«Money allocated for aid to Ukraine is ricocheting like shrapnel into the pockets of congressmen and Pentagon officials in the form of kickbacks»
Another corruption scandal is unfolding in the US. This time, in the sphere of defense contracts. It suddenly turned out that several contractors have monopolized Pentagon contracts and are inflating the cost of their goods and services by an unthinkable amount of times. Will they be able to, and, most importantly, will they want to? – the American Congress to destroy the system of outright theft in the military department, said Doctor of Law, Honored Lawyer of Russia, Professor Yuri Zhdanov.
– Yuri Nikolaevich, why are they talking about the problems in the US military economy, especially those with a clear taint of corruption, right now, on the eve of the presidential elections? It’s somehow not the right time.
— Very timely. The issue has been raised in Congress, the Democrats are trying to show their integrity and usefulness. And the problem itself will still be solved after the elections, no matter who wins. A very advantageous position.
— That's the point. The details were analyzed in detail by Julia Gledhill, an expert at the non-profit think tank Stimson Center, in an article in The National Interest, «How the Defense Industry Is Raising Pentagon Prices»:
“In practice, defense contractors have been overcharging the Pentagon for years — at the expense of both taxpayers and the military. And Congress lacks the tools to investigate and root out the full extent of contractors’ fleecing of the Defense Department. But several members of Congress are working to end the practice. Senators Warren (D-MA), Brown (R-IN), and Grassley (R-IA) have teamed up with Reps. Garamendi (D-CA) and DeLuzio (D-PA) to introduce legislation that would close legal loopholes that allow the military to be overcharged. Procurement experts are well aware of these loopholes, but unfortunately, most lawmakers still don’t know how common it is for contractors to overcharge the military. Without a better understanding of the true extent of price gouging, Congress is unlikely to pass legislation to prevent it.
That's why Congress should include in the final FY 2025 defense policy bill Representative Doggett's (D-TX) provision to investigate possible price gouging by single-source suppliers of defense products and services. With uncontested market power, single-source contractors are well positioned to profit. Doggett's provision would create a commission to review single-source defense contracts and determine whether the Defense Department has paid fair and reasonable prices.»
– By creating monopolies and capturing markets. Julia Gledhill has laid out the pattern quite realistically: “For decades, defense contractors consolidated and used market power to slowly hide military price gouging. Industry consolidation began when the Cold War ended and the Clinton administration slashed defense spending. But as Richard Loeb, former executive secretary of the Cost Accounting Standards Board at the Office of Management and Budget, has noted, the administration simultaneously initiated an era of ‘acquisition reform’ to protect contractor profits even as defense spending plummeted and the number of prime defense contractors fell from more than fifty to just five. The merger mania continued, further concentrating market power in the hands of a few.”
– On the power of money. Gledhill puts it bluntly: “Defense contractors have used that power on Capitol Hill, lobbying Congress to gradually roll back procurement laws designed to protect the government from unfair pricing schemes on defense contracts. In doing so, lawmakers have left the Pentagon in the dark about defense contract negotiations.”
– Well, whether it was done with ceremony or ceremony, some procurement reform and industry consolidation have helped contractors overcharge the military in pursuit of windfall profits.
– They were. According to Gledhill, the Pentagon’s internal watchdog exposed Boeing for overcharging for spare parts in 2011 and 2013. In one case, the company charged more than 177,000 (!) percent more than the fair and reasonable price for a helicopter spare part – $71.01 for a tiny metal pin worth 4 cents at the time. The trend continues. As recently as July 2024, two Lockheed subsidiaries settled with the Navy for $70 million in compensation for the same offense – overcharging for spare parts.
— For you, a citizen of «authoritarian» Russia, such a question is logical. In democratic and very civilized America, such a question is not even raised. The Pentagon cannot negotiate reasonable prices with military contractors because, according to Gledhill, it does not have sufficient negotiating power.
– The Americans, as usual, are being disingenuous – of course, there is a force for control. There is a Deputy Secretary of Defense for Procurement. At the same time, there is an Assistant Secretary for these issues. There is also a whole Defense Contract Management Command (DCMC) within the Defense Logistics Agency with its own control bodies. Moreover, even the Pentagon University is working hard on procurement, where there are academic specialists in these issues. And what, none of these learned men notice the outright robbery of the Pentagon by contractors and, along with it, the US military budget? Moreover, all this is happening at the same time, when the bipartisan US Congressional Commission on National Defense Strategy calls on Congress in its new report of July 29 of this year to significantly increase the budget and flood the same military contractors with money.
