Over the past several years, we reported that serious breakdowns in management processes, systems, and controls have resulted in substantial waste and inefficiency in DOD’s excess property reutilization program. Our June 2002 testimony and our November 2003 report documented instances where DOD sold to the public items such as Joint Service Lightweight Integrated Suit Technology (JSLIST) and other chemical and biological protective suits and related gear that should have been restricted to DOD use only. Our November 2003 report also identified several examples that showed that at the same time DOD excessed biological equipment items in good or excellent condition and sold many of them to the public for pennies on the dollar, it was purchasing the same or similar items. Our May 2005 report stated that DOD reported $466 million in lost, damaged, and missing excess property from fiscal years 2002 through 2004, including property with demilitarization restrictions, such as chemical and biological protective suits, body armor, and guided missile warheads. Some of the restricted items had been sold to the public. We also reported that during fiscal years 2002 and 2003, the military services purchased at least $400 million of identical items instead of using available excess items in new and unused condition. At the time of our May 2005 report, waste and inefficiency occurred because condition codes were assigned to excess property that incorrectly identified it as unusable and DOD lacked adequate systems and processes for assuring that excess items in A-condition were reused to avoid unnecessary purchases. We also found that DOD lacked adequate security over excess items requiring demilitarization, resulting in losses reported by DRMOs of nearly 150 chemical and biological protective suits, over 70 units of body armor, and 5 guided missile warheads. Losses reported by DLA supply depots included thousands of sensitive military items, such as weapons system components and aircraft parts. Our undercover investigators purchased several sensitive excess military equipment items that were improperly sold to the public at DOD liquidation sales. These items included 3 ceramic body armor inserts identified as small arms protective inserts (SAPI), which are the ceramic inserts currently in demand by soldiers in Iraq and Afghanistan; a time selector unit used to ensure the accuracy of computer-based equipment, such as global positioning systems and system-level clocks; 12 digital microcircuits used in F-14 Tomcat fighter aircraft; guided missile radar test sets used to check the operation of the data link antenna on the Navy’s Walleye (AGM- 62) air-to-ground guided missile; and numerous other electronic items. In instances where DOD required an EUC as a condition of sale, our undercover investigator was able to successfully defeat the screening process by submitting bogus documentation and providing plausible explanations for discrepancies in his documentation. We identified at least 79 buyers for 216 sales transactions involving 2,669 sensitive military items that DOD’s liquidation contractor sold to the public between November 2005 and June 2006. We are referring information on these sales to the appropriate federal law enforcement agencies for further investigation. Posing as DOD contractor employees, our investigators also entered DRMOs in two east coast states, and obtained about $1.1 million in excess military items that required demilitarization as well several other items that are currently in use by the military services. DRMO personnel even helped us load the items into our van. These items included 2 launcher mounts for shoulder-fired guided missiles, an all-band antenna used to track aircraft, 16 body armor vests, body armor throat and groin protectors, 6 circuit card assemblies used in computerized Navy systems, and 2 Palm V personal data assistant (PDA) organizers. Using a fictitious identity as a private citizen, our undercover investigator applied for and received an account with DOD’s liquidation sales contractor. The undercover investigator was then able to purchase several sensitive excess military items that were being improperly sold to the public. During our undercover purchases, our investigator engaged in numerous conversations with liquidation sales contractor staff during warehouse inspections of items advertised for sale and DRMS and DLA Criminal Investigative Activity (DCIA) staff during the processing of our EUCs. On one occasion our undercover investigator was told by a DCIA official that information provided on his EUC application had no match to official data and that he had no credit history. Our investigator responded with a plausible story and submitted a bogus utility bill to confirm his mailing address. Following these screening procedures, the EUC was approved by DCIA and our undercover investigator was able to purchase targeted excess military items. Once our initial EUC was approved, our subsequent EUC applications were approved based on the information on file. The following discussion presents the case study details of our undercover purchases of sensitive excess military items that should have been destroyed when no longer needed by DOD and should not have been sold to the public. Although these items had a reported acquisition cost of $461,427, we paid a liquidation sales price of $914 for them—less than a penny on the dollar. Small arms protective insert. In March 2006, our undercover investigator purchased 3 ceramic body armor inserts identified as small arms protective inserts (SAPI), which are the ceramic inserts currently in demand by soldiers in Iraq and