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DOD EXCESS PROPERTY: INVENTORY CONTROL

BREAKDOWNS PRESENT A SECURITY RISK

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

EMERGING THREATS, AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JULY 25, 2006

Serial No. 109–236

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

BRIAN P. BILBRAY, California

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

LAWRENCE HALLORAN, Deputy Staff Director

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING THREATS, AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

KENNY MARCHANT, Texas

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

JON C. PORTER, Nevada

CHARLES W. DENT, Pennsylvania

DENNIS J. KUCINICH, Ohio

TOM LANTOS, California

BERNARD SANDERS, Vermont

CAROLYN B. MALONEY, New York

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

NICHOLAS PALARINO, Staff Director

ROBERT KELLEY, Chief Counsel

ROBERT A. BRIGGS, Clerk

ANDREW SU, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on July 25, 2006 ............................................................................... 1

Statement of:

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office, accompanied by

Gayle L. Fischer, Assistant Director, Forensic Audits and Special Investigations; John J. Ryan, Assistant Director/Special Agent, Forensic Audits and Special Investigations; Richard C. Newbold, Special Agent,

Forensic Audits and Special Investigations; Alan F. Estevez, Assistant

Deputy Under Secretary of Defense, Supply Chain Integration, Department of Defense; Major General Bennie E. Williams, Director for Logistics Operations, Defense Logistics Agency; and Paul Peters, Director,

Defense Reutilization and Marketing Service, Department of Defense ... 19

Estevez, Alan F. ........................................................................................ 34

Kutz, Gregory D. ....................................................................................... 19

Peters, Paul ................................................................................................ 65

Williams, Bennie E. ................................................................................... 48

Letters, statements, etc., submitted for the record by:

Estevez, Alan F., Assistant Deputy Under Secretary of Defense, Supply

Chain Integration, Department of Defense, prepared statement of ......... 36

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office, prepared statement

of ..................................................................................................................... 21

Ryan, John J., Assistant Director/Special Agent, Forensic Audits and

Special Investigations, followup questions and responses ......................... 95

Shays, Hon. Christopher, a Representative in Congress from the State

of California:

Comments from the Department of Defense .................................................. 109

Prepared statement of ...................................................................................... 3

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared statement of ........................................................... 10

Williams, Major General Bennie E., Director for Logistics Operations,

Defense Logistics Agency:

Followup questions and reponses .................................................................... 92

Prepared statement of ...................................................................................... 50

(1)

DOD EXCESS PROPERTY: INVENTORY CONTROL BREAKDOWNS PRESENT A SECURITY

RISK

TUESDAY, JULY 25, 2006

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING

THREATS, AND INTERNATIONAL RELATIONS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m. in room

2154, Rayburn House Office Building, Hon. Christopher Shays

(chairman of the subcommittee) presiding.

Present: Representatives Shays, Kucinich, Waxman, Duncan,

Marchant, Turner, Van Hollen, and Platts.

Staff present: J. Vincent Chase, chief investigator; R. Nicholas

Palarino, Ph.D., staff director; Robert A. Briggs, analyst; Robert

Kelley, chief counsel; Raj Lalla, Jake Parker, and Jeff Hall, interns;

Karen Lightfoot, minority communications director/senior policy advisor; Jeff Baran, minority counsel; Andrew Su, minority professional staff member; Earley Green, minority chief clerk; and Jean

Gosa, minority assistant clerk.

Mr. SHAYS. A quorum being present, the Subcommittee on National Security, Emerging Threats, and International Relations

hearing entitled, ‘‘DOD Excess Property: Inventory Control Breakdowns Present a Security Risk,’’ is called to order.

Over the course of several hearings and related investigations,

our subcommittee found chronic, dangerous, and excessive problems in the Department of Defense excess property system run by

the Defense Logistics Agency, DLA. We continued to discover problems in the system, and they must be corrected.

The mission of DLA is to provide our war fighters what they

need to fight our enemies. Unfortunately, the Defense Logistics

Agency may be simultaneously supplying the terrorists what they

need to fight us.

Four years ago we discovered DOD had been selling top-grade

chemical protective suits to the public while military units were

waiting in line to acquire exactly the same gear. In 2003 we revealed DOD sold items on the internet that could be used to make

a biological warfare agent laboratory. This equipment was sold for

pennies on the dollar, making it both inexpensive and easy to buy.

At a June 2005 subcommittee hearing we learned DOD was

transferring, donating, or selling excess property in new or good

condition at the same time it was purchasing the same or similar

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equipment. At that hearing, DOD asserted that offensive, defensive, and highly sensitive equipment could not be bought privately.

So we asked the Government Accountability Office, GAO, to investigate whether DOD was right. Posing as private citizens, GAO

purchased sensitive military equipment from the DOD liquidation

contractor.

Some of the equipment GAO inventories bought or obtained for

free is here today. A time selector unit used to assure the accuracy

of global positioning systems: the original acquisition price for this

unserviceable but repairable item was $343,695; GAO bought the

unit for $65. Two guided missile launcher mounts which provide

the electrical connection between a missile and its tracker and contain a remote firing mechanism: the original acquisition cost for the

two launchers, clearly sensitive military equipment, was $6,246;

our investigators acquired them for free. An all-band antenna,

which is high-powered, portable unit used by the Air Force to track

aircraft: the new, unused antenna had an original cost of $120,000;

this, too, was provided for free. Other sensitive equipment obtained

by GAO includes body armor, guided weapons, radar test sets used

to check the operation of data link antennas on weapons systems,

and circuit card assemblies used in a variety of military systems.

Contrary to the claim of DOD made at the June 7, 2005, hearing,

this investigation confirms sensitive military equipment is being

sold or given to the public, posing a serious national security risk.

The sensitive nature of these items requires stringent internal

security controls, and that is not happening. The time is long past

for marginal fixes to a fundamentally broken system. This is our

fourth hearing. The time is long past for marginal fixes to a fundamentally broken system.

As supplier to the war fighter and steward of immense fiscal resources, DOD must have control over the purchase, transportation,

storage, use, and final disposition of the military inventory. Most

importantly, DOD must eliminate any opportunities for unauthorized purchase of sensitive military equipment.

Today we welcome representatives from the Government Accountability Office who conducted the investigation, the Department of Defense officials who will explain the corrective action to

prevent sensitive items from being sold or given to unauthorized

individuals. We thank all the witnesses for taking the time to appear before us today, and we hope that we have an informative

hearing.

I want to say before I recognize Mr. Kucinich the purpose of this

hearing is not ‘‘I got you.’’ The purpose of this hearing is to document what is happening and to get it stopped.

[The prepared statement of Hon. Christopher Shays follows:]

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Mr. SHAYS. Mr. Kucinich.

Mr. KUCINICH. Thank you very much, Mr. Chairman. At last June’s hearing the GAO informed us that some $400 million worth of A-condition goods, new or excellent condition commodities, were transferred, donated, sold, or destroyed by the Department of Defense in the previous 3 years instead of being re-utilized

by other military units who needed the items. Whether it was

given away for free, bought for pennies on the dollars, or sold on

the internet, the Pentagon has demonstrated time and time again

that it plays fast and loose with the American taxpayers’ dollar.

There is little or no accountability, and Secretary Rumsfeld simply

has not made financial accountability a very high priority for the

Department of Defense, yet the Pentagon continues to ask Congress for billions of dollars in supplemental and bridge funding for

military operations.

The amount of waste is extraordinary, and the millions of dollars

that are gone could have been put to better use elsewhere. Certainly, an extra $400 million in the Nation’s coffers could help prevent many of the economic difficulties faced by people in my own

District.

Department of Defense officials under oath told us fixes would be

made by the beginning of the year and assured the subcommittee

that the GAO only was able to purchase and obtain excess equipment because they were the GAO. Today we will learn just how

easy it was to obtain sensitive military equipment. The cost of a

new gas engine, $355; the cost of an X-ray enclosure, $2,914; an

ounce of common sense at the Department of Defense equipment

depots, priceless.

Whatever it is you need, they have in stock—guided missile

launcher mounts, body armor, or electric radar—all for less than

you would pay if you were actually authorized to use them. In fact,

DOD personnel may even help you load your brand new toys into

your own truck.

Mr. Chairman, the lack of security and lack of accountability is

appalling, yet it is unsurprising in this administration. In May, VA

officials lost a laptop containing tens of millions of sensitive personnel records. The VA Inspector General stated that VA officials reacted with indifference, a lack of urgency. That same attitude appears to be the case in the Department of Defense.

The subcommittee has heard for years of the extravagant waste

and abuse discovered at DLA and DRMS depot sites examined by

the Government Accountability Office, and even more so at how

easily GAO was able to obtain some of this A-condition merchandise. The GAO findings demonstrate again what we already know:

that the Department of Defense is bloated, it is inefficient, mismanaged, and it needs to be streamlined.

Finally, year after year Congress spends half of its discretionary

budget on Defense, seldom scrutinizing how the money is being

spent. As a result, the Pentagon has become sloppy and careless

with taxpayer dollars.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman.

At this time we are doing to recognize Mr. Duncan, because he

has to get on his way.

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Mr. DUNCAN. Thank you very much, Mr. Chairman. I have to go

give a speech to a group in a few minutes, but I do appreciate so

much your calling this hearing. You do such an outstanding job in

this subcommittee.

I was here a little over a year ago when we had a similar hearing, and at that time—and I wrote about part of this in a newsletter I sent to my constituents—the Department of Defense sold

172 pairs of brand new cold weather boots valued collectively at

more than $23,330 for just $69, not $69 for each pair of boots, $69

total, brand new boots. That is less than the cost of one pair of

shoes that they bought for $23,330. The GAO also found at that

time that the Department of Defense had purchased at least $400

million of identical items, instead of using materials that were already available.

Now, according to the latest report, we find out that this situation is not getting better. In fact, it is getting worse. As the chairman mentioned, we were just shown a $120,000 all-band antenna

that the GAO got for nothing by filing a bogus form, and a digital

signal converter, $800,000, that they got for nothing. In fact, the

GAO, according to this report, identified at least 79 buyers of 2,669

sensitive items just between November 2005 and June 2006. And

you have heard these other examples that the chairman and Mr.

Kucinich just mentioned.

The worst one is this purchase of these time selector units for $65, a unit that had an original acquisition cost of $343,000. And

the unit purchased, according to the GAO, was listed as unserviceable, but it was in good working order.

Now, we have, as we all want, we have the best fit, best paid,

best equipped troops, military, in the whole world. Counting our

supplemental appropriations and our military construction bills,

along with the regular Department of Defense budget, we are

spending more on Defense than all the other nations of the world

combined. Yet, even any bureaucracy is wasteful. Small ones are

wasteful. Large ones are wasteful. Gigantic bureaucracies such as

the Department of Defense seem to be the most wasteful of all.

We all want to support the military, especially in a time of war.

Everybody is bending over backward to try and prove how patriotic

they are, but I can tell you this: it is not patriotic to just blow

money in this way. In fact, it should be criminal.

And I can tell you this: anybody who is not horrified—we heard

Mr. Kucinich mention that there is indifference or even joking

about this report—anybody who is not horrified about this cannot

legitimately call themselves a fiscal conservative, and everybody

seems to like to claim that title. We need more fiscal

conservativism. But this is shameful, it is ridiculous, it is every bad

adjective that you can apply to allow this to continue.

I hope that at least somebody in the Department of Defense is

ashamed that this is happening.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman.

I now recognize the ranking member of the full committee, Mr.

Waxman.

Mr. WAXMAN. Thank you, Mr. Chairman, and thank you for holding today’s important hearing.

8

Last year in this same room we held a hearing on this very topic

and we heard from the Government Accountability Office an account of massive waste at the Department of Defense. A year ago

GAO told the subcommittee that over $3 billion worth of A-condition equipment was designated as excess by the Defense Department and simply given away, sold on the internet for pennies on

the dollar.

Even worse, GAO reported that a huge portion of this equipment

was being dumped at fire sale prices at the same time the Pentagon was buying identical equipment from contractors at full price.

Two years ago our subcommittee held another hearing. We

learned from GAO that the Defense Department sold equipment on

the internet that could be used to produce anthrax, and yet at another hearing GAO told the subcommittee that the Defense Department sold brand new chem-bio protective suits on the internet for

$3 each, while it was buying identical suits at the same time for

the full price of $200 apiece.

Each time we have these hearings GAO brings the proof. They

display the equipment, as they have again today, they purchased

on the tables of the hearing room. And each time the Defense Department officials come before the subcommittee and promise that

the administration will be a responsible steward of taxpayer dollars

and that these problems will be fixed. Yet here we are again in

2006. The problems have not been fixed. They have gotten worse.

Here are four key findings from GAO’s most recent investigation:

First, the Defense Department is needlessly selling equipment as

excess that it currently buys new. GAO found X-ray machines, gasoline generators, and a host of other equipment for sale on the

internet, even though the Pentagon was still buying these items

new.

Second, the Pentagon is practically giving away. For just $65,

GAO obtained a classified time selector technology unit which is

used to prevent soldiers in the field from exposing their positions.

The taxpayers pay not $65 but over $340,000 for this equipment.

Third, much of this equipment is in critical demand by our soldiers in Iraq and Afghanistan. The body armor components, in particular, are items that families of service members have been forced

to purchase and send to loved ones in Iraq.

Fourth, many of these items are classified national security items

that were never supposed to be sold to the public, including micro

circuits for F–14 fighter planes, high-powered portable antenna

units that track aircraft, and even shoulder-fired guided missile

launcher mounts.

As a result, GAO concludes that controls broke down at virtually

every step, that thousands of military items were inappropriately

sold to the public at a fraction of the original cost, demonstrating

continuing waste and inefficiency and posing a national security

risk.

Mr. Chairman, Einstein once said that insanity is doing the same

thing over and over again expecting a different result. Einstein was

right, and let me give you Waxman’s corollary: when there is no

accountability, insanity is rewarded and repeated.

In last year’s hearing, Mr. Chairman, you said, ‘‘Those who buy

too much this year have to know they will pay a price when the

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equipment for sale on the internet next year for one-tenth of the

acquisition cost.’’ But here we go again. It is next year and the Defense Department is not paying any price for its incompetence. It

is the American taxpayer who is paying the price and our service

members in Iraq that don’t have the critical equipment they need.

Mr. Chairman, our Nation needs a new direction. The Bush administration is treating the taxpayers like its own private piggy

bank and Congress is doing nothing to stop it.

[The prepared statement of Hon. Henry A. Waxman follows:]

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Mr. SHAYS. The Chair would recognize Mr. Marchant, the Vice

chairman.

Mr. MARCHANT. Thank you, Mr. Shays, for holding this hearing

today on this very important subject. What the Department of Defense does with its excess inventory is probably not something that

enters the public’s mind; however, the fact that the Defense Logistics Agency is responsible for the management of the inventory of

$89 billion requires reasonable oversight by the Congress.

In addition, when you think about the types of property the DOD

possesses, such as tanks, aircraft, weapons components, etc., it becomes clear that much of this inventory is extremely sensitive in

nature. Furthermore, even when we are not talking about sensitive, classified, or dangerous items, it is our duty as stewards to

make sure that this excess property is being properly managed.

Obviously, our No. 1 goal should be to make sure that our troops

are well supplied. The next goal should be to keep dangerous or

sensitive excess items from falling into the wrong hands. Last, excess inventories should be managed in a most efficient and cost efficient manner as possible.

Again, Chairman Shays, I am looking forward to testimony

today. Thank you.

Mr. SHAYS. I thank the gentleman.

Mr. Turner, you have the floor.

Mr. TURNER. Thank you, Mr. Chairman. I want to thank you for

holding this hearing today and I want to echo the comments of Mr.

Duncan concerning the amount of waste that we see as a result of

these studies.

Mr. Chairman, you have been a leader in stopping Government

waste, and also the issues of national security. This is the third in

a series of hearings that our chairman has held on this issue highlighting the lack of controls by the Defense Logistics Agency in

dealing with excess property. As GAO pointed out, they were able

to purchase numerous items that are sensitive in nature. The work

done by GAO was done over a short period of time, so we don’t actually know the full extent of the problem. GAO also did not address the issue of the types of people or groups that are purchasing

these items.

Although it apparently states on the govliquidation.com Web site

that foreign nationals are prohibited from purchasing demilitarized

equipment, we do not actually know if or how they are prevented.

I believe this would be an excellent topic for the GAO to examine,

and I congratulate our subcommittee chairman on his continuing

focus in addressing this issue.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman.

Before recognizing witnesses I want to read from the June 7,

2005, hearing that we had on this very issue. At one point I was

asking Colonel O’Donnell, who was testifying, ‘‘Is it your statement

the only way GAO was to buy this restrictive property is because

they were GAO and that they would not have been able to buy it

if they had tried to buy it privately?’’ Colonel O’Donnell, ‘‘That’s

correct, sir. These items up on the podium, they are requisitioned

through DRMS using a DUDAC that had been assigned a DepartVerDate 11-MAY-2000 10:51 Jul 23, 2007 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 C:\DOCS\35341.TXT HGOVREF1 PsN: HGOVREF1
18

ment of Defense activity address code that had been assigned to

GAO enabling them to acquire property from us.’’

