Big spender: what happened to $20bn of Iraqi funds?

Editorial

Financial Times

Published: December 10 2004

Barely a month before the US-led Coalition Provisional Authority ended its rule over occupied Iraq, a little-known committee charged with approving the authority's spending met for the penultimate time in one of Saddam Hussein's Baghdad palaces.

By the time the meeting of the so-called Program Review Board broke up a few hours later, some $2bn had been approved for disbursement - part of what one US official describes as a last-minute "spending binge" by the provisional authority before it handed power to an Iraqi interim government.

The money was not from US taxpayers. It came out of Iraqi funds - the proceeds of Iraqi oil sales, government bank accounts frozen since the 1991 Gulf War and funds left over from the UN-administered "oil-for-food" programme that managed Iraqi oil sales before the US invasion.

From the same Iraqi funds the provisional authority, in the final two months of its existence, sent nearly $1.8bn in cash to the Kurdish regional government, over and above its regular financing to the region. The Kurds have refused to provide UN-mandated auditors with access to their records but have insisted they have not spent any of it. A spokesman for the Kurdish regional government said the payment was part of $4.5bn in funds it claims the UN owed the region as part of the now defunct oil-for-food programme. Behind the scenes, however, the Kurds have been in talks with several international banks to ship part of that money to Switzerland, guided by a Washington lobbying firm with close ties to the US Republican party.

No one has accused any of these parties of acting improperly. But the lack of transparency is fuelling questions over the payment to the Kurds, as well as dozens of others totalling billions of dollars made from Iraqi oil revenues during the CPA's rule.

Altogether, the CPA spent, or made commitments to spend, nearly $20bn in Iraqi money - a sum greater than the annual gross domestic product of Iraq. Evidence suggests the money was spent in a chaotic and haphazard way and that occupation officials routinely violated CPA procedures.

Next week a UN audit panel is set to give its verdict on how Iraq's money was spent. The CPA's inspector general is also finalising a report that is expected to be sharply critical of the stewardship of Iraqi funds.

Auditors have found that the lack of controls left funds open to fraud, loss or theft. Hundreds of millions of dollars in Iraqi oil revenues may also have been squandered. The office of the CPA inspector-general is investigating at least 27 cases of alleged corruption by CPA officials. A person with knowledge of the investigations says there is evidence of fraud and abuse.

Paul Bremer, the former administrator of Iraq, did not respond to several interview requests. But before Mr Bremer left Baghdad at the end of June the CPA said, in written answers, that the Iraqi funds had been "expended in the interests of the Iraqi people" and in a transparent manner - conditions set by the UN when it authorised the provisional authority to spend Iraqi oil revenues.

Those contentions are being questioned by auditors and others. "I don't think we sustained our obligations," said one US official. "We just threw the money over the fence."

In its reconstruction of Iraq the CPA had two main sources of money to draw on. The first was an $18.4bn allocation from the US Congress. The second was the Development Fund for Iraq (DFI), an account set up under UN resolution 1483 that concentrated billions of dollars in Iraqi assets dispersed worldwide. Also at the Americans' disposal were millions of dollars worth of cash, rugs, jewels and other loot seized by US soldiers from Baathist properties.

By the time it was dissolved on June 28 the CPA had spent or committed virtually all the funds that had passed through the development fund. By contrast, the authority had spent just $366m of the US funds on reconstruction, and earmarked around $5bn for projects. (The total amount spent has since risen to about $1.2bn.)

Part of the reason for the disparity is that the US funds were difficult to spend. Rules designed to ensure that money was not wasted or misused slowed the signing of contracts. CPA officials including Mr Bremer also complained that the Pentagon had taken control of US reconstruction funds and was reluctant to let them spend the money.

By contrast, the development fund was readily available for spending and could be controlled fro m Baghdad. Those charged with meeting Iraq's massive and urgent needs felt they had no option but to start spending freely from the Iraqi account.

"One of the advantages of the Iraqi accounts was that money could be delivered faster," says Walt Slocombe, the CPA's special adviser on security and defence until November 2003. "Bremer took the position under legal advice that he was in charge of the money - that he could spend it without rattling what he affectionately called 'the Washington squirrel cage'."

To handle the growing number of requests for funding from the Iraqi account the CPA established the Program Review Board. The review board was designed to ensure that spending was transparent and in the interests of the Iraqi people, as stipulated by the UN resolutions.

