United Nations: Observations on the Oil for Food Program	 
(07-APR-04, GAO-04-651T).					 
                                                                 
The Oil for Food program was established by the United Nations	 
and Iraq in 1996 to address concerns about the humanitarian	 
situation after international sanctions were imposed in 1990. The
program allowed the Iraqi government to use the proceeds of its  
oil sales to pay for food, medicine, and infrastructure 	 
maintenance. The program appears to have helped the Iraqi people.
From 1996 through 2001, the average daily food intake increased  
from 1,300 to 2,300 calories. From 1997-2002, Iraq sold more than
$67 billion of oil through the program and issued $38 billion in 
letters of credit to purchase commodities. GAO (1) reports on its
estimates of the revenue diverted from the program, (2) provides 
preliminary observations on the program's administration, (3)	 
describes some challenges in its transfer to the CPA, and (4)	 
discusses the challenges Iraq faces as it assumes program	 
responsibility. 						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-651T					        
    ACCNO:   A09734						        
  TITLE:     United Nations: Observations on the Oil for Food Program 
     DATE:   04/07/2004 
  SUBJECT:   Commodity sales					 
	     Contract administration				 
	     Crude oil						 
	     Export regulation					 
	     Fuel sales 					 
	     International cooperation				 
	     International food programs			 
	     International organizations			 
	     International trade				 
	     International trade restriction			 
	     Program management 				 
	     Sanctions						 
	     Smuggling						 
	     United Nations Oil for Food Program		 

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GAO-04-651T

                    United States General Accounting Office

GAO Testimony

Before the Committee on Foreign

                             Relations, U.S. Senate

For Release on Delivery

Expected at 9:30 a.m. EDT UNITED NATIONS

Wednesday, April 7, 2004

                    Observations on the Oil for Food Program

Statement of Joseph A. Christoff, Director International Affairs and Trade

GAO-04-651T

Highlights of GAO-04-651T, a testimony before the Committee on Foreign
Relations

The Oil for Food program was established by the United Nations and Iraq in
1996 to address concerns about the humanitarian situation after
international sanctions were imposed in 1990. The program allowed the
Iraqi government to use the proceeds of its oil sales to pay for food,
medicine, and infrastructure maintenance. The program appears to have
helped the Iraqi people. From 1996 through 2001, the average daily food
intake increased from 1,300 to 2,300 calories. From 1997-2002, Iraq sold
more than $67 billion of oil through the program and issued $38 billion in
letters of credit to purchase commodities.

GAO (1) reports on its estimates of the revenue diverted from the program,
(2) provides preliminary observations on the program's administration, (3)
describes some challenges in its transfer to the CPA, and (4) discusses
the challenges Iraq faces as it assumes program responsibility.

Wednesday, April 7, 2004

UNITED NATIONS

Observations on the Oil for Food Program

GAO estimates that from 1997-2002, the former Iraqi regime attained $10.1
billion in illegal revenues from the Oil for Food program, including $5.7
billion in oil smuggled out of Iraq and $4.4 billion through surcharges on
oil sales and illicit commissions from suppliers exporting goods to Iraq.
This estimate includes oil revenue and contract amounts for 2002, updated
letters of credit from prior years, and newer estimates of illicit
commissions from commodity suppliers.

Both the U.N. Secretary General, through the Office of the Iraq Program
(OIP) and the Security Council, through its sanctions committee for Iraq,
were responsible for overseeing the Oil for Food Program. However, the
Iraq government negotiated contracts directly with purchasers of Iraqi oil
and suppliers of commodities, which may have been one important factor
that allowed Iraq to levy illegal surcharges and commissions. While OIP
was responsible for examining Iraqi contracts for price and value, it is
unclear how it performed this function. The sanctions committee was
responsible for monitoring oil smuggling, screening contracts for items
that could have military uses, and approving oil and commodity contracts.
While the sanctions committee responded to illegal surcharges on oil, it
is unclear what actions it took to respond to illicit commissions on
commodity contracts.

OIP transferred 3,059 Oil for Food contracts-with pending shipments valued
at $6.2 billion-to the CPA on November 22, 2003. However, the CPA stated
that it has not received all the original contracts, amendments, and
letters of credit it needs to manage the program. These problems, along
with inadequate CPA staffing during the transfer, hampered the efforts of
CPA's Oil for Food coordination center in Baghdad to ensure continued
delivery of commodities. Poor planning, coordination, and the security
environment in Iraq continue to affect the execution of these contracts.

Inadequate oversight and corruption in the Oil for Food program raise
concerns about the Iraqi government's ability to import and distribute Oil
for Food commodities and manage at least $32 billion in expected donor
reconstruction funds. The CPA has taken steps, such as appointing
inspectors general, to build internal control and accountability measures
at Iraq's ministries. The CPA and the World Food Program (WFP) are also
training ministry staff to help them assume responsibility for Oil for
Food contracts in July 2004. The new government will have to balance the
reform of its costly food subsidy program with the need to maintain food
stability and protect the poorest populations.

www.gao.gov/cgi-bin/getrpt?GAO-04-651T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Joseph Christoff at (202)
512-8979 or [email protected].

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss GAO's review of the United
Nations (U.N.) Oil for Food program.

In 1996, the United Nations and Iraq established the Oil for Food program
to address growing concerns about the humanitarian situation after
international sanctions were imposed in 1990. The program allowed the
Iraqi government to use the proceeds of its oil sales to pay for food,
medicine, and infrastructure maintenance. From 1997 through 2002, Iraq
sold more than $67 billion in oil through the program and issued $38
billion in letters of credit to purchase commodities.1

Today, we will present our findings and observations on the operation of
the Oil for Food program and its transfer to the Coalition Provisional
Authority (CPA). Specifically, we will (1) report on our estimates of the
revenue diverted from the program by the former Iraqi regime; (2) provide
some preliminary observations on the administration of the program; (3)
describe the challenges the CPA faced when it assumed responsibility for
the program; and (4) discuss the challenges Iraq faces as it assumes
responsibility for the program.

