Scandals of Oil for Food

by Joy Gordon

Rep. Ralph Hall opened a set of Congressional hearings on July 8 with a

dramatic flourish, denouncing "the deaths of thousands of Iraqis through

malnutrition and lack of appropriate medical supplies." "We have a name for

that in the United States," the Texas Republican told a subcommittee of the

House Energy and Commerce Committee. "It's called murder."

The target of Hall's accusation was not the UN economic sanctions that,

according to a 1999 UNICEF study, had helped to double the rate of mortality

among children under five in central and southern Iraq over the preceding

decade. Rather, the Congressman was introducing yet more hearings to air

broad allegations of incompetence, manipulation and personal corruption in

the so-called Oil for Food program established by the UN Security Council in

1995 to ameliorate the humanitarian emergency in Iraq. According to these

allegations, UN mismanagement allowed Saddam Hussein to pocket billions of

dollars in oil sales at the expense of the Iraqi people. Benon Sevan, former

head of the Office of Iraq Program, which housed the now dissolved Oil for

Food program, has been named as one UN official who purportedly took what

amount to bribes to look the other way.

No fewer than nine discrete investigations into these claims have been

launched: three in the House of Representatives, one in the Senate, one each

at the Treasury Department and US Customs Service, one in New York courts

and one by the US-appointed Iraqi Board of Supreme Audit, as well as an

internal UN investigation headed by Paul Volcker, former head of the Federal

Reserve Bank. One House probe has issued a subpoena for relevant records

from the Paris-based bank, BNP Paribas, where the UN kept the Oil for Food

funds on deposit; ExxonMobil has received a subpoena from a US attorney's

office in New York.

The raft of investigations has been accompanied by a loud campaign, led by

William Safire and other conservative columnists, to discredit the Oil for

Food program in public opinion. Claudia Rosett, one of the most vitriolic

critics, wrote in the April 28 Wall Street Journal, "It's looking more and

more as if one of the best reasons to get rid of Saddam Hussein was that it

was probably the only way to get rid of Oil for Food." How seriously should

these sensational accusations be taken?

HUMANITARIAN EMERGENCY

Oil for Food, though never more than a stopgap measure, saved Iraqi

civilians from privations even worse than those they suffered. The economic

sanctions imposed by the Security Council following the Iraqi invasion of

Kuwait in 1990, combined with the destruction of infrastructure during the

Gulf war and refugee flight afterwards, had resulted in a massive

humanitarian crisis by the summer of 1991. A UN team found a threefold

increase in under-five mortality over the first eight months of that year.

Iraq rejected the terms of the Security Council's initial proposal to permit

very limited oil sales, and, over the next four years, the nearly

comprehensive sanctions helped to cause increases in malnutrition and

waterborne diseases. The infrastructure continued to crumble. In 1995, the

Security Council authorized a new proposal allowing Iraq to sell somewhat

larger amounts of oil and then use the proceeds to buy food, medicine and

other humanitarian goods.

Several different UN agencies provided expertise, service delivery and

monitoring once Oil for Food was finally implemented in March 1997,

including UNICEF, the World Health Organization, the World Food Program, the

Food and Agriculture Organization and the UN Development Program. When the

program was formally terminated in November 2003, $31 billion of

humanitarian aid had been delivered, primarily food and medicine, but also

items for water and sewage treatment, electricity production, transportation

and agriculture. Within the narrow strictures of the sanctions regime, the

Oil for Food program accomplished a great deal, according to statistics kept

by these agencies and independent observers. Between 1997 and 2002, the

nutritional value of the food basket distributed monthly by the program

almost doubled, from 1,200 calories per person per day to about 2,200. The

incidence of communicable diseases, including cholera and malaria, was cut

down substantially. Electricity became more reliable, as did the

availability of potable water. Despite these gains, sanctions continued to

take a toll.

In the late 1990s and the early days of the current Bush administration,

most of the debate over Oil for Food focused on its limitations as a remedy

for Iraq's humanitarian crisis. Today's spotlight on alleged corruption in

the program, in addition to being tinged with reflexive right-wing hostility

to the UN, reveals the collective amnesia about the effects of the economic

sanctions that made Oil for Food necessary in the first place.

SMUGGLING

It is important to separate out accusations implicating the UN agencies, as

distinct from individuals working at the UN, or the policies of member

nations. One of the main sources cited by the UN's accusers is a General

Accounting Office (GAO) report issued in April 2004, which estimates that

Iraq received $5.7 billion in proceeds from oil smuggling between 1997 and

2002. Critics like Safire and Rosett charge the UN with incompetence, if not

complicity, in this illicit trade that bypassed the Oil for Food mechanism.

Yet it is somewhat misleading to portray smuggling as a failure on the part

of the UN. In 1990, Security Council Resolution 665 invited member states to

interdict the suspected smuggling with their own military forces, leading to

the establishment of the Multinational Interception Force patrolling the

Persian Gulf. The US Navy provides most of the ships for the force, which

has operated under the command of a series of American rear admirals and

vice admirals from the Fifth Fleet based in Bahrain. None of the members of

the Security Council ever intervened to block the well-known smuggling route

passing through parts of northern Iraq controlled by US-allied Kurdish

militias into Turkey. The US also filed no objection to the oil trade

between Iraq and Jordan that took place throughout the history of the

sanctions.

