United Nations
Lessons Learned from Oil for Food Program Indicate the Need to Strengthen UN Internal Controls and Oversight Activities Gao ID: GAO-06-330 April 25, 2006In 1996, the United Nations (UN) Security Council and Iraq began the Oil for Food program to address Iraq's humanitarian situation after sanctions were imposed in 1990. More than $67 billion in oil revenue was obtained through the program, with $31 billion in humanitarian assistance delivered to Iraq. The 2005 Defense Authorization Act mandated that GAO review the Oil for Food program. GAO reviewed how the UN adhered to five key internal control standards in its stewardship of the program. GAO assessed (1) the program's control environment and (2) key elements of the other internal control standards. GAO also reported on the UN Compensation Commission's progress in paying reparations from Iraq's invasion of Kuwait.
The UN Oil for Food program would have benefited from an internationally accepted internal control framework to provide reasonable assurance in safeguarding assets and meeting program objectives. Although the program averted a humanitarian crisis while limiting Iraq's ability to purchase military-related items, internal control problems allowed the former Iraqi regime to manipulate the program and circumvent sanctions to obtain billions of dollars in illicit payments. In particular, weaknesses in the control environment of the Oil for Food program compromised oversight and made it vulnerable to fraud and abuse. For example, Iraq negotiated contracts directly with companies purchasing its oil and selling commodities. In the absence of UN oversight, Iraq manipulated contract terms and obtained kickbacks. Moreover, the program had a complex structure with unclear lines of responsibility and authority. This diffusion among various entities meant that no single entity was accountable for the program in its entirety. The Oil for Food program also had weaknesses in the four key internal control standards--risk assessment, control activities, information and communication, and monitoring--that facilitated Iraq's ability to obtain illicit revenues ranging from $7.4 billion to $12.8 billion. In particular, the UN did not provide for timely assessments to address the risks posed by Iraq's control over contracting and the program's expansion from emergency assistance to commodities for 24 sectors. The UN Security Council established the UN Compensation Commission (UNCC) in 1991 to process claims and pay victims of Iraq's invasion of Kuwait. Security Council resolution 986 provided that a portion of proceeds from Iraq oil sales would go to the compensation fund. The commission approved awards of $52.5 billion to more than 1.5 million claimants and has paid more than $20 billion of this amount; however, Iraq still owes almost $32.2 billion in unpaid awards. Future payments for these awards could extend through 2020. These unpaid awards are in addition to the $51 billion that Iraq owes to international creditors.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-330, United Nations: Lessons Learned from Oil for Food Program Indicate the Need to Strengthen UN Internal Controls and Oversight Activities
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
April 2006:
United Nations:
Lessons Learned from Oil for Food Program Indicate the Need to
Strengthen UN Internal Controls and Oversight Activities:
Oil for Food:
GAO-06-330:
GAO Highlights:
Highlights of GAO-06-330, a report to congressional committees.
Why GAO Did This Study:
In 1996, the United Nations (UN) Security Council and Iraq began the
Oil for Food program to address Iraq‘s humanitarian situation after
sanctions were imposed in 1990. More than $67 billion in oil revenue
was obtained through the program, with $31 billion in humanitarian
assistance delivered to Iraq.
The 2005 Defense Authorization Act mandated that GAO review the Oil for
Food program. GAO reviewed how the UN adhered to five key internal
control standards in its stewardship of the program. GAO assessed (1)
the program‘s control environment and (2) key elements of the other
internal control standards. GAO also reported on the UN Compensation
Commission‘s progress in paying reparations from Iraq‘s invasion of
Kuwait.
What GAO Found:
The UN Oil for Food program would have benefited from an
internationally accepted internal control framework to provide
reasonable assurance in safeguarding assets and meeting program
objectives. Although the program averted a humanitarian crisis while
limiting Iraq‘s ability to purchase military-related items, internal
control problems allowed the former Iraqi regime to manipulate the
program and circumvent sanctions to obtain billions of dollars in
illicit payments. In particular, weaknesses in the control environment
of the Oil for Food program compromised oversight and made it
vulnerable to fraud and abuse. For example, Iraq negotiated contracts
directly with companies purchasing its oil and selling commodities. In
the absence of UN oversight, Iraq manipulated contract terms and
obtained kickbacks. Moreover, the program had a complex structure with
unclear lines of responsibility and authority. This diffusion among
various entities meant that no single entity was accountable for the
program in its entirety.
The Oil for Food program also had weaknesses in the four key internal
control standards”risk assessment, control activities, information and
communication, and monitoring”that facilitated Iraq‘s ability to obtain
illicit revenues ranging from $7.4 billion to $12.8 billion. In
particular, the UN did not provide for timely assessments to address
the risks posed by Iraq‘s control over contracting and the program‘s
expansion from emergency assistance to commodities for 24 sectors.
Internal Controls Framework in the Oil for Food Program:
[See PDF for Image]
[End of Figure]
The UN Security Council established the UN Compensation Commission
(UNCC) in 1991 to process claims and pay victims of Iraq‘s invasion of
Kuwait. Security Council resolution 986 provided that a portion of
proceeds from Iraq oil sales would go to the compensation fund. The
commission approved awards of $52.5 billion to more than 1.5 million
claimants and has paid more than $20 billion of this amount; however,
Iraq still owes almost $32.2 billion in unpaid awards. Future payments
for these awards could extend through 2020. These unpaid awards are in
addition to the $51 billion that Iraq owes to international creditors.
What GAO Recommends:
GAO recommends that the Secretary of State and the Permanent
Representative of the U.S. to the UN work with member states to
encourage the Secretary General to (1) ensure that UN programs with
considerable financial risk apply internationally accepted internal
control standards and (2) strengthen internal controls throughout the
UN, based on lessons from the Oil for Food program. State and the UN
responded that they are taking steps to strengthen internal controls at
the UN.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-330].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Joseph Christoff at (202)
512-8979 or christoffj@gao.gov.
[End of Section]
Contents:
Letter1:
Results in Brief:
Background:
Early Compromises in Program Structure and Widely Diffused Management
Responsibilities Led to Weak Control Environment:
Oil for Food Program Fell Short of Additional Internal Control
Standards:
UNCC Has Paid More than $20 Billion in Compensation Claims, but
Remaining Payments of More than $32 Billion May Take until 2020:
Conclusion:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Oil for Food Program Processes:
Appendix III: Estimates and Ranges of Iraq's Illicit Revenues and
Payments during the Oil for Food Program:
Appendix IV: UNCC Organization and Its Claims Categories and Amounts:
Appendix V: Comments from the Department of State:
GAO Comments:
Appendix VI: Comments from the UN Compensation Commission:
GAO Comments:
Appendix VII: GAO Contacts and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Estimates of Iraq's Illicit Revenues during the Period of the
Oil for Food Program, by Source:
Table 2: Ranges of Iraq's Illicit Revenues during the Oil for Food
Program:
Table 3: UNCC Claims Categories:
Figures:
Figure 1: Programs and Activities Authorized by Security Council
Resolution 986:
Figure 2: Internal Control Standards Related to UN Sanctions against
Iraq and the Oil for Food Program:
Figure 3: Multiple Organizations Managed the Oil for Food Program and
Enforced UN Sanctions:
Figure 4: Claims Received and Awarded by Category:
Abbreviations:
IMF: International Monetary Fund:
OIOS: Office of Internal Oversight Services:
OIP: Office of the Iraq Program:
SOMO: State Oil Marketing Organization:
UN: United Nations:
UNCC: United Nations Compensation Commission:
UNOHCI: United Nations Office of the Humanitarian Coordinator for Iraq:
United States Government Accountability Office:
Washington, DC 20548:
April 25, 2006:
Congressional Committees:
In 1996, the United Nations (UN) Security Council and Iraq began the
Oil for Food program to address growing concerns about Iraq's
humanitarian situation after international sanctions were imposed in
1990. Authorized by Security Council resolution 986, the intent of the
program was to allow the Iraq government to use the proceeds of its oil
sales to pay for food, medicine, and infrastructure maintenance and--at
the same time--prevent the regime from obtaining goods for military
purposes. Resolution 986 also provided that a portion of the oil sales
be used for a separate program to pay compensation through the UN
Compensation Commission (UNCC) to victims of Iraq's invasion of Kuwait
in 1990. Iraq obtained more than $67 billion in oil revenues through
the program; as of November 2003, about $31 billion in commodities and
humanitarian assistance had been delivered to Iraq. Four key entities
were responsible for most of the program's operations--(1) the Security
Council's Iraq sanctions committee, (2) the UN Secretariat's Office of
the Iraq Program, (3) nine UN agencies with separate programs in
northern Iraq, and (4) the Iraqi government under Saddam Hussein.
Allegations of corruption and misconduct within the UN Oil for Food
program and the overall management of the humanitarian program have
prompted a number of investigations. The 2005 Defense Authorization Act
mandated that GAO review the Oil for Food program.[Footnote 1]
Policymakers and program managers are continually seeking ways to
better achieve agencies' missions and program results and improve
accountability for results. A key factor in helping to achieve such
outcomes is to implement appropriate internal controls. Internal
controls, if properly designed and implemented, provide reasonable
assurance that objectives are being met; they also serve as the first
line of defense in safeguarding assets and preventing fraud, waste, and
abuse. A general framework for internal controls is widely accepted in
the international audit community and has been adopted by leading
accountability organizations, including the International Organization
of Supreme Audit Institutions, the U.S. Office of Management and Budget
(OMB), and GAO.[Footnote 2] The first standard within this framework is
the control environment, which provides the structure, discipline, and
ethical tone for implementing an internal control system. Other
standards focus on employing assessments of the external and internal
risks an organization faces; establishing policies and procedures to
enforce directives (control activities); providing relevant, timely,
and reliable information and communication; and monitoring performance
and adhering to audit findings.
Our report uses this internal control framework to identify the key
weaknesses in enforcing sanctions against Iraq and implementing the Oil
for Food program. Specifically, we assessed (1) aspects of the control
environment--the foundation for all internal control standards--that
the UN developed and implemented for the Oil for Food program and (2)
key elements of the remaining internal control standards--risk
assessment, control activities, information and communication, and
monitoring. In addition, we report on the activities and progress of
UNCC.
To address these objectives, we met with officials from the Departments
of State, Defense, Commerce, and Treasury who were responsible for
managing the U.S. participation in the Iraq sanctions and Oil for Food
program; we also reviewed relevant documents provided by State. We met
with UN officials who had worked in the UN Office of the Iraq program
(OIP) (the key UN organization responsible for administering the
program), UN officials representing several UN specialized agencies,
and with UNCC officials in Geneva, Switzerland. We reviewed and
analyzed documents related to management and oversight, including
audits conducted by the UN Office of Internal Oversight Services
(OIOS). We reviewed independent reports, including publications by the
UN Independent Inquiry Committee and the Iraq Survey Group.
We conducted our review from February 2005 through January 2006 in
accordance with generally accepted government auditing standards. (App.
I provides detailed information on our scope and methodology.)
Results in Brief:
UN sanctions and the Oil for Food program averted a humanitarian crisis
while limiting Iraq's ability to purchase military-related items, but
internal control problems allowed the former Iraqi regime to manipulate
the program and circumvent sanctions to obtain illicit payments ranging
from $7.4 billion to $12.8 billion.[Footnote 3] In particular,
weaknesses in the control environment compromised the oversight of the
Oil for Food program and made it vulnerable to fraud and abuse. First,
in the mid-1990s, as Iraq's humanitarian situation worsened, the
Security Council and Secretariat made concessions to the Iraqi regime
that allowed it to negotiate contracts directly with companies
purchasing oil and selling commodities. In the absence of UN oversight
of these contracts, Iraq manipulated contract terms and obtained
kickbacks. In addition, the Security Council was aware that Iraq
smuggled oil to neighboring UN member states in violation of the
sanctions but did little to prevent the smuggling, thus allowing Iraq
to obtain revenues not authorized by the Oil for Food program. Second,
the Oil for Food program had a highly complex organizational structure
with unclear lines of responsibility and authority, which contributed
to an ineffective control environment. The diffusion of responsibility
among numerous entities meant that no single entity was accountable for
the program in its entirety. In addition, each entity had weaknesses in
its fragmented responsibilities that further undermined management and
oversight of the program. Despite this difficult environment, the Oil
for Food program averted a major humanitarian crisis by raising the
food intake of the Iraqi population and decreasing malnutrition.
The Oil for Food program also had key weaknesses in the key four
internal control standards--risk assessment, control activities,
information and communications, and monitoring--that facilitated Iraq's
ability to obtain illicit revenues.
* Risk assessment identifies the internal and external risks an
organization faces, determines the likelihood of their occurrence, and
forms the basis for a plan to manage those risks. However, the UN
conducted no timely assessments to identify and address high-risk areas
and prevent fraud, even as the Oil for Food program expanded from the
short-term delivery of emergency food and medicine to a multiyear
program that included building and repairing infrastructure in 24
civilian sectors. Moreover, in 2000, the Office of the Iraq Program
rejected a proposal from the UN's internal audit office to conduct a
risk assessment of the Program Management Division. Timely and
comprehensive risk assessments might have identified the lack of
systematic reviews of the reasonableness of the prices that the Iraqi
government had negotiated with the companies supplying goods and
services. Such assessments may also have exposed the lack of clear
responsibility and reporting lines among the numerous UN entities
managing the program.
* Control activities are the policies and procedures that help ensure
that management's directives are carried out and risks are addressed.
Some control activities were effective and others were not. For
example, an insufficient number of oil experts reviewing oil contracts,
the lack of oil metering equipment, and limited review of contract
prices helped enable Iraq to smuggle oil and levy surcharges and
kickbacks on its contracts. In contrast, oversight by the Security
Council's Iraq sanctions committee--particularly by U.S. and United
Kingdom (U.K.) members--mitigated Iraq's efforts to obtain military
equipment by preventing Iraq from importing dual-use items. In
addition, the sanctions committee eventually constrained Iraq's ability
to impose up-front surcharges on oil contracts by setting prices for
Iraqi oil after the oil was delivered to the buyer.
* Information and communication that is relevant, reliable, and timely
is needed for an organization to control its operations. However, the
Office of the Iraq Program did not inform the sanctions committee of
suppliers' allegations that Iraq demanded contract kickbacks and hidden
fees and did not disclose information on Iraq's oil smuggling through
Syria. Moreover, none of the Secretariat's required 90-or 180-day
reports to the Security Council mentioned illicit payment demands in
connection with oil or commodity contracts. In addition, poor
communication and coordination among UN agencies led to delays in
completing housing projects in northern Iraq.
* Monitoring assesses performance over time and ensures that the
findings of audits and other reviews are promptly resolved. OIOS
identified more than 700 problems with the Oil for Food program and
compensation fund.[Footnote 4] However, limitations on the auditors'
reporting scope and resources hindered their effectiveness as an
oversight tool. For example, OIOS only had two to six auditors assigned
to the Oil for Food program and did not review commodity contracts for
central and southern Iraq, which comprised 59 percent of the program.
Nonetheless, OIOS audits of the Oil for Food program in northern Iraq
found more than 400 recurring problems in procurement, cash and asset
management, planning and coordination, and personnel. The recurring
nature of these problems over the course of the program demonstrated
that systemic weaknesses were not fully addressed.
In addition to the Oil for Food program, UN Security Council
resolutions required Iraq to reserve up to 30 percent of its oil
proceeds to compensate victims of its invasion of Kuwait; this amount
was reduced to 5 percent in 2003. UNCC has approved awards totaling
$52.5 billion to more than 1.5 million claimants and paid about $20.3
billion of this amount to individuals and families with smaller claims.
However, Iraq owes corporations, governments, and international
organizations almost $32.2 billion in unpaid awards. Depending on the
growth of Iraq's oil revenues, it may take nearly 14 years to pay the
remaining compensation awards. These unpaid awards are in addition to
the estimated $51 billion that Iraq owes to international
creditors.[Footnote 5]
We are recommending that the Secretary of State and the Permanent
Representative of the United States to the UN work with other member
states to encourage the Secretary General to (1) ensure that UN
programs with considerable financial risks establish, apply, and
enforce the principles of internationally accepted internal control
standards, with particular attention to comprehensive and timely risk
assessments and (2) strengthen internal controls throughout the UN
system, based in part on the lessons learned from the Oil for Food
program.