Afghanistan. SAPI are designed to slide into pockets sewn into the front and back of military vests in order to protect the warfighter’s chest and back from small arms fire. The SAPI had been improperly included in a batch lot of items that did not require demilitarization. The batch lot reportedly contained 609 items, including shelter half-tents, canteens and canteen covers, small tools, first aid pouches, insect nets, barracks bags and waterproof bags, small arms cases, miscellaneous field gear, and the SAPI. We paid $129 for the batch lot, which had a reported acquisition cost of $1,471. The SAPI have a demilitarization code of D, which requires them to be destroyed when no longer needed by DOD rather than being sold to the public. Figure 1 shows a photograph of one of the SAPI that we purchased. Time selector unit. In March 2006, our undercover investigator purchased an excess DOD time selector unit used to ensure the accuracy of computer- based equipment, such as global positioning systems and system-level clocks. According to our Chief Technologist, this technology is important because it prevents users in the battlefield from exposing their position to get timing signals from outside sources. We paid $65 for the time selector unit, which had an original acquisition cost of $343,695. Also, although the unit was listed as being in F7 condition (unserviceable, reparable condition), it appeared to be in working order. The time selector unit had a demilitarization code of D, which required it to be destroyed when no longer needed by DOD. The unit also had a FedLog controlled inventory item code (CIIC) of 7, which indicates it is a classified item that requires protection in the interest of national security, in accordance with DOD 5200.1-R, Information Security Program. Although the link on the national stock number (NSN) included on DOD’s liquidation contractor’s Internet sale Web site showed this item was assigned a demilitarization code of D, it was sold to the public as a trade security controlled item—demilitarization code B. As such, we were required to complete an application and obtain an approved EUC. Our undercover investigator submitted bogus information on his EUC application. A DCIA official contacted our undercover investigator and told him that the information on his application did not match official data and he had no credit history. After responding with a plausible story and submitting a bogus utility bill to document our mailing address, our EUC for the time selector unit was approved in April 2006. Figure 2 shows a photograph of the excess DOD time selector unit we purchased. Digital microcircuits. Our undercover investigator purchased a total of 82 excess DOD digital microcircuits, including 12 microcircuits used on the F- 14 Tomcat fighter aircraft. Because of their sensitive technology, the microcircuits had a demilitarization code of D, which requires their total destruction when they are no longer needed by DOD. The 12 microcircuits also had a CIIC of 7, which indicates they are classified items that require protection in the interest of national security, in accordance with DOD 5200.1-R. In violation of DOD demilitarization policy for D coded items, the microcircuits were improperly included in a batch lot with several other electronic items that did not require demilitarization. Further, only 12 of the 82 demilitarization code D microcircuits that we purchased were listed on the liquidation sale advertisement. We paid approximately $58 for the entire batch lot, which included a total of 591 items with a reported acquisition cost of $112,700. Because several items in the batch lot had demilitarization codes that designated them as trade security control items restricted by the U.S. Munitions List or the Commerce Control List of the U.S. Department of Commerce, an EUC was required for approval of our purchase. Our EUC for the digital microcircuits was approved in May 2006 based on our bogus information already on file. Figure 3 shows an enlarged photograph of one of the microcircuits that were improperly sold to our undercover investigator. Guided weapon radar test sets. Two guided weapon radar test sets were included in the batch lot with the digital microcircuits that our undercover investigator purchased from DOD’s liquidation sales contractor in April 2006. The test sets, which were advertised for sale as radar test sets, are used to check the operation of the data link antenna on the Navy’s Walleye (AGM-62) air-to-ground guided missile delivered by the F/A-18 Hornet fighter aircraft. The Walleye is designed to deliver a self-guided high- explosive weapon from an attack aircraft to a surface target. Because of their sensitive technology the test sets have a demilitarization code of B, which requires an EUC for trade security purposes. Figure 4 shows a photograph of the guided weapon test sets that we purchased and obtained using bogus EUC documentation. Universal frequency counter. The new, unused universal frequency counter purchased by our undercover investigator was manufactured (initially calibrated) in February 2003. DOD awarded a contract to Fluke Corporation in 2002 for 67 of these items, which are designed to count the speed at which an electrical system fluctuates. According to a manufacturer official, this item’s military application is to ensure the frequency of communication gear is running at the expected rate. The universal frequency counter has a demilitarization code of B, which requires trade security control under the U.S. Munitions List. We paid a total of $475 for this item, which had a reported acquisition cost of $1,685. In April 2006, when