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The Corrupt History Behind the Federal Financial Disclosure Reporting System

Dan C McIntosh


  • Discusses the history of financial disclosure reporting for federal government employees.
  • Discusses federal ethics scandals that contributed to the current financial disclosure reporting regime.
  • Provides an overview of ethics regulations applicable to federal government employees.
The Corrupt History Behind the Federal Financial Disclosure Reporting System
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Each January thousands of federal employees receive emails regarding the status of their annual Office of Government Ethics (OGE) 450 financial disclosure report, which requires executive branch employees to report their financial interests and interests outside of government. Federal employees handling procurement matters often ask, “Why do I have to complete this report?” This article seeks to answer the question why OGE 450 reports exist and why it is necessary for thousands of federal employees to file financial disclosure reports each year.

What Are OGE 450s?

The Office of Government Ethics is an independent arm of the executive branch responsible for preventing conflict of interest issues from arising among federal employees.

The primary purpose of the OGE 450 disclosure program is to identify if an employee has a financial conflict of interest with respect to one of their duties. Most commonly, the potential conflict of interest arises from government employees with duties to either make decisions that involve or have an impact on private companies. By requiring individuals to identify all significant sources of income, assets, and debts owned by themselves or their spouses/dependents, the ethics official is able to advise for which private entity an employee might have a financial conflict of interest in performing their official duties. This provides notice to an employee and their supervisory chain of the need for an ethical firewall between that employee and a particular private company. Such an ethical barrier helps ensure integrity and public confidence in the procurement process. Employees that provide false information in their OGE 450 disclosure risk disciplinary action from their agency, as well as a civil fine (up to $60,517) and criminal penalties from the Department of Justice (DoJ). However, the current OGE 450 process of financial disclosures did not become a routine part of government contracting until a series of scandals shook public confidence in the system.

Reviewing the OGE 450 system’s regulatory history reveals that financial disclosure reporting was just one of numerous ethical controls created in response to high-level corruption and abuse-of-power procurement scandals that occurred in the 1980s. The OGE 450 system is only one part of the congressional reaction to Operation Ill Wind, a Federal Bureau of Investigation (FBI) investigation into Department of Defense (DoD) procurement corruption that led to the convictions of over fifty individuals, including the Assistant Secretary of the Navy, the Deputy Assistant Secretary of the Navy, and the Deputy Assistant Secretary of the Air Force. The intersection of political favors, corporate espionage, and greed in the late 1980s fueled a push in Congress to create stronger controls over the government contract process. President George H. W. Bush also supported more regulation over federal procurement, and his first executive order established a commission to propose better ethical controls over the procurement process. The results of numerous congressional hearings into the procurement scandals contributed to the ethics commission’s recommendation for the OGE 450 financial disclosure system still in use.

Government Ethics Becomes a Law in 1978

The roots of the OGE 450 program started with the passage of the Ethics in Government Act of 1978 (EGA). In addition to creating the OGE, the EGA created a public reporting requirement for congressional members and senior executive employees or appointees. This public reporting program required senior government officials to detail all of their financial assets and sources of income, as well as the financial interests of their spouses and dependents.

The goal of the public reporting requirement was to prevent officials from using their influence and power of office for their financial benefit, or as the EGA reads, “to preserve and promote the integrity of public officials and institutions.” The EGA stated that this disclosure program was geared towards “preventing conflicts of interest or apparent conflicts of interest” and to provide a mechanism to discipline offenders. Such changes were common sense: Prior to 1978 a congressman who owned a financial interest in a corporation competing for a government contract could write letters directly to the contracting officer encouraging award to that corporation.

Buried in the EGA was a “confidential reporting” provision, whereby individual agencies may and, at their discretion, require certain employees to submit financial disclosure reports. However, for the most part, agencies did not utilize this confidential reporting requirement, and the idea of expanding the financial reporting requirement across the government would not be revisited for a decade.

It is evident that the EGA was targeting corruption at the very highest levels of government. However, absent were reporting requirements specifically targeting the masses of contracting officers or other government employees at the lower levels of the procurement process.

