-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-730T		

TITLE:     United Nations: Observations on the Management and Oversight
of the Oil for Food Program

DATE:   04/28/2004 
				                                                                         
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Testimony before the Committee on International Relations, House of 
Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 10:30 a.m., EDT:

Wednesday, April 28, 2004:

United Nations:

Observations on the Management and Oversight of the Oil for Food 
Program:

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

GAO-04-730T:

GAO Highlights:

Highlights of GAO-04-730T, a testimony before the House Committee on International 
Relations 

Why GAO Did This Study:

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 to 2002, Iraq sold more than $67 billion of oil through the 
program and issued $38 billion in letters of credit to purchase 
commodities. However, over the years numerous allegations have 
surfaced concerning potential fraud and program mismanagement.

GAO (1) reports on its estimates of the illegal revenue acquired by 
the former Iraqi regime in violation of U.N. sanctions, (2) provides 
observations on program administration; (3) describes the challenges 
facing the CPA and the Iraqi government in administering remaining 
contracts, and (4) discusses potential issues for further 
investigation. 

What GAO Found:

GAO estimates that from 1997 to 2002, the former Iraqi regime acquired 
$10.1 billion in illegal revenues, 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 through 
the Oil for Food program. 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.

The U.N. Secretary General, through the Office of the Iraq Program 
(OIP) and the Security Council, through its Iraq sanctions committee, 
were both responsible for overseeing the Oil for Food Program. 
However, the Security Council allowed the Iraq government, as a 
sovereign entity, to negotiate contracts directly with purchasers of 
Iraqi oil and suppliers of commodities. This structure was an 
important factor in allowing Iraq to levy illegal surcharges and 
commissions. OIP was responsible for examining Iraqi contracts for 
price and value, but 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 took 
action to stop illegal oil surcharges, but it is unclear what actions 
it took on contract commissions. U.N. external audit reports contained 
no findings of program fraud. Summaries of internal audit reports 
pointed to some concerns regarding procurement, coordination, 
monitoring, and oversight and concluded that OIP had generally 
responded to audit recommendations.

OIP transferred responsibility for 3,059 Oil for Food contracts-with 
pending shipments valued at $6.2 billion-to the CPA on November 22, 
2003. Poor communication and coordination on contracting documents and 
inadequate staffing hampered efforts by the CPAï¿½s Oil for Food 
coordination center in Baghdad to ensure that commodities continued to 
be delivered. The execution of food contracts was also affected by 
evolving decisions about food distribution, inadequate coordination, 
and security issues. Challenges face the interim Iraqi government as it 
balances the need to reform a costly food subsidy program with the 
need to maintain food stability and protect the poorest populations. 
Also, inadequate oversight and alleged corruption in the program raise 
concerns about the Iraqi governmentï¿½s ability to manage the remaining 
Oil for Food commodities, continue the food distribution system, and 
absorb $32 billion in expected donor funds for reconstruction. The CPA 
has taken steps to build internal controls and accountability measures 
in Iraqï¿½s ministries. 

Several investigations of the Oil for Food program will soon be under 
way. These efforts may wish to consider several areas for further 
analysis to better determine the extent of corruption in the program, 
the adequacy of internal controls, and the lessons learned in 
implementing a large-scale humanitarian aid program within a sanctions 
framework.

www.gao.gov/cgi-bin/getrpt?GAO-04-730T.

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].

[End of section]

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's 
intent was to allow the Iraqi government to use the proceeds of its oil 
sales to pay for food, medicine, and infrastructure maintenance, while 
at the same time preventing the regime from obtaining goods for 
military purposes. 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.[Footnote 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 illegal revenue acquired by the former Iraqi regime in 
violation of U.N. sanctions, (2) provide our observations on the 
administration of the program; (3) describe the challenges the CPA and 
Iraqi government face in administering remaining contracts, and (4) 
discuss potential issues for further investigation.

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 its ongoing management by the CPA. 
We also reviewed 12 external audits to determine the use of Oil for 
Food funds prior to the transfer to the CPA. We assessed the 
reliability of the data on the number of contracts reviewed for 
priority by the United Nations, the CPA, and Iraqi ministries, and 
those transferred to the CPA in 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 information that would have allowed us to 
confirm the dollar amounts reviewed and transferred. We also did not 
have full access to the U.N. internal audits of the Oil for Food 
program, but we reviewed the summaries of 7 annual internal audits from 
1996 to 2003.

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

Summary:

* From 1997 through 2002, we estimate that the former Iraqi regime 
acquired $10.1 billion in illegal revenues--$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 through the Oil 
for Food program. This estimate is higher than our May 2002 estimate of 
$6.6 billion because it includes (1) oil revenue and contract amounts 
for 2002, (2) updated letters of credit from prior years, and (3) newer 
estimates of illicit commissions from commodity suppliers.

