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THE OIL-FOR-FOOD PROGRAM:

TRACKING THE FUNDS

HEARING

BEFORE THE

COMMITTEE ON 

INTERNATIONAL RELATIONS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

NOVEMBER 17, 2004

Serial No. 108–157

Printed for the use of the Committee on International Relations

(

Available via the World Wide Web: http://www.house.gov/international—relations 

(II)

COMMITTEE ON INTERNATIONAL RELATIONS 

HENRY J. HYDE, Illinois, Chairman 

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

CHRISTOPHER H. SMITH, New Jersey, 

Vice Chairman 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

ILEANA ROS-LEHTINEN, Florida 

CASS BALLENGER, North Carolina 

DANA ROHRABACHER, California 

EDWARD R. ROYCE, California 

PETER T. KING, New York 

STEVE CHABOT, Ohio 

AMO HOUGHTON, New York 

JOHN M. MCHUGH, New York 

ROY BLUNT, Missouri 

THOMAS G. TANCREDO, Colorado 

RON PAUL, Texas 

NICK SMITH, Michigan 

JOSEPH R. PITTS, Pennsylvania 

JEFF FLAKE, Arizona 

JO ANN DAVIS, Virginia 

MARK GREEN, Wisconsin 

JERRY WELLER, Illinois 

MIKE PENCE, Indiana 

THADDEUS G. MCCOTTER, Michigan 

KATHERINE HARRIS, Florida 

VACANCY 

TOM LANTOS, California 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

BRAD SHERMAN, California 

ROBERT WEXLER, Florida 

ELIOT L. ENGEL, New York 

WILLIAM D. DELAHUNT, Massachusetts 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JOSEPH CROWLEY, New York 

JOSEPH M. HOEFFEL, Pennsylvania 

EARL BLUMENAUER, Oregon 

SHELLEY BERKLEY, Nevada 

GRACE F. NAPOLITANO, California 

ADAM B. SCHIFF, California 

DIANE E. WATSON, California 

ADAM SMITH, Washington 

BETTY MCCOLLUM, Minnesota 

CHRIS BELL, Texas 

BEN CHANDLER, Kentucky 

THOMAS E. MOONEY, SR., Staff Director/General Counsel 

ROBERT R. KING, Democratic Staff Director 

JONATHAN R. SCHARFEN, Chief Counsel 

GREGG RICKMAN, Subcommittee Senior Professional Staff Member 

JEAN CARROLL, Full Committee Hearing Coordinator 

(III)

C O N T E N T S 

Page

WITNESSES 

Charles A. Duelfer, Special Advisor to the Director of Central Intelligence 

on Iraq’s Weapons of Mass Destruction, Central Intelligence Agency ............ 6

Everett Schenk, Chief Executive Officer, BNP-Paribas North America ............. 31

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Charles A. Duelfer: Prepared statement ............................................................... 9

Everett Schenk: Prepared statement ..................................................................... 35

Herbert A. Biern, Senior Associate Director, Division of Banking Supervision 

and Regulation, Board of Governors of the Federal Reserve System: Prepared statement ................................................................................................... 50

APPENDIX 

The Honorable Diane E. Watson, a Representative in Congress from the 

State of California: Prepared statement ............................................................ 59

Article entitled ‘‘The Conflict in Iraq; 100 Fraud Claims Probed’’ from 

the Los Angeles Times, dated November 1, 2004, submitted for the record 60

The Honorable Dan Burton, a Representative in Congress from the State 

of Indiana, and Chairman, Subcommittee on the Western Hemisphere: 

Prepared statement .............................................................................................. 60

(1)

THE OIL-FOR-FOOD PROGRAM: 

TRACKING THE FUNDS 

WEDNESDAY, NOVEMBER 17, 2004

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON INTERNATIONAL RELATIONS, 

Washington, DC. 

The Committee met, pursuant to call, at 3 o’clock p.m., in room 

2172, Rayburn House Office Building, Hon. Henry J. Hyde (Chairman of the Committee) presiding. 

Chairman HYDE. The Committee will come to order. Before we 

commence the hearing, I want to take this opportunity to congratulate and, with very mixed feelings, say goodbye to Mr. Cass 

Ballenger, Mr. Nick Smith, and also Amo Houghton, who is not 

here with us at this time. These gentlemen are finishing their congressional careers, and they have served this Committee very well 

over the years. And I can say from the bottom of my heart that you 

will be missed, all of you, and I wish you Godspeed. 

Mr. LANTOS. Mr. Chairman. 

Chairman HYDE. Mr. Lantos. 

Mr. LANTOS. I would like to add, from the Democratic side, our 

great appreciation and respect to the colleagues you have indicated, 

and I would like to add Mr. Joe Hoeffel of Pennsylvania from the 

Democratic side, who also is finishing a distinguished congressional 

career. 

Chairman HYDE. Thank you very much. 

Mr. MENENDEZ. Mr. Chairman, if I may recognize as well all of 

the colleagues that you mentioned, but particularly, as the Ranking 

Democrat on the Western Hemisphere Subcommittee, I want to 

recognize my friend and colleague, Mr. Ballenger. 

There are few of us who consider ourselves Latin Americanists, 

and Cass Ballenger is one of those people who has had an enormous interest for a long period of time and a stated commitment, 

as is exhibited by his deeds, not only in the work on the Committee 

but on a personal basis to Latin America. We will sorely miss him 

on the Committee. It has been my privilege to work with Chairman 

Ballenger for several years as the Ranking Democrat, and, Cass, I 

appreciate everything that you have done, the courtesies you have 

extended, and the way in which you conducted the Subcommittee’s 

work with us. We know you will still be a Latin Americanist even 

after you leave this institution. 

Thank you, Mr. Chairman. 

Chairman HYDE. Thank you very much, Mr. Menendez. I have 

made the suggestion to our leadership that these gentlemen’s reVerDate Mar 21 2002 13:43 Mar 31, 2005 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 F:\WORK\FULL\111704\96930.000 HINTREL1 PsN: SHIRL
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tirements require unanimous consent, so I could object, but I can’t 

persuade the leadership to go that route. 

Before beginning the hearing today, I want to take a moment to 

thank Sharon Hammersla, our Committee’s Information Resource 

Manager, who is retiring at the end of next month. Today is likely 

to be her last Full Committee hearing after 32 years of service and 

dedication as a public servant. She served as Information Resource 

Manager under my chairmanship for both the House Committee on 

International Relations and the House Committee on the Judiciary. 

Her service has been invaluable, and we will miss her a great deal. 

Sharon, we wish you the best of luck and extend our fullest congratulations to you upon retirement. Thank you. 

Before we begin the actual testimony, I want to announce that 

while Members, particularly on a subject as important as this, 

would like to make opening statements, we are very pressed for 

time. We have witnesses whose testimony is very important, and 

we are going to, out of necessity, not permit opening statements beyond those of myself and Mr. Lantos. They will all be made a part 

of the record and will give an opportunity for everybody to ask 

questions, and so we will do it that way. 

I am beginning to believe the prevailing sentiment regarding the 

United Nations Oil-for-Food Program may have been ‘‘hear no evil, 

see no evil, and speak no evil.’’ No one seemed to be in charge of 

watching Saddam Hussein while he and his government were conducting perhaps the largest financial swindle in history. The corruption Saddam and his regime sowed created scores of accomplices around the world at the expense of the Iraqi people. Far too 

many people looked the other way as Saddam stole billions from 

the program. 

We must remember that the Oil-for-Food Program was designed 

to benefit the Iraqi people. It was imperative that they be fed and 

their medical needs attended to. Yet the Iraqi Government, the 

very government whose responsibility it was to provide that aid, 

deprived them of the benefits from the sale of their vast oil reserves, cynically using those funds to buy influence and weapons 

abroad. 

Saddam Hussein corrupted every aspect of the program, and various sources indicate he may have received help from some of our 

allies—and you can put that in quotes—perhaps even U.S. citizens 

in doing so. This is why this issue has taken on a sense of urgency. 

We must determine to what extent Saddam’s corruptive influence 

tainted others, and perhaps even those we trusted most, to help us 

to isolate and disarm him. 

Following the release of the recent report by Charles Duelfer, 

who is here today, information has come to light as to the breadth 

of Saddam’s actions, both at the United Nations and with our allies. On the one hand, some of our allies, eager to do business with 

Iraq, did all they could to facilitate business there. The commercial 

advantage they so eagerly sought in Iraq might well have made 

them susceptible to manipulations by Saddam Hussein, and influenced their relations with the United States and with Iraq. On the 

other hand, the United Nations, it now appears, so eager to provide 

humanitarian goods to Iraq, may have compounded the foreign polVerDate Mar 21 2002 13:43 Mar 31, 2005 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 F:\WORK\FULL\111704\96930.000 HINTREL1 PsN: SHIRL
3

icy challenges faced by the U.S. by overlooking Saddam’s corruption. 

I am eager to hear from Mr. Duelfer if, in their eagerness to sell 

goods to Iraq, some of our allies and other nations sold dual-use 

goods, and perhaps even weapons, to Iraq through the Oil-for-Food 

Program. We must know if these weapons were used against our 

own troops in Iraq. 

As for Saddam, it is also important for us to determine whether 

the profits from his corruption were put toward terrorist purposes, 

as we believe may have occurred. According to information provided to this Committee, Saddam paid $25,000 rewards to the families of Palestinian suicide bombers through the Iraqi Ambassador 

to Jordan out of accounts in the Rafidain Bank in Amman, which 

held kickback money Saddam demanded from suppliers to his regime. Evidence also points to Saddam extending the Arab League 

boycott against Israel, requiring companies dealing in the program 

to sign letters conforming to the boycott. 

When we speak of the transaction of funds, we must not omit 

from our examination the Banque Nationale de Paris, or BNP. This 

was the bank that held the proceeds from Iraq’s oil sales from the 

Oil-for-Food Program. 

In the process of examining the bank’s role in the Oil-for-Food 

Program, we looked at the bank’s performance in verifying the 

identity of its customers, as called for under U.S. law and through 

the U.N. Oil-for-Food Program. There are indications that the bank 

may have been noncompliant in administering the Oil-for-Food Program. If true, these possible banking lapses may have facilitated 

Saddam Hussein’s manipulation and corruption of the program. 

Evidence seems to indicate that in some cases, payments in the 

Oil-for-Food Program were made by BNP with a lack of full proof 

of delivery for goods and other necessary documents contracted for 

in the Oil-for-Food Program. At other times, payments may have 

been authorized by BNP to third parties separate from the originally intended recipient of the letter of credit. These are issues I 

am looking forward to having our witnesses from BNP address. 

We should be concerned that BNP might well have facilitated improper payments to companies that were shipping illegal goods to 

Iraq. With the bank administering thousands of contracts, we need 

to know if this occurred and, if so, how many times. 

Moreover, as we understand, BNP received millions of dollars in 

fees over the life of the Oil-for-Food Program. This is a lot of 

money, and it is reasonable to ask if BNP adequately supervised 

its compliance programs overseeing the administration of the Oilfor-Food Program, especially in light of the widespread reports in 

the press of corruption within the program. 

Because of the importance of these issues, I will refer the details 

of what we have found about BNP to the Financial Services Committee under the able direction of Chairman Mike Oxley. Questions 

related to the Federal Reserve’s oversight, while peripheral to our 

jurisdiction, may be important in the process of untangling this 

web. Chairman Oxley and I have talked, and we agree on the need 

to review BNP’s performance in its capacity as the bank used by 

the U.N. for purposes of the Oil-for-Food Program. 

4

As we proceed with this matter, it is important for us to review 

the performance of the U.N. as an institution. In the future, we 

need to ensure that programs like Oil-for-Food, if they are deemed 

helpful and necessary, should proceed with greater oversight by 

member states, with increasing accountability and transparency. 

The U.N. itself must reform. 

With this in mind, my friend Tom Lantos, Ranking Democratic 

Member of this Committee, and I are introducing legislation today 

that will aim to improve U.N. accountability and transparency. We 

need international institutions that are transparent, answerable to 

outside scrutiny, and beyond reproach. 

We have uncovered what appears to be serious malfeasance on 

an international scale. The ultimate victims of Saddam’s corruption 

have been the Iraqi people, and I believe they have already suffered enough. They are owed an accounting of the crimes of their 

former government. How many Iraqis were convinced that the 

United States was the party denying them their food and medicine, 

when, in fact, it was their own country’s leader and his corruption 

that were depriving them? 

We must explore the full dimensions of the corruption that 

plagued the Oil-for-Food Program from start to finish. To achieve 

this proper accounting, we will continue the search, leaving no 

stone unturned. 

Moreover, it must be clear that if cooperation from those agencies 

and institutions involved in this program continues to be inadequate, we will exercise such enforcement remedies as the law 

makes available to us. 

This inquiry is just beginning. 

And now I yield to my friend and colleague, Tom Lantos, for such 

remarks as he chooses to make. 

Mr. LANTOS. Thank you very much, Mr. Chairman. 

Let me first commend you and thank you for calling this historic 

hearing. 

For 7 months, our Committee’s staff has been investigating how 

Saddam Hussein was able to obtain billions in illegal earnings 

while Iraq was under United Nations sanctions. 

Mr. Chairman, I am outraged by what we have learned so far. 

We all knew that Saddam was doing everything in his power to 

evade sanctions, and I am not in the least surprised to learn the 

details of his schemes. But it is truly infuriating to discover the 

depth of the contempt and greed displayed by the governments of 

nations such as France, Russia, and Syria, who evidently jumped 

at the chance to participate in Saddam’s crimes against the international community. 

The rogue’s gallery of profiteers ranged from a close associate of 

Jacques Chirac to Vladimir Putin’s former right-hand man. No 

wonder the program needs to be redesignated as Oil-for-Fraud, not 

Oil-for-Food. This is not the kind of behavior that inspires confidence in the viability of international sanctions, which can be an 

essential diplomatic tool when they are consistently applied and 

properly enforced. 

I am also angered at the revelations of sloppy administration and 

possible malfeasance of U.N. bureaucrats in managing the Oil-forFood Program, and I am stunned at the failure of our own State 

5

Department to use the power it had—inside and outside of the corridors of the U.N.—to put a halt to Saddam’s larceny. 

I am pleased that we will have the opportunity today to hear the 

testimony of Mr. Charles Duelfer, who heads the Iraqi Survey 

Group. Mr. Duelfer’s report is the first serious investigative account, backed by documentary evidence, of how Saddam illegally financed his regime. Mr. Duelfer’s findings closely track those of our 

Committee’s investigation. 

The Iraqi Survey Group’s work confirms all of the reports that 

Saddam manipulated the U.N.’s Oil-for-Food Program to gain illegal revenues and, perhaps more importantly, to win influence with 

governments by lavishing on them lucrative commercial contracts 

and bribing their officials. 

Russia and France were clearly the most eager participants in 

this influence peddling scheme. According to the Duelfer Report, to 

win Russian support, Saddam granted one-third of Oil-for-Food 

goods contracts worth at least $10 billion to Russian firms. He also 

directed bribes in the form of tradable oil vouchers to key officials, 

such as Putin’s former Chief of Staff, Alexander Voloshin, to the 

Russian Foreign Ministry, and to Russian political parties and politicians, including one of the most odious and fascistic personalities 

of our time, Vladimir Zhirinovsky. 

French companies also received a healthy share of lucrative Oil- for-Food contracts, including almost $2 billion worth of oil. The 

Duelfer Report also reveals possible direct cash payments by the 

Iraqi regime to French companies and officials, such as former Defense Minister Pierre Joxe. 

Oil vouchers were also allotted to officials, such as former Interior Minister Charles Pasqua, and influential French citizens such 

as Patrick Maugein, who Mr. Duelfer says the Iraqis considered a 

direct conduit to President Chirac. 

Mr. Chairman, in addition to these findings, the Duelfer Report 

has also confirmed our understanding that Saddam’s manipulation 

of the Oil-for-Food Program was not the primary source of his illicit 

income. In fact, the kickbacks Saddam extracted from the Oil-forFood Program now appear to account for, at most, $1.7 billion, or 

15 percent of his illicit earnings. 

It turns out that the lion’s share of the hard currency Saddam 

obtained during the period he was under sanctions came from massive illegal trade he conducted with Syria, Jordan, Turkey, and 

Egypt. The Duelfer Report also confirms our findings that some of 

these nations facilitated Iraq’s illicit revenue stream by permitting 

their banking systems to hold, launder, and transfer hard currency 

to Saddam. 

Mr. Chairman, we know that while these massive trade deals 

clearly broke sanctions, our State Department was fully aware of 

them and barely raised objections. In certain cases, it actually encouraged this trade. Secretary Powell objected briefly when Syria 

began its own massive illegal trade with Iraq in 2001, but President Assad shrugged off United States objections and actually increased the trade as the U.S. stood by and watched. 

Mr. Chairman, I am sickened that the U.N. Administrator of Oilfor-Food, Benon Sevan, appears to have had his hand in the till to 

the tune of $13 million worth of oil vouchers. At the same time, 

6

representatives of the Department of State on the Sanctions Committee ignored warnings and consistently approved the inflated Oilfor-Food contracts designed only to line the pockets of Saddam and 

his multifarious suppliers. 

Given these findings and our specific oversight responsibilities, I 

believe it is imperative for our Committee to focus much greater attention than we have to date on the failings of the Department of 

State that contributed to Saddam’s illicit earnings. To this end, Mr. 

Chairman, I ask you to set an early date to call in State Department officials to testify before us on these matters. 

Certainly our Committee will continue to examine management 

failures and possible corruption at the United Nations, which contributed to Saddam’s abilities to steal from the Oil-for-Food Program. In this regard, I look forward to reviewing the findings of the 

U.N. panel of inquiry set up by the U.N. and headed by former 

Federal Reserve Board Chairman Paul Volcker. In order to grasp 

the scope of the sordid mess, we do need to follow the money, that 

is true. But we also have to hold accountable the authorities who 

should have been in place to prevent the money from moving 

around to begin with. For that we have to turn our attention as 

far away as Moscow and Paris, and as near as Foggy Bottom. 

Mr. Chairman, thank you once again for calling this important 

hearing. I look forward to hearing the testimony of our witnesses 

today. 

Chairman HYDE. Thank you, Mr. Lantos, and without objection, 

any Member who has an opening statement may have it placed in 

the record at this point. 

We open our testimony today with a witness from the Central Intelligence Agency. It gives me great pleasure to welcome Charles 

A. Duelfer, who has served as Special Advisor to the Director of 

Central Intelligence on Iraqi Weapons of Mass Destruction since 

January 2004. 

Mr. Duelfer is a former Deputy Assistant Secretary of State for 

Arms Control and Multilateral Defense Matters. After leaving the 

State Department, he became a Visiting Resident Scholar at the 

Center for Strategic and International Studies. We are truly 

pleased to have you appear before the Committee today, Mr. 

Duelfer, and we look forward to hearing your statement. 

STATEMENT OF CHARLES A. DUELFER, SPECIAL ADVISOR TO 

THE DIRECTOR OF CENTRAL INTELLIGENCE ON IRAQ’S 

WEAPONS OF MASS DESTRUCTION, CENTRAL INTELLIGENCE AGENCY 

Mr. DUELFER. Thank you, Mr. Chairman. Thank you, Members. 

It is customary to thank the Committee for the opportunity to be 

here, and I do. But I do want to recognize some other individuals 

for my presence here. 

A week ago, I was traveling in Baghdad, and our vehicles were 

attacked by a VVIED, which is a jargon for a suicide bomber in a 

car, which blew up my car and our protective detail. I would like 

to thank Sergeant Clinton Wisdom and Specialist Donald Clary, 

who gave their lives in that, and Nathan Gray, who was badly injured. Without them I would not be here. 

7

It also underscores my appreciation for the interest of this Committee in the report that we have put together. It was not cost-free. 

Many people gave a lot, including their lives, to accumulate this, 

and there are lessons to be learned—a lot of lessons. 

We accumulated a lot of information. We tried to put it together 

in a way that would be useful to others to dissect and to connect 

the dots in ways that they may choose to connect the dots. I intentionally wanted to make it unclassified, and that was not a natural 

act for many of the people involved in this. But we succeeded in 

making this body of information unclassified. So I really am very 

grateful for the interests of this Committee in this. It is important. 

The questions of the U.N. and Oil-for-Food were only one slice 

of what we were interested in. But there are many lessons to be 

learned from this. 

