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As a reason for the proposed legislation I wish to call to your attention the fact that in the audit by this office of certain cost-plus-a-fixed fee contracts of the War Department, there was disclosed the existence of conditions involving the payment by certain firms of commissions or fees to persons employed in the purchasing departments of prime contractors who were performing cost-plus-at fixed-fee contracts for the Government, for the purpose of obtaining the award of subcontracts or orders for the furnishing of services or supplies to the prime contractor. The existence of such conditions was brought to the attention of the chairman, Special Committee to Investigate the National Defense Program, United States Senate, and to the chairman, Military Affairs Committee, Aouse of Representatives, by my letters of April 24, 1943. The matter was investigated further hy representatives of the said Senate committee and later was the subject of hearings conducted by a subcommittee thereof, which hearings were held in Detroit, on May 20, 21, and 22, 1943. It was revealed that gratuities or gifts in the form of money, War bonds, and entertainment had been given by certain concerns to individuals employed in the purchasing departments of the prime contractors in acknowledgment for orders previously given to the concerns through the influence of said individuals, or for the purpose of inducing the award of future orders by their influence. It appears further that some of the witnesses who testified at the aforementioned hearings conducted by the Senate subcommittee, admitted that the commissions and gratuities resulted in the prime contractors paying higher costs for the services or materials than otherwise would have been charged. Since, under the terms of cost-plus-a-fixedfee contracts, the prime contractor is reimbursed by the United States for the cost of all subcontracts and purchase orders performed thereunder, the Government undoubtedly was required to bear the ultimate costs of any fees, commission, compensation, gifts or gratuities paid by subcontractors for the purpose of securing subcontracts and orders from the prime contractors.

While action to recover such portions of fees or commissions paid by subcontractors to brokers for services rendered by the latter in the procurement of orders from prime contractors, as are found to be excessive, may be taken under authority of section 403 of the Sixth Supplemental National Defense Appropriation Act, 1942 (56 Stat, 226, 245), as amended by section 801 of the Revenue Act of 1942 (56 Stat. 798, 982), and as further amended by Public Law No. 149 (78th Cong.), approved July 14, 1943, there appears to be no existing statutory or other authority of law under which it may be said that the United States clearly has a right to recover, either from prime contractors or subcontractors, the amount of any fees, commissions, or compensation, or the cost of any gifts or gratuities paid by the subcontractors to the purchasing agents of prime contractors for the purpose of obtaining the award of subcontracts or orders under the prime contract. Therefore, since the practice of paying fees, commissions, etc., by the subcontractors undoubtedly has resulted in greater costs to the United States under the prime contracts involved, I believe that legislation in this regard should be enacted in order to authorize recovery of the cost of any such fees, commission, etc., which the Government may have been required to bear.

As a further reason for recommending the proposed legislation, I desire to call to your attention the fact that there is no statutory or other authority of law under which this office may require subcontractors, who are performing work under cost-plus-a-fixed-fee prime contracts, to permit an examination of their books and records for the purpose of ascertaining whether gratuity payments were made to employees of prime contractors for the purpose of obtaining the award of subcontracts or purchase orders, or whether other improper expenditures, which may have served to increase the cost of the prime contract to the Government, were made in connection with the performance of such subcontracts. The conditions described above, which were found to exist among certain subcontractors, came to light only by reason of the fact that the subcontractors involved voluntarily permitted the examination of their books and records by representatives of this office. While by Executive Order No. 9127, dated April 10, 1942, issued under authority of title XIII of the Second War Powers Act, 1942, the President designated certain administrative departments and agencies of the Government to inspect and audit the books and records of contractors and subcontractors who are engaged in the performance of war contracts, the General Accounting Office-which under the Budget and Accounting Act, 1921, has been charged with the duty and responsibility of auditing accounts which involve the expenditure of public moneys-does not have such authority. It may be stated further that the existence of certain types of improper expenditures and other irregularities in connection with the performance of subcontracts under cost-plusa-fixed-fee contracts—which irregularities result in increased costs to the United States-may be discovered only by an inspection and audit of the books and records of the subcontractors involved.

Therefore, I strongly urge the enactment of the recommended legislation at the earliest date practicable, in order that the United States may have the right to recover the amount of any fees, commissions, compensation, gifts, or gratuities paid or given by subcontractors to employees of prime contractors and in order that this office may be better able to perform the audit of accounts covering expenditures under the numerous cost-plus-a-fixed-fee contracts which are being performed for various agencies of the Government in connection with the prosecution of the war.

LINDSAY C. WARREN, Comptroller General of the United States.

