The Development Fund for Iraq: U.S. Management of Iraq Oil Proceeds and Compliance with U.N. Security Council Resolution 1483

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 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 23–689 PDF 2005 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 COMMITTEE ON GOVERNMENT REFORM TOM DAVIS, Virginia, Chairman CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California DAN BURTON, Indiana TOM LANTOS, California ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. MCHUGH, New York EDOLPHUS TOWNS, New York JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland STEVEN C. LATOURETTE, Ohio DENNIS J. KUCINICH, Ohio TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois CHRIS CANNON, Utah WM. LACY CLAY, Missouri JOHN J. DUNCAN, JR., Tennessee DIANE E. WATSON, California CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland DARRELL E. ISSA, California LINDA T. SANCHEZ, California GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland JON C. PORTER, Nevada BRIAN HIGGINS, New York KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of LYNN A. WESTMORELAND, Georgia Columbia PATRICK T. MCHENRY, North Carolina CHARLES W. DENT, Pennsylvania VIRGINIA FOXX, North Carolina ——— 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 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 CHRISTOPHER SHAYS, Connecticut, Chairman 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 (II) VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 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, Direc- torate 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 Dep- uty Secretary of Defense for Resource Planning and Management, De- partment of Defense ..................................................................................... 85 Benkert, Joseph A. .................................................................................... 111 Bowen, Stuart W., Jr. ............................................................................... 85 DuBose, Colonel Emmett .......................................................................... 101 Norquist, David ......................................................................................... 11 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 Engi- neers, 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 Plan- ning 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 (III) VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 IV Page 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 THE DEVELOPMENT FUND FOR IRAQ: U.S. MANAGEMENT OF IRAQ OIL PROCEEDS AND COMPLIANCE WITH U.N. SECURITY COUN- CIL 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, sen- ior 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 ad- visor; 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 Na- tional Security, Emerging Threats, and International Relations hearing entitled, ‘‘The Development Fund for Iraq: U.S. Manage- ment 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 De- velopment 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 govern- ment, and a savage insurgency. Nevertheless, the International Co- alition willingly took on the U.N. Security Council mandate to ad- minister the fund ‘‘in a transparent manner for the economic recon- struction and repair of Iraq’s infrastructure and for other purposes benefiting the people of Iraq.’’ This hearing builds on the Government Reform Committee’s as- sessment of Iraq reconstruction contracting and financial manage- (1) VerDate 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 2 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 man- agement 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 ‘‘over- charge’’ 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 Coali- tion Provisional Authority [CPA], for a failure to implement con- sistent oversight and adequate controls over those expenditures. But, as the Inspector General will testify, it is a misunderstand- ing 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 re- gretfully, 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 expan- sive view of what constitutes ‘‘proprietary information’’ that must be shielded from view. After repeated requests to DOD and lengthy delays getting a re- sponse, the IAMB was justifiably dissatisfied with redacted DCAA audit reports that hid almost every meaningful number or ref- VerDate 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 3 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 suf- focating 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 lib- erators is this: the progress belongs to the people of Iraq. The mis- takes 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 ap- preciate their time and expertise, and we look forward to their tes- timony. 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 4 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 5 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 6 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 7 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 docu- mented 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, pay- ments of over $242 million; 10 cases where payments were author- ized 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 scrutiniz- ing every record and meeting related to the United Nations’ stew- ardship 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 per- haps at a future hearing we could get his presence. So it is left to this subcommittee and the Special Inspector Gen- eral 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 Coali- VerDate 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 8 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 pro- vided 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 suffi- cient 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 over- sight 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 dis- bursements 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 account- ing could not be put into place because this is a wartime environ- ment. I see this as nothing more than a self-serving excuse that we would never tolerate if it came from a multilateral agency, for in- stance. The sanctimony animating criticism of the U.N. Oil-for- Food Program and threats of withholding U.N. dues is noteworthy here. Here we have a matter that is within the sole control of Con- gress: 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 9 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 10 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 pro- grams is incredibly important. It certainly is concerning in reading the staff report concerning the level of cooperation that this com- mittee has received. The process of oversight is important so that we can make cer- tain 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 im- portant, 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 oper- ations 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. mismanage- ment 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 ques- tions 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 Oil- for-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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 11 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 Pro- gram, 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 subpoe- naed 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 12 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 13 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 14 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 15 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 16 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 17 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 18 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 19 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 20 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 21 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 22 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 23 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 24 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 25 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 26 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 27 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 28 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 29 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 30 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 31 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 32 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 33 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 34 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 35 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 36 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 37 Mr. WAXMAN. Thank you, Mr. Chairman. What we found was an appalling level of incompetence, mis- management, waste, fraud, and greed. As we will hear today from the Special Inspector General for Iraq Reconstruction, literally bil- lions of dollars of Iraqi assets taken from the DFI cannot be ac- counted 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 un- imaginable 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, weigh- ing 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 exten- sive 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 sin- gle recipient of DFI funds was Halliburton, the company vastly overcharged to import gasoline into Iraq and to provide other