The corruption is a "virtual pandemic" that represents a "second insurgency," with some of the money going to the Iraqi government's enemies, Stuart Bowen, special inspector general for Iraq reconstruction, told London's Guardian newspaper.
"It is the No. 1 issue," said Bowen, who is in charge of auditing Iraq's faltering reconstruction.
A U.S. government report says oil smuggling aided by corrupt Iraqi officials is netting insurgents $100 million a year, helping to make them financially self-sustaining, the newspaper said.
Separately, more than 14,000 U.S.-paid guns intended for the Iraqi government cannot be accounted for, Bowen's inspectors have also found.
It is impossible to know if the guns landed in the hands of insurgents or sectarian death squads because the U.S. military only noted the serial numbers of 10,000 weapons out of a total of 370,000, contrary to Defense Department regulations, Bowen said.