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THE U.N. OIL FOR FOOD PROGRAM: CASH COW

MEETS PAPER TIGER

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

EMERGING THREATS AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

OCTOBER 5, 2004

Serial No. 108–286

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

MARSHA BLACKBURN, Tennessee

PATRICK J. TIBERI, Ohio

KATHERINE HARRIS, Florida

MICHAEL C. BURGESS, Texas

ERIC CANTOR, Virginia

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

BETTY MCCOLLUM, Minnesota

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING THREATS AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

MICHAEL R. TURNER, Ohio

DAN BURTON, Indiana

STEVEN C. LATOURETTE, Ohio

RON LEWIS, Kentucky

TODD RUSSELL PLATTS, Pennsylvania

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

TIM MURPHY, Pennsylvania

KATHERINE HARRIS, Florida

DENNIS J. KUCINICH, Ohio

TOM LANTOS, California

BERNARD SANDERS, Vermont

STEPHEN F. LYNCH, Massachusetts

CAROLYN B. MALONEY, New York

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

JOHN F. TIERNEY, Massachusetts

DIANE E. WATSON, California

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. HALLORAN, Staff Director and Counsel

THOMAS COSTA, Professional Staff Member

ROBERT A. BRIGGS, Clerk

ANDREW SU, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on October 5, 2004 ............................................................................ 1

Statement of:

Kennedy, Ambassador Patrick F., U.S. Representative to the United Nations for U.N. management and reform, U.S. mission to the United

Nations, U.S. Department of State .............................................................. 56

Smith, David L., Director, Corporate Banking Operations, BNP Paribas;

Peter W.G. Boks, managing director, Saybolt International B.V; and

Andre E. Pruniaux, senior vice president, Africa and Middle East,

Cotecna Inspection S.A ................................................................................. 97

Letters, statements, etc., submitted for the record by:

Boks, Peter W.G., managing director, Saybolt International B.V, prepared

statement of ................................................................................................... 156

Kennedy, Ambassador Patrick F., U.S. Representative to the United Nations for U.N. management and reform, U.S. mission to the United

Nations, U.S. Department of State, prepared statement of ...................... 62

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, prepared statement of ........................................................... 32

Pruniaux, Andre E., senior vice president, Africa and Middle East,

Cotecna Inspection S.A, prepared statement of ......................................... 324

Ruppersberger, Hon. C.A. Dutch, a Representative in Congress from the

State of Maryland, prepared statement of .................................................. 40

Shays, Hon. Christopher, a Representative in Congress from the State

of Connecticut:

Prepared statement of ............................................................................... 3

Prepared statement of Christine Grenier, First Secretary, Political

Section, French Embassy ...................................................................... 50

Smith, David L., Director, Corporate Banking Operations, BNP Paribas,

prepared statement of ................................................................................... 101

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 18

Waxman, Hon. Henry A., a Representative in Congress from the State

of California:

E-mail dated October 4, 2004 ................................................................... 47

Prepared statement of ............................................................................... 8

(1)

THE U.N. OIL FOR FOOD PROGRAM: CASH

COW MEETS PAPER TIGER

TUESDAY, OCTOBER 5, 2004

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING

THREATS AND INTERNATIONAL RELATIONS, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 11:25 a.m., in room

2154, Rayburn House Office Building, Hon. Christopher Shays

(chairman of the subcommittee) presiding.

Present: Representatives Shays, Turner, Duncan, Murphy, Lantos, Sanders, Lynch, Maloney, Sanchez, Ruppersberger, Tierney,

Watson, and Waxman [ex officio].

Also present: Representative Ose.

Staff present: Lawrence Halloran, staff director and counsel; J.

Vincent Chase, chief investigator; R. Nicholas Palarino, senior policy advisor; Thomas Costa and Kristine McElroy, professional staff

members; Robert A. Briggs, clerk; Hagar Hajjar, intern; Phil

Barnett, minority staff director; Kristin Amerling, minority deputy

chief counsel; Karen Lightfoot, minority communications director/

senior policy advisor; David Rapallo, minority counsel; Andrew Su,

minority professional staff member; Early Green, minority chief

clerk; and Jean Gosa, minority assistant clerk.

Mr. SHAYS. A quorum being present, the Subcommittee on National Security, Emerging Threats and International Relations

hearing entitled, ‘‘The U.N. Oil-for-Food Program: Cash Cow Meets

Paper Tiger,’’ is called to order.

The United Nations Oil-for-Food Program was mugged by Saddam Hussein. Through cynical, yet subtle manipulation, he, and an

undeclared Coalition of the Venal on the Security Council, exploited structural flaws in the program and institutional naivete at

the U.N. to transform a massive humanitarian aid effort in a

multibillion dollar sanctions-busting scam.

How did it happen? How was a well-intentioned program designed and administered by the world’s preeminent multinational

organization so systematically and so thoroughly corrupted?

The answers emerging from our investigation point to a debilitating combination of political paralysis and a lack of oversight capacity, allowed to metasticize behind a veil of official secrecy. Acceding

to shameless assertions of Iraqi sovereignty, sovereignty already

betrayed by Saddam’s brutal willingness to starve the Iraqi people,

the U.N. gave the Hussein regime control over critical aspects of

the program. Saddam decided with whom to do business and on

2

what terms. While Chinese, French, and Russian delegates to the

Security Council’s Sanctions Committee deftly tabled persistent reports of abuses, the contractors hired to finance and monitor the

program had only limited authority to enforce safeguards.

We will hear from these contractors today. BNP Paribas, the

international bank retained by the U.N. to finance oil and commodity transactions through letters of credit, describes its functions as

purely nondiscretionary. Saybolt International, responsible for verifying oil shipments, faced physical and political constraints on performance of their work. Additionally the firm Cotecna Inspection

was given only a limited technical role in authenticating shipments

of humanitarian goods into Iraq.

The U.N. appears to have assumed that the rigor of commercial

trade practices would protect the program, while the contractors

took false comfort in the assumption the U.N. would assure the integrity of this decidedly noncommercial enterprise. Once it became

clear the Security Council was politically unable to police the program, no one had any incentive to strengthen oversight mechanisms that would only be ignored.

As this and other investigations got underway, the companies expressed their willingness to provide detailed information on their

Oil-for-Food activities but confidentiality provisions in U.N. agreements prevented their coming forward until the committee’s

‘‘friendly’’ subpoenas trumped those contractual restraints. Since

then, they have provided thousands of pages and gigabytes of data

which we and other committees are reviewing.

Today we are releasing some of those documents because, apart

from any findings or recommendations we might adopt, a major

goal of this investigation is to bring transparency to secretive U.N.

processes and to put information about this highly important international program in the public domain. The documents provide the

first detailed glimpse into the structural vulnerabilities and operational weaknesses exploited by Saddam and his allies.

From what we have learned thus far, one conclusion seems inescapable: The U.N. sanctions regime against Iraq was all but eviscerated, turned inside out by political manipulation and financial

greed. Saddam’s regime was not collapsing from within; it was

thriving. He was not safely contained, as some contend, but was

daily gaining the means to threaten regional and global stability

again, once sanctions were removed.

Testimony from our witnesses today will contribute significantly

to our ongoing oversight and to the public understanding of the

United Nations Oil-for-Food Program. We sincerely thank them for

their participation today and we look forward to their continued cooperation in our work.

At this time the Chair would recognize the ranking member of

the full committee, Mr. Waxman who is an ex officio member.

[The prepared statement of Hon. Christopher Shays follows:]

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Mr. WAXMAN. Thank you, Mr. Chairman.

Today the committee is holding the fifth congressional hearing to

investigate allegations of mismanagement in the U.N. Oil-for-Food

Program. This humanitarian effort was established in 1995 to provide for the basic needs of Iraqis while U.N. sanctions were in effect. Recently there have been serious allegations of corruption,

overpricing and kickbacks under this program.

And I want to make it clear that I believe it is appropriate for

Congress to investigate these allegations in an evenhanded manner

and follow the evidence wherever it leads.

My complaint is that our scope is too narrow. If we are going to

look at how Iraq’s oil proceeds have been managed, we have an obligation to examine not only the actions of the U.N. but also our

own actions. In fact, I would argue that our first priority should be

to investigate our own conduct.

The United States controlled Iraq’s oil proceeds from the fall of

Baghdad in May 2003 until June 2004. Yet Congress has not held

a single hearing to examine the evidence of corruption, overpricing

and lack of transparency in the successor to the Oil-for-Food Program, the Development Fund for Iraq—which was run by the Bush

administration when the United States exercised sovereignty over

Iraq.

Here are the facts. When the Bush administration took over in

Iraq, it received $20.6 billion through Iraqi oil proceeds, repatriated

funds, and foreign donations. Halliburton was the single largest

private recipient of these funds, receiving $1.5 billion under its contract to run Iraq’s oil fields.

This money belongs to the Iraqi people. It is not a slush fund.

The Security Council directed the administration to use these

funds in a transparent manner for the benefit of the Iraqi people.

The Security Council passed Resolution 1483 which set up the

International Advisory and Monitoring Board to make sure the

Bush administration lived up to its obligations.

But the Bush administration has not complied with this resolution. Reports from auditors at KPMG, an independent certified

public accounting firm, as well as the Coalition Provisional

Authority’s own inspector general, have found that the Bush administration failed to properly account for Iraqi funds.

KPMG said the Bush administration had inadequate accounting

systems, inadequate recordkeeping, and inadequate controls over

Iraqi oil proceeds. It reported that the administration’s entire accounting system consisted of only one contractor maintaining excel

spread sheets. That is one person for $20 billion.

Likewise, the inspector general concluded that the Bush administration had no effective contract review tracking and monitoring

system and that it failed to demonstrate the transparency required.

These actions merit a full congressional investigation. They are

compounded by evidence that the Bush administration is now actively blocking efforts to account for these funds.

For 6 months, the Bush administration has been withholding

documents from international auditors charged by the Security

Council to oversee the administration’s actions. In particular, the

Bush administration is withholding documents about Halliburton’s

receipt of $1.5 billion in Iraqi oil proceeds.

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The auditors have made seven distinct requests for this information, including a letter from the Controller of the United Nations

directly to Ambassador Bremer. But the administration has repeatedly refused to provide the documents, and continues to do so

today.

Three months ago, the international auditors ordered a special

audit of the contract with Halliburton, but again the Bush administration has obstructed their work. Administration officials have refused to approve the audit’s statement of work and refused to issue

a request for proposal. The special audit has simply languished inside the Department of Defense.

At this committee previous hearing, Mr. Claude HankesDrielsma, an advisor to the Iraqi Governing Council, testified that

the Bush administration was not properly accounting for Iraqi

funds. Ambassador Kennedy, who is here again today, could not explain why the Bush administration failed to follow its own rules

and hire an accounting firm to manage the Iraqi oil proceeds. And

the administration failed to adequately respond to the questions for

the record we sent jointly regarding the DFI.

These actions are hypocritical, they are arrogant, they breed resentment in the Arab world and they further deteriorate our global

alliances, but most of all they undermine our efforts in Iraq because they reinforce the image that our primary objective in Iraq

was to seize control of the country’s oil wealth.

If we are going to examine how Iraq’s oil money has been spent,

which I believe we should, we need to proceed in a fair and transparent way; and if we refuse to ask tough questions about the conduct of our own government officials, our efforts will have little

credibility in the eyes of the world.

After the opening statements today, I am going to make a motion

for subpoenas so that we can continue the investigation of the success or failure of the U.N. Oil-for-Food Program which was run by

the United States. I am going to ask for subpoenas, which we

asked for, by the way, when subpoenas were issued for this investigation. We asked for subpoenas on the same basis that we needed

a subpoena, for example, for the corporate banking operations of

BNP Paribas to give us the documents which the chairman is going

to make public today. Those documents would not be turned over

without a subpoena.

Documents will not be turned over to us from the Federal Reserve Bank on the same basis. We need a subpoena to get them.

We need further subpoenas as well, and I will be making a motion

for both subpoenas to be issued so that while we have our hearing

today, we can be prepared to do the full investigation of what happened to the oil money after we took over.

We want to know what happened when the U.N. was running it;

if there was corruption, if there was fraud, if there was a lack of

transparency. But we have a special obligation to know what happened to that money when we took it over, if there was corruption,

if there was fraud, if there was a lack of transparency. And so far

the Bush administration is refusing to help in this investigation to

know what happened after they ran those funds.

So I know, Mr. Chairman we are going to have the opening statements from the Members first. Before we then proceed to the first

7

witness, I will make my motion for subpoenas. And as I understand

it, you are going to ask that vote be held later, after the witnesses

have testified, presumably because we have done too good a job of

getting the Democrats here to vote, and the Republicans, unaware

that the vote would be taking place, are not here in sufficient numbers. I understand that is in the chairman’s discretion.

I want to vote. If it is a bipartisan vote, that would be great. I

think we ought to have a bipartisan vote to get these subpoenas.

If it is a partisan vote, well, I think the American people ought to

know that the Republicans are going to vote to stop a real investigation of the actions of the Bush administration with regard to

the use of those funds and particularly because of the Halliburton

involvement.

[The prepared statement of Hon. Henry A. Waxman follows:]

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Mr. SHAYS. I thank the gentleman. I also thank him for letting

me know that he was going to make this motion, but I did not

know in time to tell the Members. This is a hearing and I don’t

think they thought there would be votes, so I appreciate his letting

us know.

At this time, the Chair would recognize the vice chairman, Michael Turner.

Mr. TURNER. Thank you, Chairman Shays, for holding this hearing and for continuing your efforts to continue to examine the Oilfor-Food Program.

In our first hearing, we explored the accountability and integrity

issues with the program. We discovered a lack of transparency and

little accountability. Except for the actions of the United States and

the United Kingdom, it appears that no one was bringing to light

the corruption in the program.

The Oil-for-Food Program at its creation was poised for corruption. The U.N. allowed Iraq to select not only the suppliers of food

and medicine but also the buyers of Iraqi oil. The mechanisms established by the U.N. for controlling Oil-for-Food contracts were inadequate. Transparency was nonexistent, and an effective internal

review of the program did not occur. We do not know if members

of the Security Council were involved in any of the corruption, but

enough ancillary information exists to question the objectiveness

and credibility of the Security Council and the United Nations.

Mr. Chairman, I appreciate your continued leadership on this important issue. I appreciate your continued leadership on the issue

of our continuing involvement in Iraq and its transition to democracy.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman.

At this time the Chair would recognize Mr. Tierney.

Mr. TIERNEY. Mr. Chairman, thank you. I share your concern

about the diversion of Iraqi oil proceeds through graft, kickbacks,

and other schemes designed to line the pockets of corrupt Iraqi

leaders.

If I may, I would like to read an account about the corruption

that occurred in Iraq under the management previously in charge.

Mr. Said Abdul Kassam was the Iraqi official in charge of withdrawals at the Iraq central bank. He reported that there was no

need to rob the bank in a daring heist with guns and masks, because the bank was robbed every day by the directors of the Iraqi

ministries.

According to Mr. Kassam, they use up all the money they want

to withdraw. If it’s a big amount they can get it in big bags. If it’s

a small amount they get it in a box. But the directors general are

those people who are withdrawing the money. They can take the

money immediately from the bank and put it in their pockets.

Mr. Chairman, I regret to say that this didn’t happen under the

Oil-for-Food Program; it happened under the Development Fund

for Iraq. When I mentioned the previous management, I was talking about this country, the U.S. administration. The account was

from an NPR series called ‘‘Spoils of War’’ and it highlights just

how dysfunctional the Bush administration’s management of DFI

funds actually was. There was virtually no monitoring of what hapVerDate 11-MAY-2000 11:29 Apr 15, 2005 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 D:\DOCS\20052.TXT HGOVREF1 PsN: HGOVREF1
15

pened to Iraqi funds once they left the hands of this administration’s officials.

Indeed, according to the Wall Street Journal article published on

September 17, the Coalition Provisional Authority’s own inspector

general has now completed a report finding that the Bush administration, ‘‘hasn’t demonstrated it kept much control over any of the

assets it seized following the war.’’

In particular, the IG study reportedly concludes that the Bush administration failed to account for $8.8 billion in DFI funds that

were transferred to Iraqi ministries. According to the general report, the occupation government was unable to say for sure whether the money it disbursed was spent properly, or even spent at all.

It is amazing that we have held hearing after hearing about the

United Nations; management of the Oil-for-Food Program, which I

agree we should. I think you are on the right track, and that is

necessary. But we have not held even one hearing on this administration’s mismanagement of Iraqi oil proceeds, and I agree with

Mr. Waxman that is equally as important to the credibility of this

country if we are going to really look at the situation and have the

respect of the world, knowing that we are trying to be transparent

and get to the bottom of how these moneys were expended.

How can we expect the rest of the world to follow this administration’s example? How can we expect them to comply with Security Council resolutions when the Bush administration ignores

them?

Mr. Chairman, we do no service to the administration by allowing them to proceed in this manner. I urge the committee to immediately address these issues and exercise meaningful oversight as

well as continue our hearing process on the U.N. Oil-for-Food Program, but we must be resolute about all of the improprieties or

lapses.

Thank you. I yield back.

Mr. SHAYS. I thank the gentleman.

At this time the Chair would recognize Mr. Duncan.

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

A few years ago, 60 Minutes did a report on the scandalously

high level of waste, fraud, and abuse occurring at the United Nations, much of it with American money. But this Oil-for-Food Program scandal really takes the cake, and so I appreciate very much

your continuing to look into this situation and hold these hearings. Through this program, Saddam Hussein obtained $10.1 billion in

illegal revenues. I remember hearing a talk a few months ago by

Charlie Cook, the very respected political analyst, and he said that

people really can’t comprehend a figure over $1 billion. And it is

difficult to think of how much money $10.1 billion is. This money

was mostly squandered on Hussein’s palaces, luxury cars, and lavish lifestyle that he and his family were living. This theft was

made possible, apparently, by surcharges, illegal kickbacks, and

abuse by U.N. personnel and by the lackadaisical and inept attitude of—and greedy attitude, really, of some of the companies involved that we will hear from today.

The Wall Street Journal reported in an editorial what a lot of

business the U.N. did. Mr. Annan, Kofi Annan’s Secretariat and his

staff collected more than $1.4 billion in commissions on these sales.

16

But during this time the U.N. was doing almost nothing to really

push weapons inspections and other things that they should have

been doing in Iraq.

The U.N. Oil-for-Food Program was the largest humanitarian effort in U.N. history. Unfortunately, it has now become the shining

example of everything that is wrong with this organization. The

United States pays one-fourth of the operating expenses of the

United Nations, one-third of the money to many of the other U.N.

programs, and mostly as much as 90 or 95 percent on most of the

U.N. peacekeeping operation. If the U.N. cannot provide any better

oversight than what we see through this program, then surely our

tax dollars can be spent better elsewhere, particularly at a time

when we have a $71⁄2 trillion national debt, and deficits running in

the $400 to $500 billion range.

Thank you, Mr. Chairman.

Mr. SHAYS. Thank the gentleman.

And the Chair at this time would recognize Ms. Watson.

Ms. WATSON. Mr. Chairman, thank you. I think it is critical for

Congress to address the serious questions surrounding the Bush

administration’s deficit management of Iraqi oil proceeds and other

funds in the Development Fund for Iraq.

We made a commitment to the Iraqi people, a promise that we

would spend their money for their benefit, and we do have to remember that it is their money. We also promised to spend it in a

transparent manner so the entire world would know that we were

managing their funds properly and are not allowing graft, corruption, and mismanagement to infiltrate our mission there.

Unfortunately, Mr. Chairman, it appears that the Bush administration has failed to live up to those commitments. Auditors at the

CPA’s own Inspector General’s Office have issued a report that is

extremely critical of the administration’s management of Iraqi

funds in the Development Fund for Iraq. In particular, the inspector general’s report criticizes actions by the administration’s contracting activities office in Iraq.

If I may, I would like to read just a short portion of the report.

The CPA contracting activity had not issued standard operating

procedures or developed an effective contract review tracking and

monitoring system. In addition, contract files were missing or incomplete. Further, contracting officers did not always ensure that

contract prices were fair and reasonable, contractors were capable

of meeting delivery schedules, and payments were made in accordance with contract requirements.

This occurred because the CPA contracting activity did not provide adequate administrative oversight and technical supervision

over the contracting actions completed by procuring contracting officers as required. As a result, the CPA contracting activity was not

accurately reporting the number of contracts actually awarded by

the CPA contracting activity. This hindered the CPA contracting

activity’s ability to demonstrate the transparency required of the

CPA when it awarded contracts using DFI funds.

Mr. Chairman, this is an indictment of the administration’s entire management approach to the funds of the Iraqi people.

The inspector general went on to warn that because contract files

were not adequately maintained, they cannot be relied upon to enVerDate 11-MAY-2000 11:29 Apr 15, 2005 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 D:\DOCS\20052.TXT HGOVREF1 PsN: HGOVREF1
17

sure compliance or to be used as a source for congressional reporting.

How are we in Congress supposed to be able to conduct our oversight responsibilities when the information is not reliable? The inspector general’s report found that of the contracts they analyzed,

67 percent had incomplete or missing documentation. Sixty-seven

percent, Mr. Chairman. This is a horrendous record.

Finally, the inspector general provided its fundamental conclusion about the administration’s stewardship of these Iraqi funds.

The inspector general reported we do not believe that transparency

can be achieved when pertinent data is unavailable or inaccurate.

Mr. Chairman, this is an embarrassment to our country. The

Bush administration has failed to comply with Security Council

Resolution 1483 and we need to take action.

Thank you Mr. Chairman.

Mr. SHAYS. I thank the gentlelady.

[The prepared statement of Hon. Diane E. Watson follows:]

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Mr. SHAYS. At this time the Chair would recognize Mr. Murphy.

Mr. MURPHY. Thank you, Mr. Chairman.

The focus of today’s hearing is really twofold. First, to investigate

the structural weaknesses that made the Oil-for-Food Program vulnerable to diversion and exploitation; and second, to determine the

steps Oil-for-Food Program manager and contractors took to prevent abuse.

Now, we could spend all day just on point No. 1, but sadly I

think the answer is staring us all in the face. The evidence uncovered over the last year by several different investigations cast little

doubt that one of the fundamental problems with the U.N. Oil-forFood Program was that the U.N. was running it, fueled by the

greed and complicity of other countries.

Despite repeated criticisms and questions of concern, U.N. member countries and U.N. personnel continually turned a blind eye to

the corruption of a program designed to get humanitarian assistance to the people living under one of the most corrupt regimes in

the world. We knew Saddam Hussein was corrupt, and his tactics

of ruthless violence were a way of life. One would think the U.N.

would be aware of this and structure the program in such a way

so as to guard against it. One would think that attempts by Hussein to evade the sanctions through this program would be anticipated, and thus steps taken to counter his money-making scheme

from the beginning, rather than trying to put out fires after the

fact.

