Corruption Watch: February 16, 2004

The Iraqi daily newspaper "Al-Mada" published a sensational expose on 25 January of companies, organizations, and individuals whom it alleges were bribed with hundreds of millions of barrels of oil by former Iraqi dictator Saddam Hussein in return for their political support and as payment for items prohibited under the interwar (1991-2003) embargo on Iraq. Headlined "Presidents, Journalists, and Political Parties Received Millions of Oil Barrels From Saddam," the article listed the names of 270 alleged recipients.

The Iraqi Governing Council responded to the publication by launching an investigation into the charges and, according to the "Financial Times" of 3 February, asking Oil Minister Ibrahim Bahr al-Ulum for an official report on the allegations.

The accusations, combined with interviews with former Iraqi officials, studies by nongovernmental organizations, and items international media reports paint a picture of an interwar Iraqi regime maneuvering to influence governments, the media, and political parties at the highest levels, as well as a desperate effort by the regime to obtain hard currency for military and personal use by Hussein and his circle of underlings.

Rumors and allegations of bribery and subterfuge by Hussein's regime have surfaced before in the media. Documents purporting to support such allegations have been produced, in some cases.

The Washington- and Hague-based Coalition for International Justice (CIJ) published a detailed study in September 2002 that was titled "Sources of Revenue for Saddam & Sons" in which the CIJ noted:

"Iraqi officials have never hidden the reasons, prerequisites or criteria behind their choices of contractors under the [United Nation's] Oil-for-Food (OFF) program: indeed they have stated many times that the money will flow to those who demonstrate political support for Baghdad in the international arena."

By allowing Iraq to decide which countries and suppliers would receive oil contracts under OFF, the United Nations set the groundwork for potential future abuses of the program. The CIJ wrote: "Competitive bidding, transparency of the process and efficacy or accountability of a chosen firm are not factors in Iraq's decision-making, despite the oversight and influence of the UN's Office of the Iraqi Program."

"The Wall Street Journal" on 9 February cited the relevant passage of the 1995 UN resolution setting out the program: "Resolution 986...bends over backwards to reassure Iraq that Oil-for-Food would not 'infringe the sovereignty or territorial integrity' of Iraq. And to that end it gave Saddam power to decide on trading partners. 'A contract for the purchase of petroleum and petroleum products will only be considered for approval if it has been endorsed by the Government of Iraq,' states the program's procedures."

The United Nations kept the names of contractors in the OFF program secret by claiming this would violate commercial confidentiality. In essence, this created a bizarre and opaque "backroom" atmosphere around the entire OFF program.

The list of organizations and individuals published by "Al-Mada" might add a new understanding of the interwar covert efforts of the Iraqi government. The list does not contain names exclusively linked with legitimate contractors in the OFF program, but rather with individuals and political movements; opinion makers who allegedly took bribes in return for supporting Iraqi interests. Most of the names on the "Al-Mada" list have little if anything in common with either the oil business or humanitarian concerns. If they are eventually checked against a master list of OFF contractors, the chances are slim that many will appear on this list.

The better-known individuals and organizations that allegedly received such oil -- or vouchers presumably redeemable for oil -- include the Bulgarian Socialist Party; former French Interior Minister Charles Pasqua; Prime Minister Megawati Sukarnoputri of Indonesia; former British MP George Galloway; the Popular Front for the Liberation of Palestine; the former head of the presidential administration in Russia; a number of major Russian oil companies such as LUKoil, Yukos, and Rosneft; the Russian Orthodox Church; one of the social-democratic political organizations in Ukraine; and the Communist parties of Russia, Ukraine, and Belarus.

When this article was written, all of those named by "Al-Mada" who bothered to respond to the accusations had denied them. If even a substantial portion of the allegations prove true, what might best be described as Saddam Hussein's "oil-for-support" operation could evolve into one of the largest political bribery scandals in recent history, implicating heads of government, senior politicians, or opinion makers in more than 40 countries in Europe, Asia, and the Middle East, along with individuals in the United States and Canada.

