A CloserLook at the Future CombatSystems Agreement with Boeing: A High Risk Programwith a Higher Risk Agreement

Testimony Before the Subcommitteeon Airland of the SenateCommittee on Armed Services March L5,2005

Kenneth F. Boehm Chairman National Legal and Policy Center 107 Park Washington Court Falls ChurchoVA2Z046 wrrrv.nlpc.qry

Mr. Chairman Members the Subcommiuee, and of thankyou for this opportunity to testiff. My nameis Ken BoehmandI serve Chairman theNationalLegalandPolicy as of Center(NLPC).My legalcenter promotes accountability public life andliasbeen in critical of the actionsof the BoeingCompany duringtherecentseries defense of procurement scandals. October In 2003,NLPC filed a complaint with the Defense Department's Office of Inspector General detailingformerAir Forceofficial Darleen Druyun'stiesto Boeingthroughher daughter's with thatcompany the saleof her job and houseto a Boeingofficial while shewasoverseeing significant acquisition maffers the for Air ForceinvolvingBoeing.l The complaint went on to question whether Druyunwasnegotiating future for employment with Boeingwhile shewasrepresenting Air Forcein multi-billion dollar the business issues affectingBoeingcontracts. Thenext day,the wall streetJournalran a front-page storyon theNLpc complaint,"Air ForceEx-official HadTiesto BoeingDuring Contract Talks,',and Boeingdisingenuously the me{ia thatDruyunwasnot workingon thetankerdealas told part of her employment Boeing.' TheAir Forceweighed wi6 an equally for in disingenuous statement the effectthatDruyunhadrecused to herselffromdecisions affectingBoeingbut declined specifrwhenDruyunhadrecused to herself. The following monthBoeingterminated employment bothDarleen for Druyun andits Chief FinancialOffrcerMichaelSears, citingviolationof the company's standards in thehiring of Druyun.3 Today,Darleen Druyunis in federal prisonandMichaelSears be entering will federalprisonshortly,both in connection with their conspiracy violateconflictof to interestlaws. NLPC turnedits attention theArmy's Futurecombat Systems to program because wasthe largest it military procurement projectinvolvingBoeinganJ - muchlike the tankercase featured manyanomalies which appeared favorBoeingat the expense to of the Army. The conclusion reached thatwhile thereappeared be a consensus the was to that FutureCombatSystem (FCS)program washigh risk because its ambitious of planto coordinate manyasyet undeveloped so technologies a coordinated into weapons program of the future,these riskswerecompounded the decision useBoeingur th. L"ud by to
See Letlet to Defense Department Inspector General and Defense Criminal Investigative Service, Oct. 6, 2003, at www.nlpc.org. " "Ait See Force Ex-Official Had Ties to Boeing During ContractTalks," The Wall StreetJournal, Oct.7, 2003,p. l. ' S?", e.g., "Boeing DismissesTwo Executivesfor Unethical Conduct," Boeing news release. Nov. 24, 2003, available at http://www.boeing.com/news/releases/archive2003.html. '

SystemIntegratorandto structurethe legal agreement FCSthrougha wholly for inappropriate OtherTransaction Agreement (OTA) in a way thatminimizedoversight andaccountability. The OTA exempted Boeingfrom mostof the standard statutes which applyto majormilitary procurement contracts deterwaste, to fraudandabuse.Moreovei,th".rs" of an OTA in the FCSprogram wasunprecedented insofarasOTAswereintended by Congress attractnon-traditional to suppliers dealwith theDefense to Department without the costof thebureaucratic procedures associated majordefense with contracts.Evena cursoryexamination theFCSprogramshows of thatthehighest amount fundingby far of goesto Boeingwith very little to anynon-traditional suppliers the$20 and billion dollar costof the FCSdevelopment phase dwarfsanyprevious of an OTA for prototype use development purposes. FCS: A lligh Risk Project at significantriskfor not deliveringrequired capabilitywithin budgeted resources. Three-fourths of FCS' needed technologies were still immature when theproject started." PaulFrancis, Director,AcquisitionandsourcingManagement, GAoa Thereis a consensus theFCSis an ambitious that projectwhich facessignificant risks' This view hasbeenexpressed both legislative in hearings within theiefense and community. Eventhe FCSother Transaction Agreement signed Dec. 10,2003 on acknowledged: "The complexities and riskassociatedwith FCS the SDD Increment Programare significent.'$ I Amongthe risk factorscitedby the GAO's acquisition expert, paul Francis, Mr. . in testimony the Houseof Representatives' to Subcommittee TacticalAir andLand on Forcesof the Committee Armed Services April l,2004were the followine: on on . The first FCSprototypes not be delivered will until just beforethe production decision. Full demonstration FCS' ability to work asan overarching of "FCSis

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1s9e PaulFrancis,Director,AcquisitionandSourcingM-ag"-eot,ffi
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&e Agreement Between the Boeing Companyand U.S. Army Tank-Automotive and Armaments Command Conceming Future Combat Systems System Development and Demonstration phase, Agreement No. DAAE07-03-9-F001,atpage 14

system will not occuruntil afterproduction begun.This has demonstration assumes complete success includingdelivery and integrationof numerous complementary systems arenot that inherentlyapart of FCSbut areessential FCSto work asa whole. for when takinginto account lessons the learned from commercial best Practices the experiences pastprograms, FCSstrategy and of the is likely to resultin costandschedule consequences problems if are discovered in development. late Because costalready the dominates investment its budget, Army the may find it-difficult to find otherprograms cut in orderto further to fundFCS.6 Theseconclusions wereexplicitlyunderstood the Chairman the House by of Armed Services Subcommittee TacticalAir andLandForces on whenthe GAO presented its findingsat a hearingon April 1,2004.Chairman Curt Weldon(R-Pa.) summed the up "If problemsuccinctly whenhe stated, FCSexperiences technical the difficultiesthat everymajor develo_pment programseems experience, costovemrns to the will consume the Army budget."' Rep.JohnSpratt(D-S.C.)accepted assessment well whenhe told Army Lt. this as Gen.Joseph Yakovac,who testifiedabouttheprogram deputyto theArmy acquisition as "f secretary, can't think in the23 yearsI've sathereof a system morefraughtwith risk. It's.goingto be a Herculean to bring it together the ambitious task on scheluleyou,ve set."The technological challenges weresummed by Chairman up Weldonat the hearingwhenhe stated: "unfortunately, however, the Futurecombat Systems program alsocarries high risk. TheArmy hasnevermanaged piogrum *y the sizeandcomplexity FCS.Eighteen of systems, cntical 32 technology areas, million linesof code,r29tradestudies, 34 157 progr?$ls beingdeveloped independent FCS,andall in five-and-a-half of years.'-While the testimony GAO AcquisitionandSourcing of Management Director PaulFrancishasalready beencited,his analysis theunderlying of -inug"-"nt judgment associated the FCSprogram with wasespecially harsh:
Risks.andAternatives,6y lsef PaulFrancis, Director,Acquisition sourcing and Management, efrit t,2oo4, 64g44635a ' 'See "GAo hoists red flag overcostlyBoeingArmy project," bybarrell Hassler TonyCapaccio, and Bloomberg News,Ifte Seattle Times,AplJr|2,2004,i.E1. o
e

SeeId. SeeHearing of the Tactical Air Land ForcesSubcommittee the House Armed Services of Committee on Future Combat Systemsand Force protection Initiatives, April l, 2004, FederalNews Servicefanscript, p.3.

'olnour morethan30 years of analyzing weapons systems, we havenot foundconcurrent strategies work, particularly to whenadvanced technologies involved.Delayingthe are demonstration knowledge of results problems in beingdiscovered latein development. is susceptible suchproblems a FCS to as demonstration multipletechnologies, of individualsystems, thenetworkandthe system systems all culminate in of will late development earlyproduction."l0 and Mr. Francisfurtherconcluded evenmodest that delays costincreases and could endup costingthe government billions of dollarsandthat suchfundswouldbe very difficult to find sincethe FCSwasalready consuming sucha considerable portionof Army funding.ll Boeing:A High Risk Lead System Integratorfor FCS The FCSprogram whichtheArmy hascalledits "greatest technological and integration challenge everundertaken" is a system manned unmanned of and ground vehicles, vehicles, munitionsall connected a cutting-edg. air and with "o*-*i"ations andinformationsystem. Boeingbecame LeadSystem the Integrator the SDDphase on of FCSwhenit received, alongwith parhrer Science Applications International Corp. (SAIC), $14.8billion to oversee eight-year the effort in Decemb 2003.12 August er In 2004,a modificationto FCSadded $6.4billion to the costof theprogram.t3 Boeing'sinitial selection LSI for FCS"shocked as defense obseryers"l4 and raisedserious questions. LSI, Boeingfunctions As very muchlike a general contractor in overseeing otherkey suppliers contractors ensure program and to that objectives met. are That aspect ofthe LSI role hascaused controversy reasonitouched for uponin a Financial Timesarticle:
"Boeing's ability to defend its reputationwill be critical. It has positioned itself as a 'systemsintegrator' for many of the big defencecontractsit has secured- such as missile defenceand the Future Combat Systemsproject - acting as the middleman, piecing togetheroften complex technology from rivals, and treading a fine line about managing access
rc See Hearing of the Tactical Air Land Forces Subcommittee of the House Armed Services Committee on Future Combat Systemsand Force ProtectionInitiatives, April l, 2004, FederalNews Service hanscript, p. 8. rr SeeId. t2 "U.S. see' Army Signs Milestone FCS contract," Dec. 10, 2003, www.boeing.cor/defense3-g;, s^pace/ic/fcs/bial03l2l2_nr_armyannounce.htmt. t3 see *Army Boosts n&ing's Future combat program value By up to $6.4 Billion,,, Aug. 17,2004, htp ://www. spacedaily.com/news/milspace-04x. html. 'See: !-g-"'Boeing Plays Defonse:Besetby Airbus and rocked by scandal,the aircraft maker tums to a new CEO - and the Pentagon- for help," Fortune,April 19, 2004.

