Sales of Sensitive Military Property to the Public (06-JUL-07,	 
GAO-07-929R).							 
                                                                 
Each year the Department of Defense (DOD) sells millions of	 
dollars worth of excess property to the public through a Web site
run by its contractor, Government Liquidation. Before excess	 
property can be sold on this site, it is DOD policy to screen the
property to ensure it cannot be reutilized by the department in  
another location or that its sale would not result in sensitive  
military property becoming publicly available. DOD assigns	 
demilitarization codes to sensitive military property so that,	 
when the property is no longer in use, it is recognized and	 
disposed of properly. However, on several prior occasions--most  
recently at a July 2006 hearing--we reported that management	 
control breakdowns in DOD's excess property reutilization program
resulted in the sale of sensitive military property to the public
through the liquidation Web site, including property subject to  
demilitarization controls (demil-required property) such as F-14 
aircraft parts. One country with operational F-14s, Iran, is	 
known to be seeking these parts. If such parts were publicly	 
available, it could jeopardize national security. At the July	 
2006 hearing, DOD officials testified that they would take action
to prevent the improper sale of sensitive military property,	 
including demil-required property. Given the seriousness of the  
security risk posed by the sale of sensitive military property to
the public, Congress requested that we investigate whether (1)	 
demil-required property was still being sold on DOD's		 
contractor-run liquidation Web site and (2) whether DOD has taken
steps to prevent further improper sales of sensitive items,	 
including controlled and demil-required property.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-929R					        
    ACCNO:   A73756						        
  TITLE:     Sales of Sensitive Military Property to the Public       
     DATE:   07/06/2007 
  SUBJECT:   Federal property					 
	     Military materiel					 
	     Property and supply management			 
	     Property disposal					 
	     Sales						 
	     Surplus federal property				 
	     F-14 Aircraft					 
	     Tomcat Aircraft					 

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GAO-07-929R

   

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July 6, 2007

The Honorable Christopher Shays
Ranking Member
Subcommittee on National Security and Foreign Affairs
Committee on Oversight and Government Reform
House of Representatives

The Honorable Dennis J. Kucinich
House of Representatives

Subject: Sales of Sensitive Military Property to the Public

Each year the Department of Defense (DOD) sells millions of dollars worth
of excess property to the public through a Web site run by its contractor,
Government Liquidation. Before excess property can be sold on this site,
it is DOD policy to screen the property to ensure it cannot be reutilized
by the department in another location or that its sale would not result in
sensitive military property becoming publicly available. DOD assigns
demilitarization codes to sensitive military property so that, when the
property is no longer in use, it is recognized and disposed of properly.
However, on several prior occasions--most recently at a July 2006
hearing--we reported that management control breakdowns in DOD's excess
property reutilization program resulted in the sale of sensitive military
property to the public through the liquidation Web site,^1 including
property subject to demilitarization controls (demil-required property)
such as F-14 aircraft parts. One country with operational F-14s, Iran, is
known to be seeking these parts. If such parts were publicly available, it
could jeopardize national security.

At the July 2006 hearing, DOD officials testified that they would take
action to prevent the improper sale of sensitive military property,
including demil-required property. Given the seriousness of the security
risk posed by the sale of sensitive military property to the public, you
requested that we investigate whether (1) demil-required property was
still being sold on DOD's contractor-run liquidation Web site and (2)
whether DOD has taken steps to prevent further improper sales of sensitive
items, including controlled and demil-required property.

^1GAO, DOD Excess Property: Control Breakdowns Present Significant
Security Risk and Continuing Waste and Inefficiency, [4]GAO-06-981T
(Washington, D.C.: July 25, 2006).

To perform this investigation, we relied primarily on the national stock
numbers (NSN) ^2 DOD assigns to each property item. Relying on the NSN
created some limitations to our investigation--for example, if an item was
coded improperly, we would not have been able to identify it. To determine
whether DOD had taken steps to prevent the improper sale of sensitive
military property to the public, we obtained and reviewed information from
the Defense Reutilization and Marketing Service (DRMS), which is part of
DOD. The limitations to our investigation are discussed more fully in the
Scope and Methodology section below. We conducted our work from September
2006 through June 2007 in accordance with quality standards for
investigations as set forth by the President's Council on Integrity and
Efficiency.

Results in Brief

After monitoring excess property sales for about 7 months, we concluded
that DOD has made significant improvements in preventing the sale, through
the contractor-run liquidation Web site, of property coded as being
demil-required. During the first month of our investigation, in September
2006, we determined that DOD had sold 295 items coded as being
demil-required to the public. Although a number of demil-required items
were offered for sale on the liquidation Web site after September 2006,
these items were detected by DOD or the contractor and the property was
withdrawn prior to sale.