In the chaotic early days of the occupation, however, the review board often failed to observe its own rules. Meetings often failed to attract the eight voting members required to approve a project, but projects were often approved regardless. In other cases approval for projects was given outside formal meetings and not reflected in official minutes. An Iraqi representative was meant to sit in on meetings but turned up to just two of the 43 board meetings held in 2003.

By the standards applied to US money, projects funded with Iraqi money received cursory examination. According to figures from the Open Society Institute, funded by George Soros, the financier, 73 per cent of all contracts worth more than $5m were not competitively bid. "In 2003, [the review board] was a rubber stamp," says a US official.

Initially the review board's members approved relatively small projects relating to the country's day-to-day running in the aftermath of war: getting back-up generators, restoring oil pipelines and outfitting and training Iraqi police. Other projects appeared less urgent: $3,500 was set aside to pay actors, stagehands and producers at a Baghdad Theatre Festival.

As time went on, more and bigger projects came before the review board. Because of the delays in getting US money some multi-billion dollar projects were also being funded with Iraqi money. This was the case in a $1.4bn project to rebuild Iraq's oil infrastructure, granted to Halliburton, the US oil services company formerly headed by Dick Cheney, the US vice president, without competitive tender. The contract made Halliburton the largest single recipient of Iraqi funds.

"I know I spent some money from [the development fund] on it," says retired Rear Admiral David Oliver, the former chief financial officer for the CPA. "It purely was the matter that we'd run out of US money."

So many requests were made for changes to the sources of financing that, in January 2004, the review board's members wrote to Mr Bremer voicing their concern. The Iraqi finance minister objected that the UN-stipulated criteria were not being met.

The $2bn in projects approved by the board during its meeting on May 15 often replicated funds already assigned by the US Congress. The amount of Iraqi funds to be spent on security in the run-up to the handover of power was increased to $1bn, even though the US Congress had already assigned $3.2bn for that purpose. Similarly, the board assigned $315m in Iraqi funds to the electricity sector when the US Congress had already assigned $5.5bn to its reconstruction.

The minutes of the review board's final session two weeks later reflect deep unease among some members of the panel about the pace of spending. With Iraqi funds nearly depleted Yusaf Samiullah, the UK representative, urged the board to consider only proposals that were urgent or a matter of national security. He was overruled. However the board did overrule Mr Bremer's proposal that $10m be set aside for a museum to remember Saddam Hussein's victims.

It was not just the review board that had stepped up its spending. In June 2004, the CPA sent nearly $1.8bn in development fund money to the Iraqi ministries, more than double the monthly average that year. The CPA said the unusually large transfer would help to cover obligations following the transfer of authority. Just in case, it also set aside $800m from Iraqi funds to cover contracts after CPA officials had gone home.

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Several audit panels were established shortly after the US invasion to oversee its spending of the Iraqi funds. But many billions of dollars were spent before they were up and running.

UN resolution 1483 established the International Advisory and Monitoring Panel (IAMB), made up of representatives from the International Monetary Fund, the World Bank, the UN and the Arab Development Fund. But disagreements with the US over the panel's remit meant its chosen auditors, from accounting firm KPMG, did not start work in Iraq until a year later.

The CPA, for its part, named Stuart Bowen as its inspector-general. But he did not arrive in Iraq until February 2004, nine months after the authority began spending Iraqi funds.

With both sets of auditors now having managed to produce several reports, the picture that emerges is that inexperienced and overwhelmed CPA staff struggled to keep track of billions of dollars in spending.

Accounting systems were improvised and inadequate, both sets of auditors have found, leaving Iraqi funds open to fraud and abuse. Though neither set of auditors has yet concluded that any money is missing, they have found many troubling anomalies that are being investigated.

"There's a couple of cases where we were told that the CPA has the suspicion that one of their guys was taking money and they're doing their own investigation," says an IAMB official.

In the case of one $2.6m payment authorised by the CPA's senior adviser to the Ministry of Oil, IAMB auditors were unable to find a contract, evidence of tender procedures or evidence of any services rendered. In another case, a contract was entered into in spite of objections from the Iraqi representative to the review board. The contract was wrongly signed by a CPA senior adviser, and an advance payment of $3m made "without justification", the IAMB auditors said. "The contract was later cancelled and the adviser subsequently left the CPA," the IAMB report noted.

