The Volcker Report

on the

Oil-for-Food Programme


On 3 February 2005 an interim report was published by the inquiry headed by Paul Volcker, the former chairman of the US Federal Reserve Bank, into the Oil-for-Food Programme for Iraq, in particular, into the administration of it by the UN Secretariat, through its Office of the Iraq Programme (OIP).  The report is available on the inquiry website.


The inquiry was set up because of allegations of widespread mismanagement, and even corruption, by the UN Secretariat, allegations which threatened the future of Kofi Annan as Secretary-General.  It concluded that the head of the OIP, Benon Sevan, had solicited small amounts of oil from Iraq for a company called AMEP, but apart from that it didn’t find much evidence to support the allegations.


(Note, however, that the interim report doesn’t cover the OIP’s selection in 1998 of the Swiss company, Cotecna Inspection SA, as the inspectors of goods imported into Iraq under the Programme.  Kofi Annan’s son, Kojo, was connected with Cotecna at the time.  This matter will be covered in the final report of the Inquiry, which is due in July this year.)


“Illicit” revenue

Part of the pressure for an inquiry has been the figures that have been bandied around in the US for the “illicit” revenue acquired by Iraq, in the period from 1990 to 2003, by breaching the economic sanctions regime and bending the rules of the Oil-for-Food Programme.  In its report of 20 September 2004, for example, the Iraq Survey Group (ISG) put a figure of around $11 billion on it.  A few weeks later, the US Senate’s Permanent Subcommittee on Investigations said $21 billion. 


The interim report does not offer an opinion on the accuracy of these figures.  However, it does state categorically that the revenue was mostly unrelated to the Oil-for-Food Programme, and therefore not the fault of the UN Secretariat: it was in the main from Iraqi oil sales to its neighbours, primarily to Jordan and Turkey, in breach of sanctions, the enforcement of which was up to UN member states, not the UN Secretariat.


These sales took place with the knowledge and consent of the US, which chose not to do anything about them because the states in question were allies.  Nevertheless, many people in the US continue to point the finger at the UN, implying it was all the fault of the UN bureaucracy that Iraq acquired this revenue.


In May 1996, when she was US Ambassador to the UN, during the Clinton administration, Madeleine Albright famously agreed that the death of half a million Iraqi children under economic sanctions was a price worth paying in order to bring Iraq to heel.  It is lucky that the US had allies in the region, which it allowed to buy oil from Iraq, otherwise even more Iraqi children would have had to pay the price.


Resolution 986

Economic sanctions were first imposed on Iraq in August 1990 by Security Council resolution 661 to force it to withdraw from Kuwait.  They were continued after the Gulf War in resolution 687 passed in April 1991, ostensibly to enforce its disarmament, and they continued until the invasion in March 2003, even though it had no proscribed weapons after 1991.


The Oil-for-Food Programme was established by resolution 986, passed in April 1995.  It was the only mechanism whereby Iraq was permitted by the Security Council to engage in external trade.  It allowed Iraq to sell oil up to a prescribed limit by value (which increased over time) and to buy food, medicine and other humanitarian goods with (part of) the proceeds.


The first shipment of oil under the Programme left Iraq in December 1996 and the import of humanitarian goods under it began in March 1997.  Around 60% of the Iraqi people received food aid under the Programme, which continued until the US/UK military invasion in March 2003.  It was terminated in May 2003 by Security Council resolution 1483, which, inter alia, ceased economic sanctions against Iraq.


Iraq contracts

Under the Programme, Iraq was allowed to make contracts with purchasers for the sale of oil, but was not allowed to handle the proceeds from the sale, which had to be paid into a bank account administered by the UN OIP.  Iraq was also allowed to make contracts for the purchase of goods, which were paid for out of this bank account.  The UN OIP appointed inspection companies to verify that the oil exported and goods imported were as contracted.


The process was overseen by the 661 Committee of the Security Council, created in August 1990 to monitor the sanctions imposed by resolution 661.  Every member of the Security Council was represented on this Committee, which could block any contract under the Programme.  In practice, since the Committee operated by unanimity, each member of the Committee had a veto.  The US and the UK frequently exercised this right to stop the importation of what they claimed were “dual use” materials that could be used for military purposes.


$64.2 billion sold

At the outset, 30% of the proceeds from oil sales were taken by the UN to settle claims arising from the Iraqi invasion of Kuwait, which goes a long way to explain Iraq’s initial reluctance to participate in the Programme.  This was later reduced by degrees to 5%.  The proceeds also paid for the UN’s administration costs (2.2% was reserved for this) and for weapons inspections.


