Introduction

On January 25, 2004, the Iraqi daily Al-Mada published a list of 270 individuals and entities who had received oil vouchers from the Saddam Hussein regime. The vouchers enabled the bearer to buy Iraqi oil at a discounted price. Most of the bearers were not oil traders; they sold their vouchers to intermediaries for a quick and handsome profit. [1]

MEMRI was first to publish the Al-Mada article, which was forwarded by MEMRI’s Baghdad office and posted on the MEMRI website on January 28.

The list caught everyone by surprise for two reasons: first, because of the volume and the extent of the corruption which permeated the Oil-for-Food Programme (OFFP) [2] managed by the United Nations; and second, because of the names of entities and individuals who benefited from the illicit activities, including the executive director of the Programme, U.N. senior official Benon Sevan.

Since the publication of the list, there have been Congressional investigations at which MEMRI was invited to testify. Coming under intense scrutiny and increasing criticism about his handling and oversight of the Oil-for-Food Programme, U.N. Secretary-General Kofi Annan appointed, in April 2004, an independent, high-level inquiry committee to investigate the administration and management of the Programme. The U.N. Security Council unanimously adopted Resolution 1538 (April 21, 2004), which endorsed the inquiry and called for full cooperation in the investigation by all U.N. officials, the Coalition Provisional Authority in Iraq, and all other member states.

The Independent Inquiry Committee – A List of Reports

The Independent Inquiry Committee (IIC) was chaired by Paul Volcker, former chairman of the U.S. Federal Reserve. The two other members were Professor Mark Pieth of Switzerland, an expert on money laundering, and Richard Goldstone of South Africa, a former prosecutor of the International Criminal Tribunals. The main task of IIC was to evaluate the U.N.'s performance with regard to the administration of the Oil-for-Food Programme.

The IIC carried out a comprehensive forensic investigation of every conceivable aspect of the Oil-for-Food Programme. IIC staff conducted more than 1,100 interviews in dozens of countries and collected more than 12 million pages of documents, including extensive records from the Government of Iraq. [3] The Committee’s report, published on September 7, 2005, comprises four volumes:

Volume I: The Report of the Committee [a summary of analysis, findings and conclusions]

Volume II: Programme Background

Volume III: United Nations Administration, Part I

Volume IV: United Nations Administration, Part II

In addition, there is another, unnumbered volume on "The Impact of the Oil-for-Food Programme on the Iraqi People," which was also issued on September 7, 2005. This volume addresses primarily issues pertaining to health and nutrition before and during the implementation of the Oil-for-Food Programme.

These five volumes come on top of three previous "Interim Reports":

[First] Interim report: "The Initial Procurement of United Nations Contracts (1996) of February 3, 2005

Second Interim Report: "The 1998 Procurement of Humanitarian Goods Inspection Contract. Other Conduct of United Nations Offices," of March 29, 2005-09-22

Third Interim Report: "The Conduct of Benon Sevan. The Conduct of Alexander Yakovlev," August 8, 2005

Background of the OFFP

Four days after Iraq’s invasion of Kuwait on August 2, 1990, the Security Council adopted Resolution 661, that prohibited most forms of trade and financial transactions with Iraq. While that resolution was tantamount to imposing sanctions on the country, over time the sanctions regime was eroded through extensive acts of smuggling Iraqi oil for food and goods.

This situation led the Security Council, following the initiative of the U.S. and other members of the Council, to adopt in early 1995, Resolution 986, that provided "the basic operational template for the Oil-for-Food Programme." [4] Resolution 986 did not, however, authorize the Iraqi regime to receive money directly from oil sales. Instead, it directed the U.N. Secretary-General to establish an escrow account to receive oil sales proceeds.