For us that statement was like Gary Hart telling the press, ‘‘I

am doing nothing wrong. Come follow us.’’

What I find objectionable about the last hearing was the fact

that I don’t think DOD took that hearing seriously enough. This is

not an attempt to get you, but it is an attempt to get you to wake

up.

With that, I would like to announce our panel. It is Mr. Gregory

D. Kutz, Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office; accompanied by Ms.

Gayle L. Fischer, Assistant Director; Mr. John J. Ryan, Assistant

Director/Special Agent; Mr. Richard C. Newbold, Special Agent.

The last three I mentioned will be here to respond to questions but

not to give testimony. We then have Mr. Alan F. Estevez, Assistant

Deputy Under Secretary of Defense, Supply Chain Integration, Department of Defense; General Bennie E. Williams, Director for Logistics Operations, Defense Logistics Agency; Mr. Paul Peters, Director, Defense Reutilization and Marketing Service, Department of

Defense.

Would you please stand and we will swear you in.

[Witnesses sworn.]

Mr. SHAYS. Note for the record all our witnesses have responded

in the affirmative. Those on the second right of way to testify, we

will make sure that the names get in and we know who is testifying.

I would like at this time to take care of business. I ask unanimous consent that all members of the subcommittee be permitted

to place an opening statement in the record and that the record remain open for 3 days for that purpose. Without objection, so ordered.

I ask further unanimous consent that all witnesses be permitted

to include their written statement in the record. Without objection,

so ordered.

I will just make mention of the fact we could have had two panels. I am not looking for arguments among panel members. I don’t

think that is really what anyone is looking for. But I do want to

be able to go back to GAO if there is a claim that something took

place that had nullified the significance of GAO. For instance, I am

sure we will have a dialog about the protective gear and that is not

the most up-to-date protective gear. We might have a dialog about

whether something is repairable or not. But I think what you see

in front of us speaks for itself. It is pretty astonishing.

We will start with you, Mr. Kutz.

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STATEMENTS OF GREGORY D. KUTZ, MANAGING DIRECTOR,

FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, ACCOMPANIED BY

GAYLE L. FISCHER, ASSISTANT DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS; JOHN J. RYAN, ASSISTANT DIRECTOR/SPECIAL AGENT, FORENSIC AUDITS AND

SPECIAL INVESTIGATIONS; RICHARD C. NEWBOLD, SPECIAL

AGENT, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS;

ALAN F. ESTEVEZ, ASSISTANT DEPUTY UNDER SECRETARY

OF DEFENSE, SUPPLY CHAIN INTEGRATION, DEPARTMENT

OF DEFENSE; MAJOR GENERAL BENNIE E. WILLIAMS, DIRECTOR FOR LOGISTICS OPERATIONS, DEFENSE LOGISTICS

AGENCY; AND PAUL PETERS, DIRECTOR, DEFENSE REUTILIZATION AND MARKETING SERVICE, DEPARTMENT OF DEFENSE

STATEMENT OF GREGORY D. KUTZ

Mr. KUTZ. Mr. Chairman and members of the subcommittee,

thank you for the opportunity to discuss DOD excess property.

Previously we testified that DOD was selling new, unused chembio suits needed in Iraq, equipment that could be used to produce

anthrax, and new, unused items that were still in demand by the

military services for pennies on the dollar. You asked us to test

progress made in the excess property system using undercover operations. The bottom line of my testimony today is that we were

able to obtain sensitive military items on the internet and using social engineering. Further, we were able to purchase unused items

that were still in demand by the military services.

My testimony has two parts: first, sensitive military items and,

second, examples of waste.

First, posing as a private citizen we purchased sensitive military

equipment on the internet. Some of these items required us to obtain an end use certificate, which is intended to provide assurance

that property is sold to legitimate buyers. We prepared an application for the certificate using bogus information. Subsequently, a

DOD official called to ask us about our applicant and why they had

no credit or other history. We socially engineered the situation, provided a bogus utility bill, and our application was approved. We

used the certificate to purchase several of our items.

Let me discuss several of these purchase, which are on my left

and will also be shown on the monitors.

First, we purchased 12 micro circuits for use on the F–14 fighter

aircraft. As I will discuss, these are of particular concern to law enforcement officials. This lot also had two guided weapon radar test

sets related to the FA–18 Hornet. We used our bogus end use certificate to obtain these items. And we purchased three ceramic

body armor inserts currently used in Iraq and Afghanistan.

As was mentioned, in addition to the items we bought, we identified at least 79 other buyers that purchased over 2,600 sensitive

military items. Some of these buyers outbid us on lots that we had

targeted for purchase.

We also obtained at no cost $1.1 million of sensitive military

equipment by posing as DOD contractor employees. Specifically, we

used publicly available information and developed fictitious identiVerDate 11-MAY-2000 10:51 Jul 23, 2007 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 C:\DOCS\35341.TXT HGOVREF1 PsN: HGOVREF1
20

ties as contractor personnel. We then entered two DOD warehouses

in June 2006 seeking excess property. DOD and contractor staff

helped our investigators find targeted items and they helped us

load them into our rented van.

Let me discuss a few of these items which are on my left center

here and will also be shown on the monitor.

First, we obtained two guided missile mounts which fire dragon

anti-tank missiles, six kevlar body armor fragmentation vests, an

all-band antenna used by the Air Force to track aircraft, and 10

older-version body armor vests.

Although many of the items you see on my left are not DOD’s

latest, all of them are of concern. For example, Homeland Security

and Defense investigators met with us several weeks ago and informed us that they are spending considerable resources chasing

after items that are getting out of DOD. They are particularly concerned about aircraft parts such as the F–14 parts that we obtained, and they told us that these parts are being resold to Iran.

Also, another question: should DOD be selling military quality

body armor on the internet to the highest bidder?

My second point is that we were able to purchase new and unused items that DOD is continuing to buy or that are in demand

by the military services. As we have previously reported, we believe

that this is a waste of taxpayer resources.

Let me discuss a few of these items, which are on my right and

will also be shown on the monitor.

First, 10 wet weather parkas. We paid $87, DOD paid $359. Then we have 10 cold weather parkas. We paid $373, DOD paid

$1,400. The next item is a portable field X-ray processing enclosure. We paid $87, DOD paid over $7,000. Finally, we purchased

20 locks that are used to secure the back bay of trucks. We paid

$59, DOD paid $1,600.

DOD has made some progress in this area. Specifically, DOD ini- tiatives have saved a reported $38 million through June 2006.

In conclusion, the most troubling aspect of our investigation is

the sale of sensitive military equipment to the public. In addition

to national security issues, sales of items like body armor to the

public pose homeland security risks.

With respect to waste, we are encouraged that DOD initiatives

have saved a represented $38 million. We see the potential for several hundred million more of savings.

Mr. Chairman, this ends my statement. We look forward to your

questions.

[NOTE.—The GAO report entitled, ‘‘DOD Excess Property, Control Breakdowns Present Significant Security Risk and Continuing

Waste and Inefficiency,’’ may be found in subcommittee files.]

[The prepared statement of Mr. Kutz follows:]

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Mr. SHAYS. Could you just make reference to where in your

statement you make reference to homeland security and Iran?

Which page is that in your statement?

Mr. KUTZ. I don’t know if it is in our statement. We had a subsequent meeting to our field work ending, and so it is subsequent to

the actual——

Mr. SHAYS. So that is in addition to what you submitted to us?

Mr. KUTZ. Yes, it is. They asked to meet with us and we met

with them several weeks ago.

Mr. SHAYS. Thank you.

Mr. Estevez.

STATEMENT OF ALAN F. ESTEVEZ

Mr. ESTEVEZ. Chairman Shays, Congressman Kucinich, members

of the subcommittee, thank you for the opportunity to appear before you and discuss the Department’s excess property programs. I

am Alan Estevez, Assistant Deputy Under Secretary of Defense for

Supply Chain Integration, and I appreciate the opportunity to provide an update on improvements we have made since the last hearing in June 2005 and to address the challenges highlighted by the

recent GAO draft report on this topic.

I am proud to be joined today by Major General Bennie Williams,

DLA’s Director of Logistics Operations, and Mr. Paul Peters, a

member of the Senior Executive Service and the Director of the Defense Reutilization and Marketing Service.

The fact that we have now placed executive-level leadership at

DRMS is an indication of our commitment to the reengineering of

our reutilization and disposal process. Before we discuss our efforts

to improve reutilization and disposal, I would like to place it within

the context of the broader logistics enterprise.

Over the past year, our uniformed and civilian logistics professionals have continued to successfully support complex military operations, including ongoing operations in Iraq and Afghanistan, as

well as relief efforts for the Pakistan earthquake and along our

own Gulf Coast in support of Hurricane Katrina.

Returns and reutilization are an important part of the DOD supply chain, and the Military Services Defense Logistics Agency and

Defense Reutilization and Marketing Service are charged with implementing and executing DOD’s policy. We have three main goals

for processing or disposing of material which has reached the end

of its useful life or is in excess of a military unit’s requirements.

First, we want the reutilization process to be a source of reusable

material for the war fighter, provided this material can be used

without detriment to the mission.

Second, we want to ensure that materiel with potential military

application is properly demilitarized or destroyed. Let me be clear:

it is our policy and our goal that no materiel requiring destruction

will be offered for sale or be available under any circumstances to

unauthorized persons.

Finally, we want to get the best value for the DOD material by

selling materiel that has no DOD or other authorized user requirement and has been completely demilitarized. DRMS strives to balance these sometimes conflicting objectives.

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Independent of but reinforced by the GAO efforts in this area, we

have been reengineering the return portion in the supply enterprise. Mr. Peters will discuss DRMS’ transformational improvements in detail. Even as DOD makes major changes to the DRMS

processes, we have worked diligently to address GAO recommendations. GAO itself has praised DOD’s responsiveness and progress in

addressing the 13 recommendations in the May 2005, report. We

will continue both to address GAO’s recommendations and to complete our own review and process improvements.

Let me focus on the most significant area requiring improvement

in the recent GAO report, which is the sale of items with military

only applications to unauthorized parties. We take this matter extremely seriously and have already implemented procedures to fix

that process. Major General Williams and Mr. Peters will provide

further details.

GAO has highlighted several other areas in which we believe our

practices are sound, and I would like to take a moment to discuss

those.

In the last hearing, the focus was largely on concurrent buying

of materiel from the commercial sector when such material was

available from DRMS. The Department worked diligently to reduce

simultaneous buying and disposal, and the July 2006, report provides no examples of concurrent buying.

In its July 10th report, GAO repeatedly highlights the difference

between historic cost of an item and the amounts received via public sale. The items that are offered for resale are material in excess

of the DOD’s requirement, and the prices that the July 10th report

references have been set by public auction, an extremely efficient

pricing mechanism and thus a far better indicator of a pre-owned

item’s value than its original acquisition cost.

In closing, Mr. Chairman, thank you for the opportunity to testify before this subcommittee. The DOD has worked diligently and

will continue to transform DRMS’ processes to increase its effectiveness and improve internal controls.

I would be happy to answer questions you or any member of the

committee may have.

[The prepared statement of Mr. Estevez follows:]

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Mr. SHAYS. Thank you, Mr. Estevez.

General Williams.

STATEMENT OF MAJOR GENERAL BENNIE E. WILLIAMS

General WILLIAMS. Good afternoon, Mr. Chairman, Mr. Kucinich,

and distinguished members of the subcommittee. I am Major General Bennie Williams, Director of Logistics Operations at the Defense Logistics Agency.

I am responsible for the procurement, management, storage, and

distribution of some 5 million line items at an annual volume of 25

million receipts and issues and over $30 billion in sales. As part

of this worldwide mission, the Defense Reutilization and Marketing

Service, DRMS, provides reutilization, marketing, and disposal

services at offices in 37 States and 14 countries, including Iraq and

Afghanistan. DRMS handles a complex yearly workload that totaled over 3 million line items at over $20 million in original acquisition cost.

With me today is Mr. Paul Peters, a member of the Senior Executive Service, who assumed leadership of DRMS as its director in

February 2006.

Our No. 1 priority is logistics support to the war fighter. DLA

works closely with Mr. Estevez and his staff and the military services to resolve related issues.

Ongoing reviews by the GAO and this subcommittee’s oversight

of our efforts have also helped us to find areas warranting attention in our excess property program. In recent years we have taken

many steps to resolve vulnerabilities and inefficiencies in our program. We increased our leadership focus by restructuring our

alignment of DLA Senior Executive Service Corps to provide the

position Mr. Peters assumed in February. We enhanced reutilization condition code A items through several initiatives, including

implementing an update to our modernized software through business systems modernization release 2.2 on schedule in January

2006.

We also took action to improve control over key items received

in batch lots, worked with the military services to promote appreciate disposal guidance, increased our oversight of inventory accuracy processes, and we added further controls over further highrisk items. However, we agree more must be done. Previous corrective actions have reduced vulnerabilities but not eliminated them.

This was further evidenced by GAO’s recent findings. A more thorough compliance validation is required.

It is thus apparent that our current excess property business

model must be fundamentally changed to meet the challenges and

risk of today’s world environment. Our new business model requires a fine balance between maximizing reuse of property, controls over potential vulnerabilities, and the cost versus benefits of

related improvements. We need to take a more complete programmatic approach to reengineering and enhancing our excess

property program and accelerate progress, as well.

To address the primary focus areas that have emerged from our

own and GAO’s assessment, we are immediately implementing significant changes in how we account for and process excess property.

These include greatly enhanced and consolidated review of items in

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batch lots or with local stock numbers prior to any sale to the public. We have immediately typed in procedures for verifying the

identity and authority of those seeking to obtain material from

DRMS sites and are capitalizing our results of the DRMS A–76 private/public competition.

DRMS also has an in-depth review on the way of the complete

range of vulnerabilities and risk mitigation options to define and

implement additional improvements, and we continue to develop

information technology solutions that will give us greater availability to meet DOD’s disposal needs, with the key component being

the reutilization modernization program scheduled for implementation in fiscal year 2010.

What I have described is a complete transformation of the DOD

reutilization and excess property program. This requires a longterm commitment and focus on all aspects of the program, including human capital, process improvements, and technology-based solutions. We know that revolving issues identified by ourselves, the

GAO, and this committee will further mitigate risks to national security, better serve the men and women in the military services,

and ensure taxpayer dollars are more effectively utilized. We are

committed to providing the leadership and resources required to

successfully transform the DOD reutilization and excess property

program.

I would be happy to answer any questions you and members of

the committee may have.

[The prepared statement of General Williams follows:]

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Mr. SHAYS. Thank you.

Before I recognize Mr. Peters, General, I want to thank all of our

witnesses for serving their country, but I particular want to thank

you for your service in support of Operation Desert Shield, Storm,

Saudi Arabia, Operation Restore Hope, Somalian Operation Joint

Endeavor, Boznia Herzogovinia. We appreciate your service to your

country.

General WILLIAMS. Thank you, sir.

Mr. SHAYS. You are welcome. Thank you.

Mr. Peters.

STATEMENT OF PAUL PETERS

Mr. PETERS. Mr. Chairman and distinguished members of the

subcommittee, I am Paul Peters, Director of the Defense Reutilization and Marketing Service.

DRMS is a field activity of the Defense Logistics Agency responsible for the execution of DOD policy on the processing of DOD excess property. Specifically, DRMS provides reutilization, marketing,

and disposal services worldwide, including serving side-by-side

with our military forces in Iraq, Kuwait, and Afghanistan, and

handled last year over 300 million line items valued at approximately $20 billion in original acquisition cost.

Although actions have been implemented to address the excess

property concerns raised in prior hearings, the most recent GAO

findings and our own internal analyses have demonstrated that

more work remains. My appointment as the first SES Director of

DRMS on February 16, 2006, shows that DLA is committed to a

long-range, consistent effort to fix these problems. We must continue to balance the maximum reuse of property, controls over potential vulnerabilities, and the costs and benefits of improvement.

Current pressing issues include the proper disposal of demil-required property in batch lots, proper disposal of local stock number

items, and mitigation of unauthorized access to obtain property. To

resolve these issues, we immediately froze the processing of all

batch lots and took them apart to ensure the property was appropriate for release. We are now implementing a reengineered approach to control batch lot material by establishing consolidated,

centralized sites where batch lots will be verified and all items will

be 100 percent physically inspected prior to sale.

Items turned in to DRMS with a local stock number lack a detailed item description and cannot be automatically screened to determine the right demil code.

Higher-risk local stock number items will be processed in the

same manner as described for batch lots, with 100 percent physical

inspection before public sale.

GAO personnel posing as DOD contractors working for the U.S.

Army used forged documents to remove demil-required property.

Immediate action was taken to tighten the walk-in procedures for

excess property removal and ensure that authorization letters and

potential screeners are independently verified before property release.

The GAO was also able to get a clearance from DLA to purchase

export-controlled material by using an assumed identity and forged

documentation. Additional training is being given to ensure that no

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buyer is favorably assessed without resolving discrepancies in that

buyer’s identity.

