Volcker Probe Finds 'Tainted' Deals in 'Oil-for-Food' Program

By Maggie Farley
February 4, 2005
Los Angeles Times
http://www.latimes.com/news/nationworld/world/la-fg-oilforfood4feb04,1,6758629.story?ctrack=3&cset=true

UNITED NATIONS — The head of the Iraqi oil-for-food program helped steer lucrative oil contracts to a relative of former U.N. Secretary-General Boutros Boutros-Ghali, a conflict of interest that seriously undermined the integrity of the United Nations, a U.N.-commissioned investigation said Thursday.

An investigative panel, headed by former U.S. Federal Reserve Chairman Paul A. Volcker, also noted that the U.N.'s awarding of other key contracts was tainted. Among the questionable deals was one in which a U.N. official colluded with a former British ambassador to the United Nations so that a British firm would win an inspection contract.

Boutros-Ghali has also been questioned about circumventing U.N. procedures to hand the management of Iraq's multibillion dollar escrow account to a French bank. U.N. officials also may have shielded key information from auditors, and the problems auditors found went largely uncorrected, the report said.

Secretary-General Kofi Annan pledged Thursday to waive diplomatic immunity for any U.N. staffer who may face criminal charges and said he would remedy the world body's defects highlighted by the report. The findings, he said in a written statement, were especially uncomfortable reading for all of us who love this organization and have done our best to serve it over the years.

Annan also announced that he had started disciplinary proceedings against the oil-for-food program's chief, Benon V. Sevan, and another U.N. official named in the report, Joseph Stephanides, the former chief of the U.N. sanctions branch.

But Annan's new chief of staff, Mark Malloch Brown, acknowledged that the punishment applicable to Sevan, who is all but retired, was limited. The U.N. retains Sevan on a $1-a-year salary to make him available to investigators; that dollar also buys him diplomatic immunity.

On Thursday, Sevan's lawyer issued a lengthy denial.

It is unfortunate that the [panel] has succumbed to massive political pressure and now seeks to scapegoat [Mr. Sevan] for problems within the oil-for-food program, the statement said. Mr. Sevan never took a penny.

Volcker was appointed in April to take an independent look at charges of corruption and mismanagement in the $64-billion oil-for-food program, which was set up in the 1990s to allow Iraqi President Saddam Hussein's regime — then under U.N. sanctions — to sell oil and use the revenue to import food and other humanitarian goods for the Iraqi people.

Volcker said his 219-page report was preliminary and that the final conclusions wouldn't be ready until midsummer. The panel has yet to address the alleged role of Annan's son in winning a lucrative contract for Cotecna, a company he worked for, or wrongdoing by other firms.

This is not the whole story by a long shot, Volcker said.

Although the Volcker report did not identify any criminal wrongdoing, violations it described highlighted what many say is the U.N.'s culture of political favoritism. U.N. officials reportedly colluded with diplomats to ensure contracts went to favored firms, ambassadors negotiated on behalf of their nations' companies and political concerns short-circuited competitive bidding.

Volcker called revelations about Sevan's role the most disturbing finding. Despite Sevan's denial of wrongdoing, the panel said that it had evidence that he solicited an oil contract in 1998 for a friend who ran a small Geneva-based firm, African Middle East Petroleum Co. Ltd. Inc. The company is headed by Boutros-Ghali's cousin, an Egyptian named Fakhry Abdelnour. The company earned $1.5 million from sales of the oil it received as a result of Sevan's alleged intervention, the report said.

Volcker's panel did not show that Sevan received payment for the favor, though it expressed doubt about $160,000 in cash he received over four years that he reported as gifts from an aunt in his native Cyprus. The committee concluded that the aunt, a retired government photographer who died last year after a fall down an elevator shaft, did not have the means to make such gifts.

The report also found convincing and uncontested evidence that contracts awarded to Banque Nationale de Paris, Saybolt Eastern Hemisphere B.V. and Lloyd's Register Inspection Ltd. were made for political reasons that overrode U.N. regulations.

Boutros-Ghali allowed Iraq to choose BNP to be the program's bank, even though it did not make the U.N.'s initial short list of institutions to manage Iraq's escrow account and was not the lowest bidder. He told investigators last month that it was a political choice because it satisfied Iraq, the U.S., Britain and France.

In the selection of an inspection company to monitor imports of humanitarian goods to Iraq, Stephanides, the chief of the U.N. sanctions branch in 1996, tipped the British ambassador on how much Lloyd's Register needed to lower its bid to beat the French front-runner for the contract, the report said.

Stephanides told investigators he did it because France already held the banking contract and that he wanted to ensure the U.N.'s business was not concentrated with one country. His collaboration with the British ambassador was designed to get a lower price for the U.N., he said.

The U.S. Justice and Treasury departments also have investigations underway.