Global Policy Forum

By Ariana Eunjung Cha

Halliburton Co. and other U.S. contractors are being paid at least $1.9 billion from Iraqi funds under an arrangement set by the U.S.-led occupation authority, according to a review of documents and interviews with government agencies, companies and auditors.

Most of the money is for two controversial deals that originally had been financed with money approved by the U.S. Congress, but later shifted to Iraqi funds that were governed by fewer restrictions and less rigorous oversight.

For the first 14 months of the occupation, officials of the Coalition Provisional Authority provided little detailed information about the Iraqi money, from oil sales and other sources, that it spent on reconstruction contracts. They have said that it was used for the benefit of the Iraqi people and that most of the contracts paid from Iraqi money went to Iraqi companies. But the CPA never released information about specific contracts and the identities of companies that won them, citing security concerns, so it has been impossible to know whether these promises were kept.

The CPA has said it has awarded about 2,000 contracts with Iraqi money. Its inspector general compiled records for the major contracts, which it defined as those worth $5 million or more each. Analysis of those and other records shows that 19 of 37 major contracts funded by Iraqi money went to U.S. companies and at least 85 percent of the total $2.26 billion was obligated to U.S. companies. The contracts that went to U.S. firms may be worth several hundred million more once the work is completed.

That analysis and several audit reports released in recent weeks shed new light on how the occupation authority handled the Iraqi money it controlled. They show that the CPA at times violated its own rules, authorizing Iraqi money when it didn't have a quorum or proper Iraqi representation at meetings, and kept such sloppy records that the paperwork for several major contracts could not be found. During the first half of the occupation, the CPA depended heavily on no-bid contracts that were questioned by auditors. And the occupation's shifting of projects that were publicly announced to be financed by U.S. money to Iraqi money prompted the Iraqi finance minister to complain that the "ad hoc" process put the CPA in danger of losing the trust of the people.

Kellogg Brown & Root Inc., a subsidiary of Halliburton, was paid $1.66 billion from the Iraqi money, primarily to cover the cost of importing fuel from Kuwait. The job was tacked on to a no-bid contract that was the subject of several investigations after allegations surfaced that a subcontractor for Houston-based KBR overcharged by as much as $61 million for the fuel.

Harris Corp., a Melbourne, Fla., company, got $48 million from the Iraqi oil funds to manage and update the formerly state-owned media network, taking over from Science Applications International Corp. of San Diego. The new television and radio services and newspaper have been widely criticized as mouthpieces for the occupation and symbols of the failures of the reconstruction effort. When it was being financed with U.S.-appropriated funds, the contract drew scrutiny because of questionable expenses, including chartering a jet to fly in a Hummer H2 and a Ford pickup truck for the program manager's use.

Fareed Yaseen, one of 43 ambassadors recently appointed by Iraq's government, said he was troubled that the Iraqi money was managed almost exclusively by foreigners and that contracts went predominantly to foreign companies. "There was practically no Iraqi voice in the disbursements of these funds," Yaseen said in a phone interview from Baghdad, where he is awaiting his diplomatic assignment.

Even Iraqi officials who served in the government while the CPA was in charge complained they had little say in the use of their own country's money. Mohammed Aboush, who was a director general in the oil ministry during the occupation, said he and other Iraqi officials were not consulted about expanding the KBR contract. But he said he informed his American "advisers" at the CPA that the Iraqis felt KBR's performance had been inadequate and that he'd prefer that another company take over its work.

Aboush said that he was ignored and that he believes the decision to go with KBR was political. "I am old enough to know the Americans and their interests and they are not always the same interests as the Iraqi interests," he said.

U.S. officials contend the CPA was faithful to the terms of a United Nations resolution that gave the United States authority to manage the Iraq oil money during the occupation. "We believe that contracts awarded with Iraqi funds were for the sole benefit of the Iraqi people, without exception," Brig. Gen. Stephen M. Seay, head of contracting activity for the successor to the CPA's office, wrote in a response to a critical CPA inspector general report released last week.

The CPA identified the best company for each job, said Army Lt. Col. Joseph M. Yoswa, a Defense Department spokesman. He said shortcomings in the contract-award process should be looked at in the context of the volatile work environment in Iraq, where the need for speed and security were critical.

Critics of the CPA accused the occupation authority of using Iraqi money to bypass U.S. contracting rules on competition, oversight and monitoring for controversial projects. "With American firms charging 10 times as much as Iraqi firms for construction work, with sole-source contracts being awarded, with allegations of money-wasting . . . is it likely that the CPA was doing its best to ensure Iraqi money was spent in Iraqi interests? It doesn't look like it," said Anthea Lawson, an analyst for Christian Aid, a nonprofit group that has been investigating the spending of Iraqi oil money.

Svetlana Tsalik, director of the Iraq Revenue Watch project of the Open Society Initiative think tank, said there were few clear distinctions between which pot of money -- U.S. or Iraqi -- the CPA would use to pay for reconstruction. "Whenever it had expenses that looked unpalatable for the U.S. public they would just dip into Iraqi funds," Tsalik said.

While it ran Iraq, the CPA had at its disposal at least $45 billion -- the biggest reconstruction fund since the Marshall Plan rebuilt Europe after World War II. The money included $22 billion that Congress appropriated in two supplemental spending bills, and $23 billion in two Iraqi accounts, one holding proceeds from oil sales and the other seized assets, including frozen overseas bank accounts from the Hussein years.

