Military Contractors: Big Bucks, Big Fraud

Most of us are aware of the fact that the U.S. government is using a large number of military contractors in its operations.  What many people don’t know, however, is that as of March, 2009, there were more Department of Defense contractors than uniformed personnel in Afghanistan. According to a report by the Congressional Research Service, contractors made up 57% of the Pentagon’s personnel in Afghanistan, “the highest recorded percentage of contractors used by DoD in any conflict in the history of the United States.” Rather ominously, the study also notes that “[a]buses and crimes committed by armed private security contractors and interrogators against local nationals may have undermined US efforts in Iraq and Afghanistan.”

According to a Congressional Budget Office report, military contracts for services in the Iraq theater cost U.S. taxpayers more than $85 billion between 2003 and 2007, and the ratio of contractors to US service members was 1 to 1. The cost to U.S. taxpayers is obviously higher today, and continues to grow every single day as long as military operations continue. According to Senator Kent Conrad (D-N.D.), chairman of the Budget Committee, the use of military contractors “restricts accountability and oversight; opens the door to corruption and abuse; and, in some instances, may significantly increase the cost to American taxpayers.”

With the amount of money at stake, a recent New York Times article regarding bribes paid by security contractor Blackwater to Iraqi officials does not come as much of a surprise. According to Blackwater sources, top Blackwater executives authorized secret payments of approximately $1 million to buy the silence and support of certain Iraqi officials following a September 2007 incident in which Blackwater personnel indiscriminately opened fire on Iraqi civilians in Nisour Square, Baghdad, killing 17. The killings led to a backlash against Blackwater, and the company feared that Iraqi officials would force it to leave the country as well as denying it an operating license–essential for fulfilling contracts worth hundreds of millions of dollars.

Blackwater is currently under investigation by a federal grand jury in North Carolina. A Blackwater executive informed federal prosecutors about the company’s bribery scheme, which, if true, could open the company to charges of violating the Foreign Corrupt Practices Act (FCPA). The FCPA makes it unlawful to bribe foreign officials in order to gain/retain business.

Considering the number of foreign contractors operating in Iraq and Afghanistan, it’s not difficult to envision other contractors engaging in unauthorized activity and then entangling themselves by trying to bribe foreign officials into looking the other way. We could see more FCPA actions as military contractors attempt to cover up their nefarious deeds (see, for example, this article about a whistleblower who alerted authorities to a military contractor’s use of sex slaves while its employees were supposed to be guarding the U.S. embassy in Kabul).

If your company is operating overseas, note that the FCPA has five elements which must be satisfied in order to constitute a violation:

  1. The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the antibribery provisions or if they conspire to violate those provisions.
  2. The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person. You should note that the FCPA does not require that a corrupt act succeed in its purpose. The offer or promise of a corrupt payment can constitute a violation of the statute.
  3. The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value.
  4. The prohibition extends only to corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office. A “foreign official” means any officer or employee of a foreign government, a public international organization, or any department or agency thereof, or any person acting in an official capacity.
  5. The FCPA prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person. (DOJ Lay-Person’s Guide to FCPA)

An employee of a military contractor who observed illegal activity, such as the bribes made in violation of the FCPA, could be entitled to whistleblower protection under the Sarbanes-Oxley Act, Section 806, which protects employees of publicly traded companies who provide evidence of fraud. As more corporations expand their overseas operations, it’s important for potential whistleblowers to remain alert.

For an interesting case filed this fall involving a colorful cast of characters–notorious insurance giant AIG, a Korean government employee offered a “six week paid vacation in New York and London,” (courtesy of AIG and in violation of FCPA), and a wrongfully terminated whistleblower–see Lebron v. AIG, No. 09-4285, 2009 U.S. Dist. LEXIS 97303 (S.D.N.Y Oct. 19, 2009).