A helicopter flies over Afghanistan (U.S. Army photo)

A private security company hired to protect the U.S. Embassy in Kabul lost its contract with the State Department in 2007 over the failure of its guards to speak English, according to two senior diplomats who worked in the embassy at that time. Yet ArmorGroup, which was hired by the State Department’s Bureau of Diplomatic Security to replace that company  — and which is currently embroiled in a physical and sexual harassment scandal — was allowed to keep its contract despite exhibiting exactly the same deficiency that those diplomats said jeopardized the security of the embassy.

In late 2006, shortly after the Virginia-based security company MVM took over the protection of the embassy from the British firm Global Risk, the U.S. ambassador to Afghanistan began to notice problems with the company’s guards. The guards demonstrated “an inability to understand instructions in English that prevented following orders in an emergency situation,” said Ronald Neumann, who served as ambassador in Kabul from 2005 to 2007. Yet that same lack of proficiency in English that Neumann felt endangered the embassy was allowed to recur with ArmorGroup.

Illustration by: Matt Mahurin

While no security incident in 2006 occurred that overwhelmed the language skills of the guards, Neumann decided to take action. Working with the embassy’s regional security officer, who reported to the Bureau of Diplomatic Security, Neumann sent out a formal notice, back to the State Department that MVM’s performance “was not adequate for our security.” The State Department sent a “special team” from the Bureau of Diplomatic Security to investigate. Their findings were so evidently serious that MVM lost its contract — something that didn’t even happen after guards working for Blackwater killed 17 Iraqi civilians in Baghdad’s Nisour Square in September 2007.

A second senior diplomat, who declined to speak for attribution, who worked in the Kabul embassy at the time confirmed Neumann’s account. “We were sufficiently concerned” about MVM, the second diplomat said, that ultimately the contract of MVM’s predecessor for embassy security, Global Risk, was extended on an interim basis until the contract was re-awarded.

Private security contractors routinely hire non-English speaking guards from the developing world who are willing to work for comparatively little. A former ArmorGroup official, James Sauer, sued the company for unjust termination in 2008, and claimed in an ongoing lawsuit that the guards ArmorGroup hired to protect the embassy in Kabul were “nothing more than slave labor.”

In testimony to a Senate subcommittee in June 2008, William Moser, the deputy assistant secretary of state for logistics management, said that the State Department “terminated a contract with MVM” for securing the Kabul embassy “due to the contractor’s failure to meet contract requirements.” But he did not elaborate to say that a major reason for that termination was the inability for MVM to provide guards with proficiency in English. No one at MVM’s Ashburn, Va. headquarters responded to phone calls seeking comment.

After MVM lost its contract, State awarded the contract for embassy security to ArmorGroup North America, based in McLean, Va. But the language-barrier problem quickly recurred. In April 2008, the State Department sent ArmorGroup a formal advisory that deficiencies with how it did its job were endangering its contract. Among them: “a lack of English proficiency in a large portion of the guard force,” according to a letter sent on Tuesday to Secretary of State Hillary Rodham Clinton by Danielle Brian, executive director of the Project on Government Oversight, summing up a series of whistleblower allegations and Senate investigations brought to the good-government advocate’s attention. But in July 2008, the State Department extended its contract with ArmorGroup for another year — a contract worth $189 million.

That letter disclosed a number of additional alarming claims about ArmorGroup, including widespread physical and sexual harassment of employees, and threats made against Afghan employees. The State Department’s inspector general has opened an inquiry.

A spokesman for the State Department’s Bureau of Diplomatic Security, Jim Finkle, said the bureau could not comment until after the Labor Day holiday on how the State Department could have allowed ArmorGroup to repeat the same language-proficiency problems that it fired MVM for exhibiting. The Washington Independent will print that explanation when the agency provides it.

But the language-barrier problem extends beyond even the Kabul embassy. According to a senior government official intimately familiar with the operations of the U.S. embassy in Baghdad, many of the guards employed by contractor Triple Canopy — also overseen by the Bureau of Diplomatic Security — to protect the embassy similarly have little proficiency with English. “There is a language problem with the guards at the embassy in Iraq,” said the official, who spoke on condition of anonymity. “They are employees Triple Canopy, chiefly from Peru, and they speak virtually no English. That has certainly presented a problem with respect to certain crisis situations. I’m aware of a few, wherein the guards themselves were difficult to call upon in crisis situations.”

