GAO: DOD should take a closer look at contractor ownership

The Defense Department must dig deeper into who owns the companies that sell DOD goods and services, as dishonest contractors skulk behind a façade of bogus company names and arrangements, according to a new Government Accountability Office report.

Defense contractors sometimes have “opaque ownership” that can hide who is actually bidding on Pentagon contracts, according to the report.

Scams using shifty or shady ownerships take many forms, the report found, including price inflation funneled through multiple companies owned by the same entity, fake competitive bids from ineligible companies, rustling service-disabled veterans’ and small business set-aside contracts with bogus qualifications and foreign manufacturers wielding sensitive information delivering faulty equipment into DOD supply chains.

The report said although the DOD made an earnest effort in 2014 to protect its supply chain with changes to the Federal Acquisition Regulation, those changes didn’t go far enough when it comes to verifying contracting firms’ ownership.

Tracking U.S. military contractors is an enormous task, according to GAO. DOD is the largest contracting agency in the federal government, accounting for about two-thirds of all federal contracting activity, it said. In fiscal year 2018, DOD contracted for over $350 billion in goods and services, awarding over 570,000 new contracts to almost 40,000 contractors, GAO said.

The ownership identity gap is an insidious and shifting danger, the report warned. For instance, the study noted that in one case, it led to a foreign manufacturer illegally exporting sensitive military data for almost 50 F-15 fighter aircraft to a company based in another country and delivering “defective and nonconforming parts” in return.

In its report, GAO said it reviewed 32 cases it resolved between 2012 and 2018, examining public court and Department of Justice records, as well as DOD press releases to distinguish the type of fraud and how contractors cloaked or disguised their company’s ownership to rip off the agency.

The value of the aircraft contact wasn’t disclosed in court records, GAO said, but its list of settled court cases included other contracts with awards ranging from hundreds of thousands of dollars to one worth over $200 million. In that case, it said three contractors masqueraded as “service disabled veteran-owned” and “economically disadvantaged” companies.

GAO recommended DOD’s Office of the Undersecretary of Defense (Comptroller) include contractor ownership as part of its ongoing work in departmentwide fraud risk assessment.

DOD concurred with the recommendation and was moving ahead with implementation efforts, GAO said.