Sales of Sensitive Military Property to the Public
Gao ID: GAO-07-929R July 6, 2007Each year the Department of Defense (DOD) sells millions of dollars worth of excess property to the public through a Web site run by its contractor, Government Liquidation. Before excess property can be sold on this site, it is DOD policy to screen the property to ensure it cannot be reutilized by the department in another location or that its sale would not result in sensitive military property becoming publicly available. DOD assigns demilitarization codes to sensitive military property so that, when the property is no longer in use, it is recognized and disposed of properly. However, on several prior occasions--most recently at a July 2006 hearing--we reported that management control breakdowns in DOD's excess property reutilization program resulted in the sale of sensitive military property to the public through the liquidation Web site, including property subject to demilitarization controls (demil-required property) such as F-14 aircraft parts. One country with operational F-14s, Iran, is known to be seeking these parts. If such parts were publicly available, it could jeopardize national security. At the July 2006 hearing, DOD officials testified that they would take action to prevent the improper sale of sensitive military property, including demil-required property. Given the seriousness of the security risk posed by the sale of sensitive military property to the public, Congress requested that we investigate whether (1) demil-required property was still being sold on DOD's contractor-run liquidation Web site and (2) whether DOD has taken steps to prevent further improper sales of sensitive items, including controlled and demil-required property.
After monitoring excess property sales for about 7 months, we concluded that DOD has made significant improvements in preventing the sale, through the contractor-run liquidation Web site, of property coded as being demil-required. During the first month of our investigation, in September 2006, we determined that DOD had sold 295 items coded as being demil-required to the public. Although a number of demil-required items were offered for sale on the liquidation Web site after September 2006, these items were detected by DOD or the contractor and the property was withdrawn prior to sale. Furthermore, DRMS reported that, between August 2006 and March 2007, 59,762 line items of demil-required and sensitive property were removed from the excess property disposal system prior to sale, representing a total of 1.3 million individual pieces of demil-required or other sensitive property items. This included items that would have been sold on the liquidation Web site. DOD told us that it has taken steps to prevent further improper sales by implementing various controls, including (1) restructuring the batch lot processes (the way property is grouped into lots for sale), (2) increasing scrutiny of property before sale, (3) tightening controls on the release of property, (4) creating a postsale review and retrieval process to account for improper sales, and (5) newly designating some property items as controlled and taking steps to prevent their sale to the public. Although DRMS has clearly taken a proactive approach to identifying and removing sensitive items from its system, we determined that approximately 1,400 items newly designated as controlled property were sold to the public in February 2007. DRMS told us the parts were sold to the public because it did not successfully update its automated control list and remove these items prior to their being listed on the Web site. DRMS had identified these items as parts that could be used on the F-14 fighter aircraft.
GAO-07-929R, Sales of Sensitive Military Property to the Public
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July 6, 2007:
The Honorable Christopher Shays:
Ranking Member:
Subcommittee on National Security and Foreign Affairs: Committee on
Oversight and Government Reform: House of Representatives:
The Honorable Dennis J. Kucinich:
House of Representatives:
Subject: Sales of Sensitive Military Property to the Public:
Each year the Department of Defense (DOD) sells millions of dollars
worth of excess property to the public through a Web site run by its
contractor, Government Liquidation. Before excess property can be sold
on this site, it is DOD policy to screen the property to ensure it
cannot be reutilized by the department in another location or that its
sale would not result in sensitive military property becoming publicly
available. DOD assigns demilitarization codes to sensitive military
property so that, when the property is no longer in use, it is
recognized and disposed of properly. However, on several prior
occasions--most recently at a July 2006 hearing--we reported that
management control breakdowns in DOD's excess property reutilization
program resulted in the sale of sensitive military property to the
public through the liquidation Web site,[Footnote 1] including property
subject to demilitarization controls (demil-required property) such as
F-14 aircraft parts. One country with operational F-14s, Iran, is known
to be seeking these parts. If such parts were publicly available, it
could jeopardize national security.
