A US military aid program that favors Afghan vendors is being used by the Taliban as an extortion racket to the tune of a projected $80 million in the last year.

By Jean MacKenzie - GlobalPost

KABUL -- It seemed like such a good idea at the time.

At a staff meeting in 2006, Lt. Gen. Karl Eikenberry, who was then commander of Combined Forces Afghanistan, took a sip of bottled water.

Then he looked at the label of one of the Western companies that were being paid millions of dollars a year to ship bottled water by the container load into Afghanistan.

And Eikenberry, who is now the U.S. ambassador to Afghanistan, said, "There must be a way of producing bottled water in Afghanistan."

Thus was born the concept of Afghan First, a policy of preferential treatment for Afghan-owned companies that steers military aid into the hands of Afghan vendors.

All local procurement from fuel delivery for the Afghan army to the production of winter socks for the Afghan police -- everything short of weapons and ammunition -- now comes from a variety of local contractors, who are being paid about $800 million per year from the U.S. military. The largesse comes out of the total $1.1 billion budget for local purchases that falls under the Combined Security Transition Command-Afghanistan, CSTC-A for short. It is the lead U.S. agency responsible for developing the Afghan army and police.

"We are building this country," said Sgt. Edward Gyokeres, chief of the public affairs office at CSTC-A, explaining that the program is intended to use the American and coalition aid money in a way that helps construct a national economy in Afghanistan.

But, paradoxically, this well-intentioned policy may also benefit the insurgency, according to those inside the system, who contend that a significant portion of that money going to Afghan vendors trickles down into the hands of the very enemy the U.S. is battling in Afghanistan -- the Taliban.

Precise numbers are impossible to obtain in the lawless fringes of rural Afghanistan where there is very little accounting for this money, but those knowledgeable about the process estimate that at least 10 percent, or about $80 million, has in the last year gone to the diverse groupings of Afghan insurgents whom the U.S. military has come to call the Taliban.

Some contractors say as much as 20 percent of the contracts go to paying off the insurgency, which would put the number closer to $160 million a year.

U.S. and Afghan officials tracking where the Taliban gets its funding estimate that the Taliban's annual take of the poppy crop is about $100 million.

Over the last month, GlobalPost conducted a series of interviews with contractors, military personnel and others who work inside the system and confirmed that a flow of money goes from these local Afghan contractors to the Taliban for payoffs and protection in the widening areas of the country that are Taliban controlled.

In fact, GlobalPost found almost no one inside the military procurement and aid community who expressed surprise at the phenomenon, but very few who were willing to discuss the process on the record out of fear of losing their lucrative contracts, their jobs, or their lives.

"There is no line item for bribes," said CSTC-A's Sgt. Gyokeres. "That's not to say it doesn't happen."

Procurement officers working for two different companies with large CSTC-A contracts shared their stories and three military officers commented on the procurement process. The head of the non-governmental organization that matches contractors to funders also weighed in, as did numerous ordinary Afghans and foreigners more indirectly associated with the process.

They describe a system in which huge contracts in the tens of millions of dollars are being pushed through in a chaotic and violent environment with too few project managers and accountants. This is happening as the U.S. and coalition partners try to balance the desperate development needs of the country against the knowledge that some of those funds are ending up in the hands of the Taliban.

All agreed: Payoffs to insurgent groups do occur, are almost impossible to track and will be extremely difficult to stop. As with U.S. assistance funds, a percentage of which find their way to Taliban coffers, military procurement money is a major source of financing for the resurgent Taliban.

"ISAF (International Security Assistance Force) is aware of allegations that procurement funds may find their way into the hands of insurgent groups, but we do not directly support or condone this activity, if it is occurring," said Col. Wayne Shanks, chief of public affairs for the U.S. Forces in Afghanistan (USFOR-A).

"While rigorous contract award and oversight processes exist, the relationships between contractors and their subcontractors, as well as between subcontractors and others in their operational communities, are not entirely transparent," Shanks added.

His candid assessment of the process and the blind spots in it reflect an age-old struggle in counterterrorism: Money often flows through local businesses to the insurgency. It was a problem that was faced by the British Empire here in the 19th century and later by the Soviet Union when it invaded Afghanistan. The United States encountered the phenomenon in Vietnam and more recently in Somalia, according to aid workers who have been negotiating this terrain for decades.

Paul O'Brien is the director of the aid effectiveness team at Oxfam who has spent many years in Afghanistan. He has deep inside knowledge of the difficulties that aid agencies and the military face in providing assistance in a war zone. He said that some of the funding inevitably ends up in the wrong hands. But he pointed out that imposing overly stringent accounting methods would jeopardize the overall effort and diminish the greater good of helping the Afghan people.

"If we go in there and the first thing we say is, okay, we need to write down your names for accounting purposes and for political purposes to be sure you are not with the insurgency, it is much harder to accomplish the larger goal," O'Brien explained.

As GlobalPost first reported in its special report "Life, Death and the Taliban," the insurgents are reaping rich dividends from local contractors who are paid through U.S. and coalition development funding. The story prompted a probe by the USAID inspector general's office which is now underway. Large contracts awarded to American firms often have accounting procedures in place, but most U.S. companies engage a variety of Afghan subcontractors to carry out the work. This is where things begin to fall apart for both military and NGOs, or non-governmental organizations that provide development assistance.

"Everything was done in cash," said one contractor who worked for an Afghan firm with a wide range of CSTC-A contracts. "There is no way of tracking where the money is going. There are no controls on payments. The military does not follow up or check on [Afghan] companies the way they can U.S. vendors."

This is the rule, rather than the exception, where Afghan companies are concerned, according to those closest to the process. As a result, they say, money can be easily diverted.

