OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION

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For more information, contact SIGIR Public Affairs at 

(703) 428-1100 or PublicAffairs@sigir.mil Special Inspector General for Iraq Reconstruction

Special Inspector General for IRAQ Reconstruction

SIGIR

Summary of Report: SIGIR 10-020 

Why SIGIR Did this Study

The Development Fund for Iraq (DFI) was 

established in May 2003 by the Administrator of 

the Coalition Provisional Authority (CPA) and 

recognized by United Nations Security Council 

Resolution 1483. DFI funds were to be used in 

a transparent manner for the benefit of the 

people of Iraq. After the CPA was dissolved in 

June 2004, the U.S. government was authorized 

by the Government of Iraq (GOI) to administer 

DFI funds made available for reconstruction 

projects. The Department of Defense (DoD) 

managed DFI funds on behalf of the U.S. 

government. That authority was withdrawn 

effective December 31, 2007. 

Our reporting objective is to determine whether 

DoD organizations adequately accounted for the

funds they received from the DFI. To help 

accomplish this objective we selectively 

reviewed records from eight DoD organizations 

that received DFI funds. 

Recommendations

SIGIR recommends that the Secretary of 

Defense take a number of actions to include 

specifying procedures for the accounting and 

reporting of non-U.S. funds in future 

contingencies, designating an executive agent to 

establish and oversee policy on the use of funds, 

establishing milestones for issuing guidance 

consistent with our DFI recommendations made 

in October 2009, and determining whether DoD 

organizations are still holding DFI funds.

Management Comments and Audit 

Response 

We received comments from the Office of the 

Under Secretary of Defense, (Comptroller), U.S. 

Army Corps of Engineers (USACE), and U.S. 

Central Command on a draft of this report. The 

Comptroller concurred with the report 

recommendations. USACE and U.S. Central 

Command provided technical comments that we 

addressed where appropriate.

July 27, 2010 

DEVELOPMENT FUND FOR IRAQ: DEPARTMENT OF DEFENSE NEEDS 

TO IMPROVE FINANCIAL AND MANAGEMENT CONTROLS 

What SIGIR Found

Weaknesses in DoD’s financial and management controls left it unable to 

properly account for $8.7 billion of the $9.1 billion in DFI funds it received 

for reconstruction activities in Iraq. This situation occurred because most 

DoD organizations receiving DFI funds did not establish the required 

Department of the Treasury accounts and no DoD organization was 

designated as the executive agent for managing the use of DFI funds. The 

breakdown in controls left the funds vulnerable to inappropriate uses and 

undetected loss.

The Department of the Treasury established guidance for accounting for 

non-U.S. government funds when U.S. agencies act as a custodian of those 

funds, but DoD did not implement the guidance in a timely manner. More 

importantly, most DoD organizations that received DFI funds did not follow 

the guidance. Only one of these organizations established the required 

account and, as a result, accounts were not established for $8.7 billion (96%) 

of the DFI funds made available to DoD. 

DoD’s guidance also directed organizations that received DFI funds to 

reconcile all transactions prior to the time the guidance was issued. 

However, the reconciliations were not done. Due to the lack of records and 

personnel knowledgeable about financial and management decisions, we 

could not determine why the guidance was not followed. Because the 

accounts were not reconciled, DoD must rely on its organizations’ 

accounting records to determine the status of DFI funds. Our selective 

review shows the records were not always complete. For example, DoD

could not provide documentation to substantiate how it spent $2.6 billion. 

We also found differences in DoD contracting practices that impacted the 

return of DFI funds to the GOI. The Joint Contracting CommandIraq/Afghanistan contracted on behalf of the GOI, while USACE and the 

U.S. Air Force Center for Engineering and the Environment (AFCEE) 

contracted on behalf of the U.S. government making those agencies 

potentially liable for payment. As a result, USACE and AFCEE could not 

terminate their contracts and return remaining DFI funds when the GOI 

directed DoD to do so at the end of 2007. 

The lack of oversight and guidance has contributed to DoD organizations 

continuing to hold DFI funds. We found organizations with open contracts 

that were holding funds, and also spending funds in some cases. USACE 

and one of its contractors and the U.S. Army Central Command (ARCENT) 

are holding about $5.4 million and $28.9 million, respectively. In October 

2009, SIGIR recommended that DoD provide guidance to USACE on the 

use and ultimate disposition of funds it was still holding. However, DoD has 

still not issued the guidance and the funds that USACE and ARCENT are 

holding are at risk of being expended. While DoD has taken steps to provide 

guidance for future contingency operations, the guidance does not cover the 

accounting and reporting of funds such as occurred with the DFI in Iraq. 
SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION

400 Army Navy Drive • Arlington, Virginia 22202

July 27, 2010 

MEMORANDUM FOR THE U.S. SECRETARY OF DEFENSE

SUBJECT: Development Fund for Iraq: Department of Defense Needs To Improve Financial 

and Management Controls (SIGIR 10-020) 

We are providing this audit report for your information and use. The report discusses the 

Department of Defense’s accountability for funds received from the Development Fund for Iraq. 

We performed this audit in accordance with our statutory responsibilities contained in Public 

Law 108-106, as amended, which also incorporates the duties and responsibilities of inspectors 

general under the Inspector General Act of 1978. This law provides for independent and 

objective audits of programs and operations funded with amounts appropriated or otherwise 

made available for the reconstruction of Iraq, and for recommendations on related policies 

designed to promote economy, efficiency, and effectiveness and to prevent and detect fraud, 

waste, and abuse. This audit was conducted as Project 1006a. 

