[Senate Hearing 109-247]
[From the U.S. Government Publishing Office]
S. Hrg. 109-247
CORRUPTION IN THE UNITED NATIONS OIL-FOR-FOOD PROGRAM: REACHING A
CONSENSUS ON UNITED NATIONS REFORM
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
----------
OCTOBER 31, 2005
----------
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
CORRUPTION IN THE UNITED NATIONS OIL-FOR-FOOD PROGRAM:
REACHING A CONSENSUS ON UNITED NATIONS REFORM
S. Hrg. 109-247
CORRUPTION IN THE UNITED NATIONS OIL-FOR-FOOD PROGRAM: REACHING A
CONSENSUS ON UNITED NATIONS REFORM
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
OCTOBER 31, 2005
__________
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
24-445 WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
Trina D. Tyrer, Chief Clerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska CARL LEVIN, Michigan
TOM COBURN, Oklahoma DANIEL K. AKAKA, Hawaii
LINCOLN D. CHAFEE, Rhode Island THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia MARK PRYOR, Arkansas
Raymond V. Shepherd, III, Staff Director and Chief Counsel
Mark L. Greenblatt, Counsel
Steven A. Groves, Counsel
Elise J. Bean, Minority Staff Director and Chief Counsel
Dan M. Berkovitz, Minority Counsel
Zachary I. Schram, Minority Professional Staff Member
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Coleman.............................................. 1
Senator Levin................................................ 5
Senator Pryor................................................ 10
WITNESSES
Monday, October 31, 2005
Hon. Paul A. Volcker, Chairman, Independent Inquiry Committee
(IIC) Into the United Nations Oil-For-Food Programme, New York,
New York....................................................... 11
Hon. Newt Gingrich, Co-Chair, Task Force on the United Nations,
United States Institute of Peace, Washington, DC............... 26
Thomas Melito, Director, International Affairs and Trade Team,
U.S. Government Accountability Office.......................... 37
Robert W. Werner, Director, Office of Foreign Assets Control
(OFAC), U.S. Department of the Treasury........................ 39
Alphabetical List of Witnesses
Gingrich, Hon. Newt:
Testimony.................................................... 26
Prepared statement........................................... 57
Melito, Thomas:
Testimony.................................................... 37
Prepared statement........................................... 102
Volcker, Hon. Paul A.:
Testimony.................................................... 11
Prepared statement........................................... 53
Werner, Robert W.:
Testimony.................................................... 39
Prepared statement........................................... 115
EXHIBITS
1. GIllicit Iraqi Income 1991-2003, chart prepared by the
Minority Staff of the Permanent Subcommittee on Investigations. 122
2. GOFAC Chronology, chart prepared by the Minority Staff of the
Permanent Subcommittee on Investigations....................... 123
3. a. GWitness Statement of Oil Trader #2. (Redacted by the
Permanent Subcommittee on Investigations.)..................... 124
3. b. GSEALED EXHIBIT: Witness Statement of Oil Trader #2....... *
* Retained in the files of the Permanent Subcommittee on
Investigations
ADDITIONAL MATERIAL
Report Concerning the Testimony of George Galloway before the
Permanent Subcommittee on Investigations, prepared by the
Majority Staff of the Permanent Subcommittee on Investigations. 126
Supplemental Report on Bayoil Diversions of Iraqi Oil and Related
Oversight Failures, prepared by the Minority Staff of the
Permanent Subcommittee on Investigations....................... 396
CORRUPTION IN THE UNITED NATIONS OIL-FOR-FOOD PROGRAM: REACHING A
CONSENSUS ON UNITED NATIONS REFORM
----------
MONDAY, OCTOBER 31, 2005
U.S. Senate,
Permanent Subcommittee on Investigations,
Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 1:03 p.m., in
room 342, Dirksen Senate Office Building, Hon. Norm Coleman,
Chairman of the Subcommittee, presiding.
Present: Senators Coleman, Levin, and Pryor.
Staff Present: Raymond V. Shepherd, III, Staff Director and
Chief Counsel; Mary D. Robertson, Chief Clerk; Leland B.
Erickson, Counsel; Mark L. Greenblatt, Counsel; Steven A.
Groves, Counsel; Matthew S. Miner, Counsel; Mark D. Nelson,
Counsel; Brian M. White, Professional Staff Member; Jay
Jennings, Investigator; Phillip Thomas, Detailee, GAO; Richard
Fahy, Detailee, ICE; Melissa Stalder, Intern; Elise J. Bean,
Staff Director and Chief Counsel to the Minority; Dan M.
Berkovitz, Counsel to the Minority; Zachary I. Schram,
Professional Staff Member to the Minority; and Scott MacConomy
(Senator Pryor).
OPENING STATEMENT OF CHAIRMAN COLEMAN
Senator Coleman. Good afternoon. Today, the Permanent
Subcommittee on Investigations holds its fourth hearing related
to its investigation into corruption and mismanagement of the
United Nations Oil-For-Food Program. I am very pleased today to
be joined by Ranking Member Levin, who has participated in and
supported this investigation from the outset. Thank you,
Senator Levin.
For the past 18 months, the Subcommittee has explored many
facets of this expansive scandal. We have collected millions of
pages of documents from around the globe. The Subcommittee has
reconstructed complex financial transactions, exposing shady
oil deals and secret kickback agreements. We have interviewed
scores of witnesses, including high-level officials from the
Hussein regime.
Almost a year ago, in November 2004, the Subcommittee held
its first hearing entitled, ``How Saddam Hussein Abused the
U.N. Oil-For-Food Program.'' We outlined the ways that Saddam
made hard cash by subverting the program through kickbacks and
surcharges. Charles Duelfer, the head of the Iraqi Study Group,
testified as to how that cash permitted Saddam to rebuild his
military capacity. We also heard from Juan Zarate from the
Department of Treasury, who testified about the possibility
that Saddam's cash was financing the Iraqi insurgency.
In February 2005, the Subcommittee held its second hearing,
entitled ``The U.N.'s Management and Oversight of the Oil-For-
Food Program.'' At that hearing, we explored the effectiveness
of the U.N.'s inspection agents, Cotecna and Saybolt Group. We
also inquired into the procurement of the contract awarded by
the United Nations to Cotecna during a time when it employed
the Secretary-General's son, Kojo.
Most recently, in May, the Subcommittee held a hearing
entitled ``Oil For Influence: How Saddam Used Oil to Reward
Politicians Under the U.N. Oil-For-Food Program.'' At that
hearing, we exposed Saddam's use of oil allocations to reward
friends of the regime, including such notables as Vladimir
Zhirinovsky and George Galloway. The evidence uncovered by the
Subcommittee established that those men solicited oil
allocations from Iraq in return for their continued support for
the brutal Hussein regime.
Today, we will look at the Oil-For-Food scandal in the
context of United Nations reform. The gross mismanagement of
the Oil-For-Food Program is a textbook example of the kinds of
abuses that can occur in an organization lacking effective
oversight, acceptable ethical standards, and accountable
leadership. These shortcomings have given rise to other U.N.
scandals, such as sexual abuse by peacekeepers and outright
thievery by U.N. procurement officers.
A considerable degree of consensus exists on the need for
U.N. reform as well as the specific reforms required. The
Secretary-General himself has acknowledged as much. However,
because of the structure of the United Nations and specifically
the power of the General Assembly, enacting U.N. reform has
proven to be more difficult than prescribing it. The failure of
the recent summit to reach agreement on things such as the
basic structure, membership, and mandate of a new Human Rights
Council to replace the discredited Human Rights Commission is a
case in point. The summit also deferred key management reforms
to a later date.
The United Nations needs to make management reforms sooner
rather than later if it is to prevent future scandals and
restore its credibility. That is why I, along with Chairman
Lugar of the Foreign Relations Committee, have introduced
legislation giving the Administration additional leverage in
negotiating reform at the U.N. Ambassador Bolton recently
announced Administration support for our bill and I look
forward to its passage. I hope today's hearing will also help
move the United Nations toward immediate management reform.
Over the long term, there are other issues to be
considered, particularly related to U.N. funding. Just eight
countries pay 75 percent of the U.N. budget, yet have no more
say in budget matters than countries that pay a fraction of 1
percent. Most U.N. contributions come in the form of assessed
dues rather than voluntary contributions, which allow a country
to put its funds into those parts of the U.N. organization that
are most effective and take funding away from those parts that
are wasteful. Perhaps the best way to ensure more efficient use
of U.N. funds in the long run is to move toward a system where
each U.N. entity must make its case and compete for dollars.
I am an optimist. I believe the United Nations can be a
positive force in the world. For example, Security Council
cooperation following the assassination of Rafik Hariri may yet
succeed in bringing positive change in Lebanon and Syria. We
have a long way to go before the United Nations will be worthy
of the billions of dollars entrusted to it by the American
taxpayer. Make no mistake, a United Nations that refuses to
reform will lose the confidence of its biggest investors.
We are fortunate to have several distinguished individuals
here with us today to discuss the Oil-For-Food scandal and the
imperative for U.N. reform.
Our first presenter, who has graciously agreed to come
forward to brief us on his report and his call for U.N. reform,
is especially important since he has been investigating the
same subject matter as the Subcommittee. The Independent
Inquiry Committee (IIC) chaired by Paul Volcker has spent the
last 18 months conducting a massive investigation, the size and
scope of which are unprecedented, to my knowledge. Mr.
Volcker's committee found that more than 2,200 companies
worldwide paid kickbacks to the Hussein regime totaling more
than $1.5 billion. The IIC also found that a quarter of a
billion dollars in illegal surcharges were paid by oil
purchasers. Mr. Volcker has been kind enough to join us today
to brief us on the findings of his investigation and to give us
his views as to how we should reform the United Nations.
We are also joined today by former Speaker of the House
Newt Gingrich, who co-chaired the congressionally mandated,
bipartisan Gingrich-Mitchell Task Force on U.N. Reform. The
report of the Task Force, entitled ``American Interests and
U.N. Reform,'' is a hard-hitting analysis of many problems
confronting the United Nations and the urgent need to reform
the institution. The report focuses on safeguarding human
rights, ending genocide, repairing and reforming the management
operations of the United Nations, and several other important
issues. The report concludes that U.S. leadership is essential
to bring about meaningful reform and that a successful effort
will require bipartisan leadership in Washington's approach to
the United Nations.
Of particular significance, the report focuses on internal
U.N. management reforms and concludes that the United Nations
faces structural problems of oversight, accountability,
management, and human resources management. It cites
disagreements among U.N. member states a major contributing
factor to a wide variety of internal management problems. The
report also criticizes limited internal oversight, inadequate
management systems, politicizing budgeting, and poor personnel
practices.
The Gingrich-Mitchell Task Force recommended a reform
program that includes the establishment of an authoritative
Independent Oversight Board, the creation of a chief operating
officer, the establishment of effective policies on
whistleblower protection, and ethics disclosure standards for
top U.N. officials.
In our third and final panel, we will hear from Thomas
Melito of the Government Accountability Office and Robert
Werner from the Department of Treasury's Office of Foreign
Assets Control. Mr. Melito will update the Subcommittee on the
status of our requested review of the operations and management
of the U.N. Offices of Internal Oversight Services and the U.N.
procurement system. With the recent indictment of the head of
U.N. procurement, this review could not be more timely and
appropriate.
Mr. Werner will describe monitoring and oversight of U.S.
sanction programs, including the monitoring of the Oil-For-Food
Program by the Department of Treasury. I am particularly
concerned about the activities of U.S. companies, such as
Bayoil, which was recently indicted by the Federal authorities
out of the Southern District of New York in relation to the
payment of illegal surcharges to the Hussein regime. Senator
Levin's leadership in exposing the illicit activities of Bayoil
has been a constant feature of the Subcommittee's investigation
and I am grateful for his hard work on this issue. I hope Mr.
Werner's testimony today will help us understand how we can
more effectively administer and enforce sanctions programs in
the future.
The Oil-For-Food scandal has been documented to be one of
overwhelming proportion. The blame is all-encompassing. The
program was set up in a way which allowed Saddam Hussein to
choose to whom he sold oil. He used this power to influence
foreign policy and reward those who spoke out favorably about
the regime or opposed sanctions. Ultimately, the program was a
cash cow of illicit income to the regime.
Member states received millions of dollars in financial
incentives to turn a blind eye to kickbacks and corruption, and
that is a ``b'' for billions rather than millions. The
Secretary-General did not report the kickbacks to the Security
Council and did little to oppose the surcharges. As the U.N.'s
Chief Administrative Officer, it is untenable to suggest that
the Secretary-General was not ultimately responsible for those
failures. Private companies, including American companies, paid
the kickbacks and still made handsome profits.
One of the questions that must be asked is, did Saddam
believe that the U.N. Security Council would not act against
him because of the millions of dollars he had spread around to
those connected to member states?
Many questions still remain about the extent of the
scandal. Further legal action against those who participated in
the bribery, fraud, and corruption will take many years to play
out.
It is important now to learn the lessons of Oil-For-Food
and turn our focus to reforming the United Nations so that such
a scandal will never again occur. The Oil-For-Food scandal and
other disgraceful episodes at the United Nations, such as
sexual abuse in U.N. peacekeeping programs, have revealed the
need for immediate and comprehensive U.N. management reform.
The slow pace of U.N. internal management reform efforts,
coupled with the failure of the General Assembly at the 2005
U.N. Reform Summit to approve comprehensive management reforms,
raises concerns about the organization's ability at all levels
to take urgently needed corrective action.
I look forward to hearing from all of our distinguished
presenters, and before I turn to Senator Levin, again, Chairman
Volcker, I want to thank you for giving us this briefing. We
appreciate the opportunity to have you come before us and
explain to us what you found in your report and also talk about
U.N. reform.
With that, I will turn to Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Mr. Chairman, thank you for many things, but
also most importantly for your tenacity in examining the Oil-
For-Food Program. I share your goal of strengthening the United
Nations through needed management reforms and in also
understanding what the Oil-For-Food Program did--it did a lot
of good things, critically important things, but it also failed
in a number of important ways.
The Oil-For-Food Program collected over $64 billion in
Iraqi oil proceeds, spent somewhat over half for the people's
humanitarian needs, spent a little over a quarter for Kuwaiti
reparations, and those were important goals. But the program
was also the victim of kickback schemes that generated $229
million in illegal surcharges on contracts to buy Iraqi oil and
$1.5 billion in payoffs on contracts selling humanitarian
goods.
The kickback money is obviously a serious matter. We have
put up a chart,\1\ though, to get a full understanding of the
Oil-For-Food Program and the way in which it was used by Saddam
to obtain illicit income. The much-larger column on the chart
is neither the kickbacks nor the surcharges. Those are the
smaller columns, two of the three smaller amounts. The huge
amount there, which represented the vast majority of the
illicit income that went to Saddam Hussein, were from oil sales
that were made openly by Saddam Hussein against the rules of
the United Nations. Those oil sales, which produced the vast
bulk of the illicit income to Saddam Hussein, violated rules
which member states of the United Nations had adopted, and yet
they took place in broad daylight, mainly to Turkey, Jordan,
and Syria, with the full awareness of the world community,
including the United States.
---------------------------------------------------------------------------
\1\ See Exhibit No. 1, a chart entitled ``Illicit Iraqi Income
1991-2003,'' which appears in the Appendix on page 122.
---------------------------------------------------------------------------
This Subcommittee has held four oversight hearings and
issued six reports looking at the history of this program.
While we were doing this, the Volcker Committee--and the
Chairman Paul Volcker of that committee will testify here
today--has conducted its own intensive review on behalf of the
United Nations, issuing a number of reports with massive
information as to how the Oil-For-Food Program operated and how
it was abused by Saddam's illicit schemes.
The end result is that this Subcommittee has amassed a
wealth of detailed information to help us analyze what went
right, what went wrong, and what lessons should be learned.
First, what went right. The facts and analysis show that
the Oil-For-Food Program achieved its two principal objectives.
It stopped Saddam Hussein from rearming and acquiring weapons
of mass destruction and it alleviated the starvation and
massive health crisis that was overwhelming the Iraqi people.
It is important to realize that international sanctions can
work. They did work with Iraq. Now, that was the conclusion of
the State Department and of the Volcker Committee.
Indeed, last year, the former U.S. Ambassador to the United
Nations and Iraq, the current Director of National
Intelligence, John Negroponte, said the following: ``The U.S.
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 rearm or
reconstitute his WMD program. And,'' Mr. Negroponte stated,
``we believe the system that the Security Council devised by
and large met those objectives.''
In a report released in September, the Volcker Committee
concluded, ``The food supplies provided through the Oil-For-
Food Program reversed a serious and deteriorating food crisis,
preventing widespread hunger and probably reducing deaths to
which malnutrition was contributing.'' In terms of numbers, it
can be estimated, for example, that there were some 360,000
fewer malnourished children in 2000 than there would otherwise
have been.
The Oil-For-Food Program's achievements have been largely
overshadowed by the corrupt actions taken by Saddam Hussein to
undermine and to profit from the program. His corrupt acts
included requiring companies that bought Iraqi oil to pay an
illegal surcharge of 30 cents per barrel to Iraq instead of to
the U.N. escrow account. That netted his regime about $229
million, and we can see that item on the chart.
