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Democrat Attacks on Contractors
Posted Feb. 2, 2004
By John Berlau
Published: Tuesday, February 17, 2004

Critics protest that to be big-time government contractors, companies must operate a revolving door between themselves and the bureaucracies with which they work, effectively freezing out their smaller competitors.


Henry Waxman is outraged. Outraged. The Democrat from California who, as ranking minority member of the House Government Reform Committee, did his best to block investigations into Clinton scandals such as Chinagate is demanding investigations into what he calls irregular contracting of the Bush administration for reconstructing Iraq. Specifically, Waxman and Rep. John Dingell (D-Mich.) charge in a letter to the Iraq Program Management Office that "these contracts have created two massive fiefdoms" for Halliburton Co. on oil services and Bechtel in electricity and other public works.

The letter criticizes the Iraq reconstruction program for its plans to award more indefinite delivery/indefinite quantity (ID/IQ) contracts - those "in which the total amount of work and specific projects to be completed are unknown at the time and bid of the award. When an ID/IQ contact is put out to bid, there is no real opportunity for price competition because the projects under the contract have yet to be defined." Waxman and Dingell conclude that these practices are "deliberately precluding meaningful price competition" and "in effect doling out monopolies." They also claim that "taxpayers will pay a high price for this imprudent approach."

Criticisms of contracts such as these are common from left-wing activists. Many have pounced on the Halliburton contract, noting that Dick Cheney was the company's chief executive officer before he was vice president, despite the fact that Cheney divested himself of interest in the company. Meanwhile there are some on the right, and some independent observers, who also take issue with the federal-contracting process. But they say the outrage expressed by Waxman and other partisan Democrats is very selective; for while Halliburton's long-term contract may be problematic, it is typical of the new world of federal contracting that began in the 1990s. Clinton-era reforms have, according to critics, led to a lack of oversight, to cost overruns and other abuses. And taken together with long-standing barriers to competition, such as favoritism for unionized firms, the Clinton changes have prevented competition from innovative firms and small businesses.

The Project on Government Oversight, a watchdog group strongly critical of the postwar contracts awarded to Halliburton and others, says the problems result from the Clinton-Gore changes. "In recent months, many policymakers have inquired about Iraq reconstruction contracts," says a report from the group. "What most people do not realize is that those contracts are not anomalies - in fact, they simply reflect the flawed federal-contracting system that exists today. Favoritism, waste, abuse and even fraud are far more likely today because of the systemic reduction of oversight and transparency in government contracting over the past decade."

Some conservatives are even calling Waxman's bluff and asking for a congressional investigation. A recent Army investigation found that Halliburton did not overcharge for gasoline from Kuwait, although the company announced in January that it had fired two employees for taking kickbacks from Kuwaiti subcontractors. A Halliburton spokeswoman told the Wall Street Journal that this was unrelated to the gasoline issues, and that the company told the Pentagon promptly about the employee impropriety.

Says David Williams, vice president for policy at the right-leaning Citizens Against Government Waste, "Maybe Halliburton's innocent - we're not making that determination. What we're saying is investigate it, because that's the least that you can give the taxpayers." But, he adds, don't just stop at Halliburton and Iraq reconstruction. "Every dollar needs to be scrutinized, and if there is any question whether there are misdoings, it needs to be investigated."

Not only are the types of contracts Halliburton now has in Iraq a direct result of procurement "reforms" pushed through under Vice President Al Gore's program to "reinvent government" but, according to the Website of the General Services Administration (GSA), the ID/IQ contracts of the type being used in Iraq and in many civilian agencies "were initiated in large part by the National Performance Review" under Gore.

Many Republicans signed on too with legislation such as the Federal Acquisition Reform Act of 1996. These new proposals came, in part, in response to reports of the Pentagon paying ridiculously high prices for ordinary commercial items such as hammers. If agencies were given more flexibility to negotiate in the commercial marketplace, it was said, they could save the government bundles of money. The new philosophy was reflected in the Clinton administration's Federal Acquisition Regulation, which states that government buyers "may assume if a specific strategy, practice, policy or procedure is in the best interests of the government and is not ... prohibited by law, executive order or other regulation, that the strategy, practice, policy or procedure is a permissible exercise of authority."

It was in this new era that Halliburton's controversial contracts developed. In the 1990s the Army created its Logistic Civil Augmentation Program (LOGCAP), which designs multiyear ID/IQ contracts, the initial process being competitive. Companies submit proposals and bids, but after a bid is taken the Army can buy a number of services, such as electricity and food preparation, from the winning company for a specified number of years without going through another bid process. And these winning contractors are on call to the Army anywhere in the world. In 1997, Halliburton lost out on a bid for the LOGCAP contract to the Reston, Va.-based DynCorp, a company that derived almost its entire income from government contracts. But the Army still gave Halliburton a no-bid contract to set up some bases in the Balkans. And Halliburton so impressed government leaders that Gore gave it a "Hammer" award for efficiency.

Meanwhile DynCorp, as Insight's Kelly Patricia O'Meara has reported [see "DynCorp Disgrace," Feb. 4, 2002], became mired in scandal after some of its employees were accused of raping Bosnian girls as young as 14. Although Halliburton had paid a $2 million fine in the late 1990s based on fraud allegations involving its work on a California base, something which Waxman has made much of, given its overall record as compared to that of DynCorp it hardly was surprising or unusual to contract watchers that Halliburton won the LOGCAP contract when it was up for bid again in 2001. And it was under the terms of this pre-war contract that the Army chose Halliburton to put out oil fires in Iraq in the spring of 2003 without going through an additional bidding process.

The Army had an arguable justification for this because of the urgency of the war. "Suppose the wells had been torched and the Army, following Waxman's advice, had begun a long, complicated, competitive-bidding process to find a company to put out the fires," writes Byron York in National Review. The Democrats assuredly would not have patted the Bush administration on the back for letting the oil wells burn.

ID/IQ contracts such as Halliburton's seem to have the most justification when the military is concerned because of the emergency conditions under which it sometimes must work. But such contracts are now extremely common in domestic agencies as well, Insight has found. The National Park Service alone lists 237 of these contracts in a database. It signed a five-year contract, for instance, with McLean, Va.-based Science Applications International Corp. for unspecified "transportation and implementation tasks at various National Park Services areas throughout the United States, District of Columbia, Guam, Puerto Rico and the Virgin Islands."

As the Project on Government Oversight report explains, ID/IQs such as this "are not actual contracts for specific work. Rather, they are agreements by the government to award an unspecified amount of future work to approved contractors - the federal-acquisition equivalent of a hunting license. Requirements for competition on such awards are extremely weak, effectively allowing billions of dollars worth of noncompetitive contracts." The contracts have a guaranteed minimum the government must pay for initial services along with a maximum the government might pay for add-ons. The National Park Service contract cited above has a minimum of $25,000, but a maximum of $2 million.