I am fortunate to have with me some of the experts who worked 

on this in the field with me. If I may take a second to introduce 

them: Megan Emory, on the far right, Chris Johnston on my left, 

and the leader of the team for this element of our work is Steve 

Zydick, on my immediate right. 

I am going to summarize my statement. I realize brevity is valued here, so I would like my full statement entered into the record. 

But I want to make just a few comments by way of introduction. 

We looked at finance procurement, the oil voucher system, for a 

couple of reasons primarily. First, it seemed to be a logical way of 

bounding the problem that we had to investigate, which was weapons of mass destruction and the regime’s relationship with weapons 

of mass destruction. Because of the sanctions and because of the 

oil embargo, it seemed that the resources would be bounded. So if 

we could understand the resources which Saddam and his regime 

had, and we could find out where they went, we could provide some 

assurance to ourselves that we knew what was going on with respect to weapons of mass destruction. 

But in addition to that, as people on the Hill would know, when 

you fund something, that is when you really make decisions about 

your priorities. You can make policies and all kinds of things, but 

when you decide you are going to put money in back of it, that is 

when you make the tough decisions. I worked at OMB for a while, 

so maybe it is derivative of that. 

But in any case, we felt it was very important we look at the intentions of the regime, not just a static point on what decisions 

they made with respect to weapons of mass destruction. 

It is important, though, to understand that when we examined 

this data, it was from that perspective. It was from the perspective 

of Iraq and its relationship with WMD. It was not our task to investigate the improprieties that countries may have conducted or 

the U.N. Clearly, we identified some, but it was always from the 

Iraqi perspective. 

That is important, because we were trying to understand how 

Saddam viewed the world. We wanted to make sure we understood 

his priorities. Where did WMD fit into his view of the future and 

his levers, his influence, and power? 

So when you ask me questions, I may be circumscribed in what 

I say because our limit was the Iraqi perspective. There are others 

8

who are conducting investigations from the other side, and I think 

that is very important. This Committee is, of course, one of them. 

I will say a little bit about the trends we found in Iraq because 

I think that might be useful in establishing some context for the 

questioning. What we found was that in the early 1990s, from 1991 

immediately after the war until 1995 or 1996, Saddam took a decision of partial compliance and partial defiance. He tried to have it 

two ways. He tried to negotiate. He tried to manipulate the Security Council. 

He steadfastly refused to accept the predecessor resolutions to 

the OFF Program. The Security Council offered from the beginning, 

an opportunity for Iraq to sell oil as long as the proceeds would be 

used only for humanitarian aid. 

But Saddam steadfastly refused to exercise that option because 

he felt that if he did, it would lift the pressure from the Security 

Council to lift the sanctions in their entirety. 

In essence, he took his own population hostage. There was an 

enormous burden, and a lot of angst and guilt on people. Saddam 

was using a tool, the sanctions, and that had a lot of damaging effects on innocent people. The sanctions’ target was the leadership 

in Baghdad, but largely the effects were being paid by innocent 

Iraqis. Saddam took advantage of that. 

It was only when the effects on the Iraqi country and the population were so devastating that it became regime threatening, that 

Saddam decided to accept the Oil-for-Food Program as embodied in 

the December 1996 decision. He was surprised, and members of the 

regime were surprised, that there was more benefit to the program 

than simply providing food and humanitarian assistance to the 

population. 

They discovered there were collateral benefits that they had not 

anticipated, and you have touched on many of them. The ability to 

exercise influence and leverage around the world through the opportunity to select who gets contracts and the ability to generate 

illicit revenue streams of hard currency. All of that was a bit of a 

surprise, and it led to a period, from 1996 to 1998, when the regime was beginning to develop techniques and tactics for exercising 

influence and dividing the Security Council and creating the impression that the sanctions were crumbling anyway. 

In 1998, there were some crises with his cooperation with the inspectors, ultimately leading to a complete cessation of cooperation 

in December 1998 that was followed by the very circumscribed 

military action by the United States and the United Kingdom 

called Desert Fox—4 days of bombings—after which the Security 

Council was greatly divided. 

I think it is fair to say that the Russian and French delegations 

felt this was an unauthorized use of military action. The period 

from December 1998 to December 1999 was a period of enormous 

debate in the Security Council. They finally created a new resolution with which to address the sanctions, the weapons, and so 

forth. 

In some respects, it was a more measured or—I don’t want to use 

the term ‘‘weaker’’—but certainly the Iraqis thought of it as an 

easier version of a resolution. But even then, the Iraqis chose to 

ignore it. 

9

As the sanctions and the Oil-for-Food Program continued, there 

was a developing attitude that they were winning—the Iraqis were 

winning. In Baghdad at that time, hotels were filled with businessmen. There was an annual Baghdad International Fair held in November of each year; it was filled with Western and other companies seeking to do business in Iraq. 

There was an atmosphere of change—that Iraq was going to win, 

and in fact that was an attitude I heard expressed in my discussions with ministers and others in Iraq. They felt, in 2000 and very 

early 2001, the sanctions were in fact crumbling, and that was 

their strategy. They were proud of it, and they were succeeding. 

They were getting advice from many other countries who were participants in this, and some of these countries were active members 

of the Security Council. 

Where Saddam had failed, and he often did fail to see the future, 

was after 9/11. That was when he made a very big strategic blunder from his perspective. The world changed. The Security Council 

changed. The attitudes around the world were no longer on his 

side, and he was too late in understanding that. 

I think at the time of the State of the Union message in January 

2002, Saddam and his top lieutenants began to understand that 

things might be a little bit different. There was a period of discussion and negotiation between Iraq and the Office of the Secretary 

General on accepting weapons inspectors again. That basically took 

the entire period of 2002. 

But again, Saddam always sought a negotiation. He always had 

a dual approach of reward and punishment. He applied that approach to the international community just as he did his own people, and ultimately he failed. 

Let me end my comments there and thank you again for your attention to this issue. We put a lot of work into this report, and I 

hope it is instructive to future policies. Thank you. 

[The prepared statement of Mr. Duelfer follows:]

PREPARED STATEMENT OF CHARLES A. DUELFER, SPECIAL ADVISOR TO THE DIRECTOR

OF CENTRAL INTELLIGENCE ON IRAQ’S WEAPONS OF MASS DESTRUCTION, CENTRAL

INTELLIGENCE AGENCY

Thank you for the opportunity to be here and share some elements of my recent 

report on Iraq WMD. 

The report and the supporting analysis aimed at providing a synthetic view of the 

former Regime’s decisions and strategies as related to WMD. It was one of my objectives to describe the context within which Saddam made his decisions about WMD. 

WMD did not happen in a vacuum. To understand what happened to Iraqi WMD 

and perhaps to learn lessons that might inform future policies, I felt it was important to examine the surrounding factors that impinged on Saddam’s decisions. At 

different times Saddam opted to have, and then not to have, WMD. It was my hope 

to try to illuminate the conditions that led to these different courses. 

I also tried to analyze the Regime’s relationship with WMD over time. We have 

been wrestling with the prospect of the Iraqi nation with Saddam and WMD for almost three decades. It would have been grossly deficient simply to tally up the remnants of the WMD program. My goal was to understand the dynamics behind the 

decisions Saddam made. 

To this end, we delved into the nature of Saddam’s objectives and his perspectives 

on the world. A significant part of the report addresses the manner of Saddam’s rule 

and his vision for himself and Iraq. Unlike previous reports on the Regime, we had 

access to primary sources—Saddam’s top advisors as well as Saddam himself. 

Understanding and analyzing WMD in Iraq is, in one way, simplified because the 

regime was basically one person—Saddam Hussein. This certainly bounded the 

analysis. 

10

A second way of bounding the problem was to consider the limited amount of resources available to the regime. Sanctions and the oil embargo put strict limits on 

Iraq’s disposable income. It struck me that if we could account for the resources 

available to the Regime, and examine how the regime allocated them, we could 

learn a great deal about its objectives and actions related to WMD. 

This line of investigation quickly highlighted not just the tangible resources available to Iraq, but also the influence that the Regime accrued through the potential 

to allocate future resources. Examination of the resource decisions and the actions 

the Regime took to disperse its favors proved an excellent way of highlighting the 

objectives and intentions of Saddam. 

We have identified several key inflection points in this history. One was in the 

summer following the 1991 war. The UN Security Council had taken the decision 

to link the lifting of sanctions and oil embargo imposed in August 1990 when Iraq 

invaded Kuwait, to Iraq’s ridding itself of WMD. 

A new inspection organization was created for this purpose. Initially, all thought 

it would be short-lived-Saddam amongst them. However, during the summer, early 

inspections proved more mettlesome than Saddam anticipated and while he made 

early decisions to offer partial compliance, it became obvious this would not suffice. 

Saddam then established, as his top priority, to get out from the web of international sanctions. Other matters would be pursued on a non-interference basis 

with this prime objective. His policies, his actions, his tactics and strategies from 

that point—all had the objective of getting rid of sanctions. 

The evolution of his approach toward the UN Security Council reflected his usual 

dual approach of reward and threat. In the same way he ruled at home, he dealt 

with the international community and the UN Security Council in particular. 

Saddam offered partial compliance combined with defiance. He always wanted to 

bargain. He exerted pressure on the Security Council and tried to divide it. He 

would acquiesce to their demands only when unavoidable and usually partially. He 

preferred confrontation. 

His lieutenants criticized this approach as having prolonged the sanctions. 

Saddam’s goal of getting out of sanctions was prime and shaped all his relations 

with the Security Council and its members. 

The Security Council recognized from the start that sanctions were a penalty imposed on all Iraqis, not just the leadership. From 1991 on, the Security Council had 

made available the option for Iraq to sell oil under conditions that the revenues 

would only go for humanitarian purposes. The Council was very sensitive to accusations that their actions, imposing the sanctions, were the cause of the suffering of 

the Iraqi people. A pair of resolutions, UNSCR 706 and 712, first provided this option of humanitarian relief to the Regime. 

Saddam understood this pressure and the leverage it conveyed to him. He understood that if he exercised the option of exporting oil under the condition that only 

humanitarian aid could be delivered, then it would relieve the pressure on the 

Council to lift sanctions in their entirety. He steadfastly refused to accept this option and at every opportunity chose to link the Security Council and the problems 

with the inspectors, with the deaths of thousands of Iraqi children. In essence, he 

held his population hostage. 

Saddam sustained this position for five years during which time conditions in Iraq 

decayed. Infrastructure collapsed. Health care diminished. Aid agencies such as 

UNICEF reported the statistics of decay. 

The middle class was wiped out. The value of one Iraqi dinar was over three dollars before the 1991 war. By 1996, the value was on the order of 1500 dinars to 

the dollar. If effect the entire savings of the middle class vanished. Jobs vanished. 

Iraqis tried to leave to find work elsewhere. 

In mid-1995, Saddam’s son-in-law, Hussein Kamal, defected to Jordan. Hussein 

Kamal was the key regime figure who had been in charge of the development for 

Saddam of all the WMD programs. When he left, the regime was forced to acknowledge it has not been fully forthcoming with the UN inspectors, and WMD documents, materials, and programs had been concealed. 

The sympathy and support that had been building in the Security Council for the 

Iraqi position dissipated. Even Iraq’s friends in the Security Council backed off. 

Suddenly, Baghdad realized sanctions would not soon be lifted. At the same time, 

their effect continued to grind down Iraq’s people. 

In 1995, a new resolution, UNSCR 986, was passed to offer relief to the Iraqi civilian population. This resolution, which became known as the Oil-for-Food (OFF) program, was not accepted until December 1996 and then only after several months 

of negotiations between the office of the Secretary General and Baghdad. Saddam 

accepted this program only when the damage of the sanctions on the civilian infrastructure itself became regime-threatening. 

11

The initiation of this program turned out to have many benefits for the Regime. 

The program did achieve the higher objective of reducing the suffering of the Iraq 

population. However, it also had unanticipated collateral benefits for the regime. 

First, there began a large flow of businessmen to Baghdad in search of contracts. 

While the UN held the checkbook, in effect, Baghdad still made the decisions on 

who would get the money. This provided a lever that empowered Saddam to reward 

or punish those seeking OFF contracts. 

The flow of commerce expanded quickly to include the refurbishment of the decayed oil infrastructure. Baghdad shrewdly played various parties off against one 

another to win their favor. They made it clear that sanctions would not last forever, 

and when they were lifted, Baghdad would remember who their friends were. This 

attitude permeated all transactions and the attitude grew that sanctions were eroding and ‘‘everyone else’’ was making money. This effect was intangible, but powerful 

nonetheless. 

The report describes the nature of income that Iraq was able to generate during 

this period. We broke them into largely four types:

Protocols with neighboring countries

Smuggling of oil products

Kickbacks associated with OFF contracts

Surcharges on oil exported through the OFF program

The report describes in illustrative cases how transactions occurred, estimated 

their magnitude, and, more to the point of the report, where the funds were directed. It is shown, for example, that the budget of the Military Industrial Commission (MIC) surged from $7.8 million in 1998 to $350 million in 2001. In 2003 Iraq 

had budgeted $500 million for MIC. Saddam’s priorities were clear. 

The process of allocating oil liftings was also instructive in terms of the strategy 

and tactics of Saddam regarding escaping sanctions. 

We began obtaining data last winter from the Oil Ministry and the State Oil Marketing Organization (SOMO). The objective was to review the resources that were 

available to Iraq and determine if they led to any WMD activities. Combined with 

our investigations of the procurement mechanisms for sanctioned goods, we developed a fairly robust picture of the systems the Regime used. It is not an all-inclusive 

picture. We made no attempt to unearth all activities, but rather the illustrative examples that were supported by the testimony of Iraqis we debriefed. 

It is important to emphasize that our work took, as a point of departure, the Iraqi 

perspective. We sought to understand what Iraq was doing. We were not investigating the countries who supplied sanctioned items to Iraq, nor were we investigating the judgments or culpability of any party. 

I will note a couple of major points from this examination. 

We found that there was a momentum shift in late 1998 when Iraq terminated 

cooperation with UN inspectors. Iraq has been pursuing two tracks to getting out 

of sanctions. They participated in the inspection and monitoring process at the same 

time they worked to erode support for that process and also the sanctions. 

The decision by Baghdad to terminate cooperation and focus strictly on a policy 

of erosion of sanctions began in August 1998. The full cessation of cooperation with 

inspections provoked a limited four-day bombing campaign by the United States and 

United Kingdom in December 1998. 

Other Council members including Russia and France were furious at what they 

declared to be unauthorized military action. This left the Security Council deeply 

divided. At the same time, the OFF program was continuing and commerce growing 

in Iraq. The inspectors were gone. As former Deputy Prime Minister Tariq Aziz 

commented, Baghdad could have sanctions with inspectors or sanctions without inspectors. They chose the latter. 

Throughout 1999, the Security Council debated how to address Iraq. The sanctions remained, but were fraying and Iraq applied whatever tools it could to generate support for its position. Ultimately, the Council agreed upon a new Resolution 

1284 in December 1999. This replaced the former inspection organ, UNSCOM, with 

a new one, UNMOVIC, and changed certain other provisions related to the prospects for lifting of sanctions based upon progressive steps of compliance by Iraq. 

Nevertheless, Iraq chose to ignore the resolution and did not permit inspections. 

By 2000, funds from the four general revenue streams I noted earlier made life 

much better for the Regime. I would observe that the Jordanian protocol created in 

the early nineties now began to be replicated in this period. It was a model Iraq 

and its neighbors used to open and increase commerce. 

The infusion of funding allowed Iraq to begin efforts to refurbish conventional 

military capabilities among other things such as palace construction. In 2000 we 

12

found Saddam made a decision to invigorate his long-range ballistic missile programs—this was directly keyed to the availability of resources and material and expertise in spite of sanctions. 

The view for Baghdad was good in 2000–2001. Businessmen filled Baghdad’s hotels. Flights were restarting to Saddam International Airport. The Baghdad International Fairs were bursting with foreign companies and representatives soliciting 

business with the Regime. Saddam was looking like a winner in many places. 

Attention at OPEC meetings was riveted on the prospects for increased Iraqi oil 

production. Baghdad derived substantial international leverage from the speculation 

about its future decisions and their potential effect on markets. Oil analysts and 

traders were solicitous if not groveling with the Iraqi delegations. 

It was also apparent to Baghdad that the American effort to revise sanctions with 

so-called ‘‘Smart Sanctions’’ was an indication of weakness. Baghdad was hearing 

from other Council members that these steps were all favorable to Iraq. 

It is also important to appreciate that Baghdad was never an easy friend to its 

supporters. The Regime kept making more demands of its ‘‘friends’’ and often ignored their advice on how to relate to the Security Council. 

True to form, Saddam made one last strategic blunder. He failed to grasp the effect of the attacks of September 11, 2001. He did not understand how this radically 

changed the international environment. Only following the January 2002 State of 

the Union Message, did Saddam begin to realize he could no longer stonewall on 

weapons inspections. He realized too late that his ‘‘friends’’ on the Security Council 

were limited in what they could or would do. 

Yet he still insisted upon attempts to bargain. He would not simply accept inspections but rather opened a long process of negotiations with the UN. Ultimately, this 

worsened the conditions under which Saddam finally accepted inspectors. 

During 2002 while Saddam tried to negotiate conditions for accepting inspections, 

the US pressed for a new resolution with tougher measures than the Council agreed 

previously in December 1999 in Resolution 1284. This was a reverse from the trend 

in the Security Council of loosening constraints on Iraq. The tougher US line found 

more traction in the Council following September 11. Saddam did not understand 

the changed environment. 

In conclusion, the portion of this report devoted to OFF and the Regime’s finances 

is aimed at supporting assessments about WMD programs. It is also a vital indicator of the direction and intentions of the former regime. We were not conducting 

an investigation of OFF, the United Nations, or other nations’ actions. Our goal was 

to delve into the interior of a very opaque and dangerous regime. Much of what we 

found was ugly. The Regime depended, not on bringing out the best in people, rather on promoting the worst. It poisoned everything it touched. 

Thank you.

Chairman HYDE. Thank you. Mr. Lantos. 

Mr. LANTOS. Thank you very much, Mr. Chairman. This is an extremely complex subject. Let me try to get to the basics. 

Saddam’s goal clearly was to divide the international community, 

and, specifically, the membership of the U.N. Security Council. To 

a very large extent he succeeded in doing so. It is self-evident from 

your report, Mr. Duelfer, that certainly France and Russia in a variety of ways profited from Saddam’s illegal activities, and, more 

importantly, they anticipated to profit dramatically once the sanctions were lifted. Saddam Hussein, as I understand it, and please 

correct me if I am wrong, was not just interested in siphoning off 

money, getting kickbacks, and using funds for bribing and illegal 

payments, but he also held out the hope—that is why the hotels 

were filled with businessmen—that once the sanctions were lifted, 

and we were clearly moving in that direction, he would reward the 

countries and the companies in those countries that played ball 

with him and objected to the sanctions. Those countries bought the 

phony line that the suffering of the Iraqi people was the result of 

sanctions, not Saddam Hussein’s unwillingness to devote oil revenues for the purpose of buying food and medicine for the people. 

Could you comment? 

13

Mr. DUELFER. I think you have hit some of the very key points. 

What our investigation showed was in 1991, Saddam established as 

his prime objective getting out of sanctions. Other objectives were 

pursued on a noninterference basis. In other words, we saw this 

was important to the activities we saw in WMD. But his key objective was to get out of sanctions. 

The tools he applied were whatever he could gather up, and he 

had an exquisite sense of the use of power. He traded on the future, as you have noted and highlighted. If you want to be in on 

divvying up the rights for oil development, for example, in the various sections of Iraq, you had to be on his side. He traded on that. 

He also was very sensitive in giving individuals and countries an 

economic stake in the survival of the regime. And he knew how to 

do that. So I think the points you have made are characteristic of 

his approach, exactly. I think the data showing how he allocated 

oil concessions and how he allocated oil vouchers strongly support 

that. 

And he was making progress. In the behavior, as seen from 

Baghdad, of member states, companies and individuals, there were 

a lot of people trekking to Baghdad to solicit his favors. 

Mr. LANTOS. If I may just pursue one more item because we are 

living with this daily. We now hear that Iraq’s infrastructure in all 

of its aspects deteriorated dramatically during the last decade or 

so. 

Is it true that the resources Saddam had, which could have been 

applied, for instance, to maintaining the medical infrastructure of 

the country, providing the Iraqi people with an opportunity to get 

some health care and take care of operations, was deliberately ignored, and the funds were used to bribe corrupt foreign public officials, like Zhirinovsky of Russia, one of the most shady and sickening characters of the post-Soviet era? 

