Invitation to Steal: War Profiteering in Iraq

The heavy reliance on private contractors to do everything from serving meals and doing laundry to protecting oil pipelines and interrogating prisoners has been a major factor in the immense costs of the Iraq war. By one measure, there may be more employees of private firms and their subcontractors on the ground in Iraq than there are U.S. military personnel.

One of the main rationales for using private companies to carry out functions formerly done by uniformed military personnel -- a practice that has been on the rise since then Defense Secretary Dick Cheney commissioned a study that led to the contracting out of all Army logistics work to Halliburton in the 1990s -- was that it would save money. But in Iraq, the combination of greedy contractors and lax government oversight has resulted in exorbitant costs, many of them for projects that were never completed.

The first sign that something was terribly wrong with the contracting process for the war was the awarding of a no-bid, cost-plus contract to Halliburton, allegedly to pay the cost of putting out oil fires in Iraq. Rep. Henry Waxman started asking questions about the contract after he learned that it could be worth up to $7 billion over x years. He rightly questioned how a no-bid deal justified on the basis of potential short-term emergencies could have such a long duration at such a high price. Only then was it revealed that the contract also covered the task of operating Iraq's oil infrastructure. Given the long-term nature of this larger task, Waxman argued that this aspect of the work be taken away from Halliburton and subjected to competitive bidding. It was several years before his recommendation was implemented, and even then Halliburton received what at least one potential competitor -- Bechtel -- viewed as an unfair advantage.

While few contracts matched the size of Halliburton's oil deal, the use of cost-plus awards was widely emulated. A cost-plus award is virtually an invitation to pad costs, as profits are a percentage of funds spent -- in other words, the more you spend, the more you make. This problem has been compounded by a lack of auditors to scrutinize these contacts. For example, in one zone of Iraq, only eight people were assigned to oversee contracts worth over $2.5 billion.

Halliburton's other major contract in Iraq is for the Logistics Civil Augmentation Program (LOGCAP). Under this arrangement, Halliburton supplies virtually all of the Army's non-combat needs in the field, from building and operating bases to repairing and maintaining combat vehicles. LOGCAP operates on a variation of the cost-plus contracts, and it has exploited this arrangement to the fullest. Among the overcharges engaged in by the company have been the following: overcharging by more than a dollar a gallon for fuel shipped into Iraq from Kuwait; billing the government for three times as many meals as it actually served the troops at several of the bases it runs; leasing SUVs for its personnel at a cost of $7,000 per month; and charging $100 each for doing a bag of laundry. These are just a few examples among dozens in which Halliburton took advantage of the "fog of war" to line its pockets. The company's attitude was summed up by company whistleblower Henry Bunting, who indicated that when he raised questions with his supervisor about Halliburton's lavish expenditures of government money he was told "don't worry about it, it's cost-plus."

In all, Halliburton has been by far the greatest beneficiary of the Iraq war, with war-related contracts exceeding $8 billion, several billion of which has not been adequately accounted for. Although a number of changes were made in response to the company's record of fraud and abuse -- from taking away its fuel supply contract to splitting the work for operating Iraq's oil infrastructure into three parts -- these measures were a classic case of too little, too late. Reforms designed to prevent "another Halliburton" will be discussed below.

Large firms like Halliburton were not the only ones to exploit the war for excess -- and in some cases illegal - profits. One of the most notorious examples involved Custer Battles, named after its founders Scott Custer and Michael Battles. When the two men went to Iraq in search of contracts, they had no capital, no employees, and no experience in the security business. But they did have a knack for marketing, billing themselves "Green Berets with MBAs."

Shortly after arriving in Iraq, Custer Battles received a lucrative contract to provide security for the Baghdad airport. As an example of just how loose controls were, one early payment to the company was made in the form of $2 million in shrink wrapped $20 bills, transferred to the firm in exchange for a handwritten receipt. A film of two Custer employees playing football with a brick of the shrink wrapped bills provided one of the most enduring images of greed and corruption generated by the Iraq occupation contracting fiasco.

Even as rumors of poor performance on the airport security contract began to circulate, Custer Battles received another major contract, this time for delivering the new Iraqi currency to key points around the country. This effort was characterized by shoddy working conditions, unpaid subcontractors, and the use of broken down trucks that could not carry out their mission.

