CIA officers operating in northern Iraq bought drinking water from a bottling plant there for years prior to the 2003 invasion that ousted Saddam Hussein.

That changed soon afterward. A CIA officer handling logistics for the Middle East and other regions recommended that an American company provide water and other supplies, according to former government officials.

The U.S. contractor that benefited from the multimillion-dollar deal wasn't just anyone. The company had personal ties to the officer, Kyle "Dusty" Foggo, who would soon leave his logistics post in Frankfurt, Germany, and move to Washington to become the CIA's third-ranking official.

In at least one written communication, a Baghdad CIA officer complained about the no-bid contract. According to one official, the officer believed the deal was simply unnecessary because safe water was available commercially, but he was ignored.

The water contract, while small on the scale of the billions that flowed into Iraq, raises questions about why U.S. taxpayer dollars went to well-connected businessmen rather than Iraqis who could have benefited from a share of postwar reconstruction business. And the case provides a window into the murky world of covert government business arrangements.

Foggo retired from the CIA last year. He is now at the center of a federal investigation, nearing completion, into whether he improperly steered contracts to companies controlled by his best friend, San Diego defense contractor Brent Wilkes.

Federal prosecutors in San Diego are preparing to seek indictments against Foggo and Wilkes on charges of honest services fraud and conspiracy, two government officials familiar with the investigation told the Associated Press last week.

Those officials and others spoke on condition that they not be identified because the charges have not been finalized and because CIA contracting is classified. Justice Department and law enforcement officials in San Diego and Washington declined to comment.

Honest services fraud is a charge combining mail and wire fraud often used in public corruption cases involving officials who have engaged in a pattern of improper activities, such as accepting gifts, trips or promises of future employment from private individuals.

The probe of Foggo and Wilkes stems from a broader federal investigation involving at least five federal agencies into how associates of former Rep. Randy "Duke" Cunningham directed government business to a favored network of national security contractors. Cunningham, a San Diego Republican elected to eight terms in Congress, is currently serving more than eight years in jail for taking at least $2.4 million in bribes. Another defense contractor has pleaded guilty to paying some of them.

In June 2002, Wilkes created a government contractor called Archer Defense Technologies, which was registered to the address of his flagship, Wilkes Corp., in Poway, Calif. The company also used the name Liberty Defense Technologies. At the beginning of 2004, his nephew and apprentice, Joel Combs, formed a new company called Archer Logistics, run out of a small Virginia office.

Despite the short history of Wilkes's company, Foggo recommended that the CIA buy water from it, current and former officials said. He was a supervising officer at the CIA supply hub in Germany, and the purchasing officer there went along.

Foggo didn't tell the purchasing officer about his personal ties to Combs or Wilkes, a government official says. With CIA officers literally under fire and other large issues to deal with, the CIA station didn't put up a fight.

The issue in the investigation isn't the price but that the contract was awarded without competitive bidding and that Foggo had an obligation to disclose his personal connections, official said.

Foggo's former attorney publicly acknowledged before he died last summer that the investigation includes Archer, but he said his client had no idea that the company was associated with Wilkes. Foggo's current attorney, Mark MacDougall, declined to comment, as did Wilkes's attorney, Mark Geragos.

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