KICKBACKS from Iraq’s oil sales have run into billions of dollars because of loopholes in the United Nations Oil-for-Food system designed to feed the Iraqi people.

Diplomats said yesterday that Saddam Hussein’s regime sometimes exacted an illegal surcharge of as much as 55-75 cents (30-45p) a barrel on its daily oil sales of some two million barrels under the programme, although the amount was generally 15-25 cents.

“We thought they were getting at least $500 million a year in illegal kickbacks,” one Western official said.

The money funnelled to Baghdad helped to finance its banned weapons programmes, but it could also have been used to buy influence abroad.

Iraq was able to choose which companies were awarded lucrative contracts to export oil or to import food or other humanitarian supplies.

The main beneficiaries were companies from Saddam’s political protectors at the United Nations, some of them trading companies with little more than a brass plate on the door.

Over the seven years of the Oil-for-Food programme, Russian companies got $7.3 billion of Iraqi business, almost twice as much as firms from any other country. Next on the list of leading trading partners were Egypt, with $4.3 billion; France, with $3.7 billion; and Jordan, the United Arab Emirates and China with $3 billion each.

Diplomats said that British firms won “minimal” business, almost all of it in the health sector, worth a couple of hundred million dollars.

The Oil-for-Food programme began operation in 1996 after Iraq agreed to allow the UN to supervise its oil sales and the purchases of food and medicine it made with the revenue.

All oil contracts have to be approved by the UN sanctions committee, made up of the 15 Security Council members. The money is deposited in a UN escrow account at the Banque Nationale de Paris, where it can be spent to purchase goods approved by the sanctions committee.

Over the years the Security Council lifted any restriction on the amount of oil that Iraq could sell and the oil price rose, sending Baghdad’s oil revenues up to an annual rate of some $20 billion.

During the same period the council progressively lifted sanctions on civilian goods that could be purchased with the oil money. Iraq can buy anything except military equipment, unless it is on a “goods review list” of dual-use items that require specific sanctions committee approval.

The opportunity for siphoning off money from Oil-for-Food business arose because of the difficulty of setting a realistic price for Iraq’s crude.

The oil price is established by UN oil “overseers”, who try to make it track the world market. The contract price must then be approved by the sanctions committee, where any single member can block it.

There were originally three overseers, but the US and Norwegian members quit, leaving only a Russian who was sometimes criticised for setting the price too high. For several years, Russia blocked new replacements. But Moscow eventually relented. Iraq was able to exploit price fluctuations to ensure that the UN-fixed price allowed enough margin for extra profits to be skimmed off.

Britain led a campaign last year to change the UN system to “retroactive pricing”, so that actual, rather than predicted, market conditions were taken into account. The result has been that illegal surcharges were reduced, before the war, to an estimated three to five cents a barrel.

Diplomats also suspect that Iraqi officials profited from trading on the oil markets on inside information from Baghdad's decisions, such as its frequent moves to suspend and resume pumping crude.

The Oil-for-Food programme operates in great secrecy. The sanctions committee meets behind closed doors and details of transactions are not made public.

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