oil- related services. These overcharges, which exceed $200 million, were billed to the U.S. Corps of Engineers, but U.S. officials ar- ranged 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 38 Over $600 million in Iraqi funds were given to military com- manders and other U.S. officials to fund local reconstruction projects, yet here’s what a partial audit of $120 million in expendi- tures disclosed: more than 80 percent of funds could not be prop- erly 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 ac- count 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 39 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 40 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 41 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 42 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 43 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 44 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 45 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 46 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 47 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 48 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 49 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 50 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 51 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 52 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 53 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 54 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 55 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 56 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 57 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 58 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 59 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 60 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 61 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 62 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 63 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 64 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 65 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 66 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 67 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 68 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 69 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 70 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 71 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 72 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 73 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 Govern- ment Reform Committee’s assessment of Iraq reconstruction con- tracting 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 fi- duciary 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 state- ment. 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 reconstruc- tion 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 over- seas 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 gov- ernment 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 impor- tance 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 in- herent 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 74 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 75 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 76 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 De- partment 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 won- dered 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 coopera- tion. 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 over- charges, much like a doctor submitting a request to the insurance company and the insurance company says, ‘‘No, there are over- charges. 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 particu- lar, 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 trans- parent manner. In violation of this requirement, however, the De- fense Department tried to conceal over $200 million in Halliburton overcharges from the United Nations auditors. These vast over- charges were billed by Halliburton to the Army Corps of Engineers, but the Defense Department officials decided that over $170 mil- lion 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 Halli- burton. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 77 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 re- daction requested by Halliburton was accepted by the Defense De- partment. In effect, U.S. officials inverted the proper roles of gov- ernment and contractor, giving Halliburton unprecedented author- ity 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 dis- closed any information about the overcharges without Halliburton’s permission. There was absolutely no legal justification for these ac- tions. 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 bipar- tisan basis to obtain the documents that would explain why the De- partment concealed the overcharges from the U.N. auditors in vio- lation 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 re- sult, you then sent a second letter on May 23, and I want this let- ter also to be made part of the hearing record. In addition to these written requests, our staffs have made re- peated 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 re- questing 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 docu- ments. 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 Con- gress 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 Rums- feld to produce the documents specified in the subpoena. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 78 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 ver- bally. 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 ef- fort 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 com- mittee, and would just say to the gentleman that it takes 11 mem- bers 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 sub- poena if we do not get the information. On that basis, I will with- draw 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 par- liamentary procedure. Mr. SHAYS. Let me just say that Mr. Davis has been extraor- dinarily 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 advo- cate 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 oppor- tunity 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 79 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 con- sent 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 80 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 81 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00085 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 82 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 83 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 84 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 participa- tion 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 bil- lion 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 objec- tion, so ordered. At this time the Chair would recognize our first panel: Mr. Stu- art W. Bowen, Jr., Special Inspector General for Iraq Reconstruc- tion, 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 Plan- ning 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 af- firmative. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 85 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 an- other 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 testi- mony 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 COM- MANDER, 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 SUP- PORT OFFICE, OFFICE OF SECRETARY OF DEFENSE; AND DAVID NORQUIST, UNDER DEPUTY SECRETARY OF DEFENSE FOR RESOURCE PLANNING AND MANAGEMENT, DEPART- MENT 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 In- spector General for Iraq Reconstruction. Thank you for allowing me to address your subcommittee about the U.S. role in Iraq’s recon- struction and to testify about my organization’s involvement in au- diting the development fund for Iraq. This is my first appearance before the Congress since I was ap- pointed 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 redesig- nated 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 Recon- struction 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 operat- ing 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 86 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 com- pleted 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 com- prised of Iraqi oil revenues, primarily, as well as other assets accu- mulated for the rebuilding and operation of Iraq. Four of our pub- lished 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 re- viewed the CPA’s oversight of DFI funds provided to ministries of the Iraqi interim government through the national budgeting proc- ess. 