[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
DOD EXCESS PROPERTY: INVENTORY CONTROL BREAKDOWNS PRESENT A SECURITY
RISK
=======================================================================
HEARING
before the
SUBCOMMITTEE ON NATIONAL SECURITY,
EMERGING THREATS, AND INTERNATIONAL
RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JULY 25, 2006
__________
Serial No. 109-236
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
JON C. PORTER, Nevada C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia ELEANOR HOLMES NORTON, District of
PATRICK T. McHENRY, North Carolina Columbia
CHARLES W. DENT, Pennsylvania ------
VIRGINIA FOXX, North Carolina BERNARD SANDERS, Vermont
JEAN SCHMIDT, Ohio (Independent)
BRIAN P. BILBRAY, California
David Marin, Staff Director
Lawrence Halloran, Deputy Staff Director
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on National Security, Emerging Threats, and International
Relations
CHRISTOPHER SHAYS, Connecticut, Chairman
KENNY MARCHANT, Texas DENNIS J. KUCINICH, Ohio
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida BERNARD SANDERS, Vermont
JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio CHRIS VAN HOLLEN, Maryland
TODD RUSSELL PLATTS, Pennsylvania LINDA T. SANCHEZ, California
JOHN J. DUNCAN, Jr., Tennessee C.A. DUTCH RUPPERSBERGER, Maryland
MICHAEL R. TURNER, Ohio STEPHEN F. LYNCH, Massachusetts
JON C. PORTER, Nevada BRIAN HIGGINS, New York
CHARLES W. DENT, Pennsylvania
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Nicholas Palarino, Staff Director
Robert Kelley, Chief Counsel
Robert A. Briggs, Clerk
Andrew Su, Minority Professional Staff Member
C O N T E N T S
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Page
Hearing held on July 25, 2006.................................... 1
Statement of:
Kutz, Gregory D., Managing Director, Forensic Audits and
Special Investigations, U.S. Government Accountability
Office, accompanied by Gayle L. Fischer, Assistant
Director, Forensic Audits and Special Investigations; John
J. Ryan, Assistant Director/Special Agent, Forensic Audits
and Special Investigations; Richard C. Newbold, Special
Agent, Forensic Audits and Special Investigations; Alan F.
Estevez, Assistant Deputy Under Secretary of Defense,
Supply Chain Integration, Department of Defense; Major
General Bennie E. Williams, Director for Logistics
Operations, Defense Logistics Agency; and Paul Peters,
Director, Defense Reutilization and Marketing Service,
Department of Defense...................................... 19
Estevez, Alan F.......................................... 34
Kutz, Gregory D.......................................... 19
Peters, Paul............................................. 65
Williams, Bennie E....................................... 48
Letters, statements, etc., submitted for the record by:
Estevez, Alan F., Assistant Deputy Under Secretary of
Defense, Supply Chain Integration, Department of Defense,
prepared statement of...................................... 36
Kutz, Gregory D., Managing Director, Forensic Audits and
Special Investigations, U.S. Government Accountability
Office, prepared statement of.............................. 21
Ryan, John J., Assistant Director/Special Agent, Forensic
Audits and Special Investigations, followup questions and
responses.................................................. 95
Shays, Hon. Christopher, a Representative in Congress from
the State of California:
Comments from the Department of Defense...................... 109
Prepared statement of........................................ 3
Waxman, Hon. Henry A., a Representative in Congress from the
State of California, prepared statement of................. 10
Williams, Major General Bennie E., Director for Logistics
Operations, Defense Logistics Agency:
Followup questions and reponses.............................. 92
Prepared statement of........................................ 50
DOD EXCESS PROPERTY: INVENTORY CONTROL BREAKDOWNS PRESENT A SECURITY
RISK
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TUESDAY, JULY 25, 2006
House of Representatives,
Subcommittee on National Security, Emerging
Threats, and International Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m. in room
2154, Rayburn House Office Building, Hon. Christopher Shays
(chairman of the subcommittee) presiding.
Present: Representatives Shays, Kucinich, Waxman, Duncan,
Marchant, Turner, Van Hollen, and Platts.
Staff present: J. Vincent Chase, chief investigator; R.
Nicholas Palarino, Ph.D., staff director; Robert A. Briggs,
analyst; Robert Kelley, chief counsel; Raj Lalla, Jake Parker,
and Jeff Hall, interns; Karen Lightfoot, minority
communications director/senior policy advisor; Jeff Baran,
minority counsel; Andrew Su, minority professional staff
member; Earley Green, minority chief clerk; and Jean Gosa,
minority assistant clerk.
Mr. Shays. A quorum being present, the Subcommittee on
National Security, Emerging Threats, and International
Relations hearing entitled, ``DOD Excess Property: Inventory
Control Breakdowns Present a Security Risk,'' is called to
order.
Over the course of several hearings and related
investigations, our subcommittee found chronic, dangerous, and
excessive problems in the Department of Defense excess property
system run by the Defense Logistics Agency, DLA. We continued
to discover problems in the system, and they must be corrected.
The mission of DLA is to provide our war fighters what they
need to fight our enemies. Unfortunately, the Defense Logistics
Agency may be simultaneously supplying the terrorists what they
need to fight us.
Four years ago we discovered DOD had been selling top-grade
chemical protective suits to the public while military units
were waiting in line to acquire exactly the same gear. In 2003
we revealed DOD sold items on the internet that could be used
to make a biological warfare agent laboratory. This equipment
was sold for pennies on the dollar, making it both inexpensive
and easy to buy.
At a June 2005 subcommittee hearing we learned DOD was
transferring, donating, or selling excess property in new or
good condition at the same time it was purchasing the same or
similar equipment. At that hearing, DOD asserted that
offensive, defensive, and highly sensitive equipment could not
be bought privately.
So we asked the Government Accountability Office, GAO, to
investigate whether DOD was right. Posing as private citizens,
GAO purchased sensitive military equipment from the DOD
liquidation contractor.
Some of the equipment GAO inventories bought or obtained
for free is here today. A time selector unit used to assure the
accuracy of global positioning systems: the original
acquisition price for this unserviceable but repairable item
was $343,695; GAO bought the unit for $65. Two guided missile
launcher mounts which provide the electrical connection between
a missile and its tracker and contain a remote firing
mechanism: the original acquisition cost for the two launchers,
clearly sensitive military equipment, was $6,246; our
investigators acquired them for free. An all-band antenna,
which is high-powered, portable unit used by the Air Force to
track aircraft: the new, unused antenna had an original cost of
$120,000; this, too, was provided for free. Other sensitive
equipment obtained by GAO includes body armor, guided weapons,
radar test sets used to check the operation of data link
antennas on weapons systems, and circuit card assemblies used
in a variety of military systems.
Contrary to the claim of DOD made at the June 7, 2005,
hearing, this investigation confirms sensitive military
equipment is being sold or given to the public, posing a
serious national security risk.
The sensitive nature of these items requires stringent
internal security controls, and that is not happening. The time
is long past for marginal fixes to a fundamentally broken
system. This is our fourth hearing. The time is long past for
marginal fixes to a fundamentally broken system.
As supplier to the war fighter and steward of immense
fiscal resources, DOD must have control over the purchase,
transportation, storage, use, and final disposition of the
military inventory. Most importantly, DOD must eliminate any
opportunities for unauthorized purchase of sensitive military
equipment.
Today we welcome representatives from the Government
Accountability Office who conducted the investigation, the
Department of Defense officials who will explain the corrective
action to prevent sensitive items from being sold or given to
unauthorized individuals. We thank all the witnesses for taking
the time to appear before us today, and we hope that we have an
informative hearing.
I want to say before I recognize Mr. Kucinich the purpose
of this hearing is not ``I got you.'' The purpose of this
hearing is to document what is happening and to get it stopped.
[The prepared statement of Hon. Christopher Shays follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Shays. Mr. Kucinich.
Mr. Kucinich. Thank you very much, Mr. Chairman.
At last June's hearing the GAO informed us that some $400
million worth of A-condition goods, new or excellent condition
commodities, were transferred, donated, sold, or destroyed by
the Department of Defense in the previous 3 years instead of
being re-utilized by other military units who needed the items.
Whether it was given away for free, bought for pennies on the
dollars, or sold on the internet, the Pentagon has demonstrated
time and time again that it plays fast and loose with the
American taxpayers' dollar. There is little or no
accountability, and Secretary Rumsfeld simply has not made
financial accountability a very high priority for the
Department of Defense, yet the Pentagon continues to ask
Congress for billions of dollars in supplemental and bridge
funding for military operations.
The amount of waste is extraordinary, and the millions of
dollars that are gone could have been put to better use
elsewhere. Certainly, an extra $400 million in the Nation's
coffers could help prevent many of the economic difficulties
faced by people in my own District.
Department of Defense officials under oath told us fixes
would be made by the beginning of the year and assured the
subcommittee that the GAO only was able to purchase and obtain
excess equipment because they were the GAO. Today we will learn
just how easy it was to obtain sensitive military equipment.
The cost of a new gas engine, $355; the cost of an X-ray
enclosure, $2,914; an ounce of common sense at the Department
of Defense equipment depots, priceless.
Whatever it is you need, they have in stock--guided missile
launcher mounts, body armor, or electric radar--all for less
than you would pay if you were actually authorized to use them.
In fact, DOD personnel may even help you load your brand new
toys into your own truck.
Mr. Chairman, the lack of security and lack of
accountability is appalling, yet it is unsurprising in this
administration. In May, VA officials lost a laptop containing
tens of millions of sensitive personnel records. The VA
Inspector General stated that VA officials reacted with
indifference, a lack of urgency. That same attitude appears to
be the case in the Department of Defense.
The subcommittee has heard for years of the extravagant
waste and abuse discovered at DLA and DRMS depot sites examined
by the Government Accountability Office, and even more so at
how easily GAO was able to obtain some of this A-condition
merchandise. The GAO findings demonstrate again what we already
know: that the Department of Defense is bloated, it is
inefficient, mismanaged, and it needs to be streamlined.
Finally, year after year Congress spends half of its
discretionary budget on Defense, seldom scrutinizing how the
money is being spent. As a result, the Pentagon has become
sloppy and careless with taxpayer dollars.
Thank you, Mr. Chairman.
Mr. Shays. I thank the gentleman.
At this time we are doing to recognize Mr. Duncan, because
he has to get on his way.
Mr. Duncan. Thank you very much, Mr. Chairman. I have to go
give a speech to a group in a few minutes, but I do appreciate
so much your calling this hearing. You do such an outstanding
job in this subcommittee.
I was here a little over a year ago when we had a similar
hearing, and at that time--and I wrote about part of this in a
newsletter I sent to my constituents--the Department of Defense
sold 172 pairs of brand new cold weather boots valued
collectively at more than $23,330 for just $69, not $69 for
each pair of boots, $69 total, brand new boots. That is less
than the cost of one pair of shoes that they bought for
$23,330. The GAO also found at that time that the Department of
Defense had purchased at least $400 million of identical items,
instead of using materials that were already available.
Now, according to the latest report, we find out that this
situation is not getting better. In fact, it is getting worse.
As the chairman mentioned, we were just shown a $120,000 all-
band antenna that the GAO got for nothing by filing a bogus
form, and a digital signal converter, $800,000, that they got
for nothing. In fact, the GAO, according to this report,
identified at least 79 buyers of 2,669 sensitive items just
between November 2005 and June 2006. And you have heard these
other examples that the chairman and Mr. Kucinich just
mentioned.
The worst one is this purchase of these time selector units
for $65, a unit that had an original acquisition cost of
$343,000. And the unit purchased, according to the GAO, was
listed as unserviceable, but it was in good working order.
Now, we have, as we all want, we have the best fit, best
paid, best equipped troops, military, in the whole world.
Counting our supplemental appropriations and our military
construction bills, along with the regular Department of
Defense budget, we are spending more on Defense than all the
other nations of the world combined. Yet, even any bureaucracy
is wasteful. Small ones are wasteful. Large ones are wasteful.
Gigantic bureaucracies such as the Department of Defense seem
to be the most wasteful of all.
We all want to support the military, especially in a time
of war. Everybody is bending over backward to try and prove how
patriotic they are, but I can tell you this: it is not
patriotic to just blow money in this way. In fact, it should be
criminal.
And I can tell you this: anybody who is not horrified--we
heard Mr. Kucinich mention that there is indifference or even
joking about this report--anybody who is not horrified about
this cannot legitimately call themselves a fiscal conservative,
and everybody seems to like to claim that title. We need more
fiscal conservativism. But this is shameful, it is ridiculous,
it is every bad adjective that you can apply to allow this to
continue.
I hope that at least somebody in the Department of Defense
is ashamed that this is happening.
Thank you, Mr. Chairman.
Mr. Shays. I thank the gentleman.
I now recognize the ranking member of the full committee,
Mr. Waxman.
Mr. Waxman. Thank you, Mr. Chairman, and thank you for
holding today's important hearing.
Last year in this same room we held a hearing on this very
topic and we heard from the Government Accountability Office an
account of massive waste at the Department of Defense. A year
ago GAO told the subcommittee that over $3 billion worth of A-
condition equipment was designated as excess by the Defense
Department and simply given away, sold on the internet for
pennies on the dollar.
Even worse, GAO reported that a huge portion of this
equipment was being dumped at fire sale prices at the same time
the Pentagon was buying identical equipment from contractors at
full price.
Two years ago our subcommittee held another hearing. We
learned from GAO that the Defense Department sold equipment on
the internet that could be used to produce anthrax, and yet at
another hearing GAO told the subcommittee that the Defense
Department sold brand new chem-bio protective suits on the
internet for $3 each, while it was buying identical suits at
the same time for the full price of $200 apiece.
Each time we have these hearings GAO brings the proof. They
display the equipment, as they have again today, they purchased
on the tables of the hearing room. And each time the Defense
Department officials come before the subcommittee and promise
that the administration will be a responsible steward of
taxpayer dollars and that these problems will be fixed. Yet
here we are again in 2006. The problems have not been fixed.
They have gotten worse.
Here are four key findings from GAO's most recent
investigation:
First, the Defense Department is needlessly selling
equipment as excess that it currently buys new. GAO found X-ray
machines, gasoline generators, and a host of other equipment
for sale on the internet, even though the Pentagon was still
buying these items new.
Second, the Pentagon is practically giving away. For just
$65, GAO obtained a classified time selector technology unit
which is used to prevent soldiers in the field from exposing
their positions. The taxpayers pay not $65 but over $340,000
for this equipment.
Third, much of this equipment is in critical demand by our
soldiers in Iraq and Afghanistan. The body armor components, in
particular, are items that families of service members have
been forced to purchase and send to loved ones in Iraq.
Fourth, many of these items are classified national
security items that were never supposed to be sold to the
public, including micro circuits for F-14 fighter planes, high-
powered portable antenna units that track aircraft, and even
shoulder-fired guided missile launcher mounts.
As a result, GAO concludes that controls broke down at
virtually every step, that thousands of military items were
inappropriately sold to the public at a fraction of the
original cost, demonstrating continuing waste and inefficiency
and posing a national security risk.
Mr. Chairman, Einstein once said that insanity is doing the
same thing over and over again expecting a different result.
Einstein was right, and let me give you Waxman's corollary:
when there is no accountability, insanity is rewarded and
repeated.
In last year's hearing, Mr. Chairman, you said, ``Those who
buy too much this year have to know they will pay a price when
the equipment for sale on the internet next year for one-tenth
of the acquisition cost.'' But here we go again. It is next
year and the Defense Department is not paying any price for its
incompetence. It is the American taxpayer who is paying the
price and our service members in Iraq that don't have the
critical equipment they need.
Mr. Chairman, our Nation needs a new direction. The Bush
administration is treating the taxpayers like its own private
piggy bank and Congress is doing nothing to stop it.
[The prepared statement of Hon. Henry A. Waxman follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Shays. The Chair would recognize Mr. Marchant, the Vice
chairman.
Mr. Marchant. Thank you, Mr. Shays, for holding this
hearing today on this very important subject. What the
Department of Defense does with its excess inventory is
probably not something that enters the public's mind; however,
the fact that the Defense Logistics Agency is responsible for
the management of the inventory of $89 billion requires
reasonable oversight by the Congress.
In addition, when you think about the types of property the
DOD possesses, such as tanks, aircraft, weapons components,
etc., it becomes clear that much of this inventory is extremely
sensitive in nature. Furthermore, even when we are not talking
about sensitive, classified, or dangerous items, it is our duty
as stewards to make sure that this excess property is being
properly managed.
Obviously, our No. 1 goal should be to make sure that our
troops are well supplied. The next goal should be to keep
dangerous or sensitive excess items from falling into the wrong
hands. Last, excess inventories should be managed in a most
efficient and cost efficient manner as possible.
Again, Chairman Shays, I am looking forward to testimony
today. Thank you.
Mr. Shays. I thank the gentleman.
