[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
  H.R. 5712, CLOSE THE CONTRACTOR FRAUD LOOPHOLE ACT, AND H.R. 5787, 
             FEDERAL REAL PROPERTY DISPOSAL ENHANCEMENT ACT 

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                     ORGANIZATION, AND PROCUREMENT

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

                               H.R. 5712

  TO REQUIRE DISCLOSURE BY FEDERAL CONTRACTORS OF CERTAIN VIOLATIONS 
       RELATING TO THE AWARD OR PERFORMANCE OF FEDERAL CONTRACTS
                                 AND ON

                               H.R. 5787

  TO AMEND TITLE 40, UNITED STATES CODE, TO ENHANCE AUTHORITIES WITH 
  REGARD TO REAL PROPERTY THAT HAS YET TO BE REPORTED EXCESS, AND FOR 
                             OTHER PURPOSES

                               __________

                             APRIL 15, 2008

                               __________

                           Serial No. 110-103

                               __________

Printed for the use of the Committee on Oversight and Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                     http://www.oversight.house.gov

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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
------ ------

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director

  Subcommittee on Government Management, Organization, and Procurement

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      BRIAN P. BILBRAY, California
CHRISTOPHER S. MURPHY, Connecticut   TODD RUSSELL PLATTS, Pennsylvania,
PETER WELCH, Vermont                 JOHN J. DUNCAN, Jr., Tennessee
CAROLYN B. MALONEY, New York
                    Michael McCarthy, Staff Director




















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 15, 2008...................................     1
Text of H.R. 5712................................................     6
Text of H.R. 5787................................................     9
Statement of:
    Denett, Paul, Administrator for Federal Procurement Policy, 
      Office of Management and Budget; Barry Sabin, Deputy 
      Assistant Attorney General, Criminal Division, U.S. 
      Department of Justice; David Drabkin, Acting Chief 
      Acquisition Officer and Senior Procurement Executive, 
      General Services Administration; and Colleen Preston, 
      executive vice president, Professional Services Council....    16
        Denett, Paul.............................................    16
        Drabkin, David...........................................    34
        Preston, Colleen.........................................    43
        Sabin, Barry.............................................    22
    Werfel, Danny, Acting Comptroller, Federal Financial 
      Management, Office of Management and Budget; and Stan 
      Kaczmarczyk, Acting Deputy Associate Administrator, Office 
      of Government-wide Policy, General Services Administration.    77
        Kaczmarczyk, Stan........................................    83
        Werfel, Danny............................................    77
Letters, statements, etc., submitted for the record by:
    Davis, Hon. Tom, a Representative in Congress from the State 
      of Virginia, prepared statement of.........................    60
    Denett, Paul, Administrator for Federal Procurement Policy, 
      Office of Management and Budget, prepared statement of.....    18
    Drabkin, David, Acting Chief Acquisition Officer and Senior 
      Procurement Executive, General Services Administration, 
      prepared statement of......................................    37
    Kaczmarczyk, Stan, Acting Deputy Associate Administrator, 
      Office of Government-wide Policy, General Services 
      Administration, prepared statement of......................    85
    Moore, Hon. Dennis, a Representative in Congress from the 
      State of Kansas, prepared statement of.....................    75
    Preston, Colleen, executive vice president, Professional 
      Services Council, prepared statement of....................    45
    Sabin, Barry, Deputy Assistant Attorney General, Criminal 
      Division, U.S. Department of Justice, prepared statement of    25
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................     3
    Werfel, Danny, Acting Comptroller, Federal Financial 
      Management, Office of Management and Budget, prepared 
      statement of...............................................    80


  H.R. 5712, CLOSE THE CONTRACTOR FRAUD LOOPHOLE ACT, AND H.R. 5787, 
             FEDERAL REAL PROPERTY DISPOSAL ENHANCEMENT ACT

                              ----------                              


                        TUESDAY, APRIL 15, 2008

                  House of Representatives,
            Subcommittee on Government Management, 
                     Organization, and Procurement,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:05 p.m. in 
room 2247, Rayburn House Office Building, Hon. Edolphus Towns 
(chairman of the subcommittee) presiding.
    Present: Representatives Towns, Welch, Davis of Virginia, 
and Bilbray.
    Also present: Representative Moore.
    Staff present: Michael McCarthy, staff director; William 
Jusino and Mark Stevenson, professional staff members; Velvet 
Johnson, counsel; Kwane Drabo, clerk; Jim Moore and Charles 
Phillips, minority counsels; and Benjamin Chance, minority 
professional staff member.
    Mr. Towns. The committee will come to order.
    Welcome to today's legislative hearing on two bills related 
to contractor ethics and the disposal of Federal surplus 
property. The first bill we will review is H.R. 5712, the Close 
the Contractor Fraud Loophole Act, introduced by Representative 
Peter Welch.
    About a month ago Congressman Welch brought to the 
committee's attention a loophole in a new rule requiring 
contractors to report fraud and over-billing on Government 
contracts. For some reason, contracts performed overseas were 
exempted from that requirement. Well, that didn't make any 
sense to Congressman Welch because so much contract fraud and 
waste has been seen on contracts in Iraq and Afghanistan.
    So we have been looking into the policy behind that rule 
and how that exemption got into the rule in the first place. 
Congressman Welch introduced a bill to close the overseas 
loophole and another loophole exempting commercial items 
contracts.
    That bill is the topic of our first panel today. The rule 
in question requires contractors to report internal fraud or 
overpayment on Government-funded projects rather than wait for 
its discovery by the Government. The Department of Justice 
believed such a rule was necessary because few Government 
contractors voluntarily disclose suspected instances of fraud.
    However, the rule exempted contracts to be performed 
overseas and contracts for commercial items. This makes no 
sense at all. By exempting overseas contracts, this 
administration is telling Government contractors that if you 
are going to commit fraud, go abroad and do it. I am pleased 
that since Congressman Welch brought attention to this detail 
and introduced this bill and called for this hearing, it 
appears that the administration will now revise its proposed 
rule to include overseas and commercial items contracts in the 
fraud reporting requirements.
    That is a good step, but I think the Welch bill is still 
necessary to make sure these types of loopholes stay closed, 
and closed forever.
    H.R. 5712 will ensure that taxpayers' dollars are used for 
the purpose to which they have been appropriated, and not to 
line the pockets of corrupt individuals or companies. We take 
that responsibility very seriously. At this time when our 
national security is of paramount concern, criminals who cheat 
the Government must be identified, stopped, and punished.
    I look forward to hearing from our witnesses.
    Our second panel will discuss a bill by Representative 
Dennis Moore of Kansas to streamlining the sale of surplus 
Federal land. I will say more about that bill when it is time 
for the second panel.
    [The prepared statement of Hon. Edolphus Towns and the 
texts of H.R. 5712 and H.R. 5787 follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

    Mr. Towns. At this time I would like to yield time to 
Congressman Welch, the sponsor of this legislation.
    Mr. Welch. Thank you very much, Mr. Chairman. I want to 
thank Chairman Towns and I want to thank Chairman Waxman for 
restoring front and center the responsibility the Congress has 
to do oversight. That is especially important on the 
procurement process that has become a much bigger part of how 
Government spends taxpayers' dollars.
    Just a few facts, Mr. Chairman.
    In the year 2000, procurement spending was $203 billion. In 
the first 6 years of the Bush administration that grew to $412 
billion, the highest it has ever been in the history of the 
United States.
    Also, non-competitive procurement contracting has also 
exploded. The use of no-bid contracts and the use of limited 
competition contracts rose in the year 2000 from $67.5 billion 
to $206.9 billion in 2006, with the largest increase in a 
single year being between 2005 and 2006.
    Even as that happens, the incidents of documented waste, 
fraud, and abuse is also exploding. In a report that was done 
under the supervision of Chairman Waxman, ``More Dollars, Less 
Sense: Worsening Contracting Trends Under the Bush 
Administration,'' has documented that in 118 contracts valued 
at $745 billion that were found by Government auditors to 
involve very significant waste, fraud, abuse, or mismanagement. 
This year the report identifies 187 contracts valued at $1.1 
trillion that have been plagued by waste, fraud, and abuse. 
That raises the question as to how we will, as a Congress and 
as an administration, protect taxpayer dollars from waste, 
fraud, and abuse.
    The subject of this hearing is about a rule that was 
proposed that originally was going to do the obvious, and that 
was require contractors who are receiving literally billions of 
dollars of taxpayer money to report when they become aware of 
any incidents of fraud. That rule, from its original proposal, 
did the sensible thing to include that obligation whether the 
taxpayer money was spent in the United States or abroad, was 
ultimately promulgated with an exclusion for any expenditures 
of taxpayer dollars that were spent overseas. Of course, the 
dominant place where that money is spent is Iraq and, to some 
extent, in Afghanistan.
    The chairman laid out why that is not acceptable, but just 
a few examples of the really egregious fraud, waste, and 
mismanagement that has occurred are incidents in Iraq. Mr. 
Chairman, a few of us were able to go to the Baghdad Police 
Academy, where the contract wasted millions of taxpayer dollars 
building a facility that wasn't able to be occupied for its 
intended purpose. There was literally septic sewage that was 
leaking from second-story facilities into the first floor.
    Folks from the committee went to the Baghdad Police 
College, which I just mentioned. Another one was the dam at 
Mosul, where millions of dollars of equipment were just gone 
missing.
    There is item after item that have been documented, Mr. 
Chairman, in the report by this committee of taxpayer waste, 
fraud, and abuse which everybody opposes, so this rule that has 
allowed an exemption to continue can't be sustained.
    I thank you Mr. Chairman and yield the balance of my time.
    Mr. Towns. Thank you very much. I also thank you for the 
great work that you have done on this legislation.
    Let me introduce the members of the panel. Let me begin by 
introducing the Honorable Paul Denett, Administrator for 
Federal Procurement Policy, Office of Management and Budget. 
Thank you for coming.
    Mr. Barry Sabin, Deputy Assistant Attorney General for 
Criminal Division, U.S. Department of Justice. Thank you so 
much for coming.
    Mr. David Drabkin, Acting Chief Acquisition Officer and 
Senior Procurement Executive, General Services Administration. 
Thank you so much for coming.
    Ms. Colleen Preston, executive vice president of 
Professional Services Council. Thank you so much for being 
here.
    We will proceed with you, Mr. Denett. Let me just say that 
each of you have 5 minutes. Of course, we hope that you could 
sum up in 5 minutes. When the light goes to caution, we want to 
let you know you need to be sort of like winding up, and then 
when it gets to red, that means stop. Of course, after that we 
have a question and answer period.
    Before we do that, it is a longstanding policy here that we 
swear in all of our witnesses.
    [Witnesses sworn.]
    Mr. Towns. Let the record reflect that they all answered in 
the affirmative.
    We will begin with you, Mr. Denett.

