<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:23689.wais]
THE DEVELOPMENT FUND FOR IRAQ: U.S. MANAGEMENT OF IRAQ OIL PROCEEDS
AND COMPLIANCE WITH U.N. SECURITY COUNCIL RESOLUTION 1483
=======================================================================
HEARING
before the
SUBCOMMITTEE ON NATIONAL SECURITY,
EMERGING THREATS, AND INTERNATIONAL
RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 21, 2005
__________
Serial No. 109-72
__________
Printed for the use of the Committee on Government Reform
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada BRIAN HIGGINS, New York
KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of
LYNN A. WESTMORELAND, Georgia Columbia
PATRICK T. McHENRY, North Carolina ------
CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont
VIRGINIA FOXX, North Carolina (Independent)
------ ------
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on National Security, Emerging Threats, and International
Relations
CHRISTOPHER SHAYS, Connecticut, Chairman
KENNY MARCHANT, Texas DENNIS J. KUCINICH, Ohio
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida BERNARD SANDERS, Vermont
JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio CHRIS VAN HOLLEN, Maryland
TODD RUSSELL PLATTS, Pennsylvania LINDA T. SANCHEZ, California
JOHN J. DUNCAN, Jr., Tennessee C.A. DUTCH RUPPERSBERGER, Maryland
MICHAEL R. TURNER, Ohio STEPHEN F. LYNCH, Massachusetts
JON C. PORTER, Nevada BRIAN HIGGINS, New York
CHARLES W. DENT, Pennsylvania
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Lawrence J. Halloran, Staff Director and Counsel
J. Vincent Chase, Chief Investigator
Robert A. Briggs, Clerk
Andrew Su, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on June 21, 2005.................................... 1
Statement of:
Bowen, Stuart W., Jr., Special Inspector General for Iraq
Reconstruction, Department of Defense; Colonel Emmett
DuBose, Deputy Commander, U.S. Army Corps of Engineers,
Department of the Army, accompanied by J. Joseph Tyler,
P.E., Chief, Programs Management Division, Directorate of
Military Programs, U.S. Army Corps of Engineers; William
Reed, Director, Defense Contract Audit Agency, Department
of Defense; Joseph A. Benkert, Deputy Director of Defense
Reconstruction Support Office, Office of Secretary of
Defense; and David Norquist, Under Deputy Secretary of
Defense for Resource Planning and Management, Department of
Defense.................................................... 85
Benkert, Joseph A........................................ 111
Bowen, Stuart W., Jr..................................... 85
DuBose, Colonel Emmett................................... 101
Norquist, David..........................................
11
Reed, William............................................ 95
Soloway, Stan Z., president, Professional Services Council,
Arlington, VA; and Richard Garfield, Dr.Ph./R.N., Columbia
University................................................. 193
Garfield, Richard........................................ 209
Soloway, Stan Z.......................................... 193
Letters, statements, etc., submitted for the record by:
Bowen, Stuart W., Jr., Special Inspector General for Iraq
Reconstruction, Department of Defense, prepared statement
of......................................................... 88
DuBose, Colonel Emmett, Deputy Commander, U.S. Army Corps of
Engineers, Department of the Army:
Followup questions and answers............................... 119
Prepared statement of........................................ 103
Garfield, Richard, Dr.Ph./R.N., Columbia University, prepared
statement of............................................... 212
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, prepared statement of................... 9
Lynch, Hon. Stephen F., a Representative in Congress from the
State of Massachusetts, memo dated June 11, 2004........... 163
Maloney, Hon. Carolyn B., a Representative in Congress from
the State of New York, letter dated June 20, 2005.......... 181
Norquist, David, Under Deputy Secretary of Defense for
Resource Planning and Management, Department of Defense,
followup questions and responses........................... 121
Porter, Hon. Jon C., a Representative in Congress from the
State of Nevada, prepared statement of..................... 75
Reed, William, Director, Defense Contract Audit Agency,
Department of Defense:
Letter not dated......................................... 126
Prepared statement of........................................ 97
Ruppersberger, Hon. C.A. Dutch, a Representative in Congress
from the State of Maryland, prepared statement of.......... 134
Shays, Hon. Christopher, a Representative in Congress from
the State of Connecticut:
Memo dated June 20, 2005..................................... 137
Prepared statement of........................................ 4
Soloway, Stan Z., president, Professional Services Council,
Arlington, VA, prepared statement of....................... 197
Waxman, Hon. Henry A., a Representative in Congress from the
State of California:
Letters dated April 14, and May 23, 2005..................... 80
Minority report.............................................. 12
Prepared statement of........................................ 39
THE DEVELOPMENT FUND FOR IRAQ: U.S. MANAGEMENT OF IRAQ OIL PROCEEDS AND
COMPLIANCE WITH U.N. SECURITY COUNCIL RESOLUTION 1483
----------
TUESDAY, JUNE 21, 2005
House of Representatives,
Subcommittee on National Security, Emerging
Threats, and International Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:10 a.m., in
room 2157, Rayburn House Office Building, Hon. Christopher
Shays (chairman of the subcommittee) presiding.
Present: Representatives Shays, Van Hollen, Sanders,
Maloney, Higgins, Waxman, Kucinich, Marchant, Burton, Turner,
Duncan, Ruppersberger, and Lynch.
Staff present: Lawrence Halloran, staff director and
counsel; J. Vincent Chase, chief investigator; R. Nicholas
Palarino, Ph.D, senior policy advisor; Thomas Costa,
professional staff member; Robert A. Briggs, clerk; Sam
Raymond, intern; Phil Barnett, minority staff director/chief
counsel; Kristin Amerling, minority general counsel; Karen
Lightfoot, minority communications director/senior policy
advisor; Jeff Baran and Michael McCarthy, minority counsels;
David Rapallo, minority chief investigative counsel; Andrew Su,
minority professional staff member; Earley Green, minority
chief clerk; and Jean Gosa, minority assistant clerk.
Mr. Shays. A quorum being present, the Subcommittee on
National Security, Emerging Threats, and International
Relations hearing entitled, ``The Development Fund for Iraq:
U.S. Management of Iraq Oil Proceeds and Compliance with U.N.
Security Council Resolution 1483,'' is called to order.
As successor to the United Nations Oil-for-Food Program,
the Development Fund for Iraq [DFI], inherited more than money.
The DFI was also bequeathed the mission to maintain essential
food and fuel flows and to launch a nationwide reconstruction
program, despite a looted public infrastructure, a
dysfunctional civil government, and a savage insurgency.
Nevertheless, the International Coalition willingly took on the
U.N. Security Council mandate to administer the fund ``in a
transparent manner for the economic reconstruction and repair
of Iraq's infrastructure and for other purposes benefiting the
people of Iraq.''
This hearing builds on the Government Reform Committee's
assessment of Iraq reconstruction contracting and financial
management and asks specifically how one member of the
coalition, the United States, met that fiduciary commitment to
transparency. Last year the full committee held four hearings
on contract management challenges in Iraq. They examined in
detail the complex, multi-step processes and layered safeguards
applied to cost plus fee contracts.
Those audited procedures and fiscal protections are still
at work finalizing actual payments on the sole source
reconstruction Iraq oil, task orders, and other contracts. Yet,
today, some may feel the need to retrace those steps or
prematurely label pending contract amounts as overcharges in
what I think is a tired and transparent effort to ensnare the
administration, the Vice President, and his former employer,
Halliburton, in a breathless web of circumstance and
supposition.
In truth, there was no need to exaggerate or jump to
conclusions about problems in Iraq. Security conditions,
cultural idiosyncracies, and an all-cash economy there pose
enormous challenges to the conduct of public business as we
know it here.
The Inspector General and the U.N. International Advisory
and Monetary Board [IAMB], have raised legitimate questions
about operations of the DFI. Those issues merit our serious
attention today, but serious scrutiny demands precision. Words
like ``overcharge'' and ``fraud'' have exact legal meanings in
this context. They should not be used injudiciously or for
sensational effect. Facts and opinions are not interchangeable.
We may well disagree on their ultimate meaning and impact, but
our purpose here today is first to find facts.
It is a fact that more than $8 billion in cash was
distributed to Iraqi ministries between April 2003, and June
2004. It is a fact that the Iraqis decided how to spend that
money. It is fact that people were paid, projects were built,
and things we purchased with that cash. It is a fact the
Inspector General faulted the Coalition Provisional Authority
[CPA], for a failure to implement consistent oversight and
adequate controls over those expenditures.
But, as the Inspector General will testify, it is a
misunderstanding to conclude the absence of accounting
controls, alone, means some or all the funds at issue were
misused or stolen.
It is also a fact the Department of Defense [DOD], provided
only heavily redacted copies of Defense Contract Audit Agency
[DCAA] reports on DFI spending to the U.N. Oversight Board, the
IAMB. The redactions violated the commitment to transparency
and regretfully, very regretfully, make it appear DOD has
something to hide. This undermines our international standing
and even more seriously harms our efforts in Iraq. This is a
self-inflicted wound, a needless failure to meet transparency
obligations.
U.N. Security Council Resolution 1483 committed the United
States to an extraordinary level of disclosure for DFI
transactions, but it appears that commitment had little impact
on the Pentagon's practice of deferring completely to the
contractors' absurdly expansive view of what constitutes
``proprietary information'' that must be shielded from view.
After repeated requests to DOD and lengthy delays getting a
response, the IAMB was justifiably dissatisfied with redacted
DCAA audit reports that hid almost every meaningful number or
reference to question an unsupported contract cost, the very
matters of most concern to them and, frankly, to us.
The plundering of the Oil-for-Food Program was hidden by a
suffocating lack of transparency at the U.N. The world promised
the development fund for Iraq would be different, that Iraqi
money would be spent solely for the benefit of Iraqi people. We
convene this morning on their behalf. It is their money we are
talking about. They deserve a fair accounting of our
stewardship.
After eight trips to Iraq, it is clear to me we have made
progress and we have made mistakes. Our burden as well-
intentioned liberators is this: the progress belongs to the
people of Iraq. The mistakes are ours to remedy.
Our management of the DFI has much to teach us about both.
Our witnesses will help provide essential substance and needed
context to our discussion of the development fund for Iraq. We
appreciate their time and expertise, and we look forward to
their testimony.
I might say parenthetically it boggles my mind that some
who are appearing before us do not have written testimony,
after the time that we gave you to prepare for that testimony.
That, I think, harms your cause, makes us look bad, and hurts
this process.
At this time the Chair would recognize Mr. Kucinich, the
ranking member of this subcommittee.
[The prepared statement of Hon. Christopher Shays follows:]
<GRAPHICS NOT AVAILABLE IN TIFF FORMAT>
Mr. Kucinich. Mr. Chairman, if I may followup on what you
just said, they do not have written testimony because they were
dealing in cash.
I want to thank the Chair for calling this hearing and
thank the witnesses for their presence. I am sure we are going
to have a very interesting discussion this morning, especially
since you do not have prepared testimony.
Now, if I may, it is interesting to begin with to talk
about the redactions, because we learned through our
subcommittee that redactions to the DCAA audits were made not
by the Department of Defense but by a contractor, Kellogg,
Brown and Root. It is going to be interesting to talk about
that today.
It is also going to be interesting to talk about the
finding, factual finding in connection with disbursements that
six cases were found where contracting files could not be
located, disbursements totaling $51 million; 19 cases where
evidence of contract monitoring over the delivery of goods and
performances of services were not documented in the contract
file, $302 million; 1 case where a contractor increased the
price of proposal by over $4 million, to include, in part, the
accelerated delivery of equipment; 17 cases where there was no
formal approval of funding for contracts or payments, payments
of over $242 million; 10 cases where payments were authorized
by only one industry; and 6 cases where payments were not
authorized at all, $159 million.
Over 600 tons of Iraqi oil worth $69 million produced
between July 29, 2004, and December 31, 2004, according to this
report, missing.
This committee is one of several in Congress currently
scrutinizing every record and meeting related to the United
Nations' stewardship of Oil-for-Food Program in Iraq. This is
the first time that any committee in Congress has looked at the
United States' own financial management in Iraq of the
successor to that program, the development fund for Iraq.
Let's dispel the myth right now. There was no multi-
national control of the Coalition Provisional Authority. It was
the United States in charge of the Coalition Provisional
Authority's existence and both the Coalition Provisional
Authority and Department of Defense bear responsibility for
their actions.
I will also note that, while you do not have testimony, you
also do not have the former head of the Coalition Provisional
Authority, Bob Bremer, here. He apparently did not feel it was
necessary for public accounting and to appear before the
subcommittee today or to send any representatives to explain
his actions or the actions of the CPA, and if we did not
request Mr. Bremer be here, then perhaps at a future hearing we
could get his presence.
So it is left to this subcommittee and the Special
Inspector General for Iraq Reconstruction, who is with us
today, to track down what happen to the CPA's disbursal of
billions of dollars of Iraq's DFI funds. What we found is
alarming: hardly any accountability. In effect, we are handing
out $100 bills in contracts like candy.
There are $8.8 billion in DFI funds disbursed to Iraq
ministries that are still unaccounted for, and to take a step
back to look at a bigger picture, that $8.8 billion represents
only a portion of the DFI funds. There are over $23 billion in
Iraqi funds that the Coalition Provisional Authority had
responsibility for and neglected to account for properly.
Furthermore, of that $23 billion, the CPA spent or obligated
almost all of it, over $19 billion, before handing the Iraqi
government back to the Iraqis. Bear in mind that much of that
money went to U.S. contractors in Iraq, another topic that will
be highlighted today and merits further investigation.
In the Special Inspector General's report on DFI
disbursements to interim Iraqi government ministries dated
January 30, 2005, he noted that the CPA's operations totally
lacked transparency and proper accounting controls. The Special
IG wrote, ``The CPA provided less-than-adequate controls for
approximately $8.8 billion in DFI funds provided to Iraqi
ministries through the national budget process. Specifically,
the CPA did not establish or implement sufficient managerial,
financial, and contractual controls to ensure DFI funds were
used in a transparent manner. Consequently, there was no
assurance that funds were used for the purposes mandated by
Resolution 1483.'' Let me repeat, ``There was no assurance that
funds were used for the purposes mandated by Resolution 1483.''
The Special Inspector General report concluded that, ``We
believe the CPA management of Iraq's national budget process
and oversight of Iraqi funds was burdened by severe
inefficiencies and poor management.''
Where did the $9 billion go? We know that of a sample
review of the IG of 10 disbursements made by the CPA
comptroller's office ranging from $120 million to $900 million
in value, none of the disbursements included basic spending
plans. Where was the money spent? Was it stuffed in briefcases?
Did it go to the salaries of ghost employees who we paid? The
CPA paid cash to 8,026 Iraqi protective guards on the payroll
at one ministry, but the Special IG could only verify that 602
actually existed. At another ministry, 1,471 guards were on the
payroll, but only 642 guards could be verified.
The CPA and the DOD argue that proper controls and
accounting could not be put into place because this is a
wartime environment. I see this as nothing more than a self-
serving excuse that we would never tolerate if it came from a
multilateral agency, for instance. The sanctimony animating
criticism of the U.N. Oil-for-Food Program and threats of
withholding U.N. dues is noteworthy here.
Here we have a matter that is within the sole control of
Congress: the scandalous mismanagement of the United States of
the Iraqi's financial resources. Through systematic
mismanagement, a lack of transparency, the U.S. occupation of
Iraq has discredited the United States and I feel has brought
shame on our Nation. So, Mr. Chairman, I hope we do not hear
any more flimsy excuses from the administration today.
I want to thank the Chair for working with the minority on
this issue and hope that our tough questions today lead to far
tougher controls and improved accountability in Iraq.
I yield back.
Mr. Shays. I thank the gentleman.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
<GRAPHICS NOT AVAILABLE IN TIFF FORMAT>
Mr. Shays. At this time the Chair would recognize the
former vice chairman of this subcommittee, Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman. I want to thank you
for holding this important hearing today. The effort and the
process of the oversight of the Iraqi construction process and
of these programs is incredibly important. It certainly is
concerning in reading the staff report concerning the level of
cooperation that this committee has received.
The process of oversight is important so that we can make
certain as Americans that our country is doing the best that we
can. Not only is our reputation on the line, but the safety of
Americans that are in the Middle East and are serving in Iraq
is on the line.
Our ability to defend our processes and what we are doing
is important, just as the rules and regulations and processes
under which we operate is important. It is very concerning,
when you look in the report from our staff, concerning the
level of cooperation that we are receiving. And this chairman
has been to Iraq eight times and he has been a champion of the
reconstruction of Iraq and of this committee's support for
oversight and support for DOD's operations and trying to get
out the good news of the process of what is being accomplished.
It certainly does cause people to pause when Congress in
its oversight function is not being treated as a partner. I
certainly hope that during this hearing that we see that
partnership and that we see the types of information that is
necessary for the good news of the effort to have the Iraqi oil
proceeds program operated effectively and for the benefit of
the Iraqi people.
Thank you.
Mr. Shays. I thank the gentleman.
At this time the Chair would recognize the ranking member
for the full committee, Mr. Waxman.
Mr. Waxman. Thank you very much, Mr. Chairman. Today our
subcommittee is holding a hearing on the development fund for
Iraq. This is an important and overdue hearing. U.S.
mismanagement of the DFI is one of the biggest untold stories
of the war in Iraq.
After U.S. forces invaded Iraq in 2003, the U.N. Security
Council created the DFI to hold Iraq's oil revenues and other
assets, and the Security Council gave the U.S. officials
authority to use the DFI for the benefit of the Iraqi people.
Since then, U.S. officials have spent or disbursed over $19
billion of Iraqi money in the DFI, and there has been virtually
no congressional oversight and little public understanding of
these enormous expenditures.
I want to begin my remarks by commending Chairman Shays for
holding this hearing. Today's hearing is the first
congressional hearing on the DFI and how U.S. officials manage
and mismanage the Iraqi assets in the fund. Chairman Shays has
asked hard questions and approached today's hearing with an
open mind and a spirit of bipartisanship.
The DFI is closely related to the Oil-for-Food Program. The
DFI, which was run by the United States, is the successor for
the Oil-for-Food Program which was run by the United Nations.
In fact, over $8 billion in the Oil-for-Food Program was
transferred into the DFI by the U.N. Security Council. Yet,
there has been a stark and telling contrast between Congress'
approach to the Oil-for-Food Program and the DFI. Five separate
congressional committees have been investigating U.N.
mismanagement of the Oil-for-Food Program, more than a dozen
hearings have been held, but before today there was not a
single hearing in Congress of U.S. mismanagement of the
development fund for Iraq. This neglect of the DFI has come at
a steep cost to both congressional and public understanding of
the actions of U.S. officials.
My staff has prepared a report that provides a
comprehensive analysis of what is known about the DFI
expenditures. The report is based on review of over 14,000
pages of financial records subpoenaed from the Federal Reserve
Bank, 15,000 pages of documents from the Defense Department,
reports from multiple U.S. audit agencies, and interviews with
international investigators, U.S. agency representatives, and
Iraqi officials. I ask that this report be made part of the
hearing record.
Mr. Shays. Without objection, this report will be made part
of the record.
[The information referred to follows:]
<GRAPHICS NOT AVAILABLE IN TIFF FORMAT>
Mr. Waxman. Thank you, Mr. Chairman.
What we found was an appalling level of incompetence,
mismanagement, waste, fraud, and greed. As we will hear today
from the Special Inspector General for Iraq Reconstruction,
literally billions of dollars of Iraqi assets taken from the
DFI cannot be accounted for.
The story of the DFI begins at the Federal Reserve Bank in
New York, where the Iraqi assets were held on deposit. As the
Federal Reserve documents show, cash withdrawals on a
previously unimaginable scale were ordered by U.S. officials in
Iraq. In total, nearly $12 billion in cash was withdrawn from
the DFI account at the Federal Reserve, the largest cash
withdrawals in history.
The administration transferred from New York to Baghdad
more than $281 million individual currency notes on 484
pallets, weighing a total of 363 tons. This included more than
107 million $100 bills.
I'd like to show the committee a picture which is on our
screen. These are what Federal Reserve officials called ``cash
packs.'' Each one contains 16,000 bills. One cash pack with
$100 bills is worth $1.6 million. And the Federal Reserve
shipped more than 19,000 of these cash packs to Iraq.
In late June, 2004, in the last week of its existence, the
U.S.-run Coalition Provisional Authority ordered the urgent
delivery of more than $4 billion, including the largest 1-day
transfer in the history of the Federal Reserve, a single
shipment of $2.4 billion in cash.
Well, so much cash arriving in Iraq, you might think that
extensive precautions would be taken to account for the funds,
but the exact opposite happened. U.S. officials used virtually
no financial controls to safeguard the Iraqi funds. No
certified public accounting firm was hired to monitor
disbursements, and auditors found that U.S. officials could not
account for billions of dollars.
One former CPA official told us that Iraq was awash in $100
bills. One contractor received a $2 million cash payment in a
duffel bag. Other cash payments were made from the back of a
pickup truck. And cash was stored in unguarded sacks in Iraqi
ministry offices.
The records are so lacking that it is impossible to know
the full extent of waste, fraud, and abuse that occurred during
the period of U.S. control, but what we do know is alarming.
The largest single recipient of DFI funds was Halliburton, the
company vastly overcharged to import gasoline into Iraq and to
provide other oil-related services. These overcharges, which
exceed $200 million, were billed to the U.S. Corps of
Engineers, but U.S. officials arranged for over 80 percent of
them to be paid out of the DFI.
Here's the most incredible part. When the U.N. auditors
charged with overseeing the DFI asked about the overcharges,
U.S. officials concealed them. In fact, if it were not for my
efforts to disclose these overcharges and those of Chairman
Shays, U.N. auditors would still be mislead.
Another politically connected firm, Custer Battles,
received over $11 million in Iraqi funds, including over $4
million in cash, but the company's overcharges were so blatant
that it is now barred from receiving Federal contractors and is
facing a False Claims Act lawsuit for fraudulent billing.
Over $600 million in Iraqi funds were given to military
commanders and other U.S. officials to fund local
reconstruction projects, yet here's what a partial audit of
$120 million in expenditures disclosed: more than 80 percent of
funds could not be properly accounted for, and over $7 million
in cash was simply missing.
One of the biggest problems that we will hear about today
is what happened when U.S. officials gave over $8 billion in
cash to Iraqi ministries that lacked internal and financial
controls. As an audit by the Special Inspector General found,
we simply cannot account for billions of these dollars. In many
instances, the records indicate that these funds may have been
paid to ghost employees who never existed.
Today's hearing is the first in Congress on the DFI, but it
should not be the last. We know a lot went wrong, but we do not
know who is responsible, who squandered the money, and who
should be held accountable. There is an urgent need for more
investigation, and I hope this committee will play a major
role.
Mr. Chairman, I look forward to the hearing and I thank all
the witnesses for being here today.
Mr. Shays. I thank the gentleman.
[The prepared statement of Hon. Henry A. Waxman follows:]
<GRAPHICS NOT AVAILABLE IN TIFF FORMAT>
Mr. Shays. At this time the Chair would recognize Mr. John
Duncan from Tennessee.
Mr. Duncan. Thank you, Mr. Chairman. Thank you for calling
this very important hearing.
You said in your statement this hearing builds on the
Government Reform Committee's assessment of Iraq reconstruction
contracting and financial management and asks specifically how
one member of the Coalition, the United States, met that
fiduciary commitment to transparency. I can tell you that if
there was a fiduciary commitment by the United States, it has
been met many billions of times over.
