[NYTr] Billions over Baghdad - The Missing $9 Billion

[All the News That Doesn't Fit]

[See also below: "The Booty Vanishes" - Q&A with Barlett & Steele]

Vanity Fair - Oct, 2007
http://www.vanityfair.com//politics/features/2007/10/iraq_billions200710?printable=true&currentPage=all

The Spoils of War

Billions over Baghdad

Between April 2003 and June 2004, $12 billion in U.S. currency—much of
it belonging to the Iraqi people—was shipped from the Federal Reserve
to Baghdad, where it was dispensed by the Coalition Provisional
Authority. Some of the cash went to pay for projects and keep
ministries afloat, but, incredibly, at least $9 billion has gone
missing, unaccounted for, in a frenzy of mismanagement and greed.
Following a trail that leads from a safe in one of Saddam's palaces to
a house near San Diego, to a P.O. box in the Bahamas, the authors
discover just how little anyone cared about how the money was handled.

by Donald L. Barlett and James B. Steele

Hidden in plain sight, 10 miles west of Manhattan, amid a suburban
community of middle-class homes and small businesses, stands a
fortress-like building shielded by big trees and lush plantings behind
an iron fence. The steel-gray structure, in East Rutherford, New
Jersey, is all but invisible to the thousands of commuters who whiz by
every day on Route 17. Even if they noticed it, they would scarcely
guess that it is the largest repository of American currency in the
world.

Officially, 100 Orchard Street is referred to by the acronym eroc, for
the East Rutherford Operations Center of the Federal Reserve Bank of
New York. The brains of the New York Fed may lie in Manhattan, but
xeroc is the beating heart of its operations—a secretive, heavily
guarded compound where the bank processes checks, makes wire transfers,
and receives and ships out its most precious commodity: new and used
paper money.

On Tuesday, June 22, 2004, a tractor-trailer truck turned off Route 17
onto Orchard Street, stopped at a guard station for clearance, and then
entered the eroc compound. What happened next would have been the stuff
of routine—procedures followed countless times. Inside an immense
three-story cavern known as the currency vault, the truck's next cargo
was made ready for shipment. With storage space to rival a Wal-Mart's,
the currency vault can reportedly hold upwards of $60 billion in cash.
Human beings don't perform many functions inside the vault, and few are
allowed in; a robotic system, immune to human temptation, handles
everything. On that Tuesday in June the machines were especially busy.
Though accustomed to receiving and shipping large quantities of cash,
the vault had never before processed a single order of this magnitude:
$2.4 billion in $100 bills.

Under the watchful eye of bank employees in a glass-enclosed control
room, and under the even steadier gaze of a video surveillance system,
pallets of shrink-wrapped bills were lifted out of currency bays by
unmanned "storage and retrieval vehicles" and loaded onto conveyors
that transported the 24 million bills, sorted into "bricks," to the
waiting trailer. No human being would have touched this cargo, which is
how the Fed wants it: the bank aims to "minimize the handling of
currency by eroc employees and create an audit trail of all currency
movement from initial receipt through final disposition."

Forty pallets of cash, weighing 30 tons, were loaded that day. The
tractor-trailer turned back onto Route 17 and after three miles merged
onto a southbound lane of the New Jersey Turnpike, looking like any
other big rig on a busy highway. Hours later the truck arrived at
Andrews Air Force Base, near Washington, D.C. There the seals on the
truck were broken, and the cash was off-loaded and counted by Treasury
Department personnel. The money was transferred to a C-130 transport
plane. The next day, it arrived in Baghdad.

That transfer of cash to Iraq was the largest one-day shipment of
currency in the history of the New York Fed. It was not, however, the
first such shipment of cash to Iraq. Beginning soon after the invasion
and continuing for more than a year, $12 billion in U.S. currency was
airlifted to Baghdad, ostensibly as a stopgap measure to help run the
Iraqi government and pay for basic services until a new Iraqi currency
could be put into people's hands. In effect, the entire nation of Iraq
needed walking-around money, and Washington mobilized to provide it.

What Washington did not do was mobilize to keep track of it. By all
accounts, the New York Fed and the Treasury Department exercised strict
surveillance and control over all of this money while it was on
American soil. But after the money was delivered to Iraq, oversight and
control evaporated. Of the $12 billion in U.S. banknotes delivered to
Iraq in 2003 and 2004, at least $9 billion cannot be accounted for. A
portion of that money may have been spent wisely and honestly; much of
it probably wasn't. Some of it was stolen.

Once the money arrived in Iraq it entered a free-for-all environment
where virtually anyone with fingers could take some of it. Moreover,
the company that was hired to keep tabs on the outflow of money existed
mainly on paper. Based in a private home in San Diego, it was a shell
corporation with no certified public accountants. Its address of record
is a post-office box in the Bahamas, where it is legally incorporated.
That post-office box has been associated with shadowy offshore
activities. Coalition of the Billing

The first shipment of cash to Iraq took place on April 11, 2003—it
consisted of $20 million in $1, $5, and $10 bills. It was arranged in
small bills on the theory that these could quickly be circulated into
the Iraqi economy "to prevent a monetary and financial collapse," as
one former Treasury official put it. Those were the days when American
officials worried that the gravest threat facing Iraq might be
low-grade civilian unrest in Baghdad. They didn't have a clue as to the
power of the insurgency that was to come. The initial $20 million came
exclusively from Iraqi assets that had been frozen in U.S. banks as
long ago as the Gulf War, in 1990. Subsequent airlifts of cash also
included billions from Iraqi oil revenues controlled by the United
Nations. After the creation of the Development Fund for Iraq (D.F.I.)—a
kind of holding pit of money to be spent for "purposes benefitting the
people of Iraq"—the U.N. turned over control of Iraq's oil billions to
the United States.