At the July 2006 hearing, DOD officials testified that they would take
action to prevent the improper sale of sensitive military property,
including demil-required property. Given the seriousness of the
security risk posed by the sale of sensitive military property to the
public, you requested that we investigate whether (1) demil-required
property was still being sold on DOD's contractor-run liquidation Web
site and (2) whether DOD has taken steps to prevent further improper
sales of sensitive items, including controlled and demil-required
property.
To perform this investigation, we relied primarily on the national
stock numbers (NSN)[Footnote 2] DOD assigns to each property item.
Relying on the NSN created some limitations to our investigation--for
example, if an item was coded improperly, we would not have been able
to identify it. To determine whether DOD had taken steps to prevent the
improper sale of sensitive military property to the public, we obtained
and reviewed information from the Defense Reutilization and Marketing
Service (DRMS), which is part of DOD. The limitations to our
investigation are discussed more fully in the Scope and Methodology
section below. We conducted our work from September 2006 through June
2007 in accordance with quality standards for investigations as set
forth by the President's Council on Integrity and Efficiency.
Results in Brief:
After monitoring excess property sales for about 7 months, we concluded
that DOD has made significant improvements in preventing the sale,
through the contractor-run liquidation Web site, of property coded as
being demil-required. During the first month of our investigation, in
September 2006, we determined that DOD had sold 295 items coded as
being demil-required to the public. Although a number of demil-required
items were offered for sale on the liquidation Web site after September
2006, these items were detected by DOD or the contractor and the
property was withdrawn prior to sale.
Furthermore, DRMS reported that, between August 2006 and March 2007,
59,762 line items of demil-required and sensitive property were removed
from the excess property disposal system prior to sale, representing a
total of 1.3 million individual pieces of demil-required or other
sensitive property items.[Footnote 3] This included items that would
have been sold on the liquidation Web site. DOD told us that it has
taken steps to prevent further improper sales by implementing various
controls, including:
* restructuring the batch lot processes (the way property is grouped
into lots for sale),
* increasing scrutiny of property before sale,
* tightening controls on the release of property,
* creating a postsale review and retrieval process to account for
improper sales, and:
* newly designating some property items as controlled and taking steps
to prevent their sale to the public.
Although DRMS has clearly taken a proactive approach to identifying and
removing sensitive items from its system, we determined that
approximately 1,400 items newly designated as controlled property were
sold to the public in February 2007. DRMS told us the parts were sold
to the public because it did not successfully update its automated
control list and remove these items prior to their being listed on the
Web site. DRMS had identified these items as parts that could be used
on the F-14 fighter aircraft.
Scope and Methodology:
We focused our work on demil-required property, non-demil-required F-14
parts, and non-demil-required technology related to the F-14. To
determine if controlled or demil-required property continued to be sold
to the public, we obtained the NSN for approximately 10 million
property items sold by DOD's contractor from September 2006 through
March 2007. We then compared the NSNs to database files of property
that was coded as controlled or demil-required. The control files we
used included Federal Logistics Information System (FLIS) data, which
was used to identify the demilitarization code for military equipment
and property items, a control file of defective or nonconforming
property, and other control files listing parts and technology
associated with the F-14 fighter aircraft. If the NSN of property
offered for sale matched those in the control files, we monitored the
sales event to determine whether the property was sold or removed from
the liquidation Web site prior to sale.[Footnote 4]
We have used the data contained in the FLIS and Defense Logistics
Agency excess property databases in our prior work and found them to be
reliable. Consequently, for the purposes of the analyses performed in
this investigation, we determined the data to be reliable with certain
limitations. These limitations result from our use of NSNs listed on
the contractor-run Web site. First, we did not attempt to review the
DOD system that assigns demilitarization categories to military
property, meaning that we accepted the coding system as it exists
currently. Second, we could not account for coding errors in the
process of listing property on the Web site, meaning that demil-
required property may have been sold during this time period because
they were not coded properly. Finally, about 10 percent, or
approximately 1 million property items offered for sale during our
investigation, did not have a valid NSN, and for these we were unable
to make a comparison to control files. These items had either an
incomplete NSN or a local stock number (LSN).[Footnote 5] Given a
partial NSN, we were often able to identify the type of property being
sold.