* Both the U.N. Secretary General, through the Office of the Iraq 
Program (OIP) and the Security Council, through its Iraq sanctions 
committee, were responsible for overseeing the Oil for Food Program. 
However, the Security Council allowed the Iraqi government, as a 
sovereign entity, to negotiate contracts directly with purchasers of 
Iraqi oil and suppliers of commodities. This structure was an important 
factor in allowing Iraq to levy illegal surcharges and commissions. OIP 
was responsible for examining Iraqi contracts for price and value, but 
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 took action to stop illegal 
surcharges on oil, but it is unclear what actions it took on the 
commissions on commodity contracts. U.N. external audit reports 
contained no findings of program fraud. Summaries of internal audit 
reports provided to GAO pointed to some operational concerns in 
procurement, coordination, monitoring, and oversight and concluded that 
OIP had been generally responsive to audit recommendations.

* OIP transferred responsibility for 3,059 Oil for Food contracts--with 
pending shipments valued at $6.2 billion--to the CPA on November 22, 
2003. Poor communication and coordination on contracting documents and 
inadequate staffing hampered efforts by the CPA's Oil for Food 
coordination center in Baghdad to ensure that commodities continued to 
be delivered. The execution of food contracts has also been affected by 
evolving decisions about food distribution, inadequate coordination, 
and security issues. The CPA and the World Food Program (WFP) are 
training ministry staff on procurement and distribution functions to 
help them assume responsibility for remaining contracts and the food 
distribution system. Several challenges face the interim Iraqi 
government which is expected to assume sovereignty on July 1, 2004. 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 addition, inadequate oversight and alleged 
corruption in the Oil for Food program raise concerns about the Iraqi 
government's ability to manage the remaining Oil for Food commodities, 
continue the food distribution system, and absorb $32 billion in 
expected donor funds for reconstruction. The CPA has taken steps, such 
as appointing inspectors general, to build internal controls and 
accountability measures in Iraq's ministries.

* Several investigations of the Oil for Food program will soon be under 
way. These efforts may wish to consider several areas for further study 
and analysis to better determine the extent of corruption in the 
program, the adequacy of internal controls, and the lessons learned in 
implementing a large-scale humanitarian aid program within a sanctions 
framework.

Background:

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

In December 1996, the United Nations and Iraq agreed on the Oil for 
Food program, which permitted Iraq to sell up to $1 billion worth of 
oil every 90 days to pay for food, medicine, and humanitarian goods. 
Subsequent U.N. resolutions increased the amount of oil that could be 
sold and expanded the humanitarian goods that could be imported. In 
1999, the Security Council removed all restrictions on the amount of 
oil Iraq could sell to purchase civilian goods. The United Nations and 
the Security Council monitored and screened contracts that the Iraqi 
government signed with commodity suppliers and oil purchasers, and 
Iraq's oil revenue was placed in a U.N.-controlled escrow account. In 
May 2003, U.N. resolution 1483 requested the U.N. Secretary General to 
transfer the Oil for Food program to the CPA by November 2003. 
(Appendix I contains a detailed chronology of Oil for Food program and 
sanctions events.) The United Nations allocated 59 percent of the oil 
revenue for the 15 central and southern governates, which were 
controlled by the central government; 13 percent for the 3 northern 
Kurdish governates; 25 percent for a war reparations fund for victims 
of the Iraq invasion of Kuwait in 1990; and 3 percent for U.N. 
administrative costs, including the costs of weapons inspectors.

From 1997 to 2002, the Oil for Food program was responsible for more 
than $67 billion of Iraq's oil revenue. Through a large portion of this 
revenue, the United Nations provided food, medicine, and services to 24 
million people and helped the Iraqi government supply goods to 24 
economic sectors. Despite concerns that sanctions may have worsened the 
humanitarian situation, the Oil for Food program appears to have helped 
the Iraqi people. The Oil for Food program facilitated the operation of 
the Public Distribution System run by Iraq's Ministry of Trade. The 
system distributes a monthly "food basket" that normally consists of a 
dozen items[Footnote 2] to all Iraqis. About 60 percent of Iraqis rely 
on this basket as their main source of food. 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. Malnutrition rates for children under 5 fell by more than 
half. 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.

Former Iraqi Regime Acquired an Estimated $10.1 Billion in Illicit 
Revenue:

We estimate that, from 1997 through 2002, the former Iraqi regime 
acquired $10.1 billion in illegal revenues--$5.7 billion through oil 
smuggled out of Iraq 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.[Footnote 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. Appendix II describes our methodology for determining 
illegal revenues gained by the former Iraqi regime.

Oil was smuggled out through several routes, according to U.S. 
government officials and oil industry experts. Oil entered Syria by 
pipeline, crossed the borders of Jordan and Turkey by truck, and was 
smuggled through the Persian Gulf by ship. In addition to revenues from 
oil smuggling, the Iraqi government levied surcharges against oil 
purchasers and commissions against commodity suppliers participating in 
the Oil for Food program. According to some Security Council members, 
the surcharge was up to 50 cents per barrel of oil and the commission 
was 5 to 15 percent of the commodity contract.

In our 2002 report, we estimated that the Iraqi regime received a 5-
percent illicit commission on commodity contracts. However, a September 
2003 Department of Defense review found that at least 48 percent of 759 
Oil for Food contracts that it reviewed were potentially overpriced by 
an average of 21 percent.[Footnote 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 Iraqi regime officials, including the former oil and finance 
ministers, confirmed that the former regime received a 10-percent 
commission from commodity suppliers. According to the former oil 
minister, the regime instituted a fixed 10-percent commission in early 
2001 to address a prior "compliance" problem with junior officials. 
These junior officials had been reporting lower commissions than what 
they had negotiated with suppliers and pocketing the difference.

