War Profiteering: Proposed Legislation 2007 NDIA Educational Seminar San Antonio, TX March 12, 2007 Mark S. Dostal PricewaterhouseCoopers LLP Chicago, IL

Definitions Background – Excessive Profits Proposed Legislation

Profitability and Risk Panel Page NDIA Educational Seminar Merriam-Webster’s Online Dictionary Main Entry: prof·i·teer Pronunciation: \prä-fə-tir\ Function: noun Date: 1912 one who makes what is considered an unreasonable profit especially on the sale of essential goods during times of emergency — profiteer intransitive verb

Profitability and Risk Panel Page NDIA Educational Seminar Wikipedia, the free encyclopedia A war profiteer is any person or organization that improperly profits from warfare or by selling weapons and other goods to parties at war. The term has strong negative connotations. Currently, most established arms manufacturers, defense contractors, and other companies doing business with Western militaries enjoy good reputations. Many are publicly traded entities who proudly brandish their government contracts as evidence of financial strength. A company whose products are "in the fight" often advertises the fact as proof of their quality, or simply out of patriotic pride. Civilian-legal versions of certain items, such as personal firearms, knives, boots, and even vehicles are openly sought after on the legitimate market. The positions of cooks, technicians, truck drivers, and others who support military operations are increasingly becoming privatized. In this environment, simply making money from war is hardly a punishable crime. Nevertheless, those at intersection of military power and profitable business have drawn heavy criticism on moral grounds. A company seen as overstepping its bounds by putting its own bottom line ahead of the war effort or the welfare of soldiers can come in for serious attacks.

Profitability and Risk Panel Page NDIA Educational Seminar Background: Excessive Profits Under the Renegotiation Acts The Renegotiation Act, which was enacted on April 28, 1942, required contractors to provide written consent to compulsory renegotiation of contracts issued before December 31, 1945 for war goods and made express provision for a redetermination of excessive profits, as determined by the War Contracts Price Adjustment Board. In the Renegotiation Act of 1951, 50 U.S.C et seq., which amended previous versions of the Renegotiation Act, Congress set forth the means of determining the existence and extent of excessive profits in a series of guidelines known as “statutory factors.” See 50 U.S.C. App. § 1213(e). –Statutory factors required the consideration of the character of the renegotiated contractor’s business, the net worth and capital employed, and the reasonableness of the contractor’s costs and profits that were to be assembled in order to construct a reasonably accurate comparison of the contractor’s performance in the fiscal year under renegotiation with the performance of similar firms. –Statutory factors used to provide the means of identifying contractors sufficiently similar to the renegotiated contractor that were considered to be a part of the renegotiated contractor’s industry, and to determine the pricing policy and profit structure of that industry. –Reviewing authority would consider the renegotiated contractor’s efficiency, the business risks assumed by that contractor, and that contractor’s contribution to the defense effort, to ascertain how well the contractor fared against other firms in its industry on points affecting profitability in a competitive market.

Profitability and Risk Panel Page NDIA Educational Seminar Background: Excessive Profits Under the Renegotiation Acts (con’t) Pursuant to Public Law , Title V, § 501, Oct. 10, 1978 (92 Stat. 1043), the Renegotiation Act of 1951 became inapplicable to contracts performed after September 30, H.R 3020, the “War Profiteering Prohibition Act of 1985”, a bill to revise and reinstate the Renegotiation Act of Statement of Paul Math, Associate Director National Security and International Affairs Division, GAO, before the Subcommittee on General Oversight and Investigations of the Committee on Banking, Finance, and Urban Affairs (10/30/85): –Concern about increase in defense spending and ability of DoD to ensure contractor profit levels are fair and equitable. –Clear understanding that contractors must anticipate earning an adequate profit before they will invest shareholder resources to perform government contracts; significant effect on industrial base. –Profit ’76 study: low levels of profit in the 1970s believed to result in low levels of contractor investment; develop policy to encourage capital investment to reduce production costs. –Defense Financial and Investment Review (DFAIR): along the line of Profit ’76, but examined DoD financing and pricing policies as well as integration with profit policy. –GAO Recommendation: rather than reestablish the Renegotiation Board, enact legislation to provide a systematic procedure to periodically review DoD’s profit policy. GAO “Proposal for Program to Study the Profitability of Government Contractors” (11/86)

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress S. 119 – “War Profiteering Prevention Act of 2007”, Introduced January 4, 2007 H. R. 400 – “War Profiteering Prevention Act of 2007”, Introduced January 11, 2007 S. 606 – “Honest Leadership and Accountability in Contracting Act of 2007”, Introduced February 15, 2007

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress S.119 – War Profiteering Prevention Act of 2007 Introduced by Senator Leahy (D-VT) and joined by Senators Bingaman (D-NM), Harkin (D-IA), Kerry (D- MA), Lautenberg (D-LA), Rockefeller (D-WV), Dorgan (D- ND), Schumer (D-NY), Wyden (D-OR), Cantwell (D-WA), Clinton (D-NY), Menendez (D-NJ), and Nelson (D-NE). SEC. 2 Prohibition of Profiteering amends 18 U.S.C. Chapter 47 by adding at the end the following: §1039. War profiteering and fraud relating to military action, relief, and reconstruction efforts.

