Corporate Fraud and the U.S. Navy in Perspective of:
Conflict-of-Interest, Social Contagion & Manipulation through Trust
Salvatore Di Carlo
Corporate Fraud and Corruption SMPP-6218-G
Professor Kirsten Martin
21 January 2020
Di Carlo 1
1. What is the background for the fraud or corruption case?
Leonard Glenn Francis, owner of Glenn Marine Defense Asia (GMDA), provided
husbandry services to over 70 U.S. Navy ships in the 7th Fleet’s Pacific region. GMDA was in
competition with many other companies for lucrative contracts to service U.S. Navy ships while
docketed in foreign ports. Throughout the time after WWII, the Navy began to rely heavily on
contractors to service ships since major bases like Subic Bay in the Philippines had closed. With
the rise of China as a regional sea power and increased threats from North Korea, more ships
were deployed to the Pacific while also anchoring in numerous non-U.S. ports.1
While in commercial shipping, agents conduct business in foreign ports, the Navy assigns
responsibility to the Commanding Officer who organizes husbanding services which include,
“tugs, pilotage, trash removal, cargo drayage…as well as all port tariffs and fees” together with
the Supply Officer.2 The process in which contracts were awarded were therefore prone to fraud.
Ships personnel would frequently fail to “verify contractor charges for volumetric services,
…commanders not properly monitor funds’ execution in various port calls, lack of segregation of
duties in the ordering and receipt process, and ship’s supply officers not holding current
contracting training or carrying insufficient training”.3
2. How did the fraud or corruption start?
Francis also known as “Fat Leonard” received this nickname from Naval Officers
because of his over 6ft tall stature while weighing nearly 350lbs. Throughout the 90’s he moved
his headquarters to Singapore while he would travel throughout the Pacific to meet Navy
officials and study both the bureaucratic loopholes and human vulnerabilities. He would later
exploit these weaknesses to commit the biggest Naval fraud case in US history overcharging the
Navy by $35 million for his services while spending over $500,000 in bribes.4
1
Whiteley, Jacob T., Jimmy A. Foster, and Kyle A. Johnson. “Contracting for Navy Husbanding Services: An Analysis
of the Fat Leonard Case.” Naval Postgraduate School, 2017.
https://my.nps.edu/documents/105938399/110316974/NPS-CM-18-016.pdf/6042e1c5-e130-4e72-9619fe969a453211.
2
Ibid
Ibid
4
Hyde, Jesse. “Fat Leonard's Crimes on the High Seas,” June 25, 2018.
https://www.rollingstone.com/politics/politics-news/fat-leonards-crimes-on-the-high-seas-197055/.
3
Di Carlo 2
One of the first officials that Francis was able to recruit as a co-conspirator was Paul
Simpkins, an Air Force veteran who officiated over the Navy’s contracting office in Singapore.
In exchange for cash, vacations and prostitutes, Simpkins would help secure contracts, provide
classified intelligence and prevent any accountability for services provided. He would even help
prohibit the utilization of a meter to measure the actual tonnage of trash and sewage removed
from ships. This was one of the most lucrative methods to overcharge the Navy along with
inflated gas and services prices.5
Eventually Francis would expand his network to include several Commanding Officers
and Admirals. He would first gather intelligence about these Officers weaknesses and their
desires to slowly corrupt them to the point that they would even provide him with classified
information about the ship’s future movements. As his network grew and Francis became more
popular, Officers even started recruiting on his behalf. These corrupted Officers would
eventually refer to themselves as the Brotherhood or Wolf Pack cultivating the image of being an
exclusive club among Pacific fleet commanders.6
3. Applicable theories of how the fraud unfolded and how it could have been stopped.
a. Conflict-of-Interest (COI)
According to Dan Ariely, one of the methods in which honest people are enticed to
commit fraud is through COI which occurs when “an employee or agent…has an undisclosed
personal or economic interest in a matter that could influence his professional role”.7 One of the
first high ranking Officers that Francis was able to recruit as a co-conspirator was Captain David
Newland from the USS Blue Ridge who was the 7th Fleet chief of staff. 8 When the Blue Ridge
docket in Singapore on 9 March 2006, Newland and two other Officers were invited to have
dinner with him on the helipad roof of a restaurant. The price of the bottle of cognac alone
5
Whitlock, Craig. “Former Navy Official Gets Six Years in Prison for Taking $350,000 in Bribes from 'Fat Leonard'.”
The Washington Post. WP Company, April 28, 2019.
https://www.washingtonpost.com/news/checkpoint/wp/2016/12/02/former-navy-official-gets-six-years-in-prisonfor-taking-350000-in-bribes-from-fat-leonard/.
