John Howard also said he did not know whether any Australian company was involved.
Howard was giving evidence on Thursday into an official inquiry into reports the country's monopoly wheat exporter AWB Ltd paid multimillion-dollar kickbacks to the Iraqi government.
A 2005 UN report alleged AWB was one of more than 2,000 companies that had paid kickbacks worth $1.8 billion to the government through the UN-managed oil-for-food account.
Howard told the inquiry in Sydney, using the Australian expression "rort" which means to defraud: "It was public knowledge that Iraq was rorting the oil-for-food programme. I was aware that Saddam had rorted the programme.
"There was absolutely no belief, anywhere in the government, at that time that AWB was anything other than a company of high reputation."
The prime minister echoed testimony from his foreign and trade ministers, saying he had not seen 21 diplomatic cables between 2000 and 2004 warning of possible AWB kickbacks.
Howard said his appearance
showed the inquiry was open
Howard is the first Australian leader to face such an investigation since 1983, when Bob Hawke, then prime minister, gave evidence into a spy scandal inquiry.
AWB was among companies from 66 nations, including the US, Russia, France, Germany and Switzerland, mentioned in the UN report, but Australia is the only country to call an inquiry into the allegations.
If proven, AWB would have broken UN sanctions against Iraq. Australia was one of the first countries to join the US-led invasion and has about 1,300 troops in the region.
The inquiry, led by Terence Cole, a former supreme court judge, has no political brief and can only recommend prosecution of the AWB and other companies and associated individuals if Australian laws were broken.
It cannot make a finding on the government.
The scandal has provoked protests
and a dip in the leaderhip's image
Before testifying, Howard said his appearance proved the investigation was open and free.
"Australia alone has established a public inquiry… This demonstrates how open and transparent the government has been," he said.
The government's credibility has been brought into question with the release of the cables talking of AWB kickbacks, with media discrediting its response that it knew nothing.
Under Australian law it is illegal to pay kickbacks or bribes for deals, but facilitation payments made overseas are allowed.
The UN report alleged the AWB provided the most kickbacks, paying $222 million via a trucking company that was a front for the Iraqi government.
The AWB has told the inquiry it hid details of inflated wheat prices from the United Nations, after initially saying it thought the extra payments were approved by the UN.
The Cole inquiry will report to the government by June 30.