Annan disciplines oil-for-food chief after critical report

UNITED NATIONS - Secretary-General Kofi Annan ordered disciplinary action against the head of the U.N. oil-for-food program in Iraq on Thursday, after a report sharply criticized Benon Sevan for "undermining the integrity" of the United Nations through a "grave conflict of interest."

The investigation report said Sevan solicited oil allocations from Saddam Hussein's regime on behalf of a trading company between 1998 and 2001, and it raised concerns he may have received kickbacks for the help.

Based on the report, Annan has decided to discipline Sevan and another U.N. official, Joseph Stephanides, who was chief of the U.N. Sanctions Branch, said Mark Malloch Brown, Annan's new chief of staff. Malloch Brown said the type of disciplinary action would be announced early next week but gave no details.

In its report released Thursday, the investigation led by former Federal Reserve Chairman Paul Volcker accused Stephanides of "tainting" bidding for a contract. Stephanides now heads the Security Council Affairs Division in the U.N. Department of Political Affairs.

Allegations of corruption in the $60 billion oil-for-food program - which allowed sanctions-bound Iraq to sell oil to buy humanitarian supplies - have raised steady criticism from members of Congress.

"I am reluctant to conclude that the U.N. is damaged beyond repair, but these revelations certainly point in this direction," said Illinois Republican Henry Hyde after Thursday's report. His House International Relations Committee is one of several U.S. investigations.

Sen. Norm Coleman, who called for Annan's resignation over the scandal, said he was pleased with the report and urged Annan to lift Sevan's diplomatic immunity so U.S. prosecutors can review the case.

"There is more than enough probable cause to believe Benon Sevan's actions constitute criminal activity," said Coleman, R-Minn.

Despite Sevan's claims that he never recommended any oil companies, Volcker's Independent Inquiry Committee said it had evidence that Sevan asked Iraq to give a small Swiss-based oil company, African Middle East Petroleum Co. Ltd. Inc., known as AMEP, the opportunity to buy oil. The company received the allocations and earned $1.5 million from them.

Volcker's panel said it is still investigating "the scope and extent of benefits" that Sevan received for his requests.

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

"The most disturbing finding is the accumulation of evidence that the executive director of the program Benon Sevan did in fact solicit oil allocations for a small trading company," Volcker said at a news conference. "The Iraqis, who were assigning such allocations, certainly thought they were buying influence."

The report said Sevan's solicitations on AMEP's behalf "presented a grave and continuing conflict of interest, were ethically improper, and seriously undermined the integrity of the United Nations."

Asked whether the committee found any criminal wrongdoing, Volcker said, "We are not a criminal tribunal. Other people will have to draw conclusions from the facts that we have presented."

He said Sevan had not been entirely cooperative and had not responded to interview requests in a timely way.

Malloch Brown said Annan "is shocked" and "terribly dismayed" at the report's findings about Sevan "and he very much doubts that there can be any extenuating circumstances to explain the behavior which appears proven in the report."

But Sevan's lawyer, Eric Lewis, accused Volcker's committee of making him a scapegoat and denied he ever received any money.

"The IIC has turned its back on the principles of due process, impartiality and fairness ... and it has caved in to the pressures of those opposed to the mission of the U.N.," Lewis said in a statement.

The oil-for-food program, launched in December 1996 to help ordinary Iraqis cope with U.N. sanctions imposed after Saddam's 1990 invasion of Kuwait, quickly became a lifeline for 90 percent of the 26 million population.

Under the program, Saddam's regime could sell oil, provided the proceeds went to buy humanitarian goods or pay war reparations. Saddam's government decided on the goods it wanted, who should provide them and who could buy Iraqi oil. But the Security Council committee overseeing sanctions monitored the contracts.

In a bid to curry favor and end sanctions, Saddam allegedly gave former government officials, activists, journalists and U.N. officials vouchers for Iraqi oil that could then be resold at a profit.

Writing to U.N. staff late Thursday, Annan said, "however serious the flaws revealed in this report, it does not support many of the wilder allegations made against the program, such as that it was responsible for the alleged $21 billion of illicit revenue allegedly gained by Saddam Hussein through smuggling and other means between 1991 and 2003."

Volcker said the major source of illicit funds to Iraq was from smuggling, to Jordan, to Turkey, eventually to Syria, and then to Egypt. What isn't clear is how much those involved in the oil-for-food program pocketed, he said.

But he confirmed an estimate in an October report by top U.S. arms inspector Charles Duelfer that Saddam made $228 million in surcharges on oil. However, he questioned Duelfer's estimate that Saddam's kickbacks totaled $1.5 billion, saying they could have been as high as $2.5 billion.

Volcker's report also found "convincing and uncontested evidence" that selection of the three U.N. contractors for the oil-for-food program - Banque Nationale de Paris, Saybolt Eastern Hemisphere BV, and Lloyd's Register Inspection Limited - did not conform to established financial and competitive bidding rules.

Paris-based BNP was chosen by former Secretary-General Boutros Boutros-Ghali to be the program's banker without meeting the U.N. requirement to accept the "lowest acceptable bidder," the report said.

Volcker initially told reporters that Boutros-Ghali was under investigation for that decision. But he retracted that statement later, saying he misheard the question and thought it was about Sevan. Volcker said Boutros-Ghali was questioned about BNP and has told investigators he will continue to cooperate.

The competitive bidding process for a company to monitor Iraqi oil exports was manipulated by Allan Robertson, who was in charge of the U.N. procurement department, so Saybolt could lower its bid and win the contract, the report said.

For the inspection of humanitarian goods, the report said, there was a clear early preference for Lloyd's and the competitive bidding process was "tainted" by Stephanides. His contacts with an unnamed U.N. mission, which a U.N. committee acquiesced to for political reasons, led to Lloyd's winning the contract even though there was a lower bidder, it said.

Sevan has denied any wrongdoing. He has retired, but remains on the U.N. payroll for a dollar a year to help with the investigation. It was unclear what sorts of disciplinary action were possible against him.

AMEP was run by Fakhry Abdelnour, described as an oil trader. The report cited an Iraqi official as saying that Sevan asked Iraqi officials in 1998 to allocate oil vouchers to AMEP to "help a friend," and said the friend's name was "Abdelnour."

The report pointed to several flaws in the auditing of the program and called for greater transparency and accountability. It said U.N. watchdog Dileep Nair had a report critical of program management but never submitted.

Thursday's report did not address questions about Annan or the employment of his son, Kojo, by the Swiss company, Cotecna Inspection SA, which had a U.N. contract to certify deals under the oil-for-food program. It said that topic would be addressed in another report.

Volcker said he intends to issue a definitive report in midsummer on the entire management and oversight of the program.

The program ended in November 2003, after the U.S.-led war that toppled Saddam, but allegations of corruption first surfaced in late 2000, with accusations that the Iraqi leader was putting surcharges on oil sales and pocketing the money.

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Associated Press writers Nick Wadhams and Desmond Butler contributed to this report in New York.