Trust, but verify

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Henry Kissinger once famously remarked of Richard Nixon, ‘Even paranoids have real enemies’. Deputy Prime Minister Mark Vaile might usefully have reflected on this when in 2000 he and his colleagues failed to take seriously concerns expressed about AWB’s behaviour in Iraq, apparently on the grounds that these were unsubstantiated allegations made by AWB’s commercial competitors. We now know that even commercial competitors can raise concerns that warrant investigation.

In relation to the attitude of the Prime Minister that allegations about AWB did not need to be followed up because it was common ground between the Government and the Opposition that ‘AWB was an organisation of total integrity and repute’, the words of Ronald Reagan in relation to arms control approaches to the Soviet Union come to mind — ‘Trust, but verify’.

This reference to Ronald Reagan is relevant to the AWB Inquiry because sanctions against Iraq, from the time Security Council Resolution No. 661 was passed on 6 August 1990, were about limiting the military capabilities of Iraq. One of the main means of doing that was to limit Saddam Hussein’s access to military supplies and, more importantly, to cash.

Accordingly, Section 3 of the Resolution required all States to prevent:

(c) The sale or supply by their nationals or from their territories or using their flag vessels of any commodities or products, including weapons or other military equipment, whether or not originating in their territories, but not including supplies for medical purposes, and, in humanitarian circumstances, foodstuffs …

and Section 4 stipulated that:

All States shall … prevent their nationals and any persons within their territories from removing from their territories or otherwise making available to (the Government of Iraq) or to any (commercial, industrial or public utility in Iraq) any (funds or any other financial or economic resources) and from remitting any other funds to persons or bodies within Iraq…

Nothing in Resolution 996 of 14 April 1995, which established the Oil-for-Food Program, set aside the above provisions of Resolution 661. What it did was to open a window for Iraq to finance the purchase of medicines, humanitarian food supplies and other essential civilian supplies through the sale of oil. In order to prevent the sort of financial funny business that might enable Saddam’s regime to syphon off cash, the Resolution provided that all sales were to be at fair market price, the full proceeds were to be deposited to an escrow account established by the Secretary-General, and that accounts were to be externally audited.

A further measure was a requirement that payment for goods could only be made from the escrow account on receipt by the Secretary-General of authenticated confirmation that the goods had arrived in Iraq (i.e. they could not be diverted and sold for cash).

Australia did more than simply sign up to the above arrangements. Since September 1990 we have had Australian sailors in harm’s way to enforce them. Under Operation DAMASK, the Royal Australian Navy (RAN) provided a three-ship task group to participate in a multi-national flotilla responsible for preventing the entry of prohibited goods into Iraq and the conduct of any illegal export trade.

As the above makes clear, the purposes of the operation were to prevent Saddam from acquiring unaccounted cash, and from importing weapons that he might acquire with resources that slipped through the net. Needless to say, the full cost of this continuing RAN deployment runs to many millions of dollars.

Thanks to Bill Leak

It is in this context that one should view the inflated prices that AWB paid in order to provide $290 million in rebates to Saddam Hussein. These actions subverted a national security purpose for which the Australian Government had put service personnel into warlike operations and the Australian taxpayer was expending large amounts of treasure. Also, if it turns out that foreign officials were bribed, that has been a criminal offence under Australian law since 1999.

Let us leave it to the Cole Commission to discover the detail of AWB’s behaviour, and consider what behaviour we might expect of the Commonwealth Government given, to use the words of the Foreign Minister; it was ‘a big supporter of sanctions’.

It is not good enough for the Government to adopt the position, as Vaile appears to do, that when it came to the wheat contracts the enforcement of the sanctions was the business of the UN. The UN is a membership organization, and it cannot be more effective than its members permit and assist it to be. This is recognised by the provision of Resolution 661 that required the member states to prevent funds from reaching Iraq by any means — only the member states have direct control over their nationals and corporations.

Accordingly, a Government that was committed to the imposition of sanctions would back its commitment (and its responsibilities under the relevant resolutions) by an early and thorough risk assessment of the types of behaviours that could lead to the sanctions regime being violated, and how any violations could be detected. Inflated prices and under the table rebates would be a prime target of any risk assessment — there is no shortage of commentators telling us that this is the way business has always been done in the Middle East.

The Customs Regulations provide the mechanism for oversight of export transactions and there is ample precedent for exercising such oversight. In 1973 the Whitlam Government imposed export controls on all minerals, for the purpose of ensuring that Australian companies received fair market prices for our mineral exports in the face of coordinated buying of raw materials by the Japanese Steel Mills. These controls endured for most of the Fraser years.

Paradoxically, the mechanism was for all of these major items to become ‘prohibited exports’. In order to get permission to export, minerals exporters were required to submit copies of contracts, and prices, and get permission for the export from the Minister. In order to give the Minister effective advice, the Department had to keep closely in touch with market conditions, and also study the fine print of the contracts.

There were some robust exchanges about amounts of the order of $US2 per tonne, and warning shots fired over the bows of the companies whenever we got wind of ‘discounts’ that would frustrate the approved price level. We also declined to approve contractual provisions that could allow contract prices to get out of line with market prices in the future.

So it comes as something of a surprise to read that price discrepancies of the order in question with the wheat exports to Iraq do not seem to have attracted the pro-active attention of officials and the Ministers they advise.

There is also excellent precedent in the rigorous way we treated our most important trading partner on occasion – with much more rigour apparently than a regime with which we were prepared to go to war.

In the early 1980s I was involved in the negotiation of uranium safeguards agreements with the various countries that had expressed an interest in importing Australian uranium. Notable amongst these was Japan, which had in place contracts for the delivery of uranium from Ranger – contracts that could not become operative until a Safeguards Agreement was in place.

Like many of our potential customers, Japan was profoundly uncomfortable with the three ‘prior consents’ to which recipient states had to agree to be bound before they could be supplied with Australian nuclear material — prior consent to enrichment beyond 20 per cent, to re-transfer to any third party, and to re-processing. These three consents mean that Australia has a degree of control over its nuclear material throughout its life.

The Japanese negotiators strenuously resisted these provisions and made numerous attempts to water them down but we resisted all these attempts and finally got our way. The delay resulting from this tussle meant that by the time the Agreement was ratified by the Japanese Diet (which the Australian Government had always declared to be the pre-condition for exports to commence) the deadline for the first exports of Australian uranium would have been missed.

We then received numerous representations from the Japanese Ambassador in Canberra, on instructions from Tokyo. First try: ‘Since we have now signed the Agreement, it should be possible to let the exports take place, and ratification will take place in due course’. Politely but firmly refused. Second try: ‘Once the ratification legislation has been introduced into the Diet, it should be possible for exports to commence’. Again refused. And so on.

Given the nature of the excellent trading (and political) relationship between Australia and Japan, this was not a matter of trust. More a matter of ‘Trust, but verify’.

Perhaps a little more ‘trust, but verify’ would have been appropriate in the Government’s dealings with AWB, however much the Government considered AWB at the time to be an organization of ‘total integrity and repute’.

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