Dark cloud of legal trouble begins to lift away from Louis Berger
One of the biggest corruption cases in the aid industry appears to be coming to a close.
Louis Berger, a major infrastructure contractor with annual revenues of $1 billion, recently pleaded guilty for the final time to charges originally stemming from its work on U.S. Agency for International Development-funded projects in Afghanistan beginning in 2002 but then stretching far beyond. Multiple employees, including the company’s former chairman and CEO, have been found guilty of criminal charges, and authorities as far away as India have made arrests, including the former chief minister of the Indian state of Goa, who was charged this month with “disappearance of evidence.”
The story of the company’s rise, fall, and what may be a new beginning offers fresh lessons to an industry still reeling from the suspension and debarment cases of nonprofits Academy for Educational Development and International Relief and Development. Over the past month, Devex has spoken extensively to top Louis Berger executives and key sources close to the company and the cases against it to piece together this history and better understand what went wrong and how the company is attempting to address it. Many of these sources requested anonymity to speak freely about sensitive issues and their close connections to the company must be taken into account. Nonetheless, what emerges is a perspective on the company’s slide toward wrongdoing and the aggressive steps it has now taken that may allow Louis Berger to finally move forward.
READ: World Bank debars implementer Louis Berger for 'corrupt practices'
In the immediate aftermath of the 2001 U.S.-led invasion of Afghanistan that dislodged the Taliban from power, the Afghan economy was in shambles. With no host government partner and an emaciated civil society and private sector, the U.S. government faced the hard truth that it was now responsible for stabilizing and reconstructing one of the most fractured and underdeveloped countries in the world.
Constructing infrastructure across Afghanistan was one of the first orders of business — part of the race to win over Afghan hearts and minds, spark economic activity and prove America’s commitment to the country. So USAID assumed a lead role in designing and bidding out massive programs that would rebuild critical infrastructure.
One of the biggest infrastructure programs during those early days of US involvement in Afghanistan was the Rehabilitation of Economic Facilities and Services Program, or REFS, which was intended to rehabilitate infrastructure, strengthen public services, procure construction materials and build the capacity of Afghan construction companies.
Finding partners to manage and implement the project was not going to be easy. There were only a few companies in the world with the U.S. government credentials and implementation experience required to take it on and significantly fewer willing to accept the tremendous risk of working in Afghanistan.
But in October 2002, USAID awarded the general contract for REFS to New Jersey-headquartered engineering firm Louis Berger.
The contract award was a seminal moment for a company that, until then, had established a history of implementing smaller development projects backed by international donors around the world. REFS was big dollar, critical to the U.S. government mission in Afghanistan and had the potential to propel Louis Berger to new heights.
It would seem an opportunity too attractive to turn down, but looking back, REFS — as Louis Berger’s entryway into the world of high-risk, high-reward wartime contracting — triggered nearly a decade of legal troubles and corporate turmoil that is just now approaching some resolution.
After an intensive Department of Justice investigation and multiple court proceedings which uncovered large-scale fraud, Louis Berger settled with U.S. authorities for $69 million in 2010. In May 2015, Louis Berger’s former Chairman and CEO Derish Wolff was fined $4.5 million and sentenced to one year home confinement after pleading guilty to conspiring to defraud USAID. Then this past July, the company admitted to violating the U.S. Foreign Corrupt Practices Act by bribing foreign officials in various countries and paid an additional $17 million settlement.
The legal cases against Louis Berger
Louis Berger’s legal problems began in 2006 when a former employee who worked in its accounting department filed a whistleblower lawsuit in the District of Maryland, according to a public statement from the U.S. Attorney’s Office.
The lawsuit charged the company with several violations of the civil False Claims Act — the primary litigation tool in combating fraud against the U.S. government.
In August 2007, federal agents raided Louis Berger's home office in New Jersey and the ensuing DOJ investigation uncovered several instances of mischarging USAID and other federal agencies.
Two Louis Berger employees from the accounting division admitted that the firm falsely inflated overhead rates on cost-reimbursable contracts and billed the U.S. government at these fraudulent rates. The accountants also admitted to classifying nonfederal overheads as federal overhead and other misconduct.
Many, but not all, of the allegations and admissions were related to project work in Afghanistan and Iraq. Some dated back to 1990.
Calling it an “example of corporate and personal greed,” the Federal Bureau of Investigation said that Wolff orchestrated the scheme.
“[The Louis Berger Group], through Wolff and other former executives, intentionally overbilled USAID in connection with these cost-reimbursable contracts. The scheme to defraud the government was carried out by numerous LBG employees at the direction of Wolff,” according to the FBI.
In November 2010, Louis Berger entered into a deferred prosecution agreement and settled criminal and civil charges, agreeing to the $69 million settlement. Around the same time, the two employees also pleaded guilty to defrauding the government. Approximately four years later, Wolff pleaded guilty, which led to the $4.5 million fine and one-year home confinement penalty.
“Today’s plea is the result of impressive investigative work undertaken to root out fraud that hinders global development,” said Daniel Altman, the special agent in charge from the USAID Office of the Inspector General, referring to Wolff’s guilty plea in December 2014.