"Saddam's regime gave crude oil 'coupons' to its foreign backers to thank them for their support and help in circumventing UN-imposed sanctions, former Iraqi officials told AFP," the news agency reported on 29 January.

"The regime used to give Arab and other foreign political figures coupons worth millions of barrels of crude oil which they could sell on the market and almost always make a full profit," one of the officials was quoted as saying.

The coupons, or vouchers, were usually sold to specialized firms in the United Arab Emirates who then sold the oil on the market, according to a former Iraqi official quoted by AFP. It is unclear, however, whether the recipients merely received a commission for their work, whether they sold the coupons and kept all the proceeds for themselves, or whether they kicked substantial proceeds back to the Iraqi regime.

Details of the alleged bribery scheme were discovered among documents of the Oil Marketing Company, which is an Iraqi company affiliated with the former regime's Oil Ministry, and the coupons were listed as components of a Memorandum of Understanding also known as the OFF program, which was managed by the Iraqi State Oil Organization (SOMO). According to AFP, those oil favors continued to be dispensed until a few months before the war began in March 2003.

According to the Middle East Media Research Institute's (MEMRI) "Inquiry and Analysis Series, No. 160," of 29 January (http://www.memri.org/bin/opener_latest.cgi?ID=IA16004): "The voucher recipients sold the vouchers to oil traders, who then collected the oil against the vouchers from the Kirkuk-Banias (Syria) pipeline terminal, which was operating in contravention of the Security Council sanctions."

However, it seems feasible that some of these coupons were distributed to friends of the regime who then sold the oil and deposited most of the money into offshore accounts owned or controlled by Hussein or members of his inner circle. A portion of those vast sums might have been kept by recipients as "handling fees."

According to "Al-Mada," the lion's share of such "bribes," in the form of 1.36 billion barrels of crude oil, was given to 46 Russian nationals and organizations. Selling or donating oil to Russia, a country literally floating on oil, might be regarded as something akin to selling ice to Eskimos. Most of the oil bought by Russian companies from Iraq in the OFF program was resold on the secondary market, and most of it went to the United States, which, according to the Organization for Economic Cooperation and Development (OECD) and the U.S. Department of Energy (www.eia.doe.gov/emeu/ipsr/t314.txt), was the largest end user of Iraqi oil.

That this oil was never destined for the Russian market is clear, but what became of the earnings from the sale of this oil is not. According to the CIJ study, which quotes "Alexander's Oil and Gas Connections" of 11 January 2002, the Russian Prosecutor-General's Office began an investigation into the whereabouts of the proceeds that Russian companies received from Iraqi oil sales under the OFF program. Vladimir Kolesnikov, an adviser to Russia's prosecutor-general, said, "The earnings from selling that oil could have amounted to $15 billion, but no more than $300 million was deposited in [related] accounts." This investigation was never completed, and instead quietly ended as have so many other investigations of huge sums of money that went missing in Russia.

However, a considerable portion of the proceeds from the sale of such oil went toward buying food and other goods under the OFF program. This money was kept in an escrow account in the New York branch of Banque National de Paris (BNP) and closely controlled by the United Nations. That some of it might have been skimmed off eventually is conceivable, but it is difficult to believe that $15 billion simply disappeared.

According to the CIJ study, Russia's quota system favored patrons: "In mid-1999, for instance, the newly installed Energy Minister, Viktor [Kaluzhnii -- who is now first deputy foreign minister and Russian President Vladimir Putin's special envoy for the Caspian region], retracted Transneft's quota and rerouted it to Sibneft, a large shareholder of which had helped [Kaluzhnii] land his job." This major shareholder to whom Kaluzhnii was "beholden," according to "Kommersant" of 1 June 1999 as cited by the "Financial Times," was Sibneft head Roman Abramovich. The CIJ study further noted that under Kaluzhnii, Zarubezhneft, and LUKoil increased their shares in the Russian portion of the OFF program from 20 percent to around 30 percent, and Sibneft climbed into third place among Russian purchasers of Iraqi oil under the OFF program.

Among the Russian entities on the "Al-Mada" list are some of the largest Russian oil companies, most of which were created in a less-than-transparent manner and arguably were well known for their proclivity for shady deals and their interest in gaining access to Iraq's vast oil reserves. Hussein could not have chosen a better partner for his scheme.

