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Billions in War Reparations
By STEVE STECKLOW
and ALIX M. FREEDMAN
Staff Reporters of THE WALL STREET JOURNAL
As a punishment for its 1990 invasion of Kuwait, Iraq has been required to pay reparations to companies and individuals damaged during the Persian Gulf War. More than two million war-related claims, totaling more than $300 billion, were submitted to the United Nations, which supervises the program. The claims cite losses ranging from ruined oil equipment to lost jobs to canceled deals.
But in the past four years, some 185 companies have quietly dropped a total of $2.9 billion in claims, according to U.N. records. These companies, including giant multinationals such as DaimlerChrysler AG and GlaxoSmithKline PLC, have effectively walked away from millions of dollars in cash that is rightfully owed them by the Iraqi government.
The reason: A combination of Iraqi pressure and the companies' desire to do business with the oil-rich nation in the future. A close examination of the reparations program shows that Saddam Hussein's regime -- with the complicity of major corporations and some governments -- has repeatedly subverted the international goal of forcing Iraq to take responsibility for the losses it inflicted.
Baghdad has been able to do this in part because the U.N. has granted it tremendous influence in awarding lucrative contracts to rebuild Iraq's devastated infrastructure and to supply aid to the Iraqi people. These contracts are part of the U.N.'s "oil-for-food" program, under which Iraq is allowed to sell its oil, provided it uses the proceeds for humanitarian assistance and reparations. When Iraq discovered in 1998 that many of the companies bidding for aid contracts also had filed war-related damage claims, it began telling them that dropping claims was a precondition for winning aid contracts.
"We wish to draw your attention to the fact that your firm has presented a claim to the U.N.," begins a letter from Iraq's Ministry of Health to a Danish medical-supply company that was reviewed by The Wall Street Journal. "You are kindly requested to withdraw your claim ... otherwise we will stop dealing with your firm forever." The company dropped its claim.
The Iraqi regime doesn't get to keep the money that is saved on dropped claims, since Iraq's war reparations are currently paid from the oil-for-food fund. But as a practical matter, Iraq reaps significant economic and political benefits. Any claim that is withdrawn immediately shrinks Iraq's financial obligations. That would be especially advantageous if the oil-for-food program, which is reviewed every six months, were ever discontinued.
The dropped claims also send a signal that Baghdad has the power to get companies to do its bidding, enhancing its stature in the eyes of other countries. "It's a tweaking-of-the-West, finger-in-the-eye sort of thing," says one U.S. official familiar with the program. Officials at the U.S. State Department bluntly describe Iraq's campaign to reduce its legal liability as blackmail. They say companies that relinquish claims are violating U.N. rules that prohibit conferring even indirect economic benefits on Mr. Hussein. In the past three months alone, at least four companies have dropped claims, reducing Iraq's potential liability by about $100 million, according to U.N. records.
Iraq defends its actions as appropriate. Companies "make their own free decisions," says Samir K. Al-Nima, Iraq's ambassador to the U.N. in Geneva. "It's not blackmail. It's not pressure. It's all legal and normal practice in international relations with regard to the settlement of claims." Though Iraq agreed to pay reparations when the program was instituted in 1991, it has consistently complained that the rules are unfair because they don't allow Iraq to challenge the validity of damage claims or have input into how most of them are resolved.
Some companies that have gotten Iraqi contracts after withdrawing claims make no apologies. In general, they stress that they aren't violating any rules of the war-reparations process, and that their business dealings with Mr. Hussein's regime are all under the auspices of the U.N. program aimed at helping ordinary Iraqis.
The U.N. doesn't divulge either the names of companies that have dropped claims or those that have received contracts from Iraq. As a result, it isn't possible to know precisely how many companies that dropped claims were subsequently rewarded with business from the Hussein regime. But confidential U.N. records reviewed by the Journal show a financially significant quid pro quo in a number of cases.
For example, DaimlerChrysler had filed some $30 million in claims against Iraq, stemming from losses related to vehicles and spare parts. Early last year, the automotive giant withdrew its claims -- making the request through the government of its home country, Germany, as is required by U.N. rules. Over the next seven months, Iraq awarded the company six contracts for trucks and spare parts totaling $13 million; Daimler now is negotiating to sell 100 more trucks. The Iraqi government specifically promised Daimler that, if it agreed to drop its claims, it would stand a better chance of winning contracts, according to a DaimlerChrysler spokesman.
In another case, in February 2000, the British drug giant now known as GlaxoSmithKline withdrew a $1 million claim against Iraq, which had stemmed from the seizure of pharmaceutical goods by Iraqi forces in Kuwait. After dropping its claim, Glaxo received something worth much more: a series of contracts, valued at a total of $27.7 million to date, to provide medicine to Iraq. A Glaxo spokesman declined to elaborate on the contracts.
