DOD Excess Property: Control Breakdowns Present Significant Security Risk and Continuing Waste and Inefficiency
Published: 2006-07-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In light of GAO's past three testimonies and two reports on problems with controls over excess DOD property, GAO was asked to perform follow-up investigations to determine if (1) unauthorized parties could obtain sensitive excess military equipment that requires demilitarization (destruction) when no longer needed by DOD and (2) system and process improvements are adequate to prevent sales of new, unused excess items that DOD continues to buy or that are in demand by the military services.
section_title: What GAO Found
paragraphs: GAO investigators posing as private citizens purchased several sensitive military equipment items from DOD's liquidation sales contractor, indicating that DOD has not enforced security controls for preventing sensitive excess military equipment from release to the public. GAO investigators at liquidation sales purchased ceramic body armor inserts currently used by deployed troops, a cesium technology timing unit with global positioning capabilities, a universal frequency counter, two guided missile radar test sets, 12 digital microcircuits used in F-14 fighter aircraft, and numerous other items. GAO was able to purchase these items because controls broke down at virtually every step in the excess property turn-in and disposal process. GAO determined that thousands of military items that should have been demilitarized (destroyed) were sold to the public. Further, in June 2006, GAO undercover investigators posing as DOD contractor employees entered two excess property warehouses and obtained about $1.1 million in sensitive military equipment items, including two launcher mounts for shoulder-fired guided missiles, several types of body armor, a digital signal converter used in naval surveillance, an all-band antenna used to track aircraft, and six circuit cards used in computerized Navy systems. At no point during GAO's warehouse security penetration were its investigators challenged on their identity and authority to obtain DOD military property. GAO investigators posing as private citizens also bought several new, unused items currently being purchased or in demand by the military services from DOD's excess property liquidation sales contractor. Although military units paid full price for these items when they ordered them from supply inventory, GAO paid a fraction of this cost to purchase the same items, demonstrating continuing waste and inefficiency.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss our recent investigation of  Department of Defense (DOD) excess property controls. This testimony is  the fourth in a series of testimonies and reports to this Subcommittee,  detailing serious breakdowns in management processes, systems, and  controls that have resulted in lost and missing property and substantial  waste and inefficiency in DOD’s excess property reutilization program.  Our June 2002 testimony and our November 2003 report documented  instances where DOD sold to the public items such as Joint Service  Lightweight Integrated Suit Technology (JSLIST) and other chemical and  biological protective suits and related gear that should have been  restricted to DOD-use only. Our November 2003 report also identified  several examples to show that at the same time DOD excessed biological  equipment items in good or excellent condition and sold many of them to  the public for pennies on the dollar, it was purchasing the same or similar  items. Our May 2005 report stated that DOD reported $466 million in lost,  damaged, and missing excess property from fiscal years 2002 through  2004, including property with demilitarization restrictions, such as  chemical and biological protective suits, body armor, and guided missile  warheads. Some of the missing restricted items had been improperly sold  to the public. Further, our May 2005 report noted that during fiscal years  2002 and 2003, the military services needlessly spent at least $400 million  to purchase new items instead of reusing identical excess items in new  and unused condition (A-condition). As a result, the new, unused excess  items were sold for pennies on the dollar while the military services paid  the full acquisition price to order these items from Defense Logistics  Agency (DLA) supply depots.
Our recent investigative tests of controls over sensitive excess military  equipment and technology items that require demilitarization focused on  determining whether (1) DOD was improperly selling these items to the  public and (2) excess property warehouse facilities had adequate security  to prevent unauthorized parties from obtaining excess military items with  demilitarization restrictions. Our investigative tests of controls for  preventing liquidation sales of new, unused excess items that DOD is  continuing to buy or that are in demand by the military services focused  on whether these items were continuing to be sold to the public. We used  publicly available information to develop undercover identities and  techniques used in our investigations. We conducted our investigations  from November 2005 through June 2006 in accordance with quality  standards for investigators as set forth by the President’s Council on  Integrity and Efficiency.