And I wonder if you could comment on what basis he anticipated 

that sooner or later facts would become clear, people would buy the 

notion that a Russian—a shady Russian political figure who is 

viewed in Russia as a crook and a gangster—should be getting oil 

vouchers to the tune of millions and millions of dollars, when he 

has no experience in the business. He is not in selling oil. This was 

an outright bribe to him, as it was to the French officials and others. 

Mr. DUELFER. Let me address the first part of your question. It 

wasn’t completely the case that money was separated from proper 

use in its entirety. Certainly, funds were spent to bribe and to influence, and those funds could have been used to much better benefit in Iraq. There are many very honorable technocrats, even at 

the ministerial level, who sought to perform normal functions, 

health functions, education, so forth, but they found that within 

the regime—the leadership of the regime—funds were being siphoned off, as you suggest. 

What happened was a perversion of the Iraqi system, and in our 

report we describe a sort of normal budgetary financial process 

where Iraqi bureaucrats, Iraqi technicians, tried to do what was 

right for their country and their people, and yet the thugs around 

Saddam and his cronies perverted that system. 

14

And the second part of the question, I can only address, from my 

discussions with the Iraqis, the Iraqi perception of the situation. 

Certainly, some very senior officials, including those at the ministerial levels, understood Zhirinovsky for what he was. They also 

seemed——

Mr. LANTOS. Zhirinovsky, if I may interrupt, flew to Baghdad to 

declare his solidarity publicly with Saddam Hussein and his regime. 

Mr. DUELFER. Multiple times. 

Mr. LANTOS. Multiple times. And Saddam Hussein, as a bribe, 

gave him these oil vouchers. 

Mr. DUELFER. Again, this was to pursue the strategy of erosion 

and collapse of sanctions. And, as you know, Russia has a permanent seat on the Security Council. Russia has a very important 

voice. 

So, to the extent that the people in charge of Iraq’s policy, including foreign policy—and I had long discussions with both the Foreign Minister and Deputy Prime Minister Tariq Aziz many times—

this was natural. They were trying to affect the votes in the Security Council in a way that was to their benefit. So that was one 

of the tools that they exercised. 

Mr. LANTOS. Thank you, Mr. Chairman. 

Chairman HYDE. Mr. Leach. 

Mr. LEACH. Thank you, Mr. Chairman. Perspective is very difficult to bring to issues of this nature. It strikes me that, as we as 

a country looked at these issues, we looked at all of those contracts 

principally from the point of view of trying to restrain weapons of 

mass destruction development. The real story, in the end, is less 

about weapons of mass destruction, and more about the difficulty 

of applying sanctions to a rogue state. Secondly, the vulnerabilities 

of the international system to corruption and to one of the great 

deadly sins, greed. In many ways the bitterest breach of public 

trust in the world is corruption. 

It strikes me that we now have a circumstance where the U.N. 

has been touched; where foreign leaders have been touched; where 

the banking system has been touched; and where America is a little bit touched in terms of what Mr. Lantos raised. That frankly 

is competence. That is, the United States had the right, very unusually, to review all of these contracts in the U.N. system, and so 

we were really hit with a competence issue, but not a corruption 

issue. 

I don’t know what to conclude from all of this. And I am wondering from your perspective, is this an issue of endemic corruption 

that would exist without a sanctions approach, or do sanctions of 

this nature escalate the prospect of corruption? Do you have any 

judgment on that, having looked at this as a kind of case study? 

Mr. DUELFER. Well, sir, it is a very complicated issue. Sanctions 

are part of it. The corruption is certainly part of it. This is a long 

report, and it is without an executive summary. I did that not simply to punish the reader, but because it is very complicated, and 

what you raise is an important part of it. 

Sanctions pervert an economic system. Sanctions are a very 

blunt instrument, as you know, that people often point to. You are 

trying to affect Saddam’s behavior, and one of the things about the 

15

Iraqi regime that simplifies it is that it boils down to one guy and 

what goes on in his head. 

The sanctions affect 23 million or 24 million Iraqis. It perverts 

a system. Once you put them in place, and once you then allow for 

selective commerce, and Iraq obviously had a lot of natural resources of enormous value to the rest of the world to sell, it allows 

for corruption. Particularly when one-half of the equation is controlled in a sense, or there was an attempt to control one-half. That 

is to say, the U.N. held the checkbook. But the blank of who gets 

paid with the check, in other words, who signs the contract, that 

authority was still with Saddam. I think that was probably one of 

the elements of this that contributes to the types of corruption you 

point to. 

Mr. LEACH. Thank you, Mr. Chairman. 

Chairman HYDE. Mr. Berman. 

Mr. BERMAN. Mr. Duelfer, thank you for all of your, and your 

team’s, incredible work on this. I am not yet one of the people you 

have punished, by virtue of my failure to yet read your full report. 

I have obviously read news reports about it. 

There is one aspect of this I am curious about. In the context of 

your mission, you uncovered a lot of information about how the Oilfor-Food Program was utilized. 

There is an independent inquiry committee into the United Nations Oil-for-Food Program. I believe it is chaired by Paul Volcker. 

To what extent have they shown an interest in your findings, your 

information, your sources, and your documents and pursued them? 

Do you have any ability at this point to give us a sense of the extent to which they are approaching their charge seriously in terms 

of getting to the bottom of the scandal and essentially telling the 

world what happened? 

Mr. DUELFER. We decided early on that we wanted to find out 

as much as we could about the resources, so we went to the oil 

ministry and SOMO, the State Oil Marketing Organization. We 

wanted to get the records and that data. The Iraqis at the time 

were very helpful. I spent some time with the oil minister. Our 

team here, and many others, went to a lot of effort to gather that 

data, to copy it, and to scan it—to make sure we had those records. 

Those records are the basis for a lot of people’s investigations, and 

we have spoken with the Volcker Commission. We will share with 

them—since the data really belongs to the Government of Iraq and 

others—when asked, and we have done so. 

Mr. BERMAN. When asked by whom? 

Mr. DUELFER. Well, by investigatory groups like the Volcker 

Commission. We have met on a couple of occasions just to discuss 

the types of information which we have identified that is available. 

Now, it is up to them to then get permission from the Iraqi Government to access that. Once that has happened, they do not have to 

duplicate the effort. We went to copy it; you kind of push a button, 

and they get it. But they are looking at the same set of data. 

Now, again, our perspective was from the Iraqi perspective, and 

we were not pursuing a prosecutorial approach, but others are. And 

I think they have a lot to do. 

Mr. BERMAN. Do you have any opinions, at this point, of the extent to which they are pursuing this aggressively, and to the extent 

16

to which they are being constrained in any fashion? Do you have 

any opinion of the extent to which their investigation will tell the 

full story? 

Mr. DUELFER. I really cannot judge. In my conversations with 

them, they were asking a lot of very probing questions. And they 

were out in Baghdad, so that is step one. I mean, they were not 

just living in the United States—so they are that interested. 

Mr. BERMAN. One thing that may not be that important, but I 

am just curious to understand the thought process. In terms of who 

is getting these rights to buy oil, apparently Zhirinovsky was one 

of them, and Russia is on the Security Council. What I am missing 

in this connection is the extent to which Zhirinovsky had the ability or the clout at any particular point, either with Yeltsin or with 

Putin, to influence Russia’s position in what seems to be a Russian 

effort to weaken and undermine the sanctions. Is there a direct 

connection there that you know of? Or was this simply a bribe to 

get positive statements from somebody with some clout in the Russian Duma? 

Mr. DUELFER. Sir, what I found was, in fact, there was a debate 

among Iraqis on that point. They wondered if they were getting as 

much as they were paying for. So I think those are judgment calls 

which the Iraqis had to make. 

Zhirinovsky, by virtue of the fact that he got a plane and flew 

into Baghdad at a time when planes coming into Baghdad—that 

was considered groundbreaking. I do not know. I am not well-positioned to answer that, but I do know that the Iraqis themselves 

were debating over where they get the most leverage out of these 

allocations. 

Mr. BERMAN. You said in your opening statement that governments of Security Council members gave advice to Saddam on how 

to manipulate the system. Could you just lay out whom you were 

referring to? 

Mr. DUELFER. Again, this is from the Iraqi perspective. But the 

Iraqis would say that they would obviously maintain close contact 

with as many members of the Security Council as they could, as 

a natural diplomatic activity. 

But Tariq Aziz in particular had close contacts in Moscow and 

would get a sounding there from what the prospects were for the 

actions in the Security Council. The relationships with Paris were 

also instructive for the Iraqis. 

It is also worth pointing out that, when you talk to some of these 

other council members, they would often say having Iraq as your 

friend is a difficult prospect. I know from my discussions with the 

Iraqis that they would intentionally play off some of these members 

to see who could produce the most for them—they would intentionally try to do that. But what I am describing is not something, 

which, from the Iraqi perspective, I think, would be considered normal. 

The other sorts of data that we acquired underlie some of the 

statements in the report. We did get access to a lot of Mukhabarat 

documents. This is the Iraqi Intelligence Service overseas. And so 

we did get a sense of, from that organization, what they felt these 

countries were up to and what influence they were deriving from 

them. 

17

Chairman HYDE. Mr. Burton. 

Mr. BURTON. Thank you, Mr. Chairman. 

I think the Oil-for-Food Program was a laudable objective initially, and I know that Madeline Albright was at the United Nations and was one of the people who worked on this and was an 

architect of it. Obviously, there were some shortcomings that led to 

an awful lot of this corruption that we have now come to learn of. 

One of the problems that I have is that—and I do not know that 

you are going to be able to comment on this, but I will make a comment, and take you off the hot seat for a second. From all reports 

I have seen, we are not getting much cooperation here in the Congress from Kofi Annan and the United Nations leadership. The 

United States—and I have worked with my colleague Mr. Flake on 

this, who has a bill on it—provides about 25 percent of the funding, 

which I understand is about $10 billion a year, to the United Nations. And it seems to me, because of the gravity of this situation, 

it is imperative that the United Nations work with the United 

States to get to the bottom of this. 

You do not have to comment. I know you do not want to get into 

international politics. But the United Nations is supposed to be the 

place where leaders from around the world get together to solve 

problems. And when this corruption and horrible kickbacks are 

taking place, I think it is imperative that Mr. Kofi Annan—and I 

hope he is listening right now—will cooperate with the Congress of 

the United States, because we do not want to cause any problems; 

we just want to get to the bottom of the situation and make sure 

it does not happen again. 

Now, I just have a couple of questions here I would like to ask, 

and I hope that you are able to answer them. We know that, in 

your reports, you talked about bribes that were going in a one-way 

fashion. But can you give us any information that will lead us to 

believe that French officials, German officials, or Russian officials 

were asking for those bribes in order to get weapons in to Saddam 

Hussein during this period? 

Mr. DUELFER. There were certainly individuals and companies 

who were soliciting business, but I draw a distinction between individuals, companies, and governments. What we saw were cases 

where marketing efforts, to use a term, were being made to sell 

conventional weapons, certainly. But otherwise, it tended to be Iraq 

exploring where they could get things. And there were a large 

number of countries that did in fact become suppliers for conventional munitions, and this is laid out in the report. 

Mr. BURTON. Well, how did the French officials treat the sanctions? What was their attitude regarding those? And did you view, 

or did they view, sanctions as a nuisance, or were French officials 

trying to do something to circumvent them? And you can apply 

that to Germany and Russia, as well. 

Mr. DUELFER. I have had no data showing France provided 

weapons in violation of the sanctions. And, in fact, the French refused to pay the oil surcharge fee which Iraq, at a certain point, 

was demanding on oil exports and the Oil-for-Food Program. 

On the other hand, Tariq Aziz, who had his own view on France, 

observed in one of our discussions that it is interesting that France 

18

was in favor of lifting sanctions while Saddam was in power, but 

after Saddam was gone was opposed to lifting sanctions. 

Mr. BURTON. Let me interject here for just a second. What about 

the French-made Roland missiles? As I understand it, the missiles 

were getting into Iraq while the sanctions were in place, and there 

were covert kickbacks from the Oil-for-Food Program that allowed 

those weapons to get in there. 

Mr. DUELFER. I may be wrong, but my memory is that the Roland missiles were there before the 1991 war. There were issues 

about whether they could get spare parts or maintenance on them. 

But so far as my recollection is, I do not think I saw—and let me 

check with my colleague—but I do not think I saw any case where 

the spare parts actually were delivered after 1991. There were discussions, and there were certainly French representatives who 

were trying to work that—there were contract negotiations on that 

point. 

Mr. BURTON. What about weapons coming in from, let us say, the 

three that really opposed sanctions: France, Germany, and Russia? 

Were there any weapons that were coming in during this period in 

violation of the sanctions? 

Mr. DUELFER. Certainly, Russia. 

Mr. BURTON. Now, one more question, Mr. Chairman. Were there 

any kickbacks, Mr. Duelfer, associated with that? And can you give 

us any more details in that regard? 

Mr. DUELFER. When we discussed kickbacks in this report, it was 

as a source of hard currency revenue. But in terms of getting a contract, an individual contract for an anti-tank weapons or a shoulder-fired surface-to-air missile, we did not get to that level of detail. We certainly found there were weapons and expertise provided, and Iraq got to count on it. They did not see the sanctions 

as a problem. In fact, they were designing missile systems which 

were entirely dependent upon receiving guidance systems from 

overseas. They were designing missile systems which counted on 

expertise in a propulsion system, which was provided by some of 

the countries you mentioned, in particular Russia. 

Mr. BURTON. Thank you, Mr. Chairman. 

Chairman HYDE. Mr. Payne. 

Mr. PAYNE. Thank you very much. 

I was just looking at the October 25, 2004 Iraqi newspaper, Al 

Mada, when they published, according to this report, the names of 

270 individuals and entities who allegedly benefited from the illicit 

payment by the former regime. And on the list—I assume that in 

your investigation you took a look at these 270 entities—it allegedly said that some deny the charges. In your opinion, how significant is that newspaper article, and have you been able to determine whether the persons listed are indeed guilty? 

Mr. DUELFER. Sir, that article, if I am remembering it correctly, 

is in fact the same list which we published in our report, in the 

annex of the recipients of the oil vouchers. Now, the data that we 

had is from the Iraqis. They discuss it in detail, and they have described in great detail their process for deciding who would get the 

vouchers and who would not. But we did not follow it beyond that. 

We did not pursue a case to make sure that this individual got that 

19

particular voucher and what exactly he did with it. We took the 

documents as we received them from the Iraqis. 

Mr. PAYNE. Were there any U.S. companies or individuals listed 

in the 270? 

Mr. DUELFER. There are three. But because of the privacy of law, 

our general counsel said that we cannot print them. But in the documents provided to you, they are listed. 

Mr. PAYNE. So this——

Mr. DUELFER. We cannot tell them publicly. That is why I am 

being a little bit——

Mr. PAYNE. Okay. That is good. Okay, I will not go there. The 

persons or the organizations that were involved, they get the 

vouchers, and then it is alleged that some of them got vouchers or 

were selected because there was an exchange for favors, more or 

less. 

Mr. DUELFER. They were case by case. There was a committee 

headed by the Vice President of Iraq to determine to whom they 

would give these vouchers, and Saddam approved them personally 

because they did have monetary value. Some of them were perfectly acceptable and perfectly proper to go to oil companies and so 

forth. This was their mechanism of allocating who would lift or buy 

the Iraqi oil which they were permitted to sell. But they discovered 

that this was also a lever of influence, and they had a committee 

for allocating them. Often, what happened was if one received an 

oil voucher, and did not have an oil company, they would have to 

figure out what to do with it. They could then resell it to somebody 

who is authorized to lift. And that tended to be what happened. 

Mr. PAYNE. So, evidently, this program went along without the 

Secretary General? Was he supposed to be the person who is responsible for making sure that everything worked correctly? And 

therefore, would you say that he was at fault by virtue of this program going along? Or is the U.N. so big that one individual cannot 

necessarily be on top of all of these? Or was it a different department of the United Nations that oversaw this specifically? 

Mr. DUELFER. Sir, it is not my part to judge. But I would observe 

that the committee, the Sanctions Committee, and the resolution 

were set up by the Security Council. There was a Sanctions Committee, which is a committee of the whole, meaning that every 

member of the Security Council, including the United States, 

France, Russia, China, and the U.K., the permanent bloc, all had 

seats on that committee. They were the committee which was 

charged with monitoring and implementing the Oil-for-Food Program. The Secretary General established officers who were in 

charge of operating this, and there was the office of the Iraq Programme headed by Benon Sevan. But, again, I think in terms of 

direct responsibility, it was a Security Council program. 

Mr. PAYNE. I think that is important because we find a number 

of things happening that we are not pleased with. And because of 

the misunderstanding by some members of how the U.N. operates, 

that the Security Council—for example, we believe that the Secretary General right now wants to do more against the Government of Sudan because of what is happening in Darfur. However, 

on the Security Council, especially the permanent members—

China, for example, who was pumping most of the oil in Sudan, 

20

certainly has threatened to veto any kind of serious resolution that 

will come before the Security Council if they deem it is going too 

far. So the Security Council and the way it operates many times 

is beyond the control of the Secretary General. I would hope that 

legislation—I have not seen the Burton-Flake legislation—but I 

would hope that we would take a look carefully at this very complicated program and, if reforms need to be made, we ought to target it as best we can to an organization like the Security Council, 

which is a very difficult organization to contain and control, as we 

all know. I appreciate your testimony. It is very interesting. 

Chairman HYDE. Mr. Rohrabacher. 

Mr. ROHRABACHER. Thank you very much, Mr. Chairman. 

It pleases me to see that some of my colleagues now are understanding why some of us on this side of the aisle have been so hesitant about putting America’s security in the hands of an organization like the United Nations. This difficult organization, as my colleague mentioned, is not something that I would trust with American security. I would now yield 1 minute of my time to Mr. Burton. 

Mr. BURTON. Mr. Duelfer, I was reading through your report and 

recovered documents dated December 1998 and September 1999 

that indicate the French company, Lura, supplied a tank carrier to 

the Iraqis through a man named Mr. Claude. In 1999, recovered 

documents show that multiple French firms displayed a willingness 

to supply parts for conventional Iraqi military items, mainly related to aircraft. And in 1999, al Hadr, a trade company, sent a 

delegation that participated in an international exhibition in Baghdad. They wanted to supply spare parts for the French Mirage, and 

there were several other companies as well. SOFEMA planned a 

visit on January 15, 2000 to seek possible trading between the two 

companies and on and on. Can you quickly explain this? I understand you said a while ago, there was not any of this going on, but 

your report seems to indicate otherwise. 

Mr. DUELFER. Again, these are negotiations between marketers. 

Iraq had a large inventory of originally French-supplied equipment, 

including Mirages, Roland missiles, and their air defense system 

that was called Qari, which is Iraq spelled backwards, in French. 

French defense contractors were quite anxious to supply spare 

parts to refurbish the equipment. 

Mr. BURTON. Who would be doing it? 

Mr. DUELFER. But we did not see evidence of delivered items. 

You mentioned that tank carrier. That was a temporary export for 

the trade fair at this Baghdad International Trade Fair. I mean, 

we looked. 

Mr. BURTON. Thank you. Mr. Rohrabacher. 

Mr. ROHRABACHER. I would like to ask about the vouchers that 

we are talking about here, because it seems to me that we are 

hearing in testimony that vouchers were used as tools of bribery. 

These were actually the vehicle in which, if there was a crime 

being committed here of undue influence, the crimes were committed. Basically we are talking about how the vouchers were given 

in order to provide influence with people. And someone bought 

those vouchers back from them, did they not? And are we talking 

21

about banks basically profiteering off of what is clearly an act of 

bribery? And what banks are we talking about? 

Mr. DUELFER. Sir, the vouchers were unrelated to the banking 

issue. The vouchers were a piece of paper which gave the holder 

the right to purchase oil. 

Mr. ROHRABACHER. I understand. And that is a negotiable commodity you might say. Other people bought those vouchers for cash 

at 50 percent of face value, approximately, and they went on 

through the system. Who is doing the buying there? Who is providing the money, then, after that point? 

Mr. DUELFER. There is a range of oil lifters, and there is a list, 

in fact, in our annex of those who received the vouchers. There is 

U.N. data for every lifting of oil—who the company is and what 

ship actually lifted it. So you can pair those things up. 

Mr. ROHRABACHER. Let me guess that there is somebody in between this. Let me guess that there is someone who bought the 

voucher at a certain percentage of the value and then sold it to the 

company that does the lifting. Who are those people? 

