oversight

Energy Management: DOE Needs to Better Implement Conflict-of-Interest Controls

Published by the Government Accountability Office on 1990-12-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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Resources, Community,   and
Economic Development    Division

B-240977

December 26,199O


The Honorable David H. Pryor
Chairman, Subcommittee on Federal
  Services, Post Office and Civil Service
Committee on Governmental Affairs
United States Senate

Dear Mr. Chairman:

In response to your request and subsequent discussions with your office, this report reviews
the Department of Energy’s {DOE) controls over conflicts of interest in subcontracts awarded
by the agency’s research centers. The report makes several recommendations to the
Secretary of Energy to improve DOE's management controls for ensuring that conflicts of
interest are detected and avoided before a subcontract is awarded.

As agreed with your office, unless you announce its contents earlier, we plan no further
distribution of this report until 30 days from the date of this letter. At that time, we will
send copies to the Secretary of Energy and other interested parties.

This work was done under the direction of Victor S. Rezendes, Director, Energy Issues, (202)
275-1441. Other major contributors are listed in appendix I.

Sincerely yours,




J. Dexter Peach
Assistant Comptroller General
Ekecutive Summ~


Purpose      development centers that are managed and operated by private corpora-
             tions and universities under contracts with DOE. In fiscal year 1989,
             these research center contractors spent about $7.8 billion of DOE'S funds,
             awarding about $3.2 billion of this total to subcontractors.

             Concerned about the potential for conflicts of interest in subcontracts
             and about D&S safeguards to prevent such conflicts, the Chairman,
             Subcommittee on Federal Services, Post Office and Civil Service, Senate
             Committee on Governmental Affairs, requested that GAO review the ade-
             quacy of (1) DOE'S policies and procedures for identifying and avoiding
             conflicts of interest in subcontracts, (2) the implementation of these pol-
             icies and procedures by WE’S field offices and research center contrac-
             tors, and (3) DOE'S oversight of the implementation of these policies and
             procedures.


             DOE'S regulations define “conflict of interest” as a situation in which a
Background   potential contractor has interests that (1) may diminish the potential
             contractor’s capacity to give impartial, technically sound, objective
             assistance and advice or (2) may result in the contractor’s having an
             unfair competitive advantage over others competing for the contract.

             DOErequires that subcontractors, before they are awarded a contract,
             submit either (1) a certification that they know of no relevant informa-
             tion bearing on possible conflicts of interest or (2) information disclosing
             relevant possible conflicts. A DOE official must review this information
             to determine whether a possible conflict of interest exists and, if so,
             decide the proper course of action. Possible actions include revising the
             scope of the contract to eliminate the reason for the conflict or directing
             the research center contractor not to award the contract.

             DOEheadquarters has delegated to its eight field offices, referred to as
             operations offices, the responsibility for implementing DOE’Sconflict-of-
             interest policies and procedures and ensuring that the research centers
             follow them. GAO reviewed the handling of conflict-of-interest issues in
             subcontract awards at DOE’SAlbuquerque Operations Office and two of
             its research centers-Sandia National Laboratory and Los Alamos
             National Laboratory. In fiscal year 1989, Los Alamos and Sandia
             awarded about $1.2 billion in subcontracts-about      one-third of the
             monies all of DOE'S research centers spent on subcontracts.




             Page 2                            GAO/RCED-91-15   DOE’s Contlict-of-Interest   Controls
                         Executive   Summary




                         Previous GAO reports have discussed problems of compliance with DOE'S
                         conflict-of-interest policies and procedures at other research centers,
                         similar to those reported here, as well as problems with DOE'S oversight.


Results in Brief         management controls necessary to ensure that conflicts of interest are
                         identified and properly addressed. However, neither the Albuquerque
                         Operations Office nor the contractors that operate the Los Alamos and
                         Sandia research centers properly implemented these policies and proce-
                         dures. Contrary to DOE'S regulations, Albuquerque allowed the research
                         centers to make conflict-of-interest determinations, rather than
                         retaining this responsibility itself.

                         Because DOE'S policies and procedures had not been properly imple-
                         mented, GAO was unable to test whether, in practice, they were effective.
                         However, GAO did note two management control problems. First, Albu-
                         querque has relied extensively on subcontractors’ self-certifications to
                         make its conflict-of-interest decisions even though certifications may not
                         always be accurate. Second, Albuquerque’s documentation of conflict-of-
                         interest decisions is limited.

                         Neither Albuquerque nor DOE headquarters exercised effective oversight
                         to ensure that conflicts of interest were avoided in the subcontracts Los
                         Alamos and Sandia awarded. Since GAO'S review, Albuquerque has taken
                         steps to bring its own practices and procedures and those of the
                         research centers into compliance with DOE'S regulations. A key issue yet
                         to be resolved, however, is whether Albuquerque will have adequate
                         staff to review subcontracts for conflicts of interest,



Principal Findings

Conflict-Of-Interest     As required by law, DOE has developed conflict-of-interest policies and
Determinations May Not   procedures that follow accepted internal control standards for the man-
                         agement of federal agencies. However, GAO was unable to test whether
Be Sound Because of      these policies and procedures were effective in practice because Albu-
Problems With            querque had not properly implemented them. GAO did review the policies
Cert#ifications and      and procedures that Albuquerque was using and found two management
Documentation            control problems that could undermine Albuquerque’s ability to ensure
                         that its conflict-of-interest determinations are sound.


                         Page 3                           GAO/WED-91-16   DOE’s Couflict-of-Interest   Controls
                         Executive   Summary




                         First, Albuquerque generally does not verify the accuracy of subcon-
                         tractors’ certifications. As a result, these certifications may not always
                         be reliable. For 36 subcontracts that GAO reviewed at Los Alamos, the
                         subcontractors certified that no relevant information bearing on con-
                         flicts of interest existed. Yet in 12 subcontract files GAO found informa-
                         tion that should have been reported because it was relevant to conflict-
                         of-interest decisions.

                         Because of work load constraints, checking each subcontractor’s certifi-
                         cation may not be practical. However, other options exist to improve the
                         reliability of certifications. Albuquerque could check the accuracy of a
                         sample of the certifications against data in the subcontract files. Also,
                         DOE could impose administrative sanctions on subcontractors that
                         submit inaccurate certifications. Such enforcement actions are provided
                         for in DOE'S regulations.

                         A second management control problem is that Albuquerque’s documen-
                         tation for its decisions on possible conflicts of interest is limited. GAO
                         found that the files for most of the 18 subcontracts that Sandia referred
                         to Albuquerque for conflict-of-interest determinations did not fully
                         explain the basis for the conclusions reached.


Albuquerque Allowed      Albuquerque allowed Los Alamos and Sandia to make conflict-of-
Practices That Did Not   interest decisions even though DOE'S regulations do not permit them to
                         do so, Los Alamos reviewed all of its own subcontracts, Sandia selected
Comply With DOE’s        from among the subcontracts DOE requires to be scrutinized those that
Regulations              were more likely to have possible conflicts of interest. Information on
                         only those subcontracts was forwarded to Albuquerque for review.
                         Thus, from April 1989 through January 1990, Sandia forwarded only 18
                         of an estimated 2,100 subcontracts that were subject to DOE'S conflict-of-
                         interest provisions.

                         Albuquerque’s failure to comply with DOE'S regulations resulted in three
                         cases that GAO identified in which possible conflicts of interest were not
                         avoided. In the first case, at Los Alamos, a subcontractor evaluated
                         equipment it had previously developed-a situation that could have
                         affected the subcontractor’s objectivity. In the second case, Los Alamos
                         awarded a consulting subcontract for computer services to an individual
                         and, later, a subcontract for computer support in the same area to the
                         individual’s company. Despite the overlap in the work to be performed
                         under the two subcontracts, Los Alamos did not bar the company from
                         involvement in the consultant’s work. Without this restriction, company


                         Page 4                           GAO/RCEDBI-16   DOE’S   Conflict-of-Interest   Controls
                            Executive   Summary




                            employees might evaluate their president’s work, In the third case,
                            Sandia awarded a subcontract for communication services to a firm that
                            had previously subcontracted with Sandia-experience that Albu-
                            querque later found gave the firm an unfair competitive advantage.

                            Albuquerque officials believed incorrectly that DOE'S procurement regu-
                            lations allowed the research centers to make conflict-of-interest deci-
                            sions, As a result of GAO'S review, however, Albuquerque is bringing its
                            practices into compliance with DOE'S regulations and has directed the
                            research centers to submit subcontracts to the operations office for
                            review. Since these changes will mean an additional work load for Albu-
                            querque, officials expressed concern that the office might not have ade-
                            quate staff to carry out this task. As of October 1990, DOE’Ssenior-level
                            management was discussing this potential problem.


