A Decade of Fraud

Despite substantiated allegations of fraud that span over 10 years, defense contractor EOTech remains eligible to do business with the US.

EOTech agreed to pay $25.6 million to the US Government in November 2015 to settle allegations that company defrauded numerous defense and military organizations over a 10-year period.

Beginning in 2001, EOTech contracted with the Department of Defense, the Department of Homeland Security and the FBI to provide weapons sights capable of withstanding extreme temperatures and combat conditions. By 2006, EOTech learned that its sights would fail in cold or humid conditions and failed to disclose this information to the government according to the complaint filed by the US Attorneys Office for Southern New York.

EOTech's holographic sights were commonly used by US Special Forces because their design allowed soldiers to keep both eyes open while aiming, reducing the loss of peripheral vision. The company marketed its holographic weapon sights as capable of functioning between -40 degrees to 140 degrees Fahrenheit. EOTech also claimed that the sights could withstand extremely humid conditions.

According to the complaint by the US Attorney's office, the performance standards were crucial because "US troops used EOTech's combat optical sights in Iraq and Afghanistan, as well as in the jungle, mountains, desert, and other extreme environmental conditions around the world."

EOTech's 2004 and 2010 contracts, worth a total of $20.4 million, explicitly stated that EOTech must "notify the Government of any and all performance related data" affecting the sights.

Internal EOTech documents reveal that in August of 2006, an army infantry unit complained that the target reticle drifted off-center in extreme temperatures.

Anthony Tai, EOTech's Chief Technology Officer at the time, ordered immediate testing. In an email to company higher-ups, Tai wrote, "We cannot have soldiers test our sights for drift in the battlefield."

During a deposition, the test engineer responsible for evaluating the sights said that he didn't remember anyone attempting to fix the flaws.

Despite the attention of the CTO, the problem was neither fixed nor acknowledged until the FBI independently uncovered the flaw in 2015.

The FBI exposed the sights to weather in Virginia and noticed that the targeting reticle drifted away from the center. Notably, Virginia rarely reaches the highs of 140 degrees Fahrenheit or lows of -40 degrees Fahrenheitthat EOTech claimed its sights could withstand.

When confronted by the FBI in 2015, EOTech claimed that the flaw was newly discovered.

EOTech learned of a second flaw in its holographic sights when it attempted to sell its optics to the Norwegian Army in January 2007. During field-testing in Norway, however, the aiming dot distorted, making proper aiming very difficult. Norway passed on EOTech's sights yet the company continued to provide these same optics to the US Military.

EOTech's CTO issued an internal memo admitting that the company "had never looked at the sight performance at very low temperatures" and that EOTech "assumed the sight performed about the same at" 68 degrees Fahrenheit as it did between -40 degrees and 104 degrees Fahrenheit. [Note: To maintain consistency, temperatures were converted to Fahrenheit from Celsius]

EOTech did not disclose this flaw to the military until 2008, when, instead of acknowledging the distortion effect, the company informed the US government that they were upgrading the sights' performance as opposed to correcting a flaw.

Despite fraudulently representing its sights and withholding information about failure from the US government, EOTech was slapped with a fine that barely exceeded the total of its contracts. According to the publicly available data, the US purchased at least $24 million worth of EOTech's sights.

Within 24 hours of the US Attorney's office filing a complaint to recover triple the damages, as allowed by the False Claims Act, as well as civil penalties, EOTech settled.

The terms of the settlement required that the company, its parent company L-3 and EOTech's former president Paul Mangano admit responsibility for the company's fraudulent actions.

Although EOTech and L-3 Communications admitted and acknowledged fraudulent activity, the GSA and EOTech's government contracting official declined to suspend or debar either subsidiary or parent company.

A representative for EOTech and its parent company L-3 Communications said that the company had no comment about the settlement.

The General Services Administration's Suspension and Debarment Division would not comment on specific cases other than to refer to EOTech and L-3’s System for Award Management records, which do not show any suspensions or debarments.

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A Pattern of Inaction

In fiscal year 2014, the top ten contractors alone were awarded $117.7 billion in government contracts. "There's a history of a private arsenals as opposed to public arsenals in the wake of WWII," said Benjamin Friedman of the Cato Institute.

Defense contracting grew out of a need for the government to be able to quickly mobilize businesses and ramp up production in response to varying global events. It's easier to temporarily hire a contractor than it is to hire and fire fulltime government employees, said Friedman.

Essentially, Friedman explained, the contracting system allows an agency of the US government to procure specific items or to research new technology without creating an entire department within the agency. For instance: instead of purchasing and manufacturing small arms in government owned and operated plants, the Department of Defense can use existing private arms companies to quickly furnish the needed supplies.

"Though it can be bogged down by politics and the costs of doing business in Washington, ideally, allowing the government to employ private businesses will increase efficiency," said Friedman. Friedman adds that the system looks much more chaotic and clumsy from the outside. "For contracting officers, this is just the nature of the system," he said.

The scope of the modern defense contracting system means that contractors are often left to police themselves by internal audit (for financial fraud like overcharging/mischarging for labor) or by contractual obligation (if providing materials or products) said Neil Gordon from the Project on Government Oversight.

"The largest contractors should constantly be auditing themselves. It's the easiest way to make sure that they can continue to do business with the US," said Friedman. "The government will generally accept errors and won't hold contractors who admit mistakes liable."

"Accounting errors and billing mistakes do happen. A lot of discrepancies between contractors and the government come down to human error, not malice," said Gordon. Gordon concurred with Friedman's assessment, adding that contractors that adopt a policy of transparency after a mistake typically continue to do business with the US.

William Schmidt, of the GSA's Suspension and Debarment Division declined to say how often investigators recommend suspension or debarment when misconduct is discovered. He also declined to say often contracting officials actually use their ability to suspend or debar offending contractors.

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EOTech's pattern of fraud is notable for its duration and the rigorous internal documentation that ultimately implicated the company. Yet EOTech is just one company competing for billions of dollars in defense contracts. It's one company among many that have settled allegations of fraud without debarment or suspension.

The General Services Administration's (GSA) Suspension and Disbarment Division keeps track of contractors that are under investigation or have been debarred but does not investigate fraud or misconduct on their own, said William Schmidt, from the SDO (Suspension & Disbarment Office).

However, under the Federal Acquisition Regulations, debarment and suspension are considered separate from criminal or civil charges and are not decided by attorneys, said Schmidt.

Schmidt explained that there are often extenuating circumstances that prevent contracting officials from suspending companies. Oftentimes, companies are providing invaluable service to the government, said Schmidt. "Debarment is entirely at the discretion of the contracting official," said Gordon, of POGO. "It's subjective. Even when a company acknowledges wrongdoing, it's perfectly legal for them to continue bidding on contracts."

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