Also, companies selling to Iraq humanitarian goods
purchased with the oil sale proceeds paid Saddam a 10 percent
kickback disguised as a so-called ``after-sale service charge''
or ``inland transportation fee.'' Those kickbacks produced more
than $1.5 billion for Saddam's regime. We can see that column,
as well, on the chart. The Volcker report released last week
indicates that about half of the 4,500 companies that were
active in the Oil-For-Food Program ended up making payoffs to
the Saddam regime.
But the biggest source of illicit revenue to Saddam Hussein
throughout the sanctions period was from oil that Iraq sold to
its neighbors, mainly Jordan, Turkey, and Syria, and demanded
that they pay Iraq directly for the oil instead of paying into
the U.N. escrow account. And although those oil sales were
blatant violations of the U.N. sanctions on Iraq, for more than
a decade the United States and other U.N. countries looked the
other way and allowed them to continue.
The United Nations is not a law enforcement agency. It
can't prosecute anybody. It is completely dependent on its
member countries to police their nationals. Right now, there
are no effective mechanisms for the United Nations to compel
individual member countries to do what they should, and we will
be interested to hear from today's witnesses as to how to
tackle that problem.
We have to look not just at Saddam's conduct and the
conduct of the private sector which paid him kickbacks. In
other words, we also have to look at our own country's and
other countries' failures.
In battling Saddam's attempted corruption of the Oil-For-
Food Program, the United States did some good as well as
looking the other way for some things that should not have been
allowed. On the good side of the equation, the United States
helped to devise a way to stop Iraq from manipulating the
official selling price of Iraqi oil to facilitate the payment
of illegal surcharges. In other words, the selling price was
set by the United Nations, and the United States took a
leadership role in this, to prevent Saddam from manipulating
the selling price in order to obtain surcharges.
But in other cases, the United States fell down on the job.
For instance, we failed to do much of anything to ensure that
U.S. persons were not paying illegal surcharges to the Saddam
regime. The Minority staff report, which I have just released,
describes the case of Bayoil, an American company that was the
largest importer of Iraqi oil into the United States during the
Oil-For-Food Program. And, by the way, the United States was
the principal consumer of Iraqi oil during the program,
importing over 50 percent of all the oil that left that
country.
The Bayoil case provides a stark history of inaction,
inattention, and abdication of responsibility by United States
authorities charged with enforcing sanctions against Iraq. We
are going to go into that in some detail, but the bottom line
is this--and I would ask that my entire statement be put in the
record in this regard, Mr. Chairman.
Senator Coleman. Without objection.
[The prepared statement of Senator Levin follows:]
PREPARED STATEMENT OF SENATOR CARL LEVIN
For the past two years, a body of evidence has been building about
what went right and what went wrong with the United Nations Oil-for-
Food Program, one of the most ambitious undertakings in recent years by
the international community.
The Oil-for-Food program collected over $64 billion in Iraqi oil
proceeds, spent $34 billion on the Iraqi people's humanitarian needs,
and spent another $18 billion on Kuwaiti reparations. The program was
also the victim of kickback schemes that generated $229 million in
illegal surcharges on contracts to buy Iraqi oil and $1.5 billion in
payoffs on contracts selling humanitarian goods.
While $1.8 billion in kickback money is a serious matter, as this
chart shows, the illicit income generated from Oil-for-Food contracts
was dwarfed by the $10 billion in illicit income that Saddam Hussein
obtained from making sales of oil outside of the Oil-for-Food program.
These oil sales took place in broad daylight, mostly to Turkey, Jordan,
and Syria, with the open acknowledgment of the world community,
including the United States.
To date, this Subcommittee has held four oversight hearings and
issued six reports which, among other matters, present case histories
examining the payment to Saddam Hussein of illegal surcharges on Iraqi
oil sales and of illegal kickbacks on Iraqi humanitarian contracts, the
manipulation of Iraqi oil allocations to funnel money to political
groups and individuals who supported Saddam Hussein, and Iraq's illegal
sale of 7 million barrels of oil to Jordan at an unauthorized port
called Khor al Amaya while the United States and other U.N. member
nations looked the other way. To compile this information, the
Subcommittee staff reviewed thousands of documents and conducted scores
of interviews, including sending a team to Baghdad to interview former
Iraqi officials.
At the same time, the Volcker Committee, whose Chairman Paul
Volcker will testify here today, has conducted its own intensive
review, issuing five reports with massive information about how the
Oil-for-Food program operated and how it was abused by Saddam's illicit
schemes. Before that, the U.S. Iraqi Survey Group headed by Charles
Duelfer issued the first report that detailed key aspects of the OFF
program.
The end result is that the Subcommittee has amassed a wealth of
detailed information to help us analyze what went right, what went
wrong, and what lessons should be learned.
First, what went right. The facts and analysis show that the Oil-
for-Food program achieved its two core objectives. It stopped Saddam
Hussein from rearming and acquiring weapons of mass destruction, and it
alleviated the starvation and massive health crisis that was
overwhelming the Iraqi people. It is important to realize that
international sanctions can work and did work here.
That has been the conclusion of both the U.S. State Department and
the Volcker Independent Inquiry Committee. Last year, for example,
former U.S. Ambassador to the United Nations and Iraq, and current
Director of National Intelligence John Negroponte testified:
``The U.S. 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 rearm or reconstitute his WMD
program. We believe the system the Security Council devised by and
large met those objectives.''
In a report released in September, the Volcker Committee concluded:
``The food supplies provided through the [Oil-for-Food program]
reversed a serious and deteriorating food crisis, preventing widespread
hunger and probably reducing deaths to which malnutrition was
contributing. . . . In terms of numbers, it can be estimated, for
example, that there were some 360,000 fewer malnourished children in
2000 than there would otherwise have been.''
The Oil-for-Food program's achievements have become largely
overshadowed, however, by the corrupt actions taken by Saddam Hussein
to undermine and profit from the program. His corrupt acts included
requiring companies that bought Iraqi oil to pay an illegal surcharge
of 30 cents per barrel to Iraq instead of to the U.N. escrow account,
which netted his regime about $229 million. (See chart) Also, companies
selling Iraq humanitarian goods purchased with the oil sale proceeds
paid Saddam a 10% kickback disguised as a so-called ``after sale
service charge'' or ``inland transportation fee.'' Those kickbacks
produced more than $1.5 billion for the Hussein regime. The Volcker
report released last week indicates that over 2,200 companies, or about
half of the 4,500 companies active in the OFF program, ended up making
payoffs to the Hussein regime.
The biggest source of illicit revenue to Saddam Hussein throughout
the sanctions period was from oil that Iraq sold to its neighbors,
mostly Jordan, Turkey, and Syria, and demanded that they pay Iraq
directly for the oil instead of paying the U.N. escrow account. These
oil sales produced for Iraq illicit income totaling nearly $10 billion.
Although these oil sales were blatant violations of the U.N. sanctions
on Iraq, for more than a decade the United States and other U.N.
countries looked the other way and allowed them to continue.
Saddam Hussein was intent on lifting the U.N. sanctions that were
frustrating his efforts to rearm Iraq. Over the years, he succeeded in
generating billions of dollars in illicit revenues outside of the Oil-
for-Food program. He also corrupted thousands of companies and damaged
the reputation of the United Nations.
While the United Nations was a target and a victim of Saddam
Hussein's corruption, it also deserves a measure of blame for some of
the problems that existed with the Oil-for-Food program and the illicit
oil sales that circumvented it. The head of the Oil-for-Food program
appears to have accepted bribes, and management weaknesses, including
weak auditing, procurement, and personnel functions left the United
Nations open to abuse by a determined and corrupt foe. At the same
time, there is little evidence that Saddam was actually able to
influence the foreign policy of any country--let alone the Security
Council of the United Nations--through any of the schemes he devised
for that purpose.
One lesson to be learned from the Oil-for-Food investigations is
that the United Nations needs to strengthen its oversight efforts. It
needs a strong, independent, and adequately funded auditor of U.N.
programs. It needs a stronger, more transparent procurement system and
contract bidding process. It needs stronger conflicts of interest
prohibitions for U.N. personnel. And it needs specific anti-corruption
measures designed to protect programs, detect problems, and refer
suspicious conduct to member countries for further action.
Another lesson that ought to be learned is that the United Nations
is not a law enforcement agency. It cannot prosecute anyone. It is
completely dependent upon its member countries to police their
nationals. Right now, there are no effective mechanisms for the United
Nations to compel individual member countries to do what they should,
and I will be interested to hear from today's witnesses about how to
tackle that problem.
Another lesson is one learned from evaluating the conduct of our
own government. In some cases, the United States was a leader in
battling Saddam's attempted corruption of the OFF program, for example,
by helping to devise a way to stop Iraq from manipulating the official
selling price of Iraqi oil to facilitate the payment of illegal
surcharges. In other cases, however, the United States fell down on the
job.
For example, the United States failed to do much of anything to
ensure that U.S. persons were not paying illegal surcharges to the
Hussein regime. The Minority Staff report I have just released
describes the case of Bayoil, an American company that was the largest
importer of Iraqi oil into the United States during the Oil-for-Food
program. The United States was the principal consumer of Iraqi oil
during the program, importing over 50% of all oil that left that
country. The Bayoil case provides a stark history of inaction,
inattention, and abdication of responsibility by U.S. authorities
charged with enforcing sanctions against Iraq.
In early 2001, the U.N. Oil Overseers--the oil industry experts
employed by the United Nations to help oversee Iraqi oil sales--became
concerned over reports that purchasers of Iraqi oil were delivering and
selling that oil in unapproved markets. This issue was important,
because the price of Iraqi oil was set, in part, according to where the
oil was supposed to be delivered. Oil sent to North America, for
example, was priced lower than oil sent to Europe, in part to
compensate for the cost of transporting the oil across the Atlantic
Ocean. U.N. contracts required oil purchasers to actually deliver the
oil to the specified destination. Absent those requirements, Iraqi oil
purchasers could, for example, sell lower-priced oil that was supposed
to be sent to North America in the higher-priced European market,
making not only unintended profits, but also cheating the U.N. escrow
account out of money that should have been paid for the higher-priced
oil sold in Europe--money that would have been spent on the
humanitarian needs of the Iraqi people.
In early 2001, the U.N. Oil Overseers were especially concerned
about destination switching, because Saddam Hussein had just imposed
illegal surcharges of 25 or 30 cents per barrel of Iraqi oil, and the
Oil Overseers were worried that destination switching was being used to
obtain the illicit revenues needed to pay the illegal surcharges.
The Oil Overseers asked Bayoil, among others, for documentation
proving that the oil they bought had actually been delivered to the
destinations specified in their contracts. After Bayoil repeatedly
refused to cooperate, the U.N. Oil Overseers asked the U.S. State
Department for help.
On August 17, 2001, the State Department, in turn, asked the U.S.
Department of Treasury's Office of Foreign Assets Control or ``OFAC''--
the agency charged with enforcing U.S. sanctions regimes--to require
Bayoil to give the United Nations the information it wanted about
specific oil shipments. Five months later, after no information was
forthcoming, the U.N. Oil Overseers again asked the U.S. State
Department for help, and the State Department again simply passed the
request on to OFAC with no follow through.
Finally, eight months after the U.N. Oil Overseers first asked for
help, OFAC wrote to Bayoil in April 2002, and made a general request
that the company provide a report on its licensed activities in Iraq.
OFAC failed to ask Bayoil for the information requested by the United
Nations about specific oil shipments and failed to instruct Bayoil to
cooperate with the U.N. Oil Overseers. In May, Bayoil responded that
had no licensed activities in Iraq, because it had no direct oil sales
contracts with Iraq, and assumed OFAC was not asking about its other,
indirect purchases of Iraqi oil. OFAC never followed up, except to ask
Bayoil's permission to forward its non-responsive letter to the United
Nations. Bayoil wrote that its letter could be given to the State
Department, but not to anyone else, including the United Nations. In
the end, OFAC never even provided Bayoil's letter to the State
Department, much less to the United Nations.
As today's Minority Staff report demonstrates, the Bayoil
information that had been sought by the United Nations from the United
States in 2001 and 2002, was significant. Records later obtained by the
Subcommittee indicate that, in 2001, Bayoil switched destinations on at
least two shipments carrying over 4 million barrels of Iraqi oil and
obtained at least $7.5 million in illicit income from this
transatlantic shell game. Bayoil obtained those millions at the expense
of the U.N. escrow account for the humanitarian needs of the Iraqi
people, and improperly paid millions of dollars in higher fees to the
companies that provided that oil. Those companies, in turn, paid
millions of dollars in illegal surcharges demanded by Saddam Hussein.
By failing to respond to the United Nations' repeated requests for
assistance in monitoring and enforcing the Oil-for-Food program
requirements, U.S. authorities impaired the oversight of the OFF
program and efforts to deter the payment of illegal surcharges to
Saddam Hussein.
OFAC was not merely negligent in failing to assist the U.N. Oil
Overseers, it also abdicated its responsibility to enforce its own
regulations.
The Oil for Food program shows that international sanctions can
work. It also shows how a determined country can damage the United
Nations by tainting its programs with fraud. And it shows how important
it is that all U.N.-member nations vigilantly enforce the sanctions
regime. I commend Chairman Coleman for his tenacity in examining this
program, and I also share his goal of strengthening the United Nations
through needed management reforms.
Senator Levin. But the bottom line is this. We knew, the
United States knew and other nations of the United Nations knew
that oil was being sold directly to a number of countries by
Iraq, circumventing the Oil-For-Food Program, which required
that oil be sold by Iraq according to a very clear structure
and that the money be deposited in a U.N. escrow account so
that it could be spent for humanitarian purposes. Those
requirements, those United Nations rules that we agreed to and
helped put in place, were clearly violated and helped to
produce over $10 billion that went into Saddam Hussein's
pocket.
And when the United Nations asked us, the United States,
for information that would allow it to enforce its sanctions, I
am afraid that the Treasury Department and OFAC ignored the
request. We ignored the pleas, the urgent pleas from the United
Nations that we provide it information on Bayoil and what those
shipments were because the United Nations had the clear hunch,
and we could have proven that if we had pressed Bayoil for the
information that a number of Bayoil sales--and we are just
talking here about Bayoil--but that a number of Bayoil sales
clearly circumvented the U.N. rules.
We have got to try to figure out how we can do better when
it comes to our country and other countries enforcing
sanctions, because again, it takes the member nations of the
United Nations to enforce these sanctions. The United Nations
cannot enforce them on their own.
Mr. Chairman, again, I want to commend you and thank you.
You have shown tenacity here, leadership, sometimes despite
some criticism from certain places overseas, and you have
stayed the course and we commend you for it.
Senator Coleman. Thank you, Senator Levin.
Senator Coleman. Senator Pryor.
OPENING STATEMENT OF SENATOR PRYOR
Senator Pryor. Mr. Chairman, I just ask that my statement
be part of the record.
Senator Coleman. Without objection.
[The statement of Senator Pryor follows:]
PREPARED STATEMENT OF SENATOR PRYOR
Thank you, Mr. Chairman. The oil for food program was the
centerpiece of a long-standing U.N. Security Council effort to
alleviate human suffering in Iraq while maintaining key elements of the
1991 Gulf war-related sanctions. In order to ensure that Iraq remained
contained and that only humanitarian needs were served by the program,
the program imposed controls on Iraqi oil exports and humanitarian
imports. All Iraqi oil revenues legally earned under the program were
held in a U.N.-controlled escrow account and were not accessible to the
regime of Saddam Hussein.
The program was in operation from December 1996 until March 2003.
Observers generally agree that the program substantially eased, but did
not eliminate, human suffering in Iraq. However, growing regional and
international sympathy for the Iraqi people resulted in a pronounced
relaxation of regional enforcement--or even open defiance--of the Iraq
sanctions. The United States and other members of the United Nationals
Security Council were aware of billions of dollars in oil sales by Iraq
to its neighbors in violation of the U.N. sanctions regime and outside
of the OFFP, but did not take action to penalize states engaged in
illicit oil trading with Saddam Hussein's regime. Until 2002, the
United States argued that continued U.N. sanctions were critical to
preventing Iraq from acquiring equipment that could be used to
reconstitute banned weapons of mass destruction (WMD) programs. In
2002, the Bush Administration asserted that sanctions were not
sufficient to contain a mounting threat from Saddam Hussein's regime
and the Administration decided that the military overthrow of that
regime had become necessary.
The program terminated following the fall of Saddam Hussein's
regime, the assumption of soveignty by an interim Iraqi government on
June 28, 2004, and the lifting of Saddam-era U.N. sanctions. However,
since the fall of the regime, there have been new allegations of
mismanagement and abuse of the program, including allegations that
Saddam Hussein's regime manipulated the program to influence U.N.
officials, contractors, and politicians and businessmen in numerous
countries. New attention also has been focused on Iraq's oil sales to
neighboring countries outside the control or monitoring of the U.N.
OFFP. I am pleased that the Subcommittee is holding this important
hearing and I look forward to the testimony of our distinguished panel
of witnesses.
Senator Coleman. Chairman Volcker, it is a great pleasure
to have you with us. Again, I thank you for accommodating us
with the opportunity to hear from you and to be briefed on your
inquiry and your focus on recommendations for U.N. reform.
