser to Ernst & Young (EY), one of the Big Four audit firms.

“Her insights and experience are of great value to EY as we deliver on our commitment to the highest quality in audits,” John La Place, the spokesperson for EY, said in an email to POGO. “EY and Ms. Franzel are aware of the ethical requirements resulting from her role as a former PCAOB Board member, and we are confident of her and our ongoing compliance with those obligations,” he added.

Under the PCAOB ethics code, people who leave the oversight board “shall not practice before the board” on particular matters they worked on while at the board and must wait a year before practicing before the board on other matters.

Franzel deflected questions about her relationships with EY and the industry group.

Today, Middendorf is free on bail while appealing his conviction. He has been sentenced to a prison term of one year and one day—not for his meetings with Hanson, but rather for participating in what the Justice Department has summarized as a scheme to steal confidential PCAOB information and cheat on inspections.

Middendorf had no comment for this story, his lawyer Nelson Boxer said.

However, in court, Middendorf reflected on his role in the effort to exploit inspection secrets. If nothing else, his defense reflected the values of one former boss at one of the major audit firms.

“I don’t believe what I did was wrong,” the former head of KPMG’s national office told the jury. “I thought it was probably stretching the limits in a gray area, but not something that I did wrong.”

https://www.pogo.org/investigation/2020/01/how-accountants-took-washingtons-revolving-door-to-a-criminal-extreme/

GAO Report: Contractors Hid $875 Million In Fraud Through False Company Ownership Shells

Standard
(Illustration: CJ Ostrosky / POGO)

PROJECT ON GOVERNMENT OVERSIGHT

“DOD has not historically considered contractor ownership structures in the responsibility determination process, nor has the agency been aware of the extent to which such structures could pose a range of risks.”

______________________________________________________________________________

“Contractors using shell companies to hide their ownership are ripping off the Pentagon and endangering national security, according to a sobering report the Government Accountability Office (GAO) released last month.

The report’s focus is U.S. defense contracting, but it deals with a subject that has become a worldwide concern. The problem of companies using what the report calls “opaque ownership” schemes to hide their beneficial owners (the people who actually benefit financially from the company) is an international problem. Opaque, or anonymous, corporate ownership facilitates not only government contracting fraud, but also money launderinghuman trafficking, and terrorism financing.

The GAO reviewed 32 court cases resolved between 2012 and 2018 in which Department of Defense contractors provided false information about their ownership or corporate structure and were accused or found guilty of a litany of misdeeds: price gouging; providing poor-quality goods and services; abusing programs intended for small businesses owned by “service-disabled veterans, women, minorities, or economically and socially disadvantaged individuals;” and improperly disseminating sensitive military information. In typical GAO fashion, the report doesn’t name names. However, from the details it provides, the Project On Government Oversight (POGO) was able to track down what appear to be the companies and individuals involved in 21 of the 32 cases. With this information, POGO annotated the case summary table featured in the report:

[See complete report at]: https://www.pogo.org/analysis/2019/12/contractors-use-shell-games-to-hide-owners-cheat-taxpayers/

For instance, one case the report looks at is that of an “ineligible foreign manufacturer that illegally exported sensitive military data and provided defective and nonconforming parts that led to the grounding of at least 47 fighter aircraft.” This appears to reference Allied Components LCC, a military hardware supplier whose owner pleaded guilty in 2013 to providing F-15 fighter aircraft parts that were not only defective but also made in India even though the contract required the parts to be U.S.-made, and to passing along information about nuclear-powered submarines to India without the required government approval.

Altogether, four of the 32 cases involved contractors using U.S.-based shell companies to conceal that the work was really being done by a foreign-based company. Concealing beneficial ownership in this manner increases the chance that “adversaries seeking to act against the government’s interests” will gain access to sensitive government information or installations, according to the report.

A case the GAO cited as an example of contractors inflating prices by concealing their ownership and control of subcontractors is apparently that of Supreme Foodservice, which pleaded guilty in 2014 to major fraud against the United States and paid a total of $434 million in penalties. And the unnamed contractor executives who admitted to “creating fictitious, inflated bids that were not from actual businesses” and fraudulently inflating invoices is an unmistakable reference to Glenn Defense Marine Asia and the massive “Fat Leonard” Navy contract corruption scandal.