DOE’s Ov rersight Was Not   Neither WE headquarters’ procurement management system nor Albu-
Effective                   querque’s procurement oversight reviews identified the problems
                            described above. Furthermore, even when Albuquerque did identify
                            problems and made recommendations to correct them, it did not effec-
                            tively follow up on its recommendations. For example, in its 1988
                            review at Sandia, Albuquerque identified three subcontracts that had
                            not been reviewed for conflicts of interest and recommended that Sandia
                            request the required information from the subcontractors. Although
                            Sandia did not do so, Albuquerque closed the recommendation.


                            GAO  is making several recommendations to the Secretary of Energy that
Recommendations             should improve Albuquerque’s management controls for ensuring that
                            conflicts of interest are detected and avoided before a subcontract is
                            awarded. GAO is further recommending that the Secretary (1) determine
                            whether the problems that exist at Albuquerque also exist at DOE'S other
                            operations offices and (2) study options to improve the reliability of the
                            conflict-of-interest certifications furnished by subcontractors.


                            In providing official oral comments on a draft of this report, DOE gener-
Agency Comments             ally concurred with GAO'S findings and recommendations. DOE said it
                            plans to use GAO'S report as a catalyst for efforts to ensure that its oper-
                            ations offices properly implement conflict-of-interest policies and proce-
                            dures DOE also said that, in line with other initiatives already underway,
                            it will determine whether the problems GAO identified at the Albu-
                            querque Operations Office exist at other operations offices.


                            Page 6                            GAO/RCED-91-16   DOE’s Conflict-of-Interest   Controls
Contents


Executive Summary
Chapter 1
Int:roduction           What Is an Organizational Conflict of Interest?
                        Past GAO Reports Uncovered Problems in DOE’s
                            Management Controls Over Conflicts of Interest
                        Objectives, Scope, and Methodology

Chapter 2                                                                                                 13
DOE’s Policies and      DOE’s Policies and Procedures Governing Conflicts of                              13
                            Interest
Procedures Governing    Albuquerque Inappropriately Allowed Research Centers                               15
Conflicts of Interest       to Make Conflict-Of-Interest Determinations
Have Not Been           DOE Is Correcting Procedural Problems                                             20
                                                                                                          20
Properly Implemented    Conclusions
                        Recommendations   to the Secretary of Energy                                      21
                        Agency Comments                                                                   21

Chapter 3                                                                                                  22
DOE’s Oversight         Albuquerque’s Oversight Was Less Than Adequate                                     22
                        DOE Headquarters’ Oversight Has Been Limited                                       25
Reviews Have Been       Conclusions                                                                        25
Ineffective             Recommendations to the Secretary of Energy                                         26
                        Agency Comments                                                                    26

Chapter 4                                                                                                  27
Management Con.tJrol    Purpose of Internal Controls                                                       27
                        DOE’s Regulations Rely on Subcontractors’ Self-Reporting                           28
Problems Need               for Identifying Possible Conflict of Interest
Attention               Albuquerque Does Not Ensure That Subcontractors’                                   29
                            Certifications Are Reliable
                        Albuquerque’s Documentation of Conflict-Of-Interest                                31
                            Decisions Could Be Improved
                        Conclusions                                                                        32
                        Recommendations to the Secretary of Energy                                         33
                        Agency Comments                                                                    33

Appendix                Appendix I: Major Contributors to This Report                                      34




                        Page 6                         GAO/RCED-91-16   DOE’s Conflict-of-Interest   Ckmtrols
        Contents




Table   Table 2.1: Roles of DOE, Research Centers, and
            Subcontractors in Ensuring That Conflicts of Interest
            Are Identified




        Abbreviations

        CPSR       Contractor Purchasing System Review                                        1
        DOE        Department of Energy
        GAO        General Accounting Office                                                  g
        PMAR       Procurement and Assistance Management Review
        RCED       Resources, Community, and Economic Development Division                    j
                                                                                              /

                                                                                              I

        Page 7                          GAO/RCEDBl-16   DOE’s Codlict-of4nterest   Controls   f
                                                                                              I
                                                                                              1
Chapt,er 1

Introduction


                            The Department of Energy (DOE) has 22 federally funded research and
                            development centers (research centers) that are operated under con-
                            tracts with private corporations and universities. The research centers
                            carry out a wide range of research and development projects, from basic
                            research to advanced systems engineering and design. These projects
                            encompass a broad range of subjects, such as nuclear weapons systems
                            and energy technology.

                            In fiscal year 1989, the research centers spent about $7.8 billion of DOE'S
                            funds, awarding about $3.2 biNion, or 41 percent, of this total to subcon-
                            tractors for research and other tasks supporting the research centers’
                            activities. Subcontracting can result in organizational conflicts of
                            interest with adverse consequences. For example, a subcontractor’s
                            objectivity could be diminished if the individual evaluated a project that
                            he or she had previously developed. Therefore, management controls
                            are necessary to ensure that the government’s best interests are
                            protected.


                            As required by 42 1J.S.C.section 5918(a), DOE has established policies
Wh.at Is an                 and procedures for identifying and avoiding possible organizational con-
Organizational              flicts of interest’ before contracts and subcontracts are awarded.
Conflict of Interest?       According to DIE'S regulations, an organizational conflict of interest
                            exists when a contractor has interests that (1) may diminish the con-
                            tractor’s capacity to give impartial, technically sound, objective assis-
                            tance and advice or (2) may result in the contractor’s being given an
                            unfair competitive advantage. As DOE'S regulations state, it is difficult to
                            identify in advance all situations or relationships that might involve a
                            conflict of interest. However, the regulations give examples of situations
                            in which conflicts of interest frequently arise, such as the following:

                        . If a contract requires the evaluation of the contractor’s own products or
                          services, or another party’s products or services in whose development
                          or marketing the contractor is or has been substantially involved, then
                          the contractor is placed in a position in which its judgment could be
                          biased.
                        l If a contractor prepares or furnishes specifications for an item that is to
                          be purchased competitively and later bids for the contract for that item,
                          then the contractor can have an unfair competitive advantage.


                            ‘This report does not address personal conflicts of interest, which are governed by other policies and
                            procedures.



                            Page g                                       GAO/RCEDBl-16       DOE’s Conflict-of-Interest   Controls
                         Chapter 1
                         Introduction




                         Several previous GAO reports have discussed DOE’S controls over the
Past GAO Reports         agency’s operating contractors and their administration of conflict-of-
Uncovered Problems       interest regulations. According to an April 22, 1982, report, DOE’S Sandia
in DOE’s Management      and Argonne National Laboratories were not fully complying with DOE’S
                         conflict-of-interest regulations.2 For example, the contract for the opera-
Controls Over            tion of Sandia did not require Sandia to request conflict-of-interest infor-
Conflicts of Interest    mation from prospective subcontractors before it awarded subcontracts.
                         We recommended that DOEamend all management and operating con-
                         tracts to include such a requirement. In October 1983, Sandia’s contract
                         was modified accordingly.

                         According to the same report, DOE’S oversight of contractors’ procure-
                         ment operations did not cover the two research centers’ compliance with
                         DOE’S conflict-of-interest regulations. DOE pledged that future oversight
                         reviews would focus specifically on conflicts of interest.

                         In 1987, we reported that, in administering DOE’S technology transfer
                         program, the operating contractor for DOE’S Oak Ridge National Labora-
                         tory had given an unfair competitive advantage to an affiliate com-
                         pany.” The operating contractor gave the affiliate company information
                         on a DOE-funded technology, but did not provide this information to
                         another firm that was also interested in the technology. To strengthen
                         DOE’S oversight of the research center’s compliance with conflict-of-
                         interest requirements, we recommended that DOE periodically review the
                         operating contractor to ensure that business contacts with affiliates and
                         possible conflict-of-interest situations were identified and reported to
                         DOE. WE concurred with our recommendation and conducted its first
                         such review on February 26, 1988.


                         The Chairman, Subcommittee on Federal Services, Post Office and Civil
Objectives, Scope, and   Service, Senate Committee on Governmental Affairs, asked GAO to eval-
Methodology              uate the adequacy of DOE’S programs for preventing conflicts of interest
                         in subcontracts awarded by DOE’S research centers, The Chairman was
                         concerned that conflicts of interest could compromise a potential sub-
                         contractor’s objectivity or give a subcontractor an unfair competitive
                         advantage in obtaining subcontracts. Specifically, we reviewed the ade-
                         quacy of

                         2The Subcontracting Practices of Large DOE Contractors Need to Re Improved (GAO/EMD-K-35,
                         Apr. 22, 1982).

                         3Energy Management: Problems With Martin Marietta Energy Systems’Affiliate Relationships (GAO/
                         RCED8/-‘IO, Mar. 5, 1987).



                         Page 9                                   GAO/RCED-91-16    DOE’s Conflict-of-Interest   Controls
    Chapter 1
    Introduction




. DOE’S policies and procedures for avoiding conflicts of interest,
. the implementation of these policies and procedures, and
. DOE’S oversight of the implementation of these policies and procedures.

