Accountants in Iraq uncover $2.5 billion in tax fraud

BAGHDAD (AP) — Accountants in Iraq have uncovered a massive scheme in which a network of companies and officials embezzled about $2.5 billion from the country’s tax agency, despite multiple safeguards.

The scandal represents an early test for the new Iraqi government, which was formed late last month after a prolonged political crisis. Prime Minister Mohammed Shia al-Sudani has vowed to crack down on corruption, but few expect senior officials or political leaders to be held accountable.

The scale of the embezzlement – around 2.8% of the state’s 2021 budget – is remarkable, even for an oil-rich country where corruption has been rife for decades. Transparency International, a global watchdog, ranked Iraq 157th out of 180 countries on its 2021 Clean Governance Index.

The auditor’s report, obtained by The Associated Press and first reported by the Guardian, suggests the theft was orchestrated by a wide network of officials, civil servants and businessmen. In Iraq’s ingrained system of patronage, such individuals often have ties to powerful political factions.

“It was a very organized and agreed-upon theft process,” said Jamal al-Asadi, a legal expert and retired judge familiar with corruption cases.

Three officials confirmed details of the plan to the AP. All spoke on condition of anonymity for fear of reprisals.

The scheme came to light last month when an internal Treasury Department audit claimed that the General Commission on Taxes – Iraq’s tax agency – had fraudulently paid about 3.7 trillion Iraqi dinars, or about $2.5 billion, to five companies.

The payments were made through 247 checks cashed between September 9, 2021 and August 11 this year by a branch of the state-owned Rafidain Bank within the Tax Commission.

The account contained billions of dollars in deposits from companies that would be returned to them once the taxes were deducted and the companies submitted updated financial statements. The five companies are accused of fraudulently withdrawing refunds without depositing anything.

The then acting finance minister, Ihsan Abdul Jabbar, who also served as oil minister, initiated an investigation. He discovered the theft after receiving complaints from an oil company that couldn’t recover its tax deposits, according to a senior official close to the investigation.

When the minister inquired about the remaining balance in the account, the tax agency said it held around $2.5 billion, but a further check showed the actual balance had fallen to $100 million, the official said .

That was the first indication of the massive theft. A subsequent audit submitted to Parliament’s Finance Committee revealed the rest. The AP received a copy of that report this week.

Long before the audit, the bank’s money laundering department had raised concerns with the Treasury Department about the high volume of cash withdrawals. Abdul Jabbar’s predecessor, former Finance Minister Ali Allawi, had requested that his office authorize all large withdrawals, but key executives in the tax agency ignored the request, the official said.

Allawi resigned in August in protest at corruption and foreign interference in Iraqi affairs.

Weeks before the first checks were cashed, authorities removed a key layer of oversight, ostensibly because companies had complained of long waits. The decision to remove the federal Supreme Audit Institution from the process was prompted by a motion by lawmaker Haitham al-Jibouri, who was then chairman of the parliamentary finance committee.

The audit revealed that the companies, three of which were formed just weeks before the payout, submitted fake documents to claim the payouts. Auditors were unable to follow up on the money as it was withdrawn in cash.

“There is no doubt that these amounts were stolen,” the report concludes.

The results suggest that a broad network of tax officials and businessmen must have been conspiring.

The application process requires lengthy paperwork and approvals from at least three departments within the tax authority, as well as the Director and Deputy Director of Treasury. As required, Rafidain Bank approached the tax authorities to verify the checks before cashing them.

But the money went missing anyway, and it’s unclear who – if anyone – will ultimately be held accountable.

Nour Zuhair Jassim, a well-connected businessman, was arrested at Baghdad International Airport in late October. He was named CEO of two of the companies and received over $1 billion from the account, according to the audit. His attorney did not respond to a request for comment.

Two tax agency officials were also arrested, and the judiciary says it seized several properties and assets worth millions.

But officials say it’s unlikely an embezzlement scheme of this magnitude could unfold without the knowledge of superiors.

Political factions in Iraq have long struggled for control of ministries and other government agencies, which they then use to secure jobs and other favors for their supporters. A number of factions are linked to various government agencies involved in the tax system.

The current government did not meet until the end of October, more than a year after early elections. The bickering between powerful factions culminated in deadly street fights Earlier this year, the largest party in parliament, led by an influential Shia cleric, was handed over to the opposition.

Any attempt to hold political leaders accountable for the fraud could spark more unrest.

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