Chalabigate

U.S. gives $400M in work to contractor with ties
to Pentagon favorite on Iraqi Governing Council"

By Knut Royce
Newsday.com
Published: February 15, 2004.

Washington - U.S. authorities in Iraq have awarded more than $400
million in contracts to a start-up company that has extensive family
and, according to court documents, business ties to Ahmed Chalabi,
the Pentagon favorite on the Iraqi Governing Council.

The most recent contract, for $327 million to supply equipment for
the Iraqi Armed Forces, was awarded last month and drew an immediate
challenge from a losing contester, who said the winning bid was so
low that it questions the "credibility" of that bid.

But it is an $80-million contract, awarded by the Coalition
Provisional Authority last summer to provide security for
Iraq's vital oil infrastructure, that has become a controversial
lightning rod within the Iraqi Provisional Government and the
security industry.

Soon after this security contract was issued, the company started
recruiting many of its guards from the ranks of Chalabi's former
militia, the Iraqi Free Forces, raising allegations from other
Iraqi officials that he was creating a private army.

Chalabi, 59, scion of one of Iraq's most politically powerful
and wealthy families until the monarchy was toppled in 1958, had
been living in exile in London when the U.S. invaded Iraq. The
chief architect of the umbrella organization for the resistance,
the Iraqi National Congress, Chalabi is viewed by many Iraqis as
America's hand-picked choice to rule Iraq.

A key beneficiary of both the oil security contract and last
week's Iraq army procurement contract is Nour USA Ltd., which was
incorporated in the United States last May. The security contract
technically was awarded to Erinys Iraq, a security company also
newly formed after the invasion, but bankrolled at its inception
by Nour. A Nour's founder was a Chalabi friend and business
associate, Abul Huda Farouki. Within days of the award last August,
Nour became a joint venture partner with Erinys and the contract
was amended to include Nour.

An industry source familiar with some of the internal affairs of
both companies said Chalabi received a $2-million fee for helping
arrange the contract. Chalabi, in a brief interview with Newsday,
denied that claim, as did a top company official. Chalabi also
denied that he has had anything to do with the security firm.

Today security in the oil fields remains problematic; the number
of guards is being raised from 6,500 under the original contract
to 14,500, and so many changes are being made to the contract that
the Coalition Provisional Authority, which governs Iraq, now says
it may have to be rebid.

Erinys Iraq came into being last May, after the U.S.-led invasion.
Saboteurs had started blowing up oil pipelines and attacking other
petroleum facilities, plunging Baghdad and other Iraqi cities into
darkness. Blackouts and fuel shortages remain endemic.

The authority solicited bids on the pipeline security contract
in July. Just two weeks later, the contract was awarded to Erinys
Iraq.

A founding partner and director of Erinys Iraq is Faisal Daghistani,
the son of Tamara Daghistani, for years one of Chalabi's most trusted
confidants. She was a key player in the creation of his exile group,
the Iraqi National Congress, which received millions of dollars in
U.S. funds to help destabilize the Saddam Hussein regime before the
coalition invasion last year.

The firm's counsel in Baghdad is Chalabi's nephew Salem Chalabi.

The seed money to start Erinys came from Nour, formed in May in the
United States, according to David Braus, Nour's managing director.

Nour's Web site says that it is a collaborative "arrangement"
involving a Farouki family company, HAIFinance Corp., and a
Jordanian venture called the Munir Sukhtian Group.

Braus said Nour arrived in Iraq "with an intention of investing
funds in the country as opposed to picking up government contracts."

But it has nevertheless won government contracts. Nour was the self-
described "sponsor" of a consortium of nine companies that won a
fixed-price contract of $327,485,798 to provide the Iraqi army with
weapons, trucks, uniforms and other equipment. At least three of
those companies, including Erinys, have financial ties to Farouki.

One of the 18 losing bidders, the large Polish defense contractor
Bumar PHZ - whose bid was more than $200 million higher - cried
foul, publicly charging that Nour's bid was suspiciously low and
that the firm had no experience in the arms trade, as stipulated
in the authority's request for bids. Bumar asked the authority
to explain how it selected Noor. And Polish prosecutors are now
investigating a tiny company that is part of Noor's consortium
in the contract, Ostrowski Arms, because it is not licensed to
export arms.