The Office of the Under Secretary of Defense (Comptroller), U.S. Army Corps of Engineers, and 

U.S. Central Command provided written comments on a draft of this report, and the comments 

are included in Appendix D. We considered these comments in preparing this report and 

addressed them in the report where appropriate. 

We appreciate the courtesies extended to our staff. For additional information on the report, 

please contact David Warren, Assistant Inspector General for Audits, (703) 604-0982/ 

david.warren@sigir.mil or Glenn Furbish, Principal Deputy Assistant Inspector General for 

Audits, (703) 604-1388/ glenn.furbish@sigir.mil. 

Stuart W. Bowen, Jr. 

Special Inspector General for Iraq Reconstruction 

cc: U.S. Secretary of State

U.S. Ambassador to Iraq 

U.S. Under Secretary of Defense (Comptroller)

U.S. Assistant Secretary of the Army (Financial Management and Comptroller) 

U.S. Assistant Secretary of the Navy (Financial Management and Comptroller)

Commander, U.S. Central Command

Commanding General, U.S. Forces-Iraq

Commanding General, U.S. Army Corps of Engineers 

Director, Air Force Center for Engineering and the Environment 

U.S. Secretary of the Treasury

Director of the Office of Management and Budget
Table of Contents

Introduction 1

Background 1

Objective 3

DoD’s Financial and Management Controls for DFI Funds Need 

Improvement 4

DoD Did Not Establish Required Financial Controls for the DFI 4

DoD’s Management Controls for the DFI Were Inadequate 7

Defense Financial Management Regulation Needs To Be Expanded 8

Conclusions and Recommendations 9

Conclusions 9

Recommendations 9

Management Comments and Audit Response 10

Appendix A—Scope and Methodology 11

Appendix B—Acronyms 15

Appendix C—Audit Team Members 16

Appendix D—Management Comments 17

Appendix E—SIGIR Mission and Contact Information 23
1 

Development Fund for Iraq: Department of Defense Needs 

To Improve Financial and Management Controls 

SIGIR 10-020 July 27, 2010

Introduction

Since January 2004, the Department of Defense (DoD) has received about $9.1 billion from the 

Development Fund for Iraq (DFI) for reconstruction activities in Iraq.1

The Special Inspector General for Iraq Reconstruction (SIGIR) previously reported on 

weaknesses in the U.S. Army Corps of Engineers’ (USACE) accounting for DFI funds and 

problems with the DoD and Department of State process for facilitating payment of unpaid DFI 

project invoices.

 The DFI comprises funds 

from export sales of petroleum, petroleum products, and natural gas from Iraq, and surplus funds 

from the United Nations Oil-for-Food Program as well as frozen Iraqi assets. The Fund was 

established in May 2003 by the Coalition Provisional Authority (CPA) Administrator, and 

recognized by United Nations Security Council Resolution 1483, dated May 22, 2003. The 

resolution requires that the funds be used in a transparent manner for: (1) humanitarian needs of 

the Iraqi people, (2) economic reconstruction and repair of Iraq’s infrastructure, (3) continued 

disarmament of Iraq, (4) cost of Iraqi civilian administration, and (5) other purposes benefiting 

the people of Iraq. After the CPA was dissolved in June 2004, the U.S. government was 

authorized by the Government of Iraq (GOI) to administer the DFI funds made available for 

reconstruction projects until that authority was withdrawn effective December 31, 2007. 

2

Background 

 SIGIR is providing this report on DoD’s overall accounting for DFI funds. 

The CPA was established in May 2003 for the temporary governance of Iraq following the 

invasion of Iraq. The CPA Administrator managed DFI funds from May 2003 through June 

2004, and CPA Regulation 2, “Development Fund for Iraq,” described the responsibilities for the 

administration, use, accounting, and auditing of the DFI. The International Advisory and 

Monitoring Board was established by the United Nations to monitor and audit the use of the 

DFI.3

The CPA was dissolved in June 2004. The Interim Iraqi Government was responsible for 

administering Iraq’s affairs until the permanent Government of Iraq was formed in 2006. In June 

2004, control of the DFI was transferred to the GOI and the Iraq Minister of Finance was 

assigned responsibility for managing the DFI. The Minister of Finance established two accounts 

 Audit reports completed for the GOI indicated that U.S. government agencies did not 

maintain a complete and accurate database of reconstruction contracts awarded by the CPA. 

 

1 This figure updates information previously reported in Development Fund for Iraq: Policy Guidance Needed To 

Enhance Accountability of USACE-managed Funds, SIGIR 10-006, 10/29/2009. 2 SIGIR 10-006 and Process for Continuing Invoice Payment for the Development Fund for Iraq Needs Attention, 

SIGIR 10-014, 04/27/2010. 3 The International Advisory and Monitoring Board performed several audits of the DFI. The audit reports that we 

reviewed are listed in Appendix A. 
2 

within the Federal Reserve Bank of New York for DFI funds: (1) the Central Bank of Iraq 

account (also known as the main account), and (2) the DFI sub-account (also known as the 

secondary account). The sub-account was available to U.S. government agencies for their use, 

with GOI approval, in administering DFI contracts. Since January 2004, USACE received 

almost $1.3 billion from the DFI main account and $827.6 million from the DFI sub-account for 

relief and reconstruction contracting activities in Iraq.4

In addition to funds provided from the DFI main account and sub-account, DoD received DFI 

funds from three other sources. When the CPA dissolved, $6.6 billion was transferred from the 

CPA Comptroller to the Joint Area Support Group-Central (JASG-C) Comptroller, a DoD 

organization whose role was, in part, to manage and control the DFI funds transferred to it from 

the CPA. Some of the money was intended to pay for ongoing reconstruction contracts, but 

other funds were available for new contracts. In March 2008, $24.5 million in remaining cash 

was returned to the GOI. Also, the Interim Iraqi Government provided $136.0 million in 2004 

and 2005 from the Central Bank of Iraq for the Commander’s Emergency Response Program 

(CERP). The GOI later provided $270.0 million in 2008 to fund Iraq-Commander’s Emergency 

Response Program (I-CERP) projects. All five sources of funds are listed in Table 1. 

