3 Imposition of inland transportation fees and after-sales-service fees: Iraq documentation

3.1 In June 1999 the Government of Iraq imposed inland transport fees on humanitarian goods imported into Iraq. In August 2000 it imposed a tariff described as an 'after-sales-service' fee. Over time the inland transportation fee increased from US$12.00 to US$25.00 per metric tonne. For foodstuffs, the after-sales-service fee was 10 per cent of the contract value.

3.2 The decision to impose these fees and tariffs was deliberately made with the objective of circumventing UN Security Council Resolution 661 and subsequent resolutions that were designed to deprive Iraq of foreign currency. Provision of foreign currency to Iraq was prohibited by Resolution 661, paragraph 4.

3.3 To achieve its objective, the Government of Iraq required that monies paid for transportation fees and after-sales-service fees be paid in a foreign currency and be paid directly to Iraq through its embassies or into the government bank accounts in Baghdad or, where that was not possible, to front companies with which Iraq had made arrangements to receive the monies and remit them promptly to Government of Iraq bank accounts in Baghdad.

3.4 Both the documentation available post-March 2003 from Iraqi government sources and the course of events between June 1999 and March 2003 make it clear that Iraq would contract only with companies that agreed to pay the transportation charges and the after-sales-service fees. AWB was therefore confronted with the choice of not agreeing to pay the transportation and after-sales-service fees and potentially losing its Iraqi market or agreeing to pay the fees and retaining its market. It chose the latter course. In the case of Rhine Ruhr and Alkaloids of Australia, both companies were ultimately required to pay the after-sales-service fee. Both companies, however, utilised the services of overseas agents and it was the agents who handled the payment of the fee.

3.5 It is useful to record details of the Iraqi Government's decisions to impose the inland transportation fees and the after-sales-service fees.

Inland transportation fees

3.6 The Independent Inquiry Committee found:

On June 10, 1999 (Phase VI), the Iraqi Economic Affairs Committee issued a directive ordering ministries to impose non-negotiable 'transportation fees' on all goods requiring inland delivery by Iraqi trucks. This tariff was levied on all cargoes delivered to Umm Qasr and sometimes on cargoes shipped overland to Iraq. The Economic Affairs Committee set these fees depending on the kind of goods being transported, the form of packaging, the point of entry into Iraq, and the phase in which the contract was signed. The fees were payable to designated Iraqi entities and regime-controlled front companies. Although the Ministry of Transportation oversaw the collection of these funds, a fee schedule was circulated to all Iraqi ministries at the beginning of each phase.[124]

3.7 The finding quoted was based on interviews the Independent Inquiry Committee conducted with Iraqi officials and noted a letter dated 10 June 1999 ordering the imposition of transportation fees from Umm Qasr. The United Nations did not make available to this Inquiry that letter and the statements of interviews. The finding accords, however, with the evidence called before this Inquiry, that from June 1999 AWB was required to tender on the basis of payment of such a transportation fee, and all subsequent contracts required delivery of wheat 'FOT to silo at all Governorates of Iraq'. In fact, such inland transportation fees were paid by AWB in US dollars, euros or Deutschmarks and were paid indirectly to the Government of Iraq through Ronly Holdings Limited, shipping companies and Alia for Transportation and General Trade.

3.8 As noted in the Volcker report, and by AWB executives considering the required payment, the exporters were not required to make the payments from their own funds: the amount of the inland transport fee was added to the otherwise agreed contract price and included in the price in the contract submitted to the United Nations and paid from the escrow account. The financial disadvantage to exporters was one of timing because Iraq required payment of the transportation fee in advance of arrival of the goods.

The after-sales-service fee

3.9 On 3 August 2000, shortly after the start of phase VIII, Vice-President Ramadan issued a 'confidential and urgent' memorandum to all ministries. The subject was 'Achieving additional revenues for commercial contracts pertaining to the Memorandum of Understanding'.[125] (The Memorandum of Understanding, dated 20 May 1996, was that agreed between the United Nations and Iraq to implement Resolution 986.)

