[Senate Hearing 108-546]
[From the U.S. Government Publishing Office]
S. Hrg. 108-546
A REVIEW OF THE UNITED NATIONS
OIL-FOR-FOOD PROGRAM
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
APRIL 7, 2004
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee BILL NELSON, Florida
NORM COLEMAN, Minnesota JOHN D. ROCKEFELLER IV, West
JOHN E. SUNUNU, New Hampshire Virginia
JON S. CORZINE, New Jersey
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
C O N T E N T S
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Page
Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening
statement...................................................... 4
Christoff, Mr. Joseph A., Director, International Affairs and
Trade, U.S. General Accounting Office, Washington, DC.......... 47
Prepared statement........................................... 48
Dodd, Hon. Christopher J., U.S. Senator from Connecticut,
prepared statement............................................. 31
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 1
Negroponte, Amb. John D., U.S. Permanent Representative to the
United Nations, U.S. Mission to the United Nations; accompanied
by: Amb. Patrick F. Kennedy, U.S. Representative for United
Nations Management and Reform, U.S. Mission to the United
Nations, New York, NY.......................................... 7
Prepared statement of Ambassador Negroponte.................. 9
Excerpts from OIOS annual reports providing instances in
which findings from OIOS investigations were referred to
national law enforcement authorities for further
investigation and possible prosecutions.................... 38
Raphel, Hon. Robin L., Coordinator, Office of Iraq
Reconstruction; accompanied by: Hon. Kim R. Holmes, Assistant
Secretary of State for International Organizations, U.S.
Department of State, Washington, DC............................ 14
Prepared statement of Ambassador Raphel...................... 16
Thibault, Mr. Michael J., Deputy Director, Defense Contract Audit
Agency, U.S. Department of Defense, Washington, DC............. 60
Prepared statement........................................... 62
APPENDIX
Feingold, Hon. Russell D., U.S. Senator from Wisconsin, statement
submitted for the record....................................... 71
Bremer, Amb. L. Paul III, Administrator, Coalition Provisional
Authority (CPA), statement submitted for the record............ 71
United Nations Children's Fund (UNICEF), statement submitted for
the record..................................................... 72
World Health Organization (WHO), statement submitted for the
record, ``The Situation of Health Supplies for Iraq Under the
OFFP, 1996-2002''.............................................. 73
Cotecna Inspection S.A., letter to Senators Lugar and Biden
submitting two documents for the record: ``Guide to
authentication procedures'' followed in Iraq, along with a
``Statement from Cotecna Inspection S.A.''..................... 76
Levitte, Hon. Jean-David, French Ambassador to the United States,
op-ed article from the Los Angeles Times, April 7, 2004........ 81
Responses of Amb. John D. Negroponte to additional questions for
the record submitted by:
Senator Richard G. Lugar..................................... 82
Senator Joseph R. Biden, Jr.................................. 86
Senator Christopher J. Dodd.................................. 86
Senator John E. Sununu....................................... 93
Responses of Amb. Patrick F. Kennedy to additional questions for
the record submitted by Senator Richard G. Lugar............... 93
Responses of Hon. Robin L. Raphel to additional questions for the
record submitted by:
Senator Richard G. Lugar..................................... 98
Senator Joseph R. Biden, Jr.................................. 99
Senator Chuck Hagel.......................................... 100
Responses of Hon. Kim R. Holmes to additional questions for the
record submitted by Senator Richard G. Lugar................... 102
Responses of Joseph A. Christoff to additional questions for the
record submitted by Senator Richard G. Lugar................... 103
Response of Michael J. Thibault to an additional question for the
record submitted by Senator Richard G. Lugar................... 104
Saybolt Eastern Hemisphere B.V., responses of Peter Boks, general
counsel, to additional questions for the record submitted by
Senator Lugar.................................................. 104
Saybolt's contract with the United Nations and related
documents.................................................. 107
``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.................................... 157
A REVIEW OF THE UNITED NATIONS
OIL-FOR-FOOD PROGRAM
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WEDNESDAY, APRIL 7, 2004
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m. in room
SD-419, Dirksen Senate Office Building, Hon. Richard G. Lugar
(chairman of the committee), presiding.
Present: Senators Lugar, Hagel, Chafee, Allen, Coleman,
Sununu, Biden, and Dodd.
opening statement of senator richard g. lugar, chairman
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order. The Senate Foreign Relations
Committee meets today to examine the United Nations Oil-for-
Food Program. Although the precise extent of the corruption and
mismanagement in this program is not yet known, there is no
doubt that billions of dollars that should have been spent on
humanitarian needs in Iraq were siphoned off by Saddam
Hussein's regime through a system of surcharges, bribes and
kickbacks. This corruption was not solely a product of Saddam
Hussein's machinations. He required members of the United
Nations Security Council, who were willing to be complicit in
his activities, and he required United Nations officials and
contractors who were dishonest, inattentive or were willing to
make damaging compromises in pursuit of a compassionate
mission. Now, the costs of this corruption were multifaceted,
and they may continue to be felt for years.
First, although the Oil-for-Food Program delivered food,
medicine and other essentials to millions of people, countless
Iraqis may have died or suffered because billions of dollars
were diverted from the humanitarian effort.
Second, Saddam Hussein used the proceeds of the corruption
to prop up his regime and his army. The coalition forces that
invaded Iraq faced a better equipped Iraqi military than they
otherwise would have faced had the corruption not occurred.
According to the new head of the Iraq Survey Group, Charles
Duelfer, these funds were the, ``primary source,'' for Saddam's
efforts to procure military goods and expertise. A portion of
these illicit funds may still be accessible to Saddam loyalists
who are financing terrorism against coalition forces and Iraqi
citizens.
Third, the corruption in the Oil-for-Food Program almost
certainly contributed to the international division over
containing and ultimately ousting Saddam Hussein. By
exacerbating the humanitarian problem in Iraq, the corruption
weakened the international consensus for containment. Even more
disturbing is the prospect that governments or individual
officials may have opposed the coalition's decision to use
military force against Saddam Hussein in part because an
overthrow of the regime would expose ongoing corruption in the
Oil-for-Food Program. Even if we assume that such calculations
were not a part of any government's deliberative process, we
must acknowledge that corruption on this scale carries with it
the potential to skew international decisionmaking.
Finally, the damage to U.N. credibility from corruption in
the Oil-for-Food Program is harmful to United States foreign
policy and to efforts aimed at coordinating a stronger global
response to terrorism. Whatever influence and capabilities that
the United Nations possesses come from the credibility
associated with countries acting together in a well-established
forum with well-established rules. Profiteering, mismanagement
and bureaucratic stonewalling squander this precious resource.
At a time when the United States is appealing for greater
international help in Iraq, Afghanistan, and in trouble spots
around the world, a diminishment of United Nations credibility
reduces United States' options and increases our own burdens.
If the United Nations cannot be trusted to run a humanitarian
program, its other activities, including peacekeeping, arms
inspection regimes, or development projects, may be called into
question. The United Nations' ability to organize burden
sharing and take over missions best handled by the
international community is critical to the long-term success of
United States foreign policy. As such, the United States must
insist on a full investigation of the Oil-for-Food Program and
work with the United Nations to prevent corruption on future
projects.
The United Nations initiated the Oil-for-Food Program for
understandable reasons. The world community felt a humanitarian
responsibility to prevent the deaths of innocent Iraqis, who,
in essence, were being held hostage by the criminal
intransigence of the Iraqi regime. The United States embraced
this program in the 1990s not only because of altruistic
impulses, but also because, without it, our policy of
containing Iraq through sanctions may not have been sustainable
within the international community. To provide humanitarian
relief, the Security Council voted to allow Iraq to sell a
portion of its domestically produced oil and use the receipts
to buy food and medicine. The Security Council made the
decision to have the receipts from oil sales deposited with the
U.N., and have the U.N. oversee the Iraqi Government's purchase
of food and medicine. The process was to be managed by the
United Nations Iraq Sanctions Committee, known as the 661
Committee, after the Security Council resolution that created
it.
Few American or international officials went into this
program with the view that Saddam Hussein could be trusted. Any
rational observer should have admitted that the leader of a
brutal regime who had invaded his neighbors, used weapons of
mass destruction, undercut U.N. resolutions and routinely lied
to the international community would try to game the system.
Yet, despite this reality, the U.N.'s mechanisms for
controlling Oil-for-Food contracts were inadequate,
transparency went by the wayside, and effective internal review
of the program did not occur. The United Nations allowed Saddam
to select not only the suppliers of food and medicine, but also
the buyers of Iraqi oil. Such an arrangement was a recipe for
disaster. The General Accounting Office estimated that Saddam
skimmed some $4.4 billion from transactions involving both
sales and purchases. The GAO also estimated that an additional
$5.7 billion of oil was smuggled out of Iraq--separate from the
oil sold through the Oil-for-Food Program. Much of it
apparently was transferred through Syria and Turkey.
The American people, who have borne much of the burden in
offering the people of Iraq a better future, need answers to
some key questions. First, why didn't the U.N. committee set up
to oversee the Oil-for-Food Program discover such egregious
irregularities? Second, who were Iraq's business partners, and
to what degree did they facilitate and profit from the
corruption? Third, was there complicity on the part of United
Nations staff? Fourth, how much did individual governments
know? Fifth, did individual countries actively aid Saddam,
either because they disagreed with the sanctions policy, or
because they saw money-making opportunities?
These charges must be fully investigated. Secretary General
Kofi Annan's recent announcement that he will undertake a high-
level investigation is welcome, but the Secretary General and
his staff must understand that the credibility of this
investigation will be suspect without diligent efforts to
ensure its independence and its effectiveness. He must appoint
individuals of the highest caliber, internationally recognized
for their ability and integrity. The U.N.'s Office of
Inspection and Oversight Services is conducting its own
investigation into the possible culpability of U.N. personnel.
The executive branch of the U.S. Government also should
undertake its own investigation.
We now have access to records in Iraq, and we have a long
and highly developed expertise in contract oversight. Today,
the Foreign Relations Committee commences its contribution to
the examination of the Oil-for-Food Program and we welcome
Ambassador John Negroponte, the United States' Permanent
Representative to the United Nations. Joining him on our first
panel are Ambassador Patrick Kennedy, the U.S. Representative
for U.N. Management and Reform; Ambassador Robin Raphel, the
Coordinator of the Department of State's Office of Iraq
Reconstruction, and Dr. Kim Holmes, Assistant Secretary of
State for International Organizations.
On our second panel, we will hear from Joseph Christoff,
the Director of International Affairs and Trade at the General
Accounting Office, and Michael Thibault, the Deputy Director of
the Defense Contract Audit Agency. They will discuss in greater
detail their examination of the process and the methodology by
which Saddam Hussein skimmed billions of dollars from the Oil-
for-Food Program.
We thank, in advance, our witnesses for joining us. We look
forward to their insights. But first of all, it's my privilege
to call upon the distinguished ranking member, Senator Biden,
for his opening comments.
opening statement of senator joseph r. biden, jr.,
ranking member
Senator Biden. Thank you, Mr. Chairman, and thank you for
holding this hearing. We welcome all of our distinguished
witnesses today. As you've indicated we're going to hear
testimony about the Oil-for-Food Program in Iraq, one of the
largest humanitarian programs ever managed by the United
Nations, or any other institution for that matter.
The Oil-for-Food Program has generally been recognized as
easing the suffering of the Iraqi people. For example, the
daily caloric intake of the average Iraqi citizen doubled
between 1996 when the program started and 2002. But there also
are serious allegations about mismanagement and corruption that
must be addressed, not simply to hold accountable those who are
guilty of corruption but to make sure that we get it right in
the future because we're going to lose credibility, the
institution will lose credibility and the ability in the future
to act is going to be, I think, seriously damaged.
To that end I welcome your and Secretary General Kofi
Annan's call for an independent investigation into these
allegations because it's critically important, as I indicated,
for the integrity and efficiency of the United Nations that we
get to the bottom of the story. Without credibility it's not
going to get support. We need to know to what extent the United
Nations Secretariat and its employees knew about Saddam's
manipulation of the Oil-for-Food Program, whether they were
complicitous and what role, if any, the United Nations member
states played in the process.
Just as important as learning who did what and when is
ensuring that the lessons learned from the Oil-for-Food Program
can be applied to future humanitarian assistance programs and
sanctions regimes. Ambassador. So today's agenda is important.
But quite frankly we can't ignore the thousand-pound gorilla
sitting in the middle of this room today. The gorilla is, of
course, the date of June 30, the deadline for returning
sovereignty to Iraq. It gives us 85 days to finally get things
right in Iraq and put on a course; that is, one that increases
the prospects for success, success defined as having a
participatory democracy in Iraq that is representative of the
Iraqi people that is able to maintain its own boundaries and
security and over time can do it without the help of the
international community.
I've been saying for the last year that we have first-rate
folks in Baghdad in the Coalition Provisional Authority, and I
believe that to this day. But even the best folks can't create
order out of chaos without a plan. Speaking for myself only, I
still believe we don't have a plan for transferring authority
to the Iraqi people, and if we have one I don't know what it
is. I'm not informed of it; I don't know what the deal is and I
don't think I'm alone in that regard. I doubt whether there's
any single Member of Congress who does. We still don't know how
the caretaker Iraqi Government will be chosen or what it will
look like. We don't know who will referee the disputes that are
sure to come along among the Shi'ite, Sunni and Kurds. We still
don't know what role, if any, the United Nations will play and
whether or not NATO will play. We still don't know who the
American ambassador will be in what is likely to be the largest
and most important American embassy in the world.
We know one thing, that between July 30 and January 31,
when general elections are to be held and a constitution is to
be written, there will be an incredible difficulty. Incredible
difficulty. In short, we still don't know the answers to the
most basic and critical questions we face in Iraq.
Why are these questions and their answers so important?
Well, I would suggest they are important because they go to the
fundamental tension we face on June 30 between two
contradictory needs. On the one hand the Iraqis will
desperately need a strong international support to provide
security, settle political disputes, and economic health. Their
own security forces and political leaders will not be up to the
task no matter how good they are. On the other hand, the U.S.
desperately needs to take an American face off the occupation
in Iraq, as the President has said. Otherwise we'll continue to
bear 90 percent of the cost, take nearly 90 percent of the non-
Iraqi casualties and provide 90 percent of the force. And we'll
remain responsible for everything that goes wrong in Iraq.
Now, how do we square this circle? I believe by seizing the
one last chance that we have to get the United Nations and NATO
in on the deal. A U.N. high commissioner would have more
legitimacy with Iraqis than a U.S. Ambassador to help them
decide on a caretaker government, to referee disputes and
oversee elections, to referee the disputes that are going to
take place in the constitution, as was the case with the loya
jirga in Afghanistan, and the U.N. would open the door to a
more international participation by giving political coverage
of the leaders whose peoples oppose the war. I have met with
all of those leaders, I say to our Ambassador. They have been
very straightforward with me. They need a U.N. resolution to
vote for the participation of NATO forces. You and I both know
that will be a relatively small number of forces but enough
according to the Supreme Allied Commander to take care of
securing the borders, to take over responsibility in the north
and or to take over the responsibility for the Polish division
in the south, freeing up roughly 20,000 American soldiers that
we could badly use now, General Abizaid could badly use right
now.
And the other piece of this is, we talked in this report,
the Senator held hearings on the Hamre Commission. We talked
about the window of opportunity closing. Well, the window of
opportunity for the American people is closing. If we don't get
this right soon, they'll continue to look at this as if we're
alone in this deal. It's an exaggeration, but things appear to
be out of hand, and in fact we may very well lose their support
which would be devastating, because we cannot afford to lose
Iraq.
I would say to my friend from Nebraska, who is a decorated
war hero from Vietnam; you know what this reminds me of? Only
one similarity to Vietnam. The Tet Offensive. The Tet Offensive
took the mask off, said to the American people, my lord, we
don't have control there, we don't have control, we don't have
a plan. I think it's exaggerated but the marching that's taking
place, the uprisings occurring in the triangle as well as that
portion of the Shi'ite community, is communicating a similar
fear to the American people. That we're alone, we're the only
ones in on the deal. And we don't have a plan.
This is salvageable. NATO cannot take on Iraq tomorrow but
it could quickly generate enough troops to patrol Iraq's
borders like I said, train its military, take responsibility
for the north and or the Polish sector. And that would take a
lot of pressure off our forces.
We may be a day late and a dollar short in getting the U.N.
and NATO engaged, though. This administration, I think, has
squandered so many opportunities, I think this is its one last
opportunity. One last opportunity. And the worse the situation
gets on the ground the more reluctant others are going to
become to get involved. I read with great interest former
CENTCOM commander General Zinni's comments today in the Wall
Street Journal, basically saying it may be too late. I think
he's wrong, that it's not too late. But let me tell you, I
think it's getting close. I still believe we have a chance to
broaden the coalition because many of our friends and allies
have as much at stake in Iraq's success as we do. And as much
to fear from its failure as we do. I think we have to make this
one last effort to significantly broaden the responsibility.
In short, I believe we can still succeed and ensure a
positive outcome on June 30. But to do so the administration
needs to get serious now about answering these fundamental
questions. And that's why I will raise them today, and when the
Senator and I will be having lunch with the Secretary.
So, let me conclude, Mr. Chairman, I realize that's not the
specific subject of our hearing today but I think it's all so
interrelated here. And I respectfully suggest again to the
President of the United States, he should be either on a plane
or on the telephone with our major European allies saying we've
got a lot to lose here, folks, we're in this together. What do
you need to get in the deal? What do you need? What is it? What
is it politically? What political input do you need? I'm open.
Let's solve this problem.
And that may be going on but if it is, it's a surprise to
me. It would be a great pleasure to hear that but I don't know
why we're not being told if it is, and if it isn't I don't
understand what's going on here. The President has to make a
decision. It's decision time. What will July 1 look like in
Iraq?
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Biden. Let me
just comment for a moment that clearly the hearings that we've
scheduled for April 20, 21 and 22, are an advance notice to the
administration and to others. We encourage preparation so that
the committee and the general public will be informed. Those
are important dates. I mention them now so that those of you
who are representing the administration today, and those of you
from the State Department who are backing you, may convey our
concern back to your colleagues. Senator Biden and I will
directly address Secretary Powell. We will emphasize that we
really do need answers to very critical issues. We're
determined to get them. Absent that, the two of us,
supplemented by Senator Allen, Senator Hagel and others, may
write a potential plan and hold our own hearing. That would be
much less satisfying. We've been down this trail once before,
in terms of planning prior to hostilities. On that occasion,
inexplicably, General Garner was unavailable; so were the
planners. We do not want a repetition of that experience. We
have a very serious issue ahead of us here today. We appreciate
very much your coming to address the U.N. Oil-for-Food Program.
As I understand, you wish to testify first, Ambassador
Negroponte. Then Ms. Raphel, you will testify. Your associates
will be available for questions, as I understand. I will ask
you to proceed in the order we introduced you, first of all,
Ambassador Negroponte and then Ms. Raphel. Please take the time
that you need. Your full statements will be made a part of the
record. You need not ask for permission for that. It is
granted. Please proceed in your own way. Ambassador Negroponte.
STATEMENT OF AMB. JOHN D. NEGROPONTE, U.S. PERMANENT
REPRESENTATIVE, U.S. MISSION TO THE UNITED NATIONS; ACCOMPANIED
BY: AMB. PATRICK F. KENNEDY, U.S. REPRESENTATIVE FOR UNITED
NATIONS MANAGEMENT AND REFORM, U.S. MISSION TO THE UNITED
NATIONS
Mr. Negroponte. Thank you very much, Mr. Chairman, Senator
Biden, distinguished members of the committee. I welcome the
opportunity to appear before you today to discuss the U.N. Oil-
for-Food Program and recent allegations of possible
mismanagement and abuse involving that program. At the outset I
want to make perfectly clear that we share your concerns. We
are committed to ensuring that all allegations are investigated
and addressed.
Following the recent specific allegations of corruption by
U.N. officials, I was immediately instructed by Secretary
Powell to convey our concerns to United Nations Secretary
General Annan. I have discussed this on several occasions with
the Secretary General who has, on his own initiative, launched
an investigation that will be independent, transparent, and
comprehensive. As you know, we joined our fellow Security
Council members on March 31 in welcoming this expanded
investigation and pledging our full cooperation. We must not
forget that, allegations aside, it is the Iraqi people who
would have been most hurt by any wrongdoing. It is for them
most of all that we must take this responsibility very
seriously and we will urge all United Nations member states to
do the same.
The Oil-for-Food Program, as you indicated, was created to
alleviate the hardships faced by the Iraqi people, hardships
caused by Saddam Hussein's regime's refusal to comply with its
obligations and the resulting comprehensive, multilateral
sanctions regime imposed by the Security Council on Iraq
following the invasion of Kuwait in August 1990. The Oil-for-
Food Program allowed for the import of humanitarian goods using
the proceeds from authorized Iraqi oil sales while maintaining
sanctions on imports other than food and medicine. It
represented the largest humanitarian relief operation ever
launched by the international community. The United States
supported the program's general objective of creating a system
to address the humanitarian needs of the Iraqi civilian
population while maintaining strict sanctions enforcement on
items that Saddam Hussein could use to re-arm or reconstitute
his weapons of mass destruction program. We believe the system
the Council devised largely met those objectives. However, the
rules and procedures governing implementation of the program
were the product of negotiation among the 15 members of the
Security Council and between the United Nations and the former
Iraqi regime. The United States was able to set basic
parameters and monitor the functioning of the program through
our participation in Security Council discussions and as a
member of the Iraq Sanctions Committee, also known as the 661
Committee, named for the Security Council resolution that
created it. However, we were not in a position to exercise
exclusive control over the process as the committee made
decisions through consensus.
Although the flow of humanitarian and civilian goods to
Iraq was a matter of strong interest to the U.S. Government, an
even greater goal throughout the period of sanctions was to
ensure that no items were imported which could in any way
contribute to Iraq's weapons of mass destruction programs or
capabilities. At the United States Mission to the United
Nations we concentrated our efforts on this aspect of the
sanctions. It is important to note that no U.S. Government
funds, including those that might have been drawn from U.N.
assessments, were involved in the establishment and functioning
of the program. With the exception of voluntary funds provided
by the United States for the U.N. guards contingency in
Northern Iraq, whose task was to protect humanitarian personnel
working there, all expenses associated with management of the
program were drawn from Iraqi oil revenue that was deposited
into a U.N. escrow account established in 1995 under Resolution
986.
Recent press reports allege that there was corruption and
abuse in the implementation of the program. These allegations
fall into four general categories. First, direct oil smuggling
by the former Iraqi regime; second, the manipulation of pricing
on Iraqi oil exports; third, kickbacks on Oil-for-Food
humanitarian contracts; and last, possible abuse by United
Nations personnel. At the heart of these were the determined
efforts by Saddam Hussein to obtain funds illicitly and hide
his sanctions-busting activities.
In the written statement that I have submitted for the
record, I have provided greater detail about what we know about
the allegations in each category. Where we could identify abuse
and fraud in the implementation of the Oil-for-Food Program, we
and the United Kingdom endeavored to stop them, including
through bilateral diplomacy and special briefings to the
Security Council and the 661 Committee of the ways in which we
observed the Saddam Hussein regime diverting funds from the
program, smuggling, and generally violating Council
resolutions. What we did not have before the fall of Saddam's
regime was documentation and witnesses who were willing to step
forward to provide evidence of corruption. Documentation is now
becoming available in the wake of the Saddam Hussein regime's
demise. Witnesses are now coming forward who may be able to
shed more light on how Saddam and his supporters evaded
sanctions and on instances of corruption that may have existed
in implementing the Oil-for-Food Program.
The independent, high-level inquiry initiated by the
Secretary General will shortly get underway. The terms of
reference have been written and provided to Security Council
members. The inquiry will investigate allegations of fraud and
corruption in the administration and management of the Oil-for-
Food Program, including those against United Nations personnel,
contractors, and entities that entered into contracts with the
U.N. or with Iraq under the program. We and other Security
Council members have welcomed the Secretary General's
initiative and called for international cooperation. Both the
summary and final report on the findings of this panel will be
made public. We expect announcements soon on the membership of
the inquiry panel and have strongly urged the Secretary General
to ensure that members are of unimpeachable standing. We
believe that this inquiry can serve as an important vehicle in
addressing various allegations.
Mr. Chairman, in Baghdad the CPA is also assisting the
Iraqi Board of Supreme Audit to launch an investigation into
the allegations of corruption regarding the Oil-for-Food
Program. Coalition Provisional Authority administrator
Ambassador Bremer has issued a directive to the CPA and all
Iraqi ministries in early March, instructing all ministry
officials to identify and secure relevant Oil-for-Food
documents. Representatives of the Iraqi Board of Supreme Audit
have met with the CPA and Iraqi ministry officials to ensure
cooperation and transparency in this process. We hope that the
inquiries now being launched will identify those who conspired
with the Hussein regime and perhaps assist in recouping lost
funds for the Iraqi people.
Mr. Chairman, again I thank you for the opportunity to
provide this information on the Oil-for-Food Program. You have
my fullest support and that of my staff in your efforts to
determine the extent and involvement of wrongdoing associated
with the program. Thank you very much.
[The prepared statement of Ambassador Negroponte follows:]
Prepared Statement of Amb. John D. Negroponte
Mr. Chairman, distinguished members of the Committee,
I welcome and thank you for the opportunity to appear before you
today to discuss the UN Oil-for-Food (OFF) program and recent
allegations of possible mismanagement and abuse with regard to the
implementation of that program.
At the outset, I want to make perfectly clear that we appreciate
and share your concerns. We will do what we can to ensure that all such
allegations are investigated and addressed, most importantly for the
benefit of the Iraqi people. I can assure you of Secretary Powell's
strong personal interest and concern regarding this issue. In reaction
to recent specific allegations of corruption by UN officials, I
immediately was instructed by Secretary Powell to convey our concerns
to UN Secretary-General Annan. I have discussed this on several
occasions with the Secretary-General, who has on his own initiative
launched an investigation that will be independent, transparent and
comprehensive. As you know, we joined our fellow Security Council
members on March 31 in welcoming this expanded investigation and
pledging our full cooperation. We must not forget that, corporate and
official allegations aside, it is the Iraqi people who would have been
most hurt by any wrongdoing. It is for them most of all that we must
take this responsibility very seriously, and we will urge all UN member
states to do the same so any and all wrongdoing is uncovered and
addressed.
Mr. Chairman, I think it may be helpful to you to have some
background on the Oil-for-Food program and the Iraq sanctions regime.
The United Nations' Oil-for-Food (OFF) program was authorized by
Security Council Resolution 986 in April 1995 and became operational in
December 1996. The Security Council had imposed comprehensive
multilateral sanctions on Iraq in August 1990 (UNSCR 661) to convince
Saddam Hussein to withdraw from Kuwait without the use of force.
Sanctions on Iraq continued after the Gulf War and were thought by many
in the international community to impose extreme hardship on the Iraqi
people. The Oil-for-Food program was created to alleviate those
hardships. It allowed the import of humanitarian goods using the
proceeds from controlled Iraqi oil sales while maintaining sanctions on
imports other than food and medicine. The objective was to continue
constraining Saddam Hussein's ability to use oil revenue to build a
military arsenal.
The Oil-for-Food program represented the largest humanitarian
relief operation ever launched by the international community. Iraqi
oil exports totaled $64.2 billion over the life of the program. The
proceeds funded $46 billion worth of humanitarian contracts for Iraq,
and $16 billion for the UN Compensation Commission (UNCC), as well as
administrative costs for the Office of the Iraq Program (OIP), the UN
Monitoring, Verification, and Inspection Commission (UNMOVIC), and the
UN Special Commission (UNSCOM) totaling $2.65 billion. Of the $46
billion funding for humanitarian contracts, more than $31 billion in
humanitarian supplies was delivered to Iraq from March 1997 until
November 21, 2003. An additional $8.2 billion in prioritized supplies
ordered under the program is scheduled to arrive in the coming months.
To date, $7.6 billion in surplus funds have been transferred from the
UN escrow account to the Development Fund for Iraq (DFI), monies that
have been extremely useful in the implementation of various programs
for the people of Iraq.
The United States Government supported the program's general
objective of creating a system to address the humanitarian needs of the
Iraqi civilian population while maintaining strict sanctions
enforcement of items that Saddam Hussein could use to re-arm or
reconstitute his WMD program. We believe the system the Council devised
by and large met those objectives. However, the rules and procedures
governing implementation of the program were the product of negotiation
among the fifteen members of the Security Council and between the UN
and the former Iraqi regime. The United States was able to set basic
parameters and monitor the functioning of the program through our
participation in Security Council discussions and as a member of the
Iraq Sanctions Committee, also known as the ``661 Committee,'' named
for the Security Council resolution that created it. However, we were
not in a position to exercise exclusive control over the process.
Although the flow of humanitarian and civilian goods to Iraq was a
matter of strong interest to the U.S. government, it should be
emphasized that an even greater preoccupation throughout the period of
sanctions was to ensure that no items be permitted for import which
could in any way contribute to Iraq's WMD programs or capabilities.
Thus, at USUN we concentrated our efforts on this aspect of the
sanctions.
It is important to note that no U.S. Government funds, including
those that might have been drawn from UN assessments, were involved in
the establishment and functioning of the program. With the exception of
voluntary funds provided by the United States for the UN Guards
Contingency in Northern Iraq (UNGCI), whose task was to protect
humanitarian personnel working there, all expenses associated with
management and implementation of the program were drawn from Iraqi oil
revenue that was deposited into a UN escrow account established under
Resolution 986 (1995).
The sanctions regime and the OFF program constituted the most
comprehensive and intrusive regime ever imposed by the Security
Council, short of a complete embargo. At the insistence of many other
Security Council members, the program permitted the Government of Iraq
to control the sale of oil and the selection and negotiation of
contracts with suppliers of humanitarian items destined for Iraq. The
United Nations and its UN Office of the Iraq Program (OIP), which
managed implementation of the program, were not a party to the
contracts. The contracts were concluded exclusively between the Iraqi
government and individual suppliers. These Council members insisted
that Iraq's national sovereignty and territorial integrity, and thus
the right to execute contracts, be enshrined in the language of
Resolution 986 (1995). The 661 Committee reviewed the contracts that
had been concluded between the Iraqi government and contractors to
ensure that no items could be used for military purposes.
Much of what the U.S. Government could and could not achieve with
regard to monitoring the program and implementation of the sanctions
was directly related to the political situation surrounding the
contentious issue of Iraq in the Security Council and in the 661
Committee. U.S. efforts to keep the comprehensive sanctions regime in
place repeatedly were challenged by Council members who complained
about the humanitarian impact of sanctions on the Iraqi people, and
whose national firms would derive economic benefit from the lifting of
sanctions. Indeed, starting in the mid-'90s and continuing into 2001,
these pressures to lift sanctions grew.
Recent press reports allege there was corruption and abuse in the
implementation of the program, allegations which fall into four general
categories:
direct oil smuggling by the former Iraqi regime;
manipulation of pricing on Iraqi oil exports;
kickbacks on OFF humanitarian contracts; and
possible abuse by UN personnel.
At the heart of this were the determined efforts by Saddam Hussein
to obtain funds illicitly and his repeated efforts to hide sanctions-
busting activities.
Mr. Chairman, we know there was abuse and fraud in the
implementation of the OFF program. Where we could identify it, we and
our UK partners stopped it. What we did not have before the fall of
Saddam's regime was documentation and witnesses who were willing to
step forward to provide evidence of corruption. Documentation is now
becoming available in the wake of the Saddam Hussein regime's demise,
and witnesses are also now coming forward who may be able to shed light
more precisely on how the previous Government of Iraq and its
supporters evaded sanctions, and on instances of corruption that may
have existed in implementing the Oil-for-Food program.
The Secretary-General of the United Nations has initiated the
process for conducting an independent high-level inquiry into the
allegations of corruption and abuse in the administration and
management of the OFF program. This inquiry will look into the
allegations of fraud and corruption by UN personnel, contractors, and
entities that entered into contracts with the UN or with Iraq under the
program. Separately, the Iraqi Board of Supreme Audit, with assistance
from the CPA, has launched its own investigation in Baghdad into
allegations of misconduct concerning the OFF program. The United States
will fully support these efforts.
oil smuggling
It was commonly understood that the Saddam regime engaged in
multiple, complex efforts to evade the sanctions imposed by the
Security Council. In fact, the Saddam Government orchestrated the
largest share of non-compliance with the Council's demands through
outright oil smuggling and the procurement of unauthorized goods
completely outside the context of the OFF program.
While it is assumed that Saddam engaged in oil smuggling throughout
the life of the sanctions regime on Iraq, reports suggest that oil
smuggling efforts intensified from 2000 onward, reaching a peak annual
level of $2 billion in 2002, mostly through the Persian Gulf and Syria.
While it is not possible to confirm the General Accounting Office's
March 2004 estimate of $5.7 billion in illegal oil smuggling revenue
for the period 1997 through 2002, this figure appears realistic given
the magnitude of the problem in 2002 alone. Saddam and his fellow
ruling authorities then used these funds to acquire desired items in
circumvention of Council oversight and review.
The Multinational Maritime Interception Force (MIF) operating in
the Persian Gulf enjoyed success from 2000-2001 in significantly
reducing the number of small vessels operating out of Shatt al-Arab
that were smuggling Iraqi oil along Iran's southern coast. An equally
noteworthy source of oil smuggling prior to the 2003 Iraq war was the
illegal flow of oil through Iraq's pipeline with Syria, which restarted
operations in late November 2000. The United States, in coordination
with the UK, repeatedly raised concerns over such blatant
noncompliance, only to be told by Syrian representatives that the Iraq-
Syria pipeline was ``being tested,'' but was not operational.
oil surcharge
Evidence that the Iraqis were attempting to impose excessive price
premiums on oil exports to exploit differences between oil prices
approved by the 661 Committee and subsequent fluctuations in global oil
prices surfaced as early as the fall of 2000, when the UN oil overseers
informed the 661 Committee of instances in which the GOI was requesting
imposition of an additional fee on the sale of Iraqi crude.
Members of the 661 Committee, led by the U.S. and UK, agreed to a
statement issued by the Committee Chairman on December 15, 2000, making
clear that additional fees above the oil selling price approved by the
661 Committee were not acceptable, and that all revenue derived from
the sale of Iraqi oil was to be deposited in the authorized UN escrow
account. Despite circulation of this message to all companies approved
to lift Iraqi oil, evidence of the illicit surcharge continued through
the spring of 2001. In April 2001 the United States and the United
Kingdom first blocked 661 Committee approval of the price of Iraqi oil.
The U.S., working in close coordination with the UK delegation in New
York, raised the issue of excessive oil price premiums in a series of
more than 40 formal and informal 661 Committee and Security Council
meetings. An early instance was in December 2000. The U.S. and UK
initially sought in April 2001 to limit the time that oil prices
approved by the Committee at the beginning of each month would remain
valid, from 30 days, which had been the practice up to that point, to
15 days. The U.S. and UK also requested weekly updates from the UN oil
overseers on the status of oil price premiums, which revealed that the
Iraqis continued to seek imposition of additional, unauthorized fees on
oil shipments ranging from 5 cents to 50 cents per barrel. We were
unable to secure agreement to deal with this ploy.
Bolstered by such reports from the UN oil overseers, U.S. and UK
experts made creative use of the consensus rule governing decisions in
the 661 Committee, and began to withhold support until the end of each
month for oil prices submitted by the Iraqi State Oil Marketing
Organization (SOMO) prior to the beginning of that month. This
retroactive price analysis permitted U.S. and UK experts the
opportunity to assess oil prices sought by SOMO compared to the actual
market price of comparable crude oils to determine if SOMO's prices
reflected ``fair market value''--a requirement under Resolution 986
(1995). Beginning in October 2001 the U.S. and UK regularly employed
the retroactive oil pricing mechanism to evaluate SOMO's suggested
prices until the suspension of the OFF program in March 2003.
Certain 661 Committee members strongly resisted U.S. and UK efforts
to deviate from the previously standard 30-day, pro-active oil pricing
scheme. Some Council members alleged that imposition of retroactive oil
pricing caused a decline in the total volume of Iraqi crude oil
exports, thereby reducing available funds to finance procurement of
additional humanitarian supplies to benefit the Iraqi civilian
population. However, the retroactive oil pricing we imposed had, its
intended effect: by the spring of 2002, the UN oil overseers reported
that oil price premiums had been reduced from as much as 50 cents per
barrel to an accepted industry variation of 3 to 5 cents per barrel.
This significant reduction in price premiums made it economically
unfeasible for oil traders to pay a kickback and still make a profit.
Thus for at least the final 18 months of the program we were able to
save the people of Iraq significant sums of money in illegal oil
surcharges.
kickbacks on humanitarian contracts
Allegations of kickbacks related to OFF humanitarian contracts
began to surface in late 2000. No documentary evidence was produced at
the time to support these allegations.
U.S. and UK experts raised this issue with 661 Committee experts
and OIP representatives during late 2000 and early 2001 and formally
submitted proposals to address this issue during a 661 Committee
meeting in March 2001. Our proposals received no support: members
claimed that absent receipt of evidence indicating that such kickbacks
existed, no action could be taken.
In a few instances a supplier accidentally left surcharge language
in a contract, and in every such case we blocked the contract. As a
general rule, though we often suspected contract overpricing during the
latter years of the program, we were hampered by the lack of
substantiated evidence--evidence that is now becoming available and
which we are intent on pursuing.
The most important measures taken by the United States to address
this issue occurred after the U.S., through CPA, obtained direct access
to Iraqis and some Iraqi ministry documents. With the fall of the
Hussein regime in the spring of 2003, and with the subsequent
authorities granted to CPA under UNSC Resolution 1483, CPA officials
(including sanctions experts from USUN staff), in coordination with UN
officials and the Iraqis, took steps to eliminate surcharges in
existing Oil-for-Food contracts meant evidently for kickbacks.
The CPA and the Iraqis not only identified priority contracts in
the OFF pipeline, but also requested the UN agencies to negotiate a
reduction in the overall contract value at an average rate of 10
percent for those contracts that the Iraqis identified as containing
the kickback. It is estimated that this process saved the Iraqis
approximately $600 million--money that is being returned to the
Development Fund for Iraq.
The efforts by the CPA and the Iraqis to uncover the scale and
intricacy of the hidden network created by Saddam Hussein to siphon
funds from OFF have produced the first public acknowledgement by Iraqis
that a systemic kickback system for OFF contracts actually existed. As
more information comes to light and is evaluated, especially
documentary evidence, we hope that the true scope and extent of this
system and associated corruption and wrongdoing can be established.
allegations against un personnel
During the life of the OFF program, to the best of my knowledge the
United States Government was not aware of allegations of abuse, fraud,
or corruption against those UN officials responsible for management and
implementation of OFF. It was with the appearance of press reports in
January 2004 about abuse of the OFF program that allegations of
corruption by UN Office of the Iraq Program (OIP) Executive Director
Benon Sevan and possibly other UN officials were made. Thereafter the
UN Office of Internal Oversight Services (OIOS)--the UN's Inspector
general--approached us at USUN to request any substantiating
information or evidence from the CPA and the Iraq Governing Council.
The Independent Inquiry initiated by the Secretary-General is being
complemented by an Iraqi Board of Supreme Audit investigation. The
provision of documentation and the forthrightness of Iraqis who
previously managed the Oil-for-Food matters will be essential to
determine the full scope of the problem. We have informed the
Secretary-General that the United States Government endorses and fully
supports these investigations and will assist in whatever way we can.
u.s. initiatives: special briefings
In addition to efforts to eliminate or counter surcharges,
kickbacks, smuggling or sanctions-busting activities, the United States
also took initiatives to provide members of the 661 Committee and the
Council information and evidence of violations by the former regime
through various briefings. To counter charges that the U.S. was
responsible for the continued suffering of Iraqi children, the United
States briefed Council members in 2000 on the various ways the Saddam
regime was diverting funds to benefit Iraq's elite, including through
the use of diverted funds to build and furnish Saddam's palaces. The
U.S. again briefed Council ambassadors in the spring of 2002 on Saddam
Hussein's non-compliance with UN Security Council resolutions, and
Saddam's attempts to procure WMD-related materials. In March 2002 a
U.S. interagency team briefed the 661 Committee on the former regime's
diversion of trucks.
Starting in 1996, U.S. Commanders of the Multinational Maritime
Interception Force (MIF) in the Gulf briefed the Committee each year on
the MIF's activities in combating the illegal smuggling of Iraqi crude.
Most recently, MIF Commanders Vice Admiral Moore in 2001 and Vice
Admiral Keating in 2002 briefed the 661 Committee and highlighted the
continued attempts by Saddam Hussein to circumvent sanctions by
illegally exporting oil and illicitly importing material into Iraq
through the unauthorized use of ferry services from neighboring states.
status of investigations
The independent high-level inquiry initiated by the Secretary-
General will shortly get underway. The Terms of Reference have been
written and provided to Security Council members for their information.
