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For the second time this year, the Pentagon is trying to give a no-bid contract extension to a logistics company operating a supply warehouse in Kuwait even though the firm has been barred from federal business following an indictment for billing fraud.

The Defense Logistics Agency’s planned extension to Public Warehousing Co., also known as Agility, provides a poignant reminder that the government’s decision to suspend or debar a contractor for alleged misconduct doesn’t always stop the flow of federal funds to that firm, procurement experts told the Center for Public Integrity.

The contract extension may be legal but it “clearly violates the intent” of the government’s earlier decision to suspend Agility, said Dan Goure, vice president of the Lexington Institute, a national security think tank.

“There’s obviously a risk there given what’s going on, but it’s not like you have the choice of going down to your local post office [for military supply deliveries]. Agility and its competitors have had to put up unique systems to help our forces,” Goure said. “I’m assuming they had contracting people and auditors swarming all over to make sure it doesn’t happen again.”

A representative for Agility declined comment and referred questions to the Pentagon.

The Defense Logistics Agency said the drawdown of U.S. forces in Iraq means the military’s warehouse needs are changing, and the agency decided it was cheaper to temporarily extend the Agility contract than start a new relationship with a new contractor.

Suspended After Food Contract Indictment

Agility was indicted Nov. 9, 2009 on charges of fraudulently overbilling the military on unrelated contracts that paid $8.5 billion for distributing food to American soldiers in Jordan, Iraq and Kuwait. That criminal case is still active in federal court in Atlanta although a federal magistrate has raised the possibility of dismissing the charges on a legal technicality.

A week after the indictment, the Pentagon suspended the company and more than 100 affiliates from doing new business with the government.

When Agility was suspended, it had another military contract operating a large warehouse in Kuwait to distribute everything from generators to toilet paper to U.S. soldiers throughout the Middle East. The Pentagon had planned to replace Agility with another contractor to operate the warehouse.

Instead the Defense Logistics Agency (DLA), the Pentagon unit responsible for contracting for combat supplies, filed special paperwork, obtained by the Center, declaring that despite Agility’s suspension, a compelling need existed to continue with the company to “ensure sufficient time for a quality transition.” The DLA granted a six-month, $26 million extension to Agility’s warehouse contract.

The transition to a new warehouse operator is yet to happen.

KGL Sought Warehouse Contract

The DLA did seek other contractors to take over after the first extension ends in February 2011 and nearly signed a deal with another company, KGL Holding, which bid on the warehouse contract, according to company executive Scott Beverly. DLA officials made two trips to visit KGL’s warehouse in Kuwait.

By September, “we basically had a verbal handshake,” Beverly says. As KGL’s director of government programs, he said he participated in a lengthy phone call that included a discussion of prices. “We believed at that time that a contract was imminent and we were just waiting for the signature,” Beverly told the Center.

The military abruptly cancelled the bidding process in early October, saying it was re-evaluating its warehousing needs. Then, one week ago, on Nov. 30 , the Pentagon announced its intention to negotiate another extension with Agility on a sole-source basis without competition, which is allowed by government acquisition rules when “no other type of supplies or services will satisfy agency requirements.”

KGL has filed a formal protest with the Government Accountability Office (GAO), which reviews complaints by losing bidders in government contract competitions.

The DLA declined to comment on the cancelled KGL bid for the Agility warehouse contract, citing the GAO’s review of the case. However, when asked why it chose to continue using a suspended contractor for the warehouse, DLA pointed out that extensions on existing contracts are allowed for suspended companies. It said in a statement: “The accelerated drawdown of forces in Iraq and the changing need for distribution support in the region requires a re-evaluation of the requirement.”

Neil Gordon, an investigator for the nonprofit Project on Government Oversight, says even though it’s not against the law for the Pentagon to extend Agility’s warehouse contract, the government ought to look closely at a company’s past record.

Other Companies Barred

Congress has been concerned with individuals and businesses receiving contracts despite being excluded from doing business with the government. In 2009, lawmakers asked the GAO to investigate how often such scenarios occurred.

The resulting February 2009 report documented 25 “businesses and individuals that have been excluded for egregious offenses ranging from national security violations to tax fraud [that] are improperly receiving federal contracts and other funds.”

For instance, in 2005 the U.S. Army debarred, or permanently banned, a German company and its president for attempting to ship dual-use aluminum tubes, which can be used to develop nuclear weapons, to North Korea. “Despite this debarment,” the report says, “the Army chose to continue to award the company task orders and paid it over $4 million during fiscal year 2006.”

Most of the improper contracts and payments the GAO identified in its report tended to be the result of sloppy record-keeping or searches among the responsible agencies.

Meanwhile, despite some news reports earlier this year that Agility and the government were nearing a settlement of the Atlanta criminal fraud charges related to its food supply contract, that lawsuit is still pending.

U.S. Judge Thomas Thrash scheduled a Dec. 16 hearing on a federal magistrate’s report detailing the complex corporate structure of Public Warehousing Co., also known as Agility, and multiple attempts by the U.S. government to deliver a copy of the indictment to company representatives. The magistrate recommended the court rule that the government failed to properly serve the company with the indictment.

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