US Military Loses Control Of Subcontractor Spending, Warlords Benefit

This piece is a collaboration between the Huffington Post Investigative Fund and the Center for Public Integrity.

When federal investigators discovered that the manager of a Saudi
Arabian company paid bribes to win two lucrative subcontracts supplying
food to Americantroops in Iraq, they naturally wanted to know more. Did he act on his own? Had U.S. taxpayers been cheated?

Five years later, investigators are still largely in the dark.They
suspect similar activities by other subcontractors may have tainted
contracts worth up to $300 million. But the investigators are unable to
uncover even basic information, such as how the manager of the Saudi
company had come up with $133,000 in bribe money.

The investigators likely could have compelled a U.S.-based contractor
to turn over financial records. But the Saudi firm still hasn't shared
its books with Pentagon auditors or KBR, the big U.S. company through
which it operated as a subcontractor.Nor does it have to. The long arm
of the U.S. law doesn't extend to foreign businesses on which the
military increasingly depends -- and spends huge sums.

Even now, as the U.S. military anticipates withdrawal from Iraq and transferring of vital functions
to civilian businesses, foreign subcontractors are playing an enormous
role in war zones. Often operating through larger big-name U.S.
contractors, they ferry supplies such as ammo and weapons through
dangerous terrain. They provide translators and food for troops, help
build military outposts, and keep soldiers and civilians safe. Without
suchlocal and regional subcontractors, the modern military says it could not operate in two war zones halfway around the globe.

The foreign firms are seen as so essential, in fact, they're not
part of the $100 billion cutback in contractor spending being urged by
Defense Secretary Robert Gates, who has complained about "our
over-reliance on contractors."

But a series of ongoing congressional and military investigations
underscore the perils of unbridled dependence on foreign firms -- and
the difficulties in making sure money is well spent. Reliance on foreign
companies often involves murky arrangements that can endanger U.S.
troops and strategic goals, and put taxpayer dollars to bad use.
Customary contracting rules don't apply, and even big U.S. companies
aren't always sure whom they are ultimately paying. That can lead to
fraud and shoddy work.

Interviews, testimony, and records of recent and ongoing investigations -- like
the one involving a Saudi company -- reviewed by the Center for Public
Integrity and the Huffington Post Investigative Fund suggest more
extensive problems with subcontractors than previously known. Besides
the bribery case involving a Saudi company, the government suspects
certain foreign subcontractors providing security in Afghanistan of
bribing both sides in the conflict -- officials of the U.S.-supported
Afghan government as well as leaders of the Taliban.

In Iraq, meanwhile, U.S. money for trash collection, administered by a
bevy of foreign subcontractors, has allegedly ended up in the pockets
of insurgents, according to one investigation. In Baghdad, a
whistleblower is alleging that Middle Eastern subcontractors with
special security access sneak prostitutes into the highly secure Green
Zone, in an effort to persuade contractors and the U.S. military to hire
the company.

Taxpayer funds have even wound up in the hands of enemy fighters --
despite efforts undertaken by top military officers such as Gen. David
Petreaus, who warned in an August memo on counterinsurgency efforts in
Afghanistan that "money is ammunition; don't put it in the wrong hands."

"Without good subcontract control by prime contractors and good
oversight by the government," Michael Thibault, co-chair of the Wartime
Contracting Commission, said in a written statement, "we risk not only
wasting money, but also depriving our troops of support they need,
overlooking misconduct that alienates local populations, and even
handing funds to violent insurgents."

Foreign subcontractors are virtually untouchable in other ways, too.
When something goes awry -- such as a foreign subcontractor's
involvement in a officer's accidental death -- the government and the
officer's family have less recourse for compensation in the courts than
if the company had been based in the U.S.

Warlords, Inc.

Christopher Shays, a former Republican lawmaker, co-chairs the
bipartisan Wartime Contracting Commission, which Congress created in
2008 to investigate whether billions of dollars are being wasted in Iraq
and Afghanistan. "There are good reasons for using subcontractors," he
said. But "what makes sense for a renovation project in Connecticut or
Maryland can create some unique risks when the contractor is hiring
subcontractors in a combat zone halfway around the world."

