[Senate Hearing 110-544]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-544
 
                  UNITED NATIONS DEVELOPMENT PROGRAM: 
                      A CASE STUDY OF NORTH KOREA 

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                                 of the

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                            JANUARY 24, 2008

                               ----------                              

       Available via http://www.gpoaccess.gov/congress/index.html

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs





















    UNITED NATIONS DEVELOPMENT PROGRAM: A CASE STUDY OF NORTH KOREA






















                                                        S. Hrg. 110-544

                  UNITED NATIONS DEVELOPMENT PROGRAM: 
                      A CASE STUDY OF NORTH KOREA 

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                                 of the

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 24, 2008

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs

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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK PRYOR, Arkansas                 NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk
                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                     CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware           NORM COLEMAN, Minnesota
MARK L. PRYOR, Arkansas              TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

            Elise J. Bean, Staff Director and Chief Counsel
                       Zachary I. Schram, Counsel
  Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority
              Michael P. Flowers, Counsel to the Minority
           Melissa Stalder, Associate Counsel to the Minority
                     Mary D. Robertson, Chief Clerk
































                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Levin................................................     1
    Senator Coleman..............................................     8
    Senator Coburn...............................................    17

                               WITNESSES
                       Thursday, January 24, 2008

Hon. Zalmay Khalilzad, U.S. Ambassador to the United Nations, New 
  York, New York.................................................    18
Hon. Mark D. Wallace, U.S. Ambassador for United Nations 
  Management and Reform, New York, New York......................    21
Thomas Melito, Director, International Affairs and Trade, U.S. 
  Government Accountability Office, Washington, DC...............    36
Frederick Tipson, Director, Liaison Office, United Nations 
  Development Programme, Washington, DC, accompanied by David 
  Lockwood, Deputy Director, Regional Bureau for Asia and the 
  Pacific, United Nations Development Programme, New York, New 
  York, and David Morrison, Director of Communications, United 
  Nations Development Programme, New York, New York..............    43
Robert Benson, Director, United Nations Ethics Office, New York, 
  New York.......................................................    45

                     Alphabetical List of Witnesses

Benson, Robert:
    Testimony....................................................    45
    Prepared statement...........................................   107
Khalilzad, Hon. Zalmay:
    Testimony....................................................    18
    Prepared statement...........................................    63
Lockwood, David:
    Testimony....................................................    43
    Briefing statement with attachments..........................    87
Melito, Thomas:
    Testimony....................................................    36
    Prepared statement...........................................    68
Morrison, David:
    Testimony....................................................    43
    Briefing statement with attachments..........................    87
Tipson, Frederick:
    Testimony....................................................    43
    Briefing statement with attachments..........................    87
Wallace, Hon. Mark D.:
    Testimony....................................................    21

                                EXHIBITS

 1a G2007 Report of the Board of Auditors........................   111
 1b G2004 UNDP Internal Audit....................................   139
 2a GLetter from Robert Benson, Director of UN Ethics Office, 
  dated August 17, 2007, to Kemal Dervis, UNDP Administrator, 
  regarding Ethics Office jurisdiction...........................   196
 2b GLetter from Robert Benson, Director of UN Ethics Office, 
  dated August 17, 2007, to Artjon Shkurtaj, regarding June 5, 
  2007, request for protection from retaliation..................   198
 3a GSecretary-General's bulletin--Ethics Office--establishment 
  and terms of reference, dated December 30, 2005, issued by 
  Secretary-General Kofi Annan...................................   199
 3b GSecretary-General's bulletin--United Nations system-wide 
  application of ethics: separately administered organs and 
  programmes, dated November 30, 2007, issued by Secretary-
  General Ban Ki-moon............................................   202
 4. GUNDP DPRK Organizational Chart, based on chart from a 2004 
  UNDP audit report, redacted by Permanent Subcommittee on 
  Investigations.................................................   206
 5. GExcerpt from 2004 UNDP Internal Audit Showing Breakdown of 
  NEX/DEX Modalities, chart from 2004 UNDP audit report..........   207
 6. GUSUN Letter to UNDP, dated January 16, 2007, regarding UNDP 
  operations in North Korea......................................   208
 7. GState Department email to Senate Staff, dated June 2007, 
  attaching May 23 Briefing by Ambassador Wallace Regarding UNDP 
  Activities in North Korea......................................   212
 8. GNorth Korea Transaction Using I.F.T.J., chart prepared by 
  the Permanent Subcommittee on Investigations, based on excerpt 
  of report prepared by Ernst & Young............................   215
 9. GBDA Record of IFTJ Application for Wire Transfer to vendor 
  on behalf of UNDP..............................................   216
10. GSummary of Transactions from IFTJ to DPRK Embassy Accounts 
  for Purchases of Buildings Purportedly Related to UNDP 
  Activity, chart prepared by the Permanent Subcommittee on 
  Investigations.................................................   217
11. GBDA Record of Nine IFTJ Applications for Wire Transfers to 
  DPRK Embassy Accounts..........................................   218
12. GUSUN Letter to UNDP, dated June 7, 2007, regarding Zang Lok 
  Trading Co.....................................................   227
13. GExcerpts of BDA Record of Wire Transfer from UNDP to Zang 
  Lok Trading Co., dated April 16, 2002, and May 28, 2004........   231
14. GBusiness Cards of IFTJ and FTB employees, dated July 24, 
  2001...........................................................   232
15a GLetter Identifying Employee 3 as an Employee of 
  International Trade & Finance Joint Co. (Dated July 31, 2003)..   233
15b GExcerpt of Fax Identifying Employee 3 as a Senior Member of 
  a Delegation from FTB (Dated September 2003)...................   234
16. GLetter from Kemal Dervis, UNDP Administrator, dated January 
  22, 2007, providing information to UNDP Executive Board 
  regarding its operations in North Korea........................   235
17. GLetter from Ambassador Pak Gil Yon, DPRK Permanent 
  Representative to the United Nations, dated February 13, 2007, 
  to U.N. Secretary-General Ban Ki-moon, regarding the external 
  audit of UNDP operations in North Korea........................   240
18a GJPMorgan Chase wire transfer documents dated 8/21/02, 8/30/
  02, and 9/9/02.................................................   241
18b GCharts prepared by the Permanent Subcommittee on 
  Investigations regarding Bank of America wire transfers........   244
19. GElsingor SA Packing List for 29 books procured by UNDP for 
  DPRK, March 2007...............................................   246
20. GResponses to supplemental questions for the record from 
  Senators Carl Levin and Norm Coleman to The Honorable Zalmay 
  Khalilzad, United States Ambassador to the United Nations......   249
21. GResponses to supplemental questions for the record from 
  Senator Tom Coburn to The Honorable Zalmay Khalilzad, United 
  States Ambassador to the United Nations........................   257
22. GResponses to supplemental questions for the record submitted 
  to Thomas Melito, Director, International Affairs and Trade, 
  U.S. Government Accountability Office..........................   268
23. GResponses to supplemental questions for the record submitted 
  to Frederick Tipson, Director, Liaison Office, United Nations 
  Development Programme..........................................   292
24. GResponses to supplemental questions for the record from 
  Senator Tom Coburn to The Honorable Mark Wallace, United States 
  Ambassador for United Nations Management and Reform............   304
Staff Report.....................................................   318


    UNITED NATIONS DEVELOPMENT PROGRAM: A CASE STUDY OF NORTH KOREA

                              ----------                              


                       THURSDAY, JANUARY 24, 2008

                                   U.S. Senate,    
              Permanent Subcommittee on Investigations,    
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:05 a.m., in 
Room SD-342, Dirksen Senate Office Building, Hon. Carl Levin, 
Chairman of the Subcommittee, presiding.
    Present: Senators Levin, Coleman, and Coburn.
    Staff Present: Elise J. Bean, Staff Director and Chief 
Counsel; Mary D. Robertson, Chief Clerk; Zachary I. Schram, 
Counsel; Gina Reinhardt, Congressional Fellow; Mark L. 
Greenblatt, Staff Director and Chief Counsel to the Minority; 
Michael P. Flowers, Counsel to the Minority; Melissa Stalder, 
Associate Counsel to the Minority; Adam Hark, Law Clerk; 
Jonathan Port, Intern; Adam Pullano, Intern; John Kim, Intern; 
Trey Hicks and Katy French (Sen. Coburn); and Jon Scanlon (Sen. 
McCaskill).

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Good morning, everybody. In March 2007, the 
United Nations Development Program (UNDP), took the 
unprecedented step of suspending its operations in the 
Democratic People's Republic of Korea--North Korea--and in 
April, the UNDP withdrew from the country entirely because 
North Korea had declined to allow the UNDP to impose tighter 
controls on its activities to increase transparency and 
accountability. Today's hearing will examine some of the 
management and operational deficiencies in the UNDP operations 
in North Korea, as well as concerns about a UNDP audit policy 
so restricted in its dissemination that program oversight was 
impeded. The Staff Report also reviewed weak whistleblower 
protections that may discourage UNDP employees from speaking 
out about problems.
    The UNDP is one of the world's principal humanitarian 
agencies. It conducts development work in 166 countries, 
spending $5 billion per year of its own funds and managing 
another $4 billion or so from other U.N. entities and donors. 
UNDP priorities include reducing poverty, dealing with crises 
like floods and earthquakes, and combating health threats. It 
operates in some of the world's most challenging countries, 
working to advance humanitarian aims even under repressive 
regimes. The UNDP is often walking a tightrope and often it 
succeeds.
    UNDP activities are in America's national interest. The 
U.S. Department of State's 2006 Congressional Budget 
Justification states that ``the UNDP's programs are closely 
aligned with U.S. strategic interests.'' As we speak, for 
example, UNDP personnel are risking their lives in support of 
U.S. reconstruction efforts in Iraq and Afghanistan. They are 
working on the ground to build better government rule in Sudan, 
helping rush aid to flood and landslide victims on the island 
of Java in Indonesia. To support these and other critical 
humanitarian efforts, in 2005 the United States contributed 
over $240 million to UNDP operations.
    Last year, allegations of mismanagement involving UNDP 
operations in North Korea erupted in the press. Some press 
accounts reported allegations that the UNDP might have supplied 
upward of $100 million in hard currency to North Korea and that 
$2.7 million in UNDP money had been transferred to North Korean 
embassies abroad, among other allegations. Accusatory letters 
were exchanged between the U.S. Mission to the United Nations 
and UNDP, straining relations between the two.
    While some press reports were overblown, UNDP operations in 
North Korea raise legitimate concerns. It is our hope that this 
hearing will address the serious and complex issues involved 
when important humanitarian work is undermined by local 
government restrictions, and at what point humanitarian aid--so 
important to a poor country--should be abandoned due to an 
uncooperative and repressive regime.
    At Senator Coleman's request last year, the Subcommittee 
launched this inquiry into UNDP operations in North Korea. Our 
staffs interviewed people from the State Department, UNDP, 
other U.N. offices, GAO, and others. Our staffs reviewed 
extensive documentation, including reports, correspondence, e-
mails, financial spreadsheets, and bank records.
    The Subcommittee also obtained copies of three nonpublic 
audit reports for the years 1999, 2001, and 2004, which had 
been prepared for the UNDP on its North Korean operations. 
These reports were obtained from confidential sources because, 
under UNDP policy, not even UNDP Executive Board members are 
entitled to copies of program audits. We also reviewed a 2007 
audit report which UNDP commissioned in response to the 
allegations and released to the public. All four audits 
provided valuable information, perspective, and context.
    In addition, the Subcommittee staff met twice in New York 
with senior officials from the North Korean Mission to the 
United Nations and had, frankly, a surprisingly open exchange 
about the allegations at issue today. In my experience, direct 
meetings between North Korean and congressional personnel are 
rare, and we would like to acknowledge the North Koreans' 
responses to our inquiries. Their information contributed to 
our understanding of what transpired.
    The information obtained from the Subcommittee 
investigation, as well as the staff findings and 
recommendations, are laid out in a Staff Report being released 
in connection with today's hearing. I will focus here on just a 
few of the highlights.
    First, it is clear that UNDP operations in North Korea did 
not follow standard UNDP policy and practice and were 
undermined by management and operational deficiencies. Many of 
these deviations from UNDP policy and practice were the result 
of demands made by the North Korean Government. For example, 
North Korea insisted and, contrary to UNDP policy and practice, 
UNDP agreed to hire as its local staff only persons selected by 
the North Korean Government. UNDP also agreed to pay their 
salaries and expenses with convertible currency, such as U.S. 
dollars or euros, rather than use the local currency, which was 
the non-convertible North Korean won (currency). Moreover, UNDP 
made the payments not to the individuals doing the work, but to 
the North Korean Government itself, even after suspecting that 
the North Korean Government, in the words of one UNDP official, 
was ``skimming'' money from the payments.
    The North Korean Government also insisted that the UNDP 
conduct its financial transactions using the North Korean 
state-owned Foreign Trade Bank, even though UNDP was not 
allowed on the bank premises and was forced to use North Korean 
personnel to execute the bank paperwork. That arrangement 
undermined UNDP fiscal control over its own funds. Still 
another problem was that UNDP officials were not allowed to 
visit local project sites without prior notice to, and in the 
company of, North Korean officials. Those project visits were 
not the independent inspections called for by UNDP policy and 
practice.
    After the U.S. State Department complained to the Executive 
Board about UNDP practices in North Korea, UNDP attempted to 
install better safeguards on its program there. These 
safeguards would have required local payments to be made in the 
North Korean won, allowed local staff to be hired directly by 
UNDP, and given UNDP greater access to inspect project sites. 
But North Korea declined to accept the new conditions, and UNDP 
withdrew from the country.
    Before that, UNDP had operated in North Korea under these 
and other staffing, fiscal, and administrative constraints. 
UNDP personnel told the Subcommittee that, despite the 
constraints, it was able to accomplish important humanitarian 
aims in its North Korean work. It designed agricultural, 
health, and economic development projects and verified that 
they took place as intended.
    When asked about press reports on the transfer of upward of 
$100 million in hard currency to North Korea over 10 years, 
UNDP indicated that figure was impossible since, over the 10 
years, UNDP's total expenditures in North Korea did not exceed 
about $33 million. UNDP explained that the $33 million paid for 
UNDP's own expenses as well as North Korean development costs. 
UNDP estimated that, of the $33.5 million spent, only about 
$400,000 was transferred to the North Korean Government account 
designated for use on development projects. About $6 million 
was spent by the UNDP for local staff salaries, rent, and 
office costs, again, over 10 years. While the Subcommittee 
staff was unable to confirm these estimates through its own 
analysis since key financial records remained in Pyongyang, a 
UNDP-commissioned audit is now underway to do just that, and 
there appears to be little reason to believe that the figure of 
upward of $100 million that appeared in the press will be 
sustained.
    The UNDP was itself responsible for some of the confusion 
surrounding its operations in North Korea. When U.S. diplomatic 
personnel asked about its North Korean operations in 2006, the 
UNDP initially refused to provide detailed information and 
denied access to the relevant audit reports. Later, UNDP 
allowed the United States to see the audit reports but 
permitted U.S. personnel to review them on a single occasion 
without allowing copies to be made. This overly restrictive 
audit policy impedes oversight and encourages inaccuracies.
    This Subcommittee obtained copies of the UNDP audit reports 
and used the information to develop a better understanding of 
UNDP operations in North Korea. We have seen no reason for the 
audit reports to have been kept secret. Inaccessible U.N. audit 
reports are a perennial sore point that continues to strain 
U.S.-U.N. relations and casts suspicion, often needlessly, on 
U.N. activities.
    UNDP Administrator Kemal Dervis has proposed that the UNDP 
Executive Board grant access to UNDP audits on a routine basis 
to UNDP Executive Board members. His proposal has limitations--
it applies only to future audits, allows only in-person 
interviews, and does not allow photocopies--but it is a step 
forward. I urge the UNDP Executive Board to allow unfettered 
audit access to all UNDP financial and management audits, not 
only for board members, but also all U.N. member states and the 
public.
    Another problem to be examined today involves the UNDP's 
treatment of the key employee who spoke out about the problems 
in North Korea, Artjon Shkurtaj, former Operations Manager of 
the UNDP office in Pyongyang. The UNDP's treatment of Mr. 
Shkurtaj is the latest blow to U.N. whistleblower protections, 
and it does not inspire confidence in UNDP's willingness to 
hear negative reports about its operations.
    The UNDP's overly restrictive audit policy and weak 
whistleblower protections contributed to the concerns about its 
North Korean operations. UNDP was also the victim of misleading 
actions by North Korea. The Subcommittee investigation obtained 
bank records showing, for example, that over a 6-month period 
from April to September 2002, North Korea deposited a total of 
$2.7 million of its own funds into a bank account that was 
supposed to be used exclusively for UNDP projects. North Korea 
then moved its funds from that UNDP-related account to a bank 
account in Macau in the name of a Chinese company called 
International Finance and Trade Joint Company, which acted as a 
conduit for North Korea. IFTJ transferred the funds it received 
from North Korea to other accounts around the world controlled 
by North Korea, each time referencing the UNDP program in the 
accompanying wire transfers even though the funds had nothing 
to do with UNDP activity. Why would North Korea deposit its own 
funds into a bank account that was supposed to only contain 
UNDP funds?
    When asked about these transactions by the Subcommittee, 
North Korean officials acknowledged the transfers. They said 
that the 2002 speech by President Bush in which he said North 
Korea was part of an ``axis of evil'' raised fears that North 
Korean accounts would be frozen. North Korean officials told 
the Subcommittee that the funds they transferred were for 
operating diplomatic missions in the United States and Europe. 
They said that the North Korean Ministry of Foreign Affairs 
used the UNDP-related account as a secure channel for 
transferring its own funds, apparently because it was less 
likely to incur international scrutiny and be frozen.
    North Korea did not alert UNDP to its actions, and UNDP 
told the staff that it had no idea, until shown the bank 
records by our staff, that North Korea had deposited its own 
funds into the bank account set up to receive UNDP funds for 
UNDP development projects. UNDP had no access to the account 
records, since the account was under the sole control of the 
North Korean Government. UNDP also was surprised to learn that 
the Foreign Trade Bank had routed some outgoing UNDP funds 
through the same IFTJ bank account in Macau, and that two U.N. 
payments totaling about $50,000 that had been made by UNDP on 
behalf of other U.N. agencies had gone to an entity that the 
State Department later linked to North Korea weapons sales. The 
Staff Report provides greater detail about these incidents and 
recommends new controls to prevent similar problems in the 
future, including by enabling UNDP to monitor account activity 
of any host country account set up to receive UNDP funds.
    The UNDP is an important U.S. ally. Its mission coincides 
with our interest, as well as our hopes for a more secure and 
prosperous world. One key question raised by this investigation 
is whether UNDP operations that help the people living under 
repressive regimes should always just be ended, as they were in 
North Korea, when the government bypasses UNDP controls 
designed to ensure transparency and accountability.
    I would like to thank all of the parties for their 
cooperation with this investigation. UNDP, in particular, 
patiently answered many Subcommittee inquiries. The 
Subcommittee fully recognizes the privileges and immunities of 
the United Nations, and we appreciate the extent of its 
voluntary cooperation as well as its allowing the UNDP to brief 
the Subcommittee here today.
    We live in dangerous times, and so many of the threats we 
face--terrorism, climate change, infectious disease--require an 
international response. The United Nations, including UNDP, is 
in a position to help confront those threats. But transparency 
and accountability are essential to ensure that their aims are 
advanced. It is why we need unfettered audit reports, strong 
whistleblower protections, and the willingness to take a hard 
look at U.N. operations worldwide. Again, I commend Senator 
Coleman for his initiative in this matter. I thank our staffs 
not only for a thorough product but, as always, for working in 
a bipartisan way to improve and strengthen the United Nations.
    [The prepared statement of Senator Levin follows:]