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

Both OIP, as an office within the U.N. Secretariat, and the Security 
Council's 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 purchases, but it is unclear what actions it took to respond to 
commissions on commodity contracts.

Iraq Negotiated Directly with Oil Purchasers and Suppliers:

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

When the United Nations first proposed the Oil for Food program in 
1991, it recognized this vulnerability. At that time, the Secretary 
General proposed that either the United Nations, an independent agent, 
or the government of Iraq be given the responsibility to negotiate 
contracts with oil purchasers and commodity suppliers. The Secretary 
General concluded that it would be highly unusual or impractical for 
the United Nations or an independent agent to trade Iraq's oil or 
purchase commodities. He recommended that Iraq negotiate the contracts 
and select the contractors. However, he stated that the United Nations 
and Security Council would have to ensure that Iraq's contracting did 
not circumvent the sanctions and was not fraudulent. The Security 
Council further proposed that U.N. agents review contracts and 
compliance at Iraq's oil ministry, but Iraq refused these terms.

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 legal 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 independent U.N. inspection agents were responsible for 
monitoring the quality and quantity of the oil shipped. The agents were 
authorized to stop shipments if they found irregularities. OIP hired a 
private firm to monitor Iraqi oil sales at exit points. However, the 
monitoring measures contained weaknesses. According to U.N. reports and 
a statement from the monitoring firm, the major offshore terminal at 
Mina al-Bakar did not have a meter to measure the oil pumped nor could 
onshore storage capacity be measured. Therefore, the U.N. monitors 
could not confirm the volume of oil loaded onto vessels. Also, in 2001, 
the oil tanker Essex took a large quantity of unauthorized oil from the 
platform when the monitors were off duty. In December 2001, the 
Security Council called upon OIP to improve the monitoring at the 
offshore terminal.

OIP also was 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 and 
social sectors, including electricity, oil, and telecommunications.

* The sanction committee's procedures for implementing Security Council 
resolution 986 stated that experts in the U.N. 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. 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. However, OIP officials also stated that, in a 
number of instances, they reported to the sanctions committee that 
commodity prices appeared high but the committee did not cite pricing 
as a reason to place holds on the contracts.

* 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.

Audits Identified Some Operational Concerns but No Fraud:

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. The 
Secretary General established an escrow account at BNP Paribas for the 
deposit of Iraqi oil revenues and the issue of letters of credit to 
suppliers with approved contracts. The U.N. Board of Audit, a body of 
external public auditors, audited the account. The external audits 
focused on management issues related to the Oil for Food program and 
the financial condition of the Iraq account. U.N. auditors generally 
concluded that the Iraq account was fairly presented in accordance with 
U.N. financial standards. The reports stated that OIP was generally 
responsive to external audit recommendations. The external audits 
determined that oil prices were mostly in accordance with the fair 
market value of oil products to be shipped and checked to confirm that 
pricing was properly and consistently applied. They also determined 
that humanitarian and essential services supplies procured with oil 
funds generally met contract terms with some exceptions. U.N. external 
audit reports contained no findings of fraud during the program.

The U.N. Office of Internal Oversight Services (OIOS) conducted 
internal audits of the Oil for Food program and reported the results to 
OIP's executive director. OIOS officials stated that they have 
completed 55 audits and have 4 ongoing audits of the Oil for Food 
program. Overall, OIOS reported that OIP had made satisfactory progress 
in implementing most of its recommendations. However, because we do not 
have audit authority at the United Nations, we do not have access to 
individual OIOS audit reports. However, we were able to obtain 7 very 
brief summaries of OIOS reports covering the Oil for Food program from 
July 1, 1996, through June 30, 2003. These summaries identify a variety 
of operational concerns involving procurement, inflated pricing and 
inventory controls, coordination, monitoring, and oversight. In one 
case, OIOS cited purchase prices for winter items for displaced persons 
in northern Iraq that were on average 61 percent higher than local 
vendor quotes obtained by OIOS. In another case, an OIOS review found 
that there was only limited coordination of program planning and 
insufficient review and independent assessment of project 
implementation activities.

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 directed all states to 
prevent Iraq from exporting all products, including petroleum, 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 to 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.

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. The United States conducted the most thorough review; about 
60 U.S. government technical experts assessed each item in a contract 
to determine its potential military application. According to U.N. 
Secretariat data in 2002, the United States was responsible for about 
90 percent of the holds placed on goods to be exported to Iraq. As of 
April 2002, about $5.1 billion worth of goods were being held for 
shipment to Iraq. According to OIP, no contracts were held solely on 
the basis of price.