Mr. DUELFER. Well, there is a range. Some of those are perfectly 

legitimate oil companies. Ultimately——

Mr. ROHRABACHER. Some of them are. Who are the others? Are 

you trying to tell me that there aren’t some characters in there 

that we would know about, who knew what was going on and 

ended up buying the vouchers for less money than they were worth 

and then selling them on? 

Mr. DUELFER. Sir, we did not look at all of those from that perspective. 

Mr. ROHRABACHER. All right. You said the vouchers are not the 

only part of this, and they do not really relate to what you are 

charging in terms of the banks. What banks were involved in activity in this scheme that you feel were a little off base? 

Mr. DUELFER. We did not look at that, sir. I mean, the Oil-forFood Program worked for the BNP, the Banque Nationale de Paris 

in the New York office, and that is where the revenues went. 

Mr. ROHRABACHER. Okay. So are you charging them with wrongdoing? 

Mr. DUELFER. No, we did not look at that. We were looking for 

WMD, and we examined financing as a way of looking to see what 

was funded and what the intentions of the regime were. I am sorry; 

our level of mandate did not extend in the direction you are pointing. 

Mr. ROHRABACHER. It just seems to me, whenever I have come 

across instances like this, that if you dig a little bit deeper, you 

find out that there are people in the business community who are 

profiteering on this type of thing and know all about it. And the 

only people who are left out of this equation are people who are not 

in the clique. 

And, Mr. Chairman, I would suggest that there is probably a lot 

of profiteering going on here under the scenes, both in the financial 

community and elsewhere that we need to dig into. 

Chairman HYDE. Thank you. Mr. Menendez. 

Mr. MENENDEZ. Thank you, Mr. Chairman. Let me start by saying that no one on this side of the aisle seeks to cede or would cede 

America’s security to anyone, the United Nations, NATO, OAS, or, 

22

for that fact, even the Republican majority, because no one has a 

monopoly on how to best secure America. 

I want to be clear that the fact is Iraq was able to generate billions in illicit income while under U.N. sanctions. That must be 

thoroughly investigated. 

I also think it is important to be clear that Saddam got the vast 

majority of those funds, not only from simply abusing the Oil-forFood Program, but for selling oil directly to his neighbors. According to the calculations, if I am correct, in Mr. Duelfer’s report, Saddam gained about 25 percent of this money through his abuse of 

the Oil-for-Food Program and the corrupt actions of individuals and 

companies complicit in that abuse, including U.N. officials. But 

over 75 percent of his ill-gotten gains came from oil sales and trade 

deals with neighboring countries. U.N. member states, including 

the United States, were willing to turn a blind eye to these illicit 

trade deals with Saddam’s Iraq that willfully undermined the sanctions. We should take care to keep them separated and make sure 

where we deposit the appropriate blame. 

I think we have to vigorously investigate the serious allegations 

that have been raised against officials and companies involved in 

the program, and certainly leaders, and U.S. and international financial institutions. I am particularly concerned about the alleged 

corruption that allowed Saddam Hussein to take advantage of and 

profit from a program specifically designed to provide humanitarian assistance to the people of Iraq. I am also concerned over 

the stories we have heard of humanitarian aid contracts being manipulated for personal gain and the allegations that senior U.N. 

personnel may have been personally involved. However, at the 

same time, I think we have a responsibility here in Congress, with 

oversight over the Executive Branch, to raise some serious concerns 

about the apparent lack of action on the part of the United States 

and other U.N. member states to stem the abuse, even when the 

U.N. Secretariat’s Office of the Iraq Programme specifically raised 

concerns in multiple instances regarding inflated oil prices, surcharges, and side agreements. Saddam Hussein was blatantly manipulating the system. The 661 Committee, the committee that had 

oversight for this, was made up of member states on the U.N. Security Council, on which the United States was a member, never rejected a single contract based on the considerations of corruption 

raised by the Office of the Iraq Programme. The U.S. was unable 

to quickly prevail over other U.N. Security Council members to immediately stop these activities. I think those are serious concerns. 

I would also like to make another important point. The Oil-forFood Program was the humanitarian program established to confront the overwhelming medical and nutritional crisis in Iraq that 

had developed as a result of sanctions and that was eroding support for those sanctions. But the U.N. never had the means or the 

authority to be responsible for stopping illicit oil sales. That responsibility resided with U.N. member states and the U.S.-led multinational interception force. 

Finally, I think Mr. Duelfer’s report, while we are focused on 

what happened at the U.N. and what else may have happened in 

terms of member states not acting appropriately, found no evidence 

of weapons of mass destruction in Iraq. In fact, we learned from 

23

numerous sources that our sanctions program was generally working in Iraq and that they were stopping Saddam Hussein from developing those often talked about, but never found, weapons of 

mass destruction. 

So, Mr. Duelfer, let me ask you one question here. What went 

wrong when former officials from the U.N. Office of the Iraq Programme reported 71 contracts, just for the 2000 and 2001 period, 

including notes of concern about pricing, to the 661 Committee, 

that none of these warnings seem to have been investigated by the 

661 Committee, including the United States? And they expected to 

find hundreds of additional contracts with similar problems. Why 

was not a single contract rejected for pricing reasons? I don’t know 

if you covered this in your efforts. Why weren’t we successful in our 

efforts, or why were efforts insufficient to stop Saddam from smuggling oil with other countries? 

Mr. DUELFER. Sir, you have asked a question that is really better 

directed to another witness because, again, in our investigation, we 

were the Iraq survey group, we were looking at this from the Iraqi 

perspective. So, I apologize, but we were not looking at how the 

U.N. Security Council looked at this, and how the process went for 

allocating or deciding on these contracts. 

Chairman HYDE. Mr. Royce. 

Mr. ROYCE. I would just like to begin, Mr. Chairman, by pointing 

out it was the United States in a very tough battle in the United 

Nations at the end of 2001, that ended, through our reforms, the 

kickback-per-barrel of oil that was going back to the regime. So the 

United States has been taking on this issue. 

I wanted to make this point. I believe that support for similar 

U.N.-administrated programs will be zero unless the United Nations is forthcoming with information needed to investigate this 

scandal. The withholding of that information is a scandal which rivals the Oil-for-Food scandal. I think we have to demand transparency from the U.N. to get at the truth, wherever that truth 

leads. And I would like to ask Mr. Duelfer this question: In your 

report, you detail the oil vouchers apparently received by Benon 

Sevan, Director of the United Nation’s Oil-for-Food Program. You 

mentioned that Sevan contacted the Iraqi mission to the U.N. to 

nominate the Africa Middle East Petroleum Company to transport 

his oil. I would like to ask you if you can provide us any more details about these transactions and do you believe that Sevan might 

have profited from those vouchers? 

Mr. DUELFER. Sir, again, our perspective on this was the Iraqi 

perspective. We looked at some of those cases in a bit more detail 

almost as an existence theorem to see how Iraq was applying its 

influence and to what effect. The data provided to us by Iraq 

showed that Mr. Sevan received oil vouchers. We then saw, again 

from Iraqi data, that these vouchers were exercised through the 

company you mentioned. It was certainly the Iraqi view that they 

were conveying a good to Mr. Sevan, and in conversations with 

Iraqis, they felt that they were getting at least good will in return. 

Mr. ROYCE. Could part of that good will have been his blind eye 

in terms of oversight as Director of this program? 

Mr. DUELFER. Sir, that is beyond my investigation. 

24

Mr. ROYCE. You also mentioned the man who was said to have 

picked up Mr. Sevan’s voucher is an Egyptian named Fakhrey 

Abdelnour. Abdelnour is the nephew of former U.N. Secretary General Boutros-Ghali and was involved in an oil scandal in South Africa. Is there anything that would indicate whether Boutros-Ghali 

might have recommended his nephew Abdelnour to Sevan? 

Mr. DUELFER. Sir, I cannot go beyond what is in the report. I can 

tell you that many Iraqis discussed a lot of the approaches they 

had toward the U.N. Again, my mandate was to look at WMD. 

Mr. ROYCE. I understand. But is there any conceivable reason 

why Sevan, who is the Director of the United Nations Oil-for-Food 

Program, would himself be receiving vouchers? I do not understand 

the connection of why he would be in receipt of these vouchers. 

Mr. DUELFER. Again, sir, in our report we collected a lot of data. 

It was done for the purposes of WMD. I would be delighted if other 

people would carry some of these threads further forward. 

Mr. ROYCE. Would more information brought forward by the 

United Nations assist us perhaps in deciphering the rationale for 

these transactions? 

Mr. DUELFER. If I were charged with that, I would certainly look 

there. But I can tell you from experience, a great source of information are the Iraqis themselves. And they often will be very candid 

both in terms of discussing openly what they did as well as with 

documentation. 

Mr. ROYCE. Let me ask you another question. In this report, you 

told of efforts by Iraqi intelligence to use what they called semi-diplomatic cover to recruit agents from the U.N. headquarters in New 

York to influence public opinion and national policy toward Iraq. 

Can you provide any further details regarding this effort, and were 

there any stories you heard from Iraqi officials you talked to of successful recruitments on their part in the United Nations? 

Mr. DUELFER. We explored this to a large extent having to do 

with weapons inspections. Certainly, the Mukhabarat felt that they 

obtained people’s interests and exercised some influence. We 

achieved that by discussions with individuals as well as documents. 

But I am limited because this was a public document we were creating, and because of the exact nature of the documentation and 

the statements which they made. I really cannot go beyond that at 

this point. But it certainly was a high priority for the Mukhabarat. 

One of the enormous advantages we had was that we had access 

to Mukhabarat documents, and we had access to a lot of 

Mukhabarat who were relatively forthcoming. 

Chairman HYDE. Ms. McCollum. 

Ms. MCCOLLUM. Thank you, Mr. Chairman. 

Mr. Duelfer, the list of 270 individuals and entities who allegedly 

benefited from these illicit payments, they were all listed publicly 

in the Iraqi newspapers. Were they not? 

Mr. DUELFER. There was one article that has been quoted to me, 

but we also published what the Iraqis provided to us in this report. 

Ms. MCCOLLUM. Except for the American companies. So if they 

were——

Mr. DUELFER. The complete report is out there. 

Ms. MCCOLLUM. That is my question. I just find it rather odd 

that the complete report is available for people searching interVerDate Mar 21 2002 13:43 Mar 31, 2005 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6601 F:\WORK\FULL\111704\96930.000 HINTREL1 PsN: SHIRL
25

nationally on Web sites and newspapers, and that, yet for some privacy reason you were unable to list the American companies. 

Mr. DUELFER. We, the CIA, could not print them because of the 

Privacy Act. I was told——

Ms. MCCOLLUM. Even though it is public information? 

Mr. DUELFER. I was told that Congress could happily disclose 

them if they wanted to. 

Ms. MCCOLLUM. That is fine. It is out there for people who really 

want to dig in and ask questions about American companies, as 

well. 

I spoke, the last time I was in Baghdad, with several of the reporters who were involved in writing the story, and they questioned whether all 270 people really were guilty of possible crimes. 

That was a real question that they had. They were not able to get 

second sources. They did not have collaboration on a lot of this, 

misspellings of names of people, and possibly, they said even using 

pen names or other people’s names in order to get the vouchers to 

keep themselves sanitized. The word ‘‘alleged’’ is used in your report; it is used in a lot of what we have. Is that why we keep seeing the term ‘‘alleged’’ used over and over and over again, because 

a lot of this is hearsay and there isn’t the full investigation that 

we are waiting for from the U.N.? 

Mr. DUELFER. You are right in all of those questions. However, 

I would point out, in the charts themselves, there are those who 

received the allocations, and it is indicated whether oil was in fact 

lifted. Some of the oil allocations, there was never any oil lifted 

against them, and it may have been for a number of reasons. Some 

of those reasons are because individuals refused to pay the surcharge and so Saddam said, ‘‘Listen, if these guys refuse to pay a 

surcharge, we are not going to allow them to lift.’’ So in some ways, 

sometimes, there is a good story. 

Ms. MCCOLLUM. But their name could have still appeared on one 

of the documents even though they did not participate? 

Mr. DUELFER. Absolutely. But if the oil were lifted, I mean, that 

is an indicator. And SOMO, this is the State Oil Marketing Organization, does have a lot of data on who actually exercised these. 

Many of those things are knowable facts, but we did not pursue 

that point. 

Ms. MCCOLLUM. Right. My question is to what my colleague was 

talking about earlier, 25 percent being the Oil-for-Food, 75 percent 

of the illicit gains here being trade with Syria, Turkey, and Jordan. 

Many of these countries are allies; some countries are fair-weather 

friends at times. Do you think it is important that we not only get 

to the bottom of what the U.N.’s role was in these potential misuse 

of vouchers and kickbacks and corruption, but that we also have 

a responsibility to look at the other 75 percent, as well, to learn 

from that and to find out what to do in order for that not to happen 

again? 

Mr. DUELFER. Yes. There are a lot of factors involved in it. In 

the case of Jordan, which was the first protocol created in 1991, 

people looked at it, and they said, ‘‘Well, Jordan is a country which 

paid an enormous price for the sanctions, trade cutoff.’’ Of course, 

Turkey paid a big price when trade was ended, as well. It is interesting to me that the other three major protocols did not take place 

26

until 2000 when there was an enormous momentum shift in terms 

of people accepting whittling away on sanctions. There was the Jordanian one, which stood by itself for almost a decade, and then, all 

of a sudden in 2000, you have Syria, Turkey, and Egypt, which follow along after that. 

Ms. MCCOLLUM. Mr. Duelfer, you used the terms ‘‘Iraqi review’’ 

and ‘‘Iraqi preference.’’ What were they? Iraqi protocols? 

Mr. DUELFER. They were protocols. These are the bilateral agreements. 

Ms. MCCOLLUM. When I was in Iraq and spoke to the reporters 

afterwards, they brought to me their concern about the kickbacks 

and the new voucher program that was going on with American 

contracts after the war. This was quite a systemic problem within 

some of their ministries, and it was still continuing. Have you 

brought any of those conversations to the Administration’s attention? 

Mr. DUELFER. I am grateful that is not my job. I mean, I have 

got enough problems with WMD, thank you. Not my mandate. 

Ms. MCCOLLUM. Thank you, Mr. Chair. 

Chairman HYDE. Mr. Tancredo. 

Mr. TANCREDO. Thank you, Mr. Chairman. 

Mr. Duelfer, you mentioned earlier in your testimony that, as I 

understood it, there were committees that would meet to review 

and to develop—I think you said develop the criteria. No, you said, 

‘‘to look at the vouchers and determine who would get them and, 

also, to think about the criteria that was necessary for the award.’’ 

Did they actually spell out those criteria? Do you know exactly on 

what basis they made these decisions? 

Mr. DUELFER. No. They did not have a consistent set of criteria. 

It could have been anything. It could have been a friend. It could 

have been because somebody did something for them in some other 

form. But it was the oil minister, it was Tariq Aziz, and it was the 

Vice President who were the key members. Then it had to be approved by Saddam. But it tended to be largely driven by influence, 

which is a grand term. But, again, how to fracture the system of 

sanctions around them, that was the over-arching theme which 

guided that. 

Mr. TANCREDO. And there was nothing in there that would lead 

us to understand specifically why a person, an entity, a business, 

or whatever, would get a voucher? It was just assuming that it was 

done because of the kind of influence that could be obtained? 

Mr. DUELFER. We did not recover documents that went into that, 

nor did we really particularly look for that. There may have been 

a decision document of some sort which said, ‘‘Listen, country X 

just helped us,’’ for example, ‘‘reduce the compensation committee 

percentage; therefore, we want to give their representative X number of dollars.’’ We did not find documents that linked an act to a 

reward. 

Mr. TANCREDO. I see. How about countries like Turkey, where we 

knew that they were providing oil to the country—the United 

States was aware of it—even at the time? Do we know whether or 

not there was anything other than just a willing buyer and a willing seller on the part of Turkey and Iraq in terms of the oil, or did 

27

you get any indication that there were other things that Turkey 

was going to provide in order to be able to obtain the oil? 

Mr. DUELFER. We did not see anything explicit, but I would point 

out that there was a protocol, which was a government-to-government protocol, written in 2000 between Iraq and Turkey. But 

throughout the period, there was oil smuggling going on between 

Iraq and Turkey in tanker trucks and so forth. It was not through 

the pipeline, but there was a lot of oil going through the Kurdish 

areas and into Turkey. 

Mr. TANCREDO. I see. All right. I have no other questions, Mr. 

Chairman. Thank you. 

Chairman HYDE. Thank you. Mr. Paul. 

Mr. PAUL. Thank you, Mr. Chairman. 

I have never been a fan of sanctions, and I think you expressed 

some reservations or some complications that we can get when we 

impose sanctions, and this is certainly an example of the kind of 

problems we can get into through the sanctions of the 1990s. And 

the record is rather clear that a lot of Iraqi children suffered from 

our sanctions, which prompted this Oil-for-Food Program. And I 

think even the Administration then admitted this. But I am not a 

fan of sanctions—because I see sanctions as an act of war, denying 

vital necessities to a country. This really is a literal act of war. 

So then, going to my least favorite, or one of my least favorite 

organizations, the United Nations, and having the United Nations 

manage this program, it is not a bit of a surprise to me that we 

have ended up with the mess that we have. 

I have one or two questions, but first off, I wanted to let everybody know of something, at least the Committee here, because it 

has not been brought up. I know that you were not there the entire 

time, but to investigate the weapons of mass destruction, Congress 

allocated, and we spent, $600 million, if I am not mistaken. I was 

just wondering, do you think the taxpayers got their money’s worth 

spending that amount of money? 

Mr. DUELFER. Well, I think we have put together a report which 

describes, with a great deal of detail and in a synthetic way, a 

problem which has vexed the world for three decades, and I am 

very proud of that report. It is not simple operating in Iraq right 

now. I had the opportunity to work with the U.N. for many years 

in the 1990s. And let me tell you, it is a lot harder—contrary to 

what you might think—to conduct investigations now. We have lost 

people. And when we were the U.N. going around there, it was 

quite different. You have to have security. I mean, there are a lot 

of things which drive up the cost of doing business. 

Mr. PAUL. I guess the reason I ask is that I personally have not 

learned much, having read all 900 and some pages of the report. 

But listening to David Kay, who evidently did not think this was 

the greatest expenditure in the world, as well as individuals like 

Scott Ritter, it was explained pretty well what was over there. And 

I think he was correct about this. 

But I, too, have some concerns about this idea that the American 

companies were not mentioned, and this does seem strange that 

privacy consideration means that we prevent this. But you are absolutely right, because I have the names of four American companies that are involved there, that are on the Internet. But is there 

28

any way you can give us an idea of what percentage of all these 

sales involve the American companies? I mean, it is very popular 

now to bash the French. Is it only the French who were involved 

or some Americans, too, or don’t we know? Or do we know that the 

American companies were not involved with illicit trading, or is 

that an unknown? 

Mr. DUELFER. Sir, I would have to defer to the Treasury Department for those kinds of questions. It is clear that the United States 

imported a lot of Iraqi oil, but again, that really was not my mandate. 

Mr. PAUL. And back on the weapons, we did not find what was 

suspected. There were no weapons of mass destruction. But we do 

know about some weapons that are pretty important, and I do not 

think they fall into the category of weapons of mass destruction. 

Those are the RDX and the HMX and the supposedly missing tons, 

hundreds of tons of this. Where do you think we come up short on 

that? Is there any advice you can give us? I mean, did we not protect that well enough? Do we not know the full story? But it seems 

like there is something missing there, that this stuff is very, very 

dangerous, and we seem to ignore it if literally hundreds of tons 

of this stuff disappeared and may now be in the hands of some very 

bad people. 

Mr. DUELFER. Sir, Iraq had thousands and thousands of weapons 

depots. There was a system to go through them and try to consolidate them. To the extent that I have looked at the case that you 

referred to, which is a facility named al Qa Qaa, which is southeast 

of Baghdad—and we spoke with the director of that facility several 

weeks ago—it is not clear to me that HMX and/or the RDX are out 

on the street. The individual who ran the place said that it was 

there in June, and that that was the period of time when the U.S. 

Marines were there, and they were doing a lot of demolition. We 

sent a team out there to look at it. While I cannot tell you definitively, if I had to guess right now, I would say most of that stuff 

was probably destroyed by the American forces. 