we purchased the universal frequency counter, DOD’s liquidation sales contractor sold a total of 15 of these items for $5,506, or about $367 per unit. The 15 items had a reported total acquisition value of $25,275, or $1,685 per unit. The bogus paperwork that we submitted with our EUC application was approved by DCIA in May 2006. Figure 5 shows a photograph of the unit that we purchased. Directional coupler. In March 2006, our undercover investigator purchased an excess military item advertised as a directional coupler from DOD’s liquidation sales contractor. We paid $186 for the sales lot, which contained a total of 8 electronic equipment and supply items with a listed acquisition cost of $1,200. According to FedLog, the directional coupler advertised had an actual acquisition cost of $1,876. This directional coupler is used in the F-14 Tomcat fighter aircraft to monitor, measure, isolate, or combine electronic signals. Because of its technology, this directional coupler has a demilitarization designation code of D, which required it to be destroyed when no longer needed by DOD. The directional coupler also had a CIIC of 7, which indicates it is a classified item that requires protection in the interest of national security, in accordance with DOD 5200.1-R. However, after receiving the item, we discovered that it was not the item identified by the national stock number in the sales advertisement. As a result, it appears that DOD not only lost accountability over the actual item identified in its excess property inventory, but advertised and recorded a public sale of a sensitive military item on the U.S. Munitions List, which was required to be disposed of by destruction in accordance with DOD demilitarization policy. We observed numerous sales of additional excess sensitive military items that were improperly advertised for sale or sold to the public, including fire control components for weapon systems, body armor, and weapon system components. The demilitarization codes for these items required either key point or total destruction rather than disposal through public sale. Although we placed bids to purchase some of these items, we lost to higher bidders. We identified at least 79 buyers for 216 public liquidation sales transactions involving 2,669 sensitive military items. We are referring these sales to federal law enforcement agencies for further investigation and recovery of the sensitive military equipment. The following discussion highlights the details of sales of sensitive military equipment items that we observed or targeted for purchase but did not obtain because we were outbid during the respective sales auctions. Optical fire control items. Our investigative team identified a January 2006 sale of excess U.S. Army Armament Command optical instrument prisms and optical lenses. DOD data showed that these optical instruments are components of the fire control sighting mechanism used in the M-901A Improved Armored Anti-tank vehicle. The M-901A fires the TOW 2 series missiles. Our Chief Technologist advised us that both the prisms and lenses are high-quality optical sighting equipment used in the fire control system of the M-901A. We made an undercover visit to one of DOD’s liquidation contractor sales facilities to inspect the prisms in January 2006. Our inspection of the items listed for sale disclosed that the property label on the boxes listed 11 optical instrument prisms with an acquisition cost of $93,093. Although the demilitarization code of Q listed on the property label for the prisms identified them as requiring trade security control as an item on the Commerce Control List, the NSN listed for the prisms in fact related to a demilitarization code of D, which required their total destruction when no longer needed by DOD. Upon further inspection, we found that the items labeled as prisms were in sealed manufacturer packages that listed them as optical instrument lenses, not prisms. The NSN associated with the 11 lenses indicated that they had a total acquisition cost of $1,859 and a demilitarization code of D, requiring their total destruction rather than disposal by public sale. The mislabeling of these items indicates that DOD may have lost accountability over both the prisms and the lenses. Both the prisms and the lenses have a controlled CIIC code of 7, which indicates they are classified items that require protection in the interest of national security, in accordance with DOD 5200.1-R. We bid $550 for the lenses and lost to a higher bidder, who paid $909 for them. Figure 6 is a photograph of one of the boxes labeled as containing prisms that actually contained lenses. Body armor. Our investigative team also identified a March 2006 liquidation sale of body armor fragmentation vests. Upon our visit to the sales warehouse, we identified a total of four body armor fragmentation protective vests in two separate sales lots. According to the NSN, all of the items sold had a demilitarization code of E, which required either key point or total destruction of the item when no longer needed by DOD. We did not bid on this sale, but have included it in our referrals to federal law enforcement agencies for follow-up investigations. Figure 7 shows a photograph of the actual body armor vest that that we observed for sale in March 2006. 