Table 1: Sources of DFI Funds Made Available to DoD Since 2004 ($ millions)

Source Year(s) Received Amount

DFI Main Account 2004 $1,274.8

DFI Sub-account 2004 827.6 

Cash Transferred from the CPA 2004 6,641.1

Interim Iraqi Government 2004-05 136.0

Government of Iraq 2008 270.0

Total $9,149.5 

Source: SIGIR analysis of DoD data as of 06/10/2010. 

From June 2004 through December 2007, the Minister of Finance gave DoD the authority to 

monitor and confirm performance, certify and/or make payments, and otherwise administer the 

DFI-funded contracts and grants it had awarded. In addition to the JASG-C, we have identified 

seven other DoD organizations that shared these responsibilities: (1) U.S. Army’s Project and 

Contracting Office for Iraq, (2) USACE, (3) U.S. Army Central Command (ARCENT), (4) 

Multi-National Corps-Iraq (MNC-I), (5) Joint Contracting Command Iraq/Afghanistan (JCCI/A),5

 

4 The DFI sub-account also included an additional $2.1 billion in deposits by the end of 2004. These funds were 

used for electronic fund transfers to contractor bank accounts as well as to establish letters of credit at financial 

institutions to facilitate future payments on approved projects. These projects involved contracts administered by 

DoD agencies.

 (6) U.S. Air Force Center for Engineering and the Environment (AFCEE), and (7) 

Department of the Navy. 

5 The U.S. Central Command’s Joint Theater Support Contracting Command subsumed JCC-I/A’s activities on June 

11, 2010. This new command is commonly known as the CENTCOM Contracting Command.
3 

JCC-I/A was the last organization to have such authority when the U.S. stewardship over the DFI 

ended; however, it never received or managed DFI funds. Specifically, the Minister of Finance, 

in a letter to the Commander, JCC-I/A, agreed to extend JCC-I/A’s authority to administer DFIfunded contracts until December 31, 2007. In this letter, the Minister of Finance specified that 

JCC-I/A should not award any new contracts after that date, nor renew or extend any previously 

awarded contracts. The Minister also noted that all contracts were to be completed by December 

31, 2007, and that remaining funds were to be transferred from the sub-account to the main 

account. SIGIR’s prior work has noted problems with DoD’s DFI accounting and raised

questions as to whether DoD can fully identify the DFI funds potentially remaining in its 

accounts (see Appendix A for a list of these reports). The vulnerability of not having proper 

financial and management controls over these types of funds was demonstrated in a 2005 SIGIR 

report addressing paying agent activities in the South-Central Region of Iraq.6

Objective 

 The report 

concluded that the paying agents and the DFI Account Manager could not properly account for 

or support more than $96.6 million in cash and receipts. Consequently, SIGIR conducted a 

criminal investigation of the use of these funds which resulted in 8 convictions of CPA and DoD 

officials for bribery, fraud, and money laundering; and $7.8 million in fines, forfeitures, and 

restitution payments. 

Our reporting objective is to determine whether DoD organizations adequately accounted for the 

funds they received from the DFI. 

While we were able to achieve the objective of our audit, our work was limited by a lack of 

records maintained by the DoD organizations that received DFI funds. Additionally, we were 

unable to locate personnel with knowledge of DFI activities in the 2003-2005 timeframe when 

the largest part of the DFI contracting activities occurred. 

For a discussion of the audit scope and methodology, see Appendix A. For a list of acronyms, 

see Appendix B. For the audit team members, see Appendix C. For management comments, see 

Appendix D. For the SIGIR mission and contact information, see Appendix E. 

 

6 Control of Cash Provided to South-Central Iraq, SIGIR 05-006, 04/30/2005.
4 

DoD’s Financial and Management Controls for DFI 

Funds Need Improvement

Weaknesses in DoD’s financial and management controls left it unable to properly account for 

$8.7 billion of the $9.1 billion in DFI funds it received for reconstruction activities in Iraq. The 

Department of the Treasury established guidance for accounting for non-U.S. government funds 

when U.S. agencies were acting as a custodian of those funds. DoD did not establish the 

guidance in a timely manner, but more importantly, once established the guidance was not 

followed. Because the guidance was not followed, DoD must rely on its organizations’ 

accounting records to determine the status of DFI funds. Our selective review shows the records 

were not always complete.

Additionally, DoD did not designate an executive agent responsible for developing policy or 

overseeing the use of DFI funds and key information on using DFI funds was not transmitted to 

the organizations that received funds. Instead, organizations were left to act at their own 

discretion on contracting approaches, and some organizations wrote DFI contracts in a manner 

that has made the U.S., rather than the GOI, potentially liable. DoD organizations also continue 

to keep contracts open and are holding and spending DFI funds in some cases. SIGIR previously 

recommended that DoD provide guidance on the use and ultimate disposition of funds being held 

by USACE but DoD has still not issued the guidance. Also, unless DoD or other responsible 

agencies establish and follow guidance in future contingencies, they will be unable to account for 

similar funds making them vulnerable to inappropriate uses and undetected loss.

