[Senate Hearing 108-761]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-761

   HOW SADDAM HUSSEIN ABUSED THE UNITED NATIONS OIL-FOR-FOOD PROGRAM

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION


                               __________

                           NOVEMBER 15, 2004

                               __________

      Printed for the use of the Committee on Governmental Affairs


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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                      Amy B. Newhouse, Chief Clerk

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska                  CARL LEVIN, Michigan
GEORGE V. VOINOVICH, Ohio            DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

       Raymond V. Shepherd, III, Staff Director and Chief Counsel
                      Leland B. Erickson, Counsel
                      Mark L. Greenblatt, Counsel
                       Steven A. Groves, Counsel
                       Jay Jennings, Investigator
        Elise J. Bean, Minority Staff Director and Chief Counsel
                   Dan M. Berkovitz, Minority Counsel
                     Mary D. Robertson, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coleman..............................................     1
    Senator Levin................................................     6
    Senator Collins..............................................     9
    Senator Lieberman............................................    11
    Senator Pryor................................................    14
    Senator Bennett..............................................    28

                               WITNESSES
                       Monday, November 15, 2004

Charles Duelfer, Special Advisor to the Director of Central 
  Intelligence on Iraq's WMD, Central Intelligence Agency, 
  accompanied by Stephen C. Zidek and Christopher N. Johnsten....    15
Hon. Lindsey O. Graham, a U.S. Senator from the State of South 
  Carolina.......................................................    31
Mark L. Greenblatt, Counsel, U.S. Senate Permanent Subcommittee 
  on Investigations..............................................    39
Steven Groves, Counsel, U.S. Senate Permanent Subcommittee on 
  Investigations.................................................    44
Juan Carlos Zarate, Assistant Secretary, Terrorist Financing and 
  Financial Crimes, U.S. Department of the Treasury..............    55

                     Alphabetical List of Witnesses

Duelfer, Charles:
    Testimony....................................................    15
    Prepared statement...........................................    67
Graham, Hon. Lindsey O.:
    Testimony....................................................    31
Greenblatt, Mark L.:
    Testimony....................................................    39
    Prepared statement...........................................    73
Groves, Steven:
    Testimony....................................................    44
    Prepared statement...........................................    81
Zarate, Juan Carlos:
    Testimony....................................................    55
    Prepared statement...........................................    85

                                EXHIBITS

 1. a. GEstimate of Total Illicit Iraqi Income During UN 
  Sanctions (1991-2003), chart prepared by the Permanent 
  Subcommittee on Investigations.................................   102

     b. GMethodology for Estimate of Total Illicit Iraqi Income 
      During UN Sanctions (1991-2003), chart prepared by the 
      Permanent Subcommittee on Investigations...................   193

 2. GOil for Food Timeline, chart compiled from the Comprehensive 
  Report of the Special Advisor to the DCI on Iraq WMD...........   107

 3. GSelected Secret Oil Voucher Recipients, chart (Figure 17, 
  Vol 1) from Regime Finance and Procurement Section of the 
  Comprehensive Report of the Special Advisor to the DCI on 
  Iraq's WMD.....................................................   108

 4. GOil for Food Contracts Issued to Front Companies & Military 
  Suppliers, chart compiled from the Comprehensive Report of the 
  Special Advisor to the DCI on Iraq's WMD; Banque National 
  DeParis records................................................   109

 5. GStep-by-Step Process for Award and Use of Oil Allocations, 
  chart prepared by the Permanent Subcommittee on Investigations.   110

 6. GInternal correspondence within the Iraqi Ministry of Oil 
  regarding an oil allocation provided to a Syrian journalist 
  reflecting the in-depth, personal involvement of high-ranking 
  members of the Hussein regime in the granting of oil 
  allocations....................................................   111

 7. GCorrespondence between an oil allocation holder and a 
  prospective oil purchaser stating: During last week a high 
  ranked [sic] Iraqi delegation lead [sic] by his Excellency Mr. 
  Tariq Aziz visited Moscow. The allocation holder of the above 
  quantity had a personal meeting with him and we are informed 
  that the discrepancies regarding this allocation will be solved 
  very soon......................................................   112

 8. GCertificate which appears to indicate that Saddam Hussein 
  personally ordered an allocation of 6 million barrels of oil to 
  journalist Mahmud Al-Tamimi in recognition of his pro-Saddam 
  articles during the first Gulf War: The President leader . . . 
  has ordered . . . as follows: six million barrels of petroleum 
  will be allocated to . . . journalist Mahmud Al-Tamimi in 
  appreciation of his nationalist positions which he has adopted 
  since the thirty-nation aggression . . . in the year 1991 in 
  confronting the unjust blockade of our dear country............   113

 9. GCorrespondence from Vladimir Zhirinovsky, the leader of 
  Faction of the Liberal--Democratic Party of Russia, to an oil 
  company, extending an invitation to Moscow for negotiations....   114

10. GCorrespondence to oil company from representative of an oil 
  allocation recipient offering 2-4 million barrels of oil under 
  the OFF Program................................................   116

11. GCorrespondence reflecting negotiations between an allocation 
  holder and a prospective oil buyer concerning the amount of the 
  commission to the allocation holder............................   117

12. GCorrespondence of allocation holder and prospective oil 
  purchaser regarding Acceptance of cmmission and attaching 
  correspondence addressed to SOMO assigning the allocation to 
  the prospective oil purchaser..................................   123

13. GCorrespondence from allocation holder to SOMO ceding 
  allocation holder's quota to Devon Petroleum, Ltd..............   124

14. GDocuments regarding the contract between SOMO and Devon 
  Petroleum Limited for the purchase of oil which arose from the 
  allocation of oil to Hamidah Na'na that was assigned to Devon 
  Petroleum and reflecting the UN's approval.....................   125

15. GInvoice from Al Wasel & Babel (a well-known front company 
  for the Hussein regime) to an oil purchaser for sale of Iraq 
  oil allocation.................................................   130

16. GSurcharge Payments, chart prepared by the Permanent 
  Subcommittee on Investigations.................................   131

17. GCorrespondence to SOMO which reflects recipient of an oil 
  allocation committing to payment of oil surcharge..............   132

18. GDocuments related to transaction between Al-Hoda 
  International Trading Company and an oil company for the 
  purchase of oil under OFF Program which reveal payments outside 
  the letter of credit...........................................   133

19. GMinistry of Oil, List of Surcharges Per Agreement, excerpt 
  of chart prepared by SOMO (Iraqi State Oil Marketing 
  Organization), February 2004...................................   139

20. GMap of Weir subsidiaries in France (EnviroTech Pumpsystems) 
  and the United Arab Emirates (WESCO Dubai), and relevant Iraqi 
  entities.......................................................   140

21. GChart depicting transactions between Weir Engineering and 
  South Oil Company, on Contract #1030484, from initial tender 
  offer to submission and approval of contract by the U.N........   141

22. GFirst Tender Offer (Aug. 15, 2001): Original offer of Weir 
  Engineering Services to Iraq for an oil project for the South 
  Oil Company....................................................   142

23. GRevised Tender Offer (Sept. 18, 2001): Revised tender offer 
  from WESCO Dubai (a Weir subsidiary) to Iraq, modifying first 
  tender offer of August 15, 2001................................   149

24. GContract (Dec. 8, 2001): Contract between WESCO Dubai and 
  Iraq...........................................................   155

25. GSubmission to the U.N. (Jan. 7, 2002): The completed 
  contract between WESCO Dubai and Iraq as submitted to the 
  Office of the Iraq Program for review and approval.............   161

26. GU.N. Approval for Contract #1030484 (Mar. 22, 2002): 
  Documents indicating contract has been reviewed and approved by 
  the Office of the Iraq Program.................................   164

27. GMap showing shipment of goods by Weir on Contract #1030484 
  and confirmation of arrival in Iraq............................   166

28. GMap showing payment from BNP Paribas to Weir and payment 
  from Weir to Corsin Financial Ltd..............................   167

29. GAmendment to Contract #1030484: After Operation Iraqi 
  Freedom, Weir and hundreds of other suppliers agreed to reduce 
  their contracts by 10% to remove so-called ``after sales 
  service fees.''................................................   168

30. GTotal Kickbacks Paid by Weir to Corsin Financial Ltd. (2001-
  2004), chart prepared by the Permanent Subcommittee on 
  Investigations.................................................   173

31. GIraq Military Expenditures 1980-2002, chart prepared by the 
  Permanent Subcommittee on Investigations (Minority Staff)......   174

32. GIllicit Iraqi Revenue During Sanctions 1991-2003, chart 
  prepared by the Permanent Subcommittee on Investigations 
  (Minority Staff)...............................................   175

33. GU.S. Department of State waiver of prohibition on foreign 
  aid to Jordan and Turkey for violating United Nations sanctions 
  on Iraq, December 1998.........................................   176

34. GU.S. Department of State waiver of prohibition on foreign 
  aid to Jordan and Turkey for violating United Nations sanctions 
  on Iraq, October 2002..........................................   181

35. GExcerpt from Report of the United Nations Security Council 
  Committee established by Resolution 661, August 26, 1996. In 
  paragraph 110, the U.N. Committee ``take[s] note'' of Jordan's 
  resumption of oil imports from Iraq in violation of the U.N. 
  sanctions. (Full 31 pages of the report is retained in the 
  files of the Subcommittee).....................................   188

36. a. G``Containing Iraq: Sanctions Worked,'' Foreign Affairs, 
  July-August 2004...............................................   190

     b. G``Were Sanctions Right?,'' The New York Times, July 27, 
      2003.......................................................   198

37. GComprehensive Report of the Special Advisor to the DCI on 
  Iraq's WMD, September 30, 2004 (Volumes I, II and III), 
  prepared by Charles Duelfer, Special Advisor to the Director of 
  Central Intelligence...........................................     *

38. a. GResponses to supplemental questions for the record for 
  Juan Carlos Zarate, Assistant Secretary, Office for Terrorist 
  Financing and Financial Crimes, U.S. Department of the Treasury   208

     b. GSEALED EXHIBIT: Responses to supplemental questions for 
      the record for Juan Carlos Zarate, Office for Terrorist 
      Financing and Financial Crimes, U.S. Department of the 
      Treasury. (Includes ``For Official Use Only'' materials.)..     *

* Retained in the files of the Subcommittee.

 
   HOW SADDAM HUSSEIN ABUSED THE UNITED NATIONS OIL-FOR-FOOD PROGRAM

                              ----------                              


                       MONDAY, NOVEMBER 15, 2004

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 12:04 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Norm Coleman, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coleman, Levin, Collins, Bennett, 
Lieberman, Pryor, and L. Graham.
    Staff Present: Raymond V. Shepherd, III, Staff Director and 
Chief Counsel; Joseph V. Kennedy, General Counsel; Leland 
Erickson, Counsel; Mark Greenblatt, Counsel; Steven Groves, 
Counsel; Jay Jennings, Investigator; Katherine English, 
Counsel; Mary D. Robertson, Chief Clerk; Katherine Russell, 
Detailee, FBI; Phillip Thomas, Detailee, GAO; Gregory Coats, 
Detailee, IRS; Jeffrey James, Detailee, IRS; Sean Gray, Intern; 
Elise J. Bean, Staff Director and Chief Counsel to the 
Minority; Dan Berkovitz, Counsel to the Minority; and Zack 
Schram, Professional Staff to the Minority.

              OPENING STATEMENT OF SENATOR COLEMAN

    Senator Coleman. This hearing of the Permanent Subcommittee 
on Investigations is called to order. Good morning, and thank 
you all for being here.
    Today's hearing represents the first findings from our 
investigation into the United Nations Oil-for-Food (OFF) 
Program. The Permanent Subcommittee on Investigations began 
this bipartisan investigation in April. After 7 months of 
investigating, 8 subpoenas, 13 Chairman's letters, numerous 
interviews with key participants and the receipt of over a 
million pages of evidence, we are just beginning to understand 
the behind-the-scenes machinations of participants in the Oil-
for-Food Program.
    The magnitude of fraud perpetrated by Saddam Hussein in 
contravention of UN sanctions in the Oil-for-Food Program is 
staggering. The Majority staff estimates that Saddam generated 
personal profits of over $21.3 billion, in contravention of UN 
sanctions, from 1991 to 2002.
    Today, we examine in more detail how it occurred. But why 
it was able to occur and flourish over the course of a decade 
is still not fully understood. The extent to which member 
states were motivated by Saddam's influence-peddling to ignore 
the fraud and lack of oversight has not been fully explored. 
The question that hangs out there is how high up does the 
corruption go?
    The extent to which UN officials personally benefited from 
Saddam's influence-peddling has not been fully explored. We 
need substantially greater cooperation from the United Nations 
to answer these and other questions. Senator Levin and I have 
joined together and requested access to the United Nations' 
investigative reports and personnel. To our dismay, those 
requests have to date been denied.
    In addition, I am angered by the proactive interference of 
the United Nations with our efforts to question groups 
contracted by the United Nations to oversee parts of this 
program. I believe the credibility of the United Nations to 
monitor any future sanctions programs hangs in the balance 
unless the corruption and mismanagement in Oil-for-Food is 
identified and rooted out.
    In the end, my goal, and I believe the goal of all of us on 
this Subcommittee is to reach conclusions based on facts, to 
ask questions to which answers must be given, and hopefully 
when candor and fairness return, end the quagmire of doubts 
about the Oil-for-Food Program and the United Nations' role in 
it.
    The Oil-for-Food Program was intended to allow the 
Government of Iraq to provide for humanitarian aid and 
assistance for its people. Instead, under the Oil-for-Food 
Program, Saddam Hussein generated massive amounts of money that 
had one sole purpose--to keep him in power. He used the money 
to cultivate international support to avoid being responsive to 
UN resolution after UN resolution. The Iraqi people suffered, 
the world is more dangerous, and Saddam laughed at world 
opinion and UN sanctions.
    And the failure of the program wasn't just in providing 
food, medicine and comfort to the Iraqi people, but the failure 
of the program was also in not having strong oversight and 
checks and balances that would have prevented a small group of 
people and nations from reaping billions and billions of 
dollars from the people of Iraq.
    Finally, the question must be raised as to what happened to 
Saddam's billions, and are they being used today to fuel an 
insurgency that has taken the lives of over 1,000 American and 
Coalition servicemen and women and thousands of our Iraqi 
allies? The clear inference can be drawn that the failed 
management of the Oil-for-Food Program has cost the lives of 
many innocent individuals.
    We have an obligation to more fully understand how this 
massive fraud was able to thrive for so long, who benefited 
from it, and what has been its past and ongoing costs in 
dollars and in lives. So how much money did Saddam generate, in 
contravention of the UN sanctions, from 1991 to 2002?
    As stated earlier, the Majority staff estimates the figure 
to be $21.3 billion. That figure builds upon previous estimates 
of the General Accounting Office, $10.1 billion, and the figure 
contained in the Duelfer report, $10.9 billion. This $21.3 
billion estimate is based upon evidence discovered during our 
investigation and was formulated with the assistance of experts 
from the Joint Economic Committee, the Congressional Budget 
Office, and GAO.
    The estimate of $21.3 billion includes--and I would refer 
to a chart to my left, Chart 1a. \1\--it includes oil smuggling 
facilitated through trade protocols with Iraq, as well as 
unauthorized smuggling, including topping-off of oil tankers, 
$13.5 billion; surcharges on oil purchases, $241 million; 
kickbacks on humanitarian goods, $4.4 billion; sub-standard 
goods purchased under the Oil-for-Food Program, $2.1 billion. I 
believe that is a new category that had not been included in 
other estimates, as are the abuses in the Northern Kurdish 
region, $405 million, and investment of illicit revenues, $403 
million.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1a., which appears in the Appendix on page 102.
---------------------------------------------------------------------------
    Today, the Subcommittee will unveil evidence that will show 
how Saddam used vouchers to peddle influence and reward friends 
around the world, how Saddam extracted illegal surcharges from 
oil purchases, and how blue chip international corporations 
gave Saddam millions in illegal kickbacks.
    Our first witness today is Charles Duelfer, Special Advisor 
to the Director of Central Intelligence on Iraq's WMD. We look 
forward to his testimony about the report he prepared for the 
Administration detailing Iraq's abuse of the OFF Program.\2\
---------------------------------------------------------------------------
    \2\ Comprehensive Report of the Special Advisor to the DCI on 
Iraq's WMD, September 30, 2004 (Volumes I, II, and III), prepared by 
Charles Duelfer, Special Advisor to the Director of Central 
Intelligence, retained in the files of the Subcommittee as Exhibit No. 
37.
---------------------------------------------------------------------------
    The Duelfer report concludes that Saddam Hussein's primary 
goal was to have UN sanctions lifted. In addition, he found 
that the introduction of the OFF Program was a key turning 
point for the regime. This program provided additional illicit 
billions of dollars in revenue streams of kickbacks and 
surcharges.
    More importantly, the program rescued Iraq's economy from 
UN sanctions by increasing economic activity and reducing 
international support for UN sanctions. It appears that OFF 
abuses, particularly vouchers to well-placed individuals and 
entities favoring Iraq, and kickbacks and surcharges which went 
unhindered by the UN Security Council despite their knowledge 
of them, emboldened Saddam Hussein to finance and procure 
missile delivery systems, dual-use items and military 
munitions. As we know, Saddam Hussein devised a myriad of ways 
to violate the OFF Program.
    On the second panel, investigative counsels from the 
Subcommittee will present new evidence that describes three of 
the principal ways that Hussein abused the sale of Iraqi oil 
under the OFF Program.
    First, we will hear testimony that illustrates how Saddam 
converted oil into influence. In that segment, we will examine 
how Saddam gave so-called oil vouchers to foreign officials, 
journalists and possibly even terrorist entities in order to 
peddle influence and reward friends. In doing so, we will 
reveal previously undisclosed evidence that indicates what oil 
vouchers were and how the voucher process worked.
    For instance, we will introduce a number of documents that 
illustrate how high-ranking officials in Saddam's regime, such 
as Tariq Aziz, were personally involved in handing out these 
favors. We will present a step-by-step review of how voucher 
recipients turned these favors into cash. For instance, we will 
see evidence of how Vladimir Zhirinovsky, a prominent Russian 
politician, invited an American oil company to negotiate the 
sale of an oil voucher.
    We will show how vouchers which translated into formal oil 
contracts were then approved by the UN. As an example, we will 
trace a voucher given to a Syrian journalist named Hamidah 
Na'na, and see how that voucher ended up as a formal contract 
for the sale of oil under the Oil-for-Food Program. In the end, 
our presentation will reveal how Saddam turned UN sanctions on 
their head and actually used the Oil-for-Food Program to his 
own advantage.
    Aside from our analysis of Saddam's oil vouchers, we will 
examine a second method that Saddam used to abuse the sale of 
oil under the OFF Program, namely oil surcharges. While the 
voucher scheme was employed to peddle influence, the surcharge 
was simply a way to generate under-the-table revenue for 
Saddam's cash-strapped regime.
    We will explore how Saddam managed to generate roughly $230 
million in revenue through the oil surcharges. Our presentation 
will include new evidence of who made under-the-table payments 
to the regime. We will also explore how they made those 
payments. For instance, we will trace one transaction that 
involved an American oil company in which more than $1 million 
in illegal payments were made to the Hussein regime. Finally, 
we will present an excerpt of a document created by the 
Government of Iraq that details each and every surcharge 
payment.
    In addition to influence-peddling and generating illicit 
revenue from oil vouchers and surcharges, Saddam Hussein 
concocted a separate scheme to siphon off billions of dollars 
for himself by demanding kickbacks on contracts for 
humanitarian goods. Saddam used his freedom to contract with 
whomever he pleased to cut deals that were in his own best 
interests and not for the humanitarian needs of his people.
    We will also hear testimony describing the kickbacks paid 
by a Scottish company called The Weir Group, which did over $80 
million worth of business under the Oil-for-Food Program. The 
story of Weir is particularly disturbing, since it demonstrates 
that legitimate, reputable corporations were complicit in 
enriching the regime of Saddam Hussein.
    Our investigation revealed that in June 2000, the Iraqi 
regime demanded kickbacks from Weir. Rather than reject the 
demand, Weir agreed to enter into an arrangement to pay a 
portion of every subsequent contract back to Saddam. We will 
hear testimony detailing this arrangement and a step-by-step 
description of how Weir inflated its contracts by marking up 
the price of its products and by overstating the quantity of 
parts shipped.
    At the direction of the Iraqi regime, and over the course 
of 4 years and 15 contracts, Weir paid over $8 million into a 
secret Swiss bank account in the name of a non-existent 
corporation called Corsin Financial Limited. Weir and Iraq were 
able to transact business in this manner with impunity under 
the nose of the United Nations and without regard of the 
sanctions imposed by the international community. The Office of 
the Iraqi Program, the UN entity that oversaw the Oil-for-Food 
Program, approved Weir's contracts even though the prices of 
the contracts were sometimes inflated by 30 to 40 percent.
    Assistant Secretary of the Treasury Juan Zarate is the 
perfect witness to wrap up the hearing today. As head of the 
Interagency Iraqi Asset Tracking Task Force, Mr. Zarate will 
provide valuable information on the efforts of the U.S. 
Government and its Coalition partners to identify, locate and 
repatriate the assets of the Iraqi people.
    Although the Department of the Treasury's primary mission 
is recovery of Iraqi assets, one tangent of this recovery 
effort has been the uncovering of information pertaining to the 
illegal kickbacks, surcharges and other fraudulent activities 
committed by the former Iraqi regime under the UN Oil-for-Food 
Program.
    How much of the $21.3 billion, as estimated by this 
Subcommittee, has been channeled into the hands of terrorists 
or is currently funding the insurgency in Iraq? I don't know if 
Mr. Zarate can answer this question, but he will provide 
examples of Treasury's efforts in undermining terrorist 
activities through the identification and freezing of assets, 
as well as the designation of terrorist individuals and 
organizations. Again, the question of how much of this $21.3 
billion is fueling insurgency today is one that ultimately has 
to be answered.
    The weaknesses in the Oil-for-Food Program raise serious 
questions about the United Nation's ability to enforce 
sanctions and administer a humanitarian aid program in the 
future. American taxpayers pay close to 22 percent of the UN's 
operating costs. They need assurances and deserve assurances 
that their tax dollars are being well spent, especially in 
light of the fact that sanctions will likely be imposed upon 
other nations in the future.
    The mal-administration--and I submit to you this is an 
understatement--of the program has also undermined the 
infrastructure and the economy of Iraq, which has led to a 
substantially greater level of U.S. money needed for the 
reconstruction of Iraq after the war.
    The Iraqi people were harmed by sub-standard food and 
medicine, severely affecting the quality of life of innocent 
Iraqis.
    Finally, allegations have been raised by credible sources 
that money diverted from the OFF Program has been diverted to 
the Iraqi insurgency and to terrorist activities both in Iraq 
and elsewhere around the world. If these allegations are true, 
then the failure of the OFF Program can be tied directly to the 
loss of American lives, Coalition lives and the lives, as I 
said before, of thousands of our Iraqi allies.
    I anticipate that our investigation will lead to many more 
disclosures over the next several months. The Subcommittee will 
continue to work diligently to uncover the truth, and when we 
feel confident that we have found it, we will schedule 
additional hearings. I especially want to thank Mr. Duelfer and 
Mr. Zarate for their cooperation in helping us get to the 
truth. I hope that others will be equally forthcoming.
    Before I turn it over to the Subcommittee's Ranking Member, 
Senator Levin, I do want to acknowledge the presence of our 
Committee's Chairman, Senator Collins, and the Ranking Member, 
Senator Lieberman. Thank you both very much for being here.
    With that, I turn it over to the Subcommittee's 
distinguished Ranking Member, Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you, Mr. Chairman. Today, the 
Permanent Subcommittee on Investigations is conducting the 
first of several hearings examining efforts by Saddam Hussein 
to undermine the United Nations Oil-for-Food Program and to 
misuse its humanitarian aims to obtain illicit revenues.
    It is important that we take some time to understand what 
worked and what didn't work in the Oil-for-Food Program, how 
the program succeeded and how it failed, and how Saddam Hussein 
worked to undermine the sanctions. Sanctions are a club which 
can have an impact, as they apparently are doing today in Iran. 
It is useful to learn from the Iraqi experience, in which 
sanctions basically achieved their goals but were weakened in a 
number of ways, so that we can make sanctions work as 
effectively as possible. The Subcommittee's investigation can 
contribute to that learning process.
    Much of the testimony today will concern how Saddam Hussein 
attempted to circumvent the UN sanctions program to obtain 
revenues that helped perpetuate his regime's iron grip on power 
in Iraq. A major focus of today's hearing will be the Duelfer 
report.\1\ This report provides extensive detail on how Saddam 
Hussein gamed the system, including the use of so-called trade 
protocols, oil vouchers, contract awards, surcharges and 
kickbacks in an attempt to undermine the sanctions, while 
simultaneously obtaining illicit revenues and prohibited 
military equipment.
---------------------------------------------------------------------------
    \1\ Comprehensive Report of the Special Advisor to the DCI on 
Iraq's WMD, September 30, 2004 (Volumes I, II, and III), prepared by 
Charles Duelfer, Special Advisor to the Director of Central 
Intelligence, retained in the files of the Subcommittee as Exhibit No. 
37.
---------------------------------------------------------------------------
    The objective of the UN sanctions was to prevent Saddam 
Hussein from developing weapons of mass destruction and 
rebuilding Iraq's conventional military forces. The sanctions 
were not intended to stop all international trade with Iraq, 
but to prevent Iraq from re-arming and threatening regional 
stability.
    While Saddam had some success in circumventing sanctions, 
for the most part the UN sanctions achieved their intended 
objective of preventing Saddam from re-arming and developing 
weapons of mass destruction. In testimony before the Senate in 
2001, Secretary of State Colin Powell testified that the 
sanctions had been successful and should be continued.
    He explained as follows, ``Saddam Hussein has not been able 
to rebuild his army, notwithstanding claims that he has. He has 
fewer tanks in his inventory today than he had 10 years ago. 
Even though we know he is working on weapons of mass 
destruction--we know he has things squirreled away--at the same 
time we have not seen that capacity emerge to present a full-
fledged threat to us.'' Referring to sanctions, Secretary 
Powell added, ``So I think credit has to be given for putting 
in place a regime that has kept him pretty much in check,'' 
referring again to the sanctions regime.
    Earlier this year, our new Ambassador to Iraq and former 
U.S. Ambassador to the UN John Negroponte testified before the 
Senate that the sanctions had largely achieved their purpose, 
``The U.S. Government supported the program's general objective 
of creating a system to address the humanitarian needs of the 
Iraqi civilian population, while maintaining strict sanctions 
enforcement of items that Saddam Hussein could use to rearm or 
reconstitute his WMD program.'' And Negroponte concluded, ``We 
believe the system the Security Council devised by and large 
met those objectives.''
    Most recently, the Duelfer report provided a detailed 
analysis of how UN sanctions constrained Saddam's efforts to 
re-arm. The Duelfer report states, ``Sanctions imposed 
constraints on potential WMD programs through limitations on 
resources and restraints on imports. The sanctions forced Iraq 
to slash funding that might have been used to refurbish the 
military establishment and complicated the import of military 
goods. Rebuilding the military, including any WMD capability, 
required an end to sanctions.''
    The Duelfer report also found that sanctions had prevented 
Iraq from significantly rebuilding its conventional forces, 
confirming Secretary Powell's 2001 assessment, as well as a 
report by the General Accounting Office in 2002.
    The GAO report stated the following, ``According to U.S. 
and UN officials, there is no indication that Iraq has 
purchased large-scale weapons systems, such as aircraft, ships 
or armor. Iraq's conventional rearmament efforts are limited to 
purchases of small arms and spare parts to keep weapons and 
vehicles not destroyed during the Gulf War operational. Most 
importantly, according to State Department arms experts, 
conventional weapons systems such as aircraft and ships are 
expensive and UN controls have limited the amount that Iraq can 
spend on arms.''
    Now, the chart that I am putting up which was compiled from 
data recently updated by the GAO shows how effective the UN 
sanctions were in reducing Iraq's ability to develop weapons of 
mass destruction and large-scale conventional forces.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 31, which appears in the Appendix on page 174.
---------------------------------------------------------------------------
    The data shows that Iraq's military spending after 
sanctions were imposed in 1991 fell to a small fraction of what 
it had been prior to sanctions. It indicates that despite 
Saddam Hussein's relentless efforts to circumvent the 
sanctions, once they were imposed Iraq's military spending 
plummeted.
    The fact that the sanctions were basically meeting their 
objective was the main reason that Saddam Hussein tried so hard 
to get around them. The Duelfer report surmises that had Saddam 
Hussein succeeded in ending the sanctions, he would likely have 
resumed re-arming Iraq, with potentially dangerous results. 
Whether Saddam Hussein would have succeeded in ending sanctions 
will never be known. What we do know is that the sanctions, in 
fact, largely prevented Iraq from re-arming.
    We also know that the Oil-for-Food Program weakened the 
sanctions by allowing Saddam to pick the winners of the 
contracts issued under the program. The proceeds from the oil 
sales went into an escrow account for humanitarian use, but 
Saddam repeatedly inflated the dollar amount for humanitarian 
contracts and obtained kickbacks from these contracts and the 
oil sales to the tune of about $1.7 billion.
    Saddam's abuse of the Oil-for-Food Program, however, 
provided only a fraction, about one-sixth, of Iraq's total 
illicit income. According to the Duelfer report, the vast 
majority, which is in blue there, nearly three-quarters of 
Saddam's illicit income during the sanctions period, was 
generated through publicly-disclosed trade agreements, called 
protocols, to sell Iraqi oil to its neighbors, primarily 
Jordan, Syria, and Turkey.
    Those protocols constituted a far greater subversion of the 
sanctions because Iraq, instead of the UN, controlled the 
estimated $8 billion in proceeds. The world, including the 
United States, knew of these contracts between Iraq and its 
neighbors, but winked at them, even though they represented the 
vast majority of Saddam Hussein's illicit income.
    Now, the chart, which uses data in the Duelfer report, 
depicts the amounts and types of illicit income earned by Iraq 
during the sanctions period.\1\ It shows that the trade 
agreements which were not part of the Oil-for-Food Program were 
the largest single source, about 75 percent, of Iraq's illicit 
income, generating $8 billion out of a total that was estimated 
in the Duelfer report of $10.7 billion. According to the 
Duelfer report, the Oil-for-Food Program generated about $1.7 
billion, or about 16 percent of Iraq's total illicit income.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 32, which appears in the Appendix on page 175.
---------------------------------------------------------------------------
    Iraq also used the trade protocols to obtain illicit 
income; also, not only that, but military items prohibited by 
the UN sanctions. The Duelfer report provides extensive 
information about how Iraq used the protocols, those sales 
agreements, to obtain equipment for its conventional military 
forces, including missile, jet engine and radar components. 
Indeed, it appears from the Duelfer report that the vast 
majority of Iraq's illegal military equipment was procured 
through the trade protocols rather than through abuse of the 
Oil-for-Food Program.
    Iraq's ongoing oil sales to its neighbors was no secret. 
Both the United Nations and the United States knew of it and 
deliberately let the trade continue, presumably to maintain the 
support of Iraq's neighboring countries for the overall 
sanctions regime and to obtain other foreign policy objectives.
    In the United States, successive Administrations, both the 
Clinton Administration and the Bush Administration, 
acknowledged the existence of the Jordanian and Turkish trade 
deals, and routinely waived provisions of U.S. law that would 
have prohibited U.S. foreign aid to these countries for 
violating the UN sanctions on Iraq.
    According to the Duelfer report, Jordan and Syria were the 
major sources of illicit income for Iraq during the sanctions 
regime and the major sources of prohibited military equipment 
as well. The failure of U.S. Administrations to take forceful 
action to stop Iraq's illicit dealings with Syria, a nation 
branded by the State Department as a major sponsor of 
terrorism, is perhaps the most troubling.
    The illicit oil trade between Iraq and Syria began in late 
2000 with the opening of a pipeline and it quickly expanded. In 
February 2001, Secretary of State Powell said that he had 
obtained personal assurances from the Syrian president that he 
would place the Syrian-Iraqi trade under the UN Oil-for-Food 
Program.
    According to a contemporaneous press report, ``Mr. Powell 
said that he had won agreement from Syria to place into a 
United Nations escrow account revenues that Mr. Hussein was 
receiving from oil flowing through Syrian pipelines. In the 
last few months, those revenues have been going into Mr. 
Hussein's pockets, illustrating the fraying of sanctions. The 
commitment from Syria was so firm that President Assad stated 
it three times during the meeting, Secretary Powell said, that 
the Secretary said that he telephoned President Bush to tell 
him.''
    But Syria not only failed to keep its promise; it increased 
its oil trade with Iraq, paying Saddam more than $1 billion 
annually. This trade continued right up to the outbreak of war, 
when the U.S. military finally cut off the illegal flow of oil 
from Iraq to Syria.
    Iraqi oil sales to Syria supplied Saddam Hussein with 
billions of dollars in illicit revenue. Yet, the United States 
and other nations apparently did little to stop it. In February 
2002, The Washington Post reported, ``U.S. officials have 
applied little direct pressure on Damascus, even though this 
revenue is one of the few ways Iraqi President Saddam Hussein 
can pay to maintain his military and finance any efforts to 
acquire weapons of mass destruction.''
    It then quoted an Administration official who acknowledged 
the trade but expressed little, if any, determination to 
curtail it, ``Make no mistake about it, the pipeline issue is a 
serious topic and a point of contention. Are we willing to make 
it a sticking point so that it affects the relationship between 
our two countries? No. We have to be pragmatic.''
    The bottom line is the United States and other nations 
tolerated the trade protocols and the Iraqi oil sales which, 
according to the Duelfer report, produced billions of dollars 
in unaccounted revenue for Saddam, as well as prohibited 
military equipment for Iraq. Evaluating whether this policy of 
acquiescence was the right course of action is a key issue not 
only in drawing lessons from the Iraqi sanctions, but also in 
designing future international sanctions programs.
    The Oil-for-Food Program abuses themselves were presumably 
not acquiesced in. These abuses included awards of oil vouchers 
and allocations to curry favor, contract surcharges to generate 
kickbacks, and the use of front companies and bank accounts in 
countries with corporate and bank secrecy laws.
    We will hear not only about Saddam Hussein's demand for 
corrupt payments, but also about the willingness of some 
companies and individuals to go along with those demands. 
Oversight was supposed to be provided not only by the United 
Nations Security Council and its 661 Committee, including the 
United States, which took on the responsibility of reviewing 
Oil-for-Food contracts, licensing U.S. companies to do business 
with Iraq and monitoring Iraq's compliance with UN sanctions.
    We need to examine the shortcomings in oversight, with the 
same goal of ensuring that future sanctions regimes will be 
tighter and more effective. That is what this hearing and 
subsequent hearings before this Subcommittee are about, helping 
the world design more effective international sanctions, and I 
commend Chairman Coleman for his strong leadership in that 
effort.
    Thank you.
    Senator Coleman. Thank you, Senator Levin. Chairman 
Collins.

