    United Nations: Lessons Learned from Oil for Food Program
    Indicate the Need to Strengthen UN Internal Controls and
    Oversight Activities (25-APR-06, GAO-06-330).

    In 1996, the United Nations (UN) Security Council and Iraq began
    the Oil for Food program to address Iraq's humanitarian situation
    after sanctions were imposed in 1990. More than $67 billion in
    oil revenue was obtained through the program, with $31 billion in
    humanitarian assistance delivered to Iraq. The 2005 Defense
    Authorization Act mandated that GAO review the Oil for Food
    program. GAO reviewed how the UN adhered to five key internal
    control standards in its stewardship of the program. GAO assessed
    (1) the program's control environment and (2) key elements of the
    other internal control standards. GAO also reported on the UN
    Compensation Commission's progress in paying reparations from
    Iraq's invasion of Kuwait.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-330
        ACCNO:   A52542
      TITLE:     United Nations: Lessons Learned from Oil for Food Program
    Indicate the Need to Strengthen UN Internal Controls and
    Oversight Activities
         DATE:   04/25/2006
      SUBJECT:   Food relief programs
    	     Foreign aid programs
    	     Foreign governments
    	     Internal controls
    	     International food programs
    	     International organizations
    	     International relations
    	     International trade restriction
    	     Monitoring
    	     Program abuses
    	     Program management
    	     Reparations
    	     Risk assessment
    	     Sanctions
    	     Lessons learned
    	     Iraq
    	     United Nations Oil for Food Program

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    GAO-06-330

         * Results in Brief
         * Background
         * Early Compromises in Program Structure and Widely Diffused M
              * The Oil for Food Program Included Compromises that Limited U
              * Numerous Entities Shared Key Responsibilities, but Authority
         * Oil for Food Program Fell Short of Additional Internal Contr
              * Key Weaknesses and Challenges Were Not Addressed Due to Abse
              * Control Activities Mitigated Questionable Oil Pricing and th
                   * Inadequate Control of Oil Shipments and Oil Export Contracts
                   * Retroactive Pricing Helped Limit Illicit Oil Surcharges
                   * Contract Examination Procedures Emphasized Dual-Use Items-No
                   * Earlier Proposal for Price and Quality Review Was Not Includ
                   * Program in Northern Iraq Had Inadequate Asset and Cash Manag
              * Poor Information and Communication Compromised Disclosure of
              * Monitoring Activities Did Not Ensure Adequate Internal Overs
                   * Limitations on OIOS Reporting and Resources Compromised Its
                   * OIOS Found Numerous Problems in UN Management of Program in
         * UNCC Has Paid More than $20 Billion in Compensation Claims,
              * Almost $32.2 Billion in Unpaid Awards Increases Iraq's Debt
              * UNCC Had Controls for Claims Preparation, but OIOS Reported
                   * UNCC Secretariat Had Controls for Processing Claims
                   * OIOS Reported Concerns with Award Payments, but UNCC Challen
         * Conclusion
         * Recommendation for Executive Action
         * Agency Comments and Our Evaluation
              * Oil Sales
              * Humanitarian Assistance to Central and Southern Iraq
              * Humanitarian Assistance to Northern Iraq
              * Illicit Surcharges on Exported Oil
              * Commodity Purchase Kickbacks
              * Smuggling and Trade-Related Revenues
              * Other Estimates of Illicit Revenue
              * UNCC Formation and Organization
              * UNCC's Claims Categories and Amounts
         * GAO Comments
         * GAO Comments
         * GAO Contact
         * Staff Acknowledgments
         * GAO's Mission
         * Obtaining Copies of GAO Reports and Testimony
              * Order by Mail or Phone
         * To Report Fraud, Waste, and Abuse in Federal Programs
         * Congressional Relations
         * Public Affairs

    Contents

    Letter 1

    Results in Brief 3
    Background 6
    Early Compromises in Program Structure and Widely Diffused Management
    Responsibilities Led to Weak Control Environment 10
    Oil for Food Program Fell Short of Additional Internal Control Standards
    20
    UNCC Has Paid More than $20 Billion in Compensation Claims, but Remaining
    Payments of More than $32 Billion May Take until 2020 30
    Conclusion 35
    Recommendation for Executive Action 36
    Agency Comments and Our Evaluation 36
    Appendix I Scope and Methodology 40
    Appendix II Oil for Food Program Processes 45
    Appendix III Estimates and Ranges of Iraq's Illicit Revenues and Payments
    during the Oil for Food Program 48
    Appendix IV UNCC Organization and Its Claims Categories and Amounts 51
    Appendix V Comments from the Department of State 54
    GAO Comments 59
    Appendix VI Comments from the UN Compensation Commission 62
    GAO Comments 67
    Appendix VII GAO Contacts and Staff Acknowledgments 69
    Related GAO Products 70

    Tables

    Table 1: Estimates of Iraq's Illicit Revenues during the Period of the Oil
    for Food Program, by Source 48
    Table 2: Ranges of Iraq's Illicit Revenues during the Oil for Food Program
    48
    Table 3: UNCC Claims Categories 52

    Figures

    Figure 1: Programs and Activities Authorized by Security Council
    Resolution 986 9
    Figure 2: Internal Control Standards Related to UN Sanctions against Iraq
    and the Oil for Food Program 12
    Figure 3: Multiple Organizations Managed the Oil for Food Program and
    Enforced UN Sanctions 16
    Figure 4: Claims Received and Awarded by Category 53

    Abbreviations

    IMF International Monetary Fund OIOS Office of Internal Oversight Services
    OIP Office of the Iraq Program SOMO State Oil Marketing Organization UN
    United Nations UNCC United Nations Compensation Commission UNOHCI United
    Nations Office of the Humanitarian Coordinator for Iraq

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States Government Accountability Office

    Washington, DC 20548

    April 25, 2006 April 25, 2006

    Congressional Committees: Congressional Committees:

    In 1996, the United Nations (UN) Security Council and Iraq began the Oil
    for Food program to address growing concerns about Iraq's humanitarian
    situation after international sanctions were imposed in 1990. Authorized
    by Security Council resolution 986, the intent of the program was to allow
    the Iraq government to use the proceeds of its oil sales to pay for food,
    medicine, and infrastructure maintenance and-at the same time-prevent the
    regime from obtaining goods for military purposes. Resolution 986 also
    provided that a portion of the oil sales be used for a separate program to
    pay compensation through the UN Compensation Commission (UNCC) to victims
    of Iraq's invasion of Kuwait in 1990. Iraq obtained more than $67 billion
    in oil revenues through the program; as of November 2003, about $31
    billion in commodities and humanitarian assistance had been delivered to
    Iraq. Four key entities were responsible for most of the program's
    operations-(1) the Security Council's Iraq sanctions committee, (2) the UN
    Secretariat's Office of the Iraq Program, (3) nine UN agencies with
    separate programs in northern Iraq, and (4) the Iraqi government under
    Saddam Hussein. Allegations of corruption and misconduct within the UN Oil
    for Food program and the overall management of the humanitarian program
    have prompted a number of investigations. The 2005 Defense Authorization
    Act mandated that GAO review the Oil for Food program.1 In 1996, the
    United Nations (UN) Security Council and Iraq began the Oil for Food
    program to address growing concerns about Iraq's humanitarian situation
    after international sanctions were imposed in 1990. Authorized by Security
    Council resolution 986, the intent of the program was to allow the Iraq
    government to use the proceeds of its oil sales to pay for food, medicine,
    and infrastructure maintenance and-at the same time-prevent the regime
    from obtaining goods for military purposes. Resolution 986 also provided
    that a portion of the oil sales be used for a separate program to pay
    compensation through the UN Compensation Commission (UNCC) to victims of
    Iraq's invasion of Kuwait in 1990. Iraq obtained more than $67 billion in
    oil revenues through the program; as of November 2003, about $31 billion
    in commodities and humanitarian assistance had been delivered to Iraq.
    Four key entities were responsible for most of the program's
    operations-(1) the Security Council's Iraq sanctions committee, (2) the UN
    Secretariat's Office of the Iraq Program, (3) nine UN agencies with
    separate programs in northern Iraq, and (4) the Iraqi government under
    Saddam Hussein. Allegations of corruption and misconduct within the UN Oil
    for Food program and the overall management of the humanitarian program
    have prompted a number of investigations. The 2005 Defense Authorization
    Act mandated that GAO review the Oil for Food program.1

    Policymakers and program managers are continually seeking ways to better
    achieve agencies' missions and program results and improve accountability
    for results. A key factor in helping to achieve such outcomes is to
    implement appropriate internal controls. Internal controls, if properly
    designed and implemented, provide reasonable assurance that objectives are
    being met; they also serve as the first line of defense in safeguarding
    assets and preventing fraud, waste, and abuse. A general framework for
    internal controls is widely accepted in the international audit community
    and has been adopted by leading accountability organizations, including
    the International Organization of Supreme Audit Policymakers and program
    managers are continually seeking ways to better achieve agencies' missions
    and program results and improve accountability for results. A key factor
    in helping to achieve such outcomes is to implement appropriate internal
    controls. Internal controls, if properly designed and implemented, provide
    reasonable assurance that objectives are being met; they also serve as the
    first line of defense in safeguarding assets and preventing fraud, waste,
    and abuse. A general framework for internal controls is widely accepted in
    the international audit community and has been adopted by leading
    accountability organizations, including the International Organization of
    Supreme Audit Institutions, the U.S. Office of Management and Budget
    (OMB), and GAO.2 The first standard within this framework is the control
    environment, which provides the structure, discipline, and ethical tone
    for implementing an internal control system. Other standards focus on
    employing assessments of the external and internal risks an organization
    faces; establishing policies and procedures to enforce directives (control
    activities); providing relevant, timely, and reliable information and
    communication; and monitoring performance and adhering to audit findings.

    1Public Law 108-375, Ronald W. Reagan National Defense Authorization Act
    for Fiscal Year 2005, October 2004.

    Our report uses this internal control framework to identify the key
    weaknesses in enforcing sanctions against Iraq and implementing the Oil
    for Food program. Specifically, we assessed (1) aspects of the control
    environment-the foundation for all internal control standards-that the UN
    developed and implemented for the Oil for Food program and (2) key
    elements of the remaining internal control standards-risk assessment,
    control activities, information and communication, and monitoring. In
    addition, we report on the activities and progress of UNCC.

    To address these objectives, we met with officials from the Departments of
    State, Defense, Commerce, and Treasury who were responsible for managing
    the U.S. participation in the Iraq sanctions and Oil for Food program; we
    also reviewed relevant documents provided by State. We met with UN
    officials who had worked in the UN Office of the Iraq program (OIP) (the
    key UN organization responsible for administering the program), UN
    officials representing several UN specialized agencies, and with UNCC
    officials in Geneva, Switzerland. We reviewed and analyzed documents
    related to management and oversight, including audits conducted by the UN
    Office of Internal Oversight Services (OIOS). We reviewed independent
    reports, including publications by the UN Independent Inquiry Committee
    and the Iraq Survey Group.

    We conducted our review from February 2005 through January 2006 in
    accordance with generally accepted government auditing standards. (App. I
    provides detailed information on our scope and methodology.)

    2Committee of Sponsoring Organizations of the Treadway Commission,
    Internal Control-Integrated Framework, September 1992.

                                    Results in Brief

    UN sanctions and the Oil for Food program averted a humanitarian crisis
    while limiting Iraq's ability to purchase military-related items, but
    internal control problems allowed the former Iraqi regime to manipulate
    the program and circumvent sanctions to obtain illicit payments ranging
    from $7.4 billion to $12.8 billion.3 In particular, weaknesses in the
    control environment compromised the oversight of the Oil for Food program
    and made it vulnerable to fraud and abuse. First, in the mid-1990s, as
    Iraq's humanitarian situation worsened, the Security Council and
    Secretariat made concessions to the Iraqi regime that allowed it to
    negotiate contracts directly with companies purchasing oil and selling
    commodities. In the absence of UN oversight of these contracts, Iraq
    manipulated contract terms and obtained kickbacks. In addition, the
    Security Council was aware that Iraq smuggled oil to neighboring UN member
    states in violation of the sanctions but did little to prevent the
    smuggling, thus allowing Iraq to obtain revenues not authorized by the Oil
    for Food program. Second, the Oil for Food program had a highly complex
    organizational structure with unclear lines of responsibility and
    authority, which contributed to an ineffective control environment. The
    diffusion of responsibility among numerous entities meant that no single
    entity was accountable for the program in its entirety. In addition, each
    entity had weaknesses in its fragmented responsibilities that further
    undermined management and oversight of the program. Despite this difficult
    environment, the Oil for Food program averted a major humanitarian crisis
    by raising the food intake of the Iraqi population and decreasing
    malnutrition.

