Probes take their toll on Iraq contractor

Even Pentagon auditors waved red flags about Halliburton early this year -- but they apparently went unheeded. On January 16, the Texas oil services giant won a $1.2 billion contract to help repair Iraq's devastated oil infrastructure. Three days before, the Defense Department's principal auditing agency had sent a memo to the Army Corps of Engineers that faulted the company's cost-estimation systems for "significant deficiencies." And the day after that, on January 14, the auditing agency called on the Defense Department's inspector general to open a criminal probe into at least $61 million that Halliburton had overcharged the government on its gasoline imports into Iraq.

But Halliburton got the new contract anyway. And ironically, the $1.2 billion contract was intended to quell a firestorm of criticism about an earlier Halliburton contract for Iraq -- the giant, no-bid deal that could have been worth up to $7 billion but was capped at $2.5 billion. The original contract, first made public in March 2003 on the eve of the war, was also for fixing Iraq's damaged oil industry. The second Halliburton contract, which did go through a competitive bidding process, was the larger of two that the Army Corps of Engineers awarded to replace the original sole-source contract.

Some outside analysts say it's unusual for a company facing government scrutiny to win a new contract. "In government contracting, we usually disqualify companies that are in the midst of multiple investigations," says P.W. Singer, a national security fellow at the Brookings Institution and the author of Corporate Warriors.

Other experts also voice dismay at Halliburton's securing new defense contracts in the wake of auditors' warnings. "When you keep finding problems, you're a damned fool to keep working with the same guy," concludes retired Army Maj. Gen. William Nash, now a senior fellow at the Council on Foreign Relations. "It seems to me that the Pentagon has been taken for a ride."

The dustup over Halliburton's Iraq oil infrastructure contracts underscores the embattled state of the company, which Vice President Cheney ran from 1995 to 2000. And, if anything, Halliburton's headaches have gotten worse lately. Halliburton has also come under scrutiny by the Justice Department, the Securities and Exchange Commission, and two foreign governments for some of the far-flung projects it undertook in Nigeria, Bosnia, and Iran back when Cheney was running the show. And with the election season under way, Sen. John Kerry's presidential campaign has been running ads that suggest linkages between Halliburton's Iraq business and its former CEO. Kerry has said that if elected, he will "stop companies like Halliburton from profiting at the expense of our troops and taxpayers."

In response to the drumbeat of criticism, Halliburton and the Bush-Cheney campaign have separately, and vehemently, denied that the government gave the company any special treatment. Both have countered that the attacks on the company and on Cheney's alleged ties to it are politically motivated. "Democrats are launching baseless attacks on Halliburton because they have no forward-looking agenda," said Steve Schmidt, a Bush-Cheney campaign spokesman. "This is an issue that has been exhaustively reported. Democratic attacks on the vice president are baseless and false."

For its part, Halliburton earlier this year launched an expensive television and print ad blitz defending its track record and noting that it has done government work for six decades, for both Republican and Democratic administrations.

But no one disputes that the Iraq war has plainly boosted Halliburton's revenues. In 2003, the company became the Army's No. 1 contractor, up from No. 19 the previous year. The company became the seventh-biggest Pentagon contractor overall last year, moving up from No. 22 in 2000. Halliburton's work in Iraq includes a wide-ranging contract, called a LogCAP, that it won through competitive bidding in 2001 to provide food, fuel, and other logistical services to troops worldwide. That contract -- most of which is for services in the Middle East -- and the oil infrastructure contract are estimated to be worth a total of $11 billion. Most of that work has gone to KBR, Halliburton's construction and engineering unit.

But along the way, Halliburton's image has been tarnished by company employees -- subsequently fired -- who allegedly took $6 million in kickbacks from a Kuwaiti subcontractor. Further, Halliburton whistle-blowers asserted at a hearing of the House Government Reform Committee this summer that the company had abandoned trucks each worth $85,000 because they lacked spare tires, and had charged the government $45 a case for soda. Halliburton executives flatly denied the accusations, which were made by former KBR truck drivers and a subcontracting manager.

Further fanning the fires, Pentagon auditors in August reported that the company hasn't provided enough details to substantiate $1.8 billion of its work in Iraq and Kuwait. "Three separate government auditors have found widespread systemic problems with regard to almost every aspect of Halliburton's work in Iraq," said Rep. Henry Waxman, D-Calif., ranking member of the House Government Reform Committee, who has emerged as the company's No. 1 nemesis in Congress.

Wendy Hall, a Halliburton spokesperson, challenges the bleak auditing assessments. She notes that earlier this month, the Defense Contract Management Agency issued an "approval letter" that deemed KBR's policies and practices "effective and efficient." Ironically, given KBR's recent military revenue growth, Halliburton announced recently that it was restructuring KBR to cut costs because of low profit margins and might put the unit up for sale or spin it off.

