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Supply Side
Fat Leonard Pulls the US Navy into Procurement Corruption Scandal

We’ve featured procurement corruption and fraud stories from Eastern Europe, in Africa and Asia here, but even the world’s leading free-market economy is not immune from this problem.

The vast sums of money spent by the United States military has over the years attracted various frauds, scandals and cases of corruption. The latest has an amusing aspect, but still deserves to be taken seriously – indeed, more seriously than the US authorities seem to think it should be based on their response so far.

This tale has a certain glamour to it, not least because of the presence of one main protagonist who seems to have stepped out of a fictional gangster film, or perhaps a Damon Runyon story. Leonard Francis, of Singapore-based Glenn Defense Marine Asia (GDMA), or “Fat Leonard” as he is apparently known to his friends, is a Malaysian businessman who stands almost 2 metres tall, and weighs in at over 150 kgs (350 lbs or so). He pleaded guilty last month to fraud charges, admitting bribing US Navy officers with “cash, prostitutes, Cuban cigars and Kobe beef.”

This was a decade-long scheme involving tens of millions of dollars in bribes to win hundreds of millions in business and over-payments. The Navy officers were paid in return for favouring GDMA as a supplier of “husbanding agent” services. That involves a range of of tasks for  ships visiting ports, including arranging for pilots and tugs; customs and catering; dock security; taxis; and food, fuel and supplies. GDMA was one of the largest such firms in the western Pacific, with hundreds of US Navy contracts, and indeed contracts with other navies.

The methodology for this fraud was interesting and actually quite complex. first of all, GDMA undercut its rivals in bidding processes to win the contracts, helped by insiders who would “put in a good word” on Francis’ behalf, according to the International Business Times. But the bids were so low that the Navy should have questioned whether they were realistic – the first point to note for procurement practitioners generally.

Once the contracts were won, more ships were routed to ports where his company worked by the Navy officers involved, which enabled Francis to submit fake or inflated invoices. These presumably were paid either without real checking of the detail, or via approvals from those on the inside of the scam.

So one important point well worth noting here is that procurement fraud often does not take place at the point of awarding the contract, which is probably where we often perceive the main problems to be. It can very often happen once a supplier is in place, as in this case. So robust and appropriate controls are needed in all those post-contract areas. That means we should be ensuring, for instance, that:

–  prices charged and invoiced match the contracted pricing;

–  the goods and services invoiced really were delivered; and

–  the quantity and quality of what was provided is as agreed in specification and contract.

Clearly, those checks were not in place here, so the US Navy really needs to look at its underlying processes, not just the morals of some of its officers. And on that note, what also seems shocking here is the lightness of the actions taken to date against the staff involved. Three rear admirals involved, Michael Miller, Terry Kraft, and David Pimpo have all been “censured” and are all retiring. But at the moment, that seems to be it!

There is some unhappiness on various websites with comments suggesting that if these had been more junior men, they would have been treated more seriously. Personally, I can’t quite see why they are not in prison. As we have said many times before, corruption in public procurement, wherever and whenever it takes place, is a huge problem and really needs to be treated seriously when it is discovered. But investigations are continuing, and it may well be that more Navy folk are pulled into the scandal, or that the officers already implicated see further punishment.

Voices (2)

  1. captain crunch says:

    The other issue is was the entire contracting strategy correct in the first place.
    Why put such a large quantity and variety of eggs in one, inherently-difficult-to-check basket?

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