13. Tracking Billions of Dollars Lost in Iraq

Sources:

Vanity Fair, October 2007
Title: “Billions over Baghdad”
Authors: Donald Barlett and James Steele

Rolling Stone, August 23, 2007
Title: “The Great American Swindle”
Author: Matt Taibbi

Student Researchers: Brian Gellman, Dan Bluthardt, and Bill Gibbons

Faculty Evaluator: John Kramer, PhD

Beginning in April 2003, one month after the invasion of Iraq, and continuing for little more than a year, the United States Federal Reserve shipped $12 billion in US currency to Iraq. The US military delivered the bank notes to the Coalition Provisional Authority, to be dispensed for Iraqi reconstruction. At least $9 billion is unaccounted for due to a complete lack of oversight.

The initial $20 million came exclusively from Iraqi assets that had been frozen in US banks since the first Gulf War in 1990. Subsequent airlifts of cash included billions from Iraqi oil revenues formerly controlled by the United Nations. After the creation of the Development Fund for Iraq — a kind of holding pit of money to be spent for “purposes benefiting the people of Iraq” — the UN turned over control of Iraq’s billions of dollars from oil revenue to the United States.

When the US military delivered the cash to Baghdad, the money passed into the hands of an entirely new set of players — the Coalition Provisional Authority (CPA). The CPA had been hastily created by the Pentagon to serve as the interim government in Iraq. On May 9, 2003, President Bush appointed L. Paul Bremer III as CPA administrator. Over the next year, a compliant Congress gave $1.6 billion to Bremer to administer the CPA. This was over and above the $12 billion in cash that the CPA had been given to disburse from Iraqi oil revenues and unfrozen Iraqi assets.

Few in Congress had any idea about the true nature of the CPA as an institution. Lawmakers had never discussed the establishment of the CPA, much less authorized it—odd, given that the agency would be receiving taxpayer dollars. Confused members of Congress believed that the CPA was a US government agency, which it was not, or that at the very least it had been authorized by the United Nations, which it had not.

The Authority was in effect established by edict outside the traditional framework of American government. Because it was a rogue operation, no one was responsible for what happened to that money. Accountable to no one, its finances “off the books” for US government purposes, the CPA provided an unprecedented opportunity for fraud, waste, and corruption involving American government officials, American contractors, renegade Iraqis, and many others. In its short life more than $23 billion would pass through its hands. And that didn’t include potentially billions of dollars more in oil shipments the CPA neglected to meter.

Incidents of flagrant abuse were rampant. Of 8,206 “guards” drawing CPA paychecks, only 602 actually existed; the other 7,604 were ghost employees. Halliburton charged the CPA for 42,000 meals for soldiers while in fact serving only 14,000. Contractors played football with bricks of $100,000 shrink-wrapped $100 bills.

Yet the precedent for legal impunity was established when whistle-blowers brought to light the case of Custer Battles, considered to be one of the worst cases of fraud in US history. The Bush administration not only refused to prosecute, it actually tried to stop a lawsuit filed against the contractors by whistle-blowers hoping to recover stolen CPA money. The administration argued that Custer Battles could not be found guilty of defrauding the US government because the CPA was not part of the US government. When the lawsuit went forward despite the administration’s objections, Custer Battles mounted a defense arguing that they could not be guilty of theft since it was done with the government’s approval.

At the core of this government-sanctioned free-for-all was the award of a CPA contract to NorthStar for services of accounting and auditing. The odd thing about this accounting service was that there was no certified public accountant on staff. A businessman, Thomas Howell, ran NorthStar out of his home in La Jolla, California, along with three other unrelated businesses, including home remodeling and furnishing. The company did have the advantage of a post office box in the Bahamas as its legal address of record.

NorthStar is incorporated in the Bahamas as an international business company (IBC). Despite their impressive name, IBCs are little more than paper operations. As a rule, they don’t perform any business; they are empty vessels that can be used for anything. They have no chief executive officer or board of directors, and they don’t publish financial statements. And IBC’s books, if there are any, can be kept anywhere in the world, but no one can inspect them. IBCs aren’t required to file annual reports or disclose the identity of their owners. They are shells, operating in total secrecy.

The Pentagon put this company in charge of monitoring billions of dollars of Iraqi and US citizens’ money and of making sure it was spent honestly.

In one of his last official acts before leaving Baghdad, Bremer issued an order prepared by the Pentagon, declaring that all coalition-force members “shall be immune from any form of arrest or detention other than by persons acting on behalf of their Sending States.” Contractors also got the same get-out-of-jail-free card. According to Bremer’s order, “contractors shall be immune from Iraqi legal process with respect to acts performed by them pursuant to the terms and conditions of a contract or any sub-contract thereto.” The Iraqi people would have no say over illegal conduct by Americans in their new democracy.

Matt Taibbi says, “What the Bush administration has created in Iraq is a sort of paradise of perverted capitalism, where revenues are forcibly extracted from the customer by the state, and obscene profits are handed out not by the market but by an unaccountable government bureaucracy.”

He concludes, “What happened in Iraq went beyond inefficiency, beyond fraud even. This was about the business of government being corrupted by the profit motive to such an extraordinary degree that now we all have to wonder how we will ever be able to depend on the state to do its job in the future. If catastrophic failure is worth billions, where’s the incentive to deliver success?”

UPDATE BY DONALD BARLETT AND JAMES STEELE

It’s possible to sum up in two words what has happened since Vanity Fair published “Billions over Baghdad” in October 2007: Not much. Despite the ongoing theft, misappropriation, bribery, gratuities, profiteering, and waste of billions of taxpayer dollars, only a few low-level military people and civilians have been prosecuted. To be sure, the Defense Department has announced with great fanfare that it has launched scores of criminal investigations. But the end results are meager.

What’s more, many in Washington believe that such investigations are unwarranted. In the heat of war, they say, it isn’t possible to abide by the niceties of generally accepted accounting principles. But that doesn’t explain why the Pentagon cuts checks for millions of dollars and mails them to anonymous post office boxes in tax havens. Nor does it explain the secrecy accorded its contractors. But it does help explain why the Pentagon is unable to reconcile more than $1 trillion in spending — that’s trillion, not billion.

The Bush Justice Department has made clear by its actions that it has no intention of vigorously looking for or prosecuting those who rip off taxpayers. Similarly, Congress has failed to wage the kind of relentless probe that helped catapult a young senator from Missouri into the vice presidency and eventually the White House during World War II. In the heat of that war, the Truman committee conducted hundreds of hearings and issued scores of reports. The number of comparable hearings and reports coming out of Congress today can be counted on the fingers of one hand. Maybe.

One possible explanation is that running for election today has become so expensive that companies that help finance campaigns receive an informal immunity for their contracting fraud. Another is that Congress and the White House, whether occupied by Republicans or Democrats, have long taken the position that some corporations and financial institutions are too big to allow them to fail. Think Bear Stearns, most recently.

Now Congress and the federal government in general have seemingly applied that same principle to government contractors, who are deemed too important to indict, their top officers too essential to send to jail.

Finally, don’t expect any extended probes by the news media. Newspapers and magazines are in such turmoil as a result of their changing economic fortunes that they are incapable of mounting any meaningful or sustained examination of government operations. They are much too busy worrying about falling profit margins. As a result, their journalistic commitments go no further than the next weekly poll.