Under Security Council resolution 986 of 1995 and Security Council 
procedures, the sanctions committee was responsible for approving 
Iraq's oil contracts, particularly to ensure that the contract price 
was fair, and for approving Iraq's commodity contracts. The U.N.'s oil 
overseers reported in November 2000 that the oil prices proposed by 
Iraq appeared low and did not reflect the fair market value.[Footnote 
5] According to a senior OIP official, the independent oil overseers 
also reported in December 2000 that purchasers of Iraqi oil had been 
asked to pay surcharges. In March 2001, the United States informed the 
sanctions committee about allegations that Iraqi government officials 
were receiving illegal surcharges on oil contracts and illicit 
commissions on commodity contracts. The sanctions committee took action 
on the allegations of surcharges in 2001 by implementing retroactive 
pricing for oil contracts.[Footnote 6]

However, it is unclear what actions the sanctions committee took to 
respond to illicit commissions on commodity contracts. Due to 
increasing concern about the humanitarian situation in Iraq and 
pressure to expedite the review process, the Security Council passed 
resolution 1284 in December 1999 to direct the sanctions committee to 
accelerate the review process. Under fast-track procedures, the 
sanctions committee allowed OIP to approve contracts for food, medical 
supplies, and agricultural equipment (beginning in March 2000), water 
treatment and sanitation (August 2000), housing (February 2001), and 
electricity supplies (May 2001).

Challenges Facing the CPA and Interim Iraqi Government in Administering 
Oil for Food Contracts:

In November 2003, the United Nations transferred to the CPA 
responsibility for 3,059 Oil for Food contracts totaling about $6.2 
billion; the remaining 2,199 contracts were not continued for a variety 
of reasons. U.N. agencies had renegotiated most of the contracts 
transferred to the CPA with the suppliers to remove illicit charges and 
amend delivery and location terms. A lack of coordination and 
communication about contract documentation and inadequate staffing 
affected the transfer process and hampered the ability of the CPA's Oil 
for Food coordination center to ensure commodity deliveries continued 
without disruption. Evolving policy and implementation decisions on the 
food distribution system, coordination, and the security situation 
affected the execution of food contracts. 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. In addition, inadequate 
oversight and alleged corruption in the Oil for Food program raise 
concerns about the Iraqi government's ability to manage the remaining 
contracts and absorb donor reconstruction funds. The CPA has taken 
steps, such as appointing inspectors general, to strengthen 
accountability measures in Iraq's ministries.

Program Transferred to the CPA in November 2003:

According to OIP, it transferred 3,059 contracts worth about $6.2 
billion in pending commodity shipments to the CPA on November 22, 2003. 
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 
continued as a result of a review by U.N. agencies, the CPA, and the 
Iraqi ministries that negotiated the contracts.[Footnote 7] For 
example:

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

* Another 728 contracts, worth about $750 million, had been classified 
as priority contracts, but were not continued 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.

* 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 Communication, Coordination, and Staffing Affected the 
Transfer and Implementation of Contracts:

U.N. resolution 1483 requested the Secretary General, through OIP, to 
transfer to the CPA all relevant documentation on Oil for Food 
contracts.[Footnote 8] However, CPA officials reported that they did 
not receive complete information, including copies of all contracts. 
The CPA stated that it received several compact disks in November and 
January that were to contain detailed contract and delivery data but 
that the information was incomplete. The CPA further stated that it 
received incomplete 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. A CPA 
official stated that, as of April 26, 2004, the center had only 20 
percent of the contracts it needed. In addition, the CPA received 
little information on letters of credit that had expired. 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 could not determine the 
disposition of Oil for Food funds and whether the proper amounts were 
deposited into the Development Fund for Iraq.[Footnote 9] The CPA also 
reported that the database it received was unreliable because it 
contained mathematical and currency errors in the calculations of 
contract cost. According to CPA officials, the inadequate data and 
documentation have made it difficult to prepare accurate reports on the 
status of inbound goods and closeouts of completed contracts.

OIP officials stated that they had transferred all relevant contract 
information requested by the CPA prior to the transfer date of November 
21, 2003. According to a senior OIP official, OIP and U.N. agencies 
continued to provide relevant information on revised contract 
amendments and letters of credit within 2 weeks beyond the transfer 
date. This official stated that the CPA lost some compact disks and 
some CPA offices were unaware that other CPA offices had the disks. OIP 
stated that, on several occasions, it clarified for the CPA the 
locations of the misplaced disks and issued duplicates for lost disks. 
OIP further noted that it transferred an operational database to the 
CPA on November 21, 2003. According to a senior OIP official, the CPA 
sent one junior staff to be trained, in 3 or 4 days, in managing a very 
large and complex database. This official noted that a database of this 
size would inevitably contain some errors, but the errors on this 
database were not of the magnitude to significantly hamper operations.

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. 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; 
OIP stated that this was due to the lack of complete information from 
the CPA on how deliveries were to be authenticated. A September 2003 
U.N. report also noted that the transfer process in the northern 
governates was slowing down 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. However, according to a coordination center official, as of 
April 26, 2004, inadequate staffing continued to hamper the CPA's 
ability to ensure that Oil for Food deliveries continue without 
disruption.

Changing Policy and Implementation Decisions, 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. In addition, problems in 
transportation and communications and general confusion after major 
combat operations delayed contracts that had been prioritized.

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. As a result, 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 a provisional Iraqi government.

In January 2004, CPA negotiated a memorandum of understanding (MOU) 
with WFP and the Ministry of Trade that committed WFP to procuring a 3-
month, $900 million emergency food stock by March 31, 2004, and 
assuming the delivery of remaining food basket items to hub warehouses 
inside Iraq through June 2004. 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. In accordance with the MOU, WFP 
completed its procurement of emergency food stocks by March 31, 2004. 
The Ministry of Trade assumed responsibility for food procurement on 
April 1, 2004.