Warnings have been sounded for years. As early as 2007, Rep. Henry
Waxman, then chairman of the chief investigative committee in Congress,
complained of an inability to follow the money. The California Democrat
described the subcontracting world as "so murky that we can't even get
to the bottom of this, let alone calculate how many millions of dollars
taxpayers lose in each step of the subcontracting process." Although
Congress in 2008 ordered an exact count of the number of private
contractors working in Afghanistan, the figure was still unknown this
year and auditors remain uncertain whether the U.S. was spending money
properly, the Investigative Fund reported in March.

Subcontractors pose unique challenges. The Pentagon and some of the
biggest corporate names in the defense industry have a history of
failing to oversee the local businesses they hire on the government
dime. And even when U.S. authorities detect signs of fraud or
corruption, they often can't pursue their investigation or case.
Auditors have no authority, and investigators need cooperation of people
in other countries, including war-torn regimes where officials "don't
take this as seriously as we do," a Pentagon criminal investigator told
the Center for Public Integrity and the Huffington Post Investigative
Fund. Whistleblowers, often helpful in prosecuting fraud, are less
inclined to cooperate when they work for subcontractors; protections
against retaliation under U.S. lawdo not apply to them.

Even a seemingly simple question -- how much total federal spendinggoes to foreign subcontractors annually -- has no clear answer, largely because of the complex chain of contractors involved.

At a July hearing of the Wartime Contracting Commission, Edward
Harrington, an Army procurement official, couldn't be more precise about
how much the Pentagon spent on foreign subcontractors than offering an
estimate in the "lower billions of dollars." Likewise, the State
Department and U.S. Agency for International Development do not know how
much they spend on foreign subcontractors. Government officials also
have trouble keeping track of companies who abscond with startup fees,
do no work, and then re-emerge under new identities that allow them to
collect fees again.

Worse, worries Raymond DiNunzio, head of investigations for the
Special Inspector General for Afghanistan Reconstruction, is that the
U.S. may be helping its enemies. The government "does not have the
ability to monitor Afghan security contractors or determine the nature
of their affiliation or allegiance," he said.

An investigation by the House oversight subcommittee on national
security found that multiple private security subcontractors were
warlords, strongmen, commanders, and militia leaders -- adversaries who
are "in fundamental conflict with U.S. aims to build a strong Afghan
government," according to a subcommittee report, "Warlord, Inc."

Hard to Follow the Money

The Tamimi Group, a Saudi-based conglomerate of 37 companies, has
businesses in everything from supermarkets and hotels to tire retreading
and catering. Despite a five-year criminal investigation, the United
States is stillunable to determine how Tamimi's top
manager for Iraq and Kuwait obtained at least $133,000 to bribe
employees of the global construction and engineering company KBR
(formerly Kellogg Brown & Root and a subsidiary of Halliburton) for
subcontracts.

In 2006, Mohammad Shabbir Khan, a Tamimi manager and naturalized U.S.
citizen, was sentenced to 51 months in prison in the U.S. after
pleading guilty to 14 charges related to kickbacks. Fifteen more months
were tacked on last year when he was convicted of two further counts of
witness tampering. He has admitted he paid $133,000 in bribes to
American KBR employees to win $21.8 million in subcontracts to supply
food to troops in Iraq and Kuwait.

Tamimi has refused to turn over its financial records to the Defense
Contract Audit Agency and to prime contractor KBR, which want to examine
the company's books in connection with the Kahn case, according to
Charles Tiefer, a University of Baltimore law professor specializing in
government contracts who is a member of the Wartime Contracting
Commission. Altogether in Iraq, as much as $300 million in "tainted
subcontracts" could potentially be involved in multiple kickback schemes
perhaps implicating various foreign subcontractors, Tiefer estimated in July.

Perry V. Dalby, a retired U.S. Army officer who now serves as
Tamimi's ethics director, said Tamimi did nothing wrong, did not provide
money for kickbacks or benefit from them, and is complying with the
terms of its contract with KBR. "What happened with Mr. Khan was a
terrible thing," Dalby said. The company, after checking its own
records, found no sign of having paid for the bribe. "We cannot find
where we are missing $133,000," Dalby said.