The inquiry will investigate allegations of fraud and corruption in the
administration and management of the OFF program, including those
against UN personnel, contractors and entities that entered into
contracts with the UN or with Iraq under the program.
We and other Security Council members have welcomed the Secretary-
General's initiative, including by calling for international
cooperation. Members have requested they be provided original copies of
the complete final report. Both the summary and the final report on the
findings of this Panel will be made public. We expect announcements
will be made soon on the composition of the members of the inquiry
panel, and have strongly urged the Secretary-General to ensure that
members of the panel are of unimpeachable standing and have the
capacity and experience to make this process as thorough, viable, and
transparent as possible. We would hope that an American will be a
member of the panel. We believe that this inquiry will serve as an
important vehicle in addressing allegations against the UN and the OFF
program. The U.S. and CPA have pledged their support and assistance for
the UN investigation.
In Baghdad, the CPA is assisting the Iraqi Board of Supreme Audit
to launch a Baghdad-based investigation into the allegations of
corruption regarding OFF. CPA Administrator Bremer issued a directive
to all CPA and Iraqi Ministries in early March instructing all Ministry
officials to identify and secure relevant OFF documents.
Representatives of the Iraqi Board of Supreme Audit have met with CPA
and Iraqi Ministry officials to ensure cooperation and transparency in
this process.
Mr. Chairman, the UN Oil-for-Food program was established to
address the humanitarian needs of the people of Iraq in the face of
callous disregard by Saddam Hussein for their welfare. Failure to do so
would have prompted an accelerated deterioration in international
support for the sanctions regime. We met with fairly good success in
limiting Saddam's access to prohibited items under the program, and in
exercising control over most of the revenue derived from the export of
Iraqi oil. However, this program was abused by Saddam Hussein in
nefarious and clever ways. The inquiries now being launched will, we
hope, identify those who may have conspired with him, and perhaps
assist in recouping lost funds for the Iraqi people.
Mr. Chairman, again I thank you for the opportunity to provide this
information on the Oil-for-Food program, and would close by emphasizing
that you have my fullest support and that of my staff in your efforts
to determine the extent and involvement of wrongdoing associated with
the program.
The Chairman. Thank you very much, Ambassador Negroponte.
Coordinator Raphel.
STATEMENT OF HON. ROBIN L. RAPHEL, COORDINATOR, OFFICE OF IRAQ
RECONSTRUCTION; ACCOMPANIED BY: HON. KIM R. HOLMES, ASSISTANT
SECRETARY OF STATE FOR INTERNATIONAL ORGANIZATIONS, U.S.
DEPARTMENT OF STATE
Ms. Raphel. Thank you, Mr. Chairman, and Senator Biden. Mr.
Chairman and distinguished members of the committee, I also
want to thank you for the opportunity to appear before you here
today to share my particular experience with the U.N. Oil-for-
Food Program.
I was the CPA's senior advisor to the Ministry of Trade in
Baghdad between April and August of last year, which gave me a
particular on the ground perspective of the program during that
period. The Ministry of Trade was responsible for Iraq's public
distribution system, which rationed basic goods, most
importantly food, made scarce by international sanctions after
the first gulf war. After the Oil-for-Food Program was
established in 1996 the public distribution system was supplied
largely by OFF-procured commodities. The public distribution
system used a Ministry of Trade data base, which was designed
to list every Iraqi family. Families would pick up their
rations each month from one of close to 45,000 local food
agents. Trade Ministry trucks moved commodities from ports of
entry to warehouses throughout Iraq and the food agents took
smaller trucks and picked up their share of these rations and
took them back to their shops.
We were told that about 60 percent of the population was
totally dependent upon these food rations and most Iraqis
considered them an entitlement. So when the coalition arrived
in Baghdad in April, one of our goals was to ensure that the
ration system was reestablished, both to ensure that the people
had enough to eat but also to provide a sense of stability and
continuity for the Iraqi people. The World Food Program was
already hard at work ensuring that food was delivered and
distributed throughout Iraq. Between April and October of 2003
the World Food Program delivered over two million tons of food,
the largest amount ever delivered anywhere so quickly by the
WFP.
Through May my colleagues and I concentrated on what I
would call the infrastructure supporting the public
distribution system. We reconstituted the Ministry of Trade
leadership, made emergency salary payments and cataloged looted
warehouses and silos. We also planned for local crop purchases,
security of the various warehouses and silos, ministry building
repairs and helped to forge new relationships between Baghdad
and the Governorate offices of the Ministry of Trade so that
they could communicate and move various food items among
warehouses where shortages became apparent.
In late May the U.N. Security Council Resolution 1483 gave
the Secretary General the authority to prioritize Oil-for-Food
contracts in coordination with the CPA and the interim Iraqi
administration and according to the needs of the Iraqi people.
This precipitated CPA's involvement with the Oil-for-Food
contracts. In Baghdad we worked out a tripartite process with
the U.N. Office of the Humanitarian Coordinator for Iraq--
that's a long name, the acronym is UNOHCI--with visiting U.N.
Office of Iraqi Program staff and Iraqi ministry officials. We
agreed that we would jointly decide which contracts were of,
what the U.N. resolution referred to as ``relative utility,''
contracts that should be brought forward. The key criterion was
whether the goods were needed to meet the humanitarian and
reconstruction needs of the Iraqi people. The supplier's
ability to deliver on time and the reasonableness of price were
also considered. This work was managed by what we called the
OFF team in the CPA. This is a team which I led during my time
in Baghdad. Eligible contracts numbered roughly 5,000 approved
and funded contracts, which had been approved and funded by the
Office of Iraqi Programs in New York, worth over $8 billion.
The CPA decided that it would not agree to the prioritization
of contracts from companies about which there were outstanding
questions regarding their relationship to the former regime. So
we made it clear that we would not sign off on prioritization
of those contracts.
Now, early in the process we learned that many Iraqi
ministries had detailed knowledge of this so-called kickback
system, under which suppliers had agreed to inflated prices and
to pay a percentage of the inflated contract value into regime
officials' accounts in foreign banks. The CPA was very
determined to avoid any kind of perpetuation of this kind of
corruption related to these contracts. At the same time,
however, we believed that the Iraqis themselves were best
placed to determine which of these Oil-for-Food goods were
needed for their reconstruction; not only food items but also
goods and spare parts related to oil, electrical, and public
works infrastructure projects. Since many of these key
contracts, we understood, included extra fees or kickbacks, it
was agreed that the way to handle this was to have the
appropriate U.N. agency, which would be talking to supplier to
change delivery dates and times and so on, that those agencies
in that process would negotiate the removal of these fees with
the suppliers. So each ministry would identify the amount of
any fee or kickback associated with a contract. And we
developed a blanket instruction that in the absence of any
specific information, and we didn't always have specific
information, the level of the fee was to be 10 percent of the
contract value for all contracts from June 2000 forward.
Because it was in June 2000 we understood that the regime began
to insist and turn the screws and put the pressure on to get
more out of this kickback arrangement from the suppliers.
Once the tripartite review was complete a schedule of
contracts signed off on by the appropriate Iraqi ministry
official was submitted to our OFF team for final CPA review.
This list of contracts was then signed off on by the
appropriate CPA ministry senior advisor once the OFF team had
made sure that all the appropriate information for each
contract was included on the list. And then we sent this
package of contracts with the signatures onto the UNOHCI office
in Baghdad and they forwarded it to the Office of Iraqi
Programs in New York. Then the Office of Iraqi Programs would
notify the suppliers that their particular contract had been
prioritized and send the relevant information on to the
appropriate U.N. agency with instructions to renegotiate
delivery times and locations and to negotiate the removal of
these extra fees or kickbacks. These renegotiations were
presided over by the U.N. agencies and did not involve either
Iraqis or CPA officials. U.N. agency officials made no formal
reference to allegations of corruption when they were talking
to suppliers in order to avoid prejudicing any possible future
legal action.
The prioritization and renegotiations of these contracts
turned out to be an enormous task. I think no one really
realized, when we began, how much time it would take, how
labor-intensive it would be. And of course it was complicated
by the tragic August 19 bombing of U.N. headquarters in
Baghdad, where many of our colleagues were injured and they
were all finally evacuated.
So by late 2003 we began to worry a bit about the food
pipeline. As a result of this, in January we decided to
approach the WFP for some assistance in this regard. The CPA,
the Iraqi Ministry of Trade and the WFP agreed that WFP would
procure and transport to warehouses throughout Iraq more than
$900 million worth of food to ensure that food pipeline gaps
would be filled and that a buffer stock would begin to be
built. The stocks are now rising in Iraqi warehouses, I'm
pleased to say, and the Ministry of Trade has again taken over
all new procurement.
Mr. Chairman, in closing I would like to thank you and all
members of the committee for your continuing support to Foreign
Service officers, especially my colleagues in Iraq, and for
your support for the Diplomatic Readiness Initiative. It makes
a great deal of difference to our people who are working 16 to
18 hours a day in dangerous conditions to know that you are
interested in and appreciate their service. So thank you very
much for that, Mr. Chairman.
[Prepared statement of Ambassador Raphel follows:]
Prepared Statement of Hon. Robin L. Raphel
Mr. Chairman and distinguished members of the Committee,
Thank you for the opportunity to appear before you today to share
my experience with the UN Oil-for-Food (OFF) program in Baghdad. I was
the Coalition Provisional Authority's (CPA) Senior Advisor to the
Ministry of Trade (MoT) in Baghdad from April through mid-August last
year.
The Ministry of Trade was responsible for Iraq's Public
Distribution System (PDS), a system developed after the first Gulf War,
essentially to ration the scarcity of basic goods resulting from
international sanctions and ensure that all Iraqis had a minimum amount
of food to eat. After the OFF program was established in 1995 under
Security Council Resolution 986 and implemented in 1996, the PDS system
was supplied largely by commodities procured under OFF. The PDS system
was based on a computerized database maintained by the Ministry of
Trade that was designed to list every family in Iraq. Each family had a
ration card that they would use to pick up their rations each month
from one of the roughly 45,000 food agents based in neighborhood shops.
The food agents collected these commodities from a series of Trade
Ministry warehouses distributed throughout the governorates. A fleet of
Trade Ministry trucks moved the commodities from the ports of entry to
these warehouses.
It was estimated that before the 2003 war, roughly 60 percent of
the Iraqi population was totally dependent upon the ration basket.
Others would use it to supplement other food sources or to pass on to
poorer relatives. In any case, most Iraqis considered their rations a
basic entitlement. At least 90 percent of Iraqis picked up their
rations each month. Maintaining the ration system was important to the
sense of stability and continuity the Coalition was trying to provide
in the immediate aftermath of hostilities. While the MoT ran the PDS,
the UN's World Food Program (WFP) was responsible for monitoring the
arrival and distribution of OFF food shipments to ensure they were
fairly distributed and not diverted.
By the time the coalition arrived in Baghdad, the UN had been
authorized by the Security Council initially under UNSC Resolution 986,
and modified under UNSC Resolution 1472 (and later extended under UNSC
Resolution 1476), to oversee the procurement of new foodstuffs and
medicines on behalf of the government of Iraq, a function previously
managed by the individual Iraqi ministries. These ministries could no
longer enter into new contracts under the program. UN agencies were
also authorized to decide which existing contracts for food and
medicine should be prioritized and implemented.
The WFP began an Emergency Operation on April 1, 2003, issuing a
multilateral appeal to donors, and managing the logistics of delivering
this food to warehouses in Iraq. At the same time, WFP was given
responsibility for implementing OFF food contracts and managing the
movement of this food into Iraq. Under these combined operations, the
WFP delivered over two million tons of food between April 1 and the end
of the Emergency Operation in October 2003. It was the largest amount
of food aid ever delivered in a single WFP program over such a short a
period of time.
In January 2004, the CPA, Iraqi Ministry of Trade, and WFP agreed
that WFP would procure and transport to Iraqi warehouses more than $900
million in food items for the PDS using Iraqi money from the
Development Fund for Iraq (DFI). This was necessary to help ensure that
food pipeline gaps were filled and a buffer stock began to be built.
The MoT is now poised to take over all future procurement for the PDS.
During the period before the passage of UNSC Resolution 1483 on May
22, 2003 which provided for the termination of the OFF program and the
transition of any remaining activities to CPA, my colleagues and I
concentrated on other matters such as reconstituting Ministry of Trade
leadership, providing emergency salary payments, determining the status
of warehouses and silos--many of which had been looted--and planning
for security for these facilities, repairing ministry facilities,
sorting out relationships between Baghdad and MoT offices in the
governorates which were under new management since senior Ba'athists
officials had disappeared, developing a budget, and purchasing the
local wheat crop.
Once UNSC resolution 1483 had given the Secretary General the
authority to prioritize contracts, in accordance with the needs of the
Iraqi people, in coordination with the CPA and the Interim Iraqi
administration, the UN Office of Iraq Programs (OIP) staff came to Iraq
to work out the procedures for this prioritization process. A
tripartite process was agreed to under which the relevant UN agency,
the CPA ministry advisor, and Iraqi ministry officials would jointly
decide which contracts were of ``relative utility.''
By June 2003, we had learned from Iraqi officials that many of the
ministries had both records that documented and personnel with detailed
knowledge of the ``kickback'' system under Saddam Hussein's regime,
under which many suppliers had agreed to inflated prices and to pay a
certain percentage of the inflated contract value into foreign bank
accounts of regime officials. While the CPA was determined to avoid
perpetuating any corruption related to these contracts wherever
possible, the UN and CPA believed the Iraqis were best placed to
determine what OFF goods they needed to rebuild their country--
including its oil, electrical, and public works infrastructure. Many of
the contracts they selected included ``kickbacks.'' It was agreed that
the best way to deal with these ``kickbacks'' in the prioritized
contracts was for the responsible UN agency to negotiate the removal of
the ``kickback.''
In early June 2003 the CPA began to work with the UN agencies and
Iraqi ministries on the OFF contracts. This work was managed by the
``OFF Team'' in the CPA Ministry of Trade, and coordinated with OIP and
the UN Office of the Humanitarian Coordinator for Iraq (UNOHCI). The
general procedures governing the process are described below.
Eligible contracts were those that had been approved and funded by
OIP prior to April 14, 2003 when OIP declared a pause in processing of
contracts because of concerns about future oil revenues. This comprised
roughly 5,000 contracts worth over $8 billion. (An additional $1
billion worth of funded contracts had already been prioritized for
emergency distribution by UN relief agencies under UNSC Resolution
1472.) Contracts which had been registered with OIP but not approved,
or which had not yet been funded, were generally not considered
eligible at that time. [Note: A few unfunded contracts for very urgent
items such as food, emergency vehicles and fertilizer were later
prioritized.] CPA also took the decision that it would not agree to the
prioritization of contracts from entities about which there were
outstanding questions concerning their relationship to the former
regime. Action on contracts not considered eligible, or on contracts
determined to be of questionable utility, was to be postponed until an
internationally recognized, representative government of Iraq was in a
position to make its own determination as to whether such contracts
should be fulfilled.
By late June 2003, the tripartite review process began to gather
momentum. Officials from the relevant Iraqi ministry, the CPA ministry
advisors and the relevant UN agency sat together to examine the
contracts in order to determine relative utility. This ensured that the
historical knowledge of the Iraqis would be captured in the process,
and that the UN and CPA would be a party to all decisions. The key
criterion was whether the particular goods were needed to meet the
humanitarian and reconstruction needs of the Iraqi people. The
supplier's ability to deliver on a timely basis, and overall
reasonableness of price were also considered. Each contract was
assigned a priority of one through four, with one being the most
urgent, and four indicating that a contract was of no relative utility.
Each ministry was responsible for identifying the amount of any
extra fee or ``kickback'' associated with the contract. We were told
that the regime first began to insist on ``kickbacks'' beginning with
phase 8 of OFF in June 2000. Therefore, in our review of contracts, the
blanket instruction was that, in the absence of specific information,
the level of the fee was 10 percent of the contract value for all
contracts in and after Phase 8. In some cases ministries had more
specific information as to the exact level of the fee, or that there
was no fee assessed.
Weekly meetings of these tripartite groups were established (many
ministries met more frequently), with progress reported at a separate
weekly meeting co-chaired by UNOHCI and CPA. These meetings continued
from July 2003 until the UN bombing on August 19, 2003, after which all
UN staff vacated Baghdad. After the bombing, CPA and Iraqi ministries
continued the prioritization with deferred UN agency input via email or
telephone, though some ministries made periodic trips to Amman, Jordan,
to meet with their UN counterparts to obtain their direct input into
the process.
Once the tripartite review was complete, a schedule of contracts
signed by the appropriate Iraqi ministry official was submitted to the
OFF Team for final CPA review. Once the OFF team had determined that
each contract had been assigned a priority, the percentage ``kickback''
fee to be removed, and the delivery date and delivery location, the
list of contracts was signed off by the appropriate CPA ministry Senior
Advisor. This information was then faxed and emailed to UNOHCI, who
would countersign the document and send it to OIP.
Once OIP received the document, they would notify suppliers by
posting those contracts deemed to have relative utility on the OIP Web
site. OIP would also send the contract information to the appropriate
UN agency, with instructions to renegotiate the following terms:
delivery costs, delivery location and removal of any ``extra fees.''
These renegotiations were presided over by the UN agencies and did not
involve the Iraqis or the CPA ministries. We were told by UNOHCI
officials that in their dealings with suppliers, UN agencies made no
formal reference to allegations of corruption or improprieties, and did
not refer to the extra fees as ``kickbacks''. UNOHCI and OIP believed
this was the best way to handle this matter so as not to prejudice any
possible legal action in the future.
There were approximately 300 cases in which suppliers refused to
take out the extra fees, asserting they had never paid anything beyond
the value of the contract. Such cases were resolved by CPA querying the
Iraqi ministry to confirm--and, where possible, to document--the
presence or absence of the extra fee.
The pace of contract renegotiations picked up considerably in
September as OIP completed its processing of contracts and passed them
on to UN agencies. Some agencies hired extra staff in an effort to
complete the task by the November 21 deadline. Still, 251 contracts had
not been renegotiated by November 21. These were turned over to the
Defense Contract Management Agency (DCMA), which is still working on
the last of the renegotiations.
Since November 21, CPA has also been working with the Iraqi
ministries to ensure that the prioritized contracts are delivered on a
timely basis. They have focused particularly on food contracts to
ensure that the food pipeline for the Public Distribution System is
maintained. It is expected that delivery of the remaining OFF contracts
will continue beyond June 30, 2004.
Mr. Chairman, in closing I would like to thank you and all members
of the Committee for your continuing support for Foreign Service
officers, especially those in Iraq, and for your support for the
Diplomatic Readiness Initiative. It makes a great deal of difference to
people working 16-18 hours per day in dangerous conditions to know that
you are interested in and appreciate their service.
The Chairman. Thank you very much, Coordinator Raphel. Let
me just pick up on your last point. We do, indeed, think often
of our dedicated Foreign Service officers. They are in harm's
way, doing remarkable work for our country and for the Iraqi
people. We appreciate that. We appreciate your service there.
The Chair would suggest that we have a 10-minute question
period as this is an important subject and we want to make
certain members have an opportunity to ask their questions.
I'd like to begin, Ambassador Negroponte, with this
question, which I've carefully worded so that there will not be
a violation of security. I ask you, in your opinion, does the
fault for the abuses we have discussed today lie more at the
feet of individual United Nations officials, or with individual
member states?
Mr. Negroponte. I think, first of all, Mr. Chairman, we
have to lay the major share of the responsibility on the regime
of Saddam Hussein itself, I think. Since 1990, since the time
that sanctions were imposed, the Saddam regime made efforts to
evade the sanctions and I think when you mentioned that figure
of $4.4 billion on the one hand with respect to contracts and
the $5.7 billion with respect to oil smuggling, I believe that
the oil smuggling activities was virtually entirely the
responsibility of the regime itself. As regards the question of
the responsibility of members versus particular individuals in
the United Nations who may have been carrying out the programs,
I think in part we're going to have to wait and see how these
investigations turn out, both the U.N. investigation ordered by
the Secretary General and the CPA. I do think that there were
member states who at times frustrated efforts by the United
States and the United Kingdom to correct what we perceived as
some of the important abuses of the management of the Oil-for-
Food Program and to that extent I would fault those member
countries. I'm not sure I know what percentage of the blame I
would apart to them for that.
The Chairman. Let me followup. Is it fairer to say that in
the 661 Committee, China, France and Russia were unwilling to
impose sanction guidelines on the Iraq sanctions that would
have prevented these abuses? What other nations obstructed
reforms?
Mr. Negroponte. Well, I think with respect, for example, to
oil pricing, we've met resistance from the countries that you
mentioned. With respect to correcting improprieties and
inadequacies in the oil pricing they had a system of forward
pricing of oil where the price would be set artificially low
and then the oil would be sold at market prices and then the
regime was able to share the discrepancy between the
artificially low price and the price at which it had been sold
on the international market between various regime officials
and other middlemen. We ultimately succeeded in correcting that
problem in 2001, ourselves and the British, by insisting in the
661 Committee on a retroactive pricing system whereby the oil
would be exported first and then the price would be set later,
and that could be set in a manner more consistent with market
realities and therefore the opportunity for corruption and
kickbacks would be substantially reduced, and was in fact
substantially reduced. Had we had the cooperation of the
countries that you mentioned earlier we could have probably
corrected that problem sooner.
The Chairman. In your judgment, why did we not have that
cooperation from those countries, specifically China, France
and Russia?
Mr. Kennedy. Well, I'm not sure I can ascribe all of the
motives that these countries might have had. I think in one
instance, to some extent it must have been driven by commercial
considerations of various companies that were of the
nationality of those countries. I think another aspect may have
been the fact that these countries, Russia for example, didn't
like the sanctions regime in the first place. They had been
strong advocates of removing sanctions for a very, very long
time. Resolution 1284 was adopted in 1999 and was the last
major resolution affecting the Oil-for-Food Program. France,
China and Russia abstained in that resolution, really because
they objected to it. So that could be another consideration.
But I think as we delve into this perhaps we'll get even
further insights into their motives. And I would, as a last
point, hasten to add that I think these countries all accept
the fact that these allegations must be investigated and they
have all supported the Secretary General's initiative to
conduct an investigation.
The Chairman. Ambassador Kennedy, let me ask this question
of you. What were the most basic weaknesses in the Oil-for-Food
Program that allowed Saddam to exploit it to such a staggering
degree?
Mr. Kennedy. Mr. Chairman, I believe that the basic
weakness is that the original decision made, which as
Ambassador Negroponte pointed in his statement, was the result
of the consensus process that is necessary to get such a major
resolution passed at the United Nations was that it left
sovereignty in the hands of the Iraqis, that it was the
insistence by the Iraqis and by others in the United Nations
that the Iraqis had to have the right to select the suppliers
and the Iraqis had to have the right to select the purchasers.
Once that basic decision was made, if you have a regime that
was so inherently corrupt, brutal, evil and, if I might say,
with quotes around it, ``clever,'' as Saddam Hussein, they were
then able to take steps to manipulate the system and, as he
moved to manipulate the system as Ambassador Negroponte has
also pointed out, the United States and the United Kingdom
worked in the 661 Committee to counter every step and every
manipulation he made and I think the excellent example was the
question of prospective versus retroactive pricing. When it
became clear that he was manipulating the pricing that way the
United States and the United Kingdom moved quickly to counter
that.
The Chairman. Let me ask this question of you, Coordinator
Raphel, apropos of what has been suggested about the
sovereignty that Iraq will have after June 30. Should we worry
that kickbacks and payoffs could resume when the Oil-for-Food
Program is turned to the Iraqis? If, we should not worry, why
so?
Ms. Raphel. Mr. Chairman, with respect to the contracts
that were arrived at under the Oil-for-Food Program, they will
shortly all have been renegotiated with the kickbacks taken
out. I say shortly because when the U.N.--when the clock
stopped on the 21st of November U.N. agencies hadn't quite
finished and they handed over to the CPA about 250 contracts
which are being worked on now by the Defense Contracting
Management Agency. But these renegotiations will soon be
completed so these old contracts will be kickback-free, shall
we say. They will continue to be delivered on past the 30th of
June but I don't think there's reason to be concerned about
those contracts. The larger question is the issue of
procurement throughout the Iraqi Government. And I know that
Ambassador Bremer and everyone at CPA has been working hard,
Ambassador Kennedy as well, over the last some months to
develop a system of procurement that is transparent and fair
and as far as possible does not allow for this kind of thing to
happen. Ambassador Bremer has also established the position of
Inspector General in each one of the ministries, or at least
they are working on a code of conduct for all Iraqi civil
servants and in our own dealings with Oil-for-Food suppliers.
It's now explicitly on the CPA Web site that there are to be no
commissions paid by the suppliers. So there are a number of
steps which have been taken which we hope collectively will
establish a new ethic among the Iraqi civil servants and the
Iraqi Government and the Iraqi people with respect to this kind
of procurement.
The Chairman. Post-June 30, will we be monitoring that?
Right now, Ambassador Bremer and other Americans, as you say,
are providing a code of ethics and procedures which hopefully
would be followed. Once again, as we try to delve into what
happens post-June 30, who are the watchdogs? Or are there any?
Or are the Iraqis on their? Would this be a situation in which
whoever happens to be the minister of a particular department
deals with this in his or her own way?
Ms. Raphel. Well, two points with regard to your question,
Mr. Chairman. First of all, it is our hope and I think our
expectation that these new offices, the Inspectors General, the
new Board of Supreme Audit, which is undertaking the
investigation in Iraq, that these institutions will begin to
put down roots. And I think we have some reason to believe that
that will be true within the ministries. After all, in the
instant case of the Oil-for-Food issue it was the ministry
officials themselves who came to us and said, you know, here's
what's been going on, here's the system, here are the
percentages and so on. So I think there is a desire there.
And second, we expect that we will retain a certain number
of technical advisors to help the Iraqi ministries continue
with their reform and transition. We know that many of the
Iraqis want that and that is what we hope to arrange.
The Chairman. Thank you very much.
Senator Biden.
Senator Biden. Just like to followup on that, if I may. I'm
deadly earnest when I ask, why do you at this point only hope?
Why don't you know? I mean, hasn't anybody said how--we're 12
weeks away. We're going to be coming back, this President is
going to have to, or the next President, if it's not this
President either. Kerry or Bush are going to have to come back
to this committee and ask for billions more dollars. We all
know it, you know it. No one wants to say that but everybody
knows that. And do we not know who will be the authority, like
Bremer now, that says, hey, wait a minute. We think you've
changed the Inspector Generals in a way because you cut a deal.
There are going to be six million deals cut in this new
emerging government. Who gets to say no? Who is going to be the
person--is it going to be the U.S. Ambassador of this new super
embassy? Do we know that? I mean, do you have any idea other
than a hope? You've expressed a great hope and I think you've
done a heck of a job, personally; you personally have done a
heck of a job. But why don't we know now? Who do you get the
answer from? I mean, if we tasked you now, would you please go
back to the administration and within 24 hours come back and
tell us who, not a name, what office, is going to be
responsible for and able to say no, you're not doing it the
right way? Who would you go talk to? Would you go talk to the
Secretary of State? Who do you go to to find out the answer to
that question?
Ms. Raphel. Senator, I'm sure you're aware that we have an
Iraq Transition Team in the Department of State married up with
a counterpart in the Department of Defense.
Senator Biden. No, I'm not aware of that. I don't know the
names of those people.
Ms. Raphel. Ambassador Ricciardone and General Kicklighter,
retired general.
Senator Biden. So they'd be the ones to give you the
answer?
Ms. Raphel. They are working very hard on the whole
question of the structure of the new embassy and new mission,
how it will relate to the Iraqis, how we will oversee this
unprecedented amount of assistance, the $18.4 billion. These
are questions which the administration takes extremely
seriously and it is a very complicated and complex matter, as
I'm sure you can appreciate, of how to put the right kinds of
checks and balances in and decisionmaking processes and so on.
But that planning process is quite far advanced.
Senator Biden. Well, I'd like to formally request that you
let us know exactly what stage it's at now. This is above your
pay grade, I acknowledge, and above mine, in a sense, but
you've had 16 weeks since the decision was made as to how we
were going to transition on June 30. You've got 12 weeks left,
12 weeks left. And we all know that billions of additional
American taxpayers' dollars are going to be heading to Iraq.
I'd like to know specifically, not generically, an answer to
the following question: at what stage is the planning? What
alternatives are being considered? And what decision, if any,
has been made as to how we're going to track these dollars in
the pipeline now and the ones in the future? I'd respectfully
request within a week to get an answer to that specific
question. I'd appreciate that very much.
The second question I have, and there's a thousand
questions but Ambassador Negroponte, how does the U.N. police
itself? Are there mechanisms within the U.N. to try member
states or individuals or companies for breaking resolutions or
engaging in corruption, and is there a means to otherwise hold
them accountable? Is there a mechanism that allows whistle
blowers to come forward without fear of reprisal? How does it
work? Talk to us about how it actually functions, the policing
function.
Mr. Negroponte. I think that the U.N. organization, the
Secretariat, as a practical matter has policing power or
policing authority over its own personnel. And Kofi Annan as
the chief administrative officer of the United Nations has that
authority and that is one of the aspects that he is going to be
looking into in this independent inquiry.
Senator Biden. Is there a due process mechanism for him to
be able to make those judgments or is it a matter totally at
his discretion? He concludes by an internal investigation that
John Brown engaged in corruption or turned his back to
corruption taking place and he's fired. Or is there a mechanism
he's required to go through like we would have to in this
country? And what are the sanctions available to him other than
dismissing someone who is guilty of either directly benefiting
themselves and or turning a blind eye to corruption as it
exists or an absolute violation of a U.N. resolution that they
are responsible for implementing?
Mr. Negroponte. Well, I don't think he has. He obviously
doesn't have the authority to impose any kind of criminal
penalties. It seems to me that if wrongdoing of that kind were
found and if there was a desire to pursue a judicial recourse
of some kind then that would have to go to some particular
jurisdiction other than the United Nations itself. But I think
his powers, his own powers, are confined to taking disciplinary
action within the organization, I suppose up to and including
dismissal. Ambassador Kennedy has also given me a note here
which relates to whether or not we have jurisdiction to
prosecute those involved.
Senator Biden. Do we, Ambassador Kennedy?
Mr. Kennedy. Senator----
Senator Biden. The reason I ask the question, these are the
questions that informed constituents ask us. They're sitting
there and wondering how the investigation is taking place, the
Iraqi Governing Council's looking at this, we, our
administration is looking at this, we're talking about billions
of dollars being involved here and so I get asked the question,
as a matter of fact, getting on the train I got the following
question: is this going to be like the way we deal with
corporate scandal here? No one's held responsible? I said no,
no, we're holding people responsible here. Well, you know, how?
I mean, in terms of what is it we say to our constituents as to
what sanction is available if it is shown that an individual
member was negligent. The Wall Street Journal had an editorial
today indicating what in fact they thought about had happened
and what we should be looking at and raising some questions
about specific individuals and whether or not the investigation
is capable of being conducted fairly, et cetera. And it prompts
questions, logical questions, from our constituency. So that's
the reason I'm asking, not that I'm not suggesting that somehow
we're deficient if there is no such mechanism at the United
Nations; I just want to know, and as a matter of fact you can
help me write my answers to my mail. Do we have jurisdiction to
criminally prosecute?
Mr. Kennedy. If I could answer in two parts, Senator. The
Secretary General has the right to fire United Nations
employees who he believes are guilty of misfeasance,
malfeasance. They have the right to an appeal to a U.N.
administrative tribunal but the Secretary General also has the
right to accept or reject that administrative tribunal. So the
Secretary General may terminate U.N. employees for wrongful
acts. Should this independent investigation that he has
commissioned find that there was wrongdoing in the
implementation, there may well be criminal investigations
undertaken that would follow on. The Department of State has
been in contact with the U.S. Department of Justice after these
allegations have appeared in the media and whether or not the
United States would have jurisdiction to prosecute individuals
or corporations who might have been involved in any kind of
wrongdoing would depend on the individual facts of an
individual case and where the actual criminal act had taken
place. This would be a matter that would be referred to the
Justice Department. Of course, even if the United States did
not have jurisdiction because of where the act occurred, the
act could theoretically be prosecuted by the Iraqis in their
criminal court system because the crime had been committed
against them, or it might be prosecuted in the courts of
another nation because the wrongful act had been created there.
Senator Biden. I thank you all very much.
The Chairman. Thank you, Senator Biden.
Senator Hagel.
Senator Hagel. Mr. Chairman, thank you, and thank you each
for appearing before the committee this morning.
Ambassador Negroponte, in your sense of this, your
recollection, were any of these irregularities ever reported to
the U.N. Mission of the United States?
Mr. Negroponte. Well, first of all, with respect to oil
smuggling, we've known for a long time that there was oil
smuggling and we even undertook measures to try and prevent or
minimize that, including a multi-national interdiction force in
the Persian Gulf.
With respect to oil pricing, we were also aware of this
forward underpricing scheme that I described earlier and we
took measures to deal with that. As far as allegations against
United Nations personnel are concerned, they only surfaced in
late January of this year when a newspaper in the region, in
the Middle East, published an article listing various
individuals and entities that had received oil vouchers from
the Iraqis during the Oil-for-Food Program. But no allegations
of corruption or allegations of misconduct by United Nations
personnel had been brought to our attention before then.
And then last, Senator Hagel, on the humanitarian
contracts, there had been allegations of kickbacks on
humanitarian contracts as far back as the year 2000. But there
was no substantiating evidence available until the CPA, in
coordination with Iraqi representatives, uncovered indications
of this in the summer of the year 2003.
Senator Hagel. So to summarize, as far as you know, and
those at the U.S. Mission at the U.N. specifically focused on
the Oil-for-Food Program, no one brought forward any allegation
that U.N. representatives administering that program may have
been involved in criminal acts or any acts of corruption?
Mr. Negroponte. That is correct, until the allegations that
were made in January of this year, yes sir.
Senator Hagel. Thank you. Coordinator Raphel, how soon do
you believe that the Oil-for-Food Program will be totally, can
be totally phased out?
Ms. Raphel. Well, as you know Senator, the program was
ended on the 21st of November, 2003, in the sense that there
were no more contracts allowed to be made against the U.N.
escrow account which had the Iraqi oil revenues in it from the
past. There are no new contracts. It's now just a matter of
finishing up the renegotiation of old contracts and getting the
goods shipped into the country. So now, if the Ministry of
Trade wishes to order wheat, they do it using the funds from
the development fund of Iraq, which is where all the Iraqi oil
revenues are now going. They used to go into the U.N. escrow
account; now they go into the development fund for Iraq.
Senator Hagel. Well, what I'm really referring to is when
do you believe the Iraqi people will be in a position to
purchase their own food and all remnants?
Ms. Raphel. Sorry.
Senator Hagel. Maybe I should have qualified that, remnants
of the Oil-for-Food Program will be complete? And as you noted
the Ministry of Trade, which I want to ask you a question about
in a moment, but we know the transitional process there, but if
you could stay focused on that question.
Ms. Raphel. OK. First of all, in terms of the old contracts
we expect by autumn of this year that all of the goods that are
coming in under those contracts should be in Iraq and
distributed. If you're speaking more generally to the public
distribution system----
Senator Hagel. Yes.
Ms. Raphel [continuing]. The food ration system.
Senator Hagel. Yes.
Ms. Raphel. OK, that is another question altogether. The
view of CPA is definitely, and other international experts and
economists and the World Bank and the IMF and so on, is that
Iraq must take a serious look at the food ration system and in
fact other subsidies that pervade their whole economic
structure to find a way to bring this more in line with a
market system to stimulate production of their own agricultural
sector and so on. There's been a lot of thought given to this
and to the whole question of food security and identifying who
the really vulnerable groups are who need what would be in our
terms say, food stamps, need some support, some subsidies to
get basic food items for their family and so on. But the
decision was made that this was something we really needed to
leave to the next Iraqi Government. It's a highly political
issue; as I mentioned early on, the Iraqis consider this an
entitlement and with so many other issues on our plate, both on
the economic and clearly on the security and political side, we
thought this was best to leave to the Iraqis for a later date.
But they are also aware that they need to change this system.
Senator Hagel. So we don't have a general framework of a
date as to when this would be phased out?
Ms. Raphel. No. I suspect that it will certainly continue
at least to the end of this calendar year and on into 2005. But
we have and will continue to work on various proposals to
discuss with the Iraqis to give them some ideas on what other
countries have done to reduce food subsidies and so on. So
we're actively engaged with them on this subject.
Senator Hagel. You mentioned in your testimony the Ministry
of Trade picking this up and now the implementing agency will
be, especially after June 30. In your opinion are they prepared
to do this? And they are doing it in a way that will in fact
affect what needs to be accomplished, as you noted, socially,
economically, diplomatically?
Ms. Raphel. Right. There are a couple of elements to the
public distribution system. One of them is procurement. And in
fact, as we've noted from this whole system, the Iraqis did
their own procuring; that was part of the problem, in fact. But
the Ministry of Trade has procured food stuffs before, they've
done a lot of capacity building in Rome with the World Food
Program, our people in CPA have worked with them to expand the
list of suppliers that they consider and to develop a more
transparent system altogether. So that capacity building is
ongoing and in fact the Ministry is now doing its own procuring
with oversight from CPA officials. So that's one element of it.
The distribution, again, is something that the Ministry of
Trade was responsible for all along. They developed this system
right after the first gulf war; it's elaborate, as I say, it's
based on a sophisticated computer data base. The difficulty for
them, after hostilities ceased, was really that they had
problems with their trucking system, they had problems with
communications as we all did, and the discipline and authority
relationships between the center and the governorates upon
which this system depended, if you were in the center watching
the whole structure you had to call the Governor of Al Anbar
and say, you know, we need to release a certain amount of tea
to go from there down to Basra. That capability disappeared
overnight and so we've had to rebuild this. But the fact is
they used to do it, they're capable of doing it quite
effectively.
Senator Hagel. Thank you. I've got limited time and if you
could give me a very short answer on one question and then I
wanted to get one more--that is, NGOs. Are they going to play a
role? Are they playing a role in this distribution process?
Ms. Raphel. The WFP was charged with monitoring the system
in the south and central governorates, checking in on the
warehouses, making sure none of the food that came in under
this program disappeared and so on. It was a monitoring role.
Senator Hagel. Thank you. And last question, you mentioned
this, the Ambassador mentioned it, on CPA's involvement, your
particular involvement over the last few months and looking at
the specific charges, analyzing contracts, the issues that are
part of, or at the core, actually of this hearing; my question
is, do you believe the CPA has access to all the relevant U.N.
documentation that they need to review to get to some of these
issues that we all are going to be looking at, specifically
what CPA's responsibilities are now, aside from what the
Secretary General's charge is to his people at the U.N. for
investigation? Do you have everything you need?
Ms. Raphel. Just speaking to things in Baghdad, Ambassador
Bremer has ordered that the Board of Supreme Audit go through
the files of each ministry and collect all relevant
documentation that will help get at the bottom of the whole
kickback scheme. As you know, many of the ministries were
burned. Certainly the Ministry of Trade was and others were, so
that documentation will not be complete but it is now being
sequestered and gone through by the Iraqis in conjunction with
CPA authorities.
Senator Hagel. And you believe you have everything you
need?
Ms. Raphel. Well, again, we don't know what a complete set
of records would be and we assume that at least some of them
were lost in the immediate aftermath of hostilities through the
looting and burning and so on.
Senator Hagel. Thank you.
The Chairman. Thank you, Senator Hagel.
Senator Dodd.
Senator Dodd. Well, first of all, Mr. Chairman, thank you
very much. This is a very important hearing and I'm very
pleased that you're holding it. And I thank our witnesses as
well for being here. And Mr. Chairman, I'm just going to ask,
if I may, at the outset that some opening comments be included
in the record, if I could.
The Chairman. They will be included in the record.
Senator Dodd. And let me just summarize some of the
comments I made in my written statement, very briefly.
Obviously, looking at the Food-for-Oil Program it is
tremendously important and we can learn valuable lessons from
it, but as has been pointed out it basically has ceased to
function, except for what remains to be done back in November.
But certainly, while we're very worried, and rightly so, about
the corruption that went on, as I understand it about 72
percent of the funds that were secured as a result of the
program actually went to serve the people of Iraq, innocent
people in Iraq, who would have been, I think, under desperate
circumstances had this program not been created. At least
that's my observation. So, while I'm not excusing it, all the
$10 billion plus that may have been stolen as a result of the
program, the fact that 72 percent of the funds, roughly $63
billion, one way or the other got to people in Iraq, may have
saved them from just a human tragedy of significant
proportions. So, I just wanted to make that point.
And second, I'm actually, as I'm interested in this, I'm
really more interested in the way in how the reconstruction
funds are going to work. Let me just raise two or three quick
questions, if I can, and get your responses, if I may.