The DoD’s Budget and Opportunity for Corruption Rise

A major policy implemented by President Ronald Reagan during his tenure was a significant increase in defense spending after the post-Vietnam drawdown. The DoD budget increased from $164 billion (5.1% of GDP) in 1978 to $236 billion (6.6% of GDP) in 1985. Reagan’s defense chiefs publicly campaigned for additional funding for rapid increases in re-armament. One of these chiefs was Reagan’s Secretary of the Navy, John Lehman, who aggressively sought an increase in the Navy budget to build and fund his dream of a modern “600 ship navy.” Unfortunately, as the amount of defense procurement funds increased, so did the opportunity for corruption.

One of Lehman’s subordinates was a former World War II fighter pilot, Melvyn Paisley, who was the Assistant Secretary of the Navy from 1981 to spring 1987.

Paisley was a former program manager at Boeing with a reputation for success. Unfortunately, his quest for success also led to allegations of unethical conduct. For example, during his tenure at Boeing, Paisley was rumored to be involved in a corporate espionage scandal in which a contractor employee installed surveillance devices inside of an office building in Florida to obtain information about a competitor. According to both Paisley and his former in-laws, Paisley’s personal life embraced the “fighter jock” stereotype: He was married four times; enjoyed sports cars, travel, and parties; and was not shy to appear in public with a steady rotation of young women at his side. His third wife in 1968 died while Paisley was in the home under circumstances that local investigators eventually determined to be suicide.

Prior to his appointment as Secretary of Navy, Lehman was an industry consultant for Boeing and worked closely with Paisley. Lehman greatly admired Paisley for his fighter pilot exploits and recommended his appointment as Assistant Secretary of the Navy for acquisition matters in 1981. As part of Lehman’s “600 ship Navy” goal, Lehman wanted to reduce the costs of large procurements by seeking more competition and shifting cost responsibility to contractors. Paisley’s primary mission would be to reduce the costs of large procurements to the government. Considering both Paisley’s colorful personal life and history at Boeing, his appointment to be the acquisition lead for a DoD agency was unusual.

In the late 1970s and 1980s, it was common for agencies to utilize private procurement consultants to assist with drafting the solicitation requirements and evaluations of complex procurements. What was unusual in this period was that certain consultants created a black market to trade DoD procurement planning and evaluation documents among themselves and DoD contractors. These documents were typically obtained by bribing DoD employees. At the same time, the huge increases to the DoD budget only exacerbated this problem as more contract opportunities created a bigger pool of contractors chasing contract awards, a larger volume of contract-sensitive information to be traded, and more DoD contract employees to be tempted into selling procurement information. The record of Paisley’s participation in the illicit trading of DoD procurement information became known from the testimony of his co-conspirators, transcripts of FBI wiretaps, and Paisley’s guilty plea to conspiracy, bribery, and theft.

Soon after Paisley started his term, he began mingling with several prominent DoD consultants and lobbyists. Paisley entered his position lacking a proper industry liaison; shortly after his appointment he found one in Bill Galvin. Galvin, a consultant who represented several DoD contractors, quickly befriended Paisley. During a later interview, Paisley stated he found Galvin to be a very valuable liaison as Galvin seemed to have connections to all of the major Navy contractors and always had plenty of sage counsel to offer Paisley about the industry. Galvin later testified that to foster their budding business relationship and friendship, he also provided Paisley with extravagant dinners, travel expenses for European vacations, and tickets for popular sporting events, all of which Paisley accepted without concern. Galvin stated that he welcomed the role as Paisley’s friend to discuss the latest procurement industry machinations and exchange ideas about Navy procurement strategies. Both Paisley’s and Galvin’s statements reveal how Paisley quickly transformed into being a part of the “black market.”

Paisley was required to file annual financial disclosure reports as a senior government official. However, Paisley’s disclosure reports were filed late and were incomplete. Because of confusion between the OGE and the DoD over the annual financial disclosure process, none of the errors in Paisley’s report were discovered until after he was indicted in the Ill Wind process.

As revealed in FBI wiretaps, Galvin accepted “consulting fees” from various contractors for his help in securing contracts, which included selling contractors’ information obtained by questionable methods. In return for the growing streams of gifts, Galvin was recorded calling Paisley and requesting classified information on the Navy’s long-term plans for purchasing weapon systems or technology. According to Paisley and a Boeing employee, Galvin would sell this information to contractors debating allocation of funds for research and development costs. Soon Paisley was maximizing his access to information for Galvin to trade. Galvin also testified that Paisley would provide Galvin with copies of evaluation summary briefings he received on proposed awards that Galvin would sell to contractors. This quid pro quo relationship allegedly continued to blossom for the duration of Paisley’s term. According to Galvin, the amount of money exchanged between Paisley, Galvin, and the contractors necessitated the opening of Swiss bank accounts and other offshore accounts.

