The war for compensation

Since the 1991 Gulf War, Iraq has been paying out billions in war reparations through a UN fund. But now another war in the region could change all that, writes Cameron Timmis

Iraq's record of compliance with United Nations resolutions is not as straightforward as George Bush would have us believe. Since the last Gulf War, under the aegis of a body known as the United Nations Compensation Commission (UNCC), a subsidiary of the UN Security Council, Iraq has been made to pay billions of pounds in compensation to its former adversaries.

So far the UNCC has received claims worth $350bn (£220bn) from individuals, companies and nearly 100 governments. This makes it the largest war reparations fund ever, comparable in terms to that of the Treaty of Versailles, which established the price Germany was to pay for waging the First World War. The UNCC receives a quarter of the revenues from the UN oil-for-food programme that allows Iraq to sell oil, and uses the funds to pay Gulf War victims who have suffered financial loss.

On the brink of another war, many fear that the one UN resolution that has been working well for the past 12 years could become the first casualty of the fighting. Last week Khaled Ahmad Al-Mudaf, the chairman of the Kuwaiti Public Authority for Assessment of Compensation for Damages of the Iraqi Aggression, warned that any interruption of reparations payments to claimants worldwide would harm the credibility of the UN.

There is widespread diplomatic speculation that the Security Council might suspend UNCC payments in the event of war, or even redirect the funds to address humanitarian needs in Iraq itself. "A break in the payment of UNCC awards of compensation could be interpreted as the United Nations' failure to abide by its resolutions and their implementation, as well as its failure to hold aggressor states accountable for their wrong deeds," Al-Mudaf told the closed meeting in a speech obtained by the international news agency Reuters.

Kuwait hoped that Governing Council members would "stand firm in the face of any inclination to halt or reduce the flow of funds into the Compensation Fund," added the diplomat, whose country will be a launchpad for any US-led attack on Iraq. Under legal authority enshrined in UN Security Council resolution 687 – which made Iraq liable under international law for "any direct loss, damage, or injury" following its invasion of Kuwait – the UNCC has so far identified a total of $43.8bn in compensation against Iraq.

Compensation is not paid directly by Iraq but out of a UNCC fund that draws its income from a tariff on sales of Iraqi oil exports (controlled by the UN), currently fixed at 25 per cent. Since 1996 the UNCC has been gradually making payments out of this fund, usually getting governments to distribute compensation to claimants on its behalf. On 16 January 2003, its most recent instalment, it made $597.9m available to 17 governments, bringing the overall total compensation now paid out to $16.7bn. At the current rate of compensation, Iraq will be paying off its Gulf War debts until 2070.

UNCC claims come in all shapes and sizes, from minor personal injury claims to billion-pound claims brought by oil companies and sovereign governments. Having suffered by far the most devastation, the lion's share of these claims derives from Kuwait and its neighbours. But Western companies, too, have made thousands of claims, among them several British companies who have so far been awarded $43.3m in compensation.

The British Government also filed UNCC claims – including one for £1,350 for four paintings stolen from the British ambassador's residence in Iraq – but most of these were thrown out by the UNCC. Out of $10.7m originally claimed, the UNCC only awarded Britain $3.2m. (This failure was small by comparison with Jordan, which made an extraordinarily opportunistic claim for $8.1bn but received $72.2m in compensation.)

Anticipating an immense workload, the UNCC was deliberately designed as an institution that could assess and resolve a huge number of claims relatively quickly. Achieving this meant dispensing with many of the features one would expect in normal claims resolution. Decisions are made by a panel of three commissioners – international arbitration experts – on the basis of written evidence submitted and subsequently approved by the UNCC governing council (whose membership mirrors that of the UN security council). There are very few oral hearings and no appeals. Moreover, Iraq, the "defendant" has largely been excluded from UNCC proceedings. It is not, according to the UN Secretary General, strictly a court, or a tribunal, but a "political organ".

One of the UNCC's most vocal opponents is Michael Schneider, a partner at the Geneva-based law firm Lalive & Partners. Schneider is currently advising Iraq on environmental claims filed by several Gulf states. While claimants have had unfettered access to legal experts to prepare UNCC claims, Iraq has faced an embargo on retaining advisers except for a few occasions when it has been permitted to comment on claims. In June 2001 the UNCC governing council finally ruled that Iraq could be given access to UNCC funds to use for its defence. A previous application in 1996 was rejected.

"I don't think it [UNCC] has legitimacy," says Schneider, who draws comparisons between the UNCC and the reparations that followed the Treaty of Versailles in 1919, and says the size of awards being made at the UNCC means that Iraqis will be paying for generations. "Everyone would agree with the need for settling reparations in an international forum... but nowhere do you have unilateral procedures to determine the debt of a sovereign nation." Despite recent concessions that have allowed Iraq greater access, Schneider believes that absence of due process and the lack of formal Iraqi representation mean the UNCC system is "fundamentally flawed" and "a disgrace for the new international legal order".

Most claimant lawyers applaud the work of the UNCC. Clifford Chance partner Jeremy Carver is a leading authority on UNCC claims, having been lead adviser to the Kuwait Petroleum Corporation(KPC), the single largest UNCC claimant. So far the firm has won awards worth $21bn for Kuwait's oil sector, including one award of $15.9bn – the biggest compensation award in legal history. In terms of "success" rate the firm has scored highly, winning on average 90 per cent of the amounts claimed. 'The UNCC is one of the unsung successes of the UN," says Carver. "It demonstrates that you can deal with mass claims efficiently, effectively and at low cost." In the interests of international claims resolution, he adds, the UNCC "needs to be shown up as an example of what can be done".

Even its sceptics concede that the UNCC has made sensible choices, especially its decision to settle individual claims before corporate and government claims. In adopting this strategy, the UNCC was learning the lessons of another similar institution, the US-Iran war claims programme; the tribunal that compensated Americans who suffered losses following the Iranian revolution in 1979. Despite having only 3,100 claims to process, it took nearly 20 years to adjudicate some of these claims.

By contrast, the UNCC has successfully settled 1.5 million individual claims within four years. But on the brink of war, the future of the UNCC compensation scheme is as uncertain as the political landscape of a post-war Iraq. One question facing the UNCC is whether "regime change" in Iraq would bring proceedings to a halt. Inheriting billions of dollars in war claims wouldn't be a good start for any government.

Just to muddy the waters, it was announced last week that the UNCC had elected Germany's ambassador, Walter Lewalter, as its next president. Diplomatic sources said it was significant that the United States was the last nation to agree to Germany's presidency.