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-ade- quate controls over DFI funds provided to Iraqi ministries through the national budget process; two, the CPA failed to establish or im- plement 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 contrac- tual—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 philos- ophy 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 south- central 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 87 We also completed an audit on the management of the $2.8 bil- lion 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 imple- mented. Let me conclude by saying that, having completed my eighth trip, I am encouraged by the receptivity of the current Iraq recon- struction 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 recon- struction management as one of gradual improvement. We will con- tinue 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 88 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 89 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00093 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 90 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 91 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 92 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 93 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00097 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 94 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00098 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 95 Mr. SHAYS. Thank you. Mr. Reed, before you begin I just want to acknowledge the pres- ence 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 De- fense 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 be- tween DFI-funded contracts and contracts funded from Defense De- partment appropriations. In this capacity, we have performed au- dits 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, in- terim reviews of contract payment, and adequacy of internal con- trols 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 re- solved or are being actively worked by contractors. The most sig- nificant audit findings by DCAA have occurred on the Halliburton- Kellogg, 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, sub- ject to their subsequent submission of detailed proposals for pur- poses of negotiating specific task order prices. DCAA found that most of the KBR task order proposals ulti- mately submitted for this purpose were inadequate to negotiate a fair and reasonable price due to estimating and accounting defi- ciencies. 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 pre- pare 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 sup- port USACE negotiation of specific prices. This process is some- times referred to as price definitization. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00099 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 96 Three of the task orders have been definitized. During a review, the remaining seven task orders, valued at $2.4 billion, we ques- tioned costs totaling $205.2 million. Of the $205.2 million ques- tioned, $171 million relates to questioned fuel cost. DCAA ques- tioned $139 million due to KBR’s failure to support the reasonable- ness of prices paid for fuel and transportation from a Kuwaiti sup- plier. 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 nego- tiation 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 en- sure integrity and regulatory compliance in Iraq reconstruction contracting. We work closely with all U.S. procurement and con- tract 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 carry- ing out its responsibilities. I look forward to addressing whatever questions you may have for me. Thank you. [The prepared statement of Mr. Reed follows:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 97 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 98 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 99 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 100 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00104 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 101 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 Southwest- ern 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 com- mander 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 con- tract which was physically completed last year. The KBR RIO contract consists of 10 task orders, and the fund- ing 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 haz- ardous 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 informa- tion and the contractor’s proposals to establish the government’s position, from which the contracting officer will negotiate final pay- ment and determine the award fee. In the meantime, the govern- ment is currently withholding approximately $68 million in pay- ments 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 Ti- gris 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 mate- rials, and technical services which were required by the oil min- VerDate 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 102 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 com- plete the audit by July, after which the contracting officer will de- finitize 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 wheth- er KBR actually incurred any of these costs; rather, DCAA auditors have questioned primarily whether KBR may have been able to ob- tain some services at a lower price than which KBR has acquired them. These questioned costs will ultimately be resolved by the con- tracting 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00106 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 103 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00107 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 104 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00108 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 105 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00109 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 106 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 107 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00111 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 108 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00112 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 109 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00113 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 110 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00114 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 111 Mr. SHAYS. Thank you. Mr. Benkert, it is my understanding that you do not have a pre- pared 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 Dep- uty Director of the Defense Reconstruction Support Office in the Office of the Secretary of Defense. Relevant to this hearing, our of- fice, as the successor office to the CPA’s Washington office, pro- vided, 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 man- agement 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 state- ment; 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 con- sulted 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 pres- sure 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00115 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 112 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 state- ment because they told me last night you would not have a state- ment; it was a surprise yesterday that you did not have a state- ment. 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 re- questing that Ms. Tina Jonas, Under Secretary of Defense, Comp- troller, and Chief Financial Officer, appear, and Mr. Howard Burris, Director of Defense Support Office [DSO], Iraq and Afghan- istan, 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 en- couraging you to write a statement and have it approved and, frankly, I think it just adds to our lack of confidence and our feel- ing 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 pro- viding redacted DCAA audits to the IAMB, the U.N. Mr. NORQUIST. Yes, sir. The IAMB requested copies of audit re- ports 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 re- quest to provide the audit reports of sole source DFI-funded con- tracts 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 ad- vised that USACE could not release confidential commercial infor- mation 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 propri- etary 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 au- dits, we sought a method to provide as much information to the IAMB as possible. Accordingly, we requested that KBR review the VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00116 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 113 DFI-funded task orders and the audit reports and redact informa- tion 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 associ- ated 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 deter- mine what is happening with these dollars with so much redaction, Mr. Norquist? Mr. NORQUIST. Sir, it was our intent to see that the IAMB re- ceived 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 pos- sible 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 involve- ment with the IAMB, which ended about October. But the effort here, sir, was to take it as far as we could to pro- vide 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 an- swer 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 commis- sion 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 spe- cific 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 proprietary information, in any case would have practical difficul- VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00117 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 114 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 au- dits and any other government information. So we agreed to a statement of work with the IAMB. We re- ported this information to the International Advisory and Monitor- ing Board at the same meeting of the International Advisory and Monitoring Board where Mr. Norquist delivered the redacted au- dits, so that the IAMB knew that we were taking actions to com- mission 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 min- utes 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 al- lowing me to go first, and thank you, Mr. Chairman, for recogniz- ing me. Mr. Bowen, I want to thank you also for testifying today. Con- gress 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 re- sponsibly, 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 near- ly $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 mech- anisms to ensure that it was used for intended purposes, but you found just the opposite. You found ‘‘physical security was inad- equate. The CPA did not establish or implement sufficient manage- rial, financial, and contractual controls.’’ You found that DFI funds were susceptible to waste, fraud, and abuse. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00118 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 115 As a result, you also concluded that the CPA violated the Secu- rity 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 exam- ple, 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 comp- troller’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 be- cause of the issues you have alluded to, and that is the cash envi- ronment that we were operating in raised natural concerns. There were issues connected with management of the safe, secur- ing 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 be- cause, frankly, the environment has not changed that much with respect to cash. It is still a cash economy. It is still a cash oper- ation 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 tight- en the ship on that issue. Mr. WAXMAN. Before that they had cash in safes and lots of dif- ferent people had access to it? Is that the—— Mr. BOWEN. That is correct. Mr. WAXMAN. OK. You also found that CPA did not have ade- quate accounting procedures for this cash once it was in their pos- session. 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 cer- tified public accounting agency to provide an internal audit func- tion. A company called Northstar was hired to meet that require- ment. Their mission changed after their hiring. The comptroller at the time sought to use them more to help him manage the account- ing 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 sure these funds were spent properly. This sounds to me like a per- VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 116 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 em- ployees? 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 Au- thority. That included perhaps their most significant program, management of the DFI, which was underscored by the core pur- pose of standing up a new Iraqi government and helping it func- tion. That required the funds, namely the DFI, to make that hap- pen. We looked at how the CPA structured itself to accomplish that goal, and in looking at that we—in interviewing nine senior advi- sors 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 be- cause 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 de- cided 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 divi- sion’s vaults, and Defense Department audits have identified hun- dreds 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 govern- ment 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 environ- ment, 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00120 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 117 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 inter- views, 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 mak- ing certain that, both on the issue of terrorism and in the issue of Iraq, that we have appropriate information and appropriate sup- port 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 over- sight. I have some questions about the issues of the redaction of infor- mation 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 great- ly. 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 in- formation 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 in- formation, 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 Con- gress. Expressly it says that information can be provided to Con- gress, meaning that the contractor would have no ability for re- stricting 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 reg- VerDate 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 118 ulatory process, because if we accept that we are going to go into a process where we require transparency and our international rep- utation is on the line, it would seem to me that we would enter that process from the beginning making certain that we have cho- sen 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 trans- parency 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 ad- vice that they were given on what was permissible. But at the dif- ferent 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 ex- tent 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 informa- tion 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 pur- pose rather than the U.S. Government. I do not know whether a procedure like that could have been ap- plied 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 get- ting 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00122 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 119 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00123 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 120 Mr. TURNER. Mr. Norquist, the very first question that the chair- man asked you, you were reading from materials that had been co- ordinated with the colonel. I am assuming that, although you do not have a prepared statement for us, that you do have some writ- ten 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 an- ticipated 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00124 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 121 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00125 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 122 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 in- cluded 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 Repub- lican 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 bil- lion, 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 dis- tribution points, or were bundles of money given to other individ- uals 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, finan- cial, 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—— VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00126 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 123 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 re- sponsible 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 spe- cifically, 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 de- termination? 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 commit- tee 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 infor- mation for you. Mr. KUCINICH. Thank you. I appreciate that. Now let me switch to Colonel DuBose. Colonel, this whole subcommittee meeting is about what hap- pened 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 tes- timony, from the DFI account at the Federal Reserve, how much money has actually gotten down to rebuilding water systems, elec- tricity systems, which is the whole purpose of this whole program? VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00127 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 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 informa- tion 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 com- pleted? 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 re- ceived? 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 an- swer. 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 par- ticular? 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 re- port and I have a team of auditors, technical engineers, and inves- tigators 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00128 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 125 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 con- tract 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 ask- ing you to answer any questions about it, but if you have that sum- mary 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00129 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 126 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 127 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00131 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 128 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00132 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 129 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00133 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 130 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 an- swers 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 qual- ification 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 great- ly that we from the very beginning did not set up the proper sys- tem 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 pro- ceeds. That is $20 billion right there; $20 billion is a lot of money. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00134 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 131 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 regula- tions is the CPA shall obtain the services of an independent cer- tified public accounting firm to ensure transparency and compli- ance with Resolution 1483. Now let me ask you this question. Did the CPA ever hire a cer- tified 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 as- sist 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 cer- tified 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 cer- tified 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 head- quarters 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 con- sult 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 mis- sion that the CPA order required. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00135 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 132 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 support- ing 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 unaccount- able, it is just unacceptable, and that we have to do better. Now, one of the things an investigation—when you conduct in- vestigations, you follow the money. Mr. BOWEN. Yes, that is right. Mr. RUPPERSBERGER. From your perspective, let’s talk about fol- lowing 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 dol- lars, amounting to roughly $21 billion. The former, the $19 billion, was used to fund the stand-up of the Iraqi government and to initi- ate 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 de- termine 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 govern- ment 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00136 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 133 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 pursu- ing it. On our side we are focused on appropriated dollars. We are look- ing 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 fol- lows:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00137 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 134 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00138 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 135 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00139 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 136 Mr. RUPPERSBERGER. I think it is important that we get that in- formation 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00140 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 137 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00141 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 138 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00142 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 139 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00143 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 140 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00144 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 141 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00145 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 142 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00146 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 143 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00147 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 144 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00148 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 145 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00149 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 146 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00150 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 147 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00151 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 148 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00152 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 149 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00153 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 150 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00154 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 151 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00155 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 152 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 com- pared 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 peo- ple, 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 re- sponse program, and the other was the R3P, the rapid reconstruc- tion 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 lev- els 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? VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00156 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 153 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 mil- lion 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 bring- ing 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 dis- trict? 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 cal- culation 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00157 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 154 Mrs. MALONEY. It is an important position, and you have done a great service to the American taxpayers. I, for one, deeply appre- ciate it. I’d like to ask Mr. Reed, is DCAA looking into any of these com- mander’s emergency funds and how they were spent? Are you in- vestigating 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 inves- tigating 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 con- tracts 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 investigat- ing 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 orga- nization 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 ongo- ing or will be done of the commander’s emergency response pro- gram. 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 agen- cies and inspectors general operating in Iraq in auditing aspects of Iraq reconstruction who have so far produced over 1,500 audit re- ports, many of those from DCAA. So there is a very extensive audit program that is going on as part of the management of Iraq recon- struction. 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 sec- ond 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 con- fused 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00158 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 155 Mr. SHAYS. Could you provide that information back to the com- mittee? 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 Presi- dent 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 run- ning, 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 im- proves 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 proce- dures. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00159 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 156 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 dis- bursements 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 con- tracts 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 identi- fied 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 con- tractors, 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 proce- dures, 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 process- ing, 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 turn- over and unique situations that simply do not compare domesti- cally. 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 total- ing $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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00160 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 157 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 miss- ing oil was reported by an audit that KPMG did on behalf of the IAMB that covered this period after the U.S. transferred sov- ereignty 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 Min- istry of Oil and the financial records associated with the Develop- ment 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 depos- ited 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 Mem- bers 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 sup- port, 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 wheth- er 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 war- rant 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 re- cently had a situation where a Halliburton procurement manager, Jeff Maison, and a general manager of the Halliburton subcontrac- tor, 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 re- payment. 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00161 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 158 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 in- volved 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 envi- ronment and so yes, we are looking at other contracts. As far as this particular investigation, I have to presume, be- cause 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 res- toration 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 re- ports, and additional advice letters from DCAA on these task or- ders. We received the reports, themselves; however, the Defense De- partment 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 propri- etary business information all the figures on questions and unsup- ported 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 pro- tected 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00162 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 159 Root and Halliburton, what is the legal justification for withholding the information from Congress? Colonel DUBOSE. Sir, it is not the Corps’ assertion that informa- tion 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 re- sponded 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 liai- son 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 Con- gress regarding money that was misspent, misallocated? Are there safeguards that you would recommend either to help the trans- parency 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 re- ports 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 bil- lion in $100 bills. Mr. Bowen, is that essentially correct? VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00163 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 160 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, ac- cording 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 Coali- tion 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 spe- cific number, but we have—the data base I referred to earlier is de- veloped 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 se- rial numbers on them, correct, Mr. Bowen? Mr. BOWEN. That is correct. Mr. KUCINICH. Is any effort being made to follow the money, lit- erally, 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 investiga- tors 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 be- longings. But you are asking a really big question about a billion- dollar question so to speak, and—— Mr. KUCINICH. Actually, it is a $10.7 billion question. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00164 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 161 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 com- mittee with the serial numbers that came through Federal Re- serve—I take it these were new $100 bills—to provide this commit- tee with the information with respect to any list on which those se- rial 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 govern- ment 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 con- tracting 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 Integ- rity Commission within the Iraqi government, the Board of Su- preme Audit, and the IGs all have audits and investigations con- nected 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 expropri- ated 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 ef- fect, 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 track- ing 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00165 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 162 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 cur- rency 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 govern- ment on June 28, 2004. In the weeks before the transition, CPA officials ordered urgent disbursements. Fortunately, we have the record of the Federal Re- serve, 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 sys- tem at the Federal Reserve in which we can account specifically for every dollar spent, and then it goes to Iraq and it basically dis- appears 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 hear- ing 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 re- quested an additional shipment. In a June 15, 2004, e-mail a CPA official wrote, ‘‘The new date is 22 June departure, with arrival, de- livery 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 deliv- ery. ‘‘I checked the dates with Colonel Davis, and yes they want de- livery 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 gen- tleman has requested that we put in e-mails from the Federal Re- serve into the record, and without objection, so ordered. [The information referred to follows:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00166 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 163 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00167 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 164 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00168 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 165 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00169 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 166 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00170 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 167 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00171 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 168 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00172 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 169 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, Con- gressman, 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 ac- counts 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 depos- ited 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 ad- ministration all disbursements from the DFI were properly author- ized 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 dis- bursed 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 govern- ment employees were paid. We know for a fact that the government workers were paid. Government ministries operated. We know that VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00173 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 170 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 govern- ment. 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 some- one 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 de- tails 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 ac- cordance with their published budgets. Mr. SHAYS. But this is not an electronic transfer. These are actu- ally cash dollars—— Mr. BENKERT. That is correct. Mr. SHAYS. And the question I am asking is: did the Iraqi min- istry 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 prop- erly 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 Re- serve Bank to the Ministry of Finance and on to the Iraqi min- istries, the issue was the internal controls, the management con- VerDate 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 171 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, fi- nancial, and contractual controls. They were weak. They were inef- ficient. 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 talk- ing 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 dis- trict that funded continuing contracts. There was an agreement be- tween 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 man- agement 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 in- forming 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 en- couraged to spend cash quickly in the last days before the interim VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00175 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 172 Iraqi government took control of the funds. In the south-central re- gion 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 expendi- tures, 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 ar- gument 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, wheth- er 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 govern- ment. 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 re- ceived. 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 tax- payer, 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 pol- icy, 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 re- sponse? VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00176 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 173 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 sub- stantial transfers, I think primarily from the U.N. oil for food es- crow 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 be- fore 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? VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00177 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 174 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 rath- er 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 unsup- ported. I suspect that some of the unsupported will be supported and payments will be made, and I suspect that some of the ques- tioned, 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 offi- cer 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? VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00178 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 175 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 offi- cer 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 per- sonal 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 consid- ered in determining the award fee. Because this is a cost-plus, the profit is determined on how well they performed, and these meas- ures 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 de- cision? Colonel DUBOSE. Yes, sir. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00179 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 176 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 any- thing—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 internation- ally recognized accounting firm, has conducted three very extensive audits of all aspects of the DFI since its inception. Two of those au- dits 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 vis- its 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 specifi- cally 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 basi- cally 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00180 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 177 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 Hal- liburton case. That was well documented. And KPMG can say that everything is wonderful and honkey-dory and roses, but the Gov- ernment 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 look- ing 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 ex- tremely 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 every- thing is wonderful when we have our own Government auditor who is saying things are in a big mess, to say the least, and that mil- lions 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 pret- ty 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00181 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 178 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 cus- tody 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 Coali- tion Provisional Authority for the funds that were given to the De- velopment 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 stun- ning. 