A U.S. official stated in early March 2004 that coordination between 
WFP and the Ministry of Trade had been deteriorating. The Ministry had 
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 were subject to sudden, large, and unexplained stock adjustments, 
thereby making it difficult to plan deliveries. However, a State 
Department official noted in April 2004 that coordination between WFP 
and the Ministry was improving.

The security environment in Iraq also affected planning for the 
transfer and the movement of Oil for Food goods in the fall of 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, following the 
bombing of the U.N. office in August 2003, affected the timetable and 
procedures for the transfer of the Oil for Food program to the CPA and 
contributed to delays in prioritizing and renegotiating contracts. 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 office 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. According to a coordination center official in 
Baghdad, the worsening security situation during April 2004 has 
affected the food supply due to (1) the withdrawal of insurance by a 
major Arab insurance company, which is making it more difficult to find 
shippers to carry goods into Iraq; (2) a shortage of truck drivers 
willing to drive in Iraq; and (3) continuing and shifting route 
closures and generally high-risk conditions.

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 Finance and Planning 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[Footnote 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 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.

Addressing Corruption:

The history of inadequate oversight and alleged 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. 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 $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 an effective financial management system in Iraq's 
ministries.

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

Potential Issues for Further Investigation:

Several investigations into the Oil for Food program are planned or 
under way. A U.N. inquiry officially began on April 21, 2004, with a 
Security Council resolution supporting the inquiry[Footnote 11] and the 
appointment of three high-level officials to oversee the investigation. 
In addition, the CPA's Inspector General is planning to contract with 
an independent accounting firm to assess the Oil for Food program's 
internal controls and to assist the CPA in its management of the 
program. The Defense Contract Audit Agency is working with the CPA 
Inspector General to refine the scope of work and will also act as 
CPA's contracting representative for the review. The Iraqi Governing 
Council also contracted with an international accounting firm to 
investigate the extent to which individuals and entities wrongfully 
benefited from the Oil for Food program and identify those assets for 
recovery to the Iraqi government.

These investigations of the Oil for Food program provide an opportunity 
to better quantify the extent of corruption, determine the adequacy of 
internal controls, and identify ways to improve future humanitarian 
assistance programs conducted within an economic sanctions framework. 
Based on our work, we have identified several areas that warrant 
further analysis:

Size and Structure of the Oil for Food Program:

The scope of the Oil for Food program was extensive. The United Nations 
attempted to oversee a $67 billion program providing humanitarian and 
other assistance in 24 sectors to a country with 24 million people and 
borders 3,500 kilometers long.

When the program was first proposed in 1991, the Secretary General 
considered having either the United Nations, an independent agent, or 
the Iraqi government negotiate oil and commodity contracts. The 
Secretary General concluded that the first two options were impractical 
and proposed that Iraq would negotiate the contracts and U.N. staff 
would work at Iraq's oil ministry to ensure compliance. The final MOU 
between the Iraqi government and the United Nations granted control of 
contract negotiations to Iraq in recognition of its sovereignty.

1. How did the size and structure of the Oil for Food program enable 
the Iraqi government to obtain illegal revenues through illicit 
surcharges and commissions?

Role of Member States in Oversight:

Under Security Council resolutions, all member states were responsible 
for enforcing the sanctions and the United Nations depended on states 
bordering Iraq to deter smuggling. National companies were required to 
register with their respective permanent missions to the United Nations 
prior to direct negotiations with the Iraqi government, but it is 
unclear what criteria the missions used to assess the qualifications of 
their companies.

1. What was the role of member states in monitoring and enforcing the 
sanctions? What were the criteria used to certify national purchasers 
of oil and suppliers of commodities?

Role of Neighboring States:

Prior to the imposition of sanctions, Turkey was one of Iraq's major 
trading partners. Total trade between the two countries was valued at 
$3 billion per year, and Turkey received about $1 billion each year by 
trucking goods to Iraq from Turkish ports. Jordan has also been a top 
trading partner; in 2001, it was the fifth largest exporter to Iraq and 
was the ninth largest importer of Iraqi commodities.

Jordan and Iraq had annual trade protocols during the U.N. sanctions 
that allowed Iraq to sell heavily discounted oil to Jordan in exchange 
for up to $300 million in Jordanian goods. The sanctions committee 
noted the existence of the protocol but took no action.

From November 2000 to March 2003, Iraq exported up to 200,000 barrels 
per day of oil through a Syrian pipeline in violation of UN sanctions. 
It is unclear what actions the sanctions committee or the United States 
took to stop the illegal exporting of Iraqi oil to Syria.

What actions, if any, were taken to reduce smuggling of Iraqi oil? What 
precluded the sanctions committee from taking action?

Assessing the Reasonableness of Contract Pricing:

While sanctions committee procedures stated that the Secretariat was to 
examine each contract for price and value, OIP officials stated that no 
U.N. resolution tasked them with assessing the price reasonableness of 
the contracts. Although the sanctions committee was responsible for 
approving commodity contracts, it primarily screened contracts to 
prevent the purchases of items with potential military uses.

