Order Code RL30472
Report for Congress
Received through the CRS Web
Iraq: Oil-For-Food Program,
International Sanctions, and Illicit Trade
Updated February 28, 2003
Kenneth Katzman
Specialist in Middle East Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Iraq: Oil-For-Food Program,
International Sanctions, and Illicit Trade
Summary
The “oil-for-food” program has been the centerpiece of the long-standing U.N.
Security Council effort to alleviate human suffering in Iraq while maintaining key
elements of the Gulf war-related sanctions regime. In order to ensure that Iraq
remains contained and that only humanitarian needs are served by the program, U.N.
Security Council resolutions have mandated substantial controls on Iraqi oil exports
and humanitarian imports. All Iraqi oil revenues earned under the program are held
in a U.N.-controlled escrow account and cannot be accessed by the Iraqi government.
After six years of the program’s operations (1996-2002), there is a consensus
among observers that the program has substantially eased, but not eliminated, human
suffering in Iraq. Concerns about the program’s early difficulties prompted criticism
of the United States; critics asserted that the U.S. strategy was to maintain sanctions
on Iraq indefinitely as a means of weakening Saddam Husayn’s grip on power. At
the same time, growing regional and international sympathy for the Iraqi people
resulted in a pronounced relaxation of regional enforcement — or even open defiance
— of the Iraq sanctions. The United States argued that continued sanctions were
critical to preventing Iraq from acquiring equipment that could be used to reconstitute
banned weapons of mass destruction (WMD) programs.
Seeking to improve international unity on containment of Iraq, in early 2001 the
Bush Administration devised a “smart sanctions” plan that it said would speed the
flow of civilian goods to Iraq and thereby improve living conditions for the Iraqi
people. The U.S. plan offered to significantly ease restrictions on exportation of
purely civilian goods to Iraq in exchange for greater international and regional
cooperation to prevent any arms or weapons-related technology from reaching Iraq.
The U.S. plan also sought to prevent the Iraqi government from receiving the
proceeds of illicit oil sales to Iraq’s neighbors. The U.S. proposals appeared to move
away from post-Gulf war linkages between sanctions easing and full Iraqi
cooperation with U.N. inspections of Iraq’s WMD capabilities. After a few rounds
of negotiations on the U.S. plan, the Security Council adopted (Security Council
Resolution 1409, May 14, 2002) the portion of the U.S. plan that facilitates civilian
exports to Iraq. Regional resistance scuttled the aspects of the plan that would have
curbed Iraq’s illicit trade with its neighbors.
The Bush Administration has not announced whether, in the event of military
action against Iraq, the United States would support a continuation of the program
in the post-war period or replace it with an alternate humanitarian relief effort. Some
believe the program provides a convenient and effective vehicle for delivering relief
in the aftermath of a war. However, some experts believe that a likely post-war
easing of sanctions and the rebuilding of Iraq’s oil industry would quickly alleviate
the need to continue the program.
This product will be updated every six months or sooner, if warranted by major
developments.

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Contents
Background and Structure of the
Oil-For-Food Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Program Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Changes Outlined in Resolution 1284 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Accomplishments of the Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Health, Sanitation, and Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Recent Debates Over Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The “Smart Sanctions” Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Other Sources of Humanitarian Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Illicit Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Jordan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Iran/Persian Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Syria/Military Technology Exports to Iraq . . . . . . . . . . . . . . . . . . . . . 13
Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Oil Sales Surcharges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Oil Exploration Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Flights to Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Future of the Oil-for-Food Program in a Post-War Iraq . . . . . . . . . . . . . . . . . . . 16
Appendix: Overview of U.S. Regulations Governing
U.S. Participation in the Oil-for-Food Program . . . . . . . . . . . . . . . . . . . . . . 17

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Iraq: Oil-For-Food Program,
International Sanctions, and Illicit Trade
Background and Structure of the
Oil-For-Food Program
The “oil-for-food” program reflects a longstanding U.N. Security Council effort
to alleviate human suffering in Iraq while pressing Iraq to comply with all relevant
U.N. Security Council resolutions.1 The program represents a temporary and limited
exception to the comprehensive international trade embargo imposed on Iraq by U.N.
Security Council Resolution 661 (August 9, 1990) as a consequence of its invasion
of Kuwait. U.N. Security Council Resolution 687 (April 3, 1991) provided for the
international embargo on Iraq’s exportation of oil2 to end once Iraq had fully
complied with U.N. efforts to end its weapons of mass destruction (WMD) programs.
The WMD inspections began in April 1991 but proceeded more slowly than
expected, and an end to sanctions did not appear to be in sight by April 1991.
Without oil export revenues, Iraq was unable to import sufficient quantities of food
and medical supplies, and, according to virtually all accepted indicators (infant and
child mortality, caloric intake, and other indicators), living conditions deteriorated
sharply during 1991-1995.
The first version of an oil-for-food plan would have allowed Iraq to export $1.6
billion in oil every six months. It was adopted by the Council in 1991 in Resolutions
706 (August 15, 1991) and 712 (an implementing plan adopted September 19, 1991),
but Iraq rejected it as too limited in scope and an infringement on Iraq’s sovereignty.
There was little movement on the issue during 1991-95, despite dramatic declines in
Iraq’s living standards. On April 15, 1995, the Council adopted Resolution 986,
which took into account one of Iraq’s concerns by allowing the export of $2 billion
in oil every six months. Iraq and the United Nations signed a memorandum of
understanding on the program on May 20, 1996 (document number S/1996/356) and,
after several more months of negotiations on details, the first Iraqi oil exports began
on December 10, 1996. After the first year of the program, the Secretary General
determined that the program was not meeting the food and medical needs of the Iraqi
people, and Resolution 1153 (February 20, 1998) raised the oil export ceiling to
$5.256 billion per 6-month phase. In an effort to provide Iraq an incentive to
cooperate with a new program of U.N. weapons of mass destruction (WMD)
inspections, the U.N. Security Council, in Resolution 1284 (December 17, 1999),
1 For a further discussion of Security Council resolutions and requirements on Iraq, see CRS
Issue Brief IB92117, Iraq: Compliance, Sanctions, and U.S. Policy.
2 That embargo was imposed by U.N. Security Council Resolution 661 of August 6, 1990.