                  PREPARED STATEMENT OF SENATOR LEVIN
    In March 2007, the United Nations Development Program (UNDP) took 
the unprecedented step of suspending its operations in the Democratic 
People's Republic of Korea (DPRK), commonly known as North Korea. In 
April, the UNDP withdrew from the country entirely, because North Korea 
had declined to allow UNDP to impose tighter controls on its activities 
to increase transparency and accountability. Today's hearing will 
examine some of the management and operational deficiencies in the UNDP 
operations in North Korea as well as concerns about a UNDP audit policy 
so restricted in its dissemination that program oversight was impeded. 
The Staff Report also reviewed weak whistleblower protections that may 
discourage UNDP employees from speaking out about problems.
    The U.N. Development Programme is one of the world's principal 
humanitarian agencies. It conducts development work in 166 countries, 
spending $5 billion per year of its own funds and managing another $4 
billion or so for other U.N. entities and donors. UNDP priorities 
include reducing poverty, dealing with crises like floods and 
earthquakes, and combating health threats. It operates in some of the 
world's most challenging countries, working to advance humanitarian 
aims even under repressive regimes. The UNDP is often walking a 
tightrope. Often it succeeds.
    UNDP activities are in America's national interest. The U.S. 
Department of State's 2006 Congressional Budget Justification states 
that ``the UNDP's programs are closely aligned with U.S. strategic 
interests.'' As we speak, for example, UNDP personnel are risking their 
lives in support of U.S. reconstruction efforts in Iraq and 
Afghanistan. They are working on the ground to build better government 
rule in Sudan, and helping rush aid to flood and landslide victims on 
the island of Java in Indonesia. To support these and other critical 
humanitarian efforts, in 2005, the United States contributed over $240 
million to UNDP operations.
    Last year, allegations of mismanagement involving UNDP operations 
in North Korea erupted in the press. Some press accounts reported 
allegations that the UNDP might have supplied upward of $100 million in 
hard currency to the North Korea and that $2.7 million in UNDP money 
had been transferred to North Korean embassies abroad, among other 
allegations. Accusatory letters were exchanged between the United 
States Mission to the United Nations and UNDP, straining relations 
between the two.
    While some press reports were overblown, UNDP operations in North 
Korea raise legitimate concerns. It is our hope that this hearing will 
address the serious and complex issues involved when important 
humanitarian work is undermined by local government restrictions, and 
at what point humanitarian aid--so important to a poor country--should 
be abandoned due to an uncooperative and repressive regime.
    At Senator Coleman's request last year, the Subcommittee launched 
this inquiry into UNDP operations in North Korea. Our staffs 
interviewed people from the State Department, UNDP, other U.N. offices, 
GAO, and others. Our staffs reviewed extensive documentation, including 
reports, correspondence, emails, financial spreadsheets, and bank 
records.
    The Subcommittee also obtained copies of three nonpublic audit 
reports for the years 1999, 2001, and 2004, which had been prepared for 
the UNDP on its North Korean operations. These reports were obtained 
from confidential sources because, under UNDP policy, not even UNDP 
Executive Board members are entitled to copies of program audits. We 
also reviewed a 2007 audit report which UNDP commissioned in response 
to the allegations and released to the public. All four audits provided 
valuable information, perspective, and context.
    In addition, the Subcommittee staff met twice in New York with 
senior officials from the North Korean Mission to the United Nations 
and had, frankly, a surprisingly open exchange about the allegations at 
issue today. In my experience, direct meetings between North Korean and 
Congressional personnel are rare, and we would like to acknowledge the 
North Koreans' responses to our inquiries. Their information 
contributed to our understanding of what transpired.
     The information obtained from the Subcommittee investigation, as 
well as the staff findings and recommendations, are laid out in a Staff 
Report being released in connection with today's hearing. I will focus 
here on a few highlights.
    First, it is clear that UNDP operations in North Korea did not 
follow standard UNDP policy and practice, and were undermined by 
management and operational deficiencies. Many of these deviations from 
UNDP policy and practice were the result of demands made by the North 
Korean government. For example, North Korea insisted and, contrary to 
UNDP policy and practice, UNDP agreed to hire as its local staff only 
persons selected by the North Korean government. UNDP also agreed to 
pay their salaries and expenses with convertible currency, such as U.S. 
Dollars or Euros, rather than use the local currency, which was the 
non-convertible North Korean Won. Moreover, UNDP made the payments not 
to the individuals doing the work, but to the North Korean government 
itself, even after suspecting that the regime, in the words of one UNDP 
official, was ``skimming'' money from the payments.
    The North Korean government also insisted that UNDP conduct its 
financial transactions using the North Korean state-owned Foreign Trade 
Bank, even though UNDP wasn't allowed on the bank premises and was 
forced to use North Korean personnel to execute the bank paperwork. 
That arrangement undermined UNDP fiscal control over its funds. Still 
another problem was that UNDP officials were not allowed to visit local 
project sites without prior notice to, and in the company of, North 
Korean officials. Those project visits weren't the independent 
inspections called for by UNDP policy and practice.
    After the U.S. State Department complained to the Executive Board 
about UNDP practices in North Korea, UNDP attempted to install better 
safeguards on its program there. These safeguards would have required 
local payments to be made in the North Korean Won, allowed local staff 
to be hired directly by UNDP, and given UNDP greater access to inspect 
project sites. But North Korea declined to accept the new conditions, 
and UNDP withdrew from the country.
    Before that, UNDP had operated for years in North Korea under these 
and other staffing, fiscal, and administrative constraints. UNDP 
personnel told the Subcommittee that, despite the constraints, it was 
able to accomplish important humanitarian aims in its North Korean 
work. It designed agricultural, health, and economic development 
projects, and verified that they took place as intended.
    When asked about press reports on the transfer of upward of $100 
million in hard currency to North Korea over 10 years, UNDP indicated 
that figure was impossible since, over the ten years, UNDP's total 
expenditures in North Korea did not exceed about $33.5 million. UNDP 
explained that the $33.5 million paid for UNDP's own expenses as well 
as North Korean development costs. UNDP estimated that, of the $33.5 
million spent, only about $400,000 was transferred to the North Korean 
government account designated for use on development projects. About $6 
million was spent by the UNDP for local staff salaries, rent, and 
office costs, again, over 10 years. While the Subcommittee staff was 
unable to confirm these estimates through its own analysis, since key 
financial records remained in Pyongyang, a UNDP commissioned audit is 
now underway to do just that, and there appears to be little reason to 
believe that the figure of upward of $100 million that appeared in the 
press will be sustained.
    The UNDP was itself responsible for some of the confusion 
surrounding its operations in North Korea. When U.S. diplomatic 
personnel asked about its North Korean operations in 2006, the UNDP 
initially refused to provide detailed information and denied access to 
the relevant audit reports. Later, UNDP allowed the United States to 
see the audit reports but permitted U.S. personnel to review them on a 
single occasion without allowing copies to be made. This overly 
restrictive audit policy impedes oversight and encourages inaccuracies.
    This Subcommittee obtained copies of the UNDP audit reports and 
used the information to develop a better understanding of UNDP 
operations in North Korea. We have seen no reason for the audit reports 
to have been kept secret. Inaccessible U.N. audit reports are a 
perennial sore point that continues to strain U.S.-U.N. relations and 
casts suspicion, often needlessly, on U.N. activities.
    UNDP Administrator Kemal Dervis has proposed that the UNDP 
Executive Board grant access to UNDP audits on a routine basis to UNDP 
Executive Board members. His proposal has limitations--it applies only 
to future audits, allows only in-person reviews, and does not allow 
photocopies--but it is a step forward. I urge the UNDP Executive Board 
to allow unfettered audit access to all UNDP financial and management 
audits, not only for Board members, but also all U.N. member states and 
the public.
     Another problem to be examined today involves the UNDP's treatment 
of the key employee who spoke out about the problems in North Korea, 
Artjon Shkurtaj, former Operations Manager of the UNDP office in 
Pyongyang. Mr. Shkurtaj blew the whistle on what he believed were 
management and operational deficiencies in North Korea. He reported 
those problems to his superiors and eventually to Ambassador Wallace at 
the U.S. Mission to the United Nations. Rather than support him, UNDP 
decided not to renew his contract.
    Given the pending Independent Investigative Review now examining 
his case, this is not the occasion to consider all of Mr. Shkurtaj's 
allegations or the details of his treatment by UNDP. It is appropriate, 
however, to express concern about UNDP whistleblower protections in 
general. After his contract ended, Mr. Shkurtaj filed a complaint with 
the recently created U.N. Ethics Office alleging UNDP retaliation. In 
an August 2007 letter, the U.N. Ethics Office wrote that Mr. Shkurtaj 
had established ``a prima facie case of retaliation,'' but concluded 
that the Office lacked jurisdiction to resolve his case. The letter 
noted that an Ethics Office review would have been in the ``best 
interests of the United Nations,'' but UNDP had declined the Office's 
request to voluntarily submit the Shkurtaj matter for review. Later, 
UNDP set up an ad hoc review team that is now considering Mr. 
Shkurtaj's claim of retaliation.
    UNDP's refusal to submit the Shkurtaj matter to the Ethics Office 
for review undermined the status and authority of that Office and 
undermined confidence that U.N. personnel can blow the whistle on 
waste, fraud, or abuse without fear of retribution. The Secretary 
General has since directed all U.N. agencies to establish their own 
ethics offices and created an Ethics Committee to encourage U.N.-wide 
ethics rules. We will be discussing that effort today. The bottom line, 
however, is that UNDP's treatment of Mr. Shkurtaj is the latest blow to 
U.N. whistleblower protections, and it doesn't inspire confidence in 
UNDP's willingness to hear negative reports about its operations.
    The UNDP's overly restrictive audit policy and weak whistleblower 
protections contributed to the concerns about its North Korean 
operations. UNDP was also the victim of misleading actions by North 
Korea. The Subcommittee investigation obtained bank records showing, 
for example, that over a six month period from April to September 2002, 
North Korea deposited a total of $2.7 million of its own funds into a 
bank account that was supposed to be used exclusively for UNDP 
projects. North Korea then moved its funds from that UNDP-related 
account to a bank account in Macau in the name of a Chinese company 
called International Finance and Trade Joint Company, which has acted 
as a conduit for North Korea. IFTJ transferred the funds it received 
from North Korea to other accounts around the world controlled by North 
Korea, each time referencing the UNDP program in the accompanying wire 
transfers even though the funds had nothing to do with UNDP activity. 
Why would North Korea deposit its own funds into a bank account that 
was supposed to only contain UNDP funds?
    When asked about these transactions by the Subcommittee, North 
Korean officials acknowledged the transfers. They said that the 2002 
speech by President Bush in which he said North Korea was part of an 
``axis of evil,'' raised fears that North Korean accounts would be 
frozen. North Korean officials told the Subcommittee that the funds 
they transferred were for operating diplomatic missions in the United 
States and Europe. They said that the North Korean Ministry of Foreign 
Affairs used the UNDP-related account as a secure channel for 
transferring its own funds, apparently because it was less likely to 
incur international scrutiny and be frozen.
    North Korea did not alert UNDP to its actions, and UNDP told the 
Subcommittee that it had no idea, until shown the bank records by our 
staff, that North Korea had deposited its own funds into the bank 
account set up to receive UNDP funds for UNDP development projects. 
UNDP had no access to the account records, since the account was under 
the sole control of the North Korean government. UNDP also was 
surprised to learn that the Foreign Trade Bank had routed some outgoing 
UNDP funds through the same IFTJ bank account in Macao, and that two 
U.N. payments totaling about $50,000, that had been made by UNDP on 
behalf of other U.N. agencies, had gone to an entity that the State 
Department later linked to North Korea weapons sales. The Staff Report 
provides greater detail about these incidents and recommends new 
controls to prevent similar problems in the future, including by 
enabling UNDP to monitor account activity of any host country account 
set up to receive UNDP funds.
    The UNDP is an important U.S. ally. Its mission coincides with our 
national interest, as well as our hopes for a more secure and 
prosperous world. One key question raised by this investigation is 
whether UNDP operations that help the people living under repressive 
regimes should always just be ended, as they were in North Korea, when 
the government bypasses UNDP controls designed to ensure transparency 
and accountability.
    I would like to thank all of the parties for their cooperation with 
this investigation. UNDP, in particular, patiently answered many 
Subcommittee inquiries. The Subcommittee fully recognizes the 
privileges and immunities of the United Nations, and we appreciate the 
extent of its voluntary cooperation as well as its allowing the UNDP to 
brief the Subcommittee today.
    We live in dangerous times. So many of the threats we face--
terrorism, climate change, infectious disease--require an international 
response. The United Nations, including UNDP, is in a position to help 
confront those threats. But transparency and accountability are 
essential to ensure their aims are advanced. It's why we need 
unfettered audit reports, strong whistleblower protections, and the 
willingness to take a hard look at U.N. operations worldwide. Again, I 
commend Senator Coleman for his initiative in this matter and I thank 
our staff not only for a thorough product, but, as always, for working 
in a bipartisan way to improve and strengthen the United Nations.

    Senator Coleman.

              OPENING STATEMENT OF SENATOR COLEMAN

    Senator Coleman. Thank you, Mr. Chairman.
    As Chairman Levin noted, today's hearing examines 
management and transparency problems in the operations of the 
United Nations Development Program (UNDP) in North Korea. At 
the outset, I want to express my sincere appreciation to 
Senator Levin and his staff for their support in this 
investigation. This bipartisan effort highlights the 
Subcommittee's most enduring and valuable contribution to 
American governance: The recognition that some matters are of 
such gravity that they transcend partisan politics and require 
apolitical, sober examination. This would not have been 
possible without your cooperation and leadership, Mr. Chairman, 
and I thank you.
    Senator Levin. Thank you.
    Senator Coleman. One of those issues that should transcend 
partisanship is our obligation to ensure that when American 
taxpayer dollars are used to fund any program, domestic or 
international, there is adequate transparency and 
accountability to avoid fraud, abuse, or mismanagement. Today, 
we examine the UNDP.
    I would note at the outset that an effective United Nations 
is important to America's national security interests. When the 
U.N. operates transparently, efficiently and with 
accountability, it can make great progress on the most 
intractable problems facing the world. The UNDP, which is the 
largest development agency in the United Nations System, is a 
central part of that effort. Its mission is noble: Building 
democratic societies, reducing poverty, assisting in crisis 
recovery, protecting the environment, and curbing the AIDS 
epidemic around the world. Noble work, indeed.
    However, if U.N. agencies like UNDP can be manipulated by 
belligerent regimes, Congress must re-examine the terms under 
which it funds the U.N.'s efforts. The evidence uncovered by 
the Subcommittee's investigation brings this obligation sharply 
into focus.
    Over the course of the Subcommittee's inquiry, we have 
reviewed thousands of pages of documents, interviewed officials 
from the Departments of State, Commerce and Treasury, as well 
as current and former U.N. and UNDP personnel. I want to echo 
Senator Levin's gratitude to the UNDP for their willingness to 
be interviewed for dozens of hours. Subcommittee staff also 
sought out and met with representatives of the North Korean 
Government, who corroborated much of the evidence collected by 
the Subcommittee.
    As the Chairman has noted, our investigation gathered 
evidence establishing the following facts:
    First, there were a range of deficiencies in UNDP's 
managerial and transparency controls that left it vulnerable to 
manipulation by the North Korean regime.
    Second, the North Korean Government engaged in deceptive 
financial transactions to move more than $2.7 million all 
around the world under the pretense of U.N. activities.
    Third, more than $50,000 was transferred directly from UNDP 
to an entity that, according to a State Department letter, has 
ties to efforts by the North Korean regime to engage in 
weapons-related activities.
    Each of these areas is discussed in greater detail in a 
Subcommittee Staff Report issued in conjunction with today's 
hearing.
    As we review the evidence and examine UNDP operations, we 
should note that the United States pays much of the U.N.'s 
annual bills. We contribute hundreds of millions of American 
taxpayer dollars to UNDP every year. For example, American 
taxpayer dollars funded UNDP to the tune of $247 million in 
2005 alone. To be clear, that is on top of the over $1 billion 
the United States contributes to the U.N. Secretariat every 
year. We should keep these expenditures in mind as we explore 
the evidence. Let me turn to that evidence now.
    The Subcommittee reviewed several management practices in 
UNDP's North Korea office and found that the North Korea 
operation suffered from certain significant deficiencies. These 
weaknesses related to a number of crucial activities, ranging 
from cash management to staffing. For instance, the North 
Korean Government forced UNDP to fill sensitive positions with 
North Korean officials chosen by the regime. As one UNDP 
official acknowledged, those employees were ``effectively 
agents of the [North Korean] Government.'' In addition, UNDP 
was pressured by the North Koreans to make payments in hard 
currency--like U.S. dollars or euros--which the regime was 
desperate to obtain. Finally, the regime imposed severe 
restrictions that hindered UNDP's ability to monitor the very 
projects that it was funding.
    Many of these practices we identified were inconsistent 
with UNDP policy and best practices. Some of these problems 
resulted from one central failure: UNDP never adopted formal, 
definitive protocols in its North Korean operations. Instead, 
it relied on a series of ad hoc arrangements cobbled together 
to accommodate North Korean sensitivities. UNDP agreed to 
forego formal agreements because the North Koreans resisted 
signing them, and UNDP believed it could operate without them.
    However, the Subcommittee's investigation indicates that 
operating under these fluid arrangements with a totalitarian 
regime like North Korea left UNDP vulnerable to manipulation. 
Let's not forget that this is a brutal, oppressive regime that 
was starved for hard currency and willing to do whatever it 
takes to get it. And UNDP was well aware of that. Yet UNDP 
largely acquiesced to North Korea's demands in order to keep 
its development projects going.
    These certainly are noble goals, but I fear that UNDP's 
good intentions led to a well-intentioned culture of laxity. In 
short, UNDP's desire to assist the North Korean people 
apparently overrode their need to take necessary precautions. 
In effect, UNDP operated in a Chernobyl-like environment with a 
hazmat suit made of mesh. Ostensibly it was covered, but in 
reality it was vulnerable.
    Many of the Subcommittee's findings result from an analysis 
of UNDP's internal audits. Significantly, these audits were 
never intended to see the light of day. The Chairman has noted 
the great concerns we have here in this body with the inability 
of member states of this country to be able to review those 
audits. Even though the United States is among a handful of 
countries that provide the bulk of funding for UNDP, the U.S. 
Government is forbidden from reading UNDP audits. Member 
states, especially large donors like the United States, should 
have access to U.N. audits. Both donors and recipients of aid 
money have a stake in ensuring that U.N. Funds and Programs are 
managed in an efficient, transparent manner. The U.N.'s refusal 
to share audits with its donors gives the impression that the 
U.N. has a ``Keep your wallets open, and your mouths shut'' 
stance toward the rest of the world. That stance is 
antithetical to the concepts of transparency and 
accountability. Indeed, UNDP rightly preaches transparency and 
accountability to the developing nations that it is assisting. 
It seems that UNDP should practice what it preaches.
    After speaking with UNDP's Administrator, Kemal Dervis, 
about this very issue this week, I am confident that UNDP will 
take some strides to improve their audit release policy. If 
UNDP fails to make substantial changes in policy, however, 
Congress should seriously consider changing the way we donate 
American tax dollars to the UNDP and any other U.N. agencies 
that do not share their audits with donors and member states.
    Let me talk a little bit about whistleblower protection. No 
operation can achieve transparency and accountability when its 
employees cannot report wrongdoing without fear of retaliation. 
A recent UNDP story makes that abundantly clear. A central 
figure in this inquiry, which the Chairman has noted, is Artjon 
Shkurtaj, the former Operations Manager in UNDP's North Korean 
offices. It was Mr. Shkurtaj who first reported concerns with 
UNDP's North Korea program, and without his willingness to 
speak up and identify potential problems inside UNDP, none of 
these issues would have come to light. After he spoke out about 
the questionable practices, Mr. Shkurtaj was effectively 
terminated by the UNDP. His contract was not continued. He has 
alleged that this was retaliation for speaking out, that he was 
blacklisted because he blew the whistle.
    While the Subcommittee will not address that particular 
matter today, his story exposed a gaping hole in the U.N. 
ethics regime. When the U.N. created the Ethics Office in the 
wake of the Oil-for-Food scandal, it appeared to be a step in 
the right direction. This highly touted reform, however, was 
largely eviscerated in its first real test--Mr. Shkurtaj's 
complaint against UNDP. In response to Mr. Shkurtaj's claim, 
UNDP argued that the Ethics Office covered only the U.N. 
Secretariat and not U.N. Funds and Programs like UNDP. The 
Ethics Office determined that Mr. Shkurtaj did, in fact, make a 
prima facie case of retaliation, but ultimately it agreed with 
UNDP, concluding that it did not have jurisdiction over 
anything but the Secretariat. That ruling undermined the 
whistleblower protection policies for thousands of employees in 
the U.N.'s Funds and Programs. In short, that decision gutted 
the U.N.'s signature management reform.
    It goes without saying that a strong whistleblower 
protection policy will strengthen an organization in the long 
run. That is why I sponsored legislation that conditions UNDP 
funding on fair and effective whistleblower protection 
policies. The Secretary-General recently issued a bulletin to 
broaden the U.N.'s ethics rules and expand the whistleblower 
protections. That is certainly encouraging. The proof, however, 
is in the pudding, and I look forward to hearing from our 
witnesses and briefers from the U.N. about whether these newly 
announced measures are adequate and are in place.
    Beyond the management and oversight deficiencies, the 
Subcommittee has obtained evidence establishing that the North 
Korean Government engaged in deceptive financial transactions 
under the guise of United Nations activity. In particular, the 
Subcommittee obtained wire transfers and other banking records 
that document nine transfers, in which the North Korean 
Government moved a total of $2.72 million from its accounts to 
accounts in Western banks. The banking records indicate that 
the North Koreans routed the transactions through a front 
company in Macau and suggested that the transfers were for the 
``purchase of buildings'' in Canada, the United Kingdom, and 
France. What is most troubling of all, however, is that the 
North Korean regime invoked the name of the United Nations to 
give the transfers some legitimacy.
    The Subcommittee has confirmed with UNDP and the North 
Korean Government that these transactions had absolutely 
nothing to do with U.N. activities. While it is unclear how the 
funds were ultimately used, these transactions illustrate how 
this rogue regime was able to move large amounts of funds out 
of North Korea and into the West's financial system, dropping 
the U.N. name as a cover story.
    UNDP officials have advised this Subcommittee that they 
found these transactions deeply disturbing. They stated that 
they did not know of the transactions, and that none of its 
projects would entail the purchase of buildings in North 
America or Europe. While the funds do not appear and we do not 
know whether this is, in fact, UNDP money, the key is not the 
origin of the money in this particular instance but, rather, 
that there are loopholes in the system. UNDP itself has 
admitted that none of its controls could have caught this 
apparent misuse of its name by the North Korean regime.
    These transactions represent a cause for alarm. The reason 
for the elaborate measures used to shield these transfers--such 
as the use of the front company, the bogus connection to the 
United Nations, the use of buildings or property purchases to 
justify large transfers--is clear: North Korea was trying to 
shield its financial maneuvers from scrutiny and give Kim Jong 
Il greater access to international financial institutions.
    In fact, the North Koreans told us that quite clearly. As 
the Chairman has noted, the North Koreans informed the 
Subcommittee that, following President Bush's State of the 
Union Address in 2002, in which he included North Korea in the 
``axis of evil,'' that they feared that their assets would be 
frozen. So the regime sought secure paths to funnel its money 
to more secure accounts. The account related to the U.N. 
activity presented a safe route.
    The ostensible connection to U.N. activities is perhaps the 
most troubling aspect of these discoveries. Officials from 
executive agencies have advised the Subcommittee that 
transactions involving U.N. entities would likely receive less 
scrutiny from bank regulators and bank compliance units who may 
simply assume that such transfers are in furtherance of U.N.-
related activity. In effect, North Korea's bogus description of 
these transfers as related to UNDP activity is the financial 
equivalent of painting a Red Cross symbol on a Bradley fighting 
vehicle.
    The significance is clear. Recently, the U.S. Government 
has been making overtures to the North Korean regime. Officials 
from the Federal Government recently met with North Korean 
officials to advise them on how they could re-enter the 
international financial system. Moreover, Congress may be asked 
to alter the laws currently prohibiting certain transactions 
from being conducted with North Korean entities; it is equally 
likely that Congress will be asked to increase funds for North 
Korean humanitarian, developmental, and nuclear monitoring 
projects. As Congress contemplates these moves, it would be 
irresponsible not to seek assurances that such matters are 
being addressed.
    At the same time, UNDP must determine whether their name is 
being used elsewhere in connection with questionable 
activities. By definition, UNDP operates in countries that are 
in dire need of development assistance. In some instances, they 
are dealing with the worst, most untrustworthy regimes on the 
planet. It is deeply disturbing that there are no controls in 
place to prevent such manipulation of UNDP's presence. UNDP 
should take steps to ensure that its name and resources are not 
used as cover for non-U.N. activities. The United States should 
seek assurances from UNDP that its name, offices, and resources 
are not being used by outlaw or corrupt states to facilitate 
their financial shenanigans.
    Unfortunately, these are not the only types of troubling 
transactions that the Subcommittee has uncovered. The 
Subcommittee has established that UNDP made payments totaling 
more than $50,000 to an entity that, according to a letter from 
a State Department official, has ``ties to a North Korean 
entity that that has been designated [by the U.S. Government] 
as the main North Korean financial agent'' for sales of weapons 
and missiles. The payments at issue are described more 
completely in a classified annex to the Subcommittee Staff 
Report, and for reasons of national security, we are precluded 
from further disclosure concerning those matters in an open 
hearing. Suffice it to say, however, that these transactions 
raise disturbing questions.
    UNDP has responded that they made these payments on behalf 
of UNESCO, another U.N. agency operating in North Korea. While 
we have no evidence to the contrary, it is beside the point: 
Under no circumstances should U.N. funds be transferred to an 
entity connected with nefarious activity. U.N. agencies should 
adopt more aggressive measures to ensure that the vendor is not 
associated with illicit conduct.
    The matters to be examined here today and in the Staff 
Report make clear both Congress's obligation to have accurate 
and complete information on the agencies it funds with U.S. 
taxpayer money, as well as the obligation of executive agencies 
to exercise appropriate oversight over multilateral bodies such 
as the United Nations. The evidence also demonstrates that UNDP 
should adopt stronger safeguards when operating in totalitarian 
regimes to ensure that it will not be vulnerable to 
manipulation by the host country.
    I appreciate UNDP's hard work. They operate in the most 
difficult political and social environments on the globe and 
seek to improve the lives of the world's most downtrodden 
people. I share those objectives, and I am encouraged by the 
constructive dialogue that we have maintained with UNDP 
throughout this process. I look forward to continuing that 
constructive dialogue with the UNDP representatives, as well as 
our other witnesses today.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Coleman follows:]