             OPENING STATEMENT OF CHAIRMAN COLLINS

    Chairman Collins. Thank you, Mr. Chairman. Let me begin by 
commending you for conducting this much-needed investigation 
into Saddam Hussein's abuse of the United Nations' Oil-for-Food 
Program. I know that you have worked extraordinarily hard 
during the past several months to unravel the strands of this 
corrupt scheme.
    We should remember during the course of this investigation 
that the Oil-for-Food Program was created out of a genuine 
desire by the members of the United Nations Security Council to 
meet the humanitarian needs of the Iraqi people while the UN 
sanctions worked to force compliance with Security Council 
resolutions. But what happened was that the effort quickly 
mutated into what the Wall Street Journal has called ``the 
largest bribery scheme in the history of the world.''
    One of the most disturbing aspects of this scandal is its 
sheer size. While the world may never know exactly how much 
money was plundered by Saddam Hussein's regime, the Government 
Accountability Office estimated in July that Saddam amassed 
more than $10 billion in illegal revenues between 1997 and 
2002. That is $10 billion out of a total of $67 billion during 
that time period. The Subcommittee's estimate, which looks at a 
longer time frame, is more than $21 billion.
    It is deeply troubling that the UN sanctions could be 
circumvented by Saddam Hussein on such a massive scale. 
Moreover, the evidence suggests that the Oil-for-Food Program 
was manipulated by Saddam Hussein to erode the international 
community's resolve to enforce the sanctions against his 
regime.
    Just one example of how this money was stolen can be found 
in Saddam Hussein spending $2 billion during the 1990s to build 
nine lavish presidential palaces. As former General Tommy 
Franks said during a visit to one such palace, perhaps the Oil-
for-Food Program should have been dubbed the Oil-for-Palaces 
program instead.
    But far worse, much of Saddam Hussein's illicit revenue was 
used for the more sinister purpose of undermining sanctions and 
rebuilding the Iraqi war machine. I view what happened a little 
differently than my friend and colleague from Michigan, Senator 
Levin.
    One of today's witnesses, Charles Duelfer, will tell us, as 
he reported in September, that ``The billions of dollars of 
revenue generated by the various protocols, illicit surcharges 
and oil smuggling schemes drove the explosive growth in Iraq's 
military imports.'' This allowed the Iraq Military 
Industrialization Commission, which was the agency responsible 
for overseeing the Iraqi military-industrial infrastructure, to 
smuggle millions of dollars' worth of military equipment into 
Iraq, in contravention to the UN sanctions. Mr. Duelfer's 
report explains that this commission's budget grew from $7.8 
million in 1996, to $350 million in 2002, to $500 million in 
2003, all during a period when Iraq was supposed to be under 
strict UN sanctions.
    I look forward to hearing the testimony of today's 
witnesses and the light that they will shed on this very 
complex course of events. I think this investigation and series 
of hearings is extraordinarily important. I commend the 
Chairman and Senator Levin for investigating the scope of this 
scandal and for identifying what steps need to be taken to 
ensure that this kind of blatant wrongdoing and corruption 
never again occurs in any future humanitarian programs.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Collins follows:]

                 PREPARED STATEMENT OF SENATOR COLLINS

    Let me begin by commending you for conducting this much-needed 
investigation into Saddam Hussein's abuse of the United Nations Oil-
for-Food Program. I know that you have worked extraordinarily hard for 
months at unraveling the strands of this corrupt scheme.
    The Oil-for-Food Program was created out of a genuine desire by the 
members of the United Nations Security Council to meet the humanitarian 
needs of the Iraqi people while UN sanctions worked to force compliance 
with Security Council resolutions. But this effort quickly mutated into 
what the Wall Street Journal has called ``the largest bribery scheme in 
the history of the world.''
    One of the most disturbing aspects of this scandal is its sheer 
size. While the world may never know exactly how much money was 
plundered by Saddam Hussein's regime, the Government Accountability 
Office estimated in July that Saddam amassed more than 10 billion 
dollars in illegal revenues between 1997 and 2002. That's 10 billion 
dollars in a 67 billion dollar program. The Subcommittee's estimate 
over a longer period is a staggering 21 billion dollars. I am deeply 
troubled that UN sanctions could be circumvented by the former Iraqi 
regime on such a massive scale. Moreover, the evidence suggests that 
the Oil-for-Food Program was manipulated by Saddam to erode the 
international community's resolve to enforce the sanctions against his 
regime.
    Just one example of how this money was stolen can be found in 
Saddam spending two billion dollars during the 1990s to construct nine 
lavish presidential palaces. As General Tommy Franks said during a 
visit to one such palace, perhaps the Oil-for-Food Program should have 
been dubbed the ``Oil for Places'' program instead.
    But far worse, much of Saddam Hussein's illicit revenue was used 
for the more sinister purpose of undermining sanctions and rebuilding 
the Iraqi war machine. One of today's witnesses, Charles Duelfer, 
reported in September that, ``The billions of dollars of revenue 
generated by the various protocols, illicit surcharges, and oil 
smuggling schemes drove the explosive growth in [Iraq's] military 
imports. This allowed [Iraq's Military Industrialization Commission] to 
smuggle millions of dollars worth of military equipment into Iraq in 
contravention of UN Sanctions.''
    The Military Industrialization Commission, incidentally, was the 
agency in Iraq's government responsible for overseeing the Iraqi 
military-industrial infrastructure. Mr. Duelfer's report explains that 
this Commission's budget grew from 7.8 million dollars in 1996 to 350 
million dollars in 2002 to 500 million in 2003, all during a period 
when Iraq was supposed to be under UN sanctions.
    I look forward to the testimony of today's witnesses, and the light 
they will shed on this very complex course of events. And I again 
commend Senator Coleman and Senator Levin for investigating the scope 
of this scandal and what steps need to be taken to ensure that the same 
kind of wrongdoing never occurs in future such humanitarian programs.

    Senator Coleman. Thank you, Chairman Collins. Senator 
Lieberman.

             OPENING STATEMENT OF SENATOR LIEBERMAN

    Senator Lieberman. Thanks, Mr. Chairman. I thank you and 
Senator Levin for initiating this critically important 
investigation.
    Mr. Chairman, this investigation is not only important 
insofar as we learn lessons from it that will help us and the 
United Nations and the international community in the 
application and implementation of sanctions. I think it may be 
important in terms of our understanding, and perhaps even the 
American people's understanding, of the history of what was 
going on in Iraq.
    I am pleased to see Mr. Duelfer here. I must say that the 
bottom line here is that this investigation, Mr. Duelfer's and 
now the Subcommittee's, has shown us the way in which a 
supposedly humanitarian program, certainly a program adopted 
for humanitarian reasons, in part as a result of a cunning 
international marketing campaign by the Saddam Hussein regime 
to develop concern about people suffering in Iraq as a result 
of the sanctions--that humanitarian program was corrupted and 
exploited by Saddam Hussein not only illicitly, but for the 
most horrible and aggressive of purposes.
    Mr. Duelfer's report in this regard and the Subcommittee's 
investigation, I think, shows that Saddam Hussein was guilty of 
the grandest larceny in pursuit of a grand plan to re-arm, 
including the reconstitution of his program of weapons of mass 
destruction.
    I must say, Mr. Duelfer, I appreciate that the Subcommittee 
has brought you back because I feel that your initial report 
was a superb piece of work and, in my opinion, may have been 
the most mis-reported and misinterpreted governmental document 
in my 16 years in the Senate of the United States.
    The reason I say that is that too many people jumped on 
your conclusion that you did not find weapons of mass 
destruction, even though in your report--and I have read every 
word of it and I have read every public statement of yours on 
the report that I could find--you caution that readers not 
reach definitive conclusions based on your inability to find 
WMD, and certainly not to conclude that Saddam didn't have them 
at the time the war began, or perhaps even that there were not 
some there. In fact, your report documents a network of 
clandestine laboratories involved in work related to both 
biological and chemical weapons.
    But more to the point of this investigation, what you make 
clear--and this is based not on any pre-war intelligence which 
we now have so much doubt about--it is based on the Iraq Survey 
Group which you headed, more than 1,500 people, as I recall, 
with full range, as much as you could throughout Iraq, and 
access to people that, needless to say, in Saddam Hussein's 
government, we had no access to prior to the war.
    I think you reach some very clear and compelling 
conclusions, and I want to just read from the report. ``Saddam 
Hussein wanted to recreate Iraq's WMD capability after 
sanctions were removed. Saddam aspired to develop a nuclear 
capability, but he intended to focus on ballistic missile and 
tactical chemical warfare capabilities in the short run.''
    I continue to quote, ``Saddam recognized that the 
reconstitution of Iraqi WMD enhanced both his security and his 
image. Consequently, Saddam needed to end UN-imposed sanctions 
to fulfill his goals. Saddam continually directed his advisers 
to formulate and implement strategies, policies and methods to 
terminate the UN sanctions regime established by UNSCR 661.''
    I am continuing to read selectively from the report. 
``Under Saddam's orders, the Ministry of Foreign Affairs of 
Iraq formulated and implemented a strategy aimed at these 
United Nations Security Council members and international 
public opinion, with the purpose of ending UN sanctions and 
undermining its subsequent Oil-for-Food Program by diplomatic 
and economic means.''
    Then you say, ``Once that undermining,'' by the various 
forms that we have heard described already today--``Once the 
money began to flow into Iraq, the regime's authorities devised 
and implemented methods and techniques to procure illicit goods 
from foreign suppliers. To implement its procurement efforts, 
Iraq, under Saddam, created a network of Iraqi front companies, 
some with close relationships to high-ranking foreign 
government officials, to procure illicit goods, services and 
technologies for Iraq's WMD-related conventional arms and/or 
dual-use goods programs,'' so again WMD-related. The regime 
financed these government sanctions programs by several illicit 
revenue streams that we will describe here today.
    ``Saddam used the Iraq Intelligence Service to undertake 
the most sensitive procurement missions. Consequently, the IIS 
facilitated the import of UN-sanctioned and dual-use goods into 
Iraq through countries like Syria, Jordan, Belarus, and Turkey. 
The Ministry of Foreign Affairs played a critical role in 
facilitating Iraq's procurement of military goods and dual-use 
goods pertaining to weapons of mass destruction, transporting 
cash and other valuable goods earned by illicit oil revenue and 
forming and implementing a diplomatic strategy to end UN 
sanctions and the subsequent Oil-for-Food Program by nefarious 
means.'' ``Nefarious'' is the right word.
    So I conclude from this section of your report that Saddam 
Hussein was doing everything he could to both evade and abuse 
the sanctions program, the Oil-for-Food Program, with the 
purpose of protecting the intellectual and other capacity he 
had for a WMD program, including the development and delivery 
systems like long-range missiles, much of it with the intent of 
breaking out of the sanctions program for a primary purpose of 
reconstituting at full pace his WMD program, with an emphasis 
on long-range delivery systems and chemical weapons, but also 
returning to his biological and nuclear weapons programs, which 
says to me--and I apologize for this, but to me it is central--
that those who argue that the war to overthrow Saddam was a 
mistake because WMD was not found, do not allow for the many 
other good reasons to overthrow Saddam because he was a brutal 
dictator and murdered hundreds of thousands of his people and 
he supported terrorism.
    But based on your report, after the war, talking to people 
who weren't available before the war, and based particularly on 
these sections that document his cruel, merciless evasions of 
the sanctions program, it is clear to me that had we not 
overthrown Saddam Hussein, by this time he might have broken 
out of sanctions. He certainly would have been on the way to 
doing so, and therefore reconstituting his WMD program, which 
says to me, as many of us have said many times before, the 
world is a lot safer with Saddam Hussein in prison and not in 
power.
    I want to just add a final word about the United Nations 
and complimenting the Chairman and Ranking Member of this 
Subcommittee on their persistence. For many of us who continue 
to hold dear the ideals which motivated the formation of the 
United Nations, too much of its behavior too much of the time 
has eaten away at what I believe are those ideals.
    Your report here, and the Subcommittee's investigation 
unfortunately holds another cloud, a dark cloud over the United 
Nations and our hopes for its constructive peace-making and 
peace-keeping role in the world, because it is clear here that 
the UN not only mismanaged the Oil-for-Food Program, but that 
United Nations officials themselves may have participated in 
Saddam's efforts to undermine the very controls they were 
charged with enforcing.
    Now, it goes without saying that those are extremely 
serious charges, and until the facts are in it would be 
premature and unfair to reach any conclusions. In fact, the UN 
has opened its own investigation, headed by Paul Volcker, 
former Chairman of the Federal Reserve. But that is no excuse 
for the United Nations not to have cooperated with this 
Subcommittee's investigation.
    I wanted to join with Senators Coleman and Levin in urging 
the United Nations to cooperate fully and promptly with this 
Subcommittee's requests, or to risk further diminishing the 
support that does still exist in this Congress for the 
important work of the United Nations.
    I thank the Chairman.
    Senator Coleman. Thank you, Senator Lieberman. Senator 
Pryor.