The fact that the language barrier for security contractors has existed before ArmorGroup in Afghanistan and persists beyond it in Iraq demonstrates that the Bureau of Diplomatic Security has “not demonstrated in the last several years an ability to overcome these challenges by making hard decisions that could improve the security situation,” said a second senior government official who also requested anonymity. That official attributed those challenges to budgetary constraints placed on the Bureau.

“It shows they haven’t learned the lessons from the past,” said the first senior government official, “namely that an essential element of a good guard at the gate of an embassy is that that guard speak English. That was previously recognized in Afghanistan, that that weakness presented a threat. But in trying to solve the problem, the department instead perpetuated it.”

Brian, the executive director of POGO, said she could not explain how State could fire a security company for hiring guards who could not speak English but then award its contract to a different company that exhibited the same problems. Nor could she explain how lack of English was once a firing offense but killing civilians, as Blackwater did, was not. “It’s impossible to explain State’s behavior,” she said. “There is no logic behind any of these actions.”

She said these failures raise questions about the Bureau of Diplomatic Security’s basic competence with reigning in its contractors. “It’s hard to see [the Diplomatic Security bureau] having any role in overseeing contracts anymore,” she said.

One of the whistleblowers who helped expose the guard scandal at the U.S. Embassy in Kabul has just been forced to resign after his company—whose client is ArmorGroup, North America (AGNA)—came to believe that he had reached out to D.C. for assistance. The company told POGO that the whistleblower’s resignation was voluntary.

However, information obtained by the Project On Government Oversight (POGO) strongly suggests he was pressured into resigning to avoid being fired, an action often referred to as constructive dismissal.

POGO is deeply concerned about the action allegedly taken against the whistleblower. He is being forced out at a time when three of the supervisors responsible for allowing the misconduct at Camp Sullivan have been allowed to quietly resign and escape accountability. As per our letter to Secretary of State Hillary Clinton of September 1, 2009, POGO calls on the State Department to take immediate action to protect both the physical and employment security of whistleblowers who have stepped forward with allegations of serious misconduct involving ArmorGroup, North America and others.

My emphasis. Remember, State Department spokesman Ian Kelly said yesterday that ArmorGroup had brought damaging photos itself to the State Department’s attention “ten days ago.” But now a patron of ArmorGroup is retaliating against whistleblowers?

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Blackwater Security guards U.S. State Department employees in Baghdad. (Flickr: jamesdale10)

It remains one of the great ironies of the past eight years of war: while the government’s use of private security contractors has garnered no end of criticism, few realize that the highest-profile blunders and abuses have come from companies that work not for the Pentagon, but for the State Department.

Blackwater, now known as Xe Services, whose employees drunkenly shot a bodyguard for an Iraqi vice president and killed 17 Iraqi civilians in September 2007. It remains one of the recipients of State’s Worldwide Personal Protective Services contract.

Illustration by: Matt Mahurin

ArmorGroup, the company that hired employees who sexually harassed their Afghan colleagues and engaged in a series of hazing rituals, is still entrusted by State to guard the U.S. embassy in Kabul.

The Defense Department’s contracting branch is hardly without flaws, as years of revelations about diverted funds or missing weapons shipments in Iraq have demonstrated. But many of those revelations came from Stuart Bowen, the special inspector general for Iraq reconstruction, who focused a harsh eye on the Defense Department for credible allegations of waste, fraud and abuse. “DOD is very proactive in addressing the problems,” said one defense-contracting insider who declined to speak for the record.

The State Department, though, has come under comparatively less scrutiny.  “There’s certainly a different perception in the quality of State and Defense security contractors in particular,” said Steve Aftergood, a contracting expert with the Federation of American Scientists. “DOD on the whole seems a little bit more disciplined. The more egregious cases, including the latest, seem to involve State Department contractors.”

