Contracts and Crimes: How Defense Contractor Fraud Impacts the Military, the Economy and National Security

Posted on February 10, 2021

As a nation, we are sometimes reluctant to question defense spending. We all ultimately want to be safe and don’t want to stand in the way of the considerable efforts that keep us that way. Because we are grateful for the heroism and sacrifice of our military, we can be equally hesitant to question the nuances of the wars in which they are risking their lives.

The systemic fraud that the defense contractor industry has allegedly been getting away with for years, however, is not serving anyone other than the companies themselves.

Politics aside, it’s clear that defense contractor fraud doesn’t help our military, our economy or the communities that these corporations are paid to help rebuild.

The corporations that the U.S. government relies on for military equipment and support profit unfairly from our trust and silence. Though allegations of egregious defense contractor fraud crop up frequently, there is often insufficient follow-through, paving the way for even more fraud.

The lack of meaningful reform benefits major defense contractors financially. It means that they can continue to use federal funding as they see fit, without being held sufficiently accountable when their spending is wasteful, fraudulent or downright dangerous. As it stands, Department of Defense contractor fraud and waste have reportedly squandered at least $150 billion in taxpayer funds since the beginning of the wars in Iraq and Afghanistan.

Why the Department of Defense uses contractors

The Department of Defense pays more than $300 billion per year to corporate contractors. This is a conservative estimate; some reports put that number closer to $500 billion or more. The goods and services these private companies provide include aircrafts, jet engines, weapons, advanced technology and strategic consulting. The government relies on these companies’ immense resources and specialized expertise to support and sustain ongoing military operations abroad.

Since the start of the war in Afghanistan, however, it has become clear that the government was unprepared for the extent of its reliance on private defense contractors. The resulting state of dependency is dangerous; these companies have so much money and power that they continue operating after being accused of fraud, waste and abuse again and again.

If defense contractors are to be permanently entrenched in our military system, it’s important at the very least that their alleged crimes don’t go unnoticed or unreported.

The most common DoD contract violations

Defense contractor fraud is covered under the False Claims Act (FCA), which prohibits the submission of falsified invoices to the federal government and enables whistleblowers to report suspected FCA violations on behalf of the government. Here are just four of the many types of Department of Defense contract violations that have caused significant losses in federal funding.

  1. Accounting violations

Despite the serious nature of military spending, the DoD’s accounting practices have become infamously suspect. One type of fraud that purportedly happens on a regular basis across the defense industry is the use of “plugs.” In this practice, defense accountants are instructed to fill in unexplained gaps in budget reports so that the Treasury doesn’t notice glaring spending omissions and discrepancies. In other words, accountants may routinely be asked to fudge the numbers on federal spending reports. This would, of course, be illegal.

  1. Failure to report known defects

It is also considered fraudulent to submit federal claims for products that don’t live up to the terms of the original contract. In November 2015, L-3 Communications Holdings Inc. paid $25.6 million to settle allegations of False Claims Act violations tied to the sale of defective holographic weapon technology. The lawsuit accused the defense company of selling the products to the government despite knowing about the defects.

  1. Afghanistan Reconstruction Fraud

SIGAR, the Special Inspector General for Afghanistan Reconstruction, oversees investigations of military operations and defense contractor follow-through in Afghanistan. Until 2010, there were no regulations in place requiring the Pentagon to specify how military funds were being allocated. For example, SIGAR reported $45 billion in unspecified spending tied to the reconstruction project.

Much of this amount could have been spent on Afghan security forces, but the fact that no one seems to know where exactly where that money went is troubling, to say the least. In addition to this kind of irresponsible spending, the president himself has acknowledged a troubling pattern of defense contractors billing for reconstruction projects that were never actually completed.

  1. Cross-Charging Fraud

Defense contracts usually fall into two payment categories: fixed-price or cost-plus. Fixed-price contracts involve a flat fee for services rendered, regardless of the actual incremental costs incurred throughout the life of the contract. Cost-plus contracts add compensation for any costs incurred in addition to the fixed amount.

Though it’s common for companies to have both types of contracts with the government, the contracts are not interchangeable. If specific goods fall under the fixed-price contract, it is fraudulent to submit those costs under a separate and unrelated cost-plus contract.

In addition to these common types of defense contractor fraud, any other claims submission involving falsified information, failure to disclose price-altering information or other dishonest behavior resulting in federal overpayment is considered an FCA violation.

The highest paid defense contractors in the U.S.

Almost all prominent defense contractors have been investigated for fraud and corruption allegations at some point. Some of the corporations with the highest-grossing contracts with the U.S. government include:

  • Boeing
  • Northrop Grumman
  • Lockheed Martin
  • KBR
  • Halliburton

Among these five companies alone are a slew of fraud accusations, ranging from severe Environmental Protection Act violations to enablement of human trafficking. The most powerful defense companies continue to be awarded lucrative contracts each year, despite past misconduct.

The lasting repercussions of defense contractor fraud

There will always be disagreement within the American public about the amount of taxes any of us should be paying, but it’s clear that multi-billion dollar corporations shouldn’t flagrantly waste the taxes we do pay.

Beyond the financial implications of defense contractor fraud, misuse of the defense budget could compromise the missions of our service members.

Several years ago, one case revealed that private contractors may have irresponsibly misappropriated funds designated for a road in Afghanistan. Not only did the 64-mile road inexplicably cost over $100 million to build; some of the money allocated to the project was reportedly given to a prominent local supporter of insurgents. Then, six months after the expensive road project was partially completed, the road began to fall into disrepair.

It could, as some have suggested, be the case that paying off insurgents and their supporters is common and necessary practice in the Afghan conflict; the issue as it pertains to federal funding is the lack of transparency, and the willingness of contractors to engage in shoddy financial reporting.

Other contractor fraud cases have demonstrated a direct, negative impact on American soldiers. In 2012, former Halliburton subsidiary KBR paid $85 million to U.S. National Guard soldiers for exposing them to hexavalent chromium, a known carcinogen, after hiring the soldiers for a security project in Iraq.

Nothing about war is simple, and the wars in Afghanistan and Iraq have been glaring examples of just how complicated it can get. The complexity of military operations is no excuse for deliberate fraud, however. The people footing the bill for defense contractor projects—which ultimately is the American public—have a right to know who is receiving their money, and how those funds are being used.