Billions Wasted In Iraq?

This story originally aired on Feb. 12, 2006.

The United States has spent more than a quarter of a trillion dollars during its three years in Iraq, and more than $50 billion of it has gone to private contractors hired to guard bases, drive trucks, feed and shelter the troops and rebuild the country.

It is dangerous work, but much of the $50 billion, which is more than the annual budget of the Department of Homeland Security, has been handed out to companies in Iraq with little or no oversight.

Billions of dollars are unaccounted for, and there are widespread allegations of waste, fraud and war profiteering. As 60 Minutes correspondent Steve Kroft first reported in February, only one case, the subject of a civil lawsuit, has been unsealed. It involves a company called Custer Battles, and provides a window into the chaos of those early days in Iraq.

There were no banks or wire transfers to pay them, no bean counters to keep track of the money. Just vaults and footlockers stuffed with billions of dollars in cash.

"Fresh, new, crisp, unspent, just-printed $100 bills. It was the Wild West," recalls Frank Willis, who was the No. 2 man at the Coalition Provisional Authority's Ministry of Transportation.

The money was a mixture of Iraqi oil revenues, war booty and U.S. government funds earmarked for the coalition authority. Whenever cash was needed, someone went down to the vault with a wheelbarrow or gunny sacks.

"Those are $100,000 bricks of $100 bills and that's $2 million there," Willis explains, looking at a photo of brick-shaped stacks of money wrapped in plastic. "This, in fact, is a payment that we made on the 1st of August to a company called Custer Battles."

Willis says the bricks of money were also sometimes referred to as footballs, "… because we passed them around in little pickup games in our office," he says laughing.

Asked if he has any evidence that the accounting system was a little loose, Willis says, "I would describe it as nonexistent."

The $2 million given to Custer Battles was the first installment on a contract to provide security at Baghdad International Airport. The company had been started by Scott Custer, a former Army Ranger and Mike Battles, an unsuccessful congressional candidate from Rhode Island who claimed to be active in the Republican Party and have connections at the White House. They arrived in Baghdad with no money. Yet within a year they landed $100 million in contracts.

"They came in with a 'can do' attitude whether they could or not. They always said yes," Willis says.

Did they have any experience?

"They were not experienced. They did not know what they were doing," Willis says.

Complaints about Custer Battles performance at the airport began almost immediately. Col. Richard Ballard, the top inspector general for the Army in Iraq, was assigned to see if the company was living up to its contract, such as it was.

"And the contract looked to me like something that you and I would write over a bottle of vodka," Ballard says. "Complete with all the spelling and syntax errors and annexes, to be filled in later. They presented it the next day, and they got awarded a — about a $15 million contract."
Custer Battles was supposed to provide security for commercial aviation at Baghdad airport, including personnel, machinery and canine teams to screen passengers and cargo. But the airport never re-opened for commercial traffic.

Instead of canceling the contract or requiring Custer Battles to return the money, the Coalition Authority instead assigned them to operate a checkpoint outside the airport.

Asked how they did on that job, Ballard says, "They failed miserably."

Was anybody paying attention to this money and where it was going?

"There was significant concern," Ballard says. "But there just were not the people in theatre to monitor that kind of thing on a day-to-day basis."

The basic answer to the question, Ballard acknowledges, is "no."

As for the bomb sniffing canine teams, Ballard says, "I eventually saw one dog. The dog did not appear to be a certified, trained dog. And the dog was incapable of operating in that environment."

Asked what he meant by "incapable of operating in that environment," Ballard says: "He would be brought to the checkpoint, and he would lie down. And he would refuse to sniff the vehicles."

The handler, Ballard says, "had no certificate and no evidence."

"So neither the dog nor the handler were qualified?" Kroft asked.

"I think it was a guy with his pet, to be honest with you," he replied, laughing.

In a memo obtained by 60 Minutes, the airport's director of security wrote to the Coalition Authority: "Custer Battles has shown themselves to be unresponsive, uncooperative, incompetent, deceitful, manipulative and war profiteers. Other than that they are swell fellows."

"I would agree with most of that," says Frank Willis.

"Even the 'war profiteers?' " Kroft asks.

"I think that what they were doing was of the nature of what I understand war-profiteering to be about — which is to get into a chaotic situation and milk every penny out of it you can, as fast as you can, before the opportunity goes away," Willis says.

The Coalition Authority not only refused to throw Custer Battles off the airport job, it wrote them a glowing review and continued to give them contracts including one to supply logistical support for a massive program to replace Iraq's currency.

How did Custer Battles perform that contract?

"Absolutely abysmally. I mean, it was beyond a joke," says British Col. Philip Wilkinson.

Wilkinson was a colonel in the British Army and was assigned to the Coalition Authority's Ministry of Finance and charged with providing security to convoys that traveled all over Iraq, loaded with $3 billion in cash. The trucks were supplied by Custer Battles.

"And you can imagine, open trucks with that sort of money on the back, was just a red hot target for not only terrorists, but criminals," Wilkinson says. "And, therefore, we needed trucks that were going to work. When those trucks were delivered to us, some of them were physically dragged into our compound."