The 1990s were boom years for contracting. The Clinton administration was fond of claiming it had shrunk the number of federal employees to a total lower than when John F. Kennedy was president. But counting contracted employees the number of full-time workers getting their checks for the civilian side of government grew sharply. Brooking Institution scholar Paul Light estimated the size of the contractor workforce, or as he calls it the "shadow government," to be 5.6 million in 1999. But, as he wrote in The True Size of Government, no one really knows the actual size. "The government knows virtually nothing about its shadow - the ever-expanding number of politically well-connected contractors who are taking more and more work from federal employees," Light wrote. "Neither the Office of Personnel Management nor the Office of Management and Budget has ever counted the full-time equivalent nonfederal workforce, let alone analyzed its appropriateness."

This increase in contractors still could be justified as helping the taxpayer because the government would not be responsible for the health care or pensions of the contract workers. But contracting also has its own costs that can mushroom out of control if not watched carefully, experts warn.

Certainly such contracting is very big business and watched on Wall Street. In late 1998, Computer Sciences Corp. (CSC), an information-technology firm based in El Segundo, Calif., put itself on the proverbial map by winning what was called "the Super Bowl of government contracts" - a 15-year megacontract to modernize the computer systems of the IRS with a maximum price tag of $7 billion. Acquiring this contract and beating out competitor Lockheed Martin was reported in the Los Angeles Business Journal as "the corporate equivalent of hitting a ball clear out of the park."

But it seems to have struck out in actual performance. The Treasury De-partment's IRS Oversight Board recently documented delays and huge cost overruns and recommended removing CSC as the contractor if improvements aren't made soon. The problems have highlighted the questionable circumstances under which CSC received the contract.

The contract was awarded by IRS Commissioner Charles Rossotti, whose administration of the bureau was ethically troubled. As Insight has detailed, Rossotti held on to millions of dollars of stock in American Management Systems (AMS), the company he cofounded and ran before going to the IRS, despite the fact that AMS had ongoing contracts with the agency.

Indeed, CSC's modernization contract also came under fire in 2000 when the company hired Karla Pierce, the Kansas secretary of revenue, since Kansas was a major client of AMS and now it looked to some as though Rossotti was giving a quid pro quo. Pierce had defended Rossotti's firm at a time when its overhaul of the Kansas tax system was being criticized by Kansas legislators and the company was being sued by the state of Mississippi for negligent work in a lawsuit that turned out to be successful. CSC, after hiring Pierce, sent a statement to Insight saying it was "impressed by [Pierce's] significant accomplishments," but nowhere did the statement deny that Rossotti used influence to get Pierce the job [see "A Taxing Dilemma," April 23, 2001, and "IRS Boss Snagged Clinton Waiver," May 7, 2001].

After media scrutiny resulting from Insight's stories, Rossotti finally sold most of his AMS stock about a year before he left the IRS in 2002. He now works at the Carlyle Group, a private investment-equity firm staffed with influential Democrats and Republicans that, Washington Technology magazine says, also is one of the 40 biggest government contractors in information technology.

Meanwhile, in late 2003, the oversight board blasted CSC's work. The board wrote in a report that "virtually all of the projects with a major impact on improving customer service and IRS' internal operations and productivity were experiencing serious delays and cost overruns." CSC, the board reported, "did not demonstrate that it had the depth of leadership and experience to carry out its responsibilities" and "did not supply the important thought and program leadership it was engaged to deliver." InfoWorld quoted a CSC spokesman who said the company was "making considerable progress" on the modernization.

Regardless of the board's scathing critique, thanks largely to the IRS contract, CSC now is one of the largest government contractors in the United States. It ranked fifth on Washington Technology's top 100 federal contractors in information technology, with government contracts worth almost $2 billion for the year covered. And CSC used its new fortune to buy the troubled DynCorp in 2003 and likely will be a presence in military contracting as well.

Because the jobs of many contracting officers were cut from federal agencies in the 1990s as part of Gore's "reinventing government," increasingly one of the giants is designated the "prime contractor," leading a team of other large and small contractors. Such is the case with CSC and the IRS. This "bundling" of tasks into one megacontract has made it particularly hard on small businesses to get bids unless they partner with the giants. In the spring of 2002, President George W. Bush told a conference of women entrepreneurs that he would work sharply to reduce contract bundling. "Wherever possible, we're going to insist that we break down large federal contracts so that small-business owners have got a fair shot at federal contracting," he said. But small-business owners say the bureaucrats still are moving slowly on this presidential priority.

And what really irks many small businesses is that the new procurement policies can benefit large foreign firms more than U.S. small business. Democrats in Congress have tried to ban contractors that establish subsidiaries or move their headquarters to foreign locales such as the Caymans to escape high U.S. taxes. Yet when Bush tried to limit some Iraqi postwar work to the firms from countries in the coalition forces, Democrats such as Waxman and Dingell cried foul. In their letter, these congressmen said they were miffed at the policy because "Canada, Germany and France do have contractors that could compete effectively for these contracts, with a lower cost to taxpayers." But given the fact that, according to the London Independent newspaper, captured documents show that Saddam Hussein managed to bribe French government officials, it would seem obvious that there may be good reason to keep French firms an arm's length away, say national-security experts.

Although big contracts are hard to get, giant contractors can be even harder to get rid of, placing further barriers to many other U.S. firms that want to compete [see "What Does It Take to Lose a Contract?" March 18, 2002]. The GSA lifted a suspension that barred MCI, formerly WorldCom, from seeking new contracts. This ban had been established because of that company's bankruptcy and deception of shareholders, yet now GSA awarded it a contract for new phone lines in Iraq. In a January press release, Citizens Against Government Waste names GSA as its "Porker of the Month" and says MCI's contracts "put taxpayer dollars at risk and amounted to a hidden government bailout of the company." According to Williams of the watchdog group, "The fact that they kept on getting government contracts really sounded an alarm to us as to why. Why was this not being competitively bid? Why isn't there an open competition for this, because there obviously wasn't."

To be big-time government contractors, companies almost have to mirror the bureaucracies with which they work - and operate a revolving door between themselves and those bureaucracies. The government freezes out competition by giving contractors mandates that have nothing to do with efficiency for taxpayers, such as racial quotas and "green practices." And there also is a bias toward unionized firms, says Stefan Gleason, vice president of the National Right to Work Legal Defense Fund. "Federal-government power and resources are being marshaled effectively to drive people into unions," he says.

While Bush issued an executive order getting rid of "project-labor" requirements on federally funded projects that forced unionization of workers, he hasn't touched the Davis-Bacon Act, a law requiring workers on federal construction projects to be paid "prevailing wages" determined by unions, or the alleged union shenanigans that go along with it. Determining the prevailing wage is a process fraught with fraud, Gleason says. "The unions get together with the companies that are unionized, and they fix the price at an artificially high rate, and that becomes the prevailing wage, and then nonunion firms can't bid on those projects," he says. "Small businesses, women, minorities and, often, the most-productive companies are deprived of the opportunity to work." In fact the sponsors of Davis-Bacon in the 1930s had clear racist motivations, publicly saying the law was to keep "colored labor" out of federal contracts.

The Bush administration has said it wants to outsource as many as 800,000 federal jobs to save money for taxpayers. But Gleason warns that the savings may not be achieved with laws such as Davis-Bacon that price out small firms. Similarly, others warn that savings will evaporate without restoring some oversight. "Full and open bidding" must be restored, says the Project on Government Oversight report.

