    DOD Excess Property: Control Breakdowns Present Significant
    Security Risk and Continuing Waste and Inefficiency (25-JUL-06,
    GAO-06-943).

    GAO's previous work found problems in security controls over
    sensitive excess military equipment that resulted in lost and
    stolen items, some of which were sold to the public, and
    significant waste and inefficiency in the Department of Defense
    (DOD) excess property reutilization program. GAO was asked to
    perform follow-up investigations to determine whether (1)
    unauthorized parties could obtain sensitive excess military
    equipment that requires demilitarization (destruction) when no
    longer needed by DOD and (2) system and process improvements are
    adequate to prevent sales of new, unused excess items that DOD
    continues to buy or that are in demand by the military services.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-943
        ACCNO:   A57439
      TITLE:     DOD Excess Property: Control Breakdowns Present
    Significant Security Risk and Continuing Waste and Inefficiency
         DATE:   07/25/2006
      SUBJECT:   Crime prevention
    	     Crimes
    	     Government owned equipment
    	     Internal controls
    	     Inventory control
    	     Inventory control systems
    	     Military materiel
    	     Procurement
    	     Program abuses
    	     Security assessments
    	     Security investigations
    	     Security policies
    	     Surplus property
    	     Corrective action
    	     F-14 Aircraft
    	     F-18 Aircraft
    	     Hornet Aircraft
    	     Tomcat Aircraft

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    GAO-06-943

         * Report to Congressional Requesters
              * July 2006
         * DOD Excess Property
              * Control Breakdowns Present Significant Security Risk and
                Continuing Waste and Inefficiency
         * Contents
              * Summary of Investigation
              * Background
              * Undercover Acquisitions of Sensitive Excess Military Items
                Identifies National Security Risk
                   * Sensitive Excess Military Items Purchased at DOD Excess
                     Property Liquidation Sales
                   * Additional Sales of Sensitive Excess Military Items Targeted
                     for Undercover Purchase
                   * Sensitive Military Items Obtained Through Inside
                     Penetrations of DRMO Security
                        * DRMO A Penetration
                   * DRMO B Penetration
              * Waste Associated with Sales of A-Condition Excess Items that
                Military Services Are Continuing to Use in Operations
                   * Undercover Purchases of New, Unused Items that DOD Is
                     Continuing to Buy or that Are in Demand by Military Units
                   * Limited DOD Actions to Assure Reutilization of New, Unused
                     Items
              * Corrective Action Briefing
              * Conclusions
              * Agency Comments and Our Evaluation
         * DOD Excess Property Demilitarization Codes
         * Excess Property Condition Codes
         * Comments from the Department of Defense
         * GAO Contact and Staff Acknowledgments

    Report to Congressional Requesters

    July 2006

    DOD EXCESS PROPERTY

    Control Breakdowns Present Significant Security Risk and Continuing Waste
    and Inefficiency

    Contents

    Tables

    Figures

    Abbreviations

    July 25, 2006Letter

    The Honorable Tom Davis Chairman Committee on Government Reform House of
    Representatives

    The Honorable Christopher Shays Chairman Subcommittee on National
    Security, Emerging Threats and International Relations Committee on
    Government Reform House of Representatives

    Our May 2005 report1 stated that the Department of Defense (DOD) reported
    $466 million in lost, damaged, and missing excess property from fiscal
    years 2002 through 2004, including property with demilitarization
    restrictions,2 such as chemical and biological protective suits, body
    armor, and guided missile warheads. Some of the restricted items had been
    sold to the public. Further, our May 2005 report noted that during fiscal
    years 2002 and 2003, the military services needlessly spent at least $400
    million to purchase new items instead of reusing identical excess items in
    new and unused condition (A-condition).3 As a result, the new, unused
    excess items were sold for pennies on the dollar. In response to our May
    2005 report, at the June 2005 oversight hearing by the Subcommittee on
    National Security, Emerging Threats and International Relations, DOD
    officials stated that controls were adequate to prevent items requiring
    demilitarization from being released to unauthorized parties. In addition,
    DOD officials promised to have system enhancements in place in January
    2006 to assure that excess items in new and unused condition that the
    military services are continuing to use are returned to inventory and
    reutilized within DOD to avoid unnecessary purchases.

    This report responds to your request that we perform follow-up
    investigations to determine whether (1) unauthorized parties could obtain
    sensitive excess military equipment that requires demilitarization when no
    longer needed by DOD and (2) systems and process improvements are adequate
    to prevent liquidation sales of A-condition items that DOD is continuing
    to buy or that are in demand by the military services.

    Using investigative techniques and acting in an undercover capacity to
    disguise our identity, we tested DOD systems and controls to see if we
    could obtain sensitive excess military equipment and technology items that
    require demilitarization and should not be available to the public. We
    used DOD's Federal Logistics (FedLog) system information to identify and
    validate the population of military equipment and technology items that
    require demilitarization. We then identified public sales of excess
    military items that required demilitarization by total destruction when no
    longer needed by DOD to prevent these items from falling into the wrong
    hands. Next, we tested the systems and controls by making undercover
    purchases of military equipment and technology items from DOD's
    liquidation sales contractor.4 In making these purchases we used a
    fictitious identity to obtain End-Use Certificates (EUC)5 where this
    documentation was required as a condition of sale. For sales where we were
    outbid, we tracked the bid activity to identify the winning bidders. We
    are referring these purchases and numerous other public purchases of items
    that should have been demilitarized to federal law enforcement agencies
    for further investigation. In addition, we used publicly available
    information to develop undercover techniques to penetrate Defense
    Reutilization and Marketing Office (DRMO) excess property warehouses.

    To determine whether DOD was continuing to sell A-condition items that
    were still being purchased or were in demand by the military services, we
    monitored DOD's liquidation contractor sales to identify new, unused
    items. We targeted items for undercover purchases where our research
    identified ongoing or recent procurements and active supply inventory
    status of these items. We also monitored DOD actions to implement
    improvements in excess property systems, processes, and controls in
    response to our May 2005 audit recommendations. We analyzed Defense
    Reutilization and Marketing Service (DRMS) data to determine if
    reutilization rates of A-condition excess property increased during the
    first three quarters of fiscal year 2006. We conducted our investigations
    from November 2005 through June 2006 in accordance with quality standards
    for investigators as set forth by the President's Council on Integrity and
    Efficiency.

    Summary of Investigation

    We used a fictitious identity posing as a private citizen to purchase
    numerous sensitive excess DOD military technology items that should have
    been demilitarized instead of being sold to the public. Sensitive excess
    military equipment purchased by our investigator at DOD liquidation sales
    auctions included ceramic body armor inserts currently used by deployed
    troops; a time selector unit used to ensure the accuracy of computer-based
    equipment, such as global positioning systems and system-level clocks; a
    universal frequency counter used to ensure that the frequency of
    communication gear is running at the expected rate; 2 guided missile radar
    test sets, at least 12 digital microcircuits used in F-14 fighter
    aircraft; and numerous other sensitive electronic parts. We were able to
    purchase these items because controls broke down at virtually every step
    in the excess property turn-in and disposal process.

    In addition, posing as DOD contractor employees6 our undercover
    investigators were able to easily penetrate security at two separate
    excess property warehouses in June 2006. There, they were able to obtain,
    at no cost, numerous sensitive military equipment items valued at about
    $1.1 million that should not have been released outside of DOD. The items
    we obtained included two launcher mounts for shoulder-fired guided
    missiles, several types of body armor, a digital signal converter used in
    naval electronic surveillance, an all-band antenna used to track aircraft,
    six circuit cards used in computerized Navy systems, and several other
    items in use by the military services. The body armor could be used in
    terrorist or other criminal activity. Many of the other military items
    have weapons applications that also would be useful to terrorists. Our
    undercover investigators were able to obtain these items because DRMO
    personnel did not confirm their identity and authorization to requisition
    excess DOD property items. The DRMO personnel even helped our undercover
    investigators load the items into our van.

