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The Impact of the UN Oil-for-Food Scandal

Author: Robert McMahon, Editor
May 11, 2006

Introduction

The UN's investigation into the abuse of the Iraqi oil-for-food program officially ended in October 2005, but it continues to reverberate within UN headquarters and in an increasing number of capitals. The inquiry was triggered by a report in the Iraqi newspaper al-Mada in January 2004 listing 270 persons and entities that received oil vouchers in exchange for helping Saddam Hussein. Some of those individuals, including prominent politicians, have resigned from their positions, face prosecution, or are the subject of domestic investigations. The independent investigation, headed by former U.S. Federal Reserve Chairman Paul Volcker, pointed to deep flaws in UN oversight of the program, which has helped spur a push for management reforms at the organization. The scandal reached the very top of the UN and tarnished the reputation of the secretary-general in some key member states. The Volcker inquiry extended to thousands of private firms found complicit in paying bribes to the Iraqi regime and receiving kickbacks to participate in the program. The scandal could have repercussions for future UN sanctions programs.

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What did the investigation find?

The investigation, described in this CFR Background Q&A cast a wide net of blame for abuses of the humanitarian program in Iraq. It found the program achieved its central goal of feeding Iraqis and preventing Saddam Hussein from reassembling weapons of mass destruction. But the inquiry cited a range of lapses, negligence and corrupt practices that allowed Saddam's regime to earn as much as $11 billion while under sanctions. It cited poor judgment by UN Secretary-General Kofi Annan in failing to pursue inquiries involving his son, Kojo, and companies involved in the oil-for-food program, lax oversight by the UN Security Council, and shoddy UN procurement practices. It also accused the former head of the program, Benon Sevan, of a conflict of interest for helping a friend obtain contracts to sell Iraqi oil—a charge which Sevan has denied. The Volcker commission's final report accused more than 2,000 companies of paying bribes and receiving kickbacks to participate in the program. Though the commission's work is formally over, Annan has extended the mandate of the UN investigation until Dec. 31, 2006 so that investigators from member states can make use of the voluminous files collected in the case.

"Oil-for-food has been the catalyst which has prompted intense scrutiny of UN operations that we simply did not have before," says Nile Gardiner.

What has been the impact at the UN?

In spite of the personal damage to Annan, longstanding attempts at reform that he has championed received a boost. A UN summit in September 2005 addressed several management reform initiatives, including reforms for: ensuring ethical conduct; strengthening internal oversight and accountability; reviewing budgetary, financial, and human resources policies; and reviewing mandates. But there are sharp divisions in the 191-member General Assembly, particularly between major UN donors and a bloc of poor countries, over Annan's proposal to place more budgetary and personnel responsibilities with the Secretariat, removing them from General Assembly oversight. UN member states agreed to a spending cap on the UN's biennium budget for 2006-2007, pending progress on management reforms.

Annan has taken the following steps:

  • set up a new UN ethics office, which will help administer new financial disclosure forms and handle other issues related to conflicts of interest. Ethics training is now required for staff at all levels of the Secretariat;
  • created a new "whistleblower" policy to provide staff with a mechanism so that they feel free to come forward with concerns with the confidence that they will be protected against retribution;
  • won approval from the General Assembly to make internal audits available to member states upon request.

"Oil-for-food has been the catalyst which has prompted intense scrutiny of UN operations that we simply did not have before," says Nile Gardiner, a senior fellow at the Heritage Foundation. But Gardiner remains skeptical of Annan's commitment to reform, and has made new accusations of a conflict of interest in the selection of the next head of the UN Environmental Program.

What has been the impact in the United States?

UN critics in the U.S. Congress have seized on the scandal to press for broad reforms. U.S. prosecutors have moved aggressively to charge both private businessmen and U.S.-based diplomats with wrongdoing in the case. The following is an overview of political and criminal developments in response to the scandal:

  • Political moves

The chairman of the House International Relations Committee, Henry Hyde (R-IL), said in April that the oil-for-food scandal was a "symptom of a larger contagion that infects both procurement and oversight within the UN." His committee initiated legislation later passed in the House that would tie wide-ranging reforms, especially in management, to monetary contributions by the United States (which pays 22 percent of the UN budget). The legislation faces resistance in the Senate and from the Bush administration. Hyde's committee released a report in December calling for tough reforms in UN oversight and procurement departments. The report also urges further investigations into three companies that have worked with the UN: IHC Services, Eurest Support Services, Inc., and Compass Group.

On the Senate side, the primary body investigating the oil-for-food program is the Subcommittee on Permanent Investigations, chaired by Norm Coleman (R-MN). The committee has held a number of hearings on the scandal and continues to gather information on abuses, including following criminal investigations in the United States and abroad.

The General Accountability Office, a congressional watchdog group, issued a report in April 2006 saying: "The UN lacks an effective organizational structure for managing procurement, has not demonstrated a commitment to improving its procurement workforce, and has not adopted specific ethics guidance."