Furthermore, DRMS reported that, between August 2006 and March 2007,
59,762 line items of demil-required and sensitive property were removed
from the excess property disposal system prior to sale, representing a
total of 1.3 million individual pieces of demil-required or other
sensitive property items.^3 This included items that would have been sold
on the liquidation Web site. DOD told us that it has taken steps to
prevent further improper sales by implementing various controls, including

           o restructuring the batch lot processes (the way property is
           grouped into lots for sale),
           o increasing scrutiny of property before sale,
           o tightening controls on the release of property,
           o creating a postsale review and retrieval process to account for
           improper sales, and
           o newly designating some property items as controlled and taking
           steps to prevent their sale to the public.

^2An NSN is a 13-digit number that identifies standard use inventory
items. The first 4 digits of the NSN represent the Federal Supply
Classification, such as 8430 for men's footwear, followed by a 2-digit
North Atlantic Treaty Organization (NATO) code and a 7-digit designation
for a specific type of boot, such as cold weather boot.

^3As of May 31, 2007, 105,655 line items of demil-required and sensitive
property had been removed from public sale representing 2.4 million
individual pieces of demil-required or other sensitive property removed
from the disposal stream, according to the Defense Logistics Agency.

Although DRMS has clearly taken a proactive approach to identifying and
removing sensitive items from its system, we determined that approximately
1,400 items newly designated as controlled property were sold to the
public in February 2007. DRMS told us the parts were sold to the public
because it did not successfully update its automated control list and
remove these items prior to their being listed on the Web site. DRMS had
identified these items as parts that could be used on the F-14 fighter
aircraft.

Scope and Methodology

We focused our work on demil-required property, non-demil-required F-14
parts, and non-demil-required technology related to the F-14. To determine
if controlled or demil-required property continued to be sold to the
public, we obtained the NSN for approximately 10 million property items
sold by DOD's contractor from September 2006 through March 2007. We then
compared the NSNs to database files of property that was coded as
controlled or demil-required. The control files we used included Federal
Logistics Information System (FLIS) data, which was used to identify the
demilitarization code for military equipment and property items, a control
file of defective or nonconforming property, and other control files
listing parts and technology associated with the F-14 fighter aircraft. If
the NSN of property offered for sale matched those in the control files,
we monitored the sales event to determine whether the property was sold or
removed from the liquidation Web site prior to sale.^4

We have used the data contained in the FLIS and Defense Logistics Agency
excess property databases in our prior work and found them to be reliable.
Consequently, for the purposes of the analyses performed in this
investigation, we determined the data to be reliable with certain
limitations. These limitations result from our use of NSNs listed on the
contractor-run Web site. First, we did not attempt to review the DOD
system that assigns demilitarization categories to military property,
meaning that we accepted the coding system as it exists currently. Second,
we could not account for coding errors in the process of listing property
on the Web site, meaning that demil-required property may have been sold
during this time period because they were not coded properly. Finally,
about 10 percent, or approximately 1 million property items offered for
sale during our investigation, did not have a valid NSN, and for these we
were unable to make a comparison to control files. These items had either
an incomplete NSN or a local stock number (LSN).^5 Given a partial NSN, we
were often able to identify the type of property being sold.

^4During this investigation we reviewed only those items listed for sale
on the Government Liquidation Web site. We did not investigate items
throughout the entire excess property disposal system.

^5An LSN consists of the four-digit federal supply classification number,
a two-digit NATO code, and up to a seven-character description, such as
"monitor" for a computer monitor and "boots" for cold weather boots.

To determine whether DOD had taken steps to prevent the improper sale of
sensitive military property to the public, we gained an understanding of
the controls that DOD had implemented and those planned in the future,
reviewed DOD's statistics on the number of sensitive property items it
identified and removed from its excess property disposal system, and
received briefings from DRMS officials on their progress. We also
monitored DRMS actions to implement improvements in excess property
systems, processes, and controls.

DOD was given an opportunity to review a draft of this report and provide
comments. In providing oral comments, DOD officials agreed with our
investigative results and conclusions.

Background

In 2002 we reported on serious breakdowns in management processes,
systems, and controls that resulted in substantial waste and inefficiency
in DOD's excess property reutilization program or significant
vulnerabilities involving the release of sensitive military property. Our
June 2002^6 testimony revealed that DOD sold excess chemical and
biological protective gear at the same time it was procuring these
garments. Then, in a November 2003^7 report, we described how we
established a fictitious company and purchased over the Internet, from
DOD's liquidation contractor, key excess DOD biological equipment and
related protective clothing necessary to produce and disseminate
biological warfare agents.

