Banned firms given millions despite fraud

Companies and people who have tried to ship nuclear weapons materials into North Korea or substituted illegal parts on aircraft carriers, among other crimes, have slipped through loopholes to receive lucrative government contracts.

More than two dozen contracts were awarded in 2006 and 2007 to people and companies that were supposed to be banned because they had committed contracting fraud and other crimes, according to a report issued Thursday by the Government Accountability Office (GAO).

The president of a German company, for instance, was caught in 2005 trying to ship nuclear weapons materials into North Korea. But the following year, the company was awarded $4 million in contracts with the U.S. Army.

“The flaws in the system are just as frustrating for responsible companies that do high-quality work as they are for Congress and the taxpayers,” said Rep. Edolphus Towns, New York Democrat and chairman of the House Committee on Oversight and Government Reform, which held a hearing on the report Thursday.

The General Services Administration maintains a database of government contractors who have been “suspended and debarred,” or banned from receiving government contracts for crimes such as committing fraud, accepting bribes and rigging bids. Procurement officers are supposed to check the Excluded Parties List System (EPLS) before granting a contract and making a purchase.

GAO found at least 25 instances in which companies or people slipped through. Gregory Kutz, managing director for forensic audits and special investigations, warned that the findings are just “the tip of the iceberg.”

A Navy contractor was found to be substituting illegal parts on an aircraft carrier in 2006 and was subsequently suspended. Less than a month later, the Navy gave the company three new contracts worth more than $100,000 because the contracting officer failed to check the EPLS database.

A man found guilty of Medicare fraud and banned from receiving contracts in April 2003 later resurfaced when he opened a company in his wife’s name. The company received Medicare payments for three years.

In the case of the German company, the Army said in its debarment order that the actions of the company’s president presented a “compelling interest to discontinue any business with this morally bankrupt individual.” However, the Army said it was legally obligated to continue the contract with the company. GAO said there were options available to terminate the contract.

The debarments were likely either overlooked by procurement officers or never entered into the federal government’s database, GAO said. In some cases, individuals opened new companies under different names to avoid detection.

GAO officials also warned that Medicaid contracts - whose coffers received a large boost in the $787 billion economic stimulus legislation - in particular are subject to abuse.

“We are aware of Medicaid providers in the system right now who are debarred,” Mr. Kutz said. “I expect we also have other vulnerabilities.”