Why does contractor pricing abuse seem to persist?

Tom Temin And you wrote that this is a pretty broad problem. I think the Department of Justice filed 500 false claims Act cases in 2023. What’s going on?

Greg Williams First let me point out that this is the second largest false claims recovery ever. And the false claims portion of that roughly $1 billion settlement is almost half a billion dollars. I think it’s worth observing for your listeners that, if you don’t know, these False Claims Act cases generally don’t come to prosecution without an individual whistleblower coming forward. And that was the case in this case too. So if you take this billion-dollar deal and realize that half of it wouldn’t happen without an individual putting himself on the line and stepping forward, that actually tells you that half the value of this deal comes from someone with a lot of power. This is an act of great courage and we cannot rely on the government to catch all the perpetrators of such cases. Another issue I want to emphasize is that this bad behavior has continued since 2009. So it took us 15 years to uncover these problems and solve them with Raytheon. And imagine getting a speeding ticket 15 years after speeding on the highway, that doesn’t strike me as some kind of airtight enforcement mechanism that allows you to react immediately to the threat of being caught and being caught.

Tom Temin And given the number of statutes and the number of regulations under the FAR or DFAR supplement, the current defense federal acquisition regulations, what would lead a company to not make sure that doesn’t happen? This is an extraordinary situation.

Greg Williams Yes, I think RTX in this case is outstanding, mostly for the sheer size of the defendant. When I worked for a defense contractor, we had to go through annual briefings that lasted several hours and told us all the different ways you could break the law. And as I said, it is not difficult to understand that the entire management team has gone through this training. So it’s very hard for me to believe that the individuals involved in these crimes don’t understand that they are violating the law, that they don’t understand the very serious penalties or potential penalties. Again, what I think is unusual is that this firm is one of the five largest defense contractors in the United States. And I have no way of proving this, but it certainly raises the question: Are you big enough, or are you subject to some latitude in terms of what you can miss if the government thinks you’re too big? mistake. I think it would also be helpful to review the Department of Justice press release regarding this agreement and see the many ways in which RTX and Raytheon were actually given some leeway based on their cooperation with the investigations. And this is despite the fact that the Department of Justice has observed that in every case they have failed, at least initially, to produce a reasonable proportion of documents. So, despite this level of lack of cooperation, these penalties are still significantly smaller than they could be.

Tom Temin We’re talking to Greg Williams. He is the director of the Defense Information Center at the Government Oversight Project. True, Raytheon agreed, so they fired some people and I think they implemented anti-fraud and compliance measures that the Justice Department said reduced potential fines by 25% in some cases. This appears to be something that was initiated by these individuals who, as far as we can tell, did not rise up to the management level.

Greg Williams Yes. This does not appear to be the case of the most senior individuals who were aware of the conduct for which they were held responsible.

Tom Temin And there may be a variety of reasons for overcharging the government; some may be legal because you can get away with it and you’ve complied with everything. But sometimes it also exists in certain types of contracts; You can almost avoid False Claims Act liability because at some point in your corporate history, especially your dealer status, someone somewhere might have gotten a more favorable price and therefore you’ve violated it. . Well, I guess what is your assessment of the situation of the industry in terms of respect for the norms, laws, statutes and regulations that the industry is obliged to comply with?

Greg Williams To me, one of the key differences between defense contracting and what we do every day as consumers is that we are strongly, individually, and individually motivated to find the best deals available. And while I’ve certainly met many public buyers and contract managers who are passionate about getting the government the best possible deal as an overall system, we don’t have a good set of mechanisms to ensure that every time we interact with the government. The private sector, we push them as hard as we can to get the best price possible, we are a buyer with tremendous market power, especially with the Department of Defense. And I don’t believe we use that power effectively to capture the best prices. And a big part of that is the extent to which we’ve allowed the defense industry to define what a so-called commercial product is and greatly reduce the number of situations in which they have to document or certify their costs. We sell to us.

Tom Temin Because in this case it was about Patriot missile systems.

Greg Williams Patriot Missile systems and then a full defense facility.

Tom Temin Right. So there may be some commercial elements, but the title track itself isn’t very commercial. And it comes down to the real issue, and we’ve seen that from platform to platform. What is a reasonable cost for this thing that the department can afford? And yet it’s a unique, one-of-a-kind platform.

Greg Williams Yes. It’s not something they sell competitively to the private sector.

Tom Temin Right. So, what is the government’s best recourse in this case?

Greg Williams The government’s best recourse is to request certified pricing or certified cost information for which they have authority and then review it carefully. But when the seller deliberately hides this information, especially when he hides the cost of bribing government officials from the very beginning, you don’t get a clear picture of what’s going on.

Tom Temin Right. I think this was a violation of the government’s sale of foreign military, which was actually purchased by the US government for export purposes. And in this case, the missile defense system and its maintenance were left to Qatar. And Raytheon, I think, paid Qatar to opt for this system; maybe the Norwegian or German system or a competitive system.

Greg Williams Therefore, the information obtained from the Department of Justice is somewhat vague on these points. So I don’t know who the competitors or potential competitors might be. I think all the press release says is that an official was paid to gain an advantage for Raytheon. Now, the law is pretty clear that you can’t disguise it as an expedited charge, or the law is pretty good at avoiding any ambiguity about what you are and aren’t allowed to pay someone.

Tom Temin Certainly. So we have an almost billion-dollar deal, and the company cooperated when faced with this. But as you point out, it took many years for this to come to light, which is often the case.

Greg Williams And they took the time to collaborate. The Ministry of Justice again states that in all cases, they were initially very slow in document production.

Tom Temin So what are the lessons learned here for the government? What can we learn from this particular case other than that, yes, this is a really big case?

Greg Williams Yes. Just like you need to be careful every time you buy a car or a house, you can’t have a bad experience, then berate the seller and expect the next seller you encounter to cooperate. You need to look at each purchase and make sure you are getting the best deal possible. You also need to make sure you fully fund investigative bodies such as the Defense Contract Audit Agency and the Defense Criminal Investigative Service, as well as various inspectors general. It takes time and staff to do a good job of constantly looking for the best deal.

Tom Temin But does the government have the tools and personnel it needs to actually do this in all cases?

Greg Williams I think if it’s going to take them 15 years to do it, then your answer is obvious. And if they can only do this with the help of extraordinarily brave whistleblowers, then there is another answer. And if it’s a company as successful as RTX, I remember every year when I was training, it was emphasized to us that we didn’t want to get involved in something that could cost the company millions, tens of millions. potentially hundreds of millions of dollars. And I can’t imagine that anyone at Raytheon with authority to be directly involved in these deals would not have received this training and not know they were doing something illegal. And that strongly suggests to me that they don’t think there’s a good enough chance they’ll get caught that they’ll be motivated to avoid this clearly illegal behavior.