to proprietary information from rivals."ls (emphasis added) Boeing'sreputation illegally obtaining for proprietary information from its rivals is arguably worst of anyin the defense the community. SinceJanuary 2003,Boeing has beenimplicatedin threemajorcases involvingimproper access competitors' to proprietaryinformation. Raytheon Case A reportby the General Accounting Office (GAO) concluded Boeinghad that obtained misused and proprietary Raytheon information the course a competition in of to providea "kill vehicle"for the missiledefense system. Boeing'sactions violated Pentagon regulations a projectthatwasdescribed o'the for as coreof themissiledefense system."'o Whenthe misuse Raytheon of proprietary documents Boeingcameto light, by Boeingwasforcedto withdrawfrom the competition. Boeing'sactions hurt the govemment because defaultawardof the contract the resulted a design in saidby experts to be flawedin that the kill vehiclecouldnot adequately distinguish between warheads anddecoys. Also at issuewaswhether government appropriate the took steps punish to Boeingandrecoupsomeof the $800million invested the Pentagon the design by in competition. Especially importantin considering Boeing'srole in the Raytheon case the fact is that whenBoeingillegally usedRaytheon's proprietary documents an attempt win a in to major contract, Boeingwasthe LSI of theNationalMissileDefense Program.l? The GAO reportalsostated the Army hadrecommended that debarment against Boeing the employees involvedin thewrongdoing against and Boeing'sElectronic Systems and Missile Defense Group. "abandoned Ultimately,the Ballistic MissileDefense Organization recovery effortsbecause litigationrisksassociated provingdamages, well asanticipated of with as litigation costs, thebeliefthat litigationwasinconsistent its partnership and *ith with BoeingastheLSI contractor."ru It is difficult to imaginea moreclear-cut example a defense of contractor abusing its LeadSystem Integrator role in a majorproject.Yet, in the end,Boeingreceived a mereslapon the wrist. Therewasno debarment the company, lawzuitto recoup of no the s800million lost on the taintedcompetition no criminalprosecution. and

",see"Conditfocusesondomesticproblems,"byCarolineDaniel, FinancialTimes,June19,2003,p.29. t6 See"Antimissile Contract Won on Technicality, GAO Report Finds; Award Made After Boeing Spy Bradley Graham, The Washingtonpost,Jan.30, 2003,p. A2l. !a1e,'l!1 " "Missile ,See Defense:Events Relatedto ContractorSelectionfor the Exoatrnospheric Kill Vehicle," General Accounting Offrce-03-324R Missile Defense,J an.27, 2003. 'o "Missile ,See Defense:Events Relatedto ContractorSelectionfor the Exoatmospheric Kill Vehicle,,, GeneralAccountingOffice-03-324R Missile Defense,Jan.27,2003, l l. p.

Boeing's selectionby the Army as LSI for its largestprocurementproject ever, _ the high risk FCS program, is especiallydifficult to understandin that the A;ny was not only aware of Boeing's intentional misconductin the caseinvolving Raytheon;s proprietary information but had recommendedfar more appropriate sanctions against Boeing than was finally meted out. The following.*...pl from the GAO letter regarding the matter underscores this point: " concurr ently, the Army recomm endeddebarmentproc eedings against the Boeing employees involved in the wrongdoing, and against Boeing's Electronics Systems and Missile DefenseGroup. The Army also consideredthe alternative recommendation a on monetary settlementcommensurate with the damagessuffered by the government. The Army's assessment damages of focused on: the lossof the Integrity of a planned competition that had beencarefulty maintainedfor 8 years at great administrative expense;the loss of the benefit of a head-to-head "best value" comparisonof two technical approachesdevelopedat the cost of approximatLly $400 million each; and the lossof thepotential savingsthat might have beenachievedby the abandonedcompetiiion, which the Army suggested should be valued at approximately25 percent of the cost of Raytheon's EKV."te Lockheed-Martin Case Boeing's ethical problems with proprietary documentsbelonging to its competitors also figured prominently when Boeing was discoveredto have some25,000 proprietary documentsbelonging to Lockheed Ma-rtinCorp.while the two companies competedfor a major Pentagonrocket launch contract. The Air Force strippedBoeing of approximately$l billion in potential revenue as a penalty in the caseand also suspended three Boeing subsidiariesfoian unspecified period. The Air Force statedthat the suspension *us uppropriatefor the.,seriousand substantialviolations of federal law" involving the illegal acquisition of the Lockheed documents.The fallout continuedwith a civil racket..tiog caie filed againstBoeing by Lockheed, a JusticeDepartmentinvestigationand the indictment of trvo former eoeing employees.Speakingof the case,Air Force Undersecretary PeterB. Teets stated,..I have never heard of a caseof this scale."20 The suspension was not lifted until Mar.4,2005, making it the longest suspension , of a major defensecontractorever."
re "Missile 'See Defense:Events Relatedto ContractorSelectionfor the Exoatrnospheric Kill vehicle,,, Offrce-03-324R Missile Defense,Jan. ,2003, p. 1l. 27 S="t:lf":rmting "U.S. See Strips Boeing of Launches;$l Billion SanctionOver Data StolenFrom Rival,,, _" by Renae Merle, The Washington Post,July 25,2003, p. l. "' see " Ai Force Lifts Boeing suspension,"Reuters, LosAngeles Times, Mar.s, 2005, part c, p. 3

Comingjust monthsafterthe discovery Boeing'smisdeeds theRaytheon of in case, Lockheed the Martin case represented of the largest one penalties everassessed against defense a contractor. theyearwasnot yet over. But Airbus Case Proprietary informationinvolvinga Boeingcompetitor alsoan issuein the was Boeingtankerlease scandal. E-mailmessages writtenby Boeingexecutives foundby and members Congress of suggested "DarleenDruyun,who handled that acquisitions thefor Air Forceat the time, might haveshared confidential detailsof theAirbus offer with Boeingofficials- thusgiving themcompetitive advantage craftingtheir own in proposal."22 The Department Defense of Inspector General's office initiatedan investigation of the allegations.23 attorney theAirbusparentfirm, European An for Aeronautic Defense & Space (EADS),raisedadditional Co. questions with the allegation if Druyundid that passalongproprietary information Boeing,thatcouldhaveunfairly influenced to a competition underway Britain for the same in kind of tankers.2a All doubtasto Druyun'sactions with respect Airbusproprietary to information wasremoved OctoberI,2004 whenDruyunwassentenced 9 monthsin federal on to prison. In a document released theU.S.Attorney'soffice,it wasstated Druyun by that "acknowledges providingto Boeingduringthe [tanker]negotiations what sheconsidered to be proprietary pricing data"^from European the planemakerAirbus,whichwas competing build theplanes.25 to The cases involvingRaytheon, Lockheed Airbusall involveallegations and of misconduct Boeingin connection by with proprietary information belonging Boeing's to competitors. cases All arose duringmajordefense procurement competitions all and stories brokein 2003.But the ethicalproblems associated Boeing'sconduct a with as defense contractor werenot limitedto proprietary information issues. recentstudyby A the Projecton Government Oversight, well-respected a watchdog group,determined that Boeing"commiffed50 actsof misconduct paid $378.9 and million in finesandpenalties between1990and 2003."26

See"Pentagonto probe how Airbus lost refueling tanker deal to Boeing,,,AFX.COM, September lg, 2003. x See"Pentagonto probe how Airbus lost refueling tanker deal to Boeing," AFX.COM, September lg, 2003. % "Boeing See Deal on Tankers Again on Hold; Rumsfeld Orders Review After Executives are Fired,,, by RenaeMerle, The Washington Post,Nov. 26, 2003,p. El. '" "Ex-Pentagon See Offrcial admits to more illegal help to Boeing," by David Bowermaster Seattle , Times,Oct. 2, 2004, p. Al "U.S. See Strips Boeing of Launches;$l Billion SanctionOver Data StolenFrom Rival,,, by Renae l" Merle, The Washington Post,July 25,2003, p. A0l.

