Oil-For-Food: Facts

U.S. NEWS AND WORLD REPORT

U.S. News and World Report ran a long editorial on the Oil-for-Food Program (OFFP), "A devil's brew at the U.N." by Mortimer B. Zuckerman on December 20, 2004 . The opinion piece contains numerous factual errors and misleading claims.

1. "The U.N.'s oil-for-food program may turn out to be the largest financial scandal in history, involving a fraud of some $21 billion."

This claim greatly exaggerates the magnitude of the Oil-for-Food problems and also inaccurately suggests that all of the illicit revenue received by the Hussein regime came from OFFP.

Four separate sources have confirmed that illicit trade with Iraq 's neighbors and oil smuggling were responsible for far more of Hussein's illicit revenue than the Oil-For-Food Program. Notably, revenue linked to OFFP comprises just a small percentage of the alleged $21 billion first cited by the Senate Subcommittee on Permanent Investigations chaired by Senator Norm Coleman (R-MN). This distinction is significant because all of these trade and smuggling activities were outside the purview of the UN, while the U.S. , UK and other Security Council members were aware of many of them. This is not just a dispute about numbers. The editorial places the responsibility for Saddam's illicit revenue on the doorstep of the UN and its Secretary General Kofi Annan when, in fact, most of the money came through channels over which the UN did not have oversight.

Of the $21 billion in illicit revenue reported by Senator Coleman's Subcommittee on Permanent Investigations, about $6.5 billion is attributable to potential abuses in the Oil-for-Food Program. This is certainly a serious problem on its own. But the largest share of the money, $13.6 billion, was attributed by subcommittee investigators to oil smuggling ( see chart).

Similarly, the Iraq Survey Group headed by Charles Duelfer reported that about three quarters or $8 billion of the nearly $11 billion in illicit revenue Saddam acquired was due to illicit trade, over which the UN did not have oversight. Duelfer's investigation attributed $1.7 billion to OFFP ( see chart).

A third source, a Government Accountability Office (GAO) report, concluded Saddam Hussein likely acquired $4.4 billion through pricing irregularities in connection with OFFP. However, GAO found an additional $5.7 billion in illicit revenue was the result of illegal oil smuggling.

Finally, Paul Volcker said in a November 24 Charlie Rose interview: "Most of that 21 billion, most of that $10 billion, most of whatever the final number is was the smuggling, not the Oil-for-Food Program."

The responsibility for guarding against oil smuggling was assigned to UN member states, and in the Gulf area, to the Multinational Interception Force (MIF). Thus, it is wrong to charge or imply that the UN was solely responsible for Saddam's illicit activities, because the UN clearly did not have oversight responsibility for more than half of the illicit revenue Saddam is alleged to have acquired.

2. "...instead of providing relief for desperate Iraqis over the past decade, the U.N. appears to have become a conduit for kickbacks, graft and smuggling on a grand scale."

There were problems with OFFP, but it is wrong to suggest the program did not achieve its humanitarian goals. Nine different United Nations agencies, programs, and funds developed and managed humanitarian operations in Iraq across 24 economic and social sectors.

• OFFP delivered food rations sufficient to feed all 27 million Iraqi residents, resulting in a drop in the malnutrition rate among Iraqi children by 50%;
• OFFP contributed to national vaccination campaigns that helped reduce child mortality and eradicated polio in Iraq;
• OFFP provided more dependable access to electricity and clean water;
• More than 2,500 Iraqis were empowered to carry out these projects.

3. "There was a glaring weakness in the original plan. It gave Saddam the right to negotiate contracts, choose his customers, draw up shopping lists, and write his own deals for relief supplies. Ultimately, over $100 billion of transactions occurred--but only $15 billion went for food and medicine. The terms also allowed the U.N. to collect, in effect, a 2 percent fee on every barrel of Iraqi oil sold, so that the more oil that was sold, the bigger the fees collected for Annan's U.N., which ultimately took in roughly $1.9 billion."

The original plan for the Oil-for-Food Program was authorized by the UN Security Council, not the UN Secretariat, several years after the first Gulf War. The U.S. and the U.K., as permanent members of the UN Security Council, had a strong hand in its design. After Saddam Hussein rejected the original terms for OFFP, it took over a year of negotiation before all parties agreed on it parameters. One of the tradeoffs the Security Council accepted in order to be able to address the humanitarian needs of the Iraqi people was to grant Saddam Hussein the authority to choose who bought Iraqi oil and who sold Iraq humanitarian goods. This arrangement was the only practical way to keep the sanctions in place to prevent Saddam from acquiring weapons of mass destruction, while ensuring food and medicine reached the Iraqi people. Despite the problems with OFFP, it appears to have achieved these goals.

The U.S. News and World Report accounting of OFFP is also misleading. A total of $69.4 billion in income was generated through oil sales, interest and related activities under the OFFP (see chart below for full breakdown of expenditures). Of this amount, almost $38 billion was expended through letters of credit to purchase food, medicine and other commodities for the Iraqi people according to the GAO. The difference (the amount accrued from oil sold minus the amount allocated to purchase commodities for Iraqis) went toward:

• Gulf War reparations for the Kuwaiti people (initially 30% and then 25%);
• Funding for weapons inspections in Iraq (0.8%); and,
• Administrative costs of running the program--of which $274M of surplus was transferred to the humanitarian account (2.2%).

These administrative costs funded the entire program--including staff salaries and benefits, office space, and travel costs- -so that it could be run with Iraqi oil money instead of tapping funds from the UN regular budget. Both the United States and the United Kingdom , as permanent members of the UN Security Council, voted for the creation of the program and for its expansion in 1998.

