Briefly, the Custer Battles lawsuit will likely be an eye opener for many. The Iraq war has been a watershed in the outsourcing of not just tangible assets and roles the military used to provide for itself (meals, logistics) but intangibles also. The role of private military companies in the war, from pre-deployment training to site security to force and VIP/"nation building contractors" protection, are part of the soft power of the United States.
As the number 2 contributor of forces to the Coalition of the Willing (aka "Coalition of the Billing"), private military companies are seen as part of American foreign policy. The contractors represent America without direct supervision and without clear accountability back to the ultimate client whom they represent, the Citizens of the US.
The Custer Battles lawsuit, Blackwater lawsuit, hostages in Columbia, and other problems gurgling to the surface will be an awakening for many.
Some highlights from the Custer Battles WaPo article:
The case has generated media coverage, including a piece on CBS's "60 Minutes" last night…
Under the Civil War-era False Claims Act, individuals can file suit secretly on behalf of the government. The case becomes public after the Justice Department has had a chance to decide whether to join the case. In this case the department declined but did not say why.
"the essential nature" of the U.S.-led Coalition Provisional Authority was "shrouded in ambiguity," the reach of the fraud law turned on the source of the allegedly stolen funds. Since much of what the CPA spent was Iraqi money from oil sales, the trial is limited to $3 million Custer Battles received in funds controlled by the agency.
The WashingtonPost article doesn't even begin to show the extent of the fraud alleged to have been committed by Custer Battles. The story of the x-ray machine & bomb-sniffing dog (see below) is telling of poor site security in Iraq. Jeopardizing lives to save money either intentionally through cutting costs or unintentionally through sloppiness, negligence or deceit.
This isn't about contractors, however. It's larger than that. There are plenty of firms, with skilled and qualified men and women, working in Iraq the public will never know of or think ill of. This is about managing a solution to a problem. Coherency and coordination in resource utilization is absent, tossed to private enterprise and CPA authorities alike without training, responsibility, or accountability.
The damage to the rebuilding project that had an ad hoc and rough start (it didn't have to be a rough start, but Phase IV was nothing anybody cared about, including the SecDef apparently either before "mission accomplished" or after) is compounded by millions, if not billions of dollars wasted. The money is not the issue. The lost time in rebuilding allowed others to step into the vacuum, point to our failings and preventable missteps, shortsteps, and sidesteps, and "prove" we were there for the money. There are successful projects over there, but not nearly as many as there should be by the amount time, effort, and money that was spent. Our prestige, our ability to win the "hearts and minds" is severely jeopardized. We look at these stories from afar, from living rooms with electricity, streets with street sweepers, with our weekly garbage collection, safe roads to drive, stocked grocery stores, heating oil and gas that's available, Blackberries, Starbucks, etc. What would you think if the corruption and failure to follow through, even if some projects were successful, happened in your neighborhood? We are losing the PR campaign, if not lost it already, because of American failures to act "American" and get the job done. This has sorely damaged our credibility abroad in all areas. All of which were led by example by the Administration's strategy to get into Iraq without a plan and without listening to the military commanders and regional experts.
Our soldiers are doing the best job they can with the limited resources they've been granted. This isn't a military operation, however. It should have been a civil / public affairs, public diplomacy saturation campaign whose wheels started rolling before Mr Bush did his staged landing on an aircraft carrier with staged sailors in the background, timed and positioned with the setting sun just right. Custer Battles, KBR lawsuits, CACI DoI interrogators and others all point to a failed effort that will continue to haunt the US. The seams will continue to come out as more books like Bremer's come out and more disputes make their way to the courts.
Two transcripts are below, Sixty Minutes and NPR's MarketPlace, both on Custer Battles. Both courtesy WepsTrade mailing list. Thanks David.
Sixty Minutes transcript below:
CBS News Transcripts
SHOW: 60 Minutes 7:00 AM EST CBS
February 12, 2006 Sunday
War Profiteers?; Custer Battles and other government contractors under investigation for overbilling US government by billions in Iraqi war
ANCHORS: STEVE KROFT
STEVE KROFT, co-host:
The United States has spent over $1/4 trillion in its three years in Iraq and more than 50 billion of it has gone to private contractors hired to guard bases, drive trucks, feed and shelter the troops an rebuild the country. It's dangerous work but much of the 50 billion, which is more than the annual budget of the Department of Homeland Security, has been handed out to companies in Iraq with little or no oversight. Billions of dollars are unaccounted for. And there are widespread allegations of waste, fraud and war profiteering. So far, only one case, the subject of a civil lawsuit that goes to trial this week, has been unsealed. It involves a company called Custer Battles and provides a window into the chaos of those early days in Iraq.