In a May 2005 report,^8 we noted that DOD claimed nearly $500 million in
lost, damaged, and missing excess property from fiscal years 2002 through
2004, including demil-required property, such as chemical and biological
protective suits, body armor, and guided missile warheads. This report
also included information on continued waste and inefficiency in DOD's
reutilization program. To illustrate this point, our undercover
investigator used a fictitious identity to purchase over the Internet,
from DOD's liquidation contractor, new and unused excess military property
that DOD continued to buy and utilize. Over a year later, in July 2006,^9
we reported that our undercover investigator purchased sensitive military
equipment items that were improperly sold to the public by DOD's
liquidation contractor. These items included body armor inserts, known as
SAPIs, which were currently in demand by U.S. 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; digital microcircuits used in F-14 fighter aircraft;
and numerous other controlled items. We also identified nearly 80
individuals who purchased over 2,500 sensitive items from DOD's
liquidation contractor between November 2005 and June 2006. These
sensitive excess military items should not have been sold to the public.

^6GAO, DOD Management: Examples of Inefficient and Ineffective Business
Processes, [5] GAO-02-873T (Washington, D.C.: June 25, 2002).

^7GAO, DOD Excess Property: Risk Assessment Needed on Public Sales of
Equipment That Could Be Used to Make Biological Agents, GAO-04-15NI
(Washington, D.C.: Nov. 19, 2003).

^8GAO, DOD Excess Property: Management Control Breakdowns Result in
Substantial Waste and Inefficiency, [6]GAO-05-277 (Washington, D.C.: May
13, 2005).

^9GAO, DOD Excess Property: Control Breakdowns Present Significant
Security Risk and Continuing Waste and Inefficiency, [7]GAO-06-943
(Washington, D.C.: July 25, 2006).

Demil-Required Property Sales

After monitoring excess property sales for about 7 months, we concluded
that DOD has made significant improvements in preventing the sale, through
the contractor-run liquidation Web site, of property coded as being
demil-required. Throughout our investigation, we detected items that were
coded as being controlled or demil-required, but DRMS or the liquidation
contractor regularly identified the same property items and removed them
from the liquidation Web site before they were sold. In September 2006, we
detected the sale of 295 military items coded as being demil-required,
including F-14 parts that should not have been sold to the public.^10 We
referred pertinent information about these sales to the Defense Criminal
Investigative Service (DCIS) and Immigration and Customs Enforcement
(ICE), a branch of the Department of Homeland Security, for review and
appropriate action. More detailed information on the number of
demil-required property items and our results by month are provided in the
following table.

Table 1: Results of Testing for the Sale of Demil-Required Property on
Liquidation Web Site

Month and         Number of   Number of property Percent of      Number of 
year         property items  items tested (items   property demil-required 
                   offered for         with an NSN)   that was items actually 
                          sale                          tested           sold 
September                                                                  
2006                697,889              587,796         84            295 
October 2006        551,894              470,277         85              0 
November                                                                   
2006              3,172,916            2,888,118         91              0 
December                                                                   
2006              1,662,949            1,416,766         85              0 
January 2007      1,411,296            1,294,750         92              0 
February                                                                   
2007              1,183,428            1,088,941         92              0 
March 2007        2,704,962            2,504,011         93              0 
Total            11,385,334           10,250,659         90            295 

Source: GAO analysis of DOD data.

As discussed in the Scope and Methodology section above, there were some
limitations to using the NSNs listed on the contractor-run Web site for
our investigation. First of all, we did not attempt to review the DOD
system that assigns demilitarization categories to military property,
meaning that we accepted the coding system as it exists currently. Second,
we could not account for coding errors in the process of listing property
on the Web site, meaning that demil-required property may have been sold
during this period because they were not coded properly. Finally, about 10
percent, or approximately 1 million property items offered for sale during
our investigation, did not have a valid NSN, and for these we were unable
to make a comparison to control files. Many of these items often had a
partial stock number, indicating that they were generally office and
computer equipment, furniture, parts, and machinery. Usually this type of
property is offered for sale in batch lots. However, the lack of valid
NSNs increases the risk that demil-required property may not have been
identified and processed correctly. According to DRMS, it has tried to
reduce this risk by performing a physical inspection of property with an
incomplete NSN or an LSN. DRMS said it excludes any item from sale if the
proper demilitarization code cannot be determined.