3.10 The Vice-President's memorandum of 3 August 2000 stated:

The issue of achieving additional revenues for commercial contracts pertaining to the MOU was discussed in a meeting held on 2/8/2000 by the Supreme Command Council, who oversee the execution of the Memorandum of Understanding, in an orderly fashion and in conformity with the Memorandum's mechanism. It has been decided to execute the following:

1. Gather all commercial contracts by content with the title:

'After Sales Services or any other suitable version that achieves the purpose and also based on the nature of the contract.'

2. The allocated percentages for bullet (1) above will be as follows:

a. 2-5% for food and medication (excluding medical tools and equipment)

b. 5-10% for everything but food and medication.

3. The designated minister and the head of the entity not related to a ministry are authorized to determine the rate amount in bullet (2) above, based on the nature of the materials that are under contract and at the highest rate whenever possible.

4. a. The Ministry of Transportation revisits the tariff for the currently adopted transportation fees, port and storage services aiming to increase it at a rate of no more than 80% of the adopted tariff in ports of neighboring countries.

b. The Ministry of Transportation raises the mentioned amendment bullet (a.) above to the financial committee to be endorsed and work accordingly.

5. All the increases mentioned in bullet (2) above that are generated from the after sales services as well as the increase resulting from amending the tariff for transportation costs, and port and storage services fees, are to be transferred to general treasury. [emphasis added]

6. Income generated from after sales services are to be handed over in cash inside Iraq, or to a banking entity determined by the Iraqi side according to pre-determined banking arrangements, in the case that handing over the money in cash inside Iraq fails.

7. The above mentioned procedure is to be applied to all commercial contracts that have not been signed in a final form yet and for all phases.

Please review and take the necessary action, confirming the execution of the mentioned process in an accurate and clear manner under the supervision of the delegated Minister.

Signed
Taha Yassin Ramadan
Vice President[126]

3.11 It is apparent from this document that Iraq intended to seek to obtain additional revenue in foreign currency both by increasing transportation charges and by imposing an after-sales-service fee. Such monies were to be transferred to the 'general treasury'. The monies were to be paid in cash in Iraq or, where that was not possible, through banking arrangements made by Iraq. The fee was to apply to all commercial contracts in all phases of the Oil-for-Food Programme.

3.12 Consistent with the desire for increased revenues, on 6 August 2000 the Council of Ministers Economic Affairs Committee, headed by Deputy Prime Minister Al-Azawi, issued a 'confidential and urgent' memorandum to all ministries (see Figure 3.1). The subject was 'Tariff for transporting MOU goods'.[127]

3.13 Two things are apparent from paragraph 3 of the memorandum. First, it was Iraqi instrumentalities that were providing services for the transport and port services. Second, the Iraqi Government recognised the need for 'front companies' in order to enable companies exporting to Iraq to make the payments.

3.14 The Iraqi objective of removing the sanctions by seeking to circumvent them was made clear in a 25 October 2000 memorandum sent to all ministries and signed by the head of the Secretariat of the Council of Ministers. The memorandum read:

The President and leader (may God protect him) has ordered the following during the 44th Council of Ministers' meeting held on 22/10/2000.

1. The final outcome with respect to the 10% of the value of contracts that are made with external entities is considered the minimum per contract, exclusive of transportation fees. Any percentage above that will be welcomed, as this is the way sanctions are lifted. For this reason we want to provoke them so that they are faced with two options: either accept reality or lift the sanctions. With regards to oil contracts, they will be discussed by the Financial Affairs Committee and a report will be developed.

Figure 3.1 Memorandum from Iraqi Deputy Prime Minister, 6 August 2000

Source: Ex 949, UNO.0001.0060.

2. The Memorandum of Understanding is in essence economic occupation. As long as it exists, it means that there is a form of control over the exports and over places where imports are stored. Therefore we must work towards the goal of destroying the Memorandum and liberating external trade by creating revenues outside of its framework that help achieve this goal, and we don't care whether or not the United States finds out about it.