(Footage of fighting in Iraq; man carrying off TV; toppling of Saddam statue; soldiers taking hostages; Bremer posing for picture with and shaking hands with men; Iraqi civilians standing amid bombed communities military standing guard on Iraqi street)
KROFT: (Voiceover) When US troops entered Baghdad in the spring of 2003, there was no electricity, widespread looting and little evidence of post-war planning. With the American military stretched to the limit, the Pentagon set up the Coalition Provisional Authority to govern the country under Ambassador Paul Bremer who began hiring private companies to secure and rebuild the country. There were no banks or wire transfers to pay them no bean counters to keep track of the money, just vaults and footlockers stuffed with billions of dollars in cash.
Mr. FRANK WILLIS: Fresh, new, crisp, unspent, just-printed 100 dollar bills. It was the wild West.
(Footage of Kroft talking with Willis; bundles of $100 bills)
KROFT: (Voiceover) Frank Willis was the number two man at the Coalition Provisional Authority's Ministry of Transportation. The money was a mixture of Iraqi oil revenues, war booty and US government funds earmarked for the Coalition Authority. Whenever cash was needed, someone went down to the vault with a wheelbarrow or gunny sacks.
Mr. WILLIS: Those are $100,000 bricks of $100 bills and that's $2 million there. This, in fact, is a payment that we made on the 1st of August to a company called Custer Battles.
KROFT: These are called bricks, right?
Mr. WILLIS: Sometimes we referred to them as footballs because we passed them around in little pick-up games in our office.
KROFT: Do you have any evidence that the accounting system was a little loose?
Mr. WILLIS: I would describe it as nonexistent.
(Footage of soldiers driving in vehicles; Baghdad airport; Scott Custer; Mike Battles; campaign materials for Mike Battles congressional run; traffic on Baghdad street)
KROFT: (Voiceover) The $2 million given to Custer Battles was the first installment on a contract to provide security at Baghdad International Airport. The company had been started by Scott Custer, a former Army Ranger and Mike Battles, an unsuccessful congressional candidate from Rhode Island who claimed to be active in the Republican Party and have connections at the White House. They arrived in Baghdad with no money, yet within a year, they landed $100 million in contracts.
Mr. WILLIS: They came in with a can-do attitude, whether they could or not. They always said yes.
KROFT: They have any experience?
Mr. WILLIS: They were not experienced. They did not know what they were doing.
(Footage of Baghdad airport; photo of Colonel Richard Ballard posing in front of large poster)
KROFT: (Voiceover) Complaints about Custer Battles' performance at the airport began almost immediately. Colonel Richard Ballard, the top inspector general for the Army in Iraq, was assigned to see if the company was living up to its contract, such as it was.
Colonel RICHARD BALLARD: The contract looked to me like something that you and I would write over a bottle of vodka, complete with all the spelling and syntax errors and annexes to be filled in later, presented it the next day and then got awarded about a $15 million contract.
(Footage of Baghdad airport; room with couch and filing cabinet; men loading debris into truck; men cleaning up water; soldiers manning checkpoint)
KROFT: (Voiceover) Custer Battles was supposed to provide security for commercial aviation at Baghdad Airport, including personnel, machinery and canine teams to screen passengers and cargo. But the airport never reopened for commercial traffic. Instead of canceling the contract or requiring Custer Battles to return the money, the coalition authority instead assigned them to operate a checkpoint outside the airport.
How did they do on that job?
Col. BALLARD: They failed miserably.
KROFT: Was anybody paying attention to this money and where it was going?
Col. BALLARD: There was significant concern but there just were not the people in theater to monitor that kind of thing on a day-to-day basis.
KROFT: So the answer is?
Col. BALLARD: No.
(Footage of semi-truck)
KROFT: (Voiceover) According to Colonel Ballard, the contract required Custer Battles to provide sophisticated X-ray equipment to scan the contents of incoming trucks.
Col. BALLARD: These were multimillion-dollar devices for which they received a considerable cash advance so that they could procure them and then they never procured this equipment.
