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By Matt Haldane and Mark Hosenball
WASHINGTON (Reuters) - A U.S. government watchdog is examining a contractor that conducted a 2011 background investigation into Edward Snowden, the source of recent leaks about U.S. secret surveillance programs.
Patrick McFarland, the inspector general for the U.S. Office of Personnel Management, told lawmakers on Thursday that his office is probing USIS, a Falls Church, Virginia-based company that is the largest private provider of federal government background checks.
The USIS investigation predates the Snowden scandal, but McFarland told the homeland security subcommittee hearing that there are now concerns that USIS may not have carried out its background check into Snowden in an appropriate or thorough manner.
The hearing helped underscore questions lawmakers have about the widespread use of contractors in sensitive intelligence work and the oversight of those employees.
Not only is much intelligence work handled by contractors, but private contractors also conduct roughly 75 percent of federal government background checks, according to lawmakers.
Snowden, who disclosed details of the U.S. government's vast phone and Internet surveillance, was a contractor formerly employed by Booz Allen Hamilton who worked at a National Security Agency facility in Hawaii.
USIS conducts federal employee background checks for the Office of Personnel management, the government agency primarily responsible for overseeing such investigations.
"Yes, we do believe that there - there may be some problems," McFarland said of Snowden review.
Senator Rob Portman said the government has a history of flaws in how it deals with security clearances, and said it is particularly critical to properly vet contractors. "Done poorly it can be incredibly damaging," said the Republican from Ohio.
Senator Claire McCaskill described the probe into USIS as a criminal investigation into allegations the company systemically failed to adequately conduct investigations under its contract.
But USIS said in a statement that it has never been informed that it is under "criminal investigation". It said it received a subpoena for records from McFarland's office in January 2012.
"USIS complied with that subpoena and has cooperated fully with the government's civil investigative efforts," the statement said. Regarding Snowden, USIS said it does not comment on confidential background investigations.
Snowden, who is believed to be hiding in Hong Kong, went public in a video released by Britain's Guardian newspaper on June 9 as the source of documents about the U.S. government's surveillance programs.
An Icelandic businessman said on Thursday he has readied a private plane to take Snowden to Iceland if the government grants him asylum.
Snowden had a Top Secret/Sensitive Compartmented Information level clearance.
Senators at the hearing on Thursday said they were concerned about whether people receiving top secret clearances are being properly vetted.
"It is a reminder that background investigations can have real consequences for our national security," McCaskill said of Snowden's leaks. McCaskill, a Democrat from Missouri, chairs the contracting oversight subcommittee of the Senate's Homeland Security Committee.
McCaskill said she was worried that there appears to be a pattern of falsified background checks. She pointed to how at least 18 investigators handling the checks have been convicted of falsifying investigations since 2007.
Senators also raised concerns about a 2009 watchdog investigation that found about 87 percent of OPM investigative reports used to make clearance decisions had incomplete documentation.
Merton Miller, an official in OPM's Federal Investigative Services unit, said the high number was the result of employers not cooperating or subjects being deployed to hostile areas where investigators could not conduct interviews.
He acknowledged his agency needs clearer quality standards. "Quality is in the eye of the beholder," Miller said.
Separately, Senator Bill Nelson on Thursday called for a Senate Intelligence Committee investigation into how contractors are handling employees with top secret clearance.
The Democrat from Florida is concerned there is a pattern of disturbing incidents. He pointed to a previous scandal in which Booz Allen Hamilton had hired an employee convicted of lying to the U.S. government for a position in which he would handle classified documents.
Senate Intelligence Chair Dianne Feinstein has already called for legislation that would limit contractors' access to highly classified information.
McCaskill said USIS also has a contract to support the OPM by managing and overseeing background investigations, an arrangement she said appears to put USIS in a position of oversight of its own work. She added that the company received $200 million last year from OPM.
Security investigations for federal employees used to be conducted mainly by a large staff of full-time investigators who were civil servants at the OPM.
In 1996, the investigative functions of OPM were privatized and the resulting company, USIS, was awarded a contract with OPM to conduct background investigations for security clearances on employees of more than 95 federal agencies.
On its website, USIS says it presently has 100 federal contracts.
USIS is owned by a larger investigative company called Altegrity, which in turn is principally owned by private equity firm Providence Equity Partners.
(Reporting by Matt Haldane and Mark Hosenball; Writing by Karey Van Hall; Editing by Tim Dobbyn)