Mr. Turner, you have the floor.
Mr. Turner. Thank you, Mr. Chairman. I want to thank you
for holding this hearing today and I want to echo the comments
of Mr. Duncan concerning the amount of waste that we see as a
result of these studies.
Mr. Chairman, you have been a leader in stopping Government
waste, and also the issues of national security. This is the
third in a series of hearings that our chairman has held on
this issue highlighting the lack of controls by the Defense
Logistics Agency in dealing with excess property. As GAO
pointed out, they were able to purchase numerous items that are
sensitive in nature. The work done by GAO was done over a short
period of time, so we don't actually know the full extent of
the problem. GAO also did not address the issue of the types of
people or groups that are purchasing these items.
Although it apparently states on the govliquidation.com Web
site that foreign nationals are prohibited from purchasing
demilitarized equipment, we do not actually know if or how they
are prevented. I believe this would be an excellent topic for
the GAO to examine, and I congratulate our subcommittee
chairman on his continuing focus in addressing this issue.
Thank you, Mr. Chairman.
Mr. Shays. I thank the gentleman.
Before recognizing witnesses I want to read from the June
7, 2005, hearing that we had on this very issue. At one point I
was asking Colonel O'Donnell, who was testifying, ``Is it your
statement the only way GAO was to buy this restrictive property
is because they were GAO and that they would not have been able
to buy it if they had tried to buy it privately?'' Colonel
O'Donnell, ``That's correct, sir. These items up on the podium,
they are requisitioned through DRMS using a DUDAC that had been
assigned a Department of Defense activity address code that had
been assigned to GAO enabling them to acquire property from
us.''
For us that statement was like Gary Hart telling the press,
``I am doing nothing wrong. Come follow us.''
What I find objectionable about the last hearing was the
fact that I don't think DOD took that hearing seriously enough.
This is not an attempt to get you, but it is an attempt to get
you to wake up.
With that, I would like to announce our panel. It is Mr.
Gregory D. Kutz, Managing Director, Forensic Audits and Special
Investigations, U.S. Government Accountability Office;
accompanied by Ms. Gayle L. Fischer, Assistant Director; Mr.
John J. Ryan, Assistant Director/Special Agent; Mr. Richard C.
Newbold, Special Agent. The last three I mentioned will be here
to respond to questions but not to give testimony. We then have
Mr. Alan F. Estevez, Assistant Deputy Under Secretary of
Defense, Supply Chain Integration, Department of Defense;
General Bennie E. Williams, Director for Logistics Operations,
Defense Logistics Agency; Mr. Paul Peters, Director, Defense
Reutilization and Marketing Service, Department of Defense.
Would you please stand and we will swear you in.
[Witnesses sworn.]
Mr. Shays. Note for the record all our witnesses have
responded in the affirmative. Those on the second right of way
to testify, we will make sure that the names get in and we know
who is testifying.
I would like at this time to take care of business. I ask
unanimous consent that all members of the subcommittee be
permitted to place an opening statement in the record and that
the record remain open for 3 days for that purpose. Without
objection, so ordered.
I ask further unanimous consent that all witnesses be
permitted to include their written statement in the record.
Without objection, so ordered.
I will just make mention of the fact we could have had two
panels. I am not looking for arguments among panel members. I
don't think that is really what anyone is looking for. But I do
want to be able to go back to GAO if there is a claim that
something took place that had nullified the significance of
GAO. For instance, I am sure we will have a dialog about the
protective gear and that is not the most up-to-date protective
gear. We might have a dialog about whether something is
repairable or not. But I think what you see in front of us
speaks for itself. It is pretty astonishing.
We will start with you, Mr. Kutz.
STATEMENTS OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE, ACCOMPANIED BY GAYLE L. FISCHER,
ASSISTANT DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS;
JOHN J. RYAN, ASSISTANT DIRECTOR/SPECIAL AGENT, FORENSIC AUDITS
AND SPECIAL INVESTIGATIONS; RICHARD C. NEWBOLD, SPECIAL AGENT,
FORENSIC AUDITS AND SPECIAL INVESTIGATIONS; ALAN F. ESTEVEZ,
ASSISTANT DEPUTY UNDER SECRETARY OF DEFENSE, SUPPLY CHAIN
INTEGRATION, DEPARTMENT OF DEFENSE; MAJOR GENERAL BENNIE E.
WILLIAMS, DIRECTOR FOR LOGISTICS OPERATIONS, DEFENSE LOGISTICS
AGENCY; AND PAUL PETERS, DIRECTOR, DEFENSE REUTILIZATION AND
MARKETING SERVICE, DEPARTMENT OF DEFENSE
STATEMENT OF GREGORY D. KUTZ
Mr. Kutz. Mr. Chairman and members of the subcommittee,
thank you for the opportunity to discuss DOD excess property.
Previously we testified that DOD was selling new, unused
chem-bio suits needed in Iraq, equipment that could be used to
produce anthrax, and new, unused items that were still in
demand by the military services for pennies on the dollar. You
asked us to test progress made in the excess property system
using undercover operations. The bottom line of my testimony
today is that we were able to obtain sensitive military items
on the internet and using social engineering. Further, we were
able to purchase unused items that were still in demand by the
military services.
My testimony has two parts: first, sensitive military items
and, second, examples of waste.
First, posing as a private citizen we purchased sensitive
military equipment on the internet. Some of these items
required us to obtain an end use certificate, which is intended
to provide assurance that property is sold to legitimate
buyers. We prepared an application for the certificate using
bogus information. Subsequently, a DOD official called to ask
us about our applicant and why they had no credit or other
history. We socially engineered the situation, provided a bogus
utility bill, and our application was approved. We used the
certificate to purchase several of our items.
Let me discuss several of these purchase, which are on my
left and will also be shown on the monitors.
First, we purchased 12 micro circuits for use on the F-14
fighter aircraft. As I will discuss, these are of particular
concern to law enforcement officials. This lot also had two
guided weapon radar test sets related to the FA-18 Hornet. We
used our bogus end use certificate to obtain these items. And
we purchased three ceramic body armor inserts currently used in
Iraq and Afghanistan.
As was mentioned, in addition to the items we bought, we
identified at least 79 other buyers that purchased over 2,600
sensitive military items. Some of these buyers outbid us on
lots that we had targeted for purchase.
We also obtained at no cost $1.1 million of sensitive
military equipment by posing as DOD contractor employees.
Specifically, we used publicly available information and
developed fictitious identities as contractor personnel. We
then entered two DOD warehouses in June 2006 seeking excess
property. DOD and contractor staff helped our investigators
find targeted items and they helped us load them into our
rented van.
Let me discuss a few of these items which are on my left
center here and will also be shown on the monitor.
First, we obtained two guided missile mounts which fire
dragon anti-tank missiles, six kevlar body armor fragmentation
vests, an all-band antenna used by the Air Force to track
aircraft, and 10 older-version body armor vests.
Although many of the items you see on my left are not DOD's
latest, all of them are of concern. For example, Homeland
Security and Defense investigators met with us several weeks
ago and informed us that they are spending considerable
resources chasing after items that are getting out of DOD. They
are particularly concerned about aircraft parts such as the F-
14 parts that we obtained, and they told us that these parts
are being resold to Iran.
Also, another question: should DOD be selling military
quality body armor on the internet to the highest bidder?
My second point is that we were able to purchase new and
unused items that DOD is continuing to buy or that are in
demand by the military services. As we have previously
reported, we believe that this is a waste of taxpayer
resources.
Let me discuss a few of these items, which are on my right
and will also be shown on the monitor.
First, 10 wet weather parkas. We paid $87, DOD paid $359.
Then we have 10 cold weather parkas. We paid $373, DOD paid
$1,400. The next item is a portable field X-ray processing
enclosure. We paid $87, DOD paid over $7,000. Finally, we
purchased 20 locks that are used to secure the back bay of
trucks. We paid $59, DOD paid $1,600.
DOD has made some progress in this area. Specifically, DOD
initiatives have saved a reported $38 million through June
2006.
In conclusion, the most troubling aspect of our
investigation is the sale of sensitive military equipment to
the public. In addition to national security issues, sales of
items like body armor to the public pose homeland security
risks.
With respect to waste, we are encouraged that DOD
initiatives have saved a represented $38 million. We see the
potential for several hundred million more of savings.
Mr. Chairman, this ends my statement. We look forward to
your questions.
[Note.--The GAO report entitled, ``DOD Excess Property,
Control Breakdowns Present Significant Security Risk and
Continuing Waste and Inefficiency,'' may be found in
subcommittee files.]
[The prepared statement of Mr. Kutz follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Shays. Could you just make reference to where in your
statement you make reference to homeland security and Iran?
Which page is that in your statement?
Mr. Kutz. I don't know if it is in our statement. We had a
subsequent meeting to our field work ending, and so it is
subsequent to the actual----
Mr. Shays. So that is in addition to what you submitted to
us?
Mr. Kutz. Yes, it is. They asked to meet with us and we met
with them several weeks ago.
Mr. Shays. Thank you.
Mr. Estevez.
STATEMENT OF ALAN F. ESTEVEZ
Mr. Estevez. Chairman Shays, Congressman Kucinich, members
of the subcommittee, thank you for the opportunity to appear
before you and discuss the Department's excess property
programs. I am Alan Estevez, Assistant Deputy Under Secretary
of Defense for Supply Chain Integration, and I appreciate the
opportunity to provide an update on improvements we have made
since the last hearing in June 2005 and to address the
challenges highlighted by the recent GAO draft report on this
topic.
I am proud to be joined today by Major General Bennie
Williams, DLA's Director of Logistics Operations, and Mr. Paul
Peters, a member of the Senior Executive Service and the
Director of the Defense Reutilization and Marketing Service.
The fact that we have now placed executive-level leadership
at DRMS is an indication of our commitment to the reengineering
of our reutilization and disposal process. Before we discuss
our efforts to improve reutilization and disposal, I would like
to place it within the context of the broader logistics
enterprise.
Over the past year, our uniformed and civilian logistics
professionals have continued to successfully support complex
military operations, including ongoing operations in Iraq and
Afghanistan, as well as relief efforts for the Pakistan
earthquake and along our own Gulf Coast in support of Hurricane
Katrina.
Returns and reutilization are an important part of the DOD
supply chain, and the Military Services Defense Logistics
Agency and Defense Reutilization and Marketing Service are
charged with implementing and executing DOD's policy. We have
three main goals for processing or disposing of material which
has reached the end of its useful life or is in excess of a
military unit's requirements.
First, we want the reutilization process to be a source of
reusable material for the war fighter, provided this material
can be used without detriment to the mission.
Second, we want to ensure that materiel with potential
military application is properly demilitarized or destroyed.
Let me be clear: it is our policy and our goal that no materiel
requiring destruction will be offered for sale or be available
under any circumstances to unauthorized persons.
Finally, we want to get the best value for the DOD material
by selling materiel that has no DOD or other authorized user
requirement and has been completely demilitarized. DRMS strives
to balance these sometimes conflicting objectives.
Independent of but reinforced by the GAO efforts in this
area, we have been reengineering the return portion in the
supply enterprise. Mr. Peters will discuss DRMS'
transformational improvements in detail. Even as DOD makes
major changes to the DRMS processes, we have worked diligently
to address GAO recommendations. GAO itself has praised DOD's
responsiveness and progress in addressing the 13
recommendations in the May 2005, report. We will continue both
to address GAO's recommendations and to complete our own review
and process improvements.
Let me focus on the most significant area requiring
improvement in the recent GAO report, which is the sale of
items with military only applications to unauthorized parties.
We take this matter extremely seriously and have already
implemented procedures to fix that process. Major General
Williams and Mr. Peters will provide further details.
GAO has highlighted several other areas in which we believe
our practices are sound, and I would like to take a moment to
discuss those.
In the last hearing, the focus was largely on concurrent
buying of materiel from the commercial sector when such
material was available from DRMS. The Department worked
diligently to reduce simultaneous buying and disposal, and the
July 2006, report provides no examples of concurrent buying.
In its July 10th report, GAO repeatedly highlights the
difference between historic cost of an item and the amounts
received via public sale. The items that are offered for resale
are material in excess of the DOD's requirement, and the prices
that the July 10th report references have been set by public
auction, an extremely efficient pricing mechanism and thus a
far better indicator of a pre-owned item's value than its
original acquisition cost.
In closing, Mr. Chairman, thank you for the opportunity to
testify before this subcommittee. The DOD has worked diligently
and will continue to transform DRMS' processes to increase its
effectiveness and improve internal controls.
I would be happy to answer questions you or any member of
the committee may have.
[The prepared statement of Mr. Estevez follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Shays. Thank you, Mr. Estevez.
General Williams.
STATEMENT OF MAJOR GENERAL BENNIE E. WILLIAMS
General Williams. Good afternoon, Mr. Chairman, Mr.
Kucinich, and distinguished members of the subcommittee. I am
Major General Bennie Williams, Director of Logistics Operations
at the Defense Logistics Agency.
I am responsible for the procurement, management, storage,
and distribution of some 5 million line items at an annual
volume of 25 million receipts and issues and over $30 billion
in sales. As part of this worldwide mission, the Defense
Reutilization and Marketing Service, DRMS, provides
reutilization, marketing, and disposal services at offices in
37 States and 14 countries, including Iraq and Afghanistan.
DRMS handles a complex yearly workload that totaled over 3
million line items at over $20 million in original acquisition
cost.
With me today is Mr. Paul Peters, a member of the Senior
Executive Service, who assumed leadership of DRMS as its
director in February 2006.
Our No. 1 priority is logistics support to the war fighter.
DLA works closely with Mr. Estevez and his staff and the
military services to resolve related issues.
Ongoing reviews by the GAO and this subcommittee's
oversight of our efforts have also helped us to find areas
warranting attention in our excess property program. In recent
years we have taken many steps to resolve vulnerabilities and
inefficiencies in our program. We increased our leadership
focus by restructuring our alignment of DLA Senior Executive
Service Corps to provide the position Mr. Peters assumed in
February. We enhanced reutilization condition code A items
through several initiatives, including implementing an update
to our modernized software through business systems
modernization release 2.2 on schedule in January 2006.
We also took action to improve control over key items
received in batch lots, worked with the military services to
promote appreciate disposal guidance, increased our oversight
of inventory accuracy processes, and we added further controls
over further high-risk items. However, we agree more must be
done. Previous corrective actions have reduced vulnerabilities
but not eliminated them. This was further evidenced by GAO's
recent findings. A more thorough compliance validation is
required.
It is thus apparent that our current excess property
business model must be fundamentally changed to meet the
challenges and risk of today's world environment. Our new
business model requires a fine balance between maximizing reuse
of property, controls over potential vulnerabilities, and the
cost versus benefits of related improvements. We need to take a
more complete programmatic approach to reengineering and
enhancing our excess property program and accelerate progress,
as well.
To address the primary focus areas that have emerged from
our own and GAO's assessment, we are immediately implementing
significant changes in how we account for and process excess
property. These include greatly enhanced and consolidated
review of items in batch lots or with local stock numbers prior
to any sale to the public. We have immediately typed in
procedures for verifying the identity and authority of those
seeking to obtain material from DRMS sites and are capitalizing
our results of the DRMS A-76 private/public competition.
DRMS also has an in-depth review on the way of the complete
range of vulnerabilities and risk mitigation options to define
and implement additional improvements, and we continue to
develop information technology solutions that will give us
greater availability to meet DOD's disposal needs, with the key
component being the reutilization modernization program
scheduled for implementation in fiscal year 2010.
What I have described is a complete transformation of the
DOD reutilization and excess property program. This requires a
long-term commitment and focus on all aspects of the program,
including human capital, process improvements, and technology-
based solutions. We know that revolving issues identified by
ourselves, the GAO, and this committee will further mitigate
risks to national security, better serve the men and women in
the military services, and ensure taxpayer dollars are more
effectively utilized. We are committed to providing the
leadership and resources required to successfully transform the
DOD reutilization and excess property program.
I would be happy to answer any questions you and members of
the committee may have.
[The prepared statement of General Williams follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Shays. Thank you.
Before I recognize Mr. Peters, General, I want to thank all
of our witnesses for serving their country, but I particular
want to thank you for your service in support of Operation
Desert Shield, Storm, Saudi Arabia, Operation Restore Hope,
Somalian Operation Joint Endeavor, Boznia Herzogovinia. We
appreciate your service to your country.
General Williams. Thank you, sir.
Mr. Shays. You are welcome. Thank you.
Mr. Peters.
STATEMENT OF PAUL PETERS
Mr. Peters. Mr. Chairman and distinguished members of the
subcommittee, I am Paul Peters, Director of the Defense
Reutilization and Marketing Service.