In December 1999, U.N. Security Council resolution 1284 directed the 
sanctions committee to accelerate approval procedures for goods no 
longer subject to sanctions committee review, including food and 
equipment and supplies to support the health, agricultural, water 
treatment and sanitation, housing, and electricity sectors.

Who assessed the reasonableness of prices for commodity contracts 
negotiated between the Iraqi government and suppliers and what actions 
were taken? How were prices for commodities assessed for reasonableness 
under fast-track procedures?

Much of the information on surcharges on oil sales and illicit 
commissions on commodity contracts is with the ministries in Baghdad 
and national purchasers and suppliers. We did not have access to this 
data to verify the various allegations of corruption associated with 
these transactions. Subsequent investigations of the Oil for Food 
program should include a statistical sampling of these transactions to 
more accurately document the extent of corruption and the identities of 
companies and countries that engaged in illicit transactions. This 
information would provide a basis for restoring those assets to the 
Iraqi government.

Subsequent evaluations and audits should also consider an analysis of 
the lessons learned from the Oil for Food program and how future 
humanitarian programs of this nature should be structured to ensure 
that funds are spent on intended beneficiaries and projects. For 
example, analysts may wish to review the codes of conduct developed for 
the CPA's Oil for Food coordination center and suppliers. In addition, 
U.N. specialized agencies implemented the program in the northern 
governates while the program in central and southern Iraq was run by 
the central government in Baghdad. A comparison of these two approaches 
could provide insight on the extent to which the operations were 
transparent and the program delivered goods and services to the Iraqi 
people.

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 Acknowledgments:

For questions regarding this testimony, please call Joseph Christoff at 
(202) 512-8979. Other key contributors to this statement were Pamela 
Briggs, Mark Connelly, Lynn Cothern, Philip Farah, Zina Merritt, Tetsuo 
Miyabara, Stephanie Robinson, Jonathan Rose, Richard Seldin, Audrey 
Solis, Roger Stoltz, and Phillip Thomas. Lyric Clark, Jeanette 
Espinola, Josï¿½ M. Peï¿½a, III, and Eve Weisberg also provided technical 
support.

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

Date: Aug. 2, 1990; Event/Action: U.N. Security Council Resolution 660; 
Summary: Iraqi forces invaded Kuwait. Resolution 660 condemned the 
invasion and demands immediate withdrawal from Kuwait.

Date: Aug. 6, 1990; Event/Action: U.N. Security Council Resolution 661; 
Summary: Imposed economic sanctions against the Republic of Iraq. The 
resolution called for member states to prevent all commodity imports 
from Iraq and exports to Iraq, with the exception of supplies intended 
strictly for medical purposes and, in humanitarian circumstances, 
foodstuffs.

Date: Aug. 6, 1990; Event/Action: Operation Desert Shield; Summary: 
President Bush ordered the deployment of thousands of U.S. forces to 
Saudi Arabia.

Date: Nov. 5, 1990; Event/Action: U.S. legislation; Summary: Public Law 
101-513, ï¿½358C, prohibited the import of products from Iraq into the 
United States and export of U.S. products to Iraq.

Date: Jan. 12, 1991; Event/Action: U.S. legislation; Summary: Iraq War 
Powers Resolution authorized the president to use "all necessary means" 
to compel Iraq to withdraw military forces from Kuwait.

Date: Jan. 16, 1991; Event/Action: Operation Desert Storm; Summary: 
Operation Desert Storm was launched: Coalition operation was targeted 
to force Iraq to withdraw from Kuwait.

Date: Feb. 28, 1991; Event/Action: Gulf War cease-fire; Summary: Iraq 
announced acceptance of all relevant U.N. Security Council 
resolutions.

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

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

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

Date: Sep. 19, 1991; Event/Action: U.N. Security Council Resolution 
712; Summary: Second attempt to create an Oil for Food program. Iraq 
rejected the terms of this resolution.

Date: Oct. 2, 1992; Event/Action: U.N. Security Council Resolution 778; 
Summary: Authorized transferring money produced by any Iraqi oil 
transaction on or after August 6, 1990, which had been deposited into 
the escrow account, to the states or accounts concerned as long as the 
oil exports took place or until sanctions were lifted.

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

Date: Mar. 27, 1996; Event/Action: U.N. Security Council Resolution 
1051; Summary: Established the export and import monitoring system for 
Iraq.

Date: May 20, 1996; Event/Action: Government of Iraq and the United 
Nations; Summary: Signed a memorandum of understanding allowing Iraq's 
export of oil to pay for food, medicine, and essential civilian 
supplies.

Date: Jun. 17, 1996; Event/Action: United States; Summary: 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: Jul. 9, 1996; Event/Action: U.N. Security Council Sanctions 
Committee; Summary: Committee members asked the United States for more 
factual information about smuggling allegations, including the final 
destination and the nationality of the vessels involved.

Date: Aug. 28, 1996; Event/Action: U.S. delegation to the U.N. Security 
Council Sanctions Committee; Summary: Provided briefing on the Iraqi 
oil smuggling allegations to the sanctions committee.

Date: Dec. 3, 1996; Event/Action: Islamic Republic of Iran Permanent 
Representative to the United Nations; Summary: Acknowledged that some 
vessels carrying illegal goods and oil to and from Iraq 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.

