US embassy cable - 04AMMAN6691

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 006691 
 
SIPDIS 
 
E.O. 12958: DECL: 08/08/2014 
TAGS: EFIN, PREL, JO, IZ, UN 
SUBJECT: OIL-FOR-FOOD VIOLATIONS 
 
Classified By: Charge d'Affaires David Hale for reason 1.5 (b) 
 
1. (C) SUMMARY: A recent visit by HIRC STAFFDEL Scharfen may 
have uncovered hard, documentary evidence of involvement of 
some Jordanian banks in facilitating the payment of kickbacks 
during the closing years of the Oil-for-Food (OFF) program. 
This evidence, if verified, would still leave some doubt as 
to whether the involvement was witting on the part of the 
banks, and more doubt as to whether the Central Bank of 
Jordan should reasonably have been expected to detect the 
banks, involvement in exercising its supervisory authority. 
Nonetheless, proof of Jordanian banks' involvement in OFF 
abuses could hurt the justifiable reputation Jordan has 
gained as a key ally of the U.S. in dealing with Iraq.  We 
will seek clarification from government and Central Bank 
officials.  Action request paragraph 13.  END SUMMARY. 
 
2. (C) On July 26, 2004, STAFFDEL Scharfen met with 
interlocutors whose remarks form the basis for the following 
composite description of possibly provable activity by 
Jordanian banks in facilitating Oil-for-Food violations.  The 
STAFFDEL met with three officials from the Central Bank of 
Jordan, Deputy Governors Mohammed Said Shahin and Faris 
Sharaf and legal advisor Moosa Alaraj.  It later met with 
Hassan Abadhar, Jordan country manager for Rafidain Bank, and 
Nasim Abdulwahab, a senior branch employee.  The STAFFDEL,s 
final meeting in Amman was with Fallah Al-Khawaja, Commercial 
Manager at the Iraqi Ministry of Oil since February 2000. 
 
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"KICKBACK GUARANTEES" 
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3. (C) According to Khawaja, Saddam Hussein began requiring 
kickbacks in August 2000, after previous, cruder, 
sanctions-dodging schemes of the regime had been blocked.  He 
initially wanted the kickbacks - the required value of which 
would be set by Saddam as a percentage of the total value of 
the contract being awarded by the regime - to be paid up 
front.  However, the rejection rate of the UN 661 Committee, 
which had to approve all contracts signed between potential 
OFF suppliers and the Saddam regime, was high enough that few 
companies could afford to take the risk of paying a kickback 
up front on a contract that might be blocked. 
 
4. (C) For this reason, Saddam began instead to demand that 
potential suppliers submit a bank guarantee promising that 
the kickback would be paid.  (NOTE: Saddam would sometimes 
waive this requirement for certain favored companies and 
countries.)  The fact that banks were to guarantee kickbacks 
was never explicitly stated; instead, potential OFF suppliers 
would send letters to bank branches explaining that the terms 
of the contracts with the Iraqi ministries with which the 
suppliers were dealing required a "performance guarantee" or 
an "after-sales service" guarantee.  The banks would then 
issue a guarantee of the OFF supplier,s ability to pay the 
stated penalty for the supplier,s non-performance, which 
would usually be expressed as a percentage of the contract in 
question. 
 
5. (C) According to Khawaja, Saddam required that all bank 
guarantees (for at least those contracts relating to supplies 
for the Ministry of Oil) go to the Rafidain branches in 
Jordan and Lebanon, which in turn were only allowed to accept 
guarantees from banks registered in those countries on behalf 
of the potential OFF suppliers.  This meant that when 
guarantees were issued by banks outside of Jordan and 
Lebanon, they would have to be issued to local Jordanian and 
Lebanese banks.  These local banks would in turn issue bank 
guarantees to the Rafidain branch. 
 
6. (C) According to Abdulwahab (strictly protect), when the 
Rafidain branch in Jordan received OFF-related bank 
guarantees, it was standard operating procedure to keep the 
guarantees on file until getting word from the Central Bank 
of Iraq (CBI) that the contract had been completed.  If the 
contract was approved by the 661 Committee, BNP Paribas 
(which issued all letters of credit on 661-approved OFF 
contracts) would send a letter of credit to the CBI.  The CBI 
would then inform Rafidain, which would order the local 
Rafidain branch to cancel the bank guarantee.  If, however, 
the contract were blocked, the local Rafidain branch would 
debit the account of the bank guaranteeing the transaction. 
 