Rather, it appears as if the Oil-for-Food Program went out of its

way to encourage scandal and the illicit use of humanitarian contracts to line the pockets of Saddam Hussein and his cronies.

Now, the United States gave millions in lives to France in World

War I, World War II, and Vietnam. Yet they turned their backs on

us when faced with Hussein’s ever-increasing threat to the international community.

France and Russia had two choices: Help us militarily, or intervene directly with Saddam Hussein to cooperate with weapons inspectors and stop his murderous regime. They did neither. Why

didn’t these countries step forward? Perhaps it had something to

do with the fact that evidence suggests Russia was the recipient of

1.366 billion barrels of oil through Hussein’s voucher scheme. And

French companies close to President Chirac also benefited from

Saddam’s power. They were up to their ears in corruption, and the

financial benefit of keeping Saddam Hussein in power weigh more

heavily than their friendship with the United States.

Corruption in the Oil-for-Food Program enriched Hussein to the

tune of $10.1 billion, enough to buy and build more weapons, more

clandestine activity and further undermine the entire U.N. sanctions program.

There was one line in the subcommittee’s background memo that

really sums up the problem with the program, ‘‘The Oil-for-Food

Program was essentially run by Saddam Hussein.’’

How is it that the U.N. could allow the terms of a program

meant to punish a tyrannical leader, while offering assistance to

the very people that suffered under him to be dictated by that very

tyrant? It is because the current nature of the U.N. is to be soft

on terrorism and the world leaders that support it.

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The spineless U.N. produced paper tigers in the form of resolutions that had no teeth. Time and again, the U.N. told Saddam

Hussein and terrorists that the U.N. was all talk and no followthrough. And the world has reaped the grim harvest of that approach: more terrorists emboldened by the U.N.’s weaknesses.

According to classified documents reviewed by the subcommittee,

the U.N. created and encouraged an environment whereby Russia,

France, China, and Syria, all nations standing to gain financially

by the continued support of Saddam’s government, continually

blocked efforts by the United States and the United Kingdom to

maintain the integrity of the Oil-for-Food Program. And all of those

countries sat on the U.N. Security Council.

The contractors responsible for inspecting shipments coming in

and out of Iraq were also undermined by the U.N. Oil-for-Food Program policies. If the obstacles by Iraqi personnel were not enough,

the U.N. denied the contractors the staff and the authority necessary to enforce inspection standards. One example given was an

instance in which Saybolt was unable to prevent the transfer of oil

onto a ship with expired letters of credit. If the inspectors had no

enforcement powers, why have inspectors at all?

Now, some may question why Congress is so interested in this

issue. Our interest in the U.N.’s involvement in Iraq goes far beyond the Oil-for-Food Program. As the United States continues to

fight terrorists in Iraq, our level of cooperation with the U.N. has

been called into question. Yet, if France and Russia and the U.N.

knowingly undermined the mission of the Oil-for-Food Program

and knowingly undermined the efforts to stop Saddam Hussein,

this Congress has a responsibility to ask who our allies are and

who the U.N. is supporting.

When some critics of the Iraq war claim our actions did not pass

a global test, we must remember what interests the global community truly values. As I said before, we have given the French millions of our soldiers’ lives, and they have given us the cold shoulder. France has repeatedly turned to us for help. In response, they

have turned their back on us. The Oil-for-Food corruption scandal

may be the answer of why.

When the United States continues to foot the bill for U.N. peacekeeping missions, when the U.N. is unwilling to support us in our

efforts to protect our own citizens, if winning the approval of the

European countries of the U.N. for U.S. policy is the global test,

maybe we should reconsider and question the reliability and supposed altruism of those sitting in judgment.

I yield back my time, Mr. Chairman.

Mr. SHAYS. Thank the gentleman.

At this time, the Chair would recognize the distinguished gentleman from Vermont, Mr. Sanders.

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

I don’t think there is any disagreement on this committee about

the importance of investigating the U.N. Oil-for-Food Program. It

is important to know how American dollars being contributed to

the U.N. were spent and how the corrupt Saddam Hussein regime

ended up stealing money that should have gone to hungry people

in Iraq. So I have no objection about investigating that important

issue.

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But I think it is equally important not only that we investigate

what the U.N. does with American taxpayer money, it is equally

important to investigate what the Bush administration and the

U.S. Government does with American taxpayer moneys.

You know, Mr. Chairman, I have been on this committee for

more than a few years, and I can recall very clearly that during

the Clinton administration this committee held dozens upon dozens

of hearings to investigate every single allegation relating to the

Clinton administration, no matter how off-the-wall those allegations were. We investigated the Vince Foster suicide. We investigate the Monica Lewinski, so-called Travelgate, Whitewater, ad

infinitum, on and on and on. However, rather amazingly, during

the Bush administration this committee has not held one substantive hearing to investigate any serious allegation against the

Bush administration. And why is that important? It is important

because we have a Republican administration. We have a Republican Senate. We have a Republican House. And it is the moral obligation under the Constitution of the United States that the Congress provide oversight to any administration; otherwise the government doesn’t work.

Yes, it is easy to beat up an administration from another party.

We all know that. But we as Members of Congress have the responsibility to take a hard look at what any administration does,

regardless of what party they are. And all over this country I think

there is a growing concern, that the U.S. Congress has abdicated

its oversight responsibility.

All over America people are asking, why did we in fact go to war?

And I know there are two sides to the issue. This committee hasn’t

looked at the rationale for going to war in Iraq. We haven’t looked

at the leak of the names of CIA agents. We haven’t looked at the

fact that the Medicare actuary was threatened with being fired if

he actually told Members of Congress the truth about how much

money the prescription drug program would cost. We haven’t taken

a look at the Cheney energy task force.

Especially when we come to issues like Halliburton, we have a

double responsibility. Everybody here knows that the Vice President of the United States used to be the CEO of Halliburton. Now,

I am not casting any aspersions on what has happened. But all

over this country people want to know, did Halliburton get a special deal? How come they got no bid contracts? How come billions

of dollars went to Halliburton? Now, how come we are not looking

at that issue?

So, Mr. Chairman, what I would simply say is, yeah, let’s take

a hard look at what the U.N. did. And while I know it is easy to

beat up on France and Germany, it might be a little bit more difficult but may be of more interest to the American people to take

a hard look at what goes on at the Bush administration.

I yield back.

Mr. SHAYS. I thank the gentleman.

At this time the Chair would recognize Mr. Lynch from Massachusetts.

Mr. LYNCH. Thank you, Mr. Chairman.

I too believe that there is a very strong need to carry out a thorough investigation into the circumstances. I would like to focus on,

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however, with the Ambassador’s cooperation, the facts that led us

to this point. Now, here we have a situation where this Oil-for-Food

Program was established back in 1995, after we had fought the

first Gulf war, and it was established specifically because Saddam

Hussein had run that country into the ground. He had failed to address the infrastructure needs and the humanitarian needs of his

own people. He had used the country’s natural resources as his

own slush fund. He had used the basic funds that were in the

treasury, the national treasury, at his own pleasure. He had ignored the basic health and welfare of his citizens in favor of a military buildup.

Saddam Hussein waged wars against Iran and invaded Kuwait.

He had fired SCUD missiles into the civilian populations of Israel.

And we fought a war to remove him from power, to remove him

from Kuwait initially. And even with the evidence of his own atrocities and the evidence of the corrupt activities between him and his

son, squandering the wealth of that country and abusing its citizens, after the United States took a leadership role in establishing

this fund, in deciding who would contract for the Iraqi people, with

this fund of $20 billion, after that worldwide search for who would

negotiate and who would control the terms for the Iraqi people, the

responsibility was given to those same people: Saddam Hussein

and his thugs, his family, the people that have been abusing that

country for the previous 40 years. That was the colossal failure

here, that we allowed Saddam Hussein to call the terms of that

agreement, and he had the support of some of our international

neighbors in getting the most favorable terms, having a private

bank handle this.

We could not get information under the arrangement that was

agreed to between the United Nations, Kofi Annan, Secretary General, and Saddam Hussein and his regime. How did we ever allow

ourselves to be put in this position? How did we allow the victims

here—and there are three sets of victims—one, the Iraqi people.

This was their national wealth. This was their country, their resources; the American taxpayer footing the bill again; and also the

credibility of the United Nations.

There are great misgivings here because of what has gone on.

There is a definite—I haven’t been on this committee that long. I

have come to this committee recently. I have been here, this will

be almost 3 years I have been on this committee. But I can tell you

there is a definite reluctance on this committee to investigate anything.

I am still waiting, after three meetings with the Defense Department, to get the names of some Halliburton individuals whom they

have removed for bribery and corrupt practices with individuals in

Iraq and in the Middle East. On an investigatory committee in the

Congress, and we can’t get the names of our own people when they

have conceded that they were involved in bribery and corrupt practices in which the taxpayers’ funds have disappeared in the millions.

We need to do our job here, and I believe we will get to it eventually. But there has been tremendous wrongdoing here, and we have

to step up to the plate and do what the American people have

asked us to do: Get to the bottom of this.

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I yield back Mr. Chairman. Thank you.

Mr. SHAYS. I thank the gentleman very much.

And, Mrs. Maloney, you’re next.

Mrs. MALONEY. Thank you. Thank you very much, Chairman

Shays, and I thank also Ranking Member Waxman for your holding this important hearing. And welcome, Ambassador Kennedy.

It’s good to see you again.

I think that we learned a great deal last April at our hearing,

but since the appointment of Paul Volcker and the independent inquiry of the Oil-for-Food Program, there is much, much more to understand. I do believe that it is very important that we as an oversight body in Congress look at the U.N. and their financing, but we

must also look at the finances and how we as a government handled the funds. We need to look at that equally. And I have some

grave concerns that some of my colleagues have raised today in

their testimony of the stewardship of the Iraqi oil proceeds and the

successor to the Oil-for-Food Program, the Development Fund for

Iraq which we created.

As was mentioned, on May 22, 2003, after the United States took

control of Iraq, the U.N. Security Council passed Resolution 1483,

formally transferring the Oil-for-Food assets to a new Development

Fund for Iraq, and placing them under the authority of the Coalition Provisional Authority which was headed by Bremer. Resolution 1483 directed the Bush administration to spend these funds on

behalf of the Iraqi people. The Security Council also imposed other

restrictions, and I think these restrictions are important. And in

the testimony today, I want to know why we didn’t follow them.

And I will give several examples:

The Security Council required the administration to deposit all

oil-sale proceeds into the Development Fund for Iraq, which is held

by the central bank of Iraq at the Federal Reserve Bank of New

York.

The Security Council required that all deposits to and spending

from the Development Fund of Iraq be done, ‘‘in a transparent

manner.’’

And the Security Council required that the administration ensure that the Development Fund for Iraq funds were used to meet

the humanitarian needs of the Iraqi people, and for other purposes

benefiting the people of Iraq.

To ensure that the administration complied with these requirements, the Security Council created the International Advisory

Monitoring Board to oversee these actions, the IAMB board. The

Board was envisioned as the primary vehicle for guaranteeing the

transparency of Iraqi funds. When the Bush administration assumed responsibility for these funds, it explicitly agreed to these

terms.

On August 19, 2003, Ambassador Bremer issued a memorandum

stating as follows, ‘‘As steward for the Iraqi people, the CPA will

manage and spend Iraqi funds which belong to the Iraqi people for

their benefit. They shall be managed in a transparent manner that

fully comports with the CPA’s obligations under international law,

including Resolution 1483 of the United Nations.’’

But, Mr. Chairman, the administration has not complied with

the resolution and I do not believe that the requirements were very

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strict. The administration took in, as Mr. Waxman noted, a total

of $20.6 billion while it controlled this Development Fund in Iraq.

On July 15, 2004, the oversight board issued its first audit report

on the administration’s stewardship of Iraqi funds, and this report

was conducted by KPMG, which happens to be headquartered in

the district I represent, the same international certified public accounting firm reviewing the Oil-for-Food Program. So we had the

same auditor for both programs.

KPMG criticized the administration for, ‘‘inadequate accounting

systems, inadequate recordkeeping, inadequate controls over Iraqi

oil proceeds. On the most basic level, KPMG found that the administration failed to follow its own policy, to hire a certified public accounting firm. According to the KPMG report, the CPA was required to obtain the services of an independent certified public accounting firm to assist in the accounting function of the Development Fund of Iraq. But our administration, the current administration never did so. In addition, the sum total of the accounting system used by the administration consisted of—this is directly out of

the KPMG report, ‘‘excel spread sheets and pivot tables maintained

by one individual.’’

The KPMG report concluded as follows: ‘‘the CPA senior advisor

to the Ministry of Finances, who is also chairman of the Program

Review Board, was unable to acknowledge the fair presentation of

the statement of cash receipts and payments, the completeness of

significant contracts entered into by the DFI and his responsibilities for the implementation and operations of accounting and internal control systems designed to prevent detect fraud and error.’’

I believe these are very serious findings. They basically say that

the United States has failed to comply with the transparency and

accountability requirements set forth by the United Nations in the

Security Council Resolution 1483.

So I look forward to the opportunity to question Ambassador

Kennedy about these serious problems. Truly having accountable

and transparency over money is a very important role of government. We try to do this in our own government, and we certainly

should bring the same standards to moneys that we oversaw in

Iraq.

So, again, I thank the chairman and the ranking member for

their continued oversight. It is important, and I look forward to the

opportunity to question Mr. Kennedy.

Mr. SHAYS. I thank the gentlelady.

[The prepared statement of Hon. Carolyn B. Maloney follows:]

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Mr. SHAYS. And at this time, the Chair would recognize Mr.

Ruppersberger.

Mr. RUPPERSBERGER. Sure. Mr. Chairman, I come to this hearing

today with many concerns. My first concern is about the allegations

that have been made and the way they are being investigated.

There are three main charges that have been levied: overpricing

by the Saddam regime; kickbacks made by the companies contracting with Saddam through the program, and what Saddam used

that money for; and three, corruption within the U.N. itself in running the Oil-for-Food Program.

These are all very serious allegations, and if any or all of them

are proven to be true, those individuals proven to be guilty of illegalities and wrongdoing should be brought to full and complete justice. On that I believe we can all agree.

I have serious concerns about the number of investigations occurring, the leaks to the media, the potential of mishandling of valuable evidence, and the use of the court of public opinion, the media

and others, rather than allowing the Paul Volcker investigation to

complete its work.

When we last met in April to discuss the same issue, Members

of both sides of the aisle praised the unprecedented commissioning

of an independent investigation by Kofi Annan and the appointment of Mr. Volcker. Since then, Mr. Volcker has had to assemble

a staff, enter into the memorandums of agreement with multiple

investigations, assemble and review a decade worth of documents,

and all the while answer to U.N. member states, all with vested

interests, including the United States. And that is no easy task.

I am concerned that the current investigations are being politicized and the evidence submitted is being leaked before it is ever

vetted, authenticated, or corroborated.

I am concerned that this is turning out to be an inductive investigation rather than a deductive investigation. And I know that is

the wrong way to conduct a credible investigation.

I urge caution as we proceed further. Let’s consider a few facts:

The first, the Oil-for-Food Program is no longer in existence and

therefore the rush to judgment may do more harm than good.

Second, Mr. Volcker has promised a full and complete investigation report to member states by mid-2005, and we should allow

that investigation to conclude before condemning a report that has

yet to be written.

Three, we are fighting a global war on terrorism that requires

international involvement, including the U.N. damaging the reputation of any politician, national leader, ally, or international institution at this time, this delicate time, without a full vetting of

the facts is simply premature and dangerous. We must follow the

facts, and I am glad to see that the chairman has called these witnesses to deal with two of the three main allegations head on.

I would hope that the same will be done with the allegations

resting on the al-Mada, which is the Iraqi newspaper-published

list, and all who possess or witnessed those documents at one time.

And I would like to hear from the al-Mada editor-in-chief, from

KPMG, Patton Boggs, Fresh Fields, Bucas Derringer, Paul Bremer,

Claude Hankes-Drielsma, to address those documents which are

the starting point of this scandal.

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I also think it would be useful to bring an authentification expert

before this committee to discuss authentification and how it is done

and what it means and why it is so important. Ultimately, I think

we must allow Mr. Volcker to carry out this investigation, to look

at the facts and evidence, to look at his conclusions, and then decide as a Nation what is our best interest to do next.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman.

[The prepared statement of Hon. C.A. Dutch Ruppersberger follows:]

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Mr. SHAYS. At this time I would like to make a unanimous consent that Doug Ose, a member of the full committee and chairman

of the Regulatory Affairs Subcommittee be allowed to participate in

this hearing. Without objection, so ordered, and at this time I

would welcome any statement that Mr. Ose would like to make.

Mr. OSE. Thank you, Mr. Chairman. I was listening with particular attention to Mr. Ruppersberger’s remarks about this being an

inductive investigation as opposed to a deductive investigation. It

seems like we have had a lot of rhetoric today about, you, know

who is guilty and who is not.

I just want to go back to a couple of uncontested facts. The Oilfor-Food Program was established in April 1995 pursuant to U.N.

Security Council Resolution 986. And the food actually started to

flow in December 1996. So there was about a year-and-a-half drag

between the time it was authorized and the time it was actually

implemented. And interestingly enough, the first known request for

any examination of the program in terms of fraud or lack of transparency occurred in the first few days of March 2001.

So for 5 years, from December 1996—41⁄2 years, from December

1996 to March 2001, this program just sailed along without oversight interest or monitoring.

Pursuant to the request in early March 2001 that the 661 committee actually look at this issue, on March 7, 2001 Kofi Annan actually sent a notice to Iraq, saying they have to clean up their act.

Again, from the time of December 1996 to March 2001, nobody paid

any attention. The perpetrators of the scam set the rules. The U.N.

signed off on it, and the administration turned a blind eye.

However, in early March 2001 that changed. Finally somebody in

the administration did something and brought to the attention of

the 661 committee allegations that fraud and lack of transparency

were occurring. I think the record needs to be very clear on this

issue. But the only thing, this fraud that was taking place—excuse

me—that’s inductive. The only time that we finally got around to

examining whether fraud was taking place was in March 2001. The

people who approved the program in the mid-nineties turned a

blind eye to it. The Security Council’s 661 committee, they just

said, just do it; don’t bother us with the details.

But in March 2001, somebody finally started asking the hard

questions. What changed? I hope we examine that issue. What

changed from the mid-nineties to March 2001, so that the questions finally started getting asked? I think that is a central question to this thing, because you cannot uncover fraud. You cannot

reverse years and years of practice by snapping your fingers or

standing up here beating your chest. This culture got set up, it got

established, it got ignored. And in March 2001, we finally called

them on it.

Mr. Chairman, I hope we get to the bottom of this.

Mr. SHAYS. Thank the gentleman.

I ask unanimous consent that all members of the subcommittee

be permitted to place an opening statement in the record and the

record will remain open for 3 days for that purpose. And, without

objection, so ordered.

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I would ask further unanimous consent that all Members be permitted to include their written statement in the record, and, without objection, so ordered.

We have a representative of the French Embassy, but I think we

will have to just make a statement and leave a document. But I

think I will first ask Mr. Waxman to make his motion and then we

will put that on the table.

Mr. WAXMAN. Thank you, Mr. Chairman. I have two separate

motions for subpoenas. The first one is a subpoena under House

rule 11(2)(k)(6). On July 8 this committee issued a subpoena to the

French bank, BNP Paribas, which was responsible for maintaining

the Oil-for-Food escrow account controlled by the U.N. When the

committee issued the subpoena, the argument by the chairman and

others was that a subpoena was necessary because the bank could

not legally cooperate with this committee’s inquiries unless it had

the legal protection afforded by a subpoena. In other words, they

wanted to cooperate, we were told, but they needed to have the

subpoena for legal reasons.

Mr. Chairman, my subpoena is for the Federal Reserve Bank of

New York. This is the bank that maintains the Development Fund

for Iraq which was run by the Bush administration from May 2003

to June 2004. Just as you asked the French bank for documents

relating to the inflow and outflow of funds under the Oil-for-Food

Program, we ask for identical documents from the Federal Reserve

Bank.

In fact, the language of my subpoena tracks the broad language

of your subpoena almost word for word, substituting references to

the Oil-for-Food program with references to Development Fund for

Iraq.

In making this motion, I want the record to reflect that the Federal Reserve Bank has expressed the exact same policy as the

French bank. With respect to cooperating with this committee, they

cannot respond to a simple letter of request, but they are more

than willing to respond to a friendly subpoena, and I want to submit for the record an e-mail received from the counsel and vice

president of the Federal Reserve Bank dated October 4, 2004.

It states as follows: ‘‘with respect to providing DFI account information to the Congress, we concluded as long as we are acting pursuant to a subpoena, we can provide DFI account information for

the period that the DFI was operated by Ambassador Bremer without violating our contractual obligation to the Central Bank of

Iraq.’’

Mr. Chairman, we have an exactly parallel situation. We are

talking about the same funds, the Iraqi oil proceeds, which were

supposed to be used for the humanitarian benefit of the Iraqi people. We are talking about the financial institutions responsible for

maintaining these funds, and we are talking about serious allegations of mismanagement. The only difference is that the United

Nations controlled one set of funds, and the Bush administration

controlled the other. I believe this committee’s legitimacy will be

judged by how it treats these two cases. We can choose to treat

them equally in an even-handed manner, properly exercising our

congressional oversight responsibilities or Mr. Chairman, you and

your colleagues can attempt once again to use procedural machinaVerDate 11-MAY-2000 11:29 Apr 15, 2005 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 D:\DOCS\20052.TXT HGOVREF1 PsN: HGOVREF1
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tions to shield the Bush administration from embarrassment, and

more importantly, from accountability.

My first motion is for the committee to issue a subpoena to Mr.

Timothy Geithner, the president of the Federal Reserve Bank of

New York, to produce the documents relating to the development

fund for Iraq.

I ask unanimous consent that the e-mail be part of the record.

Mr. SHAYS. Without objection, the e-mail will be part of the

record.

[The information referred to follows:]

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Mr. SHAYS. The motion offered by Mr. Waxman is in order under

House rule 11, clause 2(k)(6). That rule states, ‘‘The Chairman

shall receive and the committee shall dispense with requests to

subpoena additional evidence.’’ Pursuant to that rule, the chairman

may determine the timing of the consideration of such request. At

this time the motion shall be considered as entered and the committee will consider the motion offered by the gentleman from California at 2:45 today.

Would you like to make a separate——

Mr. WAXMAN. I offer them separately because I can see no opposition to the first one.

Mr. SHAYS. Would you like me to comment on your motion?

Mr. WAXMAN. If you would.

