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Mr. Johnson. I have been assigned by the CID to work with the committee since March. I have been in my present assignment since January 1969.

Chairman McCLELLAN. 1969.
Mr. JOHNSON. Yes, sir.
Chairman McCLELLAN. Where is that assignment?
Mr. Johnson. In Heidelberg, Germany.
Chairman McCLELLAN. Yours, Mr. Graham?

Mr. GRAHAM. I have been in Germany at Mannheim for the last 11 months.

Chairman McCLELLAN. Mr. Johnson, I understand you have a brief statement or request you wish to make.

Mr. JOHNSON. Mr. Chairman, we have prepared statements which are 54 pages in length.

Chairman McCLELLAN. That means that three of you are participating in this one prepared statement. Mr. JOHNSON. Yes, sir. Chairman McCLELLAN. It is 54 pages in length.

Mr. Johnson. Yes, sir. I request permission to read the first five pages of the statement and then turn to page 48. At that point, Mr. Graham and Mr. Naumann will read the last six pages of the statement to bring the subcommittee up to date on the current development in the problem areas of surplus property disposal in Europe.

Following the testimony of Mr. Graham and Mr. Naumann I suggest that we respond to questions of the subcommittee members.

Chairman MCCLELLAN. Do I understand you would like to read that much of your prepared statement before responding to questions?

Mr. JOHNSON. Yes, sir.
Chairman McCLELLAN. All right.

Mr. JOHNSON. Yes, sir. In addition, we have 89 exhibits relating to our testimony.

Chairman McCLELLAN. Eighty-nine exhibits.
Mr. JOHNSON. Yes, sir.
Chairman McCLELLAN. Are they covered in the prepared statement?
Mr. JOHNSON. Yes, sir.

Chairman McCLELLAN. But you are going to skip those until you get to the substance of your prepared statement which discloses the present situation in the record and then you will go back to the exhibits, am I right? Is that what you propose ?

Mr. Johnson. Yes, sir. In our prepared testimony the exhibits are mentioned.

Chairman McCLELLAN. They are numbered ?
Mr. Johnson. Yes, sir.
Chairman McCLELLAN. You may proceed with your statement.
Mr. JOHNSON. Our testimony today relates to six-

Chairman McCLELLAN. Wait a minute. You say the exhibits are numbered in sequence as referred to and described in your statement at the point at which they appear. Will you proceed to read the rest of the statement in the record so that the record will reflect what we are doing

Mr. JOHNSON. Certain exhibits consisting of a number of separate documents and these are lettered first with a single exhibit number and then with a series of letter designations. For example, exhibit 23, 23A, 23B, 23C. Most exhibits are official documents or true copies which have been taken from CID investigations. Others are affidavits taken by the subcommittee staff from persons involved in the various cases.

We request permission to submit the exhibits now for the record with the suggestion that the record make appropriate reference to them as they are described in our complete prepared statement.

Chairman McCLELLAN. Without objection the exhibits as presented in the prepared statement will be received by the committee and marked according to their designation in the prepared statement. They will be exhibits for reference unless they are ordered printed in the record.

(The documents referred to were marked "Exhibits 1 through 89" for reference and may be found in the files of the subcommittee.)

Chairman McCLELLAN. Without objection then, you may proceed to read that part of your prepared statement as you have requested.

Mr. JOHNSON. Thank you, sir.

Our testimony relates to six CID investigations into property disposal operations in Western Europe in the 1960's. We worked, supervised or had direct knowledge of each case. While each case is different, the six revealed common patterns of inefficiency, waste and corruption in PDO operations in Europe. The problem areas were:

1. Management.
2. Personnel.
3. Receipt and storage of property.
4. Segregation and classification of property.
5. Demilitarization procedures.
6. Sales.
7. Screening of contractors.
8. End-use controls.
9. Problem-solving.

In each area there was inefficiency and waste and evidence of corruption. I will summarize our findings.

1. MANAGEMENT

Excess property operations generally were poorly managed. Property disposal yards kept no reliable inventories of materiel. Property disposal yards functioned separately from one another, each operating independently, largely as if the others did not exist. An acceptable practice at one depot was not allowed at another. Job requirements were not clearly defined. Recordkeeping procedures were incomplete. Depots were managed carelessly. Morale was low. Controls against theft and inefficiency were weak.

2. PERSONNEL

Executives, clerical help and yard personnel were not properly trained. Young, inexperienced officers—usually lieutenants—were put in charge of property disposal yards without being prepared. They were often given other jobs as well. They had neither the time nor the training to carry out their duties properly.

The executives were assisted by foreign or third country nationals who knew something about PDO work. Often this meant that they

not the Americans decided how rules and regulations were to be interpreted and executed. Inexperienced officers and noncommissioned officers were forced to rely on the foreign assistants, who frequently abused their responsibilities or were incompetent themselves.

The local and third country nationals often admitted that they did not know proper procedures. They knew only what they had learned in the field. It was frequently more than the Americans knew, but was still not adequate. The Americans, however, had to rely on them to manage the depots.

The foreign employees were often underpaid and some stole property or accepted gratuities or cash from contractors.

Dishonest or incompetent employees were often kept on the payroll because the Americans did not wish to terminate them. Incompetence and corruption were not always considered sufficient grounds for dismissal.

3. RECEIPT AND STORAGE OF PROPERTY Inefficient procedures were used to receive property. Storage methods were equally poor. Documentation on incoming materiel was insufficient. Sometimes there was no documentation.

Warehouses were ineffectively organized. Yardmen could not find items on hand, and they wasted time looking for items which were not in stock.

The ability of the PDO yards to supply American troops in Europe and elsewhere with needed equipment was severely limited. The entire concept of local screening—that is, supplying local troops and allies was just a concept which didn't work.

