U.S. Should Repay Millions to Iraq, a U.N. Audit Finds

November 5, 2005
By JAMES GLANZ
An auditing board sponsored by the United Nations recommended yesterday that the United States repay as much as $208 million to the Iraqi government for contracting work in 2003 and 2004 assigned to Kellogg, Brown & Root, the Halliburton subsidiary.

The work was paid for with Iraqi oil proceeds, but the board said it was either carried out at inflated prices or done poorly. The board did not, however, give examples of poor work.

Some of the work involved postwar fuel imports carried out by K.B.R. that previous audits had criticized as grossly overpriced. But this is the first time that an international auditing group has suggested that the United States repay some of that money to Iraq. The group, known as the International Advisory and Monitoring Board of the Development Fund for Iraq, compiled reports from an array of Pentagon, United States government and private auditors to carry out its analysis.

A spokeswoman for Halliburton, Cathy Mann, said the questions raised in the military audits, carried out in a Pentagon office called the Defense Contract Auditing Agency, had largely focused on issues of paperwork and documentation and alleged nothing about the quality of the work done by K.B.R. The monitoring board relied heavily on the Pentagon audits in drawing its conclusions.

"The auditors have raised questions about the support and the documentation rather than questioning the fact that we have incurred the costs," Ms. Mann said in an e-mail response to questions. "Therefore, it would be completely wrong to say or imply that any of these costs that were incurred at the client's direction for its benefit are 'overcharges.' "

The Pentagon audits themselves have not been released publicly. Ms. Mann said Kellogg, Brown & Root was engaged in negotiations over the questioned costs with its client in the work, the United States Army Corps of Engineers and Developmentas been set for resolution of these issues," Ms. Mann said. The monitoring board, created by the United Nations specifically to oversee the Development Fund - which includes Iraqi oil revenues but also some money seized from Saddam Hussein's government - said because the audits were continuing, it was too early to say how much of the $208 million should ultimately be paid back.

But the board said in a statement that once the analysis was completed, the board "recommends that amounts disbursed to contractors that cannot be supported as fair be reimbursed expeditiously."

The K.B.R. contracts that have drawn fresh scrutiny also cover services other than fuel deliveries, like building and repairing oil pipelines and installing emergency power generators in Iraq. The documents released yesterday by the monitoring board did not detail problems with specific tasks in those broad categories, but instead summarized a series of newly disclosed audits that called into question $208,491,382 of K.B.R.'s work in Iraq.

A member of the monitoring board said questions about the contracts "had been lingering for a long time." Once the audits are completed, said the board member, who asked not to be identified because he did not want to be seen as speaking for the United Nations, the results will give the Iraqi government "the right to go back to K.B.R. and say, 'Look, you've overbilled me on this, this is what you could repay me.' "

The monitoring board authority extends only to making recommendations on any reimbursement. It would be up to the United States government to decide whether to make the payments, and who should make them. But Louay Bahry, a former Iraqi academic who is now at the Middle East Institute in Washington, said the board's findings would stoke suspicions on the street in Iraq, where there had always been fears that the United States invaded the country to control its oil resources.

"Something like this will be caught in the Iraqi press and be discussed by the Iraqi general public and will leave a very bad taste in the mouth of the Iraqis," Mr. Bahry said. "It will increase the hostility towards the United States."

The audits may also come at a bad time for the Bush administration, since Vice President Dick Cheney's former role as chief executive of Halliburton has led to charges, uniformly dismissed by Mr. Cheney and the company, that it received preferential treatment in receiving the contracts. The early Kellogg, Brown & Root contracts in Iraq were "sole sourced," or bid noncompetitively.

"The Bush administration repeatedly gave Halliburton special treatment and allowed the company to gouge both U.S. taxpayers and the Iraqi people," Representative Henry A. Waxman, a California Democrat who is the ranking minority member of the House Committee on Government Reform, said in a statement on the new audits. "The international auditors have every right to expect a full refund of Halliburton's egregious overcharges."

Some of those contracts were paid for with American taxpayer money, but others were financed by Iraqi oil proceeds. Because the monitoring board was created to oversee those proceeds, its audits focus only on the work that was financed with Iraqi money. The board consists of representatives from the United Nations, the International Monetary Fund, the Arab Fund for Economic and Social Development, the International Bank for Reconstruction and Development and the Iraqi government.

Besides the Pentagon audits, reports from the private auditing firm K.P.M.G. and the Special Inspector General for Iraq Reconstruction, a United States government office, were used by the monitoring board.

Because Kellogg, Brown & Root employs K.P.M.G. separately for its own internal audits, the firm recused itself from some of the work on K.B.R. The recusal temporarily threw some of the auditing work into disarray, since K.P.M.G. had initially said that the conflict would not prevent it from proceeding. Ultimately, the special inspector general took over some of the work that K.P.M.G. dropped.

But some of the K.P.M.G. audits that were carried out, relying on Iraqi ministry documents, turned up what appears to be clear evidence of mismanagement and corruption among Iraqi officials that was apparently unrelated to the K.B.R. work. In its report on the Iraqi Oil Ministry, the auditing firm used the euphemism "nonrefundable fees" for bribes in the awarding of oil contracts. "We found two cases," the report said, "where nonrefundable fees ($10,000 and $20,000) were charged to obtain tender documents (total contract value $150,302,897)."

Other entries suggest the existence of $600,000 in ghost payrolling in the Electricity Ministry and additional evidence of bribes.

The K.P.M.G. audits also show ample evidence of the chaos that permeated the early reconstruction effort in Iraq, with paperwork on hundreds of millions of dollars of contracts won by firms other than K.B.R. that were lost or never completed, making it difficult or impossible to tell if the work was carried out properly.


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