Mr. SHAYS. The Chair reserves the time to speak, and I just say

that conceptually I think, while I do not agree with the arguments

on why this information is needed and that there is wrongdoing

that requires it, I do think that there is merit in getting this information. So my interest is in getting this information. My inclination is always to write a letter first. In this instance a letter may

not be required with the documentation that you have, and so I

want to consider that. I will reserve judgment, frankly, on that motion.

Mr. WAXMAN. Mr. Chairman, I think that is a reasonable position. As you think about it between now and 2:45, I hope you make

the decision to support the subpoena.

My second motion is for a subpoena under House rule 11, clause

2(k)(6). As I said in my opening statement, the Bush administration is grossly mismanaging Iraqi oil proceeds and other funds in

the Development Fund for Iraq. There have been multiple reports

about the administration failing to manage these funds in an open,

transparent and accountable manner as required by the Security

Council resolution 1483. In addition, the administration is now

withholding documents from the international auditors charged by

the U.N. Security Council to monitor its stewardship of these

funds. I think a subpoena is necessary at this point because the administration has refused requests to voluntarily turn over this information.

Indeed, Mr. Chairman, you issued a press release on June 23 of

this year condemning the administration for failing to provide information to this subcommittee regarding both the Oil-for-Food

Program and the Development Fund for Iraq. This is what you said

about the administration’s replay. ‘‘the response is incomplete.

There is still an insufficient accounting of relevant documents in

custody. Several questions and requests are simply unanswered.’’

The committee still has not received the information we requested on May 21. After the administration rejected the subcommittee’s request for information, I wrote to Congressman Davis,

the chairman of the full committee, on July 9 and asked that he

subpoena the documents. In my request, I tracked exactly the language and format he used to subpoena the French bank handling

the Oil-for-Food account.

On July 12, Chairman Davis wrote back refusing to issue the

subpoena. He said it was premature, that he preferred to send a

letter requesting the information. Well, I wrote to him again on

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July 15 attaching a draft letter for him to sign and send out but

he never did and he just ignored my request entirely.

I wrote again on July 29 repeating my request. To this day he

has failed to respond to my multiple requests to do so. Now that

these voluntary efforts have failed, it is clear we have exhausted

all our options. We have no choice but to issue an subpoena. In

light of these numerous failures to provide information to the

United Nations and the U.S. Congress, I move that the committee

subpoena Defense Secretary Donald Rumsfeld to produce these

specified documents, including records of receipts and disbursements, sole source contracts and other listed materials.

I understand, Mr. Chairman, it is always preferable to send a

letter requesting the information, but if we cannot even get the

chairman of the committee requesting it, and we have no response

to our letters requesting the information directly from DOD, it

seems to me that we have no other course but to go ahead with

the subpoena. To date, we still have not received these documents.

It is clear that we need to move to a subpoena. I urge support for

the subpoena.

Mr. SHAYS. Thank you. We will take that up after we discuss the

first one and I will reserve judgment as well on this, and we will

have dialog before we have that vote. We will have a 5-minute dialog on each of those subpoenas on each side so there will be a 10

minute debate on each motion before we vote.

Let me just say that I see Mr. Lantos is here.

Mr. Lantos, would you like to make a statement on the Oil-forFood Program, or we will get right to our hearing.

Mr. LANTOS. I will defer.

Mr. SHAYS. The French embassy has asked a representative, Ms.

Christine Grenier, to provide some information to the subcommittee. Without objection, I would like to recognize her for a brief

statement.

Mr. OSE. Mr. Chairman, I know it is our normal practice to

swear in our witnesses.

Mr. SHAYS. How brief is your statement? It is very short, a paragraph, so we are not swearing in this witness.

Ms. GRENIER. Thank you, Mr. Chairman, and distinguished

members of the committee, my name is Christine Grenier. I am

First Secretary in the Political Section at the French Embassy. Allegations have been voiced on the role of France in the Oil-for-Food

Program. The French Embassy will prepare a written statement in

response to these unjustified allegations, and I would appreciate

your allowing this statement to be included in the hearing record.

Thank you, Mr. Chairman.

Mr. SHAYS. Thank you very much. We appreciate you honoring

the committee with your presence. We will be happy to insert the

statement into the record. Without objection that will happen.

Thank you very much.

[The information referred to follows:]

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Mr. SHAYS. At this time the Chair would note that we have Ambassador Patrick F. Kennedy, U.S. representative to the United

Nations for U.N. management and reform, U.S. mission to the

United Nations, U.S. Department of State. At this time the Chair

will swear in the witness.

[Witnesses sworn.]

Mr. SHAYS. I note for the record our witness has responded in the

affirmative. I thank the witness for his patience.

Mr. Ambassador, I thank you for your presence and statement.

You have the floor.

STATEMENT OF AMBASSADOR PATRICK F. KENNEDY, U.S. REPRESENTATIVE TO THE UNITED NATIONS FOR U.N. MANAGEMENT AND REFORM, U.S. MISSION TO THE UNITED NATIONS,

U.S. DEPARTMENT OF STATE

Ambassador KENNEDY. Mr. Chairman, distinguished members of

the committee, I welcome the opportunity to appear before you

again to discuss what is commonly known as the United Nations

Oil-for-Food Program.

Mr. Chairman, recent allegations of corruption and mismanagement under the Oil-for-Food Program have been targeted not only

at the Saddam regime but also at companies and individuals doing

business under the program and at U.N. personnel and contractors.

We believe that every effort should be made to investigate these allegations seriously and to determine the facts in each case.

As you are aware, there are currently several congressional investigations looking into the question of Oil-for-Food. The independent inquiry committee headed by Paul Volcker and the Iraqi

board of Supreme Audit in Baghdad are also conducting their investigations. As these inquiries go forward, you have my assurance,

and that of my staff, to cooperate fully with you and your colleagues on other committees and provide all possible additional information and assistance. I welcome the opportunity today to answer your questions relating to these investigations on how the

program was created and operated. At the outset, Mr. Chairman,

I want to reiterate several points I made here previously in April.

First, I want to emphasize that the establishment of the Oil-forFood Program was the result of difficult and arduous negotiations

among 15 Security Council members, a number of whom advocated

a complete lifting of sanctions against Iraq. The Oil-for-Food Program was in no way perfect, but it was, at the time, the best

achievable compromise to address the ongoing humanitarian crisis

in Iraq in the mid 1990’s, while maintaining effective restrictions

on Saddam’s ability to rearm. Sanctions have always been an imperfect tool, but given the U.S. national goal of restricting

Saddam’s ability to obtain new materials of war, sanctions represented an important tool in our efforts.

Mr. Chairman, given this general context, I would now like to

outline some of the details of how the program worked, how it was

created, by whom and how it was operated and was monitored. A

comprehensive sanctions regime was established under U.S. Security Council resolution 661 in August 1990 after the Saddam Hussein regime invaded Kuwait. The council’s unanimity on the issue

of Iraq eroded as key council delegations became increasingly conVerDate 11-MAY-2000 11:29 Apr 15, 2005 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 D:\DOCS\20052.TXT HGOVREF1 PsN: HGOVREF1
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cerned over the negative impact of sanctions on the Iraqi population, the lack of food supplies and the increase in mortality rates

were worldwide news.

The concept of a humanitarian program to alleviate the suffering

of the people of Iraq was initially considered in 1991 with U.N. Security Council resolutions 706 and 712, but the Saddam regime rejected those proposals. The counsel eventually adopted U.N. Security Council resolution 986 in 1995, which provided the legal basis

for what became known as the Oil-for-Food Program. While council

members were the drafters and negotiators of this text, the memorandum of understanding signed between the U.N. and the former

government of Iraq was negotiated between Iraqi government officials and representatives of the Secretary General, in particular his

legal counsel, on behalf and at the request of the Security Council.

Under provisions of resolution 986 and the MOU, the Iraqi government, as a sovereign entity, retained the responsibility for contracting with buyers and sellers of Iraq’s choosing and the responsibility to distribute humanitarian items to the Iraqi population.

This retention of Iraqi authority was insisted upon by Saddam and

was supported by a number of Security Council members, as well

as other U.N. member states. The exception to this was for the

three northern Governorates of Iraq where the U.N. agencies, at

the request of the Council, served as the de facto administrative

body that contracted for nonbulk goods and distributed the monthly

food ration.

The sanctions committee was established under resolution 661 in

1990, also known as the 661 committee, monitored member state

implementation of the comprehensive sanctions on Iraq, and also

was authorized to monitor the implementation of Oil-for-Food Program after its inception.

The 661 committee, like all sanctions committees, operated as a

subsidiary body of the Security Council and was comprised of representatives from the same 15 member nations as the council. The

committee was chaired by the Ambassador of one of the rotating

10 elected members of the council. The committee, during its life

span, was chaired by the Ambassadors of Finland, Austria, New

Zealand, Portugal, Netherlands, Norway and Germany.

Decisionmaking in the committee was accomplished on a consensus basis. All decisions taken by the committee required the agreement of all its members. This procedure is used in all subsidiary

sanctions committees of the Security Council.

In providing oversight and monitoring of the sanctions, the committee and each of its members, including the United States, was

responsible for reviewing humanitarian contracts, oil spare parts

contracts, and oil pricing submitted on a regular basis by Iraq to

the U.N. for approval. The committee was also responsible for addressing issues related to noncompliance and sanctions busting. In

my previous testimony and statement for the record, I have provided an explanation of what we knew about issues relating to noncompliance, what we did to address them and the degree of success

we had in addressing these issues within the confines of the 661

committee.

When the United States became aware of issue related to noncompliance or manipulation of the Oil-for-Food Program by the

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Saddam regime, we raised these concerns in the committee, often

in concert with our U.K. counterparts. At our request, the committee held lengthy discussion and debate over for example allegations

of oil pricing manipulation, kickbacks on contracts, illegal smuggling and misuse of ferry services. To provide the 661 committee

with additional insight on issues related to noncompliance, we also

organized outside briefings by the commander of the Multilateral

Interception Force and other U.S. agencies. Our success in addressing issues of noncompliance was directly related to the willingness

of other members of the committee to take action.

Given the consensus rule for decisionmaking in the committee,

the ability of the United States and the U.K. to take measures to

counter or address noncompliance was often inhibited by other

Members’ desire to ease sanctions on Iraq. As reflected in many of

the 661 committee records which have been shared with your committee, the atmosphere within the committee, particularly as the

program evolved by the late 1990’s was often contentious and polemic, given the fundamental political disagreement between member states over the Security Council’s imposition and continuance

of comprehensive sanctions, a debate exacerbated by the self-serving national economic objectives of certain key member states.

Mr. Chairman, you have recently been to Baghdad and know

that the voluminous Oil-for-Food documents are now being safeguarded for use by the board of supreme audit in their investigation. The American Embassy in Baghdad is currently working on

a memorandum of understanding between the United States and

the government of Iraq regarding access to these documents. We

will keep this committee updated on the status of these negotiations. Mr. Chairman, as you and your fellow distinguished committee colleagues continue your review of the Oil-for-Food Program,

key issues in your assessment likely will be whether the program

achieved its overall objectives and whether the program could have

been better designed at its inception to preclude what some have

suggested were fundamental flaws in its design.

In retrospect, had the program been constructed differently, perhaps by eliminating Iraqi contracting authority and the resulting

large degree of autonomy afforded to Saddam to pick suppliers and

buyers, then the allegations currently facing the program might not

exist. One can postulate the elimination of this authority and the

establishment of another entity to enter into contracts on behalf of

the former government of Iraq, and this entity might have had

tighter oversight of financial flows, thus inhibiting Saddam Hussein’s ability to cheat the system through illegal transaction.

The problem is, of course, that these specific decisions to allow

the government of Iraq to continue to exercise authority, to let Saddam Hussein continue to determine who he could sell oil to and

purchase goods from were all done in the larger context of a political debate on Iraq. It was reluctantly accepted to ensure that the

significant sanctions program would remain in place, thus achieving a U.S. goal.

Mr. Chairman, I want to reiterate a point that I made earlier on

the issue of sovereignty. While we opposed the authoritarian leadership of the former Saddam Hussein regime, Iraq was, and is, a

sovereign nation. Sovereign nations are generally free to determine

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to whom they will sell their national products, and from whom they

purchase supplies. Members of the Security Council, as well as

other member states, insisted on upholding this aspect of Iraq’s

sovereign authority.

These were the arrangements that prevailed under the Oil-forFood Program given this reality. Could alternate arrangements

have been devised, such as authorizing the United Nations or some

other entity to function as the contracting party representing the

people of Iraq in oil sales, and humanitarian goods procurement?

The answer, given that there was not the political will in the Security Council to use its authorities to take charge of Iraq’s oil sales

and humanitarian goods procurement depended on the Iraqi regime’s agreeing. And it did not.

Mr. SHAYS. Ambassador, I am going to have you summarize

when we get back. We have a vote now, and I am going to go to

that vote, so we are going to recess.

[Recess.]

Mr. SHAYS. Ambassador Kennedy, there is going to be another

vote, but just complete your statement. We will put your statement

on the record.

Ambassador KENNEDY. Thank you, Mr. Chairman.

The Security Council’s original scheme for the Oil-for-Food Program outlined in resolution 706 and 712 in 1991 were for a program that would utilize the revenue derived from the sale of Iraqi

oil to finance the purchase of humanitarian supplies for use by the

Iraqi people. It was repeatedly rejected by the Saddam government.

Even after the council adopted resolution 986 on April 14, 1995,

the resolution that established the Oil-for-Food Program, it took

more than 13 months of protracted negotiations before Saddam

Hussein finally agreed to proceed, a considerable delay given the

ongoing and urgent needs of the Iraqi people.

Mr. Chairman, any plan that would have denied the authority of

the Iraqi government to select its own purchasers of Iraqi oil and

suppliers of humanitarian products would have been rejected by a

number of other key Security Council member states. You and your

committee colleagues will recall that most, if not all, of the resolutions concerning Iraq adopted by the Security Council reaffirmed

Iraq’s sovereignty and territorial integrity. It would not have been

possible politically to win support from various U.N. member states

for any arrangement that denied Iraq its fundamental authorities

as a sovereign nation and that would have endangered the durability of the sanctions regime that helped Saddam’s access to war materials.

Finally, Mr. Chairman, I want to underscore the obligations of

all U.N. member states to implement and enforce the comprehensive multilateral sanctions imposed by the Security Council under

resolution 661. It was not possible for the sanctions to be effective,

nor to prevent Saddam Hussein from evading the sanctions

through the smuggling of oil, and the purchase of prohibited goods

without the full cooperation of other states. I appreciate that this

committee is carefully reviewing this matter and I would encourage

you to consider the actions of other states in the context of the Oilfor-Food Program.

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The United Nations, first and foremost, is a collective body comprised of its 191 members. A fundamental principle inherent in the

U.N. charter is that member states will accept and carry out the

decisions of the Security Council in accordance with the charter. In

this regard, the effectiveness of the Oil-for-Food Program as well

as the larger comprehensive sanctions regime against Iraq, largely

depended on the ability and willingness of U.N. member states to

implement and enforce sanctions. In the 661 committee, the subsidiary body of the Security Council tasked with monitoring sanctions compliance, sanctions violations could be addressed only if

there was collective will and consensus to do so.

As you review the effectiveness of the Oil-for-Food Program, and

the sanctions against Iraq in general, I encourage you to keep in

mind that a decision to take effective action to address noncompliance issues required consensus in the 661 committee, a consensus

that repeatedly proved elusive. And in reviewing the effectiveness

of the U.N. secretariat, it may be relevant to recall that the staff

and contractors are hired to implement the decisions of the member states. They operate within the mandates given to them.

In this regard, resolution 986 and the May 1996 memorandum

of understanding between the United Nations and the former government of Iraq defined the mandate governing the work of the

independent inspection agents, appointed by the Secretary General,

who authenticated the arrival in Iraq of goods ordered under approved Oil-for-Food contracts. Lloyds Registry of the United Kingdom initially performed this function on behalf of the U.N. When

the Lloyds contract expired, the Swiss firm Cotecna was hired by

the U.N. to continue this authentication function. As defined in resolution 986 and the subsequent MOU, the independent inspection

agents, Lloyds and then Cotecna, were tasked with inspecting only

those shipments of humanitarian supplies ordered under the Oilfor-Food program.

Lloyds Registry and Cotecna agents were not authorized by the

Security Council to serve as Iraq’s border guards or customs officials. They lacked authority to prevent the entry into Iraq of nonOil-for-Food goods. That function and responsibility belonged solely

to Iraqi border and Customs officers, given Iraq’s sovereignty and

to every U.N. member state given the sanctions in place. The

United Nations and its agents Lloyds Registry, Cotecna and

Saybolt were not responsible for enforcing sanctions compliance. In

May 2001, the United States and U.K. delegations circulated a

draft resolution to other Security Council members that would have

tightened border monitoring by neighboring states as part of a

smart sanctions approach to Iraq. Certain council members as well

as representatives of Iraq’s neighbors, strongly opposed the United

States-U.K. text, and the draft resolution was never adopted.

Resolution 986 and the May 1996 memorandum of understanding also called for monitoring by outside agents of Iraq’s oil exports

the Dutch firm Saybolt performed this function under the Oil-forFood Program. Saybolt representatives oversaw oil loadings at the

Mina al-Bakr loading platform and monitored the authorized outbound flow of oil from Iraq to Turkey. Saybolt monitors were not

authorized by the Security Council to search out and prevent illegal oil shipments by the former Iraqi regime. This was the primary

61

responsibility of each member state. The multi national maritime

interception force operating in the Persian Gulf also was tasked

with preventing Iraq’s illegal oil smuggling.

Mr. Chairman, now that the Oil-for-Food Program has ended,

questions concerning the efficacy of the program have arisen in

light of the appearance of the documents belonging to the former

Iraqi regime. These documents were never publicly shared during

Saddam Hussein’s rule with the Security Council or the 661 committee.

A fair question to pose is what might have happened had the Oilfor-Food Program never been established. While any response is

purely conjecture. It is fair to assume that the humanitarian crisis

besetting the people of Iraq in the mid 1990’s would have only

worsened over time, given the impact of the comprehensive sanctions on Iraq and Saddam Hussein’s failure to provide for the needs

of his own civilian population.

A deteriorating humanitarian situation among the Iraqi people

would have increased calls among more and more nations for a relaxation and/or removal of the comprehensive sanctions restrictions

on Iraq, thereby undermining ongoing United States and U.K. efforts to limit Saddam’s ability to rearm. While the United States

and U.K. may have succeeded in formally retaining sanctions

against Iraq, fewer and fewer nations would have abided by them

in practice given the perceived harmful impact such measures were

thought to be having on Iraqi civilians. This would have given Saddam even greater access to prohibited items with which to pose a

renewed threat to Iraq’s neighbors and to the region.

Did the Oil-for-Food Program help to relieve the humanitarian

crisis in Iraq and the suffering of the Iraqi people? Despite what

might in the end be identified as inherent flaws, the Oil-for-Food

Program did enjoy measurable success in meeting the day-to-day

needs of Iraqi civilians. Could the program have been designed

along lines more in keeping with the U.S. Government competitive

bidding and procurement rules? Only if other council members and

the former Iraqi government itself had supported such a proposal.

In the end, the Oil-for-Food Program reflected three merged concepts: A collective international desire to assist and improve the

lives of Iraq’s civilian population; a desire by the United States and

others to prevent Saddam from acquiring materials of war and

from posing a renewed regional and international threat; and, efforts by commercial enterprises and a number of states to pursue

their own national economic and financial interests despite the interests of the international community to contain the threat posed

by Saddam’s regime.

Mr. Chairman, thank you for the opportunity to appear again before this committee. I now stand ready to answer whatever questions you or your fellow committee members may wish to post.

[The prepared statement of Ambassador Kennedy follows:]

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Mr. SHAYS. Thank you, what I will do since we have a vote, I will

go back to the vote and then we will just start with questioning.

The committee stands in recess.

[Recess.]

Mr. SHAYS. I call the hearing back to order.

I thank you, Mr. Kennedy. I also want to apologize to the second

panel for all of the delays.

I would like to start by responding to your closing that suggests

that, and let me be clear you accept this point, Ambassador Kennedy, basically you are saying because Saddam and Iraq were a

sovereign nation, and because he was not willing to abide by a

stricter Oil-for-Food Program, that we, the United Nations, conceded in allowing him to pretty much write his own ticket and that

the alternative was, what? That is what I do not understand. In

other words, are you suggesting that the sanctions worked?

Ambassador KENNEDY. Mr. Chairman, we do not believe that we

permitted Saddam Hussein to write his own ticket. I think that is

evident from the fact that it took almost 15 months between the

time that resolution 986 was passed by the Security Council and

the end of the negotiations to formulate the MOU. Saddam Hussein was obviously interested in achieving the maximum amount of

flexibility that he could. The United States, the United Kingdom

and others were interested in putting the maximum number of constraints on Saddam Hussein. We had a goal, Saddam Hussein had

goals. All of these goals were in the context of other member states

of the Security Council, and additionally, other member states of

the United Nations, who have very different views on sanctions,

some of them philosophical, some related to Saddam Hussein. The

United States, United Kingdom and others pushed very, very hard

to get the maximum amount of oversight of the sanctions regime.

Those activities were resisted by others.

What I am suggesting is that although the program certainly

was not perfect, as the work that you and your committee members

have done amply demonstrate, I am suggesting, though, that in the

absence of these sanctions, we would have probably had a very,

very less fulsome situation.

I might note in 2002 the United States and the United Kingdom were holding, meaning denying permission, to over $5.4 billion in

contracts that Saddam Hussein wished to execute. So it was a balance. The need to alleviate the horrible suffering of the Iraqi people, suffering brought on by Saddam Hussein, at the same time to

put into effect the most rigorous sanctions regime that we could politically establish.

Mr. SHAYS. I have to say you take my breath away. I feel like

you are digging into a hole that I am sorry you are going into because it sounds to me like some critics’ concern about the State Department’s double speak. It sounds to me like double-speak, and let

me explain why.

The sanctions did not work, but we had this program to what,

save face for the United States or whatever? We had a program

that allowed Saddam to sell oil at a price below the market and

get kickbacks and we had a program that allowed him to buy commodities above the price and get kickbacks. He had the capability

to now take this illegal money in addition to the leakage that they

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had. We are looking at the Oil-for-Food Program as a $4.4 billion

rip-off to the Iraqi people going to Saddam and then the $5.7 billion of illegal oil being sold through Jordan and Syria and Turkey.

But let us just focus on the $4.4 billion. In addition within that Oilfor-Food Program, he had what was considered legitimate money

that he could then pay for commodities and bought things that he

was not what he was supposed to be purchasing.

You need to tell me how those sanctions worked if he could do

that. I don’t know how you can tell me that they worked when that

happened. Are you disputing that $4.4 billion was basically ripped off and

ended up in his hands?

