Fraud could jeopardize U.S. DOD’s use of ‘OTA’

The U.S. Department of Defense (DOD) is trying to ameliorate its deteriorating global advantage by using its Congress-granted “Other Transaction Authority” when working with vendors. But OTAs might allow fraud, waste and abuse to creep in. Here’s how the DOD can improve.

A  February 2019 audit by the U.S. Department of Defense (DOD) revealed worrisome information about a vendor doing business with the DOD. The audit showed that TransDigm (a company that designs, produces, and supplies engineered aircraft parts for commercial and military aircraft) price-gouged U.S. taxpayers by earning a whopping $16.1 million in excessive profits across 112 contracts with the DOD from 2015 to 2017. How did TransDigm profit between 17% and 4,451% per contract? Particular acquisition laws and regulations didn’t apply to the company because the subject contract dollar amounts were below specific thresholds. As a result, the DOD personnel couldn’t access TransDigm’s cost data nor reliably determine whether the prices charged were fair and reasonable.

This situation cultivated a unique environment in which TransDigm could earn excessive profits yet still comply with applicable laws and regulations. The DOD requested that TransDigm refund the excessive profits. TransDigm ultimately agreed after testifying to Congress in May 2019. Congress also requested the DOD continue probing TransDigm’s business practices as a result of the findings. The TransDigm case indicates that similar instances likely have occurred with other vendors doing business with the DOD.

DOD is immense, but its advantage is waning

The DOD is one of the largest organizations in the world tasked with a unique and incomparable mission. With a 2019 budget of $716 billion, the department employs 2.9 million staffers and does business with thousands of vendors across the globe.

Despite the DOD’s massive presence, the U.S. industrial base and military advantage are deteriorating. (See “National Security Strategy of the United States of America,” December 2017, p. 29, Defense Industrial Base.)

Modernized practices and business innovations are needed to effectively compete in the highly complex global environment. Therefore, Congress has provided the DOD various flexible options to reform its business efforts supporting national defense and capitalize on the commercial industry’s technological capabilities. One of those options is “Other Transaction Authority” (OTA), which the DOD is increasingly using for acquisitions.

Although OTA helps the DOD capitalize on innovative technologies and capabilities, it also presents risks that could result in fraud, waste, abuse or mismanagement of taxpayer resources. This column identifies suggestions that can support efficient and effective OTA business activities by the DOD.

OTA explained

OTA isn’t new to the federal government or the DOD. The authority dates back to 1958 when Congress enacted the National Aeronautics and Space Act. This law created the National Aeronautics and Space Administration (NASA) and authorized NASA to enter other transactions (OTs) for research and development activities.

Congress granted the DOD limited OTA in 1989 and has enacted various laws since 2015 that expanded the DOD’s OTA: 10 U.S.C. § 2371 and 10 U.S.C. § 2371b allow the DOD to enter into OTs for research, prototyping and production that support national security. The DOD spent approximately $3.4 billion on OTs in 2018, but the Congressional Research Service expects the total to rapidly rise because of the department’s expanded authority. The DOD is among 11 U.S. federal agencies with OTA as of 2019. (See Department of Defense Use of Other Transaction Authority … by Moshe Schwartz and Heidi M. Peters, Congressional Research Service, Feb. 22, 2019.)

OTs are binding agreements that aren’t Federal Acquisition Regulation (FAR)-based contracts, grants or cooperative agreements. (FAR-based contracts are contracts that follow a principal group of rules for government entities to use when procuring goods and services.) OTs can:

• Help foster new business relations with traditional and non-traditional defense contractors (NDCs).
• Leverage commercial entity investments in technology development.
• Enhance the U.S. industrial base.
• Result in quicker and more affordable execution of projects.
• Include cost-sharing arrangements.
• Be awarded through a consortium (an organized collection of contractors, nonprofit organizations or academic institutions).

OTs are considered “flexible” because they’re typically exempt from various laws and regulations that are required for traditional acquisition alternatives.

