Skip to comments.On the Take:IRS Chief Rossotti Gets Kickbacks from Corporate-Government Fraud
Posted on 02/24/2002 1:27:02 PM PST by It'salmosttolate
On the Take: IRS Chief Rossotti Gets Kickbacks from
by Uri Dowbenko
The multi-millionaire IRS Commissioner Charles Rossotti acts as if the usual rules don't apply to him. And actually he's right. They don't.
In a glaring conflict of interest, Charles Rossotti, Commissioner of the US Internal Revenue Service and former Chairman of American Management Systems Inc. (AMS), has retained between $16 million and $80 million of AMS stock.
It's the ultimate insider's deal. In essence, Rossotti gets a kickback every time AMS, a computer data-processing company based in Fairfax, Virginia, gets a new government contract.
Rossotti's ownership of AMS stock was revealed in financial disclosure forms filed in May 2000.
In 1998, the New York Times reported that Rossotti was the largest individual shareholder in AMS, a company that had revenues of $1.28 billion in 2000.
Unlike Vice President Dick Cheney who sold his Halliburton Corp. stock and Treasury Secretary Paul O'Neill who sold $100 million worth of his Alcoa Corp. stock, Rossotti refuses to divest.
In fact, Rossotti flaunts his conflict of interest and ethically challenged behavior.
Appointed by President Clinton in 1997, Rossotti's brazen ethics-be-damned position is buttressed by the fact that later he received an executive waiver of conflict of interest rules from the Clinton Administration.
According to Insight Magazine ("IRS Boss Snagged Clinton Waiver" by John Berlau, April 30, 2001), Rossotti got a waiver from Stuart Eizenstat, Clinton's deputy Treasury Secretary. This last minute waiver allows Rossotti to participate in decisions regarding AMS contracts with the IRS. In essence, Rossotti can continue to ensure that AMS interests - and his own - continue to be served by new as well as ongoing government contracts.
Incidentally AMS is supposed to be paid more than $17 million by the IRS this year for "add-ons" to existing contracts for internal software systems -- the so-called Custodial Accounting Project (CAP).
IRS continues to give AMS these add-on contracts without taking new bids from any AMS competitors.
This egregious corporate-government fraud by IRS Commissioner Charles Rossotti is unprecedented in recent history.
AMS: Corporate Insiders at the Government Trough
Founded by Charles Rossotti in 1970, AMS has leveraged its insider contacts and government contracts into a $1.28 billion global business with clients that include more than 43 state governments and federal agencies.
From 1965 to 1969, Rossotti himself was one of the so-called "Whiz Kids" of Defense Department Secretary (and unindicted war criminal) Robert McNamara, whose legacy remains the failed policy to prosecute the bogus Vietnam War.
Rossotti worked in the Office of Systems Analysis within the Office of the Secretary of Defense. The Office's claim to fame was inventing the use of "body counts" (dead "enemy" soldiers) as a gauge of "success" during the infamous war. McNamara received an MBA from Harvard Business School in 1939, and Rossotti got his MBA from Harvard in 1964.
Headquartered in Fairfax, Virginia, AMS has approximately 8,750 employees in 512 offices worldwide. According to the AMS website, its clients include the Environmental Protection Agency (EPA), General Services Administration (GSA), the Army Reserve, State Department, Treasury Department and the Department of Defense.
In its 1997 Annual Report, AMS claims that the "US Department of Defense (DoD) has contracted with AMS for the Standard Procurement System to automate and streamline the DoD-wide procurement system."
The automation has evidently been so "successful" that four years later whistle-blower Al Martin, a former Naval Intelligence officer, reports that Defense Department fraud is at an all time high. (See "Fraud for Lunch at Redstone Arsenal," (www.almartinraw.com/column11.html)
In his report on government fraud, Al Martin writes that "at the party, there was an active lieutenant general, an active three star general no less, who was talking about moving his fraud money to Corsica. This is the type of scam that's been done for years. He's just doing it a little more professionally. It's called the Old Double-Inventory-Whammo-Scam, and it's often done against the Department of Defense. The general is doing it with his clique of ten confederates. Some are in DoD Procurement. Some are in DoD Inventory Control. Some are in DoD Payment and Disbursement. And some are in DoD Audit. You have to have someone in each of these offices to make the scam work"
"He was bragging about it," Martin continues. "'We just committed this scam last week. It cost $40,000 and it netted $2.5 million.' He said his end was $250,000 and it just got wired to his offshore account. He's going to bury the money by buying a piece of beachfront property in Corsica because he doesn't have anything else to do with it."
