updated 3/20/2008 11:07:05 PM ET 2008-03-21T03:07:05

House Democrats demanded documents Thursday about a multibillion-dollar overseas contracting loophole to track down how — and why — the Bush administration slipped it into plans to protect taxpayer money.

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Leaders of the House Oversight and Government Reform Committee gave the administration until April 4 to turn over the documents or, aides have said, face a possible subpoena.

The controversial loophole has irked Democrats and Republicans alike. But it has the support of a trade association that lobbies on behalf of giant global government contractors, including Blackwater USA, KBR Inc., Boeing Co., CACI International Inc. and Lockheed Martin.

The United States has spent more than $102 billion over the last five years to help rebuild Iraq and Afghanistan. In that time, the Justice Department has uncovered at least $14 million in contract bribes in those two nations alone.

"Preventing fraud by contractors overseas should be a high priority," Democrats wrote in letters sent to the White House Office of Management and Budget and four other executive agencies. "Instead, the exemption for contracts to be performed overseas appears to have been inserted in the rule late in the process and against the wishes of the Department of Justice, which raises serious questions as to why and how such a policy was developed."

‘Who snuck this in?’
The letters were signed by House Oversight Chairman Henry Waxman of California and committee members Reps. Edolphus Towns of New York and Peter Welch of Vermont. Welch, who first called for the investigation, vowed "to get to the bottom of this."

"Who snuck this in at the eleventh hour and why?" Welch said in a statement. "No contractor should be given a free ride to defraud taxpayers, at home or abroad."

A spokeswoman for the OMB did not immediately respond to a request for comment. Letters also were sent to the Justice and Defense departments, NASA and the General Services Administration.

Thursday's demand marked the first step in a congressional inquiry of the loophole that was quietly slipped into plans otherwise aiming to crack down on waste, fraud and abuse of taxpayer dollars spent on government contracts. The loophole was first reported last month by The Associated Press.

The government spends an estimated $350 billion a year on contracts.

Agencies, lawmakers criticize loophole
Last May, facing growing cases of fraud and increasing spending overseas, the Justice Department introduced plans to force companies to notify the government about evidence of contract abuse worth $5 million or more. Currently, contractors report evidence of abuse on a voluntary basis, and the number of company-reported fraud cases has declined steadily over the past 15 years.

By November, after it left the Justice Department and was published in the Federal Register, the proposed rule specifically exempted "contracts to be performed outside the United States."

The Justice Department and the Office of the Special Inspector General for Iraq Reconstruction have asked the exemption be eliminated before the rule becomes law. Additionally, Sen. Charles Grassley, R-Iowa, has threatened to block the loophole in the federal budget if the administration does not do away with it.

OMB's Office of Federal Procurement Policy has repeatedly declined to comment on the loophole or how it was added to the overall fraud crackdown.

The House inquiry is looking at whether the exemption was added at the request of private firms, or their lobbyists, to escape having to report abuse in U.S. contracts performed abroad.

Contractors defend exemption
Alan Chvotkin, executive vice president of the Professional Services Council, says the loophole merely follows long-standing Defense Department policy that only covers domestic contracts. Without the exemption, Chvotkin said, U.S. firms that subcontract out work to foreign businesses could be unfairly held liable for abuse that they have little or no way of preventing.

The Arlington, Va.-based Professional Services Council represents more than 300 government contractors and other businesses. Chvotkin said the lobbying firm did not ask for the loophole but agrees with it. The Professional Services Council is among firms and other business groups, including the U.S. Chamber of Commerce, that oppose the overall rule.

"We're not trying to exempt companies or suggest that fraudulent behavior in overseas contracts should go unpunished," Chvotkin said in an interview this week. "If somebody's guilty, hold them accountable. We've just stopped short of mandatory disclosure as part of a government-wide rule that goes everywhere for everything."

The rule — with or without the loophole — could become law at any time.

"It's hard to imagine that the Justice Department won't fight to eliminate this exception before the rule becomes final," said former prosecutor David Laufman, now a defense attorney in Washington.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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