by David Phinney
Thursday June 21st 2018

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Spending Billions of Iraqi Money

by David Phinney

Jan. 14, 2005 — International skepticism over a secret $7 billion Iraq contract awarded to Halliburton subsidiary KBR was already grabbing headlines when another news storm slammed the Texas-based in November 2003: Pentagon auditors said the company appeared to be overcharging on one task order by as much as $61 million for fuel being transported into war torn Iraq.

Stan Soloway, a former Pentagon official who now heads an industry group representing many of the major U.S. contractors in Iraq, the Professional Services Council, jumped to Halliburton’s defense. The company was being “pilloried as the result of an unethical leak of a highly confidential, in-process audit,” Soloway claimed in a December 2003 editorial. “It involves an audit that is still in process and has not yet undergone the requisite senior-level review and consultation with the contracting agency, in this case the Army Corps of Engineers.”

Now, more than a year later, the Army Corps has yet to publicly take a stand on that audit as Halliburton routinely denies the accusations of overcharges with constant claims that U.S. embassy officials in Kuwait pressured the company into buying expensive fuel from a mysteriously favored local Kuwait subcontractor.

However the facts pan out — if at all — hand-wringing over Halliburton’s possible $63 million in overcharges may be a waste of time.

Even as the company was being pilloried in the press and Democrats in Congress were calling for investigations, procurement strategists with the Pentagon and the Coalition Provisional Authority (CPA) quietly approved payment of the company’s disputed fuel bills — not with U.S. funds, but with Iraqi funds collected after the invasion. Since then, more than $1.7 billion in Iraqi assets was spent by September 2004 in a manner that helps distance Halliburton’s performance from pesky U.S. procurement regulations and the pressuring of embassy officials.

The fuel contract was just one of dozens of multi-million-dollar agreements paid for with Iraqi funds directly by the CPA. In the frenzied confusion of post-invasion Iraq, CPA officials found themselves shorthanded and with few knowledgeable contracting managers. The public spotlight on early disorganization, contract blunders, favoritism, inflated costs, allegations of contractor kickbacks and other mishaps, made the use of Iraqi money all that more appealing instead of heavily-scrutinized U.S. funds.

Limited Rules on Watching Billions of Dollars
“There were limited rules issued by the CPA for CPA expenditure of Iraqi funds,” notes Angela Styles, the former chief of procurement policy for the Bush administration who believes that U.S. law wields little jurisdiction over CPA contracts paid with Iraqi assets.

Broadly-worded guidance for those slim rules were largely laid out by the UN Security Council Resolution 1483, which gave the CPA custody of all Iraqi oil revenues known as the Development Fund for Iraq (DFI) in May 2003.

Intended by the UN to “be used in a transparent manner to meet the humanitarian needs of the Iraqi people,” the fund totaled $30.1 billion over the course of the CPA’s existence. An additional $2.65 billion frozen bank accounts and assets seized from Saddam Hussein’s regime were also thrown into the kitty under CPA’s control, but by the time CPA disbanded on June 28, almost every dime had been spent, frequently with only skeleton records and brief descriptions on where it went. (By comparison, of the $24.1 billion in U.S. money earmarked for reconstruction, only $6.8 billion of that sum had been spent by last September.)

As far as the UN mandate is concerned, the CPA feel far short of the goal by losing track of $8.8 billion of DFI funds given to the ministries of the interim government in Iraq, according to recent findings blasting the CPA by the U.S. Special Inspector General for Iraq Reconstruction.

In a report released Jan. 31, inspector general Stuart Bowen found that the billions could not be satisfactorily traced because sloppy oversight and poor management by CPA staff and advisors.

In short, the money is portrayed as falling into the chaotic black hole of post-invasion Iraq where hundreds of millions of dollars would be disbursed without supporting documentation or proper tracking. Although CPA hired Northstar Consultants, Inc., of California, on a $1.5 million contract to evaluate the internal control system of Iraqi funds, the small firm had no professional certified accountants on staff and did not perform the review, according to the report.

Vulnerable to Fraud and Kickbacks
In once case, financial control over a $435 million budget were observed to be “weak or non-existent,” making the money vulnerable to “fraud, kickbacks and misappropriation of funds.” Similar scenarios were found elsewhere in CPA’s management of the interim Iraqi government, including $1.5 billion that was released to Iraqi banks for operating expenses, while spending plans only called for only $498 million.

A total of 134 criminal investigations of U.S. officials, contractors and others have been managed or coordinated by the inspector general, according to the report. Eighty-eight have been since referred to other U.S. agencies or closed. Forty-six investigations remain open.

Payrolls also were a persistent problem. The CPA repeatedly tagged funds for thousands of government workers, but only hundreds could be later validated, according to the report. One interim ministry claimed that 8,206 guards were on the payroll, but only 602 could be accounted for. Another claimed 1,417, but only documented 642.

Contracting practices were also fast and loose throughout the interim government and the CPA reviewed contracting procedures at only two the 26 Iraqi ministries. CPA advisors were found to have approved major contracts without competition or terms of performance.

