The practice of paying kickbacks is rampant among defense subcontractors, according to an investigation by the Senate Governmental Affairs subcommittee on government management. The subcommittee has scheduled a hearing on Thursday to air the issue of how many subcontractors pay off prime contractors to receive Pentagon business.
Defense subcontractors are a huge but little-scrutinized sector of defense manufacture. Although prime contractors put their names on the final ship, plane or missile they have agreed to manufacture, they farm out much of the work to thousands of smaller companies that supply almost everything from rivets to operating manuals.
Subcommittee investigators, who declined to be identified, said yesterday that they have lined up witnesses who will portray kickbacks as widespread in the defense industry, particularly on contracts of $10,000 and less, which do not receive as much scrutiny as multimillion-dollar deals.
An FBI agent, two state attorneys general, a prime contractor and a subcontractor are among witnesses the subcommittee intends to call in an effort to make the case for stronger anti-kickback legislation, investigators said. The subcontractor, they said, will be known only as "Mr. Smith" and will testify from behind a screen to conceal his identity for fear he would be blackballed by prime contractors if his name were known.
The investigators acknowledged that kickbacks are not new in the defense business. They said, however, that defense subcontracts have risen so much -- to roughly $47 billion a year -- that the old problem has increased in volume. The investigators could give no estimate of how much money is passed under the table.
One subcommittee document shows how a purchasing agent of a major defense firm received from a subcontractor monthly payments, the use of a credit card and such gifts as an air conditioner worth $1,100. The government's prosecution of the purchasing agent and prime contractor resulted in jail sentences of two years for both men.
One kickback arrangement, investigators said, was for prime contractors to draft phony high bids from nonexistent companies (to give the appearance of competition) then to award the contract to the kickback-paying subcontractor, who had submitted a bid lower than the make-believe ones.
Sens. William S. Cohen (R-Maine) and Carl Levin (D-Mich.) of the subcommittee are sponsoring a bill to stiffen penalties for engaging in kickbacks and to broaden the coverage of statutes. Compared to the current maximum fine of $10,000 and two years imprisonment for a criminal conviction on kickbacks, the proposed legislation would allow up to a $100,000 fine and 10 years imprisonment and make the top executives of the prime contractor liable to $1 million fines.