The lure of cash on the battlefield

Capt. Michael Dung Nguyen had a profitable tour of duty in Iraq -- so profitable, in fact, that soon after returning to this working-class neighborhood near the Ft. Lewis Army base, he was parking a Hummer H3T outside his apartment.

Then a $70,000 BMW M3 showed up. People notice cars like that on a street filled mostly with pickups, old Chevys and low-end sport utility vehicles.

“I spent 10 years in the military, and I can tell you, nobody’s giving me bailouts like that,” said Mark Smith, who lives across the street.

The big-ticket cars raised eyebrows in more places than the neighborhood.

Federal investigators found Nguyen’s $6,169-a-month Army paychecks lying untouched in the bank since his return from Iraq last June, while he somehow was paying credit card bills for three flat-screen TVs, two desktop computers, a laptop, several iPods, a PlayStation 3 and a dozen combat video games, a refrigerator, new living room and dining room furniture, a Nikon camera and two high-powered handguns.

In a federal indictment last month, prosecutors alleged that Nguyen managed to skim more than $690,000 in cash as the civil affairs officer overseeing millions of dollars intended for reconstruction projects and payments to private Iraqi security forces northeast of Baghdad. The 28-year-old West Point graduate is accused of packing cash into boxes and mailing them to his family’s home in Beaverton, Ore.

His indictment is one of the latest in a wave of prosecutions emerging from the tangled and expensive reconstruction in Iraq and Afghanistan.

The Justice Department has secured more than three dozen bribery-related convictions in the awarding of reconstruction contracts; at least 25 theft probes are underway.

The prosecutions reveal the extent to which troops have been tempted by the Pentagon’s “money as a weapon system” policy, which has left battlefields awash in cash.

“This was more cash than Donald Trump had ever seen in his life,” said Robert J. Stein Jr., a Coalition Provisional Authority official in the Iraqi city of Hillah, who was convicted in 2006 and sentenced to nine years in prison for his role in a bribery, theft and money laundering case.

“When you work around money like that,” he told investigators, “it becomes, ‘So what, it’s just paper.’ ”

Former Army Capt. David Gilliam was indicted in February on charges of stashing more than $400,000 in his luggage when he came home from his assignment as a disbursement officer in Kandahar, Afghanistan.

In October, former Capt. Lee W. Dubois pleaded guilty to helping steal $39.6 million in fuel from the Army’s Camp Liberty in Iraq and selling it on the black market -- a scheme that netted him at least $450,000.

And two senior Army officers were convicted in November in the Hillah case, which began with the disappearance of nearly $2 million in reconstruction money.

A Defense Department review of the program -- which gives field commanders an arsenal of cash to help build community relief projects, aid families and pay civilian security forces -- found in 2007 that all 15 pay agents surveyed who handled cash in Afghanistan did not have “appropriate physical security” for storing the money. No instances of theft were found.

The audit also found that disbursement officers did not always use the correct exchange rate when doling out local currency. Manipulating the exchange rate, authorities allege, was how Gilliam amassed cash.

“If people that know the system and how it operates decide to commit a fraud, it is very difficult to detect,” said David Warren, audits director for the Office of the Special Inspector General for Iraq Reconstruction. “Because they are the people that are in essence the control system that is in place.”

Through the end of last year, $3.5 billion had been pumped into the Commander’s Emergency Response Program, an attempt to use humanitarian aid and community reconstruction projects to combat the Iraqi insurgency.

The program also has allowed coalition commanders to hire Sunni Arab gunmen, often former insurgents, as security officers with the U.S.-allied forces known as the Sons of Iraq.

During Nguyen’s tenure with the 4th Stryker Brigade combat team in Muqdadiya, in Diyala province, where he helped oversee disbursement of emergency response program funds, the program paid for $68,000 in school supplies as well as a new municipal garage and renovations to the market, courthouse and hospital.