"The scam is relatively simple," Martin writes. "They are reselling back to the Department of Defense actual Department of Defense inventory items that the Department of Defense already owns, but doesn't realize it owns. They go through the massive Department of Defense inventory list. They look for some esoteric but generic part. It doesn't have to be big. Just something that can be easily misplaced or mislaid."
"What this guy does on the inside is he simply deletes from the computer. That's all he does. He deletes it. He doesn't leave a paper trail pretending it was sold to some other company. It's just erased. It's just deleted."
By the way, at Donald Rumsfeld's confirmation hearing, Senator Robert Byrd (D-WV) said, "I seriously question an increase in the Pentagon budget in the face of the Department's recent Inspector General's report. How can we seriously consider a $50 billion increase in the Defense Department budget when DoD's own auditors say the Department cannot account for $2.3 trillion transactions in one year alone?"
Rossotti's IRS Shakedowns: Political Enemies Audited
The long-standing tradition of failing upward has finally landed Rossotti in the office of Commissioner of the Internal Revenue Service.
According to his website bio, (www.ustreas.gov/press/officers/rossotti.htm) Charles Rossotti "assumed his duties as Commissioner on November 13, 1997, pledging to turn the IRS into an organization that will consistently provide first-class service to the American public."
This stance belies the ugly reality of the IRS and its ongoing shakedowns of perceived political enemies. Its well-known tactics of fear and intimidation have been increasing steadily, marking the IRS as a reasonable facsimile of Soviet thuggery and/or banana republic corruption.
Since Rossotti assumed office, many political enemies of the administration have suffered IRS audits. These audits can only be construed as politically motivated de facto harassment.
A partial list of those targeted by Rossotti and his allegedly "kinder gentler" IRS include:
· Joseph Farah and The Western Journalism Center
· Juanita Broaddrick, who publicly accused Clinton of raping her while he was Arkansas attorney general
· National Center for Public Policy, a group critical of Clinton's environmental policies
· Bill O'Reilly of Fox News' The O'Reilly Factor
· Citizens Against Government Waste.
· Catherine Austin Fitts, former FHA Commissioner under Jack Kemp and President of Hamilton Securities, a company which ironically saved HUD $2.2 billion through its innovative loan sales/auction
Rosssotti Hires AMS Pals for High-Paying IRS Jobs
The IRS Restructuring and Reform Act of 1998 mandated that the IRS Commissioner hire non-IRS personnel for top positions in the tax-collection agency.
In an obvious quid pro quo, IRS Commissioner Rossotti then managed to hire two state tax honchos who had a prior history with AMS.
John LaFaver, Secretary of Revenue for the State of Kansas, was appointed IRS deputy commissioner for modernization, while Val Oveson, formerly chairman of the Utah State Tax Commission, was appointed national taxpayer advocate.
Even though both officials have since left IRS, both LaFaver and Oveson headed state agencies, which hired AMS to oversee the modernization of their respective states' tax collection computer systems.
In another instance of the revolving door syndrome between corporate and government networks, LaFaver's successor as Kansas Secretary of Revenue, Karla Pierce, went to work for Computer Sciences Corp, the lead contractor in IRS "modernization" project. Pierce, likewise, had been project manager when AMS's Kansas contract began.
Rossotti's AMS Sued for Breach of Contract
The corporate history of AMS is rife with lawsuits.
According to its Proxy Statement (2000), AMS has been sued at least several times by its own clients for sub-standard performance, shoddy work and breach of contract.
For example, in 1993, the State of Mississippi had contracted with AMS to improve and integrate its tax collection software. By April 1999, "not a single tax-collection software program was operational," read the lawsuit, filed on April 22, 1999 against AMS.
On August 23, 2000, a jury found AMS guilty of breach of contract and ordered to pay the State of Mississippi $474.5 million in actual and punitive damages.
Eventually the case was settled for $185 million, of which about $102 million was paid by its insurers.
In 1999, AMS Technical Systems, an AMS subsidiary, was sued by Bezeq, the Israeli telecommunications company. Bezeq alleged that AMS was in breach of contract and sought damages for $39 million. The case was later settled out of court.
In 1995, AMS's Form 10-K reported that Andersen had also sued AMS for copyright infringement and appropriation of trade secrets.
