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IRAQ: Deceit by the truckload


It is the greatest international scam in Australia's history: the inside story on the wheat board kickbacks.

by David Marr and Marian WilkinsonThe Sydney Morning Herald
April 15th, 2006

BETWEEN them, a pitiless dictator and UN sanctions had reduced Iraq to ruin. The currency was destroyed. Millions were starving. Hospitals had no medicines, no bandages and no anaesthetics. Faced with a death toll of half a million children since sanctions began, the US secretary of state, Madeleine Albright, remarked: "We think the price is worth it."

But the world grew so restive at the sight of this man-made catastrophe unfolding in Iraq that a compromise was forced on the US. The oil-for-food program was designed to feed Iraq while starving Saddam Hussein of hard currency until he gave up his weapons of mass destruction.

Within hours of the resolution passing the UN Security Council, the salesmen of the Australian Wheat Board were back on the road to Baghdad. These were crazy, dangerous journeys that ended in brief meetings, long lunches and huge wheat deals. As American bombs and missiles rained down on Baghdad in December 1998, the board clinched deals to sell more than 2 million tonnes of grain.

Australia has been selling wheat and mutton to tyrants for a long time. That's business and we're good at it. We're good at doing the deals, good at trading with the enemy while keeping our allies onside. This country traditionally runs two foreign policies: one for the nation and another for the bush. We refused to recognise Mao's China, but Mao was one of the wheat farmers' most valued customers.

Saddam was a familiar kind of client and the Australian Wheat Board - an arm of government about to morph into the private corporation AWB Limited - became the single biggest seller of wheat to Iraq in the last years of Saddam's regime. Our farmers had Iraq cornered. "It was huge," recalled an AWB executive with awe. "It was profits and money all round."

But it was not business as usual. Up in the Persian Gulf, hundreds of Australian servicemen were working in a multinational force supervising shipping in and out of Iraq's only port, Umm Qasr. Oil and weapons were the main game, but their mission was to prevent all breaches of UN sanctions. In the last stages of this story, an Australian would command that force from the decks of the USS Cushing.

Under UN Security Council Resolution 661, Australia was responsible for seeing that no cargo left its shores in breach of sanctions. Regulations introduced in Australia during the first Gulf war banned all shipments to Iraq unless the foreign minister was "satisfied that permitting the exportation will not infringe the international obligations of Australia". Under the oil-for-food program, no wheat could leave without a tick from Alexander Downer. He and his officers would sign off on 292 ships carrying 12 million tonnes of wheat to Iraq worth more than $2 billion. And almost every cargo breached sanctions.

The wheat was clean. The problem was the cash ferried in on the cargo. Iraq's oil revenues were held in a mighty escrow account in a New York bank with the UN as cashier. From these oil billions, Saddam was allowed to buy "humanitarian" supplies - mostly wheat - but he was not supposed to get his hands on the cash. Starving him of hard currency was seen by the international community - not least Australia - as the most effective way of forcing Iraq to disarm.

Yet Saddam got hold of billions. The UN was to prove too riven by political division over Iraq to police its own system. Australians were too willing to break the rules. And the Iraqis proved magnificent shakedown artists.

THE FIRST BITE: JUNE TO NOVEMBER 1999
ZUHAIR DAOUD, head of the Iraqi Grain Board for more than 30 years, was soon to die in an ambush on the road to Amman, but in his last weeks in office he had a strange task to perform: to tell an AWB team visiting Baghdad that they must now load into their contracts the cost of trucking wheat all over Iraq. The prospect was a nightmare for the company. Where would it find the trucks? Who would insure the loads? But Zuhair cleared the air by telling the team AWB wouldn't be responsible for trucking anything anywhere. Iraq just wanted the money.

Amnesia and confusion would later seize senior AWB executives when quizzed about the arrangements Iraq imposed in 1999. But the two AWB salesmen lunching that day with Zuhair - Dominic Hogan from AWB's Cairo office, and Mark Emons, the manager of the company's Middle East section - recognised this for what it was: a scheme for siphoning cash out of the UN's escrow account. Emons later told Terence Cole's inquiry into the AWB scandal: "We knew it was outside the sanctions."