During the seven years of the Programme, $64.2 billion of oil was exported under it.  With interest on unspent proceeds and currency gains, the total proceeds were $69.5 billion.  Of this, $18 billion, that is, over a quarter of the total revenue, was taken to pay compensation, and $1.4 billion was set aside for funding the UN administration of the Programme.  In total, only $38.7 billion was spent on imported goods.  After the invasion, the surplus was turned over to the Development Fund for Iraq, set up by the occupying powers.


Nine investigations

No fewer than eight separate investigations have been launched in the US into claims of mismanagement and corruption in the Oil-for-Food Programme, and about the wider, but separate, question of Iraq’s breaching of economic sanctions.  Three were launched in the US House of Representatives alone, one in the Senate, one each at the US Treasury and US Customs Service and one in the New York courts.  And yet another was launched in Iraq itself.


Because of all this, in March last year Kofi Annan was forced to set up the Volcker inquiry.  It has a very wide remit to “collect and examine information relating to the administration and management of the Oil-for-Food Programme, including allegations of fraud and corruption on the part of United Nations officials, personnel and agents, as well as contractors, including entities that have entered into contracts with the United Nations or with Iraq under the Programme”.  The Security Council endorsed the inquiry in resolution 1538 passed on 21 April 2004.



The aspect of the interim report’s findings that made headlines was, understandably, that the head of the OIP, Benon Sevan, had solicited and received allocations of oil from Iraq on behalf of a company called AMEP, with a total value of $1.5 million.  The inquiry was unable to come to a conclusion as to whether he personally benefited financially from the transaction, although it found that he had received $160,000 in income during the six-year-period he directed the Programme for which he couldn’t adequately account.  Sevan still denies any wrongdoing, and says he is a scapegoat, but the evidence presented by the inquiry is compelling.


One other UN employee, Joseph Stephanides, was found to have unduly influenced the selection of Lloyds Register as the organisation to be employed by the UN to verify the goods imported.


Commission for UN?

A specific criticism of the UN Secretariat was that it regarded the 2.2% of oil proceeds reserved for administration as a commission to be used as the Secretariat saw fit, not just for the administration of the Programme, a corollary being that the Secretariat shared with Iraq an interest in maximising the revenue derived from oil sales in order to maximise its commission.


The interim report laid this bogey to rest (pages 38-40), saying categorically that the Secretariat did not treat the account as a commission, but as a necessary pool to cover actual administrative expenses of the Programme, which, with one or two exceptions, were properly accounted for.


It found no evidence that any of these funds were used for purposes other than the administration of the Programme and pointed to the fact that, out of the 2.2% ($1.4 billion, in total) reserved for administration, $372 million (that is, 27%) was not used and was “transferred out to be used directly for the benefit of the Iraqi people”.


Surcharges & kickbacks

Much of the criticism of the administration of the Programme was concerned with Iraq’s implementation, during the later stages of the Programme, of a system of hidden surcharges on oil sales contracts and kickbacks on purchase contracts, by means of which Iraq acquired considerable amounts of revenue.


This worked as follows.  Oil was offered for sale slightly below market price on condition that all or part of the profit on resale would be transferred under the counter to Iraq.  Likewise Iraq offered to buy goods above market price on condition that all or part of the surplus would be returned under the counter to Iraq.


The UN Secretariat has been criticised for not identifying contracts not priced at market rates (which was not an easy thing to do since Iraq didn’t make them obvious).  It has even been said that the Secretariat connived at the surcharges and kickbacks because of an alleged bias towards Iraq.  However, the ultimate decision to accept each contract lay with the 661 Committee, which at the instigation of the US and the UK held up thousands of purchase contracts over the years, on the grounds – often farfetched – that the goods could be used for military purposes.  However, it appears that the Committee never refused to accept any contract on the grounds that it was overpriced.


That is the testimony of John Ruggie, an American former UN Assistant General-Secretary, writing in the International Herald Tribune on 8 December 2004:


“The United States and Britain, along with the other members of the UN Security Council, designed and oversaw the oil-for-food program. The United States alone had 60 professionals review each of the 36,000 contracts awarded - more than twice the size of the UN oil-for-food office's professional staff. America and Britain held up 5,000 contracts, sometimes for months, to ensure that no technology was getting through that Saddam could use for weapons purposes. But they held up none - not a single solitary one - on the grounds of pricing irregularities, even when alerted by UN staff.”


In 2001, the US and the UK did take steps through the 661 Committee to counter the underpricing of oil sales contracts, the net effect of which was that buyers had to sign a contract to purchase oil literally without knowing the price until well afterwards.  Naturally, this deterred buyers from buying, and oil sales fell drastically.


Volcker critical

The Volcker inquiry is critical of the UN Secretariat because the Oil-for-Food contracts were not audited by the UN’s Internal Audit Division (IAD), saying that:


“A thorough audit of these aspects could have uncovered or confirmed the various kickback schemes employed by the Government of Iraq in relation to the Programme.”