Insufficient Contractual Controls
“The CPA did not establish or implement sufficient managerial, financial, and contractual controls to ensure that DFI funds were used in a transparent manner,” claimed the inspector general’s blistering report, despite lengthy protests from former CPA Administrator Paul Bremer about the hardships of working in a war time environment that left the interim government looted, without computers or a national phone system, and where essential support services were primitive or non-existent. “There was no assurance that the funds were used for the purposes mandated by United Nations Security Council Resolution.”

Another auditing body the International Advisory and Monitoring Board also recently identified similar problems with the CPA. Established by the United Nations, the monitoring board was late in being set up because the CPA stalled in providing assistance or needed records, board members now complain, but after several audits this past year they concluded that the CPA handling of Iraqi assets was fraught with “serious weaknesses” and that the U.S.-controlled provisional authority presided over “inadequate accounting systems, the uneven application of agreed-upon contracting procedures and inadequate record-keeping.”

Both inspector general Bowen and the monitoring board singled out the Halliburton contracts as being inappropriately awarded and in their performance. The inspector general complained that the company failed to provide proper records to justify costs on logistic services, while the UN panel took issue with the Army Corps giving the fuel contract to Halliburton without first seeking competitive bids.

After conducting two audits into how the Coalition Provisional Authority handled Iraqi funds before it relinquished power on June 28, the UN panel concluded that financial controls were often lacking and that competition for contracts and procurement procedures were unevenly applied or frequently ignored .Of particular concern to the IAMB were contracts worth sometimes billions of dollars that were awarded to US companies such as Halliburton from Iraqi funds without competitive tender. Paperwork on a number of major contracts remains missing and the spending priorities were often adopted without involving Iraqi representatives.

No Strings Attached Spending
Citing security concerns for more than a year, the CPA was reluctant to release information on over $3.5 billion in Iraqi assets that it spent directly on contracts for services it deemed necessary. Only now is its spending coming into sharper focus with findings by the inspector general’s report on dozens of agreements valued at more than $5 million including several with companies associated with Ahmed Chalabi, a holder of intelligence contracts before the invasion and a onetime Pentagon favorite to become president of Iraq.

One firm operated by a close friend and business associate of Chalabi’s, Nour USA Ltd., of Vienna, Va., set up soon after the war began, received a $9.9 million contract for supplying vehicles to Iraqi security forces. Nour also provided the seed money to bankroll U.K.-based Erinys, a private security firm formed after the invasion, hired by the CPA to build a private army of 14,500 guards to watch over Iraq’s oil lines, according to a news story last year by Newsday reporter Knut Royce. Chalabi denied accusations from industry sources that he was paid $2 million for landing the contract or that he has had anything to do with the security firm.

The Erinys contract was originally intended to cost $80 million but was soon expanded to $110 million after the award. Nour also landed a $9.9 million CPA contract to supply vehicles to Iraqi security forces.

Other companies the CPA paid, in part, with Iraqi assets include Harris Corp., which received $48 million to operate Iraq’s news media on a contract originally held by Science Applications International Corp., a company that was heavily criticized for having no media experience and providing abysmal news coverage. Harris, headquartered in Florida, has also been criticized for manipulating news in favor of coalition forces and extravagant spending, including chartering a jet to fly in a Hummer H2 and a Ford pickup truck for the program manager.

Another security firm under contract with the CPA, Custer Battles is now being accused in federal court by former associates of having defrauded millions of dollars on work at Baghdad International Airport and while protecting Iraq’s massive program to introduce new currency. Custer Battles denies the allegations, but is working to have the case thrown out on the grounds that it was paid more than $38 million with assets seized from Saddam Hussein’s regime and oil revenues, not U.S. taxpayer money.

Moreover, the company contends that the CPA was not a U.S. entity. “If there are any false claims here, the entity that was cheated was the Coalition Provisional Authority,” argued Custer Battles attorney John Boese at the Federal District Court of Easter Virginia.

Many experts now believe that any possible over-charges or wrongdoing by other contractors paid with Iraqi funds will also be defended with similar arguments.

Forever a defender of contractors, Solloway and his association have joined an ongoing chorus that defends contractors chaffing under U.S. procurement regulations in a wartime environment and explained to anyone who will listen that those regulations should help to share the costs. He, and others from the contracting industry and the Pentagon, note that laws requiring meticulous accounting, justification for costs, health and safety standards for employees and careful bookkeeping can be a heavy burden in a country where bullets and bombs are flying. What’s more, post-invasion Iraq was rendered to a cash-only economy and Iraqis follow different business standards from U.S. government procurement laws.

“The decision to apply our stewardship rules might have been appropriate,” Solloway said recently, “but they come with significant costs.”

Still, Soloway is a realist. The rules have to change in the future for war time environments, he said, and the government needs to quickly get acquisition managers and contracting experts on the ground alongside military operations dependent on support services from the private sector.

Surveying the rush to put contracts together that obligated billions of dollars in the frenzy following the occupation of Iraq, he predicts that the troubles have not ended the CPA’s dissolution. “The contract actions are so big and were done so fast that reconciling them will be brutal.”

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