Emons returned from Baghdad to drive a five-month search for ways of hiding the payments from the UN. Aware that Iraq's transport infrastructure was in ruins, the international body had approved the principle of contracts covering the cost of "inland transport" - but the fees had to be customary, reasonable and not a source of hard currency for the regime. All three provisos were breached by the 700,000-tonne contract AWB signed in July loaded with "trucking fees" of $US12 per metric tonne. It was a hard-currency bonanza.

Strictly speaking this was not a bribe because the rate was set by the Iraqi Grain Board and would be paid - somehow or other - into the coffers of the government of Iraq. But it was a classic kickback: a side payment made from falsely inflated contracts. The beauty of the rort from AWB's point of view was that Australia's wheat farmers didn't pay a cent. The money was all coming out of the UN's escrow account.

At Ceres House, the wheat trader's headquarters in Melbourne, the mantra was: "It's no skin off our nose."

By October AWB still hadn't found a way to get the cash into Iraq undetected. Dominic Hogan was running out of ideas. A notorious email he sent at this time ended with the flourish: "Other option is to use maritime agents/vessel owners' account/or buy a very large suitcase."

Salvation - if that's the word - came out of the blue nine days later in a mangled fax from Alia for Transportation and General Trade, a company based in the Jordanian capital of Amman: "We would like to introduce to you our company being one of the Jordanian Establishments specialized on the fields of over land and ocean freight transportation." Zuhair confirmed Alia would take the "trucking fees", which had to be paid in advance.

Just days before the MV Pretty Ruby arrived at Umm Qasr in late November with its cargo of Australian Hard, AWB deposited $US504,000 in Alia's account in the Jordanian capital. Over the next three years, AWB would pay this obscure company hundreds of millions of dollars without ever conducting due diligence, without a contract and without ever checking if it had any trucks in Iraq. It didn't.

This is a story defined at every stage by what was not done. When obvious checks aren't made and obvious questions aren't asked, someone doesn't want to know the answer. A grey area is being left grey. No evidence has emerged at the Cole inquiry that AWB ever sought advice on paying "transport fees" from the bodies supposed to be vetting the contracts: the Foreign Affairs Department and the UN. And no one at AWB checked up on Alia.

Othman al-Absi, the company's general manager, would tell the Cole inquiry: "I do not recollect ever being asked by anyone from AWB about who owned or controlled Alia, or whether it had connections with the Ministry of Transport. However, Alia's ownership was public knowledge and was not hidden." The records show the Baghdad ministry holding 49 per cent of the shares.

According to a "distillation" of secret evidence to the Cole inquiry, this fact had been known for at least a year in Canberra. A 1998 report by a foreign intelligence agency had been circulated to the departments of Foreign Affairs, Defence and Prime Minister and Cabinet indicating "that Alia Corporation based in Jordan was part-owned by the Iraqi government and that it was involved in circumventing UN sanctions on behalf of the Iraqi government".

THE CANADIAN COMPLAINT: JANUARY TO JUNE 2000
IRAQ was putting the hard word on everyone, but the Canadians did what AWB would never do in the years ahead: they sought the UN's advice and were told emphatically not to pay.

The Canadians were Australia's only real rivals in the market because Saddam had black-banned American grain. Now the UN's verdict put them in a bind and they turned on the Australians. In mid-January 2000, a Canadian diplomat told UN inspectors that according to the Iraqi Grain Board, AWB was already paying the trucking fees.

A UN official, Felicity Johnston, immediately contacted the Australian mission at the UN to ask for "discreet, high-level inquiries" to be made into AWB. At this point, the whole trucking fee scam could have been stopped in its tracks. But it never happened. The to and fro of cables and meetings and phone calls that followed raise for the first time the big question in this story: was the Australian Government complicit or staggeringly incompetent?

On the ABC's Four Corners, Johnston insisted she spoke to the diplomat Bronte Moules at the Australian mission specifically about "trucking fees". Moules denies this but she kept no notes of their conversations; says she never asked what the suspect payments were for and never examined any of the many AWB contracts in her UN office. She confessed she couldn't have understood their terms even if she had.

Canberra's inquiries amounted to one phone call to AWB's government liaison man, Andrew McConville, who said the accusations were "bullshit". As far as the Australians were concerned, that settled the matter. But the Canadians were still unhappy and threatening to go public, so in March Johnston alerted the Australian trade commissioner in Washington. Alistair Nicholas was galvanised into action and within days had a high-powered AWB team sitting in his office.

