[Congressional Record (Bound Edition), Volume 155 (2009), Part 3]
[Senate]
[Pages 3566-3586]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           EXECUTIVE SESSION

                                 ______
                                 

 NOMINATION OF WILLIAM J. LYNN, III, TO BE DEPUTY SECRETARY OF DEFENSE

  Mr. LEVIN. Mr. President, I ask unanimous consent now that the Senate 
proceed to executive session to consider Calendar No. 14, the 
nomination of William Lynn to be Deputy Secretary of Defense; that 
there be 3 hours of debate with respect to the nomination, with 1 hour 
each under the control of Senator Grassley and Senator McCain or his 
designee, 1 hour under my control or my designee's, and that upon the 
use or yielding back of time, the Senate proceed to vote on 
confirmation of the nomination; that upon confirmation, the motion to 
reconsider be laid upon the table, no further motions be in order, that 
the President then be immediately notified of the Senate's action and 
the Senate resume legislative session.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The clerk will report the nomination.
  The bill clerk read the nomination of William J. Lynn, III, of 
Virginia, to be Deputy Secretary of Defense.
  The PRESIDING OFFICER. Who yields time?
  The Senator from Michigan is recognized.
  Mr. LEVIN. Mr. President, I yield myself as much time as I utilize.
  Mr. President, I urge my colleagues to join me in supporting the 
nomination of Bill Lynn to be Deputy Secretary of Defense. This 
nomination was reported to the Senate by the Armed Services Committee 
by voice vote on February 5, without objection or dissenting vote.
  Since the time that he received his law degree from Cornell Law 
School and his master's degree in public affairs from the Woodrow 
Wilson School more than 25 years ago, Mr. Lynn has devoted his life to 
public service and the national defense. For 6 years, Mr. Lynn worked 
as the military legislative assistant and legislative counsel to 
Senator Ted Kennedy. In 1993, he moved to the Department of Defense, 
where he served first as director of program analysis and evaluation, 
and then as comptroller until 2001. Over the years, he has also served 
as a senior fellow at the National Defense University, on the 
professional staff at the Institute for Defense Analyses, and as an 
executive director of the Defense Organization Project at the Center 
for Strategic and International Studies.
  At the end of the Clinton administration, Mr. Lynn went to the 
private sector for the first time, working first for DFI international 
and then for Raytheon Corporation, where he has served as senior vice 
president of government operations and strategy, overseeing the 
company's strategic planning and government relations. As a result of 
the senior positions he has held with Raytheon, Mr. Lynn has vested and 
unvested stock in the company, as well as salary, bonus, and retirement 
payments that are due now and in the future
  Mr. Lynn's situation is of course not unique. Numerous nominees to 
senior positions in prior administrations--including nominees to serve 
as Secretary of Defense, Deputy Secretary of Defense, Under Secretary 
of Defense for Acquisition, Technology and Logistics, Secretaries of 
the Military Departments, and Service Acquisition Executives--have 
served in similar industry positions and held similar financial 
interests at the time of their nominations.
  Over the years, the Senate Armed Services Committee has developed a 
strict set of ethics guidelines to address potential conflicts of 
interest, and the appearance of conflicts of interest, arising out of 
such nominations. These guidelines are tougher and more comprehensive 
than the rules historically imposed by the executive branch or by other 
congressional committees. When I say ``These guidelines'' are tougher 
and more comprehensive, I am referring here to the guidelines that the 
Senate Armed Services Committee has developed.
  For example, under generally applicable executive branch ethics 
rules, a nominee could address actual or potential conflicts without 
divesting stock or other financial interests by recusing himself from 
matters involving his former employer--subject to a waiver by DOD 
ethics officials. However, the Armed Services Committee of the Senate 
takes a stricter approach. We require that nominees to Senate-confirmed 
positions divest themselves of stock, stock options, and other 
financial interests in companies that do business with the Department 
of Defense. In the case of stock options that have not yet vested, and 
will not vest within 90 days after confirmation, the committee insists 
that the nominee renounce the options--in other words, forfeiting the 
entire value of the stock options.
  The committee's strict divestiture requirements are added to the 
requirements of statutory and regulatory ethics rules applicable to all 
executive branch officials. Our rules require senior executive branch 
officials to recuse themselves from decisions impacting their former 
employers for a period of 1 year, even if they have already divested 
all financial interest. When I said ``our rules'' I was referring here 
to the executive branch rules. As a result, nominees to senior DOD 
positions are subject to both divestiture and recusal requirements.
  These ethics requirements have been effective. Over the 12 years that 
I have served as chairman or ranking member of the Armed Services 
Committee, I am not aware of a single instance in which a Senate-
confirmed defense official who previously served in industry has even 
been alleged to have taken an action favoring his former employer. We 
may agree or disagree with some of the decisions that these senior 
officials have made, but conflict of interest does not appear to have 
been alleged in any of those disagreements.
  Mr. Lynn has complied with all of the committee's requirements. In 
accordance with our ethics guidelines, Mr. Lynn has agreed to divest 
his financial interest in his former employer within 90 days of his 
confirmation. In order to accomplish this purpose, he has agreed to 
forfeit restricted stock. By the way, this stock has a value between 
$250,000 and $500,000. But that stock does not vest until late in 2009 
or 2010. In short, Mr. Lynn has agreed to forfeit that restricted stock 
and thereby make a significant financial sacrifice in order to return 
to Government service.
  In addition, Mr. Lynn will be subject to the statutory and regulatory 
recusal requirements that I have already discussed. These recusal 
requirements are subject to waiver by the senior ethics official in the 
Department of Defense. However, Mr. Lynn has taken an additional step 
by agreeing not to seek any waiver of the recusal requirements during 
his first year in office with regard to any matter on which he 
personally lobbied either Congress or the executive branch. This 
commitment on Mr.

[[Page 3567]]

Lynn's part goes beyond the steps taken by previous nominees to senior 
positions at the Department of Defense.
  The bottom line is this. Mr. Lynn, if confirmed, will be subject to 
ethics restrictions that are stricter than those historically imposed 
by the executive branch, stricter than those applied by other 
congressional committees, and stricter even than those applied by the 
Armed Services Committee to previous nominees with similar backgrounds.
  On January 21, 2009, President Obama issued an Executive order on 
ethics commitments by executive branch personnel. This Executive order 
includes a provision that would, for the first time, preclude 
registered lobbyists from seeking or accepting employment with an 
agency that they had lobbied within the previous 2 years. Because Mr. 
Lynn was a registered lobbyist for Raytheon, he could not have been 
appointed Deputy Secretary of Defense without a waiver of this 
prohibition.
  On January 23, 2009, the Director of the Office of Management and 
Budget approved a waiver to two paragraphs of the executive order, 
clearing the way for Mr. Lynn to serve.
  Mr. Lynn will still be subject to the tough new postemployment 
restrictions in the executive order. Those would preclude him from 
lobbying any DOD official for 2 years after leaving office, and from 
lobbying any political appointee in the Obama administration for the 
duration of the administration, should he leave his position before the 
end of the administration.
  This waiver was appropriate: Mr. Lynn is a career public servant 
whose recent history in the private sector was more of an exile than a 
calling. He didn't leave the Department of Defense 8 years ago because 
he wanted to cash in on inside connections or information, but because 
the Clinton administration came to an end. When Mr. Lynn hopefully 
passes through the doors of the Pentagon as Deputy Secretary of 
Defense, he will return to his roots as a public servant, put his 
relationships in industry behind him, and recognize that his sole duty 
and obligation is to his country and the national defense.
  Today, the Department of Defense faces huge management challenges. 
The Government Accountability Office reported last year that the cost 
overruns on the Department's 95 largest acquisition programs alone now 
total almost $300 billion over the original program estimate, even 
though the Department has cut unit quantities and reduced performance 
expectations on many programs in an effort to hold down costs.
  The Department's financial system remains incapable of producing 
timely, accurate information on which sound business decisions can be 
based. The Department's civilian workforce has been decimated by 
decades of freezes and cuts, leaving us dependent on contractors who 
perform many functions that should be performed by Government 
personnel.
  Mr. Lynn's background in senior management positions in the 
Department of Defense and in industry over the last two decades gives 
him the kind of knowledge and experience that will be useful to address 
these challenges. In the course of the committee's consideration of Mr. 
Lynn's nomination, I have spoken to him about the challenges facing the 
Department of Defense. I have been impressed by his grasp of the 
problems the Department faces and his ideas for addressing them.
  Under these circumstances, and those are the circumstances I have 
outlined about cost overruns, we cannot afford a Deputy Secretary who 
is either disengaged or ineffectual. We need someone with the kind of 
experience and background Mr. Lynn will bring to the job. His 
nomination, again, was approved by the Senate Armed Services Committee 
without a single dissenting vote. I hope our colleagues will support 
this nomination.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Arizona is recognized.
  Mr. McCAIN. Mr. President, I intend to vote in favor of the 
nomination of Mr. Lynn to be the Deputy Secretary of Defense. Mr. Lynn 
has an extensive record of public service. He has served as the 
Director of Program Analysis and Evaluation in the Pentagon during the 
Clinton administration, and following that he was the Under Secretary 
of Defense, Comptroller, from 1997 to 2001. He served as, obviously, 
the chief financial officer for the Department of Defense.
  After his DOD service, Mr. Lynn, as we know, became a registered 
lobbyist and the Raytheon Company's senior vice president of government 
operations. In that position he led Raytheon's strategic planning and 
oversaw all of their Government relations activities.
  Mr. Lynn has served as I mentioned, but nowhere, I might point out, 
does he have in his resume any extensive managerial experience. One of 
the major functions of the Deputy Secretary of Defense is to make the 
Pentagon run. Mr. Lynn does not have that executive managerial 
experience.
  Having said that, elections have consequences, as we all know, and 
this is the selection that the President of the United States made, and 
the Secretary of Defense also supports his nomination.
  I do not view the fact that Mr. Lynn became a lobbyist for Raytheon 
as, per se, disqualifying. Mr. Lynn has indicated his willingness to 
comply with the ethical requirements of the executive branch aimed at 
preventing conflicts of interest, and he has agreed to the additional 
stock divestment obligations that the Committee on Armed Services has 
consistently required of nominees.
  I have been concerned, however, about the practical problems that 
would arise from Mr. Lynn's past lobbying activities and the legitimate 
concerns the American people would have if Mr. Lynn made decisions 
related to the programs for which he lobbied.
  I sent a letter to Mr. Lynn on January 26, with a follow-up letter on 
January 29, asking him to articulate in detail what specific matters 
would be affected. Mr. Lynn responded on January 30 indicating that he 
had worked on the DDG-100 surface combatant, the AMRAAM air-to-air 
missile, the F-15 airborne radar, the Patriot Pure Fleet Program, the 
Future Imagery Architecture, and the Multiple Kill Vehicle. He provided 
me with written assurances that he would refrain from participating in 
any decisions regarding those programs for 1 year if he is confirmed.
  I believe these assurances and with ongoing reviews within DOD that 
encompass rigorous screening Mr. Lynn will endeavor to perform 
effectively as the Deputy Secretary of Defense.
  I am aware, as I mentioned, that he has the support of Secretary 
Gates, and I obviously consider that to be an endorsement in Mr. Lynn's 
favor. President Obama, as we all know, signed an Executive order on 
January 21, 2009, that established a praiseworthy ``revolving door 
ban'' that would bar any lobbyist from working for an agency they 
lobbied within 2 years of an appointment. The Executive order included 
a provision for granting a public interest waiver, and Mr. Lynn was 
given a waiver.
  It is disappointing that President Obama, who pledged continuously 
throughout the campaign to change the culture of Washington and the 
influence of lobbyists, then almost immediately chose to nominate 
several individuals, including Mr. Lynn, who required a waiver.
  So after proudly trumpeting a new change and the new rules and 
regulations, several individuals--and a couple have had to withdraw 
their nominations--that Mr. Lynn required a waiver or exemption to that 
policy. Obviously, the American people were promised one thing but 
delivered another.
  My colleague, Senator Grassley, who will be speaking later, sent a 
letter on January 29 to OMB Director Peter Orszag asking for a 
justification for the granting of the waiver. I ask unanimous consent 
that Mr. Orszag's response on February 3 be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:


[[Page 3568]]




                                              The White House,

                                 Washington, DC, February 3, 2009.
     Hon. Charles E. Grassley,
     U.S. Senate,
     Washington, DC.
       Dear Senator Grassley: Thank you for giving the 
     Administration the chance to address the questions you raise 
     in your letter of January 29, 2009 regarding the granting of 
     a waiver that exempts Mr. William J. Lynn from certain 
     provisions in President Obama's Executive Order on Ethics 
     Commitments by Executive Branch Personnel (the ``Order''). We 
     appreciate your concerns and are glad to have the opportunity 
     to fully explain the decision to grant this waiver, which we 
     strongly believe to be the correct one.


                              I. Background

       The President signed the Executive Order on Ethics 
     Commitments by Executive Branch Personnel on January 21, 
     2009. The Order includes some of the strictest ethics rules 
     ever imposed on executive branch personnel. In addition to 
     barring appointees from accepting gifts from registered 
     lobbyists, the Order places sharp limitations on individuals 
     traveling back and forth between government service and the 
     private sector, using their government service for personal 
     enrichment at the expense of the public interest.
       The Order takes an especially strong stand against 
     lobbyists moving into and out of the executive branch. The 
     Order restricts registered lobbyists who are appointed to an 
     executive agency from participating in any particular matter 
     on which they lobbied within the past two years and from 
     participating in the specific issue area in which that 
     particular matter falls, subject to the waiver provision 
     discussed below. Registered lobbyists are also restricted 
     from seeking or accepting any employment within an executive 
     agency that they lobbied within the past two years.
       The Order has been roundly praised by commentators and 
     leading good government advocates as the toughest ever of its 
     kind. To cite just a few, Democracy 21 said that ``the new 
     Executive Order contains the toughest and most far reaching 
     revolving door provisions ever adopted,'' and went on to say 
     that the Order ``goes further than any previous action taken 
     by a President to restrict the ability of presidential 
     appointees who serve in the Executive Branch from coming back 
     to lobby the Administration, and also to limit the role of 
     lobbyists coming in to serve in the Administration.'' The 
     Washington Post reported that experts viewed the Order as 
     ``considerably broader than those other presidents imposed,'' 
     and Meredith McGehee, policy director of the Campaign Legal 
     Center, said in a statement that ``[no] two ways about it, 
     the revolving-door provisions in the new executive order 
     issued by President Obama are very tough.''
        Even the toughest rules, however, need reasonable 
     exceptions. That is why the Order provides that a waiver of 
     these restrictions may be granted in limited circumstances. 
     The waiver may be granted when it is determined ``(i) that 
     the literal application of the restriction is inconsistent 
     with the purposes of the restriction, or (ii) that it is in 
     the public interest to grant the waiver.'' Sec. 3(a). The 
     Order goes on to explain that the ``public interest'' may 
     include, but is not limited to, exigent circumstances 
     relating to national security or to the economy. Sec. 3(b). 
     The Order also instructs the Director of the Office of 
     Management and Budget to consult with the White House Counsel 
     when determining whether a waiver is necessary and 
     appropriate.
       Experts have praised the inclusion of a waiver provision in 
     the Order. For example, Norman Ornstein, a Resident Scholar 
     at the American Enterprise Institute stated that: ``This 
     tough and commendable new set of ethics provisions goes a 
     long way toward breaking the worst effects of the revolving 
     door. There are many qualified people for the vast majority 
     of government posts. But a tough ethics provision cannot be 
     so tough and rigid that it hurts the country unintentionally. 
     Kudos to President Obama for adding a waiver provision, to be 
     used sparingly for special cases in the national interest. 
     This is all about appropriate balance, and this new executive 
     order strikes just the right balance.''
       Similarly, Thomas Mann, Senior Fellow of Governance Studies 
     and the Brookings Institution notes: ``The new Obama ethics 
     code is strict and should advance the objective of reducing 
     the purely financial incentives in public service. I applaud 
     another provision of the EO, namely the waiver provision that 
     allows the government to secure the essential services of 
     individuals who might formally be constrained from doing so 
     by the letter of the code. The safeguards built into the 
     waiver provision strike the right balance.''


                    II. Responses to Your Questions

       In considering the waiver for Mr. Lynn so that he might 
     serve as Deputy Secretary of Defense, we believe the right 
     balance has been struck by granting a waiver at the request 
     of the Secretary of Defense to a qualified candidate whose 
     service to the country is critical to our national security. 
     With that in mind, we want to address your specific 
     questions.
       First, you asked what criteria were used in determining 
     that Mr. Lynn's waiver was necessary to further ``the public 
     interest.'' As noted above, the Order specifically states 
     that the public interest includes ``exigent circumstances 
     relating to national security.'' These circumstances include 
     the urgent need to have the best-qualified individuals 
     serving at the highest levels of the President's national 
     security team. As Secretary Gates stated with regard to 
     asking the President to nominate Mr. Lynn to be the Deputy 
     Secretary: ``I interviewed Bill Lynn; I was very impressed 
     with his credentials; he came with the highest 
     recommendations of a number of people that I respect a lot. 
     And I asked that an exception be made, because I felt that he 
     could play the role of the deputy in a better manner than 
     anybody else that I saw.''
       Mr. Lynn's qualifications for the Deputy position are well 
     known. Mr. Lynn served as Under Secretary of Defense 
     (Comptroller) under President Clinton, before which he had 
     served as the Director for Program Analysis and Evaluation in 
     the office of the Secretary of Defense. Prior to that, he 
     served as an Assistant to the Secretary of Defense for 
     Budget. High-level experience in managing Pentagon budgetary, 
     finance and procurement functions is extremely rare, and it 
     was particularly important to Mr. Lynn's selection here.
       As you are aware, the Department of Defense faces enormous 
     management challenges. During Mr. Lynn's previous tenure at 
     DoD, there were significant efforts to improve financial 
     reporting, including two major initiatives. First, in 1998, 
     DoD adopted for the first time a Financial Management 
     Improvement Plan, which was a strategic framework for 
     improving critical financial systems and feeder systems in 
     the future. Second, the DoD Senior Financial Management 
     Council was reconstituted during 2000 and adopted a 
     comprehensive program management plan in January 2001.
       Mr. Lynn was generally credited with putting appropriate 
     managerial emphasis on improving financial reporting. For 
     example, on February 17, 2000, the Deputy Inspector General 
     testified to Congress that ``the DoD has seldom, if ever, 
     been so committed to across the board management improvement 
     . . . . with continuous management emphasis, th[e] 
     initiatives should dramatically improve the efficiency of DoD 
     support operations over the next several years.'' DOD IG 
     Report No. D-2000-077 at 4.
       Similarly, on May 9, 2000, Jeffrey Steinhoff from the 
     General Accounting Office (now the Government Accountability 
     Office) testified that ``DOD has made genuine progress in 
     many areas throughout the department. . . . We have seen a 
     strong commitment by the DOD Controller and his counterparts 
     in the military services to addressing long-standing, deeply 
     rooted problems.'' GAO/T-AIMD/NSIAD-00-163 at 2.
       This progress could be seen in several areas. For example, 
     when Mr. Lynn took over as Comptroller, DoD could not even 
     generate a list of its finance and accounting systems. GAO/
     AIMD-97-29 (Jan. 31, 1997). By the time he had left, DoD had 
     identified 167 critical systems, had achieved compliance with 
     federal financial management standards in 19 of those 
     systems, and had a plan to achieve compliance for the balance 
     of its systems by FY 2003. To take another example, under Mr. 
     Lynn's watch, DoD continued its progress in significantly 
     consolidating and streamlining its financial centers and 
     financial systems. Between 1991 and 2000, DoD consolidated 
     330 accounting and finance locations into 26, and reduced the 
     number of finance and accounting systems from 648 to 190. 
     Accomplishments like these led John Hamre, who was Mr. Lynn's 
     predecessor as Comptroller and who also served as Deputy 
     Secretary, to state that ``I don't know anybody who did the 
     job better than Bill Lynn.''
       Mr. Lynn's experience is not limited to the Pentagon. From 
     1987 until 1993, Mr. Lynn served on the staff of Senator 
     Edward Kennedy as the legislative counsel for defense and 
     arms control matters and as the Senator's staff 
     representative on the Senate Armed Services Committee. Prior 
     to 1987, he was a senior fellow in the Strategic Concepts 
     Development Center at National Defense University, where he 
     specialized in strategic nuclear forces and arms control 
     issues. He was also on the professional staff of the 
     Institute of Defense Analyses. From 1982 to 1985, he served 
     as the executive director of the Defense Organization Project 
     at the Center for Strategic and International Studies.
       In short, Mr. Lynn's executive branch experience, combined 
     with his legislative, think-tank and private sector 
     experience, gives him the precise set of skills that are not 
     only necessary to the job, but are rare in their breadth and 
     depth. That is why former Secretary of Defense William Cohen, 
     who served as Mr. Lynn's supervisor during the Clinton 
     Administration, commented that he has ``precisely the kinds 
     of skills required'' to serve as the Deputy Secretary. We 
     share both the current and former Secretaries' views that Mr. 
     Lynn's experience and skill set would make him an exceptional 
     Deputy Secretary of Defense.
       Second, you asked about the potential for conflicts of 
     interest given Mr. Lynn's past position at Raytheon Company 
     (``Raytheon''). These issues were carefully reviewed as part 
     of the consideration of Mr. Lynn, and we believe that strong 
     safeguards