Ambassador KENNEDY. No, sir, I am not.

Mr. SHAYS. Are you in agreement this is not the Oil-for-Food Program, but it was the sanctions, are you in disagreement that he did

not filter about $5.7 billion of oil sales illegally through the neighboring states?

Ambassador KENNEDY. Saddam Hussein engaged in oil smuggling which was not part of the Oil-for-Food Program. I think we

all agree that Saddam Hussein was an evil man who attempted to

manipulate any opportunity.

Mr. SHAYS. I don’t want to go down whether he is evil or not.

I want to go back over how you can defend these sanctions. Why

did you go in that direction?

Ambassador KENNEDY. I think, Mr. Chairman, that the sanctions

enabled Saddam Hussein to be deprived of weapons of war and

dual-use items.

Mr. SHAYS. Is it your testimony and your comfort level that $10.1

billion was not used to purchase weapons?

Ambassador KENNEDY. No, sir. I am saying that the sanctions regime assisted. I said in my testimony that it is not a perfect system. He attempted to purchase materials under the sanctions

through the U.N. Oil-for-Food process. We put holds on those. We

stopped his purchasing of materials overtly, such as dual-use items.

He attempted to purchase for example dump trucks and heavy

equipment transporters. Dump trucks are easily convertible into

rocket launchers because of the hydraulic mechanisms on the back.

And a heavy equipment transporter that can move a bulldozer or

a crane is the same piece of equipment, essentially, that you use

to move tanks.

Mr. SHAYS. Is it your testimony that you know what he bought?

Are you comfortable with the documents that came from Saybolt

and Cotecna? Are you testifying that when they testify and basically come before us and say that he was not abiding by the sanctions, bought material he should not have, are you saying that he

bought material that he should have? You can’t be saying that.

Ambassador KENNEDY. No, sir. What I am saying is the contracts

that ran through the Oil-for-Food Program ran through the 661

committee. When the United States, using the example of our own

Nation, received those contract proposals, those contracts were vetted by any number of Washington agencies that were specialists in

that regard. They vetted those contracts to make sure that none of

the material included therein were weapons of war or potential

dual-use items.

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Mr. SHAYS. Is it your testimony that you in fact believe those

documents?

Ambassador KENNEDY. I believe that the United States reviewed

contracts and held on contracts that would have been given Saddam Hussein weapons of war and dual-use materials, yes.

Mr. SHAYS. I am not asking that. What I am asking is: So you

stopped some transactions, but are you testifying as a representative of the United States that this system, which this subcommittee

certainly believes is a paper tiger, was not a paper tiger. Do you

believe that Cotecna and Saybolt had the power to properly monitor?

I want to say it again. Representing the United States of America, you come before this committee under oath, are you telling us

that this system worked and that both companies were able to verify and properly manage this program? That is the question I am

asking you. I want you to think long and hard before you answer

it.

Ambassador KENNEDY. I think, Mr. Chairman, that you are conducting an investigation, an investigation we welcome. If Saddam

Hussein was moving materials into Iraq outside of those which

were contracted for under the Oil-for-Food Program, he and someone else were engaged in smuggling sanctions.

Mr. SHAYS. That is a no-brainer statement, but it is not answering my question. I want you to answer my question. I want you to

think a second and answer the question.

Is it your testimony representing the State Department, and representing the administration, that this program, that the way this

program was set up, that these two companies were able to properly enforce the sanctions? That is the question. Were they given

the power necessary? Were you given the cooperation necessary

with the other members of the Security Council, the 661 committee?

Ambassador KENNEDY. Absolutely not. Absolutely not.

Mr. SHAYS. Let us work with that. You are digging yourself out

of a hole right now. The bottom line is they were not, correct?

Ambassador KENNEDY. That is correct.

Mr. SHAYS. Tell me in your words what was the problem with

the program?

Ambassador KENNEDY. The problem was in the negotiating process that takes place in the international arena all of the time, the

ultimate resolution passed by the Security Council, which was a

process of negotiation, did not authorize either Cotecna or Saybolt

or X or Y or Z, or anyone, to become all encompassing sanctioned

enforcement agents.

Mr. SHAYS. That is the extreme they did not do. Tell me the minimum that they did? What power did these companies have?

Ambassador KENNEDY. They were empowered under the resolution to validate goods that were being shipped into Iraq that were

declared to be part of the Oil-for-Food Program.

Mr. SHAYS. You are familiar with this program?

Ambassador KENNEDY. Yes, sir.

Mr. SHAYS. Were they able to do that? This is an investigation

to know, and I want to know if my own government that is supposed to be overseeing this, that I frankly thought had problems

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with this program, I want to know if they were properly able to

oversee this program? It is a simple and very clear answer. I want

to make sure under oath you are stating it clearly, not something

you want me to believe, but I want to know the truth and the committee wants to know the truth. I want to have some confidence

that my government that was overseeing it knew what the heck

was going on.

Were they able to properly oversee this program?

It is a simple answer.

Ambassador KENNEDY. Because of the efforts of Saddam Hussein, in that sense, no, sir, they were not.

Mr. SHAYS. In any sense they were not able to. The reasons why

we will explore later. But were they able to properly oversee this

program? You do know they are testifying afterwards?

Ambassador KENNEDY. Yes, sir.

Mr. SHAYS. And you are aware of the complaints they had, I

hope?

Ambassador KENNEDY. Yes, sir.

Mr. SHAYS. Even before this hearing, correct?

Ambassador KENNEDY. Absolutely.

Mr. SHAYS. Were they properly able to fulfill their responsibilities and oversee this program?

Ambassador KENNEDY. Up to a point yes; and beyond that, no.

Mr. SHAYS. You are going to have to tell me yes, up to what point

and after what no. You tell me up to what point were they able

to?

Ambassador KENNEDY. They were empowered by the resolution

of the Security Council to authenticate materials that were arriving. They authenticated those materials.

Mr. SHAYS. Wait a second. Are you saying that they authenticated these materials? Are you saying they had a theoretical power

to do it or are you saying they actually were able to do it? There

is a difference.

Ambassador KENNEDY. It was their mission——

Mr. SHAYS. I want to know if they were able to.

Ambassador KENNEDY. I was not at every border station, sir.

They authenticated the materials and submitted documents to the

United Nations saying they had authenticated material.

Mr. SHAYS. Isn’t it a fact that they said they didn’t always have

the people? Isn’t it a fact that they said sometimes they couldn’t

even look, that is, in terms of Saybolt, sometimes they could not

even be there, and when they left, isn’t it a fact that they had suspicious?

Ambassador KENNEDY. Absolutely. And we have testified to that

effect.

Mr. SHAYS. That is what is frustrating me. And you are someone

who was in Iraq, a friend, and someone I have awesome respect for.

What concerns me is you are giving a party line that even you do

not believe. I feel very awkward having this public dialog with you,

but it is so logical it is almost frightening to me that we cannot

at least have the truth and then work from that as to what. I don’t

want to know why they were not able to authenticate the fact that

this happened. I want to know if they did. Then we will explore

why they couldn’t.

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Ambassador KENNEDY. Mr. Chairman, I have tried to answer the

question the best I can. And I appreciate the compliment you just

paid me. I believe that Cotecna and Saybolt attempted to carry out

the functions that they had.

Mr. SHAYS. We agree. They attempted to do that. On one level

we are in agreement. The question is could they? The answer is a

simple one.

Ambassador KENNEDY. Absolutely. The results were not perfect.

Mr. SHAYS. I did not say perfect. Perfect is too much discretion.

Perfect may mean 99 percent, and I don’t think it was even close

to 50 percent. I don’t think they had the power and I don’t think

anyone who has looked at this program believes they had the

power, and I think they are going to testify they did not have the

power. What concerns me is you were basically trying to give the

impression they were not perfect but, and I think that is misleading to the committee. I think it does not do you credit.

I don’t want you to say anything you do not believe. I just do not

want you to speak in words that do not frankly help us. I want you

to be more precise.

Were they able to make sure that oil sales were actually the oil

sales they were and that commodities that were purchased were

actually what was bought to the amounts that were bought, the

quality and so on? Were they? Maybe you can look at that note and

hopefully somebody else is telling you to say no.

Ambassador KENNEDY. It was the position of the United States

and joined by the United Kingdom that we wanted a more robust

inspection regime. We wanted more robust inspections. Obviously,

I think I am trying to answer your point. I am saying yes, there

were restraints inherent in the program that prevented Cotecna

and Saybolt, and Lloyds before that.

Mr. SHAYS. The problem with the word ‘‘robust’’ is like your word

‘‘perfect.’’ It was not robust, so to say that you wanted it to be more

is almost meaningless in my judgment as I have looked at this.

This was a program that was basically not working. I want you to

start us off explaining why it was not working. You have given a

justification as to why we basically allowed for this program to go

forward even though it was not working. So you have given a lot

of people cover, but you have not helped us understand whether

you, the government, the State Department, this administration,

felt this program worked. You are trying to give us the impression

that it was working, but not perfect; that it was robust, but it could

be more robust. That to me is misleading. That is what I am wrestling with, and I am trying to understand why. Why do you want

me to have this impression?

Ambassador KENNEDY. Mr. Chairman, I grant you, and I am

looking for another word other than ‘‘perfect.’’

Mr. SHAYS. Have you been instructed to say that this program

worked when it did not work?

Ambassador KENNEDY. No, sir.

Mr. SHAYS. Was there any meeting did you had before that said

under no circumstances are you supposed to agree that the program did not work?

Ambassador KENNEDY. No, sir.

Mr. SHAYS. Was the program working?

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Ambassador KENNEDY. The program accomplished some of its

goals, as I have said.

Mr. SHAYS. What were the goals?

Ambassador KENNEDY. The goals of the Oil-for-Food Program

were to relieve the humanitarian crisis of the Iraqi people and retain a sanctions regime on Saddam Hussein that would assist in

restricting his desire to rearm. He had other means of attempting

to rearm, as you rightly pointed out, sir. He attempted and he did

utilize those means, but the program did deliver food and medicine

and other supplies and equipment to the Iraqi people.

Mr. SHAYS. That part we concede. I’m going to concede that part.

Because we knew that Iraqis were starving and we knew they

weren’t getting medicine and we knew that Saddam Hussein was

willing to starve and kill his people and deprive them of medicine,

we decided to cave in and accept a program that simply on the face

looked like we hadn’t caved in, looked like there were sanctions,

but in fact it was about as leaky as it could get. And I wanted to

understand if you understood that it was very leaky. Instead you

used words, I wanted it to be more robust and I want it to be perfect.

But it wasn’t perfect and it wasn’t more robust. The bottom line

was almost every transaction, it appears, may have been a rip-off,

may have been a transaction that compromised the United Nations, compromised other people, and allowed Saddam Hussein to

make money illegally without the world community having to agree

that he was. That’s the way I look at it. Tell me what’s wrong with

my picture.

Ambassador KENNEDY. Your picture is absolutely correct. Saddam Hussein—you mentioned earlier, sir, in our discussion that

you take Saddam Hussein. He was sanction-busting from 1991

until the Oil-for-Food Program started in 1995—1996. He was

sanction-busting. The Oil-for-Food Program was put into place. He

attempted to get around the sanctions regime at every possible

opportunity——

Mr. SHAYS. And the irony is——

Ambassador KENNEDY. He priced——

Mr. SHAYS. Go on.

Ambassador KENNEDY. He attempted to write contracts for oil

where he priced the oil below the market rate and attempted to

pocket that premium. We discovered that, and the United States

and the U.K. raised that in the 661 committee, and then halted all

price-setting under the old scheme until we achieved putting a new

system into place which set the oil price retroactively after the sale;

in other words, stopping him from getting a surcharge.

Having blocked him in that regard, he then moved to another aspect which was kickbacks after sales. We attempted to block that.

So it was almost—and I hate to say this—a chess game. He attempted to maneuver and we attempted with certain allies, but not

enough of them, to seize and block his activities.

And so I am agreeing that sanctions are leaky. The sanctions regime did not work as it was intended; i.e., to have 100 percent effectiveness.

Mr. SHAYS. No, don’t say 100 percent, because I’m not even sure

you had 50 percent. So don’t say 100 percent. No, I mean, if the

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truth comes out, whatever the truth is, it may embarrass the

United States. It may embarrass someone else. It may embarrass

Congress. But it will be the truth. And from the truth we can learn

from it.

And my problem right now is what you are suggesting is that basically Saddam was willing to kill his people by not getting the food

and not getting medicine and he wasn’t willing to do an Oil-forFood Program that we wanted, so ultimately we did a program that

he wanted. He was able to buy or sell in euros. He was able to

undersell his oil. He was able to overpay for commodities. He was

able to get kickbacks. He was basically able to tell Cotecna and

Saybolt basically they had no authority. He was basically able to

ignore them. He was basically able to have more transactions than

they could even handle so that they weren’t even aware of some

transactions. And he did this with the assistance of our allies.

And it’s not a bad thing that Americans and the world community have to contend with this because it suggests that even before

a decision to go into Iraq, it suggests frankly to me that we didn’t

have the support of our allies, that President Clinton didn’t have

the support of our allies, and that it was somewhat of a joke. And

that when you had a President finally trying to say, you know,

we’ve got to make this program work and we also have to look at

a regime change if he doesn’t cooperate, and we still don’t have the

assistance of our allies, it says to me, well, what’s new? What’s new

about it?

Are you saying to us that the allies cooperated? No, your testimony was the reverse. Isn’t it true that you said the allies did not

cooperate and enable us to have a sanctions system that is working? Is that a fair statement?

Ambassador KENNEDY. I totally agree sir. As I testified, we

sought a sanction regime and we were unable to get the sanction

regime we wanted, yes, sir because of the lack of willingness on the

part of other members of the Security Council and other nations to

agree to that sanction regime.

Mr. SHAYS. OK. And so they didn’t agree with it. And then we

had a sanction that Saddam basically could live with; and isn’t it

true that on occasion, the United States protested some of the

transactions?

Ambassador KENNEDY. We contested many of the transactions. We were holding at one point, as I mentioned, sir, $5.4 billion

worth of proposed transactions.

Mr. SHAYS. Well, but isn’t it true that there were actually transactions that happened that you objected to?

Ambassador KENNEDY. No, sir the system operated on the consensus basis, and if any member of the 661 committee representing

the member states of the Security Council, if any member objected

to a transaction, that transaction was held——

Mr. SHAYS. OK. Why didn’t you object to the fact that Saybolt

and Cotecna did not have enough manpower and were not given

the authority they needed to make sure that they were actually

documenting the actual transactions? Why didn’t the United States

protest their inability to accurately document transactions?

Ambassador KENNEDY. For example, sir, when we learned that—

using the Essex case, the oil tanker in which—it was topped off

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after it had been loaded—we did raise that in the 661 committee.

We insisted that additional personnel, additional technical matters,

whatever, we demanded to the 661 committee.

Mr. SHAYS. And it didn’t happen. And why didn’t it happen?

Ambassador KENNEDY. Some of it happened, some of it didn’t, because it was resisted by other members of the 661 committee.

Mr. SHAYS. Most of it didn’t. Most of it did not happen. And it

didn’t happen because it just took one member to object, correct?

Ambassador KENNEDY. Correct.

Mr. SHAYS. OK. So you could theoretically prevent a transaction

from happening that you knew about, but you couldn’t make sure

that Cotecna and Saybolt had the authority, the personnel, to make

sure that they were properly running this program.

Ambassador KENNEDY. The mandate to the companies came from

Security Council resolution and from the 661 committee.

Mr. SHAYS. Is that yes or a no?

Ambassador KENNEDY. The answer is that their mandate was

governed by the consensus requirements. And, yes, a member state

could hold on that consensus and that would have the effect that

you outlined.

Mr. SHAYS. Why can’t you say that the bottom line to it was that

because member states would object if you wanted Saybolt or

Cotecna to have more authority, more personnel and so on, because

they objected to it, they didn’t get it; and because they didn’t get

it, they couldn’t do their job properly? Why is that so hard to say?

Ambassador KENNEDY. Phrased that way, sir, I have no——

Mr. SHAYS. Well, why don’t you say it?

Ambassador KENNEDY. The mandate to Cotecna, to Saybolt, was

governed from the original Security Council resolution and then

implemented in the memorandum of understanding and in the 661

committee. Efforts to achieve our goals on sanctions were blocked

by other member states.

Mr. SHAYS. That’s not the same thing that I said, which you

agreed with. What I wanted to know from you is whether you could

say this. And if you can’t, because you don’t believe it, then tell me

you don’t believe it. But don’t agree with my statement and then

tell me something else in your answer.

What I said was because a member state could block the United

States or Great Britain from wanting Saybolt or Cotecna to have

enough authority and enough personnel to properly document

transactions because member states could veto that—any one state,

and did—that they did not have enough personnel and they did not

and were not able to properly document transactions.

What you said to me was you agree with that statement, but you

can’t say it in your own words, and I just don’t understand why it’s

hard for you to say it in your own words that way.

Ambassador KENNEDY. I guess, sir, because I think—the only

distinction I am trying to draw, if I might, is that there were transactions outside the scope of the Oil-for-Food Program.

Mr. SHAYS. We have put those aside. We’re just focused on the

Oil-for-Food.

Ambassador KENNEDY. All right. Then, yes, Cotecna and Saybolt

and their predecessor in one case did not always have the resources

they needed to do their job, yes.

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Mr. SHAYS. Or the authority?

Ambassador KENNEDY. Yes.

Mr. SHAYS. Yes, what?

Ambassador KENNEDY. Yes, they did not have the full authority

to do their job because the mandate from the Security Council was

not as broad as we wished it would have been.

Mr. SHAYS. Wished it would have been. As it should have been;

correct?

Ambassador KENNEDY. Should have been, yes. It was our goal,

as I said, to have a more robust sanctions regime. That’s——

Mr. SHAYS. Don’t say more robust. It was not robust at all. It

was a paper tiger, it was a leaky sieve, it enabled Saddam to get

$4.4 billion. It was a joke. And you don’t have to say it was a joke.

I can say it was a joke. But you and I can certainly agree it wasn’t

robust. Was it a robust program?

Ambassador KENNEDY. No, sir, it was not a robust program.

Mr. SHAYS. OK. Was it close to being a robust program?

Ambassador KENNEDY. I think I’m——

Mr. SHAYS. Was it close to being a robust program?

Ambassador KENNEDY. No, it was not close to being a robust program.

Mr. SHAYS. OK. Well let’s leave it right there.

Mr. Waxman.

Mr. WAXMAN. Mr. Chairman, earlier today at this hearing I

moved for two subpoenas, and we held off any vote on them. As I

understand it, you’re willing to issue the first subpoena to the Federal Reserve Bank in New York to get the information that we

have requested; and rather than issue a second subpoena, you’ve

suggested that you and I write a letter to the Department of Defense requesting the information that we wanted and would have

subpoenaed.

I want to thank you for your suggestion of resolving these subpoena questions in that way. I think it will be very helpful for us

to issue the letter to Secretary Rumsfeld, insisting he comply with

this request. And, of course, I take you at your word that the committee will followup aggressively if the Pentagon fails to provide

the documents we have requested.

I think this is a reasonable way to proceed, and rather than have

a vote on it, I would like to have this understanding memorialized

at this point in the hearing so that we can go ahead with the one

subpoena and issue a joint letter from the two of us in lieu of the

second subpoena.

Mr. SHAYS. Thank you. I appreciate the gentleman’s, one, effort

and interest in this issue. I think he is correct in wanting to get

these documents. I do totally agree that the Bank needs a subpoena, and I also want to say to you that we’ve asked for 12 documents, records—more than 12—but we have made 12 specific requests that are quite extensive, and it is my expectation that the

Secretary will provide these documents, and if he doesn’t then we

need to followup with the subpoena.

Mr. WAXMAN. Well, I thank you very much. I certainly agree

with you, and I think it’s a reasonable way for us to proceed, to

have all of the information which our committee ought to have as

we do the investigation and in all respects.

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Mr. SHAYS. Thank you very much.

Mr. WAXMAN. Thank you.

Mr. SHAYS. Thank you. Thank you for being here.

Mr. SHAYS. Thank you. Mr. Murphy, you have the floor.

Mr. MURPHY. Thank you, Mr. Chairman. I just have a couple of

questions here that I—and I apologize if some of these were covered while I was on the floor of the House.

But, Ambassador, I thank you for being here, and I wanted to

know where do we stand with the status of gaining access to the

United Nations Oil-for-Food Program documents for Congress now

and—can you give me some background with where we stand right

now?

Ambassador KENNEDY. The State Department has asked Chairman Volcker of the independent investigating committee for the release of the documents, and up to this point he has declined, saying

that he is using the documents and he intends to conduct his investigation. And he has declined to release them, sir.

Mr. MURPHY. Those would just be documents, official U.N. documents; is that what you’re saying?

Ambassador KENNEDY. Yes, sir.

Mr. MURPHY. Is anyone trying to pursue documents from any

other country, too? Is there any attempt to do that?

Ambassador KENNEDY. Yes, sir. Before I left Baghdad in August,

I had presented to the acting chair of the Board of Supreme Audit

a proposed memorandum of understanding between the United

States and Iraq to release for use of government of Iraqi documents. And I understand that work is continuing and we hope to

have a resolution to that request in the very near future. I checked

with Baghdad just the other day and I am expecting those——

Mr. MURPHY. So those documents are being scanned now.

Ambassador KENNEDY. We are attempting to make an arrangement between various parties to scan those documents.

Mr. MURPHY. Now, how about the reverse? We have access to the

Iraqi documents. Those will be released soon.

Ambassador KENNEDY. The request has been made, sir, yes.

Mr. MURPHY. The request has been made. How about the reverse? Is there any attempts to obtain documents from some of

these other countries that are part of this scandal: Russia, France,

China, Syria?

Ambassador KENNEDY. I believe that the request to other nations

for their documents is within the jurisdiction of the independent investigating commission, Mr. Volcker’s commission.

Mr. MURPHY. Are those nations cooperating?

Ambassador KENNEDY. That is a question that would have to be

posed to the independent investigating commission, sir.

Mr. MURPHY. Let me ask about another area here. When it became apparent—and it was some years ago—that the issue, the

question of some corruption in this Oil-for-Food scandal began to

take some legs on it, what was the responsibility of the U.N. Office

of Iraqi Programs to maintain the integrity of this program, and

did they act within the scope of their responsibility at that time?

Ambassador KENNEDY. That is a question, sir, that is actually

part of the investigation that is going on now by the Independent

Investigations Commission. We are aware of information that did

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come to the attention of the United States, including some from the

Office of Iraqi Programs; which then as a member state, as a member of the 661 committee, the United States, the United kingdom,

did followup on.

