Contract Killer

Why did USAID suspend one of its biggest contractors without any explanation?

Dr. Rajiv Shah (far left) of USAID visits Nangarhar Province, Afghanistan

In the fall of 2010, the Academy for Educational Development, then headed by president and CEO Stephen Moseley, sent a check for nearly $1 million to the United States Agency for International Development. Money usually flows the other way—AED was one of USAID’s largest contractors—but AED had concluded it had overcharged the federal government by that amount for a project it was overseeing in Pakistan. Hence the check.

If the payment was intended to settle the matter, it didn’t work. In November 2010, Moseley stepped down. Four other top executives followed him out the door. On Dec. 8, USAID announced its decision to suspend AED because of “evidence of serious corporate misconduct, mismanagement, and a lack of internal controls,” as well as “serious concerns of corporate integrity.” That meant AED couldn’t receive new funds from the federal government. Less than three months later, on March 3—after 50 years of spearheading thousands of development projects around the world—AED announced that it would sell its assets and dissolve itself.

The sudden collapse of AED startled the development community. One moment, USAID’s inspector general had been investigating reported mismanagement in AED projects in Pakistan and Afghanistan, two projects out of scores that AED managed for USAID. The next, AED was suspended based on “initial findings” by the inspector general that weren’t being made public. Soon after that, AED was folding—and the inspector general hadn’t even released its report yet.

According to USAID, the suspension of AED was evidence of the government’s careful stewardship of taxpayer dollars. But to five current AED employees and three others in the development community—none of whom would speak on the record for fear of retribution by USAID—it’s the result of a recent crackdown on government contractors at a time when “accountability” has become a byword of both political parties and the Obama administration, particularly when it comes to Iraq and Afghanistan. “The American people’s money must be spent to advance their priorities, not to line the pockets of contractors or to maintain projects that don’t work,” Obama said in March 2009. For some, the death of AED was evidence that it’s possible to take “accountability” too far.

The fall of AED made waves in part because of its size and history. AED managed about $500 million in grants and contracts every year. Until the suspension, it employed more than 700 people in Washington and about 2,000 people worldwide. Since then, 180 employees have left or been laid off, according to Michelle Galley, a spokesperson for AED. As president and CEO for more than 20 years, Moseley turned AED into one of the biggest nonprofits in the country. He was compensated for it, too: In 2007, he was paid nearly $900,000 in total.

AED’s woes first began in the summer of 2009, when someone blew the whistle on an AED project in Pakistan. After the country was hit by a massive earthquake in October 2008, AED had scrambled to provide emergency relief and apparently overpaid for emergency supply kits, according to an AED employee close to the activity. AED hired the accounting firm Ernst & Young to investigate the problem, and looped in some USAID officials. But it didn’t immediately involve the USAID’s inspector general.

That turned out to be a mistake. “You need to engage with them fully as soon as possible, instead of pushing them off and making it look like you’re obstructing justice,” says the AED employee.

In the fall of 2009, USAID’s inspector general launched its own investigation into AED’s Pakistan project. From the start, AED and the inspector general disagreed on how much AED was required to cooperate, according to people familiar with the events. AED argued that because its project was technically a “cooperative agreement” with USAID—a deal that’s looser than a formal contract—it wasn’t strictly required to report any problems to the I.G.

When a new round of allegations emerged in July 2010 involving an AED higher education project in Afghanistan, the inspector general expanded its investigation. AED dug in its heels. Instead of dealing with the inspector general directly, AED engaged its attorneys. “We lawyered up,” says an AED source.

In late 2010, AED gave back almost $1 million to USAID—the amount that AED’s own audit had determined that it owed as a result of its mismanagement of the Pakistan project. It was Moseley’s way of saying, “I can handle this. We’ve dealt with this issue,” says a longtime development official who has worked with Moseley. The final straw was the inspector general’s discovery of emails that suggested AED wasn’t fully cooperating with the investigation, according to sources within AED who admit they haven’t seen the emails. On Nov. 16, 2010, Moseley stepped down, and three weeks later—the same week that the inspector general released an audit critical of USAID’s work in Pakistan—AED was suspended.

