August 13, 2004
Under Eye of U.N., Billions for Hussein in Oil-for-Food Plan
By SUSAN SACHS and JUDITH MILLER
Toward the end of 2000, when Saddam Hussein's skimming from the oil-for-food program for Iraq kicked into high gear, reports spread quickly to the program's supervisors at the United Nations.
Oil industry experts told Security Council members and Secretary General Kofi Annan's staff that Iraq was demanding under-the-table payoffs from its oil buyers. The British mission distributed a background paper to Council members outlining what it called the systematic abuse of the program and described how Iraq was shaking down its oil customers and suppliers of goods for kickbacks. 
When the report landed in the United Nations' Iraq sanctions committee, the clearinghouse for all contracts with Iraq, it caused only a few ripples of consternation. There was no action, diplomats said, not even a formal meeting on the allegations.
Since the fall of Mr. Hussein, the oil-for-food program has received far more scrutiny than it ever did during its six years of operation. Congress's Government Accountability Office, formerly the General Accounting Office, has estimated that the Iraqi leader siphoned at least $10 billion from the program by illicitly trading in oil and collecting kickbacks from companies that had United Nations approval to do business with Iraq. Multiple investigations now under way in Washington and Iraq and at the United Nations all center on one straightforward question: How did Mr. Hussein amass so much money while under international sanctions? An examination of the program, the largest in the United Nations' history, suggests an equally straightforward answer: The United Nations let him do it.
Everybody said it was a terrible shame and against international law, but there was really no enthusiasm to tackle it, said Peter van Walsum, a Dutch diplomat who headed the Iraq sanctions committee in 1999 and 2000, recalling the discussions of illegal oil surcharges. We never had clear decisions on anything. So we just in effect condoned things.
As recently as February, the official position of the United Nations office that ran the program was that it learned of the endemic fraud only after it ended. But former officials and diplomats who dealt directly with the program now say the bribery and kickback racket was an open secret for years. 
In blunt post-mortem assessments, they describe the program as a drifting ship - poorly designed, leaking money and controlled by a Security Council that was paralyzed by its own disputes over Iraq policy.
The program, created in 1996, was an ambitious attempt to keep up international pressure on Iraq to disarm while helping the Iraqi people survive the sanctions imposed on the Hussein government after its invasion of Kuwait in 1990.
The entire effort was financed by the sale of Iraqi oil. A political compromise allowed Iraq to decide to whom it would sell its oil and from whom it would buy relief supplies. It was up to the United Nations to make sure that the price Iraq set for the oil was fair and that the proceeds were buying relief goods, and not being funneled to Mr. Hussein's coffers or being used for illicit arms.
As the flow of money ballooned, the United Nations, with an annual budget of just $1.5 billion, was responsible for collecting and disbursing as much as $10 billion a year in Iraqi oil revenues. Even as the fraud engineered by Mr. Hussein's government became widely understood, the officials said, neither the Security Council nor United Nations administrators tried to recover the diverted money or investigate aggressively.
The work of the Office of the Iraq Program, which administered the oil-for-food activities, and of its former director, Benon V. Sevan, is the focus of an independent United Nations investigation headed by Paul A. Volcker, the former Federal Reserve chairman. His panel is looking into the broader charges of mismanagement and corruption in the program, as well as specific accusations that United Nations officials, including Mr. Sevan, took kickbacks. 
Mr. Volcker announced in a news conference on Monday that his panel would need at least $30 million and probably a year to determine whether the charges are justified. Despite an elaborate system in the United Nations for overseeing oil-for-food contracts, corruption never seemed to be the chief concern of anyone involved. The United States and Britain were focused on keeping material related to illicit weapons out of Iraq. Other nations that had greater financial stakes in Iraq, including France and Russia, favored lifting the sanctions. And for the United Nations bureaucracy, diplomats said, the priority was keeping goods flowing to the Iraqi people.
In the halls of the United Nations, the program became a battleground for the competing commercial interests and political agendas of the 15 individual nations that made up the Security Council, diplomats said. Those same nations made up the Iraq sanctions committee, which took action only by a consensus that could be blocked by any member.
The result was a paralysis that translated into acquiescence toward matters like oil kickbacks. Annual reports of the sanctions committee reflect the limp reaction to repeated signs of corruption.
