Pentagon Logistics Agency Urged to Adopt Smart Contracts After Two Incomplete Audits

A cargo truck off-loads water purifiers onto a C- 17 Globemaster III from Joint Base Pearl Harbor-Hickam, Hawaii, on Kadena Air Base, Japan. This was one of many supply deliveries that was made to assist the Philippines after Super Typhoon Haiyan. (U.S. Air Force photo by Senior Airman Marcus Morris).

Boatloads of savings could be realized on supply contracts if history is any guide.

A small group of civilian experts has determined that the US military’s biggest logistics agency should use smart contracts and blockchain tech to “improve contract oversight to streamline efficiency and enhance supply chain security.”

The Defense Science Board urged the $40-billion-per-year Defense Logistics Agency (DLA) “conduct a proof-of-concept with blockchain-like technology” in the hopes of slashing waste in the defense budget, according to a report from the board. This somewhat obscure agency’s budget tops those of Cabinet-level departments:

  • US Department of Agriculture ($22.5B)
  • Department of Energy ($30B)
  • Department of State ($38.1B)

The DLA is basically Walmart for the Pentagon, a report by Politico notes, processing 100,000 orders per day to bring every provision imaginable to US troops stationed overseas.

DLA’s budget is larger than several departments. N.B. that the Pentagon’s budget is underestimated here as $574 billion in 2018 because it excludes the Overseas Contingency Operations budget. Source: Office of Management and Budget

‘We Failed The Audit’

The Pentagon’s first comprehensive audit was a ‘failure’ in the words of then-Deputy Secretary of Defense Patrick Shanahan. He said:

We failed the audit, but we never expected to pass.”

The inspection took 1,200 auditors to complete and cost about $1 billion; Citizens can get charged $5,000 for miscalculations on Internal Revenue Service tax forms, or otherwise face heft evasion charges for not following IRS rules.

Shanahan added:

“It was an audit on a $2.7 trillion dollar organization, so the face that we did the audit is substantial.”

But when it comes to a government audit, the whole department can fail and everyone gets promoted anyway: Shanahan rose to acting defense secretary after General James Mattis resigned.

CONTRACTOR DOCTORS ‘PROGRESS’ PHOTOS OF CONSTRUCTION SITE ON AN $8B DEAL

Executives of a Dubai-based defense contractor were indicted in the US for fraud on an $8 billion government contract just last November, the Department of Justice said in an announcement.

A trio of Virginia residents working for Anham FZCO faked the pictures of a construction site in Afghanistan that they would have used to dupe the DLA into believing was progress on the multibillion-dollar contract – ultimately squandering taxpayer money.

Scott Amey, general counsel of the nonprofit Project on Government Oversight, told the Washington Post at the time:

“Allegations of fraud against Ahanm are even more disturbing because other food services contractors in Afghanistan have pleaded guilty to similar charges” of money laundering and fraud.

Ahanm has serviced US supply contracts in Iraq, Kuwait, Syria and Jordan, the Post noted. A DLA spokesman confirmed to the publication last month that Ahanm FZCO has been suspended from competing on future US government contracts.

MEMO TO THE DoD: USE SMART CONTRACTS

Smart contracts could mitigate the level of abuse and waste by automatically controlling the disbursement of funds to contractors. Better contracts may require procedures verifying that the contractor’s inputted data, which purports itself as meeting a contract requirement, are authentic. Smarter contracts might delay disbursement of taxpayer dollars until after this data is verified.  By taking this approach, the government could reduce its exposure to fraudulent schemes. And a token tracking the status of supply contracts would at least provide a transparent ledger – which would create an incentive framework for faithful contract execution.

Furthermore, the DSB report recommends that US Transportation Command (USTRANSCOM) incorporate “commercial logistics partners” when conducting its proof-of-concept with blockchain tech.

The DSB report was issued in November.

E&Y: MILLIONS WORTH OF DLA SPENDING HAS NO DOCUMENTATION

At this point, virtually any oversight capability offered by smart contracts would promote accountability in Pentagon supply chains.

A “damning review” completed by Ernst & Young in December found that the DLA “couldn’t produce supporting evidence for many items that are documented in some form – including records for $100 million worth of assets in the computer systems that conduct the agency’s day-to-day business,” Politico writes.

There were not enough records for the auditor to try verifying where $384 million had gone for DLA construction projects designated “in progress.” Another $465 million for construction work financed by the US Army Core of Engineers was misstated on financial documents.

E&Y said in the audit:

“The documentation, such as the evidence demonstrating that the asset was tested and accepted, is not retained or available,”

The absence of audit evidence means damage to financial statements cannot be accurately assessed, E&Y concluded.

DoD ‘MUST ADOPT’ DIRECTIVES ‘QUICKLY’

DSB’s directives were issued to USTRANSCOM, the DLA, and US Indo-Pacific Command, so developments in the way of a smart contract token may originate as a partnership between one of these sub-groups inside the Pentagon and a commercial partner.

Who that commercial partner could be is anyone’s guess. IBM gave a briefing to officials on blockchain technology in early 2018, though, according to Appendix C of the report. The company and its partners in crypto could be front-runners.

IBM launched a stablecoin on Stellar’s (XLM) network for international payments last May, CCN.com reported, shortly after Stellar, IBM, and KlickEx announced plans for a blockchain-based cross-borders payment solution.

Retired US generals Paul Kern and Duncan McNabb urged the recommendations be adopted “without delay.” They wrote writing in the DSB report’s executive summary:

“Logistics data is neither accessible nor used as efficiently as it should be. Technological solutions to these problems exist, or will exist in the near future. The DoD must adopt them quickly.”

WHY IT MATTERS

The US national debt has reached $22 trillion. You cannot have a serious conversation about reconciling those debts without scrutinizing all parts of the budget, including the military.

Critics say the U.S. cannot afford Rep. Alexandra Ocasio-Cortez’s (D-N.Y.) Green New Deal, yet the U.S. pours hundreds of billions into defense every year without offsetting revenues, a.k.a. taxes.

Harvard University’s Linda Blimes, therefore, decided to call the US military’s foreign excursions the past two decades “the credit card wars,” because they were paid for with borrowed funds.

The government should start by cutting down on the wasteful spending and providing Congress with tools for effective oversight. Smart contracts have the potential to be just that tool.

Last modified: March 4, 2021 2:31 PM

Grant Ferowich: Grant is the Assistant Editor at CCN. He was a news editor at Sputnik International and an associate editor at FierceMarkets in Washington, D.C. before joining CCN. You can follow him on Twitter or get in touch directly at g.ferowich(at)gmail.com.