IRAQ: U.N. Oil-for-Food Head Blocked Audit

NEW YORK -- The U.N. oil-for-food program chief under scrutiny for alleged corruption and mismanagement blocked a proposed audit of his office around the same time he's accused of soliciting lucrative oil deals from Iraq, according to investigators.

A U.N. auditing team, which was severely understaffed, said running the $64 billion oil-for-food program was "a high risk activity" and a priority for review. But Benon Sevan denied the internal auditors' request to hire a consultant to examine his office in May 2001 - an act top investigators of the program are now calling into question.

"I think the auditors thought they were steered away from some areas," Paul Volcker, who's leading the independent probe, told The Associated Press. "Our judgment is that the main office should have been audited. And that leaves the inference that perhaps the auditors were not encouraged to do the work. I think we draw the inference that it was at least suspicious."

Two months after Sevan refused the auditors' request, a Panamanian company, African Middle East Petroleum, purchased 1 million barrels of oil, which Iraq had allocated to Sevan - one of nine allocations made between 1998 and 2002 involving Sevan and believed to have netted the company $1.5 million, said an interim report Volcker's committee released this month.

The head of AMEP, Fakhry Abdelnour, a friend of Sevan, told investigators he paid $160,000 as a kickback to an Iraqi-controlled account in Jordan in October 2001 under one of the oil-for-food schemes under examination.

Volcker did not say that Sevan received kickbacks but expressed concern at $160,000 in cash that Sevan said he received from an aunt in his native Cyprus in 1999-2003. The investigative report questioned this "unexplained wealth," noting that the aunt, who recently died, was a retired government photographer living on a modest pension.

U.N. Secretary-General Kofi Annan last week suspended Sevan after Volcker accused him of a "grave conflict of interest," saying his conduct in soliciting oil deals for AMEP was "ethically improper and seriously undermined the integrity of the United Nations."

On the day Volcker issued his report, Sevan's lawyer, Eric Lewis, accused the panel of trying to make his client a "scapegoat," saying: "Mr. Sevan never took a penny." He said Sevan was proud of his 40-year U.N. career and of the oil-for-food program, which saved tens of thousands of Iraqis "from death by disease and starvation."

The oil-for-food program was the largest U.N. humanitarian aid operation, running in 1996-2003. It was designed to let Saddam Hussein's government sell limited amounts of oil in exchange for humanitarian goods as an exemption from post-Gulf War sanctions imposed in 1991.

Faced with a $64 billion program involving multiple U.N. agencies, the small team of auditors assigned to monitor it were overmatched and underfunded. For other programs, Volcker's investigators said, the United Nations mandated one auditor for every $100 million in funding. At that ratio, the oil-for-food program managers should have expected more than 160 auditors.

Instead, in 2001, they had only five, according to Volcker's report.

Volcker's report said structural problems within the U.N. audit system undermined auditors' authority. In many cases, auditors were forced to seek funding from the budgets of the programs they sought to monitor, giving the managers an implicit veto - which Sevan exercised.

A little-noticed portion of Volcker's report details how Sevan steered auditors away from his office and its regulation of the oil and humanitarian goods contracts that allegedly were the source for a massive kickback scheme run by Saddam's government, which investigators estimate brought in between $1.9 billion and $2.9 billion.

In April 2001, the head of the five-member U.N. auditing team, Esther Stern, wrote to Sevan requesting funds for an outside accountant to evaluate the management of the main oil-for-food office he ran at U.N. headquarters in New York, according to Volcker's report.

Because the auditors' own resources were insufficient for the $70,000 fee to the accountant Arthur Anderson - by protocol - they needed Sevan's approval. He declined.

After considering the matter for a month, Sevan responded to the letter, saying that because of uncertainty about how much longer the oil-for-food program would continue, he could not justify the expense. About the same time, Sevan and his team moved into a new office at a cost of more than $3 million.

After that exchange, the auditors, following the advice of Sevan's office, used their resources to review programs inside Iraq, the auditors told investigators in interviews.

"There were other instances where they were dissuaded from looking at the main office," said Mark Pieth, one of the two other committee members on Volcker's investigative panel and an expert on money laundering. "The problem we see is that there was no independent institution that regulated audits across the U.N. and could step in when these instances occurred."

Investigators told the AP they have no evidence Sevan's office coerced auditors to look the other way but instead steered them to other work outside his office.

"They were influenced in some cases, but whether they were influenced for nefarious purposes is another question" Volcker said. "They could always say, don't bother with us, your priority is to go investigate in Baghdad. The underlying problem was that the auditing force was so small, was so in demand and did not have strong enough reporting lines to overcome any problems."

Investigators suggested that if Sevan's office would have been audited alleged abuses of the oil-for-food program would have almost certainly been uncovered.

"There are some features of the contracts, that had they been audited, it could have brought the whole scheme into question," an official close to the investigation said on condition of anonymity.

The U.N. audit team did carry out more than 50 audits of U.N. agencies, which spent Iraqi oil revenues under oil-for-food or the U.N. Compensation Commission that was established to make payments to countries, businesses or individuals harmed by Iraq's 1990 invasion of Kuwait. The audits, which Volcker released last month, uncovered extensive mismanagement by the agencies of multimillion-dollar deals with contractors and fraudulent paperwork by its employees.

"The concrete work that they did was quite good," Pieth told the AP in a telephone interview Friday. "They were tenacious, but they had too few resources."

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