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MESSAGE FROM THE SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION
I am pleased to present our 35th Quarterly Report to the U.S. Congress and the Secretaries of State and Defense.
On October 16, 2012, the Council of Ministers dismissed Central Bank of Iraq (CBI) Governor Sinan al-Shabibi,amid allegations of corruption leveled against him. Th is peremptory and constitutionally questionable move occurred as an audit of the CBI’s foreign currency auctions surfaced. The audit purportedly found that perhaps 80% of the $1 billion purchased at weekly CBI-managed auctions was tied to illegal transactions, with the funds subject to those transactions potentially lost abroad to money laundering. Th is development is symptomatic of a troubled year in Iraq, evidenced by increasing corruption, resurgent violence, deepening ethnosectarian strains,growing apprehensions about the confl ict in Syria, and widening divides within the coalition government. Despite these daunting challenges, Iraq achieved record electricity production this quarter (averaging about 7,300 megawatts), the highest crude oil output since 1990 (more than 3 million barrels per day), and a post-1990 record volume of crude oil exports (almost 2.6 million barrels per day). Moreover, the country’s economic growth rate remained at above 10%. Th e polarity between these evident economic successes and the constraints imposed by a variety of political and security impasses continues to limit Iraq’s democratic progress.
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This quarter, a number of Government of Iraq (GOI) officials told SIGIR that corruption was on the rise, diverting significant amounts of Iraq’s increasing oil income away from pressing economic and social needs. Moreover, Prime Minister Nuri al-Maliki’s opponents remained concerned about the continuing political imbroglio, which has been exacerbated by constitutionally questionable acts. For example, the decision by the Council of Ministers (CoM) to dismiss the Governor of the Central Bank of Iraq (CBI) and appoint a temporary successor created controversy both inside and outside Iraq.
Notwithstanding these difficulties, Iraq showed tangible signs of progress. Crude oil production and exports both reached levels not seen in more than two decades. Iraq overtook Iran as the second-largest producer of crude oil in the Organization of the Petroleum Exporting Countries, and its projected gross domestic product (GDP) growth rate for 2012 was among the highest of oil-exporting nations in the Middle East and North Africa region. In the still-struggling electric power sector, production increased by unprecedented amounts. A GOI agreement with the KRG secured the resumption of crude oil exports from the Kurdistan Region, temporarily assuaging the dispute over the control of hydrocarbon resources within the KRG.
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Corruption at the Central Bank of Iraq? On October 16, 2012, the Council of Ministers dismissed CBI Governor Dr. Sinan al-Shabibi, replacing him, on an interim basis, with the President of the Board of Supreme Audit (BSA), Dr. Abdul Basit Turki al-Sae’ed. Th e decision to replace Dr. al-Shabibi came amid claims that the CBI’s role in supervising the country’s banking system was compromised and that corruption was growing to unprecedented levels. Dr. al-Shabibi was said to be under investigation for possible misconduct, and a warrant was issued for his arrest.3
The former CBI Governor is credited by many analysts for maintaining the stability of the Iraqi dinar and for keeping infl ation and interest rates low—all viewed as crucially important prerequisites for the kind of wellmanaged economic growth Iraq hopes to achieve with its enormous oil wealth.4
Political opponents of Prime Minister al-Maliki, along with many banking and financial experts, expressed immediate concern that the dismissal of
Dr. al-Shabibi—who is widely viewed as personally honest and professionally effective—was an attempt to bring the CBI and its $63 billion in reserves under executive branch control. They pointed to the CoM’s action as just one of among several steps the Prime Minister has taken to concentrate power within his office. For example, in 2010, al-Maliki won a legal case that eff ectively shift ed control of independent agencies, such as the CBI, from the Council of Representatives (CoR) to the CoM. In an advisory opinion issued in February 2012, the Higher Judicial Council affirmed the earlier ruling, this time naming the CBI. The ruling drew criticism at the time as a violation of the CBI’s independence as guaranteed under the 2005 Iraqi Constitution.5 An audit of the CBI and its daily currency auctions completed by the BSA this quarter and personally supervised by Dr. Abdul Basit concluded that, of the $1 billion transferred out of Iraq each week, at least $800 million is laundered money—that is, transferred illegally under false pretenses. In a meeting with the Inspector General in mid-September, Dr. Abdul Basit talked about the BSA audit and what he called a triangle of sectarianism, corruption, and violence, in which each element feeds off the others ina dynamic that threatens the well-being of the state.6
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On reports of authoritarianism within al-Maliki’s government—“Iraq is … a democracy. It does face a lot of issues that are challenging to that democracy. It is fragile in many ways. We are working constantly with all sides … In short, what we’re doing is pushing them all to engage to pursue their interests in the legislative process, in an independent reform process that they’ve agreed to.”
• On the GOI’s ability to manage political differences within the political process and what the U.S. government can do to encourage cooperation or consensus—“Now, it’s oft entimes a slow, protracted process. It certainly doesn’t move at the pace that we would like to see, or with the efficiency we would like to see. But as I see it, our role is largely to continue to encourage this, to …be helpful in pointing out ways forward, ways things might be done, the way they might be able to compromise or reach consensus on issues....But again, I’d like to reiterate, the encouraging thing is that Iraq has not fallen apart. That it has held together.”
