In a new report, London-based watchdog Global Witness sheds light on the dangers of anonymously-owned companies in government contracting. The recent Panama Papers scandal has raised concerns of how money stashed in anonymous shell companies is used to evade taxes and fund international crime. In a similar vein, a Global Witness report titled Hidden Menace: How secret company owners are putting troops at risk and harming American taxpayers is a fascinating and startling look at how money lost to anonymously-owned contractors engenders waste, defrauds taxpayers, and threatens national security.
As POGO and more than 100 other civil society groups wrote in a 2015 letter to the World Bank, “Done properly, procurement allows governments to provide high quality goods, works, and services that better people’s lives by improving health, education, and economic outcomes…Done wrong, procurement can result in substandard goods, works, and services being purchased at inflated prices...” The letter goes on to say that transparency benefits the global economy by stimulating healthy competition.
Anonymously-owned companies may be used by corrupt government officials to hide the identities of contract bidders, allowing them to steer contracts to family members or associates, threatening the efficacy and integrity of the system. They are also facilitators of waste, fraud, and abuse that can pose serious national security risks. Research by the United Nations has shown that at least 25 percent of government money spent in fragile states ends up in the hands of criminals. Hidden Menace demonstrates that the diversion of these funds is made possible in part by the anonymity of shell companies.
By highlighting several instances of fraudulent contracts that have endangered U.S. troops and been used to fund our enemies in Afghanistan, the report strongly underscores the gravity of the situation. Task Force 10, a military-led group of contract investigators, discovered that U.S. spending flowed from prime contractors to subcontractors on to criminal and terrorist networks, including the Taliban. In one instance, a money exchange broker in Afghanistan who received $1.14 million from a U.S. subcontractor was strongly suspected of passing some of these funds to insurgent groups in the area.
Also included in the report are troubling discoveries of contract waste and abuse by shell companies within the United States. The briefing explains, “When fraudsters are able to cheat legitimate contractors by hiding behind anonymous companies, responsible businesses are economically disadvantaged, excluded from the market or have to race to the bottom when forced to compete with such nefarious business actors.”
For example, according to the report, the largest Medicare fraud ever perpetrated was executed by criminals hiding behind anonymous companies. They were able to steal $35 million by setting up at least 118 fake health clinics in 25 states. The clinics were “in the names of anonymous companies incorporated in eight different states,” according to Global Witness.
To combat the fraud perpetuated by the existence of anonymous shell companies, Global Witness offers three clear-cut solutions: (1) the Administration should collect, verify, and publish information on who owns and controls all bidders for federal funds, (2) Congress should work with the Administration to put this information into the public domain, and (3) all companies should be required to publicly disclose who ultimately owns and controls them. Global Witness has been calling for similar measures since 2012, and hopes that the newly-provided and compelling examples of malfeasance featured in the Hidden Menace report draw supporters to the cause.
The Federal Acquisition Regulation already includes requirements for obtaining federal contracts and listing certain ownership information. It makes little sense that we cannot identify the actual owners to ensure the government and taxpayers are not rewarding bad actors.
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