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CRS-2
abolished the export limit. This resolution had a number of additional provisions and
implications for the oil-for-food program, as discussed below.
Program Operations

In order to ensure that only humanitarian objectives are served by the program,
the oil-for-food program places substantial controls on Iraqi oil exports and
humanitarian imports. Iraq’s state-owned oil marketing company (State Oil
Marketing Organization, SOMO) negotiates with international oil companies to sell
Iraqi oil. Oil purchase contracts are reviewed by a panel of oil contract overseers
reporting to the U.N. Sanctions Committee,3 which administers the implementation
of sanctions on Iraq. The oil overseers review Iraq’s pricing proposals monthly. Iraq
is only allowed to export oil under the program, not any other products.
The oil sold is exported through an Iraq-Turkey pipeline and from Iraq’s
terminals in the Persian Gulf. According to Resolution 986, “the larger share” of oil
exports must run through the Turkish route. The proceeds from these sales are
deposited directly, by the oil purchasers, into a U.N.-monitored escrow account held
at the New York branch of France’s Banque Nationale de Paris (BNP). Iraq’s oil
exports are monitored at the point of exportation by personnel from Saybolt
Nederland BV, an energy services firm working under contract to the program.
In each six-month phase of the program, Iraq purchases goods and services
directly from supplier firms, in accordance with an agreed distribution plan allocating
anticipated revenues among categories of goods to be purchased in that phase. Prior
to the major amendment to the program approved in May 2002, which is discussed
later, the Sanctions Committee reviewed and had authority to approve contracts for
the export of goods to Iraq. The Committee operates by consensus. Any Sanctions
Committee member could place a “hold” on a contract for goods to be imported by
Iraq, and the United States often placed holds on exports of dual use items (civilian
items that could have military applications). In deciding whether to place a hold on
a contract, the U.S. representative on the Sanctions Committee consulted with
agencies of the U.S. government to determine whether Iraq could use the requested
items for military purposes.
Under the new procedures adopted in Security Council Resolution 1409 (May
14, 2002) and placed into effect in July 2002, the U.N. weapons inspection unit
(UNMOVIC, U.N. Monitoring, Verification, and Inspection Commission) reviews
export contracts to ensure that they contain no items on a designated list of dual use
items known as the Goods Review List (GRL). If so, the Sanctions Committee then
decides whether to approve that portion of the contract containing the GRL items in
question.
Under U.S. regulations written for the program, U.S. firms can buy Iraqi oil and
sell goods to Iraq, including oil industry spare parts and equipment. Over the past
few years, purchases of Iraqi oil by U.S. firms have ranged between one-third to one-
3 The Sanctions Committee, set up by Resolution 661, consists of representatives of the
member states on the U.N. Security Council.

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CRS-3
half of Iraq’s normal export volume of about 2.1 million barrels per day. As of
February 2003, U.S. imports of Iraqi oil are tending toward the high end of that
range, about 1 million barrels per day. The U.S. imports come primarily by
purchases from intermediate energy trading firms rather than direct buys from Iraq.
(See appendix for an overview of U.S. regulations governing U.S. firms’
participation in the program.)
Once a contract is approved, BNP uses the funds deposited in the escrow
account to pay letters of credit for the purchased goods. The arriving supplies are
monitored at their point of entry into Iraq by about 50 personnel from the Swiss firm
Cotecna4 at four approved border crossings — Umm Qasr on the Persian Gulf; Trebil
on the Iraqi-Jordanian border; Walid on the Iraqi-Syrian border; and Zakho on the
Iraqi-Turkish border. In Baghdad-controlled Iraq, the Iraqi government distributes
imports to the population through a government rationing system, and distribution
is monitored by about 158 U.N. workers from the World Food Program, the Food and
Agriculture Organization, the World Health Organization, and UNICEF. The U.N.
personnel visit ration centers, marketplaces, warehouses, and other installations to
ensure that distribution is equitable and accords with the targeted allocation plans
submitted by Iraq for each six month phase. In Kurdish-controlled Iraq, about 65
U.N. workers, accompanied by about 130 U.N. security guards, perform the
distribution function. Some goods bound for the Kurdish-controlled areas are
combined with Baghdad’s purchases in order to obtain more favorable prices in bulk.
Under Security Council Resolution 1051 (March 27, 1996), exports to Iraq of
dual use items are supposed to be monitored by U.N. weapons inspectors at their
point of entry and site of end use in Iraq. This import monitoring mechanism was
altered during 1998-2002 when the U.N. weapons inspection regime was not in
operation inside Iraq. Security Council Resolution 1284 (December 17, 1999)
replaced UNSCOM with UNMOVIC, which now performs that end-use monitoring
function after reentering Iraq in November 2002. During the 1998-2002 hiatus in
weapons inspections, end use monitoring in Iraq was performed by some of the 158
U.N. employees who monitor the distribution of civilian goods coming into Iraq.
However, these monitors were not trained weapons inspectors, and this caused the
United States and Britain to closely scrutinize, and to place many holds on, exports
of dual use items to Iraq.
The oil-for-food program attempts to help Iraq meet its international obligations
and ensure equitable distribution of imports to the Iraqi people. The revenues from
Iraq’s oil sales are distributed as follows:
! 25% is transferred to a U.N. Compensation Commission (UNCC) to
pay reparations to victims of Iraq’s invasion of Kuwait. As provided
for in Security Council Resolution 1284 (see below), the deduction
percentage fell to 25% from its previous level of 30% at the
commencement of phase nine of the oil-for-food program
(December 6, 2000).
4 Cotecna replaced Lloyd’s Register as point-of-entry monitoring contractor on February 1,
1999.

