They backed the scam to the bitter end

Sydney Morning Herald
April 17, 2006

DECEIT BY THE TRUCKLOAD: PART TWO The story so far: despite emerging evidence of AWB's kickbacks, the Howard Government continued giving the wheat trader its unconditional support. By Marian Wilkinson and David Marr.

UNDER FIRE: APRIL 2004 - OCTOBER 2004

PAUL VOLCKER is one of those rare figures who survived public life in Washington with a reputation as an honourable man. Admired for his towering intellect as well as his personal integrity, the former chairman of the US Federal Reserve Bank was not one to shirk onerous tasks. He had mediated the fraught, emotional battles between Holocaust survivors and the Swiss banks and taken on the failings of global accountancy firms in the aftermath of the Enron scandal.

In April 2004, the UN Secretary-General, Kofi Annan, asked Volcker to investigate the greatest scandal ever faced by the world body: the corruption of its $US100 billion oil-for-food program. The program had rescued Iraq from the brink of starvation and economic collapse after the UN-imposed sanctions on Saddam Hussein. But since the US-led invasion toppled the dictator, a chorus of critics from Iraqi exiles to the US Congress were on the attack, even accusing Annan's son of corruptly benefiting from the program.

News of Volcker's investigation was met with anxiety in Canberra, where the Government had mounted a vigorous defence of allegations coming out of Baghdad and Washington that Australia's monopoly wheat trader, AWB, had paid kickbacks to Saddam's regime. AWB had shipped $2.2 billion worth of wheat under the oil-for-food program, by far the largest supplier of goods, and would inevitably come under intense scrutiny by Volcker.

A month earlier, the Foreign Minister, Alexander Downer, and the Trade Minister, Mark Vaile, were warned that despite AWB's previous blanket denials it had paid kickbacks in exchange for these contracts, the company was now admitting it could be vulnerable. Downer's senior adviser, Zena Armstrong, reported an AWB executive telling her that the Jordanian trucking company used by the company "might of its own volition have provided kickbacks to the regime".

Despite this, Downer never asked his department to independently inquire into the kickbacks. The elite Iraq Task Force that pulled together the expertise of Australia's intelligence agencies, diplomats and public servants never had such an instruction. Instead, for the next 18 months, as the evidence mounted against AWB, Downer would put his head in the sand. No one wanted to believe the great Australian wheat exporter had been funding Saddam's regime. John Howard told the Cole inquiry last week: "It hadn't crossed my mind that it would have behaved corruptly."

Yet a simple check of the internet, or indeed Australia's intelligence holdings, would have revealed that Alia, the Jordanian trucking company paid by AWB, was half-owned by the old Iraqi regime and deeply involved in sanctions busting for years. It would have exposed AWB's denials as disingenuous. From the company's own records it was clear that its oil-for-food contracts had been inflated with kickbacks to the regime funnelled through Alia.

On April 21, Australia's delegate at the United Nations in New York voted to support the independent investigation of the oil-for-food program. The resolution called on all member states to "co-operate fully by all appropriate means with the inquiry". From the outset, this was not Canberra's intention.

Both the Howard Government and AWB knew Volcker depended on their co-operation. Volcker had no power to subpoena documents and no legal authority to compel anyone to be interviewed. In the end, these constraints would not save AWB - partly because of documents being unearthed in Baghdad but also because the politics of the oil-for-food scandal were ultimately beyond the control of either the company or Canberra.

In Washington, the war in Iraq was rapidly turning against President George Bush. The brutal, ugly images of Abu Ghraib were dominating the media. Baghdad was convulsed by violence as the US-led occupation government, the Coalition Provisional Authority, handed over to a fractious interim Iraqi administration.

On Capitol Hill, Bush's allies were nervous. In this election year they were desperate to shore up their defence of the war. One of the most strident voices was that of Senator Norm Coleman, a Republican former Minnesota prosecutor who now sat on the powerful Senate permanent sub-committee on investigations. Coleman had made his name in Washington attacking the UN and had announced a sweeping investigation of corruption in the oil-for-food program, rivalling Volcker's inquiry.

On June 23, one of Coleman's staff made a surprising call to AWB's American office in Portland, Oregon, to warn that the Australian wheat trader was a target of the senator's probe. Stunned by the news, the company directed its high-powered American law firm, Piper Rudnick, to assess the potential threat. It was bleak. Coleman's investigation was to be the committee's biggest in a decade; it had bipartisan support, was planning to hold hearings for up to two years and any false statements to the committee could land witnesses in jail.

