American Greed

The Greed Report: Will Trump’s Pentagon be a fraud magnet?

President Donald Trump (L) talks to Defense Secretary James Mattis as they watch the inaugural parade from the main reviewing stand in front of the White House on Jan/ 20, 2017 in Washington.
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President Donald Trump (L) talks to Defense Secretary James Mattis as they watch the inaugural parade from the main reviewing stand in front of the White House on Jan/ 20, 2017 in Washington.

At more than $600 billion per year, the U.S. defense budget is by far the largest category of discretionary federal spending. It is also an inviting target for scammers, with as much as $60 billion in waste, fraud and abuse from the wars in Iraq and Afghanistan alone according to the Commission on Wartime Contracting.

Now, with President Donald J. Trump promising to build up the military, is the target about to get bigger?

"I'm worried about the Trump buildup," said William Hartung, director of the Arms and Security Project at the Center for International Policy in New York. "They're talking about up to $1 trillion more over 10 years. And they want to do it quickly, ... and a lot of times when you move quickly, monitoring goes by the boards."

In his confirmation hearing before the Senate Armed Services Committee on Jan. 12, Defense Secretary James N. Mattis pledged to cut wasteful spending. Responding to a committee questionnaire, he also promised to enforce whistleblower protections at the Pentagon.

The president himself railed about excessive defense spending even before taking office, vowing to seek "better deals" on specific programs like Lockheed-Martin's F-35 fighter jet. But beyond that, there has been little specific discussion by the new administration about fighting defense contracting fraud. That is despite some glaring examples staring military planners in the face.

One of the most blatant involved a nearly $300 million contract to supply ammunition to U.S. troops in Afghanistan, won by Miami arms dealer Efraim Diveroli in 2007, within weeks of his 21st birthday. Diveroli got caught trying to pass off ammunition that was made in China, in direct violation of U.S. law.

The story is the basis for the 2016 movie "War Dogs." With Jonah Hill playing Diveroli and Miles Teller playing his business partner David Packouz, the movie is a comedy. But the real-life story — explored in the latest episode of CNBC's "American Greed" — is deadly serious.

"This guy is getting rich off selling bad ammunition while people the same age as him are taking sacrifices. It's despicable," said Charles Tiefer, who investigated the scandal as a member of the contracting commission.

Diveroli, who served a four-year prison sentence after pleading guilty to a single count of conspiracy, has been critical of the Hollywood version of his story. On his own website, he complains about "influenced" government officials and prosecutors who pressed the case against him, and he alludes to what he calls "untouchables" in the George W. Bush administration who did not want him to succeed.

Diveroli got caught early on in his scheme, but Hartung says the case was an example of what became a sort of free-for-all in Afghanistan, driven, he says, by the fog of war.

"They just wanted to get the stuff over there, they wanted to fight the war, monitoring was very limited," he said. "It was more about pushing the stuff out rather than monitoring whether the cost was right or the quality was good."

Since then, Hartung says, controls have tightened and the fog of war has lifted. And despite his concerns about the Trump defense buildup, he is encouraged by some of the president's statements during the transition.

"It was fairly extraordinary for Trump to be tweeting about the cost of specific weapons systems, meeting with the CEOs, saying he's going to get us a better deal. That doesn't normally happen. And he's also talked about auditing the Pentagon. So all that is promising," he said.

But Hartung says it should not end there.

"He'd have to go from tweeting to a policy — to systemic change."

That means giving more power to independent inspectors general to root out fraud and abuse.

A key test for the new administration: how it staffs the Pentagon's Operational Test and Evaluation office, which serves as a sort of quality-control operation for weapons systems and the like. The office is controversial among some defense contractors, who say it delays the process and drives up costs.

Hartung says blatant frauds, like Diveroli's Chinese ammunition scam are, thankfully, rare. The bigger issue is more systemic frauds like overbilling and cost overruns. And the bigger the pot of taxpayer money, the greater the potential for the taxpayers to get ripped off.

See the real story of "War Dog" Efraim Diveroli on an all-new 'American Greed — The Real "War Dogs"' — Monday, Jan. 30 10P ET/PT only on CNBC.