This latest case comes in the form of a letter from the Project on Government Oversight to Secretary of State Hillary Rodham Clinton about ArmorGroup, which holds what’s called a “static security” contract estimated to be worth $180 million to $200 million to guard the perimeter of the U.S. embassy in Kabul. (A separate State contract, to guard diplomats as they move throughout a given area, is currently split between three other security companies: Xe, Triple Canopy and DynCorp.) After receiving numerous anonymous complaints from ArmorGroup employees, POGO executive director Danielle Brian wrote to Clinton on Tuesday to warn of “a pattern of blatant, longstanding violations of the security contract, and of a pervasive breakdown in the chain of command and guard force discipline and morale.” Numerous incidents of physical and sexual harassment were reported to have occurred.

But only half of Brian’s memo focused on ArmorGroup. The rest of it accused the State Department of lax contractor oversight, an atmosphere contributing, Brian alleged, to the abuses. It noted that State officials had placed ArmorGroup on notice for two years, “but its threats have been empty,” as indicated by State re-awarding the static security contract to the company in June 2008 despite having issued it two official notices that the company’s “deficiencies were endangering the performance of the contract.” One of those notices, from 2007, explicitly stated that ArmorGroup’s laxity put “the security of the US Embassy in Kabul … in jeopardy.” Brian’s recommendation was to take embassy security out of the hands of the State Department entirely and give it over to the military.

In a press briefing yesterday, State Department spokesman Ian Kelly conceded that the department had warned ArmorGroup of lax discipline and disturbing incidents for years. “We have pointed out to them some of the deficiencies,” Kelly said. “And I can’t answer right now from this podium exactly what they have done in response to this letter.” Yet he said Clinton would have “zero tolerance” for the abuses Brian detailed.

Sen. Claire McCaskill (D-Mo.), the chairwoman of the Senate’s subcommittee on contractor oversight, wrote Tuesday to Ambassador Patrick Kennedy, the State Department’s undersecretary for management, urging him to “conduct a thorough review of the performance, management, and oversight of this contract.” A spokeswoman for McCaskill, Maria Speiser, said the senator was “quite disappointed” with State’s oversight of ArmorGroup’s contract.

Additionally, the State Department will soon re-award its contract to protect diplomats in conflict zones, known as the Worldwide Protective Services Contract. Despite having been kicked out of Iraq following the shooting incident at Baghdad’s Nisour Square in 2007, Xe — which is presently the only security company hired by State to protect diplomats in Afghanistan — told The Washington Independent last month that it would seek to retain that contract, estimated to be worth $1.2 billion to the controversial company.

Spokespeople for the State Department’s Bureau of Diplomatic Security have repeatedly delayed answering TWI’s questions about the propriety of letting Xe resubmit its bid. Nor did anyone respond to repeated requests to discuss ArmorGroup. But in a previous email to TWI, spokesman Brian Leventhal said the bureau had “increased its staffing levels in Afghanistan to ensure appropriate oversight” — precisely what Brian’s letter questioned — and had placed Diplomatic Security agents in all diplomatic protective details run by security contractors in Afghanistan, alongside “video and audio equipment” in many of them to deter wrongdoing.

Aftergood could not answer why it was that so many problems have persisted with State’s contractors. “It’s not clear who is dropping the ball, but certainly someone is,” he said, speculating that perhaps the Defense Department has had “more time to establish and enforce expectations of a sort that would preclude the total chaos that seems to prevail with some of the State Department’s contractors.”

Roads are everything in Afghanistan, precisely because there are so few of them. They’re an economic necessity and a strategic choke-point. David Kilcullen once opted to tell the story of counterinsurgency in Afghanistan through a series of observations about roads. Some roads in Afghanistan that I’ve seen are littered with the giant, boxy detritus of overturned shipping containers after bandits — insurgents or, more often, police — loot the so-called “jingle trucks” that transport goods. To deny Afghan civilians access to scarce roadspace is a surefire way to alienate them.

So, Hodge reports, McChrystal is considering telling troops in Afghanistan to be careful not to force Afghans off the road when their Humvees roll out:

Canadian Brig. Gen. Eric Tremblay, spokesman for the NATO-led International Security Assistance Force, told Danger Room that McChrystal was considering a new directive that would set the tone for working among the population, while “maintaining the delicate balance” between cultural sensitivity and protecting the force.

“The commander is maybe thinking of producing COIN [counterinsurgency] guidance that will govern day-to-day interactions with Afghans,” he said. “And that may cover tactical driving both in Kabul and outside, and it may also deal with how you portray yourself with Afghans — but also leaving it to the tactical commander or the commander on the ground to decide.”

