Monday, February 23, 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.