    The Oil for Food program also had key weaknesses in the key four internal
    control standards-risk assessment, control activities, information and
    communications, and monitoring-that facilitated Iraq's ability to obtain
    illicit revenues.

               o  Risk assessment identifies the internal and external risks an
               organization faces, determines the likelihood of their occurrence,
               and forms the basis for a plan to manage those risks. However, the
               UN conducted no timely assessments to identify and address
               high-risk areas and prevent fraud, even as the Oil for Food
               program expanded from the short-term delivery of emergency food
               and medicine to a multiyear program that included building and
               repairing infrastructure in 24 civilian sectors. Moreover, in
               2000, the Office of the Iraq Program rejected a proposal from the
               UN's internal audit office to conduct a risk assessment of the
               Program Management Division. Timely and comprehensive risk
               assessments might have identified the lack of systematic reviews
               of the reasonableness of the prices that the Iraqi government had
               negotiated with the companies supplying goods and services. Such
               assessments may also have exposed the lack of clear responsibility
               and reporting lines among the numerous UN entities managing the
               program.

               o  Control activities are the policies and procedures that help
               ensure that management's directives are carried out and risks are
               addressed. Some control activities were effective and others were
               not. For example, an insufficient number of oil experts reviewing
               oil contracts, the lack of oil metering equipment, and limited
               review of contract prices helped enable Iraq to smuggle oil and
               levy surcharges and kickbacks on its contracts. In contrast,
               oversight by the Security Council's Iraq sanctions
               committee-particularly by U.S. and United Kingdom (U.K.)
               members-mitigated Iraq's efforts to obtain military equipment by
               preventing Iraq from importing dual-use items. In addition, the
               sanctions committee eventually constrained Iraq's ability to
               impose up-front surcharges on oil contracts by setting prices for
               Iraqi oil after the oil was delivered to the buyer.

               o  Information and communication that is relevant, reliable, and
               timely is needed for an organization to control its operations.
               However, the Office of the Iraq Program did not inform the
               sanctions committee of suppliers' allegations that Iraq demanded
               contract kickbacks and hidden fees and did not disclose
               information on Iraq's oil smuggling through Syria. Moreover, none
               of the Secretariat's required 90- or 180-day reports to the
               Security Council mentioned illicit payment demands in connection
               with oil or commodity contracts. In addition, poor communication
               and coordination among UN agencies led to delays in completing
               housing projects in northern Iraq.

               o  Monitoring assesses performance over time and ensures that the
               findings of audits and other reviews are promptly resolved. OIOS
               identified more than 700 problems with the Oil for Food program
               and compensation fund.4 However, limitations on the auditors'
               reporting scope and resources hindered their effectiveness as an
               oversight tool. For example, OIOS only had two to six auditors
               assigned to the Oil for Food program and did not review commodity
               contracts for central and southern Iraq, which comprised 59
               percent of the program. Nonetheless, OIOS audits of the Oil for
               Food program in northern Iraq found more than 400 recurring
               problems in procurement, cash and asset management, planning and
               coordination, and personnel. The recurring nature of these
               problems over the course of the program demonstrated that systemic
               weaknesses were not fully addressed.

               In addition to the Oil for Food program, UN Security Council
               resolutions required Iraq to reserve up to 30 percent of its oil
               proceeds to compensate victims of its invasion of Kuwait; this
               amount was reduced to 5 percent in 2003. UNCC has approved awards
               totaling $52.5 billion to more than 1.5 million claimants and paid
               about $20.3 billion of this amount to individuals and families
               with smaller claims. However, Iraq owes corporations, governments,
               and international organizations almost $32.2 billion in unpaid
               awards. Depending on the growth of Iraq's oil revenues, it may
               take nearly 14 years to pay the remaining compensation awards.
               These unpaid awards are in addition to the estimated $51 billion
               that Iraq owes to international creditors.5

               We are recommending that the Secretary of State and the Permanent
               Representative of the United States to the UN work with other
               member states to encourage the Secretary General to (1) ensure
               that UN programs with considerable financial risks establish,
               apply, and enforce the principles of internationally accepted
               internal control standards, with particular attention to
               comprehensive and timely risk assessments and (2) strengthen
               internal controls throughout the UN system, based in part on the
               lessons learned from the Oil for Food program.

               We provided a draft of this report to the Secretary of State, the
               UN Deputy Secretary General, and the UN Compensation Commission
               for comment. We received written responses from State and UNCC and
               oral comments from the UN. However, State commented that our first
               recommendation would apply only to future sanctions programs
               similar to the Oil for Food Program. We have modified our
               recommendation to clarify that the principles of oversight and
               control should apply to future UN programs with considerable
               financial risk, not merely programs similar to the Oil for Food
               program. The UN concurred with our recommendations and noted that
               it is taking steps to strengthen internal control throughout the
               organization.

               Regarding our findings, State noted that our report (1) does not
               clearly distinguish between the responsibilities and actions of
               the Secretary General and the Security Council, (2) does not
               highlight the Security Council's inaction on corruption in the
               sanctions regime, (3) overstates the case that no single entity
               was in charge of the program, and (4) overly focuses on internal
               controls which would not have corrected the problems without
               political will. We disagree. Our report distinguishes between the
               responsibilities and actions of the Secretary General and the
               Security Council; when both entities are responsible, our report
               refers collectively to the UN. We also fully discuss how the
               Security Council's inaction facilitated oil smuggling to
               neighboring states in violation of UN sanctions. Moreover, the
               diffusion of responsibility among multiple UN entities was a major
               structural weakness of the program and contributed to unclear
               authority, manipulation, and weak oversight. We also believe that
               State underestimates the importance of a control framework that,
               if in place, would have identified the program's vulnerabilities
               and established clear lines of authority for responding to the
               program's mismanagement and corruption.

               UNCC stated that we should not include it in our report because it
               would unfairly taint UNCC with the problems ascribed to the Oil
               for Food Program. We have modified the report to distinguish the
               roles and responsibilities of UNCC from those of the UN Oil for
               Food program. UNCC also commented that our report does not
               adequately describe its organization and its relationship with the
               internal auditors; we have added more information about these
               topics.

               In 1990, Security Council resolution 661 imposed economic
               sanctions on Iraq in response to its invasion and occupation of
               Kuwait, thereby prohibiting all countries from buying Iraqi goods
               and selling most commodities to Iraq. In 1995, in response to
               growing international concern over the impact that sanctions were
               having on the humanitarian situation in Iraq, Security Council
               resolution 986 authorized Iraq to sell up to $1 billion worth of
               oil every 90 days to pay for food, medicine, and humanitarian
               goods. Iraq first exported oil under the Oil for Food program in
               December 1996, and the first shipments of humanitarian goods
               arrived in March 1997. The Security Council subsequently increased
               the amount of oil that Iraq could sell and expanded the types of
               humanitarian goods that it could import. In 1999, the Security
               Council removed all restrictions on the amount of oil Iraq could
               sell to purchase civilian goods. The Security Council implemented
               the program in 13 6-month phases. In May 2003, Security Council
               resolution 1483 requested the UN Secretary General to transfer the
               Oil for Food program to the U.S.-led Coalition Provisional
               Authority by November 2003. At that time, the Coalition assumed
               responsibility for managing Iraq's oil proceeds and outstanding
               commodity contracts.

               In addition to UN sanctions, the Security Council established UNCC
               in 1991 to pay compensation for damages and losses resulting from
               Iraq's invasion and occupation of Kuwait.6 Advances from the UN
               Working Capital Fund; voluntary contributions from governments;
               and proceeds, from Iraqi oil sold after the invasion of Kuwait,
               that had been frozen by various governments funded the UNCC for
               several years after its establishment. With the adoption of
               Security Council resolution 986 in 1995, UNCC received 30 percent
               of Iraqi oil proceeds to fund the compensation program. Subsequent
               resolutions in 2000 and 2003 reduced the amount of oil proceeds
               the UNCC received to 25 and 5 percent, respectively.

               At the time UNCC was receiving 25 percent of Iraqi oil proceeds,
               the UN allocated 59 percent of proceeds for humanitarian
               assistance in the 15 central and southern governorates, 13 percent
               for assistance to the three northern Kurdish governorates, and 3
               percent for UN administrative costs. Figure 1 illustrates the
               programs and activities funded by Iraq's oil proceeds in
               accordance with Security Council resolution 986. Iraq's
               state-owned marketing company negotiated the oil contracts, and
               the Security Council's Iraq sanctions committee approved these
               contracts and oil prices, on the basis of advice from independent
               oil experts. Once the oil was shipped, the purchasing company
               deposited the proceeds into a UN-controlled escrow account. Iraq
               negotiated contracts for the commodities it purchased for the
               central and southern governorates as well as bulk food and
               medicine contracts for the entire country. The suppliers, through
               their national governments, sent contracts to OIP and the
               sanctions committee for approval. When the items arrived in Iraq,
               inspectors verified them against appropriate documentation and
               notified the UN treasurer that it could pay the supplier from the
               escrow account. In northern Iraq, UN agencies distributed the food
               and medicine purchased by the central government and implemented
               projects in several sectors. Appendix II contains additional
               information on processes related to oil sales, commodity
               purchases, and the program in northern Iraq.

    3See appendix III for further information on Iraq's illicit revenues
    during the Oil for Food program. The ranges given represent estimates
    developed by GAO, the Independent Inquiry Committee, and the Iraq Survey
    Group for 1997 through about early 2003.

    4GAO, United Nations: Oil for Food Program Audits, GAO-05-346T
    (Washington, D.C.: Feb. 15, 2005).

    5International Monetary Fund, Iraq: Request for Stand-By Arrangement
    (Washington, D.C.: Dec. 7, 2005).

                                       Background

    6Security Council resolution 687 of April 3, 1991, states that Iraq is
    liable, under international law, for any direct loss or damages, including
    "environmental damage and the depletion of natural resources, or injury to
    foreign Governments, nationals and corporations."

    The Committee of Sponsoring Organizations of the Treadway Commission
    developed the internationally accepted and widely used framework and
    standards for internal control used in this report. These standards were
    used as a basis for the internal control standards and guidance issued by
    (1) GAO,7 (2) the International Organization of Supreme Audit Institutions
    (INTOSAI),8 and (3) OMB Circular A-123, "Management's Responsibility for
    Internal Control." According to these standards, internal controls, if
    properly designed and implemented, provide reasonable assurance that
    objectives are being met and serve as the first line of defense in
    safeguarding assets and preventing fraud. Within this framework,

               o  the control environment establishes and maintains an
               environment that sets a positive and supportive attitude toward
               internal control,

               o  risk assessment identifies and analyzes internal and external
               risks and forms a basis for determining how these challenges
               should be managed,

               o  control activities are the policies and procedures that help
               ensure that management directives are followed,

               o  information and communication are timely and help enable
               managers and others to perform their internal control
               responsibilities, and

               o  monitoring assesses performance over time and helps to ensure
               that audit findings and other issues are promptly resolved.

               The Oil for Food program suffered from two key weaknesses in the
               control environment that led to weak oversight and enabled the
               former Iraqi regime to circumvent the sanctions and obtain
               billions of dollars in illicit contract revenues. First, the UN
               Secretariat negotiated and the Security Council approved an
               agreement that allowed the Iraqi government, a country under
               international sanctions, to negotiate contracts directly with
               purchasers of Iraqi oil and suppliers of commodities and to
               control the internal distribution of its imported items. The UN
               was under considerable pressure at this time to respond to Iraq's
               humanitarian crisis. Nonetheless, this structure was an important
               factor in enabling Iraq to manipulate contracts. In addition, the
               Security Council was aware that Iraq smuggled oil to neighboring
               UN member states in violation of the sanctions but did little to
               prevent the smuggling. The Security Council relied on these
               neighboring states to enforce the sanctions against Iraq that were
               related to military and dual-use items but allowed these countries
               to continue illicit trade with Iraq, thus enabling the regime to
               obtain illicit funds.

               Second, management and oversight of the program were diffused
               among more than a dozen UN and international entities, with no
               single entity in charge of and accountable for the program. Figure
               2 summarizes the internal control weaknesses in the Oil for Food
               program, including the control environment. Subsequent sections of
               this report will discuss the additional control standards.

         Early Compromises in Program Structure and Widely Diffused Management
                    Responsibilities Led to Weak Control Environment

    7GAO, Standards for Internal Control in the Federal Government,
    GAO/AIMD-00-21 .3.1 (Washington, D.C.: November 1999).

    8INTOSAI, Guidelines for Internal Control Standards for the Public Sector
    (Vienna, Austria: 2004).