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Iraq’s plans for bolstering its security forces position the country as a major new consumer on the world armaments market. Currently, the GOI allocates 3% of its budget for security equipment,30 but growing oil revenues mean that Iraq will have substantial funds with which to continue to expand its armament procurements. During 2008–2011, the total value of Iraq’s arms transfer agreements ranked fourth among Middle East and North Africa nations, behind Saudi Arabia, the United Arab Emirates, and Egypt.31 Purchase agreements with the United States accounted for 72% of the total (see Figure 1.2),32 assisted by U.S. appropriations for the ISFF, which augmented GOI funding for FMS purchases.33
While the GOI likely will continue to be a big consumer of U.S. security equipment through the FMS program, the expiration of ISFF obligation authority on September 30, 2012, means that the U.S. total share of arms transfers to Iraq could drop.
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Baghdad-Erbil Dispute Nearly six months aft er the KRG halted crude oil exports to protest a lack of reimbursement for oilfield development costs, the GOI and KRG reached an agreement this quarter securing the resumption of crude oil exports from the Kurdistan Region.
For a timeline of important events in the dispute,see Figure 1.4. Talks also resumed in the CoR regarding the Hydrocarbon Laws, which are key to the growth of Iraq’s oil and gas industry. Notwithstanding this progress, relations between the KRG and Baghdad remain tense.
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Money Laundering
Money laundering plays an important role in corruption. Th e recent BSA audit alleges that the principal mechanism for money laundering in Iraq is the daily currency auction operated by the CBI through which it sells U.S. dollars to commercial banks, which, in turn, provide those dollars to customers for a fee. Th e customer, who provides a large amount of Iraqi dinars—possibly obtained by taking a bribe or via fraudulent withdrawal of money from ministry accounts—“launders” the illegal funds, requesting the commercial bank to transfer the dinar-purchased dollars to a bank
outside Iraq.51 Before the transaction can occur, the commercial bank is obligated to determine that the customer has a legitimate reason to transfer the money by demanding documentation, such as a contract to buy goods from a foreign company. Recent BSA reviews of the documentation offered for such purchases have shown that a large portion of the transactions have been based on fraudulent representations.
Improperly documented capital flight over the past year is draining Iraq of its capital, possibly reaching 80% of the estimated $1 billion in U.S. currency that is transferred out of the country each week, according to recent BSA findings.53
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The GOI earned $20.73 billion in receipts from the sale of crude oil during the quarter. But the total receipts were 9% less than the previous quarter, mainly because of lower crude oil prices.56 The International Monetary Fund’s 2012 World Economic Outlook published this quarter revised Iraq’s GDP growth forecast upward to a robust 14.7% for 2013—exactly three times that of the next strongest economy in the Middle East and North Africa region, Qatar. Iran’s economy, laboring under the impact of international sanctions, was projected to grow at less than 1% in 2013.57 The forecast reflects the view that Iraq’s long-anticipated infrastructure-spending program is beginning to take hold and oil production and exports will grow briskly in the coming years.
Despite the bright picture painted by these new reports, there are issues that could limit the country’s economic growth. Iraq’s antiquated banking industry has been unable to fi nance the kind of massive development spending required for Iraq to reach its goals. Further, international bankers voiced concern that the dismissal of CBI Governor al-Shabibi could weaken Iraq’s fi nancial services industry.59
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Total FY 2013 funding for Iraq relief and reconstruction has yet to be determined. In its budget request for FY 2013, the Administration requested $2.69 billion, which was $0.47 billion more than was appropriated for FY 2012.62 As of October 30, 2012, the FY 2013 budget request was still being considered by the Congress. This quarter, the Congress passed—and on September 28, the President signed into law—House
Joint Resolution 117, the “Continuing Appropriations Resolution, 2013” (Public Law 112-175). The law provided interim FY 2013 appropriations for most programs of the federal government, including programs to reconstruct Iraq, at the levels provided in FY 2012, with a slight increase of 0.612%. This funding is available through March 27, 2013.63
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The IMF this quarter approved a 7-month extension (to February 2013) of its $3.58 billion Stand-By Arrangement (SBA) with the GOI. The SBA, effectively a lending facility, was first scheduled to expire in February 2012 and later extended through July 2012. Despite projected budget deficits, the GOI so far has not needed to draw on the SBA, mainly because it has been unable to spend large percentages of ministerial capital budgets, resulting in annual surpluses.93 According to the IMF, the extension will give the GOI more time to implement the policy measures needed to complete the IMF’s combined third and fourth reviews of Iraq’s progress in these areas.94
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On other topics, the U.S. representatives reiterated that the United States is committed to working with both Iraq and Kuwait to resolve remaining issues relating to the UN Chapter VII sanctions imposed on Iraq in the wake of its 1990invasion of Kuwait, and they pledged to assist Iraq in implementing its 2013 provincial and 2014 national elections.
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The five-year, $117 million Governance Strengthening Project aims to increase the capacityof provincial governors and provincial and local councils to better respond to the needs of Iraqi citizens. A goal of this program is to improve budget accountability and transparency. In recent meetings with SIGIR, a GOI official praised the program’s new approach to budgeting (via the zerobasedbudgeting system).
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The five-year, $53.3 million Financial Development Program focuses on the continued capacity building of Iraq’s financial sector to international standards, with an emphasis on private banks. According to USAID, the program is currently undergoing a mid-term evaluation that will inform USAID on how to improve the program’s effectiveness.212
This quarter, USAID reported that the Central Bank of Iraq (CBI) announced its goal to develop infrastructure for a retail payment system in Iraq and invited concerned parties to combine efforts to achieve this goal. In support of this effort, the Financial Development Program completed a review of regulations and an “instructions” document needed to govern payment service providers, banks, and mobile network operators in the operation and use of a potential retail payment system infrastructure. Th e program also worked with the CBI on a request for proposal to
implement this system.213
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Cost management of current cases. The majority of current cases, including several expansive ones like the delivery of 18 F-16s, do not have separate funding for contractor life support or security costs that refl ect OSC-I’s transition. Cases whose delivery schedules mature as OSC-I minimizes or eliminates its operational footprint are going to face challenges that are currently unfunded and have yet to be addressed.