Galvin also testified that Paisley and Galvin created a procurement consulting business that included Paisley’s wife, daughter, and stepson as paid employees while Paisley was Navy Secretary. The idea was that the new company would be Paisley’s way to continue funding his newfound luxurious lifestyle using his contacts and information gleaned from his position. According to Galvin’s grand jury testimony, the two agreed that he would act as head of the business until Paisley resigned from his position. Galvin testified that Paisley used his influence to push contractors into utilizing the services of this new business, with the goal that their new company would receive 10% of the revenue for the contracts.

Ironically, when, early in his term, Paisley was asked during a congressional hearing on defense procurement costs about what should happen to those who cause fraud, waste, and abuse to the procurement system, Paisley explained, “You have to hang ’em from a tree where everybody can see them.”

Paisley and Galvin were far from the only bad apples in the procurement barrel. The procurement process was corrupt at every level. Executives for the contractors were finding ways to fund the bribes to the consultants for sensitive information. Executives and program managers reasoned that trading this information was so common throughout the industry that not buying secrets would render the company noncompetitive. Later evidence revealed contractors would often bury these bribes into their costs charged back to the government on the contracts. Sixteen of the top twenty government contractors were later investigated as participants in the black market of procurement information. Later testimony and indictments of other consultants would demonstrate that Galvin was only part of the clique of consultants that operated this black market of information (much of the information being traded was classified).

At the other end of the corruption operation were the numerous DoD employees who, like Paisley, were alleged to have provided or sold procurement information to the consultants. One of these DoD employees was Jack Sherman, a contracting officer for the Marine Corps.Sherman’s government salary was around $30,000 in the 1980s (roughly adjusted to $70,000 in 2019) as a contracting officer with around fifteen years of civil service. Sherman later testified that at one point in his career, when he faced numerous personal expenses, he agreed to help a contractor obtain a contract modification that would contribute $6 million in revenue to the contractor in exchange for $80,000 cash. While pleading guilty to bribery and conspiracy, Sherman testified that he used this money to fix the roof of his house, buy a new truck, maximize his IRA contributions, and provide a nice batch of Christmas presents for his family. He stated that he continued taking bribes over several years, hiding stacks of money wrapped in aluminum foil under his ice cube tray in his freezer. The alibi Sherman would tell his friends regarding the sudden increase in wealth: He was a very lucky gambler on horse races. Because Sherman was not considered a senior government employee, the financial disclosure reporting requirements did not apply. Therefore, he was not required to disclose his sources of income for review to determine whether he had a conflict of interest with any company.

The procurement corruption was widespread across the DoD. For example, Paisley’s counterpart in the Air Force, Deputy Assistant Secretary Vic Cohen, pled guilty to charges that he also sold information to Galvin. Cohen admitted that he directly advised a contractor how to change its proposal to be more competitive after he received evaluation briefings.

Operation Ill Wind

Behind the scenes, in 1986, Navy detectives and the FBI received information from an unnamed source that several Washington, D.C.–area consultants were bribing DoD employees in exchange for release of classified information and then selling that information to other consultants. This tip developed into Operation Ill Wind, which was the code name for a DoJ investigation of DoD contractors, defense consultants, and DoD employees that concluded in the summer of 1988. The FBI was able to set up wiretaps of individuals involved in the black market of DoD data. One by one, the FBI was able to arrest individuals involved, and often turn the individual to cooperate with the agents to investigate another member of a growing list of government employees, consultants, and corporate officials who were suspects in the corruption probe.

Eventually the FBI was led to Galvin. Wiretaps installed in his office recorded numerous conversations implicating Galvin in various bribery schemes involving government employees, other consultants, and contractor employees. Meanwhile, Paisley quietly resigned from his position in March 1987 and quickly transitioned into his consulting business with Galvin. FBI wiretaps continued to record Paisley and Galvin discussing their plans to profit from future contract awards Paisley had influenced while in office. Paisley and Galvin were recorded discussing the exchange of procurement information and the appropriate “fees” interested contractors should pay for this information.