(Footage of Kroft interviewing Colonel Ballard)
KROFT: (Voiceover) As for the bomb sniffing canine teams:
Col. BALLARD: I eventually saw one dog. The dog did not appear to be a certified trained dog. And the dog was incapable of operating in that environment.
KROFT: What do you mean, incapable of operating in that environment?
Col. BALLARD: He would be brought to the checkpoint and he would lie down and he would refuse to sniff the vehicles.
KROFT: What about the handler? Did he have a handler?
Col. BALLARD: The handler had no certificate, no evidence.
KROFT: So neither the dog nor the handler were qualified?
Col. BALLARD: I think it was a guy with his pet, to be honest with you.
(Footage of memo)
KROFT: (Voiceover) In a memo obtained by 60 MINUTES, the airport's director of security wrote to the Coalition Authority, "Custer Battles have shown themselves to be unresponsive, uncooperative, incompetent, deceitful, manipulative and war profiteers. Other than that, they're swell fellows."
Mr. WILLIS: I would agree with most of that.
KROFT: Even the war profiteers?
Mr. WILLIS: I think that what they were doing was of the nature of what I understand war profiteering to be about, which is to get into a chaotic situation and milk every penny out of it you can as fast as you can before the opportunity goes away.
(Footage of soldiers driving military vehicles; soldiers entering a building; money being printed; money being exchanged at a window)
KROFT: (Voiceover) The Coalition Authority not only refused to throw Custer Battles off the airport job, it wrote them a glowing review and continued to give them contracts, including one to supply logistical support for a massive program to replace the Iraqi currency.
And how did Custer Battles perform that contract?
Mr. PHILIP WILKINSON: Absolutely abysmally. I mean, it was–it was beyond a joke.
(Footage of Kroft talking with Wilkinson; photos of Wilkinson and soldiers; men unloading truck; tucks loaded with boxes)
KROFT: (Voiceover) Philip Wilkinson was a colonel in the British Army assigned to the Coalition Authority's Ministry of Finance and charged with providing security to convoys that travel all over Iraq, loaded with $3 billion in cash. The trucks were supplied by Custer Battles.
Mr. WILKINSON: And you can imagine open trucks with that sort of money on the back was just a red hot target for not only terrorists but criminals. And therefore, we needed trucks that were going to work. When those trucks were delivered to us, some of them were physically dragged into our compound.
KROFT: They were towed into the camp?
Mr. WILKINSON: They were towed into the camp.
(Footage of Kroft interviewing Wilkinson)
KROFT: (Voiceover) And Custer Battles' response?
Mr. WILKINSON: When questioned as to the serviceability of the trucks, was, `We were only told we had to deliver the trucks. They didn't–the contract doesn't say they had to work.' Which, I mean, when you're given that sort of answer, what can you do?
KROFT: How did they get away with it?
Mr. WILKINSON: I really don't know. I mean, it was just a joke. The assumption that we had was that they had to have high political top cover to be able to get away with it because it–it was just outrageous, their failure to deliver that which they were contracted to do.
(Footage of Custer Battles employees; Robert Isaacson and other men standing in front of pile of debris; heavy machinery)
KROFT: (Voiceover) In fact, the company continued to work in Iraq for another year, even after Robert Isaacson, one of Custer Battles' major subcontractors, went to federal authorities with allegations of criminal misconduct. Isaacson and another whistle-blower claimed Custer Battles bilked the government out of $50 million and they're suing the company on behalf of US taxpayers to recover some of the money.
Mr. ROBERT ISAACSON: Well, they approached me three times to participate in a defrauding of the United States government. They wanted to open fraudulent companies overseas and inflate their invoices to the United States government.
KROFT: Did the fraud actually take place?
Mr. ISAACSON: Two weeks later, apparently, from what I'm understanding, two weeks later, they began exactly the fraud they described to me.
(Footage of flags flying; ocean; people walking on a beach; people rowing in a kayak; cruise ship; vehicles on road)
KROFT: (Voiceover) According to a subsequent investigation by the US Air Force, Custer Battles set up sham companies in the Cayman Islands to fabricate phony invoices that it submitted to the Coalition Authority with the intention of fraudulently inflating its profits.
According to this Custer Battles spreadsheet, which was left behind after a meeting with US officials, the company submitted invoices on the currency contract totaling nearly $10 million when its actual costs were less than 4 million.