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. Our investigators used publicly available information to develop fictitious identities as DOD contractor personnel and enter DRMO warehouses (referred to as DRMO A and DRMO B) in two east coast states on separate occasions in June 2006, to requisition excess sensitive military parts and equipment valued at about $1.1 million. Our investigators were able to search for and identify excess items without supervision. In addition, DRMO personnel assisted our investigators in locating other targeted items in the warehouse and loading these items into our van. At no point during either visit did DRMO personnel attempt to verify with the actual contractor that our investigators were, in fact, contractor employees. During the undercover penetration, our investigators obtained numerous sensitive military items that were required to be destroyed when no longer needed by DOD to prevent them from falling into the wrong hands. These items included two guided missile launcher mounts for shoulder-fired missiles, several types of body armor, an all-band antenna used to track aircraft, six circuit card assemblies used in Navy computerized systems, a digital signal converter used in naval electronic surveillance, and two Palm V personal digital assistants (PDA) that were certified as having their hard drives removed. Shortly after leaving the second DRMO, our investigators received a call from a contractor official whose employees they had impersonated. The official had been monitoring his company’s requisitions of excess DOD property and noticed transactions that did not appear to represent activity by his company. He contacted personnel at DRMO A, obtained the phone number on our excess property screening letter, and called us. Upon receiving the call from the contractor official, our lead investigative agent explained that he was with GAO and we had performed a government test. The following discussion presents the details of our case study requisitions of sensitive military items we obtained during our penetration of the first east coast DRMO. Guided missile launcher mounts. Posing as DOD contractor employees, our undercover investigators entered DRMO A in June 2006 and requisitioned two excess DOD shoulder-fired guided missile launcher mounts with a total reported acquisition cost of $6,246. The missile launcher mounts provide the electrical connection between the round and the tracker and contain a remote firing mechanism for the wire-guided Dragon missiles. While the Dragon has been replaced by newer technology missiles, it is a man-portable, shoulder-fired, medium antitank weapon system that can defeat armored vehicles, fortified bunkers, concrete gun emplacements, and other hardened targets. Under department demilitarization policy, missile launcher mounts have a demilitarization code of C, which requires removal and/or demilitarization of installed key point(s) or lethal parts, components, and accessories to prevent them from falling into the wrong hands. The missile launcher mounts also have a CIIC code of 7, which indicates they are classified items that require protection in the interest of national security, in accordance with DOD 5200.1-R. Figure 8 shows a photograph of one of the guided missile launcher mounts obtained by GAO. Kevlar body armor fragmentation vests. Our undercover investigators obtained six Kevlar body armor fragmentation vests with a total reported acquisition cost of $2,049 from DRMO A during our June 2006 security penetration. This body armor has a woodland camouflage pattern and was designed for use by ground troops and parachutists. Although the Kevlar fragmentation vest has been replaced by newer technology, it is still considered a sensitive military item and has a demilitarization code of E, which identifies it as critical items/materiel determined to require demilitarization, either key point or total destruction. The Kevlar fragmentation vests also have a CIIC code of 7, which indicates they are classified items that require protection in the interest of national security, in accordance with DOD 5200.1-R. Figure 9 shows a photograph of one of the fragmentation vests obtained during our undercover penetration. Digital signal converter. During the undercover penetration at DRMO A, our investigators also obtained a DOD digital signal converter with a reported acquisition cost of $882,586. The digital signal converter is used as part of a larger surveillance system on the Navy’s E2C Hawkeye early warning and control aircraft. Under department demilitarization policy, this digital signal converter has a demilitarization code of D that requires it to be destroyed when no longer needed by DOD. This signal converter also has a CIIC code of 7, which indicates it is a classified item that requires protection in the interest of national security, in accordance with DOD 5200.1-R. Figure 10 shows a photograph of the digital signal converter our investigators obtained from DRMO A. All-band antenna. Our undercover investigators identified and requisitioned a new, unused all-band antenna during their June 2006 security penetration at DRMO A. According to manufacturer information, the antenna is a high-powered portable unit that is used by the Air Force to track aircraft. The antenna can be tripod-mounted or mounted on a portable shelter. The new, unused all-band antenna, which was purchased by DOD in 2003, had a reported acquisition cost of $120,000. A manufacturer representative told our investigator that this antenna is currently in production. Under department demilitarization policy, this all- band antenna has a demilitarization code of D that requires it to be destroyed when no longer needed by DOD. This antenna also has a CIIC code of 7, which indicates it is a classified item that requires protection in the interest of national security, in accordance with DOD 5200.1-R. Figure 11 shows a photograph of the all-band antenna obtained during our undercover penetration of security