Tag Archive: Defense Security Service

I hear through my sources that the DoD OIG completed a Title V investigation (Reprisal Office) and issued a report of findings in support of the federal employee whistleblower.  I have obtained a copy of this report from my sources in the DC area.  I am wading through it as we speak.  It would appear that Stanley Sims, DSS Director and Jay Freaude, DSS Counsel are purposefully refusing to acknowledge receipt of this report and responsibility to take constructive action to make the damaged employee whole, as directed by the DoD OIG. 

Is this how it will work?  Defense Security Service Director, Legal Department and Management will ignore investigative reports and pretend the investigation from DoD OIG simply does not exist and continue on their unethical and illegal path with impunity?  There are some very angry federal employees and civilian citizens regarding this cavalier attitude toward justice.  Not to mention questions about what appears to be DSS malfeasance in managing a federal agency and expenditure of taxpayer funds. 

If Defense Security Service oversight cannot be ethical in its own in-house matters, how can they be trusted to be ethical in doing their oversight job of policing government defense contracting and contractor corporations?

Anybody have more information or perspective? 


A contributor sent this in today.  Thanks!  I appreciate contributions from my readers.  It seems like I have heard nothing good about DSS for a very long time, other than the management has seemingly been successful at pulling the wool over any number of politicians eyes.  It is one long progression of bad decision after bad decision from this observer’s perspective.  GFS

G. Florence –

Rumors on the contracting street back here in the beltway are that the Defense Security Service and its industrial security mission will be handed back to the Defense Logistics Agency.  Some agency employees have shared,  that the employee pay and benefits program has already been given back to the Defense Logistics Agency.  Handing a failing agency back to another failing agency doesn’t seem like a very good idea to this old navy man.  Isn’t it time for the agencies who actually own the programs to takeback ownership of their programs?

 The Old Navy Man 

The Washington Post

Report criticizes defense agency’s auditing

By Robert O’Harrow Jr., Sunday, March 20, 6:54 PM


It is supposed to be an A Team that keeps a close eye on the Defense Logistics Agency, the $41 billion-a-year operation that supplies Meals Ready-to-Eat, uniforms, spare parts and just about everything else to troops around the world.

But the agency’s accountability office does F-grade work when it comes to conducting audits, according to a recent report by the Pentagon’s Inspector General.

Many of the audits are improperly performed. Investigators often do not have enough auditing experience and don’t follow generally accepted government auditing standards. In six of eight offices reviewed, planning was found to be deficient, according to the report.

“As a result of the significant deficiencies described . . . we are issuing a fail opinion on the DLA audit organization’s system of quality control,” said Randolph R. Stone, deputy inspector general for policy and oversight.

The DLA did not respond to requests for comment.

The IG report raises questions about the Pentagon’s ability to properly oversee contractors vital to its far-flung operations.

For years, Congress has heard testimony that the Pentagon’s logistics operations are hampered by questionable practices, poor planning and overpriced goods and services. The DLA’s accountability office contributes to the problem by failing in its oversight role, the findings conclude.

“The report confirms the alarming trend we are seeing where Pentagon management has relegated audits of contracts and internal controls to a back seat,” said Danielle Brian, executive director of the Project On Government Oversight, a private nonpartisan oversight organization that tracks Pentagon spending. “Despite rhetoric to the contrary, senior DOD leadership has been on a tear to reduce or even eliminate any type of audit oversight, whether related to contractors or DOD’s own internal controls.”

The DLA faces a mammoth task. Its 27,000 employees provide support to nearly 1,900 weapons systems and eight supply chains moving 5 million items. The wars in the Middle East have added to the strain.

The accountability office was formed in early 2008 to focus investigators and auditors on improving “efficiency, accountability and warfighter support.”

The IG criticism deals with the quality control of audits, which are crucial to identifying theft, fraud and other abuses. The IG report found an “absence of official quality control policies and procedures” and a lack of independence among auditors.

The report notes that only “one quality assurance auditor position” was established, in late 2009, but that person has not conducted “any reviews of DLA audit work and therefore could not provide any evidence of quality assurance monitoring.”

The IG made nine recommendations, including calling for revisions of the audit policies. The DLA agreed with all nine, the report said.

“We determined that the DLA audit organization did not exercise professional judgment due to the vast array of noncompliances,” the report said. “The DLA Accountability Office, Audit Division, and the DLA Disposition Services audit offices did not have a clear understanding of what constituted an audit.”

Link to original: 



I received a follow up comment from “An Old Navy Man” today.  He states:

“I guess Lawhorn will have to share underwear with Cole and Hellman now.  The Beltway rumor is that Vince Taylor was encouraged to move on.”


