| | Public Sector Governance
Corruption Investigations
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Transparency International Looks at International Soccer Scandals (TI)
As the big clubs of European football take to the field this August, the crisis at the heart of world football continues to fester. The controversies that shadowed the decision on which countries would host the 2018 and 2022 World Cups and the presidential elections of football's world governing body FIFA have not gone away. Although fans are once again captivated by the action in the stadiums, FIFA's focus this season must be to demonstrate its commitment to fair play both on and off the pitch.
Sport not only affords billions of people a chance to have fun and keep fit, but also sets a positive example on the importance of rules, fair play and respect. As the world's most popular sport, football has a special opportunity to spread these values among its many fans, players, clubs and institutions. If FIFA takes steps to enhance integrity, that good practice can have global reverberations.
We have drawn up recommendations to help FIFA undertake fundamental change and regain trust in the aftermath of recent controversies. The recommendations draw on our long experience in advising governments, businesses and organisations that seek to be more accountable, as well as tools we’ve developed to strengthen organisational integrity and reduce opportunities for corruption. Taken together, these approaches can bring more transparency to world football.
FIFA is facing a crisis of integrity, with current corruption allegations surrounding the organisation’s recent presidential election and the selection of host countries for FIFA’s most high-profile event, the World Cup.
On 23 July, FIFA’s Ethics Committee suspended one member of its Executive Committee, Mohammed Bin Hammam, over allegations of bribery ahead of the 1 June 2011 FIFA presidential elections, in which he was a candidate. Another member of the Executive Committee resigned before his role in the allegations was examined. An investigation into which members of the FIFA Congress – encompassing representatives of all 208 national football federations – accepted or were offered bribes has just been started.
Bribery allegations have also been reported regarding several other senior FIFA figures, related to the selection of host countries for the 2018 and 2022 football World Cups. Two then active members of the Executive Committee were suspended in November 2010, as well as two former members of the Executive Committee and two other officials.
To respond to all these allegations – new ones as well as old ones – in an adequate way and to convince the public that FIFA is really willing to change will not be possible without outside oversight.
Transparency International recommends that FIFA accept a group made up of representatives of various groups with a stake in the game that can oversee reforms such as:
- Tackling all outstanding corruption allegations in a sufficient manner through an independent investigation led by a professional firm
- Establishing clear rules for dealing with future allegations of corruption, including whistleblower protections, empowering the Ethics Committee to launch investigations in the future, and publishing lists of breaches and sanctions
- Reviewing FIFA’s code of ethics and organisational structure, and introducing new procedures that ensure transparency and good governance:
- term limits for senior positions
- a conflict of interest policy
- having external figures sit on committees where there are corruption risks, such as the Ethics Committee or committees selecting World Cup host countries
- Expanding reporting beyond financial data to include implementation of anti-corruption policies.
How can we be sure that an organisation’s commitment to transparency and accountability will lead to action? An oversight group made up of multiple stakeholders can serve both as a witness that genuine change is taking place and as a powerful defence for an organisation that faces accusations or distrust. Such a group can take different views into account, give a voice to all those who have a stake in the sport and dramatically reduce opportunities for misconduct.
The multi-stakeholder group would advise, not answer to FIFA, and should be composed of figures of unquestionable integrity, such as people with good governance experience from the private sector, civil society and international organisations. It should also include representatives of the world of football such as federations, professional clubs/leagues, FIFA sponsors, players, referees, women’s football and supporters. The composition, as well as the scope and approach of the multi-stakeholder group, need to ensure its independence from FIFA.
FIFA faces unique challenges as a non-governmental, not-for-profit organisation under Swiss private law with a huge turnover (US$ 1.29 billion revenue and US$ 1.09 billion expenses in 2010) comparable to a large global company. Each step will require innovation and the multi-stakeholder group will be crucial in bringing expertise from different fields into the process.
This type of oversight group is much like parliamentary enquiries that are often formed to respond to political scandals, but there are also examples in the world of sport and commerce. The International Olympic Committee created a reform panel in 2000 and endorsed nearly 50 of its recommendations for reshaping the organisation in the wake of the bribery scandal that surrounded the selection of Salt Lake City as host of the 2002 Winter Olympics.
Defence and aerospace firm BAE Systems appointed a former judge to delve into its operations following a corruption scandal, and agreed to abide by whatever outcome was recommended in the resulting 2008 Woolf Report.
The Partnering Against Corruption Initiative, driven by World Economic Forum and including leading multinational companies from the extractive and construction sectors, commits companies to a zero-tolerance policy on bribery and the development of a programme to make that commitment a reality.
Similarly, entire sectors have come together to make commitments to greater integrity, transparency and oversight. Oil, gas and mining companies have joined governments in disclosing payments for exploration and production rights under the Extractive Industries Transparency Initiative (EITI). Under the initiative, governments from 35 resource-rich countries have published revenues from oil, gas and mining firms, who in turn publish their payments to governments.
Transparency International has a track record of working with other bodies to facilitate integrity initiatives. One broad example is the UN Global Compact, with some 8000 participants including 6000 companies making it the world’s largest corporate citizenship and sustainability initiative. Transparency International worked with the Global Compact to develop and jointly publish anti-corruption guidelines to assist Global Compact participants in reporting on their commitments to the 10th Global Compact principle on corruption.
The guidelines were prepared by a task force co-chaired by Transparency International and comprising businesses, NGOs and anti-corruption experts, and were successfully field tested by 19 multinational organisations around the world.
Transparency International’s goal in working with the private sector is to change company behaviour by developing and raising the standards of practice in countering bribery. Since their initial publication in 2003, the Business Principles for Countering Bribery have been used by many leading companies around the world to benchmark their own anti-bribery policies and procedures.
Our Integrity Pacts are another tool for combating bribery. These pacts use independent experts or civil society groups to oversee anti-corruption accords in which public officials and companies bidding on a public tender sign up to a legally binding no-bribe agreement, with sanctions for any who breaks it.
The most recent example of an Integrity Pact comes from Kenya, where the Mombasa Water and Sewerage Company committed to improve communication, reporting, and billing systems with the public, and to have their performance monitored by civil society in a pact supported by Transparency International. Read a blog post about this first-of-its-kind pact.
In the past 10 years, Integrity Pacts have resulted in the increased accountability of public resources in hundreds of contracts in more than 15 countries, from natural resources to water and sanitation companies. Integrity Pacts are also well suited to the construction sector, as exemplified by the case of Berlin’s new international airport, and can therefore be effective in countries upgrading their infrastructure in preparation to host the FIFA World Cup, such as Brazil.
Posted 08/22/2011
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GLOBAL WITNESS ASKS:
Côte d’Ivoire: is cocoa money propping up Gbagbo regime?
Companies exporting from Côte d’Ivoire must publish information on taxes paid into the country’s cocoa sector, and respect the temporary ban on exports announced this week by president-elect Alassane Ouattara, said Global Witness today. The embargo comes amid fears that the incumbent Laurent Gbagbo – who refuses to recognise Ouattara’s November election victory – is using cocoa money to preserve his grip on power.
Global Witness’s 2007 report, Hot Chocolate, exposed how money from the international cocoa trade had financed both rebels and government loyalists in the country’s civil war from 2002-03. The rebels continue to control the north of the country, with Gbagbo loyalists – who rejected Ouattara’s November electoral victory – ruling over the south. Concerns about the cocoa sector have not gone away, and there are now concerns that Gbagbo may now be using the industry to finance his activities, as fears grow that the country could see a return to war.
The EU has imposed sanctions on Mr Gbagbo and his allies following reports of systematic killings of groups considered loyal to Mr Ouattara. However, he was until recently able to access Ivorian state funds held at the Central Bank of West African States (BCEAO). The governor of the BCEAO was forced to quit last week after reportedly allowing Gbagbo’s government to withdraw at least $140m from state coffers(1).
Mr Ouattara’s ban on exports is an attempt to restrict the cash flow to Mr Gbagbo and his supporters.
“The army’s loyalty allows Gbagbo to maintain his stranglehold on the Ivorian state, and it needs to be paid,” said Daniel Balint-Kurti, Campaigner at Global Witness. “Cocoa taxes have long been a major source of funds for his regime, and there’s a danger money stolen from the sector is being used to fund the militias now terrorising parts of the population.”
In December 2010, Global Witness wrote to several cocoa companies to make them aware of our concerns that their payments could be diverted and ask what policies they have in place to prevent this. We are awaiting their reply.
"Companies should now respect the ban and immediately publish the taxes and levies they have paid on cocoa, so that this money can be properly traced," added Balint-Kurti.
Posted January 27, 2011.
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UNESCO executive should cancel Obiang Prize at October Meeting
Global Witness posts letter of protest from intrernational civil society coalition
The United Nations Educational, Scientific, and Cultural Organization should cancel definitively the Obiang Prize at its next session in October 2010, demanded a coalition of 96 civil society groups from 6 continents, including 25 from Africa, said in a letter sent to UNESCO Executive Board members today.
In June UNESCO agreed to delay the proposed $3 million UNESCO-Obiang Nguema Mbasogo International Prize for Research in the Life Sciences. Now, the civil society groups want UNESCO to draw a close on the issue and they noted in their letter, “A prize in President Obiang's name or supported by money provided by him offends the very standards and goals UNESCO promotes," the organizations said in their letter.
The letter stressed that the President Obiang’s government in Equatorial Guinea “has been roundly condemned for its abuse of human rights, including the systematic use of torture in detention documented by the UN special rapporteur on torture. It is equally notorious for its control of the press; official prepublication censorship, as well as self-censorship resulting from ongoing monitoring and pressure on journalists and media outlets, denies people basic information about their government’s functioning. The Obiang government’s reputation for corruption is supported by findings of several foreign government investigations. Despite Equatorial Guinea’s vast wealth from natural resources—which gives it the highest per capita GDP in Sub-Saharan Africa—it has shockingly low health and development indicators, on par with some of the poorest countries in the region and world. Moreover, UNESCO noted in its 2010 “Education for All” report that, while most countries have improved access to education, Equatorial Guinea’s net primary school enrollment rates declined, from 89 percent in 1999 to 67 percent in 2007.”
The letter added, "We strongly encourage you to use this time of consultation to reform the prize establishment process generally, so that any prize inconsistent with UNESCO's mission-including its work to promote human rights-cannot go forward….By rejecting this ‘dictator prize' and making sure that the funds are better used, UNESCO can uphold the principles in its mandate and help the people of Equatorial Guinea at the same time."
Earlier this year a U.S. Senate committee published a report on dealings involving Mr. Teodoro Obiang, the 40-year old son of the President of Equatorial Guinea, who is currently under investigation by the U.S. Justice Department for corruption and other misconduct. The report alleged that between 2004 and 2008, Mr. Obiang used U.S. lawyers, bankers, and real estate and escrow agents to move more than $110 million in suspect funds through U.S. bank accounts, including $30 million to purchase a residence in Malibu and $38.5 million to purchase an aircraft.
The report from the Senate’s Permanent Subcommittee on Investigations stated that Mr. Obiang used shell company, attorney-client, and law office accounts controlled by his attorneys to bring suspect funds into the United States and conduct transactions through U.S. banks without their knowing of his activity, including at banks that had made it clear they did not want his business. Further, the report said an escrow agent who refused to complete the purchase of a $38.5 million Gulfstream jet without information on the source of the funds being supplied by Mr. Obiang, lost out to a competitor willing to complete the transaction with no questions asked.
Posted 12/08/2010
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WHY THE SECURITIES AND EXCHANGE COMMISSION FAILED TO UNCOVER BERNARD MADDOFF'S PONZI SCHEMES - INVESTIGATION SHOWS MASSIVE FAILURES, BUT ENDS RUMORS THAT MADOFF FAMILY CONNECTIONS WERE KEY
REPORT OF INVESTIGATION BY The OFFICE of the Inspector General (OIG) of the Securities & Exchange Commission – the SEC’s Failure in Uncovering Bernard Madoff’s Ponzi Scheme
From the Executive Summary
The OIG investigation did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff Investment Securities, LLC (BMIS) had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work. The OIG also did not find that former SEC Assistant Director Eric Swanson's romantic relationship with Bernard Madoffs niece, Shana Madoff, influenced the conduct of the SEC examinations of Madoff and his firm. We also did not find that senior officials at the SEC directly attempted to influence examinations or investigations of Madoff or the Madoff firm, nor was there evidence any senior SEC official interfered with the staffs ability to perform its work.
The OIG investigation did find, however, that the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed. The OIG found that between June 1992 and December 2008 when Madoff confessed, the SEC received six! substantive complaints that raised significant red flags concerning Madoff’s hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading. Finally, the SEC was also aware of two articles regarding Madoffs investment operations that appeared in reputable publications in 2001 and questioned Madoffs unusually consistent returns.