at DRMO A. Posing as employees for the same DOD contractor identity used during our June 2006 penetration at DRMO A, our investigators entered DRMO B a day later for the purpose of testing security controls at that location. DRMO officials appeared to be unaware of our security penetration at DRMO A the previous day. During the DRMO B undercover penetration, our investigators obtained the following items, most of which had demilitarization requirements. Body armor fragmentation vests. Our undercover investigators obtained 10 body armor fragmentation vests with a total reported acquisition cost of $290 from DRMO B. Although the protective capability of this body armor has been superseded by newer technology, it would still provide firearm protection to terrorists or criminals. These fragmentation vests have a demilitarization code of E, which identifies them as critical items/materiel determined to require demilitarization, either key point or total destruction. Figure 12 shows a photograph of one the 10 fragmentation vests obtained during our undercover penetration. Throat and groin protection armor. Our undercover investigators also obtained a Kevlar throat protector related to the camouflage body armor. The throat protector had a reported acquisition cost of $3.35 and a demilitarization code of D, which requires it to be destroyed when no longer needed by DOD. The groin protector, which is designed to hold a ceramic insert, had a reported acquisition cost of $37.85 and a demilitarization code of D. Figure 13 shows a photograph of the throat and groin protection armor obtained during our undercover penetration at DRMO B. Circuit card assemblies. Our undercover investigators obtained six circuit card assemblies with a reported acquisition cost of $77,011 from DRMO B. The circuit card assemblies, which were turned in by the Naval Air Warfare Center, had a demilitarization code of D which requires them to be destroyed when no longer needed by DOD. A Lockheed Martin representative, who confirmed that his company manufactured the circuit cards we obtained, told our investigator that the circuit card assemblies are used in a variety of computerized Navy systems. The circuit cards also have a CIIC code of 7, which indicates they are classified items that require protection in the interest of national security, in accordance with DOD 5200.1-R. Figure 14 shows a photograph of the circuit card assemblies obtained during our undercover penetration at DRMO B. Palm V Organizer PDAs. During our undercover security penetration at DRMO B in June 2006, our investigators noticed two Palm V Organizer PDAs and accessories. The Palm PDAs had tags affixed to them which read “Certificate of Hard Drive Disposition/This certified hard drive was removed from CPU” and “Computer Casing Empty.” Because PDAs do not have hard drives, after successfully requisitioning them, we asked our information technology (IT) security expert to test them to confirm that all sensitive information had been properly removed. Our IT expert used National Institute of Standards and Technology (NIST) utilities recommended for forensic analysis to run the tests. Based on the tests, our IT expert determined that the RAM on both devices had been wiped clean of any trace of residual data, leaving only the normal information that a user would expect to find on an unused Palm V PDA. Figure 15 shows a photograph of one of the Palm V PDAs and related accessories obtained from DRMO B. 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. It was easy for us to purchase new, unused items that are in demand by the military services because of the limited scope of DOD’s actions to address this problem. Our undercover investigator used a fictitious identity to obtain a DOD liquidation sales customer account and purchase several new, unused excess DOD items that the military services are continuing to order from supply inventory or use in operations. The following discussion describes examples of the new, unused excess DOD items that we purchased. Wet-weather parkas. In March 2006, our undercover investigator purchased 10 new, unused excess DOD wet-weather parkas with the manufacturer’s tags still attached from DOD’s liquidation sales contractor. Although Army combat units have begun using an upgraded version of the parkas, they are a nondeteriorative item, and Army training units and other military services are continuing to use them in military operations. However, after the New Jersey Army National Guard turned in the unused items as excess to their needs, the parkas were transferred to DOD’s liquidation contractor for sale instead of being returned to supply inventory for reissue. We paid $87 for the 10 wet-weather parkas, which had a total reported acquisition cost of a $359. Figure 16 shows a photograph of one of the wet-weather parkas our undercover investigator purchased at the public liquidation sale. Cold-weather parkas. In May 2006, our undercover investigator purchased 10 excess DOD cold-weather desert camouflage parkas from DOD’s liquidation sales contractor. Although the parkas were listed as being in H condition (unserviceable, condemned condition), they were advertised as new. We paid a total of $373 for these 10 parkas, which had a total reported acquisition cost of $1,468. After receiving the parkas, we noted that all of them appeared to be unused and 7 of them still had the manufacturer’s tags attached. According to a Defense Supply Center, Philadelphia official, these cold-weather parkas are nondeteriorative and are currently stocked and issued to the military services. The cold-weather parkas, which were ordered in support of