We provided a draft of this report to the Secretary of State, the UN
Deputy Secretary General, and the UN Compensation Commission for
comment. We received written responses from State and UNCC and oral
comments from the UN. However, State commented that our first
recommendation would apply only to future sanctions programs similar to
the Oil for Food Program. We have modified our recommendation to
clarify that the principles of oversight and control should apply to
future UN programs with considerable financial risk, not merely
programs similar to the Oil for Food program. The UN concurred with our
recommendations and noted that it is taking steps to strengthen
internal control throughout the organization.
Regarding our findings, State noted that our report (1) does not
clearly distinguish between the responsibilities and actions of the
Secretary General and the Security Council, (2) does not highlight the
Security Council's inaction on corruption in the sanctions regime, (3)
overstates the case that no single entity was in charge of the program,
and (4) overly focuses on internal controls which would not have
corrected the problems without political will. We disagree. Our report
distinguishes between the responsibilities and actions of the Secretary
General and the Security Council; when both entities are responsible,
our report refers collectively to the UN. We also fully discuss how the
Security Council's inaction facilitated oil smuggling to neighboring
states in violation of UN sanctions. Moreover, the diffusion of
responsibility among multiple UN entities was a major structural
weakness of the program and contributed to unclear authority,
manipulation, and weak oversight. We also believe that State
underestimates the importance of a control framework that, if in place,
would have identified the program's vulnerabilities and established
clear lines of authority for responding to the program's mismanagement
and corruption.
UNCC stated that we should not include it in our report because it
would unfairly taint UNCC with the problems ascribed to the Oil for
Food Program. We have modified the report to distinguish the roles and
responsibilities of UNCC from those of the UN Oil for Food program.
UNCC also commented that our report does not adequately describe its
organization and its relationship with the internal auditors; we have
added more information about these topics.
Background:
In 1990, Security Council resolution 661 imposed economic sanctions on
Iraq in response to its invasion and occupation of Kuwait, thereby
prohibiting all countries from buying Iraqi goods and selling most
commodities to Iraq. In 1995, in response to growing international
concern over the impact that sanctions were having on the humanitarian
situation in Iraq, Security Council resolution 986 authorized Iraq to
sell up to $1 billion worth of oil every 90 days to pay for food,
medicine, and humanitarian goods. Iraq first exported oil under the Oil
for Food program in December 1996, and the first shipments of
humanitarian goods arrived in March 1997. The Security Council
subsequently increased the amount of oil that Iraq could sell and
expanded the types of humanitarian goods that it could import. In 1999,
the Security Council removed all restrictions on the amount of oil Iraq
could sell to purchase civilian goods. The Security Council implemented
the program in 13 6-month phases. In May 2003, Security Council
resolution 1483 requested the UN Secretary General to transfer the Oil
for Food program to the U.S.-led Coalition Provisional Authority by
November 2003. At that time, the Coalition assumed responsibility for
managing Iraq's oil proceeds and outstanding commodity contracts.
In addition to UN sanctions, the Security Council established UNCC in
1991 to pay compensation for damages and losses resulting from Iraq's
invasion and occupation of Kuwait.[Footnote 6] Advances from the UN
Working Capital Fund; voluntary contributions from governments; and
proceeds, from Iraqi oil sold after the invasion of Kuwait, that had
been frozen by various governments funded the UNCC for several years
after its establishment. With the adoption of Security Council
resolution 986 in 1995, UNCC received 30 percent of Iraqi oil proceeds
to fund the compensation program. Subsequent resolutions in 2000 and
2003 reduced the amount of oil proceeds the UNCC received to 25 and 5
percent, respectively.
At the time UNCC was receiving 25 percent of Iraqi oil proceeds, the UN
allocated 59 percent of proceeds for humanitarian assistance in the 15
central and southern governorates, 13 percent for assistance to the
three northern Kurdish governorates, and 3 percent for UN
administrative costs. Figure 1 illustrates the programs and activities
funded by Iraq's oil proceeds in accordance with Security Council
resolution 986. Iraq's state-owned marketing company negotiated the oil
contracts, and the Security Council's Iraq sanctions committee approved
these contracts and oil prices, on the basis of advice from independent
oil experts. Once the oil was shipped, the purchasing company deposited
the proceeds into a UN-controlled escrow account. Iraq negotiated
contracts for the commodities it purchased for the central and southern
governorates as well as bulk food and medicine contracts for the entire
country. The suppliers, through their national governments, sent
contracts to OIP and the sanctions committee for approval. When the
items arrived in Iraq, inspectors verified them against appropriate
documentation and notified the UN treasurer that it could pay the
supplier from the escrow account. In northern Iraq, UN agencies
distributed the food and medicine purchased by the central government
and implemented projects in several sectors. Appendix II contains
additional information on processes related to oil sales, commodity
purchases, and the program in northern Iraq.
Figure 1: Programs and Activities Authorized by Security Council
Resolution 986:
[See PDF for image]
[A] The Security Council shifted more approval authority for
humanitarian items to OIP in 1999 and 2002.
[End of figure]
The Committee of Sponsoring Organizations of the Treadway Commission
developed the internationally accepted and widely used framework and
standards for internal control used in this report. These standards
were used as a basis for the internal control standards and guidance
issued by (1) GAO,[Footnote 7] (2) the International Organization of
Supreme Audit Institutions (INTOSAI),[Footnote 8] and (3) OMB Circular
A-123, "Management's Responsibility for Internal Control." According to
these standards, internal controls, if properly designed and
implemented, provide reasonable assurance that objectives are being met
and serve as the first line of defense in safeguarding assets and
preventing fraud. Within this framework,
* the control environment establishes and maintains an environment that
sets a positive and supportive attitude toward internal control,
* risk assessment identifies and analyzes internal and external risks
and forms a basis for determining how these challenges should be
managed,
* control activities are the policies and procedures that help ensure
that management directives are followed,
* information and communication are timely and help enable managers and
others to perform their internal control responsibilities, and:
* monitoring assesses performance over time and helps to ensure that
audit findings and other issues are promptly resolved.
Early Compromises in Program Structure and Widely Diffused Management
Responsibilities Led to Weak Control Environment:
The Oil for Food program suffered from two key weaknesses in the
control environment that led to weak oversight and enabled the former
Iraqi regime to circumvent the sanctions and obtain billions of dollars
in illicit contract revenues. First, the UN Secretariat negotiated and
the Security Council approved an agreement that allowed the Iraqi
government, a country under international sanctions, to negotiate
contracts directly with purchasers of Iraqi oil and suppliers of
commodities and to control the internal distribution of its imported
items. The UN was under considerable pressure at this time to respond
to Iraq's humanitarian crisis. Nonetheless, this structure was an
important factor in enabling Iraq to manipulate contracts. In addition,
the Security Council was aware that Iraq smuggled oil to neighboring UN
member states in violation of the sanctions but did little to prevent
the smuggling. The Security Council relied on these neighboring states
to enforce the sanctions against Iraq that were related to military and
dual-use items but allowed these countries to continue illicit trade
with Iraq, thus enabling the regime to obtain illicit funds.
Second, management and oversight of the program were diffused among
more than a dozen UN and international entities, with no single entity
in charge of and accountable for the program. Figure 2 summarizes the
internal control weaknesses in the Oil for Food program, including the
control environment. Subsequent sections of this report will discuss
the additional control standards.
Figure 2: Internal Control Standards Related to UN Sanctions against
Iraq and the Oil for Food Program:
[See PDF for image]
[End of figure]
The Oil for Food Program Included Compromises that Limited UN
Oversight:
In establishing the Oil for Food program, the UN made two major
concessions to the former Iraqi regime that allowed it to (1) retain
control over the negotiation of contracts and the distribution of
imported goods and (2) trade with neighboring countries outside the Oil
for Food program.
When the UN first proposed the Oil for Food program in 1991, it
recognized the vulnerability inherent in allowing Iraqi control over
the contracting process. At that time, the Secretary General proposed
that the UN, an independent agent, or the Iraqi government be given the
responsibility to negotiate contracts with oil purchasers and commodity
suppliers. However, the Secretary General subsequently concluded that
it would be highly unusual or impractical for the UN or an independent
agent to trade Iraq's oil or purchase commodities and recommended that
Iraq negotiate the contracts and select the contractors. Nonetheless,
he stated that the UN and Security Council must ensure that Iraq's
contracting did not circumvent the sanctions and was not fraudulent.
Accordingly, the Security Council proposed that UN agents review
contracts and compliance at Iraq's oil ministry. Iraq refused these
conditions.
In April 1995, as humanitarian conditions worsened, the Security
Council passed resolution 986 to permit Iraq to use its oil sales to
finance humanitarian assistance. The UN reported that the average
Iraqi's food intake was about 1,275 calories per day, compared with the
standard requirement of 2,100 calories. Against a backdrop of pressure
to maintain sanctions while addressing emergency humanitarian needs,
the UN conceded to Iraq's demand that it retain independent control
over contract negotiations. Accordingly, a May 1996 memorandum of
understanding[Footnote 9] between the UN and Iraq allowed Iraq to
directly tender and negotiate contracts without UN oversight and to
distribute imported goods to the intended recipients.
When the Oil for Food program began, the UN was responsible for
confirming the equitable distribution of commodities, ensuring the
effectiveness of program operations, and determining Iraq's
humanitarian needs. According to the memorandum of understanding, the
Iraqi government was to provide UN observers with full cooperation and
access to distribution activities. However, observers faced
intimidation and restrictions from Iraqi regime officials in carrying
out their duties. According to a former UN official, observers could
not conduct random spot checks and had to rely on distribution
information provided by ministry officials, who then steered them to
specific locations. The Independent Inquiry Committee[Footnote 10]
reported that observers were required to have government escorts and
cited various instances of intimidation and interference by Iraqi
officials. The committee concluded that limits placed on the observers'
ability to ask questions and gather information affected the UN
Secretariat's ability to provide full and complete field reports to the
sanctions committee.
Concessions to regional trade activity further affected the control
environment and allowed the Iraqi regime to obtain revenues outside the
Oil for Food program. Although oil sales outside the program were
prohibited, the Security Council's Iraq sanctions committee did not
address pre-existing trade between Iraq and other member states.
Illicit oil sales were primarily conducted on the basis of formal trade
agreements. For example, trade agreements with Iraq allowed Jordan--a
U.S. ally dependent on Iraqi trade--to purchase heavily discounted oil
in exchange for up to $300 million in Jordanian goods. Members of the
sanctions committee, including the United States, took note of Iraq's
illicit oil sales to its neighbors, but took no direct action to halt
the sales or punish the states or entities engaged in them. In this
regard, the UN relied on Iraq's neighboring countries to enforce the
sanctions prohibiting Iraq from obtaining military and dual-use items.
However, these states formally protested the economic sanctions, citing
commercial harm to their economies. Successive U.S. administrations
also issued annual waivers to Congress exempting Turkey and Jordan from
unilateral U.S. sanctions for violating the UN sanctions against Iraq.
According to U.S. government officials and oil industry experts, Iraq
smuggled oil through several routes. Oil entered Syria by pipeline,
crossed the borders of Jordan and Turkey by truck, and was smuggled
through the Persian Gulf by ship. Syria received up to 200,000 barrels
of Iraqi oil a day in violation of the sanctions. Oil smuggling also
occurred through Iran. The Security Council authorized the
Multinational Interception Force in the Persian Gulf; but, according to
the Department of Defense, it interdicted only about 25 percent of the
oil smuggled through the Gulf.[Footnote 11]
Numerous Entities Shared Key Responsibilities, but Authority and
Accountability Were Not Clearly Defined:
Both OIP, as an office in the UN Secretariat, and the Security
Council's Iraq sanctions committee were responsible for the management
and oversight of the Oil for Food program. The Iraq government, other
UN agencies, UN member states, the interdiction force in the Persian
Gulf, inspection contractors, and internal and external audit offices
also played specific roles. However, no single entity was accountable
for the program in its entirety. (See fig. 3 for an illustration of
these entities and their roles.) In 2005, the Independent Inquiry
Committee reported that the Security Council had failed to clearly
define the program's broad parameters, policies, and administrative
responsibilities and that neither the Security Council nor the
Secretariat had control over the entire program. The absence of clear
lines of authority and reporting were important structural weaknesses
in a program that allowed the sanctioned Iraq regime initiative and
control over program design and implementation. In addition, each
entity had weaknesses in their fragmented responsibility that further
undermined oversight and management of the Oil for Food program.
Figure 3: Multiple Organizations Managed the Oil for Food Program and
Enforced UN Sanctions:
[See PDF for image]
[End of figure]
* In October 1997, the UN Secretariat created the Office of the Iraq
Program to administer the Oil for Food program. OIP's responsibilities
included key oversight aspects of the program, including (1) accounting
for the program's finances, (2) monitoring oil exports under the
program, (3) approving Iraq's plans for distributing imported
commodities, (4) reviewing commodity contracts, (5) monitoring Iraq's
purchases of commodities and delivery of goods, and (6) reporting to
the Security Council every 90 and 180 days. In 2005, the Independent
Inquiry Committee reported that the Secretariat had not clearly defined
OIP's responsibilities and that OIP had lacked clear authority to
reject contracts based on pricing concerns.
* The UN Office of the Humanitarian Coordinator for Iraq (UNOHCI)
administered OIP's field operations in Iraq. The field unit's functions
included monitoring and reporting, ensuring the efficient and equitable
distribution of goods within Iraq, and overseeing the separate Oil for
Food program in northern Iraq. However, the Independent Inquiry
Committee found that OIP had not clearly defined the responsibilities
and reporting lines of UNOHCI's and OIP's Program Management Division,
which served as a headquarters liaison to the field. The lack of
clarity led to confusion over the division's role in coordinating field
activities and diminished its ability to provide quality control over
the field's observation and reporting mechanisms.
* The Secretariat also contracted inspection companies to inspect
humanitarian supplies imported into Iraq at three entry points.
However, the inspectors' duties were mostly limited to comparing
letters of credit for commodities to the shipping documents supplied at
the border and visually inspecting about 7 to 10 percent of the goods.
They only inspected goods presented by the transporter and did not
inspect goods arriving in non-Oil for Food lanes.
* The UN Security Council shared key oversight responsibilities through
its Iraq sanctions committee, which was comprised of representatives
from the 15 Security Council members. The sanctions committee was first
created in 1990 as part of Security Council resolution 661 to monitor
compliance with UN sanctions against Iraq. In 1995, resolution 986
directed the sanctions committee to also monitor the Oil for Food
program. The committee was responsible for (1) monitoring the
implementation of sanctions, (2) screening commodity contracts to
prevent the purchase of items that could have military uses, and (3)
approving Iraq's oil and commodity contracts. The committee's review of
commodity contracts focused on whether the contracts contained items of
potential military use, or so-called dual-use items. It did not review
contracts for price and value. In addition, it operated by unanimous
consensus, which, according to the Independent Inquiry Committee,
weakened its ability to undertake investigations of illicit activity or
take remedial action. The Independent Inquiry Committee also noted
that, although the sanctions committee was a monitoring body, its rules
did not require it to take action in response to reports of sanctions
or Oil for Food program violations, except for information indicating
illegal arms trafficking.
The Iraq sanctions committee's responsibilities for reviewing commodity
contracts lessened over time. From the beginning of the program until
1999, the committee was responsible for approving all contracts.
However, in 1999, the Security Council shifted more approval
responsibilities to OIP. Due to concerns about the humanitarian
situation in Iraq and pressure to expedite the review process, Security
Council resolution 1284 in December 1999 directed the sanctions
committee to accelerate the review process. The committee subsequently
allowed OIP to approve contracts for food, medical supplies, and
equipment for the agricultural, water and sanitation, housing, and
electricity sectors.
However, political pressure on the UN continued, and U.S. officials
asserted that support for international sanctions enforcement was
collapsing. According to a congressional report,[Footnote 12] the
United States proposed targeted sanctions in early 2001 to reduce
criticism by other Security Council members of continuing the sanctions
and to help rebuild consensus on containing Iraq. In May 2002, OIP
began approving contracts if they did not contain any items on a list
of dual-use items known as the goods review list.[Footnote 13]
The rules of the Iraq sanctions committee provided for four oil experts
to assist the committee. The oil overseers were responsible for
ensuring that oil sales contracts complied with program requirements
and helped the committee determine oil prices. However, for a 14-month
period in 1999 and 2000, only one overseer reported to the sanctions
committee. In addition, the Secretariat contracted with Saybolt Eastern
Hemisphere B.V. to oversee the export of oil and oil products from Iraq
through approved export points. The agents were expected to monitor oil
leaving Iraq under the Oil for Food program and were authorized to stop
shipments if they found irregularities. However, they were not required
to monitor or report on oil smuggled outside the Oil for Food program
in violation of international sanctions.