The first complaint, brought to the SEC's attention in 1992, related to allegations that an unregistered investment company was offering "100%" safe investments with high and extremely consistent rates of return over significant periods of time to "special" customers. The SEC actually suspected the investment company was operating a Ponzi scheme and learned in their investigation that all of the investments were placed entirely through Madoff and consistent returns were claimed to have been achieved for numerous years without a single loss.
The second complaint was very specific and different versions were provided to the SEC in May 2000, March 2001 and October 2005. The complaint submitted in 2005 was entitled "The World's Largest Hedge Fund is a Fraud" and detailed approximately 30 red flags indicating that Madoffwas operating a Ponzi scheme, a scenario it described as "highly likely." The red flags included the impossibility of Madoffs returns, particularly the consistency of those returns and the unrealistic volume of options Madoff represented to have traded.
In May 2003, the SEC received a third complaint from a respected Hedge Fund Manager identifying numerous concerns about Madoffs strategy and purported returns, questioning whether Madoff was actually trading options in the volume he claimed, noting that Madoffs strategy and purported returns were not duplicable by anyone else, and stating Madoffs strategy had no correlation to the overall equity markets in over 10 years. According to an SEC manager, the Hedge Fund Manager's complaint laid out issues that were "indicia of a Ponzi scheme."
The fourth complaint was part of a series of internal e-mails of another registrant that the SEC discovered in April 2004. The e-mails described the red flags that a registrant's employees had identified while performing due diligence on their own Madoff investment using publicly-available information. The red flags identified included Madoffs incredible and highly unusual fills for equity trades, his misrepresentation of his options trading and his unusually consistent, non-volatile returns over several years. One of the internal e-mails provided a step-by-step analysis of why Madoff must be misrepresenting his options trading. The e-mail clearly explained that Madoff could not be trading on an options exchange because of insufficient volume and could not be trading options over-the-counter because it was inconceivable that he could find a counterparty for the trading. The SEC examiners who initially discovered the emails viewed them as indicating "some suspicion as to whether Madoff is trading at all."
The fifth complaint was received by the SEC in October 2005 from an anonymous informant and stated, "I know that Madoff [sic] company is very secretive about their operations and they refuse to disclose anything. If my suspicions are true, then they are running a highly sophisticated scheme on a massive scale. And they have been doing it for a long time." The informant also stated, "After a short period of time, I decided to withdraw all my money (over $5 million)."
The sixth complaint was sent to the SEC by a "concerned citizen" in December 2006, advising the SEC to look into Madoff and his firm as follows:
Your attention is directed to a scandal of major proportion which was executed by the investment firm Bernard L. Madoff.... Assets well in excess of$10 Billion owned by the late [investor], an ultra-wealthy long time client of the Madoff firm have been "co-mingled" with funds controlled by the Madoff company with gains thereon retained by Madoff.
In March 2008, the SEC Chairman's office received a second copy of the previous complaint, with additional information from the same source regarding Madoff's involvement with the investor's money, as follows:
It may be of interest to you to that Mr. Bernard Madoff keeps two (2) sets of records. The most interesting of which is on his computer which is always on his person.
The two 2001 journal articles also raised significant questions about Madoff's unusually consistent returns. One of the articles noted his "astonishing ability to time the market and move to cash in the underlying securities before market conditions turn negative and the related ability to buy and sell the underlying stocks without noticeably affecting the market." This article also described that "experts ask why no one has been able to duplicate similar returns using [Madoff's] strategy." The second article quoted a former Madoff investor as saying, "Anybody who's a seasoned hedge-fund investor knows the split-strike conversion is not the whole story. To take it at face value is a bit nai've."
The complaints all contained specific information and could not have been fully and adequately resolved without thoroughly examining and investigating Madoff for operating a Ponzi scheme. The journal articles should have reinforced the concerns about how Madoff could have been achieving his returns.
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SEC FILES COMPLAINT THAT STARTS TO PROVIDE DETAILS ON THE GREATEST FINANCIAL CRIME IN HISTORY
The Financial Times, August 12, 2009 - DiPascali: Madoff business ‘all fake’...."…Frank DiPascali, a senior lieutenant to Bernard Madoff pleaded guilty on Tuesday to 10 criminal charges and provided extensive new details about the $65bn Ponzi scheme orchestrated by his long-time boss, saying: “It was all fake. It was all fictitious.” Mr DiPascali, who has agreed to co-operate with prosecutors…”
The COMPLAINT
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against defendant Frank DiPascali, Jr. ("DiPascali" or the "Defendant"), alleges:
SUMMARY
1. For decades, DiPascali helped Bernard L. Madoff ("Madoff') conduct a massive securities and advisory fraud at Bernard L. Madoff Investment Securities LLC ("BMIS") that victimized thousands of investors before it collapsed, causing more than $64 billion in investor losses.
2. A BMIS employee since 1975, DiPascali rose to become a key Madoff lieutenant responsible for overseeing the bulk of the day-to-day' operations of the unprecedented fraud that was run out of the 17th floor at BMIS' offices.
3. DiPascali oversaw the mechanics ofan entirely fictitious investment strategy, known as the "split-strike conversion," that BMIS claimed to be pursuing on behalf of its clients. DiPascali helped Madoff structure and record non-existent trades that were reflected on millions of pages of customer confirmations and account statements distributed each year. Not one of the trades purportedly executed as part of this strategy ever occurred.
4. DiPascali also played a critical role in helping Madoff avoid detection of his scheme. DiPascali designed, developed and oversaw a wide and varying array of fictitious books and records - all prepared to conceal the scheme from investors, auditors and regulators.
Excerpts: The Strategy
“….to be clear, none of the trading under this strategy ever actually occurred. The entire exercise was a fantasy.”
At least as early as the 1980s, DiPascali (together with other employees of BMIS) helped to fabricate various backdated and fictitious trades, often involving options, and to record them in investor account records for the purpose of generating phantom returns, hedges or tax events in those investors' accounts. DiPascali and others continued to help fabricate trades for this original group of accounts until the end of the fraudulent scheme in December 2008.
To handle (a rising) volume (of investors), Madoff needed a more efficient and less labor intensive method of generating phony trade confirmations and account statements. Previously, BMIS had manually entered fictitious, backdated trades on an account-by account basis. Madoff also needed an investment strategy that could credibly explain how he supposedly achieved specific target rates of retum across hundreds of different .accounts. DiPascali was instrumental in addressing both of these challenges.
Beginning around the time that A&B investors opened accounts at BMIS, and continuing through December 2008, Madoff told most of BMIS' investors that he managed their accounts pursuant to the split-strike conversion strategy. In fact, Madoffs entire split-strike conversion strategy was a longstanding fraud. Every trade, every order ticket, every account statement, every confirmation and all other relevant records were fictitious. Because of the size of the accounts, Madoff concluded that the "strategy" had to focus on large cap stocks so that no questions would arise about the volume of purported trading they were supposedly engaging in.
The strategy entailed purchasing a subset of the stocks (which they called a "basket") comprising the S&P 100 index ("S&P 100"), the performance of which was presumed to correlate very closely with the performance of the overall index. The purported goal was to time the market by purchasing the basket before a run-up in the S&P 100 and selling the basket after the index increased. When Madoff sold off a basket and was not "in the market," he purportedly invested the money in U.S. Treasuries and money market funds while awaiting the next trading opportunity.
DiPascali used his knowledge and experience with options to help Madoff develop a fictitious hedging strategy for the new accounts. To hedge the downside risk of the phantom position, Madoff and DiPascali "purchased" fictitious put options on the S&P 100, which were supposedly funded by the "sale" of call options on the S&P 100. This now-infamous strategy has been described as a split-strike conversion. And, to be clear, none of the trading under this strategy ever actually occurred. The entire exercise was a fantasy.
Posted 08/12/2009
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AMERICA IN IRAQ
The remarkable story of reconstruction waste, mismanagement, fraud and corruption.
By Frank Vogl, Publisher of www.ethicsworld.org and co-founder of Transparency International
HARD LESSONS - the report by the US Special Inspector General for Iraq Reconstruction.
Since 2003, a sea of U.S. taxpayers’ dollars has washed over Iraq. Not since the Marshall Plan has the U.S. undertaken so massive an effort to rebuild a nation. Never before has the U.S. expended so much on a foreign national reconstruction program. It was and is a catastrophe: a combination of gross mismanagement, waste, fraud and corruption. The Office of the Special Inspector General for Iraq Reconstruction (SIGIR) conducted hundreds of audits, inspections, as well as hundreds of criminal investigations. It found that the overuse of cost-plus contracts, high contractor overhead expenses, excessive contractor award fees, and unacceptable program and project delays all contributed to the disaster.
As the U.S. expended billions (the oversight juristiction of the SIGIR covered about $50 billion in Congress-appropriated funds) a nation’s public service, which under Saddam Hossain had already become highly corrupt, now became still more corrupt. The abuse of public office for personal gain – at all governmental levels from the highest cabinet ministries to the smallest provincial town halls – became rampant. Even the head of the nation’s anti-corruption commission fled to the U.S. after multiple death threats and the assassination of numerous of his colleagues. In 2008, Iraq had a score of 1.3 out of 10.0 on the Transparency International Corruption Perception’s Index, which placed it just a notch above Myanmar and Somalia as the most corrupt nation of the 160 covered by the survey.
While the U.S. reconstruction billions fueled domestic bribery, there was no shortage of Americans drinking at the trough. On February 15, 2009, for example, the lead front-page story in The New York Times carried the headline: Inquiry on Graft in Iraq Focuses on U.S. Officers. Reporters James Glanz, C.J. Chievers and William K. Rashbam, noting that U.S. authorities that have been investigating the reconstruction programs in Iraq, “have significantly broadened their inquiry to include senior American military officers who oversaw the program, according to interviews with senior government officials and court documents. Court records show that last month investigators subpoenaed the personal bank records of Col. Anthony B. Bell, who is now retired from the Army but who was in charge of reconstruction contracting in Iraq in 2003 and 2004 when the small operation grew into a frenzied attempt to remake the country’s broken infrastructure. In addition, investigators are examining the activities of Lt. Col. Ronald W. Hirtle of the Air Force, who was a senior contracting officer in Baghdad in 2004, according to two federal officials involved in the inquiry.”
Each new investigation and disclosure of yet another crooked scheme is like a piece in a puzzle that begs the question, how could this possibly have happened?
In addition, as the U.S. escalates its engagement in Afghanistan (after years of failed reconstruction efforts by a host bilateral and multilateral development assistance agencies), its important to ask: can we learn the lessons of the Iraq debacle to ensure that never again does such a mountain of U.S. taxpayer cash be so mismanaged, wasted and stolen?
The answers to these questions are to no small degree is provided in a remarkable 400 page volume, “HARD LESSONS – The Iraq Reconstruction Experience” by Stuart W. Bowen Jr., Special Inspector General for Iraq Reconstruction. This remarkable book, dully published by the U.S. Government Printing Office, is written without hype or drama. It offers insights into how the combined forces of the titans of government and U.S. industry could squander enormous sums.
The Initial Catastrophic Miscalculation
Bowen discusses fraud and corruption, but stresses that mismanagement on a scale that can barely be grasped was the prime culprit. Things went dreadfully wrong even before the invasion.
It is useful to recall, as Bowen does, that Deputy Secretary of Defense Wolfowitz declared as the war started, “There’s a lot of money to pay for this that doesn’t have to be U.S. taxpayer money…the oil revenues of that country could bring between $50 and $100 billion over the course of the next two or three years…We’re dealing with a country that can really finance its own reconstruction and relatively soon.”
The leadership of the Bush Administration, starting with the President, Vice President Cheney and Defense Secretary Rumsfeld, devoted little time to thinking about reconstruction as they moved to invade. They spent just as little time to thinking about costs. Bowen noted , “that victory would be swift and that a new interim Iraqi authority would quickly assume power. They planned on Iraq’s police providing postwar security and anticipated that Iraqi oil revenues would fund most relief and reconstruction projects. When Iraq’s withering post-invasion reality superseded these expectations, there was no well-defined “Plan B” as a fallback and no existing government structures or resources to support a quick response.”
The failure to plan for reconstruction ensured mismanagement from the beginning. HARD LESSONS pointed out that at times there was virtual chaos in contracting and many different U.S. government agencies were doing their own programs without overall supervision and management. “In the absence of effective management by government officials, contractors in Iraq were often left in dangerous circumstances to carry out insufficiently defined contracts written by inexperienced contracting officers who lacked situational awareness. In this chaotic environment, it was, at times, difficult to differentiate between reliable contractors who would carry out good work and those whose ad hoc operations and lack of experience pointed to failure.”
