SYDNEY — As scandals go in the annals of Australian business, the one over wheat sales to Iraq during the Saddam Hussein regime is huge. And the political fallout, both domestic and international, may prove to be even mightier. It leaves many people here and abroad scratching their heads in amazement.

In Washington, American class-action lawyers are mounting an action to sue for $1 billion in damages.

Australia was the main wheat supplier to Iraq while the United Nations Organization was trying to enforce sanctions in its oil-for-food program. As an inquiry has just revealed, it turns out that Australian kickbacks helped finance the Baghdad dictator in defiance of U.N. sanctions.

For hapless Australian farmers, worse is yet to come. Wheat is a huge export-income earner in Australia and pivotal in local politics. As if losing a $500 million-a-year market in Iraq is not enough, they are enduring a record drought. Their marketing body, the Australian Wheat Board (AWB), is about to be gutted, and nobody can predict how many will survive the crisis.

For Prime Minister John Howard and several senior ministers caught napping, the repercussions appear less drastic than first feared. Caught-out politicians always blame public servants for ghastly advice, and in this case the bureaucrats can in turn justifiably pass the blame to greedy traders. Twelve executives are tipped to face criminal charges.

The dimensions of the wheat scandal finally became known last week after a government-appointed inquiry commission headed by former judge Terence Cole handed down a large report.

The Cole commission details how, between late 1999 and the start of the second Persian Gulf War in March 2003, AWB made secret payments of $224 million to a Jordanian-based trucking company, Alia. AWB knew Alia merely passed the money, less commission, on to the Hussein regime — this at a time when Howard was preparing to send Australian troops to Iraq in support of U.S.-led coalition forces.

Cole exposes how AWB executives lied and damaged Australia’s trading reputation. He urges Canberra to enact a prohibition against breaching U.N. trading obligations as well as laws to override legal privileges that enabled AWB to hide documents. The 12 executives are under investigation for making false statements, destroying government property and breaching foreign exchange regulations.

Top Howard men who should have stopped such mischief, including Foreign Minister Alexander Downer and former Trade Minister Mark Vaile, escape Cole’s censure — as does the Department of Foreign Affairs and Trade.

Small wonder, then, that opposition Labor Party spokesman Kevin Rudd is tut-tutting that advisers had given the Howard government 35 sets of warnings over a five-year period that the AWB was up to no good. Senior Canberra bureaucrats questioned by Cole found the old nobody-told-me excuse very handy. As did their Cabinet ministers.

Canberra is likely to inflict drastic change. First up is to split the “didn’t-know” department into two separate ministries, foreign affairs and trade. Joined 20 years ago as an economy measure, the bipolar ministry left officials at overseas embassies, including in Tokyo, with a schizophrenic template for handling Australia’s overseas affairs.

Still wiping sweat from its brow, Melbourne-based BHP Billiton, the world’s biggest mining company, is hurriedly cleaning up its image after its brush with the scandal. BHP was questioned about a $5 million wheat sale to Iraq. Corporate boss Chip Goodyear wants a quick cleanup. At stake is the good name that BHP needs to cultivate to answer U.S. environmentalists trying to stop its plans to build a liquefied natural gas facility off the coast of California.

A less lucky figure is Norman Davidson Kelly, boss of the BHP-associated Tigris company, which traded in Iraq. Cole found him to be “a thoroughly disreputable man with no commercial morality.” This former BHP man, described by colleagues as a jovial scion of the English landed gentry, refused to appear before Cole but is expected to be extradited from London to face charges.

As for AWB, its days of monopoly over bulk exports of wheat are over. Such power, a hangover from an era when Australian governments of all stripes supported a form of rural socialism in marketing, will be broken up. New AWB Chairman Brendan Stewart, who will stand down early next year, wants a farmer-owned, stock exchange-listed marketing monopoly and a commercial agribusiness company.

And there’s the rub. Voters are so fed up with this scandal that Howard will probably strip AWB of its monopoly. Such a move will anger, and possibly alienate, the farmers’ National Party, his partner in the coalition government.

Meanwhile, Washington-based lawyer L. Palmer Foret is signing up farmers to file a $1 billion damages claim against AWB. His case rests on U.S. anti-racketeering laws. Foret says the Cole report provides a wealth of information for a class-action suit in U.S. Federal Court.

The scary thing is that nobody trading with the Middle East is spotless. Corruption and kickbacks are the name of the game. In fact, Paul Volcker’s report to the U.N. on the oil-for-food program, which touched off the probe of AWB, found that 2,250 companies from 66 countries had paid commissions to the Iraqi dictator.

For instance, a South Korean businessman became the first person convicted on oil-for-food charges when a New York court found him guilty of lobbying on behalf of Hussein. Two Texas oilmen have been charged with manipulating the U.N. program. Russia has ignored allegations against its nationals.

No other country besides Australia has set up an open judicial inquiry into what its companies did. Canberra’s cleanup should prompt other countries to deal with hypocrisy.

Australia’s international trading reputation remains in high standing. But while the shadow may have faded, at least to Australian eyes, a bad smell lingers. At home, the cost will be heavy to named politicians, bureaucrats, businessmen, not to mention still-stunned farmers.

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