To BHP, the Oil-for-Food program meant access to oilfields in return for wheat

The UN sanctions busting by large Australian corporations just keeps getting curioser and curioser.

But before we get to the latest, let's put this in some kind of historical context. Jeremy Scahill is an investigative journalist who tells the story this way:

"You have to go back some 20-plus years, to a time when Ronald Reagan was president and the Iran-Iraq war was escalating dramatically. The United States was giving aid and weapons to both Iran and Iraq with the understanding, as Henry Kissinger put it, “that it’s best to let them kill each other off,” and, “oil is too valuable a commodity to be left in the hands of the Arabs.”

The Islamic revolution in Iran in 1979 shook the foundations of power in Washington so the United States began actively backing Iraq. In 1982, Ronald Regan moved to take Iraq off the list of nations that sponsored terrorism. That allowed a floodgate of U.S. “aid” to go into Iraq. The Reagan administration was actively encouraging manufacturers to sell to Iraq and Saddam Hussein was aggressively buying everything he could get his hands on from the United States. That included the sale of helicopters that had been “demilitarized.”

Ronald Reagan dispatched his special envoy to Iraq with a hand-written letter from Reagan to be given to Saddam Hussein, with a clear message that what Washington wanted was to restore normal relations. They had been severed in 1967 during the Arab-Israeli War. Iraq broke them off in protest of U.S. policy.

So when this envoy arrived in Baghdad, not only did he have a hand-written letter, but he also gave Saddam Hussein a pair of golden cowboy spurs, as a present from Ronald Reagan. He shook Saddam’s hand, called him “Mr. President,” and had a meeting that the Iraqi foreign ministry described at the time as being about “topics of mutual interest.” That envoy, who began the process of restoring relations between Washington and Iraq, a man who stood with Saddam Hussein in 1983, was Donald Rumsfeld, the current U.S. Defense Secretary. Rumsfeld was in Iraq as the U.S. was aggressively selling to Iraq, and just a short time after that visit, some allegations started to emerge about Iraq’s use and possession of chemical weapons.

On March 5, 1984 (Rumsfeld’s visit was in 1983), the U.S. State Department issued a public alert, saying that it had evidence that Iraq was using chemical weapons against Iranian solders. A couple weeks after that report came out, Rumsfeld was back in Baghdad, meeting with Tariq Aziz, then Iraqi Foreign Minister. The day that Rumsfeld arrived in Baghdad, the United Nations issued a report saying that a team of UN scientists on the ground in the front lines of the Iran-Iraq war had determined that chemical weapons had been used multiple times against Iranian solders. Donald Rumsfeld was in Baghdad when the United Nations had said yes, we have proof from our scientists that chemical weapons had been used against Iran and Rumsfeld said nothing. He was in the prime position to address the alleged Iraqi threat when it first emerged.

According to an article in Covert Action Quarterly a number of years ago, the U.S. government provided the elements for Saddam’s chemical weapons through the U.S. Agricultural Department.

Not only that, it was at a time when the Reagan administration was faced with the prospect that the American economy was in trouble and so he viewed the wealthy economy of Iraq as an open market for U.S. corporations. It wasn’t so much a covert thing, there were companies in Maryland selling components that were used to make chemical weapons. It wasn’t just the United States. It was German, French, and British companies—all of the major western powers in Europe and the Western hemisphere were bolstering Saddam Hussein’s military capacity.

Western so-called democracies were major supporters of Saddam Hussein’s chemical weapons program. You can also find receipts on the Internet from U.S. companies that sold these chemical components to Iraq.

The whole story of U.S. sales to Iraq was openly talked about under the Reagan administration and at the beginning of Bush, the Elder’s administration. It wasn’t something that Washington was ashamed of. Remember, Saddam Hussein was considered an SOB, but he was considered Washington’s SOB."

Then, after so much fawning from the West and to divert attention from a less than glorious confrontation with Iran, Saddam decided he could annex the Kuwait oil fields, and invaded Kuwait in 1991. United in popular international opposition, the UN backed the Dessert Storm war, led by "Bush, the Elder", who had the good sense to realize, while he had Saddam on the run, he would nevertheless be biting off more than he could chew if he finished him off by occupying Iraq. As part of the punishment for that little escapade, Saddam was left in charge of Iraq, but made subject to certain trade embargoes as part of the settlement of Dessert Storm success. When it became apparent that Saddam was using the embargo as cover to further distress elements of his population unpopular to him, the UN opened the door just a little to allow in "humanitarian aid" while keeping up its sanctions against other forms of trade with Iraq. This was all way back a decade or so ago, and long before bin Laden was on the radar screen and certainly before Australia and the US and Britain decided to invade - and occupy - Iraq.