For instance, at a meeting in 2002, an annual report said, the sanctions committee considered a report from the Islamic Republic of Iran on the interception of an alleged oil-smuggling attempt in its territorial waters, adding, The committee took note of this information.
When the committee learned from a press report in late 2001 of allegations that an Indian company was helping Iraq purchase embargoed materials for a nuclear fuel plant, the United States and Britain pressed for an investigation. Two committee members said the panel debated for months whether to urge India to investigate. Discussions on the matter remain inconclusive, the committee said in its 2002 report.
While the diplomats were deadlocked over how to address violations of the sanctions, money and contracts continued to flow through the Office of the Iraq Program. 
Mr. Sevan, the Cypriot who headed the program, has denied that he received any kickbacks and would only say in a statement that his office was not responsible for ferreting out corruption. Congressional investigators this year disputed that claim, citing United Nations resolutions.
Evidence of fraud passed from office to office in a round robin ending nowhere. A former State Department official who was part of an interagency committee that reviewed trade contracts with Iraq said the group detected abnormalities in pricing that suggested fees and kickbacks. The former officials said the committee asked why Iraq needed to import gilded tiles for palaces, or liposuction equipment.
Peter Burleigh, who was the deputy American representative to the United Nations in the late 1990's, said those concerns had been relayed to Mr. Sevan's office. Mr. Sevan's office said it had passed information regarding suspicious contracts to the sanctions committee, on which the United States held a permanent seat.
Even after the committee received reports that suppliers were padding their contracts to hide payoffs, the committee never rejected a contract because of cost, according to recent Congressional reports and former United Nations officials.
Mr. Sevan's chief interest was to avoid deadlocks over relief supplies, said Michel Tellings, one of the three oil overseers who monitored Iraq's oil sales for the United Nations.
Benon saw that he had a divided Security Council in front of him and was more concerned about getting the food in and the oil out, Mr. Tellings said. So he took a middle way and didn't investigate problems. He'd say, 'If you've got clear evidence, I've got to go to the Security Council. If it's a rumor, don't bother.'  The lack of coordination in the program was evident in the fact that while United Nations auditors produced 55 reports on the program over the years, several diplomats on the sanctions committee said in interviews that they never even saw them.
In the end, a complicated set of political and financial pressures kept the program ripe for corruption.Mr. van Walsum, the retired Dutch diplomat, said he sometimes suspected that his fellow diplomats were disinclined to hear about potential fraud because they were concerned about protecting the interests of friendly companies and foreign allies eager to trade with Iraq. 
Everyone, he said, was living in the same glass house.
A System Ripe for Picking
The oil-for-food program was established to get food and medicine to the Iraqi people and to counter Mr. Hussein's claims that sanctions were solely responsible for the widespread malnutrition in Iraq after the embargo was imposed in 1990. 
Iraq was not prohibited from buying food and medicine; it just was not using its money for that purpose. By modifying the oil sanctions, the Security Council wagered that it might gain enough leverage to force Iraq to buy more relief goods.
On one level, the program worked well. According to Congress's General Accounting Office, the program provided food, medicine and services to 24 million Iraqis. Malnutrition rates for children fell. But along the way, the Security Council approved provisions that opened the program to corruption.
Mr. Hussein agreed to the program in 1996 only after winning a major concession: While the United Nations would control oil revenues, Iraq could negotiate its own contracts to sell oil and to purchase supplies. That arrangement, according to the General Accounting Office, may have been one important factor in allowing Iraq to levy illegal surcharges and commissions.
Then in 1999, the Security Council removed all restrictions on the amount of oil Iraq could sell. And the Office of the Iraq Program was given power to approve contracts for a range of items - food and medicine, agriculture and sanitation equipment - without approval from the Council's sanctions committee.
Meanwhile, the United States and Britain were delaying the approval of billions of dollars in contracts that they feared would provide Iraq with material or equipment that could be used for the development of weapons of mass destruction. Those holds on contracts deeply concerned the United Nations officials trying to improve Iraqi living conditions, and drew objections from members of the Security Council that favored a freer flow of commerce with Iraq.
Countries that supported the continuation of sanctions came to see the relief aid side of the program as secondary. As Mr. van Walsum put it, oil for food meant oil not for W.M.D.  
Facing pressure from other nations, the United States and Britain agreed to further compromises in the sanctions system.
Special Interests in Council
Under Security Council resolutions and the oil-for-food program, all of Iraq's oil revenues were to be paid into a United Nations bank account to be used for relief goods. But Iraq's booming trade in illicit oil continued under the eyes of the Council.
