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.
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.
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.
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.
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”.
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.
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.
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