Lawrence Lindsey, who was chairman of the President's
Council for Economic Advisors, said before the war started that
the war would cost us $100 to $200 billion. He lost his job
over that statement. When I went for a briefing at the White
House, I specifically asked whether that statement was
accurate, and I was told by then National Security Council
advisor Rice that, ``Oh, no, the war would not cost nearly that
much.'' Now, of course, we know that by the end of September we
will have spent $300 billion in Iraq and Afghanistan, 95
percent of it probably in Iraq, and a figure so huge that it is
humanly incomprehensible.
Secretary Wolfowitz said or implied or led people to
believe in many statements that he made that most of the costs
of reconstruction in Iraq would be paid for from their oil
proceeds. Of course, we know that is not even close to being
accurate now.
Senator Hagle, a member of our own party, said a couple of
days ago that things are not getting better in Iraq, they are
getting worse. I do not know whether that is true or not. I
hear somebody else say that the media is not reporting all the
good things that are happening. Well, I can tell you this, I
hope for the expenditure of $300 billion there should have been
many, many, many good things happening.
When I think back to several months after this war started,
a conservative syndicated columnist, George M. Guyer, wrote
this, ``Critics of the War against Iraq have said since the
beginning of the conflict that Americans, still strangely
complacent about overseas wars being waged by a minority in
their name, will inevitably come to a point where they will see
that they have to have a government that provides services at
home or one that seeks empire across the globe.''
Thank you, Mr. Chairman.
Mr. Shays. At this time the Chair would recognize Mr.
Higgins from New York.
Mr. Higgins. Thank you, Mr. Chairman. I just wanted to say
that, first of all, your thorough review of this issue and its
importance relative to transparency, relative to accountability
I think is critically important at a critically important time.
You have done an outstanding job, very thorough, in framing the
issue and its inherent problems, and I look forward to the
response from this panel of expert witnesses who have been
assembled here.
Thank you very much.
Mr. Shays. Thank you. I appreciate the gentleman's
comments, as I do of all the Members.
Mr. Porter, welcome. Do you have any statement you would
like to make?
Mr. Porter. I have one to submit.
Mr. Shays. Thank you. The gentleman will be submitting his
statement.
[The prepared statement of Hon. Jon C. Porter follows:]
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Mr. Shays. Let me just say as strongly as I can that there
is no disagreement, I think, among majority and minority that
we want and expect full cooperation from the administration and
the Department of Defense. Newt Gingrich told me that we are
not in Congress a Parliament, we are a separate branch of
government. I think we do a disservice to the American people
and to DOD when we allow things to happen without the proper
questions.
I was very interested in the hearings that had been
conducted to date, and I felt that DOD had a good story to tell
and I wondered why it was so darned reluctant to tell the
story, and it only to me adds to the suspicions that maybe the
story is not a good story. So on this issue today, right now,
the agreement I think you see on both sides is we do not want
redactions, we want cooperation. This committee is doing an
investigation of the Oil-for-Food Program. We are outraged at
the lack of transparency that we saw at the United Nations, the
lack of transparency that we have seen with its member nations
with regard to the Oil-for-Food Program, and I am faced as
chairman with the fact that we see this same reluctance to
provide information. It just undermines any criticism we may
have of others for the same reason.
I think ultimately that the issue of money not accounted
for will be resolved, so I agree on the redaction issue but
disagree with the conclusion at this time that DCAA audit
findings constitute overcharges, much like a doctor submitting
a request to the insurance company and the insurance company
says, ``No, there are overcharges. We do not agree with them.''
That is what I think this process is about. But I also think in
the end we will find there are some overcharges, and that is
what we want to know. How much? We need your cooperation.
At this time I think the gentleman, the ranking member, has
a request for some time.
Mr. Waxman. Mr. Chairman, I would like to be recognized to
make a motion for a subpoena under House Rule 112K6.
Mr. Shays. The Member is in order to make a motion.
Mr. Waxman. I move that the subcommittee issue a subpoena
for the documents that the Defense Department has refused to
turn over voluntarily in response to our bipartisan request. In
particular, I ask that the subcommittee subpoena all records
relating to the Department's decision to conceal Halliburton's
overcharges from the international auditors at the IAMB.
Mr. Chairman, as you know, U.N. Security Council Resolution
1483 requires the United States to spend Iraqi funds in a
transparent manner. In violation of this requirement, however,
the Defense Department tried to conceal over $200 million in
Halliburton overcharges from the United Nations auditors. These
vast overcharges were billed by Halliburton to the Army Corps
of Engineers, but the Defense Department officials decided that
over $170 million in overcharges should be paid out of the
Iraqi funds in the DFI, and then they decided that to hide all
information about the amount of the overcharges from the
reports given to U.N. auditors. We know that they handed over
statements with a lot of redactions, and the redactions all
dealt with the billings from Halliburton.
At a briefing last week we learned some other disturbing
facts. First, Department officials confirmed that Halliburton
requested each of the 463 redactions in the audits, and that
every single redaction requested by Halliburton was accepted by
the Defense Department. In effect, U.S. officials inverted the
proper roles of government and contractor, giving Halliburton
unprecedented authority to withhold key parts of Defense
Department audits.
Second, we learned that the decision to conceal the
overcharges was made after consultation with multiple offices
in the Pentagon, including the Office of Deputy Secretary Paul
Wolfowitz, the Office of General Counsel, and the Comptroller.
And when officials from the Corps of Engineers urged a ``sanity
check,'' their calls went unheeded.
We were even told that lawyers in the General Counsel's
office threatened Department officials with criminal charges if
they disclosed any information about the overcharges without
Halliburton's permission. There was absolutely no legal
justification for these actions. Department lawyers said that
Halliburton overcharges should not be disclosed because they
would reflect unfavorably on the company and impair its ability
to obtain future contracts. That is what Department lawyers
were saying. They apparently forgot that they work for the
Federal taxpayers, not Halliburton.
Mr. Chairman, you and I have been trying for months on a
bipartisan basis to obtain the documents that would explain why
the Department concealed the overcharges from the U.N. auditors
in violation of the Security Council resolution. On April 14,
2005, we sent a joint letter to Secretary Rumsfeld asking for
the identities of those responsible for these redactions, and
for documents and other correspondence with Halliburton and
within the Pentagon that would expose the rationale for the
withholding. We asked for this information by May 27th so that
we would have it for today's hearing. I want to make this
letter part of the hearing record, as well.
We received no response from the Defense Department. As a
result, you then sent a second letter on May 23, and I want
this letter also to be made part of the hearing record.
In addition to these written requests, our staffs have made
repeated efforts to obtain these documents, but to no avail.
They sent at least nine e-mail requests and also made repeated
telephone and in-person requests.
Despite all of this effort, we have not received a single
document. I know that your policy as chairman is to first send
a letter requesting documents before issuing a subpoena. In
this case, we have sent two written requests, made countless
informal requests, but the Defense Department has produced a
total of zero documents.
Mr. Chairman, we have been extremely patient, but this is
not an isolated occurrence. First, the Department defied the
Security Council by concealing Halliburton's overcharges, then
it defied Congress by withholding the unredacted audits, now it
is trying to cover up evidence of its violations. This pattern
of obstruction leaves us no choice but to subpoena the
documents, and I therefore move that the committee compel
Defense Secretary Donald Rumsfeld to produce the documents
specified in the subpoena.
Mr. Shays. If the gentleman would yield?
Mr. Waxman. Certainly.
Mr. Shays. While I may disagree on the term overcharge, I
am in total agreement with the gentleman. We did send this
letter and we did request that it be here on May 27th. For the
edification of the entire committee, they are overdue,
obviously. It was supposed to be in by May 27th.
We continued to request this information since that date
verbally. I would even say we begged for the information. I
would say that we not only begged for it, we said, just give us
some, so that when we had this hearing we could say there was a
good faith effort to cooperate.
We have no information, and I would say to the gentleman
that it would be my request that at this time he withdraw his
motion, that I will request from Mr. Davis, the full committee
chairman, that if we do not get this information by next Monday
that I will request that he consider and I would certainly
advocate that we subpoena the information. I would like to do
it with the full committee, and would just say to the gentleman
that it takes 11 members of this subcommittee to make such a
motion. I agree with his request. My request is that we work
through the full committee for that information.
Mr. Waxman. Mr. Chairman, I respect your request to me and
I am going to accede to that request and withdraw this motion,
but I do feel strongly that Congress should not have to grovel
to get information. This is information we are entitled to.
I know you are giving them a little bit more time, so they
are only 30 days out after the time we specified for them to
comply, and I respect the fact that you will join with me in
urging a subpoena if we do not get the information. On that
basis, I will withdraw my motion, but I would request of you
that, if a majority of this subcommittee appeals to the
chairman for a subpoena, I would inquire whether that would be
sufficient. I am not sure of the parliamentary procedure.
Mr. Shays. Let me just say that Mr. Davis has been
extraordinarily helpful in our request to get information. You
are right, this committee chairman did grovel, if only to prove
a point. But those days have ended and so the fact is that I
will strongly advocate and I think other members of this
committee would advocate that we get this information on both
sides of the aisle to Mr. Davis.
Mr. Waxman. Mr. Chairman, I understand that Chairman Davis
can issue a subpoena. A majority vote of this subcommittee can
also issue a subpoena.
Mr. Shays. Right.
Mr. Waxman. I will join you in the request to Chairman
Davis. I'd like to ask of you that if for some reason we do not
get that subpoena in a timely manner that you make available an
opportunity for this subcommittee to vote on an issue of
subpoena.
Mr. Shays. I think that would probably happen.
Mr. Waxman. OK.
Mr. Shays. It may not happen as quickly as you like, but
the gentleman is always free to put another motion in.
Withdrawing this motion does not mean you cannot make it again.
We will be meeting for other hearings, and the gentleman can
obviously make a motion at that time.
Mr. Waxman. Thank you, Mr. Chairman.
Mr. Shays. And I am aware of that. Mr. Davis is aware of
that. And also I hope DOD is aware of that.
Mr. Waxman. Thank you, Mr. Chairman. I ask unanimous
consent to withdraw my motion.
Mr. Shays. Without objection.
Mr. Waxman. I ask that two letters be made part of the
record, and I'd like to have unanimous consent.
Mr. Shays. Without objection.
[The information referred to follows:]
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Mr. Shays. Mr. Kucinich, do you have any----
Mr. Kucinich. Yes. As the ranking member on the
subcommittee I want to support the direction that the Chair and
our ranking member of the overall committee have recommended
here. You used the term ``gentleman'' in a way that creates
comity here. Our chairman has, indeed, been a gentle man in his
approach toward this issue, and I think that it would be a
mistake for anyone to mistake his gentleness for a lack of
commitment to the taxpayers of this country. I want to thank
Mr. Shays for the direction he's taking this and let him know
that he has my full support.
Thank you.
Mr. Shays. I thank the gentleman. Just one other
clarification before we recognize our witnesses. Ambassador
Bremer's participation was not requested by this subcommittee
because the primary focus is on the redacted information.
Obviously, he may choose to participate. The full committee may
choose to ask him to come in at some time. But, just for the
record, he was never consulted, he was never requested to
participate, and that is why you do not see his presence here
today.
Mr. Waxman. Would the gentleman yield?
Mr. Shays. I would be happy to yield.
Mr. Waxman. I appreciate the gentleman for noticing that. I
also think that, given the gravity of this situation where
nearly $9 billion is unaccounted for, that Mr. Bremer would be
happy to come forward without the committee making the request.
Thank you.
Mr. Shays. I ask unanimous consent that all members of the
subcommittee be permitted to place an opening statement in the
record and that the record remain open for 3 days for that
purpose. Without objection, so ordered.
I ask further unanimous consent that all witnesses be
permitted to include their written statements in the record.
Without objection, so ordered.
At this time the Chair would recognize our first panel: Mr.
Stuart W. Bowen, Jr., Special Inspector General for Iraq
Reconstruction, Department of Defense; Mr. William Reed,
Director, Defense Contract Audit Agency [DCAA], Department of
Defense; Colonel Emmett H. DuBose, Jr., Deputy Commander of the
Southwestern Division, U.S. Army Corps of Engineers, Department
of the Army; Mr. Joseph A. Benkert, Deputy Director of Defense
Reconstruction Support Office, Office of the Secretary of
Defense; and Mr. David Norquist, Under Deputy Secretary of
Defense for Resource Planning and Management, Department of
Defense.
At this time, gentlemen, as you know, we swear in all
witnesses and request that you stand and be sworn in.
Let me say if you think there is anyone else you think you
may draw on to make testimony, it would be better if they stand
up now so that we do not have to swear them in. And if they are
asked to testify, we will take their name and give it to the
transcriber.
Please raise your right hands.
[Witnesses sworn.]
Mr. Shays. Thank you, gentleman. You all responded in the
affirmative.
Mr. Bowen, we are going to start with you. I know we have a
fairly large panel, but we will go 5 minutes. We will roll over
another 5 minutes if you creep into the next 5. We definitely
stop you after 10, but we definitely prefer you be closer to 5
than 10, but frankly your testimony is very important and we
want that testimony on the record. Your full statements will
obviously be on the record, but we want you to feel free to say
whatever you need to say.
Thank you, Mr. Bowen.
STATEMENTS OF STUART W. BOWEN, JR., SPECIAL INSPECTOR GENERAL
FOR IRAQ RECONSTRUCTION, DEPARTMENT OF DEFENSE; COLONEL EMMETT
DUBOSE, DEPUTY COMMANDER, U.S. ARMY CORPS OF ENGINEERS,
DEPARTMENT OF THE ARMY, ACCOMPANIED BY J. JOSEPH TYLER, P.E.,
CHIEF, PROGRAMS MANAGEMENT DIVISION, DIRECTORATE OF MILITARY
PROGRAMS, U.S. ARMY CORPS OF ENGINEERS; WILLIAM REED, DIRECTOR,
DEFENSE CONTRACT AUDIT AGENCY, DEPARTMENT OF DEFENSE; JOSEPH A.
BENKERT, DEPUTY DIRECTOR OF DEFENSE RECONSTRUCTION SUPPORT
OFFICE, OFFICE OF SECRETARY OF DEFENSE; AND DAVID NORQUIST,
UNDER DEPUTY SECRETARY OF DEFENSE FOR RESOURCE PLANNING AND
MANAGEMENT, DEPARTMENT OF DEFENSE
STATEMENT OF STUART W. BOWEN
Mr. Bowen. Thank you. Good morning.
Mr. Shays. Good morning.
Mr. Bowen. Chairman Shays, Ranking Member Kucinich, and
members of the subcommittee, I am Stuart Bowen, the Special
Inspector General for Iraq Reconstruction. Thank you for
allowing me to address your subcommittee about the U.S. role in
Iraq's reconstruction and to testify about my organization's
involvement in auditing the development fund for Iraq.
This is my first appearance before the Congress since I was
appointed the Coalition Provisional Authority's Inspector
General in January 2004. I carried out my duties as the CPA IG
until October 2004, when Congress reauthorized my organization
and redesignated me as the Special Inspector General for Iraq
Reconstruction.
The Congress has directed the SIGIR to audit and
investigate the programs and operations funded by the Iraq
Relief and Reconstruction Fund [IRRF], and to report our
findings to the Secretaries of Defense and State and to the
Congress.
I have just returned, as well, Mr. Chairman, from my eighth
trip to Iraq, and I am pleased to report that my organization
is operating at optimal levels, that we are carrying out the
mission that you have assigned us with skill, speed, and
precision, and that we will soon have 45 personnel on the
ground in Iraq carrying out that job, composed of auditors and
investigators.
I am proud of those on my staff who volunteered to serve in
this high-threat environment that is Iraq today, and they know,
they have heard from me, that they are the taxpayers' watchdog
on the ground in Iraq covering Iraq reconstruction.
We are effectively promoting economy, efficiency, and
program results, and we are deterring fraud, waste, and abuse.
To date, SIGIR has submitted five quarterly reports to the
Congress, the most recent being our April 30, 2005, report, and
we have completed 19 audit reports and have 8 more underway and
much more to come. Our reports are available at our Web site,
WWW.SIGIR.MIL in English and Arabic.
You invited me today, Mr. Chairman, to testify about the
audits we issued that addressed the Development Fund for Iraq.
First off, let me point out the DFI is Iraqi money, not U.S.
money. It is comprised of Iraqi oil revenues, primarily, as
well as other assets accumulated for the rebuilding and
operation of Iraq. Four of our published audit reports have
addressed the DFI, and I have submitted them for the record. We
have four more audits still underway that will continue to
address the DFI.
As has been referenced, our January 30, 2005, audit report
reviewed the CPA's oversight of DFI funds provided to
ministries of the Iraqi interim government through the national
budgeting process. That audit addressed $8.8 billion of the DFI
disbursed by the CPA to the Iraqi government pursuant to U.N.
Security Council Resolution 1483. The audit attracted
substantial attention.
There have been some misinterpretations about exactly what
we said, so let me be clear about what the audit did not say.
It did not say that the money was lost. It did not say that the
money was stolen. It did not say that the money was
fraudulently disbursed by U.S. authorities.
What we did say was this: One, the CPA provided less-than-
adequate controls over DFI funds provided to Iraqi ministries
through the national budget process; two, the CPA failed to
establish or implement sufficient managerial, financial, and
contractual controls to ensure that DFI funds were used in a
transparent manner--three facets of analysis there: managerial,
financial, and contractual--and tied to the 1483 standard of
review, transparency; three, there were no assurances, thus,
that DFI funds were used for the purposes mandated by U.N.
Security Council Resolution 1483, namely and primarily for the
benefit of the Iraqi people.
SIGIR has completed three other DFI audits. One addressed
how the comptroller managed DFI cash. We found problems there
and we brought them to the comptroller's attention. They
concurred and corrected those problems.
And let me just make an aside here. One of my goals--my
philosophy as an IG here, because we are a temporary
organization, is when I find problems to bring them to
management's attention and to correct them so that taxpayers'
money is saved today and that those reports of losses are not
first realized by management and the Congress later when audit
reports are published. I think we succeeded and will continue
to succeed in that regard. Our last quarterly report had 28
findings, virtually all of them resolved.
The other audits that we have done regarding DFI, the
south-central paying office in Hillah, DFI issues, many of them
arose. We have four more audits coming from that. In this case
we did find indicators of fraud, and from this case we have
opened a series of investigations that are pending at various
stages of review, both within our office and before the U.S.
attorney.
We also completed an audit on the management of the $2.8
billion of DFI money put in the sub-account to manage contracts
post June 28th, and we found problems there--lack of
specificity, lack of visibility about the amounts that remain
in those accounts, the amounts paid out in specific contract
actions. Again, those were concurred in by management and steps
to correct those were implemented.
Let me conclude by saying that, having completed my eighth
trip, I am encouraged by the receptivity of the current Iraq
reconstruction management teams to our advice, and I am
confident that we will continue to promote cost-saving measures
to those teams and that we will be able to look at the
continuum of Iraq reconstruction management as one of gradual
improvement. We will continue to play our role and fulfill the
mission you have assigned us.
Thank you. I look forward to answering your questions.
[The prepared statement of Mr. Bowen follows:]
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Mr. Shays. Thank you.
Mr. Reed, before you begin I just want to acknowledge the
presence of Mr. Ruppersberger. We appreciate his presence.
Mr. Reed.
STATEMENT OF WILLIAM REED
Mr. Reed. Mr. Chairman, members of the subcommittee, my
name is William H. Reed. I am the director of the Defense
Contract Audit Agency. My statement this morning will center on
the Defense Contract Audit Agency's oversight of Iraq
reconstruction and rehabilitation contracts funded from the
Development Fund for Iraq. Generally DCAA's services include
professional advice and audit assistance to acquisition
officials related to the negotiation, award, administration,
and settlement of contracts. These services are available upon
request from contracting officers to enable them to negotiate a
fair and reasonable contract price or are routinely performed
by DCAA where required to approve interim payments and assure
compliance with other contract terms.
In performing our audits, DCAA has made no distinction
between DFI-funded contracts and contracts funded from Defense
Department appropriations. In this capacity, we have performed
audits on large DFI-funded programs which include Restore Iraqi
Oil [RIO], and Restore Iraqi Electricity [RIE].
DCAA is currently responsible for providing contract audit
services at 14 contractors holding DFI-funded contracts valued
at $3 billion. These audit services include forward pricing
proposals, interim reviews of contract payment, and adequacy of
internal controls in business systems, as well as compliance
with acquisition regulations and contract terms. In addition,
flexibly priced DFI contracts and task orders will be included
in DCAA's annual review of contractor incurred cost audits.
Most audits have found only minor cost exceptions or
deficiencies in systems or processes. In instances where
significant issues were identified, the majority of these
problems have already been resolved or are being actively
worked by contractors. The most significant audit findings by
DCAA have occurred on the Halliburton-Kellogg, Brown and Root
RIO contract. The RIO contract is made up of 10 task orders
currently valued at $2\1/2\ billion. Of the 10 RIO task orders,
6 include DFI funding. KBR was authorized to begin work on all
of these orders under not-to-exceed-ceiling prices, subject to
their subsequent submission of detailed proposals for purposes
of negotiating specific task order prices.
DCAA found that most of the KBR task order proposals
ultimately submitted for this purpose were inadequate to
negotiate a fair and reasonable price due to estimating and
accounting deficiencies. In such cases, DCAA consulted with the
U.S. Army Corps of Engineers [USACE], and was asked to proceed
with the audits while the contractor attempted to correct the
deficiencies and prepare a revised proposal. This led to
multiple revised proposals and audit reports on the same task
orders.
At this time, DCAA has issued a total of 24 pricing reports
on RIO task orders, including nine audits of revised proposals
to support USACE negotiation of specific prices. This process
is sometimes referred to as price definitization.
Three of the task orders have been definitized. During a
review, the remaining seven task orders, valued at $2.4
billion, we questioned costs totaling $205.2 million. Of the
$205.2 million questioned, $171 million relates to questioned
fuel cost. DCAA questioned $139 million due to KBR's failure to
support the reasonableness of prices paid for fuel and
transportation from a Kuwaiti supplier. In making this
determination, we used prices negotiated by the Defense Energy
Support Center as a benchmark to assess the reasonableness of
the proposed KBR cost.
DCAA also questioned $32 million because KBR
inappropriately adjusted fixed prices for fuel purchased from a
Turkish supplier on a retroactive basis.
We are working closely with USACE to provide audit and
negotiation support on these undefinitized task orders.
In closing, I want to underscore that DCAA is an integral
part of the oversight and management controls instituted by DOD
to ensure integrity and regulatory compliance in Iraq
reconstruction contracting. We work closely with all U.S.
procurement and contract administration organizations to not
only identify contract pricing or cost issues but to assist
them in recovering any excess charges. Sources of the funds
obligated on contracts are determined by the contracting
organization and transparent to DCAA in carrying out its
responsibilities.
I look forward to addressing whatever questions you may
have for me. Thank you.
[The prepared statement of Mr. Reed follows:]
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Mr. Shays. Thank you, Mr. Reed.
Colonel DuBose.
STATEMENT OF COLONEL EMMETT H. DUBOSE, JR.
Colonel DuBose. Mr. Chairman and distinguished members of
the subcommittee, good morning. I am Colonel Emmett DuBose and
I currently serve as the Deputy Commander of the Southwestern
Division, U.S. Army Corps of Engineers out of Dallas, TX. Prior
to this assignment, I was stationed in Iraq from October 2003
through June 2004, where I served as the second task force
commander and then director of the Corps' Restore Iraqi Oil
[RIO], program. My mission there was to work cooperatively with
the Iraqi people to safely and effectively restore the oil
infrastructure of Iraq to enable the economic recovery of Iraq.