Iraq's suppliers included Russian factories, Arab trade brokers, European manufacturers and state-owned companies from China and the Middle East. In one instance, American officials in Iraq found, Syria had been prepared to kick back nearly 15 percent on its $57.5 million contract to sell wheat to Iraq. And some of the world's biggest oil traders and refineries did business with Baghdad, including Glencore, a Swiss-based trading company. 
Different Security Council members had different levels of tolerance for the abuse, said Mr. Tellings, the former oil overseer.
When the United States and others wanted the sanctions committee to confront Syria on oil sales, they were blocked by Russia and France, which argued that Syria should not be singled out when the Americans refused to investigate Iraq's equally lucrative oil trade with their allies, Jordan and Turkey.
Congressional investigators have estimated that Iraq collected $5.7 billion from selling oil outside United Nations supervision, while the oil-for-food program was chronically short of money for relief supplies. 
They could have done a cost analysis of at least what Saddam was selling to Syria, said Hans von Sponeck, a longtime United Nations diplomat who resigned as relief aid coordinator for Iraq in 1999, and then ask Iraq for a credit to the oil-for-food program because there was never ever money enough for the minimal needs of the people.
John D. Negroponte, then the American ambassador to the United Nations and now to Iraq, defended the special treatment given to Jordan and Turkey that let them pay Iraq directly for oil either in cash or barter goods. Both countries were suffering economically from the sanctions, he told a Senate committee this year.
He demurred when asked by Senator Christopher J. Dodd who benefited from the unsupervised oil sales. But the senator said he had few doubts.
Wouldn't it be a pretty good guess, he said, that they probably ended up in the pockets of Saddam Hussein and his cronies? Mr. Dodd asked.
Mr. Negroponte replied, I just don't know, sir. 
Hussein the 10 Percenter
The Hussein government demanded kickbacks on almost every contract it negotiated, beginning in 2000, according to documents from Iraqi ministries obtained by The New York Times this year. 
Senior Iraqi leaders ordered ministries to notify companies that they had to pay an amount equal to 10 percent of the contract value into secret foreign bank accounts, a violation of the United Nations sanctions. To do so, Iraqi officials said, suppliers would deliberately inflate the prices of their goods. 
On a $500,000 contract for trucks, for instance, Iraq would tell the supplier to prepare a contract for $550,000, with a side agreement promising to transfer the $50,000 add-on to an Iraqi-controlled bank account.
A shakedown plan of such magnitude - $33 billion worth of goods were ordered by Iraq from mid-2000 until the American-led invasion last year - did not go unnoticed. 
When the 10 percent came in, companies came and asked us what to do, said Jacques Sarnelli, who was the commercial counselor of the French Embassy in Baghdad at the time. We said it's illegal, you do it at your own risk, we don't want to know about it, and we are against it.
From his vantage point, he said, pinpointing evidence of a kickback would have been difficult. It was a shadow part of the business, he said.
At United Nations headquarters in New York, diplomats said the officials administering the program were more concerned about relief supplies. Mr. Sevan, who headed the Office of the Iraq Program, repeatedly appealed to the sanctions committee to speed up contracts for equipment, food and other goods. 
Mr. Sevan's office was supposed to examine the contracts to ensure price and quality. But it was unclear how it fulfilled that responsibility, according to the General Accounting Office.
At the sanctions committee, news of the systematic 10 percent kickback scheme prompted some public hand-wringing. Some diplomats, reacting to news reports, said they wished, but did not expect, companies to come forward and provide information.
Ole Peter Kolby, a Norwegian diplomat who succeeded Mr. Van Walsum as chairman of the sanctions committee, expressed hope for hard evidence, but then added, I guess also companies that do that are not likely to tell anybody.
At one point, the sanctions committee outmaneuvered Mr. Hussein on the illegal surcharges the Iraqis levied on every barrel of oil. In late 2000, the oil overseers relayed complaints by major oil companies that were buying from Iraq. 
After the committee debated for months about what to do, the United States and Britain pushed through a change in the way Iraq's oil was priced, bringing it more in line with world prices and drastically reducing the margin for fraud.
But no attempt was made to recover the surcharge payment or to investigate which companies paid. 
You couldn't ask the committee for guidance because you'd never get an answer, Mr. Tellings said. It was nobody's responsibility.