WAR DEPARTMENT,

Washington, February 9, 1945. Hon. CARTER Manasco, Chairman, Committee on Expenditures in the Executive Departments,

House of Representatives. DEAR MR. MANAsco: The War Department is opposed to the enactment in its present form of H. R. 131, Seventy-ninth Congress, a bill to eliminate the practice by subcontractors, under cost-plus-a-fixed-fee contracts of the United States, of paying fees or kick-backs, or of granting gifts or gratuities to employees of cost-plus-a-fixed-fee prime contractors or of other subcontractors for the purpose of securing the award of subcontracts or orders, on which you have requested a report, but would favor its enactment amended as hereinafter suggested.

This bill is the same as H. R. 3558, Seventy-eighth Congress, on which this Department submitted a report dated June 13, 1944.

Section 1 of H. R. 131 would prohibit the payment of any fee, commission, or other compensation by a subcontractor to any officer, partner, employee, or agent of either a prime contractor holding a cost-plus-a-fixed-fee prime contract with the United States or any Government department or of a subcontractor holding a subcontract under such a prime contract, if the payment is made as an inducement for awarding the subcontract or order from the prime contractor or a subcontractor or as an acknowledgment of an order previously awarded. The reimbursement, either directly or indirectly, from appropriated funds of the amount of any such fee would be forbidden by the section, and if paid, the amount would be recoverable from the contractor by set-off or suit. The department concerned or the General Accounting Office would be required to withhold from any moneys due the amount of any such fees found to have been paid.

Section 2 contains a definition of the term "subcontractor." Section 3 provides that for the purpose of ascertaining whether any such prohibited payment has been made or whether any irregularities exist in connection with the performance of subcontracts which increase the cost of the prime contract to the United States, the General Accounting Office would have the same powers of investigation of prime contractors and subcontractors that any Gov. ernment agency designated by the President may exercise pursuant to title XIII of the Second War Powers Act, 1942.

By substituting criminal provisions for those contained in H. R. 131 this Department feels that the purpose of the legislation could be accomplished without adding serious complications to the administration of the war-procurement program. Under such a criminal statute, the need for maintaining in the procurement agencies additional investigative forces would be obviated, since administration of the act would be left to the regular criminal enforcing agencies of the Federal Government. The procurement agency, however, would be afforded means of combating commercial bribery in those cases where its existence is discovered. The deterrent effect of such criminal provisions no doubt would prove beneficial.

Section 3 of H. R. 131 is regarded as being unnecessary and inexpedient. This Department believes that its provisions should be omitted from the bill in any event. The several procurement departments and agencies of the Government already have ample authority to make investigations. Section 3 would add to to that authority a further and duplicating type of investigation by the General Accounting Office in addition to the very broad investigatory powers which it already possesses. By the terms of the bill this new form of investigation would not be confined to instances where there is reasonable ground to suspect that the prohibited types of payment have been made, but would extend to the question of whether any other irregularities exist in connection with the performance of

subcontracts which increase the cost of the prime contract to the United States." While the precise meaning of this language seems to be uncertain, it is believed that it unduly and unnecessarily would expand the scope of investigation and make subcontractors subject to the possibility of investigations far beyond the range of the apparent real purpose of the bill. Particularly, these provisions would be unnecessary if the bill should be redrafted as a criminal statute in accordance with the suggestion made above, in view of the broad powers of investigation now possessed by the Department of Justice.

The purpose of H. R. 131 obviously is to prevent the placement by cost-plus-&fixed-fee contractors and subcontractors of orders or subcontracts in return for cash payments to employees or for compensation in some other form, frequently referred to as commercial bribery. The bill is limited to relationships arising under cost-plus-a-fixed-fee prime contracts with the United States, because under such type of contract the Government is more likely to bear the ultimate cost. The War Department is in full accord with the objective of outlawing this type of transaction. However, there would be serious administrative difficulties if the bill should be enacted in its present form.

Section 1 of the bill provides that it will be conclusively presumed that payments made in the manner condemned are being borne by the United States and that the amount of any such payments may be deducted from any moneys due the subcontractor under the contract. The bill would apply not only to dealings between prime contractors and first-tier subcontractors but also to transactions between more remote tiers of subcontractors. Accordingly, a very substantial burden of administrative investigation would be placed upon the Government procurement agencies. This unquestionably would tend to delay procurement. Further, there is doubt whether such investigative procedure would be justified in those cases where the first-tier subcontractor is on a fixed-price basis and where the investigation is directed against payments by lower-tier subcontractors. In such instances the chances of the United States bearing the ultimate cost of payments under such an arrangement are somewhat remote and indirect.