Since the “Coalition Provisional Authority” established its Program Management Office in August 2003, HARD LESSONS found that “A succession of contracting and program management offices suffered under varying sets of complex contracting regulations, divergent chains of authority, changing program requirements and shifting reconstruction priorities. A shortage of qualified contracting officers, continuous staff turnover, and poor program management practices, particularly regarding quality assurance programs, weakened oversight of reconstruction projects. Finally, contracting officers did not have adequate information systems to track contract activity.”
Oil and KBR
Oil was Iraq’s crown jewel. It could finance the war, and it could provide additional solid supplies to the U.S. for year’s to come. While it may be thought that a top priority for the U.S. was to establish a sustainable system of law and order in Iraq, this in many respects, at least from the perspective of all concerned with reconstruction, took a backseat to the ensuring maximum oil output. A key priority for Under Secretary of Defense Douglas Feith was how to revitalize the oil sector and he and the Pentagon had no doubt that the people to just that were the executives at KBR in Houston.
KBR was a wholly-owned subsidiary of Haliburton Company of Houston whose Chairman and Chief Executive Officer from 1996 to 2000 was Richard Cheney. KBR had long provided an array of ground services to the army and was the prime contractor as the U.S. forces massed in Kuwait prior to the invasion of Iraq. As the Pentagon rushed to award oil sector contracts to KBR, issues were raised with the White House over the appearance of a conflict of interest given Cheney’s recent former involvement with KBR, but HARD LESSONS noted that, “White House officials said the mission took priority over whatever political fallout might occur from granting a sole-source contract to KBR.”
In terms of major corporate contracts, the involvements of KBR in Iraqi reconstruction illustrate the utter mess of the vast U.S. effort. Today, there are still many open questions. In an editorial on February 15 2009 in The New York Times, commenting on another scandal involving KBR – Haliburton, the paper declared: “There may be some taxpayer comfort in the fact that this scandal was rooted in Nigeria, not Iraq, where the Halliburton megacorporation (you know, the one Dick Cheney ran before he became vice president) reaped multibillions as the Bush administration’s most favored no-bid contractor. Still, there are a lot of unanswered questions about Halliburton’s practices in Iraq, with numerous complaints of overpricing and ineptitude. Its corporate conduct in the Nigerian scheme is hardly encouraging and should compel tighter scrutiny of its Iraq failures.”
(The U.S. Justice Department and the Securities and Exchange Commission announced on February 10, 2009, that KBR and Haliburton had agreed to pay fines to the two agencies of the U.S. government amounting to $579 million – the largest fines ever paid by a U.S. firm to resolve a case under the Foreign Corrupt Practices Act - as a result of bribes to Nigerian officials over a decade amounting to $180 million in relation to over $6 billion of Nigerian official energy contracts).
Oil sector reconstruction was a crucial U.S. priority and the U.S. government awarded two huge programs to two companies – Parsons Iraq Joint Venture (PJV) in the north and KBR in the south. HARD LESSONS noted that KBR has operated in the southern section of Iraq since the March 2003 invasion and, “By July 2005, the United States had provided as much as $2.7 billion in Iraqi funds – much of it going to KBR – to rebuild Iraq’s oil infrastructure, import refined fuels, develop oil security and pipelines repair teams, and provide technical assistance.”
Nevertheless, Iraq’s oil production declined. The insurgency and massive security issues were clearly a major factor. But in late 2004, U.S. authorities did become highly concerned about KBR’s performance and issued a “ cure notice” – or intention to terminate the contract – warning that KBR had to provide a much moiré detailed explanation of its costs. Eventually, KBR did seemingly satisfy the authorities, but in time PJV, whose performance in the north was better, was to obtain much of the southern contract as well.
An inspection by the Special Inspector General for Iraq found that U.S. government authorities and KBR “failed to ensure necessary engineering studies were completed before the project began. The government and contractor failed to adequately research, plan, design, and manage the project. Thus, $75.7 million allocated to the project was exhausted, while only 28 percent of the drilling scope was completed. Because this was a cost-plus contract, the government was unable to recover taxpayer dollars that KBR unwisely spent – and thus wasted on this project.”
The book also stated that Defense Contract Audit Agency reviews found that in early 2006, a controversy centered on the near-full payment of fees of $263 million billed by the contractor KBR for oil-sector work, including what appeared to be exorbitant charges for charges for transporting fuel to Iraq from Turkey and Kuwait. Questions were raised.
HARD LESSONS stated: “Although a 2004 audit reported that the costs were inflated and not supported by documentation, the Army decided to pay KBR all but $10.1 million of these contested costs. That meant the Army withheld payment on just 3.8 percent of the charges questioned by the Pentagon audit agency, far below the rate at which the agency’s recommendation is usually followed or sustained by the military.”
Elsewhere in the energy sector, the booked noted that USAID spent about $1.1 billion on contracts awarded to Bechtel to implement electricity projects between 2003 and 2005, but audits found “that Bechtel’s projects frequently failed to meet their objectives.”
The Rule of Law and Corruption
HARD LESSONS quotes Ali Baban, Minister of Planning, Government of Iraq in 2006 as followed: “Corruption is a disease which is connected with many aspects of the government and in this society. It has become now a social phenomenon from the low rank and class to the higher rank in government…and for that reason there is no remedy for that except privatization. I think the government failed to defeat the corruption.”
While some U.S. funds were spent explicitly on assisting the Iraqi government to fight corruption, the amounts were modest and, as the Inspector general noted in his book, “Support for Iraq’s anti-corruption entities – necessary for protecting Iraq’s resources from waste and theft – was very weak.” In fact, as the author explained, there was no coordinated leadership on rule-of-law initiatives and a paucity of personnel engaged in this. It was not until 2005 that a rule-of-law coordinated was even appointed.
A report in that year by the U.S. State Department Inspector General found that funds designated for the Iraqi justice sector went mostly for infrastructure under a set of contracts amounting to $900 million awarded to Parsons Delaware. That reported noted that “Parsons fell far short of fulfilling its obligations, and the United States terminated the contract in 2007 after expending $333 million.”
It is not altogetehr surprising that HARD LESSONS that stated that corruption, which had been rampant in Saddam Hussein’s Iraq, should have continued after the U.S invasion given that corruption tends to thrive in post-conflict reconstruction situations, which combined large public procurement projects, major infusions of cash and inadequate government economic management. Prime Minister Maliki is quoted in the book as calling corruption “a second insurgency.”
A U.S. General Accounting office study of 2006 is quoted that suggested that 10 percent of refined fuels in Iraq were diverted to the black market and about 30 percent of imported fuels are smuggled out of the country and sold for a profit. Corruption in the oil sector was seen as particularly egregious.
In June 2004, at the end of his term in Iraq, U.S. Ambassador Bremer appointed Judge Radhi Hamza al-Radhi to head the anti-corruption commission. It filed 541 cases in its first 18 months, includeing 42 that involved government ministers. The Judge told a U.S. Congressional hearing in 2008 that the cost of corruption across all ministries in Iraq, according investighations, has been estimated to be as high as $18 billion.”
HARD LESSONS pointed out that the commission’s efforts to enforce the law made it a target. Between 2004 and 2007, 31 of its employees were assassinated, and 12 family members were murdered. Judge Radhi lived under constant threat and ultimately had to flee, seeking political asylum in the U.S. in August 2007. HARD LESSONS stressed that, “Since April 2003, hundreds of thousands of U.S. civilian and military personnel have participated in the Iraq reconstruction effort. The vast majority of them served honorably, but some did not. (In the immediate post-invasion period) when there was little oversight of the reconstruction effort and no fraud-fighting presence in Iraq, an unscrupulous few too advantage of the chaotic circumstances to enrich themselves. Not until the Special Inspector General of Iraq started to deploy in Baghdad in March 2004 did the United States have meaningful numbers of auditors and investigators permanently based in Iraq to pursue allegations of fraud, waste and abuse.”
There have been at least 35 convictions of Americans resulting from criminal misconduct committed during the reconstruction program. The catalogue of these cases is included in HARD LESSONS, but it is merely the tip of an iceberg of criminality in Iraq associated with the vast sums expended by the U.S. on reconstruction projects. The massive domestic corruption that Judge Radhi and his commission sought to disclose, needs to be set alongside the amazing manner in which vast sums of U.S. taxpayer money disappeared in Iraq over the last five years.
The New York Times story on February 15, 2009, noted, for example, “As part of the inquiry, the authorities are taking a fresh look at information given to them by Dale C. Stoffel, an American arms dealer and contractor who was killed in Iraq in late 2004. Before he was shot on a road north of Baghdad, Mr. Stoffel drew a portrait worthy of a pulp crime novel: tens of thousands of dollars stuffed into pizza boxes and delivered surreptitiously to the American contracting offices in Baghdad, and payoffs made in paper sacks that were scattered in “dead drops” around the Green Zone, the nerve center of the United States government’s presence in Iraq, two senior federal officials said. Mr. Stoffel, who gave investigators information about the office where Colonel Bell and Colonel Hirtle worked, was deemed credible enough that he was granted limited immunity from prosecution in exchange for his information, according to government documents obtained by The New York Times and interviews with officials and Mr. Stoffel’s lawyer, John H. Quinn Jr. There is no evidence that his death was related to his allegations of corruption.”
Conclusions
The Bush Administration failed to consider the reconstruction challenge prior to the U.S. invasion of Iraq and thereafter, it seemed, a haphazard series of programs involving vast sums of taxpayer dollars were pursued. Gradually, the U.S. embassy in Iraq sought to coordinate the efforts, determine priorities and demonstrate leadership. In one of the few understatements in HARD LESSONS, the author concluded that various reconstruction efforts, “Underscore the need for the U.S. government to reform its approach to contingency relief and reconstruction operations and to develop greater capacity to execute them.”
The blunders, one after the other, were so vast and fundamental that reading this book suggests that what could go wrong, did go wrong. For example, the book pointed out that, “Historically rooted conceptions of defense, diplomacy, and development shaped the content of prewar reconstruction decisions. Military planners excluded post-conflict experts from early deliberations that determined the scope of U.S. policy. USAID Administrator Andrew Natsios, the highest-ranking Administration official with both development and combat experience, was not invited to NSC (National Security Council) meetings until long after the war began.” (And, the book added at one point, then NSC chief Condoleeza Rice said, “A lot of it (reconstruction) wasn’t handled very well…There are a lot of things, if I could go back and do them differently, I would.”)
HARD LESSONS concluded that there are several crucial first principles for contingency relief and reconstruction operations:
• Security is necessary for large-scale reconstruction to succeed.
• Developing the capacity of people and systems is as important as bricks and mortar reconstruction.
• Soft programs serve as an important compliment to military operations in insecure environments.
• Programs should be geared to indigenous priorities and needs. And,
• Reconstruction is an extension of political strategy – “The reconstruction experience in Iraq revealed deficiencies in how the U.S. government understands the dynamics of societies it seeks to influence through military and non-military means. War, politics and reconstruction are linked in ways that individuals within the government failed to appreciate in the opening years of the Iraq conflict. It war, as Clausewitz said, is an extension of politics by other means, so too is relief and reconstruction an extension of political, economic, and military strategy. In this regard, there is a distinct difference between pursuing reconstruction to catalyze long-term economic growth and deploying reconstruction to support a counterinsurgency campaign.”
There is not only a profound sense of repeatedly chaotic management in reconstruction efforts that runs throughout the book, but also a deep sense of frustration on the part of the author that, at the highest levels of the U.S. Administration, there was inadequate attention to the vital importance of solid reconstruction planning from the start of planning a military campaign; a lack of meaningful authority granted to those charged with managing reconstruction; and, a vast deficit of serious interest by the Pentagon and the White House from the beginning in ensuring comprehensive oversight and auditing of procurement contracts.
But, there was an even more serious failure that points to the American democratic political system itself. The United States Congress has the charge to ensure substantive oversight of the Executive branch of government and when it came to reconstruction in Iraq it failed to do its duty. Constantly pressured by the White House and the Pentagon, the Congress was too compliant in voting for rising reconstruction appropriations, while not demanding the management and oversight systems that were essential.
In addition, the media, especially reporters based in Iraq, were for the most part – and still are – so busy tracking military affairs and the high level discourse between Iraqi political leaders and U.S. senior officials, that they have largely failed to consistently report on the reconstruction mismanagement, waste, fraud and corruption. And, this is all the more concerning given that in Iraq, and quite probably in Afghanistan today as well, it will be the success of both security and reconstruction programs that will be essential for eventual political and social stability.
LINKS: HARD LESSONS - the report.
The New York Times editorial of Feb 15, 2009.
The New York Times Page 1 story on graft in Iraq, Feb 15, 2009.
