US case throws light on Saddam’s abuse of oil scheme

David Chalmers, owner of Bayoil, a Texan oil company, appeared in court in Houston in handcuffs on Thursday, having been arrested at home that morning.

With him was Ludmil Dionissiev, a Bulgarian resident in the US and employee of Bayoil, who was also charged in connection with alleged offences relating to the United Nations' oil-for-food programme in Iraq.

Michael Shelby, representing the US attorney's office, told the court both men were accused of “enriching themselves in a significant way to help this country's enemy”.

No pleas were taken. Lawyers for both men said later they intended to plead not guilty to charges including wire fraud and conducting prohibited transactions with Iraq.

“We will enter pleas of not guilty. . . . We will vigorously dispute the allegations of criminal conduct,” said Catherine Recker, an attorney for Mr Chalmers.

David Howard, representing Mr Dionissiev, said: “The complete absence of specifics in the government's indictment concerning Ludmil Dionissiev demonstrates that the government has seriously over-reached by charging him.”

If convicted, the men face maximum sentences of up to 62 years and the forfeiture of at least $100m in assets.

Bayoil's involvement in the oil-for-food programme, a humanitarian scheme to alleviate shortages caused by sanctions against Saddam Hussein, was first revealed last year in a joint investigation by the Financial Times and Il Sole 24 Ore, the Italian business daily.

But the indictments on Thursday yesterday by the US attorney for the southern district of New York mark a significant step in the criminal prosecution of the alleged corruption.

The US attorney alleges fraud and illegal transactions by Mr Chalmers, Mr Dionissiev and John Irving, a London-based oil trader. Mr Irving, a British citizen currently believed to be in England, faces extradition to the US. A separate charge issued on Thursday against Tongsun Park, a South Korean, focuses on Iraqi efforts to influence the initial design of the programme, possibly through the bribery of UN officials, to allow its later schemes to succeed.

The orginal aim of the oil- for-food programme was that all Iraqi oil receipts should be put in a UN escrow account, which would then be used to pay for food, medicine and other goods. But in practice Iraq controlled who won the oil contracts, and convinced the UN to allow it to sell oil at below market prices.

That created a significant profit margin for Iraq's chosen business partners, who sold the oil on to other traders.

In the early days of the programme the regime assigned contracts to people of political influence who benefited directly from the margin as part of its campaign to end sanctions.

From around the middle of 2000 the Iraqi government began to demand direct kickbacks for itself, in return for granting the contracts.

In one example, the US attorney alleges that Mr Chalmers' network sent large amounts of money to the Iraqi government through Al Wasel and Babel, a front company based in the United Arab Emirates.

The indictment says that in August 2001 Bayoil sent $1.3m to a bank account controlled by a representative of a “foreign company”. The “foreign company” then wired $1.1m to Al Wasel and Babel.

The indictment also says Mr Chalmers' network even helped to design the scheme, by advising the Iraqi government how to sell its oil below market price.

It alleges that in December 2000 Mr Chalmers “sent a letter to officials of the government of Iraq in which [he] proposed a pricing mechanism that could be used to seek a lower price for Iraqi oil”.

The southern district says that Mr Chalmers and his companies “used interstate and foreign wires to supply United Nations oil overseers [who set the price] with fraudulent information regarding the high costs of doing business under the oil-for-food programme”.

David Kelley, US attorney for the southern district of New York, said the charges amounted to “two more pieces in the oil-for-food puzzle”. John Klochan, an acting assistant director of the FBI, said that allowing Iraq to have such influence over the programme amounted to “the fox guarding the henhouse”, and described the conduct of the Bayoil defendants as “unconscionable”.

“They didn't merely participate in the scheme, they helped further it,” he said.

Earlier this year the UN-appointed commission of inquiry led by Paul Volcker found that Benon Sevan, the UN official in charge of the oil-for-food programme, had placed himself in an irreconcilable conflict of interest in helping to steer Iraqi oil contracts. A second report said there was no evidence that Kofi Annan, UN secretary-general, had steered a contract to Cotecna, a company that employed his son, but it left many questions open about their relationship.

Additional reporting by Sheila McNulty in Houston