Annan Orders Disciplinary Action After Report

U.N. Secretary-General Kofi Annan called for disciplinary action against the chief of Oil-for-Food (search) after a report released Thursday said the program head had "seriously undermined" the integrity of the United Nations.

The U.N.-authorized investigation found that Benon Sevan (search) broke the rules by allegedly trying to obtain oil vouchers from Saddam Hussein's regime in Iraq. Sevan has been accused of receiving about $1 million worth of lucrative oil vouchers but he has denied any wrongdoing.

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

The finding 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.

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

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

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.

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," said 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.

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

Volcker personally delivered a copy of the 200-page report to Annan on Thursday morning, several hours before the public release.

"This is an interim report. It is not the whole story by a long shot," Volcker said. "This is a painful episode I think for everybody in the life of the United Nations. At the same time, I think it's one of the signals for review and renewal."

The report did not delve into the possible connection of Annan's son, Kojo Annan (search), to Oil-for-Food. 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. That issue is expected to be addressed in a future report.

The Oil-for-Food program, launched in December 1996 to help ordinary Iraqis cope with U.N. sanctions imposed after Saddam Hussein's (search) 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 to buy 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.

Despite Sevan's claims that he never recommended any companies for oil vouchers, Volcker's Independent Inquiry Committee said it had evidence that Sevan asked Iraq to give a small Swiss-based oil company, African Middle East Petroleum Co. Ltd. Inc. the opportunity to buy oil. The company, known as AMEP, received the allocations and earned $1.5 million from them.

The report did not say Sevan received kickbacks, but said it was suspicious of $160,000 he said he received from his aunt in his native Cyprus from 1999-2003. The report questioned this "unexplained wealth," noting that his aunt, who recently died, was a retired Cyprus government photographer living on a modest pension.

In a separate investigation by U.S. arms inspector Charles Duelfer (search), allegations surfaced that Sevan may have personally profited by receiving vouchers to sell Iraqi oil. According to the Duelfer report — which got its information from the former Iraqi oil ministry — Sevan allegedly received vouchers for 7.3 million barrels of oil through various companies and representatives that he recommended to Iraqi ministries. The financial take would have been in the range of $700,000 to $2 million, depending on oil prices.

The Volcker report said Sevan's solicitations on AMEP's behalf "presented a grave and continuing conflict of interest, were ethically improper, and seriously undermined the integrity of the United Nations."

It also noted that Sevan had been uncooperative with investigators by changing his story and sometimes not responding promptly to interview requests.

The report also found "convincing and uncontested evidence" that selection of the three U.N. contractors for the oil-for-food program — Banque Nationale de Paris, Saybolt Eastern Hemisphere BV, and Lloyd's Register Inspection Limited — did not meet established financial and competitive bidding rules.

Paris-based BNP was chosen by former Secretary-General Boutros Boutros-Ghali (search) to be the program's banker without meeting the U.N. requirement to accept the "lowest acceptable bidder," the report said.

The competitive bidding process for a company to monitor Iraqi oil exports was manipulated by Allan Robertson, who was in charge of the U.N. procurement department, so Saybolt could lower its bid and win the contract, the report said.

For the inspection of humanitarian goods, the report said, there was a clear early preference for Lloyd's and the competitive bidding process was "tainted" by Stephanides, the U.N. official. His contacts with an unnamed U.N. mission led to Lloyd's winning the contract even though there was a lower bidder, it said.

Annan told reporters Wednesday the United Nations is already taking measures to strengthen some management practices and will implement Volcker's recommendations.

He added that he has already asked the General Assembly to review the mandate of the U.N. watchdog office, which was created 10 years ago, "to see how we can strengthen it and give it appropriate authority to do its work."

At least five committees on Capitol Hill are investigating Oil-for-Food. The chairman of one panel, Rep. Henry Hyde (search), released a statement saying the report reinforced evidence of mismanagement at the United Nations.

"I am reluctant to conclude that the U.N. is damaged beyond repair, but these revelations certainly point in this direction. The interim findings should come as no surprise, given what is already known about other significant scandals engulfing the organization," said Hyde, R-Ill., chairman of the House International Relations Committee.

Sen. Norm Coleman, R-Minn., who is leading one U.S. investigation into oil-for-food wrongdoing, said the report showed the program was "inherently flawed" and asked that Sevan's diplomatic immunity be lifted so federal prosecutors can review the case.

"There is more than enough probable cause to believe Benon Sevan's actions constitute criminal activity," Coleman said in a statement.

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