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. Last Updated: 07/27/2016

U.S. Fund Misspent $1M on High Life

WASHINGTON -- Auditors say a handful of Americans working in Moscow on a high-profile U.S. aid project showered more than $1 million on themselves in the form of taxpayer-funded fine dining, tennis games, golf club memberships, vacations to warmer climes and tickets to theaters and the symphony.

The Americans were running the Defense Enterprise Fund, a body created by Congress in 1994 and over the years entrusted with $66.7 million. The DEF was to make hard-headed investments into "conversion" -- meaning in business projects that somehow moved an institution or its personnel out of the Soviet military past and into the free-market future.

But according to an audit published on New Year's Eve by the Pentagon's Office of the Inspector General, the DEF spent "at least" $35.6 million solely on the managing of that $66.7 million -- or about 53 percent of the fund. The audit quotes a government official who says "acceptable" money-managing costs typically range from 1 percent to 2 percent of a portfolio's size.

Nor did spending 53 cents of every dollar on managing investments bring very exciting returns. Today, the audit says, the DEF's investment portfolio is worth just $11 million, plus about $4 million in cash.

Of the $35.6 million spent on money-managing, auditors only identified about 3 percent spent on questionable staff comforts. The rest was paid either in salaries to DEF staff or in fees to outside companies for management, consulting, accounting or legal work. The audit does not identify what the outside firms paid.

As bad as that sounds, the audit broadly hints reality could well be worse. The audit states that employees of Siguler Guff -- a New York-based company with an active Moscow office, Russia Partners, that is now managing the DEF -- "destroyed an unknown quantity of records prior to the start of this review" in fall of 2000.

Neither Siguler Guff nor the DEF board's legal counsel returned calls and e-mail messages seeking comment.

Generally, auditors complain that the DEF kept poor financial records -- this despite the fact that the fund's work was high-profile and diplomatically delicate, and despite occasional critical media reports and questions in Congress.

Finally, auditors note that they only looked closely at three years, 1997-1999. That is a period that the DEF's defenders have in the past championed as a time of cleaning up after sloppy and free-spending ways at the fund from 1994 to 1996. It's also a period atypical for including the August 1998 ruble crash, which inaugurated layoffs and belt-tightening thrift at the DEF.

Among DEF spending from just the examined period of 1997-1999, the audit highlighted:

$537,400 in unreasonable pension fund payments to American employees. The DEF made contributions to pension funds equal to 19 percent of salaries -- a rate about four times what American financial, insurance or real estate companies typically contribute, the audit says.

$106,800 for an office membership in the Moscow Country Club.

$35,500 to send one employee to a management course in London, and $4,000 for employee vacations to Scotland and the Middle East.

More than $200,000 to house one expat employee, equal to a monthly housing allowance of about $7,800. For comparison, the audit says that U.S. State Department guidelines put the maximum Moscow housing allowance at $2,292/month.

$95,800 for employee meals and entertainment while not traveling, and $29,500 on first-class air fares.

$15,000 for a loan to "the general director of a DEF investment partner and his wife" that was never collected or repaid.

$900 for a subscription to the Moscow symphony, $700 for an employee to play golf at a prestigious resort, $500 for theater tickets, $300 for tennis fees.

However, while auditors are critical of such spending, and draw unfavorable comparisons to accepted government practices, they also note repeatedly that the usual rules don't apply.

That's because the DEF is one of 11 "enterprise funds" set up by Congress to help seed the growth of free-market economics across the former Soviet Union. At one point, such funds represented a third of all U.S. aid to the former Soviet bloc.

The chairman of each fund was appointed by the president of the United States. Congress gave the funds millions of dollars to "invest" -- and with it unusual freedoms from government oversight, on grounds that they would be more effective venture capitalists without such "red tape."

"Congress did not set up the controls you normally have," said an official with the Pentagon's Office of the Inspector General in an interview Friday. "Normally in government you have cost controls for federal grants. ... The purpose of this report is to show that this is what happens when the government doesn't put any rules out."

If that sounds like a recommendation, the auditors say it's not -- the audit makes no recommendations. In fact, because there were no clear rules, the DEF's spending may not have broken any.

In a written pre-publication reply to the audit, Major General Robert Bongiovi, representing the Pentagon office that oversees the DEF's work, suggested the very first sentence of the audit's introduction should state that "Defense Enterprise Fund expenses were not found to be in violation of the terms of the grant."

As The Moscow Times recounted in an April expose, the DEF made a series of ill-fated and ill-considered investments -- a failed scheme to coax gold out of trash, a bungled telecom venture that led to behind-the-scenes feuding between the U.S. and Russian governments -- before firing nearly its entire staff in 1999 and falling dormant.

Among those who kept his job was the fund's former top Moscow official, Richard Nordin, now an employee of Siguler Guff. Nordin signed off on many of the expenses the audit cites, and defended some of them in interviews with The Moscow Times in the spring.

He is still in Moscow managing the DEF's portfolio, and in November he was appointed to the Moscow Country Club's board of governors, as chairman of the Golf Committee.

Among those claimed in the final round of firings was Matthew Maly, an American of Russian descent who complained to the DEF board of mismanagement and extravagant living by his superiors, in particular Nordin. Maly's believes his whistle-blowing has damaged his career, and questions whether the board of the DEF investigated his concerns in good faith.

In particular, Maly said in an e-mail reply to questions about the audit that he wonders what has come of a criminal investigation the Pentagon is conducting into the DEF.

The Pentagon would not comment on that investigation other than to confirm its existence. But as The Moscow Times reported in April, defense investigators are studying, among other things, Maly's allegations that DEF managers bribed Russian government officials. Maly said he has never once been contacted by the Defense Department's criminal investigators.






The Defense Department's audit can be found at: www.dodig.osd.mil/audit/reports/fy02/02-033.pdf

Matthew Maly's home page: www.matthew-maly.ru.