WASHINGTON (AP) -- A multibillion-dollar loophole that would have helped conceal abuse of overseas contracts has been eliminated from a Bush administration proposal to protect taxpayer dollars, according to documents obtained Monday by The Associated Press.
Reversing itself after months of criticism, the administration closed the loophole that was quietly slipped last year into a proposed Justice Department crackdown on government contract fraud.
The loophole specifically exempted contractors from reporting evidence of fraud or abuse in overseas work that cost taxpayers at least $5 million. An updated version of the proposal, drafted April 4, requires reporting on all contracts - whether at home or abroad.
The government has spent more than $102 billion since 2003 on contracts in Iraq and Afghanistan alone.
"This change would result in making the clause requirements for a contractor code of business ethics and conduct, business ethics awareness and compliance program, and internal control system applicable to contracts performed outside the United States," the new draft rule states.
Government policywriters said the original rule was drawn up quickly, and chided the Justice Department for not explicitly making sure that overseas contracts should be included in the crackdown. "It was only after publication of the proposed rule ... that DoJ and other respondents expressed concern about the overseas exemption," the draft states.
The draft has not been publicly released. It was provided to the AP on the eve of a hearing by a House panel investigating whether the loophole was slipped into the crackdown at the request of lobbyists who represent giant global government contractors.
The draft is still tentative, and the regulations requiring the contract reporting are not expected to become final until later this year. The Democratic congressman who called for the House inquiry, Rep. Peter Welch, D-Vt., vowed Monday to "close this multibillion-dollar loophole" for good.
"This investigation proves why oversight works," said Welch, who is sponsoring legislation to eliminate the overseas exemption whether or not the Bush administration does so on its own. "The question is why it required a congressional investigation to prevent the Bush administration from giving overseas contractors a free pass to defraud taxpayers."
Numerous business groups, including the U.S. Chamber of Commerce, oppose the overall crackdown that will force companies to spend at least tens of thousands of dollars to hire auditors and conduct internal reviews in search of fraud. They say companies need to have some discretion in determining whether internal accounting errors are intentional or honest mistakes.
The tale of the loophole, first reported by the AP two months ago, provides a look into the complex and often murky world of government contracting.
The government spends an estimated $350 billion a year on contracts. For decades, contractors have been asked to voluntarily report internal fraud or overpayment on government-funded projects.
But over the last 15 years, the number of company-reported fraud cases has declined steadily, according to Justice Department data. And since the start of the so-called war on terror, prosecutors have charged 44 people in investigations into kickbacks, bribes and other abuses of taxpayer money in Iraq and Afghanistan.
The increased violations led the Justice Department in May to ask for regulations that would force companies to notify the government if they find evidence of contract abuse of more than $5 million. Failure to comply could make a company ineligible for future government work.
The loophole showed up in the final draft of the regulations when they were published in the Federal Register last November. It led to bipartisan criticism in Congress and by Bush administration inspectors general fearing it would undercut government efforts to curb waste, fraud and abuse in contracts.
A Bush administration official on Monday called the loophole "a drafting error" that happened when policywriters merely cut and pasted a 20-year-old Defense Department regulation into the contracting crackdown. As required under government guidelines, the updated draft calls for public comment about the new effort to close the loophole.
Business groups opposing the crackdown say companies generally have been diligent about voluntarily reporting abuse to the government. For example, the number of export violations reported to the State Department increased from 216 in 1999 to 394 in 2004, according to data provided Monday by the Arlington, Va.-based Professional Services Council.
Many U.S. firms are required under the terms of their contracts to subcontract out work to foreign businesses - particularly in third-world nations where U.S. contracts would provide an economic boost, said PSC President and CEO Stan Z. Soloway. Without the exemption, U.S. firms could be unfairly held liable for abuse that they have little or no way of preventing, he said.
The PSC represents more than 300 government contractors and other businesses, including Blackwater USA, KBR Inc., Boeing Co., CACI International Inc. and Lockheed Martin.
"It's impractical, and it raises a severe challenge for the U.S. government trying to assist developing countries," Soloway said.