               OPENING STATEMENT OF SENATOR PRYOR

    Senator Pryor. Thank you. I just wanted to really say thank 
you to Chairman Coleman and Senators Levin, Collins, and 
Lieberman, for your great leadership not just on this issue, 
because you have been great on the Oil-for-Food Program, but 
also on a variety of issues over the last couple of years since 
I have been in the Senate that relate to Iraq, homeland 
security, national defense and national security. They relate 
to intelligence, and the list goes on and on.
    I want to thank you all, and if we don't accomplish 
anything else today other than to get a clear and accurate 
picture of what was going on in Iraq during the Oil-for-Food 
Program, this hearing would be worth doing. But I think there 
is a larger and more significant piece to this. That in and of 
itself is very important, but maybe more significant than that 
is to look to the future because we know it won't be long--we 
don't know when, but at some point the United Nations or some 
other organization will impose sanctions on some other country.
    In fact, there are sanctions that exist today around the 
world, but to learn from what was going on in Iraq will help us 
to do a better job in the future to make sure that sanctions 
are most effective and that they actually accomplish the goals 
that they set out to accomplish.
    So, again, I want to thank the Chairman and everyone for 
their leadership on this issue.
    Senator Coleman. Thank you, Senator Pryor. Senator Pryor, 
let me return the compliment by saying I don't know if there is 
another single Member of this Subcommittee who has been as 
active in all our investigations and all the work we have done. 
So we greatly appreciate your deep involvement in all the 
matters that have come before us. Thank you.
    We would now like to welcome our first witness at today's 
hearing, Charles Duelfer, the Special Advisor to the Director 
of the Central Intelligence Agency who prepared the 
comprehensive report of the Special Advisor to the DCI on 
Iraq's WMD. This recently released report provides an overview 
and some examples of the abuses related to the Oil-for-Food 
Program.
    Mr. Duelfer, I want to express my personal appreciation for 
the extraordinary service you have rendered this Nation in your 
search for Saddam Hussein's conventional, radiological, 
chemical and biological weapons, and for your evaluation of the 
Oil-for-Food Program.
    According to press accounts, I understand that an assassin 
sought to take your life during your recent visit to Baghdad, 
which resulted in the death of two American soldiers and the 
wounding of three others. I am glad that you were not injured 
and can be with us today. I also want to express my condolences 
to the families of those who gave their lives in service to 
this Nation and wish a speedy recovery for those who were 
injured in the attack.
    I appreciate your attendance at today's important hearing 
and I am looking forward to hearing your observations about the 
Oil-for-Food Program. I note, Mr. Duelfer, that you have two of 
your colleagues with you. Would you identify them for the 
record, please?
    Mr. Duelfer. Steve Zidek to my immediate left and Chris 
Johnsten next to him.
    Senator Coleman. Thank you very much.
    Gentlemen, before we begin, pursuant to Rule VI, all 
witnesses who testify before this Subcommittee are required to 
be sworn. At this time, I would ask you to please stand and 
raise your hand.
    Do you swear that the testimony you give before this 
Subcommittee will be the truth, the whole truth and nothing but 
the truth, so help you, God?
    Mr. Duelfer. I do.
    Mr. Zidek. I do.
    Mr. Johnsten. I do.
    Senator Coleman. We will be using a timing system today. 
Please be aware that approximately 1 minute before the red 
light comes on, you will see the lights change from green to 
yellow and it will give you an opportunity to conclude your 
remarks. Your written testimony will be printed in the record 
in its entirety. We ask that you limit your oral testimony to 
no more than 10 minutes.
    Mr. Duelfer, you may proceed.

    TESTIMONY OF CHARLES DUELFER,\1\ SPECIAL ADVISOR TO THE 
  DIRECTOR OF THE CENTRAL INTELLIGENCE ON IRAQ'S WMD, CENTRAL 
     INTELLIGENCE AGENCY, ACCOMPANIED BY STEPHEN ZIDEK AND 
                      CHRISTOPHER JOHNSTEN

    Mr. Duelfer. Mr. Chairman and Senators, thank you very 
much. It is customary to thank the Subcommittee for the 
opportunity to be here, and I do that. But again, as you noted, 
as a personal note I have to declare my thanks to three 
individuals who are not here.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Duelfer appears in the Appendix 
on page 67.
---------------------------------------------------------------------------
    As you noted, there was a suicide bomb attack on a convoy I 
was in and we lost two of the protective details, a staff 
sergeant, Clinton Wisdom, and Specialist Donald Cleary. And 
Specialist Nathan Gray was badly injured. Without their 
actions, I doubt whether I would be here today.
    And in a way, I think that lends even more gratitude that 
you are taking this interest in this material because the 
report and the facts we tried to assemble were not done without 
significant cost. And I think they merit debate; they merit a 
lot of attention in terms of lessons learned. This has been a 
long tragedy for many decades, and my experience last week was 
only just the most recent. So, as with your colleagues, Mr. 
Chairman, I think it is good that this investigation take 
place.
    My report and the supporting analysis aimed at providing a 
synthetic view of the former regime's decisions and strategies 
as it related to WMD. It was one of my objectives to describe 
the context within which Saddam made his decisions about WMD.
    WMD did not happen in a vacuum. To understand what happened 
to Iraqi and WMD, and perhaps to learn lessons that might 
inform future policies, I felt it was important to examine the 
surrounding factors that impinged on Saddam's decisions.
    At different times, Saddam opted to have, and then to have 
not, WMD. It was my hope to try to illuminate the conditions 
that led to these different courses. I also tried to analyze 
the regime's relationship with WMD over time. We have been 
wrestling with the prospect of the Iraqi Nation with Saddam and 
WMD for almost three decades. It would have been grossly 
deficient to simply tally up the remnants of the WMD program. 
My goal was to understand the dynamics behind the decisions 
that Saddam made. To this end, we delved into the nature of 
Saddam's objectives and his perspectives on the world.
    A significant part of the report addresses the manner of 
Saddam's rule and his vision for himself and Iraq. Unlike 
previous reports on the regime, we had access to primary 
sources, Saddam's top advisers, as well as to Saddam himself.
    Understanding and analyzing WMD in Iraq is in one way 
simplified because the regime was basically one person--Saddam 
Hussein. This certainly bounded the analysis. The second way we 
found of bounding the problem was to consider the limited 
amount of resources available to the regime. Sanctions and the 
oil embargo put strict limits on Iraq's disposable income.
    It struck me that if we could account for the resources 
available to the regime and examine how the regime allocated 
them, we could learn a great deal about its objectives and 
actions related to WMD. This line of investigation quickly 
highlighted not just the tangible resources available to Iraq, 
but also the influence that the regime accrued through the 
potential to allocate future resources. Examination of the 
resource decisions and actions that the regime took to disburse 
its favors proved an excellent way of highlighting the 
objectives and intentions of Saddam.
    We identified several key inflection points in this 
history. One was the summer following the 1991 war. The UN 
Security Council had taken a decision to link the lifting of 
sanctions and oil embargo imposed in August 1990, when Iraq 
invaded Kuwait, to Iraq's ridding itself of WMD. The new 
inspection organization was created for this purpose. 
Initially, all thought it would be short-lived, Saddam amongst 
them.
    However, during the summer, early inspections proved more 
meddlesome than Saddam anticipated. And while he made early 
decisions to offer partial compliance, it became obvious that 
this would not suffice.
    Saddam then established as his top priority to get out from 
the web of international sanctions, and other matters would be 
pursued on a non-interference basis with this prime objective. 
His policies, his actions, his tactics and strategies from that 
point all had the objective of getting rid of sanctions.
    The evolution of his approach toward the UN Security 
Council reflected his usual dual approach of reward and threat. 
In the same way he ruled at home, he dealt with the 
international community and the UN Security Council, in 
particular. Saddam offered partial compliance combined with 
defiance. He always wanted to bargain. He exerted pressure on 
the Security Council and tried to divide it. He would acquiesce 
to their demands only when unavoidable, and usually he would 
acquiesce only partially. He preferred confrontation. His 
lieutenants criticized this approach as having prolonged the 
sanctions.
    Saddam's goal of getting out of sanctions was prime and 
shaped all his relations with the Security Council and its 
members. The Security Council recognized from the start that 
sanctions were a penalty imposed on all Iraqis, not just the 
leadership.
    From 1991 on, the Security Council had made available the 
option for Iraq to sell oil, under condition that the revenues 
would go only for humanitarian purposes. The Council was very 
sensitive to accusations that their actions--imposing the 
sanctions--were the cause of the suffering of the Iraqi people.
    A pair of resolutions, UNSCR 706 and 712, first provided 
this option of humanitarian relief to the regime. Saddam 
understood this pressure and the leverage it conveyed to him. 
He understood that if he exercised the option of exporting oil 
under the condition that only humanitarian aid could be 
delivered, then it would relieve the pressure on the Council to 
lift sanctions in their entirety. He steadfastly refused to 
accept this option and at every opportunity chose to link the 
Security Council and the problems with the inspectors with the 
deaths of thousands of Iraqi children. In essence, he held his 
population hostage.
    Saddam sustained this position for 5 years, during which 
time conditions in Iraq decayed. Infrastructure collapsed, 
health care diminished. Aid agencies such as UNICEF reported 
the statistics of decay. The middle class was wiped out. The 
value of one Iraqi dinar was over $3.00 before the 1991 war. By 
1996, the value was on the order of 1,500 dinars to the dollar. 
In effect, the entire savings of the middle class vanished. 
Jobs vanished. Iraqis tried to leave to find work elsewhere.
    In mid-1995, Saddam's son-in-law, Hussein Kamal, defected 
to Jordan. Hussein Kamal was the key figure who had been in 
charge of the development for Saddam of all the WMD programs. 
When he left, the regime was forced to acknowledge it had not 
been fully forthcoming with the UN inspectors and WMD 
documents, materials and programs had been concealed.
    The sympathy and support that had been building in the 
Security Council for the Iraqi position dissipated. Even Iraq's 
friends in the Security Council backed off. Suddenly, Baghdad 
realized sanctions would not soon be lifted. At the same time, 
their effect continued to grind down Iraq's people.
    In 1995, a new resolution, Security Council Resolution 986, 
was passed to offer relief again to the Iraqi civilian 
population. This resolution, which became known as the Oil-for-
Food Program, was not accepted by Saddam until December 1996, 
and only after several months of negotiations between the 
Office of the Secretary General and Baghdad. Saddam only 
accepted this program when the damage of the sanctions on the 
civilian infrastructure became regime-threatening.
    The initiation of this program turned out to have many 
benefits for the regime. The program did achieve the higher 
objective of reducing the suffering of the Iraqi population. 
However, it also had unanticipated collateral benefits for the 
regime.
    First, there began a large flow of businessmen to Baghdad 
in search of contracts. While the UN held the checkbook, in 
effect, Baghdad still made the decisions on who would get the 
money. This provided a lever that empowered Saddam to reward or 
punish those seeking OFF contracts.
    The flow of commerce expanded quickly to include the 
refurbishment of the decayed oil infrastructure. Baghdad 
shrewdly played various parties off against one another to win 
their favor. They made it clear that sanctions would not last 
forever, and when they were lifted, Baghdad would remember who 
their friends were. This attitude permeated all transactions, 
and the attitude grew that sanctions were eroding and, 
``everyone else was making money.'' This effect was intangible, 
but powerful nevertheless.
    The report describes the nature of income that Iraq was 
able to generate during this period. We broke them into largely 
four types. As some of you have mentioned, there were protocols 
with neighboring countries, there was smuggling of oil 
products, there were kickbacks associated with the OFF 
contracts, and there were surcharges on oil exported through 
the OFF Program.
    The report describes in illustrative cases how transactions 
occurred, estimated their magnitude and, more to the point of 
the report, where the funds were directed. It has shown, for 
example, that the budget of the Military Industrial Commission 
surged from $7.8 million in 1998 to $350 million in 2001. In 
2003, Iraq had budgeted $500 million for this organization. 
Saddam's priorities were quite clear.
    The process of allocating oil liftings was also instructive 
in terms of the strategy and tactics of Saddam regarding 
escaping sanctions. We began obtaining data last winter from 
the oil ministry and the state oil marketing organization, 
SOMO. The objective was to review the resources that were 
available to Iraq and determine if they led to any WMD 
activities.
    Combined with our investigation of the procurement 
mechanisms for sanctioned goods, we developed a fairly robust 
picture of the systems the regime used. It is not an all-
inclusive picture. We made no attempt to unearth all 
activities, but rather the illustrative examples that were 
supported by the testimony of Iraqis we debriefed.
    It is important to emphasize that our work took as a point 
of departure the Iraqi perspective. We sought to understand 
what Iraq was doing. We were not investigating the countries 
that supplied sanctions to Iraq, nor were we investigating the 
judgments or culpability of any party. I will note a couple of 
major points from this examination.
    We found that there was a momentum shift in late 1998, when 
Iraq terminated cooperation with UN inspectors. To that point, 
Iraq had been pursuing two tracks to getting out of sanctions. 
They participated in the inspection and monitoring process at 
the same time they worked to erode support for that process, 
and also the sanctions.
    The decision by Baghdad to terminate cooperation and focus 
strictly on a policy of erosion of sanctions began in August 
1998. The full cessation of cooperation with inspections 
provoked a limited 4-day bombing campaign by the United States 
and the United Kingdom in December 1998. Other Council members, 
including Russia and France, were furious at what they declared 
to be an unauthorized military action. This left the Security 
Council deeply divided.
    At the same time, the OFF Program was continuing and 
commerce growing in Iraq. The inspectors were gone. As Tariq 
Aziz, the former Deputy Prime Minister, commented, Baghdad 
could have sanctions with inspectors or sanctions without 
inspectors. They chose the latter.
    Throughout 1999, the Security Council debated how to 
address Iraq. The sanctions remained, but were fraying, and 
Iraq applied whatever tools it could to generate support for 
its position. Ultimately, the Council agreed upon a new 
resolution, 1284, in December 1999. This replaced the former 
inspection organ, UNSCOM, with a new one, UNMOVIC, and changed 
certain other provisions related to the prospects for lifting 
of sanctions based upon progressive steps of compliance by 
Iraq. Nevertheless, Iraq chose to ignore the resolution and did 
not permit inspection.
    By 2000, funds from the four general revenue streams I 
noted earlier made life much better for the regime. I would 
observe that the Jordanian protocol created in the early 1990s 
now began to be replicated in this period. It was a model Iraq 
and its neighbors used to open and increase commerce.
    The infusion of funding allowed Iraq to begin efforts to 
refurbish conventional military capabilities, among other 
things, such as palace construction. In 2000, we found Saddam 
made a decision to invigorate his long-range ballistic missile 
programs. This was directly keyed to the availability of 
resources and material and expertise, in spite of sanctions.
    The view for Iraq was good in 2000 to 2001. Businessmen 
filled Baghdad's hotels. Flights were restored into Saddam 
International Airport. The Baghdad International Fairs were 
bursting with foreign companies and representatives soliciting 
business with the regime. Saddam was looking like a winner in 
many places.
    Attention at OPEC meetings was riveted on the prospects for 
increased Iraqi oil production. Baghdad derived substantial 
international leverage from the speculation about its future 
decisions and their potential effect on markets. Oil analysts 
and traders were solicitous, if not groveling, with the Iraqi 
delegations.
    It was also apparent to Baghdad that the American effort to 
revise sanctions with so-called Smart Sanctions was an 
indication of weakness. Baghdad was hearing from other Security 
Council members that these steps were all favorable to Iraq. It 
is also important to appreciate that Baghdad was never an easy 
friend to its supporters. The regime kept making more demands 
of its friends and often ignored their advice on how to relate 
to the Security Council.
    True to form, Saddam made one last strategic blunder. He 
failed to grasp the effect of the attacks of September 11, 
2001. He did not understand how this radically changed the 
international environment. Only following the January 2002 
State of the Union Message did Saddam begin to realize he could 
no longer stonewall on weapons inspections. He realized too 
late that his friends on the Security Council were limited in 
what they could or would do.
    Yet, he still insisted upon attempts to bargain. He would 
not simply accept inspections, but rather opened a long process 
of negotiation with the UN. Ultimately, this worsened the 
conditions under which Saddam finally accepted inspectors.
    During 2002, while Saddam tried to negotiate conditions for 
accepting inspections, the United States pressed for a new 
resolution with tougher measures than the Council agreed 
previously, in December 1999. That was in Resolution 1284. This 
was as reverse from the trend in the Security Council of 
loosening constraints on Iraq. The tougher U.S. line found more 
traction in the Council following September 11. Saddam did not 
understand the changed environment.
    In conclusion, the portion of this report devoted to the 
Oil-for-Food Program and the regime's finances is aimed at 
supporting assessments about WMD programs. It is also a vital 
indicator of the direction and intentions of the former regime. 
We were not conducting an investigation of the OFF Program, per 
se, the United Nations or other nations' actions. Our goal was 
to delve into the interior of a very opaque and dangerous 
regime. Much of what we found was ugly. The regime depended not 
on bringing out the best in people, rather on promoting the 
worst. It poisoned everything it touched, including the UN.
    Thank you very much.
    Senator Coleman. Thank you very much, Mr. Duelfer.
    If we could put up Exhibit 2.\1\
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    \1\ See Exhibit No. 2, which appears in the Appendix on page 107.
---------------------------------------------------------------------------
    Exhibit 2 is a timeline. Just to make sure I understand 
kind of the impact of Oil-for-Food, what I heard from you, Mr. 
Duelfer, is that with the implementation of the Oil-for-Food 
Program, there was almost a change in the whole atmosphere with 
Saddam.
    We have had the Jordanian protocol, for instance, since 
1991. But in 1996, we have Oil-for-Food. And if you look, UN 
actions in blue, and actions by Iraq in yellow. Illicit 
earnings in 1997 allow them to pursue military procurement, and 
I think in your testimony you indicated--are you making 
reference to the MIC, the Military Industrialization 
Commission, that their budget grew from $7.8 million in 1996 to 
$350 million in 2002, to $500 million in 2003?
    Mr. Duelfer. Yes.
    Senator Coleman. First of all, what was the MIC responsible 
for? What were they spending that money on?
    Mr. Duelfer. The Military Industrial Commission or 
Corporation, depending on the translation, is basically the 
government-run military industrial complex. It is the entire 
defense industry.
    Senator Coleman. So we see a huge increase in their 
military industrial complex from the time Oil-for-Food gets 
started until the end of Saddam's regime?
    Mr. Duelfer. Correct.
    Senator Coleman. And in 1997, Phase III--it is on the 
bottom of the chart, vouchers to favorable political parties 
and individuals. And we are going to have some more discussion 
of vouchers later on, but I think it is fair to say that 
Saddam--and you indicated that folks were now dealing directly 
with Saddam in the capacity to do the contracts, a direct 
relationship.
    But vouchers, in effect, gave individuals the option and 
opportunity to buy Iraqi oil at less than market price, is that 
correct?
    Mr. Duelfer. That is correct, yes.
    Senator Coleman. I think in your report you may even have 
provided some approximation of where those vouchers went. 
Thirty percent to Russia, China 15 percent, and 10 percent 
France--is that from information in your report?
    Mr. Duelfer. We presented the raw data that we received 
from Iraq in terms of the assigning of those vouchers, yes.
    Senator Coleman. And then in 1998, Iraq weaponized VX gas, 
missile and warheads. Is that from your report?
    Mr. Duelfer. No. There was a debate in 1998 where UNSCOM 
raised evidence that Iraq had weaponized VX prior to that time, 
which they had not admitted. This was a serious issue because 
it would have thrown off all of the declarations that Iraq had 
made with respect not only to its chemical weapons program, but 
also its missile program. This was a huge issue of debate 
between the UN and Iraq. It was never resolved.
    Senator Coleman. Did the inspectors, in fact, find VX nerve 
gas in the summer of 1998?
    Mr. Duelfer. What we found, or what the inspectors found, 
was degradation products in remnants of warheads that Iraq had 
declared has no VX in them. So what they found was evidence 
that there was VX where there should not have been.
    Senator Coleman. If I can just touch upon the WMD 
capabilities, I want to touch upon that. At the onset of 
Operation Iraqi Freedom, can you just briefly talk about 
Saddam's WMD capabilities when it came to developing missile 
technology? How would you characterize that?
    Mr. Duelfer. At the beginning of OIF, he had a very 
substantial program in something called the Al-Samood program, 
which was a missile developed from technology largely 
derivative of an SA-II, which is a surface-to-air missile. It 
had a range which exceeded the 150-kilometer limit by the UN.
    I believe they had in their inventory at that time close to 
80 missiles, and a couple of them were used during OIF.
    Senator Coleman. A capable delivery system for nuclear 
weapons, chemical, and biological weapons?
    Mr. Duelfer. What Iraq declared was simply conventional 
warheads. But, of course, in a WMD program the long pole in the 
tent is the ballistic missile. So we were concerned about what 
the potential was.
    Senator Coleman. And it was fair to say that Saddam 
successfully acquired all the equipment and supplies necessary 
to begin manufacturing of biological weapons?
    Mr. Duelfer. Iraq had the equipment, the intellectual 
capacity totally indigenously to create biological weapons, 
should it make that decision. But we did not see evidence that 
it had biological weapons at that time.
    Senator Coleman. What I am trying to understand is, and 
what I heard in the testimony and read in the report, a sense 
that at one point Saddam was waiting for the end of sanctions, 
perhaps, to be able to move forward. On the other hand, it 
appears that with the Oil-for-Food Program Saddam had achieved 
a lot of his goals.
    He had hard currency with kickbacks and surcharges, is that 
correct?
    Mr. Duelfer. Yes.
    Senator Coleman. Hard currency that was used to finance 
weapons procurement?
    Mr. Duelfer. Absolutely.
    Senator Coleman. He had influence-peddling, vouchers to 
politicians, vouchers to journalists who were supportive of the 
Iraqi cause. He had increased economic activity that you have 
outlined in your testimony that allowed a cover for smuggling. 
Smuggling included military weapons.
    In fact, as you have laid out in your report, he had front 
operations for this smuggling. And is it correct to say that 
some of those front operations had Oil-for-Food contracts?
    Mr. Duelfer. Yes, that is true.
    Senator Coleman. So they could be profitable by Oil-by-Food 
at the same time they were involved in smuggling of weapons?
    Mr. Duelfer. That is true.
    Senator Coleman. And then the Oil-for-Food--I will move on. 
If I can, in your report, I want to get to some of the 
individuals who benefited from the vouchers, one in particular. 
You indicate that Benon Sevan got 13 million barrels. He was 
the Executive Director of the Oil-for-Food Program, is that 
correct?
    Mr. Duelfer. That is correct. What we are reporting simply 
is what the Iraqis--their own data showed, because again we 
were not investigating the UN. We were simply reporting what 
the Iraqi data itself showed.
    Senator Coleman. And when you say their data, what are you 
talking about?
    Mr. Duelfer. Their listings of the oil vouchers and who got 
them.
    Senator Coleman. And the way the oil vouchers work is if 
you had an oil voucher, you, in fact, could sell it to a 
legitimate oil trader and you would get a commission. In other 
words, the price set by the UN for oil was below market price, 
so you could go to a legitimate oil trader and get a percentage 
commission, and you could still sell it to somebody at below 
cost of what the world price for oil was. Is that correct?
    Mr. Duelfer. That is correct. I mean, the voucher had 
monetary value. You don't have to exercise it yourself.
    Senator Coleman. And we are talking about tens of 
thousands, and perhaps in some cases hundreds of thousands of 
dollars that individual could profit from having these 
vouchers?
    Mr. Duelfer. It obviously depended on the number of barrels 
that the voucher was for and the price discount, but they 
tended to be between 10 and 30 cents per barrel discounts, or 
profit that you could make off of it, which would mean each 
voucher was a substantial amount of money.
    Senator Coleman. Now, you indicated in your report that 
Vladimir Zhirinovsky and the Liberal Democratic Party of Russia 
received 53 million barrels of oil. Now, that is one of the 
largest parties in the Duma?
    Mr. Duelfer. Ask me a question about Iraq. I will feel more 
comfortable.
    Senator Coleman. A lot of money you can make from 50 
million barrels of oil, though.
    Mr. Duelfer. It is, but again that is the Iraqi data. I 
can't tell you for sure that----
    Senator Coleman. You found Iraqi data indicating that 
Zhirinovsky has got 53 million barrels. Do you know if 
Zhirinovsky is a known Iraqi sympathizer? Do you have any 
information about him?
    Mr. Duelfer. Well, what I can tell you is what the Iraqis 
thought, and the Iraqis were quite pleased when he came and 
visited Baghdad. I mean, they saw him as a favorable influence.
    Senator Coleman. Was it also correct--and I don't have a 
name here--that among those listed in Iraqi data as getting 
these vouchers were the son of a Russian ambassador to Iraq?
    Mr. Duelfer. That was listed in their listing of oil 
vouchers. That is correct.
    Senator Coleman. Russian presidential office?
    Mr. Duelfer. That is correct.
    Senator Coleman. Russian foreign ministry, no name?
    Mr. Duelfer. Yes, that is correct.
    Senator Coleman. Ukraine Communist Party?
    Mr. Duelfer. Yes.
    Senator Coleman. In France, Iraqi-French Friendship 
Society?
    Mr. Duelfer. This is as they are listed in the Iraqi 
document.
    Senator Coleman. Mr. Charles Pasqua, a former interior 
minister of France?
    Mr. Duelfer. As listed by the Iraqis, that is true.
    Senator Coleman. Syrian journalist Hamidah Na'na, author of 
a biography of former Iraqi Deputy Prime Minister Tariq Aziz?
    Mr. Duelfer. I didn't know the latter part of that, but I 
will take your word for it.
    Senator Coleman. There was a Samir Vincent, apparently a 
U.S. citizen--Samir Vincent.
    Mr. Duelfer. That was on the list.
    Senator Coleman. Do we know whether any organizations with 
specific terrorist ties were included as getting vouchers, such 
as Popular Front for the Liberation of Palestine?
    Mr. Duelfer. I don't know off the top of my head. We looked 
at that question and to the extent--I don't know how thoroughly 
we could--we didn't go into every possible path, but we didn't 
see anything obvious.
    Senator Coleman. I have a lot more to discuss with Mr. 
Duelfer, but would like to note the presence of Senator Graham, 
from South Carolina, who is not a Member of this Subcommittee.
    Senator Graham, I do want to welcome you here today and 
give you the opportunity later to make a statement for the 
record, and certainly participate in the hearing.
    Senator Graham. Thank you, Mr. Chairman.
    Senator Coleman. I will defer any further questions perhaps 
to the next round and go to the Subcommittee's Ranking Member, 
Senator Levin.
    Senator Levin. Thank you very much, Mr. Chairman.
    Mr. Duelfer, your report discusses the tactics which were 
used by Saddam Hussein to undermine UN sanctions on Iraq, 
including selling oil to his neighbors under the so-called 
trade protocols, and then offering oil vouchers and contracts 
under the Oil-for-Food Program to win favors from recipients--
two different streams of illicit income, as you have pointed 
out in your report.
    Why was Saddam trying to undermine the UN sanctions?
    Mr. Duelfer. Well, I mean they were the largest constraint 
on his freedom of movement and in achieving what he envisioned 
as his grand future.
    Senator Levin. Did they constrain his ability to rebuild 
his military?
    Mr. Duelfer. They constrained his ability to do almost 
everything, but, of course, including the military.
    Senator Levin. When Secretary Powell testified before the 
Senate Foreign Relations Committee that those sanctions then 
had been successful, at least to that degree or in that sense 
that they constrained him from rebuilding his military--as he 
put it, the sanctions regime kept him pretty much in check--do 
you agree with Secretary Powell?
    Mr. Duelfer. Well, that is a judgment beyond, I think, what 
we were looking at because to determine whether sanctions are 
successful or unsuccessful is a very broad question because the 
sanctions have effects far beyond just limiting WMD or limiting 
conventional military. And, I think it is a vital question, it 
is an important debate, but it is much broader than the context 
of this report.
    Senator Levin. Let's go back, then, to your testimony and 
your report. A number of times in your report you indicate that 
the sanctions were truly biting on Saddam and that his major 
goal, besides his own survival, was to get rid of those 
sanctions. Is that correct?
    Mr. Duelfer. That is true.
    Senator Levin. Weren't they then useful at least to that 
extent that they----
    Mr. Duelfer. That became clear in 1991 that his highest 
priority, aside from survival, was to figure out a way of 
getting rid of the sanctions.
    Senator Levin. And the fact that he couldn't get rid of the 
sanctions, does that not lead anyone reasonably to the 
conclusion that those sanctions were useful?
    Mr. Duelfer. Well, the report again tries to not look at 
just a static point in time, and this is where the trends, and 
so forth, are important and we tried to identify the trends. 
And, certainly, the sanctions were in place up until OIF.
    Senator Levin. You discuss a number of sources of illicit 
income for Hussein during that sanctions period, including now 
the trade protocol funds, which were those sales agreements 
that he had with a number of neighboring countries which were 
open. Is that correct?
    Mr. Duelfer. That is correct.
    Senator Levin. And they produced the bulk of his illicit 
income, did they not?
    Mr. Duelfer. Certainly, they provided most of the revenues, 
as the charts have indicated, and the Jordanian one provided 
the most because that started the soonest.
    Senator Levin. Those are your numbers, I believe.
    Mr. Duelfer. Correct.
    Senator Levin. Looking at that chart \1\ and adding up your 
numbers, then, would you conclude that the blue [Trade 
Protocols] represents the bulk of his illicit income?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 32, which appears in the Appendix on page 175.
---------------------------------------------------------------------------
    Mr. Duelfer. Yes, that is correct.
    Senator Levin. Now, he openly entered into those agreements 
and the UN, including the United States, acquiesced in those 
agreements, did they not?
    Mr. Duelfer. Well, I don't know whether they formally said 
they are OK. They took note of them, particularly the Jordanian 
one in 1991. I am not sure that anybody ever said, oh, that is 
OK. I suspect far from that.
    Senator Levin. But we ignored them, didn't we?
    Mr. Duelfer. Well, I am not----
    Senator Levin. We allowed them to happen?
    Mr. Duelfer. I am not in a position to answer that. I am 
not sure about the exchanges which went on.
    Senator Levin. Well, let me then tell you what the law was. 
The law was that in order to maintain our aid agreements or our 
aid activities with Jordan and with Turkey that the President, 
whether it was President Clinton or President Bush, would have 
to sign a waiver. And they signed a waiver saying that they 
knew that these deals between Iraq and Turkey and Iraq and 
Jordan occurred.
    Nonetheless, despite those deals and despite the fact that 
they provided the bulk of his illicit income, they said 
continue the aid. Is that not correct? Are you aware of that 
fact?
    Mr. Duelfer. I am aware of it, sir. But, again my line of 
inquiry is focused on Iraq.
    Senator Levin. But you were with UNSCOM at that point?
    Mr. Duelfer. I was in UNSCOM, yes.
    Senator Levin. Did you bring to the attention of the U.S. 
Government that why are you not putting pressure on countries 
which are getting around the sanction program? Why are you 
continuing to waive any action against countries that are 
producing the bulk of his illicit income? Did you ever express 
that opinion to the U.S. Government?
    Mr. Duelfer. Sir, I was working at the United Nations at 
that time, and so that wasn't my job.
    Senator Levin. Did you express it to the United Nations?
    Mr. Duelfer. No, because, again we were looking for weapons 
of mass destruction at that point. I mean, it is a very 
legitimate point that you are making, but that was not my 
position.
    Senator Levin. There are two exhibits, 33 and 34, Mr. 
Chairman, that I would ask be made part of the record at this 
point.\1\
---------------------------------------------------------------------------
    \1\ See Exhibits No. 33 and 34, which appear in the Appendix on 
pages 176 and 181.
---------------------------------------------------------------------------
    Senator Coleman. Without objection
    Senator Levin. These are the waivers that both President 
Clinton and President Bush's Administration filed with the 
Congress that were required if we were going to continue our 
aid programs to both Turkey and to Jordan, and indicating 
explicit awareness of the fact that these activities, in 
violation of the sanctions program, were going on.
    For instance, the first exhibit (Exhibit No. 34) which is 
dated October 18, 2002, to then-Chairman Biden of the Foreign 
Relations Committee, signed by the State Department, says on 
page 4, ``Despite UNSC [U.N. Security Council] resolutions 
banning Iraqi oil imports (except under the terms of `oil-for-
food' resolutions . . . Jordan has continued since 1991 to 
import oil from Iraq. The UN Sanctions Committee, with USG 
[U.S. Government] support, has `taken note of' Jordan's imports 
of Iraqi oil and its lack of economically viable alternatives. 
That said, we have consistently urged Jordan to seek 
alternative energy sources.''
    So other than urging Jordan to look for other energy 
sources, we were very well aware of the fact that they were 
buying Iraqi oil in violation of the UN sanctions program. Is 
that correct?
    Mr. Duelfer. Sir, that is not my mandate.
    Senator Levin. I understand, but is that correct? Did I 
read that correctly?
    Mr. Duelfer. Yes.
    Senator Levin. And the vouchers, which is a different issue 
because here, under the Oil-for-Food Program, the UN allowed 
the sale of Iraqi oil to other entities, individuals and 
countries--they had to be reported, but Saddam was allowed to 
pick and choose who would get those vouchers. Is that correct?
    Mr. Duelfer. That is correct.
    Senator Levin. And it is your estimate that those vouchers 
and kickbacks produced about how much money?
    Mr. Duelfer. Well, the $1.5 billion. I mean, that is an 
estimate.
    Senator Levin. That is your estimate?
    Mr. Duelfer. Correct.
    Senator Levin. And your estimate is that that money then 
was a clear violation of UN law, UN regulations, because there 
was no provision in the Oil-for-Food Program that anybody would 
get a kickback. Is that correct?
    Mr. Duelfer. That is right, and largely the methodology 
there was it was based on discussions with Iraqis in specific 
cases and we averaged it out to about 10 percent the value of a 
contract, was what they had to kick back to get the contract.
    Senator Levin. That is your estimate. Now, you have an 
Annex B on your report which lists all of the voucher 
recipients, and I don't know how many thousands of--do you know 
about how many there are that are on that annex?
    Mr. Duelfer. The number of the vouchers?
    Senator Levin. Yes, approximately.
    Mr. Duelfer. No, I'm sorry. I don't know.
    Senator Levin. It's in the thousands, though?
    Mr. Duelfer. No. I think it is hundreds.
    Senator Levin. In the hundreds, all right. Whatever the 
number is, have you----
    Mr. Duelfer. It was a lot.
    Senator Levin [continuing]. Have you compared that--well, 
first of all, do you know that everybody on that list actually 
received a voucher or are you basing that on Iraqi documents?
    Mr. Duelfer. We are going by Iraqi data, and the Iraqi data 
tends to indicate those--and it is pretty good; they are pretty 
methodical about this, but who received the voucher and if a 
lifting actually occurred.
    Senator Levin. All right, but----
    Mr. Duelfer. And that is reflected in those charts.
    Senator Levin. Right, but the chart or the annex is based 
on Iraqi documents. Is that correct?
    Mr. Duelfer. That is correct.
    Senator Levin. You don't know that those vouchers were 
received, do you?
    Mr. Duelfer. We did not check that, no.
    Senator Levin. So you don't know that those vouchers were 
received? You base your statements that they were allocated on 
Iraqi documents, but you personally, for instance, have not 
concluded, have you, that those----
    Mr. Duelfer. I have not gone through it and checked every 
voucher, but clearly the SOMO data is--money appeared in banks, 
oil left the terminals.
    Senator Levin. Therefore, for instance, that that UN person 
who is named here, Benon Sevan----
    Mr. Duelfer. We did not investigate individual cases, but 
certainly what happened was that vouchers were given, oil was 
lifted.
    Senator Levin. We know that, but I am just trying to be 
very specific because my time is up. You have in your annex a 
title, ``Known Oil Voucher Recipients.'' Do you know that Benon 
Sevan received a voucher? That is my question.
    Mr. Duelfer. The Iraqi firmly believe that.
    Senator Levin. Do you know that he did? This is your 
document. This isn't a document which says Iraqi documents that 
state the following. This is your----
    Mr. Duelfer. I would conclude with high confidence from the 
data that the Iraqis provided from all that we saw that that 
happened.
    Senator Levin. All right, so that you have concluded based 
on Iraqi documents that this UN representative has----
    Mr. Duelfer. I certainly did not see----
    Senator Levin. I understand that, but you have concluded 
that he has done that, because it is a very serious allegation. 
And that is one of the allegations this Subcommittee is looking 
at and it is one of the allegations we are determined to find 
out if it is true, and so Kofi Annan determined to find out 
whether it is true. It is critically important that UN 
officials not receive kickbacks. We are all interested in that.
    And so my question is to you, have you concluded that, in 
fact, this person received an allocation of vouchers? That is 
my question to you.
    Mr. Duelfer. But my response, Senator, is that was not our 
job to investigate these individuals. Our job was to 
investigate the approaches that Iraq was using to use its 
influence and whether or not these resources were funding WMD 
programs.
    There is the Volcker Commission which is looking at this in 
excruciating detail. There are other investigations, such as 
this Subcommittee, which are going into that. I apologize, that 
was not our mandate to go look into these individual cases.
    Senator Levin. Well, except your annex says that he is a 
known recipient.
    Mr. Duelfer. We are conveying the data that we received 
from Iraq and when we had confidence in it, that is what we 
said.
    Senator Levin. Thank you.
    Senator Coleman. Thank you, Senator Levin. Senator Bennett.