* Nine UN agencies,[Footnote 14] ran the Oil for Food program in
northern Iraq. They were responsible for distributing food rations and
medicine in the three Kurdish governorates and for other activities,
such as constructing or rehabilitating schools, health clinics, power
generation facilities, and houses. However, the Independent Inquiry
Committee and OIOS reported numerous instances of poor coordination and
communication among the agencies and UNOHCI as well as problems with
procurement and financial and asset management.
* Other entities involved in the sanctions program included UN member
states and the Multinational Interception Force. UN member states,
particularly those in the region, were responsible for enforcing the
sanctions to ensure that Iraq did not sell oil or purchase goods
outside the Oil for Food program, but oil smuggling and trade with
Iraq's neighbors outside the program occurred. The U.S.-led
Multinational Interception Force, a naval unit that patrolled the
Persian Gulf to prevent illicit oil exports, was responsible for
ensuring that Iraq used only approved export routes, but it only
interdicted about 25 percent of the oil smuggled through the Persian
Gulf.
* The Iraqi government tendered and negotiated contracts for selling
its oil and procuring goods for the 15 central and southern
governorates and also procured bulk food and medical supplies for all
of Iraq, including the three northern governorates. It was also
responsible for developing a distribution plan every 6 months for the
commodities it planned to procure and for ensuring the distribution of
these commodities in accordance with the plan. Iraqi control over the
contracting and distribution processes allowed it to manipulate
contract terms for illicit revenues and to restrict the efforts of UN
observers responsible for monitoring the distribution of humanitarian
goods.
* OIOS, the internal oversight office within the Office of the
Secretariat, conducted audits of the Oil for Food program and the
separate UNCC program and reported the results to OIP's executive
director and the UNCC's executive secretariat, respectively. OIOS
issued 55 audits and two summary reports and have several ongoing
audits at UNCC. Although OIOS identified more than 700 problems in all
these reports, including 430 in more than 20 audits of program
activities in northern Iraq, its effectiveness as an accountability
tool was compromised by lack of resources and its limited scope. In
addition to OIOS, UN external auditors conducted audits on the
condition of the escrow account holding Iraq's oil proceeds, and the
internal auditors of the UN agencies implementing the program in
northern Iraq conducted audits of their agencies' Oil for Food
activities.[Footnote 15] The audit units of these UN agencies conducted
66 audits of the program. According to the Independent Inquiry
Committee, these reports identified weaknesses and made several
recommendations for improvement.
Despite the difficulties posed by fragmented implementation and unclear
oversight, the Oil for Food program did provide emergency humanitarian
relief to the Iraqi people. The Independent Inquiry Committee reported
that the food provided through the Oil for Food program reversed a
serious and deteriorating food crisis, preventing widespread hunger and
probably reducing deaths in which malnutrition was a factor. The UN
also reported that average daily caloric intake almost doubled, and
malnutrition rates for children under age 5 fell by more than half
during the program.
Oil for Food Program Fell Short of Additional Internal Control
Standards:
The Oil for Food program and the Iraq sanctions fell short in the
remaining four key internationally accepted standards for internal
control--conducting risk assessments, implementing control activities,
ensuring adequate information and communication, and monitoring. The
lack of fundamental controls--particularly in light of the
vulnerabilities inherent in the control environment--facilitated the
regime's ability to obtain illicit payments ranging from $7.4 billion
to $12.8 billion. Figure 2 summarizes some of our key findings about
the UN's internal controls within these standards.
Key Weaknesses and Challenges Were Not Addressed Due to Absence of Risk
Assessments:
Risk assessment is used to identify and manage internal and external
risks that can affect a program's outcomes and accountability,
including those risks that emerge as conditions change. The Oil for
Food program expanded rapidly as it evolved from an emergency 6-month
measure to provide humanitarian needs to a program that delivered about
$31 billion in commodities and services in 24 sectors for more than 6
years. When the international community was not satisfied with Iraq's
compliance with weapons inspections, the Security Council continued the
sanctions and expanded its initial emphasis on food and medicines to
include infrastructure rehabilitation and activities in 14 sectors.
These sectors included food, food handling, health, nutrition,
electricity, agriculture and irrigation, education, transport and
telecommunications, water and sanitation, housing, settlement
rehabilitation for internally displaced persons, demining, a special
allocation for vulnerable groups, and oil industry spare parts and
equipment. In June 2002, the Iraqi government introduced another 10
sectors, including construction, industry, labor and social affairs,
youth and sports, information, culture, religious affairs, justice,
finance, and the Central Bank of Iraq.
The Security Council and UN Secretariat did not assess the risks posed
by this expansion, particularly in light of the fact that they had
relegated responsibility for the contracting process to Iraq. OIOS was
the only entity that attempted to assess the enormous risks in the Oil
for Food program, but OIP blocked that attempt. In August 2000, the
Under Secretary General for OIOS proposed an overall risk assessment to
the Deputy Secretary General to improve the program by identifying the
factors that could prevent management from fulfilling the program's
objectives. The proposal noted that this assessment could be a model
for other UN departments and activities. OIOS considered the Oil for
Food program a high-risk activity and decided to focus on an assessment
of OIP's Program Management Division. This unit was responsible for
providing policy and management advice to OIP's executive director and
for supporting UNOHCI in its field implementation and observation
duties. In May 2001, OIP's executive director refused to fund the risk
assessment, citing financial reasons and uncertainty over the program's
future. However, the Independent Inquiry found that, about the same
time, OIP moved to a new office in New York with increased rental costs
and refurbishments totaling about $3 million.
In July 2003, OIOS issued an assessment of OIP's Program Analysis,
Monitoring, and Support Division--formerly the Program Management
Division--that identified a number of organizational, management, and
administrative problems, including poor communication and coordination,
unclear reporting lines among OIP headquarters units and the field, and
the lack of approved work plans. However, by this date, the UN was
preparing for the November 2003 transfer of the program to the
Coalition Provisional Authority, and the report was of limited
usefulness for addressing high-risk areas. Timely risk assessments
might have identified the internal control weaknesses--such as
inadequate contract pricing reviews--that facilitated Iraq's ability to
levy illicit contract revenues and the structural management weaknesses
that led to ineffective communication and coordination within the
program.
Control Activities Mitigated Questionable Oil Pricing and the Import of
Dual-Use Items but Did Not Prevent Smuggling, Contract Kickbacks, or
Poor Asset Management:
Control activities are those activities that help provide assurance
that management's directives are carried out and that risks are
addressed and include the policies and procedures established to ensure
accountability. The Security Council's sanctions committee established
some control activities, such as retroactive pricing and review of
contracts for items having potential military use, which helped address
problems resulting from Iraq's control over the contracting and
distribution processes. However, other important control activities for
monitoring oil exports and assessing the reasonableness of the prices
that Iraq was negotiating were limited or nonexistent, which helped
enable Iraq to smuggle oil and levy surcharges and kickbacks on its
contracts. In addition, physical control over vulnerable assets is a
key control activity, particularly in environments lacking adequate
security. However, in northern Iraq, cash and asset management policies
were compromised due to the failure to maintain inventory systems or
secure cash in UN offices and during transport.
Inadequate Control of Oil Shipments and Oil Export Contracts
Facilitated Smuggling and Illicit Surcharges:
A limited role for contractors overseeing oil exports and the lack of
oil meters facilitated Iraq's ability to obtain revenues from smuggling
that ranged from $5.7 billion to $8.4 billion during the course of the
Oil for Food program. In 1996, the Secretariat contracted with Saybolt
to oversee the export of oil from Iraq through selected export points.
The inspectors were to monitor the amount of oil leaving Iraq under the
Oil for Food program at these locations and to stop shipments if they
found irregularities. The inspectors worked at two locations--the
Ceyhan-Zakho pipeline between Iraq and Turkey and the Mina al-Bakr
loading platform in southern Iraq. In 2005, a Saybolt official
testified that Saybolt's mandate did not include monitoring all oil
exports leaving Iraq from other locations or acting as a police
force.[Footnote 16] As a result, the contractors did not monitor oil
that was smuggled outside the Oil for Food program.
Further, because the Iraqi government did not install functioning oil
meters at the port, inspectors could not accurately confirm the volume
of oil loaded onto vessels. The lack of functioning meters enabled the
Iraqi government to smuggle oil undetected by inspectors. A Saybolt
employee testified that the company notified UN officials of the
problems posed by the lack of functioning meters at the beginning of
the program.[Footnote 17] He also testified that the lack of metering
equipment allowed the two "topping off" incidents involving the oil
tanker Essex, in which the tanker loaded additional oil after the
inspectors had certified the loading and left the vessel. In November
2001, a Saybolt representative noted that Iraq's distribution
plans[Footnote 18] provided for the installation of a meter at the Mina
al-Bakr port, and a U.S. official called for OIP to develop a plan to
prevent unauthorized oil sales that would include installing a meter at
the port. However, Iraq did not tender a contract for the meter. As of
March 2006, the Iraqi government had not yet installed oil meters at
Mina al-Bakr.
In the absence of metering, Saybolt measured the onboard quantity of
the vessel before loading. After loading, an inspector measured the
amount by which the vessel tank fell short of being full and the oil
temperature. Inspectors analyzed these data using the vessel's
calibration chart to determine how much oil had been loaded onto the
vessel. While this is an alternative method accepted in the inspection
industry for situations in which reliable metering equipment is not
available, a U.S. official noted that meters are a more consistent
method for measuring oil loading and encouraged their incorporation
into a plan for preventing unauthorized oil sales. The Saybolt
representative also testified that this method was not as accurate or
foolproof as using a meter.
In addition, the sanctions committee relied on the advice of
independent oil overseers to approve oil sales contracts. The overseers
reviewed Iraq's oil sales contracts to determine compliance with
program requirements and whether the prices that Iraq negotiated for
its oil were fair and reflected market pricing. However, the inadequate
number of overseers monitoring Iraq's oil pricing over a 14-month
period may have been a factor in Iraq's ability to levy illicit
surcharges on oil contracts. From June 1999 to August 2000, only one
oil overseer was responsible for monitoring billions in Iraq's oil
transactions, contrary to the sanctions committee's requirements for at
least four overseers. Four overseers were hired at the beginning of the
program but three had resigned by June 1999. Political disputes among
sanctions committee members prevented the committee from agreeing on
replacements. According to the Independent Inquiry Committee, the
sanctions committee demonstrated weak program oversight in its
inability to fill the vacant positions.
Retroactive Pricing Helped Limit Illicit Oil Surcharges:
In October 2001, the Security Council's sanctions committee imposed a
positive control activity--retroactive oil pricing--to prevent Iraqi
officials from adding illegal oil surcharges to contracts. In November
2000, UN oil overseers reported that Iraq's oil prices were low and did
not reflect the fair market value. The overseers also reported in
December 2000 that Iraq had asked oil purchasers to pay surcharges. In
early 2001, the United States informed the sanctions committee about
its concerns regarding allegations that Iraqi government officials were
receiving illegal surcharges on oil contracts. Because the committee
operated by consensus, the United States could delay oil pricing by not
approving a specific price per barrel until the oil was delivered to
the refinery. The Iraq government thus signed contracts with suppliers
without knowing the price it would have to pay until delivery. This
practice, known as retroactive pricing, curbed the ability of the Iraqi
government to levy illicit surcharges on its oil sales contracts. Prior
to retroactive pricing, estimates of Iraq's illicit revenues from
surcharges on exported oil ranged from about $230 million to almost
$900 million.
Contract Examination Procedures Emphasized Dual-Use Items--Not Price
and Value:
According to a report by defense contract experts, in a typical
contract pricing environment, fair and reasonable commodity prices are
generally based on prevailing world market conditions or competitive
bids among multiple suppliers.[Footnote 19] Ensuring a fair and
reasonable price for goods can mitigate the possibility of overpricing
and kickbacks. The sanctions committee and OIP were responsible for
reviewing commodity contracts under the Oil for Food program, but
neither entity conducted sufficient reviews of commodity pricing and
value. As a result, Iraq was able to levy illicit commissions and
kickbacks ranging from about $1.5 billion to about $3.5 billion.
The sanctions committee was responsible for screening contracts for
items that could have military uses and for approving commodity
contracts; any member had the authority to block or hold specific
items. The committee focused on limiting Iraq's ability to import dual-
use items rather than examining contracts for price and value. The
United States, as a member of the sanctions committee, devoted
resources to this contract oversight--about 60 staff from several U.S.
government agencies reviewed the contracts for compliance with dual-use
restrictions and made their recommendations to the U.S. mission to the
UN. However, although the United States accounted for about 90 percent
of the sanctions committee's holds, few contracts were held based
solely on price and value concerns.
While OIP was to examine each contract for price and value before
submitting it to the sanctions committee, the Independent Inquiry
Committee found that OIP lacked clear authority to reject contracts on
pricing grounds and did not hire customs experts with the requisite
expertise to conduct thorough pricing evaluations. OIP stated that it
informed the sanctions committee if it found pricing irregularities and
that it was up to the sanctions committee to approve or hold contracts.
However, the Independent Inquiry Committee found that few of the
customs reports submitted to the sanctions committee included any
quantitative or qualitative assessment beyond a general notation that
pricing appeared high or was higher than in previous applications for
similar goods. An OIP official also stated that OIP found that about 70
out of a total of approximately 30,000 contracts in the OIP database
had specific price and value issues. OIP directly approved more than
half of these 70 contracts as a result of Security Council decisions in
1999 and 2002 that shifted additional approval responsibilities to OIP.
We did not have access to OIP's decisions to determine the extent to
which OIP may have held contracts for price and value concerns.
Earlier Proposal for Price and Quality Review Was Not Included in Final
Inspection Contract:
The Secretariat's contract for inspecting humanitarian supplies at
three entry points in Iraq required inspection agents to "authenticate"
goods, but the agents' responsibilities fell short of a previous
proposal to include more rigorous reviews of commodity price and
quality. Under the Oil for Food program, inspection agents compared
appropriate documentation, including UN approval letters, with the
commodities arriving in Iraq; visually inspected about 7 to 10 percent
of the goods; and tested food items to ensure that they were "fit for
human consumption." However, inspection agents were not required to (1)
verify that food items were of the quality contracted, (2) assess the
value of goods shipped, (3) interdict prohibited goods, (4) inspect
goods that were not voluntarily presented by transporters, or (5)
select the items and suppliers or negotiate contracts. According to
Cotecna, the inspections contractor from 1999 to 2004,[Footnote 20]
"authentication" is not a standard customs term or function. The UN
created the term for the Oil for Food program and did not include
traditional customs inspection activities, such as price verification
and quality inspection. In 1992, the UN selected Cotecna for a proposed
program, which was not implemented, that would have been similar to the
Oil for Food program. Under that proposal, Cotecna would have verified
fair pricing and inspected whether the quality of the items conformed
to contract requirements.
Program in Northern Iraq Had Inadequate Asset and Cash Management
Controls:
Control activities that ensure accountability include cash management
policies and procedures that provide for physical control over
vulnerable assets and other resources. OIOS and the Independent Inquiry
Committee reported specific instances in which the UN offices involved
in administering the Oil for Food program in northern Iraq lacked such
controls. For example, in 2002, OIOS found that UN-Habitat lacked a
proper asset inventory system and that no policies and procedures
governing asset management were evident. In one case, $1.6 million in
excess construction material remained after most projects were
complete.
OIOS also reported that some funds were not used for the purpose
intended, thus subjecting project funds misuse. In a March 2000 audit,
OIOS reported that the UN Development Program country office used
$500,000 in project funds for office expenses without authorization or
proper documentation. A February 2002 audit found that the UN-Habitat
office in Erbil put at risk $600,000 to $800,000 in cash due to a lack
of cash management policies. In addition, the Independent Inquiry
Committee reported thefts from several UN offices or persons, including
$300,000 from the UN Educational, Scientific, and Cultural
Organization's Erbil office; $64,000 from a World Health Organization
suboffice; and $40,000 from the Food and Agricultural Organization when
an automobile carrying more than $100,000 from Baghdad to Erbil was
involved in an accident.