DoD Did Not Establish Required Financial Controls for the DFI

DoD did not establish deposit fund accounts within the Department of the Treasury for about 

$8.7 billion out of the $9.1 billion (about 96%) of the DFI funds it controlled. Treasury 

Financial Manual Volume 1, Part 2, Chapter 1500, Section 1535—Deposit Funds Accounts—

states that the Financial Management Service’s Budget Reports Division is to establish deposit 

fund accounts for agencies to record monies that do not belong to the Federal government. 

Treasury’s guidance states that to maintain accountability agencies must establish separate 

deposit fund accounts to hold non-U.S. government funds, such as from a foreign government, 

for individual statutory authorizations or programs, for which the U.S. government is acting 

solely as a banker, fiscal agent, or custodian. These accounts, a key financial management 

control, enable agencies to maintain accountability for non-U.S. government funds by tracking 

obligations and expenditures on a monthly basis, just as they would with U.S.-appropriated 

funds. According to a Treasury official, DFI funds are subject to this requirement, and each U.S. 

government agency possessing DFI funds is responsible, in consultation with the Office of 

Management and Budget, for requesting that the deposit fund account be established. 

The DoD Under Secretary of Defense (Comptroller) issued guidance for establishing deposit 

fund accounts. However, the guidance was not issued until December 2004, about six months 

after most of the DFI funds had been made available to DoD organizations for reconstruction. 

This guidance provided the Assistant Secretary of the Army (Financial Management and 

Comptroller) direction on the establishment of a deposit fund account in accordance with the 
5 

Treasury Financial Manual and noted that it applied to all parties involved in the receiving, 

disbursing, accounting for, securing, and reporting of DFI assets following transition from the 

CPA to the Interim Iraqi Government. The guidance also directed DoD organizations to develop 

and implement procedures to reconcile DFI transactions prior to December 2004. 

However, only one DoD organization established the required deposit fund account and reported 

its DFI financial activities to the Department of the Treasury. ARCENT received a total of 

$136.0 million from the Interim Iraqi Government, the first allocation being received in 

December 2004, for use in the CERP. At that time, ARCENT deposited the money in a deposit 

fund account in accordance with the DoD guidance. Later, in 2008, when the GOI provided an 

additional $270.0 million in DFI funds for the I-CERP, ARCENT managed the funds as a 

separate budget line in the original deposit fund account. As a result, ARCENT was readily able 

to provide us with an accounting of its DFI obligations, expenditures, and remaining balances. 

The other DoD organizations were not readily able to provide that information. 

SIGIR found that other DoD organizations that were required to establish separate deposit fund 

accounts did not do so. It was unclear why some organizations such as JASG-C and the 

Department of the Navy did not establish separate deposit fund accounts and instead used other 

processes to track DFI funds. Our ability to determine this was limited due to a lack of personnel 

that were knowledgeable about the subject and records maintained by these organizations. We 

found no evidence that DoD organizations reconciled their DFI transactions prior to December 

2004. Consequently, DoD is uncertain about the amount of DFI funding made available to DoD 

or the amount of DFI funding its organizations may be holding. We selectively reviewed 

available records from eight DoD organizations that received DFI funds and found the 

information was not always complete. For example: 

• During our visit to Iraq, we met with JASG-C officials to discuss their DFI contracting 

activities associated with these funds. The officials told us they were not in Iraq at that 

time and, therefore, were not familiar with JASG-C’s DFI activities. The officials 

provided us with electronic copies for all of JASG-C’s DFI files retained in Iraq. Our 

review of this information showed that $4.0 billion of the $6.6 billion in cash transferred 

from the CPA was intended to pay ongoing reconstruction contracts executed by the 

CPA. However, the electronic records did not show the manner in which these funds 

were expended. JASG-C returned $24.5 million in cash in March 2008 to the GOI. We 

could not account for the approximately $2.6 billion in remaining funds made available to 

JASG-C from these records. 

• USACE was the only DoD organization to receive direct funding transfers, totaling about 

$2.1 billion, from the DFI accounts at the Federal Reserve Bank of New York. In 

October 2009, SIGIR reported that USACE officials provided us with a computergenerated listing indicating that it received a total of $2.4 billion in DFI funding.7

 

7 SIGIR 10-006.

 

However, because it did not establish a single DFI accounting code, USACE experienced 

difficulty isolating the amount of DFI funding made available to it. In follow-up work, 

USACE provided us copies of all available electronic fund transfer documents to support 

the amount of funding the agency received directly from the DFI main and sub-accounts. 
6 

From the information provided, we could not determine or validate the source of the 

remaining $300.0 million USACE reportedly received. The gap occurred because the 

records prior to 2004, including cash receipts in support of early U.S. reconstruction work 

authorized by the CPA, were not readily available.

• USACE did not establish a separate deposit fund account to report its DFI-funding status 

to the Department of the Treasury. USACE officials told us they considered the DFI 

funds as advanced payments for reconstruction work they were planning. As a result, 

USACE combined the funds with regular appropriations, including Military Construction 

and Operation and Maintenance, for the purpose of reporting them to the Department of 

the Treasury. 

• MNC-I records show that, as of June 1, 2005, it had about $15.0 million in unexpended 

DFI funds from the original $368.1 million in total DFI funds it received. MNC-I 

officials told us that MNC-I did not award contracts itself but instead provided the funds 

to its subordinate commands to execute DFI contracts. MNC-I officials in Iraq at the 

time of our audit did not have knowledge or record of the final disposition of the 

unexpended DFI funds. The officials told us that DFI obligations and disbursements 

were entered into the Army’s Standard Finance System which is maintained by the 

Defense Finance and Accounting Service. 

