The Manhattan district attorney has launched a criminal probe into Benon Sevan (search), the U.N. Oil-for-Food (search) chief who investigators said had "serious conflict of interest" while overseeing the program.

Sources close to the case told FOX News that District Attorney Robert Morgenthau (search), who has been investigating financial relationships within the Oil-for-Food program, planned to probe the activities of Sevan, who has been accused of receiving about $1 million worth of lucrative oil vouchers.

A report released Thursday pointed to significant management problems within the United Nations surrounding the $60 billion Oil-for-Food program. The report by a U.N.-authorized committee headed by Paul Volcker (search) said that Sevan had "seriously undermined" the integrity of the United Nations.

"Our conclusion is he placed himself in a serious conflict of interest," Volcker said at a news conference. "Our investigation continues into what other implications there may be if any."

Morgenthau's investigation into Sevan, whose diplomatic immunity, the U.N. said, won't be lifted unless it's requested by Volcker or a prosecutor, marks the first step toward prosecution of the official.

The finding in the report represents the first time a high-level U.N. official has been implicated by the investigative panel headed by Volcker, a former chairman of the U.S. Federal Reserve.

U.N. Secretary-General Kofi Annan said Friday he would take prompt action in response to the report.

"Obviously there were some hard knocks in the report and we are concerned about it, and that is why we intend to take action promptly," Annan told reporters at the United Nations. "We are as determined as everyone to get to the bottom of this. We don't want this shadow to hang over the U.N."

Based on the report, Annan has decided to discipline Sevan and another U.N. official, Joseph Stephanides, said Mark Malloch Brown, Annan's new chief of staff. Malloch Brown said the type of disciplinary action would be announced early next week but gave no details.

To read the full report, click here (pdf).

Brown acknowledged that there was limited action Annan could take because Sevan had retired. But Annan could discipline Stephanides, who was chief of the U.N. Sanctions Branch and deputy director of the Security Council Affairs Division in the U.N. Department of Political Affairs. The Volcker report found that Stephanides manipulated an Oil-for-Food contract.

Volcker and his panel were unable to conclude if Sevan actually took bribes because they were prohibited from issuing subpoenas.

To read the full statement on behalf of Sevan, click here (pdf).

But Richard Goldstone, a member of the Volcker group and a justice of the South African Constitutional Court, told FOX News he believed the threshold had been reached for criminal charges against Sevan.

Responding to the conclusion, an attorney for Sevan said in a statement that his client had done nothing wrong and had become a "scapegoat."

"It is unfortunate that the Independent Investigative Committee [IIC] has succumbed to massive political pressure," Eric L. Lewis, a lawyer based in Washington, D.C., said in a written statement. "After eight months of investigation with more than 60 employees and a $30 million budget, the IIC needed to produce a 'smoking gun.' As Mr. Volcker has conceded, there is no smoking gun. Mr. Sevan never took a penny."

Lewis said in the statement that Sevan, who holds the title of undersecretary-general, had served the United Nations for 40 years. "He is enormously proud of his service," Lewis said.

Annan said it was "a bit early" to conclude that anyone was being scapegoated. "This is one in a series of investigative reports. We should wait until the work is done to draw definitive conclusions," he said.

Although he was not a subject of Thursday's report, Annan remains under investigation by the Volcker panel because of his son's links to a company that won one of the most lucrative Oil-for-Food contracts. Kojo Annan was employed for a period by the Swiss company, Cotecna Inspection SA, which had a U.N. contract to certify deals under the Oil-for-Food program.

The Oil-for-Food program, launched in December 1996 to help ordinary Iraqis cope with U.N. sanctions imposed after Saddam Hussein's 1990 invasion of Kuwait, quickly became a lifeline for 90 percent of the population.

Under the program, Saddam's regime could sell oil, provided the proceeds went primarily toward humanitarian goods and pay reparations to victims of the 1991 Gulf War (search). Saddam's government decided on the goods it wanted, who should provide them, and who could buy Iraqi oil — but the Security Council committee overseeing sanctions monitored the contracts.

FOX News' Eric Shawn, Jonathan Hunt and Per Carlson contributed to this report.