Blind Oversight and Custer Battles

A company defrauded the CPA for millions in Iraq. Why won’t the administration take notice?

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Last week, the Senate Democratic Policy Committee set up an oversight hearing to discuss “waste, fraud, and abuse in U.S. government contracting in Iraq.” Notably absent were any Republicans or, for that matter, the administration officials who are actually supposed to oversee this issue. The hearings touched on a variety of outrages, including: Halliburton charging the Coalition Provisional Authority (CPA) for 42,000 daily meals for soldiers while only serving 14,000; the CPA’s Inspector General finding that the Iraqi ministry could account for only 602 of the 8,206 guards on payroll; and a truck driver for one company describing a policy of abandoning or torching $85,000 trucks if they had a flat tire or minor mechanical problem.

Also testifying at the hearing was Attorney Alan Grayson, who represents two former employees of Custer Battles, a private firm hired to provide security in Iraq. Grayson’s clients have charged that the company defrauded the CPA of millions of dollars during its time in Iraq. Custer Battles has been accused of, among other things, charging the CPA for security detail at airports that weren’t even running flights. Former employees also allege that members of the firm have fired on Iraqi civilians.

Grayson and his colleagues have unearthed so much dirt on Custer Battles that it’s hard to believe the case is still pending. The company’s own documents reveal that Custer Battles forged invoices. (The documents are available online at Taxpayers against Fraud.) One of the former employees Grayson is defending is a former FBI agent who refused to take part in a scam. Grayson claims his client was then held at gunpoint by other employees, stripped of his weapons and security ID, and left on the streets of Baghdad. Originally, both of Grayson’s clients planned to testify before the Senate, but then sent e-mails to the Committee explaining that they could not. When questioned as to why his clients did not appear, Grayson explained that they are both receiving death threats—one of the employees recently discovered that there is a $50,000 bounty on his head.

The employees also reportedly fear retaliation from the Bush administration, as they are still both government contractors and worry that the White House may cut off contracts for their current employers. That may sound odd—why would the administration retaliate against anyone who exposed fraud against the U.S. government?—but there may be more to the story here. As it turns out, one of the cofounders of Custer Battles, Mike Battles, is pretty well known in Republican circles (he ran for Congress back in 2002, where he managed to get fined by the FEC for “misstatement of financial activities”). His partner, Scott Custer once stated, in an interview with two federal agents, “Battles is very active in the Republican Party and speaks to individuals he knows at the White House almost daily.”

Battles’ connections have come in handy. In October of 2003, Custer and Battles had a meeting with U.S. military staff responsible for a currency exchange program in Iraq. The two accidentally left behind a spreadsheet revealing that Custer Battles had overcharged the U.S. government by at least $6.5 million. Yet the administration continued to award contracts to Custer Battles for almost a year after the incident. It wasn’t until September of 2004—when Air Force officials declared that they had adequate evidence that Custer Battles had defrauded the government—that contracts were finally cut off.

Despite all the evidence, the Department of Justice (DOJ) has declined to take sides in the suit. As Grayson told Mother Jones, “This is the strongest cases of fraud, in terms of proving it to a jury, that I’ve seen in my entire life. We have e-mails, we have order reports, we have spreadsheets, we have witnesses, we have whistle-blowers, we have every conceivable kind of evidence that these people have committed fraud, and still the Justice Department does nothing.” (The court proceedings have been held up in a Virginia federal court, with the judge still waiting for the DOJ to submit a brief—something the department has promised to do by April 1st.)

Assistant U.S. Attorney Richard Sponseller had told Grayson that the DoJ declined to get involved because the White House had decided that cheating the CPA was not the same as cheating the U.S. government. This seems to be pretty bizarre reasoning considering that, back in November 2003, President Bush signed an “executive order declaring the CPA “an entity of the United States government.” Still, Custer Battles is taking full advantage of the administration’s reticence, claiming that the company is not subject to U.S. law because the CPA was effectively a sovereign entity. Grayson countered, “In the law, nobody could argue that the CPA was a sovereign state. All they’ve done is basically concoct this argument so that they can change the subject.” He added, “The only thing that makes it possible for them to do that and get away with it is the fact that the government hasn’t weighed in to try and get the money back.”

If Custer Battles’ claim wins out, it would imply that the company is not subject to any legal recourse for the funds they bilked—especially since the CPA was outside the jurisdiction of Iraqi law. For its part, Custer Battles has also claimed that any money it spent or obtained was Iraqi money, not U.S. money. But Grayson notes that Custer Battles was paid in brand new U.S. $100 bills, straight from the U.S. Treasury and still wrapped in plastic. Frank Willis, a former senior official of the CPA, backed Grayson’s claim in the Senate hearings supplying pictures of the transfer of cash from the CPA to Custer Battles, remarking, “Yes. $100 bills in plastic wrap. We played football with the plastic wrapped bricks for a little while.”

Custer Battles isn’t even the biggest fish to fry. Allegations of fraud by contractors like Halliburton and Bechtel are also being looked into by the Pentagon. But Grayson’s case against Custer Battles is the first case involving contractor fraud that has been unsealed by a U.S. court. A ruling on this case will set a precedent for any other investigations that are unsealed in the future.

Unfortunately, these cases won’t move along until the U.S. government starts to take action. The Democratic Policy Committee has been virtually alone in hammering on the issue, and it has no subpoena power and no ability to enforce oversight. As Senator Harry Reid (D-NV) remarked at the hearing, “The sad part about all this [is that] we shouldn’t be holding this hearing. This should be done by committees having jurisdiction to do oversight of these government operations. Indeed, one person who should be doing something is Rep. Tom Davis (R-VA), Chairman of the House Committee on Government Reform. Recently Davis claimed promised to hold more hearings on the use of reconstruction funds in Iraq, saying, “If there’s something wrong, we will go after it vigorously.” Yet his committee has yet to take action, and Davis has actually sponsored legislation to prevent controls on oversight and accounting for private contractors.

Towards the end of the DPC hearing, U.S. Representative Henry Waxman asked Grayson, “So, if the government doesn’t pursue recovery of the money, and they block the lawsuits and tell their friends who run the Congress not to do any oversight, you’re really talking about a no fraud zone in Iraq and no fraud zone wherever this administration is involved. Is this the case?” To which Grayson replied, “That is 100 percent true.”


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