    Figure 2: Internal Control Standards Related to UN Sanctions against Iraq
    and the Oil for Food Program

    The Oil for Food Program Included Compromises that Limited UN Oversight

    In establishing the Oil for Food program, the UN made two major
    concessions to the former Iraqi regime that allowed it to (1) retain
    control over the negotiation of contracts and the distribution of imported
    goods and (2) trade with neighboring countries outside the Oil for Food
    program.

    When the UN first proposed the Oil for Food program in 1991, it recognized
    the vulnerability inherent in allowing Iraqi control over the contracting
    process. At that time, the Secretary General proposed that the UN, an
    independent agent, or the Iraqi government be given the responsibility to
    negotiate contracts with oil purchasers and commodity suppliers. However,
    the Secretary General subsequently concluded that it would be highly
    unusual or impractical for the UN or an independent agent to trade Iraq's
    oil or purchase commodities and recommended that Iraq negotiate the
    contracts and select the contractors. Nonetheless, he stated that the UN
    and Security Council must ensure that Iraq's contracting did not
    circumvent the sanctions and was not fraudulent. Accordingly, the Security
    Council proposed that UN agents review contracts and compliance at Iraq's
    oil ministry. Iraq refused these conditions.

    In April 1995, as humanitarian conditions worsened, the Security Council
    passed resolution 986 to permit Iraq to use its oil sales to finance
    humanitarian assistance. The UN reported that the average Iraqi's food
    intake was about 1,275 calories per day, compared with the standard
    requirement of 2,100 calories. Against a backdrop of pressure to maintain
    sanctions while addressing emergency humanitarian needs, the UN conceded
    to Iraq's demand that it retain independent control over contract
    negotiations. Accordingly, a May 1996 memorandum of understanding9 between
    the UN and Iraq allowed Iraq to directly tender and negotiate contracts
    without UN oversight and to distribute imported goods to the intended
    recipients.

    When the Oil for Food program began, the UN was responsible for confirming
    the equitable distribution of commodities, ensuring the effectiveness of
    program operations, and determining Iraq's humanitarian needs. According
    to the memorandum of understanding, the Iraqi government was to provide UN
    observers with full cooperation and access to distribution activities.
    However, observers faced intimidation and restrictions from Iraqi regime
    officials in carrying out their duties. According to a former UN official,
    observers could not conduct random spot checks and had to rely on
    distribution information provided by ministry officials, who then steered
    them to specific locations. The Independent Inquiry Committee10 reported
    that observers were required to have government escorts and cited various
    instances of intimidation and interference by Iraqi officials. The
    committee concluded that limits placed on the observers' ability to ask
    questions and gather information affected the UN Secretariat's ability to
    provide full and complete field reports to the sanctions committee.

    9Memorandum of Understanding between the Secretariat of the United Nations
    and the Government of Iraq on the Implementation of Security Council
    Resolution 986 (1995), May 20, 1996.

    Concessions to regional trade activity further affected the control
    environment and allowed the Iraqi regime to obtain revenues outside the
    Oil for Food program. Although oil sales outside the program were
    prohibited, the Security Council's Iraq sanctions committee did not
    address pre-existing trade between Iraq and other member states. Illicit
    oil sales were primarily conducted on the basis of formal trade
    agreements. For example, trade agreements with Iraq allowed Jordan-a U.S.
    ally dependent on Iraqi trade-to purchase heavily discounted oil in
    exchange for up to $300 million in Jordanian goods. Members of the
    sanctions committee, including the United States, took note of Iraq's
    illicit oil sales to its neighbors, but took no direct action to halt the
    sales or punish the states or entities engaged in them. In this regard,
    the UN relied on Iraq's neighboring countries to enforce the sanctions
    prohibiting Iraq from obtaining military and dual-use items. However,
    these states formally protested the economic sanctions, citing commercial
    harm to their economies. Successive U.S. administrations also issued
    annual waivers to Congress exempting Turkey and Jordan from unilateral
    U.S. sanctions for violating the UN sanctions against Iraq.

    According to U.S. government officials and oil industry experts, Iraq
    smuggled oil through several routes. Oil entered Syria by pipeline,
    crossed the borders of Jordan and Turkey by truck, and was smuggled
    through the Persian Gulf by ship. Syria received up to 200,000 barrels of
    Iraqi oil a day in violation of the sanctions. Oil smuggling also occurred
    through Iran. The Security Council authorized the Multinational
    Interception Force in the Persian Gulf; but, according to the Department
    of Defense, it interdicted only about 25 percent of the oil smuggled
    through the Gulf.11

    10In April 2004, the UN established the Independent Inquiry Committee,
    headed by Paul Volcker, the former Chairman of the U.S. Federal Reserve,
    to investigate the administration and management of Oil for Food program.
    Its scope included investigating allegations of fraud and corruption on
    the part of UN officials, personnel, and agents that entered into
    contracts with the UN or with Iraq under the program.

    Numerous Entities Shared Key Responsibilities, but Authority and Accountability
    Were Not Clearly Defined

    Both OIP, as an office in the UN Secretariat, and the Security Council's
    Iraq sanctions committee were responsible for the management and oversight
    of the Oil for Food program. The Iraq government, other UN agencies, UN
    member states, the interdiction force in the Persian Gulf, inspection
    contractors, and internal and external audit offices also played specific
    roles. However, no single entity was accountable for the program in its
    entirety. (See fig. 3 for an illustration of these entities and their
    roles.) In 2005, the Independent Inquiry Committee reported that the
    Security Council had failed to clearly define the program's broad
    parameters, policies, and administrative responsibilities and that neither
    the Security Council nor the Secretariat had control over the entire
    program. The absence of clear lines of authority and reporting were
    important structural weaknesses in a program that allowed the sanctioned
    Iraq regime initiative and control over program design and implementation.
    In addition, each entity had weaknesses in their fragmented responsibility
    that further undermined oversight and management of the Oil for Food
    program.

    11GAO, Weapons of Mass Destruction: UN Confronts Significant Challenges in
    Implementing Sanctions Against Iraq, GAO-02-625 (Washington, D.C.: May 23,
    2002).

    Figure 3: Multiple Organizations Managed the Oil for Food Program and
    Enforced UN Sanctions

               o  In October 1997, the UN Secretariat created the Office of the
               Iraq Program to administer the Oil for Food program. OIP's
               responsibilities included key oversight aspects of the program,
               including (1) accounting for the program's finances, (2)
               monitoring oil exports under the program, (3) approving Iraq's
               plans for distributing imported commodities, (4) reviewing
               commodity contracts, (5) monitoring Iraq's purchases of
               commodities and delivery of goods, and (6) reporting to the
               Security Council every 90 and 180 days. In 2005, the Independent
               Inquiry Committee reported that the Secretariat had not clearly
               defined OIP's responsibilities and that OIP had lacked clear
               authority to reject contracts based on pricing concerns.

               o  The UN Office of the Humanitarian Coordinator for Iraq (UNOHCI)
               administered OIP's field operations in Iraq. The field unit's
               functions included monitoring and reporting, ensuring the
               efficient and equitable distribution of goods within Iraq, and
               overseeing the separate Oil for Food program in northern Iraq.
               However, the Independent Inquiry Committee found that OIP had not
               clearly defined the responsibilities and reporting lines of
               UNOHCI's and OIP's Program Management Division, which served as a
               headquarters liaison to the field. The lack of clarity led to
               confusion over the division's role in coordinating field
               activities and diminished its ability to provide quality control
               over the field's observation and reporting mechanisms.

               o  The Secretariat also contracted inspection companies to inspect
               humanitarian supplies imported into Iraq at three entry points.
               However, the inspectors' duties were mostly limited to comparing
               letters of credit for commodities to the shipping documents
               supplied at the border and visually inspecting about 7 to 10
               percent of the goods. They only inspected goods presented by the
               transporter and did not inspect goods arriving in non-Oil for Food
               lanes.

               o  The UN Security Council shared key oversight responsibilities
               through its Iraq sanctions committee, which was comprised of
               representatives from the 15 Security Council members. The
               sanctions committee was first created in 1990 as part of Security
               Council resolution 661 to monitor compliance with UN sanctions
               against Iraq. In 1995, resolution 986 directed the sanctions
               committee to also monitor the Oil for Food program. The committee
               was responsible for (1) monitoring the implementation of
               sanctions, (2) screening commodity contracts to prevent the
               purchase of items that could have military uses, and (3) approving
               Iraq's oil and commodity contracts. The committee's review of
               commodity contracts focused on whether the contracts contained
               items of potential military use, or so-called dual-use items. It
               did not review contracts for price and value. In addition, it
               operated by unanimous consensus, which, according to the
               Independent Inquiry Committee, weakened its ability to undertake
               investigations of illicit activity or take remedial action. The
               Independent Inquiry Committee also noted that, although the
               sanctions committee was a monitoring body, its rules did not
               require it to take action in response to reports of sanctions or
               Oil for Food program violations, except for information indicating
               illegal arms trafficking.

               The Iraq sanctions committee's responsibilities for reviewing
               commodity contracts lessened over time. From the beginning of the
               program until 1999, the committee was responsible for approving
               all contracts. However, in 1999, the Security Council shifted more
               approval responsibilities to OIP. Due to concerns about the
               humanitarian situation in Iraq and pressure to expedite the review
               process, Security Council resolution 1284 in December 1999
               directed the sanctions committee to accelerate the review process.
               The committee subsequently allowed OIP to approve contracts for
               food, medical supplies, and equipment for the agricultural, water
               and sanitation, housing, and electricity sectors.

               However, political pressure on the UN continued, and U.S.
               officials asserted that support for international sanctions
               enforcement was collapsing. According to a congressional report,12
               the United States proposed targeted sanctions in early 2001 to
               reduce criticism by other Security Council members of continuing
               the sanctions and to help rebuild consensus on containing Iraq. In
               May 2002, OIP began approving contracts if they did not contain
               any items on a list of dual-use items known as the goods review
               list.13

               The rules of the Iraq sanctions committee provided for four oil
               experts to assist the committee. The oil overseers were
               responsible for ensuring that oil sales contracts complied with
               program requirements and helped the committee determine oil
               prices. However, for a 14-month period in 1999 and 2000, only one
               overseer reported to the sanctions committee. In addition, the
               Secretariat contracted with Saybolt Eastern Hemisphere B.V. to
               oversee the export of oil and oil products from Iraq through
               approved export points. The agents were expected to monitor oil
               leaving Iraq under the Oil for Food program and were authorized to
               stop shipments if they found irregularities. However, they were
               not required to monitor or report on oil smuggled outside the Oil
               for Food program in violation of international sanctions.

               o  Nine UN agencies,14 ran the Oil for Food program in northern
               Iraq. They were responsible for distributing food rations and
               medicine in the three Kurdish governorates and for other
               activities, such as constructing or rehabilitating schools, health
               clinics, power generation facilities, and houses. However, the
               Independent Inquiry Committee and OIOS reported numerous instances
               of poor coordination and communication among the agencies and
               UNOHCI as well as problems with procurement and financial and
               asset management.

               o  Other entities involved in the sanctions program included UN
               member states and the Multinational Interception Force. UN member
               states, particularly those in the region, were responsible for
               enforcing the sanctions to ensure that Iraq did not sell oil or
               purchase goods outside the Oil for Food program, but oil smuggling
               and trade with Iraq's neighbors outside the program occurred. The
               U.S.-led Multinational Interception Force, a naval unit that
               patrolled the Persian Gulf to prevent illicit oil exports, was
               responsible for ensuring that Iraq used only approved export
               routes, but it only interdicted about 25 percent of the oil
               smuggled through the Persian Gulf.

               o  The Iraqi government tendered and negotiated contracts for
               selling its oil and procuring goods for the 15 central and
               southern governorates and also procured bulk food and medical
               supplies for all of Iraq, including the three northern
               governorates. It was also responsible for developing a
               distribution plan every 6 months for the commodities it planned to
               procure and for ensuring the distribution of these commodities in
               accordance with the plan. Iraqi control over the contracting and
               distribution processes allowed it to manipulate contract terms for
               illicit revenues and to restrict the efforts of UN observers
               responsible for monitoring the distribution of humanitarian goods.
               o  OIOS, the internal oversight office within the Office of the
               Secretariat, conducted audits of the Oil for Food program and the
               separate UNCC program and reported the results to OIP's executive
               director and the UNCC's executive secretariat, respectively. OIOS
               issued 55 audits and two summary reports and have several ongoing
               audits at UNCC. Although OIOS identified more than 700 problems in
               all these reports, including 430 in more than 20 audits of program
               activities in northern Iraq, its effectiveness as an
               accountability tool was compromised by lack of resources and its
               limited scope. In addition to OIOS, UN external auditors conducted
               audits on the condition of the escrow account holding Iraq's oil
               proceeds, and the internal auditors of the UN agencies
               implementing the program in northern Iraq conducted audits of
               their agencies' Oil for Food activities.15 The audit units of
               these UN agencies conducted 66 audits of the program. According to
               the Independent Inquiry Committee, these reports identified
               weaknesses and made several recommendations for improvement.

