Australian Inquiry into Corporate Responsibility for Complicity in Efforts to Manipulate Humanitarian Exceptions to Security Council Sanctions Regimes
In September 2005, the UN Independent Inquiry Committee ('IIC' or 'Volcker Inquiry') concluded that Iraq under Saddam Hussein imposed inland transportation fees and after-sales service fees to generate $1.8 billion from 2200 companies during the Oil-for-Food ('OFF') program. The Australian Wheat Board ('AWB'), as the largest supplier of humanitarian goods, accounted for fourteen percent of that illicit revenue. AWB's contracts with the Iraqi Grain Board were submitted through the Australian Department of Foreign Affairs and Trade ('DFAT') for approval by the UN Office of Iraq Program ('OIP') and the UN Security Council ('SC') Committee entrusted with monitoring compliance with UN sanctions (the '661 Committee'). This regime has recently been the subject of scrutiny in Australia by a Commission of Inquiry (the 'Cole Commission'). The process offers unique insights into corporate compliance with UN resolutions, prospective criminal responsibility and the oversight responsibilities of Member States.
The Oil-for-Food (OFF) Program
Following Iraq's invasion of Kuwait during 1990, the UN Security Council directed States to prevent their nationals from conducting business with, or making financial resources available to, Iraq except supplies or payments 'intended strictly' or 'exclusively' for medical or humanitarian purposes.[1] The OFF Program envisaged that Iraq would purchase medicine, foodstuffs and other materials from petroleum sales to meet essential civilian requirements.[2] The 661 Committee was notified of humanitarian suppliers,[3] secretariat officials examined contracts to determine repayment eligibility from a UN-controlled escrow account,[4] and the OIP undertook administrative responsibilities.[5]
The Volcker (IIC) Inquiry
In 2000 Canada alleged that Iraq was demanding payment into a Jordanian account from the Canadian Wheat Board to cover 'inland transportation fees' on terms similar to those in contracts concluded with AWB.[6] In 2004 the UN Secretary-General established the IIC to investigate any fraud, corruption or violation of UN procedures under the OFF Program.
The IIC determined that from 1999 contractors were required to pay internal transportation fees into Iraqi-controlled bank accounts or through Jordanian-based front companies including Alia for Transportation and General Trade Co. ('Alia'). By 2000, Iraq had imposed a ten percent 'after-sales service fee' on all humanitarian contracts. The IIC concluded that the UN's OIP inadequately reviewed contracts, misunderstood their terms and failed to adequately monitor execution.[7]
AWB argued that contractual arrangements fell within the humanitarian exception to SC resolutions, that the 661 Committee approved all contracts and that AWB was an unwitting participant in an elaborate Iraqi deception. The IIC found that AWB did not have actual knowledge of Iraq's partial ownership of Alia, nor did it know that Alia never performed trucking services or that payments were remitted to Iraq.[8] However, several documentary or circumstantial warning signs should have signaled the probability that Iraq stood to benefit financially.
The Findings of the Cole Commission[9]
The Honourable Terence Cole, in Australia, investigated whether AWB and several other companies identified by the IIC 'might' have breached Australian law.[10] For this purpose the Cole Commission accessed IIC documents[11] and secured a limited waiver of immunity for one UN officer, but was denied access to IIC witness statements. Australian corporations may be held criminally responsible for committing offences, including by failing to create a 'culture' of compliance.[12] AWB paid approximately $224 million in inland transportation fees and after-sales services fees. Commissioner Cole found that AWB had not denied its criminal responsibility and identified a failure in corporate culture. For example, AWB's Code of Conduct envisaged that agency or facilitation payments must comply with Australian law, but was insufficient by itself to ensure adherence.
In Australia, SC resolutions only impose obligations upon corporations if they are implemented by domestic law. However, there was no statutory obligation or DFAT procedure requiring exporters to verify the correctness or completeness of contracts. Nonetheless, Commissioner Cole concluded that AWB was obliged to act honestly in seeking export permits and, in his view, must have made a conscious decision to deceive both DFAT and the UN. Indeed, according to Commissioner Cole, AWB had a legal duty of honesty and thus could not lawfully deceive or defraud the UN by seeking payment from UN-controlled accounts and employing subterfuges to disguise trucking fees.
AWB had been encouraged to cooperate with IIC investigators. However, AWB did not fully cooperate with the Cole Commission, being slow to produce documents and not providing witness statements 'of any material assistance.'[13] In particular, AWB emphatically denied impropriety and relied upon legal advice that it acted consistently with UN resolutions and Australian law. However, an Australian federal judge found that certain transactions were 'deliberately and dishonestly structured by AWB'so as to misrepresent the true nature and purpose of the trucking fees and to work a trickery on the UN.'[14]
Commissioner Cole took the view that the UN's OIP failed adequately to review AWB's contracts because of its lack of training, the pace of review and Australia's good reputation. In 1997 the UN Office of Legal Affairs advised that Iraqi port charges were permissible provided that they did not exceed what was customary and reasonable, Iraqi dinars were used and arrangements did not financially benefit Iraq. However, the 661 Committee had turned a blind eye to US dollar payments, provided that the amounts were not excessive. It knew that Iraq was breaching sanctions between 1999 and 2003, but did not attempt to prevent this practice.