DRMS is a field activity of the Defense Logistics Agency
responsible for the execution of DOD policy on the processing
of DOD excess property. Specifically, DRMS provides
reutilization, marketing, and disposal services worldwide,
including serving side-by-side with our military forces in
Iraq, Kuwait, and Afghanistan, and handled last year over 300
million line items valued at approximately $20 billion in
original acquisition cost.
Although actions have been implemented to address the
excess property concerns raised in prior hearings, the most
recent GAO findings and our own internal analyses have
demonstrated that more work remains. My appointment as the
first SES Director of DRMS on February 16, 2006, shows that DLA
is committed to a long-range, consistent effort to fix these
problems. We must continue to balance the maximum reuse of
property, controls over potential vulnerabilities, and the
costs and benefits of improvement.
Current pressing issues include the proper disposal of
demil-required property in batch lots, proper disposal of local
stock number items, and mitigation of unauthorized access to
obtain property. To resolve these issues, we immediately froze
the processing of all batch lots and took them apart to ensure
the property was appropriate for release. We are now
implementing a reengineered approach to control batch lot
material by establishing consolidated, centralized sites where
batch lots will be verified and all items will be 100 percent
physically inspected prior to sale.
Items turned in to DRMS with a local stock number lack a
detailed item description and cannot be automatically screened
to determine the right demil code.
Higher-risk local stock number items will be processed in
the same manner as described for batch lots, with 100 percent
physical inspection before public sale.
GAO personnel posing as DOD contractors working for the
U.S. Army used forged documents to remove demil-required
property. Immediate action was taken to tighten the walk-in
procedures for excess property removal and ensure that
authorization letters and potential screeners are independently
verified before property release.
The GAO was also able to get a clearance from DLA to
purchase export-controlled material by using an assumed
identity and forged documentation. Additional training is being
given to ensure that no buyer is favorably assessed without
resolving discrepancies in that buyer's identity.
DLA is also preparing a procedure for public comment that
would exclude questionable buyers from purchasing such
property.
The transition to the most efficient organization in the
continental United States will further reduce the number of
fully functioning DRMS warehousing operations from 68 to 18,
thereby improving command control and communication regarding
the processes such as those I have just discussed and enabling
more efficient use of resources, in addition to actions to
leverage existing DLA systems and the plan for their
transformation by providing improved capability to DLA
activities to match excess property assets against inventory
retention levels.
The overall reutilization rate for condition code A
property was approximately 18 percent in fiscal years 2004 and
2005 and is currently 21 percent year to date in fiscal year
2006 and is saving the Department approximately $224 million in
original acquisition cost.
Finally, we are conducting a major outcome-based review to
identify additional vulnerabilities and gaps in DRMS processes,
to define and test the appropriate corrective actions, and to
continue the efforts to improve condition code and demil code
accuracy.
The re-engineered batch lot and local stock number
processes noted earlier are an important initial result of this
review.
Mr. Chairman and distinguished committee members, we are
taking both the short-and the long-term actions necessary to
ensure these problems are resolved and to enable DRMS to
provide the best possible support to the war fighter while
conserving taxpayer resources.
Thank you.
Mr. Shays. Thank you all very much.
We will start with Mr. Marchant. We are going to do 10
minute rounds of questions.
Mr. Marchant. Thank you for your testimony today.
Major General, in your statement you talked about a new
business model. How long has the concept of a new business
model been in the works as far as this process goes?
General Williams. Sir, we started a new business model when
I assumed responsibilities in my current position and when Mr.
Peters came onboard. The focus is really to concentrate on how
we can improve upon those improvements that have been made, the
seams and gaps that we detected, and work that needs to be
done, and there is more work that needs to be done. So we just
want to pile on what has already been done and then improve
upon what has been done and then really do some reengineering
because we need more work done and done faster, sir.
Mr. Marchant. What would you say would be the major
difference in the resale or disposal of excess items versus 10
years ago that exist today? What would be the major difference
in how you disposed of these items 10 years ago or during the
Bosnian War or Desert Storm as opposed to now? Are there new
complexities involved? Are there new business strategies, or is
there just more stuff to get rid of?
General Williams. No, sir. In terms of items to get rid of
with our Army, I won't put a quantity on that; however, what I
will tell you is that the key to success is identifying that
which need not fall into the hands of a third party. If there
is a demil required, then it is our responsibility to, No. 1,
correctly identify, to accept accountability, and to ensure
that throughout the process that item does not transition over
to GL or is eligible to be bought by a third party, sir.
Mr. Marchant. Thank you.
Mr. Peters, is there a penalty, is there a civil penalty,
is there a crime that is committed if someone falsifies bidding
information, besides the GAO, to obtain sensitive material? Do
we have a prosecutorial system to go after someone that obtains
something fraudulently?
Mr. Peters. Congressman, the process that is in place right
now when a prospective buyer fills out an end use certificate
is designed to verify their identity and the stated intention
and purpose of the item that they are purchasing. What happened
with the GAO was those alarms went off. There were
discrepancies in the identity information that was provided.
The assessor, unfortunately, made a favorable assessment
for that buyer without resolving the discrepancies in that
identity. If a public citizen were to do the same thing that
GAO did, our job is to try to verify that those discrepancies
exist and determine that individual is not authorized for that.
I am not aware of a prosecutorial position that DLA or DRMS
would take, but clearly our job is to properly execute that
process and ensure that those individuals are identified and we
don't favorably resolve their assessment while there are still
discrepancies.
Mr. Marchant. Is there some kind of a notification process
that you would refer to the Justice Department when someone
tried to fraudulently obtain excess material?
Mr. Peters. If we were aware of an individual trying to
make that attempt, we certainly would inform DLA and the
Department. At this point I haven't been here long enough to--
--
Mr. Marchant. Mr. Ryan seems to have an answer.
Mr. Ryan. Congressman, in situations where someone is lying
to the Government, there is violation to Title 18, 1001, false
statement to the Government. The method in which they are
making application, either by wire or mail, is also a violation
of the crime. In this particular case they shouldn't be
referring these things. Once a red flag comes up, they should
be passing this on to agents who have experience in
interviewing people and can get the information and the
intelligence that they need from the field to make value
decisions.
But to answer your question, there are violations that they
can pursue and they should work that out with Justice and
determine if Justice is going to pursue these type of crimes.
Mr. Marchant. I guess my question, rhetorical question, is
if there aren't any referrals going on and there is, in de
facto, no penalty, nothing, no down side to having this happen,
you know, maybe people aren't being discouraged from doing
this.
Mr. Peters. Congressman, if I may, the Defense Criminal
Investigation Agency and DLA is involved in the assessment
process, and so their involvement would automatically trigger
that type of notification internally to our Agency.
Mr. Marchant. I would suggest that maybe occasionally one
of those cases be made public so that the public, in general,
understands that there is some consequence to this kind of
behavior.
The last thing I will ask of Mr. Kutz or Mr. Peters, either
one, has there been an analysis made of the cost of the
Agencies that implement the sale of the property, and does the
value of the sale of the property even cover the cost of the
agencies that are charged with selling the property? I mean, do
we have this whole elaborate system of disposal of materials
that costs more than we recoup from the sale of the material?
Has there been any kind of a cost analysis done of that?
Mr. Peters. Congressman, when you just look at condition
code A, reutilization of property, in fiscal year 2006 year to
date we have reutilized approximately $224 million just in
condition code A property. That exceeds the cost of operations
of the DRMS. If you look at the total reutilization of all
property for the Department, it is well over $1.5 billion.
Again, that far exceeds the operating cost of the DRMS.
Mr. Marchant. OK.
Mr. Kutz. There are two savings. There is the issue of how
much you bring in from the public sales, but the reutilization
within the Department of Defense and Government agencies there
is a bigger savings to the Government there.
Mr. Marchant. OK. Thank you.
Mr. Shays. I wonder if the gentleman would yield the
remainder of his time?
Mr. Marchant. Yes.
Mr. Shays. Thank you. I think Republicans and Democrats are
on the same page in terms of what we are seeing at this
hearing. I would just like to start by asking about the all-
band antenna. Is this all-band antenna new or is it used, Mr.
Kutz?
Mr. Kutz. I believe it is new and unused.
Mr. Shays. Mr. Ryan, that is correct?
Mr. Ryan. Yes, that is true.
Mr. Shays. Are we still purchasing these antennas or are
they antennas that we are no longer purchasing?
Mr. Kutz. According to the manufacturer, they are still
producing them for the Department of Defense.
Mr. Shays. OK. Were we incorrect when we stated it cost
$120,000?
Mr. Kutz. According to DOD records, that is a $120,000
purchase.
Mr. Shays. And this was given free to you, to our
inspectors? That is correct, Mr. Ryan?
Mr. Ryan. Yes. When we went to the DRMO we walked in and
requisitioned it and we walked out with it.
Mr. Shays. I mean, the bottom line to this is, Mr. Kutz,
what I find most surprising is your statement that you are
saying that the Department of Homeland Security is saying they
are looking for this equipment that is being sold by the
Department of Defense, that it is getting into the wrong hands;
is that correct?
Mr. Kutz. Particularly of interest to them were the
aircraft parts, and F-14 was the major part. As you know, Iran
is the only country that is currently flying F-14s.
Mr. Shays. Iran has the old F-14s.
Mr. Kutz. Correct.
Mr. Shays. We have refused to provide parts for them, so
they are going really on the black market.
Mr. Kutz. Yes.
Mr. Shays. And so these were bought for nothing or for
something?
Mr. Kutz. For something. I mean, the ones that were the F-
14 micro circuits, we actually bought those on the internet.
Mr. Shays. But to Iran they are worth a fortune, correct?
Mr. Kutz. Correct.
Mr. Shays. Thank you.
I recognize Mr. Kucinich. Mr. Kucinich has pointed to you,
so I recognize you, Mr. Waxman.
Mr. Waxman. Thank you very much.
Mr. Peters, as I understood your answer to the question a
minute ago, there are procedures that alert you when someone is
pretending to be someone else in order to buy equipment; is
that correct? You said there was a red light that went off?
Mr. Peters. Yes, sir.
Mr. Waxman. In effect?
Mr. Peters. Yes.
Mr. Waxman. Gee, I was pretending to be a Defense
contractor; is that right?
Mr. Peters. Yes.
Mr. Waxman. And you were alerted to that fact, yet they
were able to walk off with $1 million worth of equipment. What
happened? Why didn't somebody at Defense say wait a minute, we
are starting to get suspicious you are not who you say you are?
Why did the sale proceed?
Mr. Peters. For clarification, Congressman, the trade
security control process that I was describing was different
than the process of allowing an authorized screener to walk
onto a military installation into a DRMO and directly remove
property. The direct removal capability is something that
exists for the convenience of the military services to acquire
the items that they need to support their mission. The issue--
--
Mr. Waxman. But if there was some suspicion that somebody--
it turned out to be GAO--was passing themselves off as a
legitimate purchaser, a Defense contractor, and you had some
idea that was happening, why was the sale culminated?
Mr. Peters. For the direct removal process where the GAO
was able to use letters of authorization and identification to
have physical access to the receiving area and remove items,
the breakdown in the procedure there is that the letter of
authorization, the identity of that individual, and the
confirmation of the items that they wish to remove need to be
independently verified to offset and mitigate that risk. That
process did not happen at the point in time at the two DRMO
warehouses on the east coast where the GAO was able to conduct
the direct removal investigation.
We have tightened those procedures by ensuring that there
is an independent verification of the letter of authorization
from the home organization and the identification of that
individual with the home organization and a confirmation of the
items that individual would wish to remove.
Mr. Waxman. So you think that the problem will be
corrected?
Mr. Peters. Yes. The actions that we have already taken in
response to what the GAO was able to do will significantly
mitigate the risk of that type of operation again.
Mr. Waxman. Well, Mr. Kutz, you were here before. This
isn't the first time that we have been able to fool the people
at the Defense Department into selling your undercover agents
military equipment. Some of that military equipment jeopardizes
our national security; isn't that right?
Mr. Kutz. Yes. This is items that could be used against us
or other countries.
Mr. Waxman. Now, one of the examples that you used was
dozens of classified digital micro circuits, including those
for F-14 fighter aircraft. Your report states these are
classified items that require protection in the interest of
national security. What was supposed to have happened to these
micro circuits?
Mr. Kutz. They should have been destroyed. They should not
have gone out in a public sale.
Mr. Waxman. And who would want these micro circuits? Are
there any foreign countries or U.S. adversaries that would want
to get their hands on these items?
Mr. Kutz. Well, we are aware that the only country flying
F-14s right now is Iran, and the investigators that came over
and met with us several weeks ago had said that they had
serious concerns about F-14 parts leaving DOD and going to
Iran. So yes.
Mr. Waxman. Well, my colleague on the other side of the
aisle said perhaps we ought to make some of this public so that
the American people would know it is a crime to do what you
did, in effect, by representing yourself as eligible to buy
this equipment. Instead we have a hearing this year, as we had
in previous years, indicating that it is not that hard to fool
these people at Defense. Why was it so easy for you to be able
to buy equipment that could jeopardize our national security?
Mr. Kutz. Well, with respect to the end use certificate, I
want to clarify those are two separate incidents.
Mr. Waxman. OK.
Mr. Kutz. When we posed as contractors they did not have
suspicion that we weren't contractors. When we got our end use
certificate they actually called us and said the person that
applied for this end use certificate doesn't exist, doesn't
have the credit history, doesn't have any other history. The
answer to the question we gave them is that it was identity
theft, and they bought it.
And we basically then counterfeited--we said we will send
you a copy of a utility bill. They said that would be fine. We
sent them a copy of the utility bill, which we forged
basically, and, based upon that, they accepted our application.
And that end use certificate allowed us to purchase several of
the items that you are talking about now.
Mr. Waxman. You are pretty smart. Do you think some of our
adversaries could be just as smart and get away with purchasing
this equipment?
Mr. Kutz. I suspect they are much smarter than we are,
certainly.
Mr. Waxman. I mean, this is really incredible because we
are talking about national security of the United States of
America. Wouldn't it be better to--well, they are supposed to
be destroyed. Why weren't they destroyed?
Mr. Kutz. I think it was a combination of the batch lots
that were mentioned. I think they covered in their opening
statement some of the reasons. I think they have gone back and
taken a look at some of the reasons these have gone out. There
are issues with errors in coding, items getting into these
batch lots, and other types of errors that have occurred in the
system why these were able to get out. I think they know what
the problem is. They need to demonstrate that they can fix it
or it really raises questions about whether we should be
selling things to the public.
Mr. Waxman. Are you satisfied that what Mr. Peters told us
is going to be a fix for the future, is going to stop this from
happening in the future?
Mr. Kutz. Well, from a standpoint of what he said it sounds
good. I mean, I think we would have to look at more of the
details of actually what they are going to plan to implement
and how they can do it, because the issues relate to people,
processes, and systems, as I think the general said, and so
they have to address all of those areas to be successful in
what they are doing.
Mr. Waxman. Mr. Estevez, you are the Deputy Under Secretary
for the supply chain integration, and General Williams, you are
the Director of the Logistics of Operation, Defense Logistics
Agency, and Mr. Peters, you are the Director of the Defense
Reutilization Marketing Service. Who is responsible for what we
are hearing about these breaches of our national security and
what we have heard in the past were also breaches of our
national security? Who is responsible?
Mr. Estevez. Let me answer that, Congressman Waxman. In my
job I write the policy that we are executing for not just the
disposal process but overall supply management in the
Department of Defense. Our policy remains sound in this regard.
Items that should be destroyed we need to destroy.
I also provide oversight of the process, and I will go back
to the point that over the course of time, in answer to some of
GAO's previous findings, we have been marching forward also on
our own, changing the structure of the DRMS organization,
changing the leadership to making it Executive level
leadership, are all things that the Department has been doing
because we recognize the issues here.
Again, let me be clear that we do not want anything that
should be destroyed out for sale to the public.
Mr. Waxman. Well, you shouldn't have wanted it the first
time it was revealed to us that this sort of thing was
happening. Now, GAO says this is a significant security breach.
Do you disagree?
Mr. Estevez. No, I do not, but I want to point out that
GAO, in its investigation, in their ability to access a DRMS
facility posing as not a DOD contractor, as contract support
for the U.S. Army--so they were representing themselves as a
valid Army agency with the ability to take any of this
material. We have put checks in process, and I agree we need to
do those checks in process, but GAO has a lot of information
that a private citizen would not have in order to perform that
false identification.
Mr. Waxman. Now, do you know how many agents have been
assigned to investigate examples of this kind of transaction
where either security is being breached by equipment that
should have been destroyed has been sold or what we have also
heard about, equipment that shouldn't have been sold, been sold
for pennies on the dollar? How much manpower are we spending to
investigate these sales after the fact?
Mr. Estevez. Sales after the fact would be referred to
Defense Criminal Investigation Service, and after that I would
have to take the question for the record on how many people
they may be expending or how many people GAO may be expending
through law enforcement to address that issue, sir.
