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23–689 PDF 2005

THE DEVELOPMENT FUND FOR IRAQ: U.S.

MANAGEMENT OF IRAQ OIL PROCEEDS AND

COMPLIANCE WITH U.N. SECURITY COUNCIL

RESOLUTION 1483

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

EMERGING THREATS, AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 21, 2005

Serial No. 109–72

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING THREATS, AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

KENNY MARCHANT, Texas

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

JON C. PORTER, Nevada

CHARLES W. DENT, Pennsylvania

DENNIS J. KUCINICH, Ohio

TOM LANTOS, California

BERNARD SANDERS, Vermont

CAROLYN B. MALONEY, New York

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. HALLORAN, Staff Director and Counsel

J. VINCENT CHASE, Chief Investigator

ROBERT A. BRIGGS, Clerk

ANDREW SU, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on June 21, 2005 ............................................................................... 1

Statement of:

Bowen, Stuart W., Jr., Special Inspector General for Iraq Reconstruction,

Department of Defense; Colonel Emmett DuBose, Deputy Commander,

U.S. Army Corps of Engineers, Department of the Army, accompanied

by J. Joseph Tyler, P.E., Chief, Programs Management Division, Directorate of Military Programs, U.S. Army Corps of Engineers; William

Reed, Director, Defense Contract Audit Agency, Department of Defense;

Joseph A. Benkert, Deputy Director of Defense Reconstruction Support

Office, Office of Secretary of Defense; and David Norquist, Under Deputy Secretary of Defense for Resource Planning and Management, Department of Defense ..................................................................................... 85

Benkert, Joseph A. .................................................................................... 111

Bowen, Stuart W., Jr. ............................................................................... 85

DuBose, Colonel Emmett .......................................................................... 101

Norquist, David .........................................................................................

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Reed, William ............................................................................................ 95

Soloway, Stan Z., president, Professional Services Council, Arlington, VA;

and Richard Garfield, Dr.Ph./R.N., Columbia University ......................... 193

Garfield, Richard ....................................................................................... 209

Soloway, Stan Z. ........................................................................................ 193

Letters, statements, etc., submitted for the record by:

Bowen, Stuart W., Jr., Special Inspector General for Iraq Reconstruction,

Department of Defense, prepared statement of ......................................... 88

DuBose, Colonel Emmett, Deputy Commander, U.S. Army Corps of Engineers, Department of the Army:

Followup questions and answers ..................................................................... 119

Prepared statement of ...................................................................................... 103

Garfield, Richard, Dr.Ph./R.N., Columbia University, prepared statement

of ..................................................................................................................... 212

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 9

Lynch, Hon. Stephen F., a Representative in Congress from the State

of Massachusetts, memo dated June 11, 2004 ........................................... 163

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, letter dated June 20, 2005 .................................................... 181

Norquist, David, Under Deputy Secretary of Defense for Resource Planning and Management, Department of Defense, followup questions and

responses ....................................................................................................... 121

Porter, Hon. Jon C., a Representative in Congress from the State of

Nevada, prepared statement of .................................................................... 75

Reed, William, Director, Defense Contract Audit Agency, Department

of Defense:

Letter not dated ......................................................................................... 126

Prepared statement of ...................................................................................... 97

Ruppersberger, Hon. C.A. Dutch, a Representative in Congress from the

State of Maryland, prepared statement of .................................................. 134

Shays, Hon. Christopher, a Representative in Congress from the State

of Connecticut:

Memo dated June 20, 2005 .............................................................................. 137

Prepared statement of ...................................................................................... 4

Soloway, Stan Z., president, Professional Services Council, Arlington, VA,

prepared statement of ................................................................................... 197

Page

IV

Letters, statements, etc., submitted for the record by—Continued

Waxman, Hon. Henry A., a Representative in Congress from the State

of California:

Letters dated April 14, and May 23, 2005 ...................................................... 80

Minority report ................................................................................................. 12

Prepared statement of ...................................................................................... 39

(1)

THE DEVELOPMENT FUND FOR IRAQ: U.S.

MANAGEMENT OF IRAQ OIL PROCEEDS AND

COMPLIANCE WITH U.N. SECURITY COUNCIL RESOLUTION 1483

TUESDAY, JUNE 21, 2005

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING

THREATS, AND INTERNATIONAL RELATIONS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:10 a.m., in room

2157, Rayburn House Office Building, Hon. Christopher Shays

(chairman of the subcommittee) presiding.

Present: Representatives Shays, Van Hollen, Sanders, Maloney,

Higgins, Waxman, Kucinich, Marchant, Burton, Turner, Duncan,

Ruppersberger, and Lynch.

Staff present: Lawrence Halloran, staff director and counsel; J.

Vincent Chase, chief investigator; R. Nicholas Palarino, Ph.D, senior policy advisor; Thomas Costa, professional staff member; Robert

A. Briggs, clerk; Sam Raymond, intern; Phil Barnett, minority staff

director/chief counsel; Kristin Amerling, minority general counsel;

Karen Lightfoot, minority communications director/senior policy advisor; Jeff Baran and Michael McCarthy, minority counsels; David

Rapallo, minority chief investigative counsel; Andrew Su, minority

professional staff member; Earley Green, minority chief clerk; and

Jean Gosa, minority assistant clerk.

Mr. SHAYS. A quorum being present, the Subcommittee on National Security, Emerging Threats, and International Relations

hearing entitled, ‘‘The Development Fund for Iraq: U.S. Management of Iraq Oil Proceeds and Compliance with U.N. Security

Council Resolution 1483,’’ is called to order.

As successor to the United Nations Oil-for-Food Program, the Development Fund for Iraq [DFI], inherited more than money. The

DFI was also bequeathed the mission to maintain essential food

and fuel flows and to launch a nationwide reconstruction program,

despite a looted public infrastructure, a dysfunctional civil government, and a savage insurgency. Nevertheless, the International Coalition willingly took on the U.N. Security Council mandate to administer the fund ‘‘in a transparent manner for the economic reconstruction and repair of Iraq’s infrastructure and for other purposes

benefiting the people of Iraq.’’

This hearing builds on the Government Reform Committee’s assessment of Iraq reconstruction contracting and financial manageVerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1
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ment and asks specifically how one member of the coalition, the

United States, met that fiduciary commitment to transparency.

Last year the full committee held four hearings on contract management challenges in Iraq. They examined in detail the complex,

multi-step processes and layered safeguards applied to cost plus fee

contracts.

Those audited procedures and fiscal protections are still at work

finalizing actual payments on the sole source reconstruction Iraq

oil, task orders, and other contracts. Yet, today, some may feel the

need to retrace those steps or prematurely label pending contract

amounts as overcharges in what I think is a tired and transparent

effort to ensnare the administration, the Vice President, and his

former employer, Halliburton, in a breathless web of circumstance

and supposition.

In truth, there was no need to exaggerate or jump to conclusions

about problems in Iraq. Security conditions, cultural idiosyncracies,

and an all-cash economy there pose enormous challenges to the

conduct of public business as we know it here.

The Inspector General and the U.N. International Advisory and

Monetary Board [IAMB], have raised legitimate questions about

operations of the DFI. Those issues merit our serious attention

today, but serious scrutiny demands precision. Words like ‘‘overcharge’’ and ‘‘fraud’’ have exact legal meanings in this context.

They should not be used injudiciously or for sensational effect.

Facts and opinions are not interchangeable. We may well disagree

on their ultimate meaning and impact, but our purpose here today

is first to find facts.

It is a fact that more than $8 billion in cash was distributed to

Iraqi ministries between April 2003, and June 2004. It is a fact

that the Iraqis decided how to spend that money. It is fact that

people were paid, projects were built, and things we purchased

with that cash. It is a fact the Inspector General faulted the Coalition Provisional Authority [CPA], for a failure to implement consistent oversight and adequate controls over those expenditures.

But, as the Inspector General will testify, it is a misunderstanding to conclude the absence of accounting controls, alone, means

some or all the funds at issue were misused or stolen.

It is also a fact the Department of Defense [DOD], provided only

heavily redacted copies of Defense Contract Audit Agency [DCAA]

reports on DFI spending to the U.N. Oversight Board, the IAMB.

The redactions violated the commitment to transparency and regretfully, very regretfully, make it appear DOD has something to

hide. This undermines our international standing and even more

seriously harms our efforts in Iraq. This is a self-inflicted wound,

a needless failure to meet transparency obligations.

U.N. Security Council Resolution 1483 committed the United

States to an extraordinary level of disclosure for DFI transactions,

but it appears that commitment had little impact on the Pentagon’s

practice of deferring completely to the contractors’ absurdly expansive view of what constitutes ‘‘proprietary information’’ that must

be shielded from view.

After repeated requests to DOD and lengthy delays getting a response, the IAMB was justifiably dissatisfied with redacted DCAA

audit reports that hid almost every meaningful number or refVerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1
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erence to question an unsupported contract cost, the very matters

of most concern to them and, frankly, to us.

The plundering of the Oil-for-Food Program was hidden by a suffocating lack of transparency at the U.N. The world promised the

development fund for Iraq would be different, that Iraqi money

would be spent solely for the benefit of Iraqi people. We convene

this morning on their behalf. It is their money we are talking

about. They deserve a fair accounting of our stewardship.

After eight trips to Iraq, it is clear to me we have made progress

and we have made mistakes. Our burden as well-intentioned liberators is this: the progress belongs to the people of Iraq. The mistakes are ours to remedy.

Our management of the DFI has much to teach us about both.

Our witnesses will help provide essential substance and needed

context to our discussion of the development fund for Iraq. We appreciate their time and expertise, and we look forward to their testimony.

I might say parenthetically it boggles my mind that some who

are appearing before us do not have written testimony, after the

time that we gave you to prepare for that testimony. That, I think,

harms your cause, makes us look bad, and hurts this process.

At this time the Chair would recognize Mr. Kucinich, the ranking

member of this subcommittee.

[The prepared statement of Hon. Christopher Shays follows:]

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Mr. KUCINICH. Mr. Chairman, if I may followup on what you just

said, they do not have written testimony because they were dealing

in cash.

I want to thank the Chair for calling this hearing and thank the

witnesses for their presence. I am sure we are going to have a very

interesting discussion this morning, especially since you do not

have prepared testimony.

Now, if I may, it is interesting to begin with to talk about the

redactions, because we learned through our subcommittee that

redactions to the DCAA audits were made not by the Department

of Defense but by a contractor, Kellogg, Brown and Root. It is going

to be interesting to talk about that today.

It is also going to be interesting to talk about the finding, factual

finding in connection with disbursements that six cases were found

where contracting files could not be located, disbursements totaling

$51 million; 19 cases where evidence of contract monitoring over

the delivery of goods and performances of services were not documented in the contract file, $302 million; 1 case where a contractor

increased the price of proposal by over $4 million, to include, in

part, the accelerated delivery of equipment; 17 cases where there

was no formal approval of funding for contracts or payments, payments of over $242 million; 10 cases where payments were authorized by only one industry; and 6 cases where payments were not

authorized at all, $159 million.

Over 600 tons of Iraqi oil worth $69 million produced between

July 29, 2004, and December 31, 2004, according to this report,

missing.

This committee is one of several in Congress currently scrutinizing every record and meeting related to the United Nations’ stewardship of Oil-for-Food Program in Iraq. This is the first time that

any committee in Congress has looked at the United States’ own

financial management in Iraq of the successor to that program, the

development fund for Iraq.

Let’s dispel the myth right now. There was no multi-national

control of the Coalition Provisional Authority. It was the United

States in charge of the Coalition Provisional Authority’s existence

and both the Coalition Provisional Authority and Department of

Defense bear responsibility for their actions.

I will also note that, while you do not have testimony, you also

do not have the former head of the Coalition Provisional Authority,

Bob Bremer, here. He apparently did not feel it was necessary for

public accounting and to appear before the subcommittee today or

to send any representatives to explain his actions or the actions of

the CPA, and if we did not request Mr. Bremer be here, then perhaps at a future hearing we could get his presence.

So it is left to this subcommittee and the Special Inspector General for Iraq Reconstruction, who is with us today, to track down

what happen to the CPA’s disbursal of billions of dollars of Iraq’s

DFI funds. What we found is alarming: hardly any accountability.

In effect, we are handing out $100 bills in contracts like candy.

There are $8.8 billion in DFI funds disbursed to Iraq ministries

that are still unaccounted for, and to take a step back to look at

a bigger picture, that $8.8 billion represents only a portion of the

DFI funds. There are over $23 billion in Iraqi funds that the CoaliVerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1
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tion Provisional Authority had responsibility for and neglected to

account for properly. Furthermore, of that $23 billion, the CPA

spent or obligated almost all of it, over $19 billion, before handing

the Iraqi government back to the Iraqis. Bear in mind that much

of that money went to U.S. contractors in Iraq, another topic that

will be highlighted today and merits further investigation.

In the Special Inspector General’s report on DFI disbursements

to interim Iraqi government ministries dated January 30, 2005, he

noted that the CPA’s operations totally lacked transparency and

proper accounting controls. The Special IG wrote, ‘‘The CPA provided less-than-adequate controls for approximately $8.8 billion in

DFI funds provided to Iraqi ministries through the national budget

process. Specifically, the CPA did not establish or implement sufficient managerial, financial, and contractual controls to ensure DFI

funds were used in a transparent manner. Consequently, there was

no assurance that funds were used for the purposes mandated by

Resolution 1483.’’ Let me repeat, ‘‘There was no assurance that

funds were used for the purposes mandated by Resolution 1483.’’

The Special Inspector General report concluded that, ‘‘We believe

the CPA management of Iraq’s national budget process and oversight of Iraqi funds was burdened by severe inefficiencies and poor

management.’’

Where did the $9 billion go? We know that of a sample review

of the IG of 10 disbursements made by the CPA comptroller’s office

ranging from $120 million to $900 million in value, none of the disbursements included basic spending plans. Where was the money

spent? Was it stuffed in briefcases? Did it go to the salaries of

ghost employees who we paid? The CPA paid cash to 8,026 Iraqi

protective guards on the payroll at one ministry, but the Special IG

could only verify that 602 actually existed. At another ministry,

1,471 guards were on the payroll, but only 642 guards could be

verified.

The CPA and the DOD argue that proper controls and accounting could not be put into place because this is a wartime environment. I see this as nothing more than a self-serving excuse that we

would never tolerate if it came from a multilateral agency, for instance. The sanctimony animating criticism of the U.N. Oil-forFood Program and threats of withholding U.N. dues is noteworthy

here.

Here we have a matter that is within the sole control of Congress: the scandalous mismanagement of the United States of the

Iraqi’s financial resources. Through systematic mismanagement, a

lack of transparency, the U.S. occupation of Iraq has discredited

the United States and I feel has brought shame on our Nation. So,

Mr. Chairman, I hope we do not hear any more flimsy excuses from

the administration today.

I want to thank the Chair for working with the minority on this

issue and hope that our tough questions today lead to far tougher

controls and improved accountability in Iraq.

I yield back.

Mr. SHAYS. I thank the gentleman.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. SHAYS. At this time the Chair would recognize the former

vice chairman of this subcommittee, Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman. I want to thank you for

holding this important hearing today. The effort and the process of

the oversight of the Iraqi construction process and of these programs is incredibly important. It certainly is concerning in reading

the staff report concerning the level of cooperation that this committee has received.

The process of oversight is important so that we can make certain as Americans that our country is doing the best that we can.

Not only is our reputation on the line, but the safety of Americans

that are in the Middle East and are serving in Iraq is on the line.

Our ability to defend our processes and what we are doing is important, just as the rules and regulations and processes under

which we operate is important. It is very concerning, when you look

in the report from our staff, concerning the level of cooperation that

we are receiving. And this chairman has been to Iraq eight times

and he has been a champion of the reconstruction of Iraq and of

this committee’s support for oversight and support for DOD’s operations and trying to get out the good news of the process of what

is being accomplished.

It certainly does cause people to pause when Congress in its

oversight function is not being treated as a partner. I certainly

hope that during this hearing that we see that partnership and

that we see the types of information that is necessary for the good

news of the effort to have the Iraqi oil proceeds program operated

effectively and for the benefit of the Iraqi people.

Thank you.

Mr. SHAYS. I thank the gentleman.

At this time the Chair would recognize the ranking member for

the full committee, Mr. Waxman.

Mr. WAXMAN. Thank you very much, Mr. Chairman. Today our

subcommittee is holding a hearing on the development fund for

Iraq. This is an important and overdue hearing. U.S. mismanagement of the DFI is one of the biggest untold stories of the war in

Iraq.

After U.S. forces invaded Iraq in 2003, the U.N. Security Council

created the DFI to hold Iraq’s oil revenues and other assets, and

the Security Council gave the U.S. officials authority to use the

DFI for the benefit of the Iraqi people. Since then, U.S. officials

have spent or disbursed over $19 billion of Iraqi money in the DFI,

and there has been virtually no congressional oversight and little

public understanding of these enormous expenditures.

I want to begin my remarks by commending Chairman Shays for

holding this hearing. Today’s hearing is the first congressional

hearing on the DFI and how U.S. officials manage and mismanage

the Iraqi assets in the fund. Chairman Shays has asked hard questions and approached today’s hearing with an open mind and a

spirit of bipartisanship.

The DFI is closely related to the Oil-for-Food Program. The DFI,

which was run by the United States, is the successor for the Oilfor-Food Program which was run by the United Nations. In fact,

over $8 billion in the Oil-for-Food Program was transferred into the

DFI by the U.N. Security Council. Yet, there has been a stark and

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telling contrast between Congress’ approach to the Oil-for-Food

Program and the DFI. Five separate congressional committees have

been investigating U.N. mismanagement of the Oil-for-Food Program, more than a dozen hearings have been held, but before today

there was not a single hearing in Congress of U.S. mismanagement

of the development fund for Iraq. This neglect of the DFI has come

at a steep cost to both congressional and public understanding of

the actions of U.S. officials.

My staff has prepared a report that provides a comprehensive

analysis of what is known about the DFI expenditures. The report

is based on review of over 14,000 pages of financial records subpoenaed from the Federal Reserve Bank, 15,000 pages of documents

from the Defense Department, reports from multiple U.S. audit

agencies, and interviews with international investigators, U.S.

agency representatives, and Iraqi officials. I ask that this report be

made part of the hearing record.

Mr. SHAYS. Without objection, this report will be made part of

the record.

[The information referred to follows:]

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Mr. WAXMAN. Thank you, Mr. Chairman.

What we found was an appalling level of incompetence, mismanagement, waste, fraud, and greed. As we will hear today from

the Special Inspector General for Iraq Reconstruction, literally billions of dollars of Iraqi assets taken from the DFI cannot be accounted for.

The story of the DFI begins at the Federal Reserve Bank in New

York, where the Iraqi assets were held on deposit. As the Federal

Reserve documents show, cash withdrawals on a previously unimaginable scale were ordered by U.S. officials in Iraq. In total,

nearly $12 billion in cash was withdrawn from the DFI account at

the Federal Reserve, the largest cash withdrawals in history.

The administration transferred from New York to Baghdad more than $281 million individual currency notes on 484 pallets, weighing a total of 363 tons. This included more than 107 million $100

bills.

I’d like to show the committee a picture which is on our screen.

These are what Federal Reserve officials called ‘‘cash packs.’’ Each

one contains 16,000 bills. One cash pack with $100 bills is worth

$1.6 million. And the Federal Reserve shipped more than 19,000 of

these cash packs to Iraq.

In late June, 2004, in the last week of its existence, the U.S.-run

Coalition Provisional Authority ordered the urgent delivery of more

than $4 billion, including the largest 1-day transfer in the history

of the Federal Reserve, a single shipment of $2.4 billion in cash.

Well, so much cash arriving in Iraq, you might think that extensive precautions would be taken to account for the funds, but the

exact opposite happened. U.S. officials used virtually no financial

controls to safeguard the Iraqi funds. No certified public accounting

firm was hired to monitor disbursements, and auditors found that

U.S. officials could not account for billions of dollars.

One former CPA official told us that Iraq was awash in $100 bills. One contractor received a $2 million cash payment in a duffel

bag. Other cash payments were made from the back of a pickup

truck. And cash was stored in unguarded sacks in Iraqi ministry

offices.

The records are so lacking that it is impossible to know the full

extent of waste, fraud, and abuse that occurred during the period

of U.S. control, but what we do know is alarming. The largest single recipient of DFI funds was Halliburton, the company vastly

overcharged to import gasoline into Iraq and to provide other oilrelated services. These overcharges, which exceed $200 million,

were billed to the U.S. Corps of Engineers, but U.S. officials arranged for over 80 percent of them to be paid out of the DFI.

Here’s the most incredible part. When the U.N. auditors charged

with overseeing the DFI asked about the overcharges, U.S. officials

concealed them. In fact, if it were not for my efforts to disclose

these overcharges and those of Chairman Shays, U.N. auditors

would still be mislead.

Another politically connected firm, Custer Battles, received over

$11 million in Iraqi funds, including over $4 million in cash, but

the company’s overcharges were so blatant that it is now barred

from receiving Federal contractors and is facing a False Claims Act

lawsuit for fraudulent billing.

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Over $600 million in Iraqi funds were given to military commanders and other U.S. officials to fund local reconstruction

projects, yet here’s what a partial audit of $120 million in expenditures disclosed: more than 80 percent of funds could not be properly accounted for, and over $7 million in cash was simply missing.

One of the biggest problems that we will hear about today is what happened when U.S. officials gave over $8 billion in cash to

Iraqi ministries that lacked internal and financial controls. As an

audit by the Special Inspector General found, we simply cannot account for billions of these dollars. In many instances, the records

indicate that these funds may have been paid to ghost employees

who never existed.

Today’s hearing is the first in Congress on the DFI, but it should

not be the last. We know a lot went wrong, but we do not know

who is responsible, who squandered the money, and who should be

held accountable. There is an urgent need for more investigation,

and I hope this committee will play a major role.

Mr. Chairman, I look forward to the hearing and I thank all the

witnesses for being here today.

Mr. SHAYS. I thank the gentleman.

[The prepared statement of Hon. Henry A. Waxman follows:]

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Mr. SHAYS. At this time the Chair would recognize Mr. John

Duncan from Tennessee.

Mr. DUNCAN. Thank you, Mr. Chairman. Thank you for calling

this very important hearing.

You said in your statement this hearing builds on the Government Reform Committee’s assessment of Iraq reconstruction contracting and financial management and asks specifically how one

member of the Coalition, the United States, met that fiduciary

commitment to transparency. I can tell you that if there was a fiduciary commitment by the United States, it has been met many

billions of times over.

Lawrence Lindsey, who was chairman of the President’s Council

for Economic Advisors, said before the war started that the war

would cost us $100 to $200 billion. He lost his job over that statement. When I went for a briefing at the White House, I specifically

asked whether that statement was accurate, and I was told by then

National Security Council advisor Rice that, ‘‘Oh, no, the war

would not cost nearly that much.’’ Now, of course, we know that

by the end of September we will have spent $300 billion in Iraq

and Afghanistan, 95 percent of it probably in Iraq, and a figure so

huge that it is humanly incomprehensible.

Secretary Wolfowitz said or implied or led people to believe in

many statements that he made that most of the costs of reconstruction in Iraq would be paid for from their oil proceeds. Of course,

we know that is not even close to being accurate now.