Today, we will summarize the results of our recent work with respect to  whether (1) unauthorized parties could obtain sensitive excess military  equipment that requires demilitarization when no longer needed by DOD  and (2) systems and process improvements are adequate to prevent  liquidation sales of A-condition items that DOD is continuing to buy or that  are in demand by the military services. In addition, we will highlight the  status of DOD corrective actions on the recommendations in our May 2005  report. The details of our work are included in our investigative report,  which the Subcommittee is releasing today.
subsections: section_title: Undercover Acquisitions of Sensitive Excess Military Items Identifies National Security Risk
paragraphs: Posing as private citizens, our undercover investigators purchased several  sensitive excess military equipment items that were improperly sold to the  public at DOD liquidation sales. These items included three ceramic body  armor inserts identified as small arms protective inserts (SAPI), which are  the ceramic inserts currently in demand by soldiers in Iraq and  Afghanistan; a time selector unit used to ensure the accuracy of computer- based equipment, such as global positioning systems and system-level  clocks; 12 digital microcircuits used in F-14 Tomcat fighter aircraft; guided  missile radar test sets used to check the operation of the data link antenna  on the Navy’s Walleye (AGM-62) air-to-ground guided missile; and  numerous other electronic items. In instances where DOD required an  EUC as a condition of sale, our undercover investigator was able to  successfully defeat the screening process by submitting bogus  documentation and providing plausible explanations for discrepancies in  his documentation. In addition, we identified at least 79 buyers for 216  sales transactions involving 2,669 sensitive military items that DOD’s  liquidation contractor sold to the public between November 2005 and June  2006. We are referring information on these sales to the appropriate  federal law enforcement agencies for further investigation.
Our investigators also posed as DOD contractor employees, entered  DRMOs in two east coast states, and obtained several other items that are  currently in use by the military services. DRMO personnel even helped us  load the items into our van. These items included two launcher mounts for  shoulder-fired guided missiles, an all-band antenna used to track aircraft,  16 body armor vests, body armor throat and groin protectors, six circuit  card assemblies used in computerized Navy systems, and two Palm V  personal data assistant (PDA) organizers.
subsections: section_title: Sensitive Excess Military Items Purchased at DOD Excess Property Liquidation Sales
paragraphs: Using a fictitious identity as a private citizen, our undercover investigator  applied for and received an account with DOD’s liquidation sales  contractor. Our investigator was then able to purchase several sensitive  excess military items noted above that were being improperly sold to the  public. During our undercover purchases, our investigator engaged in  numerous conversations with liquidation sales contractor staff during  warehouse inspections of items advertised for sale and with DRMS and  DLA’s Criminal Investigative Activity (DCIA) staff during the processing of  our EUCs. On one occasion our undercover investigator was told by a  DCIA official that information provided on his EUC application had no  match to official data and that he had no credit history. Our investigator  responded with a plausible story and submitted a bogus utility bill to  confirm his mailing address. Following these screening procedures, the  EUC was approved by DCIA and our undercover investigator was able to  purchase our targeted excess military items. Once our initial EUC was  approved, our subsequent EUC applications were approved based on the  information on file. Although the sensitive military items that we  purchased had a reported acquisition cost of $461,427, we paid a  liquidation sales price of $914 for them—less than a penny on the dollar.
We observed numerous sales of additional excess sensitive military items  that were improperly advertised for sale or sold to the public, including  fire control components for weapon systems, body armor, and weapon  system components. The demilitarization codes for these items required  either key point or total destruction rather than disposal through public  sale. Although we placed bids to purchase some of these items, we lost to  higher bidders. We identified at least 79 buyers for 216 public liquidation  sales transactions involving 2,669 sensitive military items. On July 13, 2006,  we briefed federal law enforcement and intelligence officials on the details  of our investigation. We are referring public sales of sensitive military  equipment items to the federal law enforcement agencies for further  investigation and recovery of the sensitive military equipment.