KICKBACKS

The GAO report estimates that Iraq received $4.4 billion in illicit income

from kickbacks on import contracts and on oil surcharges. According to

interviews with Iraqi ministry officials cited in the report, it was the

practice of the Iraqi government to inflate by 5-10 percent the price it

would pay for humanitarian imports channeled through Oil for Food. The

vendor would then return the surplus to the Iraqis under the table.

It would have been difficult for UN officials to detect and stop these

kickbacks. As the deputy director of the Defense Contract Audit Agency

testified before Congress on April 21, his agency had found that of several

hundred contracts reviewed, 48 percent were "potentially overpriced" by at

least 5 percent, based on market prices. A 5 percent price difference is not

outside the normal variations of commerce. But Oil for Food contracts were

not signed under normal market conditions. Many contracts were for specially

designed items, such as parts for sewage treatment plants, for which there

was no "market price." In addition, there were extraordinary transaction

costs: to sell Iraq goods under the Oil for Food program, a vendor had to go

through an elaborate application procedure, provide detailed documentation

and often answer additional questions about component parts and chemical

makeup. The process sometimes dragged on for years. It would be surprising

if, under these circumstances, vendors always sold their goods at the

"normal" rates.

On more than 70 occasions when there were obvious price discrepancies, the

Office of the Iraq Program did bring them to the attention of the so-called

661 Committee -- composed of all 15 Security Council members -- which

reviewed all proposed Oil for Food contracts. In testimony submitted to

Congress on April 28, John Ruggie, the assistant secretary-general charged

with relations with the US mission, recalled that the committee "approved

roughly 36,000 contracts over the life span of the program. Every member had

the right to hold up contracts if they detected irregularities, and the US

and Britain were by far the most vigilant among them. Yet, as best as I can

determine, of those 36,000 contracts not one -- not a single solitary one --

was ever held up by any member on the grounds of pricing."

The US delegation alone had 60 people examining contracts, and, over the

course of the program, this delegation blocked thousands of contracts worth

billions of dollars. In July 2002, for instance, over $5 billion of

contracts were on hold, virtually all of them red-flagged by the US and its

ally Britain. Yet, in placing the holds, the US and Britain were almost

exclusively concerned with preventing potential "dual-use" goods -- items

that theoretically could have military uses -- from entering Iraq. From time

to time, according to sources who served on the 661 Committee staff,

Americans on the staff did claim to have espied kickbacks, but offered no

evidence.

SURCHARGES

In late 2000, Iraq began a practice of selling oil at low prices, often to

middlemen, who would then resell the oil at higher prices and pay Iraq a

surcharge under the table. The "oil overseers," oil industry consultants

working for the Oil for Food program, brought this practice to the attention

of the Security Council. The US and Britain responded in 2001 by

implementing a "retroactive oil pricing policy." Normal commercial practice

is to set the sale price for some period of time, such as a month. Under Oil

for Food, the oil overseers submitted a proposed price, the 661 Committee

then approved it and oil was then sold for the following month at that

price. As the 661 Committee operated by consensus, every member could

effectively exercise a veto over any measure. Making "creative use of the

consensus rule," in the words of Ambassador Patrick Kennedy, a US official

familiar with the 661 Committee, the US and Britain simply withheld their

approval of contracts until the sales period had passed. The 661 Committee

then decided what the market value would have been the prior month -- a

determination that can be somewhat arbitrary -- and required the buyer to

pay that amount. Thereafter, buyers had to sign a contract to purchase oil

literally without knowing the price until well afterwards.

Few buyers would commit to purchases under these conditions, and the oil

overseers warned the committee that Iraqi oil sales were likely to collapse.

Iraqi petroleum exports, in fact, dropped from an average of 1.7 million

barrels per day in 2001 to less than one quarter of that amount in September

2002. Meanwhile, Iraq had ended its surcharges -- oil prices were raised and

the profit margin was too low for surcharges to be possible. Still, the US

and Britain would not suspend the retroactive pricing gambit, with which

they continued until the US-led coalition invaded Iraq in March 2003.

The result was that the Oil for Food program was, in substantial measure,

bankrupted. Speaking before Congress on April 21, Kennedy bragged that,

through retroactive pricing, "we were able to save the people of Iraq

significant sums of money in illegal oil charges," yet the policy also

prevented the program from raising billions of dollars in revenue for

critical humanitarian goods. In February 2002, Benon Sevan announced that

revenues had dropped so drastically that $1.6 billion of approved contracts

could not be funded. If the contracts then on hold had been approved, the

shortfall would have totaled $6.9 billion. While the former Iraqi regime may

well have reaped ill-gotten gains from the surcharges, that practice had far

less impact on the Iraqi population than the punishing response of the US

and Britain, which nearly halted the humanitarian program altogether.