Senator Hagle, a member of our own party, said a couple of days

ago that things are not getting better in Iraq, they are getting

worse. I do not know whether that is true or not. I hear somebody

else say that the media is not reporting all the good things that are

happening. Well, I can tell you this, I hope for the expenditure of

$300 billion there should have been many, many, many good things

happening.

When I think back to several months after this war started, a

conservative syndicated columnist, George M. Guyer, wrote this,

‘‘Critics of the War against Iraq have said since the beginning of

the conflict that Americans, still strangely complacent about overseas wars being waged by a minority in their name, will inevitably

come to a point where they will see that they have to have a government that provides services at home or one that seeks empire

across the globe.’’

Thank you, Mr. Chairman.

Mr. SHAYS. At this time the Chair would recognize Mr. Higgins

from New York.

Mr. HIGGINS. Thank you, Mr. Chairman. I just wanted to say

that, first of all, your thorough review of this issue and its importance relative to transparency, relative to accountability I think is

critically important at a critically important time. You have done

an outstanding job, very thorough, in framing the issue and its inherent problems, and I look forward to the response from this

panel of expert witnesses who have been assembled here.

Thank you very much.

Mr. SHAYS. Thank you. I appreciate the gentleman’s comments,

as I do of all the Members.

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Mr. Porter, welcome. Do you have any statement you would like

to make?

Mr. PORTER. I have one to submit.

Mr. SHAYS. Thank you. The gentleman will be submitting his

statement.

[The prepared statement of Hon. Jon C. Porter follows:]

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Mr. SHAYS. Let me just say as strongly as I can that there is no

disagreement, I think, among majority and minority that we want

and expect full cooperation from the administration and the Department of Defense. Newt Gingrich told me that we are not in

Congress a Parliament, we are a separate branch of government.

I think we do a disservice to the American people and to DOD

when we allow things to happen without the proper questions.

I was very interested in the hearings that had been conducted

to date, and I felt that DOD had a good story to tell and I wondered why it was so darned reluctant to tell the story, and it only

to me adds to the suspicions that maybe the story is not a good

story. So on this issue today, right now, the agreement I think you

see on both sides is we do not want redactions, we want cooperation. This committee is doing an investigation of the Oil-for-Food

Program. We are outraged at the lack of transparency that we saw

at the United Nations, the lack of transparency that we have seen

with its member nations with regard to the Oil-for-Food Program,

and I am faced as chairman with the fact that we see this same

reluctance to provide information. It just undermines any criticism

we may have of others for the same reason.

I think ultimately that the issue of money not accounted for will

be resolved, so I agree on the redaction issue but disagree with the

conclusion at this time that DCAA audit findings constitute overcharges, much like a doctor submitting a request to the insurance

company and the insurance company says, ‘‘No, there are overcharges. We do not agree with them.’’ That is what I think this

process is about. But I also think in the end we will find there are

some overcharges, and that is what we want to know. How much?

We need your cooperation.

At this time I think the gentleman, the ranking member, has a

request for some time.

Mr. WAXMAN. Mr. Chairman, I would like to be recognized to

make a motion for a subpoena under House Rule 112K6.

Mr. SHAYS. The Member is in order to make a motion.

Mr. WAXMAN. I move that the subcommittee issue a subpoena for

the documents that the Defense Department has refused to turn

over voluntarily in response to our bipartisan request. In particular, I ask that the subcommittee subpoena all records relating to

the Department’s decision to conceal Halliburton’s overcharges

from the international auditors at the IAMB.

Mr. Chairman, as you know, U.N. Security Council Resolution

1483 requires the United States to spend Iraqi funds in a transparent manner. In violation of this requirement, however, the Defense Department tried to conceal over $200 million in Halliburton

overcharges from the United Nations auditors. These vast overcharges were billed by Halliburton to the Army Corps of Engineers,

but the Defense Department officials decided that over $170 million in overcharges should be paid out of the Iraqi funds in the

DFI, and then they decided that to hide all information about the

amount of the overcharges from the reports given to U.N. auditors.

We know that they handed over statements with a lot of

redactions, and the redactions all dealt with the billings from Halliburton.

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At a briefing last week we learned some other disturbing facts.

First, Department officials confirmed that Halliburton requested

each of the 463 redactions in the audits, and that every single redaction requested by Halliburton was accepted by the Defense Department. In effect, U.S. officials inverted the proper roles of government and contractor, giving Halliburton unprecedented authority to withhold key parts of Defense Department audits.

Second, we learned that the decision to conceal the overcharges

was made after consultation with multiple offices in the Pentagon,

including the Office of Deputy Secretary Paul Wolfowitz, the Office

of General Counsel, and the Comptroller. And when officials from

the Corps of Engineers urged a ‘‘sanity check,’’ their calls went

unheeded.

We were even told that lawyers in the General Counsel’s office

threatened Department officials with criminal charges if they disclosed any information about the overcharges without Halliburton’s

permission. There was absolutely no legal justification for these actions. Department lawyers said that Halliburton overcharges

should not be disclosed because they would reflect unfavorably on

the company and impair its ability to obtain future contracts. That

is what Department lawyers were saying. They apparently forgot

that they work for the Federal taxpayers, not Halliburton.

Mr. Chairman, you and I have been trying for months on a bipartisan basis to obtain the documents that would explain why the Department concealed the overcharges from the U.N. auditors in violation of the Security Council resolution. On April 14, 2005, we

sent a joint letter to Secretary Rumsfeld asking for the identities

of those responsible for these redactions, and for documents and

other correspondence with Halliburton and within the Pentagon

that would expose the rationale for the withholding. We asked for

this information by May 27th so that we would have it for today’s

hearing. I want to make this letter part of the hearing record, as

well.

We received no response from the Defense Department. As a result, you then sent a second letter on May 23, and I want this letter also to be made part of the hearing record.

In addition to these written requests, our staffs have made repeated efforts to obtain these documents, but to no avail. They sent

at least nine e-mail requests and also made repeated telephone and

in-person requests.

Despite all of this effort, we have not received a single document.

I know that your policy as chairman is to first send a letter requesting documents before issuing a subpoena. In this case, we

have sent two written requests, made countless informal requests,

but the Defense Department has produced a total of zero documents.

Mr. Chairman, we have been extremely patient, but this is not

an isolated occurrence. First, the Department defied the Security

Council by concealing Halliburton’s overcharges, then it defied Congress by withholding the unredacted audits, now it is trying to

cover up evidence of its violations. This pattern of obstruction

leaves us no choice but to subpoena the documents, and I therefore

move that the committee compel Defense Secretary Donald Rumsfeld to produce the documents specified in the subpoena.

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Mr. SHAYS. If the gentleman would yield?

Mr. WAXMAN. Certainly.

Mr. SHAYS. While I may disagree on the term overcharge, I am

in total agreement with the gentleman. We did send this letter and

we did request that it be here on May 27th. For the edification of

the entire committee, they are overdue, obviously. It was supposed

to be in by May 27th.

We continued to request this information since that date verbally. I would even say we begged for the information. I would say

that we not only begged for it, we said, just give us some, so that

when we had this hearing we could say there was a good faith effort to cooperate.

We have no information, and I would say to the gentleman that

it would be my request that at this time he withdraw his motion,

that I will request from Mr. Davis, the full committee chairman,

that if we do not get this information by next Monday that I will

request that he consider and I would certainly advocate that we

subpoena the information. I would like to do it with the full committee, and would just say to the gentleman that it takes 11 members of this subcommittee to make such a motion. I agree with his

request. My request is that we work through the full committee for

that information.

Mr. WAXMAN. Mr. Chairman, I respect your request to me and

I am going to accede to that request and withdraw this motion, but

I do feel strongly that Congress should not have to grovel to get

information. This is information we are entitled to.

I know you are giving them a little bit more time, so they are

only 30 days out after the time we specified for them to comply,

and I respect the fact that you will join with me in urging a subpoena if we do not get the information. On that basis, I will withdraw my motion, but I would request of you that, if a majority of

this subcommittee appeals to the chairman for a subpoena, I would

inquire whether that would be sufficient. I am not sure of the parliamentary procedure.

Mr. SHAYS. Let me just say that Mr. Davis has been extraordinarily helpful in our request to get information. You are right,

this committee chairman did grovel, if only to prove a point. But

those days have ended and so the fact is that I will strongly advocate and I think other members of this committee would advocate

that we get this information on both sides of the aisle to Mr. Davis.

Mr. WAXMAN. Mr. Chairman, I understand that Chairman Davis

can issue a subpoena. A majority vote of this subcommittee can

also issue a subpoena.

Mr. SHAYS. Right.

Mr. WAXMAN. I will join you in the request to Chairman Davis.

I’d like to ask of you that if for some reason we do not get that

subpoena in a timely manner that you make available an opportunity for this subcommittee to vote on an issue of subpoena.

Mr. SHAYS. I think that would probably happen.

Mr. WAXMAN. OK.

Mr. SHAYS. It may not happen as quickly as you like, but the

gentleman is always free to put another motion in. Withdrawing

this motion does not mean you cannot make it again. We will be

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meeting for other hearings, and the gentleman can obviously make

a motion at that time.

Mr. WAXMAN. Thank you, Mr. Chairman.

Mr. SHAYS. And I am aware of that. Mr. Davis is aware of that.

And also I hope DOD is aware of that.

Mr. WAXMAN. Thank you, Mr. Chairman. I ask unanimous consent to withdraw my motion.

Mr. SHAYS. Without objection.

Mr. WAXMAN. I ask that two letters be made part of the record,

and I’d like to have unanimous consent.

Mr. SHAYS. Without objection.

[The information referred to follows:]

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Mr. SHAYS. Mr. Kucinich, do you have any——

Mr. KUCINICH. Yes. As the ranking member on the subcommittee

I want to support the direction that the Chair and our ranking

member of the overall committee have recommended here. You

used the term ‘‘gentleman’’ in a way that creates comity here. Our

chairman has, indeed, been a gentle man in his approach toward

this issue, and I think that it would be a mistake for anyone to

mistake his gentleness for a lack of commitment to the taxpayers

of this country. I want to thank Mr. Shays for the direction he’s

taking this and let him know that he has my full support.

Thank you.

Mr. SHAYS. I thank the gentleman. Just one other clarification

before we recognize our witnesses. Ambassador Bremer’s participation was not requested by this subcommittee because the primary

focus is on the redacted information. Obviously, he may choose to

participate. The full committee may choose to ask him to come in

at some time. But, just for the record, he was never consulted, he

was never requested to participate, and that is why you do not see

his presence here today.

Mr. WAXMAN. Would the gentleman yield?

Mr. SHAYS. I would be happy to yield.

Mr. WAXMAN. I appreciate the gentleman for noticing that. I also

think that, given the gravity of this situation where nearly $9 billion is unaccounted for, that Mr. Bremer would be happy to come

forward without the committee making the request.

Thank you.

Mr. SHAYS. I ask unanimous consent that all members of the

subcommittee be permitted to place an opening statement in the

record and that the record remain open for 3 days for that purpose.

Without objection, so ordered.

I ask further unanimous consent that all witnesses be permitted

to include their written statements in the record. Without objection, so ordered.

At this time the Chair would recognize our first panel: Mr. Stuart W. Bowen, Jr., Special Inspector General for Iraq Reconstruction, Department of Defense; Mr. William Reed, Director, Defense

Contract Audit Agency [DCAA], Department of Defense; Colonel

Emmett H. DuBose, Jr., Deputy Commander of the Southwestern

Division, U.S. Army Corps of Engineers, Department of the Army;

Mr. Joseph A. Benkert, Deputy Director of Defense Reconstruction

Support Office, Office of the Secretary of Defense; and Mr. David

Norquist, Under Deputy Secretary of Defense for Resource Planning and Management, Department of Defense.

At this time, gentlemen, as you know, we swear in all witnesses

and request that you stand and be sworn in.

Let me say if you think there is anyone else you think you may

draw on to make testimony, it would be better if they stand up now

so that we do not have to swear them in. And if they are asked

to testify, we will take their name and give it to the transcriber.

Please raise your right hands.

[Witnesses sworn.]

Mr. SHAYS. Thank you, gentleman. You all responded in the affirmative.

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Mr. Bowen, we are going to start with you. I know we have a

fairly large panel, but we will go 5 minutes. We will roll over another 5 minutes if you creep into the next 5. We definitely stop you

after 10, but we definitely prefer you be closer to 5 than 10, but

frankly your testimony is very important and we want that testimony on the record. Your full statements will obviously be on the

record, but we want you to feel free to say whatever you need to

say.

Thank you, Mr. Bowen.

STATEMENTS OF STUART W. BOWEN, JR., SPECIAL INSPECTOR

GENERAL FOR IRAQ RECONSTRUCTION, DEPARTMENT OF

DEFENSE; COLONEL EMMETT DUBOSE, DEPUTY COMMANDER, U.S. ARMY CORPS OF ENGINEERS, DEPARTMENT

OF THE ARMY, ACCOMPANIED BY J. JOSEPH TYLER, P.E.,

CHIEF, PROGRAMS MANAGEMENT DIVISION, DIRECTORATE

OF MILITARY PROGRAMS, U.S. ARMY CORPS OF ENGINEERS;

WILLIAM REED, DIRECTOR, DEFENSE CONTRACT AUDIT

AGENCY, DEPARTMENT OF DEFENSE; JOSEPH A. BENKERT,

DEPUTY DIRECTOR OF DEFENSE RECONSTRUCTION SUPPORT OFFICE, OFFICE OF SECRETARY OF DEFENSE; AND

DAVID NORQUIST, UNDER DEPUTY SECRETARY OF DEFENSE

FOR RESOURCE PLANNING AND MANAGEMENT, DEPARTMENT OF DEFENSE

STATEMENT OF STUART W. BOWEN

Mr. BOWEN. Thank you. Good morning.

Mr. SHAYS. Good morning.

Mr. BOWEN. Chairman Shays, Ranking Member Kucinich, and

members of the subcommittee, I am Stuart Bowen, the Special Inspector General for Iraq Reconstruction. Thank you for allowing me

to address your subcommittee about the U.S. role in Iraq’s reconstruction and to testify about my organization’s involvement in auditing the development fund for Iraq.

This is my first appearance before the Congress since I was appointed the Coalition Provisional Authority’s Inspector General in

January 2004. I carried out my duties as the CPA IG until October

2004, when Congress reauthorized my organization and redesignated me as the Special Inspector General for Iraq Reconstruction.

The Congress has directed the SIGIR to audit and investigate

the programs and operations funded by the Iraq Relief and Reconstruction Fund [IRRF], and to report our findings to the Secretaries

of Defense and State and to the Congress.

I have just returned, as well, Mr. Chairman, from my eighth trip

to Iraq, and I am pleased to report that my organization is operating at optimal levels, that we are carrying out the mission that you

have assigned us with skill, speed, and precision, and that we will

soon have 45 personnel on the ground in Iraq carrying out that job,

composed of auditors and investigators.

I am proud of those on my staff who volunteered to serve in this

high-threat environment that is Iraq today, and they know, they

have heard from me, that they are the taxpayers’ watchdog on the

ground in Iraq covering Iraq reconstruction.

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We are effectively promoting economy, efficiency, and program

results, and we are deterring fraud, waste, and abuse. To date,

SIGIR has submitted five quarterly reports to the Congress, the

most recent being our April 30, 2005, report, and we have completed 19 audit reports and have 8 more underway and much more

to come. Our reports are available at our Web site,

WWW.SIGIR.MIL in English and Arabic.

You invited me today, Mr. Chairman, to testify about the audits

we issued that addressed the Development Fund for Iraq. First off,

let me point out the DFI is Iraqi money, not U.S. money. It is comprised of Iraqi oil revenues, primarily, as well as other assets accumulated for the rebuilding and operation of Iraq. Four of our published audit reports have addressed the DFI, and I have submitted

them for the record. We have four more audits still underway that

will continue to address the DFI.

As has been referenced, our January 30, 2005, audit report reviewed the CPA’s oversight of DFI funds provided to ministries of

the Iraqi interim government through the national budgeting process. That audit addressed $8.8 billion of the DFI disbursed by the

CPA to the Iraqi government pursuant to U.N. Security Council

Resolution 1483. The audit attracted substantial attention.

There have been some misinterpretations about exactly what we

said, so let me be clear about what the audit did not say. It did

not say that the money was lost. It did not say that the money was

stolen. It did not say that the money was fraudulently disbursed

by U.S. authorities.

What we did say was this: One, the CPA provided less-than-adequate controls over DFI funds provided to Iraqi ministries through

the national budget process; two, the CPA failed to establish or implement sufficient managerial, financial, and contractual controls

to ensure that DFI funds were used in a transparent manner—

three facets of analysis there: managerial, financial, and contractual—and tied to the 1483 standard of review, transparency; three,

there were no assurances, thus, that DFI funds were used for the

purposes mandated by U.N. Security Council Resolution 1483,

namely and primarily for the benefit of the Iraqi people.

SIGIR has completed three other DFI audits. One addressed how

the comptroller managed DFI cash. We found problems there and

we brought them to the comptroller’s attention. They concurred

and corrected those problems.

And let me just make an aside here. One of my goals—my philosophy as an IG here, because we are a temporary organization, is

when I find problems to bring them to management’s attention and

to correct them so that taxpayers’ money is saved today and that

those reports of losses are not first realized by management and

the Congress later when audit reports are published. I think we

succeeded and will continue to succeed in that regard. Our last

quarterly report had 28 findings, virtually all of them resolved.

The other audits that we have done regarding DFI, the southcentral paying office in Hillah, DFI issues, many of them arose. We

have four more audits coming from that. In this case we did find

indicators of fraud, and from this case we have opened a series of

investigations that are pending at various stages of review, both

within our office and before the U.S. attorney.

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We also completed an audit on the management of the $2.8 billion of DFI money put in the sub-account to manage contracts post

June 28th, and we found problems there—lack of specificity, lack

of visibility about the amounts that remain in those accounts, the

amounts paid out in specific contract actions. Again, those were

concurred in by management and steps to correct those were implemented.

Let me conclude by saying that, having completed my eighth

trip, I am encouraged by the receptivity of the current Iraq reconstruction management teams to our advice, and I am confident that

we will continue to promote cost-saving measures to those teams

and that we will be able to look at the continuum of Iraq reconstruction management as one of gradual improvement. We will continue to play our role and fulfill the mission you have assigned us.

Thank you. I look forward to answering your questions.

[The prepared statement of Mr. Bowen follows:]

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Mr. SHAYS. Thank you.

Mr. Reed, before you begin I just want to acknowledge the presence of Mr. Ruppersberger. We appreciate his presence.

Mr. Reed.

STATEMENT OF WILLIAM REED

Mr. REED. Mr. Chairman, members of the subcommittee, my

name is William H. Reed. I am the director of the Defense Contract

Audit Agency. My statement this morning will center on the Defense Contract Audit Agency’s oversight of Iraq reconstruction and

rehabilitation contracts funded from the Development Fund for

Iraq. Generally DCAA’s services include professional advice and

audit assistance to acquisition officials related to the negotiation,

award, administration, and settlement of contracts. These services

are available upon request from contracting officers to enable them

to negotiate a fair and reasonable contract price or are routinely

performed by DCAA where required to approve interim payments

and assure compliance with other contract terms.

In performing our audits, DCAA has made no distinction between DFI-funded contracts and contracts funded from Defense Department appropriations. In this capacity, we have performed audits on large DFI-funded programs which include Restore Iraqi Oil

[RIO], and Restore Iraqi Electricity [RIE].

DCAA is currently responsible for providing contract audit serv- ices at 14 contractors holding DFI-funded contracts valued at $3

billion. These audit services include forward pricing proposals, interim reviews of contract payment, and adequacy of internal controls in business systems, as well as compliance with acquisition

regulations and contract terms. In addition, flexibly priced DFI

contracts and task orders will be included in DCAA’s annual review

of contractor incurred cost audits.

Most audits have found only minor cost exceptions or deficiencies

in systems or processes. In instances where significant issues were

identified, the majority of these problems have already been resolved or are being actively worked by contractors. The most significant audit findings by DCAA have occurred on the HalliburtonKellogg, Brown and Root RIO contract. The RIO contract is made

up of 10 task orders currently valued at $21⁄2 billion. Of the 10 RIO

task orders, 6 include DFI funding. KBR was authorized to begin

work on all of these orders under not-to-exceed-ceiling prices, subject to their subsequent submission of detailed proposals for purposes of negotiating specific task order prices.

DCAA found that most of the KBR task order proposals ultimately submitted for this purpose were inadequate to negotiate a

fair and reasonable price due to estimating and accounting deficiencies. In such cases, DCAA consulted with the U.S. Army Corps

of Engineers [USACE], and was asked to proceed with the audits

while the contractor attempted to correct the deficiencies and prepare a revised proposal. This led to multiple revised proposals and

audit reports on the same task orders.

At this time, DCAA has issued a total of 24 pricing reports on

RIO task orders, including nine audits of revised proposals to support USACE negotiation of specific prices. This process is sometimes referred to as price definitization.

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Three of the task orders have been definitized. During a review, the remaining seven task orders, valued at $2.4 billion, we questioned costs totaling $205.2 million. Of the $205.2 million questioned, $171 million relates to questioned fuel cost. DCAA questioned $139 million due to KBR’s failure to support the reasonableness of prices paid for fuel and transportation from a Kuwaiti supplier. In making this determination, we used prices negotiated by

the Defense Energy Support Center as a benchmark to assess the

reasonableness of the proposed KBR cost. DCAA also questioned $32 million because KBR inappropriately

adjusted fixed prices for fuel purchased from a Turkish supplier on

a retroactive basis.

We are working closely with USACE to provide audit and negotiation support on these undefinitized task orders.

In closing, I want to underscore that DCAA is an integral part

of the oversight and management controls instituted by DOD to ensure integrity and regulatory compliance in Iraq reconstruction

contracting. We work closely with all U.S. procurement and contract administration organizations to not only identify contract

pricing or cost issues but to assist them in recovering any excess

charges. Sources of the funds obligated on contracts are determined

by the contracting organization and transparent to DCAA in carrying out its responsibilities.

I look forward to addressing whatever questions you may have

for me. Thank you.

[The prepared statement of Mr. Reed follows:]

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Mr. SHAYS. Thank you, Mr. Reed.

Colonel DuBose.

STATEMENT OF COLONEL EMMETT H. DUBOSE, JR.

Colonel DUBOSE. Mr. Chairman and distinguished members of

the subcommittee, good morning. I am Colonel Emmett DuBose

and I currently serve as the Deputy Commander of the Southwestern Division, U.S. Army Corps of Engineers out of Dallas, TX. Prior

to this assignment, I was stationed in Iraq from October 2003

through June 2004, where I served as the second task force commander and then director of the Corps’ Restore Iraqi Oil [RIO],

program. My mission there was to work cooperatively with the

Iraqi people to safely and effectively restore the oil infrastructure

of Iraq to enable the economic recovery of Iraq.

I have been asked to review with you today the DCAA audits of

the DFI-funded task orders which are part of the KBR RIO contract which was physically completed last year.

The KBR RIO contract consists of 10 task orders, and the funding for this involved both U.S. and Iraqi sources. Four of the task

orders were funded using U.S. appropriated funds and six using

DFI funds. Since this is a cost plus award fee contract, It requires

the DCAA audits as an integral part of the contract quality control

and cost definitization process in which we are now engaged.