(Footage of invoices; Mike Battles; Scott
Custer; Department of Justice headquarters; footage of deposition)
KROFT: (Voiceover) Electricity costs of $74,000 were invoiced to the Coalition Authority at $400,000. Those trucks that didn't work were bought on the local market for $228,000, and billed at $800,000. Mike Battles and Scott Custer, who are currently under investigation by the Justice Department, declined to be interviewed for this story because of the whistle-blower lawsuit. But in a videotaped deposition for that case, Scott Custer disavowed any knowledge of the phony invoices.
Unidentified Man: (Speaking in taped deposition) Would you agree with me that it is highly improper for a contractor simply to fabricate invoices and then hand them in for payment?
Mr. SCOTT CUSTER: (Speaking in taped deposition) Yes. I mean, the short answer, I don't believe–I'm not a government contracts expert or a legal expert, but I would think it's improper to fabricate anything that you know not to be true.
(Footage of Mike Battles)
KROFT: (Voiceover) Custer and Battles blamed their problems on former employees, competitors and the bureaucratic incompetence of the CPA.
Mr. MIKE BATTLES: (Speaking in taped deposition) I know we were supposed to do one thing for a certain amount of money and by the time it was said and done, they asked us to do many, many more things for a different amount, a greater amount of money.
(Footage of legal document)
KROFT: (Voiceover) To date, the only action that's been taken against them has been a one-year suspension from receiving government contracts. It has since expired.
Senator BYRON DORGAN: I think what's happening over there is an orgy of greed here with contractors.
Today the Policy Committee is holding a fifth hearing.
(Footage of Senator Dorgan speaking in committee; headquarters of Halliburton; Senator Dorgan speaking in committee; newspaper article about Halliburton overcharging for services; hand towel with KBR logo)
KROFT: (Voiceover) North Dakota Senator Byron Dorgan, chairman of the Democratic Party Policy Committee, says Custer Battles is small potatoes compared to behemoths like Halliburton and its subsidiary, Kellogg, Brown and Root, who've collected half of all the money awarded to contractors in Iraq and according to Defense Department auditors, have overbilled taxpayers by more than $1 billion. Dorgan's committee has held hearings and heard testimony that Halliburton has overcharged for meals and fuel and gouged taxpayers on items as trivial as these hand towels.
Sen. DORGAN: Instead of buying a white towel, which would be $1.60, this company said `No, no, put–embroider our logo on it.' Five bucks.' So what's the difference? Well, the American taxpayer is going to pay the bill.
(Footage of Dorgan showing Kroft the embroidered hand towel; Dorgan asking questions of people appearing in a committee hearing)
KROFT: (Voiceover) Halliburton says the towels were embroidered to keep them from being stolen or lost and that allegations it overbilled by $1 billion are exaggerated. But Dorgan says none of this being seriously investigated. He says he's called for full congressional inquiries of alleged abuses by Halliburton and other contractors but they have been defeated by the Republican majority in straight party line votes.
Sen. DORGAN: I mean to tell you that there's very little oversight by anybody on anything in this Congress. We have a president and a Congress of the same party. They have no interest in doing any aggressive oversight.
(Footage of Stuart Bowen looking at documents)
KROFT: (Voiceover) The only one really looking into it is Stuart Bowen, the special inspector general for Iraq reconstruction, a position created by Congress back in 2004 to monitor construction and development projects to rebuild Iraq.
How would you describe the oversight early on with the CPA?
Mr. STUART BOWEN: It was relatively nonexistent.
(Footage of audit reports; Bowen testifying before congressional committee)
KROFT: (Voiceover) In two lengthy reports, Bowen's staff outlined suspected fraud and incompetence of staggering proportions, like the $8.8 billion that the coalition seems to have lost track of.
KROFT: $8.8 billion?
Mr. BOWEN: That's right.
KROFT: And that's money that is not accounted for?
Mr. BOWEN: Not accounted for.
KROFT: What you seem to be saying is that nobody really knows exactly where that $8.8 billion went to?
Mr. BOWEN: That's right.
(Footage of construction; woman exiting building; patrons and workers inside library; photos of people that have been arrested)
KROFT: (Voiceover) Some of the money, Bowen says, was spent on projects it was intended for. It's just that there are no receipts. But some of it, like the funds to buy books and train personnel at this library in Karbala, simply vanished. Four people have already been arrested on bribery and theft charges and more arrests will follow.
How many investigations do you have going on right now?
