The reconstruction of post-war Iraq is in danger of becoming "the biggest corruption scandal in history", Transparency International has warned.
Oil reserve management needs more transparency, the report says
The anti-corruption body said urgent steps were needed to ensure that corruption did not become endemic.
Publishing its annual report, TI said there was evidence of "high levels" of corruption in post-war Iraq.
The Iraqi government, coalition forces and foreign donors must be more "aggressive" on corruption, it said.
Foreign contractors should be bound by anti-corruption laws while the management of Iraq's oil revenues needed to be much more transparent and accountable, Transparency International said in its Global Corruption Report 2005.
"Strong and immediate measures must be taken to address corruption before the real spending on reconstruction starts," it said.
Iraq has so far failed to learn the lessons of post-war reconstruction in Cambodia, Congo and Afghanistan, TI said, where a combination of weak government, thriving black markets, and a legacy of patronage allowed corruption to flourish.
Since the overthrow of Saddam Hussein, bribery has taken place at all levels of government while officials within the Coalition Provisional Authority, contractors and ministry staff have admitted to corruption.
According to Transparency International, the former regime's control of the economy left a legacy of corruption which survived its collapse.
However, the body is critical of the United States' handling of the reconstruction process, arguing that its process for awarding public contracts was secretive and favoured a small number of large firms.
Its comments echo those of the International Advistory and Monitoring Board, a United Nations body, which in December criticised the CPA for awarding contracts to oil services firm Halliburton and other firms without a competitive process.
"In its procurement strategies, the US has been a poor role model in how to keep corrupt practices at bay," the report says.
Attempts to tackle corruption, such as independent auditing of government ministries and new laws to protect whistleblowers, had only had a modest impact.
Failure to address corruption threatened to push up the cost of rebuilding Iraq and hold back its economic development.
"Corruption doesn't just line the pockets of political and business elites, it leaves ordinary people without essential services and deprives them of access to sanitation and housing," said Peter Eigen, Transparency International's chairman.
Tougher penalties are needed to stamp out the corruption blighting public procurement, not just in Iraq but worldwide, TI said.
Companies found guilty of bribery should forfeit the relevant contract and should be prevented from bidding for similar work. Tendering processes should be open to public scrutiny and independent oversight.
The World Bank - which since last year has required all companies awarded large-scale projects under its control to sign an anti-bribery agreement - said the report highlighted issues of "deep concern".
"The diversion of funds from publicly financed projects represents an unacceptable tax on the poor," said World Bank president James Wolfensohn.
"In the construction sector, it represents a deplorable opportunity lost for the delivery of essential services and it undermines citizen trust in government."