U.S.A.: Iraq Contract Fraud Can Be Tried in U.S. Courts

Government lawyers said the federal False Claims Act applies to contracts issued by the CPA, which ran Iraq from shortly after the 2003 invasion until it handed over power to an interim Iraqi government last June.

Although much of the money the CPA used was seized from the former government of Saddam Hussein, U.S. government or military workers distributed it, making fraud against the CPA equal to fraud against the U.S., a group of Justice Department lawyers said in a court brief.

The brief came in response to a judge hearing a fraud lawsuit against the security firm Custer Battles LLC. Two former employees are suing Custer Battles, saying the firm fleeced the CPA out of about $50 million. The company denies any wrongdoing.

Custer Battles has argued that it cannot be sued in the U.S. for actions involving the use of seized Iraqi funds. Lawyers for both Custer Battles and its former employees said U.S. officials originally had declined to take the case against Custer Battles for the same reason.

The Justice Department brief offered no opinion on whether Custer Battles defrauded the CPA. But it did say the False Claims Act is an important tool for "rooting out any fraud that might have occurred during the occupation of Iraq."

The Justice Department brief sided with lawyers for the former Custer Battles employees, saying that the U.S. law applied because U.S. officials were handing out the money. Victor Kubli, one of the former employees' lawyers, said the brief raises the "pregnant question" of why U.S. officials originally said CPA contracts were not covered by the U.S. anti-fraud law.

A lawyer for Custer Battles said Friday he believes the False Claims Act only applies to contracts using money from the U.S. Treasury, not the Iraqi funds used in the contracts at issue. John T. Boese said in a statement that the Justice Department "is attempting in this brief to extend the False Claims Act far beyond its intent and purpose."

The former employees, Robert Isakson and William Baldwin, sued under a federal law that allows citizens to sue on behalf of the government when they suspect fraud in federal contracting. Should they win, those who bring the lawsuit can get up to 30 percent of the money recovered from the contractor.

Isakson and Baldwin say they were threatened and fired when they objected to Custer Battles' business practices. The lawsuit says Custer Battles billed the CPA for work that was never done, employees who were never hired and equipment which never arrived.

Custer Battles has denied any wrongdoing and has asked the court to throw out the case.

The company and the former employees have until April 15 to file briefs with U.S. District Judge T.S. Ellis III, who will then decide whether to dismiss the case.

The Justice Department brief also gives details of how the United States moved money to Baghdad to fund the fledgling Iraqi government and pay contractors.

A dozen U.S. military flights carried about $10.3 billion in cash to Baghdad during the time the CPA was governing Iraq, the brief said. That currency was deposited in the Central Bank of Iraq. The CPA used wire transfers to make another $6 billion in payments, the brief said.