The most rampant form of abuse documented in the report—accounting for 20 of the 32 cases—is contractors falsely posing as being eligible for contracts set aside for small businesses owned by “service-disabled veterans, women, minorities, or economically and socially disadvantaged individuals.” The report describes what POGO determined is likely a recent case involving a Kansas City, Missouri-area construction company owner who was sentenced to 18 months in prison last year for falsely claiming the company was managed by a service-disabled veteran in order to win more than $13.7 million in contracts.

And in one instance, an individual debarred from federal contracting got around his debarment by creating shell companies under the names of relatives and fictitious people. He was convicted of fraud and sent to prison, but not before selling the Pentagon $2.8 million in defective parts for airplanes. Suspended and debarred contractors getting around their bans through opaque ownership structures has long been an area of concern for POGO.

The GAO estimates the government’s losses from the 32 cases total over $875 million ($200 million of which comes from just one small business set-aside fraud case). In addition, there is the potential nonmonetary harm to U.S. national security, and all of this could be just the tip of the iceberg. As the report states, “There may be additional fraud or other risks and cases related to contractor ownership that are presently undiscovered fraud and are not identified in our report.”

The problem of opaque contractor ownership structures can be addressed by a series of common sense reforms. The easiest one, which the GAO recommends, is for the Pentagon to conduct a systematic “department-wide assessment of risks posed by contractor ownership.”

Performing this assessment would give the Pentagon and the other agencies a greater awareness of the potential harms of anonymous company ownership, which would hopefully cause contracting officials to more carefully vet contractors’ ownership and financial structures during the pre-award evaluation process.

POGO has two additional reform recommendations that will be a much heavier lift. First, the government must revamp the system for reporting contractor ownership information. Companies wishing to do business with the government register in a database called the System for Award Management. However, the system currently doesn’t require the disclosure of beneficial owners; instead, contractors are only required under law to disclose their “highest-level” and “immediate” owners. Subcontractors are not required to register. Any company that receives federal funds—from a prime contractor to the lowest-tier subcontractor—should be required to register and disclose their beneficial owners. And the system must be audited periodically to ensure the data is timely and accurate.

Second, a centralized database of corporate beneficial ownership information would greatly help government contracting officials identify and verify contractors’ real owners. There is currently an effort underway to lay the groundwork for such a database as part of a growing worldwide campaign to impose greater transparency on corporations. The government should do all it can to support this effort.”

https://www.pogo.org/analysis/2019/12/contractors-use-shell-games-to-hide-owners-cheat-taxpayers/

Time Sheet Fraud Yields False Claims Suits And Individual Indictments

Standard

CYBER SCOOP

A contractor who has been working at the National Security Agency since 2017 has been charged with five counts of falsifying timesheets, according to an indictment filed in the U.S. District Court of Maryland.

In a similar indictment a U.S. Army Intelligence officer employed as a security guard for the Department of Defense was charged for falsely claiming presence at work while actually being elsewhere, resulting in a $40,000 loss to the government. 

______________________________________________________________________________

“The contractor, Melissa Heyer, allegedly filed hours claiming to have been working in a sensitive compartmented information facility (SCIF), meant to function as a highly classified work environment, when she was actually elsewhere. She allegedly filed these false claims on five separate occasions between May 2017 and July 2018.

The false work Heyer claimed to have completed amounted to the government paying her and her company $100,000 in all, the indictment claims. The wages she falsely claimed to have earned amount to more than $7,000, according to the indictment.

It wasn’t immediately clear if Heyer had admitted to the allegations in a review of her activity, or whether she denied or sought to cover it up.

The NSA rarely pursues criminal charges over false timesheets or labor charges, according to Bradley Moss, an attorney who specializes in national security law.

“Ordinarily speaking, allegations of time card discrepancies (if not outright fraud) are derived from internal audits and investigations,” Moss told CyberScoop. “In the overwhelming number of occasions, the agency will notify the individual in writing of the findings and offer an opportunity to correct or clarify the facts. If the discrepancies can’t be rectified, financial restitution is often sought. In 13 years, I have rarely seen criminal charges brought. That they were done so here is no doubt due to the enormity of the alleged fraud.”