                 PREPARED STATEMENT OF SENATOR COLEMAN
    As Chairman Levin noted, today's hearing examines management and 
transparency problems in the operations of the United Nations 
Development Program (UNDP) in North Korea. At the outset, I want to 
express my sincere appreciation to Senator Levin and his staff for 
their support in this investigation. This bipartisan effort highlights 
the Subcommittee's most enduring and valuable contribution to American 
governance: the recognition that some matters are of such gravity that 
they transcend partisan politics and require apolitical, sober 
examination. This would not have been possible without your cooperation 
and leadership, Mr. Chairman, and I thank you.
    One of those issues that should transcend partisanship is our 
obligation to ensure that American tax-dollars are not being used to 
harm American interests. Now, more than ever, the United States must 
balance two competing interests: its core duty to protect the American 
people from its enemies, on the one hand, and its moral obligation to 
lead the effort to improve the lives of the downtrodden in the under-
developed world, on the other. These efforts need not conflict. In 
fact, in many situations, the goals work hand-in-hand--by helping the 
downtrodden, we simultaneously undermine their oppressors and empower 
them to transform their own countries into free--and non-threatening--
members of the international community.
    The United Nations is one of America's most important partners in 
this endeavor. When the U.N. operates transparently, efficiently and 
with accountability, it can make great progress on the most intractable 
problems facing the world. The United Nations Development Program, 
which is the largest development agency in the United Nations system, 
is a central part of that effort. Its mission is noble: building 
democratic societies, reducing poverty, assisting in crisis recovery, 
protecting the environment, and curbing the AIDS epidemic around the 
globe. Noble work, indeed.
    However, if U.N. agencies like UNDP can be manipulated by 
belligerent regimes, Congress must re-examine the terms under which it 
funds the U.N.'s efforts. The evidence uncovered by the Subcommittee's 
investigation brings this obligation into sharp focus.
    Over the course of the Subcommittee's inquiry, we have reviewed 
thousands of pages of documents, interviewed officials from the 
Departments of State, Commerce and Treasury, as well as current and 
former U.N. and UNDP personnel. I want to echo Senator Levin's 
gratitude to the UNDP for their willingness to be interviewed for 
dozens of hours. Subcommittee staff also sought out and met with 
representatives of the North Korean government, who corroborated much 
of the evidence collected by the Subcommittee.
    Our investigation gathered evidence establishing the following 
facts:

      First, there were a range of deficiencies in UNDP's 
managerial and transparency controls that left it vulnerable to 
manipulation by the North Korean regime.
      Second, the North Korean government engaged in deceptive 
financial transactions to move more than $2.7 million all around the 
world under the pretense of U.N. activities.
      Third, more than $50,000 was transferred directly from 
UNDP to an entity that, according to a State Department letter, has 
``ties'' to efforts by the North Korean regime to engage in weapons-
related activities.Each of these areas is discussed in great detail in 
a Subcommittee staff report issued in conjunction with today's hearing.

    As we review the evidence and examine UNDP operations, we should 
note that the United States pays much of the U.N.'s annual bills. We 
contribute hundreds of millions of American tax-dollars to UNDP every 
year--for example, American taxpayers funded UNDP to the tune of 247 
million dollars in 2005 alone. To be clear, that is on top of the $1 
billion the U.S. contributes to the U.N. Secretariat every year. We 
should keep these expenditures in mind as we explore the evidence. 
Let's turn to that evidence now.

                  Managerial and Transparency Failures

    The Subcommittee reviewed several management practices in UNDP's 
North Korea office and found that the North Korea operation suffered 
from certain significant deficiencies. These weaknesses related to a 
number of crucial activities, ranging from cash management to staffing. 
For instance, the North Korean government forced UNDP to fill sensitive 
positions with North Korean officials chosen by the regime. As one UNDP 
official acknowledged, those employees were ``effectively agents of the 
[North Korean] government.'' In addition, UNDP was pressured by the 
North Koreans to make payments in hard currency--like U.S. dollars and 
Euros--which the regime was desperate to obtain. Finally, the regime 
imposed severe restrictions that hindered UNDP's ability to monitor the 
very projects that it was funding.
    Many of the practices we identified were inconsistent with UNDP 
policy and best practices. Some of these problems resulted from one 
central failure: UNDP never adopted formal, definitive protocols in its 
North Korea operations. Instead, it relied on a series of ad hoc 
arrangements cobbled together to accommodate North Korean 
sensitivities. UNDP agreed to forgo formal agreements because the North 
Koreans resisted signing them, and UNDP believed it could operate 
without them.
    However, the Subcommittee's investigation indicates that operating 
under these fluid arrangements with a totalitarian regime like North 
Korea left UNDP vulnerable to manipulation. Let's not forget that this 
is a brutal, oppressive regime that was starved for hard currency and 
willing to do whatever it takes to get it. And UNDP was well aware of 
that. Yet, UNDP largely acquiesced to North Korea's demands in order to 
keep its development projects going.
    These are certainly noble goals, but I fear that UNDP's good 
intentions led to a well-intentioned culture of laxity. In short, 
UNDP's desire to assist the North Korean people apparently overrode 
their need to take necessary precautions. In effect, UNDP operated in a 
Chernobyl environment with a Haz-mat suit made of mesh--ostensibly it 
was covered, but in reality it was vulnerable.
    Many of the Subcommittee's findings result from an analysis of 
UNDP's internal audits. Significantly, these internal audits were never 
intended to see the light of day. Even though the United States is 
among a handful of countries that provide the bulk of funding for UNDP, 
the U.S. Government is forbidden from reading UNDP's audits. Member-
states, especially large donors like the US, should have access to the 
U.N.'s audits. Both donors and recipients of aid money have a stake in 
ensuring that funds and programs are managed in an efficient, 
transparent manner. The U.N.'s refusal to share audits with its donors 
gives the impression that the U.N. has a ``Keep your wallets open, and 
your mouths shut'' stance toward the rest of the world. That stance is 
antithetical to the concepts of transparency and accountability. 
Indeed, UNDP rightly preaches transparency and accountability to the 
developing nations that it is assisting--it seems that UNDP should 
practice what it preaches.
    After speaking with UNDP's Administrator, Kemal Dervis, about this 
very issue earlier this week, I am confident that UNDP will take some 
strides to improve their audit-release policy. If UNDP fails to make a 
substantial change in policy, however, Congress should seriously 
consider changing the way we donate American tax-dollars to the UNDP 
and any other U.N. agencies that do not share their audits with donors 
and member states.

      Retaliation and the U.N.'s Whistleblower Protection Policies

    No operation can achieve transparency and accountability when its 
employees cannot report wrongdoing without fear of retaliation. A 
recent UNDP story makes that abundantly clear. A central figure in this 
inquiry is Mr. Artjon Shkurtaj, the former Operations Manager in UNDP's 
North Korean offices. It was Mr. Shkurtaj who first reported concerns 
with UNDP's North Korea program, and without his willingness to speak 
up and identify potential problems inside UNDP, none of these issues 
would have come to light. After he spoke out about the questionable 
practices, Mr. Shkurtaj was effectively terminated by the UNDP. He has 
alleged that this was retaliation for speaking out--that he was 
blacklisted because he blew the whistle.
    While the Subcommittee will not address that particular matter 
today, his story exposed a gaping hole in the U.N. ethics regime. When 
the U.N. created the Ethics Office in the wake of the Oil-For-Food 
scandal, it appeared to be a step in the right direction. This highly-
touted reform, however, was largely eviscerated in its first real 
test--Mr. Shkurtaj's complaint against UNDP. In response to Mr. 
Shkurtaj's claim, UNDP argued that the Ethics Office covered only the 
U.N. Secretariat and not funds and programs like UNDP. The Ethics 
Office determined that Mr. Shkurtaj did, in fact, make a prima facie 
case of retaliation--but ultimately it agreed with UNDP, concluding 
that it did not have jurisdiction over anything but the Secretariat. 
That ruling undermined the whistleblower protection policies for 
thousands of employees in the U.N.'s funds and programs. In short, that 
decision gutted the U.N.'s signature management reform.
    It goes without saying that a strong whistleblower protection 
policy will strengthen an organization in the long run. That is why I 
sponsored legislation that conditions UNDP funding on fair and 
effective whistleblower protection policies. The Secretary-General 
recently issued a bulletin to broaden the U.N.'s ethics rules and 
expand the whistleblower protections. That is certainly encouraging. 
The proof, however, is in the pudding, and I look forward to hearing 
from our witnesses and briefers from the U.N. about whether these 
newly-announced measures are adequate.

      Deceptive Financial Practices by the North Korean Government

    Beyond the management and oversight deficiencies, the Subcommittee 
has obtained evidence establishing that the North Korean government 
engaged in deceptive financial transactions under the guise of United 
Nations activity. In particular, the Subcommittee obtained wire 
transfers and other banking records that document nine transfers, in 
which the North Korean government moved a total of $2.72 million from 
its accounts in Pyongyang to its accounts in Western banks. The banking 
records indicate that the North Koreans routed the transactions through 
a front company in Macau and suggested that the transfers were for the 
``purchase of building[s]'' in Canada, the United Kingdom and France. 
What is most troubling of all, however, is that the North Korean regime 
invoked the name of the U.N. to give the transfers some legitimacy.
    The Subcommittee has confirmed with UNDP and the North Korean 
government that these transactions had absolutely nothing to do with 
any U.N. activities. While it is unclear how the funds were ultimately 
used, these transactions illustrate how this rogue regime was able to 
move large amounts of funds out of North Korea and into the West's 
financial system, dropping the U.N. name as a cover story.
    UNDP officials have advised this Subcommittee that they found these 
transactions deeply disturbing. They stated that they did not know of 
the transactions, and that none of its projects would entail the 
purchase of buildings in North America or Europe. While the funds do 
not appear to have included UNDP money, the key is not that the origin 
of the money in this particular instance, but rather that there are 
loopholes in the system--UNDP itself has admitted that none of its 
controls could have caught this apparent misuse of its name by the 
North Korean regime.
    These transactions represent a cause for alarm. The reason for the 
elaborate measures used to shield these transfers--such as the use of 
the front company, the bogus connection to the U.N., the use of 
buildings or property purchases to justify large transfers--is clear: 
North Korea was trying to shield its financial maneuvers from scrutiny 
and give Kim Jong Il greater access to international financial 
institutions.
    In fact, the North Koreans told us that quite clearly. North Korean 
officials informed the Subcommittee that, following President Bush's 
State of the Union Address in 2002, in which he included North Korea in 
the ``Axis of Evil,'' their government feared that its assets would be 
frozen. So, the regime sought secure paths to funnel its money to more 
secure accounts. The account related to the U.N. activity presented a 
safe route.
    The ostensible connection to U.N. activities is perhaps the most 
troubling aspect of these discoveries. Officials from executive 
agencies have advised the Subcommittee that transactions involving U.N. 
entities would likely receive less scrutiny from bank regulators and 
bank compliance units who may simply assume that such transfers are in 
furtherance of U.N.-related activity. In effect, North Korea's bogus 
description of these transfers as related to UNDP activity is the 
financial equivalent of painting a Red Cross symbol on a Bradley 
Fighting Vehicle.
    The significance is clear. Recently, the U.S. Government has been 
making overtures to the North Korean regime. Officials from the federal 
government recently met with North Korean financial officials to advise 
them on how they could re-enter the international financial system. 
Moreover, Congress may be asked to alter the laws currently prohibiting 
certain transactions from being conducted with North Korean entities; 
it is equally likely that Congress will be asked to increase funds for 
North Korean humanitarian, developmental and nuclear monitoring 
projects. As Congress contemplates these moves, it would be 
irresponsible not to seek assurances that such matters are being 
addressed.
    At the same time, UNDP must determine whether their name is being 
used elsewhere in connection with questionable activities. By 
definition, UNDP operates in countries that are in dire need of 
development assistance. They are dealing with the worst, most 
untrustworthy regimes on the planet. It is deeply disturbing that there 
are no controls in place to prevent such manipulation of UNDP's 
presence. UNDP should take steps to ensure that its name and resources 
are not used as cover for non-UN activities. The United States should 
seek assurances from UNDP that its name, offices and resources are not 
being used by outlaw or corrupt states to facilitate their financial 
shenanigans.

                    Weapons Proliferation Transfers

    Unfortunately, these are not the only type of troubling 
transactions that the Subcommittee has uncovered. The Subcommittee has 
established that UNDP made payments totaling more than $50,000 to an 
entity that, according to a letter from a State Department official, 
has ``ties to a North Korean entity that that has been designated [by 
the U.S. Government] as the main North Korean financial agent'' for 
sales of weapons and missiles. The payments at issue are described more 
completely in a classified annex to the Subcommittee staff report and, 
for reasons of national security, we are precluded from further 
disclosure concerning those matters in an open hearing. Suffice it to 
say, however, that these transactions raise disturbing questions.
    UNDP has responded that it made these payments on behalf of UNESCO, 
another U.N. agency operating in North Korea. While we have no evidence 
to the contrary, it is beside the point: under no circumstances should 
U.N. funds be transferred to an entity connected with nefarious 
activity. U.N. agencies should adopt more aggressive measures to ensure 
that the vendor is not associated with illicit conduct.
    The matters to be examined here today and in the staff report make 
clear both Congress's obligation to have accurate and complete 
information on the agencies it funds with U.S. taxpayer money, as well 
as the obligation of executive agencies to exercise appropriate 
oversight over multilateral bodies such as the United Nations. The 
evidence also demonstrates that UNDP should adopt stronger safeguards 
when operating in totalitarian regimes to ensure that it will not be 
vulnerable to manipulation by the host country.
    Let me be clear: I appreciate UNDP's hard work--they operate in the 
most difficult political and social environments on the globe and seek 
to improve the lives of the world's most downtrodden people. I share 
those objectives and I am encouraged by the constructive dialogue we 
have maintained with UNDP throughout this process. I look forward to 
continuing that constructive discussion with the UNDP representatives, 
as well as our other witnesses today.

    Senator Levin. Thank you, Senator Coleman.
    Senator Coburn, do you have an opening statement.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Just a few short comments. First of all, 
thank you for the work of this Subcommittee in addressing this 
issue. As you know, I have been highly critical for the past 3 
years of the lack of transparency at the United Nations, not 
just at UNDP but at the complete United Nations. And I also 
passed an amendment that passed the Senate 92-1 that said our 
funds ought to be contingent on transparency at the United 
Nations. Now, that was gutted in conference, and so that is not 
our policy. But I can assure you I plan to bring that back up 
each and every time we consider appropriations and 
authorizations for the United Nations.
    There can be no accountability anywhere in the world where 
there is not transparency. UNDP has no transparency. It does 
not even allow the members sitting on its Executive Board to 
see the audits, let alone the Congress to see the audits. And 
so what we find is a very troubling position that the American 
taxpayer finds itself in: Sending money, a quarter of a billion 
dollars this last year, plus another $5.3 billion that we 
contribute, over 21 percent of the United Nations, of which we 
know 40 percent of it is fraudulent and wasted. We know that. 
And yet nobody wants to solve the problem. And whether it is 
for taxpayers here or those people we are intending to help 
throughout the world, without transparency we will accomplish 
nothing of permanent value. And when people question the 
integrity and the ethics of the process, no matter what our 
message is, it goes unheard.
    And so I am going to redouble my effort in terms of 
requiring transparency, both through procedural positions on 
the floor and amendments, and I want to thank the staff of this 
Subcommittee for their diligent work. And so we cannot continue 
doing what we are doing. It cannot continue. The American 
people, as they find out about this, are sick. We are paying 
money to help the North Koreans sell missiles? I mean, that is 
in essence--when you boil it all down, that is what we are 
doing.
    And so it has got to stop, and I look forward to the 
testimony of our witnesses. I thank both the Ambassador to the 
U.N. and Ambassador Wallace for their work and their efforts, 
and I look forward to the questioning.
    Senator Levin. Thank you, Senator Coburn.
    Now let me welcome our first panel to this morning's 
hearing. We are delighted to have with us Zalmay Khalilzad, the 
U.S. Ambassador to the United Nations, and Mark Wallace, the 
U.S. Ambassador for U.N. Management and Reform. We very much 
appreciate you both being with us this morning. We welcome you 
to the Subcommittee.
    As you are aware, pursuant to Rule VI, all witnesses who 
testify before this Subcommittee are required to be sworn in. 
So at this time I would ask you both to please stand and raise 
your right hand. Do you swear that the testimony that you will 
give before this Subcommittee will be the truth, the whole 
truth, and nothing but the truth, so help you, God?
    Ambassador Khalilzad. I do.
    Ambassador Wallace. I do.
    Senator Levin. We are going to be using a timing system 
today. We would appreciate it if you could give your oral 
testimony in 5 minutes. Your entire testimony, of course, will 
be made part of the record. About a minute before the 5 minutes 
is up, there will be a red light--the red light comes at 5 
minutes, but the light will change from green to yellow about a 
minute before the red light comes on.
    Ambassador Khalilzad, why don't you go first. Again, let me 
give you a special welcome. It is always great to see you, 
whether it is here or in more difficult areas of the world--at 
least I think they are more difficult than the Subcommittee. 
But it is great to see you again.

