The U.N.’s Spreading Bribery Scandal: Russian Ties and Global Reach

Co-authored by: George Russell.

NEW YORK —  How widespread is the corruption at the United Nations? The multibillion-dollar Iraq Oil-for-Food (search) scandal was just the beginning.

Now the issue is becoming the scale of corruption in the U.N.'s normal operations — and which individuals and corporations are reaping the benefits of a network of bribery and conspiracy that investigators have just begun to uncover. So far, those identities are still a mystery — but perhaps not for much longer.

Last Friday, federal prosecutors in Manhattan indicted the head of the U.N.'s own budget oversight committee, a Russian named Vladimir Kuznetsov, on charges of laundering hundreds of thousands of dollars worth of bribes paid by companies seeking contracts with the United Nations.

Kuznetsov, who has pleaded innocent, allegedly took a cut so openly that he had part of it deposited into the United Nations' own staff credit union in New York.

Kuznetsov's arrest is the latest twist in the scandal involving the U.N. procurement department, which was the longtime post of Alexander Yakovlev (search), another Russian U.N. official recently fingered by U.S. federal investigators.

On Aug. 8, Yakovlev pleaded guilty to federal charges of corruption, wire fraud and money laundering, after a FOX News investigation revealed his unauthorized ties with a U.N. contractor, IHC Services, and details leading to his secret offshore bank account. Federal investigators have now alleged that from 2000 on, Yakovlev did at least some of his grafting in partnership with Kuznetsov, transferring bribe money to him via the Antigua Overseas Bank in the West Indies. Allegedly the bribe money was obtained in exchange for providing inside information to companies seeking U.N. contracts.

The Yakovlev-Kuznetsov scandal joins a growing list of cases of U.N. misconduct, waste, theft and abuse. They include bribe-taking under Oil-for-Food, sexual abuse of minors by peacekeepers in West Africa, sexual and financial misconduct — including outright larceny — at U.N. offices in Geneva, and business ties between the son of Secretary-General Kofi Annan and one of the Oil-for-Food inspection firms hired with Yakovlev's input, Swiss-based Cotecna Inspection (Cotecna has denied any wrongdoing).

In yet another scandal that emerged just last week, the United Nations disclosed that its Ukrainian peacekeeping contingent in Lebanon, including the commanding officer, has engaged in “significant financial misconduct” — though the world body has refused to provide details of what was done wrong or how much money was involved.

Amid all this, the U.N. procurement scandal at headquarters stands out as especially important, because the graft is not confined to any one program, but radiates from the United Nations' administrative core. Kuznetsov held an influential post in which he passed judgment on line items in the U.N. budget. Yakovlev, who held various portfolios in procurement during his 20-year career, dealt with contractors operating in places as far-flung as Africa, Asia and the Middle East. He even managed the architectural contract for the U.N.'s proposed $1.2 billion renovation of its Manhattan headquarters.

While there is no proof that in every case Yakovlev solicited bribes, there is by now enough evidence to invite investigation into all contracts he dealt with. Secretary-General Annan has ordered a review of the procurement department and put the organization's new controller in charge, but has not lifted the secrecy behind which Yakovlev operated in the first place. The investigation, according to a U.N. spokesman, is “ongoing.”

The amounts at issue in this alleged Russian bribery ring are quite likely far larger than the “several hundreds of thousands” so far cited by federal investigators. The most recent report from Paul Volcker's Oil-for-Food investigation dwelled at length on Yakovlev's failed attempt in 1996 to solicit a bribe related to an Oil-for-Food contract. But Volcker also noted in passing that Yakovlev had received more than $950,000 in bribes from companies that “collectively won more than $79 million in United Nations contracts and purchase orders.”

Volcker did not elaborate, presumably because the graft involved U.N. activities outside his Oil-for-Food mandate. But the hundreds of thousands that according to federal investigators allegedly passed from Yakovlev to Kuznetsov via secret bank accounts in the West Indies hint at a pie even bigger than $79 million.

(The Volcker committee is slated to deliver its main report on Oil-for-Food on Wednesday. Read more by clicking here and read the preface to the report by clicking here.)

Procurement and budgeting corruption may escape Volcker's scrutiny, but they are central to the mandate of Annan.

This scandal touches on almost everything the secretary-general is supposed to control. It is by way of procurement contracts, for goods and services ranging from cappuccino and paper clips at U.N. headquarters, to air freight services and food rations for peacekeeping troops worldwide, that the United Nations spends the billions contributed every year by member states — of which U.S. taxpayers provide the largest slice.

So which contractors paid the six-figure bribes mentioned by federal prosecutors and by Volcker? And what did they get in return? In almost all cases, the United Nations keeps secret most details of its procurement contracts, including which procurement officials handled specific deals. The international organization still refuses to disclose the names of all the firms Yakovlev dealt with.

U.S. federal investigators, who are clearly not done with their own probe, have lifted the curtain only a little further.

So far U.S. authorities have cited four unnamed “foreign firms” in connection with the Yakovlev-Kuznetsov case, and provided only a bare description of their activities. One firm is described in the federal summaries as involved in “the airlifting of United Nations supplies to foreign countries.” Two more were described in Yakovlev's guilty plea as firms helping additional firms get U.N. contracts — companies known in U.N. parlance as “vendor intermediaries” — which strongly implies that yet more companies are involved.