The Defense Finance and Accounting Service is responsible for identifying and 

implementing finance and accounting requirements, systems, and functions for DoD. 

However, Defense Finance and Accounting Service officials told us they had no record of 

MNC-I transactions involving DFI. We were unable to find any other office in DoD that 

could provide us with information on the status of these unexpended funds. 

Consequently, we could not reconcile MNC-I’s obligations and expenditures for DFI. 

• We also could not identify the process and procedures that the Department of the Navy 

used to track DFI funds. Since the majority of funds were not in deposit fund accounts, 

we attempted to identify how much DFI the Navy as well as other DoD organizations 

may have received by querying the Iraq Reconstruction Management System. The data 

in that system, which captures the status of Iraq reconstruction projects, shows the Navy 

received $29.2 million in DFI funds. While in Iraq, we located and reviewed several 

Navy DFI-funded contracts which confirmed that the Navy was involved in DFI 

contracting activities. We contacted the Office of the Assistant Secretary of the Navy 

(Financial Management and Comptroller) as well as the Naval Facilities Engineering 

Command and were told they had no knowledge of these DFI contracting activities. 

We contacted the Defense Finance and Accounting Service, but they did not have any 

financial data on the Navy’s DFI-contracting activities. Due to the problems associated 

with completeness and accuracy of data in the Iraq Reconstruction Management System 

and lack of readily available financial records, SIGIR is uncertain whether this represents 

the Navy’s total amount of DFI contracting activities.8

 

8 For purposes of this audit, we used the data only to identify DoD organizations that we should talk to about 

possible DFI contracting activities in Iraq. SIGIR previously reported that the data in this automated system was 

inconsistent, inaccurate, and incomplete. See Comprehensive Plan Needed To Guide the Future of the Iraq 

Reconstruction Management System, SIGIR 08-021, 07/26/2008.
7 

DoD’s Management Controls for the DFI Were Inadequate 

DoD did not designate an executive agent within DoD to be responsible for establishing and 

overseeing policy for, or controls over, the use of DFI funds. Also, key information on using 

DFI funds was not transmitted to all organizations that received funds. DoD has not established 

management controls to ensure consistent contracting practices when using DFI funds. SIGIR 

found that some DoD organizations obligated DFI funds on contracts on behalf of the GOI, while 

other organizations contracted on behalf of the U.S. government. This caused problems when 

the GOI directed that DFI contracts be terminated at the end of 2007. SIGIR also found that due 

to the lack of an executive agent to oversee DFI policies within DoD, some organizations did not 

receive information directing them to terminate contracts and return remaining DFI funds. At 

least two organizations and one contractor are holding up to $34.3 million in DFI funds. 

However, as previously discussed, SIGIR cannot be certain of the total amount of DFI funds 

remaining in DoD organization accounts because of the lack of adequate financial controls.

DoD did not provide guidance on awarding contracts using DFI funds. Lack of guidance for 

reconstruction contracting in Iraq using DFI funds contributed to organizations conducting their 

DFI activities differently. For example, JCC-I/A followed the practice put in place by CPA 

Memorandum #4 and awarded DFI-funded contracts on behalf of the GOI rather than the U.S. 

government. By contracting in this manner, the U.S. was not liable for payment and resolution 

of these contracts; instead, the GOI was responsible for them. This enabled JCC-I/A to terminate 

DFI contracts and arrange for the return of $24.5 million in remaining DFI cash being held by 

JASG-C almost immediately after the GOI directed it to do so. 

Conversely, contracting organizations such as AFCEE and USACE awarded DFI-funded 

contracts in a manner that could make the U.S. government liable for payment and resolution of 

the contracts. These organizations issued task orders on existing U.S. contracts in an attempt to 

speed up the start time of the reconstruction work. Some contractors have DFI invoices that 

have not been paid by the GOI, and questions have been raised by contracting officials within 

AFCEE about whether the U.S. government could be liable for paying the outstanding invoices. 

Further, in a response to a congressional inquiry on DFI contracts, the U.S. Air Force Office of 

Legislative Liaison, in a letter dated February 12, 2008, stated that contracts issued by AFCEE 

were awarded with the mutual understanding that payment for work was backed by the authority 

of the Federal Acquisition Regulation and the U.S. government. Moreover, USACE officials 

told us that if the preferred method of contracting was between the GOI and the contractor, it was 

never communicated to them by any organization in DoD. Nonetheless, the practical result of 

these contracting practices is that USACE and one of its contractors are still holding up to $5.4 

million of DFI funds almost 2.5 years after the GOI directed their return.9

Similarly, DoD has not provided Department-wide guidance on terminating contracts and 

returning funds to the GOI. USACE stated that DoD never directed them to terminate contracts 

and return remaining DFI funds when the U.S. authority to administer the DFI ended. USACE 

previously returned $13.1 million to the GOI as the result of a SIGIR investigation, and USACE 

is awaiting the completion of several audits before making a decision on returning the $5.4 

 

9 The Defense Contract Audit Agency has questioned $2.1 million of the $2.2 million held by a USACE contractor. 

USACE is responsible for determining whether it will deny the claim and the final disposition of the funds being 

held by the contractor. USACE had not made its determination prior to the time this report was issued. 
8 

million that it and one of its contractors are holding, according to a USACE official. Also, 

ARCENT officials stated they never received guidance or direction from higher headquarters 

indicating that residual DFI balances were to be returned to the GOI at the end of 2007, and that 

no new DFI contracting activities should take place after that date. 