Here are major U.S. laws and regulations that aren’t required for OTs:

• Truthful Cost and Pricing Data Act [formerly known as Truth in Negotiations Act (TINA)].
• Competition in Contracting Act (CICA).
• Cost Accounting Standards (CAS).
• Buy American Act.
• Bayh-Dole Act.
• Contract Disputes Act.
• Procurement protest process.
• Federal Acquisition Regulation (FAR).
• Defense Federal Acquisition Regulation Supplement (DFARS).
• DOD entity-specific acquisition regulations or policies.

DOD entities can uniquely tailor agreements based on their needs or situations. However, some U.S. laws and regulations must always apply: the False Claims Act, Trade Secrets Act, Economic Espionage Act, Antideficiency Act, Civil Rights Act, Freedom of Information Act, import/export control laws, environmental laws, audit readiness and property accountability.

OTA risks and issues

Multiple government audit reports identify OTA-related risks and issues across the federal government. The Government Accountability Office (GAO) identified many such problems at the Transportation Security Administration (TSA) in a December 2017 report.

The report detailed lapses in organizational controls and oversight, such as incomplete OT financial and accounting data, nonexistent documentation to support the rationale for OT selection, nonexistent documentation of major technical or administrative personnel involved, and inaccurate OT data reported on the publicly available Federal Procurement Data System-Next Generation (FPDS-NG) site. GAO’s audit also found that the TSA started an OT effort five months before the agreement was signed and continued OT efforts years after an agreement expired.

In another 2017 report, the Department of Homeland Security (DHS) Office of Inspector General found that the DHS didn’t comply with laws nor accurately or timely report its OT data to Congress.

Poor records management resulted in DHS paying $2.8 million on an OT without having proper evidence to support delivery of a service or prototype. Also, inaccurate and untimely reporting of its OT data inhibited Congress from ensuring DHS appropriately used OTs in accordance with Congress’ intent. It also prevented taxpayers from having reasonable assurance that DHS effectively averted fraudulent or improper payments.

The DOD contract efforts referenced within the opening TransDigm case weren’t OTs. However, the attributes of those contracts were similar to OTs because of exemptions that applied. The Truthful Cost or Pricing Data Act and FAR, for example, provide the law and regulation on the dollar threshold that require the DOD to obtain certified cost data from vendors.

See Figure 1 below for specific risks and issues associated with the DOD’s OT usage.

Figure 1: DOD's risks and issues associated with the DOD's OT usage (Source: author)

Congress, DOD entities and vendors have responsibilities to manage risks. Congress provides OTA and taxpayer funds to the DOD. DOD entities plan, publicize, solicit, evaluate, negotiate, award and administer OTs. Vendors enter into OTs with the DOD and are responsible for delivering based on terms of the agreement. Congress’ interest in the DOD’s OT usage will remain high because “implementing DOD reform initiatives” was the DOD’s top 2019 management challenge. A new law (John S. McCain National Defense Authorization Act for Fiscal Year 2019) also requires that DOD entities collect detailed OT data and report annually to Congress on OT usage.

Figure 2 below provides suggestions the DOD can use to strengthen OT controls to prevent fraud, waste, abuse and mismanagement.

Figure 2: Suggestions the DOD can use to strengthen OT controls to prevent fraud, waste, abuse and mismanagement (Source: author)

DOD can learn from previous OT shortcomings

The DOD must transform the ways it conducts business to remain competitive in today’s environment. OTA provides unique and flexible options that could enhance the industrial base and help deliver capabilities in a modernized fashion. However, OTA is accompanied by risks and issues.

Because the DOD’s authority and usage of OTs has substantially increased in recent years, the DOD must effectively govern processes so operations are compliant and produce efficient and effective outcomes. The DOD can learn from previous OT shortcomings by internal and external entities. Inappropriate use of OTs, coupled with instances of fraud or mismanagement of funds, could result in Congress reducing or eliminating the DOD’s OTA and associated business flexibility. OTs will prove successful so long as sufficient accountability and transparency exist.

Stephen M. Speciale, CFE, is a professor of financial management at the Defense Acquisition University of the U.S. Department of Defense. In addition to the CFE, he holds the Certified Defense Financial Manager with the Acquisition Specialty (CDFM-A) credential. Contact him at stephen.speciale@dau.edu.