OIL-FOR-FOOD VIOLATIONS

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 006691

SIPDIS

E.O. 12958: DECL: 08/08/2014
TAGS: EFIN PREL JO IZ UN
SUBJECT: OIL-FOR-FOOD VIOLATIONS

Classified By: Charge d'Affaires David Hale for reason 1.5 (b)


1. (C) SUMMARY: A recent visit by HIRC STAFFDEL Scharfen may
have uncovered hard, documentary evidence of involvement of
some Jordanian banks in facilitating the payment of kickbacks
during the closing years of the Oil-for-Food (OFF) program.
This evidence, if verified, would still leave some doubt as
to whether the involvement was witting on the part of the
banks, and more doubt as to whether the Central Bank of
Jordan should reasonably have been expected to detect the
banks, involvement in exercising its supervisory authority.
Nonetheless, proof of Jordanian banks' involvement in OFF
abuses could hurt the justifiable reputation Jordan has
gained as a key ally of the U.S. in dealing with Iraq. We
will seek clarification from government and Central Bank
officials. Action request paragraph 13. END SUMMARY.


2. (C) On July 26, 2004, STAFFDEL Scharfen met with
interlocutors whose remarks form the basis for the following
composite description of possibly provable activity by
Jordanian banks in facilitating Oil-for-Food violations. The
STAFFDEL met with three officials from the Central Bank of
Jordan, Deputy Governors Mohammed Said Shahin and Faris
Sharaf and legal advisor Moosa Alaraj. It later met with
Hassan Abadhar, Jordan country manager for Rafidain Bank, and
Nasim Abdulwahab, a senior branch employee. The STAFFDEL,s
final meeting in Amman was with Fallah Al-Khawaja, Commercial
Manager at the Iraqi Ministry of Oil since February 2000.

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"KICKBACK GUARANTEES"
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3. (C) According to Khawaja, Saddam Hussein began requiring
kickbacks in August 2000, after previous, cruder,
sanctions-dodging schemes of the regime had been blocked. He
initially wanted the kickbacks - the required value of which
would be set by Saddam as a percentage of the total value of
the contract being awarded by the regime - to be paid up
front. However, the rejection rate of the UN 661 Committee,
which had to approve all contracts signed between potential
OFF suppliers and the Saddam regime, was high enough that few
companies could afford to take the risk of paying a kickback
up front on a contract that might be blocked.


4. (C) For this reason, Saddam began instead to demand that
potential suppliers submit a bank guarantee promising that
the kickback would be paid. (NOTE: Saddam would sometimes
waive this requirement for certain favored companies and
countries.) The fact that banks were to guarantee kickbacks
was never explicitly stated; instead, potential OFF suppliers
would send letters to bank branches explaining that the terms
of the contracts with the Iraqi ministries with which the
suppliers were dealing required a "performance guarantee" or
an "after-sales service" guarantee. The banks would then
issue a guarantee of the OFF supplier,s ability to pay the
stated penalty for the supplier,s non-performance, which
would usually be expressed as a percentage of the contract in
question.


5. (C) According to Khawaja, Saddam required that all bank
guarantees (for at least those contracts relating to supplies
for the Ministry of Oil) go to the Rafidain branches in
Jordan and Lebanon, which in turn were only allowed to accept
guarantees from banks registered in those countries on behalf
of the potential OFF suppliers. This meant that when
guarantees were issued by banks outside of Jordan and
Lebanon, they would have to be issued to local Jordanian and
Lebanese banks. These local banks would in turn issue bank
guarantees to the Rafidain branch.


6. (C) According to Abdulwahab (strictly protect),when the
Rafidain branch in Jordan received OFF-related bank
guarantees, it was standard operating procedure to keep the
guarantees on file until getting word from the Central Bank
of Iraq (CBI) that the contract had been completed. If the
contract was approved by the 661 Committee, BNP Paribas
(which issued all letters of credit on 661-approved OFF
contracts) would send a letter of credit to the CBI. The CBI
would then inform Rafidain, which would order the local
Rafidain branch to cancel the bank guarantee. If, however,
the contract were blocked, the local Rafidain branch would
debit the account of the bank guaranteeing the transaction.