But your point, I think, is more general than that. That is that 

there were a lot of facilities in Iraq with a lot of weapons, and you 

would have to have hundreds of thousands of troops in Iraq if you 

were going to guard all those locations. There was a system to consolidate munitions. It is ongoing. There were contractors involved 

in destroying that material. But, again, it is a problem which is 

just too big to get our arms around. 

Mr. PAUL. So you make the point that possibly we did not have 

enough troops on the ground? 

Mr. DUELFER. I do not want to be quoted. What I am saying is 

there are a lot of sites in Iraq. I mean, it is full with weapons 

caches, and it would take a lot of people to guard them. 

Mr. PAUL. Thank you. 

Chairman HYDE. Mr. Nick Smith. 

Mr. SMITH OF MICHIGAN. Thank you, Mr. Chairman. 

Mr. Duelfer, do I understand you to suggest that the United Nations bureaucracy has not been totally open in the effort to investigate all of the situations and happenings with the Oil-for-Food 

Program? 

29

Mr. DUELFER. Sir, I have no window into that; my mission is separate from that. You would have to talk to those who are doing an 

investigation of the OFF program itself at the U.N. I simply do not. 

Mr. SMITH OF MICHIGAN. With your experience with the U.N., do 

they need additional encouragement, or are you again saying that 

they might or they might not? 

Mr. DUELFER. Sir, I would rather confine my comments to the 

WMD. 

Mr. SMITH OF MICHIGAN. The reason I ask is, when the appropriations bill went through for the United Nations, I had an 

amendment on the Floor that said we would withhold $20 million 

of dues until they were fully cooperative in this investigative effort, 

because it seems to me, to get to the bottom of it, we need to know 

also what happened to the U.N. 

Let me move to ask you a question on the dealings that were not 

totally legal in the Oil-for-Food Program that involved countries 

like Russia, France, and Germany. Did that involvement, and their 

gain in some situations from what Saddam was doing in kickbacks 

and paybacks, possibly have an influence on their vote at the U.N. 

after 9/11 and after we went for the final resolutions for going into 

Iraq? 

Mr. DUELFER. I answer from the perspective of the Iraqis. I think 

the Iraqis certainly believed they had a return on their investment 

certainly up to 9/11. Where I think they—Saddam in particular—

may have had an intelligence failure, was when he did not realize 

the calculus which these other countries had changed after 9/11. 

And whereas he felt that these other countries would be more supportive, that support, again from the Iraqi perspective, attenuated 

over time. Although they did feel they had promises from certain 

members that they would veto resolutions proposed by the United 

States and the Security Council against Iraq. 

Mr. SMITH OF MICHIGAN. Can I translate that to understand you 

to say that the interaction of countries like France, Germany, and 

Russia in the Oil-for-Food Program may very well have, to some 

extent, influenced their vote on the final resolutions? 

Mr. DUELFER. The Iraqis believed that they were getting influence and getting some help from those countries. But at the end 

of the day, Tariq Aziz and others said these guys were going to behave in terms of their own self-interests, not Iraq’s. 

Mr. SMITH OF MICHIGAN. Would there have been any impact or 

influence on the decision in Turkey to not allow the United States 

and British and other troops to go in through North Turkey because of their involvement in the Oil-for-Food Program? 

Mr. DUELFER. I saw no evidence of that, and it really was not 

a particular area of our examination. 

Mr. SMITH OF MICHIGAN. Thank you. Mr. Chairman, I have no 

further questions. 

Mr. ROYCE [presiding]. Mr. Smith. 

Mr. SMITH OF NEW JERSEY. Thank you very much, Mr. Chairman. 

Mr. Duelfer, as you know, the 9/11 Commission Report noted 

that, to date, the United States Government has been unable to determine how much money al-Qaeda raises, from whom, and how it 

spends the money. It is, I think you would admit, entirely plausible 

30

that at least some of the $23 billion Saddam Hussein is alleged to 

have diverted from the Oil-for-Food Program went to al-Qaeda. 

What do we know, if anything, about links between the Oil-forFood Program and al-Qaeda? And, secondly, in your investigation 

regarding Iraq’s weapons of mass destruction program, even 

though it was not the Iraq Survey’s mandate to investigate allegations of illicit financial dealings, did you find any indication that 

the World Trade Center bombers were financed by illicit proceeds 

from the Oil-for-Food Program? 

Finally, on the issue of human trafficking, this is an issue that 

many Members of this Committee have taken very seriously. It is 

a transnational crime. After drugs and weapons, it is the third 

largest money-maker for organized crime. Did your group investigate or uncover any documentation of links between human trafficking and terrorism? 

Mr. DUELFER. Sir, the answer to all three of your questions is, 

we have no evidence that we came across. What I would say, 

though, is we, the United States, the coalition, recovered a lot of 

documents which are being examined in Qatar. There is a facility 

there, a document exploitation facility, and there are literally millions and millions of pages of documents. Many people will be examining that resource to look at a number of questions. I think the 

ones which you have suggested also could be looked at. 

Mr. SMITH OF NEW JERSEY. Could you give any indication what 

the timeline might be regarding an investigation into whether the 

Oil-for-Food money that was derived illegally from that program is 

linked to al-Qaeda? Is there any kind of prioritization to find out 

if there was such a link? I mean, it is an enormous amount of 

money. This was not all financed by the fortune that the head of 

al-Qaeda purportedly has. 

Mr. DUELFER. I simply do not know. That was not what we were 

looking for. We did not incidentally find anything like that. Others 

may be examining that question, but I cannot comment. 

Mr. SMITH OF NEW JERSEY. Understood. Thank you. 

I yield back. 

Mr. ROYCE. Mrs. Davis, we will go to you. 

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Chairman. 

Mr. Duelfer, I was in Baghdad last week when the unfortunate 

incident happened with you, and I really appreciate you honoring 

those two gentlemen. Their same unit carted us around, and they 

definitely are brave men and heroes, and I appreciate you honoring 

them today. 

Could you tell us what role, if any, you think Syria may have 

played in aiding Saddam and trying to evade the sanctions? And, 

second, I do not know if you investigated this or not, but do you 

believe that BNP was ill-suited and ill-equipped to handle the Oilfor-Food Program? And, if so, why would the U.N. have chosen 

them? 

Mr. DUELFER. On your second question, I am really not the one 

to ask. You will have to ask another witness. 

On the first, Syria was key. There were close relations at a government-to-government level. There were companies who facilitated the acquisition and transport of weapons into Iraq. Syria provided false end-user certificates so that companies and countries 

31

that wanted to ship to Iraq could ship to an end-user nominally in 

Syria. The Syrian protocol provided a substantial avenue of finance. I think we have laid out a pretty detailed case in the report 

on this. But Syria is one of the key actors in this. 

Mrs. DAVIS OF VIRGINIA. Given that you said the reason you did 

not answer some of these other questions was because your mandate was to look into weapons of mass destruction, is there any evidence whatsoever that Saddam Hussein may have transported any 

of the WMDs over to Syria? Have you looked into that as of yet? 

Mr. DUELFER. It is still an open question. We have been looking 

very carefully at that. It is difficult to investigate because one of 

the things we would like to do, and have not been able to do, is 

to go up to the border area and talk to some of the Mukhabarat 

people and so forth. It turns out that is a pretty dangerous area 

right now. We certainly have seen reports. I cannot confirm anything one way or the other. 

What we do know is that a lot of stuff was crossing the border 

before the war such as trucks. But we do not know what was in 

them. So I would like to be able to state definitively one way or 

the other an answer to that; I am not sure I am going to be able 

to. 

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Duelfer. 

Mr. Chairman, I yield back. 

Mr. ROYCE. Thank you. We are going to have to go to our third 

panel at this time. I want to thank the witnesses here today. We 

need to hear from our witnesses from BNP-Paribas North America. 

I am going to ask Mr. Everett Schenk, who serves as the Chief 

Executive Officer, if he would come forward to be on this next 

panel. And I am going to ask Mr. Nicholas Farachi, who was formerly the Compliance Officer for BNP-Paribas. We are going to 

switch our third and second panels so that we can have a chance 

to hear from these two gentlemen at this time. Let me welcome 

them both to the House International Relations Committee. 

We will be hearing from Mr. Everett Schenk. As I mentioned, he 

is the Chief Executive Officer of BNP-Paribas. We have a copy of 

his written testimony. If you could make your comments within the 

designated 5 minutes, that will give us a chance to ask questions. 

STATEMENT OF EVERETT SCHENK, CHIEF EXECUTIVE 

OFFICER, BNP-PARIBAS NORTH AMERICA 

Mr. SCHENK. Mr. Royce, Members of the Committee, my name is 

Everett Schenk, and to my left is Nick Farachi, who is the former 

FHC and Banking Compliance Officer within BNP-Paribas. 

You mentioned 5 minutes, Mr. Chairman. I had prepared a few 

remarks a little bit longer than that. Given the recent releases in 

the press over the last 24 hours, I thought it would be appropriate, 

if you don’t object, that I take a little bit more time than that. 

Thank you very much. 

Since May 2000, I have served as CEO of North American Corporate Investment Banking Operations for BNP-Paribas. In its entirety, the bank has over 10,000 employees in the United States. 

In my capacity as CEO since May 2000, I have been responsible, 

among other things, for overseeing the operations of the New York 

branch of the bank, which provided certain banking services to the 

32

United Nations in connection with the U.N. Oil-for-Food Program. 

These services were provided under a written agreement for banking services between the United Nations and the bank. 

At the outset, let me say that the bank is deeply disturbed by 

reports in today’s media, apparently based on statements from this 

Committee, that the bank may have paid letters of credit with 

funds from the U.N. Iraq account without having received confirmations from the U.N. that the goods had arrived in Iraq. Those 

statements evidently were prompted by a document obtained by 

the Committee from the bank’s regulator, which raised questions 

regarding such confirmations of arrival in connection with a number of letter of credit payments, as well as other issues, all of which 

we believe have been satisfactorily resolved. 

The bank has never been asked by this Committee or its staff to 

provide even a single letter of credit file, much less to address the 

particular issue before these reports appeared in the media. Obviously, it is impossible for me, sitting here today, to discuss the details of highly complex letter of credit transactions that I have not 

personally had an opportunity to review. 

But I am advised by bank staff that the bank received confirmations of arrival for each of the payments in question. The bank 

would be happy to make its staff available to meet with the Committee staff and take them through each of these multifaceted 

transactions one step at a time to ensure that they understand how 

each of these transactions was processed. 

An issue has also been aired in today’s media, again based upon 

a document I referred to earlier, about possible letter of credit payments by the bank to persons other than those designated as the 

suppliers of specified goods to Iraq. That document identifies a single letter of credit issued in 2001, under which approximately 40 

percent of the amount due was paid to one trading company at the 

request of another that was the designated supplier of the goods. 

This was not consistent with the procedures followed by the bank 

under the Oil-for-Food Program, which limited payments to a designated supplier or to a financial institution providing financing for 

the transaction. It appears to have been authorized as an exception 

to those procedures, and as yet we have not been able to ascertain 

the reasoning behind the action. 

I am, however, unaware of any other such exception having been 

identified as a result of any other internal or external reviews that 

have been conducted of the bank’s performance of services in connection with the Oil-for-Food Program. I do not believe in any way 

that it is characteristic of the bank’s handling of the more than 

50,000 payments it has made on letters of credit under the program. 

I also believe that the name of the recipient of the payments in 

question, along with the designated supplier of the credits, would 

have been checked against the list of designated nationals published by the U.S. Department of Treasury Office of Foreign Asset 

Control, and I have been advised that the recipient of the payments in question is not among the list of suspected front companies identified in the Duelfer report. 

In short, we believe it is unfair to characterize the bank’s performance under its agreement to provide banking services to the 

33

U.N. based upon this isolated incident which bears no relationship 

to the evidence of improper payments that was unearthed by Mr. 

Duelfer during his recent mission to Iraq on behalf of the Director 

of Central Intelligence. 

I would also like to address the suggestions in today’s media 

emanating from the Committee that raises issues by the bank’s 

regulators with respect to its anti-money-laundering procedures 

and how they may have somehow impacted the Oil-for-Food Program. This simply is not the case. 

The bank had only one customer under its agreement to provide 

banking services to the U.N. in connection with the Oil-for-Food 

Program, and that was the U.N. itself. Under the agreement, only 

one account was opened at the bank, and that was the U.N. Iraq 

account. With the exception of OFAC filtering, to which I have referred earlier, which was performed on all names associated with 

all letter of credit transactions processed by the bank, the antimoney-laundering procedures at issue had no applicability in the 

bank’s processing of these transactions. 

The bank believes that the standards and procedures that were 

applied in processing its letters of credit under the Oil-for-Food 

Program comported with all applicable legal and regulatory requirements, and that the improprieties that have been identified in 

the Duelfer report could not have been detected through any greater diligence by the bank in processing these transactions. 

Moreover, the bank reasonably took comfort that the Security 

Council had reauthorized the program on 13 occasions; that the 

Sanctions Committee of the Security Council had implemented procedures to ensure the integrity of the program; and that the Sanctions Committee had authorized all of the transactions under the 

program. 

The bank understands that in approving those transactions, the 

Sanctions Committee operated by consensus, and that any member 

of that committee, including the United States, was able to withhold approval for any transaction under the program. 

The bank further understands that at times approvals were withheld, including when there were concerns that contracts proposed 

for the sale of goods to Iraq involved items that might be converted 

to military use, despite their ostensible civilian purpose. 

We make these observations to underscore the fact that in performing its obligations under its contract with the U.N., the bank 

could not have uncovered the information that Mr. Duelfer has 

been able to discover only by following an intensive and thorough 

investigation with access to previously unknown documents maintained in secrecy by former members of the Iraq regime. 

Again, the bank believes it performed its obligations under its 

contract with the U.N. with appropriate diligence and with the 

knowledge that the Oil-for-Food Program itself, and all transactions thereunder, had the authorization of the U.N. Security 

Council and the committee that was chartered by the Security 

Council to oversee enforcement of the sanctions against Iraq. 

In order to properly evaluate the bank’s performance under the 

agreement to provide banking services to the U.N., we think it is 

important that the Committee understands the role of that agreement. The bank was retained by the U.N. to provide nondisVerDate Mar 21 2002 13:43 Mar 31, 2005 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 F:\WORK\FULL\111704\96930.000 HINTREL1 PsN: SHIRL
34

cretionary banking services in connection with the Oil-for-Food Program. Generally, on the oil side of the program, the bank services 

involved confirmation of letters of credit issued on behalf of U.N.-

approved purchasers of Iraqi oil. Those letters of credit were issued 

by various banks for the benefit of the U.N. Iraq account, an account that was opened by the U.N. at the bank’s New York branch 

at the inception of the Oil-for-Food Program. When a bank confirms a letter of credit, it takes upon itself the obligation of the 

issuing bank to pay the beneficiary, in this case the U.N. The 

bank’s confirmation of each of the oil letters of credit was done at 

the direction of the U.N. 

The processing of oil letters of credit under the Oil-for-Food Program conformed with standard practices governing letters of credit 

with the following additional controls. First, each contract between 

the Iraqi State Oil Marketing Organization, SOMO, and a buyer 

had to be approved by the U.N. Second, the price of oil was established by a process approved by the U.N. Third, the loading of the 

oil was supervised by an independent company appointed by the 

U.N. to ensure that the correct volume and grade of oil was loaded. 

And, finally, at the payment stage, all shipping documents were 

presented to the bank by the U.N. 

On the humanitarian side of the Oil-for-Food Program, the banking services under the contract with the U.N. 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, in fact, receive payment for their goods once they had been 

delivered to Iraq in accordance with their contractual obligations. 

The processing by the bank of those letters of credit was performed 

in accordance with standard letter of credit practice, with the additional safeguard that, prior to payment, the U.N. was required to 

provide the bank with a certificate confirming the arrival of the 

goods in Iraq based upon an independent inspector’s report. 

Significantly, the bank had no discretion over how money has 

been spent or invested under the U.N. Oil-for-Food Program. The 

bank did not select the buyers of the oil or the sellers of the goods. 

It did not establish the volume or price of the oil to be sold by Iraq, 

and it did not determine the goods to be supplied or the price to 

be paid for them. 

In sum, the bank provided nondiscretionary banking services to 

the U.N. under the banking services agreement. Its role has been 

to confirm oil letters of credit, ensuring that the U.N. Iraq account 

received all of the proceeds from the U.N.-approved sales of Iraqi 

oil; to credit the U.N. Iraq account with the proceeds from U.N. oil 

sales; to transfer certain of those funds, pursuant to U.N. instructions; to invest the balance pursuant to U.N. directives; and to 

issue, process and pay humanitarian letters of credit at the direction of the U.N., all in accordance with traditional trade finance 

practice, OFAC filtering requirements, and the specified protections 

of the Oil-for-Food Program. 

The bank reasonably relied on the Sanctions Committee for its 

authorization of all of the oil and humanitarian transactions under 

the program. Aside from temporary backlog and other administrative matters that did not affect the integrity of the program, the 

35

bank believes it properly fulfilled all of its responsibilities under its 

banking services agreement in accordance with applicable law and 

regulatory requirements. 

I would be pleased to answer any questions the Committee may 

have, and I respectfully request that my written statement be submitted for the record. Thank you. 

Mr. ROYCE. Certainly, Mr. Schenk, we will put that, without objection, into the record. 

[The prepared statement of Mr. Schenk follows:]


96930a.eps
36


96930c.eps
37


96930b.eps
38

Mr. ROYCE. Let me explain some of the differences of opinion on 

this issue. Regulators looked at 80 transactions. Of those 80 transactions, they report that they found three transactions with East 

Star Trading Company where you have third-party assignments of 

letters of credit without authorization. 

Now, members of the staff of the House International Relations 

Committee have been informed by State Department officials that 

the United Nations has found no record authorizing your bank to 

make third-party payments to the East Star Trading Company on 


96930d.eps
39

March 23rd, or April 12th, or May 3rd. Those sums were in the 

amounts of $2,224,000 in the first instance, $3,609,000 in the second, and $3,055,000 in the third. 

I understand your position that you received authorization to 

make these third-party payments, but the U.N. reports that their 

records indicate they ordered the bank to make the payment to the 

named party on the letters of credit on these dates, and that is AlRiyadh International Flower Company’s group. 

One of the questions I’d like to ask you is whether you know who 

the East Star Trading Company is? U.N. records don’t indicate that 

particular entity, and I was wondering if your records might indicate this. 

Mr. SCHENK. A couple of comments. First of all, the specific subject you raise came to our attention late in the day yesterday 

through the media. And I would offer up to this Committee that 

we would be more than pleased to sit down and review with staff 

of this Committee the details that we have on that file or other 

files which are in our possession. As the Committee had not really 

requested that information, I must say that today I am not prepared to comment on the complexity of a number of these situations. 

We did, however, have a chance, over the evening, to review and 

can at least validate to this Committee that for the payments that 

were made, we did have certificates of arrival in all of the situations that you referred to. 

Mr. ROYCE. Well, I understand. But the regulators did raise this 

issue with your bank. Part of the question is the failure to respond, 

I believe, to the concerns of the regulators. I mean, this is how we 

got to this point. 

If we recognize that the act of the regulators calling it to your 

attention puts you on notice as to the nature of the problem, and 

today you are indicating with respect to the one instance you did 

cite that you didn’t have explanation of how the payment was 

made, how the third-party assignment occurred. It does bring to 

our minds the question of whether the letter of credit operation in 

your bank was compliant with the banking laws and regulations, 

including the USA PATRIOT Act. That is one of the questions we 

have. 

It is my further understanding that increased attention to operational risk within the banking community may be causing banks 

to further tighten their internal standards for whom they choose to 

do business with in order to check out these types of situations. Is 

that correct, in your opinion? 

Mr. SCHENK. Again, if I can—I appreciate the breadth of the 

comments you just made. First, with specific reference to comments 

that the regulators have made to us, I certainly appreciate that you 

understand and are aware that, by law and regulation, the information contained in any examination reports or any communications with our regulators is considered confidential supervisory information. The bank is really not permitted to disclose that information without prior authorization from the regulators. 

Prior to this hearing, the bank consulted with its regulators for 

guidance on how the bank should answer questions such as you 

have posed with reference to regulatory discussions. We were adVerDate Mar 21 2002 13:43 Mar 31, 2005 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6601 F:\WORK\FULL\111704\96930.000 HINTREL1 PsN: SHIRL
40

vised that the regulators have discussed this matter with the Committee and indicated they would not permit disclosure by us of confidential supervisory information in a public hearing. 

