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| Cartoon by Khalil Bendib |
The
Carlyle Group, one of the world's largest private equity funds, may
soon acquire the $2 billion government contracting business of
consulting giant Booz Allen Hamilton, one of the biggest suppliers of
technology and personnel to the U.S. government's spy agencies. Carlyle
manages more than $75 billion in assets and has bought and sold a long
string of military contractors since the early 1990s. But in recent
years it has significantly reduced its investments in that industry. If
it goes ahead with the widely reported plan to buy Booz Allen, it will
re-emerge as the owner of one of America's largest private intelligence
armies.
Reports of a potential Carlyle acquisition of Booz
Allen's government unit began circulating among U.S. military
contractors in December 2007, after Booz Allen's senior partners and
board members - a group of 300 vice presidents who own the
privately-held firm - gathered at company headquarters in McLean,
Virginia, for an extraordinary two-day meeting.
According to a December 15 letter to Booz Allen
employees from CEO Ralph W. Shrader that was released by the firm, the
vice presidents signed off on a "new strategic direction" that would
involve separating the company's commercial and government units and
operating them as separate companies. That was widely seen, both inside
and outside the company, as a sign that a sale of one or both of the
units was imminent. Shrader said the company hoped to come to a
resolution of the issues involved by March 31, 2008.
In January 2008, major newspapers - each quoting
unnamed people close to the situation - reported that discussions
between Booz Allen and Carlyle about the sale of the government unit
were underway. According to the Wall Street Journal, the deal
will be "centered on Booz Allen's influence in defense and intelligence
contracting. If an agreement is reached the sale price will likely be
around $2 billion."
Christopher Ullman, Carlyle's chief spokesman,
could neither confirm nor deny that a deal was in the works, and
declined to comment to CorpWatch about the reports. Because of
Carlyle's long experience in the defense sector, he added, such
companies "would be a priority for us when the price is right and it's
the right fit for us." George Farrar, a Booz Allen spokesman, said his
company "has refused to discuss particulars of any ongoing discussions"
and would not comment beyond what Shrader wrote in his December 15
missive to Booz Allen's workforce.
Who Is Booz Allen Hamilton?
In
2006, Booz Allen Hamilton, a privately held company based in McLean,
Virginia, had a global staff of 18,000 and annual revenues of $3.7
billion. Its work for U.S. government agencies accounts for more than
50 percent of its business. Notably Booz Allen is a key adviser and
prime contractor to all of the major U.S. intelligence agencies - the
Central Intelligence Agency (CIA), the Defense Intelligence Agency
(DIA), the National Geospatial-Intelligence Agency (NGA), the National
Reconnaissance Office (NRO), the National Security Agency (NSA), and -
as well as the Department of Homeland Security (DHS), the National
Counterterrorism Center, the Department of Defense and most of the
Pentagon's combatant commands.
Shadow Intelligence Agency
Booz
Allen prides itself on the long-term personal relationships it has
forged between its personnel and their government clients. "We stay for
a lifetime," Mark J. Gerencser, the senior vice president in charge of
Booz Allen's government contracting division, remarked in 2006. A quick
study of their biographies posted on Booz Allen's Website suggests that
this is indeed true - the senior management have shuttled back and
forth between the company and the government for their entire lives.
As the director of Booz Allen's
U.S. government business, for example, Gerencser serves in "several
broad-based roles," including "representing industry" to the Office of
the Secretary of Defense and the Joint Chiefs of Staff, which manage
the Pentagon's vast intelligence operations. He is also a member of
Booz Allen's leadership team that sets the strategic direction of the
company, and has run many of the war games staged by Booz Allen for its
government clients.
Just below him in the company's
intelligence hierarchy is Ken Wiegand, another senior vice president.
Weigand came to Booz Allen in 1983 after working for a decade in Air
Force intelligence, and now leads the firm's work for national
intelligence and law enforcement agencies and the Department of
Homeland Security. His specialty, the Website says, includes imagery
intelligence operations, which are managed by the NGA, one of Booz
Allen's most important clients.
Senior vice president Joseph W.
Mahaffee, a veteran of naval intelligence, is the leader of Booz
Allen's Maryland procurement office business, which puts him in charge
of the company's contracts with the NSA in Fort Meade. He focuses on
"meeting the Information Assurance mission objectives" of the NSA with
various technology services, including systems engineering, software
development and "advanced telecommunications analysis."