KBR-Haliburton pay record fines of $579 million.
KBR Bribes to Nigeria -- see story below here - the background on the scandal.
Posted 02/15/09
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Oversight Group Calls for End of U.S. Government Program Responsible for Collecting Oil Royalties
The series of scandals at the U.S. Department of the Interior’s Royalty-In-Kind Program belie serious lack of accountability and mismanagement, the Project on Government Oversight says in its latest statement
The U.S. Department of the Interior’s (DOI) Mineral Management Services division continually ignored signs of concerns regarding its Royalty in Kind (RIK) program since its inception, the Project on Government Oversight states, and is pushing to expand it. After a shocking report was released from DOI’s Inspector General revealing evidence of widespread “ethical failure” and “substance abuse and promiscuity” within the RIK program, the Project on Government Oversight (POGO) has released its own statement on how it has continually opposed the program since it was pilot tested in 1997.
The dispute now extends beyond employee misconduct into allegations that the program is responsible for collecting an undervalued amount of oil and natural gas, essentially depriving the American people of huge sums of money. Instead of collecting money from oil and gas companies in exchange for allowing them to drill on U.S. federal land, the program allows the companies to pay back the government “in kind.” However, according to POGO, “the RIK program asks taxpayers to trust that industry delivers that correct amount of oil or gas to the government in lieu of cash, but has reduced oversight to such a degree that the Government Accountability Office (GAO) labeled RIK’s management ‘an honor system.’”
The evidence is numerous, POGO states, that there is a serious lack of transparency and accountability within the RIK program, and it calls for the program to be dismantled. The group expressed doubts about the benefits of such a program when its creation was originally being discussed in Congress and other policy organizations. The number of conversations between elected officials and the oil and gas industries illustrate the hold the industry had over the government. It was clear, POGO said, that many Congressmen, and MMS itself, were not sold on the idea, but eventually the industry won out. It clearly benefits the industry to participate in the RIK program specifically because there is less oversight and regulation and a greater chance that the in-kind payments could be undervalued.
POGO’s evidence seems to prove this has been exactly the case. In the years 2003, 2004, 2007, and 2008, the GAO found that the Mineral Management Services (MMS) division, in charge of the RIK program, could not account for all the costs and benefits, notes POGO. The statement also lists numerous former employees of RIK who previously worked for, or went on to work for, consulting firms with oil and gas companies as clients – a clear violation of conflict of interest. There is also evidence of insufficient auditing of royalty payments. For example, one contractor was used to both ship and receive product, making it much easier to misrepresent the amount of product coming in and out. There is virtually no regulation on the program, POGO says. The lack of transparency is also debilitating. POGO said that they could not obtain any information on contracts or who manages them. When asked to evaluate to program reports, the RIK Risk Metrics Manual and RIK Performance Metric and Measurement Tools Manual, both were withheld on the grounds that the activities described were too minor to be of public interest.
POGO has said that the latest report of RIK employees engaging in ethical abuses, ranging from sexual relationships between government employees and oil and gas industry executives, job offers by the industry to government employees with whom they were negotiating contracts, drug abuse, acceptance of gifts and holidays from oil and gas firms, and bribes in a few cases, is the last straw. The POGO report clearly states “The Secretary of Interior should immediately begin phasing out the RIK program, and should return to relying on a market price-based Royalty In Value (payment in cash) program instead. POGO would only accept the RIK program for the purposes of filling the Strategic Petroleum Reserve when prices are low.
However, if this strategy is not pursued, POGO recommends a number of actions to increase institutional checks and oversight:
- Congress should prohibit MMS’s proposed expansion of the RIK program.
- Until auditing functions are removed from MMS, the Department of Interior should institute regular auditing of the RIK program to improve oversight and management, and only use compliance reviews as a tool to identify leases that need auditing rather than as a replacement for audits.
- The Department of Interior should disclose detailed bi-annual reports concerning the profitability and performance of the RIK program to the Congress.
Posted 9/18/08
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Halliburton: A Case Study in International Bribery
The News... "Albert Jackson Stanley now lies at the center of a widening scandal in the oil industry that has implications for corporations and governments across the globe. Stanley’s case is the first in what federal officials believe will be a string of indictments in coming months against U.S. corporate executives who have participated in bribing foreign officials in recent years,” according to Propublica.org
The Villain: Albert Jackson Stanley has pleaded guilty in U.S. court to violations of the U.S. Foreign Corrupt Practices Act (FCPA) and now faces a seven-year prison term and a personal fine of $10.8 million. Mr. Stanley, a former top executive of a major wholly owned subsidiary of Halliburton Company, a leading U.S. energy and construction company, was the central figure in an international bribery scheme.
The Bribes: Mr. Stanley arranged for $182 million in bribes to be paid to senior government officials in Nigeria and to leading executives of a Nigerian energy company controlled by the Nigerian Government. The only Nigerian official to be named in documents is former President General Sani Abacha. In return, it appears that four companies involved in joint ventures received $6 billion in contracts from the Nigerian company and government. Mr. Stanley arranged for a portion of the bribes to be kicked back into his personal bank accounts.
The Bribery Channels: The main channel for passing the bribes from the U.S. firms, for which Mr. Stanley worked, back to the Nigerians was via an agent based in the U.K., who accounted for $132 million of the total. An agent based in Japan accounted for the remaining $50 million. The bribery payments were transferred via Bank accounts in Gibraltar, London, Tokyo, Amsterdam, New York and possibly other cities as well and it would appear that a considerable amount of the proceeds may have ended in accounts in Switzerland.
The Companies: When Mr. Stanley started to pay bribes in 1995 he worked for a U.S. company called M.W. Kellogg that was a subsidiary of the then large Dresser Industries. This latter company was acquired by Halliburton in 1998 and the Kellogg-Brown & Root division (in 2002 renamed to KBR) was formed with Mr. Stanley as this subsidiary’s chief executive officer and then, until 2004, its chairman. KBR is a major international construction company and became a separately publicly listed company on 5 April 2007. Halliburton’s acquisition of Dresser Industries and the restructuring of KBR took place during the time (1995-2000) when the current Vice President of the United States, Richard Cheney, served as Halliburton’s CEO and Chairman. Kellogg, and subsequently KBR, was the lead firm in the joint venture that sought construction contracts on the liquefied natural gas projects on Bonny Island, Nigeria that involved the bribes. Other firms that were involved in at least one of the major consortia engaged in securing the Nigerian contracts with KBR were France's Technip SA, Snamprogetti Netherlands B.V., an affiliate of Italy's ENI SpA, and Japan's JGC Corporation.
Other Deals: The official U.S. government documents hint, but do not specify, that additional suspect contracts involving Mr. Stanley and Kellogg/KBR involve projects in Yemen, Malaysia and Egypt. Bank accounts in Lebanon may also have been involved.
Consequences: Mr. Stanley’s plea of guilty in court involves his agreement to fully cooperate with U.S. public prosecutors. They are further investigating all aspects of this case. The original information that triggered the U.S. investigation came from French authorities, who had come across suspicious banking transactions while investigating another case. It is likely that the French are also pursuing investigations into this bribery affair, while it is possible that Japanese and British authorities are also engaged. So far, there are no indications of money laundering investigations, although the range of banks involved in channeling the illicit payments does raise money-laundering concerns.
Speculation: The story is likely to continue to achieve quite a high public profile as a documentary on this matter for national U.S. public television, to appear on the Public Broadcasting Station’s “Frontline,” is being completed. One of the key questions relates to whether Mr. Cheney, as the head of Halliburton at the time of many of Mr. Stanley’s transactions, was aware of the bribery.
Posted 9/9/08
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Anti-Corruption Groups Outraged at Law Lords' Ruling in Favor of the SFO
“The international fight against corruption has suffered a serious blow today."
-Transparency International UK
After the British High Court condemned the British Serious Fraud Office for dropping a probe into suspect payments being made between British arms supplier BAE Systems and Saudi Arabia, the House of Lords has now ruled that the nation's antifraud agency acted lawfully, effectively overturning the High Court ruling. According to the Financial Times, the judgment ends legal efforts to force the SFO to re-open the high-profile probe.
The latest ruling is a significant blow to the anti-corruption groups that have worked relentlessly to hold the SFO and BAE Systems accountable. BAE has been under significant pressure to reform its system of governance, prompted in part by a report issued by the committee headed by Lord Woolf. The Woolf Committee provides an extensive analysis of the company's shortfalls and lists a number of recommendations for ethics reforms. BAE has thus far agreed to implement the Woolf Committee recommendations in full.
The two British anti-corruption advocacy groups integral to bringing the case to the High Court are the Campaign Against Arms Trade (CAAT) and The Corner House.
After the latest ruling was made public, Symon Hill of CAAT said: "BAE and the government will be quickly disappointed if they think that this ruling will bring an end to public criticism. Throughout this case we have been overwhelmed with support from people in all walks of life. There has been a sharp rise in opposition to BAE's influence in the corridors of power. Fewer people are now taken in by exaggerated claims about British jobs dependent on Saudi arms deals. The government has been judged in the court of public opinion. The public know that Britain will be a better place when BAE is no longer calling the shots."
In response to the excuse made by the British government that dropping the BAE case was a matter of national security, Nicholas Hildyard of The Corner House said: "Now we know where we are. Under UK law, a supposedly independent prosecutor can do nothing to resist a threat made by someone abroad if the UK government claims that the threat endangers national security. The unscrupulous who have friends in high places overseas willing to make such threats now have a 'Get Out of Jail Free' card -- and there is nothing the public can do to hold the government to account if it abuses its national security powers. Parliament needs urgently to plug this gaping hole in the law and in the constitutional checks and balances dealing with national security.”
According to Transparency International in the UK, a branch of the largest anti-corruption fighting organizations, "The implications of the House of Lords ruling are very serious", TI(UK)'s Chairman, Laurence Cockcroft, said. "Although they say this case was exceptional, the fact is that any bribery of a senior foreign government official will invoke similar intense objection from the official concerned."
A statement from TI-UK also stated that “Even more serious is the finding that the SFO Director was entitled to ignore Article 5 of the OECD Anti-Bribery Convention which stipulates that the investigation and prosecution of foreign bribery shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”
In a joint statement from both CAAT and The Corner House, both groups emphasize an important question for democratic governments that arose from the two court hearings. During the High Court hearing in April 2008, Lord Justice Moses asked if a powerful foreign state makes a threat against our legal system, is there anything a lawyer or court can do? Or is the law powerless in the face of threats from abroad? His answer, based on access to unedited secret documents that were disclosed because of the court proceedings, was that it is unlawful for a prosecutor to surrender to such threats unless every other option had been exhausted and unless the threat was imminent, according to the statement. The High Court therefore quashed the SFO decision.
Both groups contend that after the SFO immediately appealed, the law lords -- who did not see the unedited secret documents -- have now given a definitive answer on the law as it stands. Their conclusion? The law is indeed powerless, the statement says.
If the public is to be assured that criminal investigations and prosecutions are dropped only in the face of genuine national security threats, the two groups say, and if the rule of law is not to be compromised, CAAT and The Corner House believe that Parliament should urgently review the political, legal and constitutional issues raised by this judicial review.
Included in the statement is also a list of actions the groups plan to take going forward.
- Pressing for changes to the law to ensure that our prosecutors can remain independent and are empowered to resist threats from abroad.
- Ensuring that national security advice can be scrutinised by the courts and by parliament so that the Government cannot arbitrarily invoke national security -- without effective checks and balances -- to trump the rule of law.
- Opposing the clauses in the draft Constitutional Renewal Bill that would prevent a judicial review like ours from ever being taken in the future and that would give the Government 'carte blanche' to invoke national security to stop a fraud investigation or criminal prosecution without effective checks and balances.
- Insisting that the Government fulfil its international obligations to cooperate with requests for assistance from the US and Swiss authorities in their investigations into BAE's dealings with Saudi Arabia.
- Pressing the OECD to clarify the circumstances under which national security concerns can legitimately be invoked to exempt signatories from fulfilling their obligations under the OECD Anti-Bribery Convention.
- Pressing the Serious Fraud Office to re-open its investigation into BAE's dealings with Saudi Arabia given that circumstances have changed since the investigation was dropped in December 2006. Much of the information that Saudi Arabia was apparently concerned to keep out of the public domain is now public knowledge.
- Exposing the preferential access of arms companies, such as BAE, to the Government, and campaigning to end public subsidies to the arms industry.
See more coverage of this case on this page.