KBR says that subcontractor costs passed on to the U.S. taxpayer are
not inflated because of kickback schemes and that they will "vigorously
defend" challenges by government auditors over "unallowable" costs
allegedly included in the Pentagon's tab, according to a July filing by
KBR with the Securities and Exchange Commission.

The company has said it effectively manages thousands of subcontractors. During testimony before the Wartime Contracting Commission,
Cheryl Ritondale, the company's procurement director, described
"extensive oversight processes" while acknowledging that "challenges do
remain" in monitoring foreign companies. Tamimi, she noted, refused to
produce accounting records when KBR asked for them on behalf of the
Defense Contract Audit Agency. KBR shared with auditors whatever
invoices it had, she added.

Parties and Prostitutes?

A previously unpublished homemade video allegedly taken at a
subcontractor-organized party in March 2005 may provide a glimpse at
what some dub the "Wild West of contracting" in Iraq -- a reference to
the unbridled flow of U.S. taxpayer dollars without much in the way of
an overseeing sheriff. A copy of the video, never before seen publicly,
was provided to authorities by a whistleblower and obtained by the
Center and the Investigative Fund. It shows two women moving across the
laps of three Western men who wear tan-colored vests, clothing common to
civilian contractors in Iraq. Music is playing in the background.

"It was common practice for [foreign]subcontractors
to provide prostitutes at these parties" inside the Green Zone, the
source of the video alleged to investigators for the Defense Criminal
Investigative Service in 2007, according to a transcript of their
interview. The whistleblower supplied short clips of video, taken with a
cell phone camera, that he said were taken at one of the parties. (The
interview documents and the video were made available to the Center and
the Fund on the condition that the news organizations do not reveal the
whistleblower's name.)

Investigators from the FBI, the Defense Criminal Investigative
Service and the Department of Homeland Security are familiar with the
videos and the circumstances. Agents began interviewing the
whistleblower in 2005, according to the documents. The investigation,
which a Pentagon source says is ongoing, focuses on alleged foreign
subcontractor kickback schemes for Iraq reconstruction contracts awarded
by the U.S. Air Force Center for Engineering and the Environment in San
Antonio.

Military officials declined to discuss the allegations. "The issue is
still in a legal investigation so we can offer no further comment," Air
Force spokesman Doug Karson said in an e-mail.

The whistleblower "cited the issuance of [common security access
cards] to Middle-Eastern contractors as contributing to multiple
problems, including the [alleged] provision of prostitutes to U.S.
government and U.S. contractor personnel," according to a Defense
Criminal Investigative Service interview report of the whistleblower's
allegations obtained by the Center and the Investigative Fund.

Possession of a security access card allegedly allowed a contractor
to escort up to five people into the Green Zone without having his
automobile searched, the DCIS interview report said. One reconstruction
contractor based in the Mideast "managed to routinely have prostitutes
at their parties," the whistleblower alleged in the report. The FBI
record of the interview indicates the whistleblower alleged to agents
that the prostitutes were young Iraqi women, "generally dressed in what
he described as 'belly-dancer' outfits."

The company declined e-mail requests for comment. Though an
investigation is said to be ongoing, no charges have been filed in
connection with these specific allegations. The extent to which law
enforcement authorities are focusing on the whistleblower's allegations
of security violations or methods of swaying contracting officers is
unclear.

Other allegations accuse Iraqi contractors of similar abuses. The
Baghdad-based Organization of Women's Freedom in Iraq, in a report
issued in March, detailed two operations where Iraqi women were
allegedly brought to U.S. military personnel for money. In one case, it
was an Iraqi translator who "brought different girls for the U.S.
officer on every visit and let him use his own bedroom." The other
instance involved an Iraqi who "has a badge for access to the nearby
American military base who are the main clients," similar to the other
allegation of security card abuse in the Green Zone.

The military "does not condone" prostitution, a spokesman for the
U.S. Forces in Iraq, which is part of U.S. Central Command, said in an
e-mailed statement to the Center and the Fund.

Prostitution can give the mission a "terrible black eye," because
success hinges on the U.S. government building a good relationship with
the local Islamic communities, noted Steven Cullen, a former JAG Corps
attorney. "Contractors abusing local girls could get people killed...or
at least cause people to stop cooperating with us."