<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:20052.wais]
THE U.N. OIL FOR FOOD PROGRAM: CASH COW MEETS PAPER TIGER
=======================================================================
HEARING
before the
SUBCOMMITTEE ON NATIONAL SECURITY,
EMERGING THREATS AND INTERNATIONAL
RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
OCTOBER 5, 2004
__________
Serial No. 108-286
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
THE U.N. OIL FOR FOOD PROGRAM: CASH COW MEETS PAPER TIGER
=======================================================================
HEARING
before the
SUBCOMMITTEE ON NATIONAL SECURITY,
EMERGING THREATS AND INTERNATIONAL
RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
OCTOBER 5, 2004
__________
Serial No. 108-286
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
------
U.S. GOVERNMENT PRINTING OFFICE
20-052 WASHINGTON : 2005
_____________________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky DANNY K. DAVIS, Illinois
TODD RUSSELL PLATTS, Pennsylvania JOHN F. TIERNEY, Massachusetts
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
EDWARD L. SCHROCK, Virginia DIANE E. WATSON, California
JOHN J. DUNCAN, Jr., Tennessee STEPHEN F. LYNCH, Massachusetts
NATHAN DEAL, Georgia CHRIS VAN HOLLEN, Maryland
CANDICE S. MILLER, Michigan LINDA T. SANCHEZ, California
TIM MURPHY, Pennsylvania C.A. ``DUTCH'' RUPPERSBERGER,
MICHAEL R. TURNER, Ohio Maryland
JOHN R. CARTER, Texas ELEANOR HOLMES NORTON, District of
MARSHA BLACKBURN, Tennessee Columbia
PATRICK J. TIBERI, Ohio JIM COOPER, Tennessee
KATHERINE HARRIS, Florida BETTY McCOLLUM, Minnesota
MICHAEL C. BURGESS, Texas ------
ERIC CANTOR, Virginia BERNARD SANDERS, Vermont
(Independent)
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on National Security, Emerging Threats and International
Relations
CHRISTOPHER SHAYS, Connecticut, Chairman
MICHAEL R. TURNER, Ohio DENNIS J. KUCINICH, Ohio
DAN BURTON, Indiana TOM LANTOS, California
STEVEN C. LaTOURETTE, Ohio BERNARD SANDERS, Vermont
RON LEWIS, Kentucky STEPHEN F. LYNCH, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania CAROLYN B. MALONEY, New York
ADAM H. PUTNAM, Florida LINDA T. SANCHEZ, California
EDWARD L. SCHROCK, Virginia C.A. ``DUTCH'' RUPPERSBERGER,
JOHN J. DUNCAN, Jr., Tennessee Maryland
TIM MURPHY, Pennsylvania JOHN F. TIERNEY, Massachusetts
KATHERINE HARRIS, Florida DIANE E. WATSON, California
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Lawrence J. Halloran, Staff Director and Counsel
Thomas Costa, Professional Staff Member
Robert A. Briggs, Clerk
Andrew Su, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on October 5, 2004.................................. 1
Statement of:
Kennedy, Ambassador Patrick F., U.S. Representative to the
United Nations for U.N. management and reform, U.S. mission
to the United Nations, U.S. Department of State............ 56
Smith, David L., Director, Corporate Banking Operations, BNP
Paribas; Peter W.G. Boks, managing director, Saybolt
International B.V; and Andre E. Pruniaux, senior vice
president, Africa and Middle East, Cotecna Inspection S.A.. 97
Letters, statements, etc., submitted for the record by:
Boks, Peter W.G., managing director, Saybolt International
B.V, prepared statement of................................. 156
Kennedy, Ambassador Patrick F., U.S. Representative to the
United Nations for U.N. management and reform, U.S. mission
to the United Nations, U.S. Department of State, prepared
statement of............................................... 62
Maloney, Hon. Carolyn B., a Representative in Congress from
the State of New York, prepared statement of............... 32
Pruniaux, Andre E., senior vice president, Africa and Middle
East, Cotecna Inspection S.A, prepared statement of........ 324
Ruppersberger, Hon. C.A. Dutch, a Representative in Congress
from the State of Maryland, prepared statement of.......... 40
Shays, Hon. Christopher, a Representative in Congress from
the State of Connecticut:
Prepared statement of.................................... 3
Prepared statement of Christine Grenier, First Secretary,
Political Section, French Embassy...................... 50
Smith, David L., Director, Corporate Banking Operations, BNP
Paribas, prepared statement of............................. 101
Watson, Hon. Diane E., a Representative in Congress from the
State of California, prepared statement of................. 18
Waxman, Hon. Henry A., a Representative in Congress from the
State of California:
E-mail dated October 4, 2004............................. 47
Prepared statement of.................................... 8
THE U.N. OIL FOR FOOD PROGRAM: CASH COW MEETS PAPER TIGER
----------
TUESDAY, OCTOBER 5, 2004
House of Representatives,
Subcommittee on National Security, Emerging Threats
and International Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 11:25 a.m., in
room 2154, Rayburn House Office Building, Hon. Christopher
Shays (chairman of the subcommittee) presiding.
Present: Representatives Shays, Turner, Duncan, Murphy,
Lantos, Sanders, Lynch, Maloney, Sanchez, Ruppersberger,
Tierney, Watson, and Waxman [ex officio].
Also present: Representative Ose.
Staff present: Lawrence Halloran, staff director and
counsel; J. Vincent Chase, chief investigator; R. Nicholas
Palarino, senior policy advisor; Thomas Costa and Kristine
McElroy, professional staff members; Robert A. Briggs, clerk;
Hagar Hajjar, intern; Phil Barnett, minority staff director;
Kristin Amerling, minority deputy chief counsel; Karen
Lightfoot, minority communications director/senior policy
advisor; David Rapallo, minority counsel; Andrew Su, minority
professional staff member; Early Green, minority chief clerk;
and Jean Gosa, minority assistant clerk.
Mr. Shays. A quorum being present, the Subcommittee on
National Security, Emerging Threats and International Relations
hearing entitled, ``The U.N. Oil-for-Food Program: Cash Cow
Meets Paper Tiger,'' is called to order.
The United Nations Oil-for-Food Program was mugged by
Saddam Hussein. Through cynical, yet subtle manipulation, he,
and an undeclared Coalition of the Venal on the Security
Council, exploited structural flaws in the program and
institutional naivete at the U.N. to transform a massive
humanitarian aid effort in a multibillion dollar sanctions-
busting scam.
How did it happen? How was a well-intentioned program
designed and administered by the world's preeminent
multinational organization so systematically and so thoroughly
corrupted?
The answers emerging from our investigation point to a
debilitating combination of political paralysis and a lack of
oversight capacity, allowed to metasticize behind a veil of
official secrecy. Acceding to shameless assertions of Iraqi
sovereignty, sovereignty already betrayed by Saddam's brutal
willingness to starve the Iraqi people, the U.N. gave the
Hussein regime control over critical aspects of the program.
Saddam decided with whom to do business and on what terms.
While Chinese, French, and Russian delegates to the Security
Council's Sanctions Committee deftly tabled persistent reports
of abuses, the contractors hired to finance and monitor the
program had only limited authority to enforce safeguards.
We will hear from these contractors today. BNP Paribas, the
international bank retained by the U.N. to finance oil and
commodity transactions through letters of credit, describes its
functions as purely nondiscretionary. Saybolt International,
responsible for verifying oil shipments, faced physical and
political constraints on performance of their work.
Additionally the firm Cotecna Inspection was given only a
limited technical role in authenticating shipments of
humanitarian goods into Iraq.
The U.N. appears to have assumed that the rigor of
commercial trade practices would protect the program, while the
contractors took false comfort in the assumption the U.N. would
assure the integrity of this decidedly noncommercial
enterprise. Once it became clear the Security Council was
politically unable to police the program, no one had any
incentive to strengthen oversight mechanisms that would only be
ignored.
As this and other investigations got underway, the
companies expressed their willingness to provide detailed
information on their Oil-for-Food activities but
confidentiality provisions in U.N. agreements prevented their
coming forward until the committee's ``friendly'' subpoenas
trumped those contractual restraints. Since then, they have
provided thousands of pages and gigabytes of data which we and
other committees are reviewing.
Today we are releasing some of those documents because,
apart from any findings or recommendations we might adopt, a
major goal of this investigation is to bring transparency to
secretive U.N. processes and to put information about this
highly important international program in the public domain.
The documents provide the first detailed glimpse into the
structural vulnerabilities and operational weaknesses exploited
by Saddam and his allies.
From what we have learned thus far, one conclusion seems
inescapable: The U.N. sanctions regime against Iraq was all but
eviscerated, turned inside out by political manipulation and
financial greed. Saddam's regime was not collapsing from
within; it was thriving. He was not safely contained, as some
contend, but was daily gaining the means to threaten regional
and global stability again, once sanctions were removed.
Testimony from our witnesses today will contribute
significantly to our ongoing oversight and to the public
understanding of the United Nations Oil-for-Food Program. We
sincerely thank them for their participation today and we look
forward to their continued cooperation in our work.
At this time the Chair would recognize the ranking member
of the full committee, Mr. Waxman who is an ex officio member.
[The prepared statement of Hon. Christopher Shays follows:]
[GRAPHIC] [TIFF OMITTED] T0052.001
[GRAPHIC] [TIFF OMITTED] T0052.002
Mr. Waxman. Thank you, Mr. Chairman.
Today the committee is holding the fifth congressional
hearing to investigate allegations of mismanagement in the U.N.
Oil-for-Food Program. This humanitarian effort was established
in 1995 to provide for the basic needs of Iraqis while U.N.
sanctions were in effect. Recently there have been serious
allegations of corruption, overpricing and kickbacks under this
program.
And I want to make it clear that I believe it is
appropriate for Congress to investigate these allegations in an
evenhanded manner and follow the evidence wherever it leads.
My complaint is that our scope is too narrow. If we are
going to look at how Iraq's oil proceeds have been managed, we
have an obligation to examine not only the actions of the U.N.
but also our own actions. In fact, I would argue that our first
priority should be to investigate our own conduct.
The United States controlled Iraq's oil proceeds from the
fall of Baghdad in May 2003 until June 2004. Yet Congress has
not held a single hearing to examine the evidence of
corruption, overpricing and lack of transparency in the
successor to the Oil-for-Food Program, the Development Fund for
Iraq--which was run by the Bush administration when the United
States exercised sovereignty over Iraq.
Here are the facts. When the Bush administration took over
in Iraq, it received $20.6 billion through Iraqi oil proceeds,
repatriated funds, and foreign donations. Halliburton was the
single largest private recipient of these funds, receiving $1.5
billion under its contract to run Iraq's oil fields.
This money belongs to the Iraqi people. It is not a slush
fund. The Security Council directed the administration to use
these funds in a transparent manner for the benefit of the
Iraqi people. The Security Council passed Resolution 1483 which
set up the International Advisory and Monitoring Board to make
sure the Bush administration lived up to its obligations.
But the Bush administration has not complied with this
resolution. Reports from auditors at KPMG, an independent
certified public accounting firm, as well as the Coalition
Provisional Authority's own inspector general, have found that
the Bush administration failed to properly account for Iraqi
funds.
KPMG said the Bush administration had inadequate accounting
systems, inadequate recordkeeping, and inadequate controls over
Iraqi oil proceeds. It reported that the administration's
entire accounting system consisted of only one contractor
maintaining excel spread sheets. That is one person for $20
billion.
Likewise, the inspector general concluded that the Bush
administration had no effective contract review tracking and
monitoring system and that it failed to demonstrate the
transparency required.
These actions merit a full congressional investigation.
They are compounded by evidence that the Bush administration is
now actively blocking efforts to account for these funds.
For 6 months, the Bush administration has been withholding
documents from international auditors charged by the Security
Council to oversee the administration's actions. In particular,
the Bush administration is withholding documents about
Halliburton's receipt of $1.5 billion in Iraqi oil proceeds.
The auditors have made seven distinct requests for this
information, including a letter from the Controller of the
United Nations directly to Ambassador Bremer. But the
administration has repeatedly refused to provide the documents,
and continues to do so today.
Three months ago, the international auditors ordered a
special audit of the contract with Halliburton, but again the
Bush administration has obstructed their work. Administration
officials have refused to approve the audit's statement of work
and refused to issue a request for proposal. The special audit
has simply languished inside the Department of Defense.
At this committee previous hearing, Mr. Claude Hankes-
Drielsma, an advisor to the Iraqi Governing Council, testified
that the Bush administration was not properly accounting for
Iraqi funds. Ambassador Kennedy, who is here again today, could
not explain why the Bush administration failed to follow its
own rules and hire an accounting firm to manage the Iraqi oil
proceeds. And the administration failed to adequately respond
to the questions for the record we sent jointly regarding the
DFI.
These actions are hypocritical, they are arrogant, they
breed resentment in the Arab world and they further deteriorate
our global alliances, but most of all they undermine our
efforts in Iraq because they reinforce the image that our
primary objective in Iraq was to seize control of the country's
oil wealth.
If we are going to examine how Iraq's oil money has been
spent, which I believe we should, we need to proceed in a fair
and transparent way; and if we refuse to ask tough questions
about the conduct of our own government officials, our efforts
will have little credibility in the eyes of the world.
After the opening statements today, I am going to make a
motion for subpoenas so that we can continue the investigation
of the success or failure of the U.N. Oil-for-Food Program
which was run by the United States. I am going to ask for
subpoenas, which we asked for, by the way, when subpoenas were
issued for this investigation. We asked for subpoenas on the
same basis that we needed a subpoena, for example, for the
corporate banking operations of BNP Paribas to give us the
documents which the chairman is going to make public today.
Those documents would not be turned over without a subpoena.
Documents will not be turned over to us from the Federal
Reserve Bank on the same basis. We need a subpoena to get them.
We need further subpoenas as well, and I will be making a
motion for both subpoenas to be issued so that while we have
our hearing today, we can be prepared to do the full
investigation of what happened to the oil money after we took
over.
We want to know what happened when the U.N. was running it;
if there was corruption, if there was fraud, if there was a
lack of transparency. But we have a special obligation to know
what happened to that money when we took it over, if there was
corruption, if there was fraud, if there was a lack of
transparency. And so far the Bush administration is refusing to
help in this investigation to know what happened after they ran
those funds.
So I know, Mr. Chairman we are going to have the opening
statements from the Members first. Before we then proceed to
the first witness, I will make my motion for subpoenas. And as
I understand it, you are going to ask that vote be held later,
after the witnesses have testified, presumably because we have
done too good a job of getting the Democrats here to vote, and
the Republicans, unaware that the vote would be taking place,
are not here in sufficient numbers. I understand that is in the
chairman's discretion.
I want to vote. If it is a bipartisan vote, that would be
great. I think we ought to have a bipartisan vote to get these
subpoenas. If it is a partisan vote, well, I think the American
people ought to know that the Republicans are going to vote to
stop a real investigation of the actions of the Bush
administration with regard to the use of those funds and
particularly because of the Halliburton involvement.
[The prepared statement of Hon. Henry A. Waxman follows:]
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Mr. Shays. I thank the gentleman. I also thank him for
letting me know that he was going to make this motion, but I
did not know in time to tell the Members. This is a hearing and
I don't think they thought there would be votes, so I
appreciate his letting us know.
At this time, the Chair would recognize the vice chairman,
Michael Turner.
Mr. Turner. Thank you, Chairman Shays, for holding this
hearing and for continuing your efforts to continue to examine
the Oil-for-Food Program.
In our first hearing, we explored the accountability and
integrity issues with the program. We discovered a lack of
transparency and little accountability. Except for the actions
of the United States and the United Kingdom, it appears that no
one was bringing to light the corruption in the program.
The Oil-for-Food Program at its creation was poised for
corruption. The U.N. allowed Iraq to select not only the
suppliers of food and medicine but also the buyers of Iraqi
oil. The mechanisms established by the U.N. for controlling
Oil-for-Food contracts were inadequate. Transparency was
nonexistent, and an effective internal review of the program
did not occur. We do not know if members of the Security
Council were involved in any of the corruption, but enough
ancillary information exists to question the objectiveness and
credibility of the Security Council and the United Nations.
Mr. Chairman, I appreciate your continued leadership on
this important issue. I appreciate your continued leadership on
the issue of our continuing involvement in Iraq and its
transition to democracy.
Thank you, Mr. Chairman.
Mr. Shays. I thank the gentleman.
At this time the Chair would recognize Mr. Tierney.
Mr. Tierney. Mr. Chairman, thank you. I share your concern
about the diversion of Iraqi oil proceeds through graft,
kickbacks, and other schemes designed to line the pockets of
corrupt Iraqi leaders.
If I may, I would like to read an account about the
corruption that occurred in Iraq under the management
previously in charge. Mr. Said Abdul Kassam was the Iraqi
official in charge of withdrawals at the Iraq central bank. He
reported that there was no need to rob the bank in a daring
heist with guns and masks, because the bank was robbed every
day by the directors of the Iraqi ministries.
According to Mr. Kassam, they use up all the money they
want to withdraw. If it's a big amount they can get it in big
bags. If it's a small amount they get it in a box. But the
directors general are those people who are withdrawing the
money. They can take the money immediately from the bank and
put it in their pockets.
Mr. Chairman, I regret to say that this didn't happen under
the Oil-for-Food Program; it happened under the Development
Fund for Iraq. When I mentioned the previous management, I was
talking about this country, the U.S. administration. The
account was from an NPR series called ``Spoils of War'' and it
highlights just how dysfunctional the Bush administration's
management of DFI funds actually was. There was virtually no
monitoring of what happened to Iraqi funds once they left the
hands of this administration's officials.
Indeed, according to the Wall Street Journal article
published on September 17, the Coalition Provisional
Authority's own inspector general has now completed a report
finding that the Bush administration, ``hasn't demonstrated it
kept much control over any of the assets it seized following
the war.''
In particular, the IG study reportedly concludes that the
Bush administration failed to account for $8.8 billion in DFI
funds that were transferred to Iraqi ministries. According to
the general report, the occupation government was unable to say
for sure whether the money it disbursed was spent properly, or
even spent at all.
It is amazing that we have held hearing after hearing about
the United Nations; management of the Oil-for-Food Program,
which I agree we should. I think you are on the right track,
and that is necessary. But we have not held even one hearing on
this administration's mismanagement of Iraqi oil proceeds, and
I agree with Mr. Waxman that is equally as important to the
credibility of this country if we are going to really look at
the situation and have the respect of the world, knowing that
we are trying to be transparent and get to the bottom of how
these moneys were expended.
How can we expect the rest of the world to follow this
administration's example? How can we expect them to comply with
Security Council resolutions when the Bush administration
ignores them?
Mr. Chairman, we do no service to the administration by
allowing them to proceed in this manner. I urge the committee
to immediately address these issues and exercise meaningful
oversight as well as continue our hearing process on the U.N.
Oil-for-Food Program, but we must be resolute about all of the
improprieties or lapses.
Thank you. I yield back.
Mr. Shays. I thank the gentleman.
At this time the Chair would recognize Mr. Duncan.
Mr. Duncan. Thank you very much, Mr. Chairman.
A few years ago, 60 Minutes did a report on the
scandalously high level of waste, fraud, and abuse occurring at
the United Nations, much of it with American money. But this
Oil-for-Food Program scandal really takes the cake, and so I
appreciate very much your continuing to look into this
situation and hold these hearings.
Through this program, Saddam Hussein obtained $10.1 billion
in illegal revenues. I remember hearing a talk a few months ago
by Charlie Cook, the very respected political analyst, and he
said that people really can't comprehend a figure over $1
billion. And it is difficult to think of how much money $10.1
billion is. This money was mostly squandered on Hussein's
palaces, luxury cars, and lavish lifestyle that he and his
family were living. This theft was made possible, apparently,
by surcharges, illegal kickbacks, and abuse by U.N. personnel
and by the lackadaisical and inept attitude of--and greedy
attitude, really, of some of the companies involved that we
will hear from today.
The Wall Street Journal reported in an editorial what a lot
of business the U.N. did. Mr. Annan, Kofi Annan's Secretariat
and his staff collected more than $1.4 billion in commissions
on these sales. But during this time the U.N. was doing almost
nothing to really push weapons inspections and other things
that they should have been doing in Iraq.
The U.N. Oil-for-Food Program was the largest humanitarian
effort in U.N. history. Unfortunately, it has now become the
shining example of everything that is wrong with this
organization. The United States pays one-fourth of the
operating expenses of the United Nations, one-third of the
money to many of the other U.N. programs, and mostly as much as
90 or 95 percent on most of the U.N. peacekeeping operation. If
the U.N. cannot provide any better oversight than what we see
through this program, then surely our tax dollars can be spent
better elsewhere, particularly at a time when we have a $7\1/2\
trillion national debt, and deficits running in the $400 to
$500 billion range.
Thank you, Mr. Chairman.
Mr. Shays. Thank the gentleman.
And the Chair at this time would recognize Ms. Watson.
Ms. Watson. Mr. Chairman, thank you. I think it is critical
for Congress to address the serious questions surrounding the
Bush administration's deficit management of Iraqi oil proceeds
and other funds in the Development Fund for Iraq.
We made a commitment to the Iraqi people, a promise that we
would spend their money for their benefit, and we do have to
remember that it is their money. We also promised to spend it
in a transparent manner so the entire world would know that we
were managing their funds properly and are not allowing graft,
corruption, and mismanagement to infiltrate our mission there.
Unfortunately, Mr. Chairman, it appears that the Bush
administration has failed to live up to those commitments.
Auditors at the CPA's own Inspector General's Office have
issued a report that is extremely critical of the
administration's management of Iraqi funds in the Development
Fund for Iraq. In particular, the inspector general's report
criticizes actions by the administration's contracting
activities office in Iraq.
If I may, I would like to read just a short portion of the
report. The CPA contracting activity had not issued standard
operating procedures or developed an effective contract review
tracking and monitoring system. In addition, contract files
were missing or incomplete. Further, contracting officers did
not always ensure that contract prices were fair and
reasonable, contractors were capable of meeting delivery
schedules, and payments were made in accordance with contract
requirements.
This occurred because the CPA contracting activity did not
provide adequate administrative oversight and technical
supervision over the contracting actions completed by procuring
contracting officers as required. As a result, the CPA
contracting activity was not accurately reporting the number of
contracts actually awarded by the CPA contracting activity.
This hindered the CPA contracting activity's ability to
demonstrate the transparency required of the CPA when it
awarded contracts using DFI funds.
Mr. Chairman, this is an indictment of the administration's
entire management approach to the funds of the Iraqi people.
The inspector general went on to warn that because contract
files were not adequately maintained, they cannot be relied
upon to ensure compliance or to be used as a source for
congressional reporting.