To address these objectives, we reviewed documents and statements from (1)
the United Nations on its management and oversight responsibilities for
the Oil for Food program; (2) the CPA, the Departments of Defense and
State, and the United Nations and its World Food Program (WFP) on the
transfer of the program to the CPA and its implementation; and (3) from
the World Bank and Iraq's 2004 budget regarding the effect of food
subsidies on the Iraqi economy. We met with U.N. officials immediately
following the transfer of the program to the CPA in November 2003 and with
numerous U.S. officials representing the CPA, the Departments of Defense
and State, and the U.S. Agency for International Development to discuss
the program's transfer and ongoing management by the CPA. Our review is
ongoing because we have not yet received all the CPA and Iraqi ministry
documentation that we have requested from the CPA and the Department of
State. We have also requested certain U.N. documents, including internal
audits, to determine the use of Oil for Food funds prior to the transfer
to the CPA and the current disposition of funds. We assessed the
reliability of the data on the number of contracts reviewed for

1All references to Oil for Food estimates are in 2003 constant U.S.
dollars.

priority by the United Nations, the CPA, and Iraqi ministries and those
transferred to the CPA November 2003 by corroborating OIP information with
CPA data. We were unable to assess the reliability of the dollar amounts
of contracts reviewed and pending shipment because we did not have access
to the information that would have allowed us to confirm the dollar
amounts reviewed and transferred.

We conducted our review from November 2003 through April 2004 in
accordance with generally accepted government auditing standards.

Summary  o  	From 1997 through 2002, we estimate that the former Iraqi
regime acquired $10.1 billion in illegal revenues related to the Oil for
Food program-$5.7 billion in oil smuggled out of Iraq and $4.4 billion in
surcharges on oil sales and illicit charges from suppliers exporting goods
to Iraq. This estimate is higher than our May 2002 estimate of $6.6
billion because it includes (1) oil revenue and contract amounts for 2002,
(2) updated letters of credit from prior years, and (3) newer estimates of
illicit commissions from commodity suppliers.

o  	Both the U.N. Secretary General, through the Office of the Iraq
Program (OIP) and the Security Council, through its sanctions committee
for Iraq, were responsible for overseeing the Oil for Food Program.
However, the Iraq government negotiated contracts directly with purchasers
of Iraqi oil and suppliers of commodities, which may have been one
important factor in allowing Iraq to levy illegal surcharges and
commissions. While OIP was responsible for examining Iraqi contracts for
price and value, it is unclear how it performed this function. The
sanctions committee was responsible for monitoring oil smuggling,
screening contracts for items that could have military uses, and approving
oil and commodity contracts. While the sanctions committee responded to
illegal surcharges on oil, it is unclear what actions it took to respond
to illicit commissions on commodity contracts.

o  	OIP turned over responsibility for 3,059 Oil for Food contracts-with
pending shipments valued at $6.2 billion-to the CPA on November 22, 2003.
However, the information the United Nations supplied to the CPA on the
renegotiated contracts contained database errors and did not include all
contracts, amendments, and letters of credit associated with the 3,000
contracts. These problems, along with inadequate CPA staffing at the time
of the transfer, hampered efforts by the CPA's Oil for Food coordination
center in Baghdad to ensure that commodities continued to be delivered.
Also, the execution of these contracts

Background

     continues to be affected by poor planning, coordination, and security.

o  	The history of inadequate oversight and corruption in the Oil for Food
program raises concerns about the Iraqi government's ability to manage the
remaining Oil for Food commodities and about $32 billion in expected donor
reconstruction funds. The CPA has taken steps, such as appointing
inspectors general, to build internal controls and accountability measures
in Iraq's ministries. The CPA and the World Food Program (WFP) are also
training ministry staff on procurement and distribution functions to help
them fully assume responsibility for remaining contracts and a continued
food distribution system in July 2004. In addition, the new government
will have to balance the need to reform a costly food subsidy program with
the need to maintain food stability and protect the poorest populations.

In August 1990, Iraq invaded Kuwait, and the United Nations imposed
sanctions against Iraq. Security Council Resolution 661 of 1990 prohibited
all nations from buying and selling Iraqi commodities, except for food and
medicine. Security Council Resolution 661 also prohibited all nations from
exporting weapons or military equipment to Iraq and established a
sanctions committee to monitor compliance and progress in implementing the
sanctions. The members of the sanctions committee were members of the
Security Council. Subsequent Security Council resolutions specifically
prohibited nations from exporting to Iraq items that could be used to
build chemical, biological, or nuclear weapons. In 1991, the Security
Council offered to let Iraq sell oil under a U.N. program to meet its
peoples' basic needs. The Iraqi government rejected the offer, and over
the next 5 years, the United Nations reported food shortages and a general
deterioration in social services.

In December 1996, the United Nations and Iraq agreed on the Oil for Food
program, which permitted Iraq to sell up to $1 billion worth of oil every
90 days to pay for food, medicine, and humanitarian goods. Subsequent U.N.
resolutions increased the amount of oil that could be sold and expanded
the humanitarian goods that could be imported. In 1999, the Security
Council removed all restrictions on the amount of oil Iraq could sell to
purchase civilian goods. The United Nations and the Security Council
monitored and screened contracts that the Iraqi government signed with
commodity suppliers and oil purchasers, and Iraq's oil revenue was placed
in a U.N.-controlled escrow account. In May 2003, U.N. resolution 1483
requested the U.N. Secretary General to transfer the Oil for Food program
to the CPA by November 2003.

Despite concerns that sanctions may have worsened the humanitarian
situation, the Oil for Food program appears to have helped the Iraqi
people. According to the United Nations, the average daily food intake
increased from around 1,275 calories per person per day in 1996 to about
2,229 calories at the end of 2001. In February 2002, the United Nations
reported that the Oil for Food program had considerable success in several
sectors such as agriculture, food, health, and nutrition by arresting the
decline in living conditions and improving the nutritional status of the
average Iraqi citizen.