The report recommends: "Establish a bidding process that is open to large and small contractors. Strict oversight should ensure that the lack of full and open competition was necessary under the circumstances, including instances when an agency awards a sole-source, limited bid, or classified contract or acquisition. ... Restore 1980's-era procurement laws [as under Reagan-Bush] that ensured as many contracts as possible were fully competed and therefore the government received the best deals."

John Berlau is a writer for Insight magazine.

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Here, according to Government Executive magazine, are the top 10 private contractors to the federal government in terms of the dollar value of contract awards in fiscal 2002:

1. Lockheed Martin Corp. -- $22,868,969

2. Boeing Co. -- $19,569,810

3. Northrop Grumman Corp. -- $10,231,037

4. Raytheon Co. -- $7,522,196

5. General Dynamics Corp. -- $7,264,308

6. United Technologies Corp. -- $4,117,346

7. Computer Sciences Corp. -- $4,090,770

8. Bechtel Group Inc. -- $3,603,148

9. SAIC -- $3,466,739

10. Carlyle Group -- $2,166,233

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DynCorp Disgrace
Posted Jan. 14, 2002
By Kelly Patricia O Meara
Published: Monday, February 4, 2002

Americans were seen in Bosnia as defenders of the children, as shown here, until U.S. contractors began buying children as personal sex slaves.


Middle-aged men having sex with 12- to 15-year-olds was too much for Ben Johnston, a hulking 6-foot-5-inch Texan, and more than a year ago he blew the whistle on his employer, DynCorp, a U.S. contracting company doing business in Bosnia.

According to the Racketeer Influenced Corrupt Organization Act (RICO) lawsuit filed in Texas on behalf of the former DynCorp aircraft mechanic, "in the latter part of 1999 Johnston learned that employees and supervisors from DynCorp were engaging in perverse, illegal and inhumane behavior [and] were purchasing illegal weapons, women, forged passports and [participating in] other immoral acts. Johnston witnessed coworkers and supervisors literally buying and selling women for their own personal enjoyment, and employees would brag about the various ages and talents of the individual slaves they had purchased."

Rather than acknowledge and reward Johnston's effort to get this behavior stopped, DynCorp fired him, forcing him into protective custody by the U.S. Army Criminal Investigation Division (CID) until the investigators could get him safely out of Kosovo and returned to the United States. That departure from the war-torn country was a far cry from what Johnston imagined a year earlier when he arrived in Bosnia to begin a three-year U.S. Air Force contract with DynCorp as an aircraft-maintenance technician for Apache and Blackhawk helicopters.

For more than 50 years DynCorp, based in Reston, Va., has been a worldwide force providing maintenance support to the U.S. military through contract field teams (CFTs). As one of the federal government's top 25 contractors, DynCorp has received nearly $1 billion since 1995 for these services and has deployed 181 personnel to Bosnia during the last six years. Although DynCorp long has been respected for such work, according to Johnston and internal DynCorp communications it appears that extracurricular sexcapades on the part of its employees were tolerated by some as part of its business in Bosnia.

But DynCorp was nervous. For instance, an internal e-mail from DynCorp employee Darrin Mills, who apparently was sent to Bosnia to look into reported problems, said, "I met with Col. Braun [a base supervisor] yesterday. He is very concerned about the CID investigation; however, he views it mostly as a DynCorp problem. What he wanted to talk about most was how I am going to fix the maintenance problems here and how the investigation is going to impact our ability to fix his airplanes." The Mills e-mail continued: "The first thing he told me is that 'they are tired of having smoke blown up their ass.' They don't want anymore empty promises."

An e-mail from Dyncorp's Bosnia site supervisor, John Hirtz (later fired for alleged sexual indiscretions), explains DynCorp's position in Bosnia. "The bottom line is that DynCorp has taken what used to be a real positive program that has very high visibility with every Army unit in the world and turned it into a bag of worms. Poor quality was the major issue."

Johnston was on the ground and saw firsthand what the military was complaining about. "My main problem," he explains, "was [sexual misbehavior] with the kids, but I wasn't too happy with them ripping off the government, either. DynCorp is just as immoral and elite as possible, and any rule they can break they do. There was this one guy who would hide parts so we would have to wait for parts and, when the military would question why it was taking so long, he'd pull out the part and say 'Hey, you need to install this.' They'd have us replace windows in helicopters that weren't bad just to get paid. They had one kid, James Harlin, over there who was right out of high school and he didn't even know the names and purposes of the basic tools. Soldiers that are paid $18,000 a year know more than this kid, but this is the way they [DynCorp] grease their pockets. What they say in Bosnia is that DynCorp just needs a warm body -- that's the DynCorp slogan. Even if you don't do an eight-hour day, they'll sign you in for it because that's how they bill the government. It's a total fraud."

Remember, Johnston was fired by this company. He laughs bitterly recalling the work habits of a DynCorp employee in Bosnia who "weighed 400 pounds and would stick cheeseburgers in his pockets and eat them while he worked. The problem was he would literally fall asleep every five minutes. One time he fell asleep with a torch in his hand and burned a hole through the plastic on an aircraft." This same man, according to Johnston, "owned a girl who couldn't have been more than 14 years old. It's a sick sight anyway to see any grown man [having sex] with a child, but to see some 45-year-old man who weighs 400 pounds with a little girl, it just makes you sick." It is precisely these allegations that Johnston believes got him fired.

Johnston reports that he had been in Bosnia only a few days when he became aware of misbehavior in which many of his DynCorp colleagues were involved. He tells INSIGHT, "I noticed there were problems as soon as I got there, and I tried to be covert because I knew it was a rougher crowd than I'd ever dealt with. It's not like I don't drink or anything, but DynCorp employees would come to work drunk. A DynCorp van would pick us up every morning and you could smell the alcohol on them. There were big-time drinking issues. I always told these guys what I thought of what they were doing, and I guess they just thought I was a self-righteous fool or something, but I didn't care what they thought."

The mix of drunkenness and working on multimillion-dollar aircraft upon which the lives of U.S. military personnel depended was a serious enough issue, but Johnston drew the line when it came to buying young girls and women as sex slaves. "I heard talk about the prostitution right away, but it took some time before I understood that they were buying these girls. I'd tell them that it was wrong and that it was no different than slavery -- that you can't buy women. But they'd buy the women's passports and they [then] owned them and would sell them to each other."

"At first," explains Johnston, "I just told the guys it was wrong. Then I went to my supervisors, including John Hirtz, although at the time I didn't realize how deep into it he was. Later I learned that he had videotaped himself having sex with two girls and CID has that video as evidence. Hirtz is the guy who would take new employees to the brothels and set them up so he got his women free. The Serbian mafia would give Hirtz the women free and, when one of the guys was leaving the country, Hirtz would go to the mafia and make sure that the guys didn't owe them any money."

"None of the girls," continues Johnston, "were from Bosnia. They were from Russia, Romania and other places, and they were imported in by DynCorp and the Serbian mafia. These guys would say 'I gotta go to Serbia this weekend to pick up three girls.' They talk about it and brag about how much they pay for them -- usually between $600 and $800. In fact, there was this one guy who had to be 60 years old who had a girl who couldn't have been 14. DynCorp leadership was 100 percent in bed with the mafia over there. I didn't get any results from talking to DynCorp officials, so I went to Army CID and I drove around with them, pointing out everyone's houses who owned women and weapons."