How are we in Congress supposed to be able to conduct our
oversight responsibilities when the information is not
reliable? The inspector general's report found that of the
contracts they analyzed, 67 percent had incomplete or missing
documentation. Sixty-seven percent, Mr. Chairman. This is a
horrendous record.
Finally, the inspector general provided its fundamental
conclusion about the administration's stewardship of these
Iraqi funds. The inspector general reported we do not believe
that transparency can be achieved when pertinent data is
unavailable or inaccurate.
Mr. Chairman, this is an embarrassment to our country. The
Bush administration has failed to comply with Security Council
Resolution 1483 and we need to take action.
Thank you Mr. Chairman.
Mr. Shays. I thank the gentlelady.
[The prepared statement of Hon. Diane E. Watson follows:]
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Mr. Shays. At this time the Chair would recognize Mr.
Murphy.
Mr. Murphy. Thank you, Mr. Chairman.
The focus of today's hearing is really twofold. First, to
investigate the structural weaknesses that made the Oil-for-
Food Program vulnerable to diversion and exploitation; and
second, to determine the steps Oil-for-Food Program manager and
contractors took to prevent abuse.
Now, we could spend all day just on point No. 1, but sadly
I think the answer is staring us all in the face. The evidence
uncovered over the last year by several different
investigations cast little doubt that one of the fundamental
problems with the U.N. Oil-for-Food Program was that the U.N.
was running it, fueled by the greed and complicity of other
countries.
Despite repeated criticisms and questions of concern, U.N.
member countries and U.N. personnel continually turned a blind
eye to the corruption of a program designed to get humanitarian
assistance to the people living under one of the most corrupt
regimes in the world. We knew Saddam Hussein was corrupt, and
his tactics of ruthless violence were a way of life. One would
think the U.N. would be aware of this and structure the program
in such a way so as to guard against it. One would think that
attempts by Hussein to evade the sanctions through this program
would be anticipated, and thus steps taken to counter his
money-making scheme from the beginning, rather than trying to
put out fires after the fact.
Rather, it appears as if the Oil-for-Food Program went out
of its way to encourage scandal and the illicit use of
humanitarian contracts to line the pockets of Saddam Hussein
and his cronies.
Now, the United States gave millions in lives to France in
World War I, World War II, and Vietnam. Yet they turned their
backs on us when faced with Hussein's ever-increasing threat to
the international community.
France and Russia had two choices: Help us militarily, or
intervene directly with Saddam Hussein to cooperate with
weapons inspectors and stop his murderous regime. They did
neither. Why didn't these countries step forward? Perhaps it
had something to do with the fact that evidence suggests Russia
was the recipient of 1.366 billion barrels of oil through
Hussein's voucher scheme. And French companies close to
President Chirac also benefited from Saddam's power. They were
up to their ears in corruption, and the financial benefit of
keeping Saddam Hussein in power weigh more heavily than their
friendship with the United States.
Corruption in the Oil-for-Food Program enriched Hussein to
the tune of $10.1 billion, enough to buy and build more
weapons, more clandestine activity and further undermine the
entire U.N. sanctions program.
There was one line in the subcommittee's background memo
that really sums up the problem with the program, ``The Oil-
for-Food Program was essentially run by Saddam Hussein.''
How is it that the U.N. could allow the terms of a program
meant to punish a tyrannical leader, while offering assistance
to the very people that suffered under him to be dictated by
that very tyrant? It is because the current nature of the U.N.
is to be soft on terrorism and the world leaders that support
it.
The spineless U.N. produced paper tigers in the form of
resolutions that had no teeth. Time and again, the U.N. told
Saddam Hussein and terrorists that the U.N. was all talk and no
follow-through. And the world has reaped the grim harvest of
that approach: more terrorists emboldened by the U.N.'s
weaknesses.
According to classified documents reviewed by the
subcommittee, the U.N. created and encouraged an environment
whereby Russia, France, China, and Syria, all nations standing
to gain financially by the continued support of Saddam's
government, continually blocked efforts by the United States
and the United Kingdom to maintain the integrity of the Oil-
for-Food Program. And all of those countries sat on the U.N.
Security Council.
The contractors responsible for inspecting shipments coming
in and out of Iraq were also undermined by the U.N. Oil-for-
Food Program policies. If the obstacles by Iraqi personnel were
not enough, the U.N. denied the contractors the staff and the
authority necessary to enforce inspection standards. One
example given was an instance in which Saybolt was unable to
prevent the transfer of oil onto a ship with expired letters of
credit. If the inspectors had no enforcement powers, why have
inspectors at all?
Now, some may question why Congress is so interested in
this issue. Our interest in the U.N.'s involvement in Iraq goes
far beyond the Oil-for-Food Program. As the United States
continues to fight terrorists in Iraq, our level of cooperation
with the U.N. has been called into question. Yet, if France and
Russia and the U.N. knowingly undermined the mission of the
Oil-for-Food Program and knowingly undermined the efforts to
stop Saddam Hussein, this Congress has a responsibility to ask
who our allies are and who the U.N. is supporting.
When some critics of the Iraq war claim our actions did not
pass a global test, we must remember what interests the global
community truly values. As I said before, we have given the
French millions of our soldiers' lives, and they have given us
the cold shoulder. France has repeatedly turned to us for help.
In response, they have turned their back on us. The Oil-for-
Food corruption scandal may be the answer of why.
When the United States continues to foot the bill for U.N.
peacekeeping missions, when the U.N. is unwilling to support us
in our efforts to protect our own citizens, if winning the
approval of the European countries of the U.N. for U.S. policy
is the global test, maybe we should reconsider and question the
reliability and supposed altruism of those sitting in judgment.
I yield back my time, Mr. Chairman.
Mr. Shays. Thank the gentleman.
At this time, the Chair would recognize the distinguished
gentleman from Vermont, Mr. Sanders.
Mr. Sanders. Thank you very much, Mr. Chairman.
I don't think there is any disagreement on this committee
about the importance of investigating the U.N. Oil-for-Food
Program. It is important to know how American dollars being
contributed to the U.N. were spent and how the corrupt Saddam
Hussein regime ended up stealing money that should have gone to
hungry people in Iraq. So I have no objection about
investigating that important issue.
But I think it is equally important not only that we
investigate what the U.N. does with American taxpayer money, it
is equally important to investigate what the Bush
administration and the U.S. Government does with American
taxpayer moneys.
You know, Mr. Chairman, I have been on this committee for
more than a few years, and I can recall very clearly that
during the Clinton administration this committee held dozens
upon dozens of hearings to investigate every single allegation
relating to the Clinton administration, no matter how off-the-
wall those allegations were. We investigated the Vince Foster
suicide. We investigate the Monica Lewinski, so-called
Travelgate, Whitewater, ad infinitum, on and on and on.
However, rather amazingly, during the Bush administration this
committee has not held one substantive hearing to investigate
any serious allegation against the Bush administration. And why
is that important? It is important because we have a Republican
administration. We have a Republican Senate. We have a
Republican House. And it is the moral obligation under the
Constitution of the United States that the Congress provide
oversight to any administration; otherwise the government
doesn't work.
Yes, it is easy to beat up an administration from another
party. We all know that. But we as Members of Congress have the
responsibility to take a hard look at what any administration
does, regardless of what party they are. And all over this
country I think there is a growing concern, that the U.S.
Congress has abdicated its oversight responsibility.
All over America people are asking, why did we in fact go
to war? And I know there are two sides to the issue. This
committee hasn't looked at the rationale for going to war in
Iraq. We haven't looked at the leak of the names of CIA agents.
We haven't looked at the fact that the Medicare actuary was
threatened with being fired if he actually told Members of
Congress the truth about how much money the prescription drug
program would cost. We haven't taken a look at the Cheney
energy task force.
Especially when we come to issues like Halliburton, we have
a double responsibility. Everybody here knows that the Vice
President of the United States used to be the CEO of
Halliburton. Now, I am not casting any aspersions on what has
happened. But all over this country people want to know, did
Halliburton get a special deal? How come they got no bid
contracts? How come billions of dollars went to Halliburton?
Now, how come we are not looking at that issue?
So, Mr. Chairman, what I would simply say is, yeah, let's
take a hard look at what the U.N. did. And while I know it is
easy to beat up on France and Germany, it might be a little bit
more difficult but may be of more interest to the American
people to take a hard look at what goes on at the Bush
administration.
I yield back.
Mr. Shays. I thank the gentleman.
At this time the Chair would recognize Mr. Lynch from
Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman.
I too believe that there is a very strong need to carry out
a thorough investigation into the circumstances. I would like
to focus on, however, with the Ambassador's cooperation, the
facts that led us to this point. Now, here we have a situation
where this Oil-for-Food Program was established back in 1995,
after we had fought the first Gulf war, and it was established
specifically because Saddam Hussein had run that country into
the ground. He had failed to address the infrastructure needs
and the humanitarian needs of his own people. He had used the
country's natural resources as his own slush fund. He had used
the basic funds that were in the treasury, the national
treasury, at his own pleasure. He had ignored the basic health
and welfare of his citizens in favor of a military buildup.
Saddam Hussein waged wars against Iran and invaded Kuwait.
He had fired SCUD missiles into the civilian populations of
Israel. And we fought a war to remove him from power, to remove
him from Kuwait initially. And even with the evidence of his
own atrocities and the evidence of the corrupt activities
between him and his son, squandering the wealth of that country
and abusing its citizens, after the United States took a
leadership role in establishing this fund, in deciding who
would contract for the Iraqi people, with this fund of $20
billion, after that worldwide search for who would negotiate
and who would control the terms for the Iraqi people, the
responsibility was given to those same people: Saddam Hussein
and his thugs, his family, the people that have been abusing
that country for the previous 40 years. That was the colossal
failure here, that we allowed Saddam Hussein to call the terms
of that agreement, and he had the support of some of our
international neighbors in getting the most favorable terms,
having a private bank handle this.
We could not get information under the arrangement that was
agreed to between the United Nations, Kofi Annan, Secretary
General, and Saddam Hussein and his regime. How did we ever
allow ourselves to be put in this position? How did we allow
the victims here--and there are three sets of victims--one, the
Iraqi people. This was their national wealth. This was their
country, their resources; the American taxpayer footing the
bill again; and also the credibility of the United Nations.
There are great misgivings here because of what has gone
on. There is a definite--I haven't been on this committee that
long. I have come to this committee recently. I have been here,
this will be almost 3 years I have been on this committee. But
I can tell you there is a definite reluctance on this committee
to investigate anything.
I am still waiting, after three meetings with the Defense
Department, to get the names of some Halliburton individuals
whom they have removed for bribery and corrupt practices with
individuals in Iraq and in the Middle East. On an investigatory
committee in the Congress, and we can't get the names of our
own people when they have conceded that they were involved in
bribery and corrupt practices in which the taxpayers' funds
have disappeared in the millions.
We need to do our job here, and I believe we will get to it
eventually. But there has been tremendous wrongdoing here, and
we have to step up to the plate and do what the American people
have asked us to do: Get to the bottom of this.
I yield back Mr. Chairman. Thank you.
Mr. Shays. I thank the gentleman very much.
And, Mrs. Maloney, you're next.
Mrs. Maloney. Thank you. Thank you very much, Chairman
Shays, and I thank also Ranking Member Waxman for your holding
this important hearing. And welcome, Ambassador Kennedy. It's
good to see you again.
I think that we learned a great deal last April at our
hearing, but since the appointment of Paul Volcker and the
independent inquiry of the Oil-for-Food Program, there is much,
much more to understand. I do believe that it is very important
that we as an oversight body in Congress look at the U.N. and
their financing, but we must also look at the finances and how
we as a government handled the funds. We need to look at that
equally. And I have some grave concerns that some of my
colleagues have raised today in their testimony of the
stewardship of the Iraqi oil proceeds and the successor to the
Oil-for-Food Program, the Development Fund for Iraq which we
created.
As was mentioned, on May 22, 2003, after the United States
took control of Iraq, the U.N. Security Council passed
Resolution 1483, formally transferring the Oil-for-Food assets
to a new Development Fund for Iraq, and placing them under the
authority of the Coalition Provisional Authority which was
headed by Bremer. Resolution 1483 directed the Bush
administration to spend these funds on behalf of the Iraqi
people. The Security Council also imposed other restrictions,
and I think these restrictions are important. And in the
testimony today, I want to know why we didn't follow them.
And I will give several examples:
The Security Council required the administration to deposit
all oil-sale proceeds into the Development Fund for Iraq, which
is held by the central bank of Iraq at the Federal Reserve Bank
of New York.
The Security Council required that all deposits to and
spending from the Development Fund of Iraq be done, ``in a
transparent manner.''
And the Security Council required that the administration
ensure that the Development Fund for Iraq funds were used to
meet the humanitarian needs of the Iraqi people, and for other
purposes benefiting the people of Iraq.
To ensure that the administration complied with these
requirements, the Security Council created the International
Advisory Monitoring Board to oversee these actions, the IAMB
board. The Board was envisioned as the primary vehicle for
guaranteeing the transparency of Iraqi funds. When the Bush
administration assumed responsibility for these funds, it
explicitly agreed to these terms.
On August 19, 2003, Ambassador Bremer issued a memorandum
stating as follows, ``As steward for the Iraqi people, the CPA
will manage and spend Iraqi funds which belong to the Iraqi
people for their benefit. They shall be managed in a
transparent manner that fully comports with the CPA's
obligations under international law, including Resolution 1483
of the United Nations.''
But, Mr. Chairman, the administration has not complied with
the resolution and I do not believe that the requirements were
very strict. The administration took in, as Mr. Waxman noted, a
total of $20.6 billion while it controlled this Development
Fund in Iraq. On July 15, 2004, the oversight board issued its
first audit report on the administration's stewardship of Iraqi
funds, and this report was conducted by KPMG, which happens to
be headquartered in the district I represent, the same
international certified public accounting firm reviewing the
Oil-for-Food Program. So we had the same auditor for both
programs.
KPMG criticized the administration for, ``inadequate
accounting systems, inadequate recordkeeping, inadequate
controls over Iraqi oil proceeds. On the most basic level, KPMG
found that the administration failed to follow its own policy,
to hire a certified public accounting firm. According to the
KPMG report, the CPA was required to obtain the services of an
independent certified public accounting firm to assist in the
accounting function of the Development Fund of Iraq. But our
administration, the current administration never did so. In
addition, the sum total of the accounting system used by the
administration consisted of--this is directly out of the KPMG
report, ``excel spread sheets and pivot tables maintained by
one individual.''
The KPMG report concluded as follows: ``the CPA senior
advisor to the Ministry of Finances, who is also chairman of
the Program Review Board, was unable to acknowledge the fair
presentation of the statement of cash receipts and payments,
the completeness of significant contracts entered into by the
DFI and his responsibilities for the implementation and
operations of accounting and internal control systems designed
to prevent detect fraud and error.''
I believe these are very serious findings. They basically
say that the United States has failed to comply with the
transparency and accountability requirements set forth by the
United Nations in the Security Council Resolution 1483.
So I look forward to the opportunity to question Ambassador
Kennedy about these serious problems. Truly having accountable
and transparency over money is a very important role of
government. We try to do this in our own government, and we
certainly should bring the same standards to moneys that we
oversaw in Iraq.
So, again, I thank the chairman and the ranking member for
their continued oversight. It is important, and I look forward
to the opportunity to question Mr. Kennedy.
Mr. Shays. I thank the gentlelady.
[The prepared statement of Hon. Carolyn B. Maloney
follows:]
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Mr. Shays. And at this time, the Chair would recognize Mr.
Ruppersberger.
Mr. Ruppersberger. Sure. Mr. Chairman, I come to this
hearing today with many concerns. My first concern is about the
allegations that have been made and the way they are being
investigated.
There are three main charges that have been levied:
overpricing by the Saddam regime; kickbacks made by the
companies contracting with Saddam through the program, and what
Saddam used that money for; and three, corruption within the
U.N. itself in running the Oil-for-Food Program.
These are all very serious allegations, and if any or all
of them are proven to be true, those individuals proven to be
guilty of illegalities and wrongdoing should be brought to full
and complete justice. On that I believe we can all agree.
I have serious concerns about the number of investigations
occurring, the leaks to the media, the potential of mishandling
of valuable evidence, and the use of the court of public
opinion, the media and others, rather than allowing the Paul
Volcker investigation to complete its work.
When we last met in April to discuss the same issue,
Members of both sides of the aisle praised the unprecedented
commissioning of an independent investigation by Kofi Annan and
the appointment of Mr. Volcker. Since then, Mr. Volcker has had
to assemble a staff, enter into the memorandums of agreement
with multiple investigations, assemble and review a decade
worth of documents, and all the while answer to U.N. member
states, all with vested interests, including the United States.
And that is no easy task.
I am concerned that the current investigations are being
politicized and the evidence submitted is being leaked before
it is ever vetted, authenticated, or corroborated.
I am concerned that this is turning out to be an inductive
investigation rather than a deductive investigation. And I know
that is the wrong way to conduct a credible investigation.
I urge caution as we proceed further. Let's consider a few
facts: The first, the Oil-for-Food Program is no longer in
existence and therefore the rush to judgment may do more harm
than good.
Second, Mr. Volcker has promised a full and complete
investigation report to member states by mid-2005, and we
should allow that investigation to conclude before condemning a
report that has yet to be written.
Three, we are fighting a global war on terrorism that
requires international involvement, including the U.N. damaging
the reputation of any politician, national leader, ally, or
international institution at this time, this delicate time,
without a full vetting of the facts is simply premature and
dangerous. We must follow the facts, and I am glad to see that
the chairman has called these witnesses to deal with two of the
three main allegations head on.
I would hope that the same will be done with the
allegations resting on the al-Mada, which is the Iraqi
newspaper-published list, and all who possess or witnessed
those documents at one time. And I would like to hear from the
al-Mada editor-in-chief, from KPMG, Patton Boggs, Fresh Fields,
Bucas Derringer, Paul Bremer, Claude Hankes-Drielsma, to
address those documents which are the starting point of this
scandal.
I also think it would be useful to bring an
authentification expert before this committee to discuss
authentification and how it is done and what it means and why
it is so important. Ultimately, I think we must allow Mr.
Volcker to carry out this investigation, to look at the facts
and evidence, to look at his conclusions, and then decide as a
Nation what is our best interest to do next.
Thank you, Mr. Chairman.
Mr. Shays. I thank the gentleman.
[The prepared statement of Hon. C.A. Dutch Ruppersberger
follows:]
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Mr. Shays. At this time I would like to make a unanimous
consent that Doug Ose, a member of the full committee and
chairman of the Regulatory Affairs Subcommittee be allowed to
participate in this hearing. Without objection, so ordered, and
at this time I would welcome any statement that Mr. Ose would
like to make.
Mr. Ose. Thank you, Mr. Chairman. I was listening with
particular attention to Mr. Ruppersberger's remarks about this
being an inductive investigation as opposed to a deductive
investigation. It seems like we have had a lot of rhetoric
today about, you, know who is guilty and who is not.
I just want to go back to a couple of uncontested facts.
The Oil-for-Food Program was established in April 1995 pursuant
to U.N. Security Council Resolution 986. And the food actually
started to flow in December 1996. So there was about a year-
and-a-half drag between the time it was authorized and the time
it was actually implemented. And interestingly enough, the
first known request for any examination of the program in terms
of fraud or lack of transparency occurred in the first few days
of March 2001.
So for 5 years, from December 1996--4\1/2\ years, from
December 1996 to March 2001, this program just sailed along
without oversight interest or monitoring.
Pursuant to the request in early March 2001 that the 661
committee actually look at this issue, on March 7, 2001 Kofi
Annan actually sent a notice to Iraq, saying they have to clean
up their act. Again, from the time of December 1996 to March
2001, nobody paid any attention. The perpetrators of the scam
set the rules. The U.N. signed off on it, and the
administration turned a blind eye.
However, in early March 2001 that changed. Finally somebody
in the administration did something and brought to the
attention of the 661 committee allegations that fraud and lack
of transparency were occurring. I think the record needs to be
very clear on this issue. But the only thing, this fraud that
was taking place--excuse me--that's inductive. The only time
that we finally got around to examining whether fraud was
taking place was in March 2001. The people who approved the
program in the mid-nineties turned a blind eye to it. The
Security Council's 661 committee, they just said, just do it;
don't bother us with the details.
But in March 2001, somebody finally started asking the hard
questions. What changed? I hope we examine that issue. What
changed from the mid-nineties to March 2001, so that the
questions finally started getting asked? I think that is a
central question to this thing, because you cannot uncover
fraud. You cannot reverse years and years of practice by
snapping your fingers or standing up here beating your chest.
This culture got set up, it got established, it got ignored.
And in March 2001, we finally called them on it.
Mr. Chairman, I hope we get to the bottom of this.
Mr. Shays. Thank the gentleman.
I ask unanimous consent that all members of the
subcommittee be permitted to place an opening statement in the
record and the record will remain open for 3 days for that
purpose. And, without objection, so ordered.
I would ask further unanimous consent that all Members be
permitted to include their written statement in the record,
and, without objection, so ordered.
We have a representative of the French Embassy, but I think
we will have to just make a statement and leave a document. But
I think I will first ask Mr. Waxman to make his motion and then
we will put that on the table.
Mr. Waxman. Thank you, Mr. Chairman. I have two separate
motions for subpoenas. The first one is a subpoena under House
rule 11(2)(k)(6). On July 8 this committee issued a subpoena to
the French bank, BNP Paribas, which was responsible for
maintaining the Oil-for-Food escrow account controlled by the
U.N. When the committee issued the subpoena, the argument by
the chairman and others was that a subpoena was necessary
because the bank could not legally cooperate with this
committee's inquiries unless it had the legal protection
afforded by a subpoena. In other words, they wanted to
cooperate, we were told, but they needed to have the subpoena
for legal reasons.
Mr. Chairman, my subpoena is for the Federal Reserve Bank
of New York. This is the bank that maintains the Development
Fund for Iraq which was run by the Bush administration from May
2003 to June 2004. Just as you asked the French bank for
documents relating to the inflow and outflow of funds under the
Oil-for-Food Program, we ask for identical documents from the
Federal Reserve Bank.
In fact, the language of my subpoena tracks the broad
language of your subpoena almost word for word, substituting
references to the Oil-for-Food program with references to
Development Fund for Iraq.
In making this motion, I want the record to reflect that
the Federal Reserve Bank has expressed the exact same policy as
the French bank. With respect to cooperating with this
committee, they cannot respond to a simple letter of request,
but they are more than willing to respond to a friendly
subpoena, and I want to submit for the record an e-mail
received from the counsel and vice president of the Federal
Reserve Bank dated October 4, 2004.
