Hussein's Regime Skimmed Billions From Aid Program [major expose of UN Oil-for-Food program]

New York Times ^ | February 29, 2004 | SUSAN SACHS

[weegee]

This is a LONG article...

Hussein's Regime Skimmed Billions From Aid Program

Published: February 29, 2004
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Iraq also created a variety of other, less lucrative, methods of extorting money from its oil customers. It raised more than $228 million from illegal surcharges it imposed on companies that shipped Iraqi crude oil by sea after September 2000, according to an accounting prepared by the Iraqi Oil Ministry late last year. An additional $540 million was collected in under-the-table surcharges on oil shipped across Iraq's land borders, the documents show.

"A lot of it came in cash," recalled Shamkhi H. Faraj, who managed the Oil Ministry's finance department under the old government and is now general manager of the ministry's oil-marketing arm. "I used to see people carrying it in briefcases and bringing it to the ministry."

United Nations overseers say they were unaware of the systematic skimming of oil-for-food revenues. They were focused on running aid programs and assuring food deliveries, they add.

The director of the Office of Iraq Programs, Benon V. Sevan, declined to be interviewed about the oil-for-food program. In written responses to questions sent by e-mail, his office said he learned of the 10 percent kickback scheme from the occupation authority only after the end of major combat operations.

In the few instances when Mr. Sevan's office suspected an irregularity, the statement said, it notified the sanctions committee, "which then requested member states concerned to investigate."

As the details of the corruption have recently emerged, law enforcement authorities in several countries said they had opened criminal and civil investigations into whether companies violated laws against transferring money to Iraq. Treasury Department investigators have also been helping the Iraqi authorities recover an estimated $2 billion believed to be left in foreign accounts. So far, more than $750 million has been found in foreign accounts and transferred back to Iraq, said Juan C. Zarate, a deputy assistant treasury secretary.

To some officials of Iraq's provisional government, what is perhaps most insulting is how little their country got for its oil money. Taking stock of what was bought before the American-led invasion toppled Mr. Hussein last spring, they have found piles of nonessential drugs, mismatched equipment and defective hospital machines.

"You had cartels that were willing to pay kickbacks but would also bid up the price of goods," said Ali Allawi, a former World Bank official who is now interim Iraqi trade minister. "You had rings involved in supplying shoddy goods. You had a system of payoffs to the bourgeoisie and royalty of nearby countries.

"Everybody was feeding off the carcass of what was Iraq."

Trade Embargo Imposed

The United Nations Security Council first imposed a trade embargo on Iraq on Aug. 9, 1990, one week after Mr. Hussein's invasion of Kuwait. It was kept in place after the Persian Gulf war in 1991, with the provision that sanctions would be lifted once Iraq destroyed its unconventional weapons and ended its weapons program.

But as living conditions deteriorated, the Council made several offers to let Iraq export limited quantities of oil to buy food and medicine. The two sides agreed on a mechanism only in 1996.

Late in 1999, after further tinkering, Iraq was permitted to sell as much oil as it wanted, with the proceeds going into an escrow account at Banque Nationale de Paris, supervised by the United Nations. The new rules also allowed Iraq to sign its own contracts for billions of dollars in imported goods.

As ministry officials and government documents portrayed it, the oil-for-food program quickly evolved into an open bazaar of payoffs, favoritism and kickbacks.

The kickback scheme worked, they said, because the payoffs could be included in otherwise legitimate supply contracts negotiated directly by the former government and then transferred to Iraq once the United Nations released funds to pay the suppliers.

"We'd accept the low bid and say to the supplier, `Give us another 10 percent,' " said Faleh Khawaji, an Oil Ministry official who used to supervise the contracting for spare parts and maintenance equipment. "So that was added to the contract. If the bid was for $1 million, for example, we would tell the supplier to make it $1.1 million."

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The contract would then be sent to the United Nations sanctions committee, which was supposed to review contracts with an eye only to preventing Iraq from acquiring items that might have military uses.

Mr. Khawaji said he always assumed that United Nations officials simply chalked up the higher costs after 2000 to inflation. "If it was possible, Saddam would have made it 50 percent," he added. "But 10 percent could be hidden."

