Conversion of Soviet weapons of mass destruction

U.S. Fund In Russia Spent Defense Dollars On Luxuries

By John M. Donnelly
Defense Week, January 7, 2002, Pg. 1

Officials working for a Pentagon-funded corporation created to convert former Soviet military organizations into civilian enterprises spent at least $1 million of U.S. taxpayer money on things like golf, tennis, theater, meals and first-class airfares, according to the Defense Department Inspector General.

Since the autumn of 2000, the Defense Criminal Investigative Service has been conducting a criminal probe of some of the officials involved in the Defense Enterprise Fund. The fund, a private not-for-profit corporation, has received $67 million from the U.S. government since Congress created the program in fiscal 1994 to turn former Soviet swords into plowshares in Russia, Belarus, Kazakhstan and Ukraine.

Officials spent roughly half that money managing the fund's affairs, the report said. They invested another $38 million in former Soviet enterprises that today are worth less than half that-just $15 million. And they spent at least $1 million of it, and almost assuredly more, living high on the hog in Moscow, St. Petersburg and elsewhere.

The Inspector General says the story illustrates the importance of monitoring all programs that reimburse contractors' costs. The Defense Enterprise Fund is one of a handful of U.S. programs designed to convert former Soviet military bodies to peaceful ends that have not gone according to plan.

Last August, Defense Week disclosed that the program was being investigated and that the man who blew the whistle on its problems said he was having trouble feeding his family in Russia, while the man who oversaw the loss of half the fund's investments had been promoted to fund president.

Robert Odle, an attorney representing the fund's board, in an interview last summer, disputed Maly's charges, saying: "We found nothing that supports his allegations." Odle also said the fund's poor return on investments was due to the difficult investment climate in Russia.

The new Pentagon Inspector General report did not name any names but described misspending on an almost operatic scale, especially considering the fact that the number of employees at the Russia fund was never more than 48 in its first half dozen years, according to The Moscow Times.

`Unreasonable' expenses

The new report, published New Years' Eve, looked at how the fund spent defense dollars in just three of the eight years it has been in existence-fiscal 1997 to 1999. In those three years, fund employees spent about $1 million on "unallowable and unreasonable" expenses, the audit said.

The employees spent the $1 million not only on sports, dining and other avocations, but also on housing allowances and pension contributions far above the norm.

It stands to reason that, in the five years of the fund's existence that the auditors didn't examine, more unjustifiable sums of money were spent on such pleasures.

For its first three years, the fund's loans and equity investments were run by its own employees. Then, in 1997, the Pentagon transferred management of the money to Global Partner Ventures, LLC, a firm owned by two employees of the fund.

In 1999, the fund hired a new firm, New York-based Siguler Guff and Company, LLC, to manage the fund's investments until 2004. The fund has received no new U.S. funds since 1997.

When Congress set up the fund in 1994, it wanted the program to be free of the red tape that usually comes with government grants, so that it could perform more like a private organization. So Congress left the fund unshackled by government rules that limit or ban certain expenditures of federal dollars.

The Defense Threat Reduction Agency is the Pentagon organization responsible for grants made to the fund. The agency's deputy director, Air Force Maj. Gen. Robert Bonjiovi, said in a letter to the Inspector General published in the audit that the fund "is not a DOD agency and is not under the direction, control or supervision of DOD." Instead, it is "regulated by internal documents typical of a venture capital firm."

Bonjiovi conveyed no outrage about first-class airfares or symphony tickets bought with taxpayer dollars. The Inspector General's most "significant conclusion," Bonjiovi said, is that the fund's expenses "were not found to be in violation of the terms of the grant."

Living large

Among the expenses the Inspector General said would have been "unallowable" if the fund was operating under usual federal spending rules:

In fiscal 1999 alone, the fund managers spent $29,500 of grant funds to buy first-class tickets for six trips, mostly for the owners of the management firm.
Between fiscal 1997 and 1999, the program "incurred at least $192,600 for meals and entertainment, including the cost of a country-club membership, employee lunches at their Moscow and St. Petersburg offices, a subscription to the symphony, tennis fees and theater tickets."
"In November 1997, the fund paid about $96,800 for a membership to a country club, including $85,000 for the initial membership fee and about $1,800 in yearly dues for employees."
In August 1998, the fund spent $10,000 in yearly dues to the country club.
The organization spent $95,800 for meals served in their offices.
The entertainment and meals included $500 theater tickets and $300 tennis fees and an office subscription to the Moscow symphony worth $900.
Among the costs the auditors dubbed "unreasonable":
In the three years that were reviewed, the fund spent $258,600 to house six expatriate employees in Russia. "One employee received $142,500 for housing allowances in excess of State Department allowances," the report said.
Fund employees netted $537,400 in pensions above amounts considered reasonable in the three years at issue. The pensions amounted to 30 percent of their salaries, whereas employees in the finance business average 5 percent of their salaries for retirement plans.
An employee of the investment-management firm attended a management course in England in the summer of 1998 at a cost of $35,500. "We could identify no documentation to show that the course included unique materials or instruction that was unavailable domestically or that would otherwise justify that particular employee's attendance," the auditors said.
In 1997, the fund lent $15,000 to "the general director of a DEF investment partner and his wife. The purpose of the loan was not stated in the agreement," the audit said, and "the accounting records provided do not show that the loan was repaid."
In 1999, $4,000 was spent for a Moscow-based employee and his family to take three vacations, one to the Middle East and two to Scotland.

The criminal investigation is still underway, a Defense Department official said. The Pentagon does not discuss ongoing criminal probes.