Another key Booz Allen figure at
the NSA is Marty Hill, who came to the company after a 35-year career
in signals intelligence and electronic warfare and previously served as
an expert on "information operations capabilities and policy" for
Donald Rumsfeld's Pentagon. He leads of team of 1,200 professionals
engaged in all aspects of "signals intelligence" including technical
analysis, systems development and operations.
Vice President Pamela Lentz is a
former cryptology officer with the Navy and once worked as a program
manager for TRW, one of the nation's oldest intelligence contractors
(it is now owned by Northrop Grumman). She is Booz Allen's "client
service officer" for the DIA and other military intelligence markets,
which includes intelligence units within the Navy, Air Force, Army, the
unified combatant commands and the undersecretary of defense for
intelligence. Among other tasks, Lentz manages a 120-person Booz Allen
team that supports the NRO, the Pentagon agency that manages the
nation's military spy satellites. She also runs a task force that
supports human intelligence collection efforts at the DIA.
Vice President Laurene Gallo, a
former intelligence analyst at the NSA, leads a Booz Allen
"intelligence research and analysis" team that support several
agencies, including the CIA, the DNI and the National Counterterrrorism
Center. Vice President Richard Wilhelm, whose job at Booz Allen is to
work with the CIA and the ODNI, came to the company after a long career
in U.S. intelligence that included stints directing the Joint
Intelligence Center for Iraq during Operation Desert Storm and the
NSA's first director of information warfare.
Vice President William Wansley, a
former Army intelligence officer, leads a team of experts in "strategic
and business planning" who support the CIA's National Clandestine
Service, the part of the CIA that conducts covert operations and
recruits foreign spies, as well as the DNI. Another vice president
Robert W. Noonan, a retired Army lieutenant general who once served as
the Army's deputy chief of staff for intelligence and the commanding
general of the U.S. Army's Intelligence and Security Command, is in
charge of expanding Booz Allen's military intelligence business within
all the armed services, the combatant commands, the DIA and the Office
of the Secretary of Defense.
It is each of these vice presidents who are poised to personally profit from a corporate takeover by the Carlyle Group.
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On its website, Booz Allen describes its intelligence work as part of
its broader expertise in information technology. "Whether dealing with
homeland security, peacekeeping operations, or the battlefield, success
depend on the ability to collect, safeguard, store, distribute, fuse,
and share information - on getting the right information to the right
place at the right time," it says. "Our security professionals work in
partnership with clients to develop capabilities ... for protecting
information and networks against cyber and physical threats."
That
has not always been the case: Booz Allen Hamilton was founded as a
management consultancy in 1914 in Chicago by three businessmen whose
surnames gave the firm its name. In 1940, after more than three decades
of giving advice to top ranking companies in America's manufacturing
and service economy, such as Montgomery Ward, Goodyear Tire and the
Illinois State Railroad, Booz Allen started working for the U.S.
military, where its clients included the Army, the Navy, and, after the
war, the Air Force and the Pentagon.
Its initial contracts with the Navy in 1940 set the
pace for its military work: as a management consultant, Booz Allen
helped the Navy restructure for World War II and permeated its ranks
with contractors ("Each Navy bureau had a Booz rep," Investors Daily
reported in a 2005 profile of the firm). That relationship served as a
template for Booz Allen's later work in intelligence and national
security where its personnel worked inside government agencies
alongside public employees.
Since the late-1990s, Booz Allen has forged a
particularly close relationship with the NSA, the spy agency that
monitors global telephone, e-mail and Internet traffic for the U.S.
military and political leaders, which hired Booz Allen as its chief
outside consultant on Project Groundbreaker. This $4 billion project
outsourced the NSA's internal communications and networking systems to
a consortium led by Computer Sciences Corporation (CSC) and the IT
subsidiary of Northrop Grumman.
Today, among the many services Booz Allen provides
to intelligence agencies, according to its Website, are war-gaming -
simulated drills in which military and intelligence officials test
their response to potential threats like terrorist attacks - as well as
data-mining and analysis of imagery and intelligence picked up by U.S.
spy satellites, the design of cryptographic, or code-breaking, systems
(an NSA specialty) and "outsourcing/privatization strategy and
planning." The company's 2007 annual report spells out several other
areas of expertise, including "all source analysis," an intelligence
specialty managed by the CIA and the Office of the Director of National
Intelligence (DNI) that draws on public sources of information, such as
foreign newspapers and textbooks, to add texture to data gathered by
spies and electronic surveillance.