To determine whether DOD had taken steps to prevent the improper sale
of sensitive military property to the public, we gained an
understanding of the controls that DOD had implemented and those
planned in the future, reviewed DOD's statistics on the number of
sensitive property items it identified and removed from its excess
property disposal system, and received briefings from DRMS officials on
their progress. We also monitored DRMS actions to implement
improvements in excess property systems, processes, and controls.
DOD was given an opportunity to review a draft of this report and
provide comments. In providing oral comments, DOD officials agreed with
our investigative results and conclusions.
Background:
In 2002 we reported on serious breakdowns in management processes,
systems, and controls that resulted in substantial waste and
inefficiency in DOD's excess property reutilization program or
significant vulnerabilities involving the release of sensitive military
property. Our June 2002[Footnote 6] testimony revealed that DOD sold
excess chemical and biological protective gear at the same time it was
procuring these garments. Then, in a November 2003[Footnote 7] report,
we described how we established a fictitious company and purchased over
the Internet, from DOD's liquidation contractor, key excess DOD
biological equipment and related protective clothing necessary to
produce and disseminate biological warfare agents.
In a May 2005 report,[Footnote 8] we noted that DOD claimed nearly $500
million in lost, damaged, and missing excess property from fiscal years
2002 through 2004, including demil-required property, such as chemical
and biological protective suits, body armor, and guided missile
warheads. This report also included information on continued waste and
inefficiency in DOD's reutilization program. To illustrate this point,
our undercover investigator used a fictitious identity to purchase over
the Internet, from DOD's liquidation contractor, new and unused excess
military property that DOD continued to buy and utilize. Over a year
later, in July 2006,[Footnote 9] we reported that our undercover
investigator purchased sensitive military equipment items that were
improperly sold to the public by DOD's liquidation contractor. These
items included body armor inserts, known as SAPIs, which were currently
in demand by U.S. soldiers in Iraq and Afghanistan; a time-selector
unit used to ensure the accuracy of computer-based equipment, such as
global positioning systems and system-level clocks; digital
microcircuits used in F-14 fighter aircraft; and numerous other
controlled items. We also identified nearly 80 individuals who
purchased over 2,500 sensitive items from DOD's liquidation contractor
between November 2005 and June 2006. These sensitive excess military
items should not have been sold to the public.
Demil-Required Property Sales:
After monitoring excess property sales for about 7 months, we concluded
that DOD has made significant improvements in preventing the sale,
through the contractor-run liquidation Web site, of property coded as
being demil-required. Throughout our investigation, we detected items
that were coded as being controlled or demil-required, but DRMS or the
liquidation contractor regularly identified the same property items and
removed them from the liquidation Web site before they were sold. In
September 2006, we detected the sale of 295 military items coded as
being demil-required, including F-14 parts that should not have been
sold to the public.[Footnote 10] We referred pertinent information
about these sales to the Defense Criminal Investigative Service (DCIS)
and Immigration and Customs Enforcement (ICE), a branch of the
Department of Homeland Security, for review and appropriate action.
More detailed information on the number of demil-required property
items and our results by month are provided in the following table.
Table 1: Results of Testing for the Sale of Demil-Required Property on
Liquidation Web Site:
Month and year; Percent of property that was tested; .
Month and year: September 2006;
Number of property items offered for sale: 697,889; Number of property
items tested: (items with an NSN): 587,796; Percent of property: 84;
Number of demil-required items actually sold: 295.
Month and year: October 2006;
Number of property items offered for sale: 551,894; Number of property
items tested (items with an NSN): 470,277; Percent of property: 85;
Number of demil-required items actually sold: 0.
Month and year: November 2006;
Number of property items offered for sale: 3,172,916; Number of
property items tested (items with an NSN): 2,888,118; Percent of
property: 91;
Number of demil-required items actually sold: 0.
Month and year: December 2006;
Number of property items offered for sale: 1,662,949; Number of
property items tested (items with an NSN): 1,416,766; Percent of
property: 85;
Number of demil-required items actually sold: 0.
Month and year: January 2007;
Number of property items offered for sale: 1,411,296; Number of
property items tested (items with an NSN): 1,294,750; Percent of
property: 92;
Number of demil-required items actually sold: 0.