    We conducted our work at DOE headquarters in Washington, D.C.; DOE’s
    operations office in Albuquerque, New Mexico (including its area office
    in Los Alamos, New Mexico); and two research centers in New Mexico:
    Sandia National Laboratories (Sandia) and Los Alamos National Labora-
    tory (Los Alamos). Sandia has research centers in Albuquerque and
    Livermore, California; our work was limited to the Albuquerque center.
    The combined subcontracts of Sandia and Los Alamos totaled about $1.2
    billion in fiscal year 1989, which was over one-third of the $3.2 billion
    subcontracted by DOE’S22 research centers. Sandia is operated by Amer-
    ican Telephone and Telegraph, Inc. (formerly AT&T Technologies, Inc.),
    and Los Alamos is operated by the University of California.

    To evaluate the adequacy of DOE’S policies and procedures on conflicts
    of interest, we reviewed the relevant legislation and regulations to deter-
    mine how DOE had implemented the statutes. We also compared DOE’S
    policies and procedures with accepted internal control standards for the
    management of federal agencies4 -for example, standards for the docu-
    mentation and separation of duties-to determine whether DOE’S con-
    trols would ensure that conflicts of interest are identified and avoided.
    In addition, we discussed the adequacy of DOE’S policies and procedures
    with the headquarters officials who are responsible for establishing
    them and who administer headquarters’ oversight program and with
    Albuquerque officials. We discussed possible changes that would
    address the problems we found in WE’S policies and procedures.

    To evaluate the adequacy of the implementation of DOE’Sconflict-of-
    interest policies and procedures, we first reviewed the policies and pro-
    cedures DOE’S Albuquerque Operations Office and the two research cen-
    ters followed to determine whether they were consistent with DOE’S
    regulations. We then interviewed the responsible officials to determine
    how they implemented these policies and procedures and whether they
    had any problems meeting DOE’S requirements.

    To test the implementation of DOE’S policies and procedures, we
    reviewed a judgmentally selected sample of 81 subcontracts totaling
    approximately $39 million. (Because our sample was judgmentally

    4Standards for Internal Controls in the Federal Government, GAO (Washington, D.C.: U.S. Govern.
    ment Printing Office, 1983).



    Page 10                                    GAO/RCED-91-16     DOE’s Conilict-of-Interest   Controls
Chapter 1
Introduction




selected, our results cannot be projected to the universe of subcontracts
awarded by Los Alamos, Sandia, or DOE'S other research centers.) We
selected subcontracts awarded in fiscal year 1989 from the categories
that DOE'S regulations identify as susceptible to conflicts of interest (see
ch. 2). We had to review a few contracts from the previous fiscal year to
answer questions on the subcontracts in our sample. To keep our sample
size manageable and to concentrate on the more significant subcon-
tracts, we included only those valued in excess of $50,000, except for
consulting subcontracts. We did not impose a dollar threshold on these
subcontracts because! according to DOE officials, even a small consulting
subcontract can potentially influence subcontracts for large sums of
money. In addition, we reviewed all 18 subcontracts that Sandia sub-
mitted to Albuquerque from April 1989 through January 1990 to deter-
mine how Albuquerque reached its conflict-of-interest decisions.

We reviewed the files for the subcontracts selected to determine what
information the subcontractors submitted concerning conflicts of
interest and how it was evaluated. In selected cases, we contacted the
subcontractors concerning the data they provided. To the extent pos-
sible, we validated the statements subcontractors made about their rela-
tionships with affiliates by checking the relevant annual reports and
independent business references. We also reviewed the financial disclo-
sure statements of selected senior research center officials, as well as
those of research center employees involved in the subcontracts in our
sample, to identify information that should have been considered in con-
flict-of-interest determinations.

To evaluate the adequacy of DOE’Soversight activities, we interviewed
DOE headquarters and field officials about their criteria and procedures
for evaluating the implementation and effectiveness of DOE'S conflict-of-
interest policies and procedures. We reviewed DOE headquarters’ and
Albuquerque’s management oversight reports to determine what they
contained concerning conflict-of-interest activities. We also obtained
information on what actions had been taken in response to findings and
recommendations in ~0~;‘sreviews.

Lastly, we reviewed the Secretary of Energy’s reports to the President
for fiscal years 1983 through 1989, which are required by the Federal
Managers’ Financial Integrity Act. None of the reports identified mate-
rial internal control weaknesses in the management of conflicts of
interest.




Page 11                           GAO/WED-91-15   DOE’s Conflict-of-Interest   Controls
Chapter 1
Introduction




We performed our fieldwork from July 1989 through June 1990 in
accordance with generally accepted government auditing standards.

DOEprovided official oral comments on a draft of this report. These com-
ments are presented in chapters 2,3, and 4.




Page 12                        GAO/RCED91-16   DOE’s Con&%.-of-Interest   Controls
DOE’s Policies and ProceduresGoverning
Conflicts of Interest Have Not Been
Properly Implemented
                        At the time of our review, neither the Albuquerque Operations Office
                        nor the Sandia and Los Alamos research centers had properly imple-
                        mented DOE'S policies and procedures for avoiding conflicts of interest.
                        According to LIOE'S regulations, conflict-of-interest determinations are to
                        be made by a DOE contracting officer. However, Albuquerque allowed
                        these two research centers to make their own determinations. Los
                        Alamos made conflict-of-interest decisions on all subcontracts. Sandia
                        was allowed to select which subcontracts were more likely to have pos-
                        sible conflicts of interest and forward information on only those subcon-
                        tracts to Albuquerque for review. This practice diminished
                        Albuquerque’s managerial controls for ensuring that conflicts of interest
                        are detected and properly mitigated. We identified three instances of
                        possible conflicts of interest that the research centers did not avoid. The
                        research centers also did not document their conflict-of-interest
                        determinations.

                        Albuquerque officials believed incorrectly that they could delegate the
                        authority to make conflict-of-interest decisions. As a result of our
                        review, Albuquerque instructed Sandia and Los Alamos to bring their
                        procedures into compliance with DOE's regulations. With the new proce-
                        dures, Albuquerque officials expect that an additional 4,800 subcon-
                        tracts will be submitted annually to Albuquerque for conflict-of-interest
                        determinations. They are concerned that the office may not have ade-
                        quate staff to handle this additional work load.


                        As required by 42 USC. section 5918(a), DOE has established policies
DOE’s Policies and      and procedures for identifying and avoiding or mitigating conflicts of
Procedures Governing    interest before contracts and subcontracts are awarded. Contained in
Conflicts of Interest   DOE'S Acquisition Regulations and Departmental Orders, these policies
                        and procedures are to be followed not only by all DOE offices but also by
                        DOE contractors that subcontract work to other companies or
                        individuals,

                        The statute and DOE'S regulations require DOE to avoid or mitigate con-
                        flicts of interest before a contract or subcontract is signed. DOE'S regula-
                        tions emphasize that certain procurement categories are particularly
                        susceptible to conflicts of interest. These categories include contracts for
                        evaluation services, technical consulting, management support, and pro-
                        fessional services. For such procurements, DOE operating contractors-
                        such as those that manage the research centers-must include in con-
                        tract solicitations notices requiring potential subcontractors to either (1)
                        provide information on the possible existence of any conflicts of interest


                        Page 13                          GAO/RCED-91-16   WE’s   Conflict-of-Interest   Controls
                                               Chapter 2
                                               DOE’s Policies and Procedures Governing
                                               Conflicts of Interest Have Not Been
                                               Properly Implemented




                                               when they submit their offers or (2) certify that there are no relevant
                                               facts that give rise to a conflict, The notices define what a conflict of
                                               interest is and describe DOE’S policy governing such conflicts.

                                               Under DOE’S regulations, a DOE contracting officer is required to find
                                               either that a possible conflict of interest exists or that there is little or
                                               no likelihood of such a conflict, using the potential subcontractor’s state-
                                               ment and other relevant information that may be available. DOE requires
                                               that all determinations by contracting officers be reviewed by a DOE
                                               attorney or a specially appointed contracting official. According to DOE
                                               officials, it is necessary for government officials, to make the final deci-
                                               sions when the government’s interests may be jeopardized.

                                                When a conflict is possible, the DOE contracting officer must either dis-
                                                qualify the offerer or include appropriate conditions in the contract to
                                                avoid the conflict. When conflicts cannot be avoided and the Secretary
                                                of Energy or the Secretary’s designee determines that the contract
                                                award is in the best interests of the United States, the contract may still
                                                be awarded. However, appropriate mitigating clauses must be placed in
                                                the resulting contract, and the Secretary’s determination must be pub-
                                                lished in the Federal Register.

                                                The roles of DOE, the research centers, and the subcontractors are
                                                described in table 2.1.