              OPENING STATEMENT OF SENATOR BENNETT

    Senator Bennett. Thank you, Mr. Chairman. I don't have an 
extended line of questions here. I am impressed by the 40,000-
foot view that you have of this situation, and let me just go 
over that so that I understand it correctly.
    This was a very carefully constructed program to evade UN 
resolutions. Is that correct?
    Mr. Duelfer. A lot of thought went into it and a lot of 
testing and response to those tests, yes.
    Senator Bennett. So it wasn't a haphazard, lower-level kind 
of bureaucratic graft going on. It was centrally controlled and 
directed from the highest levels in Iraq?
    Mr. Duelfer. Yes, it was run from the highest levels, but 
there was a lot of trial and error in how it evolved.
    Senator Bennett. But when it did evolve and got to its 
final status, would you describe it as a fairly well-oiled, 
shake-down kind of operation that ran rather smoothly?
    Mr. Duelfer. Parts of it went fairly regularly in terms of 
the Oil-for-Food and how the oil liftings were allocated, and 
so forth. I could not conclude that they knew that they were 
going to derive these benefits when they signed up for the 
program in December 1996. I think they discovered this as they 
went along.
    Senator Bennett. I understand that, but when it reached its 
maturity, it would require not only a degree of coordination 
and shaken-down trial and error, but we have got it working 
properly. On the Iraqi side, would it not also require a degree 
of sophistication, trial-and-error experimentation and shaken 
down to a smooth-running operation on the other side; that is, 
those that were participating in it?
    Mr. Duelfer. That is a fair statement, sir.
    Senator Bennett. So if there was something illicit and 
illegal going on, it would have to have been understood by the 
people on the other side that this wasn't just a one-time 
opportunity, this just wasn't something they had stumbled into, 
but it was a coordinated thing that they had made adjustments 
in order to keep it going on a continuing basis.
    Mr. Duelfer. Well, of course, on the buy side, as it were, 
I mean they had to operate under whatever national rules and 
regulations that they operated. The Iraqis were providing the 
opportunity and they certainly did that with a great deal of 
thought. But how systematic the other side was, I really can't 
comment on that. That was not my line of inquiry.
    Senator Bennett. I see. Well, that is the impression that 
we get, and that is one of the areas, Mr. Chairman, that we 
want to look at here. The Iraqi put together a smoothly-
functioning operation which was illegal and the question is 
were the people on the other side of the transaction equally 
aware of the fact that what they were doing was in violation of 
UN resolutions and that they themselves did a trial-and-error, 
shake-down kind of cruise so that when it was finally 
functioning on a regular basis, they had worked themselves into 
a system of regular violation of UN law.
    That is not your charge to be in a position to comment on 
the other side.
    Mr. Duelfer. Well, we certainly looked at, along the lines 
of an existence theorem, the way many of these transactions 
took place. For example, in the import of conventional 
munitions or weapons systems which could be applied to WMD, we 
would watch how those transactions took place.
    They did become fairly systematic in terms of the front 
companies that were used and in terms of the funding, the 
bankings, who were provided false end user certificates, and so 
forth. And that became fairly systematic and we did lay that 
out in some detail in the report.
    Senator Bennett. So that which is fairly systematic on the 
part of those that are supplying weapons--would they have known 
that they were in violation of UN sanction requirements as they 
provided weapons?
    Mr. Duelfer. Oh, absolutely.
    Senator Bennett. I see.
    That is all I have, Mr. Chairman. Thank you. Thank you for 
convening this hearing. I think it is very important that we 
keep the spotlight on this issue and that it not be allowed to 
die.
    Senator Coleman. Thank you, Senator Bennett. Senator 
Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman.
    Mr. Duelfer, as we have said, your report uncovered a lot 
of infuriating information about individuals, governments, 
groups that were cooperating with Saddam in undermining the UN 
sanctions program, including the Oil-for-Food Program, which 
obviously was intended to benefit the people of Iraq.
    I should ask it in the form of a question. Am I correct 
that you do not consider it within the purview of the Iraq 
Survey Group to pursue investigations of those who were 
involved in these illicit efforts by Saddam to evade the 
sanctions program?
    Mr. Duelfer. No, that was not our writ.
    Senator Lieberman. I simply raise the question rhetorically 
here, and perhaps when Secretary Zarate is on, we can ask him.
    I wonder whether there is some kind of legal action, based 
on your work, by the United Nations, by the current Iraqi 
Government on behalf of the people of Iraq who lost the benefit 
of billions of dollars as a result of Saddam's illicit 
behavior, which benefited the people that you have itemized in 
this report, whether there may be some legal action to recover 
that money for the UN, or more directly, really, for the 
intended beneficiaries, which are the people of Iraq. But I 
leave that as a question.
    I was interested because in our staff review--and this is 
also in Volume 1 of 3 of your report, and I am sure you know 
every single word in it--in our staff review of the oil 
allocation recipient list, there is a listing for the Popular 
Front for the Liberation of Palestine. And I was curious--and 
obviously you can't remember everything in this--whether you 
want to refresh your memory on that. I find it on page 195 of 
Volume 1.
    It indicates that the Popular Front for the Liberation of 
Palestine, working through Awad Ammora and Partners, a Syrian 
group--is that in barrels, 2,000 barrels, oil allocation for 
2,000 barrels?
    Mr. Duelfer. Two million.
    Senator Lieberman. Two million, because we drop the zeroes, 
right?
    Mr. Duelfer. Yes.
    Senator Lieberman. So that is a hefty number. Now that you 
look at it, does that sound right?
    Mr. Duelfer. Yes.
    Senator Lieberman. There is obviously no way you would 
remember everything in here, but I wanted to point that out 
based on our staff review.
    The staff review also found the name Abu Abbas on the list 
of recipients. Abu Abbas is an international terrorist who was 
the mastermind of the 1985 hijacking of the Italian cruise ship 
Achille Lauro, on which a wheelchair-bound American was killed. 
And he, in fact, was picked up in Iraq in April of last year, 
as I recall.
    I don't know to what extent you can verify that. Obviously, 
there may be more than one person whose name is Abu Abbas, but 
do you know whether that is the terrorist Abu Abbas?
    Mr. Duelfer. Sir, that one I did see, and just out of 
curiosity I asked that question. There is a lot of data in this 
report which I think should be looked at further by others. But 
I could not get a firm answer, because as you point out, Abu 
Abbas is not a very definitive name, but it certainly got my 
attention when I saw that.
    Senator Lieberman. Right, so that also would bear further 
investigation by somebody else. Thank you.
    Let me ask you a very different kind of question. With the 
possible exception of Mr. Volcker and his staff and ongoing 
investigation, you probably know as much about the way in which 
Saddam Hussein corrupted and stole and abused and evaded the 
sanctions Oil-for-Food Program.
    Based on what you know, if the UN came to you, or the 
Secretary of State of the United States came to you, and asked 
what mistakes were made here in this sanctions program, because 
sanctions programs are an important element of our foreign 
policy and international relations, what would you have done 
differently to avoid Saddam's nefarious behavior, what would 
you say?
    Mr. Duelfer. Sir, the dilemma, I think, that the Security 
Council and the whole world faced was the dilemma which is 
faced by anyone who is confronting someone who has taken a 
hostage. The pain that the Iraqi people were enduring because 
of sanctions was--we are still learning it. When we see the 
devastation in Iraq today, some of it is because of the war. A 
great deal of it is because of a decade of sanctions. So the 
dilemma which the Security Council, I think, with honor, tried 
to address, was how do you separate the punishment between the 
people and the decisionmakers.
    I would say that one of the key things that was taken 
advantage of by Saddam was the fact that he could pick the 
contracts. Yes, the Security Council kept their hands on the 
checkbook, but by giving the discretion to Saddam to pick who 
would get the check, that to me is one of the largest levers 
which we offered to him. That would be one thing. But I think 
this study by your Subcommittee and others--I think that is 
exactly the right question to ask.
    Senator Lieberman. Thanks, Mr. Duelfer. Let me just say 
that the point you make is a very important point. It seems 
obvious, but it wasn't so obvious then that the UN could have 
had an Oil-for-Food Program, but retained the right to approve 
all of the contracts, the agreements that Saddam was making so 
as to prohibit exactly what happened here, because what we did 
was give him billions and billions of dollars to play with, 
essentially, for his own benefit, including the re-armament of 
his country. Thank you for drawing that lesson. Thank you for 
your extraordinary work.
    I cannot resist, Mr. Chairman, in a burst of very parochial 
pride to point out for the record that the first time I met Mr. 
Duelfer he gave full disclosure, which was that he and I went 
to the same high school, Stamford High School. As is evident, I 
am sure, to you, he went considerably after I did.
    The Stamford High School Black Knights are very proud of 
your work, Mr. Duelfer.
    Mr. Duelfer. My record, I am sure, was far inferior to 
yours.
    Senator Lieberman. Thank you.
    Senator Coleman. Thank you, Senator Lieberman. Senator 
Graham.