Posted 7/31/08
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Criticisms Continue - British Serious Fraud Office Dragging Feet on Prosecutions
SFO drops another corruption case and new UK draft legislation could block many more
Since new anti-corruption laws were passed in 2001, the British Serious Fraud Office (SFO) has failed to successfully prosecute any cases of corruption, according to a recent article in The Guardian. It states that on June 3, 2008, the new head of the SFO abandoned its attempt to prosecute Serb businessman, Vuk Hamovic, who was involved with two London-based energy finance companies, because there was "no realistic prospect of conviction" in the case. Hamovic is suspected of manipulating aid payments and electricity deals in Bosnia.
The SFO has come under serious international pressure because of its other decision to abandon the case against BAE Systems, alleged to have bribed Saudi officials to secure a huge arms deal with the country. Two British NGOs, Campaign Against Arms Trade and Corner House, won a court case on April 10, 2008 in which the UK High Court ruled that the Director of the Serious Fraud Office (SFO) acted unlawfully when he stopped a corruption investigation into BAE Systems' arms deals with Saudi Arabia. (See EthicsWorld’s past coverage of the BAE Systems investigation).
There is renewed concern over the issue as CAAT and The Corner House report that new legislation is on the table that could prevent judicial review of SFO cases in the future. The UK Government’s draft Constitutional Renewal Bill, announced on 25 March 2008, would significantly increase and concentrate the powers that the Executive can exercise over the Judiciary and Parliament, effectively allowing the Executive to block investigations on such grounds as “national security,” without any meaningful explanation or accountability to Parliament, the Courts or international
bodies.
Susan Hawley of The Corner House said, "This new power is potentially unconstitutional and is an extremely worrying concentration of power in the hands of the Government. It allows for no meaningful oversight and effectively prevents any recourse to justice for those concerned by potential abuse of national security arguments."
If this draft Bill becomes law, the Courts would not be able to review the Attorney General's decisions that invoke 'national security'. The Attorney General would have to inform Parliament of any decision, but would not have to provide any information that he or she judged might harm not only national security but also international relations, according to a joint press release issued by CAAT and The Corner House.
Symon Hill of CAAT said “This draft Bill would effectively put BAE above the law, to the detriment of Britain's democracy, economy and security. The Government cannot be allowed to get away with this. ”
Posted 6/3/08
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Major British Media Outlets Praise UK Court Comdemnation of BAE Bribery Probe Decision
Comments and analysis from leading British newspapers and anti-corruption organizations
The British High Court ruling to condemn the British government for supporting a halt to the Serious Fraud Office probe into suspect payments being made between British arms supplier BAE Systems and Saudi Arabia dominated British headlines. The decision, and harsh words from Lord Justice Moses, threatens to damage the reputation Britain seeks to uphold as a key player in the fight against corruption. The April 10 announcement ends a two-month long British investigation while a U.S. Department of Justice investigation into BAE Systems is still ongoing.
When the probe was stopped in September 2006, by then British Prime Minister Tony Blair, the justification was made on behalf of “security concerns.” Many groups have questioned the validity of these concerns, and the latest court ruling has only served to verify their suspicions. The following are a collection of comments and analysis from leading British newspapers and key anti-corruption organizations regarding the ruling.
Financial Times
The FT editorial forcefully condemns the UK government for caving into Saudi threats and sending a message to its allies that “you will get your way if you scream loudly enough.” It is also highly suspicious of the claim that national security was at stake. The FT says that “internal memos show ministers were just as worried about losing the Euro-fighter Typhoon contact.” The court also deemed these concerns not to be legally valid. The editorial lets BAE Systems off the hook, as “It is a different company now. Management has commissioned a business practices review.” However, the Serious Fraud Office reputation still remains in tatters, the article says, and the FT encourages the Gordon Brown government not to pass current legislation which would introduce new statutory powers to shut down investigations on national security grounds.
The Independent
At last, some sound and principled sense has been spoken on the matter of the Serious Fraud Office, BAE Systems and the Saudi arms deal, stated an editorial in The Independent. It calls the ruling “as disturbing as it is excoriating” and encourages further judicial steps - “the more swinging and authoritative the better.” The bulk of the blame is placed at the feet of the UK government. As for Tony Blair, he “looks more and more the escape artist with every month that passes since he left office,” the article states. Now it will be up to Gordon Brown to clean up the mess.
London Times
A London Times editorial calls the court condemnation “stunning” and the damage done to BAE and the Serious Fraud Office “substantial and humiliating.” Although these reputations can be repaired, the damage done to Tony Blair’s legacy cannot. The article acknowledges that a security threat may have been real, but Blair is at fault for exaggerating those claims and failing to assess the potential fallout from supporting a decision to drop the probe. It also condemns then Attorney-General Lord Goldsmith for “meekly endorsing the Prime Minister, Mr Goldsmith came to embody a shameful blurring of the demands of justice and convenience.” As with other newspapers, The Times encourages the SFO to reopen the probe, for Gordon Brown to “should defend justice where his predecessor jeopardised it,” and BAE to pledge to institute governance reforms.
Transparency International UK
The 2006 decision raised acute concerns over the United Kingdom’s international obligation to combat corruption. The obvious conclusion was that the UK Government was willing to ignore its commitments for undisclosed and questionable reasons.
TI (UK) particularly welcomes the fact that this long-drawn-out process has thrown important light on an episode that has lacked transparency for too long. Any UK Government ready to submit to inconvenient threats in the interests of covering up illegal business transactions has been given notice that the Courts will not tolerate such conduct.
Laurence Cockcroft, TI (UK) chairman said today “the Courts in the UK have also demonstrated, internationally, what an independent judiciary can and will do where legally required to strengthen poor governance.”
The Court’s decision on whether the Al Yamamah (BAE-Saudi arms deals) investigation should be resumed is not yet known. But the judgment clears the way for immediate actions:
- The new SFO (Serious Fraud Office) Director has been reminded forcefully that his independence cannot be compromised by government pressure, however intense. He has the power to decide that the investigation should be resumed. TI (UK) believes that he should now do so, bringing to an end the present legal case.
- The Ministry of Justice has failed to respond for 10 months to a proper request from the US Department of Justice for legal assistance with their investigation of the Al Yamamah contract. The Justice Ministry should now provide the assistance requested.
- The UK Government should promptly abandon that part of its Constitutional Renewal Bill that attempts to reinforce the conduct of the Attorney General in this case by providing an unquestionable power to interfere in future investigations in the interests of self-defined “national security”. The Court judgment casts doubt as to whether such a power is constitutional.
- The Government must now make a serious commitment to repair its tattered reputation for combating corruption by engaging constructively with its OECD partners, and correcting its long-standing failings under the Anti-Bribery Convention. A commitment to fast-track this year the recommendations of the Law Commission for a new corruption law would be particularly welcomed.
See TI website for more anti-corruption news and activities.
Statements from The Corner House and Campaign Against Arms Trade, the two organizations who brought the case to court:
Susan Hawley of The Corner House, said:
"This is a great day for British justice. The judges have stood up for the right of independent prosecutors not to be subjected to political pressure. And they have made sure that the Government cannot use national security arguments just because a prosecution is not in their interests."
Symon Hill, spokesperson for Campaign Against Arms Trade (CAAT), said:
"We are delighted. This judgment brings Britain a step closer to the day when BAE is no longer calling the shots. It has been clear from the start that the dropping of the investigation was about neither national security nor jobs. It was due to the influence of BAE and Saudi princes over the UK Government. As we have pursued this case, we have been overwhelmed by the support we have received from people in all walks of life, who do not want BAE to be above the law that the rest of us have to follow."
The judgment comes just weeks after Gordon Brown's Government announced that it is planning to give the Attorney General the power to stop criminal investigations and prosecutions by citing "national security" without the decision being subjected to judicial consideration or meaningful Parliamentary oversight. In the light of today's judgment, The Corner House and CAAT insist that this proposed legislation, contained in the Constitutional Renewal Bill, must be abandoned.
Posted 4/11/08
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Questioning Official “Evaluation” Reports:
Allegations Made Against the European Union
Questions about the credibility of official evaluations of financed projects, programs and/or consulting services are constantly raised with regard to major multilateral official institutions. At times these have led such organizations to establish special independent commissions. Establishing a reputation for instituting independent evaluations is key to establishing good governance – a new set of allegations brought against the European Union’s Commission (EC) and exclusively brought to the attention of EthicsWorld, raises core issues.
David Lempert, an American lawyer who was hired by the EC as an independent evaluator, alleges in an article sent to EthicsWorld that his efforts failed to urge “the European Ombudsman to assure investigation into a purported scandal in the contracting processes for consultants in evaluations and project approval for European Commission projects, alleging the possible abuse of tens of millions of Euros of public funds and the planned rigging of public oversight procedures.”
Mr. Lempert pointed to regulations on the EC’s own website that, “[t]he evaluator's independence in his/her work must be respected and the evaluation results must not be interfered with.” He has offered his documentation of an example of a case in which 100 pages of allegations of misconduct were censored out of a report, the evaluator was fired, conclusions and recommendations were reversed or rewritten, and an allegedly falsified report was put on the EC’s website, according to Lempert’s statement.
Mr. Lempert says he has sent a letter to the European Ombusman, Nikiforos Diamandouros, but no formal case has yet been brought against the EC. He argues that it is particularly important that the European Commission and other lending institutions have rigorous evaluating and auditing processes in place and in the public arena. Many of these institutions have the same expectations for the countries they are helping so that doing otherwise would appear hypocritical.
See also EC pages on its evaluation methodology.
Posted 3/10/08
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UPDATE: Former U.S. State Dept. Officials Testify Their Colleagues Complicit in Corruption
Former judge and Director of the Office of Accountability and Transparency in the Iraqi Embassy, Arthur Brennan, told the U.S. Senate Democratic Policy Committee on May 8, 2008 that his office was only a "window dressing" that concealed the U.S. government's unwillingness to demand good governance in the Iraqi government. He and his colleague, James Mattil, senior advisor to the Iraqi Commission on Public Integrity, recount several examples of how their efforts to investigate Iraqi officials were thwarted or undermined by others in the State Department. (Read the full news article.)
The testimony of both former State Department officials can be downloaded below:
Judge Arthur Brennan, Director of the Office of Accountability and Transparency, U.S. Embassy in Baghdad
James Mattil, Chief of Staff at the Office of Accountability and Transparency, U.S. Embassy in Baghdad
US Congressional Testimony on Anti-Corruption Efforts in Iraq Reveals Need for Major Overhaul
The United States House Committee on Oversight and Government Reform held a hearing on October 4, 2007 on “Assessing the State of Iraqi Corruption.” The hearing, headed by Chairman Henry Waxman, focused on the institutional capacity, in both the Iraqi government and the US government, to deal with corruption in Iraq. Representatives from the US Office of Accountability and Transparency (OAT), the US Anticorruption Working Group, and Judge Radhi Hamza al-Radhi, Commissioner of the Iraqi Commission on Public Integrity, all gave disturbing details about the failures of their respective institutions to fight corruption in the Iraqi government. Representatives from the US Department of State refused to comment on the situation outside a “classified setting.”
Problems Confronted in US Offices
Both OAT and the Anticorruption Working Group were created by the State Department, the former as a liaison to the Iraq Commission on Public Integrity and the later as the coordinator of US anticorruption efforts. During the testimony of officials from both these entities, they described a lack of coordination between their respective departments, high turnover in key positions, poor attendance at meetings, and a lack of regular reports. When the Committee asked Michael Richards, the Executive Secretary of the Anticorruption Working Group to describe its meetings, he responded “To be completely embarrassingly honest with you, a lot of these meetings don’t have a lot of people in them, so there’s not a lot of conversation going on.”
The Committee also asked Judge Arthur Brennan, former director of the Office of Accountability and Transparency, whether there was an overall US strategy for combating Iraqi corruption. Judge Brennan responded, “I think Ambassador Crocker was serious about going forward on this, but I don’t think everybody is serious about it, and if they are serious, then somebody else should have been doing their job.”
It was suggested that one problem causing the lack of coordination was high turnover and staffing problems. Since OAT was established in 2006, it has had at least three directors. In August, Suneeta Sahgal took over as acting director, and until this appointment, she had served as a paralegal who performed primarily administrative tasks, according to a House Committee Memorandum. In October, funding for Ms. Sahgal’s position was eliminated.
The attendance at meetings of the Anticorruption Working Group have been so poorly attended, James Santelle, Rule of Law Coordinator which oversees OAT, advised staff members of OAT to cease attending working group meetings. Mr. Richards of the Anticorruption Working Group called his decision “very disturbing.”
State Department Keeps Quiet on Iraq
In order to gain a better understanding of the extent of corruption in Iraq, the Committee directed several questions to the State Department. According to its instructions, State Department officials could not discuss: “broad statements/assessments which judge or characterize the quality of Iraqi governance or the ability/determination of the Iraq government to deal with corruption, including allegations that investigations were thwarted/stifled for political reasons.”