It states as follows: ``with respect to providing DFI
account information to the Congress, we concluded as long as we
are acting pursuant to a subpoena, we can provide DFI account
information for the period that the DFI was operated by
Ambassador Bremer without violating our contractual obligation
to the Central Bank of Iraq.''
Mr. Chairman, we have an exactly parallel situation. We are
talking about the same funds, the Iraqi oil proceeds, which
were supposed to be used for the humanitarian benefit of the
Iraqi people. We are talking about the financial institutions
responsible for maintaining these funds, and we are talking
about serious allegations of mismanagement. The only difference
is that the United Nations controlled one set of funds, and the
Bush administration controlled the other. I believe this
committee's legitimacy will be judged by how it treats these
two cases. We can choose to treat them equally in an even-
handed manner, properly exercising our congressional oversight
responsibilities or Mr. Chairman, you and your colleagues can
attempt once again to use procedural machinations to shield the
Bush administration from embarrassment, and more importantly,
from accountability.
My first motion is for the committee to issue a subpoena to
Mr. Timothy Geithner, the president of the Federal Reserve Bank
of New York, to produce the documents relating to the
development fund for Iraq.
I ask unanimous consent that the e-mail be part of the
record.
Mr. Shays. Without objection, the e-mail will be part of
the record.
[The information referred to follows:]
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Mr. Shays. The motion offered by Mr. Waxman is in order
under House rule 11, clause 2(k)(6). That rule states, ``The
Chairman shall receive and the committee shall dispense with
requests to subpoena additional evidence.'' Pursuant to that
rule, the chairman may determine the timing of the
consideration of such request. At this time the motion shall be
considered as entered and the committee will consider the
motion offered by the gentleman from California at 2:45 today.
Would you like to make a separate----
Mr. Waxman. I offer them separately because I can see no
opposition to the first one.
Mr. Shays. Would you like me to comment on your motion?
Mr. Waxman. If you would.
Mr. Shays. The Chair reserves the time to speak, and I just
say that conceptually I think, while I do not agree with the
arguments on why this information is needed and that there is
wrongdoing that requires it, I do think that there is merit in
getting this information. So my interest is in getting this
information. My inclination is always to write a letter first.
In this instance a letter may not be required with the
documentation that you have, and so I want to consider that. I
will reserve judgment, frankly, on that motion.
Mr. Waxman. Mr. Chairman, I think that is a reasonable
position. As you think about it between now and 2:45, I hope
you make the decision to support the subpoena.
My second motion is for a subpoena under House rule 11,
clause 2(k)(6). As I said in my opening statement, the Bush
administration is grossly mismanaging Iraqi oil proceeds and
other funds in the Development Fund for Iraq. There have been
multiple reports about the administration failing to manage
these funds in an open, transparent and accountable manner as
required by the Security Council resolution 1483. In addition,
the administration is now withholding documents from the
international auditors charged by the U.N. Security Council to
monitor its stewardship of these funds. I think a subpoena is
necessary at this point because the administration has refused
requests to voluntarily turn over this information.
Indeed, Mr. Chairman, you issued a press release on June 23
of this year condemning the administration for failing to
provide information to this subcommittee regarding both the
Oil-for-Food Program and the Development Fund for Iraq. This is
what you said about the administration's replay. ``the response
is incomplete. There is still an insufficient accounting of
relevant documents in custody. Several questions and requests
are simply unanswered.''
The committee still has not received the information we
requested on May 21. After the administration rejected the
subcommittee's request for information, I wrote to Congressman
Davis, the chairman of the full committee, on July 9 and asked
that he subpoena the documents. In my request, I tracked
exactly the language and format he used to subpoena the French
bank handling the Oil-for-Food account.
On July 12, Chairman Davis wrote back refusing to issue the
subpoena. He said it was premature, that he preferred to send a
letter requesting the information. Well, I wrote to him again
on July 15 attaching a draft letter for him to sign and send
out but he never did and he just ignored my request entirely.
I wrote again on July 29 repeating my request. To this day
he has failed to respond to my multiple requests to do so. Now
that these voluntary efforts have failed, it is clear we have
exhausted all our options. We have no choice but to issue an
subpoena. In light of these numerous failures to provide
information to the United Nations and the U.S. Congress, I move
that the committee subpoena Defense Secretary Donald Rumsfeld
to produce these specified documents, including records of
receipts and disbursements, sole source contracts and other
listed materials.
I understand, Mr. Chairman, it is always preferable to send
a letter requesting the information, but if we cannot even get
the chairman of the committee requesting it, and we have no
response to our letters requesting the information directly
from DOD, it seems to me that we have no other course but to go
ahead with the subpoena. To date, we still have not received
these documents. It is clear that we need to move to a
subpoena. I urge support for the subpoena.
Mr. Shays. Thank you. We will take that up after we discuss
the first one and I will reserve judgment as well on this, and
we will have dialog before we have that vote. We will have a 5-
minute dialog on each of those subpoenas on each side so there
will be a 10 minute debate on each motion before we vote.
Let me just say that I see Mr. Lantos is here.
Mr. Lantos, would you like to make a statement on the Oil-
for-Food Program, or we will get right to our hearing.
Mr. Lantos. I will defer.
Mr. Shays. The French embassy has asked a representative,
Ms. Christine Grenier, to provide some information to the
subcommittee. Without objection, I would like to recognize her
for a brief statement.
Mr. Ose. Mr. Chairman, I know it is our normal practice to
swear in our witnesses.
Mr. Shays. How brief is your statement? It is very short, a
paragraph, so we are not swearing in this witness.
Ms. Grenier. Thank you, Mr. Chairman, and distinguished
members of the committee, my name is Christine Grenier. I am
First Secretary in the Political Section at the French Embassy.
Allegations have been voiced on the role of France in the Oil-
for-Food Program. The French Embassy will prepare a written
statement in response to these unjustified allegations, and I
would appreciate your allowing this statement to be included in
the hearing record. Thank you, Mr. Chairman.
Mr. Shays. Thank you very much. We appreciate you honoring
the committee with your presence. We will be happy to insert
the statement into the record. Without objection that will
happen. Thank you very much.
[The information referred to follows:]
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Mr. Shays. At this time the Chair would note that we have
Ambassador Patrick F. Kennedy, U.S. representative to the
United Nations for U.N. management and reform, U.S. mission to
the United Nations, U.S. Department of State. At this time the
Chair will swear in the witness.
[Witnesses sworn.]
Mr. Shays. I note for the record our witness has responded
in the affirmative. I thank the witness for his patience.
Mr. Ambassador, I thank you for your presence and
statement. You have the floor.
STATEMENT OF AMBASSADOR PATRICK F. KENNEDY, U.S. REPRESENTATIVE
TO THE UNITED NATIONS FOR U.N. MANAGEMENT AND REFORM, U.S.
MISSION TO THE UNITED NATIONS, U.S. DEPARTMENT OF STATE
Ambassador Kennedy. Mr. Chairman, distinguished members of
the committee, I welcome the opportunity to appear before you
again to discuss what is commonly known as the United Nations
Oil-for-Food Program.
Mr. Chairman, recent allegations of corruption and
mismanagement under the Oil-for-Food Program have been targeted
not only at the Saddam regime but also at companies and
individuals doing business under the program and at U.N.
personnel and contractors. We believe that every effort should
be made to investigate these allegations seriously and to
determine the facts in each case.
As you are aware, there are currently several congressional
investigations looking into the question of Oil-for-Food. The
independent inquiry committee headed by Paul Volcker and the
Iraqi board of Supreme Audit in Baghdad are also conducting
their investigations. As these inquiries go forward, you have
my assurance, and that of my staff, to cooperate fully with you
and your colleagues on other committees and provide all
possible additional information and assistance. I welcome the
opportunity today to answer your questions relating to these
investigations on how the program was created and operated. At
the outset, Mr. Chairman, I want to reiterate several points I
made here previously in April.
First, I want to emphasize that the establishment of the
Oil-for-Food Program was the result of difficult and arduous
negotiations among 15 Security Council members, a number of
whom advocated a complete lifting of sanctions against Iraq.
The Oil-for-Food Program was in no way perfect, but it was, at
the time, the best achievable compromise to address the ongoing
humanitarian crisis in Iraq in the mid 1990's, while
maintaining effective restrictions on Saddam's ability to
rearm. Sanctions have always been an imperfect tool, but given
the U.S. national goal of restricting Saddam's ability to
obtain new materials of war, sanctions represented an important
tool in our efforts.
Mr. Chairman, given this general context, I would now like
to outline some of the details of how the program worked, how
it was created, by whom and how it was operated and was
monitored. A comprehensive sanctions regime was established
under U.S. Security Council resolution 661 in August 1990 after
the Saddam Hussein regime invaded Kuwait. The council's
unanimity on the issue of Iraq eroded as key council
delegations became increasingly concerned over the negative
impact of sanctions on the Iraqi population, the lack of food
supplies and the increase in mortality rates were worldwide
news.
The concept of a humanitarian program to alleviate the
suffering of the people of Iraq was initially considered in
1991 with U.N. Security Council resolutions 706 and 712, but
the Saddam regime rejected those proposals. The counsel
eventually adopted U.N. Security Council resolution 986 in
1995, which provided the legal basis for what became known as
the Oil-for-Food Program. While council members were the
drafters and negotiators of this text, the memorandum of
understanding signed between the U.N. and the former government
of Iraq was negotiated between Iraqi government officials and
representatives of the Secretary General, in particular his
legal counsel, on behalf and at the request of the Security
Council.
Under provisions of resolution 986 and the MOU, the Iraqi
government, as a sovereign entity, retained the responsibility
for contracting with buyers and sellers of Iraq's choosing and
the responsibility to distribute humanitarian items to the
Iraqi population. This retention of Iraqi authority was
insisted upon by Saddam and was supported by a number of
Security Council members, as well as other U.N. member states.
The exception to this was for the three northern Governorates
of Iraq where the U.N. agencies, at the request of the Council,
served as the de facto administrative body that contracted for
nonbulk goods and distributed the monthly food ration.
The sanctions committee was established under resolution
661 in 1990, also known as the 661 committee, monitored member
state implementation of the comprehensive sanctions on Iraq,
and also was authorized to monitor the implementation of Oil-
for-Food Program after its inception.
The 661 committee, like all sanctions committees, operated
as a subsidiary body of the Security Council and was comprised
of representatives from the same 15 member nations as the
council. The committee was chaired by the Ambassador of one of
the rotating 10 elected members of the council. The committee,
during its life span, was chaired by the Ambassadors of
Finland, Austria, New Zealand, Portugal, Netherlands, Norway
and Germany.
Decisionmaking in the committee was accomplished on a
consensus basis. All decisions taken by the committee required
the agreement of all its members. This procedure is used in all
subsidiary sanctions committees of the Security Council.
In providing oversight and monitoring of the sanctions, the
committee and each of its members, including the United States,
was responsible for reviewing humanitarian contracts, oil spare
parts contracts, and oil pricing submitted on a regular basis
by Iraq to the U.N. for approval. The committee was also
responsible for addressing issues related to noncompliance and
sanctions busting. In my previous testimony and statement for
the record, I have provided an explanation of what we knew
about issues relating to noncompliance, what we did to address
them and the degree of success we had in addressing these
issues within the confines of the 661 committee.
When the United States became aware of issue related to
noncompliance or manipulation of the Oil-for-Food Program by
the Saddam regime, we raised these concerns in the committee,
often in concert with our U.K. counterparts. At our request,
the committee held lengthy discussion and debate over for
example allegations of oil pricing manipulation, kickbacks on
contracts, illegal smuggling and misuse of ferry services. To
provide the 661 committee with additional insight on issues
related to noncompliance, we also organized outside briefings
by the commander of the Multilateral Interception Force and
other U.S. agencies. Our success in addressing issues of
noncompliance was directly related to the willingness of other
members of the committee to take action.
Given the consensus rule for decisionmaking in the
committee, the ability of the United States and the U.K. to
take measures to counter or address noncompliance was often
inhibited by other Members' desire to ease sanctions on Iraq.
As reflected in many of the 661 committee records which have
been shared with your committee, the atmosphere within the
committee, particularly as the program evolved by the late
1990's was often contentious and polemic, given the fundamental
political disagreement between member states over the Security
Council's imposition and continuance of comprehensive
sanctions, a debate exacerbated by the self-serving national
economic objectives of certain key member states.
Mr. Chairman, you have recently been to Baghdad and know
that the voluminous Oil-for-Food documents are now being
safeguarded for use by the board of supreme audit in their
investigation. The American Embassy in Baghdad is currently
working on a memorandum of understanding between the United
States and the government of Iraq regarding access to these
documents. We will keep this committee updated on the status of
these negotiations. Mr. Chairman, as you and your fellow
distinguished committee colleagues continue your review of the
Oil-for-Food Program, key issues in your assessment likely will
be whether the program achieved its overall objectives and
whether the program could have been better designed at its
inception to preclude what some have suggested were fundamental
flaws in its design.
In retrospect, had the program been constructed
differently, perhaps by eliminating Iraqi contracting authority
and the resulting large degree of autonomy afforded to Saddam
to pick suppliers and buyers, then the allegations currently
facing the program might not exist. One can postulate the
elimination of this authority and the establishment of another
entity to enter into contracts on behalf of the former
government of Iraq, and this entity might have had tighter
oversight of financial flows, thus inhibiting Saddam Hussein's
ability to cheat the system through illegal transaction.
The problem is, of course, that these specific decisions to
allow the government of Iraq to continue to exercise authority,
to let Saddam Hussein continue to determine who he could sell
oil to and purchase goods from were all done in the larger
context of a political debate on Iraq. It was reluctantly
accepted to ensure that the significant sanctions program would
remain in place, thus achieving a U.S. goal.
Mr. Chairman, I want to reiterate a point that I made
earlier on the issue of sovereignty. While we opposed the
authoritarian leadership of the former Saddam Hussein regime,
Iraq was, and is, a sovereign nation. Sovereign nations are
generally free to determine to whom they will sell their
national products, and from whom they purchase supplies.
Members of the Security Council, as well as other member
states, insisted on upholding this aspect of Iraq's sovereign
authority.
These were the arrangements that prevailed under the Oil-
for-Food Program given this reality. Could alternate
arrangements have been devised, such as authorizing the United
Nations or some other entity to function as the contracting
party representing the people of Iraq in oil sales, and
humanitarian goods procurement? The answer, given that there
was not the political will in the Security Council to use its
authorities to take charge of Iraq's oil sales and humanitarian
goods procurement depended on the Iraqi regime's agreeing. And
it did not.
Mr. Shays. Ambassador, I am going to have you summarize
when we get back. We have a vote now, and I am going to go to
that vote, so we are going to recess.
[Recess.]
Mr. Shays. Ambassador Kennedy, there is going to be another
vote, but just complete your statement. We will put your
statement on the record.
Ambassador Kennedy. Thank you, Mr. Chairman.
The Security Council's original scheme for the Oil-for-Food
Program outlined in resolution 706 and 712 in 1991 were for a
program that would utilize the revenue derived from the sale of
Iraqi oil to finance the purchase of humanitarian supplies for
use by the Iraqi people. It was repeatedly rejected by the
Saddam government. Even after the council adopted resolution
986 on April 14, 1995, the resolution that established the Oil-
for-Food Program, it took more than 13 months of protracted
negotiations before Saddam Hussein finally agreed to proceed, a
considerable delay given the ongoing and urgent needs of the
Iraqi people.
Mr. Chairman, any plan that would have denied the authority
of the Iraqi government to select its own purchasers of Iraqi
oil and suppliers of humanitarian products would have been
rejected by a number of other key Security Council member
states. You and your committee colleagues will recall that
most, if not all, of the resolutions concerning Iraq adopted by
the Security Council reaffirmed Iraq's sovereignty and
territorial integrity. It would not have been possible
politically to win support from various U.N. member states for
any arrangement that denied Iraq its fundamental authorities as
a sovereign nation and that would have endangered the
durability of the sanctions regime that helped Saddam's access
to war materials.
Finally, Mr. Chairman, I want to underscore the obligations
of all U.N. member states to implement and enforce the
comprehensive multilateral sanctions imposed by the Security
Council under resolution 661. It was not possible for the
sanctions to be effective, nor to prevent Saddam Hussein from
evading the sanctions through the smuggling of oil, and the
purchase of prohibited goods without the full cooperation of
other states. I appreciate that this committee is carefully
reviewing this matter and I would encourage you to consider the
actions of other states in the context of the Oil-for-Food
Program.
The United Nations, first and foremost, is a collective
body comprised of its 191 members. A fundamental principle
inherent in the U.N. charter is that member states will accept
and carry out the decisions of the Security Council in
accordance with the charter. In this regard, the effectiveness
of the Oil-for-Food Program as well as the larger comprehensive
sanctions regime against Iraq, largely depended on the ability
and willingness of U.N. member states to implement and enforce
sanctions. In the 661 committee, the subsidiary body of the
Security Council tasked with monitoring sanctions compliance,
sanctions violations could be addressed only if there was
collective will and consensus to do so.
As you review the effectiveness of the Oil-for-Food
Program, and the sanctions against Iraq in general, I encourage
you to keep in mind that a decision to take effective action to
address noncompliance issues required consensus in the 661
committee, a consensus that repeatedly proved elusive. And in
reviewing the effectiveness of the U.N. secretariat, it may be
relevant to recall that the staff and contractors are hired to
implement the decisions of the member states. They operate
within the mandates given to them.
In this regard, resolution 986 and the May 1996 memorandum
of understanding between the United Nations and the former
government of Iraq defined the mandate governing the work of
the independent inspection agents, appointed by the Secretary
General, who authenticated the arrival in Iraq of goods ordered
under approved Oil-for-Food contracts. Lloyds Registry of the
United Kingdom initially performed this function on behalf of
the U.N. When the Lloyds contract expired, the Swiss firm
Cotecna was hired by the U.N. to continue this authentication
function. As defined in resolution 986 and the subsequent MOU,
the independent inspection agents, Lloyds and then Cotecna,
were tasked with inspecting only those shipments of
humanitarian supplies ordered under the Oil-for-Food program.
Lloyds Registry and Cotecna agents were not authorized by
the Security Council to serve as Iraq's border guards or
customs officials. They lacked authority to prevent the entry
into Iraq of non-Oil-for-Food goods. That function and
responsibility belonged solely to Iraqi border and Customs
officers, given Iraq's sovereignty and to every U.N. member
state given the sanctions in place. The United Nations and its
agents Lloyds Registry, Cotecna and Saybolt were not
responsible for enforcing sanctions compliance. In May 2001,
the United States and U.K. delegations circulated a draft
resolution to other Security Council members that would have
tightened border monitoring by neighboring states as part of a
smart sanctions approach to Iraq. Certain council members as
well as representatives of Iraq's neighbors, strongly opposed
the United States-U.K. text, and the draft resolution was never
adopted.
Resolution 986 and the May 1996 memorandum of understanding
also called for monitoring by outside agents of Iraq's oil
exports the Dutch firm Saybolt performed this function under
the Oil-for-Food Program. Saybolt representatives oversaw oil
loadings at the Mina al-Bakr loading platform and monitored the
authorized outbound flow of oil from Iraq to Turkey. Saybolt
monitors were not authorized by the Security Council to search
out and prevent illegal oil shipments by the former Iraqi
regime. This was the primary responsibility of each member
state. The multi national maritime interception force operating
in the Persian Gulf also was tasked with preventing Iraq's
illegal oil smuggling.
Mr. Chairman, now that the Oil-for-Food Program has ended,
questions concerning the efficacy of the program have arisen in
light of the appearance of the documents belonging to the
former Iraqi regime. These documents were never publicly shared
during Saddam Hussein's rule with the Security Council or the
661 committee.
A fair question to pose is what might have happened had the
Oil-for-Food Program never been established. While any response
is purely conjecture. It is fair to assume that the
humanitarian crisis besetting the people of Iraq in the mid
1990's would have only worsened over time, given the impact of
the comprehensive sanctions on Iraq and Saddam Hussein's
failure to provide for the needs of his own civilian
population.
A deteriorating humanitarian situation among the Iraqi
people would have increased calls among more and more nations
for a relaxation and/or removal of the comprehensive sanctions
restrictions on Iraq, thereby undermining ongoing United States
and U.K. efforts to limit Saddam's ability to rearm. While the
United States and U.K. may have succeeded in formally retaining
sanctions against Iraq, fewer and fewer nations would have
abided by them in practice given the perceived harmful impact
such measures were thought to be having on Iraqi civilians.
This would have given Saddam even greater access to prohibited
items with which to pose a renewed threat to Iraq's neighbors
and to the region.
Did the Oil-for-Food Program help to relieve the
humanitarian crisis in Iraq and the suffering of the Iraqi
people? Despite what might in the end be identified as inherent
flaws, the Oil-for-Food Program did enjoy measurable success in
meeting the day-to-day needs of Iraqi civilians. Could the
program have been designed along lines more in keeping with the
U.S. Government competitive bidding and procurement rules? Only
if other council members and the former Iraqi government itself
had supported such a proposal. In the end, the Oil-for-Food
Program reflected three merged concepts: A collective
international desire to assist and improve the lives of Iraq's
civilian population; a desire by the United States and others
to prevent Saddam from acquiring materials of war and from
posing a renewed regional and international threat; and,
efforts by commercial enterprises and a number of states to
pursue their own national economic and financial interests
despite the interests of the international community to contain
the threat posed by Saddam's regime.
Mr. Chairman, thank you for the opportunity to appear again
before this committee. I now stand ready to answer whatever
questions you or your fellow committee members may wish to
post.
[The prepared statement of Ambassador Kennedy follows:]
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Mr. Shays. Thank you, what I will do since we have a vote,
I will go back to the vote and then we will just start with
questioning. The committee stands in recess.
[Recess.]
Mr. Shays. I call the hearing back to order.
I thank you, Mr. Kennedy. I also want to apologize to the
second panel for all of the delays.
I would like to start by responding to your closing that
suggests that, and let me be clear you accept this point,
Ambassador Kennedy, basically you are saying because Saddam and
Iraq were a sovereign nation, and because he was not willing to
abide by a stricter Oil-for-Food Program, that we, the United
Nations, conceded in allowing him to pretty much write his own
ticket and that the alternative was, what? That is what I do
not understand. In other words, are you suggesting that the
sanctions worked?
Ambassador Kennedy. Mr. Chairman, we do not believe that we
permitted Saddam Hussein to write his own ticket. I think that
is evident from the fact that it took almost 15 months between
the time that resolution 986 was passed by the Security Council
and the end of the negotiations to formulate the MOU. Saddam
Hussein was obviously interested in achieving the maximum
amount of flexibility that he could. The United States, the
United Kingdom and others were interested in putting the
maximum number of constraints on Saddam Hussein. We had a goal,
Saddam Hussein had goals. All of these goals were in the
context of other member states of the Security Council, and
additionally, other member states of the United Nations, who
have very different views on sanctions, some of them
philosophical, some related to Saddam Hussein. The United
States, United Kingdom and others pushed very, very hard to get
the maximum amount of oversight of the sanctions regime. Those
activities were resisted by others.