Some companies balked, he said, but most accepted the suggestion that they find a willing trading company to act as their intermediary. The trading companies, most of them Russian or Arab and some no more than shells, would then sell the product to Iraq and make the required kickback, Mr. Khawaji said.

"The Western company would say, `I can't do it, I've got a board, how do I get around the auditors?' " he said. "And someone would tell them there are companies in Jordan willing to do this for you. You sign with this trader and authorize them to sign a contract on your behalf."

The kickbacks were paid into Iraq's accounts, and designated ministry employees withdrew the cash and brought it to Baghdad on a regular basis, according to Mr. Khawaji and Iraqi financial records.

American and European investigators said they were trying to determine whether the banks knew they were being used for illegal financial dealings with Iraq.

Mr. Zarate, the Treasury official, said it was possible that banks did not see the whole picture because Mr. Hussein's government sometimes used agents and front companies to help move money. "But the reality was that banks were used," he said.

The chairman of Jordan National Bank in Amman, for one, said his bank was unaware that Iraq was collecting kickbacks, although Iraqi records show that tens of millions of dollars flowed into accounts at the bank in the name of government agencies and high-ranking Iraqi officials.

"If there is something like this, this 10 percent, to be honest, it wouldn't appear in the bank transactions," said the bank's chairman, Rajai Muasher. "It would be between the Iraqi government and the supplier."

The old government, however, required companies to provide separate bank letters of credit for the kickbacks, "to guarantee that they will pay them later to Iraq," as the country's irrigation minister noted in a Sept. 9, 2000, letter to Mr. Ramadan.

Businessmen who paid the kickbacks said they had no choice but to follow instructions.

"If you wanted to do business in Iraq, these were the conditions you had to abide by, not only my company but thousands of companies from all over the world that dealt in the oil-for-food program," said Emad Geldah, a member of the Egyptian Parliament who had three trading companies that sold commodities to Iraq.

"Once they told us it is for transportation inside Iraq because everything is very expensive," he said. "Or they would tell us it is for the maintenance of the trucks or they would call it after-sales service. We didn't know what they did with it."

Margin for Corruption

Under normal circumstances, Iraq would have been expected to seek the highest price for its oil, its only legal source of cash. Instead, said officials who worked with the oil-for-food program, Mr. Hussein's government fought to keep the price as low as possible to leave a margin for oil traders to pay illegal surcharges.

"We were instructed by the government to get the lowest price," said Ali Mubdir, director of crude oil sales in the State Oil Marketing Organization, or SOMO.

Under the oil-for-food program rules, the United Nations' oil overseers had to certify that Iraq was selling its crude oil at fair value. Until the overseers changed the pricing formula in late 2001, Iraq's oil sold at a discount compared with similar oil from other producers.

The margin allowed Iraq to impose an illegal surcharge on each barrel of oil it sold, with purchasers required to pay in cash or by transferring money into foreign bank accounts, Oil Ministry officials said.

At the same time, the Oil Ministry officials said, purchasers of Iraqi oil were required to pay a surcharge, either in cash or by transferring money into Iraqi accounts in foreign banks.

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"It started in September 2000 and stopped in October 2002," said Mr. Faraj, the SOMO general manager. "It was 10 cents a barrel for three months. Then some people suggested 50 cents, then it was 30, then 25, then 15 cents."

According to SOMO balance sheets, one in four oil purchasers, mostly Russian companies, paid cash. The ministry's records showed that the Iraqi Embassy in Moscow, as well as embassies in Turkey, Switzerland and Vietnam, received $61 million in cash from the companies that bought oil.

Among the companies listed by SOMO as having paid the surcharges are some of the world's biggest oil trading companies and refineries. Although the balance sheet lists payments down to the penny, companies contacted about the surcharges denied they were the ones that paid.

Iraqi records, for example, show that Glencore, a Swiss-based trading company that was one of the most active purchasers of Iraqi crude, paid $3,222,780.70 in surcharges. But the company said in a written statement that "it has at no time made any inappropriate payments to the Iraqi government" and "had no dealings with the Iraqi government outside the U.N. approved oil-for-food program."

