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IRAQ: Some Rebuilding Funds Go Untraced

Investigators Have Yet to Pursue U.S. Contracting Money That May Be Missing

by Scott J. PaltrowThe Wall Street Journal
January 17th, 2006

WASHINGTON -- More than 18 months after the Pentagon disbanded the Coalition Provisional Authority that ran Iraq, neither the Justice Department nor a special inspector general has moved to recover large sums suspected of disappearing through fraud and price gouging in reconstruction.

Earlier audits by the Special Inspector General for Iraq Reconstruction -- a post Congress created in late 2004 -- found that oversight of contractors by the Authority was so lax that widespread abuse was likely. An audit in April 2005, for example, found "significant deficiencies in contract administration," which meant that "there was no assurance that fraud, waste, and abuse did not occur in the management and administration of contracts" the U.S. awarded with Iraqi oil money administered by the United Nations.

Nevertheless, there hasn't been a concerted effort to trace what happened to the money and make recipients pay back any ill-gotten gains. The inspector general's office said it doesn't plan to ask the Justice Department to file lawsuits or to conduct widespread audits of individual contracts to look for fraud.

Instead, it says, it is using its limited resources to pursue higher priorities, including investigating charges of bribery to win some Iraqi work and auditing current controls on the spending of redevelopment aid.

The Coalition Provisional Authority, which existed from shortly after the fall of Saddam Hussein in April 2003 until June 2004, was allocated more than $38 billion in U.S. and Iraqi funds. It spent $19.7 billion of U.N.-administered Iraqi oil money.

Authority officials rapidly doled out the money, including $12 billion from the U.N. fund paid in cash, as they scrambled to restore vital services and impose order in Iraq. Concerns that contracts weren't being sufficiently monitored led Congress to create the office of the special inspector general and vest it with powers to investigate money misspent or unaccounted for by the Authority. President Bush named as the special inspector general Stuart Bowen Jr., who had been the Authority's own inspector general.

The U.S. has been under pressure to better account for funds spent in the early days of Iraqi reconstruction. A U.N. monitoring board has pushed the U.S. to return Iraqi money that might have been misspent under no-bid contracts awarded by the authority. Meanwhile, a group of Congressional Democrats has pressed the Defense Department and other agencies to track down and recover overpayments to contractors.

Some officials who were associated with the contracting, in the Pentagon and in Iraq, have defended contractors' practices in the country, citing the chaos of wartime. They say contractors were doing their best to perform quickly amid trying circumstances. Paul Bremer, who ran the Authority, wrote in response to one critical audit that it unfairly assumed that "Western-style budgeting and accounting standards" should apply "in the midst of war."

Still, some in Congress have advocated tough action against contractors, noting that the government's main legal means to recover money is the False Claims Act, passed during the Civil War to recoup gains from contractors who had gouged the Union Army for essential supplies.

Under that act, the Justice Department's civil division has the authority to sue contractors that defraud the government, and to seek treble damages. But Justice hasn't initiated any such suits involving Iraq-related work, a spokesman said. The civil division also hasn't joined any suits filed by private-sector whistle-blowers who claim they know of fraud or abuse, although lawyers familiar with such suits estimate that at least two dozen are pending.

One problem is that any attempts to recover money through the courts could prove challenging, say former lawyers for the Justice and Defense Departments. The Pentagon put the Authority in place as a temporary government, but no law or regulation established it. As a result, debate persists over whether it was an international entity or an agency of the U.S. government and subject to U.S. law.

Also, there could be scant evidence for such lawsuits because U.S. officials in Iraq didn't keep extensive records, and often didn't track whether contractors performed the work they were paid to do.

It isn't clear how many contracts the Authority issued, in part because the inspector general's office says it hasn't located many of the contracts. But among those awarded large ones were Fluor Corp., Parsons Corp. and Washington International Group. One question facing the government is whether to seek recovery of funds paid to the largest contractor, Halliburton Co.'s KBR unit, which was awarded multibillion-dollar no-bid contracts beginning shortly before the U.S. invaded Iraq to rebuild oil fields and provide logistical support to the U.S. military.

A series of 2004 audits by the Defense Contract Audit Agency, the Pentagon's contract-auditing arm, found expenses of $1.48 billion unsupported by adequate documentation on KBR's two largest contracts, which were valued at a total of $9.5 billion.

In a recently disclosed letter, the audit agency said it has passed on findings about Halliburton to the Justice Department, to consider whether a criminal investigation is warranted.

But the audit agency's calls to withhold some payments from Halliburton have been resisted by Pentagon units that awarded the contracts. The Army Corps of Engineers disclosed in November 2005 that it was going ahead with a $1.5 billion payment to Halliburton for work on Iraqi oil fields, including $124 million for costs the defense-department auditors had challenged as questionable. It also paid Halliburton nearly $38 million in bonuses allowed under a contract formula for good performance.

A Halliburton spokeswoman said the company "has continued to cooperate with audit agencies and our customer throughout this process. Audits are part of the normal contracting process."

She added, "The costs questioned are just that -- questioned costs. The auditors have raised questions about the support and the documentation rather than questioning the fact that KBR incurred the costs. Many of DCAA's questions have been about the quality of supporting documentation for costs that KBR clearly incurred. Therefore, it would be wrong to say or imply that any of these costs that were incurred at the client's direction for its benefit are 'overcharges.' "

A spokeswoman for the Defense Contract Audit Agency said that as of the end of the government's 2006 fiscal first quarter, it had "performed 1,373 audits in support of Iraq reconstruction contracting activity." She said these audits weren't designed specifically to look for fraud but added that the auditors are required "to obtain reasonable assurance about whether the contractor submissions and supporting data are free of material misstatement."

In addition to seeking fund recovery, the federal government can intervene in suits filed under the False Claims Act by individuals who maintain that they know of misused money. Each case must be filed under seal until the Justice Department decides whether to intervene; if it doesn't, the individuals may pursue the cases on their own. Individuals can receive 15% to 20% of funds recovered if the government intervenes, and up to 30% if it doesn't.

The Justice Department won't disclose how many whistle-blower suits have been filed against contractors in Iraq. But the only Iraq-related False Claims Act case on which the Justice Department so far has announced a decision, it declined to intervene.

That case was filed in U.S. District Court in Alexandria, Va., by two individuals who alleged that Custer Battles LLC, of Fairfax, Va., overcharged the government for expenses on work in Iraq. The company was awarded contracts totaling $38 million -- partially paid with $4 million in cash -- to provide security at Baghdad Airport, and later to help guard distribution of new Iraqi currency, although the tiny concern never had provided security services before.

The Justice Department declined to say why it decided not to back the case -- filed by a former Custer Battles employee and an employee of a subcontractor -- citing department policy. Robert T. Rhoad, a lawyer for Custer Battles, denies wrongdoing by the company, and said he was optimistic that the case would be dismissed. After suspending Custer Battles from receiving new contracts because of the fraud allegations, the Air Force in Sept. 2005 reinstated the company, declaring it eligible again for contracts. An Air Force spokeswoman said contracting regulations require it to reinstate a company after a year if the Justice Department hasn't taken action or requested that the ban be extended.





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