    We also made several undercover purchases of new, unused A-condition
    excess DOD items, including wet-weather parkas, cold-weather desert
    camouflage parkas, a portable field x-ray processing enclosure,
    high-security locks used to secure the back bay of trucks, a gasoline
    engine, and a refrigerant recovery system used for servicing automotive
    vehicles. The items we purchased at DOD liquidation sales were being
    ordered from supply inventory by military units at or near the time of our
    purchases. In the case of one supply-depot-stocked item-the portable x-ray
    enclosure-no items were in stock at the time of our purchase. At the time
    we made our purchase, DOD's liquidation contractor sold 40 of these x-ray
    enclosures with a total reported acquisition cost of $289,400 for a
    liquidation sales price of $2,914-about a penny on the dollar. In another
    example, we purchased a gasoline engine in March 2006 for $355. The Marine
    Corps ordered 4 of these gas engines from Defense Logistics Agency (DLA)
    supply inventory in June 2006 and paid $3,119 each for them. At the time
    of our undercover purchase, 20 identical gasoline engines with a reported
    acquisition cost of $62,380 were sold to the public for a total
    liquidation sales price of $6,221. Our investigation demonstrated that the
    problems we reported in May 2005 have not been fully resolved and that
    there is continuing waste and inefficiency in DOD's excess property
    reutilization program.

    Our May 2005 report included 13 recommendations to address problems in
    accountability over sensitive military items and the economy and
    efficiency of DOD's excess property reutilization program. Thus, we are
    making no new recommendations in this report. We provided a corrective
    action briefing to DOD on June 28, 2006, and we provided a draft of our
    report to DOD for comment on July 10, 2006. The Deputy Under Secretary of
    Defense for Logistics and Materiel Readiness responded that given the time
    allotted to comment, the Department was not able to do a detailed review
    and has no comments at this time. DOD's comment letter is reprinted in
    appendix III.

    Background

    Over the past several years, we reported7 that serious breakdowns in
    management processes, systems, and controls have resulted in substantial
    waste and inefficiency in DOD's excess property reutilization program. Our
    June 2002 testimony and our November 2003 report documented instances
    where DOD sold to the public items such as Joint Service Lightweight
    Integrated Suit Technology (JSLIST)8 and other chemical and biological
    protective suits and related gear that should have been restricted to DOD
    use only. Our November 2003 report also identified several examples that
    showed that at the same time DOD excessed biological equipment items in
    good or excellent condition and sold many of them to the public for
    pennies on the dollar, it was purchasing the same or similar items. Our
    May 2005 report stated that DOD reported $466 million in lost, damaged,
    and missing excess property from fiscal years 2002 through 2004, including
    property with demilitarization restrictions, such as chemical and
    biological protective suits, body armor, and guided missile warheads. Some
    of the restricted items had been sold to the public. We also reported that
    during fiscal years 2002 and 2003, the military services purchased at
    least $400 million of identical items instead of using available excess
    items in new and unused condition.

    At the time of our May 2005 report, waste and inefficiency occurred
    because condition codes were assigned to excess property that incorrectly
    identified it as unusable and DOD lacked adequate systems and processes
    for assuring that excess items in A-condition were reused to avoid
    unnecessary purchases. We also found that DOD lacked adequate security
    over excess items requiring demilitarization, resulting in losses reported
    by DRMOs of nearly 150 chemical and biological protective suits, over 70
    units of body armor, and 5 guided missile warheads. Losses reported by DLA
    supply depots included thousands of sensitive military items, such as
    weapons system components and aircraft parts.

    Undercover Acquisitions of Sensitive Excess Military Items Identifies
    National Security Risk

    Our undercover investigators purchased several sensitive excess military
    equipment items that were improperly sold to the public at DOD liquidation
    sales. These items included 3 ceramic body armor inserts identified as
    small arms protective inserts (SAPI), which are the ceramic inserts
    currently in demand by soldiers in Iraq and Afghanistan; a time selector
    unit used to ensure the accuracy of computer-based equipment, such as
    global positioning systems and system-level clocks; 12 digital
    microcircuits used in F-14 Tomcat fighter aircraft; guided missile radar
    test sets used to check the operation of the data link antenna on the
    Navy's Walleye (AGM-62) air-to-ground guided missile; and numerous other
    electronic items. In instances where DOD required an EUC as a condition of
    sale, our undercover investigator was able to successfully defeat the
    screening process by submitting bogus documentation and providing
    plausible explanations for discrepancies in his documentation. We
    identified at least 79 buyers for 216 sales transactions involving 2,669
    sensitive military items that DOD's liquidation contractor sold to the
    public between November 2005 and June 2006. We are referring information
    on these sales to the appropriate federal law enforcement agencies for
    further investigation.

    Posing as DOD contractor employees, our investigators also entered DRMOs
    in two east coast states, and obtained about $1.1 million in excess
    military items that required demilitarization as well several other items
    that are currently in use by the military services. DRMO personnel even
    helped us load the items into our van. These items included 2 launcher
    mounts for shoulder-fired guided missiles, an all-band antenna used to
    track aircraft, 16 body armor vests, body armor throat and groin
    protectors, 6 circuit card assemblies used in computerized Navy systems,
    and 2 Palm V personal data assistant (PDA) organizers.

    Sensitive Excess Military Items Purchased at DOD Excess Property
    Liquidation Sales

    Using a fictitious identity as a private citizen, our undercover
    investigator applied for and received an account with DOD's liquidation
    sales contractor. The undercover investigator was then able to purchase
    several sensitive excess military items that were being improperly sold to
    the public. During our undercover purchases, our investigator engaged in
    numerous conversations with liquidation sales contractor staff during
    warehouse inspections of items advertised for sale and DRMS and DLA
    Criminal Investigative Activity (DCIA) staff during the processing of our
    EUCs. On one occasion our undercover investigator was told by a DCIA
    official that information provided on his EUC application had no match to
    official data and that he had no credit history. Our investigator
    responded with a plausible story and submitted a bogus utility bill to
    confirm his mailing address. Following these screening procedures, the EUC
    was approved by DCIA and our undercover investigator was able to purchase
    targeted excess military items. Once our initial EUC was approved, our
    subsequent EUC applications were approved based on the information on
    file. The following discussion presents the case study details of our
    undercover purchases of sensitive excess military items that should have
    been destroyed when no longer needed by DOD and should not have been sold
    to the public. Although these items had a reported acquisition cost of
    $461,427, we paid a liquidation sales price of $914 for them-less than a
    penny on the dollar.

    Small arms protective insert. In March 2006, our undercover investigator
    purchased 3 ceramic body armor inserts identified as small arms protective
    inserts (SAPI), which are the ceramic inserts currently in demand by
    soldiers in Iraq and Afghanistan. SAPI are designed to slide into pockets
    sewn into the front and back of military vests in order to protect the
    warfighter's chest and back from small arms fire. The SAPI had been
    improperly included in a batch lot of items that did not require
    demilitarization. The batch lot reportedly contained 609 items, including
    shelter half-tents, canteens and canteen covers, small tools, first aid
    pouches, insect nets, barracks bags and waterproof bags, small arms cases,
    miscellaneous field gear, and the SAPI. We paid $129 for the batch lot,
    which had a reported acquisition cost of $1,471. The SAPI have a
    demilitarization code of D, which requires them to be destroyed when no
    longer needed by DOD rather than being sold to the public. Figure 1 shows
    a photograph of one of the SAPI that we purchased.