     STATEMENTS OF PAUL DENETT, ADMINISTRATOR FOR FEDERAL 
  PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET; BARRY 
 SABIN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, 
    U.S. DEPARTMENT OF JUSTICE; DAVID DRABKIN, ACTING CHIEF 
 ACQUISITION OFFICER AND SENIOR PROCUREMENT EXECUTIVE, GENERAL 
 SERVICES ADMINISTRATION; AND COLLEEN PRESTON, EXECUTIVE VICE 
            PRESIDENT, PROFESSIONAL SERVICES COUNCIL

                    STATEMENT OF PAUL DENETT

    Mr. Denett. Thank you, Chairman Towns, Ranking Member 
Bilbray, and members of the subcommittee. I appreciate the 
opportunity to appear before you today to discuss recent 
regulatory actions addressing contractor ethics and disclosure 
requirements. You have asked for comments on H.R. 5712, the 
Close the Contractor Fraud Loophole Act. I have prepared 
written remarks that I would like the subcommittee to enter 
into the record, and I would like to briefly summarize those 
comments for you.
    Mr. Towns. Without objection.
    Mr. Denett. Let me begin by assuring the subcommittee that 
the administration is committed to an acquisition process with 
high standards of integrity and effective management controls 
to reduce fraud, waste, and abuse in Government contracting.
    Two recent rulemakings to change the Federal Acquisition 
Regulation reflect unprecedented steps to strengthen contractor 
ethics to protect our taxpayers from fraudulent conduct in the 
award and performance of Federal contracts and subcontracts. 
First, the Civilian Defense Acquisition Regulatory Council's 
finalized FAR changes last November that for the first time 
establish Government-wide requirements for Federal contractors 
to have a written code of business ethics.
    Second, the Council has issued a proposed rule, also last 
November, that would require Government contractors to disclose 
to an agency whenever the contractor has reasonable grounds to 
believe that a violation of criminal law has occurred in 
connection with award or performance of a contract or 
subcontract. The proposed rule would require contractors to 
establish internal control systems and employee training 
programs to ensure compliance.
    You have asked why the rules provide exemptions for 
overseas contracts and commercial item contracts. I understand 
that the exemption for overseas contracts is patterned after 
pre-existing Defense Department regulations dating back to 1988 
that exempted overseas contracts from contract clauses 
requiring hotline posters. These are posters that are placed in 
the contractor workplace with information on how contractor 
employees can report suspected fraud and other misconduct.
    The exemption for commercial item contracts reflects 
provisions in the Federal Acquisitions Streamlining Act that 
require the acquisition of commercial items to resemble 
customary commercial marketplace practices to the maximum 
extent practicable.
    I am inclined to favor the elimination of these exemptions 
for the purposes of these rulemakings. My office asked the 
acquisition law team, which is the team that is responsible for 
drafting ethics rules, to carefully consider whether exemptions 
for overseas contracts and commercial items acquisition are 
necessary.
    In response to this request, the Councils sent OMB a draft 
proposed rule as a followup to the November proposed rule. This 
rule, which OMB received last week, is currently under 
interagency review and will be subject to public notice and 
comment.
    You have asked me to discuss H.R. 5712. This bill would, in 
effect, impose statutory requirements on Federal contractors 
that are similar to the November proposed rule, except that 
H.R. 5712 would also apply these requirements to overseas and 
commercial item contracts. The followup rulemaking and the 
process I just described will ensure that the concerns 
underlying this legislation are appropriately addressed. For 
this reason, I believe the legislation is unnecessary.
    In short, the administration is creating stronger 
Government-wide ethics requirements for government contractors. 
I am confident, when the deliberations are concluded and 
regulatory changes are finalized and fully implemented, we will 
have taken significant steps to have protected the Government 
and taxpayer from fraud in Government contracting.
    This concludes my prepared remarks, and I will be happy to 
answer any questions that you may have.
    [The prepared statement of Mr. Denett follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
    
    Mr. Towns. Thank you very much, Mr. Denett.
    Now we go to you, Mr. Sabin.

                    STATEMENT OF BARRY SABIN

    Mr. Sabin. Thank you, Chairman Towns, Congressman Welch. I 
appreciate the opportunity to be here today to discuss the 
Close the Contractor Fraud Loophole Act, H.R. 5712, the efforts 
of the Department of Justice to combat fraud in Government 
contracting, and specifically the requirement that Government 
contractors report fraud in material over-billing.
    The Justice Department has a demonstrated and continued 
commitment to a strong and vigorous enforcement effort in the 
important area of procurement fraud. The Department of Justice 
has made the investigation and prosecution of procurement fraud 
a priority, to include procurement fraud related to the wars 
and the building efforts in Iraq and Afghanistan.
    In October 2006 the Justice Department announced a new 
national procurement fraud initiative and the creation of the 
National Procurement Fraud Task Force led by the Justice 
Department's Deputy Attorney General's Office and Criminal 
Division to promote the early detection, prevention, and 
prosecution of procurement and grant fraud associated with 
increasing contracting activity for national security and other 
Government programs.
    The task force has been enthusiastically embraced by the 
entire law enforcement community, including the FBI, the 
Inspector General community, and Defense-related agencies. 
Overall, we now have more effective resource allocation in 
procurement fraud investigations, which has resulted in the 
acceleration of investigations and prosecutions.
    This combined effort of task force members has resulted in 
significant accomplishments, including a number of working 
committees, specialized training, a public Web site, maybe 300 
procurement fraud cases, regional working groups, and more.
    Procurement fraud cases, especially those involving the 
wars in Iraq and Afghanistan, are usually very complex and 
resource intensive. The cases often involve extra-territorial 
conduct, as well as domestic conduct, requiring coordination 
between appropriate law enforcement agencies.
    In order to improve coordination and information sharing, 
we have established a joint operations center based in 
Washington.
    To date, the Justice Department has charged 46 individuals 
or companies for contract fraud relating to the efforts in 
Afghanistan, Kuwait, and Iraq. Last week a KBR fuel technician 
was sentenced to 26 months incarceration in the Eastern 
District of Virginia following his guilty plea to conspiracy to 
defraud and accept bribes in connection with a scheme to divert 
fuel intended for our airfield to the black market in 
Afghanistan.
    Also, last week in the District of Maryland a former senior 
contract fuel manager pled guilty to conspiracy to defraud the 
United States, commit wire fraud, and steal trade secrets.
    With respect to the proposals to require mandatory 
disclosure by contractors, on May 23, 2007, in a letter to the 
Office of Federal Procurement Policy, the Justice Department 
proposed, on behalf of the task force, some modifications to 
the Federal Acquisition Regulation, which would require, among 
other things, that contractors notify the Government whenever 
they become aware of material overpayment or fraud relating to 
the award or performance of contract or subcontract rather than 
wait for the contract overpayment or fraud to be discovered by 
the Government.
    Shortly thereafter, the Councils began the review process, 
and on November 14, 2007, published proposed rules, 
substantially incorporating the task force's requested changes 
of the FAR. The task force's proposal is mild on existing 
requirements found in other areas of corporate compliance.
    In my written statement I will give some of the reasons why 
the changes were requested, including the data evidencing a 
decline in voluntary disclosures to a Department of Defense 
Inspector General.
    The proposed rule, as published by the Councils on November 
14, 2007, added two exemptions, one to Government contracts 
performed entirely overseas and the other for commercial 
contracts that were not included in the original task force's 
proposal submitted on May 23, 2006.
    After the Councils published the proposed rule and sought 
public comment, the task force considered ways to improve the 
proposed rule. In response to what the task force believed were 
some legitimate concerns, we submitted comments on the proposed 
rule on January 14th of this year, addressing the standard for 
the schedule of over-payments and criminal violations, 
cooperation and attorney/client privilege, navigation to 
disclose potential violations of the False Claims Act, the 
grounds for suspension and debarment, the time limit for 
disclosures, and internal investigations by contractors. Law 
enforcement agencies submitted numerous comments to the 
councils in support of the task force's proposal.
    In our January 14th comments we also address the Council's 
decision not to include overseas contracts. We asserted that 
the United States still is a party to these contracts and 
potentially a victim when over-payments are made or when fraud 
occurs in connection with those contracts.
    We noted that, under these circumstances, the Government 
still maintains jurisdiction to prosecute the perpetrators of 
fraud and that these types of contracts, which in many cases 
support our efforts to fight the global war on terror, need 
greater contractor vigilance, because they are performed 
overseas where U.S. Government resources and remedies are more 
limited.
    As the Justice Department has previously stated, the 
Department welcomes the enactment of new tools to combat fraud 
committed by contractors within the criminal jurisdiction of 
the United States. With respect to H.R. 5712, we believe that 
the rulemaking process should be able to address real concerns 
adequately by appropriately incorporating the types of changes 
discussed in our January letter.
    The Justice Department and the task force have taken a 
proactive leadership role in proposing that new ethics rules 
and fraud and overpayment rules be incorporated into the FAR. 
Moreover, the Justice Department will continue its efforts to 
detect, deter, investigate, and prosecute procurement fraud by 
companies and individuals.
    Through these and other efforts, we will ensure that 
taxpayer moneys are protected, our Nation's security defended, 
and the investigation and prosecution of procurement fraud 
remains a Justice Department priority.
    I welcome any questions you may have.
    [The prepared statement of Mr. Sabin follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
        
    Mr. Towns. Thank you very much, Mr. Sabin.
    You may proceed, Mr. Drabkin. Thank you so much.