Depot security was inadequate. Valuable fire control equipment was stolen. Property was stored in unsecured, unfenced areas.

4. SEGREGATION AND CLASSIFICATION OF PROPERTY

Property disposal depots did not properly segregate and classify property. Depot personnel lumped diverse categories of property into lots identified as miscellaneous scrap. Often valuable property, sophisticated fire control equipment and costly automotive parts were mixed with the scrap.

This property—particularly the weapons and the fire control devices-should have been sold as scrap only after thorough demilitarization procedures had been inflicted on it. Demilitarization procedures, when properly carried out, meant that weapons, fire control equipment and other munitions list items, which require demilitarization, would be cut in two or crushed or mangled so completely that future military application was out of the question.

In addition, for these automotive parts that did not require demilitarization, property disposal depots could have earned for U.S. revenues considerable returns by selling these parts for what they were. Instead, through the haphazard system of miscellaneous of mixed lotting, property of all categories—from serviceable weapons to usable carburetors were piled upon one another and sold by the pound. It was wasteful, costly, and resulted in weaponry getting out of American PDO yards in significant numbers.

So blatant was the failure of segregation and classification systems that contractors would at times buy a certain lot of property, take from it those items which were serviceable and were not scrap and then abandon the genuine scrap behind because they were not scrap dealers.

Many so-called scrap dealers would bid on miscellaneous scrap piles with bids so high that they could only lose money in the market. They wanted the valuable components hidden inside those mixed lots. That obvious point seems to have been evaded or ignored by responsible PDO personnel.

5. DEMILITARIZATION PROCEDURES

This was a major area of inefficiency and wrongdoing. Employees charged with performing demilitarization procedures often had never been briefed. One employee thought he was demilitarizing periscopes by breaking the lenses and mirrors. Such damage is only an inconvenience for arms traffickers. Defense Department regulations call for cutting, crushing or mangling periscopes.

Not only were depot personnel ignorant of demilitarization procedures, PDO executives and their assistants did not know what items required demilitarization and which did not. Their response to this dilemma was frequently just to avoid all demilitarization work, At one satellite depot, it was found that only one demilitarization procedure had been carried out in about 5 years.

Often property would arrive at the depot without adequate identification. Yard personnel would be in doubt as to whether or not demilitarization was required, and if required, what procedures they were to follow.

PDO officials often assumed a trustful attitude toward contractors. They left demilitarization requirements to the contractors and did not check to determine if the work was done. Often verbal assurances were acceptable.

We found an instance, which we will document at some length, in which one acknowledged gun merchant—a man in the business of selling weapons-bought a large shipment of undemilitarized small arms. He agreed to demilitarize the arms and then to sell them as scrap. Only an extremely trusting person would leave it up to that gun merchant to demilitarize these weapons without checking. But the PDO officials were extremely trusting and they used the honor system with the gun merchant.

Simple commonsense should indicate that a merchant in the gun business wants to buy guns not for scrap but because he intends to sell the property as guns. Anyway, thanks to the Belgian police, the gun merchant was caught selling the undemilitarized armaments.

Administrative procedures in demilitarization work were poor. One document particularly abused in the PDO yards was the inventory adjustment report. One PDO official declared 44 vehicles to be scrap when the report was signed. Nothing physical happened to the vehicles. It was strictly a paper transaction. Property that could have been sold for significant returns was classified as scrap. One German national admitted he had invoked an inventory adjustment report on 109 vehicles without even inspecting them.

6. SALES

Under the category of sales, we placed bidding practices, weigh-in procedures with scrap and percentage of return on surplus property, We found collusive bidding in which contractors agreed not to bid beyond a certain price. We found contractors having access to documents which indicated what contraband materiel was in certain lots. When a contractor noted that certain undemilitarized equipment was missing from a scrap lot, he complained to PDO officials and the auction was canceled. In general, we found PDO personnel motivated by inordinate concern for the contractors. They seemed to be worried not at all about Defense Department procedures.

Truck weights and scrap load weights were often falsified where scales were used-in tare (or empty truck) weights, in loaded truck weights, in railroad car weights. We found counterfeit or falsified weight vouchers on the person of one contractor. We found poor controls in certain weigh-in procedures that allowed contractors to record their own truck weights. Contractors sometimes were allowed to attest to the authenticity of their weight vouchers. In scrap sales, weight is vital.

It wasn't sufficient for contractors to smuggle items out of PDO depots classified as scrap. They went a step further. They wanted to doctor weights of serviceable items they were buying as scrap. In other words, they would first arrange to have an item such as a serviceable machinegun or a valuable automotive engine hidden away aboard a scrap load. Then they would arrange to pay through a false weighin, deflated prices for the scrap—that wasn't even scrap in the first place. They were buying valuable weaponry and equipment by the pound-and still cheating on the scales.

7. SCREENING OF CONTRACTORS

The U.S. Government had a system of integrity and reliability checks on contractors, but background checks were carried out superficially. Often contractors received reliability and integrity sanction and then engaged in corrupt practices. When they were discovered to be corrupt, only rarely did they lose their integrity and reliability clearances.

The designation "scrap dealer" was a misnomer for many contractors. They were arms traffickers. Simple investigation could have established them as arms traffickers. Yet PDO officials treated them as scrap dealers. Many contractors exercised their PDO yard entrance privileges freely.

Contractors fraternized with PDO employees. They often gave them "beer money” and other gratuities. They hired them for special after-duty-hour projects. Virtually no controls existed as to when and where contractors were allowed to go on PDO depots.

8. END-USE CONTROLS

In end-use control certificates, contractors spelled out how they would use the property they were buying. They invariably wrote that they intended to reduce the property to scrap and sell it as scrap. Sometimes they stipulated "spare parts” as the end-use. But they

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