[[Page 3569]]

     have been erected that address these concerns and allow Mr. 
     Lynn to serve. We note that these arrangements were 
     structured in conformance with the Armed Services Committee's 
     longstanding requirements and practices. These arrangements 
     have also been approved by the Defense Department's ethics 
     official as eliminating potential conflicts and providing for 
     appropriate protective measures.
       Specifically, Mr. Lynn will divest his Raytheon stock 
     within 90 days of his appointment, including his shares in 
     the Raytheon Savings and Investment Plan. He also will 
     forfeit all of his restricted stock units that he holds under 
     the 2007-2009 Raytheon Long-Term Performance Plan (LTPP) and 
     the 2008-2010 LTPP, and will divest those shares he holds 
     under the 2006-2008 LTPP within 90 days of their vesting in 
     February. To ensure there are no conflicts regarding the 
     stock, he will not participate personally and substantially 
     in any particular matter that has a direct and predictable 
     effect on the financial interests of Raytheon until he has 
     divested the stock, unless he first obtains a written waiver, 
     pursuant to 18 U.S.C. Sec. 208(b)(1), or qualifies for a 
     regulatory exemption, pursuant to 18 U.S.C. Sec. 208(b)(2).
       Further, for a period of one year after his resignation 
     from Raytheon, he will not participate personally and 
     substantially in any particular matter involving specific 
     parties in which Raytheon is a party, unless first authorized 
     to participate, pursuant to 5 C.F.R. 2635.502(d). As 
     an additional precaution, Mr. Lynn has promised not to seek 
     authorization to participate in decisions on any of the six 
     specific programs where he personally lobbied: the DDG-1000 
     surface combatant, the AMRAAM air-to-air missile, the F-15 
     airborne radar, the Patriot Pure Fleet program, the Future 
     Imagery Architecture, and the Multiple Kill Vehicle.
       Finally, consistent with the customary practice for 
     departing executives of Raytheon, Mr. Lynn will continue to 
     participate in the Raytheon Defined Benefit Plan, which would 
     pay him about $4,300 monthly beginning on January 1, 2019. In 
     accord with the letter signed by the Chairman and Ranking 
     Member of the Senate Committee on Armed Services dated 
     September 23, 2005, Mr. Lynn has agreed that prior to acting 
     in any particular matter that is likely to have a direct, 
     predictable, and substantial effect on the financial interest 
     of Raytheon, he will consult with his Designated Agency 
     Ethics Official, and will not act in the matter unless that 
     official determines that the interest of the Government in 
     his participation outweighs any appearance of impropriety, 
     and issues a written determination authorizing his 
     participation. Mr. Lynn understands that such an 
     authorization does not constitute a waiver of 18 U.S.C. 
     Sec. 208 and does not affect the applicability of that 
     section.
       Under the circumstances, we believe this arrangement 
     accomplishes the twin goals of enforcing tough ethical 
     standards that protect the public interest, while also 
     assuring that the nation is not deprived of a talented and 
     badly-needed public servant to assist with the defense of our 
     nation.
       Third, you ask about the process for selecting Mr. Lynn. We 
     can assure you that the selection of Mr. Lynn came at the end 
     of an extensive process that resulted in a consensus opinion 
     that Mr. Lynn was the best-qualified candidate for this job. 
     Multiple candidates were considered and interviewed over the 
     course of what was a long and rigorous review. Ultimately, 
     though, this is a position for which there is a short list of 
     truly qualified applicants who have the kind of experience we 
     detailed earlier in response to your first question. Taking 
     into account all of the factors, including the concerns 
     raised in your letter, the President and Secretary Gates felt 
     that Mr. Lynn was the best person for the job.
       Fourth and finally, you have asked whether Mr. Lynn's 
     ability to perform his job will be impaired by any necessary 
     recusals. We do not believe the ethics compliance process 
     described above will hinder Mr. Lynn from doing his job. The 
     process strikes a reasonable balance under the circumstances. 
     It waives the need for Mr. Lynn to recuse himself from issues 
     that would otherwise be implicated by paragraphs 2 and 3 of 
     the ethics pledge, but still requires him to follow the 
     remainder of the Order, including the revolving door exit 
     provisions and the gift ban, as well as the other 
     restrictions detailed in this letter.
       Again, thank you for this opportunity to address these 
     issues. As the Ethics Executive Order and the other Orders 
     and Presidential Memoranda signed on the same day reflect, 
     President Obama and all of us in the Executive Office of the 
     President are committed to running a highly transparent and 
     accountable administration. We look forward to working with 
     you on these issues and on government reform issues more 
     broadly.
           Sincerely,
     Peter R. Orszag,
       Director, Office of Management and Budget.
     Gregory B. Craig,
       Counsel to the President.

  Mr. McCAIN. With respect to the waiver, Mr. Orszag stated:

       The selection of Mr. Lynn came at the end of an extensive 
     process that resulted in a consensus opinion that Mr. Lynn 
     was the best qualified candidate for the job.

  He went on to say:

       Mr. Lynn's executive branch experience, combined with his 
     legislative, think tank and private sector experience--

  As you note, he did not mention a managerial role that he might have 
had in his career--

     gives him the precise set of skills that are not only 
     necessary to do the job, but are rare in their breadth and 
     depth.

  I hope Mr. Lynn will be a rare exception to the new rule--you know, 
one of the things I had hoped would happen because of the deep 
disapproval the American people have in the way we do business is this 
kind of cycle of lobbyists to executive branch, to legislative branch, 
to lobbyists. It goes on in this town with enormous frequency and has 
led to scandals, indictments, and convictions of former staff members, 
former Members of Congress, and former members of the executive branch. 
I had hoped that somewhere in America there would be someone who had 
the experience and knowledge and background in running what probably, I 
believe, is the largest organization in the world, the Department of 
Defense, rather than again having to go inside the beltway.
  But as I mentioned, elections have consequences. The President has 
designated Mr. Lynn and others to positions which are in violation of 
the much heralded Executive order he made concerning not having 
lobbyists serve in Government.
  So I will give him at least, in my opinion, my vote, the benefit of 
the doubt, and will vote in favor of Mr. Lynn's nomination.
  He responded to, albeit belatedly, the questions I submitted to him. 
I wish him well. We face enormous challenges both in the way the 
Department of Defense operates, the acquisition programs--and many of 
them are completely out of control, with cost overruns that are 
staggering--to a lack of efficiency in a number of areas.
  I not only wish Mr. Lynn well, but I look forward to working with him 
as we do whatever we can to defend this Nation's vital national 
security interests as well as manage the functions of a bureaucracy 
which, in all candor, has defied sound management under both Republican 
and Democratic administrations.
  I know Senator Coburn and Senator Grassley will be over later on. I 
am confident that Mr. Lynn's nomination will be voted out 
overwhelmingly by the Senate. I hope Mr. Lynn will do well in his new 
position of responsibility. I pledge to work with him as much as 
possible, as I have done with Secretaries of Defense and Deputy 
Secretaries of Defense in Republican and Democratic administrations.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Michigan is recognized.
  Mr. LEVIN. I wanted to thank Senator McCain for his support. It is 
exceedingly important, and his very thoughtful statement makes a real 
contribution to the debate.
  I yield the floor, and I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The bill clerk proceeded to call the roll.
  Mr. GRASSLEY. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Merkley). Without objection, it is so 
ordered.
  Mr. GRASSLEY. Mr. President, I come to the floor to raise questions 
about whether Mr. Lynn ought to be Deputy Secretary of Defense. I do it 
with the normal courtesy, that a President ought to be able to name 
people to his team, and I do it based upon two questions: One, the use 
of the waiver for him to be in this position contrary to the Executive 
order of President Obama; and, secondly, to raise questions about his 
activity as chief financial officer in the second Clinton 
administration, and now coming to be Deputy Secretary of Defense. I 
will try to lay this out as best I can with documentation.

[[Page 3570]]

  I will not be able nor do I need to document the first consideration 
on the waiver. I wanted to express views on it.
  I thought I had seen the last of Mr. Lynn when President George W. 
Bush first took office. I was dead wrong. So I had to send my staff out 
to where the Senate buries old skeletons. It is the Records Center out 
in Maryland, the scenic countryside about 20 miles from the Capitol. 
There I had my staff dig up the remains of what came to be known, and 
what I came to know about Mr. Lynn's activities as chief financial 
officer about 10 years ago.
  I would give a little bit of word of advice to my colleagues, 
archival of your materials. I found that political nominees, good and 
bad, come back like Australian boomerangs. Some take longer than others 
to return, but eventually you will see them again.
  Mr. Lynn is currently employed as senior vice president, government 
operations, of a major defense contractor, Raytheon. Until June 2008, 
Mr. Lynn was registered as Raytheon's principal lobbyist to the 
Department of Defense.
  I have serious questions about the nomination. My first area of 
concern is that Mr. Lynn does not appear to meet President Obama's 
strict new ethical standards for executive branch appointees. Those 
standards were laid down in an Executive order of January 21, 2009.
  It is important for me to say what ethics means to me. Everyone has a 
different idea as to what ethics represents. This is a complicated 
issue, and I don't want there to be any confusion about this word or 
principle. The Merriam Webster dictionary defines the word ``ethics,'' 
one, as the discipline dealing with what is good and bad, with moral 
duty and obligation. This definition is very clear, but I want to go a 
step further to say that, to me, ethics are very uncomplicated 
principles of life. Simply put, when faced with tough choices or 
decisions, we must always do what is true and correct.
  Throughout the Presidential campaign, candidate Barack Obama 
repeatedly promised to close the revolving door and change the 
political culture in Washington. This was one of his top priorities. 
Consistent with those promises, within 24 hours of being sworn in, he 
signed the Executive order that set new ethical standards in stone. 
Under the ``revolving door ban'' section of those rules, Mr. Lynn 
should have been barred from serving as Deputy Secretary of Defense 
until July 2011. I understand Mr. Lynn has been given a special order 
by the administration to further the public interest.
  According to a letter I have received from OMB Director Peter Orszag 
of February 3, 2009--and I have it here if anybody is interested in 
reading it. Senator Levin has already had this letter printed in the 
Record.
  According to this letter from OMB Director Peter Orszag of February 
3, 2009, Mr. Lynn's waiver was based on ``exigent circumstances 
relating to national security.''
  Director Orszag stated:

       Mr. Lynn is uniquely qualified for this position and is 
     urgently needed to serve on the President's national security 
     team.

  Mr. Orszag was responding to my letter of January 29, 2009, asking 
for the justification of the waiver.
  I ask unanimous consent to have that letter printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                      U.S. Senate,


                                         Committee on Finance,

                                 Washington, DC, January 29, 2009.
     Hon. Peter Orszag,
     Director, Office of Management and Budget, Washington, DC.
       Dear Director Orszag: I write today to express my concerns 
     with the recent decision to grant a waiver for Mr. William J. 
     Lynn, exempting him from the strict new ethics rules outlined 
     in President Obama's Executive Order titled ``Ethics 
     Commitments by Executive Branch Personnel,'' signed on 
     January 21, 2009.
       Mr. Lynn has been nominated by the President to serve as 
     the Deputy Secretary of Defense. He is currently employed as 
     a senior vice president at a major Department of Defense 
     (DOD) contractor--Raytheon Company. Until very recently, he 
     was also registered as Raytheon's principal lobbyist to the 
     DOD.
       Throughout the presidential campaign, President Obama 
     repeatedly promised the American voters that he would ``close 
     the revolving door'' in order to greatly limit the role of 
     lobbyists in his administration. He warned lobbyists, they 
     ``won't find a job in my White House'' and [lobbyists] ``will 
     not run my White House, and they will not drown out the 
     voices of the American people.'' He also stated: ``If you are 
     a lobbyist entering my administration, you will not be able 
     to work on matters you lobbied on or in the agencies you 
     lobbied during the previous two years [emphasis added].'' 
     Further, President Obama explained why it was important to 
     close the revolving door: ``Lobbyists spend millions of 
     dollars to get their way. The status quo sets in. . . . They 
     use their money and influence to stop us from reforming 
     [government policies]''. He added, ``. . . together, we will 
     tell the Washington lobbyists that their days of setting the 
     agenda are over.''
       President Obama's message was crystal clear: allowing 
     lobbyists to pass freely through the revolving door was 
     simply not in the public interest. He espoused that lobbyists 
     in government ``are a problem'' because they block needed 
     reforms--reforms that Mr. Obama promised to the American 
     people.
       President Obama's promises to ``close the revolving door'' 
     seemed to be a top priority. He meant what he said. He kept 
     his promise. In fact, within 24 hours of being sworn in, 
     President Obama signed a new Executive Order titled, ``Ethics 
     Commitments by Executive Branch Personnel'' to cement his 
     campaign pledge into an official order. Paragraphs two and 
     three of Section One--entitled ``Revolving Door Ban''--
     appeared to solidify President Obama's pledge to ``close the 
     revolving door.''
       However, exactly two days after signing the Executive 
     Order, you exercised authority delegated to you under Section 
     3 of the Executive Order and issued a waiver to Mr. Lynn, 
     which effectively gutted the ethical heart of the President's 
     ``Revolving Door Ban.'' I find it difficult to reconcile Mr. 
     Lynn's nomination to be the Deputy Secretary of Defense with 
     the purpose and intent of the Executive Order.
       Mr. Lynn was a registered Raytheon lobbyist for six years. 
     His lobbying reports clearly indicate that he lobbied 
     extensively on a very broad range of DOD programs and issues 
     in both the House and Senate and at the Department of 
     Defense. If confirmed, Mr. Lynn would become the top 
     operations manager in the Pentagon. He would be the final 
     approval authority on most--if not all--contract, program and 
     budget decisions. Surely, a number of Raytheon issues would 
     come across his desk. Mr. Lynn's conflict of interest has 
     been characterized by some as an ``impossible conflict.'' The 
     Chairman of the Armed Services Committee, Senator Levin, has 
     stated that Mr. Lynn will have to recuse himself from those 
     decisions for one year. Since Raytheon is a big defense 
     contractor, those recusal requirements could limit Mr. Lynn's 
     effectiveness as Deputy Secretary of Defense.
       Based upon President Obama's statements made during the 
     presidential campaign and leading up to and following the 
     signing of the Executive Order, I simply cannot comprehend 
     how this particular lobbyist could be nominated to fill such 
     a key position at DOD overseeing procurement matters, much 
     less be granted a waiver from the ethical limitations listed 
     in the Executive Order.
       Additionally, I have serious questions about the message 
     that this waiver sends to other lobbyists seeking employment 
     in President Obama's administration. Despite strong language 
     limiting the role of lobbyists in the Executive Order, it 
     appears to me that Mr. Lynn's nomination and the waiver 
     granted to him leaves ``the barn door wide open'' for other 
     potential nominees with lobbying backgrounds to circumvent 
     the Executive Order. This is a giant loophole that places the 
     burden of granting waivers strictly with the Director of the 
     Office of Management and Budget (OMB). As such, I believe a 
     detailed explanation of the reason for granting the waiver is 
     warranted in order to ensure that the granting of future 
     waivers is done in a fully transparent manner and given the 
     sunshine such an important decision deserves.
       The waiver provision in the Executive Order provides that 
     the OMB Director may grant a waiver for two reasons, (1) 
     ``that the literal application of the restriction is 
     inconsistent with the purposes of the restriction'' or (2) 
     ``that it is in the public interest to grant the waiver''. 
     These provisions are general and provide wide latitude in 
     determining when a waiver is applicable. For instance, in Mr. 
     Lynn's case, the waiver simply states: ``After consultation 
     with Counsel to the President, I hereby waive the 
     requirements of Paragraphs 2 and 3 of the Ethics Pledge of 
     Mr. William Lynn. I have determined that it is in the public 
     interest [emphasis added] to grant the waiver given Mr. 
     Lynn's qualifications for his position and the current 
     national security situation. I understand that Mr. Lynn will 
     otherwise comply with the remainder of the pledge and with 
     all preexisting government ethics rules.''
       While I am glad to see that the waiver does not appear to 
     fully circumvent the Executive Order or other existing 
     government ethics rules, the broad language used in 
     determining that the waiver is in the ``public interest'' is 
     a concern. Little detail is provided

[[Page 3571]]

     as to why the waiver is necessary. Only general criteria used 
     in the analysis and justification for the waiver are given. 
     Accordingly, I strongly urge OMB to publicly set forth a list 
     of criteria utilized to examine whether a waiver would be in 
     ``the public interest.'' Further, OMB should also publicly 
     set forth criteria examined to determine when ``literal 
     application of the restriction is inconsistent with the 
     purposes of the restriction.'' By making these criteria 
     public, it will go a long way toward making OMB decisions 
     transparent and providing the American people with a full 
     accounting of why waivers to the Executive Order are 
     necessary. I strongly encourage OMB to do this as soon as 
     possible to ensure those decisions do not merely become an 
     arbitrary basis to circumvent the Executive Order.
       Additionally, I respectfully request that OMB provide 
     responses to the following questions:
       (1) What criteria did OMB use to determine that Mr. Lynn's 
     waiver was necessary to further ``the public interest''?
       (2) Does OMB believe there are no inherent conflicts of 
     interest to have Mr. Lynn serve as the Deputy Secretary of 
     Defense overseeing procurement from a company he formerly 
     lobbied for? If not, why not?
       (3) Given President Obama's position on lobbyists serving 
     in government positions, did anyone in OMB ask the President 
     or his Counsel to consider whether other candidates for the 
     position would be better qualified before granting the Lynn 
     waiver?
       (4) Does OMB believe Mr. Lynn's requirement that he recuse 
     himself in certain instances under provisions of the 
     Executive Order not impacted by the waiver will hinder him 
     from doing the job? Why or why not?
       The idea behind President Obama's promise to close the 
     revolving door and ban lobbyists from his administration had 
     one purpose: to protect the public interest. The new rules 
     are designed to protect the taxpayers against wasteful and 
     unnecessary expenditures and policies that might be advocated 
     by ``special interests'' inside the government. By granting 
     Mr. Lynn's waiver, it appears that OMB has undermined the 
     principal purpose of the new ethics rules--to protect the 
     public interest. It seems like the OMB waiver embraces the 
     lobbyist culture that President Obama promised to change. As 
     Director of OMB, your decisions set the tone for the entire 
     federal bureaucracy. By making the waiver process more 
     public, OMB would send a clear and unambiguous message: 
     transparency is first and foremost when it comes to dealing 
     with ethics rules.
       Please bring transparency and accountability to Mr. Lynn's 
     waiver and all future waivers of the Executive Order by 
     providing details about why waivers have been granted and the 
     criteria used to determine them.
       I would very much appreciate a prompt answer to my 
     questions.
           Sincerely,
                                                 Charles Grassley,
                                                   Ranking Member.