In a similar indictment from 2016, a U.S. Army Intelligence officer employed as a security guard for the Department of Defense was charged for falsely claiming she was at work when she was actually elsewhere, resulting in a $40,000 loss to the government. Penn also allegedly lied about the timeline of her wrongdoing. She ultimately pleaded guilty and was sentenced to one month in prison and fines worth $40,000.

The NSA’s Office of the Inspector General periodically releases data on false claims and false labor charges. Over the period from October 2018 to May 2019, the Investigations Division of the inspector general’s office identified 11 claims that included possible violations of criminal law, including the submission of false timesheets and contractors submitting false labor charges. In the half-year before that, there were eight such cases.

In both instances, the inspector general said those cases would likely be handled administratively and not criminally.

While the NSA’s inspector general has referred at least five cases to the U.S. Attorney for the District of Maryland in the last two years, some of those have not been accepted for prosecution, according to the NSA’s most recent inspector general reports.

Heyer claims to currently be employed at Booz Allen Hamilton on LinkedIn, but she left the company in February of 2015, a person familiar with the matter told CyberScoop.

Heyer could face a maximum penalty of up to five years in prison for each charge, although it is possible they could run concurrently.

You can read the full indictment below:”

Click to access Document-6.pdf

GAO Finds Foreign Ownership In Government Contract Awards

Standard

U.S. GOVERNMENT ACCOUNTABILITY OFFICE (GAO)

Foreign-owned contractors have received Defense Department contracts for which they are ineligible due to opaque ownership structures that have gone unnoticed by contracting officers.

Such awards have led to leaks of sensitive information to foreign-owned companies and the acquisition of defective parts, according to a recent report from the Government Accountability Office.

______________________________________________________________________________

“The Department of Defense (DOD) faces several types of financial and nonfinancial fraud and national security risks posed by contractors with opaque ownership. These risks, identified through GAO’s review of 32 adjudicated cases, include price inflation through multiple companies owned by the same entity to falsely create the appearance of competition, contractors receiving contracts they were not eligible to receive, and a foreign manufacturer receiving sensitive information or producing faulty equipment through a U.S.-based company.

DOD has taken some steps that could address some risks related to contractor ownership in the procurement process but has not yet assessed these risks across the department. DOD, in coordination with other agencies, revised the Federal Acquisition Regulation in 2014 to require contractors to self-report some ownership information. DOD has taken steps to identify and use ownership information—for example, as part of its supply-chain risk analysis when acquiring critical components. DOD has also begun a department-wide fraud risk management program, but it has neither assessed risks of contractor ownership across the department nor identified risks posed by contractor ownership as a specific area for assessment. Assessing risks arising from contractor ownership would allow DOD to take a strategic approach to identifying and managing these risks, make informed decisions on how to best use its resources, and evaluate its existing control activities to ensure they effectively respond to these risks.

Why GAO Did This Study

DOD generally accounts for about two-thirds of federal contracting activity. Some companies doing business with DOD may have an opaque ownership structure that conceals other entities or individuals who own, control, or financially benefit from the company. Opaque ownership could be used to facilitate fraud and other unlawful activity.

The House Armed Services Committee report on the National Defense Authorization Act for fiscal year 2018 included a provision for GAO to examine the risks posed by contractors with opaque ownership and DOD’s processes for identifying ownership. This report identifies types of fraud and other risks that opaque contractor ownership poses to DOD in the procurement process and assesses whether DOD has taken steps to address those risks. GAO reviewed applicable laws and regulations and interviewed DOD officials, including procurement staff and criminal investigators. GAO researched cases from 2012–2018 where contractors may have concealed or failed to disclose ownership information. GAO compared DOD’s efforts to leading practices in GAO’s Fraud Risk Framework. This is a public version of a sensitive report that GAO issued in September 2019. Information that DOD deemed sensitive involving ongoing investigations and certain internal controls and vulnerabilities has been omitted.

What GAO Recommends

GAO recommends that DOD assess risks related to contractor ownership as part of DOD’s ongoing efforts to assess fraud risk. DOD should use this information to inform other types of risk assessments, including national security concerns. DOD concurred with GAO’s recommendation.

For more information, contact Seto J. Bagdoyan at (202) 512-6722 or bagdoyans@gao.gov.”

https://www.gao.gov/products/gao-20-106#summary’

Chinese-Made Surveillance Equipment Sold To U.S. Military

Standard
Photo: Getty Images

CYBERSCOOP

Aventura Technologies  is accused of lying to customers, including the U.S. military, for over a decade by claiming to make their equipment in Long Island while surreptitiously importing it from China. 

