Defense Contracts : Kickbacks: New Growth Industry
John Power, who runs a small Southern California defense factory, has seen the military spending boom create new business opportunities in his industry--but not all of the type that the Pentagon has in mind.
Crooked purchasing agents at major aerospace firms have established their own growth industry, Power said, one based on taking cash kickbacks and expensive gratuities in exchange for awarding Pentagon subcontracts.
“There is a lot of corruption, both at the buyers’ and management level,” he said. “There are a lot of honest buyers. But there are those who ask for money and those who quietly hint they’ll not be offended by your offer.”
Become Entrenched
Such outspoken remarks are unusual for someone in Power’s position, but they confirm a growing perception in defense and law enforcement circles that kickbacks have become entrenched in the purchasing end of the defense industry and threaten the integrity of the military procurement system.
“Corrupt schemes in this area are a significant problem,” U.S. Atty. Gen. Edwin Meese III said in a statement to The Times. “The problem is one of our principal areas of focus in . . . protecting taxpayers against predatory economic crimes.”
Subcontractors have footed $25,000 liquor bills to keep buyers supplied. They have paid for buyers’ European vacations and workday golf outings at posh Orange County country clubs. One buyer’s home mortgage was paid in exchange for an important contract award, according to industry officials.
In the most dramatic recent action against such illicit payments, 10 purchasing agents and executives at the Southern California defense firms of Hughes Aircraft, Northrop and Teledyne were charged in federal court with taking $100,000 worth of cash kickbacks over a period of several months. Within the last several months, nine of the 10 have pleaded guilty.
Fraction of Employees
The 10 represent only a fraction of the more than 500,000 employees in California’s huge defense industry and only a small number of those involved in purchasing activities. Although many buyers are unswervingly ethical, U.S. Atty. Robert C. Bonner of Los Angeles said that those charged represent only the “tip of the iceberg.” The practice of paying outright cash bribes and kickbacks is “widespread” throughout the industry, he said.
Some industry executives believe that the problem needs to be faced head-on. “We fear that it is widespread,” said Tom B. Carvey, Hughes vice president for corporate materiel. “We have had eight employees indicted. . . . We are very concerned.”
The Department of Defense is investigating alleged bribery schemes at seven other major defense firms, which are among 45 contractors under criminal investigation for various reasons, according to a list recently released by congressional sources. In addition, the FBI has under way an unspecified number of other bribery probes.
Many industry officials said that the recent investigative activity in this area makes the problem appear more pervasive than it actually is. The recent indictments in Southern California and other allegations are exceptions in a business that is honest and committed to the public interest, they say.
“I resent the hell out of the allegation that corruption is widespread in this industry,” said H. David Crowther, vice president of Lockheed Corp. “I maintain that absolutely is not the case. . . . Everybody thinks this industry is fair game for their shots.”
Industry officials noted that their own firms, in many cases, are the victims of bribery and kickback schemes. “When a buyer accepts a kickback, it is Lockheed they are hurting,” Crowther said. “The first and primary damage is to the corporation.”
At the same time, corporations have a duty to protect the reputation of honest employees until proof of a crime is in hand, Hughes’ Carvey said, noting that disgruntled vendors who lose contracts sometimes make false allegations that a buyer took a bribe.
“This is a very competitive business,” he said. “A salesman who has lost a sale may tell his boss, ‘Well, we lost that sale because that guy over at Hughes is taking kickbacks from the other guy.’ It is very important to us to protect our people from false and spurious accusations.”
Hughes has begun a major effort to ensure the integrity of its purchasing activities and was among the first contractors to cooperate closely with law enforcement authorities.
“To some degree, we are glad to get it out in the open. We are anxious to clean up anything that is going on,” Carvey said.
‘Prostitutes the System’
The evidence of corruption now drawing increased attention represents an especially disturbing aspect of the Pentagon’s problems, defense officials said. While defense contractors have been widely attacked for high prices, poor quality and unreliable products, many of these problems fall into the category of honest disputes.