During our undercover operations, we also noted 13 advertised sales  events, including 179 items that were subject to demilitarization controls,  where the items were not sold. In 5 of these sales involving 113 sensitive  military parts, it appears that DOD or its liquidation sales contractor  caught the error in demilitarization codes and pulled the items from sale.  One of these instances involved an F-14 fin panel assembly that we had  targeted for an undercover purchase. During our undercover inspection of  this item prior to sale, a contractor official told our investigator that the  government was in the process of changing demilitarization codes on all   F-14 parts and it was likely that the fin panel assembly would be removed  from sale. Of the remaining 8 sales lots containing 66 sensitive military  parts, we could not determine whether the items were not sold because  DOD or its contractor caught the demilitarization coding errors or because  minimum bids were not received during the respective sales events.
section_title: Sensitive Military Items Obtained through Inside Penetrations of DRMO Security
paragraphs: Our investigators used publicly available information to develop fictitious  identities as DOD contractor personnel and enter DRMO warehouses  (referred to as DRMO A and DRMO B) in two east coast states on separate  occasions in June 2006, to requisition excess sensitive military parts and  equipment valued at about $1.1 million. Our investigators were able to  search for and identify excess items without supervision. In addition,  DRMO personnel assisted our investigators in locating other targeted  items in the warehouse and loading these items into our van. At no point  during either visit, did DRMO personnel attempt to verify with the actual  contractor that our investigators were, in fact, contractor employees.
During the undercover penetration at DRMO A, our investigators obtained  numerous sensitive military items that were required to be destroyed when  no longer needed by DOD to prevent them from falling into the wrong  hands. These items included two guided missile launcher mounts for  shoulder-fired missiles, six Kevlar body armor fragmentation vests, a  digital signal converter used in naval electronic surveillance, and an all- band antenna used to track aircraft.
Posing as employees for the same DOD contractor identity used during  our June 2006 penetration at DRMO A, our investigators entered DRMO B  a day later for the purpose of testing security controls at that location.  DRMO officials appeared to be unaware of our security penetration at  DRMO A the previous day. During the DRMO B undercover penetration,  our investigators obtained 10 older technology body armor fragmentation  vests, throat and groin protection armor, six circuit card assemblies used  in Navy computerized systems, and two Palm V personal digital assistants  (PDA) that were certified as having their hard drives removed. Because  PDAs do not have hard drives, after successfully requisitioning them, we  asked our Information Technology (IT) security expert to test them and  our expert confirmed that all sensitive information had been properly  removed.
Shortly after leaving the second DRMO, our investigators received a call  from a contractor official whose employees they had impersonated. The  official had been monitoring his company’s requisitions of excess DOD  property and noticed transactions that did not appear to represent activity  by his company. He contacted personnel at DRMO A, obtained the phone  number on our bogus excess property screening letter, and called us.  Upon receiving the call from the contractor official, our lead investigative  agent explained that he was with GAO, and we had performed a  government test.
section_title: Waste Associated with Sales of A- Condition Excess Items that Military Services Are Continuing to Use in Operations
paragraphs: Because significant numbers of new, unused A-condition excess items still  being purchased or in use by the military services are being disposed of  through liquidation sales, it was easy for our undercover investigator to  pose as a liquidation sales customer and purchase several of these items  for a fraction of what the military services are paying to obtain these same  items from DLA supply depots. For example, we paid $1,146 for several  wet-weather and cold-weather parkas, a portable field x-ray enclosure,  high-security locks, a gasoline engine that can be used as part of a  generator system or as a compressor, and a refrigerant recovery system  used to service air conditioning systems on automobiles. The military  services would have paid a total acquisition cost of $16,300 for these items  if ordered from supply inventory, plus a charge for processing their order.
Several of the items we purchased at liquidation sales events were being  ordered from supply inventory by military units at or near the time of our  purchase, and for one supply depot stocked item—the portable field x-ray  enclosure—no items were in stock at the time we made our undercover  purchase. At the time of our purchase, DOD’s liquidation contractor sold  40 of these x-ray enclosures with a total reported acquisition cost of  $289,400 for a liquidation sales price of $2,914—about a penny on the  dollar. We paid a liquidation sales price of $87 for the x-ray enclosure  which had a reported acquisition cost of $7,235. In another example, we  purchased a gasoline engine in March 2006 for $355. The Marine Corps  ordered 4 of these gas engines from DLA supply inventory in June 2006  and paid $3,119 each for them. At the time of our undercover purchase, 20  identical gasoline engines with a reported acquisition cost of $62,380 were  sold to the public for a total liquidation sales price of $6,221, also about a  penny on the dollar.
