WASHINGTON - The Sultan family of Kuwait runs a variety of businesses alleged
to be at the heart of a scheme to overcharge the United States military by as
much as US$1 billion over the past seven years. The company is currently
scheduled to face criminal arraignment on February 8 in Atlanta, Georgia.
Federal criminal investigators say that the Sultan Center supermarkets bought
food supplies, marked up the prices and then resold them to another Sultan
family business named Public Warehousing Corporation (PWC), which in turn sold
it to the US military at an even higher price.
PWC was renamed Agility in 2006 and is now one of the eight
largest logistics companies in the world with annual revenues of $6.8 billion
and offices in 120 countries.
The Sultan Center supermarkets are familiar to any wealthy Kuwaiti and
expatriates who flock to their brightly lit, one-stop, 24-hours-a-day stores,
often trailed by maids pushing overladen shopping carts. Located in or near
some of Kuwait's fanciest shopping malls, they offer consumer goods ranging
from fresh Horizon organic milk flown in from the US ($11.50 a liter), to
mangosteens from Thailand.
Some shops feature a "Just Ask" program under which they offer to import "any
product you need, local or international, at real time and without any
additional cost".
The supermarket chain was created in 1981 by the family of Jamil Sultan
al-Essa, a Kuwaiti family whose heritage has been alternately described as
southern Iraqi and Saudi. The first Sultan market was a self-service store near
Shuwaikh port that focused on hardware and do-it-yourself products.
Almost three decades later, that store had evolved into a chain of 11 Sultan
Centers scattered around Kuwait. In 1999, the Sultans expanded the retail chain
to Oman, and in 2003 they acquired the Safeway chain in Jordan.
Like many wealthy Middle Eastern families, the Sultans have multiple businesses
each operated by a sibling or cousin with overlapping ownership and often
senior government positions.
One family member, Abdul Aziz Sultan al-Essa, was chairman of Kuwait's Gulf
Bank. Another, Kamal Sultan, ran the local franchise for Apple. Yet another
Sultan venture, National Real Estate, bought up 25% of the shares of a
state-owned company - Public Warehousing Corporation (PWC) - when it was
privatized in 1997.
PWC was given to Abdul Aziz's son, Tarek Sultan al-Essa, who is a dual
Kuwaiti-US citizen and a graduate of the University of Pennsylvania's Wharton
School of Business. When Tarek Sultan took over PWC, the company was already
charging the US military $60,000 a month to operate Camp Doha on a 1.6
million-square-meter property near Shuwaik port in Kuwait.
In 2003, PWC won a contract called Prime Vendor Subsistence to supply food to
the US military in Kuwait and Iraq. That contract has since generated $8.5
billion in sales for PWC.
Allegations of overcharging
The fraud scheme allegedly created by PWC exploits an obscure federal
contractual mechanism known as "prompt payment discounts" to increase profits.
The best way to explain it is to use a fictional example: Company A (a shell
company) buys a pound of chicken for $1 and gives it to Company B (eg PWC)
along with a bill for $1.10. Then Company B sells it to the military for $1.10
plus the agreed-on overhead and profits. Next, Company B pays Company A $1.10
and pockets the 10-cent mark-up from Company A as a prompt payment discount.
In this case, Company B has effectively earned the agreed-upon (and legal)
profits from the military plus an extra 10 cents that the military would never
have paid if it bought it directly from company A. At the very least, this
system is a waste of taxpayer money. And if Companies A and B are owned by the
same people, it may constitute fraud.
The Sultan Center is alleged to have bought food supplies and sold them to PWC
at a profit which they then paid back to PWC through prompt payment discounts.
PWC/Agility spokesperson Jim Cox told Inter Press Service in September 2008
that "prompt payment discounts" are written into the company's Prime Vendor
contract with the Pentagon to supply food to dining facilities used by US
soldiers in the Middle East and therefore not illegal. Indeed, the military
even offers such an incentive program. (Typically, however, the military offers
2% military discounts, not 5% or 10%).
Asked about the relationship between PWC and the Sultan Center, Cox said that
the two companies are distinct businesses, listed separately on the Kuwait
stock exchange.
In reality, Tarek Sultan and family head Jamil Sultan al-Essa serve on each
other's boards, while Jamil and four other Sultan family members are the
largest stockholders in the Sultan Center and also control a large stake in
PWC. The US Department of Justice (DoJ) criminal indictment states: "The two
companies had interlocking directorates with at least three directors in
common." PWC/Agility's Cox explains that this cross-ownership is common and
legal in Kuwait.
In the grand jury documents submitted by the DoJ to the courts in November
2009, however, the investigators cite multiple examples of collusion. An
October 15, 2004, e-mail from PWC officials asked the Sultan Center to alter
figures so that "the temporary price decline in the catalogue will not be
obvious to the DSCP (Defense Supply Center, Philadelphia)."
It also quotes e-mails from Albuquerque-based Professional Contract
Administrators (a consulting firm working for PWC) to tell Toby Switzer, the
chief executive officer of PWC Global Logistics, to "fire somebody, blame it on
them, and cover up" the revisions in the Sultan Center's local market prices
"ASAP - THIS IS VERY SERIOUS."
Related allegations
PWC is also alleged to have profited from "prompt payment discounts" from
companies in the US. In early 2007, the DoJ began a series of investigations
into the company's pricing practices, alleging that PWC had overcharged the
Pentagon by as much as $374 million "by inserting a related company to inflate
the amount billed".
One PWC supplier that the DoJ investigated was American Grocers Inc, which
provides foods such as Smucker's peanut butter to the Sultan Center for resale
to PWC in Iraq. In July 2009, American Grocers owner Samir Itani, a
Houston-based Lebanese-American businessman, was convicted for tacking on
"bogus trucking charges".
Another company under DoJ scrutiny is Ocean Direct LLC, owned by Richmond
Wholesale Meats Inc of California. At one point, it was supplying $2.3 million
a month worth of raw cold-water lobster tails to the military at $21 a pound,
while the average wholesale price at that time was between $17.60 and $18.75 a
pound.
Settlement talks
In November, PWC/Agility said it "is confident that once these allegations are
examined in court, they will be found to be without merit". Since then,
PWC/Agility has attempted to reach a settlement with the DoJ by offering to pay
a $600 million fine, according to reports in the Kuwaiti press.
"No agreement has been reached so far and there is no guarantee these
negotiations will lead to a solution," the company stated at the end of
December.
Unless these settlement talks bear fruit soon, the arraignment could lead to a
trial in which spectators can expect a fascinating view into the extent of
corruption engendered by the US occupations of Afghanistan and Iraq.
Pratap Chatterjee is a senior editor at CorpWatch. This article was
produced in partnership with CorpWatch. It is the second of a two-part series.
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