An excerptfrom the Projecton Government Oversight Federal Conhactor Misconduct Database detailingBoeingmisconduct defense in cases from 1990through 2003is appended Exhibit A. It is all the morestrikingin thatit leaves manyofthe at out billions of dollarsin taintedprocurement contracts involvingBoeingwhich havebeen disclosed the past 18months.WhenformerAir Forceofficial undfo.-.r Boeing in executive Druyunwassentenced Oct. 1, 2004,U.S. on AttorneyPaulMcNulty revealed that Druyun,afterfailing a polygraph, confessed had to: ' ' providingBoeingwith proprietary information abouta competitor asa partinggift to Boeing negotiating excessive an $100million payment Boeingfrom to NATO awarding Boeinga $4 billion contract 2001to modernize in more than500c-130 aircraftbuilt by Lockheed-Martin, discrosing that "an objective selection authority may not haveselected Boeing." negotiating a$4r2 million payment Boeingin 2000tied to its to production c-17 transports of because seniorBoeingexecutive a at thetime washelp_ing secure job for her futureson-in-law, a MichaelMcKee''
And as recently as Feb. 14,2005, the Departmentof Defenserevealedthat it was tuming over to the Inspector Generalfor investigationeight additional questionable contractsoverseenby Darleen Druyun worth billions of dollars. Four ofthe eight contractsinvolved Boeing, including a programmedDepot $1.5 billion KC-135 maintenancecontract from 2000-200| .28 The Future Combat Systemsproject with Boeing as LSI has alreadygenerated controversy after it was learnedthat Boeing executiveshad gotten access secret to information of companiescompetingwith Boeing for FCS contracts:2e

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Boeingexecutives James AlbaughandRogerKronewerebroughtinside the so-called fire-wall,causing competitors seniorArmy officialsto and worry that "Boeingcouldget anunfairadvantage thework it bidsfor.,, on o'concerns aboutBoeing'srole in theprojectcomeagainst backdrop the of recentallegations the chicago-based that aerospace on at leasttwo titan

'- See"Ex-Pentagon official admitsto moreillegal helpto Boeing,"by David BowermasterTheSeattle , Times. Oct.2, 2004,p. At. 'o "Department See of Defense Announces Contract Reviews," DoD NewsRelease lS7-04,Feb. No. 14, 2005. a See"Boeing's Rolein Defense Project Worries Pentagon, Competitors," AnneMarieSqueo, Walt by The Street Journal,June16,2003.
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occasions inappropriately obtained rival's information a while competing for military contracts." The article went on to statethat Army officials were "unhappywith the fire-wall situation" andthat "any further controversy couldundercutthe Pentagon's emerging practiceof usinga 'lead system integrator'from theprivatesector big military on programs." While Boeingwasquickto denyanyproblemwith therevelations, may that be smallcomfortinsofarasBoeingalsomisrepresented extentof thewrongdoing the in both the Raytheon Lockheed and cases.3O By all accounts, LSI for a majorPentagon an projectmusthavea reputation beyondreproach because LSI hasaccess sensitive the to proprietary infornr,ation from companies with which it is in competition a regular on basis. this is a definingfeature As of the LSI role, a strongargument be madethatnot only is Boeinga questionable can selection LSI in the FCSproject,but givenits documented for reputation illegally ior misusing proprietary information competitors, of Boeingis the worstpossible choicefor the role. Boeing'sFCS OTA: WhereAre the NontraditionalDefense Contractors? The agreement between Army andBoeingstructuringthe legal relationship the for the FCSprogram'sSystem Development Demonstration and lSnnlphase is known asan "othertransaction agteemenf'orOTA. Thelegalauthorityfor theFCSOTA is derived from 10U.S.C.S 2371and Section of thePublicLiw 103-160, modified 845 as by Section804of PublicLaw 104-20l,andasmodifiedby Section of theFloyd D. 803 Spence NationalDefense Authorization for FY 2001.Jl Act These agreements also are sometimes referred asSection agreements. of the distinguishing to 845 One features an of OTA is thatthey arenot generally subject the federallawsandr.g.ttutioi. which are to applicable procurement to contracts. Oneof the principalpurposes removing legalrequirements of the associated with standard procurement contracts major defense for contractors in orderto attract is nontraditional defense contractors consider to workingwith the Defense Department. The rationale this pu{pose expressed a recentGAO Reporton defense for was in acquisitions:
an era of shrinking defenseindustrial baseand new threats, DoD views 'other transaction' prototype authority as a key rc attracting nontraditional defensecontractors.,,3r
3o'S," "Boeing's Misconduct is Detailed in Memo," by Peter Pae,The LosAngeles Times, Api123,2004. "' &e Agreement Between the Boeing Company and U.S. Army Tank-Automotive and Armaments Command Conceming Future Combat Systems System Develoiment and Demonstration phase, Agreement No. DAAE07-03-9-F001, page l. at

"In

'2

s"e Enhanced, Reportto the Chairman RankingMinority l\,I.trb"t; C"--ittee on Armed Serviceffi and Senate, OcL2002, GAO-03-150, 3 p.

lo

The GAO Reportwenton to cite asan exnmple a benefitto these of agreements "attractingbusiness entitiesthatnormallydo not do business with the government." Despitethe intentof Congress OTAsbe usedto reachout to the newerhigh that techcompanies which might not otherwise consider dealing with the Pentagon, too all oftenprototypefundsassociated OTAs do not flow to thenontraditionat with suppliers but to major defense contractors. Suchis the case with the FCSOTA. Boeingis the second largest defense contractorin the countryandmostof the otherfirms participatingin the FCSprogramdo not fit the description a nontraditional of defense contractor. This fact wasreadilyconceded a reportprepared yearfor Acting Army in last Secretary Brownleeon FCSmanagement issues: intended benefitof OT authority- attractingnontraditional - hasnot beenrealized date;the initial roundof suppliers to subcontracts gonealmostexclusively traditionaldefense has to suppliers."tt A closerlook at the fundingof the FCSSDDprogramshows just four large that defense contractors account mostof the funding. Thecostshare theplanned for of work showsBoeingreceiving$4.9billion, SAIC receiving $1.3billion, andGeniralDynamics andUnitedDefense together receiving$4.6billion. The2l Tier 1 competitive subcontracts combined total$1.7billion.3a Boeing'sFCS OTA: LessAccountability and Oversightfor America'sMost Dishonest Defense Contractor In recognition potential of problems with usingan OTA in lieu of a standard procurement contract, Congtess very carefulin the extension legalauthorityto the was of Department Defense utilize OTAs.The conference of to r-eport ur.o.punying the NationalDefense Authorization for FiscalYear 19993t, Act which extendld[. Ofe authority,cautioned that any further extension would be contingenton the congressional defense committees concluding OTAs hadbeenusedin a responsible that andlimited manner:
"[S]ection 845 authority should only be used in the exceptional caseswhere it can be clearly demonstrated that a normafgrant or contract will not allow sufficient access affordable technologies. to The confereesare especially concerned that such authoritv not
" sgg

"One

Erownlee, Institute for DefenseAnalyses,Aug. 17, 2004,p.ES_3. 3o op cit " SeePub.L. 105-161,112 Stat. tg}}, tgi4 (199g).

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be usedto circumventthe appropriate management controls in the standard acquisitionand budgetingprocess."36 (emphasis added) Because useof OTA authoritycanresultin an agreement is virtgally the that exemptfrom mostof the statutes regulations and governing Defense Department R&D or prototyping efforts, repeated effortshavebeenmadeto identift andclari$, exactlywhich legalauthorities might applyto an orA. paul G. Kaminski,ajunderr..ritury fo, AcquisitionandTechnblogy December in 1996, identified21 statutes relatineto procurement "are not necessarily that applicable 'othertransactions."'37 to While the objectives cuttinggovemment tapeto empower Defense of red the Department haveincreased to flexibility in dealing with high-tech-companies for advanced technology projects clearlydesirable, factthatmanyof the statutes is the inapplicable OTAs werespecifically to enacted deterwaste, to fraudandabuse a very real andpersistent problemfor government contracting callsfor very carefulanalysii. of statutes withoutprotecting government's the limply strippingout decades protective interests dealingwith contractors a formulafor financialdisastei. in put-simply, is sucha process would leavethe government wlnerableto almostanykind of waste, fraudand abuse - addinginsultto injury - anunethical and company couldsayits actions were "legal" because lawsrestricting unscrupulous its activitiessimplydid not apply. A groupof contract experts assembled an adhocworkinggroupsought as to analyze exactlywhich statutes wereexempted from OTAs andtheiamifiiationlsof those exemptions, publishingan excellent treatise the subject January on in 2000.38 group The "may raisesignificantconcluded inapplicability certainstatutes regulations that of and questions accountability thepublic fisc andothermatters publicpohJy."3e of for of Increased risks anduncertainties areas in suchasfundinglimitationsanddispute resolution wereidentified.ao therewasa warningthit, ..confusion And overols statutory exemption be costlyeitherin litigationor in themisuse ors.,/l can of The signalcontributionmadeby the ad hoc working groupto the understanding of potentialrisks andbenefits OTAs comes of from its unaiysis o?th. question to as whetherOTAs areexemptfrom the 21 statutes identifiedin theKaminskimemoo'as well asan additionalI I statutes identifiedby the workinggroup.
36 SeeH.R. Conf. Rep.No. 105-736, 590 (1998). at " ,See'Memorandum from Undersecretary of Defense for Acquisition and Technology paul G. Kaminski to Secretaries the Military Departmentsand Directors of DeienseAgencies," Dec.14,1996 of reprinted in fullin Department of DefenseOther Trqnsactions:An Analysis of AppTicable'Laws,aproject of the Ad Hoc Working Group on Other Transactions Section of Public Contract Law, American Bar Association, 2000, Attachment 1. 3-llry.neryrtment of DefenseOther Transactions:An Analysis of Applicable Laws, aprojectof the Ad Hoc Group on Other TransactionsSectionof Public Contrait iaw, American BarAssociation, 2000. Ygtklg " Seeld.at2. q Seeldat2. al SeeId,. at2. a Seekd.at Attachment I

1)

