IRAQ: Oil for Food Scandal

IRAQ: Oil for Food Scandal

Last updated October 28, 2005 8:00 am (EST)

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What is the controversy over the U.N. Oil-for-Food Program?

The UN Security Council started the Oil-for-Food program in 1996 to allow Iraq to sell enough oil to pay for food and other necessities for its population, which was suffering under strict UN sanctions imposed after the first Gulf War. But Saddam Hussein exploited the program, earning some $1.7 billion through kickbacks and surcharges, and $10.9 billion through illegal oil smuggling, according to a 2004 Central Intelligence Agency investigation. Wide-scale mismanagement and unethical conduct on the part of some UN employees also plagued the program, according to the UN Independent Inquiry Committee.

What are the latest revelations?

The UN committee’s fifth and final 623-page report released October 27, 2005, accused nearly half of the 4,500 participating companies of paying kickbacks and illegal surcharges to win lucrative contracts, and allowing Saddam Hussein to pocket $1.8 billion at the expense of Iraqis suffering under UN economic sanctions. The commission’s lead investigator, former U.S. Federal Reserve Chairman Paul Volcker, stated that it was UN mismanagement and failure of the world’s most powerful nations to end corruption in the program that allowed Saddam to fill his coffers.

What did the earlier reports find?

A September report faults UN Secretary-General Kofi Annan, his deputy, and the UN Security Council for allowing Saddam Hussein to graft over $1 billion from the humanitarian operation. The committee’s January briefing paper charged UN management of the oil-for-food “operated in an ineffective, wasteful, and unsatisfactory manner,” leading to some $5 million in documented contractor overpayments, and “undoubtedly much higher” losses not discovered by the limited UN audits. The February interim report found the program’s procurement office did not follow established rules “designed to assure fairness and accountability.” It also accused the former head of the program, Benon Sevan, of an “irreconcilable conflict of interest” because he helped a company owned by a friend obtain valuable contracts to sell Iraqi oil. Other allegations against Sevan are also being investigated. Sevan retired from the United Nations last year and has denied any wrongdoing.

What does the committee’s final report recommend?

In conjunction with the September report (PDF), the commission proposed several changes they believe should be enacted within a year, but experts say that is unlikely to happen. UN member states are already grappling with similar reform proposals introduced during September’s General Assembly meetings. Among the report’s recommendations:

  • The UN Security Council should be clearer about UN operations’ purposes and criteria.
  • A Chief Operating Officer should be nominated by the Security Council to provide needed focus for the Secretariat’s administrative responsibilities.
  • An Independent Auditing Board should be established to fully review UN programs and hiring.
  • Tasks should be coordinated more effectively between UN agencies.

What were the committee’s earlier findings?

The Volcker’s committee has issued four interim reports since it began its work in April 2004. These reports found there is no evidence of corruption on the part of UN Secretary-General Kofi Annan in administering the program. However, it finds that his son, Kojo, inappropriately concealed his business relationship with a major Oil-for-Food contractor. Kojo Annan, who was not a UN employee, received some $400,000 from Swiss-based Cotecna Inspections S.A. between 1995 and 2004. Kojo Annan formally stopped working for Cotecna in 1998, leaving just before the company won its $10-million a year UN contract. But he continued to receive monthly payments from the firm until 2004, as part of an unusual arrangement in which he was paid thousands of dollars a month to refrain from joining a competing firm.

The committee’s January briefing paper charged UN management of the Oil-for-Food “operated in an ineffective, wasteful, and unsatisfactory manner,” leading to some $5 million in documented contractor overpayments, and “undoubtedly much higher” losses not discovered by the limited UN audits. The February interim report found the program’s procurement office did not follow established rules “designed to assure fairness and accountability.” It also accused the former head of the program, Benon Sevan, of an “irreconcilable conflict of interest” because he helped a company owned by a friend obtain valuable contracts to sell Iraqi oil. Other allegations against Sevan are also being investigated. Sevan retired from the United Nations last year and has denied any wrongdoing.

What other investigations into Oil-for-Food are there?

