Three British companies are facing accusations that they engaged in large-scale fraud in Iraq after it emerged they were paid for "phantom" armoured vehicles destined to protect Iraqi government employees. The vehicles were never delivered, but the companies were paid anyway.
One company, headed by a former deputy assistant commissioner at Scotland Yard and a colourful ex-army officer, received $5.7m (£2.93m), even though the vehicles never left the factory in Russia where they were due to be manufactured.
Government investigators in the United States have condemned a "virtual pandemic" of corruption in Iraq which saw $9bn of the country's oil revenues disappear without trace after Saddam Hussein was toppled four years ago. However, this is the first time that British companies have been accused of involvement in the widespread fraud which flourished in the chaos following the 2003 invasion.
Allegations against the three British companies are known to be detailed in a confidential statement which was lodged with a court in New York earlier this month. In London, meanwhile, officials from the Serious Fraud Office are also examining documents relating to the deal. Whilst the SFO has not yet opened a formal investigation, if it were to do so it would be the first of its kind into allegations of British involvement in fraud in Iraq.
The deal under suspicion was negotiated in late 2004, when Iraq was still governed by the Coalition Provisional Authority (CPA). Amid the growing threat from insurgents against civilian employees working for government ministries, the CPA put out a tender for a fleet of armoured vehicles. Many were bomb-proof trucks and coaches which were intended to protect civil servants from attack as they were being bussed to and from work.
A total of 51 vehicles was included in the final tender, including crowd control vehicles, command vehicles, water cannons and armoured buses. The money to pay for the contract came from Iraqi oil revenues held by the Trade Bank of Iraq, but under the control of US officials.
The contract, worth $8.48m, was won by Zeroline, a Norfolk-based armoured car company run by ex-soldier Peter Tarrant. He subcontracted the sourcing of the vehicles to another British company called APTx, a subsidiary of Alchemie Technology Ltd. Alchemie and APTx were formed soon after the invasion of Iraq by Haslen Back, a former junior officer in the Royal Anglian Regiment. The chairman of APTx is Graham James, a former deputy assistant commissioner of Scotland Yard.
Both men have a colourful past. Mr Back, 39, from Suffolk, is well known in army circles for his exploits during the first Gulf war in 1991. Leading a three-vehicle armoured group from Saudi Arabia to Kuwait City in the aftermath of the defeat of Saddam's occupying army, he drove on to a nearby beach for a spot of surfing. Unfortunately, the beach he chose was a minefield and Back and his platoon had to be rescued by Royal Engineers. Asked about this episode last week, he replied: "Well, it was bloody hot."
Mr James, 53, became the most senior Scotland Yard officer to be suspended when he faced an inquiry into his expenses claims in June 2003, months before he was due to retire. A spokesman for the Metropolitan Police Authority said : "There was insufficient evidence to warrant any disciplinary proceedings. An agreement was reached with the officer for him to reimburse the MPA for the expenses over-claimed in error, and he retired."
Mr James joined Alchemie Technology and APTx in January 2005 and says on his website that he has "advised on developing the group strategy and business development for armouring vehicles and protection clothing".
The company had a lucrative Iraqi contract, but was facing difficulties in obtaining permission to export the vehicles from Russia to Iraq. Even though the vehicles would not pass through Britain, Department of Trade and Industry regulations specified that British export licences had to be obtained for armoured vehicles because the principals behind the company were British. There was a July 2005 time limit on the contract and as time went by and the licences had not appeared, Peter Tarrant and Haslen Back are said to have become increasingly worried.
But a few weeks before the contract was due to expire, APTx and Zeroline received their payments from the CPA, without the vehicles having been supplied. Some $5.7m went to APTx and Zeroline received a substantial payment.
Investigations into why this happened are expected to focus on a series of documents presented to the bank in Britain which was holding a letter of credit raised in Iraq by the CPA. JP Morgan Chase, acting in Britain on behalf of the Iraqi Trade Bank, was shown documents which appeared to suggest the multimillion-dollar convoy of vehicles was about to be shipped from Russia. At this point, the bank says, it agreed to make payments totalling $8.48m. It appears that US authorities in Iraq were unaware that the payment had been made. Six months later, on December 18 2005, they formally announced that the contract had been cancelled.
Mr Tarrant admitted to the Guardian that he had received his payment, although he knew the vehicles were never delivered. He says he strongly suspects the documents shown to JP Morgan Chase were forgeries. "At the same time that this was going on, people were being dragged off Toyota buses [in Baghdad] and shot."
Mr Tarrant says amid the confusion and chaos in Iraq as the CPA handed over to the elected government there was little or no official oversight of contracts or payments. "From what I know, the office in Baghdad that was signing all these letters of credit had only three employees - the president, his driver and a tea boy. He was there all day simply signing letters of credit. There was not a single officer there who understood anything more than a goat herder. All the competent staff had been sacked under the anti-Ba'athist regulations."
The whereabouts of the millions of dollars paid to APTx remains a mystery. Mr Back agreed to meet a Guardian reporter, but then cancelled the meeting by text message and boarded a flight to Moscow. He has since been unavailable.
Mr James said: "There was nothing untoward about the contract at all. We received payment for work that was done." He referred all queries to Simon Ratcliffe, a lawyer representing the company. Mr Ratcliffe declined to comment on the fraud allegations, and then hung up.
Missing Tonnes of cash just disappeared
Fraud, corruption and smuggling have reached such enormous proportions in Iraq since the invasion that some US officials call it a "second insurgency".
Almost $9bn in Iraqi oil revenues cannot be accounted for, according to Stuart Bowen, the special inspector general for Iraqi reconstruction.
The revenues were converted US dollar bills flown into Iraq in shrink-wrapped bundles, then distributed with few controls. Billions from seized Iraqi assets and surplus funds from the UN food for oil programme were sent in the same way.
In 2004, 281m notes, weighing 363 tonnes, were sent to Baghdad destined for Iraqi ministries and US contractors
Henry Waxman, head of a congressional committee, said last month: "Who in their right mind would send 363 tonnes of cash into a war zone?"
A memorandum prepared for the committee on oversight and government reform said one contractor received $2m in a duffel bag stuffed with shrink-wrapped bundles.
The memo concludes: "Many of the funds appear to have been lost to corruption and waste ... thousands of 'ghost employees' were receiving pay cheques from Iraqi ministries ... Some of the funds could have enriched both criminals and insurgents."
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