 TESTIMONY OF HON. ZALMAY KHALILZAD,\1\ U.S. AMBASSADOR TO THE 
               UNITED NATIONS, NEW YORK, NEW YORK

    Ambassador Khalilzad. Thank you. Mr. Chairman, Senator 
Coleman, and Senator Coburn, it is an honor to appear before 
this Subcommittee. I want to thank you for your leadership in 
looking into the issue of the North Korean and UNDP 
interaction. It is a very worthwhile investigation. Thank you 
also for the opportunity to discuss our efforts to promote 
transparency and accountability within the United Nations 
generally.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ambassador Khalilzad appears in the 
Appendix on page 63.
---------------------------------------------------------------------------
    The United States, as one of the founders of this 
institution, designed the U.N. to maintain international peace 
and security, promote economic and social advancement, and 
reaffirm faith in fundamental human rights. Though we all know 
its limitations, the U.N., including UNDP, serves our 
interests.
    I have personally seen in Afghanistan and Iraq the 
significant contributions the United Nations can make when it 
has the right mandate and the right leadership in the field. 
The United States has a great interest in ensuring that the 
United Nations succeeds as an institution.
    When I testified before the Senate Foreign Relations 
Committee on March 15 last year, as the President's nominee to 
serve as the U.S. Permanent Representative to the United 
Nations, I said that one of my principal goals in New York 
would be to promote effective, efficient, transparent, 
accountable, and ethical management of the United Nations. 
Since my arrival at the U.S. Mission last spring, my staff and 
I have been striving to fulfill this objective, focusing on a 
number of key U.N. management reforms in order to make the U.N. 
more effective and to ensure that the U.S. taxpayers receive 
value for the money we pay in assessed and voluntary 
contributions.
    In my opening remarks today, I would like to cite four 
recent achievements related to reform that apply to the U.N. in 
general:
    First, establishment of the Independent Audit Advisory 
Committee. In November of last year, the General Assembly 
elected five individuals to serve as the first members of this 
committee, including David Walker of the United States, who is 
both the Comptroller General of the United States and current 
head of the U.S. Government Accountability Office.
    Second, the extension of the U.N. Ethics Code to apply 
overall to the U.N. System, including the U.N. Funds and 
Programs.
    Third, continuation of the work of the United Nations 
Procurement Task Force which to date has identified ten 
significant instances of fraud and corruption involving tainted 
contracts worth $610 million.
    And, fourth, Mr. Chairman, the establishment of a new 
framework for mandate review.
    Despite these four achievements, we still have a long way 
to go to achieve the U.N. reform that we want in terms of 
accountability and transparency. For example, significant work 
remains to be done in order to achieve substantive progress in 
the area of mandate review.
    We also have a considerable stake in advancing needed 
reforms with respect to U.N. Funds and Programs. The United 
States provides some $3 billion a year to U.N. Funds and 
Programs and Specialized Agencies. These programs do important 
and valuable work, as you said, Mr. Chairman and Senator 
Coleman, throughout the world. Therefore, we want to ensure 
that the resources devoted to them are delivered efficiently, 
effectively, and with oversight and accountability to the 
world's neediest people and that they are used for their 
intended purposes.
    To pursue these objectives in practical ways, the U.S.-U.N. 
Mission has launched an initiative that we call UNTAI, the U.N. 
Transparency and Accountability Initiative. Since May 2007, the 
U.S.-U.N. has made progress in some of eight UNTAI reforms 
outlined in my written testimony, such as the extension of 
jurisdiction of the U.N. Ethics Office over the U.N. Funds and 
Programs, as well as a new policy providing for the 
availability of prospective internal audit reports to member 
states. We will remain diligent, Mr. Chairman, in pursuing and 
pushing for the implementation of the entire package of reforms 
and will continue to press for the availability of past audits.
    I would like to turn to the issue concerning North Korea. 
The mission of the United States in the United Nations raised a 
number of concerns with regard to this program sometime ago. 
The UNDP in North Korea established its mission in 1979. The 
purpose was to ``support and supplement the national efforts of 
the DPRK at solving the most important problems of their 
economic development and to promote social progress and better 
standards of life.'' This effort reflected the international 
community's concern for the immense suffering of the people of 
North Korea. The program was shut down, as you said, Mr. 
Chairman, in March 2007 because the DPRK refused to accept the 
application of U.N. rules and regulations that apply across 
UNDP and that were agreed to by the UNDP Executive Board in 
January 2007.
    In June 2006, the United States raised the issue of the 
irregularities of UNDP's operations in North Korea with UNDP 
officials. Specifically, our concerns related to whether the 
UNDP acted in North Korea in violation of U.N. policies and 
rules by, first, making payments in hard foreign currency; 
second, utilizing staff seconded from the North Korean 
Government in core functions; and, three, failing to make 
adequate project site visits. The purpose of this important 
triad of financial controls was to ensure that development 
money directed to North Korea would serve its intended 
beneficiaries--the North Korean people.
    On May 31, 2007, a Board of Auditors preliminary inquiry, 
initiated by the Secretary-General and the UNDP Executive 
Board, validated USUN concerns in those areas. In this period, 
the U.S. Government received further information that indicated 
the possible misuse of funds in the DPRK programs. USUN shared 
their concerns about this new information and inquired about 
these matters with UNDP officials. We also proceeded to engage 
with the UNDP at the technical level to resolve our concerns, 
providing representative samples of the information we had 
received.
    Mr. Chairman, the USUN and UNDP could not come to closure 
on the facts of what had happened. Therefore, USUN sought an 
independent investigation of UNDP operations in the DPRK. At 
the end of September, UNDP established the External Independent 
Investigative Review Panel, led by Mr. Nemeth, the former Prime 
Minister of Hungary, to review UNDP operations in the DPRK. We 
have met with Mr. Nemeth and his staff on several occasions and 
have emphasized our strong commitment to providing all possible 
assistance in order to facilitate the work of the Review Panel. 
Our understanding is that Mr. Nemeth will complete his 
investigation in March 2008. We look forward to his report.
    Mr. Chairman, Senator Coleman, Senator Coburn, these are 
critical issues that affect not only the situation in North 
Korea but also, as you have all stated, the trust and 
confidence of Americans and other donors to the UNDP, as well 
as those in the less developed world who share an interest in 
an effective and efficient UNDP and the vitally important goal 
that aid--humanitarian or development aid--is delivered to its 
intended recipients, the world's neediest people.
    Mr. Chairman, I thank you and Senator Coleman and Senator 
Coburn and the Subcommittee for your interest in this matter. I 
look forward to reviewing in detail the report of the 
Subcommittee. I want to state a firm commitment to you that my 
goal is to work with UNDP and the U.N. at large to make it as 
effective and as efficient as possible to serve the intent for 
which it was created and the purposes for which the Americans 
contribute their hard-earned money to that organization.
    Thank you very much, Mr. Chairman.
    Senator Levin. Ambassador Wallace, do you have a statement?