They include:

  • Five ongoing congressional investigations examining the role of U.S. companies and individuals and the program more generally. The Senate Government Affairs Permanent Subcommittee on Investigations has already issued a dozen subpoenas for individuals affiliated with the program, according to news reports. Four House panels are also conducting inquiries: the International Relations Committee—which has already made three trips to the region and issued a subpoena to Paris-based bank BNP Paribas—the Energy and Commerce Committee, the Government Reform Subcommittee on National Security, and the Appropriations subcommittee on commerce.
  • An ongoing U.S. Treasury Department investigation into which U.S. trade laws may have been violated.
  • An ongoing federal criminal investigation by the U.S. attorney for the Southern District of New York.
  • Oil-for-food-related investigations underway in Iraq, Britain, and Switzerland, according to The Wall Street Journal.
  • An April 2004 report by Congress’s nonpartisan investigative arm, the General Accounting Office, now called the Government Accountability Office.

What are the details of the CIA report?

The September 30, 2004, report by Iraq weapons inspector Charles Duelfer uncovered the regime’s complicated and lucrative schemes to earn illicit funds. In a particularly egregious abuse, Saddam was found to be using secret “oil vouchers” worth millions of dollars to reward individuals and companies for helping Iraq subvert sanctions. Among the alleged recipients of the vouchers was Sevan, the program’s chief administrator. Duelfer headed the CIA team that authored the report, known as the Iraq Survey Group.

How did the oil voucher scam work?

Under the Oil-for-Food program, the United Nations was supposed to monitor and approve all of Iraq’s oil sales. All profits went into special escrow accounts that the United Nations controlled. Because the purpose of the program was to help feed and provide for the basic needs of the Iraqi people, Iraq was not permitted to buy military equipment or so-called dual-use items—items that could potentially be used in banned weapons programs—with its oil proceeds. But Iraq was given wide latitude to determine to whom it sold its oil, and was also permitted to select the vendors from which the United Nations would purchase goods with Iraqi oil profits. Saddam Hussein skimmed billions from the program by controlling these decisions.

How did Saddam Hussein choose buyers of Iraqi oil?

Iraq could sign final oil contracts only with a set number of approved “lifting” companies—major oil companies that could transport the oil. But, officially unreported to the United Nations, Saddam Hussein developed a complex internal system that moved the oil through middlemen before it got to the final buyer. The initial oil sale, the Duelfer report said, was generally to a company or individual whom Saddam wanted to influence or favor. Senior Iraqi leaders, such as former Deputy Prime Minister Tariq Aziz, and Iraqi ambassadors could nominate an individual or company to receive secret “oil vouchers”—guarantees from the regime that the holder of the voucher could buy a certain amount of oil at a set price. Iraq priced this oil below market value, so that the holder of the voucher could make a significant profit when he sold it on to another middleman or international oil company. Saddam Hussein personally approved all names on the voucher recipient lists, the Duelfer report states.

How much could a voucher holder earn?

Depending on the price of oil, voucher holders could earn from ten cents to thirty-five cents per barrel beyond the regular market profit, the report says.

Who received the vouchers?

The Duelfer report contains a list of more than 1,300 oil vouchers that Saddam Hussein gave to more than a hundred corporations, foreign officials, individuals, and political parties around the world. This information came from lists found at Iraq’s state oil company and interviews with captured regime officials.

  • Thirty percent of the oil vouchers were issued to beneficiaries in Russia, including individual officials in the president’s office, the Russian
    Foreign Ministry, the Russian Communist Party, members of the Russian
    parliament, and the oil firms Lukoil, Gazprom, Zarubezhneft, Sibneft, Rosneft, and Tatneft.
  • Fifteen percent of the beneficiaries were French, including a former
    interior minister, the Iraqi-French Friendship Society, and the oil company
  • Entities in China received 10 percent of the vouchers.
  • Entities in Switzerland , Malaysia , and Syriaeach received 6 percent.
  • U.S. companies and individuals received between 2 percent and 3 percent of the total vouchers—some 111 million barrels out of a total of 4.1 billion. These companies were not named in the report, because of U.S. privacy laws, but were later leaked to the press.