DLA is also preparing a procedure for public comment that

would exclude questionable buyers from purchasing such property.

The transition to the most efficient organization in the continental United States will further reduce the number of fully functioning DRMS warehousing operations from 68 to 18, thereby improving command control and communication regarding the processes

such as those I have just discussed and enabling more efficient use

of resources, in addition to actions to leverage existing DLA systems and the plan for their transformation by providing improved

capability to DLA activities to match excess property assets against

inventory retention levels.

The overall reutilization rate for condition code A property was

approximately 18 percent in fiscal years 2004 and 2005 and is currently 21 percent year to date in fiscal year 2006 and is saving the

Department approximately $224 million in original acquisition cost.

Finally, we are conducting a major outcome-based review to identify additional vulnerabilities and gaps in DRMS processes, to define and test the appropriate corrective actions, and to continue the

efforts to improve condition code and demil code accuracy.

The re-engineered batch lot and local stock number processes

noted earlier are an important initial result of this review.

Mr. Chairman and distinguished committee members, we are

taking both the short-and the long-term actions necessary to ensure these problems are resolved and to enable DRMS to provide

the best possible support to the war fighter while conserving taxpayer resources.

Thank you.

Mr. SHAYS. Thank you all very much.

We will start with Mr. Marchant. We are going to do 10 minute

rounds of questions.

Mr. MARCHANT. Thank you for your testimony today.

Major General, in your statement you talked about a new business model. How long has the concept of a new business model

been in the works as far as this process goes?

General WILLIAMS. Sir, we started a new business model when

I assumed responsibilities in my current position and when Mr. Peters came onboard. The focus is really to concentrate on how we

can improve upon those improvements that have been made, the

seams and gaps that we detected, and work that needs to be done,

and there is more work that needs to be done. So we just want to

pile on what has already been done and then improve upon what

has been done and then really do some reengineering because we

need more work done and done faster, sir.

Mr. MARCHANT. What would you say would be the major difference in the resale or disposal of excess items versus 10 years ago

that exist today? What would be the major difference in how you

disposed of these items 10 years ago or during the Bosnian War or

Desert Storm as opposed to now? Are there new complexities involved? Are there new business strategies, or is there just more

stuff to get rid of?

General WILLIAMS. No, sir. In terms of items to get rid of with

our Army, I won’t put a quantity on that; however, what I will tell

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you is that the key to success is identifying that which need not

fall into the hands of a third party. If there is a demil required,

then it is our responsibility to, No. 1, correctly identify, to accept

accountability, and to ensure that throughout the process that item

does not transition over to GL or is eligible to be bought by a third

party, sir.

Mr. MARCHANT. Thank you.

Mr. Peters, is there a penalty, is there a civil penalty, is there

a crime that is committed if someone falsifies bidding information,

besides the GAO, to obtain sensitive material? Do we have a prosecutorial system to go after someone that obtains something fraudulently?

Mr. PETERS. Congressman, the process that is in place right now

when a prospective buyer fills out an end use certificate is designed

to verify their identity and the stated intention and purpose of the

item that they are purchasing. What happened with the GAO was

those alarms went off. There were discrepancies in the identity information that was provided.

The assessor, unfortunately, made a favorable assessment for

that buyer without resolving the discrepancies in that identity. If

a public citizen were to do the same thing that GAO did, our job

is to try to verify that those discrepancies exist and determine that

individual is not authorized for that. I am not aware of a prosecutorial position that DLA or DRMS would take, but clearly our job

is to properly execute that process and ensure that those individuals are identified and we don’t favorably resolve their assessment

while there are still discrepancies.

Mr. MARCHANT. Is there some kind of a notification process that

you would refer to the Justice Department when someone tried to

fraudulently obtain excess material?

Mr. PETERS. If we were aware of an individual trying to make

that attempt, we certainly would inform DLA and the Department.

At this point I haven’t been here long enough to——

Mr. MARCHANT. Mr. Ryan seems to have an answer.

Mr. RYAN. Congressman, in situations where someone is lying to

the Government, there is violation to Title 18, 1001, false statement to the Government. The method in which they are making

application, either by wire or mail, is also a violation of the crime.

In this particular case they shouldn’t be referring these things.

Once a red flag comes up, they should be passing this on to agents

who have experience in interviewing people and can get the information and the intelligence that they need from the field to make

value decisions.

But to answer your question, there are violations that they can

pursue and they should work that out with Justice and determine

if Justice is going to pursue these type of crimes.

Mr. MARCHANT. I guess my question, rhetorical question, is if

there aren’t any referrals going on and there is, in de facto, no penalty, nothing, no down side to having this happen, you know,

maybe people aren’t being discouraged from doing this.

Mr. PETERS. Congressman, if I may, the Defense Criminal Investigation Agency and DLA is involved in the assessment process,

and so their involvement would automatically trigger that type of

notification internally to our Agency.

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Mr. MARCHANT. I would suggest that maybe occasionally one of

those cases be made public so that the public, in general, understands that there is some consequence to this kind of behavior.

The last thing I will ask of Mr. Kutz or Mr. Peters, either one,

has there been an analysis made of the cost of the Agencies that

implement the sale of the property, and does the value of the sale

of the property even cover the cost of the agencies that are charged

with selling the property? I mean, do we have this whole elaborate

system of disposal of materials that costs more than we recoup

from the sale of the material? Has there been any kind of a cost

analysis done of that?

Mr. PETERS. Congressman, when you just look at condition code

A, reutilization of property, in fiscal year 2006 year to date we

have reutilized approximately $224 million just in condition code A

property. That exceeds the cost of operations of the DRMS. If you

look at the total reutilization of all property for the Department,

it is well over $1.5 billion. Again, that far exceeds the operating

cost of the DRMS.

Mr. MARCHANT. OK.

Mr. KUTZ. There are two savings. There is the issue of how much

you bring in from the public sales, but the reutilization within the

Department of Defense and Government agencies there is a bigger

savings to the Government there.

Mr. MARCHANT. OK. Thank you.

Mr. SHAYS. I wonder if the gentleman would yield the remainder

of his time?

Mr. MARCHANT. Yes.

Mr. SHAYS. Thank you. I think Republicans and Democrats are

on the same page in terms of what we are seeing at this hearing.

I would just like to start by asking about the all-band antenna. Is

this all-band antenna new or is it used, Mr. Kutz?

Mr. KUTZ. I believe it is new and unused.

Mr. SHAYS. Mr. Ryan, that is correct?

Mr. RYAN. Yes, that is true.

Mr. SHAYS. Are we still purchasing these antennas or are they

antennas that we are no longer purchasing?

Mr. KUTZ. According to the manufacturer, they are still producing them for the Department of Defense.

Mr. SHAYS. OK. Were we incorrect when we stated it cost

$120,000?

Mr. KUTZ. According to DOD records, that is a $120,000 purchase.

Mr. SHAYS. And this was given free to you, to our inspectors?

That is correct, Mr. Ryan?

Mr. RYAN. Yes. When we went to the DRMO we walked in and

requisitioned it and we walked out with it.

Mr. SHAYS. I mean, the bottom line to this is, Mr. Kutz, what I

find most surprising is your statement that you are saying that the

Department of Homeland Security is saying they are looking for

this equipment that is being sold by the Department of Defense,

that it is getting into the wrong hands; is that correct?

Mr. KUTZ. Particularly of interest to them were the aircraft

parts, and F–14 was the major part. As you know, Iran is the only

country that is currently flying F–14s.

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Mr. SHAYS. Iran has the old F–14s.

Mr. KUTZ. Correct.

Mr. SHAYS. We have refused to provide parts for them, so they

are going really on the black market.

Mr. KUTZ. Yes.

Mr. SHAYS. And so these were bought for nothing or for something?

Mr. KUTZ. For something. I mean, the ones that were the F–14

micro circuits, we actually bought those on the internet.

Mr. SHAYS. But to Iran they are worth a fortune, correct?

Mr. KUTZ. Correct.

Mr. SHAYS. Thank you.

I recognize Mr. Kucinich. Mr. Kucinich has pointed to you, so I

recognize you, Mr. Waxman.

Mr. WAXMAN. Thank you very much.

Mr. Peters, as I understood your answer to the question a minute

ago, there are procedures that alert you when someone is pretending to be someone else in order to buy equipment; is that correct?

You said there was a red light that went off?

Mr. PETERS. Yes, sir.

Mr. WAXMAN. In effect?

Mr. PETERS. Yes.

Mr. WAXMAN. Gee, I was pretending to be a Defense contractor;

is that right?

Mr. PETERS. Yes.

Mr. WAXMAN. And you were alerted to that fact, yet they were

able to walk off with $1 million worth of equipment. What happened? Why didn’t somebody at Defense say wait a minute, we are

starting to get suspicious you are not who you say you are? Why

did the sale proceed?

Mr. PETERS. For clarification, Congressman, the trade security

control process that I was describing was different than the process

of allowing an authorized screener to walk onto a military installation into a DRMO and directly remove property. The direct removal

capability is something that exists for the convenience of the military services to acquire the items that they need to support their

mission. The issue——

Mr. WAXMAN. But if there was some suspicion that somebody—

it turned out to be GAO—was passing themselves off as a legitimate purchaser, a Defense contractor, and you had some idea that

was happening, why was the sale culminated?

Mr. PETERS. For the direct removal process where the GAO was

able to use letters of authorization and identification to have physical access to the receiving area and remove items, the breakdown

in the procedure there is that the letter of authorization, the identity of that individual, and the confirmation of the items that they

wish to remove need to be independently verified to offset and mitigate that risk. That process did not happen at the point in time at

the two DRMO warehouses on the east coast where the GAO was

able to conduct the direct removal investigation.

We have tightened those procedures by ensuring that there is an

independent verification of the letter of authorization from the

home organization and the identification of that individual with the

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home organization and a confirmation of the items that individual

would wish to remove.

Mr. WAXMAN. So you think that the problem will be corrected?

Mr. PETERS. Yes. The actions that we have already taken in response to what the GAO was able to do will significantly mitigate

the risk of that type of operation again.

Mr. WAXMAN. Well, Mr. Kutz, you were here before. This isn’t

the first time that we have been able to fool the people at the Defense Department into selling your undercover agents military

equipment. Some of that military equipment jeopardizes our national security; isn’t that right?

Mr. KUTZ. Yes. This is items that could be used against us or

other countries.

Mr. WAXMAN. Now, one of the examples that you used was dozens of classified digital micro circuits, including those for F–14

fighter aircraft. Your report states these are classified items that

require protection in the interest of national security. What was

supposed to have happened to these micro circuits?

Mr. KUTZ. They should have been destroyed. They should not

have gone out in a public sale.

Mr. WAXMAN. And who would want these micro circuits? Are

there any foreign countries or U.S. adversaries that would want to

get their hands on these items?

Mr. KUTZ. Well, we are aware that the only country flying F–14s

right now is Iran, and the investigators that came over and met

with us several weeks ago had said that they had serious concerns

about F–14 parts leaving DOD and going to Iran. So yes.

Mr. WAXMAN. Well, my colleague on the other side of the aisle

said perhaps we ought to make some of this public so that the

American people would know it is a crime to do what you did, in

effect, by representing yourself as eligible to buy this equipment.

Instead we have a hearing this year, as we had in previous years,

indicating that it is not that hard to fool these people at Defense.

Why was it so easy for you to be able to buy equipment that could

jeopardize our national security?

Mr. KUTZ. Well, with respect to the end use certificate, I want

to clarify those are two separate incidents.

Mr. WAXMAN. OK.

Mr. KUTZ. When we posed as contractors they did not have suspicion that we weren’t contractors. When we got our end use certificate they actually called us and said the person that applied for

this end use certificate doesn’t exist, doesn’t have the credit history, doesn’t have any other history. The answer to the question we

gave them is that it was identity theft, and they bought it.

And we basically then counterfeited—we said we will send you

a copy of a utility bill. They said that would be fine. We sent them

a copy of the utility bill, which we forged basically, and, based upon

that, they accepted our application. And that end use certificate allowed us to purchase several of the items that you are talking

about now.

Mr. WAXMAN. You are pretty smart. Do you think some of our

adversaries could be just as smart and get away with purchasing

this equipment?

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Mr. KUTZ. I suspect they are much smarter than we are, certainly.

Mr. WAXMAN. I mean, this is really incredible because we are

talking about national security of the United States of America.

Wouldn’t it be better to—well, they are supposed to be destroyed.

Why weren’t they destroyed?

Mr. KUTZ. I think it was a combination of the batch lots that

were mentioned. I think they covered in their opening statement

some of the reasons. I think they have gone back and taken a look

at some of the reasons these have gone out. There are issues with

errors in coding, items getting into these batch lots, and other

types of errors that have occurred in the system why these were

able to get out. I think they know what the problem is. They need

to demonstrate that they can fix it or it really raises questions

about whether we should be selling things to the public.

Mr. WAXMAN. Are you satisfied that what Mr. Peters told us is

going to be a fix for the future, is going to stop this from happening

in the future?

Mr. KUTZ. Well, from a standpoint of what he said it sounds

good. I mean, I think we would have to look at more of the details

of actually what they are going to plan to implement and how they

can do it, because the issues relate to people, processes, and systems, as I think the general said, and so they have to address all

of those areas to be successful in what they are doing.

Mr. WAXMAN. Mr. Estevez, you are the Deputy Under Secretary

for the supply chain integration, and General Williams, you are the

Director of the Logistics of Operation, Defense Logistics Agency,

and Mr. Peters, you are the Director of the Defense Reutilization

Marketing Service. Who is responsible for what we are hearing

about these breaches of our national security and what we have

heard in the past were also breaches of our national security? Who

is responsible?

Mr. ESTEVEZ. Let me answer that, Congressman Waxman. In my

job I write the policy that we are executing for not just the disposal

process but overall supply management in the Department of Defense. Our policy remains sound in this regard. Items that should

be destroyed we need to destroy.

I also provide oversight of the process, and I will go back to the

point that over the course of time, in answer to some of GAO’s previous findings, we have been marching forward also on our own,

changing the structure of the DRMS organization, changing the

leadership to making it Executive level leadership, are all things

that the Department has been doing because we recognize the

issues here.

Again, let me be clear that we do not want anything that should

be destroyed out for sale to the public.

Mr. WAXMAN. Well, you shouldn’t have wanted it the first time

it was revealed to us that this sort of thing was happening. Now,

GAO says this is a significant security breach. Do you disagree?

Mr. ESTEVEZ. No, I do not, but I want to point out that GAO, in

its investigation, in their ability to access a DRMS facility posing

as not a DOD contractor, as contract support for the U.S. Army—

so they were representing themselves as a valid Army agency with

the ability to take any of this material. We have put checks in procVerDate 11-MAY-2000 10:51 Jul 23, 2007 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 C:\DOCS\35341.TXT HGOVREF1 PsN: HGOVREF1
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ess, and I agree we need to do those checks in process, but GAO

has a lot of information that a private citizen would not have in

order to perform that false identification.

Mr. WAXMAN. Now, do you know how many agents have been assigned to investigate examples of this kind of transaction where either security is being breached by equipment that should have

been destroyed has been sold or what we have also heard about,

equipment that shouldn’t have been sold, been sold for pennies on

the dollar? How much manpower are we spending to investigate

these sales after the fact?

Mr. ESTEVEZ. Sales after the fact would be referred to Defense

Criminal Investigation Service, and after that I would have to take

the question for the record on how many people they may be expending or how many people GAO may be expending through law

enforcement to address that issue, sir.

Mr. WAXMAN. Mr. Kutz, is this really a money-making venture

for the Department, or do the risks of these kinds of security

breaches outweigh any monetary benefit that might arise? Perhaps

the best way to settle this problem is not to let them sell what they

call excess equipment. What is your thought on this issue?

Mr. KUTZ. I think in the long term if they are unable to demonstrate that they can prevent military technology from going out

in the excess system to the public, then that is a very serious question that they would need to answer, and maybe Congress would

need to take action. If they can’t show that they can prevent it

from going out, the $30 or $40 million that they net from the public

sales is possibly not worth it.

Mr. WAXMAN. My time is over, but I do want to say, Mr. Chairman, you said Democrats and Republicans both are outraged by

this behavior, but Republicans are in charge. They are in charge

of the Congress and they are in charge of the executive branch, and

someone should be held accountable.

If we are not going to have the people at DOD held accountable,

we ought to have the elected officials held accountable who are supposed to be sure that these kinds of things do not take place. They

claim to be fiscal conservatives, they claim to care about national

security, and we see this gross incompetence which jeopardizes

every American, Democrat and Republican.

Thank you.

Mr. RYAN. Mr. Waxman, I would like to respond to the statement

about—I would like to comment on Mr. Estevez’ statement about

having a great amount of knowledge to be able to accomplish this.

This was done with information that you can get off the internet.

This information that we used, we have a policy that we don’t use

inside information, so we didn’t use it.