                   STATEMENT OF DAVID DRABKIN

    Mr. Drabkin. Chairman Towns, Ranking Member Bilbray, 
members of the subcommittee, thank you for the invitation to 
come and talk to you today about the FAR rulemaking process and 
specifically the ``Federal Acquisition and Regulation Case 
2007-006, Contractor Compliance Program and Integrity 
Reporting.''
    Changes to the FAR undergo a long-established process 
following the direction of the Congress, the President, or 
suggestions from agencies or the public. The proposed changes 
are assigned a case number and are referred to one of the 
standing teams of the FAR Council. These teams are composed of 
career civil servants and uniformed members of the armed 
forces. On occasion, an ad hoc team may be formed to address 
either an unusually complicated matter or a matter that 
requires special attention. Ad hoc teams are also composed of 
career civil servants and uniformed members of the armed forces 
and are drawn from either existing team members or experts 
sought from other agencies.
    Once a case is assigned to a team, the team develops the 
language they believe implements the suggested or directed 
changes based upon their specific expertise and knowledge of 
the procurement process. If they are making the changes based 
on statutory Executive direction, discretion in formulating 
regulatory guidance is limited by the directive they have 
received. If they are making changes based upon suggestions for 
the agencies or the public, their discretion is much broader in 
terms of evaluating the overall consistency of proposed changes 
with existing policies and practices. There is a FAR guide, and 
that guide is available on the Web, and I have placed the Web 
site in my testimony, which I ask, Mr. Chairman, be included in 
the record.
    Mr. Towns. Without objection, so ordered.
    Mr. Drabkin. Once the team completes its assigned work, the 
case is then sent to either the Defense Acquisition Regulatory 
Council [DARC], or the Civilian Agency Acquisition Council 
[CAAC], who reviews the team's work. Once both councils have 
concluded their reviews and made any changes they deem 
appropriate, the case is submitted to the OMB's Office of 
Federal Procurement Policy for review and approval, then to 
OMB's Office of Information and Regulatory Affairs [OIRA], for 
its review, including an interagency coordination at OIRA's 
discretion and approval.
    Then the final rule is sent to the FAR signatories. Those 
would be the Director of Procurement at Defense, the Director 
of Procurement at NASA, and myself at GSA, for their review and 
approval, and then the case is published in the Federal 
Register.
    Currently, over 50 cases are being processed, both 
statutory and non-statutory in origin, and the details and the 
status of all those cases may be found on the Web site set 
forth in my testimony.
    With regard to FAR case 2006-007, it originated from a 
letter from the Department of Homeland Security as a Katrina 
hotline poster case. DHS had been asked by Senators Lieberman 
and Collins to acquire and ensure wide distribution of fraud 
hotline posters in hurricane relief and reconstruction 
contracts. The Senators requested that the regulatory action 
mirror the Department of Defense's contract clause contained in 
the Defense Acquisition Regulatory Supplement [DFARS], that 
requires the prominent display of contract information to 
report fraud, waste, and abuse.
    DOD, GSA, and NASA took the initiative to make the ethics 
coverage in the FARs stronger than DHS or the Senators had 
requested. The original request by DHS was to take the existing 
DOD hotline poster regulation and make it Government-wide. The 
DOD hotline poster clause, which is found at 252.203-7002, was 
required in solicitations of contracts expected to exceed $5 
million, except when performance will take place in a foreign 
country. It also was not required in commercial item contracts.
    The DOD ethics and internal control regulation in the DFARS 
recommended that a contractor system of management controls 
should provide for a timely reporting. This was not mandatory 
on contractors, as there was no clause binding the contractor.
    In FAR case 2006-007, originating from DHS, we issued a 
clause for hotline posters, keeping the overseas and commercial 
items exemptions in that case. The FAR case went further by 
making the ethics aspect mandatory and adding on to the hotline 
poster clause.
    The final rule had two clauses, one for the contractor code 
of business ethics and conduct and another for the display of 
the hotline poster, itself. The introductory paragraph, which 
provides an exception if the contract is for the acquisition of 
commercial items in the part 12 or if it will be performed 
entirely outside the United States applies to both clauses. The 
policy states that all the Government contractors must conduct 
themselves with the highest degree of integrity and honesty and 
should have a written code of business ethics and conduct.
    All contractors should also have an employee business 
ethics and compliance training program and an internal control 
system that is suitable to the size of the company to 
facilitate timely discovery and disclosure of improper conduct 
in connection with Government contracts, and ensure corrective 
measures are promptly instituted and carried out.
    As this FAR case was progressing, the Department of Justice 
submitted a public comment asking that FAR case 2006-007 
provide more detail on the U.S. citizen guidelines. DOJ did not 
comment on the exception for contracts for commercial items or 
contracts performed entirely outside the United States.
    At the same time, DOJ submitted a letter to OFBP setting 
out DOJ's request to open a new FAR case. DOJ requested changes 
to the FAR to require contractors to establish and maintain 
internal controls to detect and prevent fraud in their contract 
and notify contracting officers without delay whenever they 
become aware of the contract overpayment or fraud, rather than 
wait for the discovery by the Government.
    The emphasis of the DOJ letter and the focus of the DOD and 
GSA and NASA was on mandatory disclosure rather than on the 
exemptions. The DOJ request provided that commercial 
contractors may be excluded from the compliance program 
requirements. DOJ asked for and received a commitment from OFBP 
to publish a new proposed rule on an expedited basis. The FAR 
Council complied with this request by expediting the drafting, 
finishing, and approving of a proposed rule.
    The new 2007-006, and this can by very confusing, because 
the other rule is 2006-007, but the new rule, 2007-006 proposed 
rule did not totally exempt overseas contracts. The proposed 
rule applied the new debarment and suspension clauses to the 
overseas contracts. A contractor may be debarred or suspended 
for knowing failure to timely disclose an overpayment on a 
Government contract or violations of Federal criminal law in 
connection with the award and performance of the Government 
contract or subcontract, which includes violations of any 
contract, whether domestic or overseas.
    The law team has modified the proposed rule and will 
publish it for public comment and review. Comments received 
will be considered in drafting the final rule.
    Mr. Chairman, Ranking Member Bilbray, the FAR rulemaking 
process is one of the unheralded great success stories in the 
Federal Government's procurement practices. It has kept parties 
and politics out of the business function of Government for 
decades. I hope that you will join me in congratulating the 
hundreds of career civil servants and uniformed military 
members who have, over the years, honed this process and made 
it work for the American taxpayers and the Federal Government. 
These individuals are truly the unsung heroes of Government.
    Our colleagues in government all over the world study our 
system with envy and try to emulate it within their own 
customers and cultures, as allowed.
    I would be happy to answer any questions you may have.
    [The prepared statement of Mr. Drabkin follows:]
    
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    Mr. Towns. Thank you very much, Mr. Drabkin.
    Ms. Preston.

                  STATEMENT OF COLLEEN PRESTON

    Ms. Preston. Thank you very much, Mr. Chairman and 
Congressman Welch. Thank you for the invitation to testify 
today on behalf of the Professional Services Council.
    PSC is the national trade association of the Government 
services industry. This year PSC and the Contract Services 
Association of America merged to form a single unified voice 
representing the full range and diversity of the Government 
services sector. We now represent over 340 member companies 
with hundreds of thousands of employees in over 50 States.
    We support the efforts of this committee, the Department of 
Justice's National Procurement Fraud Initiative, the various 
agencies, and the Office of Federal Procurement Policy in their 
efforts to ensure that the Government is protected against 
fraudulent behavior by contractors whether in the United States 
or abroad, whether commercial suppliers or Government-only 
contractors.
    We all share the goal of reducing unethical behavior. The 
question is how best do you do that.
    Often what sounds like a simple and sensible proposal, when 
applied in the context of the realities of the contracting 
process, can end up having significant unintended consequences 
and costs far beyond its benefits. We believe that is the case 
with H.R. 5712, and we oppose it in its present form.
    Before going further, I would just like to point out that 
the Government is currently protected against fraudulent 
behavior by any number of criminal statutes, the False Claims 
Act, by contract penalties that may be imposed, and by the 
suspension and debarment process. These protections apply, 
whether or not a company is providing a commercial item or 
whether the contract is being performed domestically or 
overseas.
    Our objections to the proposed legislation are based on the 
following key factors: First, there is no reason to believe 
that a mandatory reporting requirement will actually result in 
reduced fraud or additional opportunities for redress by the 
Government. Indeed, history suggests strongly that voluntary 
programs properly structured and supported are more effective 
tools.
    Second, we believe that the voluntary disclosure programs 
that are in existence now are actually a lot more effective 
than DOJ claims. The data shows that, while the specific DOD 
voluntary disclosure program has been experiencing a downturn, 
there are other equally important DOJ programs that are 
experiencing an increase in voluntary disclosures. They are 
projecting the exact opposite trend.
    Additionally, there are substantial improvements that could 
be made in the DOD voluntary disclosure program that we believe 
would strengthen it without requiring mandatory reporting for 
every error that may be then subject to the criminal 
investigation.
    We also believe that contractors are making many, many 
voluntary disclosures outside of the formal program, and we 
think it would be better served if the Department of Justice 
and others would explore why that is occurring outside of the 
current formal program and if that is a problem if they are 
occurring.
    Third, the exemption from reporting for work performed 
outside the United States was not added, as you have heard 
today, at the last second, and in no way changes a company's 
obligations to adhere to U.S. anti-fraud laws and regulations. 
What we are talking about in H.R. 5712 is a procedural 
requirement. These are procedural requirements that are often 
imposed on Government contractors in the United States that our 
companies understand. That is not the same when you are dealing 
with foreign companies who do not operate under the same terms 
and conditions that U.S. companies do.
    Fourth, even the Department of Justice in its comments on 
the proposed Federal acquisition regulation that this 
legislation seeks to modify acknowledged that the proposed 
threshold for mandatory reporting, a reasonable grounds to 
believe, was too vague and would open the door to potential 
landslide of unnecessary reports, which have little or no 
relationship to actually fraud.
    As they have also acknowledged, it is both unnecessary and 
inappropriate to apply this to commercial contracts. The idea 
of getting commercial items is that the Government would buy 
under the same terms and conditions in the commercial 
marketplace that every other vendor does. If you go out to buy 
a computer, for example, you don't dictate to the company what 
the terms and conditions are of the sale that they are giving 
to you. In the same regard, if the Government wants access to 
the best technology in the world in the commercial sector and 
commercial services, there are many instances where companies 
will not abide with agreeing to unique, Government-only terms 
and conditions.
    Six, the proposed legislation would place prime contractors 
in an untenable position. The vagaries of the mandatory 
reporting threshold places them at great risk, since it 
requires them to have a degree of insight, and inside knowledge 
about the business processes of their subcontractors. Might I 
add that the legislation provides no threshold for reporting at 
the subcontract level. We believe the better approach would be 
to mandate that the Department of Justice enter into 
discussions with contractors to ascertain why the DOD voluntary 
disclosure program isn't operating as effectively as they 
believe it should and to require an assessment of the totality 
of voluntary disclosures that contractors are making before 
making any further changes.
    We support the continued emphasis on education and training 
rather than penalties to foster that internal self-governance 
in companies that will encourage employees to come forward to 
seek advice, and then if they find that there have been errors 
or problems or infractions to then come forward and report 
them.
    We strongly encourage companies to do this and we are happy 
to work with the committee and the Department of Justice to 
assist in developing processes that will further the goal of 
enhancing ethical contractor behavior.
    Thank you. I appreciate the opportunity to testify. I look 
forward to your questions.
    [The prepared statement of Ms. Preston follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
    
