War Profiteering:
Proposed Legislation
2007 NDIA Educational Seminar
San Antonio, TX
March 12, 2007
Mark S. Dostal
PricewaterhouseCoopers LLP
Chicago, IL
Definitions
Background – Excessive Profits
Proposed Legislation
Merriam-Webster’s Online Dictionary
Main Entry: prof·i·teer
Pronunciation: \prä-fə-tir\
Function: noun
Date: 1912
one who makes what is considered an unreasonable profit
especially on the sale of essential goods during times of
emergency
— profiteer intransitive verb
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Wikipedia, the free encyclopedia
A war profiteer is any person or organization that improperly profits from
warfare or by selling weapons and other goods to parties at war. The term has
strong negative connotations.
Currently, most established arms manufacturers, defense contractors, and other
companies doing business with Western militaries enjoy good reputations.
Many are publicly traded entities who proudly brandish their government
contracts as evidence of financial strength. A company whose products are "in
the fight" often advertises the fact as proof of their quality, or simply out of
patriotic pride. Civilian-legal versions of certain items, such as personal
firearms, knives, boots, and even vehicles are openly sought after on the
legitimate market. The positions of cooks, technicians, truck drivers, and others
who support military operations are increasingly becoming privatized. In this
environment, simply making money from war is hardly a punishable crime.
Nevertheless, those at intersection of military power and profitable business
have drawn heavy criticism on moral grounds. A company seen as overstepping
its bounds by putting its own bottom line ahead of the war effort or the welfare
of soldiers can come in for serious attacks.
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Background:
Excessive Profits Under the Renegotiation Acts
• The Renegotiation Act, which was enacted on April 28, 1942, required contractors
to provide written consent to compulsory renegotiation of contracts issued before
December 31, 1945 for war goods and made express provision for a
redetermination of excessive profits, as determined by the War Contracts Price
Adjustment Board.
• In the Renegotiation Act of 1951, 50 U.S.C. 1211 et seq., which amended previous
versions of the Renegotiation Act, Congress set forth the means of determining the
existence and extent of excessive profits in a series of guidelines known as
“statutory factors.” See 50 U.S.C. App. § 1213(e).
– Statutory factors required the consideration of the character of the renegotiated contractor’s
business, the net worth and capital employed, and the reasonableness of the contractor’s
costs and profits that were to be assembled in order to construct a reasonably accurate
comparison of the contractor’s performance in the fiscal year under renegotiation with the
performance of similar firms.
– Statutory factors used to provide the means of identifying contractors sufficiently similar to the
renegotiated contractor that were considered to be a part of the renegotiated contractor’s
industry, and to determine the pricing policy and profit structure of that industry.
– Reviewing authority would consider the renegotiated contractor’s efficiency, the business risks
assumed by that contractor, and that contractor’s contribution to the defense effort, to
ascertain how well the contractor fared against other firms in its industry on points affecting
profitability in a competitive market.
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Background:
Excessive Profits Under the Renegotiation Acts (con’t)
• Pursuant to Public Law 95-431, Title V, § 501, Oct. 10, 1978 (92 Stat. 1043), the
Renegotiation Act of 1951 became inapplicable to contracts performed after September 30,
1976.
• H.R 3020, the “War Profiteering Prohibition Act of 1985”, a bill to revise and reinstate the
Renegotiation Act of 1951. Statement of Paul Math, Associate Director National Security
and International Affairs Division, GAO, before the Subcommittee on General Oversight
and Investigations of the Committee on Banking, Finance, and Urban Affairs (10/30/85):
– Concern about increase in defense spending and ability of DoD to ensure contractor profit levels
are fair and equitable.
– Clear understanding that contractors must anticipate earning an adequate profit before they will
invest shareholder resources to perform government contracts; significant effect on industrial
base.
– Profit ’76 study: low levels of profit in the 1970s believed to result in low levels of contractor
investment; develop policy to encourage capital investment to reduce production costs.
– Defense Financial and Investment Review (DFAIR): along the line of Profit ’76, but examined
DoD financing and pricing policies as well as integration with profit policy.
– GAO Recommendation: rather than reestablish the Renegotiation Board, enact legislation to
provide a systematic procedure to periodically review DoD’s profit policy.
• GAO “Proposal for Program to Study the Profitability of Government Contractors” (11/86)
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Proposed War Profiteering Legislation, 110th Congress
• S. 119 – “War Profiteering Prevention Act of 2007”,
Introduced January 4, 2007
• H. R. 400 – “War Profiteering Prevention Act of 2007”,
Introduced January 11, 2007
• S. 606 – “Honest Leadership and Accountability in
Contracting Act of 2007”, Introduced February 15, 2007
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Proposed War Profiteering Legislation, 110th Congress
S.119 – War Profiteering Prevention Act of 2007
• Introduced by Senator Leahy (D-VT) and joined by
Senators Bingaman (D-NM), Harkin (D-IA), Kerry (DMA), Lautenberg (D-LA), Rockefeller (D-WV), Dorgan (DND), Schumer (D-NY), Wyden (D-OR), Cantwell (D-WA),
Clinton (D-NY), Menendez (D-NJ), and Nelson (D-NE).
• SEC. 2 Prohibition of Profiteering amends 18 U.S.C.
Chapter 47 by adding at the end the following:
§1039. War profiteering and fraud relating to military
action, relief, and reconstruction efforts.
