Pentagon IG investigation renews scrutiny of Shanahan's ties to Boeing

President has repeatedly praised former executive

By CNN'S ZACHARY COHEN CONTRIBUTED TO THIS REPORT.
Martin H. Simon - Pool/Getty Images

Acting U.S. Secretary of Defense Patrick Shanahan

In the months since Patrick Shanahan became acting defense secretary following the departure of James Mattis, President Donald Trump has repeatedly praised the former Boeing executive.

Yet Shanahan's relationship with his former employer has emerged as a point of controversy that could pose challenges if he's nominated to permanently lead the Pentagon.

That controversy got more heated on Wednesday, when the Pentagon's inspector general's office announced an investigation into complaints that Shanahan has promoted Boeing and disparaged its competitors.

The investigation comes in the immediate aftermath of the Boeing 737 Max 8 crash in Ethiopia, which has prompted a closer examination of the relationship between the company and the federal government.

Shanahan has largely avoided scrutiny from the crash. Although he served as general manager of Boeing's commercial airplane programs, he did not lead the 737 Max's development program. The ethics accusations leveled by the organization Citizens for Responsibility and Ethics in Washington accuse Shanahan of violating his signed ethics agreement by praising Boeing during discussions of government contracts in his current position and criticizing the company's competitors.

A Pentagon spokesman said Shanahan welcomes the inspector general's investigation and that he has always upheld his ethics agreement.

But an aide to Sen. Jack Reed, the top Democrat on the Senate Armed Services Committee, told CNN if Shanahan were nominated for the permanent job, the committee couldn't move forward in bipartisan manner until the inspector general's investigation is completed.

Although Shanahan has recused himself from Boeing-related matters, his ascension to the top of the Pentagon marks an unprecedented moment in which a decades-long executive for a top defense contractor occupies ultimate influence over government programs that rely on defense contracts. Shanahan spent 31 years at Boeing before officially joining the Pentagon in July 2017.

That has stoked concerns over the potential for impropriety, particularly as the defense budget swells to near-record levels and the Pentagon implements expensive new initiatives such as Space Force. Much of that new money will be spent on contracts signed with the country's top defense contractors, including Boeing, the second biggest defense contractor in the country.

"He may not be directly negotiating contracts, but he now directs overall policy. Boeing provides so many services for DOD, so I don't see how Shanahan can pull back from all decisions that could potentially affect those issues," said William Hartung, director of the Arms and Security Project at the Center for International Policy.

Shanahan was originally nominated to work at the Pentagon in June 2017 as deputy secretary under Mattis. Though Shanahan had no military and little foreign policy experience, Mattis brought him in to handle internal reform and budget issues.

To avoid the appearance of conflicts of interest, Shanahan divested stocks in more than a dozen defense contract companies, including Boeing. But a review of his financial disclosures shows that Shanahan still makes money from the company.

He continues to receive about $218,000 annually from a Boeing retirement plan, which Shanahan said is permitted under his ethics agreement. The disclosures also show that he earned roughly $19 million in income from various Boeing stock sales, payouts and awards as he separated from the company to enter the Pentagon.

Lt. Col. Joe Buccino, a spokesman for Shanahan, said in a statement, "Acting Secretary of Defense Shanahan welcomes the Inspector General's review of the complaint filed by Citizens for Responsibility and Ethics in Washington."

"Acting Secretary Shanahan has at all times remained committed to upholding his ethics agreement filed with the DoD. This agreement ensures any matters pertaining to Boeing are handled by appropriate officials within the Pentagon to eliminate any perceived or actual conflict of interest issue with Boeing," Buccino added.

The Defense Department's inspector general has not yet concluded whether a violation occurred, according to a US defense official.

The official told CNN Wednesday that the IG precisely chose to use the word investigation because there is enough credible initial information beyond the complaint filed by CREW to warrant a probe into whether Shanahan violated his ethics agreement.

Since 2009, Boeing has ranked second behind Lockheed Martin on a list of the top 100 U.S. government contractors, earning an average of about $22 billion a year through contracts, according to Federal Procurement Data System data. Boeing boasted record revenue in 2018 in part due to its defense contracts, according to a January press release.

Boeing announced Wednesday a long-planned Navy contract worth $4 billion for 78 upgraded F/A-18 jets. The contract would likely not have made it to the secretary of defense level for approval.

Shanahan previously managed some of Boeing's departments that seek such contracts. He was vice president and general manager of Boeing's Missile Defense Systems and also served as vice president and general manager of Boeing's Rotorcraft Systems, where he oversaw facilities that produce military aircraft like the V-22 Osprey and Apache helicopters.

Prior administrations have also appointed individuals with defense-industry experience as senior Pentagon officials. Gordon England worked at General Dynamics before becoming deputy secretary of defense under President George W. Bush. William Lynn, who lobbied for Raytheon, was appointed deputy secretary of defense under President Barack Obama.

But Mandy Smithberger, director of the military reform program at the Project on Government Oversight's Center for Defense Information, said Shanahan is the first secretary of defense whose experience is almost exclusively rooted in the defense industry, and she argues that his former employer Boeing has a unique level of government influence.

A Project on Government Oversight report she compiled found that in 2018 Boeing hired more senior government and military officials as executives, directors or lobbyists than other major defense contractors.

Smithberger also expressed concerns about a memo Shanahan authored in March 2018, when he was deputy secretary of defense, in which he encouraged Department of Defense officials to communicate more with the defense industry.

In the memo titled "Engaging with industry," Shanahan wrote that "a competitive mindset requires that we optimize our relationships with industry to drive higher performance."

Though he stressed the importance of following ethics regulations, Shanahan also wrote that events hosted by industry associations could provide opportunities for military officials "to efficiently, effectively, and ethically connect" with industry leaders.

"We think that there is already too much pressure to be cozy with industry, and this confuses what's in the best interests of taxpayers and troops with what's in the best interests of defense-industry profits," Smithberger said.

Gordon Johndroe, a spokesperson for Boeing, said in a statement, "Boeing adheres to and respects Secretary Shanahan's decision to recuse himself from Company matters. We have not spoken to Sec. Shanahan regarding Boeing programs during his entire Pentagon tenure."

Another Boeing official told CNN the company sees Shanahan's position in the Pentagon as a disadvantage because his recusal means that the company cannot communicate with him about its programs, as other companies can.

Despite Shanahan's promised recusal from all things Boeing-related, the late Sen. John McCain expressed discomfort in 2017 during Shanahan's confirmation hearing that he sought to enter the government straight from the defense industry.

"I have to have confidence that the fox is not going to be put back into the henhouse," McCain said, later adding, "I am not overjoyed that you came from one of the corporations."

Although the Trump administration has pushed for defense budget increases ($750 billion for 2020, up from $716 billion in 2019), Todd Harrison, a senior fellow at the Center for Strategic and International Studies who analyzes military funding, said Shanahan's current leadership at the helm of the Pentagon should not be interpreted as automatically equaling increased prosperity for defense contractors like Boeing.

Harrison said factors such as Democrats taking control of the House of Representatives and questions about how long Shanahan will hold his role inject uncertainty into the defense industry.

Sean Kennedy, director of research at Citizens Against Government Waste, a Washington-based nonprofit, said that even if Shanahan actively avoids all issues related to Boeing, his position plays into what he described as a larger trend of former industry executives or lobbyists occupying top government roles.

Kennedy added that Shanahan's role "doesn't really fit the draining-the-swamp narrative President Trump campaigned on."

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