All Players Gained From ‘Oil-for-Food’

Times Staff Writer

It was the summer of 1990, and Saddam Hussein’s Republican Guard had just stormed into oil-rich Kuwait. The U.N. Security Council, hoping to induce Iraq to withdraw and disarm, responded by imposing sanctions.

Nearly 15 years, two wars and a regime change later, those sanctions and the multibillion-dollar “oil-for-food” program that followed them still shadow the United Nations. Eight investigations are underway in Washington and New York into how Hussein subverted and the U.N. mismanaged a program that was meant to deny the Iraqi dictator funds for weapons but instead buoyed his regime.

The 15 members of the U.N. Security Council, including the United States, were at best complacent and at times complicit in Hussein’s exploitation of the program, diplomats and U.N. officials say. Competing national interests and economic stakes in one of the world’s biggest oil producers chilled the council’s willingness to scrutinize the program, which allowed Iraq to sell oil in exchange for cash intended to be used only to buy food, medicine and other essentials.


Systemic corruption on Hussein’s part, inaction of world governments and mismanagement by the United Nations combined to allow one of the greatest frauds in U.N. history.

In the seven years of the program, which took effect in 1996, Security Council members had many opportunities to plug the holes that allowed money to continue flowing into Hussein’s coffers. But they often chose to look the other way, or even actively block reforms, say diplomats who were on the program’s sanctions committee. The members made a Faustian bargain: Hussein’s side deals were the price to pay for keeping him from rebuilding his weapons program.

Instead, Hussein used the program to amass billions of dollars and consolidate his control. Although the program helped feed the Iraqi population and blocked Hussein from massive re-arming, the skimmed windfall helped pay for the very weapons it was designed to block: missile components, surveillance equipment and tank barrels.

Hussein “was playing the international community like a violin,” Condoleezza Rice said last month during her confirmation hearings for secretary of State. “And we can’t let that happen again.”

All five permanent members of the Security Council diminished the sanctions. Even the United States, Iraq’s most implacable adversary, made a crucial compromise when the original sanctions were put in place. For 12 years, citing national interests, Washington exempted Turkey’s and Jordan’s substantial illegal trade from a law that would have blocked U.S. aid to countries that violated the sanctions on Iraq.

The U.S. and Britain also looked the other way when their citizens and businesses traded favors for oil and brought it into the country in ways that skirted legality, say U.N. officials who oversaw oil contracts.


Russia was Iraq’s best customer and most powerful ally on the Security Council; it blocked several U.S. and British attempts to tighten controls on Iraqi imports and told Hussein’s government in advance when and where U.N. weapons inspections would take place, a former U.N. official said.

China was a consistent opponent of sanctions and interference with another country’s sovereignty, wary of precedents that could be used against it.

France fought attempts to reduce kickbacks that traders paid to Hussein’s regime for the right to buy discounted oil, and sent charter flights to Baghdad in a brazen challenge to sanctions it had voted to enact.

To prevent a recurrence and to pinpoint blame, the eight pending investigations, five of them launched by Congress, will try to unravel the failures of the oil-for-food program, including the possibility that U.N. officials accepted Iraqi bribes to tolerate illicit trade or to block efforts to tighten the sanctions. A preliminary report by former Federal Reserve Chairman Paul Volcker, in an investigation commissioned by U.N. Secretary-General Kofi Annan, is expected to be released today.

An opinion piece in today’s Wall Street Journal previews Volcker’s findings: The awarding of contracts to firms responsible for monitoring the program was “tainted,” the U.N.’s internal audit process was ineffective, and the program’s chief, Benon Sevan, helped pick oil purchasers, an “irreconcilable conflict of interest.”


Problems Began Early

But to understand what went wrong with the oil-for-food program, it is necessary to understand what went wrong with the sanctions program that predated it. Even in the earliest days of the sanctions, Hussein exploited diplomatic fissures, foreshadowing his skillful upending of the oil-for-food program.


When the U.N. first imposed sanctions on Iraq in 1990, Turkey and Jordan complained that the penalties would also damage their economies, which were dependent on Iraqi oil. So the United States and the rest of the Security Council quietly allowed Iraq to export oil to its neighbors in return for cash or bartered goods in “trade protocols.” Often, they later discovered, those goods included military supplies.