In the absence of guidance, ARCENT has continued to spend DFI funds. ARCENT obligated 

and expended most of its residual DFI balance remaining from the $136.0 million it received in 

2004 and 2005 for use in CERP projects. ARCENT records show that on December 31, 2007, it 

had about $10.1 million in unobligated DFI funds from the $136.0 million it received in 2004-05 

to use for CERP projects that could have been returned to the GOI had DoD instructed it to do 

so. However, a U.S. Army Finance Center official concluded that when the GOI provided an 

additional $270.0 million for the I-CERP on April 14, 2008, that residual funding from the initial 

DFI authorizations did not need to be returned. As a result, ARCENT authorized the initiation of 

five new CERP projects in 2008 and 2009 and continued to spend its unobligated funds from the 

2004-05 money. Only $473,000 remained as of May 19, 2010. 

Furthermore, $28.4 million remains unobligated of the funds that ARCENT received in 2008. 

The Memorandum of Understanding covering the implementation and oversight of the I-CERP is 

silent on if, or when, remaining funds should be returned to the GOI. However, due to the fact 

that there has been little recent activity in this account, we question whether ARCENT needs to 

hold the remaining I-CERP funds. 

DoD has still not provided guidance on terminating DFI contracts and returning the funds to the 

GOI. SIGIR previously recommended the Under Secretary of Defense (Comptroller)/Chief 

Financial Officer develop guidance on the use and ultimate disposition of DFI funds that USACE 

was holding because the GOI withdrew the U.S.’ authority for administering DFI funds effective 

December 31, 2007.10

Defense Financial Management Regulation Needs To Be Expanded 

 The Under Secretary of Defense concurred and estimated the action 

would be completed by January 2010. However, as of the issuance of this report, the guidance 

had still not been issued. SIGIR believes that until DoD issues guidance for its organizations to 

stop obligating and spending DFI funds, the funds currently held by USACE and ARCENT are 

at risk of being expended without proper authorization from the GOI. 

In November 2008, DoD established a new chapter within its Financial Management Regulation 

on administering, using, and accounting for vested and seized funds and property during 

contingency operations to ensure transparency and accountability of these assets.11

 

10 SIGIR 10-006.

 The new 

chapter, however, does not cover the accounting and reporting of non-U.S. government funds 

such as the DFI. During our exit conference with the Office of the Secretary of Defense 

(Comptroller), officials acknowledged the need for updated procedures for the accounting and 

reporting of all non-U.S. government funds made available to DoD for future contingency 

operations to prevent inappropriate uses of the funds to deter and detect loss. 

11 DoD Financial Management Regulation, Volume 12, Chapter 29, Administering, Using and Accounting for Vested 

and Seized Funds and Property During Contingency Operations. SIGIR has an ongoing audit of Iraqi seized and 

vested assets and will be reporting the results of this audit later in the year.
9 

Conclusions and Recommendations

Conclusions 

Weaknesses in DoD’s financial and management controls left it unable to properly account for 

$8.7 billion of the $9.1 billion in DFI funds it received for reconstruction activities in Iraq. This 

situation occurred because most DoD organizations receiving DFI funds did not establish the 

required Department of the Treasury accounts or reconcile DFI accounts as required by DoD. 

Only one organization established the required account. DoD cannot readily and completely 

account for its obligations, expenditures, and remaining balances associated with the DFI. The 

breakdown in controls left the funds vulnerable to inappropriate uses and undetected loss. 

Further, no DoD organization was designated as the executive agent for managing the use of DFI 

funds. This situation contributed to the lack of timely and adequate guidance on the use and 

return of DFI funds to the GOI. Differences in contracting practices contributed to DoD’s 

inability to comply with GOI direction to terminate contracts and return DFI funds. DoD 

organizations still have open contracts and are holding and spending DFI funds in some cases. 

While DoD has taken some steps to provide guidance on the use of non-U.S. government funds 

in future contingency operations, the guidance does not cover the accounting and reporting of 

funds such as occurred with the DFI in Iraq. Until it provides such guidance, DoD and other 

responsible agencies will be unable to properly account for similar funds in future contingencies. 

Lastly, DoD has not issued guidance, as we recommended in October 2009, on the use and 

disposition of remaining DFI funds and, until it does, these funds are at risk of being expended. 

Recommendations 

SIGIR recommends that the Secretary of Defense direct the: 

1. Under Secretary of Defense (Comptroller) to update the DoD Financial Management 

Regulation to specify procedures for the accounting and reporting of all non-U.S. 

government funds made available to DoD organizations for use in future contingency 

operations. This guidance should also include the designation of an executive agent 

within DoD to be responsible for establishing and overseeing policy on the use of these 

funds. 

2. Under Secretary of Defense (Comptroller) to establish specific milestones for issuing 

guidance consistent with our recommendation in October 2009. 

3. Service Secretaries and the Commander, U.S. Central Command to determine the amount 

of DFI funds their respective organizations received and whether they are still holding 

any of those funds. At a minimum, these organizations would include the: (1) JASG-C, 

(2) U.S. Army’s Project and Contracting Office for Iraq, (3) USACE, (4) ARCENT, (5) 

MNC-I, (6) JCC-I/A, (7) AFCEE, and (8) Department of the Navy.
10 

Management Comments and Audit Response

The Under Secretary of Defense (Comptroller), USACE, and U.S. Central Command provided 

SIGIR written comments. The Deputy Chief Financial Officer concurred with our 

recommendations and identified specific actions it plans to take, and stated that all actions would 

be completed by November 2010. SIGIR believes the identified actions, if implemented as 

planned, will address SIGIR’s concerns. 

