Digging Deeper: Are Government Fines a Firewall?

Who thinks fines work? Large fines, in the millions and billions of dollars, do they really change the corporate culture of open corruption, criminal behavior, the rule-breaking practices, the willingness to cheat that they are supposed to punish and deter?  Or are they  the cost of doing business for many businesses, especially large, multi-national corporations, whose continued violations damage US security and policy and are a major theft of taxpayers’ money?

In May 2011, the Department of State levied its largest civil penalty ever, $79 million, against a subsidiary of a British firm, BAE Systems, for illegal arms trafficking, after the firm was convicted of conspiracy to violate two international laws an estimated 2,591 times. 2,600 arms deals with Saudi Arabia, Hungry, Tanzania and Sweden, among other countries, were a part of the violations. The State Department settlement was the civil case. BAE Systems paid a $400 million criminal fine.

The Department of State’s Office of Defense Trade Controls addresses civil violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR), the two acts most frequently violated.

After it was all over, BAE Systems issued a statement thanking the State Department for its help in bringing the company’s inventory, record keeping, and sales program into international compliance. Of course, it has “initiated the appropriate steps.” BAE System is one of the Defense Department’s Top 10 contractors.

Penalties and fines–paid to the Department of State? By military procurers? Yes, State’s Directorate of Defense Trade Controls (DDTC), in the Bureau of Political Military Affairs investigates, charges and negotiates civil settlements of US and international violations of arms trade agreements and regulations. This March (2012) it settled nine violations by New Jersey’s Alpine Aerospace Corporation acts for $30,000.

In late June (2012), DDTC landed a bigger fish, a major Connecticut defense contractor, the bellwether United Technologies (UTC). According to a State Department announcement, UTC was fined $75 million “global settlement” for violations of ITAR with China, dating back to 2002, some involving military software. Its stock price rose 3.5% last Friday on the news. State said, “UTC’s numerous violations demonstrated a systemic, corporate-wide failure to maintain effective ITAR controls.” The investigation and fine addressed “arms export violations to China, false and belated disclosures to the U.S. Government about these illegal exports, and many other compliance failures.” But $20 million of the fine was suspended and returned to UTC to be used for remedial compliance!

What court or legal authority gives you money back? Especially after you have potentially damaged foreign policy and arms trade agreements involving software with a major power with whom we have major differences? This is not an intervention with a certificate of completion. These fines were not for acts that were inadvertent, causal or occasional. They were multiple, sustained, and intentional.

In many cases, they were corruption in plain sight, a complete failure of oversight.

Since 2007, the Justice Department has a 44 page list that summarizes its major indictments and arrests for defense exports. These include:

  1. ~A January 2011 arrest for possession of 300 automatic assault rifles, 150 grenades and other remote detonated explosive devices.
  2. ~A January 2011 $15.5 million fine and prison terms for providing China with restricted electronics including military phased array radar, guidance systems and satellite communication systems.
  3. ~A January 2011 attempted sale of an F-5 fighter plane to Iran.
  4. ~October 2010, 58 tons of weapons and ammunition to Sri Lanka.
  5. ~A $4 million arms ship to the Ivory Coast.

Are fines closing the gates on the commerce that daily seems to compromise US security? Are the variety of violators operating without fear, taking advantage of lax regulation and oversight to direct arms and technology worldwide while reaping spectacular profits? Media covers the financial markets and their stumbles are front page news. Defense is an ongoing market that represents a bigger and more deadly threat that accumulates daily violations as a matter of course, but is ignored and off the radar of public consciousness. Why?

The Obama administration must be credited with creating a more transparent system of reporting, releasing charging letters, settlement agreements, and other information about the cases than any administration before. Who thinks a Republican administration will document defense crime and corruption on its federal websites? At the same time, it reveals how little Americans are engaged in their government and how easy it is circumvent enforcement—and how many firms and individuals are willing to run the risk!

And that brings us to Darleen Druyun, an Air Force civilian official, the Principal Deputy Undersecretary for Air Force Acquisition, whose contracting activities led to the biggest defense fraud settlement on record. She doled out billions of dollars to Boeing for personal favors, mainly line jobs for family members and later for herself.

Druyun had become the most powerful woman in military procurement, with a reputation for toughness but a long history of being near marginal practices and sketchy deals without being directly implicated. In her main responsibilities, Druyun negotiated the price of weapon deals–$131 million per F-22 fighters, $350 million boosters for spy satellites. Druyun spent up to $30 billion each year–a budget bigger than the Department of Homeland Security or the Justice Department.

In a 2009 story, CBS News had this to say:

Druyun called Michael Sears, the chief financial officer at Boeing, and asked him to arrange a job for her daughter’s fiancé. Boeing set up the job right away. Three months later,  Druyun asked for a job for her daughter, Heather. Boeing complied. Under Pentagon rules, that’s not illegal.

After her daughter and now son-in-law went to work at Boeing, Druyun awarded Boeing a $4 billion contract.

Next, Boeing presented an idea, enormous even for the Pentagon: to lease to the Air Force 100 767s as refueling tankers, at a  cost of $23.5 billion. During the price negotiations, Boeing internal emails show Druyun was siding with Boeing, not the Air Force. After one meeting, a Boeing executive wrote: “Meeting today on price was very good. Darleen spent most of the time bringing the USAF pricer up to our number.”

Sen. John McCain noted: “Her job was to get the best possible price of the product for the American taxpayer. Instead, obviously she drove the price up to get the best possible deal for Boeing Corporation.”

Later Duryun said she liked Boeing’s “honest values.”

The air tanker leases would have overcharged the American taxpayer $6 billion. For her part in initiating the largest defense fraud case ever, instead of a Boeing job with a $250,000 salary, she agreed to a plea agreement on ethic violations. The agreement called for a nine-month sentence, $5,000 in fines and 150 hours of community service. A year after her sentencing, the Air Force’s second-ranking procurement officer committed suicide.

Do fines work? Writing “Digging Deeper” every week is more than research into hidden issues, parallels of history, and media failures, although that is where the track often begins. Really it’s a journey about the dust of our footprints, the understanding of the human and American story, its contradictions and paradoxes. The main focus of “Digging Deeper” is to advance, from all angles, the tradition of transparency about power. It’s about the transparency of history, but also about the transparency of the heart.  Look deeply into both. If you do, you will live differently, if you are honest about what you see.

No. Fines do not work. But keep the websites alive by voting for Obama.