If there is other information that came into their possession that

they should have followed up on that we are unaware of, of course

we are unaware of that information, and that is one of the charges

that was given to Chairman Volcker and his colleagues on the

Independent Investigations Commission, to find out if there was

any malfeasance, misfeasance. And I am not a lawyer, so I may not

be using the appropriate words on the part of U.N. employees, but

that is one of the mandates of the IIC, to look and see if U.N. employees conducted themselves as appropriate——

Mr. MURPHY. But it appears that there is some lack of cooperation in releasing doubts that would help us know this.

Ambassador KENNEDY. Chairman Volcker has indicated to me

that his investigation is ongoing and he intends to gets to the bottom of it and then file a full and complete report. I can only report,

sir, what he has said to me.

Mr. MURPHY. Does he feel that he is getting cooperation from the

member nations and from the U.N. itself, fully?

Ambassador KENNEDY. He has indicated he is getting full cooperation from the United Nations Secretariat. I have not posed

the question about discussions with other nations.

Mr. MURPHY. Also in the historical time line of this, what was

the year in which the concerns about corruption first began to surface?

Ambassador KENNEDY. First of all, corruption only within the

Oil-for-Food Program itself, or issues about Saddam Hussein’s

sanctions-busting in general? I mean, the fact that he was engaged

in oil smuggling came to our knowledge, you know, in 1991–1992.

That’s outside of the Oil-for-Food Program. And efforts were made

then by the United States and others, and it led to the establishment of the multinational interdiction—maritime interdiction force,

which were United States and other nations’ naval assets deployed

in the Shatt al Arab and the Gulf to seize that. We first, I think,

became aware of his schemes related to oil, the premium on oil

pricing, in July 2000, which is where he was——

Mr. MURPHY. Did the involvement of other countries and the Oilfor-Food corruption continue after July 2000? So even after the

United States became aware, did it continue?

Ambassador KENNEDY. We began pushing for a system to bring

this under control. It was resisted by other nations. We were challenged. We said, do you have hard evidence? Do you have——

Mr. MURPHY. Wait. Who was asking for the hard evidence?

Ambassador KENNEDY. Other nations.

Mr. MURPHY. Which nations were they?

Ambassador KENNEDY. I would have to go back and read the

exact text again.

Mr. MURPHY. France.

Ambassador KENNEDY. France.

Mr. MURPHY. Germany.

Ambassador KENNEDY. France, Russia, and China would be

the——

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Mr. MURPHY. Syria.

Ambassador KENNEDY. Syria was on the committee at one point.

I mean, over the course of the 13 years, there were many nations

on the—and in 2000 when this first came to our attention——

Mr. MURPHY. So the very nations that are——

Ambassador KENNEDY. The nations changed every year.

Mr. MURPHY. I want to make sure I understand what you’re saying. So the nations that the allegations are against now, at that

time were saying you don’t have any evidence on us?

Ambassador KENNEDY. Yes, sir. They were saying, do you have

hard proof? And we said, we are getting these stories, its being reported in industry trade publications, it’s being reported elsewhere.

This must be addressed.

We pushed and we pushed and met a lot of resistance, and since

we were meeting this resistance, if I might for a moment, sir, the

program then was to set the oil price at the beginning of the

month. And then what Saddam was playing off of was the volatility

of the oil market where the price would move 10, 15, 20, 50 cents

a barrel over the course of the month, and then he would sell at

one price and sell to a favored supplier and say, I’m going to sell

to you at the peg price of $20.50, but now that the price for the

rest of the month is $20.75, you keep the nickel and you kick me

back 20 cents. When we saw that this is what he was doing, and

then we met the resistance from others to our activities, what the

United States and the United Kingdom then did was to refuse to

set an oil price at the beginning of the month. So there was no oil

price. Oil sales went on, but there was no price.

We then agreed to an oil price at the end of the month that

would then deprive Saddam Hussein of playing with the volatility

of the market. And by setting a retroactive price, we believe that

from the oil overseers—which were the professionals who had been

engaged—that still he was potentially making something, but it

might have been on the order of 3 to 5 cents a barrel as opposed

to on the order of 25 to 50 cents a barrel simply because of the

movements over the course of the month.

Mr. MURPHY. And what countries were involved with that after

the United States has worked to deal with oil prices at the end of

the month? What countries were still purchasing oil and giving him

a kickback at that time?

Ambassador KENNEDY. We do not know which country. That is

part of the investigation now. I do not have in front of me a confirmed list of what countries were engaged in that. I should say

these were national—these were companies that were purchasing

the oil and giving kickbacks, not nations themselves.

Mr. MURPHY. Well that’s an important distinction. Was there any

role or awareness, for example, of the French, the Russian, Chinese

governments of these kickbacks going on?

Ambassador KENNEDY. We informed their members of the 661

committee.

Mr. MURPHY. So they were informed. Back in what year? Midnineties?

Ambassador KENNEDY. In 2000, sir, when it came to our attention. It was first raised, I believe, in the July 13, 2000 meeting of

the 661 committee on oil price.

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Mr. MURPHY. So that’s the definite date by which we know that

those member nations were notified. And I’m assuming that in the

U.N. investigation we may find that those member nations knew

something prior to that, but we don’t know.

Ambassador KENNEDY. That would be speculation, sir, that I cannot comment on.

Mr. MURPHY. But they were notified at least in the year 2000,

and yet the Oil-for-Food purchasing continued on after this. It

didn’t end in 2000. It continued on; am I correct?

Ambassador KENNEDY. We believe that because of the steps we

took to put this retroactive pricing, that we drove the premium or

surcharge down from, you know, multiple cents a barrel to 2 or 3

cents a barrel. But I cannot say that we ended it entirely, because

Saddam Hussein was always looking for some way to get around

the sanctions.

Mr. MURPHY. Mr. Chairman, I’m not sure. Could I have 2 more

minutes or 1 more minute?

Let me shift to a different line of questioning here. The total

amount of money that I understand Saddam Hussein received from

this Oil-for-Food corruption was of the nature of $10 billion, am I

correct, $10.1 billion? In the whole package of things here.

Ambassador KENNEDY. He achieved much more than that if you

count in the oil smuggling that took place outside the scope of the

Oil-for-Food Program, and it is very difficult to get an exact estimate. But I’m in no position to challenge the figure that we are

talking about that was provided by the Government Accountability

Office. I have every reason to believe that figure is probably in the

ball park.

Mr. MURPHY. So it’s probably in the ball park. It may be more.

Ambassador KENNEDY. Could be a little more, a little less. Yes,

sir.

Mr. MURPHY. OK. And what did he do with the money?

Ambassador KENNEDY. He did a wide variety of things, I’m sure.

Some of the sumptuous palaces that are extant in Baghdad at this

time are undoubtedly built with that money. And he may well have

done other things, but I don’t have direct and confirmed information about that.

Mr. MURPHY. Will we have information from these investigations

with regard to what he spent that money on? For example, did he

purchase weapons on a black market or directly with that money?

Ambassador KENNEDY. I do not believe that is going to be the

subject of the Volcker or the IIC investigation. That may come out

through other U.S. Government channels, sir.

Mr. MURPHY. As we connect the dots, the thing that worries me

intensely on this is not only the oppression Saddam Hussein kept

his people under, the tortures and the murders, the killing fields

which continued on at that time, but also it kept his regime going,

much of it in sumptuous palaces which I have seen in Iraq. But the

third, it kept his military going.

And I would hope that somebody would find in this—I’m sure,

Mr. Chairman, this is some of your concerns as well—that if one

penny of that was used to buy any bullets or bombs or grenade

launchers or anything else, I suspect on the black market, because

he’s not permitted to purchase them overtly—and this is where we

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have to also connect the dots to find if those companies within

those member nations of the U.N. have blood on their hands

against our soldiers.

And I would hope that is part of what this investigation brings

out; that those nations who acted holier than thou in saying, you

don’t have any evidence, you don’t know anything about what’s

going on, but also saying stay away from Iraq, they’re nice people,

leave them alone, could very well be—and this is the crux of what

we have to find out from this investigation—if they were sending

the money to Saddam Hussein which he used to arm his soldiers

against the world.

Ambassador KENNEDY. I agree. That is something that is absolutely abhorrent; absolutely, sir.

Mr. MURPHY. And I hope the world is paying attention to that,

because all this time that people are looking at let’s ask the United

Nations, they’re not an altruistic system. Let’s ask other member

nations to come out and somehow decide what is best for the

United States. The fact is no Ambassador from another country is

given a mission of deciding what’s best for the United States.

They’re all supposed to represent their own nation. And I hope that

people pay attention to this; that when you have this sort of absolute power to spend and to find that kind of money, that nations

and the businesses that operate within them are not pure. And we

may like to think about perhaps these other nations may have

some pure motives, but quite frankly, there’s too much in the negative column to suggest otherwise.

And I would hope that the investigation of this committee, led by

the chairman and by the United Nations, would give us that answer. I wish we could get that answer soon. But as it is, I go back

to my opening statement, too, that it concerns me deeply that these

nations which have been very quick to ask us for help when they

needed it, when we ask them for help—if they knowingly participated, if it was active or passive participation in sending money to

this murderer Saddam Hussein, which he then used to keep his

military regime in power, which was then used against our own

soldiers and citizens is disgusting.

Thank you, Mr. Chairman.

Mr. SHAYS. I’ll allow counsel to ask a few questions, and then I’ll

have a few more, Ambassador, and then we’ll be all set.

Mr. HALLORAN. Thank you, Mr. Chairman.

Ambassador Kennedy, two areas. First, much of the document,

many of the documents the State Department has provided are

marked sensitive or classified because of their foreign origin, I believe. In particular, there has been recent media reference to a document produced by the Iraqi Oil Ministry soon after the Governing

Council and the CPA was in place, characterizing in detail the Oilfor-Food Program and abuses. That report is marked sensitive and

classified and not for distribution.

I’m wondering what the process is for the U.S. Government to request or accomplish the declassification and public release of such

a report.

Ambassador KENNEDY. Let me find out those exact parameters

and get back to the committee for the record.

Mr. HALLORAN. Thank you.

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The other area I want to explore is this concept of sovereignty,

and try to plumb the depths and the parameters of that concept.

It struck me in your testimony that it is not an absolute, that I—

if you could describe other situations in which sovereignty has been

described or observed differently in other U.N. regimes; that it’s

struck us in the documents that Saddam simply waited out those

who had the most expansive view of sovereignty possible, but that

other formulations of this problem were possible within a plausible

concept of sovereignty for a nation that was already under an oppressive sanctions regime, that had already been documented as

trying to avoid that sanctions regime. So, in one sense, the sovereignty had already been severely mortgaged.

Could you describe those negotiations a little more, please?

Ambassador KENNEDY. I will first plead that I am not an international lawyer and I am not qualified to provide you with a textbook definition of sovereignty. What I believe we are talking about

here is, I will call it a political definition of sovereignty. The United

States, the United Kingdom, other allies, sought to put into place,

and did in 1990 after the invasion of Kuwait, a complete embargo

on the movement of goods and services into Iraq. And then it was

later amended to permit certain donations of food and medicines.

But as we saw over the course of the years between 1991 and

1995, you know, the mortality rate; the ability of the Iraqis to get

basic basic nutrition, was just simply collapsing because of Saddam

Hussein’s own unwillingness to treat his people in a humane sense.

This built political pressure on those nations who were in favor of

sanctions. And we did not wish to see that sanctions regime end,

because of our goal of doing whatever possible to restrict the movement of materials of war to Saddam Hussein so he could re-arm.

So taking the political aspect of trying to keep the sanctions in

place, but seeing the resistance, a series of negotiations took place

within and among member states at the United Nations to formulate a new regime that eventually led to the Security Council resolution that established the Iraq program.

Did we want a program that had more teeth in it than that? Absolutely. Could we get other nations to agree to that fully and completely? Could we get Saddam Hussein to tell the other nations

that he was willing to accept that? The answer was no. Why——

Mr. HALLORAN. So we can conclude there is another formulation

of the Oil-for-Food arrangement that would give Saddam less control but still observe the concept of the sovereignty.

Ambassador KENNEDY. As I said in my testimony, yes, one could

have had such another activity. However, in the negotiations that

took place in the 661 committee and in the Security Council, we

did not achieve that consensus on a regime with more teeth.

Mr. HALLORAN. Thank you.

Mr. SHAYS. Thank you, Ambassador. Let me ask you, how many

months were you in Iraq?

Ambassador KENNEDY. I was in Iraq for 6 months in 2003 and

then I went back again for another 3 months’ assignment in 2004,

sir.

Mr. SHAYS. Was that a classified assignment, then, or can you

tell us, bottom line, what you were involved in?

93

Ambassador KENNEDY. No, sir. I can tell you. For the first 6

months in 2003, I was the chief of staff of the Coalition Provisional

Authority, and then when I went back in 2004, I was the chief of

staff of a small unit that was working on the transition from CPA

to American Embassy and the transition logistically from the Iraqi

Governing Council to the Iraqi Interim Government.

Mr. SHAYS. Well, we know those were not easy assignments, and

we sincerely appreciate what you did during that time. I would like

you to describe to me the Clovely incident, C-L-O-V-E-L-Y, the

ship. Are you familiar with it?

Ambassador KENNEDY. No, sir. I am aware of the Essex incident

that took place several years ago, but, Mr. Chairman, I will be glad

to research that and provide you information for the record. I

apologize. I am unaware of such.

Mr. SHAYS. You don’t need to. If you don’t know of the incident,

I’d just as soon you not respond to it.

When I listened to your statement, and I really—you know, we

don’t usually allow someone to speak for more than 10 minutes. I

wanted to hear your whole statement. I think why I get uneasy is

certain things seem so simple to me, and then they are the hard

things. And then I think you have a big dialog about the hard

things.

The easy things are that it’s clear Saddam starved his people and

deprived them of medicine and would have continued to do that unless we had some way to allow him to get food and medicine for

his people. And we basically decided to let him determine, really,

how the program should function. He decided it was in euros, not

dollars. He decided who could buy oil. He decided who he would

buy commodities from. He basically set the price of oil. He set the

price of commodities. He undersold his oil. No reason to do that.

He overpaid for commodities. No reason to do it, unless he did

what he did. And that was, he got kickbacks in both ways.

And it seems very evident to me that both Saybolt and Cotecna

did not have the capability, either in personnel or authority, to prevent bad things from happening in this program. And so they happened routinely, not on occasion. It seemed to me we could have

just had a quick dialog. What is of concern to me, is there anything

that I just said that you would disagree with?

Ambassador KENNEDY. No, sir. If I do, is that one that neither

Saybolt nor Cotecna set the price of oil or set the price of commodities.

Mr. SHAYS. No, they didn’t.

Ambassador KENNEDY. No, sir.

Mr. SHAYS. So everything I said was pretty accurate from your

standpoint.

Ambassador KENNEDY. Except, sir, that he proposed the price of

oil.

Mr. SHAYS. He being——

Ambassador KENNEDY. Saddam Hussein. He proposed the price

of oil, but the price of oil was then set by the 661 committee, not

by Saddam Hussein. He——

Mr. SHAYS. And in some cases set it below market price.

Ambassador KENNEDY. When it was set at the beginning of the

month, when the market moved, it ended up being below market

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price, which is why the United States and the United Kingdom

moved to set the price at the end of the month so that he could

not take advantage of the natural market shifts. Yes, sir.

Mr. SHAYS. And so I’m getting to my point. What concerns me

is that you basically have described to me the reality that our allies

who didn’t support the embargo were pretty much shaping it, and

that was the reality of this program; and that it was more important to have the program happen, even though it wasn’t working

properly. In other words, having the program and not having it

work properly was better than not having the program at all. I conclude from that, because you felt the only alternative was that we

would continue to see Iraqis starve and they wouldn’t get the medicine. And I guess that’s the conclusion of the State Department.

Ambassador KENNEDY. I think, sir, if there had been massive

starvation in Iraq, I think the belief at that time—and I was not

there—was that the entire sanction regime totally would have collapsed, and then Saddam Hussein would have had no sanction regimes to have to deal with at all, and that free rein would have

been not in the U.S. national interest.

Mr. SHAYS. OK. But the bottom line is as a result, we had Saddam able to make a fortune in kickbacks. That was basically the

compromise. And it is a fact that the United States knew this was

happening.

Ambassador KENNEDY. Every time, sir, that we saw him move to

abuse the system—pricing oil, kickbacks—we moved to try to

counter that in the 661 committee; and, as you have rightly noted

earlier, sir, met resistance from other member states.

Mr. SHAYS. Who could veto.

Ambassador KENNEDY. Yes, sir. The way the Security Council

procedures work, yes, sir.

Mr. SHAYS. Ambassador, are you set to ask questions? Would you

like to ask some questions?

Ms. WATSON. Yes.

Mr. SHAYS. Thank you. We have two Ambassadors here.

Ms. WATSON. I am a bit confused—thank you, Mr. Chairman—

because I just heard you say that every time you saw something

appeared abusive, that there would be some response. However, we

have been told how Saddam Hussein had taken the money intended for the people and food, and built magnificent palaces. It

seems to me that this would be the time that some action should

have been taken. Can you respond, please?

Ambassador KENNEDY. There is no doubt, Madam Ambassador,

that Saddam Hussein received kickbacks. That is a fact. We moved

to counter those kickbacks, but during this period of time while he

was making kickbacks, and as I testified before this committee several months ago, what he did was on very large quantities of goods,

and he—remember, he was feeding a nation of some 23 to 25 million people—he would attempt to get very small kickbacks on very

large sums. But the sums mount up over that kind of volume. He

was receiving those funds. Yet the medicines and the foodstuffs

were still going in.

I am not defending what he was doing by any means. What he

was doing is wrong. But the food and medicines were going in, and

he was getting the kickbacks while we and our United Kingdom alVerDate 11-MAY-2000 11:29 Apr 15, 2005 Jkt 000000 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 D:\DOCS\20052.TXT HGOVREF1 PsN: HGOVREF1
95

lies moved to cutoff either his attempt to manipulate oil prices or

attempt to add surcharges or attempt to add after-sales service

contracts. And so we took steps to block him as soon as we discovered it. And as we have discussed earlier, we were not successful

in blocking all his activities.

Ms. WATSON. And I know, Mr. Ambassador how difficult this is.

I have been there, too. However, I think you’re the only one that

can help our understanding of what went wrong so wrong. And so

I understand that the Oil-for-Food Program helped provide food for

27 million Iraqi residents. It prevented malnutrition. It reduced

communicable diseases. It eradicated polio, and was a major success for a period of time. We’re focusing on $4.4 billion of a $67 billion humanitarian success story.

So do you believe that this program met its objectives, and do

you believe that we as the United States, and the monitors who

were participating, were on the job? I need to know out in the field

what it was that was lacking and how we lost so much of the fund

to corruption. What was it that should have been done beyond

what you’ve just described?

Ambassador KENNEDY. The Oil-for-Food Program had multiple

objectives. One objective was to ensure that foods, medicine, and

other essential human needs of the Iraqi people were met. And so

to that extent, it met its objective by ensuring that the infant mortality rate and maternal mortality rate, which had gone up, went

back down.

The nutrition was achieved by the Iraqi people. So yes, it met

that objective. But in terms of being a sanctioned regime that

stopped any attempt by Saddam Hussein to bust the sanction regime and keep him from cheating on the sanctions regime, busting

it and then potentially using those funds to get other materials, it

was not a total success. But——

Mr. SHAYS. Would the gentlelady suspend for a second?

Ms. WATSON. Certainly.

Mr. SHAYS. When you say ‘‘any attempt’’ and ‘‘it was not a total

success’’ as it relates to that part of it, you seem to be going back

and suggesting that the abuses were infrequent. Is it your testimony that the abuses were infrequent?

We’ve already conceded that people are going to get aid. They are

going to get money and medicine. But on the other side of the

equation, is it your testimony that it was just any attempt, we

didn’t succeed in any attempt? Where the abuse is more frequent,

happened more than less? I want to know which way you see it.

Ambassador KENNEDY. The abuses, Mr. Chairman, were continuous. But they were, if I might, sir, they were different abuses each

time. I mean, he abused it with oil smuggling outside of program.

He abused it with kickbacks. He abused it with premiums on oil.

He took different steps, so continuous abuse, different tools that he

used each time to cause the abuses, sir.

Mr. SHAYS. Thank you. Thank you.

Ms. WATSON. If I might continue—and if you want to continue

to respond to my last question, fine—but let me raise another

issue. What other U.N. bilateral or multilateral mechanism besides

the 661 committee could the United States have utilized to publicize and put an end to these practices? I’m concerned that too

96

much of the oil moneys were diverted in other directions, and those

who suffered were the Iraqi people. With the Coalition, what could

have been done to end this misuse?

Ambassador KENNEDY. With Saddam Hussein as the figure here,

I don’t know that anything would have stopped Saddam Hussein

from attempting to get around any activities.

Ms. WATSON. Well let me just ask you this, then. What would

have stopped the flow of funds into the program Oil-for-Food?

Ambassador KENNEDY. The only thing that would have stopped

it would have been if you had had a different sanctions regime. But

the sanction regime that was put into place was the one that was

the result of long, extensive, and arduous negotiations with other

member states to achieve that sanctions regime. If you had had a

regime in which, again, hypothetically a company had pumped all

the oil, sold all the oil, and bought all the goods and sent them in,

then there might not have been any leakage as you described.

However, there was not the political will on the part of nations to

impose that kind of a sanctions regime.

Ms. WATSON. What of our political will here? Did we make a

strong enough effort, Security Council in the United Nations, to

bring their attention and get a focus on possibly changing the kind

of structure that we had? What was being done from within?

Ambassador KENNEDY. I only arrived at the U.S. mission to the

United Nations in the fall of 2001. But my preparation for this, my

reading of the very extensive record, indicate that the U.S. Government made extensive efforts to get the most teeth into sanctions

that it could, and met resistance from other member states who are

unwilling to accept that.

Ms. WATSON. I understand how difficult it is when you’re coming

in and programs like this have been running. That is the reason

why we were concerned on this committee with our oversight, and

we wanted to see what records, what documents, documentation,

what facts there are held by other departments and branches. I understand that there were 60 staffers and five different U.S. agencies who reviewed each of the Oil-for-Food contracts. If we had that

information, then my questions might be answered.

And I want to thank you for your service, and I want to thank

you for coming here and being on the hot seat. But I think there

should be some others that are on the hot seat so we can find

where we went wrong, where it went wrong.

We know that Saddam Hussein was wrong. But that doesn’t excuse this whole thing. And so we would just like to get to the bottom of it. I appreciate your service and I thank you so much for

trying to explain what happened before your duties started. But we

are trying to seek truth.

Thank you, Mr. Chairman.

Mr. SHAYS. Thank you.

Just very briefly, Ambassador, do you feel this story should come

out?