    Mr. Towns. Thank you very much. I thank all of you for your 
testimony.
    Let me begin with you, Ms. Preston. So you are saying that 
H.R. 5712 is not necessary?
    Ms. Preston. We are saying that we believe that better 
approach is--yes, the short answer would be that it is 
unnecessary. We believe that through the regulatory process we 
have had the opportunity to explain a lot of the concerns that 
have come about as a result of the Department of Justice's 
proposal, and that, if you look at the behavior of companies 
and employees in those companies, you are much more likely to 
get not only reporting if there is unethical behavior, but also 
cures to make sure that act or problem doesn't occur again if 
you have a voluntary program.
    Mr. Towns. Mr. Sabin, what do you say to that?
    Mr. Sabin. With respect to the legislation?
    Mr. Towns. Yes.
    Mr. Sabin. The Department of Justice and the task force 
proceeded through the regulatory route. We thought that would 
be an appropriate means and an appropriate mechanism for 
addressing the concerns. We wanted to instill strong ethics, 
business corporate compliance, and the like, and we felt that 
working through the interagency process, that the regulatory 
mechanism, as articulated by Mr. Denett, is an appropriate 
vehicle by which to do that.
    In terms of the legislation proposed by Congressman Welch 
in recent days, we don't have a formal Department of Justice 
views letter or position with respect to that piece of 
legislation. So, our initial preference is to proceed through 
the regulatory mechanism before going through the legislative 
process.
    Looking at the actual bill, we would be happy to sit down 
with staff, with you, but we can, at least on initial 
observation, see some deficiencies, both technical, 
definitional, and the like, to work through if the legislation 
proceeds. But, I don't come before you today with a Department 
of Justice views based upon the recency of the proposed 
legislation.
    Mr. Towns. All right. Mr. Denett, don't you think that 
something needs to be done? I mean, I think it was Mr. Sabin 
who talked about 46 cases. And let me just say to you that I 
know there are a lot of others. So, don't you think we need to 
do something?
    Mr. Sabin. Well, Congressman, we are doing something. The 
things that we have out now are unprecedented. We are advancing 
the ethical behavior with contractors more than has ever been 
done, so we are pleased by that. We are requiring them to have 
ethics training, internal reporting mechanisms. We are 
requiring them to inform us when they have done criminal 
activity. So to me this is major initiatives that have gone 
forth in the last several months.
    The fact that we are now giving serious thought to getting 
rid of the exemption for overseas and commercial, that is a 
significant change from what we proposed a short while ago.
    So in order for us to fully vet that and get comments from 
everyone--the American Bar, various companies, associations--we 
think that they are owed the opportunity, since that is in the 
works, to have a chance to vet their views so that we know 
everybody's view on this before a final decision is made. I 
think to legislate without that input is not a wise choice.
    Mr. Towns. Well, you know, let me just go back to you 
again, Ms. Preston, because you are saying that voluntary is 
fine, voluntary disclosure. You say that is fine, voluntary?
    Ms. Preston. Yes, Mr. Chairman.
    Mr. Towns. Right, and, Mr. Sabin, you are saying mandatory 
is what we need?
    Mr. Sabin. We believe that in this context, in the 
procurement fraud context, it has not been working. The data 
does not reflect that voluntary disclosures to, for example, 
the Department of Defense Inspector General has declined, 
especially in recent years. Indeed, we are not aware, over the 
past 2 years, of any disclosures, voluntary disclosures, from 
the top 15 contractors relating to fraud and material over-
billing.
    So in that realm, with the increased spending that is 
occurring in national security and the like, we believe that 
and our recommendations were to have a mandatory disclosure 
obligation.
    Some of the voluntary disclosure programs that are 
referenced either in Ms. Preston's written statement or in her 
remarks this morning, we believe are sort of misplaced with 
respect to the application in this reign. For example, the 
antitrust program that is referenced in her statement in the 
Department of Justice that provides amnesty is one in which it 
is for the company reporting about other companies, as opposed 
to the particular company that is disclosing, which would be in 
the procurement fraud context about either conduct that occurs 
within that corporate structure. So, to apply other voluntary 
disclosure programs, which can work in other contexts, to this 
one we believe is misplaced.
    Ms. Preston. Mr. Chairman, as Mr. Sabin said, there are 
other programs that have worked very well and are working, and 
the reporting under those voluntary programs is increasing.
    If I understand what he is saying is basically that because 
they haven't had a voluntary report from the top 15 
contractors, there is an assumption that there is fraud that 
has been unreported. Most of those companies belong to and are 
probably signatories to the Defense Ethics Initiative and other 
things. They have instituted strong, strong ethics programs 
with reporting.
    Many of the reasons that people do not report, as we are 
told, under the DOD voluntary disclosure program is that once 
they do, it becomes a criminal process that takes up to two to 
3 years to resolve. Most of the times, the companies will 
report to a contracting officer if there is not fraudulent 
conduct. And, it turns out that if it can be handled through an 
administrative process, they will do it that way, and that is 
much preferable to them to be able to resolve the situation, to 
punish the employee, to figure out why it happened in the first 
place, and to work out a system with the Government so that 
they can improve the program that they do have and make sure it 
doesn't happen again.
    So, I think to say that just because they haven't had a 
report from 15 companies doesn't mean that the program is not 
working. All we are asking is, sit down with us, figure out why 
the program isn't working. Let's see if we can make it work by 
getting rid of some of the impediments that are causing people 
not to report under it.
    Mr. Towns. My time has expired, so I yield now to 
Congressman Bilbray.
    Mr. Bilbray. Justice Department, I assume, has made some 
suggestions on some numbers changes in the rulemaking, right?
    Mr. Sabin. Yes, we have.
    Mr. Bilbray. Including the suspension language. Do you 
intend to add any other language or have any other 
recommendations specifically to the rulemaking?
    Mr. Sabin. We had on January 14th provided a number of 
detailed recommendations and suggested language with respect to 
2007-006. To the extent that, as Mr. Denett indicated, 
additional materials would be circulated, either in interagency 
process or published for additional comment, we would actively 
engage in that to ensure that the task force's views and the 
Justice Department's views are provided.
    Mr. Bilbray. Are you comfortable with how FAR has vetted 
this with stakeholders such as Ms. Preston?
    Mr. Sabin. Yes. I believe the notice and comment period 
provided for extensive opportunity for specifics to be 
addressed, that there were a number received by both Inspector 
Generals, law enforcement community, as well as law firms and 
others in private industry, and we have had dialog with a 
number of those to ensure that we are trying to be surgical, 
reasonable, and thoughtful in how to establish what, I think, 
we all share common ground on, which is a rigorous business and 
ethics compliance code.
    Mr. Bilbray. With the progress we have made on the 
rulemaking, do you think this legislation is essentially needed 
or advisable?
    Mr. Sabin. Our position has been that in the first instance 
the rulemaking should proceed forward rather than the 
legislative this year.
    Mr. Bilbray. Your point is the rulemaking should move 
forward and then, we will see what we should do with 
legislation?
    Mr. Sabin. That is where we are. We do not have further 
Justice Department views on the particular legislation.
    Mr. Bilbray. OK. Thank you, Mr. Chairman. I yield back. Can 
I yield to the chairman, please?
    Mr. Davis of Virginia. Closing loopholes always sounds 
good, but when the loophole just turns out to be an exemption 
inadvertently transported into a proposed rulemaking, this bill 
applies a blunt instrument process to a process that requires 
delicate surgery.
    This bill provides that a known failure to report 
violations is a criminal law when it is related to a Federal 
contract. It would be a cause of debarment or suspension for 
all concerned, including those holding contracts performed 
overseas or contracts for commercial items.
    That is exactly the coverage currently contained in much 
more lengthy proposed regulation. What's all the fuss about? 
The proposed rule does include an exemption for overseas and 
commercial contracts, but the exemption applies only to the 
establishment of internal ethics and programs and control 
systems.
    The enforcement of debarment and suspension for failure to 
report would apply to all contractors, even without this bill. 
While it may or may not be good policy to apply all or some of 
the internal programs to overseas or commercial contractors, 
the frenzy accompanying the bill hardly seems justified.
    This does not make a significant change to the substance of 
the proposed rule, but it does leap from the statutorily 
designated process for writing acquisition regulations and in 
statute a novel reporting scheme yet to be completely vetted.
    The concept of mandatory reporting by contractors of 
possible criminal violations based on reasonable grounds is 
unprecedented and controversial. The rule is the subject of 
more than 70 comments, and only two of those commentators are 
present today. We expected many of the firms subject to the 
rule to express serious concerns. They argue a company could 
well face the loss of the ability to do business with the 
Government based on highly technical interpretations of what 
constitutes a criminal law violation.
    I admit that debarment and suspension are to protect the 
Government, not to punish companies. That has always been the 
underlying policy. None of the witnesses today, including the 
Department of Justice, support this bill, and they urge 
justifiable statutorily mandated regulatory process to take its 
course.
    We understand the new proposed rules to be issued any day 
now, which will, among other things, correct the exemptions and 
internal ethics awareness and control programs and call for 
another round of comments.
    In stark contrast to open and very deliberate and open 
process, today is the first and the only hearing on this bill. 
Tomorrow at 9:30 a.m. members of the full committee will be 
asked to consider and approve this proposal, which appears 
designed to close more political holes than legal ones.
    Thank you. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Tom Davis follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
    