But, the IAD regarded these contracts as outside their purview, since its business is to appraise the use of financial resources by the UN and its various agencies.  The Oil-for-Food contracts were not contracts between the UN and other parties, leading to the use of UN resources, but between a member state of the UN and other parties.  The IAD regarded these contracts as the business of the 661 Committee, which had the authority to accept or reject them.


It might be argued that the OIP should have applied more resources to identifying pricing irregularities, and bringing them to the attention of the 661 Committee (for the Committee to ignore, in all probability), but it is very difficult to see why they should have been the concern of the UN’s internal auditors.


How much revenue?

Various investigating bodies, including the Iraq Survey Group (ISG), have attempted to estimate the revenue that Iraq managed to acquire through these surcharges and kickbacks.  In his interim report, Volcker presents (pages 41-42) various estimates of these revenues.


For example, in last September’s report, the ISG estimated the surcharges on oil sales contracts at $229 million (out of $64.2 billion total sales), and the kickbacks on purchase contracts at $1.5 billion (out of a total of $38.7 billion).  However, it is not clear how much of these kickbacks ended up in the Iraqi state coffers.  Volcker writes of this (page 42):


“There can be no question that bribes and other abuses, including shipments of overpriced or substandard goods, provided many opportunities for illicit gains, often as part of a deliberate effort by Iraq to ‘reward friends’ or cultivate political influence.  What is not clear is the extent to which these illicit financial gains benefited middlemen participating in the Programme and corrupt individual Iraqi officials rather than the Iraqi Regime.”


Fairly small beer

What is clear from all estimates of the “illicit” revenue acquired by Iraq is that the surcharges and kickbacks within Oil-for-Food Programme were fairly small beer compared with the revenue acquired by selling oil to its neighbours – primarily Jordan and Turkey – outside the Programme, the bulk of it through formal trade agreements.  It began before the Programme started and continued when the Programme was in operation.  The ISG estimates these revenues at $9.2 billion ($2.4 billion before the Programme started and $6.8 billion afterwards).


This is confirmed by the Volcker report (page 42):


“What does appear clear is that the major source of external financial resources to the Iraqi Regime resulted from sanctions violations outside the Programme’s framework.  These illicit sales, usually referred to as ‘smuggling’, began years before the Programme started.  Exports of Iraqi oil to both Jordan and Turkey and imports from these countries generally took place within the terms of trade agreements (‘protocols’) negotiated with Iraq.”


What is clear also is that, while complaining about the minor leakages in the Oil-for-Food Programme, the US turned a blind eye to these transactions, because Iraq’s trading partners were allies of the US.  As the Volcker report says (ibid):


“The existence, but not necessarily the amounts, of sales and purchases under these protocols was brought to the attention of the 661 Committee and at least in the case of Jordan, it was ‘noted’.  United States law requires that assistance programs to countries in violation of United Nations sanctions be ended unless continuation is determined to be in the national interest.  Such determinations were provided by successive United States administrations for both Jordan and Turkey.”


The enforcement of economic sanctions against Iraq was up to UN member states, not the UN Secretariat.  The US knew Jordan and Turkey were breaching the UN sanctions against Iraq.  It could have threatened them with the cessation of assistance programmes, unless they ceased breaching the sanctions.  But it didn’t: it allowed the trade to continue and, under three successive US administrations – Bush I, Clinton and Bush II – the US Secretary of State had to certify to Congress that the assistance programmes to Jordan and Turkey were in the US national interest, otherwise it would have been contrary to US law to continue them.


CPA loses control

The Oil-for-Food Programme was wound up after the US/UK military invasion of Iraq and the surplus in the UN bank account was transferred to the Development Fund for Iraq, established under Security Council resolution 1483, passed on 22 May 2003.


This resolution authorised the Coalition Provisional Authority (CPA), established by the occupying powers, to sell Iraqi oil, to place the proceeds in the Fund and to spend out of the Fund “to meet the humanitarian needs of the Iraqi people, for the economic reconstruction and repair of Iraq’s infrastructure, for the continued disarmament of Iraq, and for the costs of Iraqi civilian administration, and for other purposes benefiting the people of Iraq”.


A few days before the publication of the Volcker report, the Special Inspector General for Iraq Reconstruction, a US government auditor, published a report on the use of monies from the Development Fund for Iraq by the CPA.  The burden of the report was that the CPA had inadequate controls over nearly $8.8 billion it had transferred to Iraqi ministries in the period October 2003 to June 2004, so much so that “there was no assurance that the funds were used for purposes mandated by Resolution 1483”.


Isn’t that interesting?



David Morrison


Labour & Trade Union Review

March 2005