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CRS-4
! 59% is used to purchase humanitarian items for Baghdad-controlled
Iraq. This account was increased from its previous level of 53%
when the reparations deduction was reduced in December 2000.

! 13% is used to purchase supplies in the three Kurdish-inhabited
provinces of northern Iraq.
! 3%, the remaining amount, pays for U.N. costs to administer the oil-
for-food program, as well as UNMOVIC’s operating costs.
Changes Outlined in Resolution 1284. U.N. Security Council Resolution
1284, adopted December 17, 1999,5 was intended in part to improve the provision of
relief for the Iraqi people and to offer Iraq an incentive to readmit U.N. weapons
inspectors. The following highlights key provisions of it and related decisions:
! As noted previously, Resolution 1284 eliminated the limit on the
amount of oil Iraq could export, in order to enable Iraq to generate
more revenues for humanitarian purchases.
! Resolution 1284 began the process, continued in subsequent oil-for-
food program rollover resolutions, of easing restrictions on the flow
of civilian goods to Iraq. The resolution directed the Sanctions
Committee to draw up lists of items, in several categories, that
would no longer be subject to Sanctions Committee review, and
therefore would not be vulnerable to “holds.” The accelerated
approval procedures for foodstuffs and educational goods began on
March 1, 2000, and continued with pharmaceuticals, medical
supplies, medical equipment, and agricultural equipment (March 29,
2000). Subsequent oil-for-food rollover resolutions made eligible
for the new procedures water treatment and sanitation supplies
(August 11, 2000) goods for the housing sector (February 26, 2001)
and electricity supplies (May 24, 2001).
! The resolution laid the groundwork for foreign investment to explore
for and produce oil in Iraq, although the resolution made this
investment contingent on full Iraqi cooperation with UNMOVIC.
Since late 2000, the Sanctions Committee has approved drilling in
existing fields by two Russian firms (Tatneft and Slavneft) and a
Turkish firm (Turkish Petroleum Company), but exploration of new
fields is still not permitted.
! Resolution 1284 created incentives for Iraq to cooperate with
UNMOVIC by “express[ing] the intention,” if Iraq is deemed to
have “cooperated in all respects” with UNMOVIC, to suspend
export and import sanctions for 120 days, renewable by Security
Council. The resolution implies that the Security Council would
5 For full text of Resolution 1284, see [http://www.un.org/Docs/scrses/1999/99sc1284.htm].

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CRS-5
have to vote to implement the sanctions suspension. If sanctions had
been suspended under this provision, Iraq would have been allowed
to control its own revenues, although subject to strict but unspecified
financial controls, according to the resolution. Arms exports to Iraq
would still be banned and exports of dual use items would still be
subject to scrutiny by the Sanctions Committee. As of February
2003, there has been virtually no discussion within the Security
Council of suspending sanctions. The Council has focused instead
on whether to authorize the use of force against Iraq to ensure its
WMD disarmament under applicable resolutions, particularly
Resolution 1441 of November 8, 2002.
! Resolution 1284 also made some oil industry spare parts eligible for
a streamlined approval process — contracts for such equipment are
scrutinized by the same Sanctions Committee panel of oil overseers
that review Iraq’s oil sales contracts, without requiring full Sanctions
Committee review. U.N. Security Council Resolution 1293 (March
31, 2000) increased to $600 million, from $300 million, the value of
oil industry spare parts that Iraq could import per oil-for-food phase.
This decision was taken in response to recommendations by the U.N.
Secretary General that improving the humanitarian situation was
contingent on the rehabilitation of Iraq’s ability to export its oil. As
of November 30, 2002, about $1.55 billion worth of oil industry
spare parts have arrived in Iraq under the program.
Accomplishments of the Program
There is a consensus among U.N. officials and outside observers that the oil for
food program has eased substantially, but not eliminated, human suffering in Iraq.
The program, as well as some economic liberalization measures and illicit activity
outside the program (discussed below), enabled Iraq to achieve 15% economic
growth during 2000, according to the CIA’s “World Factbook: 2001.”
Few observers question that the program has made vast amounts of funds
available for the purchase of food, medicine, and essential civilian goods. Table 1,
supplied by the United Nations’ Office of the Iraq Program, shows that higher oil
prices, coupled with program modifications, have enabled Iraq to generate substantial
revenues to fund imports. At times since the program began operations in December
1996, Iraq has generated more oil revenue than it did before the U.N. embargo was
imposed in 1990 (about $12.5 billion in total exports was generated in 1988),
although substantial deductions are taken to pay the cost of implementing the
program and for reparations payments.
From inception until February 21, 2003, the program has generated over $63
billion in revenues. From inception until November 30, 2002, contracts for exports
to Baghdad-controlled Iraq of civilian goods worth $38 billion have been approved,
with goods worth $24.4 billion having been delivered. For Kurdish-controlled
northern Iraq, import contracts worth about $4 billion have arrived from inception
until November 30, 2002, including about $3 billion purchased in concert with

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CRS-6
Baghdad’s purchases. Another $600 million in locally produced goods and contracts
in the north were procured during the time period.
As noted in Table 1, Iraq’s sales of oil ran significantly below capacity during
2001 and much of 2002. The decrease was largely a result of disputes between Iraq
and the United Nations over the formula for pricing Iraq’s oil. Some members of the
Sanctions Committee have sought to complicate Iraq’s ability to impose surcharges
on its oil buyer — such surcharges of about 30 - 50 cents per barrel constitute illicit
revenue and are prohibited. In September 2001, to reduce Iraq’s surcharging ability,
the pricing formula was changed to “retroactive pricing,” in which the oil is priced
after sale. This significantly reduced Iraq’s oil sales by about 25%, although the
United Nations noted a rebound to previous levels (about 2 million barrels per day)
as of September 2002. Iraq has sometimes unilaterally interrupted the sale of oil to
protest Security Council policy or to challenge the United States and its allies. For
example, Iraq suspended its oil sales for the month of April 2002 in protest against
Israel’s military incursion into the West Bank.