    Mr. Towns. Thank you.
    On that note I yield to the author of the bill, Mr. Welch.
    Mr. Welch. Thank you, Mr. Chairman. There are really two 
very simple questions. One, how is it that the original rule 
was proposed that would require reporting for domestic 
contracts but not for foreign contracts? And then the second is 
the need for the statutory protection to give the benefit of 
protection to the taxpayer.
    Mr. Denett, I am going to ask you a little bit about this. 
The original rule that was proposed had a requirement for fraud 
reporting if it was a domestic contract, correct?
    Mr. Denett. Yes.
    Mr. Welch. And it did not include a requirement for 
reporting if that taxpayer dollar was spent abroad, correct?
    Mr. Denett. Well, the work group of career people that 
worked on it, when they looked at the fact that Defense 
Department had exempted overseas for earlier requirements, such 
as these posters, they decided not to include overseas in it.
    Mr. Welch. OK. Let me ask you this: in your mind, does a 
taxpayer dollar spent abroad deserve any less protection from 
waste, fraud, or mismanagement than a taxpayer dollar that is 
spent here in the United States?
    Mr. Denett. Well, as I stated in my opening remarks, I am 
inclined to remove the exemption, but I am not comfortable----
    Mr. Welch. I'm asking a simple question: does the taxpayer 
dollar abroad deserve the same degree of protection as a 
taxpayer dollar spent here at home?
    Mr. Denett. All our tax dollars, regardless of location----
    Mr. Welch. All right. We all agree on that, I take it. All 
right? So isn't it your job, among other things, at OMB to take 
appropriate action, including rulemaking, to protect all 
taxpayer dollars, regardless of where those taxpayer dollars 
are being spent?
    Mr. Denett. That is, in fact, what we are doing.
    Mr. Welch. And now, you have proposed this rule, and you 
are now suggesting that you want to amend it so that it does 
incorporate suggestions that were made to you by the Department 
of Justice to include foreign contracts, correct?
    Mr. Denett. That is correct.
    Mr. Welch. All right. I want to know, if you can explain 
it, how it is in this rulemaking process where you sent out for 
comment the rule that had this exception for foreign 
contracts--you sent it to Homeland Security, the SBA, the 
Department of Labor, Veterans Affairs, Defense, Housing and 
Urban Development, Transportation, Agriculture, Health and 
Human Services, State, Interior, Treasury, and so on, 18 
different agencies. None of them comment, with the exception of 
Justice, about the oversight of leaving outside the protection 
of taxpayer dollars that were spent abroad?
    Mr. Denett. That is what I am told.
    Mr. Welch. All right. We have, thanks to documents that 
have been provided, a couple of e-mails that were sent out 
probably to 50 to 80 people who had an opportunity to comment, 
and with the exception of one comment from the Social Security 
Administration, nobody in this extensive process that you go 
through flagged this failure to include subject to the rule 
foreign contracts?
    Mr. Denett. That is correct. The focus was on creating 
ethics standards for the first time ever, requiring mandatory--
--
    Mr. Welch. Wait a minute. The focus is on protecting 
taxpayer dollars. How did we get from here to there? You did 
have a comment from the Social Security Administration, of all 
places, that stated very explicitly under this proposed rule 
contracts performed by a U.S. company on foreign soil would be 
exempt. Did you respond to that comment by the Social Security 
Administration?
    Mr. Denett. I did not. I don't know if GSA, who had members 
on there----
    Mr. Welch. So the answer is no. Why did you take the advice 
offered by the Department of Justice?
    Mr. Denett. As I said earlier, our focus was on making 
major improvements, which in fact we did. This group of career 
civil servants that labored over this for many weeks put forth 
to us something that did not include overseas contracting.
    Mr. Welch. Mr. Drabkin, what about the GSA? We went through 
this extensive process, e-mails and comments from people all 
across Government, and no one, with the exception of somebody 
from Social Security Administration, flagged this separation 
between domestic and foreign?
    Mr. Drabkin. Yes, sir. What happened at the CAAC meeting 
when the rule was discussed, a Social Security representative--
and I was informed of this today, not when I spoke with your 
staff members on Friday--but the Social Security member to the 
CAAC did raise the issue. There was a brief discussion, and 
that same member withdrew the issue and the rule went forward. 
At the time----
    Mr. Welch. This is the first----
    Mr. Drabkin. If I may, Mr. Welch----
    Mr. Welch. No. You have answered it.
    Mr. Drabkin. No, sir, I haven't.
    Mr. Welch. You actually haven't is right, but do you 
support change in the rule so that it includes foreign 
contracts as well as domestic contracts?
    Mr. Drabkin. Sir, I support the process, and the process we 
are going through now, and I support taking public comments. 
Since I am one of three people that get to vote on the rule and 
sign it, it would be inappropriate for me in advance of that 
process being complete to tell you where I sit, although Mr. 
Denett has made it clear to us what the administration's policy 
is, and we generally follow the administration's policy at this 
point.
    Mr. Welch. Fair enough. Thank you.
    Ms. Preston, you represent the Professional Services 
Council. It is over 300 contractors.
    Ms. Preston. Yes, sir.
    Mr. Welch. And your boss, I think, was on record as saying 
that they do not want this rule; is that correct?
    Ms. Preston. Yes, sir, that is correct.
    Mr. Welch. I listened to your testimony, and, frankly, I 
think we are talking about, in some respects, two different 
things. This rule and this legislation does not require any of 
your member companies to become private Inspector Generals. 
This requires them to report when they have knowledge about 
waste, fraud, or abuse. I mean, what are you so afraid of if, 
let's say, Bechtel and the $150 million that went to $160 
million and $169 million contract in building the Basrah 
Children's Hospital, if they become aware of fraud why wouldn't 
we have an expectation, on behalf of the taxpayers, that they 
would report that?
    Ms. Preston. The reason that there is concern is because of 
the standard and creating a standard for when it is. That----
    Mr. Welch. I hate to interrupt, but I don't have much time. 
That goes to the terms and conditions and perhaps the language 
of the statute or the rule, but why would any of your 
contracting entities that you work for--Blackwater, Triple 
Canopy, KBR--companies that have received billions of dollars 
in taxpayer dollars, why would they have any reservation about 
sharing with the Government knowledge that they have when they 
have it that taxpayers are being ripped off?
    Ms. Preston. There isn't any question that they would share 
that information if they knew it. The question is: how is it 
drafted in terms of particularly the legislation, and what are 
the risks that they incur? So they----
    Mr. Welch. So you don't want any statutory either 
rulemaking obligation. You want them to have voluntary capacity 
to do this, so when in doubt they make the final decision?
    Ms. Preston. Because if they voluntarily can report, then 
they will report when they understand something. It is the 
practicalities of what happens. So if you are the contractor--
and many of these contracts, as you said, are over in Iraq--you 
are the contractor who has five levels of subcontractors. The 
subcontractor that is doing the plumbing on that building, they 
probably----
    Mr. Welch. Or not doing the plumbing on that building.
    Ms. Preston. The prime contractor is not in privity of 
contract with that subcontractor and may not have----
    Mr. Welch. I don't have much time, so----
    Ms. Preston. Say one of those employees----
    Mr. Welch. I yield the balance of my time. I'm sorry.
    Ms. Preston. Say one of those employees overhears one of 
the Iraqi nationals saying to a friend, I just got someone to 
work for me at $10 an hour and I was able to charge the 
Government or charge my prime contractor $15 an hour. An 
employee of the prime contractor hears that. Does he then 
immediately report that as being a case of fraud? He doesn't 
know if the person was bluffing. He doesn't know whether or not 
there has been a violation of law. He doesn't know if that is 
unethical behavior. He doesn't really know what happened.
    The concern is that if he doesn't immediately report it and 
it later turns out to be some type of fraudulent or unethical 
behavior, that company could be debarred, the whole company, 
for something that someone overheard in a conversation out on 
the----
    Mr. Welch. Mr. Sabin, would you debar that company?
    Mr. Sabin. It would look to the specific facts and 
circumstances relating to the matter. We have limited 
resources, and we would use our enforcement and investigative 
resources appropriately. I think we could have common ground at 
what could be appropriate standards and manners in which 
disclosures could be made subject to internal investigation by 
the company to root out the particular facts so that 
expeditiously the referral was made in a thoughtful and proper 
manner.
    Mr. Welch. Thank you.
    Thank you, Mr. Chairman.
    Mr. Towns. I now yield to the gentleman from Virginia, Mr. 
Davis.
    Mr. Davis of Virginia. We seem to have different 
philosophies here. My philosophy in Government contracting is: 
you want to get the best deal for the taxpayer, and to do that, 
you want as many bidders in the process or as many companies 
and ideas coming in as possible.
    What I hear coming from some other Members is, we want to 
reduce this. We want to debar people. We want to put up 
restrictions so you have fewer people, and that means less 
competition, which at the end of the day means we end up paying 
more and getting less.
    Ms. Preston, you have a long record in this, going back to 
when I was a Government contracts attorney back in the 1980's. 
You remember the procurement integrity certifications and 
everything that came out. You note that many commercial 
companies would be unwilling to accept the risk level that is 
levied upon them by the mandatory self-reporting requirements 
in this bill. Do you think the self-reporting regime will cause 
such companies to walk away from the Federal market, or parts 
of it?
    Ms. Preston. I do believe that there are many companies now 
who sell commercial products to the Government who are very 
concerned that----
    Mr. Davis of Virginia. The downside is raised so much.
    Ms. Preston. That the costs of doing business with the 
Government are increasing, and every single provision that gets 
added on, there will come a time when there is the straw that 
breaks the camel's back.
    Mr. Davis of Virginia. Is there a high cost of compliance 
with the proposed self-reporting regime, and is this high cost 
or is this a very marginal cost for a company as you look at 
it?
    Ms. Preston. No. I believe that when you put on the threat 
of debarment, suspension in the way this legislation is 
drafted, that it will cause companies to increase dramatically 
some of the costs of doing business, but it is the risk that is 
the biggest factor. It is the unknown that really causes people 
concern.
    Mr. Davis of Virginia. We did a hearing a couple of years 
ago that noted some of the largest companies in America still 
refuse to do business with the Federal Government. They will 
work through intermediaries, re-sellers, and the like, but they 
are very nervous for a number of reasons. Some of it is the 
liability, some was protection of IP, some of it is separate 
accounting systems. We tried through time to try to attract 
these companies--many of them are very large--into the Federal 
marketplace so we can get better deals for taxpayers instead of 
having to go through re-sellers.
    But this is just another, it seems to me, lower of the 
unintended consequence of trying to protect consumers. In point 
of fact, it may drive away competitors.
    Ms. Preston. Exactly. We believe that it will. We believe 
that the voluntary process works well. It is an incentive to 
companies. Companies have tremendous incentives to report. One 
is if they do they avoid the potential of a suit. They get 
leniency under the U.S. sentencing guidelines. That has been a 
dramatic factor in incentivizing companies to voluntarily 
report.
    We think that process is working well and allows them to 
operate within the context of the ethics programs that they 
have established within their companies.
    Mr. Davis of Virginia. Mr. Drabkin, let me ask, do you have 
any reason or any evidence that the alleged loophole for the 
contracts performed overseas or for commercial items was 
nefariously slipped in the proposed rule at the 11th hour to 
try to give contractors a free ride to defraud taxpayers?
    Mr. Drabkin. No, sir. Quite frankly, I am offended that the 
suggestion was made without a scintilla of evidence that 
suggested that was the case. In fact, for many months prior to 
this hearing there have been suggestions floating around that 
somehow someone influenced one of these career civil servants 
to put that in. That is absolutely not true.
    The truth of the matter is they made a drafting error. They 
copied and cut and pasted language from 2006-007. They put it 
into 2007-006. They didn't give any great thought to whether or 
not the exemption made sense or not. They were in a hurry and 
they processed a rule. Quite frankly, sir, the suggestion that 
has been made by some folks around town that these folks did 
wrong is just horrible. It is an offense.
    Mr. Davis of Virginia. In point of fact, in procurement in 
general, whether it is contract managers, procurement 
officials, we are having a hard time recruiting good people 
into this business, aren't we?
    Mr. Drabkin. Sir, we are not meeting what anybody calls a 
recruitment goal. We are barely staying even. We add additional 
requirements each day to what a contracting officer does, and 
then we impugn their honor and their integrity without a 
scintilla of evidence, not a single bit of evidence. Why would 
they do this? Ask yourself why would they sign up to do this. 
You don't pay them any extra. They're not the ones that get to 
go and travel. They are not the ones that get to go to big, 
giant institutions for education. They work 60 to 80 hours a 
week to get the job done. They don't ask for overtime, and we 
impugn their honor and integrity because we--well, I had better 
stop.
    Mr. Davis of Virginia. I represent 5,400 Federal employees 
and a number of contractors, as well, and most of them are very 
hard working and try to do their job, and once in a while you 
make a mistake, as we do, I might add, up here. We make a lot 
of them. Hence, we have a $9 trillion deficit.
    Thank you very much.
    Mr. Towns. Thank you very much.
    At this time I will go a second round.
    Ms. Preston, what do you feel could be done to fix this 
legislation? What do you feel, or is it a fact that you just 
feel that we should not be involved in the process at all?
    Ms. Preston. Well, I don't believe the legislation is 
necessary at this time. I think the regulatory process is 
working well. We have concerns about the regulations the way 
they have been drafted, and particularly the new exclusions. We 
will get the opportunity to comment on those, as well.
    But, certainly we think that, at least in the regulatory 
process, you have an opportunity to have every voice heard and 
to explore further the particular impact of changes that we 
don't necessarily get in the legislative process.
    Mr. Towns. Right. You know, it is interesting, though, that 
most people just oppose legislation, period. Sarbanes-Oxley, I 
will never forget in terms of people coming up and opposing it 
and opposing it and opposing it, and at the same time they were 
saying there were some problems. So if we have some problems, 
how do we fix the problems?
    Now, I think with Mr. Sabin, who indicated that those 46 
cases--anyway, I think, going back to the money, I think there 
was $102 billion we spent over the last 5 years to help rebuild 
Iraq and Afghanistan, and, of course, they cover at least $14 
million in contract bribes. Well, even with this structure we 
are finding bribes. So, I think that there are some serious 
problems, and I think that we cannot sit back and just sort of 
ignore the problem. I think something needs to be done.
    Now, if H.R. 5712 is not the answer, then I think we should 
talk about what needs to be done, but to say that legislation 
is not necessary, I can't quite accept that. I think that it is 
too serious to just sort of pass off the fact that making a 
decision to volunteer the information they give to you. I don't 
think that we can really move forward with that in mind, with 
the fact that the kind of money that is being spent and 
knowing--and everybody sitting at that table knows there are 
some problems. Nobody said there are no problems.
    Ms. Preston. And, Mr. Chairman, we certainly do not 
advocate any of the activity that is going on that is unethical 
in any form whatsoever. The fact that it is being found and 
prosecuted is, I think, a good news story that people are 
finding out about what is happening and prosecuting those 
people who have acted unethically. That should definitely 
happen.
    What we are talking about here is not whether or not people 
will be prosecuted for fraudulent behavior; it is a question of 
a reporting mechanism to--what people believe is the tool to 
make sure that we do, in fact, find out about whether or not 
there is fraud. That is the issue. It is not whether or not 
people are being prosecuted or not; it is how you get there.
    We are saying that you are more likely to get companies to 
self-report if you don't hit them with punishment and other 
things in addition to the penalties that already are associated 
with whatever activity occurred. That is the only question is 
how you get there.
    Mr. Towns. Well, I think that we need to help them get 
there, and I think that H.R. 5712 sort of helps them to get 
there.
    You know, I think that we need to do something, and if this 
is not the answer I want to hear something from you other than, 
``continue to trust them.'' That is what I really say, because, 
you know, we are spending a lot of money. That is $102 billion. 
That is B as in Boy. That is a lot of money.
    Ms. Preston. I certainly agree, Mr. Chairman, and I am not 
asking to trust them. I am pointing out that there are 
incentives already in place that are much more powerful than a 
mandatory reporting requirement, which has many pitfalls 
associated with it; that there are so many more incentives that 
would cause a company to report a violation if they found one.
    If you are knowingly violating the law, you are not likely 
to self-report. The chances are if somebody is embezzling in 
one of your companies, they are not going to tell anybody else. 
They are not going to self-report. They are not going to report 
themselves. If someone else finds out about it, they are much 
more likely to report it in a system where they know the 
company won't be punished in a way that hits them instead of 
the offending person.
    If it is your colleague next door and you find out that 
they are embezzling, you want that colleague punished. You want 
them thrown out of the company. You want them prosecuted, but 
you don't want yourself and the rest of your fellow colleagues 
hurt, like you would be if you were debarred or suspended.
    Mr. Towns. Let me say that it does not appear to me that 
the Federal contractors are being asked to do anything that is 
