Western Powers Limit Flow of Qaddafi's Billions to Rebel Leaders

The U.S. and others are beginning to release the money to Libya's new government, but slowly for fear of creating new problems

The U.S. and others are beginning to release the money to Libya's new government, but slowly for fear of creating new problems

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Anti-Gaddafi fighters walk in Burkan air defense military base

If the Transitional National Council wants Libya's money back, it's going to have to make a shopping list.

So far, the council seems to be making sensible choices, claiming it wants to spend the billions in frozen assets for humanitarian needs, providing basic services, and easing the country into a democratic transition. But "what's the likelihood that, at the end of the day they end up in control" of the release of the funds to Libya's interim government, asked Kori Schake, research fellow at Stanford University's Hoover Institution.

The international community is starting to transfer Libyan government money back into Libyan hands, and as it does, diplomats are walking a fine line, balancing an obligation to return billions of dollars and a desire to avoid a humanitarian crisis with concern that Libya's interim government might not be able to handle the cash influx.

Usually, transition governments find themselves "squabbling over chicken bones," said Thomas Carothers, a democratization expert at the Carnegie Endowment for International Peace. Libya does not have that problem--and that's a "tremendous challenge."

Libyans have two sources of wealth to tap: oil reserves, and the Qaddafi regime's overseas holdings, estimated at $160 billion. Legal, political, and practical barriers ensure that the assets will be unfrozen slowly, and much of that money may never reach the new Libyan leadership. But as diplomats met in Paris on Thursday to discuss Libya's future, billions of dollars were already on the move.

"I think this really does have the potential to become the traditional transitional economy corruption bonanza," Schake said.

The United States has started releasing $1.5 billion in frozen government assets to Libya under the conditions of a humanitarian exemption granted by the United Nations sanctions committee last week. Nations including the United Kingdom, France, Italy, and Germany have logged similar requests for exemption; the U.K.'s request to release roughly $1.6 billion and France's request to release roughly $2.1 billion have already been granted.

The new exemptions, like the one granted to the United States, won't just hand the TNC a blank check, a U.N. diplomat said.

The U.S. has no plans to free up more money until "we see how they're doing," State Department spokeswoman Victoria Nuland said of the Libyan people on Monday. Roughly $3 billion of the $37 billion in assets under U.S. jurisdiction are considered liquid. "As you know, they are themselves very interested in getting the oil flowing again, the gas flowing again. It's a rich country; they want to support themselves," Nuland said.

U.N. Secretary General Ban Ki-moon said on Wednesday that the actions of donor nations must "correspond to Libyan wishes. In turn, this will require Libya's transitional authorities to provide clear priorities - short term and longer term."

The TNC was expected to outline its current needs at the Friends of Libya summit on Thursday.

In order to ensure that the interim government uses the money for humanitarian purposes, the United States' exemption divides the $1.5 million into three tranches. One-third will go to U.N. aid organizations, one-third will pay existing fuel bills, and one-third will be held in a temporary financial mechanism set up by the international community. The relevant Libyan authorities will have to bring itemized receipts to the mechanism's steering committee in order for any money to change hands.

"It seems, to me, reasonable for Western governments to release money slowly" and "reasonable to talk about what the needs are," said Elliott Abrams, now a senior fellow for Middle Eastern studies at the Council on Foreign Relations, and once part of the Reagan and George W. Bush administrations.

Experts noted that Libya has yet to negotiate a new political status quo, set up new government institutions, or set up the framework for private enterprise to flourish--let alone dispose of Qaddafi and end the violence on the ground. The TNC is not an elected body, Abrams noted, and it's not clear that sufficient safeguards are in place to prevent abuses as the money is handed out.

After all, a similar humanitarian funding mechanism set up for Iraq after the Gulf War led to the oil-for-food scandal, several experts noted. Back then, an international fund subject to "intensive supervision" became "a nightmare of corruption," Schake said.

"You can audit these things to death, and that's what's needed," said Paul Collier, professor of economics and director of the Centre for the Study of African Economies at Oxford University. Both Collier and Schake argued that transparency will help keep the temporary funding mechanism honest.

"It would be really unwise to go at this from a perception that the West has a right to curtail access to the money," Collier said. At the very least, the money that belonged to the old Libyan government must be passed on to the new leadership. The international community can help the transitioning government set up and monitor its revenue and spending channels-- but the Libyan leadership needs to set the policy, Collier said.