According to the notes of the team, they talked trucking fees that day. Nicholas denies this. But everyone agrees they spoke about sending the UN the full text of the standard terms and conditions in AWB's contracts. If that's all the UN wants, one of the team emailed home, "we have nothing to worry about".

The terms and conditions say nothing about trucking. But every contract AWB was now writing with Iraq contained the commercial formula for inland transport: "The cargo will be discharged Free into Truck to all silos within all Governorates of Iraq." Australian officials would claim they never noticed these words in more than 40 AWB contracts. And by sheer bad luck, Felicity Johnston had picked from the pile the one last contract with Iraq that didn't have a trucking clause.

It was an extremely close shave. AWB got through without being quizzed about trucking fees by anyone. Unable to find anything in the paperwork about them, Johnston let the matter drop. She reproaches herself now but it seemed so unlikely to her back then. "That what I perceive to be an agency of [the Australian] Government would be deceptive and would be deliberately flouting the sanctions, and then avoiding telling the truth about the matter, was really incomprehensible."

The crisis had only the vaguest impact on Canberra. Alexander Downer remembers being told about the complaint but can't recall reading any of the cables generated by the crisis, though they were distributed to his office.

In these same weeks, more foreign intelligence about Alia reached both Downer's department and the Department of Prime Minister and Cabinet: "Alia received fees in Jordan for the discharge and inland transport within Iraq of goods purchased under the oil-for-food program ... the fees, less a small commission, were paid into accounts accessible by Iraq in violation of sanctions. The amounts involved were very substantial."

GIVING COMFORT: OCTOBER- NOVEMBER 2000
CHARLES STOTT was an old Iraq hand, wheeling and dealing in oil and wheat for decades in the Middle East. In June 2000 he returned to AWB after a few years with BHP Petroleum. Stott was the key figure in the single shabbiest episode in this saga.

Stott would always claim the UN approved the trucking fees, but evidence to the Cole inquiry suggests that on his return to AWB he set out to simplify and shore up the covert system for paying them. His strategy included extracting a vague letter from the Foreign Affairs Department that AWB would later produce as proof of a kind that the "trucking fees" had official blessing.

In late October Stott faxed the section that handled AWB's contracts and asked if it would be "comfortable" with the company "entering into discussions with ... Jordan trucking companies with a view to agreeing a commercial arrangement in order to ensure that there are enough trucks to enable the prompt discharge of Australian wheat cargoes".

The fax bristled with problems, not least that by this time AWB had been locked into its deal with Alia - at the direction of the Iraq government - for nearly a year. Neither the deal nor Alia were mentioned in the fax. Stott would later claim that before sending the letter he spoke informally to officers of the branch "to make sure that DFAT was comfortable with the terms of the letter". They deny this.

Jane Drake-Brockman's reply came astonishingly swiftly. The assistant secretary of the Middle East and Africa branch wrote: "We ... can see no reason from an international legal perspective why you should not proceed. That is, this would not contravene the current sanctions regime in Iraq."

Success has many authors. No one claims to have written the Drake-Brockman letter. One officer concedes she may have had a bit of a hand. All the others swear ignorance. Drake-Brockman says she signed the draft relying on the line that reads: "International Legal Division has been consulted in the preparation of this response." But, told AWB needed the letter in a hurry, she sent it away without checking with the lawyers.

The letter was prized at AWB and used to reassure restive employees and unhappy lawyers - especially when things got sticky after the fall of Baghdad. But at the Department of Foreign Affairs and Trade, the copy went missing from the files.

AT FULL THROTTLE: NOVEMBER 2000 TO JUNE 2002
AUSTRALIA was now supplying 2 million tonnes of wheat a year to Iraq. We had virtually the entire market to ourselves. But shakedowns were constant. Ships might be delayed for weeks at Umm Qasr or cargoes knocked back on spurious quality grounds. AWB fought back as best it could but in the end loaded up the contracts even more. The mantra at Ceres House was still: "It's no skin off our nose."

In November 2000, an AWB expedition to Baghdad led by Dominic Hogan was told by the new supremo of the grain board, Yousif Abdul Rahman, that a 10 per cent surcharge was now to be paid on all contracts under the oil-for-food program. Hogan had no doubt what this was about. Back in Melbourne he emailed his worries to everyone in the international sales and marketing division: "We believe the increase in trucking fee and addition of the service charge is a mechanism of extracting more dollars from the escrow account."