Critics have lately found additional ammunition in other federal investigations that focus in part on the years when Cheney was at Halliburton's helm. Halliburton is facing separate Justice Department and SEC probes into allegations that it participated with foreign corporate partners in a $180 million payment scheme in the late 1990s to build a $4 billion natural gas complex in Nigeria. French and Nigerian authorities are also probing the charges involving a complex system of payments to Nigerian officials to help the international consortium win the lucrative project.

Halliburton is cooperating with these inquiries. In June, the company took the unusual step of severing all ties with two prominent consultants linked to the scheme; one is Albert Stanley, who ran the company's KBR unit under Cheney when some of the payments were allegedly made. Halliburton said that Stanley had channeled $5 million into a Swiss bank account and personally enriched himself.

Halliburton's Hall wrote in an e-mail that the consultants were terminated because of "violations of Halliburton's ... codes of business conduct."

Meanwhile, the Justice Department is probing other charges of war profiteering by Halliburton in the Balkans during the period when Cheney was CEO, and is looking into Halliburton's work in Iran, where, for years, the company has used a loophole to evade U.S. prohibitions against doing business with Tehran.

Separately, the SEC this summer settled a probe into changes in Halliburton's accounting methods that occurred on Cheney's watch. The SEC alleged that the changes permitted the company to inflate its reported profits. As part of the settlement, the company made a payment of $7.5 million to the agency.

But it is Halliburton's work in Iraq and Cheney's former leading role at the company that, for now, are grabbing headlines.

Cheney's public statements about his relationship with the company have been challenged by critics as less than full disclosure. On Meet the Press, for example, Cheney said in 2003, "I have no financial interest in Halliburton of any kind and haven't had now for over three years."

But that assertion is undercut somewhat by the vice president's financial disclosure forms: Since early 2001, Cheney has yearly received deferred-compensation payments for his work for Halliburton in 1999. Cheney's deferred payments have ranged from a low of $147,579 in 2001 to a high of $178,437 in 2003.

Altogether he will have received five deferred-compensation payments, including one in January. Just before taking office in 2001, Cheney also received $1.5 million that was part of his 2000 compensation. He has options to purchase 400,000 shares of Halliburton stock; he has pledged to donate the proceeds from the sale of that Halliburton stock to charity.

A Cheney spokesman has stressed that these payments are not affected in any way by how well the company has done since Cheney has been in office. Cheney bought an insurance policy that guarantees the payments. Still, the nonpartisan Congressional Research Service indicated in response to questions from Sen. Frank Lautenberg, D-N.J., last year that officials' deferred salary and stock options could be considered "continuing financial interest" in a company.

Potentially more important to Halliburton's ongoing troubles is a recent Washington Post report that new information emerged from a House briefing this summer that seems to contradict a Pentagon claim that career civil servants were responsible for giving Halliburton its original, no-bid contract to repair Iraq's oil infrastructure. At the briefing, it was revealed that Michael Mobbs, a senior Pentagon political appointee, was instrumental in helping Halliburton's KBR subsidiary get a leg up in its effort to secure the huge contract.

Mobbs indicated at the closed briefing that he had pushed to award Halliburton the contract for a contingency study on Iraq's oil needs in the fall of 2002, before the war. That work put the company in a good position to gain the sole-source contract the following March. The study, called a task order, was justified by Mobbs under the company's separate LogCAP contract for providing logistical services worldwide. Still, an Army lawyer challenged Mobbs's view at the time, arguing that it was inappropriate to use the LogCAP contract because the Iraq study didn't fall "within its scope." A Government Accountability Office report later seconded this concern.

Further, The Post reported that in the fall of 2002, Cheney's chief of staff, Lewis Libby, attended a wide-ranging meeting with a group of national security deputies at which Mobbs said he intended to give the contingency study contract to KBR. Kevin Kellems, a spokesman for Cheney, has said that Libby didn't inform Cheney about Mobbs's decision to use KBR. Kellems has also stressed that "vice presidents don't do contracting."

Some outside analysts argue that the company and the Bush administration have at least indirectly created some of these problems. "When they complain about a political witch-hunt, they have only themselves to blame for opening the doors up, by not following the rules," says Singer. "The procurement system is set up to keep political interests out of the contract awarding process. But in this case, you had individuals from both the Office of the Secretary of Defense and Office of the Vice President who were linked to, either through knowledge of or influence over, the process -- and in either case it's inappropriate."

Waxman is also dissatisfied with the administration's explanations, and he has stepped up his calls for the vice president's office to provide a full accounting of any "contacts for contracts."

Halliburton rejects as "completely false" any suggestion that its work in Iraq has been influenced in any way by its former CEO. "We get our business based on the skills and abilities of our employees to deliver quality services to those who need them," said Halliburton's Hall.