At AWB's Melbourne headquarters, fresh lawyers were summoned. The company's own secret investigation into the kickback scandal, Project Rose, had been under way for a year since the allegations first surfaced after the fall of Saddam. Now Project Rose was expanded to manage both the Volcker and US Senate investigations. AWB's chief legal counsel, Jim Cooper, was already working with an outside legal firm, Blake Dawson Waldron, but a second firm, Minter Ellison, was now brought on board along with the US lawyers. A third firm, Arnold Bloch Liebler, would soon join them.

The team had examined some 30,000 internal documents including scores of incriminating emails from AWB's international sales and marketing team. It was clear from these that hundreds of millions of dollars in "trucking fees" had been paid to Saddam's regime through Alia. It was also clear the trucking firm was 49 per cent owned by the Iraqi government.

Yet the Project Rose team confidently reported to AWB's board that it had a credible defence. Put simply: there was no "identifiable evidence" that AWB knew the money it paid to Alia was paid to the Iraqi regime; that all AWB contracts had been vetted and approved by the UN Office of the Iraq Program; and that there was no evidence AWB had paid any individual Iraqi any kickbacks.

The first proposition was simply untrue, as the Cole inquiry would later discover. But just how Project Rose justified this defence has never been revealed because the material prepared by the legal teams remains protected by legal professional privilege.

The strategy AWB's senior executive chose for handling the Coleman and Volcker inquiries was this: the company would provide only "limited co-operation" and would "seek the support of the Australian Government" in taking this stand. Coleman would be offered no witnesses and few documents.

AWB turned to Canberra to try to persuade the American senator to get off its back altogether. In September, the company's managing director, Andrew Lindberg, begged Downer and Vaile to send Australia's ambassador in Washington to plead their case with Coleman. They agreed.

This was a turning point for the Howard Government. By now it had to be clear that AWB was in deep trouble. The company had admitted its money might have been funnelled to the Iraqi regime, albeit without its knowledge. The Coalition Provisional Authority had explicitly told Canberra "all contracts" under the oil-for-food program contained kickbacks. And in July, Colonel Mike Kelly, an Australian officer who had been working with the CPA, briefed the Iraq Task Force that AWB was most likely heavily implicated in the scandal.

Despite all these warning signals, Canberra instructed Michael Thawley to argue AWB's case on Capitol Hill. In early October 2004, armed with talking points drawn up by the Project Rose team, Thawley met the senator and his staff. By Coleman's account, Thawley "unequivocally dismissed the allegations that AWB paid illegal kickbacks to the Hussein regime" and argued that "reports of AWB's illegal payments were simply the smear tactics of a rogue journalist and perhaps an insidious trick by a US wheat marketing association".

By this time, Thawley had been arguing AWB's case in Washington for a year. Once again he was persuasive. AWB's tough legal stance in refusing to hand over documents and witnesses to the committee stymied the probe. Coleman dropped off.

A few days later, in a spectacular election victory, Howard crushed Labor's Mark Latham, who had become a trenchant critic of the Iraq war. Throughout the campaign, the scandal engulfing AWB barely surfaced.

COVER UP: OCTOBER 2004-MARCH 2005

PAUL VOLCKER'S investigators shocked Canberra with their demands. They wanted full access to people, to documents and even to records of financial transactions held by AUSTRAC, the agency responsible for tracking suspicious currency movements in and out of Australia.

Downer and his department baulked. After considering the request for a little more than a week, the minister decided he would severely limit Volcker investigators. They would not be allowed to interview his officers, they could only put questions in writing and they would get no access to any classified cables or to AUSTRAC.

In early January last year, members of AWB's Project Rose team came to Canberra for a meeting with the new head of the Iraq Task Force, Bassim Blazey. Told of the Government's strategy of limited co-operation, AWB immediately decided to follow suit. The company told Volcker's people it was refusing to make AWB employees available to be interviewed by the UN investigators to ensure "an approach consistent with that adopted by DFAT [the Foreign Affairs Department]". Volcker's investigators cancelled their trip to Australia.

Back in New York, the old banker was deeply unimpressed. In a stern face-to-face meeting with Australia's ambassador to the UN, John Dauth, he chided the Australian Government for displaying an attitude that was "beyond reticent, even forbidding". He bluntly informed Dauth that he had "strong evidence" that "AWB had knowingly paid inflated transportation costs which were kicked back to the Iraqi regime".

Volcker delivered a veiled warning that put Howard on the spot: it would be in the best interests of both Canberra and AWB to assist his investigations. The diplomatic consequences for Australia were all too clear if it was lumped in with dubious oil brokers and middlemen refusing to co-operate with his inquiry.