Mr. Waxman. Mr. Kutz, is this really a money-making venture
for the Department, or do the risks of these kinds of security
breaches outweigh any monetary benefit that might arise?
Perhaps the best way to settle this problem is not to let them
sell what they call excess equipment. What is your thought on
this issue?
Mr. Kutz. I think in the long term if they are unable to
demonstrate that they can prevent military technology from
going out in the excess system to the public, then that is a
very serious question that they would need to answer, and maybe
Congress would need to take action. If they can't show that
they can prevent it from going out, the $30 or $40 million that
they net from the public sales is possibly not worth it.
Mr. Waxman. My time is over, but I do want to say, Mr.
Chairman, you said Democrats and Republicans both are outraged
by this behavior, but Republicans are in charge. They are in
charge of the Congress and they are in charge of the executive
branch, and someone should be held accountable.
If we are not going to have the people at DOD held
accountable, we ought to have the elected officials held
accountable who are supposed to be sure that these kinds of
things do not take place. They claim to be fiscal
conservatives, they claim to care about national security, and
we see this gross incompetence which jeopardizes every
American, Democrat and Republican.
Thank you.
Mr. Ryan. Mr. Waxman, I would like to respond to the
statement about--I would like to comment on Mr. Estevez'
statement about having a great amount of knowledge to be able
to accomplish this. This was done with information that you can
get off the internet. This information that we used, we have a
policy that we don't use inside information, so we didn't use
it.
As a matter of fact, when we called the contractor or we
called DRMO to find out how to prepare the forms, they were
gracious enough to tell us what to put on the forms. So it is a
matter of they are accepting--this idea of challenging isn't
part of the process. It is an accepting. They accept what you
tell them so they can fill a blank in, and then they go ahead
and they allow you to get what you need.
So I just want the Congress to know that we didn't use
inside information; that the agents that did this used publicly
available information to be able to accomplish this, with a
little bit of guts to walk in, and that is all it was.
Mr. Shays. Before I recognize Mr. Kucinich I just want to
point out that the Department of Defense has been unauditable
since 1947, starting with President Truman. This has been an
issue that both Republicans and Democrats have been trying to
deal with for years. This is a problem that exited pre this
administration. I do agree we need to deal with it, but I want
that on the record.
Mr. Kucinich, you have the floor.
Mr. Kucinich. Thank you very much.
Mr. Kutz, is it possible that private contractors are
buying sensitive equipment at a discount and then turning
around and reselling it back to the Pentagon at market prices?
Mr. Kutz. Yes. In fact, I think it has been documented that
has happened in the past, but that is possible.
Mr. Kucinich. And are you continuing to look at that, that
we pay twice for something?
Mr. Kutz. We have not looked at that, no.
Mr. Kucinich. Mr. Chairman, I think it would be useful, in
the context of looking at surplus equipment----
Mr. Shays. Don't give away our next hearing.
Mr. Kucinich. All right. But I think it would be useful. We
are looking at a whole system here. How is something declared
surplus? Who declares it surplus? Do they have any business
interest connected?
Once something is declared surplus, how long is it sitting
around as surplus? Who purchases it? What do they do with it
and how fast do they move it? Who do they resell it to? How
much was it first purchased for by the taxpayers? How much did
the secondary purchaser pay for it? How much was it resold for?
It is like a whole system here we are looking at.
Now, there was an allusion made by Mr. Shays earlier. We
had a little side conversation about an issue about a black
market. I mean, is it possible that Army ``surplus'' is a
substantial part of a black market in Defense material?
Mr. Kutz. I don't know about substantial. It certainly is
possible, and I think that the investigators have told us that
it is. I think that the other market is a legitimate market.
There is a lot of industries that have cropped up around the
country of people who live off of the DOD excess property
system, and there is various associations and surplus stores,
etc., that buy these items legitimately and resell them to the
public, and presumably they are making a profit on it.
Mr. Kucinich. OK. We are saying these items.
Mr. Kutz. Not the military sensitive items. I am talking
two things: the sensitive items on the black market you are
talking about, versus legitimate.
Mr. Kucinich. Are you aware of everything that is sold Army
surplus? Do you have a list of every single thing that has been
sold on surplus?
Mr. Kutz. We wouldn't have a list, no.
Mr. Kucinich. Who does? Who knows? Who has the list of
everything that is being sold Army surplus? I mean, you showed
missile launchers. Are missiles being sold Army surplus? You
showed parts for an F-14. Are planes being sold Army surplus?
You showed radar guidance.
Who has the list of what is being sold Army surplus? We
don't really know what we are talking about here if we don't--I
mean, we have to define what we are talking about. What is for
sale? Does anyone know? Does anyone have a list? It is
unbelievable.
Mr. Estevez. Congressman, we could tell you what processes
through the excess system, through DRMS. There are other types
of material.
Mr. Kucinich. That is the Defense----
Mr. Estevez. That is the Defense Reutilization and
Marketing Service.
Mr. Kucinich. Just may have tuned in. It is Defense----
Mr. Estevez. Defense Reutilization and Market Service.
Mr. Kucinich [continuing]. Reutilization and Market
Service, and that is pronounced ``dermes?''
Mr. Estevez. ``DRMS'' is the way we would pronounce that
acronym.
Mr. Kucinich. ``Dermes?''
Mr. Estevez. Close enough.
Mr. Kucinich. OK. Go ahead.
Mr. Estevez. We would be able to tell you what we process
through that pipeline, whether it goes in for destruction or
whether it goes out through donation to first responders, the
other needy hospitals and the like that are eligible for that
type of material through special----
Mr. Kucinich. Could you make available, Mr. Chairman, Mr.
Estevez, to this committee the list of what is Army surplus?
Mr. Estevez. I am going to have to turn to Mr. Peters, but
I believe we could tell you what was processed through the
system.
Mr. Kucinich. Mr. Peters.
Mr. Peters. Yes, sir, we can make available for the record
items that have been sold, transferred, and donated and
reutilized.
[Note.--The information referred to may be found in
subcommittee files.]
Mr. Kucinich. Well, what is Army surplus? What constitutes
Army surplus, Mr. Kutz, is it anything the Army says is
surplus, correct?
Mr. Kutz. If they've declared it surplus and it goes
through their system, yes.
Mr. Kucinich. So it could be anything?
Mr. Estevez. But that does not include things like
munitions that would be destroyed. We would not sell munitions.
We would not excess munitions. Munitions that have reached
their end of useful life would be destroyed. Weapons platforms,
tanks, planes, etc., certain types of those might end up, after
they are demilled, after the military capability is removed,
given to museums or certain associations, but only under
certain conditions. For the most part they----
Mr. Kucinich. You are talking about weapons. Are weapons
Army surplus?
Mr. Estevez. Again, they would not go through this process,
but certain types of those items could end up being given--not
fighter planes, but planes could be given to first responders,
and there are certain old planes that could end up in museums
with the military capabilities for those weapons platforms,
tanks, planes, etc., removed from them before they would be
allowed out, many of those at congressional behest.
Mr. Kucinich. You know, I want to say that the gentleman
representing various aspects of handling the surplus, it is
comforting to hear you speak with such certitude. On the other
hand, when GAO does its investigations the certitude with which
you speak meets a little bit of reality. There is reality
testing right next to you.
We need a list to know exactly what is declared surplus.
The other thing that I am interested in is the relationship
between what our taxpayers pay for it and the creation of a
black market. I am very interested in that. I mean, if you are
talking about these--you were able to essentially fake some
documentation to get an end use certificate. Have there ever
been audits done of end use certificates to see how many other
end use certificates, since it was so easy for you to fake it,
are there other end use certificates that might similarly be
faked that have resulted in people getting goods that they
shouldn't have?
Mr. Ryan. I am not aware of an audit that was done, but I
can tell you that when we held the conference with DHS
investigators and the DOD investigators, they had some real
major concerns about the credibility of those end use
certificates, because they are supposed to be an identification
of people who get a hold of items that aren't supposed to ship
it out of the country. If that material in those applications
are false and there is no credibility to them, where do we go
to identify these people that aren't supposed to ship the
items?
So if you are talking about your black market, a black
market is created when someone lies and disguises their
identity and they have an opportunity to make money.
Mr. Kucinich. That is exactly the point of my question. So
what I am asking you, Mr. Chairman, you know, as this
subcommittee's work seems to be growing here in leaps and
bounds before our very eyes, maybe it is appropriate for this
committee to ask for an audit of the end use certificates to
see who has been applying for the ability to purchase Army
surplus and to see if, in fact, they are legitimate and to see
what has happened with what they have purchased. It may be very
instructive.
And I think that certainly where the GAO report reads, ``In
instances where DOD required an end use certificate as a
condition of sale, our undercover investigator was able to
successfully defeat the screening process by submitting bogus
documentation and providing plausible explanations for
discrepancies and documentation.'' That, to me, is an open door
to the black market, folks, and we need an audit on that.
Mr. Chairman, I guess my time is up at this point, but----
Mr. Ryan. Mr. Kucinich, in response to that, also at that
meeting we had with law enforcement----
Mr. Kucinich. We had what?
Mr. Ryan. In regards to the meeting we had with law
enforcement with the DHS and the DOD, they indicated that they
were going to try to reach out and try to get some data and try
to do some credibility checks to determine whether or not they
are credible. So the intelligence group of DHS, Department of
Homeland Security, was aware of the situation. We briefed them
and they said they were going to try to do it, but I know that
is not going to be a full audit like you are talking about. But
the intelligence people at DHS were thinking on the same lines
you were.
Mr. Kucinich. Well, it is nice that they are thinking about
it.
Mr. Ryan. Yes, sir.
Mr. Kucinich. Mr. Chairman, thank you.
Mr. Shays. I am not usually at a loss for words, but I am
getting close to it, because this is like, where do you begin.
One of the thoughts that I was thinking is I wouldn't want your
job, Mr. Estevez, for all the money in the world, or Mr.
Peters. I wouldn't want it, because I have this sense that if
it was easily solvable it would have been solved. And I have
this sense that, because it is not easily solvable, we are not
even trying to solve it. That may be unfair, but this is now
the 4th year we have been at it.
I don't want to be unkind to any of you, but there is an
outrage here and I don't feel the outrage. I feel, just in
terms of looking at this equipment and thinking that if the
all-band antenna is something we keep buying and we basically
gave it away for $120,000, something really, really, really,
really is serious. Then I think that if the F-14, I was
thinking, well, there are some F-14s around somewhere. Someone
may want it. And then I thought maybe you can convert the
circuit board. And then I think, well, you have it.
Our enemy--they are our enemy. I hate to say it, but they
are our enemy, and that is Iran. We don't have diplomatic
relations with them. They have helped fund Hezbollah. They've
helped train them. Their fingerprints are all over what has
happened in the Middle East. And we have an embargo with F-14s,
but they can come and get it for free. Well, maybe they have to
pay the person who is buying it a tidy sum, but at least they,
from their standpoint, get it.
I am smiling through my tears.
I guess the way I will begin is by asking you about the two
reports. I mean, your report last year of May 2005, which we
had the June hearing, there are 13 recommendations. Now, this
report that you are doing, DOD Excess Property Control
Breakdowns, there are not recommendations here, so, Mr. Kutz,
tell me why.
Mr. Kutz. Well, that was more of an investigation.
Mr. Shays. OK.
Mr. Kutz. So it wasn't a full scope audit. We gave what we
call a corrective action briefing after we had done the various
operations, and we gave them our input at that point in time.
Mr. Shays. I am going to come back to the 13
recommendations, so this hearing is going to be a little longer
than I would like and it is going to be a little tedius,
because I am going to ask you about each of the
recommendations. I am going to ask about where we are in those
recommendations.
Should I make an assumption, Mr. Kutz, that we need to add
to these 13 recommendations, or are these 13 recommendations
probably still pretty operative?
Ms. Fischer, I am going to ask you. You are nodding your
head. I am getting a little more life out of you than some
others here.
Ms. Fischer. Those recommendations are still operative.
They have taken action on many of them, but the ones we are
still concerned about are the ones that related to identifying
systemic weaknesses that resulted in loss, theft, missing,
sensitive military items, and the recommendation that they take
a look at DRMO security and fix weaknesses there.
And then, with regard to their corrective action on their
system so that they pull these A-condition, new, unused items
back into the process instead of continuing to buy the same
items, we think they haven't gone quite far enough in the
action they took.
They met with us. They told us how they implemented the
system fix in January and the interim fix prior to that, which
they started last July, but we just haven't seen the money
coming back.
When you look at the process, the screening process for----
Mr. Shays. Let me just interrupt you here. When you say the
fix, what is this? Does this mean there are other things that
should be added to your recommendations? This does not describe
a fix to me.
Ms. Fischer. What I meant was the recommendations on the
systemic weaknesses for the stuff getting out and the DRMO
security, those have not been addressed. Those recommendations
are still open, they still stand. And as far as the reuse of
new, unused items, they are treating those things the same in
the process as they are items that need repair or junk. They
have the same 14-day screening period and then they are out the
door.
Mr. Shays. Let me just tell you, unfortunately, your
knowledge, you are losing me right now.
Ms. Fischer. I am sorry.
Mr. Shays. I am at baby steps here. You are taking big
leaps and I am not there and neither is DOD there. I am going
to just come back to this all-band antenna. If they paid
$120,000 for it, Mr. Kutz, should they have been able to buy it
outside?
Mr. Kutz. We didn't buy that. That was something that we
used our undercover operation.
Mr. Shays. So it was given?
Ms. Fischer. That is a DRMO security issue.
Mr. Shays. Right. But it is a secure item that should not
have been sold to the general public, correct?
Mr. Kutz. Right. And it was in the excess property system.
Mr. Shays. Right. So we can have a question as to why it
was excess when we are still buying it. We can have questions
why it was free when it cost $120,000. And we can have a
question about how the heck could anyone get it when this was
military equipment that shouldn't have been sold to anyone.
Now, Mr. Estevez, do you agree that this should never have
gotten in the hands of our investigators?
Mr. Estevez. Congressman Shays, it should not have gotten
in the hands of your investigators, but let me be clear. This
item was in a DRMS. They came into that DRMS.
Mr. Shays. Slow down. You are going to have as much time.
Slower. This item was what?
Mr. Estevez. This item was in the excess property system.
That means that it was not needed by the unit that held that
item nor by that service to issue to any other unit when it was
excessed into the reutilization system. The GAO investigators,
impersonating an Army user--let's be clear.
Mr. Shays. Right.
Mr. Estevez. They were not impersonating a private citizen
or a Defense contractor. They were impersonating a valid Army
user. They came in and requisitioned this item as a valid
member of the military service, the contract support through
that military service. Any item in the reutilization system is
available to members of the military service. That is the point
of having the system, so that we can reutilize that material
across that service.
Mr. Shays. OK. So the story is terrible, but you are saying
it is not as terrible.
Mr. Estevez. It is terrible that they were able to access
the system and forge documents. We should have had a cross
check on that. But once you accepted that validity, they were
entitled to that item.
Mr. Shays. Mr. Estevez, we had at one time the Secretary of
HEW under the previous administration, and they didn't move
forward with what they were required to do with the safety of
the blood supply when I was chairman of the Health Committee.
She wouldn't have thought to come in here and in any way
justify anything. She said we screwed up, this is what we are
going to do, and this is when we are going to get it done. You
know what? There were no stones thrown at her because she did
it.
I need to be very clear about just this one item as a for
example. Is it your testimony under oath before this
subcommittee that this equipment was never to be sold outside
the military, even as marked? Is it your testimony that this
was viewed as excess throughout the military or just excess
within that unit?
Mr. Estevez. Before that item should have been put in
DRMS--and I would have to go back through the reutilization
system----
Mr. Shays. Well, did you know that this item was going to
be one of the items that was brought? Were you told about this
item?
Mr. Estevez. Yes, sir.
Mr. Shays. It would have been helpful for you to find out.
Mr. Estevez. Yes.
Mr. Peters. Congressman Shays, if I may----
Mr. Shays. Yes.
Mr. Peters. This item is required to be demilitarized and
destroyed if it is not reutilized, and it should not ever be
made available to go through the entire reutilization transfer
and donation process and made available to a public sale. It is
a demil-controlled item that is required to be destroyed if it
is, in fact, not used by our military.
Mr. Shays. Well, I hope to God we wouldn't destroy it,
though, because we are still buying them.
Mr. Estevez. Congressman, we were not buying these items.
The fact that we may have these items in inventory is not an
indication that we are continuing to buy this item. Now, I
can't say that we wouldn't in the future.
Mr. Shays. You know what? I feel like we are straining at
gnats and swallowing camels here. I mean, I want to be fair to
you because I don't think we need to, from this standpoint,
make the story worse than it is because it is really bad. From
my standpoint, if I were thinking if I were you in your place,
Mr. Estevez or Mr. Peters, my comment would be this is a huge
example of lots of breakdowns in the system, to which we are
trying to correct.