As a matter of fact, when we called the contractor or we called

DRMO to find out how to prepare the forms, they were gracious

enough to tell us what to put on the forms. So it is a matter of they

are accepting—this idea of challenging isn’t part of the process. It

is an accepting. They accept what you tell them so they can fill a

blank in, and then they go ahead and they allow you to get what

you need.

So I just want the Congress to know that we didn’t use inside

information; that the agents that did this used publicly available

73

information to be able to accomplish this, with a little bit of guts

to walk in, and that is all it was.

Mr. SHAYS. Before I recognize Mr. Kucinich I just want to point

out that the Department of Defense has been unauditable since

1947, starting with President Truman. This has been an issue that

both Republicans and Democrats have been trying to deal with for

years. This is a problem that exited pre this administration. I do

agree we need to deal with it, but I want that on the record.

Mr. Kucinich, you have the floor.

Mr. KUCINICH. Thank you very much.

Mr. Kutz, is it possible that private contractors are buying sensitive equipment at a discount and then turning around and reselling it back to the Pentagon at market prices?

Mr. KUTZ. Yes. In fact, I think it has been documented that has

happened in the past, but that is possible.

Mr. KUCINICH. And are you continuing to look at that, that we

pay twice for something?

Mr. KUTZ. We have not looked at that, no.

Mr. KUCINICH. Mr. Chairman, I think it would be useful, in the

context of looking at surplus equipment——

Mr. SHAYS. Don’t give away our next hearing.

Mr. KUCINICH. All right. But I think it would be useful. We are

looking at a whole system here. How is something declared surplus? Who declares it surplus? Do they have any business interest

connected?

Once something is declared surplus, how long is it sitting around

as surplus? Who purchases it? What do they do with it and how

fast do they move it? Who do they resell it to? How much was it

first purchased for by the taxpayers? How much did the secondary

purchaser pay for it? How much was it resold for? It is like a whole

system here we are looking at.

Now, there was an allusion made by Mr. Shays earlier. We had

a little side conversation about an issue about a black market. I

mean, is it possible that Army ‘‘surplus’’ is a substantial part of a

black market in Defense material?

Mr. KUTZ. I don’t know about substantial. It certainly is possible,

and I think that the investigators have told us that it is. I think

that the other market is a legitimate market. There is a lot of industries that have cropped up around the country of people who

live off of the DOD excess property system, and there is various associations and surplus stores, etc., that buy these items legitimately and resell them to the public, and presumably they are

making a profit on it.

Mr. KUCINICH. OK. We are saying these items.

Mr. KUTZ. Not the military sensitive items. I am talking two

things: the sensitive items on the black market you are talking

about, versus legitimate.

Mr. KUCINICH. Are you aware of everything that is sold Army

surplus? Do you have a list of every single thing that has been sold

on surplus?

Mr. KUTZ. We wouldn’t have a list, no.

Mr. KUCINICH. Who does? Who knows? Who has the list of everything that is being sold Army surplus? I mean, you showed missile

launchers. Are missiles being sold Army surplus? You showed parts

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for an F–14. Are planes being sold Army surplus? You showed

radar guidance.

Who has the list of what is being sold Army surplus? We don’t

really know what we are talking about here if we don’t—I mean,

we have to define what we are talking about. What is for sale?

Does anyone know? Does anyone have a list? It is unbelievable.

Mr. ESTEVEZ. Congressman, we could tell you what processes

through the excess system, through DRMS. There are other types

of material.

Mr. KUCINICH. That is the Defense——

Mr. ESTEVEZ. That is the Defense Reutilization and Marketing

Service.

Mr. KUCINICH. Just may have tuned in. It is Defense——

Mr. ESTEVEZ. Defense Reutilization and Market Service.

Mr. KUCINICH [continuing]. Reutilization and Market Service,

and that is pronounced ‘‘dermes?’’

Mr. ESTEVEZ. ‘‘DRMS’’ is the way we would pronounce that acronym.

Mr. KUCINICH. ‘‘Dermes?’’

Mr. ESTEVEZ. Close enough.

Mr. KUCINICH. OK. Go ahead.

Mr. ESTEVEZ. We would be able to tell you what we process

through that pipeline, whether it goes in for destruction or whether

it goes out through donation to first responders, the other needy

hospitals and the like that are eligible for that type of material

through special——

Mr. KUCINICH. Could you make available, Mr. Chairman, Mr.

Estevez, to this committee the list of what is Army surplus?

Mr. ESTEVEZ. I am going to have to turn to Mr. Peters, but I believe we could tell you what was processed through the system.

Mr. KUCINICH. Mr. Peters.

Mr. PETERS. Yes, sir, we can make available for the record items

that have been sold, transferred, and donated and reutilized.

[NOTE.—The information referred to may be found in subcommittee files.]

Mr. KUCINICH. Well, what is Army surplus? What constitutes

Army surplus, Mr. Kutz, is it anything the Army says is surplus,

correct?

Mr. KUTZ. If they’ve declared it surplus and it goes through their

system, yes.

Mr. KUCINICH. So it could be anything?

Mr. ESTEVEZ. But that does not include things like munitions

that would be destroyed. We would not sell munitions. We would

not excess munitions. Munitions that have reached their end of

useful life would be destroyed. Weapons platforms, tanks, planes,

etc., certain types of those might end up, after they are demilled,

after the military capability is removed, given to museums or certain associations, but only under certain conditions. For the most

part they——

Mr. KUCINICH. You are talking about weapons. Are weapons

Army surplus?

Mr. ESTEVEZ. Again, they would not go through this process, but

certain types of those items could end up being given—not fighter

planes, but planes could be given to first responders, and there are

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certain old planes that could end up in museums with the military

capabilities for those weapons platforms, tanks, planes, etc., removed from them before they would be allowed out, many of those

at congressional behest.

Mr. KUCINICH. You know, I want to say that the gentleman representing various aspects of handling the surplus, it is comforting

to hear you speak with such certitude. On the other hand, when

GAO does its investigations the certitude with which you speak

meets a little bit of reality. There is reality testing right next to

you.

We need a list to know exactly what is declared surplus.

The other thing that I am interested in is the relationship between what our taxpayers pay for it and the creation of a black

market. I am very interested in that. I mean, if you are talking

about these—you were able to essentially fake some documentation

to get an end use certificate. Have there ever been audits done of

end use certificates to see how many other end use certificates,

since it was so easy for you to fake it, are there other end use certificates that might similarly be faked that have resulted in people

getting goods that they shouldn’t have?

Mr. RYAN. I am not aware of an audit that was done, but I can

tell you that when we held the conference with DHS investigators

and the DOD investigators, they had some real major concerns

about the credibility of those end use certificates, because they are

supposed to be an identification of people who get a hold of items

that aren’t supposed to ship it out of the country. If that material

in those applications are false and there is no credibility to them,

where do we go to identify these people that aren’t supposed to

ship the items?

So if you are talking about your black market, a black market

is created when someone lies and disguises their identity and they

have an opportunity to make money.

Mr. KUCINICH. That is exactly the point of my question. So what

I am asking you, Mr. Chairman, you know, as this subcommittee’s

work seems to be growing here in leaps and bounds before our very

eyes, maybe it is appropriate for this committee to ask for an audit

of the end use certificates to see who has been applying for the

ability to purchase Army surplus and to see if, in fact, they are legitimate and to see what has happened with what they have purchased. It may be very instructive.

And I think that certainly where the GAO report reads, ‘‘In instances where DOD required an end use certificate as a condition

of sale, our undercover investigator was able to successfully defeat

the screening process by submitting bogus documentation and providing plausible explanations for discrepancies and documentation.’’

That, to me, is an open door to the black market, folks, and we

need an audit on that.

Mr. Chairman, I guess my time is up at this point, but——

Mr. RYAN. Mr. Kucinich, in response to that, also at that meeting

we had with law enforcement——

Mr. KUCINICH. We had what?

Mr. RYAN. In regards to the meeting we had with law enforcement with the DHS and the DOD, they indicated that they were

going to try to reach out and try to get some data and try to do

76

some credibility checks to determine whether or not they are credible. So the intelligence group of DHS, Department of Homeland Security, was aware of the situation. We briefed them and they said

they were going to try to do it, but I know that is not going to be

a full audit like you are talking about. But the intelligence people

at DHS were thinking on the same lines you were.

Mr. KUCINICH. Well, it is nice that they are thinking about it.

Mr. RYAN. Yes, sir.

Mr. KUCINICH. Mr. Chairman, thank you.

Mr. SHAYS. I am not usually at a loss for words, but I am getting

close to it, because this is like, where do you begin. One of the

thoughts that I was thinking is I wouldn’t want your job, Mr.

Estevez, for all the money in the world, or Mr. Peters. I wouldn’t

want it, because I have this sense that if it was easily solvable it

would have been solved. And I have this sense that, because it is

not easily solvable, we are not even trying to solve it. That may be

unfair, but this is now the 4th year we have been at it.

I don’t want to be unkind to any of you, but there is an outrage

here and I don’t feel the outrage. I feel, just in terms of looking at

this equipment and thinking that if the all-band antenna is something we keep buying and we basically gave it away for $120,000,

something really, really, really, really is serious. Then I think that

if the F–14, I was thinking, well, there are some F–14s around

somewhere. Someone may want it. And then I thought maybe you

can convert the circuit board. And then I think, well, you have it.

Our enemy—they are our enemy. I hate to say it, but they are

our enemy, and that is Iran. We don’t have diplomatic relations

with them. They have helped fund Hezbollah. They’ve helped train

them. Their fingerprints are all over what has happened in the

Middle East. And we have an embargo with F–14s, but they can

come and get it for free. Well, maybe they have to pay the person

who is buying it a tidy sum, but at least they, from their standpoint, get it.

I am smiling through my tears.

I guess the way I will begin is by asking you about the two reports. I mean, your report last year of May 2005, which we had the

June hearing, there are 13 recommendations. Now, this report that

you are doing, DOD Excess Property Control Breakdowns, there

are not recommendations here, so, Mr. Kutz, tell me why.

Mr. KUTZ. Well, that was more of an investigation.

Mr. SHAYS. OK.

Mr. KUTZ. So it wasn’t a full scope audit. We gave what we call

a corrective action briefing after we had done the various operations, and we gave them our input at that point in time.

Mr. SHAYS. I am going to come back to the 13 recommendations,

so this hearing is going to be a little longer than I would like and

it is going to be a little tedius, because I am going to ask you about

each of the recommendations. I am going to ask about where we

are in those recommendations.

Should I make an assumption, Mr. Kutz, that we need to add to

these 13 recommendations, or are these 13 recommendations probably still pretty operative?

Ms. Fischer, I am going to ask you. You are nodding your head.

I am getting a little more life out of you than some others here.

77

Ms. FISCHER. Those recommendations are still operative. They

have taken action on many of them, but the ones we are still concerned about are the ones that related to identifying systemic

weaknesses that resulted in loss, theft, missing, sensitive military

items, and the recommendation that they take a look at DRMO security and fix weaknesses there.

And then, with regard to their corrective action on their system

so that they pull these A-condition, new, unused items back into

the process instead of continuing to buy the same items, we think

they haven’t gone quite far enough in the action they took.

They met with us. They told us how they implemented the system fix in January and the interim fix prior to that, which they

started last July, but we just haven’t seen the money coming back.

When you look at the process, the screening process for——

Mr. SHAYS. Let me just interrupt you here. When you say the fix,

what is this? Does this mean there are other things that should be

added to your recommendations? This does not describe a fix to me.

Ms. FISCHER. What I meant was the recommendations on the

systemic weaknesses for the stuff getting out and the DRMO security, those have not been addressed. Those recommendations are

still open, they still stand. And as far as the reuse of new, unused

items, they are treating those things the same in the process as

they are items that need repair or junk. They have the same 14-

day screening period and then they are out the door.

Mr. SHAYS. Let me just tell you, unfortunately, your knowledge,

you are losing me right now.

Ms. FISCHER. I am sorry.

Mr. SHAYS. I am at baby steps here. You are taking big leaps and

I am not there and neither is DOD there. I am going to just come

back to this all-band antenna. If they paid $120,000 for it, Mr.

Kutz, should they have been able to buy it outside?

Mr. KUTZ. We didn’t buy that. That was something that we used

our undercover operation.

Mr. SHAYS. So it was given?

Ms. FISCHER. That is a DRMO security issue.

Mr. SHAYS. Right. But it is a secure item that should not have

been sold to the general public, correct?

Mr. KUTZ. Right. And it was in the excess property system.

Mr. SHAYS. Right. So we can have a question as to why it was

excess when we are still buying it. We can have questions why it

was free when it cost $120,000. And we can have a question about

how the heck could anyone get it when this was military equipment that shouldn’t have been sold to anyone.

Now, Mr. Estevez, do you agree that this should never have gotten in the hands of our investigators?

Mr. ESTEVEZ. Congressman Shays, it should not have gotten in

the hands of your investigators, but let me be clear. This item was

in a DRMS. They came into that DRMS.

Mr. SHAYS. Slow down. You are going to have as much time.

Slower. This item was what?

Mr. ESTEVEZ. This item was in the excess property system. That

means that it was not needed by the unit that held that item nor

by that service to issue to any other unit when it was excessed into

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the reutilization system. The GAO investigators, impersonating an

Army user—let’s be clear.

Mr. SHAYS. Right.

Mr. ESTEVEZ. They were not impersonating a private citizen or

a Defense contractor. They were impersonating a valid Army user.

They came in and requisitioned this item as a valid member of the

military service, the contract support through that military service.

Any item in the reutilization system is available to members of the

military service. That is the point of having the system, so that we

can reutilize that material across that service.

Mr. SHAYS. OK. So the story is terrible, but you are saying it is

not as terrible.

Mr. ESTEVEZ. It is terrible that they were able to access the system and forge documents. We should have had a cross check on

that. But once you accepted that validity, they were entitled to that

item.

Mr. SHAYS. Mr. Estevez, we had at one time the Secretary of

HEW under the previous administration, and they didn’t move forward with what they were required to do with the safety of the

blood supply when I was chairman of the Health Committee. She

wouldn’t have thought to come in here and in any way justify anything. She said we screwed up, this is what we are going to do, and

this is when we are going to get it done. You know what? There

were no stones thrown at her because she did it.

I need to be very clear about just this one item as a for example.

Is it your testimony under oath before this subcommittee that this

equipment was never to be sold outside the military, even as

marked? Is it your testimony that this was viewed as excess

throughout the military or just excess within that unit?

Mr. ESTEVEZ. Before that item should have been put in DRMS—

and I would have to go back through the reutilization system——

Mr. SHAYS. Well, did you know that this item was going to be

one of the items that was brought? Were you told about this item?

Mr. ESTEVEZ. Yes, sir.

Mr. SHAYS. It would have been helpful for you to find out.

Mr. ESTEVEZ. Yes.

Mr. PETERS. Congressman Shays, if I may——

Mr. SHAYS. Yes.

Mr. PETERS. This item is required to be demilitarized and destroyed if it is not reutilized, and it should not ever be made available to go through the entire reutilization transfer and donation

process and made available to a public sale. It is a demil-controlled

item that is required to be destroyed if it is, in fact, not used by

our military.

Mr. SHAYS. Well, I hope to God we wouldn’t destroy it, though,

because we are still buying them.

Mr. ESTEVEZ. Congressman, we were not buying these items. The

fact that we may have these items in inventory is not an indication

that we are continuing to buy this item. Now, I can’t say that we

wouldn’t in the future.

Mr. SHAYS. You know what? I feel like we are straining at gnats

and swallowing camels here. I mean, I want to be fair to you because I don’t think we need to, from this standpoint, make the

story worse than it is because it is really bad. From my standpoint,

79

if I were thinking if I were you in your place, Mr. Estevez or Mr.

Peters, my comment would be this is a huge example of lots of

breakdowns in the system, to which we are trying to correct.

What my feeling would be if I were on that side of the table is

this is where we are having success and this is where we are having failure. I feel like you are trying to make it seem like somehow

there is nothing—you know, it is a problem but it is really not a

problem. We just don’t get it up here. I don’t think that is to your

value. I really don’t.

We are told that we have an inventory of about 1,000-plus different computer systems that can’t talk to each other. Mr. Estevez,

that was not your problem. You never caused that. General, you

never caused it. That is a problem you have to deal with. So in

dealing with it, what we know is—and we have known this for a

while—you have one department within one branch, you have a

unit that has excess, and even within the same branch they may

need it, they just don’t know it is somewhere else. But then it is

compounded because it may be even another branch, and, and, and.

I mean, that part I get.

What I am not getting, and it has to be corrected, and you aren’t

going to be correct it over night, nor was President Clinton able to

correct it and his people overnight, but I would at least like to

know we have made some progress.

What I want to know is, is this an item that we are actively

using, and the answer is yes. Is this an item that may be needed

somewhere else within the military? Probably yes. Is this an item

we may buy in the future? Probably yes. Therefore, I can see your

argument if you said well, we found someone within the military

that wants it, and we are going to make sure we get it. That part

I get now, so there is a little sanity to this conversation.

