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May 20, 2002 No.
382

Iraq Buys and Smuggles Its Way Out of UN Sanctions

In an article published recently in the London-based Arabic daily Al-Hayat, reporter 'Hazem Al-Amin exposes the manner in which Iraqi authorities subvert the sanctions regime in an effort to buy friendships and, at the same time, earn illicit income. According to Al-Amin, two interrelated instruments are used for this purpose: First, the "Oil for Food" program administered by the United Nations, and second, the smuggling of oil, primarily through Syria, but also through Jordan and Turkey and via waterways. The following is a summary of Al-Amin's article:[1]

The Jordanian Channel
Iraq's relationship with Jordan is a case in point. The road between Amman and Baghdad is crowded with cargo shipments and oil tankers. Big transactions, generating big profits, are common. The Iraqi leadership is famous for its "generosity" toward those who support its causes and its financing of Jordanian newspapers is well-known. Journalists who receive their salaries from the Iraqi embassy can be critical of the Jordanian government and even of the Jordanian royal institution but never of Iraq. Another way of supporting Jordanian newspapers is through commercial contracts. In one instance, Iraq contracted a Jordanian newspaper to publish Iraqi schoolbooks. In another instance, a Jordanian newspaper was contracted to print all official stationary for Iraqi ministries. Al-Amin points out that the Jordanian government is a shareholder in these newspapers and ultimately benefits from these transactions.

Trade Manipulations
Under the "Oil for Food" program, oil revenues are deposited in a special account administered by the United Nations to allegedly prevent Iraq from using these revenues to buy weapons or weapon-related equipment and supplies. The special account reimburses the exporters and suppliers for goods exported to Iraq after advance approval by the U.N. However, it is the Iraqi government which negotiates the deals with the exporters or suppliers. At that stage, the two sides (the government and the exporters) connive to add a big margin, a minimum of 10%, to the negotiated price. This additional margin of illicit profit (known in business as pricing transfer) is then transferred in cash to the Iraqi treasury or to an individual beneficiary designated by the government.

Another way of subverting the sanctions regime is to import commodities under the "Oil for Food" program which are not needed for local markets but are re-exported by the government to earn illicit cash. A good example is importing wheat which is then resold to local merchants who export it as a domestic commodity. Iraq then resells the wheat at a lower price than it cost to import, as the government must allow a margin of profit for local trading companies and for the cost of reshipment.

Oil Smuggling
There are other ways, sometimes even more efficient, for the Iraqi government to subvert the sanctions regime. As in many other developing countries, Al-Amin points out, "politics and trade are indistinguishable," particularly in view of the fact that the ruling elites often control the economy and monopolize economic activities. In Iraq, most of the trading companies are owned by members of the ruling Ba'ath Party or their children, trade unions, activists, and media personalities, who turn these companies into "a large political bazaar."[2] Foreign trading companies, which are not allowed to do business directly with the government of Iraq, operate through an Iraqi representative with political clout. Some traders, particularly those from Qatar, enter into contracts through these agents to buy smuggled Iraqi oil at a discounted price. Once the oil reaches Qatar, it is issued a new "certificate of origin" and sold into the international markets.

The problem is that many of the ships used for oil smuggling are unseaworthy and cause serious environmental damage to the Gulf.[3] According to the International Maritime Bureau, smugglers sail their ships at night through the Shatt Al-Arab waterway between Iraq and Iran, claiming to be heading for Iranian ports; then they turn north and pick up the oil at Iraqi terminals. They go back through Iranian waters, sometimes paying a transit fee on the way. Another study claims that the smugglers pay Iran $50 a metric ton for a tariff to use Iran's waters.[4]

Special Deals for Friends of the Iraqi Regime
There is ample evidence that Iraq uses the "Oil for Food" program to acquire support among writers, artists, singers, and journalists across the Arab world. One way to secure their support, according to an Iraqi official who fled to Amman, is for the government to grant individuals a coupon which allows them to receive a certain amount of oil either free or at discounted prices. The beneficiary of the coupon uses the services of a local agent to sell the coupon to a foreign company. The buyer of the coupon submits it to SOMO (State Oil Marketing Organization) of Iraq, which, in turn, will pump the oil through the Iraqi-Syrian oil pipeline for the benefit of the buyer who is responsible for shipping the oil. There are various estimates about the volume of Iraqi oil exports to Syria through the Kirkuk-Banian pipeline but it is probably close to $250,000 b/d.[5] The potential to use this money for Saddam Hussein's weapons of mass destruction is enormous.

An additional form of illicit income is the special surcharge of $0.25-0.40 levied by SOMO on each barrel of oil sold by Iraq. While this surcharge is illegal under the UN sanctions regimes, most traders are prepared to pay it to maintain good relations with SOMO. The many efforts by the UN to insist on an ex post-pricing regime of the Iraqi oil have apparently failed.

New Sanctions Regime – No Real Change
On May 14, the Security Council approved a revised sanctions regime on Iraq. While Iraq is still denied access to items that may be used for dual (military as well as civilian) purposes, such as heavy trucks and communications equipment, it may import everything else subject to a quick review by the Security Council.

As has been the case since the "Oil for Food" program was introduced in 1996, oil revenues will continue to be deposited in the special account administered by the UN, and Iraq will, no doubt, continue to play its old tricks to subvert the system and generate illicit revenues.


[1] Al-Hayat, May 8, 2002.

[2] Late last year, the son of Tariq Aziz, Iraq's deputy Prime Minister, was sentenced to 6 months in prison for allegedly double-crossing Saddam's son, Uday, in a business transaction.

[3] The International Maritime Bureau has called for increased port controls by Gulf States in a bid to stop unseaworthy vessels smuggling oil out of Iraq and reduce the risk of collisions and oil spills. Ships carrying the flags of Albania, Belize, Bolivia, Cambodia, Comoros, Georgia, Honduras, Maldives, Mauritius, St. Vincent and Grenadines have all been involved in oil smuggling. http://www.iccwbo.org/ccs/news_archives/2001/Iraq.asp.

[4] "Iraq: Oil Smuggling Produces High Profits," www.rferl.org/nca/features/2000/06/F.RU.000621122248.html.

[5] Al-Hayat, February 2 and February 14, 2002; and http://www.al-jazeera.com/economics/, February 22-3, 2002. A recent study by The Wall Street Journal (May 2, 2002) suggests that Iraq receives at least $1 billion annually from its oil exports to Syria.