Original Post – story



There’s an old Navy story about a ship’s Captain who inspected his sailors.  Afterward he told the first mate that his men smelled bad.  Perhaps it would help if the sailors would change underwear occasionally.  The first mate responded “Aye, aye sir, I’ll see to it immediately!”


The first mate went straight to the sailor’s berth and announced, “The Captain thinks you guys smell bad and wants you to change your underwear.”  The first mate continued, “Watson, you change with Sterling.”  “Taylor you change with Cole.”  “Lawhorn you change with Hellmann.”


The moral of the story-   someone may come along and promise change, but don’t count on things smelling any better.


It’s time for the Office of the Secretary of Defense to hand the Industrial Security mission back to the Government Contracting Authorities.


From an old Navy man


I have not been able to confirm this yet, but I hear through sources in the Beltway that multiple new criminal investigations have been launched into DSS management’s mode of operation.  Anyone know anything about this?  GFS

Update from a reader on 10-7-10:

“Some computers of DSS HQ senior management were seized by the Defense Criminal Investigative Service (DCIS), so there may be a criminal case under investigation.

On another front, an investigation is being conducted by either DoD or DSS IG regarding timekeeping; not compensating staff for overtime work.  They are examining timesheets and other documents regarding duty hours; staff’s compressed work schedules.   They may be visiting every DSS office and interviewing everyone.”

This seems like a good time to remind everyone in DoD and in particular DSS,  to be even more conscientious than usual about not using work computers for personal emails or websurfing.  The individuals who have been committing these violations against federal employees are most likely becoming quite desperate as the pressure is building and the lights are beginning to be shined onto them wherever they are hiding.    GFS

Outgoing DSS Director, Kathleen (Kathy) Watson has stated in her farewell letter that the new acting Director of DSS in October when she leaves will be Barry Sterling.   -GFS

 As a start, here is what is posted on the Defense Security Service Website:

Barry E. Sterling

Chief Financial Officer

Defense Security Service

Barry E. Sterling, a member of the Senior Executive Service, is the Chief Financial Officer of the Defense Security Service. In this position, he is the primary advisor to the Director, DSS, in the areas of budget formulation, budget execution, financial management and policy, financial systems, and financial/cost reporting.  Additionally, he provides executive leadership to the agency’s safety, logistics, nationwide facility management programs, the Strategic Management Office, and manages the Base Realignment and Closure (BRAC) Program.  Prior to this assignment, Mr. Sterling was assigned to the Deputy Under Secretary of Defense for Intelligence Counterintelligence and Security (DUSD(I) CI&S) where he formulated and executed the DUSDI financial program and provided financial oversight of the Defense Security Service and The Counterintelligence Field Activity.

Mr. Sterling is a retired U. S. Air Force Officer who during his Air Force career performed management assistance services, spearheaded Wing and Command level Management Information Programs, cost and economic analysis, and developed and administered cost analysis policy for 120 analysts at Headquarters Air Education and Training Command (AETC) and its 13 bases; interpreted, clarified and supplemented Air Force guidance on budget policy and procedures, tracked congressional, DoD and Air Force budget actions and developed the AETC financial plan and oversaw the execution of over $4 Billion in multiple appropriations.

Mr. Sterling commanded the 325th Comptroller Squadron where he provided financial services, budgeting and accounting of 34 appropriations exceeding $360 million.  He also served as a Senior Financial Manager, Secretary of the Air Force Financial Management, performing strategic planning activities and conceived and managed manpower policy for all 13,000 Air Force Financial Management and Comptroller positions Air Force wide.

He served as the Comptroller and Director of Financial Management for Headquarters Air Force Office of Special Investigations (HQ AFOSI) where he developed and defended a $325 million budget supporting Counterintelligence, Counterespionage, Force Protection and Security and investigative activities.  He was the Secretary of the Air Force Inspector General’s (IG) representative to the Headquarters Air Force Resource Management program providing oversight and input to SAF/IG’s financial program and provided oversight to the (HQ AFOSI) and Air Force Inspection Agency.  He also was the SAF/IG representative to the USAF Group and USAF Board representing SAF/IG input into the Air Force Corporate Structure making resource decisions affecting all Air Force entities upon his retirement from active duty.

Prior to his military career, Mr Sterling was a Vice President/Branch Manager for a large Florida Bank managing all branch financial operations. He has had a 30-year career in financial management.  He holds a Bachelor’s degree from the University of Maryland and a Master’s degree from Central Michigan University both in business.  He also holds a Florida Bankers Association School of Banking Branch Management Institute degree.