At the request of the contracting officer, DCAA has completed 20

audits and is actively working on several others. Fifteen of these

audits have been in support of DFI-funded task orders. This is a

part of an iteractive process involving the efforts of the auditors,

the contracting officer, and the contractor focused on protecting the

public interest, both United States and Iraqi, while providing a fair

and equitable task order settlement.

Five of the six DFI-funded task orders were established to meet

emergency humanitarian fuel requirements by importing refined

petroleum products. The urgency, magnitude, complexity, and hazardous conditions under which these task orders were performed is

unprecedented. These factors are reflected in the fact that there

have been multiple revisions of the KBR proposals resulting in

multiple revisions of the DCAA audits.

In this iterative process, we have had 14 DCAA audits, 9 of

which have been superseded by revised audits, which leaves 1

audit for each of the five fuel task orders. These audits, to include

all questioned costs, are being used by the contracting officer in

conjunction with the government’s contracts performance information and the contractor’s proposals to establish the government’s

position, from which the contracting officer will negotiate final payment and determine the award fee. In the meantime, the government is currently withholding approximately $68 million in payments plus all possible award fees pending settlement of this task

order.

The other DFI task order is No. 6. It involved three things: First,

the design and construction of multiple pipeline crossings of the Tigris River; second, power generation stations which were used to

run various oil production, distribution, and refinery facilities

across Iraq; and, third, we supply equipment, construction materials, and technical services which were required by the oil minVerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1
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istry’s own construction crews so that they could construct and

build a 40-inch diameter pipeline from the oil fields in Kirkuk to

Baiji. DCAA has completed one audit of this effort and has what

we believe to be the final audit now underway. We expect to complete the audit by July, after which the contracting officer will definitize the task order and negotiate final payment.

In summary, it is expected that in a contract of this magnitude

and complexity DCAA will continue to question some costs. As we

have seen in this case, questioned costs usually decrease as the

contractor revises his proposals and responds to the DCAA audits.

The resulting final audits are then used by the contracting officer

to definitize and negotiate the task order payments and determine

award fees.

It is important to note here that DCAA does not question whether KBR actually incurred any of these costs; rather, DCAA auditors

have questioned primarily whether KBR may have been able to obtain some services at a lower price than which KBR has acquired

them.

These questioned costs will ultimately be resolved by the contracting officer based on input from DCAA, DCMA, and others as

appropriate. Our job now is to use this information, the information

at our disposal, to assist the contracting officer in reaching a fair

and equitable settlement of these task orders with the contractor

while fully protecting the public interest of the United States and

Iraqi people.

Sir, this concludes my prepared statements. I would be happy to

answer your questions.

[The prepared statement of Colonel DuBose follows:]

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Mr. SHAYS. Thank you.

Mr. Benkert, it is my understanding that you do not have a prepared statement; is that correct?

Mr. BENKERT. Mr. Chairman, that is correct.

Mr. SHAYS. OK.

STATEMENT OF JOSEPH BENKERT

Mr. BENKERT. I am, as you said, Joseph Benkert. I am the Deputy Director of the Defense Reconstruction Support Office in the

Office of the Secretary of Defense. Relevant to this hearing, our office, as the successor office to the CPA’s Washington office, provided, on behalf of OSD, the management comments on the Special

Inspector General for Iraq Reconstruction’s audit of funds provided

to Iraqi ministries that Mr. Bowen testified about, that set of management comments which accompanied a detailed set of comments

from Ambassador Bremer included in the audit report.

I am also, since about December of last year, the DOD’s liaison

to the International Advisory and Monitoring Board, and attend

meetings of the International Advisory and Monitoring Board as a

U.S. observer.

I am prepared to answer questions.

Mr. SHAYS. OK.

Mr. Norquist, it is my understanding you do not have a statement; is that correct?

STATEMENT OF DAVID NORQUIST

Mr. NORQUIST. That is correct, Mr. Chairman.

Mr. SHAYS. Before I begin my questioning, I just want to ask

why. Why, Mr. Benkert, do not you have a statement? Why, Mr.

Norquist, do you not have a statement?

Mr. NORQUIST. I’d be happy to answer that, Mr. Chairman, and

I regret that there was this problem.

I learned last week that I would be the witness, and I learned,

regretfully, too late for me to get testimony written and cleared. It

was my understanding that the subcommittee was going to be consulted on this, but I did not find out until last night that had not

happened, and I regret that.

Mr. SHAYS. But what I do not understand, Mr. Norquist, is that

you could have at least written your statement and then the pressure would have been on someone else, OMB, to have approved it.

But why did not you at least write your statement? You had at

least a week to do that.

Mr. NORQUIST. I did not have a week to do that, sir. I asked

whether or not it would be able to be done and cleared in time and

was simply advised that would not happen. I apologize for that,

though.

Mr. SHAYS. Well, you know, they have put you in a bad situation.

Mr. Benkert, am I pronouncing your name correctly, sir?

Mr. BENKERT. That is correct, sir.

My answer is the same as Mr. Norquist’s, Mr. Chairman. I

learned late last week that I would be the witness. And I apologize

for not having a statement and regret not having done so, but my

understanding was that this information had been communicated

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to your staff and that there had been discussions along these lines,

and I regret it if this was a surprise to you.

Mr. SHAYS. No, it is not a surprise that you do not have a statement because they told me last night you would not have a statement; it was a surprise yesterday that you did not have a statement.

My predecessor on this subcommittee, the previous chairman,

was the Speaker of the House. I just wonder if you would have

done that to his subcommittee as you have done it to ours.

We are grateful both of you are here. We wrote on June 9th requesting that Ms. Tina Jonas, Under Secretary of Defense, Comptroller, and Chief Financial Officer, appear, and Mr. Howard

Burris, Director of Defense Support Office [DSO], Iraq and Afghanistan, Office of Secretary of Defense. You both are better witnesses

in terms of your knowledge than they are, so we appreciate who

they sent.

We think DOD has done you a disservice in not helping and encouraging you to write a statement and have it approved and,

frankly, I think it just adds to our lack of confidence and our feeling that there is something to hide when I do not think there is

something to hide.

I will begin my questions.

Mr. Norquist, describe in detail the process DOD followed in providing redacted DCAA audits to the IAMB, the U.N.

Mr. NORQUIST. Yes, sir. The IAMB requested copies of audit reports of sole source contracts paid for using DFI funds. The audit

reports for the six DFI-funded task orders on this contract were

completed by DCAA between August and October 2004. Since the

authority to release DCAA audits rests with the contracting officer,

we asked if the Corps would provide the reports to the IAMB. My

understanding is the Corps consulted with the contracting officer,

who was the deciding official for the releasability of the reports.

At this point I would like to turn it over to Colonel DuBose, who

can explain how the Corps handled this portion of the process.

Colonel DUBOSE. Mr. Chairman, USACE officials received a request to provide the audit reports of sole source DFI-funded contracts to the IAMB. The Office of Chief Counsel was consulted due

to concerns about the release of proprietary data outside of official

U.S. Government channels. The Office of Chief Counsel was advised that USACE could not release confidential commercial information to sources outside the U.S. Government without contractor

consent. USACE officials asked KBR if they would agree to release

the audit reports to IAMB.

KBR then informed USACE that they would not agree to provide

the audit reports, asserting that the audits contained their proprietary information and that the Government was prohibited from

releasing that information under the Trade Secrets Act.

USACE’s Office of Chief Counsel advised that redacted audits

could not be released to the IAMB without contractor consent. The

USACE Office of Chief Counsel coordinated this with DOD Office

of General Counsel and provided this advice.

Recognizing that we could not provide the IAMB unredacted audits, we sought a method to provide as much information to the

IAMB as possible. Accordingly, we requested that KBR review the

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DFI-funded task orders and the audit reports and redact information that they believed was protected under the Trade Secrets Act.

KBR provided USACE with the redacted audit reports and a letter

authorizing USACE to release the redacted audit reports to the

IAMB.

USACE officials and counsel noted that there were significant

legal risks to include potential individual criminal violations associated with changing the redactions provided by KBR.

Mr. SHAYS. Would either or both of you describe to me how this

is a transparent process? How is the U.N. basically able to determine what is happening with these dollars with so much redaction,

Mr. Norquist?

Mr. NORQUIST. Sir, it was our intent to see that the IAMB received as full an answer as possible consistent with the law. With

that premise, as I recall, we first asked if they could be provided

unredacted reports. When we understood that they could not, we

asked if the redactions could be less so the information provided

could be more. We then followed up and suggested would it be possible to provide the unredacted to a third party. Since it appeared

we’d only be able to provide the Corps the redacted, we looked into

the option of a—we were advised if it was a contract with the U.S.

Government we could hire an auditor of some other firm, give them

the complete, unredacted, and let them report to the IAMB as to

the contents. That contracting process occurred after my involvement with the IAMB, which ended about October.

But the effort here, sir, was to take it as far as we could to provide as full answer as possible and then to try and provide the

IAMB with an additional means of having some assurance as to

the nature of those documents.

At this point I think—I do not know if anyone else wants to add

to that.

Mr. SHAYS. So basically no one has been given an unredacted

version?

Mr. BENKERT. If I could just add to that, Mr. Chairman, as Mr.

Norquist mentioned, I think as you know, the IAMB—to try to answer your question about transparency with the IAMB, in addition

to a specific request for these audits, the IAMB requested that an

audit be—a special audit be undertaken of all sole source contracts

funded from the DFI, that is, to try to get a picture of all sole

source contracts which might have been funded from the DFI and

what other audits may have been out there, as well.

The IAMB made this request to the CPA in June of last year just

prior to the CPA being disestablished, on the theory that the CPA

would commission such an audit using DFI funds. When the CPA

went away, the IAMB looked to the Iraqi government to commission such an audit on the theory that the Iraqi government was

now responsible for the DFI from the point of the transition on

June 28th.

As Mr. Norquist said, in the process of trying to provide the specific audits that the IAMB had requested, it became apparent that

if the Iraqi government were to commission an audit of sole source

contracts, that the Iraqi government, because the auditor would

work for them, might have similar problems in gaining access to

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ties of being able to do this audit because the information they

would need to get is in various places, including in the United

States.

At that point we offered to the IAMB to commission—that is, the

Department of Defense—to commission this special audit of sole

source contracts because if we did so the auditor working for us

would have no issues of his ability to gain access to unredacted audits and any other government information.

So we agreed to a statement of work with the IAMB. We reported this information to the International Advisory and Monitoring Board at the same meeting of the International Advisory and

Monitoring Board where Mr. Norquist delivered the redacted audits, so that the IAMB knew that we were taking actions to commission this audit which would have access to all the unredacted

information.

We agreed with the IAMB in December on a statement of work

for this audit and we have contracted with a firm to do this audit

on April 15th, and so this audit is now in progress. This is all

known to the IAMB.

Mr. SHAYS. I thank the gentleman.

I have taken 7 minutes, so every Member here will have 7 minutes to start, and we will have a second round.

Mr. Kucinich.

Mr. KUCINICH. All right, Mr. Chairman. If it please the Chair, I

would like to defer to our ranking member for the full committee,

Mr. Waxman.

Mr. SHAYS. Thank you. Before the gentleman begins, I just would

welcome Mrs. Maloney and Mr. Sanders here. Thank you.

Mr. WAXMAN. I want to thank my colleague, Mr. Kucinich, for allowing me to go first, and thank you, Mr. Chairman, for recognizing me.

Mr. Bowen, I want to thank you also for testifying today. Congress created your position so that we would have a professional

auditor reporting directly to us on the billions of dollars being

spent in Iraq, and you have done your job professionally and responsibly, even when your conclusions have been uncomfortable

ones, and that is exactly what an IG should do. I understand this

is your first appearance before Congress. I commend the chairman

for giving you this long-time overdue invitation and I commend you

for being here.

As I mentioned in my opening statement, the CPA shipped nearly $12 billion in cash from the United States during its term in

Iraq. It is hard for people to conceptualize that much money, so I

tried to put it in real terms—19,000 cash packs, 484 pallets, 107

million $100 bills. You might think that with this amount of money

in cash there would be established strict procedures on controlling

the physical access to this cash, as well as strong accounting mechanisms to ensure that it was used for intended purposes, but you

found just the opposite. You found ‘‘physical security was inadequate. The CPA did not establish or implement sufficient managerial, financial, and contractual controls.’’ You found that DFI funds

were susceptible to waste, fraud, and abuse.

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As a result, you also concluded that the CPA violated the Security Council requirement for transparency set forth in Resolution

1483.

I want to ask you a little bit about some of these conclusions.

First, in your July 28, 2004, report on DFI cash controls, you

concluded physical security safeguards were inadequate. For example, you found CPA comptroller did not have adequate control or

access to their field safe. Can you tell us more about that?

Mr. BOWEN. Yes, sir. Thank you.

This was an audit of really the operational security of the comptroller’s practices and procedures. Interestingly, their office was

right next to the IG office at that time in the palace there on the

Tigris, and I assigned two of my top auditors to get in there because of the issues you have alluded to, and that is the cash environment that we were operating in raised natural concerns.

There were issues connected with management of the safe, securing the keys to those safes, and general procedures connected with

cash security.

We brought those to the comptroller’s attention and they changed

the way they did business as a result. I am confident that since

then there are proper security measures in place in the palace because, frankly, the environment has not changed that much with

respect to cash. It is still a cash economy. It is still a cash operation for the most part. Electronic funds transfer is still an idea in

Iraq, an idea whose time is closer and closer to coming.

But to answer your question, I think that our audit helped tighten the ship on that issue.

Mr. WAXMAN. Before that they had cash in safes and lots of different people had access to it? Is that the——

Mr. BOWEN. That is correct.

Mr. WAXMAN. OK. You also found that CPA did not have adequate accounting procedures for this cash once it was in their possession. For instance, you reported that CPA did not follow its own

regulation requiring an independent certified public accounting

firm to monitor DFI spending. Can you tell us about that?

Mr. BOWEN. Yes. CPA regulation required the CPA to hire a certified public accounting agency to provide an internal audit function. A company called Northstar was hired to meet that requirement. Their mission changed after their hiring. The comptroller at

the time sought to use them more to help him manage the accounting aspects of management of the DFI, thus, the internal audit

function was superseded by a more direct ledger sheet accounting

process just simply to keep up with the mammoth task of keeping

track of the DFI.

Mr. WAXMAN. By far the largest disbursements were made to

Iraqi ministries. You issued a report on that, and you found that

when the United States took control of Baghdad there was ‘‘no

functioning Iraqi government, no experience within the Ministry of

Finance in managing the national budget, no budget or personnel

records, and the payroll systems were corrupted by cronyism and

ad hoc fixes.’’

Despite all these glaring deficiencies, the CPA transferred more than $8.8 billion to these ministries without any followup to make

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fect recipe for waste and potentially for fraud. In your opinion, how

likely is it that some of the ministry funds were skimmed, stolen,

paid to non-employees, or paid to fake employees and ghost employees? Were these real risks?

Mr. BOWEN. They were real risks and we reported them in our

audit. Let me be clear about the scope of our audit. At the time

I was the Coalition Provisional Authority’s IG, which meant I was

overseeing the plans and programs of the Coalition Provisional Authority. That included perhaps their most significant program,

management of the DFI, which was underscored by the core purpose of standing up a new Iraqi government and helping it function. That required the funds, namely the DFI, to make that happen.

We looked at how the CPA structured itself to accomplish that

goal, and in looking at that we—in interviewing nine senior advisors of the 26 ministries, interviewing a number of personnel, and

reviewing every document we could come across, we ran across

these other issues that we reported in our audit, namely the issues

you alluded to about the paying of ghost employees.

I think the response to that was it was necessary to make those

payments to preserve the peace, but I think that the reality of the

situation——

Mr. WAXMAN. In other words, they were handing out money because they thought that would calm things down. They were not

really sure who was getting the money. It was risk of all this

money being dissipated improperly, but that was a risk they decided to take?

Mr. BOWEN. In that instance, yes, with respect to that issue.

Mr. WAXMAN. This is not the only evidence of waste, fraud, and

abuse. Your office also found that millions of dollars in DFI funds

given to commanders simply went missing. An audit by KPMG

found hundreds of thousands of DFI funds missing from one division’s vaults, and Defense Department audits have identified hundreds of millions of dollars in overcharges by contractors to the

DFI.

The bottom line is that there were multiple deficiencies at every

stage in this process, from the point at which the cash arrived in

Baghdad to the point at which it left the hands of CPA officials.

It seems to me that CPA was ill prepared for this responsibility

and, frankly, it appears that the administration was making up

policies and procedures as it went along. Do you think that is an

unfair statement?

Mr. BOWEN. This was an enormously challenging situation to

stand up from destruction a new Iraqi government, to help begin

the reconstruction of a nation, both structurally within its government and structurally as part of its infrastructure.

I know—I was there—that the personnel within CPA worked

around the clock 7 days a week, and for the most part, by my own

observation, were well-intentioned. Inevitably in such an environment, with so much cash and such an enormous task and limited

resources—personnel was a big issue—there were inefficiencies,

and we found them.

As I said when I started this job, we will let our audits and our

investigations speak for themselves, and they have. But we have

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investigations going on with respect to fraud that you alluded to,

but our audits point primarily to inefficiencies. Could things have

been done better? Yes. Do we have some significant lessons learned

out of this? Yes. Is my organization pursuing, accumulating all

those lessons learned? Yes. We have a very ambitious enterprise

that we are going to push into next year that is going to look at

personnel, program, planning, acquisition, and contracting with the

experts who are there. We have already done hundreds of interviews, we have accumulated a lot of information, and at the end

of the day we will encapsulate this story in that report.

Mr. WAXMAN. Thank you.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman.

At this time the Chair would recognize Mr. Turner for questions

for 7 minutes.

Mr. TURNER. Thank you. Mr. Chairman, I just want to begin by

echoing what I had indicated in my opening statement of just my

admiration of this chairman and his efforts in oversight and making certain that, both on the issue of terrorism and in the issue of

Iraq, that we have appropriate information and appropriate support and oversight for the important functions of our Government.

As we talk about the democratization of Iraq, we have to be very

mindful of the issue of the role of Congress and its role of oversight.

I have some questions about the issues of the redaction of information and the relationship to this committee.

I have just been conferring with the Congressional Research

Service staff that is being provided to us, regarding the applicable

laws. Mr. Norquist, you stated something that concerned me greatly.

In talking about the issue of the ability to provide the necessary

information for transparency, you talked about operating within

applicable laws. Many times in my 10 years now in dealing with

Government bureaucracies I have found that many times when we

get the answer of ‘‘going with applicable laws in order to comply

with what we know is a requirement,’’ that sometimes it is a result

of lack of foresight of the individual having the responsibility for

commencing an action.

For example, it appears that you find yourself in a situation—

we found ourselves in a situation of how do we provide redacted information and the contractor’s rights and abilities to prevent that

disclosure. I have been provided with provision of the U.S. Code,

Section 423, that talks about not knowingly providing proposal information, source selection information, and other restrictions on

providing information.

I want to note that the exceptions that are specifically identified

do not include a restriction of providing that information to Congress. Expressly it says that information can be provided to Congress, meaning that the contractor would have no ability for restricting the ability to provide information that this chairman has

been asking for and still does not have, so this law does not apply

with respect to providing information to this chairman.

But I want to know to what extent there are or were options

when we started this process, in the contract process or in the regVerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00121 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1
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ulatory process, because if we accept that we are going to go into

a process where we require transparency and our international reputation is on the line, it would seem to me that we would enter

that process from the beginning making certain that we have chosen a path that permits us to have transparency.

I’d like Mr. Norquist and Mr. Benkert if you would to please

comment on the ability in the beginning of this process to have

structured it in a manner that would have given us the transparency we need.

Let’s start with Mr. Benkert.

Mr. NORQUIST. Sir, as you pointed out, it was our intent to give

them a full answer, and so our initial thought and our initial effort

was to try and get them unredacted audits, which would be the

most complete answer, and that is what we sought to do.

I cannot speak to the rules and the laws that govern what is or

not revisable. I’d defer to the lawyers and to the Corps for the advice that they were given on what was permissible. But at the different stages we asked if more could be done, and it was in part

because of the difficulty in doing that we sought other solutions

such as providing unredacted to an independent party so that there

would be some sense that you do not have to take our word for it.

My intent throughout this process was to ensure that, to the extent possible, that we did that. But I apologize. I cannot speak to

the legal provisions that affect this.

Mr. BENKERT. Let me speak to this sole source audit that we

have commissioned, this special audit of sole source contracts. In

the audit that—to address your issue of dealing with these issues

of transparency up front, in the audit we have commissioned we

have specifically told the auditor that our intent is for him to

produce a report that is going to be handed over to the IAMB. So

at the beginning it is clear that his purpose is to provide information that is going to go to the IAMB, so there is no issue down the

line of his collecting information which then becomes a problem to

hand over because of his not knowing that was the intended purpose rather than the U.S. Government.

I do not know whether a procedure like that could have been applied in the early days of these contracts or not, and I would defer

to my colleagues on that.

Mr. TURNER. Does anyone else on the panel have an answer for

that?

Colonel DUBOSE. Sir, I would just note that when we started the

KBR contract it was with appropriated funds. We really did not

know that DFI funds would be applied until around April, May

2003.

Mr. TURNER. I would appreciate it if you guys would pursue getting an answer for the committee on the issue of whether or not

the processes that are chosen could have been different that would

have removed the impediment.

[The information referred to follows:]

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Mr. TURNER. Mr. Norquist, the very first question that the chairman asked you, you were reading from materials that had been coordinated with the colonel. I am assuming that, although you do

not have a prepared statement for us, that you do have some written materials that have been approved for your appearance here

today?

Mr. NORQUIST. I do not have a prepared statement or materials

that were approved. What I did do is I sat down with the colonel

when he had his redacted and I agreed that was my understanding

of the process, as well, so I support his prepared statement and his

explanation of what happened in the process.

Mr. TURNER. Do you have any objection to providing us copies of

the written answers that you have to the questions that were anticipated and asked by the chairman?

Mr. NORQUIST. I do not know of a reason I could not. Let me

check. I do not know what the protocols are on this, but I will go

back and find out and I will provide what I can.

[The information referred to follows:]

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Mr. TURNER. I conferred with our counsel before, the chief of

staff of the subcommittee, before asking this question. If you would

coordinate with him on that issue, I think it would be helpful and

appreciated.

I do not have any other questions.

Mr. SHAYS. Thank you. The Chair would recognize Mr. Kucinich.

Mr. KUCINICH. I thank the Chair.

Mr. Bowen, I would like to explore a little bit more about this

cash environment. We know from Mr. Waxman’s testimony that

the administration transferred from New York to Baghdad more

than $281 million individual currency notes on 484 pallets that included more than 107 million $100 bills, and he put up on the

screen what the Federal officials called cash packs, pictures of

them, and each one of these cash packs contained 16,000 bills. One

cash pack with $100 bills is worth $1.6 million, and the Federal

Reserve shipped more than 19,000 of these cash packs to Iraq. You

agree substantially with that description, correction?

Mr. BOWEN. Yes, I do.

Mr. KUCINICH. OK. Now, let’s take a cash pack worth about $1.6

million and let’s locate it with someone in Iraq. Explain to me what

happened. Put it in somebody’s hands and just describe for this

committee what would happen. What would they do? How would

they distribute the money?

Mr. BOWEN. Sir, there was a safe in the basement of the Republican Palace where the money was kept, and there were a number

of those flanks that you described that brought money over that

funded the obligation, so to speak, of the Iraqi government, $19 billion, roughly, in the year that the CPA was operating.