To address any questions specifically related to regulatory confidential supervisory information, we would be willing, and our regulators would permit us, to sit in a private session with the Committee. We will make every effort today to be responsive to your 

questions, but I put my response in the context of that qualification. 

I can say that at various points in time we have received inquiries about the status of various programs, and people have visited 

the subject from a regulatory perspective. 

My remarks at the beginning implied, and I would like to repeat 

them, to say that all of the concerns that we are aware of, we believe have been satisfactorily resolved. I don’t have the benefit of 

all of the information that you may have available to you, but, 

again, we would be happy to discuss this in more detail in a private session. 

You made further reference to the bank’s compliance with the 

USA PATRIOT Act. And the bank, as all financial institutions, I 

suspect, has taken particular care to review its own internal procedures to ensure compliance with the USA PATRIOT Act. There is 

nothing in our approach to the administration of the Oil-for-Food 

Program which in any way is not compliant with the USA PATRIOT Act. In fact, we find the procedures present in the Oil-forFood Program to be at least, if not stronger, than what is implied 

in the Know Your Customer applications and enhanced due diligence required under the USA PATRIOT Act. 

With reference to your comments about operational risk, it is 

true that it has been a significant focus for all institutions these 

days, and one which we take very seriously and are actively pursuing in our own operations. 

Mr. ROYCE. Well, again, we had three payments assigned. I think 

that was in July 2003 that issue was uncovered, and it has been 

over a year since that initial discovery. I think resolving this goes 

to the heart of the issue of compliance in the Oil-for-Food Program. 

And it has been called to our attention. That is why we press the 

issue today. 

If I may ask, your contract with the U.N., was that priced and 

identified as being high risk for internal risk management purposes at any time during this contact period? Also, what kinds of 

internal controls exist at the bank regarding high-risk customers 

and transactions? 

Mr. SCHENK. In the context of a risk-grading system for purposes 

of assessing a client’s suitability for the banks, if it is in the context of that, our client for the Oil-for-Food Program is the U.N. The 

U.N. is a large multinational organization, and as such carries a 

low-risk grading for us internally as part of our rating system because, if you recall under the U.N. Oil-for-Food Program, our client 

is the U.N. We have one account, the U.N. Iraq account at the 

bank. 

Our procedure today, as it exists for handling clients and new clients, consistent with the PATRIOT Act, involves very deliberate 

and specific processes for opening new accounts. These accounts inVerDate Mar 21 2002 13:43 Mar 31, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 F:\WORK\FULL\111704\96930.000 HINTREL1 PsN: SHIRL
41

volve a preparation of detailed background information on the client and the preparation of an account profile, which indicates the 

kind of activity that the bank will engage in with that client. 

That information is then presented to a client acceptance review 

department, which validates it. This is an independent group, part 

of our banking operations. If, in the process of that customer validation process, it is deemed to be high risk, high risk by the nature 

of its business or high risk by the nature of its company origin, we 

submit that to a client acceptance committee. 

That client acceptance committee includes not only myself, but 

representatives of our audit, legal, and compliance areas in order 

to validate whether the risk associated with that client is determined to be one acceptable to the bank. 

Mr. ROYCE. But after 2001, you had widespread allegations of 

fraud, corruption, and, frankly, of worse, routinely in the press, 

connected with this Oil-for-Food Program. Why would you not consider these accounts to be high risk when you began seeing thirdparty assignments and documentation problems that were expressly not permitted by the U.N. program? That is the question. 

Mr. SCHENK. Okay. With reference to third-party payments, at 

this point in time, of the various independent internal and external 

examinations associated with the Oil-for-Food Program, we are—

and I am—only aware of the one instance with a third-party payment which was not approved in accordance with the procedures 

which governed the Oil-for-Food Program. 

Mr. ROYCE. I understand your assertion. The inspections report 

that we have identified 3 out of 80 such third-party payments. 

Mr. SCHENK. I was speaking in particular about one client who 

was under, I think, one contract. So I realize there were seven or 

eight payments related to that contract. So I generalize to one contract, yes, sir. 

Mr. ROYCE. Was anyone in management ever concerned that a 

customer might be criminally diverting funds away from the people 

of Iraq? Did that flag ever go up? If you were concerned, what internal control mechanisms might you have put in place to protect 

the bank from becoming an unwitting tool in what we look at 

today, as we examine the overall picture of the Oil-for-Food Program, as sort of a broad international web of corruption? That is 

something, frankly, that undermines not only, in my mind, the legitimacy of the United Nations itself, but it could undermine an institution. Did that flag ever go up? 

Mr. SCHENK. Well, I guess, for the record, we had one customer, 

and that customer was the U.N. As it relates to our procedures, all 

incoming requests and outgoing moneys were run through various 

filters, especially OFAC filters, so that we did not deviate in any 

way from standard practice of monitoring requests. It wasn’t just 

the money, but the names involved in the specific requests were 

also run through our filters, and such that we didn’t perceive those 

to be clients of the bank. They were, in fact, run through the various filters available to us such that it gave us comfort that we 

were not doing acts as you suggest. 

Mr. ROYCE. What did you do in response to the violation notices 

you received regarding East Star Trading Company? 

42

Mr. SCHENK. It is a question of characterization. I am not familiar with the expression ‘‘violation notices.’’ What I said was we 

have, first of all, some aspects of that particular review, and it was 

a regulatory review, so I am somewhat restricted in my comments 

in terms. But we have engaged in a review of specific transactions. 

The specific transactions have involved ongoing discussions. 

I don’t have the benefit today of the material that you and the 

Committee have, so all I can say is we believe that any review done 

by internal or external parties has been successfully resolved. I 

again reiterate on that particular transaction, I am personally not 

equipped to discuss it in detail today. I just haven’t had the time. 

It surfaced yesterday as a comment. We would be happy to sit 

down with the Committee, and we would be happy to go over all 

of the information we have on that file. 

But as we understand it today, any issues that have been raised 

have been satisfactorily resolved. 

Mr. ROYCE. The last question I am going to ask you is, independent of the bank’s responsibilities under the contract, and independent of your responsibilities, since you are operating in the 

United States under U.S. law. There is the issue of responsibility 

to implement strong internal risk management procedures to protect shareholders and depositors from becoming unwitting tools of 

corrupt Iraqi officials. 

Is it your testimony that management at BNP chose merely to 

comply with the terms of the contract and the strict letter of the 

law without any additional internal risk management overlay? 

Does the bank normally defer to external judgment when assessing 

the risk of a client or counterparty without undertaking further 

due diligence? And if not, why would you choose to defer risk assessment to the U.N., as you have commented in this instance, 

when in the newspapers, as I mentioned, there was evidence of all 

of the concerns about the Oil-for-Food Program? There was growing 

concern worldwide about the possibility and the allegations of corruption at the U.N. involved in this program. 

I am referring to 2001 on, not prior to the surfacing of that dialogue. 

Mr. SCHENK. You suggest by your question that we deferred to 

the U.N. While the U.N. is our customer in this instance, we took 

enormous comfort from the fact that every oil contract and every 

contract for humanitarian aid was approved and validated by the 

661 Committee. This includes all of the members of the Security 

Council. 

So we are not relying exclusively on some body called the United 

Nations, but we, in fact, are looking through that to an organization which includes substantial representation of meaningful countries, including the United States. And we took great comfort from 

that. 

That external validation, if you will, of qualified purchasers of 

oil, qualified vendors of services or providers of supplies, humanitarian contracts to Iraq, is more than we get in traditional banking 

services. That validation by a number of independent people represents a level of due diligence that is beyond normal banking practice. 

43

Mr. ROYCE. But the bottom line here, the reason we ask the 

questions, is the United Nations indicated that their records indicated that they ordered the bank to pay the named party on the 

letters of credit. That named party was Riyadh International Flower Company; it was not East Star Trading. So hence we get to this 

point of questioning about due diligence. 

Mr. SCHENK. And in my remarks, I suggested that the process 

calls for payments to be made to a designated supplier or to a financial institution that is providing financing for the transaction. 

In the instance that you have cited, we continue to investigate 

and ascertain the reasons. But I will also say, once again, that in 

both our own external and internal evaluations at this moment is 

the only instance that our staff has made known to me where, in 

fact, we do not have external—I mean, we don’t have appropriate 

support for that. 

I think we just have to sit down and go through this with the 

Committee staff. 

Mr. ROYCE. Thank you, Mr. Schenk. 

We are going to go to Mr. Payne of New Jersey. 

Mr. PAYNE. Thank you very much. I certainly commend the acting Chairman for the detail of his questioning. 

I just wanted to mention very quickly, though, that my colleague, 

Mr. Smith, had asked the question before about al-Qaeda and profiting from the Oil-for-Food Program, and whether the hijackers, 

they felt, profited from the Oil-for-Food Program or any of that 

money had gotten to them. 

I wanted to indicate that I think it was made pretty clear that 

al-Qaeda was responsible for 9/11, and according to all that we 

have been able to ascertain, there was actually no relationship between al-Qaeda and the Government of Iraq and Saddam Hussein. 

They are both very horrible entities, but I think to continue to 

try to make a connection between al-Qaeda and Saddam Hussein 

and the lack of weapons of mass destruction continues to cloud the 

line between two separate, distinct issues. Al-Qaeda, as a matter 

of fact, was unwelcomed in Iraq because Saddam Hussein wanted 

the money; he wanted to behave in a way that the head of alQaeda despised. Saddam Hussein was called an infidel by Osama 

bin Laden. So I think that continually trying to make the connection between the two keeps our focus away from these separate incidents. 

Maybe you can answer yes or no. Did BNP have a problem complying with the antilaundering section of the PATRIOT Act known 

as the Know Your Client requirement? Did you feel that that was 

a nuisance or was something burdening? Did you feel it was something the bank did not feel it needed to comply with? 

Mr. SCHENK. Well, the bank has to comply with the USA PATRIOT Act. Every bank has to comply with the USA PATRIOT Act. 

The enhanced due diligence embedded in the USA PATRIOT Act 

specifically related to Know Your Customer is something that every 

bank is putting in place actively or has already put in place. 

We have put in place a significant new account opening process 

which we believe is consistent with the rules embedded in the requirements of the USA PATRIOT Act. 

44

Mr. PAYNE. What about the automated computer system that is 

supposed to be in place? Is that a part of that supposed list of suspected terrorists and front companies? Has your bank moved into 

that system yet? 

Mr. SCHENK. Well, we are in the process. We have automated solutions associated with our monitoring activity. Our compliance 

function today has a monitoring group within it. That monitoring 

group would use account profiles that are provided to identify any 

behavior that looks to be outside of the normal course of behavior 

we anticipated from a client. 

We have an inquiry-based tool today that allows us to make inquiries. And I think the best current practice implied among banks 

is that there would be a more automated inquiry and artificial intelligence-based automation system, which would lift out and try 

and make connections that perhaps human intervention might not 

be able to see. And we are in the process of installing such a system. 

So that system is not in place today, but we have an automated 

system in place for lifting up any behavior which is inconsistent 

with the behavior that we expected to see from our current client. 

Mr. PAYNE. Thirty years ago, the Congress passed the Currency 

and Foreign Transactions Reporting Act, known as the Bank Secrecy Act, trying to deal, at that time, with drug money and money 

laundering. And one of the things—although I guess this is more 

for the Banking Committee—one of the problems that I have had 

in general with the banking industry—and I realize that you just 

happen to be with a bank, but since you are here, I might as well 

get it out; I may never have the opportunity since I am not on the 

Banking Committee. I think one of the problems that I have seen 

with illegal activities is really the cooperation of the banking industry in general. 

It seems to me like banks are in a position of saying, ‘‘All our 

job is, is to take the money, invest it, hold it, give the interest rate, 

and send a check to whomever the person sends the check to,’’ and 

no one investigates anything. 

You might tell me, since I am so far removed from banking, and 

I have just been trying to keep my little account straight—I know 

the philosophy of a bank is that it is not a social agency. There are 

social agencies, but I guess bankers would say that is for someone 

else to do. I think that a lot of misery in this world really could 

have been avoided if there was some semblance, just a little bit of 

semblance, of integrity in the banking department. You take a person like Mobutu from Zaire, a country where at the time he was 

in power the average person lived on 50 cents a week, and Mobutu 

put money in banks in France; he had villas, and they said he had 

25 billion in banks. But when the money came to the bank, no one 

ever wondered, ‘‘Wow, this guy is making a lot of money in his job 

as President of Zaire.’’? 

We can go from the Shah of Iran to Marcos in the Philippines, 

and on and on. The drug dealers and the cartels used to load the 

money up in banks—U.S. banks, offshore banks, European banks—

and no one would ever question where all of this money came from. 

As a matter of fact, if they don’t want their name on it, the bank 

will give them a number. 

45

And so I think it is just sad that such an important entity and 

the way that the world works has resulted in every agency having 

to be regulated. Nothing is done without a law passed, to comply 

with this or comply with that. And, like I said, it has been something that has bothered me for a long time. It seems like the dirtiest of criminals, blood on the hands of people for decades, it just 

seems like the industry—and like I say, I don’t know you, so don’t 

take this personally—is almost like a misguided missile. 

I don’t have any question. I just had a little statement that I 

wanted to make. Thank you, Mr. Chairman. 

Mr. ROYCE. Well, I think Don makes a good point. That is why 

we have passed the Know Your Customer law. But we passed that 

predating the passage of the PATRIOT Act, and I think in these 

circumstances, Know Your Customer becomes a very important law 

for everyone to follow. 

I am going to go to Mr. Rohrabacher and then to Mr. Leach. 

Mr. ROHRABACHER. Well, thank you very much. 

First of all, just for the record, let me ask you, at any time did 

you, or any other member of your banking team—or were you requested—by a compliance officer at your bank, to discuss the efforts within the bank to examine the bank’s position on this Oilfor-Food Program or letter of credit program? 

Mr. SCHENK. The way you phrased the question——

Mr. ROHRABACHER. Well, did BNP compliance officials ever ask 

for, but were denied access——

Mr. SCHENK. Absolutely not. 

Mr. ROHRABACHER [continuing]. To the Oil-for-Food Program? 

Mr. SCHENK. Absolutely not. You have to understand the way 

that compliance works today in a bank. It is not a department that 

sits off in the corner and is uninvolved in the business. It is a dayto-day business. 

Mr. ROHRABACHER. But you have compliance officials in the bank 

who work for you. You are saying absolutely not. No one ever requested——

Mr. SCHENK. No. No. I thought you said were they ever denied 

access. To that question the answer is no. The compliance department is actively and intimately involved in all aspects of our business and has access to every operation that we have. And it is such 

an active, regular process embedded in our day-to-day lives, it is 

not a question of an inquiry today or tomorrow. It is a constant. 

Mr. ROHRABACHER. So it would never happen that someone 

would come up with a letter that says, ‘‘Please let us in to look at 

this program, we think there are some problems,’’ and you would 

get another memo back that says, ‘‘Denied’’? That would never—

that could not have occurred in your——

Mr. SCHENK. Typically, if someone felt there were any activities—and let’s just step away from the Oil-for-Food Program for a 

minute—that were suspect, they have a number of avenues to raise 

those issues. 

Normally, we would involve our audit department to investigate 

those situations and surface any. And, in fact, back to the Oil-forFood Program, in the normal course of its activities, certain activities we schedule for audits on a certain regulated basis. And our 

independent audit, internal audit department, did examinations on 

46

seven different occasions specifically addressing issues of compliance to regulations process, to procedures within the Oil-for-Food 

department, with no significant findings. 

Mr. ROHRABACHER. All right. Thank you. 

Mr. Payne’s comments were interesting to me. I was wondering 

what kind of clients—when you talk about clients, now, do you 

have other oil clients? What other countries do you represent? 

Mr. SCHENK. Well, BNP itself is a large international organization with operations around the world. 

Mr. ROHRABACHER. Did you deal with Saddam Hussein before 

1990, for example? 

Mr. SCHENK. I personally don’t—I can’t comment—I don’t 

have——

Mr. ROHRABACHER. Did your bank deal with Saddam Hussein before 1990? 

Mr. SCHENK. I am not in a position to respond. I don’t recall. I 

joined Paribas, for the record, in 1989, and Paribas merged with 

BNP in 2000. I cannot speak prior to 2000 for anything associated 

with BNP. I just don’t have that kind of knowledge. And I honestly 

didn’t know the answer to that question. 

Mr. ROHRABACHER. Well, that is astounding that you don’t know 

the answer to that question. This is huge. This huge contract that 

your bank has, and you don’t even know the history of your bank’s 

association with Saddam Hussein. 

Mr. SCHENK. It was a very specific question. I provided a specific 

answer. I arrived at BNP-Paribas——

Mr. ROHRABACHER. You can read your historic background of 

your bank. You can review the history of your bank. This is a 

multi-billion-dollar contract. You are telling me you didn’t even review it enough to know whether your bank had had activities with 

Saddam Hussein’s regime before 1990? 

Mr. SCHENK. I am not completely comfortable with your characterization here. Understand the nature of our business: BNP won 

a contract through a competitive bid in 1996 with an RFP. And 

there were a short-listed group of banks based on a number of criteria that were provided, and we won that. 

Mr. ROHRABACHER. You won that. And we are talking about a 

multi-billion-dollar endeavor, and you are not aware of the history 

of the bank’s relationship with the country that is in the center of 

that multi-billion-dollar business deal? 

Mr. SCHENK. First of all, my experience with the bank is in the 

U.S. I just don’t—I do not have that kind of——

Mr. ROHRABACHER. It would seem to me that if you came here 

to testify, you would know that, frankly. That is my opinion, and 

we will move on to something else. 

Let’s talk about some of your other clients who you may know 

about. First of all, does the bank differentiate between democratic 

governments and nondemocratic governments in relationship to the 

people it takes on as clients? 

Mr. SCHENK. I can speak with reference to our North American 

operations, and in North America we have several government-related entities as clients: Fannie Mae, Ginnie Mae, people like that. 

And we deal with the U.N., and we deal with U.S. corporate relationships. 

47

I really am not in a position to comment on any standard globally for the bank as you posed the question. We look at every client 

on an individual basis in accordance with procedures we have, 

which tend to judge a number of criteria. Credit worthiness obviously is one. 

Mr. ROHRABACHER. Mr. Payne’s criticism may well be justified 

then, right. You are trying to tell me you can’t answer whether or 

not your bank is willing to take on, let’s say, some wondrous and 

noteworthy regime, some praiseworthy regime the likes of Burma 

or some country like that? 

Mr. SCHENK. The bank has criteria for dealing with its clients 

and would view each client——

Mr. ROHRABACHER. It is reported that Yasser Arafat has stored 

bundles of money in various places. Is it possible that some of that 

money is stored in your bank? 

Mr. SCHENK. I am not in a position to comment. 

Mr. ROHRABACHER. Let me note for the record, and from my perspective—look, I am a former journalist. I am a writer by profession; I am not a lawyer. I know there a lot of lawyers who will just 

take answers like that as, ‘‘Well, that is all we legally have to say,’’ 

or ‘‘This is how legally we would say something to don’t get ourselves in trouble.’’ It is just not good enough. I mean, it is just not 

good enough. You are here before the United States Congress. And 

I think Mr. Payne’s heartfelt comments are something that I pay 

attention to, and we are talking about some horrible people around 

the world who are gangsters who run countries. And it seems like 

there are financial institutions that are, frankly, making their profit, at least in part, by doing the bidding of these gangster regimes. 

And you have said nothing—nothing—that would make me feel any 

more comfortable that your bank isn’t, and that you personally because of your association with the bank, are not engaged in that 

type of, what I consider to be, immoral activity. 

Mr. SCHENK. Well, I think it is a terribly unfair characterization. 

And in response to the questions about BSA and AML, recall that 

my responsibilities reside in North America, and in that context, 

and as oversight over the program, the U.N. Oil-for-Food Program 

is administered out of our New York operation. 

Mr. ROHRABACHER. Well, let’s be specific. Your bank was the correspondent bank for the Central Bank of Iraq when Saddam Hussein was in power before 1990; was it not? Okay. 

Mr. SCHENK. I honestly am not in a position—I just——

Mr. ROHRABACHER. We are in a situation right now where we are 

trying to find out about how—what you call letters of credit, or 

what became vouchers in some way—were transmitted from one 

person to another person in a way that was detrimental to the people of Iraq and the people of the world. 

And some of us believe that some people have been profiteering 

off this type of activity and that morality didn’t come into play. 

Well, it seems to me that you have done nothing to convince me 

that your bank wouldn’t be interested in taking a look at such opportunities. 

