[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

                              ----------                              
                                                                   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

                              ----------                              


                         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:]


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    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:]


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    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.
    [The information referred to follows:]


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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.]
    [Additional information submitted for the hearing record 
follows:]


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