The sweeping investigation into Louis Berger revealed other accounting and operational anomalies related to work in multiple Asian countries, resulting in Foreign Corrupt Practices Act violations and a separate fine of $17 million, which Louis Berger has called its “final U.S. Government settlement.” Two former Louis Berger executives pleaded guilty to those charges and await sentencing. Meanwhile, the revelation that the company bribed officials in India to the tune of $1 million has sparked a series of arrests in the Indian state of Goa.
The perfect storm
Louis Berger’s evolution from a small American company building roads at home to one of the largest international development contractors in the world was more of an incremental progression over time than a meteoric rise.
Founded as an engineering firm in 1953 with a single office in Harrisburg, Pennsylvania, the firm established a track record in transport engineering through the 1950s by building roads in the U.S., but in 1959 ventured overseas to build a major road in Myanmar.
Incorporated in New Jersey in 1962, Louis Berger endured for decades as a midsize company winning and undertaking moderately sized projects. Often with World Bank funding, the company completed transport sector master plans for multiple countries which led to follow-on road and bridge design and program management assignments in those same countries.
As the company won more and more work in developing countries from Haiti to Indonesia, it supplemented its infrastructure expertise with softer service offerings, like capacity building and training, which helped establish the link between infrastructure development and social and economic development. Viewed as innovative at the time, the linkage also formed the foundation of Louis Berger’s “Integrated Development” division, which is still in existence today.
The integrated model led to a well-established presence in the countries in which it was working and an expansion of its markets from transport to agriculture, environment, energy and other sectors. Resident managers built local knowledge and staff in each country. And Louis Berger adopted a decentralized and geography-based management structure where senior officers were given a territory for which they were responsible and operational control of the contracts they signed.
The more decentralized and localized approach worked well in developing countries and difficult operating environments, particularly in the days before technology facilitated global connectivity and allowed tighter centralized control from headquarters.
“In terms of being out there for your clients and being in touch with what’s going on on the ground, that decentralized model was very effective,” said Charles Bell, Louis Berger’s Integrated Development Group vice president. “You could be so responsive to your client in terms of technical needs.”
The structure also resulted in what former and current executives called a “silo-based organization,” and this only worsened as Louis Berger started to acquire other companies to grow revenue. While many corporations approach market expansion through acquisition, Louis Berger generally decided against integrating the new firms into its operations. Instead, Louis Berger acquired controlling interests in the companies, but retained them as separate enterprises each with their own governance structures and cultures. (The Louis Berger brand includes Berger Group Holdings and all of its subsidiaries, including Louis Berger Group, Louis Berger International and Louis Berger Services.)
The inorganic growth strategy, coupled with an ongoing push to penetrate new markets, was to help achieve the far bigger vision of becoming a billion-dollar corporation. Some former employees say this aggressive target, pursued relentlessly by Wolff and other executives, overshadowed other important aspects of the business and contributed to an unsparing work environment where falling short of revenue forecasts would result in career-damaging consequences.
“Pressure was on to meet forecast, and performance as a manager was assessed on these metrics. It was a brutal business equation: perform or be moved out of the way for someone else who would,” said one former Louis Berger officer who requested not to be named.
But in the early 2000s, with the U.S. deeply engaged in Afghanistan and Iraq, the firm’s reputation for operating effectively all over the world and tackling more adventurous assignments began to pay off. Massive U.S. aid spending in both countries opened up new funding streams that Louis Berger was well-positioned to tap.
“That demarcation line in terms of being really a smaller firm flying below the radar in a lot of respects really changed with Afghanistan and Iraq,” revealed Larry D. Walker, Louis Berger’s executive vice president of strategy and development. “We won huge contracts because we were known for being able to get places quickly and get things done.”
REFS, in particular, was widely regarded as the largest and most visible program being implemented by USAID in Afghanistan at the time. According to U.S. government procurement and audit records, the project was originally priced at $210 million, but contract modifications quickly escalated costs to $665 million. The program included the design and construction management contract for the Kabul-Kandahar road — a key corridor essential for the military campaign.
“All of a sudden [we were] thrown into this political limelight where it was very Washington oriented, very centralized. Meetings with the national security council,” Bell highlighted.
Louis Berger completed the high-profile Kabul-Kandahar road project, which led to other major awards in Afghanistan through umbrella-type contracts. Similarly in Iraq, the company won large construction design and program management assignments in support of the U.S. State Department and military.
This growth catapulted Louis Berger from a midsize company, operating more or less smoothly, to a major wartime implementer with contracts under intense scrutiny. Ill-prepared for the compliance requirements demanded by U.S. government contracting officers and auditors, the company’s systems weaknesses and management indiscretions were exposed.
“It was the perfect storm,” Bell acknowledged.
$25 million well-spent
Berger’s treatment by USAID has raised questions over how the company evaded more serious sanctions.
As part of the settlement with the U.S. government, Louis Berger and USAID entered into a three-year administrative agreement. The special agreement states that while federal acquisition regulations provided a basis to debar Louis Berger, USAID determined that suspension or debarment is “not necessary at this time.” Louis Berger has continued working with USAID.