Hogan was carpeted by Stott. Now under growing pressure within the company, Hogan felt he could do no more. He told Cole: "To pursue my concerns any further would have resulted in career suicide."

The new scam was hardly secret. Foreign intelligence reports about it were circulating in Canberra by March 2001. That same month, the US and Britain tried and failed to persuade the UN to curtail the kickbacks. Riven by division, the enforcing 661 Committee never, in the words of Paul Volcker, "seriously considered the merits of these or any other proposals to redress the payment of kickbacks".

Bronte Moules reported these failed attempts in a cable distributed to the offices of the Prime Minister, the Minister for Trade and the Minister for Foreign Affairs. By October, P&O stevedores in the Persian Gulf was warning its customers of Iraq's compulsory 10 per cent "after sales service" fee. P&O tipped off the US and British navies and posted the news on its website. If you were in the business of shipping to Iraq, you knew what was going on.

But the Foreign Affairs Department kept on rubber-stamping AWB's contracts on their way to the UN. Once approved over there, the department rubber-stamped export permits for every shipload of wheat leaving Australia for Umm Qasr. Department officials have told the Cole inquiry they regarded themselves as no more than a postbox in this process. They never checked the contracts, didn't read them, would not have understood their terms and were unaware they even contained trucking clauses.

"I took the view that AWB probably knew more about the way the oil-for-food program operated than I did," testified Don Cuddihy of the Middle East branch. "They were very experienced users."

Downer faced a key question when he appeared before the Cole inquiry: who told the bureaucrats they were only a postbox? Evidence before the inquiry showed that a much tougher system of scrutiny had operated under Labor. And no one from Drake-Brockman down could explain when and why it was decided that scrutiny of Australian contracts under oil-for-food would be left entirely to the UN.

Downer explained that the change came about after a fresh UN resolution in 1996. "Under Security Council Resolution 986 the United Nations established an Office for the Iraq Program, and this office had the task, amongst other things, of vetting particular contracts." In time, this would become the Government's core defence.

That the UN did a spectacularly poor job of checking contracts emerged early on and would later be one of the principal findings of Paul Volcker's investigation of the whole oil-for-food program.

THE SHADOW OF WAR: JUNE 2002 TO APRIL 2003
ON A cold night in Canberra, Senator Robert Hill pledged Australia's support for the US doctrine of pre-emptive warfare to enforce UN sanctions designed to strip Saddam of weapons of mass destruction. "We are not waiting for attacks any longer," the Defence Minister told the press. "That is the lesson of September the 11th."

In Baghdad a few days later, Hogan and his tall, bald AWB colleague Michael Long found themselves face to face with an angry minister for trade, Mohammed Mehdi Saleh. Long testified: "The minister was dressed in full military regalia, he was armed ... I counted some 17 posters of Saddam Hussein staring down at me, and it was a particularly stressful environment, particularly when we were being hauled over the coals for the position of the Australian Government."

Saleh told them he was slashing purchases from AWB by half. Wheat farmers turned on the Government. John Howard promised diplomatic assistance. And the company responded to the threat in August by sending a high-powered delegation on what's known in the folklore of the wheat trade as the "mad dash to Baghdad".

How they saved the day was a mystery. AWB would put it down to the deep bonds of trust between Iraq and Australian wheat farmers. John Howard would talk of the importance of keeping politics and commerce separate, and commend "the capacity of the wheat board to handle these things with sensitivity". But the truth is that AWB sold 1.5 million tonnes of wheat to Iraq as we slid towards war by dramatically increasing kickbacks.

The last two contracts signed with Saddam's ministers - known as 1670 and 1680 - were the dirtiest of them all. They were loaded with "trucking fees" of more than $US50 million; a scam known as the "iron filings rebate" of more than $US2 million; and the repayment of the 1996 debt to Tigris Petroleum of a further $US8.4 million. Total payments in breach of sanctions on that million-tonne sale alone came to roughly $US60 million.

When the sums were finally done by Volcker, it was revealed that AWB had funnelled into Iraq $US220 million in breach of UN Security Council Resolution 661. That made the Australian wheat trader the biggest single sanctions-buster among suppliers of humanitarian goods under the oil-for-food program. And AWB was the winner by a big margin: second on the list was a Thai rice trader called Chayaporn that paid a mere $US40 million.

