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<title> - THE U.N. OIL FOR FOOD PROGRAM: CASH COW MEETS PAPER TIGER</title>
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[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





       THE U.N. OIL FOR FOOD PROGRAM: CASH COW MEETS PAPER TIGER

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY,
                   EMERGING THREATS AND INTERNATIONAL
                               RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 5, 2004

                               __________

                           Serial No. 108-286

                               __________

       Printed for the use of the Committee on Government Reform


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


       THE U.N. OIL FOR FOOD PROGRAM: CASH COW MEETS PAPER TIGER

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY,
                   EMERGING THREATS AND INTERNATIONAL
                               RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 5, 2004

                               __________

                           Serial No. 108-286

                               __________

       Printed for the use of the Committee on Government Reform


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


                                ------                                
                    U.S. GOVERNMENT PRINTING OFFICE
20-052                      WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
TODD RUSSELL PLATTS, Pennsylvania    JOHN F. TIERNEY, Massachusetts
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
EDWARD L. SCHROCK, Virginia          DIANE E. WATSON, California
JOHN J. DUNCAN, Jr., Tennessee       STEPHEN F. LYNCH, Massachusetts
NATHAN DEAL, Georgia                 CHRIS VAN HOLLEN, Maryland
CANDICE S. MILLER, Michigan          LINDA T. SANCHEZ, California
TIM MURPHY, Pennsylvania             C.A. ``DUTCH'' RUPPERSBERGER, 
MICHAEL R. TURNER, Ohio                  Maryland
JOHN R. CARTER, Texas                ELEANOR HOLMES NORTON, District of 
MARSHA BLACKBURN, Tennessee              Columbia
PATRICK J. TIBERI, Ohio              JIM COOPER, Tennessee
KATHERINE HARRIS, Florida            BETTY McCOLLUM, Minnesota
MICHAEL C. BURGESS, Texas                        ------
ERIC CANTOR, Virginia                BERNARD SANDERS, Vermont 
                                         (Independent)

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

 Subcommittee on National Security, Emerging Threats and International 
                               Relations

                CHRISTOPHER SHAYS, Connecticut, Chairman
MICHAEL R. TURNER, Ohio              DENNIS J. KUCINICH, Ohio
DAN BURTON, Indiana                  TOM LANTOS, California
STEVEN C. LaTOURETTE, Ohio           BERNARD SANDERS, Vermont
RON LEWIS, Kentucky                  STEPHEN F. LYNCH, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    CAROLYN B. MALONEY, New York
ADAM H. PUTNAM, Florida              LINDA T. SANCHEZ, California
EDWARD L. SCHROCK, Virginia          C.A. ``DUTCH'' RUPPERSBERGER, 
JOHN J. DUNCAN, Jr., Tennessee           Maryland
TIM MURPHY, Pennsylvania             JOHN F. TIERNEY, Massachusetts
KATHERINE HARRIS, Florida            DIANE E. WATSON, California

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
            Lawrence J. Halloran, Staff Director and Counsel
                Thomas Costa, Professional Staff Member
                        Robert A. Briggs, Clerk
             Andrew Su, Minority Professional Staff Member

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 5, 2004..................................     1
Statement of:
    Kennedy, Ambassador Patrick F., U.S. Representative to the 
      United Nations for U.N. management and reform, U.S. mission 
      to the United Nations, U.S. Department of State............    56
    Smith, David L., Director, Corporate Banking Operations, BNP 
      Paribas; Peter W.G. Boks, managing director, Saybolt 
      International B.V; and Andre E. Pruniaux, senior vice 
      president, Africa and Middle East, Cotecna Inspection S.A..    97
Letters, statements, etc., submitted for the record by:
    Boks, Peter W.G., managing director, Saybolt International 
      B.V, prepared statement of.................................   156
    Kennedy, Ambassador Patrick F., U.S. Representative to the 
      United Nations for U.N. management and reform, U.S. mission 
      to the United Nations, U.S. Department of State, prepared 
      statement of...............................................    62
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, prepared statement of...............    32
    Pruniaux, Andre E., senior vice president, Africa and Middle 
      East, Cotecna Inspection S.A, prepared statement of........   324
    Ruppersberger, Hon. C.A. Dutch, a Representative in Congress 
      from the State of Maryland, prepared statement of..........    40
    Shays, Hon. Christopher, a Representative in Congress from 
      the State of Connecticut:
        Prepared statement of....................................     3
        Prepared statement of Christine Grenier, First Secretary, 
          Political Section, French Embassy......................    50
    Smith, David L., Director, Corporate Banking Operations, BNP 
      Paribas, prepared statement of.............................   101
    Watson, Hon. Diane E., a Representative in Congress from the 
      State of California, prepared statement of.................    18
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California:
        E-mail dated October 4, 2004.............................    47
        Prepared statement of....................................     8

 
       THE U.N. OIL FOR FOOD PROGRAM: CASH COW MEETS PAPER TIGER

                              ----------                              


                        TUESDAY, OCTOBER 5, 2004

                  House of Representatives,
Subcommittee on National Security, Emerging Threats 
                       and International Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:25 a.m., in 
room 2154, Rayburn House Office Building, Hon. Christopher 
Shays (chairman of the subcommittee) presiding.
    Present: Representatives Shays, Turner, Duncan, Murphy, 
Lantos, Sanders, Lynch, Maloney, Sanchez, Ruppersberger, 
Tierney, Watson, and Waxman [ex officio].
    Also present: Representative Ose.
    Staff present: Lawrence Halloran, staff director and 
counsel; J. Vincent Chase, chief investigator; R. Nicholas 
Palarino, senior policy advisor; Thomas Costa and Kristine 
McElroy, professional staff members; Robert A. Briggs, clerk; 
Hagar Hajjar, intern; Phil Barnett, minority staff director; 
Kristin Amerling, minority deputy chief counsel; Karen 
Lightfoot, minority communications director/senior policy 
advisor; David Rapallo, minority counsel; Andrew Su, minority 
professional staff member; Early Green, minority chief clerk; 
and Jean Gosa, minority assistant clerk.
    Mr. Shays. A quorum being present, the Subcommittee on 
National Security, Emerging Threats and International Relations 
hearing entitled, ``The U.N. Oil-for-Food Program: Cash Cow 
Meets Paper Tiger,'' is called to order.
    The United Nations Oil-for-Food Program was mugged by 
Saddam Hussein. Through cynical, yet subtle manipulation, he, 
and an undeclared Coalition of the Venal on the Security 
Council, exploited structural flaws in the program and 
institutional naivete at the U.N. to transform a massive 
humanitarian aid effort in a multibillion dollar sanctions-
busting scam.
    How did it happen? How was a well-intentioned program 
designed and administered by the world's preeminent 
multinational organization so systematically and so thoroughly 
corrupted?
    The answers emerging from our investigation point to a 
debilitating combination of political paralysis and a lack of 
oversight capacity, allowed to metasticize behind a veil of 
official secrecy. Acceding to shameless assertions of Iraqi 
sovereignty, sovereignty already betrayed by Saddam's brutal 
willingness to starve the Iraqi people, the U.N. gave the 
Hussein regime control over critical aspects of the program. 
Saddam decided with whom to do business and on what terms. 
While Chinese, French, and Russian delegates to the Security 
Council's Sanctions Committee deftly tabled persistent reports 
of abuses, the contractors hired to finance and monitor the 
program had only limited authority to enforce safeguards.
    We will hear from these contractors today. BNP Paribas, the 
international bank retained by the U.N. to finance oil and 
commodity transactions through letters of credit, describes its 
functions as purely nondiscretionary. Saybolt International, 
responsible for verifying oil shipments, faced physical and 
political constraints on performance of their work. 
Additionally the firm Cotecna Inspection was given only a 
limited technical role in authenticating shipments of 
humanitarian goods into Iraq.
    The U.N. appears to have assumed that the rigor of 
commercial trade practices would protect the program, while the 
contractors took false comfort in the assumption the U.N. would 
assure the integrity of this decidedly noncommercial 
enterprise. Once it became clear the Security Council was 
politically unable to police the program, no one had any 
incentive to strengthen oversight mechanisms that would only be 
ignored.
    As this and other investigations got underway, the 
companies expressed their willingness to provide detailed 
information on their Oil-for-Food activities but 
confidentiality provisions in U.N. agreements prevented their 
coming forward until the committee's ``friendly'' subpoenas 
trumped those contractual restraints. Since then, they have 
provided thousands of pages and gigabytes of data which we and 
other committees are reviewing.
    Today we are releasing some of those documents because, 
apart from any findings or recommendations we might adopt, a 
major goal of this investigation is to bring transparency to 
secretive U.N. processes and to put information about this 
highly important international program in the public domain. 
The documents provide the first detailed glimpse into the 
structural vulnerabilities and operational weaknesses exploited 
by Saddam and his allies.
    From what we have learned thus far, one conclusion seems 
inescapable: The U.N. sanctions regime against Iraq was all but 
eviscerated, turned inside out by political manipulation and 
financial greed. Saddam's regime was not collapsing from 
within; it was thriving. He was not safely contained, as some 
contend, but was daily gaining the means to threaten regional 
and global stability again, once sanctions were removed.
    Testimony from our witnesses today will contribute 
significantly to our ongoing oversight and to the public 
understanding of the United Nations Oil-for-Food Program. We 
sincerely thank them for their participation today and we look 
forward to their continued cooperation in our work.
    At this time the Chair would recognize the ranking member 
of the full committee, Mr. Waxman who is an ex officio member.
    [The prepared statement of Hon. Christopher Shays follows:]

    [GRAPHIC] [TIFF OMITTED] T0052.001
    
    [GRAPHIC] [TIFF OMITTED] T0052.002
    
    Mr. Waxman. Thank you, Mr. Chairman.
    Today the committee is holding the fifth congressional 
hearing to investigate allegations of mismanagement in the U.N. 
Oil-for-Food Program. This humanitarian effort was established 
in 1995 to provide for the basic needs of Iraqis while U.N. 
sanctions were in effect. Recently there have been serious 
allegations of corruption, overpricing and kickbacks under this 
program.
    And I want to make it clear that I believe it is 
appropriate for Congress to investigate these allegations in an 
evenhanded manner and follow the evidence wherever it leads.
    My complaint is that our scope is too narrow. If we are 
going to look at how Iraq's oil proceeds have been managed, we 
have an obligation to examine not only the actions of the U.N. 
but also our own actions. In fact, I would argue that our first 
priority should be to investigate our own conduct.
    The United States controlled Iraq's oil proceeds from the 
fall of Baghdad in May 2003 until June 2004. Yet Congress has 
not held a single hearing to examine the evidence of 
corruption, overpricing and lack of transparency in the 
successor to the Oil-for-Food Program, the Development Fund for 
Iraq--which was run by the Bush administration when the United 
States exercised sovereignty over Iraq.
    Here are the facts. When the Bush administration took over 
in Iraq, it received $20.6 billion through Iraqi oil proceeds, 
repatriated funds, and foreign donations. Halliburton was the 
single largest private recipient of these funds, receiving $1.5 
billion under its contract to run Iraq's oil fields.
    This money belongs to the Iraqi people. It is not a slush 
fund. The Security Council directed the administration to use 
these funds in a transparent manner for the benefit of the 
Iraqi people. The Security Council passed Resolution 1483 which 
set up the International Advisory and Monitoring Board to make 
sure the Bush administration lived up to its obligations.
    But the Bush administration has not complied with this 
resolution. Reports from auditors at KPMG, an independent 
certified public accounting firm, as well as the Coalition 
Provisional Authority's own inspector general, have found that 
the Bush administration failed to properly account for Iraqi 
funds.
    KPMG said the Bush administration had inadequate accounting 
systems, inadequate recordkeeping, and inadequate controls over 
Iraqi oil proceeds. It reported that the administration's 
entire accounting system consisted of only one contractor 
maintaining excel spread sheets. That is one person for $20 
billion.
    Likewise, the inspector general concluded that the Bush 
administration had no effective contract review tracking and 
monitoring system and that it failed to demonstrate the 
transparency required.
    These actions merit a full congressional investigation. 
They are compounded by evidence that the Bush administration is 
now actively blocking efforts to account for these funds.
    For 6 months, the Bush administration has been withholding 
documents from international auditors charged by the Security 
Council to oversee the administration's actions. In particular, 
the Bush administration is withholding documents about 
Halliburton's receipt of $1.5 billion in Iraqi oil proceeds.
    The auditors have made seven distinct requests for this 
information, including a letter from the Controller of the 
United Nations directly to Ambassador Bremer. But the 
administration has repeatedly refused to provide the documents, 
and continues to do so today.
    Three months ago, the international auditors ordered a 
special audit of the contract with Halliburton, but again the 
Bush administration has obstructed their work. Administration 
officials have refused to approve the audit's statement of work 
and refused to issue a request for proposal. The special audit 
has simply languished inside the Department of Defense.
    At this committee previous hearing, Mr. Claude Hankes-
Drielsma, an advisor to the Iraqi Governing Council, testified 
that the Bush administration was not properly accounting for 
Iraqi funds. Ambassador Kennedy, who is here again today, could 
not explain why the Bush administration failed to follow its 
own rules and hire an accounting firm to manage the Iraqi oil 
proceeds. And the administration failed to adequately respond 
to the questions for the record we sent jointly regarding the 
DFI.
    These actions are hypocritical, they are arrogant, they 
breed resentment in the Arab world and they further deteriorate 
our global alliances, but most of all they undermine our 
efforts in Iraq because they reinforce the image that our 
primary objective in Iraq was to seize control of the country's 
oil wealth.
    If we are going to examine how Iraq's oil money has been 
spent, which I believe we should, we need to proceed in a fair 
and transparent way; and if we refuse to ask tough questions 
about the conduct of our own government officials, our efforts 
will have little credibility in the eyes of the world.
    After the opening statements today, I am going to make a 
motion for subpoenas so that we can continue the investigation 
of the success or failure of the U.N. Oil-for-Food Program 
which was run by the United States. I am going to ask for 
subpoenas, which we asked for, by the way, when subpoenas were 
issued for this investigation. We asked for subpoenas on the 
same basis that we needed a subpoena, for example, for the 
corporate banking operations of BNP Paribas to give us the 
documents which the chairman is going to make public today. 
Those documents would not be turned over without a subpoena.
    Documents will not be turned over to us from the Federal 
Reserve Bank on the same basis. We need a subpoena to get them. 
We need further subpoenas as well, and I will be making a 
motion for both subpoenas to be issued so that while we have 
our hearing today, we can be prepared to do the full 
investigation of what happened to the oil money after we took 
over.
    We want to know what happened when the U.N. was running it; 
if there was corruption, if there was fraud, if there was a 
lack of transparency. But we have a special obligation to know 
what happened to that money when we took it over, if there was 
corruption, if there was fraud, if there was a lack of 
transparency. And so far the Bush administration is refusing to 
help in this investigation to know what happened after they ran 
those funds.
    So I know, Mr. Chairman we are going to have the opening 
statements from the Members first. Before we then proceed to 
the first witness, I will make my motion for subpoenas. And as 
I understand it, you are going to ask that vote be held later, 
after the witnesses have testified, presumably because we have 
done too good a job of getting the Democrats here to vote, and 
the Republicans, unaware that the vote would be taking place, 
are not here in sufficient numbers. I understand that is in the 
chairman's discretion.
    I want to vote. If it is a bipartisan vote, that would be 
great. I think we ought to have a bipartisan vote to get these 
subpoenas. If it is a partisan vote, well, I think the American 
people ought to know that the Republicans are going to vote to 
stop a real investigation of the actions of the Bush 
administration with regard to the use of those funds and 
particularly because of the Halliburton involvement.
    [The prepared statement of Hon. Henry A. Waxman follows:]

    [GRAPHIC] [TIFF OMITTED] T0052.003
    
    [GRAPHIC] [TIFF OMITTED] T0052.004
    
    [GRAPHIC] [TIFF OMITTED] T0052.005
    
    [GRAPHIC] [TIFF OMITTED] T0052.006
    
    [GRAPHIC] [TIFF OMITTED] T0052.007
    
    [GRAPHIC] [TIFF OMITTED] T0052.008
    
    Mr. Shays. I thank the gentleman. I also thank him for 
letting me know that he was going to make this motion, but I 
did not know in time to tell the Members. This is a hearing and 
I don't think they thought there would be votes, so I 
appreciate his letting us know.
    At this time, the Chair would recognize the vice chairman, 
Michael Turner.
    Mr. Turner. Thank you, Chairman Shays, for holding this 
hearing and for continuing your efforts to continue to examine 
the Oil-for-Food Program.
    In our first hearing, we explored the accountability and 
integrity issues with the program. We discovered a lack of 
transparency and little accountability. Except for the actions 
of the United States and the United Kingdom, it appears that no 
one was bringing to light the corruption in the program.
    The Oil-for-Food Program at its creation was poised for 
corruption. The U.N. allowed Iraq to select not only the 
suppliers of food and medicine but also the buyers of Iraqi 
oil. The mechanisms established by the U.N. for controlling 
Oil-for-Food contracts were inadequate. Transparency was 
nonexistent, and an effective internal review of the program 
did not occur. We do not know if members of the Security 
Council were involved in any of the corruption, but enough 
ancillary information exists to question the objectiveness and 
credibility of the Security Council and the United Nations.
    Mr. Chairman, I appreciate your continued leadership on 
this important issue. I appreciate your continued leadership on 
the issue of our continuing involvement in Iraq and its 
transition to democracy.
    Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentleman.
    At this time the Chair would recognize Mr. Tierney.
    Mr. Tierney. Mr. Chairman, thank you. I share your concern 
about the diversion of Iraqi oil proceeds through graft, 
kickbacks, and other schemes designed to line the pockets of 
corrupt Iraqi leaders.
    If I may, I would like to read an account about the 
corruption that occurred in Iraq under the management 
previously in charge. Mr. Said Abdul Kassam was the Iraqi 
official in charge of withdrawals at the Iraq central bank. He 
reported that there was no need to rob the bank in a daring 
heist with guns and masks, because the bank was robbed every 
day by the directors of the Iraqi ministries.
    According to Mr. Kassam, they use up all the money they 
want to withdraw. If it's a big amount they can get it in big 
bags. If it's a small amount they get it in a box. But the 
directors general are those people who are withdrawing the 
money. They can take the money immediately from the bank and 
put it in their pockets.
    Mr. Chairman, I regret to say that this didn't happen under 
the Oil-for-Food Program; it happened under the Development 
Fund for Iraq. When I mentioned the previous management, I was 
talking about this country, the U.S. administration. The 
account was from an NPR series called ``Spoils of War'' and it 
highlights just how dysfunctional the Bush administration's 
management of DFI funds actually was. There was virtually no 
monitoring of what happened to Iraqi funds once they left the 
hands of this administration's officials.
    Indeed, according to the Wall Street Journal article 
published on September 17, the Coalition Provisional 
Authority's own inspector general has now completed a report 
finding that the Bush administration, ``hasn't demonstrated it 
kept much control over any of the assets it seized following 
the war.''
    In particular, the IG study reportedly concludes that the 
Bush administration failed to account for $8.8 billion in DFI 
funds that were transferred to Iraqi ministries. According to 
the general report, the occupation government was unable to say 
for sure whether the money it disbursed was spent properly, or 
even spent at all.
    It is amazing that we have held hearing after hearing about 
the United Nations; management of the Oil-for-Food Program, 
which I agree we should. I think you are on the right track, 
and that is necessary. But we have not held even one hearing on 
this administration's mismanagement of Iraqi oil proceeds, and 
I agree with Mr. Waxman that is equally as important to the 
credibility of this country if we are going to really look at 
the situation and have the respect of the world, knowing that 
we are trying to be transparent and get to the bottom of how 
these moneys were expended.
    How can we expect the rest of the world to follow this 
administration's example? How can we expect them to comply with 
Security Council resolutions when the Bush administration 
ignores them?
    Mr. Chairman, we do no service to the administration by 
allowing them to proceed in this manner. I urge the committee 
to immediately address these issues and exercise meaningful 
oversight as well as continue our hearing process on the U.N. 
Oil-for-Food Program, but we must be resolute about all of the 
improprieties or lapses.
    Thank you. I yield back.
    Mr. Shays. I thank the gentleman.
    At this time the Chair would recognize Mr. Duncan.
    Mr. Duncan. Thank you very much, Mr. Chairman.
    A few years ago, 60 Minutes did a report on the 
scandalously high level of waste, fraud, and abuse occurring at 
the United Nations, much of it with American money. But this 
Oil-for-Food Program scandal really takes the cake, and so I 
appreciate very much your continuing to look into this 
situation and hold these hearings.
    Through this program, Saddam Hussein obtained $10.1 billion 
in illegal revenues. I remember hearing a talk a few months ago 
by Charlie Cook, the very respected political analyst, and he 
said that people really can't comprehend a figure over $1 
billion. And it is difficult to think of how much money $10.1 
billion is. This money was mostly squandered on Hussein's 
palaces, luxury cars, and lavish lifestyle that he and his 
family were living. This theft was made possible, apparently, 
by surcharges, illegal kickbacks, and abuse by U.N. personnel 
and by the lackadaisical and inept attitude of--and greedy 
attitude, really, of some of the companies involved that we 
will hear from today.
    The Wall Street Journal reported in an editorial what a lot 
of business the U.N. did. Mr. Annan, Kofi Annan's Secretariat 
and his staff collected more than $1.4 billion in commissions 
on these sales. But during this time the U.N. was doing almost 
nothing to really push weapons inspections and other things 
that they should have been doing in Iraq.
    The U.N. Oil-for-Food Program was the largest humanitarian 
effort in U.N. history. Unfortunately, it has now become the 
shining example of everything that is wrong with this 
organization. The United States pays one-fourth of the 
operating expenses of the United Nations, one-third of the 
money to many of the other U.N. programs, and mostly as much as 
90 or 95 percent on most of the U.N. peacekeeping operation. If 
the U.N. cannot provide any better oversight than what we see 
through this program, then surely our tax dollars can be spent 
better elsewhere, particularly at a time when we have a $7\1/2\ 
trillion national debt, and deficits running in the $400 to 
$500 billion range.
    Thank you, Mr. Chairman.
    Mr. Shays. Thank the gentleman.
    And the Chair at this time would recognize Ms. Watson.
    Ms. Watson. Mr. Chairman, thank you. I think it is critical 
for Congress to address the serious questions surrounding the 
Bush administration's deficit management of Iraqi oil proceeds 
and other funds in the Development Fund for Iraq.
    We made a commitment to the Iraqi people, a promise that we 
would spend their money for their benefit, and we do have to 
remember that it is their money. We also promised to spend it 
in a transparent manner so the entire world would know that we 
were managing their funds properly and are not allowing graft, 
corruption, and mismanagement to infiltrate our mission there.
    Unfortunately, Mr. Chairman, it appears that the Bush 
administration has failed to live up to those commitments. 
Auditors at the CPA's own Inspector General's Office have 
issued a report that is extremely critical of the 
administration's management of Iraqi funds in the Development 
Fund for Iraq. In particular, the inspector general's report 
criticizes actions by the administration's contracting 
activities office in Iraq.
    If I may, I would like to read just a short portion of the 
report. The CPA contracting activity had not issued standard 
operating procedures or developed an effective contract review 
tracking and monitoring system. In addition, contract files 
were missing or incomplete. Further, contracting officers did 
not always ensure that contract prices were fair and 
reasonable, contractors were capable of meeting delivery 
schedules, and payments were made in accordance with contract 
requirements.
    This occurred because the CPA contracting activity did not 
provide adequate administrative oversight and technical 
supervision over the contracting actions completed by procuring 
contracting officers as required. As a result, the CPA 
contracting activity was not accurately reporting the number of 
contracts actually awarded by the CPA contracting activity. 
This hindered the CPA contracting activity's ability to 
demonstrate the transparency required of the CPA when it 
awarded contracts using DFI funds.
    Mr. Chairman, this is an indictment of the administration's 
entire management approach to the funds of the Iraqi people.
    The inspector general went on to warn that because contract 
files were not adequately maintained, they cannot be relied 
upon to ensure compliance or to be used as a source for 
congressional reporting.
    How are we in Congress supposed to be able to conduct our 
oversight responsibilities when the information is not 
reliable? The inspector general's report found that of the 
contracts they analyzed, 67 percent had incomplete or missing 
documentation. Sixty-seven percent, Mr. Chairman. This is a 
horrendous record.
    Finally, the inspector general provided its fundamental 
conclusion about the administration's stewardship of these 
Iraqi funds. The inspector general reported we do not believe 
that transparency can be achieved when pertinent data is 
unavailable or inaccurate.
    Mr. Chairman, this is an embarrassment to our country. The 
Bush administration has failed to comply with Security Council 
Resolution 1483 and we need to take action.
    Thank you Mr. Chairman.
    Mr. Shays. I thank the gentlelady.
    [The prepared statement of Hon. Diane E. Watson follows:]