    Figure 1: Example of Small Arms Protective Inserts Purchased in March 2006

    Time selector unit. In March 2006, our undercover investigator purchased
    an excess DOD time selector unit used to ensure the accuracy of
    computer-based equipment, such as global positioning systems and
    system-level clocks. According to our Chief Technologist, this technology
    is important because it prevents users in the battlefield from exposing
    their position to get timing signals from outside sources. We paid $65 for
    the time selector unit, which had an original acquisition cost of
    $343,695. Also, although the unit was listed as being in F7 condition
    (unserviceable, reparable condition), it appeared to be in working order.

    The time selector unit had a demilitarization code of D, which required it
    to be destroyed when no longer needed by DOD. The unit also had a FedLog
    controlled inventory item code (CIIC) of 7, which indicates it is a
    classified

    item that requires protection in the interest of national security, in
    accordance with DOD 5200.1-R, Information Security Program.9

    Although the link on the national stock number (NSN)10 included on DOD's
    liquidation contractor's Internet sale Web site showed this item was
    assigned a demilitarization code of D, it was sold to the public as a
    trade security controlled item-demilitarization code B. As such, we were
    required to complete an application and obtain an approved EUC. Our
    undercover investigator submitted bogus information on his EUC
    application. A DCIA official contacted our undercover investigator and
    told him that the information on his application did not match official
    data and he had no credit history. After responding with a plausible story
    and submitting a bogus utility bill to document our mailing address, our
    EUC for the time selector unit was approved in April 2006. Figure 2 shows
    a photograph of the excess DOD time selector unit we purchased.

    Figure 2: Excess DOD Time Selector Unit Purchased in March 2006

    Digital microcircuits. Our undercover investigator purchased a total of 82
    excess DOD digital microcircuits, including 12 microcircuits used on the
    F-14 Tomcat fighter aircraft. Because of their sensitive technology, the
    microcircuits had a demilitarization code of D, which requires their total
    destruction when they are no longer needed by DOD. The 12 microcircuits
    also had a CIIC of 7, which indicates they are classified items that
    require protection in the interest of national security, in accordance
    with DOD 5200.1-R. In violation of DOD demilitarization policy for D coded
    items, the microcircuits were improperly included in a batch lot with
    several other electronic items that did not require demilitarization.
    Further, only 12 of the 82 demilitarization code D microcircuits that we
    purchased were listed on the liquidation sale advertisement. We paid
    approximately $58 for the entire batch lot, which included a total of 591
    items with a reported acquisition cost of $112,700. Because several items
    in the batch lot had demilitarization codes that designated them as trade
    security control items restricted by the U.S. Munitions List or the
    Commerce Control List of the U.S. Department of Commerce, an EUC was
    required for approval of our purchase. Our EUC for the digital
    microcircuits was approved in May 2006 based on our bogus information
    already on file. Figure 3 shows an enlarged photograph of one of the
    microcircuits that were improperly sold to our undercover investigator.

    Figure 3: Enlarged Photograph of One of the Excess DOD Microcircuits
    Purchased in April 2006

    Guided weapon radar test sets. Two guided weapon radar test sets were
    included in the batch lot with the digital microcircuits that our
    undercover investigator purchased from DOD's liquidation sales contractor
    in April 2006. The test sets, which were advertised for sale as radar test
    sets, are used to check the operation of the data link antenna on the
    Navy's Walleye (AGM-62) air-to-ground guided missile delivered by the
    F/A-18 Hornet fighter aircraft. The Walleye is designed to deliver a
    self-guided high-explosive weapon from an attack aircraft to a surface
    target. Because of their sensitive technology the test sets have a
    demilitarization code of B, which requires an EUC for trade security
    purposes. Figure 4 shows a photograph of the guided weapon test sets that
    we purchased and obtained using bogus EUC documentation.

    Figure 4: Guided Weapon Radar Test Sets Purchased in April 2006

    Universal frequency counter. The new, unused universal frequency counter
    purchased by our undercover investigator was manufactured (initially
    calibrated) in February 2003. DOD awarded a contract to Fluke Corporation
    in 2002 for 67 of these items, which are designed to count the speed at
    which an electrical system fluctuates. According to a manufacturer
    official, this item's military application is to ensure the frequency of
    communication gear is running at the expected rate. The universal
    frequency counter has a demilitarization code of B, which requires trade
    security control under the U.S. Munitions List. We paid a total of $475
    for this item, which had a reported acquisition cost of $1,685. In April
    2006, when we purchased the universal frequency counter, DOD's liquidation
    sales contractor sold a total of 15 of these items for $5,506, or about
    $367 per unit. The 15 items had a reported total acquisition value of
    $25,275, or $1,685 per unit. The bogus paperwork that we submitted with
    our EUC application was approved by DCIA in May 2006. Figure 5 shows a
    photograph of the unit that we purchased.

    Figure 5: Example of the Universal Frequency Counter Purchased in April
    2006

    Directional coupler. In March 2006, our undercover investigator purchased
    an excess military item advertised as a directional coupler from DOD's
    liquidation sales contractor. We paid $186 for the sales lot, which
    contained a total of 8 electronic equipment and supply items with a listed
    acquisition cost of $1,200. According to FedLog, the directional coupler
    advertised had an actual acquisition cost of $1,876. This directional
    coupler is used in the F-14 Tomcat fighter aircraft to monitor, measure,
    isolate, or combine electronic signals. Because of its technology, this
    directional coupler has a demilitarization designation code of D, which
    required it to be destroyed when no longer needed by DOD. The directional
    coupler also had a CIIC of 7, which indicates it is a classified item that
    requires protection in the interest of national security, in accordance
    with DOD 5200.1-R. However, after receiving the item, we discovered that
    it was not the item identified by the national stock number in the sales
    advertisement. As a result, it appears that DOD not only lost
    accountability over the actual item identified in its excess property
    inventory, but advertised and recorded a public sale of a sensitive
    military item on the U.S. Munitions List, which was required to be
    disposed of by destruction in accordance with DOD demilitarization
    policy.11

    Additional Sales of Sensitive Excess Military Items Targeted for
    Undercover Purchase

    We observed numerous sales of additional excess sensitive military items
    that were improperly advertised for sale or sold to the public, including
    fire control components for weapon systems, body armor, and weapon system
    components. The demilitarization codes for these items required either key
    point or total destruction rather than disposal through public sale.
    Although we placed bids to purchase some of these items, we lost to higher
    bidders. We identified at least 79 buyers for 216 public liquidation sales
    transactions involving 2,669 sensitive military items. We are referring
    these sales to federal law enforcement agencies for further investigation
    and recovery of the sensitive military equipment. The following discussion
    highlights the details of sales of sensitive military equipment items that
    we observed or targeted for purchase but did not obtain because we were
    outbid during the respective sales auctions.