Finally, after revelations by whistleblowers who had worked for the firm, the extent of Custer Battles corruption was exposed. In addition to failing to provide the security and transport services it was contracted to do, internal company documents showed that it had routinely charged for at least twice the value of services supplied by padding bills and funneling subcontracts to phony companies. While all of this was going on, Mike Battles was paying himself $3 million as head of the company.

These were far from isolated incidents, but the extent of the problem might never have been known without the creation of the Special Inspector General for Iraq Reconstruction (SIGIR). IG Stuart Bowen and his staff did scores of audits of every aspect of the reconstruction effort, from building schools to restoring electric service to providing security for a wide range of projects and activities. They discovered a pattern in which contract dollars were spent out in full while only a fraction of the promised work had been completed. While some of this gap can be accounted for by the violence and insecurity that was rampant in significant parts of Iraq from early on in the occupation, this cannot begin to account for the shoddy performance of major and minor contractors alike.

To cite just one example of a company that was roundly criticized in SIGIR audits, the Parsons Corporation -- the second largest Iraq reconstruction contactor after Halliburton -- is worthy of mention. The company completely botched or failed to deliver on hundreds of millions of dollars worth of contracts to build health clinics, fire stations, prisons, and a police academy. This misconduct not only wasted dollars, it endangered the lives of U.S. soldiers by fostering resentment among Iraqi citizens.

The lack of accountability of contractors in Iraq has extended well beyond financial malfeasance. Interrogators and translators from Titan Corp. and CACI Inc. were allegedly involved in incidents of torture at the infamous Abu Ghraib prison, but no employees of these firms were ever subjected to legal proceedings. This is due to the fact that private contractors in Iraq exist in a legal never-never land, subject neither to Iraqi law nor to the Uniform Code of Military Justice (UCMJ). The U.S. Extraterritorial Justice Act is supposed to cover cases like this one but it has almost never been utilized, due to the difficulty of having a prosecutor based in America build a case regarding an incident or incidents that may occur thousands of miles away.

The existence of security contractors who operate outside the military chain of command also poses serious problems. For example, when four employees of the private security firm Blackwater were killed and tortured by a mob in Falluijah in April 2004, the U.S. military felt compelled to strike hard at the city in a punitive backlash that did much to accelerate the opposition to the U.S. occupation among ordinary Iraqis. If the job had been done by personnel within the military chain of command, they might never have been deployed to that location at that time, thereby preventing the first Fallujah crisis from ever occurring.

Another circle of beneficiaries may be referred to as the "policy profiteers": individuals who advocated for the war with Iraq at the same time that they stood to gain from it. Chief among these were Bruce Jackson, R. James Woolsey, and Richard Perle. Jackson, a former vice president at the world's largest weapons contractor, Lockheed Martin, co-chaired the Committee for the Liberation of Iraq, an advocacy group which closely coordinated its pro-war messages with the Bush administration. He had previously served as chair of the foreign policy subcommittee of the Republican platform committee at the party's 2000 convention. Both Woolsey and Perle served as advisors to then Secretary of Defense Donald Rumsfeld as part of the Defense Policy Board. Both men used their posts as official advisors to the Pentagon to beat the drums for war, and both simultaneously ran investment funds that were receiving money from major contractors like Boeing that have profited mightily from the Iraq conflict. In addition, Woolsey is an executive at Booz, Allen and Hamilton, a consulting firm that has given seminars on how to get Iraq-related contracts.

Preventing war profiteering on the scale that has prevailed in Iraq will require the implementation of thoroughgoing reforms:

• Increasing the use of competitive bidding, even in cases in which only a few contractors are deemed to be capable of doing the task at hand;
• Better screening of bidders to rule out companies with no experience in the relevant area of work (e.g., see profile of Custer Battles, above);
• More auditors in the field from the outset of a conflict;
• A new "Truman Committee" modeled on the effort led by then Senator Harry Truman during World War II. The committee should have subpoena power, a robust investigative staff, and the ability to forward major abuses to the relevant criminal authorities;

These initial steps would go a long way towards preventing fraud and misconduct in future conflicts.

William Hartung is director of the Arms and Security Project at the New America Foundation. With FPIF's Miriam Pemberton he edited the just-published Lessons from Iraq: Avoiding the Next War (Paradigm Publishers) from which this essay was taken.

Copyright (c) 2008, Institute for Policy Studies