How two shell companies duped the Pentagon

CHEYENNE/ATLANDA (Reuters) - Two companies incorporated at a little house in Cheyenne, Wyoming, won Pentagon contracts after their owner took advantage of the state’s liberal incorporation laws to create the firms using an alias, and then represented them as minority-owned to win favorable treatment as a military supplier. The firms and their owner were later banned from doing business with the Pentagon for providing knock-off parts.

A Reuters investigation has found that more than 2,000 companies are registered at 2710 Thomes Avenue in Cheyenne, the headquarters for Wyoming Corporate Services, a business incorporation company that specializes in corporate anonymity.

Among the firms incorporated there is a small subset that make their money from government contracts.

A Reuters review of federal contracting databases found nine firms registered at 2710 Thomes Avenue have been awarded 93 contracts worth more than $1.6 million by a half dozen government agencies, including the U.S. Department of Defense, the U.S. Treasury’s Internal Revenue Service, the Centers for Disease Control, and the Department of Veterans Affairs.

More than 90 percent of the contracts were awarded by the Department of Defense.

There is no evidence that the majority of the defense-related contracts awarded to firms registered at 2710 Thomes Avenue were in any way suspicious. But two firms show the potential for the system to be abused.

In January, the Defense Logistics Agency (DLA) banned Eagle Logistic Solutions and Eagle Logistics Aerospace from selling components to the Pentagon for three years. The ban came after investigators found the firms, and their owners, had knowingly supplied air and fluid-filtering kits for military tractor-trailers between 2001 and 2005 that were reverse-engineered in Turkey to look like they were made by Parker Hannifin, the required manufacturer.

Both firms listed their address as 2710 Thomes Avenue in Cheyenne, the DLA records show. The parts were considered “critical application items,” which the Pentagon defines as “essential to operating personnel.”

The companies were created by Atilla C. Kan, an employee of another Pentagon supplier called New York Machinery. DLA records, Wyoming incorporation data, and documents submitted by an attorney for New York Machinery in a settlement agreement in a separate federal criminal lawsuit show Kan formed the companies in Wyoming under the name John Ryan. He later used the alias, and a description of the companies as “minority-owned,” “woman-owned” and “Hispanic-owned,” when applying to supply military parts, the documents show.

A Pentagon memo detailing the proposed ban on Eagle Logistics Solutions and a sister company, Eagle Logistics Aerospace, says the company won four contracts worth $53,923 in which it supplied knock-off parts. But the Reuters review of the Federal Procurement Data System, a federal contracts database, shows the companies got even more business, netting orders for 44 parts contracts worth more than $715,000.

Latonya M. Johnson, a spokeswoman for DLA, said in an email that the agency “is not currently reviewing other delivery orders filled by Eagle Logistics.”

It isn’t clear whether the Pentagon screens for shell companies in the procurement process. Asked if the agency examines whether a contracting company has been registered through a third-party incorporation service and may use nominee directors and officers, Johnson said the agency “cannot speculate” on the subject.

“As long as the company has not been debarred or currently suspended from bidding on government contracts, then that company is eligible to bid on government contracts and can be awarded” them, she said.

Gerald Pitts, the president of Wyoming Corporate Services, declined to comment on specific clients.

In January 2007, Kan pleaded guilty to one count of wire fraud in New Jersey federal court as part of two criminal cases related to the scheme to supply fake parts, which included his former employer New York Machinery. The company pleaded guilty to one count of wire fraud last December.

Kan is scheduled to be sentenced in June. Kan and his lawyer, Eric Breslin, did not respond to requests for comment.

In recent years, the Department of Defense has been hit by a flood of counterfeit and non-conforming parts infiltrating its supply chain. The infiltration of fake parts stemmed largely from the Pentagon’s effort since the 1990s to save money by purchasing components off the shelf.

Editing by Michael Williams and Claudia Parsons