Any efforts to curtail the flow of counterfeit parts into U.S. military planes, ships, and missiles will be hampered by the Pentagon's poor vetting of suppliers and contracting rules that allow questionable companies to continue selling to the Pentagon. The checkered history of one supplier illustrates the problem.
In 1999, U.S. Customs agents launched an undercover operation targeting companies suspected of violating the Arms Export Control Act, a federal law that prohibits the export of sensitive military parts without a license from the government. Customs agents created two fictitious companies: a freight-forwarder in Milwaukee, and a parts buyer called MLP Logistics in Vienna. The fake companies mimicked the operations of a real military parts supplier previously charged with illegally selling parts to Iran, according to a Justice Dept. official.
Camnetics Manufacturing was caught in the crackdown. At the time, Camnetics manufactured components for F-4, F-15, and F-16 fighter jets. An indictment filed in federal court in Milwaukee in December 2002 charged the company with "knowingly" attempting to export parts for Sikorsky military helicopters and F-4 fighter jets to MLP Logistics. Camnetics agreed to send the parts without first obtaining licenses from the State Dept., according to the indictment.
In 2004, Camnetics pleaded guilty to making a false statement and was fined $25,000. A company vice-president, William Manning, pleaded guilty to "obstructing agents in their execution of a federal search warrant," according to a plea agreement. Manning failed to inform the company's president about transactions with MLP Logistics, which Customs agents said hindered their ability to execute a search warrant at the company on a day when Manning was not present. He was fined $5,000 and sentenced to three years' probation. The Air Force banned Camnetics from selling parts to the Pentagon between January 2003 and March 2004.
Despite this record, Camnetics is back in business with the military. In the past three years, it has obtained contracts worth nearly $3 million to sell parts to the military, including microchips, according to a public database of government contracts. Military records show that the Air Force approved these sales after April 2004 partly because the company acknowledged its prior violations. Air Force officials declined to comment.
In a statement e-mailed to BusinessWeek, Camnetics President Allen Whittle blames his company's past violations on its reliance on the fictitious freight forwarder. "During that time period, freight forwarders routinely obtained export licenses for customers. Since this 'sting operation,' the laws have changed requiring the seller and/or brokers to obtain the export license." Whittle says that Camnetics never knew the parts might be destined for Iran. The Pentagon says it has had no reports of problems with microchips supplied by Camnetics.
Camnetics Challenged a Longer Ban
But some Pentagon officials believe that Camnetics' criminal indictment and guilty pleas should permanently ban the company from selling parts to the Pentagon. "They were bad," says Normand Lussier, associate general counsel at the Defense Logistics Agency, the Pentagon's principal spare-parts buyer. "I don't think they should be able to do business with us." Lussier and DLA were considering taking administrative action against Camnetics and other suppliers caught in the Customs investigation. But to the frustration of Lussier, the case was handed off to the Air Force.
Lussier says it's likely he would not have been able to take tougher action than the 14-month suspension imposed by the Air Force because Camnetics hired legal counsel to challenge a longer ban. Lussier says that with limited personnel and a heavy case load, Pentagon debarment officials often don't push for stiffer penalties, even when warranted.
"In the suspension and debarment process, those with money who hire effective representation make it hard to apply long terms or in any way deviate from the exact language of the regulation," says Lussier in an e-mail. "It's not exactly buying your way out of trouble, but it's about as close as you can get to it."
One reason past offenders continue to supply the Pentagon is the lack of a central means to track military suppliers. The General Services Administration maintains an online database to keep tabs on banned contractors. But the Pentagon, individual military services, and other government agencies all operate separate databases for excluding wayward suppliers. What's more, government rules generally limit debarment to three years. Lussier says longer bans can be imposed but they require "aggravating circumstances" such as the violator having destroyed evidence. When contractors' deals are suspended during court proceedings, that often counts as part of the three-year penalty. Once-banned contractors can easily slip back into the system, says Lussier. "What a mess," he says.
Tracking Contractor Misconduct
Watchdog groups have created their own databases to track government suppliers. In 2007, the Project on Government Oversight (POGO) a nonprofit in Washington, launched a Web site called www.contractormisconduct.org, which keeps record of the largest contractors cited for misconduct. "The government really isn't looking at who they're doing business with," says Danielle Brian, executive director of POGO.
Congress is beginning to take action. A new bill approved by the House in April calls for a centralized database of government suppliers. It would include a description of actions taken against government contractors, provide criminal and debarment histories, and track when companies have failed to complete contracts on time or exceed cost estimates. "Each procurement officer is operating on their own," says Representative Carolyn Maloney (D-N.Y.), who introduced the bill. "We're in the 21st century now; there's really no reason why we can't have a centralized database where procurement officers could check on the track record of contractors."
Burnsed is an editorial assistant in BusinessWeek's Atlanta bureau. Grow is a senior writer for BusinessWeek's special projects team based in Atlanta.