House panel probes 'cozy relationship' between IRS official, contractor

A senior procurement official of the Internal Revenue Service refused to testify before Congress on June 26 about his relationship with an IT contractor who won federal contracts with a potential value of $500 million.

Gregory Roseman, the IRS deputy director for enterprise networks and tier support systems, asserted his Fifth Amendment right against self-incrimination at a hearing of the House Oversight and Government Reform Committee, which was part of a longstanding investigation into hardware and software reseller and IT services provider Strong Castle. At issue is how Braulio Castillo, the firm's proprietor, was able to secure preferential status as a small business owned by a disabled veteran and as a business operating in a blighted neighborhood, and how Castillo's "cozy relationship" with Roseman allegedly gave Strong Castle the inside track on lucrative government contracts.

According to the committee report, in January 2012 Castillo and his wife purchased Signet Computers, a small company with a top secret clearance and a track record of government business, and began to reposition it as a federal contractor that qualified for preferential treatment in awards as a business operating in a Historically Underutilized Business Zone or HUBZone and as a Service-Disabled Veteran-Owned Small Business (SDVOSB).

"In our evaluation, we find no value added performed by Strong Castle, although profits flow to that company over and above the full payment to the companies that actually provide the IRS with those services," said committee chairman Darrell Issa (R-Calif.) in his opening statement.

Strong Castle sought and obtained HUBZone status from the Small Business Administration after relocating the headquarters to a designated neighborhood in downtown Washington, D.C. It was later found that the company principals – Castillo and his wife – did not work out of the location, and hired hourly workers from nearby Catholic University to staff the headquarters to comply with the residency requirements of the HUBZone program. One former employee told the committee that she was fired because she was not living inside the HUBZone area, and could not relocate. SBA launched an investigation of Strong Castle as a result of a protest filed by a competing firm in December, and as a result of the probe, SBA decertified Strong Castle's HUBZone status on May 23 of this year.

Strong Castle's status as a SDVOSB arises from a sports injury Castillo suffered in 1984, while a student at the U.S. Military Academy Preparatory School, where Castillo attended for one year as a "redshirt" football recruit. Castillo never served in the military other than this year of training, but under the Veterans Affairs rules, the injury qualified Castillo for monthly disability payments of $469 and "preferred" status as an SDVOSB contractor.

Castillo went on to play college football for the University of San Diego after leaving military training, and did not seek out disability benefits until 2011 – 27 years after he suffered the injury. In an email to a government official obtained by the committee, Castillo wrote, "My service connected disability status should serve as a testimony to that end. I can't play with my kids because I can't walk without pain. I take twice daily pain medication so I can work a normal day's worth. These are crosses that I bear due to my service to our great country."

I'm so glad that you would be willing to play football in prep school again 'to protect this great country.' -- Rep. Tammy Duckworth.

Castillo stuck to this narrative under withering questioning from Rep. Tammy Duckworth (D-Ill.), who sustained grievous injuries requiring multiple amputations serving as a helicopter pilot in the Iraq War.

"I'm so glad that you would be willing to play football in prep school again 'to protect this great country,' Duckworth said, as Castillo listened impassively. (Watch video of the exchange at CBSNews.com.)

The preferred status of HUBZone and SDVOSB were instrumental in Strong Castle's success in qualifying for lucrative IT contracts, according to the report. Additionally, the report suggests that Castillo leveraged his friendship with Roseman to get added to the General Services Administration's IT Schedule 70 contract vehicle. Roseman, who formerly worked at GSA, contacted former employees to expedite Strong Castle's application, which was awarded in just 50 days. According to the GSA official in charge of IT schedule programs at GSA, this was record time. Applications take an average of 114 days to process, she told the committee, and 75 days is considered fast.

Once added to the Schedule 70 vehicle, Strong Castle began to rack up wins in IRS procurements, with more than $47 million obligated to Strong Castle between August and December of last year. In addition, there is the potential for almost $500 million in IRS business under blanket purchase agreements awarded to Strong Castle. By design, all but a small fraction of this money would pass through Strong Castle to companies like IBM, HP and others for which Strong Castle acts as a reseller. The IRS comes in for criticism in the report because they apply the "full dollar amount" of such awards to set-aside goals for firms with socio-economic certification like HUBZone and SDVOSB. Castillo, according to the report, "designed Strong Castle to fit this market perfectly."

According to the testimony of IRS deputy commissioner Beth Tucker, Roseman has been reassigned to a non-supervisory role pending the outcome of an internal operation. She said under questioning that "the information we've seen about the personal relationship between Roseman and Castillo is inappropriate," particularly hundreds of personal text messages between the two, which were shared by Castillo with the committee. Tucker also said that so far, IRS investigators "have not seen or otherwise been made aware of any evidence of steering contracts to Strong Castle or any statutory or regulatory violations in connection with the award of these contracts."

Tucker said that the IRS was looking at ways of discontinuing its relationship with Strong Castle, but she noted that immediately terminating a $266 million blanket purchase agreement for IBM software "would have significant implications and create critical operational challenges in the immediate term for the IRS." She testified that the agreement would continue, "absent a finding of fraud or other wrongdoing by Strong Castle."