    Optical fire control items. Our investigative team identified a January
    2006 sale of excess U.S. Army Armament Command optical instrument prisms
    and optical lenses. DOD data showed that these optical instruments are
    components of the fire control sighting mechanism used in the M-901A
    Improved Armored Anti-tank vehicle. The M-901A fires the TOW 2 series
    missiles. Our Chief Technologist advised us that both the prisms and
    lenses are high-quality optical sighting equipment used in the fire
    control system of the M-901A. We made an undercover visit to one of DOD's
    liquidation contractor sales facilities to inspect the prisms in January
    2006. Our inspection of the items listed for sale disclosed that the
    property label on the boxes listed 11 optical instrument prisms with an
    acquisition cost of $93,093. Although the demilitarization code of Q
    listed on the property label for the prisms identified them as requiring
    trade security control as an item on the Commerce Control List, the NSN
    listed for the prisms in fact related to a demilitarization code of D,
    which required their total destruction when no longer needed by DOD. Upon
    further inspection, we found that the items labeled as prisms were in
    sealed manufacturer packages that listed them as optical instrument
    lenses, not prisms. The NSN associated with the 11 lenses indicated that
    they had a total acquisition cost of $1,859 and a demilitarization code of
    D, requiring their total destruction rather than disposal by public sale.
    The mislabeling of these items indicates that DOD may have lost
    accountability over both the prisms and the lenses. Both the prisms and
    the lenses have a controlled CIIC code of 7, which indicates they are
    classified items that require protection in the interest of national
    security, in accordance with DOD 5200.1-R. We bid $550 for the lenses and
    lost to a higher bidder, who paid $909 for them. Figure 6 is a photograph
    of one of the boxes labeled as containing prisms that actually contained
    lenses.

    Figure 6: Optical Instrument Lenses Used in Fire Control Technology on the
    M-901A Anti-tank Vehicle Sold to the Public in January 2006

    Body armor. Our investigative team also identified a March 2006
    liquidation sale of body armor fragmentation vests. Upon our visit to the
    sales warehouse, we identified a total of four body armor fragmentation
    protective vests in two separate sales lots. According to the NSN, all of
    the items sold had a demilitarization code of E, which required either key
    point or total destruction of the item when no longer needed by DOD. We
    did not bid on this sale, but have included it in our referrals to federal
    law enforcement agencies for follow-up investigations. Figure 7 shows a
    photograph of the actual body armor vest that that we observed for sale in
    March 2006.

    Figure 7: Example of Excess Body Armor Vest Sold to the Public in March
    2006

    During our undercover operations, we also noted 13 advertised sales
    events, including 179 items that were subject to demilitarization
    controls, where the items were not sold. In 5 of these sales involving 113
    sensitive military parts, it appears that DOD or its liquidation sales
    contractor caught the error in demilitarization codes and pulled the items
    from sale. One of these instances involved an F-14 fin panel assembly that
    we had targeted for an undercover purchase. During our undercover
    inspection of this item prior to sale, a contractor official told our
    investigator that the government was in the process of changing
    demilitarization codes on all F-14 parts and it was likely that the fin
    panel assembly would be removed from sale. Of the remaining 8 sales lots
    containing 66 sensitive military parts, we could not determine whether the
    items were not sold because DOD or its contractor caught the
    demilitarization coding errors or because minimum bids were not received
    during the respective sales events.

    Sensitive Military Items Obtained Through Inside Penetrations of DRMO
    Security

    Our investigators used publicly available information to develop
    fictitious identities as DOD contractor personnel and enter DRMO
    warehouses (referred to as DRMO A and DRMO B) in two east coast states on
    separate occasions in June 2006, to requisition excess sensitive military
    parts and equipment valued at about $1.1 million. Our investigators were
    able to search for and identify excess items without supervision. In
    addition, DRMO personnel assisted our investigators in locating other
    targeted items in the warehouse and loading these items into our van. At
    no point during either visit did DRMO personnel attempt to verify with the
    actual contractor that our investigators were, in fact, contractor
    employees.

    During the undercover penetration, our investigators obtained numerous
    sensitive military items that were required to be destroyed when no longer
    needed by DOD to prevent them from falling into the wrong hands. These
    items included two guided missile launcher mounts for shoulder-fired
    missiles, several types of body armor, an all-band antenna used to track
    aircraft, six circuit card assemblies used in Navy computerized systems, a
    digital signal converter used in naval electronic surveillance, and two
    Palm V personal digital assistants (PDA) that were certified as having
    their hard drives removed.

    Shortly after leaving the second DRMO, our investigators received a call
    from a contractor official whose employees they had impersonated. The
    official had been monitoring his company's requisitions of excess DOD
    property and noticed transactions that did not appear to represent
    activity by his company. He contacted personnel at DRMO A, obtained the
    phone number on our excess property screening letter, and called us. Upon
    receiving the call from the contractor official, our lead investigative
    agent explained that he was with GAO and we had performed a government
    test.

    DRMO A Penetration

    The following discussion presents the details of our case study
    requisitions of sensitive military items we obtained during our
    penetration of the first east coast DRMO.

    Guided missile launcher mounts. Posing as DOD contractor employees, our
    undercover investigators entered DRMO A in June 2006 and requisitioned two
    excess DOD shoulder-fired guided missile launcher mounts with a total
    reported acquisition cost of $6,246. The missile launcher mounts provide
    the electrical connection between the round and the tracker and contain a
    remote firing mechanism for the wire-guided Dragon missiles. While the
    Dragon has been replaced by newer technology missiles, it is a
    man-portable, shoulder-fired, medium antitank weapon system that can
    defeat armored vehicles, fortified bunkers, concrete gun emplacements, and
    other hardened targets. Under department demilitarization policy, missile
    launcher mounts have a demilitarization code of C, which requires removal
    and/or demilitarization of installed key point(s) or lethal parts,
    components, and accessories to prevent them from falling into the wrong
    hands. The missile launcher mounts also have a CIIC code of 7, which
    indicates they are classified items that require protection in the
    interest of national security, in accordance with DOD 5200.1-R. Figure 8
    shows a photograph of one of the guided missile launcher mounts obtained
    by GAO.

    Figure 8: Guided Missile Mount Obtained from DRMO A during the June 2006
    Undercover Penetration

    Kevlar body armor fragmentation vests. Our undercover investigators
    obtained six Kevlar body armor fragmentation vests with a total reported
    acquisition cost of $2,049 from DRMO A during our June 2006 security
    penetration. This body armor has a woodland camouflage pattern and was
    designed for use by ground troops and parachutists. Although the Kevlar
    fragmentation vest has been replaced by newer technology, it is still
    considered a sensitive military item and has a demilitarization code of E,
    which identifies it as critical items/materiel determined to require
    demilitarization, either key point or total destruction. The Kevlar
    fragmentation vests also have a CIIC code of 7, which indicates they are
    classified items that require protection in the interest of national
    security, in accordance with DOD 5200.1-R. Figure 9 shows a photograph of
    one of the fragmentation vests obtained during our undercover penetration.

    Figure 9: One of the Kevlar Body Armor Fragmentation Vests Obtained from
    DRMO A during the June 2006 Undercover Penetration

    Digital signal converter. During the undercover penetration at DRMO A, our
    investigators also obtained a DOD digital signal converter with a reported
    acquisition cost of $882,586. The digital signal converter is used as part
    of a larger surveillance system on the Navy's E2C Hawkeye early warning
    and control aircraft. Under department demilitarization policy, this
    digital signal converter has a demilitarization code of D that requires it
    to be destroyed when no longer needed by DOD. This signal converter also
    has a CIIC code of 7, which indicates it is a classified item that
    requires protection in the interest of national security, in accordance
    with DOD 5200.1-R. Figure 10 shows a photograph of the digital signal
    converter our investigators obtained from DRMO A.