While AWB was doing its last shabby deals in Baghdad, the Australian Government was at work in Washington pledging military support and securing Australia's hold on the wheat market in post-Saddam Iraq. It would be a cheap crack to say we went to war for wheat, but Australia was not going to join the Coalition of the Willing only to see its market taken by the ruthless and highly subsidised wheat traders of the US. Australia sold an audacious plan to the US: after the fall of Saddam, AWB's former chairman, Trevor Flugge, a man who knew Iraq and its old regime well, would run the Ministry of Agriculture. His formal role would be to assist the "revitalisation of Iraq's agricultural sector". But as Howard would later tell Parliament: "The Government has sought the involvement of Mr Flugge in post-Saddam Iraq ... because our principal concern at that time was to stop American wheatgrowers from getting our markets."

War when it came was accompanied by rhetoric that looks, in retrospect, deeply embarrassing. A few days before the formal declaration of hostilities, the Prime Minister told the Canberra press club that among the many urgent reasons for ousting the tyrant of Iraq was this: "He has cruelly and cynically manipulated the United Nations oil-for-food program. He's rorted it to buy weapons to support his designs at the expense of the wellbeing of his people."

A NEW REGIME: APRIL TO SEPTEMBER 2003
THE streets of Baghdad were still teeming with looters ransacking almost every government building, except the heavily guarded oil ministry. Cheerful Iraqis interrupted their scavenging to smile at heavily armed US soldiers and chant praise for George Bush, before stuffing ceiling fans, curtains, computers and chairs into cars and trucks.

In the once manicured Firdos Square, a small band of marines joined angry locals to pull down a giant statute of the Iraqi dictator. After a drawn-out battle with chains and pulleys, its legs finally snapped at the knees: the old leader hung briefly in suspended animation then crashed to the ground.

With the fall of Saddam, AWB lost one of its best customers ever. The Trade Minister, Mehdi Saleh, so assiduously wooed by AWB, was on the Pentagon's most-wanted list, the six of hearts in the pack of cards. Within weeks, he would be in US military custody and talking under interrogation.

AWB and the Australian Government had always worked hand in glove but in the new Iraq, the intimacy between the diplomats and the grain trader intensified. Their long-term aim was the same: to secure the Iraq market for Australia. Inside AWB the strategy was dubbed Operation Hunta and its chief strategist was Michael Long, whom the Australians had placed in a critical position in the new Iraqi Ministry of Trade. Long gave himself the codename Proton.

The Government and the grain trader also shared an identical short-term objective: persuading the UN to "reprioritise" or honour those filthy last contracts, 1670 and 1680. What followed was a breathtaking fraud on the newly liberated Iraq that was only achieved with unquestioning support at the highest levels for AWB sales to Iraq: the Trade Minister, Mark Vaile, Foreign Minister, Alexander Downer, and their senior officials working in Baghdad, Washington, New York and Canberra.

There was no time to lose. The oil-for-food program was to be wound up within six months and already hostile forces - the US wheat lobby and Iraqi exiles led by Ahmed Chalabi - were sniffing around, convinced quite rightly that the program was riddled with kickbacks that had kept Saddam afloat. "Reprioritising" was jargon for weeding out inflated or corrupt deals.

AWB was in deep trouble. Iraqis are fine bureaucrats. Buried in the files of the old regime was the evidence of the company's kickbacks paid over years, laundered through Alia, washed through Jordanian bank accounts and ultimately channelled to the Ministry of Finance, where it was used for whatever purpose the dictator chose. Numerous Iraqi officials knew about AWB's kickbacks. It was only a matter of time before their discovery. The question was: how much time?

An ABC journalist-turned-diplomat, Zena Armstrong, of the Iraq Task Force, was given the job in Canberra of working with AWB to save the contracts. With no background in the wheat trade or Iraq, Armstrong was heavily dependent on Long and his AWB colleagues to get the job done. She seems never to have seriously doubted their bona fides: "I believe we dealt with each other very professionally, but also co-operatively."

Though rumours of kickbacks were rife by the time Long and Flugge arrived in Baghdad to take up their posts in May, AWB was not going to take a backward step. Despite the obvious conflict of interest, Long's duties at the Ministry of Trade included the reprioritisation of oil-for-food contracts. While he was there he helped secure a top job in the ministry for AWB's old friend from the Grain Board, Yousif Abdul Rahman. Long was to boast in emails back to Ceres House that he'd saved Yousif from the "de-Baathification" purge carried out by the Coalition Provisional Authority.