6
Hyde, Jesse. “Fat Leonard's Crimes on the High Seas,” June 25, 2018.
7
Morang, Steve C. “U.S. Navy Corruption on the High Seas.” Fraud Magazine, 2018. https://www.fraudmagazine.com/article.aspx?id=4295003093.
8
Standifer, Cid. “Timeline: The 'Fat Leonard' Case.” USNI News, March 16, 2017.
https://news.usni.org/2017/03/16/timeline-fat-leonard-case.
Di Carlo 3
consumed at this dinner cost around $2,000. This directly violated military ethics regulations
where officials are not allowed to accept gifts in excess of $50.9
Dan explains that the danger of accepting gifts or favors is that it creates a feeling of
indebtedness. That feeling “can in turn color our view, making us more inclined to try to help
that person in the future”.10 Shortly afterwards, Francis contacted Newland to inquire why the
rest of the strike group for the aircraft carrier USS Abraham Lincoln were heading to a different
port. Five days later Newland replied that the three escort ships would also dock with the carrier
in Laem Chabang, Thailand where services were exclusively provided by GDMA. After the
seven-day visit, Francis charged the Navy $1.9 million for husbandry services. 11
i. How Could it have been stopped
During one of Dan’s experiments, he proved that disclosure created an even greater bias
when trying to reduce COI. Dan explains that COI is actually essential for conducting business
because the increased bureaucracy and draconian rules would inhibit innovation and the flow of
goods and services.12 One of the most effective methods to eliminate COF is through
regulation.13 A new regulation that the Navy has implemented is the utilization of a Multiple
Award Contracts (MAC) system where multiple husbanding service providers can be contracted
for the same port visit.14 Another disadvantage is that the Navy limits civilian employees to act
as contracting officers for only five years. Because of the relatively high turnover rate of both
military and civilian personnel, Francis was able to exploit his constant presence to maintain a
reputation of being the most reliable contractor. By instituting long-term contract officers,
similar to corporate counterparts, less responsibility would be assigned to the Supply Officer. 15
b. Social Contagion/Culture
Another method in which honest individuals are lured into committing fraud is through
social contagion. When fraud begins to become widespread and tolerated, a culture of fraud is
9
Hyde, Jesse. “Fat Leonard's Crimes on the High Seas,” June 25, 2018.
Ariely, Dan. The (Honest) Truth about Dishonesty: How We Lie to Everyone--Especially Others. New York, NY:
Harper, 2012.
11
Standifer, Cid. “Timeline: The 'Fat Leonard' Case.” USNI News, March 16, 2017.
12
Ariely, Dan. The (Honest) Truth about Dishonesty: How We Lie to Everyone--Especially Others.
13
Ibid
14
Whiteley, Jacob T., Jimmy A. Foster, and Kyle A. Johnson. “Contracting for Navy Husbanding Services: An Analysis
of the Fat Leonard Case.”
15
Ibid
10
Di Carlo 4
then institutionalized within an organization. In analyzing how fraud became so rampant at
Enron, Dan concluded that social contagion was one of the main factors. This means that
cheating can be “infectious and can be increased by observing bad behavior of others around us.
Specifically, it seems that the social forces around us work in two different ways: When the
cheater is part of a social group, we identify with that person and, as a consequence, feel that
cheating is more socially acceptable”. 16
Francis utilized this psychological behavior very strategically when recruiting new coconspirators. He would often invite Officers as a group to dinners intentionally trying to mix new
attendees with already established co-conspirators. Mike Misiewicz, who was the new
commander of the flag ship USS Blue Ridge, actually was recommended by his instructor to
contract services from GDMA as a student at Surface Warfare Officer School. Once in Japan,
Mike was approached by Ed Aruffo a former Navy Officer, to have dinner together with himself
and Francis. They would not only have dinner together but also frequent gentlemen’s clubs in
Tokyo.17 The in-group mentality was further cultivated when the co-conspiring Officers labeled
themselves as the brotherhood and wolfpack. This group mentality legitimized their ethical
violations and created a sense of entitlement. Since GDMA did indeed provide excellent
services, the Officers justified their actions by thinking that they chose the best provider
regardless of the lavish gifts or favors they received.18
At the height of cementing a culture of fraud amongst Officers, Francis refurbished a
decommissioned warship to a party boat called the Braveheart. The interior was redesigned to be
a massive strip club where live sex shows were performed while Officers dined on Kobe beef
and consumed vintage cognac. These kinds of events eventually became the norm in the 7th fleet
where Officers also got accustomed to ask Francis for luxury hotel rooms, high-end escorts and
expensive presents for their families.19
16
Ariely, Dan. The (Honest) Truth about Dishonesty: How We Lie to Everyone--Especially Others.