Table 2.1: Roles of DOE. Research Centers. and Subcontractors        in Ensurina That Conflicts of Interest Are Identified
Oraaniration                                                                   Role
DOE headquarters (Office of Procurement, Assistance, and                       Develop policies and procedures
Program Management)
                                                                              Oversee activities of ooerations offices
DOE operations offices                                                        Contract for the operation of research centers

                                                                              Decide whether conflicts of interest exist in subcontracts     at
                                                                              research centers

                                                                              Oversee procurements at research centers
Research centers                                                              Notify subcontractors of conflict-of-interest reporting
                                                                              requirements

                                                                              Forward information from subcontractors to operations office
                                                                              for a decision
Subcontractors (for contracts in the categories designated in                 Disclose relevant facts regarding possible confkts of interest
DOE’s regulations)                                                            or certify that no such facts exist




                                                Page 14                                  GAO/RCED91-15     DOE’s Conflict-of-Interest   Controls
                            Chapter    2
                            DOE’s    Policies and Procedures Governing
                            Conflicts of Interest Have Not Been
                            Properly Implemented




Albuquerque                 allowed Los Alamos and Sandia to review subcontracts for conflicts of
Inappropriately             interest-a practice that runs counter to DOE'S regulations. At Los
Allowed Research            Alamos, Albuquerque approved procedures that allowed the research
                            center to make conflict-of-interest decisions. At Sandia, Albuquerque
Centers to Make             allowed contracting officials to selectively request information from
Conflict-Of-Interest        those subcontractors that it thought were more likely to have a possible
                            conflict of interest and to then forward information on only those sub-
Determinations              contracts to Albuquerque for a decision. We found three instances of
                            subcontracts with possible conflicts of interest that might have been
                            avoided if Albuquerque, instead of the research centers, had made the
                            required determinations. We also found that the research centers did not
                            document their decisions.


Los Alamos Was Allowed      The contract between DOE and the University of California for the man-
                            agement and operation of Los Alamos requires that conflict-of-interest
to Review All Contracts     procedures comply with DOE'S regulations. However, Los Alamos’ poli-
for Conflicts of Interest   cies and procedures for procuring products and services, contained in
                            the research center’s Procurement Manual, makes the research center,
                            not Albuquerque, responsible for determining whether conflicts of
                            interest exist. Albuquerque approved the manual in September 1987,
                            when the contract between DOE and the University of California was
                            renewed. Similarly, policies and procedures for the procurement of con-
                            sulting services, contained in the research center’s Administrative
                            Manual, allow the research center to determine whether conflicts of
                            interest exist in consulting contracts. According to Los Alamos officials,
                            the procedures in the Administrative Manual are routinely sent to DOE
                            for review, but they could not document this practice. An Albuquerque
                            official told us that no one could recall reviewing and approving the
                            Administrative Manual procedures.

                            According to officials in Albuquerque’s Contracts and Procurement Divi-
                            sion, they permitted Los Alamos to make conflict-of-interest decisions
                            because they believed that DOE'S regulations allowed this delegation of
                            the contracting officer’s authority. As a result of our review, they dis-
                            cussed this issue with DOE headquarters policy officials, who informed
                            them that the conflict-of-interest responsibility could not be delegated to
                            the research centers. Albuquerque is bringing Los Alamos’ procedures
                            into compliance with DOE'S regulations. Its target date for completion is
                            December 31, 1990.




                             Page 15                                     GAO/RCED-II-16   DOE’s Conflict-of-Interest   Controls
         Chapter 2
         DOE’s Policies and Procedures Governing
         Confkta   of Interest Have Not Been
         Properly Implemented




         We found two subcontracts with possible conflicts of interest that Los
         Alamos did not identify.


Case 1   Los Alamos awarded a sole-source subcontract, for approximately
         $470,000, to a company for the evaluation of five types of inertial
         instruments for the Strategic Defense Initiative program. Although a
         company official certified that he knew of no relevant facts that could
         give rise to a conflict of interest, the company noted in its technical pro-
         posal that it had developed or built-or     was currently evaluating, devel-
         oping, or building-each of the five inertial instruments to be evaluated.
         Thus, the subcontractor would be evaluating systems that it had an
         interest in developing or marketing.

         Los Alamos’ written analysis of the proposal did not mention whether
         awarding the subcontract would create a conflict of interest. Moreover,
         a Los Alamos official told us that he did not think conflict of interest
         was an issue because the subcontract was a sole-source subcontract and
         the firm involved was a nonprofit company+

         An official in Albuquerque’s Contracts and Procurement Division told us
         that he was not familiar with the details of this subcontract and thus
         could not comment on the conflict-of-interest question we raised. This
         official noted that the contract had been completed and indicated that
         he did not think time would be productively spent reviewing the case to
         answer our inquiry.


         Los Alamos awarded a consulting subcontract to a former Los Alamos
         employee and a separate support services subcontract to a company he
         incorporated shortly before leaving Los Alamos. One month after
         leaving, the former employee (not his company) received a sole-source
         consulting subcontract to advise and assist Los Alamos on a 3-dimen-
         sional computer graphics hardware and software system. At the end of
         fiscal year 1989, the former employee had billed Los Alamos approxi-
         mately $13,000 for these services.

         About 9 months after the employee’s departure, Los Alamos began nego-
         tiating with the former employee’s company a sole-source subcontract,
         for approximately $200,000, to advise and assist Los Alamos on similar
         aspects of the same system. Los Alamos recognized that a conflict of
         interest might arise, since the company’s president, the former



         Page 16                                   GAO/BCED91-16   DOE’s Conflict-of-Interest   Controls
Chapter 2
DOE’s Policies and Procedures Governing
Conflicts of Interest Have Not Been
Properly Implemented




employee, was already consulting for the same project. Thus, poten-
tially, the individual could offer advice to Los Alamos that it would then
pay his own company to execute. To avoid this problem, Los Alamos
placed the following clause in the company’s subcontract:

In order to avoid a conflict of interest, [the former employee and company president]
shall not participate in any of the tasks negotiated under this subcontract. His work
as a consultant shall not be charged against this subcontract. Furthermore, he shall
not use his position as a consultant to influence the tasks which are performed
under this subcontract.

The company did not adhere to these contractual restrictions. The
employee wrote us that he had

participated in general group discussions and demonstrations [regarding the com-
pany’s subcontract], On such occasions I have made comments as to how good (sic)
the project is getting along, what technologies already available at [company] might
be useful to the projects, but the oversight for the project has been the task of
[another employee].

The awarding of the subcontract to the former employee’s company cre-
ated other possible conflicts of interest that were not avoided or miti-
gated. First, no similar clause was included in the employee’s consulting
subcontract prohibiting him from becoming involved in his company’s
contract with Los Alamos. Indeed, the individual wrote us that he would
help Los Alamos with the company’s computer hardware and software
contract if Los Alamos’ program manager became overloaded or moved
to another job. Second, the statement of work for the company’s subcon-
tract included potential evaluations of hardware and software that the
employee had suggested or developed under his consulting contract. In
such a situation, the employees of the company might have to evaluate
work done by their company’s president.

A Los Alamos official told us that Los Alamos would review the subcon-
tracts and take whatever actions were necessary, which could include
amending or terminating these subcontracts, Subsequently, Los Alamos
furnished us a copy of a letter to the consultant dated July 17, 1990,
stating that his consulting agreement was terminated.




Page 17                                   GAO/RCED-91-15   DOE’s Conflict-of-Interest   Controls
                             Chapter 2
                             DOE’s Policies and Procedures Governing
                             Ckmflicts of Interest Have Not Been
                             Properly Implemented




Sandia’s Practices Did Not   Sandia’s purchasing instructions, approved in December 1988, required
                             Sandia to (1) request conflict-of-interest data or no-conflict certifications
Follow DOE’s Regulations     from offerers for all contracts cited by the regulations as being suscep-
or Approved Procedures       tible to conflicts and (2) forward this material to DOE for a determina-
                             tion. But while these requirements conformed with DOE’S regulations,
                             Sandia’s practices throughout 1989 and early 1990 did not. Unlike Los
                             Alamos, Sandia did forward selected subcontracts for DOE’S review.
                             However, instead of requesting information on all subcontracts in the
                             categories DOE specifies as susceptible to conflicts of interest, Sandia
                             independently judged the likelihood that a subcontract could give rise to
                             a conflict of interest before it issued a solicitation or a request for pro-
                             posal. If Sandia officials decided the likelihood was slim, even for a con-
                             tract in one of the designated categories, they would not require the
                             potential subcontractor to submit conflict-of-interest data or no-conflict
                             certifications. Only if a possible conflict was obvious would Sandia
                             require the potential subcontractor to submit data, which it would then
                             forward to DOE for review. As a result, from April 1989 through January
                             1990, Sandia forwarded to Albuquerque only 181of an estimated 2,100
                             subcontracts that required DOE’S review.