In most cases, to spend congressionally appropriated funds, CPA officials had to coordinate with officials in Washington, keep detailed records, advertise contracts widely and conform to waiting periods for bids to come in. Some of the money was held up by a turf war between the Pentagon and the State Department over who controlled the reconstruction.

It was simpler to use the Iraqi money.

Nearly all the Iraqi assets were held in what was known as the Development Fund for Iraq. It was used primarily to support Iraqi government ministries by paying salaries and expenses, according to budget documents. But some of the fund was used to pay private contractors for reconstruction projects. The main restriction on spending the money was that it be used for the benefit of the Iraqi people.

To get access to the funds, all that was usually needed was the recommendation of an entity called the Program Review Board, made up of 10 members and a chairman, according to former CPA officials. The final authorization required a single signature -- that of L. Paul Bremer, the occupation's top civil administrator.

CPA officials have acknowledged that contracts were sometimes shown to a just a few bidders and that winners were picked within days. Several of the large contracts that went to U.S. companies, for example, were awarded with no competition, including a $16.8 million contract awarded to Custer Battles LLC of McLean to provide security for the main U.S. military base in Baghdad, and a $15.6 million contract for police radios awarded to Motorola Inc. of Schaumburg, Ill., the CPA inspector general's compilation shows.

Iraqi company executives have complained since the first days of the occupation that the process favored U.S. firms. They said in interviews that they could not get through the heavily guarded gates of the occupation headquarters in the Green Zone to meet with contracting officers. They also said the process was so secretive that they had to bribe CPA translators to get information about what requests for bids were coming up. In April, the CPA announced that contracts worth less than $500,000 awarded from the Iraq oil fund should go only to Iraqi companies.

The biggest contract obligation paid with Iraqi money went to KBR. The oil-services company's work began in early 2003, before the war with Iraq began, when the U.S. Army Corps of Engineers gave it a no-bid contract worth as much as $7 billion to repair Iraq's oil infrastructure. There were fears that Hussein would set the oil fields ablaze, and the U.S. government believed that it needed a contractor lined up to go in right behind invasion forces.

The first tasks KBR performed under the contract -- training for and advising on a safe shutdown of oil facilities, pre-positioning spill equipment and preparing repair plans -- were paid for with U.S. funds. But in fall 2003, the occupation was confronted by a different kind of oil problem. It had become clear that pipeline sabotage was causing a shortage and the occupation authority decided that it had to import fuel to prevent a full-blown crisis.

Meanwhile, some members of Congress expressed their disapproval of using more U.S. money for KBR's no-bid contract. In meetings on Nov. 11 and Nov. 29 in Baghdad, the CPA authorized tapping Iraqi funds to import fuel and fix the distribution system, according to minutes of CPA meetings. The task was added to KBR's contract and no new bids were sought, even though the funding source changed.

In all, KBR was paid $2.53 billion, $1.64 billion of which came from the Iraqi funds, according to an analysis for The Washington Post by Andre Verloy, a researcher for the Center for Public Integrity.

Verloy said the commingling of U.S. and Iraqi money to pay for tasks under a single contract raises significant oversight issues. "It is often difficult enough to find out where the money is coming from, but if U.S. taxpayer funds are used alongside Iraqi money, who has the ultimate oversight?" he said. "Can Congress oversee work funded with Iraqi assets? Should U.S. government agencies even pay U.S. companies with Iraqi money?"

The CPA also shifted the funding source for several other contracts.

As U.S. money for Stevedoring Services of America Inc.'s contract to manage the port of Umm Qasr began to dwindle, CPA officials on March 6 authorized an infusion of Iraqi money to keep the company in place until the transfer of authority. Sometime this spring, a few months into Harris Corp.'s media contract, the CPA stopped using Defense Department money to pay Harris and began charging the Iraqi oil funds.

On April 24, a little over a month after complaints by a losing bidder of political favoritism and a flawed contracting process prompted the U.S. Army to cancel a $327 million contract funded by U.S. money to Nour USA Ltd. of Vienna, the CPA awarded the company a different contract from Iraqi money. The new $9.9 million contract was for supplying the Iraqi security forces with vehicles. Two recently released audits point to numerous problems with the procedures the CPA used to account for, authorize and disburse Iraqi money.

The United Nations, in a report dated July 15, noted that metering of oil extracted from Iraq was not functioning so it was impossible to tell whether all of it had been accounted for. The U.N. report also criticized the CPA's program review board for authorizing funds in at least 10 cases when it lacked a quorum. The audit also noted that only one of the review board members was Iraqi, and he had attended only two of the 43 meetings held by December 2003. "Controls were insufficient to provide reasonable assurance . . . whether all [Iraqi oil-funded] disbursements were made for the purposes intended," the audit concluded.

The CPA's inspector general found in audits released last week that the occupation failed to establish "effective funds controls and accountability" for hundreds of millions of dollars that were held in cash. In fact, the investigative unit said, the keys to one of the safes that held the cash was "kept in the disbursing officer's unattended backpack."

It also studied 60 disbursements from assets seized from the former regime and found that no documentation existed for five of them, totaling $99.1 million in payments. Paperwork had not been properly filled out for items such as furniture, carpets and vases, meaning, the inspector general said, that the CPA was not able to ensure that the assets "would be available for the use and benefit of the Iraqi people."

Special correspondent Omar Fekeiki in Baghdad contributed to this report.