Auditors in Iraq uncover staggering $2.5 billion tax fraud

Auditors in Iraq uncover staggering $2.5 billion tax fraud

BAGHDAD (AP) — Iraqi auditors have uncovered a massive scheme in which a network of companies and officials embezzled some $2.5 billion from the country’s tax administration, despite layers of safeguards.

The scandal is a first test for Iraq’s new government, which was formed late last month after a protracted political crisis. Prime Minister Mohammed Shia al-Sudani has pledged to crack down on corruption, but few expect senior officials or political leaders to be held accountable.

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

The auditors’ 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 deep-rooted patronage system, these people often have ties to powerful political factions.

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

Three officials confirmed details of the scheme to the AP. All spoke on condition of anonymity, fearing reprisals.

The scheme came to light last month when an internal Finance Ministry audit alleged that the General Tax Commission – Iraq’s tax authority – had fraudulently paid out some 3.7 trillion Iraqi dinars, or about 2.5 billion dollars, to five companies.

The payments were made by means of 247 checks cashed between September 9, 2021 and August 11 this year, from a branch of the public bank Rafidain located within the tax commission.

The account contained billions of dollars in deposits made by companies which were supposed to be returned to them after taxes had been deducted and the companies had submitted updated financial statements. The five companies allegedly fraudulently drew refunds without depositing anything.

An audit was launched by the then acting finance minister, Ihsan Abdul Jabbar, who also served as oil minister. He discovered the theft after receiving complaints from an oil company unable to recover his tax deposits, according to a senior official familiar with the investigation.

When the Minister inquired about the balance remaining in the account, the tax office said it held approximately $2.5 billion, but further inspection revealed that the actual balance had been reduced to $100 million. dollars, the official said.

This was the first indication of the massive theft. A subsequent audit presented to parliament’s finance committee revealed the rest. The AP obtained a copy of that report this week.

Long before the audit, the bank’s money laundering department had expressed concern to the Ministry of Finance over the high volume of cash withdrawals. Abdul Jabbar’s predecessor, former finance minister Ali Allawi, had asked his office to approve any large withdrawals, but top tax officials ignored the request, the official said.

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

Weeks before the first checks were cashed, authorities removed a key level of oversight, reportedly because businesses had complained of long wait times. The decision to remove the Supreme Control Federal Council from the process was prompted by a request from lawmaker Haitham al-Jibouri, who was then head of the parliamentary finance committee.

The audit found that the companies, three of which were set up just weeks before the payments were made, submitted false documents in order to claim the payments. Auditors could not follow the money further because it was withdrawn in cash.

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

The results suggest that a vast network of tax officials and businessmen must have conspired.

The claims process requires lengthy documentation and approvals from at least three departments within the tax office, as well as the director and deputy director of the finance department. The Rafidain bank contacted the tax authorities to check the checks before cashing them, as it was required to do.

But the money still disappeared, and it’s unclear who – if anyone – will ultimately be held accountable.

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

Two tax administration officials were also arrested and the judiciary said they seized several properties and millions of dollars in assets.

But officials say it is unlikely an embezzlement scheme of this scale could take place without the knowledge of superiors.

Political factions in Iraq have long fought over control of ministries and other government bodies, which they then use to provide jobs and other favors to their supporters. A number of factions are tied to different government agencies involved in the tax system.

The current government only met at the end of October, more than a year after snap elections. Quarrels between powerful factions escalated into deadly street fights earlier this year, and the largest party in parliament, led by an influential Shia cleric, was relegated to opposition.

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

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