What my feeling would be if I were on that side of the
table is this is where we are having success and this is where
we are having failure. I feel like you are trying to make it
seem like somehow there is nothing--you know, it is a problem
but it is really not a problem. We just don't get it up here. I
don't think that is to your value. I really don't.
We are told that we have an inventory of about 1,000-plus
different computer systems that can't talk to each other. Mr.
Estevez, that was not your problem. You never caused that.
General, you never caused it. That is a problem you have to
deal with. So in dealing with it, what we know is--and we have
known this for a while--you have one department within one
branch, you have a unit that has excess, and even within the
same branch they may need it, they just don't know it is
somewhere else. But then it is compounded because it may be
even another branch, and, and, and. I mean, that part I get.
What I am not getting, and it has to be corrected, and you
aren't going to be correct it over night, nor was President
Clinton able to correct it and his people overnight, but I
would at least like to know we have made some progress.
What I want to know is, is this an item that we are
actively using, and the answer is yes. Is this an item that may
be needed somewhere else within the military? Probably yes. Is
this an item we may buy in the future? Probably yes. Therefore,
I can see your argument if you said well, we found someone
within the military that wants it, and we are going to make
sure we get it. That part I get now, so there is a little
sanity to this conversation.
But what raises huge story here, and Mr. Kutz, he could
just comment on this one item and it would be a huge story. We
don't know who you are. You don't exist. Well, you don't
understand. There was identity theft, dah, dah, dah. If that
part of the dialog is true, that, alone, is huge.
My red light is on here, but let me just pursue this and we
will keep at it here.
Mr. Kutz, is it your testimony--and maybe someone could
speak more directly rather than secondhand. Was this you, Mr.
Ryan, that had this experience?
Mr. Ryan. I think in the situation of this antenna we were
able to secure the antenna by doing an intrusion into the DRMO
and getting possession of it.
Mr. Shays. Now, you did it pretending you were the
military?
Mr. Ryan. We did it by being a contractor hired by the
military working for the military, so I was not posing as a
military----
Mr. Shays. Well, that raises an interesting question. Are
we in a position where we are having to have contractors help
the Army find their own equipment?
Mr. Ryan. Well, it appears in this particular case yes,
because we basically were not identified until the second day
by the person who was contracted by the Army to search for the
property. They called----
Mr. Shays. You are the contractor. They don't think you
exist, correct? This is the one where you don't exist?
Mr. Ryan. Actually----
Mr. Shays. I don't want to mix them up.
Mr. Ryan. We are, because what we have to do is to think
about the intrusion into the DRMO as us providing totally bogus
information.
Mr. Shays. Right.
Mr. Ryan. No one challenging us.
Mr. Shays. And that is not because you were GAO. I could
have done the same thing.
Mr. Ryan. If you had put together a plan to pose as a
contractor.
Mr. Shays. OK. So you did that. Just finish it out and then
I am going to yield to the gentleman from Maryland. Keep moving
here.
Mr. Ryan. So once we got the property, they contacted us
and we told them it was a test. What we are talking about----
Mr. Shays. You told who it was a test?
Mr. Ryan. We told the contractor that when they contacted
us--DLA never contacted us. We told them at the end of our----
Mr. Shays. Who is we?
Mr. Ryan. GAO.
Mr. Shays. And you told who?
Mr. Ryan. We told DCIS, Defense Criminal Investigative
Service, and DLA that we had successfully penetrated the DRMOs
and we were able to take possession of excess property that was
demil.
Mr. Shays. Right. But before that wasn't there a call
raising questions?
Mr. Ryan. There was a call by the contractor who was
working on behalf of the Army screening property who realized
that their company was being--this property was being charged
to them as us taking it, and realized that they didn't have any
screeners.
Mr. Shays. So you used somebody else, contractor, who was
legitimate?
Mr. Ryan. Yes.
Mr. Shays. And so you used a legitimate contractor and the
contractor was wondering what the heck is going on here, and
then you told that contractor, not the military----
Mr. Ryan. Yes.
Mr. Shays [continuing]. That, in fact, this was identity,
and the issue dropped, and the contractor didn't notify the
military?
Mr. Ryan. Wasn't the identity. Identity issue was the end
use certificate situation. That is primarily a purchase over
the internet. The end use----
Mr. Shays. Let's stay with this story.
Mr. Ryan. OK. But the identity issue doesn't come into play
in regards to securing the penetration into the DRMO. We just
falsified everything.
Mr. Shays. You falsified everything, used a legitimate
contractor as the person?
Mr. Ryan. Yes.
Mr. Shays. Eventually that contractor did find out about
it. By then you had the equipment?
Mr. Ryan. Yes, that is true.
Mr. Shays. So you could have just disappeared?
Mr. Ryan. Absolutely, and if we wouldn't have given a
legitimate telephone number as a call-back so we could monitor
the activities, they would never know who we were.
Mr. Shays. Yes. I get it now.
Mr. Ryan. OK.
Mr. Shays. And you could have been an operation, a front
for anyone?
Mr. Ryan. You are absolutely correct.
Mr. Shays. And had you taught me how to do it, I could have
done it?
Mr. Ryan. Absolutely.
Mr. Shays. And when you went to DOD, they helped you load
that on to----
Mr. Ryan. The agents that did the penetration, they got
assistance from the people inside the DRMO to load the property
on their truck.
Mr. Shays. And you were a contractor picking this up, so
you didn't have military uniforms on or anything like that?
Mr. Ryan. No.
Mr. Shays. Nothing?
Mr. Ryan. Used a driver's license to get on the base.
Mr. Shays. OK. Well, I mean, it is astonishing. I mean,
that is astonishing. That, alone, is an astonishing story. It
is astonishing.
I thank the gentleman from Maryland. You have the floor.
Mr. Van Hollen. Thank you, Mr. Chairman, for holding this
hearing. As you and others have said, I am sure this
subcommittee looks forward to the day that we get a report that
the recommendations have been adopted and things have changed
and, in fact, we are saving the taxpayer some money.
Mr. Kutz, I was just looking at your testimony from about a
year ago in front of the subcommittee on some of the same
issues. In your testimony then you found that there was about
$3.5 billion in money essentially wasted from the taxpayers'
perspective. Do you recall that testimony?
Mr. Kutz. Yes.
Mr. Van Hollen. OK. And, as I understand your testimony
today, in this round you sort of tested the system and you have
concluded that the 13 recommendations you have made have not
been adopted; is that right?
Mr. Kutz. No, there has been some progress, and I have
mentioned in my opening statement they have reportedly saved
$38 million through June of this year. But we believe that the
potential is there for hundreds of millions of more savings.
Mr. Van Hollen. OK. Do you have any reason to believe that,
with the exception of the approximately $24 million----
Mr. Kutz. That was $38 million.
Mr. Van Hollen. The $38 million, that we are not continuing
to lose $3.5 billion?
Mr. Kutz. The $3.5 billion wasn't related necessarily just
to the excess property system. The actual amount for the excess
property system last year I believe was several hundred million
dollars. And so the $3.5 billion related to items that were
purchased and that were never used, but that was not really
related directly to the excess property system, so that gets
into the broader logistics issue at the Department of Defense.
Mr. Van Hollen. OK. But as I understand the testimony from
last year, you are talking about $4 billion related to items in
new, unused, and excellent condition----
Mr. Kutz. Yes.
Mr. Van Hollen [continuing]. That were sold, and you say we
determined that $3.5 billion, or 88 percent, included
substantial waste and inefficiency because new, unused, and
excellent condition items were being transferred or donated
outside of DOD, sold on the internet for pennies on the dollar,
or destroyed, rather than being reutilized.
Mr. Kutz. Yes.
Mr. Van Hollen. Do you recall that testimony?
Mr. Kutz. Yes, that is correct.
Mr. Van Hollen. And do you have any reason to believe there
has been a significant change in the practices to avoid that?
Mr. Kutz. Yes. Like Mr. Estevez, I think there has been
some progress, but there is a lot more issues that need to be
resolved.
Mr. Van Hollen. All right. We can get into that in a
moment, but, as Mr. Kucinich mentioned, I think that people
following this are going to be just amazed to hear that, rather
than take the principle I think most people were taught by
their financial advisors or parents, which is you buy low and
you sell high, DOD has just reversed it and done the opposite
and they are selling low and buying high. The consequence is
great losses it seems to me to the taxpayer.
I would point out that just last Friday the Army came out
with a statement, the Army bearing most of the cost for the war
in Iraq and Afghanistan, saying that its money crunch has
gotten so bad it is clamping down on spending for travel,
civilian hiring, and other expenses. We have to wonder, given
the crunch that the Army is facing, whether or not we can't
find savings through the kind of efficiencies that we are
talking about here.
Let me just make sure I understand and get this straight in
my mind. I do think specific examples are important to make it
clear what is at stake here.
On page 31 of your current report you talked about a
gasoline engine, and you say that GAO was able to buy the
gasoline engine for $355. Do you recall that?
Mr. Kutz. Yes, that is correct.
Mr. Van Hollen. Now, it seems like a pretty simple item, a
gasoline engine, but, of course, there are large quantities of
gasoline engines being sold. As I understand, the same time you
were buying these engines for a few hundred dollars, the
military, in particular the Marine Corps, was buying these
identical gasoline engines for $3,119; is that correct?
Mr. Kutz. Yes, they got four of them from DLA in June 2006,
is my understanding.
Mr. Van Hollen. So the Marines are paying 10 times for the
equipment what you were purchasing the equipment for; is that
true?
Mr. Kutz. That is correct.
Mr. Van Hollen. And you also looked at purchases, I
understand, of 20 more gasoline engines from the Internet?
Mr. Kutz. At the same time we bought ours, there were
another 20 or so available. We just picked one and bought it
for about $350.
Mr. Van Hollen. OK. And so on the internet, and the
original acquisition cost, if you sort of add all that up, was
$62,000, and the price on the internet was the same discount
that you got, so it was approximately $6,221; is that right?
Mr. Kutz. Yes.
Mr. Van Hollen. So a tenth of the price, essentially.
Let me ask you, Mr. Estevez, I mean, these are concrete
examples. I guess most people would ask the question all of us
would ask: how come we can't seem to get a handle on this? And
the reason I focus on a specific example is that it is there,
they went out and did it. It was on the internet. What do we
have to say?
Mr. Estevez. Congressman, we have put a number of fixes in
place from the time of the last hearing, so that if we are
going out to the commercial sector to buy material from a
commercial vendor and that material has been put into the
excess property system, we will offset the buy from the
commercial sector against material that is in the excess
property system so long as that material is in brand new
contract. You know, there is a training factor in the process
of turning in material from a unit that owns that material to
ensure that they code it properly. We have reinforced that
training. That remains an issue because it is a rotational
assignment that is generally a junior grade.
Using that in the last year we have offset buys by $224
million, so we are, in fact, reusing material to the benefit of
the American taxpayer and to the benefit of our military
forces.
Items that go back into the excess property system that
have been screened against the requirements of the military
service, that have been sitting in that system for, I believe,
45 days, and then another period of time, and there is no
requirement from the military service while that item is
sitting in that system, depending on the condition code of that
item, on whether they believe that is an item that they can
use, you know, we would not--they have the opportunity to reuse
that item.
That does not preclude them from ordering that item from
the national inventory where we would stock that item and where
we have the networks, in fact, set up so we can distribute that
item to them in a cost effective, timely manner so that they
can use that item to make a weapons system operate, which is
the true cost savings for the Department of Defense, getting
the return on the dollar investment in weapons platforms.
That is standard supply chain management practice. In that
regard we do the same as a Wal-Mart or a Target or any
industrial operation would do. Most of those folks would not
take any item back into the inventory and put it back in their
national stock system.
We continually do retention analysis, when we should be re-
buying an item. We buy millions of buys a year. As our s yes,
sirs become more sophisticated, as our ERP systems come online,
and as the system that we manage the realization system gets
modernized, we will probably have the ability to do better
retention analysis. But those are tough calculations. It is an
ongoing process and in that regard I believe we are doing sound
supply chain management.
Mr. Van Hollen. Well, let me ask you. I am not sure I
understood the full answer, but you are saying that you put
some changes in place that would address the issue we just
talked about, which I understand was within the last year, I
understand.
Mr. Estevez. The beginning of this year we put a system fix
in place so that if there is an item coded in brand new
condition that is in the reutilization process at the time we
are going out to the commercial sector to buy that same
material, we will offset the buy by inducting the material that
is in the reutilization process back into the national
inventory and only buy the difference of those items.
Mr. Van Hollen. All right. So, as I understand it, based on
that testimony, this particular scenario we talked about with
the gasoline engines should not have happened with the new
system in place, assuming that the Marines were asking to
purchase these engines at the same time the same engine was up
for sale on the Internet?
Mr. Estevez. The Marines, in that scenario, we were not
buying it from the commercial sector. The Marines were ordering
it from items already in the existing inventory, so really they
are paying a working capital fund, a transfer of dollars within
the DOD. The DOD has already expended the true cost of that
item out to the commercial sector to buy it, so it is not a
matter of an O&M dollar into a working capital fund to repay
the working capital fund.
Mr. Van Hollen. Sure, but I guess the problem is--I mean, I
understand what you are saying about inventory management, but
obviously a gasoline engine is something that is a pretty
common item. That is something I think you would expect to
restock your inventory, and so, you know, just because they are
buying it off the inventory shelf doesn't mean that is not a
loss to the taxpayer because you can expect that you are going
to have to buy it back from the original contractor for the
same $3,000 level from the original supplier.
And so it would seem to me that, especially for items that
are in common use and where you have a pretty reasonable
expectation that there is going to be a need for them in the
future, we wouldn't put them up and sell them, as GAO said in
its report last year, for pennies on the dollar when we know we
are going to have to buy that some time down the road. I really
hope that when we have this hearing next year there won't be
any more examples like the kind we heard about here.
Mr. Estevez. I would like to say that. We want to make full
use of our inventory, and at that point it goes down to how
much inventory do we want to hold. So if it is in brand new
condition and we believe there is a use case for it, we need to
determine what inventory we should be inducting back into the
national system, which is not the norm, based on the retention
rate of that item and what the use case of that item is, the
demand against that item. We continually have to do that.
It goes back to Congressman Shays' point about our systems
not being fully interconnected. But as our systems mature, we
modernize the RP systems that we are putting in place, and as
the system that we are upgrading our reutilization process
comes into place, we should be able to do that better than we
are doing that today, Congressman.
Mr. Kutz. Congressman, the waste there goes back to the
beginning of the process when someone actually decided in the
1990's to buy all these engines and, as it turns out, nobody
was going to use them, which is a different problem than what
Mr. Estevez is dealing with here.
Mr. Van Hollen. Right. And I don't know, based on this
testimony, how many engines were in the inventory, but I----
Mr. Kutz. I am told 1,500.
Mr. Van Hollen. So 1,500 was the total, but, I mean, I
would suspect that you are right, the problem of over-buying up
front, but especially with an item that is likely to be needed
some day in the future, even though there is no an immediate
demand for it, it seems to me it probably makes more sense to
retain it in the inventory, if there is an expectation you are
going to use it, then to sell it really literally pennies on
the dollar, 10 percent, and then go back and have to order
another one at taxpayer expense.
Thank you, Mr. Chairman. Thank you for the testimony.
Mr. Shays. I thank the gentleman.
We still have a number of questions we need to ask. I just
need you to know that.
I want to start by asking each of our three folks from DOD
which of these items is most discomforting to you that it is
out there as an example that people, our investigators, could
get. Which one? Take your pick. Which is the one, Mr. Peters,
that you find the most disconcerting up there?
Mr. Peters. Congressman Shays, it is disturbing that any of
these items would ever go through the reutilization, transfer,
and donation cycle and then be made available to public sale.
They reflected a breakdown in the procedures. They also reflect
some inherent risks in the disposal process. Changing or
reengineering the process to control batch lotting and local
stock number items which represent 44 percent of the annual
workload that DRMS handles, that is a tremendous amount of the
annual workload that we really need to close the gaps and the
vulnerabilities inherent with that batch lotting process.
Many of items that are in front of us that the GAO bought
were observed or obtained, came out of batch lots. Many of
these other items were----
Mr. Shays. Now let me just speak about batch lots. I was
going to get to it. In our hearing last year, in June 7, 2005,
Mr. O'Donnell, who was your predecessor--is that correct, Mr.
Peters?
Mr. Peters. Yes.
Mr. Shays. OK. He said, ``We no longer accept batch lots.
All of the items that are now turned in in J-list are reviewed
at those sites. They make the determination if they are
serviceable for reutilization.'' Was that a correct statement?
Mr. Peters. Congressman, I believe that Colonel O'Donnell
was referring to biological and chemical items when he made
that statement.
Mr. Shays. Right.