But what raises huge story here, and Mr. Kutz, he could just

comment on this one item and it would be a huge story. We don’t

know who you are. You don’t exist. Well, you don’t understand.

There was identity theft, dah, dah, dah. If that part of the dialog

is true, that, alone, is huge.

My red light is on here, but let me just pursue this and we will

keep at it here.

Mr. Kutz, is it your testimony—and maybe someone could speak

more directly rather than secondhand. Was this you, Mr. Ryan,

that had this experience?

Mr. RYAN. I think in the situation of this antenna we were able

to secure the antenna by doing an intrusion into the DRMO and

getting possession of it.

Mr. SHAYS. Now, you did it pretending you were the military?

Mr. RYAN. We did it by being a contractor hired by the military

working for the military, so I was not posing as a military——

Mr. SHAYS. Well, that raises an interesting question. Are we in

a position where we are having to have contractors help the Army

find their own equipment?

Mr. RYAN. Well, it appears in this particular case yes, because

we basically were not identified until the second day by the person

who was contracted by the Army to search for the property. They

called——

80

Mr. SHAYS. You are the contractor. They don’t think you exist,

correct? This is the one where you don’t exist?

Mr. RYAN. Actually——

Mr. SHAYS. I don’t want to mix them up.

Mr. RYAN. We are, because what we have to do is to think about

the intrusion into the DRMO as us providing totally bogus information.

Mr. SHAYS. Right.

Mr. RYAN. No one challenging us.

Mr. SHAYS. And that is not because you were GAO. I could have

done the same thing.

Mr. RYAN. If you had put together a plan to pose as a contractor.

Mr. SHAYS. OK. So you did that. Just finish it out and then I am

going to yield to the gentleman from Maryland. Keep moving here.

Mr. RYAN. So once we got the property, they contacted us and we

told them it was a test. What we are talking about——

Mr. SHAYS. You told who it was a test?

Mr. RYAN. We told the contractor that when they contacted us—

DLA never contacted us. We told them at the end of our——

Mr. SHAYS. Who is we?

Mr. RYAN. GAO.

Mr. SHAYS. And you told who?

Mr. RYAN. We told DCIS, Defense Criminal Investigative Service,

and DLA that we had successfully penetrated the DRMOs and we

were able to take possession of excess property that was demil.

Mr. SHAYS. Right. But before that wasn’t there a call raising

questions?

Mr. RYAN. There was a call by the contractor who was working

on behalf of the Army screening property who realized that their

company was being—this property was being charged to them as

us taking it, and realized that they didn’t have any screeners.

Mr. SHAYS. So you used somebody else, contractor, who was legitimate?

Mr. RYAN. Yes.

Mr. SHAYS. And so you used a legitimate contractor and the contractor was wondering what the heck is going on here, and then

you told that contractor, not the military——

Mr. RYAN. Yes.

Mr. SHAYS [continuing]. That, in fact, this was identity, and the

issue dropped, and the contractor didn’t notify the military?

Mr. RYAN. Wasn’t the identity. Identity issue was the end use

certificate situation. That is primarily a purchase over the internet.

The end use——

Mr. SHAYS. Let’s stay with this story.

Mr. RYAN. OK. But the identity issue doesn’t come into play in

regards to securing the penetration into the DRMO. We just falsified everything.

Mr. SHAYS. You falsified everything, used a legitimate contractor

as the person?

Mr. RYAN. Yes.

Mr. SHAYS. Eventually that contractor did find out about it. By

then you had the equipment?

Mr. RYAN. Yes, that is true.

Mr. SHAYS. So you could have just disappeared?

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Mr. RYAN. Absolutely, and if we wouldn’t have given a legitimate

telephone number as a call-back so we could monitor the activities,

they would never know who we were.

Mr. SHAYS. Yes. I get it now.

Mr. RYAN. OK.

Mr. SHAYS. And you could have been an operation, a front for

anyone?

Mr. RYAN. You are absolutely correct.

Mr. SHAYS. And had you taught me how to do it, I could have

done it?

Mr. RYAN. Absolutely.

Mr. SHAYS. And when you went to DOD, they helped you load

that on to——

Mr. RYAN. The agents that did the penetration, they got assistance from the people inside the DRMO to load the property on

their truck.

Mr. SHAYS. And you were a contractor picking this up, so you

didn’t have military uniforms on or anything like that?

Mr. RYAN. No.

Mr. SHAYS. Nothing?

Mr. RYAN. Used a driver’s license to get on the base.

Mr. SHAYS. OK. Well, I mean, it is astonishing. I mean, that is

astonishing. That, alone, is an astonishing story. It is astonishing.

I thank the gentleman from Maryland. You have the floor.

Mr. VAN HOLLEN. Thank you, Mr. Chairman, for holding this

hearing. As you and others have said, I am sure this subcommittee

looks forward to the day that we get a report that the recommendations have been adopted and things have changed and, in fact, we

are saving the taxpayer some money.

Mr. Kutz, I was just looking at your testimony from about a year

ago in front of the subcommittee on some of the same issues. In

your testimony then you found that there was about $3.5 billion in

money essentially wasted from the taxpayers’ perspective. Do you

recall that testimony?

Mr. KUTZ. Yes.

Mr. VAN HOLLEN. OK. And, as I understand your testimony

today, in this round you sort of tested the system and you have

concluded that the 13 recommendations you have made have not

been adopted; is that right?

Mr. KUTZ. No, there has been some progress, and I have mentioned in my opening statement they have reportedly saved $38

million through June of this year. But we believe that the potential

is there for hundreds of millions of more savings.

Mr. VAN HOLLEN. OK. Do you have any reason to believe that,

with the exception of the approximately $24 million——

Mr. KUTZ. That was $38 million.

Mr. VAN HOLLEN. The $38 million, that we are not continuing to

lose $3.5 billion?

Mr. KUTZ. The $3.5 billion wasn’t related necessarily just to the

excess property system. The actual amount for the excess property

system last year I believe was several hundred million dollars. And

so the $3.5 billion related to items that were purchased and that

were never used, but that was not really related directly to the exVerDate 11-MAY-2000 10:51 Jul 23, 2007 Jkt 000000 PO 00000 Frm 00085 Fmt 6633 Sfmt 6633 C:\DOCS\35341.TXT HGOVREF1 PsN: HGOVREF1
82

cess property system, so that gets into the broader logistics issue

at the Department of Defense.

Mr. VAN HOLLEN. OK. But as I understand the testimony from

last year, you are talking about $4 billion related to items in new,

unused, and excellent condition——

Mr. KUTZ. Yes.

Mr. VAN HOLLEN [continuing]. That were sold, and you say we

determined that $3.5 billion, or 88 percent, included substantial

waste and inefficiency because new, unused, and excellent condition items were being transferred or donated outside of DOD, sold

on the internet for pennies on the dollar, or destroyed, rather than

being reutilized.

Mr. KUTZ. Yes.

Mr. VAN HOLLEN. Do you recall that testimony?

Mr. KUTZ. Yes, that is correct.

Mr. VAN HOLLEN. And do you have any reason to believe there

has been a significant change in the practices to avoid that?

Mr. KUTZ. Yes. Like Mr. Estevez, I think there has been some

progress, but there is a lot more issues that need to be resolved.

Mr. VAN HOLLEN. All right. We can get into that in a moment,

but, as Mr. Kucinich mentioned, I think that people following this

are going to be just amazed to hear that, rather than take the principle I think most people were taught by their financial advisors or

parents, which is you buy low and you sell high, DOD has just reversed it and done the opposite and they are selling low and buying

high. The consequence is great losses it seems to me to the taxpayer.

I would point out that just last Friday the Army came out with

a statement, the Army bearing most of the cost for the war in Iraq

and Afghanistan, saying that its money crunch has gotten so bad

it is clamping down on spending for travel, civilian hiring, and

other expenses. We have to wonder, given the crunch that the

Army is facing, whether or not we can’t find savings through the

kind of efficiencies that we are talking about here.

Let me just make sure I understand and get this straight in my

mind. I do think specific examples are important to make it clear

what is at stake here.

On page 31 of your current report you talked about a gasoline

engine, and you say that GAO was able to buy the gasoline engine

for $355. Do you recall that?

Mr. KUTZ. Yes, that is correct.

Mr. VAN HOLLEN. Now, it seems like a pretty simple item, a gasoline engine, but, of course, there are large quantities of gasoline

engines being sold. As I understand, the same time you were buying these engines for a few hundred dollars, the military, in particular the Marine Corps, was buying these identical gasoline engines for $3,119; is that correct?

Mr. KUTZ. Yes, they got four of them from DLA in June 2006,

is my understanding.

Mr. VAN HOLLEN. So the Marines are paying 10 times for the

equipment what you were purchasing the equipment for; is that

true?

Mr. KUTZ. That is correct.

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Mr. VAN HOLLEN. And you also looked at purchases, I understand, of 20 more gasoline engines from the Internet?

Mr. KUTZ. At the same time we bought ours, there were another 20 or so available. We just picked one and bought it for about $350.

Mr. VAN HOLLEN. OK. And so on the internet, and the original acquisition cost, if you sort of add all that up, was $62,000, and the

price on the internet was the same discount that you got, so it was

approximately $6,221; is that right?

Mr. KUTZ. Yes.

Mr. VAN HOLLEN. So a tenth of the price, essentially.

Let me ask you, Mr. Estevez, I mean, these are concrete examples. I guess most people would ask the question all of us would

ask: how come we can’t seem to get a handle on this? And the reason I focus on a specific example is that it is there, they went out

and did it. It was on the internet. What do we have to say?

Mr. ESTEVEZ. Congressman, we have put a number of fixes in

place from the time of the last hearing, so that if we are going out

to the commercial sector to buy material from a commercial vendor

and that material has been put into the excess property system, we

will offset the buy from the commercial sector against material that

is in the excess property system so long as that material is in

brand new contract. You know, there is a training factor in the

process of turning in material from a unit that owns that material

to ensure that they code it properly. We have reinforced that training. That remains an issue because it is a rotational assignment

that is generally a junior grade.

Using that in the last year we have offset buys by $224 million,

so we are, in fact, reusing material to the benefit of the American

taxpayer and to the benefit of our military forces.

Items that go back into the excess property system that have

been screened against the requirements of the military service,

that have been sitting in that system for, I believe, 45 days, and

then another period of time, and there is no requirement from the

military service while that item is sitting in that system, depending

on the condition code of that item, on whether they believe that is

an item that they can use, you know, we would not—they have the

opportunity to reuse that item.

That does not preclude them from ordering that item from the

national inventory where we would stock that item and where we

have the networks, in fact, set up so we can distribute that item

to them in a cost effective, timely manner so that they can use that

item to make a weapons system operate, which is the true cost savings for the Department of Defense, getting the return on the dollar investment in weapons platforms.

That is standard supply chain management practice. In that regard we do the same as a Wal-Mart or a Target or any industrial

operation would do. Most of those folks would not take any item

back into the inventory and put it back in their national stock system.

We continually do retention analysis, when we should be re-buying an item. We buy millions of buys a year. As our s yes, sirs become more sophisticated, as our ERP systems come online, and as

the system that we manage the realization system gets modernized, we will probably have the ability to do better retention analyVerDate 11-MAY-2000 10:51 Jul 23, 2007 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 C:\DOCS\35341.TXT HGOVREF1 PsN: HGOVREF1
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sis. But those are tough calculations. It is an ongoing process and

in that regard I believe we are doing sound supply chain management.

Mr. VAN HOLLEN. Well, let me ask you. I am not sure I understood the full answer, but you are saying that you put some

changes in place that would address the issue we just talked about,

which I understand was within the last year, I understand.

Mr. ESTEVEZ. The beginning of this year we put a system fix in

place so that if there is an item coded in brand new condition that

is in the reutilization process at the time we are going out to the

commercial sector to buy that same material, we will offset the buy

by inducting the material that is in the reutilization process back

into the national inventory and only buy the difference of those

items.

Mr. VAN HOLLEN. All right. So, as I understand it, based on that

testimony, this particular scenario we talked about with the gasoline engines should not have happened with the new system in

place, assuming that the Marines were asking to purchase these

engines at the same time the same engine was up for sale on the

Internet?

Mr. ESTEVEZ. The Marines, in that scenario, we were not buying

it from the commercial sector. The Marines were ordering it from

items already in the existing inventory, so really they are paying

a working capital fund, a transfer of dollars within the DOD. The

DOD has already expended the true cost of that item out to the

commercial sector to buy it, so it is not a matter of an O&M dollar

into a working capital fund to repay the working capital fund.

Mr. VAN HOLLEN. Sure, but I guess the problem is—I mean, I

understand what you are saying about inventory management, but

obviously a gasoline engine is something that is a pretty common

item. That is something I think you would expect to restock your

inventory, and so, you know, just because they are buying it off the

inventory shelf doesn’t mean that is not a loss to the taxpayer because you can expect that you are going to have to buy it back from

the original contractor for the same $3,000 level from the original

supplier.

And so it would seem to me that, especially for items that are

in common use and where you have a pretty reasonable expectation

that there is going to be a need for them in the future, we wouldn’t

put them up and sell them, as GAO said in its report last year, for

pennies on the dollar when we know we are going to have to buy

that some time down the road. I really hope that when we have

this hearing next year there won’t be any more examples like the

kind we heard about here.

Mr. ESTEVEZ. I would like to say that. We want to make full use

of our inventory, and at that point it goes down to how much inventory do we want to hold. So if it is in brand new condition and

we believe there is a use case for it, we need to determine what

inventory we should be inducting back into the national system,

which is not the norm, based on the retention rate of that item and

what the use case of that item is, the demand against that item.

We continually have to do that.

It goes back to Congressman Shays’ point about our systems not

being fully interconnected. But as our systems mature, we modernVerDate 11-MAY-2000 10:51 Jul 23, 2007 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 C:\DOCS\35341.TXT HGOVREF1 PsN: HGOVREF1
85

ize the RP systems that we are putting in place, and as the system

that we are upgrading our reutilization process comes into place,

we should be able to do that better than we are doing that today,

Congressman.

Mr. KUTZ. Congressman, the waste there goes back to the beginning of the process when someone actually decided in the 1990’s to

buy all these engines and, as it turns out, nobody was going to use

them, which is a different problem than what Mr. Estevez is dealing with here.

Mr. VAN HOLLEN. Right. And I don’t know, based on this testimony, how many engines were in the inventory, but I——

Mr. KUTZ. I am told 1,500.

Mr. VAN HOLLEN. So 1,500 was the total, but, I mean, I would

suspect that you are right, the problem of over-buying up front, but

especially with an item that is likely to be needed some day in the

future, even though there is no an immediate demand for it, it

seems to me it probably makes more sense to retain it in the inventory, if there is an expectation you are going to use it, then to sell

it really literally pennies on the dollar, 10 percent, and then go

back and have to order another one at taxpayer expense.

Thank you, Mr. Chairman. Thank you for the testimony.

Mr. SHAYS. I thank the gentleman.

We still have a number of questions we need to ask. I just need

you to know that.

I want to start by asking each of our three folks from DOD which

of these items is most discomforting to you that it is out there as

an example that people, our investigators, could get. Which one?

Take your pick. Which is the one, Mr. Peters, that you find the

most disconcerting up there?

Mr. PETERS. Congressman Shays, it is disturbing that any of

these items would ever go through the reutilization, transfer, and

donation cycle and then be made available to public sale. They reflected a breakdown in the procedures. They also reflect some inherent risks in the disposal process. Changing or reengineering the

process to control batch lotting and local stock number items which

represent 44 percent of the annual workload that DRMS handles,

that is a tremendous amount of the annual workload that we really

need to close the gaps and the vulnerabilities inherent with that

batch lotting process.

Many of items that are in front of us that the GAO bought were

observed or obtained, came out of batch lots. Many of these other

items were——

Mr. SHAYS. Now let me just speak about batch lots. I was going

to get to it. In our hearing last year, in June 7, 2005, Mr.

O’Donnell, who was your predecessor—is that correct, Mr. Peters?

Mr. PETERS. Yes.

Mr. SHAYS. OK. He said, ‘‘We no longer accept batch lots. All of

the items that are now turned in in J-list are reviewed at those

sites. They make the determination if they are serviceable for reutilization.’’ Was that a correct statement?

Mr. PETERS. Congressman, I believe that Colonel O’Donnell was

referring to biological and chemical items when he made that statement.

Mr. SHAYS. Right.

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Mr. PETERS. When I talk about batch lotting, I am talking about

the total volume of items that entered the disposal system through

the batch lot process, which is much broader, and we need to reengineer and transform that process, and we can do that by establishing multiple check points.

Mr. SHAYS. Why don’t you talk about batch lots. Explain what

batch lots are.

Mr. PETERS. Batch lots is a methodology that exists in the disposal system whereby DRMS tries to minimize the handling, the

cost, and the administrative time to process an excess item through

the disposal system. Because it includes 44 percent of the annual

workload, that is over 1.2 million line items——

Mr. SHAYS. So you combine a lot of things together?

Mr. PETERS. You combine a lot of things together.