Current as of September 2009

Here is a new blog post by Nick Schwellenbach.  Enjoy.  A link to POGO, the origin of this post, is at the bottom after DSS Director Watson’s goodbye letter.  GFS

Sep 16, 2010

Defense Security Service Director Leaving for “the Private Sector”

In an email (see below) to the staff of Defense Security Service (DSS) on Monday afternoon, the agency’s director, Kathleen M. Watson, announced she would be retiring next month “to pursue a career in the private sector,” though where exactly she did not say. If her actions are like those of some of her predecessors at DSS who have gone on to work in the private sector, she may soon be working for a government contractor whom she once oversaw in her role at DSS.

DSS is the Pentagon agency responsible for ensuring that government contractors have systems in place needed to protect classified information in accordance with the National Industrial Security Program. The little-known agency has been the subject of some of POGO’s work over the years, namely POGO’s unearthing of a Pentagon inspector general report that said the agency did not properly oversee BAE System’s protection of classified information in the Joint Strike Fighter program (JSF). The Pentagon Inspector General later retracted the report when it was found that the report’s conclusions were not fully backed up by evidence.

Looking at DSS more broadly, Congress’s investigative arm, the Government Accountability Office (GAO), has said DSS has systemic problems overseeing contractors in two reports—once in 2004 and later in 2005. In testimony before the House Armed Services Committee on April 16, 2008, DSS Director Kathleen Watson herself admitted that when she began as director in 2007, DSS was “broken across the board.”

But where is she going next? If past is prologue, then she may be gunning for a job with a government contractor.
For example, one of DSS’s previous directors, Lt. Gen. Charles J. Cunningham Jr., who left in May 2002, went to DynCorp International in November of that year to become its director of Air Force Strategic Programs, according to a DynCorp press release.

Another senior DSS official, Gregory Gwash, DSS’s deputy director until July 1997, went on to work for a company that DSS oversees: Boeing, the U.S.’s second largest defense contractor and one trusted with many of the military’s cutting edge secrets. In his farewell message, which was obtained by Steven Aftergood of the Federation of American Scientists, Gwash used the same kind of government-industry partnership rhetoric praised in the Clinton and Bush years, but now seen as helping to create the rubber stamp, “service oriented” oversight culture at agencies like the Minerals Management Service (MMS—now known as the Bureau of Ocean Energy Management, Regulation, and Enforcement) and the Federal Aviation Administration (FAA). Gwash wrote of some of the highlights of his time at DSS, including the “partnership” between government and industry and “the reinvention of the Industrial Security Program from a compliance-based activity to a service oriented, threat based program.”

No one disagrees that government and industry have to work together closely—POGO just thinks that they’ve been far too cozy for too long. When top government officials don’t want to ruin their chances for a lucrative job in private industry, how hard will they push on their potential future employers when they’re in the government?

Earlier this year, The Washington Post’s “Top Secret America” investigation did a good job exposing the extent to which private companies are handling some of our nation’s most sensitive intelligence and national security functions. But the Post‘s discovery that more contractors are handling secrets than ever before raises the question: Is the key agency overseeing how well companies protect our secrets doing its job appropriately? And is its senior management keeping an arm’s length distance from those it is overseeing?

–Nick Schwellenbach

Text from Watson’s email:

—– Original Message —–
From: Watson, Kathy, DISES, DSS
Sent: Mon Sep 13 16:42:13 2010 Subject: Farewell

It is with a tremendous amount of trepidation that I have decided to leave DSS to pursue a career in the private sector. My decision making process was long and hard because working with all of you has been enlightening, humbling and a lot of fun. I respect DSS, its mission, and more importantly, all of you. The work is rewarding, critical to our national security and a reminder of just how fragile we may be as a nation on any given day.

My last day at DSS will be 8 October. Barry Sterling, our very able CFO and colleague, will serve as the Acting Director upon my departure. I would ask that you all continue to do what you do so well — focus on the mission and keep making DSS a better place every day you come to work. We have come a long way as an organization in the last four years, but there is still much to be done. I will be watching as you all continue to accelerate and enhance the mission and image of DSS.

Thanks to all of you for the fine support, comraderie and just plain hard work. And remember, DSS is yours and will be what you make of it.

Take care and my best to all of you.