Poor Information and Communication Compromised Disclosure of Iraq's
Illicit Revenue Schemes and Hindered UN Activities in Northern Iraq:
Information should be communicated to those who need it within time
frames that allow them to carry out their oversight responsibilities;
however, OIP did not disclose to the sanctions committee all
appropriate information that may have mitigated Iraq's ability to
obtain illicit revenues, according to the Independent Inquiry
Committee. For example, in December 2000, OIP's Program Management
Division director informed the OIP director of alleged contract
kickback schemes by the Iraqi government and recommended that OIP
inform the sanctions committee of these allegations. The U.K. member of
the sanctions committee asked for a written report of these
allegations, but the Independent Inquiry Committee found no evidence
that the report was submitted. In October 2001, OIP's customs chief--
the person responsible for OIP's price and value reviews--prepared a
written summary of the kickback incidents, including documentation of
illicit side agreements with the Iraqi regime, and presented it to OIP
senior management. However, the Independent Inquiry Committee found no
evidence that this information was provided to the sanctions committee.
Moreover, none of the Secretariat's 90-day or 180-day reports to the
Security Council mentioned illicit payment demands in connection with
oil or commodity contracts. Further, while both the Security Council
and Secretariat were aware of smuggling activities outside of the
program, OIP and the Secretariat had specific information from the
Saybolt oil inspectors about the Syrian pipeline that was not disclosed
to the sanctions committee.
In addition, poor communication and coordination among UN agencies in
northern Iraq had a negative impact on some projects. In one instance,
in 2004, OIOS reported that UN-Habitat had not adequately coordinated
with other UN agencies in providing essential services for its housing
projects. UN-Habitat provided high-capacity generators but had not
contacted the UN Development Program--the entity responsible for the
power sector--to provide electric power connections. In another
instance, OIOS found that about 3,200 houses were unoccupied for
extended periods due to a lack of coordination among agencies providing
complementary services. The Independent Inquiry Committee's
investigation also revealed problems with coordination among UN
agencies, which was exacerbated by poorly defined relationships among
those agencies, the Iraqi government, and the local authorities in the
three northern governorates.
Monitoring Activities Did Not Ensure Adequate Internal Oversight:
Monitoring is an internal control standard that assesses program
performance on an ongoing basis and helps provide assurance that the
findings of audits and other reviews are resolved. We identified
monitoring weaknesses that compromised the Secretariat's internal
oversight of the program. While OIOS conducted numerous audits and
identified hundreds of problems, it did not review OIP's oversight of
the commodity contracts for central and southern Iraq. Nonetheless, its
review of UN activities in northern Iraq led to more than 400 findings.
Although OIP attempted to implement OIOS' recommendations, OIOS and the
Independent Inquiry Committee reported that some systemic issues
remained unresolved.
Limitations on OIOS Reporting and Resources Compromised Its Ability to
Provide Effective Oversight:
Although OIOS conducted more than 50 audits of the Oil for Food program
and the separate compensation fund and identified more than 700
problems, the office did not review key aspects of the Oil for Food
program and operated with low numbers of staff, given the program's
size. Except for audits of OIP's inspection contracts, OIOS did not
review whether OIP was adequately monitoring and coordinating the Oil
for Food program, including OIP's role in assessing commodity pricing.
OIOS did not examine certain headquarters functions, particularly OIP's
oversight of the commodity contracts for central and southern Iraq,
which accounted for 59 percent or almost $40 billion in Oil for Food
proceeds. According to the Independent Inquiry Committee, OIOS believed
that it did not have the authority to audit humanitarian contracts
because the sanctions committee was responsible for their approval, and
OIOS did not review OIP's relationship with the sanctions committee. In
contrast, OIOS took an aggressive stance in reviewing UNCC decisions on
compensation awards, despite the challenges to its authority from UNCC
and the UN Office of Legal Affairs.
OIP management also steered OIOS toward program activities in northern
Iraq rather than headquarters functions where OIP reviewed the
humanitarian contracts. The Independent Inquiry Commission further
noted that the practice of allowing the heads of programs the right to
fund internal audit activities led to excluding high-risk areas from
internal audit examination. We also found that UN funding arrangements
constrain OIOS's ability to operate independently as mandated by the
General Assembly and required the international auditing standards to
which OIOS subscribes.[Footnote 21] Because OIOS did not review
commodity contracts, it was difficult to quantify the extent to which
the Iraqi people received the humanitarian assistance funded by its
government's oil sales.
In addition, the number of OIOS staff assigned to the Oil for Food
program was low compared with the level of staff providing oversight of
peacekeeping operations, according to the Independent Inquiry
Committee. Although OIOS had only 2 to 6 auditors assigned to cover the
Oil for Food program. The UN Board of Auditors indicated that the UN
needed 12 auditors for every $1 billion in expenditures. The committee
concluded that the Oil for Food program should have had more than 160
auditors at its height in 2000. However, the committee found no
instances in which OIOS communicated broad concerns about insufficient
staff to UN management.
OIOS also encountered problems in its efforts to widen the distribution
of its reporting beyond the head of the agency audited. In August 2000,
OIOS proposed to send its reports to the Security Council. However, the
OIP director opposed this proposal, stating that it would compromise
the division of responsibility between internal and external audit. In
addition, the UN Deputy Secretary General denied the request, and OIOS
subsequently abandoned any efforts to report directly to the Security
Council.
OIOS Found Numerous Problems in UN Management of Program in Northern
Iraq, but Issues Were Not Fully Addressed:
We did not have access to the internal audit reports conducted by eight
of the nine agencies managing the program in northern Iraq. However,
our February 2005 analysis of 25 OIOS audits on Oil for Food activities
in northern Iraq identified about 430 problems in program management
and monitoring and about 420 recommendations to correct these
deficiencies.[Footnote 22] In one instance, OIOS reported in 2004 that
UN-Habitat had not adequately coordinated with other UN agencies in
providing essential services for its housing projects. An August 2000
report noted a lack of planning that resulted in the questionable
viability of some projects, including a health facility subject to
flooding and diesel generators procured for an area in which diesel
fuel was not readily available. In November 2002, OIOS reported that
almost $38 million in equipment procurement was not based on a needs
assessment--resulting in 51 generators not being used from September
2000 to March 2002--and that 11 purchase orders totaling almost $14
million showed no documentary evidence supporting the requisitions. In
April 2002, OIOS reported that OIP and UNOHCI had made serious efforts
to implement audit recommendations. However, it also noted that a
number of issues had not been resolved, including efforts to improve
the procurement, planning, coordination, and monitoring of projects in
northern Iraq. The Independent Inquiry Committee also found that a lack
of attention to addressing systemic problems hindered the effectiveness
of the Oil for Food program in the north. The recurring nature of these
problems over the course of the program demonstrated that systemic
weaknesses were not fully addressed.
UNCC Has Paid More than $20 Billion in Compensation Claims, but
Remaining Payments of More than $32 Billion May Take until 2020:
The UN Security Council established UNCC in 1991 under Security Council
Resolution 692 to process claims and pay compensation for damages and
losses resulting from Iraq's invasion and subsequent occupation of
Kuwait. UNCC is a subsidiary organ of the UN Security Council, with its
Governing Council acting as the policy-making body. With the adoption
of Security Council resolution 986, UNCC, along with UN-sponsored
humanitarian programs in Iraq, received funding from the profits from
Iraqi oil sales. (App. IV provides more information on the organization
of UNCC and its claims process.)
UNCC approved awards of almost $52.5 billion to more than 1.5 million
claimants and, as of January 2006, had paid about $20.3 billion of this
amount. However, how and when the remaining approximately $32.2 billion
in approved claims will be paid is uncertain. Depending on the growth
of Iraq's oil export revenues, award payments may be completed sometime
between 2017 and 2020. These unpaid claims are in addition to Iraq's
external debt to international creditors, which the International
Monetary Fund (IMF) estimated at $51 billion at the end of 2005. UNCC's
Secretariat had controls for preparing claims for presentation to the
expert panels, who then recommended which claims should be paid and the
amounts to be compensated. However, OIOS found some weaknesses in
UNCC's oversight of procedures for returning unclaimed payments and
instances of claims overpayments by the panels recommending the awards.
For example, in May 2005, OIOS reported that governments and
international organizations owed UNCC about $38.8 million in claims
that it was unable to pay because claimants could not be located.
According to UNCC, the total amount owed to the UNCC as of March 2006
was $11.7 million.
Almost $32.2 Billion in Unpaid Awards Increases Iraq's Debt Burden and
May Not Be Paid Until 2020:
From 1991 to 1997--its deadline for accepting claims--UNCC received
almost 2.7 million claims seeking almost $353 billion in compensation
for damages and losses.[Footnote 23] UNCC required that claimants
submit claims through their governments and also allowed international
organizations to submit claims on their behalf or on behalf of
individuals who were not in a position to have a government file their
claims. Individual claims came from Kuwaitis and also from many of the
roughly two and a half million expatriate workers and their dependents
living in Kuwait and Iraq at the time of the invasion, 90 percent of
whom fled the region due to the war. As a result, UNCC received claims
from 100 countries on behalf of the country submitting the claim, its
nationals, or its corporations. Upon completing its work in 2005, UNCC
had awarded more than 1.5 million claimants almost $52.5 billion in
compensation, almost 15 percent of the total amount sought. OIOS
auditors stated that an award rate of 15 percent is low and is evidence
of the UNCC's conservative approach to making awards. Appendix IV
provides greater detail on the categories and amounts of claims.
As of late January 2006, UNCC had paid about $20.3 billion in
compensation of the $52.5 billion awarded, mostly to individuals and
families. About $32.2 billion in outstanding awards remains to be paid.
Depending on the growth of Iraq's oil revenue, payments could extend
through around 2020. In 2003, Security Council resolution 1483 reduced
the portion of Iraqi oil revenues allotted to UNCC from 25 percent to 5
percent.[Footnote 24] Using projections made by the International
Monetary Fund, we estimate that the remaining compensation awards could
be paid between 2017 and 2020, assuming that oil export revenues grow
at an annual average rate of about 5 percent and are about 57 percent
of gross domestic product. With an average growth rate of 1 percent,
the remaining compensation awards would be paid by 2020. At 10 percent,
these awards would be paid by 2017.[Footnote 25] These unpaid claims
are in addition to Iraq's substantial external debt. In January 2006,
the IMF estimated Iraq's debt at the end of 2005 at about $51 billion.
With the conclusion of the award process in 2005, UNCC's Secretariat
completed its claims preparation duties and began reducing its staff.
The UNCC secretariat expects that by mid-2007 the payment of all
individual awards will be completed. As an interim measure after that
time, the Governing Council will oversee the Compensation Fund with
assistance from a smaller secretariat. The Governing Council will
consider a future date for transferring responsibility for remaining
payments to the Iraqi government under the supervision of the Security
Council.
UNCC Had Controls for Claims Preparation, but OIOS Reported Concerns
with Award Payment Procedures:
The UNCC secretariat employed controls in its administrative procedures
for preparing claims for the expert panels, but OIOS found some
weaknesses in the procedures for ensuring that unpaid claims are
returned to UNCC and instances of claims overpayments. OIOS found that
inadequate oversight of the procedures for paying awarded amounts to
claimants resulted in governments and international organizations owing
UNCC about $38.8 million in unclaimed payments. In its response to a
draft of this report, UNCC noted that this amount totaled $11.7 million
as of March 2006. Further, OIOS noted that only about half of these
entities had submitted required audit documents certifying their
payments to claimants. UNCC responded that the overwhelming majority of
awards had been successfully paid and that it was working with five of
these governments to improve their reporting obligations. UNCC
questioned OIOS' authority to audit certain aspects of its work, and a
UN legal opinion agreed with UNCC, stating that the scope of OIOS'
audit authority did not extend to those parts of UNCC's work that
constituted a legal process. Nonetheless, OIOS identified more than
$500 million in potential overpayments to claimants.
UNCC Secretariat Had Controls for Processing Claims:
The claims award process was handled by three UNCC entities: the
Secretariat, the Governing Council, and the Commissioner panels. The
Secretariat organized the claims, prepared them for review by the
Commissioner panels, and administered the award payments to governments
and international organizations submitting the claims on behalf of
claimants. The Commissioner panels reviewed the claims, made
recommendations to reject or accept the claims, and recommended award
amounts. The Governing Council made final award decisions based on the
panels' recommendations. The council could disagree with the
recommendations and return the decisions to the panels for further
review; it could also increase or reduce the award amounts. After award
decisions were final, payments were made to governments and
international organizations submitting claims, and these entities
distributed award payments to individual claimants.
In managing the steps required to prepare claims for presentation to
the Commissioner panels, the Secretariat put in place various measures
to mitigate administrative errors and fraud, including efforts to
ensure the integrity of claims data, identify duplicate claims, and
deliver preliminary claims valuations to the Commissioner panels. For
example, the Secretariat's process included assigning all incoming
claims a unique number, running quality control checks, and cleaning up
queries to ensure the integrity of the data entered under each number.
A 2002 assessment conducted by OIOS stated that certain controls for
processing claims and the claims database were generally adequate at
that time.
OIOS Reported Concerns with Award Payments, but UNCC Challenged OIOS's
Authority to Audit Specific Aspects of UNCC's Work:
OIOS concluded in May 2005 that UNCC did not exercise adequate
oversight over the distribution of award payments by governments and
international organizations. UNCC requires governments and
organizations to report on the amount of payments distributed and the
reasons for nonpayment of claims 12 months following the release of
award payments. All funds not located and paid are to be returned to
UNCC within this 12-month period.[Footnote 26] OIOS reported that the
Secretariat did not properly review reports from governments detailing
which awardees could not be located. The auditors also reported that
governments and international organizations owed UNCC about $38.8
million in compensation intended for claimants they were unable to
locate (governments and organizations did refund about $99 million to
UNCC). Of this amount, more than $4 million had been outstanding for
more than 2 years.[Footnote 27] In addition, OIOS found that 14 of the
32 governments and international organizations receiving a total of
about $197 million in an October 2003 disbursement of award payments
had not submitted an audit certificate documenting that payments had
been distributed. The uncertified amount totaled about $156 million.
In comments to OIOS dated June 2005, UNCC responded that the
overwhelming majority of the awards were successfully paid and that
UNCC strongly pursued the submission of audit certificates by
governments and international organizations. UNCC also commented that
it had visited five countries to assist governments with their
reporting obligations and payment distribution. UNCC further noted that
it is the responsibility of the governments and organizations to locate
claimants for payment but added that it would review the actions
necessary to obtain a full accounting from governments that failed to
meet prescribed deadlines. In addition, in commenting on a draft of
this report, UNCC noted that the amount owed to UNCC can fluctuate
almost daily as governments and international organizations locate
previously unreachable claimants and ask for funds for repayment. UNCC
further noted that audit certificates were required for payments
beginning in October 2003. In responding to our draft report, UNCC
provided updated documentation demonstrating that, as of March 2006,
the amount owed to UNCC had decreased to $11.7 million, and only $1.5
million--or 0.8 percent of the $197 million for which certificates were
due--had not been supported by audit certificates.
UNCC challenged OIOS's authority to review specific aspects of UNCC's
work and requested guidance from the UN Office of Legal Affairs.
Specifically, UNCC questioned whether OIOS had the authority to review
(1) the Panel's work in identifying applicable law and the Panel's
application of that law to claims pursuant to the UNCC's Provisional
Rules for Claims Procedure; (2) the manner in which the Panel organized
its work pursuant to those Rules; and (3) the Panel's determinations
regarding the sufficiency of evidence, including its determinations
relating to the relevance, materiality, and weight of evidence pursuant
to UNCC's rules. In 2002, UN legal counsel rendered an opinion, stating
that the audit authority of OIOS included reviewing the panels'
computations of its recommended compensation amounts but did not extend
to reviewing those aspects of the panels' work that were part of the
legal process. The UN legal counsel concluded that all three aspects of
the Panel's work in question were beyond the proper scope of OIOS's
audit authority. Both UNCC and the Department of State agreed with the
UN legal opinion. OIOS disputed it, however, noting its general mandate
to review and appraise the use of UN financial resources. In response,
UNCC argued that the compensation fund does not constitute UN financial
resources. As a result, UNCC only acted on those OIOS recommendations
that it determined, consistent with the UN legal counsel's opinion,
were within the scope of its audit authority.