               Despite the difficulties posed by fragmented implementation and
               unclear oversight, the Oil for Food program did provide emergency
               humanitarian relief to the Iraqi people. The Independent Inquiry
               Committee reported that the food provided through the Oil for Food
               program reversed a serious and deteriorating food crisis,
               preventing widespread hunger and probably reducing deaths in which
               malnutrition was a factor. The UN also reported that average daily
               caloric intake almost doubled, and malnutrition rates for children
               under age 5 fell by more than half during the program.

               The Oil for Food program and the Iraq sanctions fell short in the
               remaining four key internationally accepted standards for internal
               control-conducting risk assessments, implementing control
               activities, ensuring adequate information and communication, and
               monitoring. The lack of fundamental controls-particularly in light
               of the vulnerabilities inherent in the control
               environment-facilitated the regime's ability to obtain illicit
               payments ranging from $7.4 billion to $12.8 billion. Figure 2
               summarizes some of our key findings about the UN's internal
               controls within these standards.

               Risk assessment is used to identify and manage internal and
               external risks that can affect a program's outcomes and
               accountability, including those risks that emerge as conditions
               change. The Oil for Food program expanded rapidly as it evolved
               from an emergency 6-month measure to provide humanitarian needs to
               a program that delivered about $31 billion in commodities and
               services in 24 sectors for more than 6 years. When the
               international community was not satisfied with Iraq's compliance
               with weapons inspections, the Security Council continued the
               sanctions and expanded its initial emphasis on food and medicines
               to include infrastructure rehabilitation and activities in 14
               sectors. These sectors included food, food handling, health,
               nutrition, electricity, agriculture and irrigation, education,
               transport and telecommunications, water and sanitation, housing,
               settlement rehabilitation for internally displaced persons,
               demining, a special allocation for vulnerable groups, and oil
               industry spare parts and equipment. In June 2002, the Iraqi
               government introduced another 10 sectors, including construction,
               industry, labor and social affairs, youth and sports, information,
               culture, religious affairs, justice, finance, and the Central Bank
               of Iraq.

               The Security Council and UN Secretariat did not assess the risks
               posed by this expansion, particularly in light of the fact that
               they had relegated responsibility for the contracting process to
               Iraq. OIOS was the only entity that attempted to assess the
               enormous risks in the Oil for Food program, but OIP blocked that
               attempt. In August 2000, the Under Secretary General for OIOS
               proposed an overall risk assessment to the Deputy Secretary
               General to improve the program by identifying the factors that
               could prevent management from fulfilling the program's objectives.
               The proposal noted that this assessment could be a model for other
               UN departments and activities. OIOS considered the Oil for Food
               program a high-risk activity and decided to focus on an assessment
               of OIP's Program Management Division. This unit was responsible
               for providing policy and management advice to OIP's executive
               director and for supporting UNOHCI in its field implementation and
               observation duties. In May 2001, OIP's executive director refused
               to fund the risk assessment, citing financial reasons and
               uncertainty over the program's future. However, the Independent
               Inquiry found that, about the same time, OIP moved to a new office
               in New York with increased rental costs and refurbishments
               totaling about $3 million.

               In July 2003, OIOS issued an assessment of OIP's Program Analysis,
               Monitoring, and Support Division-formerly the Program Management
               Division-that identified a number of organizational, management,
               and administrative problems, including poor communication and
               coordination, unclear reporting lines among OIP headquarters units
               and the field, and the lack of approved work plans. However, by
               this date, the UN was preparing for the November 2003 transfer of
               the program to the Coalition Provisional Authority, and the report
               was of limited usefulness for addressing high-risk areas. Timely
               risk assessments might have identified the internal control
               weaknesses-such as inadequate contract pricing reviews-that
               facilitated Iraq's ability to levy illicit contract revenues and
               the structural management weaknesses that led to ineffective
               communication and coordination within the program.

               Control activities are those activities that help provide
               assurance that management's directives are carried out and that
               risks are addressed and include the policies and procedures
               established to ensure accountability. The Security Council's
               sanctions committee established some control activities, such as
               retroactive pricing and review of contracts for items having
               potential military use, which helped address problems resulting
               from Iraq's control over the contracting and distribution
               processes. However, other important control activities for
               monitoring oil exports and assessing the reasonableness of the
               prices that Iraq was negotiating were limited or nonexistent,
               which helped enable Iraq to smuggle oil and levy surcharges and
               kickbacks on its contracts. In addition, physical control over
               vulnerable assets is a key control activity, particularly in
               environments lacking adequate security. However, in northern Iraq,
               cash and asset management policies were compromised due to the
               failure to maintain inventory systems or secure cash in UN offices
               and during transport.

               A limited role for contractors overseeing oil exports and the lack
               of oil meters facilitated Iraq's ability to obtain revenues from
               smuggling that ranged from $5.7 billion to $8.4 billion during the
               course of the Oil for Food program. In 1996, the Secretariat
               contracted with Saybolt to oversee the export of oil from Iraq
               through selected export points. The inspectors were to monitor the
               amount of oil leaving Iraq under the Oil for Food program at these
               locations and to stop shipments if they found irregularities. The
               inspectors worked at two locations-the Ceyhan-Zakho pipeline
               between Iraq and Turkey and the Mina al-Bakr loading platform in
               southern Iraq. In 2005, a Saybolt official testified that
               Saybolt's mandate did not include monitoring all oil exports
               leaving Iraq from other locations or acting as a police force.16
               As a result, the contractors did not monitor oil that was smuggled
               outside the Oil for Food program.

               Further, because the Iraqi government did not install functioning
               oil meters at the port, inspectors could not accurately confirm
               the volume of oil loaded onto vessels. The lack of functioning
               meters enabled the Iraqi government to smuggle oil undetected by
               inspectors. A Saybolt employee testified that the company notified
               UN officials of the problems posed by the lack of functioning
               meters at the beginning of the program.17 He also testified that
               the lack of metering equipment allowed the two "topping off"
               incidents involving the oil tanker Essex, in which the tanker
               loaded additional oil after the inspectors had certified the
               loading and left the vessel. In November 2001, a Saybolt
               representative noted that Iraq's distribution plans18 provided for
               the installation of a meter at the Mina al-Bakr port, and a U.S.
               official called for OIP to develop a plan to prevent unauthorized
               oil sales that would include installing a meter at the port.
               However, Iraq did not tender a contract for the meter. As of March
               2006, the Iraqi government had not yet installed oil meters at
               Mina al-Bakr.

               In the absence of metering, Saybolt measured the onboard quantity
               of the vessel before loading. After loading, an inspector measured
               the amount by which the vessel tank fell short of being full and
               the oil temperature. Inspectors analyzed these data using the
               vessel's calibration chart to determine how much oil had been
               loaded onto the vessel. While this is an alternative method
               accepted in the inspection industry for situations in which
               reliable metering equipment is not available, a U.S. official
               noted that meters are a more consistent method for measuring oil
               loading and encouraged their incorporation into a plan for
               preventing unauthorized oil sales. The Saybolt representative also
               testified that this method was not as accurate or foolproof as
               using a meter.

               In addition, the sanctions committee relied on the advice of
               independent oil overseers to approve oil sales contracts. The
               overseers reviewed Iraq's oil sales contracts to determine
               compliance with program requirements and whether the prices that
               Iraq negotiated for its oil were fair and reflected market
               pricing. However, the inadequate number of overseers monitoring
               Iraq's oil pricing over a 14-month period may have been a factor
               in Iraq's ability to levy illicit surcharges on oil contracts.
               From June 1999 to August 2000, only one oil overseer was
               responsible for monitoring billions in Iraq's oil transactions,
               contrary to the sanctions committee's requirements for at least
               four overseers. Four overseers were hired at the beginning of the
               program but three had resigned by June 1999. Political disputes
               among sanctions committee members prevented the committee from
               agreeing on replacements. According to the Independent Inquiry
               Committee, the sanctions committee demonstrated weak program
               oversight in its inability to fill the vacant positions.

               In October 2001, the Security Council's sanctions committee
               imposed a positive control activity-retroactive oil pricing-to
               prevent Iraqi officials from adding illegal oil surcharges to
               contracts. In November 2000, UN oil overseers reported that Iraq's
               oil prices were low and did not reflect the fair market value. The
               overseers also reported in December 2000 that Iraq had asked oil
               purchasers to pay surcharges. In early 2001, the United States
               informed the sanctions committee about its concerns regarding
               allegations that Iraqi government officials were receiving illegal
               surcharges on oil contracts. Because the committee operated by
               consensus, the United States could delay oil pricing by not
               approving a specific price per barrel until the oil was delivered
               to the refinery. The Iraq government thus signed contracts with
               suppliers without knowing the price it would have to pay until
               delivery. This practice, known as retroactive pricing, curbed the
               ability of the Iraqi government to levy illicit surcharges on its
               oil sales contracts. Prior to retroactive pricing, estimates of
               Iraq's illicit revenues from surcharges on exported oil ranged
               from about $230 million to almost $900 million.

               According to a report by defense contract experts, in a typical
               contract pricing environment, fair and reasonable commodity prices
               are generally based on prevailing world market conditions or
               competitive bids among multiple suppliers.19 Ensuring a fair and
               reasonable price for goods can mitigate the possibility of
               overpricing and kickbacks. The sanctions committee and OIP were
               responsible for reviewing commodity contracts under the Oil for
               Food program, but neither entity conducted sufficient reviews of
               commodity pricing and value. As a result, Iraq was able to levy
               illicit commissions and kickbacks ranging from about $1.5 billion
               to about $3.5 billion.

               The sanctions committee was responsible for screening contracts
               for items that could have military uses and for approving
               commodity contracts; any member had the authority to block or hold
               specific items. The committee focused on limiting Iraq's ability
               to import dual-use items rather than examining contracts for price
               and value. The United States, as a member of the sanctions
               committee, devoted resources to this contract oversight-about 60
               staff from several U.S. government agencies reviewed the contracts
               for compliance with dual-use restrictions and made their
               recommendations to the U.S. mission to the UN. However, although
               the United States accounted for about 90 percent of the sanctions
               committee's holds, few contracts were held based solely on price
               and value concerns.

               While OIP was to examine each contract for price and value before
               submitting it to the sanctions committee, the Independent Inquiry
               Committee found that OIP lacked clear authority to reject
               contracts on pricing grounds and did not hire customs experts with
               the requisite expertise to conduct thorough pricing evaluations.
               OIP stated that it informed the sanctions committee if it found
               pricing irregularities and that it was up to the sanctions
               committee to approve or hold contracts. However, the Independent
               Inquiry Committee found that few of the customs reports submitted
               to the sanctions committee included any quantitative or
               qualitative assessment beyond a general notation that pricing
               appeared high or was higher than in previous applications for
               similar goods. An OIP official also stated that OIP found that
               about 70 out of a total of approximately 30,000 contracts in the
               OIP database had specific price and value issues. OIP directly
               approved more than half of these 70 contracts as a result of
               Security Council decisions in 1999 and 2002 that shifted
               additional approval responsibilities to OIP. We did not have
               access to OIP's decisions to determine the extent to which OIP may
               have held contracts for price and value concerns.

               The Secretariat's contract for inspecting humanitarian supplies at
               three entry points in Iraq required inspection agents to
               "authenticate" goods, but the agents' responsibilities fell short
               of a previous proposal to include more rigorous reviews of
               commodity price and quality. Under the Oil for Food program,
               inspection agents compared appropriate documentation, including UN
               approval letters, with the commodities arriving in Iraq; visually
               inspected about 7 to 10 percent of the goods; and tested food
               items to ensure that they were "fit for human consumption."
               However, inspection agents were not required to (1) verify that
               food items were of the quality contracted, (2) assess the value of
               goods shipped, (3) interdict prohibited goods, (4) inspect goods
               that were not voluntarily presented by transporters, or (5) select
               the items and suppliers or negotiate contracts. According to
               Cotecna, the inspections contractor from 1999 to 2004,20
               "authentication" is not a standard customs term or function. The
               UN created the term for the Oil for Food program and did not
               include traditional customs inspection activities, such as price
               verification and quality inspection. In 1992, the UN selected
               Cotecna for a proposed program, which was not implemented, that
               would have been similar to the Oil for Food program. Under that
               proposal, Cotecna would have verified fair pricing and inspected
               whether the quality of the items conformed to contract
               requirements.

