IRAQ: Rules and Cash Flew Out the Window

 WASHINGTON - Bill Keller knew that rebuilding Iraq's shattered telecommunications network meant throwing money into a black hole.

As the clock ticked down to the U.S. transfer of power last June, reconstruction projects were hopelessly mired in delays, and financial controls at the Iraqi Communications Ministry appeared nonexistent. Yet instead of putting the brakes on spending, top U.S. officials urged that contracts be accelerated, Keller said.

"We were squandering the money we were entrusted to handle," said Keller, who at the time was a deputy advisor to the ministry. "We were a blind mouse with money."

This apparent indifference toward accountability in spending Iraqi money was common among American officials last year as they rushed to sign contracts in the waning days of U.S. control of Iraq, according to interviews and documents obtained by the Los Angeles Times.

In recent audits and interviews, June 2004 has emerged as a month when both money and accountability were thrown out the window - something like a Barneys warehouse sale in the Wild West, with the U.S. playing the role of frenzied shopper and leaving Iraqis to pay the bill.

More than 1,000 contracts were issued by U.S. officials in June, about double the usual number. American officials discovered last month that the U.S. had improperly used Iraqi funds to award at least $85 million in contracts after its authority had lapsed and an interim Iraqi government took over, according to the documents and interviews.

Auditors disclosed this month that several U.S. officials were under investigation for possible embezzlement in connection with the June spending blitz.

"There were lots of examples of bad management because of the chaos around the turnover," said Ginger Cruz, chief of staff for the special inspector general for Iraq reconstruction, who oversees U.S. spending in Iraq. "There was a greater opportunity for fraud."

Senior officials with the U.S.-led Coalition Provisional Authority, which ruled Iraq until the hand-over, defended their actions. They acknowledged paperwork problems but said wartime circumstances demanded a focus on action, not accounting principles. Most of the money, they said, helped prevent bloodshed by providing desperately needed goods and services to Iraqis.

"There was no way in the world to have a system that would have satisfied the standards set [by recent audit reports] that would have also resulted in significant money being provided to the Iraqis," said a former senior CPA official, who requested anonymity because of the sensitivity of the issue.

But the pell-mell effort to spend that June may help explain many of the problems in the reconstruction of Iraq, and it continues to haunt the U.S. nearly a year later.

U.S. officials are unsure whether billions of dollars dispatched to Iraqi ministries for reconstruction projects ever reached their intended destinations. Schools and hospitals refurbished under hastily issued contracts have again fallen into disrepair. The oil and power industries are in worse shape than during the regime of Saddam Hussein.

"The Iraqis will be paying for the screw-ups of the CPA for a long time," said a coalition advisor who requested anonymity. "They have had to unwind what we did in that year, and that has made it tougher for them to recover."

There is a pervasive belief among Iraqis that the occupation shifted corruption from cronies of Hussein to cronies of U.S. officials.

"Corruption is a huge problem in Iraq's reconstruction today," said Julie McCarthy, acting director of Iraq Revenue Watch, a watchdog group funded by liberal U.S. billionaire George Soros. The U.S. "did nothing to encourage a climate of zero tolerance for corruption in postwar Iraq, and may indeed have contributed to a climate of permissiveness."

Under the terms of a United Nations resolution, the U.S. was to safeguard Iraqi money in a special account called the Development Fund for Iraq. The money consisted of Iraqi oil revenue and assets seized from the Hussein regime.

The fund, which eventually totaled more than $20 billion, was supposed to pay for the operations of the government during the U.S.-led occupation. It supplemented $18.4 billion in U.S. taxpayer money earmarked for reconstruction projects.

The U.N., which had control over Iraqi oil proceeds, would deposit money into the fund as it cleared old debts.

In March 2004, the U.N. unexpectedly released $2.5 billion into the fund.

Coalition officials had a massive windfall. The senior coalition official said that sparked an intense internal debate: Should the coalition spend it or leave it for the new Iraqi government?

In the end, the official said, the U.S. decided in consultation with the Iraqis that the country's needs were too urgent to wait. There was also a belief that the Iraqi money could be spent more easily than the U.S. money, which was governed by stricter contracting rules and oversight.

The windfall "was kind of a curse," the official said. "Either we work with the Iraqis to determine spending priorities or we sit on it. Neither option was attractive."

So the spree began. On a single day in May, U.S. and Iraqi officials approved almost $1.9 billion in spending, including oil, security and electricity projects.

Over the next few months, U.S. officials throughout Iraq placed more focus on launching projects and less on accounting concerns.

E-mails, documents and interviews with officials who worked in Iraq at the time portray a mania to move money.

Keller said Thomas Gramaglia, then working for the CPA in Washington to oversee telecommunications work in Iraq, brushed aside concerns about accountability.

In one e-mail in April 2004, Gramaglia ordered a contractor to "force projects through quickly."

Noting that an article in a British newspaper that morning had warned of "corruption in contracting for Iraq reconstruction," Gramaglia wrote: "I expect this to heat up in coming days and weeks. This could bring the entire process to a screeching halt, so time is of the essence."

Gramaglia, now a contractor for the State Department, did not respond to requests for comment.

In another exchange obtained by The Times, a contracting officer implored CPA officials to come up with new ideas to spend money on projects in the restive Sunni Triangle region north and west of Baghdad.

"The White House wants us to get any projects or requirement we know of in those areas rolling ASAP," the contracting officer wrote April 21.

By June, the spending was at full tilt. Some 700 of the contracts signed that month - or more than two-thirds - were issued without following standard procedures, according to a statement from a contracting official contained in a recent audit by Stuart W. Bowen Jr., the special inspector general for Iraq reconstruction.

According to another audit by Bowen, a U.S. official charged with distributing cash payments was given $6.75 million on June 21 and told to hand it out by the end of the month.

Then, in a surprise move, L. Paul Bremer III, then U.S. administrator in Iraq, handed the country over to Iraqis two days early, on June 28. Under the terms of the transfer, the newly appointed interim government took control of the Development Fund for Iraq.

But in a violation of the terms, the U.S. signed 17 more contracts worth $85 million. Most of those final contracts went to U.S. corporations to pay for armored vehicles, including $39.4 million to Michigan-based Cadillac Gage Textron Inc., according to documents obtained by The Times.

In April, U.S. contracting officials persuaded the outgoing Iraqi finance minister, Adel Abdul Mahdi, to pay for the tardy contracts, which included armored cars, police riot gear and road paving, documents show.

"These kind of slipped through the cracks," a U.S. military official said.

Chastened by the barrage of criticism, U.S. officials in Iraq have undertaken a review of all contracts funded with Iraqi money.

They have even discovered a surplus $8 million to return to the Iraqis.

"We realized that we had to get our arms around this," said Army Maj. Gen. John Urias, the head of the contracting command.

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