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Originally Published: 1/16/2008

WHERE’S THE $9 BILLION?

By The Issue Wonk

 

A while back I told you about an inspector general’s report that said the Iraq Coalition Provisional Authority (CPA), headed by L. Paul Bremer, which led Iraq until June 2004, was responsible for losing $9 billion. The director of the Office of the Special Inspector General for Iraq Reconstruction, Stuart W. Bowen, said, “The CPA did not establish or implement sufficient managerial, financial and contractual controls to ensure that [Development Fund for Iraq] funds were used in a transparent manner.” His report concluded that the money was reported to have been spent on salaries, operating and capital expenditures, and reconstruction projects between October 2003 and June 2004. “The money came from revenues from the United Nations’ former oil-for-food program, oil sales and seized assets – all Iraqi money. The audit did not examine the use of U.S. funds appropriated for reconstruction.”1

 

What makes this so amazing is that $12 billion in U.S. currency was shipped to Iraq. That’s a lot of paper. I’ve always wondered about that. Where did it come from? How did it get to Iraq? How did it get disbursed? Donald L. Barlett and James B. Steele were obviously curious too and did a remarkable piece of investigative reporting for Vanity Fair.2 While I encourage everyone to read the entire thing, for those of you who do not have the time, I thought I’d summarize it for you.

 

THE CPA

 

The Coalition Provisional Authority, formed sometime in April 2003, is an interesting organization. According to Barlett and Steele,3 the CPA was “literally a rogue agency” with “no formal document establishing it. Congress [had] funded it with taxpayer dollars . . . but it was never created within the legal process of Congress.” They said:

 

The CPA had been hastily created to serve as the interim government of Iraq, but its legality and paternity were murky from the start. The Authority was in effect established by edict outside the traditional framework of American government. Not subject to the usual restrictions and oversight of most agencies, the CPA during the 14 months of its existence would become a sump for American and Iraqi money as it disappeared into the hands of Iraqi ministries and American contractors. The Coalition of the Willing, as one commentator observed, had turned into the Coalition of the Billing.2

 

Barlett and Steele also claim that the CPA, which created an “illusion that this was [a] multinational force,” was created and run by the Pentagon. They told Amy Goodman:

 

Most of the contracts were awarded with the approval of the Pentagon. This was totally their entity. And it became an absolutely perfect sieve for this cash, because it only existed for fourteen months and then we turned Iraq over to the Iraqis. And during that period, because it was not a U.S. government agency, because it was not really an entity of the UN, because it was a rogue operation . . . nobody was responsible for really what happened to that money. And, in fact, some of the litigation that has come up in this country, the traditional whistleblower things, it’s basically failed so far, because you’re not dealing with malfeasance within a normal U.S. government agency.

 

The . . .  courts have ruled that because this is not an entity of the United States government, normal whistleblowers, people who observe wrongdoing within an agency, see theft and so forth, cannot appeal to the courts, because nobody has authorized this thing. I mean, it’s a classic Catch-22 situation. I mean, you’ve created this thing that isn’t legitimate, therefore you can’t sue it. But in the meantime, it’s become this wonderful repository for this incredible amount of cash.3

 

THE CASH

 

The first shipment of cash was in April 2003, probably before the CPA was actually formed, of $20 million in $1, $5, and $10 bills. Small bills were used so that the cash could get into the hands of Iraqis quickly, kind of “walking around money,” to keep Iraq from a monetary and financial crisis. The money came exclusively from Iraqi assets that had been frozen in U.S. banks during and after the Persian Gulf War.

 

Later cash shipments were of money controlled by the United Nations. The UN had controlled the Iraqi oil reserves and also controlled the money from the oil-for-food program that had been deposited in its Development Fund for Iraq (DFI). The money was supposed to be spent for “purposes benefitting the people of Iraq.” There were billions of dollars in the DFI and this money was turned over to the United States after the creation of the CPA. The money was handled by the Federal Reserve Bank of New York.

