Fraud crackdown to include overseas contracts

updated 7:54 p.m. ET April 14, 2008

WASHINGTON - A multibillion-dollar loophole that would have helped conceal abuse of overseas contracts has been eliminated from a Bush administration proposal to protect taxpayer dollars, according to documents obtained Monday by The Associated Press.

Reversing itself after months of criticism, the administration closed the loophole that was quietly slipped last year into a proposed Justice Department crackdown on government contract fraud.

The loophole specifically exempted contractors from reporting evidence of fraud or abuse in overseas work that cost taxpayers at least $5 million. An updated version of the proposal, drafted April 4, requires reporting on all contracts — whether at home or abroad.

The government has spent more than $102 billion since 2003 on contracts in Iraq and Afghanistan alone.

"This change would result in making the clause requirements for a contractor code of business ethics and conduct, business ethics awareness and compliance program, and internal control system applicable to contracts performed outside the United States," the new draft rule states.

Old rule exempts overseas contracts
Government policywriters said the original rule was drawn up quickly, and chided the Justice Department for not explicitly making sure that overseas contracts should be included in the crackdown. "It was only after publication of the proposed rule ... that DoJ and other respondents expressed concern about the overseas exemption," the draft states.

The draft has not been publicly released. It was provided to the AP on the eve of a hearing by a House panel investigating whether the loophole was slipped into the crackdown at the request of lobbyists who represent giant global government contractors.

The draft is still tentative, and the regulations requiring the contract reporting are not expected to become final until later this year. The Democratic congressman who called for the House inquiry, Rep. Peter Welch, D-Vt., vowed Monday to "close this multibillion-dollar loophole" for good.

"This investigation proves why oversight works," said Welch, who is sponsoring legislation to eliminate the overseas exemption whether or not the Bush administration does so on its own. "The question is why it required a congressional investigation to prevent the Bush administration from giving overseas contractors a free pass to defraud taxpayers."

Business groups oppose crackdown
Numerous business groups, including the U.S. Chamber of Commerce, oppose the overall crackdown that will force companies to spend at least tens of thousands of dollars to hire auditors and conduct internal reviews in search of fraud. They say companies need to have some discretion in determining whether internal accounting errors are intentional or honest mistakes.

The tale of the loophole, first reported by the AP two months ago, provides a look into the complex and often murky world of government contracting.

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