Volcker Report

When the Volcker report hit headlines in October 2005, Wafers’ heart skipped a beat. 20 years ago, in April 1986, her dad had gone through similar pangs when the Bofors story broke out. She wasn’t too sure whether she understood Volcker just as her dad had understood precious little of Bofors. So, she decided to chat up with her friend China.
Wafers did some quick homework. She learnt that in 1990, following the Gulf War, the United Nations (UN) had imposed economic sanctions on Iraq. This had hurt the civilian population. The law of “unintended consequences” of which her professor had once explained had been at work! To mitigate the hardship, in 1995, the UN conceived the “Oil for Food Program” (OFFP). Under this program the UN allowed Iraq to sell its oil and use the revenues to buy relief supplies. The sale was to be at a UN decided “fair market price” and the proceeds were to be deposited to a UN-controlled escrow account from out of which relief supplies were to be bought. At no time did Saddam Hussein have access to these funds. In November 2003 the program was phased out.
China made a quite entry to the cafe. Sipping into her coffee, Wafers asked, “Did this scandal blow up on our face overnight?” The walking encyclopedia responded. “No. It is a two years old story. In early 2004, an Iraqi newspaper named UN officials, politicians and companies who may have profited from the illegal sale of Iraqi oil during the OFFP. It alleged that Saddam Hussein had embezzled millions of dollars through under-priced oil sales and over-priced purchases.” To Wafers, it rang a bell. Her auditing guru had talked about how one should scout for over-billing and under-invoicing while conducting management audits. Ha, a practical application indeed.
“Now if I have understood this right” said Wafers, “The Volcker committee was constituted by the UN itself and Paul A Volcker had impeccable credentials”. The captain at the table, overhearing the conversation said, “That’s right.” Wafers asked, “What were the principal findings?”
“Kofi Annan, Cotecna and Kojo Annan” remarked China. And then explained. “The UN Secretary General, Kofi Annan’s son, Kojo Annan, is a former employee of Cotecna, one of the companies that contracted with the OFFP. Cotecna’s contract with the UN, signed on December 31, 1998, enlisted the company in the authentication of imported humanitarian goods as part of the OFFP. Kojo was employed with Cotecna till 1998 i.e. before the contract was signed but was still being paid by Cotecna as a ‘consultant’ till 2004”. Wafers was aghast. “Don’t tell me that a contract cannot be awarded to a professional company because an employee happens to be dad’s son!” The captain smiled and said, “That’s the price you pay for being the son of an illustrious father.” China snorted, “Caesar’s wife should be above suspicion”.
Wafers wondered, “Did Volcker nail Kofi?” Reading her mind, China responded, “The Volcker committee investigated the possibility that Kojo Annan used his UN contacts to secure the award of the contract for Cotecna. But it did not find any evidence”.
“I guess the main plot is how Saddam Hussein, the butcher of Baghdad, had manipulated the OFFP” said Wafers. “Volcker reported that about 2,200 companies including 129 Indian companies had paid kickbacks to Saddam Hussein’s government, right?” she asked. “Yup” said China, a shade surprised that Wafers was also aware of life outside chartered accountancy! “But how did it work?” Wafers wondered aloud. It was her signal to others that they had better brief her.
A smiling China responded, “The Iraqi government handed over oil sale contracts to individuals, organizations and political parties considered to be ‘friends’ of Iraq; in particular, to permanent members of the Security Council who were in a position to ease sanctions”. The captain chipped in. “The oil allotments were made at UN approved prices to nominees of these political beneficiaries. Iraq negotiated with the nominees and asked them to pay a surcharge into bank accounts that were in the name of Iraq’s State Oil Marketing Organisation. The nominees then made their profits by selling the oil at market prices to oil companies. A part of the profits went to the beneficiary”.
China added, “In the case of imports, ‘after-sales service provisions’ and ‘inland transportation fees’ were incorporated in the invoices to inflate prices. This helped contractors to recover from the UN escrow account, amounts that they had paid to Iraq as kickbacks. The balance was pocketed by Saddam”. Wafers was beginning to get a sniff of the scandal.

“What about the Indian connection?” she asked. China explained, “Mr. Natwar Singh, the former foreign minister, the Congress party, Mr. Bhim Singh of the Panthers party and Reliance Petroleum have been named as non-contractual beneficiaries. Masefield AG, a Switzerland-based oil trading company, lifted the allocations made to the Congress and Natwar Singh. The intermediary nominee in this case allegedly was Andy Sehgal and his company Hamdan Exports”. Wafers interrupted; “but Andy has gone on record saying that he hasn’t “touched a barrel of oil in his life.” China winked, “Viola, you don’t have to touch a barrel to deal in one!” The captain said, “Bhim Singh did not lift the oil while the allotments to Reliance were lifted by Alcon Petroleum Ltd”. And then added, “The non-contractual beneficiaries have been so called because they have not actually traded in oil on their own.”

Wafers was ready to offer a judgment. She now felt that she had cracked the Volcker puzzle. Her judgment came courtesy a series of questions. “Why are we barking up the Congress and the politicians? Why have we spared the companies that were named? What is this nonsense about pocketing the difference between actual market price and fair market price? How can the fair market price be fair if it is below the actual market price? Is this not a commercial transaction where two parties have the right to decide on the terms of sale?”

“Finally, these allegations are based on the documents of the Iraq government that fell into the US hands after the Iraq invasion. There has been no corroborative evidence. A mere name in a document cannot be proof of wrong- doing. If that were so, then leading politicians named in the Jain diary (famous Jain hawala case) should be behind bars.
China smiled. “Wafers, there are some things that may look legally right but which are morally wrong.” The captain said, “It is time to pull down the shutters”. Wafers wondered, “On the Volcker scandal or the coffee shop”, as she walked out with China into the long night.