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CRS-7
Table 1. Revenue Generated by Oil-For-Food Program
(through February 2003)
Average
Phase Number
Volume Sold
Value of Export
Price per
(each phase is six months)
(millions of barrels)
($billion)
Barrel ($)
One
120
2.15
17.92
December 10, 1996 - June 7, 1997
($2 billion export ceiling)a
Two
127
2.125
16.73
June 8, 1997 - December 4, 1997
Three
182
2.085
11.46
December 5, 1997 - May 29, 1998
Four
308
3.027
9.83
May 30, 1998 - November 25, 1998
(Export ceiling raised to $5.2 billion by
Resolution 1153)
Five
360.8
3.947
10.94
November 26, 1998 - May 24, 1999
Six
389.6
7.402
19.00
May 26, 1999 - December 11, 1999
Seven
343.4
8.302
24.13
December 12, 1999 - June 8, 2000
(Export ceiling lifted permanently by
Resolution 1284)
Eight
375.7
9.564
25.50
June 9, 2000 - December 5, 2000
Nine
293
5.638
19.24
December 6, 2000 - July 3, 2001
Ten
300.2
5.35
17.82
July 4, 2001 - November 30, 2001
Eleven
225.9
4.589
20.31
December 1, 2001 - May 29, 2002
Twelve
232.7
5.639
24.3
May 30, 2002 - December 4, 2002
Thirteen (as of February 21, 2003)
130.5
3.618
27.7
December 5, 2002 - June 3, 2003
Totals
3,117.3
56.412
Source: U.N. Office of the Iraq Programme. [http://www.un.org/Depts/oip/].
a. Applicable U.N. Security Council resolutions allow Iraq to generate revenue, over and above the
ceilings, to pay the costs of transit fees for exporting oil through Turkey, which explains why
some figures might exceed stated ceilings.

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CRS-8
The following represent the major accomplishments of the program in
improving the living standards of the Iraqi people, taken mostly from a report by the
U.N. Secretary General to the U.N. Security Council, dated November 12, 2002.
Food. According to the U.N. report, in Baghdad-controlled Iraq, the Iraqi
government is now importing and distributing about 2,200 kilocalories of food per
person per day - about 90% of the U.N. target caloric intake of 2,463 kilocalories per
person per day. The full ration was achieved only during December 2000. The
report notes that 60% of Iraq’s families rely solely on the food ration under the
program to meet all household needs. The U.N. report does not identify any food
problems for the three Kurdish provinces, which is consistent with press reports that
food has become relatively abundant there, sometimes to the detriment of local
agricultural production.
Health, Sanitation, and Electricity. The U.N. report said that there have
been “notable” achievements in the health sector, including an increase in major
surgeries performed and a reduction in communicable diseases. This and previous
U.N. reports on the program have noted improvement in the diagnostic and other
equipment in use in Iraq’s hospitals. In the related area of water and sanitation, the
U.N. report said that there has been some recent improvement in access to potable
water, although access is still insufficient in both quantity and quality. The U.N.
report says the situation in the electricity has been “improving gradually,” noting a
more reliable supply of electricity to Iraqis than was the case previously.
In mid-1999, UNICEF released its first country wide survey of infant and
maternal mortality in Iraq since 1991. The survey took a number of precautions to
ensure that the survey results would not be altered or modified and UNICEF is
confident that the survey information is accurate. It showed that infant mortality in
the southern and central sections of Iraq (under the control of the Iraqi government)
rose from 47.1 deaths per thousand live births during 1984-1989 to 107.9 deaths per
thousand during 1994-1999. The under five-year-old mortality rate rose from 56 to
130.6 per thousand live births in the same time period. According to the report, this
increase in mortality resulted in about 500,000 more deaths among children under
five than would have been the case if child mortality trends noted prior to 1990
(imposition of sanctions) had continued. In northern Iraq, the mortality rate has
declined over the same period: infant mortality dropped from 63.9 per thousand live
births in 1984-1989 to 58.7 in 1994-1999 and under five-year-old mortality dropped
from 80.2 per thousand live births to 71.8 per thousand.
Education. The U.N. report identifies significant shortages of materials and
equipment throughout the education sector, particularly school overcrowding. The
report says that the recent distribution of 1.2 million school desks has met 60% of the
need at primary and secondary schools. According to an earlier report (September
8, 2000), Iraq’s literacy rate (53.7% of adults and 70.7% of the youth) “has remained
fixed for a number of years.”

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CRS-9
Recent Debates Over Sanctions
The accomplishments of the program did not end debate over how strictly to
enforce some of the program’s restrictions. The United States and Britain tended to
place most of the blame for the program’s shortcomings on Iraq, alleging that the
Iraqi regime disregards the needs of its people. U.N. administrators of the program
have criticized Iraq on similar grounds, but they also attributed program deficiencies
to U.S. and British policy, which they alleged slowed or halted the flow of
infrastructure equipment that is required to realize the program’s benefits.
The issue of contract “holds” on infrastructure equipment has been one of the
most contentious that the United Nations has faced. Past U.N. reports on the
program claim that infrastructure equipment, such as trucks, communications gear,
forklifts, electricity, and water treatment equipment, are crucial to the timely
distribution and proper storage and functioning of foodstuffs and medical products.
At the time of the adoption in May 2002 of aspects of the “smart sanctions” plan
discussed below, the United States had placed almost $5 billion of goods on hold.
In response to international criticism of the holds, the United States asserted that
90% of all contracts were approved and that the holds had minimal impact. The
United States maintained that all contracts needed to be scrutinized to ensure that no
equipment would be used to rebuild WMD programs, especially during the time
U.N. weapons inspectors were not in Iraq (December 1998 - November 2002) to
monitor dual use exports that are shipped there. U.S. officials said they also wanted
to ensure that no contract was being awarded solely to encourage political support for
Iraq from parent governments. U.N. reports have not accused Iraq of purposely
diverting imports from the program to the military or regime supporters, although
some U.S. reports, such as a February 28, 1998 State Department fact sheet, say Iraq
has diverted other food stocks to these elements.
The “Smart Sanctions” Plan. With no permanent end to international
sanctions in sight due to the lack of U.N. weapons inspections, the debate over
further modifications to the oil-for-food program was the centerpiece of a broader
debate over Iraq sanctions during 2001. This debate intensified in May and June
2001 when the five permanent members of the U.N. Security Council first discussed
the U.S. plan to adopt “smart sanctions” on Iraq. The smart sanctions plan
represented an effort, articulated primarily by Secretary of State Colin Powell at the
beginning of the George W. Bush Administration, to rebuild a consensus to contain
Iraq. When it came into office, the Bush Administration asserted that international
sanctions enforcement was collapsing and that Iraq was using the relaxation to
acquire prohibited goods and raise illicit revenue. The U.S. smart sanctions proposal
centered on a trade-off in which restrictions on the flow of civilian goods to Iraq
would be greatly eased and, in return, Iraq’s illicit trade with its neighbors would be
brought under the oil-for-food program and its monitoring and control mechanisms.
The net effect, according to the concept, would be to target sanctions only on limiting
Iraq’s strategic capabilities, and not on its civilian economy.
The smart sanctions plan was intended to defuse criticism by several
governments, including permanent members of the U.N. Security Council France,
Russia, and China, that the United States is using international sanctions to promote