  Mr. GRASSLEY. I also understand that President Obama's picks for 
these key positions should be respected. I said that about President 
Bush. I have to say it about President Obama. They were elected. They 
have a certain respect of the people, and that respect should not be 
questioned by the Senate except under extraordinary circumstances. I 
think these are extraordinary circumstances, and I am bringing it up.
  Mr. Lynn has informed me that he would be divesting his financial 
stakes in Raytheon in the next 90 days. He also said he would not 
engage in any Raytheon-related decisions for 1 year at DOD unless he 
receives a special waiver.
  Regrettably, for Mr. Lynn and for American taxpayers, getting rid of 
conflicts of interest is not as easy as it might sound. The Raytheon 
Corporation has hundreds of potential contracts and programs with the 
Department of Defense. As such, the Office of Government Ethics will 
have to set up a full-time department just to handle Mr. Lynn's 
conflict-of-interest Raytheon waivers.
  On the one hand, I believe the best leaders lead by example. So mean 
what you say. For that reason, I challenge Mr. Lynn to take control of 
this ethical debate and demonstrate true leadership on this issue by 
sticking to the principles set forth by President Obama's Executive 
order on ethics commitments by executive branch personnel. Special 
waivers and exemptions undermine the basic principle of good 
government.
  Changing the rules as you go along tends to foster a basic sense of 
distrust of the Government of all Americans. We all know that is a 
problem. We have to be cautious to make sure we don't make the 
situation worse. Why make rules if you know you are going to break 
them? How can gutting the ethical heart of the new ethics rule be in 
the public interest when those very same rules were created in the 
first place in the public interest?
  Even the best qualified nominees with the highest recommendation 
should recognize when serving in his or her post would not be in the 
public interest. I believe the American people expect nominees to be 
true and honest. Given his chosen career path, Mr. Lynn should know he 
does not comply with the spirit or intent of the Executive order on 
ethics.
  If he is seriously devoted to serving his country and this President, 
Mr. Lynn should consider withdrawing his nomination and ask to be 
reconsidered when he is within the ethics ``revolving door'' principles 
laid down by my President, Mr. Obama. Then he would come back in 2 
years to seek such appointment. This country will always need good 
leaders who lead by example. By doing this, he would set the standard 
of excellence for all other nominees to follow. It would restore 
integrity and credibility to President Obama's new ethics rules. As it 
stands now, unfortunately, the Lynn nomination is rolling down a very 
low road at high speed. By setting the new rules aside for the first 
top-level appointee to come down the pike, President Obama and his 
administration appear to embrace the very same culture President Obama 
promised to change.
  None of us knows for sure whether Mr. Lynn's nomination is truly in 
the public interest. We can only hope it is. In time, we will find out.
  What is going to take me longest to explain is documentation of some 
activity of Mr. Lynn when he was Chief Financial Officer and how that 
fits into some questions I have about the position to which he was 
nominated.
  My second area of concern pertains to Mr. Lynn's financial management 
record at the Pentagon. Mr. Lynn served as Chief Financial Officer at 
the Department of Defense from November 1997 through 2000. I first came 
to know Mr. Lynn in 1998, after he was appointed to the position. 
Between June 1997 and July 1998--1 month, approximately--I conducted an 
in-depth investigation of internal financial controls at the Department 
of Defense. I was testing basically internal controls within the 
Department. I reviewed about 200 financial transactions from Pentagon 
offices where the fraud had occurred. We examined purchase orders, 
contracts, invoices, delivery verifications or receipts, and, finally, 
we examined final payments. We even checked to see if remit addresses 
were correct. In short, we looked at the whole ball of wax.
  The results of this investigation were presented in a report in 
September 1998. This is a report my staff and other people put 
together. The report concluded, in September 1998, involving the Chief 
Financial Officer and/or things under his command or jurisdiction:

       Internal controls at the Department of Defense were weak or 
     nonexistent.

  The Government Accountability Office, then called the General 
Accounting Office, concurred with my assessment.
  Our investigations found that not one of the accounts payable files 
examined was 100 percent up to snuff. I was alarmed to find they all 
had either minor or major accounting deficiencies. If the Department of 
Defense had followed standard accounting practices, none of the bills 
should have been paid. Unfortunately, all went out the payment door.
  The most glaring and persistent shortcoming observed was the near 
total absence of valid receiving reports in the accounts examined at 
the Defense Finance and Accounting Service Center in Denver, CO. A 
receiving report is one of the most important internal control devices. 
They provide written verification that the goods and services billed on 
an invoice were received and matched with what was ordered. In all the 
files examined, we found only 6 out of 200 genuine receiving reports, 
or what they call DD-250 forms. The rest of the files contained none. 
Of the six receiving reports found, all were either invalid or 
incorrect.

[[Page 3572]]

  We also noticed gaping holes in another key control mechanism, remit 
addresses. A remit address is important because it is at the end of the 
money trail, where the money goes. The review found zero control over 
remit addresses. A total of 286 technicians in the Dallas center had 
authority to alter remit addresses. This was a violation of another 
basic internal control principle--separation of duties. A person 
responsible for paying bills should never be allowed to change a remit 
address.
  On September 23, 1998, I met with Mr. Lynn to discuss the findings of 
my investigation. I provided him with a draft of the report. I asked 
him to review it and provide comment. In his response, dated 5 days 
later, September 28, 1998, Mr. Lynn did not challenge the findings in 
this report. So we have this report I have been referring to, and I 
asked Mr. Lynn for comment on that report. I have his letter here not 
challenging the findings.
  I ask unanimous consent that it be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                   Under Secretary of Defense,

                               Washington, DC, September 28, 1998.
     Hon. Charles E. Grassley,
     U.S. Senate,
     Washington, DC.
       Dear Senator Grassley: At our meeting of September 23, 
     1998, you requested that I review and comment on the ``Joint 
     Review of Internal Controls at Department of Defense'' draft 
     report dated September 21, 1998.
       I am very troubled by the problems cited in this report, as 
     well as the related General Accounting Office (GAO) report. 
     Effective internal controls are essential to the detection 
     and prevention of fraudulent activity in our vendor payment 
     operations. Without question, the Krenick and Miller fraud 
     cases, which are at the core of both reports, indicate that 
     there are unacceptable weaknesses in our internal control 
     programs. Although both individuals were caught and 
     convicted, and funds were recovered, we must ensure that the 
     appropriate actions are taken to prevent further abuses. Let 
     me briefly describe for you the measures that the Defense 
     Finance and Accounting Service (DFAS) is taking to improve 
     internal management controls.
       First, we are taking steps to ensure that the vendor pay 
     process establishes positive control over payment-related 
     information. An important step in this regard is to tighten 
     controls over remittance addresses through use of a Central 
     Contractor Registration database maintained by the 
     acquisition community. Eliminating the ability of personnel 
     in the paying offices to change the addresses to which 
     payments are sent will correct a critical weakness that was 
     exploited in the fraud cases cited.
       Second, to reinforce the principle that there must be a 
     strong separation of responsibilities for providing and 
     verifying payment information, we are strengthening the 
     processes that preclude a single individual from controlling 
     multiple critical portions of the payment process. In 
     particular, pursuant to a GAO recommendation, DFAS is 
     reducing by at least half the number of employees who have 
     the highest level of access to the Integrated Accounts 
     Payment System.
       Third, a critical internal control is the positive check of 
     payment information with accounting data prior to 
     disbursement. To ensure the effectiveness of this control, we 
     will make systems changes to eliminate the ability of a 
     single individual to have concurrent access to both the 
     vendor payment system and the accounting system.
       No internal control system will work if it is not 
     rigorously adhered to throughout the organization. During 
     August of this year, a top to bottom review of the various 
     vendor pay operations was accomplished at each DFAS center 
     and operating location. This review concentrated on 
     identifying weaknesses in the application of these controls 
     and business practices. At the same time, DFAS has conducted 
     a stand down of all vendor pay operations to provide formal 
     training in internal controls and fraud awareness. Finally, 
     earlier this month, I met personally with all of the 
     directors of the DFAS centers and operating locations to 
     stress the need to strengthen our management controls.
       To ensure a more permanent senior level oversight of 
     internal controls, DFAS has established a separate 
     organization which reports directly to the Director's office. 
     The mission of this organization will be internal review, 
     fraud prevention, fraud detection, and audit follow-up. One 
     of the primary functions of this office is to track and 
     ensure that accepted recommendations from existing fraud 
     oases, GAO audits, along with other internal and external 
     reviews and reports are implemented. This unit will be 
     operational within the next 30 days.
       In closing, Senator, I want you to know that I place the 
     highest priority on ensuring that we have the best possible 
     protections against fraud and wrongful payments. We have more 
     to do, but I believe that we have made a strong start in 
     responding to the lessons of the Miller and Krenick cases. I 
     have conveyed these thoughts to Senator Durbin as well.
           Sincerely,
                                                  William J. Lynn.

  Mr. GRASSLEY. In this letter, Mr. Lynn appeared to agree with all of 
my findings and recommendations 100 percent. That is a conclusion I 
make. The letter will be in the Record, so Members can read it for 
themselves. He said that he was ``very troubled'' by every one of the 
control weaknesses cited in the report.
  Mr. Lynn further stated:

       There are unacceptable weaknesses in our internal control 
     programs.

  He promised me he would be taking aggressive corrective action to 
improve and tighten controls. He concluded by saying:

       I want you to know that I place the highest priority on 
     ensuring that we have the best possible protections against 
     fraud and wrongful payments.

  I also shared my concerns with Secretary of Defense Bill Cohen in a 
letter dated October 5, 1998. In his response on November 16, 1998--and 
I have that response from Secretary Cohen here--he offered identical 
assurances.
  I ask unanimous consent to have that letter printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                      U.S. Senate,


                                   Committee on the Judiciary,

                                  Washington, DC, October 5, 1998.
     Hon. William S. Cohen,
     Secretary of Defense, Pentagon,
     Washington, DC.
       Dear Bill, I am writing to follow up on my recent 
     Subcommittee hearing that examined the results of the Joint 
     Review of Internal controls at the Department of Defense.
       First, I would like to extend my sincere appreciation to 
     the Department of Defense (DOD) for excellent cooperation and 
     support throughout the Joint Review of Internal Controls. The 
     person who is most responsible for energizing this project is 
     Mr. Bob Hale, Assistant Secretary of the Air Force for 
     Financial Management and Comptroller. We first met on June 
     27, 1997 to lay the ground work for the project. At that 
     meeting, Mr. Hale agreed--with the full backing of the 
     Secretary of the Air Force--that this would be a joint review 
     between his office and my Subcommittee on Administrative 
     Oversight and the Courts. As part of this arrangement, Mr. A. 
     Ernest Fitzgerald, Management Systems Deputy of the Air 
     Force, was authorized to participate. Mr. Fitzgerald was a 
     key asset, since internal controls are one of his primary 
     areas of responsibility. The ``jointness'' of this project 
     contributed greatly to its success. Despite some rough spots, 
     this approach could serve as a model for future cooperative 
     efforts. Due largely to Mr. Fitzgerald's active 
     participation, the department directed some corrective action 
     as problems were being discovered and documented.
       Second, I have the distinct impression that no one in the 
     department takes much exception to the findings and 
     recommendations contained in either the Joint Staff Report or 
     the accompanying reports issued by the General Accounting 
     Office. The attached letter from the Under Secretary of 
     Defense, Mr. Bill Lynn, is testimony to that fact. He admits 
     that he is ``very troubled'' by the control weaknesses that 
     were uncovered by the Joint Review and is taking aggressive 
     corrective action. Those efforts appear to be focused in one 
     critical area--tightening controls over the process for 
     placing ``remittance addresses'' on checks and electronic 
     fund transfers. I am encouraged by Mr. Lynn's positive 
     attitude and his determination to address these problems in 
     meaningful ways. However, my long experience with the 
     department causes me to feel some skepticism. In the past, I 
     have found wide disconnects between what is promised by 
     senior DOD officials and what is really done. I hope you will 
     personally make sure that Mr. Lynn and other responsible 
     officials fix this terrible problem.
       I intend to follow up until I feel that the taxpayers' 
     money is adequately protected.
       Third, as Mr. Lynn said, he was ``very troubled'' by the 
     problems cited in the reports. The Joint Staff Report, for 
     example, states that the control environment within the 
     Defense Finance and Accounting Service (DFAS) is 
     characterized by ``fraud and deceit''--to use the exact words 
     of a senior DFAS official. Between late 1995 and early 1997, 
     there were repeated reports and allegations of fraudulent 
     activity in DFAS--particularly at the OPLOC at Dayton, Ohio. 
     In at least three instances, the Director of the Denver 
     center, Mr. John Nabil, ordered the Director of Internal 
     Review, LTC Boyle, to investigate. In each case, LTC Boyle 
     confirmed the existence of fraudulent activity within DFAS. 
     Mr. Nabil even signed a memorandum (attached) on September 
     30, 1996

[[Page 3573]]

     that substantiates the existence of criminal activity within 
     his organization. Yet every one of these ``red warning 
     flags'' was ignored, and DFAS management failed to report 
     suspected violations of 18 U.S.C. 1001 and other laws to the 
     proper authorities--as required by law. The end result of 
     this mismanagement was costly to the taxpayers. Embezzlers 
     like SSGT Miller--and certainly others--were allowed to tap 
     into the DOD money pipe--unrestricted--and steal huge sums of 
     money--undetected. Eventually, an employee at Dayton blew the 
     whistle and called the law directly. Maybe those persons who 
     raised red flags at Dayton deserve awards?
       In conclusion, I don't believe that the problems at the 
     Dayton OPLOC are an isolated case. I think they are part of a 
     general pattern of fraud and abuse within DFAS. The Joint 
     Staff Report uncovered evidence of similar kinds of 
     fraudulent activities at the Denver center in 1997 and 1998. 
     I intend to refer this matter and other related matters to 
     investigative and audit agencies for further investigation.
       Bill, someone needs to be held accountable for what 
     happened at the Dayton OPLOC and for what appears to be 
     happening at the Denver center today. Who is responsible? 
     Without some accountability, Mr. Lynn's promises will, in 
     fact, come to nothing. Please let me know what you decide to 
     do.
           Sincerely,

                                Charles E. Grassley, Chairman,

          Subcommittee on Administrative Oversight and the Courts.
       Attachment.


                                     The Secretary of Defense,

                                Washington, DC, November 16, 1998.
     Hon. Charles Grassley,
     Chairman, Subcommittee on Administrative Oversight and the 
         Courts, U.S. Senate, Washington, DC.
       Dear Chuck: This is in response to your recent letter 
     following your Subcommittee hearing regarding internal 
     controls at the Department of Defense (DoD). Be assured we 
     take this matter very seriously. I know my Comptroller, Mr. 
     Bill Lynn, has discussed with you measures the Defense 
     Finance and Accounting Service (DFAS) is taking to improve 
     internal management controls.
       Your letter made specific mention of the DFAS Denver Center 
     in Colorado, and the fraud case at its subsidiary office in 
     Dayton, Ohio. Even though the perpetrator at Dayton was 
     caught and convicted, the case indicates weaknesses in 
     internal management controls that must be remedied. Toward 
     that end, DFAS has implemented a number of very specific, 
     system-oriented improvements to strengthen existing controls, 
     establish new controls, and ensure that published procedures 
     are followed. In addition, we have instituted an extensive, 
     in-depth internal review of the entire Denver Center network. 
     DFAS also established a separate office to strengthen 
     internal controls and ensure compliance at all levels.
       DFAS, as an organization, is 7 years old and is composed of 
     approximately 20,000 personnel located in 17 states. We 
     should acknowledge the dedicated public servants who go out 
     of their way every day to ensure that the taxpayers' money is 
     protected. Bill Lynn and I will help them in every way we can 
     to make sure that the suggestions for improvement, which have 
     been presented in the various reports, hearings, and 
     meetings, are evaluated and implemented where necessary.
       Chuck, you and I share a common interest in protecting 
     scarce financial resources, while supporting the great men 
     and women of our armed forces. The hard work by you and your 
     staff has assisted significantly in the progress we have 
     made. We will continue to work to improve our financial 
     management.
           Sincerely,
                                                             Bill.

  Mr. GRASSLEY. While Secretary Cohen and Chief Financial Officer Lynn, 
the nominee now under consideration, both assured me over and over that 
they were taking steps to tighten internal controls--I am shocked to 
say this--they were already quietly moving in the opposite direction. 
They were busy pushing other policies to weaken and undermine internal 
financial controls.
  So I want to get into that. In 1998, when Mr. Lynn was chief 
financial officer, something we call pay-and-chase was the Pentagon 
lingo used to describe the Department of Defense vendor paying process. 
With pay-and-chase, the Pentagon paid bills under $2,500 first, and 
then worried about chasing down receipts later. You get it--pay-and-
chase: pay without worrying about what you are buying or the invoice 
and then, after you pay, go out and find some justification for the 
payment.
  Ever wonder why there is waste in the Defense Department? Sometimes 
receipts were found under pay-and-chase, sometimes not. Nobody seems to 
care either way. This is how the Department of Defense ended up with 
not $2,500 here and there but with billions of dollars in what they 
refer to as unmatched disbursements--another big control problem with 
which chief financial officer Bill Lynn was thoroughly familiar.
  Pay-and-chase accurately characterized the core DFAS problem I 
witnessed during my review of internal controls from 1997 through 1998. 
I saw pay-and-chase up close and personal. Pay-and-chase was not an 
official policy; it was an unofficial policy. It was actively practiced 
but not authorized by any Government regulation or laws.
  As I understand it, pay-and-chase was supposed to end in October 1997 
when the Department of Defense general counsel determined it was 
illegal. But it did not stop. Secretary Cohen wanted to, instead, 
legalize pay-and-chase and make it the law of the land.
  On February 2, 1998, when Mr. Lynn was chief financial officer, 
Secretary Cohen asked the Senate for legal authority to pay bills 
without receipt with no dollar limit. Now, that is pretty high up in 
the Department that you are deciding that we ought to have a policy to 
pay bills without receipts, and to do it not with a $2,500 limit but 
with no dollar limit. This proposal was embodied in section 401 of the 
Defense Reform Initiative. It was touted--can you believe it--as a 
measure to ``streamline'' the DOD payment process.
  Fortunately, the Congress rejected this absurd and misguided 
legislative proposal. But you know what the thinking was at the highest 
levels of the Defense Department. So I discussed Secretary Cohen's pay-
and-chase proposal in great detail in a speech on the floor of this 
body on May 5, 1998. You will find that on pages S4247 through S4250. I 
placed, at that time, Secretary Cohen's request in the Record.
  So what was Mr. Lynn's position on section 401 of Secretary Cohen's 
Defense Reform Initiative? I asked him this question on February 5, 
2009. This is what he said: He could not ``recall'' taking a position 
on it but agreed it was wrong ``to pay bills without a receipt.''
  This seems like a real cop-out. I responded this way:

       In February 1998, you had been [chief financial officer] 
     for several months. This issue fell directly under your 
     purview. How could you possibly avoid taking a position on an 
     issue the Secretary of Defense was urging the Senate to 
     adopt? As the Chief DOD Lobbyist for Raytheon, you say it was 
     wrong. As the DOD [chief financial officer] back in 1998, why 
     didn't you know it was wrong and speak up about it [at that 
     time]?