 TESTIMONY OF HON. MARK D. WALLACE, U.S. AMBASSADOR FOR UNITED 
       NATIONS MANAGEMENT AND REFORM, NEW YORK, NEW YORK

    Ambassador Wallace. I would like to thank the Chairman, 
Senator Coleman, and Senator Coburn. Obviously, Ambassador 
Khalilzad and I are a team at the USUN Mission, and his 
statement speaks for both of us, and I look forward to 
answering any questions that you have.
    I would like to thank you all and your staff for, 
obviously, the hard work put into this report on a subject 
matter that is obviously important to us at the mission. Thank 
you.
    Senator Levin. Thank you so much.
    Ambassador Khalilzad, a number of problems here have been 
shown to exist with the U.N. program. Despite those problems, 
do you believe that the program is worth supporting?
    Ambassador Khalilzad. I do, Mr. Chairman.
    Senator Levin. And why?
    Ambassador Khalilzad. Because, as you have stated, these 
programs within UNDP do serve the purposes of providing 
humanitarian assistance or economic development for needy 
people around the world. I have seen them work with us in areas 
of great importance to us, the two places where I have had 
direct experience--Afghanistan and Iraq, both very important 
for our national security interests and for the future of the 
broader Middle East, an area of the most importance 
geopolitically for us at the present time.
    So I think they do work well with us. But for them to do 
what they need to do, there has to be appropriate oversight, 
and there has to be care taken that the monies go to the 
purposes for which they have been dedicated.
    Clearly, in the case of North Korea, there were problems, 
and we were the ones that brought those problems to the 
attention of the UNDP, and we are working with them to address 
those. But I believe that this is a very worthwhile program in 
terms of America's national interests.
    Senator Levin. By the way, let's have an 8-minute first 
round. I should have announced that.
    There are a number of issues I want to focus on. One is the 
allegation about the $2.7 million which were transferred by the 
North Korean Government to its embassies. Both Senator Coleman 
and I spent some time in our opening statement describing that, 
and I think you are probably familiar with it. There are a 
number of issues that are involved in that, its use, misuse of 
the imprimatur of the U.N. in an account to make it appear as 
though somehow or other that transfer involved the U.N. And I 
am wondering if you would agree, Ambassador Khalilzad, with 
what our staff has found, that the $2.7 million were North 
Korean funds and not U.N. funds. That is our staff finding. Do 
you agree with that finding?
    Ambassador Khalilzad. I have no reason to judge otherwise. 
It is clear--and that is one of the concerns we have had, that 
the UNDP account in DPRK's Foreign Trade Bank was not 
supervised and attended to appropriately. And that is the kind 
of information and allegation we had. And one of the things 
that I am grateful that you have looked at, and hopefully, Mr. 
Nemeth would also deal with, is the oversight, the issue of 
oversight. I think as you judged overall there were some 
problems with regard to the oversight by the UNDP management of 
the account.
    Senator Levin. All right. Now, it is understandable why 
people might believe that those funds were U.N. funds, because 
of the way they were characterized in the wire transfers.
    Ambassador Khalilzad. Right.
    Senator Levin. That is understandable that that impression 
was created.
    Ambassador Khalilzad. Right.
    Senator Levin. But knowing now what we know, it was our 
finding that, in fact, those were North Korean funds, which 
were made to appear to a recipient that they had some 
connection with the U.N.
    Ambassador Wallace, would you agree, knowing what you know 
now, that those were North Korean funds, that $2.7 million?
    Ambassador Wallace. Senator, I appreciate the inquiry, and 
I appreciate the close analysis that you gave to this matter. I 
think the answer is that we do not know, and I would assert, 
with due respect to the Subcommittee and the staff who did work 
very hard, I do not think any of us know.
    Senator Levin. All right.
    Ambassador Wallace. Here is the reason why. We know two 
facts that have been found by UNDP's internal audits. We know 
they have been found by the U.N. Board of Auditors and now this 
Subcommittee. They are that we know that UNDP really operated 
in the absence of financial controls in North Korea and that 
they paid in cash currency. The second part of that is that we 
know and have found that the North Korean Government used this 
program in a way for less than desirable uses.
    Given those two facts, we have documents in front of us 
that you all have seen that indicate the transfers were made in 
some way with the imprimatur of the U.N. saying that it was 
U.N. money, if you will. So if you have two entities, one that 
did not follow its rules, one that admittedly was engaging in 
abuses of the U.N. system, and you have documents that suggest 
that the money was U.N. money, I think it would be somewhat 
inappropriate to give a free pass and say we do not know that 
is U.N. money, particularly since cash is fungible, sir.
    Senator Levin. All right.
    Ambassador Wallace. If cash is paid into that system and it 
is cash and cash is going out, you do not know where it came 
from. So I think we do not know.
    Senator Levin. I understand. Our staff has concluded that. 
You say you do not know. Would you agree at least that you 
cannot say that those were U.N. funds?
    Ambassador Wallace. Sir, I believe that cash is fungible 
and----
    Senator Levin. Do you believe they were U.N. funds?
    Ambassador Wallace. I don't know, sir.
    Senator Levin. You cannot represent then to this 
Subcommittee that these were U.N. funds.
    Ambassador Wallace. I could not represent to this 
Subcommittee that I know for certain that those were U.N. 
funds.
    Senator Levin. Now, in the briefing last May 23, you did 
represent that they were U.N. funds. Is that correct? And I 
understand why, I understand the documents and all the rest. 
But is it accurate to say that last May 23 you did tell the 
Senators that, in fact, these were U.N. funds?
    Ambassador Wallace. I took the documents at face value, 
Senator, and I did not have the benefit of a briefing with the 
North Korean mission, and you----
    Senator Levin. For whatever reason, that was your statement 
at the time.
    Ambassador Wallace. Yes, Senator.
    Senator Levin. You no longer would make that statement 
because now you don't know. Is that fair?
    Ambassador Wallace. I would say I don't know where the 
funds came from.
    Senator Levin. All right. Now, on another matter--and I 
understand the reason for these confusions, and if we had 
decent audits and if the North Korean Government were 
transparent, this would not have happened, presumably. I just 
want to clarify, however, because these allegations and 
statements got to the press, that in that particular case that 
they were North Korean funds--excuse me, that they were U.N. 
funds. Our staff has found that they were North Korean funds. 
You, Ambassador, are now saying--I understand why--that you 
cannot say one way or the other. But that is different from 
what you briefed Senators back last May when you flat out 
alleged that these were U.N. funds, for reasons that you have 
given, and we understand those reasons. I am just trying to 
clarify the record, including the public record, because a lot 
of statements have been made publicly here.
    Now, the statement has also been made that $7 million were 
paid into the North Korean UNDP account. It appears now--this 
is an account called NCCUNDP. This is an account designated to 
receive UNDP development funds. Do we know now or do you 
believe, Ambassador Wallace, that $7 million of U.N. funds were 
deposited in that account? Based on what you now know, not what 
you were able to ascertain last May but what you now know.
    Ambassador Wallace. Senator, we have a limited picture of 
documents that are ostensibly official UNDP documents that 
appear to show transfers and misuses of UNDP funds. We continue 
to have representations and evidence that suggest monies were 
paid directly to the North Korean Government. I believe, based 
upon the findings of its internal audit reports of the Board of 
Auditors and this Senate Subcommittee, that payments were made 
in cash directly to North Korean Government officials.
    So I would submit to you, Senator, we don't know how much 
money was paid.
    Senator Levin. Talking about that bank account, that North 
Korean bank account entitled NCCUNDP, do you believe now that 
$7 million was transferred to that account by the U.N.?
    Ambassador Wallace. It would appear that all the transfers 
went through that account, Senator. So whatever the monies that 
were deposited into North Korea--and I think that is another 
item that we don't know, and the numbers were ranging very 
broad. So I would submit to you, Senator, that whatever monies 
were paid into North Korea somehow went through that bank 
account.
    Senator Levin. All right. So is it still your belief--I am 
asking you for your belief--that $7 million of UNDP funds were 
transferred to a government entity called the National 
Coordination Committee for UNDP, NCC? Is that still your 
belief?
    Ambassador Wallace. It is my belief that it may be even 
more. Whatever the total amount of funds I believe are somehow 
tainted or went through that account, and one of the questions 
that I think that is an open issue, frankly, is the total 
amount of money that was actually paid by UNDP and other 
agencies in that country. Whatever that total amount of money 
was I believe went through the FTB in some fashion.
    Senator Levin. All right. The answer then is yes, you 
believe that at least $7 million was transferred to that 
account by the UNDP. Is that correct? Based on what you now 
know, you believe it.
    Ambassador Wallace. As I said, Senator, I would testify 
again, whatever amounts of money--and I think that they are 
greater than that amount of money--went through the FTB in some 
fashion one way or the other because of their relationship 
there. Frankly, we don't have a complete picture, so we are 
all, I think, speculating here. To the extent that we had the 
ability to forensically look at their bank accounts and 
otherwise, I think we could be certain. What I do find 
disturbing is that after looking at internal audits, the Board 
of Auditors, a Senate PSI investigation, and the U.S. Mission 
to the U.N., I don't think any of us can say with certainty the 
amount of money that UNDP delivered North Korea, either on 
behalf of itself or the variety of U.N. agencies that it paid 
for.
    Senator Levin. I am just asking your belief, and you 
believe that at least $7 million was put by UNDP into that 
account. That is your belief, your current belief. I am asking 
you a simple question. At least that much you believe was 
transferred by UNDP to that account.
    Ambassador Wallace. Well, when you say ``transferred,'' 
Senator, I believe there were payments in cash that went into 
that account. I believe that there were transfers to that 
account. I believe we don't know the total amounts.
    Senator Levin. Finally, Ambassador Khalilzad, do you 
believe that the UNDP operations in North Korea were corrupt or 
tainted by widespread corruption?
    Ambassador Khalilzad. I have seen no evidence, and the 
people, including Ambassador Wallace, who have worked with who 
have looked at this, none of them have brought to me evidence 
that the management headquarters was involved in corruption or 
corrupt practices or profited from their supervision of the 
program in North Korea.
    What it looks to me like--and I am giving you a personal 
judgment at this point based on what I have seen, and we are 
going to wait to read your report in detail, and Mr. Nemeth's--
is that there was lax supervision and not the kind of detailed 
management and the kind of accountability and transparency that 
should have been performed was not performed. But I don't 
believe the management was involved in corrupt practices.
    Senator Levin. All right. Would you agree with that, 
Ambassador Wallace?
    Ambassador Wallace. We have never asserted that anyone 
profiteered or took advantage of monies for the personal 
account of any UNDP official that we are aware of. We have 
obviously focused on the absence of financial controls.
    Senator Levin. And would you describe, therefore, those 
operations as corrupt or tainted by widespread corruption?
    Ambassador Wallace. I would characterize them as mismanaged 
and with gross neglect.
    Senator Levin. Does that mean you do not agree with the 
description of ``corrupt'' or ``characterized by widespread 
corruption''?
    Ambassador Wallace. We do not believe nor have we seen any 
corruption in the sense that a UNDP official profited from 
business in North Korea, Senator.
    Senator Levin. Thank you. Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman. I just thought I 
would clear up this issue of the $2.72 million that moved from 
a North Korean account and a bogus account. If staff could put 
up some of the documents because I want to make sure we have 
stats so we know what we are talking about here. We are talking 
about the IFTJC and the other document here.\1\ But just so we 
are clear, the Subcommittee's statement about moving $2.7 
million, now that is--UNDP maintains that it is not UNDP money. 
But I do believe that what the Subcommittee then states in a 
footnote is that, ``We were not given unfettered access to the 
system. We have not had the opportunity to review original 
receipts, so we really do not know where the money came from. 
We cannot establish it was UNDP money. We simply don't know. 
UNDP says it is not theirs and that they have never seen, in 
fact, some of these records.''
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    \1\ See Exhibit 8, which appears in the Appendix on page 215.
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    Ambassador Khalilzad, beyond the North Korea situation, 
this issue of management reform and transparency has been a 
concern of this Subcommittee for a while. The outcome 
document--I think it was in 2005--raised this issue. One of the 
issues has to do with program review, and I think in your 
statement you talked about progress being made.
    To date, there are over 9,000 various U.N. programs. Is 
that correct?
    Ambassador Khalilzad. Mandated.
    Senator Coleman. Mandated. To date, has there been a 
program review of a single one of those?
    Ambassador Khalilzad. Well, at the present time, as we 
speak, the humanitarian mandates are being reviewed by the 
Secretariat as part of this agreement that we made 3 or 4 
months ago of a framework agreement for mandate reviews. The 
9,700-plus mandates are a huge burden on the organization, and 
there are mandates that are of no relevance anymore. So, 
therefore, this has been a top priority of mine, and we have 
made an agreement on how to proceed with the review, and it has 
started.
    Senator Coleman. My frustration is we have had an agreement 
to proceed. I was with the Secretary-General last year with 
Senator Biden, and we had an agreement on how to proceed in 
Darfur and that we were going to have troops on the ground. And 
in spite of agreements to proceed, we have seen no action. And 
my concern here is we have an agreement to proceed, and 3 years 
after we raised--perhaps 4 years after we raised the issue, we 
are still proceeding under an agreement to proceed.
    Ambassador Khalilzad. Right.
    Senator Coleman. So I just kind of lay that out there and--
--
    Ambassador Khalilzad. Well, if I could say something, 
Senator Coleman, on your example of Darfur, of course, the 
problem is mostly with Bashir, that he is not allowing the U.N. 
to do things.
    With regard to the mandate, it is mostly the problem within 
the U.N. System, so there is more of a burden, I think, with 
regard to----
    Senator Coleman. I understand, but in both instances--I 
remember vividly talking to the Secretary-General, who was very 
positive about the agreement with Bashir.
    Ambassador Khalilzad. Right.
    Senator Coleman. And that was a year ago, and travesty is 
still occurring in Darfur. And that is my concern with the U.N. 
We have a lot of agreements that require action.
    Ambassador Khalilzad. Right.
    Senator Coleman. Whistleblower protection is another area. 
It is an important area. I would hope after the beginning of 
this inquiry that, in fact, we would have whistleblower 
protection across the board. The Secretary-General in January 
came out and said whistleblower protection should apply to all 
the agencies.
    Ambassador Khalilzad. Right.
    Senator Coleman. We are still debating it, though, with 
UNDP. Is that correct?
    Ambassador Khalilzad. We are, but I think we made, as you 
noted in your statement, progress that the Secretary-General 
said it should apply to all U.N. Funds and Programs.
    Now, the particular case that you have mentioned with 
regard to the person, the whistleblower at UNDP, there has been 
a disagreement in terms of the jurisdiction applying by the 
Ethics Office of the Secretariat to this case, and this is part 
of the Nemeth group that will look at. But we have made 
progress, but not sufficient, in our view. We want and we will 
work for the coverage of the Secretariat application to all 
U.N. Funds and Programs. That is where we are, and we will push 
for that.
    But we have made progress, and I do not want to oversell 
how much progress we have made. We have made some progress, but 
there is a long way to go.
    Senator Coleman. And I applaud the Secretary-General for 
his statement. His policy covers--is this correct, Ambassador 
Wallace? His policy would cover contracted employees? UNDP said 
that they have had whistleblower protection a long time. Does 
their current policy cover contractors?
    Ambassador Wallace. I think you raise an issue that is 
really a big fundamental issue in the U.N. System. There is a 
big difference between staff and contractors. We see the U.N. 
on a core resources budget having a finite number of staff but 
thousands and thousands of additional people under a contract 
that are performing staff-like functions. And there is a big 
debate going on whether those people that are performing staff-
like functions should be covered. I believe that if people are 
performing staff-like functions, I think they should have the 
benefits of being protected like staff.
    Senator Coleman. And the case in question, Mr. Shkurtaj was 
a contractor. And so if you simply----
    Ambassador Wallace. Performing core work.
    Ambassador Khalilzad. Core work.
    Senator Coleman. Doing core work. He was a manager. He was 
overseeing a program. And if you simply terminate his contract, 
you would argue there is no retaliation. But that is exactly 
what whistleblower protection should be protecting against. And 
UNDP comes and says, well, we have had protection. I would 
maintain that is insufficient. That is why the Secretary-
General issued the policy. And then to come back and to argue 
the policy does not apply to others other than those within the 
Secretariat, and then to maintain--and I believe with UNDP they 
have about 9,000 staff versus about 20,000 contractors. Am I in 
the ball park on that?
    Ambassador Wallace. I believe it is even more contractors, 
but it is not clear to me, Senator.
    Senator Coleman. If staff could put up some of the charts. 
We have talked about this International Finance and Trade Joint 
Company (IFTJ), and at the same time, we have talked about the 
Foreign Trade Bank. Just so that we understand, the Foreign 
Trade Bank is an entity of North Korea. Is that correct? 
Foreign Trade Bank?
    Ambassador Wallace. That is what we understand, Senator.
    Senator Coleman. A government entity.
    Ambassador Khalilzad. Right.
    Senator Coleman. What the Staff Report is showing is that 
you have individuals who are employees of the government entity 
are also now involved in running this IFTJ. In effect, the IFTJ 
is a phony entity. Is that a fair statement?
    Ambassador Wallace. Senator, I am not familiar with--I know 
what I know about IFTJ. Certainly it is a suspicious entity.
    Senator Coleman. OK, but there is no question that the IFTJ 
is not an official North Korean Government agency. Is that 
correct?
    Ambassador Wallace. Ostensibly, yes, sir.
    Senator Coleman. Ostensibly, yes. But, in fact, the same 
people who run the Foreign Trade Bank are government officials. 
Their cards were interchangeable; they go back and forth. And 
the IFTJ is the entity through which the $2.72 million was 
transited then to embassies in Canada or the U.K. and Europe. 
Is that correct?
    Ambassador Wallace. That is what the documents reflect, 
Senator.
    Senator Coleman. I have a little point, one last question 
to you, Ambassador Wallace, but it is a little point that, I 
have to tell you, gets my goat. I do not know where this is in 
the documents, but there is a document and it is labeled 
``Elsingore S.A.'' It is a packing list. This is UNDP money 
providing for the North Koreans certain member--this is a 
development program. Is that correct?
    Ambassador Wallace. Yes, Senator.
    Senator Coleman. There were books that were purchased with 
Development Program money. Is that correct?
    Ambassador Wallace. Yes, Senator.
    Senator Coleman. There is no question about the 
authenticity of the document.
    Ambassador Wallace. Yes, Senator.
    Senator Coleman. And among the purchases, the books 
purchased with Development Program money, is a book labeled 
``Second Strike: Arguments About Nuclear War in South Asia''; 
``The Secret History of the CIA''; ``Taming American Power''; 
three others--I have a score of other books. ``The End of 
Iraq,'' Galbraith book; ``Contemporary Nuclear Debates.'' This 
is ``Deadly Arsenals,'' ``Reshaping Rogue States.'' I could go 
on. A number of ``Second Strike: Arguments About Nuclear War in 
South Asia,'' a copy of that.
    Am I missing something? Could you let me know, is there any 
development purpose that would be accomplished by UNDP funding 
this for the North Koreans?
    Ambassador Wallace. No, Senator, and I truly hope you don't 
ask me to do a book review while I am here.
    Senator Coleman. OK. No further questions at this time, Mr. 
Chairman.
    Senator Levin. Thank you, Senator Coleman. Senator Coburn.
    Senator Coburn. Thank you. Let me go back and make a couple 
of points. All the Korean funds are fungible, right? They are 
all fungible. So whether they came from their drug sales, which 
we know they are doing, or whether they came from selling 
missiles, or whether they were deposited in this account of 
money that we had given them through UNDP, we don't know. 
Correct? We don't know the answer to that.
    Ambassador Wallace. I think that is correct, Senator, and I 
think it is very important because I think we are having a 
tendency to be somehow at odds over the amount of monies there. 
The reality is we don't really know, I don't believe. We can 
only know the statements that are made by UNDP's audits, the 
other agencies that they paid in. We know that they paid in 
cash. We know that there were transfers. And we know they were 
all somehow tainted by this banking system.
    So I think that the debate about the total figure, we can 
have that debate, and I have lots of facts about----
    Senator Coburn. OK. I don't care what----
    Ambassador Wallace. I just know it is a lot of money. I 
don't know what the----
    Senator Coburn. I don't care what the total figure is. I 
just want to establish the point is we don't know where the 
money--it is a deep, dark black hole and nobody knows where the 
money is.
    There was an audit done on this, correct?
    Ambassador Wallace. There were in 1999, 2001, and 2004 
and----
    Senator Coburn. And that is not available to us as U.S. 
Senators, correct?
    Ambassador Wallace. That is correct, sir.
    Senator Coburn. And is there a good reason why, when 
America contributes 22 percent of the U.N. budget and a smaller 
percentage, 10 or 11 percent, of UNDP's total budget, that we 
should not be able to see the audit results of programs within 
UNDP?
    Ambassador Wallace. In fact, it has been one of the top 
reforms that I have fought to adopt at the U.N. We need to have 
those audits. We can't follow the money----
    Senator Coburn. I am not disputing that. I am saying is 
there a cogent reason why we should not have that information.
    Ambassador Wallace. The only reason offered by UNDP is that 
it reveals internal decisionmaking. And my answer to that, 
Senator, would be: If there is internal private matters, Social 
Security numbers or the like, that is sensitive to the people, 
you can redact that information. I think otherwise that 
information should be made available to member states and, 
frankly, to the Senate, and it should be public, in my opinion.
    Senator Coburn. Senator Levin asked Ambassador Khalilzad 
about the potential good that UNDP can do. How do we know if we 
do not have metrics and we are not measuring it? How do we know 
what UNDP is doing if there is not a metric set out there to 
measure and then we don't compare what their goals are against 
what they accomplished? How do we know that UNDP is positive in 
its effect other than we are spending a lot of money?
    Ambassador Khalilzad. Well, to go back to the audit issue, 
I completely agree with Ambassador Wallace that we need to have 
access to it. Some of the reasons, when we have had the 
discussion with them, have had to do with the kinds of things 
that Ambassador Wallace talked about, but they also mentioned 
that previously there was no decision that they would be made 
public and, therefore, information that is in there, countries 
would be sensitive to be shared with other countries with 
regard to what is happening in their programs. And Ambassador 
Wallace has suggested this idea that maybe there would be a way 
to overcome that, redaction. So we are pushing for that.
    As far as knowing whether we are achieving goals, of 
course, when they build a school, we know whether they have 
built a school there, development projects that we know that 
are taking place. But I think to have the fullest confidence 
that they are achieving the goals that they have sought to 
achieve, we need to have access to their audit reports. There 
is no question about that.
    Senator Coburn. Why should there be any effort to hide 
where the money goes? I mean, why should----
    Ambassador Khalilzad. Absolutely.
    Senator Coburn. Why shouldn't the whole world know? I mean, 
if what we are doing is humanitarian in our goal and supposedly 
ethical in how we accomplish it, why would we not want sunshine 
to be on it? So how is it that we can stand and continue--by 
the way, the Federal Accountability and Transparency Act is a 
Federal law that requires the U.N. to give us where they spend 
our money. You all are aware of that. And so I suspect, since 
we are not going to get that from the U.N., we are going to see 
a large court case come up that will force or tie U.S. 
contributions to the realization that the U.N. has to be 
compliant in exposing where our money is spent.
    Ambassador Wallace, UNDP's own auditors, the U.S. State 
Department, and now this Subcommittee report all found that 
UNDP had committed serious wrongdoing in terms of its North 
Korean programs. You said you did not think they were criminal, 
but at the best, it was highly incompetent. Yet the UNDP has 
denied each charge and has already begun spinning this 
Subcommittee report as exonerating their management of the 
programs. And when their own core manager, who was a contract 
employee, raised something about it, what did they do? They 
canned him. Correct? Are there any insurances that our 
contributions right now that are going to go forward this next 
year are going to be safe from enriching other rogue and 
terrorist states? How do the American people know that if we 
give another quarter of a billion dollars to UNDP next year 
that it is not going to get wasted or is not going to 
supplement somebody's missile sales to somebody else? How do we 
know that?
    Ambassador Wallace. Senator, I think in certain countries 
where there is much more transparency--and frankly, the 
countries that are a challenge are the politically difficult 
countries around the world. I think in those politically 
difficult countries, if we are not adhering to the strictest 
U.N. financial regulations, which are on the books, which UNDP 
did not follow in North Korea, I could not sit here today and 
attest that I knew where the money went. When you are paying in 
cash currency, you have government seconded officials doing 
core tasks, and you have greatly restricted project sit visits, 
you do not even get to see the school or the development 
project at issue, I am worried. And that is one of the reasons 
why we raised concerns.
    So I would submit to you, Senator, that I am definitely 
concerned about certain areas where UNDP does business. I think 
UNDP is a really important partner to the United States. I 
think they could do very good work. But if they are not going 
to follow U.N. financial regulations in these tough 
environments, I cannot in good faith come to you, sit before 
you, and swear to you that I knew where U.S. taxpayer dollars 
went.
    Senator Coburn. So has the President or the Administration 
suggested that we reduce the dollars that are going to UNDP 
until we know where the money is going to go?
    Ambassador Wallace. I believe, Senator, that our request 
was about $100 million last year.
    Senator Coburn. OK. I want to make one other point because 
it is fairly concerning to me. Ambassador Hill, who is leading 
our Six Party Talks, some of the information in this report he 
wanted to keep classified even though the Treasury Department 
said there was no reason to do that. The Treasury Department 
said this information should not be classified since it did not 
reveal methods and sources.
    So is there any other reason why the State Department 
authorized Ambassador Hill to censure the information other 
than to protect the reputation of the Six-Party Talks? Is there 
a political reason why we are not allowing this information to 
be put out there when, in fact, it has no true classified 
value? Is there a political reason why we are doing that?
    Ambassador Khalilzad. I am not aware of any political 
reasons for doing that, Senator.
    Senator Coburn. OK. Well, it is very concerning to me that 
here we find ourselves with a great intent of the American 
taxpayer giving money through the U.N., counting what we do--it 
is about $5.6 billion a year. We are by far the largest 
contributor in almost every program, and that we have members 
of our own government stopping our ability to see transparently 
whether or not the American taxpayer is getting value.
    I have a lot of other questions. I think I will submit 
them, if I may, for the record and ask that I get a written 
response to them rather than tie you up now. And I thank the 
Chairman.
    Senator Levin. They will be made part of the record, and we 
will leave the record open for the usual amount of time so that 
other questions can be asked.
    As a matter of fact, we did end our support of this 
program. Is that not correct?
    Ambassador Khalilzad. We have. The program has ended.
    Senator Levin. And the reason that we did is because they 
did not comply with their own rules and regulations. Is that 
correct?
    Ambassador Khalilzad. When UNDP did, the North Koreans said 
no, and, therefore, the program was suspended.
    Senator Levin. And so what UNDP did was, under our 
insistence, say that you are not following your own rules and 
regulations, policies and practices.
    Ambassador Khalilzad. Right.
    Senator Levin. And so they ended their program as a result 
of our insistence.
    Ambassador Khalilzad. Absolutely. We played a vital role in 
bringing about changes in the UNDP practices, which the North 
Koreans rejected to comply with, and, therefore, the program 
was suspended.
    Senator Levin. Now, if our mission to the U.N. had been 
given access immediately to UNDP audits, would that have 
eliminated some of the controversy which surrounded the 
operations of the UNDP in North Korea?
    Ambassador Khalilzad. I believe it would have contributed, 
it would have helped, certainly.
    Senator Levin. All right. Now, Dr. Dervis' proposal that 
the UNDP Executive Board members get ``read only'' access to 
future UNDP audits, is that acceptable? Why should we just be 
able to read them and not make copies of them?
    Ambassador Khalilzad. I think that it is a step in the 
right direction compared to where he was, but it is not 
sufficient. We disagree with him on not having access, complete 
access, and also not getting existing audits that have been 
done in the past.
    Senator Levin. And have you made that clear to Dr. Dervis?
    Ambassador Khalilzad. I have.
    Senator Levin. Is the Administration recommending that we 
continue support of UNDP even though we do not get copies, and 
copies are not made public of those audits?
    Ambassador Khalilzad. Yes.
    Senator Levin. And why?
    Ambassador Khalilzad. Because we believe what we get from 
UNDP otherwise is very important for our national interest, 
and, therefore, while we want those changes that we talked 
about, we want access to the audits, we want other changes. We 
believe we have a variety of weapons to use and that 
terminating all assistance is not appropriate at this point to 
achieve those goals.
    Senator Levin. Now, UNDP disavowed the jurisdiction of the 
U.N. Ethics Office, and they declined to allow the office to 
review the case of Mr. Shkurtaj. Do we agree with that 
decision?
    Ambassador Khalilzad. We do not agree with that decision of 
UNDP.
    Senator Levin. And what actions have we taken to overcome 
that decision?
    Ambassador Khalilzad. We are now--both sides agree, the 
Secretariat and UNDP, to have the Nemeth Committee look at how 
this gentleman was treated.
    Senator Levin. But also the process?
    Ambassador Khalilzad. With regard to the process, again, 
there is discussion going on among the U.N. Funds and Programs 
and the Secretariat with regard to this issue to develop a 
common set of approaches that they could all agree to. And we 
have made our point clear that we believe that the Secretariat 
should have jurisdiction over all U.N. Funds and Programs. But 
they are in discussion among themselves.
    Senator Levin. Thank you. Senator Coleman.
    Senator Coleman. Ambassador, do you know whether as part of 
the Six-Party Talks, whether there is an effort for UNDP to go 
back into North Korea? Do you know whether that has been on the 
table?
    Ambassador Khalilzad. I am not aware of that, Senator. I 
have received no indication of that kind.
    Senator Coleman. Have there been any discussions about 
possibilities of increasing humanitarian aid for North Korea?
    Ambassador Khalilzad. Not that I have been instructed with 
regard to.
    Senator Coleman. But if that were to be, then UNDP would be 
the agency that would typically administer the aid? Is that 
correct?
    Ambassador Khalilzad. That is one of the instruments.
    Senator Coleman. Could we look just very quickly at the 
organizational chart? If that happens, my concern is that what 
we saw before, we don't go through it again. The organizational 
chart is the UNDP.\1\ That is their structure in North Korea. 
The shaded boxes are--when we talk about seconded, that means 
that the North Koreans place people there.
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    \1\ See Exhibit 4, which appears in the Appendix on page 206.
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    Ambassador Khalilzad. Right.
    Senator Coleman. So these are North Korean agents that are 
working within UNDP, and, in fact, is it correct that they 
include folks who were bank signatories on behalf of the North 
Koreans? These are things that in seconding we have given the 
North Koreans authority, both in terms of the people they 
place, authority over things like bank signatories, certifying 
office functions, contract and travel authorizations, 
maintaining petty cash, maintaining financial aid, these are 
all done by North Korean agents working for ostensibly UNDP. Is 
that correct, Ambassador Wallace?
    Ambassador Wallace. Yes, Senator. It appears that North 
Korean seconded officials were operating in core places, 
including with signature authority. That is what we have 
understood.
    Senator Coleman. And we also understand that UNDP 
operations themselves were subject to searches by North Korean 
security officials, that conversations were monitored. In 
effect, there was no privacy that any UNDP functionaries had in 
operating in North Korea. Is that correct?
    Ambassador Khalilzad. I wouldn't be surprised that those 
would be correct given the nature of that system.
    Senator Coleman. OK. And, by the way, my staff said it is 
not just the shaded. It is a whole range of those that are 
marked as official, official, official, and there are a series 
of them.
    My point is this, that if we go back, if there is 
discussion about aid to North Korea as we deal with the Six-
Party Talks, which we all want to be successful, my hope would 
be that we would operate with a system of transparency and 
accountability. We cannot measure what we have got out of UNDP, 
and I want them to succeed. But I do know you have a system in 
which the North Koreans basically set the terms, and UNDP has 
come back and said that that is the way that other NGOs 
operate, that is the way we operate in other countries. Could 
you respond as to whether that is a sufficient justification 
for what we have found here?
    Ambassador Khalilzad. Not a sufficient justification in my 
view, but they do point out--and I have been told by some of my 
colleagues from the countries who have missions there--that is 
how they operate, the way UNDP did. But that is not acceptable 
in my view.
    Ambassador Wallace. If I could add, Senator, remember what 
UNDP does. UNDP is typically the resident representative in the 
country----
    Senator Coleman. Say that again.
    Ambassador Wallace. The resident representative of the 
Secretary-General, the top U.N. agency official in-country. And 
in Pyongyang, it is our understanding that UNDP made payments 
and delivered aid, development aid, on behalf of its own 
account, but on behalf of a variety of other agencies. So I do 
think that as the top lead official, particularly as they seek 
to implement something called the ``one U.N. System,'' where 
they are the top official around the world, I think that the 
highest standards of financial control, they need to speak to 
that. And in my opinion, I think it is imperative that if you 
are going to deliver aid, no matter where it is, if you do it 
in the absence of financial controls, you are doing it 
irresponsibly.
    Senator Coleman. Thank you, Mr. Chairman.
    Senator Levin. Thank you. Dr. Coburn.
    Senator Coburn. Ambassador Khalilzad, just one other 
question. You answered Senator Levin and you answered Senator 
Coleman that we are getting value from UNDP. How do you know 
that?
    Ambassador Khalilzad. Well, we have to make a distinction 
between the North Korean case, which has had these problems, 
but that is not the entirety of----
    Senator Coburn. Oh, I understand that. I am just saying, 
what statistics, measurements, metrics, or indications tell you 
that we are getting value? In other words, that is a judgment 
you are making. I am not critical of the judgment. I am just 
asking what are the tools you are using to make----
    Ambassador Khalilzad. Well, we do have tools, and I will 
submit it to you in detail for the record. We know what the 
programs are of North Korea. There is appropriate oversight. We 
have not raised questions about oversight with regard to quite 
a number of other countries where there are UNDP programs. 
There are site visits where programs, projects that are carried 
out are being observed. So my comment was overall, not with 
regard to the North Korea----
    Senator Coburn. OK. Does any of that information come from 
other sources other than UNDP's self-reporting?
    Ambassador Khalilzad. Well, our embassies in some of these 
countries also have access to--our AID folks also see those 
programs. But in order to be completely responsive with regard 
to each country, I could provide----
    Senator Coburn. That is fair.
    Ambassador Khalilzad. So North Korea should not be seen 
that that is the model as to how UNDP operates around the 
world.
    Senator Coburn. Well, I will assure you from our other 
hearings on USAID, they do not do any oversight. So it is hard 
to know whether USAID is accurate in their assessments as well.
    Ambassador Khalilzad. Well, I mean, there are always 
questions about--I have worked in Afghanistan and Iraq, and I 
have had some problems----
    Senator Coburn. I know you are.
    Ambassador Khalilzad [continuing]. Myself knowing even our 
own projects as to when they say that school is being built, 
that is given to a contractor who has subcontracted, and the 
area has security problems. And that is why I got the Corps of 
Engineers to come and help me with sort of----
    Senator Coburn. I agree, you and I both have been through 
this. We know about Afghanistan. That is why we have the SIGIR 
in Afghanistan that started in January this year.
    Ambassador Khalilzad. Exactly.
    Ambassador Wallace. May I add to that, Senator, briefly?
    Senator Coburn. Sure.
    Ambassador Wallace. I think we should be honest. I do not 
believe that we perform adequate oversight of the U.N. Funds 
and Programs and Specialized Agencies. That is a tough 
admission for a U.S. Ambassador whose portfolio is supposed to 
cover that. But I am admitting that to you today, and that is 
in no way a criticism of the incredibly fine civil servants 
that I have worked with who have been struggling to deal with 
these multi-headed U.N. Funds and Programs. But the reality is 
that in many cases our oversight entails going to a board 
meeting twice a year, you sit in a chair for a couple of hours, 
and you hear reports. And this has to do with hundreds of 
millions of dollars of U.S. money.
    I think that the transparency and accountability mechanisms 
of these U.N. Funds and Programs are, frankly, living 30 years 
in the past, and that is one of the reasons why we have 
promoted the UNTAI initiative. By admitting, Senator, frankly, 
that I don't think we do a good enough job and it is something 
I think I said a long time ago, I hope that we can do better.
    Senator Coburn. Yes, I agree.
    Ambassador Wallace. And we have to do better; otherwise, I 
cannot answer questions that you are fairly asking me.
    Senator Coburn. OK. One final question. You are charged 
with oversight, correct?
    Ambassador Wallace. Yes.
    Senator Coburn. What is the size of your staff?
    Ambassador Wallace. My staff is small, but very effective, 
Senator. I think that they--I wouldn't trade them for anybody 
in the world.
    Senator Coburn. Well, this isn't to make a quality judgment 
about your staff. The point I want to make is here is all this 
area that we don't have any oversight on, and yet we have this 
limited group of people who are highly qualified and dedicated, 
and we are going to ask you to give us an answer to something 
that is impossible for you to do.
    Ambassador Wallace. I think I have eight to 10 people on my 
staff.
    Senator Coburn. So the point, again, comes: Are not the 
American people entitled to know where their money is being 
spent through U.N. agencies? Are they not entitled to that?
    Ambassador Wallace. Not only are they entitled; they should 
know it.
    Senator Coburn. And so, therefore, what is this Congress, 
and what is this Administration going to do about it, 
especially with regard to the North Korean UNDP and the other 
areas where it may not be effective because we don't know? So 
the question has to be before this Congress: Are we going to 
put some teeth into our contributions to the U.N. to require 
transparency so we know whether or not what we are giving money 
to is actually carrying out what we intended to do, which is 
the betterment of other people?
    Ambassador Wallace. Absolutely. And, Senator, I think the 
first step of oversight is being informed, and I think your 
interest in audits, for example, our UNTAI initiative, which 
really is a mechanism for providing information to us and the 
flow of information so that we can provide effective oversight. 
You need to be informed before you can make oversight. And that 
is why we rolled out our UNTAI initiative. We have had some 
beginning successes, but we have a long way to go.
    Senator Coburn. Things are going to change when the United 
Nations and every agency that works therein understands that 
American dollars are predicated on transparency. Your job is 
going to get a lot easier, and it is going to require our bolus 
to make that as a condition, and then the U.N. is going to have 
to change. And if it does not change, we should not keep 
sending the money. And I am going to work as hard as I can to 
get that transparency, and if they want to keep denying it, 
then I am going to work as hard as I can to start sending the 
money a different way where we can see how it is spent. Thank 
you.
    Senator Levin. Thank you, Senator Coburn. We thank you both 
for your appearance and your very helpful testimony.
    Ambassador Khalilzad. Thank you.
    Ambassador Wallace. Thank you.
    Senator Coleman. Mr. Chairman, I want to thank the 
Ambassadors--Ambassador Khalilzad, we have worked together in 
Afghanistan and Iraq--for their tremendous service to this 
country.
    Ambassador Khalilzad. Thank you.
    Senator Coleman. And, Ambassador Wallace, what you have 
done. I was remiss in not expressing my deep appreciation for 
you and the staff with whom you work and the contributions they 
make on a daily basis. So please understand that.
    Ambassador Wallace. Thank you, Senator.
    Ambassador Khalilzad. Thank you very much.
    Senator Levin. Thank you both.
    Let's now call our second panel: Thomas Melito, Director of 
International Affairs and Trade at the Government 
Accountability Office.
    Mr. Melito, we appreciate your being with us this morning. 
We welcome you to the Subcommittee, and as you well know, all 
witnesses who testify before the Subcommittee are required to 
be sworn in, and so I would ask you to stand and raise your 
right hand. Do you swear that all 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.
    Senator Levin. I think you know the ground rules, so we 
would ask you to proceed.