Determining who paid the surcharge in each oil transaction will take time, according to American and Iraqi investigators.

Iraqi oil shipments passed through more than one set of hands before reaching the major Western oil companies and refineries that were the ultimate customers. Those that directly bought the oil and resold it were a scattered collection of politically connected businessmen rewarded with contracts by the government, small oil dealers and companies with no experience in the business, among them a Thai rice company and a Belarussian drug company.

When oil companies complained to the United Nations about the per-barrel surcharges, Iraq levied higher charges on ships loading at its port.

"Before the war, when a lot of companies refused to pay them under the table, they started pushing up the port charges because that was also money that came to them directly," said Ahmed Ashfaq, managing director of B.C. International, an Indian oil trading company that bought Iraqi oil during the oil-for-food program.

The port charges, up to $60,000 for large tankers, were collected by two Jordan-based shipping companies and transferred to Iraqi bank accounts in Jordan, according to SOMO officials.

The companies, Al Huda International Trading Company and Alia for Transportation and General Trade Company, are owned by the Khawam family, leaders of one of Iraq's biggest tribes.

"We had a contract with Iraq to provide services at the port," said Hatem al-Khawam, chairman of the board of the family business in Amman. Collecting and passing on the charges, he added, was simply business. "It wasn't my job to say if it was right or wrong."

Vouchers for Favors

In the high-flying days after Iraq was allowed to sell its oil after 10 years of United Nations sanctions, the lobby of the Rashid Hotel in Baghdad was the place to be to get a piece of the action.

That was where the oil traders would gather whenever a journalist, actor or political figure would arrive in Iraq and openly praise Mr. Hussein. Experience taught them that the visitor usually returned to the hotel with a gift voucher, courtesy of the Iraqi president or one of his aides, representing the right to buy one million barrels or more of Iraqi crude.

The vouchers had considerable value. With the major oil companies monopolizing most Persian Gulf oil, there was fierce competition among smaller traders for the chance to buy Iraqi oil. And as long as Iraq kept its oil prices low enough, traders could make a tidy profit, even after buying the voucher and paying the surcharge.

"We used to joke that if you get one million barrels, you could make $200,000," Mr. Faraj, of SOMO, added, referring to a period when the vouchers sold for about 20 cents per barrel. "And yet the ones who got it were those people who used to come here and praise Saddam for his stand against imperialism."

Tarek Abdullah, an Iraqi-born trader living in Jordan, formed a company, DAT Oil, in Cyprus to take advantage of the Iraqi government's low oil prices.

"We all bought from those people who got the allocations," he said. "Sometimes they'd register the quantity under my name, but often the Iraqis wouldn't give us an allocation directly."
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Late last year, SOMO prepared a list showing 267 companies and individuals that it said received allocations during the oil-for-food program. "The list is factual," Mr. Faraj said. "There's nothing made up regarding the person and the quantities."

Laith Shbeilat and Toujan Faisal, two Jordanian politicians who supported the former Iraqi government, said they received oil allocations but gave them to friends who wanted to get into the business.

So did Bernard Guillet, a French diplomat and an adviser to the former French interior minister, Charles Pasqua. He said he asked Tariq Aziz, one of Mr. Hussein's top aides, for gift vouchers and then gave them to people from Mr. Pasqua's European parliamentary district who were looking to deal in Iraqi oil.

"Some people were trying to do some business," Mr. Guillet said. "My role was only to say to Tariq Aziz or others, `Look, there are some companies that are willing to work and they're having difficulties.' That's it."

Last month, a Baghdad newspaper published the list of companies that got allocations, prompting a chorus of denials. The Russian Foreign Ministry, for example, blames politics for releasing the list, which contained 46 Russian companies and individuals, including the former Russian ambassador to Iraq, Vladimir Titorenko, and Nikolai Ryzhkov, a Parliament member.

In a statement, the ministry denied any wrongdoing by Russians. "It is hard not to notice," the statement also said, that publication of the list "coincided with the strengthening of efforts to return Russian companies to the Iraqi market in order to cooperate in the reconstruction of war-destroyed Iraq."