Ambassador KENNEDY. Absolutely.

Mr. SHAYS. Do you feel this story should come out, even if it embarrasses our allies?

Ambassador KENNEDY. Absolutely.

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Mr. SHAYS. Do you believe it should come out, even if it embarrasses some allies and makes it more difficult to get their cooperation in Iraq?

Ambassador KENNEDY. Absolutely.

Mr. SHAYS. Thank you. Thank you very much.

We are going to go to our next panel. Thank you.

Our next panel, our last panel, and many hours later, David

Smith, director, Corporate Banking Operations, BNP Paribas;

Peter W.G. Boks, managing director, Saybolt International B.V;

and Andre Pruniaux, senior vice president, Africa and Middle East,

Cotecna Inspection SA.

If you would all stay standing, we will swear you in. If there is

someone else who might respond to a question, I would like them

to be able to be sworn in as well.

So we have David Smith, Peter Boks, and Andre Pruniaux.

Thank you. And we swear in all our witnesses. If you’d raise your

right hands, please.

[Witnesses sworn.]

Mr. SHAYS. Note for the record, our witnesses have responded in

the affirmative. Gentlemen, thank you so much for your patience.

And also, thank you for your cooperation. You all have been very

cooperative. You all have tried to be consistent with your obligations that enable us to do our job as well, and we thank you for

that.

David Smith, we are going to have you go first. I’ll just go down

and you’ll need to bring that mic closer to you. Plese bring it down

a little further. And the lights on means your mic is on. Do you

want to just tap it just to see? Thank you.

So what we’ll do is, you have the floor for 5 minutes, and then

we roll it over for another 5 minutes. After 10, I’d ask you to stop.

Mr. SMITH. Thank you Mr. Chairman.

Mr. SHAYS. Thank you.

STATEMENTS OF DAVID L. SMITH, DIRECTOR, CORPORATE

BANKING OPERATIONS, BNP PARIBAS; PETER W.G. BOKS,

MANAGING DIRECTOR, SAYBOLT INTERNATIONAL B.V; AND

ANDRE E. PRUNIAUX, SENIOR VICE PRESIDENT, AFRICA AND

MIDDLE EAST, COTECNA INSPECTION S.A

Mr. SMITH. Chairman Shays, members of the committee, I request that my written statement be submitted for the record.

Mr. SHAYS. And it will, without objection.

Mr. SMITH. Thank you. Before responding to any particular inquiries members of this committee may have, I would like to make

a brief statement which summarizes the key points of my written

statement to the committee.

My name is David Smith. Since September 2001, I have been employed by BNP Paribas, North America, where I serve as director

of Corporate Banking Operations. In that capacity I have been responsible for overseeing the Bank’s letter-of-credit processing operations, including those operations as they pertain to the Bank’s

agreement to provide banking services to the United Nations for

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

First, as to the selection of BNP, according to a report of the

General Secretary dated November 25, 1996, the selection process

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for the holder of the U.N. Iraq account began with the preparation

of, ‘‘a working list of major banks in all parts of the world with the

necessary credit quality ratings, strong capital positions, and capabilities to provide the services necessary for the account.’’

The report indicates that a short list of those banks, including

BNP, were asked in June 1996 to submit written proposals to the

U.N. for the provision of the required banking services. The U.N.’s

request for proposals sought certain pricing information from each

bank and inquired into each bank’s capabilities to handle the business of the program’s size.

The Bank understands that four major international banks submitted formal offers in response to the RFP. The General Secretary

reported in 1996 that, ‘‘After careful consideration of the proposals

received,’’ BNP was selected on June 18, 1996 to be the holder of

the U.N. Iraq account. Accordingly, a banking services agreement

was executed by BNP and the United Nations after several weeks

of negotiations.

The Bank believes that several factors resulted in BNP’s selection by the United Nations, including the following: one, its large

international presence; two, its significant position in the commodities trade finance business; three, its high credit rating; four, its

strong capital position; five, its willingness to assume the credit

risk of other banks by confirming the oil letters of credit to be

issued for the benefit of the program; six, its competitive pricing;

and seven, its substantial trade finance support operation, located

in New York City, where the U.N. is headquartered.

Second, as to the services the Bank has provided to the United

Nations, the role of the Bank under the banking services agreement has consisted of delivering nondiscretionary banking services

to its customer, the United Nations. These services have related to

both the oil and the humanitarian sides of the program. Generally

on the oil side of the program, those services have involved the confirmation of letters of credit issued on behalf of U.N.-approved purchases of Iraq oil. Those letters of credit were issued by various

banks for the benefit of the U.N. Iraq account.

When a bank confirms a letter of credit, it takes upon itself the

obligation to pay the beneficiary, here the U.N. The Bank’s confirmation of the oil letters of credit was done at the request of the

U.N. It was performed in accordance with standard banking practices, letters of credit practices, with several additional controls imposed by the United Nations, as described in my written statement.

On the humanitarian side of the program, the Bank’s services

have involved the issuance of letters of credit at the direction of the

U.N. for the benefit of U.N.-approved suppliers of goods to Iraq.

Those letters of credit provided the necessary assurance to suppliers that they would receive payment for their goods once they had

been delivered to Iraq in accordance with their contractual obligations.

The processing by the Bank was performed in accordance with

standard letter-of-credit practice, with a number of additional controls, again as detailed in my written statement.

Significantly, the Bank has had no discretion over how money

has been spent or invested under the program. The Bank did not

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select the buyers of the oil, sellers of the goods, or the goods to be

supplied.

Third, as to the Bank’s legal and ethical obligations, the Banks

provision of services pursuant to the banking services agreement

was licensed by the U.S. Department of Treasury, Office of Foreign

Asset Control [OFAC]. Moreover, all services provided by the Bank

under the agreement were performed within a framework designed

by the U.N. under the agreement, the United Nations, a universally known international organization of sovereign states, was the

Bank’s sole customer.

As I have stated, all aspects of the transaction under the program, including the purchases of oil and the supplies of goods, as

well as the nature, amount, and pricing of goods involved, were approved by the U.N. All letters of credit confirmed or issued by the

Bank under the banking services agreement were governed by the

Uniform Customs and Practices for Documentary Credits, a set of

detailed procedures for letters of credit published by the International Chamber of Commerce.

Program transactions were also subject to U.S. regulatory requirements, including in particular the screening of any program

participants against lists of specially designated nationals published by OFAC. There also were, as described in my written statement, a number of additional controls imposed by the U.N. that

were unique to the program.

Notably, an article in Saturday’s New York Times purports to

quote from a briefing paper provided to members of this committee

that suggests that the Bank was remiss because it ‘‘never initiated

a review of the program or the reputation of those involved.’’

Any such suggestion misunderstands the nature of the Bank’s

role under its banking services agreement with the U.N. Under

that agreement, the U.N. was the Bank’s sole customer. The Bank

reasonably relied upon the sanctions committee of the Security

Council for its review and approval of both purchases of oil and the

suppliers of goods. The Bank provided specified nondiscretionary

services to the U.N. under the banking services agreement, and it

was not the Bank’s place to substitute its judgment for that of the

sanctions committee regarding who would be approved by the U.N.

to participate in the program.

Fourth, as to the unique challenges of the program, from a banking perspective the program has represented an enormously challenging and unique undertaking involving the process of over

23,000 letters of credit and the disbursement of billions of dollars

for investment purposes at the direction of the U.N. Those investments have generated in excess of $2.7 billion for the benefit of the

program.

With the exception of a temporary backlog in processing of humanitarian letters of credit in mid-2000, the Bank believes that it

has done a good job in handling the highly demanding banking assignment under a program of unprecedented scope and magnitude.

Finally, as to the design of the program, the Bank believes that

the use of letters of credit provided the correct banking framework

for the program. Although outside the scope of our responsibilities

it appears, with the benefit of hindsight, that the program might

have been better structured in other respects to minimize the risk

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of abuse. In this regard, a well-managed competitive bidding process, both for the purchase of oil and for the sale of goods, might

have been substituted for what was essentially a sole-source procurement process. This would have eliminated the Government of

Iraq in the selection of prospective counterparties for U.N. approved Oil-for-Food transactions, and would have provided greater

transparency regarding program participants. It might also have

reduced the possibility that the program might not always have received the most favorable pricing.

On behalf of BNP Paribas, I thank the committee for this opportunity to provide this statement. I would be happy to respond to

any questions members of the committee may have.

Mr. SHAYS. Thank you, Mr. Smith.

[The prepared statement of Mr. Smith follows:]

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Mr. SHAYS. Mr. Boks.

Mr. BOKS. Mr. Chairman and distinguished members of the subcommittee, my name is Peter Boks. I am an executive of Saybolt

International which is headquartered in The Netherlands, just outside of Rotterdam. Thank you for inviting me to discuss with the

subcommittee today the role of Saybolt International in the administration of the United Nations Oil-for-Food Program. Having submitted a more complete statement for the record, I will discuss my

brief oral remarks on our principal responsibilities; namely, the

monitoring of oil exports under the Oil-for-Food Program.

Mr. Chairman, please bear with me that English is not my native language. So excuse me if things are unclear.

Mr. SHAYS. Let me assure you that we hear you very well, and

we appreciate you are speaking in English.

Mr. BOKS. Thank you. Saybolt won its contract with the United

Nations in 1996 through a competitive bid process. Under that contract and multiple extensions, Saybolt deployed teams of inspectors

selected on the basis of their prior experience in the industry. Oil

inspectors were screened by Saybolt, approved by the United Nations, trained and briefed for this assignment and required to certify compliance with Saybolt’s code of conduct.

Under its contract with the United Nations, Saybolt’s responsibility was to monitor the quality and quantity of oil exports from the

two authorized Oil-for-Food export points, the offshore platform in

Al-Bakr and the port of Ceyhan in Turkey, along with the remote

monitoring station on the Iraq-Turkey pipeline near Zakho, close to

the northern border with Turkey.

The monitoring procedures follow: First, the United Nations oil

overseers would review and approve contracts and letters of credit

negotiated between the Iraqi oil company SOMO and the buyers of

Iraqi oil. Coordinating through a common data base shared by

Saybolt and the United Nations, Saybolt would monitor the quantity and quality of oil, pursuant to the approved contracts at the

two authorized export points and report confirming figures to the

United Nations.

Also important were the limits of Saybolt’s responsibilities.

Saybolt had no responsibility, for example, with respect to the underlying contracts which were negotiated directly between the seller and buyer and reviewed by the United Nations. Saybolt had no

control over the moneys that were involved in the underlying

transactions—that was a matter for the sellers, buyers, and the

United Nations—nor did Saybolt itself buy or sell Iraqi oil.

Finally, from time to time, we reported irregularities that we observed to the United Nations or the Multilateral Interception

Force. Saybolt had no responsibility for monitoring oil exports from

any locations other than the three locations specified in its contract. In performing their responsibilities, Saybolt inspectors typically operated in remote locations in inhospitable work environments. Some days, for example, the isolated Mina Al-Bakr platform

was without electricity or water and sometimes during heat that

exceeded 110 degrees. U.N. audits and reports confirmed the harsh

working conditions and risk to personal safety. The entire program

was also characterized by highly charged, political interests and

sensitivities.

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The simultaneous operation of the humanitarian Oil-for-Food

Program and a comprehensive U.N.-imposed sanctions regime created a variety of practical and logistical complications affecting everything from obtaining visas to paying for basic necessities.

The job of monitoring authorized oil exports was also made more

challenging by the poor state of the oil industry infrastructure and

the deficiencies in equipment and technology in Iraq. Even before

the program began, Saybolt informed the United Nations of problems with the metering equipment at each of the three sites. At

Mina Al-Bakr, the Iraqi failure to install, repair, or calibrate metering equipment meant there were no counterpart measurements

to cross-check against ship measurements at the point of loading

on the Mina Al-Bakr platform.

In the absence of calibrated metering equipment, Saybolt used

the best alternative techniques accepted and widely used in the industry. Specifically, in the absence of metering, inspectors relied on

calibration charts, vessel experience factors, and shipboard measurements to determine the quantity of oil loaded onto vessels, a

methodology that the United Nations expressly accepted.

Monitoring loadings without access to reliable meters is accepted

industry practice but is less accurate than metering at loading

points. Although falsification of calibration charts and VEF data is

rarely an issue, the possibility exists. To avoid such a problem,

Saybolt originally recommended that the volume of oil be measured

at the foreign point offloadings, as well as at the loading points of

Mina Al-Bakr and Ceyhan. For whatever reasons, his recommendation was not adopted.

In January 1999 following discussions with the United Nations,

Saybolt began requiring that each master sign a statement certifying the accuracy of the records provided to Saybolt. The United Nations was informed of this procedure and supported its recommendation. Over 7 years, Saybolt inspectors monitored more

than 2,600 loadings involving a total of approximately 3.4 billion

barrels of crude oil. Over that period of time, very few irregularities occurred. Two instances of loading excess quantities of oil, the

unauthorized topping off, occurred in 2001, both involving the same

vessel, the same vessel charter. Saybolt promptly investigated

these incidents, made written and personal reports to the United

Nations, and put in place additional safeguards to prevent any

similar abuses in the future. Thereafter, Saybolt encountered no

recurrences of the incidents experienced in 2001.

Looking back on the program and the variety of challenges it

faced, we can now identify the ways that the monitoring of oil exports under the Oil-for-Food Program might have been strengthened. These include requiring accurate metering equipment, the

continued presence of at least one U.N. official at each loading location, incorporating from the outset various safeguards that Saybolt

developed during the course of the program, and monitoring mechanisms for detecting unauthorized exports from other than the two

U.N.-approved export points. More broadly, it now appears in hindsight that the ability for Iraq to contract directly with buyers of oil

and sellers of goods introduced a significant opportunity for abuse.

And to the extent that the member states of the United Nations

disregarded or systematically violated the U.N. embargo against

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Iraq, that conduct obviously undercut fundamentally the objectives

of the Oil-for-Food Program which was conceived to be an exception

to the embargo.

Saybolt and its professionals performed a difficult job under very

difficult circumstances in Iraq. While not without blemishes, the

monitoring of oil was done professionally over an extended period

of time. I am happy to discuss that project with you today and to

help extract from their experience any lessons which may be of

value in conducting humanitarian programs in the future.

Mr. SHAYS. Thank you, Mr. Boks.

[The prepared statement of Mr. Boks follows:]

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Mr. SHAYS. Mr. Pruniaux.

Mr. PRUNIAUX. Mr. Chairman and distinguished members of the

subcommittee, my name is Andre Pruniaux. Since 1998, I have

been employed as Senior Vice President of Cotecna Inspection in

Geneva, Switzerland, which has some 4,000 personnel in over 100

offices around the world. I appreciate the opportunity to appear before the subcommittee today to clearly establish for the public

record the difficult task of Cotecna as a contractor of the U.N. Oilfor-Food Program.

Mr. Chairman, my primary duties at Cotecna consisted of managing operations in Africa and the Middle East as summarized in

my curriculum vitae included in my prepared statement. We hope

to clarify Cotecna’s responsibilities and authority under the Oil-forFood Program in the United States and the CPA contracts. The

documents we provided to the subcommittee clearly demonstrate

our performance under the contracts has been fully consistent with

our obligations.

Since the inception of its contract in Iraq, Cotecna has authenticated the arrival of goods in Iraq worth a total of $29.2 billion, of

which no single authentication has been proven to be erroneous. To

fairly judge our performance, you must first understand what services Cotecna was and was not contracted to perform under the OFF

program. Cotecna was not hired to perform inspection services in

the traditional sense which would normally entail a broad range of

tasks, in support of full customs inspection services, including, for

instance, price analysis, quantity, quality inspection, and port-of-origin and/or port-of-destination.

The 1992 request for proposal on which Cotecna was the successful bidder issued by the U.N. did incorporate broader, more traditional customs inspection mandates. That contract was never

awarded, however, because the Iraqi Government would not give

its consent. A subsequent contract was awarded in 1996 to Lloyds

Register and included the narrower scope of responsibility and authority for authentication of goods under the 986 OFF program.

The parameter of this contract were originally established by the

Security Council working with the U.N. OIP and Lloyd’s. In 1998

Cotecna presented the strongest technical proposal at the lowest

price, and on that basis was awarded the contract succeeding

Lloyds.

Importantly, the term ‘‘authentication’’ in this context is unique

to the U.N. OIP contract. In the world of customs inspection services, the term ‘‘authentication’’ does not appear. This reflects the

limited role under the contract of authenticating the arrival of approved and permitted shipments in Iraq so suppliers could be paid.

Under the narrow scope of the contract, Cotecna played a limited

technical role in verifying that the goods entering Iraq matched the

list of goods authorized for importation, and in the case of foodstuffs, assessing their fitness for human consumption. Our prepared testimony includes these details.

Conversely, Cotecna was not involved in selecting the goods to be

imported, establishing the specifications of such products, selecting

the suppliers, negotiating the prices to be paid, nor designating any

sales commissions.

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Further, Cotecna was not involved in handling any funds for the

payment for any goods, but only with verifying that items that had

been approved for import were delivered in Iraq.

Mr. Chairman, it is important for this committee to understand

that two types of goods were coming into Iraq under U.N. authority

and approval. The first set of goods entered the country under the

Oil-for-Food Program pursuant to Security Council Resolution 986.

In addition, a separate volume of goods, valued by some to be

worth double that of 986 goods, were imported under Security

Council Resolution 661. These 661 goods were the subject of private

contracting, were not financed by the OFF program and, therefore,

Cotecna had no responsibility or authority to authenticate or inspect them.

Under the contract, Cotecna authenticated the shipments entering Iraq under the 986 program, and was required to perform physical examination on up to 10 percent of them, with the exception

of quality control testing of food basket items, as I have already

mentioned. We consistently fulfilled each of these mandates.

The company was operating in a difficult and challenging physical and political environment as detailed in part 4 of my prepared

written statement. Relations with the U.N. officials, the Humanitarian Coordinator for Iraq, the UNOHCI-Baghdad, were sometimes difficult, because Cotecna was required to report directly to

OIP only, while UNOHCI-Baghdad was assisting Cotecna activities

and inspections for logistics, visas, transportation authorizations,

and complaints from the Iraqi authorities related to Cotecna inspectors. Also the relationship with U.N. humanitarian agencies

was delicate and a source of tension because these humanitarian

agencies adopted a more sympathetic attitude toward Iraqi and

Kurdish entities. UNOHCI, for example, presided over monthly coordination meetings in Baghdad between these humanitarian agencies and Cotecna. Congestion in the port of Umm Qasr became a

very serious problem, and suppliers began to complain that the

government was refusing to remove containers from the port unless

suppliers paid a fee to the port authority, and the government continuously sought ways to influence the authentication and payment

process for financial gain.

In direct response to concerns raised by Cotecna to U.N. OIP,

this process stopped and the congestion situation immediately

eased. Iraq frequently exerted pressure on Cotecna to resolve or retract authentication. Cotecna was directed under the contract to

refer all such matters to U.N. OIP New York, but this did not alleviate the pressure from the government, particularly in Umm Qasr.

Mr. Chairman, Cotecna has consistently performed its limited

technical role in the authentication of goods under the 986 OFF

Program under difficult physical and political conditions. In so

doing, the company fulfilled its contractual obligations as established by the U.N. Security Council. There were problems, and

many. The company reported those problems. We have sought to

cooperate with the subcommittee and have provided documentation

of those communications to you.

Mr. Chairman, this concludes my statement. I would be pleased

to answer any questions members of the subcommittee might have.

I would respectfully ask that my full statement be included in the

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record along with a letter I sent to you on October 1 regarding an

article that appeared in the New York Post.

Mr. SHAYS. Your letter and all of your statements will be in the

record in their entirety. Without objection, that will happen.

[The prepared statement of Mr. Pruniaux follows:]

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Mr. SHAYS. Let me start with the counsel to ask some questions,

and then I will have some questions.

Mr. HALLORAN. Mr. Smith, in describing the factors that you say

led the United Nations to select BNP as the provider of banking

services, you said an established commercial trade operation in Europe. Did that include facilities for processing letters of credit of

the kind that the program generated?

Mr. SMITH. The program in itself was unique. I don’t think that

any bank had facilities established to process the type of business

that was created by the program itself. However, BNP had an existing trade finance operation which dealt with the issue of letters

of credit in New York City.

Mr. SHAYS. Could you just explain what made it unique?

Mr. SMITH. Potentially the size of the program, which was obviously a little bit unclear at the start of the actual program, but especially the additional controls that were included. The confirmations of arrival are unique. As far as I am aware, they are not used

anywhere else as far as letters of credit are concerned.

Normally a supplier of goods under a letter of credit would be

paid as soon as they presented all of the required documents under

the letter of credit, which is usually at the point they ship the

goods. Under this program, no payment is possible until the goods

have actually arrived in Iraq and been inspected and confirmed to

be in accordance with the contract.

Mr. HALLORAN. So that complicated the process both in terms of

paper and time?

Mr. SMITH. It complicated the process. It gave us an additional

amount of paper that we needed to check against the shipping documents and the letter of credit.

Mr. HALLORAN. In that line of business with your client, the

United Nations, when does the Bank get paid, based on what triggering event?

Mr. SMITH. The Bank basically gets paid for the issuance of the

letter of credit. There are some associated fees relating to pure payments, to SWIFT messages, etc. But the actual fees charged under

the program really related to the issuance of the letters of credit.

Mr. HALLORAN. The Oil-for-Food Program was run in phases designated by the Office of the Iraqi Program?

Mr. SMITH. It was run in 6-month phases, yes.

Mr. HALLORAN. Were there negotiations with the Iraqi Government and other entities from phase to phase as the program matured, and how did that change the Bank’s operating?

Mr. SMITH. As far as the Bank was concerned, the banking service agreement was basically extended by the United Nations at

each stage during the process. To the best of my knowledge, during

the course of a series of extensions over what eventually were 13

phases of the program, there were some changes made to the way

the business was conducted.

Mr. HALLORAN. As the processing or the flow of business

changed, what kind of capacity did the Bank have to discern trends

or novelties in the business? For example, it has been suggested

about phase 8, when Saddam got a little more sophisticated about

oil vouchers as opposed to directly selling to end users, that the

roster of those being paid would have changed both in quality and

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quantity, new people and a new number of people. Would that have

been discernible by the Bank and would it have put a red light on

the border anywhere for any reason?

Mr. SMITH. There was certainly an increase in the volume and

the complexity of the business that the Bank was handling around

about phase 8. As far as red flags are concerned, I would come back

to my statement in that the United Nations was the Bank’s customer. The United Nations was approving all of the counterparties

on both the oil and the humanitarian contracts. In addition to that,

I would remind you that all of this business was screened for

OFAC purposes and reviewed against the various OFAC listings.

Mr. HALLORAN. With those safeguards in place, the Bank felt

confident that its business was being done according to the rules.