OIOS continued to report on claims amounts and identified more than
$500 million in recommended claims reductions. For example, in a
September 2002 audit, OIOS found potential overpayments of $419 million
in compensation awarded to Kuwait due to duplicate payments,
calculation errors, insufficient evidence to support losses, and
inconsistent claims methodologies. In April 2003, UNCC provided a
detailed response to OIOS. In its response, UNCC cited documentation
which they said showed that there were no duplicate payments and
provided additional evidence of the losses--consultant reports,
additional documentation, and testimony. UNCC also stated that it and
not OIOS had authority to determine the sufficiency of evidence--for
example, using testimonial evidence with other support when documentary
evidence was destroyed during Iraq's invasion of Kuwait. As of February
2005, UNCC had agreed to reduce total claims overpayments by about $3.3
million.
Conclusion:
The Oil for Food program was flawed from the outset because it did not
have sufficient controls to prevent the former Iraqi regime from
manipulating the program. Internal controls, if properly designed and
implemented, can provide reasonable--although never absolute--
assurance that program goals will be met and fraud will be minimized.
Despite the risks inherent in allowing Iraqi government control over
the contracting process and expanding the program beyond its initial
emergency mandate, the Security Council and the Secretariat did not
establish a system of internal controls, including timely and
comprehensive risk assessment and effective control activities and
monitoring. Moreover, fragmentation of responsibilities led to an
environment in which no single unit or person was accountable for
program management, monitoring, and oversight. The Oil for Food program
was arguably the largest sanctions and humanitarian program in its
scope, complexity, and structure that the UN had undertaken. Given the
enormity of the undertaking, internationally accepted internal control
standards should have been applied throughout the course of the
program. Such standards would have helped ensure that the program was
effectively and efficiently managed and that the Iraqi people received
the intended benefits from the proceeds of its government's oil sales.
U.S. oversight of the Oil for Food program focused on preventing Iraq
from obtaining dual-use items that could be used for military and
weapons of mass destruction programs while meeting the humanitarian
needs of those suffering from sanctions. However, the United States and
other Security Council members did not apply the same rigor to
preventing Iraq from obtaining illicit funds through smuggling and
contract kickbacks. Over the past several years, the United States has
taken the lead in promoting management and oversight reform at the UN.
The lessons learned from the internal control weaknesses in the Oil for
Food program could prove useful as the United States continues to press
the UN to undertake fundamental reforms to address its key efficiency,
management, and accountability challenges.
Recommendation for Executive Action:
We recommend that the Secretary of State and the Permanent
Representative of the United States to the UN work with other member
states to encourage the Secretary General to take the following two
actions:
* ensure that UN programs with considerable financial risk establish,
apply, and enforce the principles of internationally accepted internal
control standards, with particular attention to comprehensive and
timely risk assessments and:
* strengthen internal controls throughout the UN system based in part
on the lessons learned from the Oil for Food program.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Secretary of State, the UN
Deputy Secretary General, and the UN Compensation Commission for
comment. We received written responses from State and UNCC (see apps. V
and VI for the comments and our complete response). State did not agree
or disagree with our recommendation but commented that, although no
sanctions regime similar to Oil for Food is in place, tighter internal
controls would be appropriate for a future program similar to Oil for
Food. We have modified our recommendation to clarify that the
principals of oversight and control should apply not just to programs
with the unique characteristics of Oil for Food. The UN concurred with
our recommendations and noted that it is taking steps to strengthen
internal control in the organization. The UN also provided technical
comments, which we have incorporated into the report as appropriate.
State commented that our report does not (1) clearly distinguish
between the responsibilities and actions of the Secretary General and
the Security Council, (2) overstates the case that diffusion of
responsibility for the program meant that no single entity was in
charge and accountable for the program, (3) does not highlight the
Security Council's inaction in the face of corruption in the sanctions
regime, and (4) overstates the importance of internal control.
We disagree. First, our report clearly distinguishes between the
responsibilities and actions of the Secretary General and the Security
Council. We note that both had a role in the decision to give Iraq
contract authority; the Secretary General negotiated the agreement and
the Security Council approved it. Second, the diffusion of program
responsibilities was a major structural weakness of the program.
Although the Secretary General was responsible for program management,
the Security Council made key decisions about commodity contracts and
oil pricing, and nine UN agencies administered the program in the
North. Third, our report highlights inaction by the Security Council by
fully discussing, for example, its inaction on oil smuggling to
neighboring states. Finally, we believe that State does not
sufficiently emphasize the importance of internal controls for a
vulnerable program. Internationally accepted controls require an
overall structure of accountability with clear lines of authority and a
comprehensive risk assessment. Taking these actions could have
mitigated some of the corruption in the Oil for Food program.
UNCC commented that we should not include UNCC as part of a report that
deals with lessons learned from the Oil for Food program. UNCC
requested that we issue a separate report or distinct chapter on its
organization with additional information about its organization. We
included UNCC in this report because it received more than $20 billion
in Iraqi oil revenues under resolution 986; our intent is to report
fully on the entities entrusted with management of this revenue. We
have modified the report to further make it clear that UNCC is not part
of the Oil for Food program and that it is a separate entity funded by
Iraqi oil revenues. UNCC further commented that it provided OIOS with
comprehensive responses to audit findings of potential overpayments of
compensation but that our draft report did not adequately discuss these
formal responses. In addition, UNCC stated that our discussion of
OIOS's legal authority to audit UNCC awards does not adequately
describe the position of UNCC or the UN General Counsel's legal
opinion. We added information to the report to describe UNCC responses
to OIOS recommendations and its position regarding OIOS's legal
authority to audit its activities.
We are providing copies of this report to the Secretary of State and
interested congressional committees. We will also make copies available
to others upon request. In addition, the report will be available on
the GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-8970 or ChristoffJ@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix VII.
Signed by:
Joseph A. Christoff, Director:
International Affairs and Trade:
Congressional Committees:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Duncan L. Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable Richard G. Lugar:
Chairman:
The Honorable Joseph R. Biden, Jr.
Ranking Minority Member:
Committee on Foreign Relations:
United States Senate:
The Honorable Henry J. Hyde:
Chairman:
The Honorable Tom Lantos:
Ranking Minority Member:
Committee on International Relations:
House of Representatives:
The Honorable Susan M. Collins:
Chairwoman:
The Honorable Joseph I. Lieberman:
Ranking Minority Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Tom Davis:
Chairman:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To assess aspects of the control environment of the Oil for Food
program, we collected and analyzed (1) our prior reports and
testimonies on the Iraq sanctions and Oil for Food program, (2) reports
issued by the United Nations (UN) Independent Inquiry Committee and the
Iraq Survey Group, (3) UN Office of the Iraq Program (OIP) documents,
(4) relevant Security Council resolutions and the memorandum of
understanding between the UN and the Iraqi government, (5) UN
Secretariat reports to the Security Council, and (6) summaries of
meetings of the Security Council's Iraq sanctions committee. We
reviewed Security Council reports and documents related to oil
smuggling to neighboring countries.
To assess the sanctions and Oil for Food Program in relation to the
four other internal control standards, we collected and analyzed the
documentation listed above and also reviewed reports of the UN Office
of Internal Oversight Services (OIOS) and other entities. The UN
General Assembly created OIOS in 1994 and tasked it with conducting
audits, investigations, inspections, and evaluations of UN programs and
funds. The internal audit divisions of OIOS adhere to the Standards for
the Professional Practice of Internal Auditing in the UN.[Footnote 28]
In February 2005, we catalogued the findings and recommendations of 50
OIOS reports to determine common themes related to the management of
the Oil for Food program and UN Compensation Commission (UNCC) using a
protocol to identify findings for data input. To ensure consistency of
data input, a database manager reviewed all input, and all input was
independently validated. At the State Department's Oil for Food reading
room, we reviewed more than 600 documents, including cables, reports,
and memoranda. We asked for copies of these documents; we received
about 250 of them. We also reviewed summaries of internal audits
provided by the UN Development Program. Based on our review of these
summaries and references to agencies' internal audits in Independent
Inquiry Committee reports, we determined that the basic issues raised
in these reports mirrored many of the findings and recommendations of
the OIOS reports.
We also met with officials responsible for implementing and overseeing
the sanctions and Oil for Food program to discuss the internal controls
used in the program. These officials included representatives from the
Departments of Commerce, Defense, Treasury, and State. We traveled to
New York to meet with officials from the U.S. Permanent Mission to the
UN in New York, OIP, OIOS, the UN Children's Fund, the UN Development
Program, and the UN Office for Project Support. We also met with
representatives from the Independent Inquiry Committee and the Iraq
Survey Group to discuss their report findings and methodologies. To
assess both the control environment and the other internal control
standards, we applied the internal control standards described in GAO's
Standards for Internal Control in the Federal Government.[Footnote 29]
We used the following methodology to estimate the former Iraqi regime's
illicit revenues from oil smuggling, surcharges on oil, and commissions
from commodity contracts from 1997 through 2002:
* To estimate the amount of oil the Iraqi regime smuggled, we used
Energy Information Administration (EIA) estimates of Iraqi oil
production and subtracted oil sold under the Oil for Food program and
domestic consumption. The remaining oil was smuggled through Turkey,
the Persian Gulf, Jordan, and Syria (oil smuggling to Syria began in
late 2000).
* We estimated the amount of oil to each destination based on
information from and discussions with officials of EIA, Cambridge
Energy Research Associates, the Middle East Economic Survey, and the
private consulting firm Petroleum Finance.
* We used the price of oil sold to estimate the proceeds from smuggled
oil. We discounted the price by 9 percent for the difference in
quality. We discounted this price by 67 percent for smuggling to Jordan
and by 33 percent for smuggling through Turkey, the Persian Gulf, and
Syria. According to oil industry experts, this is representative of the
prices paid for smuggled oil.
* To estimate the amount Iraq earned from surcharges on oil, we
multiplied the barrels of oil sold under the Oil for Food program from
1997 through 2002 by 25 cents per barrel. According to Security Council
members, the surcharge varied, but Iraq tried to get as much as 50
cents per barrel. Industry experts also stated the surcharge varied.
* To estimate the commission from commodities, we multiplied Iraq's
letters of credit for commodity purchases by 5 percent for 1997 through
1998 and 10 percent for 1999 through 2002. According to Security
Council members, the commission varied from 5 percent to 10 percent.
This percentage was also confirmed in interviews conducted by U.S.
officials with former Iraqi regime ministers of oil, finance, and trade
and with Saddam Hussein's presidential advisors.
We did not obtain source documents and records from the former regime
about its smuggling, surcharges, and commissions. Our estimate of
illicit revenues is therefore not a precise accounting number. Areas of
uncertainty in our estimate include:
* Our estimate of the revenue from smuggled oil is less than the
estimates of U.S. intelligence agencies. We used estimates of Iraqi oil
production and domestic consumption for our calculations. U.S.
intelligence agencies used other methods to estimate smuggling.
* Our estimate of revenue from oil surcharges is based on a surcharge
of 25 cents per barrel from 1997 through 2002. However, the average
surcharge could be lower. UN Security Council members and oil industry
sources do not know when the surcharge began or ended or the precise
amount of the surcharge. One oil industry expert stated that the
surcharge was imposed at the beginning of the program but that the
amount varied. Security Council members and the U.S. Treasury
Department reported that surcharges ranged from 10 cents to 50 cents
per barrel. As a test of reasonableness, we compared the price paid for
oil under the Oil for Food program with a proxy oil price for the
period 1997 through 2002. We found that for the entire period, the
price of Iraqi oil was considerably below the proxy price. Oil
purchasers would have to pay below market price to have a margin to pay
the surcharge.
* Our estimate of the commission on commodities could be understated.
We calculated commissions based on the commodity contracts for the 15
governorates in central and southern Iraq (known as the "59-percent
account" because these governorates received this percentage of Oil for
Food revenues). We excluded contracts for the three northern
governorates (known as the "13-percent account"). However, the former
Iraqi regime negotiated the food and medical contracts for the northern
governorates, and the Defense Contract Audit Agency found that some of
these contracts were potentially overpriced. The Defense Contract Audit
Agency also found extra fees of between 10 and 20 percent on some
contracts.
To examine the progress and procedures of UNCC, we reviewed its
publicly available information, including extensive background
information, a literature review, and copies of all official
documentation pertaining to Governing Council policy decisions, panel
recommendations, and disbursement figures. To gather information about
UNCC's management of its claims process, we reviewed about 20 OIOS
audit reports related to the UNCC's activities and met with attorneys
from the Department of State regarding the U.S. role in adjudicating
and delivery claims payments. In July of 2005, we visited the UNCC
headquarters in Geneva, Switzerland, where we met with UNCC officials
and the U.S. representative to the Governing Council regarding the
procedures for administering the claims review and award processes. At
that time, we obtained and reviewed written information on all steps
for the claims processes undertaken by the UNCC Secretariat. We also
met with OIOS auditors that conducted reviews of UNCC's claims files,
award decisions, and internal controls for the UNCC Secretariat's
claims procedures. We verified the most recent figures related to
claims received, awarded, and disbursed with officials in Geneva and
Washington. We determined that UNCC data on claims are sufficiently
reliable to report the aggregate amount of claims awarded, the claims
that UNCC has paid on behalf of Iraq, and the claims that Iraq still
owes.
To determine figures relating to Iraq's ability to pay off remaining
compensation awards, we developed an analysis built on International
Monetary Fund (IMF) projections of Iraqi crude oil export revenue,
award payment, and nominal gross domestic product (GDP), in both
dollars and Iraqi dinars, for the period 2006 through 2010.[Footnote
30] We converted estimated crude oil export revenue and award payments
into dollars. We projected annual crude oil export revenue for the
period 2011 through 2025 by assuming a constant annual growth rate. For
each scenario, we selected a constant growth rate such that the annual
average growth rate during 2006 through 2025 would be 10, 5, or 1
percent, respectively. We estimated annual award payments as 5 percent
of annual crude oil export revenue. For each scenario, we computed
cumulative award payments commencing in 2006 until the total exceeded
$32.5 billion,[Footnote 31] the outstanding award balance as of January
2006. We noted the year in which this occurred for each scenario.
To calculate the ratio of crude oil export revenue to GDP, we projected
annual Iraqi GDP during 2011 through 2025. Using nominal GDP
projections from the economic consulting firm Global Insight,[Footnote
32] we computed annual growth rates of nominal dollar GDP for the years
2011 through 2025. We applied these growth rates to the IMF-projected
2010 GDP figure and computed annual GDP through 2025. We constructed
the ratio of crude oil export revenue to GDP for each scenario and
calculated the average ratio for the period 2006 through 2025.
We used the IMF report as the basis for our projections of how long it
might take Iraq to repay the UNCC-awarded compensation because the
report is the basis for approving the Stand-By Arrangement for Iraq of
(Special Drawing Rights) SDR 475.4 million (about $685 million), which
is intended to stabilize Iraq's economy. Further, the IMF stand-by
arrangement triggers a further reduction of 30 percent of Iraq's
sovereign debt, as agreed to by international creditors.
[End of section]
Appendix II: Oil for Food Program Processes:
This appendix briefly summarizes the extensive and complicated
processes of the Oil for Food program. Under the program, the UN
Security Council's Iraq sanctions committee approved the contracts
negotiated by Iraq for selling its oil. After oil was shipped, the
companies deposited the funds into a UN-held account, and the proceeds
from this account were used to fund humanitarian goods and services for
Iraq. The Iraqi government negotiated the commodities for the 15
central and southern governorates under its control, as well as food
and medicine for the entire country, including the three autonomous
Kurdish governorates in northern Iraq. The UN reviewed and approved
contracts to ensure that no items with potential military use were
imported by Iraq with the program's funds. The Iraqi government
distributed the goods within the central and southern governorates. In
northern Iraq, UN agencies distributed the food and medicine procured
by the Iraqi government and contracted goods and services to implement
humanitarian assistance projects in several sectors.
Oil Sales:
Iraq's state-owned oil marketing company was responsible for
negotiating contracts with international oil companies to sell Iraqi
oil. Once negotiated, the oil purchase contracts were reviewed by a
panel of contracted oil overseers reporting to the Security Council's
Iraq sanctions committee. The oil overseers also reviewed Iraq's
pricing proposals and advised the sanctions committee on fair pricing.
The sanctions committee used the advice of the overseers to set the oil
price and approve contracts. The Secretariat also contracted oil
inspectors to monitor and inspect the quantity of the oil exported.
Once the oil was shipped, the oil purchasers directly deposited the
proceeds into a UN-monitored escrow account held at the New York branch
of France's Banque Nationale de Paris (BNP, now BNP-Paribas).[Footnote
33]
Humanitarian Assistance to Central and Southern Iraq:
The Iraqi government used the proceeds from its oil sales to purchase
food, medicines, and infrastructure supplies and equipment. The
government first submitted a distribution plan to the UN Secretariat
for all 18 governorates and then negotiated contracts directly with
suppliers for goods for central and southern Iraq.[Footnote 34] OIP
reviewed contracts submitted by suppliers to ensure that the paperwork
was complete and submitted it to the sanctions committee for approval.
