The Pentagon Fails Audit – $21 Trillion in Transactions Could Not Be Traced, Documented, or Explained

WAR is a racket. It always has been.

It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.

A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small “inside” group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes.

– From Major General Smedley Butler’s War is a Racket

The following story’s been on my radar for a while, but it wasn’t until I read the fictional-sounding article published in The Nation yesterday that I finally turned my focus on the issue.

To give you a sense of what’s going on when it comes to the unimaginable levels of waste, secrecy and probable fraud occurring at the U.S. Department of Defense, check out the first couple of paragraphs from this must read article:

On November 15, Ernst & Young and other private firms that were hired to audit the Pentagon announced that they could not complete the job. Congress had ordered an independent audit of the Department of Defense, the government’s largest single cost center—the Pentagon receives two of every three federal tax dollars collected—after the Pentagon failed for decades to audit itself. The firms concluded, however, that the DoD’s financial records were riddled with so many bookkeeping deficiencies, irregularities, and errors that a reliable audit was simply impossible.

Deputy Secretary of Defense Patrick Shanahan tried to put the best face on things, telling reporters, “We failed the audit, but we never expected to pass it.” Shanahan suggested that the DoD should get credit for attempting an audit, saying, “It was an audit on a $2.7 trillion organization, so the fact that we did the audit is substantial.” The truth, though, is that the DoD was dragged kicking and screaming to this audit by bipartisan frustration in Congress, and the result, had this been a major corporation, likely would have been a crashed stock.

If that’s not surreal enough, here’s what The Nation magazine concluded following its own investigation:

“For decades, the DoD’s leaders and accountants have been perpetrating a gigantic, unconstitutional accounting fraud, deliberately cooking the books to mislead the Congress and drive the DoD’s budgets ever higher, regardless of military necessity.”

It appears the Pentagon routinely takes money appropriated by Congress for specific purposes, keeps what it doesn’t spend, and then funnels the excess towards all kinds of unaccountable purposes, apparently including secret programs or black budget operations. The amounts left over and spent in opaque ways appear to amount to billions, if not trillions, of dollars over time. This practice is also completely and flagrantly unconstitutional:

The fraud works like this. When the DoD submits its annual budget requests to Congress, it sends along the prior year’s financial reports, which contain fabricated numbers. The fabricated numbers disguise the fact that the DoD does not always spend all of the money Congress allocates in a given year. However, instead of returning such unspent funds to the US Treasury, as the law requires, the Pentagon sometimes launders and shifts such moneys to other parts of the DoD’s budget.

Veteran Pentagon staffers say that this practice violates Article I Section 9 of the US Constitution.

Not only does this practice take money that could be put to productive use and place it into the pockets of war profiteers, it may also be funding secret wars all over the world.

This Pentagon accounting fraud is déjà vu all over again for Spinney. Back in the 1980s, he and a handful of other reform-minded colleagues exposed how the DoD used a similar accounting trick to inflate Pentagon spending—and to accumulate money for “off-the-books” programs. “DoD routinely over-estimated inflation rates for weapons systems,” Spinney recalled. “When actual inflation turned out to be lower than the estimates, they did not return the excess funds to the Treasury, as required by law, but slipped them into something called a ‘Merged Surplus Account,’” he said.

“In that way, the Pentagon was able to build up a slush fund of almost $50 billion” (about $120 billion in today’s money), Spinney added. He believes that similar tricks are being used today to fund secret programs, possibly including US Special Forces activity in Niger. That program appears to have been undertaken without Congress’s knowledge of its true nature, which only came to light when a Special Forces unit was ambushed there last year, resulting in the deaths of four US soldiers.

This immediately made me think of a tweet I sent out last night.

What’s most difficult to wrap your head around is the enormity of the unaccountable numbers at play here. Mark Skidmore, a professor of economics at Michigan State University, and two graduate students looked into decades of Pentagon financial statements and found the following:

In all, at least a mind-boggling $21 trillion of Pentagon financial transactions between 1998 and 2015 could not be traced, documented, or explained, concluded Skidmore. To convey the vastness of that sum, $21 trillion is roughly five times more than the entire federal government spends in a year. It is greater than the US Gross National Product, the world’s largest at an estimated $18.8 trillion. And that $21 trillion includes only plugs that were disclosed in reports by the Office of Inspector General, which does not review all of the Pentagon’s spending.

There’s a lot more in this excellent Nation article, which I strongly encourage you to read and share at: Exclusive: The Pentagon’s Massive Accounting Fraud Exposed.

Finally, here’s a clip of David Degraw discussing the issue on Lee Camp’s show earlier this year.

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22 thoughts on “The Pentagon Fails Audit – $21 Trillion in Transactions Could Not Be Traced, Documented, or Explained”

  1. What’s a mere $21 trillion between friends?

    If only people would remember this stuff when Trump and many other politicians want to increase the Pentagon budget, rather than mindlessly waving their flags and chanting “USA-USA”.

    Reply
  2. I was a budgeteer in the Pentagon for 2 years. The waste is astronomical in that costs are inflated beyond reason. At the end of the fiscal year, damn the souls that dare to turn unspent money back into the system. Buy everyone new PCs, new giant color copiers but don’t turn it back in lest the amount gets cut next year. I’ve seen careers get ended because of this.