That's when Johnston's life took a dramatic turn.

On June 2, 2000, members of the 48th Military Police Detachment conducted a sting on the DynCorp hangar at Comanche Base Camp, one of two U.S. bases in Bosnia, and all DynCorp personnel were detained for questioning. CID spent several weeks working the investigation and the results appear to support Johnston's allegations. For example, according to DynCorp employee Kevin Werner's sworn statement to CID, "during my last six months I have come to know a man we call 'Debeli,' which is Bosnian for fat boy. He is the operator of a nightclub by the name of Harley's that offers prostitution. Women are sold hourly, nightly or permanently."

Werner admitted to having purchased a woman to get her out of prostitution and named other DynCorp employees who also had paid to own women. He further admitted to having purchased weapons (against the law in Bosnia) and it was Werner who turned over to CID the videotape made by Hirtz. Werner apparently intended to use the video as leverage in the event that Hirtz decided to fire him. Werner tells CID, "I told him [Hirtz] I had a copy and that all I wanted was to be treated fairly. If I was going to be fired or laid off, I wanted it to be because of my work performance and not because he was not happy with me."

According to Hirtz's own sworn statement to CID, there appears to be little doubt that he did indeed rape one of the girls with whom he is shown having sexual intercourse in his homemade video.

CID: Did you have sexual intercourse with the second woman on the tape?

Hirtz: Yes

CID: Did you have intercourse with the second woman after she said "no" to you?

Hirtz: I don't recall her saying that. I don't think it was her saying "no."

CID: Who do you think said "no"?

Hirtz: I don't know.

CID: According to what you witnessed on the videotape played for you in which you were having sexual intercourse with the second woman, did you have sexual intercourse with the second woman after she said "no" to you?

Hirtz: Yes.

CID: Did you know you were being videotaped?

Hirtz: Yes. I set it up.

CID: Did you know it is wrong to force yourself upon someone without their consent?

Hirtz: Yes.

The CID agents did not ask any of the men involved what the ages of the "women" were who had been purchased or used for prostitution. According to CID, which sought guidance from the Office of the Staff Judge Advocate in Bosnia, "under the Dayton Peace Accord, the contractors were protected from Bosnian law which did not apply to them. They knew of no [U.S.] federal laws that would apply to these individuals at this time."

However, CID took another look and, according to the investigation report, under Paragraph 5 of the NATO Agreement Between the Republic of Bosnia-Herzegovina and Croatia regarding the status of NATO and its personnel, contractors "were not immune from local prosecution if the acts were committed outside the scope of their official duties."

Incredibly, the CID case was closed in June 2000 and turned over to the Bosnian authorities. DynCorp says it conducted its own investigation, and Hirtz and Werner were fired by DynCorp and returned to the United States but were not prosecuted. Experts in slave trafficking aren't buying the CID's interpretation of the law.

Widney Brown, an advocate for Human Rights Watch, tells INSIGHT "our government has an obligation to tell these companies that this behavior is wrong and they will be held accountable. They should be sending a clear message that it won't be tolerated. One would hope that these people wouldn't need to be told that they can't buy women, but you have to start off by laying the ground rules. Rape is a crime in any jurisdiction and there should not be impunity for anyone. Firing someone is not sufficient punishment. This is a very distressing story -- especially when you think that these people and organizations are going into these countries to try and make it better, to restore a rule of law and some civility."

Christine Dolan, founder of the International Humanitarian Campaign Against the Exploitation of Children, a Washington-based nonprofit organization, tells Insight: "What is surprising to me is that Dyncorp has kept this contract. The U.S. says it wants to eradicate trafficking of people, has established an office in the State Department for this purpose, and yet neither State nor the government-contracting authorities have stepped in and done an investigation of this matter."

Dolan says, "It's not just Americans who are participating in these illegal acts. But what makes this more egregious for the U.S. is that our purpose in those regions is to restore some sense of civility. Now you've got employees of U.S. contractors in bed with the local mafia and buying kids for sex! That these guys have some kind of immunity from prosecution is morally outrageous. How can men be allowed to get away with rape simply because of location? Rape is a crime no matter where it occurs and it's important to remember that even prostitution is against the law in Bosnia. The message we're sending to kids is that it's okay for America's representatives to rape children. We talk about the future of the children, helping to build economies, democracy, the rule of law, and at the same time we fail to prosecute cases like this. That is immoral and hypocritical, and if DynCorp is involved in this in any way it should forfeit its contract and pay restitution in the form of training about trafficking."

Charlene Wheeless, a spokeswoman for DynCorp, vehemently denies any culpability on the part of the company, According to Wheeless, "The notion that a company such as DynCorp would turn a blind eye to illegal behavior by our employees is incomprehensible. DynCorp adheres to a core set of values that has served as the backbone of our corporation for the last 55 years, helping us become one of the largest and most respected professional-services and outsourcing companies in the world. We can't stress strongly enough that, as an employee-owned corporation, we take ethics very seriously. DynCorp stands by its decision to terminate [whistle-blower] Ben Johnston, who was terminated for cause."

What was the "cause" for which Johnston was fired? He received his only reprimand from DynCorp one day prior to the sting on the DynCorp hangar when Johnston was working with CID. A week later he received a letter of discharge for bringing "discredit to the company and the U.S. Army while working in Tuzla, Bosnia-Herzegovina." The discharge notice did not say how Johnston "brought discredit to the company."

It soon developed conveniently, according to Johnston's attorneys, that he was implicated by a DynCorp employee for illegal activity in Bosnia. Harlin, the young high-school graduate Johnston complained had no experience in aircraft maintenance and didn't even know the purposes of the basic tools, provided a sworn statement to CID about Johnston. Asked if anyone ever had offered to sell him a weapon, Harlin fingered Johnston and DynCorp employee Tom Oliver, who also had disapproved of the behavior of DynCorp employees.

Harlin even alleged that Johnston was "hanging out with Kevin Werner." Although Werner had no problem revealing the names and illegal activities of other DynCorp employees, Werner did not mention Johnston's name in his sworn statement.

Kevin Glasheen, Johnston's attorney, says flatly of this: "It's DynCorp's effort to undermine Ben's credibility. But I think once the jury hears this case, that accusation is only going to make them more angry at DynCorp. In order to make our claim, we have to show that DynCorp was retaliating against Ben, and that fits under racketeering. There is a lot of evidence that shows this was what they were doing and that it went all the way up the management chain."

According to Glasheen, "DynCorp says that whatever these guys were doing isn't corporate activity and they're not responsible for it. But this problem permeated their business and management and they made business decisions to further the scheme and to cover it up. We have to show that there was a causal connection between Ben's whistle-blowing about the sex trade and his being fired. We can do that. We're here to prove a retaliation case, not convict DynCorp of participating in the sex-slave trade.

"What you have here is a Lord of the Flies mentality. Basically you've got a bunch of strong men who are raping and manipulating young girls who have been kidnapped from their homes. Who's the bad guy? Is it the guy who buys the girl to give her freedom, the one who kidnaps her and sells her or the one who liberates her and ends up having sex with her? And what does it mean when the U.S. steps up and says, 'We don't have any jurisdiction'? That's absurd."

