I Cogitate

Follow the Money
Watchdogs are warning that corruption in Iraq is out of control. But will the United States join efforts to clamp down on it?

By Michael Hirsh
Newsweek

April 4 issue - By many accounts, Custer Battles was a nightmare contractor in Iraq. The company's two principals, Mike Battles and Scott Custer, overcharged occupation authorities by millions of dollars, according to a complaint from two former employees. The firm double-billed for salaries and repainted the Iraqi Airways forklifts they found at Baghdad airport—which Custer Battles was contracted to secure—then leased them back to the U.S. government, the complaint says. In the fall of 2004, Deputy General Counsel Steven Shaw of the Air Force asked that the firm be banned from future U.S. contracts, saying Custer Battles had also "created sham companies, whereby [it] fraudulently increased profits by inflating its claimed costs." An Army inspector general, Col. Richard Ballard, concluded as early as November 2003 that the security outfit was incompetent and refused to obey Joint Task Force 7 orders: "What we saw horrified us," Ballard wrote to his superiors in an e-mail obtained by NEWSWEEK.

Yet when the two whistle-blowers sued Custer Battles on behalf of the U.S. government—under a U.S. law intended to punish war profiteering and fraud—the Bush administration declined to take part. "The government has not lifted a finger to get back the $50 million Custer Battles defrauded it of," says Alan Grayson, a lawyer for the two whistle-blowers, Pete Baldwin and Robert Isakson. In recent months the judge in the case, T. S. Ellis III of the U.S. District Court in Virginia, has twice invited the Justice Department to join the lawsuit without response. Even an administration ally, Sen. Charles Grassley, demanded to know in a Feb. 17 letter to Attorney General Alberto Gonzales why the government wasn't backing up the lawsuit. Because this is a "seminal" case—the first to be unsealed against an Iraq contractor—"billions of taxpayer dollars are at stake" based on the precedent it could set, the Iowa Republican said.

Why hasn't the administration joined the case? It has argued privately that the occupation government, known as the Coalition Provisional Authority, was a multinational institution, not an arm of the U.S. government. So the U.S. government was not technically defrauded. Lawyers for the whistle-blowers point out, however, that President George W. Bush signed a 2003 law authorizing $18.7 billion to go to U.S. authorities in Iraq, including the CPA, "as an entity of the United States government." And several contracts with Custer Battles refer to the other party as "the United States of America." Pressure has been building on the administration to join the case—or at least to file a brief saying publicly if it believes defrauding the CPA is the same as defrauding the United States. The judge's latest deadline for that brief is this Friday. But a Justice Department spokesman said last week the government "could" still refuse to take part. "I'll bet you $50 they will not show up," says Richard Sauber, a lawyer for Custer Battles, which is still operating in Iraq. (He also rejects the charges of fraud and incompetence.)

The administration's reluctance to prosecute has turned the Iraq occupation into a "free-fraud zone," says former CPA senior adviser Franklin Willis. After the fall of Baghdad, there was no Iraqi law because Saddam Hussein's regime was dead. But if no U.S. law applied either, then everything was permissible, says Willis. The former CPA official compares Iraq to the "Wild West," saying he delivered one $2 million payment to Custer Battles in bricks of cash. ("We called Mike Battles in and said, 'Bring a bag'," Willis told Congress in February.) Willis and other critics worry that with just $4.1 billion of the $18.7 billion spent so far, the U.S. legal stance will open the door to much more fraud in the future. "If urgent steps are not taken, Iraq ... will become the biggest corruption scandal in history," warned the anti-corruption group Transparency International in a recent report. Grassley adds that if the government decides the False Claims Act doesn't apply to Iraq, "any recovery for fraud, waste and abuse of taxpayer dollars ... would be prohibited...

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