  My records appear to indicate that pay-and-chase continued as the 
unofficial policy through 1998 and eventually evolved into another more 
troublesome policy known as ``straight pay.'' This policy was even more 
dangerous for the taxpayers. The straight pay policy had much higher 
dollar thresholds than the old pay-and-chase plan. Believe it or not, 
it was a whopping half million dollars.
  Straight pay was Mr. Bill Lynn's baby. This policy was personally 
approved by Mr. Lynn in a memorandum on December 17, 1998, and 
reauthorized in another memo on March 9, 1999, and possibly again 
later. This is that document:

     Memorandum for Director, Defense Finance and Accounting 
         Service
     Subject: Prevalidation Threshold

       In a memorandum dated December 17, 1998, I authorized a 
     temporary $500,000 threshold on new contracts paid by the 
     Mechanization of Contract Administration Services (MOCAS) 
     system. This temporary authorization is scheduled to expire 
     on March 22, 1999. However, while the Defense Finance and 
     Accounting Service Columbus Center has made significant 
     improvements in the backlog of payments, we are not at the 
     point where we can lower the threshold to $2,500. Therefore, 
     the temporary threshold of $500,000 is extended for another 
     90 days for Columbus MOCAS payments only.
       I request you continue to provide me with a monthly report 
     showing progress in resolving the current prevalidation 
     process delays. The monthly report should include your plan 
     to lower the threshold at the appropriate pace to reach the 
     goal of total prevalidation by July 2000. As we improve our 
     systems capabilities, we will continue to aggressively reduce 
     the threshold until all payments are prevalidated.
                                                  William J. Lynn.

  On January 19, 1999, I addressed a letter to Mr. Lynn expressing 
grave concern about straight pay and requesting

[[Page 3574]]

verification of certain facts surrounding this policy. The facts in 
question were provided to me anonymously by a DFAS employee. I wanted 
Mr. Lynn to check out all of this for me.
  Prior to the implementation of straight pay, the DFAS center in 
Colombia, OH, had a prevalidation policy that required that all 
disbursements over $2,500 be matched with obligations or contracts 
prior to payment, which is the way it ought to be--well, no; it ought 
to be for every dollar, but at least over $2,500 it had to be matched. 
When an invoice was submitted to the center for payment, a DFAS 
technician searched the database for supporting obligations and 
receipts.
  If supporting documentation could not be found, a red warning flag 
was supposedly run up the pole. Accounting due diligence was needed to 
confirm if this particular invoice was valid, a duplicate, or 
fraudulent payment. In theory, these red flags had to be resolved. As 
you would expect, in practice, that did not always happen.
  Mr. Lynn's straight pay policy raised the prevalidation threshold by 
$497,500, up to finally a half million dollars. This allowed the DFAS 
technicians to make payments up to a half million dollars without a 
valid obligation. To cover these payments, technicians were ordered to 
create a bogus account known as negative unliquidated obligations. Now, 
that is a Harvard word, isn't it. But they called it NULO for short, 
the acronym. So we have these negative unobligated obligations. Bills 
were then paid from these bogus NULO accounts which carried negative 
balances.
  Mr. Lynn's policy gave DFAS accountants up to 6 months to link the 
payments to valid supporting obligations in the accounting records. If 
valid supporting documentations could not be found in that timeframe, 
then the center was authorized to cover the payments with other 
available funds with no further investigation. This is how the 
unmatched disbursements of the Department of Defense were born and 
eventually built into the billions of dollars.
  In my January 19, 1999, letter to Mr. Lynn, I drew some comparisons 
between straight pay and the case of Air Force SSgt Robert L. Miller. 
Now, Robert L. Miller may not be a very famous name to most people 
around here, and he would not be to me if I had not run into him 
through this investigation. So I wanted to draw a comparison between 
the straight pay policy and the case of this Air Force staff sergeant.
  I think Mr. Lynn and others in the Pentagon at the time remember the 
Miller case, and remember it all too well, or at least they did at that 
time. I examined that case and several others just like it in great 
detail at a hearing before my Judiciary Subcommittee on Oversight on 
September 28, 1998.
  As chief of vendor pay at a DFAS center, then-Staff Sergeant Miller 
had pursued his own unlawful versions of straight pay. Miller had full 
access to the Integrated Accounts Payable System. As such, Miller was 
able to manipulate Department of Defense systems to create obligations 
and invoices where none existed and generate nearly $1 million in 
allegedly fraudulent payments to his mother and his girlfriend. Miller 
was not apprehended because internal controls at DFAS were effective, 
the things that were under the control of Mr. Lynn; he was caught 
because a coworker blew the whistle on him. She was one of Miller's 
subordinates who had allegedly been sexually harassed by him.
  At that time, I told Mr. Lynn--the same Mr. Lynn whose confirmation 
we are considering now--that his straight pay policy appeared to 
authorize DFAS accountants to do essentially what Staff Sergeant Miller 
did: create false bookkeeping entries to cover large payments in the 
absence of valid obligations. DFAS and Miller obviously had different 
goals, but there was a common denominator, and that common denominator 
was manipulation of the accounting system.
  DFAS payment policies practiced on Mr. Lynn's watch left the barn 
door wide open to fraud and outright theft of the taxpayers' dollars.
  The Government Accountability Office, which provided excellent 
support all the way through my investigation, fully agreed with this 
assessment.
  There was another disturbing facet of the Miller case that I took up 
with Mr. Lynn. On October 19, 1995, the date that Staff Sergeant Miller 
became chief of vendor pay at the Dayton center--a position considered 
far above his rank--he was already under investigation in connection 
with, one, the alleged disappearance of Government checks at Castle Air 
Force Base and, two, allegedly directing at least eight fraudulent 
checks valued at $50,769 to his mother.
  On October 26, 1995, just 1 week after Staff Sergeant Miller became 
chief of vendor pay at Dayton, an investigating officer at Castle Air 
Force Base made this recommendation about Miller:

       Management should not place SSgt Miller in a position where 
     he is entrusted with funds again . . .

  After this report was issued, Miller should have been removed from 
his position at the Dayton center immediately. But it took 2 years, 
until June 1997, when Miller was arrested for allegedly stealing the 
million dollars.
  The whole Miller story, of course, is unbelievable.
  In view of his problems at Castle Air Force Base, why did the DFAS 
center place him in charge of vendor pay? Why did DFAS keep him there 
after an official report indicated he could not be trusted with the 
money? That makes as much sense as hiring a bank robber to be the bank 
teller.
  On September 18, 1998, I wrote another letter that I have. This is 
letter No. 9, which I ask unanimous consent be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                      U.S. Senate,


                                   Committee on the Judiciary,

                               Washington, DC, September 18, 1998.
     Hon. William J. Lynn III,
     Comptroller and Chief Financial Officer,
     Pentagon, Washington, DC.
       Dear Bill: I am writing to thank you for providing the 
     ``Investigation of Major Loss of Funds'' at Castle AFB 
     involving Staff Sergeant (SSGT) Robert L. Miller, Jr. and to 
     raise several additional questions.
       I am very disturbed by what I found in the investigative 
     report on the disappearance of U.S. Treasury checks at Castle 
     AFB. The very obvious red warning flag raised by this report 
     was totally ignored by management at the Defense Finance and 
     Accounting Service (DFAS).
       The report states that ``SSGT Miller was negligent in the 
     loss of the two treasury checks entrusted to him.'' It says: 
     ``He breached his duty,'' and it says ``he failed to 
     safeguard his funds.'' For a military pay agent, that would 
     normally be a death sentence. And if those words didn't ruin 
     SSGT Miller's career in money matters forever, the report's 
     recommendation number one should have done it. The 
     investigating officer recommended that: ``Management should 
     not place SSGT Miller in a position where he is entrusted 
     with funds again. . . .'' Those are strong words.
       The recommendation that SSGT Miller not be trusted with 
     money again was made on October 26, 1995. That recommendation 
     came exactly one week after SSGT Miller was ``forced'' into a 
     position at the DFAS/Dayton finance center that was far above 
     his rank. A much more senior civilian--Mr. Chuck Tyler--who 
     occupied that position, was summarily removed to make room 
     for SSGT Miller. Although official organizational charts 
     indicate that SSGT Miller was just Chief of the Data Entry 
     Branch, officials familiar with SSGT Miller's operation 
     contend that he was, in fact, Chief of the entire Vendor Pay 
     Department. In that position, he had direct control over 
     billions of dollars in payments. In addition, for unknown 
     reasons, SSGT Miller was given unrestricted access to the 
     check generating system known as the Integrated Accounts 
     Payable System or IAPS. This was a clear violation of 
     internal control procedures. His predecessor--Mr. Tyler--had 
     much more limited access.
       On October 19, 1995--the date on which SSGT Miller was 
     ``forced'' into Mr. Tyler's position, SSGT Miller was under 
     active investigation for the disappearance of a large sum of 
     money at Castle AFB. Unfortunately, his suspicious and 
     improper conduct at Castle was not limited to the two missing 
     Treasury checks. He had also generated at least 8 fraudulent 
     checks worth $50,769.00, which were addressed to his mother, 
     Ruby J. Miller. Only these facts were apparently not known at 
     the time. Furthermore, on October 19, 1995, he was just a few 
     days away from generating his first fraudulent check at 
     Dayton. This one was for $12,934.67 and was also addressed to 
     his mother.
       All the new information that surfaced in connection with 
     SSGT Miller's court-martial clearly shows that the 
     investigating officer's concerns about SSGT Miller and money 
     were based on sound judgement. SSGT Miller

[[Page 3575]]

     could not be trusted with money again. If the investigating 
     officer's advice had been followed, SSGT Miller's criminal 
     activities could have been brought to a screeching halt in 
     October 1995 instead of June 1997. In November 1995, a 
     trusted employee at the Dayton center, Mr. Otas Horn, even 
     warned Colonel Berger about the dangers of placing SSGT 
     Miller in Mr. Tyler's position with unrestricted access to 
     IAPS. This early warning was followed by repeated reports of 
     criminal conduct at Dayton throughout 1996, including an 
     internal DFAS memo signed by Mr. Nabil, Director of the 
     Denver Center, on September 30, 1996. Most involved 
     fraudulent documents created in SSGT Miller's section. All 
     involved criminal conduct--violations of 18 U.S.C. 1001--as 
     noted in Mr. Nabil's memo. Why didn't DFAS management report 
     this criminal activity to the law as required by every rule 
     in the book?
       Bill, I would like to return to the investigating officer's 
     recommendations: ``Management should not place SSGT Miller in 
     a position where he is entrusted with funds again. . . .'' 
     When this report was issued, SSGT Miller should have been 
     removed from his new position at Dayton--on the spot. Who in 
     SSGT Miller's chain of command at Dayton was responsible for 
     acting on the findings and recommendations in the 
     investigative report? Was it Mr. Nabil? Was it the Commander 
     at Dayton, Colonel Berger? Or was it Captain Brown, SSGT 
     Miller's immediate supervisor? Who at Dayton had knowledge of 
     this report? Who in DFAS management was responsible for 
     totally ignoring this very dangerous red warning flag?
       Bill, the responsible person or persons in your 
     organization need to be held accountable for ignoring obvious 
     and repeated warning signals about SSGT Miller's 
     trustworthiness and giving him unrestricted access to your 
     department's money vault.
       I respectfully request a response to my questions by 
     September 23, 1998.
           Sincerely,

                                Charles E. Grassley, Chairman,

                                    Subcommittee on Administrative
                                         Oversight and the Courts.

  Mr. GRASSLEY. I wrote this letter to Mr. Lynn and asked him two 
questions: Who at Dayton--that means the financial center at Dayton--
had knowledge of the Castle Air Force Base report on Miller? Who in the 
finance center management was responsible for totally ignoring this 
very dangerous red warning flag? I ended my letter to Mr. Lynn this 
way:

       Bill, the responsible person or persons in your 
     organization need to be held accountable for ignoring obvious 
     and repeated warning signals about SSGT Miller's 
     trustworthiness and giving him unrestricted access to your 
     department's money vault.

  I asked for answers to these two questions by September 23, 1998. 
That would have been 5 days after I wrote the letter. None ever 
arrived, as far as I know.
  When I did not get a prompt response to my January 19 letter to Mr. 
Lynn on straight pay, I raised those same issues with Secretary Cohen. 
I did that at a hearing before the Budget Committee on March 2, 1999. 
This is what Secretary Cohen said at the time:

       There is no authorized procedure called Straight Pay.

  Now, get that. You have straight pay that people talk about, and you 
have a Secretary of Defense saying there is no authorized procedure 
called straight pay.

       The process described is not correct and is not authorized.

  These answers do not square with the evidence I have tried to lay 
out.
  Then, on March 9, came further explanation from Chief Financial 
Officer Lynn. He said essentially the same thing but with a slightly 
different twist:

       The Straight Pay policy you refer to in your letter is not 
     used at our Columbus Center. . . .

  There are some words left out. It goes on to say:

       ``Straight Pay,'' as reported to you, does not exist at the 
     Columbus Center.

  This letter No. 10 explains that in great detail, and I ask unanimous 
consent to have printed in the Record letter No. 10.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                   Under Secretary of Defense,

                                    Washington, DC, March 9, 1999.
     Hon. Charles B. Grassley,
     U.S. Senate,
     Washington, DC.
       Dear Senator Grassley: This is in reply to your recent 
     letter on my decision to raise the prevalidation dollar 
     threshold for payments of contracts paid using the 
     Mechanization of Contract Administration System (MOCAS) at 
     the Defense Finance and Accounting Service (DFAS) Columbus 
     Center.
       In the prevalidation plan that we submitted to Congress, we 
     stated we would gradually lower the threshold until all 
     payments were prevalidated by July 2000. We took an 
     aggressive approach in our attempt to reach the goal of 100 
     percent prevalidation before July 2000. Contracts awarded 
     before FY 1997 are now prevalidated at the current statutory 
     level of $1,000,000. Since March 1997, we have attempted to 
     prevalidate all contracts above $2,500 that were issued in FY 
     1997 and later.
       Unfortunately, we could not sustain the new prevalidation 
     level in MOCAS and meet our obligations under the Prompt 
     Payment Act. The imposition of the $2,500 prevalidation 
     threshold, together with other factors, caused critical 
     delays in our connector payments. In December 1998, after 
     carefully considering the need to reduce our payment backlogs 
     while complying with the Prompt Payment Act, I temporarily 
     raised the prevalidation dollar threshold to $500,000 for 
     centrally administered contracts paid through MOCAS. I also 
     recently extended this threshold increase until June 1999. 
     However, we still plan to meet our July 2000 goal to 
     prevalidate all payments. We will continue to lower the 
     prevalidation threshold, but at a deliberate pace to achieve 
     our goal of prevalidating all payments by July 2000 and 
     ensuring compliance with the Prompt Payment Act.
       The ``Straight Pay'' policy you refer to in your letter is 
     not used at our Columbus Center. Before a payment is made in 
     Columbus using MOCAS, the system must have entries that 
     validate a contract exists, an invoice has been presented, 
     and goods or services have been received or accepted. 
     Increasing the prevalidation threshold does not waive the 
     requirement to have these items before a payment is made. In 
     addition, MOCAS does not allow one person to enter all three 
     data elements into the system. I have enclosed a description 
     of the MOCAS payment process. I believe that after you review 
     our contract payment process, you will agree that some 
     critical elements of the process were not provided to you and 
     that ``Straight Pay,'' as reported to you, does not exist at 
     the Columbus Center.
       You also expressed concern that with the threshold raised 
     to $500,000, DFAS experience the same type of fraud in MOCAS 
     that SSgt Miller perpetuated using the Integrated Accounts 
     Payable System (IAPS) in Dayton. The MOCAS payment 
     environment is significantly different from the IAPS 
     environment. The MOCAS system architecture does not permit 
     multiple levels of access. The internal controls built into 
     MOCAS that force separations of functions all but eliminate 
     the possibility of one person creating fraudulent payments.
       I am still committed to reaching the goal of total 
     prevalidation by July 2000. As we improve our systems 
     capability, we will combine to aggressively reduce the 
     threshold until all payments are prevalidated. I appreciate 
     your interest and look forward to working with you to improve 
     our operations.
           Sincerely,
                                                  William J. Lynn.

  Mr. GRASSLEY. I felt as though then-Secretary Cohen on the one hand 
and Chief Financial Officer Lynn were trying to convince me that 
straight pay did not exist. Their statements appear to be, even today, 
misleading and inaccurate.
  Just because I didn't explain the policy exactly right did not mean 
the policy did not exist. Everything that was coming over the transom 
at night to me was telling me that I was on the right track.
  I responded to the denials this way--and they are in this letter, my 
letter No. 11. I wish to quote a couple of sentences:

       If this statement is indeed accurate--and ``Straight Pay'' 
     doesn't exist, then why do I have official DFAS documents 
     establishing ``Straight Pay Procedures?'' Are these documents 
     a fake?

  Are these documents I am getting a fake if they come directly from 
the financial center?
  I later discovered another DFAS document, dated March 8, 1999, which 
states:

       Due to concerns over the use of the term ``straight pay'' 
     and its connotation, we must delete all references to 
     ``straight pay'' the from the policy. . . .

  Now, how does that square with what the Secretary of Defense Cohen 
told me? How does that square with the exchange I had with Bill Lynn, 
Chief Financial Officer at that time? Those things are in this document 
No. 12.
  I ask unanimous consent to have document No. 12 printed in the 
Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:


[[Page 3576]]


                                                   Defense Finance


                                       and Accounting Service,

                                                    March 8, 1999.


                    memorandum for see distribution

     Subject: Policy for Processing Unmatched Disbursements
       Effective November 1, 1999, you were authorized to post 
     unmatched disbursements (UMDs) without posting a negative 
     unliquidated obligation (NULO) offset for transactions 
     meeting criteria described in the attached policy. Due to 
     concerns over the use of the term ``straight pay'' and its 
     connotation, we must delete all references to ``straight 
     pay'' from the policy, and clarify that the policy does not 
     create an environment for fraudulent payments. Terms such as 
     unmatched disbursements or direct disbursements were 
     substituted.
       Operating location (OPLOC) recommendations to add other 
     categories under paragraph F, ``Unmatched Disbursements Which 
     May Be Recorded Without Research, Approval, and NULO 
     Offset,'' were incorporated. For example, Fund Type K 
     transactions for Deposit/Suspense Accounts and disbursements 
     posted under processing center ``Y,'' etc., were added. The 
     inclusion of these categories did not change the intent or 
     scope of the policy. We also clarified that for disbursements 
     made against obligations recorded as Miscellaneous Obligation 
     Reimbursement Documents (MORD) where the difference exceeds 
     $3,000, Financial Service Office/Accounting Liaison office 
     (FSO/ALO) approval is not required, but the FSO/ALO should be 
     notified within 4 work days.
       The revised policy is attached for your action. OPLOCs will 
     continue to maintain a log on unmatched disbursements 
     requiring FSO/ALO review. Copies of attached Missing 
     Commitment/Obligation form (Atch 1) may be kept in lieu of a 
     log.
       We are requesting you to submit another report from the log 
     statistics you gather for UMDs processed between February 1--
     May 31, 1999. The UMD Report, in Excel 5.0 format, is due to 
     DFAS-DE/ASP on June 11, 1999. Please submit report via 
     cc:mail to address indicated on attached report format. At 
     that time we will decide whether another reporting cycle is 
     necessary.
       These procedures were coordinated with the Office of the 
     Assistant Secretary of the Air Force for Financial 
     Management-Air Force Accounting and Finance Office (AFAFO/
     FMF). If you have any questions, my project officer is Ms. 
     Mirta Valdez, DFAS-DE/ASP, (303) 676-7708 or DSN 926-7708.
                                                   Sally A. Smith,
                                          Dierctor for Accounting.