So, once again: what about the private military contractors, particularly those who guard U.S. diplomats? How to coordinate with them so they know not to run civilians off the road and still do their jobs protecting their charges?

Interrogation Duties:  The Administration objects to section 823 in its current form, which would prohibit contractor personnel from interrogating persons detained during or in the aftermath of hostilities under any circumstances.  In some limited cases, a contract interrogator may possess the best combination of skills to obtain critical intelligence and this provision, therefore, could prevent U.S. Forces from conducting lawful interrogations in the most effective manner.  The Administration fully supports the application of ordinary Defense Department rules and regulations to contractors engaged in interrogations (as contemplated in subsection (a)(2) of the current section 823), and could support a revised version of the section that would apply such provisions to contractors who participate in interrogations.  The Administration also would object to any amendment requiring video recording of all intelligence interrogations. Although the Administration is open to studying a possible video recording requirement, implementing a mandatory requirement at this time would be imprudent, unduly burdensome, and could risk significant unintended consequences in current and future military operations.

Emphasis added. CIA Director Leon Panetta banned contractor involvement in CIA interrogations. Why should contractors be acceptable in military interrogators? After all, the military has a more robust interrogation capability than CIA does. And this video provision is also noteworthy. As a state senator in Illinois, Barack Obama was instrumental in requiring police interrogations to be videotaped, which was both a civil liberties and a quality-control measure.

In May, following a wealth of disclosures about the role of the Survival Evasion Resistence Escape program, which trains U.S. troops to resist torture, in shaping the Defense Department and the CIA’s interrogation programs under the Bush administration, it appeared that one of the biggest unanswered questions was how and why the CIA under George Tenet knew to turn to contract psychologists with SERE experience like James Mitchell and Bruce Jessen for assistance in devising interrogation programs. Retired FBI agent Ali Soufan testified that one such contractor — identified by Jane Meyer as Mitchell — on the Abu Zubaydah interrogation, the wellspring from which all future CIA “enhanced interrogation” emerged, overrulled all his FBI and CIA colleagues in order to experiment with SERE techniques.

That raised an additional concern: how deeply did CIA interrogation involvement with Mitchell and Jessen, who started a consulting firm after leaving SERE, actually run? Apparently pretty deeply: CIA Director Leon Panetta canceled all contractor involvement in interrogations in the spring, although Mayer reports there are some caveats to that. But it’s unclear, and so I filed a Freedom of Information Act request with the CIA for “all contracts signed between the CIA and the firm of Mitchell Jessen & Associates between September 2001 and April 2009″ including those where M-J are subcontractors. After I filed it, I realized it was imprecisely worded: since there was no Mitchell Jessen & Associates in late 2001, I probably wouldn’t be able to answer my first question anyway.

As it happens: moot point! Today I got my response, courtesy of Delores M. Nelson, the CIA’s information and privacy coordinator:

… [T]he CIA can neither confirm nor deny the existence or nonexistence of records responsive to your request. The fact of the existence or nonexistence of requested records is currently and properly classified and is intelligence sources and methods information that is protected from disclosure by section 6 of the CIA Act of 1949, as amended. Therefore, your request has been denied pursuant to FOIA exemptions (b)(1) and (b)(3).

Now, the fact of Mitchell Jessen & Associates contracting for CIA is not a secret. In addition to Mayer’s reporting, Katherine Eban delved deeply into the company’s history with CIA for Vanity Fair in 2007. The company even replied to her questions. And yet the CIA contends that even confirming the existence of any contracts it signed with the company would jeopardize national security. There’s an appeals process for my rejected FOIA request; I’ll be taking full advantage of it.

Treasury Secretary Timothy Geithner (WDCpix)

As the Wall Street bailout nears its first anniversary, the controversy over giving public money to private banks has become public knowledge. But an equally risky aspect of the financial rescue has flown largely under the radar: the government’s reliance on private contractors – many with potentially significant conflicts of interest – to help revive the stalled economy.

The Treasury Department knows that the law firms and investment managers hired to aid its salvage effort could be influenced by their ties to bailed-out banks; in fact, the department released a rule in January aiming to mitigate the problem.