The Public Distribution System run by Iraq's Ministry of Trade is the food
portion of the Oil for Food program. The system distributes a monthly
"food basket" that normally consists of a dozen items2 to all Iraqis.
About 60 percent of Iraqis rely on this basket as their main source of
food.

  Former Iraqi Regime Diverted an Estimated $10.1 Billion from the Oil for Food
  Program

We estimate that, from 1997 through 2002, the former Iraqi regime acquired
$10.1 billion in illegal revenues related to the Oil for Food program-$5.7
billion through oil smuggling and $4.4 billion through surcharges against
oil sales and illicit commissions from commodity suppliers. This estimate
is higher than the $6.6 billion in illegal revenues we reported in May
2002.3 We updated our estimate to include (1) oil revenue and contract
amounts for 2002, (2) updated letters of credit from prior years, and (3)
newer estimates of illicit commissions from commodity suppliers.

Oil was smuggled out through several routes, according to U.S. government
officials and oil industry experts. Oil entered Syria by pipeline, crossed
the borders of Jordan and Turkey by truck, and was smuggled through the
Persian Gulf by ship. In addition to revenues from oil smuggling, the
Iraqi government levied surcharges against oil purchasers and commissions
against commodity suppliers participating in the Oil for Food program.
According to some Security Council members,

2Wheat flour, rice, vegetable ghee (semifluid clarified butter used for
cooking), pulses (edible seeds of various leguminous crops, such as peas,
beans, or lentils), sugar, tea, salt, milk, infant formula, weaning
cereal, soap, and detergent.

3U.S. General Accounting Office, Weapons of Mass Destruction: U.N.
Confronts Significant Challenges in implementing Sanctions Against Iraq,
GAO-02-625 (Washington, D.C.: May 23, 2002).

the surcharge was up to 50 cents per barrel of oil and the commission was
5 to 15 percent of the commodity contract.

In our 2002 report, we estimated that the Iraqi regime received a
5-percent illicit commission on commodity contracts. However, a September
2003 Department of Defense review found that at least 48 percent of 759
Oil for Food contracts that it reviewed were overpriced by an average of
21 percent.4 Defense officials found 5 contracts that included
"after-sales service charges" of between 10 and 20 percent. In addition,
interviews by U.S. investigators with high-ranking Iraq regime officials,
including the former oil and finance ministers, confirmed that the former
regime received a 10-percent commission from commodity suppliers.

Both OIP and the sanctions committee were responsible for overseeing the
Oil for Food Program. However, the Iraqi government negotiated contracts
directly with purchasers of Iraqi oil and suppliers of commodities. While
OIP was to examine each contract for price and value, it is unclear how it
performed this function. The sanctions committee was responsible for
monitoring oil smuggling, screening contracts for items that could have
military uses, and approving oil and commodity contracts. The sanctions
committee responded to illegal surcharges on oil, but it is unclear what
actions it took to respond to commissions on commodity contracts.

  United Nations and Security Council Had Responsibility for Oversight of
  Program, but Iraq Contracted Directly with Purchasers and Suppliers

Iraq Negotiated Directly with Oil Purchasers and Suppliers

U.N. Security Council resolutions and procedures recognized the
sovereignty of Iraq and gave the Iraqi government authority to negotiate
contracts and decide on contractors. Security Council resolution 986 of
1995 authorized states to import petroleum products from Iraq, subject to
the Iraqi government's endorsement of transactions. Resolution 986 also
stated that each export of goods would be at the request of the government
of Iraq. Security Council procedures for implementing resolution 986
further stated that the Iraqi government or the United Nations
Inter-Agency Humanitarian Program would contract directly with suppliers
and conclude the appropriate contractual arrangements. Iraqi

4The Defense Contract Audit Agency and the Defense Contract Management
Agency, Report on the Pricing Evaluation of Contracts Awarded under the
Iraq Oil for Food Program (Washington, D.C.: Sept. 12, 2003).

control over contract negotiations may have been one important factor in
allowing Iraq to levy illegal surcharges and commissions. Appendix I
contains a chronology of major events related to sanctions against Iraq
and the administration of the Oil for Food program.

OIP Was Responsible for Key Oversight Aspects of the Program

OIP administered the Oil for Food program from December 1996 to November
2003. As provided in Security Council resolution 986 of 1995 and a
memorandum of understanding between the United Nations and the Iraqi
government, OIP was responsible for monitoring the sale of Iraq's oil,
monitoring Iraq's purchase of commodities and the delivery of goods, and
accounting for the program's finances. The United Nations received 3
percent of Iraq's oil export proceeds for its administrative and
operational costs, which included the cost of U.N. weapons inspections.

The sanctions committee's procedures for implementing resolution 986
stated that U.N. independent inspection agents were responsible for
monitoring the quality and quantity of oil being shipped and were
authorized to stop shipments if they found irregularities. To do this, OIP
employed 14 contract workers to monitor Iraqi oil sales at 3 exit points
in Iraq. However, the Iraqi government bypassed the official exit points
by smuggling oil through an illegal Syrian pipeline and by trucks through
Jordan and Turkey. According to OIP, member states were responsible for
ensuring that their nationals and corporations complied with the
sanctions.

OIP was also responsible for monitoring Iraq's purchase of commodities and
the delivery of goods. Security Council Resolution 986, paragraph 8a(ii)
required Iraq to submit a plan, approved by the Secretary General, to
ensure equitable distribution of Iraq's commodity purchases. The initial
distribution plans focused on food and medicines while subsequent plans
were expansive and covered 24 economic sectors, including electricity,
oil, and telecommunications.

The sanction committee's procedures for implementing Security Council
resolution 986 stated that experts in the Secretariat were to examine each
proposed Iraqi commodity contract, in particular the details of price and
value, and to determine whether the contract items were on the
distribution plan. It is unclear whether the office performed this
function. OIP officials told the Defense Contract Audit Agency they
performed very limited, if any, pricing review. They stated that no U.N.
resolution tasked them with assessing the price reasonableness of the
contracts and no

contracts were rejected solely on the basis of price.