3. Our enemy has implemented a policy to achieve its goals step by step until it has caused us extreme damage, without our finding any reason to engage in conflict with it at any particular step along the way. After this long experience, we should avenge the enemy over this matter step by step.

Please review … and take the necessary action.

With regards

Signed
Khalil Yassin Al-Ma'mouri
Head of the Secretariat of the Council of Ministers[128]

3.15 Addressing the manner in which the after-sales-service fee might be paid by exporters to Iraq, on 27 October 2000 Mr Saleh, the Minister of Trade, wrote a 'very confidential and private' memorandum to 'Member of the Revolutionary Command Council/Vice President Mr Taha Yasin Ramadan':

Subject: Incorporating contract amounts to After Sales Services

Our kindest regards

In reference to your letter number (M.T/1574) on 13/9/2000 regarding forming a committee, headed by a representative from this ministry and representative members of your office, the ministry of irrigation and the Central Bank of Iraq, to study the matter mentioned in paragraph (3) of your above-mentioned letter.

The committee's suggestions have been determined as follows:

Firstly: With regards to goods that are imported via Umm Qasr port, the involved sectors can add the percentage to the pre-determined transportation fees within the country and as a result collect the fees from contracts coming in via this port in combination with shipping fees by the State Company for Water Transport in collection of internal transportation fees, therefore there is no problem collecting this percentage of contracts that have been imported via Umm Qasr port.

…

Thirdly: With regards to the execution mechanism for the above, we suggest that Al-Rafidain Bank should be in charge of assigning one or more banks in Amman and in Beirut where accounts are to be opened with names and numbers to be determined by the contracting Iraqi side and Al-Rafidain bank whereby money collected from the agreed upon percentages and based on the agreement with Al-Rafidain Bank, is deposited.

Fourthly: The supplier issues the required bank guarantee required by the Iraqi importer within a period not exceeding 15 days from opening of L/C [letter of credit] by BNP, and the duration of the bank guarantee is over once the amount stated in the guarantee is paid to the account open in the name of the importing Iraqi side, and it is possible to divide the bank guarantee making it (assignable) to the contract based on the shipping schedule agreed upon with the supplier.

We kindly ask your review, and we suggest the circulation of the above to the sectors involved in the MoU for them [to] adopt ensuring the collection of the determined percentage.

Regards,

Signed
Muhammed Mahdi Salih
Ministry of Trade
27/10/2000[129]

3.16 This memorandum makes apparent that the transportation fee and the after-sales-service fee were to be recovered by the Iraqi State Company for Water Transport, using accounts with the Rafidain Bank in Amman, by having deposits made to accounts opened with that bank by the purchasing entity or by use of a bank guarantee.

3.17 On 6 November 2001, in a confidential and private memorandum headed 'the mechanism of receiving and transferring revenues from after sales services', the Minister of Finance and Vice President of the Council of Ministers, Hikmat Al-Ghazawi, advised all ministries:

To follow up on our letter no. 4165 dated 27/8/2000.

It has been decided to adopt the following mechanism instead of the mechanism stated in our mentioned letter as follows:

Based on the letter by the member of the Revolutionary Command Council and Vice President of the republic no. 1339 dated 3/8/2000, below is the mechanism of receiving and transferring revenues, which were included in the MOU trade contracts from the after sales services to the account of the General Treasury that has been set up for this purpose:

1. The information included in form (1) for the signed contracts for which L/C have been opened to the MOU account and form (2) for the signed and executed contracts with open L/Cs of which a copy of each is enclosed in a very precise manner assuming we receive it before the end of the first week of the following month to the intended month.

2. a. The Ministry of Transportation-the State Company for Water Transport is in charge of receiving the revenues from after sales services stated in paragraph (2) of the letter referred to above in addition to additional and original transportation fees from vessels upon their unloading for goods imported via Umm Qasr port and distributed to Ministries and entities unaffiliated with any ministry.

b. The Ministry of Transportation-the State Company for Water Transport transfers the revenues from the after sales services arriving to its account, to the accounts of Ministries and departments not affiliated with a Ministry, after the completion of the inspection and matching process and the confirmation of the inspection company (Cotecna).