When the U.S. military delivered the cash to Baghdad, the money passed
into the hands of an entirely new set of players—the staff of the
American-led Coalition Provisional Authority. To many Americans, the
initials C.P.A. would soon be as familiar as those of long-established
government agencies such as D.O.D. or hud. But the C.P.A. was anything
but a conventional agency. And, as events would show, its initials
would have nothing in common with "certified public accountant." The
C.P.A. had been hastily created to serve as the interim government of
Iraq, but its legality and paternity were murky from the start. The
Authority was in effect established by edict outside the traditional
framework of American government. Not subject to the usual restrictions
and oversight of most agencies, the C.P.A. during the 14 months of its
existence would become a sump for American and Iraqi money as it
disappeared into the hands of Iraqi ministries and American
contractors. The Coalition of the Willing, as one commentator observed,
had turned into the Coalition of the Billing.

The first mention of the C.P.A. came on April 16, 2003, in a so-called
freedom message to the Iraqi people by General Tommy R. Franks,
commander of the coalition forces. A week after mobs ransacked Iraq's
National Museum of its treasures, unchallenged by American troops,
General Franks arrived in Baghdad for a six-hour whirlwind tour. He met
with his commanders in one of Saddam Hussein's palaces, held a video
conference with President Bush, and then quickly flew off. "Our stay in
Iraq will be temporary," General Franks wrote, "no longer than it takes
to eliminate the threat posed by Saddam Hussein's weapons of mass
destruction, and to establish stability and help Iraqis form a
functioning government that respects the rule of law." With that in
mind, General Franks wrote that he created the Coalition Provisional
Authority "to exercise powers of government temporarily, and as
necessary, especially to provide security, to allow the delivery of
humanitarian aid and to eliminate weapons of mass destruction." Three
weeks later, on May 8, 2003, the U.S. and British ambassadors to the
United Nations sent a letter to the U.N. Security Council, effectively
delivering the C.P.A. to the United Nations as a fait accompli.

The day before, President Bush had appointed L. Paul Bremer III, a
retired diplomat, as presidential envoy to Iraq and the president's
"personal representative," with the understanding that he would become
the C.P.A. administrator. Bremer had held State Department posts in
Afghanistan, Norway, and the Netherlands; had served as an assistant to
Henry Kissinger and Alexander Haig; and had closed out his diplomatic
career in 1989 as ambassador-at-large for counterterrorism. More
recently, he had been the chairman and chief executive officer of a
crisis-management business called Marsh Crisis Consulting. Despite his
State Department background, Bremer had been selected by the Pentagon,
which had elbowed aside all contenders for authority in post-invasion
Iraq. The C.P.A. itself was a creature of the Pentagon, and it would be
Pentagon personnel who did the C.P.A.'s hiring.

Over the next year, a compliant Congress gave $1.6 billion to Bremer to
administer the C.P.A. This was over and above the $12 billion in cash
that the C.P.A. had been given to disburse from Iraqi oil revenues and
unfrozen Iraqi funds. Few in Congress actually had any idea about the
true nature of the C.P.A. as an institution. Lawmakers had never
discussed the establishment of the C.P.A., much less authorized it—odd,
given that the agency would be receiving taxpayer dollars. Confused
members of Congress believed that the C.P.A. was a U.S. government
agency, which it was not, or that at the very least it had been
authorized by the United Nations, which it had not. One congressional
funding measure makes reference to the C.P.A. as "an entity of the
United States Government"—highly inaccurate. The same congressional
measure states that the C.P.A. was "established pursuant to United
Nations Security Council resolutions"—just as inaccurate. The bizarre
truth, as a U.S. District Court judge would point out in an opinion, is
that "no formal document … plainly establishes the C.P.A. or provides
for its formation."

Accountable really to no one, its finances "off the books" for U.S.
government purposes, the C.P.A. provided an unprecedented opportunity
for fraud, waste, and corruption involving American government
officials, American contractors, renegade Iraqis, and many others. In
its short life more than $23 billion would pass through its hands. And
that didn't include potentially billions more in oil shipments the
C.P.A. neglected to meter. At stake was an ocean of cash that would
evaporate whenever the C.P.A. did. All parties understood that there
was a sell-by date, and that it was everyone for himself. An Iraqi
hospital administrator told The Guardian of England that, when he
arrived to sign a contract, the army officer representing the C.P.A.
had crossed out the original price and doubled it. "The American
officer explained that the increase (more than $1 million) was his
retirement package." Alan Grayson, a Washington, D.C., lawyer for
whistle-blowers who have worked for American contractors in Iraq, says
simply that during that first year under the C.P.A. the country was
turned into "a free-fraud zone."

Bremer has expressed general satisfaction with the C.P.A.'s work while
at the same time acknowledging that mistakes were made. "I believe the
C.P.A. discharged its responsibilities to manage these Iraqi funds on
behalf of the Iraqi people," he told a congressional committee. "With
the benefit of hindsight, I would have made some decisions differently.
But on the whole, I think we made great progress under some of the most
difficult conditions imaginable, including putting Iraq on the path to
democracy." The Bottomless Vault

To be fair, the C.P.A. really did need money desperately, and it really
did need to start spreading it among the traumatized Iraqi population.
It also needed to jump-start Iraq's basic services. As the C.P.A.
demanded ever greater amounts of cash, the pallets of $1, $5, and $10
bills were soon replaced by bundles of $100 bills. During the C.P.A.'s
little more than a year of life, the New York Federal Reserve Bank made
21 shipments of currency to Iraq totaling $11,981,531,000. All told,
the Fed would ship 281 million individual banknotes, in bricks weighing
a total of 363 tons.

