It is estimated that since 2003 billions of dollars of public funds in Iraq have been lost due to widespread corruption. This loss has greatly hindered the development of Iraq’s economy. Iraq ranks at only 175th out of 183 countries on Transparency International’s Corruption Perceptions Index, despite membership of the United Nations Convention against Corruption and the establishment of Iraq’s anti-corruption commission, Nazaha, in 2004.
Iraq before 2003
During the economic embargo years of 1990 to 2003, corruption was seen as a way to survive through hardship, with bribes being paid for almost everything, and varying from just a few cents to millions of dollars. In 1995, the United Nations introduced the Oil-for-Food (OFF) Programme, aimed at providing the basic needs for the Iraqi people; however, the programme failed on several levels, with foreign companies paying kickbacks to the former Iraqi regime in order to obtain oil or food contracts. The former regime also used the programme to bribe individuals, politicians, journalists and even governments to gain their political support. Allegations of wrongdoing were made public for the first time on 25 January 2004, when Iraqi newspaper Al Mada published a list of individuals and organisations alleged to have received oil sales contracts via the OFF Programme. The list came from over 15,000 documents which reportedly belonged to the Iraqi Ministry of Oil.
After the release of the list in Al Mada, the Iraq Survey Group, which was tasked with finding evidence of weapons of mass destruction in Iraq, issued the Duelfer Report, which cited that Russia, France and China had been the top-three recipients of oil coupons. The United States was also listed, although the names of individuals and entities were initially censored by CIA lawyers citing the 1974 Privacy Act and other applicable laws.
As a result of the list, the United States Department of State and some European governments sued the companies which had been listed and were proven to be participating in paying kickbacks to Saddam Hussein’s regime. An example occurred on June 5, 2007, when the German chapter of the anti-corruption organisation Transparency International lodged a complaint with the German Federal Ministry of Economics and Technology (BMWi) against 57 German companies for allegedly paying USD 11.9 million in kickbacks to the United Nations’ Oil-for-Food Programme in Iraq. Also, on October 2007, the SEC brought a case against Chevron Corporation. Chevron had paid premiums to third parties that in turn were paid to Iraq’s State Oil Marketing Organisation (SOMO) as illegal surcharges, and then paid into Jordanian and Lebanese bank accounts controlled by the former Iraqi government and held under the names of former Iraqi government officials and other individuals. Moreover, Chevron allegedly did not record the true nature of the payments in its accounting books and failed to detect such improper payment, which led to violation of the books, records and internal controls provisions of the Foreign Corrupt Practices Act. Chevron’s sanctions consisted of US$25 million in disgorgement, which was satisfied by Chevron’s payments to the Department of Justice, and US$3 million in civil penalties.
The new Iraq
After May 2003, major combat operations in Iraq ended and the reconstruction of the new state began. Since that date, tens of billions of dollars have been allocated annually to rebuild and upgrade all sectors in Iraq, with the 2013 government budget announced to be US$118 billion. This enormous annual budget means there are huge opportunities for foreign investors to win large-scale contracts, but such contracts do not come without risk. Iraq currently still suffers from the lack of security stability, and corruption is still widespread despite the efforts of Nazaha. Contrary to Transparency International, however, Nazaha’s numbers indicate that corruption (mainly bribery) is becoming less of a problem each year. Nazaha’s annual reports show that 10.4 percent of Iraqi government employees received bribes in 2009, which was down to four percent in 2010, and less than two percent in 2011. Nazaha’s 2011 report also mentioned that the Ministry of Oil ranked first in the most-corrupted ministries, with 6.8 percent of the total 2011 bribery cases, followed by the Ministry of Justice, the Establishment of Martyrs, the Ministry of Education and finally the Ministry of Transport. Furthermore, Nazaha stated that it had found that 22 percent of the bribery occurred as a result of employee requests, 6.7 percent occurred due to improper applications, 34 percent to expedite the completion of an application or transaction and 37 percent as a result of the delay caused by the government departments. It is worth mentioning that in 2011 Nazaha included bribes paid by foreign companies and private-sector bribes as part of its new war to fight corruption and bribery in Iraq. Nevertheless, media reports still detail corruption cases, which cost the Iraqi economy billions and slow down the process of development in the country.
Iraq is a land of opportunities; however, due to the nature of business in the country, foreign companies are forced to operate in a very difficult environment, while trying to comply with international anti-corruption regulations. Therefore, choosing the right local partner in Iraq is a crucial element in conducting successful and ethical business. It is always advised to conduct due diligence on local partners in Iraq to avoid any unnecessary legal issues which may lead to financial loss and potentially-irreversible reputational harm.
What are the most common red flags found in Iraq?
- Government is reluctant to recognise and address corruption as an issue
- Official action to fight corruption is often seen as ineffective
- High-level of politicians and officials are noted to be corrupt
- Petty bribery is widespread in the course of activities with the government.
- State-owned enterprises have maintained an important role in the economy
- Government has a significant stake in the business through stake or stock ownership
- Principals are often politically-exposed persons (PEPs), and/or relatives or close associates of PEPs
- Bidding process for government tenders is not recognised as highly transparent and accountable.
- Legal and institutional framework is not well developed
- Judicial system is regularly criticised for the lack of independence and efficacy
- Litigation records are not open or easy for public to review and check.
- Giving of gifts, meals, entertainment or other forms of gratifications are considered very important in local business culture
- It is common to use third-party agents for doing business due to geographical and language differences.
- Human rights activities are closely monitored by public authorities.
- One company is often involved across various industries
- Principals are often connected to several companies
- Reverse directorships are usually not found in official records
- Companies frequently get registered by using a new name and address after being deregistered or liquidated.
• United Nations Oil-for-Food Programme scandal: contracts to sell Iraq humanitarian goods through the programme were allegedly given to companies and individuals based on their willingness to kick back a certain percentage of the contract profits to the Iraqi regime. Media reports disclosed that over 150 foreign companies were accused of corruption in the programme. Companies such as ABB, AGCO, GE, Akzo Nobel, AB Volvo, Chevron, El Paso, Fiat and Daimler have been involved in the scandal.