After roughly two years of investigations, Ill Wind uncovered numerous incidents of bribery of DoD officials by contractors for sensitive information related to DoD procurements and consultants trading sensitive information among DoD contractors. On June 14, 1988, over 100 federal agents served dozens of search and arrest warrants across twelve states to DoD employees, corporate executives, and industry consultants. The black market of procurement data was finally shut down.

The ensuing Ill Wind investigation led to over sixty prosecutions, over fifty convictions, and over $622 million worth of fines and restitutions paid back to the government from contractors. In June 1991, Paisley pled guilty to federal conspiracy, bribery, and theft and received a four-year sentence. For his part, Jack Sherman pled guilty to bribery charges and served an eighteen-month prison term. Five of the then–top ten government contractors pled guilty to mishandling and bribery of classified documents.

Congressional Review of the Procurement Process

The Ill Wind scandal created intense public pressure on Congress to reform the procurement system and the ethics regulations. Numerous congressional and Senate hearings targeting procurement fraud occurred in 1988 and 1989. During the hearings, participants frequently raised questions about Ill Wind and Paisley and made recommendations aimed at eliminating corruption in the procurement system.

Running practically concurrent to the Ill Wind scandal in the mid-1980s was the Wedtech procurement scandal. Wedtech Corporation was initially a small business based in New York City that sought federal contracts under one of the Small Business Administration programs for disenfranchised businesses. Several Wedtech executives were found guilty of exchanging bribes with several government officials (similar to Ill Wind, testimony revealed that industry consultants often served as intermediaries in the bribery scheme) for awards of over $250 million worth of sole-source contracts to Wedtech. The Wedtech scandal extended to several politicians and generals, leading to twenty convictions (Rudy Giuliani was the lead federal prosecutor in the Wedtech scandal). Less than a month after the Ill Wind agents served arrest warrants, Ed Meese, the U.S. Attorney General, resigned in July 1988 after being implicated in the Wedtech scandal. Wedtech further tarnished the reputation of the federal procurement system already stained by Ill Wind and further incited a powerful congressional response.

New Ethics Laws and Regulations

Describing the influence of Ill Wind and the Wedtech scandals on the numerous procurement laws passed by Congress between 1988 and 1993 warrants a separate and lengthy article (increased civil and criminal penalties for federal employees, contractor employees, and businesses; post-government employment prohibitions; Procurement Integrity Act; etc.). In the late 1980s, Congress passed twenty-two major procurement reform statutes, including several changes recommended by the Packard Commission chaired by the former CEO of Hewlett-Packard, David Packard. The thousands of pages of testimony and legislative debate over these issues produced procurement laws and regulations that are still in place today.

One of the problems Congress sought to address was the identification of financial conflicts of interest of government officials. As previously noted, Paisley was required to submit the public financial reporting documents under the EGA. Paisley did submit his financial disclosures, although only after his arrest were his disclosures audited and determined to be inaccurate. Negligence and cross-agency confusion between the OGE and the DoD’s role in the process led to rampant abuse of the existing financial disclosure system. An audit of the DoD’s 1987 financial disclosure report revealed that the list of employees required to file had not been updated for two years, and 126 out of 694 DoD employees required to file a report had filed nothing.

As previously noted, Jack Sherman had no requirement under the existing laws to report his sources of income as he was not a senior employee. More laws and regulation to increase review standards of the financial disclosures of senior federal employees such as Paisley or Cohen would have little impact on the biggest part of the procurement population. Without a similar system of financial disclosures at every level of the procurement process, little would change for the herds of contracting officers, program managers, contract specialists, technical consultants, legal advisors, and other employees that represent the majority of the federal procurement system.

The General Accounting Office, now known as the Government Accountability Office (GAO), produced a report on October 5, 1988, with several recommendations for changes in ethics regulations. This report recommended the OGE issue regulations prescribing a confidential financial reporting system for executive branch employees as well as the creation of penalties for individuals who violate the conflict of interest regulations.

On January 25, 1989, five days after swearing in as president, George H.W. Bush issued his first executive order, E.O. 12668, titled “President’s Commission on Federal Ethics Law Reform.” E.O. 12668 created a commission to review existing ethics laws with recommendations for improvement.