7. (C) In this way, the "661 disapproval risk" was passed on 
from the suppliers to the local Jordanian and Lebanese banks 
issuing the guarantees.  Khawaja speculates that the local 
banks covered themselves by demanding that suppliers pay a 
large percentage of the guaranteed amount (presumably a 
substantially larger percentage than the percent of risk that 
the suppliers' OFF contracts would be blocked) as a service 
fee for the issuance of the guarantee - in essence, providing 
"kickback insurance."  He further speculates that the 
dynamics of insuring a transaction that was by its nature 
illegal probably would have meant that these transactions 
were quite lucrative for the banks involved. 
 
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EVIDENCE? 
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8. (C) Aside from the verbal attestations of Khawaja and 
Abdulwahab, the STAFFDEL obtained a photocopy of an actual 
outstanding bank guarantee from a Jordanian bank to the 
Rafidain Bank.  It promised to act as surety for an OFF 
supplier,s ability to pay a certain sum that had been 
previously agreed upon between that supplier and the 
government of Iraq as a performance guarantee.  The 
guarantee, like many others, had been issued prior to the 
war.  With the end of the war, however, the guaranteeing 
banks had abandoned their role.  Although the letter of 
credit was never paid out, the guaranteeing banks had already 
zeroed out their Rafidain accounts and could refuse to pay; 
Rafidain would have little recourse in collecting. 
 
9. (C) This bank guarantee is potentially a conclusive proof 
of some Jordanian banks, involvement in funneling money to 
Iraq, if a statement by Khawaja proves to be true.  According 
to Khawaja, there was no such thing as a "performance clause" 
or an "after-sales service" clause in an OFF contract.  The 
contracting officials in the Ministry of Oil pushed 
repeatedly to include clauses guaranteeing performance (i.e., 
requiring payment in the event of non-performance), since OFF 
suppliers - with whom Saddam and his sons required that they 
deal - were sending them faulty equipment for whose 
performance Saddam would hold them to account.  However, the 
contracting officials were unable to do this because the MOU 
governing the OFF program protected supppliers by ruling out 
such guarantees. 
 
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COMMENT: JORDAN,S POTENTIAL CULPABILITY 
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10. (C) If performance clauses were not allowed in OFF 
contracts, Jordanian banks face a difficult situation.  The 
banks can claim to have issued guarantee letters on the basis 
of false information they received (i.e., that the companies 
needed the guarantees to fulfill a "performance clause" in 
their contracts), and to have had no way of knowing what 
exactly (i.e., the 661 Committee's blocking of a contract 
rather than a true performance issue) would trigger a 
deduction from their Rafidain accounts.  But if the banks 
really did not know from the beginning that all blocked 
contracts triggered drawdowns on their Rafidain accounts, why 
had they never done an analysis on this major drain on bank 
finances?  The confidentiality clause of Jordan,s Banking 
Law prohibits (with limited exceptions) revelation of further 
information that could confirm Jordanian banks, active 
knowledge of their role in facilitating OFF violations. 
However, a solid piece of evidence that violations were being 
facilitated - whether knowingly or unknowingly - would seem 
likely to lead to substantial pressure on Jordan to waive the 
clause and allow further investigation. 
 
11. (C) The CBJ could more plausibly have been unaware of the 
"kickback guarantees" flowing through Jordan,s banking 
system - but its failure to detect traces of such a 
potentially large money-laundering scheme would diminish 
confidence in the CBJ,s competence to handle its regulatory 
functions.  Both the CBJ regulators auditing Rafidain and 
those auditing the other Jordanian banks would presumably 
have no reason to know that the Jordanian banks' accounts at 
Rafidain were being drawn down for any reason other than a 
performance issue on the part of a supplier (coupled with a 
failure by the supplier to pay the GOI the contractually 
obligated amount) as stated in the guarantee letter issued to 
Rafidain. 
 
12. In the immediate prewar period, the CBJ froze many 
accounts associated with the Iraqi regime, accounts totalling 
$620 million.  $250 million of those accounts have already 
been transferred to the DFI, with more transfers expected 
shortly.  Nevertheless, in the matter of OFF violations, the 
CBJ has left itself open for criticism by the strong 
rhetorical stance it has taken in denying any role by 
Jordanian banks in OFF violations.  CBJ Deputy Governor 
Mohammed Said Shahin, for instance, told STAFFDEL Scharfen 
that the banks "knew better than to be involved in anything 
like this.  If they had, we would have strung them up!" 
 
13. ACTION REQUEST: Embassy will be seeking further 
clarification from GOJ and CBJ officials on these matters. 
To aid in this search, Embassy requests assistance from 
Department and USUN in verifying Khawaja's allegation that 
OFF contracts were exempted from all performance guarantees. 
HALE