The region 2 contract

The Navy’s Seventh Fleet is the most powerful naval force on the planet, consisting of more than 60 ships, nearly 300 aircraft and more than 40,000 sailors and Marines. It patrols the Pacific Ocean from Southeast Asia to the Pacific Islands, monitors Russia and cruises into Australian waters. The fleet even makes forays into the Indian Ocean.

All combined, it’s an absolutely huge swath of the ocean. That blue expanse is where Francis operated most of his ports.

GDMA offered ship-husbanding services at ports in Japan, Singapore, Thailand, Malaysia, South Korea, India, Hong Kong, Indonesia, Australia, the Philippines and Sri Lanka. His business was massive enough to be a one-stop shop for the Seventh Fleet.

Husbanding is a lucrative business, one Francis and GDMA had been in with the U.S. Navy for 25 years. He and his business were already worth millions when — in 2004 — he began corrupting naval officers and overcharging for basic services.

In 2009, GDMA signed a lucrative deal with the Navy, becoming Seventh Fleet’s sole supplier of husbanding services for the entire Pacific. They called the agreement “the region 2 contract,” a reference to the Pacific Fleet’s area of operation.

Court documents detail how Fat Leonard and his company’s government contract manager — Francis’ cousin Alex Wisidagama — used that agreement to bilk the Navy out of millions. The Justice Department complaint against Wisdidagama in particular reads like a how to manual for bilking the Navy.

The contract’s terms are specific. The Navy would pay a fixed price for husbanding services, reimburse GDMA at cost for fees such as tariffs, and work with GDMA to seek bids at the lowest price for items such as fuel and water.

The agreement considered anything else an “incidental.” That is, for anything not specifically listed in the contract, GDMA was to seek outside bids from several companies, report those bids to the Navy and move forward with the lowest bid price.

But Fat Leonard — through GDMA — frequently created fake companies, submitted fake claims and overcharged the Navy every chance he could.

Between September 2011 and June 2012, GDMA submitted 117 fake bids for incidentals to the Navy’s pricing database — for one port alone. But those 117 incidents comprised only 35 unique bids. GDMA would often just resubmit the same fraudulent pricing quotes over and over again.

“Every time a U.S. Navy ship arrived in Phuket and requested any of the above incidental services, GDMA uploaded into [Navy pricing databases] copies of the same fraudulent quotes, often without even changing the dates,” court documents stated.

Fat Leonard was brazen. He and his cronies never even attempted to throw a bone in the form of a business offer to a competitor simply to avoid trouble. He just made sure that GDMA was the lowest bid every single time the Navy needed something for one of its ships.

And remember, those 177 quotes were just for one port for a short period of time. GDMA has been doing the same at dozens of ports for years.

Even worse, because GDMA had the market cornered on the Seventh Fleet’s husbanding services, the company radically inflated the prices. The provisions of the contract required GDMA to disclose its markup or profit on each item it sold to the ships.

But it never did, though internal company emails acquired by the Justice Department revealed “GDMA had a pricing formula for its quotes that included a significant markup over its costs.”

Thanks to a lack of competition and overcharging, GDMA bilked the Seventh Fleet out of more than $2 million dollars from ports in Thailand alone. But those ports were far from the only ones involved in the scandal.

The company overcharged the Navy for services such as food, even though the contract stipulated GDMA provide those provisions at cost. But Fat Leonard didn’t sell anything without making a profit, and his company inflated everything he was contractually obligated to sell at cost.

Ships need a lot of fuel … and the Seventh Fleet has a lot of ships. According its contract, GDMA acted as the Navy’s liaison to the area’s fuel providers.

But in theory, going through GDMA was only a last resort. The Defense Logistics Agency handles the Pentagon’s supply chain, and it has a department that deals exclusively in fuel procurement. This entails building relationships with companies around the globe.

Where no such relationship exists, the DLA expected Francis’ company to contact the government of whatever port the Navy’s ships were in — and ask if it could buy fuel directly for the vessels. If that fell through for some reason, then GDMA would search out alternative suppliers, provide it to the Navy at cost and recoup a fixed fee.

That never happened.

A typical example of this kind of corruption is what the GDMA did to the Navy in Thailand.

American ships require fuel with no biodiesel content. The DLA didn’t have any relationships with fuel vendors in Thailand, so the Navy asked GDMA to see if Bangkok could provide the fuel.

“[Fuel] is unavailable due to Thailand’s regulation that diesel in the country must have a biodiesel content mix which does not meet [Navy] requirements,” GDMA explained in forms provided to the Navy. “GDMA will provide [the Navy with fuel] from its own stocks which are imported and contain no biodisel.”

It was a lie. Bangkok had no regulations requiring a biodiesel mix. So GDMA bought the fuel from local suppliers, then sold it back to the Navy … and not at cost, as its contract required. GDMA overcharged for every gallon of fuel it sold to American ships.

The company scammed the Navy to the tune of $3 million from just five port visits to Thailand in 2011. GDMA overcharged at multiple ports in the area for several years.

It didn’t stop there. GDMA even overcharged the Seventh Fleet on tariffs.

Tariffs are taxes a ship pays to local governments when it docks at a foreign port. Under the contract, GDMA would handle all the Seventh Fleet’s tariffs, then bill the Navy at cost.

In Thailand, a state-owned port authority maintains the ports, collects tariffs and maintains a list of its fees and services on its Website. The Thai port authority doesn’t collect any of those fees, but contracts the collection out to third parties.

Any time ships from the Seventh Fleet docked in Thailand, GDMA would take care of the tariffs, then use a fake company to bill the Navy at exorbitant prices.

GDMA billed the Navy about $300,000 when a ship docked at the port of Laem Chabang in Thailand. Prosecutors in the case went back through the Thai port authority’s Website, cross referenced the tariffs charged at the time and got the real total.

The Navy only owed $35,000 for the Seventh Fleet ship. The Justice Department’s current estimate of cash overcharged from tariffs is $4 million.