Billions Wasted In Iraq?

U.S. Official Says Oversight Was "Nonexistent"

(CBS) 
In fact, the company continued to work in Iraq for another year, even after Robert Isakson, one of Custer Battles' major sub-contractors, went to federal authorities with allegations of criminal misconduct. Isakson and another whistleblower claim Custer Battles bilked the government out of $50 million, and they're suing the company on behalf of U.S. taxpayers to recover some of the money.

"Well, they approached me three times to participate in a — defrauding of the United States government," Isakson says. "They wanted to open fraudulent companies overseas and inflate their invoices to the United States government."

Asked if the fraud actually took place, Isakson says, "Two weeks later, apparently, I heard they began exactly the fraud they described to me."

According to a subsequent investigation by the U.S. Air Force, Custer Battles set up sham companies in the Cayman Islands to fabricate phony invoices that it submitted to the Coalition Authority with the intention of fraudulently inflating its profits.

According to a Custer Battles spreadsheet, which was left behind after a meeting with U.S. officials, the company submitted invoices on the currency contract totaling nearly $10 million, when its actual costs were less than $4 million.

Electricity costs of $74,000 were invoiced to the Coalition Authority at $400,000. And those trucks that didn’t work were bought on the local market for $228,000 and billed to the Coalition Authority for $800,000.

Mike Battles and Scott Custer are currently under federal investigation by the Department of Justice and declined to be interviewed for this story. But in videotaped depositions for the whistleblower lawsuit, Custer disavowed any knowledge of the phony invoices.

"Would you agree with me that it is highly improper for a contractor working under a time and materials contract to simply fabricate invoices and then hand them in for payment?" attorney Alan Grayson asked during the deposition.

"Yes, the short answer, I am not a government or legal expert, but I would think it is improper to fabricate anything you would know to be true," Custer replied.

Custer and Battles blame their problems on former employees, competitors and the bureaucratic incompetence of the CPA.

"I know we were supposed to do one thing for a certain amount of money and by the time it was said and done they asked us to do many, many more things for a different, a greater amount of money," Battles said in deposition.

To date, the only action taken against them has been a one-year suspension from receiving government contracts; it has since expired.

"I think what’s happening over there is an orgy of greed here with contractors," says North Dakota Sen. Byron Dorgan.

He is the chairman of the Democratic Party Policy Committee, and says Custer Battles is small potatoes compared to behemoths like Halliburton and its subsidiary, Kellogg, Brown and Root (KBR), who have collected half of all the money awarded to contractors in Iraq, and, according to Department of Defense auditors, have over-billed taxpayers more than a billion dollars.

Dorgan’s committee has held hearings and heard testimony that Halliburton has overcharged for meals, and fuel and gouged taxpayers on items like hand towels.

"Instead of buying a white towel, which would be $1.60, this company said, 'No, no, no. Put, embroidery our logo on it. Five bucks,' " says Dorgan. "So, what's the difference? Well, the American taxpayer's gonna pay the bill."

Halliburton says the towels were embroidered to keep them from being stolen or lost, and that allegations it over-billed by a billion dollars are exaggerated. But Dorgan says none of this is being seriously investigated.

"Let me tell you that there’s very little oversight by anybody on anything in this Congress. We have a president and a Congress of the same party. They have no interest in doing any aggressive oversight," Dorgan says.

The only one really looking into it is Stuart Bowen, the special inspector general for Iraq reconstruction, a position created by Congress in 2004 to monitor construction and development projects to rebuild Iraq.

Asked how he would describe the oversight early on with the CPA, Bowen says, "It was relatively non-existent."

In two lengthy reports, Bowen’s staff outlined suspected fraud and incompetence of staggering proportions. Like the $8.8 billion dollars that the coalition seems to have lost track of.

Bowen says that money is "not accounted for" and acknowledges that nobody really knows exactly where it went.

Some of the money Bowen says was spent on projects it was intended for. It’s just that there are no receipts. But some of it, like the funds to buy books and train personnel at a library in Karbala, simply vanished.

Four people have already been arrested on bribery and theft charges and more arrests will follow.

Bowen says he there are nearly 50 investigations going on right now, involving suspected "fraud, kickbacks, bribery, waste."

"Involving American companies?" Kroft asks.

"That's right," Bowen replies.

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Shortly after this story aired, a federal jury found Custer Battles guilty of 37 separate fraudulent acts. It demanded the company repay $10 million dollars in damages and penalties to the U.S. government and whistleblowers.

The Air Force debarred the company from receiving government contracts until March 2009. The Special Inspector General for Iraq Reconstruction has kept busy too. He arrested another person for fraud and is now investigating more than 70 cases of abuse in Iraq.