On the Volcker trail

The 630-page Volcker Report is an exhaustive account of the audit trail relating to the Oil-For-Food Programme.

THE Independent Inquiry Committee into the United Nations Oil-For-Food Programme (OFFP) headed by Paul A. Volcker submitted its fifth and final substantive report on October 27. Its conclusions, contained in the report titled Report on Programme Manipulation, basically rest on the analysis of the trail of transactions related to the OFFP account. Its main findings relate to the manner in which Iraq "manipulated the Programme to dispense contracts on the basis of political preference and to derive illicit payments from companies that obtained oil and humanitarian good contracts."

The Volcker Report, running into 630 pages, is an exhaustive account of the audit trail relating to the OFFP. The accounts of the Programme, which was meant to enable Iraq to use oil revenues to provide humanitarian supplies to its people hit by sanctions, basically had two sets of transactions. The first leg, related to inflows into the OFFP account, arose out of Iraqi earnings from oil exports. The second leg related to the use of the resulting revenues for the purchase of humanitarian supplies. In the main, the Volcker panel's findings relate to irregularities in both sets of transactions.

Between December 1996, when oil exports under the OFFP commenced, and March 2003, when the Programme was wound up following the United States' invasion of Iraq, Iraq sold $64.23 billion worth of oil to 248 companies. During this period the country also purchased $34.5 billion worth of humanitarian supplies from 3,614 companies from all over the world. The rules governing the OFFP - inflows resulting from the sale of oil as well as outflows for the purchase of supplies - would be made through an escrow account controlled and managed by the Office of the Iraq Programme (OIP), which administered the OFFP.

The Volcker Report alleges that the Iraqi regime levied an "illicit" surcharge on oil contracts between September 2000 and September 2002, which bypassed the escrow account. It estimates that the regime mobilised $228.8 million from the imposition of surcharges paid by 139 of the 248 companies that bought oil from Iraq.

The panel also alleges that 2,253 companies (out of 3,614) that sold humanitarian supplies paid "kickbacks" amounting to $1.55 billion to the Saddam Hussein regime. The panel's audit shows that these "kickbacks" were essentially in the nature of "over-invoices" for supplies. It calculates that After-sales Service Fees (ASSF) levied on imports of humanitarian supplies accounted for $1.02 billion; "Inland Transportation Fees" accounted for $0.53 billion. In all, the Volcker panel estimates the total "illicit" income accruing to the Iraqi regime at $1.779 billion.

To put these figures in perspective, the total "illicit" income must be measured against the scale of the programme. The total "illicit" income earned by the Iraqi regime amounts to less than 2 per cent of the value of transactions of the OFFP, which amounted to about $100 billion. When measured in terms of the volume of oil exported during the tenure of the OFFP, the "illicit" income amounts to about 7 cents a barrel. The alleged "kickbacks" on humanitarian supplies account for about 4 per cent of the value of supplies purchased during the OFFP.

Apart from the main report, the panel also released eight "comprehensive" tables, which run into more than 1,000 pages and provide details about the contractors involved in the programme, details of the underlying financiers for the oil contracts (who were the eventual purchasers of the oil) and the details of allocations made to "non-contractual beneficiaries".

THE politically explosive part of the Report is in Chapter 1, titled Oil transactions and Illicit Payments. The Chapter is backed by information in Table 3, which provides details of oil allocations made by the then Iraqi government to political parties (such as the Congress), individuals including politicians (such as the British Member of Parliament George Galloway and the former Indian External Affairs Minister Natwar Singh) and business entities (Reliance Petroleum, for instance, from India). All these entities, classified as "non-contractual beneficiaries", were recipients of oil allocations, according to the Report. The Volcker panel observes that "Iraq dispensed oil allocations to and on behalf of a wide array of individuals and groups whom it considered influential in their respective countries and who espoused pro-Iraq views or organised anti-sanctions activities."

The Report observes that these primary recipients of oil allocations forwarded their quotas in favour of "little-known intermediary companies" by entering into contracts with them. These smaller companies, in turn, sold the allocations to established oil companies or traders across the world. Significantly, the panel notes that the end-buyers were willing to pay the intermediaries "a premium above the U.N. official selling price". A part of the premium, the Report alleges, was paid to the primary entity that received the allocation from the Iraqi government.

The Report argues that since Iraq had the freedom to choose the buyers of its oil, and given the value of oil as a commodity in world markets, the government "selected oil recipients in order to influence foreign policy and international public opinion in its favour". The Volcker Report provides an insight into how and to what extent Saddam Hussein utilised the window of opportunity that the oil-pricing mechanism adopted by the U.N. provided. The only guideline on pricing was the rather vague notion of what constituted a "fair market price" for the oil that Iraq exported under the OFFP. This price was actually set by the Sanctions Committee, otherwise known as the "661 Committee", because the U.N. Security Council Resolution 661 constituted the Committee.