not already expected for their counterparts in other 
industries. To me, it doesn't appear to be any different. I 
guess I need to yield to the author of it, but it seemed to me 
that when I look at Sarbanes-Oxley and others, you know that we 
are asking the same thing really. I don't understand the 
resistance here.
    Yes, sir, Mr. Sabin?
    Mr. Sabin. I think Ms. Preston's points--we share some 
common ground there with respect to the desire that sentencing 
guidelines provide a foundation by which risk is taken out of 
the equation for corporations in terms of their reporting. I 
think we share common ground that we want to increase 
incentives so that corporate individuals, both employees and 
management, understand the consequences and understand the 
process. Process is important, as well as substance. So we get 
to, as she indicated, the mechanism by which that can occur so 
that we can achieve, both in terms of corporate culture as well 
as other appropriate goals and objectives, including law 
enforcement, that goal.
    I think the flaw in her analysis is that the present system 
is working in terms of that kind of information flowing either 
to the contracting officer or to the Inspectors General, 
because the indication that was received when we looked at this 
matter through our interagency process is that those referrals 
were not coming, even though there has been an extraordinary 
increase in terms of Government spending, and that the idea is 
that there needs to be thoughtful prosecutional discretion that 
it not linger in terms of the investigation or the prosecution, 
that we make real-time decisions, but that the referrals and 
that information could assist the Government in greater means 
of addressing a problem we believe exists, and that we believe 
that additional enforcement efforts, as appropriate--there may 
be declinations. There may be matters that are inappropriate 
for Federal prosecution.
    Again, we are not seeking to go very wide in that. It has 
to be fraud in connection with the contract or subcontract. It 
has to be material over-billing, not just routine contract 
administration. So, our objective is to make sure that those 
enforcement efforts are thoughtful and productive so that there 
is a culture, both in the corporate community as well as in 
their interaction between private and public sector.
    Mr. Towns. I yield to Congressman Bilbray.
    Mr. Bilbray. Thank you.
    As followup on that, doesn't the DOD contractors have the 
ability to go to the Defense Contractor Management Agencies, 
the Inspector General for the DOD? Now, does the Inspector 
General report to these other agencies so that they can be 
informed that reports have shown up there?
    Mr. Sabin. If I understand the question, there is a 
referral process from DOD IG to prosecutorial enforcement, as 
well as an interagency process so that we are vetting so that 
there isn't overlap between what DOD is doing and another 
Inspector General. So there is, as they say in Washington, 
deconfliction occurring with respect to the investigative 
matter.
    Mr. Bilbray. The fact that DOD has this different system, 
is it possible that those reports are going over there and not 
double backing, not being reported?
    Mr. Sabin. The information that we received in the task 
force is that those referrals are not occurring, whether in DOD 
or elsewhere.
    Mr. Bilbray. OK. Now, you deferred to the FAR. Why do you 
defer to the FAR?
    Mr. Sabin. On certain matters they certainly have the 
expertise and the Justice Department doesn't profess to be 
experts in all nuances of Government contracting. All they are 
primarily is the enforcement. But our task force members, many 
of whom are steeped in the specifics, recommended that this was 
an appropriate vehicle by which to address a problem that 
needed addressing.
    Mr. Bilbray. Now, the FAR sort of indicated that this was 
sort of a clerical error that had created a loophole here?
    Mr. Drabkin. The exception language was a drafting error, 
and we now have a draft proposed rule without that language in 
it for the comment process. I didn't get a chance to explain it 
fully, but we can't add new requirements to a rule after we 
have gone out for public comment without going out for public 
comment again, and so we have to go back through the proposed 
process. And actually, we have more in this proposed rule than 
is in Mr. Welch's legislation, including some additional 
recommendations from the Department of Justice, which have been 
incorporated in the proposed rule and is currently being 
cleared within the Government. But, we have provided copies to 
members of your staff so you can see what is in there.
    Mr. Bilbray. So Mr. Welch's legislation is actually 
addressing a concern you have; it is just that you are saying 
we created the problem with a clerical error, we are now going 
through the process, as mandated by Federal law, to not only 
address this but to address other related items or more 
extensive coverage within the system where the problem 
originally occurred, rather than doing it through the 
legislative process?
    Mr. Drabkin. I want to be clear, because I don't want there 
to be any mistake. We did not knowingly, thinkingly, put in the 
exception.
    Mr. Bilbray. OK.
    Mr. Drabkin. We have taken that exception out in the 
proposed rule. Even though it was mentioned by the Social 
Security Administration person at the CAAC meeting, it got no 
real thought. It wasn't examined. It was never raised, and it 
never went any further.
    We understand as a result of the comment process, which 
Congress told us to use when it set up the procurement 
rulemaking process in title 41--we have gone through that 
process. It has worked. It has identified this issue and a 
number of others, which are really important to making this 
work and work well.
    I think it is fair to say there is not a member of the FAR 
Council that is not concerned with procurement fraud, with 
people stealing from the Government or the taxpayers, 
particularly in a time of war, but generally as a whole--I am 
probably the only person in this room who has actually been a 
fraud counsel and ran a fraud program as part of the Defense 
Contract Management Agency--none of us like fraud. We all want 
to address it. How we address it is a process we go through. We 
are going through that process. We certainly don't disagree 
with Mr. Welch that we should have a process, but we are going 
through the process----
    Mr. Bilbray. Title 41, what year did we implement title 41?
    Mr. Drabkin. The rulemaking process in title 41 was part of 
the OFPP Act, and I believe it was passed in 1970.
    Mr. Bilbray. OK. Now, your position is that it is not with 
title 41, it is not with the legislation, the enabling 
legislation. The problem was basically in the rulemaking 
itself, and you are going back and revisiting that within the 
rulemaking process?
    Mr. Drabkin. Yes, sir, and we have made that clear to the 
staff. As I said, we have provided you with copies of----
    Mr. Bilbray. But the intention of the gentleman's 
legislation--this is the vehicle you are using, saying the 
problem was not in the original legislation, it was in a 
process of rulemaking, and so that is why you feel you should 
keep it in the rulemaking process to correct it?
    Mr. Drabkin. Yes, sir, and it also gives us greater 
flexibility. If we discover we have made a mistake in 
implementing it, we can fix it faster than the legislative 
process normally is able to respond. That is not a criticism, 
it is just a reflection of the way Government works.
    Mr. Bilbray. Thank you very much.
    Mr. Chairman, I just think that--remember, we are 
legislators. We are taking the vehicles that we have available 
to us. Obviously, with the rulemaking the way it is, they are 
looking at directing the same issue from their jurisdiction 
because they say it came out of their camp.
    I yield back, Mr. Chairman.
    Mr. Towns. Thank you very much.
    Mr. Welch. Thank you very much, Mr. Chairman.
    You know, I am hearing two things that are contradictory. 
We are hearing that we don't really need legislation because 
the rule is being fixed, but I don't think it is a coincidence 
that there was no action toward fixing the rule until the 
chairman held a hearing and we introduced legislation. Also, 
nobody on the panel is committing to when that final rule is 
going to be published and implemented, so it raises significant 
questions, certainly on my part, as to whether, if we drop the 
pressure, the ball is going to be dropped.
    The other issue that is really of concern to me, Mr. 
Drabkin, you know, I have absolutely no doubt about the quality 
and integrity of the folks that work for our entire Federal 
Government.
    Mr. Drabkin. Thank you, sir.
    Mr. Welch. They work hard. They don't get paid. But, what 
we have here since 2000 is an explosion in these contracts, 
including foreign contracts, including no-bid contracts, and 
the contracting procurement process has gone from $200 billion 
to $400 billion. And, I bet your department and OMB haven't 
received a comparable increase in personnel that they need to 
review contracts.
    Mr. Drabkin. Sir, the number of contracting specialists in 
the Government in 1990 was 33,000 doing $150 billion worth of 
work. Today it is 28,000 doing $450 billion worth of work. The 
problem is we don't have enough people.
    Mr. Welch. That is my point. What you have said, with all 
due respect, is that the fix wasn't in. This wasn't a 
conspiracy, it was a mistake.
    Mr. Drabkin. Yes, sir.
    Mr. Welch. Well, that is not reassuring for taxpayers, and 
we need a remedy. On the other hand, while your numbers to do 
your job have been declining, the membership in the 
professional contractors or services, Ms. Preston's group, has 
been increasing, and there has been some suggestion here by my 
friend from Virginia that it is getting to be a hassle to do 
work with the Government. But, there is a lot of contractors 
that are doing just fine. We had Blackwater in here who 
testified they have done $1 billion worth of contracts and have 
made at least 10 percent of profit. That is not a bad take.
    Mr. Drabkin. Sir, our concern isn't with Blackwater. In 
terms of access to the market, it is not with being able to 
access Blackwater; it is being able to access the IT companies 
who don't do business with the Government, who have solutions 
we would like to buy but who don't want to sell to us because 
of our terms and conditions and the fact that we have turned 
contracting into a criminal matter, not a contractual business 
matter. Although that is no excuse for cheating the Government 
and no one should ever be allowed to do it.
    Mr. Welch. It is something that is very simple here where 
we protect the taxpayer dollars when they are spent abroad as 
well as at home. There has been an acknowledgement on the part 
of three of the four panelists that there, at least, has to be 
a rule, some debate about whether you need legislation. I 
absolutely want to give the benefit of the additional 
protection to the taxpayer, particularly when the agencies that 
are reviewing these contracts are getting squeezed on the 
personnel required to protect the taxpayers.
    I have some confidence that Justice can use appropriate 
discretion so that it will be used wisely and well on behalf of 
the goal of protecting the taxpayers. I reject the position of 
the contractees, the ones who have been paid $400 billion and 
above, that they don't want ``the burden'' of having to accept 
as part of the benefit of $400 billion in taxpayer dollars the 
obligation to share in a timely way with the Government their 
knowledge that taxpayers are being ripped off.
    I yield the balance of my time.
    Mr. Towns. Thank you very much.
    Let me thank all of you for your testimony. Of course, we 
look forward to working with you, because I think we agree on 
one thing: something needs to be done. It is not perfect. I 
think we all agree on that. Of course, I think we can try to 
move from there. So thank you so much, all of you, for your 
testimony.
    Yes, Mr. Denett?
    Mr. Denett. Chairman Towns, we will expedite this proposed 
rule. I heard Congressman Welch say he's concerned that we 
might drop the ball. We won't drop the ball. It is a high 
priority to us. We will move it. We will get it out soon. I 
hope you give us the opportunity to get input from all 
interested parties. We do not need this legislation. Give us a 
turn at bat. You will be pleased with the outcome.
    Mr. Towns. Well, we thank you very much for your comment. 
Of course, as you know, it takes things a while to move around 
here, so we will be watching you as we continue to move, 
because it doesn't happen overnight around here. It really 
doesn't. I wish it did a lot of times.
    Thank you so much, Mr. Denett, Mr. Sabin, Mr. Drabkin, and 
Ms. Preston. I thank all of you.
    I would like to welcome our second panel to H.R. 5787, the 
Moore-Duncan Property Bill. I think it will fix the problem 
that we should not have. A lot of Federal agencies are sitting 
on property that they aren't using, old buildings, antennas, 
and plenty of land. GAO says that agencies have almost $14 
billion in land that they do not need, and there is also about 
$4 billion in land that no one in the Government can use. These 
agencies should dispose of the property. There are better uses 
for the money.
    The problem is that to get the property ready to be sold 
there are a lot of up-front costs. You have to do environmental 
cleanup, demolition, historical preservation, things like that. 
This would cost the agencies a lot, so they just hold on to the 
property, especially since they don't keep the proceeds from 
selling it. The money just goes back into the Treasury.
    Representative Moore from Kansas' bill will allow agencies 
to keep all of the proceeds from selling the property and would 
give GSA funds to take care of the things that have to be done 
first. The agencies would reimburse GSA for those expenses 
after the property is sold.
    I think the bill will go a long way to helping agencies get 
rid of this unneeded property.
    As with the first panel, it is our committee policy that 
all witnesses are sworn in.
    Before we do that, let me yield for an opening statement by 
Ranking Member Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Chairman, I think that this is an issue that both sides 
can work on. I think that one of the sides that really is not 
talked enough about in Washington is the mistakes that have 
been made in the past and try to build onto it. There are a few 
of you that might have been around during the so-called savings 
and loan debacle. I just know for one, as somebody that saw the 
way the Federal Government handled that issue, that the real 
crisis in that situation was not that the savings and loans had 
problems, but that the Federal Government inherited huge 
amounts of real estate assets, and then basically sold it for 
10 or 20 cents on the dollar.
    The taxpayer was literally ripped off, not by somebody 
violating the law, but by agencies not having an incentive to 
get every dollar of value out of real estate assets. There is 
where the real loss of the savings and loan was. And one way to 
be able to point that out is you look around through the tax 
codes of how many people made a fortune off of buying up the 
RTC property and then selling it and managing the property in 
an appropriate way and how much successes were built on the 
backbone of us losing huge amount of resources in real estate.
    So I am encouraged to go through the hearing, take a look 
at the bill as recently introduced, and hopefully we can work 
on this.
    I think that assets unused are assets wasted, and so let's 
see how well we can work this.
    The challenge is for any bureaucracy to be responsive and 
address this issue in a way that will maximize the benefit for 
the taxpayer.
    With that, I appreciate the hearing, Mr. Chairman.
    Mr. Towns. Thank you very much.
    I would like to ask unanimous consent that Congressman 
Dennis Moore be allowed to sit in on this hearing. Of course, 
it is his legislation.
    At this time I would like to yield to Congressman Moore.
    Mr. Moore. Mr. Chairman and Mr. Bilbray, thank you very 
much for the opportunity to be here to join the subcommittee 
today for this hearing to discuss new legislation, H.R. 5787, 
that I have introduced with Mr. Duncan of Tennessee that would 
help address the disincentives that are currently keeping some 
Federal agencies from disposing of assets and property they no 
longer need.
    Last June, the OMB released a report, which found there is 
currently a backlog of more than 21,000 excess and surplus 
Federal properties worth a total of $18 billion. Holding on to 
these properties has serious implications for the a motion 
taxpayer, as it costs Federal agencies billions of dollars each 
year to maintain secure properties that are under-utilized or 
simply not needed.
    Investigations by the GAO have also pointed out that the 
administrative requirements and cost preparing the property for 
transfer or sale continue to hamper some agencies' efforts to 
address their backlog of unneeded properties.
    Because it can be difficult for agencies to secure the 
resources they need to prepare a property for disposal, these 
costs serve as a disincentive, because it makes more sense in 
the short term for them to simply hold on to a property, 
particularly if they do not expect to receive the proceeds of a 
transfer or sale.
    Fortunately, over the past several years the administration 
and Federal agencies have made progress toward strategically 
managing Federal real property by establishing asset management 
plans, standardizing data reporting, and adopting performance 
measures, but I believe there are common sense steps that we 
can take now to ensure that all Federal agencies have the 
proper incentives to dispose of property they no longer need.
    H.R. 5787, the Federal Real Property Disposal Enhancement 
Act, is designed to do that. First, the legislation would move 
to help agencies deal with the administrative requirements and 
costs of preparing under-utilized properties for transfer or 
sale by allowing the GSA, in cooperation with agencies, to use 
its resources and expertise to cover these up-front costs and 
help agencies ensure that title records, property descriptions, 
and environmental clearances are in order. GSA would then be 
reimbursed for all the costs it incurs from the proceeds that 
agencies receive from the transfer or sale of these properties.
    The legislation would also provide agencies with another 
incentive to reduce their inventory of unneeded properties by 
allowing them to keep all the proceeds received from the sale 
of surplus properties, which they could then use for future 
disposal and asset management activities.
    Over half of all land-holding agencies, including the three 
largest land-holding agencies in our Government--Department of 
Defense, GSA, and the Veterans Administration--already have 
this authority to retain proceeds, and it has been shown to be 
a tremendous incentive for some agencies to dispose of property 
they no longer need.
    As we are all aware, the Federal Government faces huge 
fiscal challenges, which is why we must increase our efforts 
both to manage our existing assets more effectively and to 
significantly reduce the inventory of under-utilized Federal 
properties. We should no longer waste precious taxpayer funds 
on maintaining and holding properties that are not needed by 
our Government.
    Again, Mr. Chairman, thank you for the invitation to join 
the subcommittee today. I look forward to hearing from the 
witnesses. Thank you, sir.
    [The prepared statement of Hon. Dennis Moore follows:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
    
