GAO Finds That DOD Faced Fraud and National Security Risks From Contracting in 2019

The Government Accountability Office (“GAO”) published a report on November 25, 2019 which recommended that the Department of Defense (“DOD”) should include an assessment of risks related to contractor ownership as part of its ongoing efforts to conduct fraud risk assessments.  See Ongoing DOD Fraud Risk Assessment Efforts Should Include Contractor Ownership.

In coming to this recommendation, the GAO reviewed thirty-two adjudicated cases between 2012 and 2018, including cases where contractors created the appearance of competition by operating through multiple companies owned by the same entity, contractors received contracts they were not eligible to receive, and, perhaps most egregiously, a foreign manufacturer received sensitive information and produced faulty equipment through a U.S.-based company. In one case, a contractor (which should have been deemed ineligible to contract with DOD) illegally exported sensitive military data and provided defective and nonconforming parts that led to the grounding of 47 fighter aircraft. These thirty-two contractors used shell companies to help obscure their overseas ties and the fact that some were making U.S. military equipment abroad, where military technical drawings can leak out.

This problem could well be more widespread than the GAO Report lets on – the GAO Report was not intended to measure or estimate the scope of DOD contractors with opaque ownership. Indeed, DOD generally accounts for about two-thirds of federal contracting activity, awarding over $350 billion in contracts, with over 570,000 new contracts, to approximately 38,000 companies. DOD’s extensive contracting demonstrates the need for it to address contractor ownership issues.

DOD isn’t the only agency in hot water. Another recent GAO Report, Agencies and OMB Need to Continue Implementing Recommendations on Acquisitions, Operations, and Cybersecurity, found that since 2010, agencies have only implemented 61% of the GAO’s 1,320 recommendations on IT acquisitions and operations and 76% of the 3,323 recommendations on cybersecurity. However, the GAO gave itself a pat on the back in its Performance and Accountability Report Fiscal Year 2019, in which it noted that the GAO saved a “record” $214.7 billion for taxpayers in fiscal year 2019 by preventing payment errors, improving the efficiency and effectiveness of federal programs, and preventing fraud.