TESTIMONY OF THOMAS MELITO,\1\ DIRECTOR, INTERNATIONAL AFFAIRS 
 AND TRADE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, 
                               DC

    Mr. Melito. Thank you. Chairman Levin and Ranking Member 
Coleman, I am pleased to be here today to discuss U.N. 
operations in the context of three key issues that we reported 
on in 2007: First, the progress of management reform efforts at 
the U.N. Secretariat; second, weaknesses in oversight and 
accountability in selected U.N. organizations; and, third, 
constraints upon U.N. activities in Burma.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Melito appears in the Appendix on 
page 68.
---------------------------------------------------------------------------
    Events over the past several decades indicate that there is 
continuing need to reform and modernize the U.N. in areas 
including management, oversight, and accountability. While U.N. 
worldwide operations have expanded in complexity and 
significance, longstanding problems in U.N. management have 
contributed to scandals in the Oil-for-Food Program and 
procurement operations. In addition, the United States has been 
critical of Burma's military regime, which has hindered the 
ability of some U.N. organizations to address Burma's most 
pressing problems.
    In our report on U.N. management reform efforts, we noted 
that progress has varied in ethics, oversight, and procurement, 
and several factors have slowed the pace of progress. The U.N. 
Ethics Office has worked to improve ethics by developing 
standards, enforcing financial disclosure requirements, and 
implementing a whistleblower protection policy. However, 
weaknesses in the U.N.'s internal justice system may constrain 
the impact of the whistleblower protection policy.
    The U.N. has made some progress in improving oversight by 
creating an Independent Audit Advisory Committee and improving 
the capacity of the U.N.'s internal oversight office to carry 
out internal audits and investigations. However, U.N. funding 
arrangements continue to constrain the independence of this 
unit and its ability to audit high-risk areas.
    Progress in procurement reform efforts has been mixed. The 
U.N. has strengthened its training program for procurement 
staff but has not formally established an independent bid 
protest system.
    Finally, the pace of U.N. management reforms has been 
slowed by several factors, including disagreements among member 
states on the importance of management reform efforts, a lack 
of comprehensive implementation plans, and competing U.N. 
priorities. These factors limit the capacity of member 
countries to address management reform issues.
    In our report on oversight and accountability of six U.N. 
organizations, we addressed the extent to which these 
organizations' internal audit offices have implemented 
professional standards and whether governing bodies are 
provided with information about the results of U.N. oversight 
practices. Although the six U.N. internal audit offices have 
made progress in implementing international auditing standards, 
they have not fully implemented key components of the 
standards. We found that five of the six organizations have 
established whistleblower protection policies; however, UNDP 
was still developing such a policy, and none of the six 
organizations required their staff to disclose their financial 
interests.
    In addition, some of the audit offices had not fully 
implemented a quality assurance process, such as having 
external peer review. Several of the organizations also did not 
have professional investigators to probe allegations of 
wrongdoing. We also reported that the governing bodies 
responsible for oversight of the six organizations lacked full 
access to internal audit reports, limiting their ability to 
identify critical systemic weaknesses.
    In our report on Burma, we identified U.N. efforts to 
address Burma's humanitarian and development problems and 
describe the impact of the regime's recent actions upon them. 
We found that Burma's military regime has blocked or 
significantly impeded efforts to address human rights concerns 
and to help people living in areas affected by ethnic conflict. 
The regime frustrated ILO's efforts to monitor forced labor for 
4 years before signing an agreement in February 2007. It 
restricted efforts by UNHCR to assist populations living in 
areas affected by ethnic conflict and blocked efforts by the 
International Committee of the Red Cross to monitor prison 
conditions in conflict situations. The regime has also, to a 
lesser degree, impeded U.N. food, development, and health 
programs by restricting their ability to operate freely within 
the country. Nonetheless, several officials told us they are 
still able to achieve meaningful results in our efforts to 
mitigate some of Burma's humanitarian problems.
    In conclusion, the U.N. is increasingly called upon to 
undertake important and complex activities worldwide. As the 
U.N.'s role and budget expand, so do concerns about weaknesses 
in accountability, transparency, and oversight. Addressing 
these weaknesses will require concerted and sustained actions 
by member states and U.N. management.
    Mr. Chairman, I would be pleased to answer any questions 
you may have at this time.
    Senator Levin. Thank you, Mr. Melito.
    As we have heard this morning, the U.N.'s general practice 
has been to keep its audit reports confidential, seen only by 
management, has often denied access to U.N. member states, and 
this Subcommittee and many others have for years urged greater 
access to U.N. audit reports, not just for U.N. member states 
but for the public, and obviously for the Congress.
    The UNDP case history in North Korea proves the point. 
Denying ready access to the audit reports hurt UNDP-U.S. 
relations, caused confusion over the facts, and for no real 
gain. We were able to obtain copies of the UNDP audit reports 
from other sources. Those reports did not cause problems. They 
helped us understand and analyze the facts.
    So let me ask you, what has been your experience with 
getting access to U.N. audit reports? Have you had access?
    Mr. Melito. Last year, we reviewed the auditing practices 
of three U.N. Funds and Programs and three Specialized 
Agencies, and that included UNDP. And in the course of our 
work, we were denied access to the internal audit reports. We 
were able to discuss generalities about the audit processing, 
but we were unable to look at individual reports. We 
recommended that one of the reforms that U.N. Funds and 
Programs and Specialized Agencies should implement is to make 
audit reports available to member states.
    Senator Levin. Were you given reasons for why you were 
denied audit reports?
    Mr. Melito. It was policy and practice.
    Senator Levin. But did they give you the policy? Did they 
tell you what the policy is, or did they just say it is policy?
    Mr. Melito. Well, they must answer to their Executive 
Board, and without having been given permission to make this 
change, I don't think such a change was possible. But, that 
said, I think these are the kind of things which would help 
oversight and help transparency.
    Senator Levin. Have you seen U.N. audit reports?
    Mr. Melito. Oh, yes.
    Senator Levin. And what is the quality of those reports?
    Mr. Melito. Starting in 2005, the reports of OIOS, which is 
the audit unit of the Secretariat, have become available to 
member states. As with many things, they vary in quality, but 
there are some very good reports being done. I think the 
quality of the reports probably would improve over time if they 
were made publicly available.
    Senator Levin. Before he left office, U.N. Secretary Kofi 
Annan established a U.N. Ethics Office, and it was set up in 
early 2007, and it got its first Director in May 2007, and I 
believe the GAO has been an observer of that effort. Was it 
your understanding that the U.N. Ethics Office was intended to 
issue ethics policy for the entire U.N. community covering not 
only the U.N. Secretariat but all U.N. Funds and Programs?
    Mr. Melito. We understood that there was ambiguity on this 
matter from early on. We know that the U.S. position was that 
the coverage should include U.N. Funds and Programs, but we 
also know that there are a number of areas where the authority 
of the Secretariat to the U.N. Funds and Programs is unclear. 
And it is my understanding that the Office of Legal Affairs at 
the Secretariat made it clear early on that General Assembly 
resolution did not cover the U.N. Funds and Programs.
    So we just report the facts. We could not make a 
determination because that was mostly a legal determination on 
the structure of the U.N.
    Senator Levin. Well, when the U.N. Ethics Office made a 
determination in August in response to the Shkurtaj complaint 
that it has jurisdiction over only the U.N. Secretariat and not 
U.N. Funds and Programs like the UNDP, did that surprise you?
    Mr. Melito. Actually, it did not, because that is 
consistent with some of the other decisions that have been made 
about where the authority of the Secretariat ends.
    Senator Levin. In November, Secretary-General Ban directed 
that all U.N. Funds and Programs establish their own Ethics 
Offices. First of all, how many U.N. Funds and Programs are 
there at the U.N.? And what percentage met the January 1, 2008, 
deadline for setting up their internal Ethics Offices?
    Mr. Melito. I can get back to you on the number of U.N. 
Funds and Programs. I do know for the three U.N. Funds and 
Programs we looked at last year, the two criteria that were 
relevant were that you have an Ethics Office and that you also 
have a whistleblower protection policy. And UNDP has an Ethics 
Office but did not have a whistleblower protection policy. The 
other two U.N. Funds and Programs had whistleblower protection 
policies but did not have an Ethics Office. So at the time of 
our study in June, none of the three would have met the 
criteria.
    Senator Levin. When the U.N. Ethics Office made its 
decision in August, it said that even though it did not have 
jurisdiction over the UNDP, it urged the UNDP voluntarily to 
submit the Shkurtaj case to it for review. The UNDP declined to 
do that. It would seem to me that the UNDP, when they did that, 
undermined the status and authority of the U.N. Ethics Office 
for no particular reason. Then it set up an ad hoc review 
committee to adjudicate the Shkurtaj case.
    Do you have an analysis or an opinion as to why the UNDP 
declined to submit that case to the U.N. Ethics Office for 
review?
    Mr. Melito. I can only speculate, but it goes back to the 
issues of governance and the role--the different lines of 
authority between the Secretariat and the U.N. Funds and 
Programs. But I think you should pursue that with UNDP 
yourself.
    Senator Levin. Thanks. Senator Coleman.
    Senator Coleman. Thank you.
    I want to touch, Mr. Melito, on mandate review. You heard 
the testimony of the Ambassador that progress is being made. In 
your report, you make a statement: ``Despite some limited 
initial actions, the U.N. review mandate has not advanced due 
in part to lack of support by many member states.'' Is that a 
fair statement? Do you still stand by that?
    Mr. Melito. Yes, we do.
    Senator Coleman. And so there are over 9,000 mandated 
programs, things known as mandate review----
    Mr. Melito. Actually, I think there is some confusion on 
the actual total number. I think they have settled on 6,900 
mandates that are older than 5 years. I don't think they have a 
total that includes the ones that are younger than 5 years.
    Senator Coleman. OK. So there are at least 6,900 that old. 
And out of those 6,900, to date how many have effectively been 
reviewed and eliminated?
    Mr. Melito. I don't know if any have been eliminated. I 
think there are 74 that were--the words they use--``set 
aside,'' and I am not exactly sure what the operational meaning 
of that means. But those are ones that have already been 
completed. Many of these mandates were mandates that set up 
various organizations within the U.N.
    Senator Coleman. And when you say lack of support by member 
states, can you give me a little more information about that?
    Mr. Melito. There is a lot of suspicion about what the 
ultimate purpose of mandate review is and a lot of 
disagreements on how it should be carried out and, if there are 
any freed-up staff resources or budget resources, how they 
should be used. And I think the lack of agreement and consensus 
on those elements has held the review up.
    Senator Coleman. Isn't it a fair statement to say that in 
many cases these are jobs programs for many folks?
    Mr. Melito. There are a number of mandates which have 
reporting requirements, annual reports, and there are people 
staffed on those annual reports.
    Senator Coleman. With regard to access, the question raised 
by the Chairman and that all of us have raised--the Chairman 
has pushed very forcefully--is about the importance of audit 
access to member states, the importance of access to this body, 
transparency. You also raised the issue about access--internal 
access. You make a point of saying that U.N. member states have 
a lack of access by internal governing bodies. Can you explain 
that?
    Mr. Melito. This is actually part of the audit reports. 
Each of these organizations have their own internal oversight 
unit, and the oversight units tend to be part of the 
organization, which is not uncommon or necessarily incorrect. 
But the question then becomes how do you give the units some 
independence, some ability to go where the units need to go, 
and then have their information reach the levels where it needs 
to reach, which is, in the case of the U.N., the Executive 
Board, which is comprised of the member states. And we actually 
have two recommendations which tried to improve this. The first 
one we have been talking about already today, which was to make 
the audit reports themselves available directly, let the member 
states decide.
    But there is also another realization, another reality, 
which is that a lot of the audit reports are arcane, they are 
dealing with technical issues, so it may be difficult for very 
busy, limited staff to actually really understand the 
significance of them. So we think it is important that they 
also have an independent audit committee composed of 
professionals who don't answer to senior management, who work 
with the audit office, look at their work plans, look at the 
quality of the audits, make sure they are sufficiently 
resourced, and that group independently reports to the 
Executive Board on how the audit office is doing.
    Senator Coleman. So the concerns then are both access in 
terms of transparency, but also the internal process of the 
audits themselves and how they are processed and the 
independence of the auditors.
    Mr. Melito. The independence of auditors and also whether 
they have sufficient resources to do their work.
    Senator Coleman. Then the last area of inquiry has to do 
with the whistleblower protection. In UNDP's statement, they 
say in their statement to this Subcommittee that they have had 
policies and procedures in place to protect employees from 
retaliation, some of which pre-dated the policies initiated by 
the Secretary-General in 2005. In your statement, you indicate 
that UNDP was developing a policy on whistleblower protection 
policies. It appears that your findings--are they in 
contradiction to UNDP's statements? Can you help resolve this?
    Mr. Melito. UNDP had a general policy toward treatment of 
staff, but they did not have a specific whistleblower policy 
protection process which outlines processes and steps and 
rights and responsibilities and such. That was what was 
missing, and that is vital to actually having a credible 
whistleblower protection system.
    Senator Coleman. And when you talk about staff, I want to 
make sure we understand the definition of staff. In earlier 
testimony in the first panel, it was indicated that you have 
staff employees and you have contractors. But the reality is 
that these contractors, like Mr. Shkurtaj, for instance, he was 
the operations manager. He was not an outside contractor or 
consultant. He was the operations manager performing a core 
staff function. Are those contractors--and the definition of 
UNDP talks about it has procedures in place to protect 
employees from retaliation. Are contractors covered by those 
procedures?
    Mr. Melito. The U.N. has multiple categories for 
employment, and actually relatively--less than half of them are 
permanent employees. But the rest of them have contracts of 
varying lengths, and I do think there are some categories which 
are covered, but I am not certain--this is actually an area we 
have not studied.
    Senator Coleman. But, clearly, there is not full coverage, 
and Mr. Shkurtaj's case is clearly not covered.
    Mr. Melito. Well, it is confusing in that case because was 
it his contracting status what mattered or was it the lack of 
whistleblower protection that mattered. So I think there are 
possibly two reasons.
    Senator Coleman. We have called it a contract. All you have 
to do is not renew the contract.
    Mr. Melito. I understand that.
    Senator Coleman. Which goes to the heart of why you want 
whistleblower protection.
    Mr. Melito. Yes.
    Senator Coleman. And if they are not ``employees,'' 
particularly when they are performing core functions, you are 
able to exclude a whole group of folks from the purpose of 
whistleblower protection. We want individuals who have concerns 
to be able to raise their hand, come forward, and not worry 
about losing their job or in this case losing their contract. 
Does the Secretary-General's program of whistleblower 
protection, does this provide adequate coverage for the broad 
range of folks who are working for the United Nations?
    Mr. Melito. As I said earlier, there are staff in different 
categories, and I am hesitant to say definitively one way or 
another, but I do believe that staff who have long-term 
contracts may be covered. But I would defer to Mr. Benson on 
that matter.
    Senator Coleman. All right. I will probably submit that and 
some additional questions. I would like to get a response to 
that.
    Mr. Melito. OK.
    Senator Coleman. Thank you very much for your good work, 
Mr. Melito.
    Mr. Chairman, thank you.
    Senator Levin. Thank you, Senator Coleman.
    Thank you so much, Mr. Melito. We appreciate it and 
appreciate your good work generally at the GAO. Thank all your 
colleagues there for all the good they do, will you?
    Mr. Melito. I will.
    Senator Levin. We will now move to our third panel. We now 
welcome the final panel of witnesses from the United Nations, 
who will brief the Subcommittee on UNDP issues. As mentioned 
earlier, we thank the United Nations for the extent of its 
voluntary cooperation with this inquiry. We are very pleased 
this morning to have with us Frederick Tipson, who is the 
Director of the U.N. Development Programme's Liaison Office; 
David Lockwood, who is the Deputy Director of the Regional 
Bureau for Asia and the Pacific for the United Nations 
Development Programme; David Morrison, Director of 
Communications for the U.N. Development Programme; and Robert 
Benson, the Director of the U.N. Ethics Office.
    The Subcommittee recognizes the privileges and immunities 
of the United Nations, and, therefore, this panel will not be 
sworn in. Again, gentlemen, we appreciate very much your being 
with us this morning, for the cooperation you have shown with 
our staff and with us, and we welcome you to the Subcommittee.
    I think you were here when you heard our announcement about 
the timing system and about when the lights flash on and off. 
We understand, Mr. Tipson, that you will be presenting a brief 
statement for the UNDP, and so we will have you go first, 
following by Mr. Benson, who will be presenting the briefing 
statement of the U.N. Ethics Office, and then after these two 
statements, I gather it is your understanding that we would 
then proceed to questions. Is that acceptable? Mr. Tipson, 
please proceed.

  TESTIMONY OF FREDERICK TIPSON,\1\ DIRECTOR, LIAISON OFFICE, 
     UNITED NATIONS DEVELOPMENT PROGRAMME, WASHINGTON, DC, 
ACCOMPANIED BY DAVID LOCKWOOD, DEPUTY DIRECTOR, REGIONAL BUREAU 
FOR ASIA AND THE PACIFIC, UNITED NATIONS DEVELOPMENT PROGRAMME, 
      NEW YORK, NEW YORK, AND DAVID MORRISON, DIRECTOR OF 
COMMUNICATIONS, UNITED NATIONS DEVELOPMENT PROGRAMME, NEW YORK, 
                            NEW YORK

    Mr. Tipson. Thank you, Mr. Chairman. Thank you very much. 
As representatives of the U.N. Development Programme (UNDP), we 
appreciate the opportunity to address the issues raised by this 
Subcommittee. As employees of an international organization, we 
must appear informally and on a voluntary basis within the 
limits of the immunities recognized by the U.S. Government, and 
we appreciate the Subcommittee's willingness to accommodate 
these considerations. Yet we also appear here willingly, with 
the objective of satisfying this Subcommittee that the funds 
provided to UNDP by the U.S. Government are applied effectively 
to the purposes intended.
---------------------------------------------------------------------------
    \1\ The briefing statement of Mr. Tipson, Mr. Lockwood and Mr. 
Morrison appears in the Appendix on page 87.
---------------------------------------------------------------------------
    I am Fred Tipson, Director of the Washington Office. You 
have already introduced me and my colleagues. I am going to 
limit my remarks to three main points.
    First, we appreciate very much the professional manner in 
which your staff has reviewed UNDP operations in North Korea. 
We take the findings in this Staff Report very seriously and 
will consider as an organization how best to address each of 
the recommendations it contains.
    At the same time, in light of the serious allegations about 
UNDP's operations that have appeared over the past year, it is 
really essential that we take note that this report does not 
substantiate any of the following claims: UNDP did not transfer 
hundreds of millions of dollars to the North Korean Government 
over the last 10 years. UNDP's funds did not go for North 
Korean purchases of real estate, nuclear technology, or missile 
programs. And UNDP did not use cash in North Korea which could 
otherwise have been diverted or embezzled in circumvention of 
financial controls. It is important as we address the other 
issues of concern to this Subcommittee that we emphasize this 
point at the outset, given the visibility of those allegations 
in the media.
    Second, our objective as an organization must be to satisfy 
the standards of our major government supporters, including the 
U.S. Congress in particular, that UNDP is sufficiently 
transparent and accountable to provide you with confidence in 
our operations wherever in the world they are. If you are not 
satisfied with our performance in that regard, then we cannot 
be satisfied, and we must engage in the continuing process of 
review and improvement. And I appreciate the recognition that 
that is an objective on both sides. I hope that our efforts to 
cooperate with this investigation have demonstrated our high 
level of commitment in that regard.
    In fact, as the attachment to our statement makes clear, 
UNDP is often cited as a model among global organizations for 
its openness in reporting, and we pride ourselves on the 
substantial progress we have made in becoming a flexible, 
performance-driven, and financially sound organization. 
Nevertheless, we recognize that on two of the most important 
issues you have raised--access to internal audits and 
whistleblower protections--there are basic concerns, and we can 
address both of those here today.
    On access to internal audits, I want to assure you that the 
head of UNDP, Kemal Dervis, has actually taken a leading role 
within the U.N. System to advocate a policy of greater access, 
and he is currently pursuing such a policy with our Executive 
Board. We can respond to further questions on that issue 
shortly.
    I know you are also concerned about whether UNDP offers 
adequate protections to whistleblowers. I want to assure you 
that UNDP strongly encourages the reporting of wrongdoing and 
does offer protections on those who step forward to report it. 
But I also want to assure you that in this area as well, Mr. 
Dervis has worked to support a more collaborative framework on 
ethics standards and procedures across the U.N. System, and we 
particularly look forward to working with Mr. Benson's office 
to assure a strengthened outcome.
    Third, UNDP does operate in the most difficult locations in 
the world, as both of you Senators have acknowledged. We have 
attached a short overview of the major programs we conduct in a 
set of the most challenging countries of particular interest to 
the United States, including Afghanistan and Iraq. To do so, we 
must apply considerable resourcefulness and discipline to 
assure that our funds and resources go to serve the needs of 
the people and not the narrower interests of particular leaders 
or elites. North Korea is certainly a case in point. The 
Subcommittee's report has it right. By all accounts, operating 
development projects in North Korea presented management and 
administrative challenges of the most extreme nature. I am 
quoting the report here: ``By definition, UNDP operates in 
challenging environments and has crafted, for the most part, 
sound rules and procedures to ensure that UNDP development 
funds benefit the people of the host nation.''
    But the report and Ambassador Khalilzad's testimony focus 
on three areas where our practices in North Korea diverge from 
our general policies in other countries. These involve 
practices required by the North Korean Government as a 
condition of operating there. These include the use of 
convertible currency rather than local currency, the hiring of 
local staff indirectly through the government, and the 
requirements regarding government oversight of visits to 
project sites.
    Two points should be emphasized. First, there is nothing 
hidden about these practices. All three have been well known 
and permitted by all governments, including the United States, 
for nearly 30 years. They continue to be the conditions under 
which all other international organizations, all foreign 
embassies, and all NGOs operate in North Korea. They were not 
unique to UNDP and, in fact, are based on operational practices 
that were widespread in countries such as China and Vietnam 
until relatively recently. UNDP is alone amongst organizations 
in North Korea to have moved to change their practices, and 
North Korean resistance to these changes was a factor in our 
decision to suspend our program there last spring. But we know 
you have further questions about these issues, we were not 
comfortable having to operate in that situation, and we will do 
our best to address the considerations involved in those 
issues.
    In closing, let me just offer a personal perspective on 
these matters. I worked for 5 years as counsel to the Senate 
Foreign Relations Committee. I know firsthand the 
responsibilities you feel to assure that the international 
organizations supported by U.S. contributions can be relied on 
to do the important work they are committed to doing. It is my 
full-time job to facilitate the transparency and accountability 
of UNDP to the U.S. Government and to the Congress, and to you 
Senators in particular, and I hope you agree that our 
responsiveness to your investigation makes clear how seriously 
we take this responsibility.
    I thank you.
    Senator Levin. Thank you, Mr. Tipson. Mr. Benson.