7. (C) In this way, the "661 disapproval risk" was passed on
from the suppliers to the local Jordanian and Lebanese banks
issuing the guarantees. Khawaja speculates that the local
banks covered themselves by demanding that suppliers pay a
large percentage of the guaranteed amount (presumably a
substantially larger percentage than the percent of risk that
the suppliers' OFF contracts would be blocked) as a service
fee for the issuance of the guarantee - in essence, providing
"kickback insurance." He further speculates that the
dynamics of insuring a transaction that was by its nature
illegal probably would have meant that these transactions
were quite lucrative for the banks involved.

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EVIDENCE?
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8. (C) Aside from the verbal attestations of Khawaja and
Abdulwahab, the STAFFDEL obtained a photocopy of an actual
outstanding bank guarantee from a Jordanian bank to the
Rafidain Bank. It promised to act as surety for an OFF
supplier,s ability to pay a certain sum that had been
previously agreed upon between that supplier and the
government of Iraq as a performance guarantee. The
guarantee, like many others, had been issued prior to the
war. With the end of the war, however, the guaranteeing
banks had abandoned their role. Although the letter of
credit was never paid out, the guaranteeing banks had already
zeroed out their Rafidain accounts and could refuse to pay;
Rafidain would have little recourse in collecting.


9. (C) This bank guarantee is potentially a conclusive proof
of some Jordanian banks, involvement in funneling money to
Iraq, if a statement by Khawaja proves to be true. According
to Khawaja, there was no such thing as a "performance clause"
or an "after-sales service" clause in an OFF contract. The
contracting officials in the Ministry of Oil pushed
repeatedly to include clauses guaranteeing performance (i.e.,
requiring payment in the event of non-performance),since OFF
suppliers - with whom Saddam and his sons required that they
deal - were sending them faulty equipment for whose
performance Saddam would hold them to account. However, the
contracting officials were unable to do this because the MOU
governing the OFF program protected supppliers by ruling out
such guarantees.

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COMMENT: JORDAN,S POTENTIAL CULPABILITY
--------------


10. (C) If performance clauses were not allowed in OFF
contracts, Jordanian banks face a difficult situation. The
banks can claim to have issued guarantee letters on the basis
of false information they received (i.e., that the companies
needed the guarantees to fulfill a "performance clause" in
their contracts),and to have had no way of knowing what
exactly (i.e., the 661 Committee's blocking of a contract
rather than a true performance issue) would trigger a
deduction from their Rafidain accounts. But if the banks
really did not know from the beginning that all blocked
contracts triggered drawdowns on their Rafidain accounts, why
had they never done an analysis on this major drain on bank
finances? The confidentiality clause of Jordan,s Banking
Law prohibits (with limited exceptions) revelation of further
information that could confirm Jordanian banks, active
knowledge of their role in facilitating OFF violations.
However, a solid piece of evidence that violations were being
facilitated - whether knowingly or unknowingly - would seem
likely to lead to substantial pressure on Jordan to waive the
clause and allow further investigation.


11. (C) The CBJ could more plausibly have been unaware of the
"kickback guarantees" flowing through Jordan,s banking
system - but its failure to detect traces of such a
potentially large money-laundering scheme would diminish
confidence in the CBJ,s competence to handle its regulatory
functions. Both the CBJ regulators auditing Rafidain and
those auditing the other Jordanian banks would presumably
have no reason to know that the Jordanian banks' accounts at
Rafidain were being drawn down for any reason other than a
performance issue on the part of a supplier (coupled with a
failure by the supplier to pay the GOI the contractually
obligated amount) as stated in the guarantee letter issued to
Rafidain.


12. In the immediate prewar period, the CBJ froze many
accounts associated with the Iraqi regime, accounts totalling
$620 million. $250 million of those accounts have already
been transferred to the DFI, with more transfers expected
shortly. Nevertheless, in the matter of OFF violations, the
CBJ has left itself open for criticism by the strong
rhetorical stance it has taken in denying any role by
Jordanian banks in OFF violations. CBJ Deputy Governor
Mohammed Said Shahin, for instance, told STAFFDEL Scharfen
that the banks "knew better than to be involved in anything
like this. If they had, we would have strung them up!"


13. ACTION REQUEST: Embassy will be seeking further
clarification from GOJ and CBJ officials on these matters.
To aid in this search, Embassy requests assistance from
Department and USUN in verifying Khawaja's allegation that
OFF contracts were exempted from all performance guarantees.
HALE