Kathy Watson

Link to original at POGO:  http://pogoblog.typepad.com/pogo/2010/09/defense-security-service-director-leaving-for-the-private-sector.html

Here are a couple of excerpts from a post at POGO regarding BAE, Joint Strike Fighter, and the failure of Defense Security Service in protecting matters of National Security.  Later it is correctly stated that there are problems with DSS’s performance as the watchdog in charge of ensuring BAE was adequately protecting classified information and includes soon to be past Director, Kathleen Watson’s inexplicable comments and excuses for her agencies failures.  Please follow the link to read the whole story and to take a look at the other excellent reports on POGO’s website.  (http://pogo.org

Note:  This is not the only documented case of this type of problem.  I am told that there are others, involving DSS and other contractors.  -GFS


A “Black Eye” for the Pentagon’s Watchdog: The Backstory of the BAE-Joint Strike Fighter Audit Report Withdrawal

By Nick Schwellenbach

“The findings were troubling to say the least. In spring 2008, British Aerospace Enterprises, the U.K.’s largest defense contractor better known by its initials BAE, had been accused by the Pentagon watchdog agency of possibly losing classified information related to the world’s most expensive weapons program,  the Joint Strike Fighter (JSF).

This tale did not end here.”  



“On top of findings related to BAE the OIG’s report contained arguably equally troubling, yet less well-publicized findings that a little-known Pentagon agency had failed in its job to ensure that BAE was adequately protecting classified information. Questions about the effectiveness of the Defense Security Service (DSS) in overseeing contractors had been bubbling to the surface since a 2004 Government Accountability Office report—but this was the first real example of the agency’s inadequacy to come to light.”

‘In its defense, DSS Director Kathleen Watson told the OIG that “DSS has a thorough and fundamentally sound facility inspection process which was only marginally diminished by the failure to systematically collect, analyze, and retain BAE’s required reports.”’

Follow Link to complete story:  http://pogoblog.typepad.com/pogo/2010/09/a-black-eye-for-the-pentagons-watchdog-the-backstory-of-the-bae-joint-strike-fighter-audit-report-wi.html

A concerned citizen emailed me this a short time ago.  It appears that there are some who are trying to make things even less transparent.  The better to commit fraud, waste and abuse with I suspect.  I wonder if  James McNerney had anything to do with this?  This must be stopped.  GFS

