US: Foxes and Henhouses and Government Contracts

SPRINGFIELD, ILL. - Trust the fox. That's the policy behind last week's indictment of a former procurement agent at Halliburton's KBR unit in Kuwait.

The indictment, unsealed here Thursday, is the first involving Halliburton's much-maligned Iraq contracts.

According to a grand jury investigating the case, the KBR procurement agent, Jeff Mazon, inflated the bid he received from a Kuwaiti subcontractor, La Nouvelle General Trading & Contracting Co., for fuel tanker operations. La Nouvelle's managing partner, Ali Hijazi, then passed $1 million on to Mazon when he left KBR in late 2003, the indictment says.

The alleged malfeasance, though, wasn't unearthed by stalwart government auditors. Instead, it was Halliburton itself that brought the problem to the government's attention.

Which brings us back to the trustworthy fox and the clubby world of defense contracting.

"That's the way it's supposed to happen," U.S. Attorney Jan Paul Miller told me, sitting at a conference table adjoining his downtown office here. "All government contractors are required by law to report contracting fraud."

The fox, in other words, must guard the henhouse of our tax dollars.

In the past year, KBR's billing for government work has come under scrutiny, either by the military itself or by congressional skeptics like Rep. Henry Waxman, D-Calif.

The Mazon-Hijazi case is, in many ways, small potatoes, but it points to larger problems in the Pentagon's dealings with private business.

KBR itself estimated that the subcontract for fuel tankers would run about $685,000, according to the indictment. The bids, from La Nouvelle and another company, both came in higher - almost $1.7 million and $1.9 million, respectively.

Mazon then tripled both bids, awarding the contract to La Nouvelle for about $5.5 million, the indictment claims.

Apparently, the Army didn't find this curious, and it didn't raise any objections. It simply cut the check.

In the Mazon case, Halliburton, it seems, did the right thing. The question remains, how many other Mazons are out there that haven't been discovered yet?

Nothing more disclosed

So far, Halliburton hasn't disclosed any more in its regular quarterly filings with the Securities and Exchange Commission, which is where the Mazon case first surfaced.

Miller will say only that the government investigation is ongoing. He won't say whether his office is looking into other allegations of fraud.

All of this is disturbingly normal. Pentagon policies fail to adequately police the spending of taxpayers' money, and rarely are contractors held accountable.

Time after time, abusive contractors are allowed to bid on new deals, renegotiate the terms of existing contracts, or simply continue working for the government with little or no punishment.

Even in Halliburton's case, the Pentagon defers to the company's wishes. Last October, it released a 30-page audit of Halliburton's Iraq contract, for which it has billed some $2.5 billion since the invasion two years ago. The audit questioned about $100 million and also accused Halliburton of poor record keeping.

When the audit originally was released, though, the Pentagon blacked out passages, many of them at Halliburton's request. The deletions went beyond the typical commercially sensitive information, to embarrassing findings Halliburton didn't want released.

Among the deletions was a statement that auditors found KBR's system of estimating costs inadequate.

Yet the Army still accepted them.

Taken off the list

It's worth noting that when Halliburton uncovered the alleged improprieties involving La Nouvelle, it immediately dropped the company from its subcontractor list.

As a private enterprise, Halliburton recognizes the dangers of doing business with partners that don't follow the rules.

The Pentagon doesn't.

The military is used to tradition, and it likes dealing with the same companies, contractors it knows and trusts, even if that trust is misplaced.

That's why Halliburton got handed the contract to rebuild Iraq without competitive bidding, and it's why when the company says a job will cost $685,000 and it winds up charging $5.5 million, the military pays the bills and asks no questions.

It's confident that, sooner or later, the fox will fess up.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays.

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