BRIEFING BY HON. PAUL A. VOLCKER,\1\ CHAIRMAN, INDEPENDENT
INQUIRY COMMITTEE (IIC) INTO THE UNITED NATIONS OIL-FOR-FOOD
PROGRAMME, NEW YORK, NEW YORK
Mr. Volcker. Thank you, Mr. Chairman, Senator Levin, and
Senator Pryor. As you are aware, the Independent Inquiry
Committee of the United Nations into the United Nations Oil-
For-Food Program last Thursday issued its final report. It is
rather a substantial volume, as you can see here. In that
light, your request for an informal briefing is timely, and as
chairman of the committee, I am glad to respond.
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\1\ The prepared statement of Mr. Volcker appears in the Appendix
on page 53.
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In doing so, I should emphasize that our inquiry has been
an international effort. My two fellow committee members are
Justice Richard Goldstone, widely known and respected for
leading investigations both in South Africa and for war crime
tribunals, and Professor Mark Pieth from Switzerland, who has
actively led work in the OECD and elsewhere on efforts to curb
corporate corruption and money laundering. Over half of our
roughly 75-person staff of attorneys, investigators, forensic
accountants, and administrators is from 27 other countries.
On September 7, we issued a lengthy report reviewing in
detail the overall management of the Oil-For-Food Program by
the Security Council, the U.N. Secretariat led by Secretary-
General Kofi Annan, and nine U.N.-related agencies. Each of
those bodies had substantial and often overlapping
responsibilities for implementing the program. That detailed
report concluded that the Administration by the Security
Council, the Secretariat, and certain U.N. agencies failed in
important respects and was indeed marred by corruption. I draw
your attention particularly to the brief preface to that
report, which has been made available to Subcommittee members.
Our even larger final report reviews the program from a
different angle. Specifically, it describes the ways and means
by which Saddam Hussein, the Saddam Hussein regime in Iraq,
manipulated the Oil-For-Food Program to its own ends. As a
result of that manipulation and with the complicity of
thousands of companies, other entities and individuals, close
to $2 billion was siphoned off illicitly into the coffers of
the former Iraq regime at the expense of its own suffering
population. One result was to reduce the amount of funds
available to the new Government of Iraq today.
Our report contains a detailed analysis and a number of
specific examples of the manner in which the so-called
surcharges were imposed by Iraq on those purchasing Iraq oil,
while kickbacks were required from those supplying humanitarian
goods under the program. What stands out to me from that
analysis is not only the individual instances of corruption and
failures of sufficient diligence by important U.N. contractors,
important as that is. The overriding theme is the
politicization of the process.
Saddam plainly chose to favor those nations, companies, and
individuals that he felt, rightly or wrongly, would assist his
efforts to end the sanctions imposed at the end of the Gulf
War. It is also true, as our earlier reports have emphasized,
that political differences and pressures within the U.N.
organization itself, Security Council, Secretariat, and some
U.N. agencies, frustrated appropriate and effective response to
the manipulation and corruption of the program.
What I particularly want to emphasize is that the
corruption of the program by Saddam and by many participants,
and it was substantial, could not have been nearly so pervasive
if there had been more disciplined management by the United
Nations and its agencies. In that sense, the last report
reinforces and underscores the need for fundamental and wide-
ranging administrative reform, the point that we emphasized in
delivering our report last month. That is, I think, the central
point that emerges from our whole inquiry.
Let me try to put this in perspective. The Oil-For-Food
Program presented a very large, very complicated challenge to
the United Nations. It was the mother of all U.N. humanitarian
programs. It involved more financial flows than all the
ordinary operations of the organization. Thousands of new
employees were required and hired, and the Oil-For-Food Program
was not just a humanitarian program, it was an integral part of
the effort to maintain sanctions against Iraq and to keep
Saddam from obtaining and maintaining weapons of mass
destruction.
In both of these objectives, humanitarian and security, it
had a measure of success, but that success came with a high
cost--in my judgment, a really intolerable cost--of grievously
wounding confidence in the competence and even the integrity of
the United Nations.
In terms of money alone, the illicit payments to the Saddam
regime within the Oil-For-Food Program were dwarfed by Iraq oil
trade with Jordan, Turkey, and Syria, as Senator Levin has just
mentioned, in violation of the Security Council sanctions. Over
the years of the program, that smuggling amounted to more than
$8 billion. Including the years before the program, it was more
than $10 billion. The smuggling, at least in direction, if not
in amount, became known to the Security Council and
specifically to the United States, but no action was taken to
deal with it. I have little doubt that laxity in that respect,
a willful closing of eyes, if you will, was symptomatic of
attitudes that led to lax administration more generally.
The Oil-For-Food Program may be unique, never to be
repeated, but other large and complex challenges--humanitarian,
environmental genocidal, or others--are sure to appear alone or
in combination. What is at stake is whether the organization
will be able to act effectively, whether it will have the
funds, the professional confidence, and the administrative
leadership to respond.
Those are not just technical requirements. They are
necessary to support any claim the U.N. organization can make
to competence and credibility, and without credibility and
confidence, legitimacy cannot be sustained.
The committee's simple conclusion is that administrative
reform is, indeed, urgently needed if the United Nations is to
be looked to in the future to deal with large humanitarian,
environmental, genocidal, and other threats. All too often,
crises come with little warning. They extend across national
borders and beyond the political and management capacity of
individual countries or ad hoc coalitions. Then there will be a
demand for the United Nations to respond. But if the
organization itself is unable to command confidence in its
administrative procedures and competence and in its honesty,
then it, too, will have lost its capacity to respond
effectively.
In essence, we emphasize four areas where prompt reform is
essential. First, in initiating and improving U.N. intervention
in critical and administratively complex areas, the Security
Council needs to clarify purpose and criteria. Execution could
then be clearly delegated to the Secretariat and appropriate
agencies with understood lines of reporting responsibility.
That was lacking in the case of the Oil-For-Food Program.
Second, that delegation and the capacity to carry it out
effectively will require a substantially stronger focus on
administrative responsibility. Experience indicates that
necessary focus and capacity is not likely to be found in the
Office of the Secretary-General, as presently instituted.
Secretaries-General, understandably, are preoccupied by
political and diplomatic concerns. They are chosen in that
light. Experience indicates that subordinate appointees,
whatever their formal responsibilities for the Administration
is, have simply been unable to enforce the discipline
necessary.
Hence, we recommend that a position of chief operating
officer should be created with the incumbent, like the
Secretary-General himself, nominated by the Security Council
and approved by the General Assembly. While reporting to the
Secretary-General, the new COO would then have his status
confirmed by direct access to the Security Council with clear
authority for planning and personnel practices that emphasize
professional and administrative talent.
Third, internal control, auditing, and investigatory
functions need to be strongly reinforced. We believe that will
require a strong independent oversight board with adequate
staff support and the capacity to fully review budgeting and
staffing of accounting and auditing functions.
Fourth, in large programs extending by their nature over
more than one operating arm or agency of the United Nations
with a common source of funds, the Security Council and the
Secretary-General must demand effective coordination from the
start. A clear and agreed memorandum of understanding should be
reinforced by common accounting and auditing standards.
I realize that those recommendations, for the most part,
mostly parallel those by others who have assessed the work of
the United Nations, including the group headed by Mr. Gingrich
and Mr. Mitchell. Nonetheless, I believe the IIC adds something
unique to the discussion. The IIC investigation, so far as I
know an investigation unparalleled in intensity of a major U.N.
program, provides unambiguous evidence of a systemic problem.
I won't claim--no one can--that our review has touched
every aspect of the Oil-For-Food Program with its thousands of
contractors, the number of member states involved, and the
difficult working environment. We do feel confident, however,
in the judgment that real reform is needed. Verbal and moral
support of that objective is not enough. Clear benchmarks for
progress must be set, and it is the member states themselves
through the General Assembly and otherwise that must drive the
process.
As things stand, the United Nations simply has lost the
credibility and the confidence in its administrative capacity
necessary for it to meet large challenges that seem sure to
arise in the future. But I believe our investigation can have a
different and more satisfactory result. My hope is that it can
be a catalyst, a needed springboard for a truly effective
reform effort, an effort that for too long has been more a
matter for talk than for action.
Thank you very much.
Senator Coleman. Thank you, Chairman Volcker.
First, I do want to compliment you on the report. It made
for some interesting reading this weekend, but clearly, your
investigators under your direction did a very thorough job of
identifying a great litany of problems.
I just want to touch upon one of the comments you made in
your testimony. You talked about the importance of a new COO,
Chief Operating Officer. U.N. reform has been an issue of
discussion going back for many years. I believe that when the
position of--was it Deputy Louise Frechette's position--the
Deputy Secretary-General, was one that was originally supposed
to be somebody who would be responsible for reform.
So my question is, is it a structural issue? Is it one in
which you actually have to have somebody appointed independent
of the Secretary-General, or is it a personnel issue? If you
don't have a Secretary-General focused on reform, if he doesn't
pick somebody who has the capacity to do the job that at least
it was anticipated they would have the powers to do, then you
have a problem. So help me understand. Do you see it as a
structural change or simply the personnel involved?
Mr. Volcker. I think it is a systemic problem in the sense
that the only mention of the Secretary-General in the charter
says he is the chief administrative officer and I don't think
the people who designed the charter had any idea of the
responsibilities that this U.N. organization would have 50
years later, 60 years later, with 191 countries. I think there
are 19, now, peacekeeping operations active in the world, and
we have a kind of program like the Oil-For-Food Program. In my
judgment, the responsibilities of the Secretary-General are
going to be focused on diplomatic and political affairs and the
administrative side doesn't get the attention that it needs in
a highly-politicized organization.
Now, there have been a number of attempts to deal with
this. In my own memory, going back 15 years or so, Dick
Thornburgh was once there as the Administrative Undersecretary.
He was replaced by Mr. Connors, considered a strong executive.
As you mention, Louise Frechette became Deputy Secretary-
General in order to strengthen the administrative side. All of
that has failed, it appears to me, because these people have
not been able to assume the authority that they need to have to
enforce administrative discipline in that organization. Other
officials would say, look, I am an Under Secretary. I am an
Assistant Secretary-General. I have as much authority as you
do. That seems to me the case. And no one has been able to have
the necessary kind of administrative control.
So our thought is to get somebody there that is going to
have the authority. You had better get them appointed by or
nominated by the Security Council and approved by the General
Assembly so that he clearly has the status of strength in
dealing with the organization generally. And a lot of other of
these subsidiary reforms, hopefully, will follow because he
will have the strength to enforce them.
Senator Coleman. I want to just touch a little bit, having
gone through the report, on the past. Chairman Volcker, one of
the things that strikes me is the kind of pattern of
manipulation. I have also been struck by the responses. You
have folks denying, denying, denying, up until the point that
you show them a receipt with money in their bank account, a
receipt or a contract that they signed with the Iraqis. I mean,
the pattern is pretty clear.
One, the Iraqis kept pretty substantial documents, so they
documented the surcharges. They documented to whom they gave
the allocations, is that correct?
Mr. Volcker. Yes.
Senator Coleman. It is also pretty clear from the testimony
of a number of individuals--Tariq Aziz being one, I think the
Minister of Oil, was it Rashid, another--it made it very clear
that part of the program was set up, but when they realized
that they controlled who got the oil, they used the oil to
benefit folks who were friendly to them or who took anti-
sanctions positions, but who helped the regime, and they used
this in a way to reward and perhaps encourage future, from
their perspective, positive conduct. Would that be a fair
statement?
Mr. Volcker. Yes, that is fair.
Senator Coleman. And so what you have then is you have the
regime making decisions, Aziz and others making decisions about
who gets the allocations. You have Iraqi documents that
identify, these are the people who get the allocation. And then
you have those folks, in effect, giving them or passing them
over to companies that actually lifted the oil, Bayoils,
Tauruses, and others.
And in exchange, what Bayoil would do is give a commission
back to the politician or the journalist, George Galloway or
Zhirinovsky, who is presently in the Russian Parliament, or
others, but that was the system. They would then--some of those
individuals would actually have agents operating on their
behalf. Some of them didn't want to personally get the money in
their pocket----
Mr. Volcker. It is fairly complicated.
Senator Coleman. But the pattern is the same, in effect, as
you go through this report, a very similar pattern. Iraqis
identified people who were helpful. They arranged to give them
oil allocations----
Mr. Volcker. If I may say, that pattern became evident in
the year 2000 or so when they began demanding the oil
surcharges and the kickbacks. Earlier, it tended to be more
direct.
Senator Coleman. And what you have, then, is ultimately
what you were able to get and our Subcommittee got was bank
records that would actually trace--and we could trace a payment
from Taurus Oil to Fawaz Zuraiqat and then we trace Zuraiqat
making a payment to Galloway's wife or the Marian Appeal. You
had payments, I believe, to Benon Sevan, but not to him
directly. I think that his wife also got payments----
Mr. Volcker. Well, in Benon Sevan's case, there were cash
payments to him out of an intermediary account and those cash
payments, at least the ones we identified, ended up in accounts
in the United States in cash, both to him and his wife.
Senator Coleman. I think in regard to Zhirinovsky, the
Russian, I think there were payments to his son----
Mr. Volcker. I don't remember that one.
Senator Coleman. But in any case, the pattern of payments,
either to an individual or somebody, was not unusual. That was
the pattern. And the Iraqis whom you spoke with, whether it was
Aziz or the Minister of Oil, again, they said this was a system
and the system for them worked.
My question is, did the Iraqis believe that they were able
to impact the conduct of member states as a result of this
system of kickbacks and oil allocations?
Mr. Volcker. I think all I can say is they were trying. I
don't know whether they did or whether they didn't, and that
would be a matter, I am sure, of some dispute. But I don't
think there is any question that the evidence shows that in
many cases, anyway, in making these so-called allocations, they
thought of it as rewarding, and I presume encouraging, people
that would publicly or otherwise be taking a position they
interpreted as favorable to Iraq.
Senator Coleman. In particular with the Russians, who I
believe got $19.3 billion worth of oil allocations. They were
very active in trying to lift the sanctions and they opposed
the U.S. and British efforts to impose retroactive pricing.
Mr. Volcker. Well, that is true. What the cause and effect
is, of course, it is hard to know what people hide in their
mind. But they undoubtedly thought that they were rewarding
people in a country that was taking positions friendly to them.
Senator Coleman. And is your own sense that, just your own
opinion that they were successful----
Mr. Volcker. I can't speculate on that. I'm not sure that
behavior changed.
Senator Coleman. Let me, in the time I have, talk a little
bit about reform. Unfortunately, your report came out right
after the last meeting with the United Nations.
Mr. Volcker. Yes.
Senator Coleman. Were you in contact with U.N. officials
before the report came out? Did they understand the scope and
magnitude? I mean, you had a number of reports. That last
report, were they aware of what you were going to find before
it was published?
Mr. Volcker. Well, they certainly are aware we were finding
many difficulties and were going to make recommendations. I had
indicated to the Secretary-General when I took this job in the
first place that I wasn't going to do it unless we could make
recommendations when we got finished, so they weren't surprised
we made recommendations.
I don't remember just when we may have talked with them
about these two specific recommendations which are kind of at
the heart of it. There couldn't have been any doubt in their
mind that we were going to criticize their control apparatus
and the lack of independence and strengths of the auditing
department and strengths of the inspection department because
they were subjects of earlier reports. So there wouldn't have
been any doubt in their mind about that. I don't remember the
Chief Operating Officer idea, just when I introduced that to
them.
Senator Coleman. But the results of the reform summit
certainly don't indicate a ready acceptance of these changes, a
willingness to move forward quickly. Some of the concerns that
we have here is the timing that is in place----
Mr. Volcker. I think many of the proposals that have been
talked about, including those by the Secretary-General himself,
in a general way in direction parallel what we are talking
about. Whether they are strong enough or effective enough is
the question, and you are right. It kind of got blurred over at
the time of the summit meeting. I am sorry that our report
didn't come earlier, but to do the kind of job we had to do, we
couldn't get it out any earlier.
But the way I look at it, anyway, is the critical time for
whether they have done the job or not is not tomorrow, it is
not next month, it is not even this year. By the time of the
next General Assembly meeting, will some of this, the key
reforms, be put in place and operating? I think there are
obvious questions. It is one thing for us to say you need an
independent oversight body, and I think they need it. But just
how that is structured obviously involves a lot of interesting
questions. The responsibilities for the Chief Operating Officer
involves some interesting questions. And there is a whole flow
of other questions about conflict of interest rules, ethical
rules, employment rules, disclosure rules, that presumably will
flow from this.
So I would rather they get it right than get it next month.
But I think you are going to put down some benchmarks no later
than the time of the General Assembly, next September----
Senator Coleman. Before next September, the United Nations
will meet. There will be a budgeting session. They will set a
budget going over the next couple of years. If the budget is
set without the reforms included in the budget, how do you get
to make the reforms?
Mr. Volcker. Well, some of them can be. The reforms that
can be included in the budget ought to be, but I think that is
a problem. The budget process probably needs to be reformed
itself. That the budgetary process is cumbersome understates
it. Part of the problem, I think, is, again, nobody trusts each
other, so they make a very detailed budget that is very hard to
change and it is very inflexible and they do it for 2 years.
