The perils of playing with federal funds

This post is essentially a guest post. It is the basis of a letter to the editor of the Pacific Daily News, written by Guam Attorney Charles D Stake, which is posted here with his permission.

Acceptance of federal financial assistance and procurement dollars under the American Recovery and Reinvestment Recovery Act (Stimulus Funds) presents serious risks for any recipient including the Government of Guam and its local procurement and audit personnel. Federal funds are never distributed without constraints on the manner in which they can be utilized including civil and even criminal penalties for violating those restrictions. This process can already be observed in the emerging problems with procurement methods at the port and the investigation which will inevitably follow.

Having recently attended several informative sessions of the 2009 Association of Pacific Island Auditors Conference, I noticed that local audit personnel were becoming increasingly and justifiably concerned about the disproportionate amount of responsibility being shifted to their shoulders. Under the new law they must now bear the burden of administering the stringent accountability provisions of the economic recovery stimulus package and the billions of dollars involved. In fact one local auditor anonymously complained to the media that, “we are being set up to fail” (See July 31 issue of Marianas Variety page 1 “Fraud”.)


Guam is currently in the midst of vigorously seeking much needed federal funding ,not only the development of the Port of Guam, but also schools ,roads , the hospital, public safety, the landfill, and public assistance. However, local governments would do well to recall the famous adage that past is prologue. President Obama recently gave a speech devoted to procurement fraud and abuse. He intends to reform the process. The stringent accountability standards placed on local governments by Congress in the American Recovery and Reinvestment Act also reflects President Obama’s approach and shifts responsibility to local government.

This is a familiar refrain which is indicative of a recurring cycle. It is a love/hate phenomenon present in most interactions with the federal government and is perhaps most clearly illustrated through the defense industry. Our national security and defense relies heavily on large private military contractors. Justifiable defense acquisition has an historical tendency to spin out of control and begin to take on a life of its own. Needless to say big money and significant benefits are an integral part of the process. Consequently, it can readily metamorphize into a culture of corruption. This involves an implicit cooperative and mutually beneficial understanding between contractors, executive branch officials, military procurement officers, Washington DC K Street lobbyist firms and congress. Eventually, so many corners are cut by so many key players that a lowered legal threshold becomes the norm and virtually everyone is implicated to some extent. Everyone within the circle benefits in one form or another through lucrative job offers, consulting contracts, cost overruns, inferior cheaper goods that do not meet specifications, excessive profits, political contributions, ad nauseam.

Eventually, when the excesses become too blatant a tipping point is reached and the tide begins to turn. Usually this occurs when a new administration, either democrat or republican, takes office. The cycle changes to emphasize fraud investigation and prosecution of the previous abuse. Cynically, the chance to appear as a reformer makes good opportunistic political capital. However, this scrutiny also provides valuable protection for the taxpayer and is both necessary and valid. For example, in the present case the new Obama administration may begin with a review of the Iraq reconstruction contracts and the role of major defense contractors such as Halliburton. The process is historical and circular and has been occurring since the civil war where there was wide spread public outrage over major procurement fraud, profiteering, and abuse. I have experienced this repetitive process myself as a minor participant and procurement fraud attorney with the federal government during the 1980s.

Bureaucratic messages are often somewhat confusing at best. The federal government and its individual agencies rarely speak with one clear voice. Far from being monolithic, one government bureau within an agency can be focused on dispensing federal funds and grants , while yet another bureau such as an inspector general within the very same agency ,may be concentrated on ensuring the funds are utilized by grantees in strict compliance with federal statutes and regulations. Employees of the first agency bureau will be evaluated in part based on their successful distribution of federal funds. Conversely employees of the second agency bureau are evaluated in part based any fraud and abuse of these federal funds they successfully investigate and prosecute. As an example, many Guam residents are familiar with the relatively liberal distribution of FEMA funds immediately after a typhoon. However, in subsequent months FEMA investigators, begin to carefully track the use of these federal funds and when merited, conduct investigations and make referrals for federal prosecution in the District Court.

Any dreams of simply relying on a federal "free money" stimulus bonanza to solve Guam's problems can be extremely deceptive. The restrictions and "strings" attached to federal funds can be so cumbersome that some states actually reject the funding. Also large long term local projects initiated in reliance on federal funding may need to be curtailed prior to completion if congress decides not to continue funding the project. For example this has occurred when local governments hired a large number of new police recruits under a federal grant which was later cut back leaving the local government with no funds to pay the new officers.

Following seemingly liberal expenditures such as the Obama stimulus package and its grants, the trend is toward subsequent strict federal enforcement and scrutiny for compliance with federal statutory and regulatory restrictions. This enforcement trend generally filters down to the states and territories and will include Guam. As long as so much as a pencil is purchased by our local government with federal funds there is federal jurisdiction to review the appropriateness of that expenditure. There is often only a thin margin between poorly planned wasteful spending and arguably intentional ,fraudulent, criminal expenditures. The statute of limitations offers little protection and is rather easily circumvented in procurement fraud prosecutions. Consequently, our local government planning and procurement agencies preparing for the military buildup, the landfill project, highway expansion projects, school construction, and Port of Guam expansion would to do well to immediately initiate a serious comprehensive process of procurement education and to carefully police themselves in all future purchases involving federal funds.

Charles D Stake

Charles D Stake is an Attorney, Member of the Guam and District of Columbia Bars, and graduate of the George Washington University Government Contract Program. He is a Procurement Appeal Hearing Officer with the Office of Public Accountability and a retired federal attorney and law enforcement officer residing in Barrigada.