Despite the growing suffering of the Iraqi people, it took Iraq and the U.N. no fewer than 50 meetings to agree on the mechanics for the OFFP, culminating in a May 20, 1996 formal memorandum of understanding (the "Iraq-U.N. MOU"). The delay must be attributed, in large measure, to the Iraqi regime, whose representatives at the negotiations with the U.N. lacked authority to reach an agreement and had to shuttle back and forth between Vienna and Baghdad and New York and Baghdad to seek approval for the various stages of the negotiations. Indeed, in Saddam’s Iraq, negotiators had to seek Saddam’s approval for each step of the process. At the same time, using a well-tested method of doing business in that part of the world, the Iraqi regime attempted to bribe then-U.N. Secretary-General Boutros Boutros-Ghali through Iraqi-born intermediary and oil voucher beneficiary Samir Vicent.

Throughout the process, Boutros Ghali had instructed the staff to keep the talks confidential, lest members of the Security Council attempt to "obstruct or ‘micro-manage’ development." [5] Clearly, the Secretary-General’s intention was primarily to keep the U.S. and the U.K., which had led the international forces that expelled Saddam’s army from Kuwait, from getting too heavily involved in the process of negotiating a deal with Iraq.

Significant Bodies Dealing with OFFP

With the adoption of Resolution 661 (sanctions on Iraq), the Security Council created the 661 Committee, comprising the 15 members of the Council, to monitor the negotiations with Iraq. With the signing of the Memorandum of Understanding with Iraq regarding the OFFP, the 661 Committee was given an expanded operational role "in the review and approval of billions of dollars of transactions that eventually would be conducted under the Program."

The 661 Committee was to operate under the principle of "unanimous consent," which meant that any member could block any action that ran contrary to its national interests. [6] The Russian Federation, France, and China, the three largest beneficiaries of OFFP in terms of both their exports to Iraq and priority for the purchase of Iraqi oil, often forestalled measures that would have brought greater scrutiny of the program. Syria prevented scrutiny as well. When it was elected for a two-year membership in the Council in 2000, Syria was able to block any investigation of alleged smuggling of vast amounts of Iraq oil through the Kirkuk-Banias pipeline. Syria claimed that the pipeline was simply being tested for its technical viability. To a different end, but acting under the same principle of unanimous consent, the U.S. and the U.K. put a hold on hundreds of contracts which were suspected of providing Iraq with supplies of dual usage –military and civilian.

Patterns of Corruption by the Iraqi Regime

The ICC report dwelt at great length on patterns of corruption associated with the Oil-for-Food Programme through which the Iraqi regime sought to derive illicit income above and beyond what was to be managed by the Office of the Iraq Programme. The total illicit income during the life of OFFP – 1997-2003 – was estimated at $10.2 billion, derived from the following activities:

• Revenues from trade agreements with Jordan, Egypt, Turkey and Syria (oil bartered for goods or sold for cash) and other revenues from private sales
• Border trade (referring mainly to smuggling of oil inland and on water)
• Transaction Fees on Oil Sales (surcharges and kickbacks, from $0.10 to $0.50 per barrel)
• Transaction Fees on Humanitarian Purchases, comprising two main categories: (a) After-Sales-Service Fees (another form of kickback on sales transactions), and (b) Inland Transportation Fees (excessive fees for port and inland transportation of humanitarian supplies). [7]

All of these charges, fees, kickbacks, illegal trade and smuggling would generate illicit income for the Iraqi regime.

There is another sub-category of illicit income which the ICC has not addressed, namely the re-exporting by the regime of food products imported through the OFFP. There was a case reported at the time of milk powder which was seized by the Kuwaiti authorities as it was on its way from Iraq to a buyer overseas. The Iraqis argued that the milk powder was not of a quality suitable for Iraqi children. Whether this was a single case or one of many has yet to be determined.