    [GRAPHIC] [TIFF OMITTED] T0052.009
    
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    Mr. Shays. At this time the Chair would recognize Mr. 
Murphy.
    Mr. Murphy. Thank you, Mr. Chairman.
    The focus of today's hearing is really twofold. First, to 
investigate the structural weaknesses that made the Oil-for-
Food Program vulnerable to diversion and exploitation; and 
second, to determine the steps Oil-for-Food Program manager and 
contractors took to prevent abuse.
    Now, we could spend all day just on point No. 1, but sadly 
I think the answer is staring us all in the face. The evidence 
uncovered over the last year by several different 
investigations cast little doubt that one of the fundamental 
problems with the U.N. Oil-for-Food Program was that the U.N. 
was running it, fueled by the greed and complicity of other 
countries.
    Despite repeated criticisms and questions of concern, U.N. 
member countries and U.N. personnel continually turned a blind 
eye to the corruption of a program designed to get humanitarian 
assistance to the people living under one of the most corrupt 
regimes in the world. We knew Saddam Hussein was corrupt, and 
his tactics of ruthless violence were a way of life. One would 
think the U.N. would be aware of this and structure the program 
in such a way so as to guard against it. One would think that 
attempts by Hussein to evade the sanctions through this program 
would be anticipated, and thus steps taken to counter his 
money-making scheme from the beginning, rather than trying to 
put out fires after the fact.
    Rather, it appears as if the Oil-for-Food Program went out 
of its way to encourage scandal and the illicit use of 
humanitarian contracts to line the pockets of Saddam Hussein 
and his cronies.
    Now, the United States gave millions in lives to France in 
World War I, World War II, and Vietnam. Yet they turned their 
backs on us when faced with Hussein's ever-increasing threat to 
the international community.
    France and Russia had two choices: Help us militarily, or 
intervene directly with Saddam Hussein to cooperate with 
weapons inspectors and stop his murderous regime. They did 
neither. Why didn't these countries step forward? Perhaps it 
had something to do with the fact that evidence suggests Russia 
was the recipient of 1.366 billion barrels of oil through 
Hussein's voucher scheme. And French companies close to 
President Chirac also benefited from Saddam's power. They were 
up to their ears in corruption, and the financial benefit of 
keeping Saddam Hussein in power weigh more heavily than their 
friendship with the United States.
    Corruption in the Oil-for-Food Program enriched Hussein to 
the tune of $10.1 billion, enough to buy and build more 
weapons, more clandestine activity and further undermine the 
entire U.N. sanctions program.
    There was one line in the subcommittee's background memo 
that really sums up the problem with the program, ``The Oil-
for-Food Program was essentially run by Saddam Hussein.''
    How is it that the U.N. could allow the terms of a program 
meant to punish a tyrannical leader, while offering assistance 
to the very people that suffered under him to be dictated by 
that very tyrant? It is because the current nature of the U.N. 
is to be soft on terrorism and the world leaders that support 
it.
    The spineless U.N. produced paper tigers in the form of 
resolutions that had no teeth. Time and again, the U.N. told 
Saddam Hussein and terrorists that the U.N. was all talk and no 
follow-through. And the world has reaped the grim harvest of 
that approach: more terrorists emboldened by the U.N.'s 
weaknesses.
    According to classified documents reviewed by the 
subcommittee, the U.N. created and encouraged an environment 
whereby Russia, France, China, and Syria, all nations standing 
to gain financially by the continued support of Saddam's 
government, continually blocked efforts by the United States 
and the United Kingdom to maintain the integrity of the Oil-
for-Food Program. And all of those countries sat on the U.N. 
Security Council.
    The contractors responsible for inspecting shipments coming 
in and out of Iraq were also undermined by the U.N. Oil-for-
Food Program policies. If the obstacles by Iraqi personnel were 
not enough, the U.N. denied the contractors the staff and the 
authority necessary to enforce inspection standards. One 
example given was an instance in which Saybolt was unable to 
prevent the transfer of oil onto a ship with expired letters of 
credit. If the inspectors had no enforcement powers, why have 
inspectors at all?
    Now, some may question why Congress is so interested in 
this issue. Our interest in the U.N.'s involvement in Iraq goes 
far beyond the Oil-for-Food Program. As the United States 
continues to fight terrorists in Iraq, our level of cooperation 
with the U.N. has been called into question. Yet, if France and 
Russia and the U.N. knowingly undermined the mission of the 
Oil-for-Food Program and knowingly undermined the efforts to 
stop Saddam Hussein, this Congress has a responsibility to ask 
who our allies are and who the U.N. is supporting.
    When some critics of the Iraq war claim our actions did not 
pass a global test, we must remember what interests the global 
community truly values. As I said before, we have given the 
French millions of our soldiers' lives, and they have given us 
the cold shoulder. France has repeatedly turned to us for help. 
In response, they have turned their back on us. The Oil-for-
Food corruption scandal may be the answer of why.
    When the United States continues to foot the bill for U.N. 
peacekeeping missions, when the U.N. is unwilling to support us 
in our efforts to protect our own citizens, if winning the 
approval of the European countries of the U.N. for U.S. policy 
is the global test, maybe we should reconsider and question the 
reliability and supposed altruism of those sitting in judgment.
    I yield back my time, Mr. Chairman.
    Mr. Shays. Thank the gentleman.
    At this time, the Chair would recognize the distinguished 
gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman.
    I don't think there is any disagreement on this committee 
about the importance of investigating the U.N. Oil-for-Food 
Program. It is important to know how American dollars being 
contributed to the U.N. were spent and how the corrupt Saddam 
Hussein regime ended up stealing money that should have gone to 
hungry people in Iraq. So I have no objection about 
investigating that important issue.
    But I think it is equally important not only that we 
investigate what the U.N. does with American taxpayer money, it 
is equally important to investigate what the Bush 
administration and the U.S. Government does with American 
taxpayer moneys.
    You know, Mr. Chairman, I have been on this committee for 
more than a few years, and I can recall very clearly that 
during the Clinton administration this committee held dozens 
upon dozens of hearings to investigate every single allegation 
relating to the Clinton administration, no matter how off-the-
wall those allegations were. We investigated the Vince Foster 
suicide. We investigate the Monica Lewinski, so-called 
Travelgate, Whitewater, ad infinitum, on and on and on. 
However, rather amazingly, during the Bush administration this 
committee has not held one substantive hearing to investigate 
any serious allegation against the Bush administration. And why 
is that important? It is important because we have a Republican 
administration. We have a Republican Senate. We have a 
Republican House. And it is the moral obligation under the 
Constitution of the United States that the Congress provide 
oversight to any administration; otherwise the government 
doesn't work.
    Yes, it is easy to beat up an administration from another 
party. We all know that. But we as Members of Congress have the 
responsibility to take a hard look at what any administration 
does, regardless of what party they are. And all over this 
country I think there is a growing concern, that the U.S. 
Congress has abdicated its oversight responsibility.
    All over America people are asking, why did we in fact go 
to war? And I know there are two sides to the issue. This 
committee hasn't looked at the rationale for going to war in 
Iraq. We haven't looked at the leak of the names of CIA agents. 
We haven't looked at the fact that the Medicare actuary was 
threatened with being fired if he actually told Members of 
Congress the truth about how much money the prescription drug 
program would cost. We haven't taken a look at the Cheney 
energy task force.
    Especially when we come to issues like Halliburton, we have 
a double responsibility. Everybody here knows that the Vice 
President of the United States used to be the CEO of 
Halliburton. Now, I am not casting any aspersions on what has 
happened. But all over this country people want to know, did 
Halliburton get a special deal? How come they got no bid 
contracts? How come billions of dollars went to Halliburton? 
Now, how come we are not looking at that issue?
    So, Mr. Chairman, what I would simply say is, yeah, let's 
take a hard look at what the U.N. did. And while I know it is 
easy to beat up on France and Germany, it might be a little bit 
more difficult but may be of more interest to the American 
people to take a hard look at what goes on at the Bush 
administration.
    I yield back.
    Mr. Shays. I thank the gentleman.
    At this time the Chair would recognize Mr. Lynch from 
Massachusetts.
    Mr. Lynch. Thank you, Mr. Chairman.
    I too believe that there is a very strong need to carry out 
a thorough investigation into the circumstances. I would like 
to focus on, however, with the Ambassador's cooperation, the 
facts that led us to this point. Now, here we have a situation 
where this Oil-for-Food Program was established back in 1995, 
after we had fought the first Gulf war, and it was established 
specifically because Saddam Hussein had run that country into 
the ground. He had failed to address the infrastructure needs 
and the humanitarian needs of his own people. He had used the 
country's natural resources as his own slush fund. He had used 
the basic funds that were in the treasury, the national 
treasury, at his own pleasure. He had ignored the basic health 
and welfare of his citizens in favor of a military buildup.
    Saddam Hussein waged wars against Iran and invaded Kuwait. 
He had fired SCUD missiles into the civilian populations of 
Israel. And we fought a war to remove him from power, to remove 
him from Kuwait initially. And even with the evidence of his 
own atrocities and the evidence of the corrupt activities 
between him and his son, squandering the wealth of that country 
and abusing its citizens, after the United States took a 
leadership role in establishing this fund, in deciding who 
would contract for the Iraqi people, with this fund of $20 
billion, after that worldwide search for who would negotiate 
and who would control the terms for the Iraqi people, the 
responsibility was given to those same people: Saddam Hussein 
and his thugs, his family, the people that have been abusing 
that country for the previous 40 years. That was the colossal 
failure here, that we allowed Saddam Hussein to call the terms 
of that agreement, and he had the support of some of our 
international neighbors in getting the most favorable terms, 
having a private bank handle this.
    We could not get information under the arrangement that was 
agreed to between the United Nations, Kofi Annan, Secretary 
General, and Saddam Hussein and his regime. How did we ever 
allow ourselves to be put in this position? How did we allow 
the victims here--and there are three sets of victims--one, the 
Iraqi people. This was their national wealth. This was their 
country, their resources; the American taxpayer footing the 
bill again; and also the credibility of the United Nations.
    There are great misgivings here because of what has gone 
on. There is a definite--I haven't been on this committee that 
long. I have come to this committee recently. I have been here, 
this will be almost 3 years I have been on this committee. But 
I can tell you there is a definite reluctance on this committee 
to investigate anything.
    I am still waiting, after three meetings with the Defense 
Department, to get the names of some Halliburton individuals 
whom they have removed for bribery and corrupt practices with 
individuals in Iraq and in the Middle East. On an investigatory 
committee in the Congress, and we can't get the names of our 
own people when they have conceded that they were involved in 
bribery and corrupt practices in which the taxpayers' funds 
have disappeared in the millions.
    We need to do our job here, and I believe we will get to it 
eventually. But there has been tremendous wrongdoing here, and 
we have to step up to the plate and do what the American people 
have asked us to do: Get to the bottom of this.
    I yield back Mr. Chairman. Thank you.
    Mr. Shays. I thank the gentleman very much.
    And, Mrs. Maloney, you're next.
    Mrs. Maloney. Thank you. Thank you very much, Chairman 
Shays, and I thank also Ranking Member Waxman for your holding 
this important hearing. And welcome, Ambassador Kennedy. It's 
good to see you again.
    I think that we learned a great deal last April at our 
hearing, but since the appointment of Paul Volcker and the 
independent inquiry of the Oil-for-Food Program, there is much, 
much more to understand. I do believe that it is very important 
that we as an oversight body in Congress look at the U.N. and 
their financing, but we must also look at the finances and how 
we as a government handled the funds. We need to look at that 
equally. And I have some grave concerns that some of my 
colleagues have raised today in their testimony of the 
stewardship of the Iraqi oil proceeds and the successor to the 
Oil-for-Food Program, the Development Fund for Iraq which we 
created.
    As was mentioned, on May 22, 2003, after the United States 
took control of Iraq, the U.N. Security Council passed 
Resolution 1483, formally transferring the Oil-for-Food assets 
to a new Development Fund for Iraq, and placing them under the 
authority of the Coalition Provisional Authority which was 
headed by Bremer. Resolution 1483 directed the Bush 
administration to spend these funds on behalf of the Iraqi 
people. The Security Council also imposed other restrictions, 
and I think these restrictions are important. And in the 
testimony today, I want to know why we didn't follow them.
    And I will give several examples:
    The Security Council required the administration to deposit 
all oil-sale proceeds into the Development Fund for Iraq, which 
is held by the central bank of Iraq at the Federal Reserve Bank 
of New York.
    The Security Council required that all deposits to and 
spending from the Development Fund of Iraq be done, ``in a 
transparent manner.''
    And the Security Council required that the administration 
ensure that the Development Fund for Iraq funds were used to 
meet the humanitarian needs of the Iraqi people, and for other 
purposes benefiting the people of Iraq.
    To ensure that the administration complied with these 
requirements, the Security Council created the International 
Advisory Monitoring Board to oversee these actions, the IAMB 
board. The Board was envisioned as the primary vehicle for 
guaranteeing the transparency of Iraqi funds. When the Bush 
administration assumed responsibility for these funds, it 
explicitly agreed to these terms.
    On August 19, 2003, Ambassador Bremer issued a memorandum 
stating as follows, ``As steward for the Iraqi people, the CPA 
will manage and spend Iraqi funds which belong to the Iraqi 
people for their benefit. They shall be managed in a 
transparent manner that fully comports with the CPA's 
obligations under international law, including Resolution 1483 
of the United Nations.''
    But, Mr. Chairman, the administration has not complied with 
the resolution and I do not believe that the requirements were 
very strict. The administration took in, as Mr. Waxman noted, a 
total of $20.6 billion while it controlled this Development 
Fund in Iraq. On July 15, 2004, the oversight board issued its 
first audit report on the administration's stewardship of Iraqi 
funds, and this report was conducted by KPMG, which happens to 
be headquartered in the district I represent, the same 
international certified public accounting firm reviewing the 
Oil-for-Food Program. So we had the same auditor for both 
programs.
    KPMG criticized the administration for, ``inadequate 
accounting systems, inadequate recordkeeping, inadequate 
controls over Iraqi oil proceeds. On the most basic level, KPMG 
found that the administration failed to follow its own policy, 
to hire a certified public accounting firm. According to the 
KPMG report, the CPA was required to obtain the services of an 
independent certified public accounting firm to assist in the 
accounting function of the Development Fund of Iraq. But our 
administration, the current administration never did so. In 
addition, the sum total of the accounting system used by the 
administration consisted of--this is directly out of the KPMG 
report, ``excel spread sheets and pivot tables maintained by 
one individual.''
    The KPMG report concluded as follows: ``the CPA senior 
advisor to the Ministry of Finances, who is also chairman of 
the Program Review Board, was unable to acknowledge the fair 
presentation of the statement of cash receipts and payments, 
the completeness of significant contracts entered into by the 
DFI and his responsibilities for the implementation and 
operations of accounting and internal control systems designed 
to prevent detect fraud and error.''
    I believe these are very serious findings. They basically 
say that the United States has failed to comply with the 
transparency and accountability requirements set forth by the 
United Nations in the Security Council Resolution 1483.
    So I look forward to the opportunity to question Ambassador 
Kennedy about these serious problems. Truly having accountable 
and transparency over money is a very important role of 
government. We try to do this in our own government, and we 
certainly should bring the same standards to moneys that we 
oversaw in Iraq.
    So, again, I thank the chairman and the ranking member for 
their continued oversight. It is important, and I look forward 
to the opportunity to question Mr. Kennedy.
    Mr. Shays. I thank the gentlelady.
    [The prepared statement of Hon. Carolyn B. Maloney 
follows:]

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    Mr. Shays. And at this time, the Chair would recognize Mr. 
Ruppersberger.
    Mr. Ruppersberger. Sure. Mr. Chairman, I come to this 
hearing today with many concerns. My first concern is about the 
allegations that have been made and the way they are being 
investigated.
    There are three main charges that have been levied: 
overpricing by the Saddam regime; kickbacks made by the 
companies contracting with Saddam through the program, and what 
Saddam used that money for; and three, corruption within the 
U.N. itself in running the Oil-for-Food Program.
    These are all very serious allegations, and if any or all 
of them are proven to be true, those individuals proven to be 
guilty of illegalities and wrongdoing should be brought to full 
and complete justice. On that I believe we can all agree.
    I have serious concerns about the number of investigations 
occurring, the leaks to the media, the potential of mishandling 
of valuable evidence, and the use of the court of public 
opinion, the media and others, rather than allowing the Paul 
Volcker investigation to complete its work.
    When we last met in April to discuss the same issue, 
Members of both sides of the aisle praised the unprecedented 
commissioning of an independent investigation by Kofi Annan and 
the appointment of Mr. Volcker. Since then, Mr. Volcker has had 
to assemble a staff, enter into the memorandums of agreement 
with multiple investigations, assemble and review a decade 
worth of documents, and all the while answer to U.N. member 
states, all with vested interests, including the United States. 
And that is no easy task.
    I am concerned that the current investigations are being 
politicized and the evidence submitted is being leaked before 
it is ever vetted, authenticated, or corroborated.
    I am concerned that this is turning out to be an inductive 
investigation rather than a deductive investigation. And I know 
that is the wrong way to conduct a credible investigation.
    I urge caution as we proceed further. Let's consider a few 
facts: The first, the Oil-for-Food Program is no longer in 
existence and therefore the rush to judgment may do more harm 
than good.
    Second, Mr. Volcker has promised a full and complete 
investigation report to member states by mid-2005, and we 
should allow that investigation to conclude before condemning a 
report that has yet to be written.
    Three, we are fighting a global war on terrorism that 
requires international involvement, including the U.N. damaging 
the reputation of any politician, national leader, ally, or 
international institution at this time, this delicate time, 
without a full vetting of the facts is simply premature and 
dangerous. We must follow the facts, and I am glad to see that 
the chairman has called these witnesses to deal with two of the 
three main allegations head on.
    I would hope that the same will be done with the 
allegations resting on the al-Mada, which is the Iraqi 
newspaper-published list, and all who possess or witnessed 
those documents at one time. And I would like to hear from the 
al-Mada editor-in-chief, from KPMG, Patton Boggs, Fresh Fields, 
Bucas Derringer, Paul Bremer, Claude Hankes-Drielsma, to 
address those documents which are the starting point of this 
scandal.
    I also think it would be useful to bring an 
authentification expert before this committee to discuss 
authentification and how it is done and what it means and why 
it is so important. Ultimately, I think we must allow Mr. 
Volcker to carry out this investigation, to look at the facts 
and evidence, to look at his conclusions, and then decide as a 
Nation what is our best interest to do next.
    Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentleman.
    [The prepared statement of Hon. C.A. Dutch Ruppersberger 
follows:]

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[GRAPHIC] [TIFF OMITTED] T0052.026

