WASHINGTON — The ghost of the Fat Leonard looms large over the U.S. Navy and Department of Defense.

And, based on the findings of a new federal audit, it’s almost certain there are even more fraudsters like him bilking the government and its taxpayers out of tens of millions of dollars.

Leonard Glenn Francis, who’s known by the nickname “Fat Leonard” due to his 350-pound girth, is a Malaysian defense contractor at the center of one of the Navy’s most embarrassing corruption scandals.

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In 2015, Francis pleaded guilty to federal charges that were part of a mass conspiracy to secure U.S. government contracts for his company, Glenn Defense Marine Asia, via fraud and bribery of uniformed military officials, including some of the Navy’s top brass in the Indo-Pacific.

Among his many illicit gifts were cash, prostitutes and Spanish suckling pigs. There were also Cuban cigars, luxury hotel stays and Kobe beef.

Dozens of naval officers were charged and hundreds more came under scrutiny for possible criminal and ethical violations, including many with ties to Hawaii, where the U.S. Pacific Fleet is headquartered.

The U.S. Government Accountability Office studied the Fat Leonard case as part of a larger examination of the Defense Department’s shortcomings in vetting contractors, and particularly those with opaque ownership structures.

In a report issued late last month, the GAO analyzed 32 criminal cases in which contractors used shell companies to hide their true identities to commit fraud against the government, inflate their own profit margins, and, on occasion, present serious threats to national security.

For example, a foreign manufacturer that was not eligible to receive U.S. contracts used a shell company to win work and illegally export sensitive military data overseas. That same manufacturer also provided defective airplane parts that ultimately resulted in the grounding of at least 47 F-15 fighter jets.

In another case, a contractor agreed to pay $434 million in criminal penalties after it was caught buying goods through one of its shell companies so that it could mark-up the prices charged to the government.

All told the cases involved at least $875 million in fraudulent contracts and overpayments, but it’s clear the problem is systemic given the lack of Defense Department oversight.

“This is probably the tip of the tip of the iceberg,” said Seto Bagdoyan, who’s the director of the GAO’s Forensic Audits and Investigative Services team that conducted the study. “This was based only on what we know. And you don’t know what you don’t know until you start looking for it.”

According to the GAO report, the Defense Department doesn’t fully vet its contractors, particularly when it comes to ownership. Much of the information is self-reported and there appears to be little in the way of follow-up.

Cory Lum/Civil Beat

There’s no centralized database that tracks ownership information for all companies formed in the U.S., and states require minimal disclosure, which can make verification a difficult task, especially if a contractor is trying to actively conceal ownership status.

The Defense Department answered the GAO report by saying that it had a plan to respond to the risks, but that the specifics were deemed “sensitive” and therefore unable to be released to the public.

The Defense Department is the largest contracting agency in the federal government, which makes it a prime target for fraud.

In fiscal year 2018, the agency spent more than $350 billion on contracts for various goods and services. That included more than 570,000 new contracts that went to nearly 38,000 different contractors.

Defense contracting is big business in Hawaii, where military spending in fiscal year 2017 accounted for 7.3% of the state’s gross domestic product. That’s enough to rank Hawaii second only to Virginia among all states and the District of Columbia.

In all, the Defense Department spent $6.5 billion in Hawaii in 2017, with $4.7 billion of that allocated to personnel expenses. The remaining $1.8 billion was for contracts.

The report laid out a number of schemes in which contractors duped the Defense Department out of millions of dollars.

In some cases, the agency hired subcontractors who didn’t actually provide any goods or services. Instead, they charged the government for work other companies performed, but for less money.

There were several cases in which contracts set aside for disabled veterans and minorities went to companies that were not in fact owned by disabled veterans or minorities.

In the case of Leonard Francis and his company, executives created fake businesses to submit high-priced bids so that the Defense Department would pick Leonard’s company as the so-called lowest bidder.

Two employees involved in that scheme were sentenced to 46 and 70 months in prison.

Bagdoyan said that while it’s impossible to extrapolate from the relatively small sample size, it is indicative of a systemic problem with government contracting that can be mitigated if top officials, from the secretary of defense on down, take it seriously.

“It’s not rocket science, and I don’t mean to be flippant,” Bagdoyan said. “This is a fundamental control and risk management proposition. We’re not asking them to go to Mars.”

You can read the full report here: