Military Sales to Israel and Egypt:

DOD Needs Stronger Controls Over U.S.-Financed Procurements

NSIAD-93-184: Published: Jul 7, 1993. Publicly Released: Aug 10, 1993.

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Pursuant to a congressional request, GAO reviewed the Foreign Military Financing (FMF) programs for Israel and Egypt, focusing on: (1) why Israel and Egypt often purchase U.S.-funded goods and services directly from contractors rather than from the U.S. government; (2) potential program weaknesses; and (3) each countries' procurement procedures.

GAO found that: (1) in 1992, Israel and Egypt allocated 60 percent and 20 percent, respectively, of their U.S.-funded FMF funds for commercial procurement; (2) although Israel and Egypt initially obtain price and availability data from the Department of Defense (DOD), they usually purchase U.S.-funded items and services directly from commercial contractors because they offer the best price, availability, and quality; (3) while some items purchased through the DOD Foreign Military Sales (FMS) channel are advantageous to buyers, these items are not always readily available, can often be purchased cheaper, and are limited to U.S. standards; (4) although Israel and Egypt have safeguards to protect the integrity of purchases made through the FMF program, the recent fraudulent collusion between a U.S. commercial contractor and a foreign military official revealed the program's vulnerability to contractor abuses; (5) as a result of DOD audits that uncovered evidence that contractors may have improperly used FMF funds to pay questionable commissions, reimburse foreign officials for travel expenses, and make payments for items that were not of U.S. origin, the Defense Security Assistance Agency (DSAA) has terminated the commercial channel of the FMF program; (6) FMF program weaknesses include the inability of foreign countries to access contractor records, poor contractor record maintenance, and inadequate contract monitoring by foreign procurement authorities; and (7) DOD could reduce its vulnerability to fraud by implementing stronger program controls and having foreign countries contract with the Defense Contract Management Command (DCMC) to conduct capability surveys, price analyses, and quality assurance support.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Current guidelines require the contractor to submit a list of all subcontractors on a proposed contract. It is the prime contractor's responsibility to manage and ensure compliance of subcontractors. Pre-award surveys are now required on all purchase orders of $100,000 or more unless the vendor is already a U.S. supplier.

    Recommendation: To improve oversight of subcontractors, DSAA should require FMF recipient countries and contractors to report all subcontractors required or directed by the country. Also, DSAA should arrange for DCMC to perform a pre-award survey of subcontractor capability, if unknown.

    Agency Affected: Department of Defense: Defense Security Assistance Agency

  2. Status: Closed - Implemented

    Comments: New guidelines issued in January 1995 require the country to buy FMS unless DOD determines that the FMS system cannot satisfy the requirement. Price comparisons will be conducted on all sole-source contracts over $500,000. Proof of competition, to include offer prices, will be required on all competitive buys. If the lowest offer is not selected, the country will be required to justify its choice.

    Recommendation: To ensure greater use of the FMS procurement channel, DSAA should direct U.S. military buying organizations to perform price comparisons on high-value commercial contracts and where the buyer requests a sole-source procurement. Where price and availability are comparable to FMS, DSAA should require that the country buy through the FMS channel.

    Agency Affected: Department of Defense: Defense Security Assistance Agency

  3. Status: Closed - Implemented

    Comments: Under new guidelines that took the effect on January 1, 1995, foreign countries are now required to purchase contract administration services from DCMC on all contracts over $500,000. DCMC quality assurance inspections are done at the discretion of the country unless DOD determines otherwise. DCMC services are paid for by the country in accordance with AECA.

    Recommendation: To verify that milestones are achieved and services are preformed in-country, DSAA should direct DCMC to conduct quality assurance checks on purchases over a certain dollar threshold. Also, DSAA should require that the foreign country pay the costs for these DCMC services.

    Agency Affected: Department of Defense: Defense Security Assistance Agency

  4. Status: Closed - Not Implemented

    Comments: Commercial contractors doing business with DOD must comply with cost accounting standards. By contract, subcontractors are required to meet the same standards. DCAA monitors compliance with procedures.

    Recommendation: To verify contractor compliance with the certification, DSAA should require contractors, and their subcontractors, to maintain their books and records in a manner that permits the U.S. government to verify contractor compliance.

    Agency Affected: Department of Defense: Defense Security Assistance Agency


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