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 contro's 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

were not required to provide any more details after that. There was no indication, for example, where they would sell the scrap and to whom or to what specific uses the spare parts were to be directed.

We found very few indications that PDO officials followed up on validity of end-use certificates to make sure contractors were telling the truth. End-use certificates enabled PDO officials to point out they had end-use controls but they did not constitute adequate controls.

9. PROBLEM SOLVING

Here we had no adequate Defense Department rules, regulations or directives to refer to or with which to measure honesty and efficiency in PDO operations. What we looked for was an attitude, a spirit, if you will, that motivates responsible officials to want to improve their operations, to make them more efficient and more responsive to the mission they are supposed to fulfill. We found an attitude all right. But it was not a good attitude.

It was an attitude that said, in effect, there is nothing wrong with our operations. Our contractors, this attitude seemed to be saying, are honest and straightforward and when they say they are in the scrap business that is the business they are in. Their assertions of propriety should be taken at face value.

(At this point Senator Percy entered the hearing room.)

Mr. JOHNSON. The attitude seemed to say that PDO managers and executive yard personnel are all conscientious and knowledgeable and are running surplus operations strictly by the book. And the foreign employees are efficient and hard working and would never be compromised.

In short, the attitude said, hear no evil, see no evil, speak no evil. PDO officials accepted end-use certificates without checking them. They relied on integrity and reliability checks that were certainly not accurate. There seemed to be a presumption that everyone was operating in good faith.

Contractors were stealing from and cheating PDO depots. Rarely was anything done to protect American interests. Rarely was a crooked contractor barred from future sales. Rarely were compromised employees fired. Property disposal operations in Western Europe were inefficient, wasteful and corrupt, and little effort was made by PDO officials to correct these conditions.

Chairman MCCLELLAN. You want to skip to page what?

Mr. JOHNSON. I would now like to turn to page 48, Mr. Chairman. Mr. Graham will read the conclusions and give some updates.

Chairman MCCLELLAN. We will now go to page 48 and then we will return to the specific cases and let you identify them and comment on them. You may read your conclusions.

Mr. GRAHAM. Mr. Chairman, the many problems of CID found in the mid-1960's in property disposal operations were not corrected. They were allowed to continue through the late 1960's and into the 1970's.

The extent to which the improper conditions were allowed to continue is seen in the documents, exhibits mentioned before.

The documents are:

1. An "in-depth crime prevention survey" begun in 1970 by the CID at the direction of the Department of the Army.

2. Department of the Army cables of late 1971 listing defects in the property disposal operation.

3. A survey in February 1972 showing that debarred contractors still had access to PDO depots.

4. Subcommittee review of operations at the PDO depot at Ludwigsburg.

The crime prevention survey:

On July 23, 1970, Maj. Gen. Kenneth G. Wickham, the Adjutant General of the Army, acting on behalf of the Secretary of the Army, directed the CID to conduct an immediate "in-depth crime prevention survey" into property disposal activities throughout the world.

In Europe, the responsibility for this survey was given to Detachment A, 9th Military Police Group (Criminal Investigation), U.S. Army/Europe and 7th Army Headquarters, Heidelberg, Germany. WO Robert W. Moody headed the survey group. I was the operations officer of A Detachment at the time Mr. Johnson was the commanding officer of the detachment. Since I had experience in property disposal matters, I worked with Mr. Moody on the survey under the supervision of Mr. Johnson.

All PDO depots and satellite yards in Germany were studied.

The survey is completed. But only the study of the Ludwigsburg PDO has been written up. Therefore, we will quote from the final report on Ludwigsburg in this presentation.

Then we will summarize selected sections of the working papers from the survey of other PDO depots. These working papers were written by Mr. Moody, by myself, and by other CID investigators. CID inquiry at Ludwigsburg in connection with the survey began November 14, 1970, and was concluded March 5, 1971.

The findings included assertions that:

1. Ludwigsburg employees ignored regulations on the correct documenting of property as it was turned in to the depot. Major discrepancies existed in recording of quantity, condition, and description of surplus property as it arrived at the depot.

2. Segregation of property and scrap was poor. Property was not stored in orderly fashion as required. High-value scrap was combined with scrap of lower value. This mixing resulted in reduced financial return to the United States.

3. Contractors were permitted to enter and move about the yard without escort.

4. Contractors stole property.

5. Weigh-in procedures were inefficient. Security of weight tickets and supervision over the scalemaster was lax. Control over railshipment weigh-ins was inadequate.

6. The barbed wire fencing and lighting system were inadequate and did not provide sufficient security.

7. There was no key-control system. Possession of keys to the depot and critical facilities was not limited to selected employees.

8. Serious pollution and fire hazards existed due to the improper storage of wet-cell batteries and used engine oil.

9. At the Ludwigsburg satellite yard in Nellingen, Germany, improper conditions also existed as it was noted that:

(a) Barbed wire fences did not provide security. (b) Internal security lighting did not exist.

(c) No system of key-control was used.

(d) Supervision of scales and weigh-ins was insufficient.

(e) Contractors were allowed to cannibalize spare parts and components from the chassis and bodies of military type automotive vehicles.

CID investigators spoke with one contractor who told them that security was so poor at Ludwigsburg and thievery so easy to accomplish that collusion between contractors and depot personnel was not necessary (exhibit 83 is survey, dated September 2, 1971).

The crime prevention survey working papers:

Improper procedures and conditions were found in other depots. The Ludwigsburg situation was the rule, not the exception.

It was noted, for example, that the depot personnel at the Germersheim PDO depot were grossly negligent and indifferent to existing regulations on demilitarization of munitions list items.

On munitions list items, an inspector is required to be present and witness the demilitarization of each item. The inspector then signs a demilitarization certificate. But at Germersheim, this procedure was sidestepped.

One inspector, Sp5c Donald Hood, Jr., in a sworn statement May 27, 1971, told the CID how he and other Germersheim personnel conducted demilitarization procedures. At this point in the interview, Specialist 5 Hood was discussing the responsibilities of a Sergeant Quales, the noncommissioned officer in charge of demilitarization. Following are the questions and Mr. Hood's answers:

Q. Did you ever have occasion to take any demilitarization certificates to him (Sergeant Quales) ?

A. Yes, two times...

Q. Can you cxplain to me what reason you had for taking these certificates to Sergeant Quales?

A. They told me that since I was going down to DQ to take them down to Sergeant Quales which I did. While I was there I gave them to Sergeant Quales. When I gave them to him, these items, he told me he didn't have an inspector's stamp with him and he asked me to stamp them for him and then he signed the certificates.

Q. When you placed your inspector's stamp on these demilitarization certificates, what did this represent?

A. This represents that the inspector was physically there and seen them cut these items up.

Q. Was this the policy in effect at this time that the inspector would stamp the demilitarization certificate saying it has been cut and that the demilitarization NCO would sign it later?

A. All the time I was there we never did really go by the policy they had set up, the SOP. Ain't nobody gone by it.

Q. These items he asked you to stamp which were reflecting that you had seen the items demilitarized, were they in fact demilitarized?

A. This I don't know because I never saw the items.

Q. Have you ever seen any items demilitarized?

A. No.

Q. So if I would find a number of demilitarization certificates with your stamp number 65, this would mean in actuality that you never did see them demilitarized, is this correct?

A. Right, I just stamped them and he signed them.

(Exhibit 84 is statement of Specialist 5 Hood, dated May 27, 1971.) One noncommissioned officer at Germersheim, S. Sgt. Baltazar F. Garcia, refused to go along with the improper demilitarization procedures. In a statement to the CID, May 27, 1971, Sergeant Garcia