Auditors in Iraq uncover staggering $2.5 billion tax fraud

BAGHDAD -- Auditors in Iraq have uncovered a massive scheme in which a network of businesses and officials embezzled some $2.5 billion from the country’s tax authority, despite layers of safeguards.

The scandal poses an early test for Iraq’s new 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 any senior officials or political leaders to be held accountable.

The scale of the embezzlement is remarkable, even for an oil-rich country where corruption has been rampant for decades. Transparency International, a global watchdog, rated Iraq 157th out of 180 countries on its 2021 index for clean governance.

The auditors' report, obtained by The Associated Press and first reported by the Guardian, suggests the theft was orchestrated by a broad network of officials, civil servants and Businessmen. In Iraq’s deeply-rooted patronage system, such individuals often have links 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 reprisal.

The scheme came to light last month when an internal audit by the Finance Ministry alleged that the General Commission for Taxes — Iraq’s Internal Revenue Service — had fraudulently paid some 3.7 trillion Iraqi dinars, or around $2.5 billion, to five companies.

The payments were made through 247 checks cashed between Sept. 9, 2021 and Aug. 11 of this year, from a branch at the state-run Rafidain Bank located within the tax commission.

The account held billions of dollars in deposits made by companies that were supposed to be returned to them once taxes had been deducted and the companies had presented updated financial statements. The five companies are alleged to have fraudulently drawn refunds without depositing anything.

An audit was launched by the acting finance minister at the time, Ihsan Abdul Jabbar, who also served as oil minister. He discovered the theft after receiving complaints from an oil company unable to retrieve its tax deposits, according to a senior official close to the investigation.

When the minister inquired as to the remaining balance in the account, the tax authority said it held around $2.5 billion, but further inspection revealed the actual balance had been drained down to $100 million, the official said.

That 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.

Well before the audit, the money laundering department in the bank had expressed concern to the Finance Ministry over the high volume of cash withdrawals. Abdul Jabbar’s predecessor, former Finance Minister Ali Allawi, had asked that his office approve any large withdrawals, but key managers in the tax authority ignored the request, the official said.

Allawi resigned in August in protest over 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 wait times. The decision to remove the Federal Board of Supreme Audit from the process was triggered 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 established just weeks before the payments were made, submitted fake documents to be able to claim the payouts. Auditors were unable to follow the money further because it was withdrawn in cash.

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

The findings suggest a broad network of tax officials and Businessmen must have conspired.

The claim process requires lengthy paperwork and signoffs from at least three departments within the tax authority, as well as the director and deputy director of the financial department. Rafidain Bank contacted the tax authority to verify the checks before cashing them, as it was required to do.

But the money vanished anyway, 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 as the CEO of two of the companies and obtained over $1 billion from the account, according to the audit. His lawyer did not respond to a request for comment.

Two officials at the tax authority have also been detained, and the judiciary says it has seized several properties and millions of dollars in assets.

But officials say it's unlikely that an embezzlement scheme of this scale could unfold without the knowledge of higher-ups.

Political factions in Iraq have long jockeyed for 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 linked to different government bodies implicated in the tax scheme.

The current government only came together in late October, more than a year after early elections. Bickering among powerful factions boiled over into deadly street fighting earlier this year, and the largest party in parliament, headed by an influential Shiite cleric, was consigned to the opposition.

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