The outraged attorney pauses for breath. "This is more than one twisted mind. There was a real corporate culture with a deep commitment to a cover-up. And it's outrageous that DynCorp still is being paid by the government on this contract. The worst thing I've seen is a DynCorp e-mail after this first came up where they're saying how they have turned this thing into a marketing success, that they have convinced the government that they could handle something like this."

Johnston is not the only DynCorp employee to blow the whistle and sue the billion-dollar government contractor. Kathryn Bolkovac, a U.N. International Police Force monitor hired by the U.S. company on another U.N.-related contract, has filed a lawsuit in Great Britain against DynCorp for wrongful termination. DynCorp had a $15 million contract to hire and train police officers for duty in Bosnia at the time she reported such officers were paying for prostitutes and participating in sex-trafficking. Many of these were forced to resign under suspicion of illegal activity, but none have been prosecuted, as they also enjoy immunity from prosecution in Bosnia.

DynCorp has admitted it fired five employees for similar illegal activities prior to Johnston's charges.

But Johnston worries about what this company's culture does to the reputation of the United States. "The Bosnians think we're all trash. It's a shame. When I was there as a soldier they loved us, but DynCorp employees have changed how they think about us. I tried to tell them that this is not how all Americans act, but it's hard to convince them when you see what they're seeing. The fact is, DynCorp is the worst diplomat you could possibly have over there."

Johnston's attorney looks to the outcome. "How this all ends," says Glasheen, "will say a lot about what we stand for and what we won't stand for."

Kelly Patricia O'Meara is an investigative reporter for Insight.
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A Taxing Dilemma
By John Berlau
Published: Monday, April 23, 2001
When it was revealed that Dick Cheney would be running for vice president on the GOP ticket with George W. Bush, Cheney was pummeled with questions about potential conflicts of interest that might result from his holdings in Halliburton Corp., the oil-services company Cheney headed before he was tapped as Bush's running mate. Cheney sold the stock and turned over his unvested options to an independent administrator to give the proceeds to charity.

When Treasury Secretary Paul O'Neill announced he was going to keep his $100 million in stock and options in Alcoa Corp., where he had been chairman and chief executive officer, he was subjected to intense scrutiny in the media, including Insight (see "The $100 Million Misunderstanding," April 2-9). O'Neill did an about-face and announced on ABC's This Week that he would divest.

In sharp contrast, hardly a peep has been uttered, even from Republicans, about a Clinton-administration holdover who owns millions of dollars of stock in a company that has millions of dollars of contracts with the very agency he heads.

Charles O. Rossotti was appointed by Bill Clinton to head the IRS in 1997. His background in technology and business won praise at the time from both Republicans and Democrats. Rossotti had been chairman of American Management Systems (AMS), a Fairfax, Va.-based information-technology consulting firm that he cofounded after a stint as one of Robert McNamara's famed "Whiz Kids" at the Defense Department's Office of Systems Analysis. With the IRS computer systems in disarray and gross abuses of taxpayer rights unearthed during congressional hearings, members of Congress were eager to have a "manager" at the helm of IRS rather than another political tax attorney.

So eager, apparently, that the Senate Finance Committee agreed to let Rossotti keep his stock in AMS, even though the company was providing computer software and data-processing services to the IRS. At his confirmation hearing Rossotti promised Sen. William Roth of Delaware, then-chairman of the Senate Finance Committee, that he would divest "if AMS decides to bid for more work from the IRS beyond existing GSA contracts, or successor contracts of similar scope." He also said he would do his best to avoid even the appearance of a conflict of interest. "No one has, I do not think, a greater interest than I do in ensuring that no one believes, at this stage in my life, that I have taken on this job in order to further any particular interest of my own," Rossotti said.

Yet in a press release dated Nov. 7, 1997 - just four days after he was confirmed as IRS commissioner on a Senate vote of 92-0, but in a convenient interlude before he was sworn - Rossotti praised the achievements of AMS in a company press release announcing his IRS confirmation and AMS resignation. "This is an exciting time for AMS," Rossotti said, sounding like the major shareholder he is, in this release distributed to the business press by the PR Newswire service. "Within the next year, AMS is expected to reach $1 billion in revenues. The company will have nearly 9,000 employees working with leading organizations around the world, including the largest banks, telecommunications firms, government organizations, health-care providers and utilities. The outlook for the business is excellent, and I am confident that AMS' management team will continue the company's successful track record."

This statement, and other questionable actions such as putting state tax chiefs whose agencies contracted with AMS in top IRS positions, has raised questions among critics about how independent Rossotti really is of his former company.

"I think that in this case the line between public interest and his private interests is, at a minimum, blurred," says Mark Levin, president of Landmark Legal Foundation, a conservative public-interest legal group. "All the more reason to follow the lead of Mr. O'Neill and Mr. Cheney and so many other officials" who have divested themselves of large holdings in companies where they were executives.

According to his most recent financial-disclosure forms (filed in May 2000), at the end of 1999 Rossotti and his wife, Barbara, owned between $16 million and $80 million in AMS stock. In 1998, the New York Times reported that he was the largest individual shareholder in AMS, a company that last year had revenues of $1.28 billion.

At press time Rossotti had not responded to Insight's request for an interview. But Rossotti's spokesman, Frank Keith, tells Insight that his boss has no plans to divest: "He's done an incredible job of running the Internal Revenue Service, which is as large as most corporations. And he's done it successfully within the ethical constraints of his executed recusal statements."

Levin says there must not be a double standard in ethics for Bush appointees and Clinton holdovers such as Rossotti. "What Treasury Secretary O'Neill did stands in stark contrast to what Rossotti hasn't done and still refuses to do, which is divest himself of interest in a business that raises at least the appearance of a conflict," Levin says. "I think this is a snapshot of the difference between the Clinton and Bush administrations."

Former senator Roth tells Insight Rossotti's decision not to divest is still fine with him. "In today's world, it's almost impossible to avoid any perception of conflict of interest and you've got to get people that are qualified," Roth says. "I think we also have to have a little more confidence that a typical person is going to do what's right. i We're extraordinarily fortunate to have a man of his caliber." Sen. Charles Grassley, R-Iowa, who replaced Roth as chairman of the Senate Finance Committee after the Delaware Republican was defeated last November, has praised Rossotti for improving customer service by putting more IRS personnel on the taxpayer hot lines. He gave Rossotti an "A" for managing the agency in a recent Wall Street Journal article. But Grassley is a stickler for ethics, and a Senate Finance Committee staffer tells Insight the chairman is likely to review the issue, particularly if AMS is bidding for more IRS business than was under contract when Rossotti was confirmed.

"Grassley's good government," the staffer says. "I think you could certainly say that it's something that the Finance Committee is going to want to understand better."

And the scrupulous Grassley may have a lot to investigate. The IRS' Keith says that the agency signed three new contracts with AMS in 2000 that will pay the company more than $17 million this year. Keith stressed that the new contracts were "add-ons" to an existing contract with the IRS to provide financial-management systems. This means Grassley may be asking Rossotti whether the add-ons violate his pledge to the Senate Finance Committee in 1997 to divest if his old company did additional business with the agency.