Operation Enduring Freedom, were turned in as excess by the Al Udeid Air Base, in Qatar. Instead of being returned to inventory for reissue, the new, unused parkas were transferred to DOD’s liquidation sales contractor. Figure 17 shows a photograph of one of the excess new, unused parkas that we purchased. Portable field x-ray processing enclosure. In April 2006, our undercover investigator purchased a portable field x-ray processing enclosure with a reported acquisition cost of $7,235. We paid $87 for this item. We received the x-ray enclosure in May 2006, after approval of our bogus Food and Drug Administration (FDA) certificate. DOD’s liquidation sales contractor requires buyers of medical and laboratory equipment items that are subject to federal regulation to submit FDA certificates as a condition of sale. On the FDA certificate, the buyer certifies that he or she is a licensed medical practitioner or person regularly and lawfully engaged in the manufacture or refurbishing of the medical device listed and agrees to assure that items resold will not be adulterated or misbranded within the meaning of those terms in the Federal Food, Drug and Cosmetic Act (codified at 21 U.S.C. Ch. 9). A manufacturer official told our undercover investigator that the x-ray enclosure that we purchased is manufactured and sold to DOD on an as-needed basis. The official stated that there is no shelf-life issue associated with this product. In addition, a Defense Supply Center, Philadelphia official assigned to the X-ray Equipment and Supplies/Biomedical Systems Office of the Technical, Quality, and Packaging Staff responsible for x-ray equipment and supply items advised us that the x-ray enclosure is currently used by the military services, and the Army is the primary user. The supply center official noted that the enclosure is a depot-stocked item. However, after checking the inventory system, the official told us that there were currently none of these items in stock. The supply center official confirmed that the enclosure has no shelf- life issues. At the time we purchased the x-ray enclosure, 40 identical x-ray enclosures with a reported acquisition cost of $289,400 were sold for a total liquidation sales price of $2,914. Figure 18 is a photograph of the excess DOD portable x-ray enclosure that we purchased over the Internet. The enclosure is stored in an oversized foot-locker-type container approximately 5 feet in length. High-security locks. Our undercover investigator purchased 20 new, unused high-security locks from the DOD liquidation sales contractor in April 2006. The locks, which were in the original manufacturer’s boxes, had a total reported acquisition cost of $1,675, and we paid a total of $59 for them. We contacted the manufacturer, whose representative told us that his company sold DLA 100 of these locks in September 2005. The representative explained that the locks are used to secure the back bay of logistics trucks. He said that his company was not aware of any problems with the locks. A U.S. Marine Corps unit in Albany, Georgia, turned the locks in as excess, and they were not returned to inventory for reissue. At the time we purchased the 20 locks, DOD’s liquidation sales contractor had advertised a total of 19 lots consisting of 480 locks for sale. Six of the 19 lots, with a reported total acquisition cost of $18,423, sold for $365. Figure 19 shows a photograph of one of the excess DOD high-security locks that we purchased in April 2006. Gasoline engine. Our undercover investigator purchased a new, unused Teledyne 4-cylinder gasoline engine in March 2006. The engine, which was manufactured in the 1990s, is part of a generator unit. It can also be used with a compressor. According to FedLog data, the engines are required to be issued until current supplies are exhausted. The item manager for this engine told our undercover investigator that DLA currently has about 1,500 of these engines in stock and they are still being issued, primarily to Army National Guard and Reserve units. He said that the Air Force and the Marine Corps also use them. He noted that the Marine Corps ordered 4 of these engines in June 2006. We paid $355 for the gasoline engine, which had a reported acquisition cost of $3,119—the amount the Marine Corp paid for each item, plus a service charge. At the time we purchased this unit, a total of 20 identical gasoline engines with a total reported acquisition cost of $62,380 were sold for a total liquidation sales price of $6,221. Figure 20 shows a photograph of the gasoline engine that we purchased. Refrigerant recovery system. In April 2006, our undercover investigator purchased a new, unused excess DOD refrigerant recovery system Model ST-100A. This is a portable system designed to recover and recycle R-12, R- 22, R-500, and R-502 refrigerants at the rate of 2 to 3 pounds per minute. According to a manufacturer representative, the unit that we purchased is designed to recover refrigerants from small systems, such as those in automotive vehicles. We paid a total of $185 for the new, unused refrigerant recovery system, which had a reported acquisition cost of $2,445. According to a Refrigerant Recovery Systems, Inc., representative, this item is still being purchased and used by DOD. The refrigerant recovery system that we purchased was likely turned in as excess by the Army Risk Assessment Modeling System (ARAMS) Project Office located in Chesapeake, Virginia. ARAMS turned in nine identical excess recovery systems in January 2006 that appeared to have been sold during the liquidation sales event at which we made our undercover purchase. These 9 refrigerant recovery systems, which had a listed acquisition cost of $22,004, sold for a total liquidation sale price of $1,140. When our undercover investigator went to pick up the refrigerant recovery system that we purchased, he found that it was stored outside and exposed to weather. As a result, the box the unit was stored in had become wet and the filters included with the unit had become soaked. Figure 21 is a photograph of the excess DOD refrigerant recovery system that we purchased. 