That rule, however, has raised questions from watchdogs by asking contractors to identify and police their own conflicts of interest. And a careful review of bailout hiring agreements reveals an inconsistent set of rules applied to the types of private deals that contractors can make while serving as agents of the U.S. government.

Illustration by: Matt Mahurin

“It’s just a wonderfully closed circle,” Simon Johnson, former chief economist at the International Monetary Fund and leading critic of the bailout, said in a recent interview.

“They’ll sell you on this line that there’s a scarcity of talent,” so contractors must be plucked from Wall Street and remain part of its culture, Johnson continued. “It’s the same argument they’re using to explain why they’re appointing a Goldman Sachs lobbyist as [Treasury Secretary Tim] Geithner’s chief of staff. That’s part of how the club thinks.”

Can these contractors guide the bailout with the public interest in mind while simultaneously courting bailout-related business for themselves? It’s tough to say, but imposing greater transparency requirements is crucial, according to more than a dozen financial and legal experts interviewed for this story.

Right now, even as more of these lawyers and financiers are helping with the financial rescue, less is being disclosed about their handling of taxpayer-owned assets. Investment managers are setting values for securities that their companies may also hold privately, while law firms are approving government aid for companies they still represent in certain cases – but the public remains almost completely in the dark.

The Investment Managers

Consider the case of AllianceBernstein. Like many investment management firms, Alliance did not have a good 2008. Assets dropped by more than 40 percent, net income fell by one-third and the company was forced into its first layoffs in 35 years.

Yet things were looking up by late April, thanks to the Treasury. Alliance was one of three firms the department chose to monitor the assets and debt of banks receiving bailout. Its contract involves Alliance in highly sensitive issues, from executive pay limits to the execution of government stock warrants.

“We expect this to be an attractive proposition from a profitability point of view,” CEO Peter Kraus told analysts as he announced the news.

But Alliance executives also told analysts that the firm plans to apply for the Treasury’s Public-Private Investment Program, which could allow the firm to leverage its look at banks’ balance sheets into profits down the road.

If Alliance joins the PPIP, the company could partner with private investors to purchase the same types of mortgage-backed securities that it’s also handling for the government – thus earning a double windfall when the market value of those mortgage-backed securities increases.

Neil Barofsky, the special inspector general for the Troubled Assets Relief Program warned of this potential conflict in his most recent report to Congress: “transactions in these frozen markets will have a significant impact on how any particular asset is priced in the market. As a result, the increase in the price of such an asset will greatly benefit anyone who owns or manages the same asset, including the [public-private program] manager who is making the investment decisions…”

Under the Treasury’s conflict-of-interest rule, Alliance and its fellow contractors (FSI Group and Piedmont Investment Advisors) are only required to step aside from managing assets owned by a bailed-out bank if that bank’s assets provided more than 5 percent of the firm’s most recent annual revenue.

The contracts signed by Alliance, FSI and Piedmont, posted on the Treasury’s website, acknowledge six potential conflicts of interest and suggest how each can be worked around. Yet Treasury did not reveal which banks’ assets were given to which contractor, or even whether the investment managers are doing anything with the securities they’re being paid to watch.

An Alliance spokesman declined to comment when asked how the firm is working out any conflict-of-interest risks it may face.

“The whole idiocy of this,” Chris Whalen, co-founder of the banking risk-management firm Institutional Risk Analytics, said during a recent conversation, “is that the administration would even have these firms pretending to manage this stuff, giving them subsidized deals.”

Alliance is now poised to value assets once held by Merrill Lynch – the same company that paid Alliance CEO Kraus a $25-million bonus for three months of work. Kraus’ bonus, distributed just before Merrill was sold to Bank of America, was part of a $3.6 billion pot that is now under investigation by the New York attorney general and the Securities and Exchange Commission.

A Treasury spokesman did not respond to several requests for comment on conflicts of interest, but did point to its January regulation as evidence of the government’s action on the issue and awareness of possible problems.

The Law Firms

The risk of conflicts of interest is not limited to asset managers sitting on toxic mortgage-backed assets. Simpson Thacher & Bartlett, the prominent New York law firm chosen in October to be the chief legal adviser to the TARP, has a long history of shepherding mergers and acquisitions in the banking industry, particularly during the housing bubble’s halcyon days.