The sanction committee's procedures for implementing resolution 986 state
that independent inspection agents will confirm the arrival of supplies in
Iraq. OIP deployed about 78 U.N. contract monitors to verify shipments and
authenticate the supplies for payment. OIP employees were able to visually
inspect 7 to 10 percent of the approved deliveries.

Security Council resolution 986 also requested the Secretary General to
establish an escrow account for the Oil for Food Program, and to appoint
independent and certified public accountants to audit the account. In this
regard, the Secretary General established an escrow account at BNP Paribas
into which Iraqi oil revenues were deposited and letters of credit were
issued to suppliers having approved contracts. The U.N. Board of Audit, a
body of external public auditors, audited the account. According to OIP,
there were also numerous internal audits of the program. We are trying to
obtain these audits.

The Sanctions Committee Had a Key Role in Enforcing Sanctions and
Approving Contracts

The sanctions committee was responsible for three key elements of the Oil
for Food Program: (1) monitoring implementation of the sanctions, (2)
screening contracts to prevent the purchase of items that could have
military uses, and (3) approving Iraq's oil and commodity contracts.

U.N. Security Council resolution 661 of 1990 directs all states to prevent
Iraq from exporting petroleum products into their territories. Paragraph 6
of Resolution 661 establishes a sanctions committee to report to the
Security Council on states' compliance with the sanctions and recommend
actions regarding effective implementation. As early as June 1996, the
Maritime Interception Force, a naval force of coalition partners including
the United States and Great Britain, informed the sanctions committee that
oil was being smuggled out of Iraq through Iranian territorial waters. In
December 1996, Iran acknowledged the smuggling and reported that it had
taken action. In October 1997, the sanctions committee was again informed
about smuggling through Iranian waters. According to multiple sources, oil
smuggling also occurred through Jordan, Turkey, Syria, and the Gulf.
Smuggling was a major source of illicit revenue for the former Iraqi
regime through 2002. It is unclear what recommended actions the sanctions
committee made to the Security Council to address the continued smuggling.

A primary function of the members of the sanctions committee was to review
and approve contracts for items that could be used for military

purposes. For example, the United States conducted the most thorough
review; about 60 U.S. government technical experts assessed each item in a
contract to determine its potential military application. According to
U.N. Secretariat data in 2002, the United States was responsible for about
90 percent of the holds placed on goods to be exported to Iraq. As of
April 2002, about $5.1 billion of worth of goods were being held for
shipment to Iraq.

Under Security Council resolution 986 of 1995, paragraphs 1 and 8, the
sanctions committee was responsible for approving Iraq's oil contracts,
particularly to ensure that the contract price is fair, and for approving
most of Iraq's commodity contracts.5 In March 2001, the United States
informed the Security Council about allegations that Iraqi government
officials were receiving illegal surcharges on oil contracts and illicit
commissions on commodity contracts.6 According to OIP officials, the
Security Council took action on the allegations of surcharges in 2001 by
implementing retroactive pricing for oil contracts.7 However, it is
unclear what actions the sanctions committee took to respond to illicit
commissions on commodity contracts. At that time, there was increasing
concern about the humanitarian situation in Iraq and pressure on the
United States to expedite its review process.

In November 2003, the United Nations transferred to the CPA responsibility
for 3,059 Oil for Food contracts totaling about $6.2 billion and decided
not to transfer a remaining 2,199 contracts for a variety of reasons. U.N.
agencies had renegotiated most of the contracts turned over to the CPA
with the suppliers to remove illicit charges and amend delivery and
location terms. However, the information the United Nations supplied to
the CPA on the renegotiated contracts contained database errors and did
not include all contracts, amendments, and letters of credit associated
with the 3,000 contracts. These data problems, coupled with inadequate

5Under fast-track procedures established by Security Council resolution
1383 of 1999, OIP could approve contracts that contained only humanitarian
goods.

6The sanctions committee received reports from the independent oil experts
appointed by the Secretary General to determine whether there was fraud or
deception in the oil contracting process.

7Under retroactive pricing, the Security Council did not approve a price
per barrel until the oil was delivered to the refinery. The Iraq
government signed contracts with suppliers without knowing the price it
would have to pay until delivery. This allowed a fair market price to be
set.

  CPA's Administration of the Oil for Food Program

staffing at the CPA, hampered the ability of the CPA's Oil for Food
coordination center to ensure that suppliers complied with commodity
deliveries. In addition, poor planning and coordination are affecting the
execution of food contracts.

Program Transferred to the CPA in November 2003

On November 22, 2003, OIP transferred 3,059 contracts worth about $6.2
billion in pending commodity shipments to the CPA, according to OIP. Prior
to the transfer, U.N. agencies had renegotiated the contracts with the
suppliers to remove "after-sales service fees"-based on information
provided by the CPA and Iraqi ministries-and to change delivery dates and
locations. These fees were either calculated separately or were part of
the unit price of the goods. At the time of the transfer, all but 251
contracts had been renegotiated with the suppliers. The Defense Contract
Management Agency is renegotiating the remaining contracts for the CPA to
remove additional fees averaging 10 percent. The criteria for
renegotiating contracts and the amount of the reductions were based on
information from the CPA in Baghdad and the ministries that originally
negotiated the contracts.

An additional 2,199 contracts worth almost $2 billion were not transferred
as a result of a review by U.N. agencies, the CPA, and the Iraqi
ministries that negotiated the contracts. For example:

o  	The review did not recommend continuing 762 contracts, worth almost
$1.2 billion, because it determined that the commodities associated with
the contracts were no longer needed.

o  	Another 728 contracts, worth about $750 million, had been classified
as priority contracts, but were not transferred to the CPA for several
reasons. About half-351 contracts-were not transferred because suppliers
were concerned about the adequacy of security within Iraq or could not
reach agreement on price reductions or specification changes. Another 180
contracts were considered fully delivered. Another 136 suppliers had
either declared bankruptcy, did not exist, or did not respond to U.N.
requests. It is unclear why the remaining 61 contracts were removed from
the priority list; the OIP document lists them as "other."

o  	Suppliers did not want to ship the outstanding small balances for an
additional 709 contracts totaling about $28 million.