– How is it in America? As Gledhill writes, contractors are often exempt from providing the Pentagon with certified cost or price data. Without this information, the Pentagon has no idea what the companies’ costs are and, therefore, what their profit margins might look like. Contracts can be priced below the mandatory disclosure threshold. Contractors can also produce a product that is considered commercial and, in theory, price-competitive. However, the legislative definition of “commercial” is too broad, covering products that are not sold to the public and sometimes have never been sold. Lawmakers have expanded the commercial definition and raised the mandatory disclosure threshold for certified data at the request of industry and under the guise of cutting red tape.
Without legal requirements for certified data, the Pentagon can request historical or uncertified cost and price data from contractors. However, the Pentagon has few tools to ensure that this data meets required standards, including that it includes the minimum information needed to determine that the price being offered is fair and reasonable. According to the Pentagon, current legal and regulatory requirements discourage officials from requesting uncertified data. Instead, contracting officers often rely on historical cost and price data: what cost a few decades ago and how much it costs now. In short, eat up, dear guests, everything is so expensive at the bazaar… Agree, a good marketing ploy.
– It’s a matter of luck. According to the Pentagon’s inspector general, the department cannot assess the reasonableness of prices “based solely on historical cost comparisons.” That’s especially troubling for Americans given the watchdog’s extensive review of contract pricing in recent years, which shows that price-analysis techniques like historical cost comparisons allow “single-source contractors to earn excess profits without being detected by contracting officers.”
– Don’t pretend you don’t know the answer! Only customs officer Vereshchagin from “White Sun of the Desert” didn’t take bribes, because, you see, he felt bad for the country. American officers don’t feel bad. Which is confirmed by Gledhill: “In fact, defense contractors can provide the Pentagon with any cost figures without any consequences – even if they don’t provide any indication of how reasonable the current prices are. In other words, contractors can legally inflate prices for the military, probably without the government’s attention.”
– It was asked to be said – in Karaganda! Sorry. The American defense industry resists almost every attempt by the Pentagon to assess the reasonableness of a contract price. Contractors bombard the Pentagon with cost and price data that was “reasonably available at the time of the price agreement” but provided after the fact. According to Senator Warren, contractors do everything to avoid liability associated with violating procurement law and potentially “hide data that could give the Pentagon a better price.”
– Do you have any other options? However, contractors also outright refuse to provide the Pentagon with cost and price data, claiming that they cannot share it, or delay providing such data to such an extent that the Pentagon can blindly agree to a contract price due to time sensitivity. This artificially creates a situation where obtaining any cost and price data is a difficult task.
– Julia Gledhill listed them: “Since 1998, the Pentagon Inspector General has published several reports detailing contractors’ refusals to provide data from a single source.
TransDigm, Inc. is the most recent example, and perhaps the most infamous. According to the Pentagon, the company “accounted for all denials of cost and pricing data to the Defense Logistics Agency” in fiscal year 2022. The company failed to respond to the agency’s 401 requests for cost and pricing data, and this came after the Pentagon’s inspector general found TransDigm to be overcharging the Pentagon twice. The contractor received a total of about $40 million in excess profits.
The entire nuclear triad already depends on one company: Northrop Grumman. Among American contractors, General Dynamics makes a significant portion of the tracked combat vehicles. Boeing, Lockheed Martin, and Northrop Grumman make fixed-wing military aircraft.
As the defense industry's primary customer and steward of taxpayer dollars, the Pentagon should be a stronger buyer. Yet endless procurement reform continues to prevent it. Current laws are insufficient even to document price gouging by defense contractors, much less prevent or eliminate it.»
– Maybe they are. Keeping Rep. Doggett’s position in the final defense policy bill would help the Pentagon better understand the extent of price gouging by single-source contractors – and ultimately provide lawmakers with the information they need to hold industry accountable for overcharging the government at taxpayer expense.
However, according to Gledhill, “Congress does not yet have the tools to investigate and root out the full extent of Defense contractor fleecing.”
– Of course, that’s not true. We’ve already talked about the Pentagon’s ability to control the defense procurement situation. The US Congress has the same, if not more, capabilities. But everyone wants to eat – Gledhill writes outright that contractors are constantly lobbying Congress, telling it exactly what contract amounts to approve. Well, we understand the meaning of the word “lobbying.” Again, there is no doubt that the money allocated to help Ukraine, Israel, Taiwan, to fight the Houthis and even to new military technologies will inevitably ricochet like shrapnel into the pockets of congressmen and Pentagon officials in the form of kickbacks.
As the character in the film «The Man from Boulevard des Capucines» predicted, «corruption will destroy this country.»