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CRS-10
the overthrow of the Iraqi government or to punish Iraq indefinitely for the invasion
of Kuwait. These governments appeared to believe that no amount of Iraqi
cooperation with the United Nations would be sufficient to persuade the United
States to lift sanctions on Iraq, and they and other governments moved unilaterally
to skirt or erode the sanctions regime.
Differences between the permanent members over how to implement these
measures prevented immediate agreement on the U.S. plan. With phase nine of the
oil-for-food program set to expire on June 4, 2001, the permanent five members of
the Security Council began discussions on the U.S. smart sanctions plan, but no
agreement was reached, and the oil-for-food program was extended with no changes.
With the September 11, 2001 attacks and the war in Afghanistan bringing the United
States politically closer to Russia and, to a lesser extent, China, the Security Council
reached agreement to adopt some elements of the U.S. plan, as provided for in
Security Council Resolution 1409 (May 14, 2002). The resolution created the Goods
Review List (GRL), mentioned above, a list of dual use items that are subject to
review by UNMOVIC before they can be exported to Iraq. The Goods Review List
is contained in U.N. document S/2002/515 of May 3, 2002; it can be found online at
the U.N. oil-for-food program Web site [http://www.un.org/depts/oip].
Resolution 1447 (December 4, 2002) contained a pledge to add, within 30 days,
certain items to the GRL, items that the United States said could be used by Iraq to
counter a U.S. military offensive. The Security Council added 36 U.S.-suggested
items to the GRL on December 30, 2002 (Resolution 1454).
The following discusses the debate over the U.S. smart sanctions plan and
compares what was agreed to in the resolution versus what had been sought in the
original U.S. smart sanctions proposals.
! List of Restricted Items. A major point of dispute was the criteria
for placing items on the GRL. Russia and France initially
maintained that the proposed list, which included such goods as high
performance computers, optical sensing technology, drilling
equipment, aircraft spare parts, and marine sensing gear,6 was too
extensive, and would have the net effect of hindering the rebuilding
of Iraq’s civilian infrastructure.
! Border Controls. Enhanced border control provisions, a central
element of the original U.S. smart sanctions plan, were not included
in Resolution 1409, largely because of strong opposition by Iraq’s
neighbors to controls on illicit trade with Iraq. Iraq’s neighbors
maintained that enhanced border controls would harm their
economies.
! Flights. Early draft resolutions of the smart sanctions plan
attempted to gain some control over international civilian flights to
6 A May 24, 2001 draft of the list of goods that would still be subject to review is at
[http://www.cam.ac.uk/societies/casi/info/annex010524.html].

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Iraq by requiring that their cargo be inspected at designated airports
outside Iraq. The draft proposals would have permitted Jordan to
return six Iraqi Airways passenger aircraft grounded in Amman since
the Gulf war, and Tunisia to return four planes there. These
provisions were not contained in Resolution 1409.
! Foreign Investment/Energy Exploration. Early drafts of the smart
sanctions resolution “expresse[d] an intention” to permit foreign
companies to provide services in Iraq. Some diplomats interpreted
this as implicitly including energy exploration services, although
most observers believed that such permission would need to be
explicit. Permanent Security Council members Russia, France, and
China have pressed for investment in Iraq’s energy sector, and
companies from these countries have reached agreement with Iraq
to develop several oil fields if and when the prohibition on foreign
exploration is lifted. No provision along these lines was included in
Resolution 1409.
! Oil Sales Surcharges. The early smart sanctions proposals
attempted to address the reported practice of Iraq’s surcharges of
about 30 - 50 cents per barrel of oil, which goes into the coffers of
Iraq’s government. The drafts stipulate that a list of companies
authorized to do business with Iraq be drawn up, a list which it is
widely understood would include only large, well-known
international oil firms that would not pay Iraq these surcharges. This
provision was not incorporated into Resolution 1409, but the
Sanctions Committee subsequently addressed the issue separately by
adopting the “retroactive pricing” mechanism. The surcharging
issue is discussed further below in the section on illicit trade.
Other Sources of Humanitarian Aid
UNICEF, the World Food Program (WFP) the U.N. Development Program
(UNDP), the European Community (ECHO), the International Committee of the Red
Cross (ICRC), governments, and private relief organizations such as Catholic Relief
Services and Save the Children continue to provide additional relief to supplement
the oil-for-food program. UNICEF, ECHO, and WFP focus their humanitarian aid
on the South and Central part of the country rather than on the economically better
off Kurdish north.
It is impossible to determine precisely the total amounts of bilateral and
multilateral aid by all donors. However, the U.N. Secretary-General’s recent reports
and statements have suggested that these aid sources are declining, possibly because
donors believe the oil-for-food program is satisfying Iraq’s needs. Secretary General
Annan has called for increased international assistance to Iraq, and Resolution 1284
“encourages” countries and international organizations to provide supplementary
humanitarian aid and educational materials to Iraq. After Baghdad’s incursion into
the Kurdish north in late August 1996, the United States virtually ended its assistance
program for northern Iraq, which had been about $45 million per year. The incursion