TESTIMONY OF ROBERT BENSON,\1\ DIRECTOR, UNITED NATIONS ETHICS 
                   OFFICE, NEW YORK, NEW YORK

    Mr. Benson. Thank you. Senators, this is the first 
opportunity I have had to appear before a U.S. Senate 
Subcommittee, and I welcome the opportunity. I have been 
required to appear in order to brief this Subcommittee on the 
jurisdiction of the Ethics Office and the adequacy of 
whistleblower protection within the U.N. System. We also have 
been requested to provide a written briefing statement, which 
we have done.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Benson appears in the Appendix on 
page 107.
---------------------------------------------------------------------------
    In accordance with the U.N. policy regarding U.N. officials 
required to appear before legislative bodies of member states, 
the Secretary-General has approved my attendance in order to 
provide information to this Subcommittee, provided, as is 
indicated, it is achieved by means of a briefing session 
conducted on an informal basis.
    The Ethics Office of the United Nations Secretariat was 
established and became operational on January 1, 2006, 
discharging its mandate as set out in the applicable Secretary-
General bulletin. On May 1, 2007, as you have indicated, I was 
appointed as the United Nations' first Director of Ethics. 
However, prior to that time, I had come to the United Nations 
with 17 years of public sector experience working at the 
Federal level in Canada and the last 3 years working for an 
independent Office of the Ethics Commissioner, which was an 
entity of the Parliament of Canada. Myself personally, I am a 
lawyer by training, and through my career I have worked in the 
Judge Advocate General's branch of the Canadian Armed Forces. I 
worked in the Federal Department of Justice where my client 
group at that time, my clients, were the Royal Canadian Mounted 
Police and the Security Service. And then at some point in time 
I changed career paths and went into being a senior manager 
within the Canadian Government and finally ended up my career 
working in the Ethics Commissioner's office in the Parliament 
of Canada. That ends my opening statement.
    Senator Levin. Thank you so much, Mr. Benson.
    The U.S. Mission to the U.N. made requests for audit access 
relative to the North Korea issue, and it was not given what it 
asked for. Our U.N. representatives were denied the kind of 
access that they requested, and I am just wondering why.
    Mr. Tipson. Mr. Chairman, just to clarify, I want to make 
clear that we understand--we are here in part to understand, 
not simply to respond and defend.
    Senator Levin. OK.
    Mr. Tipson. And we understand the importance of the 
objective of facilitating access to member states to the 
audits. As I have just indicated, we are leading the charge in 
trying to get that policy adopted, not only in UNDP but in 
other parts of the United Nations. It is a policy that has to 
be approved by our Executive Board. We have a board of 36 
countries, and so it is not a matter of simply taking a pen and 
changing the policy overnight. I can tell you that this very 
week our leader is in the process of trying to propose that 
policy be adopted.
    Senator Levin. Are you privy to the reasons for the policy?
    Mr. Tipson. Well, I am going to defer to one of my 
colleagues who has much more experience dealing with audits, 
but let me just say on the basis of experience in the private 
sector for the last 23 years that audits are a key way in which 
boards keep track of the honesty of what they are getting from 
all the parts of the organization. But one of the things that 
audits need to accomplish is to verify the validity of the 
systems that the organization uses to report the numbers, the 
funds, what happens to the money in those organizations. And 
the concern with the way Ambassador Wallace characterized the 
situation is that if the U.S. Government cannot rely on the 
representation of UNDP with respect to key financial issues, 
they simply will not take what we say as being reliable 
information unless there is somehow an independent audit of 
that information. Then it is a very difficult way to have a 
relationship, and it is really very rare that governments take 
that position or that becomes the style with which we have to 
exchange information.
    As your staff will tell you, we have taken them through in 
sometimes exhaustive detail what our systems do and how they 
are structured to accomplish them. And the audits that have 
occurred would have shown up if those systems were not 
reliable, if that were indeed the case.
    I know that does not fully respond to the question you 
asked, and I will ask my colleague to try to get into the 
question of why there is a tendency to want to limit access to 
audits.
    Senator Levin. OK. Mr. Morrison.
    Mr. Morrison. Thank you. As Mr. Tipson just said, to 
respond to the question why is UNDP hesitant, traditionally the 
hesitancy has come from the understanding at UNDP, and I think 
in other parts of the U.N. Funds and Programs as well, that the 
internal audits are management tools that then feed into an 
external audit process which is available to member states, and 
that is, my understanding is that is how the member states set 
up the system so it is actually two-tiered, with the internal 
audits being just for UNDP management and the external audits 
being widely available to member states. The external auditors 
have full access to the internal audit.
    In terms of why they are considered management tools, and I 
think the question that has been asked throughout the morning, 
why does the Secretariat make their audits--or other 
organizations, not just the Secretariat, make their audits 
fully available, and the U.N. Funds and Programs up to this 
point have had a more restrictive regime, UNDP's view on this--
and, again, it is listening to its member states--is that we 
are a field-based organization. We run operations in 166 
countries. Our primary partner in those countries is the 
national government. We run programs in some cases which 
national governments consider very sensitive. I am thinking of 
gender programs that we run in some countries or democratic 
governance programs that we run in some countries. The strong 
sense that we are getting from our Executive Board, and 
particularly the program countries in which we work, is that 
they are reluctant to have what is, in effect, very frank 
comments on their own programs made publicly available.
    I think as you know, Kemal Dervis has a proposal in front 
of the Executive Board this week that they are debating today 
and tomorrow to try to square the circle of the very legitimate 
demands for increased oversight with those feelings from the 
program countries.
    Senator Levin. Has there ever been a resolution at the U.N. 
to change the policy relative to audits that was voted on by 
the General Assembly?
    Mr. Morrison. My understanding is that as part of or 
subsequent to the Oil-for-Food affair, the General Assembly 
did, in fact, require the Secretariat to make its audits 
public.
    Senator Levin. Just the Secretariat, but not the U.N. Funds 
and Programs, and----
    Mr. Morrison. No, not the U.N. Funds and Programs. In such 
matters, we are governed by our Executive Board.
    Senator Levin. Not by the General Assembly.
    Mr. Morrison. That is my understanding.
    Senator Levin. And has anyone on the Executive Board, 
including the United States, ever made a motion that those 
internal audits be made public?
    Mr. Morrison. There is no question that the United States 
and several other countries, primarily on the donor side, have 
moved very strongly to increase access to internal audits. 
There has been equally strong feelings on the other side, 
primarily but not exclusively the program countries, the 
recipient countries, that do not want to have such a broad 
access regime. So the proposal before the Executive Board today 
and tomorrow, which I think both Senator Coleman and yourself, 
Mr. Chairman, have characterized as a step in the right 
direction, although not going far enough--because I think 
Senator Coleman listed three or four additional steps that you 
would like to see. In any event, that is the proposal that our 
Administrator has put before our governing council, and we very 
much hope that it carries. And I know that he spoke personally 
with both of you on that.
    Senator Levin. In your opening statement, Mr. Tipson, you 
said that the UNDP did not transfer tens of millions of dollars 
to the North Korean Government. How many dollars were 
transferred?
    Mr. Tipson. In our written statement, we have tried to 
summarize the various accounts, the various summaries of funds 
that went--with respect to the NCC for the UNDP account, which 
has been the subject of such controversy, the total amount of 
money that we transferred to that account over the 10-year 
period covered in that chart is, I think, $376,000. It was 
not--and we can discuss how development projects are done in 
North Korea that indicate why that is not a larger channel of 
funding that goes through that account.
    Senator Levin. Well, now, you heard Ambassador Wallace say 
that the UNDP sent perhaps much more than $7 million in cash to 
the UNDP-related account. Did you hear him?
    Mr. Tipson. Yes.
    Senator Levin. Do you have a reaction to that?
    Mr. Tipson. Well, again, our records are pretty clear on 
what went into that account, and it is a matter of the 
reliability of our systems, which we take great pride in, 
frankly, in knowing how much money went into that account. It 
is not possible that the money that is being discussed, either 
$2.7 million or $7 million, or higher amounts that have been 
discussed, were money that came from the UNDP.
    Senator Levin. Into that specific account?
    Mr. Tipson. That is right.
    Senator Levin. OK. Thank you. Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman, and I appreciate, 
gentlemen, the opportunity for this briefing, and I look 
forward to this as a conversation that we would like a little 
help on figuring out where do we go to make sure that in other 
countries the imprimatur of the U.N. is not being used for 
shell organizations, money laundering, and transferring cash.
    I want to get back to this issue about the amount of 
dollars, and part of the confusion is the internal auditors--I 
was looking at the Subcommittee report. It talks about the 
difference, by the way, between--not that sharp, but NEX and 
DEX. There are some programs that you give the money directly 
to the North Koreans, and others that you provide the money--
you do it yourself. And so the testimony is that most of the 
programs in North Korea you were doing, so you were not turning 
over cash to the North Koreans. Is that correct?
    Mr. Tipson. Can I have my colleague David Lockwood answer?
    Senator Coleman. Mr. Lockwood.
    Mr. Lockwood. That is absolutely correct, Senator. The norm 
across the world is that most programs are executed with 
governments who have full responsibility for their----
    Senator Coleman. And is that NEX or DEX? Which one is it?
    Mr. Lockwood. That is called NEX.
    Senator Coleman. NEX.
    Mr. Lockwood. National execution.
    Senator Coleman. National execution.
    Mr. Lockwood. In the case of North Korea, they also 
preferred that route, but at our insistence, large amounts of 
the money were, in fact, directly executed by UNDP so that we 
could have direct controls in place.
    Senator Coleman. But the problem we have is if you looked 
at your internal auditing, you have it broken up as 48 
percent--I have the chart, 48 percent is going to NEX and 40 
percent DEX.
    Mr. Lockwood. That is correct, Senator.
    Senator Coleman. In the chart.
    Mr. Lockwood. The chart is correct.
    Senator Coleman. So the auditors were not aware of the 
internal arrangements?
    Mr. Lockwood. I think the auditors were aware of the 
internal arrangements, and the distinction, of course, is that 
within what is formally nationally executed, the government in 
turn has asked UNDP, at our insistence, to execute a large 
proportion--the largest proportion of that ourselves, which we 
also called direct execution.
    Mr. Tipson. Indeed, there is a sentence right here, 
Senator: ``The office is providing 100 percent support services 
to NEX projects.'' In other words, we executed on their behalf, 
even though it was called national execution.
    Senator Coleman. But when you say executed, are you talking 
about executing by employees in North Korea, by the program in 
North Korea? Is that correct?
    Mr. Tipson. The overall employee base.
    Senator Coleman. And one of our concerns here--and, again, 
you said simply a way of operating--the North Koreans, they 
were North Korean agents. They picked the employees. They ran 
the programs. Is that a fair statement?
    Mr. Tipson. Senator, it is fundamental to the way we work 
in development that it is a matter of capacity building. It is 
the locals we are trying to create the capabilities to do 
development.
    Senator Coleman. But there is a difference between the 
government supplying government agents--I am not talking about 
development. There are other programs in which you actually 
hire locals, and you are hiring people. But the difference 
between those folks and the government saying this is who is 
going to sit in that position, they are agents of the 
government, that is not development. That is the government 
simply saying here is who you are going to hire and here is who 
is going to run the program.
    Mr. Tipson. But the test then would be whether the work 
gets done. The objective is to accomplish development projects, 
and Mr. Morrison, of course, is the one with the experience in 
North Korea. But the test is whether those employees are 
actually doing the work they are paid for.
    Senator Coleman. But, again, the conversation, to say that 
is capacity building when a government tells you these are the 
people you are hiring, I don't think that--I am a former mayor. 
That is not capacity building. It is a conversation, not a 
debate.
    Mr. Tipson. It is.
    Senator Coleman. I am wondering if we can go to the chart 
with the application of payment order,\1\ JP Morgan Chase Bank 
of New York. One of the things that the Subcommittee found, the 
North Koreans have admitted, is that they have created this 
International Finance and Trade Joint Company, which is a shell 
company, to use the transfer of dollars from North Korea to 
embassies in New York and other places around--Paris, whatever. 
And I understand in our conversations you were not aware of 
this arrangement. Is that a fair statement?
---------------------------------------------------------------------------
    \1\ See Exhibit 8, which appears in the Appendix on page 215.
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    Mr. Lockwood. We were not aware at all of this arrangement.
    Senator Coleman. And, in fact, it went forward. Were you 
aware of the International Finance and Trade Joint Company?
    Mr. Lockwood. I think we can all say we were not aware of 
that company.
    Senator Coleman. Are there some procedural things that 
could be put in place that--I am thinking of co-signing checks 
or doing something that would put you in a better place, other 
U.N. agencies in a better place for their seal--this is the 
Good Housekeeping Seal. Money is being transferred by financial 
institutions. It says B/I, National Coordinating Committee for 
UNDP, message, payment for purchase of building in Canada. It 
looks like a pretty basic transaction. We know the buildings 
were not purchased. We don't know where the money went. But is 
there a system that you have thought about that would help make 
sure that your good name--your Good Housekeeping Seal is not 
abused by countries like North Korea or other places in the 
world?
    Mr. Tipson. One of the recommendations that your staff 
makes in this report is that it be accomplished by changing the 
structure of how these accounts are managed and giving 
development agencies like UNDP co-signing authority so that 
actually the money is jointly controlled by the development 
agency. That is something we are going to have to consider as a 
structural change. I will say that is a significant challenge 
for all development agencies to get countries to agree that 
that is the right approach to take. But I think it is one that 
we are going to have to consider very carefully.
    There are really two problems here. One is the money and 
the other is the name. And I think we are able to protect 
ourselves from the abuse of the money by making sure we know 
how much goes in and how much does not go in.
    As far as the name goes, it is very difficult to prevent 
any government from using our name on any account they want to 
use, and that would not even be solved by the structural 
approach proposed by the staff, although it would accomplish 
other objectives.
    Senator Coleman. Just one other chart, perhaps. This is 
Sindok Trading. This apparently is a legitimate transaction of 
UNDP, so about $229,000, almost $330,000. And the name of the 
applicant on this one is the International Finance and Trade 
Joint Company. So you have the shell company being used to 
transit a legitimate transaction.
    Is there in place any process or something that would kind 
of alert you to the fact that you may have a shell company? 
Again, I am trying to find out are there things we can do to 
make sure that we don't give legitimacy to what we have found 
out to be shell companies that were used for the purpose of 
laundering cash?
    Mr. Tipson. Can I ask Mr. Morrison to respond?
    Senator Coleman. Absolutely.
    Mr. Morrison. Sure. Senator Coleman, I think that we have 
researched this particular transaction quite extensively. It 
was a legitimate transaction. We got what we paid for in the 
$229,000. We frankly did not know that when we went to the bank 
and said would you please pay this company in Singapore that 
they were sending the money via an entity that has for us 
subsequently been identified as an entity involved in financial 
shenanigans, about which, of course, we are not happy.
    There is a recommendation in the Staff Report in regards to 
a separate issue, which is our financial transactions with an 
entity called Zang Lok, which does recommend that the various 
entities and the various organizations in the international 
community--UN and presumably non-UN--make stronger efforts to 
share information about which entities may be up to no good. 
And we fully support that recommendation.
    Senator Coleman. Thank you, Mr. Morrison.
    Mr. Benson, if I may, when you first became aware of the 
Shkurtaj case, I believe you indicated that they made a prima 
facie case of retaliation against UNDP. Is that correct?
    Mr. Benson. That is correct.
    Senator Coleman. And you urged UNDP to submit it to the 
jurisdiction of your office in the best interest of the United 
Nations. They did not do so. This debate we are having about 
whether the Secretary-General's policy should apply--and let 
me, again, be very clear. My big concern is that the UNDP 
policy in place certainly did not cover contractors. And that 
is a big part of your operation, contractors who perform core 
functions. And I guess anyone can answer this, then. Is there 
any question that contractors, individuals performing core 
functions should be covered by whistleblower protections? 
Anyone arguing about that? Mr. Benson.
    Mr. Benson. From my perspective running the Ethics Office, 
I do not have a problem with that. As was indicated earlier in 
some testimony, individuals that are performing staff-related 
functions or core functions should be afforded. So issues that 
arise and come before me, I will address them in that context.
    Senator Coleman. If somebody is reporting to somebody a 
case, you want to make sure that you are able to operate 
independently. A UNDP ethics officer reports to the executive 
head of the program. Is that correct?
    Mr. Tipson. That is right.
    Mr. Benson. That is correct.
    Senator Coleman. And who do you report to, Mr. Benson?
    Mr. Benson. I report to the Secretary-General.
    Senator Coleman. Would it be fair to say that you have a 
high measure, a high degree--gentlemen, would you argue that 
there is a high degree of independence, that if an employee is 
going to report to a guy who is reporting to the head of the 
program that you have got complaints about, would it be fair to 
say that it would be a better system to have this employee go 
to somebody where he wouldn't be worried that the guy who could 
get rid of him or not renew the contract is going to make some 
judgment? Would you argue that it is a better system to have 
that higher degree of independence?
    Mr. Tipson. One of the innovations, I think, by the 
Secretary-General's bulletin in December is the idea that the--
Mr. Benson will chair an ethics committee, to which appeals can 
be taken by employees who feel they haven't been satisfied by 
their own organizations. Obviously, it is important that we 
have a strong program in our own entity and that it does 
protect people against that kind of retaliation. But this at 
least would provide a two-step process for people who felt they 
weren't fairly treated.
    Senator Coleman. Could you respond then to the concern 
about contractors? Are we going to see some change in that 
program?
    Mr. Tipson. Yes.
    Senator Coleman. Mr. Morrison.
    Mr. Morrison. We have been discussing this very recently, 
and I think as you know, the strengthened UNDP protections 
against retaliation came out as part of a legal framework that 
UNDP had been working on for some time. In the work program, 
that was a legal framework covering staff. The next part of the 
work program was supposed to be a legal framework actually 
covering contractors.
    Now, you have said contractors performing core functions. 
Mr. Benson has said he would have no difficulty with that. This 
is a very difficult issue. I cannot speak for where we are 
going to come out. I personally would not have any difficulty 
with that either.
    You have listed some statistics about the number of 
contractors employed within the U.N. System, and we need to be 
honest. Some of those contractors are on long-term contracts. 
They are not performing core functions, but they are with the 
organization, if you will, for a long time. And so we have 
begun an internal dialogue as to what is correct as part of a 
coming legal framework covering contractors.
    Senator Coleman. I would just suggest that the current 
framework is wholly insufficient in providing the kind of 
protection that we would all want to have in place. Mr. Tipson, 
going back to your days on the Foreign Relations Committee----
    Mr. Tipson. Right.
    Senator Coleman. We want what we would all say is the kind 
of protection that encourages individuals to come forward 
without fear of retaliation.
    Gentlemen, I thank you.
    Senator Levin. Thank you. Dr. Coburn.
    Senator Coburn. Thank you. I caught some of this on the TV, 
but I just want to kind of review and see if I have got your 
testimony. You basically deny all the findings in the report 
that this Subcommittee has issued. It is your statement also 
that all programs in North Korea, including USAID, operate with 
the same weaknesses that we have seen in UNDP, i.e., payment of 
cash and hard currency instead of local currency.
    If that is the case----
    Mr. Tipson. That is not the case, Senator.
    Senator Coburn. All right. Well, then, correct what my 
assumption was based on what I heard from my office just a 
minute ago.
    Mr. Tipson. Well, I think there is a confusion there 
between hard currency and cash. We did not deal in cash in 
North Korea, hard currency being convertible currency.
    Senator Coburn. Right.
    Mr. Tipson. And the requirement by the North Korean 
Government that said all entities pay in convertible currency.
    Senator Coburn. But that is exactly opposite of the rules 
under which UNDP operates everywhere else, correct?
    Mr. Tipson. We did not have a rule on that subject, and, in 
fact, it is intended to be flexible enough so that the 
discretion of the local office can determine what the right 
approach may be in a case of that kind. But the challenge if it 
is the other way around, Senator, if you require to pay in only 
local currency, in the case of North Korea the only place to 
get local currency is from the North Korean bank. And if the 
concern is that they will skim off a piece of that hard 
currency for other purposes and only give you--they can set the 
exchange rate in the case of North Korea.
    Senator Coburn. Well, we don't know that they----
    Mr. Tipson. It is not really a protection----
    Senator Coburn. When we pay directly to the government, 
anyhow, the salaries of the people that were employed that were 
North Koreans. In other words, we didn't directly pay the North 
Korean employees, did we?
    Mr. Tipson. No. We went through the government. That is 
right.
    Senator Coburn. So we do not know how much they skimmed 
that way.
    Mr. Tipson. We don't.
    Senator Coburn. And so we have no idea. And that is not 
standard practice everywhere else, is it?
    Mr. Tipson. In my testimony, I mentioned that China, 
Vietnam, and North Korea all had that policy. Vietnam and China 
have since abandoned that policy. North Korea is the only 
country that requires----
    Senator Coburn. So three stellar human rights organizations 
have had that policy.
    Mr. Tipson. When I worked in China with AT&T, in the 