After arriving in Baghdad, some of the cash was shipped to outlying
regions, but most of it stayed in the capital, where it was delivered
to Iraqi banks, to installations such as Camp Victory, the mammoth U.S.
Army facility adjacent to the Baghdad airport, and to Saddam's former
presidential palace, in the Green Zone, which had become the home of
Bremer's C.P.A. and the makeshift Iraqi government. At the palace the
cash disappeared into a vault in the basement. Few people ever saw the
vault, but the word was that during one short period it held as much as
$3 billion. Whatever the figure, it was a major repository of the
banknotes from America during the brief time the cash was under the
care of the C.P.A. The money flowed in and out rapidly. When someone
needed cash, a unit called the Program Review Board, composed of senior
C.P.A. officials, reviewed the request and decided whether to recommend
a disbursement. A military officer would then present that
authorization to personnel at the vault.

Even those who picked up large sums usually did not actually see the
vault. Once a disbursement had been made, the cash was brought to an
adjoining room for pickup. This "secure room," as one military officer
called it, looked a lot like a vault itself: a thick metal door at the
entrance, with the room beyond starkly furnished with only a table and
chairs. The table would be piled high with cash. An authorized officer
would sign papers for the money, then begin carting it
upstairs—sometimes in sacks or metal boxes—to the Iraqi ministry or
C.P.A. office that had requested it. Upon turning over the cash, the
officer would be required to obtain a receipt—nothing more.

C.P.A. officials tried to keep a rough running tab on the amount
disbursed to individual Iraqi agencies such as the Ministry of Finance
($7.7 billion). But there was little detail, nothing specific, on how
the money was actually used. The system basically operated on "trust
and faith," as one former C.P.A. official put it. Once the cash passed
into the hands of the Iraqis or any other party, no one knew where it
went. The C.P.A. turned over $1.5 billion in cash to Iraqi banks, for
instance, but later auditors could account for less than $500 million.
The United Nations retained a team of auditors to look over American
shoulders. They didn't see much, because they were largely cut off from
access while the C.P.A. held power. As a report by the U.N.'s
accounting consultant, KPMG, noted dryly, "We encountered difficulties
in performing our duties and meeting with key C.P.A. personnel."

"There was corruption everywhere," said one former military officer who
worked with the C.P.A. in Baghdad in the months after the invasion.
Some of the Iraqis who were put in charge of ministries after Saddam's
fall had never run a government agency before. Their inexperience
aside, he said, they lived in constant fear of losing their jobs or
their lives. All many cared about, he added, was taking care of
themselves. "You could see that a lot of them were trying their best to
get a quick retirement fund before they were ousted or killed," he
added. "You just get what you can while you're in that position of
power. Instead of trying to build the nation, you build yourself."

Did any withdrawals from the vault pay for secret activities by
government personnel? It is an obvious possibility. Much of the cash
was clearly destined for American contractors or Iraqi subcontractors.
Sometimes the Iraqis came to the palace to collect their cash; other
times, when they were reluctant to show up at the American compound,
U.S. military personnel had to deliver it themselves. One of the
riskier jobs for some U.S. military men was to fill up a car with bags
of cash and drive the money to contractors in Baghdad neighborhoods,
handing it over like a postal worker delivering mail.

‘Fraud" was simply another word for "business as usual." Of 8,206
"guards" drawing paychecks courtesy of the C.P.A., only 602 warm bodies
could in fact be found; the other 7,604 were ghost employees.
Halliburton, the government contractor once headed by Vice President
Dick Cheney, charged the C.P.A. for 42,000 daily meals for soldiers
while in fact serving only 14,000 of them. Cash was handed out from the
backs of pickup trucks. On one occasion a C.P.A. official received
$6.75 million in cash with the expectation he would shell it out in one
week. Another time, the C.P.A. decided to spend $500 million on
"security." No specifics, just a half-billion dollars for security,
with this cryptic explanation: "Composition TBD"—that is, "to be
determined."

The pervasiveness of this Why-should-I-care? attitude was driven home
in an exchange with retired admiral David Oliver, the C.P.A.'s director
of management and budget. Oliver was asked by a BBC reporter what had
happened to all the cash airlifted to Baghdad:

Oliver: "I have no idea—I can't tell you whether or not the money went
to the right things or didn't—nor do I actually think it's important."

Q: "Not important?"

Oliver: "No. The coalition—and I think it was between 300 and 600
people, civilians—and you want to bring in 3,000 auditors to make sure
money's being spent?"

Q: "Yes, but the fact is that billions of dollars have disappeared
without a trace."

Oliver: "Of their money. Billions of dollars of their money, yeah, I
understand. I'm saying what difference does it make?"

The difference it made was that some American contractors correctly
believed they could walk off with as much money as they could carry.
The circumstances that surround the handling of comparatively small
sums help explain the billions that ultimately vanished. In the
south-central region of Iraq a contracting officer stored $2 million in
a safe in his bathroom. One agent kept $678,000 in an unsecured
footlocker. Another agent turned over some $23 million to his team of
"paying agents" to deliver to contractors, but documentation could be
found for only $6.3 million of it. One project officer received
$350,000 to fund human-rights projects, but in the end could account
for less than $200,000 of it. Two C.P.A. agents left Iraq without
accounting for two payments of $715,000 and $777,000. The money has
never been found.

To Frank Willis, a senior adviser to the Iraqi transportation ministry,
the presence of so much cash circulating so freely gave the Green Zone
a "Wild West" feel. A moderate Republican who worked for Reagan and
voted for George W. Bush, Willis spent many years in executive roles in
the State Department and the Department of Transportation before
leaving government service in 1985. He was a top executive of a health
institute in Oklahoma when, in 2003, an old friend from Washington
called and asked if he would come to Iraq to help the C.P.A. get the
various transportation systems running again.