  Mr. GRASSLEY. I say to my colleagues, is the March 8, 1999, date on 
this document a coincidence or was this a bureaucratic tactic to 
suppress, to bury or to rename the policy to conform with the highest 
level of rhetoric that I heard in March of that year?
  Not getting the straight story from the Pentagon, I brought the issue 
of straight pay to the attention of one of our colleagues now and a 
colleague back then, Senator Inhofe, who was chairman of the Readiness 
Subcommittee on Armed Services. My letter to Senator Inhofe is dated 
April 8, 1999, and I have that letter here as No. 13 document.
  I ask unanimous consent to have document No. 13 printed in the 
Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                  U.S. Senate,

                                    Washington, DC, April 8, 1999.
     Hon. James M. Inhofe,
     Chairman, Subcommittee on Readiness and Management Support, 
         Committee on Armed Services, U.S. Senate, Washington, DC.
       Dear Jim: In view of your upcoming hearing on financial 
     management at the Department of Defense (DOD) along with my 
     continuing interest in these matters, I am submitting several 
     questions bearing on internal control issues for your 
     consideration.
       Back on January 19, 1999, I wrote a letter to DOD's Chief 
     Financial Officer (CFO), Mr. Bill Lynn, to verify certain 
     facts pertaining to a policy known as ``straight pay.'' The 
     facts in question were provided anonymously by an employee at 
     the Defense Finance and Accounting Service (DFAS). In a 
     nutshell, this policy authorizes DFAS to make payments up to 
     $500,000.00 when no corresponding obligation or contract 
     could be located in the database or otherwise identified. 
     When bills are paid in the absence of contracts, how does 
     DFAS know how much money, if any, is owed? As I understand 
     it, this policy was personally approved by Mr. Lynn.
       In my mind, this is a very dangerous policy. But it is not 
     only dangerous. It is also misguided, and it may violate the 
     law. It is certainly helping to erode one of the last visible 
     traces of internal controls at DOD, and its continued use 
     will undermine any hope of a ``clean'' audit opinion on the 
     department's annual financial statements--as required by the 
     Chief Financial Officers Act.
       Last year, during my investigation of the breakdown of 
     internal controls at DOD, I learned that Air Force Staff 
     Sergeant (SSGT) Robert L. Miller, Jr. had pursued his own 
     version of ``straight pay'' while Chief of Vendor Pay at 
     DFAS' Dayton center during 1995-1997. With full access to the 
     Integrated Accounts Payable System, SSGT Miller was able to 
     create obligations, where none existed, and generate nearly a 
     $1,000,000.00 in fraudulent payments to his mother and 
     girlfriend. Now, Mr. Lynn's ``straight pay'' policy 
     authorizes DFAS technicians to do exactly what SSGT Miller 
     did--create false bookkeeping entries to cover large payments 
     in the absence of supporting contracts. This policy leaves 
     the door wide open to fraud and mismanagement.
       I am attaching a copy of my letter to Mr. Lynn on 
     ``straight pay'' dated January 19, 1999. Since Mr. Lynn never 
     answered this letter, I had to verify the facts on my own in 
     consultation with the General Accounting Office. According to 
     a March 8, 1999 DFAS memorandum, Mr. Lynn's ``straight pay'' 
     policy is still in place today, though its name has been 
     changed to avoid any negative connotations. DFAS is concerned 
     that the term ``straight pay'' may suggest a permissive 
     ``environment for fraudulent payments.''
       I would very much appreciate it if you would place a copy 
     of my letter in the hearing record and raise my enclosed 
     questions on DOD's ``straight pay'' policy. My questions 
     should be directed to Mr. Lynn.
       Again, thank you very much for giving me the opportunity to 
     submit questions for your upcoming hearing on DOD Financial 
     Management problems.
       In addition, in the very near future, I expect to be 
     submitting ``a legislative reform package'' to you and other 
     colleagues for consideration. The rationale for this draft 
     legislation is outlined under the heading ``The Need for DOD 
     Financial Reforms'' on pages 25 to 29 of the Budget 
     Committee's report on the Concurrent Resolution on the Budget 
     for FY 2000 (Senate Report No. 106-27).
       I look forward to having Mr. Lynn's responses to my 
     questions on ``straight pay'' and working with you in the 
     future on these matters.
           Sincerely,
                                              Charles E. Grassley,
                                                     U.S. Senator.

  Mr. GRASSLEY. I told my friend from Oklahoma that I considered 
straight pay to be ``a very dangerous and misguided policy that might 
violate the law.'' I also told him about the Miller case heretofore 
referenced. I urged Senator Inhofe to ask Secretary Cohen and Chief 
Financial Officer Lynn five questions on straight pay at an upcoming 
hearing.
  Mr. Lynn attempted to clarify the Department of Defense position on 
straight pay in a letter dated June 18, 1999. That is document No. 14.
  I ask unanimous consent to have document No. 14 printed in the 
Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                   Under Secretary of Defense,

                                    Washington, DC, June 18, 1999.
     Hon. Charles E. Grassley,
     U.S. Senate,
     Washington, DC.
       Dear Senator Grassley: This is in reply to your recent 
     letter to the Honorable William S. Cohen, Secretary of 
     Defense, concerning the Department of Defense responses to 
     your questions submitted for the record following a March 2, 
     1999, hearing before the Senate Budget Committee. Enclosed is 
     the Department's response to your questions.
           Sincerely,
                                                  William J. Lynn.
       Enclosure.

       Responses to the Questions of Senator Charles E. Grassley

       Question. The General Accounting Office (GAO)--in report 
     No. AIMD-99-19--states that Mr. Hamre's policy authorizes the 
     Navy to delay recording obligations in excess of available 
     budget authority for up to five years. The GAO further 
     indicates that the purpose of the policy allowing such delays 
     in recording obligations in the books of account is to avoid 
     a potential over obligation and violation of the 
     Antideficiency Act. Are these two statements accurate and 
     correct?
       Answer. The policy referenced in GAO report No. AIMD-99-19 
     is not intended to and, in fact, in no way does, shield any 
     DoD Component from a violation of the Antideficiency Act. 
     Similarly, in no instance is the policy intended to allow any 
     DoD Component to willingly defer the recording of a known 
     valid obligation in excess of available budget authority.
       The Department's policies require that an obligation be 
     established at the time a contract is entered into or a good 
     or service is ordered, and to be recorded within 10 days of 
     the date on which the obligation is incurred. Additionally, 
     prior to making a disbursement, the applicable technician is 
     required to verify that an appropriate contract or other 
     ordering instrument exists, that a government official has 
     verified that the goods or services have been received and 
     that a proper invoice requesting payment has been received. 
     Also, depending on the amount of the payment, the technician 
     may be required

[[Page 3577]]

     to prevalidate an obligation. (Prevalidation is the process 
     of checking to ensure that a matching obligation has been 
     recorded in the accounting records prior to making a 
     disbursement.) Additionally, the technician also is required 
     to identify the proper appropriation to be charged and the 
     accounting office responsible for the related obligation. 
     Further, the disbursement should be matched to the applicable 
     obligation at the time the disbursement is made, if feasible, 
     or as soon thereafter as is feasible.
       The GAO report referred to above addresses in-transit 
     disbursements. In-transit disbursements occur when the paying 
     office (the office making the disbursement) is different than 
     the accounting office (the office accounting for the 
     obligation). In such instances, in addition to determining 
     the existence of a contract or ordering document and 
     verifying the receipt of the goods or services before making 
     the payment, and deducting the amount of the payment from the 
     cash balance of the appropriation involved, the paying office 
     also must forward the disbursement information to the 
     accounting office to enable the disbursement to be recorded 
     against the related obligation. (Only the applicable 
     accounting office, and not the paying office, can record a 
     disbursement against its related obligation. Thus, this 
     latter action is required irrespective of whether the 
     disbursement was prevalidated prior to payment.)
       Since the amount of in-transit disbursements is deducted 
     from the cash balance of the applicable appropriation at the 
     time of disbursement, the Department can determine if the 
     cash balance of the appropriation involved is positive or 
     negative. Since a negative cash balance is an indication of a 
     potential Antideficiency Act violation, if an appropriation 
     has a negative cash balance, the Defense Finance and 
     Accounting Service is required to stop making any further 
     payments chargeable to the appropriation. Additionally, the 
     DoD Component involved is required to initiate an 
     investigation of a potential Antideficiency Act violation. 
     Except in very rare instances, in-transit disbursements do 
     not result in a negative cash balance in the applicable 
     appropriation. Since the appropriations charged have a 
     positive cash balance that means that amounts disbursed from 
     those appropriations are not in excess of available budget 
     authority.
       As stated above, when the paying office is different than 
     the accounting office, the paying office must forward the 
     disbursement information to the accounting office to enable 
     the disbursement to be recorded against the related 
     obligation. During the time that the information is being 
     transmitted from the paying office to the accounting office 
     the information is said to be in-transit, and the 
     disbursement is said to be an in-transit disbursement. Once 
     the information is received by the accounting office, the 
     accounting office attempts to match the disbursement to an 
     obligation, and the disbursement no longer is considered to 
     be an in-transit disbursement. At that point, the 
     disbursement becomes a matched disbursement, an unmatched 
     disbursement or a negative unliquidated obligation.
       Over 90 percent of in-transit disbursements are matched to 
     an obligation within 60 days of arriving at the applicable 
     accounting station. However, in some instances the 
     information does not arrive at the applicable accounting 
     office or the information that does arrive is not sufficient 
     to allow the applicable accounting office to attempt to match 
     the disbursement to an obligation. In such circumstances, the 
     accounting office must take additional steps to research and 
     obtain the information required to allow it to attempt to 
     match the disbursement to an obligation.
       Until the 1990s, the Department had no policy regarding 
     such research efforts and did not require that obligations be 
     recorded for unresolved in-transit disbursements. The policy 
     addressed in the referenced GAO report recognized that, 
     consistent with DoD policy, in most instances, obligations 
     are established at the time an applicable contract is entered 
     into or goods or services are ordered. However, in those 
     instances where an accounting office does not receive 
     detailed information on an in-transit disbursement, this lack 
     of detailed information often precludes the accounting office 
     from being able to attempt to identify the disbursement to an 
     obligation. Establishment of a new obligation for such 
     disbursements, in many instances, could result in a duplicate 
     obligation. In order to avoid such duplicate obligations, the 
     Department allows the DoD Components time to conduct 
     additional research. Often, this requires a considerable 
     period of time and involves significant manual research. This 
     is especially so for those in-transit disbursements made by 
     one of the over 300 former paying offices that now have been 
     closed.
       Question. If a bill for $499,999.99 is submitted to the 
     Defense Finance and Accounting Service (DFAS) Columbus Center 
     for payment and the responsible technician is unable to 
     identify a matching obligation, and Mr. Lynn's waiver is used 
     to authorize the payment, exactly how is the payment posted 
     in the books of account? Without a valid, matching 
     obligation, there are just three options: (a) post it to a 
     bogus account; (b) post it to the wrong account; or (c) don't 
     post it. How does DFAS do it?
       Answer. In the example described above, the technician at 
     the DFAS Columbus Center would not be required to validate 
     that an obligation was recorded in the official accounting 
     records prior to making the payment because the dollar amount 
     would be below the prevalidation threshold amount in effect 
     at the DFAS Columbus Center. (However, at any DFAS location 
     other than the Columbus Center, this amount would be above 
     the prevalidation threshold amount and the technician would 
     be required to match the proposed disbursement to the 
     applicable obligation prior to making the disbursement.) 
     Although in the above example, the technician at the DFAS 
     Columbus Center would not be required to match the payment to 
     an obligation prior to payment, the technician would be 
     required to determine that the payment otherwise is valid. 
     This would require that the technician verify that an 
     appropriate contract or other ordering instrument exists and 
     that a government official verified that the goods or 
     services were received. Also, the technician would be 
     required to identify the proper appropriation to be charged 
     and the accounting station where the related obligation is 
     recorded. Generally, this information would reside, and could 
     be found, in the payment system at the DFAS Columbus Center.
       Irrespective of whether a disbursement is matched to an 
     obligation prior to payment, once a payment is made by the 
     DFAS Columbus Center, the amount of the disbursement would be 
     deducted from the cash balance of the applicable 
     appropriation charged and information concerning the 
     disbursement would be forwarded to the applicable accounting 
     station. When that information arrived at the applicable 
     accounting station, the accounting station would: match the 
     disbursement to the applicable obligation recorded in the 
     accounting system; or if the amount of the disbursement 
     exceeded the amount of the applicable obligation, match the 
     disbursement to the applicable obligation but record a 
     negative unliquidated obligation against the same account for 
     the amount of the difference between the disbursement and the 
     obligation; or if no corresponding obligation record can be 
     found in the accounting system, treat the disbursement as an 
     unmatched disbursement.
       Question. While the DFAS attempts to identify the matching 
     obligation, is the payment placed in the ``in-transit'' 
     status?
       Answer. The Columbus Center, using the Department's 
     existing finance network, would forward information on the 
     disbursement to the applicable accounting station. That 
     information would be considered to be ``in-transit'' for the 
     period of time necessary for the information to be forwarded 
     from the Columbus Center to the applicable accounting 
     station. Once the information arrived at the accounting 
     station, the accounting station would match the disbursement 
     to the applicable obligation and the transaction no longer 
     would be considered to be in an in-transit disbursement.
       Question. If a valid, matching obligation cannot be found, 
     how is the problem resolved?
       Answer. If a valid, matching obligation cannot be found, 
     the disbursement is treated as an unmatched disbursement. In 
     the case of an unmatched disbursement, the applicable 
     accounting station and DoD Component involved are given 180 
     days to conduct research to identify the matching obligation. 
     If, after the 180-day period, a valid matching obligation 
     cannot be found, the DoD Component involved is required to 
     establish a new obligation for the disbursement.

  Mr. GRASSLEY. In his followup letter, Mr. Lynn backed away from his 
assertion that straight pay did not exist. So they said it didn't 
exist, and now you see an assertion backing away from that. While he 
never used the term ``straight pay,'' he did not try to disassociate 
himself from the policy. His description of the policy was generally 
accurate, though somewhat incomplete.
  I raised essentially the same question with Mr. Lynn in a recent 
letter, dated January 29, 2009, because of his appointment to this 
position of Deputy Secretary of Defense. Regrettably, he provided 
essentially the same answers in a letter dated February 3, 2009.
  I ask unanimous consent to have printed in the Record those two 
letters, documents 15 and 16.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                      U.S. Senate,


                                         Committee on Finance,

                                 Washington, DC, January 29, 2009.
     Mr. William J. Lynn,
     Senior Vice President, Raytheon Company, Arlington, VA.
       Dear Mr. Lynn: I am writing to follow-up on six questions I 
     submitted for the record at your nomination hearing before 
     the Senate Armed Services Committee earlier this month.
       Two of my questions pertain to a potential conflict of 
     interest flowing from your status

[[Page 3578]]

     as a registered lobbyist with the Raytheon Company. Four of 
     the questions pertain to your efforts as the Department of 
     Defense (DOD) Chief Financial Officer (CFO) to bring the 
     department into compliance with the CFO Act. I am eagerly 
     waiting for your answers to my six questions.
       Since submitting those questions for the record, I have had 
     an opportunity to retrieve and examine certain archived files 
     on DOD financial management issues that I investigated in the 
     late 1990's while you were the DOD CFO and Comptroller. I 
     came across two files of particular interest as follows: 1) 
     ``Straight Pay;'' and 2) ``Pay and Chase.'' These are DOD 
     payment policies that were either attributed to you and/or 
     adopted while you were the department's Chief Financial 
     Officer in charge of such matters. My follow-up questions 
     pertain to these matters.
       In 1998, when you were CFO, ``Pay and Chase'' was a term 
     used to describe DOD vendor payment policy. With ``Pay and 
     Chase,'' the Pentagon paid bills first and worried about 
     tracking down the receipts later. Sometimes receipts were 
     found; sometimes not; And sometimes no effort was made to 
     look. This is how DOD ended up with billions of dollars in 
     unmatched disbursements. As I understand it, this was SOP 
     when you were CFO. It was unofficial policy. It was practiced 
     but not authorized in government regulations or law.
       Secretary of Defense Cohen attempted to legalize ``Pay and 
     Chase.'' He wanted to make it the law of the land. He 
     forwarded his proposal to the Senate on February 2, 1998 as 
     part of a larger package of so-called defense reforms. At 
     that point in time, you were CFO, and this matter fell 
     directly under your area of responsibility. ``Pay and Chase'' 
     was just one small piece of the Defense Reform Act of 1988--
     also known as the Defense Reform Initiative (DRI). ``Pay and 
     Chase'' was embodied in Section 401 of that bill. It was 
     touted as a measure to ``streamline'' DOD payment practices.
       Section 401 would have authorized DOD to pay bills without 
     receipts with no dollar limit. It would have required only 
     random after-the-fact verification of some receipts. And it 
     would have relieved disbursing officers of all responsibility 
     for fraudulent payments that might have resulted from the 
     policy.
       There is nothing in my files to indicate Section 401 of 
     Secretary Cohen's DRI became law. I believe ``Pay and Chase'' 
     continued as an unofficial policy and evolved into another 
     troublesome one known as ``Straight Pay.'' This policy was 
     initially approved by you in a signed memorandum on December 
     17, 1988.
       On January 19, 1999, I wrote to you, expressing grave 
     concern about ``Straight Pay.''
       Prior to the implementation of ``Straight Pay,'' the 
     Defense Finance and Accounting Center (DFAS), Columbus, Ohio 
     had a pre-validation policy that required all disbursements 
     over $2,500.00 be matched with obligations prior to payment. 
     When a bill was submitted to the center for payment, a 
     technician searched the database for the supporting 
     obligation or contract. If one could not be found, a red 
     warning flag was allegedly run up the pole. Was it a 
     duplicate or fraudulent payment? Your ``Straight Pay'' policy 
     raised the pre-validation threshold to $500,000.00. 
     ``Straight Pay'' allowed the technician to ignore the warning 
     signals and make payments up to $500,000.00 without checking 
     documentation. Then the accountants at the center were 
     directed to create bogus accounts for negative unliquidated 
     obligations or ``NULO'' to cover the payment. The bill was 
     then paid from the bogus account with a negative balance. The 
     center had six months to locate valid supporting obligation. 
     If a valid, matching obligation could not be found within 
     that time frame, then the center would cover the payment with 
     other available funds with no further investigation.
       In my letter to you, I drew some comparisons between 
     ``Straight Pay'' and the scenario in the case of Air Force 
     Staff Sergeant (SSGT) Robert L. Miller, Jr. You may remember 
     the Miller case. I examined that case--and others like it--in 
     great detail at a hearing before my Judiciary Oversight 
     Subcommittee on September 28, 1998. As Chief of Vendor Pay at 
     another DFAS Center, SSGT Miller had pursued his own version 
     of ``Straight Pay.'' With full access to the Integrated 
     Accounts Payable System, SSGT Miller was able to create 
     obligations, where none existed, and to generate nearly a 
     $1,000,000.00 in allegedly fraudulent payments to his mother 
     and girlfriend. He was not caught until a co-worker blew the 
     whistle.
       Mr. Lynn, on the surface at least, your ``Straight Pay'' 
     policy appeared to authorize DFAS technicians to do 
     essentially what SSGT Miller allegedly did--create false 
     bookkeeping entries to cover large payments in the absence of 
     supporting documentation. Your policy left the barn door wide 
     open to fraud and mismanagement. At the time, the General 
     Accounting Office agreed with that assessment.
       Also, at the time, I told you and other senior officials--
     and spoke extensively about this problem on the floor--that 
     ``Straight Pay'' was a dangerous, misguided, irresponsible, 
     and unbusinesslike policy. Furthermore, it was totally 
     inconsistent with various provisions of Title 31 of the U.S. 
     Code, Money and Finance.
       American taxpayers deserved to know that their hard earned 
     money was being protected and properly accounted for under 
     your leadership at DOD. So please help me understand your 
     position on ``Straight Pay.'' It seemed to be completely 
     inconsistent with your responsibilities under the CFO Act. As 
     CFO, how could you endorse such a policy?
       Your prompt response to my questions would be appreciated,
           Sincerely,
                                              Charles E. Grassley,
     Ranking Member.
                                  ____