In doing so, Aventura exposed its customers to “serious, known cybersecurity risks, and created a channel by which hostile foreign governments could have accessed some of the government’s most sensitive facilities.

___________________________________________________________________________

“U.S. prosecutors on Thursday announced charges against a New York company and seven of its current and former employees for allegedly selling Chinese-made surveillance equipment with known cybersecurity flaws while falsely claiming the technology was made in the U.S.

The U.S. Air Force, Navy, and the Department of Energy were among Aventura’s clients.

Jack Cabasso, the company’s de facto owner, his wife, Frances, and other senior company executives were charged with conspiracy to commit wire and bank fraud and “unlawful importation,” prosecutors said. Four of the defendants were charged with defrauding the U.S. government by falsely asserting that Aventura was owned by Frances Cabasso in order to win government contracts reserved for female-owned firms.

Six of the accused were arrested Thursday morning, authorities said. The fate of the seventh defendant wasn’t immediately clear. U.S. authorities also seized the Cabassos’ 70-foot yacht and froze some $3 million of the defendants’ ill-gotten gains, the Justice Department said.

Neither a spokesperson nor an attorney for Aventura could be immediately reached for comment.

In a statement, U.S. Attorney Richard Donoghue accused the defendants of “padding their pockets with money from lucrative contracts without regard for the risk” to U.S. national security posed by their products. The company made more than $20 million off of federal contracts, U.S. officials said.

The announcement is just the latest example of Chinese technology, which U.S. officials have often tried to exclude from government supply chains, slipping into the government’s procurement process. On Wednesday, Sen. Marco Rubio, R-Florida, wrote to the Department of Defense asking why more than 2,700 Chinese-made surveillance cameras had reportedly been installed at U.S. defense facilities.

The Justice Department announced in April that Fortinet, a U.S. security vendor, had agreed to pay the equivalent of $545,000 to settle allegations it sold the government Chinese-made equipment while claiming the technology originated in North America.

U.S. officials also have gone to great lengths to try to keep equipment from Chinese telecommunication giants like Huawei and ZTE out of federal networks amid espionage concerns. Both companies deny any wrongdoing.

In May, President Donald Trump issued an executive order that warned companies not to use surveillance-enabling telecom equipment coming from overseas. A defense policy bill signed by Trump last year bans U.S. government agencies from using certain Huawei and ZTE components.”

VA And DOJ Join Forces To Crack Down On Health Care Fraud

Standard
Image: “Stars and Stripes

MILITARY.COM

The Departments of Veterans Affairs and Justice are teaming up to combat healthcare fraud as the VA expands a Medicare-like program that allows veterans to seek care at private facilities in the community at taxpayer expense.”

______________________________________________________________________________

“The VA’s Office of Inspector General is joining forces with the Justice Department’s criminal division to form an interagency task force that will focus on that program, the government said in a statement Tuesday.

The new partnership “will aggressively target fraud in the VA’s expanding health care programs,” said Assistant Attorney General Brian A. Benczkowski of the DOJ’s criminal division.

Legislation passed last year allows veterans to receive care from approved providers from outside the VA’s more than 1,200 medical facilities. As with Medicare, the providers submit claims to the government for payment for their services.

In announcing the task force, the VA IG released a list of more than a dozen cases in which the office partnered with the Justice Department to bring charges or obtain guilty pleas in recent months, including one involving a former chief of pathology for the VA in Arkansas accused of involuntary manslaughter, another in which VA claims processors are accused of collecting overtime pay for hours not worked, and several cases involving fraudulent prescriptions.

Federal investigators from the FBI, IRS, Department of Health and Human Services IG and other agencies are investigating the cases and the DOJ criminal division’s fraud section is prosecuting them, the statement said.

“This Task Force sends a clear message to anyone considering committing health care fraud at VA — we will protect our veterans’ health care system at all costs,” VA IG Michael J. Missal said in the statement.

Modeled on DOJ’s Medicare Fraud Strike Force, the task force will include an attorney from the VA IG’s office assigned to the fraud section as a special prosecutor in its health care fraud unit.

