The Hindu Business Line : Food for thought from the oil-for-food scam

FOR professionals recovering from festivals and generally ruing over the weather, here is something to get busy with: The 630-page report of the Independent Inquiry Committee on the United Nations Oil-for-Food Programme (OFFP), a.k.a. the Volcker Report, dated October 27, and available at www.iic-offp.org. Two reasons for the choice of subject: One, it is topical; and two, it is about the audit of what some say is the scam of all times.

"Oil is a very important component of economic growth," says Maria Bartiromo. And Saddam Hussein knew it only too well. What came in handy for him were `Resolution 986' and the Iraq-UN memorandum of understanding, which allowed Iraq to choose to whom it sold oil under the OFFP. In retrospect, experts opine that the seeds of the problem were sown in this arrangement that gave a powerful discretion to the wrong man.

Not only were customers for oil picked on political considerations, but also there was the collection of illicit `surcharges' totalling $228.8 million for the award of contracts, often to beneficiaries who had little `familiarity with the oil trading market'.

There was the official selling price that the UN had specified but there was a black-market where a premium was collected to cover the commissions owed to layers of intermediaries and beneficiaries, through transactions "in which the UN could not determine from the face of the contract who was benefiting from or purchasing the oil".

The `policy' of collecting `surcharge' on every barrel of oil sold under the OFFP was routed through the Ministry of Oil and SOMO, the Iraqi State Oil Marketing Organisation, which `maintained an extensive database to keep track of the payments'.

The brazen move started with $0.10 per barrel, rose to $0.50, and then ultimately ended at $0.15. "Surcharge payments were generally due within thirty days of the oil lift... SOMO prohibited a company from loading additional oil when surcharges were overdue."

The report speaks of `certain practices' that developed `to cope with the surcharges'. For instance, "companies used a disclaimer in their contracts providing that the party to the contract was not involved in paying surcharges."

It seems one agent confessed to "including the disclaimer in fabricated, after-the-fact agreements created to disguise the payment of surcharges". Another ploy was to call the offending payments by a different name, such as `loading fees' or `port fees'. "In one instance, a bank official advised Taurus to switch the term `commissions' on certain money transfers to `loading fees'," narrates the report, as an example of the load that accounts take!

Greasy accounts in the oil game

Here is a glimpse into the SOMO Accounting Department. "Its employees created invoices for all oil shipments with a corresponding debit note recording an internally assigned serial number, the amount of oil lifted, and the surcharge owed on each shipment. They also maintained an electronic database that kept track of surcharge payments collected. The database reflected the amount of the surcharge paid, how it was paid, the name of the contracting company, and the name of the individual or entity making the payment."

This was all necessary because of frequent `partial payments', towards account. "Most surcharges were paid through deposits in designated SOMO bank accounts in Jordan and Lebanon or through cash payments made at Iraqi Embassies abroad."

The `bridge' accounts in the banks were in the names of SOMO employees, `upon the instructions of the Economic Affairs Committee'. The report cites a Jordan National Bank official saying that "when individuals and companies came to the bank to make their payments, they provided the bank agent with a copy of the oil contract signed by SOMO and approved by the UN," to signify that the payments were `in conformity with the UN regulations'.

The cloak did work, and the bank would generate an advice when it received a payment, recording the name of the depositor and the amount of deposit; "these bank advices, as well as monthly bank statements, were sent regularly to the SOMO Accounting Department," thus completing the cycle of book-keeping. The report assures that the Committee has reviewed "bank records supporting the payment information recorded in the SOMO database," as part of the audit procedure.

How did money go from the `bridge' accounts? "The funds were then transferred to accounts of the Central Bank of Iraq (CBI) held at the same bank. From there, CBI employees withdrew the funds in cash and transported it to the CBI in Baghdad."

Diplomatic diddle

Embassies in "Russia, Greece, Egypt, Switzerland, Italy, Malaysia, Turkey, Austria, Vietnam, Yemen, and Syria" helped Iraq by doubling as collection centres. "By far the largest portion of total surcharge payments went through the Iraqi Embassy in Moscow," notes the report. The Iraqi Ministry of Foreign Affairs constituted `a three-member committee to collect cash surcharge payments' and one of the three was the Embassy's accountant!

Here is a description of the accounting procedure: "Members of the payment committee usually would count the cash in the presence of the company representative. Three copies of receipts would be made and signed by all members of the committee present at the meeting. The receipts would contain a serial number, the amount of the payment, the name of the company depositing the money, and the names of Iraqi officials receiving the money. Sometimes receipts contained names of individuals bringing cash to the Embassy, but their signatures were not required.

"After the money was received, the Iraqi ambassador would sign and stamp each receipt. One copy of the receipt was then given to the company representative, one was placed with the cash in the safe to be included in shipment to Baghdad, and the third copy was placed in the Embassy's books."

How did cash move from the Embassy? Read the following description from a section titled `Surcharge payments on Russian contracts': "Cash payments were stored by the commercial counsellor in the safe in his office at the Embassy. The cash, along with copies of relevant receipts, was transported periodically in red canvas diplomatic bags from Moscow to Baghdad by the diplomatic staff of the Iraqi Embassy. The time and amount of transported cash was decided by the ambassador."

Diplomatic bags, which could hold up to $1.5 million in $100 bills, were used to transport the money when a sufficient amount accumulated at the Embassy, describes the report. "All diplomatic bags were numbered and sealed with wax. Nevertheless, Embassy staff transporting the cash was often aware of the contents of the bag, since the Embassy was rather small and the employees exchanged information. Because the cash was transported in diplomatic pouches and Embassy staff exercised diplomatic immunity, the pouches were not searched at the Moscow airport by Russian customs authorities."

Once the bags flew in, the Iraqi diplomat transporting cash was met by a representative of the Ministry of Foreign Affairs for collection, against two copies of a receipt — one for the Ministry and the other for the Iraqi Embassy in Russia. The diplomatic bags with the cash would then go to Rafidain Bank in Baghdad, for depositing in SOMO's dollar account "in the presence of witnesses who verified that the amount of cash that left the Embassy corresponded to the amount that reached Baghdad". From this account, the money was transferred periodically to the Ministry of Finance's account at the CBI.

Also of interest, from a forensic accountant's angle, are chapters titled `The broadening of the kickback scheme' and `Other manipulations of the programme'.

Truth may be stretched, but it cannot be broken, and it always gets above falsehood, as does oil in water, Miguel de Cervantes said, just in case you're afraid that the slick may let culprits slip through.

AccountSpeak@TheHindu.co.in

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