Every year, the State Department acknowledged the trade when it exercised a waiver necessary to give aid to countries that traded with Iraq in violation of sanctions. The waivers concluded that continued support of Jordan, which backed U.S. goals in the region, and Turkey, a North Atlantic Treaty Organization ally, was in America’s interest.

“From the beginning, there was a policy decision made not to press Jordan and Turkey,” former U.S. Deputy Ambassador Peter Burleigh said. “That was the price of keeping the sanctions effort in place.”

But the scope of the trade was much larger than anyone imagined, bringing Hussein’s regime an estimated $8 billion in a dozen years, according to a September report by the CIA’s Iraq Survey Group led by former U.N. weapons inspector Charles A. Duelfer. Other congressional estimates put it closer to $14 billion.

The sanctions devastated the Iraqi people but the regime profited from illicit trade. Reports of malnourished children, hospitals without medicines, and food shortages were frequent.

Under intense popular pressure, the U.N. created the oil-for-food program to cushion the effects of the sanctions. Under the plan, U.N. officials would be responsible for controlling oil sales, keeping the money and distributing the goods, to prevent the Iraqi regime from diverting funds to buy arms.


The new program dramatically widened Iraq’s trade, but the exceptions for Turkey and Jordan quickly became the rule for its neighbors. Soon, Iran, Bahrain, the United Arab Emirates and Egypt all were receiving Iraqi oil, entirely outside the oil-for-food program.

Most audacious of all, in November 2000, Syria reopened a pipeline from Iraq that carried 200,000 barrels a day. Britain wanted to halt the flow with a Security Council resolution, but the U.S. preferred to deal with Damascus quietly and directly. In 2001, Secretary of State Colin L. Powell received several promises from the Syrian government and others to put their trade under the oil-for-food program to keep the revenue out of the Iraqi government’s control. But Syria never came through.

When the U.S. and Britain asked the council in 2001 to confront Syria over its illicit oil trade, France and Russia argued that Syria should not be singled out for punishment while Turkey and Jordan were merely winked at.

The issue died when the U.S. wouldn’t tackle the special deals with Turkey and Jordan, said a French official long involved with the Security Council’s oil-for-food committee.

“Why should those countries get special consideration?” the official said. “We said we wanted to deal with the smuggling comprehensively. Then we went back to square one.”

Syria ended up being the main supplier of black-market military goods to Iraq. Syria was the transit point for Iraq-bound Czech Scud missiles, rockets and guidance systems, according to the Iraq Survey Group report. And Jordan alone provided about half of Iraq’s black-market oil revenue, an estimated $4.4 billion, the report said.



Crucial Loophole

The oil-for-food program contained a crucial loophole that Hussein had been angling for: Iraq was allowed to choose its business partners. Hussein insisted that maintaining control of the country’s spending was a matter of sovereignty, and held out until the Security Council gave in, in May 1996. In a pattern that would echo throughout the next seven years, Russia, France and China backed Hussein’s right to make decisions for his country.

“We had to make a judgment,” said Patrick F. Kennedy, the U.S. ambassador for U.N. management and reform. “It was something less robust than we wanted, or nothing at all. We wanted a wall; we had to settle for a screen. But having any filter there at all made it more difficult and expensive for Iraq to cheat.”

But that program gave Iraq new means to cheat, and new evidence suggests that the built-in holes were not an accident. An Iraqi American businessman, Samir A. Vincent, testified in a federal court in January that he had received millions of dollars from the Iraqi government to lobby U.S. officials and pass money on to an unnamed U.N. official to shape the oil-for-food program to benefit Iraq.

Hussein was well-versed in the parties’ ultimate interests and how to play them off one another: The United States and Britain wanted, above all else, to keep Iraq from re-arming. Russia, France and China had significant economic interests in the country and growing concern about the sanctions’ humanitarian consequences. The U.N. wanted to keep relief goods flowing to Iraq’s population.