               Control activities that ensure accountability include cash
               management policies and procedures that provide for physical
               control over vulnerable assets and other resources. OIOS and the
               Independent Inquiry Committee reported specific instances in which
               the UN offices involved in administering the Oil for Food program
               in northern Iraq lacked such controls. For example, in 2002, OIOS
               found that UN-Habitat lacked a proper asset inventory system and
               that no policies and procedures governing asset management were
               evident. In one case, $1.6 million in excess construction material
               remained after most projects were complete.

               OIOS also reported that some funds were not used for the purpose
               intended, thus subjecting project funds misuse. In a March 2000
               audit, OIOS reported that the UN Development Program country
               office used $500,000 in project funds for office expenses without
               authorization or proper documentation. A February 2002 audit found
               that the UN-Habitat office in Erbil put at risk $600,000 to
               $800,000 in cash due to a lack of cash management policies. In
               addition, the Independent Inquiry Committee reported thefts from
               several UN offices or persons, including $300,000 from the UN
               Educational, Scientific, and Cultural Organization's Erbil office;
               $64,000 from a World Health Organization suboffice; and $40,000
               from the Food and Agricultural Organization when an automobile
               carrying more than $100,000 from Baghdad to Erbil was involved in
               an accident.

               Information should be communicated to those who need it within
               time frames that allow them to carry out their oversight
               responsibilities; however, OIP did not disclose to the sanctions
               committee all appropriate information that may have mitigated
               Iraq's ability to obtain illicit revenues, according to the
               Independent Inquiry Committee. For example, in December 2000,
               OIP's Program Management Division director informed the OIP
               director of alleged contract kickback schemes by the Iraqi
               government and recommended that OIP inform the sanctions committee
               of these allegations. The U.K. member of the sanctions committee
               asked for a written report of these allegations, but the
               Independent Inquiry Committee found no evidence that the report
               was submitted. In October 2001, OIP's customs chief-the person
               responsible for OIP's price and value reviews-prepared a written
               summary of the kickback incidents, including documentation of
               illicit side agreements with the Iraqi regime, and presented it to
               OIP senior management. However, the Independent Inquiry Committee
               found no evidence that this information was provided to the
               sanctions committee. Moreover, none of the Secretariat's 90-day or
               180-day reports to the Security Council mentioned illicit payment
               demands in connection with oil or commodity contracts. Further,
               while both the Security Council and Secretariat were aware of
               smuggling activities outside of the program, OIP and the
               Secretariat had specific information from the Saybolt oil
               inspectors about the Syrian pipeline that was not disclosed to the
               sanctions committee.

               In addition, poor communication and coordination among UN agencies
               in northern Iraq had a negative impact on some projects. In one
               instance, in 2004, OIOS reported that UN-Habitat had not
               adequately coordinated with other UN agencies in providing
               essential services for its housing projects. UN-Habitat provided
               high-capacity generators but had not contacted the UN Development
               Program-the entity responsible for the power sector-to provide
               electric power connections. In another instance, OIOS found that
               about 3,200 houses were unoccupied for extended periods due to a
               lack of coordination among agencies providing complementary
               services. The Independent Inquiry Committee's investigation also
               revealed problems with coordination among UN agencies, which was
               exacerbated by poorly defined relationships among those agencies,
               the Iraqi government, and the local authorities in the three
               northern governorates.

               Monitoring is an internal control standard that assesses program
               performance on an ongoing basis and helps provide assurance that
               the findings of audits and other reviews are resolved. We
               identified monitoring weaknesses that compromised the
               Secretariat's internal oversight of the program. While OIOS
               conducted numerous audits and identified hundreds of problems, it
               did not review OIP's oversight of the commodity contracts for
               central and southern Iraq. Nonetheless, its review of UN
               activities in northern Iraq led to more than 400 findings.
               Although OIP attempted to implement OIOS' recommendations, OIOS
               and the Independent Inquiry Committee reported that some systemic
               issues remained unresolved.

               Although OIOS conducted more than 50 audits of the Oil for Food
               program and the separate compensation fund and identified more
               than 700 problems, the office did not review key aspects of the
               Oil for Food program and operated with low numbers of staff, given
               the program's size. Except for audits of OIP's inspection
               contracts, OIOS did not review whether OIP was adequately
               monitoring and coordinating the Oil for Food program, including
               OIP's role in assessing commodity pricing. OIOS did not examine
               certain headquarters functions, particularly OIP's oversight of
               the commodity contracts for central and southern Iraq, which
               accounted for 59 percent or almost $40 billion in Oil for Food
               proceeds. According to the Independent Inquiry Committee, OIOS
               believed that it did not have the authority to audit humanitarian
               contracts because the sanctions committee was responsible for
               their approval, and OIOS did not review OIP's relationship with
               the sanctions committee. In contrast, OIOS took an aggressive
               stance in reviewing UNCC decisions on compensation awards, despite
               the challenges to its authority from UNCC and the UN Office of
               Legal Affairs.

               OIP management also steered OIOS toward program activities in
               northern Iraq rather than headquarters functions where OIP
               reviewed the humanitarian contracts. The Independent Inquiry
               Commission further noted that the practice of allowing the heads
               of programs the right to fund internal audit activities led to
               excluding high-risk areas from internal audit examination. We also
               found that UN funding arrangements constrain OIOS's ability to
               operate independently as mandated by the General Assembly and
               required the international auditing standards to which OIOS
               subscribes. 21 Because OIOS did not review commodity contracts, it
               was difficult to quantify the extent to which the Iraqi people
               received the humanitarian assistance funded by its government's
               oil sales.

               In addition, the number of OIOS staff assigned to the Oil for Food
               program was low compared with the level of staff providing
               oversight of peacekeeping operations, according to the Independent
               Inquiry Committee. Although OIOS had only 2 to 6 auditors assigned
               to cover the Oil for Food program. The UN Board of Auditors
               indicated that the UN needed 12 auditors for every $1 billion in
               expenditures. The committee concluded that the Oil for Food
               program should have had more than 160 auditors at its height in
               2000. However, the committee found no instances in which OIOS
               communicated broad concerns about insufficient staff to UN
               management.

               OIOS also encountered problems in its efforts to widen the
               distribution of its reporting beyond the head of the agency
               audited. In August 2000, OIOS proposed to send its reports to the
               Security Council. However, the OIP director opposed this proposal,
               stating that it would compromise the division of responsibility
               between internal and external audit. In addition, the UN Deputy
               Secretary General denied the request, and OIOS subsequently
               abandoned any efforts to report directly to the Security Council.

               We did not have access to the internal audit reports conducted by
               eight of the nine agencies managing the program in northern Iraq.
               However, our February 2005 analysis of 25 OIOS audits on Oil for
               Food activities in northern Iraq identified about 430 problems in
               program management and monitoring and about 420 recommendations to
               correct these deficiencies.22 In one instance, OIOS reported in
               2004 that UN-Habitat had not adequately coordinated with other UN
               agencies in providing essential services for its housing projects.
               An August 2000 report noted a lack of planning that resulted in
               the questionable viability of some projects, including a health
               facility subject to flooding and diesel generators procured for an
               area in which diesel fuel was not readily available. In November
               2002, OIOS reported that almost $38 million in equipment
               procurement was not based on a needs assessment-resulting in 51
               generators not being used from September 2000 to March 2002-and
               that 11 purchase orders totaling almost $14 million showed no
               documentary evidence supporting the requisitions. In April 2002,
               OIOS reported that OIP and UNOHCI had made serious efforts to
               implement audit recommendations. However, it also noted that a
               number of issues had not been resolved, including efforts to
               improve the procurement, planning, coordination, and monitoring of
               projects in northern Iraq. The Independent Inquiry Committee also
               found that a lack of attention to addressing systemic problems
               hindered the effectiveness of the Oil for Food program in the
               north. The recurring nature of these problems over the course of
               the program demonstrated that systemic weaknesses were not fully
               addressed.

               The UN Security Council established UNCC in 1991 under Security
               Council Resolution 692 to process claims and pay compensation for
               damages and losses resulting from Iraq's invasion and subsequent
               occupation of Kuwait. UNCC is a subsidiary organ of the UN
               Security Council, with its Governing Council acting as the
               policy-making body. With the adoption of Security Council
               resolution 986, UNCC, along with UN-sponsored humanitarian
               programs in Iraq, received funding from the profits from Iraqi oil
               sales. (App. IV provides more information on the organization of
               UNCC and its claims process.)

               UNCC approved awards of almost $52.5 billion to more than 1.5
               million claimants and, as of January 2006, had paid about $20.3
               billion of this amount. However, how and when the remaining
               approximately $32.2 billion in approved claims will be paid is
               uncertain. Depending on the growth of Iraq's oil export revenues,
               award payments may be completed sometime between 2017 and 2020.
               These unpaid claims are in addition to Iraq's external debt to
               international creditors, which the International Monetary Fund
               (IMF) estimated at $51 billion at the end of 2005. UNCC's
               Secretariat had controls for preparing claims for presentation to
               the expert panels, who then recommended which claims should be
               paid and the amounts to be compensated. However, OIOS found some
               weaknesses in UNCC's oversight of procedures for returning
               unclaimed payments and instances of claims overpayments by the
               panels recommending the awards. For example, in May 2005, OIOS
               reported that governments and international organizations owed
               UNCC about $38.8 million in claims that it was unable to pay
               because claimants could not be located. According to UNCC, the
               total amount owed to the UNCC as of March 2006 was $11.7 million.

               From 1991 to 1997-its deadline for accepting claims-UNCC received
               almost 2.7 million claims seeking almost $353 billion in
               compensation for damages and losses.23 UNCC required that
               claimants submit claims through their governments and also allowed
               international organizations to submit claims on their behalf or on
               behalf of individuals who were not in a position to have a
               government file their claims. Individual claims came from Kuwaitis
               and also from many of the roughly two and a half million
               expatriate workers and their dependents living in Kuwait and Iraq
               at the time of the invasion, 90 percent of whom fled the region
               due to the war. As a result, UNCC received claims from 100
               countries on behalf of the country submitting the claim, its
               nationals, or its corporations. Upon completing its work in 2005,
               UNCC had awarded more than 1.5 million claimants almost $52.5
               billion in compensation, almost 15 percent of the total amount
               sought. OIOS auditors stated that an award rate of 15 percent is
               low and is evidence of the UNCC's conservative approach to making
               awards. Appendix IV provides greater detail on the categories and
               amounts of claims.

               As of late January 2006, UNCC had paid about $20.3 billion in
               compensation of the $52.5 billion awarded, mostly to individuals
               and families. About $32.2 billion in outstanding awards remains to
               be paid. Depending on the growth of Iraq's oil revenue, payments
               could extend through around 2020. In 2003, Security Council
               resolution 1483 reduced the portion of Iraqi oil revenues allotted
               to UNCC from 25 percent to 5 percent.24 Using projections made by
               the International Monetary Fund, we estimate that the remaining
               compensation awards could be paid between 2017 and 2020, assuming
               that oil export revenues grow at an annual average rate of about 5
               percent and are about 57 percent of gross domestic product. With
               an average growth rate of 1 percent, the remaining compensation
               awards would be paid by 2020. At 10 percent, these awards would be
               paid by 2017.25 These unpaid claims are in addition to Iraq's
               substantial external debt. In January 2006, the IMF estimated
               Iraq's debt at the end of 2005 at about $51 billion.

               With the conclusion of the award process in 2005, UNCC's
               Secretariat completed its claims preparation duties and began
               reducing its staff. The UNCC secretariat expects that by mid-2007
               the payment of all individual awards will be completed. As an
               interim measure after that time, the Governing Council will
               oversee the Compensation Fund with assistance from a smaller
               secretariat. The Governing Council will consider a future date for
               transferring responsibility for remaining payments to the Iraqi
               government under the supervision of the Security Council.

               The UNCC secretariat employed controls in its administrative
               procedures for preparing claims for the expert panels, but OIOS
               found some weaknesses in the procedures for ensuring that unpaid
               claims are returned to UNCC and instances of claims overpayments.
               OIOS found that inadequate oversight of the procedures for paying
               awarded amounts to claimants resulted in governments and
               international organizations owing UNCC about $38.8 million in
               unclaimed payments. In its response to a draft of this report,
               UNCC noted that this amount totaled $11.7 million as of March
               2006. Further, OIOS noted that only about half of these entities
               had submitted required audit documents certifying their payments
               to claimants. UNCC responded that the overwhelming majority of
               awards had been successfully paid and that it was working with
               five of these governments to improve their reporting obligations.
               UNCC questioned OIOS' authority to audit certain aspects of its
               work, and a UN legal opinion agreed with UNCC, stating that the
               scope of OIOS' audit authority did not extend to those parts of
               UNCC's work that constituted a legal process. Nonetheless, OIOS
               identified more than $500 million in potential overpayments to
               claimants.