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caused all American-based humanitarian relief organizations in northern Iraq to leave
in fear of Iraqi reprisals against them.
There is no single source for information on humanitarian assistance to Iraq. A
recent report of the Organization for Economic Cooperation and Development
(OECD), which provides donor information for the years 1994 through 1998,
indicates that Iraq received a total of $76.36 million in bilateral assistance in 1998.7
This does not include any funds provided by U.N. agencies but does include grants
by the European Commission (ECHO). A Washington-based official of the
European Commission said in June 2001 that the European Union has given over
$200 million in aid to Iraq since 1991.
Illicit Trade
In order to generate funds that it can use without restriction, Iraq has conducted
illicit oil dealings with its neighbors and other countries, imposed surcharges on oil
buyers, and solicited kickbacks from suppliers of humanitarian and other civilian
goods. The primary concern of U.S. officials is that Iraq is reportedly using these
revenues to buy prohibited military and WMD technology. U.S. officials have
accused Iraq of squandering the illicit revenues on projects and items that do not
improve living standards for average Iraqis. In February 2000, the Clinton
Administration accused the Iraqi government of using its resources to build nine
lavish palaces (valued at about $2 billion) and to import non-essential items such as
cigarettes and liquor.8
There are no authoritative figures for the value of illicit trade with Iraq.
However, the most widely cited estimates come from a study, released in May 2002
by the General Accounting Office (GAO).9 According to the GAO study, Iraq earned
$6.6 billion in illicit revenue from oil smuggling and surcharges during 1997-2001.
Of that total, GAO estimates $4.3 billion was from illicit oil sales and $2.3 was from
surcharges on oil and commissions from its contracts to buy civilian goods
(kickbacks). The study estimates that during 2001, Iraq earned $1.5 billion from
illicit oil sales through Jordan, Syria, Turkey, and the Persian Gulf; and about $700
million from surcharges and contract kickbacks.
Additional details on Iraq’s illicit dealings are discussed below.
Jordan. Since the Gulf war, Jordan has notified the Security Council that it
imports Iraqi oil (between 70,000 - 100,000 barrels per day as of March 2002,
according to the GAO study) at below-market prices. The oil is in exchange for
7 Geographical Distribution of Financial Flows to Aid Recipients. Disbursements,
Commitments, Country Indicators. 1994-1998. OECD. 2000.
8 Alcohol is classified as a food, so the imports are technically legal under the international
sanctions regime in place since Iraq’s August 2, 1990 invasion of Kuwait.
9 GAO-02-625. Weapons of Mass Destruction: U.N. Confronts Significant Challenges in
Implementing Sanctions Against Iraq. General Accounting Office, May 2002.

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civilian goods and write-downs of Iraq’s debt to Jordan. The United States supports
the Sanctions Committee decision to “take note of” the Jordanian purchases, neither
approving them nor deeming them a violation. The Administration has routinely
waived unilateral sanctions on Jordan that could be imposed because of this trade.10
In October 2000, Jordan cancelled an agreement with Lloyd’s Registry, in force since
1993, for the firm to inspect Iraq-bound cargo in Jordan’s port of Aqaba. This
inspection agreement covered goods other than those imported under the oil-for-food
program; goods imported under the program are monitored at all points of entry,
including the Iraq-Jordanian border.
Iran/Persian Gulf. The GAO study estimates that Iraq was exporting illicitly
about 30,000 - 40,000 barrels per day through the Persian Gulf in March 2002. This
exportation is apparently conducted with cooperation from Iran. Of the funds
generated through this export channel, about one-half go to Iraq, one-quarter go to
smugglers and middlemen, and one-quarter go to Iran’s Revolutionary Guard for
“protection fees” to allow the shipments to hug its coast and avoid capture. Many
believe that exports through the Gulf were higher during 1998-2000, but they have
fallen because Iraq is diverting oil to the Syrian route, where there are fewer
middlemen to pay.
Syria/Military Technology Exports to Iraq. In late 2000, according to
several press reports, Iraq began exporting oil through an Iraq-Syria pipeline, closed
since 1982 but now repaired. According to the GAO study, Iraq exported 180,000 -
250,000 barrels per day through this route in March 2002, and exports through Syria
are believed to be at similar levels as of early 2003. This exportation is reputedly
under a bilateral agreement with Syria under which Syria refines the Iraqi oil for
domestic use, and pays Iraq about half the world market price for oil, freeing up extra
Syrian oil for export. The United Nations has not formally approved this export route
and the U.S. position is that it is illegitimate. Many experts believe the United States
has not forcefully pressed Syria to cease this importation in order to enlist Syria’s
support in the global war on terrorism and the U.S. effort to build international
support for confronting Iraq.
There is growing concern that Syria is becoming a major transit point for
prohibited imports by Iraq of military equipment and technology that could be used
for WMD. In July 2002, a respected Israeli military expert reported that Syria had
served as a transit point for Iraq’s importation of Russian-made engines for combat
aircraft (sold by Ukraine) and tanks (sold by Bulgaria and Belarus), and Czech-made
anti-aircraft cannons (sold by the Czech Republic).11 According to the same article,
Syria also passed on prohibited equipment to Iraq sold by Hungary and Serbia.
In late September 2002, both Ukraine and Belarus denied providing weapons
systems or dual use technology to Iraq. However, in late September 2002, the Bush
Administration initiated what it called a “temporary pause” in U.S. assistance to
Ukraine (about $55 million held up) because of allegations that Ukraine has provided
10 Every fiscal year since 1994, Congress has included a provision in foreign aid
appropriations cutting U.S. aid to countries that violated the Iraq embargo.
11 Schiff, Ze’ev. Syria Buys Arms for Iraq. Ha’aretz, July 15, 2002.

