A Quick Guide to Government Graft

by Latoya Peterson

According to the New York Times:

The Army official who managed the Pentagon’s largest contract in Iraq says he was ousted from his job when he refused to approve paying more than $1 billion in questionable charges to KBR, the Houston-based company that has provided food, housing and other services to American troops.

The official, Charles M. Smith, was the senior civilian overseeing the multibillion-dollar contract with KBR during the first two years of the war. Speaking out for the first time, Mr. Smith said that he was forced from his job in 2004 after informing KBR officials that the Army would impose escalating financial penalties if they failed to improve their chaotic Iraqi operations.

In a nutshell KBR, like a few other companies, were responsible for providing needed on the ground services in Iraq. In order to get these kinds of contracts, you have to bid for them and show your pricing and an estimated cost for the full job. The government then evaluates these bids and selects the one that will get the job done and save taxpayers the most money. (In theory, that is.) After the contract is awarded, the contractors must submit invoices to be paid. If the invoices are accurate, the payment is processed – if the invoice is incorrect or for a higher amount, the government can stop services and investigate why this is happening.

Unfortunately, that’s not quite what happened.

Army auditors had determined that KBR lacked credible data or records for more than $1 billion in spending, so Mr. Smith refused to sign off on the payments to the company. “They had a gigantic amount of costs they couldn’t justify,” he said in an interview. “Ultimately, the money that was going to KBR was money being taken away from the troops, and I wasn’t going to do that.”

But he was suddenly replaced, he said, and his successors — after taking the unusual step of hiring an outside contractor to consider KBR’s claims — approved most of the payments he had tried to block.

Other Army officials claim that they removed Charles M. Smith for other reasons. They also claim that disrupting service to KBR would have cut off needed services to the troops that would compromise operations. But KBR was warned well in advance of the issues with their invoices, as confirmed by an internal audit. And in situations like this, the government tends to hold the upper hand – a contractor who is not cooperating and does not provide accurate record keeping can be banned from bidding on any future government requests, which for most businesses could be devastating. Most contractors quickly come into compliance, or find their contracts terminated. So why wasn’t KBR scared?

Ever since KBR emerged as the dominant contractor in Iraq, critics have questioned whether the company has benefited from its political connections to the Bush administration. Until last year, KBR was known as Kellogg, Brown and Root and was a subsidiary of Halliburton, the Texas oil services giant, where Vice President Dick Cheney previously served as chief executive.

Oh, right.

Mr. Smith, a civilian employee of the Army for 31 years, spent his entire career at the Rock Island Arsenal, the Army’s headquarters for much of its contracting work, near Davenport, Iowa. He said he had waited to speak out until after he retired in February.

As chief of the Field Support Contracting Division of the Army Field Support Command, he was in charge of the KBR contract from the start. Mr. Smith soon came to believe that KBR’s business operations in Iraq were a mess. By the end of 2003, the Defense Contract Audit Agency told him that about $1 billion in cost estimates were not credible and should not be used as the basis for Army payments to the contractor.

“KBR didn’t move proper business systems into Iraq,” Mr. Smith said.

Along with the auditors, he said, he pushed for months to get KBR to provide data to justify the spending, including approximately $200 million for food services. Mr. Smith soon felt under pressure to ease up on KBR, he said. He and his boss, Maj. Gen. Wade H. McManus Jr., then the commander of the Army Field Support Command, were called to Pentagon meetings with Tina Ballard, then the deputy assistant secretary of the Army for policy and procurement.

Ms. Ballard urged them to clear up KBR’s contract problems quickly, but General McManus ignored the request, Mr. Smith said. Ms. Ballard declined to comment for this article, as did General McManus.

This situation is not unusual. When goods and services are needed, often the onus is on the government to resolve disputes with the contractor so that services can continue uninterrupted. And that is exactly what Smith was trying to do.

Eventually, Mr. Smith began warning KBR that he would withhold payments and performance bonuses until the company provided the Army with adequate data to justify the expenses. The bonuses — worth up to 2 percent of the value of the work — had to be approved by special boards of Army officials, and Mr. Smith made it clear that he would not set up the boards without the information.

Mr. Smith also told KBR that, until the information was received, he would withhold 15 percent of all payments on its future work in Iraq.