All of that needs to be looked at. It is not central to our
report, but I think it is part of an improved administrative
structure in the United Nations. If they can get all these done
by the time they do the budget, that is fine, but I am a little
bit skeptical again.
Senator Coleman. My last question in this round, if the
reforms aren't done by the time the budget is done and we come
to next September and we are still where we are at today and we
don't see a clear commitment, what do you recommend this
Congress do?
Mr. Volcker. Well, I think the job of the United States and
other interested countries has to be to get a critical mass of
member states together to push this and some mechanism for
keeping on top of it. And I think the United Nations has to
recognize that if there is no reform, it has budgetary
consequences. I don't like the idea of just the United States
unilaterally cutting off money in a very disruptive way, but I
think, inevitably, if the reforms aren't made, it should be not
just the United States, but other countries worrying about how
their money is being spent and it will affect a willingness to
finance new programs. It will affect willingness to cut off old
ones. I think it should be a continuing process. But I hope it
comes out otherwise so that there is more confidence in the
institution so that appropriate new initiatives might be taken.
Senator Coleman. Thank you, Chairman Volcker. Senator
Levin.
Senator Levin. Thank you, Mr. Chairman.
You indicated in your written testimony that the Oil-For-
Food Program had two principal objectives, is that correct?
Mr. Volcker. Yes.
Senator Levin. Now, despite some of the corruption which
you have identified here that Saddam engaged in and that others
engaged in, did the Oil-For-Food Program basically meet its
core objectives?
Mr. Volcker. Yes, it certainly contributed to the core
objective of the sanction regime, which was to maintain the
sanctions without unduly harming the Iraqi population. It
certainly contributed to that objective, yes.
Senator Levin. And did the sanctions regime ever get
loosened or removed by the United Nations? Did Hussein succeed
in removing sanctions?
Mr. Volcker. Well, the sanctions were liberalized by
agreement to permit more goods to flow in, but they obviously
were maintained strongly enough so they didn't have weapons of
mass destruction, which was the object of the exercise.
Senator Levin. There was, as you have indicated in your
written testimony, about $10 billion in oil sales that went to
Jordan, Syria, and to Turkey. These were in violation of U.N.
sanctions and represented about 80 percent of the illicit Iraqi
income. Is that correct so far?
Mr. Volcker. Yes.
Senator Levin. All right. Now, how do we stop that? This is
a matter of the nations of the United Nations looking the other
way, as you have pointed out.
Mr. Volcker. It is interesting. By U.S. law, if the U.S.
Administration was aware of this, which they were to some
extent--I don't know if they were aware of the volume, they
were certainly aware of the destination--they had to notify the
Congress because by law, a country that is violating U.N.
sanctions is not eligible for assistance from the United
States.
Senator Levin. And as a matter of fact----
Mr. Volcker. But if Congress was notified, I don't know how
it was notified. I think it was notified by a messenger in the
dark of the night or something----
Senator Levin. No, they were notified.
Mr. Volcker. They were notified. I know they were notified.
What notice the Congress took, I don't know.
Senator Levin. Well, formal notice, a letter to Congress.
We were notified that all of this money, $10 billion, was going
into Saddam's pockets----
Mr. Volcker. That is correct.
Senator Levin [continuing]. In violation of U.N. sanctions.
The Administration decided to look the other way, notified
Congress, and we decided to look the other way, is that fair?
Mr. Volcker. Well, yes, and it is interesting, as I
understand it, a sanctions regime itself has built-in
provisions where an individual country might be exempted or
limited in an exemption if it pleads particular need or
particular hardship. But for some reason, that wasn't done. It
was just people looked the other way, as you say, instead of
openly recognizing it and making an exception. Why that was, I
don't know.
Senator Levin. There was one other area where we looked the
other way and that was the area of kickbacks. Is it not true
that--do you know, from your own investigation, as to whether
or not when the United Nations asked the Administration for
information relative to the Bayoil sales, that the
Administration did not provide the United Nations with the
information that it would have needed to investigate kickbacks?
Mr. Volcker. I, frankly, don't recall that point exactly
right----
Senator Levin. This is the OFAC chronology.\1\ Have you
read our report on that, the requests that went from the United
Nations to the U.S. Administration asking for information
relative to the Bayoil sales? Are you familiar with that?
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\1\ See Exhibit No. 2 which appears in the Appendix on page 123.
---------------------------------------------------------------------------
Mr. Volcker. Well, maybe I should be familiar, but I don't
remember all those details.
Senator Levin. But do you remember, in general, that there
were requests from the U.N. oil overseers to the U.S.
Administration requesting information about Bayoil sales that
they had evidence were in violation of U.N. rules? Is that
something you looked into, or----
Mr. Volcker. I certainly should remember that, but I must
confess, I don't know whether it is in our report or not.
Senator Levin. If you are not sure, then I won't--you
suggested in this afternoon's testimony, but also in an
interview last Wednesday that was reported in the New York
Times that by tolerating large-scale oil sales--I am going back
to the oil sales, now--that were in violation of the sanctions.
Mr. Volcker. Right.
Senator Levin. I am going back to that point. You suggested
in that interview and in your testimony here today that by
tolerating those large-scale oil sales outside of the U.N.
sanctions, that this compromised the Security Council's
willingness to intervene.
Mr. Volcker. Right.
Senator Levin. Can you explain that in greater detail, what
you meant?
Mr. Volcker. Well, this is perhaps a surmise on my part,
but it is clear that the Security Council and the 661 Committee
knew about the so-called smuggling in the case of Jordan and
later in the case of Turkey. Why no more explicit action was
taken to deal with that, I don't know. But it seems to me that
having not taken action in that area, it is a little harder to
come back and be very strict about other violations of the
sanctions, but that is a surmise on my part.
Senator Levin. Do any of your reforms get to the problem of
nations not enforcing sanctions where it is their
responsibility to enforce sanctions? We have a law that
prohibited Bayoil from doing what it did. How does the United
Nations get member states to either enforce its own laws or to
help enforce U.N. sanctions?
Mr. Volcker. Well, my understanding is that the United
Nations has a long history of sensitivity, I suppose, to
national sovereignty, which small countries are concerned with,
but the United States has often argued that itself, as I
understand it, in terms of some intended U.N. actions. But in
sanctions, it is left, as I understand it, to the individual
countries to enforce the sanctions, to enforce the anti-
smuggling.
In this case, what I don't understand is as this became
known, and it became known to the United Nations, it became
known to the U.N. inspectors, the U.N. inspectors had no
responsibility to deal with it, but they could have brought it
to the attention of the U.N. officials and the U.N. officials
could have pressed harder in terms of the Security Council
about a decision, but that wasn't done.
Senator Levin. And did the member states insist on that
being done?
Mr. Volcker. No. The member states did not insist upon it
being done, quite obviously.
Senator Levin. And your report, when it comes, again, to
the responsibility of member states points out that four, and
this is on page 115 of your report and this goes back to the
Bayoil question, that four traders and companies financed and
lifted over 60 percent of the Iraqi crude oil during exporting
crisis in Phase 9. The top financiers of Iraqi crude oil in
that phase were Bayoil and three other companies. That is in
your report, is that correct?
Mr. Volcker. Yes. If it is in our report, I am sure it is
correct.
Senator Levin. The largest oil trader of the group and the
only U.S. company out of the four was Bayoil, is that correct?
Mr. Volcker. Yes.
Senator Levin. So your report does make reference to the
Bayoil activity.
Mr. Volcker. It certainly does. But if I may make one
comment in that general connection, the critical time for this
corruption of the system was in 2000, when the surcharges were
put on, the kickbacks were put on, and that is the time when
something should have been done. At that time, the American
companies, by and large, that had participated backed out, I
suspect under concern about the Federal Corrupt Practices Act
and otherwise. So you did have something of a withdrawal by
respectable American companies from playing ball and the Iraqis
then clearly went to other companies and other devices to get
around that.
Senator Levin. The largest oil trader and the only U.S.
company out of the four you mentioned was Bayoil, lifted 400
million barrels of oil during the program, including 200
million during that 2-year period of 2000 to 2002 during which
the illegal surcharges were demanded and paid. My staff
calculated that Bayoil financed at least $37 million in illegal
kickbacks that were paid to Saddam. Shouldn't we have done more
as a Nation to police U.S. companies and to make sure that they
didn't finance the payment of surcharges to Iraq?
Mr. Volcker. I suppose so, yes. We didn't follow through in
that area, but I do think that we as a country were more
disciplined than a lot of other areas.
Senator Levin. Thank you. My time is up. Thank you.
Senator Coleman. I want to just follow up on concerns
raised by Senator Levin. All companies who have been involved
in this raise a great deal of concern. Bayoil, of course, is
being prosecuted now. I don't know if you focus on that in your
report, but they are being prosecuted, and I think they had
18.85 percent of Iraqi petroleum exports. Taurus Petroleum had
17.81 percent. Do you know if anyone is being prosecuted in
regard to Taurus Petroleum? I think they are a Swiss company.
Mr. Volcker. Who?
Senator Coleman. Taurus. Of the four major companies, there
were four majors----
Mr. Volcker. Right.
Senator Coleman [continuing]. Bayoil at 18 percent, Taurus
at almost 18 percent, Vitol, Glencore, and then almost 40
percent of others. Do you know if anybody else other than
Bayoil is being prosecuted?
Mr. Volcker. There are others who are being investigated.
Senator Coleman. In terms of charges being brought.
Mr. Volcker. I don't recall charges being brought against--
--
Senator Coleman. I would hope charges would be brought
across the board, but I would note that at this point, I
think----
Mr. Volcker. There are investigations going on in some
foreign countries.
Senator Coleman [continuing]. One of those countries, the
concern I have is in regard to the Russians, which got $19.3
billion worth of the oil through the Russians. Ultimately, not
a drop of oil went to Russia, but the oil went elsewhere. And
the evidence regarding the Russian transactions is pretty
overwhelming. You have signed statements from people like
Zhirinovsky, who were negotiating with the Iraqis. You have the
Communist Party of Russia getting substantial allocations,
again, many things in writing.
First of all, do you know if there are any prosecutions,
anyone in Russia has been charged with a crime----
Mr. Volcker. I am not aware of any. In Russia's case, I
might say, I think uniquely, that the allocation process seemed
to be strongly influenced, if not run, by the government
itself.
Senator Coleman. Did the Russians cooperate, the
government, with the IIC?
Mr. Volcker. To an extremely limited--with our
investigation?
Senator Coleman. Right.
Mr. Volcker. Only to a very limited extent. We basically
were not able to talk with Russian companies. We had limited
contacts with the Russian government.
Senator Coleman. We have active investigations going on
here against American companies involved. How do we get other
countries, the Russians, the French, and the others, to
seriously act on what is in your report and what is in the
Senate report?
Mr. Volcker. I guess I would answer that by saying we have
done our best by exposing the facts as we see them, and that
was our responsibility and I hope we have discharged that.
Just to be clear, our inquiry is a fact-finding inquiry. We
haven't got any law enforcement powers ourselves. But we had a
hope, and continue to have a hope, and we have cooperated with
law enforcement bodies that have been interested in pursuing
this. None of those have arisen in Russia, but they have in
some other countries.
Senator Coleman. Just one other thought in regard to the
conduct of the United States here. And by the way, in dealing
with this program, this occurred under two Administrations,
both the Clinton Administration and the Bush Administration.
This is not just a process of dealing with the Oil-For-Food
Program and the protocols, the selling of oil. In fact,
Congress was notified and the Secretary of State said it was in
our national interests of the U.S. to provide trade with Turkey
and Jordan, is that correct?
Mr. Volcker. That is correct.
Senator Coleman. But that we did fight tooth and nail
against Syria, against some of the Syrian smuggling. There was
a strong effort to fight that, wasn't there?
Mr. Volcker. There was a stronger effort to fight it, yes.
Senator Coleman. And can you----
Mr. Volcker. But I don't think that it was ever notified to
the Congress. I am not sure. I don't think so. My memory is
Turkey and Jordan was, but not Syria.
Senator Coleman. Was there--again, I want to get back to
the Security Council--cooperation from France and Russia? Their
reaction to, for instance, the retroactive pricing. One of the
things we did, and it took us 2 years to do, is the way you
could stop the kickbacks is you could make sure that the Iraqis
couldn't manipulate the price to build in a kickback for
Saddam.
Mr. Volcker. Correct.
Senator Coleman. We fought for 2 years to try to do that.
Who was opposing that?
Mr. Volcker. Well, my memory is that I think the Russians
and the Chinese and perhaps the French.
Senator Coleman. And these were the people who were getting
the bulk of the business from the Oil-For-Food Program?
Mr. Volcker. Well, the Russians and the French were,
anyway, and the Chinese at times were, too.
Let me just note that there are active investigations going
on in France with this matter.
Senator Coleman. And I believe there was action taken
against a former French diplomat, Merimee?
Mr. Volcker. Yes. It is something short of an indictment,
as we see it. It is an investigative notice, in effect, under
the French system. They notify people that they are under
investigation, and I should get the exact term now, but it is--
they have not been brought to trial.
Senator Coleman. In the Merimee case, by the way, again, it
is one that followed a pattern. He was deemed as being helpful
by the regime.
Mr. Volcker. Yes.
Senator Coleman. He received an oil allocation. Someone
else lifted it. He got a commission----
Mr. Volcker. Yes.
Senator Coleman [continuing]. That he got back, some
direct, some indirect.
Mr. Volcker. Yes. And, of course, the problem in that
particular case, he did this while he was a U.N. official, a
U.N. advisor.
Senator Coleman. He was, in fact, at that point working for
the Secretary-General, is that correct?
Mr. Volcker. That is correct, yes.
Senator Coleman. And Sevan, when he did it, was he also
working as a U.N. official?
Mr. Volcker. Well, Sevan was not only working as a U.N.
official, he was the U.N. official in charge of the program.
Senator Coleman. I have focused very heavily on the issue
of corruption versus there have--my distinguished colleague has
focused on the oil protocols, of which Congress did get notice
and judgments were made about what was in our security
interest. But the issue of corruption, of dollars being paid to
bribe folks, payoffs to member states, and even ultimately, by
the way, the corruption of Bayoil and others who were paying
kickbacks. I mean, the sense I have, and you have stated it, is
what that does is it undermines the confidence in the United
Nations to do whatever it does.
Mr. Volcker. I think that is true. The failure of the
United Nations, and I use that term broadly now to include the
Security Council, to take effective means to combat that
undermines the sense of legitimacy of the United Nations.
Senator Coleman. How much of the corruption issue goes
beyond Oil-For-Food? Before the Foreign Relations Committee, we
had a brief exchange about whether it was a culture of
corruption or a culture of indifference.
Mr. Volcker. Well, I don't want to call it a culture of
corruption because the actual amount of corruption that we
found was, of course, limited. We found some corruption in the
purchasing department, which, of course, is a place where you
might be suspicious of getting corruption. We ran across
corruption that was outside the Oil-For-Food Program in the
purchasing department and that has led to an arrest, as you
know, of a man, or two people directly involved. We had the
corruption by the guy running the program. That is pretty
serious. But we haven't found payment of money to U.N. people
wholesale by any means.
There undoubtedly was plenty of room for a kind of petty
corruption in Iraq itself, where there were a lot of new U.N.
employees and a lot of handling of cash and other possibilities
of siphoning off money. You hear some reports of that. We were
not able to chase it down in ways we could actually identify,
but one could be suspicious.
Senator Coleman. As one looks to reform, ultimately, you
can have the concepts of reform, but then you have to enact
reform and people have to carry it out. One of the concerns
about the United Nations has been about the personnel and is
there too much nepotism, is there patronage, is it a
bureaucratic system, is it capable of change. Can you comment
on what it is going to take to truly change, not just to put
the ideas on the table, but to make it work?
Mr. Volcker. Well, when we looked at this and debated it
ourselves, the best thing we could do is come up with this idea
that, somehow, somebody has got to be more clearly responsible
for administrating the place than is possible now. Now, it is
the Secretary-General, and he shouldn't escape responsibility.
I don't believe that by any means. But I think the structure
needs to be strengthened in a way so that there are fewer
excuses for escaping responsibility or not paying enough
attention and you do that by singling out one guy, it seems to
me, one man or woman who clearly has that responsibility.
The irony of this program at one point is the Deputy
Secretary-General was presumably appointed to oversee the
program. At the end of the day, she says she wasn't aware of
that. Now, that suggests some problem in delegation and
administrative discipline, because that position was created to
exert administrative control, in theory. But for whatever
reason, it hasn't worked out that way.
Senator Coleman. I would suggest the problem, then, is the
person who was on top of her, the Secretary-General, who if she
doesn't understand that she's got that responsibility and all
this is going on, then that is clearly a problem.
Mr. Volcker. I think that is true, too.
Senator Coleman. Thank you, Chairman Volcker. Senator
Levin.?
Senator Levin. I think we are looking at two aspects of the
same problem when we look at this Oil-For-Food Program. One is
it all is illicit income or money going into Saddam Hussein
from different types of sources. One is the kickbacks and
surcharges and the other one is the direct sales which we
looked the other way on.