Mr. SHAYS. And someone buys this batch, and they may like

some of the items and they may not like some of the items, but in

the end, for a relatively small amount of money, someone is able

to purchase a batch of items; is that correct?

Mr. PETERS. If a batch goes through the entire process, it would

be available for public sale, and the risk of the batch lotting, sir,

is that once an item goes into a batch we lose the identity and the

visibility of that individual item, which is why we need to change

the process dramatically and——

Mr. SHAYS. We will come to that.

Mr. Kutz, did you buy or did your investigators buy any of these

in a batch lot?

Mr. KUTZ. Yes. Several of them were batch lots, several of them

weren’t on that side.

Mr. SHAYS. OK. And does everything on this side to my right,

your left, represent military sensitive?

Mr. KUTZ. Yes, everything on this half of the room. Some of it

we got in that operation where we were posing as contractors, the

other we bought on the internet.

Mr. SHAYS. OK. And not posing as military?

Mr. KUTZ. Correct, posing as a private citizen with a credit card.

Mr. SHAYS. So what did you get as a private citizen as opposed

to—and if someone else needs to answer, that is fine, but what did

you get here not posing as military connected?

Mr. KUTZ. Well, like the ceramic body armor, which is current

issue. That was in a batch lot.

Mr. SHAYS. OK. Any other item?

Mr. RYAN. The F–14 parts.

Mr. SHAYS. The F–14 parts?

Mr. RYAN. The F–14 parts.

Mr. SHAYS. So that was in a batch lot?

Mr. RYAN. Yes. I think it is important also to recognize that in

the batch lots some of these batch lots were prepared by the contractor that DOD has actually hired for these sales.

Mr. SHAYS. Say that one more time.

Mr. RYAN. DOD has a contract with Government Liquidators to

provide assistance of the sale of——

Mr. SHAYS. And so they assemble the batches?

Mr. RYAN. It appears that, based on talking to some GL people,

yes, they do assemble batches for sale.

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Mr. SHAYS. So let me ask you this, Mr. Peters or Mr. Estevez or

the General, whoever can answer this. It is my understanding that

you have taken away leave for some of our personnel to go through

batches to determine whether or not there is military sensitive

equipment in various batches; is that correct?

Mr. PETERS. Congressman, once we became aware of the operation by the investigation by the GAO, we immediately froze all the

batch lots that were in the inventory and we began to recertify

each individual item and its demil code. There were 9,000 batch

lots that were in the system that we froze and have been in the

process, over the last 6 weeks, of recertifying each item.

The principle of inspecting each item in the batch lot is a sound

action that needs to take, and that is part of the reengineering of

the batch lotting process in the future. If we centralize and consolidate all of the batch lots into four sites, for example, here in the

United States, we can take the more experienced subject matter experts in the disposal system, physically inspect each of those items,

verify their demil code, and verify those items that are appropriate

to move on through to the sale phase of the disposal system.

We can do that at the time we break down the batch and we can

do that again prior to the sale of the item, and that will significantly reduce the kinds of items that we see in front of us of progressing through the system inappropriately.

Mr. SHAYS. And so in the process of doing this have you been

finding any military sensitive equipment in those batches?

Mr. PETERS. Yes, sir, we have.

Mr. SHAYS. Good. So that is a positive step?

Mr. PETERS. I believe it is the right step in the short term, and

I believe that is the basis of a sound reengineering of the batch lots

process for the long term.

Mr. SHAYS. Well, Mr. Peters, you gave me a general answer, and

that is probably a good one, but I am asking for you to tell me

which is the one you find most awkward in all of these. Is it seeing

something transferred for nothing that cost $120,000, or is it seeing

potentially a hand-held missile launcher? Is that the thing that you

find most unsettling? Which one is the one that you find most unsettling here?

Mr. PETERS. Sir, DRMS has a responsibility to execute this——

Mr. SHAYS. I am asking you a question. I want to know which

one you found most disconcerting here.

Mr. PETERS. And my discomfort is that any of these items——

Mr. SHAYS. I know that, but now take your pick, boss. Which

one?

Mr. PETERS. Any item that is demilitarized and should be

controlled——

Mr. SHAYS. Mr. Peters, that is not what I asked. Which one of

these do you find most unsettling?

Mr. PETERS. Congressman, all of these items I find disturbing

that they’ve gone through the system——

Mr. SHAYS. So you would equate one of these small items to one

of the bigger? Are they all the same to you? They are all the same?

Mr. PETERS. Any of these items that have been determined that

should not be made available to——

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Mr. SHAYS. Mr. Peters, I am going to say it again and I want you

to listen to the question. You can go on record, but I want to make

sure that I understand. There are some items here that strike me

as not as significant as others. Which do you think is the most significant item that never, ever should have gotten out of military

hands?

Mr. PETERS. Any item that is directly related to a weapons

system——

Mr. SHAYS. Mr. Peters, forget it.

Mr. PETERS [continuing]. Is most disturbing.

Mr. SHAYS. That is a very uncooperative response. I can’t believe

that you would equate them all together, and if that is the way you

want it to be you are on record that way, but all that says to me

is you choose not to be cooperative.

General, which is the one you found most unsettling?

General WILLIAMS. Sir, I found the SAPI to be the most unsettling.

Mr. SHAYS. Which one?

General WILLIAMS. The Small Arms Protective Inserts.

Mr. SHAYS. OK. Thank you, sir.

Mr. Estevez.

Mr. ESTEVEZ. Congressman, I also find the small arms protective

insert extremely unsettling because they are easily identifiable for

what they are.

Mr. SHAYS. Thank you, sir.

Mr. Kutz, what would you find?

Mr. KUTZ. In addition to those, the micro circuits that are part

of the F–14.

Mr. SHAYS. Thank you.

Ms. Fischer.

Ms. FISCHER. I think the F–14 weapons system parts.

Mr. SHAYS. Thank you.

Mr. Ryan.

Mr. RYAN. I also agree the F–14s. The parts that the law enforcement officers on the street are chasing all the time, there is no reason that they should be out there. We have law enforcement, DOD,

and DHS chasing down people that have possession of those. We

could be using their manpower in other ways.

Mr. SHAYS. Mr. Peters, do you want another crack?

Mr. PETERS. Sir, I agree that the F–14 parts, because of the one

Nation in the world that continues to fly that and the SAPI armor

plats which clearly should never have gone through the process,

those are obvious examples of things that are disturbing, but all

of——

Mr. SHAYS. Thank you. I understand. I understand. Thank you.

I am going to have you ask a few. I am going to ask professional

staff to ask a few questions.

Mr. CHASE. Mr. Kutz, during your opening oral statement you

did make reference to social engineering techniques. Could you just

for the record define what you mean by that?

Mr. KUTZ. Yes. It is really a ruse or a trick or a con is kind of

the way you would describe it, where you exploit people who are

trusting and you utilize that to either penetrate systems or get

them to do something that they wouldn’t normally do. I think the

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end use certificate example is one where we told them it was identity theft and they believed it, and, using the contractor identifications we looked like contractors, we talked like contractors, we had

a few pieces of paper that made us appear to be contractors, and

we were able to get items out of the DRMS location.

Mr. CHASE. OK. As a followup to that then could you please tell

us what the end use certificate is?

Mr. KUTZ. It is a certificate that is supposed to provide some legitimacy to who is actually buying items that are trade security

controlled, and so, to the extent that we were able to get that using

a person that doesn’t exist—and they did have red flags. They said

you don’t exist and, again, I think someone should have probably

asked the next question about we said it was identity theft, well,

why do you still not exist. I mean, if it is identity theft you would

still exist probably. So I think that is something like what Mr.

Ryan said, possibly a more experienced person asking those questions would be useful.

Mr. CHASE. So then I think the first time you were able to break

the end use certificate was in 2003.

Mr. KUTZ. Yes.

Mr. CHASE. And you were able to do it again in 2006?

Mr. KUTZ. Yes. I think it was harder this time because I think

they actually checked our background. The first time I don’t believe

that they checked our background. So they have enhanced their

procedures, and I think that, again, we were able to beat those procedures with, again, social engineering this time, so they had the

right information in front of them, they just didn’t effectively utilize it.

Mr. SHAYS. OK. Then to any of our DOD witnesses, what change

have you made any changes to the procedure for identifying end

use certificates between 2003 and 2006, or is that an ongoing process?

Mr. PETERS. Sir, it is an ongoing process; however, we access additional data bases now than we did in the earlier years. The trade

security control process to verify an end use certificate is designed

to verify the identity and the stated purpose of the acquisition. It

does not eliminate the risk; it is a risk mitigation procedure.

Mr. SHAYS. I am just going to interrupt a second to make sure,

while the staff is asking these questions, Mr. Kutz, do you have

your 13 recommendations? Do we need to give them? Do you have

someone here who has the 13 recommendations?

Mr. KUTZ. Yes, we have them here.

Mr. SHAYS. Yes. I want to make sure. What I will be asking

you—I want to give you a little time—give me the ones you think

are the most important, not whether you think they have done

them or not but what you think. Pick out of the 13, I am going to

ask you to pick out half that you think are very important.

I just want to ask if Mr. Estevez, Mr. Peters, or the General, you

have those recommendations and would be able to respond to them.

Do you have that, Mr. Estevez? Do you have those 13 recommendations? I have a copy up here if we need one in writing.

Ms. Fischer, do you have those?

Ms. FISCHER. Yes.

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Mr. SHAYS. Do you have an extra copy that we could make

sure—anybody else have them?

Mr. KUTZ. We have one.

Mr. SHAYS. Could I just ask staff to bring those down. I would

mark them, and we will give them to all of you.

The purpose is to just get a sense of where we are from last time

around. I am not going to ask them right now. I am going to go

back and ask professional staff to ask some questions.

Ms. Fischer, why don’t you mark them in case Mr. Kutz is asked

questions. Who do you want to direct your questions to? General

Williams, we are going to be asking you some questions.

Mr. CHASE. General, in your written testimony—I may have

missed it if you mentioned it in your oral testimony—you have the

term the DEMIL challenge program.

General WILLIAMS. DEMIL what, sir?

Mr. CHASE. Challenge program.

General WILLIAMS. Roger.

Mr. CHASE. OK. Can you tell me, if we have this program, why

is the program failing to catch items that are miscoded?

General WILLIAMS. Well, sir, when you view current processes

and procedures there are seams and gaps that have been clearly

identified by GAO, and I agree with GAO findings. So the next step

is to accept accountability, to make sure that you understand the

problem, and then to implement fundamental changes.

For example, the SAPI plate that I referred to, the SAPI plate

is clearly a demil item, No. 1. We all agree to that. No. 2, the problem was that it was inadvertently, through human error, or classified as a mistake, placed in a batch lot. We have gone through that

particular process.

That batch lot was eventually transferred over to GAO, therefore

you have a demil item now available for sale to the general public

in a batch lot.

So when we take a holistic view of current processes and procedures—and I will have to say that there has been tremendous

progress to date but not enough—when you look at that, the question is how do you prevent that from happening.

First of all, leadership, accountability, then ensuring, through

centralizing this program process at some localized level, that we

take one final look at batch lots before we hand the particular

batch lots over to GL.

So what I am saying is we accept the accountability and the responsibility; therefore, when GL receives an item, that item clearly

is not a demil item.

By the way, if something changes and all of the sudden it becomes a demil item, then GL turns the item back. But I will tell

you again another fundamental change are the weekly and monthly review of everything that GL has in its inventory to make sure

that through some change or some mistake demil items don’t exist.

Mr. CHASE. OK. You check it at your end to ensure that demil

items aren’t going out. Shouldn’t the contractor also be checking?

You indicated the contractor was checking. If you have two systems

checking, why do we still have this problem?

General WILLIAMS. Again, sir, if you will, check, check, check.

What we are having here, if I go back to the SAPI plate again,

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clearly in a batch lot and it shouldn’t have been. At that particular

point in time, when we implement our new system of centralized

control and a final check, we break apart those batch lots, and then

the intent is that we will mitigate the intent by catching this particular item before we transfer it over to GL.

Mr. CHASE. OK. One last question. Why doesn’t DOD set a minimum price for items that legitimately can go out for sale to the

public? Looking at the Web site, it appears that there is a minimum constantly set at $35, or have I misinterpreted the Web site?

Why doesn’t DOD—as an example, I think someone mentioned the

gasoline engine. Why don’t you set a minimum price of $500? I

mean, why is everything set at a minimum price of $35?

General WILLIAMS. Sir, good question, but I will have to defer

that because I am not knowledgeable enough to answer that particular question.

Mr. CHASE. OK. Could you get back to the committee with that?

General WILLIAMS. Yes, sir, I absolutely can.

[The information referred to follows:]

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Mr. CHASE. And, finally, what procedures does DOD have in

place to recover items that have been inadvertently sold to the general public?

General WILLIAMS. Sir, once we find out that items have been inadvertently sold to the general public, the contractor agreement is

that we will make all efforts to regain those particular items, going

back to the buyer, saying that this is a demil item that should not

be in their control, and we need to recover that particular item

from you.

Mr. RYAN. I would like to add to the General’s situation. In talking to law enforcement, there seems to be some legislative help

that is needed in the law enforcement community because once the

ownership of the property is transferred on a sale, it is hard for the

Government to actually go back and request that item back. There

has been at least three or four attempts to try to get some legislative help to change to try to recover those items from a law enforcement perspective.

Mr. CHASE. When was this legislation offered?

Mr. RYAN. I can get the specifics on it, but that was at the briefing that law enforcement gave us a few weeks back. I can get you

the history on that.

Mr. CHASE. OK. Thank you.

[The information referred to follows:]

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Mr. SHAYS. I am going to say something I have said before, but

I do want to say it again. I know this problem wasn’t caused by

any of you. I know this problem has existed for decades. But it is

still stunning to see what we still fail to deal with, and, you know,

Mr. Kutz kind of took my breath away when he said the Department of Homeland Security is saying we are trying to track some

of the stuff that DOD has sold.

Could I appreciate, Mr. Kutz, that besides the Department of

Homeland Security that FBI would be involved in this process? Mr.

Ryan.

Mr. RYAN. In the briefing that we had with law enforcement, law

enforcement across the board is looking at this issue.

Mr. SHAYS. So not just Homeland Security?

Mr. RYAN. Not just Homeland. We know that the jurisdiction

over the exporting and importing of particular items goes to Homeland Security ICE, so they have been taking the lead with DOD.

Mr. SHAYS. OK. Now, have you told the subcommittee this before

or are you sharing this today as you realized it might be of interest

to us?

Mr. KUTZ. Well, it was a meeting just several weeks ago, so it

is new. We have coordinated with them before. We actually coordinated with people after we had the hearing on the biological equipment. You may recall we did investigations and saw that was being

shipped out of the country, so we had a number of case studies we

followed then, and we did a referral then to some of the same people for those items.

Mr. SHAYS. I am going to ask our subcommittee to have the same

kind of dialog that you had, and if you would supply the folks that

were in contact with you, and we will invite you, Mr. Estevez or

Mr. Peters, to participate in that so we kind of share this information.

Mr. KUTZ. And we do a referral, too. With respect to the cases

here, I mentioned the other buyers and the over 2,600 items. We

are referring those to the same group, and we have already sent

those letters several days ago.

Mr. SHAYS. You know, I was thinking that, as you mentioned,

Mr. Estevez, I think you did, you mentioned that auctions give you

a pretty good market price, but auctions do, provided everyone

knows about the auctions, and I am struck with the fact that if the

general public were involved, there may be a lot more people who

would be in the market to buy. I am not talking about the military

sensitive equipment, I am talking in concept about price.

I guess having it on the Internet, there is logic to that. More people get involved. The key is on the Internet you want to make sure

there is no military sensitive equipment, and there was testimony,

Mr. Kutz, that you got some of military sensitive equipment from

the internet, but that was batched items; is that correct?

Mr. KUTZ. No, not always. No. There were other items that went

out.

Mr. SHAYS. So items that were pretty obvious then as military

sensitive were not kind of stuck in between something that wasn’t

so obvious?

Mr. KUTZ. Correct.

Mr. SHAYS. OK. So that is pretty disappointing.

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Let’s take what you think, Mr. Kutz, are your key recommendations of the 13. I can’t emphasize enough this is to understand

where we are at along this process.

Mr. KUTZ. I am going to let Ms. Fischer answer that, but there

are two parts. We want to first of all tell you which ones have been

implemented, and then of the ones that remain there are

several——

Mr. SHAYS. No. Let me just tell you this. No. I want to know

which ones you think are the most important.

Mr. KUTZ. OK. The ones that are unimplemented.

Mr. SHAYS. Not the ones that haven’t or the ones that have,

which are the most important. And let’s just see, of the ones that

are most important, let’s just get a sense of where they are at. I

know you will be very fair as to your assessment of whether you

think they are part of the way there, all of the way there, or not

there at all.

Mr. KUTZ. OK.

Mr. SHAYS. OK, Ms. Fischer, you have the floor.

Ms. FISCHER. Recommendation No. 7 was to direct DLA and

DRMS to review daily supply depot and DRMO excess property

loss reports and identify systemic weaknesses and take immediate

and appropriate corrective actions to resolve it.