Beginning in December 1999, resolution 1284 abolished Iraq's export
ceiling to purchase civilian goods, and the Security Council authorized
OIP to approve certain humanitarian items without committee approval.
Before May 2002, all exports to Iraq were forbidden unless the Security
Council specifically permitted them through resolutions or decisions.
Starting in May 2002, in accordance with Security Council resolution
1409, the Security Council introduced a new system under which all
goods were permitted, except products that could be used to develop
weapons of mass destruction, conventional weapons, and military-related
or dual-use goods. These controlled items were specifically listed on
what was known as the goods review list, and only these items were
referred to the sanctions committee for review. Two UN inspection
bodies assigned to monitor Iraq's military and weapons of mass
destruction programs--the UN Monitoring, Verification, and Inspection
Committee and the International Atomic Energy Agency--examined
commodity contracts to see if they contained items on the goods review
list. Items that were on the goods review list, not entire contracts,
were forwarded to the sanctions committee for further review and either
approval or denial.
Each member of the Iraq sanctions committee had authority to approve,
hold, or block any contract; and the United States, as an active member
of the sanctions committee, conducted a review of each commodity
contract. U.S. technical experts assessed each item in a contract to
determine its potential military application and whether the item was
appropriate for the intended end user. These experts also examined the
end user's track record with such commodities. An estimated 60 U.S.
government personnel within the Departments of State, Defense, Energy,
and other agencies examined all proposed sales of items that could be
used to assist the Iraqi military or develop weapons of mass
destruction. In addition, the Department of the Treasury was
responsible for issuing U.S. export licenses to Iraq. It compiled the
results of the review by U.S. agencies under the UN approval process
and obtained input from the Department of Commerce on whether a
contract included any items found on a list of goods prohibited for
export to Iraq for reasons of national security or nuclear, chemical,
and biological weapons proliferation.
When a contract was approved, the government of Iraq requested a letter
of credit for the supplier. UN contractors at entry points into Iraq
authenticated shipments. Following the authentication, OIP authorized
the bank to pay the supplier from the escrow account. The Iraqi
government was then responsible for distributing the items in
accordance with the distribution plan and with its Public Distribution
System, a food ration basket for all Iraqis. Commodity distribution in
Iraq was monitored by about 160 UN observers who visited ration
centers, marketplaces, warehouses, and other installations to ensure
that distribution was equitable and in accordance with the targeted
allocation plans submitted by Iraq for each 6-month phase.
Humanitarian Assistance to Northern Iraq:
The Oil for Food program in the three semiautonomous governorates in
northern Iraq was managed separately to ensure that these regions, with
a majority Kurdish population, received the humanitarian assistance
needed. Security Council resolution 986 and the 1996 memorandum of
understanding between Iraq and the UN created a framework under which
nine UN agencies delivered emergency assistance and humanitarian aid in
these regions. The process for delivering humanitarian assistance
varied from that in central and southern Iraq. Food and medicines were
procured in bulk by the central Iraqi government, and UN workers,
accompanied by UN security guards, monitored the distribution of these
items in the northern region. Activities of the nine UN agencies
included constructing or rehabilitating schools, health clinics, power
generation facilities, and houses.
[End of section]
Appendix III: Estimates and Ranges of Iraq's Illicit Revenues and
Payments during the Oil for Food Program:
GAO, the Iraq Survey Group, and the Independent Inquiry Committee each
estimated the illicit revenues and payments obtained by the Iraq regime
through its surcharges on oil sales, questionable commissions and
kickbacks on commodity contracts, and smuggling. In their published
estimates, the Iraq Survey Group and the Independent Inquiry Committee
included revenues from smuggling and other trade outside the Oil for
Food program since 1991, when sanctions were first imposed. We have
included only their estimates for the years of the Oil for Food
program--from 1997 through about early 2003. our estimates include
revenues from 1997 through the end of 2002. (App. I contains more
detail on our methodologies for estimating Iraq's illicit revenues.)
Table 1: Estimates of Iraq's Illicit Revenues during the Period of the
Oil for Food Program, by Source:
U.S. dollars in millions.
Revenue Type: Surcharges on oil sales;
GAO: 0.9;
Iraq Survey Group[A]: 0.23;
Independent Inquiry Committee: 0.23.
Revenue Type: Commodity purchase kickbacks;
GAO: 3.5;
Iraq Survey Group[A]: 1.5;
Independent Inquiry Committee: 1.6.
Revenue Type: Smuggling/trade outside program;
GAO: 5.7;
Iraq Survey Group[A]: 6.8;
Independent Inquiry Committee: 8.4.
Revenue Type: Total;
GAO: 10.1;
Iraq Survey Group[A]: 8.53;
Independent Inquiry Committee: 10.23.
Source: For GAO estimates: analysis of data from the oil industry, the
Department of Energy, and information from Security Council member
states. For other estimates: GAO analysis of Iraq Survey Group and
Independent Inquiry Committee data.
[A] The Iraq Survey Group was created in 2003 to investigate Iraq's
weapons of mass destruction program. It included analysts from the
Central Intelligence Agency, Defense Intelligence Agency, the
Departments of Energy and State, and from allied countries. It reported
its findings in an unclassified report, Comprehensive Report of the
Special Advisor to the DCI on Iraq's WMD (Sept. 30, 2004).
[End of table]
Table 2: Ranges of Iraq's Illicit Revenues during the Oil for Food
Program:
U.S. dollars in millions.
Revenue Type: Surcharges on oil sales;
Lowest estimate: 0.23;
Highest estimate: 0.9.
Revenue Type: Commodity purchase kickbacks;
Lowest estimate: 1.5;
Highest estimate: 3.5.
Revenue Type: Smuggling/trade outside program;
Lowest estimate: 5.7;
Highest estimate: 8.4.
Revenue Type: Total;
Lowest estimate: 7.43;
Highest estimate: 12.8.
Source: GAO analysis of estimates developed by GAO, the Iraq Survey
Group, and the Independent Inquiry Committee.
[End of table]
Illicit Surcharges on Exported Oil:
For oil surcharges, we multiplied barrels of oil sold under the Oil for
Food program for 1997 through 2002 by 25 cents, based on estimates
supplied by Security Council members and oil industry experts. The Iraq
Survey Group had access to records at Iraq's State Oil Marketing
Organization (SOMO) and to U.S. interviews with former Iraqi officials.
It based its surcharge estimates on the organization's collections for
2000 through 2002. The Independent Inquiry Committee adopted a similar
methodology using Iraqi records.
Commodity Purchase Kickbacks:
We multiplied letters of credit for purchases by 5 percent for 1997
through 1998 and by 10 percent for 1999 through 2002. We based this
methodology on interviews with Security Council members that illicit
commissions varied from 5 to 10 percent. This information was
subsequently confirmed by former Iraqi minister and Saddam Hussein's
advisors in interviews conducted by U.S. officials.
The Iraq Survey Group included estimates for the period 2000 through
early 2003. It developed a formula based on Iraq's oil earnings, the
actual amounts spent on imports, lags between earnings and contract
signings, and an estimated 10-percent kickback.
The Independent Inquiry Committee's estimate was based on UN accounting
records detailing the actual amounts spent on Oil for Food contracts,
Iraqi records that set forth the regime's policies on obtaining illicit
income, Iraqi ministry records with data on the kickbacks levied and
collected, and banking records confirming and quantifying the deposit
of kickbacks into collection accounts.
Smuggling and Trade-Related Revenues:
To determine the amount of oil smuggled, we subtracted the amounts of
oil sold through the Oil for Food program and domestic consumption from
Iraq's production for 1997 through 2002 (as determined by the U.S.
Department of Energy). We estimated illicit proceeds from this oil
using prices for Iraqi oil under the Oil for Food program and price
discounting methods. On the basis of discussions with experts, we
applied a discount rate of between one-third to two-thirds of the Oil
for Food price to the smuggled shipments, depending on location.
The Iraq Survey Group separated earnings from ongoing trade agreements
with neighboring countries from "private sector" oil revenue obtained
outside either the Oil for Food program or ongoing trade agreements.
For revenue from trade agreements, the Iraq Survey Group primarily used
SOMO information on its invoices and collections from under these
agreements. For "private sector" revenues during the Oil for Food
program period, it relied mostly on SOMO actual collections for cash
transactions and the invoice value for barter trade.
Similar to the Iraq Survey Group, the Independent Inquiry Committee
broke out trade revenue from neighboring countries separately from
other oil trade outside the Oil for Food program. Like GAO, the
committee calculated the volume of oil sold on the basis of Iraq's
production, internal consumption, and foreign trade. However, it used
SOMO data for these calculations and did not apply a discount rate.
Other Estimates of Illicit Revenue:
In addition to smuggling and contract surcharges and kickbacks, the
Senate Permanent Subcommittee on Investigations, Committee on Homeland
Security and Governmental Affairs, included other categories in its
estimate of Iraq's illicit revenues. For example, the Subcommittee
estimated that Iraq gained $2.1 billion in illicit revenue from
substandard goods. This scheme involved contracting first-quality
goods, although the actual goods delivered were of lesser quality. The
supplier received a small percentage of the difference and the Iraqi
government kept the rest. The estimate was based on anecdotal
information provided by officials of the former Iraqi regime, the UN,
and the U.S. government. The estimate assumed that, from 1997 through
2003, on average, about 5 percent of all goods delivered under the Oil
for Food program were substandard.
[End of section]
Appendix IV: UNCC Organization and Its Claims Categories and Amounts:
This appendix provides more detailed information on the organization of
UNCC and how claims were decided based on the different categories of
claims.
UNCC Formation and Organization:
The UN Security Council established UNCC in 1991 to process claims and
pay compensation for damages and losses resulting from Iraq's invasion
and subsequent occupation of Kuwait. Security Council resolution 687 of
April 3, 1991 established Iraq responsibility for such losses stating
that "Iraq.is liable under international law for any direct loss,
damage, including environmental damage and the depletion of natural
resources, or injury to foreign Governments, nationals and
corporations, as a result of Iraq's unlawful invasion and occupation of
Kuwait." On May 20, 1991, the Security Council adopted resolution 692,
which established UNCC and the UN Compensation Fund. With the adoption
of Security Council Resolution 986, UNCC, along with UN-sponsored
humanitarian programs in Iraq, received funding from the profits from
Iraqi oil sales.
UNCC is a subsidiary organ of the UN Security Council and is comprised
of three entities--the Governing Council, the panels of Commissioners,
and the UNCC Secretariat. The Governing Council, whose membership is
the same as that of the Security Council, is the principal policymaking
organization within UNCC. The Governing Council approves the award
decisions recommended by the panels of Commissioners. The three-member
panels were responsible for reviewing the claims and making
recommendations on whether to award claimants and the amounts to be
awarded. Commissioner panels included experts in the fields of law,
accounting, insurance, and environmental damage assessment.
Commissioners were nominated by the UN Secretary General and appointed
by the UNCC Governing Council on the basis of professional
qualifications, experience, and geographic representation. The UNCC
Secretariat organized the claims and provided support to both the
Governing Council and the Commissioners panels.
UNCC's Claims Categories and Amounts:
UNCC divided claims into six classes (A through F). Individuals and
their families filed A, B, and C claims--known collectively as the
small claims categories--for damages and losses up to $100,000. The
large claims categories--D, E, and F--were filed by individuals
petitioning for $100,000 or more in damages and losses, and from
corporations, international organizations, and governments. Although
the number of small claims was much higher, larger claims accounted for
about 95 percent of the compensation sought. Claimants in the D, E, and
F categories petitioned for millions--and in some instances billions--
of U.S. dollars. Table 3 summarizes the claims categories and the types
of losses and damage UNCC compensated.
Table 3: UNCC Claims Categories:
Claim category: Small claims categories: A claims;
Claim description: Submitted by individuals forced to leave Iraq or
Kuwait because of the Iraqi invasion of Kuwait. Individuals and
families who intended to file claims in other categories were awarded
$2,500 and $5,000, respectively. Individuals and families that agreed
not to file other claims were entitled to receive $4,000 and $8,000,
respectively.
Claim category: Small claims categories: B claims;
Claim description: Submitted by individuals who suffered serious
personal injury by the Iraqi invading force or whose spouse, child, or
parent died as a result of the invasion and occupation of Kuwait;
individuals were awarded $2,500, and families were awarded up to
$10,000.
Claim category: Small claims categories: C claims;
Claim description: Submitted by individuals for damages up to $100,000
for 21 different types of losses, including those relating to departure
from Kuwait or Iraq;
personal injury;
mental pain and anguish;
loss of personal property;
loss of bank accounts, stocks, and other securities;
loss of income;
loss of real property;
and individual business losses.
Claim category: Large claims categories: D claims;
Claim description: Submitted by individuals for damages over $100,000
for 21 different types of losses, including those relating to departure
from Kuwait or Iraq;
personal injury;
mental pain and anguish;
loss of personal property;
loss of bank accounts, stocks, and other securities;
loss of income;
loss of real property;
and individual business losses.
Claim category: Large claims categories: E claims;
Claim description: Submitted by corporations, other private legal
entities, and public sector enterprises for construction or other
contract losses;
losses from the nonpayment for goods or services;
losses relating to the destruction or seizure of business assets;
loss of profits;
and oil sector losses.
Claim category: Large claims categories: F claims;
Claim description: Submitted by governments and international
organizations for losses incurred in evacuating citizens;
providing relief to citizens;
damage to diplomatic premises;
loss and damage to other government property;
and damage to the environment.
Source: GAO analysis based on UNCC data.
[End of table]
Claimants for the small categories were awarded $8.43 billion--a little
more than half of the $15 billion in compensation they requested, while
large category claimants were awarded about $44 billion, or about 13
percent of the $338 billion they requested. UNCC set the amount of
compensation that could be requested and awarded for A and B category
claimants.[Footnote 35] (See fig. 4).
Figure 4: Claims Received and Awarded by Category:
[See PDF for image]
[A] Claims in the E category include totals for export guarantee and
insurance claims submitted to UNCC, which were designated as an E/F
subcategory. There were 123 E/F claims, seeking $6.1 billion in
compensation, of which 57 were award $311 million in compensation.
[End of figure]
By late January 2006, the UNCC had paid about $20.3 billion in
compensation, mostly to individuals and families, leaving about $32.2
billion in outstanding unpaid awards. Almost all of the amount yet to
be paid is for claims in the E and F categories; i.e., claims submitted
by corporations and governments. UNCC officials noted that the small
outstanding amounts currently in the A and C categories are for
individuals who have not been located and therefore were unable to
receive awards. Category B claims have been paid entirely.
[End of section]
Appendix V: Comments from the Department of State:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
United States Department of State:
Assistant Secretary and Chief Financial Officer:
Washington, D. C. 20520:
March 16, 2006:
Ms. Jacquelyn Williams-Bridgers:
Managing Director:
International Affairs and Trade:
Government Accountability Office:
441 G Street, N. W.
Washington, D.C. 20548-0001:
Dear Ms. Williams-Bridgers:
We appreciate the opportunity to review your draft report, "UNITED
NATIONS: Lessons Learned from Oil for Food Program Indicate the Need to
Strengthen UN Internal Controls and Oversight," GAO Job Code 320320.
The enclosed Department of State comments are provided for
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact
Betsy Fitzgerald, Foreign Affairs Officer, Bureau of International
Organization Affairs, at (202) 736-7740.
Signed by:
Bradford R. Higgins:
cc: GAO - Audrey Solis:
IO - Kristen Silverberg:
State/OIG - Mark Duda:
Department of State Comments on GAO Draft Report UNITED NATIONS:
Lessons Learned from Oil for Food Program Indicate the Need to
Strengthen Internal Controls and Oversight (GAO-06-330, GAO Code
320320):
We appreciate the opportunity to comment on your draft report, "United
Nations: Lessons Learned from Oil for Food Program Indicate the Need to
Strengthen Internal Controls and Oversight."
With regard to the recommendation:
"We recommend that the Secretary of State and the Permanent
Representative of the United States to the UN work with other member
states to encourage the Secretary General to (1) ensure that future
sanctions programs establish, apply and enforce the principles of
internationally accepted internal control standards, with particular
attention to comprehensive and timely risk assessments; and (2)
strengthen internal controls throughout the UN system based in part on
the lessons learned from the Oil for Food program."
