The Center for Public Integrity

Following the extraordinary success of the Washington-based Carlyle Group, which has built a private equity empire that's earned billions for its investors, a number of firms have lined up rosters of former government officials and high ranking military officers as they pursue companies that are in the national security business.

Carlyle, which ranked as the ninth largest Pentagon contractor from 1998 to 2003, has made billions of dollars by investing in the defense sector. A team of high-powered former Washington insiders, including Frank Carlucci, who served as secretary of defense in the Reagan administration, and James Baker, who served as George H. W. Bush's secretary of state, led its pursuit of defense deals. (See related report, "Investing in War.")

More than a half dozen companies are now following in the footsteps of Carlyle by signing up former high-ranking government and military officials as they try to make inroads into the Pentagon and the newly-created Homeland Security contracting business.

The blue-chip political talent these private equity firms have lured include five of the past nine defense secretaries, two secretaries of state, two national security chiefs, two CIA directors and dozens of distinguished retired military officials.

A dozen companies in which Carlyle had a controlling interest netted more than $9.3 billion in contracts.

Overall, six private investment firms, including Carlyle, received nearly $14 billion in Pentagon deals between 1998 and 2003. (See related report, "The Sincerest Form of Flattery.")

From its founding in 1987, the Carlyle Group has pioneered investing in the defense and national security markets, and through its takeover of companies with billions of dollars in defense contracts became one of the U.S. military's top vendors, ranking among better known defense firms like Lockheed Martin, Boeing Co., Raytheon Co., Northrop Grumman and General Dynamics.

Unlike those firms, however, the Carlyle Group itself is not a manufacturer. It offers no services directly to the Pentagon, and has no defense contracts. Rather, it manages investments—some $18.4 billion from 600 individuals and entities in 55 countries, according to its Web site. The firm's business is making money for these investors, the vast majority of whose identities are not disclosed to the Securities and Exchange Commission or other government bodies.

Though Carlyle itself has won no contracts, the companies it has owned or controlled have done billions of dollars worth of business with the Pentagon. The Carlyle unit that brought in the largest share—$5.8 billion—was United Defense Inc., which manufactures combat vehicles, artillery, naval guns, missile launchers and precision munitions. United Defense also owns the country's largest non-nuclear ship repair, modernization, overhaul and conversion company, United States Marine Repair Inc. Its most famous product may well be the Bradley fighting vehicle. United Defense brought in more than 60 percent of Carlyle's defense business.

Carlyle took United Defense public in 2001; by April 2004 it had sold all its shares in the company.

Documents obtained by the Center for Public Integrity show that the Army Corps of Engineers ignored sharp objections by its top procurement official concerning Halliburton contracts in Iraq and the Balkans.

The most recent controversy surrounds the extension of a troop-support contract in the Balkans held by Kellogg, Brown & Root, a Halliburton subsidiary. Bunnatine Greenhouse, the contracting official, objected to the 11-month extension worth an estimated $165 million because she felt it was not justified. She has asked for an independent investigation of possible procurement fraud.

Time magazine broke the story regarding Greenhouse's allegations last week. Since then, the Center has obtained additional documents—none of which was originally included among those the Army Corps supplied to the Center in response to a Freedom of Information request and follow up lawsuit against the Corps. The new documents include the letter Greenhouse's lawyer sent to Les Brownlee, the acting Army Secretary. That letter mentions that Greenhouse came under pressure from individuals "associated with favorite companies" and experienced "repeated interference" when dealing with KBR. The documents also contain internal Army Corps e-mails and a version of the justification review document which includes notes from Greenhouse such as "Not a valid reason for extension" and "I cannot approve this."

One of the biggest contracts awarded in the war in Iraq went to Kellogg Brown & Root, a key subsidiary of Halliburton Co., the firm Vice President Dick Cheney ran as CEO before he stepped into the White House and became one of the prime movers urging the president to invade Iraq. Of the $4.3 billion in defense contracts Halliburton won in fiscal 2003 only about half were awarded based on competitive bidding. Another $1.9 billion in contract dollars was awarded on the basis of "urgency" without bidding and without going to any other contractors.

The connection between Halliburton and the Vice President has led to no end of speculation about how that particular firm was chosen. While this report does not address that issue specifically, it does examine the practice of awarding no-bid contracts to well-connected defense contractors. Indeed, one might pose a new question on the role of contractors in the American military: Was the war in Iraq an example of the Pentagon's new way of doing business, or was it an outgrowth of a way of doing business that has been much longer in duration, albeit conducted off the field of battle without a worldwide—or even any—audience?

To find the answers, the Center began in early 2004 to investigate the patterns of Defense Department contracting. Our prime source was the Pentagon's own procurement databases—public information that had been posted for years on an obscure Defense Department Web site.

Titan is not alone. Thirty percent of all defense contract money reported as going to small businesses and special minority-owned businesses has ended up in the hands of the top defense companies, the Center for Public Integrity has found.

Between 1998 and 2003, the Pentagon awarded more than $47 billion in contracts designated for small businesses to companies that have each earned more than $100 million from Defense Department contracts alone during that six year period.

More than half of the top 100 defense contractors—55 of them in all—received at least $10 million in contracts with small business designations over the past six years. All told, the small business contracts won by the largest defense firms amounted to $9.3 billion, the Center found.

Titan, the 34th largest defense contractor, has received more than half a billion dollars in preferential small business contracts by absorbing smaller companies and continuing to win awards on their small business contracts. This large amount accounted for 23 percent of the $2.39 billion in defense contracts the company received from 1998 to 2003.

Nearly 45 percent of Titan's small business awards came in the form of small business set asides, which not only carry a preferential classification for government contracting, but are exclusively reserved for small companies. Nearly 80 percent of the $176 million Titan received from 2000 to 2003 through awards on contracts SenCom Corp. won were recorded as funds set-aside to go to small businesses.

"We have no problem with the government procurement systems and how they handle these things," Titan spokesperson Ralph 'Wil' Williams told the Center.

Beltz Newtech specializes in roofing, exterior commercial painting and even does some waterproofing. Beltz said he started the company 30 years ago after working as a school teacher and operates it with his wife, Karen, who is the company's vice president.

Beltz told the Center for Public Integrity he was unaware that the Pentagon reports his company as the recipient of a $245 million, cost plus contract that calls for working on large blast thermal simulators while providing "nuclear effects services" at White Sands Missile Range in New Mexico.

"I guess they made some type of mistake," Beltz told the Center. "Either that or they got me mixed up with another company."

Beltz's contract listing by the Department of Defense is indeed a case of mistaken identity—one of hundreds of errors the Center found while going through the Pentagon's database of awarded contracts.

A Center analysis of the Defense contracts database found there have been more than 2.2 million records entered during the past six years detailing more than $900 billion in Pentagon spending. But these records often have minor errors that are attributable to the Defense Department's antiquated system that was set up decades ago.

In the case of Beltz's company, the Pentagon confused the small roofing contractor with the New Mexico Technology Group, LLC, which is located on an Army base in White Sands, N.M., rather than in a house near a golf course in Hilton Head, S.C. But both companies do share similar shortened company names: Newtech and Newtec, respectively.

The case of mistaken identity was repeated 100 times during the course of four years, and the Pentagon listed Beltz Newtech, rather than New Mexico Technology Group, as winning more than $200 million of contracts.