I have been asked to review with you today the DCAA audits
of the DFI-funded task orders which are part of the KBR RIO
contract which was physically completed last year.
The KBR RIO contract consists of 10 task orders, and the
funding for this involved both U.S. and Iraqi sources. Four of
the task orders were funded using U.S. appropriated funds and
six using DFI funds. Since this is a cost plus award fee
contract, It requires the DCAA audits as an integral part of
the contract quality control and cost definitization process in
which we are now engaged.
At the request of the contracting officer, DCAA has
completed 20 audits and is actively working on several others.
Fifteen of these audits have been in support of DFI-funded task
orders. This is a part of an iteractive process involving the
efforts of the auditors, the contracting officer, and the
contractor focused on protecting the public interest, both
United States and Iraqi, while providing a fair and equitable
task order settlement.
Five of the six DFI-funded task orders were established to
meet emergency humanitarian fuel requirements by importing
refined petroleum products. The urgency, magnitude, complexity,
and hazardous conditions under which these task orders were
performed is unprecedented. These factors are reflected in the
fact that there have been multiple revisions of the KBR
proposals resulting in multiple revisions of the DCAA audits.
In this iterative process, we have had 14 DCAA audits, 9 of
which have been superseded by revised audits, which leaves 1
audit for each of the five fuel task orders. These audits, to
include all questioned costs, are being used by the contracting
officer in conjunction with the government's contracts
performance information and the contractor's proposals to
establish the government's position, from which the contracting
officer will negotiate final payment and determine the award
fee. In the meantime, the government is currently withholding
approximately $68 million in payments plus all possible award
fees pending settlement of this task order.
The other DFI task order is No. 6. It involved three
things: First, the design and construction of multiple pipeline
crossings of the Tigris River; second, power generation
stations which were used to run various oil production,
distribution, and refinery facilities across Iraq; and, third,
we supply equipment, construction materials, and technical
services which were required by the oil ministry's own
construction crews so that they could construct and build a 40-
inch diameter pipeline from the oil fields in Kirkuk to Baiji.
DCAA has completed one audit of this effort and has what we
believe to be the final audit now underway. We expect to
complete the audit by July, after which the contracting officer
will definitize the task order and negotiate final payment.
In summary, it is expected that in a contract of this
magnitude and complexity DCAA will continue to question some
costs. As we have seen in this case, questioned costs usually
decrease as the contractor revises his proposals and responds
to the DCAA audits. The resulting final audits are then used by
the contracting officer to definitize and negotiate the task
order payments and determine award fees.
It is important to note here that DCAA does not question
whether KBR actually incurred any of these costs; rather, DCAA
auditors have questioned primarily whether KBR may have been
able to obtain some services at a lower price than which KBR
has acquired them.
These questioned costs will ultimately be resolved by the
contracting officer based on input from DCAA, DCMA, and others
as appropriate. Our job now is to use this information, the
information at our disposal, to assist the contracting officer
in reaching a fair and equitable settlement of these task
orders with the contractor while fully protecting the public
interest of the United States and Iraqi people.
Sir, this concludes my prepared statements. I would be
happy to answer your questions.
[The prepared statement of Colonel DuBose follows:]
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Mr. Shays. Thank you.
Mr. Benkert, it is my understanding that you do not have a
prepared statement; is that correct?
Mr. Benkert. Mr. Chairman, that is correct.
Mr. Shays. OK.
STATEMENT OF JOSEPH BENKERT
Mr. Benkert. I am, as you said, Joseph Benkert. I am the
Deputy Director of the Defense Reconstruction Support Office in
the Office of the Secretary of Defense. Relevant to this
hearing, our office, as the successor office to the CPA's
Washington office, provided, on behalf of OSD, the management
comments on the Special Inspector General for Iraq
Reconstruction's audit of funds provided to Iraqi ministries
that Mr. Bowen testified about, that set of management comments
which accompanied a detailed set of comments from Ambassador
Bremer included in the audit report.
I am also, since about December of last year, the DOD's
liaison to the International Advisory and Monitoring Board, and
attend meetings of the International Advisory and Monitoring
Board as a U.S. observer.
I am prepared to answer questions.
Mr. Shays. OK.
Mr. Norquist, it is my understanding you do not have a
statement; is that correct?
STATEMENT OF DAVID NORQUIST
Mr. Norquist. That is correct, Mr. Chairman.
Mr. Shays. Before I begin my questioning, I just want to
ask why. Why, Mr. Benkert, do not you have a statement? Why,
Mr. Norquist, do you not have a statement?
Mr. Norquist. I'd be happy to answer that, Mr. Chairman,
and I regret that there was this problem.
I learned last week that I would be the witness, and I
learned, regretfully, too late for me to get testimony written
and cleared. It was my understanding that the subcommittee was
going to be consulted on this, but I did not find out until
last night that had not happened, and I regret that.
Mr. Shays. But what I do not understand, Mr. Norquist, is
that you could have at least written your statement and then
the pressure would have been on someone else, OMB, to have
approved it. But why did not you at least write your statement?
You had at least a week to do that.
Mr. Norquist. I did not have a week to do that, sir. I
asked whether or not it would be able to be done and cleared in
time and was simply advised that would not happen. I apologize
for that, though.
Mr. Shays. Well, you know, they have put you in a bad
situation.
Mr. Benkert, am I pronouncing your name correctly, sir?
Mr. Benkert. That is correct, sir.
My answer is the same as Mr. Norquist's, Mr. Chairman. I
learned late last week that I would be the witness. And I
apologize for not having a statement and regret not having done
so, but my understanding was that this information had been
communicated to your staff and that there had been discussions
along these lines, and I regret it if this was a surprise to
you.
Mr. Shays. No, it is not a surprise that you do not have a
statement because they told me last night you would not have a
statement; it was a surprise yesterday that you did not have a
statement.
My predecessor on this subcommittee, the previous chairman,
was the Speaker of the House. I just wonder if you would have
done that to his subcommittee as you have done it to ours.
We are grateful both of you are here. We wrote on June 9th
requesting that Ms. Tina Jonas, Under Secretary of Defense,
Comptroller, and Chief Financial Officer, appear, and Mr.
Howard Burris, Director of Defense Support Office [DSO], Iraq
and Afghanistan, Office of Secretary of Defense. You both are
better witnesses in terms of your knowledge than they are, so
we appreciate who they sent.
We think DOD has done you a disservice in not helping and
encouraging you to write a statement and have it approved and,
frankly, I think it just adds to our lack of confidence and our
feeling that there is something to hide when I do not think
there is something to hide.
I will begin my questions.
Mr. Norquist, describe in detail the process DOD followed
in providing redacted DCAA audits to the IAMB, the U.N.
Mr. Norquist. Yes, sir. The IAMB requested copies of audit
reports of sole source contracts paid for using DFI funds. The
audit reports for the six DFI-funded task orders on this
contract were completed by DCAA between August and October
2004. Since the authority to release DCAA audits rests with the
contracting officer, we asked if the Corps would provide the
reports to the IAMB. My understanding is the Corps consulted
with the contracting officer, who was the deciding official for
the releasability of the reports.
At this point I would like to turn it over to Colonel
DuBose, who can explain how the Corps handled this portion of
the process.
Colonel DuBose. Mr. Chairman, USACE officials received a
request to provide the audit reports of sole source DFI-funded
contracts to the IAMB. The Office of Chief Counsel was
consulted due to concerns about the release of proprietary data
outside of official U.S. Government channels. The Office of
Chief Counsel was advised that USACE could not release
confidential commercial information to sources outside the U.S.
Government without contractor consent. USACE officials asked
KBR if they would agree to release the audit reports to IAMB.
KBR then informed USACE that they would not agree to
provide the audit reports, asserting that the audits contained
their proprietary information and that the Government was
prohibited from releasing that information under the Trade
Secrets Act.
USACE's Office of Chief Counsel advised that redacted
audits could not be released to the IAMB without contractor
consent. The USACE Office of Chief Counsel coordinated this
with DOD Office of General Counsel and provided this advice.
Recognizing that we could not provide the IAMB unredacted
audits, we sought a method to provide as much information to
the IAMB as possible. Accordingly, we requested that KBR review
the DFI-funded task orders and the audit reports and redact
information that they believed was protected under the Trade
Secrets Act. KBR provided USACE with the redacted audit reports
and a letter authorizing USACE to release the redacted audit
reports to the IAMB.
USACE officials and counsel noted that there were
significant legal risks to include potential individual
criminal violations associated with changing the redactions
provided by KBR.
Mr. Shays. Would either or both of you describe to me how
this is a transparent process? How is the U.N. basically able
to determine what is happening with these dollars with so much
redaction, Mr. Norquist?
Mr. Norquist. Sir, it was our intent to see that the IAMB
received as full an answer as possible consistent with the law.
With that premise, as I recall, we first asked if they could be
provided unredacted reports. When we understood that they could
not, we asked if the redactions could be less so the
information provided could be more. We then followed up and
suggested would it be possible to provide the unredacted to a
third party. Since it appeared we'd only be able to provide the
Corps the redacted, we looked into the option of a--we were
advised if it was a contract with the U.S. Government we could
hire an auditor of some other firm, give them the complete,
unredacted, and let them report to the IAMB as to the contents.
That contracting process occurred after my involvement with the
IAMB, which ended about October.
But the effort here, sir, was to take it as far as we could
to provide as full answer as possible and then to try and
provide the IAMB with an additional means of having some
assurance as to the nature of those documents.
At this point I think--I do not know if anyone else wants
to add to that.
Mr. Shays. So basically no one has been given an unredacted
version?
Mr. Benkert. If I could just add to that, Mr. Chairman, as
Mr. Norquist mentioned, I think as you know, the IAMB--to try
to answer your question about transparency with the IAMB, in
addition to a specific request for these audits, the IAMB
requested that an audit be--a special audit be undertaken of
all sole source contracts funded from the DFI, that is, to try
to get a picture of all sole source contracts which might have
been funded from the DFI and what other audits may have been
out there, as well.
The IAMB made this request to the CPA in June of last year
just prior to the CPA being disestablished, on the theory that
the CPA would commission such an audit using DFI funds. When
the CPA went away, the IAMB looked to the Iraqi government to
commission such an audit on the theory that the Iraqi
government was now responsible for the DFI from the point of
the transition on June 28th.
As Mr. Norquist said, in the process of trying to provide
the specific audits that the IAMB had requested, it became
apparent that if the Iraqi government were to commission an
audit of sole source contracts, that the Iraqi government,
because the auditor would work for them, might have similar
problems in gaining access to proprietary information, in any
case would have practical difficulties of being able to do this
audit because the information they would need to get is in
various places, including in the United States.
At that point we offered to the IAMB to commission--that
is, the Department of Defense--to commission this special audit
of sole source contracts because if we did so the auditor
working for us would have no issues of his ability to gain
access to unredacted audits and any other government
information.
So we agreed to a statement of work with the IAMB. We
reported this information to the International Advisory and
Monitoring Board at the same meeting of the International
Advisory and Monitoring Board where Mr. Norquist delivered the
redacted audits, so that the IAMB knew that we were taking
actions to commission this audit which would have access to all
the unredacted information.
We agreed with the IAMB in December on a statement of work
for this audit and we have contracted with a firm to do this
audit on April 15th, and so this audit is now in progress. This
is all known to the IAMB.
Mr. Shays. I thank the gentleman.
I have taken 7 minutes, so every Member here will have 7
minutes to start, and we will have a second round.
Mr. Kucinich.
Mr. Kucinich. All right, Mr. Chairman. If it please the
Chair, I would like to defer to our ranking member for the full
committee, Mr. Waxman.
Mr. Shays. Thank you. Before the gentleman begins, I just
would welcome Mrs. Maloney and Mr. Sanders here. Thank you.
Mr. Waxman. I want to thank my colleague, Mr. Kucinich, for
allowing me to go first, and thank you, Mr. Chairman, for
recognizing me.
Mr. Bowen, I want to thank you also for testifying today.
Congress created your position so that we would have a
professional auditor reporting directly to us on the billions
of dollars being spent in Iraq, and you have done your job
professionally and responsibly, even when your conclusions have
been uncomfortable ones, and that is exactly what an IG should
do. I understand this is your first appearance before Congress.
I commend the chairman for giving you this long-time overdue
invitation and I commend you for being here.
As I mentioned in my opening statement, the CPA shipped
nearly $12 billion in cash from the United States during its
term in Iraq. It is hard for people to conceptualize that much
money, so I tried to put it in real terms--19,000 cash packs,
484 pallets, 107 million $100 bills. You might think that with
this amount of money in cash there would be established strict
procedures on controlling the physical access to this cash, as
well as strong accounting mechanisms to ensure that it was used
for intended purposes, but you found just the opposite. You
found ``physical security was inadequate. The CPA did not
establish or implement sufficient managerial, financial, and
contractual controls.'' You found that DFI funds were
susceptible to waste, fraud, and abuse.
As a result, you also concluded that the CPA violated the
Security Council requirement for transparency set forth in
Resolution 1483.
I want to ask you a little bit about some of these
conclusions.
First, in your July 28, 2004, report on DFI cash controls,
you concluded physical security safeguards were inadequate. For
example, you found CPA comptroller did not have adequate
control or access to their field safe. Can you tell us more
about that?
Mr. Bowen. Yes, sir. Thank you.
This was an audit of really the operational security of the
comptroller's practices and procedures. Interestingly, their
office was right next to the IG office at that time in the
palace there on the Tigris, and I assigned two of my top
auditors to get in there because of the issues you have alluded
to, and that is the cash environment that we were operating in
raised natural concerns.
There were issues connected with management of the safe,
securing the keys to those safes, and general procedures
connected with cash security.
We brought those to the comptroller's attention and they
changed the way they did business as a result. I am confident
that since then there are proper security measures in place in
the palace because, frankly, the environment has not changed
that much with respect to cash. It is still a cash economy. It
is still a cash operation for the most part. Electronic funds
transfer is still an idea in Iraq, an idea whose time is closer
and closer to coming.
But to answer your question, I think that our audit helped
tighten the ship on that issue.
Mr. Waxman. Before that they had cash in safes and lots of
different people had access to it? Is that the----
Mr. Bowen. That is correct.
Mr. Waxman. OK. You also found that CPA did not have
adequate accounting procedures for this cash once it was in
their possession. For instance, you reported that CPA did not
follow its own regulation requiring an independent certified
public accounting firm to monitor DFI spending. Can you tell us
about that?
Mr. Bowen. Yes. CPA regulation required the CPA to hire a
certified public accounting agency to provide an internal audit
function. A company called Northstar was hired to meet that
requirement. Their mission changed after their hiring. The
comptroller at the time sought to use them more to help him
manage the accounting aspects of management of the DFI, thus,
the internal audit function was superseded by a more direct
ledger sheet accounting process just simply to keep up with the
mammoth task of keeping track of the DFI.
Mr. Waxman. By far the largest disbursements were made to
Iraqi ministries. You issued a report on that, and you found
that when the United States took control of Baghdad there was
``no functioning Iraqi government, no experience within the
Ministry of Finance in managing the national budget, no budget
or personnel records, and the payroll systems were corrupted by
cronyism and ad hoc fixes.''
Despite all these glaring deficiencies, the CPA transferred
more than $8.8 billion to these ministries without any followup
to make sure these funds were spent properly. This sounds to me
like a perfect recipe for waste and potentially for fraud. In
your opinion, how likely is it that some of the ministry funds
were skimmed, stolen, paid to non-employees, or paid to fake
employees and ghost employees? Were these real risks?
Mr. Bowen. They were real risks and we reported them in our
audit. Let me be clear about the scope of our audit. At the
time I was the Coalition Provisional Authority's IG, which
meant I was overseeing the plans and programs of the Coalition
Provisional Authority. That included perhaps their most
significant program, management of the DFI, which was
underscored by the core purpose of standing up a new Iraqi
government and helping it function. That required the funds,
namely the DFI, to make that happen.
We looked at how the CPA structured itself to accomplish
that goal, and in looking at that we--in interviewing nine
senior advisors of the 26 ministries, interviewing a number of
personnel, and reviewing every document we could come across,
we ran across these other issues that we reported in our audit,
namely the issues you alluded to about the paying of ghost
employees.
I think the response to that was it was necessary to make
those payments to preserve the peace, but I think that the
reality of the situation----
Mr. Waxman. In other words, they were handing out money
because they thought that would calm things down. They were not
really sure who was getting the money. It was risk of all this
money being dissipated improperly, but that was a risk they
decided to take?
Mr. Bowen. In that instance, yes, with respect to that
issue.
Mr. Waxman. This is not the only evidence of waste, fraud,
and abuse. Your office also found that millions of dollars in
DFI funds given to commanders simply went missing. An audit by
KPMG found hundreds of thousands of DFI funds missing from one
division's vaults, and Defense Department audits have
identified hundreds of millions of dollars in overcharges by
contractors to the DFI.
The bottom line is that there were multiple deficiencies at
every stage in this process, from the point at which the cash
arrived in Baghdad to the point at which it left the hands of
CPA officials. It seems to me that CPA was ill prepared for
this responsibility and, frankly, it appears that the
administration was making up policies and procedures as it went
along. Do you think that is an unfair statement?
Mr. Bowen. This was an enormously challenging situation to
stand up from destruction a new Iraqi government, to help begin
the reconstruction of a nation, both structurally within its
government and structurally as part of its infrastructure.
I know--I was there--that the personnel within CPA worked
around the clock 7 days a week, and for the most part, by my
own observation, were well-intentioned. Inevitably in such an
environment, with so much cash and such an enormous task and
limited resources--personnel was a big issue--there were
inefficiencies, and we found them.
As I said when I started this job, we will let our audits
and our investigations speak for themselves, and they have. But
we have investigations going on with respect to fraud that you
alluded to, but our audits point primarily to inefficiencies.
Could things have been done better? Yes. Do we have some
significant lessons learned out of this? Yes. Is my
organization pursuing, accumulating all those lessons learned?
Yes. We have a very ambitious enterprise that we are going to
push into next year that is going to look at personnel,
program, planning, acquisition, and contracting with the
experts who are there. We have already done hundreds of
interviews, we have accumulated a lot of information, and at
the end of the day we will encapsulate this story in that
report.
Mr. Waxman. Thank you.
Thank you, Mr. Chairman.
Mr. Shays. I thank the gentleman.
At this time the Chair would recognize Mr. Turner for
questions for 7 minutes.
Mr. Turner. Thank you. Mr. Chairman, I just want to begin
by echoing what I had indicated in my opening statement of just
my admiration of this chairman and his efforts in oversight and
making certain that, both on the issue of terrorism and in the
issue of Iraq, that we have appropriate information and
appropriate support and oversight for the important functions
of our Government. As we talk about the democratization of
Iraq, we have to be very mindful of the issue of the role of
Congress and its role of oversight.
I have some questions about the issues of the redaction of
information and the relationship to this committee.
I have just been conferring with the Congressional Research
Service staff that is being provided to us, regarding the
applicable laws. Mr. Norquist, you stated something that
concerned me greatly.
In talking about the issue of the ability to provide the
necessary information for transparency, you talked about
operating within applicable laws. Many times in my 10 years now
in dealing with Government bureaucracies I have found that many
times when we get the answer of ``going with applicable laws in
order to comply with what we know is a requirement,'' that
sometimes it is a result of lack of foresight of the individual
having the responsibility for commencing an action.
For example, it appears that you find yourself in a
situation--we found ourselves in a situation of how do we
provide redacted information and the contractor's rights and
abilities to prevent that disclosure. I have been provided with
provision of the U.S. Code, Section 423, that talks about not
knowingly providing proposal information, source selection
information, and other restrictions on providing information.
I want to note that the exceptions that are specifically
identified do not include a restriction of providing that
information to Congress. Expressly it says that information can
be provided to Congress, meaning that the contractor would have
no ability for restricting the ability to provide information
that this chairman has been asking for and still does not have,
so this law does not apply with respect to providing
information to this chairman.
But I want to know to what extent there are or were options
when we started this process, in the contract process or in the
regulatory process, because if we accept that we are going to
go into a process where we require transparency and our
international reputation is on the line, it would seem to me
that we would enter that process from the beginning making
certain that we have chosen a path that permits us to have
transparency.
I'd like Mr. Norquist and Mr. Benkert if you would to
please comment on the ability in the beginning of this process
to have structured it in a manner that would have given us the
transparency we need.
Let's start with Mr. Benkert.
Mr. Norquist. Sir, as you pointed out, it was our intent to
give them a full answer, and so our initial thought and our
initial effort was to try and get them unredacted audits, which
would be the most complete answer, and that is what we sought
to do.
I cannot speak to the rules and the laws that govern what
is or not revisable. I'd defer to the lawyers and to the Corps
for the advice that they were given on what was permissible.
But at the different stages we asked if more could be done, and
it was in part because of the difficulty in doing that we
sought other solutions such as providing unredacted to an
independent party so that there would be some sense that you do
not have to take our word for it.
My intent throughout this process was to ensure that, to
the extent possible, that we did that. But I apologize. I
cannot speak to the legal provisions that affect this.
Mr. Benkert. Let me speak to this sole source audit that we
have commissioned, this special audit of sole source contracts.
In the audit that--to address your issue of dealing with these
issues of transparency up front, in the audit we have
commissioned we have specifically told the auditor that our
intent is for him to produce a report that is going to be
handed over to the IAMB. So at the beginning it is clear that
his purpose is to provide information that is going to go to
the IAMB, so there is no issue down the line of his collecting
information which then becomes a problem to hand over because
of his not knowing that was the intended purpose rather than
the U.S. Government.
I do not know whether a procedure like that could have been
applied in the early days of these contracts or not, and I
would defer to my colleagues on that.
Mr. Turner. Does anyone else on the panel have an answer
for that?
Colonel DuBose. Sir, I would just note that when we started
the KBR contract it was with appropriated funds. We really did
not know that DFI funds would be applied until around April,
May 2003.
Mr. Turner. I would appreciate it if you guys would pursue
getting an answer for the committee on the issue of whether or
not the processes that are chosen could have been different
that would have removed the impediment.
[The information referred to follows:]
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Mr. Turner. Mr. Norquist, the very first question that the
chairman asked you, you were reading from materials that had
been coordinated with the colonel. I am assuming that, although
you do not have a prepared statement for us, that you do have
some written materials that have been approved for your
appearance here today?
Mr. Norquist. I do not have a prepared statement or
materials that were approved. What I did do is I sat down with
the colonel when he had his redacted and I agreed that was my
understanding of the process, as well, so I support his
prepared statement and his explanation of what happened in the
process.
Mr. Turner. Do you have any objection to providing us
copies of the written answers that you have to the questions
that were anticipated and asked by the chairman?
Mr. Norquist. I do not know of a reason I could not. Let me
check. I do not know what the protocols are on this, but I will
go back and find out and I will provide what I can.
[The information referred to follows:]
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Mr. Turner. I conferred with our counsel before, the chief
of staff of the subcommittee, before asking this question. If
you would coordinate with him on that issue, I think it would
be helpful and appreciated.
I do not have any other questions.
Mr. Shays. Thank you. The Chair would recognize Mr.
Kucinich.
Mr. Kucinich. I thank the Chair.