The Government Accountability Office (GAO) seriously needs to coordinate with the Department of State and the Directorate of Defense Trade Controls.  If 75 FR 15388, March 29 2010 Public Notice 6931 is allowed to stand, this amendment to the International Traffic in Arms Regulations (ITAR) will further damage and weaken any effective protection of technologies critical to United States national security interests and all the good work that GAO is trying to do under their “High Risk List” program.
There have been many instances where industry has offered too much information and technology to foreign governments and corporations during the solicitation and negotiation phases of the international contracting process.  Once the information and technology have been offered by a U.S. corporation it is almost impossible for the government to then intervene and withdraw that offer.  This appears to be yet one more effort by the Defense Trade Advisory Group’s (DTAG) industrial community members, and the Chairman of the President’s Export Advisory Council (Jim McNerney) to further weaken the export compliance process.
http://www.pmddtc.state.gov/FRN.html  )
U.S. Department of State, Directorate of Defense Trade Controls
Federal Register Notices    2010
75 FR 15388, March 29, 2010, Public Notice 6931.
Amendment to the International Traffic in Arms Regulations: Removing Requirement for Prior Approval for Certain Proposals to Foreign Persons Relating to Significant Military Equipment
The Department of State is amending the International Traffic in Arms Regulations (ITAR) to remove the requirements for prior approval or prior notification for certain proposals to foreign persons relating to significant military equipment at section 126.8 of the ITAR.
DEPARTMENT OF STATE, 22 CFR Parts 124, 126, and 129, [Public Notice: 6931], RIN 1400–AC62, Amendment to the International Traffic in Arms Regulations: Removing Requirement for Prior Approval for Certain Proposals to Foreign Persons Relating to Significant Military Equipment
AGENCY: Department of State.
ACTION: Proposed rule.
SUMMARY: The Department of State is amending the International Traffic in Arms Regulations (ITAR) to remove the requirements for prior approval or prior notification for certain proposals to foreign persons relating to significant military equipment at section 126.8 of the ITAR.
DATES: Effective Date: The Department of State will accept comments on this proposed rule until May 28, 2010.
ADDRESSES: Interested parties may submit comments within 60 days of the date of the publication by any of the following methods:
• E-mail:DDTCResponseTeam@state.gov with an appropriate subject line.
• Mail: Department of State, Directorate of Defense Trade Controls, Office of Defense Trade Controls Policy, ATTN: Regulatory Change, Section
126.8, SA–1, 12th Floor, Washington, DC 20522–0112.
• Persons with access to the Internet may also view this notice by going to the U.S. Government regulations.gov
Web site at http://regulations.gov/index.cfm.
Director Charles B. Shotwell, Office of Defense Trade Controls Policy, Department of State
Telephone (202)663–2803 or Fax (202) 261–8199; E-mail DDTCResponseTeam@state.gov. ATTN: Regulatory Change, Section 126.8.
SUPPLEMENTARY INFORMATION: Effective September 1, 1977, the Department of State amended the International Traffic in Arms Regulations (ITAR) at 22 CFR 123.16, to require Department of State approval before a proposal or presentation is made that is designed to constitute the basis for a decision to purchase significant combat equipment, involving the export of an item on the U.S. Munitions List, valued at $7,000,000 or more for use by the armed forces of a foreign country (42 FR 41631, dated August 18, 1977). Also, 22 CFR 124.06, entitled ‘‘Approval of proposals for technical assistance and manufacturing license agreements,’’ was amended to require similar prior approval requirements with respect to proposals and presentations for technical assistance and manufacturing license agreements involving the production or assembly of significant combat equipment.  ‘‘Proposals to foreign persons relating to significant military equipment’’ became section 126.8 in a final rule effective January 1, 1985 (49 FR 47682, dated December 6, 1984). Section 126.8 did not require prior approval of the Department of State when the proposed sale was to the armed forces of a member of the North Atlantic Treaty Organization (NATO), Australia, Japan, or New Zealand, except with respect to manufacturing license agreements or technical assistance agreements.  A prior notification requirement, instead of prior approval, was added to section 126.8 in a final rule effective March 31, 1985 (50 FR 12787, dated April 1, 1985). Prior notification to the Department of State was required 30 days in advance of a proposal or presentation to any foreign person where such proposals or presentations concern equipment previously approved for export.  The current section 126.8 requires prior approval or prior notification for certain proposals and presentations to make a determination whether to purchase significant military equipment valued at $14,000,000 or more (other than a member of NATO, Australia, New Zealand, Japan, or South Korea), or whether to enter into a manufacturing license agreement or technical assistance agreement for the production or assembly of significant military equipment, regardless of dollar value.  These types of proposals and presentations usually involve large dollar amounts. Before the defense industry undertakes the effort involved in formulating its proposals and presentations, if there is any doubt that the corresponding license application or proposed agreement would not be authorized by the Department of State, the industry may request an advisory opinion (See 22 CFR 126.9). The written advisory opinion, though not binding on the Department, helps inform the defense industry whether the Department would likely grant a license application or proposed agreement.  Currently, the time between submitting a license application or proposed agreement and obtaining a decision from the Department of State whether to authorize such transactions has been decreased sufficiently that requiring prior approval or prior notification for proposals is unnecessary and imposes an administrative burden on industry.

The GAO’s Director of Acquisition, Ann Calvaresi-Barr is quoted, (in an article by William Matthews), as saying,“Defense Security Service (DSS) agents also lacked basic understanding of complex transactions, such as the security implications of foreign hedge funds buying interests in U.S. defense firms.   That is increasingly common, and it is difficult to know where the money is coming from and who the players are.” 

See the Matthews article:  http://www.owlcti.com/pdfs/Swiss_Cheese_and_DSS.pdf

The whole financial arena is fraught with danger, from a security and oversight perspective, as the tools used by financial fraudsters and criminals are extremely complex and their activities are multi-layered.  With the advent and rapid development of a global technological world, our government oversight employees are hard pressed to keep up with the needed expertise in technology as well as current financial business practices. (We’ve come along way from security merely being physical security.)  DSS is not alone in the struggle; this challenge is shared by all oversight agencies.  The modus operandi of the criminals has become very sophisticated.  It is hard and sometimes impossible to detect where money is coming from and going to.  And many things maybe hidden, such as true owners, stockholders, and recipients of pay-offs for services rendered, as well as the money itself. 

Threads to any particular example of such crime may lead all over the world in multinational webs of secret contracts and accounts.  One such type of secret account, which is gaining in popularity rapidly in corporate circles, is the Hidden Treuhand, (pronounced troy-hawnd).  Although illegal in the US, this type of financial instrument is legally protected in certain countries and marketed by many of those countries throughout the world.  It is necessary to understand what a Hidden Treuhand is and how many ways it may be effectively used to evade accountability to U.S. law and oversight authorities in order to understand the challenges our oversight field people are up against. 

The term Treuhand is often translated over to “Trust” for English speakers.  Author, Shelley Stark, Hidden Treuhand:  How  Corporations and Individuals Hide Assets and Money, states this is not entirely accurate.   If you use your search engine and type in “treuhand,” you will get a great number of pages of links to companies, many in the German language who offer Treuhands, (the open and visible kind). 