8 OSC-I notes that it will support existing contracts until FMS cases are complete “or have been modified to support the transition strategy.”
Engagements with GOI Officials Under the FMS program, OSC-I manages both the obligation of U.S. funds to support the GOI’s security capacity and GOI purchases of military equipment and services. Concomitant to these program responsibilities, OSC-I has assumed an even broader responsibility of managing a wide range of relationships with the GOI—from facilitating OSC-I contractor work authorizations and visas243 to tracking and managing security-contractor incidents.244
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FMS Training Activities The largest ongoing FMS training activities coordinated by OSC-I, as of September 30, 2012, were the War Fighter Focus (WFF) program and two aviation pilot and maintainer programs, valued collectively at $279.3 million (including unexercised options):250 • More than 4,400 Iraqi Army personnel received WFF training this quarter in Erbil, Taji, and Besmaya.
• 13 prospective F-16 pilots are receiving training in the United States, and 359 Iraqi Air Force maintainers began training in Jordan.
• 7 prospective C-130 pilots, 16 maintainers, and 1 loadmaster are training at U.S. locations.
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F-16 Aircraft . The current case involving 18 F-16s provides for the purchase of aircraft ,ancillary systems, training, sustainment, and logistics. Delivery of the aircraft is being preceded by training and base preparations. As of the end of September, 13 pilots were training in the United States, with an additional 14 expected to begin training next quarter, with a goal of 27 trained pilots when the aircraft are delivered to Iraq by March 2016.
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GOI-KRG Dispute
On September 14, the two sides signed a tentative agreement that committed the KRG to restart exports on a more permanent basis. In return, the GOI agreed to reimburse oil-fi eld development cost and resume earlier commitments to supply the KRG with 17% of oil products refi ned in Iraq as well as 17% of all crude oil delivered to power plants in Iraq for electricity production. Separate committees drawn from representatives of both governments were formed to monitor adherence to the agreement and troubleshoot potential problems.
The Council of Ministers (CoM) ratified the agreement six days later.290 Although the agreement eased the immediate dispute, it is viewed as a temporary arrangement, expedient to both sides as they regroup to work on hydrocarbon legislation.
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Council of Ministers The CoM met regularly through the quarter,including during the month of Ramadan. In addition to approving the agreement that commits the KRG to increase crude oil exports in return for being reimbursed by the GOI for oil-fi eld development costs, the CoM took action across a broad range of issues:297
• approving a draft GOI budget for 2013 totaling $118.4 billion (for more details, see Section 2)
• naming Dr. Abdul Basit Turki al-Sae’ed as Acting Governor of the Central Bank of Iraq (CBI). As head of the GOI’s Board of Supreme Audit, Dr. Abdul Basit this quarter completed an audit of the CBI’s weekly currency auctions that concluded that, at most, only 20% of the estimated $1 billion in U.S. dollars purchased each week at those auctions was used inlegitimate transfers. Th e rest was laundered to get illicit money out of the country. At an October 24, 2012, news conference, Prime Minister al-Maliki said a warrant had been issued for the arrest of dismissed CBI Governor Sinan al-Shabibi in connection with the currency auctions.
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The Institutionalization of Corruption in Iraq Corruption and the level of theft of government funds by GOI officials remains a matter of controversy. While both Prime Minister al-Maliki and Chief Justice Medhat al-Mahmoud concede that corruption remains a problem, both state that the pervasiveness of corruption has been exaggerated. Critics of the government, on the other hand, claim that corruption is now worse than it has ever been.399 Dr. Abdul Basit, until mid-October President of Iraq’s Board of Supreme Audit and currently the interim Governor of Central Bank, has told SIGIR that there has been a massive fl ight of U.S.dollars from Iraq, mostly through money aundering, and that this is evidence of widespread corruption. According to Dr. Abdul Basit, approximately $1 billion a week is leaving Iraq—80% of it moved through fraudulent documents hiding its true purpose.400 According to several current and ormer GOI officials, corruption in Iraq is not tied to personal criminal activity but has become ingrained in the government infrastructure through the political parties.401 A widespread method to accomplish this corruption has been government contracts, oft en using shell companies outside of Iraq.402 Th e companies that receive these rigged awards then move the funds outside of the country through fraudulent means.403 In recent interviews with SIGIR,numerous senior Iraqi offi cials, advisors to Iraq’s anticorruption institutions, and program implementers have pointed to a clear evolving pattern of corruption that has become institutionalized within the government and political system of Iraq. In the view of several offi cials, corruption has transformed from controlled corruption under a dictatorship, to corruption out of control during a period of lawless violence, to the current situation, where corruption and the patronage it allows has become a means of governing.404 A repeated complaint, even among the supporters of the current government,has been the “Quota System,” which is shorthand for the allotment of government posts according to political blocks.Officials who owe their positions, and thus loyalty, to their political sponsors are compelled to siphon government largess to political backers according to arrangements made outside of public view. In some cases, this practice has nearly swallowed up entire projects and programs,leaving the public to benefit from a small fraction of the money spent.