Mr. KUCINICH. So somebody would come to wherever the safe

was to get their money?

Mr. BOWEN. That was part of how it happened, that is exactly

right, but it was through the comptroller. There was a budget,

2003, remainder of 2003 budget, and then a 2004 budget, and then

an amended 2004 budget, and that provided monthly allocations to

each ministry and——

Mr. KUCINICH. I understand that, but here’s what I am trying to

get at: would that one location be the only place where the money

was distributed from? Or were bundles of money taken to other distribution points, or were bundles of money given to other individuals who would then distribute that cash?

Mr. BOWEN. Now you are getting to a level of detail that I will

have to get back to you on. I know that the primary distribution

point——

Mr. KUCINICH. May I ask, Mr. Chairman, I appreciate what the

scope of your study was, but, Mr. Chairman, it seems to me if we

have the IG here saying there were not proper managerial, financial, and contractual controls, I think it would be instructive to this

committee to understand exactly how the money was distributed,

because then we could come to an understanding of whether or not,

you know, it was just simply a lack of controls or whether or not

this committee could fairly conclude that money was lost, stolen, or

corruptly misused. I mean, is that a fair assumption?

Mr. BOWEN. I would be happy to provide you with that answer.

Mr. KUCINICH. If you would, give it to our counsel——

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Mr. BOWEN. Yes.

Mr. KUCINICH [continuing]. And we will make sure it is shared

with both majority and minority.

Mr. BOWEN. I will track that down.

Mr. KUCINICH. Thank you. Again, we’d like to know, you know,

have you ever interviewed anyone who actually had in their hands

bundles of $100 bills and they were distributing? Did you talk to

anybody——

Mr. BOWEN. Yes.

Mr. KUCINICH [continuing]. In that capacity?

Mr. BOWEN. Well, we interviewed the comptroller who was responsible for that.

Mr. KUCINICH. But only one person?

Mr. BOWEN. And the other—those in his office that participated

in that, and I think you are also alluding to our most recent audit,

the April 30th audit regarding the disbursement of DFI cash under

the R3P program in south-central Iraq in Hillah. In that more specifically, yes we did interview people who were handling millions

of dollars in cash, and we have one very significant audit out on

that has serious findings. We have four more that are coming and

we have several investigations underway.

Mr. KUCINICH. Who determined whether a private contractor

should be paid in cash or in some other form? Who made that determination?

Mr. BOWEN. It was a matter of necessity, and it depended on the

nature of the circumstances. There would be no one determination

of that. If the private contractor was an Iraqi contractor in country,

that contractor was paid in cash. If it is a U.S. contractor, then

electronic funds transfer can happen back this side of the world.

Mr. KUCINICH. Were there any cases in which U.S. contractors

were paid in cash?

Mr. BOWEN. Yes, there were, but I cannot recite them for you

right now. I’d have to get back to you.

Mr. KUCINICH. Could you give us a list of—provide this committee with a list of all the U.S. contractors who were paid in cash?

Mr. BOWEN. I will research the issue for you and get back with

you on that.

Mr. KUCINICH. Mr. Chairman, I did not take that to be a positive

response.

Mr. SHAYS. I think the gentleman said he would research and get

back to us with that information.

Mr. BOWEN. Yes. I will try and get back with you—get that information for you.

Mr. KUCINICH. Thank you. I appreciate that.

Now let me switch to Colonel DuBose.

Colonel, this whole subcommittee meeting is about what happened to unaccounted-for funds relating to Iraqi reconstruction.

Can you tell this subcommittee, out of the approximately—you get

different figures, perhaps as much as $23 billion that went through

the Coalition Provisional Authority’s hands, and the at least $12

billion in cash that was withdrawn, according to Mr. Waxman’s testimony, from the DFI account at the Federal Reserve, how much

money has actually gotten down to rebuilding water systems, electricity systems, which is the whole purpose of this whole program?

124

Could you let the committee know what we have bought so far with

all of these billions of dollars?

Colonel DUBOSE. Sir, I was only involved in the Restore Iraqi Oil

program. I would have to get back with the Corps of Engineers

folks. We only have visibility on our portion of that.

Mr. KUCINICH. Now, since this hearing, Mr. Chairman, is about

the Development Fund for Iraq and about the reconstruction of the

infrastructure of Iraq, do any of the witnesses have any information about any infrastructure improvements that have been made

in Iraq with respect to water and sewer, for example, which would

in any way correspond to the amount of money which is the subject

of this hearing? Does anyone have a number? Mr. Bowen, can you

tell?

Mr. BOWEN. I can. We are working on exactly that issue. When

I went on my sixth trip to Baghdad back at the turn of the year

I asked exactly this question. I said I’d like to see what it is that

we built. When did these projects begin? When were they completed? And how much was the original contract and how much

was the final cost? And I asked that of PTO and AID and

NISTICKI, the primary entities that are spending there. And the

answer I got was, that is going to shut us down, to answer your

question, which raised concerns.

Mr. KUCINICH. Wait, wait, wait. What was the answer you received?

Mr. BOWEN. The answer was that we are going to have to shut

down our operation in operation for 2 weeks to give you that answer. So with that, you know, we pursued the why and we found

out that there are issues with respect to the information systems

management of the projects, and we announced an audit. As soon

as I delved into that a little bit, I announced the audit, the first

stage is going to address cost to complete. If we do not know what

the cost to complete is for the projects that we are building, we

may be in a difficult situation with respect to what we are going

to hand over. We need to be sure we have the funds available to

finish what we started.

Second, we began our own initiative to try to accumulate this

data, the SIGIR Iraq reconstruction information system, where we

have gotten data from AID, the Corps, NISTICKI, and PCO, and

accumulated into one data base. It is a work in progress, but we

are trying to answer the exact question you are asking. What have

we bought? How much did we pay for it? Did we get value for our

dollar? Ultimately, my mission there to answer that question. And

we are also trying to answer it with respect to the projects that are

ongoing, and then to ultimately say, what about a project in particular? Tell me about a project.

Two days ago my auditors were out visiting El Wathba water

treatment facility in Baghdad and they have come back with a report and I have a team of auditors, technical engineers, and investigators working together to answer the question you are asking,

and that is: what’s the quality of particular projects?

In the July 30th report you will see that. You will see pictures.

You will see results. In the October report you will see a lot of that.

Mr. SHAYS. I thank the gentleman.

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Mr. KUCINICH. I just want to ask the Chair that, you know, in

the next round of questions I want to continue to pursue this line.

Thank you.

Mr. SHAYS. Sure. Thank you.

I understand—yes, Mr. Waxman?

Mr. WAXMAN. I just want to ask Mr. Reed, on the LOGCAP contract I would like to know if you have a summary sheet for the task

order values in any questioned or unsupported costs? I am not asking you to answer any questions about it, but if you have that summary I’d like you to provide that for us. Do you have it?

Mr. REED. Yes. I would be happy to provide that to you.

Mr. WAXMAN. Thank you.

Mr. SHAYS. If you provide it to the counsel, we will make sure

that the same day we get it the minority gets it.

[The information referred to follows:]

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Mr. SHAYS. Let me just say for the benefit of the Members, we

have an issue of cash, we have an issue of redaction. Gentlemen

on our panel, if I am incorrect about how I described it, I want you

to tell me where I am incorrect just so we know who has the answers to this issue. On the issue of cash, it is my understanding

that you, Mr. Bowen, can speak to this, and you, Mr. Benkert, can

speak to this. On the issue of redactions, it is my understanding

Mr. Reed, Colonel DuBose, and Mr. Norquist, you can speak to

that.

Mr. Reed as the DCAA, you do the audits and you recommend

what is fair and reasonable? That is my understanding.

Let me just go forward. You, Colonel, your responsibility is you

hire and pay the contracts and sometimes you chase overpayments,

if there is, and you ultimately decide what is fair and reasonable

based on the recommendations of Mr. Reed.

Let me just go forward here one more, and then correct me

where I am wrong. It is my understanding that, Mr. Norquist, you

worked out of the comptroller’s office, was DOD’s contact with the

IAMB, correct, with U.N.?

Mr. NORQUIST. I was the observer to the IAMB, yes, sir.

Mr. SHAYS. Right. And the liaison, in a sense?

Mr. NORQUIST. In effect that is what happened.

Mr. SHAYS. OK. So with what I have described, is there any qualification or additions that you need to make so we make sure we

are not ignoring your contribution? Is there anything that I have

described that needs to be amended by any of you?

Mr. NORQUIST. No.

Mr. SHAYS. Any additions to?

[No response.]

Mr. SHAYS. At this time let me tell you the order to which I have

Members. I have Mr. Higgins, who is not here, so I would go to Mr.

Ruppersberger. Then I would go to Mr. Maloney, then I would go

to Mr. Sanders, and then I would go to Mr. Lynch. Is that the order

in which you arrived? I believe that is correct. OK. So at this time,

Mr. Ruppersberger, you have the floor.

Mr. RUPPERSBERGER. Sure. Mr. Chairman, first I want to thank

you and Ranking Member Waxman for having this hearing. It

seems to me that we have a lot of work to do based on what our

job is in Congress from an oversight capacity. It concerns me greatly that we from the very beginning did not set up the proper system that we need to set up to really monitor cash, where cash is

going, and to prevent fraud.

Unfortunately, because of this fact that we have not set up the

proper system, we have not been able to put the money back into

the Iraqi economy to win the hearts and minds of the people, which

hopefully will eventually bring our troops home. And I think it is

important that we become a lot more aggressive in this oversight

ability to really find out where the cash is.

Just right now, moneys have not been held accountable, what I

have heard from the testimony. We have $8 billion that have come

from oil for food. We have $12 billion that have come from oil proceeds. That is $20 billion right there; $20 billion is a lot of money.

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Now, let’s get the specifics. If we are going to fix the problem,

we have to learn what we did in the past, what we have not done,

and what we are going to do now.

Mr. Bowen, first thing I want to point out, when the CPA started

with Bremer he promulgated regulations, and one of the regulations is the CPA shall obtain the services of an independent certified public accounting firm to ensure transparency and compliance with Resolution 1483.

Now let me ask you this question. Did the CPA ever hire a certified public accounting firm?

Mr. BOWEN. They hired the Northstar Co. which had CPAs on it,

and the purpose of that employment was to meet that standard. As

I mentioned earlier, the mission of that entity changed pursuant to

the comptroller’s verbal direction, converting them more to an assist organization in managing the accounting records of the DFI.

Mr. RUPPERSBERGER. Were they a certified public accounting

firm?

Mr. BOWEN. No, sir.

Mr. RUPPERSBERGER. OK. So the fact that they were not a certified public accounting firm, that is step one. Do you think they

should have hired a certified public accounting firm based upon the

rules that were promulgated and also based on the standard in the

industry of accounting? Should we have at that point hired a certified public accounting firm, in your opinion?

Mr. BOWEN. I think that would have been a better choice.

Mr. RUPPERSBERGER. And I understand that Northstar was

working out of a private home in San Diego and they received a

$1.4 million contract to audit this situation; is that correct, based

on your knowledge?

Mr. BOWEN. I do not know the details of their corporate headquarters in California. I did interact with the Northstar personnel

in the comptroller’s office and they were professional.

Mr. RUPPERSBERGER. Had you ever heard of them before they

were hired?

Mr. BOWEN. No.

Mr. RUPPERSBERGER. Do you know who hired them?

Mr. BOWEN. No, I do not specifically.

Mr. RUPPERSBERGER. Do you know what department hired them?

Mr. BOWEN. They were retained by CPA through DOD.

Mr. RUPPERSBERGER. And do you know why they were hired? Did

they have any certain expertise or anything?

Mr. BOWEN. That occurred long before I arrived in Baghdad.

Mr. RUPPERSBERGER. And, by the way, these questions—we need

to be specific and strong. It has nothing personally about you all.

We want you all to fix the problem, but we have to raise these

issues.

Now, you examined the Northstar contract in one of your reports.

According to the CPA, Northstar was hired not to audit but to consult with the CPA on transparency. What do you know about that

part of the contract?

Mr. BOWEN. I have not reviewed that part of the contract. I know

we looked at what Northstar generally did in connection with the

DFI audit, and we concluded that they did not carry out the mission that the CPA order required.

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Mr. RUPPERSBERGER. So basically they really did not work as a

certified public accounting firm. Do you know what they were there

for? What was the purpose?

Mr. BOWEN. Well, as I said they were ostensibly hired to provide

internal audit expertise. They functionally were converted into an

assist organization with respect to maintaining accounting records

on DFI disbursements.

Mr. RUPPERSBERGER. You know, we have done a lot in Iraq.

Whether for or against the war, it is about the troops and supporting the troops and doing the things that we need to do right now.

It just seems to me that billions of dollars that are held unaccountable, it is just unacceptable, and that we have to do better.

Now, one of the things an investigation—when you conduct investigations, you follow the money.

Mr. BOWEN. Yes, that is right.

Mr. RUPPERSBERGER. From your perspective, let’s talk about following the money. We have what my numbers—what I have heard

in testimony, about $20 billion. Do you feel there is more that is

unaccountable, or do you feel that is the number that we have out

there now, between the oil for food, the money that was given to

the ministers? What amount do we have, or cannot you answer

that question? Do we really have a handle on how much is really

missing or held unaccountable that we are responsible, the CPA is

responsible for managing?

Mr. BOWEN. There were two types of money in Iraq. There was the DFI essentially, speaking generally, the DFI $19-plus billion

and then the IRF, which is taxpayer money, the appropriated dollars, amounting to roughly $21 billion. The former, the $19 billion,

was used to fund the stand-up of the Iraqi government and to initiate a wide variety of reconstruction activities. The IRF—IRF I and

IRF II, if you will—IRF I was roughly $3 billion in April 2003 and

$18.4 billion in November 2003, was used for the reconstruction

program that we are currently executing.

Mr. RUPPERSBERGER. You know, the fact that we have all this

unaccounted money is just very serious. The fact that we from the

very beginning did not set up the right system or hire the certified

public accounting firm whose job it would be independently to determine and follow where the money is is serious.

What I would like to hear from you is what do you feel we need

to do now. What systems do we need to set up to find this cash

and follow this cash. But before you answer that—because I see my

yellow light—that money that went to the ministers, did some of

that go to Chalabi?

Mr. BOWEN. I do not know the answer to that question.

Mr. RUPPERSBERGER. Well, I think we need to look into that also,

because of past record. But could you ask what do we need to do

now? We have talked about where we were. What systems do we

need to set up, in your opinion, do you think we will be able to find

and hold those people accountable, whether it is within our government or the Iraqi government on this amount of money? We have

Oil-for-Food scandals. We have this situation now. It is getting out

of control and it is hurting our situation in Iraq.

Mr. BOWEN. That is a good question. The DFI money is within

the sovereignty of the Iraqi government. Just so you know, I have

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met several times with the Commissioner on Public Integrity,

Judge Roddy, and he and I have a good working relationship. He

and the Iraqi anti-corruption system, which we have helped stand

up—there are 29 IGs that we helped train that are working within

Iraqi ministries now tracking exactly what you are talking about.

Third, the border supreme audit—we have helped guide them to—

there are three incipient but sound pillars of anti-corruption within

the Iraqi government. They have taken on this mission. There is

a fiscal anti—it is called the Fiscal Integrity Commission within

the interim Iraqi government, the current Iraqi government, that

is examining every contract over $3 million.

So yes, they are tracking what happened to this money. They are

pursuing accountability, and partly because of the audit work we

have done to draw attention to this issue, to the lack of controls.

But it is on that side of the fence, so to speak, and they are pursuing it.

On our side we are focused on appropriated dollars. We are looking at how the IRP is being used, has been used, and will be used.

Mr. RUPPERSBERGER. My time is up, but I would like you to get

back to me on what person or individual or department determined

that we should hire Northstar to monitor, because I think that is

the beginning of where this has started. The problem started with

that and it has continued on.

Mr. BOWEN. Yes, sir.

[The prepared statement of Hon. C.A. Dutch Ruppersberger follows:]

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Mr. RUPPERSBERGER. I think it is important that we get that information so we can analyze why that decision was made. Thank

you.

Mr. BOWEN. I will get that for you.

Mr. SHAYS. I thank the gentleman.

Before recognizing Mrs. Maloney I’d ask unanimous consent to

include in the record the CSR memorandum on applicable laws on

the disclosure of proprietary information dated June 20, 2005.

Does the minority have a copy of that?

VOICE. Yes.

Mr. SHAYS. OK. And without objection, so ordered.

[The information referred to follows:]

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Mr. SHAYS. I would just also say to our panelists, if you have not

been asked questions to which you would like to make a comment,

feel free to ask the question or whether you can jump in. And if

there is anything in the end that you want to put on the record,

you will be given time, so take notes on anything you want to share

so it is part of the record, because some of you are being asked

more questions than others and it may be that you need to put

something in the record. So, one, feel free to jump in to see if you

can respond with your information, and, two, if you choose not to

do it then, at least at the end we will give you time to respond and

make any last comments.

At this time the Chair would recognize Mrs. Maloney.

Mrs. MALONEY. I thank the chairman for really his leadership on

this issue and so many others. I must compliment Henry Waxman

on this report on the mismanagement of Iraqi funds, although I

must say that I find the contents absolutely sickening—107 million

U.S. dollars, $100 bills shipped to Iraq, but that is peanuts compared to the $8.8 billion missing in the CPA and the abuse in the

commander’s fund I find incredibly troubling in your report, and I

thank you very much for your report.

The records that we have received show that $637 million in

Iraqi funds was given out in four regions to local commanders and

officials that they could use it in short-term projects for rebuilding

hospitals and roads, employing the Iraqi people, and helping people, and helping the region.

I met with General Patrias in Mosul and was very impressed

with the projects that he had initiated and that he was helping the

Iraqi people, but your report shows, Mr. Bowen, that a great deal

of this money did not get to the people or to the purpose that was

intended, and I’d like to ask you: is it correct, when you looked at

one region that received about $120 million in these commander’s

emergency funds, you could not account for $96 million of it? In

other words, more than 80 percent of the cash, that there were no

clear records whatsoever? Is that correct from your report?

Mr. BOWEN. Let me make a distinction for you. There are two

different programs for rapid reconstruction, or there were at that

time in Iraq. One was the CERP, the commander’s emergency response program, and the other was the R3P, the rapid reconstruction response program. Our audit addressed the latter one, not the

CERP.

We have an audit ongoing of the CERP and that will be out in

our October report, and you are right to ask questions about it, but

also your point is well taken on the effectiveness of it. I think there

were some real lessons learned as to how CERP has been executed

as far as what is effective for rapid reconstruction.

In Hillah, which is a town in south-central Iraq, there was a DFI funds director who had responsibility for $120 million you referred

to. He failed in many ways in managing those funds. There were

$89 million that were not properly receipted. There were four levels

of keeping track of money. He failed at least one or all of those levels in tracking $89 million, and with respect to $7 million there is

no record. Also, as I alluded to earlier——

Mrs. MALONEY. So $7 million there is no record and $89 million

was misused or unaccounted for?

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Mr. BOWEN. Inadequate receipts or——

Mrs. MALONEY. Unaccounted for.

Mr. BOWEN [continuing]. Documentation. That is correct.

Mrs. MALONEY. OK. So $89 million unaccounted for and $7 million absolutely missing?

Mr. BOWEN. That is correct.

Mrs. MALONEY. That is a disgrace beyond words. In your report

you stated that you discovered obviously from your comments today

fraud, and that you were initiating a criminal investigation. Can

you tell us about this investigation?

Mr. BOWEN. I cannot give you the details of those investigations,

but they are ongoing.

Mrs. MALONEY. But could you tell us broadly what those officials

are accused of and how you detected the fraud in a broad sense?

Mr. BOWEN. In the broadest terms, this was a story of auditors

and investigators working well together in Hillah, auditors bringing to my attention indicators of potential fraud, the deployment of

investigators down that money trail, and the resulting cases that

were developed had been presented to the U.S. attorney.

Mrs. MALONEY. So you have presented how many cases to the

U.S. attorney?

Mr. BOWEN. On these issues, three.

Mrs. MALONEY. And are you talking about the eastern district

or——

Mr. BOWEN. Yes, ma’am.

Mrs. MALONEY. OK. When did you present it to the eastern district?

Mr. BOWEN. Within the last 2 weeks.

Mrs. MALONEY. And I understand the audit that we have been

referring to and you mentioned is in the south-central region of

Iraq?

Mr. BOWEN. That is right.

Mrs. MALONEY. Also, aside from that $120 million, by my calculation there is more than roughly $400 million went to the other

three regions. Are you auditing them, also?

Mr. BOWEN. Of the R3P programs we do not have an ongoing

audit of those other regions. Now, we have four audits going on

still in this region. We are looking at two projects, the——

Mrs. MALONEY. So you are talking about the south-central

region——

Mr. BOWEN. Yes.

Mrs. MALONEY [continuing]. You have all these audits going on?

Mr. BOWEN. That is correct.

Mrs. MALONEY. But there are three other regions. Are you going

to audit the other three regions?

Mr. BOWEN. It is a question of resources right now. Our mission

now, as assigned by Congress, is to focus on the Iraq rehabilitation

and relief fund, which is the taxpayer appropriated dollars, and my

limited resources are being devoted toward performance audits of

the projects being accomplished with the IRF.

Mrs. MALONEY. Well, I, for one, think you should be given the

funds to do your job and I compliment you on your work.

Mr. BOWEN. Thank you.

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Mrs. MALONEY. It is an important position, and you have done

a great service to the American taxpayers. I, for one, deeply appreciate it.

I’d like to ask Mr. Reed, is DCAA looking into any of these commander’s emergency funds and how they were spent? Are you investigating it at all?

Mr. REED. No, we are not. Our mission involves the audit of——

Mrs. MALONEY. That is my question is whether you are investigating it. I’d like to——

Mr. SHAYS. But if he could just explain——

Mrs. MALONEY. If you will give me additional time, that would

be great.

Mr. SHAYS. Let me just say you only had 10 seconds left anyway,

but just explain why he’s not so we——

Mr. REED. Our mission is to do contract audits involving contracts which require audits to set the price or to reimburse the

cost.

Mrs. MALONEY. OK. But if he’s not investigating it, I’d like to

know is Mr. Norquist in the comptroller’s office, are you investigating and examining this spending, and likewise Mr. Benkert, is the

DSO auditing these expenditures.

Mr. NORQUIST. Not to my knowledge. I do not belong to an organization that—as the observer to the IAMB, I would not have been

involved in that.

Mr. BENKERT. My office does not do these sorts of audits, but let

me just say I think there are—and Mr. Bowen’s quarterly report

indicates this—there are a number of audits that either are ongoing or will be done of the commander’s emergency response program. The audit he has done—I believe there were other audits

too—it is included in his quarterly report, a listing of these audits.

I would also point out that there are, I believe, eight audit agencies and inspectors general operating in Iraq in auditing aspects of

Iraq reconstruction who have so far produced over 1,500 audit reports, many of those from DCAA. So there is a very extensive audit

program that is going on as part of the management of Iraq reconstruction.

Mrs. MALONEY. But my point and my question, if I could, Mr. Chairman, was directed to the $400 million that Mr. Bowen says

he cannot have the resources to look at at this point. The other

three——

Mr. SHAYS. I’d suggest to the gentlelady that she will have a second round to——

Mrs. MALONEY. But the gentlemen say they are not looking at it.