Among the statutes determined not applyto orAs arethe following: to . . . . ' ' Competition Contracting in Act Contract Disputes Act ExtraordinaryContractual Authority andRelief Act 10U.S.C.$ 2313,Examination records conuactor of of 10u.s.c. $ 2403,Major weaponsSystems: contractorGuarantees 10U.S.C.$ 2408,Prohibition persons on convicted defense of contract relatedfeloniesandrelatedcriminalpenaltyasdefense contractors 10U.S.C.S 2409,Contractor employees: protection from reprisalfor disclosure certaininformation of 3l U.S.C' $ 1352, Limitationon theuseof appropriated fundsto influence certainFederal contracting financialfransactions and 4l U.S.C.g 423,Procurement IntegrityAct 4l U.S.C. 701-707, Drug-Free Workplace of lggg Act $$ gg 4I U.S.C. 10a-10d, American Buy Act 4l U.S.C.g 2306a, Truthin Negotiations Act 4l U.S.C.g 422,CostAccounting Standards l0 U.S.C.S 2334, Costprinciples

'

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. . . . . .

just The statutes listed,alongwith their enabling regulations, represent partial a list of the statutory exemptions OTAs.While anOTA riay incorporut.ro-" of the for missing statutoryprotectionsandtermsby writing them into th. ugr..-ent, any omissions easilybecome can loopholes throughwhich anunscrupulous contractor can extractfinancialbenefits typicallyavailable othercontractors aresubject not to who to the standard procurement contract. A moredetailed listing is appended this testimony Exhibit B: Applicability to as of SpecificStatutes OtherTransaction to Agreements. Also of concern the factthatthe lack of majorprocurements is handled through OTAs hasmeantthat thereis a distinctlack of case interpreting law possible ambiguities.

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This means additional uncertainties costsin theeventof disputes may occur and that betweenthe contractorandthe government with the burdenof pioof being on the government mostinstances. in while therehasneverbeenan orA aslargeastheFCSorA, problems of accountability havearisen recentOTAs suchasthe EvolvedExpendable in Launch Vehicle(EELV) project.A greatdealof financialinformation abouttheprojectis offlimits to the public and,amongotherissues, publicandthemediatru.t no practical the e way to assess whetherclaimsof government savings credible are A recentarticleon the EELV raisedissues directlyrelevant the FCSproject: to "In its audits, the General Accounting Office warned the OtherTransaction Agreement approach risky for a was billion-dollar-project. a tool previously It's reserved far for smallercontracts. GAo saidit posed The considerable challenges because exempted projectfrom normalrules it the for spending dollars,limited Defense tax Department oversight anddid not give the military theauthorityto conduct audits, GAo said. 'The useof Other Transaction instruments EvolvedExpendable for Launchvehicle development challenge Defense will (the Deparhnent) determining in how to protectthe government,s Interests,'GAO said. The Defense Department inspector general alsochallenged whether 'visibility' into therewasenough theprogram's spending its 1999 in reviewof the EELV program, according the ug.n.y'. Congressional to testimony. 'The EELV other transactions agreements included technical safeguards but providedlimited insightinto thefinancialaspects theprogram,' of assistant auditorDon Mancuso Congress the spring itZdOO.,At told in The lack of transparency accountability a serious and is issuein its own right but, asindicated the EELV case in above, disclosure asan important acts deterrent to unscrupulous behavior contractors: by
o'However, governmentauditors and taxpayerwatchdog groups cautionedone side effect of the new way of doing businessis far lesspublic disclosureof what the companiesand the militarv are doing with public money.

may spent Force Air I f"":Sl billion question Taxpayers neverknowhow companies rocketmoney,,, by JohnKelly, chris Kridler,andKelly young,FroridaToday,August 25,2002,p.I 14

'Anything thatremoves financialtransparency not a gooddeal is for the taxpayers,' Eric Miller, a defense said industryinvestigator for the Projecton Government oversight,which hasspent two decades investigating deals between Defense the Depirtmentand 'Time andagaindefense its contractors. contractors haveshown they will sometimes advantage these take of typesof situations. When you eliminate thatkind of oversight, you've got a potentialdisaster."a Mr. Miller went on to statethat the OtherTransaction Agreement strategywas .o'We neverintended big companies avoidscrutinyon nine-andten-figure for to coniiacts. don't think suchlargecontracts shouldcomewithoutfinancialoversight. a dangerous It's practice.'/s Boeing'sFCS OTA: How Sweet FinancialDeat? a By all accounts FCSdealhasbeenan exceptionally the goodonefor Boeing.The $14.8billion initially beingspenton the development phase already has beenaugmented with an additional FCs modificationin August2004which added appioximatetlisO billion t9 the Pl!9ram andwill probablygrow to morethan$100billion whenpioduction getsunderway."o it comes a time whenBoeinghasbeenlosingmarketshare And at to Airbus,makingits defense business themoreimportant. y"ut ZOOI all The marked the first time in decades morethanhalf of Boeing'srevenues that camefrom defense.aT Financially, importance FCSto Boeinghasbeencitedby suchdefense the of as Gansler, gxperts Jacques Undersecretary Defense Acquisition,Technology of for and "thi, Logisticsin the ClintonAdministration, who recently stated, ;FCSIis a big plum, from Boeing'sperspective.'/8 of the reasons One sucha LeadSystunIntegrator dealcan be lucrativeis that it doesnot requirea significant amount newcapitalslendingsothe of returnon investment be quitehigh. George Muellner,president phantom of Works, 9an Boeing'sresearch development hasdescribed LSI role asbeinga..highand arm, the margin,low-overhe atea.'Ae ad, Far and away,the most importantfactorto be analyzed determining in whether the FCSprogramwasnegotiated ilrBoeing's interest the expense the g&ernmentis at of the OTA signed Dec. 10,2003.s0 on

a SeeId. as See Id,. gets$14.8billion Army pact,"SanDiego (Jnion-Tribune,Dec.l1,2003. f'' *" ..P*l"t-SAIC'Team J?e "Iloeing Plays Defense;Besetby Airbus and rocked by scandal,the aircraft maker tumsto a new cEo - and the Pentaeon- for help," by Judy cresswell, Foitune,April 19, 2004, p. 90. a8 See rd,. ae See Id,. 50 ,See Agreement Between the Boeing Company and U.S. Army Tank-Automotive and Armaments -Co11nandConceming Future Combat Systems System Development and Demonstration phase, Agreement No. DAAE07-03-9-F001.

l5

While obtaininga copyof a government procurement document generally is relativelyeasyinsofarasmostarepublic information, Boeinghasshownitielf to be unusuallysensitive opposing in public scrutinyof its FCSarrangement theArmy. with WhentheNationalLegalandPolicy Center filed a request underthe Freedom of InformationAct for a copyof boththe draft andfinal versions the FCSOTA, NLpC's of counsel wasinformedthatBoeingopposed disclosure, evento thepoint of claimingthe documents were"classified."To their credit,theArmy's professional FolA staff disclosed requested the materials onceit became uppureni Boeinghadno legal that grounds preventsuchdisclosure. to An analysis theFCSOTA confirmed of whatothers already had suspected that _ the FCSOTA negotiated Boeinglackedmanyof the standard by legalirotectionsthat accompany major Defense Department acquisitions. Because OTAs arenot contracts and wereoriginally designed streamline to regulatory procedures, manylegaltermsand conditions needed deteror detect to waste, fraudandabuse mustbe individuallv incorporated an OTA or they simplywill not apply. into The first roundof public controversy addressing legalshortcomings the the of FCSOTA began whenReuters an articledisclosing two months ran that beforethe Army signedthe FCSOTA with Boeing,a privateconsultingfirm,CommerceBasix, hired Inc., to improvethe Army acquisition process, recommended theArmy reworkthe draft that agreement' Among the consulting firm's findingswasthat a delayof iix monthsin the projectunderthe termsof the Mqy 31,2003draftOTA couldresultin a $1 billion financialrisk to the government.5r While Army officialsweredismissive towardthe Oct. 14,2003consultant's reportandsignedthe OTA on Dec. 10,2003,the subsequent analysis the General by Accountingoffice released April 1,2004beforetheHouse on Armed Services Subcommittee TacticalAir LandForces only largelycorroborated consultant,s on not the claim but evencitedthe possibilityof a multi-billion-dollaicostassociated a fairly with modest delay.52 The Reuters articledisclosed concerns that aboutFCSwerenot limited to the consulting firm: 'oThe sizeof the agreement sparked concerns just at not CommerceBasix among FufureCombatSystems but top Program offrcialsanddefense industryexperts well. as 'This was unheard saidonedefense of,' industryofficial,

fl

See"Boeing deal with Army criticized; Consultantcited $l billion risk to govemment ,- Chicago Tribune,Feb. 17, 2004,p.3. " See Hearing of the Tactical Air Land Forces Subcommittee of the House Armed Services Committee on Future Combat Systemsand Force protection Initiatives, April l, 2004, Federal News Servicetranscript,p. 8.