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the “Kolchuga” early warning radar system to Iraq. In February 2001, the United
States struck an air defense network that was being upgraded with the help of a
Chinese firm, according to press accounts, although it is not known how the fiber
optic equipment reached Iraq.
Turkey. According to the GAO study, Iraq exported the equivalent of 40,000 -
80,000 barrels per day of oil through Turkey in March 2002. The exportation is in
the form of 450 Turkish trucks per day carrying Iraqi oil products (not crude oil)
through the Iraqi Kurdish areas into Turkey in spare fuel tanks. The Turkish
government taxes and regulates the illicit imports. As in the case of Jordan, the U.S.
Administration has routinely waived the imposition of U.S. sanctions on Turkey for
permitting this illicit trade. Some reports suggest that commerce between Iraq and
Turkey has slowed to a crawl, if not halted entirely, in February 2003 in anticipation
of a possible U.S.-led war against Iraq.
Oil Sales Surcharges. As noted above, the GAO study estimates that Iraq
earned over $700 million in 2001 from oil sales surcharges and kickbacks on
purchases of goods. The GAO study obtains that estimate by assuming that Iraq
obtained a surcharge of 35 cents on each barrel of oil sold under the oil-for-food
program. The GAO estimated the “kickback” percentage for Iraq at 5 percent of the
value of each purchase contract. In September 2001, the Sanctions Committee
moved to curb Iraq’s ability to surcharge on oil sales by adopting a “retroactive
pricing” formula. The United Nations said in late September 2002 that Iraq, in part
due to the pricing formula, had ended its surcharging practice and that Iraq’s oil sales
were rebounding.
Prior to adopting retroactive pricing, the Sanctions Committee had evaluated
a number of alternative methods. One proposal, not adopted, was to price Iraq’s oil
every ten days or every fifteen days rather than monthly. Another idea, not adopted,
was to limit Iraq’s oil buyers to major international oil firms, rather than smaller oil
traders that were willing to pay Iraq the surcharge. A press report in March 2001
(Reuters, March 8, 2001) listed companies that were purchasing Iraqi oil; many are
small companies from countries that seek to do business with Iraq or are sympathetic
to easing sanctions on Iraq. U.S. major oil companies are said to buy Iraqi oil
shipments from these small traders.
The list included: Italtech (Italy); Mastek, and Quantum Holdings (Malaysia);
Zarubezhneftegas, Mashinoimport, Slavneft, Sidanco, and Rosneftimpex (Russia);
Fenar (Lichtenstein); Emir Oil, Coastal Oil Derivatives, and Benzol (United Arab
Emirates); Nafta Petroleum, and KTG Kentford Globe (Cyprus); Glencore, and Lakia
Sari (Switzerland); Al Hoda (Jordan); Belmetalenergo (Belarus); Samasu (Sudan);
Erdem (Turkey); African Petroleum (Namibia); Shaher Trading (Yemen); Aredio
(France); Commercial Home (Ukraine); Awad Ammora (Syria); Montega (South
Africa); Afro Eastern (Ireland); and Bulf Drilling (Romania).
Oil Exploration Contracts. There are no public allegations that any
international oil companies have begun new oil exploration investments in
contravention of existing U.N. resolutions. However, a number of companies have
signed exploration deals that would go into effect if and when the ban on oil
exploration is lifted. Much of the focus of U.S. officials has been on oil exploration

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CRS-15
deals by Russian firms. In general, Russia seeks to obtain repayment of Iraq’s $7.6
billion in debt to Moscow, and possibly to earn funds selling arms to Iraq if such
sanctions are eventually lifted. In August 2002, it was reported that Russia and Iraq
had agreed to a $40 billion economic cooperation agreement, although it is not clear
that any of the planned cooperation would violate oil-for-food or other sanctions
guidelines. Russian-Iraqi commercial relations were set back somewhat in December
2002 when Iraq overturned a presumptive contract with Russia’s Lukoil to develop
the West Qurna field (see below). Iraq acted reportedly on the grounds that Lukoil
had held discussions with Iraq’s opposition about Lukoil’s possible role in
developing the energy sector of a post-war Iraq. However, some reports suggest that
Iraq might reverse that cancellation or offer the development contract to another
Russian firm.
France12 has long had substantial economic interests in Iraq as well, and
reportedly is owed $5 billion to $ 7 billion by Iraq, although some reports cite a
French National Assembly study that contains a much lower figure of about $2.25
billion. Several major French companies export equipment to Iraq under the oil-for
food program; these companies include Peugeot (automobiles and parts), Renault
Trucks, and Alcatel (telecommunications equipment). The International Monetary
Fund reported that French companies received the most money, $1.8 billion, in 2001
for exports to Iraq, but other sources place French companies behind Russian and
Egyptian firms.
Some of the presumptive contracts for oil exploration in Iraq include the
following:13
! Al Ahdab field — China National Oil Company (China)
! Nassiriya field — Agip (Italy) and Repsol (Spain)
! West Qurna — Lukoil (Russia)
! Majnoon — Total Fina Elf (France)
! Nahr Umar — Total Fina Elf (France)
! Tuba — ONGC (India) and Sonatrach (Algeria)
! Ratawi — Royal Dutch Shell (Britain and the Netherlands)
! Block 8 — ONGC (India)
Flights to Iraq. Since September 2000, Iraq may have conducted an unknown
amount of additional illicit trade aid from flights to and from Iraq. These flights
began as relief flights carrying humanitarian aid, intended to challenge the U.S. and
British interpretation of U.N. Security Council Resolution 670 (September 25, 1990).
Resolution 670 requires the banning of flights to or from Iraq that are carrying any
“cargo to or from Iraq or Kuwait other than food in humanitarian circumstances,
subject to authorization by the Council ...” or the Sanctions Committee. Prior to
September 2000, the U.S. interpretation prevailed that all flights to Iraq require
Sanctions Committee authorization prior to takeoff. France, Russia, and other
12 Some of the information and analysis in this section was provided by Paul Gallis,
Specialist in European Affairs, Foreign Affairs and Trade Division.
13 Morgan, Dan and David Ottaway. In Iraqi War Scenario, Oil Is Key Issue. Washington
Post, September 15, 2002.