The UN sanctions forbade foreign companies from developing or investing in Iraqi oil fields, so deals were arranged that were to go into effect once sanctions had been lifted. This factor was probably used by Hussein as a lure to Russian companies: A feasible scenario might include Hussein telling the Russians that he will allow them to develop Iraqi oil fields in return for their playing along in his "coupon" scheme and getting him the hard currency that he needed to remain in power. Hussein conceivably agreed to let the holders of the coupons keep a certain percentage for themselves.

LUKoil, one of Russia's largest oil companies, had played a major role in the OFF program. In the early stages of the sanctions, in 1997, LUKoil was searching for new upstream co-production projects, and it acquired a majority share in the giant oil field of West Qurna, which boasted deposits of 15 billion barrels. (By comparison, Russia's known oil reserves are 60 billion barrels, according to the Energy Information Administration as quoted in "The Wall Street Journal" of 4 February.) LUKoil planned to invest more than $4 billion over the life of the oil field in its development. According to "The Economist" as cited on the gasandoil.com website (www.gasandoil.com/goc/news/ntm24432.htm), Russia and Iraq reached a deal on "economic cooperation" in energy and related sectors rumored to be worth as much as $40 billion. "The Economist" reported that Hussein offered the Russians terms that were "generous," with rates of return on the order of 20 percent.

"Al-Mada" alleged that LUKoil received 63 million barrels of oil from Hussein as a bribe. Such a scenario seems strange, insofar as the Russians arguably did not need to be bribed at this stage. A far more convincing scenario envisages Hussein forcing LUKoil to sell the coupons his regime gave that company, place the money into one of his offshore accounts, and keep a few million dollars for their efforts. And while it is important to determine when such coupons would have been issued to LUKoil (before or after they entered into a contractual agreement with Iraq for the West Qurna oil field), that is not a key factor. The coupons could have been cashed in after the contract was signed -- for instance in late 2000 or 2001, when many companies were leaving the OFF program to protest Hussein's "surcharge" on every barrel of oil (a simple kickback scheme meant to bypass the UN escrow account at BNP and funnel money directly to Hussein's regime). LUKoil might justifiably have feared that Hussein would cancel its lucrative contract in West Qurna if the company refused to play ball.

Another company included on the "Al-Mada" list is Zarubezhneft. According to "The Economist" of 15 October 2002, working at times through Tatarstan-based Tatneft, Zarubezhneft "may have secured oil concessions worth up to $90 billion." Zarubezhneft was presumably obliged to follow orders from its majority owner: the Russian government. Its Iraqi partners were Iraq's South Oil Company (SOC) and North Oil Company (NOC). Zarubezhneft was responsible for the coordination in Russia of the OFF program until mid-1999, after which the Russian Energy Ministry took over that function. According to the CIJ study cited above, that ministry began to "take a direct hand in issuing quotas that recognized the preeminence of both Zarubezhneft and of LUKoil...by according each of these just over 20 percent of all Russian oil contracts under the UN program."

"Al-Mada" claimed that Zarubezhneft received coupons worth 174.5 million barrels of oil. Assuming a market price of $13 per barrel, Hussein's regime might have received up to $2 billion from the deal after "carrying costs and commissions."

The other Russian oil and gas companies that allegedly received coupons for large quantities of oil were: Rosneft Impex ("Al-Mada" alleged that this oil was in fact meant for the Russian presidential office) 66.9 million barrels, including 1 million barrels for the Russian ambassador to Iraq (which could have been a personal gift for the ambassador); Sidanco (21.2 million barrels); Rosneft (35.5 million); and Gazprom, with 21.2 million barrels. Any of the above firms might feasibly have been blackmailed into cooperating with such a kickback scheme -- although it is important to remember that questions remain regarding their possible participation.