The purpose of this background is to put in context the trade in wheat with Iraq. The then government-owned AWB was allowed to trade with Iraq as a supplier of wheat on the basis of humanitarian aid. BHP, the "Big Australian" as it was then known in those pre-Billiton days, was clearly not allowed to trade with Iraq for its oil.

But BHP dearly wanted to entreat with Iraq for access to its huge pool of oil reserves. The Herald reports,

"AUSTRALIA'S leading company, BHP-Billiton, won new oil deals in Iraq after the fall of Saddam Hussein by using agents who were deeply involved in the UN oil-for-food scandal, documents released by the Cole inquiry revealed yesterday.

The documents show extraordinary efforts by BHP to secure access to Iraq's oilfields over 10 years. These included building close relationships with officials from Saddam Hussein's regime; making huge wheat shipments to Iraq using AWB; and lobbying the Howard Government to end economic sanctions against Iraq.

A revealing internal BHP email written soon after John Howard's election as Prime Minister in 1996 calls on company executives to tell Saddam's top ministers that "BHP works with the full knowledge and support of the Australian Government and its agencies" and the Government was "open" to supporting Iraq. It also advised that BHP was working to "influence the Australian Government to moderate its position" on Iraq including "to assist Iraq's re-entry to the international community".

At the time, BHP was attempting to ship 100,000 tonnes of wheat to Iraq through AWB to help secure access to oilfields."

BHP, being the behemoth beaucracy that a large, Melbournian corporation tends to be, had several ways of looking at the Iraq situation. As about the largest company in Australia, the Big Australian had to keep up the appearance of the good Australian corporate citizen. It seems, reading into the story as it is developing in the papers, that the concerns of that were primarily with the board, but also felt in the corporate development department, but the petroleum and energy departments, were more focused on the product and less on the character. In the Business Section of the Herald we read,

"WITH BHP Billiton's reputation at stake, top executives began testifying at the Cole inquiry yesterday, giving fascinating insight into the company's overseas oil dealings. Energy president Phil Aiken and corporate development president Tom Harley were the first of five current and former BHP employees to face questioning over their business in Iraq.

When BHP began its first dealings with Iraq in 1995, gaining access to the 3 billion barrel Halfayah oilfield in Southern Iraq could have tripled BHP's oil reserves overnight.

So shipping a $US5 million donation of wheat to Iraq in return for "goodwill", was considered a drop in the bucket.

BHP knew any deal with Saddam Hussein's regime would be politically sensitive and might not be seen positively from the public's point of view. There were UN sanctions against Iraq that needed to be lifted before BHP could develop Halfayah. Nevertheless, BHP's plan to secure first rights on Halfayah was discussed at the organisation's highest levels.

After hearing of the petroleum division's plan, BHP's chief executive at the time, John Prescott, voiced an "undefined" objection to giving aid to Iraq.

In a memo, Mr Harley noted one possible objection was that payment for "goodwill" could be akin to some sort of bribe. "If his objection is that it is a bribe then I think there are some good arguments that can be mounted that it is an ethically justifiable payment, albeit unusual," Mr Harley wrote.

The topic of Iraq was so sensitive that even in internal memos, Iraq was comically rebadged as "Italy" while the Australian Wheat Board - BHP's ally in the $US5 million wheat shipment - became the "Austrian Egg Board" and oil was referred to as "wax".

BHP wanted to give the wheat to Iraq as a letter of credit with the understanding that the amount would be repaid - with interest - five years later.

After learning that would bust UN sanctions, some BHP executives seem to have been reassured that the wheat was shipped as an outright donation.

Mr Harley yesterday insisted he thought it was a legal donation, but it seems others, including his boss at the time, Norman Davidson Kelly, believed it was a loan. There doesn't appear to have been a written contract with the Iraqis."