The U.S. Mission to the United Nations is working diligently on a
number of UN reform issues, including strengthened internal controls.
However, recommendation (1) would not apply to all sanctions regimes,
only to regimes such as OFF where comprehensive sanctions have been
placed on a government and the UN is managing considerable financial
flows and a large humanitarian program. No such sanctions regime is in
place at present. If such a regime were to be put in place some time in
the future, this recommendation for tightened internal controls would
be appropriate.
With regard to the report itself:
The report correctly credits the OFF Program with having helped to
avert a humanitarian crisis in Iraq, one of its primary objectives, and
in limiting Iraq's ability to purchase military-related and WMD items.
The report does appropriately commend efforts through retroactive oil
pricing to limit oil surcharges.
The report criticizes the UN for having failed to put in place internal
controls to prevent Iraq and others from manipulating the program and
circumventing sanctions, an outcome the report notes was the direct
result of the "UN's" decision to allow Saddam to sell oil to whom he
chose and to purchase goods from the dealers he selected. The "UN's"
decision in this regard, however, was one taken by Security Council
Member States, not Secretariat officials. There is a fundamental
distinction between actions for which the Secretary General and his
officials must take responsibility and actions in the Security Council
for which Member States (serving on the Council) must take
responsibility - a distinction that may not be consistently clear in
the GAO report.
The report does acknowledge that concessions to the Government of Iraq
regarding oil sales and goods purchases were made "against a backdrop
of pressure to maintain sanctions while addressing emergency
humanitarian needs."
The report does not highlight the Council's inaction in the face of
awareness of non-compliance and corruption in the sanctions regime.
While tolerance of certain non-compliance, for example in regard to
smuggling to Jordan and Turkey, was conscious and understandable, it is
harder to understand the tolerance by some on the Security Council of
other, broader areas of non compliance.
On accountability, the repeated assertions that the diffusion of
responsibility among numerous entities meant that no single entity was
in charge and accountable for the program in its entirety seems
overstated. While diffusion certainly existed and no doubt contributed
to the problem, the Secretary General and his Deputy were ultimately
responsible for the administration of the huge and important OFF
Program. They should have reported fully and accurately any problems
that may have arisen, including as a result of the decisions of the
Security Council or any diffusion of responsibility.
A central theme is that the OFF Program was manipulated, and the
sanctions circumvented, because there were insufficient internal
program controls. There is little discussion in the report of the
political dynamics, both globally and in the Council, that governed
international efforts to contain Saddam Hussein's regime. Simply
imposing more oversight and program controls without collective
political will to take action to address sanctions non-compliance would
not have corrected the problems.
In addressing the UNCC, the report merely restates OIOS findings,
without making it clear that they are OIOS findings and not GAO
findings. The report does not address the fact that the OIOS findings
are in dispute. Furthermore, the Department of State does not agree
with many of OIOS's characterizations, especially on the exchange rate
issue and on OIOS's review of decisions made by the Panels of
Commissioners, which is outside the scope of OIOS's auditing authority.
We would like to highlight the exchange rate issue with regard to the
UNCC. OIOS has not accepted the expert opinion of Professor Crawford,
released in August 2005, on the issue of currency exchange rates.
Crawford's opinion explains that according to international legal
standards and common practices used by other compensation commissions
and tribunals, the appropriate date for use of the exchange rate
converting UNCC award payments into local currency is the date of loss.
OIOS asserts that the date of payment is the appropriate date because
that is the date used in accordance with the UN Financial Regulations
and Rules for UN commercial transactions. Because the payments of
awards under the UNCC is that of a compensation commission not a
commercial transaction, the appropriate exchange rate practice should
follow international legal standards, not UN financial regulations.
Therefore, OIOS's finding that the UNCC has made $500 million in
overpayments is a gross mischaracterization. If the GAO is not prepared
to reject the clearly erroneous OIOS findings, it is vital that the
report at least clearly reflect both sides of this dispute.
On the matter of OIOS's proper scope of auditing authority, OIOS has
reviewed decisions made by the Panels of Commissioners, which are legal
decisions that auditors are not qualified or authorized to review. The
UNCC sought legal advice from the UN Office of the Legal Counsel on
whether OIOS's review activities in this regard were appropriate. The
UN Legal Counsel determined that OIOS review of the Panel's decisions
was not within its scope of auditing authority and the UNCC considers
OIOS to be bound by this decision whereas OIOS does not. Again, your
report needs to fully address both sides of this issue.
With regard to overpayments, the GAO report states that as of May 2005
governments and international organizations owed UNCC $38.8 million in
claims they were unable to pay due to unlocated claimants. This amount
represents governments/organizations that have not reported to the UNCC
on whether amounts received have been paid out or not and hence changes
on a daily basis as reports come in. For example, as of March 2006,
this amount had changed to $11.7 million. The report mischaracterizes
this number and should reflect that the majority of the $38.8 million
represents amounts governments have not reported on with only a few
million dollars of that amount representing funds that were
delinquently held by governments.
The following are GAO's comments on the Department of State's letter
dated March 16, 2006.
GAO Comments:
1. We disagree with State's assertion that the report does not clearly
distinguish between the responsibilities and actions of the Secretary
General and the Security Council. For actions attributed to both the
Security Council and the Secretariat, our report collectively refers to
the UN. For actions taken by one or the other entity, we clearly denote
whether it is the Security Council or the Secretariat. State commented
that the member states of the Security Council were responsible for the
decisions that allowed Iraq to manipulate the program and circumvent
sanctions, not the Secretariat or the "UN." Although the Security
Council was responsible for approving the agreement with Iraq, we
disagree with State's assertion that the Secretariat did not play a
part in the agreement. We note that the Secretariat negotiated and the
Secretary General signed the May 1996 memorandum of understanding
between the UN and Iraq, and the Security Council approved it. This
agreement allowed Iraq to choose its oil buyers and commodity suppliers
and directly negotiate contract terms. Therefore, the UN was
collectively responsible for allowing a control environment that
enabled Iraq to obtain illicit revenues through surcharges and
kickbacks.
2. We disagree with State's comment that the report does not highlight
the Security Council's inaction in the face of and corruption in the
sanctions regime. We provide a clear discussion on how the Security
Council's lack of action failed to prevent smuggling to neighboring
states. Our report further notes that successive U.S. administrations
issued annual waivers to Congress exempting Turkey and Jordan from
unilateral U.S. sanctions for violating UN sanctions against Iraq.
State commented that "smuggling to Jordan and Turkey was conscious and
understandable," but noted that other, unspecified tolerance by other
Security Council members was harder to understand. We do not
distinguish between "conscious and understandable" smuggling and other
types--all smuggling violated UN sanctions and allowed a corrupt regime
to obtain illicit revenues outside the Oil for Food program.
3. We disagree with State's comment that the report overstates the
diffusion and lack of clarity regarding the program's management and
oversight. While we agree that the Secretariat, through the Office of
the Iraq Program, was responsible for the day-to-day management of the
Oil for Food program, the Security Council's Iraq sanctions committee
was responsible for key oversight functions, including contract and oil
pricing reviews and sanctions enforcement. As State points out in an
earlier comment, the Security Council was also responsible for policy
decisions that affected Iraq's ability to manipulate the sanctions and
Oil for Food program to its benefit. Moreover, as figure 3 in our
report demonstrates, numerous other entities were responsible for
various management and oversight aspects of the Oil for Food program
and sanctions enforcement, including border inspectors, oil overseers,
an interception force, nine UN agencies, and several audit offices. The
Oil for Food program was large and complex and required management and
oversight by multiple entities. However, the absence of clear
leadership and lines of authority were significant structural
weaknesses in the program.
4. We reported in our section on information and communication that OIP
failed to fully report to the Security Council's sanction committee
information on contract surcharges, kickbacks, and smuggling and that
such disclosure may have mitigated some of Iraq's manipulation of the
program. State correctly observes that the Secretariat should have
reported ongoing problems to the Security Council. This observation
further supports our finding that the Secretariat was not the only
entity responsible for the Oil for Food program and that leadership and
accountability were diffused.
5. State emphasized the role of political will in addressing
noncompliance with sanctions, stating that stronger internal controls
without political will might not have corrected the Oil for Food
Programs problems. State further commented that the report has little
discussion about the global and political dynamics that governed
international efforts to contain Saddam Hussein. State undervalues the
importance of an internal control framework. Among other elements,
internationally accepted principles of internal control require that
responsible entities (1) provide an overall structure of accountability
including clear lines of authority and responsibility; (2) conduct a
comprehensive risk assessment, including the external context affecting
the program; and (3) ensure that timely information be provided to
decision makers. Although these controls might not have identified the
oil smuggling, they would have identified and made transparent specific
program vulnerabilities and established clear accountability. This
would have helped mitigate the kickbacks on commodity contracts by
establishing accountability for contract pricing. However, we have
added additional information to the report about the political context
of the program.
6. We disagree with State comments that our report merely restates OIOS
findings about UNCC without making it clear that they are OIOS
findings. Our report makes clear that the findings about UNCC are OIOS
and not GAO findings. In response to State's comment that we do not
present both OIOS and UNCC sides, we have clarified the report to note
that UNCC has disputed OIOS findings (see comment 7).
7. State commented that we do not present the views of both OIOS and
UNCC in the discussion of potential overcompensation due to the
improper use of the exchange rate date. Our report does not discuss or
refer to the exchange rate issue. We cite more than $500 million that
OIOS refers to as potential overcompensation due to calculation errors,
insufficient evidence to support losses, and duplicate claims.
8. In response to State's comment that we do not sufficiently discuss
the issue of OIOS's proper scope of audit authority, we have added
additional information to the report about the legal challenge to
OIOS's audit authority and the UN Office of Legal Affair's opinion.
9. We have clarified and updated information on the amount of the UNCC
awards that governments and international organizations have either not
reported or not paid out.
[End of section]
Appendix VI: Comments from the UN Compensation Commission:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
United Nations:
Security Council:
Nations Unies:
Conseil De Securite:
United Nations Commission D'indemnisation:
Compensation Commission Des Nations Unies:
Comments Of The United Nations Compensation Commission On The Draft
Report Of The General Accountability Office Dated 17 March 2006:
1. At the outset, the UNCC secretariat questions the rationale for the
inclusion of the UNCC in a report, the topic of which is lessons
learned from the oil-for-food programme. Similar to the oil-for-food
programme (as well as UNMOVIC and its predecessor UNSCOM), the UNCC is
financed from the proceeds of Iraqi oil exports. But the UNCC has never
been part of the oil-for-food programme, as is evident from the fact
that the UNCC was established in 1991, nearly six years before the
creation of the oil-for-food programme. It is also clear from the
opening paragraph of the draft GAO report, wherein the nature and
intent of the oil-for-food programme and its key entities are
described, which have nothing to do with the UNCC. There was never any
administrative connection or reporting system between the two entities.
Unfortunately, the inclusion of the UNCC in the draft report cannot but
suggest that it was or is part of the oil-for-food programme. The
report is therefore misleading, and inevitably taints the UNCC with the
problems that plagued the oil-for-food programme. To the best of the
secretariat's understanding, the only reason that the UNCC has been
linked to the oil-for-food programme is because OIOS, for reasons
unknown and incomprehensible to the UNCC, apparently forwarded to the
Independent Inquiry Committee ("IIC") copies of reports on its audits
of the UNCC at the same time that it forwarded copies of reports on its
audits of the oil-for-food programme, the latter having been requested
by the IIC. While the secretariat has no difficulty with the GAO
reviewing the UNCC, it would be appropriate to do so by way of a
separate report, in order to reflect the distinct status and nature of
the UNCC.
2. If the GAO is not in a position to issue a separate report, the
secretariat would like to request that the UNCC be dealt with in a
separate chapter of the report and that the delineation between the
UNCC and the oil-for-food programme be made clear. At present,
references to the UNCC are spread out over pages 1, 2, 5-7, 20, 30, 31,
32-37, 43-44 and Appendices I and IV o^ the draft report. Moreover, the
juxtaposition of references to the oil-for-food programme and the UNCC
in the draft GAO report (in particular, at page 1 under the headings
"Lessons Learned from Oil for Food Program Indicate the Need to
Strengthen UN Internal Controls and Oversight" and "Why GAO Did This
Study", at pages 2 and 5-7 and at page 20) give the inaccurate and
unfortunate impression that the UNCC was part of the oil-for-food
programme.
3. A separate chapter on the UNCC would also facilitate a more
expansive description of the organization, including the Security
Council resolutions under which it was established, its status as a
subsidiary organ to the Security Council, its mandate to process claims
and pay compensation for direct loss, damage or injury resulting from
Iraq's invasion and occupation of Kuwait, its three principal
components (the Governing Council, Panels of Commissioners and
secretariat) and the work that it has performed. It is important, for
example, for readers of the GAO report to appreciate that the Governing
Council is the principal policy-making organ of the UNCC, has the same
composition as the United Nations Security Council, approved
recommendations for awards of compensation made by Panels of
Commissioners in their reports on instalments of claims, and to date
has taken all of its decisions by consensus. It is also important for
readers to understand that, under the UNCC's Provisional Rules for
Claims Procedure, the three-member Panels of Commissioners were
entrusted with reviewing the claims and making recommendations for
awards of compensation and, in doing so, to determine the applicable
law and assess the relevance of and weight to be given to the evidence.
Further, it is important for readers to appreciate that, in accordance
with the report of the Secretary-General to the Security Council dated
2 May 1991, adopted by the Security Council in Resolution 692, the
Commissioners were experts in such fields as law, finance, accountancy,
insurance and environmental damage assessment. Commissioners acted in
their personal capacity and were nominated by the Secretary-General and
appointed by the Governing Council on the basis of their professional
qualifications, experience and integrity, as well as the need for
geographical representation. It would also be helpful for readers to
know that the secretariat provided support and services to both the
Governing Council and Panels of Commissioners.
4. The secretariat is concerned that the draft report does not refer to
the fact that all of OIOS' audit reports were the subject of
comprehensive and detailed responses by the UNCC. Those responses
document the UNCC's disagreement with many of OIOS' audit observations,
findings and recommendations and the reasons therefore, and show that
in many instances the OIOS field auditors did not understand the claims
review procedures developed by Panels of Commissioners and applied to
the verification and valuation of claims. In other instances, the UNCC
objected to OIOS attempting to act as an appellate body and substitute
its judgment for that of the Panels of Commissioners on the applicable
law and the evaluation of evidence. Indeed, it was the attempts of OIOS
field auditors with no legal training to insist that their views on
questions of law and evidence be substituted for the judgment of the
Panels of Commissioners that led the secretariat to propose to OIOS
(which did not object) that an opinion be sought from the UN Office of
Legal Affairs ("OLA") as to the proper scope of audit of claims
processing.
5. Brief mention is made at pages 30 and 36-37 of the draft GAO report
to "challenges" to OIOS' authority from the UNCC and OLA and at pages
35 and 36-37 to a UN legal opinion, however, insufficient explanation
is given and no context is provided. In November 2002 the secretariat
asked OLA to opine on whether OIOS might properly review the following
three aspects of the work of Panels of Commissioners:
(a) their identification of the applicable law and their application of
that law to claims pursuant to the UNCC's Provisional Rules for Claims
Procedure;
(b) the manner in which they organized their work pursuant to those
Rules; and:
(c) their determinations regarding the sufficiency of evidence,
including their determinations relating to the relevance, materiality
and weight of evidence pursuant to the Rules.
6. In his opinion dated 27 November 2002, The Legal Counsel stated that
these three aspects of the work of Panels of Commissioners constituted
elements of a legal process and that OIOS' functions did not extend to
the examination, review and appraisal of decisions that were the
results of a legal process. Likewise, they did not include the
examination, review and appraisal of decision-making that took place in
the course, and as an integral part, of such a process. While the
Memorandum of Understanding entered into by the UNCC and OIOS in June
2003 provided that OIOS was to take the OLA legal opinion into
consideration in its audit of claims processing, OIOS has essentially
failed to do so. It is interesting that the GAO characterizes such
refusal as OIOS taking "an aggressive stance"; others might consider
the refusal as willful disregard of the legal opinion of the UN's Legal
Counsel. In any event, it is important for readers to understand that
the UNCC considers itself bound by the OLA opinion. The secretariat
emphasizes that the OLA legal opinion relates only to the three
enumerated aspects of the work of Panels o^ Commissioners, which are
essentially quasi judicial in nature. It does not purport to exclude
OIOS audit of other aspects of the UNCC's operations, including
financial aspects such as the payment of awards of compensation and
expenditure under the budget or the identification of waste or fraud.