    Figure 10: Digital Signal Converter Obtained from DRMO A during the June
    2006 Undercover Penetration

    All-band antenna. Our undercover investigators identified and
    requisitioned a new, unused all-band antenna during their June 2006
    security penetration at DRMO A. According to manufacturer information, the
    antenna is a high-powered portable unit that is used by the Air Force to
    track aircraft. The antenna can be tripod-mounted or mounted on a portable
    shelter. The new, unused all-band antenna, which was purchased by DOD in
    2003, had a reported acquisition cost of $120,000. A manufacturer
    representative told our investigator that this antenna is currently in
    production. Under department demilitarization policy, this all-band
    antenna has a demilitarization code of D that requires it to be destroyed
    when no longer needed by DOD. This antenna also has a CIIC code of 7,
    which indicates it is a classified item that requires protection in the
    interest of national security, in accordance with DOD 5200.1-R. Figure 11
    shows a photograph of the all-band antenna obtained during our undercover
    penetration of security at DRMO A.

    Figure 11: All-band Antenna Obtained from DRMO A during the June 2006
    Undercover Penetration

    DRMO B Penetration

    Posing as employees for the same DOD contractor identity used during our
    June 2006 penetration at DRMO A, our investigators entered DRMO B a day
    later for the purpose of testing security controls at that location. DRMO
    officials appeared to be unaware of our security penetration at DRMO A the
    previous day. During the DRMO B undercover penetration, our investigators
    obtained the following items, most of which had demilitarization
    requirements.

    Body armor fragmentation vests. Our undercover investigators obtained 10
    body armor fragmentation vests with a total reported acquisition cost of
    $290 from DRMO B. Although the protective capability of this body armor
    has been superseded by newer technology, it would still provide firearm
    protection to terrorists or criminals. These fragmentation vests have a
    demilitarization code of E, which identifies them as critical
    items/materiel determined to require demilitarization, either key point or
    total destruction. Figure 12 shows a photograph of one the 10
    fragmentation vests obtained during our undercover penetration.

    Figure 12: Body Armor Fragmentation Vest Obtained from DRMO B during the
    June 2006 Undercover Penetration

    Throat and groin protection armor. Our undercover investigators also
    obtained a Kevlar throat protector related to the camouflage body armor.
    The throat protector had a reported acquisition cost of $3.35 and a
    demilitarization code of D, which requires it to be destroyed when no
    longer needed by DOD. The groin protector, which is designed to hold a
    ceramic insert, had a reported acquisition cost of $37.85 and a
    demilitarization code of D. Figure 13 shows a photograph of the throat and
    groin protection armor obtained during our undercover penetration at DRMO
    B.

    Figure 13: Throat and Groin Protection Armor Obtained from DRMO B during
    the June 2006 Undercover Penetration

    Circuit card assemblies. Our undercover investigators obtained six circuit
    card assemblies with a reported acquisition cost of $77,011 from DRMO B.
    The circuit card assemblies, which were turned in by the Naval Air Warfare
    Center, had a demilitarization code of D which requires them to be
    destroyed when no longer needed by DOD. A Lockheed Martin representative,
    who confirmed that his company manufactured the circuit cards we obtained,
    told our investigator that the circuit card assemblies are used in a
    variety of computerized Navy systems. The circuit cards also have a CIIC
    code of 7, which indicates they are classified items that require
    protection in the interest of national security, in accordance with DOD
    5200.1-R. Figure 14 shows a photograph of the circuit card assemblies
    obtained during our undercover penetration at DRMO B.

    Figure 14: Circuit Card Assemblies Obtained from DRMO B during the June
    2006 Undercover Penetration

    Palm V Organizer PDAs. During our undercover security penetration at DRMO
    B in June 2006, our investigators noticed two Palm V Organizer PDAs and
    accessories. The Palm PDAs had tags affixed to them which read
    "Certificate of Hard Drive Disposition/This certified hard drive was
    removed from CPU" and "Computer Casing Empty." Because PDAs do not have
    hard drives, after successfully requisitioning them, we asked our
    information technology (IT) security expert to test them to confirm that
    all sensitive information had been properly removed. Our IT expert used
    National Institute of Standards and Technology (NIST) utilities

    recommended for forensic analysis to run the tests.12 Based on the tests,
    our IT expert determined that the RAM on both devices had been wiped clean
    of any trace of residual data, leaving only the normal information that a
    user would expect to find on an unused Palm V PDA. Figure 15 shows a
    photograph of one of the Palm V PDAs and related accessories obtained from
    DRMO B.

    Figure 15: Example of Excess DOD Palm V Organizers and Accessories
    Obtained from DRMO B during the June 2006 Undercover Penetration

    Waste Associated with Sales of A-Condition Excess Items that Military
    Services Are Continuing to Use in Operations

    Because significant numbers of new, unused A-condition excess items still
    being purchased or in use by the military services are being disposed of
    through liquidation sales, it was easy for our undercover investigator to
    pose as a liquidation sales customer and purchase several of these items
    for a fraction of what the military services are paying to obtain these
    same items from DLA supply depots. For example, we paid $1,146 for several
    wet weather and cold weather parkas, a portable field x-ray enclosure,
    high- security locks, a gasoline engine that can be used as part of a
    generator system or as a compressor, and a refrigerant recovery system
    used to service air conditioning systems on automobiles. The military
    services would have paid a total acquisition cost of $16,300 for these
    items if ordered from supply inventory, plus a charge for processing their
    order.13 It was easy for us to purchase new, unused items that are in
    demand by the military services because of the limited scope of DOD's
    actions to address this problem.

    Undercover Purchases of New, Unused Items that DOD Is Continuing to Buy or
    that Are in Demand by Military Units

    Our undercover investigator used a fictitious identity to obtain a DOD
    liquidation sales customer account and purchase several new, unused excess
    DOD items that the military services are continuing to order from supply
    inventory or use in operations. The following discussion describes
    examples of the new, unused excess DOD items that we purchased.

    Wet-weather parkas. In March 2006, our undercover investigator purchased
    10 new, unused excess DOD wet-weather parkas with the manufacturer's tags
    still attached from DOD's liquidation sales contractor. Although Army
    combat units have begun using an upgraded version of the parkas, they are
    a nondeteriorative item, and Army training units and other military
    services are continuing to use them in military operations. However, after
    the New Jersey Army National Guard turned in the unused items as excess to
    their needs, the parkas were transferred to DOD's liquidation contractor
    for sale instead of being returned to supply inventory for reissue. We
    paid $87 for the 10 wet-weather parkas, which had a total reported
    acquisition cost of a $359. Figure 16 shows a photograph of one of the
    wet-weather parkas our undercover investigator purchased at the public
    liquidation sale.

    Figure 16: Example of New, Unused Wet-Weather Parkas Purchased in March
    2006

    Cold-weather parkas. In May 2006, our undercover investigator purchased 10
    excess DOD cold-weather desert camouflage parkas from DOD's liquidation
    sales contractor. Although the parkas were listed as being in H condition
    (unserviceable, condemned condition), they were advertised as new. We paid
    a total of $373 for these 10 parkas, which had a total reported
    acquisition cost of $1,468. After receiving the parkas, we noted that all
    of them appeared to be unused and 7 of them still had the manufacturer's
    tags attached. According to a Defense Supply Center, Philadelphia
    official, these cold-weather parkas are nondeteriorative and are currently
    stocked and issued to the military services. The cold-weather parkas,
    which were ordered in support of Operation Enduring Freedom, were turned
    in as excess by the Al Udeid Air Base, in Qatar. Instead of being returned
    to inventory for reissue, the new, unused parkas were transferred to DOD's
    liquidation sales contractor. Figure 17 shows a photograph of one of the
    excess new, unused parkas that we purchased.