               The claims award process was handled by three UNCC entities: the
               Secretariat, the Governing Council, and the Commissioner panels.
               The Secretariat organized the claims, prepared them for review by
               the Commissioner panels, and administered the award payments to
               governments and international organizations submitting the claims
               on behalf of claimants. The Commissioner panels reviewed the
               claims, made recommendations to reject or accept the claims, and
               recommended award amounts. The Governing Council made final award
               decisions based on the panels' recommendations. The council could
               disagree with the recommendations and return the decisions to the
               panels for further review; it could also increase or reduce the
               award amounts. After award decisions were final, payments were
               made to governments and international organizations submitting
               claims, and these entities distributed award payments to
               individual claimants.

               In managing the steps required to prepare claims for presentation
               to the Commissioner panels, the Secretariat put in place various
               measures to mitigate administrative errors and fraud, including
               efforts to ensure the integrity of claims data, identify duplicate
               claims, and deliver preliminary claims valuations to the
               Commissioner panels. For example, the Secretariat's process
               included assigning all incoming claims a unique number, running
               quality control checks, and cleaning up queries to ensure the
               integrity of the data entered under each number. A 2002 assessment
               conducted by OIOS stated that certain controls for processing
               claims and the claims database were generally adequate at that
               time.

               OIOS concluded in May 2005 that UNCC did not exercise adequate
               oversight over the distribution of award payments by governments
               and international organizations. UNCC requires governments and
               organizations to report on the amount of payments distributed and
               the reasons for nonpayment of claims 12 months following the
               release of award payments. All funds not located and paid are to
               be returned to UNCC within this 12-month period.26 OIOS reported
               that the Secretariat did not properly review reports from
               governments detailing which awardees could not be located. The
               auditors also reported that governments and international
               organizations owed UNCC about $38.8 million in compensation
               intended for claimants they were unable to locate (governments and
               organizations did refund about $99 million to UNCC). Of this
               amount, more than $4 million had been outstanding for more than 2
               years.27 In addition, OIOS found that 14 of the 32 governments and
               international organizations receiving a total of about $197
               million in an October 2003 disbursement of award payments had not
               submitted an audit certificate documenting that payments had been
               distributed. The uncertified amount totaled about $156 million.

               In comments to OIOS dated June 2005, UNCC responded that the
               overwhelming majority of the awards were successfully paid and
               that UNCC strongly pursued the submission of audit certificates by
               governments and international organizations. UNCC also commented
               that it had visited five countries to assist governments with
               their reporting obligations and payment distribution. UNCC further
               noted that it is the responsibility of the governments and
               organizations to locate claimants for payment but added that it
               would review the actions necessary to obtain a full accounting
               from governments that failed to meet prescribed deadlines. In
               addition, in commenting on a draft of this report, UNCC noted that
               the amount owed to UNCC can fluctuate almost daily as governments
               and international organizations locate previously unreachable
               claimants and ask for funds for repayment. UNCC further noted that
               audit certificates were required for payments beginning in October
               2003. In responding to our draft report, UNCC provided updated
               documentation demonstrating that, as of March 2006, the amount
               owed to UNCC had decreased to $11.7 million, and only $1.5
               million-or 0.8 percent of the $197 million for which certificates
               were due-had not been supported by audit certificates.

               UNCC challenged OIOS's authority to review specific aspects of
               UNCC's work and requested guidance from the UN Office of Legal
               Affairs. Specifically, UNCC questioned whether OIOS had the
               authority to review (1) the Panel's work in identifying applicable
               law and the Panel's application of that law to claims pursuant to
               the UNCC's Provisional Rules for Claims Procedure; (2) the manner
               in which the Panel organized its work pursuant to those Rules; and
               (3) the Panel's determinations regarding the sufficiency of
               evidence, including its determinations relating to the relevance,
               materiality, and weight of evidence pursuant to UNCC's rules. In
               2002, UN legal counsel rendered an opinion, stating that the audit
               authority of OIOS included reviewing the panels' computations of
               its recommended compensation amounts but did not extend to
               reviewing those aspects of the panels' work that were part of the
               legal process. The UN legal counsel concluded that all three
               aspects of the Panel's work in question were beyond the proper
               scope of OIOS's audit authority. Both UNCC and the Department of
               State agreed with the UN legal opinion. OIOS disputed it, however,
               noting its general mandate to review and appraise the use of UN
               financial resources. In response, UNCC argued that the
               compensation fund does not constitute UN financial resources. As a
               result, UNCC only acted on those OIOS recommendations that it
               determined, consistent with the UN legal counsel's opinion, were
               within the scope of its audit authority.

               OIOS continued to report on claims amounts and identified more
               than $500 million in recommended claims reductions. For example,
               in a September 2002 audit, OIOS found potential overpayments of
               $419 million in compensation awarded to Kuwait due to duplicate
               payments, calculation errors, insufficient evidence to support
               losses, and inconsistent claims methodologies. In April 2003, UNCC
               provided a detailed response to OIOS. In its response, UNCC cited
               documentation which they said showed that there were no duplicate
               payments and provided additional evidence of the losses-consultant
               reports, additional documentation, and testimony. UNCC also stated
               that it and not OIOS had authority to determine the sufficiency of
               evidence-for example, using testimonial evidence with other
               support when documentary evidence was destroyed during Iraq's
               invasion of Kuwait. As of February 2005, UNCC had agreed to reduce
               total claims overpayments by about $3.3 million.

               The Oil for Food program was flawed from the outset because it did
               not have sufficient controls to prevent the former Iraqi regime
               from manipulating the program. Internal controls, if properly
               designed and implemented, can provide reasonable-although never
               absolute-assurance that program goals will be met and fraud will
               be minimized. Despite the risks inherent in allowing Iraqi
               government control over the contracting process and expanding the
               program beyond its initial emergency mandate, the Security Council
               and the Secretariat did not establish a system of internal
               controls, including timely and comprehensive risk assessment and
               effective control activities and monitoring. Moreover,
               fragmentation of responsibilities led to an environment in which
               no single unit or person was accountable for program management,
               monitoring, and oversight. The Oil for Food program was arguably
               the largest sanctions and humanitarian program in its scope,
               complexity, and structure that the UN had undertaken. Given the
               enormity of the undertaking, internationally accepted internal
               control standards should have been applied throughout the course
               of the program. Such standards would have helped ensure that the
               program was effectively and efficiently managed and that the Iraqi
               people received the intended benefits from the proceeds of its
               government's oil sales.

               U.S. oversight of the Oil for Food program focused on preventing
               Iraq from obtaining dual-use items that could be used for military
               and weapons of mass destruction programs while meeting the
               humanitarian needs of those suffering from sanctions. However, the
               United States and other Security Council members did not apply the
               same rigor to preventing Iraq from obtaining illicit funds through
               smuggling and contract kickbacks. Over the past several years, the
               United States has taken the lead in promoting management and
               oversight reform at the UN. The lessons learned from the internal
               control weaknesses in the Oil for Food program could prove useful
               as the United States continues to press the UN to undertake
               fundamental reforms to address its key efficiency, management, and
               accountability challenges.

               We recommend that the Secretary of State and the Permanent
               Representative of the United States to the UN work with other
               member states to encourage the Secretary General to take the
               following two actions:

               o  ensure that UN programs with considerable financial risk
               establish, apply, and enforce the principles of internationally
               accepted internal control standards, with particular attention to
               comprehensive and timely risk assessments and

               o  strengthen internal controls throughout the UN system based in
               part on the lessons learned from the Oil for Food program.

               We provided a draft of this report to the Secretary of State, the
               UN Deputy Secretary General, and the UN Compensation Commission
               for comment. We received written responses from State and UNCC
               (see apps. V and VI for the comments and our complete response).
               State did not agree or disagree with our recommendation but
               commented that, although no sanctions regime similar to Oil for
               Food is in place, tighter internal controls would be appropriate
               for a future program similar to Oil for Food. We have modified our
               recommendation to clarify that the principals of oversight and
               control should apply not just to programs with the unique
               characteristics of Oil for Food. The UN concurred with our
               recommendations and noted that it is taking steps to strengthen
               internal control in the organization. The UN also provided
               technical comments, which we have incorporated into the report as
               appropriate.

               State commented that our report does not (1) clearly distinguish
               between the responsibilities and actions of the Secretary General
               and the Security Council, (2) overstates the case that diffusion
               of responsibility for the program meant that no single entity was
               in charge and accountable for the program, (3) does not highlight
               the Security Council's inaction in the face of corruption in the
               sanctions regime, and (4) overstates the importance of internal
               control.

               We disagree. First, our report clearly distinguishes between the
               responsibilities and actions of the Secretary General and the
               Security Council. We note that both had a role in the decision to
               give Iraq contract authority; the Secretary General negotiated the
               agreement and the Security Council approved it. Second, the
               diffusion of program responsibilities was a major structural
               weakness of the program. Although the Secretary General was
               responsible for program management, the Security Council made key
               decisions about commodity contracts and oil pricing, and nine UN
               agencies administered the program in the North. Third, our report
               highlights inaction by the Security Council by fully discussing,
               for example, its inaction on oil smuggling to neighboring states.
               Finally, we believe that State does not sufficiently emphasize the
               importance of internal controls for a vulnerable program.
               Internationally accepted controls require an overall structure of
               accountability with clear lines of authority and a comprehensive
               risk assessment. Taking these actions could have mitigated some of
               the corruption in the Oil for Food program.

               UNCC commented that we should not include UNCC as part of a report
               that deals with lessons learned from the Oil for Food program.
               UNCC requested that we issue a separate report or distinct chapter
               on its organization with additional information about its
               organization. We included UNCC in this report because it received
               more than $20 billion in Iraqi oil revenues under resolution 986;
               our intent is to report fully on the entities entrusted with
               management of this revenue. We have modified the report to further
               make it clear that UNCC is not part of the Oil for Food program
               and that it is a separate entity funded by Iraqi oil revenues.
               UNCC further commented that it provided OIOS with comprehensive
               responses to audit findings of potential overpayments of
               compensation but that our draft report did not adequately discuss
               these formal responses. In addition, UNCC stated that our
               discussion of OIOS's legal authority to audit UNCC awards does not
               adequately describe the position of UNCC or the UN General
               Counsel's legal opinion. We added information to the report to
               describe UNCC responses to OIOS recommendations and its position
               regarding OIOS's legal authority to audit its activities.

               We are providing copies of this report to the Secretary of State
               and interested congressional committees. We will also make copies
               available to others upon request. In addition, the report will be
               available on the GAO Web site at http://www.gao.gov .

               If you or your staff have any questions about this report, please
               contact me at (202) 512-8970 or ChristoffJ@gao.gov . Contact
               points for our Offices of Congressional Relations and Public
               Affairs may be found on the last page of this report. GAO staff
               who made major contributions to this report are listed in appendix
               VII.

               Joseph A. Christoff, Director International Affairs and Trade

               Joseph A. Christoff, Director International Affairs and Trade

               Congressional Committees:

               The Honorable John Warner Chairman The Honorable Carl Levin
               Ranking Minority Member Committee on Armed Services United States
               Senate

               The Honorable Duncan L. Hunter Chairman The Honorable Ike Skelton
               Ranking Minority Member Committee on Armed Services House of
               Representatives

               The Honorable Richard G. Lugar Chairman The Honorable Joseph R.
               Biden, Jr. Ranking Minority Member Committee on Foreign Relations
               United States Senate

               The Honorable Henry J. Hyde Chairman The Honorable Tom Lantos
               Ranking Minority Member Committee on International Relations House
               of Representatives

               The Honorable Susan M. Collins Chairwoman The Honorable Joseph I.
               Lieberman Ranking Minority Member Committee on Homeland Security
               and Governmental Affairs United States Senate

               The Honorable Tom Davis Chairman The Honorable Henry A. Waxman
               Ranking Minority Member Committee on Government Reform House of
               Representatives

               To assess aspects of the control environment of the Oil for Food
               program, we collected and analyzed (1) our prior reports and
               testimonies on the Iraq sanctions and Oil for Food program, (2)
               reports issued by the United Nations (UN) Independent Inquiry
               Committee and the Iraq Survey Group, (3) UN Office of the Iraq
               Program (OIP) documents, (4) relevant Security Council resolutions
               and the memorandum of understanding between the UN and the Iraqi
               government, (5) UN Secretariat reports to the Security Council,
               and (6) summaries of meetings of the Security Council's Iraq
               sanctions committee. We reviewed Security Council reports and
               documents related to oil smuggling to neighboring countries.