First, this isn't something new. In 2002, weren't we
aware--and I don't know who I should address this to, whether
it's to you, Ms. Raphel or to John Negroponte--but in 2002, you
had Turkey and Jordan that there was oil flowing out of Iraq to
both of these countries. We were certainly aware of it at the
time; they were getting it at below world prices. So this idea
that we're somehow discovering this corruption at this hour, I
think, is not borne out by facts. Weren't we aware of the
Jordanian/Turkey use of Iraqi oil supplies 2 years ago?
Mr. Negroponte. Yes sir. Iraq was Jordan's main trading
partner before the gulf war and from 1980 to 1990, 19 percent
of Jordan's exports were shipped to Iraq while 12 percent of
Jordan's imports came from Iraq. And in recognition, this was a
bit of a special arrangement here, of this unique relationship
and wishing not to unnecessarily and unfairly penalize the
people of Jordan from the negative economic consequences of
sanctions on Iraq, the Security Council permitted Jordan to
import oil from Iraq as compensation for the burden it was
experiencing as a result of the United Nations sanctions on
Iraq.
Senator Dodd. Do we know what happened to the revenues that
went for that? When they came in--the revenues that came back
into Iraq?
Mr. Negroponte. I don't know the answer to that question.
Senator Dodd. Wouldn't it be a pretty good guess they
probably ended up in the pockets of Saddam Hussein and his
cronies?
Mr. Negroponte. I just don't know, sir.
Senator Dodd. Yes. Well would you generally agree that
overall, despite the obvious, the clear evidence of corruption
that the bulk of the resource that came into the program did
serve and--we were told at the time that whatever other
complaints, legitimate complaints about a terrorist regime, or
certainly a brutal regime, that the bureaucracy of Iraq was
such that in many cases they actually could serve people by
getting resources to people who needed them. Is that a fair
characterization?
Mr. Negroponte. Yes sir. And, as I said in my prepared
statement, I think the program by and large----
Senator Dodd. Worked.
Mr. Negroponte. Achieved its purposes. I think what we're
talking about is the elements of corruption that were involved
here. And I might just add that, you know, any sanctioned
regime, inherently and particularly if it's been going on for a
period of 12 years starts to get pretty seriously frayed at the
edges. Because anybody who's under sanctions is going to try to
find ways to get around it. But that notwithstanding, we
managed to capture, in that Oil-for-Food escrow account, some
$64 billion, as you mentioned, during the life of the program.
And I think that's important.
Senator Dodd. Well, I presume, based on the comments made
by Mr. Kennedy, that the United States strongly supports this
investigation that's ongoing. Will we require U.S. companies,
oil companies, that participated in the Oil-for-Food Program to
participate, to testify? What is the administration saying
about those companies that were directly involved in the
program and their willingness or unwillingness to participate
in the investigation?
Mr. Negroponte. Well, we've pledged, as a general,
political matter, our full cooperation with the investigation.
I think we'll have to see where that leads and we would have to
deal with that particular bridge when we have to cross it.
Senator Dodd. Let me ask, if I may, about this newly
established fund for Iraq, as it's called, the DFI, which was
established pursuant to Security Council Resolution 1483. As
part of that resolution, it was to establish and take the
responsibility for improving independent public audits of
expenditures from this development fund.
First, has the International Advisory and Monitoring Board
called for in the resolution ever been established?
Mr. Negroponte. It's been established. It's functioning and
it's had a couple of meetings.
Senator Dodd. And have moneys been spent from the DFI?
Mr. Negroponte. Absolutely. And I might add----
Senator Dodd. I'd like to know how much and on what, if you
could speak to that.
Mr. Negroponte. First point I would make, Senator, is that
of the unobligated moneys from the Oil-for-Food Program that
were in the escrow account, $7.6 billion have been transferred
from the Oil-for-Food escrow account to the Development Fund
for Iraq. So that money has been indispensable in terms of
helping pay Iraqi civil service salaries and helping the Iraq
Government continue to function.
If I could invite Ambassador Kennedy to address the other
part of your question in a bit more detail, if that's all
right.
Senator Dodd. Let me spell out, just so people know what
I'm talking about here, and they have referenced it already,
Mr. Ambassador, and that is that you're talking about we
transferred $1.7 billion of Iraq frozen assets to help pay for
salaries of Iraqi civil servants, ministry operations, and
expenses within Iraq; U.S. military and coalition forces seized
another $926 million, as I understand it, of the regime assets.
Other countries have transferred $751 million of assets they've
identified as belonging to the regime of Saddam Hussein. And my
question is, has the advisory body identified an independent
auditor for these funds?
Mr. Kennedy. Yes, Senator. The International Monitoring
Board has been set up; it has already had two meetings; there
is one U.S. representative, a Department of Defense official
who is a member of that board. The board has named an external
auditor; that selection has been made. There is also an
internal auditor, an American company that is employed by the
CPA to monitor that. The balance sheet of the Development Fund
for Iraq is posted daily on the CPA Web site that shows the
income, which consists of transfers of frozen assets from both
the United States and other countries plus transfers, as
Ambassador Negroponte said, from the residual balances in the
Oil-for-Food, plus all the receipts of Iraqi oil sales in
recent times. So all those sales are posted and then the
categories of disbursement from the Development Fund for Iraq
are posted there as well.
Senator Dodd. OK, very good. I may have some followup
questions for you but that's a thorough answer and I appreciate
it.
We had a very good hearing under the leadership of Senator
Allen a week or so ago focusing on the terrorist attacks in
Madrid. But obviously the questions went beyond Madrid and we
were looking ahead as to how things may work after June 30. And
one of the issues, obviously, that's been raised, is to what
extent the European countries are still going to be willing to
participate, obviously given the statements of the Prime
Minister-elect in Spain about their willingness to continue
participation in the Iraqi theatre, and to what extent we're
willing to pursue a new U.N. resolution giving the U.N. a clear
mandate to manage the administrative activities in Iraq in
cooperation with the interim Iraqi regime until elections are
held. And I wonder, Mr. Ambassador, if you might, we've crafted
a resolution, I'd say, Mr. Chairman, sort of calling on that,
and there were some suggestions, Senator Biden made some strong
suggestions there about the role of NATO, I raised the issue of
whether or not we might overtly ask the Spanish and the French
and others to help craft a resolution here, if that's what they
felt necessary. Can you share with us what steps you've taken,
what conversations you've had that you can talk about publicly
that would pursue a new U.N. resolution. We're getting very
late here, the June 30 date is closing in on us, and it seems
to many of us here that in the absence of a new U.N. resolution
that our European partners can support that we're going to find
a fractured relationship after the new interim government is
established.
Mr. Negroponte. Yes sir. Thank you for your question. First
of all, I'd like to make a point that under existing
resolutions, 1483 and 1511, the United Nations has a lot of
authorities. If one takes a close look at those resolutions a
number of different authorities are enumerated that enable them
to act in Iraq and give them a lot of scope. I think what has
been limiting the United Nations' ability to operate in Iraq up
until now has really been the security situation in the wake of
the August 19 bombing last year. And we are taking measures and
working with the U.N. to try to give them a comfort level and
assurances that if and when they go back into Iraq in any
significant way that they will have the requisite security?
Second, and this goes a bit to a question that Senator
Biden asked earlier, what's going to happen on the 1st of July
and what is being done about that now? Well, as we speak the
Secretary General's Special Envoy, Ambassador Lakhdar Brahimi,
is in Iraq talking to various political players there in an
effort to work with the Iraqis and with the Coalition
Provisional Authority and also with Ambassador Robert
Blackwell, who is the Deputy National Security Advisor and
Special Envoy for Iraq, to talk about what the shape of this
new transitional entity might be on the 1st of July. It's not
that we're not working on that issue; that issue is being
worked at the moment. I don't think we have the kind of detail
that Senator Biden asked for.
As far as a future resolution, a Security Council
resolution----
Senator Dodd. Yes, where are we on that? Are we going to
get one?
Mr. Negroponte. We don't have anything specific in mind at
the moment because I think we've been really waiting more for
the outcome of these discussions on the transitional
governmental arrangements on the 1st of July. We'd like to see
that process develop a bit further. But I have no doubt in my
mind----
Senator Dodd. A dual track that, can't you just----
Mr. Negroponte. We're already thinking about it, Senator.
We just haven't yet fashioned a resolution. I'm sure that
there's going to have to be some kind of resolution before the
transition actually takes place that deals with the kinds of
issues that you've raised.
Senator Dodd. Well, does the administration accept the
notion that we ought to have a, given the statements and
positions taken by our European allies who are so critical in
all this, that giving the U.N. a significant management role,
working with the interim government until elections are held?
Mr. Negroponte. I don't think we have any reservation
whatsoever about giving the United Nations the primary role
when it comes to facilitating the political transition and
helping the Iraqis organize their elections if that's what the
Iraqi Government and people would like. I don't think we have
any difficulty at all giving them the central role in that
process.
Senator Dodd. Thank you, Mr. Chairman.
[The prepared statement of Senator Dodd follows:]
Prepared Statement of Senator Christopher J. Dodd
The Foreign Relations Committee has convened this morning to take a
closer look at the United Nations' Oil-for-Food Program, which helped
provide vital humanitarian aid for the Iraqi people during almost a
decade under Saddam Hussein's regime. I know we all agree that recent
allegations of improprieties by U.N. staff with respect to this program
are very troubling. And the problems of the Oil-for-Food Program did
not begin or end with these allegations. This hearing is an opportunity
to examine both the strengths and weaknesses of this program, and I
commend the chairman for holding it today.
In 1990, only one week after Saddam Hussein ordered the Iraqi army
to invade Kuwait, the U.N. Security Council passed Resolution 661,
imposing an international trade embargo on Iraq. Those sanctions
extended to Iraq's oil exports--its most profitable industry.
Nonetheless, they were an important, necessary, and internationally
accepted tool used to cripple the tyrannical regime led by Saddam
Hussein.
However, the lack of oil export revenues also crippled that
regime's ability to purchase food and medical supplies for its people.
And out of a shared desire among the members of the international
community for the welfare of the Iraqi people, in 1995, the U.N.
Security Council passed Resolution 986, which established the Oil-for-
Food Program.
The Oil-for-Food Program certainly deserves its share of criticism.
And I will get to that. But before I do, I believe that it is important
for us to keep in mind that with all its faults--and despite the
corruption of the Hussein regime--this program helped millions of
innocent Iraqis survive the violent rule of a merciless dictator.
Indeed, from December 1996 through March 2003, it generated
approximately $63 billion dollars--72 percent of which was devoted to
humanitarian efforts. Certainly this money was not a cure-all for the
ills of Iraq or its citizens. But I shudder to think of the
humanitarian catastrophe that would have occurred had the Oil-for-Food
Program not existed.
Having said that, there were obvious problems with the Oil-for-Food
Program. One was based on concerns that Saddam Hussein had found ways
to bypass the international sanctions imposed on Iraq. To that end, a
March 2004 report by the General Accounting Office (GAO) suggests that
from 1997-2002, Iraq earned $10.1 billion through oil smuggling,
surcharges against oil sales, and illicit commissions from commodity
suppliers. And it doesn't take an in-depth study to come to the
conclusion that a great deal of this money was likely used for the
personal enrichment of Saddam Hussein and his murderous cronies.
In January 2004, allegations surfaced that an array of foreign
government officials, businessmen, journalists, and even the chief U.N.
administrator of the Oil-for-Food Program, Benon Sevan, might have
received oil ``kickbacks.''
I know that we all take these charges very seriously, and I am
pleased that on March 26, U.N. Secretary General Kofi Annan called for
an independent, high-level investigation into these allegations. I am
hopeful that this investigation will soon proceed.
I also commend the Secretary General for having back in February
directed the U.N. Office of Internal Oversight Services (OIOS) to
investigate this matter, as well as for making all relevant
transactions and documents in the U.N.'s possession available to
members of the Security Council.
And while we wait for the conclusions of the independent
investigation, we must not sit idly by. It is now our responsibility to
look to the future so that we can prevent a situation like this from
recurring. However, in order to do this, I believe we must first
understand the nature of what it is we are dealing with. We must
understand that international sanctions will never be airtight.
Even in the best of times, this is a certainty. And especially when
we are presented with a situation such as this--the coupling of a
corrupt dictatorship and billions of dollars in potential oil profits--
it is inevitable that attempts will be made to circumvent sanctions.
In addition, we must become more adept at identifying potential
problems and preventing them from coming to pass, particularly in light
of the fact that the United States has been the steward of Iraq's
wealth and resources for the last twelve months. We need to account for
how all Iraqi frozen and seized assets have been spent by the Coalition
Provisional Authority. We need to insure that there is accountability
with respect to the Development Fund for Iraq, which was established
pursuant to U.N. Resolution 1483. We need to understand why it does not
appear that Iraqi oil production is currently being metered--a common
practice in the oil business to keep track of production rates.
I am frankly more concerned about preventing problems associated
with the reconstruction of Iraq, than I am about problems associated
with a program that is no longer operational, although I agree that
there are important lessons we can learn by understanding any
irregularities that occurred with the Oil-for-Food Program.
Again, I thank the chairman for holding this hearing today and I
look forward to asking some questions of our expert witnesses.
The Chairman. Thank you very much, Senator Dodd.
Senator Chafee.
Senator Chafee. Thank you, Mr. Chairman. As we look back at
the overall economic sanctions program, it seems from the
outside that the palaces continue to be built but the people
suffer. And you wonder if their counterproductive behavior does
really change. And Ambassador, you said that, going back, in
answer to Chairman Lugar's question, China, France and Russia
were opposing some of these sanctions; I think you mentioned
Resolution 1284, if I have it right. Is there a better way?
What were these countries proposing in lieu of not supporting
economic sanctions?
Mr. Negroponte. Well, I think in many instances they were
proposing that there not be sanctions at all and that the
regime be free to export and import entirely freely without any
kind of restrictions whatsoever. We did not agree with that
because we did not believe that Iraq had come into compliance
with the various U.N. Security Council resolutions that had
been passed since 1990. So we had a different point of view.
But we were ultimately able to come to this accommodation in
Resolution 1284, where they acquiesced but with abstentions
rather than voting affirmatively in favor of those resolutions.
Senator Chafee. And as you look back, it's easy to look
back, 20/20 hindsight, but is economic sanctions a good policy
or are they counterproductive?
Mr. Negroponte. I would hate to make a general statement
with regard to economic sanctions based on the particular
instance of Iraq. Let's not forget that this all comes in the
wake of Iraq having invaded and occupied Kuwait and this is all
entirely a consequence of the first gulf war. So it's a very
particular situation so I'd be reluctant to generalize about
sanctions.
Senator Chafee. Great. And I'd like to just change the
subject a little bit. You're our Ambassador to the United
Nations and I'm just curious what the mood is, particularly on
the Security Council now as we face enormous challenges in
trying to bring the international community together on these
challenges. What's the mood of, particularly on the Security
Council, is there a sense of, hey, you guys went it alone,
you're on your own? Or is there a coming together with your
colleagues and saying we want to do our best to help?
Mr. Negroponte. Well, I've been impressed by the fact that
we've been able to pass resolutions since May of last year--
Resolution 1483 was mentioned--by consensus in the Security
Council. I think that a number of these countries, the ones
that have been mentioned plus Germany certainly didn't favor
our military action but they say all right, that's in the past.
And I think they all recognize that they have an important
stake in Iraq being a success, and I don't think they want our
policies to fail. So I think they want to find ways to work
with us to make things move in a constructive and positive
direction going forward.
Senator Chafee. Well, you have a difficult job and I
support what you're doing.
Mr. Negroponte. Thank you.
Senator Chafee. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Chafee.
Senator Allen.
Senator Allen. Thank you, Mr. Chairman. I want to thank you
for holding this hearing on this important issue, as well as
for your opening statement and probative questions. This
conspiracy to skim billions of dollars from the Iraqi Oil-for-
Food Program is of great importance, and this committee
determine what the truth is in all of it. Although listening to
all of this, I don't think it should be any surprise that
Saddam Hussein would seek to take advantage of a humanitarian
program that the world community offered to the people of Iraq.
His people were not only suffering from his dictatorial
policies and his state police, that used rape and murder and
torture to govern, they also, in effect, denied food and
medicine and health facilities to the people of Iraq while he
and his thugs lined their pockets with these illegal surcharges
and kickbacks in the Oil-for-Food Program. It's been called
actually a conversion to an oil-for-palaces program. And to the
extent those billions of dollars were going for palaces it
meant it was not going for hospitals or schools or medicine or
food. There's also, from reports, that some of the food and the
medicines were outdated anyway. So this whole scheme is one
that is very troublesome. Now, the evidence is at least $10
billion was siphoned off in a 5-year period from revenues
generated from this Oil-for-Food Program. We have to look at
this complete ineptitude involved here with a lack of
transparency, any sort of scrutiny, not just for the past but
also for the future. But also recognize how this helped prop up
this regime, this was the way for Saddam Hussein and those in
power in Iraq to stay in power. Who knows what they did with
all the money. There's estimates of $2 billion that was used
for palaces. Who knows what they were buying from other
countries. Three-quarters of this revenue and the purchases
were from those three countries who were opposed to sanctions,
China, Russia and France. You look at some of the figures that
I've seen, Russia by far received the most in oil, 2\1/2\
billion barrels of oil. The French were the second largest
beneficiary at 165 million barrels.
Regardless, we have Senators here and others around the
world saying we need to get the United Nations involved in
this, that they were important in the Oil-for-Food Program, but
this is certainly a sad and very scandalous implementation of
this program. I think that we need to go forward with this very
cautiously but also we must do so fully. As a member of the
United Nations the United States has an interest in making sure
that what the United Nations does is ethical, proper and does
nothing to further dictators and despots to stay in power. The
United States taxpayers fund approximately one-fifth, maybe a
little more than one-fifth, of the budget of the United
Nations.
Let me ask some questions now on behalf of the taxpayers of
the United States. The evidence I've seen is this would not
directly affect the taxpayers of the United States. Ambassador
Negroponte would you want to respond if U.S. taxpayers' money
was at all wasted in this scandalous oil-for-palaces scheme?
Mr. Negroponte. As I said in my statement, Senator Allen,
no appropriated funds were involved in the administration of
the----
Senator Allen. All right. Let me ask you this as a
followup. Would we have to be spending as much in Iraq today if
this money had been properly handled? Are we building schools?
Are building hospitals in Iraq? And if that money had been
properly utilized for hospitals would that have saved U.S.
taxpayers money presently?
Mr. Negroponte. I think certainly that sounds like a
logical proposition. I wouldn't want to put a number on it and
as I mentioned earlier we did and we were gratified that $7.6
billion of unspent Oil-for-Food moneys was made available for
use in the Development Fund for Iraq. So we're pleased to have
those funds.
Senator Allen. Well that's nice, however we also did have
an appropriation of $20 billion, some of which was for water,
for sewer, for electricity; some for hospitals and police
stations and other security-type matters that, particularly in
the hospital and the health care areas this money could have
gone toward that rather than the United States taxpayers
providing those gratis.
Now, the United Nations is being invited to get involved in
Iraq presently and in the future maybe as, again, the interim
Iraqi governance group will make that determination. But to the
extent that you hear assignations that we ought to get the
United Nations involved, primarily as far as the security
aspects, I think to get NATO forces who actually can have a
positive impact as far as security, as you go forward in this
investigation as to the truth of this Oil-for-Food scandal, if
you can say, are the French and the Germans, not the Germans so
much, the French and the Russians and the Chinese holding back
on certain participation or any resolutions that might be
coming forth because of a concern of our investigation or
concern about this siphoning off, these kickbacks and scandal
involving Oil-for-Food Program, which implicates their
countries or companies in their countries? In fact, the
Communist Party in Russia alone got 137 million barrels
according to a report I've received.
Mr. Negroponte. It's not my impression that they're holding
back. Also, as I said earlier, as compared to last year I think
the atmosphere in the Council has improved and I think
countries, including the countries you mention, want to work
with us to make things a success. And they also, my last point
would be, they have pledged their cooperation with the
Secretary General's investigation. I think now we want to be
sure to hold them to that if we think that in some way or
another they're not living up to that pledge.
Senator Allen. Well, I understand because of your role you
have to be a diplomat as well. Do you have a great deal of
confidence that this investigation will get to the truth?
Mr. Negroponte. Well, I certainly hope so. The Secretary
General has said it's his intention. I think the first
indication is going to be to see, and I think it's important,
that he choose very high caliber people of outstanding
reputation to lead this panel, and I understand he intends to
name the panel members in the near future.
Senator Allen. I think the key will to be to see how
independent those panel members are.
A lot of these concerns--were concerns early on. These were
concerns in the mid- to late-1990s insofar as questions about
kickbacks and padded contracts and so forth. There were
objections from the Russians, the Chinese and the French
involved in this, and again, as I said earlier, three-quarters
of these contracts were deals or products, products from these
countries. Do you know, and I know you were not of that
administration, but do you know why the Clinton administration
did not push harder, rather than giving in to the Chinese and
the Russians and the French?
Mr. Negroponte. Well, I think we had different degrees of
knowledge about different categories of malfeasance. Again, in
the area of oil smuggling or of oil pricing I think we were
aware of those problems earlier than we were with respect to
some of these other issues. And again I think it's important to
stress, Senator, that these contracts were signed directly
between the Saddam regime and the suppliers so that that
information and what may have been hidden in those contracts
was not necessarily that easy to find out. And it's only in the
wake of our military action that some of this evidence is
starting to come more to light.
Senator Allen. Well, isn't it true that the British and the
United States were objecting to some of these and then they'd
be criticized for not caring about the feeding and the health
of the Iraqi people whenever they'd try to get some
transparency and honesty in this Oil-for-Food Program?
Mr. Negroponte. Yes, and particularly with respect to oil
pricing and with respect to smuggling. And it is also true that
we very often put contracts on hold at different times in the
carrying out of this program because of various objections. But
in terms of good evidence of kickbacks or of any possible
corruption by U.N. officials, I don't think there was that much
information to go on in the time period you're talking about.
Senator Allen. Well, regardless of the corruption of U.N.
officials I think there was sufficient evidence, at least in
the late 1990s, of corruption by some of these companies that
are from those particular countries.
All right, my time has expired.
Mr. Negroponte. Can I ask Ambassador Kennedy if he wants
to?
Mr. Kennedy. Senator, I think the problem we face here is
that once the allegations have come out, it appears clear. But
as the contracts were negotiated between the Saddam regime
directly with suppliers, the Saddam regime was essentially very
clever. They buried things in the contract. If you're buying
enough food to feed a nation of 24 million people, all you have
to do is add a very, very small amount to every bushel of wheat
you buy or every kilogram of baby milk. And if the contract
itself on the face of it does not seem excessive, when we did
see excessive contracts, you know, that the price of wheat was
wildly out of the scope of the market, we held on those
contracts. And the United States and the United Kingdom, as you
rightly pointed out put holds on over 2,100 contracts valued at
about $5.1 billion during the course of the effort. But what
Saddam Hussein did was clever, it was to add a little bit on a
lot and make it up in volume. And so he worked the system so
there was not evidence. It wasn't until the CPA and as
Ambassador Raphel and I were both in Iraq at that point and saw
the evidence coming forward from the Iraqis that we saw the
magnitude of it. But he was very clever and, like I said, got a
little bit on each contract, not enough to ring any alarm bell
when you read the contract.
Senator Allen. Thank you all. Thanks for your testimony.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Allen.
Senator Sununu.
Senator Sununu. Thank you Mr. Chairman. Let me ask about
the specifics of the language that might have alerted you in
these supplier contracts. Ambassador Negroponte, in your
testimony you note that there were a couple of instances where
suppliers had accidentally left surcharge language in the
contract and those were blocked. Could you describe a little
bit more specifically what kind of language you're talking
about? I think that's your testimony; is that Ambassador
Kennedy's testimony? Did I misread the package? No, I think
that's your written testimony.
Mr. Kennedy. It is. You're correct, Senator, it is
Ambassador Negroponte's testimony.
Senator Sununu. I apologize for having read it. But if
either of you could address, just describe in a little bit of
detail, what kind of language would that be? How specific was
the reference to a surcharge or what that surcharge should have
been used for?
Mr. Kennedy. Basically, the earlier holes were almost
exclusively based on the market pricing being wildly divergent
from what the contract said in itself. Every once in a while,
but more particularly when Ambassador Raphel did her work in
Baghdad, we saw what was called ``after sale service.'' You
bought something and the contract provided that they would come
and fix your refrigerator at your house afterwards. The Iraqi
employees pointed out that there was no after sale service. But
on the face of it in the contract, it would seem perfectly
reasonable when you bought a large piece of equipment. We also
did see, from time to time, clauses that contained indication
that spare parts were included and it was evident that there
weren't really that amount of spare parts and even no spare
parts required in one contract. And in another one, again, 10
percent of the value of the contract for after sales service,
again not things that would be normally for that kind of
material in that kind of contract. Those just sort of leapt out
at you.
Senator Sununu. And these are problems that were noticed
before the contracts were let.
Mr. Kennedy. Yes, sir. All the contracts required the
approval of the 661 Committee before they could be executed
because the U.N. had control of the bank account and the
supplier would not get his, her, or its money without that U.N.
sign-off and the U.N. sign-off was derivative of the 661
Committee's approval.
Senator Sununu. Ambassador, did you want to add anything to
that? The GAO evaluation of the program, Ambassador, do you
agree with the general findings of the GAO evaluation?
Mr. Negroponte. We thought it was a reasonable report
although we're not sure of those figures, the estimates that
they have made. They seem to be in the ballpark and it's the
same figures I believe that appeared in that Wall Street
Journal article.
Senator Sununu. But was there any information in the GAO
study that you found to be surprising or new?
Mr. Negroponte. I'm not aware of any, Senator.
Senator Sununu. Mr. Kennedy, could you describe the
activities, again in a little bit more detail, the activities
of the Board of Auditors?
Mr. Kennedy. Yes sir.
Senator Sununu. In other words, let me lead you a little
bit. Were they constantly performing audits? Were there simply
periodic audits? And how comprehensive were they?
Mr. Kennedy. There, if I might--there is under the Charter
of the United Nations a United Nations Board of Auditors
established. It is a rotating board comprised essentially of
the equivalent of the General Accounting Offices of three
member states. It is currently France, the Philippines, and
South Africa. Over the course of this it included at times the
United Kingdom, Ghana, and others. Under the Oil-for-Food
Program, they audited the program every 6 months.
Senator Sununu. They were not set up specifically to audit
the Oil-for-Food Program. Isn't that correct? This is a normal
auditing board that has existed for some years at the United
Nations, as part of the charter.
Mr. Kennedy. It has existed since the beginning of the
Charter. And they were engaged, so to speak, to audit the Oil-
for-Food Program every 6 months. They did that and rendered
reports on that, on their findings.
Senator Sununu. OK, it still isn't quite clear to me,
Ambassador Negroponte, whether or not their audits were made
fully available to the 661 Committee.
Mr. Negroponte. Yes they were, sir.
Senator Sununu. They were, all of them were. Were they
found to be lacking or were any concerns about their quality
raised contemporaneously?
Mr. Negroponte. I'm not aware, Senator, of the answer to
that question. I really am not aware that we've ever made a
judgment about the adequacy of those audits.
Senator Sununu. Mr. Kennedy, what in your estimation is the
track record of previous U.N. investigations of the type that
we're now seeing on the Oil-for-Food Program? Ambassador,
please.
Mr. Negroponte. I think what I would respond to that is
that we have a recent example with respect to Iraq, Senator
Sununu, which is when the Secretary General named a panel to
investigate the bombing and the security precautions that were
being taken by the United Nations in the wake of the August 19
bombing; he named the former President of Finland, Mr. Martti
Ahtisaari, to conduct an inquiry. And they came out with a
scathing report. So I'd say that there are examples and that
would be the most recent one of the Secretary General of the
United Nations being willing to have a hard look taken at the
operations of his own organization.
Senator Sununu. With regard to corruption, bribery or other
crimes that might have been unearthed by past U.N.
investigative bodies, have there ever been U.N. officials
prosecuted or convicted as a result of the U.N. investigations?
Mr. Negroponte. I would have to submit a response to that
for the record.
Senator Sununu. If you could I would appreciate it very
much.
[The following response was subsequently received.]
The following excerpts from OIOS annual reports provide instances
in which findings from OIOS investigations were referred to national
law enforcement authorities for further investigation and possible
prosecutions.
From OIOS 1998 Annual Report (A/53/428)
General Developments: These decisions by programme managers to seek
criminal prosecutions, in order to send a message that criminal conduct
can result in criminal prosecution, were supported by both human and
financial resources, and they represent hard evidence of the
realization of the Secretary-General's determination to increase
accountability as part of his reform programme.
Theft of United Nations-owned equipment: As a result of an
inquiry conducted from 1996 to 1997 by the Investigations
Section with the support of DPKO, evidence of theft of United
Nations-owned equipment by a United Nations contractor was
obtained. This contractor had supplied catering services to two
peacekeeping missions, the UN Transitional Authority in
Cambodia and the UN Operation in Somalia. The United Nations
filed a formal complaint in 1996 with the Government of Kenya
because the UN equipment was ultimately located in Mombasa. The
items that have been recovered were found in early 1997 in a
search by the Kenyan Police, with the assistance of staff from
OIOS and DPKO, of several vessels which were owned or operated
by the caterer in Mombasa harbour. The investigation yielded
evidence that the firm's owners and officials had stolen a
total of approximately $400,000 in United Nations equipment
from both missions. Although there is evidence that
substantially more UN equipment had been stolen, that equipment
has apparently been retained by the company's interests in
Somalia and is not retrievable at this time. For the first
time, the United Nations has sought criminal penalties against
owners and officials of a contractor accused of theft and
possession of United Nations-owned equipment. The trial in
Kenya has been suspended because one of the accused had become
a fugitive.
UN Conference on Trade and Development--theft of $600,000 by
manager: Evidence adduced by the investigation proved that,
over a period of more than 10 years, a manager in UNCTAD stole
nearly $600,000 from the UN by submitting false documents for
daily subsistence allowance payments to fictitious ``experts''
attending non-existent UN conferences. When confronted with the
evidence of his scheme, the staff member acknowledged his
misconduct. The findings were provided to a Swiss court, which
convicted the staff member of the crimes charged and directed
that, in addition to the $350,000 repaid, the now former staff
member was obliged to repay the balance.
From OIOS 1999 Annual Report (A/54/393)
Investigation of UNDP's Reserve for Field Accommodation: The
Investigations Section was requested by UNDP to undertake an
investigation into procurement irregularities identified by the
UNDP in the reserve for field accommodation expenditures made
for a $50 million building programme. . . . The value of the
loss to the Organization by the fraud is conservatively
estimated at approximately two million dollars. As a result of
this investigation, the Administrator fully supported the
recommendation that the case be referred to the relevant United
States authorities. In addition, he dismissed the UNDP official
involved. An indictment was issued by the U.S. authorities, and
the former staff member was arrested. Efforts to extradite the
consultant have been unsuccessful. In cooperation with UNDP and
the Office of Legal Affairs, the Section has been assisting the
United States authorities and pursuing options to recover the
lost funds. The case is pending.
From OIOS 2000 Annual Report (A/55/436)
Cases presented to national law enforcement authorities: The
Investigations Section investigated 38 cases which were
presented for administrative or disciplinary action; 22 of
those cases were recommended for criminal prosecution by
national law enforcement authorities. It can take years for
these cases to be finalized, since such proceedings are time-
consuming and they require the Office to allocate significant
resources to assist in their resolution.
From OIOS 2001 Annual Report (A/56/381)
At the conclusion of an investigation, the Section evaluates
the evidence and provides a report to the concerned programme
manager. The Investigations Section is a recommendatory body
and cannot prosecute a case before national law-enforcement
authorities, institute disciplinary proceedings or take
administrative measures. Then the Organization refers a case to
national law-enforcement authorities for criminal investigation
and possible prosecution; based on the Section's
recommendations, the Section, in consultation with the Office
of Legal Affairs and the programme manager concerned, assumes
its designated role of liaison between the United Nations and
the national authorities.
Misdirection of funds at the United Nations Environment
Programme: OIOS investigators assisted United States law
enforcement authorities in the preparation of the criminal
proceedings against a Chase Manhattan Bank customer who had
been the erroneous recipient of over $700,000 in contributions
made by several Member States for deposit in the UNEP Trust
Fund account at the bank. The customer had refused to comply
with the bank's request to have the money placed in the correct
account, claiming that the money belonged to her. She was
arrested in March 2000 and found guilty by a United States jury
in October 2000 on charges of bank fraud and bank larceny. She
was sentenced in April 2001 to 24 months in prison and was
required to make restitution of the misdirected funds to the
bank. The bank had previously credited the UNEP account with
the entire amount.
Investigation at the United Nations Mission in Bosnia and
Herzegovina (UNMIBH): Following an OIOS investigation and a
trial in a United States District Court, in April 2001, the
United States Court of Appeals upheld the conviction of a
former UNMIBH staff member who had been convicted of wire fraud
and conspiring with a local travel agent and an airline
employee to submit fraudulent invoices for excess baggage,
resulting in a loss of $800,000 to the Organization. The
individual is currently serving a 41-month prison sentence.
From OIOS 2003 Annual Report (A/58/364)
Refugee smuggling in East Africa: OIOS continued to provide
assistance to the Kenyan authorities during the ongoing
criminal trials of the four UNHCR staff members, two members of
an affiliated non-governmental organization and four others who
operated the criminal enterprise of refugee smuggling at the
Nairobi branch. To date, one of these offenders has been
convicted and has begun serving his two-year prison sentence.
United Nations Interim Administration in Kosovo: OIOS
investigated, in cooperation with the EU Anti-Fraud Office,
significant acts of fraud alleged to have been committed by an
UNMIK senior staff member, who was assigned to the UNMIK
reconstruction pillar, managed by the EU. The investigation
revealed that the staff member had caused a public electricity
provider in a neighbouring Member State to transfer more than
$4 million, derived from UNMIK funds for the purchase and sale
of electricity on the power grid of the former Yugoslavia, to
his private Gibraltar bank account and later to another account
in Belize. The transfer was stopped and the funds were
returned. The investigation also confirmed that the staff
member had engaged in other fraudulent acts of lesser
significance. The former staff member was convicted in his home
country on three charges and sentenced to a prison term of
three years and six months.
Investigation at the UN Conference on Trade and Development:
In the context of a previous investigation by OIOS at the UN
Conference on Trade and Development concerning attempted fraud
involving an advance fee of $4.7 million as a payment towards a
fake air transport contract for the delivery of humanitarian
goods, OIOS provided investigative services and testimony to
national law enforcement authorities. The perpetrator, now a
fugitive, is being sought by the Member State concerned.
Senator Sununu. And finally, with regard to the oil sales
themselves, do you believe it would have helped limit
corruption if sales had not been limited for larger U.S. firms
or larger U.S. firms had not been restricted in their
participation? There's some discussion about the degree to
which corruption may have been exacerbated by the very large
number of small firms, not just in the United States but around
the world, and a certain limitation placed on larger firms.
Mr. Negroponte. Of course, first of all, I'd like to say
that the overall share of purchases from the United States, or
by the U.S. firms or entry in the contracts----
Senator Sununu. About one-third.
Mr. Negroponte [continuing]. Was quite--well, that's the
overall quantity of oil but I think bought in the secondary
market, if you will, they were not direct contractors. I think
in the overall program, I see here, we were the eleventh
largest purchaser of oil from Iraq. The question of whether it
might have been helpful to have larger firms I think is a good
one. I think what happened with the forward pricing scheme was
that it caused a proliferation of a number of smaller companies
to want to get into this business. It might have been a factor,
I'm not sure.
[The following response was subsequently received.]
A fundamental principle underlying UN Security Council Resolution
986 (1995), which established the UN Oil-for-Food Program, was the
preservation of the former Government of Iraq's sovereignty and
territorial integrity. Consequently, the former Iraqi regime was
permitted to sell its petroleum and petroleum products to purchasers of
its choosing, as long as the oil price sought reflected ``fair market
value'' and that price was approved by the Iraq Sanctions 661
Committee.
Under the Committee's Procedures, approved August 8, 1996, UN
member states were instructed to submit a list of ``national oil
purchasers (private companies, State-owned companies, State agencies,
ministries, etc.),'' who would be authorized to communicate with the UN
oil overseers and to conclude oil purchase agreements with the Iraqis.
There were no stipulations either in the resolution or the Committee
procedures governing the size and nature of those entities authorized
to purchase Iraqi oil. We have provided under separate cover to the
Senate Foreign Relations Committee a copy of the UN List, as of March
11, 2003, of Authorized Oil Purchasers. A total of 86 countries and
1,129 companies, of varying size, are listed.
You pose the hypothetical question of whether the alleged
corruption involving Iraqi oil sales might have been reduced if there
had been rules mandating that the former Iraqi regime could only sell
its oil to large firms. While the answer to that question is best left
to economists, I note that such a proposal likely would have elicited
extensive debate among, and possible opposition from, certain Security
Council members who sought to preserve the former Iraqi government's
sovereign right to choose with whom to transact oil sales. I also note
that it was the result of the former regime's concerted efforts to
exploit differences between the Official Selling Price (OSP) of Iraqi
crude oil, as approved by the 661 Committee, and constantly fluctuating
global prices for other comparable oils, that produced alleged oil
surcharges. Because the OSP remained fixed, typically for a 30-day
period, price differences with other comparable crude oils necessarily
emerged. Had purchasers of Iraqi crude oil been mandated to sign oil
contracts in advance, at the fixed OSP, obligating them to lift the oil
on a specific date, no matter what the price might have been for other
comparable crudes, the room to exploit price differentials likely would
have been significantly reduced.
Senator Sununu. Thank you very much. Thank you, Mr.
Chairman.
The Chairman. Thank you very much, Senator Sununu. Let me
ask more about the United States' participation. We were the
eleventh largest purchaser of Iraqi oil. As Senator Sununu has
mentioned, some have suggested about a third of the oil, maybe
through secondary sources, came to the United States. First of
all, I just wanted to check the accuracy of the volume. Beyond
that, did the U.S. companies that purchased oil purchase it
directly from Iraq or through broker middlemen? I ask this
because we've talked about Saddam and his role in fashioning
contracts. Were some of these contracts directly with American
oil firms? Were they observant of the items in these contracts
that we have been unearthing today?
Mr. Negroponte. Well, early in the program, Senator, we
were a major buyer. The program had twelve 6-month phases over
its life. And in the first two or three tranches, if you will,
we were important direct buyers. But after that our direct
purchases from Iraq fell off to the point that, in terms of
direct purchases, we represented only about 2 percent of the
market. So you're correct to say that we then bought in the
secondary market from whomever but it was not from the regime
itself.
The Chairman. What I'm driving at is that clearly we're
suggesting that the United States and Great Britain were
vigilant, and that the Security Council and other countries
were not. I just want to make certain, in terms of our own
United States participation, that everybody was above-board,
that is, the American firms. Were there direct contracts
between U.S. oil companies and Iraqi oil sellers? Were
cognizant of these pricing changes, the kickbacks, and the
developments that we've been describing today?
Mr. Negroponte. Well, I think we'll have to see if any of
that kind of information develops in the inquiry, Mr. Chairman.
The Chairman. Is the list of companies that sold goods to
Saddam Hussein under the Oil-for-Food Program a public document
at this point? Do we have documentation of all who were
involved?
Mr. Negroponte. I'm advised that we do not, Mr. Chairman,
have a public list available.
The Chairman. Does it exist? I mean, is it likely that it
will come to the fore in this investigation?
Mr. Negroponte. Well, I would have thought that it would
exist because the contracts had to be approved so any contract
that was approved under the Oil-for-Food Program would, of
course, list the companies. You wanted to say something,
Ambassador?
Ms. Raphel. Yes, just to confirm that, the lists do exist,
which include the name of the company, the country of origin,
the type of product, and so on. These were given to the CPA as
we worked on these contracts from the Office of Iraqi Programs.
But these lists at this point are not public lists. On the U.N.
Web site, when they notified suppliers on the prioritization of
their contracts it listed merely what we call the COM number,
the identification number, and the name of the mission in New
York which had been working the particular contract.
The Chairman. Is all of this coming to the fore? I
appreciate why things may not have been public, but are they
going to be? Will the rest of the world have an item-by-item
accounting of what occurred here?
Mr. Negroponte. We have been assured that the Secretary
General's report, both its summary and the body of its report,
will be made public. We have been told that there may be
instances where either for the protection of whistle blowers,
and we actually insisted on a whistle blower clause in the
terms of reference, and in the case of perhaps naming certain
entities for either reasons of proprietary information of some
other legal consideration, those names might be redacted. But I
believe that the fundamental motivation of the Secretary
General is to have maximum transparency.
