Why contractor pricing misconduct seems to endure perpetually
"These False Claims Act cases often don't come to prosecution without an individual whistleblower stepping forward," said Greg Williams.
A defense contractor this month agreed to pay nearly a billion dollars to settle criminal fraud and other federal charges. Not some fly-by-night, but rather the legacy contractor Raytheon. The company is under Justice Department investigations for defective pricing, foreign bribery and violations of the Arms Export Control Act. My next guest says these problems aren’t isolated to Raytheon. Greg Williams, from the Project on Government Oversight, joined the Federal Drive with Tom Temin to discuss more.
Interview transcript:
Tom Temin And you have written that this is kind of an extensive problem. The Justice Department filed, I think, 500 false claims Act cases in 2023. What’s going on?
Greg Williams Well, let me just first put in context that this is the second largest false claims recovery ever. And the false claims recovery portion of this roughly $1 billion settlement is nearly half a billion dollars. I think it’s also worth observing for your listeners that in case you don’t know, these False Claims Act cases often don’t come to prosecution without an individual whistleblower stepping forward. And that was the case in this case. So if you take this billion dollar settlement and realize that fully half of it would not have come to fruition without an individual putting themselves at risk and stepping forward, that essentially tells you that half of the value of this settlement comes from somebody with a great deal of bravery, and that we can’t rely on the government to catch all of the perpetrators of cases like this. The other piece of context that I wanted to emphasize is that these misbehaviors have been going on since 2009. So it took us 15 years to uncover and settle these issues with Raytheon. And so imagine if you only got a speeding ticket 15 years after you sped down the highway, that does not speak to me as being a sort of airtight enforcement mechanism where you’re caught and to react immediately to the threat of being caught.
Tom Temin And given the number of statutes and the number of regulations under the FAR or the DFAR supplement, defense federal acquisition regulations that exist, what would motivate a company to not make sure this doesn’t happen? This is an extraordinary case.
Greg Williams Yeah, I think it’s extraordinary mostly in the size of the defendant in this case, RTX. Back when I worked for a defense contractor, we had to go through annual briefings that lasted several hours that told us all of the different ways that you could potentially break the law. And it’s not difficult to understand, as I said, essentially all management staff went through these trainings. And so it’s very difficult for me to believe that the individuals involved in these crimes didn’t understand that they were breaking the law and didn’t understand the very serious penalties or are potential. Again, what I think is unusual is that this is one of the top five US defense contractors. And there’s no way that I can prove this, but it certainly raises the question, if you’re big enough or are you subject to some leeway in terms of what you can get away with if the government thinks that you’re too big to fail. I think it’s also worth reviewing the Justice Department press release on this settlement and seeing the many ways in which RTX and Raytheon were in fact given some some leeway based on their cooperation with the investigations. And this is despite the fact that in each case the Justice Department observes that at least initially, they were failing to produce documentation at a reasonable rate. So even with that level of lack of cooperation, these penalties are still substantially smaller than they might have been.
Tom Temin We’re speaking with Greg Williams. He’s director of the Center for Defense Information at the Project on Government Oversight. That’s right, Raytheon did agree, well they fired certain people and they put in antifraud and compliance measures that I think the Justice Department said reduced the potential penalties by 25% in some of the cases. So it looks like this didn’t rise to the executive suite, so far as we can tell, that was something initiated by individuals.
Greg Williams Yeah. This does not appear to be a case of the most senior people likely to have been aware of the behavior being held accountable.
Tom Temin And in the whole area of overcharging the government can be for a variety of reasons, some legal just because you can get away with it and you’ve complied with everything. But then there’s also sometimes in certain types of contracting, you can almost not avoid the False Claims Act at some point in your corporate history because of especially in the reseller situation where somewhere someone might get a more favorable price and therefore you’re in violation. So what’s your assessment of, I guess, the state of the industry with respect to its respect for the norms and laws and statutes and regulations it’s obligated to operate under?
