AG Gonzales Failed to Effectively Prosecute False Claims Acts Against Private Contractors

During Senate confirmation, Alberto Gonzales pledged to vigorously pursue false claims actions against all who sought to defraud the U.S. government. Senator Grassley actually questioned Gonzales in writing regarding his position on the False Claims Act (FCA), 31 U.S.C. §§ 3729-3733. Specifically, the Senator asked Gonzales how he would handle false claims litigation and what Gonzales would do to defend the U.S. against those who seek to defraud it.

The importance of the unequivocal promise of Gonzales to vigorously pursue such claims lies in the fact that the FCA is a principle weapon in the U.S. arsenal against war profiteering. The FCA lets private individuals, ideally in conjunction with Attorney General Gonzales recover triple the fraudulent payments plus fines from anyone who knowingly participates in filing false claims with the U.S. government.

Called the Lincoln Law, Congress enacted it in March 1863 to root out war profiteering and fraud in times of war. For instance, profiteers would ship sawdust instead of guns. "You can sell anything to the government at almost any price you've got the guts to ask," boasted Jim Fisk, a Civil War profiteer, who made millions unloading moldy blankets to the military. In United States v. McNinch, 356 U.S. 595, 599 (1958), the Supreme Court explained:

The False Claims Act was originally adopted following a series of sensational congressional investigations into the sale of provisions and munitions to the War Department. Testimony before the Congress painted a sordid picture of how the United States had been billed for nonexistent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war.

Iraq is no exception. In auditing reconstruction contracts, Ernst & Young noted numerous instances of fraud. In "The Great Iraq Swindle," Rolling Stone describes Operation Iraqi Freedom as an invasion of the federal budget. We learn the beauty of cost-plus contracts where the federal government guarantees you a profit (3% for example) above your costs. The more a company can spend, the greater its profit. Alan Grayson, an attorney involved in the qui tam action against Custer Battles, testified before a Senate committee:

"I wish I could tell you that the Bush administration has done everything it could to detect and punish fraud in Iraq, but if I said that to you, I would be lying. In our case, the Bush administration has not lifted a finger to recover tens of millions of dollars that our whistleblowers allege was stolen from the government."

Custer Battles bragged of how Michael Battles arrived in Baghdad having to borrow cab fare. Within a short period, it had secured multi-million dollar contracts to provide security inspection for civilian flights at Baghdad International Airport. Updating the sawdust trick, it repainted at least one abandoned Iraqi Airways forklift and invoiced it as materials under a different contract. Because the company had a time and materials contract that allowed it to bill dollar for dollar for all non-labor expenses plus (in some cases) 25% for overhead and profit, such tactics proved exceptionally profitable.

To further leverage its profits, Custer Battles set up Cayman Island subsidiaries. The company would backdate and forge signatures on invoices from its Cayman Islands companies. It would then turn the fabricated invoices over to the government for payment. The Cayman Islands invoices included such items as $12,000-a-month trucks, $5,000-a-month buses and $2,000-a-month forklifts -- all of which a Cayman Islands-based company said Custer Battles LLC leased from it for contract work in Iraq.

In one case, an individual named "Tam Burch" signed an invoice that Custer Battles submitted from a vendor called "Secure Global Distribution, Inc." At trial, the jury learned that "Tam Burch" was Scott Custer's personal assistant. Ms. Bush testified someone had forged her signature. When it barred Custer Battles from further participation in defense contract, the Defense Department called these "sham companies."

When federal agents first began to look into the fraud, Scott Custer jauntily told the agents that Michael Battles "is very active in the Republican Party and speaks to individuals he knows at White House almost daily." As evidence of fraud emerged and individuals testified before Congress regarding Custer Battles, the question arises, "Why did Attorney General Gonzales refuse to participate in the FCA action against it?" Why did Gonzales never investigate why the U.S. paid Custer Battles to guard non-existent civilian flights from Baghdad? Why did Attorney General Gonzales never lend his support to any qui tam actions involving Iraqi reconstruction fraud? Why did Gonzales signal through inaction that such cases lack merit?