I am just saying that is a lot of money. Someone should be looking

at it. I think it is an important program, but if there is a waste,

fraud, and abuse of these dollars, Mr. Bowen has already referred

three people to the eastern district court system, and I think that

the other $400 million should likewise be audited, and from their

testimony no one is doing that now.

Mr. SHAYS. Let me just clarify. Is no one doing it now? I am confused by that.

Mr. BOWEN. We are auditing the CERP program and that is $600

million and that is nationwide. With respect to the R3P, I do not

know if the other regions’ allocations of R3P are being audited.

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Mr. SHAYS. Could you provide that information back to the committee?

Mr. BOWEN. Yes, sir.

Mr. SHAYS. And we will get back to Mrs. Maloney on that.

Mr. BOWEN. Yes, sir.

Mr. SHAYS. I hope there is someone taking notes on what you all

are going to get back to us.

Mr. BOWEN. Yes, right here.

Mr. SHAYS. Mr. Sanders, you have the time.

Mr. SANDERS. Thank you very much.

Mr. SHAYS. Thank you for your patience, Mr. Sanders.

Mr. SANDERS. Thank you very much, Mr. Chairman. And let me

congratulate you for holding this hearing. This committee has an

enormously important responsibility, regardless of who the President of the United States is, and that is to provide oversight to

make sure that, among other things, taxpayers get their dollar’s

worth and that our Government runs in the way it should be running, and I must say that since George Bush has been President

this committee has in many ways abdicated its responsibility and

not had the kind of hearings that it should be having.

I can recall that under Bill Clinton we had hearings every other

day for every other reason, and yet on some of the most important

issues of concern to the American people this committee has not

been active, so I want to applaud you for delving into an issue that

obviously is a concern to the American people.

The war in Iraq is controversial. This country has a huge deficit.

This week we will be debating on the floor of the House cuts in

very important programs for low income and moderate income

Americans. I think, regardless of one’s position on the war, there

is no American that does not believe that every dollar that we

spend or that we budget for Iraq should be spent in a way that improves the lives of the Iraqi people and that does not disappear in

thin air. I do not think there is any disagreement on that.

In looking over this report, there are just some statements here

that almost defy imagination, and I speak as someone who was a

mayor of a city for 8 years and has some administrative experience.

I would just ask any member of the panel to please help me out

and provide additional information on some of these issues.

The assertion is that American officials frequently exercise poor

or nonexistent oversight over contracts funded with hundreds of

millions of dollars from Iraqi proceeds. We found six cases where

contracting files could not be located which involved disbursements

of over $51 million. Explain to me. I am not quite sure what that

means—contracting files could not be located.

I am a mayor. I sign you off as a vendor. We sign a contract. We

put it away some place. That is usually the way business is done.

What does that mean that contracting files could not be located,

Mr. Bowen?

Mr. BOWEN. Quite literally what you have just said. We did two

contract audits—that is, audits of the processes—in Baghdad of

how contracts were let both under the DFI and using appropriated

funds, and in both audits we had findings that criticized the procedures.

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As you noted, in both cases there were situations where we just

randomly asked for a set of contracts, and in those situations there

were some that they simply could not put their hands on, and there

were——

Mr. SANDERS. You could not find the document?

Mr. BOWEN. Yes, sir. That is right.

Mr. SANDERS. Well, how does one disburse money for services

without a document that tells us how much you are paying for

what you are supposedly getting?

Mr. BOWEN. Well, these were completed contracts, so the disbursements had occurred. But, nevertheless, that is not an excuse.

I am just saying——

Mr. SANDERS. They were completed but you did not see it?

Mr. BOWEN. No, no. The fact of the matter was we asked for contracts that were completed. We wanted to go back and look through

their files.

Here’s the issue. There was substantial turnover within CPA—

still is. We are hitting the 1-year mark in Baghdad since the State

Department took over, and guess what, they are all on 1-year

tours. There is significant turnover occurring. I am not ascribing

the same set of problems to the State Department that we identified in those two audits, but what I am saying is that personnel

turnover resulted in a lack of continuity.

Frequently a contract officer would use in charge of a set of contractors, his or her replacement would follow on weeks later, and

there was just a complete drop informationally. Sometimes they

were on stick, memory sticks, or there were not adequate procedures, as we identified.

Here’s a lesson learned. What do we need to do in situations like

that? We need to have a single repository of contracting data like

you were referring to when you were mayor. You know, you had

one place you could go and find out about all the contracts of your

city. That is what we need to do. I mean, it is common sense.

Mr. SANDERS. This is kind of an A,B,C of governmental processing, would not one think?

Mr. BOWEN. But at the same time we were in the middle of a

massive insurgency in a wartime situation with significant turnover and unique situations that simply do not compare domestically.

Mr. SANDERS. I appreciate it. But let me ask another question of

anybody——

Mr. REED. Could I add to that?

Mr. SHAYS. Please, Mr. Reed.

Mr. REED. I think it is important to note that in my opening

statement I mentioned that DCAA is actively involved in providing

contract audit oversight on some 14 contracts or 16 contracts totaling $3 billion. These are awards to U.S. firms that contain the

proper normal audit clauses that we operate with, and they are

going to be very effectively audited.

Mr. SANDERS. Good. There is another assertion here that over

600,000 tons of Iraqi oil worth $69 million produced between June

29, 2004, and December 31, 2004, is missing. We simply have lost

600,000 tons of oil. Anyone have any thoughts about where we

might locate 600,000 tons of oil? Mr. Benkert.

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Mr. BENKERT. Mr. Sanders, as you know, since June 28th the

production of oil and the complete operation of the oil industry is

an Iraqi responsibility. I mean, it is a sovereign country. This missing oil was reported by an audit that KPMG did on behalf of the

IAMB that covered this period after the U.S. transferred sovereignty to the Iraqis. So this took place after the U.S. transferred

responsibility to the Iraqis and before the end of the year.

What the auditor found was, in looking at the records of the Ministry of Oil and the financial records associated with the Development Fund for Iraq, that they could not account for that much oil.

And they have referred this matter to the Iraqi government.

Mr. SANDERS. OK. Thanks for the explanation. But am I correct

in asserting that is, everything being equal, money that should

have gone back to the Iraqi people to rebuild their country?

Mr. BENKERT. Yes, sir, you are correct. That is money that

should have been, if it was properly accounted for, if those oil sales

were properly accounted for, that money should have been deposited into the Development Fund for Iraq, which of course now

funds the Iraqi budget.

Mr. SANDERS. Right. So that investigation is ongoing but at this

point we have not located that $69 million; is that correct?

Mr. BENKERT. As I said, this is a matter that is between the

auditor, the IAMB, and the Iraqi government. To the best of my

knowledge, it has not been resolved.

Mr. SANDERS. OK. Mr. Chairman, thank you again. And let me

again—I think this is a very important hearing, and I hope that

we can continue to hold hearings like this. Thank you very much.

Mr. SHAYS. Thank you. And I appreciate the conduct of the Members in just trying to get at the truth.

At this time the Chair would recognize my friend from Boston.

Mr. LYNCH. Thank you, Mr. Chairman. I want to add my support, as well. I think this is a long overdue hearing and I think

that this whole process of trying to get to the bottom of the

misallocation or theft of up to $20 billion here—just as a sidebar,

I know we have put off at least for a week the discussion of whether subpoenas should be issued for our further hearings. I just want

to weigh in publicly and say that I think the time for subpoenas

has long since passed, and I think the amount of waste, fraud, and

abuse that we have here on the American taxpayers is a disgrace.

I think we have seen enough foot-dragging in this instance to warrant subpoenas to get some people to come forward.

Mr. Bowen and Mr. Reed—Mr. Reed, we have spoken before in

these hearings—I realize that a lot has been said that this is a

wartime exercise in terms of trying to work with these programs

for the Oil-for-Food Program and Iraqi reconstruction, but we recently had a situation where a Halliburton procurement manager,

Jeff Maison, and a general manager of the Halliburton subcontractor, Ali Hajazi, were eventually finally indicted for a kickback

scheme, and it involved overcharging by the subcontractor of about

$4 million and $1 million going to the Halliburton manager in repayment. We have an indictment there.

This involved a Kuwaiti company called LaNovele. Now,

LaNovele has dozens and dozens, maybe over hundreds of contracts

not only with troop support contract but also with reconstruction

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and relief. Have we gone back—given the fact that indictments

have come down in this case, have we gone back and checked out

every contract that LaNovele has been involved in and Ali Hajazi

and Jeff Maison to find out whether or not, since they were involved in a kickback scheme in this one instance and they are

under indictment, have we looked at other activity across Iraq to

determine whether this was the standard procedure and practice

for this company and whether there is an extensive involvement

here on the part of these individuals?

Mr. REED. On DCAA’s part, of course, any time we see an abuse

like this and it is found to actually exist and we get indictments

and convict, to any auditor that becomes an immediate——

Mr. LYNCH. I am sorry, Mr. Reed, is your mic on? We want to

catch it all.

Mr. REED. It is on and I am talking as loud as I can here, sir.

Mr. LYNCH. I am sorry.

Mr. REED. I will talk even louder.

Mr. LYNCH. I appreciate it.

Mr. SHAYS. Let me just say some of the mics seem to work better

than others, because you are pretty close to it. But just start over

again. We will give the gentleman a little more time here.

Mr. LYNCH. Thank you.

Mr. REED. Yes, we are auditing all contracts awarded to Novele,

and not only Novele but any contractor over there, I believe in this

particular environment, from a fraud assessment standpoint in

terms of what an auditor might use to decide how much auditing

to do and in what areas, we are very aware of the risk in this environment and so yes, we are looking at other contracts.

As far as this particular investigation, I have to presume, because I do not have the details of the investigation, itself, but it is

normal in an investigation of that type that the investigators would

follow that lead wherever it took them, including all other contracts

that these people touched.

Mr. LYNCH. All right. That is your assumption. OK. Maybe we

have to followup with that in future hearings.

I do want to say that, with respect to the Pentagon auditing, the

DCAA Government audits, we have had six task orders on the restoration of Iraqi oil, RIO, contracts performed by Kellogg, Brown

and Root, and they were funded with DFI funds. Five involved fuel

import and distribution, and there have been a total of 14 audit reports, and additional advice letters from DCAA on these task orders.

We received the reports, themselves; however, the Defense Department redacted much of the reports. The redacted information

was considered to be proprietary information. I’d like to know from

any of the panelists who made the decision to withhold as proprietary business information all the figures on questions and unsupported costs as determined by the DCAA auditors, and what is the

legal justification for withholding that information from Congress?

Colonel DUBOSE. Sir, the redactions were made by KBR, and

that was based on their assertion that it was proprietary data protected by the Trade Secrets Act.

Mr. LYNCH. Colonel, under the circumstances here, given what

we know is going on here in large part with Kellogg, Brown and

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Root and Halliburton, what is the legal justification for withholding

the information from Congress?

Colonel DUBOSE. Sir, it is not the Corps’ assertion that information would be withheld from Congress. It was in response to the

request from the IAMB, sir.

Mr. LYNCH. I am sorry? Can you repeat? I cannot quite hear you.

Colonel DUBOSE. Sir, the redaction was made in response to the

request to provide those to the IAMB. I do not believe the Corps

has any problem with those unredacted audits being provided to

Congress or anybody in the U.S. Government.

Mr. LYNCH. So we are in agreement here? Congress should get

the unredacted reports in this instance? I just want to get this on

the record, sir.

Mr. SHAYS. Let me—if the gentleman would yield, we do have

the unredacted version. We were given that in March. But the

issue is why did—this is not off the gentleman’s time—the issue is

why did not the U.N. basically get this information. We treated it

almost like the U.N. was a FOIA request and the attorneys responded that way, and I would suggest that the U.N. had as much

right to have this information as Congress, frankly, and that is

what I will get around to in my questions.

I realize, Mr. Benkert, this was not your decision, correct? You

did not make the decision to redact; is that correct?

Mr. BENKERT. Yes, sir, that is correct. I mean, I became the liaison to the IAMB after this information was provided.

Mr. SHAYS. OK. Let me—I am sorry. The gentleman has more

time. The gentleman has about a minute left or two, whatever he’d

like.

Mr. LYNCH. Thank you, Mr. Chairman. I appreciate that.

In your estimation collectively, are there obstacles that you are

finding in terms of being able to provide information to the Congress regarding money that was misspent, misallocated? Are there

safeguards that you would recommend either to help the transparency within the programs or that would enhance the ability of

yourselves and of Congress to track, as Mr. Ruppersberger said

earlier, following the money?

Mr. REED. I do not believe there is barriers. The Department’s

policies and procedures are to be cooperative with Congress and to

provide information requests. Where we have provided audit reports in the past to Congress, we do note the restrictions on the

reports just so they will be aware that they may contain sensitive

information. So from my viewpoint there are no barriers.

Mr. LYNCH. Thank you. I yield back. Thank you, Mr. Chairman.

Mr. SHAYS. Thank you. Mr. Kucinich, I have some questions, but

I would prefer that you go. I am going to kind of close up, so do

you have questions you’d like to ask?

Mr. KUCINICH. Yes, I do.

Mr. SHAYS. Thank you, Mr. Lynch, for your questions.

Mr. LYNCH. Thanks. Thanks, Mr. Chairman.

Mr. KUCINICH. Doing the math on the fact that 107 million $100

bills were transferred from New York to Baghdad, this information

provided by staff, if that is correct we are talking about $10.7 billion in $100 bills. Mr. Bowen, is that essentially correct?

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Mr. BOWEN. That sounds like a number I have heard regarding

the flights.

Mr. KUCINICH. Now, up here on the screen this is a photo, according to information given to me by staff, taken in July 2003, in

Baghdad. What’s pictured here is 20 packages of $100,000 each.

These are $100 bills. The individuals holding this cash are Coalition Provisional Authority officials. The man in the middle is Frank

Willis, who is a deputy senior advisor at that point for the Ministry

of Transportation and Communications. His boss, Darryl Trent, is

on the right. According to information provided by staff, I am being

told that this is $2 million in cash paid, according to Frank Willis,

to Custer Battles. Again according to Mr. Willis, the company was

told to bring a big bag for payment.

I offer this, Mr. Bowen, for your consideration as you begin to

look at the manner in which things were disbursed and to whom.

Custer Battles is a U.S. contractor.

Mr. Bowen, do you know how many private contractors there are

in Iraq right now? Do you have any idea?

Mr. BOWEN. We have developed a data base that is tracking who

has received contracts in Iraq, so yes, we have that information.

Mr. KUCINICH. Can you give the committee a number?

Mr. BOWEN. I will have to provide that number for you. I do not

want to ballpark it right now.

Mr. KUCINICH. Is it possible that it could be more than 5,000?

Mr. BOWEN. We will just have to get back to you with that specific number, but we have—the data base I referred to earlier is developed precisely to answer these types of questions, so we can get

that for you.

Mr. KUCINICH. While you are developing the data base—I’d like

to ask the Chair’s indulgence here, Mr. Chairman. The thing that

interests me is I am looking at—I looked earlier at cash packs on

the earlier screen. Could you bring up one of those? Could staff

bring up one of those cash packs on the screen? Now, remember we

are talking about $10.7 billion in $100 bills. These cash packs came

through the Federal Reserve.

Now, it seems to me that $100 bills, as with all money, have serial numbers on them, correct, Mr. Bowen?

Mr. BOWEN. That is correct.

Mr. KUCINICH. Is any effort being made to follow the money, literally, to try to determine if any of these $100 bills have found

their way back through the currency system back to the United

States to determine where they are located? Is anyone even asking

that question about where’s the money, where is the money going,

where is it, has it turned up anywhere? Has any effort been made

to see where those $100 bills are showing up?

Mr. BOWEN. Yes. U.S. Customs has been notified about this and

we have worked with them. On specific case through our investigators we have had bags searched and we have stopped people both

at the Baghdad Airport and we have had Customs agents meet

them at airports as they have landed here and go through their belongings. But you are asking a really big question about a billiondollar question so to speak, and——

Mr. KUCINICH. Actually, it is a $10.7 billion question.

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Mr. BOWEN. Yes, you are right. And so you have to understand

sort of what types of money and where this money went and what’s

the jurisdiction over it now. I think those are important questions.

Mr. KUCINICH. Is it within your jurisdiction to provide this committee with the serial numbers that came through Federal Reserve—I take it these were new $100 bills—to provide this committee with the information with respect to any list on which those serial numbers have turned up on coming back through Customs,

who held those serial numbers? Do we have that?

Mr. BOWEN. No, we do not. And we have not—the measures that

I have described have not produced findings, so to speak.

What this money was used for that you see on this slide, this is

DFI money. This money was used to fund the new Iraqi government and to fund contracting that they did, to capital projects, to

pay salaries—what I addressed in my controls audit report. The

issue with respect to fraud may have occurred regarding that contracting or those payments are potential Iraqi crimes. In other

words, that is what I was referring to that Judge Roddy, who is

the Commissioner of Public Integrity and, indeed, the Fiscal Integrity Commission within the Iraqi government, the Board of Supreme Audit, and the IGs all have audits and investigations connected to how that money was used.

Mr. KUCINICH. Well, let me ask you this. Any of this—are U.S.

contractors or anyone who is a U.S. citizen who comes into contact

with any of the cash in Iraq, are they covered by U.S. law?

Mr. BOWEN. You have raised a good question. We are treating

the—I treat that as a yes. If we uncover information with respect

to a contractor who has misappropriated or fraudulently expropriated DFI dollars, then we will pursue that as a U.S. crime.

Mr. KUCINICH. Mr. Chairman, I am going to wrap up right now,

but I just think that as the committee gets into this subject it

would be of great interest to determine how that money is coming

back to the United States at some point—since we are talking

about cash here, which does represent a note that is legal tender—

at some point that money has to find its way back to the United

States. If we are looking at the potential for fraud here or any kind

of corruption it might be instructive to this Congress to make such

a determination about where the money is coming from and, in effect, to follow the money.

Mr. BOWEN. And I am trying to follow the money. You have put

your finger on an exceedingly large difficulty with respect to tracking funds in Iraq. There is no forensic electronic trail with respect

to how this money was used.

Just so you know and without getting specific, I am using the

tools at my disposal this side of the world to track those issues.

Mr. KUCINICH. Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman. I thank you, Mr. Bowen, as

well.

Mr. Lynch, if you have questions then I will end up and we will

get to the next panel. I am going to go last, but you are more than

welcome to ask questions if you have them.

Mr. LYNCH. Thank you, Mr. Chairman. Just 1 second.

Mr. SHAYS. Take your time.

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Mr. LYNCH. Thank you, Mr. Chairman. We just have one thing

we want to get on the record here. We have been trying to track

here the flow of taxpayer dollars and also the funds that have been

directed for this purpose of reconstruction. I’d like to ask some

questions about the last-minute spending rush in the final days

and weeks of the Coalition Provisional Authority’s existence.

The report by Representative Waxman’s staff has already been

made part of the record, but it details how nearly half of the currency shipped into Iraq under U.S. discretion, which was more

than $5 billion, flowed into the country in the final 6 weeks before

the control of Iraqi funds was returned to the interim Iraqi government on June 28, 2004.

In the weeks before the transition, CPA officials ordered urgent

disbursements. Fortunately, we have the record of the Federal Reserve, the New York Federal Reserve, of more than $4 billion in

U.S. currency from the Federal Reserve, including one shipment of

$2.4 billion, the largest shipment of cash in the bank’s history.

As part of this report, Representative Waxman’s staff reviewed

thousands of pages of documents that were subpoenaed from the

Federal Reserve Bank of New York, so we have a transparent system at the Federal Reserve in which we can account specifically for

every dollar spent, and then it goes to Iraq and it basically disappears from the screen. No accountability. No paper trail. No way

to follow the money.

These include a number of e-mails about this 11th hour spending

spree, and I’d like to request the copies of these e-mails, some of

which are quoted and cited in Representative Waxman’s report,

and I’d like to request that they be made part of the official hearing record.

For example, in the words of one Federal Reserve official who

was writing on June 11, 2004, ‘‘Just when you think you have seen

it all, the CPA is ordering $2,401,600,000 in currency shipped out

on Friday, June 18th.’’ While the Federal Reserve was preparing

this shipment, the CPA pushed back the delivery date and requested an additional shipment. In a June 15, 2004, e-mail a CPA

official wrote, ‘‘The new date is 22 June departure, with arrival, delivery on 23 June.’’ This is also in the quote, ‘‘It is important that

we make these dates as we have little flex time. Heads up.’’ So this

is a rush to get the money in place before the transition occurs.

The quote goes on. ‘‘We are going to request a second mission for

a 28 June delivery.’’ That is an e-mail from Lieutenant Colonel Bill

McQuail to Tina Smith June 15th quoting Colonel Don Davis. The

emphasis is in the original, the heads up.

On June 16, 2004, a Federal Reserve official confirmed the delivery. ‘‘I checked the dates with Colonel Davis, and yes they want delivery to Baghdad on Monday the 28th.’’

I’d like to ask Mr. Norquist, can you explain?

Mr. SHAYS. For the record—I did not have my mic on—the gentleman has requested that we put in e-mails from the Federal Reserve into the record, and without objection, so ordered.

[The information referred to follows:]

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Mr. SHAYS. The gentleman has time. We will give him an extra

minute.

Mr. LYNCH. May I reclaim my time?

Mr. SHAYS. Yes, and you have more time, so the gentleman has

about 3 minutes left.

Mr. LYNCH. Thank you, Mr. Chairman.

Mr. Norquist, if I can ask you, can you explain the reasons for

these massive cash deliveries in the last days of the CPA? Earlier

we heard that you trusted the ministries to spend their money

without any accounting procedures. Why did not you trust them

with this cash?

Mr. BENKERT. Let me try to break your question up here, Congressman, first. The DFI—and break up the management of the

DFI into its component pieces——

Mr. SHAYS. Let me just interrupt to say the gentleman will have

more time. You do not need to rush. So the gentleman will have

more time to have you fully answer the question.

Mr. LYNCH. Thank you, Mr. Chairman.

Mr. BENKERT. I want to be clear on the management of the DFI

at a fairly broad level. First of all, there were several pieces to this.

This first was the export sale of oil and the deposits of proceeds

from the sale of oil in some transfers from oil for food escrow accounts and so forth into the DFI. These were funds that were—so

this was the deposit side of the ledger.

The International Advisory Monitoring Board in its oversight

and based on audits from KPMG concluded that during the CPA’s

tenure all known proceeds from the sale of oil were properly deposited into the DFI and were properly and transparently accounted

for in the DFI.

The second piece of this is disbursements from the DFI to other

places. So, for example, the CPA—the administrator of the CPA

was responsible for administration of the DFI. On the authority of

the CPA administrator, disbursements were made from the DFI to

Iraqi ministries—that is the $8.8 billion that Mr. Bowen testified

about—or directly to projects of various sorts.

The International Advisory Monitoring Board concluded—again,

based on KPMG audits—that during the period of the CPA’s administration all disbursements from the DFI were properly authorized and recorded. All disbursements from the DFI were properly

authorized and recorded.

The third piece of this then is once money had been disbursed

from the DFI—remember, the DFI is a set of accounts held in the

Federal Reserve Bank in New York and in the Central Bank of

Iraq in Baghdad. Once money had been disbursed from the DFI to,

for example, the Ministry of Finance and onto Iraqi ministries or

to other projects, this is the piece that Mr. Bowen assessed in his

audit, this piece of what happened to the money once it was disbursed from the DFI. And, as he found, there were weaknesses in

this. But I would say, for example, of this $8.8 billion that went

to the Iraqi ministries, there were observable results of what that

money was spent on. Salaries for hundreds of thousands of government employees were paid. We know for a fact that the government

workers were paid. Government ministries operated. We know that

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they operated. Various projects were done on the behalf of those

ministries, and we know what those projects are.

