Contracts Go to Allies of Iraq's Chalabi

Times Staff Writers

Businessmen with close ties to a leading -- and controversial -- member of Iraq's Governing Council have won large contracts for the country's reconstruction, leading to charges by some council members and other Iraqis that the actions are fueling a cronyism that threatens to sabotage the nation-building effort.

The men are associates of Ahmad Chalabi, an American-trained financier who has close ties to senior Pentagon officials and is a prominent member of the council, the U.S.-appointed interim government in Iraq.

Although it is perfectly legal for entrepreneurs with ties to top government officials to land reconstruction contracts, the perception of favoritism is setting back the rebuilding effort in Iraq by discouraging some foreign companies from seeking contracts, Iraqi and U.S. businessmen and officials said in interviews in Washington and Iraq.

It is further damaging the image of a reconstruction effort already hurt by the granting of huge no-bid awards to the politically connected U.S. firms Halliburton Co. and the Bechtel Group, Iraqis said.

"We have to show people that we are fair and aboveboard," said Sam Kubba, an Iraqi American architect who is also president of the American Iraqi Chamber of Commerce in Washington. Perceptions of insider influence, Kubba cautioned, "are hurting us.... They're driving people away."

The problem, said Iyad Allawi, a member of the Governing Council, "is on the conscience of everyone" in the interim government. After many of its members spent 30 years working to overthrow Saddam Hussein and other Baathists and replace them with a better government, the Governing Council "cannot indulge itself and its relatives in doing private business," Allawi said.

As U.S. and Iraqi authorities distribute billions of dollars worth of contracts in Iraq, two Chalabi associates have been awarded at least a portion of significant contracts.

Ahud Farouki, a longtime Chalabi business associate and family friend, got a substantial piece of an $80-million contract to provide security for the country's oil fields when a partnership that includes one of his companies landed the deal.

Mudar Shawkat, the No. 2 official at the Iraqi National Congress, the organization of anti-Hussein former exiles that Chalabi heads, won a significant share of the reconstruction effort when a consortium that includes his son's company got a contract to provide cell phone service for southern Iraq. Shawkat is a shareholder in his son's business.

U.S. authorities insist that ties between business and government officials have not tainted any contracts. "We're following all the standard federal rules" in awarding U.S. contracts, said a Pentagon official, who asked to remain unidentified.

But an official with the U.S. Agency for International Development, who also spoke on condition on anonymity, noted that although the U.S. has vetted bids in awarding the 11 prime contracts given by USAID, for instance, it was up to the companies that won the contracts to vet the thousands of subcontractors carrying out the work -- and they rarely did.

U.S. officials note that they are working with Iraqis to develop rules for Iraqi contracts that will increase disclosure requirements and bar people close to officials from benefiting from contracts.

But stricter rules to avoid conflicts of interest and influence peddling, Iraqi and U.S. officials acknowledge, would run counter to a strong Iraqi cultural tradition of including family and friends in business ventures.

And tough restrictions could shut out some people the new Iraq needs: former exiles and other educated Iraqis who have business experience, strong ties to the country and a willingness to take risk.

Since U.S. forces seized control of Iraq seven months ago, Iraqis and foreign companies have scrambled to build alliances that would help them land contracts with the occupation authorities.

International companies quickly realized the value of having an Iraqi representative or partner who knew the country and could win local support. In a still-tribal society, it is difficult for foreigners to function without support of Kurdish leaders in the north, for example, Sunni Muslims in the center or Shiite Muslims in the south.

Iraqis -- including officials and people close to them -- sometimes use surrogates to approach foreign firms and offer partnerships or to serve as local representatives to make vital connections, U.S. and Iraqi businesspeople say.

Ed Kubba, an Iraqi American who runs a Michigan marketing consulting firm and is Sam Kubba's cousin, said he has talked to several European firms in detail about the possibility of bidding for infrastructure projects in Iraq.

But the talks with one European company abruptly broke off, he said, when an e-mail message sent from one company official to another was accidentally copied to Kubba.

In the message, one executive told the other not to pursue discussions with Kubba because he was a competitor of their intended partner, a member of the Chalabi family, Kubba said.

Kubba said he had no objection if, for example, a cousin of a top government official had a visible relationship and won a government contract based on a solid bid. But, "when there are secret relationships," as in the case of the European company and the Chalabi relative, "that, to me, opens the whole issue of nepotism and corruption."

Shawkat's relationship with his son's telephone company, which has also drawn complaints from competitors, has not been a secret.

Shawkat's son, Ali, runs Nijla Telecommunications, which is part of a telephone consortium that also includes MTC, a well-known Kuwaiti telecommunications company. After a contentious bidding process for all three sectors of Iraq, the consortium was awarded a two-year license to provide cell phone service to the southern part of the country.