Note: diagram on this page is important but can't be copied but part reads "
The BSA found that 80% of audited documents involved in money exchanges with the CBI had been falsified. "
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Other Developments On October 16, 2012, the Governor of the Central Bank of Iraq, Sinan al-Shabibi, was removed from office.416 In his place, the CoM installed the President of the Board of Supreme Audit, Dr. Abdul Basit, as a temporary measure.417 For more on these developments, see Section 1 of this Report. An outspoken leader of the anticorruption effort, former Commission of Integrity (COI) Commissioner Raheem al-Ugaili has been assigned to the HJC’s public prosecution offi ce. He informed SIGIR that he now faces at least 10 charges of “administrative corruption” for allegations such as:418
• holding press conferences and exaggerating the level of corruption in Iraq• providing U.S. officials statistics on the performance of the COI—a requirement for receiving U.S. grant assistance through the GoCASE initiative
(a computerized case processing system) A number of other COI offi cials also have been charged with similar crimes or have been reassigned since al-Ugaili resigned as COI Commissioner in protest, claiming political interference in his duties.419 The current COI Commissioner, Judge Alla’a Jwad Hameed, completed his fi rst year in office,serving as the third interim commissioner since the last appointed and confi rmed commissioner, Judge Radhi Hamza al-Radhi, resigned and fled to the United States in September 2007. Commissioner Alla’a has focused enforcement resources on an antibribery campaign that confronts retail corruption420 and on the requirements that government employees sign a code of conduct and submit financial reports. Only a third of GOI employees have signed the code of conduct.421
The most significant corruption conviction this quarter involved a former Financial and Administrative Director General who was sentenced to 15 years in prison for embezzling more than $430,000.422 The most notable arrest this quarter was of an employee in the state-owned al-Rasheed Bank accused of embezzling approximately $9.7 million by helping a customer draw checks from accounts with no balance. The criminal case is pending.
• Currency and Interest Rates. Th e Iraqi dinar remained stable this quarter, with the offi cial exchange rate holding at 1,166 per U.S. dollar since it was revalued by a token amount of 4 dinars in January 2012. Th e unoffi cial market rate for the dinar also moved closer to the offi cial rate.428 The CBI’s policy interest rate was also unchanged at 6% for the 10th consecutive quarter
Stock Exchange. As Figure 4.11 shows, the Iraq Stock Exchange (ISX) index rose marginally this quarter by just over 1%, but remained 15% lower for the year to date. Once the best-performing equities market in the Middle East region, the ISX so far in 2012 has been among the worst, as political uncertainty and the impact of ongoing slow bureaucratic decision making continue to dampen market sentiment. Participation of foreign investors remained well below levels seen through much of 2011, with their share of total trading volume accounting for 5% or less of the total for several weeks during the quarter. Between mid-2010 and the end of 2011,foreigners’ share in total trading volume tended to fluctuate between 8% and 16%.430
• Debt and Reserves. The GOI continued its payment of war reparations related to SaddamHussein’s 1990 invasion of Kuwait with
a transfer of $1.3 billion to Kuwait on July 26, 2012. Iraq has now paid a total of $37.6 billion to more than 100 governments and international
organizations for distribution to 1.5 million claimants. About $14.7 billion in claims remain to be paid, mainly to Kuwaiti claimants.431 Even with these payments, Iraq’s hard currency reserves held by the CBI remained at $63 billion during the quarter.432
• IMF Stand-By Arrangement (SBA). The IMF this quarter approved a 7-month extension (to February 2013) of its $3.58 billion Stand- By Arrangement (SBA) with the GOI. The SBA, effectively a lending facility, was first scheduled to expire in February 2012 and later extended through July 2012. Despite projected budget deficits, the GOI so far has not needed to draw on the SBA mainly because it has been unable to spend large percentages of ministerial capital budgets, resulting in annual surpluses.433 The key objectives of the SBA are to preserve Iraq’s macroeconomic stability and to support Iraq’s adoption of policies and measures to ensure sustainable
growth and poverty reduction. The program focuses on modernizing Iraq’s public financial management system; developing the financial sector, including enhancing CBI operations and restructuring the balance sheets of Iraq’s two main state-owned banks; and ensuring transparency and accountability in the oil sector.434 According to the IMF, the extension will give the GOI more time to implement the policy measures needed to complete the IMF’s combined third and fourth reviews of Iraq’s progress in these areas.
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National Development Plan A $275 billion GOI National Development Plan for 2013–2017 is now in the drafting stage. The plan calls for 50% more investment than Iraq’s current development plan, which was to provide $186 billion for 2010–2014. According to the GOI, the overarching goal of the new plan will be to diversify an economy that today is driven almost exclusively by crude oil income.
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The “Iraq Finance 2012” conference, held in London in September, brought together senior GOI leaders responsible for financial issues and international capital market specialists to discuss steps required to regenerate Iraq’s banking and financial
services industry. Two state-owned banks, Rafidain and Rasheed, control 90% of the sector despite years of U.S. efforts to strengthen the small group of private banks. The conference produced several recommendations, including a proposal that Iraq’s
private sector banks play a larger role; however, there were few specifics on how to turn the recommendations into reality.
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During this quarter, the Congress did not take further action on authorization and appropriations legislation related to SIGIR or Iraq reconstruction.The Congress passed and, on September 28, the President signed into law House Joint Resolution
117—the Continuing Appropriations Resolution,2013 (Public Law 112-175). As a general rule, the continuing resolution provided interim FY 2013 appropriations for most programs of the federal government, including programs to reconstruct Iraq, at the levels that had been provided in FY 2012 increased by 0.612%. Th at funding is available through March 27, 2013, unless altered by a
law passed before that date.