The largest portion of the $6.2 billion in Oil for Food contracts pending
shipment in November 2003-about 23 percent-was designated for food
procurement. An additional 9 percent was for food handling and transport.
The oil infrastructure, power, and agriculture sectors also benefited from
the remaining contracts. Nearly one half of the renegotiated contracts
were with suppliers in Russia, Jordan, Turkey, the United Arab Emirates,
and France.

Inadequate Information and Staffing Affected Transfer and Implementation
of Contracts

According to CPA officials and documents, the incomplete and unreliable
contract information the CPA received from the United Nations has hindered
CPA's ability to execute and accurately report on the remaining contracts.
U.N. resolution 1483 requested the Secretary General, through OIP, to
transfer to the CPA all relevant documentation on Oil for Food contracts.8
When we met with OIP officials on November 24, 2003, they stated that they
had transferred all contract information to the CPA.

CPA officials and documents report that the CPA has not received complete
information, including copies of all contracts. The CPA received several
compact disks in November and January that were to contain detailed
contract and delivery data, but the information was incomplete. The CPA
received few source documents such as the original contracts, amendments,
and letters of credit needed to identify the status of commodities,
prepare shipment schedules, and contact suppliers. In addition, the CPA
received little information on letters of credit that had expired or were
cancelled. Funds for the Oil for Food program are obligated by letters of
credit to the bank holding the U.N. escrow account. When these commitments
are cancelled, the remaining funds are available for transfer to the
Development Fund for Iraq. Without this information, the CPA cannot
determine the disposition of Oil for Food funds and whether the proper
amounts were deposited into the Development Fund for Iraq.9

In addition, the CPA received an OIP contract database but found it
unreliable. For example, CPA staff found mathematical and currency errors
in the calculation of contract cost. The inadequate data and documentation
have made it difficult for CPA to prepare accurate reports on the status
of inbound goods and closeouts of completed contracts.

8U.N. Resolution 1483, P:16(f) (May 2003).

9As of March 31, 2004, the United Nations had transferred $7.6 billion in
Oil for Food funds to the Development Fund for Iraq.

According to a Department of Defense contracting official, some
contractors have not received payment for goods delivered in Iraq because
the CPA had no record of their contracts.

In November 2003, the CPA established a coordination center in Baghdad to
oversee the receipt and delivery of Oil for Food commodities. The CPA
authorized 48 coalition positions, to be assisted by Iraqis from various
ministries. However, according to several U.S. and U.N. officials, the CPA
had insufficient staff to manage the program and high staff turnover. As
of mid-December 2003, the center had 19 coalition staff, including 18
staff whose tours ended in January 2004. U.S. and WFP officials stated
that the staff assigned at the time of the transfer lacked experience in
managing and monitoring the import and distribution of goods. A former CPA
official stated that the Oil for Food program had been thrust upon an
already overburdened and understaffed CPA. As a result, 251 contracts had
not been renegotiated prior to the time of the transfer and the CPA asked
the Defense Contract Management Agency to continue the renegotiation
process. A November 2003 WFP report placed part of the blame in food
shortfalls during the fall of 2003 on OIP delays in releasing guidelines
for the contract prioritization and renegotiation process. A September
2003 U.N. report also noted that the transfer process in the northern
governates was slowing due to an insufficient number of CPA counterparts
to work with U.N. staff on transition issues.

The center's capacity improved in March 2004 when its coalition staff
totaled 37. By April 2004, the coordination center had 16 coalition staff.
Up to 40 Iraqi ministry staff are currently working on Oil for Food
contracts. As of April 1, the coordination center's seven ministry
advisors have begun working with staff at their respective ministries as
the first step in moving control of the program to the Iraqi government.

Inadequate Planning, Coordination, and Security Affect the Management of
Food Contracts

According to U.S. officials and documents, CPA's failed plans to privatize
the food distribution system and delayed negotiations with WFP to
administer the system resulted in diminished stocks of food commodities
and localized shortages. Before the transfer of the Oil for Food program,
the CPA administrator proposed to eliminate Iraq's food distribution
system and to provide former recipients with cash payments. He asserted
that the system was expensive and depressed the agricultural sector, and
the Ministry of Trade began drawing down existing inventories of food. In
December 2003, as the security environment worsened, the CPA administrator
reversed his decision to reform the food ration system and left the
decision to the provisional Iraqi government.

In January 2004, CPA negotiated a memorandum of understanding (MOU) with
WFP and the Ministry of Trade that committed WFP to procuring a 3month
emergency food stock by March 31, 2004 and providing technical support to
the CPA and Ministry of Trade. Delays in signing the MOU were due to
disagreements about the procurement of emergency food stocks, contract
delivery terms, and the terms of WFP's involvement. No additional food was
procured during the negotiations, and food stocks diminished and localized
shortages occurred in February and March 2004. The CPA and WFP addressed
these problems with emergency procurements from nearby countries.

An April WFP report projected a continued supply of food items through May
2004 except for a 12-percent shortage in milk. Only 55 percent of required
domestic wheat has been procured for July 2004 and no domestic wheat has
been procured for August. Under the terms of MOU, WFP's commitment to
procuring food stock ended March 31, 2004. The Ministry of Trade assumed
responsibility for food procurement on April 1, 2004.

According to a U.S. official, coordination between WFP and the Ministry of
Trade has been deteriorating. The Ministry has not provided WFP with
complete and timely information on monthly food allocation plans, weekly
stock reports, or information on cargo arrivals, as the MOU required. WFP
staff reported that the Ministry's data are subject to sudden, large, and
unexplained stock adjustments, thereby making it difficult to plan
deliveries.