"You've got to be crazy," Willis told him at first. He says he was
talked into going for 30 days, but once in Baghdad became caught up in
the work and stayed for six grueling months. Willis says he wasn't
there a month before he felt the way things were being done was
"terribly wrong." One afternoon he returned to his office to find piles
and piles of shrink-wrapped $100 bills stacked on a table. "This just
got wheelbarrowed in," one of his American colleagues explained. "What
do you think of two million bucks?" The money had been "checked out" of
Saddam's old vault in the basement, two floors below, in order to pay a
U.S. contractor hired by the C.P.A. to provide security.

The neat bundles of cash looked almost like play money, and the
temptation to handle them was irresistible. "We were all in the room
passing those things around and having fun," Willis remembers. He and
his colleagues played a game of football, tossing the bricks back and
forth. "You could spin them but not throw a spiral," Willis says with a
laugh. When he called the American contractor to come get his money,
Willis advised him, "You better bring a gunnysack." "Integrity Is a
Core Principle"

The American contractor needing the gunnysack was a company called
Custer Battles. The name was derived not from Little Big Horn but from
the names of the company's owners, Scott K. Custer and Michael J.
Battles. Both were former army rangers in their mid-30s, and Battles
also had once been a C.I.A. operative. The pair showed up on the
streets of Baghdad with the blessing of the White House at invasion's
end, looking for a way to do business. At the time, the only American
civilians who could gain access to the city were those approved by
President Bush's staff.

The Battles half of the team brought the White House access, secured
when Michael Battles became the G.O.P.-backed candidate in the 2002
Rhode Island congressional primary for the privilege of losing to the
Democratic incumbent, Patrick Kennedy. Battles not only lost the
primary but was fined by the Federal Election Commission for
misrepresenting campaign contributions. Nevertheless, he forged
important political connections. His contributors included Haley
Barbour, the longtime Washington power broker and former chairman of
the Republican National Committee, who is now governor of Mississippi,
and Frederic V. Malek, a former special assistant to President Nixon,
who survived the Watergate scandal and went on to become an insider in
the Reagan administration and both Bush administrations.

The C.P.A. awarded Custer and Battles one of its first no-bid
contracts—$16.5 million to protect civilian aircraft flights, of which
at the time there were few, into Baghdad International Airport. The
company faced immediate obstacles: Custer and Battles didn't have any
money, they didn't have a viable business, and they didn't have any
employees. Bremer's C.P.A. had overlooked these shortcomings and forked
over $2 million anyway, in cash, to get them started, simply ignoring
long-standing requirements that the government certify that a
contractor has the capacity to fulfill a contract. That first $2
million cash infusion was followed shortly by a second. Over the next
year Custer Battles would secure more than $100 million in Iraq
contracts. The company even set up an internal Office of Corporate
Integrity. "Integrity is a core principle of Custer Battles' corporate
values," Scott Custer stated in a press release.

The U.S. business community was impressed by this upstart. In May 2004,
Ernst & Young, the global accounting firm, announced the finalists for
its New England Entrepreneur of the Year Awards, honoring an ability
"to innovate, develop, and cultivate groundbreaking business models,
products, and services." Among the honorees were Scott Custer and
Michael Battles.

Four months later, in September 2004, the air force issued an order
barring Custer Battles from receiving any new government contracts
until 2009. The company had come to epitomize the way business was done
in Baghdad. Custer Battles had billed the government $400,000 for
electricity that cost $74,000. It had billed $432,000 for a food order
that cost $33,000. It had charged the C.P.A. for leased equipment that
was stolen, and had submitted forged invoices for reimbursement—all the
while moving millions of dollars into offshore bank accounts. In one
instance, the company claimed ownership of forklifts used to transport
the C.P.A.'s cash (among other things) around the Baghdad airport. But
up until the war the forklifts had been the property of Iraqi Airways.
They were "liberated," along with the Iraqi people, following
hostilities. Custer Battles seized them, painted over the old name, and
transferred ownership to its offshore businesses. The forklifts were
then leased back to Custer Battles for thousands of dollars a month, a
cost that Custer Battles passed along to the C.P.A. In 2006, a
federal-court jury in Virginia ordered the company to pay $10 million
in damages and penalties for defrauding the government. The jury found
more than three dozen instances of fraud in which Custer Battles used
shell companies in the Cayman Islands and elsewhere to manufacture
phony invoices and pad its bills. During the same period Battles
personally withdrew $3 million from the company coffers as a kind of
bonus—or, as he put it, "a draw." The jury decision in the
whistle-blower lawsuit was subsequently overturned when the trial judge
set the verdict aside, pointing out that the C.P.A. was not in fact a
U.S.-government entity and hence Custer Battles could not be tried
under the federal fraud act. That decision is under appeal. The
NorthStar Contract

How can billions of dollars simply vanish? Wasn't there any accounting
mechanism in place to keep track of the money?

La Jolla, California, is about as far away from Iraq in both distance
and mind-set as one can get. The house at 5468 Soledad Road is a
two-story dwelling with six bedrooms and five and a half baths, a
typical California home of beige stucco under a red tiled roof. The
neighborhood is lush and well kept. But in one respect 5468 Soledad is
not a typical suburban house at all.

On October 25, 2003, the C.P.A. awarded a $1.4 million contract "to
provide accountant and audit services" to help "in the management and
accounting of the Development Fund for Iraq." In other words, the
purpose was to help Bremer and the C.P.A. keep tabs on the billions of
dollars under their control, and to help make sure that the money was
properly spent. The one-year C.P.A. contract was awarded to a company
called NorthStar Consultants.