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I am pleased to present our 35th Quarterly Report to the U.S. Congress and the Secretaries of State and Defense.
On October 16, 2012, the Council of Ministers dismissed Central Bank of Iraq (CBI) Governor Sinan al-Shabibi,amid allegations of corruption leveled against him. Th is peremptory and constitutionally questionable move occurred as an audit of the CBI’s foreign currency auctions surfaced. The audit purportedly found that perhaps 80% of the $1 billion purchased at weekly CBI-managed auctions was tied to illegal transactions, with the funds subject to those transactions potentially lost abroad to money laundering. Th is development is symptomatic of a troubled year in Iraq, evidenced by increasing corruption, resurgent violence, deepening ethnosectarian strains,growing apprehensions about the confl ict in Syria, and widening divides within the coalition government. Despite these daunting challenges, Iraq achieved record electricity production this quarter (averaging about 7,300 megawatts), the highest crude oil output since 1990 (more than 3 million barrels per day), and a post-1990 record volume of crude oil exports (almost 2.6 million barrels per day). Moreover, the country’s economic growth rate remained at above 10%. Th e polarity between these evident economic successes and the constraints imposed by a variety of political and security impasses continues to limit Iraq’s democratic progress.
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This quarter, a number of Government of Iraq (GOI) officials told SIGIR that corruption was on the rise, diverting significant amounts of Iraq’s increasing oil income away from pressing economic and social needs. Moreover, Prime Minister Nuri al-Maliki’s opponents remained concerned about the continuing political imbroglio, which has been exacerbated by constitutionally questionable acts. For example, the decision by the Council of Ministers (CoM) to dismiss the Governor of the Central Bank of Iraq (CBI) and appoint a temporary successor created controversy both inside and outside Iraq.
Notwithstanding these difficulties, Iraq showed tangible signs of progress. Crude oil production and exports both reached levels not seen in more than two decades. Iraq overtook Iran as the second-largest producer of crude oil in the Organization of the Petroleum Exporting Countries, and its projected gross domestic product (GDP) growth rate for 2012 was among the highest of oil-exporting nations in the Middle East and North Africa region. In the still-struggling electric power sector, production increased by unprecedented amounts. A GOI agreement with the KRG secured the resumption of crude oil exports from the Kurdistan Region, temporarily assuaging the dispute over the control of hydrocarbon resources within the KRG.
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Corruption at the Central Bank of Iraq? On October 16, 2012, the Council of Ministers dismissed CBI Governor Dr. Sinan al-Shabibi, replacing him, on an interim basis, with the President of the Board of Supreme Audit (BSA), Dr. Abdul Basit Turki al-Sae’ed. Th e decision to replace Dr. al-Shabibi came amid claims that the CBI’s role in supervising the country’s banking system was compromised and that corruption was growing to unprecedented levels. Dr. al-Shabibi was said to be under investigation for possible misconduct, and a warrant was issued for his arrest.3
The former CBI Governor is credited by many analysts for maintaining the stability of the Iraqi dinar and for keeping infl ation and interest rates low—all viewed as crucially important prerequisites for the kind of wellmanaged economic growth Iraq hopes to achieve with its enormous oil wealth.4
Political opponents of Prime Minister al-Maliki, along with many banking and financial experts, expressed immediate concern that the dismissal of
Dr. al-Shabibi—who is widely viewed as personally honest and professionally effective—was an attempt to bring the CBI and its $63 billion in reserves under executive branch control. They pointed to the CoM’s action as just one of among several steps the Prime Minister has taken to concentrate power within his office. For example, in 2010, al-Maliki won a legal case that eff ectively shift ed control of independent agencies, such as the CBI, from the Council of Representatives (CoR) to the CoM. In an advisory opinion issued in February 2012, the Higher Judicial Council affirmed the earlier ruling, this time naming the CBI. The ruling drew criticism at the time as a violation of the CBI’s independence as guaranteed under the 2005 Iraqi Constitution.5 An audit of the CBI and its daily currency auctions completed by the BSA this quarter and personally supervised by Dr. Abdul Basit concluded that, of the $1 billion transferred out of Iraq each week, at least $800 million is laundered money—that is, transferred illegally under false pretenses. In a meeting with the Inspector General in mid-September, Dr. Abdul Basit talked about the BSA audit and what he called a triangle of sectarianism, corruption, and violence, in which each element feeds off the others ina dynamic that threatens the well-being of the state.6
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On reports of authoritarianism within al-Maliki’s government—“Iraq is … a democracy. It does face a lot of issues that are challenging to that democracy. It is fragile in many ways. We are working constantly with all sides … In short, what we’re doing is pushing them all to engage to pursue their interests in the legislative process, in an independent reform process that they’ve agreed to.”
• On the GOI’s ability to manage political differences within the political process and what the U.S. government can do to encourage cooperation or consensus—“Now, it’s oft entimes a slow, protracted process. It certainly doesn’t move at the pace that we would like to see, or with the efficiency we would like to see. But as I see it, our role is largely to continue to encourage this, to …be helpful in pointing out ways forward, ways things might be done, the way they might be able to compromise or reach consensus on issues....But again, I’d like to reiterate, the encouraging thing is that Iraq has not fallen apart. That it has held together.”