                             According to Sandia’s Purchasing Planning Division Supervisor, this
                             practice evolved after October 1988, when Sandia’s contract was
                             renewed and more emphasis was placed on conflict-of-interest require-
                             ments. According to Sandia officials, they and Albuquerque realized
                             that compliance with the requirements would flood Albuquerque with
                             more possible conflict-of-interest cases than Albuquerque could process
                             in a timely manner; consequently, both parties agreed to minimize the
                             number of cases sent to Albuquerque for review. Officials in Albu-
                             querque’s Contracts and Procurement Division told us that this practice
                             had not been formally approved by Albuquerque, although they were
                             aware of it.

                             During one of its oversight reviews, Albuquerque found that Sandia had
                             awarded the following subcontract despite the existence of a conflict of
                             interest. This case had not been referred to Albuquerque for a decision.




                             ‘This number includes subcontracts from Sandia’s Livermore, California, location. We audited only
                             the Albuquerque location, but Sandia officials told us that the same procedures were used at both
                             lo-cations.



                             Page 18                                     GAO/BCEDSl-16      DOE’s Conflict-of-Interest   Controls
                         Chapter 2
                         DOE’s Policies and Procedures Governing
                         Conflicts of Interest Have Not Been
                         Properly Implemented




Case 3                   Sandia awarded a $614,000 subcontract for communication services to a
                         firm that had previous subcontracted with Sandia. According to file doc-
                         uments, Sandia personnel discussed whether the subcontractor had an
                         unfair competitive advantage over other potential contractors because
                         of its previous work with Sandia. Deciding that there was no conflict,
                         Sandia did not refer the subcontract to Albuquerque. However, during
                         one of its quarterly surveillance reviews, Albuquerque reviewed the
                         subcontract and concluded that the subcontractor did have an unfair
                         competitive advantage. Albuquerque asked Sandia to prevent such situ-
                         ations in future subcontracts, but did not require Sandia to act on this
                         subcontract because it would expire in 3 months. If Albuquerque had
                         reviewed the subcontract before it was awarded, then the conflict of
                         interest could have been avoided or properly mitigated.


Los Alamos and Sandia    With Albuquerque exercising limited management control, Los Alamos
                         and Sandia not only overlooked possible conflicts of interest but also
Did Not Document Their   had only limited documentation on their conflict-of-interest decisions-a
Conflict-Of-Interest     problem Albuquerque identified at Los Alamos in a 1987 procurement
Decisions                system oversight report (see ch. 3). D&S policies and procedures require
                         that conflict-of-interest decisions be documented.

                         Of 36 subcontract files we reviewed at Los Alamos, 6 contained conflict-
                         of-interest data reported by the subcontractor. We found no evidence
                         that Los Alamos considered these data in deciding whether a possible
                         conflict of interest existed. Similarly, the documentation in 45 subcon-
                         tract files we reviewed at Sandia was poor. Although all of these sub-
                         contracts were in the categories that DOE defines as susceptible to
                         conflicts of interest, Sandia did not request the relevant information
                         from the subcontractors, document its reasons for not doing so, or docu-
                         ment the conclusions of its review. According to Sandia officials, if they
                         determined that the likelihood for a conflict of interest was slim, they
                         did not document their decisions.

                         We did not pursue this documentation problem further because Albu-
                         querque, not the research centers, will be making future conflict-of-
                         interest decisions. IIowever, poor documentation is a problem at Albu-
                         querque as well (see ch. 4 for more details).




                         Page 19                                   GAO/WED-91-15   DOE’s Conflict-of-Interest   Controls
                      Chapter 2
                      DOE’s Policies and Procedures Governing
                      Conflicts of Interest Have Not Been
                      Properly Implemented




                      Under DOE'S decentralized method of operation, DOEheadquarters has
DOE Is Correcting     delegated the responsibility for implementing and overseeing conflict-of-
Procedural Problems   interest activities to the operations offices and limited its own involve-
                      ment. However, after we brought the problems discussed above to head-
                      quarters’ attention, headquarters intervened to inform Albuquerque of
                      its responsibility to review subcontracts for conflicts of interest and to
                      revise its practices accordingly. As a result, Albuquerque’s Contracts
                      and Procurement Division instructed Sandia and Los Alamos to draft
                      new procedures incorporating this requirement. On March 17, 1990,
                      Albuquerque approved new procedures at Sandia requiring that all sub-
                      contracts in the specified categories be sent to Albuquerque for review.
                      Albuquerque officials expect to approve Los Alamos’ new procedures-
                      which will cover subcontracts in the required categories, including con-
                      sulting services-by December 31, 1990.

                      Albuquerque officials are concerned that the new procedures will
                      increase its work load-from    18 subcontracts reviewed for conflicts of
                      interest from April 1989 through January 1990 to an estimated 4,800
                      subcontracts each year. During the period covered by our review, Albu-
                      querque had only one staff person who, among other duties, reviewed
                      subcontracts for possible conflicts of interest. DOE headquarters officials
                      are discussing how to accommodate this increased work load.


                      At the time of our review, the Albuquerque Operations Office had
Conclusions           improperly delegated its authority for making conflict-of-interest deter-
                      minations to the Sandia and Los Alamos research centers. In doing so, it
                      relinquished essential management controls necessary to ensure that
                      conflicts of interest are avoided or mitigated. Having a DOE official make
                      such a determination is a necessary management control to ensure that
                      government officials are aware of possible conflicts of interest when the
                      interests of the government may be jeopardized.

                      Albuquerque is now improving its management controls over conflicts of
                      interest. It has already approved procedures at Sandia that comply with
                      DOE’Sregulations and has instructed Los Alamos to revise its procedures.
                      However, the effectiveness of Albuquerque’s actions will be determined
                      by the attention and resources Albuquerque devotes to the effort, which
                      in the past were limited. At the completion of our review, Albuquerque
                      was uncertain how it would cope with the increased work load resulting
                      from the greater number of subcontracts it would now have to review.




                      Page 20                                   GAO/RCED-91-16   WE’s   Conflict-of-Interest   ControLs
                         Chapter 2
                         DOE’s Policies and Procedures Governing
                         Contlicts of Interest Have Not Been
                         Properly Implemented




                         Although our review was limited to the conflict-of-interest activities at,
                         DOE’S Albuquerque Operations Office, our previous work has demon-
                         strated that conflicts of interest in subcontracting have been a problem
                         at other operations offices and research centers. As discussed in chapter
                         1, previous reports have identified problems at Argonne National Labo-
                         ratories and Oak Ridge National Laboratoiy. In view of these problems
                         and the lack of attention given to conflict-of-interest practices at Albu-
                         querque, we believe that it is in the government’s best interest for DOE to
                         review these practices at other locations.


                         We recommend that the Secretary of Energy
Recommendations to
the Secretary of     . ensure that the Albuquerque Operations Office has sufficient resources
                       to carry out its conflict-of-interest responsibilities,
Energy               . direct the Manager of the Albuquerque Operations Office to ensure that
                       its research centers forward subcontracts in the specified categories to
                       Albuquerque for conflict-of-interest determinations, and
                     . determine whether the conflict-of-interest problems identified at the
                       Albuquerque Operations Office exist, at other operations offices.


                         DOEconcurred with our findings and recommendations and stated that
Agency Comments          this report will be used as a catalyst for efforts to ensure that opera-
                         tions offices and research centers comply with conflict-of-interest poli-
                         cies and procedures. Furthermore, WE said that resource needs at
                         Albuquerque-as      well as at other operations offices-are being dis-
                         cussed at the senior management level in DOE. DOE agreed to direct the
                         Manager of the Albuquerque Operations Office to ensure that its
                         research centers forward subcontracts in the specified categories to
                         Albuquerque for conflict-of-interest determinations.

                         WE commented that, in line with other initiatives concerning conflicts of
                         interest, it has already revised the criteria headquarters teams use in
                         their management reviews of operations offices’ procurement activities.
                         The revised criteria, dated October 1990, includes the following as a new
                         review step: “Is the contracting activity retaining and exercising the
                         responsibility for OCI [conflict-of-interest] determinations and not dele-
                         gating it to the contractors or subcontractors?”




                         Page 21                                   GAO,‘RCED-91-16   DOE’s C’ontlict-of-Intereat   Controls
Chapter 3

DOE’sOversight Reviews Have Eken Ineffective


                     The oversight reviews conducted by WE headquarters and the Albu-
                     querque Operations Office have not been effective. DOEheadquarters’
                     procurement management organization was not aware that Albuquerque
                     had improperly delegated its responsibility to review subcontracts for
                     conflicts of interest to the Sandia and Los Alamos research centers. Fur-
                     thermore, Albuquerque’s oversight reviews of the research centers’ con-
                     tracting activities did not identify certain weaknesses in the research
                     centers’ implementation of DOE’S conflict-of-interest regulations. Even
                     when Albuquerque identified problems, it did not systematically follow
                     up on the research centers’ actions to ensure that the deficiencies were
                     corrected.