Attuned to such divisions, Hussein and his chiefs made a list of prominent politicians, religious figures, community leaders and journalists they believed could influence Security Council countries to support Iraq during negotiations. Those on the list were granted vouchers for discounted oil that they could sell to oil companies or middlemen for a large profit. The list included dozens of Russian and French figures, as well as Sevan. Except for Vincent, Hussein’s lobbyist, all have denied wrongdoing.

Although many of those listed appear to have collected their oil, according to Iraqi Oil Ministry documents, there is no evidence that any of them actually influenced the Security Council members’ decisions. An examination of the patterns of the nations’ support shows that they were well-established before Hussein began trying to bribe individuals. But some of those individuals were effective in rallying public opinion.


American and British diplomats knew there was a risk that the system could be manipulated, but they believed that suspect contracts would be red-flagged as they went through the system.

Yet of 36,000 contracts that ultimately passed through the countries’ missions and the Security Council committee, according to the Office of the Iraq Program, the committee didn’t reject any because of questions about overpricing, the quality or the humanitarian necessity of the items, even after warnings on 70 cases by U.N. staff. They did put contracts worth $5 million on hold because of suspicions of potential weapons use.

“The U.S. was so concerned about dual-use items and militarily relevant equipment,” Burleigh said, “that these other issues didn’t seem so important at the time.”


Sanctions Erode

By 2000, the sanctions had begun to erode under their own weight. The U.S. and Britain continued to argue that the program, although flawed, was feeding the people and seemingly stopping weapons imports.

In a pointed challenge to the sanctions, French humanitarian groups and politicians exploited a loophole to charter a flight to Iraq in September 2000, the first in nearly 10 years. Russia, Jordan and others followed, adding to the sense that the sanctions were about to crumble.

“It seemed like everybody but us was out there trying to weaken the sanctions,” Kennedy said. “It was clearly a combination of political and economic reasons. They did not see Saddam Hussein in the same light we did.”


Realizing that the sanctions were under serious threat, the United States and Britain proposed a streamlined system of “smart sanctions” that would speed delivery of humanitarian goods while tightening up monitoring systems at borders and ports to stop the flow of military goods. It called for Syria, Turkey and Jordan to bring their illicit oil sales into the system.

Russia threatened to veto, arguing that the council should be relaxing sanctions, not tightening them, and the U.S. and Britain withdrew their proposal in July 2001.

After nearly a year of wrangling, the Security Council approved a diluted resolution in May 2002 that loosened controls over humanitarian purchases but failed to tighten monitoring over the actual imports.

“There was no endpoint to sanctions. We thought we should give Iraq a light at the end of the tunnel,” said a Russian diplomat who served on the committee for years. “America wanted to make the sanctions indefinite: regime change or nothing. We believed that approach didn’t work.”

Russia also had a financial stake to protect. It received 32% of contracts during the oil-for-food program, according to the Duelfer report and Russian diplomats. It also had entered into a $40-billion agreement for Russian exploration of several Iraqi oil fields over a 10-year period.

Emboldened, Hussein publicly demanded surcharges on oil in 2000. The U.S. and Britain urged changes in the oil-pricing process. But Russia, France and the program’s chief, Sevan, would not change the process until they had seen evidence that companies had paid the illegal surcharge. No one came forward.


In 2001, the U.S. and Britain proposed a new pricing mechanism to stop the surcharges. Russia and France again tried to block the move, saying it would cause oil sales to plunge and cut funds for humanitarian goods.

After 11 months of deadlock, and more than 40 meetings, the U.S. and Britain withheld their approval of all oil contracts until the committee adopted the new pricing regime in October 2001. It cut the illegal oil charges by $60 million, and U.S. and British diplomats said they considered the move the best example of their vigilance. But it also deprived the program of millions more, as wary oil traders backed out of the uncertain market.

“We could have monitored better, but it wasn’t that Saddam hoodwinked us, nor that France and Russia screwed the rest of us,” said George Lopez, an Iraq analyst who helped create the “smart sanctions” proposal. “Every member knew that they all had domestic actors who wanted more oil business.”