Hidden Treuhands are a different kind of trust and may only be accessed in certain countries that have laws, which allow them, or do not have laws that prohibit them, and all the invisibility and secrecy that goes with them.  Ms. Stark discusses this very succinctly in her book.  Her book makes it possible to understand how the Hidden Treuhand, which few in the U.S. know anything about, is used as a financial manipulation tool to accomplish many things, legal and illegal.  Because of the impact and increasing use of Hidden Treuhand accounts by Americans and American/Multinational Corporations, including defense contractors, this book should be required reading for all federal oversight employees. 

Due to growing problems with tax evasion, money laundering, and financing of drug cartels and terrorism, many governments are beginning to try to investigate this arena.  How would a financial instrument that has created problems with tax evasion, money laundering and with connections to drug cartels, organized crime, and terrorists have anything to do with oversight of defense and other contractors?

Hidden Treuhands are not only being used for notorious crime in arenas of violence and intrigue, but are also being accessed quietly by seemingly normal upper income citizens and corporations with seemingly bland missions.  Some European countries have suffered great tax losses due to Hidden Treuhands, which that country’s citizens have set up in neighboring nations who offer them.  But loss of tax monies is really the least of the problems these secret accounts may create in Europe or here in the United States.   

This concern has now become publicly acknowledged in the United States as well.  If individuals, families, or corporations can access Hidden Treuhands, they can not only evade paying taxes here in the US, but can also hide a great variety of things, such as money, property, and other assets, as well as hide people or beneficiaries, specific stock holders or consultants who are paid or are benefitting some other way financially (boats, cars, houses, etc.).  Recently a large number of Americans were discovered to have secret accounts in certain European countries and were using them as illegal tax shelters.  And were it not for an insider (Bradley Birkenfeld) coming forward with testimony and paperwork, in the UBS tax haven scandal, the U.S. government would never have been able to prevail in prosecuting the financial crimes and recovering millions of dollars.  In fact, they probably would not have even been able to recognize the problem.  

The use of a Hidden Treuhand is illegal in America, but that does not stop a person or corporation determined to find a way to hide money, stockholders, or the true owner of an asset from obtaining and using one.  People can be paid through arrangements invisible to an outsider using a Hidden Treuhand.  Payments may be made for services rendered as a consultant or other relationship.  People who may have reasons they cannot maintain a public business relationship because of ‘conflict of interest’ concerns or laws, can be hidden and still profit, using a Hidden Treuhand with no one on the outside being the wiser.

If a corporation has a subsidiary in one of the countries that offer Hidden Treuhands, then they are well on their way to setting up such an account.  Some corporations set up what appear to be subsidiaries, but which conduct no business, do not produce or sell a product and simply are used to transfer money in and out to other locations.  If a corporation has a number of subsidiaries in multiple countries with either Hidden Treuhands, or with banking secrecy, they may devise a complicated pathway for moving funds about, making it more difficult for anyone to follow the trail, even if they could get the proof of the existence of such accounts.   And consider the amplification of this movement of funds using computers and technology and it becomes a momentary twinkle over the Internet. 

Stark clarifies, “A Hidden Treuhand is completely non-transparent, only somewhat legal and operates covertly by owning the asset through a corporate structure, where real shareholder identity remains anonymous in all business dealings.”  She goes on to say that “lawyers are often called upon to act as a ‘trustee’ in a hidden ‘Treuhand.’  There is no law regulating hidden ‘Treuhand,’ only law specifying that the lawyer cannot divulge any secrets pertaining to the client.”

In Austria, the Austrian Lawyers Chamber and its associated lawyers have control over this type of contract.  Stark states that, “This kind of trust is not so much protected by law as protected by lawyers.  If questioned, the lawyer will simply evoke attorney-client privilege.”   The contracts themselves are kept under lock and key with perfect invisibility.  The only way to even be able to investigate such a situation to find out where money is, where it came from or where it went, or in the case of assets, who the real owner is, would be to obtain copies of the original contract or other paperwork proving the existence of such an agreement.  And even then there would be a long battle in court to try to prevail.  Without the insider paperwork, you will most likely have a judge or attorney blandly ask you to show the paperwork to prove that it exists.   Since normal investigations will not turn up the paperwork, you will be quite effectively routed. 

This is possibly one of our biggest challenges in being able to detect and prosecute fraud, and other criminal behavior revolving around ownership, partnerships, stockholders of defense contractors, and others who profit from contracting with the U.S. Government.  It is also potentially an issue from the standpoint of controlling who has access to government proprietary or secret information or technology. 

