Is Iraq Becoming the World’s Biggest Cash Cow?

WASHINGTON – The United States has charged a former employee of the U.S. construction giant Halliburton and a Kuwaiti subcontractor with defrauding the U.S. government of millions of dollars in a contract scam in Iraq, one day after an international watchdog group warned that lax oversight was threatening the reconstruction effort there.

Two men – Jeff Alex Mazon, a former employee of Kellogg, Brown & Root (KBR), a subsidiary of Houston-based Halliburton Co.; and Ali Hijazi, the managing partner of a Kuwaiti business, LaNouvelle General Trading and Contracting Company – were indicted on charges of devising a scheme to defraud the United States of more than $3.5 million.

The charges are related to the awarding of a subcontract to LaNouvelle to supply fuel tankers for U.S. military operations in Iraq before the U.S. invasion of Iraq in March 2003.

The indictment alleges Mazon rigged a bid he received from Hijazi of LaNouvelle for fuel tankers to ensure that LaNouvelle would be overpaid. It also said that Mazon, 36, allegedly inflated the competitor’s bid to ensure that LaNouvelle’s bid would be the lowest.

Mazon allegedly tripled both bids and, in February 2003, on behalf of KBR, Mazon awarded the subcontract for fuel operations at the airport to LaNouvelle.

The subcontract specified that KBR was to pay LaNouvelle more than $5.5 million, nearly $5 million more than the KBR estimate of the job – about $680,000.

Hijazi allegedly presented Mazon with a $1 million check in exchange for Mazon’s favorable treatment of LaNouvelle.

The investigation is one of several involving Halliburton and its subsidiaries, which are working to support the U.S. occupation in the Middle East.

The charges surfaced only a day after the international watchdog group Transparency International said in its "Global Corruption Report 2005" that profiteering threatens to undermine the reconstruction of Iraq, where most of the companies operating are U.S.-based.

"When the size of a bribe takes precedence over value for money, the results are shoddy construction and poor infrastructure management," said Peter Eigen, chairman of Transparency International (TI), in a statement. "Corruption wastes money, bankrupts countries, and costs lives."

The TI report called for the adoption of more aggressive anti-corruption measures as Iraq rebuilds.

"Corruption thrives in a context of confusion and change," the report says, adding that the occupied Arab country was especially vulnerable due to its recent history of conflict, tyranny, and mismanagement as well as "the sizable reconstruction funds that have been pledged by the international community."

The organization said that the new Iraqi government, U.S. forces and international donors need to place more emphasis on decentralizing governance, loans, and aid projects, and they need to support Iraq’s local media as an independent watchdog.

The report also identifies management of Iraq’s oil revenue as a priority.

"Funds poured into rebuilding countries such as Iraq must be safeguarded against corruption," Eigen said.

Authors of the report on Iraq say that most of the anticipated spending on building and procurement has not yet occurred.

"If urgent steps are not taken Iraq will become the biggest corruption scandal in history," the authors say.

Attempts by donors like the World Bank and the International Monetary Fund (IMF) to hasten the pace of reconstruction can heighten the chances of waste and fraud, they argued.

Transparency International said that current standards of supervision by donors and implementing agencies are not yet sufficient. Broad consultation and multilayered monitoring that involve local communities are necessary to reduce the risks of corruption, the report said.

"The example of Iraq is particularly dismal in this respect," says the report.

It referred to how the Coalition Provisional Authority (CPA) and U.S. Department of Defense initially had only 80 people examining the largest reconstruction program in history, half the number needed according to the Association of Inspectors General, and eventually outsourced oversight to private companies, giving rise to potential conflicts of interest.

The report also said that many U.S. contractors in Iraq have been wasteful and taken what many would see as excessive profits, both of which can be attributed to "cost-plus" contracts. These are deals in which companies are reimbursed for all costs with an additional percentage added as guaranteed profit.

It said that U.S. rules in Iraq still allow the government to award an unspecified amount of future work to approved contractors.

"This system restricts the ability of poorly connected and smaller companies from bidding for contracts," it said.

The report also faulted the phenomenon of "contract bundling," which joins together two or more separate procurement requirements into a super-sized contract, effectively disqualifying smaller companies because only the very largest contractors are able to compete.

Other case studies of large-scale infrastructure projects around the world that have been plagued by corruption include dam projects in Lesotho, Argentina, and Uganda; a waste incinerator in Cologne, Germany; and the Bataan nuclear power plant in the Philippines.