Date: Dec. 10, 1996; Event/Action: Iraq and the United Nations; 
Summary: Phase I of the Oil for Food program began.

Date: Jun. 4, 1997; Event/Action: U.N. Security Council Resolution 
1111; Summary: Extended the term of resolution 986 another 180 days 
(phase II).

Date: Sep. 12, 1997; Event/Action: U.N. Security Council Resolution 
1129; Summary: Authorized special provision to allow Iraq to sell 
petroleum in a more favorable time frame.

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

Date: Nov. 18, 1997; Event/Action: Coordinator of the Multinational 
Interception Force (MIF); Summary: Reported to the U.N. Security 
Council sanctions committee that since February 1997 there had been a 
dramatic increase in the number of ships smuggling petroleum from Iraq 
inside Iranian territorial waters.

Date: Dec. 4, 1997; Event/Action: U.N. Security Council Resolution 
1143; Summary: Extended the Oil for Food program another 180 days 
(phase III).

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

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

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

Date: Aug. 14, 1998; Event/Action: U.S. legislation; Summary: Public 
Law 105-235, a joint resolution finding Iraq in unacceptable and 
material breach of its international obligations.

Date: Oct. 31, 1998; Event/Action: U.S. legislation: Iraq Liberation 
Act; Summary: Public Law 105-338, ï¿½4, authorized the president to 
provide assistance to Iraqi democratic opposition organizations.

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

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

Date: Dec. 16, 1998; Event/Action: Operation Desert Fox; Summary: 
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: Mar. 3, 1999; Event/Action: President Clinton Report to Congress; 
Summary: President Clinton provided the status of efforts to obtain 
Iraq's compliance with U.N. Security Council resolutions. He discussed 
the MIF report of oil smuggling out of Iraq and smuggling of other 
prohibited items into Iraq.

Date: May 21, 1999; Event/Action: U.N. Security Council Resolution 
1242; Summary: Renewed the Oil for Food program another 6 months (phase 
VI).

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

Date: Nov. 19, 1999; Event/Action: U.N. Security Council Resolution 
1275; Summary: Extended phase VI of the Oil for Food program for 2 
weeks until December 4, 1999.

Date: Dec. 3, 1999; Event/Action: U.N. Security Council Resolution 
1280; Summary: Extended phase VI of the Oil for Food program for 1 week 
until December 11, 1999.

Date: Dec. 10, 1999; Event/Action: U.N. Security Council Resolution 
1281; Summary: Renewed the Oil for Food program another 6 months (phase 
VII).

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

Date: Mar. 31, 2000; Event/Action: U.N. Security Council Resolution 
1293; Summary: Increased oil spare parts allocation from $300 million 
to $600 million under phases VI and VII.

Date: Jun. 8, 2000; Event/Action: U.N. Security Council Resolution 
1302; Summary: Renewed the Oil for Food program another 180 days until 
December 5, 2000 (phase VIII).

Date: Dec. 5, 2000; Event/Action: U.N. Security Council Resolution 
1330; Summary: Extended the Oil for Food program another 180 days 
(phase IX).

Date: Mar. 8, 2001; Event/Action: Deputy U.S. Representative to the 
United Nations Remarks to the Security Council; Summary: Ambassador 
Cunningham acknowledged Iraq's illegal re-export of humanitarian 
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.

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

Date: Jun. 1, 2001; Event/Action: U.N. Security Council Resolution 
1352; Summary: Extended the terms of resolution 1330 (phase IX) another 
30 days.

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

Date: Nov. 29, 2001; Event/Action: U.N. Security Council Resolution 
1382; Summary: 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).

Date: May 14, 2002; Event/Action: U.N. Security Council Resolution 
1409; Summary: UNMOVIC reviewed export contracts to ensure that they 
contain no items on a designated list of dual-use items known as the 
Goods Review List. The resolution also extended the program another 180 
days (phase XII).

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

Date: Nov. 25, 2002; Event/Action: U.N. Security Council Resolution 
1443; Summary: Extended phase XII of the Oil for Food program another 9 
days.

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

Date: Dec. 30, 2002; Event/Action: U.N. Security Council Resolution 
1454; Summary: Approved changes to the list of goods subject to review 
and the sanctions committee.

Date: Mar. 12, 2003; Event/Action: U.N. Security Council Sanctions 
Committee; Summary: Chairman reported on a number of alleged sanctions 
violations noted by letters from several countries and the media from 
February to November 2002. Alleged incidents involved Syria, India, 
Liberia, Jordan, Belarus, Switzerland, Lebanon, Ukraine, and the United 
Arab Emirates.

Date: Mar. 19, 2003; Event/Action: Operation Iraqi Freedom; Summary: 
Operation Iraqi Freedom is launched. Coalition operation led by the 
United States initiated hostilities in Iraq.

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

Date: Apr. 16, 2003; Event/Action: U.S. legislation; Summary: Public 
Law 108-11, ï¿½1503, authorized the President to suspend the application 
of any provision of the Iraq Sanctions Act of 1990.

Date: Apr. 24, 2003; Event/Action: U.N. Security Council Resolution 
1476; Summary: Extended provision of resolution 1472 until June 3, 
2003.