                     While retaining overall responsibility for establishing conflict-of-interest
Albuquerque’s        policies and procedures, DOE headquarters has delegated to its eight
Oversight Was Less   operations offices the responsibility for contract administration.
Than Adequate        Accordingly, contracting officers in DOE operations offices are to ensure
                     that DOE’s procurement policies and procedures, including those per-
                     taining to possible conflicts of interest, are properly implemented.

                     In overseeing research centers’ contracting activities, including those
                     regarding conflicts of interest, DOE requires the operations offices to con-
                     duct three types of reviews: (1) pre-award reviews of subcontracts with
                     large dollar values, (2) periodic contractor purchasing system reviews
                     (CPSR), and (3) periodic surveillance reviews. The pre-award reviews,
                     conducted by review boards, may cover conflicts of interest. The CPSRS,
                     conducted at least once every 3 years, determine whether the operating
                     contractor’s purchasing system complies with DOE’S procurement poli-
                     cies and procedures, including those governing conflicts of interest,
                     organizational structure, and staffing. The CPSR team tests compliance
                     with the research centers’ policies and procedures by reviewing a
                     sample of subcontracts.

                     Between CPSRS, the operations office performs periodic surveillance
                     reviews. DOE allows the operations offices flexibility in determining the
                     frequency of these reviews; at Albuquerque, they are generally con-
                     ducted quarterly. These reviews are essentially narrower versions of the
                     CPSRS in that they cover fewer subcontracts and follow up on problems
                     identified during the CPSRS, including conflict-of-interest problems.

                     Albuquerque’s oversight reviews of Los Alamos’ and Sandia’s procure-
                     ment systems did not identify the conflict-of-interest problems we
                     found. Furthermore, Albuquerque did not adequately follow up to


                     Page 22                           GAO/RCEDSl-15   DOE’s Cmflict-of-Interest   Controls
                             Chapter 3
                             WE’s Oversight     Reviews Have
                             Been Ineffective




                             ensure that the problems it did find were corrected. An exception to this
                             is case 3, discussed in chapter 2, in which Albuquerque identified a con-
                             flict of interest in a subcontract during a surveillance review at Sandia.


Albuquerque Did Not          Because the Albuquerque Operations Office believed that it could dele-
                             gate the authority to make conflict-of-interest determinations to DOE’S
Recognize That Procedures    research centers, neither its CPSRs nor its surveillance reviews identified
and Practices Were           the improper practices at Los Alamos or Sandia discussed in chapter 2.
Improper                     Instead, the reviews commented on the merits of the existing proce-
                             dures. For example, Albuquerque’s July 1987 CPSR at Los Alamos con-
                             cluded that the research center had an effective purchasing system and
                             had updated its instructions to reflect the changes in DOE'S regulations
                             pertaining to conflicts of interest. The CPSR report stated that the proce-
                             dures and implementing instructions incorporated the regulatory
                             requirements when, in fact, neither the Procurement Manual nor the
                             Administrative Manual required that DOE resolve conflict-of-interest
                             matters, These same procedures and instructions were in effect when
                             DOE'S contract with Los Alamos was renewed in September 1987 for the
                             1987-92 period. Albuquerque’s 1988 and 1989 quarterly surveillance
                             reviews did not report any deficiencies in Los Alamos’ procedures or
                             policies. Similarly, Albuquerque’s 1988 CPSR at Sandia stated that its
                             instructions had incorporated the required conflict-of-interest provi-
                             sions. Albuquerque’s quarterly surveillance review failed to note that
                             Sandia’s practices in 1989 did not conform with the procedures DOE
                             approved in 1988.


Consulting Subcontracts at   Neither the 1987 CPSR nor the 1988 and 1989 quarterly surveillance
Los Alamos Were              reviews conducted at Los Alamos included consulting subcontracts, even
                             though DOE considers such contracts to be particularly susceptible to
Inadvertently Excluded       conflicts of interest. According to DOE officials, they were not aware that
From Reviews                 consulting subcontracts were not included on the lists from which they
                             selected subcontracts for review.


Follow-Up on Conflict-Of-    The Albuquerque Operations Office has not effectively followed up on
                             actions the research centers took in response to its CPSR recommenda-
Interest Recommendations
                             Cons concerning conflicts of interest. In one instance-after    a 1988 CPSR
Has Been Ineffective         at Sandia identified three subcontracts that Albuquerque should have
                             reviewed for possible conflicts of interest-Albuquerque      accepted




                             Page 23                           GAO/RCED-91-15   DOE’s Contlict+f-Interest   Controls
Chapter 3
DOE’s Oversight    Reviews Have
Been Ineffective




actions that we believe did not adequately respond to its recommenda-
tions. For two of these subcontracts-one for approximately $4.2 mil-
lion and the other for approximately $4.5 million-Albuquerque
recommended that Sandia obtain from the subcontractors the informa-
tion Albuquerque needed to determine whether a possible conflict of
interest existed. (Albuquerque did not recommend similar action for the
other subcontract because it was due to expire soon,) Sandia did not do
so. Instead, it reported that there was no anticipated follow-on work to
these subcontracts and thus no need to obtain the requested informa-
tion. Albuquerque accepted Sandia’s response and closed the recommen-
dation in August 1989. Officials in Albuquerque’s Contracts and
Procurement Division agreed with us that the recommendation should
not have been closed. They explained it as an apparent oversight.

In another case, Albuquerque did not adequately monitor the corrective
action that Los Alamos was supposed to take after a 1987 CPSR. The CPSR
report noted that the documentation in subcontract files showing
actions taken on possible conflict-of-interest cases was poor and recom-
mended that Los Alamos’ contract administrators improve their docu-
mentation. Subsequently, Los Alamos indicated that it would provide
training to its personnel and revise the relevant instructions. DOE indi-
cated it would close the recommendation upon issuance of the new
instructions. In reviewing the instructions, we found that the guidance
still did not indicate how the reviewing official was to fully document
the rationale for a decision that no possible conflict of interest existed,’

Although Albuquerque requires surveillance review staff to follow up
on previous recommendations, the surveillance review performed after
Los Alamos issued its new instructions in February 1988 did not address
whether these instructions adequately responded to the recommenda-
tions. According to Albuquerque officials, these reviews usually focus
on particular problem areas by examining the relevant subcontracts or
types of subcontracts. They said conflicts of interest were not consid-
ered a problem at that time.




‘Our focus in this example is on Albuquerque’s inadequate follow-up on its recommendations. As
discussed in chapter 2, Los Alamos has been instructed to revise its procedures so that Albuquerque
will be responsible for conflict-of-interest determinations



Page 24                                     GAO/RCED-91-15      DOE’s Conflict-of-Merest    Controls
                     Chapter 3
                     DOE’s Oversight    Reviews Have
                     Been Ineffective




                     Under DOE’Sdecentralized management style, DOEheadquarters’ over-
DOE Headquarters’    sight of the Albuquerque Operations Office has been limited. Headquar-
Oversight Has Been   ters oversees its operations offices’ contracting activities, including
Limited              those pertaining to conflicts of interest, primarily through periodic Pro-
                     curement Management Assistance Reviews (PMAR) and reviews of the
                     operations offices’ CPSRS.PMARs-conducted on-site about once every 3
                     years by a team led by headquarters staff-cover       all elements of an
                     operations office’s contracting activity, including management and
                     staffing, policies and procedures, source selection and award,
                     employees’ standards of conduct, the results of and responses to
                     external management reviews, and the implementation of recommenda-
                     tions resulting from previous PMARS. Headquarters performs “desk
                     reviews” of draft and final CPSR reports to ensure that they cover all
                     required areas, including conflicts of interest.

                     Our review of a recent PMARof the Albuquerque Operations Office
                     showed that it did not identify any problems with Albuquerque’s over-
                     sight of Los Alamos’ and Sandia’s contracting activities. According to
                     the Director of the Office of Management Review and Assistance at DOE
                     headquarters, the PMAR is a very intense oversight activity, but limited
                     with regard to CPSRS.~ The PMARS focus primarily on whether the opera-
                     tions offices are performing CPSRSand surveillance reviews. According
                     to the Director, the control program for evaluating the quality of the
                     CPSRS is the headquarters’ desk reviews, conducted by his staff. How-
                     ever, when evaluating CPSRS, his staff relies on self-disclosures by the
                     operations offices to identify subcontracting problems.


                     WE    headquarters and the Albuquerque Operations Office have directed
Conclusions          little attention to the propriety of how DOE’s conflict-of-interest require-
                     ments have been implemented. As already discussed in chapter 2, Albu-
                     querque inappropriately delegated its responsibility to review
                     subcontracts for possible conflicts of interest to the research center con-
                     tractors. Although Albuquerque is now correcting its practices, it is still
                     dependent on the operating contractors to identify subcontracts suscep-
                     tible to conflicts of interest and to advise those subcontractors that they
                     must submit the relevant information to DOE for a resolution, as required
                     in DOE’S policies and procedures. Albuquerque needs to ensure that the
                     contractors carry out these responsibilities, which it can do by



                     ‘This Office replaced the Office of Procurement Management Reviews on August 23, 1990.