But what can go wrong with a letter of credit? What would have

sent a bell or red light off in a letter-of-credit transaction?

Mr. SMITH. Most of the immediate thoughts that come to mind

regarding that question are purely from an operational point of

view in how we check documents, etc., which would not really be

caused under the program.

Mr. HALLORAN. If the recipient of the shipment said this is not

the quality or quantity of oil I ordered, and there is a rejection, the

letter of credit is not claimed upon.

Mr. SMITH. The letter of credit is a written undertaking that a

payment will be made on the presentation of documents that are

specified within that letter of credit. So a letter of credit is constructed so that the buyer of the goods ensures that they have the

necessary documents to give them the comfort that the goods are

of the quality they want, of the quantity they want, and will be delivered in a timely manner.

So, for instance, on the oil that was being lifted from Iraq, one

of the documents that would need to be presented for payment

would be a chemical analysis of the goods or the oil to prove it was

of a specific quality. In addition, bills of lading confirming the shipment and the quantity of the shipment would also be presented, so

the protection is in the documents which the Bank is dealing with.

Mr. HALLORAN. In the course of these transactions, did BNP

have occasion to be in contact with the Central Bank of Iraq?

Mr. SMITH. The Bank received the initial requests to issue letters

of credit under the humanitarian program from the Central Bank

of Iraq. Once those requests were received, they were referred to

the United Nations, and the United Nations would give the approval to issue those letters of credit or not.

As far as the inspection of the documents before payment is concerned, there would be no contact with the Central Bank of Iraq.

The Bank would review those documents, check those documents

in the same way that it would under any other commercial transaction, albeit with the additional documents and controls that are

included in this program, and make a determination whether a

payment should be made. If the Bank was comfortable that the

documents were in order and a payment should be made, then we

would approach the U.N. telling them that we had good documents

and we were proposing to make a payment. They would confirm

that payment.

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Mr. HALLORAN. The Central Bank of Iraq had no say as to who

or how much got paid?

Mr. SMITH. That’s correct. Once the letter of credit is issued, it

governs the conditions of payment. As long as the correct documents are presented, payment should follow.

Mr. HALLORAN. Thank you.

Mr. Pruniaux, describe a little more, if you could, the distinction

that is being made in your testimony between authentication and

inspection. Our perception from both your testimony, and other

documents, is that it was a process that compared paper to paper,

sometimes it did not matter what was in the truck behind you, and

if the documents said the truck should contain 50 barrels of something, your obligation was fulfilled and you never got to look in the

truck; is that correct?

Mr. PRUNIAUX. Authentication is really matching documents. You

know that we were present at four sites. The fifth one was opened

in 2002, but it never really operated. It was at the border between

Iraq and Saudi Arabia. The documents were ordered by U.N. OIPNew York in such a way it provided very detailed information on

the goods which had been approved and for which the letters of approval had been issued. So the suppliers would send the goods, the

shipments, to Iraq, and we would know beforehand that the goods

were going to arrive through the secure transmission of documents

coming from the U.N. OIP addressed to each individual site. No

one—let me phrase it differently.

The information provided to a certain site was not available to

the other sites to keep confidentiality. For instance, at Trebil where

we had most of the traffic, the trucks would arrive with containers,

and they had to stop. The supplier’s and the transporter’s duty was

to come to us and tell us, this is the shipment so-and-so, these are

the references, these are all of the documents; and we would look

at all these documents and see that they matched the information

we had received from U.N. OIP.

Mr. HALLORAN. When they did not match?

Mr. PRUNIAUX. There were three major reasons. Maybe the letter

of approval had expired because it took more time for the goods to

arrive in Iraq to be presented at the border. Sometimes—and very

often the sites are changed, especially between Turkey—goods

landed in Turkey or Jordan. Very often there was substitution in

sites. Sometimes the documents were incomplete. That was mostly

the case in Umm Qasr. So we would block in the sense that we

would not authenticate, but we had no authority and no power to

prevent the truck from crossing the border and entering into Iraq.

The only thing, nobody would be paid because we had not authenticated. In such a case we would refer these problems to the U.N.

OIP and it was up to U.N. OIP to discuss with the supplier and

find the reason or maybe extend the validity of the approval.

Mr. SHAYS. Did you know what the outcome was when you would

disclose these transactions had taken place? Do you know how they

were resolved? Or once they were passed on to the U.N. authorities, it kind of left your hands?

Mr. PRUNIAUX. No, I would not know. We would get information

from U.N. OIP, yes, the approval has been extended, it was acceptable that the site be changed and the supplier was requested to

472

provide the missing documents. On that basis, on that very specific

information, requests from U.N. OIP Cotecna would authenticate

by electronic mail—that was in 2002, but before that it was faxed

and signed by the team leader on each site and it was sent to U.N.

OIP so the payment of the supplier could be processed.

Mr. HALLORAN. In your testimony you say the Iraqi ministries

complained continuously that the authentication process favored

the supplier, often claiming they had received substandard goods

or delivery shortfalls. Iraq frequently exerted firm pressure on

Cotecna to withhold or retract authentication. OIP directed

Cotecna to refer all such matters to the U.N. What does that

mean?

Mr. PRUNIAUX. To the U.N. Security Council.

Mr. HALLORAN. Where did that get you?

Mr. PRUNIAUX. Maybe I misunderstood.

Mr. SHAYS. His question is what happened then? What was

achieved by doing that?

Mr. PRUNIAUX. The Iraqi authorities in Umm Qasr, that is the

place they put us under pressure. The Iraqi authorities would complain that we were authenticating goods which were sub-quality.

We would not get involved in those discussions, as long as foodstuffs were fit for human consumption. Now, the fact that the

Iraqis considered goods were substandard or were not exactly what

they had ordered was a matter of commercial dispute between the

supplier and the receiver. In fact, being in the business, in the profession, we always told everyone that it is normal practice in this

kind of business, in commercial transactions, to appoint an independent inspection company to verify that the goods which are

being purchased matched the contract, the detailed contract specifications, and that was told by the U.N. OIP to the Iraqi authorities to implement these kinds of procedures.

Mr. HALLORAN. But they chose not to?

Mr. PRUNIAUX. They did that occasionally. I would like to mention, for instance, that one of the things that Cotecna was forbidden, we were forbidden from acting as a commercial inspection

company providing our services to, of course, the Iraqi receivers

and, of course, the suppliers. So there would be no conflict of interest between the independent inspection authentication that we

were providing to the U.N. OIP and the commercial disputes between a receiver and the supplier.

Mr. HALLORAN. That was a provision in your contract with the

U.N.?

Mr. PRUNIAUX. Yes.

Mr. HALLORAN. Your testimony also says that one of the challenges you faced in executing this contract was that you had to

navigate Cotecna’s delicate web of contacts with U.N.’s Office of

Humanitarian Coordinator for Iraq. Could you amplify on that?

There are other references in testimony that particular office was

a problem in terms of executing this program.

Mr. PRUNIAUX. I would not say it was a problem. It was a delicate, diplomatic way of having to coordinate on a daily basis in Iraq

because we had from 54 to 67 inspectors living and traveling and

eating and sleeping in Iraq. You have to realize also, to get into

Iraq you need a visa to enter the territory, and the visas were proVerDate 11-MAY-2000 11:29 Apr 15, 2005 Jkt 000000 PO 00000 Frm 00480 Fmt 6633 Sfmt 6633 D:\DOCS\20052.TXT HGOVREF1 PsN: HGOVREF1
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vided only at the Embassy of Iraq in Amman, in Jordan, and if for

some reason the visa was not granted, the inspectors would be

stranded and cannot reach their sites. The only way to get some

support to clear visas or get transportation authorization to travel

in Iraq, you needed a very specific authorization, and that was provided by the Iraqi authorities. The Iraqi authorities for all of these

problems of logistics and transportation was handled by the Office

of the Humanitarian Coordinator in UNOHCI in Baghdad.

Also and more importantly, a lot of complaints came from the

Iraqis, unjustified and justified, on the behavior of certain of our

inspectors on things which could have happened on some of the

sites which have been reported to the Iraqi officials, and also complaints on the performance of Cotecna, especially in Umm Qasr

where we were put under extreme pressure to shorten some of the

delays that they were experiencing.

In such case I have to be frank. UNOHCI was adopting a rather

friendly attitude toward the requests from the Iraqi authorities;

and this is what I mean, ‘‘problem’’ is maybe not the right word,

but rather a ‘‘delicate.’’

Mr. HALLORAN. Right. Sounds like a problem to me.

You also say that you had to deal with direct pressure from the

Iraqis. What kind of pressure? There is some e-mail traffic describing pressure to move things through and not be so careful about

things. Where did that pressure come from?

Mr. PRUNIAUX. From Iraqi officials. We have an example which

I presented in the documents you have received where it was in

1999 there was a minister of I think of Kuwait, who came with armored guards to our site in Umm Qasr and told us that we would

not be authorized to authenticate unless the goods had already

been accepted in terms of quality by the Baghdad laboratories. As

we brought in various correspondence which appear in the documents, the inspectors were very shaken on the ground. So we

issued a formal complaint that came to my attention in Geneva,

and I told the U.N. OIP-New York. But there was pressure of these

kinds of things.

Mr. HALLORAN. What would have been the problem of Baghdad

checking off on the acceptance of goods?

Mr. PRUNIAUX. They would have blocked all authentication.

Mr. HALLORAN. Until they got paid first?

Mr. PRUNIAUX. Yes, and create a bottleneck so someone would

have to pay to get the goods cleared by financial gains to the Iraqi

officials.

Mr. HALLORAN. After the Minister of Trade shows up with 20 or

more armed guards and intimidates your crew, how was that demand resolved?

Mr. PRUNIAUX. Diplomatically or politically I cannot respond. I

can say technically that problem was solved because that did not

occur again. However, as I said before, there was constant pressure, especially in Umm Qasr, on Cotecna to authenticate, in a

speedy or in a slow way, so the Iraqi officials could exercise some

pressure on the suppliers.

Mr. HALLORAN. Thank you.

Mr. Boks, there was an allegation in the Wall Street Journal 2

days ago that in the course of one oil transaction a Saybolt emVerDate 11-MAY-2000 11:29 Apr 15, 2005 Jkt 000000 PO 00000 Frm 00481 Fmt 6633 Sfmt 6633 D:\DOCS\20052.TXT HGOVREF1 PsN: HGOVREF1
474

ployee had been bribed to allow a topping-off of the ship. The company’s response was that it had been investigated before. Do you

have anything more to say about that?

Mr. BOKS. We have investigated that incident at the time we

learned of the incident which was in October 2001. At that time we

conducted a thorough investigation. We went through the whole

process. We looked at off-loadings. We interviewed the team leader.

We virtually took all of the events and circumstances and we submitted that report of the investigation to the United Nations with

a briefing also to the 661 committee.

What we have now learned from the article in the Wall Street

Journal actually is for us a new allegation. We had no knowledge

of that before it was published. You can rest assured that we will

investigate this further. We will get to the bottom of it. Actually,

as a matter of fact, our board has already instructed our general

counsel to get a team of lawyers to investigate this to the bottom.

Mr. HALLORAN. If you can supply the subcommittee with whatever product your investigation produces, that would be helpful.

Mr. BOKS. Sure. We will share this with the investigating commission.

Mr. HALLORAN. The incident of the Essex, which was detained

and found to have oil loaded in excess of the Oil-for-Food Program

contract, what changes were made in the Saybolt inspection process and the U.N. inspection process as a result of that? What confidence do you have that it was effective in preventing the practice

of topping off?

Mr. BOKS. That evening I heard we took immediate actions for

temporary reasons to have an inspector sitting 24 hours, 7 days a

week, on board a vessel if it was alongside the terminal. Given the

staff levels, that was not something that we could continue, so we

implemented new instructions in terms of sealing the ship’s manifold after the loading had been completed and the loading arms

were disconnected. These seals would have unique numbers and

would be also inserted on the notification letter. The notification

letter was a letter which we put on board with the U.N.-authorized

quantity loaded on board that specific vessel, actually a procedure

that only was implemented earlier in 2001.

In addition to that, we would check the seals prior to departure

of a vessel because a vessel would not always depart immediately

after it completed its loadings. So before departing, we would check

the integrity of the seals. If not, we would then remeasure the vessel.

Other instruction was we would look at the draft of the vessel

after its completed loading. Draft is, I would say the surface of the

water and the keel of the vessel. Maximum draft is, say, 21 meters,

so if a vessel would load with less than that, we would take reference of that and also check it prior to departure.

Basically we would also look at potential vessels that would still

have space after it had loaded its U.N.-authorized volume. So if

that were the case, special attention would be required. Those new

instructions have been adopted by the 661 committee at some

stage.

Mr. HALLORAN. The calibration of the measuring methods you

describe in your testimony, of the 2,600 loadings, of those, how

475

many were validated by you based on less than the type of methods

you would have preferred?

Mr. BOKS. You mean did we ever?

Mr. HALLORAN. In your testimony you said you would prefer to

have the calibration and use other indirect methods to determine

the amount of oil.

Mr. BOKS. The consideration is as follows. When we first came

to Iraq and we did our fact-finding mission, we came to the conclusion there were no properly calibrated metering facilities in place.

Actually the border station in Zakho did not have a metering station so the Iraqis had to cannibalize on the Syrian pipeline and

build it there within a couple of weeks.

Generally speaking, the metering equipment has never, during

the whole of the Oil-for-Food Program, became on a level which

would be able to be used for fiscalisation purposes. So all 2,600

loadings have been done by utilizing the methods that I have described in my statement.

Mr. HALLORAN. In your experience, what is the potential margin

of error?

Mr. BOKS. That is a very good question. Actually what we did

was we made a total comparison of all of the volumes we lifted

from Turkey. In Turkey we had a cross-check possibility of measuring prior to loading and after loading, and then the volume could

be calculated, derived from those two measurements. And we did

also the ship, applying the vessel experience factor, and of the 1.3

billion barrels which were loaded from that port, actually we found

a surplus even; a small surplus of 0.04 percent, which would lead

us to believe that method was applied very accurately, and, I would

say, very professionally.

Mina Al-Bakr was a different story because we could not crosscheck. We did not have any ability. We only could rely on the ship’s

figures by applying the vessel experience factor. I could not give

any estimate as to the accuracy of those figures. Although I would

have to say that the percentages would be probably around maximum 2 percent.

Mr. HALLORAN. Two percent, OK.

Finally, for all three of you, what kind of oversight did you get

on this contract with the U.N. from the U.N.? Were you subject to

an audit or an inquiry by the Office of Internal Oversight at the

United Nations, and if so, how often and what was the outcome?

Mr. SMITH. The Bank provided daily statements of the U.N. Iraq

account to the United Nations. They also had copies of all of the

letters of credit that we were issuing and the amendments that

were made to those letters of credit and details of the payments.

From that, I understand that there were internal audits within

the U.N. based on that information. As far as I am aware, there

was never a physical audit of the Bank or the Bank’s premises in

our conducting of the business.

Mr. HALLORAN. But certainly the Bank, through perhaps other

regulatory channels, had lines of business audited that crossed Oilfor-Food transactions?

Mr. SMITH. The Bank in itself had internal audits and external

audits which included the trade finance area that provided the supVerDate 11-MAY-2000 11:29 Apr 15, 2005 Jkt 000000 PO 00000 Frm 00483 Fmt 6633 Sfmt 6633 D:\DOCS\20052.TXT HGOVREF1 PsN: HGOVREF1
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port to the United Nations. Sorry, my answer was the United Nations.

Mr. HALLORAN. Thank you.

Mr. Boks.

Mr. BOKS. In terms of audits, from what I know, the U.N. has

audited us three times in total. At least I have seen three times

the report; or let me say in two instances we only got a requirement to answer a few questions which basically were for us very

easy to answer.

In one instance there was done a full audit report of which, let

us say, there were quite a few comments and we had to go through

them and answer them point by point, which we obviously did.

Mr. HALLORAN. Thank you.

Mr. PRUNIAUX. Because of the nature of our activities, we had almost 24-hour coordination with the U.N. OIP-New York, and U.N.

OIP would call directly the sites to discuss technical or management matters on the sites. However, we were audited several

times, maybe every 3 to 6 months. One of the senior customs officers from the U.N. OIP would go and visit the sites, with or without the Cotecna contract manager. We had an organization where

we had a contract manager based in Amman and one working in

Geneva working with me. We would go with them or without them.

As a consequence, we would have meetings, regular meetings in

New York every 3 months, and meetings also with the team leaders in Baghdad or Amman. That was an ongoing exercise that we

conducted several times.

Mr. HALLORAN. Thank you.

Mr. SHAYS. I have a number of questions that I would like to go

through. I don’t think that they will take us long to answer. Some

of them simply may not be relevant in the end, but since they are

on my mind I want to ask and get them out of my brain if they

were not relevant.

Why were transactions carried out in euros instead of dollars?

Mr. SMITH. A decision was made part way through the program

to change the pricing and the settlement of the oil sales from U.S.

dollars to euros. That decision was made by the Security Council

of the United Nations.

Mr. SHAYS. So it was the Security Council and not Saddam Hussein?

Mr. SMITH. The decision was made by the Security Council, sir.

Mr. SHAYS. What sort of challenges, if any, did this present?

Mr. SMITH. In banking terms, the additional challenges were

minimal. Whatever currency we are dealing with, whether it is

U.S. dollars or Euro’s the process is basically the same. The physical payment process is slightly different. But again, it is a wellestablished process.

Mr. SHAYS. And the charge that your Bank would make would

be the standard charge made on every transaction?

Mr. SMITH. Yes. Pricing was agreed based on the transactions

that were being undertaken on behalf of the United Nations.

Mr. SHAYS. I am told the bank did not begin an internal investigation for the Oil-for-Food Program and allegations of the corruption began to emerge in 2001. One, is that true; and two, why not?

477

Mr. SMITH. The Bank undertakes regular reviews of the program. If your question relates to the rumors and the stories relating to overpricing——

Mr. SHAYS. They were rumors that turned out to be true.

Mr. SMITH. Right. From what the Bank could see from the details they had from the information that it had, from the letters of

credit and the documents that were presented, there was no evidence that we could see that substantiated anything that was happening. We were dealing with documents presented under a letter

of credit which determined what the amount of the payment was,

and the payment was basically made to the beneficiary or their

bankers. Anything that happened outside of the letter of credit arrangement, obviously, we had no knowledge of at all.

Mr. SHAYS. So your company was not really in the field, this was

more papers crossed your desk?

Mr. SMITH. We were dealing solely with paperwork, and we were

dealing with it in Manhattan, in New York City.

Mr. SHAYS. The bottom line is when there were rumors that ultimately turned out to be true, your bank pretty much decided that

there was not sufficient knowledge to have you conduct your own

internal investigation?

Mr. SMITH. We would certainly from an operational point of view

look at whatever rumors were going around. Indeed, quite often we

would discuss them at what were reasonably frequent operational

communication meetings with the U.N. treasury, so I am aware

that the U.N. was also aware of those rumors. At the end of the

day, it was the Security Council that were sanctioning the various

transactions.

Mr. SHAYS. Did you have a sense, or lack thereof, of Saybolt and

Cotecna’s ability to verify transactions?

Mr. SMITH. We were obviously not on the ground in Iraq, so we

did not see their operations at all. We were being provided with

certificates that were required under the letters of credit. As far as

the Cotecna certificates were concerned, they came to us directly

from the United Nations, they did not come through any direct

route. Again, the Saybolt inspections, all of the documentation for

the payment of an LC relating to an oil shipment were presented

to us by the United Nations.

Mr. SHAYS. Mr. Boks, do you have any reaction, or did you have

any reaction to the description in the Amman newspaper that said

there was a Netherland company of SyBolt, S-Y, and then capital

B-O-L-T, as receiving $3 million in oil? Did that get your attention?

Mr. BOKS. Sure. We looked at that. We were puzzled that our

name appeared on that list because we had not received any allocation. That also would have been very unusual. I can say Saybolt

did not buy or sell oil or vouchers.

Mr. SHAYS. Being one in that list of 269, it would make us have

to question some of the others on that list. In the Essex incident

which was the illegal topping-off of oil, how were the Iraqis punished or censored for this obvious illegality?

Mr. BOKS. I’m sorry, I can’t answer that question because that

is beyond our mandate.

Mr. SHAYS. So you don’t know?

Mr. BOKS. I don’t know.

478

Mr. SHAYS. Your mandate, you basically reported the incident?

Mr. BOKS. Well, what happened is a letter was sent by the captain of that vessel with corresponding documents to the United Nations clearly stipulating what happened during the event, and actually said this all happened after the U.N. inspectors left the vessel,

after they had completed.

Mr. SHAYS. How did you respond?

Mr. BOKS. When we received that letter, we took immediate action. We changed immediately the working procedures and introduced the seals.

Mr. SHAYS. Could you describe the Clovely incident?

Mr. BOKS. The Clovely incident was of a different magnitude.

This vessel was nominated to load in February 2002, and when it

arrived alongside the terminal, it was very close to the expiration

of the letter of credit.

Mr. SHAYS. I have no sense how long a letter of credit lasts.

Mr. BOKS. It was just a matter of days.

Mr. SHAYS. Letters of credit give you a window of how much?

Mr. SMITH. It depends on the individual letter of credit. Normally

the oil letters of credit—and they varied—but normally it would be

a period of 4 to 6 weeks.

Mr. SHAYS. Thank you.

Mr. Boks.

Mr. BOKS. When the vessel arrived, we noticed, because we kept

track and record of the expiration date of each individual letter of

credit so we would make sure that the completion of the vessel

would fall into that window; otherwise there would be problems by,

I would say, drawing on the letter of credit to get payment for the

oil lifting.

So what we did was basically we instructed our team leader to

notify SOMO of this event, and that loading would not be started

until we had received from the U.N. oil overseers a revised date or

window for the letter of credit.

That took obviously some time, and irrespective of that, the loading master or the Iraqi people on the platform decided still irrespective of that problem to start loading the vessel. And luckily we

were able to get the letter of credit arranged prior to the departure

of the vessel. But on itself it was clearly, I would say, an abuse.

Mr. SHAYS. This is for both Saybolt and Cotecna. How did the

various U.N. offices that you work with coordinate their assistance

and responses to your needs?

Mr. PRUNIAUX. I’m sorry?

Mr. SHAYS. Both of you have complained about confusion within

the United Nations, sometimes a lack of cooperation from the U.N.

Both of you have said that. I want to know how the various U.N.

offices that you worked with coordinated their interaction with you.

Let me ask you this way: How many different parts of the U.N. did

you need to interact with?

Mr. PRUNIAUX. On a daily basis and for technical matters, operational matters, it was only the U.N. OIP. However, when you negotiate a contract, or if you want to modify the content of the

contracts——

Mr. SHAYS. You’re talking about your own contract?