In the end, national interests trumped vigilance, even for the U.S. and Britain. In one of the biggest and most blatant cases of oil smuggling, 14 tankers hired by a Jordanian company illegally lifted at least 7 million barrels of oil from an Iraqi port not approved or monitored by the U.N. in February 2003, one month before the U.S.-led invasion of Iraq.

Authorized oil traders at a nearby port reported the illegal lifting to a U.N. overseer after it interrupted the flow of oil to their ships. The overseer, Michel Tellings, passed detailed information, including the names of the ships, to the American and British missions at the U.N. so their joint interdiction force could challenge the smugglers.

Nothing happened.

“Everybody in the oil industry knows that the oil went out unchallenged,” Tellings told The Times.


Oil traders were told informally that the U.S. let the tanks go because Amman needed oil to build up its strategic reserves before the U.S.-led invasion of Iraq, according to a joint report by the Financial Times and the Italian business daily Il Sole 24 Ore that was confirmed by U.N. officials. But Jordan sold most of the oil to Yemen, China and Malaysia.


Poor Oversight

At the heart of the probes now underway is to what extent the U.N. could have detected and stopped Iraq’s exploits under either the sanctions or oil-for-food programs, and how well member states monitored their companies’ adherence to sanctions.

Recently released internal audits of the program’s administration, however, described systemic mismanagement and poor oversight, with inspections companies such as Lloyd’s Register, Cotecna and Saybolt Eastern Hemisphere billing the U.N. for millions of dollars for inspection work they didn’t do -- the audits were never shared with the sanctions committee -- a fundamental example of the communications breakdown between the two bodies that worsened the program’s failures.

Diplomats acknowledge that their countries knew of some fraud and abuse allegations, but didn’t -- or couldn’t -- act on them. The reason? The committee operated by consensus, which meant the objections of just one of its 15 members could stall action on an issue indefinitely. “Every country had a veto,” said Kennedy.

In committee meetings in late 2000, Sevan, the chief of the U.N. program, reported that his office had been getting complaints about excessive oil surcharges being paid into a non-U.N. account. “All Security Council members heard him say that,” said a British official on the committee. “But the people around the table didn’t want to hear it.”

And Sevan believed he didn’t have time to pursue it. “He said, ‘I have my hands full just making sure the people get their food. I don’t have time to do investigations,’ ” said a former colleague of Sevan, who asked not to be named.



‘Using Each Other’

Diplomats say there was a lack of consensus about who should be responsible for Iraqi compliance: the Security Council or the U.N.

A U.N. spokesman says it was the Security Council: “Iraq’s compliance, as in all sanctions regimes, was the responsibility of the Security Council and member states. The Secretariat was implementing the program on behalf of the council.”

Not entirely so, says the Security Council’s most powerful member, the United States.

“The secretary-general will have to be accountable for those management problems,” Powell said in a Jan. 12 interview with Fox News. He added, however: “The responsibility does not rest entirely on Kofi Annan. It also rests on the membership, and especially on the Security Council. And we are a member of the Security Council.”

But just as the responsibility for the oil-for-food program bounced from the members of the Security Council to the U.N. and back without ever coming to rest, so may the culpability.

“Everyone was playing their own game,” said the Russian diplomat who dealt with the program. “Everyone was using each other. And everyone agreed to close their eyes a little.”



Slippery oil deals

How oil-for-food evolved

Since the U.N. imposed sanctions, there has been evidence of mismanagement of Iraq’s ‘oil-for-food’ program, including the smuggling of oil to its neighbors.


Aug. 2, 1990: Iraq invades Kuwait

Aug. 6, 1990: Security Council imposes broad sanctions on Iraq

Aug. 15, 1991: Iraq rejects first oil-for-food deal offered by Security Council

April 14, 1995: Security Council creates oil-for-food program to cushion effect of sanctions; Iraq refuses its terms

May 20, 1996: Iraq accepts program after receiving right to pick trade partners

Oct. 1997: U.N.’s Office of the Iraq Program established, with Benon Sevan as its chief

March 20, 2003: U.S. and British bombing of Iraq begins

March 22, 2003: Security Council lifts sanctions, agrees to terminate oil-for-food program within six months

Nov. 21, 2003: Program handed over to Coalition Provisional Authority