So there is a record of this, despite the fact that there were a

number of internal control problems which both Mr. Bowen and

KPMG identified in the management of these funds once they had

been disbursed from the DFI, there were observable results.

Because those internal controls now would be residing with the

Iraqi spending ministries and the Iraqi Ministry of Finance, those

results have been provided to the Iraqi government, both by Mr.

Bowen and by KPMG, so that the Iraqi government, again under

the oversight of the IAMB, can ensure that internal controls are

tightened up in the spending Ministry, and that process has been

discussed between the IAMB and members of the Iraqi government.

Now, as far as the flow of cash into Iraq, I cannot speak to the

pacing of the flow of cash into Iraq. I can only speak to these issues

that I just mentioned about the accountability of these funds.

Mr. SHAYS. If the gentleman would yield a second—and he will

have all the time he needs——

Mr. LYNCH. Thank you, Mr. Chairman. I yield.

Mr. SHAYS. Thank you. I just want to—I think the committee

wants to be clear and, Mr. Bowen, you can make sure you are

weighing in on this. Of the $8.8 billion in cash—and I understand

they did not have an electronic system—is all $8.8 billion—this is

where I am confused, frankly. Has all of that been signed by someone in the ministry, or is some of that in question? I mean, I know

we have a question of how they spent it, but are we certain that

all $8.8 got transferred to them? I’d like you, Mr. Benkert, first and

then Mr. Bowen.

Mr. BENKERT. And I will defer to Mr. Bowen on some of the details of this, but I think what I have said is that the disbursement

from the DFI was accounted for. In other words, from the—for

funds that went to Iraqi ministries, the general flow was that

funds would go to the Ministry of Finance, and then the Ministry

of Finance would disburse the funds to the Iraqi ministries in accordance with their published budgets.

Mr. SHAYS. But this is not an electronic transfer. These are actually cash dollars——

Mr. BENKERT. That is correct.

Mr. SHAYS. And the question I am asking is: did the Iraqi ministry literally sign documents saying we got all $8.8? That is the

question.

Mr. BENKERT. Right. And at that point, when the money passed

from the Central Bank to the Ministry of Finance and on to the

spending ministries, the disbursement from the DFI, that is, from

the Federal Reserve Bank or from the Central Bank of Iraq to the

Ministry of Finance, that disbursement was, according to the

KPMG and according to the IAMB, those disbursements were properly authorized by someone, an appropriate person in the CPA, and

properly recorded. The issue then is once it was disbursed from the

DFI, from this account in the Central Bank or in the Federal Reserve Bank to the Ministry of Finance and on to the Iraqi ministries, the issue was the internal controls, the management conVerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00174 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1
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trols from that point onward, that is from the Ministry of Finance

and on to the central and on to the spending ministries.

Mr. SHAYS. We understand. Mr. Bowen, do you agree with that?

Mr. BOWEN. Yes. Mr. Benkert has summarized it very well. The

recording of disbursements from the CPA of the DFI that funded

the Iraqi government is there. We have historical record of it. The

issue is what happened to that money once it was distributed

through the Ministry of Finance, the Iraqi Ministry of Finance, to

the other ministries. That is the core issue with respect to the

audit that we are here talking about, and that is managerial, financial, and contractual controls. They were weak. They were inefficient.

Mr. SHAYS. Or non-existent.

Mr. BOWEN. Or non-existent.

Mr. SHAYS. Let me just say——

Mr. BOWEN. Or they existed and were violated.

Mr. SHAYS. Let me just make sure we return this back to Mr.

Lynch, but his main question, though, would anyone be able—this

was his question. Why $2 billion-plus in the last week or so? Who

can respond to Mr. Lynch’s on that? And, Mr. Lynch, you just have

the time again. Thank you for yielding.

Mr. LYNCH. Thank you.

Mr. BOWEN. I can address that. The $2 billion that we are talking about, we did do an audit of the DFI sub-account. There were—

these funds went into a so-called DFI sub-account in the center district that funded continuing contracts. There was an agreement between the CPA and the Iraqi Ministry of Finance. That permitted

the continuing funding of ongoing contracts.

Now, the concern that you raised and I was concerned about at

the time is the pace of contracting in that last month. But our

audit did not address that policy question. It addressed the management of those contracts under the DFI subaccount, and we had

a number of findings specifically that—we are unable to track the

exact amounts in the account, exact disbursements, and contract

supporting documentation was inefficient.

Thank you.

Mr. LYNCH. Mr. Chairman, if I could, I just want to reclaim

my——

Mr. SHAYS. You have the floor.

Mr. LYNCH. Thank you. Thank you, Mr. Chairman. I just want

to go back. Mr. Benkert, I find the claim that we are properly informing IAMB of these expenditures and the flow of money to be

preposterous when my last question we confirmed that IAMB was

getting redacted copies, we were not giving them information. So

I do not believe that at all, that there is some type of protection

because IAMB is getting the information. They, indeed, were not,

and I think we have shown that earlier.

Let me just respond, if I may. There is a big rush here last few

days of the CPA before the conditional—the Coalition Provisional

Authority expires. Big rush. Lot of dough changing hands here,

huge amounts of cash coming out of New York into Baghdad.

Mr. Bowen, an audit that your office prepared found that the

CPA staff—this is the Coalition Provisional Authority—were encouraged to spend cash quickly in the last days before the interim

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Iraqi government took control of the funds. In the south-central region of Iraq, one disbursing official was given $6.75 million in cash

on June 21, 2004 ‘‘with the expectation of disbursing the entire

amount before the transfer of sovereignty on June 28, 2004.’’

It just appears to me that in these final days of the Authority

before its expiration were looking for places to spend money. I just

have to ask, do you gentlemen believe that all the cash expenditures, especially in these final weeks of the CPA’s existence, were

paid to existing contracts? It just puzzles me, if things were being

spent properly through the ministries—and I understand your argument that the black hole occurs at the point of the ministry and

not beforehand, but that is where the black hole occurs, but that

does not really do anything for me. The money is being lost, whether what step we are losing it—you know, it may be interesting in

a historical context in terms of who made the biggest mistakes. It

was misspent. The fact that we allowed it to be misspent is, I

think, our collective failure.

I just see this spending rush, if you look at the final transactions

here that are made in these final days. There is a huge amount of

money, the largest cash shipment in the history of the country, and

it just begs the question why this transfer is occurring in the 11th

hour. This is a perfect metaphor, I think, for what went wrong

here. We gave people millions and millions and millions of dollars

in DFI funds and told them to spend it in a week, and there was

just no accountability.

Again, if anybody can tell me why all this money was spent in

the fire sale manner in which it was spent, because it could have

stayed in accounts. It could have stayed in accounts, gone over to

the interim Iraqi government and spent for the proper purpose, if

there was any accountability at all and if we had assurances that

it was going to be spent on the proper purpose. Why the big—the

massive, massive transfer of cash by the Federal Reserve Bank to

the CPA in the final days with the direction to spend it as fast as

you can because it is going to go over to the Iraqi interim government. I am not questioning whether it was properly authorized,

Mr. Benkert. It was properly authorized. And it was—when the

money was received it was properly accounted for when it was received. It is after that point that the black hole appears and we

have no accountability at all and we have $20 billion out the door—

not only the financial loss to the DFI and to the American taxpayer, but tragically a lost opportunity to help the Iraqi people in

the way that was intended. That is the biggest lost opportunity

here. We are still feeling that reverberation.

As patience grows thin with this whole operation in Iraq, this

may be the biggest tragedy out of all of this, the fact that so much

was spent here financially, in human lives of our men and women

in uniform, and at the end, when we were going to execute our policy, the lack of accountability here robbed us of that opportunity.

If you have any response as to why this money was spent in this

fashion without proper controls, I’d like to hear it. Thank you.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman. Anybody want to make a response?

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Mr. BENKERT. If I could just make a brief response, I do not

claim to have read Ambassador Bremer’s mind about his decisions

during this process, but I think there are some facts that bear on

this. First of all, in the late spring of 2004 there were some substantial transfers, I think primarily from the U.N. oil for food escrow account, into the DFI, so there was an infusion of money in

the spring which made possible, I think, in the CPA’s view, which

made possible addressing a number of needs that they had seen before but did not have funds in the DFI to address, one.

Two, obviously the CPA only had until the CPA went away if it

wanted to take action on these things, because once the CPA

ceased to exist and we transferred authority to a sovereign Iraqi

government there was no control at all over the DFI and we had

no way at that point of taking DFI funds and putting that against

contracts, either existing contracts that we were administering or

new contracts that we might want to put in place.

So I think these are the facts that bear on the matter, and I

think the third point, I guess, that I would make is I think senior

officials in this Department, at least, have always made clear that

in the rebuilding of Iraq we would turn first to Iraqi resources

rather than always relying on U.S. taxpayers’ resources, and so

these were clearly Iraqi resources that were available.

And then, finally, the CPA obviously had to be concerned about

the fact that once this new Iraqi government was in place that it

would be limited in what it could do because of the fact that it was

an interim government and was not able to do the full range of

things that might be needed in terms of some of this contracting.

So those are the facts. Again, I do not profess to speak here for

Ambassador Bremer or his decisionmaking process. This is just

what I know to be the case.

Mr. SHAYS. I thank the gentleman.

Let me say, in my line of questioning there is enough that is bad

about this without our having to make it worse, frankly, but there

are some things that I’m comfortable with and there are some

things I’m not comfortable with.

In my visits, I remember meeting with the shadow ministries.

They had a play in how money was spent. Budgets were made as

to where things should go. But ultimately Mr. Bremer had the final

decision. There were some ministries that were not getting enough.

There were some that were getting enough. There were some of

Mr. Bremer’s folks who were out in the field who were not getting

enough—enough people, enough resources—and there were some

that may have been. There were some in the military that wanted

to spend money in ways—Mr. Patrias, frankly, did an awesome

job—General Patrias, excuse me—did an awesome job of getting

money out right away and, in my judgment, helping deal with some

potentially very difficult programs early on.

I have problems with the disbanding of the army, the military,

and the police. My gosh, if we just kept the army in place and left

them on base it would have been better than what we did. So we

all have our things that we think went well and did not go well.

It is a fact, I believe, that about $12 billion of cash was sent over,

about $8.8 was given to the ministries, but there is other cash that

was given directly to contractors; is that correct, Mr. Bowen?

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Mr. BOWEN. That is correct.

Mr. SHAYS. And so when I see a picture like this I get a little

unsettled because it looks a little bit like the picture that Mr.

Kucinich put up. You like to feel that if there is $2 billion worth

of money, that guys are not having a picture taken of holding $2

billion. It looks a little loose to me.

Mr. BOWEN. I share your concern.

Mr. SHAYS. Yes. So that is the bad part of this story. It is very

clear that when it comes to the cash part we did not have systems

in place to account for them. It does not mean they were not spent

well, but, given my sense of human temptations, I suspect some of

it was, frankly, taken. The extent of that is—I cannot believe that

all this cash just floating around all went perfectly to the right

place. And I think it makes sense for us to try to determine how

much did not go in the right places.

I also know that Mr. Bremer had a 20-hour work day and he

made good decisions and he made bad decisions. He probably would

have made better decisions if he was willing to have other people

share in some of these decisions. He, in my judgment, was a pretty

strong micro manager and he chose, in a sense—the irony is, as I

looked at it, it was almost like Baghdad being recreated. I mean,

all that power was so centrally located.

I was, frankly, very happy when the power was transferred in

June of that year. If money was going to be wasted, I’d rather have

the Iraqis who waste it and not the Americans, and I’d like them

to begin to start—I do not want any of it wasted, but I would rather have them start to have a say in this process.

I want to be clear about this. It seems to me that the testimony

is that, for instance, with Kellogg, Brown and Root and others

there are what they proposed as costs, there is what we called

questioned by DCAA, correct, and there is some that is unsupported. I suspect that some of the unsupported will be supported

and payments will be made, and I suspect that some of the questioned, some of it will not be paid and some of it will.

Mr. Reed, is that correct?

Mr. REED. That is correct.

Mr. SHAYS. OK. So that is a work in process. We will have a

more definitive response to that in the days and weeks to come; is

that correct? I mean, you will nail down that as it relates to this

contractor and others, as well?

Mr. REED. That is correct. It is important to note that this is part

of the administration of the contract. This is not a matter of coming

in and saying, ‘‘OK, we messed up, and who screwed up and how

much?’’ This is just the way the contract is being administered.

There is oversight throughout the process and the contracting officer is using his auditors to determine if the contractor is complying

with the terms of the contract and these costs should be paid or

not paid, and we are in that process.

Mr. SHAYS. And the reason is this is what we call cost-plus, and

so you may dispute what they call a legitimate cost. You may not

feel it is a legitimate cost. Or you may find that they spent money

in areas where they were not authorized to spend money; is that

correct?

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Mr. REED. That is correct. In this process in many cases there

is not an absolute right or wrong in terms of compliance. There are

grays, like what is a reasonable cost. That is what the auditor’s job

is, to bring before the contracting officer whatever facts exist and

whatever other information might be useful to the contracting officer to make a fair settlement and negotiate of that.

Mr. SHAYS. Is this a negotiated process?

Mr. REED. Yes, it is.

Mr. SHAYS. But let me ask you, in the end do you, Mr. Reed, you

pass your opinion on to Colonel DuBose, and, Colonel, you are the

ultimate decisionmaker on whether or not a payment is made?

Colonel DUBOSE. It is actually the contracting officer who uses

the information from DCAA on——

Mr. SHAYS. I’m not picking you up for some reason. Is your light

on?

Colonel DUBOSE. It is on now, sir.

Mr. SHAYS. OK. Given that I did it wrong three times in a

row——

Colonel DUBOSE. Sir, the contracting officer—I’m not the personal contracting officer. We have many contracting officers.

Mr. SHAYS. But are the contracting officers within your——

Colonel DUBOSE. Absolutely, sir.

Mr. SHAYS. So they are under your command?

Colonel DUBOSE. So they take the information from the DCAA

audits, they get information from our field reps who observe the

contractors’ performance. We rate their performance. And all of

that goes into the negotiations on the final payment and is considered in determining the award fee. Because this is a cost-plus, the

profit is determined on how well they performed, and these measures are taken into account before we give any profit.

Mr. SHAYS. Well, it concerns me you say negotiate. I mean, I’m

happy it is negotiated, but in the end does someone get to make

the decision or——

Colonel DUBOSE. Yes, sir, the contracting officer.

Mr. REED. The contracting officer makes the final decision as to

the allowability of the cost.

Mr. SHAYS. And, Mr. Reed, is your mic on?

Mr. REED. Yes, it is on.

Mr. SHAYS. Mr. Reed, but you make the recommendation to the

contracting officer? You do not decide, correct?

Mr. REED. That is correct.

Mr. SHAYS. OK. And, Colonel, it is under your department, your

agency, your ultimately—but you defer to the contractor because

they know, you do not?

Colonel DUBOSE. No, sir.

Mr. SHAYS. Contracting officer?

Colonel DUBOSE. The contracting officer takes the information

from the people who observe the contractor’s performance, from the

auditors who——

Mr. SHAYS. These are your people, correct?

Colonel DUBOSE. Yes, sir.

Mr. SHAYS. Just so I am very clear, they ultimately make the decision?

Colonel DUBOSE. Yes, sir.

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Mr. SHAYS. OK. And they are empowered to make the decision?

You cannot overrule them even——

Colonel DUBOSE. Yes, sir.

Mr. SHAYS. OK.

Colonel DUBOSE. Absolutely.

Mr. SHAYS. All right. Let me, just for the record—is there anything—and you may say something that triggers a comment from

any of the Members who are here, and they are free to a make a

comment, but is there anything that you feel we need to put on the

record to make this record more complete before we go to the next

panel? Mr. Benkert.

Mr. BENKERT. If I could just clarify one thing, this is relating to

the various questions about what has been provided to the IAMB

and our transparency with the IAMB. I just want to be clear and

point out that under the IAMB’s oversight KPMG, an internationally recognized accounting firm, has conducted three very extensive

audits of all aspects of the DFI since its inception. Two of those audits covered the period from its inception until the CPA went away,

one of the audits covered the period from June 28th or 29th until

the end of last year. These audits—again, these are KPMG audits.

They are very extensive audits. They cover—they are publicly

available audits that the IAMB posts on its Web site. They cover

the financial statements of the DFI, they cover internal controls of

the DFI, they involve audits both of the financial side but also visits by the auditors to individual ministries of the Iraqi government

to be able to verify the controls in place, and they include findings

on financial controls, managerial controls, contract controls. So that

very extensive information is what goes to the IAMB.

The only issue—and I think the issue you have raised here

today—has to do with a very one specific set of contracts, the KBR

restore Iraqi oil contracts, and a set of audits that relate specifically to that contract, but in general there is a very extensive set

of audits done by KPMG on the DFI as a whole that have no

redactions, are publicly available, posted on their Web site, and

that go to the IAMB, and those are the audits on which the IAMB

bases its judgments of the management of the DFI, including the

judgments that I referred to earlier.

Mr. SHAYS. Just to state this again, though, and I cannot state

it strongly enough. It seems to me like we have treated the U.N.

request as a FOIA request, and they are partners in this. They are

not some individual citizen requesting this information. They basically empowered us to run a program they were in charge of. And

so it seems to me, you know, sometimes lawyers can keep you out

of jail but they make you look guilty as hell in the process, and it

seems to me the lawyers got carried away here. They make it look

like we’re trying to hide something from the world community as

we are asking the world community to cooperate with us about oil

for food. It really ticks me off because it just seems senseless.

Frankly, I do not think this information is that big a deal either

way. So it is just a view I hold.

Anyone else want to make a comment here before we get to the

other panel?

Mrs. MALONEY. I would if I could, Mr. Chairman.

Mr. SHAYS. Sure.

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Mrs. MALONEY. You know, we have our own auditor there, IG

who gave us very troubling information.

Mr. SHAYS. Own auditor where? I’m so really?

Mrs. MALONEY. Mr. Bowen, auditor for the U.S. Government.

Why in the world are we referring to KPMG when we know that

certain information was withheld from them, particular in the Halliburton case. That was well documented. And KPMG can say that

everything is wonderful and honkey-dory and roses, but the Government auditor, Mr. Bowen, pointed out tremendous problems in

the commander’s fund, $7 million that evaporated into thin air. He

has no idea where it is. And questions of $80 million more with no

documentation. And he’s only looking at one region. He does not

have the resources to go into the other regions and no one is looking at it. So I think to be citing an auditor employed by a different

organization that does not have access to the information that the

auditor from the U.S. Government has—and he pointed out extremely troubling things in the commander’s funds and in Mr.

Bremer’s organization, $8.8 billion missing. These are serious items

that he put forward, and I think his testimony—my main point is

why are we citing all these other auditors who are saying everything is wonderful when we have our own Government auditor who

is saying things are in a big mess, to say the least, and that millions and zillions of dollars are missing.

Mr. SHAYS. I would just—I want to make sure I do not disagree

with part of what the gentlelady said. We have an issue of what

happened to $12 billion of cash, of which $8.8 was given to the

ministries. We can document they were given to the ministries. The

question is what did the ministries do with it. And we can be pretty certain, based on—with no disrespect to Iraqis—some of it was

spent well and some of it was not, and some of it was siphoned off

by the Iraqi government.

The other issue is what’s the balance of that. When you take the $8.8 billion, what is the balance that went to contractors? What I

was referring to was the issues of the redacted information as it

related to Kellogg, Brown and Root, which is something different

than the cash payment issue. It is an issue of what is in dispute,

how do we characterize what is in dispute, and will we ultimately

know what the disagreement is.

It is not unlike someone putting in a request for their health bill

to be paid for and some of—the insurance company says, ‘‘We will

pay for this, but we will not pay for that,’’ and they have a dispute.

We do not say that what is not paid that the individual tried to

cheat the government, we just acknowledge that there is a dispute

and then we can judge that dispute one way or the other. It is not

to say that some of that money may have been just an outrageous

request, thank God DCAA saw it and put a stop to it. That says

the process is working, that they caught it and it is being resolved.

That part I do not fault our Government for at all. That is just my

take on this. But I do not dispute about the concern about cash.

Mr. Kucinich, and then it would be good to get on to the other

panel.

Mr. KUCINICH. Mr. Chairman, thank you. I will be brief here.

One of the things that I find very disturbing about Mr. Benkert’s

recitations is that nowhere do we hear any kind of an assertion

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about the responsibility of the Coalition Provisional Authority or

any U.S. Government oversight once the money passed through to

the Iraqi ministry. It seems to me that what’s happening here—

and I hope that I am not correct in this assumption—is that there

is an attempt here to basically whitewash this $8.8 billion that is

not accounted for by saying, well, the Iraqis are handling it now.

Frankly, Mr. Benkert, I do not think there is enough whitewash in

the whole world to cover over $8.8 billion that cannot be accounted

for.

So I am just respectfully suggesting, Mr. Chairman, that this

committee—that we be very careful about assuming that this is

simply the responsibility of the Iraqi ministry and not somehow the

responsibility of the Coalition Provisional Authority which had custody of the money before it went to the Iraqi ministry. I mean, Mr.

Bowen, there must be some kind of a chain of custody with respect

to the money and some type of oversight responsibility of the Coalition Provisional Authority for the funds that were given to the Development Fund for Iraq.

Mr. SHAYS. Let me just explain my take on it. Correct me if I

am wrong. When we transfer power in June of last year, we took

DOD and Mr. Bremer out of running the country. We gave it to the

Iraqi people. It was a stunning moment in time. We ended up

transferring the responsibility and our communication with the

government from DOD to State Department, and that was stunning. We became advisory rather than controlling. I can illustrate

it when I was there at a press conference in August of that last

year. I met with the new Prime Minister. I met with the Foreign

Minister and the new Ambassador Negroponte and I walked out

with the Foreign Minister. I held a press conference in August of

last year and I was excited about this press conference and I

thought, well, here we go, and I explained I had been there a number of times and that we had made some mistakes and done some

things well, but now there is a new Iraqi government.

The first question was to the Foreign Minister, not to me or

Negroponte. The second question was to the Foreign Minister, not

to me or Negroponte. The third question was to the Foreign Minister, not to me or Negroponte. The fourth question. Finally I asked

if there were any more questions. There were not. I said to Mr.

Negroponte, ‘‘What better proof that we have transferred power.’’ The bottom line was that $8.8 billion was their money. We had

given it to them. It was their country. They were in charge of it.

It was their right to spend it well or to screw it up. The one thing

we were certain of was that we gave it to them. It is not an issue

of whether it ever reached them. And that is the bottom line to it

as it related to those dollars.

I understand how you would have liked it spent better and I

would have, but once we gave them the ability to run their own

country, they can spend their money as they choose. It was not the

money that we appropriated from here.

Mr. KUCINICH. Would the gentleman yield for a simple question?

Mr. SHAYS. Sure.

Mr. KUCINICH. Here’s the concern. Them. They were our people.

We put them in charge. These were people that we installed, basically. So if we installed them, there was a relationship between the

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Coalition Provisional Authority and these individuals, and so that

is where these questions I think are relevant.

