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+ - THE U.N. OIL FOR FOOD PROGRAM: CASH COW MEETS PAPER TIGER
+
+[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
+
+ [GRAPHIC] [TIFF OMITTED] T0052.010
+
+ [GRAPHIC] [TIFF OMITTED] T0052.011
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+
+ [GRAPHIC] [TIFF OMITTED] T0052.016
+
+ 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:]
+
+[GRAPHIC] [TIFF OMITTED] T0052.017
+
+[GRAPHIC] [TIFF OMITTED] T0052.018
+
+[GRAPHIC] [TIFF OMITTED] T0052.019
+
+[GRAPHIC] [TIFF OMITTED] T0052.020
+
+[GRAPHIC] [TIFF OMITTED] T0052.021
+
+[GRAPHIC] [TIFF OMITTED] T0052.022
+
+ 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:]
+
+[GRAPHIC] [TIFF OMITTED] T0052.023
+
+[GRAPHIC] [TIFF OMITTED] T0052.024
+
+[GRAPHIC] [TIFF OMITTED] T0052.025
+
+[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:]
+ [GRAPHIC] [TIFF OMITTED] T0052.027
+
+ 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:]
+
+ [GRAPHIC] [TIFF OMITTED] T0052.028
+
+ [GRAPHIC] [TIFF OMITTED] T0052.029
+
+ [GRAPHIC] [TIFF OMITTED] T0052.030
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+ [GRAPHIC] [TIFF OMITTED] T0052.031
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+ [GRAPHIC] [TIFF OMITTED] T0052.032
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+ [GRAPHIC] [TIFF OMITTED] T0052.033
+
+ 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:]
+
+[GRAPHIC] [TIFF OMITTED] T0052.412
+
+[GRAPHIC] [TIFF OMITTED] T0052.413
+
+[GRAPHIC] [TIFF OMITTED] T0052.414
+
+
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+