private sector we had to hire people through a government 
agency. That is the way China required it to be done.
    Senator Coburn. OK. Why should U.S. taxpayers support an 
organization that provides legitimacy to illegitimate 
transactions? In other words, based on some of the things that 
we have seen going on, that went on with UNDP operations in 
North Korea, in terms of some of the transactions like the 
$50,000, why should Americans support UNDP's effort there? In 
other words, we have $100 million in direct, and then we have 
all these other agencies that put another $140-some million 
into UNDP--nothing wrong with your goals. But why should we do 
that?
    If somebody is afraid of transparency, absolute 
transparency, then we ought to really worry about whether we 
ought to be supporting that agency at all in the first place.
    So, it is not a matter of trust. I don't trust Federal 
Government agencies. That is why I want them transparent. They 
need to be able to show the American people that they are 
effective in what they are doing and how they are doing it, and 
there ought to be some metrics.
    So explain to me why you would take a position that says 
that is on the basis that we don't trust. I don't trust. I 
readily admit it. And that is what keeps governments open and 
responsive, is that they are transparent. So why would we take 
a position that we wouldn't want transparency?
    Mr. Tipson. You shouldn't and we don't. I think the 
discussion is how do we get to a point where you feel you have 
sufficient transparency to have confidence in the information 
that we are providing to you. We are not there, clearly, and if 
there are a number of steps that the staff has suggested that 
would help the process--and, as Senator Coleman has indicated, 
we really need to have a conversation around these issues to 
get to a point where you have that level of----
    Senator Coburn. You may have answered this already, and 
forgive me if I am asking--so you have this audit, and you have 
this governing body, and yet they cannot have a copy of the 
audit? Explain to me--I am just from Oklahoma; I don't 
understand that--why the people that is your governing board 
cannot have a hard copy of the audit of what you are doing.
    Mr. Tipson. In the case of North Korea, which, of course, 
we are talking about, in 2006 there was a request for the 
audits, and on an extraordinary basis, the Administrator did 
make audit access available to the U.S. Government so that they 
could confirm the content of the audit.
    Senator Coburn. OK. But that is not the point. The point 
is: Why would that be an extraordinary basis that we get to see 
how the money is spent? Why is that extraordinary?
    Mr. Tipson. Well, one reason that we are advocating that 
policy be changed is obviously unless you feel you have access 
to them, you are not satisfied that it is sufficiently 
transparent.
    Senator Coburn. We shouldn't and nobody----
    Mr. Tipson. But I think when you were out of the room, Mr. 
Morrison was trying to explain the original rationale for why 
audits, internal audits, can be considered to contain the kinds 
of sensitive information that are best left confidential.
    Under the current circumstances, to change that policy we 
have to get the Executive Board of our organization to agree to 
go along. We are well on the way to doing that, but it is a 
matter of our leadership persuading the governing board of our 
organization that that is a policy we should adopt.
    And that is his posture with respect to other----
    Senator Coburn. I would hope that the realization is 
present among you today that there is a group of us in the U.S. 
Senate that, if, in fact, that does not become the policy, it 
is going to become our policy.
    That there is a U.S. Federal law right now called the 
Accountability and Transparency Act that is publishing today 
how all the money that this Federal Government is spending, and 
if you are not in compliance with that, then you are not in 
compliance with the law, which will put at jeopardy funds from 
the American Government to UNDP.
    So I would think it would be in your best interest to 
become as transparent as you can. Nobody wants to know 
somebody's Social Security number. Nobody wants to know the 
details under a certain contract. But the U.N. routinely--not 
UNDP but the U.N. routinely does not share a contract when it 
does not have anything to do with private actions or 
significant proprietary information on contracting, and they 
still refuse to do so.
    So I am not going to allow UNDP or the U.N. to hide behind 
the idea that there is so much proprietary stuff that we cannot 
know how our money is spent. And my suggestion is that you all 
move in that direction because as long as I am going to be a 
Senator, I am going to keep attaching that thing and eventually 
the American people are going to see that--they are not happy 
with the way we spend money domestically, and I guarantee you 
there is less support for how we spend it internationally. And 
it would be in--to do what you want to accomplish, which is to 
truly impact and help people who need help, the best way to do 
that is do that in the light, open, and taking the criticism, 
and that builds understanding. The lack of transparency implies 
and the lack of desire for transparency implies there is 
something to hide. And that may not be a great basis under 
which to have a relationship, but the fact is that is the basis 
that we have now because of things like North Korea and the 
fact that a U.N. agency was hoodwinked and was utilized to 
accomplish things other than what they intended to.
    Mr. Tipson. Senator, we take the point. I hope, however, we 
can also get to a relationship where, once you do have that 
level of access and confidence, we can deal in a much more open 
way and you will have confidence in the rest of the information 
that we share with you.
    Senator Coburn. I will give you a great example. USAID, 
malaria in Africa, totally closed, not transparent, most of the 
money went for bureaucracies, not for treatment and care for 
black African pregnant women or their children. This is just 
the opposite. They have a transparent website. We can see how 
much money they are spending. We can see their contracts. We 
can see what they are doing now. So we went from total lack of 
transparency to transparency with me saying, ``Atta boy, keep 
going. If I can get you more money, I will.''
    So if, in fact, you become transparent and what you are 
doing is accomplishing something that really moves, then you 
won't have any problem.
    Mr. Morrison. Could I address that point, Senator?
    Senator Coburn. Sure.
    Mr. Morrison. Because that gets to the point of other 
things than internal audit access create this level of 
transparency. We are actually implementing country by country 
the requirement that our country offices put on websites a 
whole range of information relating to contracts and 
procurements and so on, for exactly the purpose that you say, 
so people can see the details of what is going on in that 
country and have some level of confidence that it is going for 
the right purpose.
    We are also, for example, piloting a possible way of 
allowing access to information where major countries, donor 
countries like the United States can actually get into our 
system, look at our financial systems and have direct access to 
understand the kinds of information that they can rely on as to 
what is happening with the money. That is not obviously an easy 
thing for security reasons to implement, but that is one of the 
things that we are working on implementing. So we are trying to 
move in that direction.
    Senator Coburn. Well, my last comment, Mr. Chairman, is I 
think that Senator Coleman raises a great point on 
whistleblowers. If you do not have the capability to raise the 
issue and then be protected, we will never have transparency. 
And that has to get fixed.
    Senator Levin. Did you want to comment, Mr. Morrison.
    Mr. Morrison. I was just going to add on the transparency 
point because in our view it is very closely linked to your 
role in oversight, and tie this back to the audit dialogue we 
were having a moment ago. And I think we have been--I hope you 
are clear where we stand on the audit issue, and it is before 
the board and so on.
    But it strikes us that an audit is a snapshot of a country 
office or a headquarters unit at a moment in time, and that is 
getting you folks access to that is a very good way to enable 
your oversight.
    But I would say that in countries of particular concern, 
North Korea being one of them but Burma being another one, my 
colleague Mr. Lockwood is reasonably well known down here on 
the Hill because he has come down multiple times to talk about 
our operations in Burma. there is an ongoing dialogue with the 
United States as a very close partner and one of our largest 
donors.
    Similarly, on North Korea, we were engaged over a number of 
years in a very close dialogue with countries that had 
expressed concern, Japan being the leader, but also in 2004 we 
were engaged in a dialogue with the U.S. mission who had sought 
information on our operations in North Korea. We explained our 
staffing practices. We explained NEX versus DEX and that we, in 
fact, controlled all of that expenditure and that it was 
auditable. We gave all details of programs and budgets and so 
on.
    So the point that I am trying to make is that audits and 
access to audits are one issue--but I would like the 
Partnership Bureau, we engage on an ongoing basis with donors 
all of the time.
    Senator Levin. Let me pick up that NEX/DEX. Could you put 
that chart back up there again, the one with the--yes, that 
one. Can you see--this is your document.
    Mr. Morrison. Yes.
    Senator Levin. Can you understand why there might be some 
confusion about that?
    Mr. Morrison. I think I can understand why there is a lot 
of confusion about many parts of our operations.
    Senator Levin. Well, how about that one particular chart?
    Mr. Morrison. Well, I am trying to say we are hard to 
understand, and I would acknowledge that.
    The left pie chart divides NEX versus DEX. The intent of 
the right pie chart is to show that 100 percent of the NEX 
expenditure was actually done by UNDP, meaning it is fully 
auditable. We did the procurement and so on. That is also the 
intent of the text down below.
    Yes, I can see why someone who does not know what DEX is 
and does not know what NEX is might not have picked that up 
instantly.
    Senator Levin. Well, even somebody who does know what NEX 
is and DEX is could be confused by it. The way you described 
this was--the reason that this was all DEX, U.N. controlled, is 
because North Korea asked UNDP, at UNDP's insistence, to have 
the UNDP do the administration. So there is a little bit of 
diplomatic dance going on here. But why couldn't that have been 
explained more carefully there? Why couldn't you have made the 
same statement on that chart that you made here today, that 
this is all administered by us at the request of the U.N.?
    Mr. Morrison. That is from an internal audit report, so it 
was not available to member states. At roughly the same time, 
because we are talking about 2004, the UNDP did engage with the 
U.S. mission to the U.N. on exactly this issue and explained in 
an e-mail exchange and a meeting the difference between NEX 
versus DEX and that all of the spending was done by us.
    Mr. Tipson. And the United States supported that approach 
for the very reasons that you----
    Senator Levin. Are you saying that the USUN mission in 2004 
was told that all of the North Korean funds were being 
controlled and administered by UNDP?
    Mr. Morrison. Yes, I am, Senator.
    Senator Levin. Well, I don't know. Ambassador Wallace sure 
didn't seem to know that. I mean, he got his $7 million figure 
by just simply multiplying 48 percent times $12 million. I 
don't know if you want to look at it--you are probably familiar 
with it. But Exhibit 5 says, ``Out of the total budget value of 
ongoing projects of $12 million, 48 percent is NEX.'' \1\ Well, 
if somebody reads that, it says 48 percent is NEX, so you 
multiply 48 percent times $12 million, you can get roughly the 
$7 million that Ambassador Wallace says. Now you are saying in 
2004 they were told no, that is not the way it is, take a look 
at the right-hand side of the chart. Take a look at the line 
that says the office is providing 100 percent support services.
---------------------------------------------------------------------------
    \1\ See Exhibit 5, which appears in the Appendix on page 207.
---------------------------------------------------------------------------
    Well, I don't think the chart is very clear to begin with, 
I've got to tell you. But if you have a conversation with us 
explaining it and that is an internal document--was Ambassador 
Wallace not there in 2004?
    Mr. Morrison. I don't know whether he was or not.
    Mr. Tipson. No, he wasn't.
    Senator Levin. Well, when the question was raised, whenever 
the letter came from him to you, did you sit down with 
Ambassador Wallace and say, ``we told you folks in 2004 that 
you cannot just multiply $12 million by 48 percent to get $7 
million because, folks, we are administering the whole thing, 
take a look at the line below it, take a look at the right-hand 
chart, which says 0 percent?'' Did you explain that to him when 
he wrote you?
    Mr. Morrison. To tell you the truth, Senator, I have just 
learned where the $7 million figure came from. I had no idea up 
until now where that figure came from.
    Senator Levin. No, but did you ask him when the letter came 
or it became public?
    Mr. Morrison. I was not in the meetings. We responded by 
saying that we did not--I think he was under the impression 
that the $7 million all went to the National Coordinating 
Committee for UNDP. We responded by checking our own records 
and learning that in the period that he was talking about, 
$175,000 went to the NCC for UNDP. So we had no idea where he 
got the figure.
    Senator Levin. But did he ask you or did you ask him? I 
mean, you are in the same town, aren't you?
    Mr. Morrison. I think in your opening remarks, you used the 
phrase ``accusatory.'' I think by this time it was June 2006, 
and we were quite far apart on our understanding of the issues, 
and most of the dialogue was taking place via formal letter.
    Mr. Tipson. Something went off the track, Senator, and that 
was when Ambassador Khalilzad and our boss, Kemal Dervis, said 
we are not getting anywhere with this exchange of letters, 
let's create an independent commission that can look into it 
and will solve our questions here. And that commission, of 
course, will report soon.
    Senator Levin. Who was it in 2004, do you know who was 
briefed on this at the U.S. mission?
    Mr. Tipson. Advisor Robert Shapiro.
    Senator Levin. Robert Shapiro. OK. I am over my time limit. 
Do you want to pick up?
    Senator Coleman. My concern, I keep getting back to the 
idea that North Korean officials are the folks who are 
operating the program. I am not sure there is much difference 
between NEX and DEX. If, in fact, UNDP is controlled by the 
North Koreans in North Korea, I am not sure it makes a big 
difference.
    We are making appropriations of significant amounts of U.S. 
taxpayer dollars for UNDP. I thought the figure was $100 
million. Just a couple days ago, maybe yesterday, I found it 
was $247 million in 2005. It should be the reasonable 
expectation of working with your partners and funders that they 
have access to all the information that they need. I think that 
is what my colleague, Senator Coburn, is raising--$247 million, 
that is a lot of money, even for Washington. And I think what 
we are talking about here is simply a reasonable expectation as 
funders and partners that, in fact, there is full 
accountability. We understand the limits of audits. We deal 
with this stuff all the time. This government at this time is 
one that has made some very strong statements about 
accountability and transparency and use of taxpayer dollars 
about that. My colleague, the Chairman, is a champion of 
knowing how money is spent and that it is spent wisely. We have 
raised some issues today about use of the UNDP imprimatur. We 
raised issues about access to audits. We have raised issues 
about whistleblowers. And I just think it is important, knowing 
the significant contribution we make, that they are adequately 
addressed so that we can kind of walk out of this together and 
be in a situation, by the way, where we can respond to the 
question about what are we accomplishing. We can do it using 
metrics. And I think if we do that, we are all going to be 
better served.
    Thank you.
    Mr. Tipson. I think we are on the same page, Senator.
    Senator Levin. I fully agree with the need for transparency 
and open audits and having audits and sharing audits. I totally 
agree with that. But there also is a requirement that there be 
conversation, and I, for the life of me, don't understand if we 
are making an allegation about mis-spending money, why we just 
don't go to the UNDP and say, hey, folks, how is it that this 
money is getting into the hands of the North Koreans or that 
they are controlling it? Apparently the answer is there was a 
conversation back in 2004.
    Mr. Tipson. Senator, I think one of the contributions of 
this inquiry hopefully will be to get that communication back 
on track.
    Senator Levin. Well, I hope it will be. Just on the NEX/DEX 
issue, what is the difference?
    Mr. Tipson. National execution and----
    Senator Levin. I think I know the difference, but is there 
a difference between the two? Is it real?
    Mr. Tipson. Yes.
    Mr. Lockwood. There is a real difference.
    Senator Levin. Even in a situation where a country is 
picking the employees for the UNDP?
    Mr. Lockwood. In most countries, national execution is 
implemented by government ministries or departments themselves. 
They obviously hire their own staff to do their own work, and 
we are partners in that development process, bringing often 
technical support behind the scenes.
    In the case of some countries, especially those emerging 
from crisis where you have capacity issues, UNDP very commonly 
is then asked by government--that is a polite way or a 
diplomatic way of putting it, as you said--to assist in that 
through direct execution, where we then----
    Senator Levin. Is that direct execution using their people 
that they pick for you?
    Mr. Lockwood. No. That is absolutely unique to North Korea.
    Senator Levin. But that was what was done in North Korea.
    Mr. Lockwood. Because there are no other people in North 
Korea.
    Mr. Tipson. Well, among the people working there would be 
the North Korean nationals.
    Senator Levin. Among, but it wouldn't be all of them?
    Mr. Morrison. No, not at all. The office is staffed with a 
mix of internationals and nationals. In the case of North 
Korea, Mr. Morrison would know the exact figures better than I 
would, but I do know that when we shut down, we had eight 
internationals and 20 nationals, including drivers and so on. 
Project visits, for example, are conducted with internationals. 
Signing of checks, internationals.
    Senator Levin. Who would be the controlling folks in the 
office? Who would be the top people? The internationals or the 
nationals?
    Mr. Morrison. No. The internationals. We had a resident 
coordinator. Reporting to that person was someone that headed 
the programs, someone that headed the operations. There is a 
deputy reservation representative. So you have a structure in 
all UNDP offices worldwide where the key managerial functions 
are staffed by internationals, and the support staff plus the 
program staff, those actually doing the projects, working in 
very close collaboration with the Ministry of Health or the 
Ministry of Agriculture and so on are nationals.
    Senator Levin. Just one question on the ethics, because 
there was a request from, as I understand it, the Ethics 
Office. The Director of the U.N. Ethics Office, as I understand 
it, urged UNDP to voluntarily submit Mr. Shkurtaj's case to 
their office, and that was rejected. You are all sitting here, 
you are all friends. What was the reason you folks rejected the 
request?
    Mr. Tipson. There was a formal jurisdictional issue with 
respect to the jurisdiction of the Ethics Office, which Mr. 
Benson could probably better address. The upshot is that his 
case will be looked into by this independent review and 
potentially referred to the U.N. Ethics Office.
    Senator Levin. Are you satisfied with the answer you got 
from UNDP on the request that the case be referred to your 
office? And if you were not satisfied, did you make your 
dissatisfaction known, and to whom?
    Mr. Benson. I think to answer that question, the 
information that transpired in that wasn't released by my 
office. The information went out other than through me. But 
obviously the letters that were in confidence and provided to 
the individual did make it out into the public area.
    The communication between myself and UNDP did not get into 
the facts of the case--couldn't. I have to maintain 
confidentiality. But on the basis of the information that I 
obtained in conducting the review that I did, I met on two 
occasions with Mr. Dervis and Mr. Melkert, and through that we 
discussed the process of the protection for retaliation.
    I indicated at that time and I have indicated subsequent to 
that that I did not have the jurisdiction. As I went through it 
myself coming into the United Nations--and I should say I have 
said this also publicly out there, that when I came into the 
United Nations, I expected the jurisdiction would be United 
Nations. To me the United Nations was the United Nations. But 
when I got in and faced with actually having to discharge this 
mandate with responsibility, as issues come before me, then I 
have to look at it, and I look at it from the Charter on down. 
I look, as to where my mandate flows. So I was able to conclude 
myself that I didn't have jurisdiction, but in light of the 
fact that this individual had come into the office, and in 
light of the fact that it got into the media, it was well known 
that I was looking into the matter. And there was actually a 
press conference that Mr. Morrison had acknowledged that I had 
been looking--the Ethics Office was looking into it.
    But subsequent to that, as I said, the issue of information 
I had become privy to and the fact that I didn't have 
jurisdiction, but I felt, as I still do, that in the best 
interest of the United Nations, if they ceded jurisdiction on 
this one case and allowed it to proceed, it would be in the 
best interest. It was then their consideration of that, and 
they communicated back--I am not privy to what transpired or 
who they communicated with. But I allowed the opportunity for 
them to consider, and they communicated back to me that they 
wished to proceed on their own, which they did.
    Senator Levin. Thank you. Senator Coleman.
    Senator Coleman. Do you expect to or do you anticipate 
returning to North Korea? Is there discussion about that?
    Mr. Lockwood. I think that is a decision that our Executive 
Board would make. I am sure at this point they are not ready to 
even discuss that issue pending the outcome of various reviews 
that are underway. But that is not a position that I think we 
as the Secretariat of the organization, would want to take. It 
is a very complicated decision.
    Senator Coleman. Maybe this is difficult to answer now, but 
would you have the ability to change anything, where we are at 
today, if you were to go back in tomorrow?
    Mr. Lockwood. I think it is perfectly clear to all that we 
would not go back in under the old conditions under which we 
worked. We suspended the program because the government would 
not accede to a change in those conditions. And I am sure the 
board itself would not want us to go back there unless those 
conditions changed.
    Senator Coleman. I appreciate that, and without getting 
into NEX and DEX, just to follow up. Unlike other countries 
where you hire nationals through some hiring process, which I 
think does build development, I consider these folks to be 
North Korean officials. I consider them no different than they 
are working in a ministry, and they are the finance officer and 
the IT manager and the general services administrative officer 
and bank signators. If you look at it, it is their program. 
And, again, it is the only conditions in which it could 
operate.
    We may have exhausted that discussion, but I appreciate 
your response, Mr. Lockwood, that if we could go back in, we 
have to understand that there are going to have to be some 
changes in the way in which we operate. Thank you, gentlemen.
    Senator Levin. Thank you. Do any of you want to add 
anything to the conversation before we adjourn?
    Mr. Tipson. I hope it will be a robust conversation going 
forward, not just with this Subcommittee but with the U.S. 
mission and others in the U.S. Government.
    Senator Levin. We thank you for coming. We know it is 
voluntary. We know it is in the form of a conversation. It was 
very helpful, regardless of what you call it, designate it, or 
label it. Thank you.
    Mr. Morrison. Thank you.
    Mr. Benson. Thank you.
    Mr. Lockwood. Thank you.
    Senator Levin. We will stand adjourned.
    [Whereupon, at 12:59 p.m., the Subcommittee was adjourned.]


















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