                     Page 25                                   GAO/RCED-91-15    DOE’s Conflict-of-Interest   Control
                     Chapter 3
                     DOE’s Oversight    Reviews Have
                     Been Ineffective




                     improving its oversight reviews. Furthermore, until changes are effec-
                     tively instituted, DOE headquarters needs to be especially attentive to
                     Albuquerque’s conflict-of-interest activities in its oversight reviews.

                     While our review focused only on Albuquerque’s activities, the conflict-
                     of-interest oversight activities at the other operations offices may also
                     need to be improved-especially      since DOE headquarters generally relies
                     on the operations offices for self-disclosures of subcontracting problems.
                     We believe that DOE headquarters should pay more attention to conflict-
                     of-interest activities regarding subcontracts in its oversight reviews at
                     DOE operations offices,




Recommendations to   Albuquerque Operations Office to ensure that (1) Albuquerque’s over-
the Secretary of     sight reviews focus on the adequacy of Sandia’s and Los Alamos’ imple-
Energy               mentation of conflict-of-interest requirements and (2) operations office
                     officials follow up on research centers’ actions to ensure that identified
                     weaknesses are corrected,

                     We also recommend that the Secretary ensure that the Director of Pro-
                     curement, Assistance, and Program Management revises DOE headquar-
                     ters’ oversight procedures so that they rely less on self-disclosures by
                     the operations offices to identify problems with the implementation of
                     conflict-of-interest policies and procedures.


                     DOE  concurred with our findings and recommendations. According to
Agency Comments      DOE, Albuquerque’s recently completed CPSR at Los Alamos identified
                     problems similar to those discussed in this report and contained recom-
                     mendations to correct them. DOE also commented that the Manager of
                     the Albuquerque Operations Office will be directed to ensure that weak-
                     nesses identified during oversight reviews are corrected.

                     According to DOE, senior management officials are discussing the
                     problem that headquarters relies on self-disclosures by the operations
                     offices to identify subcontracting problems. However, they have not yet
                     decided on a solution.




                     Page 26                           GAO/RCED-91-15   DOE’s Conflict-of-Interest   Controls
Chapter 4

ManagementControl Problems Need Attention


                      DOE   has developed conflict-of-interest policies and procedures that
                      follow internal control standards for the management of federal agen-
                      cies. However, we were unable to test how effective they were in prac-
                      tice because the Albuquerque Operations Office had not properly
                      implemented them. Nevertheless, our review of the policies and proce-
                      dures that were in place indicated two management control problems
                      that need attention. First, Albuquerque does little to ensure that the cer-
                      tifications submitted by subcontractors stating that they have no pos-
                      sible conflicts of interest are reliable. Yet officials rely on these
                      certifications, as permitted by DOE'S regulations, to decide whether a
                      conflict of interest exists. In a review of 36 subcontract files at Los
                      Alamos that contained a certification, we found that 12 files also con-
                      tained other information regarding a possible conflict of interest. Better
                      management controls- such as random verification of the information
                      provided in the certifications against the information in the subcontract
                      files-could be instituted to improve the certifications’ reliability.
                      Second, although DOE'S policies and procedures require that conflict-of-
                      interest decisions be documented, we found that the files contained lim-
                      ited documentation. Without reliable certifications and more complete
                      documentation, Albuquerque cannot ensure that conflicts of interest are
                      identified and avoided in the subcontracts Los Alamos and Sandia
                      award.


                      Internal control systems for the management of federal agencies ensure
Purpose of Internal   that programs are consistent with the relevant laws, regulations, or
Controls              agency goals. Internal controls further ensure that resources are used
                      only for intended purposes and are safeguarded from fraud, waste, and
                      abuse. Good internal controls call for, among other things, explicit poli-
                      cies and procedures describing how operations are to be conducted, the
                      clear assignment of duties and responsibilities, adequate supervision,
                      and proper documentation to show that the agency’s operations are in
                      accordance with senior management’s direction. For the management of
                      activities concerning conflicts of interest, the overall measure of the
                      adequacy of an internal control system is whether DOE can provide rea-
                      sonable assurance that conflicts of interest are identified and avoided.




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                        DOE’Sregulations rely on a contractor’s or subcontractor’s cooperation,
DOE’s Regulations       judgment, and integrity in providing information on possible conflicts of
Rely on                 interest. According to an official in DOE headquarters’ Office of Procure-
Subcontractors’ Self-   ment Policy, the regulations were intended to make the subcontractors
                        responsible for identifying possible conflicts of interest. As discussed in
Reporting for           chapter 2, before a contract or subcontract is awarded, the contractor
Identifying Possible    must provide either (1) pertinent data on other relevant work in which
                        it is, has been, or will be involved that could have a bearing on a possible
Conflict of Interest     conflict of interest or (2) a statement certifying that there is no relevant
                        information bearing on the existence of a conflict, Specifically, DOE’S reg-
                        ulations require that the following clause be placed in all proposals for
                        contracts in the categories DOE has identified as particularly susceptible
                        to conflicts of interest:

                        The offeror shall provide a statement which describes in a concise manner all rele-
                        vant facts concerning any past, present or currently planned interest...relating to
                        the work to be performed . ..and bearing on whether the offeror has a possible orga-
                        nizational conflict of interest.... The offeror may also provide relevant facts that
                        show how its organizational structure and/or management systems limit its knowl-
                        edge of possible organizational conflicts of interest...and how that structure or
                        system would avoid or mitigate such organizational conflict.

                        According to the regulations, the subcontractor should furnish a list of
                        past, present, and currently planned interests, including (1) the name of
                        the company for which the work was, is being, or will be performed; (2)
                        the nature of the work; (3) the period of performance; and (4) the dollar
                        value of the work. The regulations let the contractor decide which of its
                        other interests are “relevant” or have a “bearing” on a proposed
                        contract.

                        Under DOE’Sregulations, if a subcontractor does not disclose the relevant
                        facts or misrepresents them, DOE can impose administrative sanctions.
                        For example, DOEcan terminate the contract, change the contract’s scope
                        or terms to avoid the conflict, disqualify the contractor from subsequent
                        WE contracts, or impose civil fines. When there is cause, DOE can refer
                        the matter to the Department of Justice for civil or criminal penalties
                        under other sections of the law,




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                             Although Albuquerque and the research centers have relied on subcon-
Albuquerque Does Not         tractors’ self-certifications for conflict-of-interest determinations, these
Ensure That                  certifications may not always be accurate. Verification of, at a min-
                             imum, a random sample of subcontractors’ certifications would help
Subcontractors’              Albuquerque ensure that they are more reliable.
Certifications Are
Reliable

Certifications Are Not       We reviewed 36 subcontract files at Los Alamos that contained certifica-
                             tions by subcontractors that they knew of no facts relevant to possible
Always Reliable              conflicts of interest. However, these certifications were not always accu-
                             rate. In 12 files, we found information that was relevant to possible con-
                             flicts of interest. This information, which for the most part was
                             contained in the contract proposals, usually disclosed that the subcon-
                             tractors were employed by other companies that had subcontracts with
                             Los Alamos. Two examples follow.

                         l   In one case, a former Los Alamos employee had a subcontract, at $242
                             per day, to document the operational aspects of a computerized central
                             facility for producing hard copies of data. The consultant certified that
                             he had no possible conflicts of interest. However, our review of the sub-
                             contract file showed that this former employee was also an employee of
                             a computer firm that had subcontracts with the research center, totaling
                             approximately $601,000, to provide consulting and maintenance ser-
                             vices for computer hardware and software. Furthermore, the file for the
                             research center’s subcontract with the computer firm did not disclose
                             that the firm had a former Los Alamos employee on its staff,

                             Los Alamos officials acknowledged that a conflict of interest could
                             occur. They now plan to monitor the individual’s work closely to ensure
                             that he will not get involved in any decisions for future courses of action
                             concerning the firm’s subcontract. Our review of file documents and our
                             discussions with research center officials did not reveal any conclusive
                             evidence that the consultant’s work actually overlapped with the firm’s
                             work,

                         . In another case, a consultant had been working with Los Alamos staff
                           on laser physics research since 1984. His contractual rate of pay at the
                           time of our review was $207 per day. Information in the subcontract file
                           showed that the consultant was also employed during this period by a
                           firm that had contracted with Los Alamos in 1985 to study and design a



                             Page 29                           GAO/RCED-91-16   DOE’s ConIIkt-of-Interest   Controla
                             Chapter 4
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                             laser system. At the end of fiscal year 1989, the firm’s contracts with
                             Los Alamos totaled approximately $879,000. The individual was using
                             the firm’s facilities and studying the same type of laser. The subcontract
                             files for both the consultant and the firm designing the laser system con-
                             tained certifications that there were no conflicts of interest.