Farouki, who founded Nour, is a Jordanian-American who lives in
northern Virginia. He and his wife are prominent socialites in
the D.C. area and frequently attended White House affairs during
the Clinton administration.

Farouki's many companies have done extensive construction work for
the Pentagon over the years.

The Iraqi contracts appear to be his first ventures into security
and military hardware.

Though some of Erinys' principals have a background in oil field
security work in Africa and Colombia, the company itself had no
experience in the field. The Pentagon's request for proposals
required competing companies to list five contracts "of the same
or similar type to demonstrate previous experiences."

Farouki's businesses received at least $12 million in the 1980s
from a Chalabi-controlled bank in Washington, D.C. The Jordanian
government says that bank was part of a massive embezzlement
scheme perpetrated by Chalabi on a bank he owned in Jordan.

Chalabi, despite his status in Iraq as a possible future leader of
the country, is still wanted in Jordan after being convicted and
sentenced in absentia on bank fraud charges, Jordanian officials in
Washington said.

In a brief interview in a Baghdad parking lot, Chalabi denied
receiving any fees from Erinys. "I have no involvement in Erinys,"
he said. "I have no financial relationship with Farouki." Asked
about his former bank's loans to Farouki, he replied, "Farouki's
my friend."

And Farouki, reached by phone recently in Cairo, described Chalabi
as a "great [Iraqi] patriot." He denied that Chalabi had received any
fee or that he has had any role in the company. "There's no basis,
no substantiation whatsoever" for those claims, he said. He said that
Chalabi was too busy as a statesman and politician to be involved in
business activity.

Erinys guards are being recruited from the ranks of the Iraqi Free
Congress, the militia loyal to Chalabi's Iraqi National Congress,
Daghistani acknowledged to Britain's Financial Times in December.

This concerns Ayad Allawi, who runs the interior ministry in the
U.S.- appointed interim Governing Council. He publicly criticized
Chalabi in Iraq in December for allegedly undermining central
authority by helping create a private military company for the
Erinys contract. Oil field security, Allawi said, should be the
responsibility of the state.

Asked how much influence Chalabi had in the decision to award
the contract to Erinys Iraq, Sam Kubba, president of the American
Iraqi chamber of commerce, a congressional candidate in Virginia
and a businessman with extensive connections in Iraq, said, "100
percent ... and you can quote me on that."

Laith Kubba, a senior program officer at the National Foundation of
Democracy who helped Chalabi found the Iraqi National Congress, said
Chalabi's influence over Coalition Provisional Authority contracts
was "immense ... especially on security contracts." Laith Kubba is a
second cousin of Sam Kubba.

Even with the infusion of additional guards, security has been
tenuous, with weekly attacks on pipelines and installations slowing
oil exports and forcing Iraqis, who sit atop the world's second
largest oil reserves, to line up for hours at gas stations. Erinys
Iraq's CEO was shot and gravely injured recently, and several
employees have been killed.

A veil of secrecy imposed by the authority in the awarding of
the contract makes it difficult to reconstruct what happened. The
project was probably flawed from the start because of inefficiency
by contracting officials and heavy influence from Chalabi and his
associates, industry and business officials say.

An industry official who knows and respects Erinys Iraq's senior
managers said Chalabi "got his contractor to win that award ...
Chalabi is backing Erinys big time." This official, whose company
has several security contracts in Iraq, said that Erinys initially
"had a hard time getting people and a hard time getting equipment"
but was now learning from experience.

"They [the authority] didn't have a clue" of what was needed, said
this official, who considered bidding and drafted an internal plan
that would have cost more than three times what the authority wanted
to pay. But, he said, his firm concluded that whatever the Coalition
Provisional Authority was willing to accept was unrealistic and "had
no chance of success."

DynCorp, which is training Iraqi police under a $50-million contract,
did make an offer. A DynCorp official said that his company's bid
was three times higher than Erinys'. But unlike Erinys' proposal,
he said, his firm included helicopter surveillance, which is costly.
"There's no way in this godly earth that you can surveil the pipeline
with people in vehicles," which Erinys proposed, the DynCorp official
said.