Whitlock, Craig. “'Fat Leonard' Bribery Scandal Claims Navy Officer Who Escaped Cambodia's Killing Fields as a
Child.” The Washington Post. WP Company, April 28, 2019.
https://www.washingtonpost.com/news/checkpoint/wp/2016/04/29/fat-leonard-bribery-scandal-claims-navyofficer-who-escaped-cambodias-killing-fields-as-a-child/.
18
Morang, Steve C. “U.S. Navy Corruption on the High Seas.” Fraud Magazine, 2018.
19
Hyde, Jesse. “Fat Leonard's Crimes on the High Seas,” June 25, 2018.
17
Di Carlo 5
i. How it could have been stopped.
One method to contain negative social contagion according to Dan, is by implementing
the Broken Windows Theory. This theory was initially conceptualized to combat crime in a
neighborhood. George Kelling and James Wilson used the broken windows as an analogy to
prevent greater crimes by strictly enforcing laws against petty crimes. When people observe a
building with shattered windows they are enticed to break more windows. That is why if all
small crimes are punished, a zero tolerance for crime is exuberated which will then prevent more
serious crimes from occurring. 20
The Officers should have been punished when they were exceeding the dollar amount of
gifts they were receiving such as accepting invitations to dinner. This would have set a precedent
that any ethical violations, no matter how small, would be prosecuted which would have also
prevented the framework for Francis to establish a monopoly on husbanding services. One of the
problems was that after 9/11, the Navy reassigned most of its 140 NCIS agents focused on
economic crime to dealing with terrorism. Only 9 were left to investigate white-collar crimes of
which none of them were assigned to the Asia-Pacific region. 21
Another method to contain negative influence is through positive social contagion in
form of whistleblowers. David Schaus, who was a junior Officer, had several encounters with
Francis while assigned to the Ship Support Office in Hong Kong. Schaus who maintained his
integrity throughout his tour in China once confronted Francis when he was presented with a bill
for the removal of 100,000 gallons of sewage from a ship that could only carry 12,000. Francis
responded in a furious manner and was then able to bypass Schaus to receive payment for the
fraudulent invoice. After witnessing several of these incidents and not receiving any support
from his chain of command, he notified NCIS. By this time Francis had although already
infiltrated the highest echelons of the Navy as investigations were closed upon the request of
Admirals. After Schaus transferred to his next duty station his position in Hong Kong was
eliminated. 22
20
Ariely, Dan. The (Honest) Truth about Dishonesty: How We Lie to Everyone--Especially Others.
Morang, Steve C. “U.S. Navy Corruption on the High Seas.” Fraud Magazine, 2018.
22
Grazier, Dan, and Liz Hempowicz. “Fat Leonard and the Need for Whistleblower Protection.” Project on
Government Oversight, June 28, 2016. https://www.pogo.org/analysis/2016/06/fat-leonard-and-need-forwhistleblower-protection/.
21
Di Carlo 6
c. Trust/Emotional appeal
Just as Bernie Madoff was able to mislead his investors by invigorating a sense of trust
through his personality, so did Francis to garner the trust of his future co-conspirators so that
they would skew the risk-benefit calculation in favor of committing fraud. Francis was not only
able to use his personality but also meticulously observed and researched the weaknesses of
potential recruits. This was the case with John Beliveau II, a supervisory NCIS agent who
suffered from anxiety, OCD and loneliness. When Francis met him in Singapore, he quickly was
able to identify John’s weaknesses and exploited them. He gave John the impression that he
cared about him by providing prostitutes, money and alcohol as coping mechanisms. This
arrangement became one of the most fruitful relations for Francis since John was able to warn
him about ongoing sting operations by having access to highly classified information.23
Commander Mike Misiewicz was initially harder to recruit but Francis was able to gain
his trust by pretending to share common values. When Francis became aware that Mike was an
ardent Catholic who cherished family values, he invited Mike to his home presenting himself as
a family man and gifted him with a gold coin inscribed with a cross. Francis also found out that
as a child, Mike had fled the fields of Cambodia where most of his family had been massacred.
Luckily, Mike was adopted by a family in America and after graduating high school was
accepted into the Naval Academy. Francis then preyed upon Mike’s past by arranging a private
jet with all expenses included to fly Mike and his family to Cambodia to be reunited with his
surviving family members. After this trip Mike fulfilled all of Francis’ requests.24
i. How it could have been stopped.
