By Daniel Wilson

Law360 (May 24, 2021, 9:49 PM EDT) -- A U.S. Department of Defense watchdog has found that the DOD's contentious use of a $1 billion COVID-19 relief fund to support the defense industrial base, previously criticized by lawmakers, complied with both the Defense Production Act and relevant regulations.

A sample of six of the largest funding agreements awarded to offset financial distress within the defense industrial base, or DIB, using funding provided to the DOD through the Coronavirus Aid, Relief and Economic Security, or CARES, Act, showed that the DOD had appropriate vetting in place for the deals and acted within its authority, the DOD Office of Inspector General said in a May 20 report released Monday.

"The six DIB companies we reviewed will receive $206.8 million in CARES Act funding to help them overcome the financial distress caused by the COVID-19 pandemic and sustain projects that are critical to national defense," the OIG said.

Congress had given the DOD that funding as part of the massive COVID-19 relief bill to increase DIB manufacturing capacity, and the way the department used that funding quickly drew complaints from lawmakers, with Sen. Elizabeth Warren, D-Mass., and Rep. Ro Khanna, D-Calif., asking the OIG in September to launch a related probe.

The department allocated $100 million to offering loans under the Defense Production Act, or DPA, which gives the president and designated agencies broad authority to address issues within domestic industry deemed necessary for supporting "the national defense"; $213 million for medical supplies and equipment; and the bulk of funding, $687 million, for offsetting financial distress within the DIB, according to the OIG.

Warren and Khanna argued that the $1 billion was meant to shore up supplies of domestic medical and personal protective equipment, or PPE, not to "pad the pockets of defense contractors."

That was followed by four House committee and subcommittee leaders saying in October they would launch their own investigation into the "potentially inappropriate" use of that funding.

But the DPA is not limited to increasing manufacturing capacity and can also be used to help sustain the industrial base, the watchdog said Monday. The uses of CARES Act funding reviewed by the OIG, which included the highest-value award from each of the six designated DIB sectors, fell within that sustainment authority as well as related regulations, it said.

DOD officials had sufficient review and verification processes in place to identify appropriate projects where funding was necessary to respond to financial distress and where those companies were critical to the national defense, and the department continues to provide related oversight, according to the OIG.

For example, $63 million awarded to Boeing Co. was used to support the supply chain for critical spare parts for C-17 transport aircraft engines, being passed on to subcontractors who were adversely affected by the pandemic, the OIG said.

The pandemic created an unplanned need for those parts due to unexpected missions flown by the Air Force to transport personnel infected with COVID-19 in remote locations to medical facilities, and to deliver PPE and testing material, the watchdog said.

A representative for the DOD declined to comment on the report Monday, but former Pentagon chief spokesman Jonathan Hoffman had argued in a September statement that the controversy over how the DOD had used the $1 billion fund was based on a "misunderstanding" and that the department had been "wholly transparent" with how it had used the funding.

"The CARES Act did not limit — nor did it intend to limit in its language — the use of Defense Production Act Title III to only medical resources," Hoffman had said. "As part of the efforts to mitigate economic damage, the Act allowed monies to be spent to support individuals and industries that had been impacted by COVID. This is exactly what DOD has done."

A representative for House Coronavirus Crisis Subcommittee Chairman Jim Clyburn, D-S.C., one of the House leaders involved in launching the October investigation, said Monday that he did not have any response to the report "at this time."

Representatives for several other lawmakers did not immediately respond to requests for comment.

--Additional reporting by Jennifer Doherty. Editing by Daniel King.

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