Date: May 1, 2003; Event/Action: Operation Iraqi Freedom; Summary: End 
of major combat operations and beginning of post-war rebuilding 
efforts.

Date: May 22, 2003; Event/Action: U.N. Security Council Resolution 
1483; Summary: Lifted civilian sanctions on Iraq and provided for the 
end of the Oil for Food program within 6 months, transferring 
responsibility for the administration of any remaining program 
activities to the Coalition Provisional Authority (CPA).

Date: Nov. 21, 2003; Event/Action: U.N. Secretary General; Summary: 
Transferred administration of the Oil for Food program to the CPA.

Date: Mar.19, 2004; Event/Action: U.N. Secretary General; Summary: 
Responded to allegations of fraud by U.N. officials that were involved 
in the administration of the Oil for Food program.

Date: Mar. 25, 2004; Event/Action: U.N. Secretary General; Summary: 
Proposed that a special investigation be conducted by an independent 
panel.

Date: April 21, 2004; Event/Action: U.N. Security Council Resolution 
1538; Summary: Supported the appointment of the independent high-level 
inquiry and called upon the CPA, Iraq, and member states to cooperate 
fully with the inquiry.

[End of table]

[End of section]

Appendix II: Scope and Methodology:

We used the following methodology to estimate the former Iraqi regime's 
illicit revenues from oil smuggling, surcharges on oil, and commissions 
from commodity contracts from 1997 through 2002:

To estimate the amount of oil the Iraqi regime smuggled, we used Energy 
Information Administration (EIA) estimates of Iraqi oil production and 
subtracted oil sold under the Oil for Food program and domestic 
consumption. The remaining oil was smuggled through Turkey, the Persian 
Gulf, Jordan, and Syria (oil smuggling to Syria began late 2000). Our 
estimate is on information from and discussions with officials of EIA, 
Cambridge Energy Research Associates, and the Middle East Economic 
Survey, and the private consulting firm Petroleum Finance.

We used the price of oil sold to estimate the proceeds from smuggled 
oil. We discounted the price by 9 percent for the difference in 
quality. We discounted this price by 67 percent for smuggling to Jordan 
and by 33 percent for smuggling through Turkey, the Persian Gulf, and 
Syria. According to oil industry experts, this is representative of the 
prices paid for smuggled oil.

To estimate the amount Iraq earned from surcharges on oil, we 
multiplied the barrels of oil sold under the Oil for Food program from 
1997 through 2002 by 25 cents per barrel. According to Security Council 
members, the surcharge varied, but Iraq tried to get as much as 50 
cents per barrel. Industry experts also stated the surcharge varied.

To estimate the commission from commodities, we multiplied Iraq's 
letters of credit for commodity purchases by 5 percent for 1997 through 
1998 and 10 percent for 1999 through 2002. According to Security 
Council members, the commission varied from 5 percent to 10 percent. 
This percentage was also confirmed in interviews conducted by U.S. 
officials with former Iraqi regime ministers of oil, finance, and trade 
and with Sadaam Hussein's presidential advisors.

GAO did not obtain source documents and records from the former regime 
about its smuggling, surcharges, and commissions. Our estimate of 
illicit revenues is therefore not a precise accounting number. Areas of 
uncertainty in our estimate include:

GAO's estimate of the revenue from smuggled oil is less than the 
estimates of U.S. intelligence agencies. We used estimates of Iraqi oil 
production and domestic consumption for our calculations. U.S. 
intelligence agencies used other methods to estimate smuggling.

GAO's estimate of revenue from oil surcharges is based on a surcharge 
of 25 cents per barrel from 1997 through 2002. However, the average 
surcharge could be lower. U.N. Security Council members and oil 
industry sources do not know when the surcharge began or ended or the 
precise amount of the surcharge. One oil industry expert stated that 
the surcharge was imposed at the beginning of the program but that the 
amount varied. Security Council members and the U.S. Department of 
Treasury reported that surcharges ranged from 10 cents to 50 cents per 
barrel. As a test of reasonableness, GAO compared the price paid for 
oil under the Oil for Food program with a proxy oil price for the 
period 1997 through 2002. We found that for the entire period, the 
price of Iraqi oil was considerably below the proxy price. Oil 
purchasers would have to pay below market price to have a margin to pay 
the surcharge.

GAO's estimate of the commission on commodities could be understated. 
We calculated commissions based on the commodity contracts for the 15 
governates in central and southern Iraq (known as the "59-percent 
account" because these governates received this percentage of Oil for 
Food revenues). However, the former Iraqi regime negotiated the food 
and medical contracts for the northern governates, and the Defense 
Contract Audit Agency found that some of these contracts were 
potentially overpriced. The Defense Contract Audit Agency also found 
extra fees of between 10 and 20 percent on some contracts.

FOOTNOTES

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

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

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

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

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

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

[7] According to OIP, neither the United Nations nor the CPA had the 
authority to cancel these contracts. The future of these contracts is 
to be decided by a sovereign Iraqi government.

[8] U.N. Resolution 1483, ï¿½16(f) (May 2003).

[9] As of Apri1 21, 2004, the United Nations had transferred $8.1 
billion in Oil for Food funds to the Development Fund for Iraq.

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

[11] U.N. Security Council Resolution 1538 (April 2004).