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Proposed War Profiteering Legislation, 110th Congress
S.119 – War Profiteering Prevention Act of 2007 (con’t)
(a) Prohibition(1) IN GENERAL- Whoever, in any matter involving a
contract or the provision of goods or services, directly
or indirectly, in connection with a war or military action
or relief or reconstruction activities within the
jurisdiction of the United States Government,
knowingly and willfully—
(A)(ii) materially overvalues any good or service with
the specific intent to defraud and excessively profit
from the war, military action, or relief or reconstruction
activities;
shall be fined under paragraph (2), imprisoned not
more than 20 years, or both; . . .
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Proposed War Profiteering Legislation, 110th Congress
S.119 – War Profiteering Prevention Act of 2007 (con’t)
(a) Prohibition(2) FINE- A person convicted of an offense under
paragraph (1) may be fined the greater of-(A) $1,000,000; or
(B) if such person derives profits or other proceeds
from the offense, not more than twice the gross
profits or other proceeds.
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Proposed War Profiteering Legislation, 110th Congress
H. R. 400 - War Profiteering Prevention Act of 2007
• Introduced by Representative Abercrombie (D-HI).
• SEC. 2 Prohibition of Profiteering amends 18 U.S.C.
Chapter 47 by adding at the end the following:
§1039. War profiteering and fraud relating to military
action, relief, and reconstruction efforts.
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Proposed War Profiteering Legislation, 110th Congress
H. R. 400 - War Profiteering Prevention Act of 2007 (con’t)
(a) Prohibition(1) IN GENERAL- Whoever, in any matter involving a
contract or the provision of goods or services, directly
or indirectly, in connection with a war or military action
or relief or reconstruction activities within the
jurisdiction of the United States Government,
knowingly and willfully—
(A)(ii) materially overvalues any good or service with
the specific intent to defraud and excessively profit
from the war, military action, or relief or reconstruction
activities;
shall be fined under paragraph (2), imprisoned not
more than 20 years, or both.
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Proposed War Profiteering Legislation, 110th Congress
H. R. 400 - War Profiteering Prevention Act of 2007 (con’t)
(a) Prohibition(2) FINE- A person convicted of an offense under
paragraph (1) may be fined the greater of-(A) $1,000,000; or
(B) if such person derives profits or other proceeds
from the offense, not more than twice the gross
profits or other proceeds.
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Proposed War Profiteering Legislation, 110th Congress
S.606 – Honest Leadership and Accountability in Contracting
Act of 2007
• Introduced by Senator Dorgan (D-ND) and joined by
Senators Bayh (D-IN), Bingaman (D-NM), Boxer (D-CA),
Brown (D-OH), Clinton (D-NY), Conrad (D-ND), Durbin
(D-IL), Feingold (D-WI), Feinstein (D-CA), Harkin (D-IA),
Kennedy (D-MA), Kerry (D-MA), Landrieu (D-NJ),
Lautenberg (D-LA), Leahy (D-VT), Menendez (D-NJ),
Mikulski (D-MD), Nelson (D-NE), Obama (D-IL), Pryor
(D-AR), Reid (D-NV), and Wyden (D-OR).
• SEC. 101 Prohibition of War Profiteering and Fraud
• SEC. 102 Suspension and Debarment of Unethical
Contractors
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Proposed War Profiteering Legislation, 110th Congress
S.606 – Honest Leadership and Accountability in Contracting
Act of 2007 (con’t)
• SEC. 101 Prohibition of War Profiteering and Fraud amends
18 U.S.C. Chapter 47 by adding to §1039. War profiteering and
fraud.
(a) Prohibition(1) IN GENERAL- Whoever, in any matter involving a contract or the
provision of goods or services, directly or indirectly, in connection
with a war or military action knowingly and willfully-(D) materially overvalues any good or service with the specific
intent to defraud and excessively profit from the war or military
action;
shall be fined under paragraph (2), imprisoned not
more than 20 years, or both.
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Proposed War Profiteering Legislation, 110th Congress
S.606 – Honest Leadership and Accountability in Contracting
Act of 2007 (con’t)
• SEC. 101 Prohibition of War Profiteering and Fraud amends
18 U.S.C. Chapter 47 by adding to §1039. War profiteering
and fraud.
(a) Prohibition-
(2) FINE- A person convicted of an offense under paragraph
(1) may be fined the greater of-(A) $1,000,000; or
(B) if such person derives profits or other proceeds from
the offense, not more than twice the gross profits or other
proceeds.
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Proposed War Profiteering Legislation, 110th Congress
S.606 – Honest Leadership and Accountability in Contracting
Act of 2007 (con’t)
• SEC. 102. Suspension and Debarment of Unethical
Contractors
(a) In General- Not later than 90 days after the date of
enactment of this Act, the Federal Acquisition Regulation
issued pursuant to section 25 of the Office of Federal
Procurement Policy Act (41 U.S.C. 421) shall be revised to
provide that no prospective contractor shall be considered to
have a satisfactory record of integrity and business ethics if it-(1) Has exhibited a pattern of overcharging the Government
under Federal contracts; or
(2) Has exhibited a pattern of failing to comply with the law,
including tax, labor and employment, environmental,
antitrust, and consumer protection laws.
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Other Proposed Legislation, 110th Congress
• S. 274 – “Federal Employee Protection of Disclosures
Act”, Introduced January 11, 2007
• S. 680 – “Accountability in Government Contracting Act
of 2007”, Introduced February 17, 2007
• H. R. 984 – “Executive Branch Reform Act of 2007”,
Introduced February 12, 2007
• H. R. 985 – “Whistleblower Protection Enhancement Act
of 2007”, Introduced February 12, 2007
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Profitability and Risk Panel
2007 NDIA Educational Seminar
San Antonio, TX