^10Of these 295 items, 216 were demil category D (requiring total
destruction) and 79 were demil category C (requiring demilitarization
through the removal of key points, parts, components, or accessories).

DRMS Corrective Actions

DRMS reported that, between August 2006 and March 2007, it removed 59,762
line items of demil-required and sensitive property from the excess
property disposal system prior to sale, representing a total of 1.3
million individual pieces of demil-required or other sensitive property
items.^11 DOD told us that it has taken steps to prevent further improper
sales by implementing various controls, including

           o restructuring the batch lot processes (the way property is
           grouped into lots for sale) by consolidating it at four locations
           and performing a physical inspection of all property,
           o increasing scrutiny of property before sale,
           o tightening controls on the release of property,
           o creating a postsale review and retrieval process to account for
           improper sales, and
           o newly designating some property items as sensitive and taking
           steps to prevent their sale to the public.

To increase scrutiny on property before sale, DRMS told us that it took
the following actions:

           o Modified its contract with the liquidation company in September
           2006 to include incentives and disincentives based on performance.
           Under the terms of the new contract, if the company discovers
           export-controlled property or demil-required property and removes
           it from the Web site prior to sale, it is rewarded financially.
           DRMS told us that, if such property is sold by the contractor,
           there are financial penalties.
           o Increased screening of property before sale by performing
           automated reviews of the property being sold on the liquidation
           Web site and dedicating staff to physically review the site.
           o Match, before it is sold, all property to a specific list of
           property types that should not be sold. Included in DRMS and
           contractor verification efforts is a daily automated screening of
           the entire inventory of FLIS to detect any changes in
           demilitarization codes.

^11Note that we reviewed only items listed for sale on the Government
Liquidation Web site and did not investigate items throughout the entire
excess property disposal system. Moreover, our review was limited to the
period of September 2006 through March 2007. As of May 31, 2007, 105,655
line items of demil-required and sensitive property had been removed from
public sale representing 2.4 million individual pieces of demil-required
or other sensitive property removed from the disposal stream, according to
the Defense Logistics Agency.

Furthermore, DRMS told us that it has also strengthened controls in the
release of property to minimize the risk of unauthorized release to
walk-in customers. To address future situations in which new NSNs are
added to control lists or changes in demilitarization codes occur, DRMS
told us that it has established a postsale review process to identify and
recover any property that, after sale, is determined to be sensitive or
demil-required. In these situations, DRMS told us that the liquidation
contractor contacts the customer to reacquire the property.

During the course of our investigation we learned that additional property
items were determined to be sensitive by the Defense Logistics Agency and
should not be sold on the Government Liquidation Web site. DOD has a
separate listing of controlled military property, which includes
non-demil-required items such as uniforms, lab equipment, defective
property, and non-demil-required F-14 parts. When we obtained an updated
list of controlled military property with property items that had been
newly designated as sensitive, we screened Web site sales and compared it
with the new list. We then determined that approximately 1,400 newly
designated sensitive items were sold to the public in February 2007.^12
Although these were not demil-required property items, they were
identified as parts that could be used on the F-14 fighter aircraft. DRMS
told us that it added these parts to its control list; however, the
automated system that screens property sold on the Web site was not
properly updated to reflect the additional property items. DRMS reported
that this problem was resolved in March 2007 and that it has reacquired
(or is in the process of reacquiring) these property items. In some cases,
however, accountability for the property may have been lost since some
customers have denied receiving the property and the government contractor
is unable to locate it. According to DRMS, the contractor is researching
the sales to determine whether the property was in fact released to the
customer.

Conclusion

DOD has made significant progress in preventing demil-controlled and
sensitive property from being sold through the Government Liquidation Web
site. However, we did observe two occasions where demil-required and
controlled property was sold after DOD had implemented new controls. The
postsale review process DOD is implementing may help it recover many of
the improperly sold items. Nevertheless, as DOD moves forward identifying
additional items that could be considered sensitive, it is important for
program managers to test controls and provide oversight at the
implementation phase.

^12Of these 1,385 items, 1,362 were demil category A (no demilitarization
requirements) and 23 were demil category B (no demilitarization
requirements but may be subject to trade security controls).

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies to the Director of the
Defense Logistics Agency. We will provide copies to others on request, and
the report is available at no charge on GAO's Web site at
http://www.gao.gov. GAO staff who made key contributions to this report
are Mario Artesiano, Andrew McIntosh, Richard Newbold, John Ryan, and Viny
Talwar. Contact points for our Offices of Congressional Relations and
Public Affairs

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Gregory D. Kutz
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(192234)

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