Mr. Bowen, I would like to explore a little bit more about
this cash environment. We know from Mr. Waxman's testimony that
the administration transferred from New York to Baghdad more
than $281 million individual currency notes on 484 pallets that
included more than 107 million $100 bills, and he put up on the
screen what the Federal officials called cash packs, pictures
of them, and each one of these cash packs contained 16,000
bills. One cash pack with $100 bills is worth $1.6 million, and
the Federal Reserve shipped more than 19,000 of these cash
packs to Iraq. You agree substantially with that description,
correction?
Mr. Bowen. Yes, I do.
Mr. Kucinich. OK. Now, let's take a cash pack worth about
$1.6 million and let's locate it with someone in Iraq. Explain
to me what happened. Put it in somebody's hands and just
describe for this committee what would happen. What would they
do? How would they distribute the money?
Mr. Bowen. Sir, there was a safe in the basement of the
Republican Palace where the money was kept, and there were a
number of those flanks that you described that brought money
over that funded the obligation, so to speak, of the Iraqi
government, $19 billion, roughly, in the year that the CPA was
operating.
Mr. Kucinich. So somebody would come to wherever the safe
was to get their money?
Mr. Bowen. That was part of how it happened, that is
exactly right, but it was through the comptroller. There was a
budget, 2003, remainder of 2003 budget, and then a 2004 budget,
and then an amended 2004 budget, and that provided monthly
allocations to each ministry and----
Mr. Kucinich. I understand that, but here's what I am
trying to get at: would that one location be the only place
where the money was distributed from? Or were bundles of money
taken to other distribution points, or were bundles of money
given to other individuals who would then distribute that cash?
Mr. Bowen. Now you are getting to a level of detail that I
will have to get back to you on. I know that the primary
distribution point----
Mr. Kucinich. May I ask, Mr. Chairman, I appreciate what
the scope of your study was, but, Mr. Chairman, it seems to me
if we have the IG here saying there were not proper managerial,
financial, and contractual controls, I think it would be
instructive to this committee to understand exactly how the
money was distributed, because then we could come to an
understanding of whether or not, you know, it was just simply a
lack of controls or whether or not this committee could fairly
conclude that money was lost, stolen, or corruptly misused. I
mean, is that a fair assumption?
Mr. Bowen. I would be happy to provide you with that
answer.
Mr. Kucinich. If you would, give it to our counsel----
Mr. Bowen. Yes.
Mr. Kucinich [continuing]. And we will make sure it is
shared with both majority and minority.
Mr. Bowen. I will track that down.
Mr. Kucinich. Thank you. Again, we'd like to know, you
know, have you ever interviewed anyone who actually had in
their hands bundles of $100 bills and they were distributing?
Did you talk to anybody----
Mr. Bowen. Yes.
Mr. Kucinich [continuing]. In that capacity?
Mr. Bowen. Well, we interviewed the comptroller who was
responsible for that.
Mr. Kucinich. But only one person?
Mr. Bowen. And the other--those in his office that
participated in that, and I think you are also alluding to our
most recent audit, the April 30th audit regarding the
disbursement of DFI cash under the R3P program in south-central
Iraq in Hillah. In that more specifically, yes we did interview
people who were handling millions of dollars in cash, and we
have one very significant audit out on that has serious
findings. We have four more that are coming and we have several
investigations underway.
Mr. Kucinich. Who determined whether a private contractor
should be paid in cash or in some other form? Who made that
determination?
Mr. Bowen. It was a matter of necessity, and it depended on
the nature of the circumstances. There would be no one
determination of that. If the private contractor was an Iraqi
contractor in country, that contractor was paid in cash. If it
is a U.S. contractor, then electronic funds transfer can happen
back this side of the world.
Mr. Kucinich. Were there any cases in which U.S.
contractors were paid in cash?
Mr. Bowen. Yes, there were, but I cannot recite them for
you right now. I'd have to get back to you.
Mr. Kucinich. Could you give us a list of--provide this
committee with a list of all the U.S. contractors who were paid
in cash?
Mr. Bowen. I will research the issue for you and get back
with you on that.
Mr. Kucinich. Mr. Chairman, I did not take that to be a
positive response.
Mr. Shays. I think the gentleman said he would research and
get back to us with that information.
Mr. Bowen. Yes. I will try and get back with you--get that
information for you.
Mr. Kucinich. Thank you. I appreciate that.
Now let me switch to Colonel DuBose.
Colonel, this whole subcommittee meeting is about what
happened to unaccounted-for funds relating to Iraqi
reconstruction. Can you tell this subcommittee, out of the
approximately--you get different figures, perhaps as much as
$23 billion that went through the Coalition Provisional
Authority's hands, and the at least $12 billion in cash that
was withdrawn, according to Mr. Waxman's testimony, from the
DFI account at the Federal Reserve, how much money has actually
gotten down to rebuilding water systems, electricity systems,
which is the whole purpose of this whole program? Could you let
the committee know what we have bought so far with all of these
billions of dollars?
Colonel DuBose. Sir, I was only involved in the Restore
Iraqi Oil program. I would have to get back with the Corps of
Engineers folks. We only have visibility on our portion of
that.
Mr. Kucinich. Now, since this hearing, Mr. Chairman, is
about the Development Fund for Iraq and about the
reconstruction of the infrastructure of Iraq, do any of the
witnesses have any information about any infrastructure
improvements that have been made in Iraq with respect to water
and sewer, for example, which would in any way correspond to
the amount of money which is the subject of this hearing? Does
anyone have a number? Mr. Bowen, can you tell?
Mr. Bowen. I can. We are working on exactly that issue.
When I went on my sixth trip to Baghdad back at the turn of the
year I asked exactly this question. I said I'd like to see what
it is that we built. When did these projects begin? When were
they completed? And how much was the original contract and how
much was the final cost? And I asked that of PTO and AID and
NISTICKI, the primary entities that are spending there. And the
answer I got was, that is going to shut us down, to answer your
question, which raised concerns.
Mr. Kucinich. Wait, wait, wait. What was the answer you
received?
Mr. Bowen. The answer was that we are going to have to shut
down our operation in operation for 2 weeks to give you that
answer. So with that, you know, we pursued the why and we found
out that there are issues with respect to the information
systems management of the projects, and we announced an audit.
As soon as I delved into that a little bit, I announced the
audit, the first stage is going to address cost to complete. If
we do not know what the cost to complete is for the projects
that we are building, we may be in a difficult situation with
respect to what we are going to hand over. We need to be sure
we have the funds available to finish what we started.
Second, we began our own initiative to try to accumulate
this data, the SIGIR Iraq reconstruction information system,
where we have gotten data from AID, the Corps, NISTICKI, and
PCO, and accumulated into one data base. It is a work in
progress, but we are trying to answer the exact question you
are asking. What have we bought? How much did we pay for it?
Did we get value for our dollar? Ultimately, my mission there
to answer that question. And we are also trying to answer it
with respect to the projects that are ongoing, and then to
ultimately say, what about a project in particular? Tell me
about a project.
Two days ago my auditors were out visiting El Wathba water
treatment facility in Baghdad and they have come back with a
report and I have a team of auditors, technical engineers, and
investigators working together to answer the question you are
asking, and that is: what's the quality of particular projects?
In the July 30th report you will see that. You will see
pictures. You will see results. In the October report you will
see a lot of that.
Mr. Shays. I thank the gentleman.
Mr. Kucinich. I just want to ask the Chair that, you know,
in the next round of questions I want to continue to pursue
this line. Thank you.
Mr. Shays. Sure. Thank you.
I understand--yes, Mr. Waxman?
Mr. Waxman. I just want to ask Mr. Reed, on the LOGCAP
contract I would like to know if you have a summary sheet for
the task order values in any questioned or unsupported costs? I
am not asking you to answer any questions about it, but if you
have that summary I'd like you to provide that for us. Do you
have it?
Mr. Reed. Yes. I would be happy to provide that to you.
Mr. Waxman. Thank you.
Mr. Shays. If you provide it to the counsel, we will make
sure that the same day we get it the minority gets it.
[The information referred to follows:]
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Mr. Shays. Let me just say for the benefit of the Members,
we have an issue of cash, we have an issue of redaction.
Gentlemen on our panel, if I am incorrect about how I described
it, I want you to tell me where I am incorrect just so we know
who has the answers to this issue. On the issue of cash, it is
my understanding that you, Mr. Bowen, can speak to this, and
you, Mr. Benkert, can speak to this. On the issue of
redactions, it is my understanding Mr. Reed, Colonel DuBose,
and Mr. Norquist, you can speak to that.
Mr. Reed as the DCAA, you do the audits and you recommend
what is fair and reasonable? That is my understanding.
Let me just go forward. You, Colonel, your responsibility
is you hire and pay the contracts and sometimes you chase
overpayments, if there is, and you ultimately decide what is
fair and reasonable based on the recommendations of Mr. Reed.
Let me just go forward here one more, and then correct me
where I am wrong. It is my understanding that, Mr. Norquist,
you worked out of the comptroller's office, was DOD's contact
with the IAMB, correct, with U.N.?
Mr. Norquist. I was the observer to the IAMB, yes, sir.
Mr. Shays. Right. And the liaison, in a sense?
Mr. Norquist. In effect that is what happened.
Mr. Shays. OK. So with what I have described, is there any
qualification or additions that you need to make so we make
sure we are not ignoring your contribution? Is there anything
that I have described that needs to be amended by any of you?
Mr. Norquist. No.
Mr. Shays. Any additions to?
[No response.]
Mr. Shays. At this time let me tell you the order to which
I have Members. I have Mr. Higgins, who is not here, so I would
go to Mr. Ruppersberger. Then I would go to Mr. Maloney, then I
would go to Mr. Sanders, and then I would go to Mr. Lynch. Is
that the order in which you arrived? I believe that is correct.
OK. So at this time, Mr. Ruppersberger, you have the floor.
Mr. Ruppersberger. Sure. Mr. Chairman, first I want to
thank you and Ranking Member Waxman for having this hearing. It
seems to me that we have a lot of work to do based on what our
job is in Congress from an oversight capacity. It concerns me
greatly that we from the very beginning did not set up the
proper system that we need to set up to really monitor cash,
where cash is going, and to prevent fraud.
Unfortunately, because of this fact that we have not set up
the proper system, we have not been able to put the money back
into the Iraqi economy to win the hearts and minds of the
people, which hopefully will eventually bring our troops home.
And I think it is important that we become a lot more
aggressive in this oversight ability to really find out where
the cash is.
Just right now, moneys have not been held accountable, what
I have heard from the testimony. We have $8 billion that have
come from oil for food. We have $12 billion that have come from
oil proceeds. That is $20 billion right there; $20 billion is a
lot of money.
Now, let's get the specifics. If we are going to fix the
problem, we have to learn what we did in the past, what we have
not done, and what we are going to do now.
Mr. Bowen, first thing I want to point out, when the CPA
started with Bremer he promulgated regulations, and one of the
regulations is the CPA shall obtain the services of an
independent certified public accounting firm to ensure
transparency and compliance with Resolution 1483.
Now let me ask you this question. Did the CPA ever hire a
certified public accounting firm?
Mr. Bowen. They hired the Northstar Co. which had CPAs on
it, and the purpose of that employment was to meet that
standard. As I mentioned earlier, the mission of that entity
changed pursuant to the comptroller's verbal direction,
converting them more to an assist organization in managing the
accounting records of the DFI.
Mr. Ruppersberger. Were they a certified public accounting
firm?
Mr. Bowen. No, sir.
Mr. Ruppersberger. OK. So the fact that they were not a
certified public accounting firm, that is step one. Do you
think they should have hired a certified public accounting firm
based upon the rules that were promulgated and also based on
the standard in the industry of accounting? Should we have at
that point hired a certified public accounting firm, in your
opinion?
Mr. Bowen. I think that would have been a better choice.
Mr. Ruppersberger. And I understand that Northstar was
working out of a private home in San Diego and they received a
$1.4 million contract to audit this situation; is that correct,
based on your knowledge?
Mr. Bowen. I do not know the details of their corporate
headquarters in California. I did interact with the Northstar
personnel in the comptroller's office and they were
professional.
Mr. Ruppersberger. Had you ever heard of them before they
were hired?
Mr. Bowen. No.
Mr. Ruppersberger. Do you know who hired them?
Mr. Bowen. No, I do not specifically.
Mr. Ruppersberger. Do you know what department hired them?
Mr. Bowen. They were retained by CPA through DOD.
Mr. Ruppersberger. And do you know why they were hired? Did
they have any certain expertise or anything?
Mr. Bowen. That occurred long before I arrived in Baghdad.
Mr. Ruppersberger. And, by the way, these questions--we
need to be specific and strong. It has nothing personally about
you all. We want you all to fix the problem, but we have to
raise these issues.
Now, you examined the Northstar contract in one of your
reports. According to the CPA, Northstar was hired not to audit
but to consult with the CPA on transparency. What do you know
about that part of the contract?
Mr. Bowen. I have not reviewed that part of the contract. I
know we looked at what Northstar generally did in connection
with the DFI audit, and we concluded that they did not carry
out the mission that the CPA order required.
Mr. Ruppersberger. So basically they really did not work as
a certified public accounting firm. Do you know what they were
there for? What was the purpose?
Mr. Bowen. Well, as I said they were ostensibly hired to
provide internal audit expertise. They functionally were
converted into an assist organization with respect to
maintaining accounting records on DFI disbursements.
Mr. Ruppersberger. You know, we have done a lot in Iraq.
Whether for or against the war, it is about the troops and
supporting the troops and doing the things that we need to do
right now. It just seems to me that billions of dollars that
are held unaccountable, it is just unacceptable, and that we
have to do better.
Now, one of the things an investigation--when you conduct
investigations, you follow the money.
Mr. Bowen. Yes, that is right.
Mr. Ruppersberger. From your perspective, let's talk about
following the money. We have what my numbers--what I have heard
in testimony, about $20 billion. Do you feel there is more that
is unaccountable, or do you feel that is the number that we
have out there now, between the oil for food, the money that
was given to the ministers? What amount do we have, or cannot
you answer that question? Do we really have a handle on how
much is really missing or held unaccountable that we are
responsible, the CPA is responsible for managing?
Mr. Bowen. There were two types of money in Iraq. There was
the DFI essentially, speaking generally, the DFI $19-plus
billion and then the IRF, which is taxpayer money, the
appropriated dollars, amounting to roughly $21 billion. The
former, the $19 billion, was used to fund the stand-up of the
Iraqi government and to initiate a wide variety of
reconstruction activities. The IRF--IRF I and IRF II, if you
will--IRF I was roughly $3 billion in April 2003 and $18.4
billion in November 2003, was used for the reconstruction
program that we are currently executing.
Mr. Ruppersberger. You know, the fact that we have all this
unaccounted money is just very serious. The fact that we from
the very beginning did not set up the right system or hire the
certified public accounting firm whose job it would be
independently to determine and follow where the money is is
serious.
What I would like to hear from you is what do you feel we
need to do now. What systems do we need to set up to find this
cash and follow this cash. But before you answer that--because
I see my yellow light--that money that went to the ministers,
did some of that go to Chalabi?
Mr. Bowen. I do not know the answer to that question.
Mr. Ruppersberger. Well, I think we need to look into that
also, because of past record. But could you ask what do we need
to do now? We have talked about where we were. What systems do
we need to set up, in your opinion, do you think we will be
able to find and hold those people accountable, whether it is
within our government or the Iraqi government on this amount of
money? We have Oil-for-Food scandals. We have this situation
now. It is getting out of control and it is hurting our
situation in Iraq.
Mr. Bowen. That is a good question. The DFI money is within
the sovereignty of the Iraqi government. Just so you know, I
have met several times with the Commissioner on Public
Integrity, Judge Roddy, and he and I have a good working
relationship. He and the Iraqi anti-corruption system, which we
have helped stand up--there are 29 IGs that we helped train
that are working within Iraqi ministries now tracking exactly
what you are talking about. Third, the border supreme audit--we
have helped guide them to--there are three incipient but sound
pillars of anti-corruption within the Iraqi government. They
have taken on this mission. There is a fiscal anti--it is
called the Fiscal Integrity Commission within the interim Iraqi
government, the current Iraqi government, that is examining
every contract over $3 million.
So yes, they are tracking what happened to this money. They
are pursuing accountability, and partly because of the audit
work we have done to draw attention to this issue, to the lack
of controls. But it is on that side of the fence, so to speak,
and they are pursuing it.
On our side we are focused on appropriated dollars. We are
looking at how the IRP is being used, has been used, and will
be used.
Mr. Ruppersberger. My time is up, but I would like you to
get back to me on what person or individual or department
determined that we should hire Northstar to monitor, because I
think that is the beginning of where this has started. The
problem started with that and it has continued on.
Mr. Bowen. Yes, sir.
[The prepared statement of Hon. C.A. Dutch Ruppersberger
follows:]
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Mr. Ruppersberger. I think it is important that we get that
information so we can analyze why that decision was made. Thank
you.
Mr. Bowen. I will get that for you.
Mr. Shays. I thank the gentleman.
Before recognizing Mrs. Maloney I'd ask unanimous consent
to include in the record the CSR memorandum on applicable laws
on the disclosure of proprietary information dated June 20,
2005.
Does the minority have a copy of that?
Voice. Yes.
Mr. Shays. OK. And without objection, so ordered.
[The information referred to follows:]
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Mr. Shays. I would just also say to our panelists, if you
have not been asked questions to which you would like to make a
comment, feel free to ask the question or whether you can jump
in. And if there is anything in the end that you want to put on
the record, you will be given time, so take notes on anything
you want to share so it is part of the record, because some of
you are being asked more questions than others and it may be
that you need to put something in the record. So, one, feel
free to jump in to see if you can respond with your
information, and, two, if you choose not to do it then, at
least at the end we will give you time to respond and make any
last comments.
At this time the Chair would recognize Mrs. Maloney.
Mrs. Maloney. I thank the chairman for really his
leadership on this issue and so many others. I must compliment
Henry Waxman on this report on the mismanagement of Iraqi
funds, although I must say that I find the contents absolutely
sickening--107 million U.S. dollars, $100 bills shipped to
Iraq, but that is peanuts compared to the $8.8 billion missing
in the CPA and the abuse in the commander's fund I find
incredibly troubling in your report, and I thank you very much
for your report.
The records that we have received show that $637 million in
Iraqi funds was given out in four regions to local commanders
and officials that they could use it in short-term projects for
rebuilding hospitals and roads, employing the Iraqi people, and
helping people, and helping the region.
I met with General Patrias in Mosul and was very impressed
with the projects that he had initiated and that he was helping
the Iraqi people, but your report shows, Mr. Bowen, that a
great deal of this money did not get to the people or to the
purpose that was intended, and I'd like to ask you: is it
correct, when you looked at one region that received about $120
million in these commander's emergency funds, you could not
account for $96 million of it? In other words, more than 80
percent of the cash, that there were no clear records
whatsoever? Is that correct from your report?
Mr. Bowen. Let me make a distinction for you. There are two
different programs for rapid reconstruction, or there were at
that time in Iraq. One was the CERP, the commander's emergency
response program, and the other was the R3P, the rapid
reconstruction response program. Our audit addressed the latter
one, not the CERP.
We have an audit ongoing of the CERP and that will be out
in our October report, and you are right to ask questions about
it, but also your point is well taken on the effectiveness of
it. I think there were some real lessons learned as to how CERP
has been executed as far as what is effective for rapid
reconstruction.
In Hillah, which is a town in south-central Iraq, there was
a DFI funds director who had responsibility for $120 million
you referred to. He failed in many ways in managing those
funds. There were $89 million that were not properly receipted.
There were four levels of keeping track of money. He failed at
least one or all of those levels in tracking $89 million, and
with respect to $7 million there is no record. Also, as I
alluded to earlier----
Mrs. Maloney. So $7 million there is no record and $89
million was misused or unaccounted for?
Mr. Bowen. Inadequate receipts or----
Mrs. Maloney. Unaccounted for.
Mr. Bowen [continuing]. Documentation. That is correct.
Mrs. Maloney. OK. So $89 million unaccounted for and $7
million absolutely missing?
Mr. Bowen. That is correct.
Mrs. Maloney. That is a disgrace beyond words. In your
report you stated that you discovered obviously from your
comments today fraud, and that you were initiating a criminal
investigation. Can you tell us about this investigation?
Mr. Bowen. I cannot give you the details of those
investigations, but they are ongoing.
Mrs. Maloney. But could you tell us broadly what those
officials are accused of and how you detected the fraud in a
broad sense?
Mr. Bowen. In the broadest terms, this was a story of
auditors and investigators working well together in Hillah,
auditors bringing to my attention indicators of potential
fraud, the deployment of investigators down that money trail,
and the resulting cases that were developed had been presented
to the U.S. attorney.
Mrs. Maloney. So you have presented how many cases to the
U.S. attorney?
Mr. Bowen. On these issues, three.
Mrs. Maloney. And are you talking about the eastern
district or----
Mr. Bowen. Yes, ma'am.
Mrs. Maloney. OK. When did you present it to the eastern
district?
Mr. Bowen. Within the last 2 weeks.
Mrs. Maloney. And I understand the audit that we have been
referring to and you mentioned is in the south-central region
of Iraq?
Mr. Bowen. That is right.
Mrs. Maloney. Also, aside from that $120 million, by my
calculation there is more than roughly $400 million went to the
other three regions. Are you auditing them, also?
Mr. Bowen. Of the R3P programs we do not have an ongoing
audit of those other regions. Now, we have four audits going on
still in this region. We are looking at two projects, the----
Mrs. Maloney. So you are talking about the south-central
region----
Mr. Bowen. Yes.
Mrs. Maloney [continuing]. You have all these audits going
on?
Mr. Bowen. That is correct.
Mrs. Maloney. But there are three other regions. Are you
going to audit the other three regions?
Mr. Bowen. It is a question of resources right now. Our
mission now, as assigned by Congress, is to focus on the Iraq
rehabilitation and relief fund, which is the taxpayer
appropriated dollars, and my limited resources are being
devoted toward performance audits of the projects being
accomplished with the IRF.
Mrs. Maloney. Well, I, for one, think you should be given
the funds to do your job and I compliment you on your work.
Mr. Bowen. Thank you.
Mrs. Maloney. It is an important position, and you have
done a great service to the American taxpayers. I, for one,
deeply appreciate it.
I'd like to ask Mr. Reed, is DCAA looking into any of these
commander's emergency funds and how they were spent? Are you
investigating it at all?
Mr. Reed. No, we are not. Our mission involves the audit
of----
Mrs. Maloney. That is my question is whether you are
investigating it. I'd like to----
Mr. Shays. But if he could just explain----
Mrs. Maloney. If you will give me additional time, that
would be great.
Mr. Shays. Let me just say you only had 10 seconds left
anyway, but just explain why he's not so we----
Mr. Reed. Our mission is to do contract audits involving
contracts which require audits to set the price or to reimburse
the cost.
Mrs. Maloney. OK. But if he's not investigating it, I'd
like to know is Mr. Norquist in the comptroller's office, are
you investigating and examining this spending, and likewise Mr.
Benkert, is the DSO auditing these expenditures.
Mr. Norquist. Not to my knowledge. I do not belong to an
organization that--as the observer to the IAMB, I would not
have been involved in that.
Mr. Benkert. My office does not do these sorts of audits,
but let me just say I think there are--and Mr. Bowen's
quarterly report indicates this--there are a number of audits
that either are ongoing or will be done of the commander's
emergency response program. The audit he has done--I believe
there were other audits too--it is included in his quarterly
report, a listing of these audits.