Rossotti's AMS and the "Missing" $59 Billion at HUD
One of the most outrageous breaches of public trust (or in-your-face fraud) has been the Department of Housing and Urban Development's (HUD) "loss" of $59 billion in Fiscal Year (FY) 1999 and $17 billion in FY 1998.
According to the Government Accounting Office (GAO), the company responsible for the HUD software system called HUDCAPS was Rossotti's company, AMS, as well as a company called Advance Technology Systems (ATS).
Despite the poor performance, HUD continued to pay on its contract to AMS, even though the system didn't work and $59 billion was "missing."
The HUD Audit Debacle was then blamed on the agency's financial reporting systems, i.e. accounting software. In fact in her statement to Congress, HUD Inspector General Susan Gaffney reported that she could not validate an audit of the books. In other words, there has been no audit of HUD financial statements for 1999. And $59 billion is still "missing."
In May 2000, Gaffney herself told lawmakers that "the material weakness is that HUD does not have a single financial ledger system in place the financial systems flowing in were incompatible and the system rejected the transactions. The rejected transactions weren't corrected in the new ledger system."
Gaffney's conclusion was that "HUD does not have a reliable and accurate statement of its financial condition."
In other words, then HUD Commissioner Andrew Cuomo (who plans to run for Governor of New York, while "losing" $59 billion during his tenure at HUD) used AMS to install an accounting system, which has never worked.
The HUDCAPS system has supposedly been going online since 1997. According to Gaffney, HUDCAPS does not work and that a new so-called "add-on" system is being implemented.
It's well known among insiders that "computer glitches" are often used as an excuse to hide fraud within government agencies.
The Office of Management and Budget (OMB), which has the power to rein in this fraud by cutting the HUD budget, has heretofore refused to take responsibility.
And, so far, AMS has avoided a PR debacle - primarily because mainstream media has studiously avoided mentioning its role in HUD's "missing" $59 billion scandal.
AMS, however, continues to be paid on its $250 million HUD contract - despite its non-performance and its breach of contract in providing HUD with a useable accounting system.
Rossotti must be smiling. But you'd be smiling too - if you weren't held accountable. And if you had between "$16 million and $80 million" worth of AMS stock that was going up while you slept. As IRS Commissioner, Charles Rossotti has reached the pinnacle of corporate-government fraud.
After all, who's going to trifle with the guy?
Here are a few snippets:
The Mississippi Department of Information Technology Services (ITS), as contracting agent for the state of Mississippi, was a party in the lawsuit against American Management Systems, Inc. (AMS) that concluded on Wednesday, August 23, 2000, with a verdict in favor of the State. As the technology agency for state government, we have clear and simple expectations for contracting vendors to deliver quality work within the time frame and budget promised and deal with the State and its representatives in good faith. We firmly believe this was not the case with AMS on the STARS project. Continued Here
This is America. This is how IRS witnesses have to testify in America.
IRS Hearings Highlight IRS Abuses
"The committee has for the most part kept the latest witness list under wraps. None of those scheduled to testify are expected to use voice distorters or sit behind screens as witnesses did in the September hearings."
This is not normal for a vibrant Constitutional Republic. It is normal for a vibrant Communist totalitarian Banana republic where the rule of law has completely broken down.
IRS chief testifies at hearings
"The committee heard tales of armed IRS criminal inspectors raiding businesses whose owners didn't pose a violent threat, and then failing to bring criminal charges. Several IRS agents testified they faced retaliation from managers after attempting to blow the whistle on misconduct.
Charges of racial discrimination and sexual harassment were aired, as were allegations that corporations received multimillion-dollar breaks in tax disputes. And, most surprising, three witnesses described an aborted plot by a renegade agent in Tennessee to bring phony money-laundering and bribery charges against former Sen. Howard Baker, R-Tenn., in order to enhance the agent's career."
...Sen. Phil Gramm, R-Texas, and others pressed Rossotti about how many IRS workers have been fired as a result of alleged abuses publicized in last fall's hearings. ``I think that firing about 50 of these people who clearly abuse the system would be a good thing'' for worker morale, Gramm said.
Rossotti didn't respond directly, but instead explained how difficult it is to fire federal workers. In most cases, employees resign or retire when faced with allegations of misconduct."
"As of late we seem to be auditing only poor people," said IRS agent Jennifer Long. "The current IRS management does not believe anyone in this country can possibly live on less than $20,000 a year, insisting that anyone below that level must be cheating by understating their true income.
