WASHINGTON — The U.S. government has opened a criminal inquiry into suspected embezzlement by officials who failed to account for almost $100 million they disbursed for Iraqi reconstruction projects, federal investigators said Wednesday.
Auditors have been unable to fully document how the money was allocated to Iraqi workers by a small group of officials working from a U.S. outpost in Hillah, according to an audit report released Wednesday by Stuart W. Bowen Jr., the special inspector general for Iraq reconstruction.
The auditors found "significant" problems in the Hillah office, including one case in which an official fired for mishandling funds was allowed to continue disbursing money nearly a month after his termination.
The case is the first time U.S. government officials have been investigated for a suspected major corruption scheme involving the Iraq reconstruction. The rebuilding effort has been marred by allegations against Iraqis as well as contractors from the United States and elsewhere.
The reconstruction funds that were examined came from seized assets of the former regime of Saddam Hussein and from Iraqi oil revenue, not from U.S. taxpayer money.
A few other U.S. officials in Iraq have drawn the scrutiny of investigators for smaller incidents, though none have been charged. In the cases now under investigation, the report notes questionable accounting practices by several officers involving millions of dollars over a 16-month period ending in October.
Investigators are looking at a "handful" of possible suspects, said Jim Mitchell, a spokesman for the special inspector general's office. He noted that the inquiry was in an early stage, saying only that the discrepancies uncovered by the auditors warranted referral to criminal investigators.
He also said it was unclear whether the U.S. officials operated in concert, since they served at different times.
"We're not saying the money is lost. We're saying they can't account for it," Mitchell said.
One U.S. official told auditors that he was given $6.75 million on June 21 and told he had to spend the money by June 28, the day the U.S.-led administration in Iraq turned over sovereignty to an interim Iraqi government.
U.S. officials "were under the impression that it was more important to quickly distribute the money to the region than to obtain all necessary documentation," the audit report says.
Auditors were struck by a series of apparent accounting errors in the Rapid Regional Response Program, an obscure rebuilding effort operated from the Hillah office. The program was designed to jump-start reconstruction in south-central Iraq by allowing U.S. officials to quickly issue contracts worth up to $200,000 each.
To pay for contract work in Iraq's cash-based economy, the U.S. appointed military personnel and civilians to physically hand out money to Iraqis. The U.S. officials were then supposed to reconcile those payments with receipts. But the auditors found that such receipts were lacking or incomplete for $96.6 million of $119.9 million in payments.
In one case, two U.S. officials left Iraq after completing their tours of duty without accounting for a total of $1.5 million. The manager of the cash funds zeroed out the balance on a spreadsheet -- an apparent attempt "to remove outstanding balances by simply washing accounts," the audit report says. The officials, like all others in the audit, were not named.
In another case, the U.S. on May 30 ordered the removal of the official in charge of the overall cash program, but he remained in the job until June 20. When told he had failed to account for $1,878,870, the official returned exactly that sum three days later -- leading to suspicions that he had "a reserve of cash and turned in only the amount" needed to complete the clearance process, the report says.
In another case, one payment official had three errors in his accounting books. In one example, he told superiors that he had given $311,100 to another U.S. official when he had actually handed over $1,210,000, leaving it unclear where the remaining $898,900 was, the report says.
Two other audits, also released Wednesday, criticize the overall U.S. handling of Iraqi and U.S. funds.
For contracts funded with Iraqi money, contract officers could not show that services had been delivered in more than half of 300 contracts valued at $332.9 million.
For contracts funded with $18.4 billion in U.S. taxpayer funds, officers could not even find about a quarter of 48 contracts that had been selected for review. Other contracts were found stuffed in drawers or misfiled.
U.S. officials responding to the audits acknowledged problems and promised to fix them. They blamed the discrepancies on the difficulty of operating in a wartime environment.
The officials cited challenges such as high turnover, security concerns and a lack of basic office supplies, including file cabinets.
"The environment here in Iraq during the war had a debilitating effect on the quality of statements of work and contracts in general," Army Maj. Gen. John Urias, the head of contracting in Iraq, wrote in a remarkably candid reply. "Crisis management was the order of the day."
Army Col. Thomas Stefanko, who now oversees the Hillah office, said he was forming a "special action team" to investigate the discrepancies and collect any missing money.