I would also point out that there are, I believe, eight
audit agencies and inspectors general operating in Iraq in
auditing aspects of Iraq reconstruction who have so far
produced over 1,500 audit reports, many of those from DCAA. So
there is a very extensive audit program that is going on as
part of the management of Iraq reconstruction.
Mrs. Maloney. But my point and my question, if I could, Mr.
Chairman, was directed to the $400 million that Mr. Bowen says
he cannot have the resources to look at at this point. The
other three----
Mr. Shays. I'd suggest to the gentlelady that she will have
a second round to----
Mrs. Maloney. But the gentlemen say they are not looking at
it. I am just saying that is a lot of money. Someone should be
looking at it. I think it is an important program, but if there
is a waste, fraud, and abuse of these dollars, Mr. Bowen has
already referred three people to the eastern district court
system, and I think that the other $400 million should likewise
be audited, and from their testimony no one is doing that now.
Mr. Shays. Let me just clarify. Is no one doing it now? I
am confused by that.
Mr. Bowen. We are auditing the CERP program and that is
$600 million and that is nationwide. With respect to the R3P, I
do not know if the other regions' allocations of R3P are being
audited.
Mr. Shays. Could you provide that information back to the
committee?
Mr. Bowen. Yes, sir.
Mr. Shays. And we will get back to Mrs. Maloney on that.
Mr. Bowen. Yes, sir.
Mr. Shays. I hope there is someone taking notes on what you
all are going to get back to us.
Mr. Bowen. Yes, right here.
Mr. Shays. Mr. Sanders, you have the time.
Mr. Sanders. Thank you very much.
Mr. Shays. Thank you for your patience, Mr. Sanders.
Mr. Sanders. Thank you very much, Mr. Chairman. And let me
congratulate you for holding this hearing. This committee has
an enormously important responsibility, regardless of who the
President of the United States is, and that is to provide
oversight to make sure that, among other things, taxpayers get
their dollar's worth and that our Government runs in the way it
should be running, and I must say that since George Bush has
been President this committee has in many ways abdicated its
responsibility and not had the kind of hearings that it should
be having.
I can recall that under Bill Clinton we had hearings every
other day for every other reason, and yet on some of the most
important issues of concern to the American people this
committee has not been active, so I want to applaud you for
delving into an issue that obviously is a concern to the
American people.
The war in Iraq is controversial. This country has a huge
deficit. This week we will be debating on the floor of the
House cuts in very important programs for low income and
moderate income Americans. I think, regardless of one's
position on the war, there is no American that does not believe
that every dollar that we spend or that we budget for Iraq
should be spent in a way that improves the lives of the Iraqi
people and that does not disappear in thin air. I do not think
there is any disagreement on that.
In looking over this report, there are just some statements
here that almost defy imagination, and I speak as someone who
was a mayor of a city for 8 years and has some administrative
experience.
I would just ask any member of the panel to please help me
out and provide additional information on some of these issues.
The assertion is that American officials frequently
exercise poor or nonexistent oversight over contracts funded
with hundreds of millions of dollars from Iraqi proceeds. We
found six cases where contracting files could not be located
which involved disbursements of over $51 million. Explain to
me. I am not quite sure what that means--contracting files
could not be located.
I am a mayor. I sign you off as a vendor. We sign a
contract. We put it away some place. That is usually the way
business is done. What does that mean that contracting files
could not be located, Mr. Bowen?
Mr. Bowen. Quite literally what you have just said. We did
two contract audits--that is, audits of the processes--in
Baghdad of how contracts were let both under the DFI and using
appropriated funds, and in both audits we had findings that
criticized the procedures.
As you noted, in both cases there were situations where we
just randomly asked for a set of contracts, and in those
situations there were some that they simply could not put their
hands on, and there were----
Mr. Sanders. You could not find the document?
Mr. Bowen. Yes, sir. That is right.
Mr. Sanders. Well, how does one disburse money for services
without a document that tells us how much you are paying for
what you are supposedly getting?
Mr. Bowen. Well, these were completed contracts, so the
disbursements had occurred. But, nevertheless, that is not an
excuse. I am just saying----
Mr. Sanders. They were completed but you did not see it?
Mr. Bowen. No, no. The fact of the matter was we asked for
contracts that were completed. We wanted to go back and look
through their files.
Here's the issue. There was substantial turnover within
CPA--still is. We are hitting the 1-year mark in Baghdad since
the State Department took over, and guess what, they are all on
1-year tours. There is significant turnover occurring. I am not
ascribing the same set of problems to the State Department that
we identified in those two audits, but what I am saying is that
personnel turnover resulted in a lack of continuity.
Frequently a contract officer would use in charge of a set
of contractors, his or her replacement would follow on weeks
later, and there was just a complete drop informationally.
Sometimes they were on stick, memory sticks, or there were not
adequate procedures, as we identified.
Here's a lesson learned. What do we need to do in
situations like that? We need to have a single repository of
contracting data like you were referring to when you were
mayor. You know, you had one place you could go and find out
about all the contracts of your city. That is what we need to
do. I mean, it is common sense.
Mr. Sanders. This is kind of an A,B,C of governmental
processing, would not one think?
Mr. Bowen. But at the same time we were in the middle of a
massive insurgency in a wartime situation with significant
turnover and unique situations that simply do not compare
domestically.
Mr. Sanders. I appreciate it. But let me ask another
question of anybody----
Mr. Reed. Could I add to that?
Mr. Shays. Please, Mr. Reed.
Mr. Reed. I think it is important to note that in my
opening statement I mentioned that DCAA is actively involved in
providing contract audit oversight on some 14 contracts or 16
contracts totaling $3 billion. These are awards to U.S. firms
that contain the proper normal audit clauses that we operate
with, and they are going to be very effectively audited.
Mr. Sanders. Good. There is another assertion here that
over 600,000 tons of Iraqi oil worth $69 million produced
between June 29, 2004, and December 31, 2004, is missing. We
simply have lost 600,000 tons of oil. Anyone have any thoughts
about where we might locate 600,000 tons of oil? Mr. Benkert.
Mr. Benkert. Mr. Sanders, as you know, since June 28th the
production of oil and the complete operation of the oil
industry is an Iraqi responsibility. I mean, it is a sovereign
country. This missing oil was reported by an audit that KPMG
did on behalf of the IAMB that covered this period after the
U.S. transferred sovereignty to the Iraqis. So this took place
after the U.S. transferred responsibility to the Iraqis and
before the end of the year.
What the auditor found was, in looking at the records of
the Ministry of Oil and the financial records associated with
the Development Fund for Iraq, that they could not account for
that much oil. And they have referred this matter to the Iraqi
government.
Mr. Sanders. OK. Thanks for the explanation. But am I
correct in asserting that is, everything being equal, money
that should have gone back to the Iraqi people to rebuild their
country?
Mr. Benkert. Yes, sir, you are correct. That is money that
should have been, if it was properly accounted for, if those
oil sales were properly accounted for, that money should have
been deposited into the Development Fund for Iraq, which of
course now funds the Iraqi budget.
Mr. Sanders. Right. So that investigation is ongoing but at
this point we have not located that $69 million; is that
correct?
Mr. Benkert. As I said, this is a matter that is between
the auditor, the IAMB, and the Iraqi government. To the best of
my knowledge, it has not been resolved.
Mr. Sanders. OK. Mr. Chairman, thank you again. And let me
again--I think this is a very important hearing, and I hope
that we can continue to hold hearings like this. Thank you very
much.
Mr. Shays. Thank you. And I appreciate the conduct of the
Members in just trying to get at the truth.
At this time the Chair would recognize my friend from
Boston.
Mr. Lynch. Thank you, Mr. Chairman. I want to add my
support, as well. I think this is a long overdue hearing and I
think that this whole process of trying to get to the bottom of
the misallocation or theft of up to $20 billion here--just as a
sidebar, I know we have put off at least for a week the
discussion of whether subpoenas should be issued for our
further hearings. I just want to weigh in publicly and say that
I think the time for subpoenas has long since passed, and I
think the amount of waste, fraud, and abuse that we have here
on the American taxpayers is a disgrace. I think we have seen
enough foot-dragging in this instance to warrant subpoenas to
get some people to come forward.
Mr. Bowen and Mr. Reed--Mr. Reed, we have spoken before in
these hearings--I realize that a lot has been said that this is
a wartime exercise in terms of trying to work with these
programs for the Oil-for-Food Program and Iraqi reconstruction,
but we recently had a situation where a Halliburton procurement
manager, Jeff Maison, and a general manager of the Halliburton
subcontractor, Ali Hajazi, were eventually finally indicted for
a kickback scheme, and it involved overcharging by the
subcontractor of about $4 million and $1 million going to the
Halliburton manager in repayment. We have an indictment there.
This involved a Kuwaiti company called LaNovele. Now,
LaNovele has dozens and dozens, maybe over hundreds of
contracts not only with troop support contract but also with
reconstruction and relief. Have we gone back--given the fact
that indictments have come down in this case, have we gone back
and checked out every contract that LaNovele has been involved
in and Ali Hajazi and Jeff Maison to find out whether or not,
since they were involved in a kickback scheme in this one
instance and they are under indictment, have we looked at other
activity across Iraq to determine whether this was the standard
procedure and practice for this company and whether there is an
extensive involvement here on the part of these individuals?
Mr. Reed. On DCAA's part, of course, any time we see an
abuse like this and it is found to actually exist and we get
indictments and convict, to any auditor that becomes an
immediate----
Mr. Lynch. I am sorry, Mr. Reed, is your mic on? We want to
catch it all.
Mr. Reed. It is on and I am talking as loud as I can here,
sir.
Mr. Lynch. I am sorry.
Mr. Reed. I will talk even louder.
Mr. Lynch. I appreciate it.
Mr. Shays. Let me just say some of the mics seem to work
better than others, because you are pretty close to it. But
just start over again. We will give the gentleman a little more
time here.
Mr. Lynch. Thank you.
Mr. Reed. Yes, we are auditing all contracts awarded to
Novele, and not only Novele but any contractor over there, I
believe in this particular environment, from a fraud assessment
standpoint in terms of what an auditor might use to decide how
much auditing to do and in what areas, we are very aware of the
risk in this environment and so yes, we are looking at other
contracts.
As far as this particular investigation, I have to presume,
because I do not have the details of the investigation, itself,
but it is normal in an investigation of that type that the
investigators would follow that lead wherever it took them,
including all other contracts that these people touched.
Mr. Lynch. All right. That is your assumption. OK. Maybe we
have to followup with that in future hearings.
I do want to say that, with respect to the Pentagon
auditing, the DCAA Government audits, we have had six task
orders on the restoration of Iraqi oil, RIO, contracts
performed by Kellogg, Brown and Root, and they were funded with
DFI funds. Five involved fuel import and distribution, and
there have been a total of 14 audit reports, and additional
advice letters from DCAA on these task orders.
We received the reports, themselves; however, the Defense
Department redacted much of the reports. The redacted
information was considered to be proprietary information. I'd
like to know from any of the panelists who made the decision to
withhold as proprietary business information all the figures on
questions and unsupported costs as determined by the DCAA
auditors, and what is the legal justification for withholding
that information from Congress?
Colonel DuBose. Sir, the redactions were made by KBR, and
that was based on their assertion that it was proprietary data
protected by the Trade Secrets Act.
Mr. Lynch. Colonel, under the circumstances here, given
what we know is going on here in large part with Kellogg, Brown
and Root and Halliburton, what is the legal justification for
withholding the information from Congress?
Colonel DuBose. Sir, it is not the Corps' assertion that
information would be withheld from Congress. It was in response
to the request from the IAMB, sir.
Mr. Lynch. I am sorry? Can you repeat? I cannot quite hear
you.
Colonel DuBose. Sir, the redaction was made in response to
the request to provide those to the IAMB. I do not believe the
Corps has any problem with those unredacted audits being
provided to Congress or anybody in the U.S. Government.
Mr. Lynch. So we are in agreement here? Congress should get
the unredacted reports in this instance? I just want to get
this on the record, sir.
Mr. Shays. Let me--if the gentleman would yield, we do have
the unredacted version. We were given that in March. But the
issue is why did--this is not off the gentleman's time--the
issue is why did not the U.N. basically get this information.
We treated it almost like the U.N. was a FOIA request and the
attorneys responded that way, and I would suggest that the U.N.
had as much right to have this information as Congress,
frankly, and that is what I will get around to in my questions.
I realize, Mr. Benkert, this was not your decision,
correct? You did not make the decision to redact; is that
correct?
Mr. Benkert. Yes, sir, that is correct. I mean, I became
the liaison to the IAMB after this information was provided.
Mr. Shays. OK. Let me--I am sorry. The gentleman has more
time. The gentleman has about a minute left or two, whatever
he'd like.
Mr. Lynch. Thank you, Mr. Chairman. I appreciate that.
In your estimation collectively, are there obstacles that
you are finding in terms of being able to provide information
to the Congress regarding money that was misspent,
misallocated? Are there safeguards that you would recommend
either to help the transparency within the programs or that
would enhance the ability of yourselves and of Congress to
track, as Mr. Ruppersberger said earlier, following the money?
Mr. Reed. I do not believe there is barriers. The
Department's policies and procedures are to be cooperative with
Congress and to provide information requests. Where we have
provided audit reports in the past to Congress, we do note the
restrictions on the reports just so they will be aware that
they may contain sensitive information. So from my viewpoint
there are no barriers.
Mr. Lynch. Thank you. I yield back. Thank you, Mr.
Chairman.
Mr. Shays. Thank you. Mr. Kucinich, I have some questions,
but I would prefer that you go. I am going to kind of close up,
so do you have questions you'd like to ask?
Mr. Kucinich. Yes, I do.
Mr. Shays. Thank you, Mr. Lynch, for your questions.
Mr. Lynch. Thanks. Thanks, Mr. Chairman.
Mr. Kucinich. Doing the math on the fact that 107 million
$100 bills were transferred from New York to Baghdad, this
information provided by staff, if that is correct we are
talking about $10.7 billion in $100 bills. Mr. Bowen, is that
essentially correct?
Mr. Bowen. That sounds like a number I have heard regarding
the flights.
Mr. Kucinich. Now, up here on the screen this is a photo,
according to information given to me by staff, taken in July
2003, in Baghdad. What's pictured here is 20 packages of
$100,000 each. These are $100 bills. The individuals holding
this cash are Coalition Provisional Authority officials. The
man in the middle is Frank Willis, who is a deputy senior
advisor at that point for the Ministry of Transportation and
Communications. His boss, Darryl Trent, is on the right.
According to information provided by staff, I am being told
that this is $2 million in cash paid, according to Frank
Willis, to Custer Battles. Again according to Mr. Willis, the
company was told to bring a big bag for payment.
I offer this, Mr. Bowen, for your consideration as you
begin to look at the manner in which things were disbursed and
to whom. Custer Battles is a U.S. contractor.
Mr. Bowen, do you know how many private contractors there
are in Iraq right now? Do you have any idea?
Mr. Bowen. We have developed a data base that is tracking
who has received contracts in Iraq, so yes, we have that
information.
Mr. Kucinich. Can you give the committee a number?
Mr. Bowen. I will have to provide that number for you. I do
not want to ballpark it right now.
Mr. Kucinich. Is it possible that it could be more than
5,000?
Mr. Bowen. We will just have to get back to you with that
specific number, but we have--the data base I referred to
earlier is developed precisely to answer these types of
questions, so we can get that for you.
Mr. Kucinich. While you are developing the data base--I'd
like to ask the Chair's indulgence here, Mr. Chairman. The
thing that interests me is I am looking at--I looked earlier at
cash packs on the earlier screen. Could you bring up one of
those? Could staff bring up one of those cash packs on the
screen? Now, remember we are talking about $10.7 billion in
$100 bills. These cash packs came through the Federal Reserve.
Now, it seems to me that $100 bills, as with all money,
have serial numbers on them, correct, Mr. Bowen?
Mr. Bowen. That is correct.
Mr. Kucinich. Is any effort being made to follow the money,
literally, to try to determine if any of these $100 bills have
found their way back through the currency system back to the
United States to determine where they are located? Is anyone
even asking that question about where's the money, where is the
money going, where is it, has it turned up anywhere? Has any
effort been made to see where those $100 bills are showing up?
Mr. Bowen. Yes. U.S. Customs has been notified about this
and we have worked with them. On specific case through our
investigators we have had bags searched and we have stopped
people both at the Baghdad Airport and we have had Customs
agents meet them at airports as they have landed here and go
through their belongings. But you are asking a really big
question about a billion-dollar question so to speak, and----
Mr. Kucinich. Actually, it is a $10.7 billion question.
Mr. Bowen. Yes, you are right. And so you have to
understand sort of what types of money and where this money
went and what's the jurisdiction over it now. I think those are
important questions.
Mr. Kucinich. Is it within your jurisdiction to provide
this committee with the serial numbers that came through
Federal Reserve--I take it these were new $100 bills--to
provide this committee with the information with respect to any
list on which those serial numbers have turned up on coming
back through Customs, who held those serial numbers? Do we have
that?
Mr. Bowen. No, we do not. And we have not--the measures
that I have described have not produced findings, so to speak.
What this money was used for that you see on this slide,
this is DFI money. This money was used to fund the new Iraqi
government and to fund contracting that they did, to capital
projects, to pay salaries--what I addressed in my controls
audit report. The issue with respect to fraud may have occurred
regarding that contracting or those payments are potential
Iraqi crimes. In other words, that is what I was referring to
that Judge Roddy, who is the Commissioner of Public Integrity
and, indeed, the Fiscal Integrity Commission within the Iraqi
government, the Board of Supreme Audit, and the IGs all have
audits and investigations connected to how that money was used.
Mr. Kucinich. Well, let me ask you this. Any of this--are
U.S. contractors or anyone who is a U.S. citizen who comes into
contact with any of the cash in Iraq, are they covered by U.S.
law?
Mr. Bowen. You have raised a good question. We are treating
the--I treat that as a yes. If we uncover information with
respect to a contractor who has misappropriated or fraudulently
expropriated DFI dollars, then we will pursue that as a U.S.
crime.
Mr. Kucinich. Mr. Chairman, I am going to wrap up right
now, but I just think that as the committee gets into this
subject it would be of great interest to determine how that
money is coming back to the United States at some point--since
we are talking about cash here, which does represent a note
that is legal tender--at some point that money has to find its
way back to the United States. If we are looking at the
potential for fraud here or any kind of corruption it might be
instructive to this Congress to make such a determination about
where the money is coming from and, in effect, to follow the
money.
Mr. Bowen. And I am trying to follow the money. You have
put your finger on an exceedingly large difficulty with respect
to tracking funds in Iraq. There is no forensic electronic
trail with respect to how this money was used.
Just so you know and without getting specific, I am using
the tools at my disposal this side of the world to track those
issues.
Mr. Kucinich. Thank you, Mr. Chairman.
Mr. Shays. I thank the gentleman. I thank you, Mr. Bowen,
as well.
Mr. Lynch, if you have questions then I will end up and we
will get to the next panel. I am going to go last, but you are
more than welcome to ask questions if you have them.
Mr. Lynch. Thank you, Mr. Chairman. Just 1 second.
Mr. Shays. Take your time.
Mr. Lynch. Thank you, Mr. Chairman. We just have one thing
we want to get on the record here. We have been trying to track
here the flow of taxpayer dollars and also the funds that have
been directed for this purpose of reconstruction. I'd like to
ask some questions about the last-minute spending rush in the
final days and weeks of the Coalition Provisional Authority's
existence.
The report by Representative Waxman's staff has already
been made part of the record, but it details how nearly half of
the currency shipped into Iraq under U.S. discretion, which was
more than $5 billion, flowed into the country in the final 6
weeks before the control of Iraqi funds was returned to the
interim Iraqi government on June 28, 2004.
In the weeks before the transition, CPA officials ordered
urgent disbursements. Fortunately, we have the record of the
Federal Reserve, the New York Federal Reserve, of more than $4
billion in U.S. currency from the Federal Reserve, including
one shipment of $2.4 billion, the largest shipment of cash in
the bank's history.
As part of this report, Representative Waxman's staff
reviewed thousands of pages of documents that were subpoenaed
from the Federal Reserve Bank of New York, so we have a
transparent system at the Federal Reserve in which we can
account specifically for every dollar spent, and then it goes
to Iraq and it basically disappears from the screen. No
accountability. No paper trail. No way to follow the money.
These include a number of e-mails about this 11th hour
spending spree, and I'd like to request the copies of these e-
mails, some of which are quoted and cited in Representative
Waxman's report, and I'd like to request that they be made part
of the official hearing record.
For example, in the words of one Federal Reserve official
who was writing on June 11, 2004, ``Just when you think you
have seen it all, the CPA is ordering $2,401,600,000 in
currency shipped out on Friday, June 18th.'' While the Federal
Reserve was preparing this shipment, the CPA pushed back the
delivery date and requested an additional shipment. In a June
15, 2004, e-mail a CPA official wrote, ``The new date is 22
June departure, with arrival, delivery on 23 June.'' This is
also in the quote, ``It is important that we make these dates
as we have little flex time. Heads up.'' So this is a rush to
get the money in place before the transition occurs. The quote
goes on. ``We are going to request a second mission for a 28
June delivery.'' That is an e-mail from Lieutenant Colonel Bill
McQuail to Tina Smith June 15th quoting Colonel Don Davis. The
emphasis is in the original, the heads up.
On June 16, 2004, a Federal Reserve official confirmed the
delivery. ``I checked the dates with Colonel Davis, and yes
they want delivery to Baghdad on Monday the 28th.''
I'd like to ask Mr. Norquist, can you explain?
Mr. Shays. For the record--I did not have my mic on--the
gentleman has requested that we put in e-mails from the Federal
Reserve into the record, and without objection, so ordered.
[The information referred to follows:]
<GRAPHICS NOT AVAILABLE IN TIFF FORMAT>
Mr. Shays. The gentleman has time. We will give him an
extra minute.
Mr. Lynch. May I reclaim my time?
Mr. Shays. Yes, and you have more time, so the gentleman
has about 3 minutes left.
Mr. Lynch. Thank you, Mr. Chairman.
Mr. Norquist, if I can ask you, can you explain the reasons
for these massive cash deliveries in the last days of the CPA?
Earlier we heard that you trusted the ministries to spend their
money without any accounting procedures. Why did not you trust
them with this cash?
Mr. Benkert. Let me try to break your question up here,
Congressman, first. The DFI--and break up the management of the
DFI into its component pieces----
Mr. Shays. Let me just interrupt to say the gentleman will
have more time. You do not need to rush. So the gentleman will
have more time to have you fully answer the question.
Mr. Lynch. Thank you, Mr. Chairman.
Mr. Benkert. I want to be clear on the management of the
DFI at a fairly broad level. First of all, there were several
pieces to this. This first was the export sale of oil and the
deposits of proceeds from the sale of oil in some transfers
from oil for food escrow accounts and so forth into the DFI.
These were funds that were--so this was the deposit side of the
ledger.
The International Advisory Monitoring Board in its
oversight and based on audits from KPMG concluded that during
the CPA's tenure all known proceeds from the sale of oil were
properly deposited into the DFI and were properly and
transparently accounted for in the DFI.
The second piece of this is disbursements from the DFI to
other places. So, for example, the CPA--the administrator of
the CPA was responsible for administration of the DFI. On the
authority of the CPA administrator, disbursements were made
from the DFI to Iraqi ministries--that is the $8.8 billion that
Mr. Bowen testified about--or directly to projects of various
sorts.