                                                 February 3, 2009.
     Hon. Charles E. Grassley,
     Ranking Member, Committee on Finance, U.S. Senate, 
         Washington, DC.
       Dear Senator Grassley: Thank you for your letter of January 
     29, 2009 concerning my tenure as Under Secretary of Defense 
     (Comptroller) and Chief Financial Officer from November 1997 
     to January 2001. You asked specifically about two payment 
     practices: ``Pay and Chase'' and ``Straight Pay''.
       The Denver Center of the Defense Finance and Accounting 
     Service (DFAS) initiated the ``Pay and Chase'' pilot 'in 
     early 1997 in order to achieve more timely payments. It was a 
     limited test that allowed certain payments under $2,500 to be 
     made based on matching a proper invoice to the corresponding 
     contract. Receipt and acceptance was followed up after the 
     payment was made. The pilot was discontinued by October 1997 
     when the DoD General Counsel and DFAS General Counsel found 
     that matching a proper invoice and contract alone was not 
     legally sufficient to make a payment. The Department proposed 
     legislation to Congress in 1998 called Verification After 
     Payment that would have authorized making payments from the 
     invoice/contract match, but that request was later dropped 
     without Congressional action.
       ``Straight Pay'' is an informal term used to describe the 
     practice of making payment based on a three way match of a 
     proper invoice, receiving report and contract when an 
     obligation has not yet been recorded in the accounting 
     records. ``Straight Pay'' recognizes the government's legal 
     obligation to make payment and was used to ensure contractors 
     were paid on time and to reduce payment backlogs and 
     associated interest penalties due to late payments. Under 
     ``Straight Pay'' policies, payments could not be made on an 
     invoice alone. But if DFAS had a proper invoice together with 
     a valid contract for the goods/services and a valid receiving 
     report that the goods/services had been delivered, payment 
     could be made without a matching obligation. DFAS then 
     contacted the Military Services to update the accounting 
     records, ensuring that the expenditure was recorded and 
     valid.
       The Defense Department has two important obligations: to 
     ensure that those who provide goods and services to the 
     Department are paid on time pursuant to the Prompt Payment 
     Act and to make certain there are proper controls that ensure 
     the Department has received the goods and services pursuant 
     to a valid contract. At a time when the Department faced a 
     backlog of unpaid invoices and mounting interest costs due to 
     late payments, ``Straight Pay'' was an attempt to draw the 
     right balance between those objectives by reducing late 
     payments while still ensuring that the Department had 
     received what it paid for and that the accounting records 
     were accurate.
       Best practices require that all proper invoices be matched 
     with a receiving report and contract, and that the obligation 
     be pre-validated in the accounting records prior to payment. 
     The Department made progress toward this pre-validation 
     objective while I was Under Secretary. And I understand that 
     further progress has been made since I left. If confirmed, I 
     will work with the Chief Financial Officer and the Military 
     Departments to achieve this important goal.
       Finally, you raised the case of Air Force Staff Sergeant 
     Robert L. Miller, who defrauded the Department in a series of 
     activities between October 1994 and June 1997. The Miller 
     case did not actually involve ``Straight Pay''. It did, 
     however, expose significant internal control weaknesses 
     within both DFAS and the Air Force. As a consequence of the 
     Miller case, I directed DFAS to take a series of corrective 
     actions, including revising internal control guidance to 
     ensure better segregation of duties, reviewing and adjusting 
     vendor payment access to the minimum number of personnel 
     needed to properly conduct business, ensuring proper 
     documentation existed to pay invoices, and correcting 
     deficiencies in computer system security. In addition, DFAS 
     in November 1999 established an Internal Review office to 
     examine its systems and operations for weaknesses and 
     potential cases of fraud.
       As you requested, I have also included answers to the six 
     questions you submitted for the record after my nomination 
     hearing on January 15, 2009. Looking ahead, if confirmed as 
     Deputy Secretary of Defense, I will do my utmost to 
     strengthen the Department's financial management and internal 
     controls designed to prevent fraud. I will also work to 
     accelerate the modernization and integration of the 
     Department's management information systems. From my earlier 
     DoD tenure, I know the obstacles to achieving this,

[[Page 3579]]

     but I also know its vital importance. In this era of 
     increasing fiscal strain, financial stewardship at the 
     Department of Defense is essential, and I look forward to 
     making that happen.
           Sincerely,
                                             William J. Lynn, III.

                    Senate Armed Services Committee

                        Questions for the Record

   (To consider the following nominations: William J. Lynn III to be 
 Deputy Secretary of Defense; Robert F. Hale to be Under Secretary of 
Defense (Comptroller) and Chief Financial Officer; Michele Flournoy to 
be Under Secretary of Defense for Policy; and Jeh Charles Johnson to be 
    General Counsel, Department of Defense. Witnesses: Lynn, Hale, 
                           Flournoy, Johnson)

       Senator Chuck Grassley


                          Financial Management

       93. Mr. Lynn, as the Under Secretary of Defense 
     (Comptroller), you were the Department's Chief Financial 
     Officer (CFO). That position was established by the CFO Act 
     of 1990. Section 902 of the CFO Act states: ``The CFO shall 
     develop and maintain an integrated agency accounting and 
     financial management system, including financial reporting 
     and internal controls.'' This requirement existed for at 
     least 5 years before you became the DOD CFO. While you were 
     CFO, did DOD operate a fully integrated accounting and 
     financial management system that produced accurate and 
     complete information? If not, why?
       Answer: The DoD financial and business management systems 
     were designed and created before the CFO Act of 1990 to meet 
     the prior requirements to track obligation and expenditure of 
     congressional appropriations accurately. The CFO Act required 
     the Department to shift from its long-time focus on an 
     obligation-based system designed to support budgetary actions 
     to a broader, more commercial style, accrual-based system. To 
     accomplish this transformation, several things needed to be 
     done. First, the Department created the Defense Finance and 
     Accounting Service (DFAS) to consolidate financial 
     operations, which was accomplished in 1991 before my tenure 
     as Under Secretary. Second, the Department had too numerous 
     and incompatible finance and accounting systems. From a peak 
     of over 600 finance and accounting systems, I led an effort 
     to reduce that number by over two thirds. This consolidation 
     effort also strove to eliminate outdated financial management 
     systems and replace them with systems that provided more 
     accurate, more timely and more meaningful data to decision 
     makers. The third and most difficult step in developing an 
     integrated accounting and financial management system has 
     been to integrate data from outside the financial systems. 
     More than 80 percent of the data on the Defense Department's 
     financial statement comes from outside the financial systems 
     themselves. It comes from the logistics systems, the 
     personnel systems, the acquisition systems, the medical 
     systems and so on. On this effort, we made progress while I 
     was Under Secretary but much more needs to be done. If 
     confirmed, I will take this task on as a high priority.
       94. Mr. Lynn, under section 3515 of the CFO Act, all 
     agencies, including DOD, are supposed to prepare and submit 
     financial statements that are then subjected to audit by the 
     Inspectors General. While you were the CFO, did DOD ever 
     prepare a financial statement in which all DOD components 
     earned a ``clean'' audit opinion from the DOD IG? If not, 
     why?
       Answer: In the 1997, the Department of Defense had twenty-
     three reporting entities, only one of which, the Military 
     Retirement Fund, had achieved a clean audit. Over the next 
     four years, the Department under my leadership as Under 
     Secretary earned a ``clean'' opinion on three other entities: 
     most importantly, the Defense Finance and Accounting Service 
     in 2000, followed by the Defense Commissary Agency and the 
     Defense Contract Audit Agency in 2001. We were unable to 
     obtain clean opinions on the other reporting entities. The 
     primary reason for not earning clean opinions on the 
     remaining entities was the difficulty of capturing data from 
     non-financial systems and integrating that data into the 
     financial systems in an auditable manner. It is my 
     understanding that the Department still faces the challenge 
     of integrating financial and non-financial systems to support 
     the auditability of the DOD financial statements.
       95. Mr. Lynn, as CFO, what specific steps did you take to 
     correct this problem?
       Answer: Under my leadership, the DOD instituted several 
     important efforts to achieve a ``clean'' audit opinion. The 
     primary effort was described in the Biennial Financial 
     Management Improvement Plan (FMIP) which was submitted to 
     Congress in 1998. That plan merged previous initiatives with 
     new ones into a single comprehensive effort to achieve both 
     financial management improvement and auditability. To 
     directly address auditability, the FMIP included an effort in 
     collaboration with the Office of Management and Budget, the 
     General Accounting Office, and the Office of the Inspector 
     General to address ten major issues identified by the audit 
     community: 1) internal controls and accounting systems 
     related to general property plant and equipment; 2) 
     inventory; 3) environmental liabilities; 4) military 
     retirement health benefits liability; 5) material lines 
     within the Statement of Budgetary Resources; 6) unsupported 
     adjustments to financial data; 7) financial management 
     systems not integrated; 8) systems not maintaining adequate 
     audit trails; 9) systems not valuing and depreciating 
     property, plant and equipment; and 10) systems not using the 
     Standard General Ledger at the transaction level. Due to this 
     effort, substantial progress was made on most of these issues 
     and several were resolved, including valuation of the 
     military retirement health benefits liability, the reduction 
     of unsupported adjustments to financial data, and the 
     identification of environmental liabilities.
       96. Mr. Lynn, 18 years after the CFO Act was signed into 
     law, DOD is still unable to produce a comprehensive financial 
     statement that has been certified as a ``clean'' audit. It 
     may be years before that goal is met. If DOD's books cannot 
     be audited, then the defense finance and accounting system is 
     disjointed and broken. Financial transactions are not 
     recorded in the books of account in a timely manner and 
     sometimes not at all. Without accurate and complete financial 
     information, which is fed into a central management system, 
     DOD managers do not know how the money is being spent or what 
     anything costs. That also leaves DOD financial resources 
     vulnerable to fraud, waste and abuse, and even outright 
     theft. The last time I looked at this problem billions--and 
     maybe hundreds of billions--of tax dollars could not be 
     properly linked to supporting documentation. As Deputy 
     Secretary of Defense, what will you do to address this 
     problem? Please give me a realistic timeline for fixing this 
     problem.
       Answer: The Department needs stronger management 
     information systems. I can assure you that, if confirmed, I 
     will be committed to improving financial information and 
     business intelligence needed for sound decision making. I 
     have not yet completed my review of all the information 
     needed to provide a specific timeline; however, I will 
     continue to examine this issue, including consideration of 
     this and other Committees' views as well as the resources 
     needed for the audit, before forming my assessment of how 
     close DoD is to a clean audit.


                     Potential Conflict of Interest

       97. Mr. Lynn, as a Senior Vice President of Government 
     Operations at the Raytheon Company, you were a registered 
     lobbyist until July 2008. Correct? How long were you a 
     registered lobbyist?
       Answer: I was a registered lobbyist for Raytheon from July 
     2002 to March 2008.
       98. Mr. Lynn, in his ``Blueprint for Change,'' President-
     elect Obama promises to ``Shine Light on Washington 
     Lobbying.'' He promises to ``Enforce Executive Branch 
     Ethics'' and ``Close the Revolving Door.'' He promises: ``no 
     political appointees in an Obama-Biden administration will be 
     permitted to work on regulation or contracts directly and 
     substantially related to their prior employer for 2 years.'' 
     Raytheon is one of the big defense contractors. As Deputy 
     Secretary, Raytheon issues will surely come across your desk. 
     If you have to recuse yourself from important decisions, you 
     would limit your effectiveness as Deputy Secretary of 
     Defense. How will you avoid this problem for 2 years?
       Answer: I have received a waiver of the ``Entering 
     Government'' restrictions under the procedures of the 
     Executive Order implementing the ethics pledge requirements. 
     The waiver, however, does not affect my obligations under 
     current ethics laws and regulations. Until I have divested my 
     Raytheon stock, which will be within 90 days of appointment, 
     I will take no action on any particular matter that has a 
     direct and predictable effect on the financial interests of 
     Raytheon. Thereafter, for a period of one year after my 
     resignation from Raytheon, I also will not participate 
     personally and substantially in any particular matter 
     involving Raytheon, unless I am first authorized to do so 
     under 5 C.F.R. Sec.  1A2635.502(d). In addition, for the one 
     year period covered by Section 502, I have agreed not to seek 
     a written authorization for the handful of issues on which I 
     personally lobbied over the past two years. If confirmed, I 
     pledge to abide by the foregoing provisions. I would add that 
     I have not been exempted from the other Executive Order 
     pledge requirements, including the ones that restrict 
     appointees leaving government from communicating with their 
     former executive agency for two years and bar them from 
     lobbying covered executive branch officials for the remainder 
     of the Administration.

  Mr. GRASSLEY. Mr. Lynn continues to defend straight pay, a policy 
that Secretary Cohen said didn't exist back then. He said it was 
necessary ``to ensure that contractors were paid on time.''
  Well, can't you pay contractors on time by having invoices and all 
the proper documentation to write even a $1 check? That is the 
streamlining effect that former Secretary Cohen argued for in his 
failed June 2, 1998 DRI legislative initiative.

[[Page 3580]]

  I exchanged followup Q and A on these matters with Mr. Lynn on 
February 5 and 6 this year, and I will include those letters in the 
record as well. As Chief Financial Officer at one of our biggest 
departments, Mr. Lynn signed the memo authorizing straight pay policy. 
It was his policy.
  I ask unanimous consent that the followup documents be printed in the 
Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                      U.S. Senate,


                                         Committee on Finance,

                                  Washington, DC February 5, 2009.
     Mr. William J. Lynn,
     Senior Vice President, Raytheon Company, Arlington, VA
       Dear Mr. Lynn: I am writing to follow-up on our recent 
     exchange of correspondence regarding your record as the Chief 
     Financial Officer (CFO) at the Department of Defense (DOD).
       I respectfully request that you respond to the following 
     questions in writing:
       (1) On February 2, 1998, when you were CFO, Secretary of 
     Defense Cohen asked the Senate for legal authority to pay 
     bills without receipts with no dollar limit. This proposal 
     was embodied in Section 401 of the Defense Reform Initiative 
     (DRI). What was your position on this legislative proposal?
       (2) In a letter to you dated January 19, 1999, I expressed 
     grave concern about a DOD payment policy known as ``Straight 
     Pay.'' This policy was authorized by you in documents that 
     bear your signature. The purpose of my letter was to verify 
     the facts pertaining to this policy that was brought to my 
     attention by a Defense Finance and Accounting Service (DFAS) 
     employee, Your response to this letter is dated March 9, 
     1999. In your letter, you report that ``Straight Pay'' does 
     not exist. This is what you said: ``Straight Pay'' is not 
     used at our Columbus Center . . . `Straight Pay,' as it was 
     reported to you, does not exist at the Columbus Center.'' 
     Secretary Cohen made essentially the same statement in 
     response to questions I raised at a Budget Committee hearing 
     on March 2, 1999. He stated: ``there is no authorized 
     procedure called straight pay.'' In your February 3, 2009 
     letter, by comparison, you provided a description of the 
     ``Straight Pay'' policy. Did ``Straight Pay'' exist at the 
     Columbus Center in 1998-99?
       (3) How do you explain a DFAS Memo dated March 8, 1999 that 
     contains the following instructions: ``Due to concerns over 
     the use of the term `Straight Pay' and its connotation, we 
     must delete all references, to `straight pay' from the policy 
     and clarify that policy does not create an environment for 
     fraudulent payments. Terms such as unmatched disbursements or 
     direct disbursements were substituted.'' Did you instruct 
     DFAS to get rid of the term ``Straight Pay.''
       (4) Do you believe unmatched disbursements were a 
     satisfactory outcome?
       (5) One day after DFAS gave ``Straight Pay'' policy a new 
     name, you issued orders to keep the policy alive. Your memo 
     of March 9, 1999 actually re-authorized the policy for 
     another 90 days beyond the March 22, 1999 expiration date. Is 
     that true?
       (6) When you were CFO, were you knowledgeable or aware of 
     the arbitrary allocation scheme used by DFAS at the Columbus 
     Center for making progress payments? That policy also had an 
     informal name. It was called ``bucket billing.'' Both the 
     GAO. and IG had conducted numerous audits and reviews of 
     these procedures and declared them to be illegal. If you knew 
     about these bill paying practices, what specific steps did 
     you take to correct the problem?
       (7) I note that the waiver granted to you in connection 
     with President Obama's new ethics rules was co-signed by OMB 
     Director Orszag and Mr. Gregory B. Craig, Counsel to the 
     President. I understand that you have past associations with 
     Mr. Craig. Please characterize your relationship with Mr. 
     Craig?
       (8) According to the Project on Government Oversight 
     (POGO), Raytheon is ``ranked #4 in a top 50 corrupt list'' of 
     government contractors. POGO reports numerous instances of 
     double billing on aircraft maintenance contracts, contractor 
     kickbacks, defective pricing, False Claims Act violations, 
     substitution/nonconforming products, violations of SEC rules, 
     etc. involving Raytheon. As the top Raytheon lobbyist, to 
     what extent did you know about or become involved with any of 
     these issues? Did you ever discuss any of these issues with 
     DOD officials or Members of Congress or congressional staff?
       (9) In view of the fact that your nomination appears to be 
     inconsistent with President Obama's rules pertaining to the 
     ``Revolving Door Ban,'' do you belief you have compromised 
     any of your personal and/or professional values by accepting 
     it?
       Your continuing cooperation in this matter would be greatly 
     appreciated.
           Sincerely,
                                              Charles E. Grassley,
                                                   Ranking Member.
                                                 February 5, 2009.
     Hon. Charles E. Grassley,
     Ranking Member, Committee on Finance, U.S. Senate, 
         Washington, DC.
       Dear Senator Grassley: I am writing to respond to your 
     letter of February 5, 2009. Following my February 3, 2009 
     letter, you asked nine additional questions.
       (1) Although I took office as Under Secretary just before 
     the Defense Reform Initiative was submitted to Congress, I 
     did not participate in the development of Section 401. I do 
     not recall having taken a position on it. At this time, I 
     would not support a proposal that with no dollar limit would 
     allow the Defense Department to pay bills without a receipt.
       (2) In your letter of January 19, 1999, you equated an 
     obligation to a contract, implying that ``Straight Pay'' 
     allowed payment without a valid contract. As I explained in 
     both my recent February 3, 2009 letter and the earlier March 
     9, 1999 letter, ``Straight Pay'' required that the Department 
     be in possession of a valid contract as well as a valid 
     invoice and a valid receiving report prior to payment being 
     authorized. If this three way match existed, the policy 
     allowed payment without a matching obligation in the 
     accounting records, with the proviso that the Military 
     Services update the accounting records to ensure that a valid 
     payment had been made. In short, ``Straight Pay'' did exist 
     at the Columbus Center in 1998-99, but the process was 
     different than the one you described in your January 19, 1999 
     letter.
       (3) I am not aware of the March 8, 1999 DFAS memo that you 
     referenced. To my knowledge, I did not sign or authorize it.
       (4) Unmatched disbursements are not a satisfactory outcome. 
     They reflect the age and inadequacy of some of our finance 
     and accounting systems. This is one of the primary reasons 
     that I supported the modernization of our finance and 
     accounting infrastructure when I was Under Secretary in the 
     late 1990s and why I will continue to support that 
     modernization should I be confirmed as Deputy Secretary.
       (5) As I stated in my February 3, 2009 letter, ``Straight 
     Pay'' was an attempt to strike the right balance between 
     meeting our obligations to pay on time and ensuring the 
     Department only paid vendors for what was actually received 
     under a valid contract. The 90-day extension of that policy 
     on March 9, 1999 was done because the backlog of unpaid 
     invoices remained at an unacceptable level.
       (6) With regard to progress payments, I took steps to 
     ensure that payment procedures were tightened. In 1998, I 
     directed that on all new contracts, other than firm fixed 
     price contracts, the practice of prorating payments 
     proportionately to all accounting classification reference 
     numbers be discontinued. Effective August 31, 1998, the 
     Department began distributing progress payments on the basis 
     of the best available estimates of the specific work being 
     performed under the contract. Both the Office of the 
     Inspector General and the Office of the General Counsel of 
     the Department of Defense reviewed and approved the new 
     policy.
        (7) I served on the staff of Senator Edward Kennedy in the 
     late 1980s with Gregory B. Craig, who is now Counsel to the 
     President.
        (8) While at Raytheon, I did not participate in any of the 
     of the issues that you cite. Nor did I lobby on those issues 
     with either Defense Department officials or any Members or 
     staff in Congress.
       (9) I am honored that President Obama nominated me to serve 
     as Deputy Secretary of Defense. If confirmed, I will serve 
     the Department and the nation to the best of my ability. It 
     is fully consistent with my personal and professional values 
     to return to public service at this time.
           Sincerely,
     William J. Lynn III
                                  ____