TESTIMONY OF SENATOR LINDSEY O. GRAHAM, A U.S. SENATOR FROM THE 
                    STATE OF SOUTH CAROLINA

    Senator Graham. Thank you, Mr. Chairman. I appreciate your 
letting me participate. I have been on the Armed Services 
Committee and other committees following this issue, and I am 
very proud of what you are trying to do here in a bipartisan 
fashion.
    I think there are 270 entries of where people were 
receiving units of oil we call vouchers. I think that is the 
number of people. Every transaction is illegal?
    Mr. Duelfer. No. The voucher system was the system which 
Iraqis used to allocate the oil that was going to be lifted. 
The Oil-for-Food Program--lifting oil from Iraq under the Oil-
for-Food Program is not illegal or illicit.
    The method by which Saddam selected those who would 
benefit--that was legal from his perspective. I mean, it was 
quite natural. I talked at length with Naji Sabri and he said, 
well, of course we rewarded our friends. Wouldn't you?
    But the way they tried to leverage it was to try to reward 
those who would support him in the Security Council. Those who 
would break the sanctions he would reward because, again, his 
goal was to cause an erosion. He wanted to create the aura that 
everybody else is doing it, and so there is an intangible but 
very important element of this that is sort of the image that 
Iraq is going to come out of this.
    And what Saddam was trading on was the future, in a sense. 
If you want to be my friend tomorrow when the sanctions are 
gone, if you want to be my friend and get a concession on oil-
lifting or a concession on oil development, you better be my 
friend now. And that was the greed that he played up to. I 
mean, this is a guy who really understood how people worked at 
their basic level.
    Senator Graham. So the UN program would allow this 
dictator, if he wanted to, to give money to a terrorist 
organization by assigning units?
    Mr. Duelfer. Well, that was the allocation that Saddam 
made, and the approval of who was authorized to lift was by the 
UN. Now, if you are referring to the previous point on the 
Palestinian issue, the person who got the--I am just looking at 
the chart--the person who got the allocation and the person who 
lifted--the entities were two different ones. And the UN 
approved the entity lifting the oil.
    Senator Graham. Well, let's see if we can explain this a 
little bit. The man who is overseeing the program--what was his 
name, Sevan?
    Mr. Duelfer. In the UN?
    Senator Graham. Right.
    Mr. Duelfer. Benon Sevan was the head of the----
    Senator Graham. The allegation is--and that is what Senator 
Levin is trying to say--that basically this guy who is 
overseeing the whole operation--because of Iraqi data, they 
have him receiving units of oil. Is that right?
    Mr. Duelfer. It is certainly the case that Iraq allocated 
him vouchers and oil was lifted.
    Senator Graham. Once the contract was approved for that 
unit, would the people who write the checks know that Sevan was 
involved at all?
    Mr. Duelfer. Not the way it was done because there was an 
intermediary organization which actually did the lifting, and I 
think it was the----
    Senator Graham. So there are no fingerprints on this guy's 
involvement, is what you are saying?
    Mr. Duelfer. Well, not unless you start walking backwards a 
few steps.
    Senator Graham. Well, why would they even put his name 
down?
    Mr. Duelfer. Well, I don't think the Iraqis--they weren't 
anticipating being invaded and then having to cough up all 
these documents to people like me.
    Senator Graham. Yes, but why would they put down an illegal 
transaction?
    Mr. Duelfer. Well, because they do keep a lot of records. 
And, if you look at the Muquabarat records, there is a lot of 
documentation on who they were paying off in various places.
    Senator Graham. So, basically, you found books that you 
think show who the Iraqis were paying off? Long story short.
    Mr. Duelfer. Yes.
    Senator Graham. OK, and one of the groups we are looking at 
as to who they paid off is the guy running the program?
    Mr. Duelfer. That certainly is what it indicates.
    Senator Graham. Thank you.
    Senator Coleman. Thank you, Senator Graham.
    We are going to do another 5-minute round.
    Senator Levin. Thanks.
    Senator Coleman. Just a couple of follow-ups. Senator 
Lieberman asked about the Popular Front for the Liberation of 
Palestine, and also asked about Abu Abbas. And though we don't 
know who he is, we know that is the name of a known terrorist.
    It is correct to say, if you look at your document listing 
who received the vouchers, that both the Popular Front for the 
Liberation of Palestine and Abu Abbas both contracted with the 
same company, a company out of Syria called Awad Ammora and 
Partners Company. Is that correct?
    Mr. Duelfer. That says it is listed as a lifter.
    Senator Coleman. In regard to the question that Senator 
Graham asked about documenting who they paid off--and I think 
our staff exhibits will show this--in fact, we have the 
vouchers in which a political favor was received. We then have 
the kickbacks on the Oil-for-Food Program, the humanitarian 
goods. And I take it you have looked at some of the documents 
there in which they list the exact contract and then the 
commission.
    Mr. Duelfer. That is correct.
    Senator Coleman. And just literally piece by piece, here is 
the contract, here is the kickback, and then here is the new 
total amount that is presented to the UN?
    Mr. Duelfer. There is a lot of data on that and we have had 
access to some of it. Steve Zidek, my colleague here, has been 
through stacks and stacks of these.
    Senator Coleman. Can I just walk you through Exhibit 11,\1\ 
if you have a copy of that in front of you? We have blocked out 
who this is to and where it is from, but Exhibit 11 is a letter 
and it says ``Thank you for the opportunity to meet with . . . 
and you during our recent visit to your offices in Moscow.'' 
Then it summarizes our proposal for future cooperation.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 11, which appears in the Appendix on page 117.
---------------------------------------------------------------------------
    In the third paragraph, it says, ``Firstly,'' again named 
blocked out, ``is prepared to assist and/or cooperate with . . 
. on oil development project opportunities in Iraq, which are 
being offered to .  .  .'' and again blanked out, ``for 
completion after sanctions are lifted.'' And then this document 
lays out some of the things after sanctions are lifted, and 
then it goes into the--``Secondly'' is talking about the 
purchase, allocation of Iraqi oil and the price. If you go to 
the second page, ``.  .   will pay SOMO's''--let me back you 
up. What is SOMO? You have made reference to that. Can you tell 
us for the record what SOMO is?
    Mr. Duelfer. SOMO is the state organization for the 
marketing of oil. It is the marketing arm. The oil ministry 
develops the oil fields. These are the guys that sell it.
    Senator Coleman. And they set the price, the SOMO price?
    Mr. Duelfer. This is actually--under the Oil-for-Food 
Program, there were two individuals at the UN called the oil 
overseers and they would actually set the price, but SOMO did 
the other contracting.
    Senator Coleman. And here on page 2, this document says, 
again blanked out who it is, ``.  .  . will pay SOMO's official 
selling formula price applicable for the month of lifting plus 
$0.07/barrel.'' So what they are saying is we will pay here 7 
cents.
    And if you go then to the next page, it is another letter. 
It says, ``I refer to the portion . . . which includes the 
purchase of,'' again not saying who has got the allocation, ``.  
.  . allocation under the fourth period U.N. . . ., we are 
pleased to increase our premium to S.O.M.O.'s official selling 
price from $0.07/barrel to $0.09/barrel.'' So now they are 
saying we will actually go up a little bit.
    And then if I can go forward, what these documents show--
actually, right before Exhibit 12,\1\ the last thing in this 
series of correspondence. ``Dear Sirs: Thank you for time spent 
with . . ., we confirm once again the bid of USD 0.13 premium . 
. . '' So the price still involved--now, it is 13 cents.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 12, which appears in the Appendix on page 123.
---------------------------------------------------------------------------
    But the bottom line is this doesn't strike you as unusual 
that, in effect, there is a bidding process going on here until 
they decide how much of a premium or kickback they want to get. 
Is that a fair reading of these?
    Mr. Duelfer. Correct. That is correct, absolutely.
    Senator Coleman. Let me just touch, if I can, one other 
area, and if I can have Exhibit 2 again,\2\ please, put back up 
there. There were a couple of decisions that the United Nations 
made after the Oil-for-Food Program. One of them is that the UN 
decides to raise the revenue ceilings on oil exports and then 
completely remove the ceiling on Iraqi oil exports. So at a 
certain point in time, the UN removed the ceilings. Iraq could 
sell as much oil as it wanted, Saddam deciding who to sell it 
to. Is that correct?
---------------------------------------------------------------------------
    \2\ See Exhibit No. 2, which appears in the Appendix on page 107.
---------------------------------------------------------------------------
    Mr. Duelfer. That is right.
    Senator Coleman. So he can get more money from the 
surcharges associated with oil exports. Is that correct?
    Mr. Duelfer. Yes. That was part of Resolution 1284. As I 
mentioned, there was a period of a year during which the 
Council was in a lot of turmoil.
    Senator Coleman. And you found that by June 2000, French 
companies had Oil-for-Food contracts totaling $1.78 billion and 
Russia had received 32 percent of the total amount of Oil-for-
Food contracts under Oil-for-Food?
    Mr. Duelfer. Yes. Those proportions tended to shift as Iraq 
tried to play off one against the other. They wanted to keep a 
tension between those who were trying to do favors for them.
    Senator Coleman. And are you aware that with regard to 
1284, the United Nations Security Council resolution that 
removed the ceiling, Russia insisted on language for the 
suspension and ultimate elimination of sanctions in the same 
resolution? Is that correct.
    Mr. Duelfer. Well, as part of my previous job at the UN, I 
sort of witnessed that evolution, and I wouldn't disagree with 
your characterization.
    Senator Coleman. Would it be fair to say that, in addition, 
Russia and France pushed to reduce the Kuwaiti Compensation 
Fund, lowering that from 30 percent to 25 percent of the oil 
revenues in UN Security Council Resolution 1330, which also 
increased Saddam's revenue?
    Mr. Duelfer. Sir, again I wasn't--that is not part of my 
WMD mandate. It is a fact that that proportion was reduced at 
that time and that had a sizable effect on what Iraq was able 
to generate in terms of revenues.
    Senator Coleman. Because some of the legitimate money from 
Oil-for-Food was supposed to go into the Iraqi Compensation 
Fund?
    Mr. Duelfer. That is correct.
    Senator Coleman. So if you lessened that, then there is 
more money available for Saddam.
    Mr. Duelfer. I believe it was on the order of $250 million 
a year difference in terms of what they were able to receive.
    Senator Coleman. And I think it is then fair to pull all 
this together. What happened is that we had a situation where 
the Iraqi people were suffering and Oil-for-Food was put 
together for a humanitarian purpose. There is absolutely no 
question about that. Is that correct?
    Mr. Duelfer. That is correct.
    Senator Coleman. And I think this was a question that you 
responded to from Senator Lieberman. By putting Saddam directly 
in charge of who he deals with, who he contracts with, he then 
had the capacity to line his pockets from any number of ways 
under the purview of Oil-for-Food.
    Mr. Duelfer. That is correct. I would observe that part of 
the nature of this dynamic was played out when you saw that the 
Oil-for-Food benefits to the northern part of Iraq, to 
Kurdistan, were handled separately because they were concerned 
that that was an area which the regime did not have control 
over. They were concerned that the benefits also go there, so 
they set out a separate process to handle that. I am not an 
expert on that, but it was for exactly those kinds of reasons.
    Senator Coleman. We can have an argument that there are 
some differences perhaps in the total amount. You saw the 
figure that the Majority staff put together, and they 
calculated, by the way, smuggling from 1991 to 1996. That 
calculation is not included in your report, is it?
    Mr. Duelfer. No. We do have a calculation on smuggling from 
that time, but it is evidently smaller. I mean, we tried to err 
on the conservative side of much of this.
    Senator Coleman. The bottom line is that Saddam was able to 
pilfer untold billions, while the UN supposedly was managing, 
overseeing and trying to enforce an Oil-for-Food Program.
    Mr. Duelfer. He certainly was able to generate a lot of 
money around OFF and through the leverage that the OFF Program 
offered him.
    Senator Coleman. And Mr. Zarate, our last witness, can 
answer this and I am not sure what expertise you have, but do 
we know whether that money today is being used to fuel an 
insurgency?
    Mr. Duelfer. I don't know, but it is well worth going 
after.
    Senator Coleman. And we clearly don't know where all the 
money is, though, do we, as we sit here today?
    Mr. Duelfer. That is true.
    Senator Coleman. Thank you. Senator Levin.
    Senator Levin. Thank you.
    You separate in your four-part stream of illicit income 
smuggling from these vouchers. Is that correct?
    Mr. Duelfer. Yes. Smuggling we had as a separate category, 
and we had kickbacks as a separate one as well.
    Senator Levin. So you have four categories.
    Mr. Duelfer. Right.
    Senator Levin. You have got smuggling, kickbacks, 
vouchers--I am sorry----
    Mr. Duelfer. Protocols.
    Senator Levin. Protocols--I am sorry--protocols, which are 
the sales that were openly arrived at or openly known about, 
right?
    Mr. Duelfer. Right.
    Senator Levin. And the fourth category?
    Mr. Duelfer. Well, it was the kickbacks.
    Senator Levin. Smuggling, kickbacks, protocols.
    Mr. Duelfer. And there was the surcharges on the----
    Senator Levin. And the surcharges.
    Mr. Duelfer. Yes, which didn't really amount to that much.
    Senator Levin. All right. On Annex B which has a couple 
hundred names, which are the people that were the recipients of 
the vouchers, have you compared that annex, your annex, with 
the UN list?
    Mr. Duelfer. No, we have not. It would be a very 
interesting exercise, for other reasons.
    Senator Levin. Why have you not compared the list of the 
recipients shown on the Iraqi documents with the UN list of 
vouchers that they have in their possession?
    Mr. Duelfer. Well, on the UN side they had people who were 
contracting to provide under OFF. On the UN side, they had 
their list. The OIP, the Office of Iraqi Programs, had a list 
of who lifted. But, frankly, while it would be interesting to 
see if those match up, that wasn't--we were looking for WMD and 
what we were trying to do is just get a sense of what revenues 
were available which could be used for the MIC corporation and 
what this indicated about the regime's intentions.
    Senator Levin. You have looked for WMD, but you have also 
reached certain conclusions that certain people were engaged in 
illicit conduct.
    Mr. Duelfer. This is as a result of our investigation of 
what were the regime's long-term goals and objectives, and how 
it was going about to achieve them. We had to draw a line 
someplace, sir.
    Senator Levin. I understand, but you reached a conclusion 
that certain people, including a very highly-placed person at 
the UN, engaged in illicit conduct.
    Mr. Duelfer. We certainly concluded that the Iraqis were 
working that and that is what they were doing. That was part of 
the----
    Senator Levin. You have also said here today that you have 
concluded that he was the recipient.
    Mr. Duelfer. Based on the Iraqi data.
    Senator Levin. Right, but that is your conclusion. I am 
just simply saying that that is not just looking for WMD. And 
by the way, you may be right, and if you are, we ought to root 
this out and get to it and the UN ought to take appropriate 
action. That is clear, but you have gone beyond WMD. You have 
reached certain conclusions that certain individuals have 
engaged in illicit conduct. You have reached that conclusion.
    Mr. Duelfer. Sir, we are looking at where the regime was 
headed over time, what were its directions and how was it 
planning on getting there. The question of the existence or 
non-existence of WMD at any point in time is interesting, but 
to me I felt that a more dynamic analysis of it was important, 
and that caused us to look at things that you might not 
consider to be strictly WMD.
    Senator Levin. Are you aware of the fact that some of the 
named oil voucher recipients in your annex deny receiving 
vouchers?
    Mr. Duelfer. I am unaware of that, but again it is Iraqi 
data. Some of them, the Iraqis indicate that oil was not 
lifted. Someone may have received a voucher, but never have--or 
the Iraqis may believe they have issued one, but the oil was 
never lifted.
    Senator Levin. You are not aware of the fact that some of 
the people listed in your annex as having received vouchers by 
the Iraqis deny receiving those vouchers? You are not aware of 
that fact?
    Mr. Duelfer. No.
    Senator Levin. In late 2000, Syria opened up that oil 
pipeline I referred to to Iraq and began importing large 
amounts of oil from Iraq, which would be a clear violation of 
UN sanctions. And here is what your report says, ``Syria was 
Iraq's primary conduit for illicit imports from late 2000 until 
Operation Iraqi Freedom. Military and security entities openly 
contracted with Syrian companies under the auspices of the 
Iraq-Syria trade protocol.'' Is that correct?
    Mr. Duelfer. That is true.
    Senator Levin. Now, Secretary Powell received a pledge 
three times from the President of Syria in 2001 that Syria 
would come into compliance with the sanctions by putting its 
trade with Iraq under the Oil-for-Food Program and UN 
oversight. Are you aware of that?
    Mr. Duelfer. I hadn't followed that, no.
    Senator Levin. So you don't know whether or not they made 
that pledge or not?
    Mr. Duelfer. No.
    Senator Levin. Thank you. Thank you, Mr. Chairman.
    Senator Coleman. Senator Graham.
    Senator Graham. Senator Levin always intrigues me because 
he asks great questions, and now I am a bit confused.
    Senator Levin. On my question or the answer?
    Senator Graham. By both, actually, but not so much by the 
question, but by the answer, to be honest with you.
    Let's break this simply. Saddam gives me a unit, a voucher. 
Since I don't own any oil tankers or refineries, I am 
eventually going to have to get this in the hands of somebody 
who does, right?
    Mr. Duelfer. That was the practice.
    Senator Graham. So the bottom line is that when you look at 
names, some of those people are end users and some of those 
people are just individuals who could not have possibly done 
this without turning around and selling the voucher or giving 
it to someone with the capacity. Is that correct?
    Mr. Duelfer. That is correct, because the lifters also had 
to be approved by the UN.
    Senator Graham. And the likelihood of the lifter being the 
director of the program on a UN book is probably zero?
    Mr. Duelfer. According to the Iraqi data, that person did 
not lift it, but it was transferred to someone else who could.
    Senator Graham. So within the data, there is likely 
recording of transactions that were clearly illegal because it 
was not legal for Saddam Hussein to pick someone without UN 
approval. Is that correct?
    Mr. Duelfer. No. Well, the procedure was that lifters--in 
other words, if you were going to go to Umm Qasr and lift oil, 
you had to be approved by the UN.
    Senator Graham. Right.
    Mr. Duelfer. And there were UN people there who assured 
that that took place.
    Senator Graham. Well, why would you ever give a voucher to 
somebody who didn't have the capacity to lift the oil? To buy 
favor, right?
    Mr. Duelfer. Well, you are looking for something in return.
    Senator Graham. Right, and one of the people that allegedly 
got those vouchers was the director of the program, and Senator 
Levin's question is a great question. I think this person has 
denied it. What could we do, what could the Congress do, what 
could this Subcommittee or any other committee do to go find 
out whether that is a fact?
    Mr. Duelfer. I would start, Senator Graham, by having the 
opportunity to question them. That would probably be a good 
start.
    Senator Graham. Yes, and I know you are frustrated, but I 
mean from your point of view, what could we do?
    Mr. Duelfer. Well, you could talk to Iraqis. The Iraqis 
have been very candid.
    Senator Graham. Could you give the names to the Chairman of 
who you think might help solve this riddle?
    Senator Coleman. We are pursuing many of these routes, 
Senator Graham.
    Senator Graham. Well, I applaud the Subcommittee for your 
effort because without you, I don't think we are ever going to 
get to the bottom of this. And so I am glad you let me come.
    Senator Coleman. Thank you.
    Mr. Duelfer and gentlemen, I thank you for your testimony. 
I thank you for your service. I thank you for your sacrifice. 
This panel is excused.
    Mr. Duelfer. Thank you.
    Senator Coleman. I would now like to call Mark Greenblatt 
and Steven Groves, investigative counsels for the Majority on 
the Permanent Subcommittee on Investigations.
    I appreciate all of the staff's hard work in this 
investigation. Today, they will present a portion of the 
evidence that has been gathered so far. Mr. Greenblatt will 
testify on how Saddam Hussein curried favor with oil 
allocations, colloquially referred to as vouchers, that were 
granted to individuals, companies and government officials. 
Further, Mr. Greenblatt will present evidence that Saddam 
Hussein gained almost $230 million by imposing illegal 
surcharges on oil sales under the Oil-for-Food Program. Mr. 
Groves will testify about the kickbacks that were required as a 
condition for receiving a contract to provide humanitarian 
goods to the Iraqi people.
    Gentlemen, as you are well aware, pursuant to Rule VI, 
before we begin, all witnesses who testify before this 
Subcommittee are required to be sworn. At this time, I would 
ask you both to stand and raise your right hand.
    Do you swear the testimony you are about to give before 
this Subcommittee is the truth, the whole truth and nothing but 
the truth, so help you, God?
    Mr. Greenblatt. I do.
    Mr. Groves. I do.
    Senator Coleman. As you are also well aware, your full 
written presentation will be presented in the record in its 
entirety. Mr. Greenblatt will be allocated 15 minutes. Mr. 
Groves will be allocated 10 minutes.
    Mr. Greenblatt, I understand that you are to testify first 
and then we will proceed with Mr. Groves. Mr. Greenblatt, you 
may proceed.