section_title: Status of DOD Corrective Actions
paragraphs: In response to recommendations in our May 2005 report, DOD has taken  a number of actions to improve systems, processes, and controls over  excess property. Most of these efforts have focused on improving the  economy and efficiency of DOD’s excess property reutilization program.  However, as demonstrated by our tests of security controls over sensitive  excess military equipment, DOD does not yet have effective controls in  place to prevent unauthorized parties from obtaining these items. For  example, although DLA and DRMS have emphasized policies that prohibit  batch lotting of sensitive military equipment items, we observed many of  these items being sold in batch lots during our investigation and we were  able to purchase several of them. In addition, DLA and DRMS have not  ensured that DRMO personnel and DOD’s liquidation sales contractor are  verifying demilitarization codes on excess property turn-in documentation  to assure appropriate disposal actions for items requiring demilitarization.
Further, although DLA and DRMS implemented several initiatives to  improve the overall reutilization rate for excess A-condition items, our  analysis of DRMS data found that the reported reutilization rate as of June  30, 2006, remained the same as we had previously reported—about 12  percent. This is primarily because DLA reutilization initiatives are limited  to using available excess A-condition items to fill customer orders and to  maintain established supply inventory retention levels. As a result, excess  A-condition items that are not needed to fill existing orders or replenish  supply inventory are disposed of outside of DOD through transfers,  donations, and public sales, which made it easy for us to purchase excess  new, unused DOD items.
Despite the limited reutilization supply systems approach for reutilization  of A-condition excess items, DLA and DRMS data show that overall system  and process improvements since the Subcommittee’s June 2005 hearing  have saved $38.1 million through June 2006. According to DLA data,  interim supply system initiatives using the Automated Asset Recoupment  Program, which is part of an old DOD legacy system, achieved reutilization  savings of nearly $2.3 million since July 2005 and Business System  Modernization supply system initiatives implemented in January 2006 as  promised at the Subcommittee’s June 2005 hearing, have resulted in  reutilization savings of nearly $1.1 million. In addition, DRMS reported that  excess property marketing initiatives implemented in late March 2006 have  resulted in reutilization savings of a little over $34.8 million through June  2006. These initiatives include marketing techniques using Web  photographs of high-dollar items and e-mail notices to repeat customers  about the availability of A-condition items that they had previously  selected for reutilization.
section_title: Concluding Remarks
paragraphs: Our most recent work shows that sensitive military equipment items are  still being improperly released by DOD and sold to the public, posing a  significant national security risk. The sensitive nature of these items  requires particularly stringent internal security controls. Our tests, which  were performed over a short duration, were limited to our observations,  meaning that the problem may likely be more significant than what we  identified. Although we have referred the sales of items identified during  our investigation to federal law enforcement agencies for follow-up, the  solution to this problem is to enforce controls for preventing improper  release of these items outside DOD. Further, liquidation sales of items that  military units are continuing to purchase at full cost from supply inventory  demonstrates continuing waste to the taxpayer and inefficiency in DOD’s  excess property reutilization program.
Mr. Chairman and Members of the Committee, this concludes my  statement. I would be pleased to answer any questions that you or other  members of the committee may have at this time.
section_title: Contacts and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Gregory D.  Kutz at (202) 512-7455 or kutzg@gao.gov. Major contributors to this  testimony include Mario L. Artesiano, Donald L. Bumgardner, Matthew S.  Brown, Paul R. Desaulniers, Stephen P. Donahue, Lauren S. Fassler, Gayle  L. Fischer, Cinnimon Glozer, Jason Kelly, John Ledford, Barbara C. Lewis,  Richard C. Newbold, John P. Ryan, Lori B. Ryza, Lisa M. Warde, and Emily  C. Wold.
Technical expertise was provided by Keith A. Rhodes, Chief Technologist,  and Harold Lewis, Assistant Director, Information Technology Security,  Applied Research and Methods.
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