The NewStandard ceased publishing on April 27, 2007.

U.S. Took Eyes Off Mercenaries, $96M in Iraq, New Audits Find

by Chris Shumway
Brian Dominick contributed to this piece.

The government office charged with investigating misconduct in the reconstruction of Iraq just revealed dozens of new allegations that Western contractors and their overseers mismanaged Iraqi reconstruction funds.

May 9, 2005 – United States authorities failed to ensure that a British mercenary company was in full compliance with the terms of its security contract in Iraq, according to an audit by the office set up to investigate mismanagement of reconstruction funds. Aegis Defense Services, which received the largest contract of all the private armies operating in Iraq despite a highly questionable background, failed to comply with regulations established to ensure a basic order within mercenary oufits.

Additional audits prepared by the Special Inspector General for Iraq Reconstruction (SIGIR) and delivered to Congress last week additionally show that American officials poorly maintained dozens of relatively small reconstruction contracts collectively worth more than $184 million. They also reveal that American managers of the Development Fund for Iraq (DFI), an account consisting primarily of Iraqi oil revenues, failed to keep track of at least $96.6 million in funds earmarked for reconstruction and relief projects in south-central Iraq.

This fresh evidence of mismanagement was all discovered on top of the $9 billion in unaccounted-for funds discovered earlier this year. And the troubles with Aegis arrive as concern over fraud allegedly committed by another private military company, Custer Battles, still simmers.

More Shady Mercenaries Run Amok

Investigators found that the US Army hired Aegis last year to provide armed bodyguards for US government employees and contractors managing reconstruction of the oil and gas fields and repairing the electricity and water services in Iraq. The UK-based company failed to comply with requirements in five key areas of its $293 million "cost-plus" contract, the auditors’ report conveys.

Cost-plus contracts cover all of a company’s expenses, plus a pre-determined percentage of whatever they spend, ensuring that the contractor makes a significant profit.

Among the findings, auditors reported that Aegis bodyguards did not have proper experience and qualifications for hostage rescue and chemical and biological warfare; that Aegis did not provide suitable documentation showing that its weapons toting employees were trained and qualified to use those weapons; and that the company did not have sufficient proof that its Iraqi employees had been properly vetted. In many cases, Aegis had no records showing that it performed police background checks on Iraqi workers, or that it even conducted interviews with workers before hiring them.

Auditors reported that the Project and Contracting Office (PCO) in Iraq, which handles all financial and programmatic matters related to the reconstruction effort, did not adequately monitor the Aegis deal - the largest single security contract in Iraq. "As a result" of both Aegis’ and the PCO’s failures, the audit concluded, "there is no assurance that Aegis is providing the best possible safety and security" for government and reconstruction personnel in Iraq.

As much evidence of mismanagement as the inspector general’s office found, watchdogs point out there was reason for grave concern just based on the past dealings of the mercenary outfit’s founder. Aegis was launched by Tim Spicer, a former British commando, in 2003, a little more than a year before it won the lucrative contract in Iraq. Spicer has long been involved in using private forces to intervene in civil wars on behalf of mining, oil and gas interests, according to a report by CorpWatch, a web site that monitors corporate fraud and abuse.

In 1998, a company called Sandline, also operated by Spicer, was reportedly contracted to sell 30 tons of arms to the forces of the then- leader of Sierra Leone, in violation of a UN arms embargo. Subsequently, Spicer’s firm became the subject of multiple British investigations. Spicer maintained at the time that he did not know the company’s actions were illegal, CorpWatch reports.

One year earlier, Spicer was involved in a civil war in Papua New Guinea during which Sandline was reportedly paid $36 million to battle local citizens who had shut down a profitable copper mine to protest environmental damage it had caused and to assert their case for independence. At a Papua New Guinea court hearing, Spicer reportedly said that part of his project involved a psychological campaign waged against citizens with the aid of attack helicopters. Charges against Spicer were eventually dismissed, CorpWatch reported.

Spicer’s past, reported by The NewStandard last June, was outside the scope of the inspector general’s audit, which focused on the conduct of the company and the contracting process rather than the wisdom of the contract itself.

The Aegis story is in some ways reminiscent of a similar situation involving former US contractor Custer Battles. That firm, itself co-founded in 2003 by a former commando looking to take advantage of the burgeoning mercenary industry and its practically open-ended contracts, currently faces a lawsuit brought by former associates on behalf of the US government, charging massive fraud and theft. Custer Battles also received lucrative contracts despite its limited history as a corporation and the questionable backgrounds of its founders.

Fraud, Theft Suspected in Up to 37 Cases

In a report to Congress last week that summarized the Aegis audit, the special inspector general also stated that the US contracting office "did not adequately maintain" 37 of its contracts and associated files for projects worth more than $184 million. Officials additionally failed to produce 21 percent of the files that auditors requested for their review. As a result of mismanagement, "there was no assurance that fraud, waste and abuse did not occur in the management and administration" of Iraqi reconstruction contracts, the report said.

Government auditors also found "indicators of potential fraud" on the part of the Development Fund for Iraq’s (DFI) Account Manager’s office, which failed to "properly account for or support" more than $96.6 million in cash that employees were supposed to hand out in shrink-wrapped bricks of hundred-dollar bills. Auditors have referred several cases to a special office for criminal investigation.

Most of the funds US contractors are suspected to have defrauded was Iraqi money to begin with.

In an examination of financial records between June 2003 and October 2004, reviewers found poor bookkeeping on the part of managers handling the DFI for the former Coalition Provisional Authority and, more recently, the US Embassy’s Joint Area Support Group for Central Iraq. Money from the cash disbursal program was intended to pay local citizens and contractors for rebuilding and relief projects in South Central Iraq.

On several occasions, employees handed out large bundles of cash without properly counting the money.

In another case, two US "field paying agents" left Iraq without telling their bosses what happened to $1.49 million in cash they were supposed to hand out. The inspector general's office found that the two workers did not sign the required forms to take on personal liability for any lost cash.

The audit further found that the DFI account manager was aware that the two field agents had outstanding balances "but did not take action to resolve the issue." Instead of trying to determine exactly what happened to the money, the manager prepared a worksheet that made it appear as though the workers transferred the cash to another, higher ranking agent. Such an act "appears to be an attempt to remove outstanding balances by simply washing accounts," the audit said.

Corruption and Inspection Continue

The SIGIR office just began its second year of oversight and inspections concerning the management of US, Iraqi and international funds in occupied Iraq. In a report slated for release today, Special Inspector General Stuart W. Bowen Jr. notes that the rebellion operating across much of Iraq remains "a major barrier to the reconstruction and rehabilitation" process. But during a year of audits, the SIGIR has uncovered numerous cases of fraud and misallocation.

The SIGIR says it is currently conducting an audit of DFI cash disbursement in the southern region of Iraq.

Expecting to more than quadruple its original Iraq-based staff to 30 personnel by month’s end, the office currently has a total of 34 cases under investigation on the ground, six of which are categorized as "procurement fraud" and another six suspecting theft.

Between January 1 and March 31, a corruption hotline set up by the special inspector general received 57 new complaints of corruption related to Iraq reconstruction projects. Fourteen of those have been classified as abuse, while ten each are listed as fraud and waste.

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The NewStandard ceased publishing on April 27, 2007.


Chris Shumway is a contributing journalist.

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