    Mr. Shays. At this time I would like to make a unanimous 
consent that Doug Ose, a member of the full committee and 
chairman of the Regulatory Affairs Subcommittee be allowed to 
participate in this hearing. Without objection, so ordered, and 
at this time I would welcome any statement that Mr. Ose would 
like to make.
    Mr. Ose. Thank you, Mr. Chairman. I was listening with 
particular attention to Mr. Ruppersberger's remarks about this 
being an inductive investigation as opposed to a deductive 
investigation. It seems like we have had a lot of rhetoric 
today about, you, know who is guilty and who is not.
    I just want to go back to a couple of uncontested facts. 
The Oil-for-Food Program was established in April 1995 pursuant 
to U.N. Security Council Resolution 986. And the food actually 
started to flow in December 1996. So there was about a year-
and-a-half drag between the time it was authorized and the time 
it was actually implemented. And interestingly enough, the 
first known request for any examination of the program in terms 
of fraud or lack of transparency occurred in the first few days 
of March 2001.
    So for 5 years, from December 1996--4\1/2\ years, from 
December 1996 to March 2001, this program just sailed along 
without oversight interest or monitoring.
    Pursuant to the request in early March 2001 that the 661 
committee actually look at this issue, on March 7, 2001 Kofi 
Annan actually sent a notice to Iraq, saying they have to clean 
up their act. Again, from the time of December 1996 to March 
2001, nobody paid any attention. The perpetrators of the scam 
set the rules. The U.N. signed off on it, and the 
administration turned a blind eye.
    However, in early March 2001 that changed. Finally somebody 
in the administration did something and brought to the 
attention of the 661 committee allegations that fraud and lack 
of transparency were occurring. I think the record needs to be 
very clear on this issue. But the only thing, this fraud that 
was taking place--excuse me--that's inductive. The only time 
that we finally got around to examining whether fraud was 
taking place was in March 2001. The people who approved the 
program in the mid-nineties turned a blind eye to it. The 
Security Council's 661 committee, they just said, just do it; 
don't bother us with the details.
    But in March 2001, somebody finally started asking the hard 
questions. What changed? I hope we examine that issue. What 
changed from the mid-nineties to March 2001, so that the 
questions finally started getting asked? I think that is a 
central question to this thing, because you cannot uncover 
fraud. You cannot reverse years and years of practice by 
snapping your fingers or standing up here beating your chest. 
This culture got set up, it got established, it got ignored. 
And in March 2001, we finally called them on it.
    Mr. Chairman, I hope we get to the bottom of this.
    Mr. Shays. Thank the gentleman.
    I ask unanimous consent that all members of the 
subcommittee be permitted to place an opening statement in the 
record and the record will remain open for 3 days for that 
purpose. And, without objection, so ordered.
    I would ask further unanimous consent that all Members be 
permitted to include their written statement in the record, 
and, without objection, so ordered.
    We have a representative of the French Embassy, but I think 
we will have to just make a statement and leave a document. But 
I think I will first ask Mr. Waxman to make his motion and then 
we will put that on the table.
    Mr. Waxman. Thank you, Mr. Chairman. I have two separate 
motions for subpoenas. The first one is a subpoena under House 
rule 11(2)(k)(6). On July 8 this committee issued a subpoena to 
the French bank, BNP Paribas, which was responsible for 
maintaining the Oil-for-Food escrow account controlled by the 
U.N. When the committee issued the subpoena, the argument by 
the chairman and others was that a subpoena was necessary 
because the bank could not legally cooperate with this 
committee's inquiries unless it had the legal protection 
afforded by a subpoena. In other words, they wanted to 
cooperate, we were told, but they needed to have the subpoena 
for legal reasons.
    Mr. Chairman, my subpoena is for the Federal Reserve Bank 
of New York. This is the bank that maintains the Development 
Fund for Iraq which was run by the Bush administration from May 
2003 to June 2004. Just as you asked the French bank for 
documents relating to the inflow and outflow of funds under the 
Oil-for-Food Program, we ask for identical documents from the 
Federal Reserve Bank.
    In fact, the language of my subpoena tracks the broad 
language of your subpoena almost word for word, substituting 
references to the Oil-for-Food program with references to 
Development Fund for Iraq.
    In making this motion, I want the record to reflect that 
the Federal Reserve Bank has expressed the exact same policy as 
the French bank. With respect to cooperating with this 
committee, they cannot respond to a simple letter of request, 
but they are more than willing to respond to a friendly 
subpoena, and I want to submit for the record an e-mail 
received from the counsel and vice president of the Federal 
Reserve Bank dated October 4, 2004.
    It states as follows: ``with respect to providing DFI 
account information to the Congress, we concluded as long as we 
are acting pursuant to a subpoena, we can provide DFI account 
information for the period that the DFI was operated by 
Ambassador Bremer without violating our contractual obligation 
to the Central Bank of Iraq.''
    Mr. Chairman, we have an exactly parallel situation. We are 
talking about the same funds, the Iraqi oil proceeds, which 
were supposed to be used for the humanitarian benefit of the 
Iraqi people. We are talking about the financial institutions 
responsible for maintaining these funds, and we are talking 
about serious allegations of mismanagement. The only difference 
is that the United Nations controlled one set of funds, and the 
Bush administration controlled the other. I believe this 
committee's legitimacy will be judged by how it treats these 
two cases. We can choose to treat them equally in an even-
handed manner, properly exercising our congressional oversight 
responsibilities or Mr. Chairman, you and your colleagues can 
attempt once again to use procedural machinations to shield the 
Bush administration from embarrassment, and more importantly, 
from accountability.
    My first motion is for the committee to issue a subpoena to 
Mr. Timothy Geithner, the president of the Federal Reserve Bank 
of New York, to produce the documents relating to the 
development fund for Iraq.
    I ask unanimous consent that the e-mail be part of the 
record.
    Mr. Shays. Without objection, the e-mail will be part of 
the record.
    [The information referred to follows:]
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    Mr. Shays. The motion offered by Mr. Waxman is in order 
under House rule 11, clause 2(k)(6). That rule states, ``The 
Chairman shall receive and the committee shall dispense with 
requests to subpoena additional evidence.'' Pursuant to that 
rule, the chairman may determine the timing of the 
consideration of such request. At this time the motion shall be 
considered as entered and the committee will consider the 
motion offered by the gentleman from California at 2:45 today.
    Would you like to make a separate----
    Mr. Waxman. I offer them separately because I can see no 
opposition to the first one.
    Mr. Shays. Would you like me to comment on your motion?
    Mr. Waxman. If you would.
    Mr. Shays. The Chair reserves the time to speak, and I just 
say that conceptually I think, while I do not agree with the 
arguments on why this information is needed and that there is 
wrongdoing that requires it, I do think that there is merit in 
getting this information. So my interest is in getting this 
information. My inclination is always to write a letter first. 
In this instance a letter may not be required with the 
documentation that you have, and so I want to consider that. I 
will reserve judgment, frankly, on that motion.
    Mr. Waxman. Mr. Chairman, I think that is a reasonable 
position. As you think about it between now and 2:45, I hope 
you make the decision to support the subpoena.
    My second motion is for a subpoena under House rule 11, 
clause 2(k)(6). As I said in my opening statement, the Bush 
administration is grossly mismanaging Iraqi oil proceeds and 
other funds in the Development Fund for Iraq. There have been 
multiple reports about the administration failing to manage 
these funds in an open, transparent and accountable manner as 
required by the Security Council resolution 1483. In addition, 
the administration is now withholding documents from the 
international auditors charged by the U.N. Security Council to 
monitor its stewardship of these funds. I think a subpoena is 
necessary at this point because the administration has refused 
requests to voluntarily turn over this information.
    Indeed, Mr. Chairman, you issued a press release on June 23 
of this year condemning the administration for failing to 
provide information to this subcommittee regarding both the 
Oil-for-Food Program and the Development Fund for Iraq. This is 
what you said about the administration's replay. ``the response 
is incomplete. There is still an insufficient accounting of 
relevant documents in custody. Several questions and requests 
are simply unanswered.''
    The committee still has not received the information we 
requested on May 21. After the administration rejected the 
subcommittee's request for information, I wrote to Congressman 
Davis, the chairman of the full committee, on July 9 and asked 
that he subpoena the documents. In my request, I tracked 
exactly the language and format he used to subpoena the French 
bank handling the Oil-for-Food account.
    On July 12, Chairman Davis wrote back refusing to issue the 
subpoena. He said it was premature, that he preferred to send a 
letter requesting the information. Well, I wrote to him again 
on July 15 attaching a draft letter for him to sign and send 
out but he never did and he just ignored my request entirely.
    I wrote again on July 29 repeating my request. To this day 
he has failed to respond to my multiple requests to do so. Now 
that these voluntary efforts have failed, it is clear we have 
exhausted all our options. We have no choice but to issue an 
subpoena. In light of these numerous failures to provide 
information to the United Nations and the U.S. Congress, I move 
that the committee subpoena Defense Secretary Donald Rumsfeld 
to produce these specified documents, including records of 
receipts and disbursements, sole source contracts and other 
listed materials.
    I understand, Mr. Chairman, it is always preferable to send 
a letter requesting the information, but if we cannot even get 
the chairman of the committee requesting it, and we have no 
response to our letters requesting the information directly 
from DOD, it seems to me that we have no other course but to go 
ahead with the subpoena. To date, we still have not received 
these documents. It is clear that we need to move to a 
subpoena. I urge support for the subpoena.
    Mr. Shays. Thank you. We will take that up after we discuss 
the first one and I will reserve judgment as well on this, and 
we will have dialog before we have that vote. We will have a 5-
minute dialog on each of those subpoenas on each side so there 
will be a 10 minute debate on each motion before we vote.
    Let me just say that I see Mr. Lantos is here.
    Mr. Lantos, would you like to make a statement on the Oil-
for-Food Program, or we will get right to our hearing.
    Mr. Lantos. I will defer.
    Mr. Shays. The French embassy has asked a representative, 
Ms. Christine Grenier, to provide some information to the 
subcommittee. Without objection, I would like to recognize her 
for a brief statement.
    Mr. Ose. Mr. Chairman, I know it is our normal practice to 
swear in our witnesses.
    Mr. Shays. How brief is your statement? It is very short, a 
paragraph, so we are not swearing in this witness.
    Ms. Grenier. Thank you, Mr. Chairman, and distinguished 
members of the committee, my name is Christine Grenier. I am 
First Secretary in the Political Section at the French Embassy. 
Allegations have been voiced on the role of France in the Oil-
for-Food Program. The French Embassy will prepare a written 
statement in response to these unjustified allegations, and I 
would appreciate your allowing this statement to be included in 
the hearing record. Thank you, Mr. Chairman.
    Mr. Shays. Thank you very much. We appreciate you honoring 
the committee with your presence. We will be happy to insert 
the statement into the record. Without objection that will 
happen. Thank you very much.
    [The information referred to follows:]

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    Mr. Shays. At this time the Chair would note that we have 
Ambassador Patrick F. Kennedy, U.S. representative to the 
United Nations for U.N. management and reform, U.S. mission to 
the United Nations, U.S. Department of State. At this time the 
Chair will swear in the witness.
    [Witnesses sworn.]
    Mr. Shays. I note for the record our witness has responded 
in the affirmative. I thank the witness for his patience.
    Mr. Ambassador, I thank you for your presence and 
statement. You have the floor.

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

    Ambassador Kennedy. Mr. Chairman, distinguished members of 
the committee, I welcome the opportunity to appear before you 
again to discuss what is commonly known as the United Nations 
Oil-for-Food Program.
    Mr. Chairman, recent allegations of corruption and 
mismanagement under the Oil-for-Food Program have been targeted 
not only at the Saddam regime but also at companies and 
individuals doing business under the program and at U.N. 
personnel and contractors. We believe that every effort should 
be made to investigate these allegations seriously and to 
determine the facts in each case.
    As you are aware, there are currently several congressional 
investigations looking into the question of Oil-for-Food. The 
independent inquiry committee headed by Paul Volcker and the 
Iraqi board of Supreme Audit in Baghdad are also conducting 
their investigations. As these inquiries go forward, you have 
my assurance, and that of my staff, to cooperate fully with you 
and your colleagues on other committees and provide all 
possible additional information and assistance. I welcome the 
opportunity today to answer your questions relating to these 
investigations on how the program was created and operated. At 
the outset, Mr. Chairman, I want to reiterate several points I 
made here previously in April.
    First, I want to emphasize that the establishment of the 
Oil-for-Food Program was the result of difficult and arduous 
negotiations among 15 Security Council members, a number of 
whom advocated a complete lifting of sanctions against Iraq. 
The Oil-for-Food Program was in no way perfect, but it was, at 
the time, the best achievable compromise to address the ongoing 
humanitarian crisis in Iraq in the mid 1990's, while 
maintaining effective restrictions on Saddam's ability to 
rearm. Sanctions have always been an imperfect tool, but given 
the U.S. national goal of restricting Saddam's ability to 
obtain new materials of war, sanctions represented an important 
tool in our efforts.
    Mr. Chairman, given this general context, I would now like 
to outline some of the details of how the program worked, how 
it was created, by whom and how it was operated and was 
monitored. A comprehensive sanctions regime was established 
under U.S. Security Council resolution 661 in August 1990 after 
the Saddam Hussein regime invaded Kuwait. The council's 
unanimity on the issue of Iraq eroded as key council 
delegations became increasingly concerned over the negative 
impact of sanctions on the Iraqi population, the lack of food 
supplies and the increase in mortality rates were worldwide 
news.
    The concept of a humanitarian program to alleviate the 
suffering of the people of Iraq was initially considered in 
1991 with U.N. Security Council resolutions 706 and 712, but 
the Saddam regime rejected those proposals. The counsel 
eventually adopted U.N. Security Council resolution 986 in 
1995, which provided the legal basis for what became known as 
the Oil-for-Food Program. While council members were the 
drafters and negotiators of this text, the memorandum of 
understanding signed between the U.N. and the former government 
of Iraq was negotiated between Iraqi government officials and 
representatives of the Secretary General, in particular his 
legal counsel, on behalf and at the request of the Security 
Council.
    Under provisions of resolution 986 and the MOU, the Iraqi 
government, as a sovereign entity, retained the responsibility 
for contracting with buyers and sellers of Iraq's choosing and 
the responsibility to distribute humanitarian items to the 
Iraqi population. This retention of Iraqi authority was 
insisted upon by Saddam and was supported by a number of 
Security Council members, as well as other U.N. member states. 
The exception to this was for the three northern Governorates 
of Iraq where the U.N. agencies, at the request of the Council, 
served as the de facto administrative body that contracted for 
nonbulk goods and distributed the monthly food ration.
    The sanctions committee was established under resolution 
661 in 1990, also known as the 661 committee, monitored member 
state implementation of the comprehensive sanctions on Iraq, 
and also was authorized to monitor the implementation of Oil-
for-Food Program after its inception.
    The 661 committee, like all sanctions committees, operated 
as a subsidiary body of the Security Council and was comprised 
of representatives from the same 15 member nations as the 
council. The committee was chaired by the Ambassador of one of 
the rotating 10 elected members of the council. The committee, 
during its life span, was chaired by the Ambassadors of 
Finland, Austria, New Zealand, Portugal, Netherlands, Norway 
and Germany.
    Decisionmaking in the committee was accomplished on a 
consensus basis. All decisions taken by the committee required 
the agreement of all its members. This procedure is used in all 
subsidiary sanctions committees of the Security Council.
    In providing oversight and monitoring of the sanctions, the 
committee and each of its members, including the United States, 
was responsible for reviewing humanitarian contracts, oil spare 
parts contracts, and oil pricing submitted on a regular basis 
by Iraq to the U.N. for approval. The committee was also 
responsible for addressing issues related to noncompliance and 
sanctions busting. In my previous testimony and statement for 
the record, I have provided an explanation of what we knew 
about issues relating to noncompliance, what we did to address 
them and the degree of success we had in addressing these 
issues within the confines of the 661 committee.
    When the United States became aware of issue related to 
noncompliance or manipulation of the Oil-for-Food Program by 
the Saddam regime, we raised these concerns in the committee, 
often in concert with our U.K. counterparts. At our request, 
the committee held lengthy discussion and debate over for 
example allegations of oil pricing manipulation, kickbacks on 
contracts, illegal smuggling and misuse of ferry services. To 
provide the 661 committee with additional insight on issues 
related to noncompliance, we also organized outside briefings 
by the commander of the Multilateral Interception Force and 
other U.S. agencies. Our success in addressing issues of 
noncompliance was directly related to the willingness of other 
members of the committee to take action.
    Given the consensus rule for decisionmaking in the 
committee, the ability of the United States and the U.K. to 
take measures to counter or address noncompliance was often 
inhibited by other Members' desire to ease sanctions on Iraq. 
As reflected in many of the 661 committee records which have 
been shared with your committee, the atmosphere within the 
committee, particularly as the program evolved by the late 
1990's was often contentious and polemic, given the fundamental 
political disagreement between member states over the Security 
Council's imposition and continuance of comprehensive 
sanctions, a debate exacerbated by the self-serving national 
economic objectives of certain key member states.
    Mr. Chairman, you have recently been to Baghdad and know 
that the voluminous Oil-for-Food documents are now being 
safeguarded for use by the board of supreme audit in their 
investigation. The American Embassy in Baghdad is currently 
working on a memorandum of understanding between the United 
States and the government of Iraq regarding access to these 
documents. We will keep this committee updated on the status of 
these negotiations. Mr. Chairman, as you and your fellow 
distinguished committee colleagues continue your review of the 
Oil-for-Food Program, key issues in your assessment likely will 
be whether the program achieved its overall objectives and 
whether the program could have been better designed at its 
inception to preclude what some have suggested were fundamental 
flaws in its design.
    In retrospect, had the program been constructed 
differently, perhaps by eliminating Iraqi contracting authority 
and the resulting large degree of autonomy afforded to Saddam 
to pick suppliers and buyers, then the allegations currently 
facing the program might not exist. One can postulate the 
elimination of this authority and the establishment of another 
entity to enter into contracts on behalf of the former 
government of Iraq, and this entity might have had tighter 
oversight of financial flows, thus inhibiting Saddam Hussein's 
ability to cheat the system through illegal transaction.
    The problem is, of course, that these specific decisions to 
allow the government of Iraq to continue to exercise authority, 
to let Saddam Hussein continue to determine who he could sell 
oil to and purchase goods from were all done in the larger 
context of a political debate on Iraq. It was reluctantly 
accepted to ensure that the significant sanctions program would 
remain in place, thus achieving a U.S. goal.
    Mr. Chairman, I want to reiterate a point that I made 
earlier on the issue of sovereignty. While we opposed the 
authoritarian leadership of the former Saddam Hussein regime, 
Iraq was, and is, a sovereign nation. Sovereign nations are 
generally free to determine to whom they will sell their 
national products, and from whom they purchase supplies. 
Members of the Security Council, as well as other member 
states, insisted on upholding this aspect of Iraq's sovereign 
authority.
    These were the arrangements that prevailed under the Oil-
for-Food Program given this reality. Could alternate 
arrangements have been devised, such as authorizing the United 
Nations or some other entity to function as the contracting 
party representing the people of Iraq in oil sales, and 
humanitarian goods procurement? The answer, given that there 
was not the political will in the Security Council to use its 
authorities to take charge of Iraq's oil sales and humanitarian 
goods procurement depended on the Iraqi regime's agreeing. And 
it did not.
    Mr. Shays. Ambassador, I am going to have you summarize 
when we get back. We have a vote now, and I am going to go to 
that vote, so we are going to recess.
    [Recess.]
    Mr. Shays. Ambassador Kennedy, there is going to be another 
vote, but just complete your statement. We will put your 
statement on the record.
    Ambassador Kennedy. Thank you, Mr. Chairman.
    The Security Council's original scheme for the Oil-for-Food 
Program outlined in resolution 706 and 712 in 1991 were for a 
program that would utilize the revenue derived from the sale of 
Iraqi oil to finance the purchase of humanitarian supplies for 
use by the Iraqi people. It was repeatedly rejected by the 
Saddam government. Even after the council adopted resolution 
986 on April 14, 1995, the resolution that established the Oil-
for-Food Program, it took more than 13 months of protracted 
negotiations before Saddam Hussein finally agreed to proceed, a 
considerable delay given the ongoing and urgent needs of the 
Iraqi people.
    Mr. Chairman, any plan that would have denied the authority 
of the Iraqi government to select its own purchasers of Iraqi 
oil and suppliers of humanitarian products would have been 
rejected by a number of other key Security Council member 
states. You and your committee colleagues will recall that 
most, if not all, of the resolutions concerning Iraq adopted by 
the Security Council reaffirmed Iraq's sovereignty and 
territorial integrity. It would not have been possible 
politically to win support from various U.N. member states for 
any arrangement that denied Iraq its fundamental authorities as 
a sovereign nation and that would have endangered the 
durability of the sanctions regime that helped Saddam's access 
to war materials.
    Finally, Mr. Chairman, I want to underscore the obligations 
of all U.N. member states to implement and enforce the 
comprehensive multilateral sanctions imposed by the Security 
Council under resolution 661. It was not possible for the 
sanctions to be effective, nor to prevent Saddam Hussein from 
evading the sanctions through the smuggling of oil, and the 
purchase of prohibited goods without the full cooperation of 
other states. I appreciate that this committee is carefully 
reviewing this matter and I would encourage you to consider the 
actions of other states in the context of the Oil-for-Food 
Program.
    The United Nations, first and foremost, is a collective 
body comprised of its 191 members. A fundamental principle 
inherent in the U.N. charter is that member states will accept 
and carry out the decisions of the Security Council in 
accordance with the charter. In this regard, the effectiveness 
of the Oil-for-Food Program as well as the larger comprehensive 
sanctions regime against Iraq, largely depended on the ability 
and willingness of U.N. member states to implement and enforce 
sanctions. In the 661 committee, the subsidiary body of the 
Security Council tasked with monitoring sanctions compliance, 
sanctions violations could be addressed only if there was 
collective will and consensus to do so.
    As you review the effectiveness of the Oil-for-Food 
Program, and the sanctions against Iraq in general, I encourage 
you to keep in mind that a decision to take effective action to 
address noncompliance issues required consensus in the 661 
committee, a consensus that repeatedly proved elusive. And in 
reviewing the effectiveness of the U.N. secretariat, it may be 
relevant to recall that the staff and contractors are hired to 
implement the decisions of the member states. They operate 
within the mandates given to them.
    In this regard, resolution 986 and the May 1996 memorandum 
of understanding between the United Nations and the former 
government of Iraq defined the mandate governing the work of 
the independent inspection agents, appointed by the Secretary 
General, who authenticated the arrival in Iraq of goods ordered 
under approved Oil-for-Food contracts. Lloyds Registry of the 
United Kingdom initially performed this function on behalf of 
the U.N. When the Lloyds contract expired, the Swiss firm 
Cotecna was hired by the U.N. to continue this authentication 
function. As defined in resolution 986 and the subsequent MOU, 
the independent inspection agents, Lloyds and then Cotecna, 
were tasked with inspecting only those shipments of 
humanitarian supplies ordered under the Oil-for-Food program.
    Lloyds Registry and Cotecna agents were not authorized by 
the Security Council to serve as Iraq's border guards or 
customs officials. They lacked authority to prevent the entry 
into Iraq of non-Oil-for-Food goods. That function and 
responsibility belonged solely to Iraqi border and Customs 
officers, given Iraq's sovereignty and to every U.N. member 
state given the sanctions in place. The United Nations and its 
agents Lloyds Registry, Cotecna and Saybolt were not 
responsible for enforcing sanctions compliance. In May 2001, 
the United States and U.K. delegations circulated a draft 
resolution to other Security Council members that would have 
tightened border monitoring by neighboring states as part of a 
smart sanctions approach to Iraq. Certain council members as 
well as representatives of Iraq's neighbors, strongly opposed 
the United States-U.K. text, and the draft resolution was never 
adopted.
    Resolution 986 and the May 1996 memorandum of understanding 
also called for monitoring by outside agents of Iraq's oil 
exports the Dutch firm Saybolt performed this function under 
the Oil-for-Food Program. Saybolt representatives oversaw oil 
loadings at the Mina al-Bakr loading platform and monitored the 
authorized outbound flow of oil from Iraq to Turkey. Saybolt 
monitors were not authorized by the Security Council to search 
out and prevent illegal oil shipments by the former Iraqi 
regime. This was the primary responsibility of each member 
state. The multi national maritime interception force operating 
in the Persian Gulf also was tasked with preventing Iraq's 
illegal oil smuggling.
    Mr. Chairman, now that the Oil-for-Food Program has ended, 
questions concerning the efficacy of the program have arisen in 
light of the appearance of the documents belonging to the 
former Iraqi regime. These documents were never publicly shared 
during Saddam Hussein's rule with the Security Council or the 
661 committee.
    A fair question to pose is what might have happened had the 
Oil-for-Food Program never been established. While any response 
is purely conjecture. It is fair to assume that the 
humanitarian crisis besetting the people of Iraq in the mid 
1990's would have only worsened over time, given the impact of 
the comprehensive sanctions on Iraq and Saddam Hussein's 
failure to provide for the needs of his own civilian 
population.
    A deteriorating humanitarian situation among the Iraqi 
people would have increased calls among more and more nations 
for a relaxation and/or removal of the comprehensive sanctions 
restrictions on Iraq, thereby undermining ongoing United States 
and U.K. efforts to limit Saddam's ability to rearm. While the 
United States and U.K. may have succeeded in formally retaining 
sanctions against Iraq, fewer and fewer nations would have 
abided by them in practice given the perceived harmful impact 
such measures were thought to be having on Iraqi civilians. 
This would have given Saddam even greater access to prohibited 
items with which to pose a renewed threat to Iraq's neighbors 
and to the region.
    Did the Oil-for-Food Program help to relieve the 
humanitarian crisis in Iraq and the suffering of the Iraqi 
people? Despite what might in the end be identified as inherent 
flaws, the Oil-for-Food Program did enjoy measurable success in 
meeting the day-to-day needs of Iraqi civilians. Could the 
program have been designed along lines more in keeping with the 
U.S. Government competitive bidding and procurement rules? Only 
if other council members and the former Iraqi government itself 
had supported such a proposal. In the end, the Oil-for-Food 
Program reflected three merged concepts: A collective 
international desire to assist and improve the lives of Iraq's 
civilian population; a desire by the United States and others 
to prevent Saddam from acquiring materials of war and from 
posing a renewed regional and international threat; and, 
efforts by commercial enterprises and a number of states to 
pursue their own national economic and financial interests 
despite the interests of the international community to contain 
the threat posed by Saddam's regime.
    Mr. Chairman, thank you for the opportunity to appear again 
before this committee. I now stand ready to answer whatever 
questions you or your fellow committee members may wish to 
post.
    [The prepared statement of Ambassador Kennedy follows:]