Mr. SHAYS. OK. That is the most important. Now, why don’t

you—is anyone, Mr. Estevez or Mr. Peters or General—Mr.

Estevez, I understand you have worked for the Department now for

6 months in this position? Mr. Peters.

Mr. PETERS. Yes. I have been in this position since February.

Mr. SHAYS. OK. And is this a recommendation that is new to you

or have you seen these recommendations before?

Mr. PETERS. I have seen these recommendations before.

Mr. SHAYS. OK. Which one or who wants to respond to that?

Mr. PETERS. Sir, I will respond.

Mr. SHAYS. OK. Thank you, Mr. Peters.

Mr. PETERS. OK. For recommendation seven, since I have arrived

I can tell you that we have initiated an internal review to identify

the vulnerabilities and gaps in the DRMS processes. Prior to my

arrival, over the last couple of responses to the hearings, DRMS

and DLA were engaged with looking at weaknesses in the controls

associated with biological and chemical items and laboratory equipment.

Even though those were responses to specific findings, if you will,

it provided an important foundation for us to be able to look at the

entire process from the moment that the DRMS receives an item

to the disposition of that item, to really understand what are the

vulnerabilities of gaps and receiving and issuance and processing

through the sales process.

We have begun that review and we are assessing corrective actions to those vulnerabilities and gaps, and over the future months

we will begin to implement those.

Mr. SHAYS. How far along do you think you are in that process?

Are you at the point of identifying them, not necessarily stopping

them?

Mr. PETERS. That is correct, sir.

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Mr. SHAYS. OK. So that would explain what we are seeing here,

in part.

Mr. PETERS. The vulnerabilities, the gaps that have been identified are certainly contributors to a breakdown in the procedures

and the inherent risks in that process.

Mr. SHAYS. General, would you want to speak to that, or Mr.

Estevez?

General WILLIAMS. Sir, again, I emphasize a holistic view of the

current processes and procedures——

Mr. SHAYS. We are talking about recommendation No. 7.

General WILLIAMS. Yes, sir. And the seams and gaps where the

vulnerabilities lie, which create the problem that is in front of us

right now.

Mr. SHAYS. Mr. Estevez.

Mr. ESTEVEZ. Congressman, the other thing we have done to address that is we have significantly changed the structure of the reutilization and marketing process. We replaced a military officer,

a colonel, with a career Senior Executive at the leadership level of

that in order to drive this change, and we have significantly

changed the structure of the organization, so we have moved down

from 68 sites to 18 sites, where we are better able to implement

internal controls and to monitor those.

Mr. SHAYS. So we have gone from 68 to 18 during a period of

what time? I mean, are we at 18 now?

Mr. PETERS. Yes, sir, we are at 18 now. We just finished that.

Mr. SHAYS. Six months ago how many did we have?

Mr. PETERS. Six months ago there were 68 operating

warehousing sites around the country.

Mr. SHAYS. OK.

Mr. PETERS. During the course of March through July, we began

the transition to the 18 fully operational warehouses.

Mr. SHAYS. Is this that aspect where the claim is that $34 million has been saved, or is that another issue?

Mr. PETERS. I can’t address that, sir.

Mr. SHAYS. OK. Mr. Kutz or any of your staff, what is your response to what you are hearing about this?

Mr. KUTZ. I think fewer locations will be conducive to stronger

internal controls, and sustained leadership has been an issue here

before, and I think that the sustained career leadership of a Senior

Executive is important.

Mr. SHAYS. With no disrespect to our uniformed military, is the

concept that someone who is in the private sector might have been

involved in this type of work for 10 or 20 years, whereas a career

military—I mean, General, you have had lots of different responsibilities, so you have to have lots of skills. Is the concept that you

are looking for someone who may have dedicated their lives, someone from Wal-Mart, someone from K-Mart or somewhere else who

has inventory experience? Is that the logic of saying non-military?

General WILLIAMS. No, sir.

Mr. SHAYS. OK.

General WILLIAMS. If we had the GO billets available easily we

could have placed a GO in that particular billet because of the

leadership that individual brings to that particular job.

Mr. SHAYS. Right.

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General WILLIAMS. Mr. Peters, by trade, is not a DRMS trained

individual.

Mr. SHAYS. Right.

General WILLIAMS. What he brings, though, is the savvy, the

leadership skills, the ability to identify, to do the analysis, and

then quickly come to a conclusion and execute the standard. So it

is the leadership that we want, and what we have done in DLA——

Mr. SHAYS. But don’t you want experience, as well?

General WILLIAMS. Yes, sir.

Mr. SHAYS. OK.

General WILLIAMS. But, sir, you know, leaders have that experience once you identify the problem. And so we made the choice to

reengineer within the Agency, to place an SES position there because of what that position brings to bear. So we have the leadership in place now that we want, and I consider this a significant

move.

Mr. SHAYS. I am just going to react. It seems to me if someone

is trained in artillery and that is their basic, training, where if

someone has gone to business school to learn how to control inventory, I will take the inventory over someone who has necessarily

been trained on artillery when we are taking about inventory control. I mean, intuitively it strikes me that there is logic to that.

I am not saying that you don’t want a command officer heading

the Department, but it seems to me you need those skills in the

unit.

General WILLIAMS. Yes, sir, I concur, but I will tell you—and I

will have Mr. Peters speak for himself—we looked at his skill sets

prior to hiring him to elevating him to the position of SES. He is

a trained auditor. In terms of business acumen, he is right where

he need to be. Already, sir, his leadership there has been a definite

impact to that particular mission.

Mr. SHAYS. Thank you.

Mr. Estevez, any comment about recommendation seven? If you

don’t have a comment, that is all right.

Mr. ESTEVEZ. Again, I raise the issue that we significantly

changed the organization in terms of leadership.

Mr. SHAYS. I am sorry, you did. I apologize, Mr. Estevez.

Ms. Fischer, what would be another item?

Ms. FISCHER. Recommendation No. 8: direct DRMS to take immediate appropriate action to resolve identified, uncorrected

DRMO security weaknesses. DRMO security weaknesses are what

allowed us to do the penetration at the two east coast DRMOs.

Mr. SHAYS. So we have really spoken to this, correct, or not, Mr.

Peters?

Mr. PETERS. We have spoken the it from a process view, and

there were also physical security recommendations made in prior

hearings, and we have allocated moneys to address those physical

weaknesses.

Mr. SHAYS. Your comment, Mr. Kutz? Do you think there is

progress? Are you hopeful? Or is the jury still out?

Mr. KUTZ. Well, I think, again, there has been some progress. We

haven’t tested the entire area in that.

Mr. SHAYS. OK.

100

Mr. KUTZ. I mean, this was more of a limited investigation. The

only real physical penetration test we did, that was what we got.

Ms. FISCHER. They focused on the structural weaknesses and

some of the capacity weaknesses last year, stuff being stored outside that got weather damaged. I believe they corrected that problem. The leaky roof at one of the DRMOs that let items inside become wet and unusable, that has been addressed. But the things

we are talking about that allowed us to do the DRMO penetration

are new and those have not been addressed.

Mr. SHAYS. OK. Fair enough.

I make an assumption, as you reduce the number of facilities you

have improved the facilities that exist, the ones that remain?

Mr. PETERS. Yes, sir, and we have also identified site improvements that need to be made at those facilities. We have prioritized

them in accordance with our fiscal year 2006 and through the outyear POM dollars.

Mr. SHAYS. Let me do this. Let me just go through one more recommendation, then let me go to Mr. Platts, who on the full committee specializes on the whole issue of management controls and so

on.

So what would be the third item that you would raise as an important item, not one that they have missed or failed to deal with,

but that you just think it is important.

Ms. FISCHER. Yes. It would be the waste and inefficiency.

Mr. SHAYS. Which one?

Ms. FISCHER. Primarily recommendation 13, and it deals with

the system changes implemented in January 2006. The recommendation says: require that DLA’s BSM system design include

adequate controls that would reject the purchase transaction or

generate an exception report when A-condition excess items are

available but are not selected for reutilization at the time purchases are made.

They have implemented a change in the system that lets them

pull in A-condition items from the excess inventory if somebody is

placing an order with DLA at the time or they need to replenish

inventory levels, but they are still working against that 2-week or

1-month period in the excess inventory pipeline before they move

it to sale. That is why, with the gasoline engines, we paid $355 in

March and the Marine Corps came along in June and paid more

than $3,000 for those same gas engines. They are not holding the

A-condition items for a longer period than they are the items needing repair or the items that are essentially junk.

Mr. SHAYS. I would like the professional staff to just followup

with that.

Mr. CHASE. Would you have a recommendation on a longer wait

time?

Ms. FISCHER. We have suggested that to them once we saw what

the January system fix encompassed and that the dollar savings

weren’t what we expected to see. We went back and looked and we

said, well, maybe you need to hold these A-condition items a little

longer to assure that they are reutilized.

Mr. SHAYS. Just then, to have you respond to that item, I was

trying to filibuster to give you guys time to think about it.

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Mr. PETERS. Congressman, when BSM release 2.2 was implemented in January. The period between January and May, the

amount of reutilized material was low. What we have done in the

month of June was DLA increased the scan, if you will, of the BSM

system of the disposal inventory, and the results during the month

of June exceeded what we incurred in the legacy system prior to

the release of BSM 2.2. In the last 5 months since that release,

there have been about approximately $1.2 million of acquisition

cost of reutilization through the BSM, and the bulk of that has

come during the month of June when we changed the cycle.

Mr. SHAYS. OK.

Mr. PETERS. Now, that doesn’t address the issue of extending the

holding period for A-conditioned assets, but it was a good step forward to maximize reuse of the property within that time constraint.

Mr. SHAYS. Thank you.

I am going to go to Mr. Platts, but I just want to tell you, Ms.

Fischer, I would like to know three other items, so we can tell DOD

so they can look at them. Have you got those three items? Just give

me the numbers. Did you only pick out three?

Ms. FISCHER. Well, I picked out three because those were of most

concern to us.

Mr. SHAYS. Fair enough. OK. I am going to ask you three more.

You can look at them, so you have time to look at them. If you

want to pass them a note during Mr. Platts’ conversation so they

know, that is helpful.

I am going to ask you, Mr. Kutz, what were items that you

weren’t able to buy that other people bought, because you just got

outbid, that you think would have been kind of surprising, as well,

if you know what those items were. That will be my questions. I

will try to wrap up after that.

Mr. Platts, you have the floor as long as you want it. Thank you

for being here.

Mr. PLATTS. Thank you, Mr. Chairman. I apologize for the late

arrival and being with you just for a few minutes. I am sure I will

be a little repetitive, and I will try not to be, in my questions.

Mr. SHAYS. Let me just say, Mr. Platts, you ask whatever you

want. If it is a little redundant, it will reinforce what I need to

know. I need to hear it three times before it sinks in.

Mr. PLATTS. Sounds good, Mr. Chairman.

Mr. SHAYS. OK.

Mr. PLATTS. First, our subcommittee, Government Management

Finance Accountability, a big focus—and, Mr. Kutz, you have been

with us a good number of times—is in the area of internal controls.

And what, to me, we are really talking about here is a breakdown

in internal controls in some fashion, whether it be technological,

personnel, the review process, but somehow we are letting items

go, either at amazingly low prices that are appropriately being sold

but not at a fair price, or they shouldn’t be sold, or they are being

given away. But somewhere there is a breakdown.

I guess I want to start with a broad question really to our officials both in uniform and civilian from the Departments. The OMB

had issued internal control regulations this past year requiring

every department and agency to do an internal control review of

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their processes and kind of, if necessary, it would lead eventually

to perhaps an audit of internal controls. Where in that process does

DLA stand in regards to this OMB regulation?

Mr. PETERS. Congressman, if I may respond, we are actually in

the process right now of finalizing that internal control review report for this year, and the internal operational review that I had

talked about earlier during the hearing, we have reflected that in

our written response this year to lay the foundation that there are

internal control weaknesses and to lay the foundation that, as we

move forward, that we can identify the corrective actions and then

test the outcomes of those corrective actions to ensure that they are

effective in closing those internal control weaknesses.

Mr. PLATTS. In where you are in that review that has gone on

thus far, I am assuming that some of those breakdowns relate directly to what has happened here with GAO?

Mr. PETERS. Yes, sir, they do.

Mr. PLATTS. And, while that process—I guess the deadline I

think is November 15th as part of the other reports coming forward. In the meantime, you have taken action based on what you

have identified, even while you are not at that deadline for the reporting; is that correct?

Mr. PETERS. That is correct. We began the review process of

those vulnerabilities and gaps before this period, and the documentation that is due this summer is reflecting that action. Specifically as it relates to these items in front of us, many of those items

came from batch lots, which is a real risk, an inherently risked

process that exists.

Mr. PLATTS. They came from—say that again?

Mr. PETERS. From batch lotting of items.

Mr. PLATTS. OK. Great.

Mr. PETERS. And it also came from a breakdown in procedures

where items that the GAO found were not in batch lots but had

line item visibility throughout the process, and so those are the

weaknesses that we are attempting to address.

Mr. PLATTS. I am not sure if it is a weakness or just a lack of

occurring as far as from a training standpoint, both with civilian

officials or on the military side. With the antenna and Chairman

Shays’ reference in his opening statement, the antenna as a kind

of a classic example of the problem here, is there training to all individuals, whatever the level in the personnel ranking, that if you

see that item that is about to go out the gate, whether you are the

one that signed off for it and said yeah, it is to be given away or

sold, is there any training of all personnel that if you see something that seems like it is too good of a deal, too good to be true,

or it is too sensitive to be thought of just driving out the gate, that

there is a reporting system in place like an 800 number? If you believe there is something askew here, here’s where you should go,

is that in place today?

Mr. PETERS. It is not in place today. What I have directed since

my arrival is that we look at what I would call a job proficiency

training curriculum for each employee within the DRMS disposal

system. Historically, your specific job would identify the types of

training classes that you would obtain. Based on our internal review, one of the weaknesses I believe that we need to shore up is

103

that, even if you have been with DRMS for a long period of time,

refresher training is important, just as it would be for new training

for a new employee, and that is what we are in the process now

of developing is that curriculum.

Mr. PLATTS. I think it seems—and, again, not hearing all the testimony—it has to be part of the breakdown, that there is not a buyin by every person on the staff at all levels that in any way is involved with this reutilization program and the distribution or selling of it, that isn’t kind of on guard to look for these breakdowns.

Mr. PETERS. Congressman, I concur completely, and when I directed the internal review of the vulnerabilities and gaps from the

moment that DRMS would receive an item through the disposition

of that item, I brought in the senior disposal experts from the field

to ensure that we began the process of having them to help identify

those weaknesses—they are the closest to the ground—and to ensure that they help identify the corrective actions.

Mr. ESTEVEZ. Congressman, if I could add a point.

Mr. PLATTS. Yes.

Mr. ESTEVEZ. Because the disposal process starts out at the unit

that has excess material and codes it and turns it in. We issue Department-issued guidance to the military services to reemphasize

the training requirements of disposal personnel. Those tend to be

military people that rotate at a junior grade, so it has to be a continual process on this.

This may be one of the items that Ms. Fischer is going to raise

in a moment. Those services have come back and committed what

they are doing to reemphasize that training, and this whole process—I chair a group of the service logistics chiefs. This is a continual discussion topic within that group, so we are trying to emphasize do the right thing.

Mr. PLATTS. That focus on the internal control process and then

the training to me are hand in hand. I know in our other efforts

we found, not just in this case with property reallocation or distribution, that it is key to getting to that bedrock foundation of

good management.

The chairman kind of touched on this a little bit. I don’t know

if it has been addressed earlier. But we certainly, in not having to

reinvent the wheel any time is good, especially when we are talking about taxpayer funds being spent, and then also the sensitivity

of the products here.

Is there any kind of ongoing dialog between the procurement and

logistic officials at Wal-Mart or Home Depot or Lowe’s? You go into

one of these national chains today, and if there is a shelf with an

empty spot somebody comes over with the computer, they scan the

bar code, and they say, yes, we have one that is coming in in 3

days. It has been shipped, is being restocked. They are amazing in

their logistical handling of goods, both in and out of their stores.

Is there any interaction that happens between the public, your

agencies, and the private sector? And I don’t mean in the sense of

hiring a consultant, but just reaching out to these American corporations to say hey, we would like to pick your brains and maybe

get your insights?

Mr. ESTEVEZ. Congressman, absolutely. I am fortunate to have a

lot of interaction with the folks from Wal-Mart and Proctor and

104

Gamble, Toyota, a number of other leading companies that do supply chain management very well to see how they do it.

Our business is different. War fighting is a different model, different operation. We are going to have more inventory than they

have because it is more important to have a weapon system operating and to have a little bit of excess because we don’t know when,

where, how much they tend to. But we do take their best ideas and

see how best we can implement them within the Department of Defense.