                                                      U.S. Senate,


                                         Committee on Finance,

                                 Washington, DC, February 6, 2009.
     Mr. William J. Lynn,
     Senior Vice President,
     Raytheon Company, Arlington, VA
       Dear Mr. Lynn: I have reviewed your letter of February 5, 
     2009, in which you attempt to address the questions I raised 
     in a letter to you also dated February 5th.
       I am baffled by some of your answers. You have answered 
     questions I did not ask; you have not answered questions I 
     did ask; and some of your answers appear to be incomplete as 
     follows:
       First, in question #1, I asked you about your position on 
     Section 401 of Secretary Cohen's Defense Reform Initiative 
     presented to the Senate in February 1998. You responded as 
     follows: ``I did not participate in the development of 
     Section 401. I do not recall having taken a position on it. 
     At this time, I would not support a proposal that with no 
     dollar limit would allow the DOD to pay bills without a 
     receipt.'' In February 1998, you had been CFO for several 
     months. This issue fell directly under your purview. How 
     could you possibly avoid taking a position on an issue the 
     Secretary of Defense was urging the Senate to adopt? As the 
     Chief DOD lobbyist for Raytheon today, you say it was wrong. 
     My question is: As the DOD CFO back in 1998, why didn't you 
     know it was wrong and speak up?
       Second, in question #2, I asked: ``Did `Straight Pay' exist 
     at the Columbus Center

[[Page 3581]]

     in 1998-99?'' You responded this way: ``Straight Pay' did 
     exist at the Columbus Center in 1998-99, but the process was 
     different than the one you described.'' Your response today 
     is a bit different from the one you provided me in 1999. In 
     early March 1999, both you and Secretary Cohen reported to me 
     that ``Straight Pay'' did not exist. Period. This is what 
     Secretary Cohen said in response to my questions at a Budget 
     Committee hearing on March 2, 1999: ``there is no authorized 
     procedure called straight pay.'' And he attributed that 
     statement to you. You are saying it existed but not exactly 
     as I described it. I find these explanations somewhat 
     confusing. Even if I did not describe it exactly right, it 
     still existed. And this is why I raised question #3.
       Third, The Defense Finance and Accounting Service (DFAS) 
     employees were providing me with documents that clearly 
     indicated that the ``Straight Pay'' did, in fact, exist.
       DFAS employees even provided me with an elaborate set of 
     rules on how this policy was to be implemented. Then I 
     received a high-level DFAS memo that appeared to constitute a 
     direct order to suppress the policy, bury it, if necessary, 
     or re-name it. This memo, dated March 8, 1999, contained the 
     following instructions: ``Due to concerns over the use of the 
     term `Straight Pay' and its connotation, we must delete all 
     references to `straight pay' from the policy and clarify that 
     policy does not create an environment for fraudulent 
     payments. Terms such as unmatched disbursements or direct 
     disbursements were substituted.'' As you know, unmatched 
     disbursements--like ``Straight Pay''--leave the door wide 
     open to fraud and theft. But that is a separate issue. In 
     question #3, I asked: ``Did you instruct DFAS to get rid of 
     the term ``Straight Pay?'' You did not answer this question. 
     You responded by saying you are not aware of that memo and 
     did not sign it or authorize it. I will re-phrase the 
     question, because some high official was probably creating 
     pressure for this change. While CFO, did you ever issue any 
     instructions to DFAS or anyone else regarding use of the term 
     or words ``Straight Pay''?
       Fourth, in question #5, I asked you if you approved and 
     signed documents authorizing ``Straight Pay.'' In your 
     response, you tell me why the policy was necessary but do not 
     accept direct responsibility for approving the policy. While 
     CFO, did you ever approve and sign documents authorizing 
     ``Straight Pay''?
       Fifth, in question #6, I asked you about your knowledge of 
     the arbitrary allocation scheme--also known as ``Bucket 
     Billing''--used at the Columbus Center for making progress 
     payments on contracts. At the time, both the GAO and DOD IG 
     had declared that this policy was illegal. As you may 
     remember, I addressed this matter in great detail with your 
     predecessor, Mr. John Hamre. You now report that a new policy 
     was put in place on August 31, 1998. You also reported that 
     the IG reviewed and approved that policy. Having a new policy 
     is an important first step, but my question is this: Is the 
     new policy working as advertised? In 1999, did you follow-up 
     and check to see if payments were being posted to the correct 
     appropriation accounts?
       Sixth, in question #7, I asked you about your association 
     with Mr. Gregory B. Craig, who was directly involved in the 
     review and approval of the waiver you were granted in 
     connection with President Obama's new ethics rules. I asked 
     this question: ``Please characterize your relationship with 
     Mr, Craig?'' You answered: ``I served with him on the staff 
     of Senator Kennedy in the late 1980s.'' Again, please 
     characterize your relationship with Mr. Craig? What 
     discussions took place between you and Mr. Craig regarding 
     this matter?
       Seventh, I will re-phrase question #9 as follows: Do you 
     believe that your nomination is fully consistent with the 
     spirit and intent of the ``Revolving Door Ban'' in paragraphs 
     2 & 3 of Section 1 of the new rules?
       I very much appreciate your patience and cooperation with 
     this matter.
           Sincerely
                                                 Charles Grassley,
     Ranking Member.
                                  ____

                                                 February 9, 2009.
     Hon. Charles E. Grassley,
     Ranking Member, Committee on Finance, U.S. Senate, 
         Washington, DC.
       Dear Senator Grassley: I am writing in response to your 
     letter of February 6, 2009. You asked some additional follow 
     up questions to your letters of February 3, 2009 and February 
     5, 2009.
       (1) You asked about my position on Section 401 of the 
     Defense Reform Initiative in 1998. As I indicated, the 
     development of Section 401 took place before I took office as 
     Under Secretary in late 1997, so I was not engaged in the 
     process that led to the inclusion of Section 401 in the 
     Defense Reform Initiative. Further, Section 401 was dropped 
     before I ever had an opportunity to review or take a position 
     on the provision.
       (2) You asked for further clarification on the issue of 
     ``Straight Pay'' at the Defense Finance and Accounting 
     Service (DFAS) Columbus Center. To my knowledge, ``Straight 
     Pay'' was an informal term used to describe a payment process 
     in the Air Force network. Your March 1999 letter and your 
     Budget Committee hearing question to Secretary Cohen used the 
     term ``Straight Pay'' differently, that is to describe the 
     pre-validation process used by the Mechanization of Contract 
     Administration System (MOCAS) at the Columbus Center. The 
     purpose of my response to your letter and Secretary Cohen's 
     response to your hearing question in 1999 was not to argue 
     over the term ``Straight Pay'', but rather to explain the 
     pre-validation process used at Columbus accurately and fully. 
     Specifically, we both described how the three-way match 
     procedures worked. They required that no payments could be 
     made without a valid invoice, a valid contract, and a valid 
     receiving report. If this three-way match existed, the policy 
     allowed payment without a matching obligation in the 
     accounting records, with the proviso that the Military 
     Services update the accounting records to ensure that a valid 
     payment had been made.
       (3) As I wrote previously, I was not aware of the March 8, 
     1999 DFAS memo that DFAS employees provided to you. Nor do I 
     recall ever issuing instructions to DFAS or anyone else 
     regarding the use of the term ``Straight Pay''.
       (4) You asked about documents that I signed authorizing 
     ``Straight Pay''. I am not aware of any official documents 
     that I signed that included the term ``Straight Pay''. I did, 
     however, approve and sign documents that authorized the 
     three-way match process described in my answer in paragraph 2 
     above. These included the March 9, 1999 memo, to which you 
     referred in your February 5, 2009 letter. This memo re-
     authorized a temporary increase in the threshold on new 
     contracts paid by the MOCAS system due to the backlog of 
     payments. The original authority for the temporary increase 
     in the threshold was a December 1998 memo, which I also 
     approved and signed.
       (5) With regard to the new policy that I directed on 
     progress payments in 1998, I did follow up and found DFAS was 
     following the payment distribution instructions required by 
     that policy. It is my understanding that the policy remains 
     in practice today with some enhancements to further ensure 
     payment distribution is made in accordance with the contract.
       (6) As I stated in my previous letter, Mr. Gregory Craig 
     and I were co-workers on Senator Kennedy's staff in the late 
     1980s. Over the ensuing decades, we have had only very few 
     contacts. Additionally, my contacts with the review and 
     approval of my waiver were not with Mr. Craig, but with his 
     colleagues in the White House Counsel's office, who conducted 
     the extensive analysis supporting the waiver. Ultimately, 
     this analysis was then reported and approved by Mr. Craig.
       (7) I believe that my nomination is consistent with the 
     spirit and intent of President Obama's Executive Order. I, 
     like every nominee, am bound by the Order's provisions. 
     However, because of my previous work experience, I was 
     granted a waiver to a portion of Section 1, which is allowed 
     under Section 3 of the Order. The reasons for receiving the 
     waiver were described in a February 3, 2009 letter to you 
     from Mr. Peter Orszag, Director of OMB and Mr. Craig, White 
     House Counsel. Notwithstanding, I remain bound by the Order's 
     revolving door exit provisions as well as all other 
     provisions contained in the Order.
       Thank you for the opportunity to respond to your questions.
           Sincerely,
                                              William J. Lynn III.

  Mr. GRASSLEY. I believe this policy developed under Mr. Lynn's 
leadership was dangerous, misguided, and irresponsible. It demonstrated 
a lack of sound business judgment. It may have been inconsistent with 
various provisions of law. Because don't the taxpayers expect you write 
a check, you have a reason for writing it, you have an invoice or 
something that says you owe X number of dollars? Straight pay left the 
taxpayers' hard-earned money vulnerable to fraud and theft, and we have 
had that.
  I was not alone in this assessment. At my subcommittee hearing on 
September 28, 1998, the Government Accountability Office witness said 
essentially the same thing. DFAS payment policies in Mr. Lynn's watch 
left the door wide open to fraud.
  For all these reasons, I have to say Mr. Lynn, as Chief Financial 
Officer, did not do everything humanly possible to protect the 
taxpayers' interests. When he pushed the straight pay policy and went 
silent on pay-and-chase, he did not act in the public interest.
  As Chief Financial Officer, Mr. Lynn was also supposed to do his part 
to develop and integrate a finance and accounting system that would 
allow the Department of Defense to produce a financial statement that 
could earn a clean audit opinion. I know this is a massive and complex 
undertaking, but Mr. Lynn could have gotten the ball rolling in the 
right direction, even if he didn't get it under control.

[[Page 3582]]

  I can guarantee one thing: The principle of straight pay was not 
conducive to the creation of an integrated accounting system. One of 
the first steps in that process is to link obligations to 
disbursements. Straight pay truncated that link and undermined 
integration.
  Although he claimed to have launched several important reform 
initiatives, there appears to be little or no measurable progress 
toward the goal of integration on his watch. In fact, his payment 
policies probably took us in the wrong and opposite direction and had 
an opposite effect. The Department's books of account were a mess when 
Mr. Lynn became Chief Financial Officer, they were a mess when he left, 
and I have a feeling they remain a mess today, with no fix in sight.
  Congress passed the Chief Financial Officers Act in 1990 in an 
attempt to fix the problems in accounting of Government finances in 
every department. Eighteen years after this legislation, the Department 
of Finance, as a whole, has yet to earn a clean audit.
  Mr. Lynn should not be the only person held accountable for poor 
accounting at the Department of Defense. He was one of many individuals 
in a long line of Chief Financial Officers and Comptrollers who, for 
whatever reason, were unsuccessful in solving the financial misstep at 
the Defense Department. Mr. Hamre, his predecessor, used to say: 
``Fixing this problem is like changing a tire on a car going at 100 
miles per hour.''
  I have shared some of my sentiments on Mr. Lynn's performance as 
Chief Financial Officer. I hope these insights are helpful to my 
colleagues before they vote yes or no on this nomination. If confirmed, 
we hope he will do everything possible to protect our national 
security. We hope he will protect the taxpayers' hard-earned money, and 
we hope he will make sure the taxpayers' money is wisely spent and, 
most importantly, spent according to law. We hope he will usher in a 
new era of financial accountability at the Department of Defense. At 
this point, we simply don't know what Mr. Lynn will do. I don't own 
that crystal ball that would be necessary to make that determination. 
It is all about the future, and that is relatively unknown. But we do 
know something about what he did in the past as the Department of 
Defense Chief Financial Officer.
  As Chief Financial Officer, he advocated very questionable accounting 
practices that obviously were not in the public interest. Writing a 
check in any department without knowing what that check is paying for 
is not in the public's interest. It is not a wise expenditure of public 
money. We need accounting systems that account for every dollar going 
out, having a purpose of a service or a product that it bought. I urge 
my colleagues then to weigh those considerations in reaching a decision 
on how to vote on the Lynn nomination.
  Lastly, I wish to take a moment to thank the Senate Armed Services 
Committee leadership, both Republican and Democratic, and their staff 
for their patience on this issue. I appreciate the time Chairman Levin 
has given me to discuss this nomination. I lay everything I have said 
before the Senate for consideration.
  I have already sought permission to have some of these documents 
printed in the Record, so I don't think I have to do that.
  I yield the floor.
  Mr. LEVIN. Mr. President, I yield myself 10 minutes.
  Let me, first, thank Senator Grassley for his dedication to trying to 
change the climate around here. He has been on the forefront. I happen 
to disagree with him on the conclusion he has reached--or apparently 
reached--relative to Mr. Lynn for reasons I will go into. Nonetheless, 
he has been an advocate of reform and he continues to do that. I will 
explain why I think, in this instance, his concerns do not fit the 
situation.
  In the first instance, when he suggested the President is changing 
the rules as we go along by providing a waiver to Mr. Lynn as part of 
the new Executive order, that is part of the Executive order.
  Let's not change the rules during the game. That is part of the rule 
President Obama has adopted in the new Executive order. It has some 
very stringent requirements. Part of them are waived by the President's 
Office of Management and Budget--in this case, for reasons they gave. 
Part of the new rule is not waived, the critical postemployment 
prohibition that applies to Mr. Lynn. I think that for the reasons 
given by President Obama's Budget Director, the waiver is a legitimate 
one, central in this case for the reasons given.
  By the way, when we talk about waivers, this is not at all unique. 
Mr. Lynn's situation is not in the least bit unique. Waivers have been 
given and provided in previous cases because senior officers have had 
experience in the private sector. Secretary Gates was subject to the 
same rule, subject to the same waiver requirement. Secretary Rumsfeld 
was subject to the same waiver and the same waiver requirement, as were 
Deputy Secretary England and Secretary Wolfowitz. This has been a 
common practice. I don't think anybody in those cases, or in any other 
case we know about, where either a waiver has been required or the 
waiver provision has been applicable--we know of no situation where 
there was a conflict of interest.
  What President Obama has done is tighten the requirement. He also 
provided for the possibility of a waiver for part or all of the new 
requirement. Part of the new requirement has been waived by the new 
President, but to suggest that he simply has waived his new requirement 
is not accurate because part of it was not waived. The critical part 
not waived is that the new officeholder, if confirmed--Deputy Secretary 
Lynn--will be subject to the prohibition that he may not lobby anybody 
in the Government if he leaves before the administration finishes, nor 
may he lobby anybody in the Department of Defense for a year after he 
leaves. These are very strict, new requirements that are not waived in 
the case of Secretary Lynn. What has been waived by the administration 
is the other part of the Executive order. That is No. 1.
  Senator Grassley has gone into a lot of technical arguments relative 
to Mr. Lynn when he previously served. I want to deal with that the 
best we can.
  These events took place 7 to 10 years ago, but they don't involve 
ethics issues at all. They involve what Mr. Lynn said in letters 
relative to certain accounting practices at the Department of Defense 
at that time. I have reviewed these answers, and the questions were 
very appropriate questions asked by Senator Grassley. I commend him for 
asking the questions.
  There were 4 separate letters to Mr. Lynn, with 30 detailed questions 
about practices for validating vendor payments in certain parts of the 
Department of Defense more than 10 years ago. Mr. Lynn has responded to 
every one of the letters Senator Grassley very appropriately wrote, and 
to each of his questions. It is my view, after reading all of the 
questions and the answers, that while the vendor payments that were 
described by Senator Grassley are real, No. 1, it is not fair to 
attribute those problems to Mr. Lynn. Secondly, the problems as 
described by Mr. Lynn and the responses he gave were accurate.
  First, the description was of the pay-and-chase--the way of paying 
vendors. That system was illegal. You cannot pay a vendor without 
checking that invoice against the contract or against the receipt of 
the goods. That was the problem with the pay-and-chase system. There 
was a failure to check the invoice that came in, the document that the 
goods were received and that they were proper under the contract. That 
system ended. It had to end; it was illegal. A new system was put into 
place where the vendor's bill was checked against the receipt of the 
goods and against the contract. That is a very different deal. It is a 
legal system. Unlike so-called pay-and-chase, which preceded it, which 
was illegal, what Senator Grassley and others have described as a 
straight pay system was legal. The problem is that it was a confusing 
name because it implied that the previous system of not checking an 
invoice against the receipt

[[Page 3583]]

of the goods or the contract continued, when it did not continue. It 
was dramatically changed from something that was illegal to something 
that was legal.
  For instance, Senator Grassley, when he wrote Mr. Lynn back on 
January 29, 2009, said:

       Straight pay allowed the technician to ignore the warning 
     signals and make payments up to half a million dollars 
     without checking documentation.