    Mr. Towns. Thank you very much.
    It is a longstanding policy that we swear in our witnesses, 
so please stand and raise your right hands.
    [Witnesses sworn.]
    Mr. Towns. Let the record reflect that they answered 
affirmatively.
    Danny Werfel is the Acting Comptroller of the Office of 
Federal Financial Management at OMB, so we ask that you go 
first.

    STATEMENTS OF DANNY WERFEL, ACTING COMPTROLLER, FEDERAL 
FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; AND STAN 
 KACZMARCZYK, ACTING DEPUTY ASSOCIATE ADMINISTRATOR, OFFICE OF 
    GOVERNMENT-WIDE POLICY, GENERAL SERVICES ADMINISTRATION

                   STATEMENT OF DANNY WERFEL

    Mr. Werfel. I would like to begin by thanking Chairman 
Towns, Ranking Member Bilbray, Representative Moore, and other 
members of this subcommittee for having the hearing today and 
inviting me to speak.
    The Federal Government is achieving measurable results as 
we work to meet the President's goals of right-sizing the 
Federal real property inventory. In 2004, before the President 
launched the real property initiative, the Federal Government 
lacked a comprehensive inventory of its real property holdings 
and could not effectively identify which assets to target for 
investment or disposal. Today we have a comprehensive inventory 
of more than 1.1 million individual assets with a replacement 
value exceeding $1.5 trillion.
    Agencies are using performance measures, such as whether 
the property is mission critical, the utilization rate of that 
property, the cost and condition of that property, to identify 
assets in need of investment and those unneeded assets suitable 
for disposal.
    Agencies have disposed of more than $7 billion in unneeded 
Federal real property since 2004, and we are moving toward the 
President's goal of disposing $15 billion in unneeded assets by 
the year 2015.
    While we are proud of these accomplishments, there is more 
work to be done. Our inventory shows many surplus assets 
remaining on our books. As long as these assets remain on our 
books, agencies are investing resources to maintain them. Of 
note, our most recent report to Congress shows over 21,000 
surplus and excess assets on the Federal inventory.
    Also importantly, our inventory shows that we have mission 
critical assets with a backlog of repairs and maintenance. 
These backlogs degrade our facilities over time and cause us to 
spend more on maintenance and repairs in the long run. One of 
the anecdotal examples we would like to give is that a roof 
repair may cost $7,000 today to address, but if we don't do 
that and wait, it could cost us $7 million in the near future 
to go ahead and replace that roof.
    As reported by GSA in their written testimony for this 
hearing, six of our largest property-holding agencies have 
backlogs that exceed $16 billion.
    Federal agencies need additional tools and resources to 
address these ongoing challenges. Agency efforts to manage and 
dispose of real property are governed predominately by the Real 
Property Act of 1949. Two critical updates to this legislation 
are needed: first, allowing agencies to retain a portion of the 
net proceeds of sale of unneeded assets and requiring those 
proceeds be reinvested to help fund disposal activities and 
fund our maintenance backlog; and, second, expediting the 
disposition process for our targeted assets.
    I would like to talk briefly about these two reform 
proposals.
    First of all, retention of proceeds. Many agencies do not 
have the authority to retain proceeds, and such proceeds can be 
converted into significant savings for taxpayers. Let me 
explain how: First, proceeds can be used to cover up-front 
costs associated with the disposing of unneeded assets. As 
these assets are removed from the inventory, the costs to 
maintain them are avoided. Second, proceeds can be used to 
address repair and maintenance backlogs, avoiding the 
inevitable higher costs incurred by agencies when these 
backlogs are not addressed timely.
    On to the issue of expedited disposals. The disposition 
process that we operate under today is lengthy and complex. Our 
goal is to streamline that process so that parties interested 
in an asset for a possible no-cost conveyance have greater 
visibility and more timely access to the assets, and properties 
that are not a good fit for a no-cost conveyance can be quickly 
demolished or sold at market so that agencies can more 
immediately terminate the ongoing maintenance costs associated 
with these assets.
    Both of these reforms were proposed as part of a pilot 
program in the 2009 President's budget. We believe that 
enactment of this pilot would both facilitate the disposal of 
surplus property in the short term and help inform Congress and 
the executive branch on our longer-term, permanent reform 
approaches.
    While the administration prefers to enact these two 
reforms, retention of proceeds and expedited disposals, 
together, we are open to working with Congress to consider 
alternative paths. Ultimately, we believe that reform in both 
of these areas is essential and necessary for agencies to 
improve the management of their real property portfolio.
    After my written testimony for this hearing was submitted, 
OMB completed its review of the draft property bill provided to 
us by staff from this committee. I understand that bill has now 
been introduced yesterday and is H.R. 5787. We appreciate you 
and your staff's willingness to consult with us on the draft 
bill, and we respectfully offer the following observations for 
your consideration.
    The draft bill would allow agencies to retain 100 percent 
of the sale's proceeds, a very positive step that we applaud; 
however, the draft bill contains additional language that such 
proceeds ``shall only be expended as authorized in annual 
appropriations acts.''
    If we understand the impact of this particular language 
correctly, proceeds will only be expended for agency real 
property needs if congressional appropriators prioritize such 
funding within their existing spending caps, which are 
sometimes referred to as 302-B allocations. In this regard, 
Federal agencies will face the same challenges they face today; 
that is, dollars needed for real property will be directly 
competing with dollars needed for other discretionary 
priorities.
    The intent of the administration's real property proposal 
was not only to allow agencies to retain proceeds from property 
disposal, but to also provide agencies with the incentive for 
increased flexibility to reinvest those proceeds in the 
properties that have the highest priorities.
    I thank you again for the opportunity to testify today, and 
I look forward to answering your questions.
    [The prepared statement of Mr. Werfel follows:]

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    Mr. Towns. Thank you very much, Mr. Werfel.
    Mr. Kaczmarczyk.