The Associated Press reported Larry Butler, US deputy assistant secretary of state for Near East Affairs, told the House committee that divulging such information could damage U.S. relations. Rep. Henry Waxman, chairman of the Committee, said Secretary of State Condoleezza Rice should know she is on a collision course with Congress over the public disclosure of corruption in Prime Minister Nouri al-Maliki's government.
According to the House Committee memo , the State Department asked Acting Rule of Law Corrdinator, Scott Winne, to do a retroactive classification review of two reports written by OAT about corruption in Iraq, which Mr. Winne then marked “confidential.” Mr. Winne later told the Committee staff that he had never done a classification review before.
Challenges to Anti-Corruption Efforts in the Iraqi Commission
Unable to obtain information from the State Department, the Committee listened to testimony from Judge Radhi Hamza al-Radhi on the serious problems that exist within the Commission on Public Integrity (CPI), which he headed. Judge al-Radhi came to the US to share this information and also to seek asylum since the situation in Iraq has become too dangerous for him to return to his post.
Judge al-Radhi was able to discuss some important accomplishments CPI has made, including the establishment of several directorates within three years. He also explained that CPI has educated government ministries in the Code of Conduct, worked on financial disclosure, established an INTERPOL liaison office, and organized conferences for Civil Service Reform and NGOs. Perhaps most importantly, a minister was arrested in accordance with the Rule of Law in a non-political, non-sectarian manner on corruption charges, for the first time in Middle East history, said al-Radhi.
However, there are serious obstacles that Judge al-Radhi outlined which prevent significant progress. His main points were:
- Thirty-one employees have been assassinated as well as at least an additional 12 family members. In a number of cases, many of al-Radhi’s staff and their relatives have been kidnapped or detained and tortured prior to being killed.
- The Prime Minister and his government have refused to recognize the independence of CPI, even though the Iraqi Constitution sets forth the independence of CPI.
- Officials and agencies in the Iraqi Government have sent letters forbidding CPI to take any action against the presidency, council of ministers and former ministers.
- The executive branch often protected corrupt employees and actively attempted to eradicate or control CPI. The legislative branch did not revise the anticorruption laws, and the judiciary branch succumbed to pressure and did not adjudicate corruption cases.
- Professional technocrats who were qualified to perform vital government services were not appointed.
- It has been impossible for CPI to safely and adequately investigate oil corruption where Sunni and Shia militias have control of the metering, transport and distribution of Iraqi oil. This has resulted in the Ministry of Oil effectively financing terrorism through these militias.
The cost of Judge al-Radhi’s testimony appears significant. The Associated Press reported on October 6, 2007 that the government of Iraq will sue him for smuggling documents, libeling the prime minister and corruption, according to a statement released by the prime minister's office. The statement also said al-Maliki urged al-Radhi to investigate corruption allegations regardless of political, religious and ethnic backgrounds.
It was not immediately clear when the suit would be filed, the AP reported.
Posted 10/9/07
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Kenyan President Moi's 'Corruption' Revealed - Secret Report Disclosed
Reactions Lead to New Kenya-UK Disputes. Former Minister Denies Allegations
A new report, which allegedly has been kept secret by the present Kenyan Government of President Kibaki, reveals the massive scale of corruption pursued by former President Moi.
The disclosures have opened a new public war of words between the Kenyan and British governments. The UK has long been a major aid donor to Kenya, but also a harsh critic of corruption in the country.
The report, attributed to the Kroll international investigative company, appeared first on a website called Wikileak (which is modeled on Wikipedia) on August 31, 2007 and was reported in The Guardian in the UK.
According to The Guardian, the Kroll investigation into the former regime was commissioned by President Mwai Kibaki shortly after he came to power on an anti-corruption platform in 2003. It was meant to be the first step towards recovering some of the money stolen during Mr Moi's 24-year rule, which earned Kenya the reputation as one of the most corrupt countries in the world. But soon after the investigation was launched, President Kibaki's government was caught up in its own scandal, known as Anglo Leasing, which involved awarding huge government contracts to bogus companies. Since then, none of Mr Moi's relatives or close allies has been prosecuted. No money has been recovered. Three of the four ministers who resigned after the Anglo Leasing scandal was exposed have been reinstated into President Kibak’s cabinet and there have been no court cases.
Scale of Moi’s Corruption
The Wikileak story includes the full Kroll report, but Kroll has refused to confirm or deny the authenticity of the report. In its introduction, Wikileak reported that he breathtaking extent of corruption perpetrated by the family of the former Kenyan leader Daniel Arap Moi is revealed in a secret report which lays bare a web of shell companies, secret trusts and frontmen used to steal over two billion dollars worth of state money.
The suppressed U.K auditor's report shows how the wealth was spread across the world from properties and shell companies in London, Newyork and South Africa to a 10,000 hectare ranch in Australia.
The countries involved in facilitating the thefts include Australia, Belgium, Brunei, Canada, Dubai, Finland, Germany, Grand, Cayman, Israel, Italy, Japan, Jersey, Liechtenstein, Liberia, Luxembourg, Malawi, Namibia, the Netherlands, Puerto, Rico, Russia, Somalia, South, Africa, Sudan, Switzerland, Uganda, the United Kingdom, the United States and Zaire.
The Guardian’s story under the headline The looting of Kenya, reported by Xan Rice in Nairobi started: “The breathtaking extent of corruption perpetrated by the family of the former Kenyan leader Daniel Arap Moi was exposed last night in a secret report that laid bare a web of shell companies, secret trusts and frontmen that his entourage used to funnel hundreds of millions of pounds into nearly 30 countries including Britain. The 110-page report by the international risk consultancy Kroll, seen by the Guardian, alleges that relatives and associates of Mr Moi siphoned off more than £1bn of government money. If true, it would put the Mois on a par with Africa's other great kleptocrats, Mobutu Sese Seko of Zaire (now Democratic Republic of Congo) and Nigeria's Sani Abacha.”
Argument with the UK
In Nairobi the government’s spokesman, Alfred Mutua, said the Kroll report was incomplete and inaccurate and “We did not find that the report was credible. It was based a lot on hearsay." He said the leaking of the report was politically motivated and insisted Kenya was working with foreign governments to recover the stolen money. "Some of the money is in UK bank accounts. We have asked the British government to help us recover the funds, but so far they have refused."
However, the Associated Press reported on September 1, 2007 that Kenyan authorities have ignored British offers of assistance in an investigation into millions of dollars (euros) allegedly plundered from Kenya's state coffers, Britain's Foreign Office said.
According to The Guardian on September 1, 2007, the U.K. Foreign Office launched an attack on the Kenyan government over its handling of the corruption investigation into the Moi regime and noted that it was "very surprised" to read the claim by Alfred Mutua, the Nairobi government's spokesman, that the British government had been asked for help - but "so far they have refused". The Foreign Office said: "That is incorrect. We stand ready to assist Kenya with any asset recovery, as we have done successfully with Nigeria. But the Kenyans have not requested assistance despite our offer. Nor have they provided the information we would need to comply with any such request. Last year, when Lord Goldsmith [then attorney general] was in Kenya with Kenya's assistant minister of foreign affairs, Danson Mungatana, they confirmed publicly that we had offered this assistance."
"There is enough information now to blow not just the Mois but most of the Kenyan establishment out of the water," said Sir Edward Clay, the former UK High Commissioner in Nairobi. "The scale and type of the money-laundering is what we were given to understand existed during the time I was in Kenya." As to who leaked the document, Sir Edward said: "The motives for leaking this are probably complex but I suppose have something to do with reminding Mr Moi that his support for the president is quite important because here is the reminder that they have the dirt on him."
Meanwhile, in Kenya, Nicholas Biwott MP scoffed at the report. He was one of President Moi's most powerful ministers and he noted, according to The Nation, that he had neither secreted funds abroad nor looted Kenyan taxpayers’ money. “The allegation that I have invested outside Kenya with commercial interests in Israel and Australia is equally false,” he said.
Posted 9/4/07
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Continued Inaction Evident on Reducing Corruption In Iraq – Scandals Continue to be Revealed in U.S. Press and by U.S. Officials
According to a survey of press reports, nothing appears to have changed on the corruption front in Iraq in recent months. Indeed, some reports suggest that there is such urgency to get tasks done that monitoring and accountability have gone by the wayside. A number of U.S. politicians have been quick to point to the incompetence of Prime Minister Nouri al-Maliki’s government, but there appears to be plenty of room for blame on both sides.
The US Government Accountability Office (GAO) has encountered difficulty monitoring the Department of Defense’s use of money awarded to contracting companies. In a July report, the GAO found that “multiple violations of federal acquisition regulations and procedures…placing millions of taxpayers dollars at risk and leaving critical questions unanswered.” After awarding nearly all of the $221 million to contracting company Kellogg,Brown & Root, the GAO found the DOD had destroyed or lost track of contract documents, failed to submit monitor reports to the award fee board, lacked advanced negotiation of terms and conditions for the company, and failed to submit evaluations on time to the company which could have helped to improve its performance.
Whistleblowers' Rights Not Guaranteed
Corrupt activities are going under the radar because few people are encouraged to come forward to report them. The Associated Press on August 24, 2007 reported that U.S. Navy veteran Donald Vance said he was imprisoned by the American military in a security compound outside Baghdad and subjected to harsh interrogation methods, all for doing what he thought was right – reporting illegal arms sales. Vance worked for Shield Group Security Co., an Iraqi-owned company he said sold weapons illegally. He supplied photos, documents, and other intelligence to an FBI agent in his hometown of Chicago because he didn’t know whom to trust in Iraq. He went to prison anyway.
A lack of guaranteed safety measures for those who report corruption is a major roadblock for curbing the spread of corruption in Iraq. Beth Daley, from the Project on Government Oversight in the US, said “There is an even greater need for whistleblowers now. But they are made into public martyrs. It’s a disgrace. Their lives get ruined."
Corruption in US Government Contracts
The extent of corruption in government contracting runs deep. The New York Times reported on August 31, 2007 that Lee Dynamics International, an American-owned company based in Kuwait, has been accused by the US Government of paying thousands of dollars in bribes to win $11 million worth of contracts from American contracting officials. The case is now part of a broader investigation in which the Army has a high-level team reviewing 18,000 contracts valued at more than $3 billion that the Kuwait office has awarded over four years. The article is just one example of the ongoing contract fraud scandals coming out of Iraq.
The Washington Post reported on August 22, 2007 what US officials call the largest bribery case to come out of the Iraq war. Although few corruption cases actually come out of Iraq, Major John Cockerham, his wife, and his sister were all indicted for receiving $9.6 million from at least eight contractors for giving them favorable contracts. Investigators have so far identified $415,000 of the $9.6 million, but the rest is still missing.
Few serious moves appear to have been taken by the US government. In a New York Times article on August 28, 2007, General Petraeus, the top commander in Iraq, was reported to have made the decision not to wait for formal tracking systems to be put in place before distributing the weapons. “We made a decision to arm guys who wanted to fight for their country,” Petraeus said. The lack of formal tracking systems has cost the US and Iraqi governments at least $40 billion overall, enormous expenditures said to have been the result of weak oversight, poor planning, and seemingly endless security problems.
Moving Forward
The NY Times reported that Senator John Warner, former chairman of the US Senate Armed Services Committee, asked for an investigation into missing weaponry in May of last year. Warner said the committee’s findings were shocking and “I asked the Secretary of the Army to brief the Armed Services Committee right away, which he did in early August (of this year).” In a sign of the seriousness of the scandal, the Defense Department Inspector General, Claude Kicklighter, will lead an 18-person team to Iraq early next month to investigate contracting practices, said Geoff Morrell, the Pentagon press secretary. The Army Secretary is expected to announce later this week the creation of a panel of senior contracting and logistics specialists to address any systemic problems they identify.
It could be one small step forward in the attempt to correct a sea of problems.
Posted 8/31/07
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U.S. Securities & Exchange Commission Reports on the Largest Ever Fine Paid by a U.S. Multinational Corporation for Violating the Foreign Corrupt Practices Act
The SEC's press release of April 26, 2007 provides the details and the context of the Baker Hughes case. It provides insights into the ways in which the SEC is approaching major FCPA cases today. It highlights the violations of the FCPA by Baker Hughes, a major U.S. oil services company.
SEC Charges Baker Hughes With Foreign Bribery and With Violating 2001 Commission Cease-and-Desist Order
Baker Hughes Subsidiary Pleads Guilty to Three Felony Charges in Criminal Action Filed by Department of Justice; Criminal Fines, Civil Penalties and Disgorgement of Illicit Profits Total More Than $44 Million
Washington, D.C., April 26, 2007 - The Securities and Exchange Commission today announced the filing of a settled enforcement action charging Baker Hughes Incorporated, a Houston, Texas-based global provider of oil field products and services, with violations of the Foreign Corrupt Practices Act (FCPA). Baker Hughes has agreed to pay more than $23 million in disgorgement and prejudgment interest for these violations and to pay a civil penalty of $10 million for violating a 2001 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions of the FCPA.