Mr. SCHENK. Well, I am disappointed to hear you say that. The 

procedures in place today for working on the Oil-for-Food Program 

have processes in place that ensure that we are not dealing with 

48

bad people. When bad people arrive, they enter into our filtering 

systems, and they are filtered out. 

Mr. ROHRABACHER. But when they start talking about vouchers, 

isn’t it some kind of an indication that when you have some new 

mechanism for transferring wealth, that all of a sudden there 

should be an alarm bell that goes off, and they say, ‘‘We should 

really look into this a little bit deeper.’’? 

Mr. SCHENK. Well, I am not the expert on this side of it. There 

are a couple of people in our bank that may be able to better respond to this. But the notion of vouchers arrived sometime earlier. 

It is within the last year or so that this thing came to light. When 

those names appeared, we did review all of the transactions, and 

we reported those transactions that may have involved names that 

were on the famous list of 270. We didn’t sit idly by. 

Mr. ROHRABACHER. Because it was required by the PATRIOT 

Act, correct? 

Mr. SCHENK. I am not so sure. It wasn’t a legal list. Even today, 

there is no legal list that you can run against that. I think we did 

that of our own volition. If it is required literally by the PATRIOT 

Act, we would do it. We did it. 

Mr. ROYCE. Thank you very much. 

Mr. ROYCE. We are going to go to Mr. Leach of Iowa. 

Mr. LEACH. You head the division of the bank in New York that 

is a traditional commercial bank; is that correct? 

Mr. SCHENK. We have both a corporate banking business as well 

as a broker-dealer operation. So we actually have a corporate and 

investment banking operation. 

Mr. LEACH. Do you trade in products? 

Mr. SCHENK. Yes. 

Mr. LEACH. Do you trade in oil? 

Mr. SCHENK. Yes. 

Mr. LEACH. In your trading function, did anyone bring vouchers 

to your bank? 

Mr. SCHENK. Not to my knowledge. 

Mr. LEACH. So not one of those 270 recipients of vouchers came 

to your bank to trade? 

Mr. SCHENK. I have never heard anything about that. I would be 

absolutely amazed if it happened. 

Mr. LEACH. One of the revelations is that as much as 10 percent 

of contracts were kickbacks. When you transferred money, would 

you at any time reserve 10 percent for one function? 

Mr. SCHENK. No, sir. 

Mr. LEACH. Okay. Do you have any relationship with the 

Rafidain Bank in Amman? 

Mr. SCHENK. I don’t know. 

Mr. LEACH. In terms of profitability in this whole process, how 

does your bank make money? 

Mr. SCHENK. It specifically is related to the Oil-for-Food Program. We have a process by which we make confirmation fees and 

issuance fees on letters of credit and amendment fees associated 

with transactions. There were some 20,000 plus letters of credit, 

and an additional 30,000 amendments to those letters of credit over 

the life of the program. 

49

Mr. LEACH. And presumably you would have deposit interest as 

well? 

Mr. SCHENK. No. We keep deposits. The oil money comes into the 

bank. Certain money then is forwarded onto the U.N. for other programs, such as relief, the northern provinces. We retained 51 percent of the proceeds from the oil sales. They were kept in an account by the U.N. Those moneys were there to collateralize the LCs 

that were issued on behalf of providers of services or products to 

Iraq, and that we issued letters of credit to collateralize. 

Mr. LEACH. Would you receive interest on these? 

Mr. SCHENCK. No, we did not. The U.N. received interest on that 

account. We did not profit from the deposits made at the bank. 

Mr. LEACH. How much profit do you think your bank made on 

your involvement with Oil-for-Food? 

Mr. SCHENCK. We estimate that over the 8 years of the program, 

we made, pretax, approximately $90 million. 

Mr. LEACH. I want to go to a question that my colleague raised 

just because your answer, I want to be very definite about it. He 

asked if—and let me broaden it—did Yasser Arafat or his family 

ever have an account with your bank? And you said you are not 

in a position to comment. Does that mean you don’t know? 

Mr. SCHENCK. I am sorry, I don’t know. 

Mr. LEACH. You don’t know? 

Mr. SCHENCK. I just don’t know. 

Mr. LEACH. Your colleague here, Mr. Farachi, would you know? 

Mr. FARACHI. I don’t know. 

Mr. SCHENCK. Excuse me. My good counsel, Mr. Bennett, reminds me that I can at least speak to what I know as it relates 

to New York, and the answer is, in the United States we do not 

have an account. 

Mr. LEACH. Thank you. Do either of you have a personal judgment that your bank did anything that would be in violation of 

law, or unethical? Would you, sir, Mr. Schenck? 

Mr. SCHENCK. With reference to the Oil-for-Food Program? 

Mr. LEACH. Yes. 

Mr. SCHENCK. To my knowledge, based on my knowledge of that 

program, the systems we have in place and the procedures that we 

have employed, I am not personally aware of anything that would 

constitute—remotely constitute—a violation of law. 

Mr. LEACH. Or unethical? 

Mr. SCHENCK. Or unethical. 

Mr. LEACH. Mr. Farachi, would you——

Mr. FARACHI. I will agree with that statement made by Mr. 

Schenck. 

Mr. LEACH. Thank you, Mr. Chairman. 

Mr. ROYCE. Thank you, Mr. Leach. 

I want to thank our witnesses for testifying today. It is my understanding that the Financial Services Committee will be following up on these issues both with BNP and with the Federal Reserve Board after we reconvene in January. And, again, I want to 

thank the Members for their participation today as well. This hearing stands adjourned. 

[The prepared statement of Mr. Biern follows:]

50

PREPARED STATEMENT OF HERBERT A. BIERN, SENIOR ASSOCIATE DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

INTRODUCTION

Mr. Chairman, thank you for the opportunity to appear before the Committee on 

International Relations to discuss the obligations of banking organizations under 

the Bank Secrecy Act (BSA) and the USA Patriot Act and the activities of bank supervisors in this important area. Money laundering and terrorist financing can, if 

not properly controlled, pose significant threats to our financial system and nation. 

Due to these risks, the Federal Reserve and the other bank supervisory agencies 

work to ensure that banking organizations have the appropriate anti-money laundering (AML) compliance programs in place. 

As the Committee requested, in my testimony today I will provide:

• a brief ‘‘primer’’ on money laundering and terrorist financing;

• an outline of BSA/AML statutory and regulatory requirements (in particular, 

I will address a few key requirements with which banking organizations must 

comply, such as suspicious activity reporting requirements and customer due 

diligence standards);

• a description of the roles of the Federal Reserve and other banking and government agencies with regard to BSA/AML; and

• a summary of the Federal Reserve’s BSA/AML supervisory program (including a description of the examination process, related enforcement and applications programs, and a few key interagency initiatives) in order to illustrate 

how bank supervisors carry out their responsibilities.

As we discussed with the staff of the Committee in advance of today’s hearing, 

this afternoon I will not be discussing the BSA/AML practices of any particular 

banking organization supervised by the Federal Reserve or the results of any supervisory efforts that were undertaken to determine compliance with applicable antimoney laundering statutes and rules at any specific institution. 

Banking organizations today are responsible for complying with a number of laws 

and regulations to combat money laundering and terrorist financing. These obligations span a number of statutes and regulations including the BSA, rules issued by 

the U.S. Department of the Treasury and the banking agencies, and the legislation 

and regulations that enact the various sanction programs administered by Treasury’s Office of Foreign Assets Control—or OFAC. To ensure that banking organizations have the programs in place to fully comply with all of their legal obligations 

and to effectively identify and manage all of the risks associated with their business 

operations, the Federal Reserve has long included a review of banking organizations’ 

anti-money laundering compliance programs as part of our safety and soundness examinations. In addition, we and the other banking agencies have developed guidance designed to help banking organizations understand applicable statutory and 

regulatory requirements and our compliance expectations. 

MONEY LAUNDERING AND TERRORIST FINANCING

The central purpose of the Bank Secrecy Act is to help identify situations when 

the U.S. financial system and the institutions that comprise that system may be 

used to facilitate money laundering, terrorist financing and other illicit financing activities. In both money laundering and terrorist financing, criminals are able to exploit the openness of our financial system to launder criminal proceeds, or to support terrorist activity, and ultimately, to hide their true purpose. 

Money laundering is the criminal practice of filtering ill-gotten gains or ‘‘dirty’’ 

money through a maze or series of transactions, so the funds are ‘‘cleaned’’ to look 

like proceeds from legal activities. Although money laundering can be diverse and 

complex, it basically involves three independent steps that can occur simultaneously: the ‘‘placement’’ of the unlawful proceeds into the financial system in an 

effort to avoid attracting the attention of law enforcement; the ‘‘layering’’ of the proceeds through a series of transactions to create confusion about the origin and true 

owner of the funds, and complicate the paper trail; and the ‘‘integration’’ of the proceeds wherein the launderers seek to create the appearance of legitimacy through 

additional transactions. 

In contrast with money laundering, the motivation behind terrorist financing is 

ideological rather than profit-based. Typically, terrorist financing includes the use 

of both clandestine and legitimate sources of financing, which is a key difference 

from traditional money laundering. However, terrorists and their support organizaVerDate Mar 21 2002 13:43 Mar 31, 2005 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 F:\WORK\FULL\111704\96930.000 HINTREL1 PsN: SHIRL
51

tions have been found to use the same methods as other criminal groups to launder 

funds. For example, law enforcement reports that terrorist financiers use currency 

smuggling; structured deposits to, or withdrawals from, bank accounts; purchases 

of various types of monetary instruments; and circuitous funds transfers in order 

to hide financial support. Terrorist financing is generally more difficult for banking 

organizations to identify. Funding for terrorist attacks does not always require large 

sums of money, and the associated transactions may not be complex. The movement 

of small sums of money for laundering or terrorist purposes can be a challenge for 

a banking organization to identify with no other information. 

STATUTORY AND REGULATORY REQUIREMENTS OF BANKING ORGANIZATIONS

With that brief explanation of money laundering and terrorist financing, I will 

now outline a brief history of the statutory and regulatory framework in the United 

States to combat these crimes and then describe a few of the key BSA/AML requirements placed on banking organizations today. 

First and foremost, in 1970, Congress passed the Currency and Foreign Transactions Reporting Act otherwise known as the ‘‘Bank Secrecy Act’’ that established 

requirements for recordkeeping and reporting by banks and other financial institutions. The BSA was designed to help identify the source, volume, and movement of 

currency and other monetary instruments into or out of the United States or U.S. 

financial institutions. The statute sought to achieve that objective by requiring individuals, banks, and other financial institutions to create a paper trail by keeping 

records and filing reports determined to have—quoting from the law—a ‘‘high degree of usefulness in criminal, tax and regulatory investigations and proceedings.’’ 

Part of the paper trail was the filing of Currency Transaction Reports, or CTRs, for 

currency transactions in excess of $10,000. CTRs and other reports enable law enforcement and regulatory agencies to pursue investigations of criminal, tax and regulatory violations. 

The next significant development was the enactment of the Money Laundering 

Control Act of 1986 that sought to preclude circumvention of the BSA requirements 

by imposing criminal liability for an institution or person that knowingly assists in 

the laundering of money, or who structures transactions to avoid reporting. It also 

directed banks to establish and maintain procedures reasonably designed to assure 

and monitor compliance with the reporting and recordkeeping requirements of the 

BSA. In January 1987, all federal banking agencies issued essentially similar regulations requiring banks to develop procedures for complying with the BSA and other 

AML requirements. For the Federal Reserve, the anti-money laundering program 

rule is set forth in Regulation H (12 C.F.R. 208.63). 

The 1992 Annunzio-Wylie Anti-Money Laundering Act strengthened the sanctions 

for BSA violations and the role of the Treasury Department. Two years later, Congress passed the Money Laundering Suppression Act that primarily addressed 

Treasury’s role in combating money laundering. 

More recently, in response to the terror attacks of September 11th, Congress 

passed the Patriot Act, more formally known as the Uniting and Strengthening 

America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. Title III of the Patriot Act is the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Patriot Act is arguably the single most significant AML law that Congress has passed since the BSA 

itself. Among other things, the Patriot Act criminalized the financing of terrorism 

and augmented the existing BSA framework by strengthening customer identification requirements for banks and other financial institutions, prohibiting banks from 

engaging in business with foreign shell banks, requiring banks to enhance their due 

diligence procedures concerning foreign correspondent and private banking accounts, 

and improving information sharing between banks and with the U.S. government. 

The Patriot Act and its implementing regulations also:

• expanded the AML compliance program requirements to all financial institutions, including broker-dealers and casinos;

• increased the civil and criminal penalties for money laundering;

• facilitated access to records and required banks to respond to requests for information within 120 hours;

• required regulatory agencies to evaluate an institution’s AML record when 

considering bank mergers, acquisitions, and other applications for business 

combinations; and

• provided the Secretary of the Treasury with the authority to impose ‘‘Special 

Measures’’ on jurisdictions, institutions, or transactions that are of ‘‘primary 

money-laundering concern.’’

52

Most of the rulemaking under the Patriot Act is now completed, and banking organizations have made significant investments to ensure compliance with these requirements. 

ROLE OF GOVERNMENT AGENCIES

To effectively oversee compliance with the BSA/AML requirements in banking organizations, Treasury and the federal banking agencies have had an important partnership for a number of years. To help you understand the roles we play, I will 

briefly describe the functions of a few of the key agencies engaged in BSA/AML 

oversight. 

A number of government agencies play a critical role in promulgating BSA regulations, developing examination guidance, and ensuring compliance with and enforcing the BSA. With respect to banks, these agencies include the U.S. Department of 

the Treasury, Treasury’s Financial Crimes Enforcement Network (FinCEN), and the 

federal banking agencies (Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of 

the Comptroller of the Currency, and Office of Thrift Supervision). The Department 

of Justice administers any prosecutions for money laundering or for criminal violations of the BSA . Finally, Treasury also administers the foreign sanctions program 

through OFAC. 

U.S. Department of the Treasury 

The U.S. Department of the Treasury has statutory authority to administer the 

BSA, and has delegated this authority to FinCEN, one of the department’s bureaus. 

In this capacity, FinCEN promulgates regulations, provides outreach and guidance 

to the regulated industries, and pursues civil enforcement actions in certain circumstances. FinCEN has authority to examine institutions for compliance with the 

BSA, but has delegated this examination authority to other federal agencies—including the Federal Reserve—for institutions within their respective jurisdictions. 

As we explain below, the bank supervisory agencies use their own examination authority to assess compliance with the Bank Secrecy Act by organizations within 

their jurisdiction. 

While Treasury has delegated its examination authority, it remains the overall 

administrator of the BSA. The role has become all the more important as BSA requirements have expanded beyond traditional financial service providers to include 

not only other federally functionally related financial services providers, but also casinos, money services businesses, insurance providers, and others. To enhance coordination of the administration of the BSA across industry sectors, FinCEN has entered into, or is in the process of entering into, memoranda of understanding for information sharing with each of the federal agencies that examine for BSA compliance—that is, the federal banking agencies, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Internal Revenue 

Service. The MOU with the banking agencies, which was executed in September, 

details the types of information that will now be shared among the banking agencies 

and FinCEN with the goal of assisting FinCEN to fulfill its role as administrator 

of the BSA and to enhance the banking agencies’ examination efforts in this area. 

(I should note in this regard that well before the execution of the recent MOU, the 

Federal Reserve routinely shared critical information concerning BSA compliance 

with FinCEN on a case-by-case basis.) 

Federal Banking Agencies 

The federal banking agencies expect the banking organizations they supervise to 

take reasonable and prudent steps to combat money laundering and terrorist financing in order to minimize their vulnerability to such activities. The agencies require 

banking organizations under their supervision to establish and maintain an antimoney laundering compliance program that addresses the risks presented by the nature, extent, and complexity of the banking products and services offered, by an organization’s customer base, and other factors. Today, it is abundantly clear that 

banking organizations face legal, reputational, and operational risks when they do 

not perform appropriate due diligence and safeguard their institutions with adequate internal controls to mitigate risks. For this reason, the commitment of the 

federal banking agencies to ensuring compliance with the BSA continues to be a 

high supervisory priority. 

The federal banking agencies work to ensure that the banking organizations they 

supervise understand the importance of having in place effective AML compliance 

programs. This obligation is ‘‘dynamic’’—that is, a bank’s policies and procedures 

must reflect any expansion of business operations and new products and services. 

An organization’s AML program should also take into account developments within 

53

the industry, as new regulatory standards are introduced, as industry best practices 

evolve to better manage risks, as law enforcement authorities provide feedback 

about laundering and terrorist funding schemes, and as improved systems and software become available to enhance compliance. 

Office of Foreign Assets Control 

Treasury’s OFAC administers and enforces economic and trade sanctions against 

targeted foreign countries, terrorism-sponsoring jurisdictions and organizations, and 

international narcotics traffickers based on U.S. foreign policy and national security 

goals. OFAC acts under presidential wartime and national emergency powers and 

authority granted by specific legislation to impose controls on transactions and 

freeze foreign assets under U.S. jurisdiction. Acting under authority delegated from 

the Secretary of the Treasury, OFAC promulgates, develops, and administers the 

sanctions under its statutes and executive orders. 

OFAC requirements are separate and distinct from the BSA, but both OFAC requirements and the BSA share a common national security goal. Because institutions and regulators view compliance with OFAC sanctions as related to BSA compliance obligations, supervisory examination for OFAC compliance is typically connected to examination of an institution’s BSA compliance. Examiners focus on a 

banking organization’s compliance processes and evaluate the sufficiency of a banking organization’s implementation of policies, procedures and systems to ensure 

compliance with OFAC regulations. 

KEY BSA/AML REQUIREMENTS

Before going forward, it is worth taking some time to outline a few of the most 

significant BSA/AML requirements placed on banking organizations. These requirements serve as the framework for BSA/AML examinations as they are the core of 

a banking organization’s BSA/AML responsibilities: the anti-money laundering compliance program, the customer indentification program, and suspicious activity reporting requirements and the customer due diligence program. 

Anti-Money Laundering Programs 

Under the Bank Secrecy Act, all financial institutions must develop, administer, 

and maintain a program that ensures compliance with the BSA and its implementing regulations, including reporting and recordkeeping requirements, and each 

federal banking agency, including the Federal Reserve, has specific rules requiring 

such programs. A strong anti-money laundering compliance program that is tailored 

to a bank’s business operations and risks, and rigorously followed by bank personnel, should ensure full compliance with all legal requirements, as well as effective risk management. 

At a minimum, a banking organization’s anti-money laundering compliance program must be documented in writing, approved by the board of directors (or its 

equivalent), and noted in the minutes of board meetings. By law, the program must 

include the following four components:

• a system of internal controls to assure ongoing compliance with the BSA;

• independent testing of the banking organization’s compliance with the BSA;

• the designation of an individual responsible for coordinating and monitoring 

day-to-day compliance with the BSA; and

• training for appropriate personnel. 

Customer Identification Program 

Under the BSA, as amended by the Patriot Act, every financial institution must 

implement a written Customer Identification Program (CIP) appropriate for its size, 

location, and type of business. The CIP must be incorporated into the institution’s 

anti-money laundering compliance program and must be approved by the institution’s board of directors. The CIP must include account-opening procedures that 

specify the identifying information that will be obtained from each customer, and 

it must include reasonable and practical risk-based procedures for verifying the customer’s identity. These procedures must enable the institution to form a reasonable 

belief that it knows the true identity of each customer. 

Suspicious Activity Reporting Requirements and Customer Due Diligence 

Under the Bank Secrecy Act and the suspicious activity reporting rules promulgated by the Federal Reserve, the other federal banking agencies, and Treasury in 

1995, banking organizations are required to report to the government any instances 

of known or suspected criminal or suspicious activity by filing a Suspicious Activity 

Report, or SAR. To ensure that it will be able to identify suspicious activity, a bankVerDate Mar 21 2002 13:43 Mar 31, 2005 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6621 F:\WORK\FULL\111704\96930.000 HINTREL1 PsN: SHIRL
54

ing organization should have in place a customer due diligence (CDD) program 

under which the organization (1) assesses the risks associated with a customer account or transaction, and (2) gathers sufficient information to evaluate whether a 

particular transaction warrants the filing of a SAR. In addition, appropriate systems, processes, and controls should be in place to monitor and identify suspicious 

or unusual activity. Common processes include employee referrals, manual systems, 

automated systems, or any combination, which vary based on the risk and size of 

the banking organization. 