Beginning in "autumn 2000", and lasting up to "autumn 2002", Iraq resorted to the levy of a surcharge on oil that was exported. The Volcker Report points out that the Iraqi regime "realised that it could generate illicit income outside of the U.N.'s oversight by requiring oil buyers to pay `surcharges' of generally between 10 to 30 cents per barrel of oil".

Iraq's State Oil marketing Organisation (SOMO) generally assessed the surcharge. The resulting revenue, outside the U.N.-controlled loop of financial flows into the OFFP, "flowed mostly to Iraqi-controlled bank accounts in Jordan and Lebanon, as well as by cash deposit to Iraqi embassies in Moscow and elsewhere".

The Volcker panel observes that Iraq used the OFFP to make oil allocations to entities from countries that it saw as being "friendly", particularly if they were also members of the Security Council, so that it could use the leverage of oil allocations to relax the sanctions. Russian companies, it points out, received about one-third of all the oil sold under the OFFP; French companies were the next biggest recipients of oil allocations.

The panel observes that during Phase Nine of the OFFP (between December 6, 2000 and July 2001) the Programme went into a crisis because of the Iraqi regime's decision to increase the surcharge to 50 cents a barrel. "Regular customers", the panel argues, "baulked at buying Iraqi oil". However, four oil traders started playing a bigger role in the market for Iraqi oil. These were: Bayoil Supply and Trading Limited (with operations in the U.S. and which purchased significant quantities of Iraqi oil through an Italian company), Taurus (which operated through two Liechtenstein-based companies), Glencore through its own Swiss-based subsidiary, and Vitol (mainly operating through a Malaysian company). All four had limited direct access to Iraqi oil. But they, according to the Report, used the intermediaries to access it.

The Volcker Report confirms reports that a substantial portion of the oil went to the United States. More significantly, it reveals that Bayoil was the single most important "underlying financier" of the oil purchases. Incidentally, the Senate inquiry into the OFFP has shown that Bayoil was the primary vehicle for funnelling Iraqi oil to the U.S. In Table 4 - Known Underlying Oil Financiers - the Report analysed transactions worth $27.80 billion involving 1.38 billion barrels of oil exports. In volume terms, Bayoil is the biggest "underlying financier", accounting for about 30 per cent of oil exports analysed in the Report.

THE bigger component in the "illicit income", however, came from the kickbacks on humanitarian supplies. These are highlighted in Chapter 3 of the Report. "Political considerations", claims the Report, dictated the choice of suppliers of "humanitarian goods". The kickbacks were "disguised by various subterfuges". The Iraqi policy governing the use of such "kickbacks" emerged in mid-1999 after the Iraqi government levied fees on the transport of the imported goods to inland destinations after they arrived at the port of Umm Qasr. The Report condemns the Saddam regime for having failed to seek U.N. approval for compensation from the U.N.-maintained escrow account for such transport expenses. Instead, the Volcker Report alleges that the regime "simply required humanitarian contractors to make such payments directly to Iraqi-controlled bank accounts or to front companies outside Iraq, that, in turn, forwarded these payments to the Government of Iraq". Tables 6-8 provide details of transactions relating to humanitarian goods.

However, the Report does observe that many companies assumed or believed that the costs "padded on" in the guise of after-sales service or transportation charges arose out of legitimate costs in Iraq. Significantly, more than half the estimated value of the ASSF paid by humanitarian contractors is based on "projections". The Explanation of Committee Tables, which lies outside the main body of the Report, notes that the estimate for about half of the total number of contracts was based on "actual" data. The remaining, it notes, has been "projected" on the basis of "historical data trends and Iraqi policy records".

This appears to indicate that a substantial portion of the estimates, accounting for $587 million out of a total of a little over $1 billion, was based on "projections" rather than actual verified amounts paid as "kickbacks". The Tables contain the names of nearly 150 Indian companies, which are alleged to have paid "kickbacks" to the Saddam Hussein regime. However, notes to Table 6, which lists the suppliers of humanitarian goods to Iraq, show that most of the Indian companies are listed on the basis of either "projections" made by the panel or on the basis of partial data, not actuals.

THE Volcker panel's evidence appears to rest on the same sources of data that other earlier investigations (mainly in the U.S.) relied on. Perhaps this explains why its estimates of "illicit" income earned through the OFFP are not significantly different from those estimated by the U.S. Government Accounting Office (April 2004) or those made by Charles Duelfer in his report prepared for the Central Intelligence Agency (CIA) in September 2004.

The panel's "principal" source was the various Ministries in the Government of Iraq. However, it also analysed data "retrieved from numerous banking institutions and, in some cases, from the company contractors themselves. On the basis of SOMO records it sent notices to the 139 companies that paid surcharges. It also sent notices to the 2,253 suppliers of humanitarian goods during the tenure of the OFFP. The panel went through SOMO records, including ledgers showing surcharges levied in each phase of the Programme. Also analysed were "handwritten approvals" for allocations issued by the Minister of Oil in Iraq. It also verified the records of Iraqi embassies in countries such as Russia and the records of the OIP.