The Chairman. Well, I hope so. Clearly, the credibility of
this entire thing is at stake. That includes who the Secretary
General is appointing, or who finally is appointed by the
Security Council, if that happens. The thoroughness of this
redacting of situations raises questions right off the bat. By
whom? Under whose authority? We're back once again to the
situation of countries that didn't really want to get into this
all that much to begin with suggesting bargaining over what is
to be found. I think you understand that. That's why I'm asking
the question. It's a critical question.
Let me ask, who conducted the audits of BNP, the bank
holding the U.N.'s Iraq oil escrow account? Do we know if BNP
was involved in passing illegal money to Saddam?
Mr. Kennedy. If I might take that question, Mr. Chairman.
The Board of Auditors, when it audited the Oil-for-Food Program
every 6 months validated that the amounts held for the Oil-for-
Food Program, which were held in two banks, principally, were
there. It would be entirely speculation on my part to say one
thing or another about the bank holdings other than the fact
that the United Nations, once the goods arrived in Iraq the
U.N. would be notified that the goods arrived under contract
number 1-2-3; that information would be passed to Washington
and all that would happen then would be that the bank holding
the funds were simply told to pay the amount of money that's
specifically allocated under the letter of credit for account
1-2-3. So the kickbacks came not from the banking institutions
but from the company that held the contract.
The Chairman. Well, let me just follow that. The BNP bank
I'm talking about is BNP Paribas. It's a French bank, and it
has accounts in New York City. The Wall Street Journal, for the
sake of argument this morning, says that another type of
investigation might occur. It might explore wrongdoing that
occurred in the state's banking department involving this bank.
The question is what if we're not able to find out either via
the U.N. investigation or through the fledgling attempts that
we're attempting in Congress? Why, Elliot Spitzer might take a
look at it, or perhaps Morgenthau, or somebody else. They might
get to the heart of it. This is why I'm wondering how rigorous
the banking audits of BNP were. Both BNP and the United Nations
are located in New York. It appears that there are ways of
finding out what happened, day by day, currency by currency. Do
you have any comment about that?
Mr. Kennedy. Mr. Chairman, we're in favor of complete
transparency. My understanding from talking to officials at the
United Nations is that the bank simply disbursed the funds as
they were instructed. They held the funds that the U.N. gave
them and then they disbursed the funds when the U.N. gave them
a piece of paper and said, ``pay this bill.'' But I believe
that this will be one of the subjects of the inquiry, to make
sure that all funds are totally, completely accounted for and
that should be done.
The Chairman. I think it's fair to say that Senator Biden
and I and clearly most of the members of this committee are
strongly in favor of a strong United Nations and strong United
States participation. I started my statement today by saying
that this is integral to our foreign policy. We've also
discussed today the importance of the U.N. in Iraq. Mention has
been made of the current U.N. emissary. As he goes back and
forth through various persons and Iraq. He may offer leadership
as he tries to find a new formula. We are praying for this
during the countdown toward June 30. The credibility of the
United Nations in attempting to referee, supervise or help to
transform Iraq in this situation is at stake. It's important to
the United States, given the sacrifices we have made, that the
institution be sound. This is why this emphasis on the oil-for-
food situation arises. The United Nations must vigorously show
its abilities to unearth the scandal and to clarify what the
situation is. After sovereignty is transferred, Iraqis will be
running their own affairs. We all pray for a democratic
government with human rights, a visible symbol to the world. In
the meanwhile, who will supervise the situation that had
previously led to the graft and corruption that we're
discussing? You can say, well, we're doing our best, and we're
sort of coaching people on why graft is not a good idea and why
corruption shouldn't happen in this world. But without going
into hyperbole about the situation, the fact is that we are
also dealing with the U.N. Security Council. I specifically
named names of countries that I believe obstructed justice.
Now, one can say, well, you must have been born in a different
era; after all, this is realpolitik, this is the way things
really work. Yet this is not only a fastidious American
government taking a look at this; there are other players. For
the U.N. to be successful, and for food to be properly
distributed to these people, even if only 72 percent got to
them and somewhere else, that's the way the world works. We're
saying, that isn't the way we want the world to work. To
compromise that with a U.N. administration that is just as
suspect after June 30 as it was before, with regards to Iraq,
would be a travesty. That is why we're having the hearing, and
that is why a number of people will have hearings. I think that
you understand the gravity, because your responsibilities as
public servants have been as advocates of the United Nations
and United States participation in it, as ours has.
I appreciate your participation today, and the answers that
you've given, and the work that you're doing. But I think it's
a responsibility all of us have. The administration, Congress,
those in the Foreign Service still have an opportunity to make
a difference. Having said this, I pass the baton on to my
distinguished colleague.
Senator Biden. Thank you, Mr. President--Mr. Chairman, and
I would like to just ask two questions. That was a Freudian
slip, Mr. President; I feel much better. By admiring him I
realize I hurt his reputation but----
Let me say two things, or ask two questions. One, so that
people listening to this hearing understand, there are two
pieces to this. One is the oil that Iraq sold, and the money
from these sales, where it went; to whom it went, what portions
were skimmed off, et cetera. And the second piece of this is
what the Iraqi Government did, i.e., Saddam Hussein, purchase,
what services were purchased with the money? And what I'm a
little confused about is why the list of those countries,
companies or individuals for whom Saddam purchased something
with this money, is not available. We have that; you don't need
the U.N. to figure that out, you can figure it out. I'd like a
copy of it or an explanation of why you can't give us a copy. I
don't quite get it. And so, I realize that might take time but
the way you answered, unless I misunderstood you, you guys
implied, well the investigation will uncover that and the
Security Council make a judgment as to whether or not they'll
release it. You have all that. The United States of America has
all that information. Release it or give us an explanation why
you shouldn't release it to this committee. Any problem with
that?
Mr. Negroponte. I think the point is it's not available
publicly. I think you're right, I think----
Senator Biden. Well publicly, what the heck does that mean?
Publicly? It just means no one's compiled it. No one's compiled
it. It's public, it has numbers attached to it, not names. You
know the names attached to the numbers on the Web site. Is
there a reason why that shouldn't be part of a report that we
file? These are all the companies in the United States, outside
the United States that benefited by acquiring a contract with
the Iraqi Government for the sale of something to Iraq from the
money that Iraq got for the sale of their oil. That's not hard,
is it?
Mr. Negroponte. It's certainly not hard to compile and we
will give you a forthright answer----
Senator Biden. OK, good.
Mr. Negroponte [continuing]. As to the basis on which it
can be provided to the committee.\1\
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\1\ See Appendix page 157.
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[The following response was subsequently received.]
On April 30, 2004, copies of the UN's List of Approved National Oil
Purchasers in Accordance with Security Council Resolution 986 (1995),
dated March 11, 2004, and a separate list of all UN Oil-for-Food (OFF)
contracts for humanitarian goods submitted to the UN 661 Committee
during the life of the program, were made available to Senate Foreign
Relations Committee staffers by State Department representatives in
response to your request.
Your request, made during my April 7, 2004, appearance before the
Senate Foreign Relations Committee, raises the more fundamental issue
of why the UN did not make public the specific information associated
with Iraqi oil and OFF humanitarian supply contracts.
The UN Office of the Iraq Program (OIP) was guided on this issue by
the views of the UN Office of Legal Affairs (OLA), who advised that in
the absence of any indication to the contrary either in the contract
itself or by the parties to the contract, that contracts and their
contents should be considered ``confidential'' to the parties and to
their advisers. However, OLA was of the view that the parties to the
contract necessarily gave their consent for the communication of that
contract to the exporting state and for circulation of that contract to
members of the 661 Committee so that Committee members could decide
whether to approve the intended export. Beyond these provisions, OLA
believed that parties to a contract could not be assumed to have given
their consent to a wider or more general circulation of the contract or
to the information contained in such contracts.
Senator Biden. Good. All right. Because I see no rationale
for it being classified. None. Zero. Nothing in the law,
nothing in terms of U.S. security. Nothing. And if there is any
I would love to hear the explanation.
Second point is to Ms. Raphel, just so she understands why
I ask for the report, the first question I asked her. In an
article published in the St. Petersburg Times, December 20 of
last year, there is the following paragraph, quote, ``But the
council''--referring to the governing council--``has been
dogged by allegations of nepotism, cronyism, self-dealing,
outright corruption. The Pentagon is investigating alleged
improprieties in the awarding of a coveted mobile phone license
to a consortium linked to Ahmed Chalabi, the council's best
known and most controversial member. Questions have been raised
about other contracts amid complaints that council members are
more interested in promoting their own agendas than working for
the good of the country.'' End of quote. That's the reason I
asked you to compile for me what I requested. Who is going to
be the one? Let's assume that we find out that there is, you
know, cronyism, nepotism, self-dealing-I don't mean Mr.
Chalabi, I have no idea whether that's true or not about Mr.
Chalabi--but among council members. Who do we rely on? Do we
rely on the council to say by the way, there's cronyism,
nepotism? Do we rely on the auditors we've trained for them?
That's the purpose of my question, so you understand. You're
welcome to comment if you'd like.
Ms. Raphel. Let me just say a couple of things. Thank you,
Senator. The specific answer to your question, in today's Iraq
in terms of who's responsible for investigating allegations
such as the ones that you read about and also the Oil-for-Food
Program and so on is the Iraqi Supreme Audit Board, which has
been reconstituted from scratch by the CPA and is working in
conjunction right now with CPA advisors.
Senator Biden. That's the point. The CPA oversees it. We
don't accept what they say. We don't accept what they say. We
take what they say, we hope they're actually auditing it, and
then we investigate them. We, the CPA, the Defense Department,
the State Department. We are spending American taxpayers'
dollars. We do not, and if we do we should not, trust an
auditing organization we set up under the control of an interim
government. We should not take it on faith that what they're
asserting to us is true. If we are we are incredibly naive and
possibly derelict. And I know we're not. We're not doing that.
So who will perform the same function that the CPA now
performs? This auditing outfit we set up for them? They come
back with a report. Somebody at the CPA sits down now and looks
at that report. If it appears not to be kosher then in fact
somebody at the CPA says hey, Ambassador Bremer, we think these
guys ain't on the square. Right? Isn't that how it works now?
I'm not using diplospeak here but that's how it works, right?
Ms. Raphel. Well, if I might just make a couple of
comments.
Senator Biden. Please.
Ms. Raphel. First of all, with regard, of course, to the
U.S. taxpayers' money, appropriated moneys, we have our own
systems, as you well know, of keeping track of that money and
what it's spent for. There's another element in this. In
speaking about the Development Fund of Iraq, which is where the
Iraqi oil revenues and their other revenues are deposited, one
of the things we've been discussing with the Governing Council
for the post-June 30 period is the possibility of having some
international monitoring function of that account. Now, this
sounds at first blush like a real affront to sovereignty,
saying how could the Iraqis, when they become sovereign, wish
to have somebody looking at their books? But the idea is, and
many of the Iraqis we've talked to have taken this under
consideration, to have some sort of international stamp of
approval to improve the kind of international confidence that
you're speaking about in the procedures of the budgeting,
revenue, and expenditures of the Iraqi system for a finite
period of time.
Senator Biden. It's not an affront to sovereignty. The
World Bank does this now. Other international organizations do
this now. When we in fact say to the State of Delaware,
federally we're going to provide x amount of dollars on
condition that you show us how you're spending the rest of the
money in your account. You know, this is not rocket science.
This is difficult, more difficult than rocket science, but this
is not rocket science. We're not setting down any new onerous
standard on an independent sovereign state. And it's kind of
basic, you know. You want our help, this is the conditions upon
which you get our help. You don't want our help, no problem. No
problem. And so I wonder who is the one, what entity it is
going to be? Now, you're telling me we're considering an
international organization of which I guess we'd be part, I
don't know, but you know, there's got to be something. And I
realize we're talking two different things. One, American
taxpayers' dollars. And the second is the use of their own
revenues that is taking advantage of fungible dollars that come
from a lot of other places, not just within Iraq. And I realize
that they are different but they are connected. And so the
first question is, how about just plain U.S. dollars? What is
the means by which we follow the dollar? And the second is this
larger question but I'm anxious to hear what has already been
decided, is being contemplated or is in the offing. And again,
I'm serious when I say I realize these are tough questions but
I also realize time's running out. Time is running out. And so,
anyway, thank you very much, Mr. Chairman, my time is up,
obviously.
The Chairman. Thank you, Senator Biden. I thank the
witnesses for their very helpful answers. I will leave the
committee record open today for additional questions that may
come from Senators who are here and may have additional
questions as well as other Senators who have not been here and
therefore not had the opportunity to ask questions in person.
We will request the cooperation of the witnesses in responding
as rapidly as possible for the fullness of the record. Thank
you, each of you, for your public service, and for the help
that you've given us today.
The Chair now calls a second panel composed of Mr. Joseph
Christoff, Director of International Affairs and Trade of the
General Accounting Office, and Mr. Michael Thibault, Deputy
Director, Defense Contract Audit Agency. Gentlemen, thank you
very much for coming to the committee today. We look forward to
your testimony. As I mentioned to the first panel of witnesses,
your full statements will be made a part of the record, in
full. We will ask you to proceed, either in summary form, or
with a full presentation of your statement, whichever way you
feel will be most effective. I will ask you to testify in the
order that I introduced you, and that would mean first of all,
Mr. Christoff.
STATEMENT OF JOSEPH A. CHRISTOFF, DIRECTOR, INTERNATIONAL
AFFAIRS AND TRADE, U.S. GENERAL ACCOUNTING OFFICE
Mr. Christoff. Thank you, Mr. Chairman. Mr. Chairman,
members of the committee, thank you for inviting GAO to this
very important hearing. Last year this committee asked GAO to
monitor reconstruction efforts in Iraq. As part of that effort
we looked at the operations of the U.N. Oil-for-Food Program,
its transfer to the Coalition Provisional Authority, and the
challenges Iraq faces as it assumes responsibility for the
program.
Let me first discuss the U.N.'s Oil-for-Food Program. Under
U.N. sanctions Iraq was allowed to sell oil to purchase food
and other humanitarian goods. From 1997 to 2002 the U.N.
controlled over $67 billion in Iraqi oil revenues and issued
$38 billion in letters of credit to purchase commodities.
However, GAO estimates that the former Iraqi regime acquired
$10.1 billion in illegal revenues from the Oil-for-Food
Program. This included $5.7 billion in oil smuggled out of Iraq
and $4.4 billion in surcharges on oil sales and illicit
commissions on imported commodities.
Oil was smuggled through Syria by pipeline, across the
borders of Jordan and Turkey by truck and through the Persian
Gulf by ship. The government also levied surcharges against oil
purchasers and commissions against suppliers of commodities.
According to Security Council members this surcharge was up to
50 cents per barrel of oil and the commission was 5 to 10
percent of the commodity contract.
Let me make some observations on the U.N.'s administration
of the Oil-for-Food Program. First, the Iraqi Government had
the authority to negotiate contracts directly with companies
that purchased oil or supplied commodities. This control over
contract negotiations may have been one important factor in
allowing Iraq to levy illegal surcharges and commissions.
Second, according to U.N. procedures the Office of the Iraq
Program was to examine the price and value of all commodity
contracts. However, it is unclear whether the Office performed
that function. Third, the Office of Iraq Program monitored oil
sales at three exit points to ensure that Iraq sold only the
amount of oil approved by the sanctions committee. However, the
Iraqi Government bypassed the official checkpoints by smuggling
oil through Syria, Jordan, and Turkey. The sanctions committee
was able to reduce the illegal oil surcharges and to screen
contracts for dual-use items. In 2001 it implemented
retroactive pricing on oil contracts to prevent Iraq from
discounting oil prices in return for surcharges. In addition,
the members of the committee placed holds on contracts
containing dual-use items. As of April 2002 about $5.1 billion
in goods were being held for shipment to Iraq.
Now let's discuss the challenges that the CPA faced when it
took over the program. Last year U.N. agencies, Iraqi
ministries, and the CPA prioritized nearly 5,200 contracts
pending shipment to Iraq. In November the U.N. transferred over
3,000 contracts worth $6.2 billion to the CPA. Most of these
contracts had been renegotiated to remove the illicit
commissions. The remaining 2,200 contracts were not continued
because the Iraqi ministries no longer needed the commodities,
suppliers were concerned about security, or suppliers did not
exist. Nearly one-half of the renegotiated contracts were with
suppliers in Russia, Jordan, Turkey, the UAE, and France.
The transfer has not gone smoothly. CPA did not receive all
of the original contracts, amendments and letters of credit.
According to DOD officials some suppliers have not received
payment for goods delivered in Iraq because CPA had no record
of their contracts. CPA also did not have enough staff to
administer the contracts. The CPA intended to have 48 coalition
staff but as of today has 16. In addition, CPA's failed plans
to privatize the food distribution system and delayed
negotiations with the World Food Program resulted in diminished
food stocks and localized shortages.
And finally, Iraq faces two key challenges in assuming
responsibility for the Oil-for-Food Program. First, Iraq must
ensure that the remaining contracts are managed with
transparent and accountable controls. Building these controls
and the operations of Iraqi ministries will help address
corruption and safeguard the $32 billion expected from donors.
And second, the Iraqi Government will have to decide
whether to continue, reform, or eliminate the current food
distribution system. Although 60 percent of the population
relies on food subsidies, the system is expensive and accounts
for 25 percent of Iraq's budget.
Mr. Chairman, that concludes my statement. I'm pleased to
answer any of your questions.
[The prepared statement of Mr. Christoff follows:]
Prepared Statement of Joseph A. Christoff
Observations on the Oil for Food Program
what gao found
GAO estimates that from 1997-2002, the former Iraqi regime attained
$10.1 billion in illegal revenues from the Oil for Food program,
including $5.7 billion in oil smuggled out of Iraq and $4.4 billion
through surcharges on oil sales and illicit commissions from suppliers
exporting goods to Iraq. This estimate includes oil revenue and
contract amounts for 2002, updated letters of credit from prior years,
and newer estimates of illicit commissions from commodity suppliers.
Both the U.N. Secretary General, through the Office of the Iraq
Program (OIP) and the Security Council, through its sanctions committee
for Iraq, were responsible for overseeing the Oil for Food Program.
However, the Iraq government negotiated contracts directly with
purchasers of Iraqi oil and suppliers of commodities, which may have
been one important factor that allowed Iraq to levy illegal surcharges
and commissions. While OIP was responsible for examining Iraqi
contracts for price and value, it is unclear how it performed this
function. The sanctions committee was responsible for monitoring oil
smuggling, screening contracts for items that could have military uses,
and approving oil and commodity contracts. While the sanctions
committee responded to illegal surcharges on oil, it is unclear what
actions it took to respond to illicit commissions on commodity
contracts.
OIP transferred 3,059 Oil for Food contracts--with pending
shipments valued at $6.2 billion--to the CPA on November 22, 2003.
However, the CPA stated that it has not received all the original
contracts, amendments, and letters of credit it needs to manage the
program. These problems, along with inadequate CPA staffing during the
transfer, hampered the efforts of CPA's Oil for Food coordination
center in Baghdad to ensure continued delivery of commodities. Poor
planning, coordination, and the security environment in Iraq continue
to affect the execution of these contracts.
Inadequate oversight and corruption in the Oil for Food program
raise concerns about the Iraqi government's ability to import and
distribute Oil for Food commodities and manage at least $32 billion in
expected donor reconstruction funds. The CPA has taken steps, such as
appointing inspectors general, to build internal control and
accountability measures at Iraq's ministries. The CPA and the World
Food Program (WFP) are also training ministry staff to help them assume
responsibility for Oil for Food contracts in July 2004. The new
government will have to balance the reform of its costly food subsidy
program with the need to maintain food stability and protect the
poorest populations.
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss GAO's review of the United
Nations (U.N.) Oil for Food program.
In 1996, the United Nations and Iraq established the Oil for Food
program to address growing concerns about the humanitarian situation
after international sanctions were imposed in 1990. The program allowed
the Iraqi government to use the proceeds of its oil sales to pay for
food, medicine, and infrastructure maintenance. From 1997 through 2002,
Iraq sold more than $67 billion in oil through the program and issued
$38 billion in letters of credit to purchase commodities.\1\
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\1\ All references to Oil for Food estimates are in 2003 constant
U.S. dollars.
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Today, we will present our findings and observations on the
operation of the Oil for Food program and its transfer to the Coalition
Provisional Authority (CPA). Specifically, we will (1) report on our
estimates of the revenue diverted from the program by the former Iraqi
regime; (2) provide some preliminary observations on the administration
of the program; (3) describe the challenges the CPA faced when it
assumed responsibility for the program; and (4) discuss the challenges
Iraq faces as it assumes responsibility for the program.
To address these objectives, we reviewed documents and statements
from (1) the United Nations on its management and oversight
responsibilities for the Oil for Food program; (2) the CPA, the
Departments of Defense and State, and the United Nations and its World
Food Program (WFP) on the transfer of the program to the CPA and its
implementation; and (3) from the World Bank and Iraq's 2004 budget
regarding the effect of food subsidies on the Iraqi economy. We met
with U.N. officials immediately following the transfer of the program
to the CPA in November 2003 and with numerous U.S. officials
representing the CPA, the Departments of Defense and State, and the
U.S. Agency for International Development to discuss the program's
transfer and ongoing management by the CPA. Our review is ongoing
because we have not yet received all the CPA and Iraqi ministry
documentation that we have requested from the CPA and the Department of
State. We have also requested certain U.N. documents, including
internal audits, to determine the use of Oil for Food funds prior to
the transfer to the CPA and the current disposition of funds. We
assessed the reliability of the data on the number of contracts
reviewed for priority by the United Nations, the CPA, and Iraqi
ministries and those transferred to the CPA November 2003 by
corroborating OIP information with CPA data. We were unable to assess
the reliability of the dollar amounts of contracts reviewed and pending
shipment because we did not have access to the information that would
have allowed us to confirm the dollar amounts reviewed and transferred.
We conducted our review from November 2003 through April 2004 in
accordance with generally accepted government auditing standards.
summary
From 1997 through 2002, we estimate that the former Iraqi
regime acquired $10.1 billion in illegal revenues related to
the Oil for Food program--$5.7 billion in oil smuggled out of
Iraq and $4.4 billion in surcharges on oil sales and illicit
charges from suppliers exporting goods to Iraq. This estimate
is higher than our May 2002 estimate of $6.6 billion because it
includes (1) oil revenue and contract amounts for 2002, (2)
updated letters of credit from prior years, and (3) newer
estimates of illicit commissions from commodity suppliers.
Both the U.N. Secretary General, through the Office of the
Iraq Program (OIP) and the Security Council, through its
sanctions committee for Iraq, were responsible for overseeing
the Oil for Food Program. However, the Iraq government
negotiated contracts directly with purchasers of Iraqi oil and
suppliers of commodities, which may have been one important
factor in allowing Iraq to levy illegal surcharges and
commissions. While OIP was responsible for examining Iraqi
contracts for price and value, it is unclear how it performed
this function. The sanctions committee was responsible for
monitoring oil smuggling, screening contracts for items that
could have military uses, and approving oil and commodity
contracts. While the sanctions committee responded to illegal
surcharges on oil, it is unclear what actions it took to
respond to illicit commissions on commodity contracts.
OIP turned over responsibility for 3,059 Oil for Food
contracts--with pending shipments valued at $6.2 billion--to
the CPA on November 22, 2003. However, the information the
United Nations supplied to the CPA on the renegotiated
contracts contained database errors and did not include all
contracts, amendments, and letters of credit associated with
the 3,000 contracts. These problems, along with inadequate CPA
staffing at the time of the transfer, hampered efforts by the
CPA's Oil for Food coordination center in Baghdad to ensure
that commodities continued to be delivered. Also, the execution
of these contracts continues to be affected by poor planning,
coordination, and security.
The history of inadequate oversight and corruption in the
Oil for Food program raises concerns about the Iraqi
government's ability to manage the remaining Oil for Food
commodities and about $32 billion in expected donor
reconstruction funds. The CPA has taken steps, such as
appointing inspectors general, to build internal controls and
accountability measures in Iraq's ministries. The CPA and the
World Food Program (WFP) are also training ministry staff on
procurement and distribution functions to help them fully
assume responsibility for remaining contracts and a continued
food distribution system in July 2004. In addition, the new
government will have to balance the need to reform a costly
food subsidy program with the need to maintain food stability
and protect the poorest populations.
background
In August 1990, Iraq invaded Kuwait, and the United Nations imposed
sanctions against Iraq. Security Council Resolution 661 of 1990
prohibited all nations from buying and selling Iraqi commodities,
except for food and medicine. Security Council Resolution 661 also
prohibited all nations from exporting weapons or military equipment to
Iraq and established a sanctions committee to monitor compliance and
progress in implementing the sanctions. The members of the sanctions
committee were members of the Security Council. Subsequent Security
Council resolutions specifically prohibited nations from exporting to
Iraq items that could be used to build chemical, biological, or nuclear
weapons. In 1991, the Security Council offered to let Iraq sell oil
under a U.N. program to meet its peoples' basic needs. The Iraqi
government rejected the offer, and over the next 5 years, the United
Nations reported food shortages and a general deterioration in social
services.
In December 1996, the United Nations and Iraq agreed on the Oil for
Food program, which permitted Iraq to sell up to $1 billion worth of
oil every 90 days to pay for food, medicine, and humanitarian goods.
Subsequent U.N. resolutions increased the amount of oil that could be
sold and expanded the humanitarian goods that could be imported. In
1999, the Security Council removed all restrictions on the amount of
oil Iraq could sell to purchase civilian goods. The United Nations and
the Security Council monitored and screened contracts that the Iraqi
government signed with commodity suppliers and oil purchasers, and
Iraq's oil revenue was placed in a U.N.-controlled escrow account. In
May 2003, U.N. resolution 1483 requested the U.N. Secretary General to,
transfer the Oil for Food program to the CPA by November 2003.
Despite concerns that sanctions may have worsened the humanitarian
situation, the Oil for Food program appears to have helped the Iraqi
people. According to the United Nations, the average daily food intake
increased from around 1,275 calories per person per day in 1996 to
about 2,229 calories at the end of 2001. In February 2002, the United
Nations reported that the Oil for Food program had considerable success
in several sectors such as agriculture, food, health, and nutrition by
arresting the decline in living conditions and improving the
nutritional status of the average Iraqi citizen.
The Public Distribution System run by Iraq's Ministry of Trade is
the food portion of the Oil for Food program. The system distributes a
monthly ``food basket'' that normally consists of a dozen items \2\ to
all Iraqis. About 60 percent of Iraqis rely on this basket as their
main source of food.
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\2\ Wheat flour, rice, vegetable ghee (semifluid clarified butter
used for cooking), pulses (edible seeds of various leguminous crops,
such as peas, beans, or lentils), sugar, tea, salt, milk, infant
formula, weaning cereal, soap, and detergent.
---------------------------------------------------------------------------
former iraqi regime diverted an estimated $10.1 billion from the oil
for food program
We estimate that, from 1997 through 2002, the former Iraqi regime
acquired $10.1 billion in illegal revenues related to the Oil for Food
program--$5.7 billion through oil smuggling and $4.4 billion through
surcharges against oil sales and illicit commissions from commodity
suppliers. This estimate is higher than the $6.6 billion in illegal
revenues we reported in May 2002.\3\ We updated our estimate to include
(1) oil revenue and contract amounts for 2002, (2) updated letters of
credit from prior years, and (3) newer estimates of illicit commissions
from commodity suppliers.
---------------------------------------------------------------------------
\3\ U.S. General Accounting Office, Weapons of Mass Destruction:
U.N. Confronts Significant Challenges in Implementing Sanctions Against
Iraq, GAO-02-625 (Washington, D.C.: May 23, 2002).
---------------------------------------------------------------------------
Oil was smuggled out through several routes, according to U.S.
government officials and oil industry experts. Oil entered Syria by
pipeline, crossed the borders of Jordan and Turkey by truck, and was
smuggled through the Persian Gulf by ship. In addition to revenues from
oil smuggling, the Iraqi government levied surcharges against oil
purchasers and commissions against commodity suppliers participating in
the Oil for Food program. According to some Security Council members,
the surcharge was up to 50 cents per barrel of oil and the commission
was 5 to 15 percent of the commodity contract.
In our 2002 report, we estimated that the Iraqi regime received a
5-percent illicit commission on commodity contracts. However, a
September 2003 Department of Defense review found that at least 48
percent of 759 Oil for Food contracts that it reviewed were overpriced
by an average of 21 percent.\4\ Defense officials found 5 contracts
that included ``after-sales service charges'' of between 10 and 20
percent. In addition, interviews by U.S. investigators with high-
ranking Iraq regime officials, including the former oil and finance
ministers, confirmed that the former regime received a 10-percent
commission from commodity suppliers.
---------------------------------------------------------------------------
\4\ The Defense Contract Audit Agency and the Defense Contract
Management Agency, Report on the Pricing Evaluation of Contracts
Awarded Under the Iraq Oil for Food Program (Washington, D.C.: Sept.
12, 2003).
---------------------------------------------------------------------------
united nations and security council had responsibility for oversight of
program, but iraq contracted directly with purchasers and suppliers
Both OIP and the sanctions committee were responsible for
overseeing the Oil for Food Program. However, the Iraqi government
negotiated contracts directly with purchasers of Iraqi oil and
suppliers of commodities. While OIP was to examine each contract for
price and value, it is unclear how it performed this function. The
sanctions committee was responsible for monitoring oil smuggling,
screening contracts for items that could have military uses, and
approving oil and commodity contracts. The sanctions committee
responded to illegal surcharges on oil, but it is unclear what actions
it took to respond to commissions on commodity contracts.
Iraq Negotiated Directly with Oil Purchasers and Suppliers
U.N. Security Council resolutions and procedures recognized the
sovereignty of Iraq and gave the Iraqi government authority to
negotiate contracts and decide on contractors. Security Council
resolution 986 of 1995 authorized states to import petroleum products
from Iraq, subject to the Iraqi government's endorsement of
transactions. Resolution 986 also stated that each export of goods
would be at the request of the government of Iraq. Security Council
procedures for implementing resolution 986 further stated that the
Iraqi government or the United Nations Inter-Agency Humanitarian
Program would contract directly with suppliers and conclude the
appropriate contractual arrangements. Iraqi control over contract
negotiations may have been one important factor in allowing Iraq to
levy illegal surcharges and commissions. Appendix I contains a
chronology of major events related to sanctions against Iraq and the
administration of the Oil for Food program.
OIP Was Responsible for Key Oversight Aspects of the Program
OIP administered the Oil for Food program from December 1996 to
November 2003. As provided in Security Council resolution 986 of 1995
and a memorandum of understanding between the United Nations and the
Iraqi government, OIP was responsible for monitoring the sale of Iraq's
oil, monitoring Iraq's purchase of commodities and the delivery of
goods, and accounting for the program's finances. The United Nations
received 3 percent of Iraq's oil export proceeds for its administrative
and operational costs, which included the cost of U.N. weapons
inspections.
The sanctions committee's procedures for implementing resolution
986 stated that U.N. independent inspection agents were responsible for
monitoring the quality and quantity of oil being shipped and were
authorized to stop shipments if they found irregularities. To do this,
OIP employed 14 contract workers to monitor Iraqi oil sales at 3 exit
points in Iraq. However, the Iraqi government bypassed the official
exit points by smuggling oil through an illegal Syrian pipeline and by
trucks through Jordan and Turkey. According to OIP, member states were
responsible for ensuring that their nationals and corporations complied
with the sanctions.
OIP was also responsible for monitoring Iraq's purchase of
commodities and the delivery of goods. Security Council Resolution 986,
paragraph 8a(ii) required Iraq to submit a plan, approved by the
Secretary General, to ensure equitable distribution of Iraq's commodity
purchases. The initial distribution plans focused on food and medicines
while subsequent plans were expansive and covered 24 economic sectors,
including electricity, oil, and telecommunications.
The sanction committee's procedures for implementing Security
Council resolution 986 stated that experts in the Secretariat were to
examine each proposed Iraqi commodity contract, in particular the
details of price and value, and to determine whether the contract items
were on the distribution plan. It is unclear whether the office
performed this function. OIP officials told the Defense Contract Audit
Agency they performed very limited, if any, pricing review. They stated
that no U.N. resolution tasked them with assessing the price
reasonableness of the contracts and no contracts were rejected solely
on the basis of price.
The sanction committee's procedures for implementing resolution 986
state that independent inspection agents will confirm the arrival of
supplies in Iraq. OIP deployed about 78 U.N. contract monitors to
verify shipments and authenticate the supplies for payment. OIP
employees were able to visually inspect 7 to 10 percent of the approved
deliveries.
Security Council resolution 986 also requested the Secretary
General to establish an escrow account for the Oil for Food Program,
and to appoint independent and certified public accountants to audit
the account. In this regard, the Secretary General established an
escrow account at BNP Paribas into which Iraqi oil revenues were
deposited and letters of credit were issued to suppliers having
approved contracts. The U.N. Board of Audit, a body of external public
auditors, audited the account. According to OIP, there were also
numerous internal audits of the program. We are trying to obtain these
audits.
The Sanctions Committee Had a Key Role in Enforcing Sanctions and
Approving Contracts
The sanctions committee was responsible for three key elements of
the Oil for Food Program: (1) monitoring implementation of the
sanctions, (2) screening contracts to prevent the purchase of items
that could have military uses, and (3) approving Iraq's oil and
commodity contracts.
U.N. Security Council resolution 661 of 1990 directs all states to
prevent Iraq from exporting petroleum products into their territories.
Paragraph 6 of Resolution 661 establishes a sanctions committee to
report to the Security Council on states' compliance with the sanctions
and recommend actions regarding effective implementation. As early as
June 1996, the Maritime Interception Force, a naval force of coalition
partners including the United States and Great Britain, informed the
sanctions committee that oil was being smuggled out of Iraq through
Iranian territorial waters. In December 1996, Iran acknowledged the
smuggling and reported that it had taken action. In October 1997, the
sanctions committee was again informed about smuggling through Iranian
waters. According to multiple sources, oil smuggling also occurred
through Jordan, Turkey, Syria, and the Gulf. Smuggling was a major
source of illicit revenue for the former Iraqi regime through 2002. It
is unclear what recommended actions the sanctions committee made to the
Security Council to address the continued smuggling.
A primary function of the members of the sanctions committee was to
review and approve contracts for items that could be used for military
purposes. For example, the United States conducted the most thorough
review; about 60 U.S. government technical experts assessed each item
in a contract to determine its potential military application.
According to U.N. Secretariat data in 2002, the United States was
responsible for about 90 percent of the holds placed on goods to be
exported to Iraq. As of April 2002, about $5.1 billion worth of goods
were being held for shipment to Iraq.
Under Security Council resolution 986 of 1995, paragraphs 1 and 8,
the sanctions committee was responsible for approving Iraq's oil
contracts; particularly to ensure that the contract price is fair, and
for approving most of Iraq's commodity contracts.\5\ In March 2001, the
United States informed the Security Council about allegations that
Iraqi government officials were receiving illegal surcharges on oil
contracts, and illicit commissions on commodity contracts.\6\ According
to OIP officials, the Security Council took action on the allegations
of surcharges in 2001 by implementing retroactive pricing for oil
contracts.\7\ However, it is unclear what actions the sanctions
committee took to respond to illicit commissions on commodity
contracts. At that time, there was increasing concern about the
humanitarian situation in Iraq and pressure on the United States to
expedite its review process.
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\5\ Under fast-track procedures established by Security Council
resolution 1383 of 1999, OIP could approve contracts that contained
only humanitarian goods.
\6\ The sanctions committee received reports from the independent
oil experts appointed by the Secretary General to determine whether
there was fraud or deception in the oil contracting process.
\7\ Under retroactive pricing, the Security Council did not approve
a price per barrel until the oil was delivered to the refinery. The
Iraq government signed contracts with suppliers without knowing the
price it would have to pay until delivery. This allowed a fair market
price to be set.
---------------------------------------------------------------------------
CPA's Administration of the Oil for Food Program
In November 2003, the United Nations transferred to the CPA
responsibility for 3,059 Oil for Food contracts totaling about $6.2
billion and decided not to transfer a remaining 2,199 contracts for a
variety of reasons. U.N. agencies had renegotiated most of the
contracts turned over to the CPA with the suppliers to remove illicit
charges and amend delivery and location terms. However, the information
the United Nations supplied to the CPA on the renegotiated contracts
contained database errors and did not include all contracts,
amendments, and letters of credit associated with the 3,000 contracts.
These data problems, coupled with inadequate staffing at the CPA,
hampered the ability of the CPA's Oil for Food coordination center to
ensure that suppliers complied with commodity deliveries. In addition,
poor planning and coordination are affecting the execution of food
contracts.
Program Transferred to the CPA in November 2003
On November 22, 2003, OIP transferred 3,059 contracts worth about
$6.2 billion in pending commodity shipments to the CPA, according to
OIP. Prior to the transfer, U.N. agencies had renegotiated the
contracts with the suppliers to remove ``after-sales service fees''--
based on information provided by the CPA and Iraqi ministries--and to
change delivery dates and locations. These fees were either calculated
separately or were part of the unit price of the goods. At the time of
the transfer, all but 251 contracts had been renegotiated with the
suppliers. The Defense Contract Management Agency is renegotiating the
remaining contracts for the CPA to remove additional fees averaging 10
percent. The criteria for renegotiating contracts and the amount of the
reductions were based on information from the CPA in Baghdad and the
ministries that originally negotiated the contracts.
An additional 2,199 contracts worth almost $2 billion were not
transferred as a result of a review by U.N. agencies, the CPA, and the
Iraqi ministries that negotiated the contracts. For example:
The review did not recommend continuing 762 contracts, worth
almost $1.2 billion, because it determined that the commodities
associated with the contracts were no longer needed.
Another 728 contracts, worth about $750 million, had been
classified as priority contracts, but were not transferred to
the CPA for several reasons. About half--351 contracts--were
not transferred because suppliers were concerned about the
adequacy of security within Iraq or could not reach agreement
on price reductions or specification changes. Another 180
contracts were considered fully delivered. Another 136
suppliers had either declared bankruptcy, did not exist, or did
not respond to U.N. requests. It is unclear why the remaining
61 contracts were removed from the priority list; the OIP
document lists them as ``other.''
Suppliers did not want to ship the outstanding small
balances for an additional 709 contracts totaling about $28
million.
The largest portion of the $6.2 billion in Oil for Food contracts
pending shipment in November 2003--about 23 percent--was designated for
food procurement. An additional 9 percent was for food handling and
transport. The oil infrastructure, power, and agriculture sectors also
benefited from the remaining contracts. Nearly one half of the
renegotiated contracts were with suppliers in Russia, Jordan, Turkey,
the United Arab Emirates, and France.
Inadequate Information and Staffing Affected Transfer and
Implementation of Contracts
According to CPA officials and documents, the incomplete and
unreliable contract information the CPA received from the United
Nations has hindered CPA's ability to execute and accurately report on
the remaining contracts. U.N. resolution 1483 requested the Secretary
General, through OIP, to transfer to the CPA all relevant documentation
on Oil for Food contracts.\8\ When we met with OIP officials on
November 24, 2003, they stated that they had transferred all contract
information to the CPA.
---------------------------------------------------------------------------
\8\ U.N. Resolution 1483, para. 16(f) (May 2003).
---------------------------------------------------------------------------
CPA officials and documents report that the CPA has not received
complete information, including copies of all contracts. The CPA
received several compact disks in November and January that were to
contain detailed contract and delivery data, but the information was
incomplete. The CPA received few source documents such as the original
contracts, amendments, and letters of credit needed to identify the
status of commodities, prepare shipment schedules, and contact
suppliers. In addition, the CPA received little information on letters
of credit that had expired or were canceled. Funds for the Oil for Food
program are obligated by letters of credit to the bank holding the U.N.
escrow account. When these commitments are canceled, the remaining
funds are available for transfer to the Development Fund for Iraq.
Without this information, the CPA cannot determine the disposition of
Oil for Food funds and whether the proper amounts were deposited into
the Development Fund for Iraq.\9\
---------------------------------------------------------------------------
\9\ As of March 31, 2004, the United Nations had transferred $7.6
billion in Oil for Food funds to the Development Fund for Iraq.
---------------------------------------------------------------------------
In addition, the CPA received an OIP contract database but found it
unreliable. For example, CPA staff found mathematical and currency
errors in the calculation of contract cost. The inadequate data and
documentation have made it difficult for CPA to prepare accurate
reports on the status of inbound goods and closeouts of completed
contracts.
According to a Department of Defense contracting official, some
contractors have not received payment for goods delivered in Iraq
because the CPA had no record of their contracts.