The Commission’s report (titled “To Serve with Honor”) and recommendations were incorporated within another executive order: E.O. 12674, titled “Principles of Ethical Conduct for Government Officers and Employees.” E.O. 12674 discusses many of the rules familiar to every federal employee who has completed an ethics briefing since 1990 (e.g., “Public service is a public trust”) as well as the guidelines for the current annual ethics training requirements (“training shall include mandatory annual briefings on ethics”). Most applicable are the directions: “Employees shall not hold financial interests that conflict with the conscientious performance of duty” and “Employees shall not engage in financial transactions using nonpublic Government information or allow the improper use of such information to further any private interest.” E.O. 12674 directed the OGE to create regulations establishing a system of nonpublic/confidential financial disclosure by executive branch employees that would operate parallel and independent of the public financial disclosure requirements set forth in the EGA. The OGE was also directed to create regulations to guide agencies when determining which employees must submit confidential reports.

The Ethics Reform Act of 1989 and New Disclosure Reporting Requirements

In December 1989, the Ethics Reform Act of 1989 (ERA) was signed into law. This law had many widespread changes: limiting outside income of certain government officials, limiting acceptance of gifts, and imposing post-government employment restrictions. Relevant here was a change that granted the OGE the authority to require employees to file confidential financial disclosure reports. Similar to President Bush’s April 1989 executive order, the ERA authorized a new type of financial disclosure report that would not be releasable to the public. Thus, the ERA granted the ability for the OGE to implement its own set of disclosure requirements for executive branch employees.

After the passage of the ERA, the OGE had both presidential direction and congressional authorization to create a system of confidential financial disclosure reporting for federal employees. The OGE also possessed the recommendations and results of numerous recent congressional hearings and investigations on government corruption scandals. The OGE released an interim rule on April 7, 1992, that established a single system of confidential/nonpublic financial disclosure reports for “midlevel employees” across the federal government. The OGE rationalized that a single confidential reporting program for the entire executive branch would “best serve the needs of conflict detection and resolution.”

The OGE reasoned, “In many agencies, certain employees in positions below the GS-13 level do have significant involvement in contracting and the other specified functions. Hence, in order to protect the integrity of the Government and avoid conflict situations, employee positions classified at the GS-15 level and below (without a floor) should be subject to reporting if they involve the types of duties specified in this regulation, as determined by the agency.”

The premise of this recommendation is sound. The Ill Wind investigations revealed that many of the government personnel implicated in the wrongdoing were “opportunists” who did not have a prior reputation as attempting to steal from the government or anyone else. Requiring all federal employees who are involved in the decision to award contracts to annually detail all of their sources of incomes—with the understanding their supervisory chain will be reviewing the information—might dissuade the next Jack Sherman from trading information about potential awards for personal gain. The annual reporting process would also mitigate opportunists from later arguing that they were unaware a conflict of interest existed. Had the financial disclosure rules applied to Jack Sherman, he would have been required to report the money he was receiving from the contractor, and his failure to report that additional income could have served as the basis for a civil fine and an additional criminal charge.

In October 1992, an interim rule went into effect as 5 C.F.R. § 2634.908 requiring annual financial reporting for employees whose duties involved substantial participation through “the making of decisions in one or more of these Government actions: (i) Contracting or procurement; (ii) administering or monitoring grants, subsidies, licenses or other benefits; (iii) regulating or auditing any non-Federal entity; or (iv) performing other activities having a direct and substantial economic effect on a non-Federal entity.” In October 1992, the OGE notified all agencies the annual confidential disclosures would be completed by employees using a form “SF-450.” The SF-450 form is the predecessor to the present electronic disclosure system known as “OGE 450.” Although minor changes to the OGE-450 process have occurred between 1992 and present, the recommendations from the 1988 GAO report are still implemented: a single system of confidential financial disclosures across the executive branch to be completed annually and a series of penalties for noncompliance.


The corruption scandals of the late 1980s demonstrated that the existing system of combating procurement corruption was wholly inadequate. The congressional response to these scandals fueled a need for increased scrutiny of individuals involved in awarding public contracts. In principle, the burden on thousands of federal employees to complete Form SF-450s (later the OGE 450) annually was offset by the reduction in corruption and increased public trust in the federal procurement process. Ideally, the present OGE 450 process dissuades opportunists (a potential Jack Sherman or Melvyn Paisley) from trying to “cash in” by trading procurement information to supplement their government income.