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    Mr. Shays. Thank you, what I will do since we have a vote, 
I will go back to the vote and then we will just start with 
questioning. The committee stands in recess.
    [Recess.]
    Mr. Shays. I call the hearing back to order.
    I thank you, Mr. Kennedy. I also want to apologize to the 
second panel for all of the delays.
    I would like to start by responding to your closing that 
suggests that, and let me be clear you accept this point, 
Ambassador Kennedy, basically you are saying because Saddam and 
Iraq were a sovereign nation, and because he was not willing to 
abide by a stricter Oil-for-Food Program, that we, the United 
Nations, conceded in allowing him to pretty much write his own 
ticket and that the alternative was, what? That is what I do 
not understand. In other words, are you suggesting that the 
sanctions worked?
    Ambassador Kennedy. Mr. Chairman, we do not believe that we 
permitted Saddam Hussein to write his own ticket. I think that 
is evident from the fact that it took almost 15 months between 
the time that resolution 986 was passed by the Security Council 
and the end of the negotiations to formulate the MOU. Saddam 
Hussein was obviously interested in achieving the maximum 
amount of flexibility that he could. The United States, the 
United Kingdom and others were interested in putting the 
maximum number of constraints on Saddam Hussein. We had a goal, 
Saddam Hussein had goals. All of these goals were in the 
context of other member states of the Security Council, and 
additionally, other member states of the United Nations, who 
have very different views on sanctions, some of them 
philosophical, some related to Saddam Hussein. The United 
States, United Kingdom and others pushed very, very hard to get 
the maximum amount of oversight of the sanctions regime. Those 
activities were resisted by others.
    What I am suggesting is that although the program certainly 
was not perfect, as the work that you and your committee 
members have done amply demonstrate, I am suggesting, though, 
that in the absence of these sanctions, we would have probably 
had a very, very less fulsome situation.
    I might note in 2002 the United States and the United 
Kingdom were holding, meaning denying permission, to over $5.4 
billion in contracts that Saddam Hussein wished to execute. So 
it was a balance. The need to alleviate the horrible suffering 
of the Iraqi people, suffering brought on by Saddam Hussein, at 
the same time to put into effect the most rigorous sanctions 
regime that we could politically establish.
    Mr. Shays. I have to say you take my breath away. I feel 
like you are digging into a hole that I am sorry you are going 
into because it sounds to me like some critics' concern about 
the State Department's double speak. It sounds to me like 
double-speak, and let me explain why.
    The sanctions did not work, but we had this program to 
what, save face for the United States or whatever? We had a 
program that allowed Saddam to sell oil at a price below the 
market and get kickbacks and we had a program that allowed him 
to buy commodities above the price and get kickbacks. He had 
the capability to now take this illegal money in addition to 
the leakage that they had. We are looking at the Oil-for-Food 
Program as a $4.4 billion rip-off to the Iraqi people going to 
Saddam and then the $5.7 billion of illegal oil being sold 
through Jordan and Syria and Turkey. But let us just focus on 
the $4.4 billion. In addition within that Oil-for-Food Program, 
he had what was considered legitimate money that he could then 
pay for commodities and bought things that he was not what he 
was supposed to be purchasing.
    You need to tell me how those sanctions worked if he could 
do that. I don't know how you can tell me that they worked when 
that happened.
    Are you disputing that $4.4 billion was basically ripped 
off and ended up in his hands?
    Ambassador Kennedy. No, sir, I am not.
    Mr. Shays. Are you in agreement this is not the Oil-for-
Food Program, but it was the sanctions, are you in disagreement 
that he did not filter about $5.7 billion of oil sales 
illegally through the neighboring states?
    Ambassador Kennedy. Saddam Hussein engaged in oil smuggling 
which was not part of the Oil-for-Food Program. I think we all 
agree that Saddam Hussein was an evil man who attempted to 
manipulate any opportunity.
    Mr. Shays. I don't want to go down whether he is evil or 
not. I want to go back over how you can defend these sanctions. 
Why did you go in that direction?
    Ambassador Kennedy. I think, Mr. Chairman, that the 
sanctions enabled Saddam Hussein to be deprived of weapons of 
war and dual-use items.
    Mr. Shays. Is it your testimony and your comfort level that 
$10.1 billion was not used to purchase weapons?
    Ambassador Kennedy. No, sir. I am saying that the sanctions 
regime assisted. I said in my testimony that it is not a 
perfect system. He attempted to purchase materials under the 
sanctions through the U.N. Oil-for-Food process. We put holds 
on those. We stopped his purchasing of materials overtly, such 
as dual-use items. He attempted to purchase for example dump 
trucks and heavy equipment transporters. Dump trucks are easily 
convertible into rocket launchers because of the hydraulic 
mechanisms on the back. And a heavy equipment transporter that 
can move a bulldozer or a crane is the same piece of equipment, 
essentially, that you use to move tanks.
    Mr. Shays. Is it your testimony that you know what he 
bought? Are you comfortable with the documents that came from 
Saybolt and Cotecna? Are you testifying that when they testify 
and basically come before us and say that he was not abiding by 
the sanctions, bought material he should not have, are you 
saying that he bought material that he should have? You can't 
be saying that.
    Ambassador Kennedy. No, sir. What I am saying is the 
contracts that ran through the Oil-for-Food Program ran through 
the 661 committee. When the United States, using the example of 
our own Nation, received those contract proposals, those 
contracts were vetted by any number of Washington agencies that 
were specialists in that regard. They vetted those contracts to 
make sure that none of the material included therein were 
weapons of war or potential dual-use items.
    Mr. Shays. Is it your testimony that you in fact believe 
those documents?
    Ambassador Kennedy. I believe that the United States 
reviewed contracts and held on contracts that would have been 
given Saddam Hussein weapons of war and dual-use materials, 
yes.
    Mr. Shays. I am not asking that. What I am asking is: So 
you stopped some transactions, but are you testifying as a 
representative of the United States that this system, which 
this subcommittee certainly believes is a paper tiger, was not 
a paper tiger. Do you believe that Cotecna and Saybolt had the 
power to properly monitor?
    I want to say it again. Representing the United States of 
America, you come before this committee under oath, are you 
telling us that this system worked and that both companies were 
able to verify and properly manage this program? That is the 
question I am asking you. I want you to think long and hard 
before you answer it.
    Ambassador Kennedy. I think, Mr. Chairman, that you are 
conducting an investigation, an investigation we welcome. If 
Saddam Hussein was moving materials into Iraq outside of those 
which were contracted for under the Oil-for-Food Program, he 
and someone else were engaged in smuggling sanctions.
    Mr. Shays. That is a no-brainer statement, but it is not 
answering my question. I want you to answer my question. I want 
you to think a second and answer the question.
    Is it your testimony representing the State Department, and 
representing the administration, that this program, that the 
way this program was set up, that these two companies were able 
to properly enforce the sanctions? That is the question. Were 
they given the power necessary? Were you given the cooperation 
necessary with the other members of the Security Council, the 
661 committee?
    Ambassador Kennedy. Absolutely not. Absolutely not.
    Mr. Shays. Let us work with that. You are digging yourself 
out of a hole right now. The bottom line is they were not, 
correct?
    Ambassador Kennedy. That is correct.
    Mr. Shays. Tell me in your words what was the problem with 
the program?
    Ambassador Kennedy. The problem was in the negotiating 
process that takes place in the international arena all of the 
time, the ultimate resolution passed by the Security Council, 
which was a process of negotiation, did not authorize either 
Cotecna or Saybolt or X or Y or Z, or anyone, to become all 
encompassing sanctioned enforcement agents.
    Mr. Shays. That is the extreme they did not do. Tell me the 
minimum that they did? What power did these companies have?
    Ambassador Kennedy. They were empowered under the 
resolution to validate goods that were being shipped into Iraq 
that were declared to be part of the Oil-for-Food Program.
    Mr. Shays. You are familiar with this program?
    Ambassador Kennedy. Yes, sir.
    Mr. Shays. Were they able to do that? This is an 
investigation to know, and I want to know if my own government 
that is supposed to be overseeing this, that I frankly thought 
had problems with this program, I want to know if they were 
properly able to oversee this program? It is a simple and very 
clear answer. I want to make sure under oath you are stating it 
clearly, not something you want me to believe, but I want to 
know the truth and the committee wants to know the truth. I 
want to have some confidence that my government that was 
overseeing it knew what the heck was going on.
    Were they able to properly oversee this program?
    It is a simple answer.
    Ambassador Kennedy. Because of the efforts of Saddam 
Hussein, in that sense, no, sir, they were not.
    Mr. Shays. In any sense they were not able to. The reasons 
why we will explore later. But were they able to properly 
oversee this program? You do know they are testifying 
afterwards?
    Ambassador Kennedy. Yes, sir.
    Mr. Shays. And you are aware of the complaints they had, I 
hope?
    Ambassador Kennedy. Yes, sir.
    Mr. Shays. Even before this hearing, correct?
    Ambassador Kennedy. Absolutely.
    Mr. Shays. Were they properly able to fulfill their 
responsibilities and oversee this program?
    Ambassador Kennedy. Up to a point yes; and beyond that, no.
    Mr. Shays. You are going to have to tell me yes, up to what 
point and after what no. You tell me up to what point were they 
able to?
    Ambassador Kennedy. They were empowered by the resolution 
of the Security Council to authenticate materials that were 
arriving. They authenticated those materials.
    Mr. Shays. Wait a second. Are you saying that they 
authenticated these materials? Are you saying they had a 
theoretical power to do it or are you saying they actually were 
able to do it? There is a difference.
    Ambassador Kennedy. It was their mission----
    Mr. Shays. I want to know if they were able to.
    Ambassador Kennedy. I was not at every border station, sir. 
They authenticated the materials and submitted documents to the 
United Nations saying they had authenticated material.
    Mr. Shays. Isn't it a fact that they said they didn't 
always have the people? Isn't it a fact that they said 
sometimes they couldn't even look, that is, in terms of 
Saybolt, sometimes they could not even be there, and when they 
left, isn't it a fact that they had suspicious?
    Ambassador Kennedy. Absolutely. And we have testified to 
that effect.
    Mr. Shays. That is what is frustrating me. And you are 
someone who was in Iraq, a friend, and someone I have awesome 
respect for. What concerns me is you are giving a party line 
that even you do not believe. I feel very awkward having this 
public dialog with you, but it is so logical it is almost 
frightening to me that we cannot at least have the truth and 
then work from that as to what. I don't want to know why they 
were not able to authenticate the fact that this happened. I 
want to know if they did. Then we will explore why they 
couldn't.
    Ambassador Kennedy. Mr. Chairman, I have tried to answer 
the question the best I can. And I appreciate the compliment 
you just paid me. I believe that Cotecna and Saybolt attempted 
to carry out the functions that they had.
    Mr. Shays. We agree. They attempted to do that. On one 
level we are in agreement. The question is could they? The 
answer is a simple one.
    Ambassador Kennedy. Absolutely. The results were not 
perfect.
    Mr. Shays. I did not say perfect. Perfect is too much 
discretion. Perfect may mean 99 percent, and I don't think it 
was even close to 50 percent. I don't think they had the power 
and I don't think anyone who has looked at this program 
believes they had the power, and I think they are going to 
testify they did not have the power. What concerns me is you 
were basically trying to give the impression they were not 
perfect but, and I think that is misleading to the committee. I 
think it does not do you credit.
    I don't want you to say anything you do not believe. I just 
do not want you to speak in words that do not frankly help us. 
I want you to be more precise.
    Were they able to make sure that oil sales were actually 
the oil sales they were and that commodities that were 
purchased were actually what was bought to the amounts that 
were bought, the quality and so on? Were they? Maybe you can 
look at that note and hopefully somebody else is telling you to 
say no.
    Ambassador Kennedy. It was the position of the United 
States and joined by the United Kingdom that we wanted a more 
robust inspection regime. We wanted more robust inspections. 
Obviously, I think I am trying to answer your point. I am 
saying yes, there were restraints inherent in the program that 
prevented Cotecna and Saybolt, and Lloyds before that.
    Mr. Shays. The problem with the word ``robust'' is like 
your word ``perfect.'' It was not robust, so to say that you 
wanted it to be more is almost meaningless in my judgment as I 
have looked at this. This was a program that was basically not 
working. I want you to start us off explaining why it was not 
working. You have given a justification as to why we basically 
allowed for this program to go forward even though it was not 
working. So you have given a lot of people cover, but you have 
not helped us understand whether you, the government, the State 
Department, this administration, felt this program worked. You 
are trying to give us the impression that it was working, but 
not perfect; that it was robust, but it could be more robust. 
That to me is misleading. That is what I am wrestling with, and 
I am trying to understand why. Why do you want me to have this 
impression?
    Ambassador Kennedy. Mr. Chairman, I grant you, and I am 
looking for another word other than ``perfect.''
    Mr. Shays. Have you been instructed to say that this 
program worked when it did not work?
    Ambassador Kennedy. No, sir.
    Mr. Shays. Was there any meeting did you had before that 
said under no circumstances are you supposed to agree that the 
program did not work?
    Ambassador Kennedy. No, sir.
    Mr. Shays. Was the program working?
    Ambassador Kennedy. The program accomplished some of its 
goals, as I have said.
    Mr. Shays. What were the goals?
    Ambassador Kennedy. The goals of the Oil-for-Food Program 
were to relieve the humanitarian crisis of the Iraqi people and 
retain a sanctions regime on Saddam Hussein that would assist 
in restricting his desire to rearm. He had other means of 
attempting to rearm, as you rightly pointed out, sir. He 
attempted and he did utilize those means, but the program did 
deliver food and medicine and other supplies and equipment to 
the Iraqi people.
    Mr. Shays. That part we concede. I'm going to concede that 
part. Because we knew that Iraqis were starving and we knew 
they weren't getting medicine and we knew that Saddam Hussein 
was willing to starve and kill his people and deprive them of 
medicine, we decided to cave in and accept a program that 
simply on the face looked like we hadn't caved in, looked like 
there were sanctions, but in fact it was about as leaky as it 
could get. And I wanted to understand if you understood that it 
was very leaky. Instead you used words, I wanted it to be more 
robust and I want it to be perfect.
    But it wasn't perfect and it wasn't more robust. The bottom 
line was almost every transaction, it appears, may have been a 
rip-off, may have been a transaction that compromised the 
United Nations, compromised other people, and allowed Saddam 
Hussein to make money illegally without the world community 
having to agree that he was. That's the way I look at it. Tell 
me what's wrong with my picture.
    Ambassador Kennedy. Your picture is absolutely correct. 
Saddam Hussein--you mentioned earlier, sir, in our discussion 
that you take Saddam Hussein. He was sanction-busting from 1991 
until the Oil-for-Food Program started in 1995--1996. He was 
sanction-busting. The Oil-for-Food Program was put into place. 
He attempted to get around the sanctions regime at every 
possible opportunity----
    Mr. Shays. And the irony is----
    Ambassador Kennedy. He priced----
    Mr. Shays. Go on.
    Ambassador Kennedy. He attempted to write contracts for oil 
where he priced the oil below the market rate and attempted to 
pocket that premium. We discovered that, and the United States 
and the U.K. raised that in the 661 committee, and then halted 
all price-setting under the old scheme until we achieved 
putting a new system into place which set the oil price 
retroactively after the sale; in other words, stopping him from 
getting a surcharge.
    Having blocked him in that regard, he then moved to another 
aspect which was kickbacks after sales. We attempted to block 
that. So it was almost--and I hate to say this--a chess game. 
He attempted to maneuver and we attempted with certain allies, 
but not enough of them, to seize and block his activities.
    And so I am agreeing that sanctions are leaky. The 
sanctions regime did not work as it was intended; i.e., to have 
100 percent effectiveness.
    Mr. Shays. No, don't say 100 percent, because I'm not even 
sure you had 50 percent. So don't say 100 percent. No, I mean, 
if the truth comes out, whatever the truth is, it may embarrass 
the United States. It may embarrass someone else. It may 
embarrass Congress. But it will be the truth. And from the 
truth we can learn from it.
    And my problem right now is what you are suggesting is that 
basically Saddam was willing to kill his people by not getting 
the food and not getting medicine and he wasn't willing to do 
an Oil-for-Food Program that we wanted, so ultimately we did a 
program that he wanted. He was able to buy or sell in euros. He 
was able to undersell his oil. He was able to overpay for 
commodities. He was able to get kickbacks. He was basically 
able to tell Cotecna and Saybolt basically they had no 
authority. He was basically able to ignore them. He was 
basically able to have more transactions than they could even 
handle so that they weren't even aware of some transactions. 
And he did this with the assistance of our allies.
    And it's not a bad thing that Americans and the world 
community have to contend with this because it suggests that 
even before a decision to go into Iraq, it suggests frankly to 
me that we didn't have the support of our allies, that 
President Clinton didn't have the support of our allies, and 
that it was somewhat of a joke. And that when you had a 
President finally trying to say, you know, we've got to make 
this program work and we also have to look at a regime change 
if he doesn't cooperate, and we still don't have the assistance 
of our allies, it says to me, well, what's new? What's new 
about it?
    Are you saying to us that the allies cooperated? No, your 
testimony was the reverse. Isn't it true that you said the 
allies did not cooperate and enable us to have a sanctions 
system that is working? Is that a fair statement?
    Ambassador Kennedy. I totally agree sir. As I testified, we 
sought a sanction regime and we were unable to get the sanction 
regime we wanted, yes, sir because of the lack of willingness 
on the part of other members of the Security Council and other 
nations to agree to that sanction regime.
    Mr. Shays. OK. And so they didn't agree with it. And then 
we had a sanction that Saddam basically could live with; and 
isn't it true that on occasion, the United States protested 
some of the transactions?
    Ambassador Kennedy. We contested many of the transactions. 
We were holding at one point, as I mentioned, sir, $5.4 billion 
worth of proposed transactions.
    Mr. Shays. Well, but isn't it true that there were actually 
transactions that happened that you objected to?
    Ambassador Kennedy. No, sir the system operated on the 
consensus basis, and if any member of the 661 committee 
representing the member states of the Security Council, if any 
member objected to a transaction, that transaction was held----
    Mr. Shays. OK. Why didn't you object to the fact that 
Saybolt and Cotecna did not have enough manpower and were not 
given the authority they needed to make sure that they were 
actually documenting the actual transactions? Why didn't the 
United States protest their inability to accurately document 
transactions?
    Ambassador Kennedy. For example, sir, when we learned 
that--using the Essex case, the oil tanker in which--it was 
topped off after it had been loaded--we did raise that in the 
661 committee. We insisted that additional personnel, 
additional technical matters, whatever, we demanded to the 661 
committee.
    Mr. Shays. And it didn't happen. And why didn't it happen?
    Ambassador Kennedy. Some of it happened, some of it didn't, 
because it was resisted by other members of the 661 committee.
    Mr. Shays. Most of it didn't. Most of it did not happen. 
And it didn't happen because it just took one member to object, 
correct?
    Ambassador Kennedy. Correct.
    Mr. Shays. OK. So you could theoretically prevent a 
transaction from happening that you knew about, but you 
couldn't make sure that Cotecna and Saybolt had the authority, 
the personnel, to make sure that they were properly running 
this program.
    Ambassador Kennedy. The mandate to the companies came from 
Security Council resolution and from the 661 committee.
    Mr. Shays. Is that yes or a no?
    Ambassador Kennedy. The answer is that their mandate was 
governed by the consensus requirements. And, yes, a member 
state could hold on that consensus and that would have the 
effect that you outlined.
    Mr. Shays. Why can't you say that the bottom line to it was 
that because member states would object if you wanted Saybolt 
or Cotecna to have more authority, more personnel and so on, 
because they objected to it, they didn't get it; and because 
they didn't get it, they couldn't do their job properly? Why is 
that so hard to say?
    Ambassador Kennedy. Phrased that way, sir, I have no----
    Mr. Shays. Well, why don't you say it?
    Ambassador Kennedy. The mandate to Cotecna, to Saybolt, was 
governed from the original Security Council resolution and then 
implemented in the memorandum of understanding and in the 661 
committee. Efforts to achieve our goals on sanctions were 
blocked by other member states.
    Mr. Shays. That's not the same thing that I said, which you 
agreed with. What I wanted to know from you is whether you 
could say this. And if you can't, because you don't believe it, 
then tell me you don't believe it. But don't agree with my 
statement and then tell me something else in your answer.
    What I said was because a member state could block the 
United States or Great Britain from wanting Saybolt or Cotecna 
to have enough authority and enough personnel to properly 
document transactions because member states could veto that--
any one state, and did--that they did not have enough personnel 
and they did not and were not able to properly document 
transactions.
    What you said to me was you agree with that statement, but 
you can't say it in your own words, and I just don't understand 
why it's hard for you to say it in your own words that way.
    Ambassador Kennedy. I guess, sir, because I think--the only 
distinction I am trying to draw, if I might, is that there were 
transactions outside the scope of the Oil-for-Food Program.
    Mr. Shays. We have put those aside. We're just focused on 
the Oil-for-Food.
    Ambassador Kennedy. All right. Then, yes, Cotecna and 
Saybolt and their predecessor in one case did not always have 
the resources they needed to do their job, yes.
    Mr. Shays. Or the authority?
    Ambassador Kennedy. Yes.
    Mr. Shays. Yes, what?
    Ambassador Kennedy. Yes, they did not have the full 
authority to do their job because the mandate from the Security 
Council was not as broad as we wished it would have been.
    Mr. Shays. Wished it would have been. As it should have 
been; correct?
    Ambassador Kennedy. Should have been, yes. It was our goal, 
as I said, to have a more robust sanctions regime. That's----
    Mr. Shays. Don't say more robust. It was not robust at all. 
It was a paper tiger, it was a leaky sieve, it enabled Saddam 
to get $4.4 billion. It was a joke. And you don't have to say 
it was a joke. I can say it was a joke. But you and I can 
certainly agree it wasn't robust. Was it a robust program?
    Ambassador Kennedy. No, sir, it was not a robust program.
    Mr. Shays. OK. Was it close to being a robust program?
    Ambassador Kennedy. I think I'm----
    Mr. Shays. Was it close to being a robust program?
    Ambassador Kennedy. No, it was not close to being a robust 
program.
    Mr. Shays. OK. Well let's leave it right there.
    Mr. Waxman.
    Mr. Waxman. Mr. Chairman, earlier today at this hearing I 
moved for two subpoenas, and we held off any vote on them. As I 
understand it, you're willing to issue the first subpoena to 
the Federal Reserve Bank in New York to get the information 
that we have requested; and rather than issue a second 
subpoena, you've suggested that you and I write a letter to the 
Department of Defense requesting the information that we wanted 
and would have subpoenaed.
    I want to thank you for your suggestion of resolving these 
subpoena questions in that way. I think it will be very helpful 
for us to issue the letter to Secretary Rumsfeld, insisting he 
comply with this request. And, of course, I take you at your 
word that the committee will followup aggressively if the 
Pentagon fails to provide the documents we have requested.
    I think this is a reasonable way to proceed, and rather 
than have a vote on it, I would like to have this understanding 
memorialized at this point in the hearing so that we can go 
ahead with the one subpoena and issue a joint letter from the 
two of us in lieu of the second subpoena.
    Mr. Shays. Thank you. I appreciate the gentleman's, one, 
effort and interest in this issue. I think he is correct in 
wanting to get these documents. I do totally agree that the 
Bank needs a subpoena, and I also want to say to you that we've 
asked for 12 documents, records--more than 12--but we have made 
12 specific requests that are quite extensive, and it is my 
expectation that the Secretary will provide these documents, 
and if he doesn't then we need to followup with the subpoena.
    Mr. Waxman. Well, I thank you very much. I certainly agree 
with you, and I think it's a reasonable way for us to proceed, 
to have all of the information which our committee ought to 
have as we do the investigation and in all respects.
    Mr. Shays. Thank you very much.
    Mr. Waxman. Thank you.
    Mr. Shays. Thank you. Thank you for being here.
    Mr. Shays. Thank you. Mr. Murphy, you have the floor.
    Mr. Murphy. Thank you, Mr. Chairman. I just have a couple 
of questions here that I--and I apologize if some of these were 
covered while I was on the floor of the House.
    But, Ambassador, I thank you for being here, and I wanted 
to know where do we stand with the status of gaining access to 
the United Nations Oil-for-Food Program documents for Congress 
now and--can you give me some background with where we stand 
right now?
    Ambassador Kennedy. The State Department has asked Chairman 
Volcker of the independent investigating committee for the 
release of the documents, and up to this point he has declined, 
saying that he is using the documents and he intends to conduct 
his investigation. And he has declined to release them, sir.
    Mr. Murphy. Those would just be documents, official U.N. 
documents; is that what you're saying?
    Ambassador Kennedy. Yes, sir.
    Mr. Murphy. Is anyone trying to pursue documents from any 
other country, too? Is there any attempt to do that?
    Ambassador Kennedy. Yes, sir. Before I left Baghdad in 
August, I had presented to the acting chair of the Board of 
Supreme Audit a proposed memorandum of understanding between 
the United States and Iraq to release for use of government of 
Iraqi documents. And I understand that work is continuing and 
we hope to have a resolution to that request in the very near 
future. I checked with Baghdad just the other day and I am 
expecting those----
    Mr. Murphy. So those documents are being scanned now.
    Ambassador Kennedy. We are attempting to make an 
arrangement between various parties to scan those documents.
    Mr. Murphy. Now, how about the reverse? We have access to 
the Iraqi documents. Those will be released soon.
    Ambassador Kennedy. The request has been made, sir, yes.
    Mr. Murphy. The request has been made. How about the 
reverse? Is there any attempts to obtain documents from some of 
these other countries that are part of this scandal: Russia, 
France, China, Syria?
    Ambassador Kennedy. I believe that the request to other 
nations for their documents is within the jurisdiction of the 
independent investigating commission, Mr. Volcker's commission.
    Mr. Murphy. Are those nations cooperating?
    Ambassador Kennedy. That is a question that would have to 
be posed to the independent investigating commission, sir.
    Mr. Murphy. Let me ask about another area here. When it 
