GAO Finds Opaque Ownership Structures Pose Risks to DoD Procurement
Government Contracts Update
Date: December 09, 2019
Opaque ownership structures of government contractors can present risks of fraud and national security concerns for the Department of Defense, according to a report to Congress by the Government Accountability Office, released to the public in November. GAO found that “some companies doing business with the Defense Department have opaque ownership structures that may conceal who owns, controls, or benefits from the company,” and that the resulting risks included contract awards to ineligible contractors and the release of sensitive information to foreign firms through U.S.-based companies.
GAO recommended that the DoD “should include an assessment of risks related to contractor ownership as part of its ongoing efforts to plan and conduct a department-wide fraud risk assessment.” According to GAO, DoD “faces several types of financial and nonfinancial fraud and national security risks posed by contractors with opaque ownership,” which were identified through GAO’s review of 32 adjudicated cases from 2012-2018, where contractors may have failed to properly disclose ownership information. These risks included:
- price inflation through multiple companies owned by the same entity to falsely create the appearance of competition;
- contractors receiving contracts they were not eligible to receive; and
- foreign manufacturers receiving sensitive information or producing faulty equipment through U.S.-based companies.
GAO highlighted the example of the grounding of 47 fighter aircraft due to an ineligible foreign manufacturer that illegally exported sensitive military data and provided defective and nonconforming parts.
GAO’s November report, “Defense Procurement: Ongoing DOD Fraud Risk Assessment Efforts Should Include Contractor Ownership,” is the public version of a sensitive report first issued to Congress in September 2019. GAO conducted the study because DoD “generally accounts for about two-thirds of federal contracting activity,” and because a contractor’s opaque ownership structure could be used to facilitate unlawful activity. According to GAO, in fiscal year 2018, DoD obligated over $350 billion in contracts for goods and services and awarded over 570,000 new contracts to approximately 38,000 contractors.
But, as found by GAO, some contractor companies are what are known as “shell companies,” which conduct either no business or minimal business. GAO noted that shell companies can be used for legitimate purposes, but also that companies sometimes use shell companies to form opaque ownership structures “designed to disguise the beneficial owner.”
GAO found that DoD has taken steps to address risks related to contractor ownership in the procurement process, “but has not yet assessed these risks across the department.” For example, DoD has taken steps to identify ownership information as part of its supply-chain risk analysis when acquiring critical components. And DoD has begun a department-wide fraud risk management program, but GAO found “it has neither assessed risks of contractor ownership across the department nor identified risks posed by contractor ownership as a specific area for assessment.”
According to GAO, DoD must take a more strategic approach to identify and manage these risks. Contractors can expect additional enforcement and regulatory efforts by DoD along these lines, and should take proactive measures to prevent opaque ownership structures and address the high-risk areas identified by GAO’s report.
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For more information, please contact:
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