Others on the list said the Iraqis tried to ply them with vouchers, but they refused.

The Rev. Jean-Marie Benjamin, a Catholic priest who campaigned for years to lift the sanctions on Iraq, said his Iraqi contacts once told him they could offer him "help" in the form of valuable oil vouchers.

He said he refused outright. In a telephone interview from his office in Assisi, Italy, Father Benjamin also said he went so far as to write to Mr. Aziz in early 2002 to repeat his refusal, and underlined it again when he met Mr. Aziz that year in Baghdad.

As he recalled the conversation, Father Benjamin said, "Aziz told me, `But we won't give you anything. Only the traders will take something.' And I said, `I don't know how it works, but I can't, morally.' "

Contracts Canceled

When Dr. Khidr Abbas became Iraq's interim minister of health six months ago, he discovered some of the effects of Mr. Hussein's political manipulation of the oil-for-food program.

After a review of the ministry's spending, he said, he canceled $250 million worth of contracts with companies he believes were fronts for the former government or got contracts only because they were from countries friendly to Mr. Hussein.

They were paid millions of dollars, said Dr. Abbas, for drugs they did not deliver, medical equipment that did not work and maintenance agreements that were never honored. Iraq, he added, was left with defective ultrasound machines from Algeria, overpriced dental chairs from China and a warehouse filled with hundreds of wheelchairs that the old government did not bother to distribute.

"There is an octopus of companies run by Arabs connected with the old regime or personalities like Uday," he said, referring to one of Mr. Hussein's sons who was killed by American troops last July. "Some paid up to 30 percent kickbacks."

Other Iraqi officials said the ministries were forced to order goods from companies and countries according to political expediency instead of quality.

"There would be an order that out of $2 billion for the Trade Ministry and Health Ministry, $1 million would have be given to Russian companies and $500 million to Egyptians," said Nidhal R. Mardood, a 30-year veteran employee of the Iraqi Ministry of Trade, where he is now the director-general for finance.

"It depended on what was going on in New York at the U.N. and which country was on the Security Council," he added. "They apportioned the amounts according to politics."

One result, for Iraqis, was a mishmash of equipment: fire trucks from Russia, earth-moving machines from Jordan, station wagons from India, trucks from Belarus and garbage trucks from China.

"We got the best of the worst," Mr. Mardood said.

Yasmine Gailani, a medical technician who worked at a lab specializing in blood disorders, said the political manipulation resulted in deliveries of drugs that varied in quality and dosage every six months.

At one point, she said, the lab was instructed to only buy its equipment from Russian companies, adding, "So we would have to find what we called a Russian `cover' in order to buy from the manufacturer we wanted."

Her husband, Kemal Gailani, is minister of finance in the interim Iraqi government. Last fall, he said, he confronted a United Nations official over the quality of goods that Iraqis received in their monthly rations during the sanctions.

"We were looking at the contracts already approved and the U.N. lady said, `Do you mind if we continue with these?' " he recalled. "She was talking as if it was a gift or a favor, with our money of course. I said, `Is it the same contracts to Egypt and China? Is it the same cooking oil we used to use in our drive shafts, the same matches that burned our houses down, the same soap that didn't clean?' She was shocked."

Dr. Abbas, a surgeon who left his practice in London to return home to Iraq, said he was preparing lawsuits against some of the drug and medical supply companies he said were allowed to cheat Iraqis. He would also like to stop dealing with any company that paid kickbacks, but he said he realized that might not be practical.

But he would like to give them a message.

"I would say to them, it was very cruel to aid a dictator and his regime when all of you knew what the money was and where it was going," he said. "Instead of letting his resources dry up, you let the dictatorship last longer."


Abeer Allam in Cairo, Erin Arvedlund in Moscow and Jason Horowitz in Rome contributed reporting for this article.

[claudiustg]

The UN was complicit in all this. If it wasn't for UN incompetence and outright corruption, this wouldn't have played out like this. Oh, but the Dems like the UN, oh dear!