Mr. Peters. When I talk about batch lotting, I am talking
about the total volume of items that entered the disposal
system through the batch lot process, which is much broader,
and we need to reengineer and transform that process, and we
can do that by establishing multiple check points.
Mr. Shays. Why don't you talk about batch lots. Explain
what batch lots are.
Mr. Peters. Batch lots is a methodology that exists in the
disposal system whereby DRMS tries to minimize the handling,
the cost, and the administrative time to process an excess item
through the disposal system. Because it includes 44 percent of
the annual workload, that is over 1.2 million line items----
Mr. Shays. So you combine a lot of things together?
Mr. Peters. You combine a lot of things together.
Mr. Shays. And someone buys this batch, and they may like
some of the items and they may not like some of the items, but
in the end, for a relatively small amount of money, someone is
able to purchase a batch of items; is that correct?
Mr. Peters. If a batch goes through the entire process, it
would be available for public sale, and the risk of the batch
lotting, sir, is that once an item goes into a batch we lose
the identity and the visibility of that individual item, which
is why we need to change the process dramatically and----
Mr. Shays. We will come to that.
Mr. Kutz, did you buy or did your investigators buy any of
these in a batch lot?
Mr. Kutz. Yes. Several of them were batch lots, several of
them weren't on that side.
Mr. Shays. OK. And does everything on this side to my
right, your left, represent military sensitive?
Mr. Kutz. Yes, everything on this half of the room. Some of
it we got in that operation where we were posing as
contractors, the other we bought on the internet.
Mr. Shays. OK. And not posing as military?
Mr. Kutz. Correct, posing as a private citizen with a
credit card.
Mr. Shays. So what did you get as a private citizen as
opposed to--and if someone else needs to answer, that is fine,
but what did you get here not posing as military connected?
Mr. Kutz. Well, like the ceramic body armor, which is
current issue. That was in a batch lot.
Mr. Shays. OK. Any other item?
Mr. Ryan. The F-14 parts.
Mr. Shays. The F-14 parts?
Mr. Ryan. The F-14 parts.
Mr. Shays. So that was in a batch lot?
Mr. Ryan. Yes. I think it is important also to recognize
that in the batch lots some of these batch lots were prepared
by the contractor that DOD has actually hired for these sales.
Mr. Shays. Say that one more time.
Mr. Ryan. DOD has a contract with Government Liquidators to
provide assistance of the sale of----
Mr. Shays. And so they assemble the batches?
Mr. Ryan. It appears that, based on talking to some GL
people, yes, they do assemble batches for sale.
Mr. Shays. So let me ask you this, Mr. Peters or Mr.
Estevez or the General, whoever can answer this. It is my
understanding that you have taken away leave for some of our
personnel to go through batches to determine whether or not
there is military sensitive equipment in various batches; is
that correct?
Mr. Peters. Congressman, once we became aware of the
operation by the investigation by the GAO, we immediately froze
all the batch lots that were in the inventory and we began to
recertify each individual item and its demil code. There were
9,000 batch lots that were in the system that we froze and have
been in the process, over the last 6 weeks, of recertifying
each item.
The principle of inspecting each item in the batch lot is a
sound action that needs to take, and that is part of the
reengineering of the batch lotting process in the future. If we
centralize and consolidate all of the batch lots into four
sites, for example, here in the United States, we can take the
more experienced subject matter experts in the disposal system,
physically inspect each of those items, verify their demil
code, and verify those items that are appropriate to move on
through to the sale phase of the disposal system.
We can do that at the time we break down the batch and we
can do that again prior to the sale of the item, and that will
significantly reduce the kinds of items that we see in front of
us of progressing through the system inappropriately.
Mr. Shays. And so in the process of doing this have you
been finding any military sensitive equipment in those batches?
Mr. Peters. Yes, sir, we have.
Mr. Shays. Good. So that is a positive step?
Mr. Peters. I believe it is the right step in the short
term, and I believe that is the basis of a sound reengineering
of the batch lots process for the long term.
Mr. Shays. Well, Mr. Peters, you gave me a general answer,
and that is probably a good one, but I am asking for you to
tell me which is the one you find most awkward in all of these.
Is it seeing something transferred for nothing that cost
$120,000, or is it seeing potentially a hand-held missile
launcher? Is that the thing that you find most unsettling?
Which one is the one that you find most unsettling here?
Mr. Peters. Sir, DRMS has a responsibility to execute
this----
Mr. Shays. I am asking you a question. I want to know which
one you found most disconcerting here.
Mr. Peters. And my discomfort is that any of these items--
--
Mr. Shays. I know that, but now take your pick, boss. Which
one?
Mr. Peters. Any item that is demilitarized and should be
controlled----
Mr. Shays. Mr. Peters, that is not what I asked. Which one
of these do you find most unsettling?
Mr. Peters. Congressman, all of these items I find
disturbing that they've gone through the system----
Mr. Shays. So you would equate one of these small items to
one of the bigger? Are they all the same to you? They are all
the same?
Mr. Peters. Any of these items that have been determined
that should not be made available to----
Mr. Shays. Mr. Peters, I am going to say it again and I
want you to listen to the question. You can go on record, but I
want to make sure that I understand. There are some items here
that strike me as not as significant as others. Which do you
think is the most significant item that never, ever should have
gotten out of military hands?
Mr. Peters. Any item that is directly related to a weapons
system----
Mr. Shays. Mr. Peters, forget it.
Mr. Peters [continuing]. Is most disturbing.
Mr. Shays. That is a very uncooperative response. I can't
believe that you would equate them all together, and if that is
the way you want it to be you are on record that way, but all
that says to me is you choose not to be cooperative.
General, which is the one you found most unsettling?
General Williams. Sir, I found the SAPI to be the most
unsettling.
Mr. Shays. Which one?
General Williams. The Small Arms Protective Inserts.
Mr. Shays. OK. Thank you, sir.
Mr. Estevez.
Mr. Estevez. Congressman, I also find the small arms
protective insert extremely unsettling because they are easily
identifiable for what they are.
Mr. Shays. Thank you, sir.
Mr. Kutz, what would you find?
Mr. Kutz. In addition to those, the micro circuits that are
part of the F-14.
Mr. Shays. Thank you.
Ms. Fischer.
Ms. Fischer. I think the F-14 weapons system parts.
Mr. Shays. Thank you.
Mr. Ryan.
Mr. Ryan. I also agree the F-14s. The parts that the law
enforcement officers on the street are chasing all the time,
there is no reason that they should be out there. We have law
enforcement, DOD, and DHS chasing down people that have
possession of those. We could be using their manpower in other
ways.
Mr. Shays. Mr. Peters, do you want another crack?
Mr. Peters. Sir, I agree that the F-14 parts, because of
the one Nation in the world that continues to fly that and the
SAPI armor plats which clearly should never have gone through
the process, those are obvious examples of things that are
disturbing, but all of----
Mr. Shays. Thank you. I understand. I understand. Thank
you.
I am going to have you ask a few. I am going to ask
professional staff to ask a few questions.
Mr. Chase. Mr. Kutz, during your opening oral statement you
did make reference to social engineering techniques. Could you
just for the record define what you mean by that?
Mr. Kutz. Yes. It is really a ruse or a trick or a con is
kind of the way you would describe it, where you exploit people
who are trusting and you utilize that to either penetrate
systems or get them to do something that they wouldn't normally
do. I think the end use certificate example is one where we
told them it was identity theft and they believed it, and,
using the contractor identifications we looked like
contractors, we talked like contractors, we had a few pieces of
paper that made us appear to be contractors, and we were able
to get items out of the DRMS location.
Mr. Chase. OK. As a followup to that then could you please
tell us what the end use certificate is?
Mr. Kutz. It is a certificate that is supposed to provide
some legitimacy to who is actually buying items that are trade
security controlled, and so, to the extent that we were able to
get that using a person that doesn't exist--and they did have
red flags. They said you don't exist and, again, I think
someone should have probably asked the next question about we
said it was identity theft, well, why do you still not exist. I
mean, if it is identity theft you would still exist probably.
So I think that is something like what Mr. Ryan said, possibly
a more experienced person asking those questions would be
useful.
Mr. Chase. So then I think the first time you were able to
break the end use certificate was in 2003.
Mr. Kutz. Yes.
Mr. Chase. And you were able to do it again in 2006?
Mr. Kutz. Yes. I think it was harder this time because I
think they actually checked our background. The first time I
don't believe that they checked our background. So they have
enhanced their procedures, and I think that, again, we were
able to beat those procedures with, again, social engineering
this time, so they had the right information in front of them,
they just didn't effectively utilize it.
Mr. Shays. OK. Then to any of our DOD witnesses, what
change have you made any changes to the procedure for
identifying end use certificates between 2003 and 2006, or is
that an ongoing process?
Mr. Peters. Sir, it is an ongoing process; however, we
access additional data bases now than we did in the earlier
years. The trade security control process to verify an end use
certificate is designed to verify the identity and the stated
purpose of the acquisition. It does not eliminate the risk; it
is a risk mitigation procedure.
Mr. Shays. I am just going to interrupt a second to make
sure, while the staff is asking these questions, Mr. Kutz, do
you have your 13 recommendations? Do we need to give them? Do
you have someone here who has the 13 recommendations?
Mr. Kutz. Yes, we have them here.
Mr. Shays. Yes. I want to make sure. What I will be asking
you--I want to give you a little time--give me the ones you
think are the most important, not whether you think they have
done them or not but what you think. Pick out of the 13, I am
going to ask you to pick out half that you think are very
important.
I just want to ask if Mr. Estevez, Mr. Peters, or the
General, you have those recommendations and would be able to
respond to them. Do you have that, Mr. Estevez? Do you have
those 13 recommendations? I have a copy up here if we need one
in writing.
Ms. Fischer, do you have those?
Ms. Fischer. Yes.
Mr. Shays. Do you have an extra copy that we could make
sure--anybody else have them?
Mr. Kutz. We have one.
Mr. Shays. Could I just ask staff to bring those down. I
would mark them, and we will give them to all of you.
The purpose is to just get a sense of where we are from
last time around. I am not going to ask them right now. I am
going to go back and ask professional staff to ask some
questions.
Ms. Fischer, why don't you mark them in case Mr. Kutz is
asked questions. Who do you want to direct your questions to?
General Williams, we are going to be asking you some questions.
Mr. Chase. General, in your written testimony--I may have
missed it if you mentioned it in your oral testimony--you have
the term the DEMIL challenge program.
General Williams. DEMIL what, sir?
Mr. Chase. Challenge program.
General Williams. Roger.
Mr. Chase. OK. Can you tell me, if we have this program,
why is the program failing to catch items that are miscoded?
General Williams. Well, sir, when you view current
processes and procedures there are seams and gaps that have
been clearly identified by GAO, and I agree with GAO findings.
So the next step is to accept accountability, to make sure that
you understand the problem, and then to implement fundamental
changes.
For example, the SAPI plate that I referred to, the SAPI
plate is clearly a demil item, No. 1. We all agree to that. No.
2, the problem was that it was inadvertently, through human
error, or classified as a mistake, placed in a batch lot. We
have gone through that particular process.
That batch lot was eventually transferred over to GAO,
therefore you have a demil item now available for sale to the
general public in a batch lot.
So when we take a holistic view of current processes and
procedures--and I will have to say that there has been
tremendous progress to date but not enough--when you look at
that, the question is how do you prevent that from happening.
First of all, leadership, accountability, then ensuring,
through centralizing this program process at some localized
level, that we take one final look at batch lots before we hand
the particular batch lots over to GL.
So what I am saying is we accept the accountability and the
responsibility; therefore, when GL receives an item, that item
clearly is not a demil item.
By the way, if something changes and all of the sudden it
becomes a demil item, then GL turns the item back. But I will
tell you again another fundamental change are the weekly and
monthly review of everything that GL has in its inventory to
make sure that through some change or some mistake demil items
don't exist.
Mr. Chase. OK. You check it at your end to ensure that
demil items aren't going out. Shouldn't the contractor also be
checking? You indicated the contractor was checking. If you
have two systems checking, why do we still have this problem?
General Williams. Again, sir, if you will, check, check,
check. What we are having here, if I go back to the SAPI plate
again, clearly in a batch lot and it shouldn't have been. At
that particular point in time, when we implement our new system
of centralized control and a final check, we break apart those
batch lots, and then the intent is that we will mitigate the
intent by catching this particular item before we transfer it
over to GL.
Mr. Chase. OK. One last question. Why doesn't DOD set a
minimum price for items that legitimately can go out for sale
to the public? Looking at the Web site, it appears that there
is a minimum constantly set at $35, or have I misinterpreted
the Web site? Why doesn't DOD--as an example, I think someone
mentioned the gasoline engine. Why don't you set a minimum
price of $500? I mean, why is everything set at a minimum price
of $35?
General Williams. Sir, good question, but I will have to
defer that because I am not knowledgeable enough to answer that
particular question.
Mr. Chase. OK. Could you get back to the committee with
that?
General Williams. Yes, sir, I absolutely can.
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Mr. Chase. And, finally, what procedures does DOD have in
place to recover items that have been inadvertently sold to the
general public?
General Williams. Sir, once we find out that items have
been inadvertently sold to the general public, the contractor
agreement is that we will make all efforts to regain those
particular items, going back to the buyer, saying that this is
a demil item that should not be in their control, and we need
to recover that particular item from you.
Mr. Ryan. I would like to add to the General's situation.
In talking to law enforcement, there seems to be some
legislative help that is needed in the law enforcement
community because once the ownership of the property is
transferred on a sale, it is hard for the Government to
actually go back and request that item back. There has been at
least three or four attempts to try to get some legislative
help to change to try to recover those items from a law
enforcement perspective.
Mr. Chase. When was this legislation offered?
Mr. Ryan. I can get the specifics on it, but that was at
the briefing that law enforcement gave us a few weeks back. I
can get you the history on that.
Mr. Chase. OK. Thank you.
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Mr. Shays. I am going to say something I have said before,
but I do want to say it again. I know this problem wasn't
caused by any of you. I know this problem has existed for
decades. But it is still stunning to see what we still fail to
deal with, and, you know, Mr. Kutz kind of took my breath away
when he said the Department of Homeland Security is saying we
are trying to track some of the stuff that DOD has sold.
Could I appreciate, Mr. Kutz, that besides the Department
of Homeland Security that FBI would be involved in this
process? Mr. Ryan.
Mr. Ryan. In the briefing that we had with law enforcement,
law enforcement across the board is looking at this issue.
Mr. Shays. So not just Homeland Security?
Mr. Ryan. Not just Homeland. We know that the jurisdiction
over the exporting and importing of particular items goes to
Homeland Security ICE, so they have been taking the lead with
DOD.
Mr. Shays. OK. Now, have you told the subcommittee this
before or are you sharing this today as you realized it might
be of interest to us?
Mr. Kutz. Well, it was a meeting just several weeks ago, so
it is new. We have coordinated with them before. We actually
coordinated with people after we had the hearing on the
biological equipment. You may recall we did investigations and
saw that was being shipped out of the country, so we had a
number of case studies we followed then, and we did a referral
then to some of the same people for those items.
Mr. Shays. I am going to ask our subcommittee to have the
same kind of dialog that you had, and if you would supply the
folks that were in contact with you, and we will invite you,
Mr. Estevez or Mr. Peters, to participate in that so we kind of
share this information.
Mr. Kutz. And we do a referral, too. With respect to the
cases here, I mentioned the other buyers and the over 2,600
items. We are referring those to the same group, and we have
already sent those letters several days ago.
Mr. Shays. You know, I was thinking that, as you mentioned,
Mr. Estevez, I think you did, you mentioned that auctions give
you a pretty good market price, but auctions do, provided
everyone knows about the auctions, and I am struck with the
fact that if the general public were involved, there may be a
lot more people who would be in the market to buy. I am not
talking about the military sensitive equipment, I am talking in
concept about price.
I guess having it on the Internet, there is logic to that.
More people get involved. The key is on the Internet you want
to make sure there is no military sensitive equipment, and
there was testimony, Mr. Kutz, that you got some of military
sensitive equipment from the internet, but that was batched
items; is that correct?
Mr. Kutz. No, not always. No. There were other items that
went out.
Mr. Shays. So items that were pretty obvious then as
military sensitive were not kind of stuck in between something
that wasn't so obvious?
Mr. Kutz. Correct.
Mr. Shays. OK. So that is pretty disappointing.
Let's take what you think, Mr. Kutz, are your key
recommendations of the 13. I can't emphasize enough this is to
understand where we are at along this process.
Mr. Kutz. I am going to let Ms. Fischer answer that, but
there are two parts. We want to first of all tell you which
ones have been implemented, and then of the ones that remain
there are several----
Mr. Shays. No. Let me just tell you this. No. I want to
know which ones you think are the most important.
Mr. Kutz. OK. The ones that are unimplemented.