“Bribes and kickbacks strike at the very integrity of our purchasing system,” said Derek J. Vander Schaaf, deputy inspector general at the Defense Department. “It prostitutes the system and the whole system will break down if we let it go on.”
An investigation by the FBI found that suppliers involved in the Southern California schemes had a going rate for bribes. They would generally kick back to the prime contractors’ buyers 5% of the face value of subcontracts.
“The fact that a rate exists is disturbing,” U.S. Atty. Bonner said. “One of these purchasing agents was able to negotiate a 10% rate. It appears this has a level of refinement, that it is widespread and that it has been going on for some time.”
If such practices are indeed widespread, then millions, if not tens of millions, of federal dollars are being skimmed off the top of the annual $100-billion Pentagon procurement budget.
“It breaks my heart to see the Department of Defense make such a big fuss about $5,000 coffee pots when there are guys who are taking a lot more under the table,” Power said. Power said he will not pay cash kickbacks.
Corruption appears to be greatest in the awarding of small contracts in the metal-forming industry, such as shops that machine, forge and cast metal parts, according to court records and interviews.
The defense procurement system, with its multibillion-dollar contracts and massive bureaucracy, seems to encourage what one law enforcement official called a “subculture” of graft, which starts with small gifts and gratuities.
A buyer at Rockwell International who finds the practice repulsive blames much of the problem on moneyed and unscrupulous subcontractors who entice often low-paid administrative workers at big prime contractors. Already cynical because of sloppy procurement practices, such as Pentagon payments of $425 for a hammer and $659 for an ash tray, such administrative staffers turn out to be receptive.
Pleaded Guilty
“The way it happens is the vendor asks, ‘What does it take to get an order?’ ” the Rockwell buyer said. “At that point, you know they are making an offer for a kickback.”
In the Los Angeles case brought by Bonner’s office, Philip R. Kaiser, a 48-year-old purchasing supervisor at Hughes Electro Optical Data Systems Group in El Segundo, was indicted by a federal grand jury on charges of taking $5,400 in cash kickbacks from Richard Haskell, a part owner of R H Manufacturing in Chatsworth.
Kaiser has since pleaded guilty to federal charges that he accepted cash bribes and a European vacation, including air fare, hotel rooms and a rental car, from Haskell. Moreover, several buyers working under Kaiser also have pleaded guilty to involvement in the scheme.
Although Bonner declined to discuss specifics of the Hughes case, several defense subcontractors said that they were aware that some Hughes buyers were taking payoffs, sometimes in the lobby of a company facility and at two El Segundo restaurants, the Hacienda and the Golden Tail.
In some of the cash hand-offs, knowledgeable sources said, a vendor would go to the Hughes lobby and hand over to a Hughes buyer an issue of Aviation Week and Space Technology, a well known aerospace trade magazine, with money slipped in between the pages.
Even more brazen was the scheme allegedly set up by Teledyne’s Richard Floyd Herbert, 52, who was vice president and general manager of Teledyne’s Camera Systems unit in Arcadia.
Herbert pleaded guilty to charges that he accepted kickbacks in exchange for awarding contracts to an Orange County machine shop and that he laundered the money through a company he set up for that purpose. The company was called Profit Makers Enterprises.
“This wasn’t a case where somebody had a moment of weakness and took a $100 bill,” a source close to the case said. “This was an elaborate scheme with clear-cut criminal intent.”
A Teledyne spokesman said the company was not aware of the investigation into Herbert’s activities until after he resigned from the company earlier this year.
Even when outright cash kickbacks are not involved in a government subcontract, the system operates on a steady flow of gratuities--including gifts, free entertainment and expensive meals, said the buyer at Rockwell International, who has been in a position to observe such practices through his work at several defense firms.
Free Golf, Tickets
The personal preferences of buyers at the prime defense contractors--their favorite restaurants and liquor brands--become a daily headache, according to a subcontractor who asked not to be named.
During the Christmas season, for example, many defense suppliers become veritable Santa Clauses. One defense subcontractor in Los Angeles, who asked not to be identified, said that each Yule season he doles out $25,000 worth of liquor to customers--a practice that is almost universal in the weapons business, he said.