“KBR really did not like that, and they told me they were going to fight it,” Mr. Smith recalled.

In August 2004, he told one of his deputies, Mary Beth Watkins, to hand deliver a letter about the threatened penalties to a KBR official visiting Rock Island. That official, whose name Mr. Smith said he could not recall, responded by saying, “This is going to get turned around,” Mr. Smith said.

Two officials familiar with the episode confirmed that account, but would speak only on the condition of anonymity out of concern for their jobs.

The next morning, Mr. Smith said he got a call from Brig. Gen. Jerome Johnson, who succeeded General McManus when he retired the month before. “He told me, “You’ve got to pull back that letter,”’ Mr. Smith recalled. General Johnson declined to comment for this article.

A day later, Mr. Smith discovered that he had been replaced when he went to a meeting with KBR officials and found a colleague there in his place. Mr. Smith was moved into a job planning for future contracts with Iraq. Ms. Watkins, who also declined to comment, was reassigned as well.

Interesting how a contractor was able to flex this much power. An outside firm was even contracted to review KBR’s files after Smith was removed from the contract. This is highly unusual, especially as government bodies have many different auditing agencies that are supposed to do this work and are accountable to congressional oversight. The General Accountability Office (GAO) is tasked with this kind of oversight for the entire government. And yet, for some reason, an outside firm was hired. And that firm worked very closely with KBR to prove that the $1 billion was accounted for. Somewhere.

Paul Heagen, a spokesman for RCI’s parent company, the Serco Group, said his firm had insisted on working with the Army auditors. While KBR did not provide all of the data Mr. Smith had been seeking, Mr. Heagen said his company had used “best practices” and sound methodology to determine KBR’s costs.

Bob Bauman, a former Pentagon fraud investigator and contracting expert, said that was unusual. “I have never seen a contractor given that position, of estimating costs and scrubbing D.C.A.A.’s numbers,” he said. “I believe they are
treading on dangerous ground.”

The Army also convened boards that awarded KBR high performance bonuses, according to Mr. Smith.

But check this out:

High grades on its work in Iraq also allowed KBR to win more work from the Pentagon, and this spring, KBR was awarded a share in the new 10-year contract. The Army also announced that Serco, RCI’s parent, will help oversee the Army’s new contract with KBR.

“In the end,” Mr. Smith said, “KBR got what it wanted.”

If a contractor is never held responsible for what they are not providing or fuzzy numbers, it means they can still win work with the government. We’ve already lost one billion. And now, they just received a contract to spend even more.

Now, the interesting thing is that there are protections and oversights in place to prevent this kind of abuse from happening. That is why dealing with governmental organizations takes so long – there are systems designed to check and recheck all activities to make sure they are in compliance with government standards. The problem is that certain people have the power to override these checks – which puts us in a very vulnerable position. And a lot of these people are government appointees – people we do not see and do not vote for.

Readers, this particular article has nothing to do with race. But it does have everything to do with how the government works and how the system functions. As voters, it is not enough for us to look at a candidate’s platform of promises and make a decision there. We need to understand the processes and failures of government, so we citizens can hold our elected officials accountable. As I found out in this thread, there is a gulf of difference in between how government is presented and how things actually work. And while we will continue to cover race and politics, I really want everyone to understand a little more. So every time I come across one of these clear, straightforward articles that illustrates a problem in the government, or how systems actually work, I will post it.

Because these things affect us.

Right now, costs associated with the War in Iraq (and to a lesser extent, Afghanistan) have caused Bush to propose a new budget that lays into domestic spending. Programs that we as American citizens want and need that are being scaled back or cut. Our state governments aren’t getting as much money and they will have to cut back services for their communities as well. So when you look at problems like this, think about the bottom line.

What could we have done for our country with that wasted one billion?

(Image from citizenx.org)

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Racialicious is a blog about the intersection of race and pop culture. Check out our daily updates on the latest celebrity gaffes, our no-holds-barred critique of questionable media representations, and of course, the inevitable Keanu Reeves John Cho newsflashes.

Latoya Peterson (DC) is the Owner and Editor (not the Founder!) of Racialicious, Arturo García (San Diego) is the Managing Editor, Andrea Plaid (NYC) is the Associate Editor. You can email us at team@racialicious.com.

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