The security environment in Iraq has also affected planning for the
transfer and movement of Oil for Food goods in fall 2003. The transfer
occurred during a period of deteriorating security conditions and growing
violence in Iraq. A September 2003 U.N. report found that the evacuation
of U.N. personnel from Baghdad affected the timetable and procedures for
the transfer of the Oil for Food program to the CPA and contributed to
delays in the contract prioritization and renegotiation processes. Most
WFP staff remained in Amman and other regional offices and continued to
manage the Oil for Food program from those locations. The August bombing
of the U.N. Baghdad headquarters also resulted in the temporary suspension
of the border inspection process and shipments of humanitarian supplies
and equipment. A March 2004 CPA report also noted that stability of the
food supply would be affected if security conditions worsened.

  CPA and Transitional Government Face Challenges in Preventing Corruption and
  Reforming the Food Distribution System

The history of inadequate oversight and corruption in the Oil for Food
program raises questions about the Iraqi government's ability to manage
the import and distribution of Oil for Food commodities and the billions
in international assistance expected to flow into the country. In
addition, the food distribution system created a dependency on food
subsidies that disrupted private food markets. The government will have to
decide whether to continue, reform, or eliminate the current system.

                             Addressing Corruption

The CPA and Iraqi ministries must address corruption in the Oil for Food
program to help ensure that the remaining contracts are managed with
transparent and accountable controls. Building these internal control and
accountability measures into the operations of Iraqi ministries will also
help safeguard the $18.4 billion in fiscal year 2004 U.S. reconstruction
funds and at least $13.8 billion pledged by other countries.

To address these concerns and oversee government operations, the CPA
administrator announced the appointment of inspectors general for 21 of
Iraq's 25 national ministries on March 30, 2004. At the same time, the CPA
announced the establishment of two independent agencies to work with the
inspectors general-the Commission on Public Integrity and a Board of
Supreme Audit. Finally, the United States will spend about $1.63 billion
on governance-related activities in Iraq, which will include building a
transparent financial management system in Iraq's ministries.

CPA's coordination center continues to provide on-the-job training for
ministry staff who will assume responsibility for Oil for Food contracts
after July 2004. Coalition personnel have provided Iraqi staff with
guidance on working with suppliers in a fair and open manner and
determining when changes to letters of credit are appropriate. In
addition, according to center staff, coalition and Iraqi staff signed a
code of conduct, which outlined proper job behavior. Among other
provisions, the code of conduct prohibited kickbacks and secret
commissions from suppliers. The center also developed a code of conduct
for suppliers. In addition, the center has begun identifying the steps
needed for the transition of full authority to the Iraqi ministries. These
steps include transferring contractrelated documents, contacting
suppliers, and providing authority to amend contracts. In addition, the
January 2004 MOU agreement commits WFP to training ministry staff in the
procurement and transport functions

currently conducted by WFP. Training is taking place at WFP headquarters
in Rome, Italy.

                               Reforming the Food
                              Distribution System

After the CPA transfers responsibility for the food distribution system to
the Iraqi provisional government in July 2004, the government will have to
decide whether to continue, reform, or eliminate the current system.
Documents from the Ministries of Trade and Finance indicate that the
annual cost of maintaining the system is as high as $5 billion, or about
25 percent of total government expenditures. In 2005 and 2006,
expenditures for food will be almost as much as all expenditures for
capital projects. According to a September 2003 joint U.N. and World Bank
needs assessment of Iraq,10 the food subsidy, given out as a monthly
ration to the entire population, staved off mass starvation during the
time of the sanctions, but at the same time it disrupted the market for
food grains produced locally. The agricultural sector had little incentive
to produce crops in the absence of a promising market. However, the Iraqi
government may find it politically difficult to scale back the food
distribution system with 60 percent of the population relying on monthly
rations as their primary source of nutrition. WFP is completing a
vulnerability assessment that Iraq could use to make future decisions on
food security programs and better target food items to those most in need.

Mr. Chairman and Members of the Committee, this concludes my prepared
statement. I will be happy to answer any questions you may have.

Contacts and	For questions regarding this testimony, please call Joseph
Christoff at (202) 512-8979. Other key contributors to this statement were
Pamela

Acknowledgments 	Briggs, Lyric Clark, Lynn Cothern, Jeanette Espinola,
Zina Merritt, Tetsuo Miyabara, Jose M. Pena, III, Stephanie Robinson,
Jonathan Rose, Richard Seldin, Audrey Solis, and Phillip Thomas.

10United Nations/World Bank, Joint Iraq Needs Assessment: Agriculture,
Water Resources, and Food Security (New York: October 2003).

Appendix I: Timeline of Major Events Related to Sanctions Against Iraq and
the Administration of the Oil for Food Program

                           Date Event/Action Summary

Aug. 2, 1990 	U.N. Security Council Resolution 660

Iraqi forces invaded Kuwait. Resolution 660 condemned the invasion and
demanded immediate withdrawal from Kuwait.

Aug. 6, 1990 U.N. Security Council Imposed economic sanctions against the
             Republic of Iraq. The resolution called Resolution 661

for member states to prevent all commodity imports from Iraq and exports
to Iraq, with the exception of supplies intended strictly for medical
purposes and, in humanitarian circumstances, foodstuffs.

                                                   President Bush ordered the 
Aug. 6, 1990  Operation Desert Shield      deployment of thousands of U.S. 
                                                              forces to Saudi 
                                                       Arabia.                
                                            Public Law 101-513 prohibited the 
                                            import of products from Iraq into 
Nov. 5, 1990     U.S. legislation                               the United 
                                          States and export of U.S. products  
                                                       to Iraq.               
                                         Iraq War Powers Resolution           
                                         authorized the president to use "all 
Jan. 12, 1991    U.S. legislation     necessary                            
                                          means" to compel Iraq to withdraw   
                                             military forces from Kuwait.     

Jan. 16, 1991 Operation Desert Storm	Operation Desert Storm was launched:
Coalition operation was targeted to force Iraq to withdraw from Kuwait.