The circumstances around Vladimir Zhirinovskii's Liberal Democratic Party of Russia (LDPR) and its alleged receipt of the equivalent of 79.8 million barrels of oil might be viewed as a permutation of the basic kickback scheme. The Liberal Democratic Party for years expressed sympathy for Saddam Hussein, and many LDPR members, including Zhirinovskii, traveled frequently to Baghdad on official or semiofficial visits before the 2003 war during which they expressed support for the regime in Iraq. According to "Vremya novostei" of 29 January, "Al-Mada" Editor Fakhri Karim -- a former member of the Iraqi Communist Party's politburo and now an independent journalist -- told that Russian daily that documents in his newspaper's possession suggest that Zhirinovskii's party was first given oil (or the equivalent) by Hussein in early 1996 (3.6 million barrels), with subsequent, similarly sized transactions every half year thereafter. After six years, beginning in 2002, the amount increased to 8 million-10 million barrels every six months.

It is important to note that Zhirinovskii vehemently denied those accusations, and told Interfax news agency on 29 January, "The Communist Party of the Soviet Union took bribes; I was told this by people from the Iraqi Foreign Ministry, but I never received even one Iraqi dinar from Hussein."

His denial might well prove true, but another question remains: Did his party receive any coupons that it cashed in for Hussein, only to subsequently hand the money over to elements of the regime in Baghdad? In that case, Zhirinovskii's claim that he never took "one dinar" from Hussein certainly rings true enough -- but leaves a host of other, equally serious questions unanswered.

Nikolai Ryzkov, who served as prime minister during Boris Yeltsin's presidency, was also fingered by "Al-Mada" as having received the equivalent of 12 million barrels of oil. Why his name was included on the list is a mystery that Russian prosecutors might have to explain someday.

The "Al-Mada" list also included the following notation: "The Russian Orthodox Church, 5 million barrels." According to Russia's "Obshchaya gazeta" of 20 January 2000, the Russian Orthodox Church, along with the Slobodskii Livestock Breeding Plant and a company called Feniks, became co-founders in 1990 of the International Economic Cooperation (MES), a company formed to trade oil on behalf of the state. Why a cattle-breeding company would join the Russian Orthodox Church to pursue trading in oil might well remain part of the Russian enigma forever.

But MES was implicated in the notorious Mabatex Kremlin reconstruction scandal in 1995. According to "The Guardian" of 28 January 2000, the company was accused of "losing $40 million" ("losing" as in apparently misplacing) in connection with that scandal. In 1996, MES became involved in the OFF program in Iraq. According to "The Washington Post" of 23 May 2002, MES went out of business in 1998.

According to the "Vremya novostei" interview with "Al-Mada" Editor Karim, an unspecified company connected to the Russian Orthodox Church received two donations of oil, one in the amount of 3 million barrels, the second of 10.2 million barrels. The dates of those purported transactions were not provided. (It is worth noting that this combined total does not jibe with the figure of 5 million barrels allegedly given to the Russian Orthodox Church that was published in "Al-Mada" on 25 January.)

Russian Orthodox Church delegations visited Baghdad often, and one such delegation delivered a message of support for the Hussein regime from the head of the church, Metropolitan Aleksii II. The metropolitan, it should be noted, had issued a number of statements supporting Hussein over the years.

A spokesman for the Russian Orthodox Church told "Vremya novostei" of 29 January that the church had sent two delegations to Iraq before the war, but he denied the church had accepted any bribes or had any business dealings with the regime.

Other companies implicated in dealings with the Hussein regime include, according to "Al-Mada":

* "Transneft, 3 million barrels." A subsidiary company of Russian gas giant Gazprom, Transneft manages the Russian oil-and-gas-pipeline network. Meanwhile, a company whose name in Arabic appears to be Gazprom is mentioned on the list as having allegedly received 26 million barrels.

* "Yukos oil company, 2 million barrels." Yukos has been under investigation for corruption (not linked to Iraq), and its former head, Mikhail Khodorkovskii, is under arrest as prosecutors seek to build a case against him. Arrest warrants for 10 other senior Yukos executives were issued in January.

* "Head of the Russian presidential administration, 5 million barrels." This entry might be interpreted as referring to Aleksandr Voloshin, the former head of President Vladimir Putin's administration who quit his post in 2003; but the dates when these alleged transactions took place are not listed, so it is impossible to be certain which head of which presidential administration (Putin's or Boris Yeltsin's) is accused of involvement. Alternatively, the reference might well refer to an element or elements within both administrations.