Mr. Volcker. Yes.
Senator Levin. I have spent a lot of time on the direct
sales because that represents 80 percent of the illicit money
that went to Saddam. But 20 percent of that money comes from
the kickbacks and the surcharges that were paid.
Mr. Volcker. Right.
Senator Levin. We laid out the chronology of the efforts of
the United Nations to obtain information from our country about
the largest single company that acquired Iraq oil. It's too
hard for you to read, so I'll just read you a couple lines of--
--
Mr. Volcker. I have it in front of me here.
Senator Levin. All right. Take a look, on July 14, 2001,
the U.N. Office of Iraq Program asks the U.S. mission to the
United Nations for assistance. The State Department writes the
Treasury Department's Office of Foreign Assets Control, OFAC,
asking it to contact Bayoil and urge the company to respond
quickly and completely to the Office of Iraq Program's request
for information. It didn't do it. The United Nations again
asked Bayoil. It doesn't get the information. In January 2002,
another request of Bayoil, doesn't get the information.
In January 2002, the United Nations again asks the State
Department for assistance and the State Department again
contacts OFAC. Nothing happens until 8 months after the initial
request, OFAC writes Bayoil requesting a report on
transactions. Bayoil writes OFAC back, does not give it the
information which the United Nations wants, which is about what
happened to specific shipments of oil.
The bottom line is that we did not help the United Nations
enforce these rules. Now, what reforms are we going to put in
place that are going to get member nations to do their duty?
This is a direct illegal surcharge issue.
Mr. Volcker. Well, look, I don't know magic answers. All I
know is our sense is the United Nations itself didn't press
very hard in this area.
Senator Levin. Well, how many letters do you have to write
to the State Department----
Mr. Volcker. Well, they----
Senator Levin [continuing]. In order to get information?
Does it take three letters? Is that what the United Nations
needs to--by the way, I admire what you have done relative to
U.N. reforms. I am all for you.
Mr. Volcker. I understand that.
Senator Levin. But I don't think we can take member nations
off the hook.
Mr. Volcker. No, I agree. You can look at this question
much more broadly. All this business that went on, particularly
after 2000, with hiding behind front companies and so forth,
all those front companies were approved by member states. Now,
I am sure they didn't investigate. The approval was virtually
automatic. But no effort was made when questions did arise to
follow up.
You have a case here obviously where the effort was much
more diligent at least in trying to find something. In most
cases, nobody tried. One of our concerns is that the bank that
was at the center of the escrow account and at the center of
issuing letters of credit made no real effort to notify the
United Nations, nor did the United Nations make a great effort
to notify the member states that these front companies were
rather questionable and what was going on here. It was just
that kind of discipline was lacking.
Senator Levin. And then the final blow to the U.N. efforts
to obtain information on Bayoil is that when Bayoil writes to
the Administration or to the State Department, excuse me, with
certain information, which, by the way, was wrong, inaccurate,
but nonetheless, they tell the administration, they tell the
State Department, you may not share this with the United
Nations, and we didn't share it with the United Nations. It was
erroneous information, by the way. But how do we allow a
company subject to our law to direct us not to share something
with the United Nations? What is the basis for that?
Mr. Volcker. I do not know.
Senator Levin. And then the State Department complies. We
don't share it with the United Nations. So I am all in favor of
pointing the finger at the United Nations when it belongs
there, and you have done that, but I don't think we can just
simply leave it there. I think we have got to look at
ourselves.
Mr. Volcker. OK. What you are saying, I think makes sense,
and that we are usually careful in saying the failures in this
program was the United Nations, but it was also member states.
Senator Levin. Thank you.
Senator Coleman. Thank you, Chairman Volcker. I would note
one thing, and I haven't taken a look at the State Department
letters, but I understand these were written to the Office of
the Iraq Program as asking the U.S. mission to the United
Nations for assistance, is that correct? Is that the program
that was overseen by Benon Sevan? Is that the same program?
Mr. Volcker. The Office of Iraq Program was overseen by
Benon Sevan, that is for sure.
Senator Coleman. Thank you very much, Chairman Volcker. I
appreciate your testimony and the work of your commission.
I would now like to welcome our next presenter, and I
should note to the audience that witnesses before this
Subcommittee are typically required to be sworn. But we have
here two individuals who are actually doing briefings for us
rather than appearing as witnesses and I want to make that
distinction.
Our next individual who will provide a briefing for us will
be the former Speaker of the House who served as a Co-Chair of
the Task Force on the United Nations at the United States
Institute of Peace and it is really an honor to have you with
us this afternoon, the Hon. Newt Gingrich. Speaker Gingrich, I
appreciate your attendance at today's hearing. I look forward
to hearing about the Task Force report and American interests
in U.N. reform as well as your views on the role of Congress in
U.N. management reform, including the need for legislation on
U.N. reform.
With that, we have a timing system today. We will do about
10 minutes, but I welcome the opportunity to have you before us
today, Speaker Gingrich.
BRIEFING BY HON. NEWT GINGRICH,\1\ CO-CHAIR, TASK FORCE ON THE
UNITED NATIONS, UNITED STATES INSTITUTE OF PEACE, WASHINGTON,
DC
Mr. Gingrich. Let me say first of all that I appreciate
very much the hearing and the opportunity. I found the dialogue
between Chairman Volcker and the two of you very helpful in
setting the stage, so if I might, I want to build on that.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Gingrich appears in the Appendix
on page 57.
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I want to say that I am going to be representing my own
views today, but we did issue a report which both of you have
seen and your staffs have seen on American interests in United
Nations reform, which Senator Mitchell and I co-chaired and was
a very bipartisan effort.
I also have a full text which I am submitting for the
record, but will not go over in detail, including an appendix
where we attempted to go through and take all the
recommendations that we had made in our report and looked at
the summit that was held with the General Assembly and tried to
measure literally item by item for 35 pages which things were
done and which weren't. I must say, it is a fairly discouraging
report if we are going to be candid about what has and has not
been done.
I noticed that Ambassador Bolton had made the comment that
there was an interesting contrast between Secretary Rice saying
we need a revolution of reform at the United Nations and
Chairman Volcker having commented on a culture of inaction. I
would simply say that from what we have seen in September and
October, the culture of inaction is defeating the revolution of
reform, and I think that is part of what the U.S. Congress has
to confront, is in a setting where an institution that matters
is failing, what are the options available to the United States
and how should we deal with it?
Let me say, just because I do agree with the concerns that
Senator Levin raised about the State Department's earlier
actions, I think it is perfectly reasonable for this
Subcommittee and for its House counterpart to also look at
those ways in which the U.S. Government as an institution has
failed to be effective in sanctions in other areas and to
propose such reforms as are necessary to our own government. I
don't think we should say this is all about the United Nations,
although there is, sadly, more than enough to deal with at the
United Nations level.
I want to begin by saying, I think, that it is very
important that the United States work with other countries to
start moving towards a voluntary dues paying model for the
entire United Nations system. I note that Chairman Volcker
commented that there had to be, in his judgment, financial
consequences if, in fact, the United Nations was not reforming
itself. I thought it was a very important term because he was
trying to talk about reality.
If the overwhelming number of members of the General
Assembly who pay virtually nothing are able to consistently
stonewall reform, knowing that the check will show up no matter
what they do, and if the U.N. bureaucracy is able to be
ineffective, which I would argue is its more frequent
behavior--I don't think the core problem is one of corruption
in the U.N. bureaucracy, although there were some corrupt
behaviors. I think the deeper problem is a stunning level of
inefficiency and incompetence and an inability to deliver and
to get things done, and that has very important consequences
for human beings around the planet.
When the United Nations is incompetent, people die in
Darfour. When the United Nations is incompetent, people find
that they don't have the right kind of help with malaria. When
the United Nations is incompetent, there are reasons to worry
about which should be an effective economic development aid.
And I think it is important to recognize that this underlying
pattern will continue unless there is substantial reform.
So I want to start with Chairman Volcker, who made the
comment talking about the effort to have reforms, ``all of that
has failed.'' He went on to say, ``if there isn't reform, there
has to be monetary consequences.'' I also note that former
United Nations Under Secretary-General for Management and the
former head of the World Food Program, Catherine Bertini, who
said that, ``voluntary funding creates an entirely different
atmosphere at the World Food Program than at the United
Nations. At the World Food Program, every staff member knows
that we have to be as efficient, accountable, transparent, and
results-oriented as is possible. If we are not, donor
governments can take their funding elsewhere in a very
competitive world among U.N. agencies and non-governmental
institutions and bilateral governments.''
My only point being that rather than talk about
withholding, the Congress should set a totally new pattern
which is to say to the Administration, we expect you to come up
every year. We expect you to justify the amount of taxpayers'
money you intend to give the United Nations. We expect you to
prove that there have been adequate reforms to justify that
money, and we, the Congress, will determine the amount we meet,
rather than have it automatically be dictated by a body, the
General Assembly, which is dominated by nations who have zero
financial interest or sense of responsibility.
Let me just very briefly use two other examples to show you
why I am so concerned about the core, and then I want to go way
beyond just the issue of corruption. I will be glad to talk to
you in the question period specifically about the scandal as it
involves Saddam Hussein in the Oil-For-Food Program.
When the Secretary-General says in a recent speech, talking
about the summit in which so much hope was placed in September,
a quote from the Secretary-General, Kofi Annan, ``It was a
disgrace that our leaders could not agree even on a single
sentence about how to tackle one of the most urgent challenges
of our time, the threat of weapons of mass destruction.'' I
think that has to be put in the context of a member of the
United Nations, Iran, the new President of whom said, ``Israel
must be wiped off the map. Israel would burn in the fire of the
Islamic nation's fury.'' And the Speaker of the Iranian
Parliament, in commenting on that speech, said, ``Israel's
existence is illegal.''
Now, the reason I cite this is the United States and the
democracies--Japan, the Europeans, and others--have to take it
upon ourselves to insist on a standard of accountability for
corruption, to insist on a standard of accountability for the
effective use of the resources that are loaned or that are
given to an international organization, but also to insist on a
mental toughness about the scale of the crisis that is
gradually and inexorably building around this planet, because
the longer we use words to disguise and to hide and to avoid,
the greater the danger that regimes are going to end up using
weapons of mass destruction and that we will look back with
horror at events that are radically more dangerous than
September 11 and then we will say, ``Gee, how did that
happen?''
One of the reasons that will have happened is because of
the failure to take head-on the need for profound reform at the
United Nations. Let me just say along that line, I believe, and
this goes back to reforming the State Department here in the
United States, I believe every American ambassador around the
world should have as a major assignment the bilateral
organizing of votes so that the U.S. Ambassador to the United
Nations has the active support on a regular organized basis of
every single ambassador, and that probably means having secure
video conferencing capabilities so that we could literally have
briefings from New York and Washington in virtually real time
so every ambassador understands what they are doing.
I believe that we have to establish a standard that says
that the burden is not on the United States, the burden is on
the United Nations to reform itself. I believe also that we
should be very aggressive in encouraging alternative forms of
international activity and the United Nations should have
notice served that if they fail to create an effective Human
Rights Council that is made up only of countries that recognize
human rights, that we reserve the right to develop a totally
different council outside the United Nations without allowing
the dictatorships to usurp that particular body.
And finally, in terms of the particular scandal of billions
of dollars that should have gone to the Iraqi people,
including, I might note, some $18 to $20 billion that
supposedly, at least some estimates are, that Saddam Hussein
may well have secreted outside the country, that there should
be a consistent effort led by the U.S. Department of Justice,
the State Department, and the Treasury Department, to work
together with other countries that believe in the rule of law
to recover this money and return it to the Iraqi people,
because it is their money, and I think that, in part, goes back
to Senator Levin's earlier comment about examples involving
American companies, not just foreign companies.
I look forward to your questions.
Senator Coleman. Thank you very much, Speaker Gingrich.
I should note that we invited George Mitchell to testify,
and I know that Ranking Member Levin, in fact, had been in
contact with Mr. Mitchell. He had a conflict and could not make
it, but we did ask him to participate today.
Let me get right into how do you make reform happen. One of
the challenges we have is that you have the G-77, you have the
non-aligned nations, who don't have a lot of financial skin in
the game. The term ``management reform'' doesn't have a
financial impact for them. From their perspective, perhaps
today the system works well. They haven't said that to me, but
that is the sense I get. What I am hearing is what you are
recommending is have our ambassadors kind of work nation-to-
nation. Is there anything else that we can do to try to move a
kind of broad group of the G-77 to understand that reform of
the United Nations is absolutely essential if we are to have
the level of participation that we have had in the past?
Mr. Gingrich. Well, let me say, first of all, this is a
manageable problem because seven democracies provide 78 percent
of the funding to the United Nations. So you can, in fact,
focus on countries where the news media is free, where some
minimum standard of honesty matters, and where you can have an
ongoing effort to say--for example, I would urge that every
meeting of the G-77 have on its agenda United Nations reform
and that we not accept this idea that since not one of us has
the right to be totally in charge, none of us have any
responsibility.
The major democracies of the world, the countries that
believe in the rule of law, that believe in transparency and
accountability, provide the vast majority of resources to the
United Nations and those countries, if they move as a block,
will, in fact, carry the day. And I think it takes persistence,
it takes a systematic strategy, but I do not believe you are
going to get serious reform without that kind of ongoing
effort, and it can't just be an every September press event. It
has to be a 365-day-a-year coordinated effort which, candidly,
if we could get those other six nations to join us in the
bilateral efforts and you suddenly had all seven ambassadors to
country after country sitting down to talk with the heads of
government, you would have a stunning shift in the voting
pattern of the General Assembly on issues of reform.
Senator Coleman. Talk to me about the timing of reform. We
had the summit in September. It did not come out. It certainly
was not a revolution. It didn't address what some people
thought would be the easiest, the Human Rights Commission, a
Human Rights Commission that has Zimbabwe as a member, that has
had Libya in charge of it, Sudan, Cuba. Some would think that
would be the easiest thing. It is absolutely absurd. And yet,
we are finding it very difficult to make any change there. You
have a budget process in the United Nations where, the early
part of next year, they will do a budget that will set
patterns, spending patterns, for the next couple of years to
come.
Talk to me a little bit about the timing of reform and how
we influence the timing of reform.
Mr. Gingrich. Let me say first of all that we keep being
told that the budget is set by consensus, to which the easy
answer is the United States shouldn't consent. If it is truly
sent by consensus and we and the Japanese both agree, between
us, we represent 40 percent of the total budget, just two
countries. So I think there are some grounds for saying, all
right, let us insist on, for example, adding no new programs of
any kind that involve spending money unless the money comes
from the current budget.
Senator Coleman. So we----
Mr. Gingrich. There is clearly, if you look at how the
summit was designed, it is clearly designed to add a whole new
layer of programs with a whole new layer of offices, with a
whole new layer of budget requirements, without having reformed
anything. So I think that one step is to simply say no.
I think a second step is to recognize one of the tragic and
frustrating lessons of the 1930's is that time is on the side
of the evil. I look at the Iranian statements in the last few
weeks and I look at the Iranian nuclear program and I must say,
I find it very formidable to think that you could end up with
this kind of radical government possessing nuclear weapons,
openly stating they intend to eliminate Israel, and then to say
later on, gee, I wonder what that phrase meant?
And I would say the same thing here. Those who are corrupt
and those who are merely inefficient would prefer never to be
noticed. They find time on their side. If you have the scandal
we had with sexual predation by U.N. peacekeepers, you have had
the scandal we have had with Oil-For-Food, you have had all the
full weight of five volumes of the Volcker report, and with all
of that, we can't get any serious reform, there is no reason to
believe time is on the side of the innocent.
And so I would argue that it is the duty of the U.S.
Congress to serve notice over and over and to serve notice on
the Administration that it fully expects this Administration to
publicly and aggressively pursue reform at every level,
including the G-77, including bilateral relations in all 190
capitals, including in New York, and that the Congress's
response financially and otherwise will be a function in part
of the proof that things are improving.
Senator Coleman. And what you have offered is a checklist
that allows us actually to measure. There are vehicles by which
you can measure whether reform is taking place and have the
State Department report checklists and then judgments can be
made as to whether reform is really reform.
Mr. Gingrich. I think if Senator Mitchell were here, he
would join me in saying that as a former Speaker and former
Majority Leader of the Senate, we would hardly believe that the
Senate or House or the White House will accept our 35-page
checklist, but we think if you all collectively can develop a
checklist sort of like this, that that is the right way to do
it, to set real metrics, set them out in the open. Obviously,
you have to negotiate with them. You want to know, what will
the Japanese accept and not accept. What will the British
accept and not accept?
But if you start with the G-77 and build out, you can have,
I think, a very powerful set of reforms, and part of the
standard has to be, how can they oppose basic accountability?
Which freely-elected government wants to go back home and say,
you shouldn't have a right to have accountability and
transparency in how your money is spent in the United Nations?
Senator Coleman. You noted that the problem in the kind of
overall large problem is not necessarily corruption. I mean,
certainly we saw corruption in Oil-For-Food and we see
different levels of corruption. But the most pervasive problem,
as I heard testimony, is inefficiency and incompetence, and we
see that not just in Oil-For-Food, but in some other programs.