In November 2003, the CPA established a coordination center in
Baghdad to oversee the receipt and delivery of Oil for Food
commodities. The CPA authorized 48 coalition positions, to be assisted
by Iraqis from various ministries. However, according to several U.S.
and U.N. officials, the CPA had insufficient staff to manage the
program and high staff turnover. As of mid-December 2003, the center
had 19 coalition staff, including 18 staff whose tours ended in January
2004. U.S. and WFP officials stated that the staff assigned at the time
of the transfer lacked experience in managing and monitoring the import
and distribution of goods. A former CPA official stated that the Oil
for Food program had been thrust upon an already overburdened and
understaffed CPA. As a result, 251 contracts had not been renegotiated
prior to the time of the transfer and the CPA asked the Defense
Contract Management Agency to continue the renegotiation process. A
November 2003 WFP report placed part of the blame in food shortfalls
during the fall of 2003 on OIP delays in releasing guidelines for the
contract prioritization and renegotiation process. A September 2003
U.N. report also noted that the transfer process in the northern
governorates was slowing due to an insufficient number of CPA
counterparts to work with U.N. staff on transition issues.
The center's capacity improved in March 2004 when its coalition
staff totaled 37. By April 2004, the coordination center had 16
coalition staff. Up to 40 Iraqi ministry staff are currently working on
Oil for Food contracts. As of April 1, the coordination center's seven
ministry advisors have begun working with staff at their respective
ministries as the first step in moving control of the program to the
Iraqi government.
Inadequate Planning, Coordination, and Security Affect the Management
of Food Contracts
According to U.S. officials and documents, CPA's failed plans to
privatize the food distribution system and delayed negotiations with
WFP to administer the system resulted in diminished stocks of food
commodities and localized shortages. Before the transfer of the Oil for
Food program, the CPA administrator proposed to eliminate Iraq's food
distribution system and to provide former recipients with cash
payments. He asserted that the system was expensive and depressed the
agricultural sector, and the Ministry of Trade began drawing down
existing inventories of food. In December 2003, as the security
environment worsened, the CPA administrator reversed his decision to
reform the food ration system and left the decision to the provisional
Iraqi government.
In January 2004, CPA negotiated a memorandum of understanding (MOU)
with WFP and the Ministry of Trade that committed WFP to procuring a 3-
month emergency food stock by March 31, 2004 and providing technical
support to the CPA and Ministry of Trade. Delays in signing the MOU
were due to disagreements about the procurement of emergency food
stocks, contract delivery terms, and the terms of WFP's involvement. No
additional food was procured during the negotiations, and food stocks
diminished and localized shortages occurred in February and March 2004.
The CPA and WFP addressed these problems with emergency procurements
from nearby countries.
An April WFP report projected a continued supply of food items
through May 2004 except for a 12-percent shortage in milk. Only 55
percent of required domestic wheat has been procured for July 2004 and
no domestic wheat has been procured for August. Under the terms of MOU,
WFP's commitment to procuring food stock ended March 31, 2004. The
Ministry of Trade assumed responsibility for food procurement on April
1, 2004.
According to a U.S. official, coordination between WFP and the
Ministry of Trade has been deteriorating. The Ministry has not provided
WFP with complete and timely information on monthly food allocation
plans, weekly stock reports, or information on cargo arrivals, as the
MOU required. WFP staff reported that the Ministry's data are subject
to sudden, large, and unexplained stock adjustments, thereby making it
difficult to plan deliveries.
The security environment in Iraq has also affected planning for the
transfer and movement of Oil for Food goods in fall 2003. The transfer
occurred during a period of deteriorating security conditions and
growing violence in Iraq. A September 2003 U.N. report found that the
evacuation of U.N. personnel from Baghdad affected the timetable and
procedures for the transfer of the Oil for Food program to the CPA and
contributed to delays in the contract prioritization and renegotiation
processes. Most WFP staff remained in Amman and other regional offices
and continued to manage the Oil for Food program from those locations.
The August bombing of the U.N. Baghdad headquarters also resulted in
the temporary suspension of the border inspection process and shipments
of humanitarian supplies and equipment. A March 2004 CPA report also
noted that stability of the food supply would be affected if security
conditions worsened.
cpa and transitional government face challenges in preventing
corruption and reforming the food distribution system
The history of inadequate oversight and corruption in the Oil for
Food program raises questions about the Iraqi government's ability to
manage the import and distribution of Oil for Food commodities and the
billions in international assistance expected to flow into the country.
In addition, the food distribution system created a dependency on food
subsidies that disrupted private food markets. The government will have
to decide whether to continue, reform, or eliminate the current system.
Addressing Corruption
The CPA and Iraqi ministries must address corruption in the Oil for
Food program to help ensure that the remaining contracts are managed
with transparent and accountable controls. Building these internal
control and accountability measures into the operations of Iraqi
ministries will also help safeguard the $18.4 billion in fiscal year
2004 U.S. reconstruction funds and at least $13.8 billion pledged by
other countries.
To address these concerns and oversee government operations, the
CPA administrator announced the appointment of inspectors general for
21 of Iraq's 25 national ministries on March 30, 2004. At the same
time, the CPA announced the establishment of two independent agencies
to work with the inspectors general--the Commission on Public Integrity
and a Board of Supreme Audit. Finally, the United States will spend
about $1.63 billion on governance-related activities in Iraq, which
will include building a transparent financial management system in
Iraq's ministries.
CPA's coordination center continues to provide on-the-job training
for ministry staff who will assume responsibility for Oil for Food
contracts. after July 2004. Coalition personnel have provided Iraqi
staff with guidance on working with suppliers in a fair and open manner
and determining when changes to letters of credit are appropriate. In
addition, according to center staff, coalition and Iraqi staff signed a
code of conduct, which outlined proper job behavior. Among other
provisions, the code of conduct prohibited kickbacks and secret
commissions from suppliers. The center also developed a code of conduct
for suppliers. In addition, the center has begun identifying the steps
needed for the transition of full authority to the Iraqi ministries.
These steps include transferring contract related documents, contacting
suppliers, and providing authority to amend contracts. In addition, the
January 2004 MOU agreement commits WFP to training ministry staff in
the procurement and transport functions currently conducted by WFP.
Training is taking place at WFP headquarters in Rome, Italy.
Reforming the Food Distribution System
After the CPA transfers responsibility for the food distribution
system to the Iraqi provisional government in July 2004, the government
will have to decide whether to continue, reform, or eliminate the
current system. Documents from the Ministries of Trade and Finance
indicate that the annual cost of maintaining the system is as high as
$5 billion, or about 25 percent of total government expenditures. In
2005 and 2006, expenditures for food will be almost as much as all
expenditures for capital projects. According to a September 2003 joint
U.N. and World Bank needs assessment of Iraq,\10\ the food subsidy,
given out as a monthly ration to the entire population, staved off mass
starvation during the time of the sanctions, but at the same time it
disrupted the market for food grains produced locally. The agricultural
sector had little incentive to produce crops in the absence of a
promising market. However, the Iraqi government may find it politically
difficult to scale back the food distribution system with 60 percent of
the population relying on monthly rations as their primary source of
nutrition. WFP is completing a vulnerability assessment that Iraq could
use to make future decisions on food security programs and better
target food items to those most in need.
---------------------------------------------------------------------------
\10\ United Nations/World Bank, Joint Iraq Needs Assessment:
Agriculture, Water Resources, and Food Security (New York: October
2003).
---------------------------------------------------------------------------
Mr. Chairman and Members of the Committee, this concludes my
prepared statement. I will be happy to answer any questions you may
have.
Mr. Chairman and Members of the Committee, this concludes my
prepared statement. I will be happy to answer any questions you may
have.
Appendix I:--Timeline of Major Events Related to Sanctions Against Iraq and the Administration of the Oil for
Food Program
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Aug. 2, 1990 U.N. Security Council Iraqi forces invaded Kuwait. Resolution 660 condemned the
Resolution 660 invasion and demands immediate withdrawal from Kuwait.
----------------------------------------------------------------------------------------------------------------
Aug. 6, 1990 U.N. Security Council Imposed economic sanctions against the Republic of Iraq.
Resolution 661 The resolution called for member states to prevent all
commodity imports from Iraq and exports to Iraq, with the
exception of supplies intended strictly for medical
purposes and, in humanitarian circumstances, foodstuffs.
----------------------------------------------------------------------------------------------------------------
Aug. 6, 1990 Operation Desert Shield President Bush ordered the deployment of thousands of U.S.
forces to Saudi Arabia.
----------------------------------------------------------------------------------------------------------------
Nov. 5, 1990 U.S. legislation Public Law 101-513 prohibited the import of products from
Iraq into the United States and export of U.S. products
to Iraq.
----------------------------------------------------------------------------------------------------------------
Jan. 12, 1991 U.S. legislation Iraq War Powers Resolution authorized the president to use
``all necessary means'' to compel Iraq to withdraw
military forces from Kuwait.
----------------------------------------------------------------------------------------------------------------
Jan. 16, 1991 Operation Desert Storm Operation Desert Storm was launched: Coalition operation,
was targeted to force Iraq to withdraw from Kuwait.
----------------------------------------------------------------------------------------------------------------
Feb. 28, 1991 Gulf War cease-fire Iraq announced acceptance of all relevant U.N. Security
Council resolutions.
----------------------------------------------------------------------------------------------------------------
Apr. 3, 1991 U.N. Security Council Mandated that Iraq must respect the sovereignty of Kuwait
Resolution 687 (Cease-Fire and declare and destroy all ballistic missiles with a
Resolution) range of more than 150 kilometers as well as all weapons
of mass destruction and production facilities.
----------------------------------------------------------------------------------------------------------------
Jun. 17, 1991 Creation of U.N. Special The U.N. Special Commission (UNSCOM) was charged with
Commission monitoring Iraqi disarmament as mandated by U.N.
resolutions and to assist the International Atomic Energy
Agency in nuclear monitoring efforts.
----------------------------------------------------------------------------------------------------------------
Aug. 15, 1991 U.N. Security Council Proposed the creation of an Oil for Food program and
Resolution 706 authorized an escrow account to be established by the
Secretary General. Iraq rejected the terms of this
resolution.
----------------------------------------------------------------------------------------------------------------
Sep. 19, 1991 U.N. Security Council Second attempt to create an Oil for Food program. Iraq
Resolution 712 rejected the terms of this resolution.
----------------------------------------------------------------------------------------------------------------
Oct. 2, 1992 U.N. Security Council Authorized transferring money produced by any Iraqi oil
Resolution 778 transaction on or after August 6, 1990, which had been
deposited into the escrow account, to the states or
accounts concerned as long as the oil exports took place
or until sanctions were lifted.
----------------------------------------------------------------------------------------------------------------
Apr. 14, 1995 U.N. Security Council Allowed Iraq to sell $1 billion worth of oil every 90
Resolution 986 days. Proceeds were to be used to procure foodstuffs,
medicine, and material and supplies for essential
civilian needs. Resolution 986 was supplemented by
several U.N. resolutions over the next 7 years that
extended the Oil for Food program for different periods
of time and increased the amount of exported oil and
imported humanitarian goods.
----------------------------------------------------------------------------------------------------------------
Mar. 27, 1996 U.N. Security Council Established the export and import monitoring system for
Resolution 1051 Iraq.
----------------------------------------------------------------------------------------------------------------
May 20, 1996 Government of Iraq and the Signed a memorandum of understanding allowing Iraq's
United Nations export of oil to pay for food, medicine, and essential
civilian supplies.
----------------------------------------------------------------------------------------------------------------
Jun. 17, 1996 United States Based on information provided by the Multinational
Interception Force (MIF), communicated concerns about
alleged smuggling of Iraqi petroleum products through
Iranian territorial waters in violation of resolution 661
to the Security Council sanctions committee.
----------------------------------------------------------------------------------------------------------------
Jul. 9, 1996 U.N. Security Council Committee members asked the United States for more factual
Sanctions Committee information about smuggling allegations, including the
final destination and the nationality of the vessels
involved.
----------------------------------------------------------------------------------------------------------------
Aug. 28, 1996 U.S. delegation to the U.N. Provided briefing on the Iraqi oil smuggling allegations
Security Council Sanctions to the sanctions committee.
Committee
----------------------------------------------------------------------------------------------------------------
Dec. 3, 1996 Islamic Republic of Iran Acknowledged that some vessels carrying illegal goods and
Permanent Representative oil to and from Iraq had been using the Iranian flag and
to the United Nations territorial waters without authorization and that Iranian
authorities had confiscated forged documents and
manifests. Representative agreed to provide the results
of the investigations to the sanctions committee once
they were available.
----------------------------------------------------------------------------------------------------------------
Dec. 10, 1996 Iraq and the United Nations Phase I of the Oil for Food program began.
----------------------------------------------------------------------------------------------------------------
Jun. 4, 1997 U.N. Security Council Extended the term of resolution 986 another 180 days
Resolution 1111 (phase II).
----------------------------------------------------------------------------------------------------------------
Sep. 12, 1997 U.N. Security Council Authorized special provision to allow Iraq to sell
Resolution 1129 petroleum in a more favorable time frame.
----------------------------------------------------------------------------------------------------------------
Oct. 8, 1997 Representatives of the Brought the issue of Iraqi smuggling petroleum products
United Kingdom of Great through Iranian territorial waters to the attention of
Britain and Northern the U.N. Security Council sanctions committee.
Ireland to the United
Nations
----------------------------------------------------------------------------------------------------------------
Nov. 18, 1997 Coordinator of the Reported to the U.N. Security Council sanctions committee
Multinational Interception that since February 1997 there had been a dramatic
Force (MIF) increase in the number of ships smuggling petroleum from
Iraq inside Iranian territorial waters.
----------------------------------------------------------------------------------------------------------------
Dec. 4, 1997 U.N. Security Council Extended the Oil for Food program another 180 days (phase
Resolution 1143 Ill).
----------------------------------------------------------------------------------------------------------------
Feb. 20, 1998 U.N. Security Council Raised Iraq's export ceiling of oil to about $5.3 billion
Resolution 1153 per 6-month phase (phase IV).
----------------------------------------------------------------------------------------------------------------
Mar. 25, 1998 U.N. Security Council Permitted Iraq to export additional oil in the 90 days
Resolution 1158 from March 5, 1998, to compensate for delayed resumption
of oil production and reduced oil price.
----------------------------------------------------------------------------------------------------------------
Jun. 19, 1998 U.N. Security Council Authorized Iraq to buy $300 million worth of oil spare
Resolution 1175 parts to reach the export ceiling of about $5.3 billion.
----------------------------------------------------------------------------------------------------------------
Aug. 14, 1998 U.S. legislation Public Law 105-235, a joint resolution finding Iraq in
unacceptable and material breach of its international
obligations.
----------------------------------------------------------------------------------------------------------------
Oct. 31, 1998 U.S. legislation: Iraq Public Law 105-338 Sec. 4 authorized the president to
Liberation Act provide assistance to Iraqi democratic opposition
organizations.
----------------------------------------------------------------------------------------------------------------
Oct. 31, 1998 Iraqi termination of U.N. Iraq announced it would terminate all forms of interaction
Special Commission with UNSCOM and that it would halt all UNSCOM activity
(UNSCOM) Activity inside Iraq.
----------------------------------------------------------------------------------------------------------------
Nov. 24, 1998 U.N. Security Council Renewed the Oil for Food program for 6 months beyond
Resolution 1210 November 26 at the higher levels established by
resolution 1153. The resolution included additional oil
spare parts (phase V).
----------------------------------------------------------------------------------------------------------------
Dec. 16, 1998 Operation Desert Fox Following Iraq's recurrent blocking of U.N. weapons
inspectors, President Clinton ordered 4 days of air
strikes against military and security targets in Iraq
that contribute to Iraq's ability to produce, store, and
maintain weapons of mass destruction and potential
delivery systems.
----------------------------------------------------------------------------------------------------------------
Mar. 3, 1999 President Clinton Report to President Clinton provided the status of efforts to obtain
Congress Iraq's compliance with U.N. Security Council resolutions.
He discussed the MIF report of oil smuggling out of Iraq
and smuggling of other prohibited items into Iraq.
----------------------------------------------------------------------------------------------------------------
May 21, 1999 U.N. Security Council Renewed the Oil for Food program another 6 months (phase
Resolution 1242 VI).
----------------------------------------------------------------------------------------------------------------
Oct. 4, 1999 U.N. Security Council Permitted Iraq to export an additional amount of $3.04
Resolution 1266 billion of oil to make up for revenue deficits in phases
IV and V.
----------------------------------------------------------------------------------------------------------------
Nov. 19, 1999 U.N. Security Council Extended phase VI of the Oil for Food program for 2 weeks
Resolution 1275 until December 4, 1999.
----------------------------------------------------------------------------------------------------------------
Dec. 3, 1999 U.N. Security Council Extended phase VI of the Oil for Food program for 1 week
Resolution 1280 until December 11, 1999.
----------------------------------------------------------------------------------------------------------------
Dec. 10, 1999 U.N. Security Council Renewed the Oil for Food program another 6 months (phase
Resolution 1281 VII).
----------------------------------------------------------------------------------------------------------------
Dec. 17, 1999 U.N. Security Council Abolished Iraq's export ceiling to purchase civilian
Resolution 1284 goods. Eased restrictions on the flow of civilian goods
to Iraq and streamlined the approval process for some oil
industry spare parts. Also established the United Nations
Monitoring, Verification and Inspection Commission
(UNMOVIC).
----------------------------------------------------------------------------------------------------------------
Mar. 31, 2000 U.N. Security Council Increased oil spare parts allocation from $300 million to
Resolution 1293 $600 million under phases VI and VII.
----------------------------------------------------------------------------------------------------------------
Jun. 8, 2000 U.N. Security Council Renewed the Oil for Food program another 180 days until
Resolution 1302 December 5, 2000 (phase VIII).
----------------------------------------------------------------------------------------------------------------
Dec. 5, 2000 U.N. Security Council Extended the Oil for Food program another 180 days (phase
Resolution 1330 IX).
----------------------------------------------------------------------------------------------------------------
Mar. 8, 2001 Deputy U.S. Representative Ambassador Cunningham acknowledged Iraq's illegal re-
to the United Nations export of humanitarian supplies, oil smuggling,
Remarks to the Security establishment of front companies, and payment of
Council kickbacks to manipulate and gain from Oil for Food
contracts. Also acknowledged that the United States had
put holds on hundreds of Oil for Food contracts that
posed dual-use concerns.
----------------------------------------------------------------------------------------------------------------
Mar. 8, 2001 Acting U.S. Representative Ambassador Cunningham addressed questions regarding
to the United Nations allegations of surcharges on oil and smuggling.
Remarks to the Security Acknowledged that oil industry representatives and other
Council Security Council members provided the United States
anecdotal information about Iraqi surcharges on oil
sales. Also acknowledged companies claiming they were
asked to pay commissions on contracts.
----------------------------------------------------------------------------------------------------------------
Jun. 1, 2001 U.N. Security Council Extended the terms of resolution 1330 (phase IX) another
Resolution 1352 30 days.
----------------------------------------------------------------------------------------------------------------
Jul. 3, 2001 U.N. Security Council Renewed the Oil for Food program an additional 150 days
Resolution 1360 until November 30, 2001 (phase X).
----------------------------------------------------------------------------------------------------------------
Nov. 29, 2001 U.N. Security Council The resolution stipulated that a new Goods Review List
Resolution 1382 would be adopted and that relevant procedures would be
subject to refinement. Renewed the Oil for Food program
another 180 days (phase XI).
----------------------------------------------------------------------------------------------------------------
May 14, 2002 U.N. Security Council UNMOVIC reviewed export contracts to ensure that they
Resolution 1409 contain no items on a designated list of dual-use items
known as the Goods Review List. The resolution also
extended the program another 180 days (phase XII).
----------------------------------------------------------------------------------------------------------------
Nov. 6, 2002 U.N. Security Council MIF reported that there had been a significant reduction
Sanctions Committee in illegal oil exports from Iraq by sea over the past
year but noted oil smuggling was continuing.
----------------------------------------------------------------------------------------------------------------
Nov. 25, 2002 U.N. Security Council Extended phase XII of the Oil for Food program another 9
Resolution 1443 days.
----------------------------------------------------------------------------------------------------------------
Dec. 4, 2002 U.N. Security Council Renewed the Oil for Food program another 180 days until
Resolution 1447 June 3, 2003 (phase XIII).
----------------------------------------------------------------------------------------------------------------
Dec. 30,2002 U.N. Security Council Approved changes to the list of goods subject to review
Resolution 1454 and the sanctions committee.
----------------------------------------------------------------------------------------------------------------
Mar. 12, 2003 U.N. Security Council Chairman reported on a number of alleged sanctions
Sanctions Committee violations noted by letters from several countries and
the media from February to November 2002. Alleged
incidents involved Syria, India, Liberia, Jordan,
Belarus, Switzerland, Lebanon, Ukraine, and the United
Arab Emirates.
----------------------------------------------------------------------------------------------------------------
Mar. 19, 2003 Operation Iraqi Freedom Operation lraqi Freedom is launched. Coalition operation
led by the United States initiated hostilities in Iraq.
----------------------------------------------------------------------------------------------------------------
Mar. 28, 2003 U.N. Security Council Adjusted the Oil for Food program and gave the Secretary
Resolution 1472 General authority for 45 days to facilitate the delivery
and receipt of goods contracted by the Government of Iraq
for the humanitarian needs of its people.
----------------------------------------------------------------------------------------------------------------
Apr. 16, 2003 U.S. legislation Public Law 108-11 Sec. 1503 authorized the President to
suspend the application of any provision of the Iraq
Sanctions Act of 1990.
----------------------------------------------------------------------------------------------------------------
Apr. 24, 2003 U.N. Security Council Extended provision of resolution 1472 until June 3, 2003.
Resolution 1476
----------------------------------------------------------------------------------------------------------------
May 1, 2003 Operation Iraqi Freedom End of major combat operations and beginning of post-war
rebuilding efforts.
----------------------------------------------------------------------------------------------------------------
May 22, 2003 U.N. Security Council Lifted civilian sanctions on Iraq and provided for the end
Resolution 1483 of the Oil for Food program within 6 months, transferring
responsibility for the administration of any remaining
program activities to the Coalition Provisional Authority
(CPA).
----------------------------------------------------------------------------------------------------------------
Nov. 21, 2003 U.N. Secretary General Transferred administration of the Oil for Food program to
the CPA.
----------------------------------------------------------------------------------------------------------------
Mar. 19, 2004 U.N. Secretary General Responded to allegations of fraud by U.N. officials that
were involved in the administration of the Oil for Food
program.
----------------------------------------------------------------------------------------------------------------
Mar. 25, 2004 U.N. Secretary General Proposed that a special investigation be conducted by an
independent panel.
----------------------------------------------------------------------------------------------------------------
The Chairman. Thank you very much, Mr. Christoff.
Mr. Thibault.
STATEMENT OF MICHAEL J. THIBAULT, DEPUTY DIRECTOR, DEFENSE
CONTRACT AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE
Mr. Thibault. Thank you, Mr. Chairman.
In May of 2003 the Under Secretary of Defense for Policy
identified a requirement for an evaluation of approved and
funded Oil-for-Food contracts before transition to the CPA. A
team of DCAA auditors, Defense Contract Audit Agency, and
Defense Contract Management Agency Contract Specialists began
work on this evaluation from mid-May until the end of August
2003. A final report was issued on September 12 of last year.
The primary objectives of the evaluation were to review
Oil-for-Food contracts for price reasonableness and develop
recommendations and lessons learned that may be applied to the
transition of the Oil-for-Food Program to the CPA. The team
reviewed 759 contracts valued at $6.9 billion. Approximately 80
percent of these contracts were from Phase 8 or forward, or
that is, from the year 2000 to the present. The review team met
with representatives from the United Nations Office of Iraqi
Program in order to gain an understanding of the review and
approval process for the Oil-for-Food contracts. Although the
Office of Iraqi Programs informed us that they did on occasion
raise pricing issues during their review of contracts submitted
for approval, validating pricing was not part of their mission
since no U.N. resolution had tasked them with assessing the
price reasonableness of the contracts. Therefore the Office of
Iraqi Programs performed very limited, if any, pricing reviews
or cost audits on individual contracts. The DCAA review team
was further advised by U.N. officials that no contracts were
disapproved based solely on pricing.
The results of the joint team review have been provided in
the testimony. The team noted potential overpricing for the
$6.9 billion that the team reviewed, totaling $656 million or
48 percent of the contracts evaluated. The team was unable,
additionally, to reach a definitive conclusion on 44 added
contracts valued at $1.1 billion simply because the contracts
lacked sufficient detail to make the kind of price comparisons
needed to similar goods, or the team was unable to obtain
independent pricing data.
Food commodity contracts were the most consistently
overpriced, with overpricing identified in 87 percent of the
contracts in this category. The potential overpricing by sector
has also been provided within the testimony. The evaluation
team also noted that many of the equipment and vehicle
contracts contained unusually large quantities of spares. The
team was advised that Iraq often purchased and warehoused large
quantities of spares because it was uncertain if they would be
able to obtain them in the future in the Oil-for-Food Program,
specifically if the Oil-for-Food Program expired or if Iraq was
otherwise unable to obtain or import these spares.
The team also attempted to identify contracts with illicit
charges or what's been referred to already today as after-sales
service charge. The team found that identifying the existence
of surcharges is difficult from an examination of the contract
documents themselves since the contract terms and conditions
often do not specifically identify these surcharges. However,
the evaluation did identify several examples of after-sales
service charges that were included, ranging from 10 to 15
percent.
Finally, the team also identified items of questionable
utility for use by the Iraqi people. For example, among the
contracts reviewed by the team were two contracts valued at
more than $16 million for high-end Mercedes Benz touring
sedans, or a total of 300 cars. There were numerous other
similar types of automobile purchases and other types of goods
and services that in the view of the team was not beneficial
for the health and benefits of the Iraqi people.
More recently DCAA has been involved with providing
financial advisory services to support the transition of the
Oil-for-Food Program to the CPA in northern Iraq. We've been
providing recommendations. We have not been issuing audit
reports but we have been providing advisory recommendations
related to inventory controls to the CPA; related to cash
management controls; related to management controls in the
hiring of key staff positions, which is a critical need as has
been mentioned at this testimony, and establishing procedures
to perform bank reconciliations and initial balance sheets for
the banking system which was somewhat limited in their
capabilities.
As an example of the service we've provided, DCA auditors
recently conducted physical perambulations and observations of
Oil-for-Food warehouses in northern Iraq, a total of 17 out of
53 such warehouses. The auditors found a range of issues
including warehouses without electricity or running water;
guards complaining of not being paid; medicine and drugs being
stored in warehouses that do not appear environmentally
appropriate for such items; inventory stored in the open air
without roofs or ceilings or protection or even tarps;
furniture being damaged by being piled into large heaps in an
open environment in the warehouses, and a couple of warehouses
with computers, printers, scanners, copiers and other office
equipment that had basically been set up as homes to very large
numbers of pigeons where the droppings had basically or
essentially gone into this various computer and high technology
equipment which may well have rendered it of minimal value. All
DCA recommendations of this nature have been provided in
writing to the Director of CPA Office of Project Coordination.
Our last activity of support has been based on a request
from Ambassador Bremer dated February 4 of this year, that an
audit, either by the Inspector General or by the DCAA be
performed as part of the transition to look at the kinds of
items, inventory controls, cash management controls, that I
previously mentioned. The decision was made by the new CPA
Inspector General that they would manage that audit and that
DCAA would provide an advisory role, that of a contract and
offer technical representative and that the CPA IG would hire a
CPA firm so that these issues could be properly addressed prior
to the transition. DCAA continues to support that.
So in closing I would like to underscore the DCAA is
absolutely committee to supporting CPA and the CPA IG in
transitioning this important program to the Iraqi people. I
look forward to addressing whatever questions or comments that
you have. Thank you, Senator.
[The prepared statement of Mr. Thibault follows:]
Prepared Statement of Michael J. Thibault
Mr. Chairman, members of the committee, my statement for this
hearing will focus on the Defense Contract Audit Agency's (DCAA)
evaluation of contracts awarded under the Iraq Oil for Food program and
the financial assistance we have provided in the transition of the Oil
for Food program to the Coalition Provisional Authority (CPA).
joint dcaa/dcma evaluation
In May 2003, the Under Secretary of Defense (USD) for Policy
identified a requirement for an evaluation of approved and funded Oil
for Food contracts before transition to the CPA. The Under Secretary of
Defense (Comptroller) requested that DCAA support the USD Policy by
forming a joint review team led by DCAA and the Defense Contract
Management Agency (DCMA). A team of DCAA auditors and DCMA contract
specialists began work on the evaluation from mid-May until the end of
August 2003. A final report was issued on September 12, 2003.
The primary objectives of the evaluation were to review Oil for
Food contracts for price reasonableness and develop recommendations and
lessons learned that may be applied to the transition of the Oil for
Food program to the CPA. The team reviewed 759 contracts (10 percent of
the total 7,591 approved and funded contracts). The 759 contracts were
valued at $6.9 billion, or about 60 percent of the total approved and
funded amount of $11.5 billion. Approximately 80 percent of the
contracts reviewed are from Phase 8 or later (from June 2000 or later).
Contracts were selected for evaluation to represent the broadest
possible range of commodities across all sectors of the Iraq economy.
Selections within the different sectors were based on dollar value,
priority of goods, past issues with certain suppliers, and the
description of the goods to be provided. The State Department worked
with the United Nations Office of Iraq Programme (OIP) to provide the
review team copies of the selected contracts.
The review team met with representatives from OIP in order to gain
an understanding of the review and approval process for the Oil for
Food contracts. OIP's primary focus was an administrative/contractual
review of the items being purchased from a legal (United Nations
Resolutions) perspective. Although OIP informed us that they did, on
occasion, raise pricing issues during its review of contracts submitted
for approval, validating pricing was not part of their mission since no
UN resolution had tasked OIP with assessing the price reasonableness of
contracts. Therefore, OIP performed very limited, if any, pricing
reviews or cost audits on individual contracts. The DCAA review team
was further advised by UN officials that no contracts were disapproved
solely based on pricing.
To evaluate the pricing of the selected contracts, the team
reviewed the terms of the contract and searched for available pricing
information for the goods provided. The type of pricing information the
team utilized included:
World Market prices for food commodities (based primarily on
data from the U.S. Department of Agriculture)
Published Price Lists for the same or similar items
Vendor quotes for the same or similar items
Third-party pricing guides, such as Kelly Blue Book
U.S. Government purchases for the same or similar items
Published Industry Statistics and Standards
Internet research for similar private or public sector
projects and items
For example, our analysis of food contracts was based on world
market prices for the individual commodities (wheat, rice, sugar,
etc.). Data, including market prices and transportation costs for most
food commodities, is maintained by the U.S. Department of Agriculture.
For most of the food commodities, the team was able to obtain market
prices specific to the countries and time periods specified in the
contracts. The analysis of food commodities also included estimated
shipping (including typical insurance costs) to a nearby port and
inland trucking costs to points within Iraq. The analysis did not
include costs for any potential transportation delay and disruption
(demurrage).
The results of the joint team review are shown below:
The team noted potential overpricing totaling $656 million in 48
percent of the contracts evaluated. The team was unable to form a
definitive conclusion on 44 contracts, valued at $1.1 billion because
the contracts lacked sufficient detail to make price comparisons to
similar goods or the team was unable to obtain independent pricing data
for comparable goods.
The review team considered a contract to be overpriced if the
overpricing in total exceeded 5 percent of the contract value. The 5
percent reasonableness threshold was selected to assure that any
reported potential overpricing was conservatively presented and did not
overstate the issue (normally DCAA would take exception to all costs
over an estimated reasonable price). A further breakdown of the
overpriced contracts is shown below:
Food commodity contracts were the most consistently overpriced, with
overpricing identified in 87 percent of the contracts in this category.
The potential overpricing by sector is detailed in the following chart:
The evaluation team also noted that many of the equipment and
vehicle contracts contained unusually large quantities of spares. The
team was advised that Iraq often purchased and warehoused large
quantities of spares because it was uncertain that they would be able
to obtain them in the future if the Oil for Food program expired or if
Iraq was otherwise unable to import goods. The team also evaluated 64
contracts that required the sellers to provide, at their own expense,
training to Iraqi personnel. The contracts almost always stipulated the
duration and location of the training. Generally, the training was to
be offered in the supplier's country. In all cases the training was not
separately priced. The team also attempted to identify contracts with
illicit surcharges (``after sales service charges''). The team found
that identifying the existence of surcharges is generally not possible
from an examination of the contract documents alone since the contract
terms and conditions do not specifically identify the surcharges.
However the evaluation did identify five examples of after sales
service charges ranging from 10 to 15 percent.
Finally, the team also identified items of questionable utility for
use by the Iraqi people. For example, among the contracts reviewed by
the team were two contracts valued at more than $16 million for high-
end Mercedes Benz touring sedans (a total of 300 cars).
dcaa financial support to the oil for food program transition
More recently DCAA has been involved with providing financial
advisory services to support the transition of the Oil for Food program
to the CPA in Northern Iraq. While DCAA has not performed any audits of
the Oil for Food program, the Agency has provided recommendations on
strengthening the CPA's Office of Project Coordination (OPC) internal
and financial controls. These controls include:
Recommendations related to inventory controls
Recommendations related to cash management controls
Recommendations on management controls and the hiring of key
staff positions
Established procedures to perform bank reconciliations and
initial balance sheets
For example, DCAA auditors recently conducted physical
perambulations and observations of Oil for Food warehouses in Northern
Iraq. The auditors found a range of issues including warehouses without
electricity or running water; guards not being paid on time; medicine
and drugs being stored in warehouses that do not appear environmentally
appropriate for such items; inventory stored in the open air; furniture
damaged by being piled into large heaps in an open environment;
computers, printers, scanners, copiers, and other office equipment
damaged by pigeon droppings. In this example, we believe these obvious
inventory control issues are ongoing and need to be addressed by the
CPA before the planned transition to the Iraqi Governing Council on
July 1, 2004. All DCAA recommendations of this nature have been
provided in writing to the Director, CPA Office of Project
Coordination.
planned review of oil for food activities by cpa inspector general
Based on a request from Ambassador Bremer, the CPA 10 is working to
engage an independent accounting firm to review Oil for Food field
activities in Iraq. The objectives of the review will center on
documenting the internal controls associated with the Oil for Food
program, assist CPA officials in effective discharge of their duties,
and ensure that CPA oversight promotes effective control at a
reasonable price.
The evaluation will be conducted in accordance with International
Standards on Assurance Engagements (ISAEs). The review will focus on
the key internal control points of the program as requested by
Ambassador Bremer:
Oil for Food Contract Authentication and Payment Process
Contract Amendment Process
Potential financial liabilities of the Oil for Food
Contracts
For the OFF North Program--the funding, selection, oversight
and administration of the Oil for Food projects
Safeguarding of all Oil for Food Assets (inventory and cash)
Identify risk for fraud, waste and abuse
DCAA has worked with the CPA 10 to refine the statement of work for
the independent accounting firm. The CPA 10 wants the work to commence
by April 15, 2004. DCAA will act as the Contracting Officer's Technical
Representative (COTR). As the COTR, DCAA will monitor the independent
accountant's work to ensure compliance with contract terms and the
quality of the final work product.
closing
In closing I want to underscore that DCAA is committed to
supporting the CPA and the CPA 10 in transitioning this important
program to the Iraqi people. I look forward to addressing whatever
questions or comments that you have. Thank you.
The Chairman. Thank you very much, Mr. Thibault. The
committee has a copy of the Defense Contract Audit Agency
Report that you completed in September. Can the report be made
part of the official record of this hearing? \2\
---------------------------------------------------------------------------
\2\ See Appendix page 157.
---------------------------------------------------------------------------
Mr. Thibault. Yes sir, we have provided that to you and we
have obtained the appropriate clearances within the Pentagon.
Yes it can.
The Chairman. I thank you for that response, as well as for
provision of the report.
Mr. Christoff, was the Oil-for-Food Program structured
differently in the north? If so, can we determine whether it
was run with any greater degree of efficiency there?
Mr. Christoff. One of the key differences is that in the
north the United Nations was responsible for management of the
Oil-for-Food Program. That was in the three northern
governorates versus the 15 southern and central governorates
where the Ministry of Trade was responsible. We have not looked
at whether or not there may have been any differences in terms
of let's say, the price reasonableness of the contracts. But I
think it's a very fair comparison that should be made in any
kind of future investigations.
The Chairman. By raising it in this hearing, we ask those
who are vested with that responsibility to do just that. It
would appear that there was a difference in administration. As
you say, we will have to see what the facts are with regards to
pricing or other aspects of the contracts.
Can you comment on the reported SOMO document, published in
Iraqi media in January? It lists 270 individuals, companies and
states that received oil vouchers from Saddam Hussein.
Mr. Christoff. Senator, I know just about as much as you
know in terms of seeing that list on their Web site and the
list of purchasers of the oil vouchers. But we haven't looked
into any of that in detail.
The Chairman. Who published that document, and how did it
come into the hands of the Iraqi media?
Mr. Christoff. I don't know.
The Chairman. What percentage of contract holds within the
UNOIP or the 661 Committee were made by U.S. officials?
Mr. Christoff. When we did our report 2 years ago, I
believe as of April 2002 there were $5.1 billion in holds.
Those were holds on dual-use contracts. They were not holds
related to any pricing concerns. And 90 percent of the holds
were placed by the United States, I think about 10 percent by
the U.K.
The Chairman. For the record, please define what a dual-use
contract would be.
Mr. Christoff. Sure. A dual-use item, first of all, is an
item that can be used for either commercial or military
applications. One example of an item that was placed on hold
was chemical fertilizers. It was placed on hold because of the
concern about the reconstitution of chemical weapons
productions within Iraq.
The Chairman. How did such items as fertilizer or other
items of this variety get to be included as goods purchased
under the Oil-for-Food Program? How common was that?
Mr. Christoff. Well, in terms of the restricted items, if
that's what you're referring to, Senator, when the United
Nations moved to what was called smart sanctions in May of 2002
there was a general goods review list which specifically listed
hundreds of items that were prohibited from being sent into
Iraq or which would require greater scrutiny, very much like
the control list that our Commerce Department uses.
The Chairman. Mr. Thibault, you mentioned the Mercedes Benz
touring sedans and other vehicles. How did this ever get into
the picture, in your judgment?
Mr. Thibault. I can't describe specifically how it got into
the picture other than to state that when we were visiting with
United Nations officials, when our auditors were visiting with
them they described that, and they were candid about it, that
they had received allegations that many of the items of
questionable utility such as the Mercedes Benz sedans or some
of the equipment, in one case, or several cases there were
private gymnasiums, for example, that these were used as either
rewards for people in the prior regime or were set up for
resale. For example, in the period we looked at there were
37,000 automobiles----
The Chairman. Thirty-seven thousand automobiles?
Mr. Thibault [continuing]. That were approved and what we
were told is it was likely, and that was the allegation, that
these were being resold as a way of generating cash for
officials in the prior regime.
The Chairman. There have been allegations that Saddam
Hussein infiltrated the United Nations organization with his
own intelligence officials. Is there any evidence that you have
found of that?
Mr. Christoff. No sir, that would have been an excellent
question for the first panel.
Mr. Thibault. We saw no indication of that also, sir.
The Chairman. Well, we'll take a second try. We will ask
that of the first panel under the reservation that the Chair
suggested, stipulating that the hearing record remain open for
questions throughout the day.
Mr. Christoff. Excellent.
The Chairman. Which states benefited most from the OFF
kickbacks? What do their mission officers say when confronted
with this information?
Mr. Christoff. You know Senator, that's the question that
you posed to the first panel as well and that we're trying to
get a handle on, the totality of the contracts. I have some
information that's just referring to 1998 to 2001--I'm not
necessarily referring about kickbacks but in terms of the
countries that were the chief suppliers of commodities were
Russia, Egypt, France, China, and Jordan. And I think getting
the totality of the information and making it public is
important to have a complete understanding of who were the
chief suppliers of the commodities, who were the chief
purchasers of the oil as well.
The Chairman. Has there been any reaction from their
missions to the U.N., their embassies with regard to these
reports?
Mr. Christoff. I haven't chatted with them, no.
Mr. Thibault. Mr. Chairman, if I might?
The Chairman. Yes, sir.
Mr. Thibault. While we looked at a small snapshot, it was
still $6.9 billion worth of costs. And in answer to your
question we identified what we saw--we built a data base of
each and every contract, each and every company that we
reviewed and we provided that to CPA officials and State
Department officials. And in our data that we evaluated there
were eight countries that represented almost 70 percent of the
potential overpricing that we identified and those countries
alphabetically, and we used a criteria of $30 million or more
and at the ninth country it fell down to like $14 million. So
there was a clear break that amounted to 70 percent for eight
countries out of about 50. And those countries alphabetically
were Egypt, Jordan, Russian, Syria, Thailand, Turkey, United
Arab Emerates, and Vietnam. And we also, again because we have
a data base, we cut the list where there are 34--and this
question came up earlier--there were 34 specific companies for
country missions that amounted to--and we looked at a total of
about 400 companies, so less than 10 percent amounted to
exactly two-thirds of the potential contract overpricing. So
it's interesting that within the data you can actually narrow
it down to a fairly specific focus.