Luxury amidst Misery and Disease

Nothing dramatizes the evil and corrupt nature of the Saddam regime more than the importation of highly luxurious goods amidst the growing misery and disease of the Iraqi people and, in particular, of the children of the country. Under a stretched concept of "foodstuffs," the Jordanian customs officials released between August and November 2000 "more than four million cigarettes, nearly 2,500 metric tons of tobacco, more than 1.5 million liters of beer, more than 185,000 bottles of wines, more than 300,000 liters of vodka, and more than 700,000 bottles of whiskey." [8]

According to data on the health and nutrition situation in Iraq drawn from independent studies carried out by U.N. specialized agencies and furnished in the Volcker report, during 2000 when so much liquor was imported by Iraq that was financed by illegitimate sources of revenues derived from various surcharges and levies, there were 609,920 cases of amoebic dysentery, 542,365 cases of giardiasis, 18,720 cases of mumps, 23,217 cases of scabies, 24,614 cases of typhoid, and 8,887 cases of viral hepatitis. There were also smaller numbers of a host of other diseases. [9] Another study showed that approximately 16 percent of children born in 2000 were below the minimum birth weight of 2.5 kilograms, or approximately 5.6 lbs. [10]

The Office of the Iraq Programme

Shortly after his election in January 1996, and concurrently with the expansion of the functions of the 661 Committee, the newly-appointed U.N. Secretary-General Kofi Annan created the Office of the Iraq Programme (OIP) under Benon Sevan, who would become a central figure in the unfolding drama of mismanagement and corruption. The investigation of the program would reveal that Sevan would blame the 661 Committee for not doing its job properly, and the Committee would blame him, and the U.N. Secretariat, for withholding critical information that would have facilitated its work.

This pattern of non-cooperation between the U.N. and the 661 Committee prevailed throughout the management of OFFP. The IIC had a lot to say about the conduct of Benon Sevan in particular, and of the U.N. Secretariat in general.

The Performance of Benon Sevan

The performance of Sevan was the subject of IIC’s Third Interim Report, issued in August 8, 2005. [11] There was also reference to Sevan in the Second Interim Report, issued on February 3, 2005. [12] The various reports accused Sevan of a record of inconsistency and evasion as well as of a grave and continuing conflict of interest between his managerial responsibility and as an illegal beneficiary of the OFFP, and suggested that his ethical improprieties "seriously undermined the integrity of the United Nations." [13]

On the professional level, Sevan saw nothing, heard nothing, and said nothing. The litany of program violations under Sevan’s eyes and ears is too lengthy to enumerate, but included:

• Concealing damaging information, which is "all the more troubling when considered against his corrupt receipt of oil allocations from the Iraqi regime from which he profited." [14]
• Failing to prevent an elaborate system of corruption.
• Failing to "resist and challenge the Iraqi regime’s rampant sanctions violations…" [15] There was ample evidence that Iraq was demanding a surcharge of $0.50 per barrel. However, Sevan "opposed [the U.N.] Secretariat’s public acknowledgment that the problem existed." [16]
• Insisting on maintaining a state of ambiguity surrounding the functioning of key administrative units in OIP.
• Being "uncooperative and hostile towards the auditors." [17]

The Report also points out that when chief customs officer Felicity Johnston complained about a kickback scheme occurring "left, right, and center," Sevan refused to take action; indeed, he withheld information from the 661 Committee. The U.N. Secretariat was aware of these legal breaches, but took no action either. They also avoided raising the issue when they met with Iraqi officials. [18] A lengthy pattern of evasion by Sevan in reporting to the 661 Committee on the kickbacks is evidenced by letters drafted for him on the subject by his subordinates but never signed by him. [19]

The Performance of the U.N. Secretariat

The Oil-for-Food Programme was the largest humanitarian program ever undertaken by the U.N., and perhaps by any other bilateral or multilateral agency. The program, which dealt with approximately $100 billion in total revenues and expenditures, was thrust upon a bureaucracy that lacked the experience and the executive leadership to shoulder a program of that size, magnitude and complexity. It was a bureaucracy that was outgunned and outclassed by a wily dictator who had constantly sought to bend the system to suit his own designs. By contrast, the U.N. Secretary-General is the Chief Administrative Officer (CAO) of the organization, rather than its Chief Executive Officer. As a CAO, his authority is constrained by the heavy hand of a quota system applied in the recruitment of management and staff, under which competence is often sacrificed in a difficult political balancing act. Ultimately, however, Sevan was the personal appointment of the Secretary-General, who should have been more proactive when abuses of the program were the subject of newspaper articles as well as multiple U.N. memoranda.