It is believed that the desired result can be reached without placing the investigative burden upon the procurement agencies by adapting provisions similar to those contained in section 112 of the United States Criminal Code (18 U. S. C. 202) to the situation contemplated by the bill. Among other things, section. 112 denounces as a criminal offense the giving or receiving of compensation for the procurement or granting of Government contracts in cases involving members of Congress or other public officials. Similar provisions could be made applicable to the evils at which H. R. 131 is aimed.

In its present form, the prohibition in H. R. 131 against payments would extend to any payment "by or on behalf of a subcontractor" as defined in the bill, as well as “to any officer

employee or agent of a subcontractor holding a subcontract under the prime contract

as an acknowledgment of a subcontract or order previously awarded.” While it is believed thot this language was intended to apply only to cases where a subcontractor of a lower tier pays to the officers or employees of a subcontractor of a higher tier compensation for the awarding of the lower tier contract, and that, if so construed, the language would relate only to what is in substance bribery, such language readily could be construed, in view of the definition of "subcontractor” in section 2 of the bill, as forbidding the payment of a commission by a subcontractor to one of his own employees or agents who by diligent and helpful effort has obtained or negotiated the lower tier contract in the ordinary course of his employment as a salesman or representative. It is not believed that the language quoted above was intended to forbid the payment, in accordance with ordinary business practices, by a business concern to its own employees or agents of a salary or commission for real services performed in obtaining a subcontract or order from another commercial concern and not from the Government in cases where such salesman or brokerage service is not otherwise objectionable. The need for clarification of such language seems apparent.

By regulation promulgated early in the procurement program, the War Department adopted the policy of discouraging and preventing the payment of contingent fees to brokers for obtaining prime contracts from the Government, and also, where no real service is actually performed in return for such fees, to commercial brokers or agents representing subcontractors dealing with cost-plus-a-fixed-fee Government prime contractors (see War Department Procurement Regulations, par. 1181).

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The War Department recommends that the bill be redrafted in the following form:

Be it enacted by the Senate and House of Represenlatives of the United States of America in Congress assembled, That the payment of any fee, commission, compensation, gift, or gratuity (in addition to the supplies, services, or work to be furnished or performed under the subcontract in question), either directly or indirectly, by or on behalf of a subcontractor (1) to any prime contractor holding a contract entered into on a cost-plus-a-fixed-fee basis with the United States for the furnishing of supplies, materials, equipment, or services of any kind whatsoever, or to any officer, director, partner, employee, or agent of such a prime contractor; or (2) to any other subcontractor, on a cost-plus-a-fixed-fee basis, under such a prime contractor, or to any officer, director, partner, employee, or agent, of such other cost-plus-a-fixed-fee subcontractor, either as an inducement for the award of a subcontract or order from such a prime contractor or from any such other cost-plus-a-fixed-fee subcontractor, or as an acknowlerlement of a subcontract or order previously awarded, is hereby prohibited and declared to be against public policy: The amount of any such prohibited fee, commission, compensation, gratuity, or gift may be recovered in behalf of the United States and for its benefit from the person receiving the same or from the person paying the same, or from both of them. Any person who shall knowingly make or receive or conspire with others in making or receiving any such prohibited payment shall be fined not more than $10,000 or imprisoned for not more than two years, or shall suffer both such a fine and imprisonment. “SEC. 2. For the purposes of this Act

“(1) The term 'subcontractor' means any person who holds an agreement or purchase order to perform all or any part of the work or to make or furnish any article or service required for the performance of a cost-plus-a-fixedfee prime contract or subcontract entered into thereunder.

"(2) The term 'person' means any corporation, association, trust, joint stock company, partnership, or individual.” The War Department is unable to estimate the fiscal effect of enactment of the bill either in its present form or in the amended form suggested above.

The Bureau of the Budget advises that there is no objection to the submission of this report. Sincerely yours,

HENRY L. Stimson, Secretary of War.

Navy DEPARTMENT,

Washington, February 13, 1945. Hon. CARTER MANASCO, Chairman, Committee on Expenditures in the Executive Departments,

House of Representatives, Washington, D. C. MY DEAR MR. CHAIRMAN: The bill (H. R. 131), to eliminate the practice by subcontractors, under cost-plus-a-fixed-fee contracts of the United States, of paying fees or kick-backs, or of granting gifts or gratuities to employees of cost-plus-a-fixed-fee prime contractors, or of other subcontractors for the purpose of securing the award, was referred to the Navy Department by your committee with request for views thereon.