Howard switched tack. Within days, he and Downer advised Volcker the Government would be "an open book" and would take "strenuous measures" to impress on AWB the need to also fully co-operate. In a scrawled directive to Downer, Howard instructed, "there must be maximum co-operation and transparency". He directed the Trade Minister, Vaile, to pass the same message to Lindberg at AWB. The result would still fall far short of full co-operation.

Downer's officials now began serious work on their own defence. Central to it were two bald arguments. First, the department would continue to accept at face value AWB's denials that it paid any kickbacks. Second, and most importantly, they argued that the failure to monitor AWB's dealings with Iraq was entirely the fault of the UN.

Under UN Security Council Resolution 661 imposing sanctions on Saddam Hussein, all member nations had an obligation to ensure that their nationals did not transfer foreign currency to the Iraqi regime. But Downer now argued that once the oil-for-food program set up its own supervisory committee in 1996, Australian officials acted simply as a "post box" to the UN. The Department of Foreign Affairs and Trade checked AWB's contracts to see all the boxes were ticked, but left the UN to vet them for sanctions violations.

International lawyers and even key UN officers would argue this misrepresented Australia's obligations but Downer clung to the line.

The ducking and weaving by Foreign Affairs was just beginning. When Volcker's investigators appeared in Canberra in February last year, they found witnesses afflicted with memory loss brought on, in part, by a decision of the department not to have them refresh their memories of key events from documents. Critical documents detailing the department's knowledge of the kickback scandal going back to January 2000 were simply not shown to the officers who handled the issue back then. They went into the interviews almost entirely unprepared and could offer Volcker's people little information of value.

Most telling was the case of Bronte Moules, a senior diplomat at Australia's UN mission who handled inquiries into the first kickback allegations against AWB in 2000. Despite cables from that time being downloaded in the department before the investigators arrived in Canberra, she was not shown them. Moules told the investigators she "didn't recall" any discussion of kickbacks in 2000 and "did not recall any allegations of impropriety in relation to AWB contracts during the time that she worked with the Australian mission in New York". Incredible.

The investigators had even less help at AWB's headquarters in Melbourne. Those executives had also not prepared themselves for the interviews. Their memories were shot. Project Rose had gathered 29,000 pages of documents in the company's "data room" but among them were none of the emails, trip reports and briefing notes that have emerged during the Cole inquiry to show AWB knowingly pursued sanctions-busting arrangements with Iraq from 1999.

EXPOSED: MARCH 2005

DESPITE their best efforts to spin the Volcker investigators, AWB's executives were rattled. Clearly Volcker knew all about Alia and the fact that AWB had channelled vast sums to the trucking company for so-called "inland trucking fees".

TO JUNE 2005

Deeply worried, Lindberg and his managers briefed the company boards on the serious consequences should Volcker find AWB had paid kickbacks. Its billion-dollar foreign markets would be put at risk. Its global rivals, especially the US wheat lobby, would use the finding to attack the company's most valuable asset - the sacred "single desk" system that gave it a monopoly of bulk wheat exports. The share price would be battered. The Government might recommend a federal police investigation or a royal commission.

The company realised its most important ally in the difficult months ahead would be the Howard Government. At the urging of the board, Lindberg and the company's chairman, Brendan Stewart, briefed Canberra on the rapidly developing crisis. Among others they saw Downer, the head of his department, Michael L'Estrange, and John Howard's senior foreign policy adviser, Paul O'Sullivan.

Lindberg would keep the company's innermost secrets from the ministers and officials, but he bluntly warned them that Volcker's findings could be dire. In a stark memo of his meeting with executives, L'Estrange recorded that it was known Alia was part-owned by the Iraq government and that it had been a conduit of funds to Saddam's regime. Lindberg told L'Estrange that AWB wanted to work out "a contingency plan" with the Government, "in the event an adverse finding is handed down".

Even when he read this memo, the Foreign Minister was unfazed. He jotted: "Spoke to them myself: have to take it as it comes but I'm more relaxed than they are."

His mood would change three months later, last September, when Volcker handed down an interim report that found the UN's oil-for-food program was, indeed, riddled with corruption. Kofi Annan was humiliated by the "deeply embarrassing" role of his son and the program's head, Benon Sevan, was exposed as being "ethically improper" in his dealings. But Volcker was leaving until his final report in October naming the names of all the companies caught paying kickbacks.

Downer decided on a face-to-face meeting with Volcker. The old banker was unswayed when they met in New York in the middle of September. Downer had come to the meeting armed with arguments mustered by AWB's lawyers but Volcker swept them aside. He told the Australian minister his investigators had "excruciating detail" on the kickback from former officials in Saddam Hussein's regime and from documents found in their files.