What I am suggesting is that although the program certainly
was not perfect, as the work that you and your committee
members have done amply demonstrate, I am suggesting, though,
that in the absence of these sanctions, we would have probably
had a very, very less fulsome situation.
I might note in 2002 the United States and the United
Kingdom were holding, meaning denying permission, to over $5.4
billion in contracts that Saddam Hussein wished to execute. So
it was a balance. The need to alleviate the horrible suffering
of the Iraqi people, suffering brought on by Saddam Hussein, at
the same time to put into effect the most rigorous sanctions
regime that we could politically establish.
Mr. Shays. I have to say you take my breath away. I feel
like you are digging into a hole that I am sorry you are going
into because it sounds to me like some critics' concern about
the State Department's double speak. It sounds to me like
double-speak, and let me explain why.
The sanctions did not work, but we had this program to
what, save face for the United States or whatever? We had a
program that allowed Saddam to sell oil at a price below the
market and get kickbacks and we had a program that allowed him
to buy commodities above the price and get kickbacks. He had
the capability to now take this illegal money in addition to
the leakage that they had. We are looking at the Oil-for-Food
Program as a $4.4 billion rip-off to the Iraqi people going to
Saddam and then the $5.7 billion of illegal oil being sold
through Jordan and Syria and Turkey. But let us just focus on
the $4.4 billion. In addition within that Oil-for-Food Program,
he had what was considered legitimate money that he could then
pay for commodities and bought things that he was not what he
was supposed to be purchasing.
You need to tell me how those sanctions worked if he could
do that. I don't know how you can tell me that they worked when
that happened.
Are you disputing that $4.4 billion was basically ripped
off and ended up in his hands?
Ambassador Kennedy. No, sir, I am not.
Mr. Shays. Are you in agreement this is not the Oil-for-
Food Program, but it was the sanctions, are you in disagreement
that he did not filter about $5.7 billion of oil sales
illegally through the neighboring states?
Ambassador Kennedy. Saddam Hussein engaged in oil smuggling
which was not part of the Oil-for-Food Program. I think we all
agree that Saddam Hussein was an evil man who attempted to
manipulate any opportunity.
Mr. Shays. I don't want to go down whether he is evil or
not. I want to go back over how you can defend these sanctions.
Why did you go in that direction?
Ambassador Kennedy. I think, Mr. Chairman, that the
sanctions enabled Saddam Hussein to be deprived of weapons of
war and dual-use items.
Mr. Shays. Is it your testimony and your comfort level that
$10.1 billion was not used to purchase weapons?
Ambassador Kennedy. No, sir. I am saying that the sanctions
regime assisted. I said in my testimony that it is not a
perfect system. He attempted to purchase materials under the
sanctions through the U.N. Oil-for-Food process. We put holds
on those. We stopped his purchasing of materials overtly, such
as dual-use items. He attempted to purchase for example dump
trucks and heavy equipment transporters. Dump trucks are easily
convertible into rocket launchers because of the hydraulic
mechanisms on the back. And a heavy equipment transporter that
can move a bulldozer or a crane is the same piece of equipment,
essentially, that you use to move tanks.
Mr. Shays. Is it your testimony that you know what he
bought? Are you comfortable with the documents that came from
Saybolt and Cotecna? Are you testifying that when they testify
and basically come before us and say that he was not abiding by
the sanctions, bought material he should not have, are you
saying that he bought material that he should have? You can't
be saying that.
Ambassador Kennedy. No, sir. What I am saying is the
contracts that ran through the Oil-for-Food Program ran through
the 661 committee. When the United States, using the example of
our own Nation, received those contract proposals, those
contracts were vetted by any number of Washington agencies that
were specialists in that regard. They vetted those contracts to
make sure that none of the material included therein were
weapons of war or potential dual-use items.
Mr. Shays. Is it your testimony that you in fact believe
those documents?
Ambassador Kennedy. I believe that the United States
reviewed contracts and held on contracts that would have been
given Saddam Hussein weapons of war and dual-use materials,
yes.
Mr. Shays. I am not asking that. What I am asking is: So
you stopped some transactions, but are you testifying as a
representative of the United States that this system, which
this subcommittee certainly believes is a paper tiger, was not
a paper tiger. Do you believe that Cotecna and Saybolt had the
power to properly monitor?
I want to say it again. Representing the United States of
America, you come before this committee under oath, are you
telling us that this system worked and that both companies were
able to verify and properly manage this program? That is the
question I am asking you. I want you to think long and hard
before you answer it.
Ambassador Kennedy. I think, Mr. Chairman, that you are
conducting an investigation, an investigation we welcome. If
Saddam Hussein was moving materials into Iraq outside of those
which were contracted for under the Oil-for-Food Program, he
and someone else were engaged in smuggling sanctions.
Mr. Shays. That is a no-brainer statement, but it is not
answering my question. I want you to answer my question. I want
you to think a second and answer the question.
Is it your testimony representing the State Department, and
representing the administration, that this program, that the
way this program was set up, that these two companies were able
to properly enforce the sanctions? That is the question. Were
they given the power necessary? Were you given the cooperation
necessary with the other members of the Security Council, the
661 committee?
Ambassador Kennedy. Absolutely not. Absolutely not.
Mr. Shays. Let us work with that. You are digging yourself
out of a hole right now. The bottom line is they were not,
correct?
Ambassador Kennedy. That is correct.
Mr. Shays. Tell me in your words what was the problem with
the program?
Ambassador Kennedy. The problem was in the negotiating
process that takes place in the international arena all of the
time, the ultimate resolution passed by the Security Council,
which was a process of negotiation, did not authorize either
Cotecna or Saybolt or X or Y or Z, or anyone, to become all
encompassing sanctioned enforcement agents.
Mr. Shays. That is the extreme they did not do. Tell me the
minimum that they did? What power did these companies have?
Ambassador Kennedy. They were empowered under the
resolution to validate goods that were being shipped into Iraq
that were declared to be part of the Oil-for-Food Program.
Mr. Shays. You are familiar with this program?
Ambassador Kennedy. Yes, sir.
Mr. Shays. Were they able to do that? This is an
investigation to know, and I want to know if my own government
that is supposed to be overseeing this, that I frankly thought
had problems with this program, I want to know if they were
properly able to oversee this program? It is a simple and very
clear answer. I want to make sure under oath you are stating it
clearly, not something you want me to believe, but I want to
know the truth and the committee wants to know the truth. I
want to have some confidence that my government that was
overseeing it knew what the heck was going on.
Were they able to properly oversee this program?
It is a simple answer.
Ambassador Kennedy. Because of the efforts of Saddam
Hussein, in that sense, no, sir, they were not.
Mr. Shays. In any sense they were not able to. The reasons
why we will explore later. But were they able to properly
oversee this program? You do know they are testifying
afterwards?
Ambassador Kennedy. Yes, sir.
Mr. Shays. And you are aware of the complaints they had, I
hope?
Ambassador Kennedy. Yes, sir.
Mr. Shays. Even before this hearing, correct?
Ambassador Kennedy. Absolutely.
Mr. Shays. Were they properly able to fulfill their
responsibilities and oversee this program?
Ambassador Kennedy. Up to a point yes; and beyond that, no.
Mr. Shays. You are going to have to tell me yes, up to what
point and after what no. You tell me up to what point were they
able to?
Ambassador Kennedy. They were empowered by the resolution
of the Security Council to authenticate materials that were
arriving. They authenticated those materials.
Mr. Shays. Wait a second. Are you saying that they
authenticated these materials? Are you saying they had a
theoretical power to do it or are you saying they actually were
able to do it? There is a difference.
Ambassador Kennedy. It was their mission----
Mr. Shays. I want to know if they were able to.
Ambassador Kennedy. I was not at every border station, sir.
They authenticated the materials and submitted documents to the
United Nations saying they had authenticated material.
Mr. Shays. Isn't it a fact that they said they didn't
always have the people? Isn't it a fact that they said
sometimes they couldn't even look, that is, in terms of
Saybolt, sometimes they could not even be there, and when they
left, isn't it a fact that they had suspicious?
Ambassador Kennedy. Absolutely. And we have testified to
that effect.
Mr. Shays. That is what is frustrating me. And you are
someone who was in Iraq, a friend, and someone I have awesome
respect for. What concerns me is you are giving a party line
that even you do not believe. I feel very awkward having this
public dialog with you, but it is so logical it is almost
frightening to me that we cannot at least have the truth and
then work from that as to what. I don't want to know why they
were not able to authenticate the fact that this happened. I
want to know if they did. Then we will explore why they
couldn't.
Ambassador Kennedy. Mr. Chairman, I have tried to answer
the question the best I can. And I appreciate the compliment
you just paid me. I believe that Cotecna and Saybolt attempted
to carry out the functions that they had.
Mr. Shays. We agree. They attempted to do that. On one
level we are in agreement. The question is could they? The
answer is a simple one.
Ambassador Kennedy. Absolutely. The results were not
perfect.
Mr. Shays. I did not say perfect. Perfect is too much
discretion. Perfect may mean 99 percent, and I don't think it
was even close to 50 percent. I don't think they had the power
and I don't think anyone who has looked at this program
believes they had the power, and I think they are going to
testify they did not have the power. What concerns me is you
were basically trying to give the impression they were not
perfect but, and I think that is misleading to the committee. I
think it does not do you credit.
I don't want you to say anything you do not believe. I just
do not want you to speak in words that do not frankly help us.
I want you to be more precise.
Were they able to make sure that oil sales were actually
the oil sales they were and that commodities that were
purchased were actually what was bought to the amounts that
were bought, the quality and so on? Were they? Maybe you can
look at that note and hopefully somebody else is telling you to
say no.
Ambassador Kennedy. It was the position of the United
States and joined by the United Kingdom that we wanted a more
robust inspection regime. We wanted more robust inspections.
Obviously, I think I am trying to answer your point. I am
saying yes, there were restraints inherent in the program that
prevented Cotecna and Saybolt, and Lloyds before that.
Mr. Shays. The problem with the word ``robust'' is like
your word ``perfect.'' It was not robust, so to say that you
wanted it to be more is almost meaningless in my judgment as I
have looked at this. This was a program that was basically not
working. I want you to start us off explaining why it was not
working. You have given a justification as to why we basically
allowed for this program to go forward even though it was not
working. So you have given a lot of people cover, but you have
not helped us understand whether you, the government, the State
Department, this administration, felt this program worked. You
are trying to give us the impression that it was working, but
not perfect; that it was robust, but it could be more robust.
That to me is misleading. That is what I am wrestling with, and
I am trying to understand why. Why do you want me to have this
impression?
Ambassador Kennedy. Mr. Chairman, I grant you, and I am
looking for another word other than ``perfect.''
Mr. Shays. Have you been instructed to say that this
program worked when it did not work?
Ambassador Kennedy. No, sir.
Mr. Shays. Was there any meeting did you had before that
said under no circumstances are you supposed to agree that the
program did not work?
Ambassador Kennedy. No, sir.
Mr. Shays. Was the program working?
Ambassador Kennedy. The program accomplished some of its
goals, as I have said.
Mr. Shays. What were the goals?
Ambassador Kennedy. The goals of the Oil-for-Food Program
were to relieve the humanitarian crisis of the Iraqi people and
retain a sanctions regime on Saddam Hussein that would assist
in restricting his desire to rearm. He had other means of
attempting to rearm, as you rightly pointed out, sir. He
attempted and he did utilize those means, but the program did
deliver food and medicine and other supplies and equipment to
the Iraqi people.
Mr. Shays. That part we concede. I'm going to concede that
part. Because we knew that Iraqis were starving and we knew
they weren't getting medicine and we knew that Saddam Hussein
was willing to starve and kill his people and deprive them of
medicine, we decided to cave in and accept a program that
simply on the face looked like we hadn't caved in, looked like
there were sanctions, but in fact it was about as leaky as it
could get. And I wanted to understand if you understood that it
was very leaky. Instead you used words, I wanted it to be more
robust and I want it to be perfect.
But it wasn't perfect and it wasn't more robust. The bottom
line was almost every transaction, it appears, may have been a
rip-off, may have been a transaction that compromised the
United Nations, compromised other people, and allowed Saddam
Hussein to make money illegally without the world community
having to agree that he was. That's the way I look at it. Tell
me what's wrong with my picture.
Ambassador Kennedy. Your picture is absolutely correct.
Saddam Hussein--you mentioned earlier, sir, in our discussion
that you take Saddam Hussein. He was sanction-busting from 1991
until the Oil-for-Food Program started in 1995--1996. He was
sanction-busting. The Oil-for-Food Program was put into place.
He attempted to get around the sanctions regime at every
possible opportunity----
Mr. Shays. And the irony is----
Ambassador Kennedy. He priced----
Mr. Shays. Go on.
Ambassador Kennedy. He attempted to write contracts for oil
where he priced the oil below the market rate and attempted to
pocket that premium. We discovered that, and the United States
and the U.K. raised that in the 661 committee, and then halted
all price-setting under the old scheme until we achieved
putting a new system into place which set the oil price
retroactively after the sale; in other words, stopping him from
getting a surcharge.
Having blocked him in that regard, he then moved to another
aspect which was kickbacks after sales. We attempted to block
that. So it was almost--and I hate to say this--a chess game.
He attempted to maneuver and we attempted with certain allies,
but not enough of them, to seize and block his activities.
And so I am agreeing that sanctions are leaky. The
sanctions regime did not work as it was intended; i.e., to have
100 percent effectiveness.
Mr. Shays. No, don't say 100 percent, because I'm not even
sure you had 50 percent. So don't say 100 percent. No, I mean,
if the truth comes out, whatever the truth is, it may embarrass
the United States. It may embarrass someone else. It may
embarrass Congress. But it will be the truth. And from the
truth we can learn from it.
And my problem right now is what you are suggesting is that
basically Saddam was willing to kill his people by not getting
the food and not getting medicine and he wasn't willing to do
an Oil-for-Food Program that we wanted, so ultimately we did a
program that he wanted. He was able to buy or sell in euros. He
was able to undersell his oil. He was able to overpay for
commodities. He was able to get kickbacks. He was basically
able to tell Cotecna and Saybolt basically they had no
authority. He was basically able to ignore them. He was
basically able to have more transactions than they could even
handle so that they weren't even aware of some transactions.
And he did this with the assistance of our allies.
And it's not a bad thing that Americans and the world
community have to contend with this because it suggests that
even before a decision to go into Iraq, it suggests frankly to
me that we didn't have the support of our allies, that
President Clinton didn't have the support of our allies, and
that it was somewhat of a joke. And that when you had a
President finally trying to say, you know, we've got to make
this program work and we also have to look at a regime change
if he doesn't cooperate, and we still don't have the assistance
of our allies, it says to me, well, what's new? What's new
about it?
Are you saying to us that the allies cooperated? No, your
testimony was the reverse. Isn't it true that you said the
allies did not cooperate and enable us to have a sanctions
system that is working? Is that a fair statement?
Ambassador Kennedy. I totally agree sir. As I testified, we
sought a sanction regime and we were unable to get the sanction
regime we wanted, yes, sir because of the lack of willingness
on the part of other members of the Security Council and other
nations to agree to that sanction regime.
Mr. Shays. OK. And so they didn't agree with it. And then
we had a sanction that Saddam basically could live with; and
isn't it true that on occasion, the United States protested
some of the transactions?
Ambassador Kennedy. We contested many of the transactions.
We were holding at one point, as I mentioned, sir, $5.4 billion
worth of proposed transactions.
Mr. Shays. Well, but isn't it true that there were actually
transactions that happened that you objected to?
Ambassador Kennedy. No, sir the system operated on the
consensus basis, and if any member of the 661 committee
representing the member states of the Security Council, if any
member objected to a transaction, that transaction was held----
Mr. Shays. OK. Why didn't you object to the fact that
Saybolt and Cotecna did not have enough manpower and were not
given the authority they needed to make sure that they were
actually documenting the actual transactions? Why didn't the
United States protest their inability to accurately document
transactions?
Ambassador Kennedy. For example, sir, when we learned
that--using the Essex case, the oil tanker in which--it was
topped off after it had been loaded--we did raise that in the
661 committee. We insisted that additional personnel,
additional technical matters, whatever, we demanded to the 661
committee.
Mr. Shays. And it didn't happen. And why didn't it happen?
Ambassador Kennedy. Some of it happened, some of it didn't,
because it was resisted by other members of the 661 committee.
Mr. Shays. Most of it didn't. Most of it did not happen.
And it didn't happen because it just took one member to object,
correct?
Ambassador Kennedy. Correct.
Mr. Shays. OK. So you could theoretically prevent a
transaction from happening that you knew about, but you
couldn't make sure that Cotecna and Saybolt had the authority,
the personnel, to make sure that they were properly running
this program.
Ambassador Kennedy. The mandate to the companies came from
Security Council resolution and from the 661 committee.
Mr. Shays. Is that yes or a no?
Ambassador Kennedy. The answer is that their mandate was
governed by the consensus requirements. And, yes, a member
state could hold on that consensus and that would have the
effect that you outlined.
Mr. Shays. Why can't you say that the bottom line to it was
that because member states would object if you wanted Saybolt
or Cotecna to have more authority, more personnel and so on,
because they objected to it, they didn't get it; and because
they didn't get it, they couldn't do their job properly? Why is
that so hard to say?
Ambassador Kennedy. Phrased that way, sir, I have no----
Mr. Shays. Well, why don't you say it?
Ambassador Kennedy. The mandate to Cotecna, to Saybolt, was
governed from the original Security Council resolution and then
implemented in the memorandum of understanding and in the 661
committee. Efforts to achieve our goals on sanctions were
blocked by other member states.
Mr. Shays. That's not the same thing that I said, which you
agreed with. What I wanted to know from you is whether you
could say this. And if you can't, because you don't believe it,
then tell me you don't believe it. But don't agree with my
statement and then tell me something else in your answer.
What I said was because a member state could block the
United States or Great Britain from wanting Saybolt or Cotecna
to have enough authority and enough personnel to properly
document transactions because member states could veto that--
any one state, and did--that they did not have enough personnel
and they did not and were not able to properly document
transactions.
What you said to me was you agree with that statement, but
you can't say it in your own words, and I just don't understand
why it's hard for you to say it in your own words that way.
Ambassador Kennedy. I guess, sir, because I think--the only
distinction I am trying to draw, if I might, is that there were
transactions outside the scope of the Oil-for-Food Program.
Mr. Shays. We have put those aside. We're just focused on
the Oil-for-Food.
Ambassador Kennedy. All right. Then, yes, Cotecna and
Saybolt and their predecessor in one case did not always have
the resources they needed to do their job, yes.
Mr. Shays. Or the authority?
Ambassador Kennedy. Yes.
Mr. Shays. Yes, what?
Ambassador Kennedy. Yes, they did not have the full
authority to do their job because the mandate from the Security
Council was not as broad as we wished it would have been.
Mr. Shays. Wished it would have been. As it should have
been; correct?
Ambassador Kennedy. Should have been, yes. It was our goal,
as I said, to have a more robust sanctions regime. That's----
Mr. Shays. Don't say more robust. It was not robust at all.
It was a paper tiger, it was a leaky sieve, it enabled Saddam
to get $4.4 billion. It was a joke. And you don't have to say
it was a joke. I can say it was a joke. But you and I can
certainly agree it wasn't robust. Was it a robust program?
Ambassador Kennedy. No, sir, it was not a robust program.
Mr. Shays. OK. Was it close to being a robust program?
Ambassador Kennedy. I think I'm----
Mr. Shays. Was it close to being a robust program?
Ambassador Kennedy. No, it was not close to being a robust
program.
Mr. Shays. OK. Well let's leave it right there.
Mr. Waxman.
Mr. Waxman. Mr. Chairman, earlier today at this hearing I
moved for two subpoenas, and we held off any vote on them. As I
understand it, you're willing to issue the first subpoena to
the Federal Reserve Bank in New York to get the information
that we have requested; and rather than issue a second
subpoena, you've suggested that you and I write a letter to the
Department of Defense requesting the information that we wanted
and would have subpoenaed.
I want to thank you for your suggestion of resolving these
subpoena questions in that way. I think it will be very helpful
for us to issue the letter to Secretary Rumsfeld, insisting he
comply with this request. And, of course, I take you at your
word that the committee will followup aggressively if the
Pentagon fails to provide the documents we have requested.
I think this is a reasonable way to proceed, and rather
than have a vote on it, I would like to have this understanding
memorialized at this point in the hearing so that we can go
ahead with the one subpoena and issue a joint letter from the
two of us in lieu of the second subpoena.
Mr. Shays. Thank you. I appreciate the gentleman's, one,
effort and interest in this issue. I think he is correct in
wanting to get these documents. I do totally agree that the
Bank needs a subpoena, and I also want to say to you that we've
asked for 12 documents, records--more than 12--but we have made
12 specific requests that are quite extensive, and it is my
expectation that the Secretary will provide these documents,
and if he doesn't then we need to followup with the subpoena.
Mr. Waxman. Well, I thank you very much. I certainly agree
with you, and I think it's a reasonable way for us to proceed,
to have all of the information which our committee ought to
have as we do the investigation and in all respects.
Mr. Shays. Thank you very much.
Mr. Waxman. Thank you.
Mr. Shays. Thank you. Thank you for being here.
Mr. Shays. Thank you. Mr. Murphy, you have the floor.
Mr. Murphy. Thank you, Mr. Chairman. I just have a couple
of questions here that I--and I apologize if some of these were
covered while I was on the floor of the House.
But, Ambassador, I thank you for being here, and I wanted
to know where do we stand with the status of gaining access to
the United Nations Oil-for-Food Program documents for Congress
now and--can you give me some background with where we stand
right now?
Ambassador Kennedy. The State Department has asked Chairman
Volcker of the independent investigating committee for the
release of the documents, and up to this point he has declined,
saying that he is using the documents and he intends to conduct
his investigation. And he has declined to release them, sir.
Mr. Murphy. Those would just be documents, official U.N.
documents; is that what you're saying?
Ambassador Kennedy. Yes, sir.
Mr. Murphy. Is anyone trying to pursue documents from any
other country, too? Is there any attempt to do that?
Ambassador Kennedy. Yes, sir. Before I left Baghdad in
August, I had presented to the acting chair of the Board of
Supreme Audit a proposed memorandum of understanding between
the United States and Iraq to release for use of government of
Iraqi documents. And I understand that work is continuing and
we hope to have a resolution to that request in the very near
future. I checked with Baghdad just the other day and I am
expecting those----
Mr. Murphy. So those documents are being scanned now.