Greg Williams Well, I think for me, one of the important differences between defense contract and what we do every day as consumers is that we are powerfully, individually, individually motivated to find the best deals available. And while I’ve certainly met many government buyers and contract administrators who are passionate about getting the government the best possible deal as an overall system, we don’t have a good set of mechanisms in place to ensure that every time we engage with the private sector, we are driving them as hard as we can to provide the best price possible, especially with the Defense Department, we are a buyer of enormous market power. And I don’t believe we’re using that power effectively to drive the best prices. And a big part of that is the extent to which we’ve allowed the defense industry to define what a so-called commercial product is, and to drastically reduce the number of situations in which they have to document or certify the costs of what they’re selling to us.
Tom Temin Because in this case, it had to do with Patriot missile systems.
Greg Williams Patriot Missile systems and then a whole defense installation.
Tom Temin Right. So there might be some commercial elements, but the main piece itself is hardly commercial. And it gets down to the issue and we’ve seen this in platform after platform. What is a reasonable cost for this thing that the department can afford? And yet it’s a unique, one of a kind type of platform.
Greg Williams Yeah. Not something that they’re selling on a competitive basis to the private sector.
Tom Temin Right. So what’s the government’s best recourse in this case?
Greg Williams Well, the best the government’s best recourse is to demand the certified pricing or certified cost information to which they’re entitled, and then carefully review it. But when the seller is deliberately hiding that information, in particular hiding the cost of bribing government officials, from the start, you’re not getting a clear picture of what’s going on.
Tom Temin Right. This was a foreign military sales violation, I guess, where the government actually, the U.S. government acquires it for purposes of exporting. And in this case, it was to Qatar this missile defense system and the maintenance of it. And Raytheon paid Qatar, I guess, to choose that system over maybe there’s a Norwegian or German system or something that’s competitive.
Greg Williams So the information that’s available from the Department of Justice is somewhat vague on these points. So I don’t know who the competitors or potential competitors might have been. All I think the the press release says is that an official was paid a fee to provide Raytheon with some advantage. Now, the law is pretty clear that you can’t disguise that as an expedited fee or the law’s pretty good about avoiding any ambiguity about what you are and are not allowed to pay somebody for.
Tom Temin All right. So we have a nearly billion dollar settlement, and the company was cooperative when confronted with this. Yet it took, as you point out, many, many years for it to come to light, which is often the case.
Greg Williams And they took their time becoming cooperative. Again, the Justice Department points out that in each case, they were initially very slow in document production.
Tom Temin So for the government, then, what are the lessons learned here? What can we learn from this particular case other than, yeah, that was a really big one.
Greg Williams Yeah. Just as you need to be vigilant every time you buy a car or house, you can’t have a bad experience and then scold the seller and then just expect that the next seller you encounter will be cooperative. You need to look at every single purchase and make sure you’re getting the best deal possible. And you need to make sure to fully fund investigative bodies like the Defense Contract Audit Agency and Defense Criminal Investigation Service, and various inspectors general. It takes time and personnel to do a good job to constantly be looking for the best deal.
Tom Temin And does the government have the tools and the personnel it needs to actually do this in each case?
Greg Williams Well, I think if it takes them 15 years to do it, then there’s your answer. And if they can only do it with the help of extraordinarily brave whistleblowers, then there’s another answer. And if a company as successful as RTX, I remember when I received the training every year, it was emphasized to us that you just don’t want to be in the business of doing something that might cost the company millions, tens of millions, potentially hundreds of millions of dollars. And I just can’t imagine that anyone with the authority at Raytheon to be directly involved in these deals would not have received that training and would not know that they were doing something illegal. And so that that just strongly suggests to me that they did not think it was likely enough that they would get caught, that they would be motivated to avoid these, obviously, illegal behaviors.
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Tom Temin
Tom Temin is host of the Federal Drive and has been providing insight on federal technology and management issues for more than 30 years.
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