A partnership between Justice, the U.S. Attorney’s Offices, the FBI and the Department of Health and Human Services IG formed in 2007, the Medicare fraud strike force has charged more than 4,200 defendants with defrauding the Medicare of a total of around $19 billion.

“This is one of those rare opportunities in government where we can be proactive and get ahead of the curve by partnering with the Fraud Section and leveraging its proven strategies for combating fraud,” said Missal, the VA IG.”

https://www.military.com/daily-news/2019/10/03/va-and-doj-join-forces-crack-down-health-care-fraud.html

Leading For-Profit Prison And Immigration Detention Medical Company Sued At Least 1,395 Times

Standard

ccs-prison-pills_1725

(Photo: Flickr / Charles Williams; Illustration by POGO)

“THE PROJECT ON GOVERNMENT OVERSIGHT (POGO)”

“A company whose medical care of immigrant detainees at one of the nation’s largest detention centers was criticized in a recent Department of Homeland Security watchdog report has been sued a staggering 1,395 times in federal courts.”


The Scam Artist Who Sold Fake Armored Trucks to U.S. Army

Standard

Fake Trucks

PHOTO ILLUSTRATION BY THE DAILY BEAST

“THE DAILY BEAST”

“Whyte’s fraud is symptomatic of rushed, desperate weapons-purchases that were common during the Pentagon’s invasion and occupation of Iraq. 

Years after the Iraq occupation morphed into a wider U.S. intervention targeting Islamic State militants, the Pentagon still doesn’t know exactly what it’s spending its money on.”


“Sometime in the summer of 2006, John Ventimiglia, a plant foreman for Canada-based Armet Armored Vehicles, visited the company’s Ontario factory to inspect several Kestrel armored trucks that Armet was assembling for the U.S. military in Iraq.

Ventimiglia was horrified by what he saw, according to court documents. The vehicles lacked the floor armor that the military had specified. Instead of special, blast-resistant mineplate, workers had installed fragile plywood planks. It was also apparent that workers were using sandbox-style play sand in the vehicles’ construction—although Ventimiglia wasn’t sure why.

Ventimiglia emailed his coworker Frank Skinner, who then approached the FBI. Nearly 12 years later, this past week, a U.S. district court sentencedArmet CEO William Whyte to five years in prison for supplying fake armored vehicles to the U.S. military during the height of the American-led occupation of Iraq. Seventy-two-year-old Whyte, of Ontario, must also pay back the U.S. government for the trucks.

“Evidence at trial demonstrated that Whyte executed a scheme to defraud the United States by providing armored gun trucks that were deliberately under-armored,” the Justice Department stated.

But the military’s contracting problems aren’t unique to Iraq.

In 2011, the congressionally mandated Commission on Wartime Contracting in Iraq and Afghanistan reported that contractors had cheated the Pentagon out of $31 billion since 2001 (PDF). In one 2007 case, two South Carolina sisters—co-owners of a small parts-supplier—were found guilty of billing the Pentagon $20 million for hardware that was worth a fraction of that.

“Unfortunately, there are unscrupulous individuals out there who will take advantage of a wartime emergency, even one involving the lives and safety of our troops, to pad their own pockets,” Dan Grazier, a former Marine who is currently an analyst with the Project on Government Oversight in Washington, D.C., told The Daily Beast.

In Iraq, an escalating insurgency motivated many of the most flawed purchases. From mid-2005 to mid-2006, roadside bombs and other improvised explosive devices killed around 40 Americans per month in Iraq. Starting in 2006, the Defense Department spent $50 billion buying no fewer than 24,000 up-armored vehicles.

So-called Mine-Resistant Ambush-Protected trucks, or MRAPs—built by major defense contractors—accounted for most of the new vehicles. But the crash effort drew in small companies too, some of which assembled less-complex armored trucks for hauling Iraqi and coalition officials around Baghdad and other Iraqi cities.

Armet Armored Vehicles was one of those smaller companies. The Ontario-based company, which also operated a factory in Danville, Virginia, specialized in adding armor to SUVs and building ambulances and police vehicles. The company provided vehicles for Fast Five, the 2011 installment in the Fast and Furious film franchise.

In March 2006 the Defense Department hired Armet to build Kestrel armored trucks based on the chassis of a Ford F550 pickup. The price: around $200,000 per truck, including shipping. All told, Armet stood to earn $4 million.