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 num- ber 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 Min- ister, 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, basi- cally. So if we installed them, there was a relationship between the VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00182 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 179 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 tremen- dously disturbing to me that the Defense Department basically hid Halliburton’s overcharges and, in my opinion, did it with a ration- ale 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 allow- ing 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 se- crets, processes, operations, style of work or apparatus, or to the identity, confidential statistical data, amount, or source of any in- come, profits, losses, or expenditures of any person, firm, partner- ship, 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00183 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 180 Now, when we made the determination on this particular point we were giving it to the IAMB, which works under the United Na- tions, 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 re- lease 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 Se- crets 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 pur- view 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 sub- committee 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 Gov- ernment has withheld as proprietary business information the ac- tual amount a company overcharged the Government.’’ Also testify- ing before this committee Harold Relyea of the Nonpartisan Con- gressional Research Service testified, it is hardly proprietary infor- mation. So Henry Waxman and I went to the private sector to look into their expertise on the Trade Secret Act and the Freedom of In- formation 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 over- charges would qualify as trade secrets or confidential commercial information.’’ Professor James O’Reilly, who wrote a document of Federal infor- mation 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, accord- ing 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00184 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 181 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00185 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 182 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00186 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 183 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00187 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 184 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00188 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 185 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00189 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 186 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00190 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 187 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00191 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 188 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00192 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 189 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00193 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 190 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00194 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 191 Mrs. MALONEY. And I would just like to ask you, do you think these renowned experts are wrong that overcharges for the Govern- ment 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 dis- cuss 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 De- cember 2003, discussing the $61 million in Halliburton over- charges, 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 mil- lion in overcharges, and then their decision to redact the over- charges 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. Wil- liam 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00195 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 192 in charge of investigation and anti-corruption within that govern- ment—and there are very, very substantial cases ongoing there— so yes, the accountability is being applied on that side of the ledg- er. At the same time, I have also told them that if they have infor- mation that comes up in the course of their investigations that in- volves 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 re- garding the lost money, the $7 million in lost money, did not in- volve 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 ex- perts 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 Engi- neers 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 be- forehand 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00196 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 193 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 Profes- sional Service Council [PSC]; and Mr. Richard Garfield, Dr. Rich- ard 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 re- sponded 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, be- cause 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, PROFES- SIONAL 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 appre- ciate 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 provid- ing 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 deci- sion 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 oper- ation—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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00197 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 194 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 enti- ties, and it has played a significant role in many of the issues sur- rounding the cost and availability of insurance, particularly under the Defense Base Act. It is also at the heart of some of the confu- sion, 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 utiliz- ing 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 dem- onstrated through our work with our member companies and our colleagues in GAO, the Inspector General for Iraq, the Defense De- partment, 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 non- traditional environment in which we have ever operated. This misalignment is evident in debates surrounding the fre- quency of full and open competition, the use of fixed price con- tracts, 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 al- lowing 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 con- tracting 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 deci- sion. 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 pos- sible, which brings me to where we need to go in the future. Over the last 2 years PSC has made a series of recommendations to the Defense Department and others that we believe remain es- VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00198 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 195 sential next steps. First, we have recommended that the Defense Department award a multiple award contract for all private secu- rity requirements in Iraq from which individual companies needing such services could procure them on a reimbursable basis. We be- lieve 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 se- curity 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 al- ready in place for the State Department and USAID. By way of comparison, basic Defense Base Act insurance, which is legally re- quired, 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 procure- ment 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 dis- agreements over what the rules do or do not allow or the guidance under which a respective work force is operating. In this environ- ment, 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 ac- counting 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 proc- esses 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 sig- nificant 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 per- VerDate 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 196 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00200 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 197 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00201 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 198 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00202 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 199 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00203 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 200 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00204 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 201 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00205 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 202 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00206 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 203 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00207 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 204 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00208 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 205 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00209 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 206 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00210 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 207 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00211 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 208 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00212 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 209 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 consult- ant 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 Colum- bia 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, par- ticularly I can only speak specifically about the health sector. Hav- ing 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 work- ing 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00213 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 210 Mr. GARFIELD. On the basis of my having worked there as a con- sultant to these U.N. organizations prior to the change in govern- ment. 