PROFITEERING

In January 2004, the Iraqi newspaper al-Mada published a list of individuals

and companies around the world that supposedly received certificates from

the government of Iraq that entitled them to buy a certain amount of oil

from Iraq. The list included an apparent reference to Sevan, the former

director of the Office of the Iraq Program. If Sevan did in fact accept

these oil certificates, he would indeed be guilty of an egregious form of

corruption.

It is rumored that the list was provided to al-Mada by Ahmed Chalabi, the

former member of the Iraqi Governing Council now in disrepute for allegedly

providing the US with false information about weapons of mass destruction in

pre-war Iraq. Thus far, no documentation of the list's authenticity is in

evidence; the Volcker commission is inquiring.

While Saddam Hussein's regime may have found ways to capture funds that were

meant to serve the Iraqi population, abuse of oil monies seems to be

occurring on a similar scale in US-occupied Iraq. For example, Halliburton,

under its contract with the US Army Corps of Engineers, provided fuel to the

military at $1.59 per gallon, while the Iraqi national oil company could buy

the fuel at 98 cents per gallon. The difference came to $300 million, and

the profits were funneled into the coffers of an American corporation,

rather than pumped into the Iraqi economy. In October 2003, a leading

British aid agency, Christian Aid, released a study showing that of the $5

billion in Iraqi oil money transferred to the Coalition Provisional

Authority, the CPA could only account for $1 billion. The accounts were

still incomplete upon the CPA's dissolution, according to Christian Aid. On

July 15, the International Accounting and Monitoring Board, created by the

Security Council to watch over the CPA's stewardship of Iraqi oil funds,

found that controls over the funds from November-May 2003 had been

inadequate. The CPA, for instance, was unable to certify that crude had not

been smuggled out of Iraq. Another independent NGO, the Iraq Revenue Watch

project of the Open Society Institute, reported that in the weeks before the

June 28 handover of "sovereignty," the CPA rushed to commit nearly $2

billion in Iraqi funds with no planning and questionable justification. In

many cases, billions of dollars of US funds had already been committed in

the same areas.

MASS DISTRACTION

Regardless of the truth of the allegations of impropriety in the UN's

administration of Oil for Food, it is clear that the real goal of the

program's vociferous new critics is to damage the credibility of the entire

international body. At the July 8 Congressional hearings, Jed Babbin, a

former Defense Department official and author of a UN-bashing tract called

"Inside the Asylum," described the UN as "the handmaiden of terrorism, the

errand boy of despots and dictators, and a quagmire that is the antithesis

of our policy to preempt terrorist attacks."

Perhaps not coincidentally, the unfolding investigations into Oil for Food

come at a time when the terms of the UN's future involvement in Iraq are

unclear. Security Council Resolution 1483, passed in May 2003 under enormous

pressure from the US, removed all UN monitors from Iraq, eliminated the 661

Committee, suspended the role of UNMOVIC, the UN disarmament agency, and

eliminated any UN oversight of oil sales or disposition of oil proceeds. The

resolution also endorsed the "Occupying Authority" of the US and Britain in

Iraq. One year later, the Bush administration again induced the Security

Council to approve a mandate for a US-dominated "multinational force" and

left the UN role in Iraq's troubled political transition undefined. Despite

its substantial experience in reconstruction, development and the

supervision of free elections, the UN's ability to negotiate a larger role

was arguably compromised by the accusations involving the Oil for Food

program.

More to the point, the Oil for Food flap fits into the decade-old pattern

whereby Washington and London place exclusive blame for the humanitarian

crisis in Iraq before the invasion -- and now for the country's hobbled

economy as well -- upon the "neglect" of the former regime. While Oil for

Food funds may have improperly ended up in the hands of Saddam Hussein's

government, the fundamental responsibility for the humanitarian crisis was

the sanctions regime imposed on Iraq by the Security Council, and then

enforced in an extraordinarily harsh way at the insistence of the US and

Britain. Under the sanctions, Iraq's annual gross domestic product dropped

from about $60 billion to about $13 billion, according to a joint Food and

Agriculture Organization and World Food Program estimate released in 1997.

Assume that all the accusations of corruption are true, and the government

of Saddam Hussein did indeed salt away $11 billion over the six years in

which Oil for Food was in effect. Even if those funds had purchased

humanitarian goods, the Iraqi GDP would have risen to $15 billion

annually -- not an amount that could have compensated for the loss of 75

percent of the economy or rebuilt the dilapidated infrastructure. History

may record US and British evasion of their share of responsibility for the

havoc wrought by sanctions in Iraq as the real Oil for Food scandal.

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Joy Gordon, author of numerous articles about sanctions on Iraq, teaches at

Fairfield University.

For background on Oil for Food, see Colin Rowat, "How the Sanctions Hurt

Iraq," Middle East Report Online, August 2, 2001.

http://www.merip.org/mero/mero080201.html

The Iraq Revenue Watch report on CPA allocation of funds is accessible

online at:

http://www.iraqrevenuewatch.org/reports/061504

This article originally appeared in the Middle East Report Online. MERIP is a free service of the Middle East Research

and Information Project (MERIP).