According to the company's annual report, Booz
Allen is also working on one of the most important spy initiatives
launched in recent years: the Cryptographic Modernization Program. Air
Force General John C. Koziol, the commander of the Air Force
Intelligence, Surveillance and Reconnaissance Agency, described this
program as an attempt to combine a variety of intelligence technologies
to pick up tell-tale signs of chemicals and other substances - into a
single electronic package that can be used by combat and special
operations commanders to track the enemy.
Booz Allen is a
full partner in the project, according to General Koziol, an idea that
has been "fully endorsed" by the Director of National Intelligence
Michael McConnell, the nation's spy chief - himself a Booz Allen
alumnus (see box).
Revolving Door
To
carry out its tasks at the intelligence agencies, Booz Allen has hired
a dazzling array of former national security officials and
foot-soldiers. In 2002, Information Week reported that Booz
Allen had more than 1,000 former intelligence officers on its payroll.
In 2007, as this reporter was researching a chapter about Booz Allen
for his forthcoming book, he asked the company if it could confirm that
number or provide a more accurate one, and received an e-mail reply
from spokesman George Farrar: "It is certainly possible, but as a
privately held corporation we consider that information to be
proprietary and do not disclose."
Buried deep on the company's Web site, however, a much larger number is
confirmed in an explanation of a Booz Allen information technology
contract with the DIA, which carries out intelligence for the Joint
Chiefs of Staff and the Office of the Secretary of Defense. It stated
that the Booz Allen team "employs more than 10,000 TS/SCI cleared
personnel." TS/SCI stands for top secret-sensitive compartmented
intelligence, one of the highest possible security ratings, which would
make Booz Allen one of the largest employers of cleared personnel in
the United States.
Many of these former intelligence officers at Booz Allen, do the same
jobs as they did for the government. For example, Keith Hall, a Booz
Allen vice president initially worked in Army intelligence and on one
of the congressional intelligence committees. In the early 1990s, he
was hired by the CIA to manage budgets and policy development for
then-Director of Central Intelligence Robert Gates. During that time,
he played an instrumental role in creating the National Imagery and
Mapping Agency, which was later renamed the National
Geospatial-Intelligence Agency. During the Clinton administration, Hall
was named Assistant Secretary of the Air Force for space programs and,
simultaneously, director of the NRO, the agency that manages the
nation's military satellite program.
Now, as a Booz Allen executive, Hall leads a "strategic intelligence
initiative" that integrates the company's extensive contracting
activities for the NRO and the NGA. Recently, one of his most important
tasks involved chairing a 2005 homeland security study group that
recommended a major expansion of information and data-sharing between
U.S. spy agencies that work outside the country and domestic law
enforcement, like the Federal Bureau of Investigation (FBI). "The
study's findings have become a road map for the government in making
decisions related to critical information sharing in support of
homeland security," Booz Allen boasts in its 2007 annual report. (See our article, Domestic Spying, Inc.)
Who is the Carlyle Group?
The
Carlyle Group is a private equity fund - a group of financial advisers
that invests large sums of money from pension funds, large
corporations, wealthy individuals and foreign banks into privately held
companies in many different industries, and then run those companies
until the market is right to sell them at a substantial profit. During
the early years of the George W. Bush administration, it gained
attention - and some notoriety - because of the large number of former
high-ranking political figures it had attracted as advisers and
managers. They included former President George H.W. Bush, former
Secretary of State James Baker and former British Prime Minister John
Major.
Shortly after the September 11, 2001,
attacks on New York and Washington, Carlyle was in the news again when
newspapers revealed that Osama Bin Laden's family in Saudi Arabia -
which owns one of the world's largest construction companies - held a
stake in the fund. The stake was quickly liquidated after the news
broke.