Some companies argue that it makes economic sense for them to drop their claims against Iraq. They point out that claims usually aren't worth as much as it might seem, since awards are often reduced by the U.N. Compensation Commission in Geneva, which administers the reparations program. Also, reparations payments are staggered over a period of many years. So, these companies say, they'd rather enter into business deals with Iraq that offer them more money up front.
Voest-Alpine MCE, an Austrian construction company, even returned an award it had already received. Last year, Voest-Alpine sent $39,962 back to the U.N. as a goodwill gesture to Iraq, "to save our chances for future contracts and for future business relations as soon as this was possible again," says Werner Marckhgott, a former in-house lawyer for the company.
Merck & Co., the pharmaceuticals giant based in Whitehouse Station, N.J., says it withdrew $6 million in claims for lost sales of medicines, because it figured that, like most companies, its award would likely be reduced. Merck estimated that it would see no more than $2 million, and that the U.N.'s payment schedule meant it wouldn't get most of that for years. "If relations ever get back to normal with Iraq," a company spokesman adds, Merck doesn't want its claims for war-reparations to be viewed as "a hostile act."
Gerald Gilbert, a Washington lawyer who represented a Russian company that withdrew its claim, says that from a business perspective, the strategy makes sense. "If Iraq gets back to normal, the companies can say, 'Remember us? We didn't sue you.' "
Since the start of the war-reparations program, claimants have sought a total of $322 billion. The U.N. Compensation Commission slashed or disallowed many of those claims, approving nearly $38 billion to date. Of that amount, $23 billion was earmarked for corporations, which thus far have received $3.6 billion.
Under the reparations program, companies and individuals are expressly permitted to withdraw their claims "at any time," without explanation. This provision -- which the U.S. was instrumental in drafting a decade ago -- was basically intended to prevent windfalls to claimants who had already gotten compensation from third parties such as insurers, or from Iraq itself in private settlements. However, Iraq has shrewdly exploited the loophole.
"No one anticipated that Iraq would use this rule to blacklist companies just because they will not give up their rights," says a State Department spokesman. "That is an abuse."
The U.N. Compensation Commission's Governing Council -- comprising the 15 member countries of the U.N. Security Council -- began debating how to deal with the claims-withdrawal phenomenon three years ago. Michael F. Raboin, the commission's director and a former U.S. State Department official, says the U.S. initially argued that the practice was illegal because it conferred an economic benefit on the Iraqi government. After all, the U.S. said, avoiding the enrichment of Iraq was the whole point of the international sanctions that have been imposed upon the Baghdad regime for the past 12 years.
But the U.S. argument was undercut by the U.N. rule that gave companies blanket permission to withdraw claims. With that argument available as cover, several countries said they supported the right of their companies to pursue or abandon demands for damages as they saw fit. Adds Mr. Raboin: "The Argentinians, French and Russians said, 'It's just business.' "
Michele Weil-Guthmann, counselor to the French mission at the U.N. in Geneva, says that since the rules permit withdrawals, "that's it." A spokeswoman for the Argentinian mission at the U.N. in New York says "we don't have a strong position regarding this question" of the withdrawal of claims. A spokeswoman for the Russian mission to the U.N. in Geneva didn't return telephone calls seeking comment.
Mr. Raboin recalls that even the United Kingdom, normally the closest ally of the U.S., expressed concern. The U.K. officials feared that their government could be sued by companies if withdrawals were declared illegal. A Foreign Office official in London says that the U.K., like the U.S., wanted to stop Iraq from pressuring companies, but was "skeptical" that banning withdrawals outright was "workable." In the U.K.'s view, the official said, "the decisions on whether to withdraw claims is one for the companies concerned."
Some diplomats privately say they believe there is a genuine element of unfairness in the claims process: Iraq, which doesn't have representation on the Governing Council, is required to hand over billions of dollars to companies without having a right to challenge the merits of their claims. In addition, says Mr. Raboin, the Compensation Commission's director, "a lot of members of the council were subtly amused by the ability of Iraq to figure out a way to manipulate the system by appealing to normal business sentiments."
Eventually, the Governing Council decided that it might be able to deter companies from withdrawing claims by assuring them that they wouldn't have to wait as long as they feared to start seeing their payments. So the commission sent letters to corporate claimants, via their governments, notifying the companies that money would soon be flowing.
But companies kept dropping claims. In one case in 1999, Machinoimport, a Russian energy concern, withdrew a claim just as the Governing Council had approved a $129 million award to compensate it for losses sustained in oil-field projects in Iraq. Since then, Iraq has given Machinoimport eight contracts, but their total value amounts to only $2.3 million, U.N. documents show. A company official said Machinoimport rejected the award because it had a business relationship with Iraq dating back to the 1970s, and it acted on "the principle that it would be incorrect to drop its business partners when they were in dire straits and to take advantage of their temporary problems."