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 orders or replenish supply inventory are disposed of outside of DOD through transfers, donations, and public sales, which made it easy for us to purchase excess new, unused DOD items. The disposal of items that exceed customer orders and inventory retention levels is an indication that DOD bought more items than it needed. In addition, several of the items we purchased at liquidation sales events were being ordered from supply inventory by military units at or near the time of our purchase, and for one supply-depot-stocked item— the portable field x-ray enclosure—no items were in stock at the time we made our undercover purchase, indicating continued waste and inefficiency. DLA and DRMS initiatives resulted in a reported $38.1 million in excess property reutilization savings through June 2006. According to DLA data as of June 30, 2006, interim supply system initiatives using the Automated Asset Recoupment Program, which is part of an old legacy system, achieved reutilization savings of nearly $2.3 million since July 2005, while Business System Modernization supply system initiatives, implemented in January 2006 as promised at the June 2005 hearing, have resulted in reutilization savings of nearly $1.1 million. In addition, DRMS reported that excess property marketing initiatives implemented in late March 2006 have resulted in reutilization savings of a little over $34.8 million through June 2006. These initiatives include marketing techniques using Web photographs of high-dollar items and e-mail notices to repeat customers about the availability of A-condition items that they had previously selected for reutilization. On June 28, 2006, we briefed DOD, DLA, DRMS, and military service management on the results of our investigations. We discussed the causes of the control breakdowns we identified with regard to security of sensitive excess military equipment and provided our perspectives on ways to address the following problems. Some military units and DLA supply depots recorded incorrect demilitarization codes to excess military property items and in some cases improperly included these items in batch lots before sending these items to DRMOs. DRMO personnel failed to verify the recorded demilitarization codes when they processed receipts of excess military property. The limited scope of DLA and DRMS compliance reviews is not sufficient to detect problems with incorrect demilitarization codes. DOD’s excess property liquidation sales contractor failed to verify demilitarization codes of items received and return items requiring mutilation or destruction to the DRMO for proper disposal. The managers told us that they shared our concern about the breakdowns in security controls that allowed sensitive military items requiring demilitarization to be sold to the public. They asked us for pertinent documentation obtained during our investigations to support their follow- up inquiries and corrective action plans. We have provided this information. In addition, the managers told us that the DRMOs rely on access controls executed by the DOD installations at which the DRMOs are located to preclude access by unauthorized parties. During our briefing, we also pointed out that because the reutilization and marketing program permits public access to DRMOs and liquidation sales locations, it is most important to confirm the identities and requisitioning authority of the individuals who enter the DRMOs to screen and requisition excess property. With regard to reutilization program economy and efficiency issues, the DOD managers maintained that forecasting the correct inventory level is difficult and that some amount of excess purchasing is necessary to assure that inventory is available when needed. They also stated that there is a cost associated with retaining excess inventory for extended periods of time. We provided DOD documentation to show that the excess A-condition items that we purchased were continuing to be ordered and used by the military services at the time of our undercover purchases. Our security tests clearly show that sensitive military equipment items are still being improperly released by DOD and sold to the public, thus posing a national security risk. The sensitive nature of these items requires particularly stringent internal security controls. Our tests, which were performed over a short duration, were limited to our observations, meaning that the problem may likely be more significant than what we identified. Although we have referred the sales of items identified during our investigation to federal law enforcement agencies for follow-up, the solution to this problem is to enforce controls for preventing improper release of these items outside DOD. Further, liquidation sales of items that military units are continuing to purchase at full cost from supply inventory demonstrates continuing waste and inefficiency in DOD’s excess property reutilization program. We provided a draft of our report to DOD for comment on July 10, 2006. The Deputy Under Secretary of Defense for Logistics and Materiel Readiness responded that given the time allotted to comment, the Department was not able