Sunday, November 06, 2005

The Volker Report: Much ado...

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A word of Caution:

While reading the Report and the procedures that the Iraqi regime had been following with regard to the oil allocations and imports into the country from the oil receipts, it is important not to be judgmental about the right or wrong of such practices. These are practices that the Government of the day in Iraq chose to adopt for whatever reason, and for which it would have a justification, howsoever unacceptable it may sound.

As far as India is concerned, the only narrow issue is whether an Indian political party and/or one of its members made any wrongful gains in the dealings under the then existing dispensation.

Excerpts from Report of the Independent Inquiry Committee


On December 10, 1996, after six years of facing export prohibitions as a result of sanctions, Iraq was authorized to sell its crude oil under the Oil-for-Food Programme. Iraq sold approximately $64.2 billion of Iraqi crude oil during the Programme. Summary listings of oil buyers are provided on the Committee’s website,, in Table 1 (entitled “Oil Allocations and
Sales Summary by Contracting Company”) and Table 2 (entitled “Oil Sales Summary by
Contracting Company and Contract”).
Under Resolution 986 and the Iraq-UN MOU, Iraq could chose to whom it sold oil. It exercised its discretion to award oil contracts to its significant advantage. Two overriding factors determined Iraq’s choice of oil recipients. The first factor was influencing foreign policy and international public opinion in favor of ending sanctions against Iraq. Later in the Programme, Iraq sought to generate illicit income outside of the United Nation’s oversight. One source of illicit income was from so-called “surcharges” paid on crude oil contracts under the Programme.
The Iraqi regime demanded that payments be made to Iraqi-controlled bank accounts and Iraqi embassies abroad. Iraq earned $228.8 million of income from these surcharges. Table 3 (entitled “Surcharge Payments Associated with a Contracting Company”) provides a listing by company of the vast majority of contracts that had been assessed surcharges.
In allocating its crude oil, Iraq instituted a preference policy in favor of companies and individuals from countries that, as Tariq Aziz described, were perceived as “friendly” to Iraq, particularly those that were members of the Security Council. Russian companies purchased almost one-third of the oil sold under the Programme. The Russian Ministry of Fuel and Energy and the Iraqi Ministry of Oil coordinated the allocation of oil to Russian companies. French companies were the second largest purchasers of oil under the Programme overall. The Iraqi oil
trade with French companies dropped significantly after Iraq imposed surcharges.