Until the recent slowdown in the
financial markets, the private equity industry, with over $160 billion
under its control, was widely seen as one of the most important drivers
of the global economy, pumping venture capital into high-tech startups
and buy-out capital into corporate reorganizations worldwide. They are
extremely active in Britain, where more than 20 percent of the private
sector workforce is employed by companies that are, or have been, the
targets of private equity investments. Business magazines credit them
with breaking up some of America's worst-run conglomerates and bringing
competition to Japan's highly regulated and incestuous banking
industry.
"Private equity funds now wield much of
the transformational power at the heart of the capitalist system," The
Economist magazine recently observed. In addition to Carlyle, which has
more than $75 billion under management, industry leaders include the
Blackstone Group ($30 billion), Bain Capital ($27 billion), Kohlberg,
Kravis, Roberts & Co. ($26 billion) and Texas Pacific Group ($20
billion).
Carlyle, the largest of the funds, is
best-known for owning large military contractors and aerospace
contractors, such as United Defense Industries, the maker of the
Bradley Fighting Vehicle and other weapons systems, which it sold to
BAE Systems in 2004, and Vought Aircraft Industries, a major producer
of structural assemblies for commercial, military and business
aircraft, which it still holds. Other military contractors that have
gone through Carlyle's hands include EG&G, LTV Aerospace and
Magnavox Electronic Systems.
During the 1990s, when it made most of
these acquisitions, the fund was led by former Secretary of Defense
Frank Carlucci, who served during the Carter administration as deputy
director of the CIA. During his tenure, Carlyle bought and sold nearly
a dozen companies active in the intelligence industry. They include BDM
International, an influential company that, during the 1990s, provided
some of the U.S. Army's first contract interpreters and, through a
subsidiary known as Vinnell Corporation, once trained the Saudi
National Guard. It was eventually sold to Northrop Grumman and is now
part of that company's huge intelligence division.
U.S. Investigative Service, which
Carlyle bought in 1996 and sold in 2007, is the largest provider of
security investigations for employees and contractors hired by the
Pentagon, the National Security Agency and other agencies, and in
recent months has been training Iraqi police commandoes under contract
to the Pentagon. (See CorpWatch coverage of USIS.)
Another spectacular acquisition was
QinetiQ, the privatized arm of Britain's military research corporation.
It was acquired by Carlyle in 2003, sold in 2007, and recently emerged
as one of the premiere U.S. intelligence contractors - after netting a
$470 million profit for Carlyle. (See our article "QinetiQ goes Kinetic".)
Carlyle, however, has divested itself of
most of its military holdings. "In our current U.S. portfolio, there's
none," Carlyle's Ullman told CorpWatch. Today, most of its investments
are concentrated in commercial industries, such as real estate and
banking. During a few months' span in 2006, for instance, Carlyle did a
"manufacturing deal, an education deal, a consumer products deal, and
buildings deal, and a financial services deal," according to an account
in the Washingtonian magazine. Its holdings are extensive and
pervasive: every time you rent a car from Hertz, catch a quick
breakfast at Dunkin' Donuts or get ice-cream at Baskin-Robbins, you're
sending money to Carlyle.
A $2 billion acquisition of Booz Allen's
contracting business would therefore put Carlyle back in the big
leagues of military contractors. |
Other
key executives who came to Booz Allen from the spy agencies include R.
James Woolsey, the former director of the CIA, who was hired in 2003 to
run Booz Allen's "global resilience" division, which advises
corporations on security issues, and Joan A. Dempsey, a career U.S.
intelligence official and a former top aide to former CIA Director
George Tenet, who was hired in 2005 as a Booz Allen vice president with
responsibility to advise the DNI and other key intelligence agencies.
(See box for list of other key corporate figures that previously worked
in government intelligence agencies.)
It is these senior managers who would most likely benefit from a sale to Carlyle.
Unlike
many of its competitors in the intelligence industry, Booz Allen is a
privately held company whose shares are owned by its 300 vice
presidents of whom "approximately 80 are in government support," Booz
Allen's Farrar told CorpWatch. For these vice presidents, Carlyle's
infusion of capital, and its $2 billion buyout of their shares, will
make them very rich men and women indeed. After all, $2 billion divided
by 80 is $25 million; even if Booz Allen's shares were divided equally,
which is unlikely, that's an astounding windfall for any executive.