The USAID decision is particularly resonant given other high-profile fraud cases involving USAID and its implementing partners.
In December 2010, USAID suspended AED, following an investigation into financial expenditures in Pakistan and Afghanistan. An audit revealed “evidence of serious corporate misconduct, mismanagement and a lack of internal controls.” In that case, AED was barred from receiving new USAID funding during the investigation and, with its primary revenue stream under threat, was ultimately acquired by FHI.
More recently, in January 2015, USAID suspended IRD, before a U.S. district court ordered the government agency to reverse the suspension. USAID originally alleged that the organization misused U.S. taxpayer funds and engaged in “serious misconduct.” USAID had blocked IRD from receiving new contracts.
USAID declined to comment directly on the case, instead referring Devex to the administrative agreement.
Louis Berger began a corporatewide voluntary recusal from World Bank work in 2011, but in February 2015 the financial institution debarred Louis Berger for one year for “engaging in corrupt practices,” charges linked to the FCPA violations. The one-year suspension ruling allows Louis Berger to avoid cross-debarment by other multilateral development banks.
Both USAID and the World Bank make clear that Louis Berger’s “remedial measures” were the key factor in their respective decisions. The administrative agreement between USAID and Louis Berger points to a “Corporate Improvement Initiative” and references Louis Berger’s “corrective actions, remedial actions, financial restitution, corporate improvement actions and further undertakings.” The World Bank’s official notice of sanctions recognizes that Louis Berger “adopted and implemented an effective integrity compliance program in a manner satisfactory to the bank.”
“A company’s response to misconduct is clear evidence of where its commitment to integrity lies,” World Bank Integrity Vice President Leonard Frank McCarthy said in a statement. “What this case demonstrates is an investigative process and outcome that has pushed the company to take remedial action toward achieving a stronger standard of compliance and accountability across the board.”
Louis Berger has taken significant, if not unprecedented, steps to turn itself around as an organization — investing $25 million in a far-reaching reform effort that executives credit for saving the company and re-establishing credibility with the international donor community.
“I can’t say I’ve ever encountered a situation where a contractor has had to invest that much,” said Todd Canni, partner at the government contracts and disputes practice within Pillsbury Winthrop Shaw Pittman LLP who called the corrective action taken by Louis Berger “extremely impressive.”
A significant portion of the $25 million was invested in new internal systems: accounting, budgeting and forecasting, centralized information management, and procurement. With the help of two external accounting firms, the company implemented 261 new internal controls along with new policies and procedures associated with the new controls.
Louis Berger dismissed several managers, instituted a new employee training program, upgraded its ethics and compliance office and introduced a hotline for employees to report any inappropriate behavior or situations. A new reporting structure and checks and balances were put in place. For instance, accountants in the field and other staff in charge of finances now report back to the home office rather than to bosses within field operations. The chief compliance and ethics officer now reports to an independent audit committee rather than to the president and CEO.
The “single most important control,” according to Walker, is the Delegation Responsibility and Authority Manual, which he said prevents the firm from being driven by personalities as was the case pre-2010.
“The DRAM empowers employees to understand who can tell them what to do and if somebody is outside the box in telling them what to do and how to do it,” Walker said.
Management also established and bolstered new career tracks, including client managers, project managers and technical managers, allowing the company’s employees to advance across the spectrum of professions within the organization.
“In the past, if you wanted to advance in your career, you basically ran a division with a profit and loss,” Bell revealed. “Now, we put in a whole new system that acknowledges the incredible importance of business services, whether it’s in compliance and ethics, whether it’s in communications, whether it’s in finance and accounting.”
The company also reformed its ownership by implementing an employee stock ownership program. Before 2010, three individuals owned 75 percent of the company and five individuals owned 80 percent. Today, no individual can have voting rights for more than 5 percent of the stock and 25 percent of the company is owned by all employees.
“The nature of the reforms and corrective actions appear to be on target with what I recommend to clients,” according to the lawyer Canni. “And when I used to serve as the director of suspension debarment operations for the Air Force, that’s the type of corrective action changes and improvements we would look for.”
Despite the internal reform effort, it remains to be seen if Louis Berger can fully rebound from the events of the past decade, particularly recovering its business with USAID. According to Devex analysis of U.S. government spending data, Berger was among USAID’s top three contractors in 2010, but did not register in the top 20 for fiscal year 2014. The firm has continued to operate around the world, further diversifying its client base and even winning some large competitive contracts with the U.S. Millennium Challenge Corp.
For the implementer community in Washington, D.C. and beyond that watched the AED and IRD cases closely, the conclusion of the Louis Berger case will do little to alleviate the confusion over USAID’s approach to investigating misconduct, pursuing legal action and assigning penalties. To many, it remains unclear what punishments fit what crimes in the eyes of America’s lead foreign aid agency. What the Louis Berger case does make clear is that corporate ambition is rarely rewarded at the expense of corporate integrity. And proactive and aggressive reform at any cost, in the long run, may offer the best chance at redemption.
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