Monday, October 31, 2011

Bad Record Keeping, Not Corruption Behind Missing $6.6 Billion In Iraq Reconstruction Funds

In June 2011, the Special Inspector General for Iraq reconstruction released a quarterly report that noted $6.6 billion in rebuilding funds went missing in 2004. The media exaggerated the story, saying that corrupt officials might have stolen the money. That led the Iraqi government to threaten to sue the United States to recover any misappropriated funds. The Inspector General however, always said that it was probably a case of bad record keeping, which was endemic at the time. Now it has conducted an audit that found that most of the money ended up in the Central Bank of Iraq, under Baghdad’s control.

The missing funds came from the Development Fund for Iraq. In May 2003, the CPA was created, and given control of the Development Fund for Iraq (DFI), which was established at the same time. The Fund collected Iraq’s oil sales, seized assets, and money left over in the Oil for Food program. In total, that gave the Americans $20.7 billion to spend on rebuilding Iraq. The Fund was located at the Federal Reserve Bank of New York. $10.2 billion was shipped from New York to Baghdad in cash, the largest such transfer in U.S. history. $1.6 billion was disbursed to the Kurdistan Regional Government, $150 million went to the Ministry of Finance, and $8 billion was deposited with the Central Bank of Iraq. No records were found for the remaining $400 million, but it was probably spent as well. Another $5.8 billion was electronically transferred to Iraq. All together, this money was used to pay for reconstruction projects, operating costs for Iraq’s ministries, and salaries and pensions for Iraqi public employees. This was the mandate given to the CPA by Washington and the U.N. Security Council.

When the CPA ended its work on June 2004, it had $6.6 billion in unspent funds. $4.7 billion of it was in the Federal Reserve Bank of New York, $1.7 billion was in the Central Bank of Iraq, and $217.7 million was in a vault at a former presidential palace of Saddam Hussein in Baghdad. On June 28, the CPA gave control of the $4.7 billion in the Federal Reserve to the governor of the Central Bank of Iraq. On July 4, the governor appointed eight bank officials to manage the funds. The $217.7 million was given to the Defense Department, and mostly spent on projects even though the Special Inspector General found that the CPA had no authority to do so. In March 2008, the Pentagon still had $24.45 million leftover from that original amount when it was transferred to the government of Iraq. That was the fate of the $6.6 billion. $6.2 billion ended up with the Central Bank of Iraq, $172.25 million was spent by the Defense Department, and $24.45 million was given to Baghdad in 2008. All along, the Special Inspector General said that the $6.6 billion was probably spent in Iraq, and blamed the poor paperwork at the time for it not being accounted for. That proved to be the case.

That bad accounting was the source of the entire story. When the CPA was shut down, it originally claimed that it had given the $6.6 billion in unspent money to the Pentagon. On July 11, the Defense Department said that it had received the funds. There were no records of the transfer however, and a Pentagon financial officer in Iraq later said that it had never received the money. As it turns out, only the $217.7 million was given to Defense, and the rest was in the hands of Iraqis. This was just another example of how badly the Americans kept track of the billions placed under their authority.

The initial reports of Iraq’s missing $6.6 billion were overblown. The media jumped on the corruption angle, without fully heeding the Special Inspector General, which said that it probably involved bad record keeping. That was ultimately the case, with the CPA, the Pentagon, and the Central Bank of Iraq all having paperwork on what happened to the money. It just took a lot of hard work to find it all, and put it together. The more important question of what were the funds expended upon, and was it money well spent were not directly addressed, but the Special Inspector answered those questions as well in its “Hard Lessons” review of America’s rebuilding of Iraq. That found that the U.S. reconstruction effort was a failure because too much was spent on security, bad contracts were signed and they were mismanaged, and too much was expended upon large projects that the Iraqis never wanted nor could maintain. The same processes that led to the money being unaccounted for in the last four years were the same that led to too much of it being wasted in the first place.

For more on the missing $6.6 billion see:


Harriman, Ed, “So, Mr Bremer, where did all the money go?” Guardian 7/7/05

Special Inspector General for Iraq Reconstruction, “Development Fund for Iraq: The Coalition Provisional Authority Transferred Control over Most of the Remaining DFI Funds to the Central Bank of Iraq,” 10/26/11
- “Hard Lessons,” 1/22/09

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