16

.It who asked to named. raised lot of alarmbells.",s3 not a The Reutersarticle went on to reportthat the decisionto opt for the lessformal OtherTransaction Agreement instead a standard of Defense Department procurement contract"alsoraisedeyebrows, givena spate ethicsscandals Boeingin recent of at months."5a Anyoneableto obtainandreviewtheFCSOTA wouldhaveevengreater reason for raisedeyebrows. The consultants only hadtheMay 30, 2003draft OTA on which to rely for their October2003report.However, reviewof that draftwith the final definitized a version signedin December 2003indicates relativelyminor changes termsandconditions. in Indeed, OTA itself indicates the definitizatiotprocess the that between May and the December versions would dealmorewith costissues thanbusiness termsand conditions.s5 Perhaps of sensitivity the consulting out to firm's allegation aboutthe government's exposure financialrisk, the final versiondid substantially to augment "Article XXXIII Termination Liability" from the relativelySpartan treatme,it those of issues the May versionandsome in related termsandcondiiions. Ironically,the reporton FCSmanagement the Institutefor Defense by Analyses wascritical of the CommerceBasix analysis thelegalweakness the FCSOTA by of of citing the fact that they did not seethe final December 2003agreement: "TheCommerceBasix reviewof a draft Army-Boeing agreement, whichwascritical of the lack of clauses protecttheTr-y', to interests, not address of theclauses are in thefinal did all that FCS agreement."56 This is somewhat disingenuous sinceit seems suggest to therewasa major strengthening the agreement protectthe Army's interests of to beforetheDecember draft was signed.Therewasnot, asanyreading the two documents of shows.TheArmy would havebeenbetterserved therebeena listingof all changes had madeto the May draft to betterprotectthe Army's legalinterests.Evenmorehelpfrrlwouldhavebeena complete analysis the legaleffectof the omission everystatute of of which covers standard DoD procurement contracts which aremissingfrom theFCSorA. but
s ,See "Boeingdeal with Army criticized; Consultant cited$l billion riskto govemm ent," Chicago Tribune, Feb.17,2004, 3. p.
55 See Agreement Between the Boeing Company and U.S. Army Tank-Automotive and Armaments -Comlnand Conceming Futwe Combat Systems System Development and Demonstration phase, Agreement No. DAAE07-03-9-F001, May 30, 2003 draft at pp. 13-14. 56
See Revi sa See Id.

Brownlee, Institute Defense for Analyses, Aug. 17,2b04,p. ES5 1'7

All too manyissues associated protecting government's with the interests against waste,fraudandabuse well aspromotingaccountabilityremain. as Traditionally, resolution disputes a criticallyimportant of is part of anymajor agreement. the case a high-risk,multi-billion-dollar In of project*here theGAO atreaay "significantrisk," hasassessed theresolution disputes an areathatrequires of is clarity as well as strongprotection the government's of interests. Contracts The Disputes does Act not applyto OTAs unless hasbeenspecifically it incorporated the agreement. into The FCSorA hasno suchincorporation the contractDisputes of Act. The issueof dispute resolution addressed the FCSOTA at Article XV is in Disputes. While BoeingandtheArmy anticipate resolving disputes througha setof sparsely wordeddispute resolution procedures, Boeingis alsoaccorded opportunity th-e to "bring a claim in a courtof competent jurisdictionasauthorized 28 USC i+'gt'tr?if by Boeingdisagrees with the outcome the dispute of resolution. An apparent shortcoming the failure to address is exactlyhow the government can bring a claim in the eventit disagrees the outcome a dispute with of resolition. Generally, jurisdictionovercivil actions thereis federal initiatedby theU.S.government asstated 28 U.S.C.$ 1345,"Exceptasotherwise in provided anAct of Co-ngress, by the district courtsshallhaveoriginaljurisdictionof all civil actions, suits,or pro..Jdiog, commenced the United States, by anyagency offrcerthereofexpressly by or or allowed to sueby Act of Congress." Contract The Disputes represents wayin r"hi.h Act a Congress "otherwise has provided"for jurisdictionin thaiit applies any,.express to or implied contract...entered by anexecutive into agency...-Thi-Courtof iederat Claims hasjurisdictionoverclaimsbroughtpursuant theContract to Disputes Act. However, sincethe FCSOTA is not considered "contract,"averyrealissueexistsasto whether a andhow the Army couldbring a breach contract against of suit Boeing.Moreover, the court of Federal claims hasneverruledon itsjurisdictioi overorAs. Throughout FCSOTA, problems the similarto the issueof dispute resolution appgar, resultingin bothuncertainty well aslegalwlnerability for tie government's as position.The Army had a professional, legalandethicalobligatitn to addiess everysuch issueso asto protectthe government's interest. guidance The provided theArmy to throughthe "other Transactions" (or) GuideforpiototypeFrojects,as revised in August2002,addresses obligation this clearly: "...the Agreements Officer is not precluded from andshould consider applyingthe principles provisions anyapplicable or of statutethat providesimportantprotections the government, to the

s7See Agreement Between BoeingCompany U.S.Army Tank-Automotive Armaments the and and ConlmandconcerningFuturecombat systemsSystem phase, Development Demonstration and Agreement No. DAAE07-03-9-F001, 10,2003,atArticie (B)(3), 53. Dec. XV p. IR

participants or participants' employees."s8 The guide went on to advisethat the AgreementsOfficer may also want to consider whether whistleblower protectionsshould be included in tlle agreement, *especially if the prime awardeeis a companythat typically doesbusinesswith the
DoD.o')Y

The guideis consistent advising government takeall appropriate in the to steps to protectthe government's interests an OTA andespecially takingrt.p. t" minimize in in projectrisk. The linkageof risk to the termsandconditions the Oi agreement also of is beyonddispute: the prototypeproject andthe capability of the sources expected compete to should a factorin the be termsandconditions the OT agreement."tr of While the FCSOTA doesincorporate number statutory a of provisions well as as Federal AcquisitionRegulations, majorityof standard the procurement lawsanda good numberof lawspromotingaccountability conspicuous their absence. are by Without providingan exhaustive listing,it appears mostof the statutes that previously specified in Department Defense of OtherTransactions: Analysis Applicitt" tori ur. oot An of applicable theFCSOTA. to A review of the FCSOTA foundno apparent inclusionof the Procurement IntegrityAct. This is especially noteworthy giventheallegations involvedin the criminal investigation Darleen of DruyunandBoeing.TheProcurement IntegrityAct6limposes two typesof obligations government on employees seeking non-govemment empioyment who havebeeninvolvedin procurement. First,for government employees havebeen who personally substantially and involvedin a procurement worth morethan$100,000, sets it forth requirements mustbe followed if the employee that inquiresaboutor is contacted by the company involvedwith the procurement. Second, theieis a one-year on ban accepting compensation from contractors involvedin theprocurement. Therearecivil penalties violationsby both thegovernment for employee the conf actor.Q and Additionally,theFCSOTA doesnot includethe Truth in Negotiations (10 Act U.S.C. $ 2306a).Possible violationof the Truthin Negotiations may be an issuein Aci the ongoingauditof the AWACs contract upgrade involvingDarleen Druyun.fiAt issue
See "Other Transactions" (OT) Guidefor Prototype Projects,Under Secretaryof Defense for Acquisition, Technology and Logistics, August 2002,C2.7 - Considerationof piotections provided in L-^aw,p.24. " SeeId. ffi See "Other Transactions" (OT) Guidefor Prototype Projects,Under Secretaryof Defense for Acquisition, Technology and Logistics, August 200t, c2.l .3.1.5 - Risk Assessment, p. at 15. "' See4l U.S.C.$ 423. "'See 4l U.S.C.g 423(c),(d),(e). o' See"Pentagonauditors check Boeing charges;Review part ofprobe of ex-company exec,,,by Tony Capaccio, The Seattle Times,May 12, 2004,p. F;6. s8

"The risks inherentin

1q

specifically is whether Boeing overchargedthe Air Force by "a significant amount" on a $1.3 billion contract to upgradeNATO surveillanceaircraft. The article stated: are required under the Truth in NegotiationsAct to provide accuratedata,which servesas the basis for final negotiatedprices."s Boeing is no strangerto allegationsthat it has mischargedor overchargedthe government on DefenseDepartmentcontracts. In one instance,a Boeing subsidiarypaid $3.8 million to settle claims arising from three Navy contractsin which the subsidiary was said to have "mischargednumerouslabor hours or provided inaccuratecost information to the governmentduring negotiationsfor all of the contracts."6s The Justice Department media releaseon the casestated: oolJnder the Truth in NegotiationsAct, companiesare required to discloseto the governmentpricing and cost information in their possession when they negotiatecontractswith the government."66 The failure of the FCS OTA to be coveredby the Truth in NegotiationsAct representsyet another legal vulnerability for the government in the event that Boeing or any of its partnersprovide inaccurateor paddedcost estimatesin any negotiation associated with the program. There is little doubt that Boeing as a defensecontractor does not like the idea of being legally required to provide the governmentwith accurate cost information under the Truth in NegotiationsAct. At a roundtablediscussionof government contract issuesduring 2001 Boeing Vice PresidentJohn Judy arguedthat the threshold for coverageof the Truth in NegotiationsAct should be raised signlificantly.6T Coincidentally, Mr. Judy's name surfacedduring the Darleen Druyun scanial when the National Legal and Policy Center disclosedthat he had contractedto purchaseDruyun's Virginia home while Druyun was still at the Air Force overseeingmult-billion dollar businessdealswith Boeing. The fact is that Boeing has a long and well-documentedrecord of blatantly overchargingthe Pentagonon defensecontracts. In the 1980's Boeing was caught charging the Air Force $748 for a pair of pliers to be usedto repair fC-tgS tanfer airplanes. An engineertestified before Sen.Grassley'sJudiciary subcommitteeon administrative practice and procedureon the subjectand statedihut he found similar pliers at a hardwarestorefor $7.61.68 "contractors

e See ld. 6 "Boeing ^See SubsidiaryPaysU.S. $3.8 Million to SettleDispute Over ThreeNavy Contacts,,, U.S. Departmentof JusticeU.S. Newswire Release,Dec. 29, lgg2. * ,See Id. Se" "Plotting Our Defense: The PentagonWants Reform, but How Will It Work?,, Legal Times, march \ 5, 2001,p. 30. oo See'Air Force Victory is Illusory in the Caseof $748 Pliers; Boeing's New ChargeOffsets price Cut,,, The WashingtonPost, March 22, l9B5,p. Al.