    Reply
  3. The Pentagon, and Republicans in general (and to be fair, some Democrats) suffer from the American Mania Syndrome – more is not enough. The defense budget, and allocations for the 17 U.S. “security agencies” are bloated and obscene amounts that do not reflect the objective security needs of the American people. The Pentagon, defense contractors, and most politicians in Congress will continue to demand ever increasing defense budgets (and get them) with the deceptive slogan (and its variants) of “we are fighting for our freedoms”, without justifying just how wars in Afghanistan, Yemen, Iraq, Libya, Niger, etc, actually affect our way of life and “freedoms”.

    The Pentagon’s real game is – continue the funding. And if we do, it will be end of us.

    Reply
  4. Waste and corruption is unimaginable. Yet they want to know where your $300 in cash comes from? They can kiss it.

    If they don’t like it, that’s their problem. I am a part of the solution. I will NOT perpetuate the problem by going along with their insanity.

    Reply
    • Bitcoin seems to be following the same boom/bust pattern we’ve seen since inception. Having been in the space since 2012 this is the third of these I have been through. I was around for the 81% decline from the all time high in 2013, the 87% decline in 2015 and now this one in 2018 went down 82% from the high.

      Before I was involved there was an even worse 94% drop in 2011. This is what Bitcoin does.

      It’ll probably get going higher again in a real way as we get closer to the 2020 halvening.

    • Dear Mike,

      Thank you for your reply.

      Can we agree that the boom bust pattern that you note at least might be suspicious? And in particular the trading pattern of huge sales into a thin market? This is precisely what the Bankers do in the gold futures markets and how they completely control the price of gold.

      Just something to think about; I don’t know what’s going on. This is just a common sense observation. But if Bitcoin is going to save us from the evil bankers, it had better find its feet in the market.

    • No we cannot agree on that. Mainly for two reasons.

      1) It’s traded this way since inception, before anyone on Wall Street knew about it or took it seriously (they largely still think it’s a joke).
      2) The way Bitcoin has traded and continues to trade makes complete sense for an asset that has such monumental upside if successful and such painful downside if it fails.

      If this sort of volatility isn’t for you, that’s understandable, but this asset trades largely as expected to me.

    • Thank you for your patience. I’m sure we can find some common ground somewhere. Let’s try this:

      Perhaps we can agree that the bankers rig not only precious metals, but EVERYTHING else as well, e.g. — Libor, interest rate swaps, bonds, commodities traded on futures exchanges, currencies, equities, repos and I’m probably leaving some out.

      So let me pose the question a different way: Why wouldn’t they rig Bitcoin?

    • People inclined to rig or manipulate markets will always attempt to do so. The difference between Bitcoin and every other market you mentioned is that many people “take delivery” of their Bitcoin private keys, and it is trivial to do so. This is completely distinct from every other market you mentioned that comprises the legacy financial system.

  5. Egads Mike, are you asserting that the bankers wouldn’t rig Bitcoin because it is different than other manipulated assets in that “many purchasers of Bitcoin “take delivery” of their Bitcoin private keys”?

    I must be missing something here…….

    Reply
    • I thought I was clear enough, but let’s try again.

      People with an interest to rig or manipulate markets for all sorts of reasons will always attempt to do so, and Bitcoin trading isn’t immune to this.

      The bigger point that you somehow missed is that UNLIKE ALL OTHER MARKETS, Bitcoin is very easily taken off market in the form of private keys (which is the digital equivalent to taking physical delivery of gold). Taking verifiable delivery of all other assets in today’s markets is generally not done and made very difficult, which makes systemic manipulation/suppression far easier. While Bitcoin is certainly vulnerable to manipulation, on a longer timescale it is far harder to simply keep it down, should that be your goal. The fact it is an easy and widespread practice to hold your own private keys makes it distinct from all the other markets you mentioned in a material way.

  6. So if you buy a lot of Bitcoin through a Bitcoin exchange the price is not affected. And conversely, if you sell bitcoin, whether into a very liquid market, or thin market, the price is not affected?

    This is what I can’t get.

    Reply
    • Sure it’s affected. The point I’m tying to get across is that you actually have to be trading real bitcoin over time, because if you start doing phantom trades of bitcoin that don’t exist on the exchange, this will be discovered and dealt with over time as longs can pull their private keys off easily and if the exchange is short the bitcoin they are finished. So when you sell a Bitcoin to a long, there better be actual bitcoins backing up the transaction since it can be so easily taken off exchange.

      This ability to take “possession” of the underlying from an exchange is what makes Bitcoin fundamentally different.

  7. I’m just referring to the simple fact that the bankers have UNLIMITED. money.

    So by my dimwitted reasoning, if the bankers want to push Bitcoin to the moon, they can do it. And then they can dump it all back on the market if they feel like it.

    And there isn’t anything you can do to stop them. Right?

    Reply
    • That general idea is correct. If you had unlimited money you could easily create the massive ups and downs.
      The point is you still have to buy it first, so the idea of just keeping it suppressed easily is the thing that’s much harder to do.
      But yes, you could pump and dump the price.

  8. I think you give the bankers too much credit.

    When it comes to their little monopoly and associated total control of planet earth, they are prepared to do anything. The point I am trying to make is that Bitcoin (which I agree is a great idea) can only thrive if the bankers are somehow brought to heel first.

    Reply

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