  That is not accurate. They had to check documentation. There were 
some things they could not check because the systems are deficient at 
the Department of Defense, including what is the original source of the 
money in the Defense Department's budget. Does it come from R&D or does 
it come from acquisition? That part, they still cannot check. Those 
systems have been deficient, and continue to be, but with the help of 
this body and hopefully real energy in the DOD, that can be corrected. 
We all need that.
  Senator Grassley has been in the forefront of trying to get these 
kinds of controls in place. I commend him for that. But it is not 
accurate to say that straight pay, so-called, which was the followup 
system, allowed these payments without checking documentation. That is 
what Mr. Lynn disagrees with. When you look at his answers, that is the 
disagreement between Mr. Lynn's answers and what Senator Grassley 
describes as being accurate.
  Part of the problem here, by the way, that Senator Grassley had is 
not with Mr. Lynn, it is with Secretary Cohen. Repeatedly and 
accurately, Senator Grassley points to the action of then-Secretary of 
Defense Cohen, saying he didn't do this, and Mr. Lynn didn't change it, 
or Secretary Cohen didn't do something, and Mr. Lynn did not disagree. 
The problem was with the Secretary of Defense, which is outlined by 
Senator Grassley, to the extent that it exists.
  It is hard for me to believe Secretary Cohen would not be eligible to 
be Secretary of Defense again or would not be confirmed unanimously by 
this body. Yet the mistakes attributed to Mr. Lynn are also attributed 
to then-Secretary Cohen, for whom Mr. Lynn worked. But does anyone 
seriously suggest that if Secretary Cohen were reappointed as Secretary 
of Defense, we would not confirm Bill Cohen by a vote of 100 to 0?
  So, Mr. President, without getting into a lot more detail--and these 
are incredibly complicated and detailed issues--let me summarize by 
saying that the difference here has been described--there is a 
difference over the description of a system of payment and the way in 
which Mr. Lynn describes it. When you look at his complete answers, it 
seems to me, there is a fair description of what the problem was.
  Mr. President, I yield the floor.
  The PRESIDING OFFICER. The Senator from Rhode Island is recognized.
  Mr. REED. Mr. President, I rise to express my support for William 
Lynn to be confirmed as Deputy Secretary of Defense. Bill has a 
combination of experience and sound judgment. He worked here on Capitol 
Hill as a significant policy aide to Senator Kennedy on the Armed 
Services Committee. He has been the comptroller of the Department of 
Defense. He has detailed and specific knowledge of the vast programs 
that will be handed over to the DOD. He has also worked in industry. 
Frankly, the job of Deputy Secretary of Defense is a place in which all 
these roads come together--the relationship with Capitol Hill, the 
relationship with industry, and a detailed understanding and knowledge 
of the way the Pentagon really works from the inside, not from the 
outside.
  He is uniquely situated to take on these daunting challenges that 
face us, at a time when we are engaged in two conflicts--Afghanistan 
and Iraq--and a continuing war against extremists across the globe and 
at a time when our budget is going to be challenged because of a 
declining economy in the United States and across the globe. The 
difficult judgments that have to be made require the expertise and 
experience Bill Lynn can bring and few can match.
  One other thing that I think is particularly compelling about this 
nomination is the enthusiastic support of it by the Secretary of 
Defense, Bob Gates. There is no one in Government whom I admire more 
for their patriotism, their sacrifice to the Nation, and their service. 
The Secretary of Defense has made it very clear that he believes Bill 
Lynn is someone whom he not only can work with, but he will aid him 
immensely in his extraordinary challenges to face the threats I have 
already illustrated. For me, Bob Gates's testimony and endorsement is 
compelling evidence that this Senate should confirm Bill Lynn 
immediately this afternoon.
  As I mentioned before, Bill worked in the Department of Defense. He 
has knowledge of the whole range of programs. That is absolutely 
critical because he will have to make judgments about these programs to 
advise the Secretary of Defense.
  For his work at the Department of Defense--which has been talked 
about this afternoon, but this wasn't mentioned--he received the Joint 
Distinguished Civilian Service Award from the Chairman of the Joint 
Chiefs of Staff. Again, the military understands not only the important 
duty he is performing but also, in their own conduct and affairs, 
understands the values of integrity, character, and commitment to the 
national interest. He has won awards from the Army, Navy, and Air 
Force. He also received the 2000 Distinguished Federal Leadership Award 
from the Association of Government Accountants for his efforts to 
improve defense accounting practices.
  He also gained valuable experience within private industry. Again, 
Bill is not unique in having an industry background. In fact, the 
current Deputy Secretary of Defense, Gordon England, came from an 
industry background. My observation of Secretary England is that his 
performance has been outstanding, aided by the insight he has had into 
the multibillion-dollar contracts that industry has with the Department 
of Defense, insight he has into the decisionmaking in corporate 
America, insight he has into the way business is done in the defense 
community. That has aided him, not disabled him, in doing an excellent 
job. Once again, Bill Lynn comes from a similar background. As Chairman 
Levin pointed out, the Secretary of the Navy, who I also believe has 
done an outstanding job, also came from a background in the defense 
industry.
  This goes also to the other issue raised about the waiver. 
Essentially, Bill Lynn stands in the same shoes, I think, as Gordon 
England and others--ladies and gentlemen who worked in private industry 
but recognized when they took the oath to serve the people in this 
country, they had only one boss--the people of the United States. They 
are committed to that duty.
  Also, I think, frankly, the rules have been followed scrupulously by 
his predecessors and will be followed by Bill Lynn regarding conflicts 
with his previous employer. I believe he is going to err on the side of 
caution when it comes to programs that may be under the purview of his 
previous employer, or anyone else, because having gotten to know Bill, 
I understand he is not only a man of intelligence but a man of 
character.
  We have someone uniquely situated to begin to aid the Secretary of 
Defense in the important challenges before us: How do we create a 
strategy of redeploying forces successfully out of Iraq? How do we 
increase our presence in Afghanistan and help military and civilian 
agencies to deal with that troubling situation? How do we deal with 
issues of defense modernization? How do we prepare for longer term 
threats? How do we continue to be active across the globe to, we hope, 
preempt terrorist activities, whether it be in the Near East, Far East, 
or anyplace on this globe?
  Again, Bill Lynn is superbly qualified to do this. He is a graduate 
of Dartmouth with a law degree from Cornell Law School, and a master's 
in Public Affairs from the Woodrow Wilson School at Princeton--again, 
superb academic preparation and superb life preparation. He is someone 
who has, again, the character and the insights to render remarkable 
service to the Department of Defense.

[[Page 3584]]

  I hope my colleagues will join with me in supporting this nomination, 
rounding out a team of excellent patriots and professionals in the 
Department of Defense. I must commend President Obama. He made a very 
sound, I won't say unusual, but unexpected announcement early on by 
offering the position of Secretary of Defense to Bob Gates. Bob served 
with distinction under President Bush. President Obama recognized, 
first, the quality of this Secretary, Secretary Gates, and also the 
need for continuity in the operations of the Department of Defense. 
That was a strong not only signal of continuity but endorsement of the 
work and effort of thousands and thousands of uniformed military 
personnel and civilian employees in the Department of Defense. That 
choice was amplified in his selection of Bill Lynn. Again, the 
endorsement of Secretary Gates speaks volumes about the team President 
Obama has put together.
  I hope at the conclusion of this debate, we could send a very strong 
vote of confirmation and confidence in the team that President Obama 
has assembled--Secretary Gates, hopefully Deputy Secretary Lynn, and 
the other members--because the tasks before them are, indeed, daunting 
and because their success will be our success.
  Mr. GRASSLEY. Mr. President, I apologize to Chairman Levin. I had to 
leave the floor to attend a conference meeting on the stimulus bill 
before he finished his remarks.
  I would like to rebut his remarks regarding Mr. Bill Lynn.
  In regards to the Executive order on ethics, I agree President Obama 
is attempting to set high standards for executive branch appointees; 
however, giving special waivers to nominees such as Mr. Lynn water down 
the spirit and authority of his own Executive order. I would ask 
President Obama: How many more waivers will you grant in the next 4 
years?
  I say to Chairman Levin, you seemed to blame former Defense Secretary 
Cohen for the financial troubles at DOD, not Mr. Lynn. I could not 
disagree with you more on this issue. Chief Financial Officer Lynn was 
chiefly responsible for the policies and regulations governing 
accounting practices. His straight-pay policy went against all 
commonsense accounting practices. DFAS technicians should not have paid 
bills like they did without first confirming that the proper 
obligations were in the books of account.
  Mr. President, I yield the floor and suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. INHOFE. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. INHOFE. Mr. President, I ask unanimous consent that I be 
recognized for 10 minutes.
  The PRESIDING OFFICER. The Senator from Oklahoma is recognized.
  Mr. INHOFE. I thank the Chair.
  (The remarks of Mr. Inhofe pertaining to the introduction of S. 412 
are located in today's Record under ``Statements on Introduced Bills 
and Joint Resolutions.'')
  Mr. INHOFE. I suggest the absence of a quorum.
  The PRESIDING OFFICER (Mr. Burris). The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. ENSIGN. Mr. President, I ask unanimous consent the order for the 
quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. ENSIGN. Mr. President, I ask to speak as if in morning business 
and have the time counted against our side.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (The remarks of Mr. Ensign are printed to today's Record under 
``Morning Business.'')
  The PRESIDING OFFICER. The Senator from Oklahoma is recognized.
  Mr. COBURN. Mr. President, I thank my friend from Nevada. I wish to 
spend just a few minutes. I am not going to talk for a long period of 
time, and I will yield back my time.
  I am extremely concerned with the nomination of Mr. Lynn. It has 
nothing to do with Mr. Lynn. Some can be critical of his time as 
Comptroller. Some can be critical of some of the lack of forthrightness 
in some of the answers about the accounting and controlling and 
auditing systems in the Pentagon, and I think that is rightly so. We 
had several hearings on IT improvements and waste in the contracting of 
IT through the Pentagon. We had several hearings in the last two 
Congresses about the waste in contracting. Mr. Lynn dealt with a large 
amount of that.
  Let that be as it may. The reason I stand to speak against his 
nomination is this is a nomination that is going to be the person who 
runs the day-to-day operation of the Pentagon. If you look at 
management experience, what there has been in running an organization 
that has 2.9 million employees--it is the largest component, even 
including mandatory programs, that we have.
  It also is the area where we have some of the greatest amount of 
waste. We had it during his tenure as Comptroller. We had it during the 
Bush administration years. Why would we put someone into that position 
who has not performed in a stellar fashion when given the authority to 
fix a lot of those problems before? Why would we put someone in charge 
who is going to be handicapped? There is no question, given the waiver 
he has received, he will be absolutely handicapped in all the 
contracting that goes before the Pentagon.
  Let me explain. His former company is one of the five largest defense 
contractors in the country. It is not just the areas he has lobbied in 
the past few years, such as the Aegis Ballistic Missile, the DDG-1000 
destroyer, the Excalibur precision-guided munitions, the Joint Land 
Attack Cruise Missile Defense Netted Sensor System and the Multiple 
Kill Vehicle System, which comes to $41 billion, 10 percent of the 
Pentagon's budget, but every other contract that has Raytheon as a 
subcontractor from which he is going to have to recuse himself.
  What he is going to be limited to is personnel matters and accounting 
matters. He will not be able to make those decisions without first 
getting a waiver to make them and then, if you are granting a waiver to 
make the exception and make a decision, here is what is going to 
happen.
  Let me give the history of the tanker program in the United States. 
We, first, had a contract let to Boeing, which was complicated by some 
very bad acting on the part of Boeing and some Defense Department 
officials, and it got thrown out.
  We last had a contract for the tanker program that was awarded to 
EADS. There was a protest filed on it. It got thrown out.
  Everything he is not involved with, Raytheon can file a protest that 
they were excluded because the management chain was not the same. We 
have created the basis for a new protest on everything Raytheon will 
not win in the future. If Raytheon does win a contract, we have created 
a protest for everyone who wasn't Raytheon to protest because there is 
a conflict of interest.
  Ask yourself, in this dire economic time we are in, with the largest 
agency we have, why we would put somebody in that position who is going 
to be--for at least 1 year and probably for 2, if we wanted to 
ethically look at it--totally out of the realm of the most important, 
outside our military men and women, most important aspect of the 
Pentagon, which is purchasing, contracting defense weapons systems.
  We are setting a man in a position. It is no reflection on him. He is 
very knowledgeable. He has been a good public servant. We are putting 
him in a position to fail. We have guaranteed that contracting will not 
go smoothly at the Pentagon because we have created two new bases for 
protests over contracts. We can go through all the contracting, and it 
is going to be raised--and rightly so. There is going to be a 
legitimate protest on both sides of these issues that is going to delay 
the ability of the American people to contract for things we should be 
contracting for. More importantly, it is going to significantly raise 
the cost.

[[Page 3585]]

  The third point I would make is, because he is going to have to 
exclude himself from the vast majority of decisions in contracting and 
purchasing, the very position he is meant to fill, to run the day-to-
day operations, means Secretary Gates is going to have to run the 
operations. If he has to run the operations himself, why does he need a 
Deputy Secretary of Defense?
  President Obama, I think rightly, has asked Secretary Gates to stay 
on. I think the continuity with that was great. I am sorry he didn't 
ask others to stay on until we got past this period of time. In spite 
of the good will of Mr. Lynn, a man of character, a man of integrity, 
we have set him up to fail.
  I have no doubt he is going to be placed in that position today when 
we vote. But we ought to think. The biggest problem we have with our 
body, in terms of what we do, is we do not think long run. We think 
short term. What we have done is totally handicapped him, but we are 
also going to handicap our military.
  This is not a time we should be doing that. We should be creating a 
streamlined procurement process that rebuilds the procurement offices, 
which need to be rebuilt--that has no question about the authority of 
the Deputy Secretary of Defense to make solid, fair, clear, and 
decisive actions and decisions. What we are going to do is ensure that 
does not happen.
  I thought it was interesting that Senator McCain's main point was he 
did not have the managerial experience to do this. Senator McCain is 
going to vote for him because he has such high regard for Secretary 
Gates. But think about that statement. He does not have the managerial 
experience to run a 2.9 million individual organization, and he is 
handicapped. We are going to handicap him so he meets the ethical 
outlines President Obama so rightly has put in place.
  I think it is a bad decision. I think it is a wrong decision. Once 
again, the consequences for that will be inefficiency, ineffectiveness, 
and a greater cost for this country. Anytime we have a greater cost on 
anything now, it goes directly to our kids and our grandkids.
  I hope my associates in the Senate will give a rethought to whether 
we ought to handicap this man this way. Surely somebody can fill the 
bill and let Mr. Lynn wait a year and then come in and do what he wants 
to do and what President Obama wants him to do.
  Again, we will make a serious mistake if we approve him, not only for 
us, not only for our kids but for him as he attempts to run the largest 
organization in the world.
  Mr. HATCH. Mr. President, today I rise in support of the confirmation 
of William J. Lynn to be the next Deputy Secretary of Defense.
  I recently had the opportunity to meet with Mr. Lynn and discuss many 
of the important defense challenges that face our Nation. I came away 
from that meeting duly impressed by his dedication to seek new and 
innovative solutions to many of these issues.
  Throughout his career, he has demonstrated a singular devotion to our 
national defense. In the early 1980s he was the executive director of 
the Defense Organization Project at the Center for Strategic and 
International Studies. This organization was a major catalyst for the 
Goldwater-Nichols Act of 1986 which transformed and modernized the 
Department of Defense. Those reforms are still the foundation from 
which the Department operates today.
  As a senior fellow at the National Defense University, Mr. Lynn 
continued his work collecting ideas and crafting solutions to solve a 
myriad of national defense issues. Then, prior to entering the 
Department of Defense, he worked for 6 years as the military 
legislative assistant to my good friend and colleague, Senator Kennedy, 
a senior member of the Senate Armed Services Committee.
  In 1993, Mr. Lynn joined the Defense Department and served 4 years as 
the director of program analysis and evaluation in the Office of the 
Secretary of Defense. There he oversaw the Department's ever-evolving 
strategic planning progress. He was then appointed as the Under 
Secretary of Defense Comptroller where he served 4 years providing 
candid advice to the Secretary of Defense on all budgetary and fiscal 
matters.
  His most recent endeavor was as senior vice president at Raytheon 
Company where he focused his energy and expertise on strategic 
planning. In this role, he ensured that a major American corporation 
developed and produced technologies that met the conflicts of today and 
the dangers of tomorrow.
  During these challenging times, it is essential we have leaders in 
our Defense Department with strength of purpose and a vision for 
innovation. William Lynn is such a leader. I am proud to pledge my 
support and look forward to working with him to create smart and 
effective solutions that support the brave men and women who defend our 
Nation.
  Mr. FEINGOLD. Mr. President, consistent with my practice of deferring 
to Presidents on executive branch nominations, I will vote to confirm 
William Lynn to be Deputy Secretary of Defense. I do have some 
concerns, however, about Mr. Lynn's longtime service as a lobbyist for 
a major defense contractor. I hope that, if confirmed, Mr. Lynn will 
take seriously the need for serious reforms to address the Department's 
troubling record of financial mismanagement.
  Mr. LEVIN. Mr. President, I ask unanimous consent that the vote on 
the confirmation of the nomination of William J. Lynn occur at 5 p.m. 
today, with the other provisions of the previous order remaining in 
effect.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. LEVIN. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The bill clerk proceeded to call the roll.
  Mr. SESSIONS. I ask unanimous consent that the order for the quorum 
call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. SESSIONS. Mr. President, I am pleased today to support the 
confirmation of Mr. William J. Lynn, III, for the important position of 
Deputy Secretary of Defense. He will be the chief deputy to the 
Secretary of Defense, the largest Department of Government, with great 
responsibilities for weapons systems and to our men and women who serve 
in harm's way.
  If confirmed, Mr. Lynn would be the thirtieth deputy secretary. I 
firmly believe that he is uniquely qualified for the position and would 
serve well in that post. He served as Under Secretary of Defense-
Comptroller during President Clinton's administration from 1997 to 
2001. He was widely commended for providing strong managerial emphasis 
on improving the Department's financial management.
  In addition to his service as comptroller, he has served as Director 
for Program Analysis and Evaluation and as Assistant Secretary of 
Defense for the Budget. He has broad experience with many of the core 
issues within the Department of Defense.
  My meeting with him was positive and I have heard people comment on 
his strong character. Many of the issues that come before the 
Department of Defense are contentious. Rather than basing decisions on 
merit, people often try to infect those decisions with politics. I 
believe he will stand firm to ensure that our men and women in uniform 
get the best equipment and training for the best value. This type of 
judgement is a critical attribute for a deputy. If the deputy is weak; 
if he compromises or tries to play politics with a defense contractor, 
or allows a Member of Congress or the executive branch to have undue 
influence, he can damage the reputation of the Department of Defense. 
More importantly, such influence can prevent our servicemembers from 
getting the best equipment at the best value in a timely manner.
  He also has 6 years of experience working in the defense industry. He 
well understands the challenges facing both the defense industry and 
the Department of Defense.
  I am convinced his experience in DOD, coupled with his experience in 
the defense industry, makes him a nominee we can support for this very 
important position.

[[Page 3586]]

  I yield the floor.
  The PRESIDING OFFICER. The Senator from Michigan.
  Mr. LEVIN. Mr. President, I thank the Senator from Alabama for his 
statement. It is a very important and valuable statement. He is a 
highly valued member of the Armed Services Committee and comments 
coming from him will have an impact on this body. I am grateful.
  I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. WICKER. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Nelson of Florida). Without objection, it 
is so ordered.
  Mr. LEVIN. Mr. President, have the yeas and nays been ordered?
  The PRESIDING OFFICER. The yeas and nays have not been ordered.
  Mr. LEVIN. I ask for the yeas and nays.
  The PRESIDING OFFICER. Is there a sufficient second? There is a 
sufficient second.
  The question is, Will the Senate advise and consent to the nomination 
of William J. Lynn, III, of Virginia, to be Deputy Secretary of 
Defense?
  The clerk will call the roll.
  The assistant legislative clerk called the roll.
  Mr. DURBIN. I announce that the Senator from Massachusetts (Mr. 
Kennedy) is necessarily absent.
  Mr. KYL. The following Senator is necessarily absent: the Senator 
from New Hampshire (Mr. Gregg).
  The PRESIDING OFFICER. Are there any other Senators in the Chamber 
desiring to vote?
  The result was announced--yeas 93, nays 4, as follows:

                       [Rollcall Vote No. 62 Ex.]

                                YEAS--93

     Akaka
     Alexander
     Barrasso
     Baucus
     Bayh
     Begich
     Bennet
     Bennett
     Bingaman
     Bond
     Boxer
     Brown
     Brownback
     Bunning
     Burr
     Burris
     Byrd
     Cantwell
     Cardin
     Carper
     Casey
     Chambliss
     Cochran
     Collins
     Conrad
     Corker
     Crapo
     DeMint
     Dodd
     Dorgan
     Durbin
     Ensign
     Enzi
     Feingold
     Feinstein
     Gillibrand
     Graham
     Hagan
     Harkin
     Hatch
     Hutchison
     Inhofe
     Inouye
     Isakson
     Johanns
     Johnson
     Kaufman
     Kerry
     Klobuchar
     Kohl
     Kyl
     Landrieu
     Lautenberg
     Leahy
     Levin
     Lieberman
     Lincoln
     Lugar
     Martinez
     McCain
     McConnell
     Menendez
     Merkley
     Mikulski
     Murkowski
     Murray
     Nelson (FL)
     Nelson (NE)
     Pryor
     Reed
     Reid
     Risch
     Roberts
     Rockefeller
     Sanders
     Schumer
     Sessions
     Shaheen
     Shelby
     Snowe
     Specter
     Stabenow
     Tester
     Thune
     Udall (CO)
     Udall (NM)
     Vitter
     Voinovich
     Warner
     Webb
     Whitehouse
     Wicker
     Wyden

                                NAYS--4

     Coburn
     Cornyn
     Grassley
     McCaskill

                             NOT VOTING--2

     Gregg
     Kennedy
       
  The nomination was confirmed.
  The PRESIDING OFFICER. Under the previous order, the motion to 
reconsider is considered made and laid upon the table.
  The President will be immediately notified of the Senate's action.

                          ____________________