Before the bailout began, Simpson Thacher had advised Washington Mutual on avoiding insolvency and the board of AIG on winning help from the Federal Reserve. Come the crash, however, the law firm was put in charge of setting terms for the government’s investment in major banks – on the opposite side of the table from the banks it once helped make mighty.

Simpson Thacher’s original contract, signed in October, did not mention the need to work around or waive conflicts. When the law firm agreed to expand its bailout work in February, however, that pact stated that Treasury “HAS NOT WAIVED any potential conflicts of interest” – giving the government room to make case-by-case decisions if problems arose.

Yet the law firm’s contract, however, appears to allow an inherent conflict of interest: The Treasury cleared Simpson Thacher to continue representing private clients participating in “other programs in support of the [bailout]” – non-TARP initiatives such as the PPIP or the Term Asset-Backed Securities Loan Facility.

In fact, Simpson Thacher senior partner Lee Meyerson, whose pivotal role in the TARP made him American Lawyer’s No. 4 “Dealmaker of the Year,” continued to advise private-equity clients on how to snap up failing banks while he worked on the bailout. When Florida’s BankUnited collapsed last month, costing the government $4.9 billion, three private equity firms represented by Meyerson swooped in to take over the property.

Simpson Thacher did not respond to repeated requests for comment about the language in its Treasury contract and on its internal mechanisms to prevent conflicts of interest.

“These firms are making up the rules [of the bailout] and advising private clients about the rules,” Yale Law School professor Jonathan Macey, a banking specialist and author, said in a recent interview.

“The problem is, No. 1, this means we lose the appearance of fairness,” he continued. “And, No. 2, there’s a very strong inclination for the people making up the rules to be sympathetic to their own clients as opposed to other people’s clients when they’re writing the rules.”

Davis Polk & Wardwell, another law firm turned Treasury contractor, was so closely involved in drafting Geithner’s proposal for “resolution authority” to wind down non-bank institutions that when members of Congress received the Obama administration’s draft proposal on the topic, it still bore Davis Polk’s computer signature. Ironically, Davis Polk turned down a chance to apply for Simpson Thacher’s first bailout contract – citing the risk of conflicts of interest.

At the Federal Reserve

The Treasury is not the only bailout administrator that has come to lean on contractors.

BlackRock, which manages a $1.3 trillion asset portfolio that ranks largest in the world, was hired for three no-bid deals in October by now-Treasury Secretary Geithner, then president of the Federal Reserve Bank of New York.

Geithner assigned BlackRock to supervise toxic assets once held by Bear Stearns, as well as those held by AIG – deals worth at least $71.3 million over three years. Yet BlackRock, like Alliance, plans to participate in the Treasury’s PPIP, again offering the firm the possibility of benefits based on its knowledge of AIG and Bear’s exposure.

Lawmakers in both parties have raised concerns about BlackRock’s conflicts, as The New York Times reported earlier this month. But Charles Hallac, a founding partner of BlackRock and the head of its risk-advisory arm, BlackRock Solutions, said such concerns are unfounded.

No BlackRock analyst managing the AIG and Bear holdings will take part in the PPIP, or “any kind of program where they’re using government funds to make money for clients, Hallac explained in a telephone interview.

BlackRock was selected because of its expertise in separating its investment business from its risk-advisory business, Hallac added. “We didn’t want to show this to anybody who was going to try to make money in the markets with this information. So we created a separate team within BlackRock Solutions to just manage the Fed portfolio.”

However, he said some employees in line to work on the PPIP have helped with a separate Fed program that involves buying up mortgage-backed securities.

The financial world often uses the anachronistic phrase “Chinese wall” – a phrase that came into wide use after the 1929 stock market crash – to describe an investment firm’s internal efforts to isolate compromising information.

To a certain extent, then, the debate over conflicts of interest at BlackRock and other firms depends on whether you believe Chinese walls can survive in the age of BlackBerries and blogs.

“Let’s be honest, it’s bullshit. They don’t exist,” Barry Ritholtz, the CEO of the independent research firm Fusion IQ and the creator of the Big Picture financial blog, said in an interview. “They’re a theoretical, abstract legal construct that looks and sounds good when you’re developing legal constructs.”

One hedge fund manager, who requested anonymity in order to speak candidly, said he is more concerned bailout contractors’ access to Geithner and Federal Reserve Chairman Ben Bernanke.