The entire purchasing department of one large Orange County subcontractor spends every Friday afternoon on a country club golf course, according to one supplier who did business with the firm. The golf outings are paid for by vendors. Tickets to major sporting events also are a popular way to reward purchasing agents.
“A meal or a bottle of liquor becomes the common ground that opens a relationship for larger offers that can be made informally,” said Fred Heather, an assistant U.S. attorney in Los Angeles. “The inexpensive lunch may lead to dinner at the country club, maybe after a round of golf. Eventually, it grows to a weekend in Las Vegas. These things have a way of elevating. Relationships build up. In order to keep up appearances of fairness, the safest route is saying no to everything.”
Such a puritanical approach puts a heavier onus on the defense industry than on most other businesses, where a free lunch is viewed as an acceptable and useful way to build business ties. But some law enforcement officials contend that the defense industry must live up to a higher standard.
“When you are doing business with the government, there is a public trust involved,” Bonner said. “In that sense, the public has a right to expect a higher level of conduct from the defense industry.”
In at least some cases, criminal activity appears to persist because corporate management prefers to deal with corruption quietly.
When management at a large prime contractor becomes aware that a purchasing agent is taking bribes, the agent is usually fired--”walked out” in industry parlance. Often enough, the buyer ends up with a job at another defense firm and sets up a new graft scheme, Bonner said.
“Management, with very little vigilance, could determine whether kickbacks are being paid,” Bonner said. “If there is acquiescence of kickbacks . . . there could be criminal responsibility on the part of not only the officers of a corporation but of the company itself.”
Mortgage Payments
But corporations say that they seldom have the hard evidence to prove that an employee has taken a bribe. Often, a corrupt employee quickly leaves a job once he is suspected of wrongdoing, ensuring that his employment record will be clean.
A story widely circulated in the defense subcontracting industry involves one buyer who was known to be taking bribes while working for a major prime contractor in Los Angeles. He was fired from the job, but quickly set himself up in a new graft scheme at TRW Inc. in Redondo Beach.
While at TRW, he received monthly mortgage payments on his home in exchange for awarding a lucrative subcontract to the owner of a San Gabriel Valley firm.
According to an informed source, when the subcontractor fell behind schedule on the contract and was threatened with cancellation by other TRW officials, he reportedly protested that he was paying the buyer’s mortgage to assure him of TRW’s business.
Today, the buyer works at another defense electronics company in suburban Los Angeles. A TRW spokeswoman said she could not discuss the incident, but added that as a general policy TRW turns over any evidence of crimes committed by its employees to appropriate law enforcement agencies.
The size of the defense business complicates the task of weeding out corruption. Hughes, for example, does about $2.2 billion in business with as many as 7,000 subcontractors, according to Carvey, the vice president, with about 80% of all that buying done at the division level. Policing such far-flung operations is not easy.
Carvey observed that many aerospace products are technically sophisticated and unique. It may be impossible to say what a product should cost if it has never been made before. In addition, manufacturers’ bids on products frequently vary widely and can easily conceal a small margin for a kickback.
Not a New Problem
While recent cases have drawn more attention to the problem of kickbacks in the defense industry, evidence of such a problem in the defense industry dates back years.
In 1974, nine Grumman employees pleaded guilty to accepting $500,000 in kickbacks on Navy work. Federal officials said at the time that they had found “indications of similar payoff schemes elsewhere in the defense industry.”
General Dynamics is currently the target of half a dozen federal investigations, many growing out of allegations that bribes were taken from the now-defunct Frigitemp Corp. in connection with the award of subcontracts for work on nuclear submarines. The General Dynamics executive who made the allegations, P. Takis Veliotis, is now a fugitive in Greece from a federal indictment alleging that he also took kickbacks.
Similarly, the FBI is currently investigating whether former Lockheed and Litton Industries employees may have taken bribes from Frigitemp in awarding contracts at their shipyards.