In April 2000, the Compensation Commission presented a report on the claims-withdrawal issue to the U.N.'s Iraq Sanctions Committee in New York, which monitors economic restrictions imposed upon the Baghdad regime in the wake of the Persian Gulf War. A debate ensued, but no action was taken.
Then, a year ago, the Compensation Commission's Governing Council encountered a new twist: companies, such as Voest-Alpine, that wanted to return reparations money that had already been paid. For instance, a $25,000 payment to Wood Group Engineering Ltd., a Scottish energy-services company -- the first installment of a $591,000 reparations award -- was returned. The company, which had lost money from a disrupted service contract in Kuwait, also waived the right to receive the remainder of its award.
U.N. records show the company, a unit of Wood Group, subsequently received more than $2.5 million in Iraqi contracts for oil-industry equipment. Carolyn Smith, a Wood Group spokeswoman, says the company's dropping of its claim was meant as "a goodwill gesture" to Iraq and to other Mideast countries where the company does business.
Often, Iraq even demands proof that companies have complied with its wishes -- since it isn't privy to most of the work of the U.N. Compensation Commission. In the case of Glaxo, which dropped its $1 million claim in February 2000, a company manager two months later faxed an urgent letter to the British Foreign Office, seeking its help in obtaining proof of the claim's withdrawal. In the letter, dated April 18, 2000, Philip R. Jones, then Glaxo's legal-services manager, asked a Foreign Office official to call the Compensation Commission immediately, because Glaxo was concerned that a lucrative contract from Iraq hung in the balance.
"This matter is now becoming critical, as there is every possibility of a total write-off on a multimillion-pound order because evidence of the withdrawal of our claim is not forthcoming," Mr. Jones wrote. He asked if the official could telephone the U.N. Compensation Commission and "tell them to deal with this matter without further delay."
When the proof was supplied, Glaxo subsequently received the contract in question -- as well as a series of others. Mr. Jones referred questions to a Glaxo spokesman, who declined to comment on the apparent quid pro quo.
DaimlerChrysler, too, was eager for evidence that it had dropped claims. "Just for good order's sake we kindly ask you to confirm in writing that all claims filed by former Daimler-Benz AG are withdrawn," wrote Christian Zuercher, an official in the company's trade-finance department, to the U.N. Compensation Commission in April 2001. "By giving such confirmation, you would provide us with enormous support."
Asked about the letter, Mr. Zuercher said, "This situation is settled and finished with us," and hung up the phone. A DaimlerChrysler spokeswoman also declined to comment.
Going even further to appease Iraq, some companies have scrambled for proof that they had never filed claims in the first place. Krautkramer GMbh, a German manufacturer, told the Compensation Commission in November 1999 that it had signed a contract with Iraq's State Oil Marketing Organization, known as SOMO, to deliver inspection equipment. But there was a hitch: Baghdad wanted Krautkramer to get a "certificate" from the U.N., addressed to SOMO, stating that Krautkramer has "no demands or any debts or compensation against Iraq." A manager in the export division of Krautkramer, now called Agfa NDT, termed SOMO's request "just a normal procedure," but wouldn't comment further. SOMO declined to comment.
These no-claim requests created another quandary for the Compensation Commission, which again found a way to accommodate the companies. The commission is permitted to provide claim updates, called "status reports," to governments that request them on behalf of companies. So if a company hadn't filed a claim, the UNCC simply provided a report that the claim had no status because it didn't exist.
While many governments requested these status reports on behalf of the corporations in their countries, the U.S. wouldn't do so. The saga of the Foxboro Co., an instrument maker in Foxboro, Mass., is a case in point. In April 1999, a Foxboro subsidiary in the United Arab Emirates found out that Iraq's Ministry of Oil planned to place the company's oil-for-food contracts on hold until it could supply proof that it had no legal claim against Iraq.
Foxboro didn't know of any claims it had filed. It turned to the U.S. State Department for proof but was turned down. A company spokesman says government officials told Foxboro it was "inappropriate for Iraq to condition business" on the absence of a legal claim. So Foxboro then tried to get a no-claims document directly from the U.N. Compensation Commission -- in effect doing an end-run around the U.S. government. But Foxboro was rebuffed again, because the commission only deals directly with governments.
In early 2000, Foxboro's lawyers in the U.S. discovered that a legal claim against Iraq had in fact been filed by another subsidiary in the Netherlands. That turned out to be a lucky break.
The company approached the Dutch government, which readily withdrew the claim on the company's behalf. The Dutch also obtained official confirmation from the Compensation Commission. Since then, Foxboro says Iraq has awarded its United Arab Emirates subsidiary a "limited" number of orders for refinery instruments.
-- Scott Miller in Frankfurt and Todd Zaun in Tokyo contributed to this article.