It must be emphasized that in the U.N. system there are many dedicated international civil servants and peacekeepers, who often operate under the most difficult and dangerous circumstances and who sometimes, tragically, pay the ultimate personal price. But, as was put succinctly by the report, although there were many successes in the OFFP, they "fell under an increasingly dark shadow." [20]

The Cover-up by the Secretary-General

The policy of cover-up initiated by Sevan was adopted by the Secretary-General. In his presentation to the Security Council on February 28, 2001, the latter made no reference to the issue of the surcharge demanded by Iraq on oil exports.[21] Regarding the oil pipeline to Syria, the Secretary-General instructed the U.N. spokesman to say that the U.N. would be following up on the information. [22] Similarly, in the case of the oil smuggling, the U.N. Secretariat and Sevan provided the 661 Committee no material to take corrective action. In fact, Security Council Resolutions 661 and 986 mandated that the Secretary-General report to the Security Council regarding the implementation of the sanctions program and humanitarian program, respectively.[23] Overall, the Secretary-General took the position that the U.N. had no obligation to report on violations. It was not that he did not know; it was, rather, that he chose not to share information with others.[24]

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The report reveals structural weaknesses of the U.N. bureaucracy: line of authority blurred, accountability poorly defined, supervision haphazard, and channels of communications far from clear. The ICC report laments that when problems arose with the management of the program, the Secretary-General and his deputy distanced themselves. The IIC concludes that that "the cumulative performance of the Secretary-General and the Deputy Secretary-General fell short of the standards that the United Nations Organization should strive to maintain." [25]

Conflict of Interest

Not only was the OFFP the largest humanitarian program ever managed by the U.N. Secretariat and by the U.N. agencies; also it provided a budgetary bonanza never previously experienced by any of the nine U.N. agencies involved in implementing the program. While it has often been constrained by limited resources, occasionally caused by the withholding of assessments member governments are required to make, the U.N. system was suddenly awash in revenues, providing agencies a lot of breathing space. When faced with the choice between continuing to milk the cow by keeping the program going despite the many infringements or taking the cow to the slaughterhouse by suspending the program, they chose the former. Herein lies one of the principal reasons why the international bureaucracy looked the other way when confronted with clear violations by the Saddam regime.

Cover-Up

After the oil scandal broke, the U.N. continued to profess ignorance of any wrongdoing. For example, Mr. Shashi Tharoor, U.N. Under Secretary-General for Communications and Public Information, published a letter in The Wall Street Journal professing ignorance of wrongdoing. The letter offers an elaborate explanation of the procedure for administering the OFFP. But Mr. Tharoor introduced the caveat: "The U.N. had no way of knowing what other transactions might be going on directly between the Iraqi government and the buyers and sellers… The program itself was managed strictly within the mandate given to it by the Security Council and was subject to nearly 100 different audits, external and internal, between 1998 and 2003 and, as the secretary-general has said, this produced no evidence of any wrongdoing by the U.N. Official [meaning Sevan]." [26] While he was interviewed by the ICC panel, there is no indication in the Volcker Report as to whether Tharoor was asked to identify the source of the information about the 100 alleged and undocumented audits which allegedly revealed nothing improper.

The Role and Greed of the U.N. Special Agencies

To isolate the three northern Kurdish governorates – Erbil, Suleimaniya, and Dohuk –from the vagaries and arbitrariness of the central government in Baghdad, the Security Council decided that 13% of oil revenues under the OFFP should be earmarked for these provinces, to be managed by the U.N. Inter-Agency Humanitarian Program (UNIAHP). [27] This was a tragic mistake, leading to uncommonly severe abuses of their mandate, driven by incompetence and greed.