Ambassador Kennedy. We are attempting to make an
arrangement between various parties to scan those documents.
Mr. Murphy. Now, how about the reverse? We have access to
the Iraqi documents. Those will be released soon.
Ambassador Kennedy. The request has been made, sir, yes.
Mr. Murphy. The request has been made. How about the
reverse? Is there any attempts to obtain documents from some of
these other countries that are part of this scandal: Russia,
France, China, Syria?
Ambassador Kennedy. I believe that the request to other
nations for their documents is within the jurisdiction of the
independent investigating commission, Mr. Volcker's commission.
Mr. Murphy. Are those nations cooperating?
Ambassador Kennedy. That is a question that would have to
be posed to the independent investigating commission, sir.
Mr. Murphy. Let me ask about another area here. When it
became apparent--and it was some years ago--that the issue, the
question of some corruption in this Oil-for-Food scandal began
to take some legs on it, what was the responsibility of the
U.N. Office of Iraqi Programs to maintain the integrity of this
program, and did they act within the scope of their
responsibility at that time?
Ambassador Kennedy. That is a question, sir, that is
actually part of the investigation that is going on now by the
Independent Investigations Commission. We are aware of
information that did come to the attention of the United
States, including some from the Office of Iraqi Programs; which
then as a member state, as a member of the 661 committee, the
United States, the United kingdom, did followup on.
If there is other information that came into their
possession that they should have followed up on that we are
unaware of, of course we are unaware of that information, and
that is one of the charges that was given to Chairman Volcker
and his colleagues on the Independent Investigations
Commission, to find out if there was any malfeasance,
misfeasance. And I am not a lawyer, so I may not be using the
appropriate words on the part of U.N. employees, but that is
one of the mandates of the IIC, to look and see if U.N.
employees conducted themselves as appropriate----
Mr. Murphy. But it appears that there is some lack of
cooperation in releasing doubts that would help us know this.
Ambassador Kennedy. Chairman Volcker has indicated to me
that his investigation is ongoing and he intends to gets to the
bottom of it and then file a full and complete report. I can
only report, sir, what he has said to me.
Mr. Murphy. Does he feel that he is getting cooperation
from the member nations and from the U.N. itself, fully?
Ambassador Kennedy. He has indicated he is getting full
cooperation from the United Nations Secretariat. I have not
posed the question about discussions with other nations.
Mr. Murphy. Also in the historical time line of this, what
was the year in which the concerns about corruption first began
to surface?
Ambassador Kennedy. First of all, corruption only within
the Oil-for-Food Program itself, or issues about Saddam
Hussein's sanctions-busting in general? I mean, the fact that
he was engaged in oil smuggling came to our knowledge, you
know, in 1991-1992. That's outside of the Oil-for-Food Program.
And efforts were made then by the United States and others, and
it led to the establishment of the multinational interdiction--
maritime interdiction force, which were United States and other
nations' naval assets deployed in the Shatt al Arab and the
Gulf to seize that. We first, I think, became aware of his
schemes related to oil, the premium on oil pricing, in July
2000, which is where he was----
Mr. Murphy. Did the involvement of other countries and the
Oil-for-Food corruption continue after July 2000? So even after
the United States became aware, did it continue?
Ambassador Kennedy. We began pushing for a system to bring
this under control. It was resisted by other nations. We were
challenged. We said, do you have hard evidence? Do you have----
Mr. Murphy. Wait. Who was asking for the hard evidence?
Ambassador Kennedy. Other nations.
Mr. Murphy. Which nations were they?
Ambassador Kennedy. I would have to go back and read the
exact text again.
Mr. Murphy. France.
Ambassador Kennedy. France.
Mr. Murphy. Germany.
Ambassador Kennedy. France, Russia, and China would be
the----
Mr. Murphy. Syria.
Ambassador Kennedy. Syria was on the committee at one
point. I mean, over the course of the 13 years, there were many
nations on the--and in 2000 when this first came to our
attention----
Mr. Murphy. So the very nations that are----
Ambassador Kennedy. The nations changed every year.
Mr. Murphy. I want to make sure I understand what you're
saying. So the nations that the allegations are against now, at
that time were saying you don't have any evidence on us?
Ambassador Kennedy. Yes, sir. They were saying, do you have
hard proof? And we said, we are getting these stories, its
being reported in industry trade publications, it's being
reported elsewhere. This must be addressed.
We pushed and we pushed and met a lot of resistance, and
since we were meeting this resistance, if I might for a moment,
sir, the program then was to set the oil price at the beginning
of the month. And then what Saddam was playing off of was the
volatility of the oil market where the price would move 10, 15,
20, 50 cents a barrel over the course of the month, and then he
would sell at one price and sell to a favored supplier and say,
I'm going to sell to you at the peg price of $20.50, but now
that the price for the rest of the month is $20.75, you keep
the nickel and you kick me back 20 cents. When we saw that this
is what he was doing, and then we met the resistance from
others to our activities, what the United States and the United
Kingdom then did was to refuse to set an oil price at the
beginning of the month. So there was no oil price. Oil sales
went on, but there was no price.
We then agreed to an oil price at the end of the month that
would then deprive Saddam Hussein of playing with the
volatility of the market. And by setting a retroactive price,
we believe that from the oil overseers--which were the
professionals who had been engaged--that still he was
potentially making something, but it might have been on the
order of 3 to 5 cents a barrel as opposed to on the order of 25
to 50 cents a barrel simply because of the movements over the
course of the month.
Mr. Murphy. And what countries were involved with that
after the United States has worked to deal with oil prices at
the end of the month? What countries were still purchasing oil
and giving him a kickback at that time?
Ambassador Kennedy. We do not know which country. That is
part of the investigation now. I do not have in front of me a
confirmed list of what countries were engaged in that. I should
say these were national--these were companies that were
purchasing the oil and giving kickbacks, not nations
themselves.
Mr. Murphy. Well that's an important distinction. Was there
any role or awareness, for example, of the French, the Russian,
Chinese governments of these kickbacks going on?
Ambassador Kennedy. We informed their members of the 661
committee.
Mr. Murphy. So they were informed. Back in what year? Mid-
nineties?
Ambassador Kennedy. In 2000, sir, when it came to our
attention. It was first raised, I believe, in the July 13, 2000
meeting of the 661 committee on oil price.
Mr. Murphy. So that's the definite date by which we know
that those member nations were notified. And I'm assuming that
in the U.N. investigation we may find that those member nations
knew something prior to that, but we don't know.
Ambassador Kennedy. That would be speculation, sir, that I
cannot comment on.
Mr. Murphy. But they were notified at least in the year
2000, and yet the Oil-for-Food purchasing continued on after
this. It didn't end in 2000. It continued on; am I correct?
Ambassador Kennedy. We believe that because of the steps we
took to put this retroactive pricing, that we drove the premium
or surcharge down from, you know, multiple cents a barrel to 2
or 3 cents a barrel. But I cannot say that we ended it
entirely, because Saddam Hussein was always looking for some
way to get around the sanctions.
Mr. Murphy. Mr. Chairman, I'm not sure. Could I have 2 more
minutes or 1 more minute?
Let me shift to a different line of questioning here. The
total amount of money that I understand Saddam Hussein received
from this Oil-for-Food corruption was of the nature of $10
billion, am I correct, $10.1 billion? In the whole package of
things here.
Ambassador Kennedy. He achieved much more than that if you
count in the oil smuggling that took place outside the scope of
the Oil-for-Food Program, and it is very difficult to get an
exact estimate. But I'm in no position to challenge the figure
that we are talking about that was provided by the Government
Accountability Office. I have every reason to believe that
figure is probably in the ball park.
Mr. Murphy. So it's probably in the ball park. It may be
more.
Ambassador Kennedy. Could be a little more, a little less.
Yes, sir.
Mr. Murphy. OK. And what did he do with the money?
Ambassador Kennedy. He did a wide variety of things, I'm
sure. Some of the sumptuous palaces that are extant in Baghdad
at this time are undoubtedly built with that money. And he may
well have done other things, but I don't have direct and
confirmed information about that.
Mr. Murphy. Will we have information from these
investigations with regard to what he spent that money on? For
example, did he purchase weapons on a black market or directly
with that money?
Ambassador Kennedy. I do not believe that is going to be
the subject of the Volcker or the IIC investigation. That may
come out through other U.S. Government channels, sir.
Mr. Murphy. As we connect the dots, the thing that worries
me intensely on this is not only the oppression Saddam Hussein
kept his people under, the tortures and the murders, the
killing fields which continued on at that time, but also it
kept his regime going, much of it in sumptuous palaces which I
have seen in Iraq. But the third, it kept his military going.
And I would hope that somebody would find in this--I'm
sure, Mr. Chairman, this is some of your concerns as well--that
if one penny of that was used to buy any bullets or bombs or
grenade launchers or anything else, I suspect on the black
market, because he's not permitted to purchase them overtly--
and this is where we have to also connect the dots to find if
those companies within those member nations of the U.N. have
blood on their hands against our soldiers.
And I would hope that is part of what this investigation
brings out; that those nations who acted holier than thou in
saying, you don't have any evidence, you don't know anything
about what's going on, but also saying stay away from Iraq,
they're nice people, leave them alone, could very well be--and
this is the crux of what we have to find out from this
investigation--if they were sending the money to Saddam Hussein
which he used to arm his soldiers against the world.
Ambassador Kennedy. I agree. That is something that is
absolutely abhorrent; absolutely, sir.
Mr. Murphy. And I hope the world is paying attention to
that, because all this time that people are looking at let's
ask the United Nations, they're not an altruistic system. Let's
ask other member nations to come out and somehow decide what is
best for the United States. The fact is no Ambassador from
another country is given a mission of deciding what's best for
the United States. They're all supposed to represent their own
nation. And I hope that people pay attention to this; that when
you have this sort of absolute power to spend and to find that
kind of money, that nations and the businesses that operate
within them are not pure. And we may like to think about
perhaps these other nations may have some pure motives, but
quite frankly, there's too much in the negative column to
suggest otherwise.
And I would hope that the investigation of this committee,
led by the chairman and by the United Nations, would give us
that answer. I wish we could get that answer soon. But as it
is, I go back to my opening statement, too, that it concerns me
deeply that these nations which have been very quick to ask us
for help when they needed it, when we ask them for help--if
they knowingly participated, if it was active or passive
participation in sending money to this murderer Saddam Hussein,
which he then used to keep his military regime in power, which
was then used against our own soldiers and citizens is
disgusting.
Thank you, Mr. Chairman.
Mr. Shays. I'll allow counsel to ask a few questions, and
then I'll have a few more, Ambassador, and then we'll be all
set.
Mr. Halloran. Thank you, Mr. Chairman.
Ambassador Kennedy, two areas. First, much of the document,
many of the documents the State Department has provided are
marked sensitive or classified because of their foreign origin,
I believe. In particular, there has been recent media reference
to a document produced by the Iraqi Oil Ministry soon after the
Governing Council and the CPA was in place, characterizing in
detail the Oil-for-Food Program and abuses. That report is
marked sensitive and classified and not for distribution.
I'm wondering what the process is for the U.S. Government
to request or accomplish the declassification and public
release of such a report.
Ambassador Kennedy. Let me find out those exact parameters
and get back to the committee for the record.
Mr. Halloran. Thank you.
The other area I want to explore is this concept of
sovereignty, and try to plumb the depths and the parameters of
that concept. It struck me in your testimony that it is not an
absolute, that I--if you could describe other situations in
which sovereignty has been described or observed differently in
other U.N. regimes; that it's struck us in the documents that
Saddam simply waited out those who had the most expansive view
of sovereignty possible, but that other formulations of this
problem were possible within a plausible concept of sovereignty
for a nation that was already under an oppressive sanctions
regime, that had already been documented as trying to avoid
that sanctions regime. So, in one sense, the sovereignty had
already been severely mortgaged.
Could you describe those negotiations a little more,
please?
Ambassador Kennedy. I will first plead that I am not an
international lawyer and I am not qualified to provide you with
a textbook definition of sovereignty. What I believe we are
talking about here is, I will call it a political definition of
sovereignty. The United States, the United Kingdom, other
allies, sought to put into place, and did in 1990 after the
invasion of Kuwait, a complete embargo on the movement of goods
and services into Iraq. And then it was later amended to permit
certain donations of food and medicines.
But as we saw over the course of the years between 1991 and
1995, you know, the mortality rate; the ability of the Iraqis
to get basic basic nutrition, was just simply collapsing
because of Saddam Hussein's own unwillingness to treat his
people in a humane sense. This built political pressure on
those nations who were in favor of sanctions. And we did not
wish to see that sanctions regime end, because of our goal of
doing whatever possible to restrict the movement of materials
of war to Saddam Hussein so he could re-arm.
So taking the political aspect of trying to keep the
sanctions in place, but seeing the resistance, a series of
negotiations took place within and among member states at the
United Nations to formulate a new regime that eventually led to
the Security Council resolution that established the Iraq
program.
Did we want a program that had more teeth in it than that?
Absolutely. Could we get other nations to agree to that fully
and completely? Could we get Saddam Hussein to tell the other
nations that he was willing to accept that? The answer was no.
Why----
Mr. Halloran. So we can conclude there is another
formulation of the Oil-for-Food arrangement that would give
Saddam less control but still observe the concept of the
sovereignty.
Ambassador Kennedy. As I said in my testimony, yes, one
could have had such another activity. However, in the
negotiations that took place in the 661 committee and in the
Security Council, we did not achieve that consensus on a regime
with more teeth.
Mr. Halloran. Thank you.
Mr. Shays. Thank you, Ambassador. Let me ask you, how many
months were you in Iraq?
Ambassador Kennedy. I was in Iraq for 6 months in 2003 and
then I went back again for another 3 months' assignment in
2004, sir.
Mr. Shays. Was that a classified assignment, then, or can
you tell us, bottom line, what you were involved in?
Ambassador Kennedy. No, sir. I can tell you. For the first
6 months in 2003, I was the chief of staff of the Coalition
Provisional Authority, and then when I went back in 2004, I was
the chief of staff of a small unit that was working on the
transition from CPA to American Embassy and the transition
logistically from the Iraqi Governing Council to the Iraqi
Interim Government.
Mr. Shays. Well, we know those were not easy assignments,
and we sincerely appreciate what you did during that time. I
would like you to describe to me the Clovely incident, C-L-O-V-
E-L-Y, the ship. Are you familiar with it?
Ambassador Kennedy. No, sir. I am aware of the Essex
incident that took place several years ago, but, Mr. Chairman,
I will be glad to research that and provide you information for
the record. I apologize. I am unaware of such.
Mr. Shays. You don't need to. If you don't know of the
incident, I'd just as soon you not respond to it.
When I listened to your statement, and I really--you know,
we don't usually allow someone to speak for more than 10
minutes. I wanted to hear your whole statement. I think why I
get uneasy is certain things seem so simple to me, and then
they are the hard things. And then I think you have a big
dialog about the hard things.
The easy things are that it's clear Saddam starved his
people and deprived them of medicine and would have continued
to do that unless we had some way to allow him to get food and
medicine for his people. And we basically decided to let him
determine, really, how the program should function. He decided
it was in euros, not dollars. He decided who could buy oil. He
decided who he would buy commodities from. He basically set the
price of oil. He set the price of commodities. He undersold his
oil. No reason to do that. He overpaid for commodities. No
reason to do it, unless he did what he did. And that was, he
got kickbacks in both ways.
And it seems very evident to me that both Saybolt and
Cotecna did not have the capability, either in personnel or
authority, to prevent bad things from happening in this
program. And so they happened routinely, not on occasion. It
seemed to me we could have just had a quick dialog. What is of
concern to me, is there anything that I just said that you
would disagree with?
Ambassador Kennedy. No, sir. If I do, is that one that
neither Saybolt nor Cotecna set the price of oil or set the
price of commodities.
Mr. Shays. No, they didn't.
Ambassador Kennedy. No, sir.
Mr. Shays. So everything I said was pretty accurate from
your standpoint.
Ambassador Kennedy. Except, sir, that he proposed the price
of oil.
Mr. Shays. He being----
Ambassador Kennedy. Saddam Hussein. He proposed the price
of oil, but the price of oil was then set by the 661 committee,
not by Saddam Hussein. He----
Mr. Shays. And in some cases set it below market price.
Ambassador Kennedy. When it was set at the beginning of the
month, when the market moved, it ended up being below market
price, which is why the United States and the United Kingdom
moved to set the price at the end of the month so that he could
not take advantage of the natural market shifts. Yes, sir.
Mr. Shays. And so I'm getting to my point. What concerns me
is that you basically have described to me the reality that our
allies who didn't support the embargo were pretty much shaping
it, and that was the reality of this program; and that it was
more important to have the program happen, even though it
wasn't working properly. In other words, having the program and
not having it work properly was better than not having the
program at all. I conclude from that, because you felt the only
alternative was that we would continue to see Iraqis starve and
they wouldn't get the medicine. And I guess that's the
conclusion of the State Department.
Ambassador Kennedy. I think, sir, if there had been massive
starvation in Iraq, I think the belief at that time--and I was
not there--was that the entire sanction regime totally would
have collapsed, and then Saddam Hussein would have had no
sanction regimes to have to deal with at all, and that free
rein would have been not in the U.S. national interest.
Mr. Shays. OK. But the bottom line is as a result, we had
Saddam able to make a fortune in kickbacks. That was basically
the compromise. And it is a fact that the United States knew
this was happening.
Ambassador Kennedy. Every time, sir, that we saw him move
to abuse the system--pricing oil, kickbacks--we moved to try to
counter that in the 661 committee; and, as you have rightly
noted earlier, sir, met resistance from other member states.
Mr. Shays. Who could veto.
Ambassador Kennedy. Yes, sir. The way the Security Council
procedures work, yes, sir.
Mr. Shays. Ambassador, are you set to ask questions? Would
you like to ask some questions?
Ms. Watson. Yes.
Mr. Shays. Thank you. We have two Ambassadors here.
Ms. Watson. I am a bit confused--thank you, Mr. Chairman--
because I just heard you say that every time you saw something
appeared abusive, that there would be some response. However,
we have been told how Saddam Hussein had taken the money
intended for the people and food, and built magnificent
palaces. It seems to me that this would be the time that some
action should have been taken. Can you respond, please?
Ambassador Kennedy. There is no doubt, Madam Ambassador,
that Saddam Hussein received kickbacks. That is a fact. We
moved to counter those kickbacks, but during this period of
time while he was making kickbacks, and as I testified before
this committee several months ago, what he did was on very
large quantities of goods, and he--remember, he was feeding a
nation of some 23 to 25 million people--he would attempt to get
very small kickbacks on very large sums. But the sums mount up
over that kind of volume. He was receiving those funds. Yet the
medicines and the foodstuffs were still going in.
I am not defending what he was doing by any means. What he
was doing is wrong. But the food and medicines were going in,
and he was getting the kickbacks while we and our United
Kingdom allies moved to cutoff either his attempt to manipulate
oil prices or attempt to add surcharges or attempt to add
after-sales service contracts. And so we took steps to block
him as soon as we discovered it. And as we have discussed
earlier, we were not successful in blocking all his activities.
Ms. Watson. And I know, Mr. Ambassador how difficult this
is. I have been there, too. However, I think you're the only
one that can help our understanding of what went wrong so
wrong. And so I understand that the Oil-for-Food Program helped
provide food for 27 million Iraqi residents. It prevented
malnutrition. It reduced communicable diseases. It eradicated
polio, and was a major success for a period of time. We're
focusing on $4.4 billion of a $67 billion humanitarian success
story.
So do you believe that this program met its objectives, and
do you believe that we as the United States, and the monitors
who were participating, were on the job? I need to know out in
the field what it was that was lacking and how we lost so much
of the fund to corruption. What was it that should have been
done beyond what you've just described?
Ambassador Kennedy. The Oil-for-Food Program had multiple
objectives. One objective was to ensure that foods, medicine,
and other essential human needs of the Iraqi people were met.
And so to that extent, it met its objective by ensuring that
the infant mortality rate and maternal mortality rate, which
had gone up, went back down.
The nutrition was achieved by the Iraqi people. So yes, it
met that objective. But in terms of being a sanctioned regime
that stopped any attempt by Saddam Hussein to bust the sanction
regime and keep him from cheating on the sanctions regime,
busting it and then potentially using those funds to get other
materials, it was not a total success. But----
Mr. Shays. Would the gentlelady suspend for a second?
Ms. Watson. Certainly.
Mr. Shays. When you say ``any attempt'' and ``it was not a
total success'' as it relates to that part of it, you seem to
be going back and suggesting that the abuses were infrequent.
Is it your testimony that the abuses were infrequent?
We've already conceded that people are going to get aid.
They are going to get money and medicine. But on the other side
of the equation, is it your testimony that it was just any
attempt, we didn't succeed in any attempt? Where the abuse is
more frequent, happened more than less? I want to know which
way you see it.
Ambassador Kennedy. The abuses, Mr. Chairman, were
continuous. But they were, if I might, sir, they were different
abuses each time. I mean, he abused it with oil smuggling
outside of program. He abused it with kickbacks. He abused it
with premiums on oil. He took different steps, so continuous
abuse, different tools that he used each time to cause the
abuses, sir.
Mr. Shays. Thank you. Thank you.
Ms. Watson. If I might continue--and if you want to
continue to respond to my last question, fine--but let me raise
another issue. What other U.N. bilateral or multilateral
mechanism besides the 661 committee could the United States
have utilized to publicize and put an end to these practices?
I'm concerned that too much of the oil moneys were diverted in
other directions, and those who suffered were the Iraqi people.
With the Coalition, what could have been done to end this
misuse?
Ambassador Kennedy. With Saddam Hussein as the figure here,
I don't know that anything would have stopped Saddam Hussein
from attempting to get around any activities.
Ms. Watson. Well let me just ask you this, then. What would
have stopped the flow of funds into the program Oil-for-Food?
Ambassador Kennedy. The only thing that would have stopped
it would have been if you had had a different sanctions regime.
But the sanction regime that was put into place was the one
that was the result of long, extensive, and arduous
negotiations with other member states to achieve that sanctions
regime. If you had had a regime in which, again, hypothetically
a company had pumped all the oil, sold all the oil, and bought
all the goods and sent them in, then there might not have been
any leakage as you described. However, there was not the
political will on the part of nations to impose that kind of a
sanctions regime.
Ms. Watson. What of our political will here? Did we make a
strong enough effort, Security Council in the United Nations,
to bring their attention and get a focus on possibly changing
the kind of structure that we had? What was being done from
within?
