Contractor’s U.S. Ties Tough to Break After Vetting Lapse

Within the next year, the federal government will have a chance to begin dropping the contractor whose background checks helped leaker Edward Snowden and the Washington Navy Yard shooter get security clearances.

Don’t count on it.

As Congress demands answers and expresses outrage, dumping a firm like USIS, a unit of Falls Church, Virginia-based Altegrity Inc. that has more than a half-billion dollars in federal contracts running out in a year, could create as many problems as it solves.

It might shift a backlog of cases to two other companies, which could lead to more vetting lapses. And, any company the government engaged to replace USIS could just hire the same people. The Senate Homeland Security and Governmental Affairs Committee planned a hearing tomorrow to examine the clearance process, only to put it off in the face of a federal shutdown.

“Replacing USIS would be something of a nightmare for the government,” said Charles Tiefer, a former member of the U.S. Commission on Wartime Contracting.

USIS has won at least $588 million under U.S. government contracts set to expire within a year, according to data compiled by Bloomberg. The company is under scrutiny by lawmakers asking how both Snowden, now a fugitive, and Aaron Alexis managed to get federal security clearances. Alexis’s clearance gave him access to the base, where he killed 12 people and died in a shootout with police on Sept. 16.

Top Provider

The agreements include a lucrative deal with the U.S. Office of Personnel Management, which is responsible for most federal background checks. While the expiring contracts might provide agencies with opportunities to begin dropping USIS, replacing the government’s top provider of background checks might lead to more chaos in an already overburdened system.

“USIS provides the heart, the limbs and the guts of the operation for the Office of Personnel Management,” said Tiefer, now a law professor at the University of Baltimore.

The number of people with security clearances ballooned to about 5 million last year, and contract investigators have struggled to keep up with the demand for background checks, according to security specialists.

The government increasingly has relied on USIS for that vetting. The company handled about two-thirds of the investigations done by contractors, and more than half of all those performed by the personnel office, according to the office of Claire McCaskill, a Missouri Democrat who leads a Senate subcommittee on contracting oversight.

Heavy Burden

Shifting the load to competitors such as Arlington, Virginia-based CACI International Inc. (CACI) or KeyPoint Government Solutions Inc. -- a unit of Veritas Capital, a New York-based private-equity firm -- might worsen the situation, Tiefer said.

“To throw the work done by USIS onto KeyPoint and CACI would heavily burden them,” Tiefer said.

Ray Howell, a USIS spokesman, declined to comment on the company’s expiring contracts. Providence Equity Partners LLC, which owns Altegrity, declined to comment, said Andrew Cole, a managing director at corporate strategy firm Sard Verbinnen & Co., which represents the private-equity firm.

USIS has at least 40 federal contracts for work related to investigations, 14 of which are scheduled to expire by Oct. 1, 2014, according to federal procurement data compiled by Bloomberg. The company performs background checks and other investigative work for the Federal Bureau of Investigation, U.S. Immigration and Customs Enforcement and the Department of Agriculture, among other agencies.

Top Customer

The contractor’s biggest agreements by far have been with the personnel office, which handles about 90 percent of federal background checks. USIS won $253 million in fiscal 2012 from the agency, the data shows.

In 2011, the company won a seat, along with CACI and KeyPoint, on a personnel-office contract for investigative services with a $2.46 billion ceiling. The award is set to expire in a year, according to federal records. So far, the contract has generated about $490 million for USIS, making it the most valuable of the expiring deals.

While there might be an option to extend the contract for another year, the agency has “no obligation” to do so, Merton Miller, OPM’s associate director for federal investigative services, said in an e-mailed statement.

If the office decides to “explore other options,” it may solicit new bids from companies, he said.

Future Work

Days before the Navy Yard shooting, the personnel office announced it was seeking information from contractors who might be interested in handling some administrative work that has in the past been performed by USIS. Such requests are often the first steps to a formal contract proposal.

The agency isn’t accepting offers yet and the value of the award hasn’t been determined.

The request doesn’t carry any “positive or negative implications about” the personnel office’s relationship with USIS, and the agency hasn’t made a decision about future work with the firm, according to information provided by the agency.

Competitors will try to take advantage of USIS’s bad publicity, said Brian Friel, a Bloomberg Industries analyst.

Winning contractors, though, often hire the former’s employees, Friel said. Consequently, the government might end up with the same workers if it replaces USIS, he said.

“There are not a lot of players in this field,” Friel said. “The government doesn’t have a lot of options.”

The U.S. attorney in Washington has said he is investigating whether companies hired by the government to perform background checks falsified information or engaged in other wrongdoing.

Inspector General

Lindsey O’Keefe, a spokeswoman for the personnel office, said Sept. 25 that there is an inspector general investigation related to USIS. She didn’t provide details, and the agency hasn’t publicly condemned the firm.

Miller, of the personnel office, said the agency “reviewed the 2007 background investigation file for Aaron Alexis, and the agency believes that the file was complete and in compliance with all investigative standards.”

An initial Navy review released Sept. 23 found the service didn’t know of a 2004 incident in which Alexis shot out the tires of a car in Seattle because a 2007 background report said he was arrested for “deflating” the tires. The report was labeled “Property of U.S. Office of Personnel Management.”

Alexis told investigators he thought he didn’t have to reveal the arrest because the charge was dismissed, the report said.

Privatized Unit

USIS’s prominence as a background-check contractor is due to its origin as the Federal Investigations Division of Office of Personnel Management. The unit, originally known as U.S. Investigations Services Inc., was privatized in 1996 as part of then-Vice President Al Gore’s effort to “reinvent” government by reducing the size of the civil service, according to a 2011 report by the Congressional Research Service.

Contracting out security reviews was designed to save the government money and offer new work for about 700 investigators no longer needed because of a declining clearance workload as the Cold War ended. Instead, demand for security clearances surged after the Sept. 11, 2001, terrorist attacks.

Non-Competitive Contract

USIS was given a non-competitive, three-year contract for investigative work with the personnel office and granted free access to federal computer databases that weren’t available to other firms.

The Carlyle Group LP (CG), a Washington-based private-equity firm, and New York-based Welsh, Carson, Anderson & Stowe LP invested in USIS. They agreed in 2007 to sell USIS to Providence, Rhode Island-based Providence Equity for about $1.5 billion.

Since 2006, at least 20 investigators have pleaded guilty or have been convicted of falsifying background-check reports for the personnel office, according to the agency’s office of the inspector general.

Ten of those were contractors. Eight of them worked for USIS.

To contact the reporter on this story: Danielle Ivory in Washington at divory@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net

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