"Of course we pay off the Taliban," said one procurement director for an Afghan company that imports fuel for the military. "What is the alternative?"

There are few viable options for those who work in the widening area of Afghanistan that is under Taliban control. Those who do not pay up-front end up bearing even greater costs in cash or blood. Contractors often tell the story of one transportation company that refused to pay: It lost 800 trucks before it bowed to the inevitable.

The amounts involved are far from negligible. According to the procurement director, who spoke on condition of anonymity, when fuel comes into the country from Central Asia it costs approximately $1 per liter.

By the time it reaches a military base in Kandahar or Tirin Kot, in the volatile, dangerous, Taliban-controlled south, the price has gone up to $1.60 -- billed, of course, to the U.S. military. A modest portion -- between 10 and 20 cents -- goes to the company as profit. The remaining 40 to 50 cents, or more than 25 percent of the total, goes for "security" -- which means handouts to the Taliban or other local insurgents to allow the shipment through.

This money is baked directly into the price of the fuel - legitimate security costs, to private firms that accompany the shipments or guard the fuel storage areas, would be a separate line item in a firm's budget.

It adds up. According to Mike Capstick, head of Peace Dividend Trust, an organization that matches Afghan companies to international donors, the value of military contracts given to Afghan companies last year alone was $1.1 billion.

If, as insiders say, between 10 and 20 percent is being siphoned off to the Taliban, then CSTC-A funding from the U.S. military would rival the narcotics industry as a source of revenue for the insurgency.

"I think it is important to note that the ISAF and our international partners are taking a broad-based approach to identify and close vulnerabilities that criminals, including the Taliban, use to raise, store and move funds," said Col. Shanks with USFOR-A.

"We work closely with our Afghan partners to take action against specific people involved in financing of the Taliban, and to build Afghan capacity in strategic areas, like internal audits, to better track budget and procurement flows, as well as to improve overall security conditions with the help of the Afghan National Security Forces," he added.

Shanks pointed to a series of recent military operations aimed at capturing or eliminating insurgents and their supporters.

Attempts are also being made to track and control the "hawala" system, a traditional financial structure in this part of the world that does not conform easily to regulation.

Hundreds of thousands, perhaps millions, of dollars are moved through hawala every day. The procedure is simple, and virtually untraceable. The customer brings his money, in cash, to a hawala trader at a central market. The broker takes a percentage, then makes a phone call to a partner in London, Cairo, New York or Sydney, who dispenses the requisite amount in cash to a designated recipient.

In Kabul, the government has distributed forms to hawala traders, and is requiring that they fill them out for every transaction. This also means that the hawala trader would have to pay taxes on all his profits.

"Of course we do not record everything," snorted one hawala broker. "We record a percentage -- usually for those businesses that are all legitimate and above board. We do not register the rest."

The major customers for hawala, according to the broker, are those dealing in drug money and those with major international contracts.

Cracking an internal Afghan system from the outside is no easy task.

"Afghans know how to get things done here," said Capstick, from Peace Dividend Trust. "They can seal a deal with a handshake."

But the Afghan way is all too often mired in corruption and nepotism, traits that have made the country the fifth most corrupt nation in the world, according to Transparency International's most recent annual index. In a country where the rule of law is more a distant dream than a present reality, giving the Taliban a cut of the funding is not seen as treason -- it is merely expedient.

"We delivered fuel to all the provinces, and the only way of accomplishing that was by greasing the Taliban," said the contractor from the Afghan firm.

Between 10 and 20 percent of the proceeds were paid out to ensure security, he added. The overall contract amounts were staggering.

"I went to Camp Eggers to collect unpaid invoices," he said, referring to the U.S. military base in the center of Kabul that houses CSTC-A. "For three weeks we were owed $16 million."

At that rate, the firm would be making upward of $250 million per year -- with a healthy cut going to insurgent groups.

The U.S. military is trying its best to build in checks and balances to keep the process honest.

"All ISAF agencies check potential contractors and organizations to ensure that money is not going directly into the hands of known terrorists," said Shanks.

But none of the procedures in place can hope to catch or counter the built-in payments to the Taliban.

According to Lt. Col. Mitchell S. Appley, commander of the Kabul Regional Contracting Center, the military keeps a list of close to 4,000 Afghan vendors.

"The policy, basically, is if there is an Afghan vendor available, we should give them preference," he said. "New rules and regulations allow us to restrict competition to Afghan only."

The contracting system is long and complex, with multiple layers of bureaucracy designed to ensure transparency.

First a potential vendor is vetted by Peace Dividend Trust, which checks the organization's registration, does a site visit to make sure that it is a legitimate company, and helps its Afghan officials to negotiate their way through the military procurement system.

The military concedes that there is much it cannot control.

"Corruption is a possibility," said Sgt. Gyokeres. "But our job is to administer the contracts fairly and objectively."

For those working inside the system, this desire to remain above the fray amounts to a willful refusal to see what is going on.

"They say 'just get it done,'" said the procurement director. "They do not seem to want to know too many of the details."

A former international military officer explained why CSTC-A may be feeling a bit overwhelmed.

"Someone from above is pushing on the soft spot in their forehead and telling them to get the contracts out," he said, speaking privately. "There is a lot of pressure on the military procurement system."

The contractor definitely agrees.

"That is the way things happen," he said. "It is not easy to start with nothing and then create a functioning infrastructure; some latitude is required. But this 'don't ask don't tell' policy has evolved to such an extent that Taliban funding is fully baked into the system. It stands to reason that the insurgency can now forecast revenue and accurately budget for combat resources based on lucrative contracts from the U.S. military, which were intended to rebuild their war-torn country."

(GlobalPost's C.M. Sennott contributed to this story.)