Mattis: Criminal charges likely amid probe into intelligence contract

Criminal investigators are looking into contracts that spent $500 million on intel program, at least a tenth of which may have been wasted.

Defense Secretary James Mattis told lawmakers Thursday it’s probable that federal officials will file criminal charges as part of an ongoing investigation into a series of contracts the Army issued to help establish security forces in Iraq and Afghanistan.

The contracts were supposed to be used to help those nations build their own intelligence gathering capabilities, but audits thus far have pointed to tens of millions of dollars in potential fraud connected to at least one vendor, including for luxury vehicles and six-figure salaries paid to its employees who performed no discernible work.

The ongoing criminal investigation involves a series of agreements, beginning in 2007, that wound up costing $458 million.

According to an audit the Special Inspector General for Afghanistan Reconstruction published in July, the lion’s share of those funds went to a single subcontractor, New Century Consulting (NCC). But SIGAR concluded that because of poor recordkeeping and a reliance on vendors to grade their own performance, it’s almost impossible to determine whether the contracts’ objectives were ever met.

And new details from a separate audit appear to show NCC charged the government for at least $51 million in unsupportable expenses. That audit, performed by the Defense Contract Audit Agency (DCAA), reportedly found the bills DoD paid included high salaries for NCC employees and the purchase of Bentleys, Porsches, Aston Martins and other luxury cars for the company’s executives.

DCAA never releases its audits to the public, but some of its findings relating to NCC were disclosed Thursday in a report by Sen. Claire McCaskill (D-Mo.), the ranking Democrat on the Senate Homeland Security and Governmental Affairs Committee.

She said the problems could have been averted by proper oversight.

“We wouldn’t have the CEO and the COO’s wives getting salaries averaging $190,000 a year, with absolutely no evidence of them doing any work,” she said. “The subcontractor not only directed the Pentagon towards this contract, they got most of the work under the contract, and there was involvement in the Pentagon in helping steer this contract to the subcontractor.”

Testifying at a Senate Armed Services Committee hearing on DoD’s annual budget, Mattis said he could not comment on the particulars because of an ongoing investigation by the Army Criminal Investigation Command. However, he appeared to endorse the report’s conclusions.

“Because of the investigation – which will likely result in criminal charges – we can’t go into a lot of detail in public. We’re not supposed to do that when something’s under an investigation,” he said. “But there’s not a word you just said that I would take issue with, senator.”

It’s unclear whether the criminal probe is focused primarily on the contractor’s activities, the government’s own, or perhaps both.

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The McCaskill report, based on a months-long investigation by the Homeland Security committee’s minority staff, points to numerous potential improprieties on the part of the Army, which administered the contract, and officials working within the office of the DoD’s undersecretary for policy, which directed it.

For one, the initial 2007 award the Pentagon made for the intelligence program — known as “Legacy” — was issued as part of a broad agency announcement (BAA) for short-term research and development that was supposed to be used for innovative “hard science,” including to help defeat the improvised explosive devices that were, at the time, the leading cause of U.S. servicemember deaths in Iraq and Afghanistan.

The contract DoD awarded to NCC had only a tenuous connection to that objective: in passing, the BAA had also asked for new approaches to human intelligence.

The report alleges that the DoD’s Combating Terrorism Technical Support Office (CTTSO) used the Army’s BAA process only because it was looking for a contract vehicle that would let it direct the work to NCC without having to conduct a full and open competition.

The Army and DoD used the BAA to make an award to another company, Imperatus, but documents uncovered by auditors suggest DoD officials then directed that company to subcontract what would ultimately be 80 percent of the work to NCC.

The Senate investigation also found that the initial BAA award was based almost entirely on a sales pitch NCC began delivering to Pentagon officials in 2006, and that there was no evidence that DoD had ever evaluated any competing proposals.

“Clearly, somebody over there said, ‘Hey, we can use this, and we can get you the money,’” McCaskill said. “These guys are burrowed-in at the Pentagon. I’ve seen this before. Somebody builds a relationship, and before you know it, hundreds of millions of dollars are flying around, and frankly, nobody’s paying close enough attention. Somebody’s head’s got to roll on this, and I need a list of people that are going to be held accountable for this happening.”

NCC, which is headquartered on the self-governing island of Guernsey in the English Channel, did not respond to an emailed request for comment Thursday.

A company official later directed Federal News Radio to an eight-page letter it posted on its website on Friday. The letter, originally sent to McCaskill in August 2017, disputed the premises of some of the questions her office had posed during the initial stages of the Senate probe.

“A number of the points of concern made in your letter are factually inaccurate and incorrect, albeit this partly stems from the inaccuracies within the DCAA audit report itself,” Michael Grunberg, the firm’s CEO wrote at the time.

Elaborating, Grunberg contended that the costs of its vehicles were not charged  directly to the Legacy contract, but were apportioned across all of its contracts, including some with non-U.S. government clients. He added the firm never possessed an Alfa Romeo, a vehicle McCaskill mentioned in her original letter to Mattis, but was deleted in the final Senate report’s account of the company’s  fleet.

The letter adds that the company’s total overhead costs —2.15 percent — are extremely low, by normal government contracting standards.

Despite the company’s dispute over DCAA’s conclusions, the $51 million unallowable costs the agency has deemed unallowable thus far may be only the tip of the iceberg.

That’s because the agency has only audited the costs the company charged to the government via the Legacy program between 2008 and 2013. Because of an ongoing backlog of incurred cost audits at the agency, it still has not examined charges incurred under a successor contract the Army awarded directly to NCC for similar work. That project, called Afghanistan Source Operations Management, ran from 2014 through 2016.

But the report also points out that it’s highly unlikely that the government will ever recover the $51 million DCAA has already flagged as potentially-fraudulent expenses.

That’s because under federal acquisition law, the government can only pursue repayment from its prime vendors: in this case, Imperatus.

But that company, which appears not to have kept any documentation for the pass-through costs claimed by, and eventually paid to NCC, is now out of business. According to federal bankruptcy filings, the firm only has about $900,000 in remaining assets.

NCC, however, is still a going concern, and has done business with DoD as a prime vendor or subcontractor on other contracts, including at least one subcontractual arrangement, with Raytheon, that remains in force.

Considering that the firm has ongoing Defense business, the Defense Contract Management Agency (DCMA) is in negotiations with the company to reach a voluntary settlement agreement. But DCMA told Senate investigators that they could not predict how much of the questioned costs they’ll ultimately be able to recoup.

McCaskill said it’s unacceptable that the company appears to be continuing to profit from government contracts.

Irrespective of the outcome of the criminal investigation, she said DoD should use the suspension and debarment process to at least temporarily prohibit the firm from receiving any new government work.

That process does not require proof beyond a reasonable doubt of criminal conduct. Rather, it allows the government to stop new contracts with a given vendor if any federal agency concludes that the company has not behaved responsibly.

“I am not going to shut up about this until somebody is held accountable,” McCaskill said. “We’re losing soldiers, families are sacrificing, we’re worried about their benefits and their pay, and some jerk is driving a Bentley in the U.K. on taxpayer money? If somebody isn’t held accountable for letting this happen, it’s going to keep happening.”

“Senator, I’m 100 percent with you on this,” Mattis replied. “When I came up here for confirmation last year, I talked about business reform. This year, alongside business reform is accountability. So we’re with you. I wish I’d been here in the job in 2012. That’s all I can tell you.”

As of Thursday evening, NCC had not been suspended or debarred, according to the government’s electronic System for Award Management. Army officials have previously said that they are awaiting the outcome of the criminal investigation before determining whether to take that step.

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