"Currently, in a typical case assigned for audit, there are no assets, no signs of wealth, no evidence that would support a suspicion of higher unreported income. So when the IRS does initiate an audit on these people, these individuals were already only one short step away from being on the street," Long continued.
"I can personally attest to the use of egregious tactics used by IRS revenue agents which are encouraged by members of the IRS management," Long said. "These tactics, which appear nowhere in the IRS manual, are used to extract unfairly assessed taxes from taxpayers, literally ruining families lives and businesses, all unnecessarily and sometimes illegally."
Charles Rossotti held on to millions of dollars of stock in AMS, which has huge contracts with the IRS, but got a midnight waiver of conflict-of-interest rules from the Clinton team.
Two weeks ago when Insight was reporting potential conflicts of interest involving IRS Commissioner Charles O. Rossottis large holdings in a company that does millions of dollars worth of business with his own agency (see A Taxing Dilemma, April 23), the IRS said not to worry. Rossotti is recused from dealing with the huge government contracts of American Management Systems (AMS), the company that he cofounded and of which he remains the major shareholder, said Frank Keith, the IRS national director of communications. The commissioner has executed a viable and rigorous recusal pro-cess to separate himself from any dealings with AMS, Keith insisted.
Now Insight has learned that in December 2000 the Clinton administration blew a very large hole in the wall that is supposed to separate Rossotti, whom Clinton appointed as commissioner in 1997, from dealing with his old company. Along with the last-minute pardons and midnight regulations that the administration rushed through in its last two months, it also issued a waiver of conflict-of-interest rules that allows Rossotti to participate in decisions that directly could affect the AMS bottom line.
Insight has obtained a copy of that waiver.
Signed on Dec. 11, 2000, by Clintons deputy Treasury secretary, Stuart Eizenstat, the waiver allows Rossotti to join in discussions and decisions about the IRS Custodial Accounting Project, which uses an automated financial-management system and software provided by AMS. I have determined that your disqualifying financial interest in the Custodial Accounting Project [CAP], which arises from your ownership interest in American Management Systems Inc. [AMS], is not so substantial as to be deemed likely to affect the integrity of the services that the government may expect to receive from you with respect to the CAP, Eizenstat wrote. Clintons man noted that, without this waiver, federal law would preclude [Rossotti] from participating in the CAP because certain decisions would have a direct and predictable effect on your financial interest in AMS.
Eizenstat, now a partner at the hugely powerful Washington law firm of Covington & Burling, did not return Insights telephone calls asking why the waiver was necessary.
The conflict-of-interest waiver allows Rossotti to participate in budget and resource-allocation issues, the prioritization of the CAP and high-level design and architecture issues. It gives him the power to decide how much money will go to the project and, indirectly, to AMS, say experts.
At press time, the IRS had not returned Insights telephone calls for comment about the newly revealed waiver and other issues that have surfaced.
And this is no minor matter, say ethics specialists. Rossotti called the Custodial Accounting Project critical to IRS ongoing computer-system modernization in testimony to a House subcommittee on April 4. The IRS has asked Congress for $50 million for the project in fiscal 2002 alone. Overall, the Bush administrations budget gives the IRS an 8 percent funding increase in 2002, double the 4 percent average re-quested for all agencies. The additional funds reflect the computer modernization.
Because so much of this money could flow to AMS scheduled to be paid more than $17 million this year by the IRS, according to IRS spokesman Keith some have expressed concern. I always want to be certain that government officials are avoiding conflicts of interests, but I wont jump to any conclusions, Rep. Ernest Istook Jr., R-Okla., chairman of the House Appropriations subcommittee that oversees IRS funding, tells Insight through a spokeswoman.
Officials of some of the watchdog groups that insisted Treasury Secretary Paul ONeill divest his $100 million worth of Alcoa stock (see The $100 Million Misunderstanding, April 2-9) now say that Rossottis situation is more serious than ONeills would have been had he not agreed to sell the stock. The point there [with Alcoa] was that there was very little the Treasury Department could do that would not impact Alcoa, and I think eventually Secretary ONeill came around to that conclusion, says Larry Noble, executive director of the Washington-based Center for Responsive Politics. I think the same principles apply [to Rossotti], a little bit more directly here in the sense that the IRS is doing business with AMS.