Keith claims Rossotti recused himself "on matters relative to that financial-management system and the financial reports we must issue each year." But a Senate aide also tells Insight that there has been tension between the IRS and its parent agency, the Treasury Department, concerning whether Rossotti should recuse himself from dealings with these financial-management contracts. "The IRS is arguing that the conflict should be waived," the aide says. "Treasury is having problems with that. I believe it's still an ongoing issue between the two staffs."

Critics say that even if Rossotti were recusing himself he still would not be able to perform his duties without ethical question as long as he owned all that stock. And if he were to recuse himself from every issue that may affect AMS, he would be taking himself out of important agency decisions that he was appointed to manage. "The problem is that, particularly with an agency like the Internal Revenue Service or the Federal Bureau of Investigation or the Drug Enforcement Administration, you're talking about serious, powerful enforcement agencies," says Levin. "There must be absolute certainty in the public's mind that there is no conflict of interest and no appearance of a conflict of interest. The problem here is that it's hard to say with a straight face that there wasn't at least an appearance problem."

AMS contracts with the IRS are not Rossotti's only problem with conflicts, say critics. In the early 1990s, AMS began modernizing and integrating tax systems for state revenue departments. State tax collectors always have had an important relationship with the IRS. They frequently share data and cooperate on investigations. In addition, the IRS Restructuring and Reform Act, passed by Congress in 1998, gave state officials and certain private-sector specialists an incentive to come to work for the IRS.

Previously, top-paying IRS posts other than the commissioner had to be filled by career IRS employees. But the new law gave the commissioner the authority to hire executives for 40 positions from outside the agency and pay all the way up to the vice president's then salary level of $175,000 - still less than what many private-sector firms pay professionals, but a substantial pay raise for state officials.

In 1998, soon after the law was passed, Rossotti hired two state tax chiefs. He named Kansas Secretary of Revenue John LaFaver as the IRS deputy commissioner for modernization. Val Oveson, chairman of the Utah State Tax Commission, was made national taxpayer advocate. Both officials since have left the IRS: LaFaver now is director of the Treasury Department's Tax Advisory Program; Oveson is a senior director in the Salt Lake City office of Pricewaterhouse Coopers. Neither returned phone calls from Insight.

The rub is that, coincidentally or not, both officials oversaw agencies that had hired AMS to overhaul the tax computer systems of their respective states. The contracts together totaled almost $100 million, according to a 1999 Wichita Eagle article that noted the connections of these men to Rossotti's old firm. An IRS spokesman told Investor's Business Daily (IBD) that Oveson was found by an executive search firm and that both men passed ethical checks within the Treasury Department.

But the arrangement still seems odd to Mississippi Commissioner of Revenue Ed Buelow, who successfully sued AMS for breach of a contract to overhaul Mississippi's tax system. "It may not be technically wrong, but to me it's not proper," Buelow tells Insight. "To me the impropriety of it would be somewhat apparent. It's just too much of a coincidence: Out of 50 commissioners, why did those two get picked. Why wasn't it one of the other 47 that didn't have a contract. i If I had been in the position that Mr. Rossotti's in, I would have been somewhat reluctant to consider someone to whom I had a contract in the private sector for a top job with the IRS."

Another state official who found the hirings suspicious was Kansas Senate Minority Leader Anthony Hensley. A staunch Democrat, Hensley often criticized the governor and his appointees such as LaFaver. But in 1999 he also launched a volley against Rossotti, an appointee of his own party's president. "It looks almost like a pipeline," Hensley told IBD in 1999. "You cooperate with AMS, and you can move on to the IRS."

LaFaver responded by saying that Hensley's charge was "absolutely preposterous" because there was no way LaFaver could have known when he signed the contract with AMS that Rossotti would be IRS commissioner more than two years later. The question, say critics, is whether Rossotti was rewarding key state officials whose states gave AMS huge contracts. And AMS did use LaFaver's status in its marketing. In a sales brochure, as well as on its Website, AMS featured this quote: "The real results of this partnership will be the creation of the best tax incentives for any firm to locate and prosper in Kansas." The author of that commercial endorsement then was identified as "former Kansas Secretary of Revenue and current Deputy Commissioner of Modernization, U.S. Internal Revenue Service."

Tom Morgan, a professor of law who teaches legal ethics at George Washington University, sees nothing wrong per se with Rossotti hiring officials who happened to have steered big contracts to AMS. At the same time, he criticizes AMS' use of LaFaver's IRS status as a sales tool. "An implication of saying that you're going to withdraw from involvement is also a kind of representation that your company, from which you're currently benefiting, should not trade on the fact that you are IRS commissioner or that your deputy is a customer of the company," says Morgan. "That implies something that you've warranted is not true - namely, that there's some connection between the commissioner and the company."

AMS did not return Insight's repeated phone calls requesting comment.

Questions again surfaced last November when LaFaver's successor as Kansas secretary of revenue, Karla Pierce, announced she was leaving Kansas to go to work on the IRS computer-systems modernization project as an employee of Computer Sciences Corp., the lead contractor. In speaking to Insight, Hensley alleged, "There's a quid pro quo here." Pierce, a longtime employee of the Kansas Department of Revenue, had been project manager when the AMS overhaul began. She and LaFaver would meet with Rossotti when he came to Kansas as AMS chairman for quarterly status reports, according to IBD. Pierce defended AMS when the company's work was under attack by Kansas lawmakers of both parties after a rash of late refunds. Mississippi officials also say she tried to thwart their efforts to get information about the AMS problems in Kansas.

"I don't question that there's a connection and that he helped her get that job," says Armin Moeller, a partner at the Jackson, Miss., office of Phelps Dunbar, LLP, who represented Mississippi in the lawsuit. "Karla Pierce was a key player in defending AMS to the hilt. Karla Pierce was a key player in not cooperating with us."

Mississippi Commissioner Buelow agrees. "In my dealings with Miss Pierce, she conducted herself more as an employee of AMS than she did as a commissioner of revenue of a sister state," he says. "She was totally uncooperative as far as trying to help us, quite contrary to other states. [Other states and Mississippi] always shared information and tried to help each other find out how your project's doing. She wouldn't cooperate, she wouldn't return telephone calls. When I filed suit, she called me and told me if that would require her to do any testifying she wasn't going to do it, and she wasn't going to do anything at all to help us."

A Computer Sciences Corp. public-affairs officer did not return Insight's telephone calls and an e-mail inquiring about these matters. The IRS' Keith said he had "no information" concerning whether Rossotti had any input or influence over the company in the hiring of Pierce. Insight tried to reach Pierce directly at the company's Federal Sector Division at Falls Church, Va. An operator said no one with the name Karla Pierce was in the employee database.

Although Mississippi had contracted with AMS in 1993 to modernize and integrate the state's entire system of various taxes, by "April 1999 not a single tax-collection software program was operational," the lawsuit said. Buelow charged that AMS had misrepresented its work and diverted resources to other states. A jury found AMS guilty of breach of contract and, because the state had included lost revenue in its damages, ordered AMS to pay the state $475 million - one of the largest jury verdicts in the country last year. The state and AMS eventually settled for $185 million, $32 million of which - plus nearly $4 million in litigation costs - had to be charged against quarterly earnings. AMS currently is suing one of it insurers for not paying a settlement to the state before trial.