"Vremya novostei" of 29 January reported that Roman Silantev, the official representative of the Moscow Patriarchy and a member of the Interfaith Council in the Russian presidential administration, related how a delegation of Russian Muslim leaders who took part in a competition of reading from the Koran in prewar Baghdad were repeatedly offered oil as a prize. Silantev said the contestants had no idea how to dispose of such a prize due to the international embargo. Supreme Mufti of Russia Talgat Tadzhuddin, who had been in Iraq as a member of a delegation, told the Russian newspaper "Gazeta" of 29 January that one of the members of the delegation had been offered a quota of export oil which he could not, or did not know how to, take out of the country.

If the allegations prove true, then Hussein appears to have at least made some headway toward his goal of solidifying political support from the Russian government. Such support obviously did not keep him in power, but he might have contributed a large amount of money to a vast number of Russian functionaries and businessmen, some at extraordinarily high levels of the Russian government.

Considering that some of the alleged recipients have no apparent connections to the oil business (the Russian presidential administration does not refine oil), such entities' presence on the "Al-Mada" list begs questions as to the role -- if any -- they might have played in the scheme.

If the scheme was simply extortion on the part of Saddam Hussein -- "Cash the coupons, give me the money, keep a percentage or else" -- then the affair needs to be examined in a somewhat different light.

Richard Butler, in his book "The Greatest Threat" (Public Affairs, New York, 2000, p. 45) wrote: "Iraq has developed a black market oil industry of growing scope. This oil flows from Iraq across the border to Turkey, or in vessels that sail from the port at [Al-Basrah] through Iranian waters (protected thanks to bribes paid to Iran) and then dash across the Gulf to the oil emirates, past the patrols of the U.S. Navy. This oil ends up in markets all around the world, earning huge markups for everyone concerned."

It cannot be excluded that some Russian entities might have been involved in smuggling oil from Iraq. "Asia Times" of 9 February 2000 posted a story on its website (http://www.atimes.com/c-asia/BB09Ag01.html) about the detention of a Russian oil tanker -- christened "Volgoneft-147" and owned by the company Transpetro-Volga -- that was apparently smuggling Iraqi oil. The tanker was stopped by the U.S. guided-missile cruiser "Monterey," which took samples of the oil and confirmed it to be of Iraqi origin.

The Russian government vigorously denied the charges and demanded the release of the ship and its crew.

Transpetro-Volga was a subsidiary of the Russian firm SovFinAmTrans (SFAT), a joint venture among the Russian Railways and Energy ministries and a U.S. company, Transcisco. The CIJ report cited above claimed that financing for the firm was provided by the European Bank for Reconstruction and Development, and that its main activities were construction, maintenance, and the leasing of railway tankers for the petroleum industry.

Regarding the seizure of the "Volgoneft-147," the CIJ report cited the Russian newspaper "Rossiiskaya gazeta" of 9 February 2000 as saying the seized cargo was the property of a British Virgin Islands-based company called Primstar. The report further stated that, according to an Estonian-based think tank, the "Volgoneft-147" and a sister ship had made 40 trips smuggling Iraqi oil. And while there is scant evidence of those purported trips, it would appear that smuggling was indeed taking place.

Petroleum-product-smuggling operations from Iraq were a constant thorn in the side of the United States and the United Kingdom. According to figures released by the U.S. Office of Naval Intelligence and the U.S. Central Command (CENTCOM) Office of Public Affairs, some 415,300 tons (about 3 million barrels) of refined petroleum products were smuggled out of the country in January 2000 alone. In January of 1999, the figure was 22,905 tons. There was thus a dramatic increase over the course of one year, with the proceeds seemingly disappearing into Hussein's pockets. According to CENTCOM, most of the smuggling operations were conducted through Iranian territorial waters, for which the Iranians allegedly took in nearly $80 million in bribes in 1997. In 2000, Iraq earned $600 million from oil smuggling, according to CENTCOM.