“The public-private cooperation that’s going on – not just in the PPIP – ought to be very unsettling to people,” the hedge-fund manager said. “These guys are on the phone with Geithner, Bernanke, with everybody who matters and is setting policy in Washington. And at the same time, they’re trading their own books.”

While bias among these government contractors is undeniably problematic, some experts asserted that it is also unavoidable. As this argument goes, if the government ruled out firms that did significant business with a bailed-out bank, there would be no one left to hire.

“Because Treasury doesn’t have the in-house expertise, it’s inevitable that they would have to contract out,” said Campbell Harvey, a professor of international business at Duke University. “It’s also inevitable that there will be conflicts of interest. If you’re qualified, then almost by definition, there’s a conflict of interest.”

William Seidman, former chairman of the Resolution Trust Corporation (RTC), which led the recovery effort after the 1990s savings-and-loan crisis, offered a sharp contrast to Treasury’s current opaque bailout contracts.

Seidman said he racked up large auditing bills to ensure that his contractors were complying with conflict-of-interest rules. “Occasionally we had transactions that we didn’t make public for some sort of public-policy reason, but … most we had to report to Congress,” he said in an interview shortly before his death on May 13.

“It was expensive,” Seidman added, “but the program had so much potential for fraud or conflict that we thought it was essential.”

Elana Schor is the Washington correspondent for Streetsblog, a news Website focusing on sustainable transportation and infrastructure. She has formerly covered Congress for The Hill and The Guardian.

[T]he stimulus bill fails to adequately protect employees of government contractors, who are in the best position to blow the whistle on fraud and abuse of taxpayer money. The Senate version of the bill also doesn’t protect federal employee whistleblowers — an odd oversight given that state and local employees are protected. And neither version explains how the government is going to ramp up its own hiring quickly enough to oversee and coordinate all these new government contracts.

Today, President Obama took a big step toward rectifying these problems when he signed the Federal Enforcement and Recovery Act of 2009 (pdf) into law, extending broad new protections for employees of federal contractors and subcontractors who shed light on fraud.

The National Whistleblowers Center released a statement praising the new legislation:

This new law fixes problems in the False Claims Act, extends whistleblower protections to those who work for contractors and provides new funds for the government to investigate fraud.  Most significantly, the Act overturns the recent Supreme Court decision in Allison Engine,  which created a major loophole allowing government subcontractors to escape liability under federal anti-fraud laws.

“This is a great day for whistleblowers and a bad day for those who would defraud the government,” Stephen M. Kohn, Executive Director of the NWC.

“President Obama has taken a significant first step in changing America’s whistleblower laws.  We hope he continues to fulfill his campaign promises on this issue,” Kohn stated.

“Congress and the President did the right thing.  Billions and billions of dollars in new government spending has been authorized.  The taxpayers need the strongest possible anti-fraud laws in order to prevent financial recovery monies from being looted.  Every major study documents that whistleblowers are key to fraud detection.  This law is designed to encourage whistleblowers and reward them for their sacrifices.” Kohn added.

Among other provisions the new law:

• Fixes the loophole which allowed companies to use subcontractors to escape from liability under federal anti-fraud laws;
• Extends whistleblower protection to contractors, sub-contractors and agents who report fraud.
• Eliminates the requirement for “specific intent” created by the Allison Engine Supreme Court decision. Previously the Supreme Court required proof that a sub-contractor specifically intended to defraud the government in addition to showing a certification was false. Now it will be possible to sue under the False Claims Act if a subcontractor knowingly uses a false statement and obtains payment. This eliminates the ability of a sub-contractor to hide behind a prime contractor in False Claims Act cases.
• Permits whistleblowers to expose fraud whenever Government money is at stake. This provision in the law is a rebuke to a decision issued by Chief Justice John Roberts, when he served on the federal appeals court. In that case, Totten v. Bombardier Corp., Judge Roberts ruled that taxpayers could not recover for fraud committed against Amtrak, even though it was the taxpayer who paid the final bill.

“We are especially happy that the new law will extend whistleblower protection to independent contractors, sub-contractors and all those who risk their career to expose fraud.  No company should be allowed to hide behind loopholes in the law to rip off the taxpayer,” Kohn said.