SAN DIEGO -- An internal audit commissioned by the top brass of the U.S. Navy more than two years ago concluded the service had "significant" failures overseeing contracts that paid out hundreds of millions of dollars to vendors around the world to provide goods and services to ships when they pulled into foreign ports.
The 69-page report from the Naval Audit Service found widespread problems in how the Navy administers contracts for port services. Because of those weaknesses, auditors concluded the Navy can't be sure it received full value on all of the servicing contracts it examined, which totaled $686 million.
The audit was completed at the end of 2014. The San Diego Union-Tribune obtained a copy using a Freedom of Information Act request filed last year.
Auditors repeatedly faulted the Navy for weak supervision in nearly every area of port services, also known as "husbanding." The Navy has come to rely increasingly on private contractors over the past decade to provide the services, which include pumping sewage, providing ground transportation, supplying fresh water and scores of other tasks over the past decade.
"The Navy's current model for obtaining husbanding services has significant weaknesses in a variety of critical areas," auditors wrote, "including the funding and scheduling of port visits, the language of contracts, contract surveillance and the invoice review and payment process."
A Navy spokesman said this week that since the audit's completion the service has adopted many of the recommendations and changed how it oversees the contracts.
"The audit found that the Navy's model for acquiring husbanding and port services did not have sufficient internal checks and balances to detect and deter fraud and abuse," Lt. Cmdr. Timothy Hawkins said. "To address this, we have removed contracting authority and pay functions from ships, increased contract oversight, standardized requirements, and created an Off Ship Bill Payment Process."
The audit was ordered by Navy Secretary Ray Mabus in 2013, in the months after the massive bribery and fraud scandal involving Leonard Glenn "Fat Leonard" Francis first surfaced.
Francis ran his own servicing company, Glenn Defense Marine Asia, and was indicted on charges that he defrauded the government of at least $35 million via overbilling and other fraud, over nearly a decade.
Federal prosecutors also charged eight current and former officers and sailors with accepting bribes of cash, gifts, prostitutes and hotel junkets. In exchange, they helped Francis get lucrative contracts, steered ships to ports Francis controlled in Asia and kept him apprised of internal Navy investigations into his billings.
The investigation, the worst scandal to hit the Navy in years, is continuing and more officials are expected to be charged in federal court in San Diego. As many as 100 other Navy officers who won't be criminally charged are still facing possible discipline with the Navy itself.
The Francis scandal is focused on the services' Seventh Fleet, which sails across a huge swath of the Pacific in Asia. The audit examined how contracts were administered from October 2012 to March 2014 in the Fifth Fleet, operating in the Indian Ocean, Arabian Gulf and Red Sea, and Sixth Fleet, which operates across ports in Europe and Africa.
The findings included:
* There were no internal controls in place to prevent another contractor, Inchcape Shipping Services, from improperly charging a markup on some items. The amount of the markups was redacted from the report, but it appears to have gone undetected for at least three years. In February, the Department of Justice joined a whistleblower lawsuit against the company, alleging it overcharged the government for millions of dollars in port services.
* Two contracts were poorly written, allowing ship supply officers an unlimited amount of authority to order supplies and services. A review of a dozen port visit files showed the supply officers ordered $439,000 worth of items that weren't authorized under the contract.
* Some ship supply officers -- a key cog in the port servicing process -- didn't understand their roles and weren't trained in the often complicated rules for government contracting.
* Access to ship schedules -- designated as classified information -- was not limited only to those with a "need to know." Instead, personnel with accounts for a computer system called the Secret Internet Protocol Network could easily access the schedules, auditors said, calling it a "significant security weakness."
Navy officials agreed with all the recommendations to fix problems, with one exception -- the call by auditors to tighten security access to ship schedules. Navy officials said that there were sufficient security controls in place, and to further tighten them would limit the ability of different commands and staffs around the world to coordinate tasks and share information about port visits.
Sharing ship schedules, which are classified information, was an issue in several of the charges levied against Navy officers and sailors in the "Fat Leonard" case. Capt. Daniel Dusek, who was sentenced to 46 months in prison for conspiracy to commit bribery, was charged with feeding Francis ship schedules dozens of times.
Craig Hooper, a defense analyst who has followed the "Fat Leonard" scandal, said the audit identified a longstanding problem as the Navy has turned more toward contractors, and not provided enough scrutiny over them.
"We've had this process where we've pulled away contracting support, and said to the Navy, go out there and be forward deployed, be present in these areas," he said. "But the support for doing that hasn't been forward deployed to the same extent."
He said the Navy has to be more aware of who it is dealing with.
"Getting money out of naval vessels is a science port operators have practiced for centuries," Hooper said. "Everybody has their hand out. You have to recognize what you're getting into is a very rapacious culture."
This was not the first audit to call attention to problems with ship servicing work. The audit noted that three previous audits in 2010 and 2013, before the Francis case broke, identified poor checks and balances and bad internal controls over such contracts.