)o

Thereareno shortages goodexamples the impactthat deficientagreement of of language agreement or negotiations have.A very recentexample can involvei once again- Boeingandthe Department Defense. anApril 16, ZOOq of post In Washington articletitled, "Audit CriticizesAnotherBoeingDeal;InipectorGeneral SayJAir Force Didn't Negotiate NATO Contract Properly,"a $1.34billion contract beingnegotiated by Air Forceofficial DarleenDruyun with her future employerBoeingfaileJto liave the properverificationof costs. a result,theparties As mustsit downundfollo* the correct procedures ensure the costsareappropriate. auditconducted the to that The by "Air Forcecontracting Department Defense of Office of Inspector General concluded, offrcialsawarded contract the modifications withoutknowingwhether $1.3billion the costwas fair andreasonable.ore daysafterthis articleappeared, Four Darleen Druyun pled guilty in the U.S. District Courtfor the Eastern Districtof Virginia in conjunction with a federalfelony countof conspiracy which arose from her employment dealings --with Boeingat the same time the conract in question b"ing fi;ud;ijd was U.S. AttorneyPaulMcNulty summed his view of the crimeby stating: up "The only interest should thepublic'sinterest. be Darleen Druyunplaced personal her interest overthe interests the of Air ForceandAmerican taxpayers. Secretly negotiating employment with a govemment confactor, at the same time you areoverseeing negotiations a multi-billion dollarlease the of from that samecontractor, strikesat the heartof the integrity of theacquisition process.'071 just The case citedraises another yet series questions of regarding lack of the integrityin the manner which Boeinghaspursued in Department oefensebusiness. of The patternof wrongdoing unmistakable. there'smore.A recentarticleinThe is And Wall StreetJournal by Andy Pasztor reportedon another pendingprocurement scandal involving allegations against Boeing: "In st. Louis, [Boeing]facesa civil investigation allegedly for usingforeigntitaniumin F-15fighterjets, certain military transport planes variousotherpentagon and programs, contrary to US. law. Investigators previously demanded company the pay $20million to resolve claims,but Boeingbalked- a the at settlement. investigation been The has for threeyears, Tgt*uv thoughit hasn'tbeenreported until now.

@ See"Defense tags Boeing AWACS Deal for criticism; Report: Conhact was Mishandled,,, by David Bowermaster,The Seattle Times, AplJrl16,2004, p. Cl. '" "Ex-Pentagon See Offrcial Admits Job Deal; Civilian Got Boeing Offer While OverseeingAir-Tanker by RenaeIVIerleand Jerry Markon, The washington poit,April 2r, 2004,p. r. t":o":!'. " ,See Statementof U.S. Attomey Paul McNulty, April 20, 2004, United Statesof America v. Darleen pruyun, Criminal No. 04-150-A '' See"PentagonProbesSuppliers' Hiring," by Andy Pasztor,The Wall Street Journal,January 12,2004.

)1

Perhaps Boeinghadhadthe foresight usean OTA in the case cited,it if just to wouldnot be facinga $20million fine.TheBuy American (41U.S.C.gg 10a- l0d) Act doesnot applyto OTAs unless hasbeenspecifically it added. In yet anothervery recent(April 23, 2004)news account,the serial natureof Boeing'smisconduct with DoD procurement underscored: was "An internalAir Force memosuggests broad pattern of a improprieties by BoeingCo. when it bid on pentagon contracts,contradictingthe aerospace giantrsassertions that suchproblemswere isolatedand that it corrected them quickly."73 The FCSOTA - on its face- raises very serious questions to whether as the government's legalandfinancialinterests havebeenwell served. Thereis little doubtthat Boeing'sinterests havebeenwell served receiving $20billion plus"plum deal.', by the Evena casual readingof the FCSOTA showsconsiderable financialincentives for Boeing,includingthe earliercited"...maximumpossible opportunity earnfee."7a to Also deserving scrutinyis the questionable million incentive $9.8 award-rgceived Boeing by from the Army for completingthe agreement the endof the year.1s a tirne when by At Boeingwasspending millions of dollarson lobbyists its pushfor Pentagon in business, a $9.8million incentiveawardfor rushingthrougha lucrativedealhardlyr"l"-, necessary - or wise. But thereis a humanelement alsoinvitesscrutiny. that Thefact thatthe senior Boeingexecutive involvedin theFCSprocurement MichaelSears, BoeingCFO was the terminated cause connection for in with his hiring of Darleen Druyunandalsoaccording Boeing- in the alleged to cover-up his actions, of oughtto be considered red a flag. Indeed,Sears, prior to becoming phantom BoeingCFo, wastheheadof Boeing,s Works,the BoeingR&D operation playeda key role in winningtheFCSdeal.76 that After Boeingtook anunexpected billion charge 2003because losses $1.1 in of in its commercial space business, mediaaccounts listedMichaelSears leaderof a teamof as experts lookingto examine business the cases associated Boeing'sbiggest with projects. Financial Timesinterviewed Sears reported: Mr. and "Mr. Sears hintedthatthebusiness cases madein someof Boeing'stenders werenot satisfactory, and addedthat the risk management practiceof the different
" See"Boeing's Misconduct Is Detailed in Memo," by Peter Pae,The Los Angeles Times, Api123,2004. 'J'eeAgreement Betweenthe Boeing Company and U.S. Army Tank-Automotive and Armaments -Coamand Conceming Future Combat Systems System Development and Demonstration phase, Agreement No. DAAE07-03-9-F001,atp. t4. n See"Boeing deal with Army criticized; Consultantcited $1 billion risk to govemm ent,, Chicago Tribune,Feb. 17, 2004,p. 3. 'o,See "Contract Gives Boeing aLift," by Paul Meni on,Crain's Chicago Business,May13, 2002,p. 13.

))

business unitsmightnot be adeqrate.'fl1 Mr. Sears went on to specifically nametheFutureCombat Systems projectasone of theBoeingeffortsbeingreviewed.T8 Despitethe Reuters account documenting concern overthe FCSdealamongboth FCSprogramofficersanddefense industryexperts, to mentionthe consultant's not report detailing the seriouslegal and financialrisks with the proposed OTA,7e Defense Daity reported: "Originally planned to be signed Nov. 26,theArmy reached agreement the SDD contract on with the LSI [Boeing]in a process went 'exceedingly that smoothly from my vantage point,' claudeBolton,assistant secretary the Army for Acquisition, of LogisticsandTechnology, lastmonth."80 said Indeed, Boeingwasreceiving nice incentive a awardto pushthrougha multibillion-dollaragteement itself.For goodmeasure, agreement rnostmajor for the had statutory regulatory and provisions meantto protectagainst ethicalmisconduct other and contractor abuses stripped out. Whatwasnot to like? Recommendations TheArmy's largest procurement projecthasasa LeadSystem Integrator Boeing, a defense contractor with the demonstrably worstrecordof procurement misconduct of any defense contractor.Boeingwaspenalized substantial for violationsof the law in the Lockheed proprietary documents with a $1 billion contract case sanction the longest and suspension anymajordefense of contractor.In thetankercase, Boeingtried to mislead Congress the needfor tankerswith falseinformationin an attemptto get funding for a on programthatwas over-priced billions of dollars. Boeingexecutives by pleaded h-ave guilty to feloniesandBoeingis currentlyfacingnumerous criminalinvestigations and civil litigation for its misconduct. Insteadof increased oversight,Boeing is managing Army's most important the procurementproject with a legal agreement which meant to attract nontraditional suppliers which minimizesoversight accountability. and and This is a recipefor disaster.

" See*Boeing Team to Reassess Top Projects,"Financial Times,by Caroline Daniel, Sept.2, 2003, p. 33. 'o SeeId. D,See"Boeing deal with Army Criticized; Consultantcited $1 billion risk to governm ent,,, Chicago Tribune, Feb. 17, 2004, p. 3. e "Army 'See and noeing-SAlc LSI Sigr $14.8 Billion SDD Contract for Future Combat Systems,,, DefenseDaily, December 12,2003.

)?