The Chairman. Clearly a lot of countries were doing a lot
of business, not only with dual-use items, but with many other
goods as well, some of which have been retraded for the benefit
of the Iraqi Government. This obviously leads to questions with
regard to the Saddam regime itself, and as to why other
governments might have been reticent to see all of this come to
an end. World rhetoric alternated between lamentations about
cruelty to Iraqis, the potential for aggression by Iraq against
its neighbors, and attempts to build weapons of mass
destruction, on the one hand; and business as usual, with
billions of dollars of business being transacted on the other
hand. This was of great benefit to a number of countries that
may have been looking for a jobless program. That might have
led some countries to say, let's don't be so fastidious about
whatever is occurring in Iraq, we have really a good thing
going. There's an overall impression that a great number of
people, countries, entities were doing well in this situation,
and that there was reticence on the part of the Security
Council or the U.N. administration, either through ignorance of
all of it or through reluctance to know much more. Perhaps we
would not know what we know now without the United States
having been in a position to finally seize the records and to
begin to read what is there. No other nation, perhaps, had that
much volition or interest. That's the basic question of the
hearing. How do we get a change in culture with regards to the
United Nations? Other nations may also be involved in this as
we proceed toward international regimes that are very
necessary, whether it be U.N. responsibilities in Iraq, or U.N.
responsibilities in many other countries that may come along.
Yes.
Mr. Christoff. Senator, I would extend your point and also
talk about how do you change the culture within the ministries
within Iraq as well.
The Chairman. Yes.
Mr. Christoff. Since if you've had a legacy of corruption,
how do you build the capacity to ensure that they are going to
be using resources, not only our resources but their own
resources, in a very fair and accountable and transparent
manner.
The Chairman. Well, that clearly is the theme of this
hearing. Senator Biden has illuminated those issues so well,
but I would second the motion. I suspect that this is why we
are very intensely interested in the planning that our
government is doing now, and what it means to transfer
sovereignty. The first witness of the day, Ambassador
Negroponte, said that Iraq had sovereignty, and therefore
Saddam Hussein was making the decisions as to what was bought
and sold there. Now, another Iraqi Government, hopefully a
democratic one, one with very good intentions, is about to
proceed. What will its checks and balances be? Will there be
any? We want to hear a lot more, very soon, because this is not
an academic issue for State and Defense. What we're talking
about today gets fundamentally to a question of, what can we
anticipate, as a country, as a world, with regard to Iraqi
sovereignty? Who will make decisions then? Who will make the
audits? Might we find ourselves once again confronting a
culture that might consider it naive to even raise these
questions that we're raising today?
Mr. Christoff. Almost calls for an amen, Senator.
The Chairman. Thank you. Let me just ask, finally, how many
contracts that you reviewed, Mr. Thibault, were refused for
content of the goods? You mentioned dual-use. That's one reason
why that might have occurred. Huge amounts of spare parts, for
example, might also be of suspicion. Would that be a reason why
somebody might take a look at such a contract?
Mr. Thibault. Senator, we saw no instances, and you're
exactly right about the spare parts. To use my automobile
example, the vehicles, which is just one sector,
transportation, the 37,000 vehicles actually averaged about
$1,200 spare parts for each vehicle when they were shipped in.
There were no disapprovals for goods, either based on the fact
that they were--at the time, by the prior regime and by the
United Nations auditors' screening process, either based on the
content, other than weapons of mass destruction or dual-use or
potential weapons of mass destruction. And that was explained
to us by the United Nations, and there were no refusals or
disapprovals based on cost.
The Chairman. Let me ask both of you, as I did of our first
witnesses, please, if you will, respond to questions that may
be raised additionally by other Senators during the course of
the day, as soon as you can, for the completeness of the
record. We very much appreciate your public service. Staff has
given to me other documents that should be a part of this
record. Therefore I ask unanimous consent, and being the only
Senator here, will grant that, that a statement by Ambassador
Bremer regarding CPA's cooperation in the OFF investigation be
placed in the record; and also a statement from UNICEF
regarding nutrition trends in Iraq; a statement from WHO; a
copy of the United Nations-Saybolt Contract and questions
answered by their general counsel via e-mail with the Senate
Foreign Relation Committee's staff, and a statement from
Cotecna.
I further ask unanimous consent that the record of this
hearing remain open until the close of business, Thursday,
April 8. That will give opportunities for those senators who
have heard this hearing, or their staffs to prompt Senators to
get their questions in. So we will grant permission that all of
this be made a part of the record, including the excellent
statement you have submitted, Mr. Thibault. We thank you for
that.
I thank both of you individually for your forthcoming
answers and for your service.
Mr. Christoff. Thank you sir.
Mr. Thibault. Thank you sir.
The Chairman. The hearing is adjourned.
[Whereupon, at 12:21 p.m. the committee adjourned, to
reconvene subject to the call of the Chair.]
APPENDIX
----------
Prepared Statement of Senator Russell D. Feingold
I thank the chairman and ranking member for holding this important
hearing, and I thank all of the witnesses for their testimony.
Since late last year, we have gathered more and more information
regarding abuses of the Oil-for-Food Program that was intended to ease
the burden borne by the Iraqi people under Saddam Hussein's regime.
What we know thus far suggests behavior that was simply unacceptable
and in some cases quite likely criminal. Getting to the bottom of who
was involved in abuse and why oversight mechanisms failed to expose and
stop abuse sooner is critically important--not only for the Iraqi
people, who have suffered for so many years, but also for the American
people and people around the world who hear of these revelations and
ask themselves why they should have confidence in the basic competence
and integrity of the United Nations. Transparency and accountability
are absolutely crucial to the future of U.S.-U.N. relations.
At the same time, we cannot allow those countries and corporations
involved in corrupt practices that undermined a system established to
bring some humanitarian relief to Iraq to avoid scrutiny by focusing on
United Nations officials alone. We need a thorough accounting for the
past that examines the roles played by everyone involved; we need to
ensure that those involved in this scandal are held accountable for
their actions; and we need to ensure that appropriate reforms are
implemented to ensure that this kind of corruption cannot take root
again.
______
Prepared Statement of Ambassador L. Paul Bremer, III, Administrator,
Coalition Provisional Authority (CPA)
Mr. Chairman and Members of the Senate Foreign Relations Committee:
I welcome this opportunity to provide a statement for the record
concerning the Coalition Provisional Authority's (CPA's) response to
allegations of misconduct involving the Oil for Food (OFF) Program,
which was established by the United Nations (U.N.) in April 1995 in
U.N. Security Council resolution no. 986.
The CPA intends to cooperate fully with the numerous investigative
and oversight efforts currently underway regarding the former U.N. OFF
Program. The CPA will not conduct its own investigation into this
matter, and instead is taking immediate steps to ensure that
potentially relevant documents are safeguarded and inventoried, and
that witnesses who may know of misconduct are identified, in order to
facilitate full and prompt access to this evidence by authorized
investigative bodies.
In a letter to the CPA dated March 11, 2004, the U.N. Under-
Secretary-General for Internal Oversight Services inquired into the
status of his request for access to information concerning allegations,
arising from records from the former Iraqi Ministry of Oil, that
certain individuals, including U.N. staff members, purportedly received
bribes in the form of oil and/or money, in connection with the
administration of the OFF Program. The U.N. Under-Secretary General for
Internal Oversight Services requested that the CPA provide direct
access to individuals within the Iraqi Governing Council and interim
ministries who had raised allegations of misconduct, and to Ministry of
Oil documents relevant to these allegations. On March 13, the CPA
responded to the Under-Secretary General for Internal Oversight
Services by describing various CPA measures to facilitate
investigations of this matter by the U.N. and other bodies.
Specifically, on March 14, I directed all interim Iraqi ministers,
CPA senior advisors, and Regional Governance Coordinators to identify
and safeguard all OFF-related information, including contracts,
amendments and annexes to contracts, and supporting materials. My
directive states that documents should be inventoried and recorded,
with notations of all irregularities--including any evidence of bribes,
kickbacks or corruption.
My directive also requires interim Iraqi ministers to identify and
make available any current ministry officials who may have knowledge of
misconduct arising from the administration of the OFF Program. I
directed the ministers to provide the names of such officials, and
their contact information, to a designated CPA official who is serving
as a point of contact on this matter, no later than March 21. We have
begun to receive those names.
A U.N. team from New York is expected to come to Baghdad soon, and
we will cooperate fully with its members and facilitate their full and
immediate access to relevant documents and witnesses. We welcome U.N.
involvement in this matter, and have recommended that the U.N.
designate individuals to join with CPA officials and Iraqi, nationals
in safeguarding and inventorying records at key ministries.
At CPA's request, the Iraqi Board of Supreme Audit (BSA) has agreed
to participate fully in the process to safeguard and inventory records.
This Board, now comprising some 1,200 employees, will provide impartial
oversight. The BSA has assigned personnel on a full-time basis to each
ministry to confirm that records are safeguarded. We have identified a
secure central evidence repository for this purpose. In each ministry,
the CPA-BSA teams seek meetings with the Minister or Inspector General
to directly and personally request that they identify individuals with
knowledge of abuses. The BSA teams will remain at each ministry to
assist in completing inventories.
An external audit, which will be overseen by the BSA, will be
undertaken as soon as possible by a firm chosen in a full, open and
competitive process to investigate thoroughly alleged abuses under the
OFF program that may have occurred prior to November 21. The CPA is
making $5 million available from the DFI for this audit. We will work
with the BSA to ensure that the auditors have complete access to
information and individuals who may have knowledge of OFF Program
abuses. The CPA is also in the process of identifying an external firm
to audit its role in administering the OFF Program since November 21.
The OFF Program now administered by the CPA works with Iraqi
partners to build Iraqi capability to distribute food and other
essential needs to Iraqi people. If allegations of bribery and
kickbacks in the OFF Program are proven, it will be yet another example
of the former regime's utter disregard of the humanitarian needs of the
Iraqi people. As stewards acting on behalf of the Iraqi people and for
their benefit, the CPA will continue to support all authorized
investigations and audits of the OFF Program, in order to ensure that
those who may have profited at their expense are held accountable, and
to recover, if possible, Iraqi assets that may have been improperly
diverted for private gain.
Thank you for allowing me to share my observations.
______
Prepared Statement of United Nations Children's Fund (UNICEF)
introduction
After the Gulf war, a nation wide rationing system was introduced
in Iraq following the imposition of sanctions. All families in Iraq
received a monthly food ration distributed each month by the
government, and approximately 60 percent of the population was fully
dependent on it to meet all household needs. Since households' income
dropped significantly after the war, the poorest families often sold
part of the food ration to purchase other necessary items such as
medicines and clothing. The calorie intake per capita dropped from an
estimated 3,315 kcal pre-1990 to 1,093 kcal in 1995.
Acting under Chapter VII of the UN Charter, the Security Council
adopted resolution 986, establishing the Oil for Food program (OFFP),
providing Iraq with the ability to sell oil to purchase humanitarian
goods. Oil was first exported under the program in December 1996 and
the first shipment of supplies arrived in March 1997. UNICEF, WFP, FAO
and WHO were directed to work on the nutritional status of children.
According to the UN Food and Agriculture Organization and The
American Journal of Public Health (2000), the calorie intake per capita
began to steadily increase in 1996. Although the caloric content of the
ration increased to 2,215 kcal in 2002 through the implementation of
the OFFP Targeted Nutrition Program, it did not meet the minimum level
of 2,472 kcal set by the UN Secretary General under the OFFP.
------------------------------------------------------------------------
Pre-
1990 1991 1992 1993 1995 1996 1997 1999 2002
------------------------------------------------------------------------
3,315 1,300 1,770 1,654 1,093 1,295 2,030 2,150 2,215
------------------------------------------------------------------------
(Source: Daponte, BO, Garfield, RM. ``The Effect of Economic Sanctions
on the Mortality of Iraqi Children prior to the 1991 Persian Gulf
War.'' American Journal of Public Health 2000, FAO/WFP Food Supply and
Nutrition Assessment Mission to Iraq, 1997; FAQ/GOI, Evaluation of the
Food and Nutrition Situation in Iraq, 1995.)
nutritional status of children
While data was not easily attained in Iraq, there were a number of
studies conducted that measured the rate of malnutrition among Iraqi
children. In 1991, for instance, a study conducted by a team from
Harvard University and in 1996 a series of Multiple Indicator Cluster
Surveys (MICS) undertaken by UNICEF and the Government of Iraq in
Northern and South/Central Iraq revealed an increase in the rates of
child malnutrition between the years of 1991 and 1996.
The 1996 UNICEF-GOI MICS confirmed that chronic malnutrition
(stunting) was 31%, underweight 23% and acute malnutrition (wasting)
10%. These figures reflected deterioration in the nutritional status of
children, when compared to the results reported by the Harvard Study
Team in 1991. The Harvard Team had observed rates of 22%, 12% and 3%
respectively.
The national data available shows a decline in rates of child
malnutrition from 1996 to 2000. Additional data is available for south/
central Iraq and extend the trend to 2002 showing a sustained decline
in malnutrition among children under five years old. The 2000 UNICEF-
GOI MICS data for south/central Iraq, for instance, showed that
nutrition rates were improving, with chronic malnutrition measured at
30%, underweight at 19.5% and acute malnutrition at 7.8%. This
improvement continued and was confirmed through a 2002 UNICEF-GOI
survey. Chronic malnutrition was measured at 23.1%, underweight at 9.4%
and acute malnutrition at 4%.
------------------------------------------------------------------------
1996 2000 2002
------------------------------------------------------------------------
Chronic Malnutrition 32 30 23.1
Underweight 12 23 16
Acute Malnutrition 11 7.8 4
------------------------------------------------------------------------
(MICS-UNICEF/GOI 1996 Report with results from South/Central
Governorates; MICS-UNICEF-GOI 1996 Report with results from Northern
Governorates; UNICEF 2002 Nutritional Survey overview of under-fives
in South/Central Governorates; UNICEF State of the Arab Child, 2002;
Arab Human Development Report, 2002, UNICEF and Central Statistical
Organization, Republic of Iraq.)
------------------------------------------------------------------------
1991 1996 2000
------------------------------------------------------------------------
Chronic Malnutrition 22 31 22
Underweight 12 23 16
Acute Malnutrition 3 10 6
------------------------------------------------------------------------
(Harvard Study Team, ``Effects of the Gulf Crisis on the Children of
Iraq,'' New England Journal of Medicine 325, no. 13 (1991,); MICS 1996
Report with results from South/Central Governorates; MICS-UNICEF-GOI
1996 Report with results from Northern Governorates; MICS-UNICEF-GOI
2000 South/Central and Northern Governorates).
______
Prepared Statement of the World Health Organization
``the situation of health supplies for iraq under the offp, 1996-2002''
Pre-1991 Situation
Before 1990, Iraq had a GNP per capita of US$ 2,800 and belonged to
the group of middle-income countries. Extensive investment in
infrastructure and in human resources development during the 1960s and
1970s contributed to the development of an efficient hospital-based
health system that was considered one of the best in the Middle East
region.
Malnutrition was rarely seen since households had easy and
affordable access to a balanced dietary intake. Health care services
were delivered by an extensive network of well-equipped, well-supplied
and well-staffed health facilities, supported by a distributed network
of secondary and tertiary hospitals/institutions accessible to all.
Ambulances and emergency services were well developed and benefited
from a properly maintained network of roads and telecommunications.
1991-1996 Situation
The sanctions imposed on Iraq in 1991 unintentionally had a
damaging effect on health facilities and programmes upon which the
health of the population was heavily dependent. In particular, owing to
the impossibility of obtaining foreign exchange from the sale of oil,
the importation of medicines and other health supplies was drastically
restricted. Although the United Nations sanctions did not apply to food
and medicine, the absence of revenues from oil sales left Iraq with
virtually no money to spend for imported food and medicines.
As a result, many essential public health services dependent on
imported items were severely compromised. Vaccination programmes were
hampered by lack of vaccines, syringes and cold chain equipment. The TB
control programme, blood transfusions, and water quality control
services could not function due to lack of laboratory reagents and
kits. Emergency and ambulance services for the referral of patients
could not carry out their functions, due to lack of or inadequate
provision of equipment and supplies. A declining number of laboratory
investigations and surgeries could be performed, as seen in the
following tables.
------------------------------------------------------------------------
Laboratory Investigation
------------------------------------------------
Number %, as % of 1990
------------------------------------------------------------------------
1990 11,370,183 100
1991 7,625,355 67
1992 7,079,420 62
1993 6,914,706 61
1994 6,316,611 54
------------------------------------------------------------------------
Source: Ministry of Health, Government of Iraq.
Note: 3 Northern Governorates excluded.
------------------------------------------------------------------------
Surgical Operations
------------------------------------------------
Number %, as % of 1990
------------------------------------------------------------------------
1990 90,318 100
1991 78,089 87
1992 65,372 73
1993 62,463 69
1994 56,153 62
------------------------------------------------------------------------
Source: Ministry of Health, Government of Iraq.
Note: 3 Northern Governorates excluded.
This was the situation in 1995 when the Security Council adopted
SCR 986 which established the Oil for Food Programme (OFFP) to allow
for the sale of oil to purchase food and essential health supplies.
Situation under the Oil for Food Programme 1997-2002
In 1997 the first health supplies financed under the Oil for Food
Programme (OFFP) arrived in Iraq.
The contracting process for health supplies under OFFP was complex
and time consuming, requiring identification of suppliers, bidding, and
submission of contracts involving many actors before contracts reached
the Office of the Iraq Programme for final approval. After final
approval, long lead times for shipping and delivery of health supplies
to Iraq--eight months on average--delayed further the deployment of
vital health supplies. Hospital equipment, in particular, was affected
by ``holds'' placed by the 661 Committee.
In 1999 WHO reported that ``40 percent of key basic drugs available
at almost all of the health facilities observed were financed under
Security Council resolution 986 (1995) while the remainder were from
other sources.'' Shortages were nevertheless still prevalent. A study
carried out the same year on 239,051 patients for whom antibacterial
drugs were prescribed revealed that only 35 percent received the full
course of treatment. Most drugs were rationed; there were still
shortages of essential drugs--e.g. anti-tuberculosis drugs--and of
medical supplies such as test tubes, syringes, needles and sutures.
Shortage of disposable syringes adversely affected immunization
programmes and the safety of injections. Medical equipment such as
infant incubators, dialysis machines, ultrasonic and x-ray equipment,
electrocardiograph machines, general laboratory equipment and patient
monitors remained in short supply.
By 2001, health services had started benefiting from the inputs of
the OFFP, and improvements in the health status of the population
started becoming apparent. Cases of malaria, polio and diphtheria
declined. Shortages of drugs and hospital equipment were, however,
still being reported: only 30 percent of the essential drugs at
hospitals were received in adequate quantities, and the stock of human
vaccines in the country was still falling short of annual requirements.
Some essential medicines, basic medical equipment, laboratory reagents
and hospital supplies were in short supply due to late submission of
contracts by the GOI, holds on applications, or erratic arrivals.
------------------------------------------------------------------------
Year Cases Reported
------------------------------------------------------------------------
1997 13,959
1998 9,684
1999 4,134
2000 3,859
2001 1,120
------------------------------------------------------------------------
------------------------------------------------------------------------
Year Total Confirmed Polio Cases
------------------------------------------------------------------------
1996 21
1997 28
1998 37
1999 8
2000 4
2001 0
------------------------------------------------------------------------
------------------------------------------------------------------------
Year Cases Reported (incidence rate per 100,000)
------------------------------------------------------------------------
1989 96 cases (0.53)
1990 168 cases (0.89)
1991 511 cases (2.61)
1992 369 cases (1.91)
1993 239 cases (1.20)
1994 132 cases (0.66)
1995 119 cases (0.58)
1996 258 cases (1.18)
1997 290 cases (1.29)
1998 160 cases (0.67)
1999 142 cases (0.59)
2000 34 cases (0.14)
2001 32 cases (0.12)
------------------------------------------------------------------------
By 2002 the OFFP inputs to the health system--from sutures to
laboratory equipment--had translated into improved health services.
Compared to 1997, major surgeries had increased by 40 percent and
laboratory investigations by 25 percent in the center and south.
Throughout the country there had been a substantial reduction in
vaccine preventable diseases because of improved quality of
immunization campaigns including increased availability of vaccines.
In the last quarter of 2002 the health supply situation had further
improved: approximately 80 percent of the essential drugs tracked in
the hospitals and chronic illness pharmacies were adequate. In other
peripheral health facilities, however, drugs continued to be available
only in limited quantities. Daily rationing of medicines, except for
in-patient services, was still the norm.
By the end of 2002, a cumulative total of US$ 2,074 million of
health supplies had reached Iraq through the OFFP with absolute and per
capita quantities having steadily increased over time. At that point in
time about half the cumulative total of pharmaceuticals and medical
items approved by the UN had been delivered to Iraq, with others still
en route. The relatively high number of contracts on hold and the
overall modest level of GOI funding for health supplies contributed to
the limitations in health services for final users but the situation
had improved measurably since 1995. The table below shows the
increasing value of health supplies received in Iraq from 1997 to end
of 2002, resulting in a gradually improving health situation due to
increasing level of material inputs but a still inadequate level of
supplies available on a per capita basis for essential health needs.
For comparison purposes, in 1996 per capita pharmaceutical consumption
alone was US$ 36 in Jordan and about US$ 15 per capita in Egypt.
Health supplies received in Iraq under OFFP in the period 1997-2002
------------------------------------------------------------------------
Average annual value
Health supplies received per capita of health
(Pharmaceuticals and supplies received
Equipment) \1\ (estimated pop. 25
million)
------------------------------------------------------------------------
1997-1999 US $ 751,439,966 US $ 10.02
2000 US $ 318,070,519 US $ 12.72
2001 US $466,464,318 US $ 18.66
2002 US $ 538,041,811 US $ 21.52
------------------------------------------------------------------------
\1\ Figures do not include Medical Equipment procured by WHO for the 3
Northern Governorates.
Throughout the OFFP, the overall quality of drugs and medical
supplies to Iraq was not particularly worrisome despite the fact that
Iraq was never allowed to include commercial protection clauses in OFFP
contracts. By the end of 2002 only 0.69% of drugs, vaccines and
insecticides received in Iraq under the OFFP had failed quality control
tests. While technical limitations of the Quality Control Laboratories
in Baghdad might imply that this low level of reported failures could
be questioned, nevertheless QC failure rates observed in GOI contracts
received by WHO under SCR 1472 and independently tested in Jordan
highlighted comparable results: out of US $ 127 million value of drugs
received in Amman, failure rates were around 0.25% of the total value.
______
Cotecna Inspection S.A.
58 rue de la Terrassiere,
PO Box 6155, CH-1211
Geneva 6, Switzerland, April 7, 2004.
Senator Richard G. Lugar, Chairman
Senator Joseph R. Biden, Jr., Ranking Member
U.S. Senate Committee on Foreign Relations,
Dirksen Senate Office Building,
Washington, DC 20510
USA
Dear Senators Lugar and Biden:
It is my understanding that the Senate Foreign Relations Committee
will be conducting a hearing on Wednesday, April 7, 2004 reviewing the
United Nations Oil-for-Food Program. In recent weeks, there have been
several articles in the media regarding this program mentioning Cotecna
Inspection S.A. (``Cotecna''), as our company was authenticating goods
imported into Iraq under the UN Oil-for-Food Program.
Recognizing the scope of your hearing and future deliberations,
Cotecna would like to have the opportunity to submit for the record two
documents:
1.) a ``Guide to authentication procedures'' we followed in
Iraq, along with
2.) a statement issued by the company which clarifies a
number of issues raised in op-eds and articles regarding
Cotecna's technical and limited mission in Iraq.
Cotecna has a record of professionalism in the industry which we
feel is being unfairly called into question and we want you to know
Senator Lugar as Chairman and Senator Joseph Biden as Ranking Minority
Member that we are prepared to provide the Committee with any further
information you may require.
Respectfully,
Robert M. Massey,
Chief Executive Officer.
The Role of OIP and Cotecna--Prior to March 2003
In April 1995 the Security Council adopted Security Council
resolution 986 which established the Oil for Food Programme and
permitted the former Government of Iraq to utilize 53 per cent of the
revenue from oil sales for the purchase of humanitarian goods in the
South and center of Iraq. The share of the oil revenue allocated to the
former Government of Iraq was later increased to 59 per cent. The
United Nations agencies were allocated 13 per cent of the oil sales
revenue to implement the programme in the North of Iraq. The revenue
from oil sales was held in an escrow account referred to as the United
Nations Iraq account administered by BNP Paribas under the supervision
of the United Nations Treasury.
Paragraph 8.a.(iii) of resolution 986 requested the Secretary-
General of the United Nations to receive authenticated confirmation
that exported goods had arrived in Iraq and for this purpose the United
Nations contracted an Independent Inspection Agent.
Cotecna S.A., an international inspection company, based in
Switzerland, was appointed as the United Nations Independent Inspection
Agent from February 1999 until the termination of the Oil for Food
Programme on 21 November 2003.
Cotecna established teams of inspectors at 5 inspection sites
referred to as entry points to Iraq. These were located at Zakho, Al
Walid, Trebil and Ar'ar on the respective land boundaries with Turkey,
Syria, Jordan and Saudi Arabia. A fifth entry point was located at Umm
Qasr, the sea port in the South of Iraq. The inspection site at Ar'ar
only became operational in November 2002, at the request of the former
Government of Iraq and no consignments were ever presented for
authentication at this entry point.
During the course of the Oil for Food Programme, the Office of the
Iraq Programme (OIP) assigned a unique Comm. (communication) number to
each contract processed and suppliers were required to list every item,
however small, destined for shipment to Iraq. This necessitated the
submission of a detailed list of the contracted items, each line item
consisting of a description of the goods (including part numbers), the
quantity and the unit values. Information concerning each line item was
transferred by, OIP, to the Oil for Food database. The supplier was
also required to select a single point of entry to Iraq. Once an
application had been approved and funded, OIP issued an approval/O.C.
(official communication) letter to the supplier authorizing the export
of the contracted goods and specifying the point of entry to Iraq.
Information concerning approved and funded contracts was replicated
by OIP to the relevant Cotecna site through which the goods were
destined for delivery. For security reasons other sites could not
access the data. Suppliers were permitted to change the points of
entry, as required, at which point a revised approval letter reflecting
the change was issued, by OIP, and the database information was
replicated to the alternative Cotecna site.
Approval letters issued by OIP were generally issued with a
validity period of one year. Goods could not be authenticated if the
validity of the approval letter had expired. In such cases suppliers
were required to submit an extension request and OIP issued an extended
approval letter.
OIP advised the UN Treasury and former Government of Iraq upon the
issuance of each approval letter which served as the trigger for the
submission of letters of credit (LCs) to Treasury by the Central Bank
of Iraq. Treasury reviewed each LC received before instructing BNP
Paribas to open the letter of credit.
It was agreed that Cotecna would physically inspect approximately
10 per cent of the delivered goods. This sampling ratio is considerably
higher than that employed by customs organizations which typically
carry out physical inspection of 3 per cent of imported goods.
Authentication for the remaining 90 per cent of contracts was based
upon documentary inspection procedures. In addition, Cotecna drew
samples of all food stuffs entering Iraq and authentication was
deferred until laboratory analysis had confirmed the goods to be fit
for human consumption. The Government of Iraq lobbied strongly and
repeatedly for deferred authentication to permit internal quality
control tests which might facilitate the rejection of sub-standard
goods. The United Nations resisted these requests as the process was
designed to be independent and deferral of authentication was not
mandated by the Security Council. In cases where the Government was not
satisfied with the delivered goods the United Nations advised that
normal commercial dispute resolution procedures, to include arbitration
if required, should go forth.
At the conclusion of the inspection process Cotecna inspectors
prepared a standardized confirmation often referred to as
authentication sheet(s), extracted from the shipment inspection report.
The shipment inspection reports and authentication sheets were issued
by either team leader or deputy team leader at each site and were
replicated to OIP via Oil for Food database (shipment inspection
reports) and via e-mail (authentication sheets) respectively. Upon
receipt of the authentication sheets, OIP staff verified that the
information was accurate and consistent with line items entered on the
database. The standardized confirmations were then dispatched
electronically to the United Nations Treasury whereupon an instruction
was issued by Treasury to BNP Paribas to effect payment against the
letter of credit.
agency goods
The payment system for agency goods operated under different
procedures. Agencies were allocated tranches of revenue to implement
activities in their respective sectors and payments were made directly
by the agencies to suppliers.
In the early days of the Programme goods contracted by the UN
agencies were not presented for authentication and data concerning the
quantity and value of goods delivered to the North of Iraq was compiled
from reports presented to OIP by the agencies. In late 1998 the
Executive Director, OIP, requested that all agencies present their
goods to the independent Inspection Agent for authentication purposes
in order that reliable, immediate data concerning deliveries under the
13 per cent account be available instantaneously from the Oil for Food
database. To this effect the UN agencies arranged daily convoys of
agency goods from the Turkish border to the inspection site in Zakho.
interim authentication mechanism--post march 2003
On 28 March 2003 the Security Council adopted resolution 1472 which
authorized the Secretary-General to establish alternative locations,
both inside and outside Iraq, in consultation with the respective
governments, for the delivery, inspection and authenticated
confirmation of humanitarian supplies and equipment provided under the
Programme, as well as to re-direct shipments of goods to these
locations, as necessary. Security Council resolution 1472 also required
the United Nations agencies and Programmes to identify essential
humanitarian goods which could be shipped within the period mandated by
the resolution. The mandate established by resolution 1472 and extended
by resolution 1476 was valid to 3 June 2003.
Under the interim revised authentication mechanism established by
resolution 1472, rather than delivering goods to Iraq, suppliers were
required to deliver to locations within the region agreed, in advance,
with the UN agencies. The UN agencies and programmes were assigned
responsibility for the storage and onward distribution of the goods
following delivery to the agreed destinations.
In consultation with OIP, Cotecna established alternative delivery
locations in Iskenderun (Turkey), Latakia (Syria), Aqaba (Jordan),
Kuwait city and Dubai (UAE). From these locations Cotecna inspectors
traveled to warehouses and ports in countries located across the region
to inspect and authenticate goods prioritized by the UN agencies for
delivery to Iraq pursuant to resolution 1472. The UN agencies were
advised to request that the goods be authenticated only once they had
assumed full control of the consignments. Such requests were submitted,
by the agencies, to OIP. Once OIP had ascertained that the contracts
had been prioritized pursuant to resolution 1472 and the contract
amended accordingly, Cotecna was advised to inspect and authenticate
the goods. In certain, exceptional, cases OIP agreed, with agencies
such as WFP or WHO, to carry out the inspection of the goods but defer
authentication until the agency had confirmed that the goods had been
delivered to Iraq or that quality control tests had been successfully
concluded.
implementation of security council resolution 1483--revised
authentication mechanism
On 22 May 2003 the Security Council adopted resolution 1483 which,
in addition to terminating the Oil for Food Programme, required the UN
agencies and programmes, in coordination with CPA, to establish the
relative utility of each approved and funded contract for delivery to
Iraq.
This presented a requirement to create a revised authentication
mechanism based upon authentication within Iraq rather than the
alternative delivery locations established under resolution 1472.
In July 2003 OIP staff met with representatives of the CPA in
Baghdad to negotiate an authentication mechanism based upon inspection
of goods within Iraq. It was agreed that Cotecna would establish bases
in Kirkuk, Baghdad, Basrah and Umm Qasr, from which inspectors would be
deployed to inspect goods at delivery locations nominated by each Iraqi
Ministry. This plan was abandoned, one week prior to its
implementation, following the evacuation of UN staff and contractors
from Iraq after the bombing of the UN headquarters on 19 August 2003.
A variety of alternative options were discussed by OIP, CPA and
Cotecna. Discussions were limited by the fact that the UN Security
Coordinator would not approve any return of Cotecna inspectors to the
former sites or any other location within Iraq.
As an emergency measure an ad hoc authentication mechanism was
agreed and suppliers were advised that the small volume of contracts
already renegotiated for delivery to Iraq under resolution 1483 could
proceed and that CPA would advise Cotecna to authenticate based upon
confirmation of the receipt of the goods by the Iraqi Ministries.
In September 2003 further discussions took place in Amman, Jordan
between CPA, Cotecna and OIP. As a result of these discussions the
agreement of the Governments of Turkey, Syria and Jordan was obtained
to co-locate Cotecna inspectors at Silopi, At Tanf and Al Karama. These
are the Turkish, Syrian and Jordanian customs stations respectively
adjacent to Zakho, Al Walid and Trebil--the former Cotecna sites in
Iraq.
Due to the absence of a corresponding land boundary, Umm Qasr
presented greater challenges. It was eventually agreed that
containerized traffic would discharge at Dubai (Port Rasheed, Port
Jebel Ali), Abu Dhabi and Khorfakkan where it would be inspected by
Cotecna. Authentication would, however, be deferred until CPA
representatives had confirmed the arrival of the goods at Umm Qasr.
With regard to foodstuffs and agricultural supplies shipped in bulk, a
rendez vous point was established 5-7 miles off the coast of Dubai.
Cotecna inspectors leased launches and boarded and inspected the
vessels at sea, drawing samples for laboratory analysis, when required.
The revised authentication mechanism was implemented and superceded the
ad hoc mechanism in October 2003.
Up to the termination of the Oil for Food Programme in November
2003 Cotecna inspectors also continued to travel throughout the region
authenticating goods prioritized under resolution 1472 which were
delivered after the deadline imposed by resolution 1476.
transfer of cotecna contract to cpa and further discussions
The contract for the inspection of goods destined to Iraq by
Cotecna was officially transferred from the United Nations to the
Coalition Provisional Authority on 20 November 2003.
period 21.november--31.december 2003
Tripartite assignment of the contract: UNOIP-CPA-Cotecna was signed
as the Amendment No. 5 to the main contract, covering period from
21.November until 31.December 2003 with no changes to the
authentication procedures, described above.
current contract: amendment no. 6, period 01.january-30.june 2004
Main changes until now:
deferred authentication for 15 days at land borders only,
effective 01.January 2004
deployment of small group of 4 Cotecna inspectors in Umm
Qasr to report the arrival of containerized and bulk cargo in
Umm Qasr to the Dubai team for authentication.
Statement from Cotecna Inspection S.A.
This statement is being made in response to questions raised about
the work carried out by Cotecna under contract with the UN's Oil For
Food programme in Iraq. It seeks to set the record straight on the
mission of Cotecna, whose thirty year record of professionalism as a
world leader in innovative inspection services, has created an industry
leader with 4,000 employees in 150 offices in 100 countries worldwide.
The Oil For Food Programme, established under resolution 986 of the
UN Security Council in April 1995, allowed Iraq to use 53% (later
increased to 59%) of oil sales revenues for the purchase of
humanitarian goods. The resolution also requested the UN Secretary
General to receive authenticated confirmation that exported goods had
arrived in Iraq and, for this purpose, the UN contracted for the
services of an agency internationally recognized as an expert in that
field.
Cotecna Inspection S.A. Geneva, one of the international leaders in
commercial authenticating services, participated in a UN call for
tender for this programme in the fall of 1998 and was selected on
December 31, 1998 for its efficiency, cost-effectiveness, and
technologically advanced solutions. Indeed, Cotecna's quality
performance led to an extension of the initial contract on a six-month
basis and, then, to an extension of one year in 2002. In November 2003,
this contract was renewed with the Coalition Provisional Authority in
Iraq under identical terms.
Cotecna's limited, technical role in the Oil for Food programme was
carried out in full compliance with contract requirements, with its own
strict code of ethical conduct, and according to the best practices in
the industry, as codified by the International Federation of Inspection
Agencies.
A specific question has been raised in the media about the
employment by Cotecna of Kojo Annan, the son of UN Secretary General
Kofi Annan. It should be noted that Mr. Annan's full-time employment by
Cotecna ended well before the selection of Cotecna for the UN mission;
Mr. Annan's full-time employment began in December 1995 and ended in
December 1997, after which Kojo Annan was retained as a consultant
until the end of 1998. His activities concerned exclusively Cotecna's
separate actitivies in Nigeria and Ghana, and he was not involved in
any of Cotecna's operations involving the United Nations or Iraq.
The Cotecna mission in Iraq began in February 1999. It consisted of
a comparative authentication between the goods entering the country and
the list of goods to be imported. Authenticating meant confirming that
imported goods effectively corresponded to their description on
shipment documents presented to the agent and the copies of documents
provided to the agent by UN-Office of Iraq Programme.
``Authenticating'' is a role that is different from ``inspecting'', as
the latter could imply an assessment of the quality and/or value of the
goods.
To perform this task, Cotecna employed 85 inspectors on four border
posts between Iraq and Turkey, Syria, Jordan and at the port of Umm
Qasr in the Persian Gulf. A fifth post on the frontier with Saudi
Arabia was later added for a limited period of time. Approval of the
UN-OIP was required for the recruitment of each of the professional
inspectors from 30 different nationalities. Once imported goods were
authenticated by Cotecna inspectors, they notified the UN-OIP-NYC in
reports transmitted electronically.
It is important to understand that Cotecna's duties under its
contract were limited to verifying that goods which were entering Iraq
matched the list of goods authorized to be imported, and in a limited
number of cases assessing the quality of the goods. Cotecna was not
involved in selecting the goods which were to be imported, establishing
the specifications of such products, selecting the parties who would
supply such products, negotiating the prices to be paid or designating
any sales intermediaries or sales commissions. In addition, Cotecna was
not involved in handling any funds for the payment for any goods, other
than verifying that items which had been approved for import had
actually been delivered.
Contrary to some press reports, there were no ``commission on
fees.'' Rather, Cotecna's fees for this mission were contractually
calculated on the basis of days worked by a maximum of 67 inspectors on
4 Iraqi sites.
Cotecna's contract for authentication of goods imported by Iraq
under the Oil For Food programme was awarded in full compliance with
United Nations' financial regulations and procurement policies.
Cotecna has accomplished its limited and technical mission in full
accordance with its contract with the UN, with its own strict code of
ethical conduct, and with the best practices in the industry, as
codified by the International Federation of Inspection Agencies (IFIA).
Any accusations or inferences otherwise are false and defamatory.
______
[From the Los Angeles Times, April 7, 2004]
Op Ed Article by Ambassador Jean-David Levitte \1\
---------------------------------------------------------------------------
\1\ Jean-David Levitte is the French Ambassador to the United
States. He previously served as the French Ambassador to the United
Nations.
---------------------------------------------------------------------------
A year ago, when the question of military intervention to disarm
Iraq was raised, my country strongly opposed such a step, convinced
that Iraq was not an imminent threat to world peace, had no link with
Al Qaeda and that the consequences of a war in Iraq needed to be
seriously weighed.
At that time, as everyone will remember, France's position, which
was shared by many countries and a number of Americans, was bitterly
criticized and widely disparaged. Although there were many signs of
friendship extended to me from individual Americans, for which I am
very grateflul, there were also lot of false accusations spread in
public to discredit France.
Since then, time has passed, and the diplomatic hurricane has
abated. Today, we all understand the importance of what unites us, from
our common fight against terrorism to our presence side by side in
regional conflicts, in Afghanistan, Haiti, Kosovo and elsewhere.
Consequently I have been deeply surprised in the last few days to
see a new campaign of unfounded accusations against my country flourish
again in the press. These allegations, which are being spread by a
handfull of influential conservative journalists in the United States,
have arisen in connection with a newly initiated inquiry into the
``oil-for-food'' program that was run by the United Nations in Iraq
during the final years of Saddam Hussein's government. These
allegations suggest that the government of France condoned kickbacks--
bribes, in effect--from French companies to the Iraqi government of
Saddam Hussein in return for further contracts. They say that the
French government turned a blind eye to these activities.
Let me be absolutely clear. These aspersions are completely false
and can only have been made to try to discredit France, a longtime
friend and an ally of the United States.
As the former French Ambassador to the United Nations, let me
explain bow the oil-for-food program worked. Created in 1996, the
program was intended to provide the Iraqi people with essential goods
so as to alleviate the humanitarian impact of the international
sanctions which remained in place. The program authorized Iraq to
export agreed quantities of oil, and allowed the money from the sales
to be used for food and other necessities. The program was managed by
the United Nations and closely monitored by the Security Council
members. Between 1996 and the end of the program in 2003, every single
contract for every humanitarian purchase had to be formally and
unanimously approved by the 15 members of the Security Council,
including France, the United Kingdom and the U.S. The complete
contracts were not circulated to Security Council members other than to
the U.S. and U.K. which had expressly asked to see them and would have
been in the best position to have known if anything improper was going
on. While a number of contracts were put on hold by the American and
British delegations on security-related grounds, no contract was ever
held up because malfeasance, such as illegal kickbacks, had been
detected.