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Iraq’s plans for bolstering its security forces position the country as a major new consumer on the world armaments market. Currently, the GOI allocates 3% of its budget for security equipment,30 but growing oil revenues mean that Iraq will have substantial funds with which to continue to expand its armament procurements. During 2008–2011, the total value of Iraq’s arms transfer agreements ranked fourth among Middle East and North Africa nations, behind Saudi Arabia, the United Arab Emirates, and Egypt.31 Purchase agreements with the United States accounted for 72% of the total (see Figure 1.2),32 assisted by U.S. appropriations for the ISFF, which augmented GOI funding for FMS purchases.33
While the GOI likely will continue to be a big consumer of U.S. security equipment through the FMS program, the expiration of ISFF obligation authority on September 30, 2012, means that the U.S. total share of arms transfers to Iraq could drop.
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Baghdad-Erbil Dispute Nearly six months aft er the KRG halted crude oil exports to protest a lack of reimbursement for oilfield development costs, the GOI and KRG reached an agreement this quarter securing the resumption of crude oil exports from the Kurdistan Region.
For a timeline of important events in the dispute,see Figure 1.4. Talks also resumed in the CoR regarding the Hydrocarbon Laws, which are key to the growth of Iraq’s oil and gas industry. Notwithstanding this progress, relations between the KRG and Baghdad remain tense.
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Money Laundering
Money laundering plays an important role in corruption. Th e recent BSA audit alleges that the principal mechanism for money laundering in Iraq is the daily currency auction operated by the CBI through which it sells U.S. dollars to commercial banks, which, in turn, provide those dollars to customers for a fee. Th e customer, who provides a large amount of Iraqi dinars—possibly obtained by taking a bribe or via fraudulent withdrawal of money from ministry accounts—“launders” the illegal funds, requesting the commercial bank to transfer the dinar-purchased dollars to a bank
outside Iraq.51 Before the transaction can occur, the commercial bank is obligated to determine that the customer has a legitimate reason to transfer the money by demanding documentation, such as a contract to buy goods from a foreign company. Recent BSA reviews of the documentation offered for such purchases have shown that a large portion of the transactions have been based on fraudulent representations.
Improperly documented capital flight over the past year is draining Iraq of its capital, possibly reaching 80% of the estimated $1 billion in U.S. currency that is transferred out of the country each week, according to recent BSA findings.53
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The GOI earned $20.73 billion in receipts from the sale of crude oil during the quarter. But the total receipts were 9% less than the previous quarter, mainly because of lower crude oil prices.56 The International Monetary Fund’s 2012 World Economic Outlook published this quarter revised Iraq’s GDP growth forecast upward to a robust 14.7% for 2013—exactly three times that of the next strongest economy in the Middle East and North Africa region, Qatar. Iran’s economy, laboring under the impact of international sanctions, was projected to grow at less than 1% in 2013.57 The forecast reflects the view that Iraq’s long-anticipated infrastructure-spending program is beginning to take hold and oil production and exports will grow briskly in the coming years.
Despite the bright picture painted by these new reports, there are issues that could limit the country’s economic growth. Iraq’s antiquated banking industry has been unable to fi nance the kind of massive development spending required for Iraq to reach its goals. Further, international bankers voiced concern that the dismissal of CBI Governor al-Shabibi could weaken Iraq’s fi nancial services industry.59
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Total FY 2013 funding for Iraq relief and reconstruction has yet to be determined. In its budget request for FY 2013, the Administration requested $2.69 billion, which was $0.47 billion more than was appropriated for FY 2012.62 As of October 30, 2012, the FY 2013 budget request was still being considered by the Congress. This quarter, the Congress passed—and on September 28, the President signed into law—House
Joint Resolution 117, the “Continuing Appropriations Resolution, 2013” (Public Law 112-175). The law provided interim FY 2013 appropriations for most programs of the federal government, including programs to reconstruct Iraq, at the levels provided in FY 2012, with a slight increase of 0.612%. This funding is available through March 27, 2013.63
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The IMF this quarter approved a 7-month extension (to February 2013) of its $3.58 billion Stand-By Arrangement (SBA) with the GOI. The SBA, effectively a lending facility, was first scheduled to expire in February 2012 and later extended through July 2012. Despite projected budget deficits, the GOI so far has not needed to draw on the SBA, mainly because it has been unable to spend large percentages of ministerial capital budgets, resulting in annual surpluses.93 According to the IMF, the extension will give the GOI more time to implement the policy measures needed to complete the IMF’s combined third and fourth reviews of Iraq’s progress in these areas.94
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On other topics, the U.S. representatives reiterated that the United States is committed to working with both Iraq and Kuwait to resolve remaining issues relating to the UN Chapter VII sanctions imposed on Iraq in the wake of its 1990invasion of Kuwait, and they pledged to assist Iraq in implementing its 2013 provincial and 2014 national elections.
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The five-year, $117 million Governance Strengthening Project aims to increase the capacityof provincial governors and provincial and local councils to better respond to the needs of Iraqi citizens. A goal of this program is to improve budget accountability and transparency. In recent meetings with SIGIR, a GOI official praised the program’s new approach to budgeting (via the zerobasedbudgeting system).
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The five-year, $53.3 million Financial Development Program focuses on the continued capacity building of Iraq’s financial sector to international standards, with an emphasis on private banks. According to USAID, the program is currently undergoing a mid-term evaluation that will inform USAID on how to improve the program’s effectiveness.212
This quarter, USAID reported that the Central Bank of Iraq (CBI) announced its goal to develop infrastructure for a retail payment system in Iraq and invited concerned parties to combine efforts to achieve this goal. In support of this effort, the Financial Development Program completed a review of regulations and an “instructions” document needed to govern payment service providers, banks, and mobile network operators in the operation and use of a potential retail payment system infrastructure. Th e program also worked with the CBI on a request for proposal to
implement this system.213
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Cost management of current cases. The majority of current cases, including several expansive ones like the delivery of 18 F-16s, do not have separate funding for contractor life support or security costs that refl ect OSC-I’s transition. Cases whose delivery schedules mature as OSC-I minimizes or eliminates its operational footprint are going to face challenges that are currently unfunded and have yet to be addressed.
