IRAQ: U.S. Army Failed to Investigate Warnings of Corruption

 BAGHDAD - Soon after interim Prime Minister Iyad Allawi took office last summer, he announced plans to create a tank division for the new Iraqi army.

The $283-million arms deal was supposed to display the power of Iraq's new government. But under the guidance of a task force overseen by one of America's top generals, it has become another chapter in a rebuilding process marked by accusations of corruption.

The U.S. contractor working on the project repeatedly warned the task force headed by Army Lt. Gen. David H. Petraeus that a Lebanese middleman involved in the deal might be routing kickbacks to Iraqi Defense Ministry officials. But senior U.S. military officials did not act on the contractor's pleas for tighter financial controls, according to documents and interviews.

"If we proceed down the road we are currently on, there will be serious legal issues that will land us all in jail," the contractor, Dale Stoffel, wrote in a Nov. 30 e-mail to a senior assistant to Petraeus.

Eight days later, Stoffel was shot dead in an ambush near Baghdad. The killing is being investigated by the FBI, according to numerous sources who have been interviewed by the bureau.

Since then, senior U.S. military officials have continued to work with the middleman, Raymond Zayna, who has taken over part of Stoffel's contract, according to the documents and interviews.

The previously undisclosed papers raise new questions about the U.S. military's role in the controversial contract, the subject of a previous Los Angeles Times story. And they call into question the degree to which Iraq is running its own affairs, despite the Bush administration's claims.

Although the U.S. military initially had insisted that the Iraqi government was in control of the project, e-mails obtained by The Times show that Petraeus' task force directly supervised it.

The case also raises concerns about the U.S. commitment to accountability in projects involving Iraqi money. The inspector general for Iraq's reconstruction recently criticized the failure of the former U.S.-led Coalition Provisional Authority to properly account for $8.8 billion in contracts issued using Iraqi funds.

A $24.7-million payment on the contract that was supposed to go to Stoffel is unaccounted for.

Through a spokesman, Petraeus declined to be interviewed, referring inquiries to the Iraqi Defense Ministry. Ministry officials did not respond to repeated requests.

When first contacted on the issue in January, Capt. Steve Alvarez, a spokesman for Petraeus' task force, said the arms contract was an "MOD [Ministry of Defense] matter."

"There really isn't much more to our involvement," he said.

Later, after being told that The Times had obtained e-mails indicating that task force officers were directing work on the contract , Alvarez said that "performance under this contract was of interest" to the task force.

"Quite naturally, there were contacts and communications between [the task force] and the parties to the contract in order to coordinate," Alvarez said in February. He insisted that Petraeus "was never told of any improprieties."

The weapons deal took shape last year, after Allawi began pressing U.S. military officials for the formation of the tank brigade.

Although the U.S. did not consider the brigade vital to fighting the insurgency, Allawi saw it as a politically important demonstration to Iraqi citizens that the government was reconstituting its armed forces, an official with the U.S.-led coalition said. The Iraqis agreed to pay for the formation of an entire mechanized division at an estimated cost of $283 million.

Allawi wanted at least one tank brigade in place before the Jan. 30 national assembly election. The deadline put tremendous pressure on the U.S. military to deliver the tanks quickly.

"The project was designed to deliver demonstrable capability quickly in an effort to show the Iraqi people success in building their armed forces," a coalition official said.

To implement the contract, Petraeus backed Stoffel, a weapons dealer with extensive experience in the Eastern European equipment used by the Iraqi army, as a man who could obtain and deliver the goods.

Stoffel had a long history of working with the U.S. government. He had acted on behalf of U.S. intelligence agencies to covertly buy foreign military equipment for research and testing by the U.S. military, according to documents obtained by The Times.

In a letter to Iraqi Defense Minister Hazem Shaalan on July 20, 2004, Petraeus pledged to "fully support" Stoffel, who proposed to refurbish Iraq's tanks and personnel carriers and buy new equipment from Eastern European sources.

On Aug. 16, Stoffel's firm, Wye Oak Technology, signed a "broker's agreement" with the Defense Ministry, giving him the exclusive right to act on the ministry's behalf to buy tanks and other equipment for the mechanized division.

The deal was unusual in several respects. Stoffel was awarded the contract without competitive bidding. The contract was structured so that Stoffel was paid a percentage of the price of goods purchased. That arrangement, illegal under U.S. government contracting law but not in Iraq, raised concerns among coalition officials.

Finally, Iraqi Deputy Defense Minister Mashal Sarraf insisted on another unusual provision, according to several sources with knowledge of the contract: He required Stoffel to conduct all financial transactions through middleman Zayna.

Sarraf did not respond to requests for comment made through the Defense Ministry.

In September, Stoffel signed a limited power of attorney allowing Zayna to "arrange financing and request banking guarantees" for the contract, according to a copy obtained by The Times. Zayna was to act as a broker between Stoffel and the Defense Ministry, reconciling invoices and disbursing payments.

Another Lebanese businessman, Mohammed abu Darwish, worked with Zayna's firm, General Investment Group, on the contract and participated in meetings with task force officials, e-mails and interviews show. In an unrelated case in September, Darwish was blacklisted by the Pentagon from receiving any future American contracts for his role in what it called a scheme to defraud the U.S. government of millions of dollars on a security contract in Iraq, according to a U.S. Air Force document.

Soon after he started work on the contract, Stoffel began to voice serious concerns about Zayna and his relationship with Iraqi defense officials, according to e-mails and interviews.

