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Sunday, February 29, 2004 - Page updated at 12:00 A.M.
Oil-for-food kickbacks put billions in Saddam coffers
By Susan Sachs
BAGHDAD, Iraq In its final years in power, Saddam Hussein's government systematically extracted billions of dollars in kickbacks from companies doing business with Iraq, funneling most of the illicit funds through a network of foreign bank accounts in violation of U.N. sanctions.
Millions of Iraqis were struggling to survive on rations of food and medicine. Yet the government's hidden slush funds were being fed by suppliers and oil traders from around the world who sometimes lugged suitcases full of cash to ministry offices, said Iraqi officials who supervised the skimming operation.
The officials' accounts of the corruption were enhanced by a trove of internal Iraqi government documents and financial records provided to The New York Times by members of the Iraqi Governing Council.
Under a U.N. program begun in 1997, Iraq was permitted to sell its oil only to buy food and other humanitarian goods. The kickback order went out from Saddam's inner circle three years later, when limits on the amount of oil sales were lifted and Iraq's oil revenues reached $10 billion a year.
In an Aug. 3, 2000, letter marked "urgent and confidential," the Iraqi vice president, Taha Yassin Ramadan, informed government ministers that a high-command committee wanted "extra revenues" from the oil-for-food program.
To that end, he wrote, all suppliers must be told to inflate their contracts "by the biggest percentage possible" and secretly transfer those amounts to Iraq's bank accounts in Jordan and the United Arab Emirates.
Iraq's sanctions-busting has long been an open secret. Two years ago, the U.S. General Accounting Office estimated that oil smuggling had generated nearly $900 million a year for Iraq. Oil companies had complained that Iraq was squeezing them for illegal surcharges, and Saddam's lavish spending on palaces and monuments provided more evidence of his access to unrestricted cash.
But the dimensions of the corruption have only lately become clear, from the newly available documents and from revelations by government officials who say they were too fearful to speak out before.
Perhaps the best measure of the corruption comes from a review by the provisional Iraqi government, with U.N. help, of the $8.7 billion in outstanding oil-for-food contracts.
At that rate, Iraq would have collected as much as $2.3 billion out of the $32.6 billion worth of contracts it signed since mid-2000, when the kickback system began. And some companies were willing to pay even more than the standard 10 percent, according to Trade and Oil Ministry employees.
Iraq's suppliers included Russian factories, Arab trade brokers, European manufacturers and state-owned companies from China and the Middle East. Iraq generally refused to buy directly from U.S. companies, which in any case needed special licenses to trade legally with Iraq.
Iraq also created a variety of other, less lucrative, methods of extorting money from its oil customers. It raised more than $228 million from illegal surcharges it imposed on companies that shipped Iraqi crude oil by sea after September 2000, according to an accounting prepared by the Iraqi Oil Ministry late last year. An additional $540 million was collected in under-the-table surcharges on oil shipped across Iraq's land borders, the documents show.
"A lot of it came in cash," recalled Shamkhi Faraj, who managed the Oil Ministry's finance department under the old government and is now general manager of the ministry's oil-marketing arm. "I used to see people carrying it in briefcases and bringing it to the ministry."
U.N. overseers say they were unaware of the systematic skimming of oil-for-food revenues. In any case, they add, they were focused on running aid programs.
As the details of the corruption have recently emerged, law-enforcement authorities in several countries said they had opened criminal and civil investigations into whether companies violated laws against transferring money to Iraq.
Treasury Department investigators have also been helping the Iraqi authorities recover an estimated $2 billion believed to be left in foreign accounts. So far, more than $750 million has been found in foreign accounts and transferred back to Iraq, said Juan Zarate, a deputy assistant Treasury secretary.
To some officials of Iraq's provisional government, what is perhaps most insulting is how little their country got for its oil money. Taking stock of what was bought before the U.S.-led invasion toppled Saddam last spring, they have found piles of nonessential drugs, mismatched equipment and defective hospital machines.
Companies were paid millions of dollars, said Dr. Khidr Abbas, Iraq's interim minister of health, for drugs they did not deliver, medical equipment that did not work and maintenance agreements that were never honored.
Iraq, he said was left with defective ultrasound machines from Algeria, overpriced dental chairs from China, and a warehouse filled with hundreds of wheelchairs that the old government did not bother to distribute.
"You had cartels that were willing to pay kickbacks but would also bid up the price of goods," said Ali Allawi, a former World Bank official who is now interim Iraqi trade minister. "You had rings involved in supplying shoddy goods. You had a system of payoffs to the bourgeoisie and royalty of nearby countries.
"Everybody was feeding off the carcass of what was Iraq."
The kickback scheme worked because the payoffs could be included in otherwise legitimate supply contracts, negotiated directly by the former government, and then transferred to Iraq once the United Nations released funds to pay the suppliers.
"We'd accept the low bid and say to the supplier, 'Give us another 10 percent,' " said Faleh Khawaji, an Oil Ministry official who used to supervise the contracting for spare parts and maintenance equipment.
The contract would then be sent to the U.N. sanctions committee, which was supposed to review contracts with an eye only to preventing Iraq from acquiring items that might have military uses.
The kickbacks were paid into Iraq's accounts, and designated ministry employees withdrew the cash and brought it to Baghdad on a regular basis, according to Khawaji and Iraqi financial records.
U.S. and European investigators said they were trying to determine whether the banks knew they were being used for illegal financial dealings with Iraq.
Under normal circumstances, Iraq would have been expected to seek the highest price for its oil, its only legal source of cash. Instead, said officials who worked with the oil-for-food program, Saddam's government fought to keep the price as low as possible to leave a margin for oil traders to pay illegal surcharges.
When oil companies complained to the United Nations about the per-barrel surcharges, Iraq levied higher charges on ships loading at its port.
Other Iraqi officials said the ministries were forced to order goods from companies and countries according to political expediency instead of quality.
"There would be an order that out of $2 billion for the Trade Ministry and Health Ministry, $1 million would have to be given to Russian companies and $500 million to Egyptians," said Nidhal Mardood, a 30-year veteran employee of the Iraqi Ministry of Trade, where he is now the director-general for finance.
"It depended on what was going on in New York at the U.N. and which country was on the Security Council," he added. "They apportioned the amounts according to politics."
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