Was there corruption and bribery inside the program? Frankly, I
don't know; Iraq was not a market economy; it was under sanctions at
the time. Customs experts had little choice but to assume that the
prices set by outside companies were ``reasonable and acceptable,'' a
criterion of acceptance used by the UN secretariat, and had no way of
checking whether some contracts were overpriced. That is why France
fully supports the independent inquiry set up by the U.N. The truth
must come out. But the notion that our government was somehow complicit
is absurd.
Was France a major beneficiary of ``oil-for-food'' contracts, as
several conservative columnists have claimed recently? Definitely not.
From the beginning of the program (1996) to its end (2003), French
contracts accounted for 8% of the total. We were Iraq's eighth largest
supplier.
In addition, throughout the program a sizable proportion of the
contracts dubbed ``French'' were in fact contracts from foreign
companies using their French branches, subsidiaries and agents. Among
them were American companies providing spare parts for the oil industry
(including several subsidiaries of Halliburton). They submitted
contracts through French subsidiaries for more than S200 million.
It is also suggested that the money from the ``oil-for-food''
contracts passed exclusively through a French bank, BNP-Paribas. Wrong
again: 41% of the money passed through J.P. Morgan Chase Bank which
like BNP, was contracted by the UN with the approval of Security
Council members.
This leaves us with one remaining accusation: that the French
position on the oil-for-food program and Iraq in general was driven by
the lure of oil. But France was never a major destination for Iraqi oil
during the program. In 2001, 8% of Iraqi oil was imported by France,
compared with 44.5% imported by the U.S., which was the number one
importer all along.
So why do some people feel such a compelling need to blame my
country for something it has not done?
At a time when the United Nations is considering a return to Iraq
and we all agree on the need for close international cooperation to
help a sovereign, stable Iraq emerge, I don't understand this campaign.
Or the hidden agenda behind it.
______
Responses of Amb. John D. Negroponte to Additional Questions for the
Record
Questions Submitted by Senator Richard G. Lugar
Question 1. Various nations began to send chartered flights to
Baghdad in the mid-1990's. Which countries sent such flights in? Were
these flights authorized by the 661 Committee? Did any member of the
661 Committee propose that the UN monitor the cargo brought in on such
flights, if so name them? Did any nations object to such monitoring, if
so who were they?
Answer. Countries that regularly sent chartered flights into Iraq
included Jordan, Egypt, Lebanon and Russia. Anywhere between 5-15
flight requests typically were received by the Committee within a one-
week period. Flights were authorized by the 661 Committee if they were
for humanitarian purposes. Flight details, including cargo lists and
flight manifests, were required to be approved by the Committee. It was
the responsibility of the member state from which the flight departed
to ensure that the contents of the aircraft had been approved by the
Committee. The French repeatedly took the position in 661 Committee
discussions that flights to Iraq only had to be notified to 661
Committee members; we and the British, however, insisted that all
flights required 661 Committee approval before they could proceed,
based on the clearly defined language in operative paragraph 4(b) of UN
Security Council resolution 670 (1990). Our view prevailed.
Question 2. Kofi Annan has announced he will appoint a team of
notables to conduct an investigation into this matter. Would an
investigation authorized by the Security Council have more clout?
Answer. On 21 April, the Security Council unanimously adopted
resolution 1538, expressing the Security Council's full support for the
independent, high-level inquiry established by UN Secretary-General
Annan. The Panel will be led by Mr. Paul Volcker, former Chairman of
the Federal Reserve Bank. Resolution 1538 underscores the importance of
full cooperation with the independent high-level inquiry by all United
Nations officials and personnel, the Coalition Provisional Authority,
Iraq, and all other Member States.
The Coalition Provisional Authority, Iraq, and all other Member
States, including their national regulatory authorities, are asked ``to
cooperate fully by all appropriate means with the inquiry.'' We already
publicly have expressed full support for the work of the inquiry, and
we have encouraged other UN Member States to act in a similar fashion.
Mr. Volcker noted in his April 21 remarks to the media that he believed
the Panel would receive cooperation from all governments.
Question 3. The UN implemented a surcharge on the proceeds of Iraqi
oil in order to cover the costs of managing the Oil-for-Food Program.
Who audits those funds, and did the U.S. ever review those audits? How
much money was left in the UN account at the termination of the
program, and where did it go?
Answer. UN costs associated with the administration and management
of the OFF program came from revenue derived from the sale of Iraq's
oil, as called for in UN Security Council resolution 986 (1995). In
this regard, the program was self-financing, and did not rely on UN-
assessed funds.
Proceeds from Iraqi oil sales were divided as follows:
59 percent used to procure humanitarian supplies for central/
southern Iraq;
13 percent used to procure humanitarian supplies for 3
northern governorates;
25 percent used to fund UN Compensation Commission (UNCC);
2.2 percent reserved for UN administrative costs, including
the activities of OIP;
0.8 percent reserved for UNSCOM, and later UNMOVIC.
The UN Board of Auditors conducted routine audits of all these
accounts--copies of such audits were provided to 661 Committee members,
including the U.S., for their review.
When the Oil-for-Food Program terminated on November 21, 2003, as
mandated by UN Security Council resolution 1483 (2003), approximately
$14 billion was left in the UN escrow accounts--most of these funds
were attached to letters of credit that had yet to expire for
outstanding OFF contracts. The UN thus far has transferred $8.1 billion
from the escrow account to the Development Fund for Iraq as letters of
credit associated with non-prioritized OFF contracts have expired.
Question 4. What recommendations would you make to ensure that any
future UN humanitarian operations do not suffer similar problems?
Answer. The Oil-for-Food Program was unprecedented in its size as
well as in the use of revenue derived from the sale of Iraqi oil to
sustain the operation. It was former Iraqi leader Saddam Hussein's
repeated defiance of the demands placed upon him and his government by
the Security Council, and his calculated failure to provide for the
basic needs of the Iraqi people, that prompted creation and
implementation of the Oil-for-Food Program in the first place. We agree
that lessons need to be drawn and incorporated into any similar, future
operations.
There are a number of investigations currently underway designed to
look at the management and implementation of the Oil-for-Food Program--
the UN inquiry led by Mr. Paul Volcker and the Baghdad-based audit led
by the Iraqi Board of Supreme Audit. The Coalition Provisional
Authority is co-operating with the Board of Supreme Audit by helping
individual Iraqi ministries to secure potentially relevant
documentation and to identify key personnel with knowledge of the
former Iraqi regime's illicit schemes. We stand ready to review and
assess any future reports and conclusions that may arise from these
investigations.
Mr. Volcker already has commented that he interprets his job as not
only to determine what had happened in the past, but also to draw
lessons on what could be done in the future to avoid similar potential
problems. This is certainly the right approach, one which the U.S.
Government supports. In that regard, it therefore would be premature to
offer any firm conclusions at this moment as to what modifications
might be necessary to ensure future humanitarian operations do not
suffer similar problems to those already identified. As we move forward
in this process, we will be in a better position to understand the
flaws and weaknesses that may have been inherent in the system, and to
take such inadequacies into account for future humanitarian operations.
Question 5. There have been charges that Saddam infiltrated the UN
organization with his own intelligence officials. Can that be verified?
Would you expand on that?
Answer. To my knowledge, there has been no evidence provided to the
U.S. Mission concerning this issue. I am not aware of any information
that would indicate such infiltration occurred.
Question 6. Before it adopted ``retroactive pricing'' in 2001,
which cut back much of the surcharges on oil being sold by the regime,
the Sanctions Committee evaluated but rejected limiting Iraq's oil
buyers to major international oil firms, rather than smaller oil
traders that were willing to pay the Iraq surcharge. Why did the
Sanctions Committee reject this idea?
Answer. Under Resolution 986 (1995), the former Government of Iraq
was granted the authority to sell its oil to whomever it designated,
thereby reflecting the insistence of most other Security Council
members that Iraq's sovereignty be respected and guaranteed under the
Oil-for-Food (OFF) Program. These other states argued that having the
Security Council dictate to whom Iraq could sell oil would have
compromised and undermined Iraq's national authority in an unacceptable
fashion.
661 Committee procedures did, however, require member states to
register companies established within their jurisdiction with the UN
Office of Iraq Program (OIP) and with the UN Oil Overseers before being
permitted to export oil from Iraq under the OFF program. It was the
responsibility of member states to ensure that these firms were
reputable. .
Question 7. What was the role of individual Mission offices in the
contracting process? Did they have review responsibilities? Which
states benefited most from the OFF kickbacks? What do their Mission
offices say when confronted with this information?
Answer. Individual UN Mission offices were responsible for
providing the UN Office of the Iraq Program (OIP), on behalf of
suppliers operating in their jurisdiction, with copies of proposed 986
humanitarian contracts signed between the supplier and the Government
of Iraq. They often served as the intermediary between these companies
and OIP.
It is unclear who, other than the Saddam Hussein regime, benefited
from the alleged kickbacks on UN Oil-for-Food (OFF) contracts. However,
major suppliers of OFF contracts under the program included firms
operating within their jurisdiction of some Council members and several
of Iraq's neighboring states.
Question 8. How does the UN police itself? Are there mechanisms
within the UN to try member states, individuals or companies for
breaking resolution, in this case sanctions? Is there a means to
otherwise hold them accountable? (As Senator Sununu asked in the
hearing, can you provide a list of UN officials who have been
disciplined for such instances.)
Answer. The UN monitors its activities through two avenues--the UN
Board of Audit and the UN Office of Internal Oversight Services (OIOS).
The three-nation UN Board of Auditors is charged with ensuring that UN
programs and operations are implemented in a fiscally responsible
manner, and that all funds are appropriately spent. The UN Office of
Internal Oversight Services (OIOS) monitors, investigates and reports
on the activities of UN personnel. The Secretary-General has the right
to fire United Nations employees whom he believes are guilty of
malfeasance. They have the right to an appeal, through a UN
administrative tribunal, but the Secretary-General also has a right to
accept or reject that administrative tribunal. So the Secretary-General
may terminate UN employees for wrongful acts.
As recently as 2003, the Secretary-General, through the OIOS, has
investigated and reprimanded UN personnel and/or contractors for
misconduct or criminal behavior. In relevant instances, the UN has
turned cases over to national authorities--whether here in the U.S. or
abroad--for potential criminal investigation.
Question 9. Compensation claims make up 25 percent of OFF outlays.
How were these claims resolved? Can you provide details of reviewed,
paid and pending claims?
Answer. At the outset of OFF, 30 percent of oil sales proceeds went
to the UN Compensation Commission (UNCC). This was reduced to 25
percent in December 2000 under UNSCR 1330 and further reduced to 5
percent in May 2003 under UNSCR 1483.
The United Nations Compensation Commission has paid out some $18
billion to victims of Iraq's invasion of Kuwait. An additional $29
billion is needed to complete payment of compensation awarded by the
UNCC to individuals and companies.
Question 10, My understanding is that United States became a major
purchaser of Iraqi oil once the Oil-for-Food Program started. Is that
correct; which were the top five nations that purchased oil from Iraq?
Did U.S. oil companies purchase the oil directly from Iraq or through
brokers/middleman?
Answer. During Phases I through XI of the Program (December 1996-
May 29, 2002), the U.S. purchased $942 million in Iraqi oil, while
during the same comparable period, Russian firms entered into oil
contracts with SOMO valued at $ 16.4 billion. France ($3.28 billion),
Switzerland ($2.5 billion), Turkey ($2.4 billion), and China ($2.35
billion) were the next largest purchasers of Iraqi oil. We have
requested from the UN Office of the Iraq Program figures concerning
Iraqi oil sales during Phases XII and XIII to complete our records for
the lifespan of the OFF Program. Those who entered into contracts with
the Iraqi State Oil Marketing Organization (SOMO) to purchase Iraqi oil
were not always the end-users. Between Phases 1 and 12 of the Program
(10 December 1996-4 December 2002), Russian traders contracted for 979
million barrels of Iraqi oil, representing 31 percent of the total
shipped by Iraq under the Program during this period.
Question 11. Do we have any reason to believe that U.S. oil
companies participated in these same kickback and surcharges that we've
discussed today?
Answer. I am unaware of any specific allegations or evidence
involving U.S. oil firms or UN Oil-for-Food contract suppliers with
regard to their possible participation in kickbacks or surcharges to
the former Iraqi regime.
Question 12. Did U.S. companies sell goods to Saddam, and do we
have any reason to believe that U.S. companies provided him with
illicit profits?
Answer. The only U.S. companies that were permitted to sell goods
to Saddam were those that received a license from the U.S. Treasury
Department's Office of Foreign Assets Control (OFAC) to do business
with Iraq under the Oil-for-Food Program. Twenty-four (24) U.S.
companies submitted a total of 47 contracts (out of a total of more
than 30,000 contracts) under the Oil-for-Food Program.
I am unaware of any specific allegations or evidence involving U.S.
companies and the provision of illicit funds to Saddam Hussein.
Question 13. Who conducted the audits of BNP--the bank holding the
UN's Iraqi oil escrow account? Do we know if BNP was involved in
passing illegal money to Saddam? Who in the U.S. Government has
reviewed BNP accounts? Do we have access to the account numbers into
which BNP deposited money, in order to check the legitimacy of those
companies? To whom has BNP turned over its documents on the OFF
program?
Answer. The UN Oil-for-Food Program, in particular the escrow
accounts held at both BNP and JP Morgan/Chase, were audited every six
months by the UN Board of Auditors. BNP had no independent authority to
make payments to suppliers--it was instructed by the UN Treasury to
make specific payments to suppliers once the goods for a particular
contract had been authenticated upon their arrival in Iraq.
Once BNP/Paribas was selected by the UN through a competitive
bidding process to handle funds associated with the 59 percent account
for procurement of goods destined for central and southern Iraq, OFAC
issued them a license, limiting BNP/Paribas' work with Iraq solely to
the Oil-for-Food Program. The U.S. Federal Reserve has oversight
responsibility over all wire transfer systems in operation in the U.S.,
including over BNP/Paribas-New York.
I am unaware of any specific evidence that would indicate that BNP
passed illegal money to Saddam. The OFF Program provided written
instructions to BNP for the actions it was to take. BNP is still
holding valid letters of credit for outstanding OFF contracts, and
therefore maintains its own files of documents concerning OFF.
Question 14. What was the role of the individual UN Missions in New
York as far as vetting the Oil-for-Food contracts were concerned? Were
they expected to verify the legitimacy of the goods and the pricing
involved?
Answer. Individual UN Mission offices were responsible for
providing the UN Office of Iraq Program (OIP), on behalf of their
suppliers established within their jurisdiction, copies of proposed 986
humanitarian contracts signed between the supplier and the Government
of Iraq.
Each member state, including the U.S., was responsible for ensuring
that their companies established within their jurisdiction adhered to
the rules and restrictions under the Program and the ongoing
multilateral sanctions regime on Iraq. The vetting process for each UN
Mission varied. Although all 661 Committee members were given copies of
each OFF contract, only the U.S. and UK governments actually reviewed
such contracts in detail, with particular emphasis on preventing access
by the former Iraqi regime to WMD and certain dual-use items that could
be used to enhance Iraq's military capabilities.
Question 15. Regarding the OFF program in the north of Iraq, is it
true that some $4 billion in funds has not been accounted for? If this
is not true, who in the U.S. Government reviewed this program?
Answer. When the UN program responsibilities in the North were
transferred to the CPA on November 21, 2003, financial liabilities for
those programs transferred as well. Funding comes from the UN OFF
escrow account, which contained a balance of roughly $14 billion as of
the November 21 transfer date. Since that time, the UN treasurer has
transferred $8.1 billion to the Development Fund for Iraq. The DFI is
funding the former UN programs in the North. The balance in the OFF
escrow account will pay for the remaining humanitarian supplies for all
of Iraq that are still in the pipeline. Thereafter, the remaining
surplus in the OFF escrow account will be transferred to the DFI. The
final accounting will be audited.
The U.S. Government reviewed the implementation of the Oil-for-Food
Program in northern Iraq on a regular basis, as a member of the
Security Council, and as a member of the Security Council's Iraq
Sanctions Committee. UN personnel working in the three northern
governorates routinely briefed members of the Iraq Sanctions 661
Committee.
Question 16. The World Food Program used a considerable number of
vehicles to distribute food throughout the North. Where are they now?
Answer. The World Food Program transferred these vehicles to the
Coalition Provisional Authority (CPA) and Iraqi representatives through
a tri-partite transfer process during the phasing out period of the
Oil-for-Food Program in November 2003.
Question Submitted by Senator Joseph R. Biden, Jr.
Question 17. Ambassador Negroponte, you acknowledged during your
testimony that the State Department is in a position to assemble a list
of Oil-for-Food participants.
For the public record, can you provide the Committee with a
comprehensive list of purchasers of Iraqi oil and suppliers of
civilian products under the Oil-for-Food Program?
If such a list can not be publicly released, could you
provide the Committee with a classified list and a detailed
explanation as to the legal and/or security rationale keeping
the information classified?
Answer. We have compiled a list of companies that purchased oil
from Iraq under the Program. Separately, we have compiled a list of
those firms that supplied civilian goods to Iraq under the program. We
stand ready to make these lists available to the Committee.
Questions Submitted by Senator Christopher J. Dodd
Question 18. How many meetings have been held by the International
Advisory and Monitoring Board?
Answer. The International Advisory and Monitoring Board has met
five times, most recently on April 22-23 in New York City. The first
formal meeting was December 5.
However, representatives of the member institutions of the Advisory
Board--the UN, the Arab Fund for Social and Economic Development, the
IMF and the World Bank--met informally many times with the CPA during
the process leading to the establishment of the IAMB. These talks led
to the October 24 announcement that the Board had been established in
accord with a Terms of Reference that governs the relationship between
the IAMB and the CPA.
The creation of the Board broke new ground in international
relations, as a mechanism to ensure transparency in the financial
affairs of an occupied country. Both CPA and the Advisory Board members
continue to work very hard with the Iraqi people to realize this
commitment to transparency.
Question 19. What are the names, affiliations, and positions of
those serving on this Advisory and Monitoring Board?
Answer. The chairman of the International Advisory and Monitoring
Board, selected by the members themselves, is Mr. Jean-Pierre
Halbwachs, Assistant Secretary General and Controller of the UN. He
represents Secretary General Annan.
The other members are Mr. Khalifa Ali Dau, a senior financial
adviser in the Arab Fund for Economic and Social Development; Mr. Bert
Keuppens, a senior advisor in the IMFs Finance Department, and Mr.
Fayezul Choudhury, Vice President and Controller at the World Bank.
Each of these representatives was appointed to represent the chief
executive officer of their respective institutions.
Question 20. On what dates have these meetings been held?
Locations?
Answer. I would like to take this opportunity to mention that the
International Advisory and Monitoring Board established a very good Web
site, www.iamb.info, which provides such information. The Board also
posts minutes of the Board's meetings.
Meetings have been held:
December 5, 2003--New York
December 22, 2003-Washington, D.C.
February 12-13, 2004--Washington, D.C.
March 17-18, 2004--Kuwait
April 22-23, 2004--New York
Question 21. Were there agendas and/or minutes of these meetings?
Please provide copies of these agendas and minutes.
Answer. The Advisory Board prepares minutes for each meeting and
posts these on its Web site. Copies of the minutes are attached.
international advisory and monitoring board
Minutes of the organizational meeting held at United Nations
Headquarters, New York on Friday 5 December 2003.
The following members of the Board were present:
Arab Fund for Economic and Social Development: Ms. Mervat
Badawi, Director
Technical Department (acting representative).
International Monetary Fund: Mr. Bert E. Keuppens, Senior
Advisor.
United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-
General,
Controller.
World Bank: Mr. Fayezul Choudhury, Vice-President and
Controller.
Also in attendance were the following:
International Monetary Fund:
Mr. Chris Hemus, Deputy Chief, Finance Department
Ms. Mary Hoare, Officer
United Nations:
Mr. Jayantilal Karia, Director, Accounts Division,
Ms. Arpana Mehrotra, Adviser/Coordinator on IAMB matters
Mr. Moses Bamuwamye, Finance Officer
World Bank:
Mr. Charles McDonough, Director, Accounting Department,
Mr. W. Ofosu Amaah, Vice President and Corporate Secretary
1. The meeting was opened at 11:00 a.m. by the Secretary General,
of the United Nations.
In his opening remarks, the Secretary-General stressed that the
IAMB had an important responsibility as an independent oversight body.
He added that its independence could not be stressed enough and that it
was fundamental to honoring the trust that the international community
had placed in it. He noted that the Security Council had referred to it
as the ``eyes and ears of the international community'', and that in
view of privileges and immunities conferred on the funds of the DFI by
the Security Council, this responsibility was even heavier.
2. The member from the United Nations, Mr. Jean-Pierre Halbwachs
was chosen as the Chair of the Board for the first year.
Rules of Procedure
3. The members discussed the rules of procedure to govern the
Board. The members agreed that it was important that the rules be
adopted as soon as possible and that they be kept simple. It was agreed
that the member from the IMF would circulate a working document to the
members of the Board.
4. Two issues were considered critical in addressing the rules of
procedure: confidentiality and transparency. Since the Board would make
public the documents of the IAMB, there was a need to set guidelines in
addition to the provisions of the rules of procedure, to ensure that
appropriate information concerning the Board's work was made publicly
available while ensuring the protection of sensitive and confidential
information.
Observers
5. The appointment of observers was discussed. It was agreed that,
consistent with its terms of reference, the Board should determine the
number and qualifications of the observers. It was also agreed that
among the observers would be one selected from nominations by the
Coalition Provisional Authority (CPA), and two selected from
nominations by the Iraqi Governing Council, preferably including, in
respect to the latter, someone from the Iraq Supreme Audit Authority.
6. It was agreed that the Chairman, after consultation with other
members, would request the CPA to submit a list of three names, and the
Iraqi Governing Council to submit a list of five names for
consideration by the Board. The IMF representative agreed to look into
the status of the Iraqi Supreme Audit Authority and report to the board
accordingly.
Secretariat
7. It was agreed that prevailing circumstances did not allow for
the Secretariat to be established in Baghdad at this point in time.
8. It was decided that the Secretariat would be small, drawn as
appropriate from member organizations, with one local professional
staff in Baghdad. It was also decided that the experience and
qualification of the staff would be determined by the Board. As for the
local staff, it was agreed that the candidate would be an Iraqi
national seconded from the Iraq Supreme Audit Authority. The
representative of the IMF is to look into this matter further. The
Chair agreed to circulate a draft on the qualifications and duties of
the Secretariat staff.
9. It was agreed, as specified in the Terms of Reference that the
costs associated with the running of the secretariat would be shared
equally among the member institutions. This would continue to reinforce
the spirit of independence with which the Board is expected to operate.
It was also decided that incidental costs that are not material would
be absorbed by the member institution providing the services.
External Auditors
10. The ``Draft Statement of Work'' for the external auditors was
received from the CPA. It was agreed that the Board will undertake an
expeditious review of the scope of work, in order that it may respond
to the CPA as soon as possible.
11. Members agreed to share with each their comments and
suggestions on the draft before the next meeting.
Briefings to the Board
12. The Board agreed on the necessity of requesting briefings from
the CPA to improve their understanding in a few areas of special
relevance to an evaluation of the Statement of Work. The initial areas
suggested, with others to be identified, included:
DFI in general
Link of Programme Review Board (PRB) disbursements to actual
programs
delivered
Procurement process of CPA
How CPA undertakes oil and gas sales
Role of CPA's internal audit.
13. It was agreed that the Chair, in consultation with the Board,
would contact the CPA in this regard.
IAMB Documentation
14. It was noted that transparency was critical to the smooth
operation of the Board. Creation of an IAMB website therefore, would be
explored. The IMF representative agreed to examine the feasibility of
such a website and to report to the Board.
Communication
15. The Board agreed that the IAMB should speak with one voice, and
that all communications from the Board will be made by the Chair
following consultation with the members. This however, would not
prevent the other Board members from providing routine information on
the IAMB and its work.
Other Matters
16. The Board decided that its next meeting would be held on Monday
22 December 2003 at the World Bank in Washington DC.
17. The Board agreed to issue a press release on its meeting.
18. The Board also agreed that a draft agenda would be circulated
among the members for their review before the next meeting.
19. The meeting was adjourned at 4.30 P.M.
* * * * *
international advisory and monitoring board
Minutes of the organizational meeting held at the World Bank
Headquarters in Washington DC on Monday 22 December 2003.
The following members of the Board were present:
International Monetary Fund: Mr. Bert E. Keuppens, Senior
Advisor.
United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-
General,
Controller.
World Bank: Mr. Fayezul Choudhury, Vice-President and
Controller.
Absent with apologies:
Arab Fund for Economic and Social Development: Mr. Khalifa Au
Dau,
Senior Financial Advisor
Also in attendance were the following:
International Monetary Fund:
Mr. Chris Hemus, Deputy Chief;, Finance Department
Mr. Ramanand Mundkur, Counsel, Legal Department
United Nations:
Mr. Jayantilal Karia, Director, Accounts Division,
Mr. Moses Bamuwainye, Finance Officer
World Bank:
Mr. Charles McDonough, Director; Accounting Department,
Mr. W. Ofosu Amaah, Vice President and Corporate Secretary
2. The meeting was opened at 10:00 a.m. by the Chair who informed
the other members that the member from the Arab Fund could not attend
the meeting due to factors beyond his control.
3. The agenda was unanimously adopted.
4. Certain revisions in the Minutes for the meeting of the 5/12/
2003 were discussed.
Statement of Work
4. The main focus of the meeting was the Statement of Work (SOW)
for the external audit of the Development Fund for Iraq (DFI). Members
made a number of comments on the draft SOW pointing, among other
things, to the need to:
make the heading more descriptive;
clarify the issue of designated recipient;
elaborate on the four deliverables;
adjust the audit option periods;
clarify the role of IAMB with External Auditors.
5. The Chair undertook to revise the SOW on the basis of comments
made during the meeting and to circulate the revised draft to the
members for final review and comments. The Chair would subsequently
complete the draft and submit it to the CPA before the end of the year.
The Chair would also request the CPA to provide briefings on accounting
and reporting issues relating to the DFI. The following were identified
as areas of interest to the Board:
The DFI in general;
The link between the Program Review Board (PRB)
disbursements to actual programs delivered;
The procurement process of the CPA;
The manner in which the CPA undertakes oil and gas sales;
The role of the CPA's internal audit.
6. The timing of the briefing was also discussed and it was agreed
that the briefing should take place at the earliest opportunity,
preferably to coincide with the Board's next meeting.
Secretariat Functions
7. It was agreed that for the time being an ad hoc Secretary to the
Board be established instead of maintaining a full time staff. To that
end, each of the member institutions could have one of their staff to
perform secretariat functions; It was however decided that all records
would be kept in one central place--with the Chair.
8. On the issue of the local professional staff, it was recognized
that further action needed to be undertaken to identify a suitable
candidate.
Rules of Procedure
9. The Board reiterated the need to set clear rules for dealing
with press queries. It was also reiterated that, as a rule, the Chair
would speak for the Board. At the same time, it would be left to
individual members to use their judgment in answering routine factual
queries.
10. The drafting of Paragraph 3B (Public Disclosure) of the draft
rules of procedure would be reviewed by the members from the World Bank
and IMF.
11. It was agreed that comments on the draft rules of procedure
should be submitted as soon as possible.
Press Release
12. The members agreed to issue a press release highlighting the
results of the meeting.
Other Business
13. The venue and date of the next meeting was to be determined at
a later date, in the light of the briefing material to be provided by
the CPA.
14. An updated mailing list was requested by the Chair, and the
issue of a logo for the IAMB was briefly discussed.
15. The meeting was adjourned at 4:30 p.m.
* * * * *
international advisory and monitoring board
Minutes of the meeting held at the IMF Headquarters in Washington
DC on 12 and 13 February 2004.
The following members of the Board were present:
Arab Fund for Economic and Social Development: Mr. Khalifa All
Dau,
Senior Financial Advisor
International Monetary Fund: Mr. Bert E. Keuppens, Senior
Advisor.
United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-
General,
Controller.
World Bank: Mr. Fayezul Choudhury, Vice-President and
Controller.
Also in attendance were the following:
International Monetary Fund:
Mr. Chris Hemus, Deputy Chief, Finance Department
Mr. Ramanarid Mundkur, Counsel, Legal Department
Ms. Mary Hoare, Officer
United Nations:
Mr. Jayantilal Karia, Director, Accounts Division,
Mr. Moses Bamuwamye, Finance Officer World Bank:
Mr. Charles McDonough, Director, Accounting Department,
Mr. W. Ofosu Amaah, Vice President and Corporate Secretary
Ms. Caroline Harper, Lead Operations Officer
5. The meeting was opened on 12th February 2004 at 1:00 p.m. by the
Chair.
6. The agenda for the two day meeting was unanimously adopted.
Briefing by the CPA
3. Responding to the Board's request, the CPA provided a useful
briefing about the financial functions and the operations of the DFI.
The following topics were covered during the briefing.
DFI Account Status
Oil Proceeds
Budget Process
Program Review Board
Contracting
Financial Operation
Extemal Audit Update
4. Following a recap of the briefing, the Chair was requested to
send a letter to the CPA seeking clarification on a number of issues
including:
The controls with regards to the extraction of crude oil
Contracting process by the CPA, including circumstances
relating to single source contracts
Oil product barter sales, not currently reflected in the DFI
accounts.
External Audit of the DFI
5. It was noted that progress had been made in the appointment of
external auditors for the DFI. The CPA had started the solicitation
process for the external auditors and proposals were due by February
18, 2004. Board members noted that finalization of the appointment
process was a priority and requested that the Chair ask the CPA to
provide the evaluation and selection criteria that would be used to
select the external auditor.
The IAMB Website
6. The IAMB website was officially launched on 13th February 2004.
In the press release issued on 13 February 2004, the public was
notified of the availability of the site which would serve as the
informational platform for the Board.
Observers
13. It was noted that the CPA had nominated a candidate to serve as
an observer.
14. Noting that the Governing Council of Iraq had not responded to
the invitation to nominate candidates to serve as observers to the
IAMB, it was agreed that the Chair would send a letter to the Governing
Council of Iraq, with a copy to the CPA, urging the council for its
nominations.
Rules of Procedure
9. The Board adopted the draft Rules of Procedure after minor
amendments were made. It was also decided that the Rules of Procedure
would be posted on the website.
Press Release
10. The members agreed to issue a press release highlighting the
results of this meeting and to post this press release on the IAMB
website.
Other Business
11. The Minutes for the 5th and 22nd December meetings of the IAMB
were adopted and posted on the website.
12. The members agreed that the venue of the next meeting will be
at the Arab Fund Headquarters in Kuwait at a date to be determined,
preferably to coincide with the selection process of the External
Auditors.
13. The meeting was adjourned on Friday at 2:30 PM.
* * * * *
international advisory and monitoring board
Minutes of the meeting held at the Arab Fund Offices in Kuwait on
17 and 18 March 2004.
The following members of the IAMB were present:
Arab Fund for Economic and Social Development: Mr. Khalifa Mi
Dau,
Senior Financial Advisor
International Monetary Fund: Mr. Bert E. Keuppens, Senior
Advisor
United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-
General,
Controller
World Bank: Mr. Fayezul Choudhuzy, Vice-President and
Controller
Observer's Representative: Mr. Faik Ali Abdul-Rasool, Deputy
Minister,
Ministry of Planning and Development Cooperation
(representing Dr. Mehdi
Hafedh, Minister of Planning and Development Cooperation
and Chairman
of the Iraqi Strategic Review board for the Reconstruction
of Iraq)
Also in attendance were the following:
The Arab Fund for Economic and Social Development:
Mr. Hassab El Rasoul El Obeid, Legal Advisor, Arab Fund for
Economic
and Social Development
Mr. Shehab Bayoumi, Financial Advisor. Legal Advisor, Arab
Fund
for Economic and Social Development
International Monetary Fund:
Mr. Chris Hemus, Deputy Chief, Finance Department
Mr. Ramanand Mundkur, Counsel, Legal Department
United Nations:
Mr. Bisrat Aklilu, Executive Coordinator, Iraq Trust Fund
Mr. Moses Bamuwamye, Finance Officer
World Bank:
Mr. Charles McDonough, Director, Accounting Department
Ms. Caroline Harper, Lead Operations Officer
Iraq Board of Supreme Audit
Mr. Ihsan Ghanim
Dr. Ala'a Alani
7. The meeting was opened by the Chair
8. The agenda for the meeting was unanimously adopted.
Executive Session
5. The members undertook a preliminary review of the information
provided by the Coalition Provisional Authority regarding the selection
process for the external auditor.
Briefing by the CPA
4. As part of its responsibility for monitoring the financial
reporting and internal control systems established by the CPA, the IAMB
received from the CPA further briefing on the issues covered by the CPA
at the IAMB previous meeting. The issues related to metering of crude
oil, barter transactions, the use of non-competitive bidding procedures
and the preparation of DFI financial statements in line with
appropriate international standards on financial reporting.
Metering
7. The IAMB was informed that crude oil extraction is currently not
metered. This precludes a reconciliation of all crude oil extracted
with its eventual utilization and represents an internal control
weakness which needs to be addressed urgently. The IAMB was informed of
the steps taken by the CPA to mitigate the consequences of such
weakness and to curtail smuggling. The IAMB welcomed these interim
steps and recommended the expeditious installation of metering
equipment in accordance with standard oil industry practices.
8. The IAMB was also informed that oil products were being metered
at depots and service stations.
Bartering
15. The IAMB was informed that the bartering of residual fuel oil
for light products had been discontinued. There is however bartering of
residual fuel and crude oil for electricity and other products with
neighbouring countries. The IAMB was concerned that such barter
transactions are not reflected in the DFI as required by UN SCR 1483
(2003). The CPA indicated that it is investigating possible ways to
ensure that the equivalent proceeds from such transactions are placed
into the DFI and the IAMB looks forward to an early resolution of this
issue.
Sole Source Contracts
8. Upon inquiry, the IAMB was informed that some contracts using
DFI funds were awarded to Halliburton without competitive bidding. The
CPA indicated that as a general rule, effective January 2004 contracts
were no longer awarded without competitive bidding. The IAMB
acknowledged that special circumstances may have warranted sole-sourced
contracts and welcomed steps taken by the CPA to limit future such
contracts to exceptional circumstances. At the same time the IAMB
decided to consider further steps, such as the conduct of a special
audit of some of the sole-sourced contracts.
9. The IAMB decided that it will continue to monitor closely these
issues, and will direct the DFI external auditor to pay special
attention, as appropriate.
10. The IAMB also expressed its thanks to the representatives of
the CPA for the useful briefings provided.
Financial Information
11. The IAMB reiterated its view that the financial statements of
the DFI need to be prepared in line with the appropriate international
standards on financial reporting. The IAMB, following discussion with
the CPA, believes such information is available to the CPA.
12. In addition, it was agreed that the DFTs weekly statements
issued by the CPA would be linked to the IAMB website to ensure wider
availability
External Audit of the DFI
14. Since the nomination and appointment by the CPA Administrator
of the DFI external auditor is subject to approval by the IAMB, the CPA
briefed the IAMB on the evaluation process of the solicitations
received from external audit firms. Based on the information obtained
by the IAMB, which was not available to the CPA's selection committee
at the time the evaluations were made, the IAMB concluded that one
candidate nominee firm did not meet the criteria. The IAMB sought
supplemental infomiation from the CPA regarding the other nominee firm.
Following receipt of such information after the meeting, the IAMB on
March 24, 2004 approved the CPA's nomination for the external auditor
noting the international competency and international composition of
the audit team including the commitment by the firm to include in its
team internationally experienced and specialized audit partners.
Observers
15. Deputy Minister Faik Ali Abdul-Rasool, representing the
Observer, Minister Mehdi Hafedh, requested that persons representing
the Iraqi Governing Council be given the right to vote. The IAMB stated
that it welcomed the presence of Iraqi nationals at its meeting and
that it looked forward to attendance by Iraqi nationals at future
meetings. However, the IAMB indicated that acceding to this specific
request would require amendments to the IAMB's Terms of Reference.
Further, such Iraqi participation raises a number of complex legal
issues, including under UN SCR 1483 (2003). In light of these
constraints, the IAMB strongly encouraged the presence of Iraqi
nationals at its future meetings, stating that such participation would
allow them to communicate their views to the IAMB and that the IAMB,
for its part, would give the fullest consideration to these views.
Post June 2004
16. The IAMB began a review of ways in which the functions of the
IAMB could be transferred to an Iraqi entity at a suitable time, in
view of the envisaged handover of power to an interim Iraqi
administration on June 30, 2004. In this context, the IAMB welcomed the
opportunity to exchange views with representatives of the Iraq Board of
Supreme Audit and expressed its thanks to the representatives of the
Board of Supreme Audit for providing the IAMB with information on the
Board of Supreme Audit's operations in Iraq. The IAMB also decided that
it would further examine ways to involve the Board of Supreme Audit
more actively in the IAMB's work.
Press Release
20. The members agreed to issue a press release highlighting the
results of this meeting and to post this press release on the IAMB
website.
Other Business
17. The minutes for the 12th-13th February meeting of the IAMB were
adopted and posted on the website.
18. The venue and date of the next meeting would be determined at a
later date, and will be announced on the website.
19. The meeting was adjourned on Thursday 18 March 2004.
* * * * *
Question 22. What are the name(s) of the independent public
accounting firm(s) that have been tasked with auditing responsibility
for the DFI? How many audits of the DFI, if any, have been conducted by
these independent accountants. Please provide copies of these audits.
Answer. KPMG Audit & Risk Advisory Services won the contract to
audit the Development Fund for Iraq and Iraq's export oil sales. CPA
nominated this firm, and the Advisory Board approved the selection.
The contract for audit services was signed only in early April
2004, so the first audit is just getting underway. We would hope it
will be available by late summer. It is part of the Board's Terms of
References that all audits will be made public.
Question Submitted by Senator John E. Sununu
Question 23. In the event UN officials are found to have engaged in
corrupt practices, would they be able to claim diplomatic immunity in
the United States or elsewhere and thus escape prosecution and
punishment?
Answer. The Secretary-General has the authority to waive the
diplomatic immunity of any UN personnel found to have engaged in
corrupt practices or misconduct under the program.
The Secretary-General has used this authority on several occasions,
including as recently as 2003, when the Secretary-General, through the
UN Office for Internal Oversight (OIOS), investigated and reprimanded
UN personnel and/or contractors for misconduct or criminal behavior. In
relevant instances, the UN has turned cases over to national
authorities--both here in the U.S. or abroad--for judicial action.
______
Responses of Amb. Patrick F. Kennedy to Additional Questions for the
Record Submitted by Senator Richard G. Lugar
Question 1. The UN apparently conducted numerous audits of the Oil-
for-Food Program--how many audits were conducted and what was
uncovered?
Answer. A three-nation UN Board of Auditors audited the operations
of the Oil-for-Food Program, including the operations of UN offices in
Iraq, and the UN Office of the Iraq Program (OIP) in New York. The
Board audited the Oil-for-Food Program every six months, following the
conclusion of each phase of the Program. There were thirteen 6-month
phases of the OFF Program.
Separately, the UN Office of Internal Oversight Services (OIOS)
conducted 55 reviews of various aspects of the UN Oil-for-Food (OFF)
Program, including an assessment of the UN escrow accounts, analysis of
UN Treasury's role in the OFF Program, and ongoing, on-the-ground
evaluation by two OIOS auditors in Iraq of the functions performed by
the UN Humanitarian Coordinator in Iraq (UNOCHI). OIOS reports are
internal UN Secretariat records which have never been shared with the
Security Council or any member state.
Question 2. Were all the trucks carrying goods into Iraq inspected
by the UN contractors; how did they report irregularities, and were
they stationed at all the border crossings into Iraq? Were they
inspected on the way out?
Answer. Cotecna's mandate was to oversee the arrival in Iraq of OFF
merchandise. Cotecna, and its predecessor, Lloyd's Registry, were not
authorized by the Security Council to inspect goods shipped to Iraq
outside the Oil-for-Food Program. They were not authorized to function
as Iraq's customs agent. Cotecna verified the arrival of Oil-for-Food
goods in country. Suppliers were required to obtain Cotecna's stamp of
authentication as a prerequisite for disbursement of funds from the UN
escrow account.
Under Resolution 661 and subsequent resolutions, member states,
including Iraq's frontline neighbors, were obligated to adhere to the
sanctions imposed by the Security Council. In May 2001, the U.S. and UK
delegations circulated a draft resolution to other Security Council
members that would have tightened border monitoring by neighboring
states. As part of this ``smart sanctions'' package that also included
creation of a ``Goods Review List'' (subsequently supported by the
Council under UNSCR 1409-05/14/02), the U.S.-UK draft resolution called
for improving and strengthening land-based monitoring of Iraq's
borders. Certain other Council members, as well as representatives of
Iraq's neighbors, strongly opposed the U.S.-UK text, and the draft
resolution was never adopted.
Question 3. There are numerous reports regarding passenger ferries
being used to smuggle goods into Iraq. Where did these ships originate?