The International Advisory Monitoring Board concluded--
again, based on KPMG audits--that during the period of the
CPA's administration all disbursements from the DFI were
properly authorized and recorded. All disbursements from the
DFI were properly authorized and recorded.
The third piece of this then is once money had been
disbursed from the DFI--remember, the DFI is a set of accounts
held in the Federal Reserve Bank in New York and in the Central
Bank of Iraq in Baghdad. Once money had been disbursed from the
DFI to, for example, the Ministry of Finance and onto Iraqi
ministries or to other projects, this is the piece that Mr.
Bowen assessed in his audit, this piece of what happened to the
money once it was disbursed from the DFI. And, as he found,
there were weaknesses in this. But I would say, for example, of
this $8.8 billion that went to the Iraqi ministries, there were
observable results of what that money was spent on. Salaries
for hundreds of thousands of government employees were paid. We
know for a fact that the government workers were paid.
Government ministries operated. We know that they operated.
Various projects were done on the behalf of those ministries,
and we know what those projects are.
So there is a record of this, despite the fact that there
were a number of internal control problems which both Mr. Bowen
and KPMG identified in the management of these funds once they
had been disbursed from the DFI, there were observable results.
Because those internal controls now would be residing with
the Iraqi spending ministries and the Iraqi Ministry of
Finance, those results have been provided to the Iraqi
government, both by Mr. Bowen and by KPMG, so that the Iraqi
government, again under the oversight of the IAMB, can ensure
that internal controls are tightened up in the spending
Ministry, and that process has been discussed between the IAMB
and members of the Iraqi government.
Now, as far as the flow of cash into Iraq, I cannot speak
to the pacing of the flow of cash into Iraq. I can only speak
to these issues that I just mentioned about the accountability
of these funds.
Mr. Shays. If the gentleman would yield a second--and he
will have all the time he needs----
Mr. Lynch. Thank you, Mr. Chairman. I yield.
Mr. Shays. Thank you. I just want to--I think the committee
wants to be clear and, Mr. Bowen, you can make sure you are
weighing in on this. Of the $8.8 billion in cash--and I
understand they did not have an electronic system--is all $8.8
billion--this is where I am confused, frankly. Has all of that
been signed by someone in the ministry, or is some of that in
question? I mean, I know we have a question of how they spent
it, but are we certain that all $8.8 got transferred to them?
I'd like you, Mr. Benkert, first and then Mr. Bowen.
Mr. Benkert. And I will defer to Mr. Bowen on some of the
details of this, but I think what I have said is that the
disbursement from the DFI was accounted for. In other words,
from the--for funds that went to Iraqi ministries, the general
flow was that funds would go to the Ministry of Finance, and
then the Ministry of Finance would disburse the funds to the
Iraqi ministries in accordance with their published budgets.
Mr. Shays. But this is not an electronic transfer. These
are actually cash dollars----
Mr. Benkert. That is correct.
Mr. Shays. And the question I am asking is: did the Iraqi
ministry literally sign documents saying we got all $8.8? That
is the question.
Mr. Benkert. Right. And at that point, when the money
passed from the Central Bank to the Ministry of Finance and on
to the spending ministries, the disbursement from the DFI, that
is, from the Federal Reserve Bank or from the Central Bank of
Iraq to the Ministry of Finance, that disbursement was,
according to the KPMG and according to the IAMB, those
disbursements were properly authorized by someone, an
appropriate person in the CPA, and properly recorded. The issue
then is once it was disbursed from the DFI, from this account
in the Central Bank or in the Federal Reserve Bank to the
Ministry of Finance and on to the Iraqi ministries, the issue
was the internal controls, the management controls from that
point onward, that is from the Ministry of Finance and on to
the central and on to the spending ministries.
Mr. Shays. We understand. Mr. Bowen, do you agree with
that?
Mr. Bowen. Yes. Mr. Benkert has summarized it very well.
The recording of disbursements from the CPA of the DFI that
funded the Iraqi government is there. We have historical record
of it. The issue is what happened to that money once it was
distributed through the Ministry of Finance, the Iraqi Ministry
of Finance, to the other ministries. That is the core issue
with respect to the audit that we are here talking about, and
that is managerial, financial, and contractual controls. They
were weak. They were inefficient.
Mr. Shays. Or non-existent.
Mr. Bowen. Or non-existent.
Mr. Shays. Let me just say----
Mr. Bowen. Or they existed and were violated.
Mr. Shays. Let me just make sure we return this back to Mr.
Lynch, but his main question, though, would anyone be able--
this was his question. Why $2 billion-plus in the last week or
so? Who can respond to Mr. Lynch's on that? And, Mr. Lynch, you
just have the time again. Thank you for yielding.
Mr. Lynch. Thank you.
Mr. Bowen. I can address that. The $2 billion that we are
talking about, we did do an audit of the DFI sub-account. There
were--these funds went into a so-called DFI sub-account in the
center district that funded continuing contracts. There was an
agreement between the CPA and the Iraqi Ministry of Finance.
That permitted the continuing funding of ongoing contracts.
Now, the concern that you raised and I was concerned about
at the time is the pace of contracting in that last month. But
our audit did not address that policy question. It addressed
the management of those contracts under the DFI subaccount, and
we had a number of findings specifically that--we are unable to
track the exact amounts in the account, exact disbursements,
and contract supporting documentation was inefficient.
Thank you.
Mr. Lynch. Mr. Chairman, if I could, I just want to reclaim
my----
Mr. Shays. You have the floor.
Mr. Lynch. Thank you. Thank you, Mr. Chairman. I just want
to go back. Mr. Benkert, I find the claim that we are properly
informing IAMB of these expenditures and the flow of money to
be preposterous when my last question we confirmed that IAMB
was getting redacted copies, we were not giving them
information. So I do not believe that at all, that there is
some type of protection because IAMB is getting the
information. They, indeed, were not, and I think we have shown
that earlier.
Let me just respond, if I may. There is a big rush here
last few days of the CPA before the conditional--the Coalition
Provisional Authority expires. Big rush. Lot of dough changing
hands here, huge amounts of cash coming out of New York into
Baghdad.
Mr. Bowen, an audit that your office prepared found that
the CPA staff--this is the Coalition Provisional Authority--
were encouraged to spend cash quickly in the last days before
the interim Iraqi government took control of the funds. In the
south-central region of Iraq, one disbursing official was given
$6.75 million in cash on June 21, 2004 ``with the expectation
of disbursing the entire amount before the transfer of
sovereignty on June 28, 2004.''
It just appears to me that in these final days of the
Authority before its expiration were looking for places to
spend money. I just have to ask, do you gentlemen believe that
all the cash expenditures, especially in these final weeks of
the CPA's existence, were paid to existing contracts? It just
puzzles me, if things were being spent properly through the
ministries--and I understand your argument that the black hole
occurs at the point of the ministry and not beforehand, but
that is where the black hole occurs, but that does not really
do anything for me. The money is being lost, whether what step
we are losing it--you know, it may be interesting in a
historical context in terms of who made the biggest mistakes.
It was misspent. The fact that we allowed it to be misspent is,
I think, our collective failure.
I just see this spending rush, if you look at the final
transactions here that are made in these final days. There is a
huge amount of money, the largest cash shipment in the history
of the country, and it just begs the question why this transfer
is occurring in the 11th hour. This is a perfect metaphor, I
think, for what went wrong here. We gave people millions and
millions and millions of dollars in DFI funds and told them to
spend it in a week, and there was just no accountability.
Again, if anybody can tell me why all this money was spent
in the fire sale manner in which it was spent, because it could
have stayed in accounts. It could have stayed in accounts, gone
over to the interim Iraqi government and spent for the proper
purpose, if there was any accountability at all and if we had
assurances that it was going to be spent on the proper purpose.
Why the big--the massive, massive transfer of cash by the
Federal Reserve Bank to the CPA in the final days with the
direction to spend it as fast as you can because it is going to
go over to the Iraqi interim government. I am not questioning
whether it was properly authorized, Mr. Benkert. It was
properly authorized. And it was--when the money was received it
was properly accounted for when it was received. It is after
that point that the black hole appears and we have no
accountability at all and we have $20 billion out the door--not
only the financial loss to the DFI and to the American
taxpayer, but tragically a lost opportunity to help the Iraqi
people in the way that was intended. That is the biggest lost
opportunity here. We are still feeling that reverberation.
As patience grows thin with this whole operation in Iraq,
this may be the biggest tragedy out of all of this, the fact
that so much was spent here financially, in human lives of our
men and women in uniform, and at the end, when we were going to
execute our policy, the lack of accountability here robbed us
of that opportunity.
If you have any response as to why this money was spent in
this fashion without proper controls, I'd like to hear it.
Thank you.
Thank you, Mr. Chairman.
Mr. Shays. I thank the gentleman. Anybody want to make a
response?
Mr. Benkert. If I could just make a brief response, I do
not claim to have read Ambassador Bremer's mind about his
decisions during this process, but I think there are some facts
that bear on this. First of all, in the late spring of 2004
there were some substantial transfers, I think primarily from
the U.N. oil for food escrow account, into the DFI, so there
was an infusion of money in the spring which made possible, I
think, in the CPA's view, which made possible addressing a
number of needs that they had seen before but did not have
funds in the DFI to address, one.
Two, obviously the CPA only had until the CPA went away if
it wanted to take action on these things, because once the CPA
ceased to exist and we transferred authority to a sovereign
Iraqi government there was no control at all over the DFI and
we had no way at that point of taking DFI funds and putting
that against contracts, either existing contracts that we were
administering or new contracts that we might want to put in
place.
So I think these are the facts that bear on the matter, and
I think the third point, I guess, that I would make is I think
senior officials in this Department, at least, have always made
clear that in the rebuilding of Iraq we would turn first to
Iraqi resources rather than always relying on U.S. taxpayers'
resources, and so these were clearly Iraqi resources that were
available.
And then, finally, the CPA obviously had to be concerned
about the fact that once this new Iraqi government was in place
that it would be limited in what it could do because of the
fact that it was an interim government and was not able to do
the full range of things that might be needed in terms of some
of this contracting.
So those are the facts. Again, I do not profess to speak
here for Ambassador Bremer or his decisionmaking process. This
is just what I know to be the case.
Mr. Shays. I thank the gentleman.
Let me say, in my line of questioning there is enough that
is bad about this without our having to make it worse, frankly,
but there are some things that I'm comfortable with and there
are some things I'm not comfortable with.
In my visits, I remember meeting with the shadow
ministries. They had a play in how money was spent. Budgets
were made as to where things should go. But ultimately Mr.
Bremer had the final decision. There were some ministries that
were not getting enough. There were some that were getting
enough. There were some of Mr. Bremer's folks who were out in
the field who were not getting enough--enough people, enough
resources--and there were some that may have been. There were
some in the military that wanted to spend money in ways--Mr.
Patrias, frankly, did an awesome job--General Patrias, excuse
me--did an awesome job of getting money out right away and, in
my judgment, helping deal with some potentially very difficult
programs early on.
I have problems with the disbanding of the army, the
military, and the police. My gosh, if we just kept the army in
place and left them on base it would have been better than what
we did. So we all have our things that we think went well and
did not go well.
It is a fact, I believe, that about $12 billion of cash was
sent over, about $8.8 was given to the ministries, but there is
other cash that was given directly to contractors; is that
correct, Mr. Bowen?
Mr. Bowen. That is correct.
Mr. Shays. And so when I see a picture like this I get a
little unsettled because it looks a little bit like the picture
that Mr. Kucinich put up. You like to feel that if there is $2
billion worth of money, that guys are not having a picture
taken of holding $2 billion. It looks a little loose to me.
Mr. Bowen. I share your concern.
Mr. Shays. Yes. So that is the bad part of this story. It
is very clear that when it comes to the cash part we did not
have systems in place to account for them. It does not mean
they were not spent well, but, given my sense of human
temptations, I suspect some of it was, frankly, taken. The
extent of that is--I cannot believe that all this cash just
floating around all went perfectly to the right place. And I
think it makes sense for us to try to determine how much did
not go in the right places.
I also know that Mr. Bremer had a 20-hour work day and he
made good decisions and he made bad decisions. He probably
would have made better decisions if he was willing to have
other people share in some of these decisions. He, in my
judgment, was a pretty strong micro manager and he chose, in a
sense--the irony is, as I looked at it, it was almost like
Baghdad being recreated. I mean, all that power was so
centrally located.
I was, frankly, very happy when the power was transferred
in June of that year. If money was going to be wasted, I'd
rather have the Iraqis who waste it and not the Americans, and
I'd like them to begin to start--I do not want any of it
wasted, but I would rather have them start to have a say in
this process.
I want to be clear about this. It seems to me that the
testimony is that, for instance, with Kellogg, Brown and Root
and others there are what they proposed as costs, there is what
we called questioned by DCAA, correct, and there is some that
is unsupported. I suspect that some of the unsupported will be
supported and payments will be made, and I suspect that some of
the questioned, some of it will not be paid and some of it
will.
Mr. Reed, is that correct?
Mr. Reed. That is correct.
Mr. Shays. OK. So that is a work in process. We will have a
more definitive response to that in the days and weeks to come;
is that correct? I mean, you will nail down that as it relates
to this contractor and others, as well?
Mr. Reed. That is correct. It is important to note that
this is part of the administration of the contract. This is not
a matter of coming in and saying, ``OK, we messed up, and who
screwed up and how much?'' This is just the way the contract is
being administered. There is oversight throughout the process
and the contracting officer is using his auditors to determine
if the contractor is complying with the terms of the contract
and these costs should be paid or not paid, and we are in that
process.
Mr. Shays. And the reason is this is what we call cost-
plus, and so you may dispute what they call a legitimate cost.
You may not feel it is a legitimate cost. Or you may find that
they spent money in areas where they were not authorized to
spend money; is that correct?
Mr. Reed. That is correct. In this process in many cases
there is not an absolute right or wrong in terms of compliance.
There are grays, like what is a reasonable cost. That is what
the auditor's job is, to bring before the contracting officer
whatever facts exist and whatever other information might be
useful to the contracting officer to make a fair settlement and
negotiate of that.
Mr. Shays. Is this a negotiated process?
Mr. Reed. Yes, it is.
Mr. Shays. But let me ask you, in the end do you, Mr. Reed,
you pass your opinion on to Colonel DuBose, and, Colonel, you
are the ultimate decisionmaker on whether or not a payment is
made?
Colonel DuBose. It is actually the contracting officer who
uses the information from DCAA on----
Mr. Shays. I'm not picking you up for some reason. Is your
light on?
Colonel DuBose. It is on now, sir.
Mr. Shays. OK. Given that I did it wrong three times in a
row----
Colonel DuBose. Sir, the contracting officer--I'm not the
personal contracting officer. We have many contracting
officers.
Mr. Shays. But are the contracting officers within your----
Colonel DuBose. Absolutely, sir.
Mr. Shays. So they are under your command?
Colonel DuBose. So they take the information from the DCAA
audits, they get information from our field reps who observe
the contractors' performance. We rate their performance. And
all of that goes into the negotiations on the final payment and
is considered in determining the award fee. Because this is a
cost-plus, the profit is determined on how well they performed,
and these measures are taken into account before we give any
profit.
Mr. Shays. Well, it concerns me you say negotiate. I mean,
I'm happy it is negotiated, but in the end does someone get to
make the decision or----
Colonel DuBose. Yes, sir, the contracting officer.
Mr. Reed. The contracting officer makes the final decision
as to the allowability of the cost.
Mr. Shays. And, Mr. Reed, is your mic on?
Mr. Reed. Yes, it is on.
Mr. Shays. Mr. Reed, but you make the recommendation to the
contracting officer? You do not decide, correct?
Mr. Reed. That is correct.
Mr. Shays. OK. And, Colonel, it is under your department,
your agency, your ultimately--but you defer to the contractor
because they know, you do not?
Colonel DuBose. No, sir.
Mr. Shays. Contracting officer?
Colonel DuBose. The contracting officer takes the
information from the people who observe the contractor's
performance, from the auditors who----
Mr. Shays. These are your people, correct?
Colonel DuBose. Yes, sir.
Mr. Shays. Just so I am very clear, they ultimately make
the decision?
Colonel DuBose. Yes, sir.
Mr. Shays. OK. And they are empowered to make the decision?
You cannot overrule them even----
Colonel DuBose. Yes, sir.
Mr. Shays. OK.
Colonel DuBose. Absolutely.
Mr. Shays. All right. Let me, just for the record--is there
anything--and you may say something that triggers a comment
from any of the Members who are here, and they are free to a
make a comment, but is there anything that you feel we need to
put on the record to make this record more complete before we
go to the next panel? Mr. Benkert.
Mr. Benkert. If I could just clarify one thing, this is
relating to the various questions about what has been provided
to the IAMB and our transparency with the IAMB. I just want to
be clear and point out that under the IAMB's oversight KPMG, an
internationally recognized accounting firm, has conducted three
very extensive audits of all aspects of the DFI since its
inception. Two of those audits covered the period from its
inception until the CPA went away, one of the audits covered
the period from June 28th or 29th until the end of last year.
These audits--again, these are KPMG audits. They are very
extensive audits. They cover--they are publicly available
audits that the IAMB posts on its Web site. They cover the
financial statements of the DFI, they cover internal controls
of the DFI, they involve audits both of the financial side but
also visits by the auditors to individual ministries of the
Iraqi government to be able to verify the controls in place,
and they include findings on financial controls, managerial
controls, contract controls. So that very extensive information
is what goes to the IAMB.
The only issue--and I think the issue you have raised here
today--has to do with a very one specific set of contracts, the
KBR restore Iraqi oil contracts, and a set of audits that
relate specifically to that contract, but in general there is a
very extensive set of audits done by KPMG on the DFI as a whole
that have no redactions, are publicly available, posted on
their Web site, and that go to the IAMB, and those are the
audits on which the IAMB bases its judgments of the management
of the DFI, including the judgments that I referred to earlier.
Mr. Shays. Just to state this again, though, and I cannot
state it strongly enough. It seems to me like we have treated
the U.N. request as a FOIA request, and they are partners in
this. They are not some individual citizen requesting this
information. They basically empowered us to run a program they
were in charge of. And so it seems to me, you know, sometimes
lawyers can keep you out of jail but they make you look guilty
as hell in the process, and it seems to me the lawyers got
carried away here. They make it look like we're trying to hide
something from the world community as we are asking the world
community to cooperate with us about oil for food. It really
ticks me off because it just seems senseless. Frankly, I do not
think this information is that big a deal either way. So it is
just a view I hold.
Anyone else want to make a comment here before we get to
the other panel?
Mrs. Maloney. I would if I could, Mr. Chairman.
Mr. Shays. Sure.
Mrs. Maloney. You know, we have our own auditor there, IG
who gave us very troubling information.
Mr. Shays. Own auditor where? I'm so really?
Mrs. Maloney. Mr. Bowen, auditor for the U.S. Government.
Why in the world are we referring to KPMG when we know that
certain information was withheld from them, particular in the
Halliburton case. That was well documented. And KPMG can say
that everything is wonderful and honkey-dory and roses, but the
Government auditor, Mr. Bowen, pointed out tremendous problems
in the commander's fund, $7 million that evaporated into thin
air. He has no idea where it is. And questions of $80 million
more with no documentation. And he's only looking at one
region. He does not have the resources to go into the other
regions and no one is looking at it. So I think to be citing an
auditor employed by a different organization that does not have
access to the information that the auditor from the U.S.
Government has--and he pointed out extremely troubling things
in the commander's funds and in Mr. Bremer's organization, $8.8
billion missing. These are serious items that he put forward,
and I think his testimony--my main point is why are we citing
all these other auditors who are saying everything is wonderful
when we have our own Government auditor who is saying things
are in a big mess, to say the least, and that millions and
zillions of dollars are missing.
Mr. Shays. I would just--I want to make sure I do not
disagree with part of what the gentlelady said. We have an
issue of what happened to $12 billion of cash, of which $8.8
was given to the ministries. We can document they were given to
the ministries. The question is what did the ministries do with
it. And we can be pretty certain, based on--with no disrespect
to Iraqis--some of it was spent well and some of it was not,
and some of it was siphoned off by the Iraqi government.
The other issue is what's the balance of that. When you
take the $8.8 billion, what is the balance that went to
contractors? What I was referring to was the issues of the
redacted information as it related to Kellogg, Brown and Root,
which is something different than the cash payment issue. It is
an issue of what is in dispute, how do we characterize what is
in dispute, and will we ultimately know what the disagreement
is.
It is not unlike someone putting in a request for their
health bill to be paid for and some of--the insurance company
says, ``We will pay for this, but we will not pay for that,''
and they have a dispute. We do not say that what is not paid
that the individual tried to cheat the government, we just
acknowledge that there is a dispute and then we can judge that
dispute one way or the other. It is not to say that some of
that money may have been just an outrageous request, thank God
DCAA saw it and put a stop to it. That says the process is
working, that they caught it and it is being resolved. That
part I do not fault our Government for at all. That is just my
take on this. But I do not dispute about the concern about
cash.
Mr. Kucinich, and then it would be good to get on to the
other panel.
Mr. Kucinich. Mr. Chairman, thank you. I will be brief
here.
One of the things that I find very disturbing about Mr.
Benkert's recitations is that nowhere do we hear any kind of an
assertion about the responsibility of the Coalition Provisional
Authority or any U.S. Government oversight once the money
passed through to the Iraqi ministry. It seems to me that
what's happening here--and I hope that I am not correct in this
assumption--is that there is an attempt here to basically
whitewash this $8.8 billion that is not accounted for by
saying, well, the Iraqis are handling it now. Frankly, Mr.
Benkert, I do not think there is enough whitewash in the whole
world to cover over $8.8 billion that cannot be accounted for.
So I am just respectfully suggesting, Mr. Chairman, that
this committee--that we be very careful about assuming that
this is simply the responsibility of the Iraqi ministry and not
somehow the responsibility of the Coalition Provisional
Authority which had custody of the money before it went to the
Iraqi ministry. I mean, Mr. Bowen, there must be some kind of a
chain of custody with respect to the money and some type of
oversight responsibility of the Coalition Provisional Authority
for the funds that were given to the Development Fund for Iraq.
Mr. Shays. Let me just explain my take on it. Correct me if
I am wrong. When we transfer power in June of last year, we
took DOD and Mr. Bremer out of running the country. We gave it
to the Iraqi people. It was a stunning moment in time. We ended
up transferring the responsibility and our communication with
the government from DOD to State Department, and that was
stunning. We became advisory rather than controlling. I can
illustrate it when I was there at a press conference in August
of that last year. I met with the new Prime Minister. I met
with the Foreign Minister and the new Ambassador Negroponte and
I walked out with the Foreign Minister. I held a press
conference in August of last year and I was excited about this
press conference and I thought, well, here we go, and I
explained I had been there a number of times and that we had
made some mistakes and done some things well, but now there is
a new Iraqi government.
The first question was to the Foreign Minister, not to me
or Negroponte. The second question was to the Foreign Minister,
not to me or Negroponte. The third question was to the Foreign
Minister, not to me or Negroponte. The fourth question. Finally
I asked if there were any more questions. There were not. I
said to Mr. Negroponte, ``What better proof that we have
transferred power.''
The bottom line was that $8.8 billion was their money. We
had given it to them. It was their country. They were in charge
of it. It was their right to spend it well or to screw it up.
The one thing we were certain of was that we gave it to them.
It is not an issue of whether it ever reached them. And that is
the bottom line to it as it related to those dollars.