USACE and U.S. Central Command provided technical comments. Each stated it was concerned

with the draft report statement that DoD was unable to account for $8.7 billion of the $9.1 billion 

of the DFI funds it received for reconstruction activities in Iraq. USACE noted that it was able 

to provide information on $2.0 billion of DFI it received and U.S. Central Command stated the 

lack of a deposit fund account does not result in lack of accountability for all of the funds DoD

received. Based on these comments, we clarified our statement to note that DoD had not 

properly established the required deposit fund accounts at the Department of the Treasury for 

$8.7 billion of the $9.1 billion it received. 

USACE and U.S. Central Command provided other technical comments that SIGIR addressed 

where appropriate. 
11 

Scope and Methodology

Appendix A—Scope and Methodology

In November 2009, the Special Inspector General for Iraq Reconstruction (SIGIR) initiated 

Project 1006a as part of its series of audits on the Development Fund for Iraq (DFI). Our 

reporting objective is to determine whether Department of Defense (DoD) organizations 

adequately accounted for the funds they received from the DFI. This audit was performed under 

the authority of Public Law 108-106, as amended, which also incorporates the duties and 

responsibilities of inspectors general under the Inspector General Act of 1978. SIGIR conducted 

its work from November 2009 through June 2010 in the United States and Iraq. 

While we were able to achieve the objective of our audit, our work was limited by a lack of 

records maintained by DoD organizations that received DFI funds. Additionally, we were 

unable to locate personnel with knowledge of DFI activities in the 2003-2005 timeframe when 

the largest part of the DFI contracting activities occurred.

To identify DoD organizations that participated in DFI contracting activities in Iraq, as a starting 

point, we relied on information contained in the Iraq Reconstruction Management System. 

SIGIR previously reported that Iraq Reconstruction Management System data suffered from a 

lack of consistency, accuracy, and completeness.12

To evaluate the adequacy of financial controls over DFI funds, we reviewed financial records 

and met with officials from the Department of the Treasury; Office of the Secretary of Defense 

(Comptroller); Assistant Secretary of the Army (Financial Management and Comptroller); and 

the U.S. Army Corps of Engineers, Millington, Tennessee. We also reviewed financial records 

during site visits to the Defense Finance and Accounting Service in Rome, New York and 

Indianapolis, Indiana, as well as the Federal Reserve Bank of New York. In addition, we 

reviewed prior SIGIR, International Advisory and Monitoring Board, and other reports 

addressing the adequacy of financial controls over the DFI. 

 However, for purposes of this audit, we used 

the data primarily to identify DoD organizations that may have received DFI funds for use in 

reconstruction activities. Additionally, we selectively reviewed the records of the eight DoD 

organizations we identified as receiving DFI funds. We tested those records to assess their 

completeness and accuracy.

To attempt to determine whether DoD organizations were still holding DFI funds, we reviewed 

documents and met with officials from the Office of Management and Budget; Department of 

State; Department of the Treasury; Office of the Secretary of Defense (Comptroller); Assistant 

Secretary of the Army (Financial Management and Comptroller); U.S. Army Budget Office; U.S. 

Army Central Command; U.S. Army Corps of Engineers; the Department of the Navy; and the 

U.S. Air Force Center for Engineering and the Environment. In Iraq, we reviewed DFI files and 

met with officials from the Joint Contracting Command-Iraq/Afghanistan, Multi-National CorpsIraq, Joint Area Support Group-Central, and the U.S. Army Corps of Engineers.

 

12 Comprehensive Plan Needed To Guide the Future of the Iraq Reconstruction Management System, SIGIR 08-021, 

07/26/2008.
12 

The audit was conducted in accordance with generally accepted government auditing standards. 

Those standards require that SIGIR plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions based on our audit 

objectives. SIGIR believes that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives. 

Use of Computer-processed Data

To determine the amount of DFI funding that DoD organizations received, we reviewed a variety 

of computer-generated reports. For example, we reviewed computer-generated listings of 

deposits and disbursements from the DFI sub-account at the Federal Reserve Bank of New York, 

fund status reports developed by the Defense Finance and Accounting Service, and computergenerated spreadsheets provided by the Joint Area Support Group-Central. Where records were 

available, we cross-checked these records with the computer-processed data to ensure accuracy

of the data retrieved from the computer systems. For example, we compared the balances on the 

Defense Finance and Accounting Service-generated records to similar information contained in 

Department of the Treasury records. As stated throughout this report, comprehensive historical 

records depicting the DFI funding history and current status were generally not available. 

However, we consider the computer-generated data provided to and collected by SIGIR, 

including those contained in the Iraq Reconstruction Management System, to be sufficiently 

reliable for the purposes for which they are used in this audit. 

Internal Controls

In conducting this audit, we reviewed DoD’s internal management and financial controls for 

administering the DFI. As a key part of these controls, we reviewed the Department of the 

Treasury’s Financial Manual addressing the requirement to establish deposit fund accounts for 

agencies to record monies that do not belong to the Federal government. We also reviewed 

DoD’s Financial Management Regulation, other DoD guidance and fund status reports, and held 

discussions with key officials to gain an understanding of the internal controls governing the use 

of DFI funds. We also considered comments and conclusions in independent audit reports 

concerning the adequacy of DoD’s internal controls over the DFI. The reports we reviewed are 

listed below. We presented the results of our review of internal controls in this report as 

appropriate. 

Related Audit Reports

We reviewed the following applicable audit reports issued by SIGIR, DoD, Defense Contract 

Audit Agency, U.S. Army Audit Agency, International Advisory and Monitoring Board, and the 

U.S. House of Representatives. 