Did any member of the 661 Committee suggest that the passengers and
goods transported on these ships be scrutinized--either in Iraq or at
the ports of embarkation--if so, which members? Which members opposed
these checks?
Answer. In 1997, the 661 Committee authorized ferry service
intended for religious pilgrims traveling between the United Arab
Emirates (UAE) and Iraq. Ferries were authorized to carry passengers
and their personal belongings, including their personal automobile. The
UAE accepted the primary responsibility for ensuring sanctions
compliance by the ferry operators, including by inspecting cargo for
violations. When concerns were brought to light on UAE non-compliance
with the procedures, the 661 Iraq Sanctions Committee, at the urging of
the U.S. and UK, raised this issue with UAE authorities through written
communications.
Because of ongoing concerns over non-compliance with the rules
governing the UAE ferry service, the U.S. and UK, through the
Committee, subsequently blocked requests from Oman, Bahrain and Qatar
to open ferry services to Iraq.
Question 4. Why didn't the 661 Committee create a group of market
sector experts to examine contracts for prices? We know that some
contracts were rejected by the 661 Committee because they contained
prohibited items; were any contracts rejected because they were either
over- or under-priced?
Answer. Customs experts at OIP reviewed the value of each OFF
contract to ensure that the price was within a credible range. These
experts, on occasion, did identify overpriced contracts, and informed
the 661 Committee thereafter. That said, we should remember that the
GOI did not overtly charge the kickback--they increased the price of
some contracts only marginally, in order to keep it under the radar of
those who would check for price fluctuations. Secondly, prices on OFF
contracts were for delivered goods. Port fees, internal Iraqi
distribution costs, warehousing fees, and related expenses controlled
by the former Iraqi regime were included in the overall contract costs,
making it difficult to isolate the prices being charged for each
requested commodity.
Question 5. What role did the three-nation Board of Auditors play
in the UN's oversight process of the Oil-for-Food Program? Which
nations were members of the Board?
Answer. The three-nation UN Board of Auditors acts much like the
United States' General Accounting Office to ensure UN programs and
operations are operated in a fiscally responsible manner, and that all
funds are appropriately spent. The current UN Board comprises
representatives of France, the Philippines, and South Africa.
Previously during this period, members included the United Kingdom,
India, and Ghana. The Board audited the financial statements of the UN
Iraq escrow account in accordance with Resolution 986 (1995) and the
May 1996 MOU signed between the former Iraqi Government and the UN.
Such audits were conducted to ensure that expenditures were
incurred for purposes approved by the 661 Committee and to ascertain
whether income and expenditures were properly classified and recorded
according to UN financial rules and regulations. Board members also
verified that the financial statements of the UN escrow account were
presented fairly and accurately.
The Board audited the Oil-for-Food Program every six months,
following the conclusion of each phase of the Program. There were
thirteen 6-month phases of the OFF Program. The UN also conducted
special, focused, audits such as an audit of UN Treasury operations,
and an audit of UN agency operations in Northern Iraq.
These reports were circulated to 661 Committee members. USUN sent
copies of such reports to the State Department.
The UN Board audited the operations of the Oil-for-Food Program,
including the operations of UN offices in Iraq, and the UN Office of
the Iraq Program (OIP) in New York.
Question 6. Were audits conducted of the companies who monitored
the arrival of goods into Iraq, first by Lloyds of London and then by
Cotecna? Did the U.S. see these audits? Were any irregularities noted?
Answer. The UN Board audited the contracts concluded between the UN
and the firms Lloyds Registry, Cotecna, and Saybolt. Lloyds (British)
and Cotecna (Swiss) furnished independent inspection agents who
authenticated the arrival in Iraq of humanitarian supplies shipped
under the Oil-for-Food Program. Saybolt (Dutch) provided independent
agents who monitored oil exports from Iraq. This information was
included in the reports circulated to all 661 Committee members. This
information was included in the audit reports of the UN Board of
Auditors that were circulated to all Committee members.
Separately, the UN Office of Internal Oversight Services (OIOS)
conducted 55 separate reviews of various aspects of the UN Oil-for-Food
(OFF) Program, including an assessment of Saybolt's and Cotecna's
operations. OIOS reports are intended for internal UN use only and are
not circulated to UN member states.
Question 7. What was the role of the Oil Observers on the 661
Committee, who were they, and how impartial were they?
Answer. The UN Oil Overseers were mandated by the 661 Committee,
per the Committee's guidelines, to provide the Committee an independent
analysis of oil pricing from the Iraqi State Oil Marketing Organization
(SOMO). There were 6 Oil Overseers during the life of the program--
their nationalities were U.S., French, Russian, Norwegian, Belgian and
Netherlands. We found the analysis provided by the UN Oil Overseers to
have been accurate, and, on occasion, helpful to U.S. and UK efforts to
address allegations that the former Iraqi regime was illicitly imposing
price premiums on its oil sales.
Question 8. Some states complained that UN sanctions were hampering
Iraqi oil exports. Can you provide the Committee with the level of
these exports relative to both the beginning of the Oil-for-Food
program and the imposition of retroactive pricing in 2001?
Answer. Oil Exports Under Oil-for-Food
------------------------------------------------------------------------
Volume of oil Value of oil
Phase I-VIII (Dec. 1996-June 2000) (millions of exported
barrels) ($million)
------------------------------------------------------------------------
One (Dec. 1996-June 1997) 120 $2,150
Two (June 1997-Dec. 1997) 127 2,125
Three (Dec. 1997-May 1998) 182 2,085
Four (May 1998-Nov. 1998) 308 3,027
Five (Nov. 1998-May 1999) 360.8 3,947
Six (May 1999-Dec. 1999) 389.6 7,402
Seven (Dec. 1999-June 2000) 343.4 8,302
Eight (June 2000-Dec. 2000) 375.7 9,564
------------------------------------------------------------------------
Total 2,206.5 $38,602
------------------------------------------------------------------------
------------------------------------------------------------------------
Volume of oil Value of oil
Phase IX-XIII (June 2000-June (millions of exported
2003) barrels) ($million)
------------------------------------------------------------------------
Nine (Dec. 2000-July 2001) 293 $5,638
Ten (July 2001-Nov. 2001) \1\ 300.2 5,350
Eleven (Dec. 2001-May 2002) 225.9 4,589
Twelve (May 2002-Dec. 2002) 232.7 5,639
Thirteen (Dec. 2002-June 2003) 169.6 4,413
------------------------------------------------------------------------
Subtotal Phases IX-XIII 1221.4 $25,629
------------------------------------------------------------------------
Grand Total: 3,427.9 $64,231
------------------------------------------------------------------------
\1\ Imposition of retroactive pricing begins Oct. 2001
During the first three phases of the program, Iraq exported between
120-182 million barrels of oil within a 6-month period. Oil exports hit
their maximum, under the program in Phases 5 through 8 between November
1998 and December 2000 when exports were between 343 and 390 million
barrels during each phase.
After the imposition of retroactive pricing, oil exports between
December 2001 and December 2002 were between 225 and 232 million
barrels per phase. Although some Council members blamed retroactive
pricing for the decline, the GOI's role in causing uncertainty over
Iraqi exports by abruptly halting oil exports on three separate
occasions, including between April and May of 2002, was a contributing
factor in the decline of oil sales.
Question 9. What impact did Saddam's arbitrary stoppages of oil
production have on the program; how many of such stoppages occurred?
Answer. The former government of Iraq abruptly halted its oil
exports on three separate occasions:
(a) December 1-12, 2000: Iraqi oil exports halted to express Iraqi
government displeasure with the refusal of the U.S. and UK, as members
of the 661 Committee, to agree to oil prices proposed by the Iraqi
State Oil Marketing Organization (SOMO) at the beginning of December;
the U.S. and UK maintained such prices varied significantly from prices
for comparable crude oils from other markets, and thus did not reflect
``fair market value'' as mandated under UNSCR 986 (1995); we estimate
the loss of revenue to the UN Oil-for-Food (OFF) Program of the
temporary halt in Iraqi oil exports to have been approximately USD 600
million;
(b) June 4, 2001-July 10, 2001: Iraq suspended its oil exports for
a second time to protest the Security Council's adoption of Resolution
1352 (2001), which presaged the Council's willingness to consider
future adoption of a Goods Review List of items with potential dual-use
application; we estimate the loss of revenue to the OFF Program to have
been approximately USD 933 million;
(c) April 8, 2002-May 8, 2002: The former Iraqi government
arbitrarily suspended its oil sales for a third time as an expression
of support for the Palestinian people; we estimate the loss of revenue
to the OFF Program to have been approximately USD 750 million.
Questions 10. What mechanisms were in place to ensure that once the
UN contract company monitoring Iraq's oil export--Saybolt--stopped work
for the day, that Iraqis weren't able to continue pumping oil into
tankers? Did these reports make it to the 661 Committee? What would
happen?
Answer. Independent inspection agents from the Dutch firm, Saybolt,
were contracted by the United Nations to monitor oil loadings at Mina
al-Bakr oil terminal in the Persian Gulf and to oversee oil flows
through the Iraq-Turkey pipeline. Saybolt representatives periodically
briefed members of the 661 Committee on their work in Iraq. Separately,
the UN Office of the Iraq Program (OIP) provided updates and comments
on Saybolt's operations in the Secretary-General's regular 90-day and
180-day reports on the Oil-for-Food Program to the Security Council.
The issue of ensuring 24-hour Saybolt monitoring at the Mina al-
Bakr oil loading platform was discussed by 661 Committee members on
November 6, 2001, and again on November 8, 2001, in conjunction with
the Committee's receipt of information concerning the reported over-
loading of the vessel, Essex, on two separate occasions (May 16, 2001;
August 27, 2001). The U.S., with UK support, called for 24-hour Saybolt
monitoring at Mina al-Bakr, as well as the use of seals on oil
manifolds of vessels, and meters on the oil pumps. The UN Office of the
Iraq Program (OIP) subsequently reported to the 661 Committee that the
U.S. proposals were being acted upon in the field.
Question 11. Are you aware of a second oil platform in the Gulf
that was not being monitored by the UN that might have been used to
pump out Iraqi oil? Was the 661 Committee aware of this?
Answer. A second Iraqi oil-loading terminal in the Persian Gulf at
Khoar al Amaya was significantly damaged during the 1991 Gulf War. The
U.S. resisted Iraqi efforts to repair and rebuild the Khoar al Amaya
facility, including by placing ``holds'' on all contracts for items
destined for use at Khoar al Amaya, unless and until the former Iraqi
government would agree to permit independent oil inspection agents
stationed at any rebuilt Khoar facility. The Iraqis, and several 661
Committee members, opposed the conditions sought by the United States.
The U.S. harbored suspicions that the Saddam regime was using the Khoar
al Amaya facility to smuggle unauthorized oil exports out of Iraq.
While the Multinational Maritime Interception Force (MIF) kept Khoar
under regular surveillance, Saybolt, on behalf of the UN, was not
mandated to monitor oil shipments from Khoar al Amaya.
Question 12. What can the Oil-for-Food Program tell us about the
difficulties of maintaining international consensus on sanctions
regimes for an extended period of time?
Answer. No sanctions regime, no matter how well targeted or well-
structured, can be expected to ensure full compliance with the
restrictive measures that have been imposed. Unless the individual,
group, or state targeted for such measures is willing to comply fully
with the demands placed upon them to modify a policy or action
determined to be unacceptable to the international community, that
targeted actor invariably will seek ways to evade the sanctions and to
``wait out'' the political will and unity of purpose of those who
imposed the restrictive measures until such measures are lessened or
removed. This has been the case with sanctions operations throughout
history, and that was the case with the multilateral, comprehensive
sanctions regime imposed by the Security Council on the former Iraqi
government.
The effectiveness of most sanctions regimes diminishes over time,
particularly when non-compliance produces economic gain. The Saddam
Hussein regime's non-compliance began shortly after comprehensive,
multilateral sanctions were imposed on Iraq. Hussein effectively used
economic incentives to his advantage to garner sympathy and support
from a number of states, including key Security Council members. The
weakening of Council support for the sanctions regime on Iraq already
has been well documented.
Question 13. How can international sanctions regimes be better
designed to impede the ability of outlaw regimes to proliferate weapons
of mass destruction, while minimizing the adverse consequences on
civilian populations?
Answer. The Security Council's use of sanction measures as a key
policy tool has evolved significantly over the past 10-12 years,
spurred on by the divergent reaction among UN member states to the
impact of the multilateral sanctions imposed in 1990 by the Security
Council on Iraq. Largely in reaction to the Iraq sanctions, many UN
members have pressed hard to ensure new sanctions regimes supported by
the Council are more narrowly focused on those most responsible for
unacceptable or harmful behavior or policies. This trend toward more
``targeted'' multilateral sanctions is reflected in the nature of
sanction measures currently in place on non-state actors in Liberia
(Resolution 1522), Al-Qaeda and Taliban members (Resolution 1267), and
those seeking to ship arms into the Democratic Republic of the Congo
(Resolution 1493). In each case, the sanction measures are designed to
focus on a small group of individuals, not the general civilian
population in the targeted state.
The effectiveness of all sanction measures rests on the willingness
of states to fulfill their obligations under the UN Charter to
implement and enforce the restrictive measures imposed by the Security
Council. When states or other entities are willing to collude with the
target of the sanctions to evade the measures, the usefulness and
impact of the sanctions rapidly deteriorates. Short of threatening
imposition of secondary sanctions on those states that fail to
implement the original measures, bringing political pressure to bear
against non-compliant states often produces only limited results.
International sanctions regimes imposed to impede the ability, of
outlaw regimes to proliferate weapons of mass destruction will depend
for their effectiveness on the commitment of states, particularly those
bordering the target country, to prevent that state's access to
prohibited goods. Publicly identifying and criticizing (``naming and
shaming'') non-compliant states is one method for promoting effective
implementation. Limiting the restrictions to those items and
individuals most closely associated with WMD, for example, will reduce
the adverse consequences of such measures on civilian populations in
the targeted state.
______
Responses of Hon. Robin L. Raphel to Additional Questions for the
Record
Questions Submitted by Senator Richard G. Lugar
Question 1. How are current stocks of food and medicine monitored?
Answer:
The Iraqi Ministry of Trade is responsible for keeping
records on food stocks. Warehouses and silos throughout the
country report on stock levels on a weekly basis.
The World Food Program is providing the Ministry of Trade
with a system of high frequency radios to improve communication
between Baghdad and outlying warehouses and silos.
In preparation for the upcoming transfer of sovereignty, CPA
has handed full authority for all health issues, including OFF
monitoring, to the Ministry of Health. The Ministry is now
responsible for tracking stocks of medicine.
Question 2. Who currently handles the food ration distribution in
Iraq at the local level? Are they the same individuals (de-
Baathification aside) that ran it when Saddam was in power? What role
will the World Food Program play?
Answer:
To a large degree, the same local food agents that
distributed food rations prior to the conflict are doing so
today and were not affected by de-Baathification programs. The
vendors tended to be local shopkeepers, many of them women.
Before the conflict, the World Food Program monitored the
Public Distribution System in south and central Iraq, and was
responsible for implementing it in the three northern
govemorates.
From June 2003 through November 2003, the World Food Program
delivered more than 2.1 million tons into Iraq, the largest
amount of food assistance ever delivered in such a short period
of time.
In January 2004 the WFP undertook to procure and deliver
$900 million worth of food commodities to help the Ministry of
Trade ensure against gaps in the food pipeline.
The Ministry of Trade took over all procurement of food
commodities in April 2004.
WFP expects to resume its normal programs for vulnerable
groups once the UN assistance agencies return to Iraq.
Question 3. How did the Iraqis view the Oil-for-Food Program?
Answer:
It is important to distinguish between the Public
Distribution System (PDS), which provided monthly rations to
all Iraqis, and the UN mandated OFF program, under which Iraqi
oil revenues were used to procure food and other essential
goods from international suppliers.
The Iraqis are by and large very proud of their ability to
feed the Iraqi people through years of sanctions under the PDS.
We are not aware of any systematic analysis or survey that
provides reliable data on Iraqi views of the OFF program, but
many Iraqis share the general perception that the regime
officials enriched themselves under the OFF program during
Saddam's rule. Some resented the UN for its association with
the sanctions regime and the OFF program. Some believed the UN
permitted the program to be manipulated by the regime, and that
it interfered unnecessarily with Iraqi management of the PDS.
Question 4. What has happened to the contracts since the
transition? Have we ensured that the graft and kickbacks are no longer
happening?
Answer:
CPA currently oversees the ongoing processing and delivery
of OFF contracts. After June 30, Iraqi ministries will take
full responsibility for the remaining OFF contracts.
Before the November 21 transition, UN agencies had
renegotiated almost all prioritized contracts to ensure excess
fees or ``kickbacks'' were removed. It has put systems in place
to prevent return to past practices.
DOD's Defense Contracting Management Agency renegotiated the
remaining 250 contracts after November 21. They also negotiated
out the ``kickbacks.''
To help guard against further corruption, there are now
Inspectors General in place in each ministry. CPA is training
ministry officials in more transparent procurement practices.
The CPA Web site explicitly states that there are to be no
commissions paid by suppliers.
The Board of Supreme Audit is charged with investigating
corruption charges concerning the OFF program in Iraq.
Question 5. What mechanisms are in place to ensure that kickbacks
and payoffs will not resume when the Oil-for-Food Program is turned
back to the Iraqis?
Answer:
CPA has renegotiated all prioritized contracts have been
renegotiated to ensure, among other things, that any bribes or
kickbacks were removed. Systems are now in place to prevent the
return to past practices.
For example, there are now Inspectors General in place in
each ministry, and a Board of Supreme Audit has been appointed
and is currently working to secure all OFF-related documents
from each ministry. Documents are stored securely in the
Ministry of Oil and will be moved to the Iraq Special Tribunal
(IST) where they will be under guard by coalition forces.
A new independent Commission on Public Integrity has been
established to develop and implement codes of conduct for
government officials in each ministry and develop a new
financial disclosure regime.
The CPA and Governing Council are developing new banking and
related rules to prevent money laundering and a revised public
procurement law to promote greater transparency.
We expect to retain, subject to Iraqi agreement, a number of
technical advisors to help the Iraqi ministries continue with
their reform and transition processes.
Question 6. How many years will it take for Iraq to be able to feed
itself? Was it not at one point a net food exporter? Would this again
be possible?
Answer:
Iraq has the potential to feed itself, but the agricultural
sector is depressed. With rich agricultural lands--more surface
water than any Middle Eastern country--it is possible that Iraq
could become a net food exporter. Iraq was a net food exporter
in the 1970's, but mismanagement of the agriculture sector
under Saddam Hussein contributed to serious decline in
production.
Food subsidies and the importation of many food commodities
under the Oil-for-Food Program have also been factors in the
lack of robust agricultural activity, because these programs
tended to depress local crop prices, and thus incentives for
farmers to plant.
We expect that the Iraqi government will want to take steps
to reduce dependency on the Public Distribution System and to
increase efficiency in the agricultural sector. Despite poor
performance, the agricultural sector is still the leading
employer.
The best outcome is not for Iraq to ``feed itself'' or
become self-sufficient in food commodties, but rather to export
agricultural projects in the areas where it has a comparative
advantage, and import where others have a significant
advantage, and ultimately to become a net exporter.
Questions Submitted by Senator Joseph R. Biden, Jr.
Question 7. What concrete measures is the Coalition Provisional
Authority taking to reform the culture of corruption that has long
existed in Iraq? How effective have these measures been in your
estimation?
Answer:
Corruption has long been a serious problem in Iraq and will
require a serious commitment from the Iraqi government.
The TAL provides for a system of checks and balances and a
functioning judicial system that can have a dampening effect on
competition.
Ambassador Bremer has established Inspectors General in each
Iraqi Ministry.
Government-wide, there is a new Commission on Public
Integrity and a Board of Supreme Audit that functions much like
our General Accounting Office.
The Coalition Provisional Authority (CPA) has placed
emphasis on capacity building in the government to ensure
accountability and business practices that meet international
standards.
New government-wide codes of conduct have been written and
provided to ministries for implementation. All ministries are
expected to implement ethics programs in the next 60 to 90
days. USAID is providing ethics instructors to each ministry.
At the end of the training period, each employee will be
required to sign a statement committing him/herself to the new
code.
Question 8. After the restoration of Iraqi sovereignty,what
specific mechanisms will the United States and its coalition partners
have in place to block corruption?
Answer:
After June 30, the Iraqi government will play the primary
role in preventing corruption. CPA is working hard to help the
Iraqis put in place the necessary mechanisms to ensure
financial accountability and transparency after the transfer of
sovereignty.
On January 28, the Iraqi Governing Council (IGC) and
Ambassador Bremer established the Commission on Public
Integrity, an independent body dedicated to enforcing anti-
corruption laws.
On February 5, Ambassador Bremer issued an order creating an
independent Inspector General in each Iraqi ministry to pursue
investigations of waste, fraud, abuse, and illegal acts. These
inspectors general will cooperate with the Commission on Public
Integrity.
In addition, the Administration supported the creation of
the International Advisory and Monitoring Board (IAMB), an
independent body endorsed by UN Security Council resolution
1483 to oversee audits of Iraqi oil sales and expenditures from
the Development Fund for Iraq (DFI). The IAMB and CPA
collaborated on the recent hiring of an independent public
accounting firm to audit oil sales and the DFI.
As we work on next steps in the Security Council, we will
discuss with the international community preserving the IAMB
during the transition period to provide oversight on the
transparent and appropriate handling of Iraq's oil revenues.
CPA and the IGC, in collaboration with the IMF, World Bank,
Washington agencies and our coalition partners, are preparing
new laws on financial management and procurement that will
provide the Iraqi interim government with guidance on how to
develop a budget and disburse government funds in a transparent
manner.
Ambassador Bremer also has empowered the Iraqi Supreme Board
of Auditors (BSA) to perform an oversight function, including
conducting an investigation of possible past corruption of the
UN Oil-for-Food Program. Bremer has committed approximately USD
5 million from the Development Fund for Iraq (DFI) to enable
the BSA to carry out a thorough investigation.
Question 9. After the restoration of Iraqi sovereignty, what
oversight authority will Americans and coalition technical advisors and
inspectors general have in the various Iraqi ministries?
Answer:
American and coalition advisors will continue to assist
ministries after June 30 in accordance with the desires of the
Iraqi ministries. While the Iraqis will need to make decisions
for themselves, we plan to remain in a supportive role to
provide technical advice and oversight as requested to
strengthen reform and transition efforts.
U.S. bilateral assistance for Iraq will continue to be
audited by U.S. government agencies.
Questions Submitted by Senator Chuck Hagel
Question 10. Has the Coalition Provisional Authority received from
the United Nations full details on contracts negotiated by Saddam
Hussein's government through the Oil-for-Food Program? If not, what
steps are you taking to get this information?
Answer:
We have asked the UN to provide the Coalition Provisional
Authority (CPA) with all contracts associated with Oil for
Food, as well as amendments to those contracts, letters of
credit and amendments, and supporting documents.
We have also requested bank statements and financial
documents that will allow CPA, and after June 30 the Iraqi
government, to administer the contracts fully and in accordance
with international legal standards.
The UN has provided many records, but files are not
complete. We continue to work with the UN to ensure that we
have access to needed records.
CPA is cooperating closely with the newly constituted UN
Voicker Commission, appointed by Secretary General Annan, in
its investigation of corruption in the Oil-for-Food Program.
Question 11. Does the CPA have a list of former Iraqi or other
government officials and businessmen who were involved in kickbacks and
questionable contracts? If there is not a list, what steps are being
taken to deter future corruption and malfeasance in Iraq by these
individuals?
Answer:
The CPA has the names of the companies which had outstanding
contracts with Iraq under the Oil-for-Food Program in March
2003, and the details of some 30,000 associated contracts.
It should be emphasized, however, that these contracts were
all delivered to the UN in accordance with OFF procedures. The
presence of a company on this list does not automatically imply
wrongdoing.
CPA does not have an authenticated copy of the list of
individual official organizations allegedly bribed by Saddam
Hussein. The purpose of the investigation now underway is to
bring to light any wrongdoing that may have occurred. Should
any officials or businessmen be found to be involved in
kickbacks, or questionable contracts emerge, we will take the
steps necessary to minimize any opportunity for these
individuals to be involved in corrupt activities in the future.
Question 12. Do we have any information regarding questionable
business practices and contracts involving members of the Iraqi
Governing Council?
Answer:
The purpose of the UN investigation now underway is to bring
to light any information about any wrongdoing that may have
occurred. We intend to continue to cooperate fully in the
effort to bring to the light any corrupt and questionable
practices.
The staff of the UN Commission investigating alleged abuses
in the Oil-for-Food Program will travel to Baghdad for the
first time the week of May 10.
The UN Commission will look into allegations involving
members of the Iraq Governing Council, as well as other Iraqi
officials and other individuals and institutions
Question 13. Please provide full information on a contract for
central irrigation pivots awarded to the Saudi Al-Khorayef Company
(Comm. No. A-1200051). What is the amount of this contract? Who was the
Iraqi point of contact for this company when the contract was
negotiated? What is the status of other agricultural contracts
negotiated during Oil-for-Food?
Answer:
The Department of State does not have independent
information on this contract. (The Comm. No. cited above is not
accurate, but it is the correct contract). However, we
requested information on this project from the Coalition
Provisional Authority (CPA) in Baghdad.
CPA Baghdad's Coordination Center has informed us that the
value of the contract is $14,784,589. The Coordination Center
does not have the information on who the Iraqi point of contact
was for the contract.
We have also asked our mission at the UN to review its
records to determine if it has this or any other useful
information to add going forward.
There are 145 other agricultural contracts that are
currently active (amended, approved and funded), out of a total
of 2,526 approved agricultural contracts under the Oil-for-Food
Program.
______
Responses of Hon. Kim R. Holmes to Additional Questions for the Record
Submitted by Senator Richard G. Lugar
Question 1. A GAO study from May 2002 provided excellent details
regarding Saddam's violations of both the Oil-for-Food Program and his
smuggling operations in general. What use did the U.S. make of this
information in the Committee?
Answer. Information on sanctions violations noted in the 2002 GAO
report was already well known and was obtained largely from U.S.
Government and UN reports. In April 2001 the U.S. and UK began
experimenting with requiring retroactive oil pricing in the 661
Sanctions Committee. By October 2001 that practice was
institutionalized, resulting in largely eliminating the illegal oil
surcharge referenced in the GAO report.
Oil smuggling through bordering states remained a problem that the
661 Committee was unable to agree on how to address. U.S. and UK
representatives did raise concerns about oil smuggling through border
states in 661 Sanctions Committee discussions, but such allegations
routinely were denied, in particular by Syria when it was a Committee
member.
In March 2001, the U.S. and UK also proposed to the 661 Committee
that the UN Secretariat (Office of the Iraq Program) produce a report
on Iraqi efforts to charge suppliers commissions on their contracts.
Our efforts were not successful because the Secretariat indicated that
it had only limited, informal information on the allegations. The
detailed information we have now was provided by Iraqi ministry
officials following the fall of the regime.
Question 2. Who was responsible for shipping food and medicine
purchased by Saddam to the Kurdish regions in the North? Were these
shipments regularly delayed, if so by how much--weeks or months?
Answer. The former Iraqi regime, in particular its Ministry of
Trade, was responsible for ensuring the timely delivery of OFF
shipments, including bulk food and medicine supplies for the three
northern governorates. Once these shipments were sent from central
warehouses to Mosul and Kirkuk, World Food Program (WFP)
representatives working in the North then arranged for the distribution
of these supplies to the end user.
World Health Organization (WHO) officials collected medical
supplies for use in northern Iraq from central warehouses in central/
southern Iraq. UN officials periodically criticized the Iraqi
government in the latter phases of the program for stockpiling in
central and southern Iraq medical supplies originally destined for
distribution throughout the country.
The UN concluded that reported delays were a result of operational
problems in the distribution system nationwide. However, to pressure
the Iraqi central government to make deliveries of food and medicine to
the North, the UN delayed the transfer of funds from the ``13 percent''
UN escrow account (set aside for procurement of funds destined for the
three northern govemorates) to the ``59 percent'' account (for
procurement of goods for central and southern Iraq) until it was
confirmed that such items were actually received in the North.
Question 3. What was the Multilateral Interception Force? Where did
it conduct its inspections--on the high seas or onshore? Who ran it?
Answer. The Multinational Interception Force (MIF) was composed of
21 member states cooperating under the operational command of the MIF
coordinator--the Commander, U.S. Fifth Fleet. The MIF conducted
interceptions of maritime shipping to inspect and verify cargos and
destinations and insure strict implementation of UNSCR 661, focusing
especially on cargos of outbound oil but also inbound goods not
approved by the UN 661 Iraq Sanctions Committee. The MIF operated both
on the high seas and in the coastal waters of cooperating states such
as the UAE. Over a more than 12-year period the MIF boarded and
inspected over 21,000 vessels and diverted more than 1,200 to port for
investigation of suspected sanctions violations.
Question 4. In 2002, the GAO reported that Syria was illegally
exporting Iraqi oil outside of the Oil-for-Food system. When did the
U.S. learn of this smuggling and what did the administration do to
terminate this smuggling?
Answer. The GAO report quoted USG officials. From the time when
sanctions against Iraq were established in 1990, Iraq continued to
supply oil to neighboring states, whose economies depended on Iraqi
oil. Syria imported Iraqi oil both for its domestic use and for export,
but denied doing so. The administration refused to accept Syrian
denials and repeatedly pressed Syria diplomatically in the Security
Council and the 661 Iraq Sanctions Committee to halt the illegal
shipments. Syria earned an estimated $3 billion in illicit trade with
Iraq in violation of United Nations sanctions.
Question 5. The 2002 GAO report suggests that certain nations were
buying cheap Iraqi oil during the embargo, and were writing down debt
owed them by the Iraqi regime. Is there any evidence that these nations
have done so?
Answer. We are not aware of any evidence that those countries we
believed were importing significant quantities of Iraqi oil during the
embargo--Syria, Jordan, and Turkey--were also writing down debt owed
them by the Iraqi regime. With the fall of the Saddam regime, official
Iraqi records can now be inspected. In addition to the work of the
Volcker Inquiry, the Iraqi Board of Supreme Audit is conducting an
investigation and has retained an international accounting firm. We
await the findings from these investigations.
______
Responses of Joseph A. Christoff to Additional Questions for the Record
Submitted by Senator Richard G. Lugar
Question 1. Was OFF structured differently in the north? If so, can
we determine if it was run with any greater degree of efficiency? Can
you provide statistics on this?
Answer. The program in the north, which received 13 percent of Oil
for Food revenues and covered the three northern governorates, was
administered by nine U.N. specialized agencies, including the World
Food Program, the U.N. Children's Fund, the U.N. Development Program,
and the World Health Organization. The U.N. agencies primarily managed
development projects in the north. Most of the food and medicines for
the north were procured in bulk by the former regime in Baghdad for the
entire country. The World Food Program implemented and oversaw the food
distribution in the north. The terms were established in the 1996
memorandum of understanding between Iraq and the United Nations and in
sanctions committee procedures.
The program in the southern and central governorates, which
received 59 percent of Oil for Food revenues, was administered by the
former regime. Unlike the north, the program in the south and central
governorates was primarily a commodity import program run by the
Ministry of Trade and other relevant ministries.
According to the U.N. Office of the Iraq Program, as of December
31, 2002, approved contracts for the north had totaled about $2.1
billion for projects and goods in nine sectors.\1\ This did not include
$2.3 billion in food and health sector supplies purchased by the Iraqi
central government and $771 million for oil industry spare parts and
equipment. Approved contracts for commodities in central and southern
Iraq totaled about $36.7 billion in 15 sectors.\2\
---------------------------------------------------------------------------
\1\ Agriculture, de-mining, education, electricity, health,
nutrition, settlement rehabilitation and emergency assistance to
internally displaced persons, telecommunications, and water and
sanitation.
\2\ Food, food handling, health, oil spares, electricity, water and
sanitation, agriculture, education, communication and transportation,
housing, special allocations, construction, industry, justice, and
religious affairs.
Question 2. Can you comment on the purported SOMO document
published in Iraqi media in January that lists individuals, companies,
---------------------------------------------------------------------------
and states that received oil vouchers from Saddam?
Answer. We do not have any information on these documents.
Question 3. What were the terms of the contract for the bank--BNP--
used by the UN to hold the escrow account for the funds generated by
the Oil for Food program? Was it fixed fee or competitively bid? What
was the length of the contract and was it ever re-bid?
Answer. We do not have the terms of the contract with BNP. The
United Nations prepared a list of international banks with necessary
credit ratings, strong capital positions, and the capability to handle
the magnitude of transactions. The United Nations consulted with Iraq
about the list and several banks were then asked to submit bids. We do
not know how the selection was made.
U.N. external audit reports regularly recommended portfolio
diversification in consultation with Iraqi government from the onset of
the Oil For Food program. The Under Secretary-General for Management
also stressed the need for bank diversification to Iraq's Permanent
Representative to the United Nations, and he requested an early
decision from the Iraqi government on the selection of additional
financial institutions. The Iraqi government agreed to execute
agreements with three additional banks in 2000. In its 2001 report, the
U.N. Board of External Auditors recommended that the U.N. Office of the
Iraq Program continue efforts to diversify its investments and broaden
the selection base for acceptable banks. We do not know which
additional banks were chosen.
______
Response of Michael J. Thibault to an Addditional Question for the
Record Submitted by Senator Richard G. Lugar
Question. Would it be accurate to say that, with the exception of
items on the Goods Review List, Saddam could choose what he wanted to
buy, from whom and at what price? As auditors, what is your assessment
of the potential for fraud in a system set up like this? Can you make
recommendations about the structure of such a program--if it were done
by the United Nations--in the future?
Answer. In light of the fact that the United Nations staff told
DCAA audit staff that there was not a procurement system in place,
including a specific requirements determination process, and that there
were no related price or audit evaluations, I would concur that the
prior regime could and did likely choose what they wanted to buy. There
were simply too many items contracted for, funded, and approved that
clearly did not appear to have utility for the Iraqi people. In
addition, approximately half of the contracts were substantially over-
priced, indicating that there were minimal to nonexistent controls over
the price.
As audit managers, we view situations in light of overall audit
risk. In a situation where there is no apparent audit oversight, and
where there are not even the basic components of a procurement process
and related internal controls, the risk for improprieties, including
fraud, are extremely high--essentially off of any risk charts, since no
one is looking at critical contract pricing aspects.
If asked, DCAA would recommend that implementation by the United
Nations of a procurement process with a good requirements definition;
required proposals by suppliers; proposal audits by independent
auditors, when appropriate; and negotiation by warranted and
independent contracting officials is essential to successfully assure
that similar overpricing does not occur in the future.
______
Responses of Saybolt Eastern Hemisphere B.V., to Additional Questions
for the Record Submitted by Senator Richard G. Lugar
Question 1. Was this contract audited (internally, externally or by
the UN)? Were there IG reports, etc? If so, can you release a copy to
the committee in advance of a hearing we are trying to do on or about 7
April.
Answer. We have been audited by the internal auditors of the United
Nations. However we have only seen once a full audit report. A request
for sharing this report will be submitted to the United Nations.
Question 2. Can the Committee get a copy of the Statement of Work
or the contract itself?
Answer. Please see attached document on page .
Question 3. What was Saybolt hired to do?
Answer. Saybolt was retained by the United Nations to monitor the
exports of crude oil and refined products exported from Iraq from the
two recognised and authorised export points at Ceyhan, Turkey, and Mina
al-Bakr, Persian Gulf, under the Security Council Resolution 986 (the
``Oil for Food'' program) from December 1996 until the commencement of
hostilities in April 2003.
This task also included the montoring of all crude oil movements
via the Iraq-Turkey pipeline (ITP) from the border crossing in Northern
Iraq (Zahko) to the receiving tank farm in Ceyhan, Turkey.
Saybolt was also retained by the United Nations to monitor the
delivery of oil spare parts and equipment approved by the 661 Sanctions
Committee, supplied under the MOU and funded by the escrow account,
and, where requested by the 661 Sanctions Committee, to monitor the
end-use of same.
Saybolt was also retained to prepare specialised expert reports
under Security Council Resolutions 1153 (1998), 1284 (2000) and 1330
(2000).
Question 3a. What reporting requirements did you have, to whom did
you report, what did you say?
Answer:
1. OIL CARGOES.
1.1. Reporting was made on a daily basis to the United Nations Oil
Overseers.
1.2. The UN Oil overseers received each day an itemised summary of
all activities covering:
Volume of oil leaving Iraq via the ITP.
Volume of oil received in Ceyhan from the ITP.
Time log of all shipping activities at Ceyhan and Mina al-
Bakr.
1.3. Each vessel scheduled to load required a current contract
approved by SOMO, and the 661. Sanctions Committee, with sufficient
barrels left to cover the loading. Copies of each contract were sent to
Saybolt on approval.
1.4. Each vessel scheduled to load required a Letter of Credit
whose terms were approved by the UN Oil Overseers. Each approved L/C
was copied to Saybolt.
1.5. Each vessel scheduled to load was given a unique file number,
and all details regarding this vessel were entered on to the United
Nations Oil for Food Lotus Notes database, live in real-time to the UN
Oil Overseers.
1.6. Each crude oil vessel loaded at both Ceyhan and Mina al-Bakr
was inspected, and analysed at our own laboratories on-site, and a full
crude oil loading report prepared. The full report was retained at the
load port. The summary page of each report (summarising the important
points) was faxed to the UN Oil Overseers, and this page was also
appended to the real-time Lotus Notes database operated by the UN to
which Saybolt had reporting access.
1.7. Saybolt was requested by the United Nations to prepare
summaries of activities for inclusion in the Office of the Iraq
Program's 90/180 day reports required under the MOU.
2. SPARE PARTS & EQUIPMENT.
2.1. From Phase 4 onwards, the UN Security Council allowed the
Iraqi Oil industry to purchase up to US$300M per phase of oil spare
parts subject to the apporval of the 661 Sanctions Committee, funded
from the escrow account. The amount was later increased to US$600M per
phase.
2.2. Approved spare parts were shipped to Iraq against L/C's
triggered by the arrival at one of four entry points into Iraq where
the goods were inspected and approved by an independent verification
agency, Cotecna.
2.3. Cotecna advised Saybolt of the arrival of these goods, and
Saybolt then monitored their arrival into approved warehouses. These
activities were reported by fax on a weekly spare parts activity report
to the Office of the Iraq Program (OIP) whcih was then forwarded to the
661 Sanctions Committee. Monitoring activities were also recorded
electronically on the UN Database against the specific Comm No for each
spare part order.
2.4. In some specialized cases, at the request of the Office of the
Iraq Program Spare Parts Section and/or the 661 Committee, Saybolt were
requested to monitor the ``end-use'' of equipment.
2.5. Saybolt was also requested to observe and report, on an ``ad-
hoc'' basis, on contracts such as intelligent pigging where the
importation of specialised equipment was monitored into the country,
during use, and then on re-export.
2.6 Saybolt also monitored the packing and shipment from the
country of certain strategic items (gas turbines) which could only be
repaired or serviced overseas.
Question 3b. Did Saybolt ever document irregularities and report
them to the UN?
Answer. Operational problems do occur in a monitoring exercise of
this size, which were reported and dealt with at the material time.
Question 3c. If so, what happened? Can you share specifics/
documents?
Answer. Given sufficient time to locate and retrieve archived
documents.
Question 4. What, if any, enforcement role did Saybolt have?
Answer. Saybolt is a professional monitoring, inspection and
testing company--we are not, nor ever have been, involved in
``enforcement''. Saybolt's role was merely to monitor the volumes of
exports of crude oil from nominated load ports. We reported only to the
UN, with the exception of one document requested by the UN Oil
Overseers regarding destination confirmation, no documents were
provided to any other parties or placed on board vessels.
Question 5. What was the size of the operation?
Answer:
Mina al-Bakr loading platform--Persian Gulf. 6 monitors
Botas Oil Terminal, Ceyhan, Turkey 5 monitors
Zahko metering station, N Iraq 3 monitors
Baghdad Spare Parts monitors Initial 2--Final 7 to 9
Question 6. How close was the observation or scrutiny of the
Saybolt crew to the lifting of oil?
Answer. (a) Mina al-Bakr is an oil loading platform some 50 kms
offshore Southern Iraq. The structure is some 1.5 kms in length and the
Saybolt monitors were housed in accommodation at one end. Owing to a
lack of metering on the terminal, and the limited (and uncalibrated)
storage capacity on shore, there was no possibilty to reconcile the
volumes of oil loaded to vessels with a shore based figure.
(b) Botas Terminal in Turkey is a multi-functional shore based
terminal with storage tanks dedicated to the storage of crude oil from
Iraq via the Iraq-Turkey pipeline. The volumes imported where compared
with the volumes leaving the metering station at Zahko every 24 hours.
All loadings to vessels were reconciled with incoming volumes on a
monthly basis.
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