Stoffel protested in conversations with military officials that Zayna was charging him a 3% fee on financial transactions - exorbitant even in the middle of a chaotic war zone with limited banking services. He suspected that a portion of the fee was being kicked back to the Defense Ministry. Stoffel also said Zayna was trying to force him to use certain subcontractors that he believed were secretly controlled by Zayna and Iraqi officials.

When contacted, Darwish referred questions to Zayna, saying that "the deal belongs to him." Zayna did not respond to attempts to reach him.

By October, the Defense Ministry had issued Zayna's firm, General Investment Group, $24.7 million in payment for the refurbishing work Stoffel had done, the contractor told military officials.

The money was never delivered to Stoffel, who began raising concerns in October with U.S. officials in Washington and Baghdad. He wrote letters, previously disclosed by The Times, to Sen. Rick Santorum (R-Pa.) and a senior Pentagon official spelling out his suspicions about Zayna.

Stoffel also e-mailed U.S. Army Col. David Styles, Petraeus' assistant on the project. He asked Styles to have Petraeus intervene to stop millions of dollars being funneled without oversight through Zayna.

"There is no oversight of the money and if/when something goes wrong, regardless of how clean our hands are, heads will roll and it will be the heads of those that are reachable, and the people who are suppose to know better (US citizens, military, etc.)," Stoffel wrote in the November e-mail to Styles.

Stoffel's concerns about Zayna were shared by an official with the U.S.-led coalition in Iraq who worked as an advisor to the Defense Ministry. On learning of Zayna's role in the contract, this official urged the ministry to suspend further payments. The official also had concerns about Stoffel, who had come under scrutiny for prior arms dealings unrelated to the Iraqi contract.

The official suggested that the Iraqi Defense Ministry establish a clear audit trail on the use of the funds. However, the official noted that Styles was concerned that implementing additional accounting measures would result in delays.

Styles said the concern over accounting was "getting in the way," the official said. "It was a pretty big issue for Petraeus to get it done and delivered, and he was riding Styles hard."

In one e-mail, Styles referred to Stoffel and business associates as his "team." The e-mail describes orders to both Stoffel and Zayna on how to implement the contract, down to such mundane details as fixing an oil leak and having Zayna buy sets of tools.

Styles pressed Stoffel to draft a progress report for coalition and Iraqi officials to "get the advisors off our [backs] and ensure the uninterrupted flow of funds for the project."

For his part, Petraeus worked with top Iraqi officials to allow Stoffel access to bases across the country, according to a letter from Bruska Noori Shaways, the Defense Ministry's secretary general.

"With the assistance, cooperation and support of Lt. Gen. David J. [sic] Petraeus and the U.S. company Wye Oak Technology, the Iraq Ministry of Defense has instituted and initiated" the program to create a mechanized division, Shaways wrote in a September letter to Army Gen. George W. Casey, commander of coalition forces in Iraq.

Task force spokesman Alvarez initially said the U.S. military did not get involved in the contract dispute. "We were not aware of any U.S. military working with Wye Oak," Alvarez wrote in January.

But in response to follow-up questions from The Times, Alvarez acknowledged that Petraeus personally intervened with top Iraqi officials after learning of problems with the contract.

"When told that there was a holdup regarding refurbishment of the armored vehicles, Lt. Gen. Petraeus did ask the ministry to get on with whatever they were going to do with the contract so that the stand-up of the mechanized brigade would not be delayed," Alvarez said.

By late November, Stoffel had returned to the United States to seek help in getting his payment. He asked Pentagon officials and Sen. Santorum's office to pressure the Iraqis to release the $24.7 million to him.

Stoffel also suggested that an international accounting firm be brought in to supervise the contract's financial transactions and clear up questions about the missing money.

He warned about the consequences if the money was not recovered.

"News of it will be on the front page under the photos of President Bush, [Defense Secretary Donald H.] Rumsfeld, me" and Petraeus' task force, Stoffel wrote to another military officer in early December. "Jobs will be lost and congressional hearings will be held."

In response to Stoffel's complaints, U.S. military officials informed Zayna about the accusations of corruption, according to several people familiar with the matter. British Brig. Gen. David Clements summoned all the parties to a Dec. 5 meeting in Iraq. Afterward, Clements ordered Zayna to release the money to Stoffel, sources familiar with the meeting said.

As of Dec. 8, Stoffel still had not received the money. That day, after he left the Taji military base outside Baghdad, his SUV was rammed by another vehicle. Stoffel and a business associate, Joseph Wemple, were cut down in a hail of bullets, their bodies left at the scene.

The circumstances of the ambush remain unclear. Another occupant of the vehicle apparently escaped unharmed, leading to suspicions among the victims' friends that he may have been involved in the attack.

About a week later, an insurgent group claimed responsibility. The group, the Brigades of the Islamic Jihad, was previously unknown to terrorism experts.

Since the killing, U.S. military officials have continued working with Zayna. He is doing construction work on a U.S.-controlled military base outside Baghdad related to the project, said officials with the U.S.-led coalition working in Iraq.

Stoffel's firm has tried unsuccessfully to keep the contract. Wye Oak Technology sent a letter to U.S. and Iraqi officials on Jan. 25 saying it was prepared to resume work so long as "transparency and accountability" mechanisms were established.

The U.S. military and Iraqi Defense Ministry have so far not responded to the request. A Wye Oak official declined to comment.

Petraeus' task force has also pressed ahead with the creation of the mechanized division. The first brigade was operational just before the January election, and some elements of it are guarding Iraqi government buildings.

Coalition officials met in February with the Defense Ministry to try to track down the $24.7 million.

So far, they have had no luck accounting for the money.

Miller reported from Baghdad and Silverstein from Washington.

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