Charles Lewis, the executive director and founder of the Center for Public Integrity who called strongly for ONeill to divest, says Rossotti should follow ONeills lead. If ONeill should have divested, then clearly this guy should divest, Lewis tells Insight. The ONeill stuff that came up about Alcoa was really speculative about things that might involve Alcoa. This is an instance with Rossotti where the company has direct dealings with the government [agency], and its headed by their former chairman. ... This is much more specific, much more real, because this is a direct vendor with the agency, and hes not taken any of the various steps one would take to create an arms-length distance.
Lewis also is disturbed that the Clinton-Eizenstat waiver could make the potential for conflict even greater. Rossotti has gotten a waiver and can in fact be involved in conversations about his old company, he says. He clearly has a problem.
The founder of the Center for Public Integrity worries that there could be the perception that this company is flourishing because their former chairman is the head of the IRS and that theyre getting favorable treatment inside the IRS. Lewis also is concerned that Rossottis large holdings might tilt IRS employees to favor AMS. They all know about his association and substantial source of his personal wealth, and thats not a fact lost on bureaucrats whose job it is to survive and know these things.
And apparently AMS hasnt hesitated to throw its weight around the agency. According to Tax Notes, a well-respected weekly journal that covers tax policy, AMS Chairman and then-CEO Paul Brands and other AMS executives met with IRS officials in May and expressed concern that the IRS was reluctant to procure upgrades and new releases of AMS financial software. The AMS executives accused the IRS officials of being slow to make decisions about purchases of AMS products because Rossotti was commissioner, but did not provide any specific instances of such actions by IRS personnel, according to the article written by veteran tax reporter George Guttman.
AMS has not returned Insights many phone calls about the Tax Notes article or other matters related to potential or alleged conflicts of interest in these matters.
Lewis admits its possible that AMS actually could be getting less-favorable treatment than other IRS vendors because of Rossottis millions of dollars worth of holdings, but he thinks thats unlikely. I dont have any evidence of heartrending hardships brought on companies whose executives joined the administration of whichever party, Lewis says.
Some see the extensions AMS keeps getting to a contract from the late 1980s to provide the IRS with an automated financial system as evidence that it may have been getting special treatment from the agency. The IRS had stressed that the $17 million in one-year contracts the agency signed with AMS last year were add-ons to the existing contract and did not violate Rossottis pledge to divest if AMS pursued new business with the IRS. But insiders wonder why the IRS keeps buying these add-ons without taking new bids or offers from AMS competitors.
It could be that what theyre doing is extending contracts as a way to get around the problem of issuing new contracts or going out for bids, says Noble of the Center for Responsive Politics.
Meredith McGehee, senior vice-president of the government-ethics advocacy group Common Cause, says these appearance issues will continue to haunt Rossotti as long as he refuses to divest. When you have the commissioner of a very high-profile agency holding stock in a company thats doing business with that agency, obviously it raises concerns, McGehee tells Insight. Mentioning the allegations of IRS hiring of state tax chiefs as a reward for steering business to AMS, McGehee says, I would not ever be able to tell what the truth is. But the point is the questions are being raised, and having the questions raised is part of what damages the public confidence here.
Insight meanwhile has learned that John LaFaver, the Kansas secretary of revenue who contracted with AMS and then was hired by Rossotti as the IRS deputy commissioner of modernization, has left for the private sector. He recently became vice president for state and local solutions at AMS, which had used his favorable comments about the company in a marketing brochure while noting his status at the IRS. Reached at AMS headquarters in Fairfax, Va., LaFaver tells Insight, I dont think Im going to comment. He says he doesnt remember whether he made the endorsement of AMS as Kansas revenue secretary or IRS deputy commissioner.
As Insight previously reported, Karla Pierce, LaFavers successor who defended AMS when lawmakers were blaming the company for a rash of late tax refunds and erroneous delinquent notices, recently was hired as director of organizational transformation for the IRS modernization project by the agencys lead contractor, Computer Science Corp. (CSC). After the deadline for Insights first article, CSC sent a statement saying that CSC was impressed by her significant accomplishments as secretary of revenue in Kansas. But nowhere did the statement deny allegations that Rossotti used input or influence to get Pierce the job.
Someday this thug will "trifle" with the wrong guy himself, create a situation where the guy has nothing to lose, and the guy will go hunting.
The goons at the IRS will never see him coming.
IRS agents testify behind screen to
protect thier identities.
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