   TESTIMONY OF MARK L. GREENBLATT,\1\ COUNSEL, U.S. SENATE 
            PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

    Mr. Greenblatt. Mr. Chairman, Ranking Member Levin, and 
Senator Graham, thank you for this opportunity to testify 
before you concerning the Subcommittee's investigation into the 
UN Oil-for-Food Program.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Greenblatt appears in the 
Appendix on page 73.
---------------------------------------------------------------------------
    The purpose of my testimony is to examine two ways in which 
the Hussein regime abused the program and present evidence 
obtained by the Subcommittee that illustrates our conclusions.
    First, I will discuss what have been called oil vouchers, 
namely how Saddam Hussein turned oil into influence. The second 
portion of my presentation will illustrate how Saddam Hussein 
exacted millions of dollars through illegal surcharges under 
the Oil-for-Food Program.
    We just heard Mr. Duelfer explain the oil vouchers, which 
could also be called oil allocations. I hope to explain the 
process by which those oil vouchers became cash in the hand of 
a recipient.
    In the beginning of the Oil-for-Food Program, SOMO 
allocated oil to traditional oil companies throughout the 
world. Those companies then contracted with SOMO to purchase 
oil and then lifted the oil themselves. Starting roughly in 
1998, however, Saddam Hussein attempted to manipulate that 
typical oil allocation process. His plan was simple. Rather 
than giving allocations to traditional oil purchases, he gave 
allocations to foreign officials, journalists, and even 
possible terrorist entities, who then flipped their allocations 
to traditional oil companies in return for a sizable 
commission. In doing so, Saddam could give a foreign official 
or a journalist hundreds of thousands of dollars without ever 
paying a dime.
    So how did these allocations get translated into cash? That 
monetization involved a simple three-step process which we have 
illustrated in Exhibit 5.\1\ This three-step process is the 
basic framework for the sale of allocations, but I should note 
that each instance varied slightly. I will now explore each of 
these steps and present evidence to illustrate them.
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    \1\ See Exhibit No. 5, which appears in the Appendix on page 110.
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    Step 1: Numerous sources, including senior officials of the 
Hussein regime, have stated that Saddam Hussein personally 
approved the people and/or entities that received oil 
allocations, and would even delete those who had fallen out of 
favor. The Subcommittee has obtained evidence that senior 
officials, such as Tariq Aziz, were also intimately involved in 
the allocation process.
    If I could direct your attention to Exhibit 6,\2\ this 
document is a letter from SOMO to the Minister of Oil 
concerning an allocation provided to a Syrian journalist named 
Hamidah Na'na. This letter illustrates the in-depth, personal 
involvement of high-ranking members of the Hussein regime.
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    \2\ See Exhibit No. 6, which appears in the Appendix on page 111.
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    For example, the first paragraph of the letter refers to a 
telephone call between the Minister of Oil and the Vice 
President of Iraq concerning an allocation to Ms. Na'na. In 
addition, on the bottom left-hand corner of the letter, you can 
see that the Minister of Oil personally ratified this letter.
    If I could direct your attention to Exhibit 7,\3\ I should 
note before we describe the content of this letter that the 
Subcommittee has redacted out the names of some of the 
individuals and/or entities mentioned in the letters when they 
are part of the Subcommittee's ongoing investigation.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 7, which appears in the Appendix on page 112.
---------------------------------------------------------------------------
    This exhibit is a letter from a prospective oil purchaser 
to a Russian voucher recipient. In the letter, the oil 
purchaser discusses a face-to-face meeting in Moscow between 
the allocation holder and Tariq Aziz, one of Hussein's closest 
aides. The meeting related to a problem that the allocation 
holder was having with respect to its voucher.
    Moving on to step 2 on the chart,\1\ once the recipients 
learned they had been allocated oil, they would negotiate with 
an oil company to sell the secret voucher. That is step 2. The 
primary issue of the negotiations was the commission paid to 
the allocation holder. I will present two exhibits that shine 
some light on these negotiations.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 5, which appears in the Appendix on page 110.
---------------------------------------------------------------------------
    First is Exhibit 9.\2\ This letter was written by Vladimir 
Zhirinovsky, the leader of the Liberal Democratic Party of 
Russia. On official party letterhead, Zhirinovsky invites an 
American oil company to Moscow to ``negotiate'' with him. He 
says: ``It is my honor to invite you for negotiations to Moscow 
from the 18th to the 25th of January, 1999. Will be happy to 
meet with you.''
---------------------------------------------------------------------------
    \2\ See Exhibit No. 9, which appears in the Appendix on page 114.
---------------------------------------------------------------------------
    The date on this letter, or the date of the invite, January 
1999, is crucial because the Subcommittee has obtained evidence 
that Zhirinovsky received an oil allocation from Hussein at 
some point in late 1998 or early 1999.
    If I could direct your attention to Exhibit 10,\3\ this 
document is a fax from a representative of a secret voucher 
holder who is offering, ``a full corporate offer'' for two 
shipments of 2 million barrels of oil apiece. The key aspect of 
this offer is that the representative demands, ``a seller's 
fee'' of 75 cents per barrel.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 10, which appears in the Appendix on page 116.
---------------------------------------------------------------------------
    After these negotiations, once the voucher holder sells the 
allocation to an oil company, the voucher holder would then 
inform SOMO that that oil company will be buying the 
allocation. One example of that is Exhibit 13.\4\ In this 
letter, Hamidah Na'na, the Syrian journalist we discussed 
earlier in Exhibit 6, informs SOMO that Devon Petroleum will 
lift the oil in connection with her allocation.
---------------------------------------------------------------------------
    \4\ See Exhibit No. 13, which appears in the Appendix on page 124.
---------------------------------------------------------------------------
    The third step of the process, which is at the bottom of 
the chart--the third step is once the voucher has been sold, 
the oil purchaser would then execute a formal contract with 
SOMO. Only after the contract was executed would the parties 
notify the UN and request its approval of the contract.
    As a result, the moment the contract is submitted to the UN 
for approval is the first time that the UN would get involved. 
Therefore, the entire transfer of the voucher between the 
allocation holder and the oil buyer is conducted completely 
under the table. To show how this step works, we will once 
again revisit the case of Syrian journalist Hamidah Na'na to 
show how her allocation became a formal UN-approved contract 
under the Oil-for-Food Program.
    If I could direct your attention to Exhibit 14,\5\ if you 
will recall, Ms. Na'na sold her allocation to Devon Petroleum 
and Devon's contract with SOMO was numbered M/13/26. These 
documents relate to that very contract, M/13/26. They are the 
first page of the contract--if I could direct your attention to 
the first page of the exhibit, you will see it is a contract 
between SOMO and Devon Petroleum.
---------------------------------------------------------------------------
    \5\ See Exhibit No. 14, which appears in the Appendix on page 125.
---------------------------------------------------------------------------
    Next is the signature page of the contract. You will see a 
signature from a representative of SOMO and a signature from 
the buyer, Devon Petroleum. The next page of the exhibit is the 
application from Devon Petroleum to the UN for approval of that 
very contract, M/13/26.
    Once this contract has been approved, as we will see on the 
next page, which is the UN letter to Devon approving that 
contract, M/13/26--once that approval comes through, Devon 
would lift the oil from SOMO. Once that lifting happens, the 
next document comes into play, and that is the invoice for that 
lifting. This is an invoice from SOMO to Devon Petroleum, and 
on the right-hand side of the exhibit you will see contract 
number M/13/26. Note that the name of Hamidah Na'na, the 
journalist who received the voucher, is nowhere to be found on 
any of these documents. All the transactions related to Na'na 
and Devon Petroleum are under the table.
    Moving on, once the oil was lifted, the commission to the 
allocation holder would become due. We have an exhibit of an 
invoice related to this commission debt as Exhibit 15.\1\ This 
is an invoice from Al Wasel and Babel Company for, ``selling of 
Iraqi oil allocation.'' The Subcommittee has learned that the 
purchaser prepared this invoice itself. The key point, however, 
is that the purchaser will be paying a 17-euro-per-barrel 
commission to Al Wasel and Babel. I should further note Al 
Wasel and Babel is perhaps the No. 1 front company of the 
Hussein regime.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 15, which appears in the Appendix on page 130.
---------------------------------------------------------------------------
    So that is how the process of Iraqi oil allocations or oil 
vouchers would be monetized. In short, this is the method by 
which Saddam Hussein could give hundreds of thousands of 
dollars without actually paying a dime.
    I will now move on to a different topic related to the oil 
side of the program, namely how Saddam extracted millions of 
dollars of illegal surcharges from oil purchasers. I should 
emphasize that while the oil allocations were the way that 
Saddam used oil to reward friends and influence world leaders, 
the surcharge scheme was solely designed to generate illegal 
revenue.
    In mid-2000, Hussein directed SOMO to generate additional 
revenues outside the Oil-for-Food Program. Pursuant to that 
directive, on September 1, 2000, SOMO began lowering the price 
of oil and demanding a ``surcharge'' of 10 cents a barrel for 
each barrel exported from Iraq.
    Over the succeeding months, the rate of the surcharge 
fluctuated widely, reaching a peak of roughly 30 cents a 
barrel. Exports to the United States had a higher surcharge 
than shipments elsewhere in the world. These surcharges were to 
be paid by the oil purchaser directly to the regime, illegally 
bypassing the UN-controlled escrow account at BNP Paribas.
    As a result, many of the traditional oil companies refused 
to pay the surcharges. Out of the shadows, however, came 
numerous unknown middle-men that were quite eager to 
participate in the scheme. The scheme continued on for 2 years, 
until the United States and the UK, as members of the 
Subcommittee overseeing the program, took action to end it. The 
device they used was called retroactive pricing.
    For the sake of brevity, I will not get into detail 
concerning what retroactive pricing is, but suffice it to say 
that retroactive pricing was completely effective in ending the 
surcharges. Over that 2-year period that the surcharges were in 
effect, Saddam amassed more than $230 million in the scheme. 
Every single one of those dollars was obtained under the table, 
outside the OFF Program. I will now present a behind-the-scenes 
look at how those dollars went into Saddam's coffers.
    The Subcommittee has learned that oil purchasers generally 
paid surcharges to the regime in two ways which are reflected 
in Exhibit 16.\1\ First is Method A, which illustrates direct 
payments from the oil purchaser to bank accounts controlled by 
the regime. The second is Method B, which goes through a third 
party that would facilitate the transaction.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 16, which appears in the Appendix on page 131.
---------------------------------------------------------------------------
    The simplest method for the surcharge payment was a direct 
payment from the oil purchaser to the regime-controlled 
account. To that end, the Hussein regime maintained numerous 
accounts at banks throughout the Middle East, in particular 
Jordan and Lebanon.
    Some companies were willing to comply with Saddam's demand 
for surcharges, but they wanted to hide the payment as much as 
possible. As a result, they would make payments to a third 
party, a middle-man, as reflected in Method B. Sometimes, the 
voucher recipients, the folks whom we discussed, the 
journalists, the officials that we discussed in the first 
presentation, would be willing to be that very conduit. They 
would transfer the money on behalf of the oil buyer.
    The next two exhibits present evidence of how those voucher 
recipients would facilitate the transaction. If I could direct 
your attention to Exhibit 17,\2\ this is an example of a 
surcharge payment going through an allocation recipient, a 
voucher holder. In this case, we revisit Hamidah Na'na, the 
Syrian journalist we have discussed earlier. Here, she commits 
to paying the oil surcharge on behalf of Devon Petroleum, the 
company that purchased her oil allocation.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 17, which appears in the Appendix on page 132.
---------------------------------------------------------------------------
    If I could direct your attention to Exhibit 18,\3\ Exhibit 
18 is a set of documents which is another example of how a 
voucher recipient would act as a middle-man to facilitate the 
surcharge payment. These documents relate to a contract between 
Al-Hoda International Trading and an American oil company.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 18, which appears in the Appendix on page 133.
---------------------------------------------------------------------------
    Al-Hoda purchased 4 million barrels of oil in connection 
with contract M/09/15 under the Oil-for-Food Program and sold 
half of that oil, 2 million barrels, to the American company. 
According to page 2 of the contract between Al-Hoda and the 
American company, which is page 2 of the exhibit, there was a 
40-cent markup on the official selling price per barrel.
    Interestingly, the payment mechanism for this oil contract 
was divided in three parts. I will direct your attention to the 
last paragraph on the bottom of page 2. That paragraph 
describes a payment ``inside the letter of credit,'' which 
refers to the approved letter of credit within the Oil-for-Food 
Program where the funds would go to BNP Paribas.
    Moving up to the next paragraph, the second to last 
paragraph on the page, there is a payment of 10 cents a barrel 
``outside the letter of credit'' at the instruction of Al-Hoda.
    Moving up to the third paragraph from the bottom, there is 
another payment outside the letter of credit, this one for 30 
cents per barrel. The Subcommittee will demonstrate how that 
30-cent payment outside the letter of credit was, in reality, 
an illegal surcharge to the Hussein regime.
    Moving on to the third page of this exhibit, it is a 
handwritten sheet of paper by the oil buyer which confirmed 
that the 40-cent fee is broken down into two separate payments, 
a 10-cent letter of credit to Al-Hoda and an identified 30-cent 
payment. The question remains, where is that 30-cent payment 
going?
    The next document in the exhibit is an invoice from Al-Hoda 
requesting payment for the 40-cent markup which amounts to 
roughly $836,000. This $836,000 includes the mystery 30-cent-
per-barrel fee.
    The next document in this exhibit is the order from the oil 
company to its bank, which just happens to be the Geneva 
affiliate of BNP Paribas, to make the payment of $836,000.
    The next document in this exhibit is an excerpt from the 
oil company's accounting ledger that confirms that a payment to 
Al-Hoda for $836,000 from the company's BNP Paribas account was 
actually paid.
    So how do we know that the $836,000 payment included a 30-
cent surcharge to Iraq? The Subcommittee has obtained SOMO 
records that provide detailed information about each surcharge 
payment that was received. Included in this chart is a 30-cent 
payment from Al-Hoda for this very contract.
    If I could direct your attention to Exhibit 19,\1\ this is 
an excerpt of the chart created by SOMO in February 2004 that 
details each oil contract in which a surcharge was paid. The 
column headers, which are in Arabic and therefore read from 
right to left, are as follows: Phase, contracting company, 
contract number, amount of oil lifted, amount of surcharge 
owed--I am sorry--amount of oil lifted, and then that is the 
surcharge rate is the fifth column, the amount of surcharge 
owed, the amount of surcharge paid, and finally is the 
difference, the balance owed on the surcharge.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 19, which appears in the Appendix on page 139.
---------------------------------------------------------------------------
    If we look at the entry on the chart for Al-Hoda's contract 
M/09/15, which falls roughly in the middle of the page, we see 
that Al-Hoda agreed to pay a surcharge of 30 cents per barrel. 
Therefore, it appears that the mystery 30-cent fee did indeed 
reflect an illegal surcharge payment to the Hussein regime.
    From the remaining columns, we see that Al-Hoda actually 
paid more than $1.2 million in connection with this contract. 
To reiterate, such a payment bypassed the UN-controlled account 
and went straight into Saddam's coffers. What he did with that 
money we do not know.
    With that, I will end my presentation and I would be happy 
to answer any questions the Subcommittee may have.
    Senator Coleman. Mr. Groves.