Some in Kansas think that Pierce may have saved AMS from a similar fate there and claim to see a connection to her new job. The Kansas tax system that AMS modernized seems to be running well now and received an award from the Federation of Tax Administrators. But, in 1999, refunds took nearly twice as long, on average, to be processed as the year before, according to a state legislative audit. Delinquent notices were sent out erroneously and lawmakers were flooded with calls from angry taxpayers.

Pierce defended AMS at the time, blaming the problem on legislative changes and the difficulty of finding temporary employees. But many lawmakers put much of the blame on AMS, saying that a multimillion-dollar system should have been able to handle the changes in tax law. Some wanted to follow Mississippi's lead and sue.

"When there was a lawsuit in Mississippi, that was the same time we were having lots of problems and many of us were suggesting that maybe we ought to be doing the same thing," recalls Kansas state Rep. Tony Powell, R-Wichita, a member of the House Tax Committee. "Even though things have improved at the department now, I'm not convinced it's because of this new tax system. i I still have questions as to whether this contract was a good deal."

But AMS touted Kansas in promotional materials as an example of its success with favorable quotes from LaFaver and Pierce. "Our vision will be achieved when we put the customer first every time," Pierce was quoted as saying in a brochure next to her picture. In news stories about the Mississippi case, AMS officials also cited the Kansas project as proof of their competence.

Another connection Rossotti still has to AMS is through his wife, Barbara. Barbara Rossotti, a partner at the Washington law firm of Shaw Pittman, which represented AMS, attended the trial in Mississippi and participated in the mediation and settlement conferences between the state and AMS, according to Buelow and Moeller. The latter recalls Barbara Rossotti giving very specific instructions about terms of the settlement. "She was acting almost as inside and outside counsel," Moeller says. "It was clear to me that when you speak to her, you're speaking to a real player. It seemed to be a bit different than your typical lawyer-client relationship."

Moeller says he was surprised to see her playing such an active role in the case, given that her husband was supposed to be distancing himself from the company. "It seemed clear to us she was there as his [IRS Commissioner Rossotti's] proxy," Moeller says. "As a partner at Shaw Pittman, she could work on all kinds of things. The bottom line was she was working on this."

Barbara Rossotti did not return Insight's repeated phone calls. The IRS' Keith insists her representation of AMS posed no problems. "Why, if the commissioner has executed a viable and rigorous recusal process to separate himself from any dealings with AMS in his capacity as the commissioner of the Internal Revenue Service, would his wife's employment have an impact?" Keith asks.

Moeller concludes, "All indications are that Charles Rossotti is a major influence, if not the primary influence, on AMS."

These are serious matters. The 1998 IRS Restructuring and Reform Act gave Rossotti a five-year term that will not end until November 2001, but it also provides that "the commissioner may be removed at the will of the president." Tom Fitton, president of the conservative ethics watchdog group Judicial Watch, thinks Rossotti's ties to AMS, as well as the allegedly politicized audits of many conservative groups critical of the Clinton administration that continued during his tenure (see sidebar, p. 12), justify his removal. The IRS commissioner's actions "raise the appearance that Rossotti and his family are working for AMS rather than the American people," Fitton says. "The taxpayer should have full faith and confidence that the IRS is not acting on behalf of any special interest, whether it be politicians like Bill Clinton or big businesses like AMS."

*****POLITICAL AUDITS REVISITED*****

During the mid-nineties, a long list of conservative groups and Clinton critics were subjected to audits by the IRS. It seemed to many that every time someone on the right - from the Western Journalism Center to Paula Jones - criticized the president, they would be visited by the IRS and put through the turmoil and fear of a government audit.

Many traced these allegedly politicized audits to IRS Commissioner Margaret Milner Richardson, who President Clinton appointed in 1993. Richardson was an accomplished Democratic fund-raiser and a close friend of Hillary Rodham Clinton. She was a determined partisan who served on the president's transition team and, while boss of the IRS, even attended the 1996 Democratic National Convention.

So it was hoped that when Charles Rossotti, an information-technology executive with good managerial skills and no apparent ties to the Clinton administration, came aboard in 1997 the rash of audits would stop.

But as long as Clinton was in power the suspicious audits continued. In May 2000, less than two months after a report from the Joint Committee on Taxation found "no credible evidence" of politically motivated audits during Clinton's tenure, the nursing home owned by Juanita Broaddrick - who alleged that Clinton raped her while he was Arkansas attorney general - was subjected to an audit from the IRS. Then, in August, Katherine Prudhomme, a woman who grilled Al Gore in New Hampshire about the Broaddrick case, found out from the IRS that she owed $1,500 in back taxes just hours before she spoke at a rally in front of Hillary Rodham Clinton's New York campaign headquarters. (The IRS has resolved Prudhomme's case in her favor, but Broaddrick's case continues, according to Larry Klayman of Judicial Watch, the public-interest law firm now representing both women.)

The National Center for Public Policy Research, a group critical of the Clinton administration's environmental policies, received a new audit in 2000 after getting a clean bill of health from an earlier audit in 1996. Bill O'Reilly, who ripped into Clinton every weeknight on Fox News, was audited three years in a row after he began hosting The O'Reilly Factor. And the Heritage Foundation and Citizens Against Government Waste, two nonprofit organizations audited in 1996 for sending out fund-raising letters signed by presidential candidate Bob Dole that the IRS deemed too political, did not get closure on their cases until after the November 2000 elections.

But according to Rossotti, a former Robert McNamara "Whiz Kid," politicized audits never were a problem during the Clinton years. Upon release of the Joint Committee report, Rossotti issued the following statement: "With this report, I think we can safely lay to rest concerns that the resources of the IRS have been diverted for political purposes." His spokesman, Frank Keith, tells Insight that Rossotti stands by that statement today.

At least one member of the congressionally created National Commission on Restructuring the IRS finds Rossotti's comments very disturbing. "It suggests he's part of a cover-up rather than getting to the bottom of this," says Grover Norquist, president of Americans for Tax Reform and an informal adviser to the Bush administration. "Those obviously targeted political audits are a scandal, and if Rossotti doesn't get them stopped and uncovered - if Rossotti's not capable of doing that, if he continues to cover up - he should resign or be asked to leave." - JB
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GOVERNMENT ETHICS - IRS Boss Snagged Clinton Waiver
By John Berlau
Published: Monday, May 7, 2001
Two weeks ago when Insight was reporting potential conflicts of interest involving IRS Commissioner Charles O. Rossotti's large holdings in a company that does millions of dollars' worth of business with his own agency (see "A Taxing Dilemma," April 23), the IRS said not to worry. Rossotti is recused from dealing with the huge government contracts of American Management Systems (AMS), the company that he cofounded and of which he remains the major shareholder, said Frank Keith, the IRS' national director of communications. "The commissioner has executed a viable and rigorous recusal pro-cess to separate himself from any dealings with AMS," Keith insisted.