The posture of the Gonzales Department of Justice with respect to FCA actions is particularly curious, because at the time of the initial audits in Iraq, the Gonzales Department of Justice indicated that the FCA would provide for the prosecution of Coalition Provisional Authority (CPA) contractors in U.S. courts. Despite the promise of Gonzales that he would address Iraq reconstruction fraud in the U.S., the government has not joined a single qui tam (FCA) suit that alleges Iraq reconstruction abuse.

According to the Taxpayers for Common Sense, a nonpartisan organization, "[i]n four years, the U.S. has not litigated one civil case of fraud or breach of contract by a U.S. contractor in Iraq." Given that the United States has notice of these fraudulent cases, the statute of limitation may ultimately bar future fraud actions against contractors in Iraq.

Despite the failure of Gonzales to join in the suit, a federal jury found Custer Battles "guilty of defrauding the United States by filing grossly inflated invoices for work in the chaotic year after the Iraqi invasion" in March 2006. The jury verdict cited 37 separate fraudulent acts. But a Republican appointed federal judge later reversed the jury's verdict. This is the same judge who threw out the claim of Khaled al-Masri. The CIA had jailed Mr. Masri in the mistaken belief that because he had the same name as a terrorist, he must be the terrorist.

In part, the failure of Attorney General Gonzales with respect to qui tam actions caused Republican Senator Charles Grassley, Chairman of the Senate Finance Committee, to introduce legislation that would require the Department of Justice to submit semi-annual reports about fraud settlements under the FCA. In a letter to Attorney General Gonzales, Senator Grassley stated that the Department of Justice's "administration of the False Claims Act lacks vision, transparency, energy, authority, goals and resources." "It's a bit odd that it is going to take an Act of Congress to get the Department of Justice to report out meaningful numbers on what it is actually doing to combat fraud," Jim Moorman, President of Taxpayers Against Fraud Education Fund, has said.

The amount at stake may explain the reluctance to let anyone pull the cord on this money train. Tongue in cheek, Jane Meyer of the New Yorker describes it as "contract sport." She explains for example, how a "secret task force in the Bush Administration picked Halliburton to receive a noncompetitive contract for up to seven billion dollars to rebuild Iraq's oil operation." According to the Times, the decision was authorized at the "highest levels of the Administration."

This information is not new. Peter Singer, Senior Fellow and Director of the Project on U.S. Relations with the Islamic World, described in a March 2005 Foreign Affairs article that the Bush administration has leveraged American military power through private military firms. These private firms let the administration act in ways that would otherwise not gain legislative or public approval. It removes such action from public oversight. For this reason, these firms have enjoyed an extraordinarily long leash.

BusinessWeek told us as long ago as May 2004, that contractor problems out of Iraq are extensive and range far beyond the headlines that appear in our daily newspapers. Because the federal government has not set up a central register of contracts, the amount of federal government dollars that pour into private military firms is difficult to assess. Moreover, there is a total lack of transparency and openness in these contracts. Thus, the Department of Justice under Gonzales never raised a question when, as happened with Blackwater USA, a private military firm hired Chilean commandos trained during the dictatorship of Augusto Pinochet, until after the fact (if then).

We needed Attorney General Gonzales to protect whistle blowers and to prosecute qui tam actions. Yet, Deborah Hasting reports, if anyone blows the whistle on fraud in Iraq, he, or she "ends up vilified, fired, or demoted." Navy veteran Donald Vance made the fatal mistake of informing the FBI of "the guns and the land mines and the rocket-launchers - all of them being sold for cash, no receipts necessary." He spent 97 days, not charged with any crime, in an American military prison outside Baghdad. William Weaver, a senior adviser to the National Security Whistleblowers Coalition, now advises individuals not to blow the whistle on fraud or corruption in Iraq. "If they're married, they'll lose their family," he said, "[t] hey will lose their jobs. They will lose everything."

Alternet.org, Iraqforsale.org, and The Media Consortium document abuses by private firms in Iraq. This is not a Republican or a Democratic issue. Whether the allegation of massive fraud and war profiteering ultimately prove true (as with Custer Battles), facts exist that justify investigation. We needed Attorney General Gonzales to investigate these claims. We needed Gonzales to protect whistle blowers. The U.S. deserves an independent attorney general who will investigate and prosecute qui tam actions. With Gonzales gone, it may get one.