I again want to applaud the Chair for the manner in which he

has conducted this in allowing all these questions to come forward.

Thank you, Mr. Chairman.

Mr. SHAYS. Thank you, and I thank you for the question.

Mrs. Maloney, you have questions and you have the right to ask

your questions, so feel free, and then we will get on to the next

panel.

Mrs. MALONEY. Thank you, Mr. Chairman, very, very much. I

thank all of the panelists. I want to return to the redactions that

took place on the Halliburton overcharges, which were tremendously disturbing to me that the Defense Department basically hid

Halliburton’s overcharges and, in my opinion, did it with a rationale that is totally not defensible.

I want to talk about this, because I really feel that working on

the Freedom of Information Act that the oversight of Government

is very important. That is why I joined this committee. I would like

to really take a closer look at the Department’s rationale for allowing Halliburton to delete all mentions of overcharges in Pentagon

audits.

Mr. Tyler, you are here right, Mr. Tyler, and I’d really like to ask

you how could overcharges identified by Government auditors be

considered confidential business information. These are findings

and work of Government employees.

Mr. SHAYS. If the gentleman would maybe sit at the corner—do

you have a card that you could give our transcriber? We will make

sure that is given to her.

I do want to say that there is another hearing in this room and

we are going to have votes, so I need to move us along.

Mr. TYLER. I will try to make this very quick.

Mr. SHAYS. Please identify yourself.

Mr. TYLER. My name is Joe Tyler. I work with U.S. Army Corps

of Engineers. My position is the chief of the program integration

division in military programs.

Let me try to clarify two points. The law that we were concerned

about concerning the audits is the Trade Secrets Act. That is 18

U.S.C. 1905. I’m not a lawyer, but I can quote the right law. It is

very broad. It covers any Government employee that is—I’m going

to kind of quote from it—any Government employee of the United

States that publishes, divulges, discloses, or makes known in any

manner or to any extent not authorized by law any information

coming to him in the course of his employment or official duties or

by any reason of any examination or investigation made by that

person. It covers information that concerns or relates to trade secrets, processes, operations, style of work or apparatus, or to the

identity, confidential statistical data, amount, or source of any income, profits, losses, or expenditures of any person, firm, partnership, or corporation. It is very broad.

Mrs. MALONEY. OK.

Mr. TYLER. When we look at audits and we talk about giving

them to the public, our concern goes to what is allowed under the

Trade Secrets Act. Giving it to Congress, that is not the public so

there is no problem.

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Now, when we made the determination on this particular point

we were giving it to the IAMB, which works under the United Nations, which is not part of the U.S. Government. I cannot address

their authority under our laws versus the Trade Secret Act. I’m

not—I do not understand that.

Mrs. MALONEY. Mr. Tyler.

Mr. TYLER. Could I go on just a second? But the authority to

allow us to release this fell under the purview of the Trade Secrets

Act. The Corps of Engineers originally was asked by OSD to release the audits unredacted, just clear. We said under the Trade

Secrets Act we had some concerns. We went to KBR, as we stated.

KBR said no, we do not agree releasing them under the Trade Secrets Act, and they said—we then went back and said we could not

release them. OSD said, ‘‘Can you find a way Corps of Engineers

to be as transparent and release as much as we could.’’ We then

went to KBR. They then said yes, we will agree to release them if

we’re allowed to redact the items that we feel fall under the purview of the Trade Secrets Act. We then asked them to do that, and

that is the documentation that we ultimately provided to the

IAMB.

I hope that answered your question.

Mrs. MALONEY. Mr. Tyler, if I could respond, at a prior subcommittee meeting and hearing William Leonard, the director of

the Information Security Oversight Office of the National Archives

testified that he had ‘‘never encountered a case in which the Government has withheld as proprietary business information the actual amount a company overcharged the Government.’’ Also testifying before this committee Harold Relyea of the Nonpartisan Congressional Research Service testified, it is hardly proprietary information. So Henry Waxman and I went to the private sector to look

into their expertise on the Trade Secret Act and the Freedom of Information Act, and I have three documents that I ask permission

to place into the record.

First is Thomas Sussman, an attorney and regulatory expert,

who told us, ‘‘I cannot conceive of a fact situation where overcharges would qualify as trade secrets or confidential commercial

information.’’

Professor James O’Reilly, who wrote a document of Federal information disclosure said, ‘‘Audit documents and findings are created

by the agency and are not subject to proprietary claims as a private

company’s recipe, formula, or other classified trade secret.’’

And Professor Henry Parrot, the former dean of Chicago Kent

College of Law, told us, ‘‘Government auditors’ statements are not

trade secrets.’’

So overcharges to the Government are not trade secrets, according to the private sector and the public sector, and I request to

place these documents in the record.

Mr. SHAYS. Without objection we will do that.

[The information referred to follows:]

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Mrs. MALONEY. And I would just like to ask you, do you think

these renowned experts are wrong that overcharges for the Government are trade secrets and should be redacted and kept secret in

going to international auditors?

Mr. TYLER. Ma’am, as I stated, I am not a lawyer. I cannot discuss matters of law. But I can tell you what we were advised by

our attorneys, and that is what I explained a moment ago.

Mrs. MALONEY. Well, Mr. Reed, in December 2003 you and the DOD comptroller held a press conference to announce the first $61

million in Halliburton overcharges, correct?

Mr. REED. That is correct.

Mrs. MALONEY. So after you held your press conferences in December 2003, discussing the $61 million in Halliburton overcharges, were you indicted for disclosing a trade secret when you

disclosed the $61 million in overcharges?

Mr. REED. No, I was not.

Mrs. MALONEY. And has the Justice Department ever contacted

you because of the release of this information?

Mr. REED. No.

Mrs. MALONEY. I really have not heard of anything that has

changed between December 2003, when the Defense Department

officials held an official press conference on Halliburton’s $61 million in overcharges, and then their decision to redact the overcharges at a later point. The only difference is that it jumped to

$200 million or more over the first $61 million. I find this very

troubling.

I would respectfully request, Mr. Tyler, that after you read these

three documents and the report from the CRS and from Dr. William Leonard, the director of the Information Security Oversight

Office of the National Archives, if you still believe that overcharges

are ‘‘trade secrets’’ of Halliburton and must be protected so that is

true international auditors and the public do not have the ability

to know about these overcharges.

I think redactions are abused many, many times, but I think this

is the worst example of Government using a redaction. A redaction

was used to hide fraud, misuse, and abuse of American taxpayer

dollars. I find it reprehensible.

Mr. SHAYS. I thank the gentlelady for her line of questioning and

I share her basic points. It is already testified that KBR decided

what would be redacted and it is the position of this committee

that this is information that should have been shared with the

United Nations. We are asking now for how that decision was

made and we are waiting for the Department of Defense to provide

that.

Is there any more information, any comments before we get to

our next panel? Mr. Bowen. Mr. Reed. Colonel. Mr. Benkert. Mr.

Norquist.

Mr. BOWEN. Yes, sir, three quick points I would like to make.

Mr. SHAYS. Yes.

Mr. BOWEN. One, with respect to accountability regarding the $8.8 billion that was disbursed to the Iraqi government for their

use, there are investigations going on within the Iraqi government

relevant to fraudulent practices, so yes, there is accountability

going on. During my last trip to Baghdad with the senior officials

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in charge of investigation and anti-corruption within that government—and there are very, very substantial cases ongoing there—

so yes, the accountability is being applied on that side of the ledger.

At the same time, I have also told them that if they have information that comes up in the course of their investigations that involves U.S. officials, that I want to know about it because we will

pursue it. So this is not a dormant issue. This is an active issue

that I was drilling down on just 3 weeks ago in Baghdad.

Second, the audit—I want to be clear. The audit in Hillah regarding the lost money, the $7 million in lost money, did not involve the commander’s emergency response fund. It was the R3P

program. We are auditing CERF and we will have that audit out

in October.

Mr. SHAYS. Thank you.

Mr. Reed, any comments you want to make?

Mr. REED. Yes. In regards to the characterization ‘‘overcharges,’’

I want to again emphasize that these are recommendations in an

advisory audit report and that they are subject to the contracting

officer evaluation of those recommendations along with other experts that he can rely on in reaching a final decision. Indeed, that

final decision may say that these costs should not be paid, but it

is important to recognize that we’re an interim process right now.

Mr. SHAYS. I think the record is pretty clear on that, but it is

good that you emphasized it.

Colonel, any comment?

Colonel DUBOSE. Sir, I can just tell you that the Corps of Engineers and the Southwestern Division is absolutely confident that

through the diligent efforts of DCAA and the Corps contracting

professionals and the others that are involved intelligence KBR

contract will make sound contracting officer decisions leading to a

fair and equitable settlement of these task orders that protects the

public interest of both the United States and Iraqi citizens.

Mr. SHAYS. Thank you.

Mr. Benkert.

Mr. BENKERT. No, sir. Thank you.

Mr. SHAYS. Mr. Norquist.

Mr. NORQUIST. No, sir.

Mr. SHAYS. Thank you.

Let me just say to all of you, you have been very responsive to

our questions. We thank all of you for showing up to this hearing.

We thank you for your service to our country. I think that these

are—this is not a 9 to 5 job and I know that you all work very hard

in this effort and you care deeply about your country.

I would say to you, Mr. Benkert and Mr. Norquist, you missed

an opportunity, unfortunately, to make your case in testimony beforehand which could have only served you and DOD well. I regret

that you were put in the position that you were put in. I suspect

you would have liked to have had a statement, and I appreciate

that.

Thank you all for your service. Thank you for helping us do our

job. We will get to our next and final panel.

I thank the gentlemen.

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Mr. Tyler, I left you out. Thank you for responding in the end.

We note that you were sworn in, and thank you for your testimony.

It was very helpful.

Our second panel is Mr. Stan Z. Soloway, president of Professional Service Council [PSC]; and Mr. Richard Garfield, Dr. Richard Garfield, Columbia University.

Mr. Garfield, you can stay standing because I will swear you in.

I think you can feel comfortable, gentlemen, before I swear you in,

that we will not take this long with this panel.

Please raise your right hands.

[Witnesses sworn.]

Mr. SHAYS. Note for the record both our panelists have responded in the affirmative.

I would say to both of you your testimony is as important as the

first. You have the advantage of knowing what our questions are.

You have the advantage of hearing the first panel. So if you choose

to read your testimony or ad lib or do a combination of both, because you know what we are interested in, I want you to feel free.

Your full statement will be part of the record, and we thank you

both for being here. We obviously thank you for your patience. It

is nice to have you be at the first panel so you get a sense of what

concerns us. Thank you.

Mr. Soloway.

STATEMENTS OF STAN Z. SOLOWAY, PRESIDENT, PROFESSIONAL SERVICES COUNCIL, ARLINGTON, VA; AND RICHARD

GARFIELD, DR.PH./R.N., COLUMBIA UNIVERSITY

STATEMENT OF STAN SOLOWAY

Mr. SOLOWAY. Mr. Chairman and members of the subcommittee,

on behalf of the nearly 200 member companies of the Professional

Services Council, the principal national association of companies

providing a full array of services to the U.S. Government, I appreciate this opportunity to offer a few perspectives and some context

on many of the challenges associated with contracting as it relates

to both DFI and the broader issues of Iraq.

Our membership is unusually diverse in terms of both company

sizes and their respective capabilities, and nowhere is this diversity

more evident than in Iraq, where numerous member companies

and thousands of their employees are currently engaged in providing military support, reconstruction, and developmental assistance.

Today I would like to divide my comments into three very brief

segments: where we have been, where we are now, and perhaps

most importantly where we need to go in the future.

Looking back, two early decisions made by the U.S. Government

have had a continued and seminal influence on much of what has

transpired with regard to contracting in Iraq. First was the decision to move immediately into reconstruction and development,

even as a significant military operation was still underway. Never

before have we simultaneously conducted a major military operation—in this case the largest sustained operation since Vietnam—

and in the same physical space been engaged in the reconstruction

of the national infrastructure, as well as a wide variety of economic

and other developmental activities.

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Normally these would be sequential operations, but in Iraq they

are concurrent. That decision is the principal reason we have such

large numbers of contractors in Iraq today, and that for the first

time many of those contractors are now seen and must be treated

as ‘‘contractors on a battlefield.’’ It is also the principal reason for

the unprecedented need for private security for non-military entities, and it has played a significant role in many of the issues surrounding the cost and availability of insurance, particularly under

the Defense Base Act. It is also at the heart of some of the confusion, sometimes poor coordination and communications between

and among the numerous entities operating in Iraq, their stateside

counterparts, the combatant commanders, contractors, and I would

suggest even the Congress.

At about the same time, the U.S. Government decided to apply

all of our traditional procurement rules to contracts in Iraq utilizing appropriated U.S. dollars. Many of the concerns that have

emerged since then, including many that you have discussed today,

can be traced directly to that decision. Indeed, as has been demonstrated through our work with our member companies and our

colleagues in GAO, the Inspector General for Iraq, the Defense Department, State, USAID, and others, the business processes and

models that dominate our traditional procurement and contracting

regimes are often wildly out of alignment with the realities of an

environment such as that in Iraq, which is probably the most nontraditional environment in which we have ever operated.

This misalignment is evident in debates surrounding the frequency of full and open competition, the use of fixed price contracts, cost accounting and growth, and more. Whether it be the

impacts of requiring third-party liability insurance on 30,000-gallon

fuel tankers in an active war zone, or whether to allow company

personnel more frequent breaks and relaxation than usual from the

extraordinary tension and intensity of working in Iraq, too many

disputes have been driven by this disconnect.

Moreover, the situation has been exacerbated by what, frankly,

appears to be an unusual push for instant oversight rather than allowing the process to operate as it does so well and as I believe it

is continuing to do. One government official reported at one point

that there were more oversight personnel in Baghdad than contracting officers.

Further, it seems that every mistake or error in judgment that

has been made with regard to Iraq is assumed to equal that of a

major scandal. As such, the mission environment has, we are told,

suffered. As that same Government official said to me, people are

not only afraid of making a mistake; they’re afraid to make a decision.

This is not to suggest that this committee back off its oversight

responsibilities. Indeed, they are an integral part of our system of

checks and balances. It is, however, to ask directly and respectfully

that as issues emerge you do everything possible to understand the

underlying causes, circumstances, and more so that the ensuing

disposition of those issues is as balanced and thoughtful as possible, which brings me to where we need to go in the future.

Over the last 2 years PSC has made a series of recommendations

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sential next steps. First, we have recommended that the Defense

Department award a multiple award contract for all private security requirements in Iraq from which individual companies needing

such services could procure them on a reimbursable basis. We believe this would help ensure that the security companies operating

in Iraq have the qualifications and experience that is needed.

Short of letting such a contract, we believe DOD should either

create a list of approved security providers or minimally establish

a common set of standards for security services that all firms must

meet. Interestingly, this push for standards has come as much from

our member companies who are procuring such services and the security firms with which we have worked.

Second, we have recommended the Defense Department enter

into a master Defense Base Act insurance contract of the type already in place for the State Department and USAID. By way of

comparison, basic Defense Base Act insurance, which is legally required, rates for State and USAID are all under $5 per $100 in

payroll. For all others who have to buy this coverage on the open

market, the rates are routinely in double figures and have at times

been as high as $25 or $30 per $100 in payroll, and clearly that

is not a sustainable cost.

Third and most importantly, teams of experts from the agencies,

the Congress, the oversight community, and industry must put

their heads together to both simplify and clarify existing procurement rules as they would or should apply in an environment such

as this and identify any significant new rulemaking that is needed.

Many of the disputes between companies, their contracting officers,

auditors, inspectors general and others stem principally from disagreements over what the rules do or do not allow or the guidance

under which a respective work force is operating. In this environment, this is particularly difficult given the occasionally gray areas

of our processes.

For example, if the DCAA audit guidance for pay premiums for

private sector personnel is 155 percent, it really does not matter to

an auditor reviewing the cost if the market conditions are driving

higher pay premiums. He or she must base their analysis on what

the audit guidance says.

The same is true of how to handle the payment to deployed work

forces idled by security constraints or to how to overcome cost accounting shortfalls driven by a lack of acceptable cost accounting

practices among Iraqi firms and more.

We can go a long way toward alleviating further disputes and I

believe addressing the concerns of this committee if we are able to

reach agreement on how better to align these crucial business processes in such a difficult environment.

Mr. Chairman, at the end of the day I think we all agree on the

need for a system that affords maximum accountability while also

reflecting the realities on the ground. We must assess Iraq on the

basis of those realities rather than on our preconceived notions of

what should have happened or has happened elsewhere or what

happens normally. Our ability to find that balance will play a significant role in the degree to which companies operating in Iraq

today will be able to again step up to support our missions, be they

military, construction, or developmental. And since they are perVerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00199 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1
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forming functions that are almost entirely in the purview of the

private sector, we place an imperative to achieve that alignment

sooner rather than later.

Thank you for your time. We look forward to answering any

questions you might have.

[The prepared statement of Mr. Soloway follows:]

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Mr. SHAYS. Thank you, Mr. Soloway. Your verbal testimony was

excellent and your written testimony which is longer, as well, is

really quite excellent. It is very helpful to the committee. Thank

you a lot for it.

Dr. Garfield.

STATEMENT OF RICHARD GARFIELD, DR.PH./R.N.

Mr. GARFIELD. Thank you for inviting me. What I can present to

you is somewhat different. I have worked in humanitarian affairs

in Iraq, among other countries, for the last 9 years. I was a consultant to UNICEF and the World Health Organization and to the

Ministry of Health in Iraq prior to and during the CPA period and

since then.

Mr. SHAYS. Let me ask you this. Does that mean that you

worked in Iraq or you were a consultant?

Mr. GARFIELD. Consultant. My normal employment is at Columbia University.

Mr. SHAYS. Right.

Mr. GARFIELD. But I get leaves for short periods, although after

the invasion I was there for 3 months to help to reactivate health

services.

Mr. SHAYS. Right. So you spent a good time in Iraq?

Mr. GARFIELD. A good deal of time.

Mr. SHAYS. Do you know how many visits to Iraq you would have

had?

Mr. GARFIELD. In the last 9 years, I guess eight visits. I believe

that is right.

Mr. SHAYS. And one 3 months. Thank you.

Mr. GARFIELD. I cannot address directly DFI funds. I can address

the function of the ministry and the CPA in that sector in which

I worked.

Mr. SHAYS. That would be helpful.

Mr. GARFIELD. And that is all I can do, so I think it provides

some insight to the question even of the funds.

There were enormous problems in the constitution of CPA, particularly I can only speak specifically about the health sector. Having been there when we expected CPA to arrive, the first dilemma

that we had was that the team of people in CPA for the Health

Ministry did not arrive until 9 months after Baghdad fell, which

created a tremendous vacuum of authority. It was after 7 or 8

weeks we pretty much believed that they were not going to come,

and were surprised when actually the team did arrive.

Of greater dilemma to those of us who were on the ground, me

at that time as World Health Organization staff member, but working with a spontaneously constituted group of Americans who met

at the palace, most of whom were military medical physicians who

had leave from their specific duties to help organization the health

services——

Mr. SHAYS. Now tell me who you were hired as a consultant for?

I’m sorry, sir.

Mr. GARFIELD. At that time?

Mr. SHAYS. Yes.

Mr. GARFIELD. In Baghdad for the World Health Organization.

Mr. SHAYS. Thank you.

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Mr. GARFIELD. On the basis of my having worked there as a consultant to these U.N. organizations prior to the change in government.

Mr. SHAYS. Gotcha.

Mr. GARFIELD. And knowing the people in the Ministry of

Health.

Mr. SHAYS. OK.

Mr. GARFIELD. When the CPA team arrived, we were surprised

to find that not one of the members of the CPA team in health had

worked outside the United States before, and not one member of

their team had a master’s degree in public health or higher degree

in that field or related fields. So they were essentially an entirely

green team with no experience at reconstruction or at reconstituting health services in areas of conflict, much less in areas where

there had been many years of deterioration of services. In other

words, they were really not in the position to establish normal accounting procedures for their activities. There were two people in

country who were, one who was the head of the AID team for the

country and the other was the head of the health contract letted

by AID to APT Associates. Both of these individuals were—I do not

know what the right term is, but were kicked out by the CPA team

as they constituted alternate sources of authority and experience in

the field.

So when I heard the term from the previous panel several times

of lessons learned, it should come as no surprise that there were

lessons learned because if you had no experience at this and suddenly you’re running a country of 27 million people you would

learn some lessons, but this is not the ideal situation in which to

learn lessons, and we are way behind the curve in doing so.

In working with some joint contracts and projects with World

Health Organization and the CPA team, it quickly became apparent to us that they did not know budgeting of health service activities and were not capable of assisting the Ministry of Health either

in establishing a budget, which the ministry had not had——

Mr. SHAYS. ‘‘They’’ being who? I’m sorry?

Mr. GARFIELD. The CPA team.

Mr. SHAYS. Right.

Mr. GARFIELD. Ministry of Health, like all ministries of the government of Iraq, essentially had been command economy ministries

where normal budgeting procedures had never been in place. You

were told what to do. They were good at carrying out orders, but

not in determining what the resources were and figuring out how

to utilize resources for maximum benefit or for specific outcomes.

Unfortunately, the CPA team which it had been assumed was

coming in to do this did not do that, was not capable of doing that.

What CPA was able to lead was a visioning exercise for the ministry, and when I was last in Baghdad in January for the Ministry

of Health the senior staff of the Ministry of Health was still talking

about our vision and visioning. They still did not have—and this

relates very much to Mr. Kucinich’s comment—when we turned

over authority to Iraqis that we picked, we did not leave systems

in place for them to do the accounting. We had not shown them the

kind of ways that we normally do it in the United States. And we

chose individuals in some sectors, including the health sector, who

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also had no experience at running health systems and had no degrees in doing so. So it was virtually a guaranteed failure in terms

of being able to follow the money.

Given these weaknesses at the central level, it was my personal

observation that the funds disbursed through the commander’s

emergency response funds, although we cannot account for them in

some cases, actually were utilized much better than the funds that

we can account for through the CPA health sector.

Mr. SHAYS. I’m unclear as to why you think we could do it better

through the military account versus——

Mr. GARFIELD. My observation is that the funds—personal observation is that funds tended to be used better, not that the accounting was better, but that——

Mr. SHAYS. I understand.

Mr. GARFIELD. These people, although they also had no training

in determining what would be the priorities, in fact, responded to

local political demand. Common sense was better than lack of

training and isolation in the green zone in order to figure out what

some of the basic needs were. So I actually was very supportive of

the commanders and their funds, and I wish we were able to provide them some basic training so they could make a better job of

determining what those needs would be.

The comment from the prior panel of people spending only a year

in passover I think responsibility is very relevant, and it was not

stated so clearly but it was implied that the passover responsibility

from one individual to the next after a year often occurs without

any physical contact between a person in responsibility. There may

be 2 or 3 weeks after somebody leaves, somebody new comes and

does not have a piece of paper to followup on, so we continue to

have tremendous difficulties in providing services and doing things

the way that we would normally do them, including to account for

where the funds have gone or where the files physically may be.

In the health sector today there is only one individual from the

United States from CDC who is tasked to the State Department in

order to followup all concerns and activities in support, including

training for Ministry of Health staff. That individual is there only

on a 6-month contract, and it is believed that post will not be filled

again, so it looks like we’re just going to leave them to their own

devices when this individual is done. And one individual certainly

cannot do the job appropriately.