Ambassador Kennedy. I only arrived at the U.S. mission to
the United Nations in the fall of 2001. But my preparation for
this, my reading of the very extensive record, indicate that
the U.S. Government made extensive efforts to get the most
teeth into sanctions that it could, and met resistance from
other member states who are unwilling to accept that.
Ms. Watson. I understand how difficult it is when you're
coming in and programs like this have been running. That is the
reason why we were concerned on this committee with our
oversight, and we wanted to see what records, what documents,
documentation, what facts there are held by other departments
and branches. I understand that there were 60 staffers and five
different U.S. agencies who reviewed each of the Oil-for-Food
contracts. If we had that information, then my questions might
be answered.
And I want to thank you for your service, and I want to
thank you for coming here and being on the hot seat. But I
think there should be some others that are on the hot seat so
we can find where we went wrong, where it went wrong.
We know that Saddam Hussein was wrong. But that doesn't
excuse this whole thing. And so we would just like to get to
the bottom of it. I appreciate your service and I thank you so
much for trying to explain what happened before your duties
started. But we are trying to seek truth.
Thank you, Mr. Chairman.
Mr. Shays. Thank you.
Just very briefly, Ambassador, do you feel this story
should come out?
Ambassador Kennedy. Absolutely.
Mr. Shays. Do you feel this story should come out, even if
it embarrasses our allies?
Ambassador Kennedy. Absolutely.
Mr. Shays. Do you believe it should come out, even if it
embarrasses some allies and makes it more difficult to get
their cooperation in Iraq?
Ambassador Kennedy. Absolutely.
Mr. Shays. Thank you. Thank you very much.
We are going to go to our next panel. Thank you.
Our next panel, our last panel, and many hours later, David
Smith, director, Corporate Banking Operations, BNP Paribas;
Peter W.G. Boks, managing director, Saybolt International B.V;
and Andre Pruniaux, senior vice president, Africa and Middle
East, Cotecna Inspection SA.
If you would all stay standing, we will swear you in. If
there is someone else who might respond to a question, I would
like them to be able to be sworn in as well.
So we have David Smith, Peter Boks, and Andre Pruniaux.
Thank you. And we swear in all our witnesses. If you'd raise
your right hands, please.
[Witnesses sworn.]
Mr. Shays. Note for the record, our witnesses have
responded in the affirmative. Gentlemen, thank you so much for
your patience. And also, thank you for your cooperation. You
all have been very cooperative. You all have tried to be
consistent with your obligations that enable us to do our job
as well, and we thank you for that.
David Smith, we are going to have you go first. I'll just
go down and you'll need to bring that mic closer to you. Plese
bring it down a little further. And the lights on means your
mic is on. Do you want to just tap it just to see? Thank you.
So what we'll do is, you have the floor for 5 minutes, and
then we roll it over for another 5 minutes. After 10, I'd ask
you to stop.
Mr. Smith. Thank you Mr. Chairman.
Mr. Shays. Thank you.
STATEMENTS OF DAVID L. SMITH, DIRECTOR, CORPORATE BANKING
OPERATIONS, BNP PARIBAS; PETER W.G. BOKS, MANAGING DIRECTOR,
SAYBOLT INTERNATIONAL B.V; AND ANDRE E. PRUNIAUX, SENIOR VICE
PRESIDENT, AFRICA AND MIDDLE EAST, COTECNA INSPECTION S.A
Mr. Smith. Chairman Shays, members of the committee, I
request that my written statement be submitted for the record.
Mr. Shays. And it will, without objection.
Mr. Smith. Thank you. Before responding to any particular
inquiries members of this committee may have, I would like to
make a brief statement which summarizes the key points of my
written statement to the committee.
My name is David Smith. Since September 2001, I have been
employed by BNP Paribas, North America, where I serve as
director of Corporate Banking Operations. In that capacity I
have been responsible for overseeing the Bank's letter-of-
credit processing operations, including those operations as
they pertain to the Bank's agreement to provide banking
services to the United Nations for the U.N. Oil-for-Food
Program.
First, as to the selection of BNP, according to a report of
the General Secretary dated November 25, 1996, the selection
process for the holder of the U.N. Iraq account began with the
preparation of, ``a working list of major banks in all parts of
the world with the necessary credit quality ratings, strong
capital positions, and capabilities to provide the services
necessary for the account.''
The report indicates that a short list of those banks,
including BNP, were asked in June 1996 to submit written
proposals to the U.N. for the provision of the required banking
services. The U.N.'s request for proposals sought certain
pricing information from each bank and inquired into each
bank's capabilities to handle the business of the program's
size.
The Bank understands that four major international banks
submitted formal offers in response to the RFP. The General
Secretary reported in 1996 that, ``After careful consideration
of the proposals received,'' BNP was selected on June 18, 1996
to be the holder of the U.N. Iraq account. Accordingly, a
banking services agreement was executed by BNP and the United
Nations after several weeks of negotiations.
The Bank believes that several factors resulted in BNP's
selection by the United Nations, including the following: one,
its large international presence; two, its significant position
in the commodities trade finance business; three, its high
credit rating; four, its strong capital position; five, its
willingness to assume the credit risk of other banks by
confirming the oil letters of credit to be issued for the
benefit of the program; six, its competitive pricing; and
seven, its substantial trade finance support operation, located
in New York City, where the U.N. is headquartered.
Second, as to the services the Bank has provided to the
United Nations, the role of the Bank under the banking services
agreement has consisted of delivering nondiscretionary banking
services to its customer, the United Nations. These services
have related to both the oil and the humanitarian sides of the
program. Generally on the oil side of the program, those
services have involved the confirmation of letters of credit
issued on behalf of U.N.-approved purchases of Iraq oil. Those
letters of credit were issued by various banks for the benefit
of the U.N. Iraq account.
When a bank confirms a letter of credit, it takes upon
itself the obligation to pay the beneficiary, here the U.N. The
Bank's confirmation of the oil letters of credit was done at
the request of the U.N. It was performed in accordance with
standard banking practices, letters of credit practices, with
several additional controls imposed by the United Nations, as
described in my written statement.
On the humanitarian side of the program, the Bank's
services have involved the issuance of letters of credit at the
direction of the U.N. for the benefit of U.N.-approved
suppliers of goods to Iraq. Those letters of credit provided
the necessary assurance to suppliers that they would receive
payment for their goods once they had been delivered to Iraq in
accordance with their contractual obligations.
The processing by the Bank was performed in accordance with
standard letter-of-credit practice, with a number of additional
controls, again as detailed in my written statement.
Significantly, the Bank has had no discretion over how
money has been spent or invested under the program. The Bank
did not select the buyers of the oil, sellers of the goods, or
the goods to be supplied.
Third, as to the Bank's legal and ethical obligations, the
Banks provision of services pursuant to the banking services
agreement was licensed by the U.S. Department of Treasury,
Office of Foreign Asset Control [OFAC]. Moreover, all services
provided by the Bank under the agreement were performed within
a framework designed by the U.N. under the agreement, the
United Nations, a universally known international organization
of sovereign states, was the Bank's sole customer.
As I have stated, all aspects of the transaction under the
program, including the purchases of oil and the supplies of
goods, as well as the nature, amount, and pricing of goods
involved, were approved by the U.N. All letters of credit
confirmed or issued by the Bank under the banking services
agreement were governed by the Uniform Customs and Practices
for Documentary Credits, a set of detailed procedures for
letters of credit published by the International Chamber of
Commerce.
Program transactions were also subject to U.S. regulatory
requirements, including in particular the screening of any
program participants against lists of specially designated
nationals published by OFAC. There also were, as described in
my written statement, a number of additional controls imposed
by the U.N. that were unique to the program.
Notably, an article in Saturday's New York Times purports
to quote from a briefing paper provided to members of this
committee that suggests that the Bank was remiss because it
``never initiated a review of the program or the reputation of
those involved.''
Any such suggestion misunderstands the nature of the Bank's
role under its banking services agreement with the U.N. Under
that agreement, the U.N. was the Bank's sole customer. The Bank
reasonably relied upon the sanctions committee of the Security
Council for its review and approval of both purchases of oil
and the suppliers of goods. The Bank provided specified
nondiscretionary services to the U.N. under the banking
services agreement, and it was not the Bank's place to
substitute its judgment for that of the sanctions committee
regarding who would be approved by the U.N. to participate in
the program.
Fourth, as to the unique challenges of the program, from a
banking perspective the program has represented an enormously
challenging and unique undertaking involving the process of
over 23,000 letters of credit and the disbursement of billions
of dollars for investment purposes at the direction of the U.N.
Those investments have generated in excess of $2.7 billion for
the benefit of the program.
With the exception of a temporary backlog in processing of
humanitarian letters of credit in mid-2000, the Bank believes
that it has done a good job in handling the highly demanding
banking assignment under a program of unprecedented scope and
magnitude.
Finally, as to the design of the program, the Bank believes
that the use of letters of credit provided the correct banking
framework for the program. Although outside the scope of our
responsibilities it appears, with the benefit of hindsight,
that the program might have been better structured in other
respects to minimize the risk of abuse. In this regard, a well-
managed competitive bidding process, both for the purchase of
oil and for the sale of goods, might have been substituted for
what was essentially a sole-source procurement process. This
would have eliminated the Government of Iraq in the selection
of prospective counterparties for U.N. approved Oil-for-Food
transactions, and would have provided greater transparency
regarding program participants. It might also have reduced the
possibility that the program might not always have received the
most favorable pricing.
On behalf of BNP Paribas, I thank the committee for this
opportunity to provide this statement. I would be happy to
respond to any questions members of the committee may have.
Mr. Shays. Thank you, Mr. Smith.
[The prepared statement of Mr. Smith follows:]
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Mr. Shays. Mr. Boks.
Mr. Boks. Mr. Chairman and distinguished members of the
subcommittee, my name is Peter Boks. I am an executive of
Saybolt International which is headquartered in The
Netherlands, just outside of Rotterdam. Thank you for inviting
me to discuss with the subcommittee today the role of Saybolt
International in the administration of the United Nations Oil-
for-Food Program. Having submitted a more complete statement
for the record, I will discuss my brief oral remarks on our
principal responsibilities; namely, the monitoring of oil
exports under the Oil-for-Food Program.
Mr. Chairman, please bear with me that English is not my
native language. So excuse me if things are unclear.
Mr. Shays. Let me assure you that we hear you very well,
and we appreciate you are speaking in English.
Mr. Boks. Thank you. Saybolt won its contract with the
United Nations in 1996 through a competitive bid process. Under
that contract and multiple extensions, Saybolt deployed teams
of inspectors selected on the basis of their prior experience
in the industry. Oil inspectors were screened by Saybolt,
approved by the United Nations, trained and briefed for this
assignment and required to certify compliance with Saybolt's
code of conduct.
Under its contract with the United Nations, Saybolt's
responsibility was to monitor the quality and quantity of oil
exports from the two authorized Oil-for-Food export points, the
offshore platform in Al-Bakr and the port of Ceyhan in Turkey,
along with the remote monitoring station on the Iraq-Turkey
pipeline near Zakho, close to the northern border with Turkey.
The monitoring procedures follow: First, the United Nations
oil overseers would review and approve contracts and letters of
credit negotiated between the Iraqi oil company SOMO and the
buyers of Iraqi oil. Coordinating through a common data base
shared by Saybolt and the United Nations, Saybolt would monitor
the quantity and quality of oil, pursuant to the approved
contracts at the two authorized export points and report
confirming figures to the United Nations.
Also important were the limits of Saybolt's
responsibilities. Saybolt had no responsibility, for example,
with respect to the underlying contracts which were negotiated
directly between the seller and buyer and reviewed by the
United Nations. Saybolt had no control over the moneys that
were involved in the underlying transactions--that was a matter
for the sellers, buyers, and the United Nations--nor did
Saybolt itself buy or sell Iraqi oil.
Finally, from time to time, we reported irregularities that
we observed to the United Nations or the Multilateral
Interception Force. Saybolt had no responsibility for
monitoring oil exports from any locations other than the three
locations specified in its contract. In performing their
responsibilities, Saybolt inspectors typically operated in
remote locations in inhospitable work environments. Some days,
for example, the isolated Mina Al-Bakr platform was without
electricity or water and sometimes during heat that exceeded
110 degrees. U.N. audits and reports confirmed the harsh
working conditions and risk to personal safety. The entire
program was also characterized by highly charged, political
interests and sensitivities.
The simultaneous operation of the humanitarian Oil-for-Food
Program and a comprehensive U.N.-imposed sanctions regime
created a variety of practical and logistical complications
affecting everything from obtaining visas to paying for basic
necessities.
The job of monitoring authorized oil exports was also made
more challenging by the poor state of the oil industry
infrastructure and the deficiencies in equipment and technology
in Iraq. Even before the program began, Saybolt informed the
United Nations of problems with the metering equipment at each
of the three sites. At Mina Al-Bakr, the Iraqi failure to
install, repair, or calibrate metering equipment meant there
were no counterpart measurements to cross-check against ship
measurements at the point of loading on the Mina Al-Bakr
platform.
In the absence of calibrated metering equipment, Saybolt
used the best alternative techniques accepted and widely used
in the industry. Specifically, in the absence of metering,
inspectors relied on calibration charts, vessel experience
factors, and shipboard measurements to determine the quantity
of oil loaded onto vessels, a methodology that the United
Nations expressly accepted.
Monitoring loadings without access to reliable meters is
accepted industry practice but is less accurate than metering
at loading points. Although falsification of calibration charts
and VEF data is rarely an issue, the possibility exists. To
avoid such a problem, Saybolt originally recommended that the
volume of oil be measured at the foreign point offloadings, as
well as at the loading points of Mina Al-Bakr and Ceyhan. For
whatever reasons, his recommendation was not adopted.
In January 1999 following discussions with the United
Nations, Saybolt began requiring that each master sign a
statement certifying the accuracy of the records provided to
Saybolt. The United Nations was informed of this procedure and
supported its recommendation. Over 7 years, Saybolt inspectors
monitored more than 2,600 loadings involving a total of
approximately 3.4 billion barrels of crude oil. Over that
period of time, very few irregularities occurred. Two instances
of loading excess quantities of oil, the unauthorized topping
off, occurred in 2001, both involving the same vessel, the same
vessel charter. Saybolt promptly investigated these incidents,
made written and personal reports to the United Nations, and
put in place additional safeguards to prevent any similar
abuses in the future. Thereafter, Saybolt encountered no
recurrences of the incidents experienced in 2001.
Looking back on the program and the variety of challenges
it faced, we can now identify the ways that the monitoring of
oil exports under the Oil-for-Food Program might have been
strengthened. These include requiring accurate metering
equipment, the continued presence of at least one U.N. official
at each loading location, incorporating from the outset various
safeguards that Saybolt developed during the course of the
program, and monitoring mechanisms for detecting unauthorized
exports from other than the two U.N.-approved export points.
More broadly, it now appears in hindsight that the ability for
Iraq to contract directly with buyers of oil and sellers of
goods introduced a significant opportunity for abuse. And to
the extent that the member states of the United Nations
disregarded or systematically violated the U.N. embargo against
Iraq, that conduct obviously undercut fundamentally the
objectives of the Oil-for-Food Program which was conceived to
be an exception to the embargo.
Saybolt and its professionals performed a difficult job
under very difficult circumstances in Iraq. While not without
blemishes, the monitoring of oil was done professionally over
an extended period of time. I am happy to discuss that project
with you today and to help extract from their experience any
lessons which may be of value in conducting humanitarian
programs in the future.
Mr. Shays. Thank you, Mr. Boks.
[The prepared statement of Mr. Boks follows:]
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Mr. Shays. Mr. Pruniaux.
Mr. Pruniaux. Mr. Chairman and distinguished members of the
subcommittee, my name is Andre Pruniaux. Since 1998, I have
been employed as Senior Vice President of Cotecna Inspection in
Geneva, Switzerland, which has some 4,000 personnel in over 100
offices around the world. I appreciate the opportunity to
appear before the subcommittee today to clearly establish for
the public record the difficult task of Cotecna as a contractor
of the U.N. Oil-for-Food Program.
Mr. Chairman, my primary duties at Cotecna consisted of
managing operations in Africa and the Middle East as summarized
in my curriculum vitae included in my prepared statement. We
hope to clarify Cotecna's responsibilities and authority under
the Oil-for-Food Program in the United States and the CPA
contracts. The documents we provided to the subcommittee
clearly demonstrate our performance under the contracts has
been fully consistent with our obligations.
Since the inception of its contract in Iraq, Cotecna has
authenticated the arrival of goods in Iraq worth a total of
$29.2 billion, of which no single authentication has been
proven to be erroneous. To fairly judge our performance, you
must first understand what services Cotecna was and was not
contracted to perform under the OFF program. Cotecna was not
hired to perform inspection services in the traditional sense
which would normally entail a broad range of tasks, in support
of full customs inspection services, including, for instance,
price analysis, quantity, quality inspection, and port-of-
origin and/or port-of-destination.
The 1992 request for proposal on which Cotecna was the
successful bidder issued by the U.N. did incorporate broader,
more traditional customs inspection mandates. That contract was
never awarded, however, because the Iraqi Government would not
give its consent. A subsequent contract was awarded in 1996 to
Lloyds Register and included the narrower scope of
responsibility and authority for authentication of goods under
the 986 OFF program. The parameter of this contract were
originally established by the Security Council working with the
U.N. OIP and Lloyd's. In 1998 Cotecna presented the strongest
technical proposal at the lowest price, and on that basis was
awarded the contract succeeding Lloyds.
Importantly, the term ``authentication'' in this context is
unique to the U.N. OIP contract. In the world of customs
inspection services, the term ``authentication'' does not
appear. This reflects the limited role under the contract of
authenticating the arrival of approved and permitted shipments
in Iraq so suppliers could be paid.
Under the narrow scope of the contract, Cotecna played a
limited technical role in verifying that the goods entering
Iraq matched the list of goods authorized for importation, and
in the case of foodstuffs, assessing their fitness for human
consumption. Our prepared testimony includes these details.
Conversely, Cotecna was not involved in selecting the goods
to be imported, establishing the specifications of such
products, selecting the suppliers, negotiating the prices to be
paid, nor designating any sales commissions.
Further, Cotecna was not involved in handling any funds for
the payment for any goods, but only with verifying that items
that had been approved for import were delivered in Iraq.
Mr. Chairman, it is important for this committee to
understand that two types of goods were coming into Iraq under
U.N. authority and approval. The first set of goods entered the
country under the Oil-for-Food Program pursuant to Security
Council Resolution 986. In addition, a separate volume of
goods, valued by some to be worth double that of 986 goods,
were imported under Security Council Resolution 661. These 661
goods were the subject of private contracting, were not
financed by the OFF program and, therefore, Cotecna had no
responsibility or authority to authenticate or inspect them.
Under the contract, Cotecna authenticated the shipments
entering Iraq under the 986 program, and was required to
perform physical examination on up to 10 percent of them, with
the exception of quality control testing of food basket items,
as I have already mentioned. We consistently fulfilled each of
these mandates.
The company was operating in a difficult and challenging
physical and political environment as detailed in part 4 of my
prepared written statement. Relations with the U.N. officials,
the Humanitarian Coordinator for Iraq, the UNOHCI-Baghdad, were
sometimes difficult, because Cotecna was required to report
directly to OIP only, while UNOHCI-Baghdad was assisting
Cotecna activities and inspections for logistics, visas,
transportation authorizations, and complaints from the Iraqi
authorities related to Cotecna inspectors. Also the
relationship with U.N. humanitarian agencies was delicate and a
source of tension because these humanitarian agencies adopted a
more sympathetic attitude toward Iraqi and Kurdish entities.
UNOHCI, for example, presided over monthly coordination
meetings in Baghdad between these humanitarian agencies and
Cotecna. Congestion in the port of Umm Qasr became a very
serious problem, and suppliers began to complain that the
government was refusing to remove containers from the port
unless suppliers paid a fee to the port authority, and the
government continuously sought ways to influence the
authentication and payment process for financial gain.
In direct response to concerns raised by Cotecna to U.N.
OIP, this process stopped and the congestion situation
immediately eased. Iraq frequently exerted pressure on Cotecna
to resolve or retract authentication. Cotecna was directed
under the contract to refer all such matters to U.N. OIP New
York, but this did not alleviate the pressure from the
government, particularly in Umm Qasr.
Mr. Chairman, Cotecna has consistently performed its
limited technical role in the authentication of goods under the
986 OFF Program under difficult physical and political
conditions. In so doing, the company fulfilled its contractual
obligations as established by the U.N. Security Council. There
were problems, and many. The company reported those problems.
We have sought to cooperate with the subcommittee and have
provided documentation of those communications to you.
Mr. Chairman, this concludes my statement. I would be
pleased to answer any questions members of the subcommittee
might have. I would respectfully ask that my full statement be
included in the record along with a letter I sent to you on
October 1 regarding an article that appeared in the New York
Post.
Mr. Shays. Your letter and all of your statements will be
in the record in their entirety. Without objection, that will
happen.
[The prepared statement of Mr. Pruniaux follows:]
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Mr. Shays. Let me start with the counsel to ask some
questions, and then I will have some questions.
Mr. Halloran. Mr. Smith, in describing the factors that you
say led the United Nations to select BNP as the provider of
banking services, you said an established commercial trade
operation in Europe. Did that include facilities for processing
letters of credit of the kind that the program generated?
Mr. Smith. The program in itself was unique. I don't think
that any bank had facilities established to process the type of
business that was created by the program itself. However, BNP
had an existing trade finance operation which dealt with the
issue of letters of credit in New York City.
Mr. Shays. Could you just explain what made it unique?
Mr. Smith. Potentially the size of the program, which was
obviously a little bit unclear at the start of the actual
program, but especially the additional controls that were
included. The confirmations of arrival are unique. As far as I
am aware, they are not used anywhere else as far as letters of
credit are concerned.
Normally a supplier of goods under a letter of credit would
be paid as soon as they presented all of the required documents
under the letter of credit, which is usually at the point they
ship the goods. Under this program, no payment is possible
until the goods have actually arrived in Iraq and been
inspected and confirmed to be in accordance with the contract.
Mr. Halloran. So that complicated the process both in terms
of paper and time?
Mr. Smith. It complicated the process. It gave us an
additional amount of paper that we needed to check against the
shipping documents and the letter of credit.
Mr. Halloran. In that line of business with your client,
the United Nations, when does the Bank get paid, based on what
triggering event?
Mr. Smith. The Bank basically gets paid for the issuance of
the letter of credit. There are some associated fees relating
to pure payments, to SWIFT messages, etc. But the actual fees
charged under the program really related to the issuance of the
letters of credit.
Mr. Halloran. The Oil-for-Food Program was run in phases
designated by the Office of the Iraqi Program?
Mr. Smith. It was run in 6-month phases, yes.