7. The secretariat's concerns are illustrated by the reference at page
6 (and again at pages 35 and 37) of the draft report to OIOS having
reported that more than $500 million in awards may have been too high
due to duplicate payments, calculation errors, insufficient evidence
and inconsistent methodologies and to the UNCC having agreed to reduce
overpayments by $3.3 million. The secretariat believes this to be a
reference to OIOS' audit of claims in part two of the third instalment
of category "F3" claims (claims filed by the State of Kuwait, apart
from environmental claims), as a result of which OIOS asserted that the
claimants had been overcompensated by approximately $419 million.
Unfortunately, no reference is made in the draft GAO report to the
UNCC's extensive responses to OIOS wherein the secretariat explained,
inter alia, why OIOS was mistaken in its view that the claimants filed
duplicate claims for the same losses (duplication checks had been
carried out as part of the review of the claims), the reasoning behind
and application of the evidentiary standards matrix developed by the
Panel to assess evidence and how OIOS had misunderstood the claims
review procedures and adjustments used by the Panel to verify and value
the claims. The UNCC agreed with the two calculation errors helpfully
spotted by OIOS and also identified a third such error in the course of
responding to the OIOS audit reports. The three calculation errors,
which gave rise to a total "over award" of some $2.5 million, were
corrected under the UNCC's Rules. Since the full amount of the award
had not been paid out, no actual overpayment occurred.
8. OIOS also asserted in the aforesaid audit and in its audits of other
instalments of claims that overpayments arose as a result of the
currency exchange rate applied by the Panels of Commissioners to
convert claims denominated in currencies other than United States
dollars for the purpose of recommending awards of compensation. Indeed,
the secretariat understands that this issue accounts for the vast
majority of the overpayments alleged by OIOS_ The Panels of
Commissioners, independently but unanimously, and following a well-
established line of legal authority, determined that the appropriate
date to use for the currency conversion was the date of loss. The OIOS
field auditor was of the view that the appropriate date was the date of
payment. In its communication to the GAO dated 30 December 2005, the
secretariat referred to the expert opinion obtained on the issue by the
HC (which provided a copy to OIOS) from Professor James Crawford of
Cambridge University and noted that Professor Crawford had opined that
the Panels of Commissioners had acted in accordance with normal
international claims practice in using the date of loss. The UNCC does
not understand why OIOS apparently refuses to accept this expert
opinion.
9. Reference is also made at page 6, and again at pages 33, 34 and 36
of the draft GAO report, to some $38.8 million in unclaimed payments
that Governments and other submitting entities had not returned to the
UNCC. The figure used is misleading and requires explanation. Under
Governing Council decisions 18 and 48, Governments and other submitting
entities are responsible for the distribution of compensation awards to
successful claimants and for providing reports to the UNCC with respect
thereto. In those cases where claimants cannot be located within a
specified period of time, the amount that would have otherwise been
paid to them is to be returned to the UNCC. At the same time, the UNCC
received regular requests from Governments and other submitting
entities for the repayment of these amounts as claimants are located.
In the result, the amount of "unclaimed payments" fluctuates almost
daily. The total reported by the secretariat to the Governing Council
at its most recent session in March 2006 was $11.7 million.
10. The suggestion that this is due to inadequate oversight by the UNCC
secretariat is unfounded. The secretariat sends reminders to submitting
entities of the due dates for reports and follows up regularly when
reports are late. Contrary to OIOS' assertions set out at pages 34 and
36 of the draft GAO report, the secretariat reviews every single report
on the distribution of payments and refunds for unlocated claimants and
enters the individual claim details in the UNCC database. Where details
are not provided, the secretariat requests them. In short, there are no
claims for which the secretariat does not have the requisite details.
Further, since December 2005, the secretariat has requested that
submitting entities provide specific address and personal details for
all newly located claimants in their requests for repayment. The
secretariat also notes that the UN Board of Auditors, in its report on
the UNCC's financial statements for the 2002-2003 biennium,
specifically commended the UNCC for its close monitoring of reports on
the distribution of payments.
11. At page 36 of the draft GAO report reference is made to the
provision of audit certificates. Again, OIOS' figures are misleading.
It is important for readers to understand that the Governing Council
decided to require audit certificates at its September 2003 session,
for payments starting in October 2003. At present, only $1.5 million of
payments have not been supported by audit certificates (0.8 per cent of
the $197.2 million in payments for which audit certificates were due).
The secretariat follows up in each case where an audit certificate has
not been provided.
12. Reference is made at pages 32 and 34 to the phasing out of the
UNCC. The secretariat notes that the GAO's information is somewhat
outdated and is pleased to provide the following update. Processing of
the approximately 2.6 million claims filed with the UNCC was completed
in mid-2005. The secretariat expects that by mid-2007 the payment of
all individual awards and certain residual activities will be
completed. Thereafter the Compensation Fund will be maintained under
the continuing oversight of the Governing Council, supported by a
residual secretariat in Geneva, as an interim arrangement while the
Governing Council keeps open for consideration at a future date the
option of transferring responsibility for continuing payments to the
Government of Iraq under the supervision of the Security Council.
13. The secretariat has also noted that in Table 3 in Appendix N the
award amounts indicated for category "A" claims are for individuals and
families that intended to file claims in other categories. Individuals
and families that agreed not to file other claims were entitled to
receive $4000 and $8000 respectively. With respect to category "B"
claims, the words "up to" should be added before the figure $10,000.
14. The secretariat is grateful for the opportunity to provide its
comments on the draft GAO report and hopes that these comments will be
taken into consideration in the finalization of the report.
Signed by:
Rolf G. Knutsson:
Executive Secretary:
10 April 2006:
Geneva:
The following are GAO's comments on the UN Compensation Commission's
letter dated April 10, 2006.
GAO Comments:
1. In response to the UNCC's concern that we are including UNCC in a
report on Oil for Food, we have further clarified the report to note
that UNCC is a separate entity. Our draft report made a clear
delineation of UNCC and Oil for Food in the structure of the report. We
included UNCC in the report because, under the terms of UN resolution
986, Iraq's oil revenues funded both the humanitarian program and the
reparations. Because the reparations amounted to 25 to 30 percent of
Iraq's oil revenues and about $20 billion, we could not responsibly
omit this important element of the sanctions in reporting to Congress.
2. In comments on our report, UNCC noted that a separate chapter on its
activities would facilitate a more expansive description of its
organization and the claims process. We have added information about
the organization of UNCC in the body of the report and in appendix IV.
3. UNCC noted that our draft did not include adequate information about
its detailed responses to the OIOS audit reports and findings and that
UNCC disagreed with most OIOS findings. We have added information to
the body of the report that describes the UNCC responses to OIOS audit
reports. We note that our report does not analyze either OIOS findings
or the UNCC responses.
4. UNCC commented that brief mention is made of UNCC's challenges to
OIOS's audit authority as well as the UNCC position on this matter.
Furthermore, UNCC stated that the view of the UN Office of Legal
Affairs was not sufficiently presented. We have provided additional
explanation and context on the UNCC-OIOS legal relationship and have
expanded on the UN Office of Legal Affairs opinion.
5. With regard to our description of the OIOS report identifying $419
million in potential overcompensation, UNCC noted that we did not
describe its detailed response to the OIOS report, which disputed the
findings. We have added information to the report on the UNCC response
to the OIOS report.
6. UNCC commented that a large majority of the claimed overpayments are
based on the date of the currency exchange rate and that the correct
date should be the date of the loss, consistent with international
norms. We did not and do not report or comment on this issue in our
report.
7. We have updated our report to reflect the current amount of
unclaimed payments.
8. UNCC commented that it disputed the OIOS assertions that its
oversight of governments' unpaid claims was inadequate and that it
provided oversight of all reports on the distribution of payments and
refunds. We have added more information from the UNCC June 16, 2005,
response to the OIOS audit dated May 27, 2005.
9. We have updated our report to reflect the current amount of payments
not supported by audit certificates.
10. We have updated the information provided by the Department of State
about the phasing out of UNCC, according to documentation UNCC provided
to us in April 2006.
11. We have revised the table, inserting the additional award
information for category "A" and inserting the words "up to" before
$10,000 in category "B."
[End of section]
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contact:
Joseph A. Christoff, Director (202) 512-8979:
Staff Acknowledgments:
In addition to the individual named above, Mona Nichols Blake, Jeanette
Espinola, Tetsuo Miyabara, and Audrey Solis made key contributions to
this report. Richard Boudreau, Lynn Cothern, Bonnie Derby, Hynek
Kalkus, Bruce Kutnick, Don Morrison, Valérie Nowak, George Taylor, Ann
Ulrich, and Judith Williams provided technical assistance; Etana
Finkler provided graphics assistance; and Mary Moutsos provided legal
assistance.
[End of section]
Related GAO Products:
United Nations: Preliminary Observations on Internal Oversight and
Procurement Practices. GAO-06-226T. Washington, D.C.: October 31, 2005.
United Nations: Sustained Oversight Is Needed for Reforms to Achieve
Lasting Results. GAO-05-392T. Washington, D.C.: March 2, 2005.
United Nations: Oil for Food Program Audits. GAO-05-346T. Washington,
D.C.: February 15, 2005.
United Nations: Observations on the Oil for Food Program and Areas for
Further Investigation. GAO-04-953T. Washington, D.C.: July 8, 2004.
United Nations: Observations on the Oil for Food Program and Iraq's
Food Security. GAO-04-880T. Washington, D.C.: June 16, 2004.
United Nations: Observations on the Management and Oversight of the Oil
for Food Program. GAO-04-730T. Washington, D.C.: April 28, 2004.
United Nations: Observations on the Oil for Food Program. GAO-04-651T.
Washington, D.C.: April 7, 2004.
Recovering Iraq's Assets: Preliminary Observations on U.S. Efforts and
Challenges. GAO-04-579T. Washington, D.C.: March 18, 2004.
Weapons of Mass Destruction: U.N. Confronts Significant Challenges in
Implementing Sanctions against Iraq. GAO-02-625. Washington, D.C.: May
23, 2002.
FOOTNOTES
[1] Public Law 108-375, Ronald W. Reagan National Defense Authorization
Act for Fiscal Year 2005, October 2004.
[2] Committee of Sponsoring Organizations of the Treadway Commission,
Internal Control-Integrated Framework, September 1992.
[3] See appendix III for further information on Iraq's illicit revenues
during the Oil for Food program. The ranges given represent estimates
developed by GAO, the Independent Inquiry Committee, and the Iraq
Survey Group for 1997 through about early 2003.
[4] GAO, United Nations: Oil for Food Program Audits, GAO-05-346T
(Washington, D.C.: Feb. 15, 2005).
[5] International Monetary Fund, Iraq: Request for Stand-By Arrangement
(Washington, D.C.: Dec. 7, 2005).
[6] Security Council resolution 687 of April 3, 1991, states that Iraq
is liable, under international law, for any direct loss or damages,
including "environmental damage and the depletion of natural resources,
or injury to foreign Governments, nationals and corporations."
[7] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[8] INTOSAI, Guidelines for Internal Control Standards for the Public
Sector (Vienna, Austria: 2004).
[9] Memorandum of Understanding between the Secretariat of the United
Nations and the Government of Iraq on the Implementation of Security
Council Resolution 986 (1995), May 20, 1996.
[10] In April 2004, the UN established the Independent Inquiry
Committee, headed by Paul Volcker, the former Chairman of the U.S.
Federal Reserve, to investigate the administration and management of
Oil for Food program. Its scope included investigating allegations of
fraud and corruption on the part of UN officials, personnel, and agents
that entered into contracts with the UN or with Iraq under the program.
[11] GAO, Weapons of Mass Destruction: UN Confronts Significant
Challenges in Implementing Sanctions Against Iraq, GAO-02-625
(Washington, D.C.: May 23, 2002).
[12] Congressional Research Service, Iraq: Oil-for-Food Program,
Illicit Trade, and Investigations, RL30472 (Washington, D.C.: Jan. 9,
2006).
[13] Two UN inspection bodies assigned to monitor Iraq's military and
weapons of mass destruction programs--(1) the UN Monitoring,
Verification, and Inspection Committee and (2) the International Atomic
Energy Agency--examined commodity contracts to see if they contained
items on the goods review list. Items that were covered by the goods
review list, not entire contracts, were forwarded to the sanctions
committee for further review.
[14] Agencies included the Food and Agricultural Organization;
International Labor Organization; World Food Program; World Health
Organization; UN Children's Fund; UN Development Program; UN
Educational, Scientific, and Cultural Organization; UN-Habitat; and the
UN Office for Project Services.
[15] With the exception of UN-Habitat, all UN agencies had their own
internal audit functions. UN-Habitat's activities were audited by OIOS.
[16] Testimony of John Denson, General Counsel, Saybolt Group, before
the Permanent Subcommittee on Investigations, Committee on Governmental
Affairs, U.S. Senate (Washington, D.C.: Feb. 15, 2005).
[17] Ibid.
[18] For program phases IX and X--Dec. 6, 2000, through Nov. 30, 2001.
[19] Report on the Pricing Evaluation of Contracts Awarded under the
Iraq Oil for Food Program, submitted by the Joint Defense Contract
Audit Agency and Defense Contract Management Agency OFF Pricing
Evaluation Team (Washington, D.C.: Sept. 12, 2003).
[20] The Coalition Provisional Authority used Cotecna from November
2003, when it assumed responsibility from the UN for remaining Oil for
Food contracts, until October 2004, when the Iraqis no longer used
independent inspection agents.
[21] GAO, United Nations: Funding Arrangements Impede Independence of
Internal Auditors, GAO-06-575 (Washington, D.C.: Apr. 25, 2006).
[22] GAO-05-346T.
[23] UNCC accepted a number of claims filed after the February 1997
deadline from groups that were unable to meet the deadline. For
example, UNCC accepted around 32,000 late claims from Bedouns--members
of a community that lived in Kuwait for many years but were not
citizens of Kuwait or any other nation--almost 10 years after the
deadline. The claims were late because no country or international
organization had accepted responsibility for filing the claims. UNCC
also continues to receive a small number of claims forwarded on behalf
of missing persons as well as claims for damages and losses resulting
from land mines but will no longer accept these claims after 2006.
[24] With the adoption of Security Council resolution 986 in 1995, UNCC
was directed to receive up to 30 percent of the proceeds of Iraq's oil
sales. This amount was reduced to 25 percent in December 2000 pursuant
to resolution 1330.
[25] See Iraq: Request for Stand-By Arrangement. We used data from IMF
and an economic consulting firm in calculating our scenarios. Appendix
I contains details on our methodology.
[26] Governing Council Decisions 18 and 48.
[27] Of the 3,126 U.S. claimants receiving UNCC awards, 29 have not
been located. The United States has returned about $100,000 to UNCC.
[28] As promulgated by the Institute of Internal Auditors and adopted
by the Representatives of Internal Audit Services of the UN
Organizations and Multilateral Financial Institutions.
[29] GAO/AIMD-00-21.3.1. We also referred to GAO's publication,
Internal Control Management and Evaluation Tool, GAO-01-1008G
(Washington, D.C.: August 2001).
[30] IMF, Iraq: Request for Stand-By Arrangement, (Washington, D.C.:
Dec. 7, 2005).
[31] At the time of our calculations, remaining unpaid awards totaled
about $32.5 billion; by late January 2006 that amount had been reduced
to about $32.2 billion.
[32] Global Insight, International Interim Forecast Analysis, Country
Tables-Iraq (Boston, MA: Jan. 6, 2006).
[33] In response to auditors' concerns that too much money was being
concentrated at BNP, the number of banks receiving Oil for Food
deposits was expanded after 2000 to include JP Morgan Chase, Deutsche
Bank, Banco Bilbao Vizcaya, Credit Agricole Indosuez, Credit Suisse,
and HypoVereinsbank.
[34] In accordance with the 1996 memorandum of understanding, the Iraqi
government purchased food and medicines in bulk, including food and
medicine intended for the three northern Kurdish governorates.
[35] At its first meeting, the Governing Council classified A, B, and C
claims as "urgent claims" and required that their review be expedited.
In general, expedited procedures meant that the panels spent less time
reviewing individual claims and depended on methods to effectively
process claims en masse.
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