Widespread Accounting Problems Reported in Iraqi Defense Ministry and Oil Account

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The Iraqi Board of Supreme Audit, in a confidential report delivered to Iraqi Prime Minister Ibrahim al-Jaafari and reviewed by Knight Ridder, has uncovered widespread fraud and waste in $1 billion worth of weapons procurement contracts involving senior Iraqi officials in the Defense Ministry. The audit report indicates that as much as $500 million may have been lost through three intermediary companies that hid “kickbacks they received from contracts involving the purchase of unnecessary, overpriced or outdated equipment”, Knight Ridder reported.

Iraqi Defense Minister Saadoun al-Dulaimi confirmed most of the audit board report's findings in an interview, according to Knight Ridder. He said that at least $500 million in Iraqi money essentially has disappeared. Al-Dulaimi has fired nine senior officials, including Ziad Cattan, the ministry's former procurement chief.

A warrant has been issued for the arrest of Cattan, a Sunni and a dual Polish-Iraqi national, who has fled Iraq. Al-Dulaimi has placed his own deputy on leave and is investigating other Ministry of Defense employees.

The key findings of the Iraqi Board audit, according to Knight Ridder, were:

  • Senior Iraqi officials kept little or no record of major purchases. Nearly all purchases for which there were records contained a clause that required payment up front in cash for the full value of the contract.
  • The Ministry of Defense hired middlemen, who subsequently disappeared, to negotiate contracts leaving officials with no way to complain about problems with fulfillment.
  • While internal records indicated that the Ministry of Defense signed contracts with Poland, Arab countries and the United States, in fact all contracts were signed by Iraqi suppliers.

The audit reviewed 89 contracts that had been signed during the period from the transfer of sovereignty, June 28, 2004, to February 28, 2005. About 20 American civilian advisers worked alongside Iraqis during this period but the report does not implicate them in the alleged corruption.

Colonel John Martin, deputy to Lt. General David H. Petraeus, who is in charge of the training of Iraqi troops, said that the general, along with American and British defense advisers, warned defense chiefs in the interim government about the Ministry of Defense's procurement practices and the possibility and rumors of corruption, Knight Ridder reported.

An audit report citing similar problems in Development Fund for Iraq (DFI), Iraq's oil account, from June 24 to December 24, 2004, was delivered to the International Advisory and Monitoring Board (IAMB) by KPMG in May. KPMG noted, according to a statement from IAMB, that records maintained by both Iraqi and U.S. agencies were incomplete, and that Iraqi ministries did not explain the lack of competition for contracts.

The KPMG audit also cited “unreconciled quantities of oil and oil products exported indicating a lack of control and possible misappropriation of oil revenues. . . and non-deposit of proceeds of export sales of petroleum products into the appropriate accounts”, according to the IAMB statement.

The DFI was established by the United Nations Security Council, which set up IAMB to watch over the stewardship of Iraq's natural resources initially during the U.S. civil administration of Iraq from May 2003 to June 28, 2004. KPMG had reported problems with accounting controls at the DFI during this period, according to the IAMB.

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