Booz Allen CEO Ralph Shrader
The
man most responsible for Booz Allen's growth as an intelligence
contractor is Ralph Shrader, who has been running the company as
chairman and CEO since 1998. Shrader, an electrical engineer by
training, came to Booz Allen in 1974 after serving at senior management
levels of two prominent telecommunications companies - Western Union,
where he was national director of advanced systems planning, and RCA,
where he served in the company's government communications system
division. These positions prepared him well for his later work at Booz
Allen as a consultant to the telecommunications industry. According to
his official biography, he "led major assignments" for the industry as
a Booz Allen consultant and was deeply involved in the company's
"landmark work for AT&T" when that company was broken up by the
government.
In those assignments, Shrader may have been exposed
to the telecommunications industry's close ties to U.S. intelligence.
During the years he worked for Western Union and RCA, those companies,
along with ITT World Communications, were part of a secret surveillance
program known as Minaret in which telecommunication companies, with the
concurrence of a handful of high-ranking executives, handed over to the
NSA information on all incoming and outgoing U.S. telephone calls and
telegrams - an early version of the NSA's warrantless surveillance
program launched by the Bush administration after the September 11th
attacks. Minaret, and the involvement of the private companies in NSA
spying, was exposed by the congressional committees investigating
intelligence abuse in the mid-1970s, and was the inspiration behind the
1978 Foreign Intelligence Surveillance Act (FISA), which set the rules
- including the important requirement for warrants - for domestic
surveillance of telephone traffic.
None of this is alluded to in Booz Allen's official
literature, of course; but Shrader, upon his appointment as CEO in
1998, mentioned in a rare press interview (with the Financial Times)
that the most relevant background for his new position of chief
executive was his experience working for telecommunications clients and
doing classified military work for the U.S. government - "something of
a Booz specialty," the FT pointed out.
Booz
Allen adds on its website that Shrader, as CEO, has also "led important
programs for the U.S. National Communications System and the Defense
Information Systems Agency," two of the most important classified
intelligence networks in use by the federal government. Under Shrader,
Booz Allen also became the NSA's most important outside consultant,
culminating in its advisory role in Project Groundbreaker. That
project, which awarded its first contracts in the summer of 2001, put
Booz Allen in a prime position to capture NSA and other intelligence
work in the aftermath of the September 11th attacks, when intelligence
budgets, and NSA surveillance, increased substantially.
"War on Terror" Contracts
After
September 11th, 2001, by Booz Allen's own account, the firm helped the
government reshape its spying capabilities to match the new era of
counterinsurgencies and terrorist threats. "The nature of intelligence
changed dramatically in the wake of 9/11," Christopher Ling, a Booz
Allen vice president, explains in the company's most recent annual
report. "An entire analytic production system geared to detect
large-scale cold war adversarial capabilities was suddenly required to
transform." At Booz Allen, he added, "We are finding innovative ways to
integrate intelligence and operations, enabled by advanced
visualization and data management capabilities, which has allowed us to
pioneer tactics, techniques, and procedures."
In addition to serving as a prime contractor on
Admiral John Poindexter's controversial Total Information Awareness
project (see box), Booz Allen was active on both the military and
economic fronts on the "war on terror." For the Pentagon, it helped
develop the "blue force" tracking system that allows soldiers and
commanders in Iraq and other battlegrounds the ability to
electronically identify friendly troops. And in the weeks leading up to
the invasion of Iraq, Booz Allen sponsored and organized several
conferences aimed at helping U.S. corporations secure contracts in
occupied Baghdad, with former CIA director Woolsey, one of the most
ardent backers of the war, as a keynote speaker.
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Michael McConnell
Booz
Allen Hamilton's most illustrious alumnus is Michael McConnell, the
current Director of National Intelligence, the top spy job in the
country, who epitomizes the term revolving door, spinning from
government job to industry and back again.
McConnell was a senior Pentagon
official during George Bush Senior's administration and the first Gulf
War, where he worked for Dick Cheney, then the Secretary of Defense, as
the chief intelligence adviser to General Colin Powell, the chairman of
the Joint Chiefs of Staff. Cheney was so impressed with McConnell's
work during the war that he appointed him to head the NSA in 1993 (he
later intervened personally to convince McConnell to take the DNI job
in 2007).