In the same complaint, the SEC also charged Roy Fearnley, a former business development manager for Baker Hughes, with violating and aiding and abetting violations of the FCPA. Fearnley has not reached any settlement with the Commission regarding these charges.
Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "Baker Hughes committed widespread and egregious violations of the FCPA while subject to a prior Commission cease-and-desist Order. The $10 million penalty demonstrates that companies must adhere to Commission Orders and that recidivists will be punished."
Christopher R. Conte, an Associate Director in the SEC's Division of Enforcement, added, "Companies like Baker Hughes will be held accountable when they circumvent the rules of fair play and honest competition by making improper payments to win business."
The SEC's complaint alleges that Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. The complaint alleges that one agent was hired in September 2000 on the understanding that Kazakhoil, Kazakhstan's national oil company at that time, had demanded that the agent be hired to influence senior level employees of Kazakhoil to approve the award of business to the company. Baker Hughes retained the agent principally at the urging of Fearnley.
According to the complaint, Fearnley told his bosses that the "agent for Kazakhoil" told him that unless the agent was retained, Baker Hughes could "say goodbye to this and future business." Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006. Baker Hughes, the complaint alleges, paid the agent $4.1 million to its bank account in London but received no identifiable services from the agent. The complaint also alleges that in 1998 Baker Hughes retained a second agent in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan. Between 1998 and 1999, Baker Hughes paid over $1 million to the agent's Swiss bank account, despite a company employee knowing by December 1998 that the agent's representative was a high-ranking executive of KazTransOil.
The SEC's complaint against Baker Hughes also alleges violations of the books and records and internal controls provisions of the FCPA in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan. In addition to violating the FCPA, certain of this conduct occurred after September 12, 2001, and consequently violated the Commission's 2001 cease-and-desist Order. Specifically, the complaint alleges that between 1998 and 2005, Baker Hughes made payments in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan in circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes' books and records.
For example, the complaint alleges that
- from 1998 to 2004, Baker Hughes authorized commission payments of nearly $5.3 million to an agent (who worked in Kazakhstan, Russia and Uzbekistan) under circumstances in which the company failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA;
- in Indonesia, between 2000 and 2003, Baker Hughes paid certain freight forwarders to import equipment into Indonesia using a "door-to-door" process under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Indonesian customs officials;
- in Nigeria, between at least 2001 and 2005, Baker Hughes authorized payments to certain customs brokers to facilitate the resolution of alleged customs deficiencies under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Nigerian customs officials; and
- in Angola, from 1998 to 2003, Baker Hughes paid an agent more than $10.3 million in commissions under circumstances in which the company failed to adequately assure itself that such payments were not being passed on to employees of Sonangol, Angola's state-owned oil company, to obtain or retain business in Angola.
Without admitting or denying the SEC's allegations, Baker Hughes consented to the entry of a final judgment permanently enjoining it from future violations of the FCPA and ordering it to pay a civil penalty and disgorgement with prejudgment interest; and to retain an independent consultant to review the company's FCPA policies and procedures.
The Commission acknowledges Baker Hughes' cooperation in the investigation.
In a related criminal proceeding announced today, the United States Department of Justice filed criminal FCPA charges against Baker Hughes and its wholly-owned subsidiary Baker Hughes Services International, Inc., with an office in Atyrau, Kazakhstan. Baker Hughes Services International, Inc. entered a guilty plea before the Honorable Gray H. Miller, United States District Judge for the Southern District of Texas, and agreed to plead guilty to one count of violating the anti-bribery provisions of the FCPA, one count of aiding and abetting the falsification of the books and records of Baker Hughes, and one count of conspiracy to violate the FCPA, and to pay a criminal fine of $11 million.
The Department of Justice has also entered into an agreement with Baker Hughes to defer prosecution for two years on charges of violating the anti-bribery and books and records provisions of the FCPA. Under the agreement, the company will retain for a period of three years a monitor to review and assess the company's compliance program and monitor its implementation of and compliance with new internal policies and procedures.
The staff acknowledges the cooperation and assistance of the U.S. Department of Justice, Fraud Section. The staff also acknowledges the help provided, in the form of mutual legal assistance, by the Isle of Man Financial Supervision Commission, HM Procureur (Attorney General) for Guernsey, and by the authorities of the United Kingdom and Switzerland.
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The Scale of Corruption in Iraq Reaches Massive Scale
U.S. Authorities Start To Take Series of Actions – Iraq’s Deputy Health Minister Arrested - New U.S. Inspector General Report -Congress Launches Oversight Hearing - Largest U.S. Gas Company Agrees to Fine
Now, after a period of silence, rumors, but few facts, the truth about the scale of corruption in Iraq is starting to emerge in the United States. There is not yet a clear and coherent story. What has become very evident is that corruption is rampant in many sectors. The scale of the corruption dwarfs that seen in almost any other country in recent times. In the following report, EthicsWorld highlights some of the latest reports, including details of abuse and concrete proposals for anti-corruption reform from the U.S. Inspector General to Iraq.
Below: The Context & Scale
Enforcement Actions
Tons of Cash Distributed – Congressional Oversight
Inspector General Highlights Issues: Overview
Corruption as Seen by the Inspector General
Corruption Commissions & Reforms
The Context & Scale
The “Iraq Study Group” co-chaired by former U.S. Secretary of State James A. Baker, III, and former Congressman Lee H. Hamilton, presented its report to the Bush Administration and the U.S. Congress on December 6, 2006.
It noted: “…Iraqi police cannot control crime, and they routinely engage in sectarian violence, including the unnecessary detention, torture, and targeted execution of Sunni Arab civilians. The police are organized under the Ministry of the Interior, which is confronted by corruption and militia infiltration and lacks control over police in the provinces…
Corruption is rampant. One senior Iraqi official estimated that official corruption costs Iraq $5–7 billion per year. Notable steps have been taken: Iraq has a functioning audit board and inspectors general in the ministries, and senior leaders including the Prime Minister have identified rooting out corruption as a national priority. But too many political leaders still pursue their personal, sectarian, or party interests. There are still no examples of senior officials who have been brought before a court of law and convicted on corruption charges…”
The report added: “…There has been some economic progress in Iraq, and Iraq has tremendous potential for growth. But economic development is hobbled by insecurity, corruption, lack of investment, dilapidated infrastructure, and uncertainty. As one U.S. official observed to us, Iraq’s economy has been badly shocked and is dysfunctional after suffering decades of problems: Iraq had a police state economy in the 1970s, a war economy in the 1980s, and a sanctions economy in the 1990s…(oil sector) Corruption is also debilitating. Experts estimate that 150,000 to 200,000—and perhaps as many as 500,000—barrels of oil per day are being stolen. Controlled prices for refined products result in shortages within Iraq, which drive consumers to the thriving black market. One senior U.S. official told us that corruption is more responsible than insurgents for breakdowns in the oil sector…To combat corruption, the U.S. government should urge the Iraqi government to post all oil contracts, volumes, and prices on the Web so that Iraqis and outside observers can track exports and export revenues.”
Enforcement Actions
Enforcement is increasing, for example:
Deputy Health Minister Arrested. On February 7, 2007 U.S. and Iraqi authorities jointly moved to arrest Iraq's deputy health minister at his ministry building in central Baghdad. Hakim Zamili is a senior member of the political group loyal to Shia cleric Moqtada al-Sadr. He is accused of grand corruption and of using his office, and its funds, to directly support killings and the supply of weapons to insurgent groups. This is the highest ranking Iraqi Government official to have been arrested on such serious charges (see report on RTE News).
Major U.S. Firm Agrees to Fines. The AP reported on February 7, 2007, that the U.S.’s largest natural gas pipeline company agreed to pay the federal government $7.7 million to settle corruption allegations related to the U.N. oil-for-food scandal over aid to Iraq. El Paso Corp. will forfeit $5.48 million to the United States, which will seek to transfer the money to the Development Fund of Iraq to be paid as restitution for the benefit of the people of Iraq. It also agreed to a deal with the U.S. Securities and Exchange Commission to pay an additional $2.25 million. Government officials said the $5.48 million represents the amount of illegal surcharges paid to Saddam Hussein's government by third parties from whom El Paso purchased Iraqi oil between mid-2000 and March 2003.
Three U.S. Miltary Officers Charged with Corruption. RTE News also reported on February 8, 2007 that three senior US military officers who have been supervising funds for reconstruction in Iraq have been charged with corruption. The Reserve officers and two US civilians are accused of steering contracts for reconstruction work towards certain companies in return for bribes. The bribes included cash, sports cars and jewellery. The US special Inspector General for Iraq, Stuart Bowen, has vowed to root out waste, fraud and abuse in Iraq.
Tons of Cash Distributed – Congressional Oversight
With the Democratic Party having won the majority of seats in the U.S. House of Representatives in last November’s elections, new chairmen of House oversight committees are turning their attention to the War in the Iraq.
A House committee report on February 6, 2007 questioned whether some of the billions of dollars in cash shipped to Iraq after the American invasion — mostly in huge, shrink-wrapped stacks of $100 bills — might have ended up with the insurgent groups now battling American troops, reported the New York Times on February 7, 2007.
The report was released by the House Oversight and Government Reform Committee at a hearing when Democrats sharply questioned the former American civilian administrator in Iraq, L. Paul Bremer III, about lax management of the nearly $12 billion in cash shipped to Iraq between May 2003 and June 2004.
As The Washington Post noted that same day, the funds were provided to the Iraqis in cash, often in shrink-wrapped packages of $100 bills. The committee's chairman, Rep. Henry A. Waxman (Democrat, California.), said the U.S. government flew nearly all the cash into Baghdad on military cargo planes from May 2003 to June 2004. "Who in their right mind would send 363 tons of cash into a war zone? But that's exactly what our government did," Waxman said. Because of the way the CPA kept track of the payments, Waxman said, "we have no way of knowing whether the cash shipped into the Green Zone ended up in enemy hands."
Congressman Waxman is planning many more hearings. One topic to be discussed is the operation of the Haliburton Company and its affiliates – questions have been raised over the effectiveness of its systems for controlling and monitoring service funds – services that are financed by U.S. Government programs.
Inspector General Highlights Issues: Overview
On January 30, 2007 the U.S. Inspector General filed his latest report to the United States Congress on Activities in Iraq in the 4th Quarter of 2006. In his cover letter Inspector General Stuart W. Bowen, Jr. noted that virtually all of the $21 billion in U.S. Government funds for Iraq’s reconstruction (IRRF funds) are now under contract (approximately 80% of which is already spent). The end of the IRRF marks the beginning of a new phase in aid to Iraq, which will entail a broader multilateral component and an increase in the Iraqi government’s responsibility for the overall economic recovery effort.
He said that, “This new phase, however, does not mark the end of oversight. To the contrary, more remains to be done to account for past U.S. investment and to promote the highest and best use of future U.S funding for Iraq. Recognizing the need for continuing oversight, Congress passed, and the President signed, the Iraq Reconstruction Accountability Act in December 2006. This Act extended SIGIR’s jurisdiction to include all FY 2006 appropriations for Iraq reconstruction, including the Iraq Security Forces Fund, the Economic Support Fund, and the Commander’s Emergency Response Program. The Act requires SIGIR to conduct a forensic audit to account for the use of the IRRF and effectively extends SIGIR’s organizational life through 2008.”
The Inspector General’s office reported that it, “completed 82 audit products, including reviews of U.S. efforts to support the capacity development of Iraq’s ministries, an examination of the Department of State’s management of funding for Iraqi police training and training support, a report on medical equipment purchased to support the primary healthcare centers, and a statistical summary of security costs for major U.S. contractors in Iraq. SIGIR investigators continued work this quarter on 78 open investigations, including 23 cases under direct Department of Justice (DoJ) supervision. SIGIR also facilitated the formation of the International Contract Corruption Task Force to coordinate fraud investigations by its several members, including the Federal Bureau of Investigation, the U.S Army’s Criminal Investigation Command, and the Defense Criminal Investigative Service. In addition, SIGIR continued its participation on DoJ’s National Procurement Fraud Task Force.”
Corruption as Seen by the Inspector General
In an early part of the report on general observations, the very first point made related to corruption…
Corruption continues to plague Iraq. Anticorruption institutions in Iraq are fragmented, and there does not appear to be an internal Iraqi consensus about how these institutions should interact. SIGIR’s 2006 audit of U.S. support to anticorruption efforts in Iraq presented a series of recommendations, some of which remain
unresolved.