When a request was made to the U.S. government for a copy of this
contract, officials at the Pentagon, which has oversight, dragged their
feet for weeks. The document they eventually supplied had been
strategically redacted. Nearly all the information about the contractor
had been blacked out, including the name and title of the company
officer who had executed the contract, the name of the person to call
for information about the company, the last four digits of the
company's phone number, and the name of the U.S.-government official
who had awarded the contract in the first place. But by
cross-referencing public records and other sources it was possible to
fill in some of the missing data. One path led to 5468 Soledad Road.

The house is owned by Thomas A. and Konsuelo Howell, according to San
Diego County records. The couple apparently bought it new in 1999.
State records indicate that several companies operate from the house.
One of them is called International Financial Consulting, Inc., though
it isn't clear what this company actually does. Incorporated in 1998,
I.F.C. was described as a venture in "business consulting," according
to papers Howell filed with the state. The Howells are listed as the
only directors.

Another company operating out of 5468 Soledad is called Kota
Industries, Inc., whose stated business is the "sale of furniture, home
furnishings, flooring," according to California records. Numerous
business directories in the San Diego area ascribe similar activities
to Kota, listing it as a remodeling, repairing, or restoration
contractor. One directory describes its specialty as "kitchen,
bathroom, basement remodeling." Again, the Howells are the only
officers and directors.

In January 2004, in the business-names index of San Diego County,
Thomas Howell indicated that a third company was now based at 5468
Soledad, noting that it was owned by International Financial
Consulting. This new company was NorthStar.

How did someone whose line of work includes home remodeling end up
getting the contract to audit the billions being airlifted to Iraq?
Thomas Howell is 60; he and his wife have lived in San Diego for at
least two decades. Over the years, the couple has also maintained
addresses in Fort Lauderdale, Florida, and Laredo, Texas. Neighbors
describe the Howells as pleasant, but can add little else. "I know
them, but I don't know what they do," said one. "That's all I can tell
you." Two others could say only that they saw the Howells occasionally
in the neighborhood. Were they aware that a company with an Iraqi
contract had operated from the house? "Really?" said one. "No. I didn't
know that."

Thomas Howell refuses to discuss the NorthStar contract in detail. A
telephone exchange with him, reached at 5468 Soledad Road, went as
follows.

A woman answered, "Kota Industries."

"Could I speak with Mr. Thomas Howell?"

"May I ask who is calling?" the woman asked.

"My name is Jim Steele."

"Wait just a second," the woman said.

A few moments later, a man came on the line. "Tom Howell," he said.

"My name is Jim Steele, and I am a writer with the magazine Vanity
Fair. I would like to talk to you about NorthStar Consultants."

Howell said, "Well, let me find a contact who can talk all this stuff
with you. What is your phone number, Jim?"

Howell repeated the number and added, "O.K. Let me get somebody who can
discuss all this stuff for you."

"I'd just like to make sure here. Aren't you president of the company?"

"That's right," said Howell.

"But you can't … "

"Well, I'm not … I can't … You want to talk about the D.F.I.
[Development Fund for Iraq] and that sort of stuff?" asked Howell.

"Well, yeah."

"O.K.," Howell replied, "I'll get someone who's authorized to talk
about all that. I'll have them give you a call or I'll call you and
give you their number."

"Is this the military or your lawyer?"

"The military," said Howell, abruptly ending the conversation with
"O.K. Thanks. Good-bye."

The next attempt was a visit to Howell's home the following day. A
stylishly dressed woman emerged from behind a locked fence. "May I help
you?" she asked. The woman confirmed that she was Konsuelo Howell, and
explained that it would be impossible to speak with her husband. "He is
out of the country."

He never did call back with the name of a Pentagon official
"authorized" to speak about NorthStar. Nor did anyone from the Pentagon
call. When a Pentagon public-affairs officer was queried about who
might be able to discuss the contract, the officer said she needed a
name, which, as it turned out, only Howell could provide. The Pentagon
also failed to respond to a request for the information deleted from
the NorthStar contract and the name of the person who had ordered it
deleted.

When Howell was contacted again, three months later, he stated that the
Department of Defense had told him that "they didn't have anybody
anymore specifically tasked with answering these questions." As far as
D.O.D. was concerned, Howell added, the issue was "closed." Once again
he refused to discuss the NorthStar contract in any detail: "The way I
normally work with all my clients is: my work is confidential," he
said. "If they want to let it out, that's fine. But I work for them.
It's their business." Howell did say that NorthStar was his one and
only U.S. government contract. How did he land it? "I saw it published
on the Web, that it was out for bids," he said.

As for how much auditing NorthStar really did in Iraq, the missing
billions provide the best answer. The company did have personnel in
Baghdad, though how many, and for how long, and for what purpose, is
not known—another point Howell declines to discuss. Under the terms of
C.P.A. Regulation No. 2, signed by Bremer on June 15, 2003, money
coming into Iraq was supposed to be tracked by an "independent
certified public accounting firm." Howell was not a certified public
accountant, nor were any of the people who worked for him. Bremer seems
to have been unaware of this detail. When he was asked at a
congressional hearing earlier this year about NorthStar, he answered,
"I don't know what kind of firm it was, other than it was an accounting
firm." Would it upset him, a congressman asked, if he found out there
were no accountants on NorthStar's staff? "It would," Bremer answered,
"if it were true."

It is true. And rather than reissue the contract to a certified public
accountant, someone in the government contract office simply eliminated
the requirement, thereby making Howell eligible for the work. The
Baghdad-Bahamas Connection

When an unknown official at the Pentagon meticulously went through the
NorthStar contract and used a thick-tipped marker to black out Thomas
Howell's name, title, office address, and phone number, he or she
neglected to conceal one of the most intriguing aspects of the
contract: NorthStar's mailing address. It was P.O. Box N-3813 in
Nassau, in the Bahamas.