    Figure 17: New, Unused Cold-Weather Parka Purchased by GAO in May 2006

    Portable field x-ray processing enclosure. In April 2006, our undercover
    investigator purchased a portable field x-ray processing enclosure with a
    reported acquisition cost of $7,235. We paid $87 for this item. We
    received the x-ray enclosure in May 2006, after approval of our bogus Food
    and Drug Administration (FDA) certificate. DOD's liquidation sales
    contractor requires buyers of medical and laboratory equipment items that
    are subject to federal regulation to submit FDA certificates as a
    condition of sale. On the FDA certificate, the buyer certifies that he or
    she is a licensed medical practitioner or person regularly and lawfully
    engaged in the manufacture or refurbishing of the medical device listed
    and agrees to assure that items resold will not be adulterated or
    misbranded within the meaning of those terms in the Federal Food, Drug and
    Cosmetic Act (codified at 21 U.S.C. Ch. 9). A manufacturer official told
    our undercover investigator that the x-ray enclosure that we purchased is
    manufactured and sold to DOD on an as-needed basis. The official stated
    that there is no shelf-life issue associated with this product. In
    addition, a Defense Supply Center, Philadelphia official assigned to the
    X-ray Equipment and Supplies/Biomedical Systems Office of the Technical,
    Quality, and Packaging Staff responsible for x-ray equipment and supply
    items advised us that the x-ray enclosure is currently used by the
    military services, and the Army is the primary user. The supply center
    official noted that the enclosure is a depot-stocked item. However, after
    checking the inventory system, the official told us that there were
    currently none of these items in stock. The supply center official
    confirmed that the enclosure has no shelf-life issues.

    At the time we purchased the x-ray enclosure, 40 identical x-ray
    enclosures with a reported acquisition cost of $289,400 were sold for a
    total liquidation sales price of $2,914. Figure 18 is a photograph of the
    excess DOD portable x-ray enclosure that we purchased over the Internet.
    The enclosure is stored in an oversized foot-locker-type container
    approximately 5 feet in length.

    Figure 18: New, Unused Portable Field X-ray Processing Enclosure Purchased
    in April 2006

    High-security locks. Our undercover investigator purchased 20 new, unused
    high-security locks from the DOD liquidation sales contractor in April
    2006. The locks, which were in the original manufacturer's boxes, had a
    total reported acquisition cost of $1,675, and we paid a total of $59 for
    them. We contacted the manufacturer, whose representative told us that his
    company sold DLA 100 of these locks in September 2005. The representative
    explained that the locks are used to secure the back bay of logistics
    trucks. He said that his company was not aware of any problems with the
    locks. A U.S. Marine Corps unit in Albany, Georgia, turned the locks in as
    excess, and they were not returned to inventory for reissue. At the time
    we purchased the 20 locks, DOD's liquidation sales contractor had
    advertised a total of 19 lots consisting of 480 locks for sale. Six of the
    19 lots, with a reported total acquisition cost of $18,423, sold for $365.
    Figure 19 shows a photograph of one of the excess DOD high-security locks
    that we purchased in April 2006.

    Figure 19: New, Unused DOD High-Security Lock Purchased in April 2006

    Gasoline engine. Our undercover investigator purchased a new, unused
    Teledyne 4-cylinder gasoline engine in March 2006. The engine, which was
    manufactured in the 1990s, is part of a generator unit. It can also be
    used with a compressor. According to FedLog data, the engines are required
    to be issued until current supplies are exhausted. The item manager for
    this engine told our undercover investigator that DLA currently has about
    1,500 of these engines in stock and they are still being issued, primarily
    to Army National Guard and Reserve units. He said that the Air Force and
    the Marine Corps also use them. He noted that the Marine Corps ordered 4
    of these engines in June 2006. We paid $355 for the gasoline engine, which
    had a reported acquisition cost of $3,119-the amount the Marine Corp paid
    for each item, plus a service charge. At the time we purchased this unit,
    a total of 20 identical gasoline engines with a total reported acquisition
    cost of $62,380 were sold for a total liquidation sales price of $6,221.
    Figure 20 shows a photograph of the gasoline engine that we purchased.

    Figure 20: New, Unused DOD Gasoline Engine Purchased in March 2006

    Refrigerant recovery system. In April 2006, our undercover investigator
    purchased a new, unused excess DOD refrigerant recovery system Model
    ST-100A. This is a portable system designed to recover and recycle R-12,
    R-22, R-500, and R-502 refrigerants at the rate of 2 to 3 pounds per
    minute. According to a manufacturer representative, the unit that we
    purchased is designed to recover refrigerants from small systems, such as
    those in automotive vehicles. We paid a total of $185 for the new, unused
    refrigerant recovery system, which had a reported acquisition cost of
    $2,445. According to a Refrigerant Recovery Systems, Inc., representative,
    this item is still being purchased and used by DOD. The refrigerant
    recovery system that we purchased was likely turned in as excess by the
    Army Risk Assessment Modeling System (ARAMS) Project Office located in
    Chesapeake, Virginia. ARAMS turned in nine identical excess recovery
    systems in January 2006 that appeared to have been sold during the
    liquidation sales event at which we made our undercover purchase. These 9
    refrigerant recovery systems, which had a listed acquisition cost of
    $22,004, sold for a total liquidation sale price of $1,140.

    When our undercover investigator went to pick up the refrigerant recovery
    system that we purchased, he found that it was stored outside and exposed
    to weather. As a result, the box the unit was stored in had become wet and
    the filters included with the unit had become soaked. Figure 21 is a
    photograph of the excess DOD refrigerant recovery system that we
    purchased.

    Figure 21: New, Unused Refrigerant Recovery System Purchased in April 2006

    Limited DOD Actions to Assure Reutilization of New, Unused Items

    Although DLA and DRMS implemented several initiatives to improve the
    overall reutilization rate for excess A-condition items, our analysis of
    DRMS data found that the reported reutilization rate as of June 30, 2006,

    remained the same as we had previously reported-about 12 percent.14 This
    is primarily because DLA reutilization initiatives are limited to using
    available excess A-condition items to fill customer orders and to maintain
    established supply inventory retention levels. As a result, excess
    A-condition items that are not needed to fill orders or replenish supply
    inventory are disposed of outside of DOD through transfers, donations, and
    public sales, which made it easy for us to purchase excess new, unused DOD
    items. The disposal of items that exceed customer orders and inventory
    retention levels is an indication that DOD bought more items than it
    needed. In addition, several of the items we purchased at liquidation
    sales events were being ordered from supply inventory by military units at
    or near the time of our purchase, and for one supply-depot-stocked
    item-the portable field x-ray enclosure-no items were in stock at the time
    we made our undercover purchase, indicating continued waste and
    inefficiency.

    DLA and DRMS initiatives resulted in a reported $38.1 million in excess
    property reutilization savings through June 2006. According to DLA data as
    of June 30, 2006, interim supply system initiatives using the Automated
    Asset Recoupment Program, which is part of an old legacy system, achieved
    reutilization savings of nearly $2.3 million since July 2005, while
    Business System Modernization supply system initiatives, implemented in
    January 2006 as promised at the June 2005 hearing, have resulted in
    reutilization savings of nearly $1.1 million. In addition, DRMS reported
    that excess property marketing initiatives implemented in late March 2006
    have resulted in reutilization savings of a little over $34.8 million
    through June 2006. These initiatives include marketing techniques using
    Web photographs of high-dollar items and e-mail notices to repeat
    customers about the availability of A-condition items that they had
    previously selected for reutilization.