became apparent--and it was some years ago--that the issue, the 
question of some corruption in this Oil-for-Food scandal began 
to take some legs on it, what was the responsibility of the 
U.N. Office of Iraqi Programs to maintain the integrity of this 
program, and did they act within the scope of their 
responsibility at that time?
    Ambassador Kennedy. That is a question, sir, that is 
actually part of the investigation that is going on now by the 
Independent Investigations Commission. We are aware of 
information that did come to the attention of the United 
States, including some from the Office of Iraqi Programs; which 
then as a member state, as a member of the 661 committee, the 
United States, the United kingdom, did followup on.
    If there is other information that came into their 
possession that they should have followed up on that we are 
unaware of, of course we are unaware of that information, and 
that is one of the charges that was given to Chairman Volcker 
and his colleagues on the Independent Investigations 
Commission, to find out if there was any malfeasance, 
misfeasance. And I am not a lawyer, so I may not be using the 
appropriate words on the part of U.N. employees, but that is 
one of the mandates of the IIC, to look and see if U.N. 
employees conducted themselves as appropriate----
    Mr. Murphy. But it appears that there is some lack of 
cooperation in releasing doubts that would help us know this.
    Ambassador Kennedy. Chairman Volcker has indicated to me 
that his investigation is ongoing and he intends to gets to the 
bottom of it and then file a full and complete report. I can 
only report, sir, what he has said to me.
    Mr. Murphy. Does he feel that he is getting cooperation 
from the member nations and from the U.N. itself, fully?
    Ambassador Kennedy. He has indicated he is getting full 
cooperation from the United Nations Secretariat. I have not 
posed the question about discussions with other nations.
    Mr. Murphy. Also in the historical time line of this, what 
was the year in which the concerns about corruption first began 
to surface?
    Ambassador Kennedy. First of all, corruption only within 
the Oil-for-Food Program itself, or issues about Saddam 
Hussein's sanctions-busting in general? I mean, the fact that 
he was engaged in oil smuggling came to our knowledge, you 
know, in 1991-1992. That's outside of the Oil-for-Food Program. 
And efforts were made then by the United States and others, and 
it led to the establishment of the multinational interdiction--
maritime interdiction force, which were United States and other 
nations' naval assets deployed in the Shatt al Arab and the 
Gulf to seize that. We first, I think, became aware of his 
schemes related to oil, the premium on oil pricing, in July 
2000, which is where he was----
    Mr. Murphy. Did the involvement of other countries and the 
Oil-for-Food corruption continue after July 2000? So even after 
the United States became aware, did it continue?
    Ambassador Kennedy. We began pushing for a system to bring 
this under control. It was resisted by other nations. We were 
challenged. We said, do you have hard evidence? Do you have----
    Mr. Murphy. Wait. Who was asking for the hard evidence?
    Ambassador Kennedy. Other nations.
    Mr. Murphy. Which nations were they?
    Ambassador Kennedy. I would have to go back and read the 
exact text again.
    Mr. Murphy. France.
    Ambassador Kennedy. France.
    Mr. Murphy. Germany.
    Ambassador Kennedy. France, Russia, and China would be 
the----
    Mr. Murphy. Syria.
    Ambassador Kennedy. Syria was on the committee at one 
point. I mean, over the course of the 13 years, there were many 
nations on the--and in 2000 when this first came to our 
attention----
    Mr. Murphy. So the very nations that are----
    Ambassador Kennedy. The nations changed every year.
    Mr. Murphy. I want to make sure I understand what you're 
saying. So the nations that the allegations are against now, at 
that time were saying you don't have any evidence on us?
    Ambassador Kennedy. Yes, sir. They were saying, do you have 
hard proof? And we said, we are getting these stories, its 
being reported in industry trade publications, it's being 
reported elsewhere. This must be addressed.
    We pushed and we pushed and met a lot of resistance, and 
since we were meeting this resistance, if I might for a moment, 
sir, the program then was to set the oil price at the beginning 
of the month. And then what Saddam was playing off of was the 
volatility of the oil market where the price would move 10, 15, 
20, 50 cents a barrel over the course of the month, and then he 
would sell at one price and sell to a favored supplier and say, 
I'm going to sell to you at the peg price of $20.50, but now 
that the price for the rest of the month is $20.75, you keep 
the nickel and you kick me back 20 cents. When we saw that this 
is what he was doing, and then we met the resistance from 
others to our activities, what the United States and the United 
Kingdom then did was to refuse to set an oil price at the 
beginning of the month. So there was no oil price. Oil sales 
went on, but there was no price.
    We then agreed to an oil price at the end of the month that 
would then deprive Saddam Hussein of playing with the 
volatility of the market. And by setting a retroactive price, 
we believe that from the oil overseers--which were the 
professionals who had been engaged--that still he was 
potentially making something, but it might have been on the 
order of 3 to 5 cents a barrel as opposed to on the order of 25 
to 50 cents a barrel simply because of the movements over the 
course of the month.
    Mr. Murphy. And what countries were involved with that 
after the United States has worked to deal with oil prices at 
the end of the month? What countries were still purchasing oil 
and giving him a kickback at that time?
    Ambassador Kennedy. We do not know which country. That is 
part of the investigation now. I do not have in front of me a 
confirmed list of what countries were engaged in that. I should 
say these were national--these were companies that were 
purchasing the oil and giving kickbacks, not nations 
themselves.
    Mr. Murphy. Well that's an important distinction. Was there 
any role or awareness, for example, of the French, the Russian, 
Chinese governments of these kickbacks going on?
    Ambassador Kennedy. We informed their members of the 661 
committee.
    Mr. Murphy. So they were informed. Back in what year? Mid-
nineties?
    Ambassador Kennedy. In 2000, sir, when it came to our 
attention. It was first raised, I believe, in the July 13, 2000 
meeting of the 661 committee on oil price.
    Mr. Murphy. So that's the definite date by which we know 
that those member nations were notified. And I'm assuming that 
in the U.N. investigation we may find that those member nations 
knew something prior to that, but we don't know.
    Ambassador Kennedy. That would be speculation, sir, that I 
cannot comment on.
    Mr. Murphy. But they were notified at least in the year 
2000, and yet the Oil-for-Food purchasing continued on after 
this. It didn't end in 2000. It continued on; am I correct?
    Ambassador Kennedy. We believe that because of the steps we 
took to put this retroactive pricing, that we drove the premium 
or surcharge down from, you know, multiple cents a barrel to 2 
or 3 cents a barrel. But I cannot say that we ended it 
entirely, because Saddam Hussein was always looking for some 
way to get around the sanctions.
    Mr. Murphy. Mr. Chairman, I'm not sure. Could I have 2 more 
minutes or 1 more minute?
    Let me shift to a different line of questioning here. The 
total amount of money that I understand Saddam Hussein received 
from this Oil-for-Food corruption was of the nature of $10 
billion, am I correct, $10.1 billion? In the whole package of 
things here.
    Ambassador Kennedy. He achieved much more than that if you 
count in the oil smuggling that took place outside the scope of 
the Oil-for-Food Program, and it is very difficult to get an 
exact estimate. But I'm in no position to challenge the figure 
that we are talking about that was provided by the Government 
Accountability Office. I have every reason to believe that 
figure is probably in the ball park.
    Mr. Murphy. So it's probably in the ball park. It may be 
more.
    Ambassador Kennedy. Could be a little more, a little less. 
Yes, sir.
    Mr. Murphy. OK. And what did he do with the money?
    Ambassador Kennedy. He did a wide variety of things, I'm 
sure. Some of the sumptuous palaces that are extant in Baghdad 
at this time are undoubtedly built with that money. And he may 
well have done other things, but I don't have direct and 
confirmed information about that.
    Mr. Murphy. Will we have information from these 
investigations with regard to what he spent that money on? For 
example, did he purchase weapons on a black market or directly 
with that money?
    Ambassador Kennedy. I do not believe that is going to be 
the subject of the Volcker or the IIC investigation. That may 
come out through other U.S. Government channels, sir.
    Mr. Murphy. As we connect the dots, the thing that worries 
me intensely on this is not only the oppression Saddam Hussein 
kept his people under, the tortures and the murders, the 
killing fields which continued on at that time, but also it 
kept his regime going, much of it in sumptuous palaces which I 
have seen in Iraq. But the third, it kept his military going.
    And I would hope that somebody would find in this--I'm 
sure, Mr. Chairman, this is some of your concerns as well--that 
if one penny of that was used to buy any bullets or bombs or 
grenade launchers or anything else, I suspect on the black 
market, because he's not permitted to purchase them overtly--
and this is where we have to also connect the dots to find if 
those companies within those member nations of the U.N. have 
blood on their hands against our soldiers.
    And I would hope that is part of what this investigation 
brings out; that those nations who acted holier than thou in 
saying, you don't have any evidence, you don't know anything 
about what's going on, but also saying stay away from Iraq, 
they're nice people, leave them alone, could very well be--and 
this is the crux of what we have to find out from this 
investigation--if they were sending the money to Saddam Hussein 
which he used to arm his soldiers against the world.
    Ambassador Kennedy. I agree. That is something that is 
absolutely abhorrent; absolutely, sir.
    Mr. Murphy. And I hope the world is paying attention to 
that, because all this time that people are looking at let's 
ask the United Nations, they're not an altruistic system. Let's 
ask other member nations to come out and somehow decide what is 
best for the United States. The fact is no Ambassador from 
another country is given a mission of deciding what's best for 
the United States. They're all supposed to represent their own 
nation. And I hope that people pay attention to this; that when 
you have this sort of absolute power to spend and to find that 
kind of money, that nations and the businesses that operate 
within them are not pure. And we may like to think about 
perhaps these other nations may have some pure motives, but 
quite frankly, there's too much in the negative column to 
suggest otherwise.
    And I would hope that the investigation of this committee, 
led by the chairman and by the United Nations, would give us 
that answer. I wish we could get that answer soon. But as it 
is, I go back to my opening statement, too, that it concerns me 
deeply that these nations which have been very quick to ask us 
for help when they needed it, when we ask them for help--if 
they knowingly participated, if it was active or passive 
participation in sending money to this murderer Saddam Hussein, 
which he then used to keep his military regime in power, which 
was then used against our own soldiers and citizens is 
disgusting.
    Thank you, Mr. Chairman.
    Mr. Shays. I'll allow counsel to ask a few questions, and 
then I'll have a few more, Ambassador, and then we'll be all 
set.
    Mr. Halloran. Thank you, Mr. Chairman.
    Ambassador Kennedy, two areas. First, much of the document, 
many of the documents the State Department has provided are 
marked sensitive or classified because of their foreign origin, 
I believe. In particular, there has been recent media reference 
to a document produced by the Iraqi Oil Ministry soon after the 
Governing Council and the CPA was in place, characterizing in 
detail the Oil-for-Food Program and abuses. That report is 
marked sensitive and classified and not for distribution.
    I'm wondering what the process is for the U.S. Government 
to request or accomplish the declassification and public 
release of such a report.
    Ambassador Kennedy. Let me find out those exact parameters 
and get back to the committee for the record.
    Mr. Halloran. Thank you.
    The other area I want to explore is this concept of 
sovereignty, and try to plumb the depths and the parameters of 
that concept. It struck me in your testimony that it is not an 
absolute, that I--if you could describe other situations in 
which sovereignty has been described or observed differently in 
other U.N. regimes; that it's struck us in the documents that 
Saddam simply waited out those who had the most expansive view 
of sovereignty possible, but that other formulations of this 
problem were possible within a plausible concept of sovereignty 
for a nation that was already under an oppressive sanctions 
regime, that had already been documented as trying to avoid 
that sanctions regime. So, in one sense, the sovereignty had 
already been severely mortgaged.
    Could you describe those negotiations a little more, 
please?
    Ambassador Kennedy. I will first plead that I am not an 
international lawyer and I am not qualified to provide you with 
a textbook definition of sovereignty. What I believe we are 
talking about here is, I will call it a political definition of 
sovereignty. The United States, the United Kingdom, other 
allies, sought to put into place, and did in 1990 after the 
invasion of Kuwait, a complete embargo on the movement of goods 
and services into Iraq. And then it was later amended to permit 
certain donations of food and medicines.
    But as we saw over the course of the years between 1991 and 
1995, you know, the mortality rate; the ability of the Iraqis 
to get basic basic nutrition, was just simply collapsing 
because of Saddam Hussein's own unwillingness to treat his 
people in a humane sense. This built political pressure on 
those nations who were in favor of sanctions. And we did not 
wish to see that sanctions regime end, because of our goal of 
doing whatever possible to restrict the movement of materials 
of war to Saddam Hussein so he could re-arm.
    So taking the political aspect of trying to keep the 
sanctions in place, but seeing the resistance, a series of 
negotiations took place within and among member states at the 
United Nations to formulate a new regime that eventually led to 
the Security Council resolution that established the Iraq 
program.
    Did we want a program that had more teeth in it than that? 
Absolutely. Could we get other nations to agree to that fully 
and completely? Could we get Saddam Hussein to tell the other 
nations that he was willing to accept that? The answer was no. 
Why----
    Mr. Halloran. So we can conclude there is another 
formulation of the Oil-for-Food arrangement that would give 
Saddam less control but still observe the concept of the 
sovereignty.
    Ambassador Kennedy. As I said in my testimony, yes, one 
could have had such another activity. However, in the 
negotiations that took place in the 661 committee and in the 
Security Council, we did not achieve that consensus on a regime 
with more teeth.
    Mr. Halloran. Thank you.
    Mr. Shays. Thank you, Ambassador. Let me ask you, how many 
months were you in Iraq?
    Ambassador Kennedy. I was in Iraq for 6 months in 2003 and 
then I went back again for another 3 months' assignment in 
2004, sir.
    Mr. Shays. Was that a classified assignment, then, or can 
you tell us, bottom line, what you were involved in?
    Ambassador Kennedy. No, sir. I can tell you. For the first 
6 months in 2003, I was the chief of staff of the Coalition 
Provisional Authority, and then when I went back in 2004, I was 
the chief of staff of a small unit that was working on the 
transition from CPA to American Embassy and the transition 
logistically from the Iraqi Governing Council to the Iraqi 
Interim Government.
    Mr. Shays. Well, we know those were not easy assignments, 
and we sincerely appreciate what you did during that time. I 
would like you to describe to me the Clovely incident, C-L-O-V-
E-L-Y, the ship. Are you familiar with it?
    Ambassador Kennedy. No, sir. I am aware of the Essex 
incident that took place several years ago, but, Mr. Chairman, 
I will be glad to research that and provide you information for 
the record. I apologize. I am unaware of such.
    Mr. Shays. You don't need to. If you don't know of the 
incident, I'd just as soon you not respond to it.
    When I listened to your statement, and I really--you know, 
we don't usually allow someone to speak for more than 10 
minutes. I wanted to hear your whole statement. I think why I 
get uneasy is certain things seem so simple to me, and then 
they are the hard things. And then I think you have a big 
dialog about the hard things.
    The easy things are that it's clear Saddam starved his 
people and deprived them of medicine and would have continued 
to do that unless we had some way to allow him to get food and 
medicine for his people. And we basically decided to let him 
determine, really, how the program should function. He decided 
it was in euros, not dollars. He decided who could buy oil. He 
decided who he would buy commodities from. He basically set the 
price of oil. He set the price of commodities. He undersold his 
oil. No reason to do that. He overpaid for commodities. No 
reason to do it, unless he did what he did. And that was, he 
got kickbacks in both ways.
    And it seems very evident to me that both Saybolt and 
Cotecna did not have the capability, either in personnel or 
authority, to prevent bad things from happening in this 
program. And so they happened routinely, not on occasion. It 
seemed to me we could have just had a quick dialog. What is of 
concern to me, is there anything that I just said that you 
would disagree with?
    Ambassador Kennedy. No, sir. If I do, is that one that 
neither Saybolt nor Cotecna set the price of oil or set the 
price of commodities.
    Mr. Shays. No, they didn't.
    Ambassador Kennedy. No, sir.
    Mr. Shays. So everything I said was pretty accurate from 
your standpoint.
    Ambassador Kennedy. Except, sir, that he proposed the price 
of oil.
    Mr. Shays. He being----
    Ambassador Kennedy. Saddam Hussein. He proposed the price 
of oil, but the price of oil was then set by the 661 committee, 
not by Saddam Hussein. He----
    Mr. Shays. And in some cases set it below market price.
    Ambassador Kennedy. When it was set at the beginning of the 
month, when the market moved, it ended up being below market 
price, which is why the United States and the United Kingdom 
moved to set the price at the end of the month so that he could 
not take advantage of the natural market shifts. Yes, sir.
    Mr. Shays. And so I'm getting to my point. What concerns me 
is that you basically have described to me the reality that our 
allies who didn't support the embargo were pretty much shaping 
it, and that was the reality of this program; and that it was 
more important to have the program happen, even though it 
wasn't working properly. In other words, having the program and 
not having it work properly was better than not having the 
program at all. I conclude from that, because you felt the only 
alternative was that we would continue to see Iraqis starve and 
they wouldn't get the medicine. And I guess that's the 
conclusion of the State Department.
    Ambassador Kennedy. I think, sir, if there had been massive 
starvation in Iraq, I think the belief at that time--and I was 
not there--was that the entire sanction regime totally would 
have collapsed, and then Saddam Hussein would have had no 
sanction regimes to have to deal with at all, and that free 
rein would have been not in the U.S. national interest.
    Mr. Shays. OK. But the bottom line is as a result, we had 
Saddam able to make a fortune in kickbacks. That was basically 
the compromise. And it is a fact that the United States knew 
this was happening.
    Ambassador Kennedy. Every time, sir, that we saw him move 
to abuse the system--pricing oil, kickbacks--we moved to try to 
counter that in the 661 committee; and, as you have rightly 
noted earlier, sir, met resistance from other member states.
    Mr. Shays. Who could veto.
    Ambassador Kennedy. Yes, sir. The way the Security Council 
procedures work, yes, sir.
    Mr. Shays. Ambassador, are you set to ask questions? Would 
you like to ask some questions?
    Ms. Watson. Yes.
    Mr. Shays. Thank you. We have two Ambassadors here.
    Ms. Watson. I am a bit confused--thank you, Mr. Chairman--
because I just heard you say that every time you saw something 
appeared abusive, that there would be some response. However, 
we have been told how Saddam Hussein had taken the money 
intended for the people and food, and built magnificent 
palaces. It seems to me that this would be the time that some 
action should have been taken. Can you respond, please?
    Ambassador Kennedy. There is no doubt, Madam Ambassador, 
that Saddam Hussein received kickbacks. That is a fact. We 
moved to counter those kickbacks, but during this period of 
time while he was making kickbacks, and as I testified before 
this committee several months ago, what he did was on very 
large quantities of goods, and he--remember, he was feeding a 
nation of some 23 to 25 million people--he would attempt to get 
very small kickbacks on very large sums. But the sums mount up 
over that kind of volume. He was receiving those funds. Yet the 
medicines and the foodstuffs were still going in.
    I am not defending what he was doing by any means. What he 
was doing is wrong. But the food and medicines were going in, 
and he was getting the kickbacks while we and our United 
Kingdom allies moved to cutoff either his attempt to manipulate 
oil prices or attempt to add surcharges or attempt to add 
after-sales service contracts. And so we took steps to block 
him as soon as we discovered it. And as we have discussed 
earlier, we were not successful in blocking all his activities.
    Ms. Watson. And I know, Mr. Ambassador how difficult this 
is. I have been there, too. However, I think you're the only 
one that can help our understanding of what went wrong so 
wrong. And so I understand that the Oil-for-Food Program helped 
provide food for 27 million Iraqi residents. It prevented 
malnutrition. It reduced communicable diseases. It eradicated 
polio, and was a major success for a period of time. We're 
focusing on $4.4 billion of a $67 billion humanitarian success 
story.
    So do you believe that this program met its objectives, and 
do you believe that we as the United States, and the monitors 
who were participating, were on the job? I need to know out in 
the field what it was that was lacking and how we lost so much 
of the fund to corruption. What was it that should have been 
done beyond what you've just described?
    Ambassador Kennedy. The Oil-for-Food Program had multiple 
objectives. One objective was to ensure that foods, medicine, 
and other essential human needs of the Iraqi people were met. 
And so to that extent, it met its objective by ensuring that 
the infant mortality rate and maternal mortality rate, which 
had gone up, went back down.
    The nutrition was achieved by the Iraqi people. So yes, it 
met that objective. But in terms of being a sanctioned regime 
that stopped any attempt by Saddam Hussein to bust the sanction 
regime and keep him from cheating on the sanctions regime, 
busting it and then potentially using those funds to get other 
materials, it was not a total success. But----
    Mr. Shays. Would the gentlelady suspend for a second?
    Ms. Watson. Certainly.
    Mr. Shays. When you say ``any attempt'' and ``it was not a 
total success'' as it relates to that part of it, you seem to 
be going back and suggesting that the abuses were infrequent. 
Is it your testimony that the abuses were infrequent?
    We've already conceded that people are going to get aid. 
They are going to get money and medicine. But on the other side 
of the equation, is it your testimony that it was just any 
attempt, we didn't succeed in any attempt? Where the abuse is 
more frequent, happened more than less? I want to know which 
way you see it.
    Ambassador Kennedy. The abuses, Mr. Chairman, were 
continuous. But they were, if I might, sir, they were different 
abuses each time. I mean, he abused it with oil smuggling 
outside of program. He abused it with kickbacks. He abused it 
with premiums on oil. He took different steps, so continuous 
abuse, different tools that he used each time to cause the 
abuses, sir.
    Mr. Shays. Thank you. Thank you.
    Ms. Watson. If I might continue--and if you want to 
continue to respond to my last question, fine--but let me raise 
another issue. What other U.N. bilateral or multilateral 
mechanism besides the 661 committee could the United States 
have utilized to publicize and put an end to these practices? 
I'm concerned that too much of the oil moneys were diverted in 
other directions, and those who suffered were the Iraqi people. 
With the Coalition, what could have been done to end this 
misuse?
    Ambassador Kennedy. With Saddam Hussein as the figure here, 
I don't know that anything would have stopped Saddam Hussein 
from attempting to get around any activities.
    Ms. Watson. Well let me just ask you this, then. What would 
have stopped the flow of funds into the program Oil-for-Food?
    Ambassador Kennedy. The only thing that would have stopped 
it would have been if you had had a different sanctions regime. 
But the sanction regime that was put into place was the one 
that was the result of long, extensive, and arduous 
negotiations with other member states to achieve that sanctions 
regime. If you had had a regime in which, again, hypothetically 
a company had pumped all the oil, sold all the oil, and bought 
all the goods and sent them in, then there might not have been 
any leakage as you described. However, there was not the 
political will on the part of nations to impose that kind of a 
sanctions regime.
    Ms. Watson. What of our political will here? Did we make a 
strong enough effort, Security Council in the United Nations, 
to bring their attention and get a focus on possibly changing 
the kind of structure that we had? What was being done from 
within?
    Ambassador Kennedy. I only arrived at the U.S. mission to 
the United Nations in the fall of 2001. But my preparation for 
this, my reading of the very extensive record, indicate that 
the U.S. Government made extensive efforts to get the most 
teeth into sanctions that it could, and met resistance from 
other member states who are unwilling to accept that.
    Ms. Watson. I understand how difficult it is when you're 
coming in and programs like this have been running. That is the 
reason why we were concerned on this committee with our 
oversight, and we wanted to see what records, what documents, 
documentation, what facts there are held by other departments 
and branches. I understand that there were 60 staffers and five 
different U.S. agencies who reviewed each of the Oil-for-Food 
contracts. If we had that information, then my questions might 
be answered.
    And I want to thank you for your service, and I want to 
thank you for coming here and being on the hot seat. But I 
think there should be some others that are on the hot seat so 
we can find where we went wrong, where it went wrong.
    We know that Saddam Hussein was wrong. But that doesn't 
excuse this whole thing. And so we would just like to get to 
the bottom of it. I appreciate your service and I thank you so 
much for trying to explain what happened before your duties 
started. But we are trying to seek truth.
    Thank you, Mr. Chairman.
    Mr. Shays. Thank you.
    Just very briefly, Ambassador, do you feel this story 
should come out?
    Ambassador Kennedy. Absolutely.
    Mr. Shays. Do you feel this story should come out, even if 
it embarrasses our allies?
    Ambassador Kennedy. Absolutely.
    Mr. Shays. Do you believe it should come out, even if it 
embarrasses some allies and makes it more difficult to get 
their cooperation in Iraq?
    Ambassador Kennedy. Absolutely.
    Mr. Shays. Thank you. Thank you very much.
    We are going to go to our next panel. Thank you.
    Our next panel, our last panel, and many hours later, David 
Smith, director, Corporate Banking Operations, BNP Paribas; 
Peter W.G. Boks, managing director, Saybolt International B.V; 
and Andre Pruniaux, senior vice president, Africa and Middle 
East, Cotecna Inspection SA.
    If you would all stay standing, we will swear you in. If 
there is someone else who might respond to a question, I would 
like them to be able to be sworn in as well.
    So we have David Smith, Peter Boks, and Andre Pruniaux. 
Thank you. And we swear in all our witnesses. If you'd raise 
your right hands, please.
    [Witnesses sworn.]
    Mr. Shays. Note for the record, our witnesses have 
responded in the affirmative. Gentlemen, thank you so much for 
your patience. And also, thank you for your cooperation. You 
all have been very cooperative. You all have tried to be 
consistent with your obligations that enable us to do our job 
as well, and we thank you for that.
    David Smith, we are going to have you go first. I'll just 
go down and you'll need to bring that mic closer to you. Plese 
bring it down a little further. And the lights on means your 
mic is on. Do you want to just tap it just to see? Thank you.
    So what we'll do is, you have the floor for 5 minutes, and 
then we roll it over for another 5 minutes. After 10, I'd ask 
you to stop.
    Mr. Smith. Thank you Mr. Chairman.
    Mr. Shays. Thank you.

