House to Investigate Contract Fraud Rule Loophole Soft on Overseas Work

WASHINGTON – House Democrats targeted a multibillion-dollar contracting loophole Friday by vowing to investigate why — and how — it was slipped into plans to crack down on fraud in taxpayer-funded projects overseas.

The inquiry will look at whether the exemption was added at the request of private firms, or their lobbyists, to escape having to report abuse in U.S. contracts performed abroad.

"Granting this safe harbor for overseas contractors flies in the face of reason," Rep. Peter Welch, D-Vt., wrote Friday asking the House Oversight and Government Reform Committee to investigate. The panel monitors government procurement policy.

"By taking this action, the Bush administration is sending an unambiguous message: If you are a U.S. government contractor in Iraq, Afghanistan or elsewhere overseas, you have a green light to defraud our government and waste taxpayer dollars," Welch wrote to Democratic leaders of the committee.

The United States has spent more than $102 billion over the last five years to help rebuild Iraq and Afghanistan. In that time, the Justice Department has uncovered at least $14 million in contract bribes in those two nations alone.

Rep. Edolphus Towns, who chairs the House subcommittee that oversees government contracts, quickly agreed to the inquiry. Towns' spokesman Mike McCarthy said the congressman "is alarmed by the loophole and will work with Rep. Welch to launch an investigation."

A spokeswoman for the White House Office of Management and Budget, which reviews contracts policy, did not immediately respond to a request for comment about the investigation.

The White House has declined to say whether the loophole, first reported last month by The Associated Press, will remain in the plans when they are finalized later this year. The government spends an estimated $350 billion a year on contracts.

The inquiry comes amid bipartisan criticism in Congress and by Bush administration inspectors general who fear the exemption will undercut government efforts to curb waste, fraud and abuse in contracts.

Additionally, the Justice Department and the Office of the Special Inspector General for Iraq Reconstruction have asked that the loophole be eliminated before the rule becomes law later this year. Prosecutors so far have charged 44 people in investigations into kickbacks, bribes and other abuses of taxpayer money in Iraq and Afghanistan.

The exemption was written into rules that were proposed by the Justice Department last May. They sought to penalize businesses that fail to root out internal waste and abuse of government contracts.

For decades, contractors have been asked to report internal fraud or overpayment on government-funded projects. Compliance has been voluntary, and over the past 15 years the number of company-reported fraud cases has declined steadily.

Facing the increased violations, prosecutors sought to force companies to notify the government if they find evidence of contract abuse of more than $5 million. Failure to comply could make a company ineligible for future government work.

But a later version of the rule, as written by policywriters reviewed by the OMB and published in the Federal Register in November, specifically exempts "contracts to be performed outside the United States."

Sens. Chuck Grassley, R-Iowa, and Claire McCaskill, D-Mo., also have criticized the exemptions and demanded that they be stripped from the proposed rule.

"The amount of money going to overseas contracts and the documented corruption that has taken place makes any exemption for fraud reporting for contracts being performed overseas unacceptable to both myself and to American taxpayers," McCaskill wrote in a letter earlier this week to White House OMB Director Jim Nussle.

Jane Lee, spokeswoman for the White House OMB, said earlier Friday, "We will take Sen. McCaskill's and Rep. Welch's letters into consideration."