I understand how you would have liked it spent better and I
would have, but once we gave them the ability to run their own
country, they can spend their money as they choose. It was not
the money that we appropriated from here.
Mr. Kucinich. Would the gentleman yield for a simple
question?
Mr. Shays. Sure.
Mr. Kucinich. Here's the concern. Them. They were our
people. We put them in charge. These were people that we
installed, basically. So if we installed them, there was a
relationship between the Coalition Provisional Authority and
these individuals, and so that is where these questions I think
are relevant.
I again want to applaud the Chair for the manner in which
he has conducted this in allowing all these questions to come
forward. Thank you, Mr. Chairman.
Mr. Shays. Thank you, and I thank you for the question.
Mrs. Maloney, you have questions and you have the right to
ask your questions, so feel free, and then we will get on to
the next panel.
Mrs. Maloney. Thank you, Mr. Chairman, very, very much. I
thank all of the panelists. I want to return to the redactions
that took place on the Halliburton overcharges, which were
tremendously disturbing to me that the Defense Department
basically hid Halliburton's overcharges and, in my opinion, did
it with a rationale that is totally not defensible.
I want to talk about this, because I really feel that
working on the Freedom of Information Act that the oversight of
Government is very important. That is why I joined this
committee. I would like to really take a closer look at the
Department's rationale for allowing Halliburton to delete all
mentions of overcharges in Pentagon audits.
Mr. Tyler, you are here right, Mr. Tyler, and I'd really
like to ask you how could overcharges identified by Government
auditors be considered confidential business information. These
are findings and work of Government employees.
Mr. Shays. If the gentleman would maybe sit at the corner--
do you have a card that you could give our transcriber? We will
make sure that is given to her.
I do want to say that there is another hearing in this room
and we are going to have votes, so I need to move us along.
Mr. Tyler. I will try to make this very quick.
Mr. Shays. Please identify yourself.
Mr. Tyler. My name is Joe Tyler. I work with U.S. Army
Corps of Engineers. My position is the chief of the program
integration division in military programs.
Let me try to clarify two points. The law that we were
concerned about concerning the audits is the Trade Secrets Act.
That is 18 U.S.C. 1905. I'm not a lawyer, but I can quote the
right law. It is very broad. It covers any Government employee
that is--I'm going to kind of quote from it--any Government
employee of the United States that publishes, divulges,
discloses, or makes known in any manner or to any extent not
authorized by law any information coming to him in the course
of his employment or official duties or by any reason of any
examination or investigation made by that person. It covers
information that concerns or relates to trade secrets,
processes, operations, style of work or apparatus, or to the
identity, confidential statistical data, amount, or source of
any income, profits, losses, or expenditures of any person,
firm, partnership, or corporation. It is very broad.
Mrs. Maloney. OK.
Mr. Tyler. When we look at audits and we talk about giving
them to the public, our concern goes to what is allowed under
the Trade Secrets Act. Giving it to Congress, that is not the
public so there is no problem.
Now, when we made the determination on this particular
point we were giving it to the IAMB, which works under the
United Nations, which is not part of the U.S. Government. I
cannot address their authority under our laws versus the Trade
Secret Act. I'm not--I do not understand that.
Mrs. Maloney. Mr. Tyler.
Mr. Tyler. Could I go on just a second? But the authority
to allow us to release this fell under the purview of the Trade
Secrets Act. The Corps of Engineers originally was asked by OSD
to release the audits unredacted, just clear. We said under the
Trade Secrets Act we had some concerns. We went to KBR, as we
stated. KBR said no, we do not agree releasing them under the
Trade Secrets Act, and they said--we then went back and said we
could not release them. OSD said, ``Can you find a way Corps of
Engineers to be as transparent and release as much as we
could.'' We then went to KBR. They then said yes, we will agree
to release them if we're allowed to redact the items that we
feel fall under the purview of the Trade Secrets Act. We then
asked them to do that, and that is the documentation that we
ultimately provided to the IAMB.
I hope that answered your question.
Mrs. Maloney. Mr. Tyler, if I could respond, at a prior
subcommittee meeting and hearing William Leonard, the director
of the Information Security Oversight Office of the National
Archives testified that he had ``never encountered a case in
which the Government has withheld as proprietary business
information the actual amount a company overcharged the
Government.'' Also testifying before this committee Harold
Relyea of the Nonpartisan Congressional Research Service
testified, it is hardly proprietary information. So Henry
Waxman and I went to the private sector to look into their
expertise on the Trade Secret Act and the Freedom of
Information Act, and I have three documents that I ask
permission to place into the record.
First is Thomas Sussman, an attorney and regulatory expert,
who told us, ``I cannot conceive of a fact situation where
overcharges would qualify as trade secrets or confidential
commercial information.''
Professor James O'Reilly, who wrote a document of Federal
information disclosure said, ``Audit documents and findings are
created by the agency and are not subject to proprietary claims
as a private company's recipe, formula, or other classified
trade secret.''
And Professor Henry Parrot, the former dean of Chicago Kent
College of Law, told us, ``Government auditors' statements are
not trade secrets.''
So overcharges to the Government are not trade secrets,
according to the private sector and the public sector, and I
request to place these documents in the record.
Mr. Shays. Without objection we will do that.
[The information referred to follows:]
<GRAPHICS NOT AVAILABLE IN TIFF FORMAT>
Mrs. Maloney. And I would just like to ask you, do you
think these renowned experts are wrong that overcharges for the
Government are trade secrets and should be redacted and kept
secret in going to international auditors?
Mr. Tyler. Ma'am, as I stated, I am not a lawyer. I cannot
discuss matters of law. But I can tell you what we were advised
by our attorneys, and that is what I explained a moment ago.
Mrs. Maloney. Well, Mr. Reed, in December 2003 you and the
DOD comptroller held a press conference to announce the first
$61 million in Halliburton overcharges, correct?
Mr. Reed. That is correct.
Mrs. Maloney. So after you held your press conferences in
December 2003, discussing the $61 million in Halliburton
overcharges, were you indicted for disclosing a trade secret
when you disclosed the $61 million in overcharges?
Mr. Reed. No, I was not.
Mrs. Maloney. And has the Justice Department ever contacted
you because of the release of this information?
Mr. Reed. No.
Mrs. Maloney. I really have not heard of anything that has
changed between December 2003, when the Defense Department
officials held an official press conference on Halliburton's
$61 million in overcharges, and then their decision to redact
the overcharges at a later point. The only difference is that
it jumped to $200 million or more over the first $61 million. I
find this very troubling.
I would respectfully request, Mr. Tyler, that after you
read these three documents and the report from the CRS and from
Dr. William Leonard, the director of the Information Security
Oversight Office of the National Archives, if you still believe
that overcharges are ``trade secrets'' of Halliburton and must
be protected so that is true international auditors and the
public do not have the ability to know about these overcharges.
I think redactions are abused many, many times, but I think
this is the worst example of Government using a redaction. A
redaction was used to hide fraud, misuse, and abuse of American
taxpayer dollars. I find it reprehensible.
Mr. Shays. I thank the gentlelady for her line of
questioning and I share her basic points. It is already
testified that KBR decided what would be redacted and it is the
position of this committee that this is information that should
have been shared with the United Nations. We are asking now for
how that decision was made and we are waiting for the
Department of Defense to provide that.
Is there any more information, any comments before we get
to our next panel? Mr. Bowen. Mr. Reed. Colonel. Mr. Benkert.
Mr. Norquist.
Mr. Bowen. Yes, sir, three quick points I would like to
make.
Mr. Shays. Yes.
Mr. Bowen. One, with respect to accountability regarding
the $8.8 billion that was disbursed to the Iraqi government for
their use, there are investigations going on within the Iraqi
government relevant to fraudulent practices, so yes, there is
accountability going on. During my last trip to Baghdad with
the senior officials in charge of investigation and anti-
corruption within that government--and there are very, very
substantial cases ongoing there--so yes, the accountability is
being applied on that side of the ledger.
At the same time, I have also told them that if they have
information that comes up in the course of their investigations
that involves U.S. officials, that I want to know about it
because we will pursue it. So this is not a dormant issue. This
is an active issue that I was drilling down on just 3 weeks ago
in Baghdad.
Second, the audit--I want to be clear. The audit in Hillah
regarding the lost money, the $7 million in lost money, did not
involve the commander's emergency response fund. It was the R3P
program. We are auditing CERF and we will have that audit out
in October.
Mr. Shays. Thank you.
Mr. Reed, any comments you want to make?
Mr. Reed. Yes. In regards to the characterization
``overcharges,'' I want to again emphasize that these are
recommendations in an advisory audit report and that they are
subject to the contracting officer evaluation of those
recommendations along with other experts that he can rely on in
reaching a final decision. Indeed, that final decision may say
that these costs should not be paid, but it is important to
recognize that we're an interim process right now.
Mr. Shays. I think the record is pretty clear on that, but
it is good that you emphasized it.
Colonel, any comment?
Colonel DuBose. Sir, I can just tell you that the Corps of
Engineers and the Southwestern Division is absolutely confident
that through the diligent efforts of DCAA and the Corps
contracting professionals and the others that are involved
intelligence KBR contract will make sound contracting officer
decisions leading to a fair and equitable settlement of these
task orders that protects the public interest of both the
United States and Iraqi citizens.
Mr. Shays. Thank you.
Mr. Benkert.
Mr. Benkert. No, sir. Thank you.
Mr. Shays. Mr. Norquist.
Mr. Norquist. No, sir.
Mr. Shays. Thank you.
Let me just say to all of you, you have been very
responsive to our questions. We thank all of you for showing up
to this hearing. We thank you for your service to our country.
I think that these are--this is not a 9 to 5 job and I know
that you all work very hard in this effort and you care deeply
about your country.
I would say to you, Mr. Benkert and Mr. Norquist, you
missed an opportunity, unfortunately, to make your case in
testimony beforehand which could have only served you and DOD
well. I regret that you were put in the position that you were
put in. I suspect you would have liked to have had a statement,
and I appreciate that.
Thank you all for your service. Thank you for helping us do
our job. We will get to our next and final panel.
I thank the gentlemen.
Mr. Tyler, I left you out. Thank you for responding in the
end. We note that you were sworn in, and thank you for your
testimony. It was very helpful.
Our second panel is Mr. Stan Z. Soloway, president of
Professional Service Council [PSC]; and Mr. Richard Garfield,
Dr. Richard Garfield, Columbia University.
Mr. Garfield, you can stay standing because I will swear
you in. I think you can feel comfortable, gentlemen, before I
swear you in, that we will not take this long with this panel.
Please raise your right hands.
[Witnesses sworn.]
Mr. Shays. Note for the record both our panelists have
responded in the affirmative.
I would say to both of you your testimony is as important
as the first. You have the advantage of knowing what our
questions are. You have the advantage of hearing the first
panel. So if you choose to read your testimony or ad lib or do
a combination of both, because you know what we are interested
in, I want you to feel free. Your full statement will be part
of the record, and we thank you both for being here. We
obviously thank you for your patience. It is nice to have you
be at the first panel so you get a sense of what concerns us.
Thank you.
Mr. Soloway.
STATEMENTS OF STAN Z. SOLOWAY, PRESIDENT, PROFESSIONAL SERVICES
COUNCIL, ARLINGTON, VA; AND RICHARD GARFIELD, DR.PH./R.N.,
COLUMBIA UNIVERSITY
STATEMENT OF STAN SOLOWAY
Mr. Soloway. Mr. Chairman and members of the subcommittee,
on behalf of the nearly 200 member companies of the
Professional Services Council, the principal national
association of companies providing a full array of services to
the U.S. Government, I appreciate this opportunity to offer a
few perspectives and some context on many of the challenges
associated with contracting as it relates to both DFI and the
broader issues of Iraq.
Our membership is unusually diverse in terms of both
company sizes and their respective capabilities, and nowhere is
this diversity more evident than in Iraq, where numerous member
companies and thousands of their employees are currently
engaged in providing military support, reconstruction, and
developmental assistance.
Today I would like to divide my comments into three very
brief segments: where we have been, where we are now, and
perhaps most importantly where we need to go in the future.
Looking back, two early decisions made by the U.S.
Government have had a continued and seminal influence on much
of what has transpired with regard to contracting in Iraq.
First was the decision to move immediately into reconstruction
and development, even as a significant military operation was
still underway. Never before have we simultaneously conducted a
major military operation--in this case the largest sustained
operation since Vietnam--and in the same physical space been
engaged in the reconstruction of the national infrastructure,
as well as a wide variety of economic and other developmental
activities.
Normally these would be sequential operations, but in Iraq
they are concurrent. That decision is the principal reason we
have such large numbers of contractors in Iraq today, and that
for the first time many of those contractors are now seen and
must be treated as ``contractors on a battlefield.'' It is also
the principal reason for the unprecedented need for private
security for non-military entities, and it has played a
significant role in many of the issues surrounding the cost and
availability of insurance, particularly under the Defense Base
Act. It is also at the heart of some of the confusion,
sometimes poor coordination and communications between and
among the numerous entities operating in Iraq, their stateside
counterparts, the combatant commanders, contractors, and I
would suggest even the Congress.
At about the same time, the U.S. Government decided to
apply all of our traditional procurement rules to contracts in
Iraq utilizing appropriated U.S. dollars. Many of the concerns
that have emerged since then, including many that you have
discussed today, can be traced directly to that decision.
Indeed, as has been demonstrated through our work with our
member companies and our colleagues in GAO, the Inspector
General for Iraq, the Defense Department, State, USAID, and
others, the business processes and models that dominate our
traditional procurement and contracting regimes are often
wildly out of alignment with the realities of an environment
such as that in Iraq, which is probably the most non-
traditional environment in which we have ever operated.
This misalignment is evident in debates surrounding the
frequency of full and open competition, the use of fixed price
contracts, cost accounting and growth, and more. Whether it be
the impacts of requiring third-party liability insurance on
30,000-gallon fuel tankers in an active war zone, or whether to
allow company personnel more frequent breaks and relaxation
than usual from the extraordinary tension and intensity of
working in Iraq, too many disputes have been driven by this
disconnect.
Moreover, the situation has been exacerbated by what,
frankly, appears to be an unusual push for instant oversight
rather than allowing the process to operate as it does so well
and as I believe it is continuing to do. One government
official reported at one point that there were more oversight
personnel in Baghdad than contracting officers.
Further, it seems that every mistake or error in judgment
that has been made with regard to Iraq is assumed to equal that
of a major scandal. As such, the mission environment has, we
are told, suffered. As that same Government official said to
me, people are not only afraid of making a mistake; they're
afraid to make a decision.
This is not to suggest that this committee back off its
oversight responsibilities. Indeed, they are an integral part
of our system of checks and balances. It is, however, to ask
directly and respectfully that as issues emerge you do
everything possible to understand the underlying causes,
circumstances, and more so that the ensuing disposition of
those issues is as balanced and thoughtful as possible, which
brings me to where we need to go in the future.
Over the last 2 years PSC has made a series of
recommendations to the Defense Department and others that we
believe remain essential next steps. First, we have recommended
that the Defense Department award a multiple award contract for
all private security requirements in Iraq from which individual
companies needing such services could procure them on a
reimbursable basis. We believe this would help ensure that the
security companies operating in Iraq have the qualifications
and experience that is needed.
Short of letting such a contract, we believe DOD should
either create a list of approved security providers or
minimally establish a common set of standards for security
services that all firms must meet. Interestingly, this push for
standards has come as much from our member companies who are
procuring such services and the security firms with which we
have worked.
Second, we have recommended the Defense Department enter
into a master Defense Base Act insurance contract of the type
already in place for the State Department and USAID. By way of
comparison, basic Defense Base Act insurance, which is legally
required, rates for State and USAID are all under $5 per $100
in payroll. For all others who have to buy this coverage on the
open market, the rates are routinely in double figures and have
at times been as high as $25 or $30 per $100 in payroll, and
clearly that is not a sustainable cost.
Third and most importantly, teams of experts from the
agencies, the Congress, the oversight community, and industry
must put their heads together to both simplify and clarify
existing procurement rules as they would or should apply in an
environment such as this and identify any significant new
rulemaking that is needed. Many of the disputes between
companies, their contracting officers, auditors, inspectors
general and others stem principally from disagreements over
what the rules do or do not allow or the guidance under which a
respective work force is operating. In this environment, this
is particularly difficult given the occasionally gray areas of
our processes.
For example, if the DCAA audit guidance for pay premiums
for private sector personnel is 155 percent, it really does not
matter to an auditor reviewing the cost if the market
conditions are driving higher pay premiums. He or she must base
their analysis on what the audit guidance says.
The same is true of how to handle the payment to deployed
work forces idled by security constraints or to how to overcome
cost accounting shortfalls driven by a lack of acceptable cost
accounting practices among Iraqi firms and more.
We can go a long way toward alleviating further disputes
and I believe addressing the concerns of this committee if we
are able to reach agreement on how better to align these
crucial business processes in such a difficult environment.
Mr. Chairman, at the end of the day I think we all agree on
the need for a system that affords maximum accountability while
also reflecting the realities on the ground. We must assess
Iraq on the basis of those realities rather than on our
preconceived notions of what should have happened or has
happened elsewhere or what happens normally. Our ability to
find that balance will play a significant role in the degree to
which companies operating in Iraq today will be able to again
step up to support our missions, be they military,
construction, or developmental. And since they are performing
functions that are almost entirely in the purview of the
private sector, we place an imperative to achieve that
alignment sooner rather than later.
Thank you for your time. We look forward to answering any
questions you might have.
[The prepared statement of Mr. Soloway follows:]
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Mr. Shays. Thank you, Mr. Soloway. Your verbal testimony
was excellent and your written testimony which is longer, as
well, is really quite excellent. It is very helpful to the
committee. Thank you a lot for it.
Dr. Garfield.
STATEMENT OF RICHARD GARFIELD, DR.PH./R.N.
Mr. Garfield. Thank you for inviting me. What I can present
to you is somewhat different. I have worked in humanitarian
affairs in Iraq, among other countries, for the last 9 years. I
was a consultant to UNICEF and the World Health Organization
and to the Ministry of Health in Iraq prior to and during the
CPA period and since then.
Mr. Shays. Let me ask you this. Does that mean that you
worked in Iraq or you were a consultant?
Mr. Garfield. Consultant. My normal employment is at
Columbia University.
Mr. Shays. Right.
Mr. Garfield. But I get leaves for short periods, although
after the invasion I was there for 3 months to help to
reactivate health services.
Mr. Shays. Right. So you spent a good time in Iraq?
Mr. Garfield. A good deal of time.
Mr. Shays. Do you know how many visits to Iraq you would
have had?
Mr. Garfield. In the last 9 years, I guess eight visits. I
believe that is right.
Mr. Shays. And one 3 months. Thank you.
Mr. Garfield. I cannot address directly DFI funds. I can
address the function of the ministry and the CPA in that sector
in which I worked.
Mr. Shays. That would be helpful.
Mr. Garfield. And that is all I can do, so I think it
provides some insight to the question even of the funds.
There were enormous problems in the constitution of CPA,
particularly I can only speak specifically about the health
sector. Having been there when we expected CPA to arrive, the
first dilemma that we had was that the team of people in CPA
for the Health Ministry did not arrive until 9 months after
Baghdad fell, which created a tremendous vacuum of authority.
It was after 7 or 8 weeks we pretty much believed that they
were not going to come, and were surprised when actually the
team did arrive.
Of greater dilemma to those of us who were on the ground,
me at that time as World Health Organization staff member, but
working with a spontaneously constituted group of Americans who
met at the palace, most of whom were military medical
physicians who had leave from their specific duties to help
organization the health services----
Mr. Shays. Now tell me who you were hired as a consultant
for? I'm sorry, sir.
Mr. Garfield. At that time?
Mr. Shays. Yes.
Mr. Garfield. In Baghdad for the World Health Organization.
Mr. Shays. Thank you.
Mr. Garfield. On the basis of my having worked there as a
consultant to these U.N. organizations prior to the change in
government.
Mr. Shays. Gotcha.
Mr. Garfield. And knowing the people in the Ministry of
Health.
Mr. Shays. OK.
Mr. Garfield. When the CPA team arrived, we were surprised
to find that not one of the members of the CPA team in health
had worked outside the United States before, and not one member
of their team had a master's degree in public health or higher
degree in that field or related fields. So they were
essentially an entirely green team with no experience at
reconstruction or at reconstituting health services in areas of
conflict, much less in areas where there had been many years of
deterioration of services. In other words, they were really not
in the position to establish normal accounting procedures for
their activities. There were two people in country who were,
one who was the head of the AID team for the country and the
other was the head of the health contract letted by AID to APT
Associates. Both of these individuals were--I do not know what
the right term is, but were kicked out by the CPA team as they
constituted alternate sources of authority and experience in
the field.
So when I heard the term from the previous panel several
times of lessons learned, it should come as no surprise that
there were lessons learned because if you had no experience at
this and suddenly you're running a country of 27 million people
you would learn some lessons, but this is not the ideal
situation in which to learn lessons, and we are way behind the
curve in doing so.
In working with some joint contracts and projects with
World Health Organization and the CPA team, it quickly became
apparent to us that they did not know budgeting of health
service activities and were not capable of assisting the
Ministry of Health either in establishing a budget, which the
ministry had not had----
Mr. Shays. ``They'' being who? I'm sorry?
Mr. Garfield. The CPA team.
Mr. Shays. Right.
Mr. Garfield. Ministry of Health, like all ministries of
the government of Iraq, essentially had been command economy
ministries where normal budgeting procedures had never been in
place. You were told what to do. They were good at carrying out
orders, but not in determining what the resources were and
figuring out how to utilize resources for maximum benefit or
for specific outcomes.
Unfortunately, the CPA team which it had been assumed was
coming in to do this did not do that, was not capable of doing
that. What CPA was able to lead was a visioning exercise for
the ministry, and when I was last in Baghdad in January for the
Ministry of Health the senior staff of the Ministry of Health
was still talking about our vision and visioning. They still
did not have--and this relates very much to Mr. Kucinich's
comment--when we turned over authority to Iraqis that we
picked, we did not leave systems in place for them to do the
accounting. We had not shown them the kind of ways that we
normally do it in the United States. And we chose individuals
in some sectors, including the health sector, who also had no
experience at running health systems and had no degrees in
doing so. So it was virtually a guaranteed failure in terms of
being able to follow the money.
Given these weaknesses at the central level, it was my
personal observation that the funds disbursed through the
commander's emergency response funds, although we cannot
account for them in some cases, actually were utilized much
better than the funds that we can account for through the CPA
health sector.
Mr. Shays. I'm unclear as to why you think we could do it
better through the military account versus----
Mr. Garfield. My observation is that the funds--personal
observation is that funds tended to be used better, not that
the accounting was better, but that----
Mr. Shays. I understand.
Mr. Garfield. These people, although they also had no
training in determining what would be the priorities, in fact,
responded to local political demand. Common sense was better
than lack of training and isolation in the green zone in order
to figure out what some of the basic needs were. So I actually
was very supportive of the commanders and their funds, and I
wish we were able to provide them some basic training so they
could make a better job of determining what those needs would
be.
The comment from the prior panel of people spending only a
year in passover I think responsibility is very relevant, and
it was not stated so clearly but it was implied that the
passover responsibility from one individual to the next after a
year often occurs without any physical contact between a person
in responsibility. There may be 2 or 3 weeks after somebody
leaves, somebody new comes and does not have a piece of paper
to followup on, so we continue to have tremendous difficulties
in providing services and doing things the way that we would
normally do them, including to account for where the funds have
gone or where the files physically may be.