So the problems in finding out where the funds are certainly

make sense when you consider these limitations.

[The prepared statement of Mr. Garfield follows:]

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Mr. SHAYS. Thank you very much.

Mrs. Maloney, you have the floor.

Mrs. MALONEY. Thank you.

Mr. Garfield, could you describe your experiences before the CPA

and after the CPA?

Mr. GARFIELD. Could you make it a bit more specific.

Mrs. MALONEY. In Iraq, your activities in health services before

the CPA and after the CPA.

Mr. GARFIELD. My activities before CPA were in assessment of

health conditions. I assisted to carry out or to analyze several of

the large servers that were done with which we determined what

the needs were, and also assisted in identifying the training needs

for staff in the Ministry of Health.

Mr. SHAYS. If I could just interrupt to ask, when you say ‘‘we,’’

could you make sure you say who we is. Is that the World Health

Organization in that case or——

Mr. GARFIELD. Each year is different. It was World Health Organization, World Food Program, or UNICEF, one of those three.

Mr. SHAYS. OK.

Mr. GARFIELD. After the invasion my responsibilities for UNICEF

in the first 6 weeks after the fall of Baghdad was, together with

staff from the World Health Organization and the World Bank, to

do a comprehensive base analysis of the health system and the

health situation in order to set priorities. This is a document that

those three organizations did together. Those three organizations

were represented by myself and one other individual. That was

called the Watching Brief, and it remains sort of the base document for which Ministry of Health is doing what little planning is

going on.

And after that I worked for the World Health Organization in

Iraq assisting staff in the Ministry of Health.

Mrs. MALONEY. In your written testimony you wrote that the

post-war period saw massive corruption, particularly in the medicine supply chain, and you were saying that this corruption was actually worse than under Saddam Hussein. Can you give more details in that corruption? And how do you know that it was worse

than what it was under Saddam Hussein?

Mr. GARFIELD. You will see that some of this is impressionistic,

but there are structural relationships that helped to give some limitation to that. The funds from the Oil-for-Food Program under the

prior government of Iraq, relatively speaking, are a crystal clear

window. We know how much money came in in contracts in the

health sector, and there were observers who went to the central

warehouse and to distribution points to identify if, indeed, those

medicines, specifically in the area of medicines, which was the largest single dollar value—still is—for imports, where they went. So

we largely know how much and where the medicines went and

where they were distributed.

There were some structural elements of corruption in the system

that were known. There were several levels at which people were

on the take. Essentially, it was a system, I would say, sort of run

by the Mafia, making sure that nobody else took because the officials were taking, and it appears to be up to about 10 percent of

the value in that sector.

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When CPA came in and those individuals were no longer in

charge of the medicine distribution system, which is usually the

highest cost accounting sector within the health sector in a developing country, accounting for 60 to 70 percent of the value of imports, which is to say currency exchange, the CPA identified early

on the central warehouse and regional warehouses as a major bottleneck and source of potential corruption. And corruption was

dealt with as a moralistic issue.

The CPA intended to close down the public distribution system

for medicines altogether and privatize it, and when they tried to do

that all medicines stopped moving, and so very quickly the central

public system was re-established. But those people who were keeping tabs on things because they were in charge and on the take

were no longer there, so everybody kind of took a box of medicines

home with them through the back door. There was very little oversight, whereas under the Saddam Hussein government there was

excessive and parasitic oversight.

We found many more of the publicly purchased medicines in private pharmacies afterwards. It is widely believed—in fact, I do not

know anybody who is not of the opinion that with those limitations

and oversight taken off and very little supervision by central authorities as security situations worsened, that the medicines did

not flow out like a sieve.

Mrs. MALONEY. Just in closing, earlier today we heard about massive amounts of money, stacks of $100 bills. You’re saying that

the medicines were not being replenished, the doctors were not

being paid. Did you see cash being handed out in the medical system to doctors or to get medicines for the people or did you see any

of that large sums of money going into the medical facilities to help

the people in Iraq?

Mr. GARFIELD. Yes. I did not say that medicines were not gotten

out and that salaries were not paid. In fact, the payment of salaries

was probably the best thing we did. Salaries were multiplied about

fivefold from where they had been prior to the invasion, and an

awful lot of Iraqi staff were happy. This actually goes to your comment, Mr. Shay, about disbanding the army and creating unhappy

people, because in the health sector health workers became happier

and went to work more often in spite of increasing insecurity because of the establishment of central payrolls and the payment of

reasonable salaries.

In spite of the pilfering of medicines through the system, in fact,

the dollar value of medicines being purchased after the invasion

was three or four times higher than where it had been under the

Oil-for-Food Program. There was just a whole lot more money coming in for this. So, in fact, hospitals became better staffed, better

supplied, and also health centers.

There are continuing problems, but these are secondary problems.

Mrs. MALONEY. My time is up. Thank you.

Mr. SHAYS. I thank the gentlelady.

Mr. Soloway, I have primary questions for you, but, Dr. Garfield,

I want to react to a few things.

First, I went into Iraq the first time in April but then went back

in August with a non-government organization and it was very

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memorable because we went to visit some hospitals, and there were

no supplies in August 2003. And one of the doctors had family

members who lived in the United States. One was a doctor. The

doctor I met was bitter. He was bitter that he had no supplies. He

was bitter that he had no oxygen. He stayed in the hospital in part

because of his protection because he had—he acknowledged that

they had limited oxygen in surgery. Some of his patients died from

lack of supplies. He did not feel safe. They have a malpractice system that works different in Iraq than here. In Iraq if you do not

like what the doctor did you kill him. Here we just sue the hell out

of them. So he stayed in the hospital, but he was really bitter

about what he did not have. And he worked morning, noon, and

night, and he would periodically go home for lunch with his family.

I will never forget that. And he could contrast it to how his

brother was living, I think in Chicago, as a doctor. It was amazing

just to talk with him.

I also just want to say I react to your talking about how under

Saddam the system worked a little differently. It worked a lot differently. He had an Oil-for-Food Program in which his margin of

corruption was smaller. He made more off of the goods that he

bought. He overpaid for goods and got a kickback of about 10 percent. And you’re right. It was the Mafia. He was allowed to cheat

the system. If anyone else did, they could be executed. That is a

disincentive to try to cheat Saddam, though many got their little

piece.

I do not disagree with anything you said and I find your testimony very helpful. It is just a sense that I have that I guess this

triggers this question. Would we have been better to keep all—is

it your statement that we kept all the people in place who were

providing health care but not necessarily keeping the ministers

who ran it, given they were political appointees? Or did we also

keep them in place, as well?

Mr. GARFIELD. It was some of both. We actually tried a lot of experiments with a lot of lessons learned. First, an attempt to keep

a vice minister had been a Bathist, which the rest of the ministry

staff refused and so that person was thrown out. And then there

was the clean sweep of all Bathists, throwing out the bath water

along with the Bathists.

Mr. SHAYS. Right.

Mr. GARFIELD. Which went too far. The reason we did not have

O–2 at that time is that there had been user fees in place for 4

years for people who received ambulatory care, and CPA abolished

the user fees, supposedly in order to create a benefit for people, but

those user fees is what purchased the consumables like bandages,

cleaning supplies, and oxygen. So the country was in a crisis with

a lack of oxygen because the hospitals did not have the money to

buy the oxygen, and that policy was then reversed and reversed

and reversed. Four times the policy was started to get rid of user

fees and then re-establish them, get rid of them, and they have just

been reestablished again.

These are the kinds of sort of mindless innovations that occur

when people do not have any experience or knowledge about the

field and are making policy.

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Mr. SHAYS. But there were people before the war that did have

experience?

Mr. GARFIELD. And most of those people are two levels or three

levels down from the ministers, and it is those individuals who are

running everything now. Nothing would run without them because

they are just enough below the radar——

Mr. SHAYS. But they were not empowered?

Mr. GARFIELD. They were not and they are not in power. They

are the directors——

Mr. SHAYS. I do not mean in power. They were not empowered.

They were not given the authority to be able to make certain decisions and so on, correct?

Mr. GARFIELD. For the most part that is correct, but even more

importantly they were not given training to do their jobs in the

way that they could so that the whole system could be at least

twice as efficient.

Mr. SHAYS. All you’re doing is you triggered the question would

we have been better off to run it the way Saddam did it or the way

we ultimately did.

Mr. GARFIELD. We would have been better off if we engaged in

public discussion with people who knew rather than making decisions in the green zone without experience and going step by step

rather than by fiat and wide sweep.

Mr. SHAYS. It is why I favored the non-government organization

model, the Save the Children, the Mercy Corps, the International

Red Cross, the other organizations that were making in the field

hiring Iraqis. I thought their money was spent better.

Mr. Soloway.

Mr. GARFIELD. Just one last point on that?

Mr. SHAYS. Sure.

Mr. GARFIELD. It was some of the experienced people in the Ministry of Health who we got rid of that those organizations hired.

Mr. SHAYS. Very interesting.

I wish more Members were here to hear your testimony, Mr.

Soloway—both of yours—but it is part of the record and it will help

this committee. The issue of Kellogg, Brown and Root as the poster

child for the issues of questioned costs and unsupported costs

which is referred to differently by some, it is your point, I think,

and I’d like you to elaborate, and you gave me some examples.

Maybe you could give me some more.

But what—and this is why, frankly, I think Kellogg, Brown, and

Root make a huge mistake having redacted this, because it implies

they do not have a meaningful story to tell that would say, for instance, I’m gathering from your testimony that there might be a

dispute. I wish I had asked the first panel this. When you started

to testify, I was thinking that is the one area we should have gotten into a little more, what exactly would questioned costs be.

I am imagining it would be their claim that they had this

amount for security and the auditor saying, ‘‘Well, we will pay that

amount but not the amount—we will pay a certain amount, but we

will not pay the amount that you want.’’ They come back and say,

‘‘Listen, this is what we ended up paying them, so we would like

to be in reverse.’’ They say, ‘‘Well, you might have paid them too

much.’’ I mean, that is one.

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First, is that an example that you were citing? And, second, are

there others that you could give us as an example of disputed costs

that do not necessarily represent trying to get one over on the Government or, you know, corruption?

Mr. SOLOWAY. I think your example is an excellent one and the

cost in question can be anything, but let me make two comments,

one about Kellogg, Brown and Root specifically and this issue of redaction, just to make sure everybody is clear on the issue, because

I think there is a couple of things that have sort of been shoved

off to the side, and then talk specifically to the question of other

examples, because I will use non-Kellogg, Brown and Root examples that I think are a little bit more evident.

Just to be clear, the Trade Secrets Act issue that was raised here

and redactions and the role of the Defense Department and the

contractor, the contractor says to the contracting officer, ‘‘These are

the things I believe to be proprietary trade secrets.’’ The contracting officer then has the authority to overrule the contractor, so the

Defense Department does have the authority to get involved in

that.

Mr. SHAYS. It appears they chose not to exercise that.

Mr. SOLOWAY. And they may have had very good reasons. I do

not know what was redacted. I cannot speak to the specific

redactions.

Mr. SHAYS. OK.

Mr. SOLOWAY. I think that there is an issue here——

Mr. SHAYS. So you would say to staff, one of the questions that

we should be asking is did they with, for instance, Kellogg, Brown

and Root, accept all the redactions or did they choose not to accept

some of them? That would be a question I would like to write in.

Mr. SOLOWAY. The other distinction, the quick distinction I was

going to draw—and I think Mr. Reed touched on this, or one of the

other witnesses—there is a difference under the law between what

the Congress is entitled to and what an IAMB or non-U.S. entity

would be entitled to, and I think there is an interesting distinction

there that needs to be very carefully addressed.

As I understand it—I am not a legal expert—as I understand the

Trade Secrets Act, it would actually probably allow you as a Member of Congress to see an unredacted document.

Mr. SHAYS. We have the unredacted.

Mr. SOLOWAY. But it cannot be publicly exposed. But it would not

necessarily allow the IAMB, because it is not a U.S. entity, it is not

a U.S.——

Mr. SHAYS. I understood the——

Mr. SOLOWAY. So there is an issue that I think the negotiation

needs to take place. I’m not taking either side. I just want to make

sure the context was clear for everybody to understand.

Mr. SHAYS. I accept that it may technically be right, though I

wonder whether or not, given the relationship we had with the

IAMB, given that they had given us this responsibility and required there be transparency, it raises the question whether we

should have asked anyone who contracted to waive this part of it.

Mr. SOLOWAY. And the discussion with a broader community in

advance to figure out how we are going to achieve the outcome

we’re trying to achieve.

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Mr. SHAYS. Right.

Mr. SOLOWAY. I think that is a fair discussion to have. I do not

disagree with you on that.

Mr. SHAYS. Right.

Mr. SOLOWAY. But to the specific question of other examples, let

me use an example of another company that had so-called unsupported or questioned costs that are still in dispute, and by the definitions that some other members of the committee have been using

today would be called overcharges. This company was one of the

first companies into Iraq. In fact, they were in the health sector.

They faced an enormous spike in insurance costs, which many people did, as you know, as you have heard I think over the last year

or two. There has been this big issue with insurance cost and access. At that point in time and to date their customer, the agency

for whom they are working, has said those are not fair and reasonable costs, we are not going to pay those insurance rates, and so

they have had to pay them themselves, the difference out of their

own pocket, but have been in a dispute with them saying this is

what the market was driving.

In subsequent contracts, that same agency is now identifying

that higher rate as what they will pay for insurance because they

have now figured out that is what the market is driving, but they

still will not pay the company that had the initial contract because

in their initial contract the estimate for insurance was lower because no one anticipated this market spike, if that makes sense.

That is an unsupported cost somebody would call, or a cost in

dispute. Someone might say the company has overcharged because

they have billed this. It is not an overcharge. This is a discussion

of what the market costs are and a very legitimate cost issue. That

is the kind of thing that often gets worked out in the negotiations

that Bill Reed was referring to, so that would be another example.

We see them all the time.

If I could just add one context here, Dr. Garfield talked about the

common sense of people who were working in the local community

and having local contact and the kind of thing that we would all

assume to be part of this process. Those common sense decisions

very often are directly in conflict with our laws about procurement,

cost accounting, and so forth. The way you deal in an economy that

has no market economy, you do not get competitive written bids,

yet you might know somebody in the health sector who you know

locally has expertise, knowledge you want to use and you contract

with them through a non-traditional manner. It is a different kind

of environment, a different kind of market. So it might make very

good management sense, but it might also put you in direct conflict

with our procurement rules. That is the point I was making in my

testimony.

Mr. SHAYS. I’m missing your last point. Please explain it differently.

Mr. SOLOWAY. The economy in Iraq is not what we would consider a market economy.

Mr. SHAYS. Right.

Mr. SOLOWAY. For example, we do not have written——

Mr. SHAYS. I understand it is not a market economy. OK.

Mr. SOLOWAY. And written bids, for instance, are very rare.

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Mr. SHAYS. Right.

Mr. SOLOWAY. Our marketplace, we rely on competition and written bids. We have overlaid our traditional procurement rules on

our appropriated dollars that are being spent in Iraq on contract,

so as a contractor working in a small outpost or in Tikrit or wherever it might be, as I am subcontracting or identifying local capabilities to help me do my job, in theory I am under the regular U.S.

procurement laws, but there is no market economy and I cannot go

out and get seven different written bids and a fixed price on a contract or expect cost accounting from my subcontractors locally that

I would require of a U.S. company operating in a normal U.S. environment, but it may be the only way I can achieve the mission.

I may only have access to those folks in the region who a tribal

elder—a lot of it is tribal, it is sectarian, it is family, whatever it

might be. It could be even the old Mafia structure. That is how capabilities are identified and brought to bear. Yet, when an auditor

comes in—and we have had cases of this where the auditors have

come in and wanted to see cost buildups to see what the subcontractors spent at every step of the way, which is our normal

rule of accountability. We cannot provide it. Companies cannot provide it because it is simply not available.

Mr. SHAYS. If a company had to pay off someone to get their

work done in Iraq, would they be breaking the law in Iraq? I know

they would in another country, but within Iraq——

Mr. SOLOWAY. I do not know the answer to that question. I do

not believe they would be breaking the law there. And I’m not even

talking about law-breaking, if I could give you one quick example.

Mr. SHAYS. I was going to the next thing, but what do you want

to say? And then Dr. Garfield I want to respond.

Mr. GARFIELD. The answer is no, they would not break a law.

Mr. SHAYS. If it was another country would they have been? We

do not allow for political payoffs.

Mr. GARFIELD. Right.

Mr. SHAYS. But in Iraq it would be legal?

Mr. GARFIELD. There would be no law against it. Well, it would

be if it was a U.S. citizen, because I do not believe we can engage

in that, but if it was an Iraqi to an Iraqi we——

Mr. SHAYS. Before you make your point, let me make sure I understand. The question I asked was if you made—you paid a bribe

in order to conduct your business in Iraq, you say it is not in Iraq

it is not against the law. But, for instance, if Sikorski, a company,

wants to get the contract in some country like Turkey and they are

competing with France and France is very willing to pay someone

off, the Sikorski—United Technologies cannot make that bribe.

What’s the difference? Why in Turkey——

Mr. GARFIELD. National law and international law.

Mr. SOLOWAY. Actually, the Foreign Corrupt Practices Act applies to any U.S. citizen or entity doing business anywhere in the

world.

Mr. SHAYS. Right.

Mr. SOLOWAY. They cannot enforce a law on the French or on an

Iraqi.

Mr. SHAYS. Right. But why an American doing business in Iraq,

why could they make a payoff?

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Mr. GARFIELD. An American could not. I’m sorry. I thought you

were asking if it was illegal in Iraq.

Mr. SHAYS. OK. So they could not do that. And obviously they

could not ask for reimbursement on a payoff?

Mr. GARFIELD. Correct.

Mr. SHAYS. OK. Fair enough.

Mr. GARFIELD. But you can put the guy’s brother on the payroll.

There have to be balances to make things work.

Mr. SHAYS. I hear you.

Mr. SOLOWAY. Let me give you a concrete example of what we’re

talking about.

Mr. SHAYS. Sure. But first what question are you answering?

Mr. SOLOWAY. The first one you asked about examples of how our

traditional rules do not necessarily work in that lack of a market

economy.

Mr. SHAYS. Right.

Mr. SOLOWAY. One of the companies we work with was contracted to build a security perimeter around a facility and were told

to extensively utilize Iraqi labor and Iraqi subcontractors.

Mr. SHAYS. Right.

Mr. SOLOWAY. Which is the intent, when people say ‘‘X amount

of money went to U.S. companies,’’ they do not count for what is

being flowed through to the Iraqi economy. They went out and

found a company through local contacts and whatever and brought

them in, negotiated a price, and paid them on a progress basis.

They gave them a certain amount down, and like you would do

your house, at certain spaces they gave them more money until the

job was done. Everybody seemed relatively happy with the work.

Several months later when there was an audit of the contractor,

routine audit, the auditor, following the guidance that they have—

I mean, this is not the auditor’s fault—wanted to know how many

bidders they had, and the answer was, well, we found one capability so we brought them in. So in effect, in our language, it was a

sole source contract.

OK. Well, that is fine. We understand it is not a market economy. How many man hours went into this? How much was the concertina wire? How much was the concrete? How much were the

shovels, the pick axes, and so forth? The answer was they did not

know because in the Iraqi economy there is no system. They do not

have a cost accounting process like we would have.

That led to an extensive discussion. They ultimately settled it

with the auditors because it was them trying to get a mission done

in the context of the economy they were in, as opposed to under

the rules that we have. So it was a conflict. We have seen many

of those occur. Some of them have been settled and, frankly, some

of them are not. They are very difficult. That is why we have made

this recommendation that we need experts from industry, from government, the oversight community, the contracting community, the

Congress to sort of review our rules and regulations and come up

with a set of rules and regulations that make sense in this kind

of an environment that we all agree to, that this is as far as we

can apply, these are the limits to what our rules will allow, this

is how we are going to do cost accounting, and so forth, because

it is a very, very difficult situation. You have people charged with

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oversight, people charged with getting a mission done, and sometimes in some marketplaces or certain environments the two do

come into conflict.

Mr. SHAYS. You know what I am struck by? Obviously there may

be other factors, but if I was a contractor and I was being accused

of overcharges, I would be writing this committee to request to be

before the committee because they have and others have a story to

tell. You educate the American people and they accept it, unless

there is concern that they do not have a good story to tell. That

is another issue. But, frankly, if I was doing business and I had

to deal with everything I have seen in Iraq in the eight times I

have been there, I think I could explain pretty clearly why I have

these costs and why I think I should be compensated and why it

would, you know, make me mad as hell to have someone call something an overcharge on something that is a dispute. It is just curious to me why.

Mr. SOLOWAY. I think from our perspective one of the great concerns that we have had is we have seen this issue get hotter and

hotter around contracting and allegations and assumptions of

wrongdoing every place you look. In addition to the impact it has

in the field, I think that it is very notable that if you listen to Mr.

Bowen as he testified today and has in the past in other reports,

Mr. Reed and other DCAA reports and others, what is remarkable

is, given the amount of money that has been expended on contracting in Iraq in a very short time in the most difficult environment

we have ever been in, they, themselves, have said many times by

and large they have been impressed about how well the process has

worked, both front end and the back end of it.

I will say that I believe Brown and Root did testify before the

full committee at some point—I believe it was the full committee—

in a rather extensive discussion of their charges and their role and

so forth.

Mr. SHAYS. You’re right. You are right. You’re absolutely right.

Mr. SOLOWAY. Most companies that I am familiar with do enjoy

the opportunity to come before the committee when they had the

chance to explain in context what is really going on, because this

really is a truly unique environment.

Mr. SHAYS. You are correct. I was not at much of that hearing,

if at all, so you are definitely right, they did testify.

I just want our professional staff to ask a question, and then we

are going to have some votes and we will call it quits.

CHIEF INVESTIGATOR. Very quickly, Mr. Soloway, the IG acknowledged that there were extraordinarily challenging threats in the

environment that CPA was working in. He did not seem to take

that into consideration in insisting that there should be standard

accounting procedures, and we were interested to know what your

thoughts were regarding that.

Mr. SOLOWAY. I have two comments. One is I think that I am

not in a position to judge what the CPA did or did not do. I think

that clearly in hindsight if the IG and other experts have identified

gaps in what was the planning, then clearly even the lessons

learned work that we have done, we have certainly identified advance planning gaps that goes into what we do better the next

time. So I cannot really judge from that perspective.

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I would say that—and this goes also to Dr. Garfield’s point—the

human capital issue here and the availability of the right skills at

the right place at the right time is a much bigger issue I think

than we have paid attention to, whether it is medical skills and

people with public health expertise, contracting and acquisition

skills, and so forth. There are tremendous issues here about getting

people deployed.

Mr. SHAYS. I need to move along because I have a vote. Let me

ask you, is there any last point, Dr. Garfield or Mr. Soloway, you’d

like to put on the record?

Mr. GARFIELD. No.

Mr. SHAYS. Thank you. Both of your testimony has been excellent

and very helpful. I thank you again for your patience and appreciate your response to our questions, as well. Thank you all very

much.

With that, this hearing is adjourned. And may I thank the transcriber for her patience.

[Whereupon, at 2:15 p.m. the subcommittee was adjourned.]

[NOTE.—The Office of Inspector General, Coalition Provisional

Authority Audit Reports, No.’s 04–009, 05–004, 05–008, and 05–

006, may be found in subcommittee files.]

[Additional information submitted for the hearing record follows:]

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