KUWAIT: How Iraq Conflict Rewards A Kuwaiti Merchant Family

The war in Iraq, like all wars, has yielded a bonanza for military suppliers. Few have prospered as spectacularly as the Sultan Al-Essa family of Kuwait.



Delivering everything from machinery to T-bone steaks to U.S. forces, a company the Sultans dominate, Public Warehousing Co., has landed billions of dollars in work for the U.S. Defense Department.



It's a risky business. Dozens of employees have been killed in Iraq. But through tough tactics and adroit maneuvering, Public Warehousing and the Kuwaiti merchant family behind it have provided U.S. commanders in Iraq with what they need -- lots of storage space and dependable deliveries to places many others won't go.



The methods used by the Sultans to get contracts and quash rivals include a near-monopoly over strategic land and warehouse space in Kuwait, the U.S. military's main staging ground for the war effort in Iraq. Along the way, the family has transformed Public Warehousing into a global player in the logistics industry, whose annual revenue is now more than 40 times its level before the war.



But the Sultans are also grappling with a broad U.S. investigation of their methods. Federal prosecutors in Atlanta are looking into whether Public Warehousing and another family-dominated company, Sultan Center Food Products Co., colluded to gouge the U.S. military.



The case is shaping up as one of the biggest fraud investigations of the Iraq conflict. The U.S. is investigating whether Public Warehousing overcharged the Pentagon as much as $374 million "by inserting a related company to inflate the amount billed," a Justice Department fraud prosecutor recently told a federal court in Washington, D.C.



The U.S. also is investigating allegations that Public Warehousing "solicited as much as $80 million in kickbacks under cover of 'discounts' from U.S. suppliers," said the prosecutor, James Graham. Those figures are much higher than previously reported.



Public Warehousing says the discounts are legitimate incentives given by its suppliers for prompt payment. The U.S. companies, which include Sara Lee Corp. and ConAgra Foods Inc., say they have been cooperating with the investigation and are merely being sought as witnesses, not targets.



Beyond this, federal agents have pursued allegations that Public Warehousing got hold of early drafts of a Defense Department bid solicitation, gaining an improper advantage, according to three people involved in the matter. Public Warehousing won the contract, which was for transporting heavy equipment into and out of the war zone.



Officials at Public Warehousing Co. deny doing anything improper. "PWC's service has been timely, reliable and cost effective throughout its work on these competitively awarded contracts, and its performance has been unparalleled," the company said in a statement. It said it wasn't aware of any wrongdoing related to its contract to move heavy equipment, called the "Heavy Lift VI" contract.



Shares of the company, which had soared on the Kuwait Stock Exchange after it first became a major vendor for the U.S. war effort, have sunk back to prewar levels. Two other publicly listed companies dominated by the Sultan family are worth just a quarter of their post-invasion peaks. The clan also is beset by internal disputes, including a long-running lawsuit between two prominent Sultan family members.



Reaping Rewards



Their story provides insight into one of the least-explored aspects of the war in Iraq: A handful of businessmen in the Middle East are reaping huge rewards from Washington's need to sustain its tens of thousands of American troops.



Warehousing has long been a basic government service in Kuwait, an emirate rich in oil but dependent on imported food and consumer goods. Few people knew warehouses better than Jamil Sultan Al-Essa, who founded Sultan Center Food Products in 1976. Importing food to sell at retail, the company became a major user of warehousing.



Many of his 11 brothers also became prominent businessmen. One, Abdul Aziz Sultan Al-Essa, became chairman of Kuwait's Gulf Bank. He also had a feisty streak that stirred trouble with the emirate's ruling Sabah family. Following the first Gulf war in 1991, Abdul Aziz, appearing on ABC News's "Nightline," accused the royal rulers of plotting to kill his pro-democracy comrades. He soon lost his bank post.



Other Sultans navigated business and politics more adroitly. A firm led by Jamil, National Real Estate Co., snapped up 25% of the shares of Public Warehousing in the late 1990s, after the Kuwait government auctioned off its share.



To head Public Warehousing, the family tapped a son of Abdul Aziz, Tarek Sultan Al-Essa. The son, who was reared partly in the U.S. and attended the University of Pennsylvania's Wharton School, speaks English with an American accent and mixes comfortably in Kuwaiti and American business circles.



Public Warehousing had one especially valuable asset: land leased from the government at bargain prices, according to competitors and papers for one 1999 deal. It covers 1.62 million square meters of storage space in a prime industrial area of Kuwait. The papers show Public Warehousing paying only 10 Kuwaiti fils per square meter, the equivalent of about one-third of a penny per square foot per month.



The company's relationship with the U.S. military soon grew. Beginning in 2000, PWC leased a sprawling warehouse complex on the coast near Kuwait City to the Defense Department, which dubbed it Camp Doha. Another family member began providing latrine-cleaning services to the U.S. military through his contracting business, Kamal M. Sultan Co.



In the run-up to the U.S.'s March 2003 invasion of Iraq, Kamal joined forces with his cousin Tarek to bid for a bigger piece of the military business. The result was a bonanza. The Pentagon named Public Warehousing "prime vendor" for virtually all food that would be served to U.S. forces in Iraq and Kuwait -- some 150,000 stomachs. The five-year deal, which included nonfood items, has been renewed and expanded, and so far has been worth more than $6 billion.



But it frayed family ties. Public Warehousing obtained the contract alone, not as part of a joint venture with Kamal. He sued, claiming he'd been cheated of his share of proceeds. Public Warehousing calls his suit, in Kuwait's Court of First Instance, "without merit." The dispute continues.



The food-supply deal helped other family ventures to thrive. A leading supplier of the food that Public Warehousing delivers to U.S. troops is Sultan Center, the retail chain founded by Tarek's uncle, Jamil. Tarek and Jamil joined each other's boards. Jamil and four other Sultan family members are the largest stockholders in Sultan Center and also control a large stake in Public Warehousing.