Mr. Halloran. Were there negotiations with the Iraqi
Government and other entities from phase to phase as the
program matured, and how did that change the Bank's operating?
Mr. Smith. As far as the Bank was concerned, the banking
service agreement was basically extended by the United Nations
at each stage during the process. To the best of my knowledge,
during the course of a series of extensions over what
eventually were 13 phases of the program, there were some
changes made to the way the business was conducted.
Mr. Halloran. As the processing or the flow of business
changed, what kind of capacity did the Bank have to discern
trends or novelties in the business? For example, it has been
suggested about phase 8, when Saddam got a little more
sophisticated about oil vouchers as opposed to directly selling
to end users, that the roster of those being paid would have
changed both in quality and quantity, new people and a new
number of people. Would that have been discernible by the Bank
and would it have put a red light on the border anywhere for
any reason?
Mr. Smith. There was certainly an increase in the volume
and the complexity of the business that the Bank was handling
around about phase 8. As far as red flags are concerned, I
would come back to my statement in that the United Nations was
the Bank's customer. The United Nations was approving all of
the counterparties on both the oil and the humanitarian
contracts. In addition to that, I would remind you that all of
this business was screened for OFAC purposes and reviewed
against the various OFAC listings.
Mr. Halloran. With those safeguards in place, the Bank felt
confident that its business was being done according to the
rules. But what can go wrong with a letter of credit? What
would have sent a bell or red light off in a letter-of-credit
transaction?
Mr. Smith. Most of the immediate thoughts that come to mind
regarding that question are purely from an operational point of
view in how we check documents, etc., which would not really be
caused under the program.
Mr. Halloran. If the recipient of the shipment said this is
not the quality or quantity of oil I ordered, and there is a
rejection, the letter of credit is not claimed upon.
Mr. Smith. The letter of credit is a written undertaking
that a payment will be made on the presentation of documents
that are specified within that letter of credit. So a letter of
credit is constructed so that the buyer of the goods ensures
that they have the necessary documents to give them the comfort
that the goods are of the quality they want, of the quantity
they want, and will be delivered in a timely manner.
So, for instance, on the oil that was being lifted from
Iraq, one of the documents that would need to be presented for
payment would be a chemical analysis of the goods or the oil to
prove it was of a specific quality. In addition, bills of
lading confirming the shipment and the quantity of the shipment
would also be presented, so the protection is in the documents
which the Bank is dealing with.
Mr. Halloran. In the course of these transactions, did BNP
have occasion to be in contact with the Central Bank of Iraq?
Mr. Smith. The Bank received the initial requests to issue
letters of credit under the humanitarian program from the
Central Bank of Iraq. Once those requests were received, they
were referred to the United Nations, and the United Nations
would give the approval to issue those letters of credit or
not.
As far as the inspection of the documents before payment is
concerned, there would be no contact with the Central Bank of
Iraq. The Bank would review those documents, check those
documents in the same way that it would under any other
commercial transaction, albeit with the additional documents
and controls that are included in this program, and make a
determination whether a payment should be made. If the Bank was
comfortable that the documents were in order and a payment
should be made, then we would approach the U.N. telling them
that we had good documents and we were proposing to make a
payment. They would confirm that payment.
Mr. Halloran. The Central Bank of Iraq had no say as to who
or how much got paid?
Mr. Smith. That's correct. Once the letter of credit is
issued, it governs the conditions of payment. As long as the
correct documents are presented, payment should follow.
Mr. Halloran. Thank you.
Mr. Pruniaux, describe a little more, if you could, the
distinction that is being made in your testimony between
authentication and inspection. Our perception from both your
testimony, and other documents, is that it was a process that
compared paper to paper, sometimes it did not matter what was
in the truck behind you, and if the documents said the truck
should contain 50 barrels of something, your obligation was
fulfilled and you never got to look in the truck; is that
correct?
Mr. Pruniaux. Authentication is really matching documents.
You know that we were present at four sites. The fifth one was
opened in 2002, but it never really operated. It was at the
border between Iraq and Saudi Arabia. The documents were
ordered by U.N. OIP-New York in such a way it provided very
detailed information on the goods which had been approved and
for which the letters of approval had been issued. So the
suppliers would send the goods, the shipments, to Iraq, and we
would know beforehand that the goods were going to arrive
through the secure transmission of documents coming from the
U.N. OIP addressed to each individual site. No one--let me
phrase it differently.
The information provided to a certain site was not
available to the other sites to keep confidentiality. For
instance, at Trebil where we had most of the traffic, the
trucks would arrive with containers, and they had to stop. The
supplier's and the transporter's duty was to come to us and
tell us, this is the shipment so-and-so, these are the
references, these are all of the documents; and we would look
at all these documents and see that they matched the
information we had received from U.N. OIP.
Mr. Halloran. When they did not match?
Mr. Pruniaux. There were three major reasons. Maybe the
letter of approval had expired because it took more time for
the goods to arrive in Iraq to be presented at the border.
Sometimes--and very often the sites are changed, especially
between Turkey--goods landed in Turkey or Jordan. Very often
there was substitution in sites. Sometimes the documents were
incomplete. That was mostly the case in Umm Qasr. So we would
block in the sense that we would not authenticate, but we had
no authority and no power to prevent the truck from crossing
the border and entering into Iraq. The only thing, nobody would
be paid because we had not authenticated. In such a case we
would refer these problems to the U.N. OIP and it was up to
U.N. OIP to discuss with the supplier and find the reason or
maybe extend the validity of the approval.
Mr. Shays. Did you know what the outcome was when you would
disclose these transactions had taken place? Do you know how
they were resolved? Or once they were passed on to the U.N.
authorities, it kind of left your hands?
Mr. Pruniaux. No, I would not know. We would get
information from U.N. OIP, yes, the approval has been extended,
it was acceptable that the site be changed and the supplier was
requested to provide the missing documents. On that basis, on
that very specific information, requests from U.N. OIP Cotecna
would authenticate by electronic mail--that was in 2002, but
before that it was faxed and signed by the team leader on each
site and it was sent to U.N. OIP so the payment of the supplier
could be processed.
Mr. Halloran. In your testimony you say the Iraqi
ministries complained continuously that the authentication
process favored the supplier, often claiming they had received
substandard goods or delivery shortfalls. Iraq frequently
exerted firm pressure on Cotecna to withhold or retract
authentication. OIP directed Cotecna to refer all such matters
to the U.N. What does that mean?
Mr. Pruniaux. To the U.N. Security Council.
Mr. Halloran. Where did that get you?
Mr. Pruniaux. Maybe I misunderstood.
Mr. Shays. His question is what happened then? What was
achieved by doing that?
Mr. Pruniaux. The Iraqi authorities in Umm Qasr, that is
the place they put us under pressure. The Iraqi authorities
would complain that we were authenticating goods which were
sub-quality. We would not get involved in those discussions, as
long as foodstuffs were fit for human consumption. Now, the
fact that the Iraqis considered goods were substandard or were
not exactly what they had ordered was a matter of commercial
dispute between the supplier and the receiver. In fact, being
in the business, in the profession, we always told everyone
that it is normal practice in this kind of business, in
commercial transactions, to appoint an independent inspection
company to verify that the goods which are being purchased
matched the contract, the detailed contract specifications, and
that was told by the U.N. OIP to the Iraqi authorities to
implement these kinds of procedures.
Mr. Halloran. But they chose not to?
Mr. Pruniaux. They did that occasionally. I would like to
mention, for instance, that one of the things that Cotecna was
forbidden, we were forbidden from acting as a commercial
inspection company providing our services to, of course, the
Iraqi receivers and, of course, the suppliers. So there would
be no conflict of interest between the independent inspection
authentication that we were providing to the U.N. OIP and the
commercial disputes between a receiver and the supplier.
Mr. Halloran. That was a provision in your contract with
the U.N.?
Mr. Pruniaux. Yes.
Mr. Halloran. Your testimony also says that one of the
challenges you faced in executing this contract was that you
had to navigate Cotecna's delicate web of contacts with U.N.'s
Office of Humanitarian Coordinator for Iraq. Could you amplify
on that? There are other references in testimony that
particular office was a problem in terms of executing this
program.
Mr. Pruniaux. I would not say it was a problem. It was a
delicate, diplomatic way of having to coordinate on a daily
basis in Iraq because we had from 54 to 67 inspectors living
and traveling and eating and sleeping in Iraq. You have to
realize also, to get into Iraq you need a visa to enter the
territory, and the visas were provided only at the Embassy of
Iraq in Amman, in Jordan, and if for some reason the visa was
not granted, the inspectors would be stranded and cannot reach
their sites. The only way to get some support to clear visas or
get transportation authorization to travel in Iraq, you needed
a very specific authorization, and that was provided by the
Iraqi authorities. The Iraqi authorities for all of these
problems of logistics and transportation was handled by the
Office of the Humanitarian Coordinator in UNOHCI in Baghdad.
Also and more importantly, a lot of complaints came from
the Iraqis, unjustified and justified, on the behavior of
certain of our inspectors on things which could have happened
on some of the sites which have been reported to the Iraqi
officials, and also complaints on the performance of Cotecna,
especially in Umm Qasr where we were put under extreme pressure
to shorten some of the delays that they were experiencing.
In such case I have to be frank. UNOHCI was adopting a
rather friendly attitude toward the requests from the Iraqi
authorities; and this is what I mean, ``problem'' is maybe not
the right word, but rather a ``delicate.''
Mr. Halloran. Right. Sounds like a problem to me.
You also say that you had to deal with direct pressure from
the Iraqis. What kind of pressure? There is some e-mail traffic
describing pressure to move things through and not be so
careful about things. Where did that pressure come from?
Mr. Pruniaux. From Iraqi officials. We have an example
which I presented in the documents you have received where it
was in 1999 there was a minister of I think of Kuwait, who came
with armored guards to our site in Umm Qasr and told us that we
would not be authorized to authenticate unless the goods had
already been accepted in terms of quality by the Baghdad
laboratories. As we brought in various correspondence which
appear in the documents, the inspectors were very shaken on the
ground. So we issued a formal complaint that came to my
attention in Geneva, and I told the U.N. OIP-New York. But
there was pressure of these kinds of things.
Mr. Halloran. What would have been the problem of Baghdad
checking off on the acceptance of goods?
Mr. Pruniaux. They would have blocked all authentication.
Mr. Halloran. Until they got paid first?
Mr. Pruniaux. Yes, and create a bottleneck so someone would
have to pay to get the goods cleared by financial gains to the
Iraqi officials.
Mr. Halloran. After the Minister of Trade shows up with 20
or more armed guards and intimidates your crew, how was that
demand resolved?
Mr. Pruniaux. Diplomatically or politically I cannot
respond. I can say technically that problem was solved because
that did not occur again. However, as I said before, there was
constant pressure, especially in Umm Qasr, on Cotecna to
authenticate, in a speedy or in a slow way, so the Iraqi
officials could exercise some pressure on the suppliers.
Mr. Halloran. Thank you.
Mr. Boks, there was an allegation in the Wall Street
Journal 2 days ago that in the course of one oil transaction a
Saybolt employee had been bribed to allow a topping-off of the
ship. The company's response was that it had been investigated
before. Do you have anything more to say about that?
Mr. Boks. We have investigated that incident at the time we
learned of the incident which was in October 2001. At that time
we conducted a thorough investigation. We went through the
whole process. We looked at off-loadings. We interviewed the
team leader. We virtually took all of the events and
circumstances and we submitted that report of the investigation
to the United Nations with a briefing also to the 661
committee.
What we have now learned from the article in the Wall
Street Journal actually is for us a new allegation. We had no
knowledge of that before it was published. You can rest assured
that we will investigate this further. We will get to the
bottom of it. Actually, as a matter of fact, our board has
already instructed our general counsel to get a team of lawyers
to investigate this to the bottom.
Mr. Halloran. If you can supply the subcommittee with
whatever product your investigation produces, that would be
helpful.
Mr. Boks. Sure. We will share this with the investigating
commission.
Mr. Halloran. The incident of the Essex, which was detained
and found to have oil loaded in excess of the Oil-for-Food
Program contract, what changes were made in the Saybolt
inspection process and the U.N. inspection process as a result
of that? What confidence do you have that it was effective in
preventing the practice of topping off?
Mr. Boks. That evening I heard we took immediate actions
for temporary reasons to have an inspector sitting 24 hours, 7
days a week, on board a vessel if it was alongside the
terminal. Given the staff levels, that was not something that
we could continue, so we implemented new instructions in terms
of sealing the ship's manifold after the loading had been
completed and the loading arms were disconnected. These seals
would have unique numbers and would be also inserted on the
notification letter. The notification letter was a letter which
we put on board with the U.N.-authorized quantity loaded on
board that specific vessel, actually a procedure that only was
implemented earlier in 2001.
In addition to that, we would check the seals prior to
departure of a vessel because a vessel would not always depart
immediately after it completed its loadings. So before
departing, we would check the integrity of the seals. If not,
we would then remeasure the vessel.
Other instruction was we would look at the draft of the
vessel after its completed loading. Draft is, I would say the
surface of the water and the keel of the vessel. Maximum draft
is, say, 21 meters, so if a vessel would load with less than
that, we would take reference of that and also check it prior
to departure.
Basically we would also look at potential vessels that
would still have space after it had loaded its U.N.-authorized
volume. So if that were the case, special attention would be
required. Those new instructions have been adopted by the 661
committee at some stage.
Mr. Halloran. The calibration of the measuring methods you
describe in your testimony, of the 2,600 loadings, of those,
how many were validated by you based on less than the type of
methods you would have preferred?
Mr. Boks. You mean did we ever?
Mr. Halloran. In your testimony you said you would prefer
to have the calibration and use other indirect methods to
determine the amount of oil.
Mr. Boks. The consideration is as follows. When we first
came to Iraq and we did our fact-finding mission, we came to
the conclusion there were no properly calibrated metering
facilities in place. Actually the border station in Zakho did
not have a metering station so the Iraqis had to cannibalize on
the Syrian pipeline and build it there within a couple of
weeks.
Generally speaking, the metering equipment has never,
during the whole of the Oil-for-Food Program, became on a level
which would be able to be used for fiscalisation purposes. So
all 2,600 loadings have been done by utilizing the methods that
I have described in my statement.
Mr. Halloran. In your experience, what is the potential
margin of error?
Mr. Boks. That is a very good question. Actually what we
did was we made a total comparison of all of the volumes we
lifted from Turkey. In Turkey we had a cross-check possibility
of measuring prior to loading and after loading, and then the
volume could be calculated, derived from those two
measurements. And we did also the ship, applying the vessel
experience factor, and of the 1.3 billion barrels which were
loaded from that port, actually we found a surplus even; a
small surplus of 0.04 percent, which would lead us to believe
that method was applied very accurately, and, I would say, very
professionally.
Mina Al-Bakr was a different story because we could not
cross-check. We did not have any ability. We only could rely on
the ship's figures by applying the vessel experience factor. I
could not give any estimate as to the accuracy of those
figures. Although I would have to say that the percentages
would be probably around maximum 2 percent.
Mr. Halloran. Two percent, OK.
Finally, for all three of you, what kind of oversight did
you get on this contract with the U.N. from the U.N.? Were you
subject to an audit or an inquiry by the Office of Internal
Oversight at the United Nations, and if so, how often and what
was the outcome?
Mr. Smith. The Bank provided daily statements of the U.N.
Iraq account to the United Nations. They also had copies of all
of the letters of credit that we were issuing and the
amendments that were made to those letters of credit and
details of the payments.
From that, I understand that there were internal audits
within the U.N. based on that information. As far as I am
aware, there was never a physical audit of the Bank or the
Bank's premises in our conducting of the business.
Mr. Halloran. But certainly the Bank, through perhaps other
regulatory channels, had lines of business audited that crossed
Oil-for-Food transactions?
Mr. Smith. The Bank in itself had internal audits and
external audits which included the trade finance area that
provided the support to the United Nations. Sorry, my answer
was the United Nations.
Mr. Halloran. Thank you.
Mr. Boks.
Mr. Boks. In terms of audits, from what I know, the U.N.
has audited us three times in total. At least I have seen three
times the report; or let me say in two instances we only got a
requirement to answer a few questions which basically were for
us very easy to answer.
In one instance there was done a full audit report of
which, let us say, there were quite a few comments and we had
to go through them and answer them point by point, which we
obviously did.
Mr. Halloran. Thank you.
Mr. Pruniaux. Because of the nature of our activities, we
had almost 24-hour coordination with the U.N. OIP-New York, and
U.N. OIP would call directly the sites to discuss technical or
management matters on the sites. However, we were audited
several times, maybe every 3 to 6 months. One of the senior
customs officers from the U.N. OIP would go and visit the
sites, with or without the Cotecna contract manager. We had an
organization where we had a contract manager based in Amman and
one working in Geneva working with me. We would go with them or
without them. As a consequence, we would have meetings, regular
meetings in New York every 3 months, and meetings also with the
team leaders in Baghdad or Amman. That was an ongoing exercise
that we conducted several times.
Mr. Halloran. Thank you.
Mr. Shays. I have a number of questions that I would like
to go through. I don't think that they will take us long to
answer. Some of them simply may not be relevant in the end, but
since they are on my mind I want to ask and get them out of my
brain if they were not relevant.
Why were transactions carried out in euros instead of
dollars?
Mr. Smith. A decision was made part way through the program
to change the pricing and the settlement of the oil sales from
U.S. dollars to euros. That decision was made by the Security
Council of the United Nations.
Mr. Shays. So it was the Security Council and not Saddam
Hussein?
Mr. Smith. The decision was made by the Security Council,
sir.
Mr. Shays. What sort of challenges, if any, did this
present?
Mr. Smith. In banking terms, the additional challenges were
minimal. Whatever currency we are dealing with, whether it is
U.S. dollars or Euro's the process is basically the same. The
physical payment process is slightly different. But again, it
is a well-established process.
Mr. Shays. And the charge that your Bank would make would
be the standard charge made on every transaction?
Mr. Smith. Yes. Pricing was agreed based on the
transactions that were being undertaken on behalf of the United
Nations.
Mr. Shays. I am told the bank did not begin an internal
investigation for the Oil-for-Food Program and allegations of
the corruption began to emerge in 2001. One, is that true; and
two, why not?
Mr. Smith. The Bank undertakes regular reviews of the
program. If your question relates to the rumors and the stories
relating to overpricing----
Mr. Shays. They were rumors that turned out to be true.
Mr. Smith. Right. From what the Bank could see from the
details they had from the information that it had, from the
letters of credit and the documents that were presented, there
was no evidence that we could see that substantiated anything
that was happening. We were dealing with documents presented
under a letter of credit which determined what the amount of
the payment was, and the payment was basically made to the
beneficiary or their bankers. Anything that happened outside of
the letter of credit arrangement, obviously, we had no
knowledge of at all.
Mr. Shays. So your company was not really in the field,
this was more papers crossed your desk?
Mr. Smith. We were dealing solely with paperwork, and we
were dealing with it in Manhattan, in New York City.
Mr. Shays. The bottom line is when there were rumors that
ultimately turned out to be true, your bank pretty much decided
that there was not sufficient knowledge to have you conduct
your own internal investigation?
Mr. Smith. We would certainly from an operational point of
view look at whatever rumors were going around. Indeed, quite
often we would discuss them at what were reasonably frequent
operational communication meetings with the U.N. treasury, so I
am aware that the U.N. was also aware of those rumors. At the
end of the day, it was the Security Council that were
sanctioning the various transactions.
Mr. Shays. Did you have a sense, or lack thereof, of
Saybolt and Cotecna's ability to verify transactions?
Mr. Smith. We were obviously not on the ground in Iraq, so
we did not see their operations at all. We were being provided
with certificates that were required under the letters of
credit. As far as the Cotecna certificates were concerned, they
came to us directly from the United Nations, they did not come
through any direct route. Again, the Saybolt inspections, all
of the documentation for the payment of an LC relating to an
oil shipment were presented to us by the United Nations.
Mr. Shays. Mr. Boks, do you have any reaction, or did you
have any reaction to the description in the Amman newspaper
that said there was a Netherland company of SyBolt, S-Y, and
then capital B-O-L-T, as receiving $3 million in oil? Did that
get your attention?
Mr. Boks. Sure. We looked at that. We were puzzled that our
name appeared on that list because we had not received any
allocation. That also would have been very unusual. I can say
Saybolt did not buy or sell oil or vouchers.
Mr. Shays. Being one in that list of 269, it would make us
have to question some of the others on that list. In the Essex
incident which was the illegal topping-off of oil, how were the
Iraqis punished or censored for this obvious illegality?
Mr. Boks. I'm sorry, I can't answer that question because
that is beyond our mandate.
Mr. Shays. So you don't know?
Mr. Boks. I don't know.
Mr. Shays. Your mandate, you basically reported the
incident?
Mr. Boks. Well, what happened is a letter was sent by the
captain of that vessel with corresponding documents to the
United Nations clearly stipulating what happened during the
event, and actually said this all happened after the U.N.
inspectors left the vessel, after they had completed.
Mr. Shays. How did you respond?
Mr. Boks. When we received that letter, we took immediate
action. We changed immediately the working procedures and
introduced the seals.
Mr. Shays. Could you describe the Clovely incident?
Mr. Boks. The Clovely incident was of a different
magnitude. This vessel was nominated to load in February 2002,
and when it arrived alongside the terminal, it was very close
to the expiration of the letter of credit.
Mr. Shays. I have no sense how long a letter of credit
lasts.
Mr. Boks. It was just a matter of days.
Mr. Shays. Letters of credit give you a window of how much?
Mr. Smith. It depends on the individual letter of credit.
Normally the oil letters of credit--and they varied--but
normally it would be a period of 4 to 6 weeks.
Mr. Shays. Thank you.
Mr. Boks.
Mr. Boks. When the vessel arrived, we noticed, because we
kept track and record of the expiration date of each individual
letter of credit so we would make sure that the completion of
the vessel would fall into that window; otherwise there would
be problems by, I would say, drawing on the letter of credit to
get payment for the oil lifting.
So what we did was basically we instructed our team leader
to notify SOMO of this event, and that loading would not be
started until we had received from the U.N. oil overseers a
revised date or window for the letter of credit.
That took obviously some time, and irrespective of that,
the loading master or the Iraqi people on the platform decided
still irrespective of that problem to start loading the vessel.
And luckily we were able to get the letter of credit arranged
prior to the departure of the vessel. But on itself it was
clearly, I would say, an abuse.
Mr. Shays. This is for both Saybolt and Cotecna. How did
the various U.N. offices that you work with coordinate their
assistance and responses to your needs?
Mr. Pruniaux. I'm sorry?