High on a hill in Nassau, the main post office commands panoramic views
of the capital city—the pink stuccoed Parliament building, bustling Bay
Street with its hordes of tourists, and, beyond it, the giant cruise
ships that dock in Nassau's harbor. Just as you enter the post office,
on a sprawling plaza beneath an overhang offering protection from the
tropical sun and rain, there stand row after row of metal boxes, each
bearing the capital letter N followed by a series of numbers. These are
the private post-office boxes of Nassau. Because there is no home
delivery in the city, it is the way people in the capital get their
mail.

Box N-3813, four inches wide by five inches high, looks like all the
other post-office boxes. It harbors many secrets that its users want to
keep. No one knows whether anyone at the C.P.A. or the Pentagon
questioned why one of its contractors used an offshore post-office box.
It is undeniably true, however, that foreigners often use post-office
boxes in the Bahamas and other tax havens for three purposes: to
conceal assets, to avoid taxes, and to launder money. NorthStar would
not be at all unusual among Iraq contractors in setting up its affairs
this way. Post-office boxes in tax havens around the world have been
flooded with contractor business based in Iraq.

Box N-3813, it turns out, has been the locus for all sorts of
transactions by Americans and others looking to move money offshore. In
addition to Howell's NorthStar, this particular box also served as the
address of record for a man named Patrick Thomson and for his Bahamian
business called Lions Gate Management. Both figured prominently in one
of the more spectacular offshore frauds in recent years, the collapse
of Evergreen Security. The Caribbean-based Evergreen enticed thousands
of investors, many of them U.S. retirees, to pour money into its
so-called tax-sheltered offshore funds, with the promise of handsome
returns. Some of the money came from hundreds of Caribbean trusts for
which Thomson acted as trustee. A Ponzi scheme masquerading as a mutual
fund, Evergreen siphoned $200 million from investors in the United
States and two dozen other countries. One of its ringleaders was
William J. Zylka, a New Jersey "con artist who falsified his
background, credentials and wealth in order to perpetrate elaborate
schemes," according to court documents. He pocketed $27.7 million of
Evergreen's money.

Throughout the looting of Evergreen, Thomson was one of the firm's
three directors. During that time he also arranged for Howell to
establish the same Nassau post-office box as NorthStar's legal home.
Identified in Nassau as a member of one of Scotland's oldest publishing
families, Thomson has operated out of one or more office buildings in
the heart of Nassau for many years. Like most of those in the shadowy
world of offshore deals, he has generally kept a low profile, the
scandal over Evergreen Security being the one great exception. Thomson
incorporated NorthStar for Howell in the Bahamas in January of 1998, as
what is known as an "international business company," or I.B.C. Despite
their impressive name, I.B.C.'s are little more than paper operations.
As a rule, they don't carry on any business; they are empty vessels
that can be used for anything. They have no real chief executive
officer or board of directors, and they don't publish financial
statements. An I.B.C.'s books, if there are any, can be kept anywhere
in the world, but no one can inspect them. I.B.C.'s aren't required to
file annual reports or disclose the identity of their owners. They're
shells, operating in total secrecy. In the last two decades, they have
sprouted by the hundreds of thousands in tax havens worldwide.

In a telephone interview, Thomson discussed with great reluctance his
role in creating NorthStar for Thomas Howell. How did they meet?

"I believe I was introduced to him through a friend with Citibank,"
Thomson replied. "I believe Howell used to work for Citibank." He said
it was his recollection that Howell initially established NorthStar
because of some consulting work he was doing in the Far East, not the
Middle East. "This was before the Iraq war started," he noted. "All we
did was supply a company name." Thomson said he had had no contact with
Howell in years. He had heard that Howell was in Iraq, but declined to
discuss the matter further. Turning Off the Spigot

By the spring of 2004 the clock was winding down for L. Paul Bremer and
the C.P.A. Within several months—on June 30—the Authority was scheduled
to turn government operations over to the Iraqis, at least formally.
There was palpable anxiety among officials and contractors about what
would happen under the new Iraqi regime, and they launched an
aggressive effort to get as much money into the pipeline as possible.
On April 26, another shipment of cash-laden pallets, this one holding
$750 million, arrived at Baghdad International Airport. On May 18 the
Fed made a $1 billion shipment, which was followed on June 22 by the
biggest single shipment ever made by the Fed anywhere—$2.4 billion.
Another $1.6 billion arrived three days later, bringing the total of
cash shipments to Iraq to $5 billion in the C.P.A.'s final three months.

The C.P.A. sought to make one more huge withdrawal. On Monday, June 28,
as Bremer stole away from Baghdad unannounced—two days ahead of the
scheduled handover of authority—another C.P.A. official put in hurried
pleas to the Federal Reserve Bank for an additional $1 billion
infusion, hoping to get the money before an Iraqi provisional
government came to power. Internal e-mails from the Federal Reserve
Bank show that the requests for money came from Don Davis, an air-force
colonel serving as the C.P.A. comptroller and manager of the
Development Fund for Iraq. But the Fed would have no part of the plan.
Because Bremer had already "transferred authority (which is being
reported in the press as 10:26 a.m. in Baghdad)," a Fed official
explained, "the C.P.A. no longer had control over Iraq's assets."

In one of his last official acts before leaving Baghdad, Bremer issued
an order—prepared by the Pentagon, he says—declaring that all
coalition-force members "shall be immune from any form of arrest or
detention other than by persons acting on behalf of their Sending
States." Contractors also got the same get-out-of-jail-free card.
According to Bremer's order, "contractors shall be immune from Iraqi
legal process with respect to acts performed by them pursuant to the
terms and conditions of a Contract or any sub-contract thereto." The
Iraqi people, who had had no say over Saddam Hussein's illegal conduct
during his dictatorship, would have no say over illegal conduct by
Americans in their new democracy.