Family Ties



The close ties are at the heart of one strand of the U.S. probe, that involving Public Warehousing's dealings with its affiliate the Sultan Center and possibly overbilling the government. Public Warehousing acknowledges it didn't tell the Pentagon of the overlap. It says it didn't have to, because Sultan Center is neither its parent nor its subsidiary. Public Warehousing plays down the family ties, saying Jamil is just one of Tarek's 21 uncles or aunts.



Close ties between the two go back more than a decade, however. Tarek is a vice president and corporate secretary at U.S. units of National Real Estate Co. -- the firm Jamil leads -- for a number of investment projects in the U.S., according to corporate records in California and Florida. In Florida, for example, a 1996 filing listed the two men as running a firm called NREC Indian Harbour Inc. A January 2007 filing lists them as the top officials in its successor, NREC Oakland Inc.



Public Warehousing's business surged after it became prime food vendor to the U.S. in Iraq. In the year before the war, 2002, revenue was about $77 million. In 2006, it was $3.69 billion.



As revenues soared, Public Warehousing expanded globally. It formed a partnership with a Dubai food and beverage distributor, Maritime Mercantile International LLC. In a matter of months Public Warehousing entered logistics markets in Oman, Qatar, Bahrain, Saudi Arabia and Jordan. In October 2004, Public Warehousing bought a warehouse operation in Lebanon, extending its reach from the Persian Gulf to the Mediterranean Sea.



In 2005, it pushed farther from home, snapping up California-based GeoLogistics Corp., a closely held freight-forwarding business, for $454 million. It took on a contract with the U.S. Navy to provide logistical support during natural-disaster responses and it won a contract to provide warehousing and distribution across the Middle East, North Africa and Pakistan for Domino's Pizza. But U.S. military business remained core.



For its business-development staff, Public Warehousing hired graduates of U.S. business schools and former U.S. military officers. Some had connections with Pentagon contracting officials. For instance, the head of the company's efforts to win defense contracts is Dan Mongeon, based in Virginia. He is a retired Army major general and was commander of the Defense Supply Center, the Pentagon contracting unit that oversees Public Warehousing's food contract, from 2000 to 2005, when the initial contract was awarded.



Mr. Mongeon declined to comment. Public Warehousing said he came aboard after its initial food-supply contract had been granted.



In 2004, Public Warehousing had its eye on what promised to be the largest U.S. military contract of its kind: a deal worth up to $1.5 billion to move heavy equipment into and out of Iraq on flatbed trucks.



'Requests for Proposals'



Before seeking bids on such contracts, military officials issue "requests for proposals," or RFPs, with detailed guidelines and expectations. Responding is a time-consuming effort. A bidder has to be able to meet all requirements.



Public Warehousing had a head start, former employees say. Donald Hill, an ex-Marine who then was a manager at Public Warehousing, says that as he started preparing for a project bid, another manager handed him a draft copy of the RFP the Pentagon would eventually issue. He says he received two more drafts with minor changes before the Pentagon finally published the RFP in 2005. Other former Public Warehousing employees, including one other executive on the project, confirm that advance copies were circulating at the company.



The RFP gave technical requirements and listed the precise formulas the Pentagon would use to evaluate bids. Public Warehousing had time to put together a proposal well in advance of publication of the RFP, Mr. Hill said in an email exchange.



He "would have never been able to develop a viable proposal" otherwise, Mr. Hill said. "For sure it helped PWC win the contract if the other companies did not have the drafts."



Mr. Hill said he didn't know how Public Warehousing managers got the advance copies, but "I knew we should not have them." He said having the draft copies nonetheless benefited U.S. taxpayers, by allowing Public Warehousing to "provide the best product we could to the U.S. Army."



U.S. law bars federal officials from disclosing contracting documents such as drafts of solicitations, and it bars companies from "knowingly" obtaining confidential government decision-making data. U.S. Army criminal investigators have questioned some former Public Warehousing employees about how the draft RFPs got into company hands, according to four former employees. They describe the probe's focus as a former major who worked in the Army Contracting Command's Kuwait office -- an office that a Pentagon report says is the subject of at least 78 corruption investigations, targeting about 50 Army officers.



Mr. Hill said Public Warehousing dismissed him in June 2005, along with many other Americans it had hired during its explosive Iraq-war growth. He said U.S. investigators probing the company have interviewed him four times about the draft RFPs, most recently this summer. Public Warehousing declined to answer written questions about Mr. Hill or comment on the specific allegation that draft proposals were circulating inside the firm.



There were other unusual aspects of the competition for the "Heavy Lift" equipment-moving contract. Pentagon officials got a mysterious email, purportedly from the government of Kuwait, with derogatory information about one competitor of Public Warehousing for the contract.



Crucial Leases



In addition, according to the U.S. Government Accountability Office, Public Warehousing informed defense officials that a third bidder was ineligible because it had lost some Kuwait land leases crucial to its bid. The landlord that canceled these leases: Public Warehousing itself.



After Public Warehousing won the contract, this third bidder, a Kuwait City company called American United Logistics, complained to the GAO that its big rival had canceled the leases in order to thwart its bid. The GAO dismissed the complaint after the Army contracting officer in Kuwait said the matter was just a land dispute between parties.



The U.S. criminal probe is now looking at whether some Army contracting officials were secretly helping Public Warehousing. The Army Contracting Agency says it doesn't comment on investigations. Public Warehousing said it "is unaware of any wrongdoing related to its successful bid for the competitively awarded Heavy Lift VI contract and the company has not been contacted by investigators. If contacted, PWC will fully cooperate."

• 20 Logistics
• 185 Corruption