               To assess the sanctions and Oil for Food Program in relation to
               the four other internal control standards, we collected and
               analyzed the documentation listed above and also reviewed reports
               of the UN Office of Internal Oversight Services (OIOS) and other
               entities. The UN General Assembly created OIOS in 1994 and tasked
               it with conducting audits, investigations, inspections, and
               evaluations of UN programs and funds. The internal audit divisions
               of OIOS adhere to the Standards for the Professional Practice of
               Internal Auditing in the UN.1 In February 2005, we catalogued the
               findings and recommendations of 50 OIOS reports to determine
               common themes related to the management of the Oil for Food
               program and UN Compensation Commission (UNCC) using a protocol to
               identify findings for data input. To ensure consistency of data
               input, a database manager reviewed all input, and all input was
               independently validated. At the State Department's Oil for Food
               reading room, we reviewed more than 600 documents, including
               cables, reports, and memoranda. We asked for copies of these
               documents; we received about 250 of them. We also reviewed
               summaries of internal audits provided by the UN Development
               Program. Based on our review of these summaries and references to
               agencies' internal audits in Independent Inquiry Committee
               reports, we determined that the basic issues raised in these
               reports mirrored many of the findings and recommendations of the
               OIOS reports.

               We also met with officials responsible for implementing and
               overseeing the sanctions and Oil for Food program to discuss the
               internal controls used in the program. These officials included
               representatives from the Departments of Commerce, Defense,
               Treasury, and State. We traveled to New York to meet with
               officials from the U.S. Permanent Mission to the UN in New York,
               OIP, OIOS, the UN Children's Fund, the UN Development Program, and
               the UN Office for Project Support. We also met with
               representatives from the Independent Inquiry Committee and the
               Iraq Survey Group to discuss their report findings and
               methodologies. To assess both the control environment and the
               other internal control standards, we applied the internal control
               standards described in GAO's Standards for Internal Control in the
               Federal Government.2

               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:

               o  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 in late 2000).

               o  We estimated the amount of oil to each destination based on
               information from and discussions with officials of EIA, Cambridge
               Energy Research Associates, the Middle East Economic Survey, and
               the private consulting firm Petroleum Finance.

               o  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.

               o  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.

               o  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.

               We 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:

               o  Our 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.

               o  Our 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. UN 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. Treasury Department reported that surcharges ranged
               from 10 cents to 50 cents per barrel. As a test of reasonableness,
               we 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.

               o  Our estimate of the commission on commodities could be
               understated. We calculated commissions based on the commodity
               contracts for the 15 governorates in central and southern Iraq
               (known as the "59-percent account" because these governorates
               received this percentage of Oil for Food revenues). We excluded
               contracts for the three northern governorates (known as the
               "13-percent account"). However, the former Iraqi regime negotiated
               the food and medical contracts for the northern governorates, 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.

               To examine the progress and procedures of UNCC, we reviewed its
               publicly available information, including extensive background
               information, a literature review, and copies of all official
               documentation pertaining to Governing Council policy decisions,
               panel recommendations, and disbursement figures. To gather
               information about UNCC's management of its claims process, we
               reviewed about 20 OIOS audit reports related to the UNCC's
               activities and met with attorneys from the Department of State
               regarding the U.S. role in adjudicating and delivery claims
               payments. In July of 2005, we visited the UNCC headquarters in
               Geneva, Switzerland, where we met with UNCC officials and the U.S.
               representative to the Governing Council regarding the procedures
               for administering the claims review and award processes. At that
               time, we obtained and reviewed written information on all steps
               for the claims processes undertaken by the UNCC Secretariat. We
               also met with OIOS auditors that conducted reviews of UNCC's
               claims files, award decisions, and internal controls for the UNCC
               Secretariat's claims procedures. We verified the most recent
               figures related to claims received, awarded, and disbursed with
               officials in Geneva and Washington. We determined that UNCC data
               on claims are sufficiently reliable to report the aggregate amount
               of claims awarded, the claims that UNCC has paid on behalf of
               Iraq, and the claims that Iraq still owes.

               To determine figures relating to Iraq's ability to pay off
               remaining compensation awards, we developed an analysis built on
               International Monetary Fund (IMF) projections of Iraqi crude oil
               export revenue, award payment, and nominal gross domestic product
               (GDP), in both dollars and Iraqi dinars, for the period 2006
               through 2010.3 We converted estimated crude oil export revenue and
               award payments into dollars. We projected annual crude oil export
               revenue for the period 2011 through 2025 by assuming a constant
               annual growth rate. For each scenario, we selected a constant
               growth rate such that the annual average growth rate during 2006
               through 2025 would be 10, 5, or 1 percent, respectively. We
               estimated annual award payments as 5 percent of annual crude oil
               export revenue. For each scenario, we computed cumulative award
               payments commencing in 2006 until the total exceeded $32.5
               billion,4 the outstanding award balance as of January 2006. We
               noted the year in which this occurred for each scenario.

               To calculate the ratio of crude oil export revenue to GDP, we
               projected annual Iraqi GDP during 2011 through 2025. Using nominal
               GDP projections from the economic consulting firm Global Insight,5
               we computed annual growth rates of nominal dollar GDP for the
               years 2011 through 2025. We applied these growth rates to the
               IMF-projected 2010 GDP figure and computed annual GDP through
               2025. We constructed the ratio of crude oil export revenue to GDP
               for each scenario and calculated the average ratio for the period
               2006 through 2025.

               We used the IMF report as the basis for our projections of how
               long it might take Iraq to repay the UNCC-awarded compensation
               because the report is the basis for approving the Stand-By
               Arrangement for Iraq of (Special Drawing Rights) SDR 475.4 million
               (about $685 million), which is intended to stabilize Iraq's
               economy. Further, the IMF stand-by arrangement triggers a further
               reduction of 30 percent of Iraq's sovereign debt, as agreed to by
               international creditors.

               This appendix briefly summarizes the extensive and complicated
               processes of the Oil for Food program. Under the program, the UN
               Security Council's Iraq sanctions committee approved the contracts
               negotiated by Iraq for selling its oil. After oil was shipped, the
               companies deposited the funds into a UN-held account, and the
               proceeds from this account were used to fund humanitarian goods
               and services for Iraq. The Iraqi government negotiated the
               commodities for the 15 central and southern governorates under its
               control, as well as food and medicine for the entire country,
               including the three autonomous Kurdish governorates in northern
               Iraq. The UN reviewed and approved contracts to ensure that no
               items with potential military use were imported by Iraq with the
               program's funds. The Iraqi government distributed the goods within
               the central and southern governorates. In northern Iraq, UN
               agencies distributed the food and medicine procured by the Iraqi
               government and contracted goods and services to implement
               humanitarian assistance projects in several sectors.

               Iraq's state-owned oil marketing company was responsible for
               negotiating contracts with international oil companies to sell
               Iraqi oil. Once negotiated, the oil purchase contracts were
               reviewed by a panel of contracted oil overseers reporting to the
               Security Council's Iraq sanctions committee. The oil overseers
               also reviewed Iraq's pricing proposals and advised the sanctions
               committee on fair pricing. The sanctions committee used the advice
               of the overseers to set the oil price and approve contracts. The
               Secretariat also contracted oil inspectors to monitor and inspect
               the quantity of the oil exported. Once the oil was shipped, the
               oil purchasers directly deposited the proceeds into a UN-monitored
               escrow account held at the New York branch of France's Banque
               Nationale de Paris (BNP, now BNP-Paribas).1

               The Iraqi government used the proceeds from its oil sales to
               purchase food, medicines, and infrastructure supplies and
               equipment. The government first submitted a distribution plan to
               the UN Secretariat for all 18 governorates and then negotiated
               contracts directly with suppliers for goods for central and
               southern Iraq.2 OIP reviewed contracts submitted by suppliers to
               ensure that the paperwork was complete and submitted it to the
               sanctions committee for approval. Beginning in December 1999,
               resolution 1284 abolished Iraq's export ceiling to purchase
               civilian goods, and the Security Council authorized OIP to approve
               certain humanitarian items without committee approval.

               Before May 2002, all exports to Iraq were forbidden unless the
               Security Council specifically permitted them through resolutions
               or decisions. Starting in May 2002, in accordance with Security
               Council resolution 1409, the Security Council introduced a new
               system under which all goods were permitted, except products that
               could be used to develop weapons of mass destruction, conventional
               weapons, and military-related or dual-use goods. These controlled
               items were specifically listed on what was known as the goods
               review list, and only these items were referred to the sanctions
               committee for review. Two UN inspection bodies assigned to monitor
               Iraq's military and weapons of mass destruction programs-the UN
               Monitoring, Verification, and Inspection Committee and the
               International Atomic Energy Agency-examined commodity contracts to
               see if they contained items on the goods review list. Items that
               were on the goods review list, not entire contracts, were
               forwarded to the sanctions committee for further review and either
               approval or denial.

               Each member of the Iraq sanctions committee had authority to
               approve, hold, or block any contract; and the United States, as an
               active member of the sanctions committee, conducted a review of
               each commodity contract. U.S. technical experts assessed each item
               in a contract to determine its potential military application and
               whether the item was appropriate for the intended end user. These
               experts also examined the end user's track record with such
               commodities. An estimated 60 U.S. government personnel within the
               Departments of State, Defense, Energy, and other agencies examined
               all proposed sales of items that could be used to assist the Iraqi
               military or develop weapons of mass destruction. In addition, the
               Department of the Treasury was responsible for issuing U.S. export
               licenses to Iraq. It compiled the results of the review by U.S.
               agencies under the UN approval process and obtained input from the
               Department of Commerce on whether a contract included any items
               found on a list of goods prohibited for export to Iraq for reasons
               of national security or nuclear, chemical, and biological weapons
               proliferation.

               When a contract was approved, the government of Iraq requested a
               letter of credit for the supplier. UN contractors at entry points
               into Iraq authenticated shipments. Following the authentication,
               OIP authorized the bank to pay the supplier from the escrow
               account. The Iraqi government was then responsible for
               distributing the items in accordance with the distribution plan
               and with its Public Distribution System, a food ration basket for
               all Iraqis. Commodity distribution in Iraq was monitored by about
               160 UN observers who visited ration centers, marketplaces,
               warehouses, and other installations to ensure that distribution
               was equitable and in accordance with the targeted allocation plans
               submitted by Iraq for each 6-month phase.

               The Oil for Food program in the three semiautonomous governorates
               in northern Iraq was managed separately to ensure that these
               regions, with a majority Kurdish population, received the
               humanitarian assistance needed. Security Council resolution 986
               and the 1996 memorandum of understanding between Iraq and the UN
               created a framework under which nine UN agencies delivered
               emergency assistance and humanitarian aid in these regions. The
               process for delivering humanitarian assistance varied from that in
               central and southern Iraq. Food and medicines were procured in
               bulk by the central Iraqi government, and UN workers, accompanied
               by UN security guards, monitored the distribution of these items
               in the northern region. Activities of the nine UN agencies
               included constructing or rehabilitating schools, health clinics,
               power generation facilities, and houses.

               GAO, the Iraq Survey Group, and the Independent Inquiry Committee
               each estimated the illicit revenues and payments obtained by the
               Iraq regime through its surcharges on oil sales, questionable
               commissions and kickbacks on commodity contracts, and smuggling.
               In their published estimates, the Iraq Survey Group and the
               Independent Inquiry Committee included revenues from smuggling and
               other trade outside the Oil for Food program since 1991, when
               sanctions were first imposed. We have included only their
               estimates for the years of the Oil for Food program-from 1997
               through about early 2003. our estimates include revenues from 1997
               through the end of 2002. (App. I contains more detail on our
               methodologies for estimating Iraq's illicit revenues.)

               Table 1: Estimates of Iraq's Illicit Revenues during the Period of
               the Oil for Food Program, by Source

               Source: For GAO estimates: analysis of data from the oil industry,
               the Department of Energy, and information from Security Council
               member states. For other estimates: GAO analysis of Iraq Survey
               Group and Independent Inquiry Committee data.

               aThe Iraq Survey Group was created in 2003 to investigate Iraq's
               weapons of mass destruction program. It included analysts from the
               Central Intelligence Agency, Defense Intelligence Agency, the
               Departments of Energy and State, and from allied countries. It
               reported its findings in an unclassified report, Comprehensive
               Report of the Special Advisor to the DCI on Iraq's WMD (Sept. 30,
               2004).

               Table 2: Ranges of Iraq's Illicit Revenues during the Oil for Food
               Program

               Source: GAO analysis of estimates developed by GAO, the Iraq
               Survey Group, and the Independent Inquiry Committee.