How do you get to the problem of inefficiency and incompetence?
Are those structural changes or are they personnel changes? And
if they are personnel issues, how do you change personnel in
the United Nations?
Mr. Gingrich. Let me try to expand on the term
``inefficiency,'' because I think it leads people to think we
are worried about paper clips falling off the desk or
something.
There was a clear and deliberate miscommunication between
the U.N. commander in Srebrenica and the U.N. offices in New
York, and during the miscommunication, 7,000 people were
slaughtered. There was a clear and deliberate pattern of
miscommunication between what the U.N. observers in the field
in Rwanda were saying and what was being said to the Security
Council. Now, that is a kind of lack of accountability, lack of
transparency that led to people dying by the hundreds of
thousands.
And so when I talk about lack of accountability--there is
one report that the Volcker Commission made that one particular
U.N. agency--I may have the numbers slightly off, but they had
approximately a $10 million administrative fee for a $680,000
project. This is part of the Volcker Commission report. Now,
that is such a grotesque abuse of the system, to have charged
$10 million to pad their administrative budget so they could be
comfortable while the people of Iraq were only getting a, I
think it was, $680,000 project. The numbers may be slightly
off, but the magnitude is about right.
I was told by Australians they had very similar patterns
happening in East Timor, where the United Nations people
absorbed every major good hotel room and booked every single
good restaurant while seeking to administer refugee money in a
way that was stunningly inefficient for the refugees. It wasn't
inefficient for the U.N. bureaucracy, but it was inefficient
for the refugees.
I think it is this sense of unaccountability,
unseriousness, and non-transparency which leads to tragic
things happening for human beings.
Senator Coleman. I appreciate, Speaker Gingrich, you
putting a human face on this. I think all too often, we talk
about these terms, about accountability and transparency and we
look at the operations of the Office of Independent Oversight
Boards and it is like we are accountants, without reflecting on
the human impact.
I mean, my concern with Oil-For-Food was did Saddam believe
that the Security Council wasn't going to act against him, and
as a result, we are engaged in battles today and lives lost and
a terrible impact because we had a thug or a tyrant who figured
he had bought the jury. I don't know. But the failure of the
right thing to take place, and particularly the United Nations,
is people pay a price and it is not just about accountants
setting up new systems.
My time is up on this round. I will turn to my Ranking
Member, but I want to come back for another round.
Senator Levin. Thank you. I welcome Speaker Gingrich.
I noted the intro, or the foreword, I guess, by you and
Senator Mitchell to your report, and one of the things you
said, it seems to me, is something that I am very much in
agreement with and spent a lot of time trying to figure out how
to implement, and that is this quote on page four, ``In
proposing sweeping reform of the United Nations, the Task Force
notes that the United Nations is a body composed of individual
Nation States.'' Regrettably, too often, member states have
found it convenient to lay the blame for failure solely on the
United Nations in cases where they themselves have blocked
intervention or opposed action by the United Nations. On
stopping genocide, all too often, ``the United Nations
failed,'' should actually read, ``members of the United Nations
blocked or undermined action by the United Nations.''
I think it is a very perceptive comment that the two of you
made. Obviously, there are problems at the United Nations,
problems in the Administration, reforms that need to be made,
and I think that is clearly true. The Secretary-General has
acknowledged that and there is an effort underway in many areas
to see if we can't get some of the needed reforms. but it is
also important to recognize, as you two did, that too often, it
is the member states that don't want those reforms or don't
want the United Nations to take certain kinds of action and we
can't just sort of act as though the United Nations is
something separate from its members, because it isn't.
I am just wondering whether there are many management
reforms that you could suggest, or any other kind of reforms
that you would suggest that might lead to member states
carrying out their own responsibilities. You talked about
accountability and responsibility, and I couldn't agree with
you more. What kind of reforms could be introduced which might
have the effect of getting member states to step up and do what
they need to do to make a program work?
Mr. Gingrich. I think you put your finger on one of the
most difficult challenges that we wrestled with for hours in
our discussions with a number of very experienced people who
had been--including several former U.N. ambassadors to the
United States, including several senior military people.
Let me break it into three components, if I might, and
again, this is certainly under the purview of this
Subcommittee. The first is there are times when the United
States fails. We have to recognize that in Rwanda, we were very
eager to avoid being directly engaged if at all possible and
that when people see ``Hotel Rwanda,'' they need to understand,
that wasn't the U.N. failed, that every great power was eager
to not go in there for different reasons and that the United
Nations was simply the instrument of the collective failure of
civilization.
So I think you have to start with that, that when you visit
the Holocaust Museum and you say, never again, you then have to
say, all right, first of all, what does that mean for the most
powerful nation in the world? It doesn't mean we have to do
everything, but we should be leaning forward in getting things
done and figuring who is going to do them.
Second, there are going to be times when we have to work
around the United Nations and we need to be clear about this.
We tried to say quite strongly in this report that if the
United Nations is unable in a place like Darfour, where you
have Chinese and French interests on the other side, if the
U.N. Security Council can't make a decision, that doesn't mean
that a non-decision is a veto, because, frankly, as long as we
are prepared to block any negative, they can't pass anything
that stops from doing it. So you could organize the
Organization of African Union. You could organize a Coalition
of the Willing. There are a variety of ways to intervene that
don't mean it is the United Nations or nothing. And I think we
have to be very clear about this on the planet and we have to
say on occasion, how many people are going to die before we
move? How many meetings of the Security Council to arrange a
meeting do we need?
Last, there are moments when it all comes together right.
In all fairness both to the Bush Administration and to the
French, and you and I might disagree about which of the two we
would criticize more intensely on any given day, but both the
Bush Administration and the French have actually come together
on the Lebanon-Syria problem in a way that is pretty
impressive, and hopefully today's ministerial will actually be
a pretty solid step in the right direction.
So I see all three. We have to be responsible for facing
realities around the world that a lot of other countries won't.
We have to, when necessary, act outside the United Nations. And
whenever possible, we should start by trying to get the United
Nations to do the job.
Senator Levin. Thank you.
Senator Coleman. Thank you. If I could just follow up, I
have to say that I want to make clear that the Ranking Member
and I are not in disagreement as to really there being two
aspects to this problem. I have focused a lot on the internals,
and I am going to get back to that, in terms of management and
the individuals and what went wrong in Oil-For-Food, and
ultimately, is there going to be accountability and
responsibility?
My frustration at times is people talk about member states
in an abstract way and that then--for some, it may somehow
absolve individuals of individual responsibility. The
individuals ultimately have to take actions. It may be, Senator
Levin, that the answer to your question is no management reform
for the United States, but in individual places, like here in
Congress, we have a greater oversight responsibility. And if we
are seeing things that--if we don't have our guard noses out
there sniffing and we see things going on, we need to be on top
of it, and if not, it is our failure. We have some
responsibility. We have oversight. And we do it, and if we
don't do it, then shame on us.
But there are individuals that ultimately, and that is my
concern, that we are not somehow absolving individuals of
responsibility. I have been particularly harsh on the
Secretary-General, not on a personal level, but as I look at
the record in the Volcker report and the mismanagement and the
fraud and the corruption and the individuals like Benon Sevan
who were directing the program and overseeing the Iraqi Office
put on the take, and Louise Frechette, the Deputy Secretary-
General who says it wasn't her job when it was her job, and
chiefs of staff that destroyed records, that does raise
concern.
I don't know how you do reform, Speaker Gingrich, if the
individuals in place can't do the heavy lifting and if their
reputations are tarnished by the fact, by the record. Based on
what you have read in the Volcker Commission report and the
work that we have done, how would you rate the Secretary-
General's performance regarding Oil-For-Food?
Mr. Gingrich. If I might, I want to comment on two of the
things you just said that I think lead to that, and I will be
quite clear when I get to that.
The first is, I do think the Legislative Branch should do a
great deal more oversight and should develop continuity in
between the headlines. I think it is very important that our
unique--the tension of our American Constitution actually leads
to more accountability and more oversight than any other system
I know of in the world, because if you have a parliamentary
system, the people in the majority are also the government. So
I think we have a unique obligation to have a continuous
process of oversight, not only of our own government, but also
of the United Nations as an institution.
And here is the second thing, where I don't quite know
where we go with it because it is something that I noticed.
Chairman Volcker made the comment in passing that the Russian
government seemed to be the primary allocator of these illegal
vouchers for oil in the Russian system. This was not being done
by a bunch of individuals. This means that this is the
autocratic regime of President Putin. These things are not
happening by accident.
Somehow, the U.S. Congress should take upon itself the
obligation to learn more about these kinds of things because it
may well be that the State Department, for a variety of
diplomatic reasons, isn't as interested. It may well be that--I
am not saying that we have the legal ability to subpoena
anybody, but it goes to the core of the nature of the modern
world.
I just want to say, there is a fascinating book called
``The Crime of the Century,'' which is written by a Russian-
speaking woman who was the Financial Times correspondent in
Moscow. She is describing the sale of all these companies to
the Russian oligarchs. The book is about 6 years old now. And
she said, late one night, having been there for 3 years, she is
out and she is at a dinner and drinking with one of the great
billionaire oligarchs and she is telling him that she is so
puzzled at how badly they have written their privatization
laws, because if they had written them correctly, they could
have all sorts of people bidding and they would have received
10 or 20 times as much money and they would have massive
amounts of foreign capital, and they had had enough to drink
that he broke up laughing at her.
And he finally said, ``Young lady, I personally wrote that
law and I wrote that law to guarantee that no foreigner would
raise the price at which I was looting the Russian
government.'' And she said she sat there feeling like an idiot,
because for 3 years, she had assumed the best of intentions.
She had assumed she was dealing with honest people. And she had
assumed they were just incompetent when, in fact, they were
stunningly incompetent. It is just that they were competent of
being crooks and she had no mechanism for that.
I say that because, as I raised earlier, I am really
worried about the Iranians. I mean, the Iranians are being
about as clear as they can humanly be. When they get nukes,
they intend to wipe out Israel. This should bother us at levels
we don't imagine. But it is so outside our conversations.
And now I come to that same framework of being honest. Let
me talk briefly about the Secretary-General. The Secretary-
General's role over the last 10 years, before he became
Secretary-General, when he was in charge of peacekeeping during
the period of Rwanda and the Balkans, by any reasonable
standard in any open society in the world, his record is
indefensible and inexplicable. I mean, if you just list
everything that he has touched that has gone wrong, it is
inconceivable that you would voluntarily hire him.
It is not that he is not a nice man. It is not that he is
not a well-meaning man. It is not that he isn't very impressive
when he gives a speech. And having, frankly, a conservative
American say this just strengthens it, because you can go
around the rest of the world as the non-American who stands up
for all the people who, in effect, are losing ground because
the money gets looted, because the system doesn't work, and
because realities aren't dealt with.
But I can't imagine anyone who took seriously the list that
you could develop in 5 minutes who could defend that list as an
example of an effective, competent stewardship.
Senator Coleman. Thank you, Speaker Gingrich. Senator
Levin.
Senator Levin. Just one comment about the Iranian
President's comment, which, I happen to agree with you, is not
only a total outrage, but a very disturbing statement. When the
Iranians are seeking nuclear weapons, that kind of statement
made by the president of that country should put everybody on
notice as to what their possible intentions are.
I do see, however, that the Security Council took some
action relative to that statement. Is that your understanding?
Mr. Gingrich. It took no action that has any meaning in the
real world.
Senator Levin. But they disowned it.
Mr. Gingrich. They disowned it. The Europeans have
indicated they feel bad. This is like dealing with Adolf Hitler
in 1935.
Senator Levin. But I think the Israelis welcomed the U.N.
Security Council taking notice of that statement, for what it
is worth.
Mr. Gingrich. No, look, Senator, if I might, you are
technically correct that given the level of anti-Semitism we
have seen in Europe, given the level of anti-Israeli behavior
by the Europeans, given the degree to which they have been
willing to overlook virtually anything done by the
Palestinians, the fact that the Europeans would at least notice
that a threat to totally wipe them out was inappropriate was
good.
All I am suggesting to you is, as a student of history, if
we lose Tel Aviv one morning, looking back on a U.N. Security
Council resolution will not be very useful, and no one that I
know of in this country or at the United Nations is talking
seriously about what you have to do with a regime which in any
reasonable world would be an outlaw regime.
Senator Levin. I think there are serious discussions taking
place, by the way. I disagree with you on that matter----
Mr. Gingrich. Well, I hope you are right.
Senator Levin. There are very serious discussions taking
place, and so your feeling that it was, given the backdrop and
given the environment and given the previous level of anti-
Semitism that the taking up of the issue at least was good, all
it does to me, it reinforces the idea that it is good, but not
good enough, and that is what you are saying----
Mr. Gingrich. It is a start.
Senator Levin [continuing]. And that is what I am saying.
But at least in the Israeli eyes, it was perceived as being
something that was good and we ought to at least acknowledge
that for what it is worth, as at least some--it may be a baby
step, but at least, finally, it is a step in the right
direction. It shouldn't have taken that kind of an unbelievable
statement by a president of a country for that baby step to be
taken. I happen to agree with you on that, too. But
nonetheless, I think we should note that at least from the
Israeli perspective, it was welcomed.
Senator Coleman. Before you leave, Mr. Speaker, as a former
Speaker, you understand this language. I associate myself with
your comments regarding Iran. Thank you very much and it is a
pleasure having you come before us today.
I would now like to welcome our final witnesses for today's
hearings, Thomas Melito, a Director with the Government
Accountability Office's International Affairs and Trade Team,
and Robert W. Werner, the Director of the Department of
Treasury's Office of Foreign Assets Control. I appreciate your
attendance at today's important hearing and am anxious to hear
your testimony.
Mr. Melito is here to update the Subcommittee on the GAO
review of U.N. procurement and auditing requested by this
Subcommittee and the House International Relations Committee.
Mr. Werner will discuss the role of the Department of the
Treasury in OFAC and the U.N. sanctions program. I look forward
to hearing from you both.
Before we begin, pursuant to Rule VI, witnesses who testify
before the Subcommittee are required to be sworn. At this time,
I would ask you all to please stand and raise your right hand.
Do you swear the testimony you are about to give before
this Subcommittee will be the truth, the whole truth, and
nothing but the truth, so help you, God?
Mr. Melito. I do.
Mr. Werner. I do.
Senator Coleman. We will be using a timing system,
gentlemen. I think 1 minute before the red light comes on, you
will see the lights change from green to yellow. That will give
you an opportunity to conclude your remarks. Your written
testimony will be printed in the record in its entirety. We ask
that you limit your oral testimony to no more than 10 minutes.
Mr. Melito, we will have you go first, followed by Mr.
Werner, and after we have heard all the testimony, we will then
turn to questions. Mr. Melito, you may proceed.
TESTIMONY OF THOMAS MELITO,\1\ DIRECTOR, INTERNATIONAL AFFAIRS
AND TRADE TEAM, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Melito. Mr. Chairman, Ranking Member Levin, I am
pleased to be here today to discuss internal oversight and
procurement in the United Nations.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Melito appears in the Appendix on
page 102.
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The findings of the Independent Inquiry Committee into the
U.N. Oil-For-Food Program have rekindled longstanding concerns
about internal oversight and procurement at the United Nations.
Today, I will share with you our observations on the extent to
which budgeting processes affect the ability of the U.N.'s
Offices of Internal Oversight Services, or OIOS, to perform
independent and effective oversight. I will also discuss some
of the U.N.'s efforts to address problems affecting the
openness and professionalism of its procurement system. I would
like to stress that my comments today reflect the preliminary
results of our ongoing work.
My statement today has two main findings. First, OIOS's
ability to carry out independent, effective oversight of U.N.
organizations is hindered by the U.N.'s budgeting processes.
Second, despite some progress, the United Nations has yet to
fully address previously identified problems affecting the
openness and professionalism of its procurement system. I will
now highlight our main findings.
We found that the ability of OIOS to carry out independent,
effective oversight is impeded by the U.N.'s budgeting
processes in three ways. First, the Secretary-General's Budget
Office, over which OIOS has oversight authority, controls
OIOS's regular budget. Although the General Assembly stated the
office is to be operationally independent, OIOS has limited
recourse regarding the Budget Office's decisions. OIOS can
negotiate with the Budget Office on suggested changes to its
budget proposal. However, it is limited in its ability to
independently request from the General Assembly the resources
it needs to provide effective oversight.
Second, the funds and programs that the OIOS examine
control its extra-budgetary resources. The Office's reliance on
these resources has steadily increased over the years, from 30
percent in its 1996-1997 budget to 62 percent in its latest
budget. This increase has been primarily due to the growth in
peacekeeping operations. Heads of funds and programs can
approve or deny budgets and staffing for oversight work. By
denying OIOS funding, U.N. entities can avoid audits and high-
risk areas may not be adequately reviewed. For example,
according to a senior OIOS official, the Office has not been
able to reach a memorandum of understanding to review the U.N.
Framework Convention on Climate Change.
Third, U.N. regulations make it difficult for OIOS to shift
resources among the locations or divisions to meet changing
priorities. For example, OIOS officials requested a
reallocation of 11 investigative posts from New York to Vienna
to save travel funds and be closer to the entities they
primarily investigate. The change was approved only after
repeated requests over a number of years.