Let me point out from the disposal standpoint almost every one

of those companies completely outsources their returns process. So

an item gets returned to a store, they give it to a third party to

assess what to do with that item, and that item is likely to end up

in an outlet mall, not back on the shelf at a Wal-Mart or a Target.

Mr. PLATTS. Right. I am glad to hear that interaction is going on

where it applies. And I readily acknowledge there is a similarity

in the time sensitive nature because they want their product on the

shelf when I am there to buy it. They want to have it ready. And

your military personnel, when they need that weapon, they need

whatever that supply is, it is there so that they are in the best position in their war fighting efforts.

On the reutilization program, is there an annual budgetary goal

that is set at the beginning of the year that is expected to be met

or hoped to be met?

Mr. SHAYS. If the gentleman would just suspend for a second,

have we passed on those three recommendations to DOD so they

know what the other three recommendations are that we are going

to be asking them about?

Ms. FISCHER. Not yet.

Mr. SHAYS. Do you have them?

Ms. FISCHER. Yes.

Mr. SHAYS. Why don’t you share that with them. What are those

numbers?

Ms. FISCHER. Recommendation——

Mr. SHAYS. Just tell me the numbers.

Ms. FISCHER. No. 4 and No. 5 and No. 6.

Mr. SHAYS. Four, five, and six. OK. You can just take a look at

that, whoever is not answering the question. I am sorry to interrupt.

Mr. PLATTS. Thank you, Mr. Chairman.

Mr. PETERS. Congressman, the DRMS goal for reutilization of

condition code A property is 30 percent of our dispositions. If you

look at the last 12 months, that goal has not been reached each

month, but it is a stretch goal, but there have been several months

where that goal has been reached and that is the baseline goal that

we strive for as we currently know the process.

If you look at overall reutilization, more than just condition code

A, we have increased that to 14 percent of our dispositions, and

that in original acquisition cost represents over $1.5 billion of acquisition cost that was not new acquisition.

Mr. PLATTS. The reason I am asking is just that I want to make

sure that we are not having goals set that are encouraging the sale

of equipment to meet an arbitrarily set goal, and that sounds like

there are some numbers, expectations, but it is not in the sense

105

of—I will use the example where you will hear citizens talk about

the police officer needs to meet his quota for tickets this month, so

there is an incentive to go out. Here there is no quota that is expected, but just what we anticipate?

Mr. PETERS. Yes, sir. We do have the goal. If you were to annualize our fiscal year 2006 year to date it is running at a 21 percent.

If you look at it each month, as we do, several months we have hit

30 and several months we have been lower than that. So 30 is a

good stretch goal, and we monitor and measure it each month.

Mr. PLATTS. Thank you, Mr. Chairman, for your oversight, and

I want to thank all of our witnesses for your service to our Nation

and your respective roles. I think our common goal in this hearing—and Chairman Shays has been outstanding in the oversight

efforts on this issue—is the bottom line is, one, especially in the

area of war fighting and the military, that we are getting whatever

our men and women out there who are courageous in their service

need. We get it to them when they need it and they have it and

we don’t repeat the example of what some of chem-bio suits where

there was a shortage that we are selling, that we never repeat

those errors, and, two, that we are doing right by the American

taxpayers.

So I appreciate your efforts and your service, and for all of you,

and, General Williams, especially, your service in uniform, believing that, while we all are public servants, those who wear the uniform are the cream of the crop, and your dedication.

The fact that I am a Baltimore Orioles fan, I saw you are from

Baltimore, you have to be an Orioles fan if you grew up in Baltimore, right?

General WILLIAMS. That is affirmative, sir.

Mr. SHAYS. That is a very important question. What was the answer to that question?

Mr. PLATTS. It is a little harder to be an Orioles fan nowadays

than when I was growing up. Brooks Robinson and those great

players of the past are gone. But I do sincerely thank all of you,

because we are all after the same goal, and that is good Government and support for our men and women in uniform.

Chairman Shays, thanks again for your efforts on the oversight.

Mr. SHAYS. I thank the gentleman. Just remember the promise

of America is the best generations are yet to come, so there is hope.

Four, five, and six. I would like you to read four, and I would

like DOD to respond to four. Would you read it nice and loud,

please?

Ms. FISCHER. OK. Direct DRMS to develop written guidance and

formal training to assist DRMO personnel and military service

turn-in generators in the proper assignment of condition codes to

excess property turn-ins.

Mr. PETERS. Congressman, if I may respond?

Mr. SHAYS. Sure.

Mr. PETERS. In the past year DRMS has met with each of the

four military services, including 30 major commands within those

four services, to not only review the outcomes of the GAO reports

in prior years, but also to discuss with them the importance of accurate condition coding. As the generator, they own the asset, they

turn it in because they have declared it excess. The more they unVerDate 11-MAY-2000 10:51 Jul 23, 2007 Jkt 000000 PO 00000 Frm 00109 Fmt 6633 Sfmt 6633 C:\DOCS\35341.TXT HGOVREF1 PsN: HGOVREF1
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derstand and appreciate the value of the reutilization program and

the more accurate that supply condition code is, the greater confidence they will have to rely upon an item out of the disposition

or out of the disposal inventory.

We have an ongoing dialog with them. We have now gone to the

second round of meetings with the services where we are now looking at their data with them to identify if there are actions that either we can take or some facilitation that we can help them as they

continue their effort to improve the accuracy of their condition

code.

In addition to that, we are developing a training curriculum that

they can insert into their military schools, so as their military

members come into the logistics arena, disposal will not be an

afterthought. It will be a pre-conscious event.

Mr. SHAYS. Is there one place where you train all the different

personnel of the different branches on logistics and inventory

chain?

Mr. PETERS. No, sir. At this point in time the actions that have

been completed to date have been the discussions with the military

services and those major commands and the development of the

training curriculum. There is a 2-year cycle for us to work with the

military services to insert that curriculum into their military

schools.

We do provide, on a demand basis, disposal experts to come in

at the appropriate windows in certain military school instructions

to provide instruction on the disposal process.

Mr. SHAYS. But we are not training all military personnel, just

the ones that need to know, correct?

Mr. PETERS. Just the ones that need to know, sir.

Mr. SHAYS. We sometimes obviously send folks to graduate

school and so on. Do we send them to graduate schools where they

can take specific courses in this inventory control type concern?

Mr. PETERS. For the DRMS personnel, yes. We participate in the

training curriculum that DLA has. We put in nominees for those

types of schools.

When I mentioned earlier to Congressman Platts the development of a job proficiency training curriculum is what we are in the

process of establishing now, and those types of opportunities to use

commercial schools will be part of the development of that curriculum.

Mr. SHAYS. Recommendation five? In each case it says the GAO

recommended the Secretary of Defense, and then you read——

Ms. FISCHER. Direct the military services to provide accurate excess property turn-in documentation——

Mr. SHAYS. This is No. 5, correct?

Ms. FISCHER. That is No. 5.

Mr. SHAYS. OK. Direct the Secretary of the Army, Navy, and Air

Force——

Ms. FISCHER. I am sorry. You wanted me to back up in the leadin? We recommend that the Secretary of Defense direct the Director of DLA, the Commander of DRMS, and the Secretaries of the

Army, Navy, and Air Force, as appropriate, to take the following

13 actions, and recommendation No. 5 was with respect to directing

the military services to provide accurate excess property turn-in

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documentation to DRMS, including proper assignment of condition

codes and national stock numbers, based on available guidance.

National stock numbers are key to identifying the demilitarization

code.

Mr. SHAYS. What I am reading, though, it says the Secretary of

Defense direct the Secretaries of the Army, Navy, and Air Force to

direct the military services to provide accurate excess property

turn-in documentations, and so on. What is the answer to this one?

Mr. ESTEVEZ. We issued guidance to the military staffs that operate their supply systems, their supply processes, my counterparts,

essentially, to issue that kind of guidance and to come back to us

for what they were doing for training to ensure that proper documentation and proper coding was issued, and also, frankly, for No.

6, which deals with the accountability of material.

Mr. SHAYS. Let me read No. 6. The GAO recommended the Secretary of Defense direct the Secretaries of the Army, Navy, and Air

Force to require the military services to establish appropriate accountability mechanisms, including supervision and monitoring for

ensuring reliability of turn-in documents.

Mr. ESTEVEZ. That is correct, sir. Each of the services, to your

earlier question, does have training courses for the enlisted and

noncommissioned officer personnel that actually would do the turnin. This is part of the curriculum in those courses. They also emphasize this at the officer level that are operating their supply

agencies. Each service does it slightly differently, so each service,

based on their business operation process. An Army unit is going

to be different from a Navy ship, for example. Each of the services

at the two-start level came back explaining where that is in their

curriculum, how that is covered in their curriculum, and what they

are doing to ensure that this documentation is proper.

Mr. SHAYS. Thank you. I am going to ask GAO one last question

as it regards to recommendation. I would like to know where you

think, of the 13 recommendations, which one they have had the

greatest success and which one, to date, they have had the biggest

failure.

Mr. KUTZ. I think with respect to the people and process related

ones, which are the front ones, that is where the most progress has

been made, so that has been numbers one through——

Ms. FISCHER. One through six.

Mr. KUTZ [continuing]. One through six, and seven through ten.

I think that the BSM, which is the new system that they are developing, and some of those are more long term. There has been some

progress in those areas, but I think that the system, the integration type of fixes are ones, as you know from your prior hearings,

are ones that aren’t necessarily short-term and those aren’t problems that these folks caused in the first place, I know.

Mr. SHAYS. Before I have the professional staff just ask the last

question, before I ask you a very general question afterwards, Mr.

Kucinich and I were talking about it. We are both hoping to come

back. One of us may, one of us may not, maybe both of us don’t

come back, but likely one of us comes back. I don’t know if it is

a Republican Congress next year or a Democratic Congress next

year, but Mr. Kucinich and I both agree there will be another hearing a year from now.

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To me, the best report and the thing that would make me the

happiest is, when we task GAO to break through the system to find

weaknesses, they are going to try to do it and we are happy to tell

you what my hope is they come back and say we tried this, we

failed, we tried this, we failed, we tried this, we failed, we tried

this, we failed. We will have a hearing with nothing on these tables. We will put all the tables up there.

You know what? That will be a good day for you in the Defense

Department, it will be a good day for GAO, and we will say at the

fifth hearing, congratulations. That would be, to me, what will happen. But whether it is me or Mr. Kucinich, that hearing will happen. I think it is important to think about it right now, and I think

you have enough time to deal with it, frankly. I think you have

started that process and that would be good for you to be able to

come back, to be able to get applause rather than criticisms.

You have one last question?

First, we want to put on the record your report of July 2006, and

we want to put on the record all 13 recommendations of your May

2005, report.

[The information referred to follows:]

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Mr. CHASE. Either to Mr. Estevez or to the General, General Williams, GAO reported in the report that they released today that in

a 3-month period the Department, DLA, saved $34.8 million in new

marketing techniques. Could you tell us a little bit about that?

What were these new marketing techniques? And have you projected out what the future savings might be for the next fiscal

year?

Mr. PETERS. Congressman, if I may respond?

Mr. SHAYS. Mr. Peters.

Mr. PETERS. I believe that, unless I have misunderstood the

question, I believe that the new marketing techniques, as it pertains to the enhancement of reutilization material, we have implemented the ability for item managers in the services to identify up

to 10,000 line items of items that they would have an interest in

acquiring. When that item shows up in the disposal inventory, that

alone has generated over 5,600 requisitions, and actually $54 million up to this point.

We have also implemented the ability to notify a prior buyer, not

a public buyer but a military service member, of items that they

have previously reutilized out of the inventory system. We send an

e-mail notification to them to say hey, that item is now in the inventory again. Since we have done that, we have had 600 requisitions with approximately $3.8 million of acquisition value.

And the last item is we have just recently added rotating photos

to improve the visibility of an item. This helps to reinforce the accurate condition coding of that item. A picture is worth more than

just trust the system. And in the course of that, we have had 140

requisitions since we have implemented those rotating photos. That

has yielded approximately $32 million as a result of that.

Those are three enhancements to strengthen the reutilization

program. They have been very successful. I believe that they are

directly attributable to the improvement that has been made, particularly in fiscal year 2006, toward that $224 million of original

acquisition cost through the reutilization of condition code property.

Mr. SHAYS. Mr. Kutz, I did forget that I was going to make sure

you put on the record what you couldn’t buy because you were outbid that needs to be on the record.

Mr. KUTZ. OK. Let me go through a couple of them. There were

several of them that were more of the military technology items.

One was a——

Mr. SHAYS. And military sensitive?

Mr. KUTZ. Yes. One was a universal frequency counter similar to

the one on my left that we also later purchased, but some of the

early purchases we were outbid. The other military sensitive one

was an optical instrument lens for an M–901A anti-tank vehicle,

and this is one that is, again, national security item. We bid $550

and it sold for $909, and so that is one we lost out on.

Mr. SHAYS. Could you have bid $900 if you wanted to?

Mr. KUTZ. Sure. Yes. We just didn’t. It is kind of like eBay. You

put an automatic bid in and if someone overbids you, you lose out.

Mr. SHAYS. So you are not able the know their bid and then bid

a higher?

Mr. KUTZ. We could have. If we were there at the time we could

have outbid, but we put an automatic bid in.

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Mr. SHAYS. Gotcha.

Mr. KUTZ. But we didn’t want to bid more than that on this one

anyway.

Mr. SHAYS. I understand.

Mr. KUTZ. The other items related to cold weather parkas, and

then there were some stainless steel pans that are similar to what

you see at, like, a hotel that are used to serve food. We were outbid

on a number of those that were new and unused.

Mr. SHAYS. OK. So you all have been very cooperative. Mr. Peters, I appreciate you being cooperative, as well. Thank you very

much. We had a little more difficult exchange, but I appreciate you

not wanting to be the first, but I appreciate you joining in afterwards.

Let me just ask you anything we should put on the record that

we didn’t put on the record, that we need to put on the record, anything that you had maybe stayed up last night thinking well, gosh,

this should be something I should respond to? Is there any tough

question that we didn’t ask that we should have asked you? So

whatever you want to say. We will start with you, Mr. Ryan.

Mr. RYAN. Mr. Congressman, I think I would ask DLA and the

General—and I appreciate what the general is trying to do to make

sure the items don’t get out the door, but I think I would suspend

all sales except for A demil items until they have gone through this

process. The general talks about oversight and searching these

batch lots and making sure that the proper demil codes are identified. I guess in order for this to take place I think I would suggest

suspending all sales except for demil A.

Mr. SHAYS. OK.

Ms. Fischer.

Ms. FISCHER. Yes. I would agree with that, and I would add that

the Federal logistics information system, which is the system that

contains the master information on demilitarization codes, be used

to always check the demil codes. There is a problem within the excess inventory system on the demil codes in that, and when they

challenge a demil code that system sometimes is giving them the

wrong answer. So I would say that they need to go use the DOD

standard.

Mr. SHAYS. OK.

Mr. Kutz.

Mr. KUTZ. I would just say we all want to see the same thing

here. We are all looking for progress and solution. I just want to

commend you for the consistent oversight you have had on this, because you could have walked away after one or two hearings but

you have stuck at it and I think it was worthwhile.

Mr. SHAYS. Thanks.

Mr. Estevez.

Mr. ESTEVEZ. Mr. Shays, thank you for the opportunity to testify.

I believe we are making progress. I think we have a long way to

go, and we are committed to making that progress. I also look forward to the day where we have this hearing with nothing in front

of us. Hopefully that will be soon.

Mr. SHAYS. Let me just tell you we will have that hearing, because we want it to be clear that we have made that progress and

we would be proud to see that progress.

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Major General.

General WILLIAMS. Sir, my goal is to provide an aggressive oversight against a timeline that will get at fixing this particular problem. So we understand the problem, let’s fix it. I, as you, don’t

want to see anything here. Now, if there are a couple of items I

should be able to clearly defend that we did to the best of our ability to mitigate the risk but a couple items due to human error happened to get through the process. But the goal is 100 percent no

demil item getting into the wrong hands, sir.

Mr. SHAYS. Thank you, sir.

Mr. Peters.

Mr. PETERS. Congressman, since I have taken over the DRMS director position in February it has been an exciting period of time.

Mr. SHAYS. Are you happy you did it?

Mr. PETERS. Yes, sir, I am.

Mr. SHAYS. OK.

Mr. PETERS. I think it is exciting to be part of fixing something,

and these problems have existed for a long time. I think we are

taking the right steps. We are taking this seriously. It is going to

require a true re-engineering of that disposal system, not just point

to point fixes, and that is going to take time.

So at the hearing next year I, too, would like to see no items, but

I also, because I know that the amount of work that remains to be

done and the time and effort that it is going to take to cause that

to happen, I hope that my expectation next year is that the GAO

will be able to report to this subcommittee that we have made significant progress and that we did what we said we would do here

this day.

Mr. SHAYS. Thank you, sir.

With that, we will adjourn the hearing. We thank you all and appreciate your patience. It has been a long afternoon, but thank you

very much. With that, this hearing is adjourned.

[Whereupon, at 5:02 p.m., the subcommittee was adjourned.]

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