 TESTIMONY OF STEVEN GROVES,\1\ COUNSEL, U.S. SENATE PERMANENT 
                 SUBCOMMITTEE ON INVESTIGATIONS

    Mr. Groves. Thank you, Chairman Coleman and Members of the 
Subcommittee, Ranking Member Levin, and Senator Graham. You 
have just heard from my colleague how Saddam Hussein peddled 
influence and generated illicit revenue by granting oil 
vouchers and demanding surcharge payments on oil sales. Not 
satisfied with the extra cash that he was skimming from these 
oil sales, Saddam concocted a separate scheme to siphon off 
billions of dollars for himself by demanding kickbacks on 
contracts for humanitarian goods.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Groves appears in the Appendix on 
page 81.
---------------------------------------------------------------------------
    Under the terms of Security Council Resolution 986, Saddam 
was permitted to contract with whomever he pleased. 
Theoretically, this freedom to contract would have allowed Iraq 
to negotiate contract terms that were in the best interests of 
the Iraqi people. In practice, however, Saddam used that 
freedom to negotiate contract terms that were in his own best 
interests and the interests of his brutal regime. He did this 
by demanding kickbacks.
    Now, a kickback is defined as a bribe paid by a seller of 
goods to a purchasing agent in order to induce the agent to 
enter into a contract. Kickbacks are normally a victimless 
crime, simple graft. But under the Oil-for-Food Program, 
kickbacks had a direct impact on the Iraqi people. You must 
understand that for every dollar that was kicked back to Saddam 
on a contract was a dollar that did not go to buy humanitarian 
goods, food or medicine or anything else, for the Iraqi people.
    Hundreds, and possibly up to 1,000 companies paid kickbacks 
to the Hussein regime. My testimony this afternoon details the 
kickbacks paid by one such company, a company called The Weir 
Group, and we will walk through one specific kickback 
transaction to see exactly how it was done.
    The business of The Weir Group is the manufacture and sale 
of industrial valves and pumps for the oil industry and the 
water and sewer industry. Weir is hardly what you would call a 
fly-by-night company. Rather, it is a reputable, publicly-
traded, blue chip engineering company based in Glasgow, 
Scotland. Weir subsidiaries span the globe, including ten 
locations here in the United States.
    In short, Weir is not the type of company one would 
normally associate with shady Iraqi middle-men and with secret 
Swiss bank accounts. Unfortunately, that was the case here. The 
Weir Group did over $80 million worth of business under the 
Oil-for-Food Program mainly through two of its subsidiaries, 
Wemco Enviro-Tech Pumpsystems in France and Wesco Dubai in the 
United Arab Emirates.
    Weir also utilized an Iraqi agent who was based in Baghdad 
to help secure the rights to these contracts. And for completed 
contracts, Weir would pay this Iraqi agent between 17 and 27 
percent commissions. Now, for the first 7 phases of the 
program, Weir executed 16 contracts with the government of Iraq 
without incident. That changed, however, at the beginning of 
Phase VIII of the program in June 2000.
    At that time, Weir had three pending offers with Iraq, one 
each with the mayor of Baghdad, the North Oil Company and the 
South Oil Company. As was the normal protocol on these 
contracts, the Weir sales representative traveled to Iraq to 
put the final completion on the contracts. But when he arrived 
on this trip, he was informed by the Iraqis that they would no 
longer enter into contracts with Weir unless the contract price 
was inflated, unless it was raised by a certain percentage, and 
that Weir would be required to pay that percentage back to 
Iraq.
    Now, this was the critical moment in time for Weir. It 
could have refused to inflate its contracts. It could have 
refused to pay back any money to the government of Iraq. It 
could have decided to take its business elsewhere. 
Unfortunately, Weir agreed to comply with the new Iraqi 
demands, and for the remainder of the Oil-for-Food Program, 
Weir inflated each of its 15 contracts by between 11 and 14 
percent and deposited that inflated amount into a bank account 
in Geneva in the name of Corsin Financial Limited, a company 
that appears to have no existence other than being the holder 
of that particular bank account.
    Now, you may ask why and how Weir and the Iraqis were able 
to get away with this while Iraq was supposedly under 
sanctions, and for answers we are going to take a closer look 
at one of the particular transactions. This chart, which is 
Exhibit 21 in your books,\1\ displays each step in contract 
number----
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    \1\ See Exhibit No. 21, which appears in the Appendix on page 141.
---------------------------------------------------------------------------
    Senator Coleman. Do me a favor. With the exhibits, if we 
can just kind of separate them out so I can see the back 
exhibit. Why don't you just move that over? That would be 
helpful.
    You are certainly welcome if you want to move over.
    Senator Graham. Fine. Thank you. I am fine.
    Mr. Groves. Thank you, Senator.
    This chart displays the key documents in a particular 
transaction for contract number 1030484. The first document, 
which is Exhibit 22 in your book,\2\ is the original tender 
offer that Weir made to the Iraqis. The total price of the 
offer is about 2.15 million euro, or about $2.6 million, and 
represents what the actual cost of this contract would have 
been.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 22, which appears in the Appendix on page 142.
---------------------------------------------------------------------------
    After the Iraqis received that first offer and the Weir 
sales representative traveled to Basra, they met with the 
Iraqis, and the Iraqis demanded a 13-percent kickback. There is 
no record of this meeting. These were verbal agreements entered 
into at least as far as Weir was concerned. There is no paper 
trail.
    At that point, as in the prior contracts where they had 
agreed to pay kickbacks, they entered a second tender offer. 
They had to manufacture a tender offer that would now meet the 
13-percent kickback price. And if you do a side-by-side 
comparison of the two documents on the top of the chart and the 
second document--that is Exhibit 23;\3\ that is the inflated 
offer, the revised offer--you will see that each line item on 
the two offers has been inflated by exactly 10 percent. And the 
quantities on some of the line items have been increased in 
order so that the total tender offer amount on the second offer 
is exactly 13-percent higher than the first, a total of 2.44 
million euro. And in that way, The Weir Group agreed to the 13-
percent demand.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 23, which appears in the Appendix on page 149.
---------------------------------------------------------------------------
    With that kickback in place, the Iraqis in turn agreed to 
sign the contract with Weir, which they did on December 8, and 
that is at Exhibit 24.\1\ Weir submitted this completed 
contract with the inflated price to the UN Office of the Iraq 
Program for review and approval. And if you turn to Exhibit 
25,\2\ that is their submission to the UN. And if you go to the 
purchase order that is attached to the submission, you will see 
that the total amount is 2.44 million euro. That is the 
submission on January 7.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 24, which appears in the Appendix on page 155.
    \2\ See Exhibit No. 25, which appears in the Appendix on page 161.
---------------------------------------------------------------------------
    At this point in the proceeding, the UN Office of the Iraq 
Program is tasked to discover whether or not this contract is 
reasonable for its price and value. Now, despite that the 
contract had a 17-percent commission built into it, and despite 
the fact that there was a 13-percent kickback amount built into 
it, for a total of over 30 percent inflated price, the Office 
of the Iraq Program concluded that the item price and value 
have been examined and appear to be within a reasonable and 
acceptable range.
    And you can see the UN's approval of the contract at 
Exhibit 26.\3\ And if you scroll down on Exhibit 26 to the part 
where it says ``Pricing,'' you will find that the Office of the 
Iraq Program stated that the 30-percent inflated contract is 
reasonable and within an acceptable range.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 26, which appears in the Appendix on page 164.
---------------------------------------------------------------------------
    With the UN's approval in place, the goods were shipped 
from Scotland to Iraq, and this presents a second opportunity 
for this contract to be caught there because at the port of Umm 
Qasr, the UN has hired Cotecna Inspection, which is an 
inspection company who is there to make sure that the goods 
that are contracted for actually arrive.
    If an actual customs inspection had occurred at this point, 
they would have realized that there were only two of a 
particular item in the shipment, where the contract calls for 
20. There were only 5 in the box that got shipped to the port, 
whereas in the contract it called for 50. But as we have 
learned, this review process was not an actual customs 
inspection, as you and I would know it, but rather just an 
authentication that a particular set of goods had arrived on a 
particular day. So, indeed, the goods were not caught at that 
point in the process and this contract went forward.
    Now that the goods had arrived in Iraq, Cotecna Inspection 
sent their certificate of arrival to BNP Paribas, which makes 
Weir eligible for payment. Now, once they are eligible for 
payment, BNP makes the contract payment to Weir in Glasgow. And 
then Weir, making good on its verbal agreement with the 
government of Iraq, enters a kickback amount into the Swiss 
bank account. And you can see that particular item itemized on 
the last part. For contract 1030484, there was a $111,000 
kickback that was put into the Corsin account.
    And this chart, Exhibit 30,\1\ itemizes each of the 15 
contracts that Weir agreed to inflate for a kickback amount and 
then made a separate payment into the Corsin Financial account 
in Geneva, Switzerland. And the contract value is represented 
in euro and pounds, and the amount of kickbacks which were all 
made in pounds in the fourth column. And then the final column 
is a conversion into today's exchange rates from pounds to 
dollars. In total, there were just over $8 million worth of 
deposits made into the account of Corsin Financial. The 
Subcommittee has been in touch with the Swiss authorities in 
regard to this particular account, in the hopes that the money 
may still be there and can be repatriated to the Iraqi people.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 30, which appears in the Appendix on page 173.
---------------------------------------------------------------------------
    Thank you for allowing me to testify about these issues and 
I would be pleased to answer any questions.
    Senator Coleman. Thank you, Mr. Groves, and thank you, Mr. 
Greenblatt.
    Mr. Greenblatt, if I can just direct attention to Exhibit 
8,\2\ and it is the exhibit that says ``Oil Coupons.'' It is in 
Iraqi on the left-hand side and then English on the right-hand 
side. It reads, ``In the name of Allah the Most Merciful, The 
Republic of Iraq, Presidency of the Republic, the Secretary.'' 
It says, ``Top Secret and most urgent, Number 9525/K.'' Are 
these coupons numbered?
---------------------------------------------------------------------------
    \2\ See Exhibit No. 8, which appears in the Appendix on page 113.
---------------------------------------------------------------------------
    Mr. Greenblatt. They are numbered. We have heard testimony 
from witnesses, including individuals who have actually 
received allocations under the program, and they have informed 
us--and others in the oil industry--that the identification 
mechanism for each oil allocation was a number designation.
    Senator Coleman. So let me go through this further. It 
says, ``Comrade Amer Muhammad Rashid Minister of Petroleum.'' 
It says, ``The President . . . (may Allah preserve him) has 
ordered in connection with a letter from the Iraqi embassy in 
Cairo of 18 August, 2002, as follows: six million barrels of 
petroleum will be allocated to Mr. Ustadh,'' which is honorary 
title for professors, lawyers and journalists, ``journalist 
Mahmud Al-Tamimi in appreciation of his nationalist positions 
which he has adopted since the thirty-nation aggression,'' 
which is the Iraqi designation for the coalition which expelled 
Iraq from Kuwait, ``in the year 1991 in confronting the unjust 
blockade of our dear country,'' etc., etc., signed by the 
Secretary of the President of the Republic.
    So this is a coupon. This is one of those that gives 
somebody who is not an oil trader an allocation that would 
allow them then to sell or to get a commission by giving it to 
someone who could translate this coupon into oil.
    Mr. Greenblatt. That is my understanding, sir, yes.
    Senator Coleman. And we then do have documents. The Iraqis, 
in what I see as kind of a methodical, documented pillaging, 
have documented how a lot of these coupons were then translated 
into actually allocated oil. Is that correct?
    Mr. Greenblatt. That is right.
    Senator Coleman. I raise this because of the questions of 
Senator Graham and Senator Levin regarding Mr. Sevan. And if we 
had actually coupon numbers, it would be possible then to see 
whether that oil was actually allocated and whether it was 
lifted and who did the lifting. Is that correct?
    Mr. Greenblatt. That is right.
    Senator Coleman. This Corsin Financial Limited we saw 
payments going to--you said that is a shell corporation. What 
kind of investigation did we do to try to find out who these 
folks are?
    Mr. Groves. Well, we found out about this particular 
account only about 2 weeks ago, and we have done an exhaustive 
search of all publicly available resources to see if any such 
company exists, and it doesn't seem to exist on any continent 
where we could do research.
    We have contacted the Swiss authorities through the 
Subcommittee and we have also been in contact with 
representatives at the Treasury Department to see if we can 
track down how much money is still in that account.
    Senator Coleman. There is almost like what I would call an 
Alice in Wonderland quality to what is going on here. This is a 
world in which your second bid is higher than your first bid in 
order for you to get the contract. Is that correct?
    Mr. Groves. Yes, Senator, it is.
    Senator Coleman. And the second bid then reflects the 
inflated price?
    Mr. Groves. Yes, it does, unlike a normal contractual 
situation where you would be bargaining the seller down.
    Senator Coleman. They are bargaining up. The money then 
goes to a Syrian account, Jordanian account, some account 
somewhere which we believe then is at the disposal of Saddam 
Hussein?
    Mr. Groves. Yes, Senator. In this case, it went to a Swiss 
account.
    Senator Coleman. I also note with some interest on Exhibit 
26 \1\--by the way, when we talk about Weir, they have admitted 
that they participated in this kickback scheme. Is that 
correct?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 26, which appears in the Appendix on page 164.
---------------------------------------------------------------------------
    Mr. Groves. Yes, Senator, they have.
    Senator Coleman. And in Exhibit 26, I note that Weir is a 
Scottish company, but in the final what appears to be the UN 
document it says ``Mission: United Arab Emirates.''
    Mr. Groves. Yes, Senator.
    Senator Coleman. What does that reference?
    Mr. Groves. Well, according to Weir, the Iraqis were loathe 
to contract with countries who were strong supporters of the 
sanctions, such as the United States and the UK. And so Weir 
did the bulk of its business through either its French 
subsidiary, or in this particular case through its subsidiary 
in the United Arab Emirates. They were nations who were more 
palatable to Iraq.
    Senator Coleman. By the way, in terms of the timing of 
this, do we know when Saddam began assessing the surcharges for 
this program?
    Mr. Groves. The evidence that we have seen indicates that 
it was sporadic through various early phases, but then became 
systematic, more industry-wide in every ministry in roughly 
June 2000, which was the beginning of Phase VIII.
    Senator Coleman. One of the things that I just have great 
difficulty in understanding is with the number of companies 
involved, those executing humanitarian contracts number, I 
think, over 3,500. Is that correct?
    Mr. Groves. That is correct.
    Senator Coleman. And is it fair to say that if you didn't 
execute a kickback once Saddam put this in place, you probably 
weren't going to get a contract?
    Mr. Groves. It is, Senator. After June 2000, in Phase VIII, 
all evidence indicates that unless you agreed, you didn't get 
the contract.
    Senator Coleman. Weren't there folks who complained that 
they had to pay kickbacks? I mean, somewhere within the 
corporate world out there, there has got to be some sense of 
morality that says, hey, this is not the right thing to do. Did 
anybody raise a red flag?
    Mr. Groves. We haven't found a single complaint where 
kickbacks were demanded, mainly because they don't appear to 
have been refused that often. And that is why the Weir example 
is so troubling because it is a very reputable, publicly-traded 
company that you think would reject these offers.
    Senator Coleman. There was a report in The Washington Post 
yesterday that focuses on the activities of Mr. Sevan and it 
indicates that there were some whistleblowers, but that their 
requests or their concerns were dismissed. So they were 
actually sent back to their original country and said, do this 
internally.
    How does that relate to the stuff that we are discussing 
here today?
    Mr. Greenblatt. Well, there were widespread complaints 
concerning the surcharges on the oil side of the deal and the 
UN Security Council and the overseers were somewhat slow to 
respond. It took 2 years for the 661 Committee, which is the 
committee that oversaw the UN Oil-for-Food Program--it took 2 
years for any action to be taken that would end the surcharges, 
and that action was taken by the U.S. and the UK 
representatives.
    Senator Coleman. This was the retroactive pricing you 
talked about?
    Mr. Greenblatt. That is right.
    Senator Coleman. And essentially what the retroactive 
pricing does is if you have retroactive pricing and afterwards 
you say this is the price, you take away the platform, you take 
away the opportunity to create a commission somewhere between 
the basic price and the market price at that time, which was 
what folks were allowed to do.
    Mr. Greenblatt. That is right.
    Senator Coleman. If you go retroactive, then there is no 
room to maneuver. You simply pay a price and you can't 
guarantee that the folks who were paying the kickback or the 
surcharge are actually going to make any money.
    Mr. Greenblatt. That is right.
    Senator Coleman. So that effectively killed it at least on 
the oil side.
    Mr. Greenblatt. That is exactly right.
    Senator Coleman. And you said it took 2 years. Can you tell 
me a little bit more about what the United States and the UK 
tried to do here?
    Mr. Greenblatt. Well, sure. From what we have learned from 
the individuals who were intimately involved in that stage of 
the Oil-for-Food Program, the United States and the UK were 
typically more assertive about attempting to shut down those 
types of schemes, in particular the surcharge scheme, and they 
felt resistance for a significant amount of time to actually 
formally ending the surcharge payments.
    Senator Coleman. You indicated that Cotecna was the company 
that had some responsibility for, I am trying to understand 
what, for verifying that the goods sold were the goods that 
were actually part of the contract? Is that essentially what 
their responsibility was?
    Mr. Groves. Yes, Senator. It turns out that their 
responsibilities were not to inspect every shipment that came 
through, but merely to authenticate that a shipment had 
arrived.
    Senator Coleman. And it is clear that there wasn't the kind 
of authentication that would somehow have caught the misdeeds 
that were going on here.
    Mr. Groves. Not in the case of Weir. They had 15 contracts 
that would have gone through with quantities having been 
shifted that weren't caught.
    Senator Coleman. Do we know anything about the fees that 
were generated by Cotecna during their participation in 
attempting to oversee this program?
    Mr. Groves. Well, we have reviewed their contracts and they 
were done on a per-phase basis and each contract is in the 
multi-millions of dollars.
    Senator Coleman. Do you know about how many contracts they 
were involved with?
    Mr. Groves. Well, they won the contract from Lloyd's 
Register back in December 1998 and remained the inspection 
agents for the program up to Operation Iraqi Freedom, so a 
substantial period of time.
    Senator Coleman. You mentioned some of the prices. If you 
just look at it, there is a 30-percent kickback involved here, 
so you would think of some inflated prices. Do you know if any 
contract was ever rejected by Cotecna for over-pricing?
    Mr. Groves. The body that would have had to have rejected 
for over-pricing would have been the Office of the Iraq 
Program, and we have heard information that at no time was a 
single contract under the Oil-for-Food Program denied or 
rejected for being over-priced.
    Senator Coleman. And I take it we haven't had the 
opportunity to speak with UN personnel as to why nothing was 
rejected. We haven't had the opportunity to get the information 
that we would like to get to be able to review how this was 
able to occur without anybody catching anything?
    Mr. Groves. Not yet, Senator.
    Senator Coleman. Senator Levin.
    Senator Levin. Thank you, and thank you to both of our 
witnesses for their work and their testimony.
    I just had a few questions. One has to do with the question 
of whether or not--apparently, the United States, as I 
understand it, was the biggest end user of Iraqi oil during the 
sanctions period. Is that your understanding?
    Mr. Greenblatt. It was certainly a significant purchaser. I 
don't know if it was No. 1, but it bought a massive amount of 
oil from Iraq.
    Senator Levin. Now, how would the subsequent purchaser of 
Iraq oil know whether there were any kickbacks that had been 
paid?
    Mr. Greenblatt. They may not have known. It is not 
necessarily a statement of fact that every end purchaser would 
know. I would note that during the surcharge period, it was 
somewhat well-known, it was just well publicized that virtually 
every contract had a surcharge during those 2 years.
    Senator Levin. So there would be nothing on the paper 
itself, though, on the transfer documents, that would show that 
surcharge for the end user?
    Mr. Greenblatt. No. That is right.
    Senator Levin. And there was no due diligence requirement?
    Mr. Greenblatt. Oh, I don't know that. I can't answer that.
    Senator Levin. On Corsin Financial, Corsin Financial is the 
account that the money was deposited in, and you said, I think, 
15 contracts were inflated and then the inflated amount was 
deposited in that account. Is that correct?
    Mr. Groves. Yes, Senator.
    Senator Levin. And we have tried to find out from the Swiss 
embassy, as you know, whether or not there is a pending 
investigation of that account and they have told us they don't 
know of any investigation. Is that correct?
    Mr. Groves. That is correct.
    Senator Levin. The Swiss are fairly opaque, are they not, 
when it comes to bank accounts?
    Mr. Groves. That is one way to put it.
    Senator Levin. Non-transparent. That is going to be a real 
issue. We take that up with the next witness, I think, in terms 
of the transparency of bank accounts so that we can track the 
money which Saddam illicitly obtained here to various accounts. 
We need governments to cooperate and to be transparent relative 
to any illicit money which is deposited in accounts in their 
country and we will pursue that further with our next witness.
    Just two other questions. On our Exhibit 3,\1\ it is 
entitled ``Selected Secret Oil Voucher Recipients.'' As I 
understand it, that title is taken from the Duelfer report, as 
well as the contents of this chart. Is that correct?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 3, which appears in the Appendix on page 108.
---------------------------------------------------------------------------
    Mr. Greenblatt. That is my understanding.
    Senator Levin. And so the Subcommittee has not yet reached 
its own conclusions about whether the listed individuals 
actually received vouchers or money. Is that correct? This is 
based purely on Duelfer's----
    Mr. Greenblatt. This document, I believe, is taken strictly 
from the Duelfer report, yes.
    Senator Levin. Now, in terms of the listed individuals on 
that document, has the Subcommittee or the staff actually 
concluded that those vouchers were received or that money was 
received for them?
    Mr. Greenblatt. I think the answer would be the same as Mr. 
Duelfer's, looking at the documents from SOMO that the 
Subcommittee has obtained. We may be able to draw some 
conclusions, but those would again be solely from Iraqi 
documents. At this stage, we can't comment on whether money 
flowed or anything of that sort.
    Senator Levin. Have those conclusions yet been drawn?
    Mr. Greenblatt. I don't believe so.
    Senator Levin. And finally, on the Weir contracts that were 
submitted to the UN for approval, those were inflated 
contracts. Should the 661 Committee at the UN have caught those 
inflated prices?
    Mr. Groves. Senator Levin, the 661 Committee was tasked to 
do certain tasks in reviewing the contracts primarily for a 
review of dual-use items. But there are procedures in place 
that were set up to regulate the day-to-day operations of the 
program that explicitly tasked the secretariat to review all 
contracts under the program for price and value.
    Senator Levin. For pricing?
    Mr. Groves. Price and value.
    Senator Levin. And value. And was that then part of the 
responsibility of the 611 Committee?
    Mr. Groves. No, Senator. It was the responsibility of the 
Office of the Iraq Program under the secretariat.
    Senator Levin. All right, so they only had the one 
function, the dual-use function. They were not to look at the 
pricing and value.
    Mr. Groves. That is correct.
    Senator Levin. Thank you.
    Senator Coleman. Senator Graham.
    Senator Graham. I just want to compliment the Subcommittee 
and the work that you are doing. I just wish the whole Senate 
could be part of this. This is really fascinating.
    Some of the things are very open. The letter from the Iraqi 
journalist on Tab 13 \1\ where she writes to SOMO--was that a 
common occurrence where you would have someone say I am going 
to assign the voucher that Saddam gave me to a specific 
company?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 13, which appears in the Appendix on page 124.
---------------------------------------------------------------------------
    And the company had to know about this, Devon, right?
    Mr. Greenblatt. Well, this is the way that SOMO would learn 
who the contract was going to. Whether it occurred in a letter 
or a telephone call or an E-mail, I have no idea.
    Senator Graham. Well, would this put the company on notice 
that something illegal is going on?
    Mr. Greenblatt. Well, the company would know that the 
voucher recipient was getting a voucher, and would know that 
SOMO would have to find out at some point because eventually 
they are going to have to contract directly with SOMO. So I 
don't know how to answer your----
    Senator Graham. This company pays this journalist money for 
this unit, right?
    Mr. Greenblatt. That is my understanding, yes.
    Senator Graham. Did the company know that was illegal, or 
is that illegal?
    Mr. Greenblatt. Well, under the rules of the Oil-for-Food 
Program, all payments for the oil purchased under the program 
were destined solely for the BNP Paribas account, the UN-
controlled escrow account at BNP Paribas.
    Senator Graham. So when this company wrote a check to this 
person, to the journalist, they had to know that was illegal.
    Mr. Greenblatt. I don't know. I can't comment on that. I 
would assume that if an oil company were writing a check to a 
politician or a foreign official, that might raise an eyebrow. 
But I can't speculate on what they would know or what they 
would think.
    Senator Graham. And the journalist winds up being a middle 
person for a money transaction, is that right?
    Mr. Greenblatt. It can be.
    Senator Graham. In this case, that is what she did, right?
    Mr. Greenblatt. In this case, she paid the surcharge, or at 
least she committed to pay the surcharge. The money for that 
surcharge would have had to come from the purchaser of the oil.
    Senator Graham. Which is Devon, right?
    Mr. Greenblatt. Which would be Devon in this case.
    Senator Graham. Did they know that was illegal?
    Mr. Greenblatt. They may not have known about the surcharge 
at all. I don't know whether Devon knew about that.
    Senator Graham. Why would they write a check if they didn't 
know?
    Mr. Greenblatt. Well, they could have viewed that as the 
commission to the voucher holder and not known anything about--
plausible deniability. I don't know. I can't speculate as far 
as what Devon knew at the time. All I can do is present the 
evidence as we receive it, and in this situation Na'na clearly 
committed to pay the surcharge. And I would assume that she 
wasn't paying that just out of the goodness of her heart; she 
must have been getting the money from somewhere.
    Senator Graham. When it comes to the UN inspector, the 
person in charge, has there been any evidence of an account 
number? There is an accounting procedure for the vouchers. Is 
that right?
    Mr. Greenblatt. Oh, the number designations?
    Senator Graham. Yes.
    Mr. Greenblatt. I have not seen any designation for a 
voucher for--I assume you are talking about Mr. Sevan.
    Senator Graham. Right.
    Mr. Greenblatt. I have not seen any number directly related 
to any voucher for Mr. Sevan.
    Senator Graham. OK, thank you.
    Senator Coleman. If I can, I am going to follow up on that 
question. Can I have Exhibit 3 again, please?\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 3, which appears in the Appendix on page 108.
---------------------------------------------------------------------------
    Senator Graham. And it really would apply to all these non-
end users, I guess, that question.
    Senator Coleman. Again, Exhibit 3, the Senator Levin 
letter--this comes clearly from Mr. Duelfer's report, right?
    Mr. Greenblatt. That is correct.
    Senator Coleman. But in Exhibit 3, at least what the report 
says is that the recipient is Benon Sevan; that the amount 
allocated--that is what the voucher would be--would be 13 
million barrels. But this exhibit does say that barrels were 
lifted. So somewhere there is documentation that says that this 
voucher was converted into oil. Again, just based on records, 
that is who the Iraqis say it is. But we do know that there is 
some documentation that that voucher was actually converted 
into barrels that were lifted. Is that what lifted means?
    Mr. Greenblatt. That is exactly right.
    Senator Coleman. Thank you. Senator Levin, anything 
further?
    Senator Levin. No, thank you.
    Senator Coleman. Gentlemen, thank you for your outstanding 
work and testimony today. Thank you. This panel is excused.
    We will now call our third panel. We welcome our final 
witness, Juan Carlos Zarate, the Assistant Secretary for 
Terrorist Financing and Financial Crimes at the Department of 
the Treasury.
    Mr. Zarate, I appreciate your attendance at today's hearing 
and look forward to hearing your views on the Oil-for-Food 
Program, including Saddam Hussein's abuse of the program, the 
amount of money that was pilfered by the Iraqi regime, the 
amount of money that has been repatriated to the Iraqi people, 
and whether the remaining funds are being used to fund the 
Iraqi insurgency or terrorist groups.
    In addition, Mr. Zarate will discuss the extent to which 
the funds that were illicitly obtained under the Oil-for-Food 
Program were used for purposes that were prohibited under the 
UN sanctions regime. I am particularly interested in knowing 
what remedies may be available to assist in the further 
recovery of Iraqi assets.
    Again, before we begin, all witnesses who testify before 
this Subcommittee pursuant to Rule VI are required to be sworn. 
At this time, I would ask you to stand and please raise your 
right hand.
    Do you swear that the testimony you are about to give 
before the Subcommittee is the truth, the whole truth and 
nothing but the truth, so help you, God?
    Mr. Zarate. I do.
    Senator Coleman. We will be using the timing system, Mr. 
Zarate. Before the red light comes on, a minute before you will 
see the light change from green to yellow, which will give you 
an opportunity to complete your remarks. Your written testimony 
will be entered into the record in its entirety. We ask that 
you limit your oral testimony to 10 minutes.
    Mr. Zarate, you may proceed.

   TESTIMONY OF JUAN CARLOS ZARATE,\1\ ASSISTANT SECRETARY, 
 TERRORIST FINANCING AND FINANCIAL CRIMES, U.S. DEPARTMENT OF 
                          THE TREASURY