The broadestrecommendations that Congressshould conducta thorough are review of the vulnerabilities the government's to positionbecause the useof an OTA of andthat Congress shouldintensifr its oversight theFCSprogram. of The FCS programis high risk because its ambitiousembrace so manynew of of and untestedtechnologies the failure of the Army to have adequate but oversightand accountability throughtheuseof an OTA represents evenhigherrisk. an The best way to assess major legal wlnerabilities of the presentFCS OTA the would be an independent legalanalysis thewaysin which the agreement to match of fails the legal protections found in standard procurement defense contracts.Startingwith an assessment the statutes of listedin Exhibit B: Applicabilityof SpecificStatutes Other to Transaction Agreements, thereshouldbe statute statute by analysis the legalbenefits of of eachstatute the government a thorough to and examination the languagein OTA of the to determinewhat benefits are missing and what effect that may have on the government's ability to oversee program to protectits legalinterests. the and Similarly, there shouldbe an independent examination the financial and fee of structureof the FCS program. While Lead SystemIntegratorpositionscan be very lucrativefor defense contractors this aspect and should closelyscrutinized, be evencloser scrutiny shouldbe given to whetherBoeing'scompensation the OTA is appropriate in given the shifting of so much of the financial and legal risk for the programto the government compared as with a standard procurement defense contract. To the degree that the government modifu the existingagreement protect can to its interestsand promote greateraccountability,it must do so. Whateverobjections Boeingmay haveto sucha modification palenext to the risk the government taking in is not asserting right to protectits interests. its Given the poor choice of Boeing as the Lead SystemIntegratorfor FCS, especially given Boeing'sincrediblypoor recordwith respect respecting to competitors' proprietary information rights, there is no alternativeto increased -ongressional oversightof the FCSprogram. As the GAO haspointedout, the costassociated the with FCS programso dominates Army's investment the budgetfor yearsto comethat any failures in this high risk programwill makeit extremelydifficult to find any other funds to remedytheproblem. The mostethically-challenged defense contractor the countryis in charge the in of most expensive high-riskdefense programusingan agreement minimizesoversight that andaccountability. that doesn'tcall for increased If Congressional oversight, whatdoes?

)4

Exhibit A
Project on GovernmentOversight FederalContractor MisconductDatabase

www.pogo. org/db/found. cfm -2003 Boeing Defense Misconduct:991 I

Contractor
Boeing -McDonnell Douslass

Case
Defense "procurementFraud,,

Amount
$1,100,000 (Civil)

Disposition, Date& Source

Settlement, 3ll3ll99I Defense Contracts: Contactor Claims for LegalCosts Associated with Stockholder LawsuitsGAOAISIAD9s-166 (July199s)

i,,liuiilitu,tiui,'#irrffiiitfii,Eif ;ili\iiffi!ffiiii]iffiil
Boeing -McDonnell *" O""_I^ Defense ugt:"d to pay $l million .'... to resolve claims that it failed to discloseall information and also misrepresented other costs in negotiating three contractswith the Navv."
l.,llfli: '1,::'fl : :i

t'ru,attirtr#ili+rru
$1,000,000 (Civil)

!#rt.*iffii:ii,Fii:r;:,1#:iffii

Settlement, 8/411992 Defense Contract Litigation Reporter 08/28t92

:.iL,r.liia,,.l.l.l.li:j

rt7ffi.t;#t,,:!i!,ii'ii ,i:il!!{ffi
Settlement,12/23 1992 / Fraud" Defense Contacts: Contractor Claims for Legal CostsAssociatedwith Stockholder Lawsuits GAOA{SIAD-

Boeing --Arqosvstem

Defense "procurement

t.i":,:iti'.::::ii., lr'iit:rfl r1ix1+ffiitiffi,!:ffiffi1t:uirffi .,!ittril::,ij,,i :+iffi i++++'#H+*,iiil4,'itiriil!,iri+rffi!;u,:,+

Boeing -McDonnell Defense $2,100,000 Settlement,31311993 Defense Contract Litigation Reporter 03/tIt93 Aflegedly ,,failedto disclose (Civil) required cost or pricing data in negotiating delivery ord;rs for an Army weapon

9s-166 (July199s)

:!tt*,tti:uliffijl,rrr;;ffiirffir#
.:.lir1::: lrli ,iiiij.l:;::i::t

lli ti,tiiilj*!$;i:Vffiiijr:,i!,ij
Pending, l0ll2/1993

Defense Accused of "mischarging labor costs on a number of Department of Defense airplane contracts... ."

!ir',l,ii,,it;.1,::,.,r:!i:1L,,+,r1ffi1ffi:t:1;;:r:11 !1:tt1!1;1,::t;1t. i.rffii#i,iijffi+"n,r,:!,,!i,!ffitf,11"$ t11X,j#i!u:ii:,ih!i,::At:.tt: f,.-:,i$

Boeing Defense

United States v Department Justice (DOJ)press of McDonnellDouglas,Release 09/08/95;TaxpayersAgainst Docket#93-CVFraud(TAF) euarterly Review 2188, DC ED MO Volume13April 199g, US Volume9 (Civil) April 1997; CourtDocket $250,000 Settlement. 4/15/lgg4

)5

"Procurement Fraud"

(ciYil)

:11;:;11;i;;,;1:ii!tffit|ii$#ttffi...,,,:,,!it:tiii:ii:!:!ii*,tg'i;1;:,111|ti,,,ffi.,ti!itlri,tiiffi ttil;liz;ffi
Boeing Defense "Accused $75,000,000 (Civil) Settlement, 4/291t994 of charging the Govenrmentmillions of dollars in researchand developmentcoststhat it should have absorbed.,'

Defense Contracts: Contactor Claims for LegalCosts Associated with Stockholder LawsuitsGAO/I.ISIAD95-166 (July1995)

,11j,1:,7r;1;1,1ur*lir,ffi =ii#t:11ffi::11Vi

DefenseContracts:ContractorClaims for Legal CostsAssociatedwith Stockholder Lawsuits GAOA{SIAD95-166(July 1995);The New York

04/30/94 'ffiFri:jHtt:li:r:.t:;1ffii*:tiffi itl',,1:1i:rrii',;!1jir,,i11;i'':1t1,r1l1ilffi,,lii;ilni:lt:1,1!:iij!4u:!1 lii; ffinnii#t;l+ir1tfitt#

Times

iiritiiir:iti

Boeing Defense -Argosystem "voluntaryDisclosure Fraud"

$3,000,000 (Civil)

Settlement, l2ll/1994
DefenseContracts:Contactor Claims for Legal CostsAssociatedwith StockholderLawsuits GAOAISIAD-

9s-r66(July 1995)
Boeing -Rockwell conhactprice negotiations Rockwell gave the Air Force proposals that failed to account for Defense "... dunng

$260,000 (Civil)

Settlement, 6/14/1995 Department Justice@OI) press of Release l4/95; Settlement 061 Agreement

discounts Rockwellreceived from its vendor.,. ."

.:...;,ttti.,,aa.::.a::,!:.,,,,ati;i,,:::r::i1:1.t:,,,,1r1ti.:,:,:r,it!:!;rtiffi#tt\t*1lftritii,,,,?ili:r-,lr!tffi#1, it:;;;t;-i;
Boeing -Rockwell allegationsthe (Civil) company knowingly failed to provide ths U.S. with accurate, complete and current information in negotiating multi-billion dollar contractsin l98l ... ." Defense "... to settle

1,:i;+ffiii::ft,itiiti,{iriiiii1i ffilrlffi

$27,000,000

Settlement,'l/3 | / 199 5 Department of Justice (DOI) press Release07/31 195;. TaxpayersAgainst Fraud (TAF) Quarterly Review October 1995; SettlementAgreement

,,1,1i1:z,lii1,t:!i:t!i::+:,:t; iu,?ffi;#1ffi::tin;ffi,;t:11iV*;:l+#l+rirriiriiiii;r:irrr:iti:t
Boeing -Space and Defense Group Defense Allegedly, "unallowable costswere ... included in computationsusedto determine overhead rates used on Govemment $6,000,000 (Administrative)

'i# fffi f,iffi ffii?!r?iffi:;ttj:,ii,ilt!!,i

Settlement, 9llll997 Department Defense of (DOD)
Inspector General Semiannual Report to the Congress04/01/97- 09/30/9j

';i:;';:,:,;:rt;;;:!i:#
Boeing

#,1t!i:x,:,ffi$::l;;ri:ffi!+!t:# :tu-:!i,lttu;,!ffil,|i+X,:/r!:!!{iffiliifi !ffi

$2,000,000
Settlement,| 1/ 19/ 1997

)6

-McDonnell Douglas Aircraft

Allegedly " overcharged the govemment to repair equipment used to manufacture aircraft under a military contract ... ."

United States v McDonnell Douglas, Docket#91-CV3139, DC CD CA US (Civil)

Senator Harkin andRepresentative DeFazio Press Release 06/07100: Department Justice@OJ)Press of Release 19197Taxpayers ll/ Against ; Fraud(TAF) QuarterlyReview Volume5 April 1996, Volume12 January 1998

Boeing Defense --McDonnell,,procurementFraud,, L,ouslas

;=,,,,;.,'111iii:..'111,..t:,11;.;1.ii:;E+,i+N;g1t+ffiiiiitlr.'ttiil:!ffi $2,000,000 Settlement, l2/l/1997 (Civil) SenatorHarkin and Representative

DeFazio PressRelease06/07100
L.l.llll l

'::;::,:;:"r:-i1;Ui:::1it,1::+rrt::!'11r1:ir;;r+j::t;t;:;rrrrrrrrrffir,,r,r,rFi -=iirli'i'";l.-+iii :1r.,ti1!:,11ii+:,1t;u,,:t1:ttiitlltllt;191115

Boeing Defense ;McD^onnell,,Defectivepricing" L'ouglas

$1,850,000 (Civil)

Settlement, 8/13/1998 Senator Harkin andRepresentative DeFazio Press Release 06/07100 Settlement, 9/2611998 StateDepartment ChargingLetter 09/02/98; StateDepartment Consent Agreement 09/26198

t:i*',,1i1il-1;!i;ii;i7:,l;iffi,;y;tir!l1tnf;ii,!i1ffiiil:urtiitilt*l
Boeing Defense $10,000,000 "Boeing repeatedly exported (Civil) defensearticles and defense servicesto Russia,Ukraine, andNorway without required approval from the Departmentof State."