Commissioner Cole did not accept evidence that OIP informed Australia of its suspicions during 2000. He also found that no Australian company identified by the IIC ever advised senior Australian Ministers of Iraqi payments or inflated wheat contracts. Commissioner Cole concluded that AWB intentionally and dishonestly concealed from DFAT (as innocent agent) and the UN that the true position was materially different from contractual arrangements. In his view, DFAT was deprived of the opportunity to scrutinize contracts and would have denied export permission had proper disclosure been made.
Until 2003 the Australian Minister for Foreign Affairs and Trade was empowered to permit exports to Iraq if satisfied that this 'will not infringe the international obligations of Australia.'[15] As there was no statutory obligation or self-perceived expectation to approve contracts, DFAT officers relied upon UN inspectors, and the Australian mission in New York characterized DFAT's function as little more than a post box. In 2000 DFAT stated that there was no reason from an international legal perspective why AWB could not pay Jordanian-based companies for transportation services. However, Commissioner Cole concluded that this statement was a response to a disingenuous attempt by AWB to create a paper trail of government approval.
DFAT moreover lacked independent investigative powers if non-compliance was suspected and could only refer matters to the Australian federal police or seek assurances. Following concerns expressed by US Wheat Associates in 2003, the Australian ambassador reiterated AWB's denials before individual members of Congress, US administration officials and the US Senate Permanent SubCommittee on Investigations. DFAT remained unaware of inland transportation fees until the Oil for Food Program was completed, and Commissioner Cole did not accept any evidence to the contrary. Its inaction did not amount to turning a blind eye: in his view, AWB was a company of integrity and DFAT supported Australian interests against allegations made by competitors. Furthermore, it would not have been in Australia's interests to continue international trade if this entailed contravening UN sanctions.
Conclusions and Implications
India, the US, France and New Zealand, but not Russia, have already conducted or will conduct investigations and prosecutions arising from violations of the OFF program. The issues canvassed by the Australian Commission of Inquiry and of particular international interest include interpreting the application of the Iraqi sanctions regime, imposing obligations of honesty upon corporations, governance and accountability standards within the public and private sectors, and insights into the interaction between international and national investigative bodies. As a result of the Cole Commission's inquiry, charges may be laid against twelve AWB officers for dishonestly obtaining financial benefits, undertaking prohibited foreign currency dealings, breaching directors' duties, providing false or misleading information and falsifying accounts. It is possible that there will be some deterrent effect on future conduct relating to UN sanctions programs.
Dr. Stephen Tully practices law in Sydney, Australia, and is the editor of International Documents on Corporate Legal Responsibility (2005).
Footnotes
[1] SC Resolution 661 (August 6, 1990).
[2] SC Resolution 986 (April 14, 1995) and UN-Iraq Memorandum of Understanding in relation to the implementation of Resolution 986, Section II (May 20, 1996).
[3] This was done by way of implementing SC Resolution 687 (April 3, 1991).
[4] Letter dated August 8, 1996 from the Chairman of the SC Committee established by Resolution 661 (1990) concerning the situation between Iraq and Kuwait addressed to the President of the SC, U.N. Doc. S/1996/636, Annex, para. 33.
[5] See SC Resolutions 1284 (December 17, 1999), 1409 (May 14, 2002) & 1454 (December 30, 2002).
[6] IIC, The Management of the UN Oil-for-Food Programme, Volume III, Report of Investigation: UN Administration, 7 September 2005, Part I, p.73.
[7] IIC, Briefing Paper on Internal Audit Reports on the UN OFF Program, January 9, 2005, pp.4, 8 & 12.
[8] IIC, Manipulation of the Oil-for-Food Programme by the Iraqi Regime, 27 October 2005, pp.251, 255-7, 325 & 395-99.
[9] Unless otherwise indicated, the following observations are extracted from The Cole Commission of Inquiry, Report of the Inquiry into certain Australian companies in relation to the UN Oil-for-Food Programme, 2006, available at www.oilforfoodinquiry.gov.au.
[10]Letters Patent November 10, 2005.
[11] IIC, Procedures for law enforcement requests for access to IIC documents and information, November 2005.
[12] Section 12.1-12.3, Criminal Code Act 1995 (Australia).
[13] Commissioner's Reasons, February 2, 2006, paras. 7, 10 & 12.
[14] AWB Limited v Honourable Terence Rhoderic Hudson Cole (No. 5) [2006] FCA 1234, para. 229 (September 18, 2006).
[15] Regulation 13CA, Customs (Prohibited Exports) Regulations.