Streamlining and reducing the number of competently trained security specialists who are experts in this type of oversight is exactly the wrong thing to do if the goal is truly to get a handle on the complex tools criminal individuals and contractor corporations are using to hide money as well as people or other business relationships who might cause them trouble in the contracting oversight world if the U.S. oversight authorities knew of them.  The types of violations occurring now are much more complicated and take even more time to work as cases, even if the oversight employee is fully trained and knowledgeable about the modus operandi of the criminals 

So, you perhaps can see why enforcing our laws about foreign ownership and the movement of money to invisible foreign owners, stockholders, consultants, or those whose primary interest may be espionage, might be quite problematic.  It would in fact be problematic in the best of circumstances where our oversight field people had sufficient levels of employees in fully staffed offices, appropriate and useful training offered all along the journey from neophyte to senior level agent, and solid support and assistance from upper managers and resource specialists in the regional and Washington DC offices. 

Despite what may be officially said by DSS directors and managers, the historical and current practice of crippling offices with lack of sufficient number of well qualified and trained agents, backbreaking workloads, and extreme pressure to turn the numbers (statistics) and not spend the time necessary to fully develop and work the cases is the main problem.  Since the business environment has been changing so rapidly, if the Agency sincerely had the goal of competently overseeing defense contractors, a commitment of resources and adjustment of employees work loads to allow for ongoing training and education in areas of useful purpose that would prepare them to become ever more skillful at finding and identifying fraud, waste, abuse, and other crimes, would be what we should be seeing.  Leaving people essentially with 20th century understanding and skills to deal with 21rst century criminal modus operandi will not be successful.  DSS and other agencies facing the same challenges must wake up and jolt themselves into reality.

All the previous statements apply in the case that there is no corruption or compromise of authority figures within the government and federal oversight agencies.  Consider for a moment, that may not be the case. 

Think about what might happen if industry, with it’s profit driven motives and values were to gain untoward influence and perhaps even control of government oversight, including many of those in positions of power or authority in elected, appointed, or career civil service positions. 

What if people were encouraged to use the revolving door to more effectively serve the interests of their corporate affiliations to the detriment of the American taxpayer and our national security?  

What if this was happening by design and not by accident and some thoroughly corrupted forces within our government and within industry were cooperatively directing the dysfunction? 

Consider human nature, and what would happen if the greed we’ve seen take such a devastating toll on our economic world, should co-opt some federal managers and employees?   What if managers in a federal agency are compromised through their past and present relationships with contractors, or other compromised and corrupted federal employees who’ve worked themselves into positions of authority and power at high levels in our government? 

What if those managers do not really want their field people empowered?  What if they want to be sure the problems are not found, or recognized and take steps to hobble their employees to be sure the work is not accomplished?  What if they want to be sure none of the criminals are brought to justice?  What if the disintegration we’ve been seeing in DSS and other oversight agencies are just that, the malfeasance of upper and middle managers in order to service the wishes of their industry confederates?

What if in this age of corruption and greed, corporations were pressuring our elected politicians and even placing them in their positions through effective campaign and election manipulation in order to make convenient use of their job authority?  (Follow the money, and take a look at the recent Supreme Court case, which now unleashes corporate ability to donate to candidates and campaigns.)

All of these ‘what if’s” must be considered and investigated by someone higher in authority who can audit with integrity, all of our oversight agencies who supervise defense and other contractors.  The chaos that DSS and other federal oversight agencies have been going through with all of the technology and globalization issues, combined with the trend toward outsourcing, and laissez-faire policies pushed by elected leaders, and various ‘Think Tanks,’ advisory groups, and the much discussed culture of corruption and greed could very well lead to the mess we are currently experiencing.  This would be replete with honest employees who are trying to ethically do their jobs, being called non team-players, labeled whistleblowers, and made targets of every type of retribution by the wrongdoers in order to drive them out of their jobs or to an early grave, which ever comes first.  Presently, honest oversight employees are a threat to the corrupted activities that are going on and to those who protect and cover up those activities. 

With these beleaguered federal agents goes the “corporate memory” and expertise of the oversight agency, leaving neophyte employees who will not be up to dealing with the contractors, particularly if the useful and necessary training and education are withheld, and heavy handed negative managers assure an environment of anxiety, fear and utter frustration are the daily environment our federal oversight employees must endure.   So, the extreme dysfunction within our oversight agencies appears to this observer, to be a combination of lack of vision and understanding by management of the current critical issues at hand combined with some systemic problems with corruption, and cover-ups of waste fraud and abuse, sometimes it appears in collusion with contractors.  It is not a pretty thought, but one we must consider upon studying the history of the past few decades which have created a perfect storm of sorts that government oversight has not been prepared to overcome. 

