updated 9/18/2006 10:46:57 AM ET 2006-09-18T14:46:57

The wife of an American contractor accused of cheating the U.S. government in Iraq was arrested in Germany on suspicion of money laundering, a prosecutor said Monday.

Jacqueline Battles, a German citizen, was detained after a German bank informed authorities about "suspicious transactions" on her accounts two months ago, prosecutor David Kirkpatrick told The Associated Press.

German investigators seized about $1 million in suspect funds from the accounts, said Kirkpatrick, a prosecutor in the German city of Darmstadt.

"She is in investigative custody," Kirkpatrick said in a telephone interview. The woman, who lives near Darmstadt, has not been formally charged.

In March, a U.S. jury ordered contractors Mike Battles and Scott Custer to pay $10 million for swindling the U.S. government over Iraqi rebuilding projects in connection with their Middletown, R.I.-based company, Custer Battles LLC.

That ruling was the first civil fraud verdict arising from the Iraq war.

However, a federal judge overturned the verdict on a technicality in July, saying any fraud was against the Coalition Provisional Authority in Iraq rather than the U.S. government, even though American taxpayers ultimately footed the bill.

$2 million moved overseas?
According to a letter provided recently to The AP, Jacqueline Battles is suspected of moving at least $2 million into overseas accounts to hide her husband's money.

Kirkpatrick did not comment directly on the July letter, which carried his name as the sender and was addressed to an American attorney representing two whistleblowers who say they were threatened and fired when they objected to Custer Battles' business practices.

The letter said Jacqueline Battles had opened several bank accounts under her maiden name of Vihernik.

Kirkpatrick said the suspicion of money laundering stemmed from the initial March ruling by a federal jury in Virginia ordering the contractors to pay $10 million to the government.

Allegations: CPA overbilled by up to $50M
The lawsuit accused the firm of overcharging the CPA, which ran Iraq after the 2003 invasion, by as much as $50 million.

Custer and Battles appealed and claimed they did not have enough assets to pay the money back. Jacqueline Battles was not part of her husband's firm.

Kirkpatrick declined to comment on any direct cooperation between U.S. and German authorities in the case of Jacqueline Battles.

A U.S. federal criminal investigation into the contracts is ongoing, and Custer Battles is also being investigated for two shooting incidents in which Iraqi civilians and soldiers were injured.

Robert Isakson, one of the two whistleblowers who won the March verdict, is a plaintiff in a second lawsuit accusing two former Pentagon officials of scheming with Custer and Battles to form sham companies that sold illegal weapons on Iraq's black market, where they could be bought by insurgents, the AP reported in July.

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