Mudar Shawkat insisted in an interview that the award was made on the merits and that he exerted no influence. He described the complaints as no more than the griping of sore losers and said that because he was not in government, he should be free to bid on as many contracts as he wanted.

Shawkat said he had close friends among the top managers of Bechtel and Halliburton and, if he wanted to, could call Clifford G. Mumm, the Bechtel manager for Iraq, to "order them to give me a contract. But it doesn't work that way." He holds stakes in several businesses, and he had bid for several contracts, Shawkat said, but none was successful. Shawkat made it clear that he intended to keep looking for business.

"What do people want me to do? Go and hide?" he asked. "I'm a person who wants to participate in the reconstruction of my country and, as a businessman, be part of its success."

He said he didn't understand how his business practices could be questioned when top U.S. officials could pass back and forth between top government and business positions. "It didn't stop [Dick] Cheney from becoming vice president," he said.

Haider Ebadi, Iraq's communications minister, defended the cell phone award, yet acknowledged concern about the Shawkat award and, more generally, about ties between businessmen and Iraq's interim government.

Ebadi said he held up the cell telephone awards for a month to consider, among other things, the Shawkat connection. But in the end, he said, he decided that the process was fair and that given Iraq's lack of guidelines, "there was nothing I could do. It's a gray area.... I just can't base this on personal feeling.

"I'm not happy with what's going on," Ebadi added. "In my opinion, no one on the Governing Council should involve themselves in economic activities, especially dealing with the government."

Questions of family ties also became an issue in connection with cell phone bids for northern Iraq, because a small company bidding for the award, Korek Telcom, listed among its shareholders an investor whose last name was the same as one of the most prominent Governing Council members, Kurdish leader Massoud Barzani.

Omar Bootani, a senior aide to Barzani, insisted that the shareholder was neither a brother nor a son of the Kurdish leader, although he acknowledged that the man could be a more distant relative. He said Barzani had no connection to Korek Telcom, the bidder, and had no business interests in the reconstruction.

Farouki, whose partnership won the Iraqi oil field security contract, is a "good family friend" whose business relationship with Chalabi dates at least to the 1980s, when Chalabi ran Petra Bank in Lebanon, said Chalabi's nephew Salem "Sam" Chalabi. Farouki, an international businessman who owns a home in the Washington, D.C., area, was said to be traveling in the Middle East and did not return calls seeking comment.

Ahmad Chalabi could not be reached for comment. But Sam Chalabi, a lawyer in Baghdad, said in an interview that his uncle is "very aware" of the issue of conflicts of interest "and is not involved in bidding for contracts or any of that."

Questions about Ahmad Chalabi's business practices surfaced 11 years ago, when a court in Jordan convicted him of bank fraud, in a casethat Chalabi says was politically motivated.

Questions about conflicts of interest have also swirled around Sam Chalabi.

Last summer, the lawyer set up a marketing partnership with L. Marc Zell, the former law partner of Douglas J. Feith, the Pentagon's undersecretary for policy. Zell was to help lead American and Russian clients interested in reconstruction to Sam Chalabi's firm, which would in turn help them meet U.S. and Iraqi officials.

In interviews, Sam Chalabi spoke of his daily contacts with his uncle, and the fact that one of his 26 first cousins is the Iraqi minister of trade. Sam Chalabi is also playing an important role in the new government: as an advisor on the writing of commercial laws and a national constitution, among other issues.

But after an outpouring of publicity, Sam Chalabi said that he had changed his mind about the partnership. He said that although he had been careful not to use his contacts to unfairly influence government decisions, "I have to be more careful about the appearance of a conflict of interest."

Iraqi and U.S. officials say privately that they are keenly aware of publicity about ethical issues related to the reconstruction, in both the United States and Iraq.

"Iraq needs commercial laws that punish bad behavior," said Tom Foley, the senior coalition advisor for business development. "For years, unethical behavior was successful. We need to change that."

But if Iraq is to adopt the norms that are recognized in America, U.S. authorities will clearly have to change some attitudes as well.

Bootani, Barzani's aide, argued that the concern about cronyism was an American issue and that Iraqis would not support any rules that they believed discriminated unfairly against family members.

"In the reconstruction of Iraq," he said, "there is enough for everyone."

Richter reported from Washington and Sanders from Baghdad.

For The Record Los Angeles Times Friday November 14, 2003 Home Edition Main News Part A Page 2 National Desk 1 inches; 43 words Type of Material: Correction Iraqi contracts -- A Nov. 7 article in Section A about Iraqi reconstruction contracts stated incorrectly that Bechtel Group received a no-bid contract for work in Iraq. In fact, Bechtel was one of seven bidders for a $680-million limited-competition contract award in April.
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