The first four Kestrels were due in Baghdad 45 days after Whyte signed the contract in mid-March 2006. The rest, by the end of July. “Here we go, the first 20 Kestrels for Baghdad,” Whyte emailed his staff, according to court documents. “The only problems that I see is the chassis and FINANCE!”

Whyte was correct that it would be problematic to finance what was, for Armet, a substantial boost in production. The company fell behind. Unable to build the trucks on time and to spec, Whyte essentially faked them—replacing some government-mandated floor armor with plywood and leaving gaps in the protection on other parts of the vehicles.

“He knew he couldn’t meet the deadline,” Frank Skinner, who in 2006 oversaw Armet’s Danville factory said of Whyte during the latter’s two-month trial in in the U.S. District Court for the western district of Virginia beginning in June 2015. The first two Kestrels arrived in Baghdad at least two months late. Around the same time, Skinner secretly contacted the FBI about Whyte’s fraud.

While building faulty trucks and delivering them late, Whyte hounded military officials to pay Armet in advance for future vehicles. The military refused most of the requests. “You need to stop using progress payments for an excuse for your inability to deliver these vehicles against any type of credible timeline,” Cmdr. Tommy Neville, a contracting officer in Baghdad, wrote to Whyte.

“We miscalculated and were deluded when we believed that money was forthcoming,” Whyte wrote to another military official in October 2006. Years later, federal prosecutors would allege that Whyte repainted some of the Kestrels he had built for, but not yet shipped to, the U.S. military and instead sold them to the Nigerian government—because the Nigerians offered a higher price. A judge threw out that complaint for a lack of evidence.

In March 2008, the Pentagon rejected the seventh gun truck that Armet had shipped to Iraq and canceled the contract. By then the military had paid Armet around $2 million for six trucks it could not use. The Justice Department indicted Whyte in July 2012 and issued a warrant for his arrest the same day.

“None of the armored gun trucks delivered by Armet and Whyte met the ballistic and blast protection requirements of the contracts, despite the defendant’s claims that the vehicles met the standards,” the FBI stated. “Armet and Whyte knew that each of the six armored gun trucks failed to meet the required standards, that they were defective, and that they would not protect the officials they were intended to protect.”

Whyte fled to Canada to avoid prosecution. Armet shut its doors. Canadian authorities extradited the former CEO after a three-year legal battle. On Oct. 9, a jury unanimously found Whyte guilty on three counts of major fraud against the United States, three counts of wire fraud and three counts of criminal false claims.

Five months later on Feb. 20, Judge Jackson Kiser sentenced Whyte to spend 70 months in prison—and to pay back the $2 million his company received for the fake armored vehicles.

For the Pentagon, the underlying problem likely persists. In January 2017, the Government Accountability Office estimated that, as recently as 2016, as much as 5 percent of all federal payments to individuals and contractors were “improper” and resulted in $144 billion in waste in that year alone (PDF).

But that calculation didn’t take into account military contracts, owing to “serious financial management problems at the Department of Defense that have prevented its financial statements from being auditable,” the GAOexplained. In late 2017 Congress finally passed a law requiring the Defense Department to conduct a full audit starting in 2018.

In the meantime, it’s unclear how many other William Whytes are out there, cheating American servicemembers and taxpayers. “This is just one of the many reasons why we need to have effective oversight of the DoD acquisition process,” Grazier said.”

https://www.thedailybeast.com/the-scam-artist-who-sold-fake-armored-trucks-to-us-army

 

Military Paid $6.8 Million to Pro Sports for “Paid Patriotism” Events

Standard

Photo Gary Wiepert AP“MILITARY TIMES”

“Pentagon officials paid at least $6.8 million over the last three years to professional sports teams for “paid patriotism” events like on-field color guards and “free” seats for troops.

The findings include 50 professional sports teams and questionable expenses in about two-thirds of the $10 million-plus total the military spent on professional sports marketing efforts since the start of fiscal 2012.