 

The Federal Reserve warehouse is located 10 miles west of Manhattan in East Rutherford, New Jersey, about a mile west of Giants Stadium. It’s the largest repository of American cash in the world. It’s a “secretive, heavily guarded compound where the bank processes checks, makes wire transfers, and receives and ships out its most precious commodity: new and used paper money.”2

 

On Tuesday, June 22, 2004, an 18-wheel tractor-trailer pulled in and loaded up $2.4 billion in $100 bills, sorted into “bricks,” shrink-wrapped, and loaded on pallets. “Forty pallets of cash, weighing 30 tons, were loaded that day.” The tractor-trailer got on the road, took the New Jersey Turnpike, and went down to Andrews Air Force Base near Washington, D.C. “There the seals on the truck were broken, and the cash was off-loaded and counted by Treasury Department personnel.” The money was then transferred to a C-130 transport plane and flown to Baghdad.2

 

As the CPA demanded ever greater amounts of cash, the pallets of $1, $5, and $10 bills were soon replaced by bundles of $100 bills. During the CPA’s little more than a year of life, the New York Federal Reserve Bank made 21 shipments of currency to Iraq totaling $11,981,531,000. All told, the Fed would ship 281 million individual banknotes, in bricks weighing a total of 363 tons.2

 

Barlett and Steele state that, by all accounts, the Federal Reserve Bank in New York and the Treasury Department exercised “strict surveillance and control” over the money. Then it got to Iraq and “control evaporated.” “Of the $12 billion in U.S. banknotes delivered to Iraq in 2003 and 2004, at least $9 billion cannot be accounted for. A portion of that money may have been spent wisely and honestly; much of it probably wasn’t. Some of it was stolen.”2

 

THE DISBURSEMENT

 

Large chunks of the money went into the palace in Baghdad (in the Green Zone, the home of the CPA). Some of it went to the other Saddam Hussein palaces located around the country. Then the distribution started. Some went to American contractors; some went to Iraqi contractors. “It was all a, basically, as-much-as-you-can-carry basis. And people stuffed it into their own pockets . . .”3

 

The cash that went to CPA headquarters was stored in a vault.

 

The money flowed in and out rapidly. When someone needed cash, a unit called the Program Review Board, composed of senior CPA officials, reviewed the request and decided whether to recommend a disbursement. A military officer would then present that authorization to personnel at the vault. . . Once a disbursement had been made, the cash was brought to an adjoining room for pickup. This “secure room,” . . . looked a lot like a vault itself: a thick metal door at the entrance, with the room beyond starkly furnished with only a table and chairs. The table would be piled high with cash. An authorized officer would sign papers for the money, then begin carting it upstairs – sometimes in sacks or metal boxes – to the Iraqi ministry or CPA office that had requested it. Upon turning over the cash, the officer would be required to obtain a receipt – nothing more.

 

One military officer said there was corruption everywhere. Some of the Iraqis who were put in charge had never worked for the government and had no experience. “They lived in constant fear of losing their jobs or their lives.”2 They were stealing as much money as they could before the gravy train stopped. “You just get what you can while you’re in that position of power. Instead of trying to build the nation, you build yourself.”2 In one instance, an American contractor didn’t want to come to collect his cash, and military personnel had to load bags full of money and drive through dangerous neighborhoods to deliver it.

 

[S]ome American contractors correctly believed they could walk off with as much money as they could carry. The circumstances that surround the handling of comparatively small sums help explain the billions that ultimately vanished. In the south-central region of Iraq a contracting officer stored $2 million in a safe in his bathroom. One agent kept $678,000 in an unsecured footlocker. Another agent turned over some $23 million to his team of “paying agents” to deliver to contractors, but documentation could be found for only $6.3 million of it. One project officer received $350,000 to fund human-rights projects, but in the end could account for less than $200,000 of it. Two CPA agents left Iraq without accounting for two payments of $715,000 and $777,000. The money has never been found.2

 

AUDITING

 

Other than getting a “receipt” as mentioned above, there was no auditing of the funds. CPA did try to keep tabs on the amount of money turned over to the Iraqi Ministry of Finance – about $7.7 billion – but there was no detail on how the money was used and later they were only able to account for about $500 million. The UN tried to watch what was going on but “they were cut off from access while the CPA held power.” KPMG, the UN’s auditor, said in its report, “We encountered difficulties in performing our duties and meeting with key CPA personnel.”

 

It wasn’t until October 2003 that the Pentagon awarded a contract to NorthStar Consultants for $1.4 million to audit the spending. NorthStar Consultants, which was run by Thomas Howell out of a home in La Jolla California, had an official address that was a post office box in Nassau, Bahamas. The post office box “also happens to be the post office box set up for a $200 million securities swindle a few years earlier.”2 The company was created by a Bahamian man on behalf of Howell. The Bahama guy was also the person who set up the $200 million securities swindle. This was who the Pentagon put in charge of watching where the money went? It seems obvious they didn’t want anyone to know where it was going.

 

“Under the terms of CPA Regulation No. 2 signed by Bremer on June 15, 2003, money coming into Iraq was supposed to be tracked by an “independent certified public accounting firm.”2 However, NorthStar Consultants is not a certified public accounting firm.