The farming hamlets and date-palm groves of the Diyala valley, where Al Qaeda fighters had set up strongholds after largely being driven out of Anbar province, had become among the toughest enclaves of the insurgency.

“We were called in because the situation was so bad in Muqdadiya and we had lost so many soldiers out of it,” said Command Sgt. Maj. Gregory Frias, who served in Nguyen’s unit.

The battlefield cash was important in pacifying the region, Frias said, not only in helping farmers to repair their irrigation systems but also in hiring local Sons of Iraq fighters to set up permanent security stations in areas that had been subject to frequent insurgent bombings.

When the unit arrived in September 2007, “people weren’t on the streets. . . . There was no real [Iraqi security] presence at all,” Frias said. “When we walked out of that place [in May 2008], it was a different place. People were out, stores were open, Sunni and Shia were working together.”

Nguyen’s officer evaluation report said he personally had developed $11 million worth of plans and programs to support the counterinsurgency fight.

The young captain “forged strong relationships with local and tribal leaders to improve governance,” a court affidavit said. “His knowledge of the systems used by the Provincial Reconstruction Team and the Muqdadiya city government helped local leaders to leverage coalition assets and money to start rebuilding the city.”

Maj. Eric Hefner, Nguyen’s supervisor, told investigators that Nguyen was the only person who had the combination to a safe where as much as $400,000 in U.S. currency at a time was stored, most of it intended to pay Sons of Iraq fighters. It was only in April 2008 that payments shifted from U.S. currency to Iraqi dinars, a tactic that military officials said reduced the chance of theft.

Hefner told investigators that Nguyen might have stolen the money by asking Iraqi fighters to sign receipts for more than they had received, or by having them sign duplicate receipts under the pretense that the originals had been lost.

Starting June 9, 2008 -- the day he returned to the United States -- Nguyen opened four bank accounts in three days, according to court documents, making 47 cash deposits totaling $387,550. Each deposit was under the $10,000 limit that would trigger a mandatory report from the bank.

Surveillance photos showed Nguyen making cash deposits at four Washington Mutual bank branches in Oregon, Washington and Utah.

Nguyen has pleaded not guilty. Neither he nor his attorney responded to requests for comment.

Warren, of the special inspector general’s office, said cash thefts such as those Nguyen is accused of often involve kickbacks to Iraqi authorities. “He says, ‘Look, if you come in and tell me you’re going to have 400 men I need to pay, and you’re really paying 200 . . . we split this,’ ” Warren said. “Those are the kind of schemes that can happen.”

Regulations adopted this year say that emergency response program managers in the war theater must approve projects larger than $500,000, and efforts costing more than $2 million must be approved by the U.S. Central Command chief (in Afghanistan) or the secretary of Defense (in Iraq). Pay agents are also now required to submit quarterly reports, with specific rules for delivery, transporting and safeguarding cash.

Internal controls have “significantly increased,” Lt. Col. Ryan Saw, emergency response program manager in Iraq, said in a telephone interview. “We’re focusing more on staff assistance visits, and making sure at the company, battalion and brigade level, the program is being managed efficiently.”

There also is less money floating around the battlefield. With the war winding down and more projects being run by Iraqi provincial governments, U.S. authorities have spent $157 million on emergency response program projects in the 2009 fiscal year (which began in October), compared with $1.08 billion in 2008.

Known cases of military theft have been relatively few and have been prosecuted aggressively. And although the opportunity to steal reconstruction funds may have lessened, staying on top of the situation will be important for building public confidence as the war in Afghanistan heats up, said Frank Vogl, co-founder of Transparency International, a watchdog group that tracks corruption around the globe.

“They are planning to deploy a huge amount of civilian people to do development and reconstruction, get the economy going and hopefully win support away from the Taliban -- a laudable goal,” Vogl said.

“But if it is not undertaken in a way that truly ensures meaningful oversight of contracting,” he said, “then all it will do is exacerbate a massively corrupt situation that already exists.”

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kim.murphy@latimes.com