   STATEMENTS OF DAVID L. SMITH, DIRECTOR, CORPORATE BANKING 
 OPERATIONS, BNP PARIBAS; PETER W.G. BOKS, MANAGING DIRECTOR, 
 SAYBOLT INTERNATIONAL B.V; AND ANDRE E. PRUNIAUX, SENIOR VICE 
   PRESIDENT, AFRICA AND MIDDLE EAST, COTECNA INSPECTION S.A

    Mr. Smith. Chairman Shays, members of the committee, I 
request that my written statement be submitted for the record.
    Mr. Shays. And it will, without objection.
    Mr. Smith. Thank you. Before responding to any particular 
inquiries members of this committee may have, I would like to 
make a brief statement which summarizes the key points of my 
written statement to the committee.
    My name is David Smith. Since September 2001, I have been 
employed by BNP Paribas, North America, where I serve as 
director of Corporate Banking Operations. In that capacity I 
have been responsible for overseeing the Bank's letter-of-
credit processing operations, including those operations as 
they pertain to the Bank's agreement to provide banking 
services to the United Nations for the U.N. Oil-for-Food 
Program.
    First, as to the selection of BNP, according to a report of 
the General Secretary dated November 25, 1996, the selection 
process for the holder of the U.N. Iraq account began with the 
preparation of, ``a working list of major banks in all parts of 
the world with the necessary credit quality ratings, strong 
capital positions, and capabilities to provide the services 
necessary for the account.''
    The report indicates that a short list of those banks, 
including BNP, were asked in June 1996 to submit written 
proposals to the U.N. for the provision of the required banking 
services. The U.N.'s request for proposals sought certain 
pricing information from each bank and inquired into each 
bank's capabilities to handle the business of the program's 
size.
    The Bank understands that four major international banks 
submitted formal offers in response to the RFP. The General 
Secretary reported in 1996 that, ``After careful consideration 
of the proposals received,'' BNP was selected on June 18, 1996 
to be the holder of the U.N. Iraq account. Accordingly, a 
banking services agreement was executed by BNP and the United 
Nations after several weeks of negotiations.
    The Bank believes that several factors resulted in BNP's 
selection by the United Nations, including the following: one, 
its large international presence; two, its significant position 
in the commodities trade finance business; three, its high 
credit rating; four, its strong capital position; five, its 
willingness to assume the credit risk of other banks by 
confirming the oil letters of credit to be issued for the 
benefit of the program; six, its competitive pricing; and 
seven, its substantial trade finance support operation, located 
in New York City, where the U.N. is headquartered.
    Second, as to the services the Bank has provided to the 
United Nations, the role of the Bank under the banking services 
agreement has consisted of delivering nondiscretionary banking 
services to its customer, the United Nations. These services 
have related to both the oil and the humanitarian sides of the 
program. Generally on the oil side of the program, those 
services have involved the confirmation of letters of credit 
issued on behalf of U.N.-approved purchases of Iraq oil. Those 
letters of credit were issued by various banks for the benefit 
of the U.N. Iraq account.
    When a bank confirms a letter of credit, it takes upon 
itself the obligation to pay the beneficiary, here the U.N. The 
Bank's confirmation of the oil letters of credit was done at 
the request of the U.N. It was performed in accordance with 
standard banking practices, letters of credit practices, with 
several additional controls imposed by the United Nations, as 
described in my written statement.
    On the humanitarian side of the program, the Bank's 
services have involved the issuance of letters of credit at the 
direction of the U.N. for the benefit of U.N.-approved 
suppliers of goods to Iraq. Those letters of credit provided 
the necessary assurance to suppliers that they would receive 
payment for their goods once they had been delivered to Iraq in 
accordance with their contractual obligations.
    The processing by the Bank was performed in accordance with 
standard letter-of-credit practice, with a number of additional 
controls, again as detailed in my written statement.
    Significantly, the Bank has had no discretion over how 
money has been spent or invested under the program. The Bank 
did not select the buyers of the oil, sellers of the goods, or 
the goods to be supplied.
    Third, as to the Bank's legal and ethical obligations, the 
Banks provision of services pursuant to the banking services 
agreement was licensed by the U.S. Department of Treasury, 
Office of Foreign Asset Control [OFAC]. Moreover, all services 
provided by the Bank under the agreement were performed within 
a framework designed by the U.N. under the agreement, the 
United Nations, a universally known international organization 
of sovereign states, was the Bank's sole customer.
    As I have stated, all aspects of the transaction under the 
program, including the purchases of oil and the supplies of 
goods, as well as the nature, amount, and pricing of goods 
involved, were approved by the U.N. All letters of credit 
confirmed or issued by the Bank under the banking services 
agreement were governed by the Uniform Customs and Practices 
for Documentary Credits, a set of detailed procedures for 
letters of credit published by the International Chamber of 
Commerce.
    Program transactions were also subject to U.S. regulatory 
requirements, including in particular the screening of any 
program participants against lists of specially designated 
nationals published by OFAC. There also were, as described in 
my written statement, a number of additional controls imposed 
by the U.N. that were unique to the program.
    Notably, an article in Saturday's New York Times purports 
to quote from a briefing paper provided to members of this 
committee that suggests that the Bank was remiss because it 
``never initiated a review of the program or the reputation of 
those involved.''
    Any such suggestion misunderstands the nature of the Bank's 
role under its banking services agreement with the U.N. Under 
that agreement, the U.N. was the Bank's sole customer. The Bank 
reasonably relied upon the sanctions committee of the Security 
Council for its review and approval of both purchases of oil 
and the suppliers of goods. The Bank provided specified 
nondiscretionary services to the U.N. under the banking 
services agreement, and it was not the Bank's place to 
substitute its judgment for that of the sanctions committee 
regarding who would be approved by the U.N. to participate in 
the program.
    Fourth, as to the unique challenges of the program, from a 
banking perspective the program has represented an enormously 
challenging and unique undertaking involving the process of 
over 23,000 letters of credit and the disbursement of billions 
of dollars for investment purposes at the direction of the U.N. 
Those investments have generated in excess of $2.7 billion for 
the benefit of the program.
    With the exception of a temporary backlog in processing of 
humanitarian letters of credit in mid-2000, the Bank believes 
that it has done a good job in handling the highly demanding 
banking assignment under a program of unprecedented scope and 
magnitude.
    Finally, as to the design of the program, the Bank believes 
that the use of letters of credit provided the correct banking 
framework for the program. Although outside the scope of our 
responsibilities it appears, with the benefit of hindsight, 
that the program might have been better structured in other 
respects to minimize the risk of abuse. In this regard, a well-
managed competitive bidding process, both for the purchase of 
oil and for the sale of goods, might have been substituted for 
what was essentially a sole-source procurement process. This 
would have eliminated the Government of Iraq in the selection 
of prospective counterparties for U.N. approved Oil-for-Food 
transactions, and would have provided greater transparency 
regarding program participants. It might also have reduced the 
possibility that the program might not always have received the 
most favorable pricing.
    On behalf of BNP Paribas, I thank the committee for this 
opportunity to provide this statement. I would be happy to 
respond to any questions members of the committee may have.
    Mr. Shays. Thank you, Mr. Smith.
    [The prepared statement of Mr. Smith follows:]

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    Mr. Shays. Mr. Boks.
    Mr. Boks. Mr. Chairman and distinguished members of the 
subcommittee, my name is Peter Boks. I am an executive of 
Saybolt International which is headquartered in The 
Netherlands, just outside of Rotterdam. Thank you for inviting 
me to discuss with the subcommittee today the role of Saybolt 
International in the administration of the United Nations Oil-
for-Food Program. Having submitted a more complete statement 
for the record, I will discuss my brief oral remarks on our 
principal responsibilities; namely, the monitoring of oil 
exports under the Oil-for-Food Program.
    Mr. Chairman, please bear with me that English is not my 
native language. So excuse me if things are unclear.
    Mr. Shays. Let me assure you that we hear you very well, 
and we appreciate you are speaking in English.
    Mr. Boks. Thank you. Saybolt won its contract with the 
United Nations in 1996 through a competitive bid process. Under 
that contract and multiple extensions, Saybolt deployed teams 
of inspectors selected on the basis of their prior experience 
in the industry. Oil inspectors were screened by Saybolt, 
approved by the United Nations, trained and briefed for this 
assignment and required to certify compliance with Saybolt's 
code of conduct.
    Under its contract with the United Nations, Saybolt's 
responsibility was to monitor the quality and quantity of oil 
exports from the two authorized Oil-for-Food export points, the 
offshore platform in Al-Bakr and the port of Ceyhan in Turkey, 
along with the remote monitoring station on the Iraq-Turkey 
pipeline near Zakho, close to the northern border with Turkey.
    The monitoring procedures follow: First, the United Nations 
oil overseers would review and approve contracts and letters of 
credit negotiated between the Iraqi oil company SOMO and the 
buyers of Iraqi oil. Coordinating through a common data base 
shared by Saybolt and the United Nations, Saybolt would monitor 
the quantity and quality of oil, pursuant to the approved 
contracts at the two authorized export points and report 
confirming figures to the United Nations.
    Also important were the limits of Saybolt's 
responsibilities. Saybolt had no responsibility, for example, 
with respect to the underlying contracts which were negotiated 
directly between the seller and buyer and reviewed by the 
United Nations. Saybolt had no control over the moneys that 
were involved in the underlying transactions--that was a matter 
for the sellers, buyers, and the United Nations--nor did 
Saybolt itself buy or sell Iraqi oil.
    Finally, from time to time, we reported irregularities that 
we observed to the United Nations or the Multilateral 
Interception Force. Saybolt had no responsibility for 
monitoring oil exports from any locations other than the three 
locations specified in its contract. In performing their 
responsibilities, Saybolt inspectors typically operated in 
remote locations in inhospitable work environments. Some days, 
for example, the isolated Mina Al-Bakr platform was without 
electricity or water and sometimes during heat that exceeded 
110 degrees. U.N. audits and reports confirmed the harsh 
working conditions and risk to personal safety. The entire 
program was also characterized by highly charged, political 
interests and sensitivities.
    The simultaneous operation of the humanitarian Oil-for-Food 
Program and a comprehensive U.N.-imposed sanctions regime 
created a variety of practical and logistical complications 
affecting everything from obtaining visas to paying for basic 
necessities.
    The job of monitoring authorized oil exports was also made 
more challenging by the poor state of the oil industry 
infrastructure and the deficiencies in equipment and technology 
in Iraq. Even before the program began, Saybolt informed the 
United Nations of problems with the metering equipment at each 
of the three sites. At Mina Al-Bakr, the Iraqi failure to 
install, repair, or calibrate metering equipment meant there 
were no counterpart measurements to cross-check against ship 
measurements at the point of loading on the Mina Al-Bakr 
platform.
    In the absence of calibrated metering equipment, Saybolt 
used the best alternative techniques accepted and widely used 
in the industry. Specifically, in the absence of metering, 
inspectors relied on calibration charts, vessel experience 
factors, and shipboard measurements to determine the quantity 
of oil loaded onto vessels, a methodology that the United 
Nations expressly accepted.
    Monitoring loadings without access to reliable meters is 
accepted industry practice but is less accurate than metering 
at loading points. Although falsification of calibration charts 
and VEF data is rarely an issue, the possibility exists. To 
avoid such a problem, Saybolt originally recommended that the 
volume of oil be measured at the foreign point offloadings, as 
well as at the loading points of Mina Al-Bakr and Ceyhan. For 
whatever reasons, his recommendation was not adopted.
    In January 1999 following discussions with the United 
Nations, Saybolt began requiring that each master sign a 
statement certifying the accuracy of the records provided to 
Saybolt. The United Nations was informed of this procedure and 
supported its recommendation. Over 7 years, Saybolt inspectors 
monitored more than 2,600 loadings involving a total of 
approximately 3.4 billion barrels of crude oil. Over that 
period of time, very few irregularities occurred. Two instances 
of loading excess quantities of oil, the unauthorized topping 
off, occurred in 2001, both involving the same vessel, the same 
vessel charter. Saybolt promptly investigated these incidents, 
made written and personal reports to the United Nations, and 
put in place additional safeguards to prevent any similar 
abuses in the future. Thereafter, Saybolt encountered no 
recurrences of the incidents experienced in 2001.
    Looking back on the program and the variety of challenges 
it faced, we can now identify the ways that the monitoring of 
oil exports under the Oil-for-Food Program might have been 
strengthened. These include requiring accurate metering 
equipment, the continued presence of at least one U.N. official 
at each loading location, incorporating from the outset various 
safeguards that Saybolt developed during the course of the 
program, and monitoring mechanisms for detecting unauthorized 
exports from other than the two U.N.-approved export points. 
More broadly, it now appears in hindsight that the ability for 
Iraq to contract directly with buyers of oil and sellers of 
goods introduced a significant opportunity for abuse. And to 
the extent that the member states of the United Nations 
disregarded or systematically violated the U.N. embargo against 
Iraq, that conduct obviously undercut fundamentally the 
objectives of the Oil-for-Food Program which was conceived to 
be an exception to the embargo.
    Saybolt and its professionals performed a difficult job 
under very difficult circumstances in Iraq. While not without 
blemishes, the monitoring of oil was done professionally over 
an extended period of time. I am happy to discuss that project 
with you today and to help extract from their experience any 
lessons which may be of value in conducting humanitarian 
programs in the future.
    Mr. Shays. Thank you, Mr. Boks.
    [The prepared statement of Mr. Boks follows:]

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    Mr. Shays. Mr. Pruniaux.
    Mr. Pruniaux. Mr. Chairman and distinguished members of the 
subcommittee, my name is Andre Pruniaux. Since 1998, I have 
been employed as Senior Vice President of Cotecna Inspection in 
Geneva, Switzerland, which has some 4,000 personnel in over 100 
offices around the world. I appreciate the opportunity to 
appear before the subcommittee today to clearly establish for 
the public record the difficult task of Cotecna as a contractor 
of the U.N. Oil-for-Food Program.
    Mr. Chairman, my primary duties at Cotecna consisted of 
managing operations in Africa and the Middle East as summarized 
in my curriculum vitae included in my prepared statement. We 
hope to clarify Cotecna's responsibilities and authority under 
the Oil-for-Food Program in the United States and the CPA 
contracts. The documents we provided to the subcommittee 
clearly demonstrate our performance under the contracts has 
been fully consistent with our obligations.
    Since the inception of its contract in Iraq, Cotecna has 
authenticated the arrival of goods in Iraq worth a total of 
$29.2 billion, of which no single authentication has been 
proven to be erroneous. To fairly judge our performance, you 
must first understand what services Cotecna was and was not 
contracted to perform under the OFF program. Cotecna was not 
hired to perform inspection services in the traditional sense 
which would normally entail a broad range of tasks, in support 
of full customs inspection services, including, for instance, 
price analysis, quantity, quality inspection, and port-of-
origin and/or port-of-destination.
    The 1992 request for proposal on which Cotecna was the 
successful bidder issued by the U.N. did incorporate broader, 
more traditional customs inspection mandates. That contract was 
never awarded, however, because the Iraqi Government would not 
give its consent. A subsequent contract was awarded in 1996 to 
Lloyds Register and included the narrower scope of 
responsibility and authority for authentication of goods under 
the 986 OFF program. The parameter of this contract were 
originally established by the Security Council working with the 
U.N. OIP and Lloyd's. In 1998 Cotecna presented the strongest 
technical proposal at the lowest price, and on that basis was 
awarded the contract succeeding Lloyds.
    Importantly, the term ``authentication'' in this context is 
unique to the U.N. OIP contract. In the world of customs 
inspection services, the term ``authentication'' does not 
appear. This reflects the limited role under the contract of 
authenticating the arrival of approved and permitted shipments 
in Iraq so suppliers could be paid.
    Under the narrow scope of the contract, Cotecna played a 
limited technical role in verifying that the goods entering 
Iraq matched the list of goods authorized for importation, and 
in the case of foodstuffs, assessing their fitness for human 
consumption. Our prepared testimony includes these details.
    Conversely, Cotecna was not involved in selecting the goods 
to be imported, establishing the specifications of such 
products, selecting the suppliers, negotiating the prices to be 
paid, nor designating any sales commissions.
    Further, Cotecna was not involved in handling any funds for 
the payment for any goods, but only with verifying that items 
that had been approved for import were delivered in Iraq.
    Mr. Chairman, it is important for this committee to 
understand that two types of goods were coming into Iraq under 
U.N. authority and approval. The first set of goods entered the 
country under the Oil-for-Food Program pursuant to Security 
Council Resolution 986. In addition, a separate volume of 
goods, valued by some to be worth double that of 986 goods, 
were imported under Security Council Resolution 661. These 661 
goods were the subject of private contracting, were not 
financed by the OFF program and, therefore, Cotecna had no 
responsibility or authority to authenticate or inspect them.
    Under the contract, Cotecna authenticated the shipments 
entering Iraq under the 986 program, and was required to 
perform physical examination on up to 10 percent of them, with 
the exception of quality control testing of food basket items, 
as I have already mentioned. We consistently fulfilled each of 
these mandates.
    The company was operating in a difficult and challenging 
physical and political environment as detailed in part 4 of my 
prepared written statement. Relations with the U.N. officials, 
the Humanitarian Coordinator for Iraq, the UNOHCI-Baghdad, were 
sometimes difficult, because Cotecna was required to report 
directly to OIP only, while UNOHCI-Baghdad was assisting 
Cotecna activities and inspections for logistics, visas, 
transportation authorizations, and complaints from the Iraqi 
authorities related to Cotecna inspectors. Also the 
relationship with U.N. humanitarian agencies was delicate and a 
source of tension because these humanitarian agencies adopted a 
more sympathetic attitude toward Iraqi and Kurdish entities. 
UNOHCI, for example, presided over monthly coordination 
meetings in Baghdad between these humanitarian agencies and 
Cotecna. Congestion in the port of Umm Qasr became a very 
serious problem, and suppliers began to complain that the 
government was refusing to remove containers from the port 
unless suppliers paid a fee to the port authority, and the 
government continuously sought ways to influence the 
authentication and payment process for financial gain.
    In direct response to concerns raised by Cotecna to U.N. 
OIP, this process stopped and the congestion situation 
immediately eased. Iraq frequently exerted pressure on Cotecna 
to resolve or retract authentication. Cotecna was directed 
under the contract to refer all such matters to U.N. OIP New 
York, but this did not alleviate the pressure from the 
government, particularly in Umm Qasr.
    Mr. Chairman, Cotecna has consistently performed its 
limited technical role in the authentication of goods under the 
986 OFF Program under difficult physical and political 
conditions. In so doing, the company fulfilled its contractual 
obligations as established by the U.N. Security Council. There 
were problems, and many. The company reported those problems. 
We have sought to cooperate with the subcommittee and have 
provided documentation of those communications to you.
    Mr. Chairman, this concludes my statement. I would be 
pleased to answer any questions members of the subcommittee 
might have. I would respectfully ask that my full statement be 
included in the record along with a letter I sent to you on 
October 1 regarding an article that appeared in the New York 
Post.
    Mr. Shays. Your letter and all of your statements will be 
in the record in their entirety. Without objection, that will 
happen.
    [The prepared statement of Mr. Pruniaux follows:]