Trust is an innate quality of people and essential for conducting business. Therefore, trust
is one of the most effective tools someone can utilize when recruiting co-conspirators. According
to Diana Henriques, if someone has a very trusting personality it is very hard not to get caught up
in the scheme.25 In addition, Dan describes that we also have an altruistic tendency to help
someone cheat once we have built a certain rapport with them.26 In these circumstances,
23
Davis, Kristina. “Ex-NCIS Agent Imprisoned in 'Fat Leonard' Navy Fraud Scheme.” The San Diego Union-Tribune,
October 15, 2016. https://www.sandiegouniontribune.com/sd-me-ncis-sentence-20161014-story.html.
24
Whitlock, Craig. “'Fat Leonard' Bribery Scandal Claims Navy Officer Who Escaped Cambodia's Killing Fields as a
Child.”
25
Henriques, Diana. “Session 3: Corporate Fraud and Corruption.” George Washington University. January 8, 2020.
26
Ariely, Dan. The (Honest) Truth about Dishonesty: How We Lie to Everyone--Especially Others.
Di Carlo 7
individuals need to stay rational and realize that sacrificing their integrity for friendship or
loyalty is counterproductive as the negative consequences will eventually outweigh the initial
benefits. By rescinding the gifts and favors of the original cheater, it is harder to develop an
emotional connection and therefore be obligated to return a favor.
Since nearly “92% of the acts of alleged fraud in the Fat Leonard case were categorized
as collusion”, the Navy should therefore implement mandatory training on procurement fraud
indicators.27 As with all other institutions, the Navy needs to also incorporate further ethics
training to include the specifics of this case. By providing employees with sufficient ethics
training and awareness to indications of being lured into committing fraud, less trust will be lent
to cheaters.
27
Whiteley, Jacob T., Jimmy A. Foster, and Kyle A. Johnson. “Contracting for Navy Husbanding Services: An Analysis
of the Fat Leonard Case.”
Di Carlo 8
Bibliography
Ariely, Dan. The (Honest) Truth about Dishonesty: How We Lie to Everyone--Especially Others.
New York, NY: Harper, 2012.
Davis, Kristina. “Ex-NCIS Agent Imprisoned in 'Fat Leonard' Navy Fraud Scheme.” The San Diego
Union-Tribune, October 15, 2016. https://www.sandiegouniontribune.com/sd-me-ncis-sentence20161014-story.html.
Grazier, Dan, and Liz Hempowicz. “Fat Leonard and the Need for Whistleblower Protection.”
Project on Government Oversight, June 28, 2016. https://www.pogo.org/analysis/2016/06/fatleonard-and-need-for-whistleblower-protection/.
Henriques, Diana. “Session 3: Corporate Fraud and Corruption.” George Washington University.
January 8, 2020.
Hyde, Jesse. “Fat Leonard's Crimes on the High Seas,” June 25, 2018.
https://www.rollingstone.com/politics/politics-news/fat-leonards-crimes-on-the-high-seas197055/.
Morang, Steve C. “U.S. Navy Corruption on the High Seas.” Fraud Magazine, 2018.
https://www.fraud-magazine.com/article.aspx?id=4295003093.
Standifer, Cid. “Timeline: The 'Fat Leonard' Case.” USNI News, March 16, 2017.
https://news.usni.org/2017/03/16/timeline-fat-leonard-case.
Whiteley, Jacob T., Jimmy A. Foster, and Kyle A. Johnson. “Contracting for Navy Husbanding
Services: An Analysis of the Fat Leonard Case.” Naval Postgraduate School, 2017.
https://my.nps.edu/documents/105938399/110316974/NPS-CM-18-016.pdf/6042e1c5-e1304e72-9619-fe969a453211.
Whitlock, Craig. “'Fat Leonard' Bribery Scandal Claims Navy Officer Who Escaped Cambodia's
Killing Fields as a Child.” The Washington Post. WP Company, April 28, 2019.
https://www.washingtonpost.com/news/checkpoint/wp/2016/04/29/fat-leonard-bribery-scandalclaims-navy-officer-who-escaped-cambodias-killing-fields-as-a-child/.
Whitlock, Craig. “Former Navy Official Gets Six Years in Prison for Taking $350,000 in Bribes
from 'Fat Leonard'.” The Washington Post. WP Company, April 28, 2019.
https://www.washingtonpost.com/news/checkpoint/wp/2016/12/02/former-navy-official-getssix-years-in-prison-for-taking-350000-in-bribes-from-fat-leonard/.
Di Carlo 9