The storm over AWB broke in June. The powerful American lobby US Wheat Associates had somehow got its hands on two of AWB's Iraq contracts. One, already heavily loaded with kickbacks, was from mid-2002. The other was 1680, signed six months later. At a time when the world price of wheat had barely shifted, the price increase between the two was $US50 a tonne. AWB's fierce opponents had the evidence they needed.

They didn't muck around. In a letter to the US Secretary of State, Colin Powell, the lobby accused Australia of writing "undoubtedly inflated" contracts with Iraq - adding that "earlier oil-for-food wheat contracts with prices inflated by millions of dollars per shipload have provided foundation to the rumours that some of the excess may have gone into accounts of Saddam Hussein's family".

Howard's senior ministers leapt to AWB's defence when the letter was published around the world. Vaile called the allegations absurd and insulting. Where was their gratitude? "I was very, very annoyed, given the close co-operation that Australia and the US have played together as both members of the Coalition of the Willing and as two countries who participated together as close allies in the first Gulf War."

Was he not "vouching the word and the good name of Australia", asked John Agius, SC, counsel assisting the Cole inquiry. Vaile agreed. But he was not vouching he had conducted any kind of independent inquiry? The minister agreed again: "I was working on the basis of advice that had been given to me from the department." But that, in turn, had come from AWB? "I now understand that to be correct."

Australia called in its markers with the US. Zena Armstrong's office asked ambassador Michael Thawley to push AWB's denials in Washington. "We are very concerned at egregious allegations made by US Wheat Associates against AWB Ltd ... Grateful ambassador raise the matter at a senior level with the US Administration, noting our concern that AWB Ltd's international reputation would be damaged by the unfounded claims ..."

Thawley was hard at work conveying "our outrage" in US capital at the "smears and innuendo" of the US wheat lobby. After making an official complaint to then deputy secretary of state Richard Armitage, the ambassador reassured Canberra that the Washington end of the fracas was under control: the State Department "understands the issue, is concerned to contain it" and would look at ways of reining in the lobby and its powerful boss, Alan Tracy.

For the next 2 years, the mantra of the Government was that these "unsubstantiated rumours" of kickbacks were to be discounted entirely as the work of AWB's enemies, who wanted to wrest the Iraq market from Australian hands. John Howard would tell the Cole inquiry that was his general understanding: "Attacking the behaviour of one's trade competitors in the international wheat trade is fairly common."

But that didn't explain Captain Blake Puckett of the US Army's civil affairs command in Baghdad, who had swiftly drawn the conclusion that "every contract" for humanitarian supplies under the oil-for-food program since 1999 "included a kickback to the regime from between 10 and 19 per cent". Within days of the US Wheat Associates writing to Colin Powell, Puckett was circulating a memorandum about the kickbacks to all the ministries in Baghdad.

Again AWB made ritual denials and, again, no one in Canberra questioned them. Now was the time for someone in government to ask AWB to provide a forensic analysis of the pricing in its contracts. It was never done. Zena Armstrong had a stab at it and thought the contracts looked OK after what she confessed was "a very inexpert lay person's analysis".

A sobering cable setting out Puckett's findings reached every senior minister's office in Canberra - including Howard's - and was also distributed to every senior public servant, including Australia's intelligence chiefs. Puckett's findings mirrored reports from Australian Treasury officials in Baghdad assigned to work on the new Iraqi budget. But nothing was done. Alexander Downer told the Cole inquiry he dismissed Puckett's conclusions as the work of someone too far down the pecking order: "This was information provided by a captain in the US Army, a junior officer in the US Army."

By contrast, the response inside AWB to the developing crisis was frenetic. Its head, Andrew Lindberg, set up an internal investigation as soon as the first allegations surfaced. Later dubbed Project Rose, this mammoth exercise was outsourced from the start to squads of private lawyers, beginning with Chris Quennell, a partner of Blake Dawson Waldron in Melbourne. In this way, all the findings of Project Rose were shielded by legal professional privilege from external investigation. It's a cast iron box the Cole inquiry has not been able to break into.

Project Rose became the source of all the briefings and talking points senior AWB executives used to maintain their blanket denials of wrong-doing. In turn they supplied this material to the Howard Government. The lawyers of Project Rose were not only fashioning the tactics of AWB but directing Downer's and Vaile's response to the looming scandal.