8 OSC-I notes that it will support existing contracts until FMS cases are complete “or have been modified to support the transition strategy.”
Engagements with GOI Officials Under the FMS program, OSC-I manages both the obligation of U.S. funds to support the GOI’s security capacity and GOI purchases of military equipment and services. Concomitant to these program responsibilities, OSC-I has assumed an even broader responsibility of managing a wide range of relationships with the GOI—from facilitating OSC-I contractor work authorizations and visas243 to tracking and managing security-contractor incidents.244
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FMS Training Activities The largest ongoing FMS training activities coordinated by OSC-I, as of September 30, 2012, were the War Fighter Focus (WFF) program and two aviation pilot and maintainer programs, valued collectively at $279.3 million (including unexercised options):250 • More than 4,400 Iraqi Army personnel received WFF training this quarter in Erbil, Taji, and Besmaya.
• 13 prospective F-16 pilots are receiving training in the United States, and 359 Iraqi Air Force maintainers began training in Jordan.
• 7 prospective C-130 pilots, 16 maintainers, and 1 loadmaster are training at U.S. locations.
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F-16 Aircraft . The current case involving 18 F-16s provides for the purchase of aircraft ,ancillary systems, training, sustainment, and logistics. Delivery of the aircraft is being preceded by training and base preparations. As of the end of September, 13 pilots were training in the United States, with an additional 14 expected to begin training next quarter, with a goal of 27 trained pilots when the aircraft are delivered to Iraq by March 2016.
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GOI-KRG Dispute
On September 14, the two sides signed a tentative agreement that committed the KRG to restart exports on a more permanent basis. In return, the GOI agreed to reimburse oil-fi eld development cost and resume earlier commitments to supply the KRG with 17% of oil products refi ned in Iraq as well as 17% of all crude oil delivered to power plants in Iraq for electricity production. Separate committees drawn from representatives of both governments were formed to monitor adherence to the agreement and troubleshoot potential problems.
The Council of Ministers (CoM) ratified the agreement six days later.290 Although the agreement eased the immediate dispute, it is viewed as a temporary arrangement, expedient to both sides as they regroup to work on hydrocarbon legislation.
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Council of Ministers The CoM met regularly through the quarter,including during the month of Ramadan. In addition to approving the agreement that commits the KRG to increase crude oil exports in return for being reimbursed by the GOI for oil-fi eld development costs, the CoM took action across a broad range of issues:297
• approving a draft GOI budget for 2013 totaling $118.4 billion (for more details, see Section 2)
• naming Dr. Abdul Basit Turki al-Sae’ed as Acting Governor of the Central Bank of Iraq (CBI). As head of the GOI’s Board of Supreme Audit, Dr. Abdul Basit this quarter completed an audit of the CBI’s weekly currency auctions that concluded that, at most, only 20% of the estimated $1 billion in U.S. dollars purchased each week at those auctions was used inlegitimate transfers. Th e rest was laundered to get illicit money out of the country. At an October 24, 2012, news conference, Prime Minister al-Maliki said a warrant had been issued for the arrest of dismissed CBI Governor Sinan al-Shabibi in connection with the currency auctions.
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The Institutionalization of Corruption in Iraq Corruption and the level of theft of government funds by GOI officials remains a matter of controversy. While both Prime Minister al-Maliki and Chief Justice Medhat al-Mahmoud concede that corruption remains a problem, both state that the pervasiveness of corruption has been exaggerated. Critics of the government, on the other hand, claim that corruption is now worse than it has ever been.399 Dr. Abdul Basit, until mid-October President of Iraq’s Board of Supreme Audit and currently the interim Governor of Central Bank, has told SIGIR that there has been a massive fl ight of U.S.dollars from Iraq, mostly through money aundering, and that this is evidence of widespread corruption. According to Dr. Abdul Basit, approximately $1 billion a week is leaving Iraq—80% of it moved through fraudulent documents hiding its true purpose.400 According to several current and ormer GOI officials, corruption in Iraq is not tied to personal criminal activity but has become ingrained in the government infrastructure through the political parties.401 A widespread method to accomplish this corruption has been government contracts, oft en using shell companies outside of Iraq.402 Th e companies that receive these rigged awards then move the funds outside of the country through fraudulent means.403 In recent interviews with SIGIR,numerous senior Iraqi offi cials, advisors to Iraq’s anticorruption institutions, and program implementers have pointed to a clear evolving pattern of corruption that has become institutionalized within the government and political system of Iraq. In the view of several offi cials, corruption has transformed from controlled corruption under a dictatorship, to corruption out of control during a period of lawless violence, to the current situation, where corruption and the patronage it allows has become a means of governing.404 A repeated complaint, even among the supporters of the current government,has been the “Quota System,” which is shorthand for the allotment of government posts according to political blocks.Officials who owe their positions, and thus loyalty, to their political sponsors are compelled to siphon government largess to political backers according to arrangements made outside of public view. In some cases, this practice has nearly swallowed up entire projects and programs,leaving the public to benefit from a small fraction of the money spent.