In a June 20 report, FOX News uncovered close personal links between Yakovlev and one “vendor intermediary.” That report led to his resignation from the United Nations, and his subsequent arrest. The firm identified by FOX News is IHC Services, a company with offices in New York and Milan, Italy, that in 1999 supplied nearly $2 million worth of portable generating sets to U.N. peacekeepers and, according to its CEO, Ezio Testa, has helped a wide variety of suppliers obtain other U.N. contracts.

A report issued last month by Paul Volcker's U.N.-authorized probe into Oil-for-Food provides clear clues to the identity of yet another U.N. contractor that dealt intensively with Yakovlev though nothing in the report suggests any impropriety in the contractor's U.N. dealings.

The report includes in its back pages a heavily redacted copy of a letter to Yakovlev from an unknown correspondent, dated May 4, 2005, and a memo from Yakovlev dated June 6, 2005. These documents include scribbled annotations by Yakovlev and were apparently released by Volcker solely as part of a set of handwriting samples. All personal and corporate names except Yakovlev's were blacked out by the investigators.

Even so, the documents provide more information than perhaps Volcker intended. The letter discusses food services costs for U.N. peacekeeping missions in Liberia, Eritrea and Burundi, and refers to pricing and delivery amendments to the supply contracts. The memo includes references in Yakovlev's handwriting to peacekeeping operations in Lebanon, Cyprus, Western Sahara and the Golan Heights.

Piecing together the details with information from other sources, FOX News has learned that the contractor referred to in both documents is Eurest Support Services Worldwide, or ESS, a food services company that has become one of the biggest suppliers of food rations for U.N. peacekeepers around the world. ESS is in turn a subsidiary of the Compass Group, a British-based firm that operates in 90 countries and bills itself as the world's largest food services company, with revenues last year in excess of $21.6 billion.

When asked to discuss the Volcker documents, a spokesman for ESS declined, citing client confidentiality agreements.

But it is intriguing that ESS not only dealt with Yakovlev, but had close ties with IHC Services, the vendor intermediary with which Yakovlev had unauthorized ties. According to an ESS Web site press release, dated Sept. 13, 2004, ESS formalized these ties by establishing a special “Best in Class” business partnership with IHC last year. This partnership was hailed in the same press release by ESS's CEO Peter Harris. The press release has since been removed from the ESS web site, though FOX News has obtained copies from two different sources.

The IHC-ESS partnership was to be managed, according to the press release, by an ESS official named Andy Siewert. According to a food service industry insider, Siewert was also the main liaison between ESS and the U.N. procurement department, and spoke frequently of meeting with Yakovlev, who in recent years managed many of the peacekeeping food service contracts.

Contacted by FOX News, Siewert referred all questions to the Compass Group media relations department, which referred all questions to a public relations firm, the Brunswick Group, as did ESS CEO Peter Harris. The Brunswick Group refused to comment on the grounds of client confidentiality.

Since 2000, ESS has won food contracts via the U.N. procurement department with U.N. peacekeeping forces in places such as East Timor, Liberia, Burundi, Eritrea, Lebanon, Cyprus and Syria. The company has just won an additional contract to feed the expanding peacekeeper force in strife-torn Sudan, which could grow to 15,000 personnel. U.N. officials estimate the total value of the institution's current peacekeeping contracts with ESS at more than $237 million. Including optional renewals and add-ons the total could run as high as $351 million.

In a previous report this past June, FOX News identified another U.N. contractor that dealt with Yakovlev. This was an architectural firm, Renato Sarno, based like IHC in Milan, which was hired by the United Nations in 2001 under Yakovlev's supervision on a $44 million contract to provide architectural services for the renovation of U.N. headquarters in New York. That contract was apparently dropped after the preliminary phase for reasons the U.N. has not explained, and it is now under scrutiny by congressional investigators.

The fact that both Yakovlev and the recently indicted Kuznetsov are Russian citizens raises additional urgent questions about where this scandal might lead.

Kuznetsov, while serving as a member, then chairman, of the U.N.'s General Assembly budget advisory committee, held a dual appointment as a Russian government official. Yakovlev joined the U.N. staff in 1985, when all Russian appointees were nominated by the former Soviet regime. Since at least 2000 Yakovlev has worked closely with at least two other Russians in the procurement department, as documented in e-mails and other records seen by FOX News, and according to some of his former U.N. colleagues he has been in frequent contact with the Russian embassy. Records seen by FOX News show that Yakovlev maintained an apartment in Moscow.

Yakovlev was also heavily involved in the United Nations' hiring of inspection firms to monitor Saddam Hussein's oil sales and relief purchases under the 1996-2003 Oil-for-Food program, in which Russia topped the global list of both oil buyers and relief suppliers. Indeed, in the first of three interim reports this year from the U.N.-authorized probe into Oil-for-Food, led by Volcker, Yakovlev was presented as a star example of U.N. integrity. Only after his wrongdoing was brought to light by FOX News did Volcker produce evidence that Yakovlev was himself embroiled in corruption schemes.

Federal investigations into the alleged U.N. procurement bribery ring are continuing. Volcker has promised to release the underlying documentation of his Oil-for-Food probe when it comes to an end, after the main report due out Wednesday and a wrap-up report due in October. That could help identify the unnamed parties Volcker referred to as holding at least $79 million worth of U.N. contracts on which they paid Yakovlev close to $1 million in bribes.

But the real responsibility for coming clean on U.N. contracts lies with the United Nations itself, where Secretary-General Annan's pledges of reform must now contend with scandals spreading well beyond Saddam Hussein's old oil patch.

Claudia Rosett is a journalist-in-residence with the Foundation for the Defense of Democracies. George Russell is executive editor of FOX News.

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