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CRS-16
governments, although not opposed in principle to inspecting cargo bound for Iraq,
argue that passengers are not “cargo” and that the U.S. interpretation that Resolution
670 restricts all flights to Iraq is not correct.
The cargo on these flights has not been subjected to any U.N. monitoring to
ensure that the cargo comports with oil-for-food guidelines. Since September 2000,
regular charter flights have begun between Iraq and Syria and Iraq and Jordan. The
United States criticized those governments that allow the flights to proceed without
approval, but no U.S. or U.N. measures have been taken against the flights or against
Jordan or Syria.
One donation to Iraq in November 2000 drew strong U.S. criticism and a
sanction. A member of the royal family of Qatar presented Saddam Husayn with a
Boeing 747 jumbo jet as a “gift.” The Qatari, Hamad bin Ali bin Jabr Al Thani,
heads the Gulf Falcon air services company, which gave him access to the aircraft.
On November 24, 2000, the Clinton Administration announced that exports and
reexports of many U.S. goods would need specific Commerce Department approval
for sale to Mr. Al Thani or his businesses. U.S. officials said that sanctions were
imposed to ensure that U.S. goods would not be improperly diverted to Iraq.
Future of the Oil-for-Food Program
In a Post-War Iraq
The Bush Administration is planning for administering a post-war Iraq, in the
event the President decides to take military action to disarm the Iraqi regime. As
noted above, the Bush Administration has not announced whether it would support
continuation of the oil-for-food program as the vehicle for delivering humanitarian
relief to the Iraqi population in a post-war period.
Some believe the oil-for-food program would be an appropriate and convenient
vehicle for providing post-war assistance. The program has been in operation for
more than 6 years and offers a ready-made distribution structure. It also provides a
means for the international community to maintain control of Iraq’s oil revenues until
there is assurance that a post-war government of Iraq would administer Iraq’s
national oil wealth equitably.
Others believe the United States should move quickly to end international
sanctions on a post-war regime and dismantle the program as soon as possible.
According to this view, keeping the program in operation would represent
continuing and unwanted international or U.S. control over post-war Iraq’s internal
affairs, and its rapid dismantlement would signal a normalization of post-war Iraq’s
economic activity.

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Appendix: Overview of U.S. Regulations Governing
U.S. Participation in the Oil-for-Food Program14
The Iraqi Sanctions Regulations implement Executive Orders No. 12722
(August 2, 1990) and 12724 (August 9, 1990), issued after Iraq’s August 2, 1990
invasion of Kuwait. The executive orders imposed a ban on U.S. trade with and
investment in Iraq, and froze Iraq’s assets in the United States. The Iraq Sanctions
Act of 1990 (Section 586 of P.L. 101-513, signed November 5, 1990 reinforces those
executive orders. The August 9 executive order amended the August 2 executive
order to align U.S. sanctions with U.N. Security Council Resolution 661 (August 6,
1990), in keeping with the United Nations Participation Act (22 U.S.C. 287c). That
resolution imposed a comprehensive embargo on all Iraqi imports and exports.
In the aftermath of Iraq’s invasion, Iraq was again placed on the U.S. list of state
sponsors of terrorism under Section 6(j) of the Export Administration Act (P.L. 96-
72). Iraq had been removed from the list in 1982. Countries on the terrorism list are
barred from receiving U.S. foreign assistance, votes in favor of international loans,
and sales of munitions list items (arms and related equipment and services). Exports
of dual use items (items that can have military applications) are subject to strict
licensing procedures.
U.S. regulations governing trade with Iraq have since been modified to allow
for U.S. participation in the oil-for-food program. Key provisions of the U.S.
sanctions include the following:
U.S. firms may apply to the Office of Foreign Assets Control (OFAC) of the
Treasury Department for specific licenses for the following activities under the oil-
for-food program:
! “the sale and exportation to Iraq of medicines, health supplies,
foodstuffs, and materials and supplies for essential civilian needs.”
The goods can be sold, subject to a license, to the government of
Iraq or to a U.N. entity distributing aid under the program.
! “the purchase and exportation from Iraq of Iraqi-origin petroleum
and petroleum products;”
! “the trading, importation, exportation or other dealings in or related
to Iraq-origin petroleum and petroleum products outside Iraq; and”
! “the sale and exportation to Iraq of parts and equipment that are
essential for the safe operation of the Kirkuk-Yumurtalik (Iraq-
Turkey) pipeline system in Iraq.”
14 Source: Iraq: What You Need to Know About the U.S. Embargo. An Overview of the
Iraqi Sanctions Regulations – Title 31, Part 575 of the U.S. Code of Federal Regulations.
U.S. Department of the Treasury, Office of Foreign Assets Control,
[http://www.treas.gov/ofac/].

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In addition:
! The regulations “generally” prohibit “the performance of contracts
in support of industrial, commercial, public utility, or governmental
projects” in Iraq. U.S. persons may not provide financing or
consulting services to a foreign country company where those
services would benefit such projects in Iraq. U.S. persons may not
provide consulting services or goods, in connection with Iraqi
projects, to foreign subsidiaries of U.S. corporations, although
foreign subsidiaries themselves are not subject to U.S. regulations.
! All transfers of funds by U.S. persons to the government of Iraq or
to persons in Iraq, are prohibited, as are “all commitments or
transfers of credit, financial transactions, or contracts.”
! All transportation-related services, or the use by U.S. persons of
vehicles, ships or aircraft registered in Iraq, are prohibited. Travel-
related transactions by U.S. persons are also prohibited, with the
exception of travel related to journalism, or U.S. government or
United Nations business.

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