And the "Sending State" itself is not interested in pursuing
misconduct. With the exception of a few low-level individuals, the Bush
administration's Justice Department has resolutely avoided the
prosecution of corporate fraud stemming from the occupation of Iraq.

"In our fifth year in the war in Iraq," according to Alan Grayson, the
attorney for whistle-blowers, "the Bush administration has not
litigated a single case against any war profiteer under the False
Claims Act." This at a time, Grayson told a congressional committee,
when "billions of dollars are missing and many billions more wasted."
Grayson knows what he is talking about. He represented the
whistle-blowers in the Custer Battles case brought under the False
Claims Act—a case in which the Justice Department refused to get
involved, and the only one that has gone to trial.

There is no true method of calculating the human cost of the war in
Iraq. The monetary cost, grossly inflated by theft and corruption, is
another matter. One simple piece of data puts this into perspective: to
date, America has spent twice as much in inflation-adjusted dollars to
rebuild Iraq as it did to rebuild Japan—an industrialized country three
times Iraq's size, two of whose cities had been incinerated by atomic
bombs. Understanding how and why this happened will take many years—if
understanding comes at all. There has been no rush to explain even this
one small part of the story, that of the missing Iraqi billions. No one
in the U.S. government wants to talk about NorthStar Consultants, much
less about the money that disappeared. Bradford R. Higgins was the
C.P.A.'s chief financial officer, on loan from the State Department,
where he is assistant secretary for resource management and chief
financial officer. Higgins says it was "a Department of Defense–managed
operation"; he says that "I don't know anyone at NorthStar" and that he
did not oversee its operations. The C.P.A.'s comptroller and D.F.I.
fund manager during the NorthStar days in 2003 was air-force colonel
Don Davis. Through the air-force public-affairs office in the Pentagon,
Davis declined to comment. L. Paul Bremer III, who wrote a 400-page
book on his experiences as the C.P.A.'s administrator, stated in an
interview that he had no input in the decision to hire NorthStar. He
explained that "all of the contracting was done, by order of the
secretary of defense, by the department of the army. They were our
contracting arm … I don't think I ever heard of NorthStar until some
questions came up after I left." Nor did he have any dealings with
NorthStar's Howell, he said. "If I met him, I have no memory of it."
Queries sent repeatedly to the army's public-affairs desk in Baghdad
and the Pentagon have gone unanswered, as have those to the office of
the secretary of defense.

The simple truth about the missing money is the same one that applies
to so much else about the American occupation of Iraq. The U.S.
government never did care about accounting for those Iraqi billions and
it doesn't care now. It cares only about ensuring that an accounting
does not occur.

[Donald L. Barlett and James B. Steele are Vanity Fair contributing
editors.]

                           ***

Vanity Fair - Sep 5, 2007
http://www.vanityfair.com/politics/features/2007/10/iraq_qanda200710?printable=true&currentPage=all

Q&A

The Booty Vanishes

Donald L. Barlett and James B. Steele talk about "Billions over
Baghdad," their October article about the $9 billion in Coalition
Provisional Authority funds that disappeared, unaccounted for, after
being shipped to Iraq in 2003 and 2004.

Interview by Claire Howorth 
WEB EXCLUSIVE September 5, 2007

In April 2003, the hastily created, American-led Coalition Provisional
Authority in Iraq began distributing planeloads of cash—$12 billion by
June 2004. To date, $9 billion is unaccounted for. In the October V.F.,
Donald L. Barlett and James B. Steele uncover evidence of a feeding
frenzy that emptied the safe in Baghdad as the Pentagon shrugged. Here,
the crack investigative duo give VF.com the scoop on their scoop,
discussing how they got on the trail, how they followed it, and what
the fiasco's larger implications are. Says Barlett, "This is a story
about money, but it's really a story about the war."

VF.com: What led you to this story?

James B. Steele: It just kind of ballooned in the news in the first of
the year. There was one hearing, and there were a couple of images of
the pallets of cash, but that was it. It just fell off the screen. So
we all talked about this and thought, Jeez, wonder if this would be
worth looking at. We were very intrigued.

Donald L. Barlett: It was really how fast the story disappeared. Some
stories pick up a life of their own—this one didn't, for whatever
reason.

Steele: A number of times people would say, "What are you working on?"
And we'd tell people, "Well, you remember the story about all the cash
that went to Iraq?" "Yeah, yeah." "Well, we're looking to see what
happened to it." And everybody remembered the images of the money, but
that's all they knew. We love to look at things below the radar screen
and bore in and see exactly what happened, especially if the news media
hasn't followed up on it. Or in this case, Congress didn't
significantly follow up on it.

With this story in particular, you found that almost nobody was willing
to talk to you. Why do you think that was the case this time?

Barlett: Well, [L. Paul] Bremer [head of the C.P.A.] did finally talk
to us a couple days ago. But he didn't know anything. Which really
tells you something. The responses were cagey. Look, if I'm in charge
of billions of dollars and it just disappears, I'm not gonna talk
either. What's to be said?

Steele: You can speculate a million years about why this is going on,
but they've obviously got a hell of a problem on their hands. All this
money came in, they didn't track it, they have no idea where it went,
they would just like to pretend the problem isn't there—one of the main
reasons nobody wants to talk. A lot of people talked about how Bremer
was a micro-manager and an absolute disaster, and that that was part of
the problem they had from day one. But that has nothing to do with what
this story ultimately became, other than the fact that it's ironic he's
micro-managing all this stuff, but not watching $12 billion in money.

Did you ever hit a wall and think the story wasn't going to work? Or
did it take any turns you didn't expect? Sounds like you kept unfolding
one thing into another.