3. The Ministry or department not affiliated with a Ministry receives the revenues from after sales services mentioned in paragraph (2) of the letter referred to above earned on goods arriving to the country from other points of entry besides Umm Qasr, in cash in foreign currency inside Iraq and if that fails, then it is received based on the following:

a. To be deposited into the Ministry's account or an entity not affiliated with a Ministry, at Al-Rafidain bank or one of the Jordanian Banks.

b. A deposit into the Al-Wasel & Babel in Dubai in the United Arab Emirates which will be opened for this purpose and we will inform you of the number later, and the supplier is to be informed of providing the bank where the mentioned company's account is open, with the contract number and date, supplier's name and L/C number at BNP upon depositing the money.

4. Every Ministry or entity not affiliated with a Ministry will conduct the following:

a. Deposit the amount they received within the country, for after sales services in foreign currency into our account at the main branch of Al-Rafidain (treasury account no. 620) immediately after receiving it, with a statement of the contract date and number, name of supplier and the BNP L/C number, and informing us once the deposit has been made, according to what is stated in form no. (2).

b. Transfer the revenues earned from after sales services in foreign currency registered in your account at Al-Rafidain bank in Amman or one of the Jordanian banks to our mentioned account in 3-a via Al-Rafidain Bank-Amman as an intermediate until we inform you of our account number at Al-Rafidain bank, ensuring the transfers match the stated amount in the corresponding field in form (2) mentioned in paragraph (1).

c. Al-Wasel & Babel will transfer the money deposited in its account that is open for this purpose, based on the agreement that will be made with it.

5. On the second week of the intended month, the Ministry of Finance will transfer the Ministry's share or the share of the entity not affiliated with a Ministry as well as the Ministry of Defense's share of revenues earned from after sales services.

6. Information related to this matter should be restricted to your office and someone should be appointed to coordinate with us on this matter. All correspondences should be handwritten.

Regards,

Signed

Hikmat Al-Ghazawi

Vice President of the Council of Ministers

Minister of Finance

5/11/2000[130]

3.18 This memorandum makes apparent the role of the Iraqi State Company for Water Transport in monitoring and receiving the foreign currencies through use of accounts opened by front companies at the Rafidain Bank in Jordan and the subsequent remission of the foreign currencies to the General Treasury.

3.19 On 11 November 2000 the account of the General Treasury, to which the funds deposited through front companies with the Rafidain Bank in Amman or other Jordanian banks were to be transferred, was emphasised and confirmed in a 'confidential and private' memorandum forwarded to all ministries and headed 'the mechanism of receiving and transferring revenues from after sales services' (see Figure 3.2).

3.20 On 21 December 2000, the Iraqi Minister of Trade wrote a memorandum marked 'very confidential' to the State Company for Water Transport. The memorandum was headed 'Jordanian companies commission for collecting transport fees under MOU'; it is reproduced as Figure 3.3.

3.21 The objective of this memorandum was to ensure the receipt of foreign currency within Iraq and to introduce measures to prevent such transfers of foreign currencies from the Rafidain Bank in Amman, after that bank had received monies from 'Jordanian front companies', being blocked before they could be transferred to the Iraqi State Company for Water Transport account at the Rafidain Bank in Baghdad.

3.22 The income Iraq received 'by MOU transport charge from Umm Qassir port' between 10 June 1999 and 31 December 2002 amounted to US$650,855,540.92, which was distributed principally between the Ministries of Transport, Trade and Finance (see Figure 3.4).[131]

Figure 3.2 Memorandum from Iraqi Minister of Finance, 11 November 2000

Source: Ex 949, UNO.0001.0033.

Figure 3.3 Memorandum from Iraqi Minister of Trade, 21 December 2000

Source: Ex 949, UNO.0001.0066.

Figure 3.4 Memorandum from Iraqi Minister of Transport, 11 March 2003

Source: Ex 949, UNO.0001.0089

Notes