Mon Mar 28 22:22:43 PST 2005


    Follow the Money
    By Michael Hirsh
    Newsweek

    Monday 04 April 2005 Issue

    Watchdogs are warning that corruption in Iraq is out of control. But
will the United States join efforts to clamp down on it?

    By many accounts, Custer Battles was a nightmare contractor in Iraq. The
company's two principals, Mike Battles and Scott Custer, overcharged
occupation authorities by millions of dollars, according to a complaint from
two former employees. The firm double-billed for salaries and repainted the
Iraqi Airways forklifts they found at Baghdad airport-which Custer Battles
was contracted to secure-then leased them back to the U.S. government, the
complaint says. In the fall of 2004, Deputy General Counsel Steven Shaw of
the Air Force asked that the firm be banned from future U.S. contracts,
saying Custer Battles had also "created sham companies, whereby [it]
fraudulently increased profits by inflating its claimed costs." An Army
inspector general, Col. Richard Ballard, concluded as early as November 2003
that the security outfit was incompetent and refused to obey Joint Task
Force 7 orders: "What we saw horrified us," Ballard wrote to his superiors
in an e-mail obtained by NEWSWEEK.

    Yet when the two whistle-blowers sued Custer Battles on behalf of the
U.S. government-under a U.S. law intended to punish war profiteering and
fraud-the Bush administration declined to take part. "The government has not
lifted a finger to get back the $50 million Custer Battles defrauded it of,"
says Alan Grayson, a lawyer for the two whistle-blowers, Pete Baldwin and
Robert Isakson. In recent months the judge in the case, T. S. Ellis III of
the U.S. District Court in Virginia, has twice invited the Justice
Department to join the lawsuit without response. Even an administration
ally, Sen. Charles Grassley, demanded to know in a Feb. 17 letter to
Attorney General Alberto Gonzales why the government wasn't backing up the
lawsuit. Because this is a "seminal" case-the first to be unsealed against
an Iraq contractor-"billions of taxpayer dollars are at stake" based on the
precedent it could set, the Iowa Republican said.

    Why hasn't the administration joined the case? It has argued privately
that the occupation government, known as the Coalition Provisional
Authority, was a multinational institution, not an arm of the U.S.
government. So the U.S. government was not technically defrauded. Lawyers
for the whistle-blowers point out, however, that President George W. Bush
signed a 2003 law authorizing $18.7 billion to go to U.S. authorities in
Iraq, including the CPA, "as an entity of the United States government." And
several contracts with Custer Battles refer to the other party as "the
United States of America." Pressure has been building on the administration
to join the case-or at least to file a brief saying publicly if it believes
defrauding the CPA is the same as defrauding the United States. The judge's
latest deadline for that brief is this Friday. But a Justice Department
spokesman said last week the government "could" still refuse to take part.
"I'll bet you $50 they will not show up," says Richard Sauber, a lawyer for
Custer Battles, which is still operating in Iraq. (He also rejects the
charges of fraud and incompetence.)

    The administration's reluctance to prosecute has turned the Iraq
occupation into a "free-fraud zone," says former CPA senior adviser Franklin
Willis. After the fall of Baghdad, there was no Iraqi law because Saddam
Hussein's regime was dead. But if no U.S. law applied either, then
everything was permissible, says Willis. The former CPA official compares
Iraq to the "Wild West," saying he delivered one $2 million payment to
Custer Battles in bricks of cash. ("We called Mike Battles in and said,
'Bring a bag'," Willis told Congress in February.) Willis and other critics
worry that with just $4.1 billion of the $18.7 billion spent so far, the
U.S. legal stance will open the door to much more fraud in the future. "If
urgent steps are not taken, Iraq ... will become the biggest corruption
scandal in history," warned the anti-corruption group Transparency
International in a recent report. Grassley adds that if the government
decides the False Claims Act doesn't apply to Iraq, "any recovery for fraud,
waste and abuse of taxpayer dollars ... would be prohibited."

    More than U.S. money is at stake. The administration has harshly
criticized the United Nations over hundreds of millions stolen from the
Oil-for-Food Program under Saddam. But the successor to Oil-for-Food created
under the occupation, called the Development Fund for Iraq, could involve
billions of potentially misused dollars. On Jan. 30, the former CPA's own
inspector general, Stuart Bowen, concluded that occupation authorities
accounted poorly for $8.8 billion in these Iraqi funds. "The CPA did not
implement adequate financial controls," Bowen said. U.S. officials argue
that it was impossible, in a war environment, to have such controls. Yet now
the Bush administration is either ignoring or stalling inquiries into the
use of these Iraqi oil funds, according to reports by Democratic Rep. Henry
Waxman, and others.

    In one case, the Pentagon's own Defense Contract Audit Agency found that
the leading U.S. contractor in Iraq, Halliburton subsidiary KBR, overcharged
Iraq occupation authorities by $108 million for a task order to deliver
fuel. Yet the Pentagon permitted KBR to redact-or black out-almost all
negative references to the company in this Oct. 8, 2004, audit. These
included any mention of the $108 million in alleged overcharges and the
audit's clear conclusion that KBR's price-supporting data were "not
adequate." The Defense Department then forwarded this censored version to a
U.N. monitoring board that Washington had agreed to under U.N. Resolution
1483. Normally, an audited company is allowed to censor its proprietary or
personal information, but "these redactions went beyond anything U.S. law
would allow," says Tom Susman, a Washington expert. Halliburton spokeswoman
Wendy Hall insists that the company had the right to make such redactions
because the audit was "predecisional" and "represented only one side of the
case." Hall also denies the company overcharged.

    The U.N. audit team, called the International Advisory and Monitoring
Board, is angry over these heavily censored reports, officials tell
NEWSWEEK. The board last fall asked that a special auditor be hired. But the
Pentagon has yet to award that contract after six months of delays. A
Pentagon spokeswoman says the U.N. audit team "agreed that the [KBR]
information provided was responsive to their request." A U.N. spokesman says
this is untrue.

    The administration's seemingly detached approach to these cases could
have other implications. NEWSWEEK has learned that federal prosecutors plan
to indict several U.S. contractors in Iraq on criminal charges but that
these could be undercut if the court rules in the Custer Battles case that
the CPA was not a U.S. government arm. "If you make the CPA a U.S. entity,
you open the door to all sorts of liability claims. But if it's not a U.S.
entity, then you can't parade these people through the court," says Jim
Mitchell of the CPA inspector general's office. And that could mean Custer
Battles and other companies will ultimately answer to no one.