Month and year: February 2007;
Number of property items offered for sale: 1,183,428; Number of
property items tested (items with an NSN): 1,088,941; Percent of
property: 92;
Number of demil-required items actually sold: 0.
Month and year: March 2007;
Number of property items offered for sale: 2,704,962; Number of
property items tested (items with an NSN): 2,504,011; Percent of
property: 93;
Number of demil-required items actually sold: 0.
Total Month and Year;
Total: Number of property items offered for sale: 11,385,334; Total:
Number of property items tested (items with an NSN): 10,250,659; Total:
Percent of property: 90;
Number of demil-required items actually sold: 295.
Source: GAO analysis of DOD data.
[End of table]
As discussed in the Scope and Methodology section above, there were
some limitations to using the NSNs listed on the contractor-run Web
site for our investigation. First of all, we did not attempt to review
the DOD system that assigns demilitarization categories to military
property, meaning that we accepted the coding system as it exists
currently. Second, we could not account for coding errors in the
process of listing property on the Web site, meaning that demil-
required property may have been sold during this period because they
were not coded properly. Finally, about 10 percent, or approximately 1
million property items offered for sale during our investigation, did
not have a valid NSN, and for these we were unable to make a comparison
to control files. Many of these items often had a partial stock number,
indicating that they were generally office and computer equipment,
furniture, parts, and machinery. Usually this type of property is
offered for sale in batch lots. However, the lack of valid NSNs
increases the risk that demil-required property may not have been
identified and processed correctly. According to DRMS, it has tried to
reduce this risk by performing a physical inspection of property with
an incomplete NSN or an LSN. DRMS said it excludes any item from sale
if the proper demilitarization code cannot be determined.
DRMS Corrective Actions:
DRMS reported that, between August 2006 and March 2007, it removed
59,762 line items of demil-required and sensitive property from the
excess property disposal system prior to sale, representing a total of
1.3 million individual pieces of demil-required or other sensitive
property items.[Footnote 11] DOD told us that it has taken steps to
prevent further improper sales by implementing various controls,
including:
restructuring the batch lot processes (the way property is grouped into
lots for sale) by consolidating it at four locations and performing a
physical inspection of all property,
* increasing scrutiny of property before sale,
* tightening controls on the release of property,
* creating a postsale review and retrieval process to account for
improper sales, and:
* newly designating some property items as sensitive and taking steps
to prevent their sale to the public.
To increase scrutiny on property before sale, DRMS told us that it took
the following actions:
* Modified its contract with the liquidation company in September 2006
to include incentives and disincentives based on performance. Under the
terms of the new contract, if the company discovers export-controlled
property or demil-required property and removes it from the Web site
prior to sale, it is rewarded financially. DRMS told us that, if such
property is sold by the contractor, there are financial penalties.
* Increased screening of property before sale by performing automated
reviews of the property being sold on the liquidation Web site and
dedicating staff to physically review the site.
* Match, before it is sold, all property to a specific list of property
types that should not be sold. Included in DRMS and contractor
verification efforts is a daily automated screening of the entire
inventory of FLIS to detect any changes in demilitarization codes.
Furthermore, DRMS told us that it has also strengthened controls in the
release of property to minimize the risk of unauthorized release to
walk-in customers. To address future situations in which new NSNs are
added to control lists or changes in demilitarization codes occur, DRMS
told us that it has established a postsale review process to identify
and recover any property that, after sale, is determined to be
sensitive or demil-required. In these situations, DRMS told us that the
liquidation contractor contacts the customer to reacquire the property.
During the course of our investigation we learned that additional
property items were determined to be sensitive by the Defense Logistics
Agency and should not be sold on the Government Liquidation Web site.
