Department Of Defense Didn’t Follow Accounting Rules During Iraq Reconstruction

On July 27, 2010 the Special Inspector General for Iraq Reconstruction (SIGIR) released an audit of the Department of Defense’s (DOD) management of the Development Fund for Iraq (DFI), which was used as a source of money for rebuilding Iraq. The Inspector General found that the DOD used the Fund in an ad hoc manner, never followed the guidelines set up for U.S. agencies involved in reconstruction, which means it can’t account for almost all of its spending, and is probably still using the Fund today even though it has no authority to do so anymore.

The Coalition Provincial Authority (CPA) created the Development Fund for Iraq in May 2003 with the cooperation of the United Nations. The DFI collected all of Iraq’s oil and gas revenues, leftover money from the U.N. run Oil for Food program, and frozen assets seized from the previous Baathist government. When the CPA was disbanded in January 2004 and sovereignty handed back to an interim government in Baghdad, the Iraqi Ministry of Finance was given nominal control of the Fund, but it signed over management of it back to the Americans. Some additional money was added to the DFI along the way, and by 2009 it had possessed a total of $9.149 billion. 

The SIGIR conducted two audits into the use of the DFI, one in 2009 and the other in 2010, and both times found accounting problems. In 2003 the Department of Treasury set up guidelines for all U.S. agencies to follow in Iraq, but the Department of Defense never really did. Rather, it carried out its reconstruction work in an ad hoc manner with each part of the DOD allowed to do what they wanted to, using whatever record keeping methods they chose. Only the U.S. Central Command (CENTCOM), which received $406 million from the Fund, followed Treasury’s rules. In fact, the rest of the Defense Department kept very few records of their uses of the DFI at all. For that reason, the Inspector General estimates that DOD cannot account for what it did with $8.7 billion of the $9.1 billion in the Fund.

Most of that money was actually spent in Iraq, but the sloppy management opened up opportunities for waste, fraud, and corruption. The 2009 SIGIR audit for example, discovered a 2005 case where eight CPA and Department of Defense officials were involved in bribery, fraud, and money laundering, which resulted in $7.8 million in fines.

Another troubling issue turned up by the recent audit is that the United States is no longer authorized to use the DFI, but probably is. That’s because DOD has no idea how much money they were authorized to use, where it is, or who has it because of their bad management. The Iraqis are supposed to have total control of the funds today, but part of it is lost in the Pentagon’s bureaucracy.

It should be no surprise that the Department of Defense has little idea about what happened with the Development Fund. In the early days of the U.S. occupation when the CPA was set up, it was desperate to get the Iraqi government up and running after it had collapsed. The CPA received huge bundles of money from the Federal Reserve Bank in New York, where the DFI funds were deposited. This was the largest cash transfer in U.S. history, with a total of $12 billion eventually being sent to Iraq. CPA officials were given stacks of cash to hand out to Iraqis and American contractors with little to no accounting of what it was being used for, whether it was effectively spent, and what happened afterward. Even when things became less chaotic, the DOD never organized its various agencies, and continued to let each follow its own rules, with no coordination. The SIGIR warns that the DOD has still not fixed its practices, so that they could make the same mistakes in the future. There are already reports of mismanaged reconstruction projects in Afghanistan as a result. This is just the latest example of the problems the Americans ran into trying to run the largest rebuilding project in U.S. history.

SOURCES

Special Inspector General For Iraq Reconstruction, “Development Fund for Iraq: Department of Defense Needs To Improve Financial and Management Controls,” 7/27/10
- “Hard Lessons,” 1/22/09