Mr. Shays. Not the ones that haven't or the ones that have,
which are the most important. And let's just see, of the ones
that are most important, let's just get a sense of where they
are at. I know you will be very fair as to your assessment of
whether you think they are part of the way there, all of the
way there, or not there at all.
Mr. Kutz. OK.
Mr. Shays. OK, Ms. Fischer, you have the floor.
Ms. Fischer. Recommendation No. 7 was to direct DLA and
DRMS to review daily supply depot and DRMO excess property loss
reports and identify systemic weaknesses and take immediate and
appropriate corrective actions to resolve it.
Mr. Shays. OK. That is the most important. Now, why don't
you--is anyone, Mr. Estevez or Mr. Peters or General--Mr.
Estevez, I understand you have worked for the Department now
for 6 months in this position? Mr. Peters.
Mr. Peters. Yes. I have been in this position since
February.
Mr. Shays. OK. And is this a recommendation that is new to
you or have you seen these recommendations before?
Mr. Peters. I have seen these recommendations before.
Mr. Shays. OK. Which one or who wants to respond to that?
Mr. Peters. Sir, I will respond.
Mr. Shays. OK. Thank you, Mr. Peters.
Mr. Peters. OK. For recommendation seven, since I have
arrived I can tell you that we have initiated an internal
review to identify the vulnerabilities and gaps in the DRMS
processes. Prior to my arrival, over the last couple of
responses to the hearings, DRMS and DLA were engaged with
looking at weaknesses in the controls associated with
biological and chemical items and laboratory equipment.
Even though those were responses to specific findings, if
you will, it provided an important foundation for us to be able
to look at the entire process from the moment that the DRMS
receives an item to the disposition of that item, to really
understand what are the vulnerabilities of gaps and receiving
and issuance and processing through the sales process.
We have begun that review and we are assessing corrective
actions to those vulnerabilities and gaps, and over the future
months we will begin to implement those.
Mr. Shays. How far along do you think you are in that
process? Are you at the point of identifying them, not
necessarily stopping them?
Mr. Peters. That is correct, sir.
Mr. Shays. OK. So that would explain what we are seeing
here, in part.
Mr. Peters. The vulnerabilities, the gaps that have been
identified are certainly contributors to a breakdown in the
procedures and the inherent risks in that process.
Mr. Shays. General, would you want to speak to that, or Mr.
Estevez?
General Williams. Sir, again, I emphasize a holistic view
of the current processes and procedures----
Mr. Shays. We are talking about recommendation No. 7.
General Williams. Yes, sir. And the seams and gaps where
the vulnerabilities lie, which create the problem that is in
front of us right now.
Mr. Shays. Mr. Estevez.
Mr. Estevez. Congressman, the other thing we have done to
address that is we have significantly changed the structure of
the reutilization and marketing process. We replaced a military
officer, a colonel, with a career Senior Executive at the
leadership level of that in order to drive this change, and we
have significantly changed the structure of the organization,
so we have moved down from 68 sites to 18 sites, where we are
better able to implement internal controls and to monitor
those.
Mr. Shays. So we have gone from 68 to 18 during a period of
what time? I mean, are we at 18 now?
Mr. Peters. Yes, sir, we are at 18 now. We just finished
that.
Mr. Shays. Six months ago how many did we have?
Mr. Peters. Six months ago there were 68 operating
warehousing sites around the country.
Mr. Shays. OK.
Mr. Peters. During the course of March through July, we
began the transition to the 18 fully operational warehouses.
Mr. Shays. Is this that aspect where the claim is that $34
million has been saved, or is that another issue?
Mr. Peters. I can't address that, sir.
Mr. Shays. OK. Mr. Kutz or any of your staff, what is your
response to what you are hearing about this?
Mr. Kutz. I think fewer locations will be conducive to
stronger internal controls, and sustained leadership has been
an issue here before, and I think that the sustained career
leadership of a Senior Executive is important.
Mr. Shays. With no disrespect to our uniformed military, is
the concept that someone who is in the private sector might
have been involved in this type of work for 10 or 20 years,
whereas a career military--I mean, General, you have had lots
of different responsibilities, so you have to have lots of
skills. Is the concept that you are looking for someone who may
have dedicated their lives, someone from Wal-Mart, someone from
K-Mart or somewhere else who has inventory experience? Is that
the logic of saying non-military?
General Williams. No, sir.
Mr. Shays. OK.
General Williams. If we had the GO billets available easily
we could have placed a GO in that particular billet because of
the leadership that individual brings to that particular job.
Mr. Shays. Right.
General Williams. Mr. Peters, by trade, is not a DRMS
trained individual.
Mr. Shays. Right.
General Williams. What he brings, though, is the savvy, the
leadership skills, the ability to identify, to do the analysis,
and then quickly come to a conclusion and execute the standard.
So it is the leadership that we want, and what we have done in
DLA----
Mr. Shays. But don't you want experience, as well?
General Williams. Yes, sir.
Mr. Shays. OK.
General Williams. But, sir, you know, leaders have that
experience once you identify the problem. And so we made the
choice to reengineer within the Agency, to place an SES
position there because of what that position brings to bear. So
we have the leadership in place now that we want, and I
consider this a significant move.
Mr. Shays. I am just going to react. It seems to me if
someone is trained in artillery and that is their basic,
training, where if someone has gone to business school to learn
how to control inventory, I will take the inventory over
someone who has necessarily been trained on artillery when we
are taking about inventory control. I mean, intuitively it
strikes me that there is logic to that.
I am not saying that you don't want a command officer
heading the Department, but it seems to me you need those
skills in the unit.
General Williams. Yes, sir, I concur, but I will tell you--
and I will have Mr. Peters speak for himself--we looked at his
skill sets prior to hiring him to elevating him to the position
of SES. He is a trained auditor. In terms of business acumen,
he is right where he need to be. Already, sir, his leadership
there has been a definite impact to that particular mission.
Mr. Shays. Thank you.
Mr. Estevez, any comment about recommendation seven? If you
don't have a comment, that is all right.
Mr. Estevez. Again, I raise the issue that we significantly
changed the organization in terms of leadership.
Mr. Shays. I am sorry, you did. I apologize, Mr. Estevez.
Ms. Fischer, what would be another item?
Ms. Fischer. Recommendation No. 8: direct DRMS to take
immediate appropriate action to resolve identified, uncorrected
DRMO security weaknesses. DRMO security weaknesses are what
allowed us to do the penetration at the two east coast DRMOs.
Mr. Shays. So we have really spoken to this, correct, or
not, Mr. Peters?
Mr. Peters. We have spoken the it from a process view, and
there were also physical security recommendations made in prior
hearings, and we have allocated moneys to address those
physical weaknesses.
Mr. Shays. Your comment, Mr. Kutz? Do you think there is
progress? Are you hopeful? Or is the jury still out?
Mr. Kutz. Well, I think, again, there has been some
progress. We haven't tested the entire area in that.
Mr. Shays. OK.
Mr. Kutz. I mean, this was more of a limited investigation.
The only real physical penetration test we did, that was what
we got.
Ms. Fischer. They focused on the structural weaknesses and
some of the capacity weaknesses last year, stuff being stored
outside that got weather damaged. I believe they corrected that
problem. The leaky roof at one of the DRMOs that let items
inside become wet and unusable, that has been addressed. But
the things we are talking about that allowed us to do the DRMO
penetration are new and those have not been addressed.
Mr. Shays. OK. Fair enough.
I make an assumption, as you reduce the number of
facilities you have improved the facilities that exist, the
ones that remain?
Mr. Peters. Yes, sir, and we have also identified site
improvements that need to be made at those facilities. We have
prioritized them in accordance with our fiscal year 2006 and
through the out-year POM dollars.
Mr. Shays. Let me do this. Let me just go through one more
recommendation, then let me go to Mr. Platts, who on the full
committee specializes on the whole issue of management controls
and so on.
So what would be the third item that you would raise as an
important item, not one that they have missed or failed to deal
with, but that you just think it is important.
Ms. Fischer. Yes. It would be the waste and inefficiency.
Mr. Shays. Which one?
Ms. Fischer. Primarily recommendation 13, and it deals with
the system changes implemented in January 2006. The
recommendation says: require that DLA's BSM system design
include adequate controls that would reject the purchase
transaction or generate an exception report when A-condition
excess items are available but are not selected for
reutilization at the time purchases are made.
They have implemented a change in the system that lets them
pull in A-condition items from the excess inventory if somebody
is placing an order with DLA at the time or they need to
replenish inventory levels, but they are still working against
that 2-week or 1-month period in the excess inventory pipeline
before they move it to sale. That is why, with the gasoline
engines, we paid $355 in March and the Marine Corps came along
in June and paid more than $3,000 for those same gas engines.
They are not holding the A-condition items for a longer period
than they are the items needing repair or the items that are
essentially junk.
Mr. Shays. I would like the professional staff to just
followup with that.
Mr. Chase. Would you have a recommendation on a longer wait
time?
Ms. Fischer. We have suggested that to them once we saw
what the January system fix encompassed and that the dollar
savings weren't what we expected to see. We went back and
looked and we said, well, maybe you need to hold these A-
condition items a little longer to assure that they are
reutilized.
Mr. Shays. Just then, to have you respond to that item, I
was trying to filibuster to give you guys time to think about
it.
Mr. Peters. Congressman, when BSM release 2.2 was
implemented in January. The period between January and May, the
amount of reutilized material was low. What we have done in the
month of June was DLA increased the scan, if you will, of the
BSM system of the disposal inventory, and the results during
the month of June exceeded what we incurred in the legacy
system prior to the release of BSM 2.2. In the last 5 months
since that release, there have been about approximately $1.2
million of acquisition cost of reutilization through the BSM,
and the bulk of that has come during the month of June when we
changed the cycle.
Mr. Shays. OK.
Mr. Peters. Now, that doesn't address the issue of
extending the holding period for A-conditioned assets, but it
was a good step forward to maximize reuse of the property
within that time constraint.
Mr. Shays. Thank you.
I am going to go to Mr. Platts, but I just want to tell
you, Ms. Fischer, I would like to know three other items, so we
can tell DOD so they can look at them. Have you got those three
items? Just give me the numbers. Did you only pick out three?
Ms. Fischer. Well, I picked out three because those were of
most concern to us.
Mr. Shays. Fair enough. OK. I am going to ask you three
more. You can look at them, so you have time to look at them.
If you want to pass them a note during Mr. Platts' conversation
so they know, that is helpful.
I am going to ask you, Mr. Kutz, what were items that you
weren't able to buy that other people bought, because you just
got outbid, that you think would have been kind of surprising,
as well, if you know what those items were. That will be my
questions. I will try to wrap up after that.
Mr. Platts, you have the floor as long as you want it.
Thank you for being here.
Mr. Platts. Thank you, Mr. Chairman. I apologize for the
late arrival and being with you just for a few minutes. I am
sure I will be a little repetitive, and I will try not to be,
in my questions.
Mr. Shays. Let me just say, Mr. Platts, you ask whatever
you want. If it is a little redundant, it will reinforce what I
need to know. I need to hear it three times before it sinks in.
Mr. Platts. Sounds good, Mr. Chairman.
Mr. Shays. OK.
Mr. Platts. First, our subcommittee, Government Management
Finance Accountability, a big focus--and, Mr. Kutz, you have
been with us a good number of times--is in the area of internal
controls. And what, to me, we are really talking about here is
a breakdown in internal controls in some fashion, whether it be
technological, personnel, the review process, but somehow we
are letting items go, either at amazingly low prices that are
appropriately being sold but not at a fair price, or they
shouldn't be sold, or they are being given away. But somewhere
there is a breakdown.
I guess I want to start with a broad question really to our
officials both in uniform and civilian from the Departments.
The OMB had issued internal control regulations this past year
requiring every department and agency to do an internal control
review of their processes and kind of, if necessary, it would
lead eventually to perhaps an audit of internal controls. Where
in that process does DLA stand in regards to this OMB
regulation?
Mr. Peters. Congressman, if I may respond, we are actually
in the process right now of finalizing that internal control
review report for this year, and the internal operational
review that I had talked about earlier during the hearing, we
have reflected that in our written response this year to lay
the foundation that there are internal control weaknesses and
to lay the foundation that, as we move forward, that we can
identify the corrective actions and then test the outcomes of
those corrective actions to ensure that they are effective in
closing those internal control weaknesses.
Mr. Platts. In where you are in that review that has gone
on thus far, I am assuming that some of those breakdowns relate
directly to what has happened here with GAO?
Mr. Peters. Yes, sir, they do.
Mr. Platts. And, while that process--I guess the deadline I
think is November 15th as part of the other reports coming
forward. In the meantime, you have taken action based on what
you have identified, even while you are not at that deadline
for the reporting; is that correct?
Mr. Peters. That is correct. We began the review process of
those vulnerabilities and gaps before this period, and the
documentation that is due this summer is reflecting that
action. Specifically as it relates to these items in front of
us, many of those items came from batch lots, which is a real
risk, an inherently risked process that exists.
Mr. Platts. They came from--say that again?
Mr. Peters. From batch lotting of items.
Mr. Platts. OK. Great.
Mr. Peters. And it also came from a breakdown in procedures
where items that the GAO found were not in batch lots but had
line item visibility throughout the process, and so those are
the weaknesses that we are attempting to address.
Mr. Platts. I am not sure if it is a weakness or just a
lack of occurring as far as from a training standpoint, both
with civilian officials or on the military side. With the
antenna and Chairman Shays' reference in his opening statement,
the antenna as a kind of a classic example of the problem here,
is there training to all individuals, whatever the level in the
personnel ranking, that if you see that item that is about to
go out the gate, whether you are the one that signed off for it
and said yeah, it is to be given away or sold, is there any
training of all personnel that if you see something that seems
like it is too good of a deal, too good to be true, or it is
too sensitive to be thought of just driving out the gate, that
there is a reporting system in place like an 800 number? If you
believe there is something askew here, here's where you should
go, is that in place today?
Mr. Peters. It is not in place today. What I have directed
since my arrival is that we look at what I would call a job
proficiency training curriculum for each employee within the
DRMS disposal system. Historically, your specific job would
identify the types of training classes that you would obtain.
Based on our internal review, one of the weaknesses I believe
that we need to shore up is that, even if you have been with
DRMS for a long period of time, refresher training is
important, just as it would be for new training for a new
employee, and that is what we are in the process now of
developing is that curriculum.
Mr. Platts. I think it seems--and, again, not hearing all
the testimony--it has to be part of the breakdown, that there
is not a buy-in by every person on the staff at all levels that
in any way is involved with this reutilization program and the
distribution or selling of it, that isn't kind of on guard to
look for these breakdowns.
Mr. Peters. Congressman, I concur completely, and when I
directed the internal review of the vulnerabilities and gaps
from the moment that DRMS would receive an item through the
disposition of that item, I brought in the senior disposal
experts from the field to ensure that we began the process of
having them to help identify those weaknesses--they are the
closest to the ground--and to ensure that they help identify
the corrective actions.
Mr. Estevez. Congressman, if I could add a point.
Mr. Platts. Yes.
Mr. Estevez. Because the disposal process starts out at the
unit that has excess material and codes it and turns it in. We
issue Department-issued guidance to the military services to
reemphasize the training requirements of disposal personnel.
Those tend to be military people that rotate at a junior grade,
so it has to be a continual process on this.
This may be one of the items that Ms. Fischer is going to
raise in a moment. Those services have come back and committed
what they are doing to reemphasize that training, and this
whole process--I chair a group of the service logistics chiefs.
This is a continual discussion topic within that group, so we
are trying to emphasize do the right thing.
Mr. Platts. That focus on the internal control process and
then the training to me are hand in hand. I know in our other
efforts we found, not just in this case with property
reallocation or distribution, that it is key to getting to that
bedrock foundation of good management.
The chairman kind of touched on this a little bit. I don't
know if it has been addressed earlier. But we certainly, in not
having to reinvent the wheel any time is good, especially when
we are talking about taxpayer funds being spent, and then also
the sensitivity of the products here.
Is there any kind of ongoing dialog between the procurement
and logistic officials at Wal-Mart or Home Depot or Lowe's? You
go into one of these national chains today, and if there is a
shelf with an empty spot somebody comes over with the computer,
they scan the bar code, and they say, yes, we have one that is
coming in in 3 days. It has been shipped, is being restocked.
They are amazing in their logistical handling of goods, both in
and out of their stores.
Is there any interaction that happens between the public,
your agencies, and the private sector? And I don't mean in the
sense of hiring a consultant, but just reaching out to these
American corporations to say hey, we would like to pick your
brains and maybe get your insights?
Mr. Estevez. Congressman, absolutely. I am fortunate to
have a lot of interaction with the folks from Wal-Mart and
Proctor and Gamble, Toyota, a number of other leading companies
that do supply chain management very well to see how they do
it.
Our business is different. War fighting is a different
model, different operation. We are going to have more inventory
than they have because it is more important to have a weapon
system operating and to have a little bit of excess because we
don't know when, where, how much they tend to. But we do take
their best ideas and see how best we can implement them within
the Department of Defense.
