Transparency International (TI) focused on post-war Iraq in a case study within its Global Corruption Report 2005, which was released at a press conference in London on Wednesday.
"Corruption thrives in a context of confusion and change," the study said, adding that ordinary Iraqis became cynical about the honesty of the factions jostling for power as soon as Saddam Hussein was removed from power in 2003.
"If urgent steps are not taken," the study concluded, "Iraq will not become the shining beacon of democracy envisioned by the Bush administration, it will become the biggest corruption scandal in history."
Up for grabs
Political groups took possession overnight of public buildings and moved into villas vacated by the ousted Saddam Hussein's closest aides.
"State property went up for grabs. If they could get away with this, how do they expect ordinary people to behave?" one Iraqi businessman told the authors of the study.
It said that while many accusations of malpractice from Iraqis were unfounded, "there are plenty of reasons to believe that high levels of corruption have indeed taken hold in the new Iraq.
"There are plenty of reasons to believe that high levels of corruption have indeed taken hold in the new Iraq"
Transparancy International report
"At the Ghazil market in central Baghdad and the souk of old Basra, salesmen and consumers engage in a booming trade in stolen medicines and medical equipment supplied by corrupt public servants," it said.
Besides, there was a danger that the rapid privatisation to be enforced by the International Monetary Fund (IMF) and Paris Club of creditor nations could lead to more problems, as the sell-off of state-owned enterprises in Russia had shown.
The report said that while the post-war period in Iraq had focused on planting the seeds of democracy and encouraging power sharing, "very little thought has been given to how the new Iraq can be more effective in managing oil revenues".
The report said the US has been a
poor anti-corruption 'role model'
It suggested giving Iraq a seat on the IMF-linked International Monitoring and Advisory Board "to familiarise it with international auditing standards and improve Iraq's local expertise".
The United States came in for fierce criticism too in the example it has set to the country it invaded.
"The US has been a poor role model in how to keep corrupt practices at bay," the study said, citing the reconstruction contracts secretly awarded to major US corporations.
Also, it claimed "many US contractors in Iraq have been wasteful and have taken what many would see as excessive profits".
The TI study questioned the morality of US firms being awarded a multi-million-dollar deal only for it to sub-contract the work to an Iraqi firm for a fraction of the cost. And it said many Iraqis simply did not understand the bidding process.
The study quotes a municipal official in Basra who told its authors that contracts would be granted by "religious men who are by nature more honest".
Despite the introduction of "modest initiatives" to tackle corruption over the past year, it was still rife.
The Iraq case study, entitled Corrupting the New Iraq, was co-written by Reinoud Leenders, a Middle East analyst, and Justin Alexander, who heads Jubilee Iraq, a pressure group which campaigns for debt reduction.