Apart from the U.N. Secretariat, which maintains overall responsibility for the OFFP, there were altogether nine U.N. agencies involved in the humanitarian program in the three northern governorates. These agencies provided humanitarian programs, mainly foodstuffs and medicine, for a total value of about $2,562 million, but collected $787,358 million for administrative expenses. [28] By our count, the administrative fees amount to 30.7% of the value of the program. The range of administrative expenses fluctuated between 22% incurred by UNICEF (U.N. Children's Fund) and 64.8% by the World Food Program (WFP). There was an exceptional and indeed scandalous case of the International Telecommunications Union, which collected $10.4 million for administrative expenses for work valued at $890,741– a ratio of about 12 to 1.

The administrative fees collected by the agencies comprised three elements: $506 million for direct costs, $102 million for indirect costs, and $179 for program support costs, which covered loosely defined management and headquarters costs. The report estimates that the agencies were paid $49 million in excess fees. The report "strongly recommends that the equivalent of up to $50 million in the aggregate be made available by the agencies for the benefit of Iraq …" [29]

The report points out that there were difficulties identifying the nature of some of the costs incurred by the agencies because the U.N. Secretariat, and particularly the Office of the Iraqi Programme, did little "to ensure that the actual expenditures reported by the Agencies were proper and related to the Programme." [30] Here are some examples of the abuses:

• UNDP (U.N. Development Programme) charged $500,000 for cars to its office in Baghdad. It was forced to reimburse the program. [31]

• UNDP received $23 million for "prioritizing and amending 512 contracts." According to the Volcker’s report, "The payment of $23 million appears excessive." [32]
• UNOPS (U.N. Office of Project Services) incurred administrative costs of $300,000, but received over $3.4 million in fees, which helped them to upgrade their offices. [33]

The report also criticized the practice of assigning agencies the implementation of projects which were beyond their technical capacity or terms of reference. Here are some examples:

• UNESCO (U.N. Educational, Scientific and Cultural Organization) built a chalk factory. The project management was "highly unsatisfactory" because UNESCO overreached its capacity. [34]
• WHO (World Health Organization) was contracted to build 15 100-bed hospitals and one 400-bed hospital, but these were never actually constructed "because of WHO lack of relevant experience and technical skills." [35]
• ITU (International Telecommunications Union) undertook to rehabilitate a telecommunication project. It failed to do so because of lack of experience. [36] This was the U.N. agency which collected $10.4 million in administrative cost for work valued at $890,741.

The report also refers to allegations of "bid-rigging, conflicts of interest, briberies, theft, nepotism, and sexual harassments" by agency staff. [37] However, the IIC has failed to examine the contracting procedures of these agencies, particularly whether they had adhered to sound rules of international competitive bidding.

After the war, the Kurds complained about the conduct of the U.N. agencies. One complaint singled out FAO. It was alleged that in 2001, Kurdistan needed chemical fertilizers for agriculture. FAO, which is headquartered in Rome, bought the fertilizers for $7 million from an Italian company, despite an offer from an Egyptian firm to provide the same quantity and of the same quality for one-fifth of the cost paid to the Italian company. FAO also allegedly imported, in 2002, 1985-model tractors, after having them painted in Jordan to give them a newer look. When asked about the absence of a complaint at the time, the source who provided the information to the London-based daily Al-Sharq Al-Awsat replied that FAO officials had threatened to cancel the program altogether. [38]

The Kurdish daily Al-Ittihad of the Patriotic Union of Kurdistan (Talabani’s party) published a blistering report about the abuses of the U.N. agencies operating in Kurdistan under the OFFP. It accused FAO of looting the program, and UNICEF of soliciting help for the children of Iraq while saying nothing about the "Anfal" operation which, in order to Arabize the region and particularly the city of Kirkuk, expelled and often killed thousands of Kurds, including many children, residing in Kurdistan. It said that Benon Sevan was aware of these abuses "but remained silent for unknown reasons." [39]

ICC argues that many of these abuses arise from the nature of the Memorandum of Understanding between the U.N. Secretariat and the U.N. agencies: "Because of the relative independence from the United Nations Secretariat, the agencies do not keep common books and records with the United Nations, generally do not share audit reports with the Secretariat, and are accustomed to working on a hire-for-fee basis." [40] The ICC should have done a better job examining the internal procedures of the relevant agencies –particularly those procedures related to reporting and auditing.

