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Taliban to PSC: How May We Serve You?

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Today we have news straight out of Mario Puzo. It seems the Taliban made local Afghan private security contractors an offer they could not refuse.

Yesterday the Inspector General's office at the U.S. Agency for International released a report that found that millions of dollars in American taxpayer funds may have been paid to Taliban fighters in southern Afghanistan to provide security for a U.S. development project. The report says subcontractors hired to protect a development project near Jalalabad may have paid more than $5 million to the militants through local authorities.

According to news reports the report examined payments for security under a $349-million contract awarded to a U.S. contractor, Development Alternatives Inc., for a small-scale infrastructure and community development project.

Because the Taliban fighters are entrenched in the area and it is deemed too dangerous there for the contractor to visit regularly, Development Alternatives left it to local subcontractors to negotiate security arrangements.

The report says local authorities often demand a 20% "protection tax" in such circumstances. Under those deals -- along the lines of extortionist protection rackets in the U.S. -- the Taliban sends security guards with promises that they won't attack the subcontractors or their equipment and won't try to halt the contract work.

Often local authorities will try to renegotiate the agreement just before the work begins to further jack up the price, the report says.

Officials from the agency and the contractor told the investigators that the development work was not being directly monitored because it was taking place in a war zone, so there was no way they could provide assurances that U.S. taxpayer money paid to subcontractors didn't end up in the hands of the insurgents.

Note that what we are discussing is not an audit but a review report titled "Review of Security Costs Charged to USAID Projects in Afghanistan."

The actual review provides a more nuanced view of what happened than some of the news reports, although the situation still merits serious concern. The summary says:

The Regional Inspector General/Manila conducted a review of Edinburgh International's security costs charged to the following three USAID-funded projects in Afghanistan implemented by Development Alternatives, Inc. (DAI):

• Afghanistan Small and Medium Enterprises Development (ASMED)
• Incentives Driving Economic Alternatives for the North, East, and West (IDEA-NEW)
• Local Governance and Community Development (LGCD)

The objective of this review was to determine whether there has been any indication that
Edinburgh International misused USAID funds to pay the Taliban or others in exchange for protection. The review covered the period from January 1 to December 31, 2009.

The review found no indication that Edinburgh International had misused USAID funds to pay the Taliban or others in exchange for protection. However, there were indications that Afghan subcontractors working on the LGCD project had paid insurgents for protection in remote and insecure areas of Afghanistan. The payments were allegedly made as part of a security arrangement with local communities that very likely included the Taliban or groups that support them. We also found indications of pervasive fraud in DAI's LGCD office in Jalalabad and indications of endemic corruption in Nangarhar Province, where Jalalabad is located.

The background to this is that USAID/Afghanistan relies on private security contractors (PSCs) to supply various security services for contractors and grantees that implement USAID-funded projects in Afghanistan. USAID practice has been to delegate responsibility and oversight for security to its implementing partners and factor the cost of security into their program budgets. These implementing partners typically subcontract their security services to PSCs. USAID indirectly pays for PSCs when the implementing partners submit their invoices for payment, which include the cost of security services.

In the past year, news reports have said that U.S. Government funds paid to contractors for reconstruction projects were being siphoned off to Taliban insurgents in exchange for
"protection" to prevent attacks. For example, one news article reported that USAID funds were ending up in the hands of the Taliban through a protection racket for contractors. Another article said that in southern Afghanistan, no contract can be implemented unless the Taliban takes a cut, sometimes at various steps along the way. Other news reports said that PSCs were involved in the negotiations with insurgents.

The good news, according to the report is that:

A review of Edinburgh's accounting system and financial records revealed that the firm had employed a strong system of internal controls over cash transactions. These controls reduced the risk of illicit payments, since such payments are often made in cash. Further, an examination of supporting documentation for expenditures of $3.85 million (34 percent of the total spent by Edinburgh in 2009) revealed no unusual or suspicious payments. Finally, the field staff's authority to make payments was strictly limited, reducing the possibility that the staff could make extortion payments to the Taliban or other insurgent groups without the knowledge of supervisory staff in Kabul.

Edinburgh International provided an armed guard force and security management staff for DAI's project offices and guest houses, as well as security for moving expatriate staff on the ground. However, Edinburgh International did not provide security for DAI's project activities, such as road construction, canal rehabilitation, or other construction activities where Taliban insurgent violence was a risk. As a result, Edinburgh International would not be in a position to negotiate with or make payments to Taliban insurgents or others in exchange for protection at these work sites.

