“Our quarrel was with Saddam’s regime, not with the people of Iraq,” said John Howard, Australia’s Prime Minister, in 2003.

Yet even as Canberra denounced Saddam’s dictatorship it was suspected that an Australian company was paying kickbacks to the Iraqi regime in order to gain lucrative contracts under the UN Oil-for-Food programme.

An inquiry in Australia is investigating whether the Australian Wheat Board, Australia’s sole wheat exporter, paid A$300 million (£128 million) in bribes by charging Iraq above-market prices to supply wheat. The extra cash was then placed in a separate account which was allegedly used to bribe Iraqi officials.

This inquiry into the “wheatgate” affair will dominate the Australian Parliament when it sits this week and could expose one of Australia’s biggest corruption scandals.

The inquiry also threatens a rift between Australia and America, amid allegations that the Howard Government put pressure on a US Oil-for-Food inquiry to ignore allegations concerning AWB. US senators are under pressure from American wheat growers, who claim that they were shut out of lucrative wheat contracts in Iraq.

Under commissioner Terence Cole, a former Australian Supreme Court judge, the inquiry is investigating who in AWB, and perhaps the Government, knew about the kickbacks. In testimony so far, AWB executives have denied paying bribes to the Iraqi regime. Executives claim that the price of contracts they signed with Iraq were unusually high because of “transport fees” paid to a Jordanian haulage company.

The company did not exist. It was a front set up by the Iraqi Government to siphon off UN aid money, according to a report last year into the Oil-for-Food scheme.

In explosive evidence last week, Mark Emons, AWB’s former Middle East manager, told the Cole inquiry that not only was the payment of bribes via “trucking fees” a common practice, it had been taking place for years.

Mr Emons said that he knew this because he had organised it. And he claimed that knowledge of this bribery was widespread among wheat traders and went right to the top of AWB, including its former chairman, Trevor Flugge.

In April 2000, when the trucking fee increased, Mr Emons said that he raised it with the then chairman. “Mr Flugge did not require any explanation as to what the trucking fee was. He also added words to the effect: ‘We want to keep as much of the market as possible’,” Mr Emons said.

Mr Flugge has not responded to the claims and is due to appear at the inquiry in a week. The senior executive was widely ridiculed after Australian newspapers last week published photos of him in Iraq in 2003, bare-chested and smiling, holding a handgun.

Also pictured was Michael Long, AWB’s marketing manager, who was wearing dark glasses and carrying an M16 assault rifle. The inquiry heard that Mr Long, who dubbed himself “agent Proton”, secretly informed AWB of concerns about kickbacks.

Mr Long and Mr Flugge featured in a key sequence of events in 2002 when they dashed to Baghdad to save a wheat deal at risk of collapsing because of the Howard Government’s support for the planned US-led invasion. When they returned to Australia they announced that not only was the wheat deal intact, they had also won fresh contracts at even higher prices.

But as the Cole inquiry has heard, the deal was allegedly sealed because AWB had agreed to inflate further wheat contracts and thus funnel funds to the Iraqi regime. Further evidence of the payment of bribes is expected today when Dominic Hogan, a former head of AWB’s Middle East desk, outlines events from 2000 to 2003 when most of the kickbacks were paid via the Jordanian lorry company.

The Cole inquiry is turning into a big embarrassment for Mr Howard’s Conservative Government, which has denied any knowledge of AWB’s actions. For the opposition Labor Party, the inquiry has provided daily weapons to attack the Government. Kim Beazley, the opposition leader, has called the scandal “wheat for weapons”. Kevin Rudd, Labor’s foreign affairs spokesman, yesterday demanded that the Government explain whether Saddam used AWB’s kickbacks to fund Palestinian suicide bombers or buy weapons that are being used against US and Australian troops.

Alexander Downer, Australia’s Foreign Minister, has rejected the claims. “Saddam Hussein’s regime doesn’t fund suicide bombers at all anymore because it doesn’t exist and it doesn’t exist because countries like the United States, Britain and Australia showed a determination to get rid of that regime,” he said.

HOW AN AID PROGRAMME WAS SUBVERTED

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