The Truth behind the Auditing of U.N. Agencies

As the former Technical Assistance Adviser of the World Bank and head of its U.N. Unit, this author spent considerable time dealing with the U.N. agencies, and with the U.N. Secretariat itself, on the issue of reporting and auditing for services rendered by these agencies under World Bank loans and credits. A document negotiated in 1990, "Handbook on the Employment by Bank Borrowers of U.N. Agencies as Consultants," provides very specific language about audit requirements:

Chapter VII [Audit] para.23: "The U.N. agency shall furnish to the Government, by not later than July 31 in each year until the completion of the Services, a statement of account showing the use of funds expended for the Services during the previous calendar year."

Para 24: "…if a U.N. agency subcontracts part or all of the services, it must include in the subcontract a provision acceptable to the government under which the subcontractor undertakes: (a) to keep accurate and systematic accounts and records in respect of the services carried out by the subcontractor in such form and detail as will clearly identify all relevant charges and cost, and (b) to permit the government or its designated representative to inspect the same as well as to have the charges and costs audited by auditors appointed by the government [italics added]."

In a subsequent "Standard Form of Agreement" which U.N. agencies had readily signed many times, the provision on audit is unambiguous. Para. 3.4 (a) stipulates: "The U.N. Agency shall keep accurate and systematic accounts and records in respect of the Services hereunder, in accordance with its Financial Regulations and Rules in such form and detail as will clearly identify all relevant charges and cost." [41]

By the nature of their structure, mandate, experience and mode of operation, most of the U.N. agencies are qualified to dealing with micro-projects –providing vaccination, protecting cultural sites, preparing forestry projects, dealing with textbooks, or advising on labor laws and practices. Suddenly, they were assigned an enormous and complex program which tested the capacity of many of these agencies in the extreme and found most wanting.

The Agencies’ Difficult Task

The task assigned to the agencies was like entrusting an ocean liner to the captain of a river boat. The agencies had to operate in an environment made difficult by a regime that was particularly hostile to the Kurdish people and did everything to disrupt that portion of the program relevant to the Kurdish region. It was quite common either to withhold requests for visas for officials of the relevant agencies, or to declare them persona non grata and demand their expulsion from the country within 72 hours because such personnel allegedly posed a risk to Iraqi security. When two FAO staff members were murdered, an Iraqi court opined: "The United Nations, whose commitment should be the alleviation of hardships in the world, was culpable of the sufferings of the Iraqi people." It dismissed the case against the Iraqis accused of the murder. [42] It was also reported that armed men "would line up in front of the [U.N.] inspection agents and train their weapons [on them]. " [43] In the words of a humanitarian coordinator, "It was commonly known that Iraq monitored the U.N. more than the U.N. monitored Iraq." [44] Despite the fact that its control of oil revenues should have given the U.N. the leverage to call on Iraq to grant the U.N. staff the privileges and immunities they were entitled to under international conventions, there is little evidence that such leverage was applied.

Conclusion

The ICC report is comprehensive, balanced and well-documented. It placed the blame squarely, as it should have, on Benon Sevan, the Executive Director of the OIP.

The Secretary-General of the U.N., who was ultimately responsible and hence accountable for the failures and abuses of the Oil-for-Food Programme, who covered up the misconduct of Sevan, and whose son earned considerable income from a company contracted under the program, escaped what could, or perhaps should, have been a call for his resignation. [45] In the words of Raghida Durgham, the London daily Al-Hayat’s correspondent in New York, whose article on the ICC report was headlined: "Annan emerges damaged from the Volcker Report but (so far) he is not thinking of resigning." [46]

*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.