In the health sector today there is only one individual
from the United States from CDC who is tasked to the State
Department in order to followup all concerns and activities in
support, including training for Ministry of Health staff. That
individual is there only on a 6-month contract, and it is
believed that post will not be filled again, so it looks like
we're just going to leave them to their own devices when this
individual is done. And one individual certainly cannot do the
job appropriately.
So the problems in finding out where the funds are
certainly make sense when you consider these limitations.
[The prepared statement of Mr. Garfield follows:]
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Mr. Shays. Thank you very much.
Mrs. Maloney, you have the floor.
Mrs. Maloney. Thank you.
Mr. Garfield, could you describe your experiences before
the CPA and after the CPA?
Mr. Garfield. Could you make it a bit more specific.
Mrs. Maloney. In Iraq, your activities in health services
before the CPA and after the CPA.
Mr. Garfield. My activities before CPA were in assessment
of health conditions. I assisted to carry out or to analyze
several of the large servers that were done with which we
determined what the needs were, and also assisted in
identifying the training needs for staff in the Ministry of
Health.
Mr. Shays. If I could just interrupt to ask, when you say
``we,'' could you make sure you say who we is. Is that the
World Health Organization in that case or----
Mr. Garfield. Each year is different. It was World Health
Organization, World Food Program, or UNICEF, one of those
three.
Mr. Shays. OK.
Mr. Garfield. After the invasion my responsibilities for
UNICEF in the first 6 weeks after the fall of Baghdad was,
together with staff from the World Health Organization and the
World Bank, to do a comprehensive base analysis of the health
system and the health situation in order to set priorities.
This is a document that those three organizations did together.
Those three organizations were represented by myself and one
other individual. That was called the Watching Brief, and it
remains sort of the base document for which Ministry of Health
is doing what little planning is going on.
And after that I worked for the World Health Organization
in Iraq assisting staff in the Ministry of Health.
Mrs. Maloney. In your written testimony you wrote that the
post-war period saw massive corruption, particularly in the
medicine supply chain, and you were saying that this corruption
was actually worse than under Saddam Hussein. Can you give more
details in that corruption? And how do you know that it was
worse than what it was under Saddam Hussein?
Mr. Garfield. You will see that some of this is
impressionistic, but there are structural relationships that
helped to give some limitation to that. The funds from the Oil-
for-Food Program under the prior government of Iraq, relatively
speaking, are a crystal clear window. We know how much money
came in in contracts in the health sector, and there were
observers who went to the central warehouse and to distribution
points to identify if, indeed, those medicines, specifically in
the area of medicines, which was the largest single dollar
value--still is--for imports, where they went. So we largely
know how much and where the medicines went and where they were
distributed.
There were some structural elements of corruption in the
system that were known. There were several levels at which
people were on the take. Essentially, it was a system, I would
say, sort of run by the Mafia, making sure that nobody else
took because the officials were taking, and it appears to be up
to about 10 percent of the value in that sector.
When CPA came in and those individuals were no longer in
charge of the medicine distribution system, which is usually
the highest cost accounting sector within the health sector in
a developing country, accounting for 60 to 70 percent of the
value of imports, which is to say currency exchange, the CPA
identified early on the central warehouse and regional
warehouses as a major bottleneck and source of potential
corruption. And corruption was dealt with as a moralistic
issue.
The CPA intended to close down the public distribution
system for medicines altogether and privatize it, and when they
tried to do that all medicines stopped moving, and so very
quickly the central public system was re-established. But those
people who were keeping tabs on things because they were in
charge and on the take were no longer there, so everybody kind
of took a box of medicines home with them through the back
door. There was very little oversight, whereas under the Saddam
Hussein government there was excessive and parasitic oversight.
We found many more of the publicly purchased medicines in
private pharmacies afterwards. It is widely believed--in fact,
I do not know anybody who is not of the opinion that with those
limitations and oversight taken off and very little supervision
by central authorities as security situations worsened, that
the medicines did not flow out like a sieve.
Mrs. Maloney. Just in closing, earlier today we heard about
massive amounts of money, stacks of $100 bills. You're saying
that the medicines were not being replenished, the doctors were
not being paid. Did you see cash being handed out in the
medical system to doctors or to get medicines for the people or
did you see any of that large sums of money going into the
medical facilities to help the people in Iraq?
Mr. Garfield. Yes. I did not say that medicines were not
gotten out and that salaries were not paid. In fact, the
payment of salaries was probably the best thing we did.
Salaries were multiplied about fivefold from where they had
been prior to the invasion, and an awful lot of Iraqi staff
were happy. This actually goes to your comment, Mr. Shay, about
disbanding the army and creating unhappy people, because in the
health sector health workers became happier and went to work
more often in spite of increasing insecurity because of the
establishment of central payrolls and the payment of reasonable
salaries.
In spite of the pilfering of medicines through the system,
in fact, the dollar value of medicines being purchased after
the invasion was three or four times higher than where it had
been under the Oil-for-Food Program. There was just a whole lot
more money coming in for this. So, in fact, hospitals became
better staffed, better supplied, and also health centers.
There are continuing problems, but these are secondary
problems.
Mrs. Maloney. My time is up. Thank you.
Mr. Shays. I thank the gentlelady.
Mr. Soloway, I have primary questions for you, but, Dr.
Garfield, I want to react to a few things.
First, I went into Iraq the first time in April but then
went back in August with a non-government organization and it
was very memorable because we went to visit some hospitals, and
there were no supplies in August 2003. And one of the doctors
had family members who lived in the United States. One was a
doctor. The doctor I met was bitter. He was bitter that he had
no supplies. He was bitter that he had no oxygen. He stayed in
the hospital in part because of his protection because he had--
he acknowledged that they had limited oxygen in surgery. Some
of his patients died from lack of supplies. He did not feel
safe. They have a malpractice system that works different in
Iraq than here. In Iraq if you do not like what the doctor did
you kill him. Here we just sue the hell out of them. So he
stayed in the hospital, but he was really bitter about what he
did not have. And he worked morning, noon, and night, and he
would periodically go home for lunch with his family.
I will never forget that. And he could contrast it to how
his brother was living, I think in Chicago, as a doctor. It was
amazing just to talk with him.
I also just want to say I react to your talking about how
under Saddam the system worked a little differently. It worked
a lot differently. He had an Oil-for-Food Program in which his
margin of corruption was smaller. He made more off of the goods
that he bought. He overpaid for goods and got a kickback of
about 10 percent. And you're right. It was the Mafia. He was
allowed to cheat the system. If anyone else did, they could be
executed. That is a disincentive to try to cheat Saddam, though
many got their little piece.
I do not disagree with anything you said and I find your
testimony very helpful. It is just a sense that I have that I
guess this triggers this question. Would we have been better to
keep all--is it your statement that we kept all the people in
place who were providing health care but not necessarily
keeping the ministers who ran it, given they were political
appointees? Or did we also keep them in place, as well?
Mr. Garfield. It was some of both. We actually tried a lot
of experiments with a lot of lessons learned. First, an attempt
to keep a vice minister had been a Bathist, which the rest of
the ministry staff refused and so that person was thrown out.
And then there was the clean sweep of all Bathists, throwing
out the bath water along with the Bathists.
Mr. Shays. Right.
Mr. Garfield. Which went too far. The reason we did not
have O-2 at that time is that there had been user fees in place
for 4 years for people who received ambulatory care, and CPA
abolished the user fees, supposedly in order to create a
benefit for people, but those user fees is what purchased the
consumables like bandages, cleaning supplies, and oxygen. So
the country was in a crisis with a lack of oxygen because the
hospitals did not have the money to buy the oxygen, and that
policy was then reversed and reversed and reversed. Four times
the policy was started to get rid of user fees and then re-
establish them, get rid of them, and they have just been
reestablished again.
These are the kinds of sort of mindless innovations that
occur when people do not have any experience or knowledge about
the field and are making policy.
Mr. Shays. But there were people before the war that did
have experience?
Mr. Garfield. And most of those people are two levels or
three levels down from the ministers, and it is those
individuals who are running everything now. Nothing would run
without them because they are just enough below the radar----
Mr. Shays. But they were not empowered?
Mr. Garfield. They were not and they are not in power. They
are the directors----
Mr. Shays. I do not mean in power. They were not empowered.
They were not given the authority to be able to make certain
decisions and so on, correct?
Mr. Garfield. For the most part that is correct, but even
more importantly they were not given training to do their jobs
in the way that they could so that the whole system could be at
least twice as efficient.
Mr. Shays. All you're doing is you triggered the question
would we have been better off to run it the way Saddam did it
or the way we ultimately did.
Mr. Garfield. We would have been better off if we engaged
in public discussion with people who knew rather than making
decisions in the green zone without experience and going step
by step rather than by fiat and wide sweep.
Mr. Shays. It is why I favored the non-government
organization model, the Save the Children, the Mercy Corps, the
International Red Cross, the other organizations that were
making in the field hiring Iraqis. I thought their money was
spent better.
Mr. Soloway.
Mr. Garfield. Just one last point on that?
Mr. Shays. Sure.
Mr. Garfield. It was some of the experienced people in the
Ministry of Health who we got rid of that those organizations
hired.
Mr. Shays. Very interesting.
I wish more Members were here to hear your testimony, Mr.
Soloway--both of yours--but it is part of the record and it
will help this committee. The issue of Kellogg, Brown and Root
as the poster child for the issues of questioned costs and
unsupported costs which is referred to differently by some, it
is your point, I think, and I'd like you to elaborate, and you
gave me some examples. Maybe you could give me some more.
But what--and this is why, frankly, I think Kellogg, Brown,
and Root make a huge mistake having redacted this, because it
implies they do not have a meaningful story to tell that would
say, for instance, I'm gathering from your testimony that there
might be a dispute. I wish I had asked the first panel this.
When you started to testify, I was thinking that is the one
area we should have gotten into a little more, what exactly
would questioned costs be.
I am imagining it would be their claim that they had this
amount for security and the auditor saying, ``Well, we will pay
that amount but not the amount--we will pay a certain amount,
but we will not pay the amount that you want.'' They come back
and say, ``Listen, this is what we ended up paying them, so we
would like to be in reverse.'' They say, ``Well, you might have
paid them too much.'' I mean, that is one.
First, is that an example that you were citing? And,
second, are there others that you could give us as an example
of disputed costs that do not necessarily represent trying to
get one over on the Government or, you know, corruption?
Mr. Soloway. I think your example is an excellent one and
the cost in question can be anything, but let me make two
comments, one about Kellogg, Brown and Root specifically and
this issue of redaction, just to make sure everybody is clear
on the issue, because I think there is a couple of things that
have sort of been shoved off to the side, and then talk
specifically to the question of other examples, because I will
use non-Kellogg, Brown and Root examples that I think are a
little bit more evident.
Just to be clear, the Trade Secrets Act issue that was
raised here and redactions and the role of the Defense
Department and the contractor, the contractor says to the
contracting officer, ``These are the things I believe to be
proprietary trade secrets.'' The contracting officer then has
the authority to overrule the contractor, so the Defense
Department does have the authority to get involved in that.
Mr. Shays. It appears they chose not to exercise that.
Mr. Soloway. And they may have had very good reasons. I do
not know what was redacted. I cannot speak to the specific
redactions.
Mr. Shays. OK.
Mr. Soloway. I think that there is an issue here----
Mr. Shays. So you would say to staff, one of the questions
that we should be asking is did they with, for instance,
Kellogg, Brown and Root, accept all the redactions or did they
choose not to accept some of them? That would be a question I
would like to write in.
Mr. Soloway. The other distinction, the quick distinction I
was going to draw--and I think Mr. Reed touched on this, or one
of the other witnesses--there is a difference under the law
between what the Congress is entitled to and what an IAMB or
non-U.S. entity would be entitled to, and I think there is an
interesting distinction there that needs to be very carefully
addressed.
As I understand it--I am not a legal expert--as I
understand the Trade Secrets Act, it would actually probably
allow you as a Member of Congress to see an unredacted
document.
Mr. Shays. We have the unredacted.
Mr. Soloway. But it cannot be publicly exposed. But it
would not necessarily allow the IAMB, because it is not a U.S.
entity, it is not a U.S.----
Mr. Shays. I understood the----
Mr. Soloway. So there is an issue that I think the
negotiation needs to take place. I'm not taking either side. I
just want to make sure the context was clear for everybody to
understand.
Mr. Shays. I accept that it may technically be right,
though I wonder whether or not, given the relationship we had
with the IAMB, given that they had given us this responsibility
and required there be transparency, it raises the question
whether we should have asked anyone who contracted to waive
this part of it.
Mr. Soloway. And the discussion with a broader community in
advance to figure out how we are going to achieve the outcome
we're trying to achieve.
Mr. Shays. Right.
Mr. Soloway. I think that is a fair discussion to have. I
do not disagree with you on that.
Mr. Shays. Right.
Mr. Soloway. But to the specific question of other
examples, let me use an example of another company that had so-
called unsupported or questioned costs that are still in
dispute, and by the definitions that some other members of the
committee have been using today would be called overcharges.
This company was one of the first companies into Iraq. In fact,
they were in the health sector. They faced an enormous spike in
insurance costs, which many people did, as you know, as you
have heard I think over the last year or two. There has been
this big issue with insurance cost and access. At that point in
time and to date their customer, the agency for whom they are
working, has said those are not fair and reasonable costs, we
are not going to pay those insurance rates, and so they have
had to pay them themselves, the difference out of their own
pocket, but have been in a dispute with them saying this is
what the market was driving.
In subsequent contracts, that same agency is now
identifying that higher rate as what they will pay for
insurance because they have now figured out that is what the
market is driving, but they still will not pay the company that
had the initial contract because in their initial contract the
estimate for insurance was lower because no one anticipated
this market spike, if that makes sense.
That is an unsupported cost somebody would call, or a cost
in dispute. Someone might say the company has overcharged
because they have billed this. It is not an overcharge. This is
a discussion of what the market costs are and a very legitimate
cost issue. That is the kind of thing that often gets worked
out in the negotiations that Bill Reed was referring to, so
that would be another example. We see them all the time.
If I could just add one context here, Dr. Garfield talked
about the common sense of people who were working in the local
community and having local contact and the kind of thing that
we would all assume to be part of this process. Those common
sense decisions very often are directly in conflict with our
laws about procurement, cost accounting, and so forth. The way
you deal in an economy that has no market economy, you do not
get competitive written bids, yet you might know somebody in
the health sector who you know locally has expertise, knowledge
you want to use and you contract with them through a non-
traditional manner. It is a different kind of environment, a
different kind of market. So it might make very good management
sense, but it might also put you in direct conflict with our
procurement rules. That is the point I was making in my
testimony.
Mr. Shays. I'm missing your last point. Please explain it
differently.
Mr. Soloway. The economy in Iraq is not what we would
consider a market economy.
Mr. Shays. Right.
Mr. Soloway. For example, we do not have written----
Mr. Shays. I understand it is not a market economy. OK.
Mr. Soloway. And written bids, for instance, are very rare.
Mr. Shays. Right.
Mr. Soloway. Our marketplace, we rely on competition and
written bids. We have overlaid our traditional procurement
rules on our appropriated dollars that are being spent in Iraq
on contract, so as a contractor working in a small outpost or
in Tikrit or wherever it might be, as I am subcontracting or
identifying local capabilities to help me do my job, in theory
I am under the regular U.S. procurement laws, but there is no
market economy and I cannot go out and get seven different
written bids and a fixed price on a contract or expect cost
accounting from my subcontractors locally that I would require
of a U.S. company operating in a normal U.S. environment, but
it may be the only way I can achieve the mission.
I may only have access to those folks in the region who a
tribal elder--a lot of it is tribal, it is sectarian, it is
family, whatever it might be. It could be even the old Mafia
structure. That is how capabilities are identified and brought
to bear. Yet, when an auditor comes in--and we have had cases
of this where the auditors have come in and wanted to see cost
buildups to see what the subcontractors spent at every step of
the way, which is our normal rule of accountability. We cannot
provide it. Companies cannot provide it because it is simply
not available.
Mr. Shays. If a company had to pay off someone to get their
work done in Iraq, would they be breaking the law in Iraq? I
know they would in another country, but within Iraq----
Mr. Soloway. I do not know the answer to that question. I
do not believe they would be breaking the law there. And I'm
not even talking about law-breaking, if I could give you one
quick example.
Mr. Shays. I was going to the next thing, but what do you
want to say? And then Dr. Garfield I want to respond.
Mr. Garfield. The answer is no, they would not break a law.
Mr. Shays. If it was another country would they have been?
We do not allow for political payoffs.
Mr. Garfield. Right.
Mr. Shays. But in Iraq it would be legal?
Mr. Garfield. There would be no law against it. Well, it
would be if it was a U.S. citizen, because I do not believe we
can engage in that, but if it was an Iraqi to an Iraqi we----
Mr. Shays. Before you make your point, let me make sure I
understand. The question I asked was if you made--you paid a
bribe in order to conduct your business in Iraq, you say it is
not in Iraq it is not against the law. But, for instance, if
Sikorski, a company, wants to get the contract in some country
like Turkey and they are competing with France and France is
very willing to pay someone off, the Sikorski--United
Technologies cannot make that bribe. What's the difference? Why
in Turkey----
Mr. Garfield. National law and international law.
Mr. Soloway. Actually, the Foreign Corrupt Practices Act
applies to any U.S. citizen or entity doing business anywhere
in the world.
Mr. Shays. Right.
Mr. Soloway. They cannot enforce a law on the French or on
an Iraqi.
Mr. Shays. Right. But why an American doing business in
Iraq, why could they make a payoff?
Mr. Garfield. An American could not. I'm sorry. I thought
you were asking if it was illegal in Iraq.
Mr. Shays. OK. So they could not do that. And obviously
they could not ask for reimbursement on a payoff?
Mr. Garfield. Correct.
Mr. Shays. OK. Fair enough.
Mr. Garfield. But you can put the guy's brother on the
payroll. There have to be balances to make things work.
Mr. Shays. I hear you.
Mr. Soloway. Let me give you a concrete example of what
we're talking about.
Mr. Shays. Sure. But first what question are you answering?
Mr. Soloway. The first one you asked about examples of how
our traditional rules do not necessarily work in that lack of a
market economy.
Mr. Shays. Right.
Mr. Soloway. One of the companies we work with was
contracted to build a security perimeter around a facility and
were told to extensively utilize Iraqi labor and Iraqi
subcontractors.
Mr. Shays. Right.
Mr. Soloway. Which is the intent, when people say ``X
amount of money went to U.S. companies,'' they do not count for
what is being flowed through to the Iraqi economy. They went
out and found a company through local contacts and whatever and
brought them in, negotiated a price, and paid them on a
progress basis. They gave them a certain amount down, and like
you would do your house, at certain spaces they gave them more
money until the job was done. Everybody seemed relatively happy
with the work.
Several months later when there was an audit of the
contractor, routine audit, the auditor, following the guidance
that they have--I mean, this is not the auditor's fault--wanted
to know how many bidders they had, and the answer was, well, we
found one capability so we brought them in. So in effect, in
our language, it was a sole source contract.
OK. Well, that is fine. We understand it is not a market
economy. How many man hours went into this? How much was the
concertina wire? How much was the concrete? How much were the
shovels, the pick axes, and so forth? The answer was they did
not know because in the Iraqi economy there is no system. They
do not have a cost accounting process like we would have.
That led to an extensive discussion. They ultimately
settled it with the auditors because it was them trying to get
a mission done in the context of the economy they were in, as
opposed to under the rules that we have. So it was a conflict.
We have seen many of those occur. Some of them have been
settled and, frankly, some of them are not. They are very
difficult. That is why we have made this recommendation that we
need experts from industry, from government, the oversight
community, the contracting community, the Congress to sort of
review our rules and regulations and come up with a set of
rules and regulations that make sense in this kind of an
environment that we all agree to, that this is as far as we can
apply, these are the limits to what our rules will allow, this
is how we are going to do cost accounting, and so forth,
because it is a very, very difficult situation. You have people
charged with oversight, people charged with getting a mission
done, and sometimes in some marketplaces or certain
environments the two do come into conflict.
Mr. Shays. You know what I am struck by? Obviously there
may be other factors, but if I was a contractor and I was being
accused of overcharges, I would be writing this committee to
request to be before the committee because they have and others
have a story to tell. You educate the American people and they
accept it, unless there is concern that they do not have a good
story to tell. That is another issue. But, frankly, if I was
doing business and I had to deal with everything I have seen in
Iraq in the eight times I have been there, I think I could
explain pretty clearly why I have these costs and why I think I
should be compensated and why it would, you know, make me mad
as hell to have someone call something an overcharge on
something that is a dispute. It is just curious to me why.
Mr. Soloway. I think from our perspective one of the great
concerns that we have had is we have seen this issue get hotter
and hotter around contracting and allegations and assumptions
of wrongdoing every place you look. In addition to the impact
it has in the field, I think that it is very notable that if
you listen to Mr. Bowen as he testified today and has in the
past in other reports, Mr. Reed and other DCAA reports and
others, what is remarkable is, given the amount of money that
has been expended on contracting in Iraq in a very short time
in the most difficult environment we have ever been in, they,
themselves, have said many times by and large they have been
impressed about how well the process has worked, both front end
and the back end of it.
I will say that I believe Brown and Root did testify before
the full committee at some point--I believe it was the full
committee--in a rather extensive discussion of their charges
and their role and so forth.
Mr. Shays. You're right. You are right. You're absolutely
right.
Mr. Soloway. Most companies that I am familiar with do
enjoy the opportunity to come before the committee when they
had the chance to explain in context what is really going on,
because this really is a truly unique environment.
Mr. Shays. You are correct. I was not at much of that
hearing, if at all, so you are definitely right, they did
testify.
I just want our professional staff to ask a question, and
then we are going to have some votes and we will call it quits.
Chief Investigator. Very quickly, Mr. Soloway, the IG
acknowledged that there were extraordinarily challenging
threats in the environment that CPA was working in. He did not
seem to take that into consideration in insisting that there
should be standard accounting procedures, and we were
interested to know what your thoughts were regarding that.
Mr. Soloway. I have two comments. One is I think that I am
not in a position to judge what the CPA did or did not do. I
think that clearly in hindsight if the IG and other experts
have identified gaps in what was the planning, then clearly
even the lessons learned work that we have done, we have
certainly identified advance planning gaps that goes into what
we do better the next time. So I cannot really judge from that
perspective.
I would say that--and this goes also to Dr. Garfield's
point--the human capital issue here and the availability of the
right skills at the right place at the right time is a much
bigger issue I think than we have paid attention to, whether it
is medical skills and people with public health expertise,
contracting and acquisition skills, and so forth. There are
tremendous issues here about getting people deployed.
Mr. Shays. I need to move along because I have a vote. Let
me ask you, is there any last point, Dr. Garfield or Mr.
Soloway, you'd like to put on the record?
Mr. Garfield. No.
Mr. Shays. Thank you. Both of your testimony has been
excellent and very helpful. I thank you again for your patience
and appreciate your response to our questions, as well. Thank
you all very much.
With that, this hearing is adjourned. And may I thank the
transcriber for her patience.
[Whereupon, at 2:15 p.m. the subcommittee was adjourned.]
[Note.--The Office of Inspector General, Coalition
Provisional Authority Audit Reports, No.'s 04-009, 05-004, 05-
008, and 05-006, may be found in subcommittee files.]
[Additional information submitted for the hearing record
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