So, at the highest levels within BHP, there was, and is, confusion whether BHP gave wheat to Iraq to get access to its oil fields, or whether it merely loaned the wheat for access, in either event a ruse intended solely for mercenary purposes to gain access to the oil. David Marr spotlights the contradictions this way in the Herald:

"TOM HARLEY slipped into the witness box like a grey schoolboy taking his seat in class. Neat and willing, he took the oath in an accent best described as Melbourne Oxbridge, each syllable distinct: "I swear by almighty God … "

After all this time spent grilling AWB executives, weeks after the inquiry's terms of reference were widened to encompass the shabby Tigris affair, BHP's time at the Cole inquiry had finally come. Alas, these Big Australian executives proved not to have memories to match.

Harley, a legendary backroom operator at BHP and in the Liberal Party, handed over one of the fattest statements to date, but he answered the first question put to him in the box with those old, familiar words: "I don't recall."

His problem is this: he was around in the mid-1990s when BHP sent a shipload of wheat to Iraq to try to curry favour with Saddam Hussein's regime. The new Howard Government regarded any attempt to sell the wheat on credit as sanctions-busting. So $5 million worth of grain went off disguised as a gift.

While Harley needs to convince the Cole inquiry he never noticed the ceaseless manoeuvring that followed to have the deal badged as a sale - "I always thought it was intended to be a gift" - Phil Aiken, the heavyset BHP Billiton boss who followed him in the witness box, has to convince the commissioner of the opposite: that he never knew this was anything but a commercial deal. Hopeless, but commercial.

So two men from the same company, on the same afternoon, represented by the same lawyers, before the same inquiry, find their reputations in the commercial world now depend on Terence Cole believing they've been sincerely, absolutely and in complete ignorance at odds with each other over this deal for a decade.

Alice hardly watched anything stranger underground."

The Australian Financial Review has also been following and reporting on the Cole inquiry. It has hardly been more sarcastic than its reporting of the BHP involvement. In today's story, Wheat bribes put Italian egg on BHP's face (subscription required), it says,

"BHP was warned by a senior executive more than a decade ago that its plan to send $US5 million of wheat to Iraq in 1996 - in an attempt to gain oil rights - could be viewed as a bribe, commercially damaging and a breach of United Nations sanctions.

Evidence tendered at the Cole inquiry into the oil-for-food scandal yesterday showed that a series of internal BHP memos from late 1995, before the wheat shipment was sent, discussed the propriety of the deal, which was seen as trading with the despotic regime of Saddam Hussein.

The internal memos showed how finely attuned the mining giant was to the sensitivity of the deal, referring to the shipment as Project Italy. BHP used Italy as a codename for Iraq and the Austrian Egg Board was substituted for references to AWB.

To further obscure the parties, the documents referred to oil as wax, the UN as the League of Nations and the Gulf War as the Punic Wars.

The inquiry has previously heard that BHP, before its merger with Billiton, had received government approval for the $US5 million transaction on the basis the wheat shipment - bought from AWB - was a gift. It had later moved to turn it into a loan despite several warnings from the Department of Foreign Affairs and Trade that debt arrangements with Iraq would breach United Nations sanctions. The evidence showed BHP had wanted Iraq to pay for the wheat shipment under a five-year letter of credit where the debt would be calculated at 10 per cent compound interest.

The inquiry has previously heard that the shipment was considered a loan in subsequent dealings by BHP and the rights to that debt were assigned to a company founded by former BHP executive Norman Davidson Kelly called Tigris Petroleum in 2000.

Evidence has since shown AWB and Tigris contracted in 2002-03 to recoup the debt, by then $US8million, by inflating wheat contracts under the oil-for-food program. BHP Billiton head of corporate development Tom Harley produced a memo yesterday from October 16, 1995, that revealed the company's early concerns about the wheat shipment. Mr Harley wrote the memo to then head of petroleum John O'Connor, which outlined the concerns from its government and external-relations department.

"There may be a perception that this deal is uncommercial and is seeking favours [from the Iraqi government] by way of what, at worst, could be characterised as a bribe," the memo said. "We would be seen to be dealing with a fundamentally corrupt regime in breach of the spirit of the LON (code for United Nations) sanctions."

A handwritten note from BHP's then managing director, John Prescott, on the memo shows that he gave his approval for the shipment to proceed but said it would need DFAT and UN sanctions committee approval.

Mr Harley's diary notes from late 1995 also showed that phone conversations with DFAT's former Middle East director, Bob Bowker, and another DFAT officer, John Feakes, confirmed that the shipment had to be a gift in order for it to be approved by the UN sanctions committee.

Mr Harley, who gave evidence yesterday, said that after those phone conversations he told Mr O'Connor of DFAT's position and that Mr O'Connor was willing for the wheat shipment to proceed as a gift.