McConnell subsequently spent more
than 10 years as a Booz Allen senior vice president in charge of the
company's extensive contracts in military intelligence and information
operations for the Pentagon. In that job, his official biography
states, McConnell provided intelligence support to "the U.S. Unified
Combatant Commanders, the Director of National Intelligence Agencies,
and the Military Service Intelligence Directors." That made him a close
colleague of not only Donald Rumsfeld, who ran the Pentagon from 2001
to 2007, but of Vice President Cheney, who has served President Bush as
a kind of intelligence godfather since the earliest days of the
administration.
As Booz Allen's chief intelligence
liaison to the Pentagon, McConnell was at the center of action, both
before and after the September 11 attacks. During the first six years
of the Bush administration, Booz Allen's contracts with the U.S.
government rose dramatically, from $626,000 in 2000 to $1.6 billion in
2006. McConnell and his staff at Booz Allen were deeply involved in
some of the Bush administration's most controversial counterterrorism
programs. They included the Pentagon's infamous Total Information
Awareness data-mining scheme run by former Navy Admiral John
Poindexter, which was an attempt to collect information on potential
terrorists in America from phone records, credit card receipts and
other databases. (Congress cancelled the program over civil liberties
concerns, but much of the work was transferred to the NSA, where Booz
Allen continued to receive the contracts.)
In 2002, when the CIA launched a
financial intelligence project to track terrorist financing with the
secret cooperation of SWIFT, the Brussels-based international banking
consortium, Booz Allen won a contract to serve as an "outside" auditor
of the project.
In January 2007, McConnell resigned
from Booz Allen after he was appointed by President George W. Bush to
his current job. He now oversees all 16 U.S. intelligence agencies, and
thus much of Booz Allen's government business. (See this reporter's 2007 Salon article.)
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Under
Shrader's leadership, Booz Allen played an instrumental role after
September 11th in proselytizing for a greater corporate role in
national and homeland security. This was important, the Booz Allen CEO
said at a CEO summit he organized in 2002, because "business leaders
cannot opt out of geopolitics and leave the job of security solely to
government and the military."
Deepening the corporate alliance with the Bush
administration and its war on terror also had significant advantages
for Booz Allen and its fellow corporations: on one hand, it drastically
increased their contracts with military and intelligence agencies; and
on the other, homeland security provided a convenient excuse for
reducing government oversight and regulation. These dual interests were
spelled out in unusual detail in 2004 by Richard Wilhelm, a former CIA
and NSA officer who once served as national security adviser to former
Vice President Al Gore and now leads Booz Allen's business with the CIA
and the Office of the DNI.
Speaking to a conference on information-sharing and
counterterrorism, Wilhelm explained that the "right mix of policies"
for business should include a wide range of "incentives" and
"cooperative arrangements," including "appropriate protections from
Freedom of Information Act requirements and other unintended
consequences of more open information sharing." Government, he argued,
should "help make the business case, and then sweeten it - because
industry will share information when there is a business case to do
so." In other words, corporations were happy to participate in the
exchange of information about terrorism and other security threats, but
only if there were enough rewards. And for Booz Allen, those rewards
have been sweet indeed, as a short list of their recent unclassified
contracts attests. They include:
• A $6.3 million contract to provide research on
3-D facial recognition biometric software for the Information Assurance
Technical Analysis Center at Offut Air Force Base in Nebraska, awarded
in 2008.
• A $48 million contract with the U.S. Air Force to
conduct research on "survivability and lethality implications" of an
Air Force vehicle program, awarded in 2008.
• In a partnership with CACI International, EDS, Lockheed
Martin, SAIC and SRA, the right to bid on $12.2 billion worth of
contracts for telecom and IT services for the Defense Information
Systems Agency (DISA), awarded in 2007.
• Participation in a consortium of seven companies that
will bid on up to $20 billion worth of work in Command, Control,
Communications, Computers, Intelligence, Surveillance and
Reconnaissance - a mouthful of a term usually referred to as C4ISR -
for the Army's Communications Electronics Command, which is based in
Fort Monmouth, New Jersey, awarded in 2006.
• A five-year, $25o million contract to provide "systems
engineering technical assistance" to the Science and Technology
Directorate of the Department of Homeland Security, signed in 2005.
Little Congressional Scrutiny?
