Allegations of Fraud Scheme at Kuwaiti Pentagon Contractor

The Sultan family of Kuwait runs a variety of businesses alleged to be at the heart of a scheme to overcharge the U.S. military by as much as a billion dollars over the last seven years. The company is currently scheduled to face criminal arraignment on Feb. 8 in Atlanta, Ga.

Federal criminal investigators say that the Sultan Center supermarkets bought food supplies, marked up the prices and then re-sold them to another Sultan family business named Public Warehousing Corporation (PWC), which in turn sold it to the U.S. military at an even higher price.

PWC was renamed Agility in 2006 and is now one of the eight largest logistics companies in the world with annual revenues of $6.8 billion and offices in 120 countries.

The Sultan Center supermarkets are familiar to any wealthy Kuwaiti and expatriates who flock to their brightly lit, one-stop, 24-hours-a-day stores, often trailed by maids pushing overladen shopping carts. Located in or near some of Kuwait’s fanciest shopping malls, they offer consumer goods ranging from fresh Horizon organic milk flown in from the U.S. (at $11.50 a liter) to mangosteens from Thailand.

Some shops feature a "Just Ask" program under which they offer to import "any product you need, local or international, at real time and without any additional cost."

The supermarket chain was created in 1981 by the family of Jamil Sultan al-Essa, a Kuwaiti family whose heritage has been alternately described as southern Iraqi and Saudi. The first Sultan market was a self-service store near the Shuwaikh Port that focused on hardware and do-it-yourself products.

Almost three decades later, that store had evolved into a chain of 11 Sultan Centers scattered around Kuwait. In 1999 the Sultans expanded the retail chain to Oman, and in 2003 they acquired the Safeway chain in Jordan.

Like many wealthy Middle Eastern families, the Sultans have multiple businesses each operated by a sibling or cousin with overlapping ownership and often senior government positions.

One, Abdul Aziz Sultan al-Essa, was chairman of Kuwait’s Gulf Bank. Another, Kamal Sultan, ran the local franchise for Apple. Yet another Sultan venture, National Real Estate corporation, bought up 25 percent of the shares of a state-owned company – Public Warehousing Corporation (PWC) – when it was privatized in 1997.

PWC was given to Abdul Aziz’s son, Tarek Sultan al-Essa, who is a dual Kuwaiti-U.S. citizen and a graduate of the University of Pennsylvania’s Wharton School of Business. When Tarek Sultan took over PWC, the company was already charging the U.S. military $60,000 a month to operate Camp Doha on a 1.6 million-square-meter property near Shuwaik port in Kuwait.

In 2003, PWC won a contract called Prime Vendor Subsistence to supply food to the U.S. military in Kuwait and Iraq. That contract has since generated $8.5 billion in sales for PWC.

Allegations of Overcharging

The fraud scheme allegedly created by PWC exploits an obscure federal contractual mechanism known as "prompt payment discounts" to increase profits.

The best way to explain it is to use a fictional example: Company A (a shell company) buys a pound of chicken for a dollar and gives it to Company B (e.g., PWC) along with a bill for $1.10. Then Company B sells it to the military for $1.10 plus the agreed-on overhead and profits. Next, Company B pays Company A $1.10 and pockets the 10-cent markup from Company A as a prompt payment discount.

In this case, Company B has effectively earned the agreed-upon (and legal) profits from the military plus an extra 10 cents that the military would never have paid if it bought it directly from Company A. At the very least, this system is a waste of taxpayer money. And if Companies A and B are owned by the same people, it may constitute fraud.

The Sultan Center is alleged to have bought food supplies and sold them to PWC at a profit which they then paid back to PWC through prompt payment discounts.

PWC/Agility spokesperson Jim Cox told IPS in September 2008 that "prompt payment discounts" are written into the company’s Prime Vendor contract with the Pentagon to supply food to dining facilities used by U.S. soldiers in the Middle East and therefore not illegal. Indeed, the military even offers such an incentive program. (Typically, however, the military offers 2 percent military discounts, not 5 or 10 percent.)

Asked about the relationship between PWC and the Sultan Center, Cox said that the two companies are distinct businesses, listed separately on the Kuwait stock exchange.

In reality, Tarek Sultan and family head Jamil Sultan al-Essa serve on each other’s boards, while Jamil and four other Sultan family members are the largest stockholders in the Sultan Center and also control a large stake in PWC. The U.S. Department of Justice (DoJ) criminal indictment states: "The two companies had interlocking directorates with at least three directors in common." PWC/Agility’s Cox explains that this cross-ownership is common and legal in Kuwait.

In the grand jury documents submitted by the DoJ to the courts in November 2009, however, the investigators cite multiple examples of collusion. An Oct. 15, 2004, e-mail from PWC officials asked the Sultan Center to alter figures so that "the temporary price decline in the catalogue will not be obvious to the DSCP [Defense Supply Center, Philadelphia]."

It also quotes e-mails from Albuquerque-based Professional Contract Administrators (a consulting firm working for PWC) to tell Toby Switzer, the CEO of PWC Global Logistics, to "fire somebody, blame it on them, and cover up" the revisions in the Sultan Center’s local market prices "ASAP – THIS IS VERY SERIOUS."

Related Allegations

PWC is also alleged to have profited from "prompt payment discounts" from companies in the U.S. In early 2007, the DoJ began a series of investigations into the company’s pricing practices, alleging that PWC had overcharged the Pentagon by as much as $374 million "by inserting a related company to inflate the amount billed."

One PWC supplier that the DoJ investigated was American Grocers Inc., which provides foods such as Smucker’s peanut butter to the Sultan Center for resale to PWC in Iraq. In July 2009, American Grocers owner Samir Itani, a Houston-based Lebanese-American businessman, was convicted for tacking on "bogus trucking charges."

Another company under DoJ scrutiny is Ocean Direct LLC, owned by Richmond Wholesale Meats Inc. of California. At one point, it was supplying $2.3 million a month worth of raw cold-water lobster tails to the military at $21 a pound, while the average wholesale price at that time was between $17.60 and $18.75 a pound.

Settlement Talks

In November, PWC/Agility said it "is confident that once these allegations are examined in court, they will be found to be without merit." Since then PWC/Agility has attempted to reach a settlement with the DoJ by offering to pay a $600 million fine, according to reports in the Kuwaiti press.

"No agreement has been reached so far and there is no guarantee these negotiations will lead to a solution," the company stated at the end of December.

Unless these settlement talks bear fruit soon, the arraignment could lead to a trial in which spectators can expect a fascinating view into the extent of corruption engendered by the U.S. occupations of Afghanistan and Iraq.

(Inter Press Service)