    Corrective Action Briefing

    On June 28, 2006, we briefed DOD, DLA, DRMS, and military service
    management on the results of our investigations. We discussed the causes
    of the control breakdowns we identified with regard to security of
    sensitive excess military equipment and provided our perspectives on ways
    to address the following problems.

    o Some military units and DLA supply depots recorded incorrect
    demilitarization codes to excess military property items and in some cases
    improperly included these items in batch lots before sending these items
    to DRMOs.

    o DRMO personnel failed to verify the recorded demilitarization codes when
    they processed receipts of excess military property.

    o The limited scope of DLA and DRMS compliance reviews is not sufficient
    to detect problems with incorrect demilitarization codes.

    o DOD's excess property liquidation sales contractor failed to verify
    demilitarization codes of items received and return items requiring
    mutilation or destruction to the DRMO for proper disposal.

    The managers told us that they shared our concern about the breakdowns in
    security controls that allowed sensitive military items requiring
    demilitarization to be sold to the public. They asked us for pertinent
    documentation obtained during our investigations to support their
    follow-up inquiries and corrective action plans. We have provided this
    information. In addition, the managers told us that the DRMOs rely on
    access controls executed by the DOD installations at which the DRMOs are
    located to preclude access by unauthorized parties. During our briefing,
    we also pointed out that because the reutilization and marketing program
    permits public access to DRMOs and liquidation sales locations, it is most
    important to confirm the identities and requisitioning authority of the
    individuals who enter the DRMOs to screen and requisition excess property.
    With regard to reutilization program economy and efficiency issues, the
    DOD managers maintained that forecasting the correct inventory level is
    difficult and that some amount of excess purchasing is necessary to assure
    that inventory is available when needed. They also stated that there is a
    cost associated with retaining excess inventory for extended periods of
    time. We provided DOD documentation to show that the excess A-condition
    items that we purchased were continuing to be ordered and used by the
    military services at the time of our undercover purchases.

    Conclusions

    Our security tests clearly show that sensitive military equipment items
    are still being improperly released by DOD and sold to the public, thus
    posing a national security risk. The sensitive nature of these items
    requires particularly stringent internal security controls. Our tests,
    which were performed over a short duration, were limited to our
    observations, meaning that the problem may likely be more significant than
    what we identified. Although we have referred the sales of items
    identified during our investigation to federal law enforcement agencies
    for follow-up, the solution to this problem is to enforce controls for
    preventing improper release of these items outside DOD. Further,
    liquidation sales of items that military units are continuing to purchase
    at full cost from supply inventory demonstrates continuing waste and
    inefficiency in DOD's excess property reutilization program.

    Agency Comments and Our Evaluation

    We provided a draft of our report to DOD for comment on July 10, 2006. The
    Deputy Under Secretary of Defense for Logistics and Materiel Readiness
    responded that given the time allotted to comment, the Department was not
    able to do a detailed review and has no comments at this time. However,
    the Deputy Under Secretary also stated that the department continues to
    implement changes to our procedures based on recommendations in our May
    13, 2005, report.15

    We are sending copies of this letter to interested congressional
    committees, the Secretary of Defense, the Deputy Under Secretary of
    Defense for Logistics and Personnel Readiness, the Under Secretary of
    Defense Comptroller, the Secretary of the Army, the Secretary of the Navy,
    the Secretary of the Air Force, the Director of the Defense Logistics
    Agency, the Director of the Defense Reutilization and Marketing Service,
    and the Director of the Office of Management and Budget. We will make
    copies available to others upon request. In addition this report will be
    available at no charge on the GAO Web site at http://www.gao.gov .

    Please contact me at (202) 512-7455 or kutzg@gao.gov , if you or your
    staffs have any questions concerning this report. Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on the
    last page of this report. Major contributors to this report are
    acknowledged in appendix IV.

    Gregory D. Kutz Managing Director Forensic Audits and Special
    Investigations

    Appendix I

    DOD Excess Property Demilitarization Codes

    Department of Defense (DOD) property is assigned a demilitarization code
    to identify the required disposition of items when they are no longer
    needed by DOD. Demilitarization codes are contained in the Defense
    Demilitarization Manual, DOD 4160.21-M-1 (1995), which implements DOD
    policy to apply appropriate controls (e.g., restrictions to use by
    authorized parties, destruction when no longer needed by DOD) over items
    that have a significant military technology application to prevent
    improper use or release of these items outside of DOD. These items include
    materiel that the Secretary of Defense has designated as requiring
    demilitarization, articles on the U.S. Munitions List (22 C.F.R. pt. 121),
    and certain articles subject to export controls because they are on the
    Commerce Control List establish by the U.S. Department of Commerce (15
    C.F.R. S: 774, Supp. 1). Appendix 3 of the Manual provides the
    demilitarization codes to be assigned to federal supply items and coding
    guidance. The codes indicate whether property is available for reuse
    without restriction or whether specific restrictions apply, such as
    removal of classified components, destruction of sensitive military
    technology, or trade security control. The table below defines the DOD
    demilitarization codes.

    Table 1: DOD Excess Property Demilitarization Codes

    Demilitarization code               Required disposal action
    A                     Demilitarization not required
    B                     Military List Item (MLI) Non-Significant Military
                             Equipment (SME) Demilitarization not required. Trade
                             Security Controls required at disposition.
    C                     MLI (SME) - Remove and/or demilitarize installed key
                             point(s) as prescribed in the Defense
                             Demilitarization Manual, or lethal parts,
                             components, and accessories.
    D                     MLI (SME) - Total destruction of item and components
                             so as to preclude restoration or repair to a useable
                             condition by melting, cutting, tearing, scratching,
                             crushing, breaking, punching, neutralizing, etc. (As
                             an alternate, burial or deep water dumping may be
                             used when coordinated with the DOD Demilitarization
                             Program Office.)
    E                     MLI (Non SME) - Additional critical items/materiel
                             determined to require demilitarization, either key
                             point or total destruction. Demilitarization
                             instructions to be furnished by the DOD
                             Demilitarization Program Office.
    F                     MLI (SME) - Demilitarization instructions to be
                             furnished by the Item/Technical Manager.
    G                     MLI (SME) - Demilitarization required - Ammunition,
                             Explosives, and Dangerous Articles (AEDA).
                             Demilitarization, and if required, declassification
                             and/or removal of sensitive markings or information,
                             will be accomplished prior to physical transfer to a
                             DRMO. This code will be used for all AEDA items,
                             including those which also require declassification
                             and/or removal of sensitive markings or information.
    P                     MLI (SME) - Security Classified Item -
                             Declassification and any additional demilitarization
                             and removal of any sensitive markings or information
                             will be accomplished prior to accountability or
                             physical transfer to a DRMO. This code will not be
                             assigned to AEDA items. Items received at a DRMO
                             with Demilitarization code P will not be processed
                             for disposal without the required certificate of
                             declassification and a certificate of
                             demilitarization.
    Q                     CCLI - Commerce Control List Item. Demilitarization
                             not required. CCLI are non-MLI and are dual-use
                             (military, commercial, and other strategic uses)
                             items under the jurisdiction of the Bureau of
                             Industry and Security, U.S. Department of Commerce,
                             through Export Administration Regulations (codified
                             at 15 C.F.R., Ch. VII, Sub Ch C).
    X                     Indicates that demilitarization requirements of MLI
                             applicability not determined by the Inventory
                             Control Point. Local determination of
                             demilitarization requirement is necessary prior to
                             disposal action.

