Supply Side
Contracts with Fat Leonard and Endemic Corruption in the US Navy

Cases of fraud and corruption with some connection to the procurement world are always fascinating to those of us who have ever designed processes with a view to stopping such events, or have faced real-life examples of this behaviour (or suspected behaviour) from colleagues or suppliers.

The case we reported on back in 2015 had the added attraction of featuring the colourful character of “Fat Leonard” (Leonard Glenn Francis). He ran a business based in South-east Asia, Glenn Defense Marine Asia, that provided services for ships docking at various ports, and was a major supplier to the US Navy. But in a court case last year, he was found guilty of bribing US naval officers to make sure they chose his firm, then significantly over-charging the Navy – presumably to cover the costs of his bribes (and generate more profit for him). Bribes included cash but also the services of prostitutes.

It all sounded a bit like a Hollywood film plot, a 1950s comedy / action gangster movie maybe, but it’s now clear there was nothing even remotely humorous about this from the military’s point of view. After a freedom of information exercise by the Washington Post, it is clear that there has been endemic corruption within the navy and a failure to stop this even when it was reported to the authorities. Indeed, the level and scope of the corruption is such that you have to wonder whether this is an isolated case or just the tip of the iceberg. Are other suppliers also corrupting the navy contracting process? Here is how the Post summarized the case.

“The Navy allowed the worst corruption scandal in its history to fester for several years by dismissing a flood of evidence that the rotund Asian defense contractor was cheating the service out of millions of dollars and bribing officers with booze, sex and lavish dinners, newly released ­documents show”.

There were apparently no less than 27 investigations into the firm over the years, led by the Naval Criminal Investigative Service (NCIS) but those considering the matter were never able to gather enough evidence to take action. The first fraud complaint was made in 2006 but it was only in 2013 that Francis was arrested and charged, pleading guilty to defrauding the navy of some $35 million.

As late as 2011 his company won a $200 million contract to service warships and support vessels at ports around the Far East and Australia. That failure act for those years was also in part caused by at least one of the NCIS staff being bribed; John Beliveau tipped off Francis about the investigations and is now serving a 12-month prison sentence for his involvement. Incredibly, 200 other naval staff are still being investigated, including 30 serving or retired admirals! The Post again:

“ … staffers at U.S. Pacific Fleet headquarters were so worried about the potential for trouble that they drafted a new ethics policy to discourage Navy personnel from accepting favors from Francis. But their effort was blocked for more than two years by admirals who were friendly with the contractor, according to officials familiar with the matter”.

That last point demonstrates that corruption can occur at all and any level in an organisation. Indeed, more senior people have more power, more discretionary budget and therefore often more ability to direct spend where they want it to go. So perhaps we should not be amazed by that top-level involvement here.

But we might be surprised by why there seems to have been so little procurement involvement or competence here? Should the selection of the port services not have been a properly competed and open procurement exercise? If Francis did win competitive process, how was he able to overcharge to the degree he clearly did? One answer may be that the procurement process itself was corrupted; Paul Simpkins, a contracting supervisor, was given $350K in bribes by Fat Leonard as well as the services of prostitutes and last month got a 6-year prison sentence.

How can organisations guard against this sort of problem? Making sure decisions are taken with multiple approvals and input is key; it is much harder to corrupt multiple people than one, although Francis seems to have made a pretty good job of it here! Having a strong audit and investigatory capability is another key protection, as well as that focus on truly open, transparent and competitive procurement processes.

That final aspect of competition is key; it would be interesting to know in this case just how competitive the market was for these services. Anyway, it is rare to find quite such endemic corruption as in this case, but it all just re-inforces the need for vigilance and strong processes to guard against fraud.

First Voice

  1. bitter and twisted says:

    The other issue is the strategy of awarding all services for a large area to one supplier, especially for business that is just farming out stuff to subcontractors, has unpredictable demand, and opaque costs.