In purpose and provisions the proposed legislation is identical with the bill H. R. 3558 of the Seventy-eighth Congress, with respect to which the Navy Department made a report to your committee under date of August 5, 1944. This report stated that no substantial benefits would be derived from the passage of such legislation in view of the regular practice of this Department in disallowing all fees or gratuities of the nature described in the bill as a part of reimbursable costs under cost-plus-a-fixed-fee contracts. Disallowances have been based on the premise that, to the extent of such fees or gratuities, the price or cost of the material or services of the subcontractor are unreasonable or excessive. In a few recent cases this premise has been questioned, and hence there would be no objection to enactment of legislation which would provide a more definite legal basis for disallowance by the contracting Department of such fees or gratuities as a part of cost.

The proposed legislation, however, contains undesirable provisions. Examination of the plant, books and records of fixed-price subcontractors to ascertain whether any such fee, etc., have been paid and "whether any other irregularities exist in connection with the performance of subcontracts which increase the cost

of the prime contract to the United States” and notice to the prime contractor to withhold funds would be made a function of the General Accounting Office. Under existing laws the General Accounting Office is charged with the power to review payments made under cost-plus-a-fixed-fee contracts by the various contracting agencies of the Government and under such power can take appropriate action with respect to improper items of cost. It seems unnecessary to charge that office with the additional responsibility for the policing of fixed price subcontracts under such cost-plus-a-fixed-fee contracts. Insofar as this Department is aware, the evils sought to be remedied by the bill are not sufficiently great to warrant such special treatment. Furthermore, the obligation to police, which naturally accompanies the powers given in the bill, may impose such a burden upon innocent contractors as to outweigh any benefits that may be derived by the Government. Also, it should be borne in mind that cost-plus-a-fixed-fee contracting is only resorted to where necessary and represents only a small portion of the total of Navy contracts.

All cost-plus-a-fixed-fee contracts provide that all payments are made by the contracting department and all contractual relations are between the contracting department and the prime contractor. It is recommended that no legislation be enacted under which agencies other than the contracting departments would be interjected into these relations and be given authority to give directions to withhold sums reported to have been paid in violation of the provisions of the bill.

For the reasons stated, the Navy Department recommends against enactment of the bill in its present form.

The Navy Department has been advised by the Bureau of the Budget that there would be no objection to the submission of this recommendation. Sincerely yours,

H. STRUVE HENSEL, Acting.

TREASURY DEPARTMENT,

Washington, August 25, 1944. The DIRECTOR OF THE BUREAU OF THE BUDGET.

Sir: Reference is made to letters dated February 10 and May 11, 1944, from the Assistant Director, Legislative Reference of your office, requesting an expression of the views of this Department with regard to H. R. 3558, a bill, to eliminate the practice by subcontractors, under cost-plus-a-fixed-fee contracts of the United States, of paying fees or kick-backs, or of granting gifts or gratuities to employees of cost-plus-a-fixed-fee prime contractors or of other subcontractors for the purpose of securing the award of subcontracts or orders.

The primary purpose of the bill, as stated in a letter of recommendation by the Comptroller General to the Congress dated October 5, 1943, B-34055, is to provide to the United States & clear statutory right to recover the amounts of any fees, commissions, or compensation, or the cost of any gifts or gratuities paid by subcontractors to the purchasing agents of prime contractors or other subcontractors for the purpose of obtaining the award of subcontracts or orders under cost-plus-a-fixed-fee prime contracts, with the result that costs reimbursable by the Government to the prime contractor probably have been or may be increased. The Comptroller General's letter refers to a Truman committee investigation at which certain practices of that kind were brought out.

This Department has entered into contracts on the cost-plus-a-fixed-fee basis in only a few cases and has no information indicating whether or not the practices which this bill seeks to reach are so prevalent generally as to warrant legislation. The Department has no objection to the enactment of properly framed legislation to prohibit such practices, if there be need for it, and to permit recovery by the Government of amounts paid by reason of violations of the prohibition.

The Department does object to that portion of section 1 of the bill, at lines 9–16 on page 2, providing that the amount of any prohibited payment, whether past or future, "shall not be charged to or reimbursed from appropriated moneys, either directly or indirectly, as a part of the price charged by the subcontractor to the prime contractor or another subcontractor." The effect of such a provision would be to make illegal whatever amount has been or may be paid to any cost-plus-&fixed-fee prime contractor that might be said to represent the amount of a prohibited payment by a subcontractor, and to subject certifying or disbursing officers to possible personal liability to that extent, when they

have had and could have no practicable means of ascertaining the existence of any such prohibited payment. Even though certifying and disbursing officers might be entitled to expect relief from the Comptroller General under section 2 of the act of December 29, 1941

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