DOD has a separate listing of controlled military property, which
includes non-demil-required items such as uniforms, lab equipment,
defective property, and non-demil-required F-14 parts. When we obtained
an updated list of controlled military property with property items
that had been newly designated as sensitive, we screened Web site sales
and compared it with the new list. We then determined that
approximately 1,400 newly designated sensitive items were sold to the
public in February 2007.[Footnote 12] Although these were not demil-
required property items, they were identified as parts that could be
used on the F-14 fighter aircraft. DRMS told us that it added these
parts to its control list; however, the automated system that screens
property sold on the Web site was not properly updated to reflect the
additional property items. DRMS reported that this problem was resolved
in March 2007 and that it has reacquired (or is in the process of
reacquiring) these property items. In some cases, however,
accountability for the property may have been lost since some customers
have denied receiving the property and the government contractor is
unable to locate it. According to DRMS, the contractor is researching
the sales to determine whether the property was in fact released to the
customer.
Conclusion:
DOD has made significant progress in preventing demil-controlled and
sensitive property from being sold through the Government Liquidation
Web site. However, we did observe two occasions where demil-required
and controlled property was sold after DOD had implemented new
controls. The postsale review process DOD is implementing may help it
recover many of the improperly sold items. Nevertheless, as DOD moves
forward identifying additional items that could be considered
sensitive, it is important for program managers to test controls and
provide oversight at the implementation phase.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to the Director
of the Defense Logistics Agency. We will provide copies to others on
request, and the report is available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov]. GAO staff who made key contributions
to this report are Mario Artesiano, Andrew McIntosh, Richard Newbold,
John Ryan, and Viny Talwar. Contact points for our Offices of
Congressional Relations and Public Affairs:
may be found on the last page of this report. If you or your staffs
have any questions about this report, please contact me at (202) 512-
9505 or kutzg@gao.gov.
Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
Footnotes:
[1] GAO, DOD Excess Property: Control Breakdowns Present Significant
Security Risk and Continuing Waste and Inefficiency, GAO-06-981T
(Washington, D.C.: July 25, 2006).
[2] An NSN is a 13-digit number that identifies standard use inventory
items. The first 4 digits of the NSN represent the Federal Supply
Classification, such as 8430 for men's footwear, followed by a 2-digit
North Atlantic Treaty Organization (NATO) code and a 7-digit
designation for a specific type of boot, such as cold weather boot.
[3] As of May 31, 2007, 105,655 line items of demil-required and
sensitive property had been removed from public sale representing 2.4
million individual pieces of demil-required or other sensitive property
removed from the disposal stream, according to the Defense Logistics
Agency.
[4] During this investigation we reviewed only those items listed for
sale on the Government Liquidation Web site. We did not investigate
items throughout the entire excess property disposal system.
[5] An LSN consists of the four-digit federal supply classification
number, a two-digit NATO code, and up to a seven-character description,
such as "monitor" for a computer monitor and "boots" for cold weather
boots.
[6] GAO, DOD Management: Examples of Inefficient and Ineffective
Business Processes, GAO-02-873T (Washington, D.C.: June 25, 2002).
[7] GAO, DOD Excess Property: Risk Assessment Needed on Public Sales of
Equipment That Could Be Used to Make Biological Agents, GAO-04-15NI
(Washington, D.C.: Nov. 19, 2003).
[8] GAO, DOD Excess Property: Management Control Breakdowns Result in
Substantial Waste and Inefficiency, GAO-05-277 (Washington, D.C.: May
13, 2005).
[9] GAO, DOD Excess Property: Control Breakdowns Present Significant
Security Risk and Continuing Waste and Inefficiency, GAO-06-943
(Washington, D.C.: July 25, 2006).
[10] Of these 295 items, 216 were demil category D (requiring total
destruction) and 79 were demil category C (requiring demilitarization
through the removal of key points, parts, components, or accessories).
[11] [1] Note that we reviewed only items listed for sale on the
Government Liquidation Web site and did not investigate items
throughout the entire excess property disposal system. Moreover, our
review was limited to the period of September 2006 through March 2007.
As of May 31, 2007, 105,655 line items of demil-required and sensitive
property had been removed from public sale representing 2.4 million
individual pieces of demil-required or other sensitive property removed
from the disposal stream, according to the Defense Logistics Agency.
[12] Of these 1,385 items, 1,362 were demil category A (no
demilitarization requirements) and 23 were demil category B (no
demilitarization requirements but may be subject to trade security
controls).
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