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    Mr. Shays. Let me start with the counsel to ask some 
questions, and then I will have some questions.
    Mr. Halloran. Mr. Smith, in describing the factors that you 
say led the United Nations to select BNP as the provider of 
banking services, you said an established commercial trade 
operation in Europe. Did that include facilities for processing 
letters of credit of the kind that the program generated?
    Mr. Smith. The program in itself was unique. I don't think 
that any bank had facilities established to process the type of 
business that was created by the program itself. However, BNP 
had an existing trade finance operation which dealt with the 
issue of letters of credit in New York City.
    Mr. Shays. Could you just explain what made it unique?
    Mr. Smith. Potentially the size of the program, which was 
obviously a little bit unclear at the start of the actual 
program, but especially the additional controls that were 
included. The confirmations of arrival are unique. As far as I 
am aware, they are not used anywhere else as far as letters of 
credit are concerned.
    Normally a supplier of goods under a letter of credit would 
be paid as soon as they presented all of the required documents 
under the letter of credit, which is usually at the point they 
ship the goods. Under this program, no payment is possible 
until the goods have actually arrived in Iraq and been 
inspected and confirmed to be in accordance with the contract.
    Mr. Halloran. So that complicated the process both in terms 
of paper and time?
    Mr. Smith. It complicated the process. It gave us an 
additional amount of paper that we needed to check against the 
shipping documents and the letter of credit.
    Mr. Halloran. In that line of business with your client, 
the United Nations, when does the Bank get paid, based on what 
triggering event?
    Mr. Smith. The Bank basically gets paid for the issuance of 
the letter of credit. There are some associated fees relating 
to pure payments, to SWIFT messages, etc. But the actual fees 
charged under the program really related to the issuance of the 
letters of credit.
    Mr. Halloran. The Oil-for-Food Program was run in phases 
designated by the Office of the Iraqi Program?
    Mr. Smith. It was run in 6-month phases, yes.
    Mr. Halloran. Were there negotiations with the Iraqi 
Government and other entities from phase to phase as the 
program matured, and how did that change the Bank's operating?
    Mr. Smith. As far as the Bank was concerned, the banking 
service agreement was basically extended by the United Nations 
at each stage during the process. To the best of my knowledge, 
during the course of a series of extensions over what 
eventually were 13 phases of the program, there were some 
changes made to the way the business was conducted.
    Mr. Halloran. As the processing or the flow of business 
changed, what kind of capacity did the Bank have to discern 
trends or novelties in the business? For example, it has been 
suggested about phase 8, when Saddam got a little more 
sophisticated about oil vouchers as opposed to directly selling 
to end users, that the roster of those being paid would have 
changed both in quality and quantity, new people and a new 
number of people. Would that have been discernible by the Bank 
and would it have put a red light on the border anywhere for 
any reason?
    Mr. Smith. There was certainly an increase in the volume 
and the complexity of the business that the Bank was handling 
around about phase 8. As far as red flags are concerned, I 
would come back to my statement in that the United Nations was 
the Bank's customer. The United Nations was approving all of 
the counterparties on both the oil and the humanitarian 
contracts. In addition to that, I would remind you that all of 
this business was screened for OFAC purposes and reviewed 
against the various OFAC listings.
    Mr. Halloran. With those safeguards in place, the Bank felt 
confident that its business was being done according to the 
rules. But what can go wrong with a letter of credit? What 
would have sent a bell or red light off in a letter-of-credit 
transaction?
    Mr. Smith. Most of the immediate thoughts that come to mind 
regarding that question are purely from an operational point of 
view in how we check documents, etc., which would not really be 
caused under the program.
    Mr. Halloran. If the recipient of the shipment said this is 
not the quality or quantity of oil I ordered, and there is a 
rejection, the letter of credit is not claimed upon.
    Mr. Smith. The letter of credit is a written undertaking 
that a payment will be made on the presentation of documents 
that are specified within that letter of credit. So a letter of 
credit is constructed so that the buyer of the goods ensures 
that they have the necessary documents to give them the comfort 
that the goods are of the quality they want, of the quantity 
they want, and will be delivered in a timely manner.
    So, for instance, on the oil that was being lifted from 
Iraq, one of the documents that would need to be presented for 
payment would be a chemical analysis of the goods or the oil to 
prove it was of a specific quality. In addition, bills of 
lading confirming the shipment and the quantity of the shipment 
would also be presented, so the protection is in the documents 
which the Bank is dealing with.
    Mr. Halloran. In the course of these transactions, did BNP 
have occasion to be in contact with the Central Bank of Iraq?
    Mr. Smith. The Bank received the initial requests to issue 
letters of credit under the humanitarian program from the 
Central Bank of Iraq. Once those requests were received, they 
were referred to the United Nations, and the United Nations 
would give the approval to issue those letters of credit or 
not.
    As far as the inspection of the documents before payment is 
concerned, there would be no contact with the Central Bank of 
Iraq. The Bank would review those documents, check those 
documents in the same way that it would under any other 
commercial transaction, albeit with the additional documents 
and controls that are included in this program, and make a 
determination whether a payment should be made. If the Bank was 
comfortable that the documents were in order and a payment 
should be made, then we would approach the U.N. telling them 
that we had good documents and we were proposing to make a 
payment. They would confirm that payment.
    Mr. Halloran. The Central Bank of Iraq had no say as to who 
or how much got paid?
    Mr. Smith. That's correct. Once the letter of credit is 
issued, it governs the conditions of payment. As long as the 
correct documents are presented, payment should follow.
    Mr. Halloran. Thank you.
    Mr. Pruniaux, describe a little more, if you could, the 
distinction that is being made in your testimony between 
authentication and inspection. Our perception from both your 
testimony, and other documents, is that it was a process that 
compared paper to paper, sometimes it did not matter what was 
in the truck behind you, and if the documents said the truck 
should contain 50 barrels of something, your obligation was 
fulfilled and you never got to look in the truck; is that 
correct?
    Mr. Pruniaux. Authentication is really matching documents. 
You know that we were present at four sites. The fifth one was 
opened in 2002, but it never really operated. It was at the 
border between Iraq and Saudi Arabia. The documents were 
ordered by U.N. OIP-New York in such a way it provided very 
detailed information on the goods which had been approved and 
for which the letters of approval had been issued. So the 
suppliers would send the goods, the shipments, to Iraq, and we 
would know beforehand that the goods were going to arrive 
through the secure transmission of documents coming from the 
U.N. OIP addressed to each individual site. No one--let me 
phrase it differently.
    The information provided to a certain site was not 
available to the other sites to keep confidentiality. For 
instance, at Trebil where we had most of the traffic, the 
trucks would arrive with containers, and they had to stop. The 
supplier's and the transporter's duty was to come to us and 
tell us, this is the shipment so-and-so, these are the 
references, these are all of the documents; and we would look 
at all these documents and see that they matched the 
information we had received from U.N. OIP.
    Mr. Halloran. When they did not match?
    Mr. Pruniaux. There were three major reasons. Maybe the 
letter of approval had expired because it took more time for 
the goods to arrive in Iraq to be presented at the border. 
Sometimes--and very often the sites are changed, especially 
between Turkey--goods landed in Turkey or Jordan. Very often 
there was substitution in sites. Sometimes the documents were 
incomplete. That was mostly the case in Umm Qasr. So we would 
block in the sense that we would not authenticate, but we had 
no authority and no power to prevent the truck from crossing 
the border and entering into Iraq. The only thing, nobody would 
be paid because we had not authenticated. In such a case we 
would refer these problems to the U.N. OIP and it was up to 
U.N. OIP to discuss with the supplier and find the reason or 
maybe extend the validity of the approval.
    Mr. Shays. Did you know what the outcome was when you would 
disclose these transactions had taken place? Do you know how 
they were resolved? Or once they were passed on to the U.N. 
authorities, it kind of left your hands?
    Mr. Pruniaux. No, I would not know. We would get 
information from U.N. OIP, yes, the approval has been extended, 
it was acceptable that the site be changed and the supplier was 
requested to provide the missing documents. On that basis, on 
that very specific information, requests from U.N. OIP Cotecna 
would authenticate by electronic mail--that was in 2002, but 
before that it was faxed and signed by the team leader on each 
site and it was sent to U.N. OIP so the payment of the supplier 
could be processed.
    Mr. Halloran. In your testimony you say the Iraqi 
ministries complained continuously that the authentication 
process favored the supplier, often claiming they had received 
substandard goods or delivery shortfalls. Iraq frequently 
exerted firm pressure on Cotecna to withhold or retract 
authentication. OIP directed Cotecna to refer all such matters 
to the U.N. What does that mean?
    Mr. Pruniaux. To the U.N. Security Council.
    Mr. Halloran. Where did that get you?
    Mr. Pruniaux. Maybe I misunderstood.
    Mr. Shays. His question is what happened then? What was 
achieved by doing that?
    Mr. Pruniaux. The Iraqi authorities in Umm Qasr, that is 
the place they put us under pressure. The Iraqi authorities 
would complain that we were authenticating goods which were 
sub-quality. We would not get involved in those discussions, as 
long as foodstuffs were fit for human consumption. Now, the 
fact that the Iraqis considered goods were substandard or were 
not exactly what they had ordered was a matter of commercial 
dispute between the supplier and the receiver. In fact, being 
in the business, in the profession, we always told everyone 
that it is normal practice in this kind of business, in 
commercial transactions, to appoint an independent inspection 
company to verify that the goods which are being purchased 
matched the contract, the detailed contract specifications, and 
that was told by the U.N. OIP to the Iraqi authorities to 
implement these kinds of procedures.
    Mr. Halloran. But they chose not to?
    Mr. Pruniaux. They did that occasionally. I would like to 
mention, for instance, that one of the things that Cotecna was 
forbidden, we were forbidden from acting as a commercial 
inspection company providing our services to, of course, the 
Iraqi receivers and, of course, the suppliers. So there would 
be no conflict of interest between the independent inspection 
authentication that we were providing to the U.N. OIP and the 
commercial disputes between a receiver and the supplier.
    Mr. Halloran. That was a provision in your contract with 
the U.N.?
    Mr. Pruniaux. Yes.
    Mr. Halloran. Your testimony also says that one of the 
challenges you faced in executing this contract was that you 
had to navigate Cotecna's delicate web of contacts with U.N.'s 
Office of Humanitarian Coordinator for Iraq. Could you amplify 
on that? There are other references in testimony that 
particular office was a problem in terms of executing this 
program.
    Mr. Pruniaux. I would not say it was a problem. It was a 
delicate, diplomatic way of having to coordinate on a daily 
basis in Iraq because we had from 54 to 67 inspectors living 
and traveling and eating and sleeping in Iraq. You have to 
realize also, to get into Iraq you need a visa to enter the 
territory, and the visas were provided only at the Embassy of 
Iraq in Amman, in Jordan, and if for some reason the visa was 
not granted, the inspectors would be stranded and cannot reach 
their sites. The only way to get some support to clear visas or 
get transportation authorization to travel in Iraq, you needed 
a very specific authorization, and that was provided by the 
Iraqi authorities. The Iraqi authorities for all of these 
problems of logistics and transportation was handled by the 
Office of the Humanitarian Coordinator in UNOHCI in Baghdad.
    Also and more importantly, a lot of complaints came from 
the Iraqis, unjustified and justified, on the behavior of 
certain of our inspectors on things which could have happened 
on some of the sites which have been reported to the Iraqi 
officials, and also complaints on the performance of Cotecna, 
especially in Umm Qasr where we were put under extreme pressure 
to shorten some of the delays that they were experiencing.
    In such case I have to be frank. UNOHCI was adopting a 
rather friendly attitude toward the requests from the Iraqi 
authorities; and this is what I mean, ``problem'' is maybe not 
the right word, but rather a ``delicate.''
    Mr. Halloran. Right. Sounds like a problem to me.
    You also say that you had to deal with direct pressure from 
the Iraqis. What kind of pressure? There is some e-mail traffic 
describing pressure to move things through and not be so 
careful about things. Where did that pressure come from?
    Mr. Pruniaux. From Iraqi officials. We have an example 
which I presented in the documents you have received where it 
was in 1999 there was a minister of I think of Kuwait, who came 
with armored guards to our site in Umm Qasr and told us that we 
would not be authorized to authenticate unless the goods had 
already been accepted in terms of quality by the Baghdad 
laboratories. As we brought in various correspondence which 
appear in the documents, the inspectors were very shaken on the 
ground. So we issued a formal complaint that came to my 
attention in Geneva, and I told the U.N. OIP-New York. But 
there was pressure of these kinds of things.
    Mr. Halloran. What would have been the problem of Baghdad 
checking off on the acceptance of goods?
    Mr. Pruniaux. They would have blocked all authentication.
    Mr. Halloran. Until they got paid first?
    Mr. Pruniaux. Yes, and create a bottleneck so someone would 
have to pay to get the goods cleared by financial gains to the 
Iraqi officials.
    Mr. Halloran. After the Minister of Trade shows up with 20 
or more armed guards and intimidates your crew, how was that 
demand resolved?
    Mr. Pruniaux. Diplomatically or politically I cannot 
respond. I can say technically that problem was solved because 
that did not occur again. However, as I said before, there was 
constant pressure, especially in Umm Qasr, on Cotecna to 
authenticate, in a speedy or in a slow way, so the Iraqi 
officials could exercise some pressure on the suppliers.
    Mr. Halloran. Thank you.
    Mr. Boks, there was an allegation in the Wall Street 
Journal 2 days ago that in the course of one oil transaction a 
Saybolt employee had been bribed to allow a topping-off of the 
ship. The company's response was that it had been investigated 
before. Do you have anything more to say about that?
    Mr. Boks. We have investigated that incident at the time we 
learned of the incident which was in October 2001. At that time 
we conducted a thorough investigation. We went through the 
whole process. We looked at off-loadings. We interviewed the 
team leader. We virtually took all of the events and 
circumstances and we submitted that report of the investigation 
to the United Nations with a briefing also to the 661 
committee.
    What we have now learned from the article in the Wall 
Street Journal actually is for us a new allegation. We had no 
knowledge of that before it was published. You can rest assured 
that we will investigate this further. We will get to the 
bottom of it. Actually, as a matter of fact, our board has 
already instructed our general counsel to get a team of lawyers 
to investigate this to the bottom.
    Mr. Halloran. If you can supply the subcommittee with 
whatever product your investigation produces, that would be 
helpful.
    Mr. Boks. Sure. We will share this with the investigating 
commission.
    Mr. Halloran. The incident of the Essex, which was detained 
and found to have oil loaded in excess of the Oil-for-Food 
Program contract, what changes were made in the Saybolt 
inspection process and the U.N. inspection process as a result 
of that? What confidence do you have that it was effective in 
preventing the practice of topping off?
    Mr. Boks. That evening I heard we took immediate actions 
for temporary reasons to have an inspector sitting 24 hours, 7 
days a week, on board a vessel if it was alongside the 
terminal. Given the staff levels, that was not something that 
we could continue, so we implemented new instructions in terms 
of sealing the ship's manifold after the loading had been 
completed and the loading arms were disconnected. These seals 
would have unique numbers and would be also inserted on the 
notification letter. The notification letter was a letter which 
we put on board with the U.N.-authorized quantity loaded on 
board that specific vessel, actually a procedure that only was 
implemented earlier in 2001.
    In addition to that, we would check the seals prior to 
departure of a vessel because a vessel would not always depart 
immediately after it completed its loadings. So before 
departing, we would check the integrity of the seals. If not, 
we would then remeasure the vessel.
    Other instruction was we would look at the draft of the 
vessel after its completed loading. Draft is, I would say the 
surface of the water and the keel of the vessel. Maximum draft 
is, say, 21 meters, so if a vessel would load with less than 
that, we would take reference of that and also check it prior 
to departure.
    Basically we would also look at potential vessels that 
would still have space after it had loaded its U.N.-authorized 
volume. So if that were the case, special attention would be 
required. Those new instructions have been adopted by the 661 
committee at some stage.
    Mr. Halloran. The calibration of the measuring methods you 
describe in your testimony, of the 2,600 loadings, of those, 
how many were validated by you based on less than the type of 
methods you would have preferred?
    Mr. Boks. You mean did we ever?
    Mr. Halloran. In your testimony you said you would prefer 
to have the calibration and use other indirect methods to 
determine the amount of oil.
    Mr. Boks. The consideration is as follows. When we first 
came to Iraq and we did our fact-finding mission, we came to 
the conclusion there were no properly calibrated metering 
facilities in place. Actually the border station in Zakho did 
not have a metering station so the Iraqis had to cannibalize on 
the Syrian pipeline and build it there within a couple of 
weeks.
    Generally speaking, the metering equipment has never, 
during the whole of the Oil-for-Food Program, became on a level 
which would be able to be used for fiscalisation purposes. So 
all 2,600 loadings have been done by utilizing the methods that 
I have described in my statement.
    Mr. Halloran. In your experience, what is the potential 
margin of error?
    Mr. Boks. That is a very good question. Actually what we 
did was we made a total comparison of all of the volumes we 
lifted from Turkey. In Turkey we had a cross-check possibility 
of measuring prior to loading and after loading, and then the 
volume could be calculated, derived from those two 
measurements. And we did also the ship, applying the vessel 
experience factor, and of the 1.3 billion barrels which were 
loaded from that port, actually we found a surplus even; a 
small surplus of 0.04 percent, which would lead us to believe 
that method was applied very accurately, and, I would say, very 
professionally.
    Mina Al-Bakr was a different story because we could not 
cross-check. We did not have any ability. We only could rely on 
the ship's figures by applying the vessel experience factor. I 
could not give any estimate as to the accuracy of those 
figures. Although I would have to say that the percentages 
would be probably around maximum 2 percent.
    Mr. Halloran. Two percent, OK.
    Finally, for all three of you, what kind of oversight did 
you get on this contract with the U.N. from the U.N.? Were you 
subject to an audit or an inquiry by the Office of Internal 
Oversight at the United Nations, and if so, how often and what 
was the outcome?
    Mr. Smith. The Bank provided daily statements of the U.N. 
Iraq account to the United Nations. They also had copies of all 
of the letters of credit that we were issuing and the 
amendments that were made to those letters of credit and 
details of the payments.
    From that, I understand that there were internal audits 
within the U.N. based on that information. As far as I am 
aware, there was never a physical audit of the Bank or the 
Bank's premises in our conducting of the business.
    Mr. Halloran. But certainly the Bank, through perhaps other 
regulatory channels, had lines of business audited that crossed 
Oil-for-Food transactions?
    Mr. Smith. The Bank in itself had internal audits and 
external audits which included the trade finance area that 
provided the support to the United Nations. Sorry, my answer 
was the United Nations.
    Mr. Halloran. Thank you.
    Mr. Boks.
    Mr. Boks. In terms of audits, from what I know, the U.N. 
has audited us three times in total. At least I have seen three 
times the report; or let me say in two instances we only got a 
requirement to answer a few questions which basically were for 
us very easy to answer.
    In one instance there was done a full audit report of 
which, let us say, there were quite a few comments and we had 
to go through them and answer them point by point, which we 
obviously did.
    Mr. Halloran. Thank you.
    Mr. Pruniaux. Because of the nature of our activities, we 
had almost 24-hour coordination with the U.N. OIP-New York, and 
U.N. OIP would call directly the sites to discuss technical or 
management matters on the sites. However, we were audited 
several times, maybe every 3 to 6 months. One of the senior 
customs officers from the U.N. OIP would go and visit the 
sites, with or without the Cotecna contract manager. We had an 
organization where we had a contract manager based in Amman and 
one working in Geneva working with me. We would go with them or 
without them. As a consequence, we would have meetings, regular 
meetings in New York every 3 months, and meetings also with the 
team leaders in Baghdad or Amman. That was an ongoing exercise 
that we conducted several times.
    Mr. Halloran. Thank you.
    Mr. Shays. I have a number of questions that I would like 
to go through. I don't think that they will take us long to 
answer. Some of them simply may not be relevant in the end, but 
since they are on my mind I want to ask and get them out of my 
brain if they were not relevant.
    Why were transactions carried out in euros instead of 
dollars?
    Mr. Smith. A decision was made part way through the program 
to change the pricing and the settlement of the oil sales from 
U.S. dollars to euros. That decision was made by the Security 
Council of the United Nations.
    Mr. Shays. So it was the Security Council and not Saddam 
Hussein?
    Mr. Smith. The decision was made by the Security Council, 
sir.
    Mr. Shays. What sort of challenges, if any, did this 
present?
    Mr. Smith. In banking terms, the additional challenges were 
minimal. Whatever currency we are dealing with, whether it is 
U.S. dollars or Euro's the process is basically the same. The 
physical payment process is slightly different. But again, it 
is a well-established process.
    Mr. Shays. And the charge that your Bank would make would 
be the standard charge made on every transaction?
    Mr. Smith. Yes. Pricing was agreed based on the 
transactions that were being undertaken on behalf of the United 
Nations.
    Mr. Shays. I am told the bank did not begin an internal 
investigation for the Oil-for-Food Program and allegations of 
the corruption began to emerge in 2001. One, is that true; and 
two, why not?
    Mr. Smith. The Bank undertakes regular reviews of the 
program. If your question relates to the rumors and the stories 
relating to overpricing----
    Mr. Shays. They were rumors that turned out to be true.
    Mr. Smith. Right. From what the Bank could see from the 
details they had from the information that it had, from the 
letters of credit and the documents that were presented, there 
was no evidence that we could see that substantiated anything 
that was happening. We were dealing with documents presented 
under a letter of credit which determined what the amount of 
the payment was, and the payment was basically made to the 
beneficiary or their bankers. Anything that happened outside of 
the letter of credit arrangement, obviously, we had no 
knowledge of at all.
    Mr. Shays. So your company was not really in the field, 
this was more papers crossed your desk?
    Mr. Smith. We were dealing solely with paperwork, and we 
were dealing with it in Manhattan, in New York City.
    Mr. Shays. The bottom line is when there were rumors that 
ultimately turned out to be true, your bank pretty much decided 
that there was not sufficient knowledge to have you conduct 
your own internal investigation?
    Mr. Smith. We would certainly from an operational point of 
view look at whatever rumors were going around. Indeed, quite 
often we would discuss them at what were reasonably frequent 
operational communication meetings with the U.N. treasury, so I 
am aware that the U.N. was also aware of those rumors. At the 
end of the day, it was the Security Council that were 
sanctioning the various transactions.
    Mr. Shays. Did you have a sense, or lack thereof, of 
Saybolt and Cotecna's ability to verify transactions?
    Mr. Smith. We were obviously not on the ground in Iraq, so 
we did not see their operations at all. We were being provided 
with certificates that were required under the letters of 
credit. As far as the Cotecna certificates were concerned, they 
came to us directly from the United Nations, they did not come 
through any direct route. Again, the Saybolt inspections, all 
of the documentation for the payment of an LC relating to an 
oil shipment were presented to us by the United Nations.
    Mr. Shays. Mr. Boks, do you have any reaction, or did you 
have any reaction to the description in the Amman newspaper 
that said there was a Netherland company of SyBolt, S-Y, and 
then capital B-O-L-T, as receiving $3 million in oil? Did that 
get your attention?
    Mr. Boks. Sure. We looked at that. We were puzzled that our 
name appeared on that list because we had not received any 
allocation. That also would have been very unusual. I can say 
Saybolt did not buy or sell oil or vouchers.
    Mr. Shays. Being one in that list of 269, it would make us 
have to question some of the others on that list. In the Essex 
incident which was the illegal topping-off of oil, how were the 
Iraqis punished or censored for this obvious illegality?
    Mr. Boks. I'm sorry, I can't answer that question because 
that is beyond our mandate.
    Mr. Shays. So you don't know?
    Mr. Boks. I don't know.
    Mr. Shays. Your mandate, you basically reported the 
incident?
    Mr. Boks. Well, what happened is a letter was sent by the 
captain of that vessel with corresponding documents to the 
United Nations clearly stipulating what happened during the 
event, and actually said this all happened after the U.N. 
inspectors left the vessel, after they had completed.
    Mr. Shays. How did you respond?
    Mr. Boks. When we received that letter, we took immediate 