Among the events included in the final report:

  • $88,500 to pay for military-themed rally towels and hats at a Baltimore Ravens game;
  • $49,000 to sponsor the singing of “God Bless America” at Sunday Milwaukee Brewers games;
  • $5,000 for two on-court enlistment ceremonies and to pay team staff to “throw out” Air Force T-shirts at a Dallas Mavericks game;
  • $1,509 to provide pregame recognition of “five high ranking Air Force officers” at a Los Angeles Galaxy game;

pro sports

In total, the findings include 50 professional sports teams and questionable expenses in about two-thirds of the $10 million-plus total the military spent on professional sports marketing efforts since the start of fiscal 2012.

But McCain and Flake said in many cases owners and management were not aware of the arrangements.

Instead, they blasted defense officials for wasting money on the events and confusing the public on which events were paid advertisements and which were sincere appreciation of military efforts.

However, McCain added that “it would be entirely appropriate for these sports teams that were awarded taxpayer money to donate that to a worthy cause, causes like wounded warriors or others specific to the men and women serving our nation.”

McCain said he did not expect to hold any oversight hearings on the issue. The Defense Department has already promised to end the practice, and the National Football League has promised a full review of its policies and participation in the marketing programs.”

http://www.militarytimes.com/story/military/pentagon/2015/11/04/paid-patriotism-dod-report/75158096/

Secrecy Exposes Government to Shady Dealings

Standard

no-public-access-sign-575px

“THE PROJECT ON GOVERNMENT OVERSIGHT”

“Certainly, false statements and fraud occur on all types of federal contracts, but agencies such as NSA that operate in the dark and in compartmentalized environments create an accountability vacuum.

While NSA’s budget isn’t released publicly, the Director of National Intelligence recently disclosed that $53.9 billion was requested for fiscal year 2016 for all national intelligence programs. the Defense Department (DoD) Inspector General (IG) published a report in 2012 entitled Pervasive Labor Mischarging by Contract Employees of the NSA

“The IG report highlighted three overbilling cases from 2010 to 2012, including charging “thousands of hours of labor, when the personnel alleged to be performing work were never present at the NSA facility.” The result for the contractor employees was criminal punishment, including home detention and fines.

The National Security Agency (NSA) operates in the dark—little is known about its operations and programs. Edward Snowden changed that to some degree, but there is more to NSA than bulk international and domestic surveillance operations.

Oversight and accountability are challenged because intelligence personnel have minimal whistleblower protections, or in the case of contractors, no protections at all, and there are genuine fears of retribution and loss of a security clearance. Those factors are further compounded by the lack of transparency in intelligence contract spending and contractors that don’t want to bite the hand that feeds them.

It seems that the feeling might be mutual. In the case of the three prosecutions that were the subject of the DoD IG’s investigation, the government bought into the “one bad apple” excuse and decided not to punish the companies involved, a real who’s who of federal contracting: Boeing, Booz Allen Hamilton, CACI, Northrup Grumman, and SRA International.

The Baltimore Sun has reported other cases of NSA employees and contractors who scammed the agency in recent years. Instances of bribery, inflated time sheets, and steering contracts to relatives have resulted in the prosecution of 11 individuals since 2007.

Overseers in Congress have been asking hard questions about intel contracting for years, focusing on the cost of contractors and the type of work they are performing as well as whether the government has the right intel workforce balance. Last year, the Senate Committee on Homeland Security and Governmental Affairs held a hearing at which then-Chairman Thomas Carper (D-Delaware) expressed concerns with the overreliance on contractors in the intelligence community.

Carper’s concerns are real. Last year, the Government Accountability Office (GAO) testified that the civilian intelligence community’s use of contractors created risks for the government, including contract management problems, and restated concerns about the use and cost of intelligence contractors.

As the GAO report highlighted, it is difficult to provide a general assessment of intelligence contracting. The best data that has been made publicly available is from a mid-2000s inventory of intelligence contractor personnel, which documented that the intelligence budget was roughly $42 billion. Approximately 70 percent of the intel budget was spent on contracts (not contractors) and contractors comprised approximately 28 percent of the total intelligence workforce. Outsourcing intelligence functions was largely the result of the downsizing of the federal workforce in the 1990s and the subsequent surge in national security demands after 9/11.

There is no doubt that contractors play an important role in the intelligence community, but with secrecy comes increased vulnerability to corrupt practices. Let’s hope the NSA and other intel agencies know as much about the contractor workforce as they do about the people who they surveil.”

http://www.pogo.org/blog/2015/02/secrecy-exposes-government-to-shady-dealings.html