Feb. 28, 1991 Gulf War cease-fire Iraq announced acceptance of all
relevant U.N. Security Council resolutions.

Apr. 3, 1991 	U.N. Security Council Mandated that Iraq must respect the
sovereignty of Kuwait and declare and Resolution 687 destroy all ballistic
missiles with a range of more than 150 kilometers as well as (Cease-Fire
Resolution) all weapons of mass destruction and production facilities.

Jun. 17, 1991 Creation of U.N. Special The U.N. Special Commission
(UNSCOM) was charged with monitoring Iraqi Commission disarmament as
mandated by U.N. resolutions and to assist the International Atomic Energy
Agency in nuclear monitoring efforts.

Aug. 15, 1991 U.N. Security Council Proposed the creation of an Oil for
Food program and authorized an escrow Resolution 706 account to be
established by the Secretary General. Iraq rejected the terms of this
resolution.

Sep. 19, 1991 	U.N. Security Council Second attempt to create an Oil for
Food program. Iraq rejected the terms of Resolution 712 this resolution.

Oct. 2, 1992 U.N. Security Council Authorized transferring money produced
by any Iraqi oil transaction on or after

Resolution 778 	August 6, 1990, which had been deposited into the escrow
account, to the states or accounts concerned as long as the oil exports
took place or until sanctions were lifted.

Apr. 14, 1995 	U.N. Security Council Allowed Iraq to sell $1 billion worth
of oil every 90 days. Proceeds were to be Resolution 986 used to procure
foodstuffs, medicine, and material and supplies for essential civilian
needs. Resolution 986 was supplemented by several U.N. resolutions over
the next 7 years that extended the Oil for Food program for different
periods of time and increased the amount of exported oil and imported
humanitarian goods.

Mar. 27, 1996 	U.N. Security Council Resolution 1051

Established the export and import monitoring system for Iraq. May 20, 1996
Government of Iraq and the United Signed a memorandum of understanding allowing
 Iraq's export of oil to pay for Nations food, medicine, and essential civilian
                                   supplies.

Jun. 17, 1996 United States	Based on information provided by the
Multinational Interception Force (MIF), communicated concerns about
alleged smuggling of Iraqi petroleum products through Iranian territorial
waters in violation of resolution 661 to the Security Council sanctions
committee.

Date Event/Action Summary

Jul. 9, 1996 U.N. Security Council Sanctions Committee members asked the
United States for more factual information about

Committee smuggling allegations, including the final destination and the
nationality of the vessels involved.

Aug. 28, 1996 	U.S. delegation to the U.N. Security Council Sanctions
Committee

Provided briefing on the Iraqi oil smuggling allegations to the sanctions
committee.

 Dec. 3, 1996 Islamic Republic of Iran Permanent Acknowledged that some vessels
                carrying illegal goods and oil to and from Iraq

Representative to the United Nations

had been using the Iranian flag and territorial waters without
authorization and that Iranian authorities had confiscated forged
documents and manifests. Representative agreed to provide the results of
the investigations to the sanctions committee once they were available.

 Dec. 10, 1996 Iraq and the United Nations Phase I of the Oil for Food program
                                     began.

Jun. 4, 1997 	U.N. Security Council Resolution 1111

 Extended the term of resolution 986 another 180 days (phase II). Sep. 12, 1997
    U.N. Security Council Authorized special provision to allow Iraq to sell
           petroleum in a more favorable Resolution 1129 time frame.

Oct. 8, 1997 	Representatives of the United Kingdom of Great Britain and
Northern Ireland to the United Nations Brought the issue of Iraqi
smuggling petroleum products through Iranian territorial waters to the
attention of the U.N. Security Council sanctions committee.

  Nov. 18, 1997 Coordinator of the Multinational Reported to the U.N. Security
    Council sanctions committee that since February Interception Force (MIF)

1997 there had been a dramatic increase in the number of ships smuggling
petroleum from Iraq inside Iranian territorial waters.

Dec. 4, 1997 	U.N. Security Council Extended the Oil for Food program
another 180 days (phase III). Resolution 1143

Feb. 20, 1998 	U.N. Security Council Raised Iraq's export ceiling of oil
to about $5.3 billion per 6-month phase (phase Resolution 1153 IV).

Mar. 25, 1998 	U.N. Security Council Permitted Iraq to export additional
oil in the 90 days from March 5, 1998, to Resolution 1158 compensate for
delayed resumption of oil production and reduced oil price.

Jun. 19, 1998 	U.N. Security Council Authorized Iraq to buy $300 million
worth of oil spare parts to reach the export Resolution 1175 ceiling of
about $5.3 billion.

Aug. 14, 1998 U.S. legislation 	Public Law 105-235, a joint resolution
finding Iraq in unacceptable and material breach of its international
obligations.

Oct. 31, 1998 U.S. legislation: Iraq Liberation Act 	Public Law 105-338
S:4 authorized the president to provide assistance to Iraqi democratic
opposition organizations.

Oct. 31, 1998 	Iraqi termination of U.N. Special Iraq announced it would
terminate all forms of interaction with UNSCOM and Commission (UNSCOM)
Activity that it would halt all UNSCOM activity inside Iraq.

Nov. 24, 1998 U.N. Security Council Renewed the Oil for Food program for 6
months beyond November 26 at the Resolution 1210 higher levels established
by resolution 1153. The resolution included additional oil spare parts
(phase V).

Dec. 16, 1998 Operation Desert Fox 	Following Iraq's recurrent blocking of
U.N. weapons inspectors, President Clinton ordered 4 days of air strikes
against military and security targets in Iraq that contribute to Iraq's
ability to produce, store, and maintain weapons of mass destruction and
potential delivery systems.

Date Event/Action Summary

Mar. 3, 1999 President Clinton Report to President Clinton provided the
status of efforts to obtain Iraq's compliance with Congress U.N. Security
Council resolutions. He discussed the MIF report of oil smuggling out of
Iraq and smuggling of other prohibited items into Iraq.