The report noted on Investigations -
“This quarter (final quarter 2006), SIGIR investigations opened 27 cases and closed 43 preliminary and open cases. Currently, 78 investigations are open, including 23 cases awaiting action under prosecutorial control at the U.S. Department of Justice. Also this quarter, the International Contract Corruption Task Force identified 36 cases. SIGIR, one of five agencies working jointly on the taskforce, contributed nine cases to this effort. Since December 2005, SIGIR has worked closely with a range of agencies to suspend and debar contractors for fraud or corrupt practices involving Iraq reconstruction and Army support contracts in Iraq. These cases arise both from criminal indictments filed in federal district courts and allegations of contractor irresponsibility requiring fact-based examination by the Army’s Suspension and Debarment Official. To date, 14 individuals and companies have been suspended based on allegations of fraud and misconduct connected to Iraqi reconstruction and Army support contracts. As of January 30, 2007, a total of eight have been debarred, and four others have been proposed for debarment.
The report stated that, “Corruption continues to limit the ability of the GOI to manage reconstruction efforts and key areas of economic policy. The Iraqi Ministry of Oil estimates that Iraq loses $700 million of revenue each month because of oil smuggling. Transparency International ranks Iraq 161st of 163 countries measured. This ranking, 1.9 on the Corruption Perceptions Index, indicates high levels of perceived corruption. SIGIR’s October 2006 Report discussed ways that Iraq, the United States, and international donors were helping to combat corruption, including new commitments and benchmarks for key actions that the Iraqis would agree to as part of the Compact. The U.S. Mission interagency Anticorruption Working Group helped the GOI identify anticorruption initiatives for the Compact and will help Iraq implement some of the key anticorruption priorities outlined in the Compact. The U.S. Mission is providing an advisor for each of the three Iraqi anticorruption institutions—the Commission on Public Integrity (CPI), the Board of Supreme Audit (BSA), and the ministry Inspectors General (IGs).”
Corruption Commissions & Reforms
From the Inspector General’s Report
Commission on Public Integrity
The future of the CPI is uncertain. It was created by the Coalition Provisional Authority, but never written into Iraqi law. Iraqi legislators have stalled a vote on whether to give the commission permanent status or to dissolve it and let the ministry IGs audit their own agencies. Meanwhile, the head of the CPI has been the subject of corruption investigations by the Parliamentary Anticorruption Committee. The CPI has nonetheless pushed for the prosecution of several former ministers and uncovered corruption in the Interior Ministry; 3,000 employees were dismissed in October for corruption and sectarianism. Targets have included former Ministers of Defense and Electricity.
CPI’s current investigations include the quality of food purchased by the Ministry of Trade for monthly rations, the disappearance of petroleum products under the supervision of the Ministry of Oil, the lack of progress refurbishing the railroad system, and misconduct by police officers in the Ministry of Interior.
Board of Supreme Audit
The UN is coordinating with international audit boards to train BSA staff according to modern audit systems. Members of the Arab Organization of Supreme Audit Institutions (ARABOSAI) would contribute to training the BSA Iraqi staff as part of a plan created by the ARABOSAI training committee when it met in Tunisia in January 2007.
International Compact for Iraq
As part of the Compact, Iraq will commit to specific steps to improve transparency and inhibit corruption in exchange for pledges of aid and other international support. The current Compact language outlines a process to develop a legal framework and build institutional capacity to deter corruption at all levels of government.
Key priorities and benchmarks include:
• strengthening the rule of law and the capacities of law-enforcement agencies
• developing anticorruption plans for institutions with substantial revenue and expenditures
• fully implementing the public income and asset disclosure law and legislation to enable asset seizure and forfeiture
• strengthening capacity for internal audit and the BSA
• reviewing the mandates of the CPI and the inspectors general to ensure that they work as independent, professional, technical, and non-political bodies
• developing a comprehensive system of internal and external controls within government, including conflict of interest policies, audit, and evaluation
• ratifying the UN Convention Against Corruption
• launching a public education campaign on anticorruption.
Posted 2/9/07
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“The Donors Who Turn a Blind Eye to Kenyan Sleaze”
A Financial Times Editorial by Michael Holman
February 16, 2006
In his article (available for subscribers to the FT or FT.com), Michael Holman, former FT Africa Editor (and author of the new novel, Last orders at Harrods) castigates aid donors for repeatedly providing funds to corrupt regimes, the most recent being the current Kenyan government. Tracing past aid flows to Zaire and to Kenya, Holman shows how political factors, business ties and old habits all combine to convince donors to support corrupt governments.
Holman, who served as the FT’s Africa Editor for more than two decades, has expertise on Kenya and he details the courage of former Kenyan ethics and corruption Minister John Githongo in providing exceptionally detailed accounts of current Kenyan corruption to a special meeting of Kenya’s parliamentary public accounts committee in London last weekend
Allegedly, around $700 million has been stolen by top officials. But, stressed Holman, it is important to note that the United Nations, the World Bank and the British Government continue to pour aid funds into Kenya. While these donors suggest that their money bypasses the corruption and serves the poor, Holman reports that every social indicator in Kenya points in one direction - downwards.
Holman concludes: “By insisting on maintaining aid, Paul Wolfowitz, World Bank president, and Hilary Benn, Britain’s aid minister, are not only forgetting the past. They are arrogantly insisting that they know what is best for Kenya. Had they bothered to ask Mr. Githongo what they should be doing, the answer, I suspect, would have been very different.”
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Kenya: Major Scandal Likely As Former Top Official Prepares To Go Public
John Githongo's Actions May Set Important International Precedent
Former Kenyan Ethics and Governance Permanent Secretary John Githongo, who has resided in the UK for the last year on resigning his office, is reported in the Kenyan media to have prepared a 90 page dossier, which it is said he plans to make public, which detailed major corruption involving some of the most senior officials in the Government.
Mr. Githongo, the former head of Transparency International Kenya, has not been intimidated by threats and his revelations may set an important precedent - very few public officials have ever quit office and gone public to provide precise details on alleged corruption by a current government.
On January 20, 2006, The Guardian in the UK, which has been in touch with Mr. Githongo, carried the following story which we excerpt:
Top ministers face inquiry into corruption allegations in Kenya
Government Under Threat As Claims Threaten to Have Knock-On Effect for Donors Across Africa
Michela Wrong and Duncan Campbell
Friday January 20, 2006
The vast scope of the allegations is likely to have serious ramifications for the government and could affect how Britain and international organisations deal with African nations that are suspected of similar activities.
Kenya's vice-president and two cabinet ministers are among more than 30 people summoned by the Kenyan anti-corruption commission (KACC).
The former internal security minister Chris Murungaru had already been summoned to appear over the weekend to explain his personal wealth. The commission said those would "not be the last notices to be issued".
Shortly after news of the summons broke, Mwai Kibaki, Kenya's president, warned his cabinet: "You are required not only to be on guard against corruption, abuse of office, and influence peddling in all forms, but also to actively participate in the fight against the vice by being alert."
The high-level investigation, on which will hang the credibility of President Kibaki's government of three years, has been prompted by a report from John Githongo, the former permanent secretary for governance and ethics, who sought exile in Britain last year.
From Oxford, Mr Githongo compiled the 36-page critique, which was sent to Mr Kibaki and the anti-corruption chief, Aaron Ringera.
Mr Githongo told the Guardian that he welcomed Mr Ringera's actions. "I am pleased to see things seem to be moving on these issues. I am determined that Kenyans get to know the whole truth as soon as possible."
Media reports suggest that the focal point of Mr. Githongo's allegations is a company called Anglo Leasing and Finance that the government had planned to pay £20m for a sophisticated passport equipment system and another £29m for forensic science laboratories, which were never provided.
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United Nations Investigating 200 Charges of Procurement Abuse
New disclosures of widespread abuse in the use of official United Nations funds are now adding to pressures for far-reaching management and governance reforms at the organization. These new allegations, which relate to fraud and abuse in U.N. peacekeeping operations, follow the totally separate report, published in late October 2005 by the Volcker Commission on the UN-Iraq oil-for-food scandal (please see stories below on this page). A core concern of the Volcker Commission was management failure at the helm of the United Nations. The evidence made public by the Commission provided the United States delegation to the United Nations, as well as some other national delegations, with a solid basis for calling for far-reaching reforms of the governance systems of the organization. The new disclosures on peacekeeping operations will now add formidably to the pressures for reform at the United Nations.
A central issue in this context relates to the moral authority of the United Nations to counter corruption and call on its member governments to improve their own governance when the U.N. itself is found to have serious shortcomings. This not only applies to governments, but also to corporations as a key principle of the U.N. Global Compact relates to corruption (please see our page on CSR Standards and Principles)
Judy Aita, United Nations Correspondent of the Bureau of International Information Programs, U.S. Department of State, reported on January 24, 2006 that internal U.N. investigations have uncovered 200 instances of alleged procurement mismanagement and fraud in peacekeeping operations and at U.N. headquarters. Eight staff members have been placed on special leave and investigations could involve tens of millions of dollars. A U.N. report on the abuse noted that "substantial evidence of abuse in procurement for peacekeeping operations leading to financial losses and significant inaccuracies in planning assumptions" had been uncovered. The report also said "the design and maintenance of controls needed to ensure that U.N. procurement complies with financial rules and regulations were insufficient. Important controls were lacking while existing ones were often bypassed,"
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Reform of United Nations' Approaches to Management Seen As Critical
Paul Volcker issued a final UN oil-for-food Iraq report on October 27, 2005 with allegations that over 2,200 companies were engaged in illegal schemes with the former Iraq regime involving over $1.7 billion of illicit payments. The former US Federal Reserve Chairman stressed that his prime concern at the end of his investigation is management in the United Nations and the vital need for reform here. He underscored that bribery is all too frequently made possible when official oversight is inadequate.
According to the final report, DaimlerChrysler AG, Siemens AG, and Volvo AB are among 2,253 companies that allegedly paid illegal kickbacks to Iraq to win business from an aid program designed to allow Saddam Hussein to sell oil to buy food and medicine. Much of the information is based on records kept in Iraq and Volcker stressed that allegations need to be viewed with caution. It also appears that a good deal of the illicit payments were made through agents. Russian companies, followed by French companies, are the most numerous on the list of those said to have paid bribes to win contracts to supply products. Iraq derived $1.5 billion from kickbacks and $229 million in illegal surcharges from 139 oil traders. Iraq required humanitarian contractors to pay these 10 percent fees, which exceeded transportation costs, directly to Iraqi-controlled bank accounts or to front companies that forwarded the money to the government. About 60 percent of all companies involved in the oil-for- food program paid oil surcharges or kickbacks on humanitarian goods for Iraq totaling $1.8 billion.
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The United Nations – Oil-for-Food Scandal
Editorial by the Wall Street Journal, September 9, 2005
Before the publication of the final Volcker Report in November, 2005, the focus of attention has been on U.N. management and Volcker was to stress this again in his final November press conference. The Wall Street Journal editorializes about the “largest fraud ever recorded in history.” The editorial writers at The Wall Street Journal have never taken a gentle view of management at the United Nations. But, they have spared no punches in an editorial on September 9, 2005. Their central focus is on the management of the United Nations under Secretary General Kofi Anan. The basic text is the report by the Paul Volcker Commission on the Iraq oil-for-food program and the basic issue is corruption. The Journal noted that this was “the largest fraud ever.’ It continued; “press reports often cite the overall size of Oil for Food at $60 billion, but Mr. Volcker's report makes clear that the real figure was in excess of $100 billion. From this, Saddam was able to derive $10.2 billion from illicit transactions. But the important point is that he was able to steer 10 times that sum toward his preferred clients in the service of his political aims.
“None of this happened by accident. Mr. Volcker's report is replete with examples of incompetent U.N. oversight and tales of political wrangling among the permanent members of the Security Council. But the abiding fact is that it was the Western powers, not Saddam, who wanted Oil for Food at virtually any cost, because it offered the appearance of a meaningful policy in the absence of a real one, namely regime change. And it was the political convenience of this chimera that led the U.S. and the U.K. to tolerate, and the rest of the Security Council to feast on, the opportunities for corruption that were inscribed in the very nature of the program.
“As for the U.N., it proved its worth to Saddam as the one hall of mirrors in which such shenanigans could take place. Yet even now we are told that "at least" Oil for Food fed the Iraqi people when they were on the edge of starvation, and this is accounted a U.N. success. That is false. Oil for Food offered a lifeline of cash and influence to a regime that was starving its people. The program did not corrupt the U.N. so much as exploit its essential nature. Now Mr. Annan wants to use this report as an endorsement of his "reform" proposals. Only at the U.N. could he dare to think he could get away with this.”
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