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress S.119 – War Profiteering Prevention Act of 2007 (con’t) (a) Prohibition- (1)IN GENERAL- Whoever, in any matter involving a contract or the provision of goods or services, directly or indirectly, in connection with a war or military action or relief or reconstruction activities within the jurisdiction of the United States Government, knowingly and willfully— (A)(ii) materially overvalues any good or service with the specific intent to defraud and excessively profit from the war, military action, or relief or reconstruction activities; shall be fined under paragraph (2), imprisoned not more than 20 years, or both;...

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress S.119 – War Profiteering Prevention Act of 2007 (con’t) (a) Prohibition- (2)FINE- A person convicted of an offense under paragraph (1) may be fined the greater of-- (A) $1,000,000; or (B) if such person derives profits or other proceeds from the offense, not more than twice the gross profits or other proceeds.

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress H. R War Profiteering Prevention Act of 2007 Introduced by Representative Abercrombie (D-HI). SEC. 2 Prohibition of Profiteering amends 18 U.S.C. Chapter 47 by adding at the end the following: §1039. War profiteering and fraud relating to military action, relief, and reconstruction efforts.

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress H. R War Profiteering Prevention Act of 2007 (con’t) (a) Prohibition- (1)IN GENERAL- Whoever, in any matter involving a contract or the provision of goods or services, directly or indirectly, in connection with a war or military action or relief or reconstruction activities within the jurisdiction of the United States Government, knowingly and willfully— (A)(ii) materially overvalues any good or service with the specific intent to defraud and excessively profit from the war, military action, or relief or reconstruction activities; shall be fined under paragraph (2), imprisoned not more than 20 years, or both.

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress H. R War Profiteering Prevention Act of 2007 (con’t) (a) Prohibition- (2)FINE- A person convicted of an offense under paragraph (1) may be fined the greater of-- (A) $1,000,000; or (B) if such person derives profits or other proceeds from the offense, not more than twice the gross profits or other proceeds.

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress S.606 – Honest Leadership and Accountability in Contracting Act of 2007 Introduced by Senator Dorgan (D-ND) and joined by Senators Bayh (D-IN), Bingaman (D-NM), Boxer (D-CA), Brown (D-OH), Clinton (D-NY), Conrad (D-ND), Durbin (D-IL), Feingold (D-WI), Feinstein (D-CA), Harkin (D-IA), Kennedy (D-MA), Kerry (D-MA), Landrieu (D-NJ), Lautenberg (D-LA), Leahy (D-VT), Menendez (D-NJ), Mikulski (D-MD), Nelson (D-NE), Obama (D-IL), Pryor (D-AR), Reid (D-NV), and Wyden (D-OR). SEC. 101 Prohibition of War Profiteering and Fraud SEC. 102 Suspension and Debarment of Unethical Contractors

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress S.606 – Honest Leadership and Accountability in Contracting Act of 2007 (con’t) SEC. 101 Prohibition of War Profiteering and Fraud amends 18 U.S.C. Chapter 47 by adding to §1039. War profiteering and fraud. (a) Prohibition- (1)IN GENERAL- Whoever, in any matter involving a contract or the provision of goods or services, directly or indirectly, in connection with a war or military action knowingly and willfully-- (D) materially overvalues any good or service with the specific intent to defraud and excessively profit from the war or military action; shall be fined under paragraph (2), imprisoned not more than 20 years, or both.

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress S.606 – Honest Leadership and Accountability in Contracting Act of 2007 (con’t) SEC. 101 Prohibition of War Profiteering and Fraud amends 18 U.S.C. Chapter 47 by adding to §1039. War profiteering and fraud. (a) Prohibition- (2)FINE- A person convicted of an offense under paragraph (1) may be fined the greater of-- (A) $1,000,000; or (B) if such person derives profits or other proceeds from the offense, not more than twice the gross profits or other proceeds.

Profitability and Risk Panel Page NDIA Educational Seminar Proposed War Profiteering Legislation, 110 th Congress S.606 – Honest Leadership and Accountability in Contracting Act of 2007 (con’t) SEC Suspension and Debarment of Unethical Contractors (a) In General- Not later than 90 days after the date of enactment of this Act, the Federal Acquisition Regulation issued pursuant to section 25 of the Office of Federal Procurement Policy Act (41 U.S.C. 421) shall be revised to provide that no prospective contractor shall be considered to have a satisfactory record of integrity and business ethics if it-- (1)Has exhibited a pattern of overcharging the Government under Federal contracts; or (2)Has exhibited a pattern of failing to comply with the law, including tax, labor and employment, environmental, antitrust, and consumer protection laws.

Profitability and Risk Panel Page NDIA Educational Seminar Other Proposed Legislation, 110 th Congress S. 274 – “Federal Employee Protection of Disclosures Act”, Introduced January 11, 2007 S. 680 – “Accountability in Government Contracting Act of 2007”, Introduced February 17, 2007 H. R. 984 – “Executive Branch Reform Act of 2007”, Introduced February 12, 2007 H. R. 985 – “Whistleblower Protection Enhancement Act of 2007”, Introduced February 12, 2007

Profitability and Risk Panel 2007 NDIA Educational Seminar San Antonio, TX