Wilkinson says some of the trucks "were towed into the camp."

And Custer Battle's response?

"When questioned as to the serviceability of the trucks was, 'We were only told we had to deliver the trucks.' The contract doesn't say they had to work," Wilkinson says. "Which, I mean, when you're given that sort of answer, what can you do?"

How did they get away with it?

"Oh," says Wilkinson laughing, "I really don't know. I mean it was just a joke. The assumption that we had was that they had to have high political top cover to be able to get away with it. Because it was just outrageous: their failure to deliver that which they were contracted to do."

In fact, the company continued to work in Iraq for another year, even after Robert Isakson, one of Custer Battles' major sub-contractors, went to federal authorities with allegations of criminal misconduct. Isakson and another whistleblower claim Custer Battles bilked the government out of $50 million, and they're suing the company on behalf of U.S. taxpayers to recover some of the money.

"Well, they approached me three times to participate in a — defrauding of the United States government," Isakson says. "They wanted to open fraudulent companies overseas and inflate their invoices to the United States government."

Asked if the fraud actually took place, Isakson says, "Two weeks later, apparently, I heard they began exactly the fraud they described to me."

According to a subsequent investigation by the U.S. Air Force, Custer Battles set up sham companies in the Cayman Islands to fabricate phony invoices that it submitted to the Coalition Authority with the intention of fraudulently inflating its profits.

According to a Custer Battles spreadsheet, which was left behind after a meeting with U.S. officials, the company submitted invoices on the currency contract totaling nearly $10 million, when its actual costs were less than $4 million.

Electricity costs of $74,000 were invoiced to the Coalition Authority at $400,000. And those trucks that didn't work were bought on the local market for $228,000 and billed to the Coalition Authority for $800,000.

Mike Battles and Scott Custer are currently under federal investigation by the Department of Justice and declined to be interviewed for this story. But in videotaped depositions for the whistleblower lawsuit, Custer disavowed any knowledge of the phony invoices.

"Would you agree with me that it is highly improper for a contractor working under a time and materials contract to simply fabricate invoices and then hand them in for payment?" attorney Alan Grayson asked during the deposition.

"Yes, the short answer, I am not a government or legal expert, but I would think it is improper to fabricate anything you would know to be true," Custer replied.

Custer and Battles blame their problems on former employees, competitors and the bureaucratic incompetence of the CPA.

"I know we were supposed to do one thing for a certain amount of money and by the time it was said and done they asked us to do many, many more things for a different, a greater amount of money," Battles said in deposition.

To date, the only action taken against them has been a one-year suspension from receiving government contracts; it has since expired.

"I think what's happening over there is an orgy of greed here with contractors," says North Dakota Sen. Byron Dorgan.

He is the chairman of the Democratic Party Policy Committee, and says Custer Battles is small potatoes compared to behemoths like Halliburton and its subsidiary, Kellogg, Brown and Root (KBR), who have collected half of all the money awarded to contractors in Iraq, and, according to Department of Defense auditors, have over-billed taxpayers more than a billion dollars.

Dorgan's committee has held hearings and heard testimony that Halliburton has overcharged for meals, and fuel and gouged taxpayers on items like hand towels.

"Instead of buying a white towel, which would be $1.60, this company said, 'No, no, no. Put, embroidery our logo on it. Five bucks,' " says Dorgan. "So, what's the difference? Well, the American taxpayer's gonna pay the bill."

Halliburton says the towels were embroidered to keep them from being stolen or lost, and that allegations it over-billed by a billion dollars are exaggerated. But Dorgan says none of this is being seriously investigated.

"Let me tell you that there's very little oversight by anybody on anything in this Congress. We have a president and a Congress of the same party. They have no interest in doing any aggressive oversight," Dorgan says.

The only one really looking into it is Stuart Bowen, the special inspector general for Iraq reconstruction, a position created by Congress in 2004 to monitor construction and development projects to rebuild Iraq.

Asked how he would describe the oversight early on with the CPA, Bowen says, "It was relatively non-existent."

In two lengthy reports, Bowen's staff outlined suspected fraud and incompetence of staggering proportions. Like the $8.8 billion dollars that the coalition seems to have lost track of.

Bowen says that money is "not accounted for" and acknowledges that nobody really knows exactly where it went.

Some of the money Bowen says was spent on projects it was intended for. It's just that there are no receipts. But some of it, like the funds to buy books and train personnel at a library in Karbala, simply vanished.

Four people have already been arrested on bribery and theft charges and more arrests will follow.

Bowen says he there are nearly 50 investigations going on right now, involving suspected "fraud, kickbacks, bribery, waste."

"Involving American companies?" Kroft asks.

"That's right," Bowen replies.

The Air Force debarred the company from receiving government contracts until March 2009. The Special Inspector General for Iraq Reconstruction has kept busy too. He arrested another person for fraud and is now investigating more than 70 cases of abuse in Iraq.
By Jennifer MacDonald/Ira Rosen