,:,,t11;r,;:;",1:,!:.
Boeing

7iuu.r:iirllii+ffi*rffilit:rt;;g;;u t;:#!,rrrui+ffi!ii,:1ffi1ffi!it?ir;1ffi:;t?ffi!*+!i#
Defense Allegedly "produced United Statesv defective aircraft and falselv Boeing, Docket #98certified parts and CV-17I6,US DC workmanship." wD wA (Civil)

Pending, L2/3/I998

i ''"::l::"; . ,, : . : , , . , i i i , , : , : . , : ' , , ' , ' " ' ' ; , , , , , : - i i . , . : . . : i . : : : .' , ' r , , , , r , , l i i i i i : , : , " ,

Boeing

Defense "Alleged

$61,500,000

Settlement, 8/l/2000

that Boeing placed defective fl ight-critical transmissiongearsinto CH47D Chinook helicopters."

UnitedStates Boeing, Department Defense v (DOD) of Docket#97-CV-410, Inspector US General Press Release DC SD oH (Civil) 08/01/00-08/5/00;Department I of Justice (DOJ)Press Release 08i03/00; DOJPress Release 05/0I I97; Taxpayers Against Fraud(TAF) QuarterlyReview Volume14April2000, Volume 18July2000,Volume

i.,''iiifl'i.'i:ii.t''

ti,titTi;li;ltlf E#,il,iii:;!i!E#ntffi iffi

)7

Boeing

Defense "... allegations that Boeing had agreed to pay bribes to offrcials of the Bahamas government... as a meansof securinga conhact ... ."

Pending, 10/112000 Aviacov Boeing TheLawyers Weekly10/06/00; CanadaDocket#98CourtDocket;Confirmedby the CV-159655 Aviaco Superior CM: Courtof Justice Clerk's v McDonnell Douglas, Office, Ontario,Canada on Docket #92-CV-2401, 04/19/01 US DC SDFL & Docket #92-CV-3739, DC US CD CA (Civil) Settlement,| / 13 2000 | I UnitedStates Boeing, Department Justice@OI) v of Docket#00-CV-32, US Press Release 0l/12l00; DOJ DC CD CA (Civil) Press Release 1912000: ll Taxpayers AgainstFraud(TAF) QuarterlyReviewVolume 18 March 2000;CourtDocket

:,t,a,aa|r,,,1alllt::,1:,:,:::ii::::::jiia;\aaa:a1.,.a1:i):):::a;t|iaaii.::+:::;aaaatlLjatatajllltjt:11

Boeing

Defense Allegedly "concealedfraud by a subcontractor."

#iiFd;+
Boeing

liltsiii:t;,1tit:titit;;Xrnii:!;1;ffiulg11
Defense "The Department

iii+t:u:tir ri+:?,u:r,,t'1,? :r:tffi lii,,it:fjffi

Fne,4l7l200l State Department Charging Letter03/30/01Consent ; Agreement 03/30/0 ; Confirmed I by StateDeparhlentPress Officeon 04/l8l0l

of State (Administrative) charges that The Boeing Company violated the Arms Export Control Act and the International Traffic in Arms Regulations... . One hundred ten (l 10) violations are alleged." r, . i:l::1;1:1i1!;ii;:1;;:,1 ,"iif.,,i,1,,,i,,,i', ll::;.;''":']l i l.,fi,ii ,.,itl..;.ii..iii:llf,..ii ,,,,,.., Boeing Defense $18,000,000 -Boeing "Settlement of the 123 charges (Administrative) Satellite againstthem [Boeing and Systems Hughes Electronics] for violations of the Arms Export Control Act and the Intemational Traffic in Arms Regulations."

ffi:ffii::+ffivix=ffi ,!;+tilntt?:,1fuffir*t#r*::ut!,fi,iir,;:,!
Settlement, 3/4/2003 Department StatePress of Release 03/05/03; Department of StateCharging Letter 12/26102; BoeingPress Release 03/05103

ifrffiffiiu::'1:iffiliclti:jlt?iti!
Boeing settlement resulted from false claims submitted by Boeing to the govemment for payment." "The

$492,163

Settlement, 414/2003

:,::t:i1:i:;:;t!'t1 :!ffi,i:!ttt!,riffi,;r:l:t:tiirtur;i1jt!;+ilffi
Boeing Defense

United States Boeing, United States v Attorney'sOffice 98-CV-1842, DC ED Eastem US District of Pennsvlvania PA (Civil) Press Release 4/4/2003; Settlement Agreement

:i'r,:4it;ltttiti ilr:,+i+ ;,t:lrr,+:i|ffiiiiit;i#fi i{,11tli,'Ftti,ffiffi

$2,s00,000
Settlement. 5116/2003

)?

-McDonnell Douglas Helicopter Systems

allegedly failed to provide [a safety system for the Apache helicopterl with the 28 volts required for proper operation."

"... Boeing

Swenson McDonnell v DouglasHelicopter, Docket #98-CV-1476, US DC AZ (Civil)

t;t:r:r;;:1r';';; Boeing
Defense "Alleges that

Department Defense of (DOD) Inspector General Press Release 06/2I / 00;Taxpayers Against Fraud(TAF) QuarterlyReview Volume19July2000;Court Docket

ii,1,1,:i;,11j]$:*::iffiir1ffi
pending, 6/1012003 LockheedMartin v Boeing, Docket #03-cv796, US DC MD FL (Ciyil) LockheedMartin pressRelease 06110/2003;courtDocket Boeing and its employeescommitted violations of Federaland Florida law resulting from their solicitation, acquisition, and use of Lockheed Martin proprietary information during the competition for launch contract awards under the U.S. Air Force'sEvolved ExpendableLaunch Vehicle program."

Exhibit B APPLICABILITYOF SPECIFIC STATUTES OTHER TO TRANSACTION AGREEMENTS

a a a

A Projectof the Ad Hoc WorkingGroupon OtherTransactions Secii,on of PublicContract Law, z}}},American Bar Association, from Tabler,p.27 Item No.
1.

Statute
Competition Confracting in Act, pub L. No.98-369 (1984), amended as gg 41 U.S.C. 601et seq.,the Contract Disputes Act, Pub.L. No. 95-563 (1987), amended as gg 3l U.S.C. 3551et seq.,procurement Protest System, SubtitleD of the Competition Contracting in Act, pub. L. No. 98-369 (1984)

Applicabilityof Statute to OTs

CICA does applyto OTs not CDA doesnot applyto OTs

2.

3.

Theprotestsystem GAO doesnot at applyto protestsover the awardof OTs. However, GAO will likelv the reviewtheagencyos of OTsto use determine whetherthe statutory requirements 10U.S.C.g 2371 of and$ 845aremet.

)q

4. 5.

10U.S.C.$ 2306,Kindsof Contracts 10U.S.C. 2313, Examination of $ records ofcontractor

Section 2306doesnot applyto OTs Section 2313does applyto OTs not

6.

l0 U.S.C.$ 2353,Contracts: acquisition, Section 2353doesnot applyto OTs construction, furnishingof test or facilitiesandequipment R & D [to contractors] 10U.S.C.5 2354, Contracts: indemnifi cationprovisions 10U.S.C.$ 2393,Prohibition against doingbusiness with certainofferors l0 U.S.C. 2403, MajorWeapons $ Systems: Contractor Guarantees Statute l0 U.S.C. 2408, Prohibition on $ persons convicted defense of contract relatedfeloniesandrelatedcriminal penaltyasdefense contractors Section 2354does applyto OTs not Section 2393doesnot applyto OTs Section 2403doesnot applyto OTS

7.

8.

9. Item No. 10.

Applicabilityof Starute to OTs

Section 2408doesnot applyto OTs

11.

l0 U.S.C.$ 2409,Contractor employees: Section 2409doesnot applyto OTs protection from reprisalfor disclosure of certaininformation 3l U.S.C.$ 1352, Limitationon theuse appropriated fundsto influencecertain Federal contracting financial and Transactions 41 U.S.C.5 423,Procurement Integrity Act, $ 27 of theOffice of Procurement PolicyAct 41 U.S.C. 701-707, Drug-Free $g Workplace of 1988 Act gg 41 U.S.C. 10a 10d, Buy American Act Section 1352 does applyto OTs not

t2.

13.

TheProcurement IntegrityAct does not applyto OTs TheDrug-Free Workplace does Act applyto OTs TheBuy American doesnot Act applyto OTs

14.

15. 16.

g$ 3s U.S.C. 200-212 (19S0)(Bayh-DoleTheBayh-Dole doesnot apply Act ?o

Act) 17. l0 u.s.c. g 2320andg 232r, Technical dataprovisions applicable DoD to

to OTs These provisions not applyto do OTs

18.

l0 u.s.c. g 2306a, Truthin Negotiations TINA does applyto ors not Act 4l U.S.C.S422,CostAccounting Standards 10u.s.c. 5 2334, cost Principles CostAccounting Standards not do applyto OTs cost principles not applyto ors do

19.

20.

?1