 

Bremer seems to have been unaware of this detail. When he was asked at a congressional hearing . . . about NorthStar, he answered, “I don’t know what kind of firm it was, other than it was an accounting firm.” Would it upset him, a congressman asked, if he found out there were no accountants on NorthStar’s staff? “It would,” Bremer answered, “if it were true.”

 

It is true. And rather than reissue the contract to a certified public accountant, someone in the government contract office simply eliminated the requirement, thereby making Howell eligible for the work.2

 

Barlett and Steele attempted to talk to Howell. However, Howell said that, while he’d love to talk to them, it was a Pentagon operation, that NorthStar was a creation of the Pentagon, and he couldn’t talk about it unless he got approval from them. “And in subsequent conversations, he simply said that the Pentagon considered this a closed issue, that there was really no one capable on duty at this point who could actually discuss this and explain the dynamics of it.”3

 

CUSTER BATTLES

 

A lot of the money went to American contractors, like Custer Battles, the company mentioned above that needed the military to deliver its gunnysack of cash. Scott K. Custer and Michael J. Battles are former Army Rangers and Battles had once been a CIA operative. “They showed up in the streets of Baghdad right after the invasion. And to get there at that point, you had to have White House approval.”3 So, how did they get there?

 

Battles had been the GOP-backed candidate in the 2002 Rhode Island congressional primary. He not only lost, but was also fined by the Federal Elections Commission for misrepresenting campaign contributions. One of his backers was Haley Barbour, former chair of the Republican National Committee and now governor of Mississippi. Another backer was Frederick V. Malek, former special assistant to Richard Nixon and an insider in the Reagan administration and both Bush administrations.2

 

The CPA awarded Custer Battles one of its first no-bid contracts for $16.5 million "to protect civilian aircraft flights, of which at the time there were few, into Baghdad International Airport.”2 Barlett and Steele said:

 

The company faced immediate obstacles: Custer and Battles didn’t have any money, they didn’t have a viable business, and they didn’t have any employees. Bremer’s CPA had overlooked these shortcomings and forked over $2 million anyway, in cash, to get them started, simply ignoring long-standing requirements that the government certify that a contractor has the capacity to fulfill a contract. That first $2 million cash infusion was followed shortly by a second. Over the next year Custer Battles would secure more than $100 million in Iraq contracts.2

 

Barlett and Steele say they are being “charitable” when they state that there were “few” civilian aircraft flights into Baghdad International Airport. They don’t believe there were any, but “maybe one sneaked in at some point.”3

 

In September 2004 the Air Force issued an order barring Custer Battles from receiving any new government contracts until 2009. The company had come to epitomize the way business was done in Baghdad. Custer Battles had billed the government $400,000 for electricity that cost $74,000. It had billed $432,000 for a food order that cost $33,000. It had charged the CPA for leased equipment that was stolen, and had submitted forged invoices for reimbursements – all the while moving millions of dollars into offshore bank accounts. In one instance, the company claimed ownership of forklifts used to transport the CPA’s cash (among other things) around the Baghdad airport. But up until the war the forklifts had been the property of Iraqi Airways. . . . Custer Battles seized them, painted over the old name, and transferred ownership to its offshore businesses. The forklifts were then leased back to Custer Battles for thousands of dollars a month, a cost that Custer Battles passed along to the CPA. In 2006 a federal-court jury in Virginia ordered the company to pay $10 million in damages and penalties for defrauding the government. The jury found more than three dozen instances of fraud in which Custer Battles used shell companies in the Cayman Islands and elsewhere to manufacture phony invoices and pad its bills. During the same period Battles personally withdrew $3 million from the company coffers as a kind of bonus – or, as he put it, “a draw.” The jury decision in the whistle-blower lawsuit was subsequently overturned when the trial judge set the verdict aside, pointing out that the CPA was not in fact a U.S.-government entity and hence Custer Battles could not be tried under the federal fraud act. That decision is under appeal.2

 

CONCLUSION

 

So, the $9 billion for which there is no accounting, was received by the CPA and disbursed in cash. The CPA also had billions of U.S. taxpayer appropriations under its control. If there was any misuse of those funds, it is unknown. In addition, no one has looked at the oil revenues which, to this day, are un-metered, “which means steal as much oil as you want.”3

 

__________

 

1  CNN.com.  Audit:  U.S. Lost Track of $9 Billion in Iraq Funds.  January 31, 2005.

 

2  Barlett, Donald L. & Steele, James B. Billions Over Baghdad. Vanity Fair, October 2007.

 

3  Goodman, Amy. Interview with Donald L. Barlett and James B. Steele. Democracy Now, September 12, 2007.

 

 

© The Issue Wonk, 2008

 

 

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