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 reconstitut- ing 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 ac- counting 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 sud- denly 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 appar- ent to us that they did not know budgeting of health service activi- ties 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 gov- ernment 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 min- istry, 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00214 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 211 also had no experience at running health systems and had no de- grees 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 obser- vation is that funds tended to be used better, not that the account- ing 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 pro- vide 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00215 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 212 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00216 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 213 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00217 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 214 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00218 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 215 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00219 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 216 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00220 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 217 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00221 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 218 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 Orga- nization, 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 docu- ment 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 medi- cine supply chain, and you were saying that this corruption was ac- tually worse than under Saddam Hussein. Can you give more de- tails 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 lim- itation 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 larg- est 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 offi- cials were taking, and it appears to be up to about 10 percent of the value in that sector. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00222 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 219 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 devel- oping country, accounting for 60 to 70 percent of the value of im- ports, which is to say currency exchange, the CPA identified early on the central warehouse and regional warehouses as a major bot- tleneck 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 keep- ing 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 over- sight, whereas under the Saddam Hussein government there was excessive and parasitic oversight. We found many more of the publicly purchased medicines in pri- vate 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 au- thorities 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 sys- tem 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 com- ment, 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 be- cause 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 com- ing in for this. So, in fact, hospitals became better staffed, better supplied, and also health centers. There are continuing problems, but these are secondary prob- lems. 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00223 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 220 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 sys- tem 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 dif- ferently. 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 per- cent. 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 testi- mony 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 ex- periments 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00224 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 221 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 deci- sions 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 deci- sions 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 Min- istry 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 in- stance, 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 got- ten 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00225 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 222 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 Gov- ernment 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 re- daction, 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 exam- ples 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 contract- ing 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 Mem- ber 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 re- quired 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00226 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 223 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 unsup- ported or questioned costs that are still in dispute, and by the defi- nitions 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 peo- ple 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 ac- cess. At that point in time and to date their customer, the agency for whom they are working, has said those are not fair and reason- able 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 be- cause 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 dif- ferently. Mr. SOLOWAY. The economy in Iraq is not what we would con- sider 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. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00227 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 224 Mr. SHAYS. Right. Mr. SOLOWAY. Our marketplace, we rely on competition and writ- ten 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 wher- ever it might be, as I am subcontracting or identifying local capa- bilities 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 con- tract or expect cost accounting from my subcontractors locally that I would require of a U.S. company operating in a normal U.S. envi- ronment, 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 ca- pabilities 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 sub- contractors spent at every step of the way, which is our normal rule of accountability. We cannot provide it. Companies cannot pro- vide 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 un- derstand. 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 ap- plies 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? VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00228 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 225 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 con- tracted 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 capabil- ity 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 econ- omy. How many man hours went into this? How much was the con- certina 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 gov- ernment, 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 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00229 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 226 oversight, people charged with getting a mission done, and some- times 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 some- thing an overcharge on something that is a dispute. It is just curi- ous to me why. Mr. SOLOWAY. I think from our perspective one of the great con- cerns 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 contract- ing 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 acknowl- edged 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 ad- vance planning gaps that goes into what we do better the next time. So I cannot really judge from that perspective. VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00230 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 227 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 appre- ciate your response to our questions, as well. Thank you all very much. With that, this hearing is adjourned. And may I thank the tran- scriber 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:] VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00231 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 228 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00232 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 229 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00233 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 230 VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00234 Fmt 6633 Sfmt 6633 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1 231 Æ VerDate 11-MAY-2000 10:24 Oct 26, 2005 Jkt 000000 PO 00000 Frm 00235 Fmt 6633 Sfmt 6011 D:\DOCS\23689.TXT HGOVREF1 PsN: HGOVREF1