However, the inquiry was shown an email on June 6, 1996, from former BHP Middle East manager Peter Worthington to several executives, including Mr Harley, which refers to the wheat shipment as a loan. The inquiry heard for the first time yesterday that BHP was seeking to send further wheat shipments to Iraq at the time and that it was seeking to gain rights to Iraq's lucrative Halfaya oilfield and had estimated a windfall of some $500 million from such a deal.

A ministerial submission by former DFAT assistant secretary for the Middle East, Mark Pierce, to Foreign Minister Alexander Downer and then Trade Minister Tim Fischer on May 7, 1996, revealed BHP wanted approval to buy a further two shipments of wheat and have them paid for against a letter of credit.

In the ministerial submission, Mr Pierce wrote: "BHP does not want to offer the wheat as a gift partly because some officers in BHP hold up hopes that the Iraqis will eventually pay for the shipments (in cash, assets, in kind or goodwill), perhaps also because - so we are told - the BHP board would not approach further exposure to Iraq without some at least notional cover."

The submission showed the ministers backed DFAT in advising against the letter-of-credit transaction, and 20 days later Mr Pierce would write a formal letter to Mr Harley confirming that the original $US5million shipment sent in January 1996 could not be reformulated into a loan.

Mr Harley told the inquiry yesterday he had always understood the shipment to be a gift and could offer little explanation for several references to it as a loan in documents between the company's staff.

The inquiry also heard from BHP Billiton head of energy Phil Aiken who assigned the debt to Tigris in 2000. Mr Aiken said he had never been told the transaction had to be a gift, and after consultation with then legal counsel Jim Lyons, he assigned the debt to Tigris, believing it was unlikely to be recovered.

The inquiry heard BHP had retained a 25 per cent interest in the debt. Mr Aiken said the company never claimed any benefit from the $US7 million, which was eventually recouped by Tigris."

Neil Chenowith wrote a commentary in the AFR today entitled, "Bad taste Iraq memo pasta joke", but I can't cite to it as it doesn't seem to come up in the online edition. I'll try to put my fingers to work on transcribing it, and apologise in advance for tpoes:

"It was a moving moment at the Cole inquiry yesterday when BHP Billiton's head of corporate development, Tom Harley, detailed the Big Ex-Australian's concerns for the starving millions in Italy.

A fifth of the Italian population was 'at severe risk due to food shortages' while 30 per cent of Italian children under the age of five showed severe signs of malnutrition, BHP executive Norman Davidson Kelly told his boss John O'Conner in a 1995 memo produced by Harley.

'There is little doubt that the populatio of Italy is being starved as a result of the use of sanctions as a political weapon against the current regime,' Davidson Kelly wrote.

Humanitarian concern is a wondrous thing, and it is never quite so wondrouos as when a big corporation puts its hand in its pocket to help the hungry.

That's what Project Italy was all about, Mr Harley told the inquiry, despite concerns he raised in a memo the same day, October 16, 1995. that buying wheat for Italy might be seen as uncommercial. Even as a bribe.

You can see why codenames were needed. BHP's philanthropic gesture in sending $US5 million in wheat aid to Iraq might be misinterpreted.

Naturally Harley preferred to talk about bribing the Italian government. It was always clear to Harley, a Melbourne corporate blueblood who was a leading member of the AIN consortium of investors bidding for Fairfax in 1991, that the shipload of wheat to Iraq in January 1996 was a gift for humanitarian reasons.

He did not know how subsequent references to the deal by subordinates persisted in calling the gift a five-year loan, he said.

But BHP gave credit where credit was due. So when Davidson Kelly left the group in 2000, his company Tigris ended up with 80 percent of the credit for the Iraq wheat shipment, which was now referred to as a receivable.

In 2003, he and AWB Ltd reached an agreement to help [sic] Iraq pay back the receivable, which had now grown to $US8 million, by inflating food for oil contracts.

To be clear here, Iraq had a fixed amount of money through the UN with which to buy food. Diverting some of that food money to pay back the BHP wheat shipment via AWB's trucking fees meant there would be even less food to go around.

This spendid piece of humanitarian concern actually seemed to end up with the starving Italians having even less food.

It wasn't all bad news. By 2004 BHP had relinquished any interest in the money, so the original humanitarian, Davidson Kelly, ended up with the $US8 million, less the $US500,000 commission to the good samaritans at AWB."