The concept of CDD incorporates and builds upon the CIP requirements for identifying and verifying customer identification. The goal of a CDD program is to conduct 

a risk assessment to develop and maintain an awareness of the unique financial details of the banking organization’s customers joined with an ability to generally predict the type and frequency of transactions in which its customers are likely to engage. In doing so, banking organizations can better identify, research, and report 

suspicious activity as required by the BSA and the agencies’ regulations. It is essential that CDD programs be tailored to each institution’s BSA/AML risk profile and 

that they include monitoring systems and procedures for identifying transactions or 

activities inconsistent with a customer’s normal or expected banking activity. 

It is important to note that sound practices in the banking industry and statutory 

and regulatory standards for specific CDD protocols vary depending on the activities 

associated with different types and volumes of banking transactions and their risk. 

For example, a bank’s CDD procedures for its large, publicly held corporate account 

holders such as General Motors and IBM will be very different than a U.S. bank’s 

customer due diligence procedures associated with its foreign correspondent banking 

activities. In the former, it is easier to understand the nature of the transactions 

undertaken by General Motors or IBM and identify what may be suspicious—for example, new requests for loans to fund transactions that are inconsistent with the 

normal, routine business activities of the customer. With respect to the foreign correspondent banking business, given the special risks associated with this activity it 

is expected that the U.S. bank’s customer due diligence procedures include a review 

of the nature of the business of its foreign respondent bank. In higher risk cases, 

U.S. banking organizations may also now be expected to look at what banks and 

other entities do business with the foreign respondent bank and review the types 

of transactions that will be undertaken by the respondent bank and its customers—

an evolving ‘‘know your customer’s customer’’ standard in a limited area of a bank’s 

correspondent banking activities. 

THE FEDERAL RESERVE’S BSA/AML SUPERVISORY PROGRAM

Understanding how the Federal Reserve conducts its BSA/AML examination program and related functions should be instructive to the Committee because it will 

illustrate what bank regulators do in this important area. 

The Federal Reserve’s BSA/AML role is multifaceted. It includes work in the 

areas of bank supervision, enforcement, applications, investigations, and coordination with the law enforcement and intelligence communities. This afternoon, I will 

touch on some of these aspects of the Federal Reserve’s anti-money laundering program, but will concentrate on bank supervision efforts and our enforcement and applications approaches. The other federal banking agencies work in similar ways. 

Our examinations are conducted at the state member banks, bank holding companies, Edge Act corporations, and U.S. branches and agencies of foreign banks supervised by the Federal Reserve. Each of the twelve Federal Reserve Banks has BSA/

AML specialists and coordinators on its staff, and, since the late 1980s, the Board 

has had an anti-money laundering program in its supervision division overseen by 

a senior official. 

The Federal Reserve supervision process includes both on-site examinations and 

off-site surveillance and monitoring. On-site examinations of banks generally occur 

once every twelve to eighteen months, and, at each examination, examiners review 

the institution’s anti-money laundering procedures and its compliance with the BSA, 

as amended by the Patriot Act and recent Treasury regulations. Banking organizations with problems generally are examined more frequently. For large, complex 

banking organizations, safety and soundness examination is a continuous process, 

and anti-money laundering and BSA compliance is incorporated into examinations 

conducted throughout the year. 

A key component of anti-money laundering examinations is the banking organization’s compliance with the anti-money laundering program rule that was already described. When a Reserve Bank conducts a BSA/AML examination of a banking organization under its supervision, the four components of the program establish the 

framework for the examination. To properly evaluate the effectiveness of a banking 

55

organization’s anti-money laundering compliance program, the Federal Reserve has 

developed comprehensive examination procedures and manuals, and regularly provides training for its examiners. 

Examiners first determine whether the institution has included BSA/AML procedures in all of its operational areas, including retail operations, credit, private banking, and trust, and has adequate internal audit procedures to detect, deter and report money laundering activities, as well as other potential financial crimes. As part 

of such an examination, bank examiners also review a banking organization’s fraud 

detection and prevention capabilities, and its policies and procedures for cooperating 

with law enforcement (whether through responding to subpoenas, acting on information requests under the Patriot Act, or otherwise). Examiners also conduct a review 

of the databases of SARs and Currency Transaction Reports to determine if the 

banking organization that is about to be examined has filed such reports and that 

they appear complete and timely. Testing of sample transactions is generally conducted to verify these procedures and systems. 

In those instances where there are deficiencies in the anti-money laundering program, including failures to adequately document self-testing or training, obvious 

breakdowns in operating systems, or failures to implement adequate internal controls, examiners conduct a more intensified second-stage examination that would include the review of source documents and expanded transaction testing, among 

other steps. 

Enforcement 

Federal Reserve supervisory staff makes every effort to assist banking organizations to identify and address anti-money laundering deficiencies as early as possible. 

The Federal Reserve focuses significant resources on the prevention and early resolution of deficiencies within the supervisory framework. When problems are identified at a banking organization, they are communicated to the management and directors. The management and directors are requested to address identified problems 

voluntarily and to take measures to ensure that the problems are corrected and will 

not recur. Most problems are resolved promptly after they are brought to the attention of a banking organization’s management and directors. 

In the event that anti-money laundering problems are pervasive, repeated, unresolved by management, or otherwise of serious concern, the Federal Reserve may 

exercise its enforcement authority by taking an action against a supervised institution. The federal enforcement statutes associated with actions based on BSA/AMLrelated problems and violations are the same for all of the federal banking agencies. 

In general, problems that give rise to enforcement actions relate to compliance with 

the four-part anti-money laundering program rule and with suspicious activity reporting requirements. The provisions of each action are tailored to the organization 

to address particular violations and weaknesses identified by examiners. Actions 

may also require forensic reviews of past transactions to ensure that the organization has properly complied with all filing obligations. As a general rule, banking organizations consent to the issuance of supervisory actions and move quickly to take 

required remedial actions. 

In the case of some deficiencies, informal, non-public supervisory action is sufficient to resolve a problem. Such action could include requiring the adoption of a resolution by an institution’s board of directors or the execution of a memorandum of 

understanding between an institution and the appropriate Reserve Bank. These actions are incorporated into the supervisory process, trigger periodic status reports 

from the institution, and guide the banking organization in making the required improvements. 

Where informal action is insufficient to address problems or the problems are 

egregious, the Federal Reserve may exercise its statutory enforcement authority to 

issue formal action against an institution. Such action includes written agreements, 

cease and desist orders, and civil money penalties. By law, the Federal Reserve 

must make these actions public, and they are posted on the Board’s website. Because these actions are public, they can have a significant impact on a banking organization, particularly one that is a public company. In determining whether formal action is appropriate, Federal Reserve staff considers all relevant factors, including the nature, severity, and duration of the problem, the anticipated resources 

and actions necessary to resolve the problem, and the responsiveness of the directors and management. 

In cases where examiners have identified a violation of the four-part anti-money 

laundering compliance program requirement, the federal banking agencies are required by law to take formal enforcement action. The same law requiring the banking agencies to promulgate rules requiring the compliance program provides that if 

an institution fails to establish and maintain the required procedures, or if it has 

56

failed to correct any previously identified problem with the procedures, then the 

agency must issue a formal action requiring the institution to correct the problem. 

The Federal Reserve takes this responsibility very seriously and has issued a number of public actions against banking organizations in fulfillment of this statutory 

mandate. 

Over the past three years, the Federal Reserve has taken approximately twentyfive formal, public enforcement actions addressing anti-money laundering compliance at a wide variety of institutions. The banking organizations subject to action 

have been large, small, domestic, and foreign. In each case, the examination process 

identified regulatory violations in the organization’s compliance programs that, 

under the law, mandated the action. 

The cases in which the Federal Reserve takes action for anti-money laundering 

problems are also brought to the attention of Treasury’s FinCEN when they involve 

serious BSA problems, so that FinCEN may itself consider assessing a penalty for 

violations of the BSA. The recent MOU among the federal banking regulators and 

FinCEN provides that FinCEN will be notified of all significant BSA deficiencies 

and violations by federal and state bank supervisory authorities. 

In recent cases, FinCEN has taken coordinated actions with federal banking agencies. For example, the Office of the Comptroller of the Currency, FinCEN, and the 

Federal Reserve coordinated their recent enforcement actions against Riggs Bank, 

N.A., Riggs National Corporation, and Riggs International Banking Corporation, the 

bank’s Edge Act subsidiary, to ensure consistency and to ensure concurrent resolution of open issues. FinCEN and the Federal Reserve recently coordinated a concurrent penalty against AmSouth Bank, which was issued together with a joint Federal 

Reserve and State of Alabama order for remedial action. In that case, the Department of Justice also coordinated the issuance of a deferred prosecution agreement 

and forfeiture against the bank. 

The Federal Reserve regularly coordinates enforcement actions with state banking 

supervisors, and enforcement actions involving U.S. operations of foreign banking 

organizations are also resolved in cooperation with supervisors abroad. 

The Applications Process 

To fully gauge the importance of a banking organization having a sound antimoney laundering compliance program, it is also essential that I mention another 

important component of the anti-money laundering supervisory process—the processing of applications and notices filed with the Board. 

The Federal Reserve has had a longstanding practice of considering an applicant’s 

compliance with federal law, including anti-money laundering laws and regulations, 

in evaluating various applications, including applications for bank mergers and acquisitions of insured depositories by bank holding companies as well as applications 

filed by foreign banks to establish U.S. banking offices under the Foreign Bank Supervision Enhancement Act. The Patriot Act memorialized our practice in the application area and required the Board to take into account the effectiveness of an applicant’s anti-money laundering compliance program when it considers applications 

under various laws. 

Under our existing protocols as well as the new law, every application matter considered by the Federal Reserve includes a BSA/AML compliance-related component. 

While I cannot of course comment on specific cases, I can report to you that Board 

staff has on some recent occasions advised banking organizations considering expansion or other activities requiring the filing of applications with the Federal Reserve 

to concentrate instead on enhancing their anti-money laundering or other federal 

law compliance programs. While not the full equivalent of an enforcement action, 

I am sure that you can appreciate that every banking organization that is seeking 

or planning on seeking Federal Reserve approval of an application makes every effort possible to ensure that its anti-money laundering program is considered to be 

fully satisfactory by examiners and that any deficiencies that may be identified are 

addressed as expeditiously as possible. 

OTHER INITIATIVES

Interagency BSA/AML Examination Procedures 

Since July 2004, the federal banking agencies, FinCEN, and state bank supervisors have been collaborating to develop a single set of BSA/AML examination procedures. This is broadly viewed as a critical initiative in the area of safety and 

soundness examination. We expect that the interagency examination procedures will 

go a long way to ensure consistency in the interpretation of BSA and AML requirements among the agencies. 

57

The new procedures will have two important components: a ‘‘core’’ section will be 

used as the term implies, as the platform for the BSA/AML examination, or perhaps 

the entire BSA/AML examination for a very low-risk organization; and ‘‘expanded’’ 

procedures will be used by examiners to address specific lines of business or products that may be more vulnerable to money laundering or terrorist financing. This 

format will allow examiners to tailor the examination scope to the specific profile 

of a banking organization. We expect to release the new examination procedures in 

the second quarter of 2005. 

To support this important work and to provide a forum for the federal banking 

supervisors to discuss matters related to BSA/AML examination and training, a 

BSA Working Group was recently formed under the Federal Financial Institutions 

Examination Council. The working group includes FinCEN and state bank regulators. This new working group complements the work of other, already existing 

interagency and international efforts, such as the Bank Secrecy Act Working Group, 

the Bank Fraud Working Group, the Financial Action Task Force and various Basel 

supervisors committees. 

Guidance to Banking Organizations 

The Federal Reserve and the other bank regulators view their supervisory roles 

as including initiatives to enhance awareness and understanding by examiners, by 

banking organizations under the agencies’ supervision, and by the financial industry 

at large. To promote a full understanding of BSA and anti-money laundering requirements, for example, we issue Supervision and Regulation letters (commonly referred to as SR letters) that are used to advise Reserve Bank supervisory staff, supervised institutions, and the banking industry about policy matters; provide ongoing training to examiners; speak regularly before the financial industry; and issue 

guidance. This is often done in conjunction with other regulators and Treasury. A 

good example of this was the recently issued interagency guidance on the embassy 

banking business, which addressed sound practices and risk management policies 

arising out of the Riggs matter. These initiatives are meant to respond to or anticipate questions that arise regarding anti-money laundering requirements. 

CONCLUSION

Banking organizations that operate in this country are subject to a wide variety 

of laws and regulations requiring them to address money laundering and terrorist 

funding activities through the establishment of compliance programs, monitoring 

systems, and reporting protocols. Regulators believe that banking organizations 

have to take reasonable and prudent steps to combat illicit financial activities such 

as money laundering and terrorist financing, and to minimize their vulnerability to 

risks associated with such activity by taking conscious and well considered steps to 

comply with their legal obligations. 

Thank you again for inviting me today to explain the laws and rules relating to 

countering money laundering and terrorist financing and the obligations of banking 

organizations under them, as well as the bank supervisors’ work in this critical 

area. I will be pleased to respond to any questions.

[Whereupon, at 5:58 p.m., the Committee was adjourned.] 

(59)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE DIANE E. WATSON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman, I think it is critical for Congress to address the serious questions 

surrounding the UN’s mismanagement of the Iraq ‘‘Oil for Food’’ program. The very 

idea that a program designed to feed people starving under the tyranny of Saddam 

Hussein was manipulated to enrich him and his cronies is repulsive. I am happy 

that this committee is taking action to ensure that we can hold the responsible parties accountable. 

But we also need to take action to make sure that this sort of thing does not happen again. So far, Congress is failing in that mission. We have failed to look into 

the Bush Administration’s poor management of Iraqi oil proceeds in the Development Fund for Iraq. 

The Bush Administration has now managed to lose close to nine billion dollars 

of Iraqi oil money. That is scandalous. We should be embarrassed. But it is more 

than just embarrassing. This scandal pulls the rug out from under our mission in 

Iraq and the world at large. 

Mr. Chairman, how can we lecture Iraqis on democracy and accountability when 

we’ve lost nine billion dollars of their money to waste, fraud and abuse? What 

makes us think Iraqis won’t notice when we take nine billion dollars that should 

be spent on hospitals and schools and let it drift into the pockets of thieves? 

At a time when we are trying to win Iraqi hearts and minds—at a time when 

we are trying to convince the Iraqi people that the U.S. presence in their country 

will bring democracy and transparency—the United States cannot afford to so blatantly fail to live up to that standard. 

The CPA’s own Inspector General’s office has 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 Activity’’ office in Iraq. Among the allegations in this report:

• The CPA failed to issue standard operating procedures or develop an effective 

review, tracking, and monitoring system.

• Contract files were missing or incomplete.

• The CPA did not always ensure that prices were fair and reasonable, that 

contractors could meet delivery schedules, or that payments were made on 

time and in full.

• The CPA did not provide adequate supervision over the actions of procuring 

contracting officers as required.

In addition, the Inspector General’s report found that, of the contracts they analyzed, ‘‘67 percent . . . had incomplete or missing documentation.’’

67%, Mr. Chairman! TWO THIRDS. That number itself is a scandal. 

I would like to insert into the record this recent Los Angeles Times article concerning abuse of Iraq development funds. 

I hope this committee can help get to the bottom of the UN’s ‘‘Oil for Food’’ scandal. But we must also make sure that the United States Government is not permitting a similar such scandal to unfold under our watch. This committee should perform our oversight responsibility by holding hearings on the Administration’s management of the Development Fund for Iraq. 

60

MATERIAL SUBMITTED FOR THE RECORD BY THE HONORABLE DIANE E. WATSON, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Main News; Foreign Desk 

The Conflict in Iraq; 100 Fraud Claims Probed

From Reuters 

231 words 

1 November 2004

Los Angeles Times 

Home Edition 

A-5

English 

Copyright 2004 The Los Angeles Times

WASHINGTON

U.S. investigators have opened more than 100 cases this year into alleged abuse 

involving the billions of dollars in U.S. and Iraqi funding to rebuild Iraq, says an 

auditors’ report that is to be released today. 

The report says most allegations involve fraud, waste and abuse of funds, and 

40% are linked to reprisals, theft and other issues. It says 75 cases have been closed 

or referred to other U.S. agencies and 38 remain open. 

The report was prepared for Congress by the inspector-general’s office of the Coalition Provisional Authority, the U.S. occupying power dissolved in June. 

The inspector-general’s office said it expected to release an audit this month on 

the CPA’s handling of money from the Development Fund for Iraq. 

The fund includes proceeds from Iraqi oil sales, frozen assets from foreign governments and surplus money from the U.N. ‘‘oil-for-food’’ program. 

A leaked draft of that audit says at least $8.8 billion in Iraqi funds given to Iraqi 

ministries by the CPA cannot be accounted for. 

In addition to the CPA investigations, the FBI has at least five open and pending 

cases involving Iraq, with two recent ones focusing on public corruption and government fraud, the report says. It gives no details. 

PREPARED STATEMENT OF THE HONORABLE DAN BURTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF INDIANA, AND CHAIRMAN, SUBCOMMITTEE ON THE

WESTERN HEMISPHERE

Mr. Chairman, A dark shadow has been cast over the United Nations. The abuse 

of the Oil-for-Food program was the result of a staggering management failure and 

has raised troubling questions about the credibility of the UN. 

Earlier this week, the Senate Permanent Subcommittee on Investigations estimated that Saddam Hussein amassed $21.3 billion by manipulating UN Security 

Council sanctions after the first Gulf War. The ruthless and greedy tyrant continued 

to enrich his regime and fuel his evil ambitions through the Oil-for-Food framework 

after it was introduced in 1996. 

I am a principal co-sponsor of H.R. 4284 introduced by Congressman Jeff Flake 

last spring. H.R. 4284 requires the withholding of DS contributions to the UN until 

the President certifies that the UN is cooperating in the investigation of the Oilfor-Food program. I am a co-sponsor of this bill because I believe so much more 

could have been achieved had the Oil-for-Food Program been implemented honestly. 

Now it is necessary to withhold payments to the UN until there is a full and transparent accounting with full cooperation from the UN. I urge colleagues who have 

yet to sponsor this bill to do so. 

Overall responsibility for the Oil for Food program’s failure—and this was one of 

the biggest financial scandals of modem times—should lie with UN Secretary General Kofi Annan. The UN’s inability to successfully manage the Oil-for-Food program represents a spectacular failure of leadership on the part of Mr. Annan. 

The $67 billion in UN Oil for Food was designed to provide humanitarian relief 

for the people of Iraq. The program required the UN to oversee approximately $15 

billion a year, by far the largest program it had administered. In fact, it was more 

than five times the UN’s annual core budget. Internal audits of the program were 

not made available to member states. Fifty-five audits prepared by the UN office 

of internal oversight services were not shared with members of the so-called ‘‘661 

Committee of Oversight.’’ Repeated requests for access to the internal audits have 

been denied by the UN. 

A growing body of evidence suggests that proceeds from smuggled oil and manipulation of the Oil for Food program may be financing the current insurgency in Iraq, 

61

where radicals are killing Coalition and Iraqi troops and civilians alike. Car bombings, abductions, and beheadings are a familiar part of this campaign to derail efforts to stabilize and secure the transition from tyranny to freedom. We absolutely 

need to know where ill-begotten proceeds of the Oil for Food program went, and if 

in fact these proceeds are fueling the insurgency. 

The Volcker Commission must operate in an open, transparent manner. Congressional leaders and the Bush Administration should demand full access to all UN 

documents relating to Oil-for-Food. 

The UN should provide a full list of documents currently in its possession that 

relate to Oil for Food. Federal and Congressional investigators should be able to 

question UN officials under investigation by the Volcker Commission. The Volcker 

Commission should be open to public scrutiny and should include third-party representatives seconded from bodies such as the FBI and Interpol. All members of the 

UN Security Council should be furnished with regular updates on the investigation 

and a firm date for publication of the Volcker Report should be announced. 

We are watching the Volcker Commission closely and we expect nothing short of 

a full and transparent investigation. We expect full access both to the U.N. Oil-forFood records and the documents in Baghdad. We must continue to conduct a systematic look at whether Saddam robbed his people of the humanitarian aid they so 

desperately needed in order to fund his extravagant lifestyle and his campaign of 

hate and terror. We must ascertain whether the Oil for Food proceeds were diverted 

to jihadists like Al Qaeda, other extremists, and the insurgency fighting to destabilize Iraq and prevent democratization there today. Thank you.

Æ