Note: diagram on this page is important but can't be copied but part reads "
The BSA found that 80% of audited documents involved in money exchanges with the CBI had been falsified. "
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Other Developments On October 16, 2012, the Governor of the Central Bank of Iraq, Sinan al-Shabibi, was removed from office.416 In his place, the CoM installed the President of the Board of Supreme Audit, Dr. Abdul Basit, as a temporary measure.417 For more on these developments, see Section 1 of this Report. An outspoken leader of the anticorruption effort, former Commission of Integrity (COI) Commissioner Raheem al-Ugaili has been assigned to the HJC’s public prosecution offi ce. He informed SIGIR that he now faces at least 10 charges of “administrative corruption” for allegations such as:418
• holding press conferences and exaggerating the level of corruption in Iraq• providing U.S. officials statistics on the performance of the COI—a requirement for receiving U.S. grant assistance through the GoCASE initiative
(a computerized case processing system) A number of other COI offi cials also have been charged with similar crimes or have been reassigned since al-Ugaili resigned as COI Commissioner in protest, claiming political interference in his duties.419 The current COI Commissioner, Judge Alla’a Jwad Hameed, completed his fi rst year in office,serving as the third interim commissioner since the last appointed and confi rmed commissioner, Judge Radhi Hamza al-Radhi, resigned and fled to the United States in September 2007. Commissioner Alla’a has focused enforcement resources on an antibribery campaign that confronts retail corruption420 and on the requirements that government employees sign a code of conduct and submit financial reports. Only a third of GOI employees have signed the code of conduct.421
The most significant corruption conviction this quarter involved a former Financial and Administrative Director General who was sentenced to 15 years in prison for embezzling more than $430,000.422 The most notable arrest this quarter was of an employee in the state-owned al-Rasheed Bank accused of embezzling approximately $9.7 million by helping a customer draw checks from accounts with no balance. The criminal case is pending.
• Currency and Interest Rates. Th e Iraqi dinar remained stable this quarter, with the offi cial exchange rate holding at 1,166 per U.S. dollar since it was revalued by a token amount of 4 dinars in January 2012. Th e unoffi cial market rate for the dinar also moved closer to the offi cial rate.428 The CBI’s policy interest rate was also unchanged at 6% for the 10th consecutive quarter
Stock Exchange. As Figure 4.11 shows, the Iraq Stock Exchange (ISX) index rose marginally this quarter by just over 1%, but remained 15% lower for the year to date. Once the best-performing equities market in the Middle East region, the ISX so far in 2012 has been among the worst, as political uncertainty and the impact of ongoing slow bureaucratic decision making continue to dampen market sentiment. Participation of foreign investors remained well below levels seen through much of 2011, with their share of total trading volume accounting for 5% or less of the total for several weeks during the quarter. Between mid-2010 and the end of 2011,foreigners’ share in total trading volume tended to fluctuate between 8% and 16%.430
• Debt and Reserves. The GOI continued its payment of war reparations related to SaddamHussein’s 1990 invasion of Kuwait with
a transfer of $1.3 billion to Kuwait on July 26, 2012. Iraq has now paid a total of $37.6 billion to more than 100 governments and international
organizations for distribution to 1.5 million claimants. About $14.7 billion in claims remain to be paid, mainly to Kuwaiti claimants.431 Even with these payments, Iraq’s hard currency reserves held by the CBI remained at $63 billion during the quarter.432
• IMF Stand-By Arrangement (SBA). The IMF this quarter approved a 7-month extension (to February 2013) of its $3.58 billion Stand- By Arrangement (SBA) with the GOI. The SBA, effectively a lending facility, was first scheduled to expire in February 2012 and later extended through July 2012. Despite projected budget deficits, the GOI so far has not needed to draw on the SBA mainly because it has been unable to spend large percentages of ministerial capital budgets, resulting in annual surpluses.433 The key objectives of the SBA are to preserve Iraq’s macroeconomic stability and to support Iraq’s adoption of policies and measures to ensure sustainable
growth and poverty reduction. The program focuses on modernizing Iraq’s public financial management system; developing the financial sector, including enhancing CBI operations and restructuring the balance sheets of Iraq’s two main state-owned banks; and ensuring transparency and accountability in the oil sector.434 According to the IMF, the extension will give the GOI more time to implement the policy measures needed to complete the IMF’s combined third and fourth reviews of Iraq’s progress in these areas.
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National Development Plan A $275 billion GOI National Development Plan for 2013–2017 is now in the drafting stage. The plan calls for 50% more investment than Iraq’s current development plan, which was to provide $186 billion for 2010–2014. According to the GOI, the overarching goal of the new plan will be to diversify an economy that today is driven almost exclusively by crude oil income.
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The “Iraq Finance 2012” conference, held in London in September, brought together senior GOI leaders responsible for financial issues and international capital market specialists to discuss steps required to regenerate Iraq’s banking and financial
services industry. Two state-owned banks, Rafidain and Rasheed, control 90% of the sector despite years of U.S. efforts to strengthen the small group of private banks. The conference produced several recommendations, including a proposal that Iraq’s
private sector banks play a larger role; however, there were few specifics on how to turn the recommendations into reality.
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During this quarter, the Congress did not take further action on authorization and appropriations legislation related to SIGIR or Iraq reconstruction.The Congress passed and, on September 28, the President signed into law House Joint Resolution
117—the Continuing Appropriations Resolution,2013 (Public Law 112-175). As a general rule, the continuing resolution provided interim FY 2013 appropriations for most programs of the federal government, including programs to reconstruct Iraq, at the levels that had been provided in FY 2012 increased by 0.612%. Th at funding is available through March 27, 2013, unless altered by a
law passed before that date.
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