Chalabi Raid Complicates Oil-For-Food Probe

Matthew Swibel, 05.20.04, 9:15 PM ET

WASHINGTON, D.C. - While the Iraqi prisoner abuse scandal rages, yet another controversy is gathering steam, involving top U.S. accounting firms, powerful K Street lobbying firms and international oil companies widely held by institutional and individual investors.

Senior congressional staffers, policy analysts and lobbyists are all pointing to mounting evidence that "utter chaos is reigning" in Baghdad over investigations into the Iraq oil-for-food program scandal, especially in the wake of today's raid by Iraqi police and U.S. forces on the home of Iraqi Governing Council member Ahmad al-Chalabi.

The purpose of the raid was not disclosed, but Chalabi himself later told reporters that among the items seized were files related to the oil-for-food program, which he and the council have been probing.

During the program established by the United Nations Security Council in 1995, the U.N. reportedly oversaw a flow of funds totaling $15 billion a year. Revenues were held in an escrow account run by BNP Paribas for the U.N. The oil-for-food program became a lucrative source of contracts for Russian and French oil companies, including Lukoil and Total (nyse: TOT - news - people ), according to congressional testimony by Nile Gardiner of the Heritage Foundation. The U.N. itself collected a 2.2% commission on every barrel of Iraqi oil sold, generating more than $1 billion in revenue. The U.S. Congress' General Accounting Office estimates that Saddam Hussein's regime siphoned off $10 billion while the U.N. oversaw the program.

The raid on Chalabi's home--characterized by the White House as resulting from an Iraqi-led investigation--may frustrate the ability of private accounting firm KPMG to complete a comprehensive audit into the oil-for-food program, which generated $67 billion in revenue for Iraq between 1997 and 2002, according to the Heritage Foundation. KPMG began investigating in February 2004 on behalf of the Iraqi Ministry of Oil, the Central Bank of Iraq, the Finance and the Trade Ministry and the State Oil Marketing Association.

Over the last several weeks, however, a growing feud has erupted between Chalabi and the rest of the Governing Council, and L. Paul Bremer, Iraq's U.S. civilian administrator, over Bremer's recent selection of Ernst & Young to begin a separate investigation on behalf of Bremer's Coalition Provisional Authority (CPA). A key difference between the contracts: The KPMG contract includes the recovery of the assets, while Ernst & Young's contract calls for recommendations on how the monies are to be recovered.

The stunning reversal of fortune for KPMG and Chalabi comes less than a month after Iraqi Governing Council consultant Claude Hanes-Drielsma told a U.S. House of Representatives subcommittee the "the CPA said that the process run by the IGC...would indeed stand."

Meanwhile, former U.S. Federal Reserve Chairman Paul Volcker, appointed last month by U.N. Secretary General Kofi Annan to lead yet another inquiry, is pressing forward with his own investigation. Some say Annan must bear ultimate responsibility for the program's massive failings. "I think our investigation is the central, authoritative investigation," Volcker said at a press conference today. "I would like to think it's understood quite generally."

Far from it. Volcker lacks the necessary power to subpoena witnesses in an investigation, according to sources on Capitol Hill, policy experts and lobbyists. And despite today's raid, the Iraqi Governing Council doesn't appear to be giving up its fight for control over the oil-for-food audit. The council's finance committee is working with Patton Boggs, a well-connected Washington, D.C., law firm, to help it navigate the political system.

The U.S. Congress may want to conduct its own investigation, says the Middle East Media Research Institute and at least one senior congressional aide. Some observers have speculated that the Senate Foreign Relations Committee may already by preparing to organize such an independent query. It is unclear, however, whether any congressional investigation would have the authority to compel testimony from United Nations staffers involved with oversight of the oil-for-food program.

It is possible that separate oil-for-food inquiries by the U.N., the CPA and the IGC could proceed separately. "One would not cancel out another," says a source close to the matter. "However, a coordination of efforts beginning with a conference involving reps from each would avoid a wasteful and redundant and inefficient three-ring circus approach. The recovery of this money is something that has to transcend all this political [nonsense]."