Iraq, meanwhile, was lurching towards a new crisis which riveted the media's attention. A massive truck bomb exploded outside the UN headquarters in Baghdad, killing its chief envoy, Sergio Vieira de Mello. In an atmosphere of deep apprehension about the future of Iraq, Michael Long flew to Canberra to brief Downer on AWB's bid to finalise the wheat contracts. The paperwork was sitting at the UN's headquarters in New York awaiting final approval.

The UN was demanding the "after sales service" kickback be cut out of all contracts. AWB was very reluctant to make the 10 per cent cut because it amounted to an acknowledgement of wrongdoing. It had no choice. But in a face-saving move it persuaded the UN that so high was the cost of trucking in postwar Iraq - and by now the company actually was delivering wheat all round the country - that the final price paid per tonne should be shaved by only a few dollars.

What AWB had failed to tell the UN was that this price included $US10 million in kickbacks. These were the so-called "iron filings rebate" and the final payment of the old and dodgy Tigris debt. The contracts were still filthy.

On September 7, a triumphant Mark Vaile announced that the 800,000- tonne deal worth more than $US200 million had at last been approved by the UN: "This tremendous result is the culmination of many months of close co-operation between the Federal Government and AWB Ltd to secure these contracts for Australia."

THE HAWKS CIRCLE: JANUARY TO MARCH 2004
ON A freezing Washington winter's day, the US chief weapons hunter, Dr David Kay, appeared before Congress to deliver his report on Iraq's weapons of mass destruction. In a stunning blow to the Coalition of the Willing, Kay candidly told Congress: "We were all wrong."

The blow was felt acutely by Bush's war supporters on Capitol Hill. These included the Chalabi's champions, who had pushed the cause of war with reports from defectors of WMD caches. But the hunt for hidden weapons had unearthed thousands of documents detailing massive corruption in the oil-for-food program.

Stung by Kay's revelation, the Bush Administration, the Republican Congress and the Iraqi opposition switched their focus to corruption. Washington instructed a Stanford-educated aid official, Jim Warlick, to secure all documents from the old ministries in Baghdad for an audit of the program. Warlick was put into the Iraqi Ministry of Trade and, as he put it, "worked to ensure that pertinent documents were not destroyed and were available to investigators".

By now, Long had left the ministry to return to Melbourne but he was replaced in Iraq by AWB's corporate affairs manager, Darryl Hockey, once again paid for by AusAid. In Baghdad, Hockey was tipped off by an American colleague in the ministry. "We're going to do a search and you guys, you Aussies, better watch out."

Hockey dashed off an email to Armstrong: "There is a high-level push to investigate corruption in the OFF program ... There is no doubt a protracted and intense investigation will be initiated at some point in the future - sooner rather than later."

Among the documents being uncovered were handwritten records from the Iraqi Ministry of Transport showing payments from AWB to Alia being funnelled to the Ministry of Finance, Saddam's funding source for everything from the Iraqi intelligence services to the postwar insurgency.

By March 2004 it was clear the UN would be forced to set up an independent investigation. The news rattled Ceres House. When Armstrong spoke about the new investigation with Chris Whitwell, her point man at AWB, he told her for the first time that AWB had paid for inland transport through a Jordanian trucking company before the war. To her amazement he went on to say the company "might have made payments to the Iraqis of their own volition". Whitwell also claimed AWB had told Armstrong's department about the trucking company back in 2000.

Armstrong was stunned by the admission of possible payments to Saddam's regime. On March 30, she prepared a ministerial submission for Downer and Vaile on the looming UN investigation. AWB had "strenuously denied" kickback allegations, but she warned that, as the largest single supplier under the oil-for-food program, AWB "was unlikely to escape scrutiny". She then added: "The company concedes, however, that the Jordanian company handling local transport might of its own volition have provided kickbacks to the regime."

Despite this crucial break in the facade of AWB's denials, Armstrong was not calling for any kind of investigation. Instead, she suggested the company put a bit more work into its defence. "Given the gravity of the allegations we have suggested to AWB Ltd that they may wish to provide more formal advice of their position to the Government."

Downer jotted on the submission: "This worries me." It was the first distinct note of alarm expressed by the Government. He also scrawled: "How were AWB's prices set and who set them? I want to know about this." He now says no one in his department ever told him. The answer would come 15 months later - in the most publicly humiliating way - from the former governor of the US Federal Reserve, Paul Volcker.





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