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Probe: $1.8B diverted to Hussein regime

Volcker recommends 'fundamental administrative reform' at U.N.

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Volcker's investigation found kickbacks came from 66 U.N. members states.

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UNITED NATIONS (CNN) -- Former Iraqi President Saddam Hussein manipulated the United Nations oil-for-food program so that his regime received $1.8 billion in illicit payments, a U.N.-backed independent report said Thursday.

The investigation, led by former U.S. Federal Reserve Chairman Paul Volcker, said kickbacks came from some 66 member states and illicit surcharges came from 40 member states.

"Oil surcharges were paid in connection with the contracts of 139 companies and humanitarian kickbacks were paid in connection with the contracts of 2,253 companies," the report said.

In a speech to the General Assembly, Volcker recommended the United Nations undertake "fundamental and wide-ranging administrative reform" to ensure future programs are not similarly corrupted.

"Corruption of the program by Saddam and many participants could not have been nearly so pervasive with more disciplined management by the United Nations," he told the U.N. governing body.

"At stake is whether the organization will be able to act effectively."

He called for the secretary-general -- typically selected for diplomatic rather than organizational skills -- to hire a strong chief operating officer to ensure oversight, auditing and inspection functions are better insulated from management influence and control.

"What's needed is a widely respected, independent oversight body ... equipped with enough staff to review budgeting and staffing," he said.

In the audience was Secretary-General Kofi Annan, who told reporters afterward he would "take measures to strengthen the organization," adding that he had already had received proposals "to ensure that, in the future, we are better equipped to handle this sort of program."

The report -- the probe's eighth and final document released about the now-defunct program since August 2004 -- describes "how thousands of contractors, wittingly or unwittingly, facilitated the process," Volcker told reporters earlier at a New York hotel.

It is based in large part on data from the former regime itself, supplemented by banking and other records, Volcker said.

He called the oil-for-food program -- which began in late 1996 and ended in 2003 -- "the mother of all humanitarian programs," noting that thousands of employees were involved in running it.

A critical point came in 2000, when the program was almost three years old and "the regime began openly to demand illicit payments from its customers," the report said.

"Iraq's largest source of illicit income under the program came from kickbacks paid by companies that had been selected to receive contracts for humanitarian goods," the report said.

"Available evidence indicates that Iraq derived more than $1.5 billion of income from the kickbacks."

Once the kickbacks and payoffs became generalized, "it should have been caught. There were provisions in the program and in its management and oversight that should have permitted it to be caught."

By the time the surcharge program ended two years later, the Iraqi government had received $228.8 million in illicit income, the report said.

Program had separate goal

The program sought to ease the toll of sanctions imposed by the United Nations after the 1991 Persian Gulf War by allowing Iraq to sell oil to provide revenue for humanitarian needs.

Volcker blamed Hussein's ability to decide how much to charge and to whom to sell for making it easy for him to manipulate the program.

In addition to its humanitarian component, oil-for-food had a separate goal, which was to keep Hussein from obtaining or maintaining unconventional weapons, Volcker said.

Though the program appears to have succeeded on both counts, "that success came with a high cost; in my judgment, an intolerably high cost," he said.

The 630-page report said there was plenty of blame to go around. Though the oil overseers expressed concern to the U.N. secretariat and to the Security Council about Iraq's demands for payment, "little action was taken," it said.

The report cited Banque Nationale de Paris, which held the escrow account for the $64 billion program and provided the letters of credit needed for the financing, saying it "was in a position to have firsthand knowledge" of what was going on but "did not recognize a particular responsibility to adequately inform the U.N."

In response, BNP said it operated through subsidiaries and affiliates that could not share customer information with each other, an argument the report described as "unpersuasive."

In addition, the report said countries that "were responsible for approving their national companies to do business with the program took no action."

The report pointed to a number of contracts with Russian companies, which it said accounted for about 30 percent of oil sales.

"By far, the largest portion of surcharge payments went through the Iraqi Embassy in Moscow between March 2001 and December 2002," when more than $52 million in surcharges was paid, the report said.

Companies deny involvement

The companies have denied involvement, despite being confronted with evidence, the report said.

Among those cited were subsidiaries for Siemens, one of the world's largest electrical engineering and electronics companies.

The subsidiaries -- in France, Turkey and the United Arab Emirates -- "paid kickbacks to the Iraqi regime in order to obtain program contracts," the report said.

The company, in a written response published in the report, said its own inquiries "cannot confirm the committee's allegations" and that its management considers the conclusions "premature" and "unjustified."

Volvo of Sweden, which sold $11.8 million in heavy construction equipment to the regime under the oil-for-food program, was cited for having paid kickbacks of more than $317,000 in April 2002 to Iraq's central bank account in Amman, Jordan.

The company decided not to furnish any contrary evidence, the report said, though its vice president and general counsel said in a letter to the commission, which was published in the report, that the conclusions were not supported by the evidence.

The report said Marc Rich & Co. financed 4 million barrels of oil under a 9.5-million-barrel contract awarded to the European Oil and Trading Co., a French-based shell company.

"Surcharges were imposed on the oil," the report said, and "Marc Rich & Co. directed BNP Paris not to disclose its identity to BNP NY in connection with its financing of the U.N. contract."

It added, "According to an individual familiar with the companies, EOTC and Marc Rich & Co. agreed that the premium paid to EOTC would cover a commission and a surcharge. The premium paid by Marc Rich & Co. of 30-40 cents per barrel was sufficiently high to cover both."

The company responded that it "continues to dispute vigorously" the report's conclusion.

The report named Daimler Chrysler for having "knowingly made or caused to be made a kickback payment of approximately $7,134."

The report said the payment was known to at least one managerial-level person working for the company in Germany.

The company issued as statement saying it was aware of the report and "in light of ongoing investigations" had no comment.

Volcker cautioned that just because a company's individual contract was identified as the subject of an illicit payment "doesn't necessarily mean that company made, authorized or even knew about the illicit payment."

The report names British Member of Parliament George Galloway for receiving proceeds, either directly or through an associate, from 18 million barrels of oil. (Galloway challenges senators)

Galloway, a critic of the U.S.-led invasion of Iraq, heatedly denied the allegation.

Volcker said he had found no evidence linking former Secretary-General Boutros Boutros-Ghali, who led the world body from 1992 to 1996, to any of the corruption schemes.

Annan's son was employed by a contractor that got an oil contract, and Volcker's panel in September released findings that criticized the elder Annan. (Full story)

Annan himself authorized an inquiry into his son's dealings, but Volcker was not impressed at the elder Annan's move.

"It was not much of an inquiry," Volcker said Thursday. "We have criticized him, I think, about as severely as you can in saying he made a mistake."

Volcker said the commission members would make themselves and their information available to any law enforcement or regulatory agencies that might want to pursue particular cases, but would disband in about a month.

In New York, meanwhile, Texas oilman Oscar Wyatt Jr. pleaded not guilty Thursday to felony charges of conspiring to pay kickbacks as part of the oil-for-food program.

U.S. District Judge Denny Chin set a June 20 trial date for Wyatt, former chairman of Coastal Corp.

CNN's Liz Neisloss contributed to this report.

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