Fat Leonard and Fat Cats: Overbilling practices in the U.S. military

Tweet

Historically, the United States has spent more on its military than any other nation on the planet; the current U.S. defense budget is the same amount as the next top eight countries spend on their national defense combined. This allows the United States Department of Defense (DOD) to have enough money to buy new equipment or build new and better ships and planes. Even so, the DOD still seeks to lower its costs and stay within its budget. To accomplish this, the DOD has government contractors fulfill its needs, and it chooses the contractor with the lowest bid to do the job.

Contractors are enticed to find any way to cut corners or exploit government contracts to maximize their profits. Even during the Civil War, government contractors would try to resell mules that were already sold to the Army, paint over rotten ship hulls to sell to the Navy, or sell barrels of sawdust instead barrels of gunpowder; however, the War Department, the predecessor to the DOD, found that no law then enacted was “adequate” to punish the violators. To combat these fraudulent claims, Congress passed the False Claims Act of 1863 (FCA). Violations of the FCA were high, carrying a fine of $2,000 for each false claim. Congress debated whether or not individuals who reported such claims, known as relators, should be rewarded. In the end, the final bill gave relators a 50 percent cut for any successful judgment brought against the accused contractor.

As CEO of the Glenn Defense Marina Asia Group, Mr. Francis overcharged $20 million to the U.S. Navy through fake tariffs and false port authorities.

Violations under the FCA would evolve into not only bad shipments of gunpowder or bad hulls on ships, but also to the overbilling for various services the contractors would perform. The most recent scandals involving the military show that the practice of defrauding continues in more subtle ways than just a bad batch of gunpowder.

The Fat Leonard scandal is a case of overbilling by a man in Singapore who contracted with the Navy to provide fuel and food to ships located around Asia. His name is Leonard Glenn Francis, also known as “Fat Leonard,” in reference to his 350-pound stature. As CEO of the Glenn Defense Marina Asia Group, Mr. Francis overcharged $20 million to the U.S. Navy through fake tariffs and false port authorities. Not only did Mr. Francis overcharge for his services, but he also gave $500,000 in cash, all-expense-paid luxury hotel stays, and Cuban cigars to high-ranking officers in the Seventh Fleet, a U.S. fleet assigned to the Pacific. In one instance, Mr. Francis invited sailors to stay at the MacArthur Suite in the Makati Shangri-La Hotel in Manila, Philippines for a lavish party. The sailors were treated to prostitutes, expensive champagne, and Hennessy Private Reserve at $600 a bottle, as well as high-priced dinners. During the wild party, memorabilia connected to General Douglas MacArthur was used and the room charges and bar tab exceeded $50,000.

All of the gifts and sex were given in exchange for military secrets, such as the movement of ships and officer schedules.

Escalating the situation further were the sailors helping Mr. Francis defraud the government. All of the gifts and sex were given in exchange for military secrets, such as the movement of ships and officer schedules. Mr. Francis would use this information to coordinate with the sailors to have ships come to ports that were more expensive with port authorities ran by Mr. Francis. Acting U.S. Attorney for the Southern District of California Alana Robinson, the person in charge of prosecuting the sailors involved in the conspiracy, stated, “This is a fleecing and betrayal of the United States Navy in epic proportions, and it was allegedly carried out by the Navy’s highest-ranking officers.”

As of August 16, 2017, 18 of the 27 people charged with sharing military secrets and conspiring to defraud the DOD have pleaded guilty. The first of those occurred in 2013, when Naval Criminal Investigative Services (NCIS) supervisor John Beliveau II pled guilty. He helped Mr. Francis avoid detection from investigators into his services by leaking names of witnesses and NCIS documents. Commander Bobby Pitts pled guilty on August 16 to also being involved in the conspiracy to help Mr. Francis. His position as head of the Fleet Industrial Supply Command allowed him to help fabricate false invoices billed to the DOD. Mr. Francis pled guilty to bribery, conspiracy to bribe, and conspiracy to defraud the United States government. He also agreed to give $35 million to the DOD.

In another overbilling scandal, the shipbuilding contractor Huntington Ingalls will have to pay back $9.3 million to the DOD for work that was never actually done. Huntington Ingalls’s contract with the Navy gave them an incentive for working less than the hours allotted for a specific project. Supervisors would share in the bonus given for coming underneath this threshold. At Huntington Ingalls’s Mississippi shipyard, the supervisors would assign hours to different ships than the ones workers were actually working on. For example, hours were assigned to ships that included supervisors diving under the ship to inspect the hull when no such dives ever occurred.

Former Huntington Ingalls employee Byron Faulkner filed a qui tam action on behalf of the government in 2013. Huntington Ingalls cooperated with the government in the investigation and improved compliance issues at the shipyard. Even so, the shipbuilding company will have to pay the DOD $9.2 million, with $4.7 million going to the Navy and $3.6 million to the Coast Guard. Mike Wiest, head of the NCIS Southeast Field Office, stated in regards to the Huntington Ingalls case, “Overcharging for work not done is not only criminal on its face, investigating those crimes siphoned resources and time which would have been better invested in protecting the nation.” Mr. Faulkner will receive $1.6 million for reporting the false claims to the government.

[O]ne would think that the DOD would step in and help the branches draft better contracts that do not encourage fraud or let the violator off with little more than a slap on the wrist.

Without the efforts of relators like Mr. Faulkner, military investigators could take years and even decades to find those responsible for the fraudulent claims. Mr. Francis, for example, had been a contractor for the Navy for 25 years by the time the case ended and the Navy revoked all contracts with Glenn Defense Marina Asia Group. NCIS and other similar military branch agencies have not been focusing on fraud since the September 11 attacks in New York City and Washington, D.C. Rather, their focus has been on counterterrorism efforts around the country and near military bases abroad. Additionally, NCIS lacked the manpower to be able to cover all regions where the military is located and to conduct specialized investigations such as fraud claims, which allowed Mr. Francis to go unnoticed for so long in Singapore. Until 2008, NCIS did not have a special agent assigned to Asia to investigate economic crimes.

Despite NCIS and other agencies’ efforts, the military lacks follow-through with violators and usually does not punish violators by revoking contracts. For example, Huntington Ingalls continues to construct Navy and Coast Guard ships despite multiple FCA cases against the company over time. Certainly, the Navy and Coast Guard can only go to a few shipyards to have ships commissioned for construction and repair, but one would think that the DOD would step in and help the branches draft better contracts that do not encourage fraud or let the violator off with little more than a slap on the wrist. More oversight and stricter contracts will be necessary for the military to stop feeding fat cats.