Let me point out from the disposal standpoint almost every
one of those companies completely outsources their returns
process. So an item gets returned to a store, they give it to a
third party to assess what to do with that item, and that item
is likely to end up in an outlet mall, not back on the shelf at
a Wal-Mart or a Target.
Mr. Platts. Right. I am glad to hear that interaction is
going on where it applies. And I readily acknowledge there is a
similarity in the time sensitive nature because they want their
product on the shelf when I am there to buy it. They want to
have it ready. And your military personnel, when they need that
weapon, they need whatever that supply is, it is there so that
they are in the best position in their war fighting efforts.
On the reutilization program, is there an annual budgetary
goal that is set at the beginning of the year that is expected
to be met or hoped to be met?
Mr. Shays. If the gentleman would just suspend for a
second, have we passed on those three recommendations to DOD so
they know what the other three recommendations are that we are
going to be asking them about?
Ms. Fischer. Not yet.
Mr. Shays. Do you have them?
Ms. Fischer. Yes.
Mr. Shays. Why don't you share that with them. What are
those numbers?
Ms. Fischer. Recommendation----
Mr. Shays. Just tell me the numbers.
Ms. Fischer. No. 4 and No. 5 and No. 6.
Mr. Shays. Four, five, and six. OK. You can just take a
look at that, whoever is not answering the question. I am sorry
to interrupt.
Mr. Platts. Thank you, Mr. Chairman.
Mr. Peters. Congressman, the DRMS goal for reutilization of
condition code A property is 30 percent of our dispositions. If
you look at the last 12 months, that goal has not been reached
each month, but it is a stretch goal, but there have been
several months where that goal has been reached and that is the
baseline goal that we strive for as we currently know the
process.
If you look at overall reutilization, more than just
condition code A, we have increased that to 14 percent of our
dispositions, and that in original acquisition cost represents
over $1.5 billion of acquisition cost that was not new
acquisition.
Mr. Platts. The reason I am asking is just that I want to
make sure that we are not having goals set that are encouraging
the sale of equipment to meet an arbitrarily set goal, and that
sounds like there are some numbers, expectations, but it is not
in the sense of--I will use the example where you will hear
citizens talk about the police officer needs to meet his quota
for tickets this month, so there is an incentive to go out.
Here there is no quota that is expected, but just what we
anticipate?
Mr. Peters. Yes, sir. We do have the goal. If you were to
annualize our fiscal year 2006 year to date it is running at a
21 percent. If you look at it each month, as we do, several
months we have hit 30 and several months we have been lower
than that. So 30 is a good stretch goal, and we monitor and
measure it each month.
Mr. Platts. Thank you, Mr. Chairman, for your oversight,
and I want to thank all of our witnesses for your service to
our Nation and your respective roles. I think our common goal
in this hearing--and Chairman Shays has been outstanding in the
oversight efforts on this issue--is the bottom line is, one,
especially in the area of war fighting and the military, that
we are getting whatever our men and women out there who are
courageous in their service need. We get it to them when they
need it and they have it and we don't repeat the example of
what some of chem-bio suits where there was a shortage that we
are selling, that we never repeat those errors, and, two, that
we are doing right by the American taxpayers.
So I appreciate your efforts and your service, and for all
of you, and, General Williams, especially, your service in
uniform, believing that, while we all are public servants,
those who wear the uniform are the cream of the crop, and your
dedication.
The fact that I am a Baltimore Orioles fan, I saw you are
from Baltimore, you have to be an Orioles fan if you grew up in
Baltimore, right?
General Williams. That is affirmative, sir.
Mr. Shays. That is a very important question. What was the
answer to that question?
Mr. Platts. It is a little harder to be an Orioles fan
nowadays than when I was growing up. Brooks Robinson and those
great players of the past are gone. But I do sincerely thank
all of you, because we are all after the same goal, and that is
good Government and support for our men and women in uniform.
Chairman Shays, thanks again for your efforts on the
oversight.
Mr. Shays. I thank the gentleman. Just remember the promise
of America is the best generations are yet to come, so there is
hope.
Four, five, and six. I would like you to read four, and I
would like DOD to respond to four. Would you read it nice and
loud, please?
Ms. Fischer. OK. Direct DRMS to develop written guidance
and formal training to assist DRMO personnel and military
service turn-in generators in the proper assignment of
condition codes to excess property turn-ins.
Mr. Peters. Congressman, if I may respond?
Mr. Shays. Sure.
Mr. Peters. In the past year DRMS has met with each of the
four military services, including 30 major commands within
those four services, to not only review the outcomes of the GAO
reports in prior years, but also to discuss with them the
importance of accurate condition coding. As the generator, they
own the asset, they turn it in because they have declared it
excess. The more they understand and appreciate the value of
the reutilization program and the more accurate that supply
condition code is, the greater confidence they will have to
rely upon an item out of the disposition or out of the disposal
inventory.
We have an ongoing dialog with them. We have now gone to
the second round of meetings with the services where we are now
looking at their data with them to identify if there are
actions that either we can take or some facilitation that we
can help them as they continue their effort to improve the
accuracy of their condition code.
In addition to that, we are developing a training
curriculum that they can insert into their military schools, so
as their military members come into the logistics arena,
disposal will not be an afterthought. It will be a pre-
conscious event.
Mr. Shays. Is there one place where you train all the
different personnel of the different branches on logistics and
inventory chain?
Mr. Peters. No, sir. At this point in time the actions that
have been completed to date have been the discussions with the
military services and those major commands and the development
of the training curriculum. There is a 2-year cycle for us to
work with the military services to insert that curriculum into
their military schools.
We do provide, on a demand basis, disposal experts to come
in at the appropriate windows in certain military school
instructions to provide instruction on the disposal process.
Mr. Shays. But we are not training all military personnel,
just the ones that need to know, correct?
Mr. Peters. Just the ones that need to know, sir.
Mr. Shays. We sometimes obviously send folks to graduate
school and so on. Do we send them to graduate schools where
they can take specific courses in this inventory control type
concern?
Mr. Peters. For the DRMS personnel, yes. We participate in
the training curriculum that DLA has. We put in nominees for
those types of schools.
When I mentioned earlier to Congressman Platts the
development of a job proficiency training curriculum is what we
are in the process of establishing now, and those types of
opportunities to use commercial schools will be part of the
development of that curriculum.
Mr. Shays. Recommendation five? In each case it says the
GAO recommended the Secretary of Defense, and then you read----
Ms. Fischer. Direct the military services to provide
accurate excess property turn-in documentation----
Mr. Shays. This is No. 5, correct?
Ms. Fischer. That is No. 5.
Mr. Shays. OK. Direct the Secretary of the Army, Navy, and
Air Force----
Ms. Fischer. I am sorry. You wanted me to back up in the
lead-in? We recommend that the Secretary of Defense direct the
Director of DLA, the Commander of DRMS, and the Secretaries of
the Army, Navy, and Air Force, as appropriate, to take the
following 13 actions, and recommendation No. 5 was with respect
to directing the military services to provide accurate excess
property turn-in documentation to DRMS, including proper
assignment of condition codes and national stock numbers, based
on available guidance. National stock numbers are key to
identifying the demilitarization code.
Mr. Shays. What I am reading, though, it says the Secretary
of Defense direct the Secretaries of the Army, Navy, and Air
Force to direct the military services to provide accurate
excess property turn-in documentations, and so on. What is the
answer to this one?
Mr. Estevez. We issued guidance to the military staffs that
operate their supply systems, their supply processes, my
counterparts, essentially, to issue that kind of guidance and
to come back to us for what they were doing for training to
ensure that proper documentation and proper coding was issued,
and also, frankly, for No. 6, which deals with the
accountability of material.
Mr. Shays. Let me read No. 6. The GAO recommended the
Secretary of Defense direct the Secretaries of the Army, Navy,
and Air Force to require the military services to establish
appropriate accountability mechanisms, including supervision
and monitoring for ensuring reliability of turn-in documents.
Mr. Estevez. That is correct, sir. Each of the services, to
your earlier question, does have training courses for the
enlisted and noncommissioned officer personnel that actually
would do the turn-in. This is part of the curriculum in those
courses. They also emphasize this at the officer level that are
operating their supply agencies. Each service does it slightly
differently, so each service, based on their business operation
process. An Army unit is going to be different from a Navy
ship, for example. Each of the services at the two-start level
came back explaining where that is in their curriculum, how
that is covered in their curriculum, and what they are doing to
ensure that this documentation is proper.
Mr. Shays. Thank you. I am going to ask GAO one last
question as it regards to recommendation. I would like to know
where you think, of the 13 recommendations, which one they have
had the greatest success and which one, to date, they have had
the biggest failure.
Mr. Kutz. I think with respect to the people and process
related ones, which are the front ones, that is where the most
progress has been made, so that has been numbers one through--
--
Ms. Fischer. One through six.
Mr. Kutz [continuing]. One through six, and seven through
ten. I think that the BSM, which is the new system that they
are developing, and some of those are more long term. There has
been some progress in those areas, but I think that the system,
the integration type of fixes are ones, as you know from your
prior hearings, are ones that aren't necessarily short-term and
those aren't problems that these folks caused in the first
place, I know.
Mr. Shays. Before I have the professional staff just ask
the last question, before I ask you a very general question
afterwards, Mr. Kucinich and I were talking about it. We are
both hoping to come back. One of us may, one of us may not,
maybe both of us don't come back, but likely one of us comes
back. I don't know if it is a Republican Congress next year or
a Democratic Congress next year, but Mr. Kucinich and I both
agree there will be another hearing a year from now.
To me, the best report and the thing that would make me the
happiest is, when we task GAO to break through the system to
find weaknesses, they are going to try to do it and we are
happy to tell you what my hope is they come back and say we
tried this, we failed, we tried this, we failed, we tried this,
we failed, we tried this, we failed. We will have a hearing
with nothing on these tables. We will put all the tables up
there.
You know what? That will be a good day for you in the
Defense Department, it will be a good day for GAO, and we will
say at the fifth hearing, congratulations. That would be, to
me, what will happen. But whether it is me or Mr. Kucinich,
that hearing will happen. I think it is important to think
about it right now, and I think you have enough time to deal
with it, frankly. I think you have started that process and
that would be good for you to be able to come back, to be able
to get applause rather than criticisms.
You have one last question?
First, we want to put on the record your report of July
2006, and we want to put on the record all 13 recommendations
of your May 2005, report.
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Mr. Chase. Either to Mr. Estevez or to the General, General
Williams, GAO reported in the report that they released today
that in a 3-month period the Department, DLA, saved $34.8
million in new marketing techniques. Could you tell us a little
bit about that? What were these new marketing techniques? And
have you projected out what the future savings might be for the
next fiscal year?
Mr. Peters. Congressman, if I may respond?
Mr. Shays. Mr. Peters.
Mr. Peters. I believe that, unless I have misunderstood the
question, I believe that the new marketing techniques, as it
pertains to the enhancement of reutilization material, we have
implemented the ability for item managers in the services to
identify up to 10,000 line items of items that they would have
an interest in acquiring. When that item shows up in the
disposal inventory, that alone has generated over 5,600
requisitions, and actually $54 million up to this point.
We have also implemented the ability to notify a prior
buyer, not a public buyer but a military service member, of
items that they have previously reutilized out of the inventory
system. We send an e-mail notification to them to say hey, that
item is now in the inventory again. Since we have done that, we
have had 600 requisitions with approximately $3.8 million of
acquisition value.
And the last item is we have just recently added rotating
photos to improve the visibility of an item. This helps to
reinforce the accurate condition coding of that item. A picture
is worth more than just trust the system. And in the course of
that, we have had 140 requisitions since we have implemented
those rotating photos. That has yielded approximately $32
million as a result of that.
Those are three enhancements to strengthen the
reutilization program. They have been very successful. I
believe that they are directly attributable to the improvement
that has been made, particularly in fiscal year 2006, toward
that $224 million of original acquisition cost through the
reutilization of condition code property.
Mr. Shays. Mr. Kutz, I did forget that I was going to make
sure you put on the record what you couldn't buy because you
were outbid that needs to be on the record.
Mr. Kutz. OK. Let me go through a couple of them. There
were several of them that were more of the military technology
items. One was a----
Mr. Shays. And military sensitive?
Mr. Kutz. Yes. One was a universal frequency counter
similar to the one on my left that we also later purchased, but
some of the early purchases we were outbid. The other military
sensitive one was an optical instrument lens for an M-901A
anti-tank vehicle, and this is one that is, again, national
security item. We bid $550 and it sold for $909, and so that is
one we lost out on.
Mr. Shays. Could you have bid $900 if you wanted to?
Mr. Kutz. Sure. Yes. We just didn't. It is kind of like
eBay. You put an automatic bid in and if someone overbids you,
you lose out.
Mr. Shays. So you are not able the know their bid and then
bid a higher?
Mr. Kutz. We could have. If we were there at the time we
could have outbid, but we put an automatic bid in.
Mr. Shays. Gotcha.
Mr. Kutz. But we didn't want to bid more than that on this
one anyway.
Mr. Shays. I understand.
Mr. Kutz. The other items related to cold weather parkas,
and then there were some stainless steel pans that are similar
to what you see at, like, a hotel that are used to serve food.
We were outbid on a number of those that were new and unused.
Mr. Shays. OK. So you all have been very cooperative. Mr.
Peters, I appreciate you being cooperative, as well. Thank you
very much. We had a little more difficult exchange, but I
appreciate you not wanting to be the first, but I appreciate
you joining in afterwards.
Let me just ask you anything we should put on the record
that we didn't put on the record, that we need to put on the
record, anything that you had maybe stayed up last night
thinking well, gosh, this should be something I should respond
to? Is there any tough question that we didn't ask that we
should have asked you? So whatever you want to say. We will
start with you, Mr. Ryan.
Mr. Ryan. Mr. Congressman, I think I would ask DLA and the
General--and I appreciate what the general is trying to do to
make sure the items don't get out the door, but I think I would
suspend all sales except for A demil items until they have gone
through this process. The general talks about oversight and
searching these batch lots and making sure that the proper
demil codes are identified. I guess in order for this to take
place I think I would suggest suspending all sales except for
demil A.
Mr. Shays. OK.
Ms. Fischer.
Ms. Fischer. Yes. I would agree with that, and I would add
that the Federal logistics information system, which is the
system that contains the master information on demilitarization
codes, be used to always check the demil codes. There is a
problem within the excess inventory system on the demil codes
in that, and when they challenge a demil code that system
sometimes is giving them the wrong answer. So I would say that
they need to go use the DOD standard.
Mr. Shays. OK.
Mr. Kutz.
Mr. Kutz. I would just say we all want to see the same
thing here. We are all looking for progress and solution. I
just want to commend you for the consistent oversight you have
had on this, because you could have walked away after one or
two hearings but you have stuck at it and I think it was
worthwhile.
Mr. Shays. Thanks.
Mr. Estevez.
Mr. Estevez. Mr. Shays, thank you for the opportunity to
testify. I believe we are making progress. I think we have a
long way to go, and we are committed to making that progress. I
also look forward to the day where we have this hearing with
nothing in front of us. Hopefully that will be soon.
Mr. Shays. Let me just tell you we will have that hearing,
because we want it to be clear that we have made that progress
and we would be proud to see that progress.
Major General.
General Williams. Sir, my goal is to provide an aggressive
oversight against a timeline that will get at fixing this
particular problem. So we understand the problem, let's fix it.
I, as you, don't want to see anything here. Now, if there are a
couple of items I should be able to clearly defend that we did
to the best of our ability to mitigate the risk but a couple
items due to human error happened to get through the process.
But the goal is 100 percent no demil item getting into the
wrong hands, sir.
Mr. Shays. Thank you, sir.
Mr. Peters.
Mr. Peters. Congressman, since I have taken over the DRMS
director position in February it has been an exciting period of
time.
Mr. Shays. Are you happy you did it?
Mr. Peters. Yes, sir, I am.
Mr. Shays. OK.
Mr. Peters. I think it is exciting to be part of fixing
something, and these problems have existed for a long time. I
think we are taking the right steps. We are taking this
seriously. It is going to require a true re-engineering of that
disposal system, not just point to point fixes, and that is
going to take time.
So at the hearing next year I, too, would like to see no
items, but I also, because I know that the amount of work that
remains to be done and the time and effort that it is going to
take to cause that to happen, I hope that my expectation next
year is that the GAO will be able to report to this
subcommittee that we have made significant progress and that we
did what we said we would do here this day.
Mr. Shays. Thank you, sir.
With that, we will adjourn the hearing. We thank you all
and appreciate your patience. It has been a long afternoon, but
thank you very much. With that, this hearing is adjourned.
[Whereupon, at 5:02 p.m., the subcommittee was adjourned.]
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