In
spite of its tremendous power as a contractor, Booz Allen has received
very little criticism or even scrutiny from the U.S. Congress. In
January 2007, the Senate had a rare opportunity to inquire about the
company when it held hearings on Michael McConnell's nomination as
Director of National Intelligence (see box). Prior to the hearing,
several senators said they would question McConnell about Booz Allen's
role as a contractor; but the hearing was a desultory affair, and few
questions were asked of the new DNI about the high level of contracting
among the spy agencies or the specific role of Booz Allen.
A month later, a Booz Allen contract with the
Department of Homeland Security came under close scrutiny in the House.
In February 2007, Henry Waxman, a Democratic Congressman from
California, the chairman of the House Committee on Government Oversight
and Reform, charged that Booz Allen had a significant conflict of
interest over its contract to oversee an $8 billion contract with the
DHS Secure Border Initiative known as SBI-Net. Under the contract,
Boeing and other companies will build a "virtual fence" of cameras,
radar and sensors that will transmit imagery and data to border patrol
agents working along the U.S. borders with Canada and Mexico. (See CorpWatch's "Fencing the Border".)
The
conflict arose, said Waxman, because Booz Allen had long-standing
business partnerships with Boeing, the prime contractor for SBI-Net,
and could therefore not provide objective oversight of the program. At
the hearing, Waxman pointed out to DHS officials that they had hired 98
people to oversee the SBI-Net contract. "But the problem is that 65 of
these people don't work for the government. They work for the
contractor," he said. "You're relying on them to do the function that a
government ordinarily would do." DHS officials responded that Booz
Allen had been hired for advice, not for oversight.
Waxman's criticism could be made of a myriad of
contracts Booz Allen holds with intelligence agencies. At the NSA, for
example, it has advised the agency about several contracts that involve
companies that Booz Allen has close business ties with. That is also
true at the NRO, the NGA and the CIA. So far, however, no reports of
conflicts of interest have emerged from Congress, which in any case
exercises little oversight over intelligence contracts.
In another damaging report issued in 2007, the General Accounting
Office, the audit arm of the U.S. Congress, found that the Department
of Homeland Security was spending nearly $16 billion a year on goods
and services from the private sector, making it the third-largest
employer of contractors in the federal government. Among the
beneficiaries of DHS' spending was Booz Allen Hamilton, which in 2006
was awarded a $43 million no-bid contract to provide services to the
DHS intelligence unit. Upon reading the $16 billion DHS figures in the
GAO report, Joseph Lieberman, an independent U.S. senator from
Connecticut, angrily commented: "plainly put, we need to know who is in
charge at DHS - its managers and workers, or the contractors."
The Washington Post later found that Booz Allen's
no-bid intelligence contract with DHS had ballooned in value from $2
million in 2003 to over $30 million in 2006 - 15 times its original
value. When DHS lawyers first examined the Booz Allen deal, the Post
said, they found it was "grossly beyond the scope" of the original
contract and had violated government procurement rules. An open
competition was ordered by DHS lawyers, but delayed for a year. During
that time, the Post said, "the payments to Booz Allen more than doubled
again under a second no-bid arrangement, to $73 million."
Union Protests
So far, the only public criticism of
the potential Carlyle-Booz Allen deal has come from the Service
Employees International Union (SEIU), one of the country's largest
labor unions. Last year, the union launched a blistering attack on
Carlyle and the private equity industry in a widely distributed report
called "Behind the Buyouts: Inside the World of Private Equity." The
gist of the report was that Carlyle, Kohlberg, Kravis, Roberts (KKR)
and other large private equity funds were undermining the U.S. economy
by avoiding taxes and creating "harsh consequences," such as layoffs,
for workers and communities. In late 2007, when Carlyle acquired the
assets of Manor Care, a chain of nursing homes where the SEIU is trying
to organize workers, the union stepped up its campaign.
Of Unions, Pension Funds and the Carlyle Group
The
SEIU's campaign material on the Carlyle Group, including a 40-page
white paper on private equity issued last year, fails to mention a
salient fact: that many SEIU members are affiliated with a pension fund
that holds a significant stake in the Carlyle Group.
That fund is the California Public
Employees Retirement System, the world's largest public pension fund,
often known as CalPERS. It has held a five percent stake in Carlyle's
core management group since 2000, and therefore profits every time
Carlyle makes money from one of its investments. Many of the California
state officials who sit on CalPERS boards are also members of the SEIU,
although they officially only represent their employer, not the union.