                 STATEMENT OF STAN KACZMARCZYK

    Mr. Kaczmarczyk. Chairman Towns, Ranking Member Bilbray, 
and members of the subcommittee. I am Stan Kaczmarczyk, 
Principal Deputy Associate Administrator for the General 
Services Administration's Office of Government-wide Policy. I 
am pleased to appear before you today to discuss GSA's policy 
support for and operational success in real property asset 
management.
    President Bush signed Executive Order 1327, Federal Real 
Property Asset Management, on February 4, 2004. From the 
outset, GSA has fully supported and participated in the 
implementation of the Executive order. GSA has taken a 
prominent role on the Federal Real Property Council established 
by the Executive order. As one of the Federal Government's many 
land-holding agencies, GSA was proud to be recognized by the 
administration for achieving and maintaining green status on 
the PMS scorecard, the first agency to attain that status.
    In support of the Council, the Office of Government-wide 
Policy developed and maintains the Federal Real Property 
Profile, a centralized real property data base that compiles 
data on more than 1.1 million real property assets with a total 
replacement value of more than $1.5 trillion. The FRPP collects 
24 major data elements, including 4 key performance measures.
    Since 2004, using existing authorities, Federal agencies 
have reported through the FRPP, as Danny mentioned, the 
disposal of more than $7 billion of surplus real property.
    One of the significant asset management challenges 
confronting the Federal Government is the lack of incentives to 
dispose of unneeded real property. For example, some agencies 
are unable to retain and reinvest the proceeds from the sale of 
surplus assets. With a limited amount of financial resources, 
too often the real property inventory becomes a secondary 
priority. This creates a backlog of repair needs and deferred 
maintenance. As Danny mentioned, in 2007 the Government 
Accountability Office found that six land-holding agencies 
reported a backlog for repair and maintenance that totaled over 
$16 billion. If agencies could retain and reinvest the proceeds 
from the sale of surplus real property assets, the funds could 
be used to help addresses this significant backlog.
    In 2005 GSA received the authority to retain all proceeds 
from sales of its surplus properties. Since enactment of this 
authority, GSA has disposed of 42 surplus real property assets, 
with the total sales amount of $155 million. We believe that 
providing all Federal land-holding agencies with the authority 
to retain net proceeds of sale will provide an incentive for 
sound asset management decisionmaking.
    The administration's fiscal year 2009 budget includes 
proposed legislation that would allow agencies, those not 
previously authorized to retain proceeds, the ability to retain 
20 percent of proceeds from the sale of unneeded assets.
    Another disincentive to sound real property asset 
management is that some agencies retain unneeded real 
properties because they cannot afford the up-front costs of 
disposal. A general provision in the administration's fiscal 
year 2009 budget recommends authorizing GSA to pay for and 
provide up-front redeployment services to other agencies to 
help them decide whether to retain and reuse the property or to 
place the asset in the disposal process.
    Federal agencies, under the leadership of the Federal Real 
Property Council, have taken the initial steps to promote the 
efficient and economical use of Federal real property resources 
and to increase agency accountability, but without funds 
necessary to reinvest in or dispose of these assets, they will 
continue to deteriorate as part of the Federal inventory.
    We ask that you consider our legislative proposals to 
improve the real property asset management.
    Mr. Chairman, this concludes my statement. I will be 
pleased to respond to any questions.
    [The prepared statement of Mr. Kaczmarczyk follows:]

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    Mr. Towns. Thank you very much. I want to thank you Mr. 
Werfel and Mr. Kaczmarczyk for your testimony.
    At this time I would like to yield to the ranking member, 
Mr. Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Just quickly, the fact is we also don't talk about the fact 
that if we put this back into the private sector, the local 
government benefits from the tax base--not that the Speaker 
would have appreciated us taking the Presidio in San Francisco 
and putting it back on the market, which you can imagine the 
resources we could have gotten for that.
    You made a recommendation, though, and I would ask the 
author of the bill to consider the fact that allowing the 
assets to go back into either the support for maintenance or 
the purchase of new--and keep it within that maintenance and 
that property management side, and I think that the authors 
should keep a real open mind to keep that from getting lost. I 
don't think the intention was for this to get buried. That was 
the whole reason to try to make the maximum on this.
    That is one recommendation we could make up there, and I 
think that we can followup on that working with the author and 
trying to focus the staff. It may not be 100 percent, it may be 
85, like we do with drug asset seizures for the local 
government, but at least focus the resources over on to that 
maintenance aspect of where we are getting this.
    I think there is a way to work this out. I think the bill 
being drafted yesterday just gives us a foundation to work 
with, and I appreciate the positive recommendations from both 
of you.
    Mr. Towns. I would like to yield to the authors of the 
legislation, Mr. Duncan and Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman. As I mentioned before 
in my statement, in June 2007 OMB reported there is currently a 
backlog of more than 21,000 Federal assets and properties worth 
$18 billion. Does OMB have an estimate of how much Federal 
agencies are spending each year to hold and maintain excess and 
surplus properties they no longer need?
    Mr. Werfel. We do. It is $130 million per year.
    Mr. Moore. That is $130 million?
    Mr. Werfel. Yes, sir.
    Mr. Moore. All right. You also have an estimate for how 
many more Federal properties are unneeded or under-utilized but 
are not yet characterized as excess?
    Mr. Werfel. That we don't have. I think what you are 
talking about, Mr. Kaczmarczyk has it.
    Mr. Moore. As you mention in your testimony, OMB has been 
supportive of proposals to create a pilot program that would 
allow agencies to take excess properties directly to sale, 
essentially allowing them to avoid the required screenings for 
transfer to another Federal agency, homeless use, and public 
benefit conveyance. It seems this proposal is based on the 
premise that the screening requirements are the primary factor 
keeping agencies from disposing of property they no longer 
need. Does OMB have any evidence that this is, indeed, the 
case?
    Mr. Werfel. What we have discussed in the Federal community 
through the Federal Real Property Council are the major 
obstacles that we confront in disposing real property, and two 
themes emerged. One is the agencies look at the process, which 
takes about 240 days to go through, to go through all the 
various public benefit conveyance steps that are necessary, and 
that is, in many cases, a deterrent to having the agencies push 
their properties through for sale.
    In addition, as has been mentioned several times, there are 
up-front costs associated with getting a property ready for 
sale. It can be as simple as moving a large dirt pile from the 
property before they get it ready for sale, but removing that 
dirt pile could cost a couple of thousand dollars that the 
agency doesn't have.
    So really seeing both these obstacles, the length of time, 
the 240 days for public benefit conveyances on average, and the 
proceed issue both present obstacles for agencies.
    Mr. Moore. Thank you.
    Are you aware of the legislation by Senators Carper and 
Coburn that would create a pilot program that would allow 
agencies that disposed of properties through the pilot to keep 
only 20 percent of the proceeds of their sales? Are you aware 
of that?
    Mr. Werfel. We are aware of it. It is very similar to a 
pilot proposal that has been in the President's budget for the 
last few years.
    Mr. Moore. My question then is if most agencies can already 
keep 100 percent of the proceeds, what incentive would they 
have to take part in the pilot program?
    Mr. Werfel. Representative Moore, one clarification about 
your question. First, it is my understanding that a minority of 
our agencies currently have the authority to retain proceeds. 
For example, Veterans Affairs and the State Department have 
such authorities, but many of our agencies, such as 
Transportation, Department of Homeland Security, and many other 
agencies, including the Defense Department for their non-BRAC 
properties, do not have such authority.
    So the 20 percent retention would be a much better 
improvement than what they face today, and that 20 percent 
proceeds could help. I used the dirt pile example--help the 
agencies remove that just for the environment work that is 
necessary. We believe that 20 percent would have a big impact.
    Clearly, 100 percent would go a much further way. It would 
not only allow you to do the up-front cost to get the property 
ready for disposal, which, relatively speaking, would be 
smaller in amount than addressing our real property maintenance 
backlog. So, when you start getting up into the 100 percent 
range, now you are talking about the opportunity to really make 
investments into our infrastructure that not only will improve 
the condition of our facilities, but, as I mentioned, will be a 
positive return on investigation for taxpayers because the 
sooner you repair those facilities the less expensive the life 
cycle cost of those facilities are.
    Mr. Moore. May I ask some very brief questions of the 
gentleman from GSA, Mr. Chairman?
    Mr. Towns. Sure.
    Mr. Moore. Could you describe the trend in the disposal of 
GSA properties that we have seen since the agency was given the 
authorization to retain the proceeds of its sales in 2004? Has 
the agency seen a significant increase in the number of 
properties disposed of since this authorization was given?
    Mr. Kaczmarczyk. The authorization applies to GSA 
properties.
    Mr. Moore. Right.
    Mr. Kaczmarczyk. I don't know if I would say there has been 
a significant increase, but it has certainly been a boon to us 
in being able to retain the proceeds and to reinvest them.
    There has been an increase in recent years, but it has 
basically been as a result of a tiering process that was put in 
by GSA, but we restructured our portfolio to three tiers. The 
ones that we really have a continuing need for that are our top 
priority investments, ones that could reach that category with 
some additional investment, and then a third tier that we 
really should get rid of, we have no use for. That has been the 
real driver for the increase in disposals.
    Mr. Moore. Does GSA have any evidence that the screening 
requirements for homeless use and public benefit conveyance are 
keeping agencies from disposing a property they no longer need?
    Mr. Kaczmarczyk. I wouldn't say evidence. I agree with 
Danny that it is a real concern that comes up in the Federal 
Real Property Council, which is all the Federal land-holding 
agencies getting together to try to increase or improve asset 
management. I am of the mind that if you should get rid of it, 
you should get rid of it, especially if it is costing you money 
to maintain it, even if it takes time to go through the proper 
channels.
    Mr. Moore. Last question, Mr. Chairman.
    Do you feel that another important factor is that it is 
often difficult for agencies to secure the resources they need 
to fund disposal efforts, and that not all agencies are allowed 
to keep the proceeds from sales they do complete? Is that a 
concern?
    Mr. Kaczmarczyk. Yes, that is definitely a concern, and the 
legislation would be a big help in that area.
    Mr. Moore. Thank you, witnesses. Thank you, Mr. Chairman.
    Mr. Towns. Let me thank you for sponsoring the legislation, 
and, of course, let me thank both of you for your testimony. 
Thank you very much.
    On that note, the committee is adjourned.
    [Whereupon, at 4 p.m., the subcommittee was adjourned.]

                                 
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