479

Mr. PRUNIAUX. Yes. You have to deal with a completely different

department or entities at the U.N. One of them is the Procurement

Department, and, in fact, since I negotiated and I signed two contracts and several amendments, all the technical work was done

with U.N. OIP. But all the rest, the negotiations on the financial

conditions, that was done with the Procurement Department, and

sometimes there was a lack of coordination between the two departments, which made it difficult for a company like Cotecna to

fully and properly negotiate. And on top of that there was the Office of Legal Affairs.

Mr. SHAYS. What affairs?

Mr. PRUNIAUX. Office of Legal Affairs.

Mr. SHAYS. Legal Affairs.

Mr. PRUNIAUX. Yes, which was a very powerful department

which included several very tough conditions, administrative contractual conditions, in our contracts. So, in fact, to operate under

a contract, we had to work with U.N. OIP, but to implement the

contract, we had to deal with three separate entities. That was in

New York.

Mr. SHAYS. Yes. Would that describe the same challenge for you,

Mr. Boks?

Mr. BOKS. To a certain extent I underlined that we had similar

problems with procurement. If our contract was up for renewal, you

have—basically when they would not continue it, obviously you

would need to have that information prior to the expiration of the

contract. But sometimes the amendment was coming after the expiration date, which gave sometimes some problems with insurers,

because obviously in Iraq, if you want to ensure yourself, then you

need to make sure that there were reasons to be there in a certain

country.

With OIP I must say I haven’t had any major difficulties other

than that we have issues where we asked advice after irregularities

were noted, and it took sometimes quite some time. The other contact points we had was with the U.N. overseers, with whom we basically on a daily basis had contact concerning the oil export, and

here and there obviously delays were observed, but not to the extent that it was an unworkable situation.

Mr. SHAYS. Both of you lacked power, and you lacked personnel.

In other words, there are just certain things you couldn’t tell the

Iraqis to do. Did you try to get power, and did you have your contracts revised so that you could hire more people to do the job you

needed to do? Mr. Boks.

Mr. BOKS. Shall I start? The staffing levels, the staffing levels in

the oil program have to a certain extent always been sufficient.

Where we faced major difficulties was in monitoring the spare

parts and equipment, which were also purchased under the Oil-forFood Program. When we started, we started with one inspector,

very modest, because spare parts were ordered but came.

Mr. SHAYS. You’re talking about parts for the oil industry itself.

Mr. BOKS. Yes. Perhaps I should elaborate a bit on that.

In 1998, the Secretary General had been to Iraq, and a proposal

was made to change the cap of dollars that could be generated

through a phase would be going up to five——

Mr. SHAYS. Greater production.

480

Mr. BOKS. Exactly. So at the same time, the oil prices were very

low, and production was very low, so Iraq was not able to come up

to those proceeds and to come up to that cap. And then the Secretary General appointed a group of experts to go to Iraq and, in

consultation with the Government of Iraq, try to find ways of increasing production. We were that group of experts. And one of the

conclusions as the industry was in an amendable state is that

spare parts were needed and equipment was needed to bring the

production up to the levels required. And for that purpose, the Security Council decided that they would allow Iraq to purchase

spare parts and equipment, as long as there was a monitoring system that would keep track that those spare parts would also be

used for their intended purpose.

Mr. SHAYS. And so that’s the area where you could have used

more people.

Mr. BOKS. Absolutely.

Mr. SHAYS. And did you request more people?

Mr. BOKS. Yes. That was on an ongoing basis because we were

facing also difficulties in terms of the fact that the Government of

Iraq insisted that our staff would be deployed only in Baghdad, and

that we had to travel throughout the country to check all those

sites, and we only had, let’s say, at the top level, six, seven people.

Mr. SHAYS. So the bottom line is you couldn’t do the job properly

with the staff you had.

Mr. BOKS. Well, we had to prioritize.

Mr. SHAYS. OK. Did this mean that you then had to take people

from one part of your program to put it in the other part, spare

parts? Did you have to kind of cannibalize your program?

Mr. BOKS. Given the constraints in traveling, we have used

mainly in the beginning some staff from Zakho to do in the northern part of Iraq also some checks on spare parts and equipment for

a very short period of time, because his traveling was difficult as

we were staying in a Kurdish area, so it was difficult to travel

around.

Mr. SHAYS. Let me ask you, Mr. Pruniaux, the whole issue of the

lack of power, which you have described, and the lack of personnel,

were both of these a serious problem at various times or not?

Mr. PRUNIAUX. Mr. Chairman, respectfully, it was not really a

question of having more power. The specifications of our mandate

were clear enough for the authentication. There was no need to get

further—in my opinion, further power, physical power, to implement and to do the work that we are doing on the sites.

Mr. SHAYS. Yes, sir.

Mr. PRUNIAUX. However, sometimes because of the fluctuations

in the volume of goods entering Iraq, or the fact that it was that

the transporters were moving from one site to the other, made the

work at certain sites more difficult, because all of a sudden we

would have almost thousands of trucks arriving at Trebil, which

was the border between Jordan and Iraq, or—and especially Umm

Qasr, we would have an accumulation of ships and loading and

containers being stored in the port. In such a case we would immediately try to ask the U.N. OIP permission to move staff between

sites.

481

In that sense we did not have the power to move at our own will

an inspector from one site to the other. The contract specified that

we were requested to put a certain number of permanent inspectors on a daily basis per site, let’s say 12 in Trebil. So if you want

to move that and do that, you are in contradiction with the obligations of the contract. So we had to ask permission. And to move

an inspector from one place to the other in Iraq could take a couple

of days, so we would rush people to Umm Qasr because there was

an accumulation of volume in Umm Qasr.

I must say that in order to have between 54 and 67 permanent

inspectors in Iraq, Cotecna had to hire up to 95 permanent inspectors because of the rotation and those that are sick or going on vacation and so on. And this would be illustrated by the statistics

that are available at U.N. We had more, always more mandates of

inspectors especially in places like Umm Qasr. For instance, we

were requested to have between 17 and 22 permanent inspectors

in Umm Qasr, but we would have always 25, 26 all paid by

Cotecna.

Mr. SHAYS. So sometimes you simply didn’t have enough people.

Mr. PRUNIAUX. Yes.

Mr. SHAYS. But was the solution to get more, and did you request more, and did the U.N. say no or yes?

Mr. PRUNIAUX. It was a question of the decisions and convincing

the U.N. OIP that it was not to increase our invoice, but we were

generally asking for more inspectors on the sites.

Mr. SHAYS. The bottom line is you don’t have to worry about the

U.N. making money off of this. I mean, their 3 percent, I’m assuming, helped pay your costs; is that right? Does anyone know? In

other words, who paid you?

Mr. PRUNIAUX. The U.N.

Mr. SHAYS. And they took a fee for——

Mr. PRUNIAUX. From the 2.2 percent.

Mr. SHAYS. Right. There is nothing that we have seen so far that

makes us think that they didn’t cover their cost plus; in other

words, they made money off of this.

Would you say the U.N. sided more with your side when there

was a dispute with the Iraqis or the Iraqis? Did they tend to dismiss—and I am asking both of you this. This isn’t a trick question.

At the end of the day, did you often feel that you lost more arguments with the United Nations, they just more or less sided with

the Iraqis, or did they more or less side with you? I am asking both

of you. Do you understand the question?

Mr. BOKS. Would you ask it——

Mr. SHAYS. In other words, when you had a dispute with some

transaction, and you contacted the U.N. officials with some disappointment, did they tend more to dismiss it and just say, you

know, don’t worry about it, or did they take your complaint very

seriously and try to deal with it?

Mr. PRUNIAUX. As far as Cotecna is concerned, they took it very

seriously, very seriously, because they had the permanent missions

to the U.N. from all the countries exporting to Iraq and back, plus

they had the suppliers coming there and so on. And there was until

2002 until there was——

482

Mr. SHAYS. Well, taking it seriously means they paid attention

to. It doesn’t mean they took your position though. I mean, in other

words, they realized they had something they had to deal with, so

they dealt with it seriously. I don’t want to put words in your

mouth. Did they basically say you all were right, and they were

wrong, and what was your feeling?

Mr. PRUNIAUX. Ultimately somebody had to make a decision, and

they told us to do the job with the number of people that you have,

and that’s it. So we tried to work under these conditions.

Mr. SHAYS. Mr. Boks.

Mr. BOKS. And in terms of disputes, the U.N. would take it serious if—we have hardly had any disputes, but we have had loadings

where the off-takers were dissatisfied for one or another reason.

And I must say that OIP did try to come to a solution; not always,

I would say, in a quick way, but at the end of the day, they always

tried to solve and to assist.

Mr. SHAYS. The number that is thrown out in these two sides of

the equation, the Oil-for-Food Program suspected that Saddam basically took out $4.4 billion, and the smuggling, which we looked

at the numbers being more like $5.7 billion. Did your inspectors

ever identify or observe any smuggling?

Mr. BOKS. Although we had not the authority to look for smuggling, and we also have to realize that our inspectors were at very

remote locations, we have——

Mr. SHAYS. In other words, there were a lot of sites were you not

at?

Mr. BOKS. Absolutely. More than that we were. But we have——

Mr. SHAYS. There were more sites that you weren’t at than you

were at.

Mr. BOKS. Absolutely.

Mr. SHAYS. OK. Is that true for you, Mr. Pruniaux, as well?

Mr. PRUNIAUX. Well, we operated on the four or five sites. As I

explained before, we were told that the goods were presented to us.

But there was a permanent flow of goods entering into Iraq which

had nothing do with the Oil-for-Food Program. And I visited Iraq

several times, Mr. Chairman, and it could be—it was easy to see

that, you know, visiting Baghdad there was plenty of goods which

shouldn’t have been on the open market.

Mr. SHAYS. OK. So in observing smuggling, if you saw it, did you

report it, or did you figure that wasn’t your responsibility?

Mr. BOKS. Well, basically I can say that we have had instances

that I felt that we had to report it, and I realized that was outside

our mandate, but still felt that it had to be brought to the attention.

Mr. SHAYS. Right. Mr. Pruniaux, tell me the response to that

question.

Mr. PRUNIAUX. When you see goods entering Iraq outside of the

Oil-for-Food Program, you do not know if these are the 661 goods

or if these are smuggled. These were entirely left to the authority

of the Iraqi Customs to check these goods entering Iraq. No, we

would not report, because we did not know what kind of goods

these were.

Mr. SHAYS. What I see the difference is that in the Oil-for-Food

Program, the oil part of the transaction, it seems to me, is a little

483

easier to have policed. But if a ship came up and loaded up, that

was something that you would simply step in. I mean, you weren’t

going to allow that kind of smuggling, correct?

Mr. BOKS. Well, it wasn’t always ships, but at some states we

also——

Mr. SHAYS. It could be a truck.

Mr. BOKS. We learned obviously there was traffic to Jordan, although that was more or less of an acceptable phenomena, and we

have reported in our fact-finding missions that volumes were estimated at 80,000 barrels a day. But we also have seen the fact that

had been used in early 2003, and we reported that to both the Multilateral Interception Force as well as the United Nations.

Mr. SHAYS. So there would be some ships, though, that you

would not have inspected, correct?

Mr. BOKS. Sure. But if they were loaded at a different terminal,

we would not have staff available to do that.

Mr. SHAYS. I mean, you know, that’s kind of significant, how

many terminals were you at versus how many terminals exist.

Mr. BOKS. Well, you had not only terminals. We have to make

a distinction here. You have the pipeline to Syria. You have trucks

to Turkey, trucks to Jordan. You had vessels in the Arabian Gulf,

which were loaded at the Shatt al-Arab, which basically—and then

we had also a terminal 10 kilometers north of Mina Al-Bakr called

Khor al-Amaya. Those were, I would say, the points that activity

has been observed, not by us, but by others.

Mr. SHAYS. Why didn’t Cotecna operate inspectionsites in neighboring countries as Saybolt did? Let me say it again. Saybolt had

inspectionsites in neighboring countries; is that correct, Mr. Boks?

Mr. BOKS. We had one inspectionsite in Turkey.

Mr. SHAYS. Right. And why were you in Turkey?

Mr. BOKS. Well, as a matter of fact, Iraq had from the beginning

onwards two export points. One in the south we talked about. But

the crude oil which was produced in the north was transshipped

through the Iraq-Turkey pipeline to Ceyhan. And in Ceyhan there

was a terminal, there is a terminal where that crude oil is stored

and loaded subsequently in vessels which then proceed through the

Mediterranean.

Mr. SHAYS. Now, why wouldn’t you have been in Syria then? If

you were in Turkey, why wouldn’t you have been in Syria?

Mr. BOKS. Well, that’s an interesting question. I can’t answer

that. That is not up to me. It’s beyond——

Mr. SHAYS. No. I understand it’s not up to you, but the same

logic that would apply that you should be in Turkey would apply,

correct, that you should be in Syria as well, correct?

Mr. BOKS. Correct. We discussed that also at some states with

OIP, that whether there could be coming a mandate to inspect also

the Syrian part. But it was obviously up to the Security Council.

Mr. SHAYS. And their response was?

Mr. BOKS. Well, again, that there was no mandate. Obviously

Iraq has subsequently said that they were testing the pipeline.

Mr. SHAYS. Well, I mean, that’s absurd. I mean, what we are basically saying is that there was a very viable pipeline through

Syria, very viable pipeline through Turkey. We were inspecting the

pipeline through Turkey, and we were not inspecting the pipeline

484

through Syria. And I just would like to have a sense of why. They

had to give you some answer.

Mr. BOKS. It is an interesting subject. But having said that, if

we would not have the authority, we couldn’t do it, and the authority had to come from the Council.

Mr. SHAYS. Let me just say this to you. You’re cleared of all responsibility, so you can relax. But what you’re doing is you’re educating the subcommittee. I want to know what they would have

said. I mean, it is a rather porous system that would—I mean, I

have wondered how the smuggling could happen, and I didn’t realize that we made it so easy. You must have had just general conversations with U.N. officials. Did they give you a logical reason as

to why we wouldn’t want you also to be in Syria?

Mr. BOKS. What I heard is that it has been discussed also merely

during meetings of the 661 committee, and there was no agreement

reached as to how to proceed on that.

Mr. SHAYS. An agreement required a unanimous consent. It’s

kind of like the Senate in Washington, which doesn’t give me any

comfort.

We’re almost done here, gentlemen. And thank you very much.

How often, Mr. Pruniaux, did goods avoid or ignore the authentication or inspection process? How often did you actually inspect

goods? I get the feeling, given your mandate, given your personnel,

that when ships lined up, when trucks lined up, you were more inspecting the paperwork than actually opening up the containers.

Mr. PRUNIAUX. Yes. It mattered to match the documents and to

authenticate. There are two things in your question.

Mr. SHAYS. No, that is your mandate. The mandate was to match

the papers, not verify that was what was in the container verified

the papers.

Mr. PRUNIAUX. It was left to our appreciation as a professional

inspection company to inspect, which means to open, for instance,

the containers, or to open the trucks, talking of the land border

sites. Now, in such a case, normal practice is about 2 percent,

sometimes 5, 6 percent, 5, 6 percent. What we did was on an average basis was about 10 percent of the number of trucks or containers being presented to us were opened, and I have provided some

pictures to illustrate this.

Mr. SHAYS. But candidly, when there was the queuing up and a

backlog, there was more pressure on you.

Mr. PRUNIAUX. Then the trucks would wait. No.

Mr. SHAYS. The trucks would wait.

Mr. PRUNIAUX. No. The trucks would wait. The drivers are educated. I mean, patience is a virtue in the Middle East, and they

would just wait at the border.

Mr. SHAYS. Patience is a virtue. So can I infer from that when

there was pressure to—a backlog, that did not impact your—quality of the work.

Mr. PRUNIAUX. No.

Mr. SHAYS. Well, here’s the general feeling I get from your testimony, and I want you to tell me whether you agree or disagree.

Mr. Smith, I get the sense that BNP basically believed—and I’m

not passing judgment on this, I’m just saying what I believe—that

485

your responsibility was to check documents. You were basically

Iraq’s bank selected by the United Nations, correct?

Mr. SMITH. We were the U.N.’s bank, in our opinion, maintaining

an account for the United Nations, which was styled the Iraq account.

Mr. SHAYS. OK. And I’m happy you’re correcting me. You were

the U.N.’s bank for Iraq, for Iraqi transactions.

Mr. SMITH. That’s right.

Mr. SHAYS. Dollars came in from the sale of oil, and dollars

flowed out for the purchase of commodities, and that your responsibility was to make sure that—and you were giving letters of credit to make sure that this would all happen. But ultimately, your

responsibility was to make sure that the paperwork matched. Is

that a fair assessment of what I’ve heard you say?

Mr. SMITH. Our responsibility was to ensure that all of the paperwork was in accordance with the letters of credit before we

made any payments.

The one additional point I would add in there, that not all of the

funds that were received for the sale of the oil were retained at

BNP Paribas. A minimum of 41 percent, as I explained in my opening statement, was transferred away to another bank, the U.N.’s

main bank, Chase Manhattan, because BNP Paribas was only involved in the part of the humanitarian program that affected the

central and southern provinces of Iraq.

Mr. SHAYS. Oh, the Kurdish area was not.

Mr. SMITH. The Kurdish area was within the funds that we

moved to Chase Manhattan.

Mr. SHAYS. OK. As long as your paperwork matched, then the

transactions took place.

Mr. SMITH. Yes. Basically we were making payment against the

letter of credits that we had issued on the U.N.’s behalf.

Mr. SHAYS. OK. And with you, Mr. Boks, and you, Mr. Pruniaux,

what I sense is a different challenge. With you, Mr. Pruniaux, you

had lots of different commodities to check. You had ports, plus you

four transaction points there. You were inspecting trucks, you were

inspecting ships, but you were primarily processing paper. You

weren’t taking a good look at every—you were not able to verify

whether or not the paperwork matched what was actually potentially in a ship or in a truck; is that correct?

Mr. PRUNIAUX. We were able to do that. Sometimes, as I mentioned before, there were pressures because of the volumes or for

outside reasons, like the Iraqis trying to put pressure on us. But,

no, we had IT technicians. The operations that we carried was a

combination of physical inspections, as I said, 10 percent or systematic sampling of foodstuffs.

Mr. SHAYS. It was sampling of the cargo. It was a sample of it.

Mr. PRUNIAUX. Of the food basket only, and for which we had to

do 100 percent laboratory analysis. But it was a combination, as I

said, of physical inspections, matching documents, and receiving

and keying data and processing these data on these documents and

sending them to New York. So the sites were busy 24 hours per

day.

Mr. SHAYS. But your testimony before the subcommittee was you

didn’t have enough people to do your job.

486

Mr. PRUNIAUX. On a case-by-case basis, not on a permanent

basis. And that was especially, as I mentioned in my testimony—

it was specially hard in 2001. And as a request there was an increase, I believe, when we were operating in Umm Qasr at—when

there was this peak at the end of 2002, 2001, at the beginning of

2001, we had the total of 62—no, 57 permanent inspectors. And

that was the following contract which was won again by us covered

additional five inspectors for Umm Qasr.

Mr. SHAYS. In both cases, neither of you were at all the sites that

you needed to be in order to see all transactions, which enabled

smuggling to take place.

Mr. PRUNIAUX. That was not our duty.

Mr. SHAYS. I’m not saying it’s your duty. I’m just saying that you

were not at all the potential sites of transaction, either for oil or

for commodities; is that correct?

Mr. PRUNIAUX. All the 986, all the Oil-for-Food transactions

across the border, and we all authenticated them.

Mr. SHAYS. What’s that?

Mr. PRUNIAUX. All transactions under the Oil-for-Food Program

crossed the border. Those which crossed the border and we authenticated them.

Mr. SHAYS. Right.

Mr. PRUNIAUX. There was nothing else for us to do but just to

look for the——

Mr. SHAYS. You only looked for the Oil-for-Food transactions.

Mr. PRUNIAUX. Yes. Absolutely.

Mr. SHAYS. All the other transactions you did not look at.

Mr. PRUNIAUX. No. We did not know.

Mr. SHAYS. And that’s the case with you, Mr. Boks?

Mr. BOKS. That’s correct. We were at the authorized export

points, and, yes, that was about it.

Mr. SHAYS. I’m sorry to keep you a little longer, but I just need

to ask you this one other area. When he undersold his oil, did you

have any responsibilities to deal with that issue? In other words,

were there questions raised when he would sell oil for below market price because the U.N. approved it, that was good enough? In

other words, I mean, any thinking person would wonder why would

he undersell for oil. Did that raise questions in your mind? He

undersold his oil. He sold it for a price below market.

Mr. BOKS. Well, obviously we didn’t have anything to do with the

transfers of money. Pricing was not——

Mr. SHAYS. A factor. You just looked at buying. When he offered

to pay for commodities, you didn’t look at pricing either.

Mr. PRUNIAUX. No, not at all.

Mr. SHAYS. OK. Let me conclude by asking you, each of you,

which is the weakness of the program? What was the greatest

weakness of the program? Tell me, each of you, what you think the

greatest weakness in the program from your perspective? I will

start with you, Mr. Smith. If you were designing the program, what

would you have designed differently to make sure there weren’t the

rip-offs that we know took place?

Mr. SMITH. As I said in my opening statement, from a banking

perspective, I think the structure was right. From the program as

487

a whole, more control was required over the procurement process

and the pricing process.

Mr. SHAYS. Mr. Boks.

Mr. BOKS. Yes. That is something I can’t comment on, but I

would say that the unauthorized export points, Syria came on line

obviously in a much later stage than the inception of the

programsm. But I think that is obviously a shame that it happened.

Mr. SHAYS. Thank you.

Mr. Pruniaux.

Mr. PRUNIAUX. Well, Cotecna has contracts worldwide for the

control of borders and especially provide services to the Customs of

various countries in the world. When I say provide, it means really

sometimes we replace the Customs or we control the Customs.

Now, the Oil-for-Food Program and the authentication was something totally different, as I mentioned at the very beginning. If a

comprehensive program had been designed even for the Oil-forFood Program, it should have covered or it could have covered the

various sectors of a complete control of imports, which is the price

verification, the quality, quantity and so on. But that was not written. That was not requested in our mandate.

Mr. SHAYS. You all have been extraordinarily patient, and I

think you have changed your schedules, and you have had to stay

later than even I thought would happen. And you have been very

cooperative with us. You have tried to be, I think, extraordinarily

helpful, which is a credit to all three of you and to your companies,

and I thank you for that.

Is there anything that you want to put on the record before we

adjourn? Anything that you think needs to be on the record before

we adjourn?

Gentlemen, thank you very much. This hearing is adjourned.

[Whereupon, at 4:45 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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