Now Insight has learned that in December 2000 the Clinton administration blew a very large hole in the wall that is supposed to separate Rossotti, whom Clinton appointed as commissioner in 1997, from dealing with his old company. Along with the last-minute pardons and "midnight regulations" that the administration rushed through in its last two months, it also issued a waiver of conflict-of-interest rules that allows Rossotti to participate in decisions that directly could affect the AMS bottom line. Insight has obtained a copy of that waiver.

Signed on Dec. 11, 2000, by Clinton's deputy Treasury secretary, Stuart Eizenstat, the waiver allows Rossotti to join in discussions and decisions about the IRS' Custodial Accounting Project, which uses an automated financial-management system and software provided by AMS. "I have determined that your disqualifying financial interest in the Custodial Accounting Project [CAP], which arises from your ownership interest in American Management Systems Inc. [AMS], is not so substantial as to be deemed likely to affect the integrity of the services that the government may expect to receive from you with respect to the CAP," Eizenstat wrote. Clinton's man noted that, without this waiver, federal law "would preclude [Rossotti] from participating in the CAP because certain decisions would have a direct and predictable effect on your financial interest in AMS."

Eizenstat, now a partner at the hugely powerful Washington law firm of Covington & Burling, did not return Insight's telephone calls asking why the waiver was necessary.

The conflict-of-interest waiver allows Rossotti to participate in "budget and resource-allocation issues, the prioritization of the CAP and high-level design and architecture issues." It gives him the power to decide how much money will go to the project and, indirectly, to AMS, say experts.

At press time, the IRS had not returned Insight's telephone calls for comment about the newly revealed waiver and other issues that have surfaced.

And this is no minor matter, say ethics specialists. Rossotti called the Custodial Accounting Project "critical" to IRS' ongoing computer-system modernization in testimony to a House subcommittee on April 4. The IRS has asked Congress for $50 million for the project in fiscal 2002 alone. Overall, the Bush administration's budget gives the IRS an 8 percent funding increase in 2002, double the 4 percent average re-quested for all agencies. The additional funds reflect the computer modernization.

Because so much of this money could flow to AMS - scheduled to be paid more than $17 million this year by the IRS, according to IRS spokesman Keith - some have expressed concern. "I always want to be certain that government officials are avoiding conflicts of interests, but I won't jump to any conclusions," Rep. Ernest Istook Jr., R-Okla., chairman of the House Appropriations subcommittee that oversees IRS funding, tells Insight through a spokeswoman.

Officials of some of the watchdog groups that insisted Treasury Secretary Paul O'Neill divest his $100 million worth of Alcoa stock (see "The $100 Million Misunderstanding," April 2-9) now say that Rossotti's situation is more serious than O'Neill's would have been had he not agreed to sell the stock. "The point there [with Alcoa] was that there was very little the Treasury Department could do that would not impact Alcoa, and I think eventually Secretary O'Neill came around to that conclusion," says Larry Noble, executive director of the Washington-based Center for Responsive Politics. "I think the same principles apply [to Rossotti], a little bit more directly here in the sense that the IRS is doing business with AMS."

Charles Lewis, the executive director and founder of the Center for Public Integrity who called strongly for O'Neill to divest, says Rossotti should follow O'Neill's lead. "If O'Neill should have divested, then clearly this guy should divest," Lewis tells Insight. "The O'Neill stuff that came up about Alcoa was really speculative about things that might involve Alcoa. This is an instance with Rossotti where the company has direct dealings with the government [agency], and it's headed by their former chairman. ... This is much more specific, much more real, because this is a direct vendor with the agency, and he's not taken any of the various steps one would take to create an arms-length distance."

Lewis also is disturbed that the Clinton-Eizenstat waiver could make the potential for conflict even greater. "Rossotti has gotten a waiver and can in fact be involved in conversations about his old company," he says. "He clearly has a problem."

The founder of the Center for Public Integrity worries that "there could be the perception that this company is flourishing because their former chairman is the head of the IRS and that they're getting favorable treatment inside the IRS." Lewis also is concerned that Rossotti's large holdings might tilt IRS employees to favor AMS. "They all know about his association and substantial source of his personal wealth, and that's not a fact lost on bureaucrats whose job it is to survive and know these things."

And apparently AMS hasn't hesitated to throw its weight around the agency. According to Tax Notes, a well-respected weekly journal that covers tax policy, AMS Chairman and then-CEO Paul Brands and other AMS executives met with IRS officials in May and "expressed concern that the IRS was reluctant to procure upgrades and new releases of AMS' financial software." The AMS executives accused the IRS officials of being slow to make decisions about purchases of AMS products because Rossotti was commissioner, but did not "provide any specific instances of such actions by IRS personnel," according to the article written by veteran tax reporter George Guttman.

AMS has not returned Insight's many phone calls about the Tax Notes article or other matters related to potential or alleged conflicts of interest in these matters.

Lewis admits it's possible that AMS actually could be getting less-favorable treatment than other IRS vendors because of Rossotti's millions of dollars worth of holdings, but he thinks that's unlikely. "I don't have any evidence of heartrending hardships brought on companies whose executives joined the administration of whichever party," Lewis says.

Some see the extensions AMS keeps getting to a contract from the late 1980s to provide the IRS with an automated financial system as evidence that it may have been getting special treatment from the agency. The IRS had stressed that the $17 million in one-year contracts the agency signed with AMS last year were "add-ons" to the existing contract and did not violate Rossotti's pledge to divest if AMS pursued new business with the IRS. But insiders wonder why the IRS keeps buying these add-ons without taking new bids or offers from AMS' competitors.

"It could be that what they're doing is extending contracts as a way to get around the problem of issuing new contracts or going out for bids," says Noble of the Center for Responsive Politics.

Meredith McGehee, senior vice-president of the government-ethics advocacy group Common Cause, says these appearance issues will continue to haunt Rossotti as long as he refuses to divest. "When you have the commissioner of a very high-profile agency holding stock in a company that's doing business with that agency, obviously it raises concerns," McGehee tells Insight. Mentioning the allegations of IRS' hiring of state tax chiefs as a reward for steering business to AMS, McGehee says, "I would not ever be able to tell what the truth is. But the point is the questions are being raised, and having the questions raised is part of what damages the public confidence here."

Insight meanwhile has learned that John LaFaver, the Kansas secretary of revenue who contracted with AMS and then was hired by Rossotti as the IRS' deputy commissioner of modernization, has left for the private sector. He recently became vice president for state and local solutions at AMS, which had used his favorable comments about the company in a marketing brochure while noting his status at the IRS. Reached at AMS headquarters in Fairfax, Va., LaFaver tells Insight, "I don't think I'm going to comment." He says he doesn't remember whether he made the endorsement of AMS as Kansas revenue secretary or IRS deputy commissioner.

As Insight previously reported, Karla Pierce, LaFaver's successor who defended AMS when lawmakers were blaming the company for a rash of late tax refunds and erroneous delinquent notices, recently was hired as director of organizational transformation for the IRS' modernization project by the agency's lead contractor, Computer Science Corp. (CSC). After the deadline for Insight's first article, CSC sent a statement saying that "CSC was impressed by her significant accomplishments as secretary" of revenue in Kansas. But nowhere did the statement deny allegations that Rossotti used input or influence to get Pierce the job.