If Iraq was dissatisfied with the political positions of a country, it stopped selling oil to that country’s companies. Initially, Iraqi Vice President Taha Yassin Ramadan and Minister of Oil Amer Rashid convinced Saddam Hussein to allocate oil to companies based in the United States in an effort to persuade the United States government to soften its attitude toward Iraq.
According to Mr. Ramadan, Iraq shifted the oil to Russian companies when there was no
perceived change in United States policies. Iraq’s policies did not prevent companies from disfavored countries from obtaining Iraqi crude oil. A substantial volume of oil under contract with Russian companies was purchased and financed by companies based in the United States and elsewhere. Many of the letters of credit executed under the Programme were financed by non-contracting companies. Table 4 (entitled “Known Underlying Oil Financiers”) provides a listing of the underlying financiers of oil contracts that the Committee was able to identify. The names of these companies typically did not appear on SOMO contracts or United Nations records.
Iraq awarded “special” allocations not only to companies, but also to individuals and their representatives. These individuals were influential in their respective countries, espoused pro- Iraq views, or organized anti-sanctions activities. They included present and former government
officials, politicians and persons closely associated with these figures, businessmen, and activists
involved in anti-sanctions activities. Iraq also allocated oil to political parties and organizations.
Instances of oil allocations to these individuals and parties are discussed in this Chapter. Table 5
(entitled “Summary of Oil Sales by Non-Contractual Beneficiary”) provides a list of oil allocations to “non-contractual beneficiaries” (i.e., individuals and entities other than the named contracting party).
Iraqi officials awarded these “special” allocations without regard to the beneficiary’s familiarity with the oil trading market. Some beneficiaries sought the assistance of intermediaries to arrange for oil sales. Others used front companies to enter into United Nations contracts and then sold the oil to established oil companies or traders who bought the oil for a premium over the Un ted Nations official selling price for the oil. The premium covered the commissions owed to
intermediaries and beneficiaries.
These layers of individuals and companies between the allocating and lifting of the crude oil resulted in transactions in which the United Nations could not determine from the face of the contract who was benefiting from or purchasing the oil. This lack of transparency took on added significance when Iraq instituted a policy to collect an illicit surcharge on every barrel of oil sold under the Programme.
Beginning in the fall of 2000, in the middle of Phase VIII, Iraq ordered its Ministry of Oil to collect surcharges. The surcharge phases ultimately extended until the fall of 2002, in the middle of Phase XII. Iraq initially set surcharges at $0.10 per barrel. At the end of 2000, Iraq tried to impose a surcharge of $0.50 per barrel, but soon reduced it to $0.25 to $0.30, and ultimately lowered it to $0.15 before the scheme ended. The Iraqi State Oil Marketing Organization (“SOMO”) ran a highly organized system to collect oil surcharges and maintained an extensive database to keep track of the payments. Every contracting customer, if not each beneficiary, was
advised of the requirement. Surcharges were levied on each barrel lifted, that is, loaded by a tanker at the port. Surcharge payments were generally due within thirty days of the oil lift.
Unless a higher official had given a company dispensation, SOMO prohibited a company from loading additional oil when surcharges were overdue. Surcharges owed on a contract were not always paid in full in one payment. Partial surcharge payments often were made in an effort to ensure that SOMO did not stop or delay future oil lifts. For this reason, payments to Iraqi-controlled accounts may not correspond to surcharges assessed on an entire contract or may be applied to surcharges owed on a number of lifts under more than one contract.
Iraq’s unrealistic expectation that the market would bear a $0.50 surcharge in Phase IX caused an oil exporting crisis in Iraq. At that time, the oil overseers also warned traders and companies that it was illegal to pay surcharges or otherwise make payments to Iraq outside the United Nations escrow account. Customers dropped out of the market. The Minister of Oil made personal efforts to persuade oil traders and companies to help Iraq by promising them substantial oil contracts.
Ultimately, four traders and companies financed and lifted over 60 percent of the Iraqi crude oil during the exporting crisis in Phase IX. The top financiers of Iraqi crude oil in that phase were Bayoil Supply & Trading Limited (“Bayoil”), the Taurus Group (“Taurus”), Glencore International AG (“Glencore”), and the Vitol Group (“Vitol”). None of these traders had been given the significant direct access to oil contracts that they sought under the Programme. In Phase IX, these companies purchased substantial amounts of crude oil through intermediary entities: Bayoil mainly through Italtech SAR, an Italian-based company; Taurus mainly through
Fenar Petroleum Ltd. and Alcon Petroleum Ltd, Liechtenstein-based companies; Glencore
through its own Swiss-based company, and Petrogaz Distribution S.A.; and Vitol mainly through Mastek Sdn Bhd, a Malaysian-based company, among others.
Iraq’s decision to value illicit income over political influence in Phase IX altered the typical distribution of Iraqi oil to companies which had been principally based on nationality in prior phases. The four traders and the companies they used to purchase oil were not from the countries most favored by Iraq. As illustrated above in Chart A, Liechtenstein, Italy, Malaysia, and Switzerland replaced countries like France and China.
Surcharges were assessed and paid on contracts financed by Bayoil, Taurus, Glencore, and Vitol in the surcharge phases. All four traders had some of the surcharges paid to Iraqi-controlled bank accounts through other entities and agents. Taurus and Vitol also paid certain surcharges directly to Iraqi-controlled bank accounts. All of these oil traders and companies deny knowingly making surcharge payments to the Government of Iraq.
Certain practices developed to cope with the surcharges. Companies used a disclaimer in their
contracts providing that the party to the contract was not involved in paying surcharges. The
inclusion of the disclaimer did not appear to prevent the payment of surcharges. In one instance,
an agent for Bayoil admitted to including the disclaimer in fabricated, after-the-fact agreements
created to disguise the payment of surcharges. Companies sometimes attempted to disguisesurcharge payments by labeling them as “loading fees” or “port fees.” In one instance, a bank official advised Taurus to switch the term “commissions” on certain money transfers to “loading fees.” Payments labeled as “loading fees” and discussed in this section were applied uniformly to the payment of surcharges on oil contracts.
Oil companies paid high premiums to intermediaries and beneficiaries on Iraqi oil purchases to cover surcharges. When interviewed, companies claimed that market forces, not any deliberate attempt to pay surcharges through another party, caused the increase in premiums. Yet, most of the participants in Iraqi oil sales have admitted that everyone was aware that Iraq demanded surcharges on oil exports. Some participants have admitted to agreeing with oil companies and traders that the premium covered their commission, as well as the surcharges owed on the contract. As described in this Chapter, the premium split was particularly apparent when
Glencore paid the commission directly to the contracting company and the surcharge to another entity.
By the fall of 2002, the Government of Iraq decided to discontinue its surcharge policy because of the decrease in demand due to the continued imposition of “retroactive pricing” by members of the 661 Committee. By then, of course, the Government of Iraq effectively had succeeded in using the sale of oil under the Programme as a tool of foreign policy and a sizeable source of illicit revenue.
Part II of this Chapter reviews the administration of Iraqi oil exports under the Programme. Parts III and IV describe the preferential treatment of companies and individuals based in Russia and France, respectively. Part V examines other political beneficiaries of oil allocations. Part VI examines the major oil traders and companies that emerged as significant purchasers of crude oil when surcharges initially were imposed by the Iraqi regime.

