Custer Battles: ex-special forces special business structures

From the Seattle Times

Attorneys for a U.S.-based security company accused of setting up sham companies in a multimillion-dollar fraud scheme in Iraq are contending that the company cannot be sued under a key federal anti-corruption law because the allegedly stolen money belonged to Iraqis, not Americans.

The potentially precedent-setting case could undercut fraud claims involving billions of dollars in reconstruction contracts issued by the U.S.-led Coalition Provisional Authority (CPA) and paid for with about $20 billion from the Development Fund for Iraq.

Arguments broke out in federal court Friday over two fundamental questions: whether the CPA, which ruled occupied Iraq until June 28, can be considered a U.S. agency, and whether fraud involving Iraqi money can be subject to suits under the False Claims Act, considered one of the federal government's most important tools against fraud

Custer Battles was one of the first U.S. contractors on the ground following the fall of Saddam in April 2003. The company's two founders, Scott Custer and Mike Battles, were former special-forces soldiers who opened for business with almost no money and little experience.

Nonetheless, the company won at least four contracts in Iraq worth millions of dollars, including a deal to provide security at Baghdad's international airport and another to help Iraqis swap their old currency for new dinars minted by the CPA.

Custer Battles has denied any fraud was committed, attributing the allegations to disgruntled former employees who have since emerged as competitors to Custer Battles.

IAMB summary report

The most recent report of the International Advisory and Monitoring Board of the Development Fund for Iraq summarises all findings from the establishment of the DFI to the dissolution of the CPA (28 June 2004). It is largely a rehash of previous reports, however it provides some important information on future directions concerning the sole-source contracting and transparency with the CPA's management of the DFI. A summary of the report, with emphasis on sole-source contracting and lack of transparency, follows:

• March 2004: Recommendations from IAMB include a special audit of sole-source contracts to check the management of the DFI by the CPA against UNSCR 1483. KPMG is appointed as an independent auditor.
• April 2004: IAMB repeatedly requests information about sole-source contracts from the CPA. Specifically, the IAMB requests access to audits conducted by the DCAA concerning sole-source contracts.
• June 2004: In light of delays obtaining sole-source contract information from the CPA, a special audit is called.
• July 2004: KPMG presents their first report, covering up until 31 December 2003. Sole-source contracts and lack of transparency in the contracting process is noted in the KPMG audit. (See previous blog entries.)
• October 2004:
  1. KPMG presents their second report, covering up until 28 June 2004. (See previous blog entries.)
  2. IAMB finally receives (censored) DCAA audits.
  3. A meeting is held, and the US Dept of Defense representative convinces the IAMB to allow the US Government to commision the special audit. The special audit will (1) Determine the extent of sole-sourced contracts using DFI resources, (2) Summarise the findings of audits that have already been conducted by various US agencies, and (3) Determine whether any such contracts have not been the subject of audits.

I might just add that under the IAMB Terms of Reference Section 3.F, the IAMB has the right to review all financial and other records, including those of external auditors, where needed to fulfill its functions. Let's hope getting to those additional audits will not be as time-consuming as dealing with the DCAA has proved to be.

Notes for now: SOMO

Currently, the Interim government of Iraq administers the DFI, subject to the oversight of IAMB, pursuant to UNSCR 1546. Relevant sections are

4. Endorses the proposed timetable for Iraqs political transition to democratic government including: (a) formation of the sovereign Interim Government of Iraq that will assume governing responsibility and authority by 30 June 2004; (b) convening of a national conference reflecting the diversity of Iraqi society; and (c) holding of direct democratic elections by 31 December 2004 if possible, and in no case later than 31 January 2005, to a Transitional National Assembly, which will, inter alia, have responsibility for forming a Transitional Government of Iraq and drafting a permanent constitution for Iraq leading to a constitutionally elected government by 31 December 2005;

24. Notes that, upon dissolution of the Coalition Provisional Authority, the funds in the Development Fund for Iraq shall be disbursed solely at the direction of the Government of Iraq, and decides that the Development Fund for Iraq shall be utilized in a transparent and equitable manner and through the Iraqi budget including to satisfy outstanding obligations against the Development Fund for Iraq, that the arrangements for the depositing of proceeds from export sales of petroleum, petroleum products, and natural gas established in paragraph 20 of resolution 1483 (2003) shall continue to apply, that the International Advisory and Monitoring Board shall continue its activities in monitoring the Development Fund for Iraq and shall include as an additional full voting member a duly qualified individual designated by the Government of Iraq and that appropriate arrangements shall be made for the continuation of deposits of the proceeds referred to in paragraph 21 of resolution 1483 (2003);

25. Decides further that the provisions in the above paragraph for the deposit of proceeds into the Development Fund for Iraq and for the role of the IAMB shall be reviewed at the request of the Transitional Government of Iraq or twelve months from the date of this resolution, and shall expire upon the completion of the political process set out in paragraph four above;

The State Oil Marketing Organisation is the key Iraqi disbursing ministry.