FRAUD in the

Bureaucracy Out of Control

By Ralph Vartabedian

       WASHINGTON - A string of embezzlements at military installations across the nation is pointing out serious weaknesses in the Pentagon's control over its multi-billion dollar contractor payment system, according to three investigative reports due to be released today. The embezzlements, ranging from $11,000 to $3 million each, were executed mainly by low-level employees at federal payment centers exploiting loopholes in the government's troubled accounting system, the reports found.

In one recent case, an Air Force staff sergeant in Dayton, Ohio, arranged for his mother and girlfriend to receive more than $900,000 in government checks, a scheme he executed even after his co-workers warned managers he should not be trusted, an internal Defense Department memo states. Weaknesses in the payment system, which is operated by the Defense Finance and Accounting Service, have played a key role in more than a dozen known cases of embezzlement in recent years, according to a General Accounting Office report obtained by The (Los Angeles) Times.

Even clerks are able to manipulate the Pentagon's computerized finance system to create fictitious contracts and then direct the Treasury Department to send checks to personal postal boxes, according to a second GAO report. The string of known embezzlements represents only the tip of the waste and fraud throughout the Pentagon's financial system, said Sen. Charles E. Grassley (R-Iowa), who requested the investigations out of growing concern about "lax internal controls."

"If we can send missiles to a bull's-eye at a factory in Khartoum and a Bedouin training camp in Afghanistan, we ought to be able to set up an accounting system at the Defense Department that operates with precision," Grassley said. "Let's say it takes a rocket scientist to do that; well, the Pentagon has rocket scientists right there." The problem has been exacerbated by the Clinton administration's highly touted effort to "re-invent government," which has curtailed traditional safeguards in an effort to cut red tape for defense contractors, according to a probe by a Senate subcommittee staff.

In addition, the Pentagon is cutting back on audits. In July, the Defense Contract Audit Agency stopped all routine reviews of contracts under $10 million. Such audits represented the backbone of the agency's efforts to ferret out fraud and corruption, according to one veteran auditor. Susan Hansen, a Pentagon spokeswoman, denied that such streamlining has compromised the integrity of the Pentagon's finances. The Defense Department wants to eliminate unnecessary layers of bureaucracy that have been building for decades, she said. She also disputed that embezzlement is commonplace within the Defense Department. But investigators for the Senate Judiciary's subcommittee on administrative oversight and the courts, which will issue its own report on the embezzlements today (28 Sept. 1998), note that the Justice Department investigated 807 financial crimes against the Pentagon in 1997 alone and obtained 88 guilty pleas.

The finance service has long been troubled by serious accounting problems. In 1996, for example, it erroneously paid contractors $184 million that was not owed. The agency has never been able to balance its books and has set a goal of producing its first clean financial statement in 1999, according to a spokeswoman. It was created in the early 1990s with a mandate to consolidate 332 autonomous payment offices spread across the military services. It now operates 19 payment centers that disburse $22 billion per month - or more than $30 million an hour.

Senate investigators for Grasley spent a year examining the agency's operations and concluded that it routinely makes payments without proper documentation. The investigators examined 50 random contracts, selected by Defense officials, and concluded that all of the contracts lacked the necessary documentation to determine whether the products paid for were ever delivered. Follow-up investigations indicated that much of the equipment could not be located. The investigators conducted 15 on-site inspections to check whether ordered goods actually existed. The list of missing items included furniture, televisions and computer equipment. No proof existed that services were performed even after payments were made. In some cases, cheaper goods were substituted for higher-cost products.

At the same time, the GAO conducted its own review of the payment system and concluded that serious weaknesses exist in the payment agency's computer security. As of June, 1800 employees had access to Pentagon computers that allow them to single-handedly create contracts, delivery orders and invoices - all of the paperwork necessary to generate a payment check. The system also allows them to enter new addresses for mailing payments, a loophole that was exploited in several of the embezzlement cases. "No one individual should control all key aspects of a transaction or event without appropriate compensating controls," the report warned. Moreover, the GAO report found that user identifications and passwords were stored in the computer system in unsecured files, giving hackers easy access to the payment system.

Today's Senate hearing is expected to focus on the case of Sgt. Robert L. Miller, who was convicted in July of embezzling checks of more than $900,000 at the Dayton finance center. Dayton officials were warned earlier about Miller by investigators who looked into the disappearance of two Treasury checks and cash totaling $7,000 that was under Miller's control at his prior job at Castle Air Force Base, according to an Oct. 26, 1995, investigative memorandum. Dayton officials were warned again in 1995, 1996 and 1997 by three accountants, who repeatedly sought to alert management to what they considered suspicious activity by Miller, according to Senate investigators. "They were warning about this fraudulent activity three years ago, and they were punished and silenced," Grassley said. "In the case of Miller, there was even a memo that preceded him."

SOURCE: Excerpted from the 28 September, 1998, issue of the Los Angeles Times, Orange County edition, from an article entitled, "Thefts Reveal Flawed Pentagon Contract System." Excerpted in the public service of the national interest of the American people.

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