November 29, 2013
Scandal Widens Over Contracts for Navy Work
By CHRISTOPHER DREW and DANIELLE IVORY
A scandal involving the Navy’s ship supply network, until now focused on the Pacific Fleet, has spread to another contractor working for Navy ships in the waters off the Middle East, Africa and South America.
The Justice Department is looking into allegations that the company, Inchcape Shipping Services, with the help of subcontractors, overcharged the Navy by millions of dollars, interviews and previously undisclosed court documents show.
Inchcape, which is owned by the government of Dubai, was suspended this week from winning new federal contracts and is expected to meet with Justice Department officials soon to discuss the case.
The civil fraud investigation, which was prompted by a whistle-blower who had worked for the company, is another serious embarrassment for the Navy, which is already grappling with a criminal investigation of its main ship supplier in the Pacific, Glenn Defense Marine Asia.
The firm’s owner, Leonard Glenn Francis, was arrested in September on charges of conspiring to bribe Navy officials with cash, trips and prostitutes. In exchange, investigators say, those officials helped divert ships to certain ports where Glenn Defense submitted inflated bills. Three Navy officials have been charged with crimes, and four others, including two admirals, have been suspended over their ties to Mr. Francis.
“It’s like finding a couple of cockroaches in the kitchen when you turn on the light,” said Charles Tiefer, a former member of the federal Commission on Wartime Contracting in Iraq and Afghanistan and a professor at the University of Baltimore School of Law. “This suggests that this area of contracting is infested with problems, including a lack of competition, overbilling and resistance to government investigations.”
Investigators accuse Inchcape of a different scheme: that it paid commissions to subcontractors willing to give large discounts, then pocketed the difference instead of refunding it to the Navy.
A federal subpoena issued in March 2011 demanded that Inchcape turn over its records involving Navy ships and any discounts or rebates from subcontractors since 2002, court records show.
A Justice Department lawyer later sent the company an email saying investigators were especially concerned about its deals in supplying six aircraft carriers and four other ships from 2005 through 2009, and about its charges for fuel in Peru and for removing waste from ships in Bahrain, Dubai and South Africa. The email, which was included in court records, asked the company for a spreadsheet listing what the suppliers charged Inchcape, what it charged the Navy, and the company’s profit margin for those and other port visits.
As was the case with Glenn Defense, contracting experts say, the Navy ignored warning signs about Inchcape’s questionable practices.
Records show that the Naval Supply Systems Command extended Inchcape’s largest contract seven times since 2010, when the Justice Department began investigating the whistle-blower’s allegations. The company has won at least $257 million for work in the Middle East under the contract. Since 2010, the Navy has awarded the firm at least eight other contracts, estimated at more than $41 million, including three this year.
The Navy said it suspended Inchcape this week after finding “evidence of conduct indicating questionable business integrity.” Rear Adm. John F. Kirby, the Navy’s chief spokesman, cited significant overpayments to Inchcape and “conduct so serious” that it warranted the suspension. Inchcape can keep its contracts while suspended, but cannot win new orders without special agency approval.
Sheila Armstrong, head of corporate communications for Inchcape, said in an email that the Justice Department investigation and the suspension involved “a small number of Navy ships between 2005 and 2008.” The company has been discussing its billings for that work with the Justice Department “with a view to bringing this matter to a conclusion,” she said.
She also said that the company had conducted an “independent audit into its billing processes in 2009 and believes that this provided full answers to all of the questions raised.”
Under federal rules, suspensions, which are rare among major contractors, are not intended to punish firms for past deeds, only for continuing problems.
The government’s subpoena in 2011 also asked Inchcape for documents about any entertainment, gifts, cameras and cellphones it had provided to Defense Department employees.
Such gifts were a major part of Mr. Francis’s case, but Admiral Kirby said there were “no indications right now” of wrongdoing by naval officers in the Inchcape case.
Inchcape, which also works for commercial shipping lines and other navies, calls itself the world’s largest independent marine management company. The firm, which has its headquarters in Britain, was bought in 2006 by Istithmar World, a subsidiary of Dubai World, a state-run investment business headed by Sheikh Ahmed bin Saeed al-Maktoum, a relative of Dubai’s ruler.
Dubai World also has stakes in Cirque du Soleil, Barneys New York and the Mandarin Oriental hotel in Manhattan.
Shortly after it bought Inchcape, Dubai World came under fire in Washington when it acquired a British company that operated several American ports. Politicians in both parties opposed the deal, contending that Dubai’s ownership of those port operations was a threat to American security. Dubai World bowed to the pressure and sold its interests in the ports.
Dubai World also tried to sell Inchcape in 2010. But the potential buyers walked away, according to news media reports, after hearing that the Justice Department might be investigating its work for the Navy.
The case started in early 2010, when a former employee filed a whistle-blower suit accusing Inchcape of defrauding the government. Under such suits, the claimants receive a percentage of any money recovered.
The Justice Department joined the suit and told Inchcape in September 2010 that it was investigating whether the company had “overcharged the Navy for its services in potential violation of the False Claims Act.”
Even though such lawsuits are sealed to protect whistle-blowers from retribution, a few records in the case were placed in a public file late last year, when the Justice Department persuaded a federal judge to order Inchcape to hand over an internal audit of some of its billing practices. Inchcape claimed that the audit, which was completed in May 2008, was protected by attorney-client privilege. But Lawrence E. Cosgriff, a former United States merchant marine officer who had been an executive at Inchcape, filed a declaration saying that Claus Hyldager, the chief executive of Inchcape, had rejected a proposal that the law firm Arnold & Porter conduct the audit.
Mr. Cosgriff wrote in his declaration that he had sent two Inchcape employees to a workshop in Dubai in December 2007, where they heard about billing practices that “caused me to be concerned that there was potential liability for fraudulent conduct.” But, he said, Mr. Hyldager “expressed dismay” that he had talked to a lawyer and decided the company would do the audit itself.
Simon Tory, the group company secretary for Inchcape, wrote in another filing that Arnold & Porter had prepared a memorandum “summarizing the potential criminal and civil liability implicated by the activities as reported.” Mr. Tory said that he oversaw the work on the audit, and that Mr. Hyldager “decided to follow up directly with some of the witnesses” to ensure the information was complete.
Mr. Cosgriff, through a lawyer, declined to comment. The company’s spokesmen said Mr. Hyldager was unavailable for an interview.
People involved in the case said Mr. Cosgriff and several other Inchcape employees left the company in 2009 after the problems appeared to recur.
Court records show that five of the 10 port visits that the Justice Department singled out as among its top investigative priorities occurred after the audit. They included a stop in South Africa in October 2008 by the aircraft carrier Theodore Roosevelt — the first visit there by an American carrier in 40 years — and three ship visits to Dubai and Bahrain in 2009.