Iraq has quietly agreed to pay $400 million in claims to American citizens who say they were tortured or traumatized by Saddam Hussein’s regime after his 1990 invasion of Kuwait.

The controversial settlement ends years of legal battles and could help Iraq emerge from United Nations sanctions put in place two decades ago – a step Iraqi leaders see as a prerequisite to becoming fully sovereign.

The Iraqi foreign ministry said the $400 million settlement, signed last week with James Jeffrey, the new US ambassador to Iraq, resolves legal claims inherited from the former regime and was in line with negotiations to end the sanctions.

Settling the claims, which were brought by American citizens, has been seen as a key requirement for Washington to be willing to push for an end to the UN sanctions.

“There was a lot of pressure on the Iraqi government to do something that gets Congress off their back,” says one senior Iraqi official, adding that the settlement cleared the way for US efforts to bring Iraq out from under the UN sanctions.

Known as "Chapter 7" sanctions after the part of the UN charter that deals with international threats to peace, they were imposed against Iraq after Saddam Hussein’s 1990 invasion of Kuwait and never fully lifted.

As part of the Status of Forces Agreement between Iraq and the United States, which provides the legal basis for the presence of American troops here, the US committed itself to helping Iraq emerge from Chapter 7.

Claims for kidnapped children, CBS reporter, and others

Law firms representing the American families pressed Congress for years to approve a measure that would allow foreign governments accused of sponsoring terrorism to be sued in the United States. They finally won an amendment lifting immunity for states accused of sponsoring terrorism.

Senior Iraqi officials who asked to remain anonymous because of the sensitivity of the issue said Iraq and legal firms representing the American families had agreed to a $400 million payout to settle up to eight groups of claims.

The claims include compensation for emotional distress from the children of two contractors seized near the Iraq-Kuwait border in 1990, Americans held as human shields in an effort to prevent a US attack, and the case of CBS News reporter Bob Simon and his cameraman who were held after being arrested along the border with Kuwait.

US courts had previously awarded at least two multimillion-dollar settlements, later appealed. The Bush administration at the time had argued that the money, held in US trust, was needed to help rebuild Iraq. Lawyers have previously said they expected individual claims to average between $400,000 and $500,000 under the final settlement.

“There were originally billions of dollars of claims from thousands and thousands of cases,” said one Iraqi official.

The claimants included an American boy who was seen frozen-looking on Iraqi television while Saddam Hussein asked him if he’d enjoyed his breakfast after he and his family were prevented from leaving the country.

Settlement money to come from frozen assets

After Saddam’s invasion of Kuwait, the regime rounded up several hundred American citizens in an effort to deter the attack launched by the United States several months later to drive Iraq out of Kuwait.

The money comes out of a roughly $900 million fund in frozen assets held by the US government to settle unresolved contracts under the Oil for Food program.

The program was an exemption to the sweeping trade sanctions in the 1990s, under which Iraq was allowed to sell oil to foreign buyers under supervision to buy food and medicine. It ended with the 2003 war, leaving dozens of countries and companies with unfulfilled contracts.

Senior Iraqi officials said the settlement was aimed at protecting Iraqi funds being held abroad. The Development Fund for Iraq, created by the UN, holds Iraq's current oil revenue as well as money from the former Oil for Food program and other frozen assets. The mandate of the advisory body which oversees it expires at the end of this year and Iraq needs US and international support to replace it with direct control of its revenue.

Iraq is still paying compensation to Kuwait under Chapter 7 sanctions – so far $27.6 billion – and continues to devote 5 percent of its oil revenues to a UN fund for Kuwaiti compensation. Baghdad, which argues that it needs the funds for reconstruction, is trying to cut that percentage in half.

Kuwait has taken additional measures such as seizing an Iraqi Airways plane on its first flight to London this year.

Iraq argues that it can’t be fully independent while it is still under Chapter 7.

Why the settlement is controversial

Despite Iraq’s potential oil wealth, the country has major economic problems, including widespread poverty, 30 percent unemployment, and an infant mortality rate among the highest in the region. Oil revenue, which the US believed would fund reconstruction when it invaded Iraq, has been limited by ongoing attacks and an infrastructure that will take billions of dollars in investment and years to repair.

The settlement is controversial not only because of Iraq's pressing developmental needs, but because it holds the current government accountable for Saddam Hussein’s actions.

“A lot of blood has flowed since then and a lot of it is Iraqi blood. It’s arguable that the suffering was not caused by the current Iraqi government or the Iraqi people,” says one senior Iraqi official. “This is politics, this is not justice.”