But, USAID, U.S. intelligence, and DAI officials expressed concerns that insurgents may have extorted protection payments from DAI subcontractors implementing stabilization and community development activities. During the review, the IG also received allegations of fraud involving employees at DAI's LGCD office in Jalalabad.

In October 2006, USAID/Afghanistan awarded DAI a 3-year, $95 million contract to implement the LGCD project. The contract was subsequently increased to $349 million and extended to April 30, 2011. The project was meant to work in partnership with local communities to create a stable environment for medium- and long-term political, economic, and social development. The LGCD project looks for communities in insecure areas who are willing to work with local government authorities to implement small-scale infrastructure and community development activities.

The contract states that one important responsibility of the communities is to guarantee security during the implementation phase of development activities. Yet some individuals said that the local communities who were supposed to guarantee security very likely included the Taliban or groups who support the Taliban. The original contract itself stated that dispute mediation and community security are "services" that the Taliban is providing.

Interviews with personnel from USAID, U.S. intelligence, and DAI indicated that, for LGCD subprojects, Afghan subcontractors would meet with local community leaders before the implementation phase and negotiate the terms of community support, including employment opportunities and security arrangements. The subcontractors would also negotiate security terms with insurgents either directly or indirectly through community leaders. Insurgents could demand from the subcontractor a "protection tax" of up to 20 percent of the total subcontract value in exchange for protection. "Protection" might include Taliban-provided security guards for the activity site and a promise not to attack the subcontractor's personnel and equipment and not to halt the activity. Sometimes insurgents would try to renegotiate the terms of the security arrangement shortly after the subcontractor began implementation. Their intent was to extort more money from the subcontractor, and they would threaten violence if the subcontractor did not comply.

The report also noted that Afghan subcontractors used several methods to recoup the money paid to insurgents. The most common method was to include the amount in the total cost of the subcontract up front, because subcontractors knew that the tax would have to be paid before implementation. Subcontractors allegedly considered such protection taxes as "mobilization costs" and billed them to DAI through normal invoicing procedures; the costs were then passed on to USAID for payment. Specific line items in the project budget might be inflated, or subcontractors might recoup costs by substituting low-quality, cheap materials for promised high-quality materials. Subcontractors might also stage a security incident at the project site and ask for more money from DAI to pay for security.

And what exactly is a security incident?

In 2009, DAI suspended or cancelled 27 LGCD subprojects totaling about $1.4 million because of security incidents in the southern, southeastern, and eastern regions of Afghanistan. According to a DAI report, the security incidents mostly involved Taliban insurgent threats and violence around the subproject construction sites. For example, in June 2008, DAI awarded a 6-month, $718,000 subcontract to an Afghan construction company to improve about 7.5 kilometers of gravel road in Kunar Province of eastern Afghanistan, just north of Nangarhar Province along the border with Pakistan. About 2 months after construction started, the subcontractor's bulldozer was set on fire by unknown arsonists, according to DAI's account of the security incident. DAI asked the subcontractor to suspend work in October 2008 and informed USAID of the situation. The subproject remained suspended until it was finally canceled in April 2009.

Further inquiry by USAID personnel in August 2009 revealed that Taliban insurgents from the local community had been involved with the arson. Apparently, insurgents had been requesting payment for security instead of providing it as part of their community contribution as originally agreed with the subcontractor. According to unclassified information obtained from U.S. intelligence officials, this incident fits the pattern of attempts by insurgents to renegotiate the terms of the security arrangement shortly after the subcontractor begins implementation. Their intent is to extort more money from the subcontractor, and they threaten or commit violence if the subcontractor does not comply. This type of activity is endemic in Taliban stronghold areas, and the LGCD incident in Kunar Province is representative of such occurrences in these areas, the officials said.

DAI ended up paying the full amount of the subcontract plus idle-equipment fees amounting to about $740,000--costs that were passed along to USAID. The length of the subcontract was 6 months, yet the subcontractor worked for only about 2 months and, as calculated from the time actually spent at the job site, completed only 33 percent of the construction. We concluded that this subproject was not only a casualty of Taliban insurgent actions and violence but also was a waste of USAID money.

One wonders if PMSC trade groups factor that in when making their usual claims about the inherent cost effectiveness of PSC use?