                             Los Alamos officials told us that the consultant had limited involvement
                             with the design project in recent years. Because both the consultant’s
                             and the firm’s subcontract files lacked documentation showing what
                             services the individual actually performed, we could not tell whether
                             the consultant had influenced-or    had been influenced by-the firm’s
                             work with Los Alamos.


Albuquerque’s Procedures     Albuquerque generally has not verified the accuracy of subcontractors’
                             certifications that they know of no relevant facts that could give rise to
to ‘Verify the Accuracy of   a possible conflict of interest. As discussed earlier, from April 1989
Certifications Are Not       through January 1990, Sandia officials forwarded 18 possible conflict-
Effective                    of-interest cases to ME'S Albuquerque Operations Office for review. The
                             M)E official responsible for reviewing these subcontracts explained that
                             if the subcontractor provided no data other than a certification-as
                             they did in 12 of the 18 cases forwarded to Albuquerque-he        would
                             generally inform Sandia’s contracting officials that there was little or no
                             likelihood of a possible conflict of interest. He said that he usually had
                             no basis for questioning a subcontractor’s certification, and unless a
                             Sandia official made him aware of relevant data, he took no other steps
                             to obtain additional information from the subcontractor. According to
                             this official, in 1989 management began to focus more on activities per-
                             taining to conflicts of interest, but Albuquerque has not decided on the
                             extent of documentation needed for decisions of no conflict based on
                             subcontractors’ certifications.


Options Exist to Improve     Options exist to ensure that subcontractors’ certifications are more
Information Provided by      accurate. For example, a more careful review of the information subcon-
                             tractors submit with their work proposals could reveal contradictions
Subcontractors               with their certifications. Albuquerque officials are concerned, though,
                             that the verification of every certification would burden the staff. As
                             already discussed in chapter 2, Albuquerque estimates that its compli-
                             ance with DOE’S regulations will increase the number of subcontracts
                             that it has to review for conflicts of interest from 18 to about 4,800 each
                             year. At the time of our review, Albuquerque had only 1 staff member
                             who reviewed Sandia’s subcontracts for conflicts of interest, whereas


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                       Sandia had 60 staff members (both Albuquerque’s and Sandia’s staff
                       had other responsibilities). Headquarters and Albuquerque officials
                       agreed that verifying subcontractors’ data in all cases would be imprac-
                       tical. However, closer review of even just a random sample of the sub-
                       contract files-which     might be more feasible-would    better ensure that
                       certifications are accurate. Albuquerque officials said that selective ver-
                       ification might be feasible but that this option had not been considered.

                       The use of administrative sanctions or other penalties could also help
                       ensure that subcontractors submit information and certifications that
                       are complete and accurate. Albuquerque officials said that, to the best
                       of their knowledge, their office had not exercised these options.


                       DOE requires that conflict-of-interest decisions be documented. However,
Albuquerque’s          our review showed that Albuquerque’s documentation was limited.
Documentation of
Conflict-Of-Interest   DOE'S  requirement for documentation is consistent with standards for
                       effective internal control systems, which require that all significant
Decisions Could Be     events be documented. Previous work by GAO and by DOE has shown that
Improved               the documentation of conflict-of-interest decisions was a problem. For
                       example, GAO reported that research centers did not obtain relevant
                       information from contractors before awarding a contract and that Albu-
                       querque’s oversight reviews had noted that research centers poorly doc-
                       umented their decisions.

                       Our present review demonstrated that Albuquerque poorly documented
                       its appraisals of the 18 subcontracts that Sandia forwarded from April
                       1989 to January 1990. In 13 of the 18 subcontract files, no documents
                       indicated (1) whether Albuquerque officials had even reviewed these
                       cases or (2) how they decided that little or no conflict was likely.
                       Another file was simply annotated to say that there was no conflict, and
                       still another contained a note stating that the proposed scope of work
                       did not present a conflict situation.

                       In one of the cases not documented, the subcontractor indicated that he
                       had other contracts with Sandia and DOE's Lawrence Livermore Labora-
                       tory, as well as with the private sector. Although the DOEreviewing offi-
                       cial could not recall reviewing the facts for possible conflicts of interest
                       until we inquired about it, he told us that he did not inform Sandia that
                       it could award the subcontract. Nevertheless, the subcontract was
                       awarded a few days after the data were sent to Albuquerque for review.
                       The Albuquerque official, subsequent to our discussion of the case,


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              included that subcontract in his March 1990 periodic review and con-
              cluded that Sandia should not have awarded the subcontract before DOE
              approved it.                                                                             Y




              Albuquerque analyzed in detail three other cases and documented them.
              According to an Albuquerque official, these cases were reviewed closely
              because of the data the subcontractors submitted. Albuquerque
              informed Sandia that it could award two of these subcontracts provided
              it included clauses restricting future work in the same areas.

              In the remaining case, for which the subcontractor provided both a cer-
              tification and data on his contractual affiliations, Albuquerque
              instructed Sandia not to award the subcontract. According to Albu-
              querque’s written determination, the awarding of this subcontract
              would create a possible conflict of interest because of the subcon-
              tractor’s affiliations, other contracts, and knowledge of proprietary
              data.

              Albuquerque’s reviewing official told us that he did not have the time to
              verify subcontractors’ data or to document conflict-of-interest decisions
              in all cases. Moreover, according to this official, Albuquerque is still
              debating how to best document decisions,


Conclusions   internal control system appropriate for ensuring that conflicts of
              interest are detected in subcontracts at DOE’S research centers. While we
              were unable to test how effective these policies and procedures were in
              practice because the Albuquerque Operations Office had not properly
              implemented them, our review of those that were in place indicated that
              two management control problems need attention. The Albuquerque
              Operations Office and its research centers have relied extensively on
              subcontractors to report facts regarding possible conflicts of interest.
              However, the certifications that subcontractors submit stating that no
              relevant facts exist concerning possible conflicts of interest may not
              always be reliable. Therefore, the Albuquerque Operations Office needs
              to investigate options for improving their reliability. Since the large
              number of subcontracts awarded by the two research centers annually
              would make it difficult for DOE to review each subcontract in detail, DOE
              could randomly review selected submissions. DOE could also impose
              administrative sanctions on subcontractors that either fail to disclose or
              misrepresent relevant data. Such enforcement would send a clear signal



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                       to potential subcontractors that   DOE   plans to improve its review of con-
                       flict-of-interest submissions.

                       The Albuquerque Operations Office also needs to improve its documen-
                       tation of conflict-of-interest decisions so that it is in accordance with
                       existing policies and procedures. Documentation of important manage-
                       ment decisions is a fundamental internal control necessary to ensure
                       that conflict-of-interest determinations are complete and accurate.

                       Again, as discussed in the previous chapters, our past work indicates
                       that the problems we identified may not be unique to the Albuquerque
                       Operations Office and may possibly exist at other DOE field offices.
                       Thus, it seems prudent for DOE to determine whether these same
                       problems exist at its other operations offices.


                       We recommend that the Secretary of Energy direct the Manager of the
Recommendations to     Albuquerque Operations Office to explore options to improve the relia-
the Secretary of       bility of the conflict-of-interest information that its research centers’
Energy                 subcontractors submit. In exploring options, Albuquerque should con-
                       sider reviewing a randomly selected sample of submissions and imposing
                       administrative sanctions on subcontractors that submit incomplete or
                       inaccurate information. We also recommend that the Secretary direct
                       the Manager of the Albuquerque Operations Office-and the managers
                       of its other operations offices, if appropriate-to    take the necessary
                       measures to ensure that conflict-of-interest decisions are well
                       documented.


                       DOE  concurred with our findings and recommendations. Along with
Agency Comments        ongoing initiatives for improvements in the conflict-of-interest area, it
                       will consider options to improve the reliability of the conflict-of-interest
                       information that subcontractors provide. According to DOE, its initiatives
                       include the following:

                     . DOEhas initiated an extensive training program concerning the proper
                       administration of conflict-of-interest policies and procedures for all DOE
                       staff-including   operations office staff-involved    in conflict-of-interest
                       determinations. The training, when offered, will include guidance on the
                       documentation appropriate for these determinations.
                     9 Forms and instructions, including those used for contractors disclosures
                       or representations, are being revised to ensure clarity and to make other
                       needed improvements.


                       Page 33                            GAO/RCED-91-15   DOE’s Conflict-of-Interest   Controls
Appendix I

Major Contributors                to   This Report


                        Judy England-Joseph, Associate Director
Resource Community      -James Fowler, Assistant Director
and Economic            James Kennedy, Assignment Manager
Development Division,
Washington, D.C.

                        Rudy Payan, Senior Evaluator
Office                  Chris Pacheco, Staff Evaluator
                        Richard Horiuchi, Staff Evaluator


                        Martin Fitzgerald, Special Assistant to the General Counsel
Office of the General   Michael Burros, Attorney-Adviser
Counsel




(308810)                Page 34                         GAO/RCEDBl-15   WE’s   Conflict-of-Interest   Controls
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