What is UNSCAM?: A Primer on the UN Oil-for-Food Scandal

After the 1990 invasion of Kuwait, UN member states placed sanctions on Iraq which prohibited trading until Saddam Hussein’s regime had disarmed. Saddam refused to disarm and so the sanctions remained in place after the first Gulf War. When it was discovered that this measure was having more effect on ordinary Iraqis than the dictator’s government, the UN proposed the idea of allowing Iraq to sell limited amounts of oil in order to buy relief supplies.

Initially, Saddam rejected the idea but had a change of heart once the hardships caused by the sanctions began to fully take effect. In April 1995, the UN passed Resolution 986, which later became known as the Oil-for-Food program (hereafter OFFP).

From its inception, Saddam was given almost complete control over how the program was implemented. The UN conceded to his demands and allowed him to choose which foreign customers would be allowed to buy his oil and which foreign suppliers would provide the "humanitarian supplies" (a list of goods that Saddam also chose). Saddam was also given a say in which bank would handle the funds and issue the letters of credit to pay these suppliers. He chose a French bank now known as BNP Paribas.

Unlike most of its relief programs, the OFFP was funded entirely by Saddam’s oil revenues rather than from the UN. The UN Secretariat even collected a 2.2-percent commission on every barrel of Iraqi oil sold, plus 0.8 percent to pay for UN weapons inspections in Iraq. And here is where the problems begin. What was intended to be a “temporary measure" soon became a profitable venture in which the UN was paid a commission to supervise Saddam. According to Claudia Rosett in an article in Commentary magazine:

Over the seven years of the program, oil sales ultimately totaled some $65 billion. On the spending side, the UN says $46 billion went for aid to Iraq, and $18.2 billion was paid out as compensation to victims of Saddam’s 1990-91 occupation of Kuwait. As for commissions to the Secretariat, these ran to about $1.9 billion, of which $1.4 billion was earmarked for administrative overhead for the humanitarian program (the UN says it turned over $300 million of this to help pay for relief, but no public accounting has ever been given) and another $500 million or so for weapons inspections in Iraq. Discrepancies in these numbers can be chalked up to interest paid on some of the funds, exchange-rate fluctuations, or simply the murk in which most of the Oil-for-Food transactions remain shrouded to this day.

Rosett points out that this program helped to strengthen Saddam’s hold on Iraq. With sanctions effectively forbidding all other foreign commerce, Iraq’s only legitimate trade was whatever flowed through Saddam’s ministries under the supervision of the UN program.

In October 1997, UN Secrtary Kofi Annan appointed Benon Sevan, an Armenian Cypriot and longtime UN official, to consolidate and run the various aspects of the program. One of Sevan’s first changes was to impose a veil of secrecy over the program’s operations, allowing Saddam a remarkable level of privacy in his business deals. Sevan removed any disclosure of such basic information as the names of individual contractors or the price, quality, or quantity of goods involved in any given deal.

Evidence cited by the Wall Street Journal alleges that starting in 1998, Sevan began covertly receiving gifts of oil from Saddam through a Panamanian firm. That same year the UN terminated a contract with a UK-based firm whose job it was to inspect OFFP shipments. The new contract was given to a Swiss company with ties to Kofi Annan’s son Kojo, who held a consultancy with the firm.

Sevan made another remarkable change during his first year as head of the program. He convinced the UN to expand the OFFP to allow Saddam to import not just food and medicine but oil-industry equipment as well. The cap on the amount of oil that Iraq could sell was also raised from $4 billion to $10 billion a year. Saddam thanked the UN for their generosity by throwing the UN weapons inspectors out of Iraq.

In 2000, Saddam found another way to profit from the venture. As Rossett explains,

It worked like this. Saddam would sell at below-market prices to his hand-picked customers—the Russians and the French were special favorites—and they could then sell the oil to third parties at a fat profit. Part of this profit they would keep, part they would kick back to Saddam as a "surcharge," paid into bank accounts outside the UN program, in violation of UN sanctions.

This allowed the dictator to pocket billions of dollars that was intended to be used for the relief of the Iraqi people. Emboldened by the UN’s refusal to reign him in, Saddam also began to smuggle out oil through Turkey, Jordan, and Syria. Rather than put a stop to this violation, the UN chose to expand the program even further. In 2002, Annan approved “Oil-for-Food Plus" which added ten new sectors to be funded by the program, including "labor and social affairs," "information," "justice," and "sports." This allowed the UN to aid in financing, as Rossett points out, “the realms of Baathist party patronage, propaganda, censorship, secret police, rape rooms, and mass graves."

After the US-led invasion of Iraq, the OFFP was shut down by the UN and the investigaions into allegations of corruption finally began. The UN started an internal investigation headed by Paul Volcker. The UN investigation is still ongoing.

The latest twist in the saga, however, concerns Iraqi National Congress leader Ahmad Chalabi, the man once preferred by the Pentagon to become the leader of the new Iraqi government. According to the AP, Chalabi took an early lead in exposing alleged abuses by the U.N.-backed program and has been trying to force the coalition government to give him the $5 million in Iraqi funds set aside for the probe to pay for his effort.

The move was strongly resisted by L. Paul Bremer III, who runs the governing Coalition Provisional Authority (CPA). Bremer had already started an investigation into the OFFP when Chalabi decided to start an audit of his own. The U.S. led audit was headed by the American firm Ernst & Young while Chalabi hired another US accounting giant, KPMG. When his demands to share the money set aside for the investigation were rebuffed, Chalabi issued a press release claiming that Bremer was "stalling on the issue" and "undermining the Iraq Governing Council's efforts to get to the truth."

In a blog article posted just a few days ago, Thomas Lifson from the American Thinker asks, “Why is the United States shutting down Chalabi’s already-established investigation?" The NY Post also chimed in and claimed that Bremer was impeding the investigation and should allow Chalabi’s audit continue.

While the idea of a “cover-up" by the Bush Administration was being tossed around, a more interesting reason for freezing out Chalabi came to light. On May 20th, his house was raided by the Iraqi Governing Council as part of a corruption investigation initiated by the Iraqi Ministry of the Interior. Chalabi, a secular Shiite Arab and former banker who left Iraq for exile after a left-wing coup in 1958, was convicted of fraud in absentia in Jordan in 1992 for allegedly embezzling over $1 billion from a bank he ran and sentenced to 22 years in jail. He has repeatedly denied the charges.

A senior Bush administration official has said that there is “rock solid" evidence that Chalabi passed secrets to Iran, who has been calling for closer ties between Iran and Iraq.

(I’ll continue to update this post as the story progresses.)

Related documents:

The Washington Times, “Kofi’s Cover Up" (Editorial)

Commentary Magazine, Claudia Rosett’s “The Oil-for-Food Scam: What Did Kofi Annan Know, and When Did He Know It?"

Timothy Woods, a journalist specializing in the mining industry, obtained a leaked internal audit that Annan refused to share with the Security Council: Office of Internal Oversight Services Audit No. AF2002/23/1 (Summary: Mineweb summary of AF2002/23/1)

Cartoon illustrating how the oil voucher scam worked (Via: Mineweb)

Thomas Gavin (The Galvin Opinion) also has an excellent timeline and roundup on the story.

(Hat tip: A special thanks to Instapundit who kept this story from being buried under other current events.)