Are charges that private military contractors commit egregious acts of fraud overblown? Not according to recent news. McClatchy Newspapers reports that the Louis Berger Group, one of the U.S. government's highest profile American contractors in Afghanistan has agreed to pay tens of millions of dollars to settle allegations that it overbilled the U.S. government.
In return, the Justice Department will end its investigation into allegations that Louis Berger was intentionally overcharging American taxpayers. The settlement, which is just over $69 million, includes civil and criminal penalties.
Louis Berger's alleged overbilling, a practice that dates to at least the mid-1990s, swelled to tens of millions in lost tax dollars. In 2006, a former Louis Berger employee handed the government evidence against the company, two months before the U.S. Agency for International Development tapped Louis Berger to jointly oversee $1.4 billion in reconstruction contracts in Afghanistan.
Court documents reveal that the Justice Department has been negotiating a deal that would "aid in preserving the company's continuing eligibility to participate" in federal contracting in Afghanistan and elsewhere.
According to McClatchy Louis Berger is accused of manipulating overhead cost data and overhead rate proposals submitted to the U.S. government and several states including Massachusetts, Nevada and Virginia.
In some instances the company is accused of shifting overhead costs from private clients to federal and state contracts, where they were less likely to be noticed.
A press conference was held in Newark, NJ today to announce developments in the government's investigation. According to Paul J. Fishman, United States Attorney for the District of New Jersey, where the Berger Group is headquartered, Rod J. Rosenstein, U.S. Attorney for the District of Maryland, and Tony West, Assistant Attorney General of the Civil Division of the Department of Justice two former senior LBG employees pleaded guilty this morning to their roles in the scheme.
Salvatore Pepe, LBG's former Chief Financial Officer, and Precy Pellettieri, the former Controller, admitted to conspiring to defraud USAID by obtaining contract payments billed at falsely inflated overhead rates.
According to documents filed in these cases and statements made in court: LBG provides engineering and other consulting services to private and public entities, including federal agencies, state agencies, and foreign governments. Several of LBG's largest contracts were with USAID, an independent federal government agency that advances U.S. foreign policy by supporting economic growth, agriculture, trade, global health, democracy, and humanitarian assistance in developing countries - including countries destabilized by violent conflict. USAID awarded several multimillion-dollar contracts to LBG for rehabilitative and reconstructive work in Iraq and Afghanistan.
From at least 1999 through August 2007, LBG, through its former executives and management employees, intentionally overbilled the U.S. government in connection with contracts for work performed overseas. The scheme to defraud the government was carried out by Pepe and Pellettieri, at the direction of a former executive.
Pepe directly supervised Pellettieri, who supervised LBG's general accounting division. Both were responsible for ensuring the integrity of LBG's cost data with respect to the calculation of overhead rates that LBG charged to USAID and other agencies. LBG charged the federal government these rates on "cost plus" contracts, which enabled contractors to pass on their overhead costs to the agency in general proportion to how much labor LBG devoted to the government contracts.
Pepe and Pellettieri admitted that from September 2001 through August 2007, they agreed with each other and others to bill USAID and other federal agencies for LBG's overhead costs at falsely inflated overhead rates. They agreed to target an overhead rate above 140 - meaning that for every dollar of labor devoted to a USAID contract, LBG would receive an additional $1.40 in overhead expenses and total profits allegedly incurred by LBG. As part of this conspiracy, Pepe and Pellettieri agreed to classify non-federal overhead as federal overhead, which had the effect of increasing the rate charged to the government. For example, Pepe supervised Pellettieri in reclassifying the work hours of LBG's corporate employees, such as those in the general accounting division, to make it appear as if they worked exclusively on federal projects when they did not. The defendants reclassified these hours without the employees' knowledge and without investigating whether the employees had correctly accounted for their time.
While it is great the U.S. government has investigated and fined the Berger group it is important to note that this came about because of a whistleblower lawsuit under the False Claims Act and not because of the superb auditing capabilities of the feds.
And it seems unlikely the Berger Group is the only perp. The sheer number of contracts in Afghanistan makes that unlikely. An October 27 report from the Special Inspector General for Afghanistan Reconstruction (SIGAR) found that DOD, State, and USAID reported more than $17.7 billion in obligations made against contracts, cooperative agreements, and grants for Afghanistan reconstruction during fiscal years 2007-2009. SIGAR identified about 7,000 contractors and other entities, including for-profit and non-profit organizations and multilateral organizations.
Given that the Justice Department has been negotiating a deal that would "aid in preserving the company's continuing eligibility to participate" in federal contracting in Afghanistan and elsewhere it appears that the government regards Louis Berger in the same light as the Bush and Obama administrations regarded Wall Street investment firms, i.e., too big to fail. I wonder how that fits in with the concept of ethical contracting.