Mr. BOWEN: Nearly 50.
KROFT: And these are all involving suspected fraud? Fraud or suspected fraud?
Mr. BOWEN: Fraud, kickbacks, bribery, waste.
KROFT: Involving American companies.
Mr. BOWEN: That's right.
KROFT: Ambassador Paul Bremer, the former head of the Coalition Provisional Authority, has said most contractors were doing their best to perform quickly and that it's unfair to apply standard accounting practices in the midst of war. To date, the US government has taken no action to recover any of the missing money.
MarketPlace transcript on Custer Battles
SHOW: Marketplace 6:30 AM EST SYND
February 13, 2006 Monday
Washington Post's Charles Babcock speaks about Custer Battles going to court for war profiteering
ANCHORS: KAI RYSSDAL
KAI RYSSDAL, anchor:
This is MARKETPLACE from American Public Media. I'm Kai Ryssdal.
You might think calling your military contracting firm Custer Battles would be an unfortunate decision. Brings up images of Little Big Horn and all that. The modern-day Custer Battles did pretty well though. Two former soldiers named Custer and Battles, I kid you not, started their company in the fall of 2002. And by the spring of 2003, they were in Baghdad with $20 million in government security contracts. Tomorrow, they find themselves in federal court on trial for war profiteering over the Civil War era false claims act. Charles Babcock is covering the story for The Washington Post.
Mr. CHARLES BABCOCK: Generally, I think they're accused of setting up phony companies and running inflated expenses through these companies so they would get paid at a much higher rate than what they'd actually spent.
RYSSDAL: What were the contracts?
Mr. BABCOCK: Well, there were two in particular that were at the focus. This first–the first trial is going to be–start tomorrow on one of them. That was about a contract they had to help distribute a new Iraqi currency. The US-led coalition wanted, obviously, currency that did not have Saddam's picture on it, so they printed up a bunch of new money, and this company was helping them set up some camps to distribute this cash.
RYSSDAL: Now, as I understand it, it's private individuals bringing this fraud suit. Where's the government? The Department of Justice?
Mr. BABCOCK: Well, the–that's correct. Under the false claims act, individuals can sue on behalf of the government. Then the US government has to decide whether or not to join the case. In this instance, they decided not to join the case.
RYSSDAL: Do we know why?
Mr. BABCOCK: They did not explain why. They did not explain why.
Tell me about this law, the false claims act.
Mr. BABCOCK: Well, it goes back to Abraham Lincoln days, I think, when a lot of people made defective products for the Union Army. It was only, I think, the last 20, 25 years ago the law was sort of re–re-engineered to make it a lot of usable nowadays. In fact, it's used a lot now in recovering money in health-care fraud and some in the defense area.
RYSSDAL: How much of this case is actually about the Coalition Provisional Authority, the CPA, and its well-publicized management problems there?
Mr. BABCOCK: Well, I think that's sort of an undercurrent in this case and that is that there didn't seem to be a lot of accounting tools in–in place.
When it started, obviously, there were–they were starting this set of coalition government right after the fall of the Iraqi government. There was chaos. There was no real accounting system set up. And so that's why the auditors and inspector generals that have come along since have been pretty critical about the lack of oversight on the spending of billions of dollars, both US-appropriated funds and Iraqi funds from the sale of oil.
RYSSDAL: Why is this case against Custer Battles important for what it says about Iraq?
Mr. BABCOCK: Well, it's mainly because it's the first case to become public.
And also because it sort of gets at the limits of federal law in a foreign country like this because the coalition government was not really a US government agency. The judge in this case had to decide whether the false claims act could even reach this conduct. And it's pretty fuzzy whether US law does in fact touch some of these areas.
RYSSDAL: Charles Babcock is a staff writer for The Washington Post. Mr.
Babcock, thanks for your time.
Mr. BABCOCK: Sure enough.
2 thoughts on “PMC Fraud: Tip of the Iceberg?”
PMC Dillemas (III)
[Addressing the issue of PMC fraud and other questions in the industry…..]
MattWhile the post is very long.. I can see the vast problems of overseeing contractors.
A war zone is not audit or auditor friendly.
The more combat-like functions are hard to assess in terms of efficiency and value for money.
While there is little doubt that the Army will do its utmost to support its soldiers there will always be doubts whether the profits or shareholders of contracting companies are a higher priority.
Basically war has a bad name and commercialising parts of it looks even dirtier.
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