Long after awarding the Erinys contract, the authority came to the
same conclusion. It recently awarded a $10-million contract for
helicopter surveillance of the pipelines to Florida-based AirScan
Inc. And it acknowledges the original contract awarded in August for
$39,454,896 a year over two years and for hiring and training 6,500
guards was inadequate. It said it had since modified the contract to
provide for the air surveillance and to increase the force. At the
same time, the authority acknowledges that so many modifications are
being made that it "could require [the contract] to be recompeted."

In brief e-mailed responses to Newsday questions, the Coalition
Provisional Authority insisted that the contract with Erinys was
aboveboard and was awarded on technical merit and cost considerations
only.

The July 25 authority solicitation for bids provided no detail of
what would be required to provide security for Iraq's "multibillion
dollar oil infrastructure." It did, however, ask that the bidder
submit "a list of five (5) contracts of the same or similar type
to demonstrate previous experience." Yet Erinys had never handled
a job as large and complicated as this one, and its partner, Nour,
has never worked in the security area.

Industry sources and contract experts said Erinys may have bid low
because it expected contract modifications to bring in additional
fees. "It's the oldest game in the Middle East," said a former senior
Reagan administration official and businessman who specializes in
the region. "... The contractor is insured by his patron. 'Low ball,'
he's told. 'Don't worry about it.'"

The official who considered bidding but worried that the authority
"didn't have a clue" said that Iraq is a war zone and therefore,
"I don't know if 65 million" guards can secure the 4,000 miles of
pipelines. "You've got to make nice with the local people, go to
the local tribal leaders and hire his guys," he said.

Farouki and Nour's managing director, David Braus, referred all
questions about the operation to Jonathan Garratt, one of Erinys'
managers in Baghdad. After an initial early morning call to Newsday
when the reporter was not at the office, he did not return further
calls and e-mails.

Braus said Chalabi was not involved in Erinys, but added, "In order
to operate in Iraq our people down there have had relations with
all former opposition groups." He said it was "absolutely untrue"
Erinys had hired Iraqi Free Congress militiamen as security personnel.

One large firm does not believe the contract will be rebid. Kroll,
the risk consulting and investigative firm, is negotiating with Nour
and Erinys to take over the Iraq operation, sources said.

How a Kroll buyout would affect Chalabi is unclear. A U.S.
intelligence official said Chalabi was "clearly looking to make
money" now that he has returned to Iraq after living in exile
for the past five decades. While declining to address the Erinys
contract, the official said that Chalabi is "interested in
establishing businesses that will benefit him, his associates
and his party, the INC."

Chalabi helped influence the Bush administration's decision to
invade Iraq even as he remained a fugitive from a 1992 criminal
conviction in Jordan on charges of embezzling millions of dollars
from his Petra Bank, which collapsed in 1989. Other Chalabi family
enterprises, all financially interlocked, also succumbed that year.

While Chalabi's banking empire crumbled, it provided millions of
dollars in loans to construction firms owned by Farouki, bankruptcy
records show.

Farouki's own businesses were going through bankruptcy proceedings
in the late 1980s when he borrowed heavily from the Washington-based
Petra International Banking Corp., which was managed by Chalabi's
nephew Mohamed Chalabi. Farouki's companies had construction projects
for the Pentagon and State Department in Europe, the Middle East and
Guantanamo Bay, Cuba.

Petra International was an Edge Act bank in Washington that was owned
largely by the Petra Bank in Jordan. An Edge Act bank is not permitted
to conduct general banking activities but can make international
business loans. Mohamed Chalabi is a son of Ahmed Chalabi's oldest
brother, Rushdi, who was a cabinet minister in Iraq before the
toppling of the monarchy.

Jordanian authorities have complained that much of the Petra
funds they claim was siphoned off the Amman bank ended up at Petra
International. By May 1989, three months before Jordan seized Petra
Bank, the bankrupt Farouki companies owed Petra International more
than $12 million, court records show. Farouki's wife, Samia, and
Mohamed Chalabi also were officers of a Virginia firm that folded
in 1995, according to public records.

Laith Kubba, who helped his cousin Ahmed Chalabi form the Iraqi
National Congress but has since had a falling out, said Farouki
became part of Chalabi's closely woven business network some time
in the '80s. "Back in 1988-91, when I worked with Chalabi on the
INC, I was aware of the people who were his confidants, close to
him, and I know Huda Farouki was one of them," Kubba said.

Tom Frank contributed to this article from Baghdad.

Copyright © 2004, Newsday, Inc.


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