Mr. Shays. Both of you have complained about confusion
within the United Nations, sometimes a lack of cooperation from
the U.N. Both of you have said that. I want to know how the
various U.N. offices that you worked with coordinated their
interaction with you. Let me ask you this way: How many
different parts of the U.N. did you need to interact with?
Mr. Pruniaux. On a daily basis and for technical matters,
operational matters, it was only the U.N. OIP. However, when
you negotiate a contract, or if you want to modify the content
of the contracts----
Mr. Shays. You're talking about your own contract?
Mr. Pruniaux. Yes. You have to deal with a completely
different department or entities at the U.N. One of them is the
Procurement Department, and, in fact, since I negotiated and I
signed two contracts and several amendments, all the technical
work was done with U.N. OIP. But all the rest, the negotiations
on the financial conditions, that was done with the Procurement
Department, and sometimes there was a lack of coordination
between the two departments, which made it difficult for a
company like Cotecna to fully and properly negotiate. And on
top of that there was the Office of Legal Affairs.
Mr. Shays. What affairs?
Mr. Pruniaux. Office of Legal Affairs.
Mr. Shays. Legal Affairs.
Mr. Pruniaux. Yes, which was a very powerful department
which included several very tough conditions, administrative
contractual conditions, in our contracts. So, in fact, to
operate under a contract, we had to work with U.N. OIP, but to
implement the contract, we had to deal with three separate
entities. That was in New York.
Mr. Shays. Yes. Would that describe the same challenge for
you, Mr. Boks?
Mr. Boks. To a certain extent I underlined that we had
similar problems with procurement. If our contract was up for
renewal, you have--basically when they would not continue it,
obviously you would need to have that information prior to the
expiration of the contract. But sometimes the amendment was
coming after the expiration date, which gave sometimes some
problems with insurers, because obviously in Iraq, if you want
to ensure yourself, then you need to make sure that there were
reasons to be there in a certain country.
With OIP I must say I haven't had any major difficulties
other than that we have issues where we asked advice after
irregularities were noted, and it took sometimes quite some
time. The other contact points we had was with the U.N.
overseers, with whom we basically on a daily basis had contact
concerning the oil export, and here and there obviously delays
were observed, but not to the extent that it was an unworkable
situation.
Mr. Shays. Both of you lacked power, and you lacked
personnel. In other words, there are just certain things you
couldn't tell the Iraqis to do. Did you try to get power, and
did you have your contracts revised so that you could hire more
people to do the job you needed to do? Mr. Boks.
Mr. Boks. Shall I start? The staffing levels, the staffing
levels in the oil program have to a certain extent always been
sufficient. Where we faced major difficulties was in monitoring
the spare parts and equipment, which were also purchased under
the Oil-for-Food Program. When we started, we started with one
inspector, very modest, because spare parts were ordered but
came.
Mr. Shays. You're talking about parts for the oil industry
itself.
Mr. Boks. Yes. Perhaps I should elaborate a bit on that.
In 1998, the Secretary General had been to Iraq, and a
proposal was made to change the cap of dollars that could be
generated through a phase would be going up to five----
Mr. Shays. Greater production.
Mr. Boks. Exactly. So at the same time, the oil prices were
very low, and production was very low, so Iraq was not able to
come up to those proceeds and to come up to that cap. And then
the Secretary General appointed a group of experts to go to
Iraq and, in consultation with the Government of Iraq, try to
find ways of increasing production. We were that group of
experts. And one of the conclusions as the industry was in an
amendable state is that spare parts were needed and equipment
was needed to bring the production up to the levels required.
And for that purpose, the Security Council decided that they
would allow Iraq to purchase spare parts and equipment, as long
as there was a monitoring system that would keep track that
those spare parts would also be used for their intended
purpose.
Mr. Shays. And so that's the area where you could have used
more people.
Mr. Boks. Absolutely.
Mr. Shays. And did you request more people?
Mr. Boks. Yes. That was on an ongoing basis because we were
facing also difficulties in terms of the fact that the
Government of Iraq insisted that our staff would be deployed
only in Baghdad, and that we had to travel throughout the
country to check all those sites, and we only had, let's say,
at the top level, six, seven people.
Mr. Shays. So the bottom line is you couldn't do the job
properly with the staff you had.
Mr. Boks. Well, we had to prioritize.
Mr. Shays. OK. Did this mean that you then had to take
people from one part of your program to put it in the other
part, spare parts? Did you have to kind of cannibalize your
program?
Mr. Boks. Given the constraints in traveling, we have used
mainly in the beginning some staff from Zakho to do in the
northern part of Iraq also some checks on spare parts and
equipment for a very short period of time, because his
traveling was difficult as we were staying in a Kurdish area,
so it was difficult to travel around.
Mr. Shays. Let me ask you, Mr. Pruniaux, the whole issue of
the lack of power, which you have described, and the lack of
personnel, were both of these a serious problem at various
times or not?
Mr. Pruniaux. Mr. Chairman, respectfully, it was not really
a question of having more power. The specifications of our
mandate were clear enough for the authentication. There was no
need to get further--in my opinion, further power, physical
power, to implement and to do the work that we are doing on the
sites.
Mr. Shays. Yes, sir.
Mr. Pruniaux. However, sometimes because of the
fluctuations in the volume of goods entering Iraq, or the fact
that it was that the transporters were moving from one site to
the other, made the work at certain sites more difficult,
because all of a sudden we would have almost thousands of
trucks arriving at Trebil, which was the border between Jordan
and Iraq, or--and especially Umm Qasr, we would have an
accumulation of ships and loading and containers being stored
in the port. In such a case we would immediately try to ask the
U.N. OIP permission to move staff between sites.
In that sense we did not have the power to move at our own
will an inspector from one site to the other. The contract
specified that we were requested to put a certain number of
permanent inspectors on a daily basis per site, let's say 12 in
Trebil. So if you want to move that and do that, you are in
contradiction with the obligations of the contract. So we had
to ask permission. And to move an inspector from one place to
the other in Iraq could take a couple of days, so we would rush
people to Umm Qasr because there was an accumulation of volume
in Umm Qasr.
I must say that in order to have between 54 and 67
permanent inspectors in Iraq, Cotecna had to hire up to 95
permanent inspectors because of the rotation and those that are
sick or going on vacation and so on. And this would be
illustrated by the statistics that are available at U.N. We had
more, always more mandates of inspectors especially in places
like Umm Qasr. For instance, we were requested to have between
17 and 22 permanent inspectors in Umm Qasr, but we would have
always 25, 26 all paid by Cotecna.
Mr. Shays. So sometimes you simply didn't have enough
people.
Mr. Pruniaux. Yes.
Mr. Shays. But was the solution to get more, and did you
request more, and did the U.N. say no or yes?
Mr. Pruniaux. It was a question of the decisions and
convincing the U.N. OIP that it was not to increase our
invoice, but we were generally asking for more inspectors on
the sites.
Mr. Shays. The bottom line is you don't have to worry about
the U.N. making money off of this. I mean, their 3 percent, I'm
assuming, helped pay your costs; is that right? Does anyone
know? In other words, who paid you?
Mr. Pruniaux. The U.N.
Mr. Shays. And they took a fee for----
Mr. Pruniaux. From the 2.2 percent.
Mr. Shays. Right. There is nothing that we have seen so far
that makes us think that they didn't cover their cost plus; in
other words, they made money off of this.
Would you say the U.N. sided more with your side when there
was a dispute with the Iraqis or the Iraqis? Did they tend to
dismiss--and I am asking both of you this. This isn't a trick
question. At the end of the day, did you often feel that you
lost more arguments with the United Nations, they just more or
less sided with the Iraqis, or did they more or less side with
you? I am asking both of you. Do you understand the question?
Mr. Boks. Would you ask it----
Mr. Shays. In other words, when you had a dispute with some
transaction, and you contacted the U.N. officials with some
disappointment, did they tend more to dismiss it and just say,
you know, don't worry about it, or did they take your complaint
very seriously and try to deal with it?
Mr. Pruniaux. As far as Cotecna is concerned, they took it
very seriously, very seriously, because they had the permanent
missions to the U.N. from all the countries exporting to Iraq
and back, plus they had the suppliers coming there and so on.
And there was until 2002 until there was----
Mr. Shays. Well, taking it seriously means they paid
attention to. It doesn't mean they took your position though. I
mean, in other words, they realized they had something they had
to deal with, so they dealt with it seriously. I don't want to
put words in your mouth. Did they basically say you all were
right, and they were wrong, and what was your feeling?
Mr. Pruniaux. Ultimately somebody had to make a decision,
and they told us to do the job with the number of people that
you have, and that's it. So we tried to work under these
conditions.
Mr. Shays. Mr. Boks.
Mr. Boks. And in terms of disputes, the U.N. would take it
serious if--we have hardly had any disputes, but we have had
loadings where the off-takers were dissatisfied for one or
another reason. And I must say that OIP did try to come to a
solution; not always, I would say, in a quick way, but at the
end of the day, they always tried to solve and to assist.
Mr. Shays. The number that is thrown out in these two sides
of the equation, the Oil-for-Food Program suspected that Saddam
basically took out $4.4 billion, and the smuggling, which we
looked at the numbers being more like $5.7 billion. Did your
inspectors ever identify or observe any smuggling?
Mr. Boks. Although we had not the authority to look for
smuggling, and we also have to realize that our inspectors were
at very remote locations, we have----
Mr. Shays. In other words, there were a lot of sites were
you not at?
Mr. Boks. Absolutely. More than that we were. But we have--
--
Mr. Shays. There were more sites that you weren't at than
you were at.
Mr. Boks. Absolutely.
Mr. Shays. OK. Is that true for you, Mr. Pruniaux, as well?
Mr. Pruniaux. Well, we operated on the four or five sites.
As I explained before, we were told that the goods were
presented to us. But there was a permanent flow of goods
entering into Iraq which had nothing do with the Oil-for-Food
Program. And I visited Iraq several times, Mr. Chairman, and it
could be--it was easy to see that, you know, visiting Baghdad
there was plenty of goods which shouldn't have been on the open
market.
Mr. Shays. OK. So in observing smuggling, if you saw it,
did you report it, or did you figure that wasn't your
responsibility?
Mr. Boks. Well, basically I can say that we have had
instances that I felt that we had to report it, and I realized
that was outside our mandate, but still felt that it had to be
brought to the attention.
Mr. Shays. Right. Mr. Pruniaux, tell me the response to
that question.
Mr. Pruniaux. When you see goods entering Iraq outside of
the Oil-for-Food Program, you do not know if these are the 661
goods or if these are smuggled. These were entirely left to the
authority of the Iraqi Customs to check these goods entering
Iraq. No, we would not report, because we did not know what
kind of goods these were.
Mr. Shays. What I see the difference is that in the Oil-
for-Food Program, the oil part of the transaction, it seems to
me, is a little easier to have policed. But if a ship came up
and loaded up, that was something that you would simply step
in. I mean, you weren't going to allow that kind of smuggling,
correct?
Mr. Boks. Well, it wasn't always ships, but at some states
we also----
Mr. Shays. It could be a truck.
Mr. Boks. We learned obviously there was traffic to Jordan,
although that was more or less of an acceptable phenomena, and
we have reported in our fact-finding missions that volumes were
estimated at 80,000 barrels a day. But we also have seen the
fact that had been used in early 2003, and we reported that to
both the Multilateral Interception Force as well as the United
Nations.
Mr. Shays. So there would be some ships, though, that you
would not have inspected, correct?
Mr. Boks. Sure. But if they were loaded at a different
terminal, we would not have staff available to do that.
Mr. Shays. I mean, you know, that's kind of significant,
how many terminals were you at versus how many terminals exist.
Mr. Boks. Well, you had not only terminals. We have to make
a distinction here. You have the pipeline to Syria. You have
trucks to Turkey, trucks to Jordan. You had vessels in the
Arabian Gulf, which were loaded at the Shatt al-Arab, which
basically--and then we had also a terminal 10 kilometers north
of Mina Al-Bakr called Khor al-Amaya. Those were, I would say,
the points that activity has been observed, not by us, but by
others.
Mr. Shays. Why didn't Cotecna operate inspectionsites in
neighboring countries as Saybolt did? Let me say it again.
Saybolt had inspectionsites in neighboring countries; is that
correct, Mr. Boks?
Mr. Boks. We had one inspectionsite in Turkey.
Mr. Shays. Right. And why were you in Turkey?
Mr. Boks. Well, as a matter of fact, Iraq had from the
beginning onwards two export points. One in the south we talked
about. But the crude oil which was produced in the north was
transshipped through the Iraq-Turkey pipeline to Ceyhan. And in
Ceyhan there was a terminal, there is a terminal where that
crude oil is stored and loaded subsequently in vessels which
then proceed through the Mediterranean.
Mr. Shays. Now, why wouldn't you have been in Syria then?
If you were in Turkey, why wouldn't you have been in Syria?
Mr. Boks. Well, that's an interesting question. I can't
answer that. That is not up to me. It's beyond----
Mr. Shays. No. I understand it's not up to you, but the
same logic that would apply that you should be in Turkey would
apply, correct, that you should be in Syria as well, correct?
Mr. Boks. Correct. We discussed that also at some states
with OIP, that whether there could be coming a mandate to
inspect also the Syrian part. But it was obviously up to the
Security Council.
Mr. Shays. And their response was?
Mr. Boks. Well, again, that there was no mandate. Obviously
Iraq has subsequently said that they were testing the pipeline.
Mr. Shays. Well, I mean, that's absurd. I mean, what we are
basically saying is that there was a very viable pipeline
through Syria, very viable pipeline through Turkey. We were
inspecting the pipeline through Turkey, and we were not
inspecting the pipeline through Syria. And I just would like to
have a sense of why. They had to give you some answer.
Mr. Boks. It is an interesting subject. But having said
that, if we would not have the authority, we couldn't do it,
and the authority had to come from the Council.
Mr. Shays. Let me just say this to you. You're cleared of
all responsibility, so you can relax. But what you're doing is
you're educating the subcommittee. I want to know what they
would have said. I mean, it is a rather porous system that
would--I mean, I have wondered how the smuggling could happen,
and I didn't realize that we made it so easy. You must have had
just general conversations with U.N. officials. Did they give
you a logical reason as to why we wouldn't want you also to be
in Syria?
Mr. Boks. What I heard is that it has been discussed also
merely during meetings of the 661 committee, and there was no
agreement reached as to how to proceed on that.
Mr. Shays. An agreement required a unanimous consent. It's
kind of like the Senate in Washington, which doesn't give me
any comfort.
We're almost done here, gentlemen. And thank you very much.
How often, Mr. Pruniaux, did goods avoid or ignore the
authentication or inspection process? How often did you
actually inspect goods? I get the feeling, given your mandate,
given your personnel, that when ships lined up, when trucks
lined up, you were more inspecting the paperwork than actually
opening up the containers.
Mr. Pruniaux. Yes. It mattered to match the documents and
to authenticate. There are two things in your question.
Mr. Shays. No, that is your mandate. The mandate was to
match the papers, not verify that was what was in the container
verified the papers.
Mr. Pruniaux. It was left to our appreciation as a
professional inspection company to inspect, which means to
open, for instance, the containers, or to open the trucks,
talking of the land border sites. Now, in such a case, normal
practice is about 2 percent, sometimes 5, 6 percent, 5, 6
percent. What we did was on an average basis was about 10
percent of the number of trucks or containers being presented
to us were opened, and I have provided some pictures to
illustrate this.
Mr. Shays. But candidly, when there was the queuing up and
a backlog, there was more pressure on you.
Mr. Pruniaux. Then the trucks would wait. No.
Mr. Shays. The trucks would wait.
Mr. Pruniaux. No. The trucks would wait. The drivers are
educated. I mean, patience is a virtue in the Middle East, and
they would just wait at the border.
Mr. Shays. Patience is a virtue. So can I infer from that
when there was pressure to--a backlog, that did not impact
your--quality of the work.
Mr. Pruniaux. No.
Mr. Shays. Well, here's the general feeling I get from your
testimony, and I want you to tell me whether you agree or
disagree. Mr. Smith, I get the sense that BNP basically
believed--and I'm not passing judgment on this, I'm just saying
what I believe--that your responsibility was to check
documents. You were basically Iraq's bank selected by the
United Nations, correct?
Mr. Smith. We were the U.N.'s bank, in our opinion,
maintaining an account for the United Nations, which was styled
the Iraq account.
Mr. Shays. OK. And I'm happy you're correcting me. You were
the U.N.'s bank for Iraq, for Iraqi transactions.
Mr. Smith. That's right.
Mr. Shays. Dollars came in from the sale of oil, and
dollars flowed out for the purchase of commodities, and that
your responsibility was to make sure that--and you were giving
letters of credit to make sure that this would all happen. But
ultimately, your responsibility was to make sure that the
paperwork matched. Is that a fair assessment of what I've heard
you say?
Mr. Smith. Our responsibility was to ensure that all of the
paperwork was in accordance with the letters of credit before
we made any payments.
The one additional point I would add in there, that not all
of the funds that were received for the sale of the oil were
retained at BNP Paribas. A minimum of 41 percent, as I
explained in my opening statement, was transferred away to
another bank, the U.N.'s main bank, Chase Manhattan, because
BNP Paribas was only involved in the part of the humanitarian
program that affected the central and southern provinces of
Iraq.
Mr. Shays. Oh, the Kurdish area was not.
Mr. Smith. The Kurdish area was within the funds that we
moved to Chase Manhattan.
Mr. Shays. OK. As long as your paperwork matched, then the
transactions took place.
Mr. Smith. Yes. Basically we were making payment against
the letter of credits that we had issued on the U.N.'s behalf.
Mr. Shays. OK. And with you, Mr. Boks, and you, Mr.
Pruniaux, what I sense is a different challenge. With you, Mr.
Pruniaux, you had lots of different commodities to check. You
had ports, plus you four transaction points there. You were
inspecting trucks, you were inspecting ships, but you were
primarily processing paper. You weren't taking a good look at
every--you were not able to verify whether or not the paperwork
matched what was actually potentially in a ship or in a truck;
is that correct?
Mr. Pruniaux. We were able to do that. Sometimes, as I
mentioned before, there were pressures because of the volumes
or for outside reasons, like the Iraqis trying to put pressure
on us. But, no, we had IT technicians. The operations that we
carried was a combination of physical inspections, as I said,
10 percent or systematic sampling of foodstuffs.
Mr. Shays. It was sampling of the cargo. It was a sample of
it.
Mr. Pruniaux. Of the food basket only, and for which we had
to do 100 percent laboratory analysis. But it was a
combination, as I said, of physical inspections, matching
documents, and receiving and keying data and processing these
data on these documents and sending them to New York. So the
sites were busy 24 hours per day.
Mr. Shays. But your testimony before the subcommittee was
you didn't have enough people to do your job.
Mr. Pruniaux. On a case-by-case basis, not on a permanent
basis. And that was especially, as I mentioned in my
testimony--it was specially hard in 2001. And as a request
there was an increase, I believe, when we were operating in Umm
Qasr at--when there was this peak at the end of 2002, 2001, at
the beginning of 2001, we had the total of 62--no, 57 permanent
inspectors. And that was the following contract which was won
again by us covered additional five inspectors for Umm Qasr.
Mr. Shays. In both cases, neither of you were at all the
sites that you needed to be in order to see all transactions,
which enabled smuggling to take place.
Mr. Pruniaux. That was not our duty.
Mr. Shays. I'm not saying it's your duty. I'm just saying
that you were not at all the potential sites of transaction,
either for oil or for commodities; is that correct?
Mr. Pruniaux. All the 986, all the Oil-for-Food
transactions across the border, and we all authenticated them.
Mr. Shays. What's that?
Mr. Pruniaux. All transactions under the Oil-for-Food
Program crossed the border. Those which crossed the border and
we authenticated them.
Mr. Shays. Right.
Mr. Pruniaux. There was nothing else for us to do but just
to look for the----
Mr. Shays. You only looked for the Oil-for-Food
transactions.
Mr. Pruniaux. Yes. Absolutely.
Mr. Shays. All the other transactions you did not look at.
Mr. Pruniaux. No. We did not know.
Mr. Shays. And that's the case with you, Mr. Boks?
Mr. Boks. That's correct. We were at the authorized export
points, and, yes, that was about it.
Mr. Shays. I'm sorry to keep you a little longer, but I
just need to ask you this one other area. When he undersold his
oil, did you have any responsibilities to deal with that issue?
In other words, were there questions raised when he would sell
oil for below market price because the U.N. approved it, that
was good enough? In other words, I mean, any thinking person
would wonder why would he undersell for oil. Did that raise
questions in your mind? He undersold his oil. He sold it for a
price below market.
Mr. Boks. Well, obviously we didn't have anything to do
with the transfers of money. Pricing was not----
Mr. Shays. A factor. You just looked at buying. When he
offered to pay for commodities, you didn't look at pricing
either.
Mr. Pruniaux. No, not at all.
Mr. Shays. OK. Let me conclude by asking you, each of you,
which is the weakness of the program? What was the greatest
weakness of the program? Tell me, each of you, what you think
the greatest weakness in the program from your perspective? I
will start with you, Mr. Smith. If you were designing the
program, what would you have designed differently to make sure
there weren't the rip-offs that we know took place?
Mr. Smith. As I said in my opening statement, from a
banking perspective, I think the structure was right. From the
program as a whole, more control was required over the
procurement process and the pricing process.
Mr. Shays. Mr. Boks.
Mr. Boks. Yes. That is something I can't comment on, but I
would say that the unauthorized export points, Syria came on
line obviously in a much later stage than the inception of the
programsm. But I think that is obviously a shame that it
happened.
Mr. Shays. Thank you.
Mr. Pruniaux.
Mr. Pruniaux. Well, Cotecna has contracts worldwide for the
control of borders and especially provide services to the
Customs of various countries in the world. When I say provide,
it means really sometimes we replace the Customs or we control
the Customs.
Now, the Oil-for-Food Program and the authentication was
something totally different, as I mentioned at the very
beginning. If a comprehensive program had been designed even
for the Oil-for-Food Program, it should have covered or it
could have covered the various sectors of a complete control of
imports, which is the price verification, the quality, quantity
and so on. But that was not written. That was not requested in
our mandate.
Mr. Shays. You all have been extraordinarily patient, and I
think you have changed your schedules, and you have had to stay
later than even I thought would happen. And you have been very
cooperative with us. You have tried to be, I think,
extraordinarily helpful, which is a credit to all three of you
and to your companies, and I thank you for that.
Is there anything that you want to put on the record before
we adjourn? Anything that you think needs to be on the record
before we adjourn?
Gentlemen, thank you very much. This hearing is adjourned.
[Whereupon, at 4:45 p.m., the subcommittee was adjourned.]
[Additional information submitted for the hearing record
follows:]
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