to do a detailed review and has no comments at this time. However, the Deputy Under Secretary also stated that the department continues to implement changes to our procedures based on recommendations in our May 13, 2005, report. We are sending copies of this letter to interested congressional committees, the Secretary of Defense, the Deputy Under Secretary of Defense for Logistics and Personnel Readiness, the Under Secretary of Defense Comptroller, the Secretary of the Army, the Secretary of the Navy, the Secretary of the Air Force, the Director of the Defense Logistics Agency, the Director of the Defense Reutilization and Marketing Service, and the Director of the Office of Management and Budget. We will make copies available to others upon request. In addition this report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-7455 or kutzg@gao.gov, if you or your staffs have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are acknowledged in appendix IV. Department of Defense (DOD) property is assigned a demilitarization code to identify the required disposition of items when they are no longer needed by DOD. Demilitarization codes are contained in the Defense Demilitarization Manual, DOD 4160.21-M-1 (1995), which implements DOD policy to apply appropriate controls (e.g., restrictions to use by authorized parties, destruction when no longer needed by DOD) over items that have a significant military technology application to prevent improper use or release of these items outside of DOD. These items include materiel that the Secretary of Defense has designated as requiring demilitarization, articles on the U.S. Munitions List (22 C.F.R. pt. 121), and certain articles subject to export controls because they are on the Commerce Control List establish by the U.S. Department of Commerce (15 C.F.R. § 774, Supp. 1). Appendix 3 of the Manual provides the demilitarization codes to be assigned to federal supply items and coding guidance. The codes indicate whether property is available for reuse without restriction or whether specific restrictions apply, such as removal of classified components, destruction of sensitive military technology, or trade security control. The table below defines the DOD demilitarization codes. The Department of Defense’s (DOD) condition code is a two-digit alphanumeric code used to denote the condition of excess property from the supply and the disposal perspective. The DOD supply condition code is the alpha character in the first position and shows the condition of property in the Defense Logistics Agency supply depot inventory, or is assigned by the unit turning in the excess property. The General Services Administration (GSA) disposal condition code, in the second position, shows whether the property is in new, used, or repairable condition, salvageable, or should be scrapped. Staff making key contributions to this report include Mario Artesiano, Donald L. Bumgardner, Matthew S. Brown, Paul R. Desaulniers, Stephen P. Donahue, Lauren S. Fassler, Gayle L. Fischer, Cinnimon Glozer, Jason Kelly, John Ledford, Barbara C. Lewis, Richard C. Newbold, John P. Ryan, Lori B. Ryza, Lisa Warde, and Emily C. Wold. Technical expertise was provided by Keith A. Rhodes, Chief Technologist, and Harold Lewis, Assistant Director, Information Technology Security, Applied Research and Methods.

Summary: GAO's previous work found problems in security controls over sensitive excess military equipment that resulted in lost and stolen items, some of which were sold to the public, and significant waste and inefficiency in the Department of Defense (DOD) excess property reutilization program. GAO was asked to perform follow-up investigations to determine whether (1) unauthorized parties could obtain sensitive excess military equipment that requires demilitarization (destruction) when no longer needed by DOD and (2) system and process improvements are adequate to prevent sales of new, unused excess items that DOD continues to buy or that are in demand by the military services. GAO investigators posing as private citizens to disguise their identity purchased several sensitive military equipment items from DOD's liquidation sales contractor, indicating that DOD has not enforced security controls for preventing sensitive excess military equipment from release to the public. GAO investigators at liquidation sales purchased ceramic body armor inserts currently used by deployed troops, a cesium technology timing unit with global positioning capabilities, a universal frequency counter, 2 guided missile radar test sets, 12 digital microcircuits used in F-14 fighter aircraft, and numerous other items. GAO was able to purchase these items because controls broke down at virtually every step in the excess property turn-in and disposal process. GAO determined that thousands of military items that should have been demilitarized (destroyed) were sold to the public. Further, in June 2006, GAO undercover investigators posing as DOD contractor employees entered two excess property warehouses and obtained about $1.1 million in sensitive military equipment items, including 2 launcher mounts for shoulder-fired guided missiles, several types of body armor, a digital signal converter used in naval surveillance, an all-band antenna used to track aircraft, and 6 circuit cards used in computerized Navy systems. At no point during GAO's warehouse security penetration were its investigators challenged on their identity and authority to obtain DOD military property. The table below shows examples of sensitive military equipment obtained during GAO's undercover operations. 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.