Where Are Iraq's Missing Oil Billions?

Telegraph/Money
http://www.telegraph.co.uk/
Thu May 22, 2003

Much of the $70bn raised by the UN's Oil for Food programme ended up lining the pockets of middlemen and Saddam's associates. Edward Simpkins investigates the scams

Iraq's dilapidated oil fields are creaking into life again for the first time since the war. With the oil from several of Iraq's fields beginning to flow once more, the dollars to pay for desperately needed food, medicine and other basic supplies should start flowing too.

But until sanctions are lifted, suppliers can only do business with Iraq through the United Nations' Oil for Food programme. Some 60 per cent of Iraq's 27m people depend on this programme for their food.

The tragedy of these arrangements is that they were wide open to fraud. "Basically, the Oil for Food programme corrupted just about everyone who came into contact with it," says David Horgan, the chief executive of the Aim-listed oil company - Petrel.

Petrel, which is based in Ireland, spent years trying to get close to Saddam Hussein's government. It was awarded contracts to operate oil fields and given vast exploration rights in Iraq's Western Desert.

The Oil for Food programme - described by General Tommy Franks, the commander of US forces in Iraq, as "Oil for Palaces" - exists in a kind of legal twilight zone. Shady middlemen thrived on a scheme that is thought to have provided kickbacks worth billions of dollars to Iraqi officials.

The basic flaw in the programme was that the Iraqis could set the price at which the oil was sold to traders.

That gave the Iraqis scope to sell oil at below the market price, allowing middlemen to make an inflated profit when they sold it on.

This profit would then be split with the Iraqi oil ministry. It was a nice and substantial earner for everyone directly involved, though the Iraqi people saw less food and medicine than was their due.

As one example, in November 2000 Petrel flew a plane loaded with food and medical supplies provided by the Irish government into Iraq under the Oil for Food scheme. Its reward from the Iraqi regime was an oil "uplift', or the right to export a tanker full of crude oil from Iraq and find a buyer on the international market.

"SOMO, the Iraqi State Oil Marketing Organisation, would offer the oil at around $20 a barrel for a tanker load of 2m barrels," says Horgan. "The Iraqis would always price the oil at about 60 cents a barrel less than you could sell it on for. So there would be a wide margin of about $1.2m on every tanker that you would have to share with the ministry.

"You would pay 10 per cent of your share, around $60,000, upfront to an account in Oman controlled indirectly through intermediaries by the Iraqi oil ministry," he says. "That 10 per cent was refundable in case you got cold feet. It was all very businesslike.

"You would then find a refiner to buy the load. It would be one of the big oil companies, which would give you a refiner's letter that would be used to authorise the release of the oil. The refiner would send a tanker to Mina al-Bakr in southern Iraq and the balance of around $40m would be paid into the UN's account.

"You would then receive, perfectly legally, your commission from the refiner and pass half of it, less the 10 per cent you'd already paid, to the Iraqis through the account in Oman."

Horgan says that, after the scheme was explained to him by Iraqi officials, he declined to accept the uplift because he could not find a legal way of doing the deal.

The Oil for Food scheme had been in place for six years before the UN's Office of the Iraq Programme endeavoured to limit the scope for kickbacks. In October 2001, it belatedly introduced a reform - so-called "retroactive" pricing - whose effect was to undermine the Iraqi ministry's ability to fix the price.

However, this reform had one deleterious effect. Saddam Hussein's administration, no longer incentivised by the profits it could skim, slowed down the supply of oil. In turn, this led to a reduction in vital supplies reaching the Iraqi people.

According to a note sent last November to the UN Security Council from UN officials administering the scheme, the gap between the cost of food and medicines demanded by the Iraqis and the revenue available to meet it was $10bn.

The note says that the latest phase of the programme had raised $5bn in oil sales. After deductions, just $3.49bn was available for humanitarian relief. It points out that over the first 11 phases of the programme, sectors such as education, water, sanitation, electricity, agriculture and health received only between 56 to 77 per cent of the funds that should have been allocated to them.

Even when the money was found, it was often spent on shoddy goods and poor quality food that was unfit for consumption. "The Iraqis chose their suppliers and they may have made bad choices," says a UN official.

The identities of the suppliers that profited may never be known because the Oil for Food programme operates under a veil of secrecy. Despite the staggering sums involved, with supply contracts worth $26bn having been awarded over the past eight years, the UN has not divulged the identity of a single company that won business.

Documents lodged on the UN's website list some of the thousands of contracts awarded. But only the nationality of the suppliers is published, not their names.

However, basic items and foodstuffs appear to have come mainly from other Middle Eastern countries. More complex manufactured items were provided by French and Russian businesses.

In total, more than $70bn has been raised by the Oil for Food scheme under its various phases. Of this, $17.5bn has been paid out for reparations to people and companies that suffered damage from Iraq's 1990 invasion of Kuwait.

There is plenty of anecdotal evidence that these reparations were vulnerable to abuse as well. Stories abound of Kuwaiti playboys claiming for new swimming pools and of companies that had already decided to pull out of the region claiming for lost profits.

Independent verification on the validity of claims is close to impossible. Once again, the identities of the beneficiaries and even the names of the UN officials who adjudicate on claims are confidential.

A spokesman for the Oil for Food programme insists that the scheme has been thoroughly audited and denies that the reparations programme has been abused.

"This is one of the most heavily audited programmes in the UN. There have been over 100 internal and external audits in the last five years and the programme reports regularly to the Security Council," he says.

Anyway, this weekend governments around the world are considering whether to back a draft resolution to the United Nations Security Council calling for the lifting of sanctions on Iraq. The United States presented the resolution 10 days ago.

The US ambassador to the UN said he hoped the resolution would be passed within two weeks and at the latest by June 3, when the current phase of the Oil for Food programme is due to expire.

But with the Russians and French still opposing the lifting of sanctions, which they see as legitimising the US-led war on Iraq, there is a strong prospect of the Oil for Food programme being extended - and the hope of the Iraqi people must be that the kickbacks have gone with the expulsion of the ancien regime.

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