  • Criminal developments

Investigations led by the U.S. Attorney for the Southern District Court of New York have led to a number of arrests. The first person charged in the scandal, Iraqi-born U.S. citizen Samir Vincent, pleaded guilty in 2005 to charges of illegal lobbying for Iraq. Two Texans, Oscar Wyatt and David Chalmers, are accused of paying illegal kickbacks to Saddam's regime to secure oil contracts. Two Russian citizens working in New York for the UN, Vladimir Kuznetsov and Alexander Yakovlev, have also been arrested. Kuznetsov, a former chairman of the UN budget advisory committee, is charged with laundering hundreds of thousands of dollars in criminal proceeds. Yakovlev has pleaded guilty to bribery charges. U.S. officials have also detained a Bulgarian, Ludmil Dionissiev, for alleged involvement in illicit payments to Saddam's government, as well as Tongsun Park, a South Korean, and charged him with conspiring to act as an unregistered agent for Saddam when the oil-for-food program was created.

U.S. prosecutors are also investigating the UN's procurement office.

How have countries cited by the Volcker commission responded?

Commission officials have said about one-fourth of the forty countries whose citizens or companies were implicated in their inquiry have requested evidence for use in prosecutions. In addition to the United States, the countries believed to have sought further evidence are France, Australia, Britain, Switzerland, India, Italy, Germany, Thailand, Jordan, and Sweden.

These are the most prominent investigations underway:

  • Australia: A government inquiry is investigating allegations by the Volcker commission that the Australian Wheat Board, the largest single supplier of humanitarian goods under the oil-for-food program, paid more than $200 million in bribes to Saddam's government. The head of the board, which is private, has resigned. Prime Minister John Howard has told the public inquiry he did not have knowledge of any bribes by the wheat board. He is the first Australian prime minister to face a judicial inquiry in more than twenty years and has vowed transparency in pursuing the case.
  • France: Prosecutors have opened a probe into companies that paid surcharges on contracts for trucks and other materials. The Volcker report said 172 French companies, including Peugeot and Renault Véhicules Industriels, violated the terms of the humanitarian program from 2000 to 2003. Jean-Bernard Mérimée, a former French UN ambassador and special advisor to Annan, has also been charged with receiving illicit contracts to buy oil from Saddam. Former Interior Minister Charles Pasqua has come under investigation for similar charges but has repeatedly denied any guilt.
  • Britain: British Member of Parliament George Galloway has been accused of accepting oil voucher payments by both UN and U.S. Senate investigators but has denied accepting any such benefits. He has already won legal damages against a local newspaper that published such charges, but he remains under investigation by Britain's Parliamentary Commissioner for Standards.
  • India: An inquiry has sent notices to eighteen nationals for alleged involvement in the oil-for-food scandal. One of them, Natwar Singh, stepped down as India's foreign secretary because of charges that he accepted oil vouchers from Saddam's government.

Other states heavily implicated in the findings of corruption by officials of private entities, such as Russia and China, have done little to pursue the matter further. Jeffrey Laurenti, a senior fellow at the Century Foundation, notes that mainly democracies are pursuing investigations into the matter. "It is no coincidence that the countries that are the most blasé about following up with the Volcker commission's leads on their own are the ones that score lowest on [corruption watchdog] Transparency International's corruption index," said Laurenti.

What was scale of private sector abuse?

The Volcker commission said nearly half of the 4,400 companies involved in the program participated in bribery and kickbacks to benefit from the program. Transparency International expressed concern over the hundreds of Western-based firms linked to corruption in the program, many in countries which have signed on to the anti-bribery convention of the Organization for Economic Cooperation and Development. Transparency International Chairman Peter Eigen issued a statement after the final Volcker commission report, saying he is skeptical about vigorous prosecutions following up the report. "But we, and other civil society voices, will not let the transgressions of these companies be forgotten nor will we let national governments back away from the promises they have made," said Eigen.

"The question is now whether you can get the Security Council to agree to absolute or comprehensive sanctions," says Jeffrey Laurenti.

What are the long-term repercussions?

Laurenti says the issues raised by the oil-for-food investigation pose a challenge to any new attempt to set up comprehensive international sanctions regime. "The question is now whether you can get the Security Council to agree to absolute or comprehensive sanctions ever again because the whole experience and then the intense scrutiny of the kind of corruption between the business suppliers and the Baghdad regime and the implications of UN corruption have discredited sanctions as a tool in the eyes of many," said Laurenti. Russia and China have recently blocked sanctions initiatives toward Sudan and Iran in the Council, repeatedly questioning the validity of sanctions. The U.S.-funded GAO said in a report in May 2006 that the oil-for-food program offers many lessons for future sanctions programs. From the outset, it said, such programs should:

  • assess whether the sanctions program gives undue control to the sanctioned country;
  • consider the economic impact that sanctions have on neighboring countries;
  • establish clear authority and responsibility for management, oversight, and monitoring activities;
  • and ensure that they have the resources and independence needed for effective oversight.

Meanwhile, says Heritage's Gardner, investigations will likely continue. "We're going to see more and more national governments launching probes," he said. "We've seen the tip of the iceberg in terms of what we're dealing with. I think the fallout from oil for food will be around for many years to come."

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