    Source: DRMS Automated Information System (DAISY) C-A-T (Codes and Terms)
    reference guide (12th ed. 2006), DRMS-I 4160.14, vol. IV, Supp. 1, "Codes
    Index" (November 2004), and DOD-4160.21-M-1, Defense Demilitarization
    Manual (1995).

    Appendix II

    Excess Property Condition Codes

    The Department of Defense's (DOD) condition code is a two-digit
    alphanumeric code used to denote the condition of excess property from the
    supply and the disposal perspective. The DOD supply condition code is the
    alpha character in the first position and shows the condition of property
    in the Defense Logistics Agency supply depot inventory, or is assigned by
    the unit turning in the excess property. The General Services
    Administration (GSA) disposal condition code, in the second position,
    shows whether the property is in new, used, or repairable condition,
    salvageable, or should be scrapped.

    Table 2: Excess Property Condition Codes

         DOD Codes         DOD Supply Condition Code            GSA Disposal
                                                               Condition Code
                     Serviceable property
    A1, A4        A - Issuable without qualification -   1 - Excellent -
                     New, used, repaired or reconditioned   Property is in new or
    B1, B4        property which is issuable without     unused condition and
                     restriction, including material with a can be used
    C1, C4        shelf life of more than 6 months.      immediately without
                                                            repairs.
    D1, D4, D7    B - Issuable with qualification - New,
                     used, repaired or reconditioned        4 - Usable - Property
                     property which is issuable, but is     shows some wear, but
                     restricted from issue to specific      can be used without
                     units, activities, or geographical     significant repair.
                     areas by reason of its limited
                     usefulness or short service life       7 - Repairable -
                     expectancy, including materials with a Property is unusable
                     shelf life of 3 through 6 months.      in its current
                                                            condition, but can be
                     C - Priority issue - Property is       economically
                     issuable to selected customers but     repaired.
                     must be issued before Condition A and
                     B material to avoid loss as a usable
                     asset, including materials with less
                     than 3 months shelf life.

                     D - Test/Modification required -
                     Property is in serviceable condition
                     but requires test, alteration,
                     modification, or conversion or
                     disassembly.
                     Unserviceable property
    E7            E - Limited restoration required -     7 - Repairable -
                     Property requires only a limited       Property is unusable
    F7            expense or effort to restore to        in its current
                     serviceable condition.                 condition, but can be
    G7                                                   economically
                     F - Reparable - Property is            repaired.
    H7            economically reparable but requires
                     repairs, overhaul, or reconditioning
                     to make it serviceable property.

                     G - Incomplete - Property requires
                     additional parts or materials to
                     complete the item prior to issue.

                     H - Condemned - Property has been
                     determined to be unserviceable and
                     does not meet repair criteria,
                     including items whose shelf life has
                     expired and cannot be extended.
                     Salvage property
    FX, GX, HX    F - Reparable; G - Incomplete; H -     X - Salvage -
                     Condemned                              Property has value in
    (VX- Salvaged                                        excess of its basic
    military                                             materiel content but
    munitions)                                           repair is impractical
                                                            and/or uneconomical.
                     Scrap property
    FS, GS, HS    F - Reparable; G - Incomplete; H -     S - Scrap - Property
                     Condemned                              has no value except
                                                            for its basic
                                                            materiel content

    Source: DRMS Automated Information System (DAISY) C-A-T (Codes and Terms)
    reference guide (12th ed. 2006), DRMS-I 4160.14, vol. IV, Supp. 1, "Codes
    Index" (November 2004).

    Appendix III

    Comments from the Department of Defense

    Appendix IV

    GAO Contact and Staff Acknowledgments

    GAO Contact

    Gregory D. Kutz, 202-512-7455

    Acknowledgments

    Staff making key contributions to this report include Mario Artesiano,
    Donald L. Bumgardner, Matthew S. Brown, Paul R. Desaulniers, Stephen P.
    Donahue, Lauren S. Fassler, Gayle L. Fischer, Cinnimon Glozer, Jason
    Kelly, John Ledford, Barbara C. Lewis, Richard C. Newbold, John P. Ryan,
    Lori B. Ryza, Lisa Warde, and Emily C. Wold.

    Technical expertise was provided by Keith A. Rhodes, Chief Technologist,
    and Harold Lewis, Assistant Director, Information Technology Security,
    Applied Research and Methods.

    (192188)

    www.gao.gov/cgi-bin/getrpt? GAO-0-9436 .

    To view the full product, including the scope

    and methodology, click on the link above.

    For more information, contact Gregory D. Kutz at (202) 512-7455 or
    kutzg@gao.gov.

    Highlights of GAO-0-9436 , a report to congressional requesters

    July 2006

    DOD EXCESS PROPERTY

    Control Breakdowns Present Significant Security Risk and Continuing Waste
    and Inefficiency

    GAO's previous work found problems in security controls over sensitive
    excess military equipment that resulted in lost and stolen items, some of
    which were sold to the public, and significant waste and inefficiency in
    the Department of Defense (DOD) excess property reutilization program. GAO
    was asked to perform follow-up investigations to determine whether (1)
    unauthorized parties could obtain sensitive excess military equipment that
    requires demilitarization (destruction) when no longer needed by DOD and
    (2) system and process improvements are adequate to prevent sales of new,
    unused excess items that DOD continues to buy or that are in demand by the
    military services.

    What GAO Recommends

    GAO briefed DOD and military service management on the results of its
    investigations and provided perspectives on ways to resolve the control
    breakdowns that resulted in public sales of sensitive excess military
    equipment and new, unused excess items that the military services are
    continuing to use. In addition, GAO asked DOD to comment on a draft of its
    report. In its comments, DOD stated that given the time allotted to
    comment, the department was not able to do a detailed review and has no
    comments at this time. DOD also commented that it continues to implement
    changes to procedures based on GAO's May 2005 report (GAO-05-277).

    GAO investigators posing as private citizens to disguise their identity
    purchased several sensitive military equipment items from DOD's
    liquidation sales contractor, indicating that DOD has not enforced
    security controls for preventing sensitive excess military equipment from
    release to the public. GAO investigators at liquidation sales purchased
    ceramic body armor inserts currently used by deployed troops, a cesium
    technology timing unit with global positioning capabilities, a universal
    frequency counter, 2 guided missile radar test sets, 12 digital
    microcircuits used in F-14 fighter aircraft, and numerous other items. GAO
    was able to purchase these items because controls broke down at virtually
    every step in the excess property turn-in and disposal process. GAO
    determined that thousands of military items that should have been
    demilitarized (destroyed) were sold to the public. Further, in June 2006,
    GAO undercover investigators posing as DOD contractor employees entered
    two excess property warehouses and obtained about $1.1 million in
    sensitive military equipment items, including 2 launcher mounts for
    shoulder-fired guided missiles, several types of body armor, a digital
    signal converter used in naval surveillance, an all-band antenna used to
    track aircraft, and 6 circuit cards used in computerized Navy systems. At
    no point during GAO's warehouse security penetration were its
    investigators challenged on their identity and authority to obtain DOD
    military property. The table below shows examples of sensitive military
    equipment obtained during GAO's undercover operations.

    Sensitive Military Equipment Obtained during GAO's Undercover Tests

    GAO investigators posing as private citizens also bought several new,
    unused items currently being purchased or in demand by the military
    services from DOD's excess property liquidation sales contractor. Although
    military units paid full price for these items when they ordered them from
    supply inventory, GAO paid a fraction of this cost to purchase the same
    items, demonstrating continuing waste and inefficiency.
    *** End of document. ***