Defense contractors hiding behind shell companies are “ripping off the Pentagon and endangering national security,” one watchdog group concluded after reading a “sobering” November 2019 report from the Government Accountability Office.
The GAO report underscores a problem that has become “a worldwide concern,” noted Neil Gordon, an investigator for the Washington, D.C.-based Project on Government Oversight. POGO has ideas for how the Pentagon can begin to address the problem.
The U.S. Department of Defense “faces several types of financial and nonfinancial fraud and national security risks posed by contractors with opaque ownership,” the GAO explained.
“These risks, identified through GAO’s review of 32 adjudicated cases, include price inflation through multiple companies owned by the same entity to falsely create the appearance of competition, contractors receiving contracts they were not eligible to receive and a foreign manufacturer receiving sensitive information or producing faulty equipment through a U.S.-based company.”
The GAO cited one case involving “an ineligible foreign manufacturer that illegally exported sensitive military data and provided defective and nonconforming parts that led to the grounding of at least 47 fighter aircraft.”
While the GAO didn’t identify the fraudulent party in that case, Gordon made an educated guess. “This appears to reference Allied Components LCC, a military hardware supplier whose owner pleaded guilty in 2013 to providing F-15 fighter aircraft parts that were not only defective but also made in India even though the contract required the parts to be U.S.-made, and to passing along information about nuclear-powered submarines to India without the required government approval.”
“Altogether, four of the 32 cases involved contractors using U.S.-based shell companies to conceal that the work was really being done by a foreign-based company,” Gordon explained. “Concealing beneficial ownership in this manner increases the chance that ‘adversaries seeking to act against the government’s interests’ will gain access to sensitive government information or installations, according to the report.”