The US Special Inspector General for Iraq Reconstruction surveyed officers and officials associated with the Commander's Emergency Response Programme (Cerp), a fund used by US military officers for projects to boost rebuilding in their areas of responsibility.
The US congress has allocated nearly US$4 billion (Dh14.68bn) since 2004 for Cerp.
"Some commanders indicated that the diversion of Cerp project funds may have benefited insurgents," said the inspector's report, which was published on Monday detailing the results of the survey.
"Money ... was found during raids on insurgents [along with] admission from contractors that they paid money 'for protection'," the report quoted one US commander as saying.
"There was substantial evidence that the local authorities ... were stealing right off the top," another commander said. "Additionally, governors were offering insurgents money that was to pay for Cerp activities to NOT attack certain Cerp-funded programmes."
The inspector found that graft also posed a problem for the dispersal of Cerp funds.
"Corruption is an integral feature of Iraqi society and politics. Battling corruption in the Iraqi system is a Sisyphean task ... It was generally understood and accepted as common practice," one commander said.
"When you pay $40,000 to a contractor to have a well dug and 10 per cent goes to the contractor, and 10 per cent more goes to the local tribal leader, we call that corruption. But that was the cost of getting things done," another said.