With multiple investigations probing allegations of corruption in the UN's oil-for-food programme during the last years of Saddam's regime, the IAMB has been reluctant to discuss with the US the touchy issue of its spending of Iraqi funds. But its audit reports obliquely refer to a series of incidents that raise questions about the conduct of some White House appointees in Iraq.

Many relate to the use of Iraqi funds by the health ministry - headed at the time by James Haveman, a CPA senior adviser appointed to the post by President George W. Bush. Mr Haveman - who was praised for having done a "superb job" by Donald Rumsfeld, the US defence secretary - appears, from the auditors' report, personally to have controlled hundreds of millions of dollars in Iraqi cash, granting contracts on his own authority, circumventing procurement rules and failing to keep adequate records.

Auditors found that Mr Haveman controlled the bank account that held the ministry's cash - nearly $5m at the time of the handover. The ministry's records wrongly recorded the asset as an expense. They also found that cheques were made out personally to Mr Haveman, instead of contractors.

Records of transfers made between the development fund and health ministry were out by $610,000; the ministry's trial balance was out by $1.3m. In three cases, contracts granted by the ministry were not publicly tendered. Millions of dollars in contracts were supported only by a letter from Mr Haveman. The ministry refused to explain the accounting discrepancies or provide auditors with any tender documents.

Mr Haveman declined to be interviewed about the discrepancies detailed by the auditors. He cast doubt on the quality of KPMG's audit report, saying in an e-mail that "to comment would give credence to it". He added: "We had a clear separation between myself and the funds expended and this was done as a matter of policy and integrity."

Many of those who worked with Mr Haveman expressed their admiration for his work, as well as scepticism that he would have sought to benefit from the large amounts of cash apparently passing through his hands. Auditors said it was likely that he and other CPA officials had "cut corners" and ignored regulations in an effort to get quick results.

The CPA's Mr Bowen has been even more critical of the way Iraqi money was handled. Iraq had no functioning banking system, so making local payments meant moving convoys of cash around the country. Hundreds of millions of dollars in cash was kept in a vault in a Baghdad palace. However investigators working for the inspector-general watched in surprise as a CPA official left the open vault unattended. When locked, the key was placed in an unsecured backpack.

The CPA did not keep a proper inventory of valuables seized by US soldiers from former regime officials, the inspector-general found, so it was unable to "ensure that non-cash assets would be available for the use and benefit of the Iraqi people". Mr Bowen also found that the CPA did not issue any standard operating procedures or develop an effective system to monitor or review contracts.

Files were often missing or incomplete, hindering the CPA's ability to "demonstrate the transparency required of . . . contracts using DFI funds", concluded Mr Bowen, a former lawyer for Mr Bush.

Charles Krohn, a former aide to David Nash, the retired US Navy admiral who was running the US reconstruction effort in Iraq, says: "When I was there, there was a general concern about the nature of the contracts to Halliburton and so on . . The thought was that these were not tightly-constructed contractual devices and that the oversight wasn't really what it could be."

Under its own rules the CPA was required to hire an independent auditing firm to assist in the accounting of the Iraqi fund. But the firm appointed, at a cost of $1.4m, was not a certified public accountant but rather a consulting firm. It never carried out the job.

Those charged with the difficult and dangerous task of overseeing Iraq's reconstruction make no apologies for the way they spent Iraqi oil revenues. They say any accounting discrepancies must be seen in the context of the scale and urgency of the task they faced.

"The whole place was at a standstill - it was dying on its feet," says Sir Jeremy Greenstock, former UK special representative to Iraq. "Of course, from the point [of view] of democratic, and particularly American, accounting procedures, there were corners cut," he says. "They were cut in the interests of getting the Iraqi economy jump-started again."

With just 1,200 people working in dangerous conditions it was unrealistic to expect the CPA to uphold the standards of a fully-fledged civil service, Sir Jeremy says.

Others say the inspector-general and IAMB were inappropriately applying US contracting standards to the Iraqi system. "I, candidly, was not interested in having an army of auditors because I thought you had to slide into the Iraqi system as quickly as possible in order encourage them to take responsibility," says Mr Oliver.

In its written answers before its dissolution the CPA strongly denied breaching the UN resolutions governing how Iraqi funds could be spent. "Great care was taken to put in place management processes to ensure DFI funds were expended pursuant to the standards contained in [the resolutions] . . . The standards established by CPA will stand up to outside scrutiny," it predicted in June.

Additional reporting by Stephen Fidler and Demetri Sevastopulo