Let me now turn to our second finding, addressing the
openness and professionalism of U.N.'s procurement system. The
U.N. Procurement Service has improved the clarity of its
procurement manual. In 1999, we reported the manual did not
provide detailed discussions on policies and procedures. The
United Nations has addressed these problems in its current
manual, which was endorsed by a group of outside experts. The
manual now has step-by-step instructions and flow charts
explaining the procurement process.
However, the United Nations has not addressed concerns
about the lack of an independent bid protest process, the
qualifications of procurement staff, and the clarity of ethics
regulations.
First, the United Nations has not heeded a 1994
recommendation by a group of independent experts to establish
an independent bid protest process, as soon as possible. As a
result, U.N. vendors cannot protest the Procurement Services'
handling of their bids to an independent office. We reported in
1999 that such a process is an important aspect of an open
procurement system because it alerts senior U.N. officials to
failures to comply with procedures. In contrast to the U.N.'s
approach to bid protest, the U.S. Government provides vendors
with two independent bid protest processes. Vendors
dissatisfied with a U.S. agency's handling of the bids may
protest to the Court of Federal Claims or to the U.S.
Government Accountability Office, which receives more than
1,100 such protests annually.
Second, the United Nations has not fully addressed
longstanding concerns regarding the qualifications of the
procurement staff. Most procurement staff at headquarters have
not been professionally certified. A U.N. commission report
found that it was imperative that more U.N. procurement staff
be certified. The authors of the study told us that the U.N.'s
level of certification was low compared to other organizations.
Procurement officials stated that their goal is to secure
certification of all staff within 5 years. According to U.N.
officials, the curriculum for the trainers has been finalized
and the United Nations has trained some staff as trainers.
However, these staff have yet to receive certification they
need before they can train U.N. procurement staff.
Finally, the United Nations has not finalized several
proposals to clarify ethics regulations for procurement staff.
Although the United Nations has established general ethics
rules and regulations for all staff, the General Assembly asked
the Secretary-General this year to issue ethics guidelines for
procurement staff without delay. The Secretary-General also
directed that additional rules be developed for procurement
offices concerning their status, rights, and obligations.
Several draft procurement regulations are waiting internal
review or approval. No firm dates have been set for their
release. The proposed policies reinforce ethics standards on
conflict of interest and acceptance of gifts from procurement
staff and outline U.N. regulations for suppliers of goods and
services to the United Nations.
Mr. Chairman, this completes my prepared statement. I will
be happy to address any questions you or Ranking Member Levin
may have. Thank you.
Senator Coleman. Thank you very much, Mr. Melito. Mr.
Werner.
TESTIMONY OF ROBERT W. WERNER,\1\ DIRECTOR, OFFICE OF FOREIGN
ASSETS CONTROL (OFAC), U.S. DEPARTMENT OF THE TREASURY
Mr. Werner. Chairman Coleman and Ranking Member Levin, I
appreciate the opportunity to discuss the responsibilities of
the Office of Foreign Assets Control, or OFAC, as these pertain
to the United Nations Oil-For-Food Program and Iraqi sanctions.
I will briefly discuss these responsibilities and respectfully
request, Mr. Chairman, that my written remarks be submitted for
the record.
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\1\ The prepared statement of Mr. Werner appears in the Appendix on
page 115.
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Senator Coleman. Without objection.
Mr. Werner. Since becoming Director of OFAC in October
2004, I have learned firsthand that it is a small but
exceptional agency of experienced, knowledgeable professionals
dedicated to carrying out the complex mission of administering
and enforcing economic sanctions based on U.S. foreign policy
and national security goals.
OFAC currently administers 30 economic sanctions programs
against foreign governments, entities, and individuals. Though
eight of these programs have been terminated, they still
require residual administrative and enforcement activities.
In administering and enforcing economic sanctions programs,
OFAC maintains a close working relationship with other Federal
departments and agencies to attempt to ensure that these
programs are implemented properly and enforced effectively. I
would also note, Mr. Chairman, that all of the programs we
administer require that we work closely with a broad range of
industries potentially affected by these programs. We are
presently expanding and improving communication with these
diverse constituencies.
As the Subcommittee knows, following the Iraq invasion of
Kuwait in August 1990, the U.N. Security Council adopted
Resolution 661, which imposed sweeping economic sanctions
against Iraq. The President also issued two Executive Orders,
one which froze the assets of the Government of Iraq in the
United States or under the control of U.S. persons and imposed
a comprehensive trade embargo against Iraq, and another that
broadened those sanctions consistent with U.N. Resolution 661.
These sanctions were implemented by OFAC through the Iraqi
Sanctions Regulations.
In April 1995, the U.N. Security Council adopted Resolution
986 in order to alleviate the serious humanitarian crisis in
Iraq. Under the Oil-For-Food Program, the Government of Iraq
was permitted to sell and to export from Iraq petroleum and
petroleum products as well as to purchase and import
humanitarian materials and supplies to meet the essential needs
of the civilian population in Iraq. The proceeds from sales of
Iraqi origin petroleum and petroleum products were to be
deposited into a special escrow account at the New York branch
of Banque Nationale de Paris, where they would be used to fund
purchases made by the Government of Iraq.
The Secretary-General established a panel of independent
experts in the international oil trade to oversee oil purchase
contracts and ensure that they complied with requirements
provided for in Resolution 986. The panel was responsible for
assessing the pricing mechanisms for petroleum purchases in
order to determine whether they reflected fair market value.
The panel was also responsible for providing analysis and
recommendations to the 661 Committee.
With respect to purchases of humanitarian materials and
supplies, the Government of Iraq was required to prepare a
categorized list of humanitarian goods and supplies it intended
to purchase and import pursuant to Resolution 986 and to submit
it to the Secretary-General. The Secretary-General would then
forward the distribution list to the 661 Committee for review
and approval. Individual contracts for purchases of
humanitarian goods and supplies were to be submitted to the 661
Committee separately through the relevant U.N. mission for the
exporting state. Experts in the U.N. Secretariat were to
examine each contract, especially regarding quality and
quantity of the goods and supplies, in order to determine
whether a fair price and value were reflected in the document.
Consistent with Resolution 986, effective December 10,
1996, OFAC amended the Iraq sanctions regulations to authorize
U.S. persons to enter into executory contracts with the
Government of Iraq for the purchase of Iraqi origin petroleum
and petroleum products into trade and oil field parts and
equipment and civilian goods, including medicines, health
supplies, and food stuffs. U.S. persons were also authorized to
enter into executory contracts with third parties outside
OFAC's jurisdiction that were incidental to permissible
executory contracts with the Government of Iraq. U.S. persons
were not authorized to engage in transactions related to travel
to or within Iraq for the purpose of negotiating and signing
executory contracts. However, OFAC amended the regulations to
authorize U.S. persons to enlist and pay the expenses of non-
U.S. nationals to travel to Iraq on their behalf.
OFAC issued approximately 1,050 specific licenses to U.S.
persons for various aspects of the Oil-For-Food Program,
primarily under three provisions of the regulations. Because of
the complexity of the Oil-For-Food Program, OFAC engaged in an
outreach program to assist licensees in understanding their
obligations. OFAC provided guidance about the program's
requirements in hundreds of sanctions workshops. It also
published information on Iraqi sanctions in numerous plain-
language brochures. Further, it referenced the program in
articles published in numerous industry magazines.
In addition to engaging in this general guidance, in
January 1997, OFAC issued a memorandum to the U.S. Customs
Service recommending that Customs require importers of Iraqi
petroleum or petroleum products to provide a copy of the 661
Committee approval for which the petroleum or petroleum
products in question comprised all or a part of the original
purchase. OFAC also suggested that Customs request from the
importer a brief statement describing the type and the amount
of imported Iraqi products and affirming that, to the best of
the importer's knowledge and belief, the imported Iraqi
petroleum or petroleum products comprised all or a portion of
the purchase covered in the accompanying U.N. document. Customs
confirmed that it had issued instructions to Customs field
offices pursuant to the guidance contained in OFAC's
memorandum.
In December 2000, OFAC also published explicit information
about authorized and unauthorized payments under the Oil-For-
Food Program. This document, entitled ``Guidance on Payment for
Iraqi Origin Petroleum,'' was prepared in response to media
reports that the Government of Iraq had attempted to force its
oil customers to violate U.N. Security Council resolutions by
demanding that they pay premiums in the form of surcharges,
port fees, or other payments into an Iraqi-controlled account.
The guidance specifically stated that no transfer of funds or
other financial or economic resources to or for the benefit of
Iraq or a person in Iraq could be made except for transfers to
the 986 escrow account.
OFAC also had the authority to specially designate, that
is, to identify publicly and to block assets of any individual
or business that was directly or indirectly owned or controlled
by the Government of Iraq or that purported to act for or on
behalf of that government. As an essential element of the Iraq
sanctions, OFAC began an initiative to identify front companies
and agents used to acquire technology, equipment, and resources
for Iraq or otherwise act on behalf of the Government of Iraq.
The designations not only exposed those persons and blocked
their assets, but also cut them off from participation in the
U.S. economic system. Ultimately, OFAC designated approximately
300 separate entities or individuals.
In addition, over the past 13 years of the Iraq sanctions,
OFAC has completed over 300 civil enforcement investigations
and audits involving U.S. financial institutions, corporations,
and individuals. The violations investigated range from
unauthorized attempts to export goods through Iraq to operating
brokerage accounts for specially designated nationals of Iraq.
In those cases where violations were found, the action taken by
OFAC ranged from the issuance of warning letters to the
imposition of civil monetary penalties, depending on the
nature, circumstances, and scope of the violation.
Finally, criminal investigations of violations of OFAC-
administered sanctions programs have been conducted by a
variety of U.S. law enforcement agencies. OFAC plays a
coordinating and advisory role in such cases and works closely
with agents and assistant U.S. attorneys. Criminal charges of
IEEPA violations for unlicensed transactions involving Iraq
have been brought in at least 13 cases since August 1990.
Having said all the above, there are clearly valuable
lessons to be learned from a review of OFAC's administration of
this program and we are already beginning to take steps to
address some of those issues.
I thank the Subcommittee for the opportunity to discuss
OFAC's role in implementing economic sanctions against Iraq,
including its role in the Oil-For-Food Program, and I look
forward to taking your questions regarding our Administration
and enforcement of Iraq sanctions and plans for improvement.
Thank you.
Senator Coleman. Thank you. Thank you very much, gentlemen.
Could we put Exhibit 2 on the podium there,\1\ the
chronology? Let me start with you, Mr. Werner and then I will
proceed to Mr. Melito. Mr. Werner, I think in your testimony
you indicated that in 2000, sometime in 2000 there were reports
of surcharges, of the Iraqis requiring surcharges in regard to
oil sales. Is that correct, was it 2000?
---------------------------------------------------------------------------
\1\ See Exhibit No. 2 which appears in the Appendix on page 123.
---------------------------------------------------------------------------
Mr. Werner. That is my understanding, yes.
Senator Coleman. So sometime in the year 2000 there is some
discussion, there is murmuring going on that the Iraqis are
requiring surcharges. One of the companies which the Volcker
report has identified as being a major importer, Bayoil, and I
think it was about 18 percent of the total Oil-for-Food imports
was involved then in lifting Iraqi oil, and looking at the
chronology it appears that in August 2001--so it is after 2000,
we have reports of surcharges. You have a major American
company involved in lifting quantities of oil. You have the
State Department writing to OFAC asking to contact Bayoil and
urge the company to respond quickly and completely to the
Office of Iraq program's request for information. If you go
down to April 23, 2002, 8 months after the initial request for
assistance, OFAC writes to Bayoil and requests a report on
transactions in Iraq.
Why would it have taken 8 months? You have reports of
surcharges, so there is a little concern out there that
something is going on that is problematic. You have issued
guidelines telling people not to pay surcharges, and you have
got 8 months in between the time you request it until the time
you actually contacted Bayoil. Can you explain why the 8
months?
Mr. Werner. Mr. Chairman, let me start by saying that since
that chart was produced by this Subcommittee in May I have had
it sitting on my desk and I have spent a lot of time thinking
about it, reviewing with staff the facts associated with that
matter and using that as a lesson as we restructure our office.
Frankly, I am really not going to dwell on the fact that August
2001, of course, is 1 month before September 11 where OFAC
played a critical role in having to address the events of that
month. Much of OFAC's resources were reallocated to deal with
that crisis.
And I am not going to dwell on the fact that we are talking
about complex criminal conduct that really, when you look at
the indictments and the history of this case, much of what was
uncovered leading to an understanding of Bayoil's conduct was
uncovered through documents that were obtained in Iraq or
through law enforcement tools that just were not available to
OFAC. And frankly, the reason I am not going to dwell on those
things, even though I think that they are valid, is that the
process in place then that indicates a serious problem with the
way OFAC addressed this issue.
The fact of the matter is that flaw, I think, came out of a
lot of confusion. This conclusion is based on my
reconstruction, because as you know I was not there at the
time. But based on my attempts to reconstruct what happened, to
the best of my knowledge what I can glean is that there was a
true confusion over how this program was to be administered.
The old adage too many cooks spoil the pot comes to mind. There
were lots of people involved in this process. The United
Nations had committees and experts, and there were
multinational governmental issues at stake. The State
Department, of course, and OFAC coordinate closely on these
sorts of things, but given all the moving parts in this program
I think in general there really was genuine confusion over who
was accountable for what.
Frankly, that is something that we can take away from this
investigation, which is the fact that when you have a complex
multinational program like this it is critical to lay out who
is accountable for what, and the lines of authority and
responsibility. I think that is something that was not done as
well as it could have been here.
But also I think it is important to understand that, as I
said, OFAC currently is administering 30 economic sanctions
programs. The level of complexity across these programs is
great. Frankly, OFAC has not in the past been able to have a
focus on complex investigations that would have allowed it to
independently pursue these kinds of issues.
Again, does that excuse the fact that apparently OFAC when
they even got information from Bayoil failed to forward that
information to the State Department? No. Those are the kinds of
things that illustrate that I have to build accountability into
my office to make sure they do not happen again. And I have
taken significant steps to do that. We filed a report with our
appropriators on a fairly ambitious technology system that will
help build accountability into OFAC and track records. We have
reorganized the components of OFAC so that now we have combined
our enforcement and civil penalties and investigative
components under a single associate director who has full
accountability across those programs for consolidating
information. And we have refocused our need to be more
proactive in the way we approach complex investigations.
Senator Coleman. I appreciate your candor, Mr. Werner, and
with that candor--and I do appreciate it--though as I look at
this, look at the chronology and look at the complexity--right
now we can look back and we see Bayoil has been indicted and we
have gotten records showing the creation of phony companies
making payments which were actually then the kickbacks. We have
seen that in regard to some of the Russian dealings and setting
up sham companies that really did not exist except for the per
se kickbacks.
But my concern is, it was not that the documents were not
available. It is that you did not try to get them. It was not
that it was complex. I mean, it would be one thing to say it is
complex after the fact, but at the time I do not even think you
knew that because it did not seem like there was an effort to
even get the documents. Now we can look back and say complex,
but I would have preferred--it would have been better--and
again I appreciate your candor--if you would have come to me
and said, ``Chairman, we have requested the documents. We have
pursued this. We simply did not have the people power to get
this done.'' But it appeared as if you never got to that stage.
You never got to make that judgment.
The concern was not that there were lots of people, but it
appeared that--it would be different if three different
agencies were looking at these documents. But as you look at
the chronology and you listen to the questions that the Ranking
Member posed of Chairman Volcker and others what you are
finding out is that very few were involved in dealing with
this. It was not a multitude of folks dealing with Bayoil. You
have rumors and a concern being raised about surcharges. You
have an American company deeply involved in the program. You
get a request for information and we get nothing. We get
nothing, as if a blind eye is being turned to this. So that is
my frustration.
Again I appreciate your candor saying you are looking at it
as a lesson of what should not be. I think that is a fair
description.
Mr. Melito, I am going to come back. I have a separate line
of questioning for you. I know this witness is of great concern
to the Ranking Member and I am going to turn to the Ranking
Member at this time and then come back to you, Mr. Melito,
afterwards.
Senator Levin.
Senator Levin. Thank you. Thank you, Mr. Chairman. Mr.
Werner, is it correct that under OFAC regulations that OFAC
licensees had to follow the terms of the U.N.-approved
contracts so that any violation of U.N.-approved contracts
would be a violation of OFAC regulations?
Mr. Werner. Yes, sir, that is true.
Senator Levin. Now who had the primary responsibility to
enforce OFAC regulations?
Mr. Werner. OFAC had the primary civil responsibility.
Senator Levin. Is there some office in OFAC or some
individual who was supposed to enforce these regulations?
Mr. Werner. The way OFAC was organized at the time--quite
different than now--is that there was a compliance division.
There was also an enforcement division and a civil penalties
division, and those three separate divisions would have had
some sort of overlapping responsibility.
Senator Levin. Now OFAC was aware of the reports that
surcharges were being paid because you issued a regulation in
the year 2000; is that correct?
Mr. Werner. Yes, sir.
Senator Levin. Were you aware that the United States was
the largest purchaser of Iraqi oil?