Of all the suppliers under the UN oil-for-food program, AWB was the largest and the largest payer of kickbacks. The only outstanding question really was whether AWB had participated wittingly or unwittingly.

When Downer insisted AWB needed to be "afforded fair and due process", one of Volcker's team interrupted, saying that rather than co-operating with the investigation, AWB had been "very difficult to deal with". However, Volcker was open to AWB executives talking to him one more time. But he warned Downer the company would soon have his draft findings and they should examine them carefully.

The findings arrived a few days later at AWB's headquarters in Melbourne. Volcker's verdict was devastating: he had evidence of AWB paying hundreds of millions in kickbacks through a trucking company that provided no transport services. "AWB's payments to Alia were in actuality kickback payments for the benefit of the government of Iraq and did not correspond to actual transportation costs."

Though AWB had told him it did not know Alia was a front for the government of Iraq, Volcker concluded the company "knew or should have known that its payments were channelled to the government of Iraq in contravention of UN sanctions imposed on Iraq".

The draft findings blasted a giant hole in AWB's defence, carefully crafted over 18 months by three of Australia's top law firms, several QCs and the company's in-house legal team. Rather than distance itself from the company, the Government had chosen to work hand in glove with AWB to try to keep a lid on the scandal. Now both were about to be exposed on a global scale.

Clearly shocked, Downer met Lindberg and Stewart in Canberra a few days later. Notes of the meeting record Downer telling the AWB men things "did not look good" and that a report from Volcker in these terms would be "a smoking gun". He feared the press reaction: there would be headlines that AWB had paid $300 million in kickbacks to Saddam.

For the first time, Downer began to ask the AWB men some hard questions. Who knew about Alia? Had the UN been told about AWB using the trucking company? It was too little much too late. Downer urged Lindberg and Stewart to fly to New York, take a lawyer with them and talk to Volcker. He would help set it up.

NOWHERE TO HIDE: OCTOBER 2005DOWNER got them through Volcker's door. Using all the carefully crafted words of the Project Rose team, Lindberg and Stewart pressed their case - a case we now know is at odds with the evidence in AWB's own documents. They were duped, they told Volcker. "Self-evidently, AWB was part of an elaborate deception by the regime."

The force of their denials, implicitly endorsed by the Howard Government, swayed the old chairman a little. When his final report was published a few days later, he gave AWB the benefit of the doubt: it paid the kickbacks but might have done so unwittingly.

But Volcker did not let AWB off the hook entirely. Not everyone at AWB could claim to have been duped: "Numerous documentary and circumstantial warning signs placed at least some employees of AWB on notice that payments to Alia may have been illicitly funding the Iraqi regime."

Volcker's verdict was a huge public surprise. To this point, the scandal had had little play in the press. The news that an icon Australian company had been exposed as a major bankroller of Saddam's dictatorship seemed to come out of the blue. Howard had taken Australia to war to enforce UN resolutions against Iraq, yet his Government had overseen some of the most serious breaches of UN sanctions documented in Volcker's report.

For the first 48 hours the Government and AWB kept to the old script. The Prime Minister leapt once again to the company's defence. He had always found their managers to be a "very straight up and down group of people," he said. "And I can't, on my knowledge and understanding of the people involved, imagine for a moment that they would have knowingly been involved in anything improper."

But the enormity and credibility of the findings were too serious to be ignored. Under intense pressure from Volcker and Kofi Annan, Howard had little option but to agree to set up his own inquiry into the AWB scandal - almost six years after the kickback allegations were first brought to his Government's attention.

"I make no judgements to the contrary," he told Parliament. "But, given the seriousness of the issue, I believe that there should be an independent inquiry into whether there was any breach of Australian law by those Australian companies referred to in the Volcker report."

After four months of sittings involving squads of lawyers in front and behind the scenes; after hearing evidence from more than 40 witnesses including two ministers and the Prime Minister; after the unearthing of tens of thousands of documents from AWB, the UN, Alia and half a dozen government departments the Cole inquiry has established beyond doubt that AWB knew what it was doing when it paid those millions to that obscure trucking company: they were kickbacks to Saddam.

Ministers may be humiliated and wheat traders may go to prison. But the Cole inquiry has revealed more than a great corporate scandal; this is one of the most extraordinary failures of government in the nation's history.

For all the evidence to the Cole inquiry, see

www.ag.gov.au/agd/www/UNOilForFoodInquiry.nsf
 

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