[Mb-civic] US firms suspected of bilking Iraq funds - The Boston Globe

[William Swiggard]

  US firms suspected of bilking Iraq funds


    Millions missing from program for rebuilding

By Farah Stockman  |  April 16, 2006  |  The Boston Globe

WASHINGTON -- American contractors swindled hundreds of millions of 
dollars in Iraqi funds, but so far there is no way for Iraq's government 
to recoup the money, according to US investigators and civil attorneys 
tracking fraud claims against contractors.

Courts in the United States are beginning to force contractors to repay 
reconstruction funds stolen from the American government. But legal 
roadblocks have prevented Iraq from recovering funds that were seized 
from the Iraqi government by the US-led coalition and then paid to 
contractors who failed to do the work.

A US law that allows citizens to recover money from dishonest 
contractors protects only the US government, not foreign governments.

In addition, an Iraqi law created by the Coalition Provisional Authority 
days before it ceded sovereignty to Iraq in June 2004 gives American 
contractors immunity from prosecution in Iraq.

''In effect, it makes Iraq into a 'free-fraud zone,' " said Alan 
Grayson, a Virginia attorney who is suing the private security firm 
Custer Battles in a whistle-blower lawsuit filed by former employees. A 
federal jury last month found the Rhode Island-based company liable for 
$3 million in fraudulent billings in Iraq.

Even the United Nations panel set up to monitor the use of Iraq's seized 
assets has no power to prosecute wrongdoers.

''The Iraqi people are out of luck, the way it stands right now," said 
Patrick Burns, spokesman for Taxpayers Against Fraud, a watchdog group 
that helps US citizens file cases such as the Custer Battles action.

Iraqi leaders, paralyzed by political deadlock in forming a new 
government, have so far made no formal complaint about funds that were 
paid out to dishonest contractors. But US officials say the need for 
Iraq to recoup the stolen money has become more urgent as it faces a 
budget shortfall of billions of dollars.

The problem has become so acute that an interagency working group, which 
includes officials from the State Department and the Department of 
Justice, has been set up to try to come up with a mechanism to return 
the funds, according to two US officials who are involved.

The issue dates to the earliest days after the March 2003 invasion, when 
US officials thought Iraqi money would cover the costs of 
reconstruction. As the Coalition Provisional Authority took control just 
after the fall of Saddam Hussein, it seized Iraq's oil revenues, money 
found in bank accounts and in Hussein's palaces, and the balance from 
the UN's oil-for-food program.

The coalition ultimately controlled more than $20.7 billion in Iraqi 
funds. The money was deposited into an account called the Development 
Fund for Iraq, or DFI, which was set up, in the words of the US 
administrator at the time, L. Paul Bremer III, ''for the benefit of the 
Iraqi people."

The fund represented the first cash reservoir US officials turned to as 
they worked to rebuild roads, bridges, and clinics. It carried fewer 
restrictions than the $18.4 billion in US funds appropriated around that 
time for reconstruction because those funds could only be used in ways 
designated by Congress.

But the Coalition Provisional Authority lacked basic controls and 
accounting procedures to keep track of the billions in Iraqi money it 
was doling out to contractors, according to a series of audits issued in 
2005 and 2006 by the Special Inspector General for Iraq Reconstruction, 
a temporary office set up by Congress to oversee the use of 
reconstruction funds. One review of the files relating to 198 separate 
contracts found that 154 contained no evidence that goods or services 
promised by contractors were ever received, according to an April 2005 
audit by the inspector general.

In some cases, contractors were paid twice for the same job. In others 
cases, they were paid for work that was never done.

In June 2004, the Coalition Provisional Authority handed power and 
control of the DFI back to an Iraqi government. By then, the coalition 
had spent or disbursed about $14 billion of the Iraqi fund on 
reconstruction projects and on the administration of the government, 
according to the audits.

Among the contracts paid for out of the Iraqi fund was Halliburton's 
controversial no-bid contract to restore Iraq's oil infrastructure, 
worth $2.4 billion. The Pentagon's auditors found $263 million in 
excessive or unsubstantiated costs for importing gasoline into Iraq, but 
the Pentagon said in February that it had agreed to pay a Halliburton 
subsidiary all but $10 million of the contested charges.

The special inspector general's investigations have resulted in the 
arrests of five suspects on criminal charges and is investigating 60 
more cases involving alleged fraud and corruption in Iraq involving both 
US and DFI funds, according to James Mitchell, a spokesman for the 
inspector general.

In addition, at least seven more cases against contractors have been 
filed in US civil courts under the federal False Claims Act, according 
to two private lawyers who have personal knowledge of the suits. The 
act, which dates to the Civil War, allows citizens to sue on behalf of 
the government when they suspect fraud in federal contracting. The cases 
are currently under seal until the Justice Department investigates them 
to determine whether the government will join the suit.

The cases eventually could help the US Treasury recover hundreds of 
millions of dollars from corrupt contractors, according to Grayson, the 
attorney suing Custer Battles, the first such case to reach the courts 
and become public.

But the False Claims Act has not helped Iraq. Last month, a federal 
judge in Virginia ruled that it only protects the US government from 
fraud and that the United States suffered no direct economic loss from 
fraud involving Iraqi funds.

The result is a victory for American taxpayers, but a loss for Baghdad: 
In the first phase of the fraud claim involving Custer Battles, the jury 
ruled in March that the company should pay triple damages to the US 
Treasury for the $3 million it was paid for delivering a fleet of trucks 
that didn't work and old, spray-painted Iraqi cranes that were passed 
off as new imports. But the company, which has denied the charges in 
court and in other statements, does not have to repay any of the $12 
million that came from the Development Fund for Iraq on the same 
contract, according to the judge's ruling.

Grayson said the injustice surrounding wasted Iraqi funds has helped 
fuel the insurgency.

''The DFI was essentially treated as a 'slush fund' for various 
quasi-military projects, run by US contractors over whom Iraqis had no 
control," he said. ''Like a colonial power, the Bush administration took 
Iraq's oil money, and wasted it. The Iraqis well know that. That's one 
reason why they're shooting at US soldiers."

Representative Henry A. Waxman, Democrat of California, has urged the 
administration to repay Iraq for the money paid to Custer Battles. 
''This was Iraqi money, and it should be returned to the Iraqi people," 
he said in a statement.

The Justice Department, which is pursuing criminal cases against 
contractors, says there is a chance that Iraq eventually could receive 
some restitution.

In February, Robert J. Stein Jr., a North Carolina man who issued 
contracts on behalf of the Coalition Provisional Authority, pleaded 
guilty to conspiring with at least three others to steal more than $2 
million from the Iraqi fund. The money, earmarked for refurbishing a 
police academy and library in the town of Hillah, was spent on expensive 
cars, machine guns, jewelry; hundreds of thousands of dollars in cash 
was also smuggled into the United States.

As part of a plea deal, Stein has agreed to pay $3.6 million in 
restitution, but Bryan Sierra, a spokesman for the Department of 
Justice, said it is too early to say whether Iraq will receive the money 
as part of that deal.

''It is possible that some of the money could go back to the Development 
Fund for Iraq," he said. ''But that hasn't been determined yet."

http://www.boston.com/news/world/articles/2006/04/16/us_firms_suspected_of_bilking_iraq_funds/
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