Scandals of Oil for Food

Joy Gordon

(Joy Gordon, author of numerous articles about sanctions on Iraq, teaches at Fairfield University.)

July 19, 2004

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.