Special Inspector General for Iraq Reconstruction 

Process for Continuing Invoice Payment for the Development Fund for Iraq Needs Attention, 

SIGIR 10-014, 04/27/2010. 
13 

Development Fund for Iraq: Policy Guidance Needed To Enhance Accountability of USACEmanaged Funds, SIGIR 10-006, 10/29/2009. 

Comprehensive Plan Needed To Guide Future of the Iraq Reconstruction Management System, 

SIGIR 08-021, 07/26/2008. 

Attestation to Development Fund for Iraq Cash in the Possession of the Joint Area Support 

Group-Central, SIGIR 08-012, 03/13/2008. 

Iraq Reconstruction: Lessons in Program and Project Management, SIGIR, 03/2007.

Follow-up on SIGIR Recommendations Concerning the Development Fund for Iraq (DFI), 

SIGIR 06-036, 01/29/2007. 

Management of the Iraqi Interim Government Fund, SIGIR 06-031, 10/27/2006. 

Iraq Reconstruction: Lessons in Contracting and Procurement, SIGIR, 07/2006. 

Administration of Contracts Funded by the Development Fund for Iraq, SIGIR 05-008, 

04/30/2005. 

Control of Cash Provided to South-Central Iraq, SIGIR 05-006, 04/30/2005. 

Coalition Provisional Authority Comptroller Cash Management Controls Over the Development 

Fund for Iraq, SIGIR 04-009, 07/28/2004. 

Department of Defense

Internal Controls Over Payments Made in Iraq, Kuwait and Egypt, Department of Defense, 

Inspector General, Report No. D-2008-098, 05/22/2008. 

Defense Contract Audit Agency

Defense Contract Audit Agency, Audit Report No. 4261-2009W17900003, 05/18/2010. 

U.S. Army Audit Agency 

Accounting for Seized Assets and Development Fund for Iraq Balances, USAAA, Audit Report: 

A-2008-0109-FFM, 05/22/2008. 

International Advisory and Monitoring Board 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the year ended 

31 December 2007, Independent Auditor’s Report, Ernst and Young, 06/12/2008. 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the year ended 

31 December 2006, Independent Auditor’s Report, Ernst and Young, 07/05/2007. 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the period from 

1 July 2005 to 31 December 2005, Independent Auditor’s Report, Ernst and Young, 09/13/2006. 
14 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the period from 

1 January 2005 to 30 June 2005, Independent Auditor’s Report, KPMG, 09/29/2005. 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the period from 

29 June 2004 to 31 December 2004, Independent Auditor’s Report, KPMG, 04/06/2005. 

U.S. House of Representatives

Rebuilding Iraq: U.S. Mismanagement of Iraqi Funds, U.S. House of Representatives, 

Committee on Government Reform-Minority Staff, Special Investigations Division, 06/2005. 
15 

Appendix B—Acronyms

ACRONYM DESCRIPTION

AFCEE Air Force Center for Engineering and the Environment 

ARCENT Army Central Command

CERP Commander’s Emergency Response Program

CPA Coalition Provisional Authority

DFI Development Fund for Iraq

DoD Department of Defense

GOI Government of Iraq

I-CERP Iraq-Commander’s Emergency Response Program

JASG-C Joint Area Support Group-Central

JCC-I/A Joint Contracting Command-Iraq/Afghanistan

MNC-I Multi-National Corps-Iraq

SIGIR Special Inspector General for Iraq Reconstruction

USACE U.S. Army Corps of Engineers
16 

Appendix C—Audit Team Members

This report was prepared and the audit conducted under the direction of David R. Warren, 

Assistant Inspector General for Audit, Office of the Special Inspector General for Iraq 

Reconstruction. The staff members who conducted the audit and contributed to the report 

include: 

Benjamin H. Comfort 

M. Glenn Knoepfle 

Jason G. Venner 

L. Michael Welsh
17 

Appendix D—Management Comments
18 
19 
20 
21 
22 
23 

Appendix E—SIGIR Mission and Contact Information

SIGIR’s Mission Regarding the U.S. reconstruction plans, programs, and 

operations in Iraq, the Special Inspector General for Iraq 

Reconstruction provides independent and objective: 

• oversight and review through comprehensive audits, 

inspections, and investigations 

• advice and recommendations on policies to promote 

economy, efficiency, and effectiveness

• deterrence of malfeasance through the prevention and 

detection of fraud, waste, and abuse 

• information and analysis to the Secretary of State, the 

Secretary of Defense, the Congress, and the American 

people through Quarterly Reports 

Obtaining Copies of SIGIR 

Reports and Testimonies

To obtain copies of SIGIR documents at no cost, go to 

SIGIR’s Web site (www.sigir.mil).

To Report Fraud, Waste, and 

Abuse in Iraq Relief and 

Reconstruction Programs

Help prevent fraud, waste, and abuse by reporting suspicious 

or illegal activities to the SIGIR Hotline:

• Web: www.sigir.mil/submit_fraud.html

• Phone: 703-602-4063 

• Toll Free: 866-301-2003 

Congressional Affairs Hillel Weinberg

Assistant Inspector General for Congressional 

Affairs

Mail: Office of the Special Inspector General 

for Iraq Reconstruction

400 Army Navy Drive

 Arlington, VA 22202-4704 

Phone: 703-604-0368 

Email: hillel.weinberg@sigir.mil

Public Affairs Deborah Horan

Director of Public Affairs

Mail: Office of the Special Inspector General 

for Iraq Reconstruction 

 400 Army Navy Drive

 Arlington, VA 22202-4704 

Phone: 703-428-1217 

Fax: 703-428-0817 

Email: PublicAffairs@sigir.mil