action. We changed immediately the working procedures and 
introduced the seals.
    Mr. Shays. Could you describe the Clovely incident?
    Mr. Boks. The Clovely incident was of a different 
magnitude. This vessel was nominated to load in February 2002, 
and when it arrived alongside the terminal, it was very close 
to the expiration of the letter of credit.
    Mr. Shays. I have no sense how long a letter of credit 
lasts.
    Mr. Boks. It was just a matter of days.
    Mr. Shays. Letters of credit give you a window of how much?
    Mr. Smith. It depends on the individual letter of credit. 
Normally the oil letters of credit--and they varied--but 
normally it would be a period of 4 to 6 weeks.
    Mr. Shays. Thank you.
    Mr. Boks.
    Mr. Boks. When the vessel arrived, we noticed, because we 
kept track and record of the expiration date of each individual 
letter of credit so we would make sure that the completion of 
the vessel would fall into that window; otherwise there would 
be problems by, I would say, drawing on the letter of credit to 
get payment for the oil lifting.
    So what we did was basically we instructed our team leader 
to notify SOMO of this event, and that loading would not be 
started until we had received from the U.N. oil overseers a 
revised date or window for the letter of credit.
    That took obviously some time, and irrespective of that, 
the loading master or the Iraqi people on the platform decided 
still irrespective of that problem to start loading the vessel. 
And luckily we were able to get the letter of credit arranged 
prior to the departure of the vessel. But on itself it was 
clearly, I would say, an abuse.
    Mr. Shays. This is for both Saybolt and Cotecna. How did 
the various U.N. offices that you work with coordinate their 
assistance and responses to your needs?
    Mr. Pruniaux. I'm sorry?
    Mr. Shays. Both of you have complained about confusion 
within the United Nations, sometimes a lack of cooperation from 
the U.N. Both of you have said that. I want to know how the 
various U.N. offices that you worked with coordinated their 
interaction with you. Let me ask you this way: How many 
different parts of the U.N. did you need to interact with?
    Mr. Pruniaux. On a daily basis and for technical matters, 
operational matters, it was only the U.N. OIP. However, when 
you negotiate a contract, or if you want to modify the content 
of the contracts----
    Mr. Shays. You're talking about your own contract?
    Mr. Pruniaux. Yes. You have to deal with a completely 
different department or entities at the U.N. One of them is the 
Procurement Department, and, in fact, since I negotiated and I 
signed two contracts and several amendments, all the technical 
work was done with U.N. OIP. But all the rest, the negotiations 
on the financial conditions, that was done with the Procurement 
Department, and sometimes there was a lack of coordination 
between the two departments, which made it difficult for a 
company like Cotecna to fully and properly negotiate. And on 
top of that there was the Office of Legal Affairs.
    Mr. Shays. What affairs?
    Mr. Pruniaux. Office of Legal Affairs.
    Mr. Shays. Legal Affairs.
    Mr. Pruniaux. Yes, which was a very powerful department 
which included several very tough conditions, administrative 
contractual conditions, in our contracts. So, in fact, to 
operate under a contract, we had to work with U.N. OIP, but to 
implement the contract, we had to deal with three separate 
entities. That was in New York.
    Mr. Shays. Yes. Would that describe the same challenge for 
you, Mr. Boks?
    Mr. Boks. To a certain extent I underlined that we had 
similar problems with procurement. If our contract was up for 
renewal, you have--basically when they would not continue it, 
obviously you would need to have that information prior to the 
expiration of the contract. But sometimes the amendment was 
coming after the expiration date, which gave sometimes some 
problems with insurers, because obviously in Iraq, if you want 
to ensure yourself, then you need to make sure that there were 
reasons to be there in a certain country.
    With OIP I must say I haven't had any major difficulties 
other than that we have issues where we asked advice after 
irregularities were noted, and it took sometimes quite some 
time. The other contact points we had was with the U.N. 
overseers, with whom we basically on a daily basis had contact 
concerning the oil export, and here and there obviously delays 
were observed, but not to the extent that it was an unworkable 
situation.
    Mr. Shays. Both of you lacked power, and you lacked 
personnel. In other words, there are just certain things you 
couldn't tell the Iraqis to do. Did you try to get power, and 
did you have your contracts revised so that you could hire more 
people to do the job you needed to do? Mr. Boks.
    Mr. Boks. Shall I start? The staffing levels, the staffing 
levels in the oil program have to a certain extent always been 
sufficient. Where we faced major difficulties was in monitoring 
the spare parts and equipment, which were also purchased under 
the Oil-for-Food Program. When we started, we started with one 
inspector, very modest, because spare parts were ordered but 
came.
    Mr. Shays. You're talking about parts for the oil industry 
itself.
    Mr. Boks. Yes. Perhaps I should elaborate a bit on that.
    In 1998, the Secretary General had been to Iraq, and a 
proposal was made to change the cap of dollars that could be 
generated through a phase would be going up to five----
    Mr. Shays. Greater production.
    Mr. Boks. Exactly. So at the same time, the oil prices were 
very low, and production was very low, so Iraq was not able to 
come up to those proceeds and to come up to that cap. And then 
the Secretary General appointed a group of experts to go to 
Iraq and, in consultation with the Government of Iraq, try to 
find ways of increasing production. We were that group of 
experts. And one of the conclusions as the industry was in an 
amendable state is that spare parts were needed and equipment 
was needed to bring the production up to the levels required. 
And for that purpose, the Security Council decided that they 
would allow Iraq to purchase spare parts and equipment, as long 
as there was a monitoring system that would keep track that 
those spare parts would also be used for their intended 
purpose.
    Mr. Shays. And so that's the area where you could have used 
more people.
    Mr. Boks. Absolutely.
    Mr. Shays. And did you request more people?
    Mr. Boks. Yes. That was on an ongoing basis because we were 
facing also difficulties in terms of the fact that the 
Government of Iraq insisted that our staff would be deployed 
only in Baghdad, and that we had to travel throughout the 
country to check all those sites, and we only had, let's say, 
at the top level, six, seven people.
    Mr. Shays. So the bottom line is you couldn't do the job 
properly with the staff you had.
    Mr. Boks. Well, we had to prioritize.
    Mr. Shays. OK. Did this mean that you then had to take 
people from one part of your program to put it in the other 
part, spare parts? Did you have to kind of cannibalize your 
program?
    Mr. Boks. Given the constraints in traveling, we have used 
mainly in the beginning some staff from Zakho to do in the 
northern part of Iraq also some checks on spare parts and 
equipment for a very short period of time, because his 
traveling was difficult as we were staying in a Kurdish area, 
so it was difficult to travel around.
    Mr. Shays. Let me ask you, Mr. Pruniaux, the whole issue of 
the lack of power, which you have described, and the lack of 
personnel, were both of these a serious problem at various 
times or not?
    Mr. Pruniaux. Mr. Chairman, respectfully, it was not really 
a question of having more power. The specifications of our 
mandate were clear enough for the authentication. There was no 
need to get further--in my opinion, further power, physical 
power, to implement and to do the work that we are doing on the 
sites.
    Mr. Shays. Yes, sir.
    Mr. Pruniaux. However, sometimes because of the 
fluctuations in the volume of goods entering Iraq, or the fact 
that it was that the transporters were moving from one site to 
the other, made the work at certain sites more difficult, 
because all of a sudden we would have almost thousands of 
trucks arriving at Trebil, which was the border between Jordan 
and Iraq, or--and especially Umm Qasr, we would have an 
accumulation of ships and loading and containers being stored 
in the port. In such a case we would immediately try to ask the 
U.N. OIP permission to move staff between sites.
    In that sense we did not have the power to move at our own 
will an inspector from one site to the other. The contract 
specified that we were requested to put a certain number of 
permanent inspectors on a daily basis per site, let's say 12 in 
Trebil. So if you want to move that and do that, you are in 
contradiction with the obligations of the contract. So we had 
to ask permission. And to move an inspector from one place to 
the other in Iraq could take a couple of days, so we would rush 
people to Umm Qasr because there was an accumulation of volume 
in Umm Qasr.
    I must say that in order to have between 54 and 67 
permanent inspectors in Iraq, Cotecna had to hire up to 95 
permanent inspectors because of the rotation and those that are 
sick or going on vacation and so on. And this would be 
illustrated by the statistics that are available at U.N. We had 
more, always more mandates of inspectors especially in places 
like Umm Qasr. For instance, we were requested to have between 
17 and 22 permanent inspectors in Umm Qasr, but we would have 
always 25, 26 all paid by Cotecna.
    Mr. Shays. So sometimes you simply didn't have enough 
people.
    Mr. Pruniaux. Yes.
    Mr. Shays. But was the solution to get more, and did you 
request more, and did the U.N. say no or yes?
    Mr. Pruniaux. It was a question of the decisions and 
convincing the U.N. OIP that it was not to increase our 
invoice, but we were generally asking for more inspectors on 
the sites.
    Mr. Shays. The bottom line is you don't have to worry about 
the U.N. making money off of this. I mean, their 3 percent, I'm 
assuming, helped pay your costs; is that right? Does anyone 
know? In other words, who paid you?
    Mr. Pruniaux. The U.N.
    Mr. Shays. And they took a fee for----
    Mr. Pruniaux. From the 2.2 percent.
    Mr. Shays. Right. There is nothing that we have seen so far 
that makes us think that they didn't cover their cost plus; in 
other words, they made money off of this.
    Would you say the U.N. sided more with your side when there 
was a dispute with the Iraqis or the Iraqis? Did they tend to 
dismiss--and I am asking both of you this. This isn't a trick 
question. At the end of the day, did you often feel that you 
lost more arguments with the United Nations, they just more or 
less sided with the Iraqis, or did they more or less side with 
you? I am asking both of you. Do you understand the question?
    Mr. Boks. Would you ask it----
    Mr. Shays. In other words, when you had a dispute with some 
transaction, and you contacted the U.N. officials with some 
disappointment, did they tend more to dismiss it and just say, 
you know, don't worry about it, or did they take your complaint 
very seriously and try to deal with it?
    Mr. Pruniaux. As far as Cotecna is concerned, they took it 
very seriously, very seriously, because they had the permanent 
missions to the U.N. from all the countries exporting to Iraq 
and back, plus they had the suppliers coming there and so on. 
And there was until 2002 until there was----
    Mr. Shays. Well, taking it seriously means they paid 
attention to. It doesn't mean they took your position though. I 
mean, in other words, they realized they had something they had 
to deal with, so they dealt with it seriously. I don't want to 
put words in your mouth. Did they basically say you all were 
right, and they were wrong, and what was your feeling?
    Mr. Pruniaux. Ultimately somebody had to make a decision, 
and they told us to do the job with the number of people that 
you have, and that's it. So we tried to work under these 
conditions.
    Mr. Shays. Mr. Boks.
    Mr. Boks. And in terms of disputes, the U.N. would take it 
serious if--we have hardly had any disputes, but we have had 
loadings where the off-takers were dissatisfied for one or 
another reason. And I must say that OIP did try to come to a 
solution; not always, I would say, in a quick way, but at the 
end of the day, they always tried to solve and to assist.
    Mr. Shays. The number that is thrown out in these two sides 
of the equation, the Oil-for-Food Program suspected that Saddam 
basically took out $4.4 billion, and the smuggling, which we 
looked at the numbers being more like $5.7 billion. Did your 
inspectors ever identify or observe any smuggling?
    Mr. Boks. Although we had not the authority to look for 
smuggling, and we also have to realize that our inspectors were 
at very remote locations, we have----
    Mr. Shays. In other words, there were a lot of sites were 
you not at?
    Mr. Boks. Absolutely. More than that we were. But we have--
--
    Mr. Shays. There were more sites that you weren't at than 
you were at.
    Mr. Boks. Absolutely.
    Mr. Shays. OK. Is that true for you, Mr. Pruniaux, as well?
    Mr. Pruniaux. Well, we operated on the four or five sites. 
As I explained before, we were told that the goods were 
presented to us. But there was a permanent flow of goods 
entering into Iraq which had nothing do with the Oil-for-Food 
Program. And I visited Iraq several times, Mr. Chairman, and it 
could be--it was easy to see that, you know, visiting Baghdad 
there was plenty of goods which shouldn't have been on the open 
market.
    Mr. Shays. OK. So in observing smuggling, if you saw it, 
did you report it, or did you figure that wasn't your 
responsibility?
    Mr. Boks. Well, basically I can say that we have had 
instances that I felt that we had to report it, and I realized 
that was outside our mandate, but still felt that it had to be 
brought to the attention.
    Mr. Shays. Right. Mr. Pruniaux, tell me the response to 
that question.
    Mr. Pruniaux. When you see goods entering Iraq outside of 
the Oil-for-Food Program, you do not know if these are the 661 
goods or if these are smuggled. These were entirely left to the 
authority of the Iraqi Customs to check these goods entering 
Iraq. No, we would not report, because we did not know what 
kind of goods these were.
    Mr. Shays. What I see the difference is that in the Oil-
for-Food Program, the oil part of the transaction, it seems to 
me, is a little easier to have policed. But if a ship came up 
and loaded up, that was something that you would simply step 
in. I mean, you weren't going to allow that kind of smuggling, 
correct?
    Mr. Boks. Well, it wasn't always ships, but at some states 
we also----
    Mr. Shays. It could be a truck.
    Mr. Boks. We learned obviously there was traffic to Jordan, 
although that was more or less of an acceptable phenomena, and 
we have reported in our fact-finding missions that volumes were 
estimated at 80,000 barrels a day. But we also have seen the 
fact that had been used in early 2003, and we reported that to 
both the Multilateral Interception Force as well as the United 
Nations.
    Mr. Shays. So there would be some ships, though, that you 
would not have inspected, correct?
    Mr. Boks. Sure. But if they were loaded at a different 
terminal, we would not have staff available to do that.
    Mr. Shays. I mean, you know, that's kind of significant, 
how many terminals were you at versus how many terminals exist.
    Mr. Boks. Well, you had not only terminals. We have to make 
a distinction here. You have the pipeline to Syria. You have 
trucks to Turkey, trucks to Jordan. You had vessels in the 
Arabian Gulf, which were loaded at the Shatt al-Arab, which 
basically--and then we had also a terminal 10 kilometers north 
of Mina Al-Bakr called Khor al-Amaya. Those were, I would say, 
the points that activity has been observed, not by us, but by 
others.
    Mr. Shays. Why didn't Cotecna operate inspectionsites in 
neighboring countries as Saybolt did? Let me say it again. 
Saybolt had inspectionsites in neighboring countries; is that 
correct, Mr. Boks?
    Mr. Boks. We had one inspectionsite in Turkey.
    Mr. Shays. Right. And why were you in Turkey?
    Mr. Boks. Well, as a matter of fact, Iraq had from the 
beginning onwards two export points. One in the south we talked 
about. But the crude oil which was produced in the north was 
transshipped through the Iraq-Turkey pipeline to Ceyhan. And in 
Ceyhan there was a terminal, there is a terminal where that 
crude oil is stored and loaded subsequently in vessels which 
then proceed through the Mediterranean.
    Mr. Shays. Now, why wouldn't you have been in Syria then? 
If you were in Turkey, why wouldn't you have been in Syria?
    Mr. Boks. Well, that's an interesting question. I can't 
answer that. That is not up to me. It's beyond----
    Mr. Shays. No. I understand it's not up to you, but the 
same logic that would apply that you should be in Turkey would 
apply, correct, that you should be in Syria as well, correct?
    Mr. Boks. Correct. We discussed that also at some states 
with OIP, that whether there could be coming a mandate to 
inspect also the Syrian part. But it was obviously up to the 
Security Council.
    Mr. Shays. And their response was?
    Mr. Boks. Well, again, that there was no mandate. Obviously 
Iraq has subsequently said that they were testing the pipeline.
    Mr. Shays. Well, I mean, that's absurd. I mean, what we are 
basically saying is that there was a very viable pipeline 
through Syria, very viable pipeline through Turkey. We were 
inspecting the pipeline through Turkey, and we were not 
inspecting the pipeline through Syria. And I just would like to 
have a sense of why. They had to give you some answer.
    Mr. Boks. It is an interesting subject. But having said 
that, if we would not have the authority, we couldn't do it, 
and the authority had to come from the Council.
    Mr. Shays. Let me just say this to you. You're cleared of 
all responsibility, so you can relax. But what you're doing is 
you're educating the subcommittee. I want to know what they 
would have said. I mean, it is a rather porous system that 
would--I mean, I have wondered how the smuggling could happen, 
and I didn't realize that we made it so easy. You must have had 
just general conversations with U.N. officials. Did they give 
you a logical reason as to why we wouldn't want you also to be 
in Syria?
    Mr. Boks. What I heard is that it has been discussed also 
merely during meetings of the 661 committee, and there was no 
agreement reached as to how to proceed on that.
    Mr. Shays. An agreement required a unanimous consent. It's 
kind of like the Senate in Washington, which doesn't give me 
any comfort.
    We're almost done here, gentlemen. And thank you very much.
    How often, Mr. Pruniaux, did goods avoid or ignore the 
authentication or inspection process? How often did you 
actually inspect goods? I get the feeling, given your mandate, 
given your personnel, that when ships lined up, when trucks 
lined up, you were more inspecting the paperwork than actually 
opening up the containers.
    Mr. Pruniaux. Yes. It mattered to match the documents and 
to authenticate. There are two things in your question.
    Mr. Shays. No, that is your mandate. The mandate was to 
match the papers, not verify that was what was in the container 
verified the papers.
    Mr. Pruniaux. It was left to our appreciation as a 
professional inspection company to inspect, which means to 
open, for instance, the containers, or to open the trucks, 
talking of the land border sites. Now, in such a case, normal 
practice is about 2 percent, sometimes 5, 6 percent, 5, 6 
percent. What we did was on an average basis was about 10 
percent of the number of trucks or containers being presented 
to us were opened, and I have provided some pictures to 
illustrate this.
    Mr. Shays. But candidly, when there was the queuing up and 
a backlog, there was more pressure on you.
    Mr. Pruniaux. Then the trucks would wait. No.
    Mr. Shays. The trucks would wait.
    Mr. Pruniaux. No. The trucks would wait. The drivers are 
educated. I mean, patience is a virtue in the Middle East, and 
they would just wait at the border.
    Mr. Shays. Patience is a virtue. So can I infer from that 
when there was pressure to--a backlog, that did not impact 
your--quality of the work.
    Mr. Pruniaux. No.
    Mr. Shays. Well, here's the general feeling I get from your 
testimony, and I want you to tell me whether you agree or 
disagree. Mr. Smith, I get the sense that BNP basically 
believed--and I'm not passing judgment on this, I'm just saying 
what I believe--that your responsibility was to check 
documents. You were basically Iraq's bank selected by the 
United Nations, correct?
    Mr. Smith. We were the U.N.'s bank, in our opinion, 
maintaining an account for the United Nations, which was styled 
the Iraq account.
    Mr. Shays. OK. And I'm happy you're correcting me. You were 
the U.N.'s bank for Iraq, for Iraqi transactions.
    Mr. Smith. That's right.
    Mr. Shays. Dollars came in from the sale of oil, and 
dollars flowed out for the purchase of commodities, and that 
your responsibility was to make sure that--and you were giving 
letters of credit to make sure that this would all happen. But 
ultimately, your responsibility was to make sure that the 
paperwork matched. Is that a fair assessment of what I've heard 
you say?
    Mr. Smith. Our responsibility was to ensure that all of the 
paperwork was in accordance with the letters of credit before 
we made any payments.
    The one additional point I would add in there, that not all 
of the funds that were received for the sale of the oil were 
retained at BNP Paribas. A minimum of 41 percent, as I 
explained in my opening statement, was transferred away to 
another bank, the U.N.'s main bank, Chase Manhattan, because 
BNP Paribas was only involved in the part of the humanitarian 
program that affected the central and southern provinces of 
Iraq.
    Mr. Shays. Oh, the Kurdish area was not.
    Mr. Smith. The Kurdish area was within the funds that we 
moved to Chase Manhattan.
    Mr. Shays. OK. As long as your paperwork matched, then the 
transactions took place.
    Mr. Smith. Yes. Basically we were making payment against 
the letter of credits that we had issued on the U.N.'s behalf.
    Mr. Shays. OK. And with you, Mr. Boks, and you, Mr. 
Pruniaux, what I sense is a different challenge. With you, Mr. 
Pruniaux, you had lots of different commodities to check. You 
had ports, plus you four transaction points there. You were 
inspecting trucks, you were inspecting ships, but you were 
primarily processing paper. You weren't taking a good look at 
every--you were not able to verify whether or not the paperwork 
matched what was actually potentially in a ship or in a truck; 
is that correct?
    Mr. Pruniaux. We were able to do that. Sometimes, as I 
mentioned before, there were pressures because of the volumes 
or for outside reasons, like the Iraqis trying to put pressure 
on us. But, no, we had IT technicians. The operations that we 
carried was a combination of physical inspections, as I said, 
10 percent or systematic sampling of foodstuffs.
    Mr. Shays. It was sampling of the cargo. It was a sample of 
it.
    Mr. Pruniaux. Of the food basket only, and for which we had 
to do 100 percent laboratory analysis. But it was a 
combination, as I said, of physical inspections, matching 
documents, and receiving and keying data and processing these 
data on these documents and sending them to New York. So the 
sites were busy 24 hours per day.
    Mr. Shays. But your testimony before the subcommittee was 
you didn't have enough people to do your job.
    Mr. Pruniaux. On a case-by-case basis, not on a permanent 
basis. And that was especially, as I mentioned in my 
testimony--it was specially hard in 2001. And as a request 
there was an increase, I believe, when we were operating in Umm 
Qasr at--when there was this peak at the end of 2002, 2001, at 
the beginning of 2001, we had the total of 62--no, 57 permanent 
inspectors. And that was the following contract which was won 
again by us covered additional five inspectors for Umm Qasr.
    Mr. Shays. In both cases, neither of you were at all the 
sites that you needed to be in order to see all transactions, 
which enabled smuggling to take place.
    Mr. Pruniaux. That was not our duty.
    Mr. Shays. I'm not saying it's your duty. I'm just saying 
that you were not at all the potential sites of transaction, 
either for oil or for commodities; is that correct?
    Mr. Pruniaux. All the 986, all the Oil-for-Food 
transactions across the border, and we all authenticated them.
    Mr. Shays. What's that?
    Mr. Pruniaux. All transactions under the Oil-for-Food 
Program crossed the border. Those which crossed the border and 
we authenticated them.
    Mr. Shays. Right.
    Mr. Pruniaux. There was nothing else for us to do but just 
to look for the----
    Mr. Shays. You only looked for the Oil-for-Food 
transactions.
    Mr. Pruniaux. Yes. Absolutely.
    Mr. Shays. All the other transactions you did not look at.
    Mr. Pruniaux. No. We did not know.
    Mr. Shays. And that's the case with you, Mr. Boks?
    Mr. Boks. That's correct. We were at the authorized export 
points, and, yes, that was about it.
    Mr. Shays. I'm sorry to keep you a little longer, but I 
just need to ask you this one other area. When he undersold his 
oil, did you have any responsibilities to deal with that issue? 
In other words, were there questions raised when he would sell 
oil for below market price because the U.N. approved it, that 
was good enough? In other words, I mean, any thinking person 
would wonder why would he undersell for oil. Did that raise 
questions in your mind? He undersold his oil. He sold it for a 
price below market.
    Mr. Boks. Well, obviously we didn't have anything to do 
with the transfers of money. Pricing was not----
    Mr. Shays. A factor. You just looked at buying. When he 
offered to pay for commodities, you didn't look at pricing 
either.
    Mr. Pruniaux. No, not at all.
    Mr. Shays. OK. Let me conclude by asking you, each of you, 
which is the weakness of the program? What was the greatest 
weakness of the program? Tell me, each of you, what you think 
the greatest weakness in the program from your perspective? I 
will start with you, Mr. Smith. If you were designing the 
program, what would you have designed differently to make sure 
there weren't the rip-offs that we know took place?
    Mr. Smith. As I said in my opening statement, from a 
banking perspective, I think the structure was right. From the 
program as a whole, more control was required over the 
procurement process and the pricing process.
    Mr. Shays. Mr. Boks.
    Mr. Boks. Yes. That is something I can't comment on, but I 
would say that the unauthorized export points, Syria came on 
line obviously in a much later stage than the inception of the 
programsm. But I think that is obviously a shame that it 
happened.
    Mr. Shays. Thank you.
    Mr. Pruniaux.
    Mr. Pruniaux. Well, Cotecna has contracts worldwide for the 
control of borders and especially provide services to the 
Customs of various countries in the world. When I say provide, 
it means really sometimes we replace the Customs or we control 
the Customs.
    Now, the Oil-for-Food Program and the authentication was 
something totally different, as I mentioned at the very 
beginning. If a comprehensive program had been designed even 
for the Oil-for-Food Program, it should have covered or it 
could have covered the various sectors of a complete control of 
imports, which is the price verification, the quality, quantity 
and so on. But that was not written. That was not requested in 
our mandate.
    Mr. Shays. You all have been extraordinarily patient, and I 
think you have changed your schedules, and you have had to stay 
later than even I thought would happen. And you have been very 
cooperative with us. You have tried to be, I think, 
extraordinarily helpful, which is a credit to all three of you 
and to your companies, and I thank you for that.
    Is there anything that you want to put on the record before 
we adjourn? Anything that you think needs to be on the record 
before we adjourn?
    Gentlemen, thank you very much. This hearing is adjourned.
    [Whereupon, at 4:45 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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