Expenditures from Oil-for-Food Program (billions U.S. dollars)
18	Compensation commission for Kuwaiti Gulf War reparations (30% then 25%)
0.5	UNSCOM and UNMOVIC (weapons inspections)
0.6	Repayments to member states who advanced funds for humanitarian goods pending the start of oil sales
1.3	Pipeline fees
1.1	Administrative and operational costs ($1.4B allocated but some $0.3B transferred to humanitarian)
47.9	Humanitarian*
69.4	Total
*This number includes the total letters of credit and $8.1 billion transferred to the Development Fund for Iraq. The remaining balance includes contracts for the Kurdish governorates, funds for the IIC, and following a completed assessment of the liabilities left against the account, the balance will be transferred to the DFI.

4. "It was left to the U.N. to check the Iraqi contracts, keep the records, control the bank accounts, arrange for audits, and provide public reporting on the program. But with all that money rolling in, it appears, there was simply too much incentive for U.N. managers to look the other way while Saddam, as the intrepid journalist Claudia Rosett reported, 'skimmed the money, bought influence, built palaces, and stashed away funds for other purposes' (including, perhaps, support of terrorism)."

It is not accurate to say that UN managers ignored the pricing irregularities that occurred under the Oil-for-Food Program. Potential problems were flagged by UN officials on many occasions but little action was taken by Security Council members sitting on the 661 committee to address the problems. For instance:

• UN oil overseers first alerted the Security Council's 661 Committee on November 17, 2000 that the oil pricing formulas proposed by Iraq for the month of December did not represent "fair market value," because the oil appeared to be considerably under-priced. As a result of the alert provided by UN officials, on December 15, the 661 Committee directed oil overseers to advise buyers of Iraqi oil that they should pay no surcharges on oil sales since this would be considered illegal. According to various accounts including the report of the Iraq Survey Group led by Charles Duelfer, this action sparked by diligence on the part of OIP effectively ended Saddam's practice of using oil surcharges to acquire illicit revenue.
• In early March, 2001, the issue of oil surcharges was further reported by the Secretary-General in his report to the Security Council.
• Regarding oil surcharges, the 661 Committee did not reach consensus as to how to address the problem until October, 2001, when the Committee decided to introduce a "retroactive pricing mechanism" for Iraqi oil in an attempt to eliminate the surcharges on oil.
• Throughout 2001 and 2002, hundreds of contracts for humanitarian goods to be sold to Iraq were queried by UN experts for potential over-pricing. At least 70 cases were reported to the 661 Committee and not a single case was placed on hold for pricing issues. Most of these contracts were ultimately approved. Though the U.S. and the UK held up 5,000 contracts over concerns that Iraq was attempting to purchase "dual-use" goods that could be used to build weaponry, no contract that the OIP experts flagged for potential pricing irregularities was blocked by the 661 Committee. (View examples of contracts flagged by OIP over pricing concerns.)

Finally, it is important to keep in mind that the largest amount of illicit revenue accumulated by the Saddam Hussein regime during the twelve years of UN sanctions came from illegal oil smuggling with its neighbors, not from circumvention of OFFP. According to the recent report issued by the Iraq Survey Group, nearly three-quarters of the illicit revenue (or $8 billion) obtained by the Hussein regime during the sanctions period came from Iraq's illegal trading- primarily with Jordan, Syria, and Turkey. That report attributes $1.7 billion to OFFP.

The UN Office of the Iraq Program (OIP), which administered OFFP, had neither the authority nor the resources to prevent smuggling. The task of policing oil smuggling fell to the Multinational Interception Force (MIF), led by the Fifth Fleet of the U.S. Navy. The coalition making up MIF was originally initiated following the inception of the sanctions in 1990.

The extent of all of these problems will be clearer when the Independent Inquiry Committee (IIC) completes its investigation.

5. "In May 2002, the U.N. Security Council passed a new resolution "cutting itself out of the loop on oil-for-food contracts deemed humanitarian…transferring responsibility for such contracts to Secretary General Annan and his staff."

There were actually two changes in the procedures for OFFP that demonstrate the primary, if not exclusive, concern of the Security Council with OFFP was to prevent the sale/acquisition of "dual use" items that the Hussein regime might use to develop weapons.

Under Security Council resolution 1284 in December 1999, the Council decided that certain goods under OFFP would be pre-approved-i.e. would not require approval on a case-by-case basis. The 661 Committee then reviewed and approved lists of such items (so-called "green lists") in several sectors (food, health, water-sanitation, agriculture, education, etc. If a contract contained only those items, the contract could be approved by the UN Secretariat and the 661 Committee would be informed. Those Committee members who requested so were provided with copies of all contracts approved in such manner. The two Security Council members that requested copies were the U.S. and the UK.

The second big change came in May 2002 under resolution 1409 and with the approval of the so-called Goods Review List (GRL), a list of items containing potential dual use items that could be used to make weapons. The new approach was, in effect, a "green list" in reverse - the Secretariat would identify contracts containing GRL items and only those contracts had to be sent to the 661 Committee. All other contracts were to be approved by the Secretariat. Again, copies of contracts approved by the Secretariat had to be provided to members of the Committee who requested so within one week. The U.S. and the UK requested copies and were provided with every contract until the end of the program.

In both cases, OIP continued to review all contracts in the same manner and any irregularities, including prices, continued to be queried and if appropriate, reported to the 661 Committee even if the goods were on the "green list" or were non-GRL. The U.S. and UK never queried any contracts over concerns about pricing irregularities, but they did question many over potential dual use issues.