For those of you interested in learning more about Hidden Truehands, what they can do and how they function, read Ms. Stark’s book and also visit the Financial Action Task Force (FATF), that the United States and many other countries have joined, in order to try to successfully deal with these kinds of financial liabilities.  The first is the link to the portion about the FATF:


The next is the link to the FATF’s full Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism, Austria, 26 June 2009. 

This report is 358 pages long.  Hidden Treuhand information may be found throughout, but there are some key issues discussed pages 218-225.  For those of you with knowledge in this area, you will want to read this report.  If this appears to be daunting to you, please read Ms. Stark’s book which has been written to make it an easier read for the average non-career-financial-professional person to absorb. 


A reader sent this in recently.  I have already been trying to find out about Kathleen Watson and Richard Lawhorn, of Defense Security Service, and someone who works for Boeing named Timothy J. McQuiggan.  I haven’t had a lot of luck using normal online search tools, but found out today, I’ve been misspelling Mr. McQuiggan’s name. (See comments on earlier posts from the last couple of weeks.)  

This article is disturbing. I will continue to work on this.   I will check with my contacts I have on the east coast and in the Washington DC area to see if I can find out anything specific, particularly about the truth of what has been happening in DSS, (that this reader is intimating at), but did not leave contact information so I can follow up with him or her.  I understand how intimidated and afraid people in the government and working in industry are now, due to the extreme retribution they face if they try to do something about the unethical or criminal behavior they are observing.  If anyone can enlighten us, please comment or email.  -GFS 


G. Florence-

If the officials,  (that can actually do something), only knew the truth about Watson and the DSS.


U.S. Defense Tech Security Called ‘Swiss



Published: 16 Apr 16:51 EDT (12:51 GMT)

     As the value of the U.S. dollar declines, investing in U.S. defense firms

becomes more attractive to foreign companies. That worries Rep. Duncan

Hunter, R-Calif., who fears more foreign ownership will mean more pilfered

defense technology secrets.

     “This is not irrational fear or veiled protectionism, this is a real national

security concern,” Hunter assured his colleagues on the House Armed

Services Committee April 16. “We are in a period where industrial espionage

is on the rise.”

     But globalization of the defense industry seems


     “We’ve got people with lots of cash” in the rest of the

world, and American companies “that are desperate for cash.” The increase

of foreign entities buying U.S. defense companies “is going to be a problem

for years to come,” Hunter said.

     So, how able is the United States to protect its defense secrets from prying

foreign investors, the Armed Services Committee wanted to know.

Not very, said witnesses from the Pentagon and the Government

Accountability Office (GAO).

     A “safety net” of agencies and policies designed to protect classified

industrial information “right now is Swiss cheese,” said Ann Calvaresi-Barr,

the GAO’s director of acquisition and sourcing management.

It’s not as bad as it was two years ago, said Kathy Watson, director of the

Defense Security Service. But improvements are coming slowly.

     The DSS is a little-known agency within the Defense Department that

determines which defense companies qualify for access to classified

information. It awards clearances to company officials and evaluates “foreign

ownership, control or influence” over U.S. defense companies.

When she took over as director in 2006, Watson said the DSS was

underfunded and understaffed. Today, the agency receives an adequate

budget and has been allotted an additional 145 personnel – but so far, only

about one-third of the new jobs have been filled, she said.

     The agency still relies on paper files scattered among 71 field offices, Watson

said. And while it has a computer system and is entering data, “it’s not the

system of the future,” Watson told committee members.

Calvaresi-Barr said a GAO evaluation in 2005 showed that the Defense

Security Service did not systematically collect and analyze information to

assess the effectiveness of its operations. As a result, the agency does not

know whether certain violations are increasing nor can it identify patterns of

security violations and then plan how to keep classified information from

being compromised, she said.

     DSS agents also lacked basic understanding of complex transactions, such

as the security implications of foreign hedge funds buying interests in U.S.

defense firms. That is increasingly common, and “it’s difficult to know where

the money is coming from and who the players are,” Calvaresi-Barr said.

Watson said DSS employees are receiving more training is those sort of


     The GAO has not re-evaluated the DSS since Watson has begun making

reforms, Calvaresi-Barr said. “We are very pleased” to hear that DSS is

working to strengthen defense industrial security, she said.

     DSS is hardly the only weak link. There are numerous agencies, laws,

regulations, policies and processes intended to protect critical defense

technology, and among them “there are alarming gaps,” Calvaresi-Barr said.