Previous Committee reports have discussed the background to the introduction of surcharges and the effect of the surcharges on the Iraqi oil market, together with the efficacy of measures taken by the United Nations to combat them.

Although the sale of crude oil was to be monitored and approved by the 661 Committee, the Iraqi Ministry of Oil and its marketing arm, SOMO, were given the discretion to choose its customers and the amount of oil to be sold to each one. As an initial matter, SOMO contracted with oil companies without regard to the nationality of the owner or the location of their corporate base.
According to an Iraqi official, when the Programme began, the Ministry of Oil was concerned about attracting customers given the risk associated with purchasing oil from a deteriorated Iraqi oil industry and under an untested United Nations program. During the first phase, Amer Rashid, then serving as Iraqi Minister of Oil, conveyed to SOMO employees that he was anxious to sell oil to any company prepared to arrange for a vessel to load it. An American, Oscar Wyatt, was the first person who agreed to purchase oil. Mr. Wyatt arranged for a vessel to load the oil through his United States-based company, Coastal Petroleum Company. Other established oil companies followed suit, including: A.S. Tupras (Turkey), Alfa Eco (Russia), BP (United
Kingdom), Chevron Products Company (United States), Lukoil Petroleum Ltd. (Russia),
Machinoimport (Russia), Repsol Petroleo S.A. (Spain), Shell (United Kingdom/Netherlands), SOCAP International (France), Total International Limited (France), and Zarubezhneft (Russia).

As early as Phase II of the Programme, the Government of Iraq began directing oil allocations to particular countries and individuals. Iraqi officials took the position that it was within their discretion to sell oil to countries “friendly to Iraq” and individuals perceived as being able toinfluence public opinion in favor of Iraq. The Government of Iraq also believed it had the discretion to cease oil sales to companies based in countries perceived as less friendly to Iraq.
Subsequent oil allocations fell into two categories, which appear in SOMO allocation tables beginning in Phase II. “Regular” oil allocations were given to established oil companies, many of which regularly had purchased Iraqi oil prior to the imposition of sanctions and had proved to be reliable purchasers. “Special” allocations were given to individuals, organizations, and political parties considered to be “friends” of Iraq or perceived as holding political views supportive of Iraq. Sometimes, to cover all bases, oil allocations were granted to members of the opposition parties as well as the ruling political party.
As its interest in directing oil allocations grew, the Government of Iraq developed an established procedure for distributing oil exports during each phase of the Programme. Beginning in Phase IV, the allocation of oil became highly politicized. A “Command Council,” headed by Vice President Taha Yassin Ramadan, and including Deputy Prime Minister Tariq Aziz, the Minister of Oil, and Minister of Finance Hikmat Al-Azzawi, was created to determine the distribution of oil contracts to companies and individuals of interest. Mr. Ramadan was in charge of allocations to individuals and companies in Arab and Islamic countries as well as in Russia and China;
whereas Mr. Aziz handled the French and Italian allocations. Mr. Al-Azzawi was responsible for Belarus and Ukraine. As of Phase IV, Iraqi leaders decided to deny American, British, and Japanese companies direct oil allocations because of their opposition to the lifting of the sanctions against Iraq. On the other hand, Iraqi leaders gave preferential treatment to French, Russian and Chinese companies, because these countries were permanent members of the Security Council and strong advocates of lifting the sanctions.
At the beginning of each phase, SOMO officials revised the list of beneficiaries and oilallocations from the preceding phase based on instructions from Iraqi regime leaders. The proposed allocation list was submitted to the Minister of Oil, who, in turn, submitted it to thewere approved by Saddam Hussein.
According to a former Iraqi official involved in the allocation process, a beneficiary was not required to provide a specific favor to Iraq in exchange for oil. Often, it was sufficient that the beneficiary express or support Iraq or political positions favorable to Iraq. According to Iraqi officials, beneficiaries normally took the initial step of requesting oil from an Iraqi leader.
Occasionally, a senior Iraqi official granted an allocation to an individual who had not requested one. When a quantity of oil was allocated to an individual, the beneficiary was notified by the office of the Minister of Oil, Tariq Aziz, or Taha Yassin Ramadan. Sometimes, the beneficiaries contacted SOMO directly to follow up on their allocation. A beneficiary or a named representative was introduced to the Crude Oil Department and then nominated a company to contract with SOMO. The nomination could be made orally or in writing.



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