The Beltway Bandit Behind the Passport Scandal

My hunch from last night was correct: Stanley Inc. (also known by the name of its subsidiary Stanley Associates) is one of the employers of contract workers who improperly viewed the passport file of Sen. Barack Obama. It now seems that the files of Senators McCain and Clinton were violated as well, so perhaps the speculation about political skulduggery is unfounded.

Yet that still leaves a host of questions related to the growing reliance of the State Department and other federal agencies on contractors such as Stanley, which until today was far from a household name. Yet it’s been around for more than three decades, making its money—like the scores of other Beltway Bandits that populate the office buildings of the Washington, DC area—from the federal spigot.

Stanley started as a maritime consultant and now provides “information technology services and solutions.” In its most recent 10-K filing, Stanley reported getting 65% of its revenue from the Pentagon and 35% from more than three dozen civilian agencies, most notably the State Department.

Stanley used to be a pretty small operator, but over the past decade it has grown at the remarkable rate of 33% a year, reaching more than $400 million. Although the company is publicly traded, it is majority-owned by officers, directors and employees (the latter through an employee stock ownership plan).

While the passport contract is the one in the news, Stanley is largely a military contractor. It brags that some 53% of its 2,700 employees have Secret or Top Secret security clearances. CEO Philip Nolan is ex-Navy, and his board includes retired generals from the Army and the Marine Corps. Stanley doesn’t produce weapons—it provides the systems engineering, operational logistics and other services that keep the high-tech war machine running.

In the 10-K filing, where it is addressing investors rather than the public, the company is blunt about why it expects continuing growth: “increased spending on national defense, intelligence and homeland security” and “increased federal government reliance on outsourcing.” In other words, its business strategy is fundamentally based on the continuation of the “War on Terror” and the steady hollowing out of the federal workforce.

The company goes on to list the specific risk factors that might affect the value of its shares. Here’s one of particular interest (see pp.20-21):

Security breaches in sensitive government systems could result in the loss of customers and negative publicity.

Many of the systems we develop, integrate and maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for federal government customers. We could incur losses from such a security breach that could exceed the policy limits under our professional liability insurance program. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install and maintain could materially reduce our revenues.

It will be interesting to see if the passport scandal has this negative effect, or if the federal government protects Stanley from its operational shortcomings.

Note: It’s just been reported that another company–Analysis Corporation–is also involved in the passport scandal. More on them later.

CEO of Major Passport Contractor is Lieberman Contributor

As this is being written late in the evening of March 20, the State Department has not yet revealed the name of the contractor(s) whose employees improperly peeked at the passport files of Sen. Barack Obama.

My money is on Stanley Inc., a Virginia company that has done extensive work for the Department’s Passport Services Directorate and only a few days ago was awarded a new $570 million contract to do more of the same. The company’s announcement of its good fortune began as follows:

ARLINGTON, Va., March 17 /PRNewswire-FirstCall/ — Stanley, Inc. (NYSE: SXE), a leading provider of systems integration and professional services to the U.S. federal government, today announced that it was awarded a five-year, $570 million contract to continue support of the U.S. Department of State, Bureau of Consular Affairs/Passport Services Directorate. Services include production, operational and business process support training, procurement, administration and evaluation of critical supplies, and facilities management support at the four Centers and 14 Passport Agencies nationwide along with the Headquarters’ support offices.

The release also says:

“Stanley is honored to continue its support services to the Department of State,” said Phil Nolan, Stanley chairman, president and CEO. “We will dedicate all resources necessary to assist Passport Services during this time of unprecedented growth and increasing demand…”

Even if it turns out that the workers involved in the electronic trespassing into Obama’s records were indeed Stanley employees, it is too early to say whether the company was in any way culpable in the matter.

But one thing that would add to the appearance of impropriety is that CEO Nolan has, according to the Open Secrets database, been a campaign contributor to Sen. Joe Lieberman, a leading supporter of Obama’s Republican adversary John McCain. In March 2005 Nolan gave $1,000 to Lieberman’s reelection campaign.

Since 2005, Nolan has also contributed a total of $5,350 to the election campaigns of Republican Rep. Tom Davis of Northern Virginia, where Stanley is headquartered and where Nolan apparently lives. He also gave $1,000 to Republican Senator Susan Collins of Maine last December. Nolan’s only other federal contributions were to the political action committee of his trade association, the Professional Services Council. According to Open Secrets, during the 2006 election cycle (which is when Nolan made his contributions), the Council gave 70 percent of its money to Republicans.

Whether or not Stanley Inc. is named in the Obama matter, the company may find itself answering questions about its passport operations. And members of Congress will hopefully also be asking whether the whole affair is, among other things, yet another reminder of the perils of outsourcing.

UPDATE (March 22): After this post was written, additional information appeared on the Open Secrets site indicating that Nolan recently contributed $1,000 to the presidential campaign of Sen. Hillary Clinton. And, as has been widely reported, it turns out that the passport files of Senators Clinton and McCain were also accessed improperly.