Which individuals were named in the report as voucher recipients?

Among them:

  • Vladimir Zhirinovsky, the Russian Liberal Democratic Party leader, and companies associated with his party were allocated 53 million barrels.
  • Alexander Voloshin, chief of staff under former Russian President Boris Yeltsin, was allocated 3.9 million barrels of oil from May to December 2002.
  • Oscar S. Wyatt Jr., a prominent Texas energy investor with a long history of dealings in Iraq, received vouchers for 29.7 million barrels, according to press reports.
  • Benon Sevan, the UN chief of the Oil-for-Food Program, received an allocation of 13 million barrels.
  • Charles Pasqua, a businessman and former French interior minister, received an allocation of 11 million barrels.
  • Megawati Sukarnoputri, the former Indonesian president, was allocated 6 million barrels.

Was it illegal to take vouchers?

Yes. If individuals and companies knowingly received profits from oil sales not approved by the Oil-for-Food program, they broke the rules of that program and violated the terms of UN Security Resolutions that established the program and the sanctions against Iraq, say investigators from the House International Relations Committee. In the case of UN employees, accepting bribes would also violate the rules of that body, experts say.

Whether individuals on the list will be prosecuted, however, would, in most cases, be the decision of their own governments and subject to the domestic laws of each nation. In the United States, as in some other nations, the sanctions became part of domestic law. Another key question in the American context would be whether these vouchers truly served as bribes that caused individuals to work on Saddam Hussein’s behalf to modify U.S. policy. A series of laws, including the 1977 Foreign Corrupt Practices Act, regulates the overseas business practices of American citizens. In addition, U.S. firms could be prosecuted if they failed to receive the required approval from the U.S. Department of Treasury to purchase Iraqi oil. 

What are the details of the allegations against UN Oil-for-Food chief Sevan?

The Duelfer report states that as Sevan was administering the UN’s program, he accepted Iraqi oil vouchers through various companies that he recommended to the Iraqi government. An investigation by the now-defunct Iraqi Governing Council uncovered a letter linking Sevan to a Panamanian-registered company called the African Middle East Petroleum Company, which set up an oil deal on his behalf, the report states. Some 7.3 million barrels were allegedly sold by Sevan before 2003, which could have netted him between $730,000 to $2 million, depending on market conditions.

How did Saddam earn his illicit funds?

The voucher system may have given Saddam Hussein political influence over world leaders and companies, but it didn’t bring in much cash to the regime. To accomplish that, Saddam Hussein tacked kickbacks and surcharges onto some Oil-for-Food transactions. For example, in some cases he asked that the suppliers of humanitarian goods provide 10 percent kickbacks to the regime in order to be selected as the vendor. This brought $1.5 billion to the regime, the Duelfer report states. Another $228 million was earned through collecting illegal surcharges of twenty-five to thirty cents per barrel to some companies that wished to buy Iraqi oil. However, the bulk of Saddam Hussein’s $11 billion in illegal revenue, collected from 1990 and through 2003, came from illicit cross-border trade and oil sales to countries in the region. Some $8 billion of that total was earned through illegal oil sales and other trade with Jordan, Turkey, Egypt, and Syria. The regime also earned $1.2 billion from unsanctioned oil sales to private companies outside of the voucher system and the Oil-for-Food program, the report states. Members of the UN Security Council, including the United States, often knew about these transactions.

What did Iraq buy with the money?

The Duelfer report says that Iraq went to great lengths to build a missile system that exceeded the range limits imposed by the United Nations. Companies from China and Russia sold, or negotiated to sell, missile guidance systems, the report says. A Polish company supplied a propulsion system. An Indian company built and sold Iraq a missile-fuel processing plant. All in all, the report alleges that six governments and private companies from a dozen other nations were willing to ignore sanctions prohibiting arms sales. Among European allies, France’s military industry had extensive contacts with Iraqi officials. The report describes, for example, repeated trips by an executive from the French company Lura, which sold Iraq a tank carrier.

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