Barlett: That's basically the way we work at it. Sometimes it takes a
little longer than other times. You just keep unraveling. This was
clearly going to be a story from day one.

Steele: If the Pentagon had not come through with [the NorthStar]
contract, there might've been a complication, but when it finally
arrived, and we did some initial checks on NorthStar, we knew then that
we had something. We didn't know what it was, but our instincts right
away told us that this one was going to be good. Particularly since
their mailing address was in the Bahamas.

Did you just plug that address into Google?

Barlett: Well, we don't like to talk about the secret methods of our
investigations [laughter]. Our high-tech methods. That's the kind of
thing that just destroys all the mystique.

Steele: One of the things that just absolutely amazed us when we got
the contract for NorthStar Consultants was that they blacked out all
kinds of pertinent data—part of the phone number, the name of the
officer who signed the contract, whatever his operating address was—but
they left on the contract this post-office box in Nassau, which turns
out to be a focal point of an awful lot of offshore tax activity. Was
this ineptitude? It just boggles the mind why they just did not redact
that. But they didn't. And that was key toward unraveling an awful lot
of the story.

Barlett: As it turned out, the post-office box—during the same period
it was set up for the company that ultimately was supposed to track
money in Iraq—was also used for one of the largest stock swindles in
history. Over $200 million disappeared. And this is at the same time
the company was being set up that would eventually get the Iraqi
contract.

Steele: When we first got the contract, the last four digits of
[NorthStar's] phone number were redacted, so when you plugged in the
area code and the first three digits, you could figure out that this
was somewhere in north San Diego or the La Jolla area. It occurred to
us to do the same thing with the post-office box. The fact that
anything at all turned up just amazed us. We try so many things just to
see what's there, and that's just part of the process. And lo and
behold, there were several hits on that post-office box, and one of
them showed up this company, Lions Gate Management, which was [run by]
this fellow Patrick Thomson, who, we found out later, actually set
NorthStar up for [Thomas] Howell, the guy who actually ran NorthStar.
Or "had" NorthStar would be a better term—it's not much of a company.

The two of you have been an investigative team for a long time now. How
have the Internet and other technologies helped you to investigate
stories like this?

Steele: The post-office box is the best example. Technically you could
find that, but in reality you couldn't, because how would you know to
look at a court case somewhere that would show that post-office box?
The Internet was tremendously powerful and influential in helping us
get to the heart of this thing. In the case of the post-office box,
there was probably no other way to get it.

Barlett: There's a flip side to this. In this case the Internet was
helpful, but you can also see and envision cases in which the Internet
won't do you any good. There's a growing tendency to destroy court
files. Under the old system, the record of a case was entered in
ledgers, and it was basically impossible to destroy any evidence that
the case existed. That's not true with the Internet. Now, with the
flick of a switch, a case can disappear—and it does. So it cuts both
ways.

As you worked on this story, did you ever feel like you were
endangering yourselves?

Barlett: No [laughter].

Steele: No [laughter].

Barlett: That's only in the movies.

I always wonder if somebody calls and says, "You better back off."

Steele: No, no—we're still waiting for that. It hasn't happened yet.
The thing here is, nobody wants to talk about it in any way. And it
does raise the question: Is there something beyond the waste, the
fraud, and the basic corruption? Was some of this money used for
purposes we can't even imagine? You just don't know. Because of the
unique nature of the Coalition Provisional Authority, which wasn't an
entity of the United States government and wasn't an entity of the
United Nations, it was not subject to the normal auditing and budgetary
constraints of a lot of our defense programs. There was even less
oversight with them than in the usual process, and that's why the fraud
was so rampant, and the corruption, and so forth. Add to that the chaos
in Baghdad and Iraq that first year. Oh gosh, that must seem like the
good ol' days now. The other thing that struck us is that nobody in any
kind of official capacity seems to be upset by this. And that's amazed
us as much as anything.

It seems like they must have been willingly not watching the money.

Steele: Yes.

Barlett: You noticed! The question is, where did it go? Did they put
someone in charge of the money who they knew would not look at it too
closely? Or did they put someone in charge of the money who channeled
it into certain areas that the government doesn't want you to know
about?

Steele: Everybody we talked to who was over there didn't think any of
the money that was actually turned over to the Iraqis got to people. Or
I shouldn't say any, but very little. The whole reason for that money
was to pay pensions, and civil servants, but you talk to people who
were over there and you're under the impression that most of the Iraqis
who were in those ministries were solely taking care of themselves
because it was so chaotic, and all order had broken down. And none of
them had ever run an agency before, because Saddam's boys had been
Ba'ath party members in administrative positions. So the sense of chaos
… I guess that's the thing that struck us both. We all knew it was very
chaotic over there, but when you actually talk to people who were there
at that time, you realize this thing was absolutely doomed from the
beginning. Nobody was in control. And the money was one illustration of
that.

Barlett: It is a metaphor for the whole war. This is a story about
money, but it's really a story about the war.

Is there anything larger we should take away from this story?

Barlett: The great unanswered question is where did this money go. And
the cavalier attitude of the C.P.A. people just raises too many
questions. The response of so many of them was, Well, this is wartime,
and this is what happens in war. And my response to that is, It does
not happen in war. You don't lose that kind of money.

How did you decide who got to go to the Bahamas?

Barlett: Well, Jim always gets those trips! He's a snorkeler.

Steele: Yeah. Also, I can speak British English.

Barlett: He speaks British English very well. But to be perfectly fair,
on the other side of the coin, he also gets all of the far-north Alaska
trips in February too.

Can you say what you're working on next?

Barlett: Of course not. We'd have to kill you!

[Claire Howorth is an executive assistant to the editor of Vanity Fair.]