It’s impossible to say definitively what happened until the inspector general’s report is released. (If you have information, Slate wants to hear from you.) But members of the development community are voicing their disappointment with what they call USAID’s lack of transparency during the investigation. In a letter that circulated widely within AED, former USAID officer Marcia Bernbaum wrote to agency director Rajiv Shah to express her “serious concerns regarding the way that USAID has handled the suspension.”

The main complaint has been that USAID suspended AED without sufficient explanation. Its announcement of the suspension uses strong language—”serious corporate misconduct, mismanagement, and a lack of internal control”—but doesn’t provide examples. Another objection is that USAID opted to suspend the entire organization rather than targeting the problematic programs in Pakistan and Afghanistan.

Others argue that USAID should have known that suspending AED, a low-margin nonprofit that relies overwhelmingly on government funds, would be a death sentence. AED receives 90 percent of its funding from USAID and other federal agencies, according to Galley, and many of those contracts require annual renewal. The suspension effectively dried up AED’s revenues. “It’s a tragic case of somebody who just wanted to smack somebody and hit them, and they fell over backwards and died,” said a senior executive at another development organization.

Then again, the financial health of a company is not a consideration when USAID is weighing suspension or debarment of the contractor. “We did not force AED to dissolve,” says Lars Anderson, a spokesman for USAID. Indeed, it was the decision of AED’s board to find an acquirer to buy the company’s assets, according to Galley. At that time, says Anderson, USAID and AED were negotiating an administrative agreement that would have allowed parts of the organization to continue operating.

Accident or not, AED’s collapse is just the latest chapter in the ongoing effort for better oversight of federal contractors. Every president since Ronald Reagan has emphasized government based on measurable results. In Obama’s case, that’s meant cracking down on spendthrift contractors who don’t deliver. Congressional Republicans have joined the crusade, too, in the name of efficiency and reducing spending overseas. In a 2009 report, USAID’s inspector general urged USAID to make more use of its powers to suspend (cut off funds to an organization temporarily) and debar (cut them off permanently).

USAID took the task to heart. By February 2011, the agency had “made great strides forward,” said USAID chief acquisitions officer Maureen Shauket in testimony before the Wartime Contracting Commission. (Shauket, who did not return a phone call to her office, was the person who made the decision to suspend AED.) Between 2003 and 2007, USAID issued 17 suspensions or debarments, according to USAID. Between 2008 and February, 2011, that number rose to 37. Their greatest “success story,” deputy inspector general Michael Carroll told the Wartime Commission at the same hearing, was “the recent suspension of the Academy for Educational Development, AED.”

Yet USAID has uncovered instances of fraud that have not resulted in suspensions. In November 2010, the Louis Berger Group agreed to a $69 million settlement after allegedly overcharging USAID by $15 million to $20 million over 10 years for development projects in Afghanistan, Iraq, and Sudan. Two former executives went to prison for fraud. Yet the settlement allowed the company to continue to working on government contracts. USAID did suspend Deloitte Consulting LLP in March after the contractor failed to crack down on corruption at Kabul Bank in Afghanistan. But unlike the suspension of AED, the suspension of Deloitte applied only to its Kabul Bank contract. Its other contracts with USAID remain.

It’s impossible to gauge USAID’s decision to suspend AED without seeing the full inspector general’s report. But AED employees say it is possible to get a rough sense of proportionality. The AED executives responsible for any high-level mismanagement have left the company or been pushed out. The money has been paid back. What was the point of suspending—and, inadvertently, destroying—the entire organization? “The terms of the suspension appear to be disproportionate to the possible infractions and mismanagement,” Bernbaum wrote in her letter to Shah.

In interviews, several AED employees brought up a recent article by Andrew Natsios, the head of USAID in the Bush administration, about the rise of a government “counter-bureaucracy” that prioritizes compliance over effectiveness. When contractors operate in corrupt and high-risk countries, it’s impossible to avoid being tainted to some extent by that corruption. Accountability is important, but not at the expense of doing good work. “A point can be reached when compliance becomes counterproductive,” he writes. “I believe we are well past that point.”