In 2001, this reporter attended a
meeting of the CalPERS investment board where Carlyle's three founding
managers appeared as witnesses. The public meeting took place at a time
when Carlyle was a hot media topic because of its close ties to the
Bush administration and its prominence as the nation's 11th largest
military contractor. Several SEIU officials attended the meeting, and
the questioning of Carlyle was led by a CalPERS official who belonged
to the SEIU. However, the investment board didn't ask about Carlyle's
military industry investments, and instead posed a single, softball
question about Carlyle's views on the U.S. investment climate.
Asked why the SEIU hasn't mentioned
CalPERS' stake in Carlyle in any of its literature, Stephen Lerner, the
director of SEIU's Private Equity Project, replied that the union
didn't start investigating the pension fund's role in Carlyle until
2007.
Until then, "we never really thought
about CalPERS' investment in Carlyle," he said. "Now that we're digging
in deeper, we're raising lots of questions." Under SEIU's initiative, a
California lawmaker has introduced legislation that would prohibit
CalPERS from investing in private equity funds owned in part by
overseas funds from countries that don't "generally respect human
rights." According to an SEIU handout, the legislation "is only
applicable to private equity firms in which sovereign wealth funds have
an ownership stake," such as Carlyle.
Carlyle's Ullman responded that the
legislation could hurt the people it is supposed to protect. California
lawmakers "should consider the detrimental impact on California
pensioners who have benefited greatly from CalPERS' investment in, and
ownership of, the Carlyle Group," he told CorpWatch.
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In
January 2008, after rumors of a Carlyle takeover of Booz Allen surfaced
in the press, SEIU issued a blistering press release denouncing the
potential deal. The union's criticism of the proposed acquisition
didn't focus on Booz Allen's role in intelligence outsourcing but on
Carlyle's ties with the Mubadala Development fund of the Government of
Abu Dhabi. In 2007, that fund paid $1.35 billion to buy a 7.5 percent
ownership stake in Carlyle's general partnership.
As a result of that investment, the SEIU charged,
Carlyle was risking national security. "The potential for a Carlyle
Group-Booz Allen buyout demands urgency on the part of lawmakers and
regulators to examine the risks faced by the U.S. when foreign
governments potentially have access to classified and other sensitive
national security information through their stake in U.S. companies,"
the union declared in a press release. In an interview with CorpWatch,
Stephen Lerner, the director of SEIU's Private Equity Project, said the
union launched this nationalist campaign out of concern that classified
information from Booz Allen could leak into the hands of the Abu Dhabi
fund, thus compromising U.S. security interests.
"When you combine buyout firms, which have much
less reporting requirements because they are private, with opaque
sovereign wealth funds, you get a toxic stew of secrecy," he said.
Asked how or why Booz Allen executives might leak classified
information to a foreign government, he replied: "The point is, you
have no way of knowing if they would or wouldn't." He added that, while
the SEIU has not taken a position on Booz Allen's extensive role in
intelligence outsourcing, the issue of "government jobs being done by
private contractors" might emerge in the future for the union.
(The SEIU does not mention in its material that the
California Public Employees Retirement System, the pension fund for
California state retirees where the SEIU has significant influence,
owns five percent of the Carlyle Group - see box.)
Carlyle's Ullman, who recently discussed the union
campaign with SEIU president Andrew Stern during a conference on
private equity, rejected the SEIU's claims. The charges that the Abu
Dhabi investment could jeopardize national security "is really an
obscene allegation," he said. Ullman added that the Abu Dhabi fund was
a "passive investor" in Carlyle and would have no role in the
management of Carlyle companies. "Carlyle's portfolio companies have a
pristine track record in handling sensitive government data," he said.
"Giving top secret and classified data to foreign governments is known
as treason, and is punishable by jail and worse. That would be a fairly
strong impediment" to leaks.
In any case, there is virtually no evidence to
suggest that any US intelligence contractor has leaked classified
information, and it's unlikely the union's allegations will be a factor
if the Carlyle Group does decide to acquire Booz Allen Hamilton.
Tim Shorrock's book on the outsourcing of U.S. intelligence, Spies for Hire, will be published in May by Simon & Schuster.
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