Mr. Werner. I am aware of that based on the information I
heard in the hearing today, sir.
Senator Levin. But you were not aware, or the folks at OFAC
were not aware at the time?
Mr. Werner. I cannot say, sir. I was not there.
Senator Levin. Did OFAC make any inquiries to Bayoil as to
the nature of the purchases of Iraqi oil?
Mr. Werner. OFAC did issue what is called a 602, which is
our parlance for an administrative subpoena, to Bayoil. I think
the chart indicates that fact. It was done based on the State
Department request. Frankly though, Senator, when I look at
that request it is not the way I would have phrased it. It did
not contain any reference to the surcharge issue. It appeared
to be based on just requiring records production under the
licenses that had been issued and really did not get to the
heart of the matter.
Senator Levin. How do you explain that?
Mr. Werner. Again, I have had to reconstruct what happened.
A lot of the folks who were the senior managers at the time are
no longer at OFAC, so it is difficult. I have to speculate. But
based on the inquiries I have been able to do, it appears that
OFAC was under the impression that they were very limited in
the sort of information they could ask at that time.
Senator Levin. Did OFAC ask any U.S. company that was
buying Iraqi oil or selling goods to Iraq about the issue of
paying surcharges or kickbacks to the Hussein regime?
Mr. Werner. Not that I am aware of.
Senator Levin. So here is a regime which during these years
we were sanctioning, we were participating in the U.N. program
to make sure that Saddam would not use Iraqi oil to build more
palaces, but would rather use it for humanitarian purposes.
This is a regime that we were contemplating going after, we
were threatening with military force. Yet we were doing nothing
at OFAC to try to prevent him from lining his pockets during
the years 2001, 2002, before we attacked him in 2003. We were
not taking steps to prevent him from lining his pockets with
money that was illicit.
How much of a higher priority could there be than that? I
mean, when you think about it, this was a period of time when
the Administration was making some very strong statements about
Saddam Hussein and about what Iraq was doing to its people, and
properly so. Congress adopted a resolution in 2002 about regime
change in Iraq. So we were all very conscious about what Saddam
meant to his people in terms of butchery and savagery.
How could OFAC not respond to the requests to keep money
from getting into this guy's treasury?
Mr. Werner. The only explanation I can offer, and in
defense of the staff who, as I said, are highly dedicated
staff--6 to 10--the number fluctuated over the years,
enforcement investigators at OFAC were dealing not just with
the enforcement issues associated with the Iraq program but
some 20-odd economic sanctions programs including at that time
not only the Iran sanctions program but also the new
counterterrorism Executive Order.
I think when you look at the resources available and the
way they were likely allocated to deal with all of the
competing priorities of the office, which by the way is not
just enforcement of programs but the Administration. So you are
talking about, I think now the statistics are about 40,000
licensing and opinion requests a year that OFAC processes,
2,000 calls a week on its hotline for compliance advice. These
are all demands being placed on an agency that at this point
is--I counted the number of people on the Volcker Commission
and I think it is about even.
So I think, again, there were difficult decisions made in
prioritizing and using resources and, in 20/20 hindsight
sometimes you can clearly point to where you wish you had
focused your resources. But again that is always easier in 20/
20 hindsight than I think it was at the time.
Senator Levin. Without using 20/20 hindsight, there was
only one country at the time that we were contemplating going
to war against. And any money that was allowed to go to that
dictator would end up being used against us in a war. We were
seriously talking about attacking Saddam Hussein during this
period of time, so this is not like 400 other inquiries. This
is like money that was going in kickbacks to a regime with whom
we could be at war. That is not 20/20 hindsight. That is the
reality at the time. So I do not understand your priorities.
Mr. Werner. Again, they were not my priorities because I
was not there but----
Senator Levin. I do not understand OFAC's priorities.
Mr. Werner. But I have a hard time second-guessing OFAC
because, again, I see the crushing amount of work and the
complexity of the programs we administer now with the resources
we have and I would be very reluctant to second-guess at the
time as people were dealing with the emergencies that were
arising and all the programs including the events created by
September 11--to include that the judgments made at that time
were clearly flawed. It would be difficult for me to conclude
that.
Senator Levin. The Administration wants to connect the
attack on Iraq with the event of September 11. That is what
they have continually tried to connect. So you are
disconnecting it, which I think is accurate, but the
Administration's constant reference to September 11 as somehow
or other connected with the attack on Iraq does not fit with
your priority either. With OFAC's priority, to be fair to you.
Mr. Werner. Again, I think we are all in a position of
having to reconstruct what was happening at the time and that
is always very difficult. But as I said, I clearly felt the
need to refocus OFAC's enforcement approach because I think
OFAC had been very reactive. Whatever was referred to it went
into a queue. There was an overwhelming backlog of cases for a
very limited number of people, and we have taken steps to try
to address that. I would be kidding you and myself though if I
told you that a reorganization of the office has been able to
fix the demands that are put on that office by the 30 economic
sanctions programs we administer.
Senator Levin. Let me ask you some very short, quick
hopefully, factual questions. As I understand it, you received
a request first from the State Department to obtain information
from Bayoil in August 2001. The State Department again
contacted OFAC in early 2002 to ask for the information from
Bayoil. Is that true? So far am I on target?
Mr. Werner. I think that is true.
Senator Levin. Then OFAC responded, and you wrote to Bayoil
requesting the report you described in April 2002. OFAC did not
ask for the specific information that the United Nations wanted
about Bayoil's shipments. Is that correct?
Mr. Werner. That is correct.
Senator Levin. And OFAC did not instruct Bayoil to
cooperate with the United Nations?
Mr. Werner. I believe that is correct. I think OFAC's
request was styled as a classic subpoena just requesting
production of the documents.
Senator Levin. Now OFAC asked Bayoil for permission to give
its response, which was inadequate, but its response to the
United Nations. Is that correct?
Mr. Werner. That is correct.
Senator Levin. Why did OFAC ask Bayoil for permission to
send a response of Bayoil to the United Nations?
Mr. Werner. I think that relates to--and having the chief
counsel's office for OFAC talk to your staff about that might
be more productive in a subsequent conversation, but I think it
based on fears that the Trade Secrets Act prohibited OFAC from
sharing certain information outside of the U.S. Government
without the consent of the parties.
Senator Levin. Have you checked to see whether that in fact
is correct?
Mr. Werner. Again, I think it is a very complex legal
analysis and I would be very reluctant to give you my view on
that. But my understanding was that was a general concern at
the time.
Senator Levin. Did OFAC forward the Bayoil letter to the
State Department?
Mr. Werner. From what I have been able to tell, that did
not happen.
Senator Levin. Do you know why that did not happen?
Mr. Werner. I do not know why it did not happen and I have
tried very hard to figure it out.
Senator Levin. Thank you, my time is up for this round.
Thank you.
Senator Coleman. Just if I can follow up that last point. I
do not want to go back because it is right here. So OFAC asked
for permission from Bayoil. Bayoil never gives permission to
share with the United Nations, right?
Mr. Werner. No, Bayoil did give permission but I cannot
find any documentary evidence that OFAC followed up and
actually forwarded the information to the State Department.
Senator Coleman. So the United Nations never obtained any
information about Bayoil?
Mr. Werner. As far as I know that is correct.
Senator Levin. Excuse me for interrupting, Mr. Chairman. I
think the Chairman's question was did Bayoil give permission to
send the information to the United Nations.
Mr. Werner. OK, I am sorry then let me--they did not give
permission to send it to the United Nations. They gave
permission for us to send it to the State Department.
Senator Coleman. Which means to no one else. So Bayoil
never gave permission then to send it to the United Nations?
Mr. Werner. I do not know that they gave permission for
that, no.
Senator Coleman. Mr. Melito, GAO did a report on OIOS, I
think, in 1997 and at that point in time I think there were
suggestions for increased transparency, which I understand were
rejected by the secretary of management oversight. Between 1997
and 2005 did GAO have occasion to check as to what happened to
your recommendations? Did you have further contact? Can you
fill me in, in that 8-year period was there ever any follow up
with what you did in 1997 prior to the Subcommittee's request?
Mr. Melito. Part of GAO's process is we do follow up on our
own recommendations, but we did not actually do any subsequent
studies, because we do studies of the United Nations at the
request of Congress.
Senator Coleman. As you look back today and go back to
1997, were there weaknesses--that eight-year period, weaknesses
that were--what exists today in OIOS management and operations
and how do they address--how should we address them?
Mr. Melito. OIOS is under a lot of pressure, budgetary
pressures, issues of reporting and such. I think it is
recognized now. I mean, it was in the outcome document that
they should actually get extra resources, and the Secretary-
General is committed to looking at a study at OIOS. This is a
prelimnary study of ours. We are going to provide you next year
with a much more expansive look at OIOS. We are concerned about
issues of independence, issues of whether they are reporting to
the right places and such. This is a vital part of the
oversight mechanism of the United Nations and we want to make
sure it is operating properly.
Senator Coleman. Has there been an effort to increase the
OIOS budgetary base? I believe it was budgeted--a 2-year budget
is $24 million or something to that degree.
Mr. Melito. OIOS receives----
Senator Coleman. But let me just say, because the issue
here is budgetary independence.
Mr. Melito. Yes.
Senator Coleman. That is one of the concerns.
Mr. Melito. Yes.
Senator Coleman. In order to do an audit you have to get
the approval of the folks who you audit, and they have to pay
for it. And if they choose not to pay for it there is not an
audit.
Mr. Melito. OIOS receives its money from two sources; the
regular budget, which is what you just referred to, which has
been relatively flat over the last 10 years, but it also
receives quite a bit of resources now from what is called extra
budgetary resources. Those are from the funds and programs
which are not directly under the Secretary-General and they now
represent 62 percent of all OIOS' resources. And we have a
particular concern about that because in those cases the heads
of those organizations have to agree to allow OIOS to audit
them, which is a direct infringement on the independence of
OIOS.
Senator Coleman. So if the organization does not agree to
the audit, OIOS does not have the resources on its own to do
the audit.
Mr. Melito. In those cases, yes.
Senator Coleman. Can we talk just a little bit, I just want
to touch on Oil-for-Food. Do you have an assessment of why OIOS
did not uncover waste, abuse, fraud in the--they did a series
of audits. Why did they miss what, if you look at the Volcker
Report, is just so overwhelming in terms of the mismanagement
and the fraud and the abuse.
Mr. Melito. Let me preface my statement by saying, Joseph
Christoff who has testified in front of this Subcommittee is
actually the lead GAO official for Oil-for-Food, but I can
answer a little bit of your question. As he testified last
year, OIOS actually was able to audit a segment of the Oil-for-
Food program, mostly the program in the north. And in those
cases I think OIOS did identify some cases of fraud, waste,
abuse, and such. But the headquarters of operations of Oil-for-
Food as well as operations based in Baghdad in the south, OIOS
was unable to look at, and that, I think probably restricted
its ability to report on some of the things which have come up
since then.
Senator Coleman. Then could you tell us the reason why they
were not able to look at it?
Mr. Melito. One example is similar to the concern that we
are raising today about extra-budgetary resources. The head of
Oil-for-Food denied OIOS from doing basically a risk assessment
of the Oil-for-Food program.
Senator Coleman. Is that Benon Sevan?
Mr. Melito. Yes.
Senator Coleman. Who was found to be getting oil
allocations and in essence being bribed by Saddam Hussein?
Mr. Melito. I believe so, yes.
Senator Coleman. The U.N. reform summit that just took
place a couple weeks ago calls for major comprehensive review
of U.N. auditing and oversight. Do you have any information on
the status of that review?
Mr. Melito. I think the Secretary-General is expected to
announce the details in November, so probably in the next few
weeks.
Senator Coleman. Is that the review itself or is that the
process of review that he is announcing? Do you know if the
review is going on right now?
Mr. Melito. I think the review has not begun yet. So he
will announce actually the timetable, who is going to do it and
such in November.
Senator Coleman. If we do not address the budget issue, one
of my concerns is that you have a U.N. biennial budget that is
normally completed in December 2005, and if you do not change
the budget process you cannot strengthen the auditing process.
Is that a fair statement?
Mr. Melito. I want to reiterate, there is a commitment to
increase the resources of OIOS so I am not sure what the final
budget allocation to OIOS will be. But I do agree with your
larger point that there is a strong connection between what is
in the budget and how they are going to reform the
organization.
Senator Coleman. One of my concerns, I believe the current
head of OIOIS has questioned the need for some of those
increases in resources.
Mr. Melito. I did see that, but I also saw a statement
where she herself expressed concerns about the independence of
the office and its reliance on extra-budgetary resources, so I
am hearing mixed signals coming from different sources.
Senator Coleman. I am deeply troubled though if the head of
the organization does not understand it and have a strong
commitment to strengthening the auditing process.
Can we talk a little bit about procurement? I believe we
have one case where an individual has actually been charged
with crimes related to the procurement process. What is the
challenge--can you give me your understanding of why the United
Nations has failed to adopt several internal proposals for
clarifying ethics regulations for procurement staff and
vendors, such as a code of conduct. Why is it so difficult to
get that enacted?
Mr. Melito. Those changes are actually moving along, I want
to say, by U.N. terms, relatively quickly.
Senator Coleman. Is that iceberg speed, if it is moving a
little faster? Is that U.N. terms?
Mr. Melito. I think those will be adopted sometime in the
next few months. I cannot speak to why it has been going so
slow. I do know that it is currently a priority.
Senator Coleman. But you would certainly support a code of
ethics for procurement officers?
Mr. Melito. Certainly.
Senator Coleman. Financial disclosure?
Mr. Melito. Certainly.
Senator Coleman. Gift limitations?
Mr. Melito. Yes.
Senator Colement. You talked a little bit about independent
bid protest system. Can you explain to the Subcommittee why the
absence of that independent bid protest system contributes to
failure of the procurement system?
Mr. Melito. Certainly. It is best to speak how it works in
the U.S. system. Under the U.S. system, if a losing bidder has
concerns of, among other things, he did not think the process
was implemented correctly, there is an independent entity--
there are two of them--one of which is GAO. The GAO is then
required to look into it and make sure the processes were
followed. And that is somewhat of an inspection process, and an
investigation process. And if we then find that there were
problems, that actually could undo the contract and it also may
reveal problems at that particular agency.
Senator Coleman. Can you tell then what the status of the
Secretary-General's special analysis of the U.N. procurement
system is?
Mr. Melito. There is an independent firm who has been hired
and is about halfway through their study Our understanding is
it is going to report to the Secretary-General some time toward
the end of November. We are not quite sure what happens at that
point.
Senator Coleman. How can GAO help us do a better job of
staying on top of this auditing system in the United Nations?
Because the issue for many of us is accountability and
transparency. You have a system now that does not provide a
measure of accountability. The independent auditing process is
not effective today. So there is discussion of reform and there
is a question of timing of reform. How do we do a better job of
staying on top of that?
Mr. Melito. I think sustained pressure on the United
Nations, including having GAO look at it is an important
device. There was a lot of interest in looking at the United
Nations in the late 1990's, early 2000, and now there is
another effort now. It would be better if this process was
continuous, I think.
Senator Coleman. We will certainly from this vantage point
do our best to make sure the pressure is continuous.
Senator Levin.
Senator Levin. Just one question for Mr. Melito.
Do you have any ideas about possible management reforms
that would enable the United Nations to compel member states to
police their nationals?
Mr. Melito. I do not actually know how that could work, and
that is actually an area that I have not looked into.
Potentially we could come back to you with an answer on that.
Senator Levin. But in all the management reforms that have
been discussed, proposed to you, studied, you have not come
across any of those that might have that positive effect?
Mr. Melito. No. The only thing I can think of right now is
if a particular violation of law occurs, say in the procurement
service or something, that person can be prosecuted in his home
country or the country that he committed the violation. But
that is a legal issue.
In terms of ethics, it is more of an employment issue with
the United Nations. But I am not sure I am answering your
question.
Senator Levin. But you have not come across any proposed
management reforms?
Mr. Melito. Not that we have seen, no.
Senator Levin. Thank you. Thank you, Mr. Chairman.
Senator Coleman. Gentlemen, I want to thank you. Mr.
Werner, I want to say in particular, you are in a difficult
position here. You are trying to explain things that for many
of us are not explainable, or not satisfactorily explainable in
terms of why things were not acted upon, delays. But I do want
to welcome your efforts to redirect OFAC's enforcement efforts
and the Administration. Given the importance of monitoring
sanctions, blocking assets of terrorists, money launderers, we
need an effective OFAC today, probably now more than ever, so I
do appreciate you being here today.
Gentleman, I thank you.
Senator Levin. On that issue, if I could, I thank you for--
and I join you in that comment too, Mr. Chairman. But also, do
you need more staff? You have laid out a real busy agenda and
demand on your resources here. Have you requested more staff
than you have been authorized?
Mr. Werner. The President's budget for 2006 does request
additional FTEs for OFAC and we are continuing to work with the
Treasury Department. As I said, we have 30 programs,
counterterrorism, Iran, Syria, and Sudan. The demands are
intense.
Senator Levin. Thank you.
Senator Coleman. With that, gentlemen, I want to thank you
for your testimony today and this hearing is now adjourned.
[Whereupon, at 3:39 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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