Firms Defraud Government but Get New US Contracts

Friday 27 February 2009

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by: Larry Margasak, The Associated Press

The government bought body armor from the Pinnacle Corporation after the Air Force concluded that the company falsely claimed testing the equipment. (Photo: Wired)

Companies that defrauded the United States and jeopardized American lives received new government work despite rulings designed to stop them from receiving federal contracts, government investigators report.

Payments went to a company whose president tried to sell nuclear bomb parts to North Korea, a company that jeopardized lives on the aircraft carrier USS John F. Kennedy, and a seller of body armor that the Air Force said was defective.

The companies were on a government database of 70,000 individuals and businesses suspended or barred by various U.S. agencies from receiving government contract work.

The Government Accountability Office blamed some of the mistakes on faulty computer searches by officials who left out commas or periods. But it also said the search engine for the database often failed to identify any of the entries on the exclusion list.

A hypothetical suspended company named XYZ Corp., Inc. - with a comma - would escape detection if one searched for XYZ Corp. Inc. - without the comma - the report said.

The investigators found a staggering list of offenses by companies awarded new contracts. They included use of fictitious Social Security numbers, massive tax fraud, delivery of faulty parts for the military, false filings with the Securities and Exchange Commission, use of insider information to bid on federal contracts, and Medicare fraud.

Rep. Edolphus Towns, D-N.Y., chairman of the House Oversight and Government Reform Committee, asked in a hearing Thursday, "What is the point of having suspension and debarment regulations if our own agencies disregard them?"

Most contracts were awarded to excluded companies by mistake. However, the Army deliberately continued a contract with a German company, Optronic GmbH, whose president was convicted in Germany for attempting to illegally ship dual aluminum tubes to North Korea. The equipment can be used in the development of nuclear bombs.

The Army paid the company $31 million under the contract, including $4 million after it was placed on the exclusion list. The firm supplied civilians for training exercises for 7,000 U.S. troops prior to their deployment to Iraq.

In ruling that the company should not receive new contracts, the Army stated in July 2005 that the gravity of the conduct was clear, given that 37,000 U.S. forces were stationed on South Korean soil.

An Army official, in an interview, said the payments continued because the convicted president was removed from the company and the firm did an excellent job in its crucial role in the training exercises.

Edward Harrington, deputy assistant secretary for procurement, said stopping the contract early would have jeopardized the two brigades that needed the civilians in their battlefield exercises.

Other examples cited by the GAO, Congress' investigative arm:

The Navy suspended Tecnico Corp. of Chesapeake, Va., in April 2006, after discovering the company was using faulty fasteners on steam pipes on the aircraft carrier USS John F. Kennedy. A rupture could have caused lethal burns.

A Tecnico Corp. vice president, Richard Freeman, declined to comment.

GAO officials, in their own test, purchased body armor worth more than $3,000 from Pinnacle Armor of Fresno, Calif. The company was placed on the exclusion list in September 2007 by the Air Force, which concluded that the firm represented its body armor was tested and effective, when the equipment actually failed to meet requirements.

Several attempts to reach the company were unsuccessful because the company mailbox was full.

Steven Industries of Bayonne, N.J., was banned in May 2007 after the GAO said it conspired to defraud the government by placing false labels on chemicals.

Bill Rubenstein, president of Steven Industries, said the payments from the government after the company was barred were for contracts that existed at the time.

Gregory Kutz, the GAO official who presented the findings, said the payments were for new orders under existing contracts and should not have been approved under the exclusion.

Chemco Industries, a cleaning supply company, was suspended in March 2007 - three years after its conviction for illegally discharging chemicals into the St. Louis sewer system. Officials in the Veterans Affairs Department never checked the exclusion list and ordered new cleaning supplies.

Company owner Kamal Yadav said the firm didn't receive new business during its ban. The government "started buying again after we got reinstated," he said.

The GAO disputed that, saying the company was suspended March 7, 2007, and the new order was placed by the VA on Aug. 8, 2007.