May 21, 1999 	U.N. Security Council Renewed the Oil for Food program
another 6 months (phase VI). Resolution 1242

Oct. 4, 1999 	U.N. Security Council Permitted Iraq to export an additional
amount of $3.04 billion of oil to make up Resolution 1266 for revenue
deficits in phases IV and V.

Nov. 19, 1999 	U.N. Security Council Extended phase VI of the Oil for Food
program for 2 weeks until December 4, Resolution 1275 1999.

Dec. 3, 1999 	U.N. Security Council Extended phase VI of the Oil for Food
program for 1 week until December 11, Resolution 1280 1999.

Dec. 10, 1999 	U.N. Security Council Renewed the Oil for Food program
another 6 months (phase VII). Resolution 1281

Dec. 17, 1999 U.N. Security Council Abolished Iraq's export ceiling to
purchase civilian goods. Eased restrictions on Resolution 1284 the flow of
civilian goods to Iraq and streamlined the approval process for some oil
industry spare parts. Also established the United Nations Monitoring,
Verification and Inspection Commission (UNMOVIC).

Mar. 31, 2000 	U.N. Security Council Increased oil spare parts allocation
from $300 million to $600 million under Resolution 1293 phases VI and VII.

Jun. 8, 2000 U.N. Security Council        Renewed the Oil for Food program 
                                      another 180 days until December 5, 2000 
                   Resolution 1302                 (phase VIII).              
Dec. 5, 2000 U.N. Security Council 
                   Resolution 1330    

  Extended the Oil for Food program another 180 days (phase IX). Mar. 8, 2001
  Deputy U.S. Representative to the Ambassador Cunningham acknowledged Iraq's
                       illegal re-export of humanitarian

United Nations Remarks to the Security Council

supplies, oil smuggling, establishment of front companies, and payment of
kickbacks to manipulate and gain from Oil for Food contracts. Also
acknowledged that the United States had put holds on hundreds of Oil for
Food contracts that posed dual-use concerns.

Mar. 8, 2001 Acting U.S. Representative  Ambassador Cunningham addressed   
                to the                     questions regarding allegations of 
                United Nations Remarks to   surcharges on oil and smuggling.  
                           the               Acknowledged that oil industry   
                                           representatives and other Security 
                     Security Council            Council members provided the 
                                                                United States 
                                           anecdotal information about Iraqi  
                                           surcharges on oil sales. Also      
                                           acknowledged                       
                                           companies claiming they were asked 
                                            to pay commissions on contracts.  

Jun. 1, 2001 	U.N. Security Council Extended the terms of resolution 1330
(phase IX) another 30 days. Resolution 1352

Jul. 3, 2001 	U.N. Security Council Renewed the Oil for Food program an
additional 150 days until November 30, Resolution 1360 2001 (phase X).

Nov. 29, 2001 	U.N. Security Council Resolution 1382

The resolution stipulated that a new Goods Review List would be adopted
and that relevant procedures would be subject to refinement. Renewed the
Oil for Food program another 180 days (phase XI).

 May 14, 2002 U.N. Security Council UNMOVIC reviewed export contracts to ensure
                that they contain no items on a Resolution 1409

designated list of dual-use items known as the Goods Review List. The
resolution also extended the program another 180 days (phase XII).

Nov. 6, 2002 	U.N. Security Council Sanctions MIF reported that there had
been a significant reduction in illegal oil exports Committee from Iraq by
sea over the past year but noted oil smuggling was continuing.

Date Event/Action Summary

Nov. 25, 2002 	U.N. Security Council Extended phase XII of the Oil for
Food program another 9 days. Resolution 1443

Dec. 4, 2002 	U.N. Security Council Renewed the Oil for Food program
another 180 days until June 3, 2003 (phase Resolution 1447 XIII).

Dec. 30, 2002 	U.N. Security Council Resolution 1454

Approved changes to the list of goods subject to review and the sanctions
committee.

 Mar. 12, 2003 U.N. Security Council Sanctions Chairman reported on a number of
            alleged sanctions violations noted by letters Committee

from several countries and the media from February to November 2002.
Alleged incidents involved Syria, India, Liberia, Jordan, Belarus,
Switzerland, Lebanon, Ukraine, and the United Arab Emirates.

Mar. 19, 2003 Operation Iraqi Freedom	Operation Iraqi Freedom is launched.
Coalition operation led by the United States initiated hostilities in
Iraq.

Mar. 28, 2003 U.N. Security Council Adjusted the Oil for Food program and
gave the Secretary General authority for Resolution 1472 45 days to
facilitate the delivery and receipt of goods contracted by the Government
of Iraq for the humanitarian needs of its people.

                                          Public Law 108-11 S:1503 authorized 
Apr. 16, 2003    U.S. legislation             the President to suspend the 
                                                               application of 
                                         any provision of the Iraq Sanctions  
                                                    Act of 1990.              
                                        Extended provision of resolution 1472 
Apr. 24, 2003 U.N. Security Council           until June 3, 2003.          
                    Resolution 1476     
                    Operation Iraqi     End of major combat operations and    
    May 1, 2003         Freedom         beginning of post-war rebuilding      
                                        efforts.                              
                                        Lifted civilian sanctions on Iraq and 
                                        provided for the end of the Oil for   
May 22, 2003  U.N. Security Council  Food                                  
                                        program within 6 months, transferring 
                    Resolution 1483     responsibility for the administration 
                                                                       of any 
                                        remaining program activities to the   
                                        Coalition Provisional Authority       
                                        (CPA).                                
                                        Responded to allegations of fraud by  
                                        U.N. officials that were involved in  
Mar.19, 2004  U.N. Secretary General the                                   
                                         administration of the Oil for Food   
                                                      program.                

Nov. 21, 2003 U.N. Secretary General Transferred administration of the Oil
for Food program to the CPA.

 Mar. 25, 2004 U.N. Secretary General Proposed that a special investigation be
                       conducted by an independent panel.

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