    Mr. Zarate. Chairman Coleman, thank you very much for the 
invitation to be here. Senator Levin and Senator Graham, it is 
an honor to be before you. It is an important issue, testifying 
with respect to the allegations of fraud pertaining to the UN 
Oil-for-Food Program, as well as the U.S. Government's 
continuing efforts to identify, freeze and repatriate Iraqi 
assets around the world.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Zarate appears in the Appendix on 
page 85.
---------------------------------------------------------------------------
    Allow me, Mr. Chairman, to commend the work of this 
Subcommittee, as well as your staff, as well as Mr. Duelfer, 
who was on the first panel, for pursuing this issue so 
aggressively and so well.
    Since Secretary Snow's call on March 20, 2003, to engage in 
a worldwide hunt to find and repatriate stolen Iraqi assets 
back to the Iraqi people, the Treasury Department and the 
entire U.S. Government have worked intensely to do just that. 
In the course of this work, we have seen and uncovered a vast 
corruption of the sanctions regime by Saddam Hussein.
    It is clear now, Mr. Chairman, that Hussein's thievery was 
the economic twin to his tyranny. It was Saddam Hussein who 
transformed the goodwill of the international community, 
represented in the OFF Program, into a corrupt enterprise. 
Although there may have been many who engaged in sanctions-
busting and OFF-related schemes, such enterprises were the 
making of a malevolent dictator.
    In essence, the Hussein regime created a system of 
kickbacks, as we have heard today, skimming schemes and 
smuggling operations to bilk the international sanctions regime 
of all of its potential value and profits. He used the 
implements of the State, the central bank, commercial 
enterprises and his diplomatic and intelligence assets to help 
skirt international restrictions.
    In some cases, he used this system to attempt to procure 
weapons and other banned goods, all in an effort to fortify his 
regime. While the Iraqi people suffered under Hussein's 
oppression, he and his sons paid for pleasure palaces and 
armaments.
    Our role, Mr. Chairman, as set out by the President and 
Secretary Snow, has been to try to find, freeze and repatriate 
Iraqi assets from around the world, be they official Iraqi 
assets or the assets looted by Hussein and his family members. 
This has been and continues to be quite a complicated mission. 
Even so, on a daily basis, through interviews, diplomacy and 
analysis, we have unmasked the financial webs used by the 
regime.
    Mr. Chairman, if you will allow me, I would like to lay out 
some of the achievements since March of last year and some of 
the important successes in returning assets to the Iraqi 
people.
    We have frozen nearly $6 billion of Iraqi-related assets 
worldwide. Since March 2003, over $2 billion of Iraqi assets 
have been newly identified and frozen outside the United States 
and Iraq. The United States, foreign countries, and the Bank of 
International Settlements have transferred back to the Iraqi 
people over $2.7 billion in frozen Iraqi funds. Approximately 
$1.3 billion in cash and valuables have been recovered in Iraq.
    We continue to identify key individuals and entities who 
acted as operatives for Saddam Hussein. The Department of the 
Treasury has designated now 232 individuals, parastatals and 
front companies that formed part of the Hussein financial 
network pursuant to Executive Order 13315. Almost all of these 
names have been listed by the United Nations 1518 Committee, 
which is responsible for maintaining the list of Hussein-
related entities.
    Mr. Chairman, two such designated front companies bear 
mentioning in the context of this hearing. On April 15, 2004, 
the Treasury Department designated Al Wasel and Babel Company, 
a UAE-based company, as a front for the Hussein regime. This 
company was controlled by, and acted on behalf of, senior 
officials of the former Iraqi regime. The Iraqis used this 
company to engage in OFF-related transactions and kickbacks, 
and also to attempt to procure restricted items, including a 
sophisticated surface-to-air missile system.
    Another such company which we designated was the Al-Bashair 
Trading Company. Al-Bashair acted as the largest of Iraq's arms 
procurement front companies and was involved in a range of 
sanctions-busting and corruption schemes on behalf of the 
Hussein regime. Al-Bashair reported directly to the 
Organization of Military Industrialization, which was 
responsible for Iraq's military procurement programs.
    We know from documents removed from Al-Bashair's 
headquarters that the company was involved in a variety of 
deals involving sham contracts, kickbacks, falsified export 
documentation and money laundering designed to deceive UN 
inspectors. The company was then used to deliver, among other 
things, missile components, surveillance equipment and tank 
barrels to the former Iraqi regime.
    In Iraq, Mr. Chairman, and throughout the world, our 
financial investigators have uncovered well over 1,000 relevant 
accounts and interviewed key detainees, as well as bankers, 
lawyers and accountants who acted as financial facilitators for 
the regime. These efforts have yielded countless leads.
    An example of this occurred when our agents determined that 
the former Iraqi ambassador to Russia had stolen $4 million in 
Iraqi assets. As a result, that amount has been frozen in 
Russia, and we are working to have it repatriated. The 
Departments of Treasury and State have provided identifying 
information on over 570 identified Iraqi bank accounts to 41 
countries for review and follow-up.
    The Secretary of the Treasury has used Section 311 of the 
Patriot Act to identify two banks, the Commercial Bank of Syria 
and Infobank in Belorussia as ``primary money laundering 
concerns,'' in part because these institutions facilitated 
illicit financial activity with Iraq. Finally, we are working 
closely with others in the U.S. Government to trace U.S. 
currency seized in Iraq in order to determine the flow of funds 
that may support attacks within Iraq.
    All of these efforts are guided by the strong recognition 
that this mission is critically important for several reasons. 
Iraqi assets must first be recovered so that they can be used 
to pay pensioners, construct schools, equip hospitals and 
rebuild Iraq. It is equally imperative to recover Iraqi assets 
to prevent them from being used to fund the Iraqi insurgency 
and to keep them out of the hands of terrorists. The United 
States and the international community cannot permit these 
assets to be used against our troops, our Coalition partners 
and innocent civilians in Iraq. Finally, Mr. Chairman, our 
successful prosecution of this hunt serves as a strong warning 
to other rogue regimes which might seek to loot their countries 
and hide the stolen assets in the international financial 
system.
    Our commitment to the people of Iraq is unwavering. We are 
now working directly with them, with representatives from the 
Iraqi interim government, to help them take on many of the 
tasks we have previously led. Given the importance of this to 
the Iraqi people, I am confident that with time and training, 
the Iraqis themselves will be able to prosecute this asset hunt 
for as long as is necessary.
    Our domestic efforts and our U.S. efforts now have to be 
focused on finding sources of funding that are being used to 
foment violence and terrorism within Iraq. In coordination with 
others in the U.S. Government, that is precisely what we are 
doing. We owe a debt of gratitude, Mr. Chairman, to the 
civilians, especially the IRS Criminal Investigation Division 
agents in Baghdad who have served nobly, and our troops on the 
ground who are engaged in these worthy and important efforts.
    We appreciate the support of Congress and look forward to 
working with you. Again, Mr. Chairman, I thank you and the 
Subcommittee for your attention and for your diligent work on 
these very important issues.
    Senator Coleman. Thank you very much, Mr. Zarate. I want to 
get right into the question of terrorist financing. Before I do 
that, though, Saddam used front companies to hide illicit 
funds. Can you help me understand better how these companies 
were set up? And then I want to get to our ability to kind of 
track them down and get any of the money that they collected.
    Mr. Zarate. Mr. Chairman, we have to date identified 11 
classic front companies, and by front companies I mean those 
companies that were used and controlled by the regime itself, 
as opposed to companies that were simply doing business with 
the Hussein regime.
    What we have found is that certain companies were located 
outside of Iraq, companies like Al Wasel and Babel which I 
mentioned, which is based in the UAE. That company was used in 
part to engage in OFF-related contracts and deals, but at the 
same time it was engaged in operations to try to procure goods 
that were outside of the Oil-for-Food Program.
    There are other companies, some companies, for example, 
within Iraq that were established and controlled by Saddam 
Hussein, in some cases by Uday and Qusay. For example, there 
was one company, the Al-Hoda Tourism and Trade Company which 
was used as a front by Saddam Hussein's sons to bilk religious 
pilgrims coming to Iraq to visit the Shiite holy shrines, to 
bilk them of upwards of $500 million--money that went into the 
hands of Saddam Hussein and his cronies.
    So there were a variety of different front companies 
located both outside of Iraq and within Iraq that were used to 
raise money, that were used to move money and ultimately to 
hide money as well.
    Senator Coleman. With the earlier witnesses, we had 
testimony about a Swiss account, Corsin Financial Limited, and 
our investigators have not been able to find any legitimate 
company with that name. Clearly, this company would have assets 
of tens of millions of dollars.
    What capacity do you have to track down that operation and 
to get access to Swiss accounts?
    Mr. Zarate. Well, Mr. Chairman, we have since the start of 
this effort been working very closely with foreign counterparts 
around the world, including the Swiss. We, as the Subcommittee 
has done, and Subcommittee staff, have reached out to the Swiss 
Government with respect to this particular account and we are 
following up with the Swiss.
    We have several conduits to working with the Swiss. We 
certainly work very closely with their finance ministry and 
with their sanctions body, known as SECO. We also work with 
their prosecutorial bodies, and we have worked with them very 
closely, for example, in their freezing of over $140 million in 
Iraqi-related assets to date. So we have both official channels 
and powers of persuasion, as well, with our counterparts around 
the world, including the Swiss.
    Senator Coleman. Let me talk a little bit about terrorist 
funding. At the beginning of Operation Iraqi Freedom, the Bank 
of Syria, I believe, had over $1 billion of deposits on record 
from various Oil-for-Food abuses and smuggling protocols. Is 
that a fair statement?
    Mr. Zarate. Yes, Mr. Chairman. It was approximately $1 
billion that existed in what was then the combined account, the 
combined trade account and cash account that existed in Syria 
right before the commencement of the war.
    Senator Coleman. And the Syrians disbursed, I believe, $800 
million of that to what they claimed were bona fide, legitimate 
folks who they said were owed the money. Is that correct?
    Mr. Zarate. Yes, sir. What we found was when we sent our 
investigators to Damascus upon review of the documents and 
review of the transactional data, it became clear that the 
Syrians had, in fact, paid out the vast bulk of the amount that 
had existed in that particular account.
    Senator Coleman. And they are claiming that these were 
legitimate brokers and traders. Have we had a chance to test 
the veracity of the Syrian claims?
    Mr. Zarate. That is something we are working with the 
Syrians on as we speak. One of the things, and I mentioned it 
in my oral remarks, that we have done is to use the power that 
Congress gave us in Section 311 to pressure the Syrian 
government. It was the imposition of Section 311 actions 
against the Commercial Bank of Syria which have, in essence, 
opened the dialogue with respect to what was going on not only 
at the time of the war, but before the war, and what 
transactions have been facilitated by the Commercial Bank of 
Syria.
    Senator Coleman. Certainly, this Chairman, and I have no 
doubt this Subcommittee have deep concerns about this issue of 
terrorist financing, and the knowledge that there is $1 billion 
in Syrian accounts that have been disbursed without us getting 
information to verify, in fact, that there were legitimate 
traders or claims upon that.
    We have folks on the front line right now who are 
sacrificing their lives and who are under fire, and somewhere, 
somehow, there is money being used to fuel that insurgency. And 
I would just hope that a very strong message is delivered to 
the Syrians that we get their cooperation, that we track this 
down and we figure out what is what.
    Mr. Zarate. Mr. Chairman, let me assure you that this issue 
has been front and center in terms of the dialogue with the 
Syrian government. It is front and center in terms of the 
Section 311 action taken. It has been part of the dialogue at 
the highest levels, so we are very much concerned, as you are, 
that the amounts paid out were either not paid out to 
legitimate claimants or were paid out to people who are 
attempting to do us harm now.
    Senator Coleman. Is there anything else that you can tell 
us about the possibility of the money that Saddam pilfered, 
stole from the Oil-for-Food Program or in violation of the UN 
sanctions--anything more you can tell us about whether that 
money is being used to fuel an insurgency right now?
    Mr. Zarate. Mr. Chairman, I can't speak in this forum to 
specific evidence, but it is certainly a concern of ours that 
assets that are not yet frozen, that are unattended to in a 
sense, could be used by former regime elements to fuel the 
insurgency.
    I think what we are concerned about are, in essence, three 
pools of money that could be fueling the terrorist attacks we 
see within Iraq. First are these unattended-to, former regime-
related assets, and that is why we continue to work on it. We 
also have assets within Iraq, and that is why the Department of 
Defense, our soldiers on the ground, the FBI, and others are 
working so hard to try to find those caches of cash within 
Iraq. And then, finally, you have traditional sources of 
terrorist funding in the region which are mobilizing for the 
Iraqi jihad, in essence. So it is all three pots of money there 
that are of concern to us.
    Senator Coleman. And the amounts of money that are involved 
here are pretty overwhelming. You have indicated you have 
recovered about $6 billion?
    Mr. Zarate. Six billion, worldwide.
    Senator Coleman. And if we have estimated over a 10-year 
period $21 billion, you could build all the castles you want, 
but that is not going to account for $21 billion, is it?
    Mr. Zarate. That is right, sir. I think one of the 
challenges is nobody, including GAO, Mr. Duelfer, or even the 
Treasury Department, has been able to account for how much of 
that was spent, how much of that was used by agents abroad, how 
much of that was simply used as part of the ongoing governance 
of Iraq. So it is very hard to tell how much is still lingering 
out there.
    Senator Coleman. What can we do within this Congress to 
assist you in your ability to recover these stolen, pilfered 
funds and getting them back to the purposes that they were 
supposed to be used for?
    Mr. Zarate. Mr. Chairman, I think continuing this 
investigation is critical. As I mentioned in my written 
testimony, as well as my oral testimony, our mandate has been 
to try to find and repatriate Iraqi assets abroad. It has not 
necessarily been our mandate to investigate the Oil-for-Food 
Program or activities of companies abroad that traded with 
Iraq. Your work in that respect and with respect to what was 
happening at the UN would be extremely beneficial to us and it 
is already bearing fruit, I would think.
    Senator Coleman. Anything legislatively that we need to do?
    Mr. Zarate. Mr. Chairman, if I could, I would like to take 
that back and think about it a bit. Let me just emphasize 
again--and this is a credit to Senator Levin and to others--the 
power that Congress gave us in Section 311 of the Patriot Act 
is an incredibly helpful tool because it allows us to identify 
actual foreign institutions that present a money laundering 
concern. And sanctions-busting falls within the category of 
money laundering issues, so that has been an incredibly 
important power.
    Senator Coleman. Thank you. Senator Levin.
    Senator Levin. Thank you, Mr. Chairman, and thank you for 
your testimony, Mr. Zarate. When you just made reference to the 
amount of money which you have tracked down of Iraqi assets 
held abroad, that is from whatever source, correct?
    Mr. Zarate. Yes.
    Senator Levin. That figure that you used does not 
necessarily flow from any of the subject matter of this 
Subcommittee's current inquiry. Is that correct?
    Mr. Zarate. That is correct, Senator.
    Senator Levin. Some of it may have come from that.
    Mr. Zarate. Exactly.
    Senator Levin. But you haven't identified what the source 
of those funds are, if they were Iraqi government funds. You 
are after them regardless of the source.
    Mr. Zarate. Yes, Senator.
    Senator Levin. It could be oil, it could be humanitarian 
contracts with kickbacks. Whatever the source is--it could be 
totally different from that--you are after it.
    Mr. Zarate. Yes, Senator. Actually, one of the issues I 
would clarify is that in terms of companies that were actually 
trading with Iraq and may have perhaps garnered profits or 
benefits from that trade, we are not necessarily looking at 
that. We are looking for assets that were controlled by the 
former Iraqi regime.
    Senator Levin. Now, the Chairman talked about Syria being a 
real concern for us, and it surely is. We at one point, 
according to Secretary of State Powell, received assurances 
that Syria would place its trade with Iraq under the UN Oil-
for-Food Program. It did not meet that commitment.
    Do you remember that?
    Mr. Zarate. Yes, Senator.
    Senator Levin. What was our response when they did not live 
up to the commitment that they made to Secretary Powell?
    Mr. Zarate. Senator, I can't speak for the Secretary or the 
State Department generally, but I will say that this 
Administration implemented vigorously the Syrian Accountability 
Act, and in coordination with that the Section 311 actions. And 
as I mentioned, at the core of the Section 311 decision by the 
Administration, by the Secretary of the Treasury, was the fact 
that not only had the Commercial Bank of Syria been used to 
facilitate the illicit financial activity that we are talking 
about here today, but the fact that the Syrians had not taken 
action to secure the assets that were rightfully the Iraqis and 
have failed to still transfer money that is frozen within the 
Syrian banking system.
    Senator Levin. You say that you are working now with Syria 
to try to identify the actual use of the money which has 
disappeared or moved out of the accounts. Is that correct?
    Mr. Zarate. Yes, Senator. One of the things that we are 
trying to do is we are brokering a discussion between the 
Iraqis themselves and the Syrians to actually review the 
payments made out. Our figures are closer to about $600 
million, but to review those payments and to verify who exactly 
received them, under what claims.
    Not only is it important in terms of the very important 
concerns the Chairman mentioned, but it also goes to the very 
integrity of the sanctions program itself and Security Council 
Resolution 1483 which requires the repatriation of these 
assets.
    Senator Levin. How would you characterize Syria's level of 
cooperation at this point in trying to identify where that 
money went?
    Mr. Zarate. I would have to say poor, Senator.
    Senator Levin. I think we are going to need from the 
Administration, perhaps not from you, but for the record what 
the steps are going to be to improve that cooperation. Can you, 
if it is all right with the Chairman, supply that for the 
record?
    Mr. Zarate. I am glad to get back, Senator.
    Senator Coleman. That request will be forthcoming.
    Mr. Zarate. Absolutely.
    Senator Levin. You have indicated you are working with the 
Swiss on the Corsin Financial issue, or have you not yet begun 
that?
    Mr. Zarate. Senator, just very recently--in fact, this is 
one of the fruits of your labor, actually, working with your 
staff. We are following up, as well, to try to help you and to 
help ourselves.
    Senator Levin. All right. I know all of the staff has been 
involved in a whole host of issues. That is one of the things 
we have taken on and it would be helpful to the Subcommittee if 
you can do what we have been unable to do, which is to get the 
Swiss to answer the question relative to that particular 
account.
    What about bank accounts in Jordan? What is the level of 
cooperation with that government?
    Mr. Zarate. Cooperation with Jordan has been generally very 
good. The Jordanians have been fairly open with us in terms of 
sharing account information. We have had investigators out in 
Amman looking at accounts. There is always an issue with 
respect to looking behind certain transactions or accounts, so 
we are continuously working with the Jordanian government to 
try to get at some of the activity behind the accounts and 
transactions we have reviewed.
    I will note that the Jordanian government has been very 
cooperative in terms of returning Iraqi assets. They have 
repatriated now $250 million back into the Development Fund for 
Iraq. We consider that to be significant, especially in 
comparison to Syria which has transferred zero.
    Senator Levin. You have graciously made reference to my 
efforts on the Patriot Act to require some due diligence from 
U.S. banks when they open accounts for senior foreign 
government officials or their associates, or wealthy foreign 
individuals or foreign financial institutions.
    The regulations pursuant to that Act have not yet been 
issued. Can you tell us when they will be issued?
    Mr. Zarate. Senator, that section of the Patriot Act, 
Section 312 which you know well, is frankly the most 
complicated, I think, of the measures coming out of Title III 
of the Patriot Act. We issued the interim final rule in July 
2002 which has the force and effect of law. In fact, Senator, I 
would note that there have been a couple of enforcement-related 
actions based on those very rules recently.
    I cannot give you a specific date, but I will tell you that 
this is at the top of the priority at the Treasury Department. 
But I will also tell you, Senator, that it is a very 
complicated rule, given the impact both on the banking system 
as well as on the enforcement community.
    Senator Levin. Well, obviously, we are looking forward to 
the final regulations.
    What is the role of the Office of Foreign Assets Control in 
the review of contracts which are submitted to the UN for the 
purchase of humanitarian goods? Is there a role at all?
    Mr. Zarate. OFAC, the Office of Foreign Assets Control, is 
the body within the U.S. Government that administers all the 
economic sanctions. We currently administer 29 of the sanctions 
programs, varying from Burma all the way to the terrorist 
financing program which everyone is quite aware of.
    OFAC, once the OFF Program was instituted, had the 
responsibility of administering the regulations. With respect 
to executory contracts that were allowed with Iraq, OFAC on a 
case-by-case basis did review the contracts and did review to 
make sure that the UN 661 Committee had approved of the 
transactions. During the course of the OFF Program, OFAC issued 
over 1,000 licenses to allow for the legitimate commerce with 
Iraq under the Iraqi regulations that they administered.
    Senator Levin. Now, was OFAC responsible for reviewing the 
price of the contracts for reasonableness?
    Mr. Zarate. I would have to go back and check, Senator, to 
see if on the case-by-case basis we would review the price. I 
would think that perhaps that was part of the process, but 
again I would have to check to make sure it was done in each 
and every instance.
    Senator Levin. Well, if it was done at all, because one of 
the big issues here is how was that not found out when there 
would be an increase in the price from the first bid to the 
second bid or where the price seemed to be out of keeping with 
what the market price was. Why wouldn't the committee at the UN 
have been alerted or found out on its own that that discrepancy 
existed so it could have done an investigation?
    If you could go back and check your records and see whether 
or not that was your--when I say ``your,'' I am talking about 
the OFAC function which I understand is under your supervision.
    Mr. Zarate. Yes, Senator.
    Senator Levin. If that was OFAC's function or 
responsibility; if so, whether or not they ever identified 
contracts where there was that discrepancy, and if so, whether 
the secretariat at the UN or that committee, which is the 661 
Committee, was notified of that discrepancy. That would be 
helpful for the record.
    Mr. Zarate. Absolutely.
    Senator Levin. Thank you.
    Senator Coleman. Thank you. Senator Graham.
    Senator Graham. Thank you, Mr. Chairman.
    These 1,000 licenses that were issued, are those to 
American companies by the American Government?
    Mr. Zarate. Yes, Senator. Those were for delivery of 
humanitarian goods, as well as oil field parts and general 
commercial activity that was allowed under the Iraqi sanction 
regulations.
    Senator Graham. So if you are an American-based company and 
you want to participate in this program, you have to get a 
license from our government?
    Mr. Zarate. Yes, sir.
    Senator Graham. Have you dealt with the UN at all in your 
investigation?
    Mr. Zarate. Not in the context, Senator, of the Oil-for-
Food Program and sort of the scandal surrounding it. We have 
certainly dealt with the UN in the context of designating front 
companies, designating the parastatals and some of the----
    Senator Graham. Have they been cooperative?
    Mr. Zarate. The UN has been very cooperative. In fact, the 
1518 Committee which is responsible for this job, which is 
chaired by the Romanian ambassador, is very cooperative. We 
have certainly been working through potential problems that we 
have had with certain states, member states, that object to 
some of the designations, but we have generally worked through 
those and been able to designate the vast majority of nominees.
    Senator Graham. What about Belarus?
    Mr. Zarate. Belarus has been silent in the context of these 
issues. They certainly were not pleased when we issued the 
Section 311 designation of Infobank. That designation, I think, 
is significant because it lays out pretty clearly that Infobank 
was being used quite obviously to help in terms of procurement 
of military equipment from Belorussia to Iraq.
    Senator Graham. One last thing I might suggest. The 
Subcommittee has done a great job of identifying organizations 
that have very troubling names and that have a history of 
international connections to terrorism that have allegedly, by 
Iraqi documents, received various units of oil that could be 
converted to monetary benefit for these organizations.
    Have you looked into that aspect at all?
    Mr. Zarate. We have started to look into that based in part 
on the work of this Subcommittee. And, again, what I said 
earlier I meant, which is your work is bearing fruit and the 
work of your staff is bearing fruit. And documents that you 
come up with--the PFLP reference in terms of the voucher is 
extremely significant to us and it is something that we plan on 
following up on, and frankly was not known to us before.
    Senator Graham. Thank you.
    Senator Coleman. Thank you very much, Mr. Zarate. I 
appreciate your testimony and I appreciate the work that you 
are doing and will continue to do. It is very important to all 
of us.
    Senator Coleman. I am going to keep the record open for 2 
weeks.
    Before we close this hearing, I would defer to my Ranking 
Member for any closing comments.
    Senator Levin. Just very briefly, Mr. Chairman, first of 
all let me join you in thanking Mr. Zarate for the work that he 
and the Treasury are doing. And I want to thank you again, Mr. 
Chairman, for your very thorough and tenacious work in this 
area.
    It is an intriguing subject because we start with the 
premise that sanctions were working, UN sanctions were working, 
and then we had Saddam who was trying to get out from under 
them. But according to both Secretary Powell and others, we had 
a sanction regime which was in place which was succeeding in 
stopping Iraq from re-arming. And so you had Iraq trying to 
undermine that regime. They did it in a number of ways.
    First, they did it in a corrupt way, a secretive way, which 
we have heard about today. But, ironically, the bigger amount 
of money that they were able to obtain came from sales 
agreements that they had with neighbors that were open and 
which we acquiesced in. They are both a problem as far as I am 
concerned. Even though the corrupt amount is a smaller amount, 
in the few billions, and the amount of the open sales which 
were a way of circumventing the Oil-for-Food Program and were 
outside of the Oil-for-Food Program represented about four 
times that amount, they both represented a problem because they 
both put money in Saddam's pocket and they both were aimed at 
undermining a regime which was otherwise working.
    I would hope that we look, in addition, to what we are 
doing with the UN, which is, I think, very important. And I 
know the UN--after talking with the head of the UN, it is 
something that they are very much interested in getting to the 
bottom of, too. I have to believe that when the Secretary 
General tells us that he wants to find out if there is truth to 
the allegation which is created by that document that the head 
of the UN program himself received these monies or these 
rights, that is extremely troubling thing.
    But we also have to keep our eye on another ball, which is 
what did we do or what did we fail to do as a country? And we 
decided that the amount of money which Saddam was getting from 
these oil sales to Syria and to Jordan and to Turkey, for 
instance, was something that we would acquiesce in. We knew 
about it. Two Presidents of both parties waived any action that 
would be taken in response to those sales even though they 
circumvented the Oil-for-Food Program. That represents a very 
intriguing kind of a dynamic which it seems to me we have to be 
willing to look at in terms of future sanction regimes.
    We want sanctions to work. It is important. It is one of 
the tools which we have. It is not a perfectly effective tool. 
It is not like taking military action in many ways, but it is a 
tool, and it is this Subcommittee's determination, I think, 
that we make this tool work better and that we look at the 
failures and the flaws during the Iraq years so that we can see 
if we can't have a stronger, tougher regime of sanctions that 
the world community can impose to try to change conduct short 
of war.
    With that comment, Mr. Chairman, I just want to again thank 
you and the staff that have been working so hard. Your staff, 
my staff, all of our staffs have been working hard on this 
matter, and I think they have produced some very important 
documents and material.
    Senator Coleman. Thank you. Senator Graham.
    Senator Graham. Thank you for letting me come, Mr. 
Chairman. It has been an excellent job by your Subcommittee. 
Thank you.
    Senator Coleman. Thank you. I thank Senator Levin and the 
witnesses. This has been very helpful. This really is a start. 
We have got a lot more work to do. We need greater cooperation 
from the United Nations. They have an important stake in 
getting to the bottom of this. This Subcommittee can help and 
we are prepared to do that. We will get to the bottom of this. 
It may take a little while.
    With that, this hearing is adjourned.
    [Whereupon, at 3:30 p.m., the Subcommittee was adjourned.]


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