               For oil surcharges, we multiplied barrels of oil sold under the
               Oil for Food program for 1997 through 2002 by 25 cents, based on
               estimates supplied by Security Council members and oil industry
               experts. The Iraq Survey Group had access to records at Iraq's
               State Oil Marketing Organization (SOMO) and to U.S. interviews
               with former Iraqi officials. It based its surcharge estimates on
               the organization's collections for 2000 through 2002. The
               Independent Inquiry Committee adopted a similar methodology using
               Iraqi records.

               We multiplied letters of credit for purchases by 5 percent for
               1997 through 1998 and by 10 percent for 1999 through 2002. We
               based this methodology on interviews with Security Council members
               that illicit commissions varied from 5 to 10 percent. This
               information was subsequently confirmed by former Iraqi minister
               and Saddam Hussein's advisors in interviews conducted by U.S.
               officials.

               The Iraq Survey Group included estimates for the period 2000
               through early 2003. It developed a formula based on Iraq's oil
               earnings, the actual amounts spent on imports, lags between
               earnings and contract signings, and an estimated 10-percent
               kickback.

               The Independent Inquiry Committee's estimate was based on UN
               accounting records detailing the actual amounts spent on Oil for
               Food contracts, Iraqi records that set forth the regime's policies
               on obtaining illicit income, Iraqi ministry records with data on
               the kickbacks levied and collected, and banking records confirming
               and quantifying the deposit of kickbacks into collection accounts.

               To determine the amount of oil smuggled, we subtracted the amounts
               of oil sold through the Oil for Food program and domestic
               consumption from Iraq's production for 1997 through 2002 (as
               determined by the U.S. Department of Energy). We estimated illicit
               proceeds from this oil using prices for Iraqi oil under the Oil
               for Food program and price discounting methods. On the basis of
               discussions with experts, we applied a discount rate of between
               one-third to two-thirds of the Oil for Food price to the smuggled
               shipments, depending on location.

               The Iraq Survey Group separated earnings from ongoing trade
               agreements with neighboring countries from "private sector" oil
               revenue obtained outside either the Oil for Food program or
               ongoing trade agreements. For revenue from trade agreements, the
               Iraq Survey Group primarily used SOMO information on its invoices
               and collections from under these agreements. For "private sector"
               revenues during the Oil for Food program period, it relied mostly
               on SOMO actual collections for cash transactions and the invoice
               value for barter trade.

               Similar to the Iraq Survey Group, the Independent Inquiry
               Committee broke out trade revenue from neighboring countries
               separately from other oil trade outside the Oil for Food program.
               Like GAO, the committee calculated the volume of oil sold on the
               basis of Iraq's production, internal consumption, and foreign
               trade. However, it used SOMO data for these calculations and did
               not apply a discount rate.

               In addition to smuggling and contract surcharges and kickbacks,
               the Senate Permanent Subcommittee on Investigations, Committee on
               Homeland Security and Governmental Affairs, included other
               categories in its estimate of Iraq's illicit revenues. For
               example, the Subcommittee estimated that Iraq gained $2.1 billion
               in illicit revenue from substandard goods. This scheme involved
               contracting first-quality goods, although the actual goods
               delivered were of lesser quality. The supplier received a small
               percentage of the difference and the Iraqi government kept the
               rest. The estimate was based on anecdotal information provided by
               officials of the former Iraqi regime, the UN, and the U.S.
               government. The estimate assumed that, from 1997 through 2003, on
               average, about 5 percent of all goods delivered under the Oil for
               Food program were substandard.

               This appendix provides more detailed information on the
               organization of UNCC and how claims were decided based on the
               different categories of claims.

               The UN Security Council established UNCC in 1991 to process claims
               and pay compensation for damages and losses resulting from Iraq's
               invasion and subsequent occupation of Kuwait. Security Council
               resolution 687 of April 3, 1991 established Iraq responsibility
               for such losses stating that "Iraq...is liable under international
               law for any direct loss, damage, including environmental damage
               and the depletion of natural resources, or injury to foreign
               Governments, nationals and corporations, as a result of Iraq's
               unlawful invasion and occupation of Kuwait." On May 20, 1991, the
               Security Council adopted resolution 692, which established UNCC
               and the UN Compensation Fund. With the adoption of Security
               Council Resolution 986, UNCC, along with UN-sponsored humanitarian
               programs in Iraq, received funding from the profits from Iraqi oil
               sales.

               UNCC is a subsidiary organ of the UN Security Council and is
               comprised of three entities-the Governing Council, the panels of
               Commissioners, and the UNCC Secretariat. The Governing Council,
               whose membership is the same as that of the Security Council, is
               the principal policymaking organization within UNCC. The Governing
               Council approves the award decisions recommended by the panels of
               Commissioners. The three-member panels were responsible for
               reviewing the claims and making recommendations on whether to
               award claimants and the amounts to be awarded. Commissioner panels
               included experts in the fields of law, accounting, insurance, and
               environmental damage assessment. Commissioners were nominated by
               the UN Secretary General and appointed by the UNCC Governing
               Council on the basis of professional qualifications, experience,
               and geographic representation. The UNCC Secretariat organized the
               claims and provided support to both the Governing Council and the
               Commissioners panels.

               UNCC divided claims into six classes (A through F). Individuals
               and their families filed A, B, and C claims-known collectively as
               the small claims categories-for damages and losses up to $100,000.
               The large claims categories-D, E, and F-were filed by individuals
               petitioning for $100,000 or more in damages and losses, and from
               corporations, international organizations, and governments.
               Although the number of small claims was much higher, larger claims
               accounted for about 95 percent of the compensation sought.
               Claimants in the D, E, and F categories petitioned for
               millions-and in some instances billions-of U.S. dollars. Table 3
               summarizes the claims categories and the types of losses and
               damage UNCC compensated.

    12Congressional Research Service, Iraq: Oil-for-Food Program, Illicit
    Trade, and Investigations, RL30472 (Washington, D.C.: Jan. 9, 2006).

    13Two UN inspection bodies assigned to monitor Iraq's military and weapons
    of mass destruction programs-(1) the UN Monitoring, Verification, and
    Inspection Committee and (2) the International Atomic Energy
    Agency-examined commodity contracts to see if they contained items on the
    goods review list. Items that were covered by the goods review list, not
    entire contracts, were forwarded to the sanctions committee for further
    review.

    14Agencies included the Food and Agricultural Organization; International
    Labor Organization; World Food Program; World Health Organization; UN
    Children's Fund; UN Development Program; UN Educational, Scientific, and
    Cultural Organization; UN-Habitat; and the UN Office for Project Services.

        Oil for Food Program Fell Short of Additional Internal Control Standards

    15With the exception of UN-Habitat, all UN agencies had their own internal
    audit functions. UN-Habitat's activities were audited by OIOS.

    Key Weaknesses and Challenges Were Not Addressed Due to Absence of Risk
    Assessments

    Control Activities Mitigated Questionable Oil Pricing and the Import of Dual-Use
    Items but Did Not Prevent Smuggling, Contract Kickbacks, or Poor Asset
    Management

      Inadequate Control of Oil Shipments and Oil Export Contracts Facilitated
      Smuggling and Illicit Surcharges

    16Testimony of John Denson, General Counsel, Saybolt Group, before the
    Permanent Subcommittee on Investigations, Committee on Governmental
    Affairs, U.S. Senate (Washington, D.C.: Feb. 15, 2005).

    17Ibid.

    18For program phases IX and X-Dec. 6, 2000, through Nov. 30, 2001.

      Retroactive Pricing Helped Limit Illicit Oil Surcharges

      Contract Examination Procedures Emphasized Dual-Use Items-Not Price and Value

    19Report on the Pricing Evaluation of Contracts Awarded under the Iraq Oil
    for Food Program, submitted by the Joint Defense Contract Audit Agency and
    Defense Contract Management Agency OFF Pricing Evaluation Team
    (Washington, D.C.: Sept. 12, 2003).

      Earlier Proposal for Price and Quality Review Was Not Included in Final
      Inspection Contract

      Program in Northern Iraq Had Inadequate Asset and Cash Management Controls

    20The Coalition Provisional Authority used Cotecna from November 2003,
    when it assumed responsibility from the UN for remaining Oil for Food
    contracts, until October 2004, when the Iraqis no longer used independent
    inspection agents.

    Poor Information and Communication Compromised Disclosure of Iraq's Illicit
    Revenue Schemes and Hindered UN Activities in Northern Iraq

    Monitoring Activities Did Not Ensure Adequate Internal Oversight

      Limitations on OIOS Reporting and Resources Compromised Its Ability to Provide
      Effective Oversight

    21GAO, United Nations: Funding Arrangements Impede Independence of
    Internal Auditors, GAO-06-575 (Washington, D.C.: Apr. 25, 2006).

      OIOS Found Numerous Problems in UN Management of Program in Northern Iraq, but
      Issues Were Not Fully Addressed

    22 GAO-05-346T .

    UNCC Has Paid More than $20 Billion in Compensation Claims, but Remaining
                 Payments of More than $32 Billion May Take until 2020

    Almost $32.2 Billion in Unpaid Awards Increases Iraq's Debt Burden and May Not
    Be Paid Until 2020

    23UNCC accepted a number of claims filed after the February 1997 deadline
    from groups that were unable to meet the deadline. For example, UNCC
    accepted around 32,000 late claims from Bedouns-members of a community
    that lived in Kuwait for many years but were not citizens of Kuwait or any
    other nation-almost 10 years after the deadline. The claims were late
    because no country or international organization had accepted
    responsibility for filing the claims. UNCC also continues to receive a
    small number of claims forwarded on behalf of missing persons as well as
    claims for damages and losses resulting from land mines but will no longer
    accept these claims after 2006.

    24With the adoption of Security Council resolution 986 in 1995, UNCC was
    directed to receive up to 30 percent of the proceeds of Iraq's oil sales.
    This amount was reduced to 25 percent in December 2000 pursuant to
    resolution 1330.

    UNCC Had Controls for Claims Preparation, but OIOS Reported Concerns with Award
    Payment Procedures

      UNCC Secretariat Had Controls for Processing Claims

    25See Iraq: Request for Stand-By Arrangement. We used data from IMF and an
    economic consulting firm in calculating our scenarios. Appendix I contains
    details on our methodology.

      OIOS Reported Concerns with Award Payments, but UNCC Challenged OIOS's
      Authority to Audit Specific Aspects of UNCC's Work

    26Governing Council Decisions 18 and 48.

    27Of the 3,126 U.S. claimants receiving UNCC awards, 29 have not been
    located. The United States has returned about $100,000 to UNCC.

                                       Conclusion

                          Recommendation for Executive Action

                           Agency Comments and Our Evaluation

    Appendix I: Scope and Methodology Appendix I: Scope and Methodology

    1As promulgated by the Institute of Internal Auditors and adopted by the
    Representatives of Internal Audit Services of the UN Organizations and
    Multilateral Financial Institutions.

    2 GAO/AIMD-00-21 .3.1. We also referred to GAO's publication, Internal
    Control Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.:
    August 2001).

    3IMF, Iraq: Request for Stand-By Arrangement, (Washington, D.C.: Dec. 7,
    2005).

    4At the time of our calculations, remaining unpaid awards totaled about
    $32.5 billion; by late January 2006 that amount had been reduced to about
    $32.2 billion.

    5Global Insight, International Interim Forecast Analysis, Country
    Tables-Iraq (Boston, MA: Jan. 6, 2006).

    Appendix II: Appendix II: Oil for Food Program Processes

    Oil Sales

    Humanitarian Assistance to Central and Southern Iraq

    1In response to auditors' concerns that too much money was being
    concentrated at BNP, the number of banks receiving Oil for Food deposits
    was expanded after 2000 to include JP Morgan Chase, Deutsche Bank, Banco
    Bilbao Vizcaya, Credit Agricole Indosuez, Credit Suisse, and
    HypoVereinsbank.

    2In accordance with the 1996 memorandum of understanding, the Iraqi
    government purchased food and medicines in bulk, including food and
    medicine intended for the three northern Kurdish governorates.

    Humanitarian Assistance to Northern Iraq

    Appendix III: EIllicit Refor Food Progr Appendix III: Estimates and Ranges
    of Iraq's Illicit Revenues and Payments during the Oil for Food Program

    U.S. dollars in millions
                                            Iraq Survey       Independent Inquiry
    Revenue type                  GAO         Groupa                 Committee
    Surcharges on oil sales       0.9           0.23                      0.23
    Commodity purchase kickbacks  3.5            1.5                       1.6
    Smuggling/trade outside       5.7            6.8                       8.4
    program
    Total                        10.1           8.53                     10.23

    U.S. dollars in millions
    Revenue type                    Lowest estimate Highest estimate
    Surcharges on oil sales                    0.23              0.9
    Commodity purchase kickbacks                1.5              3.5
    Smuggling/trade outside program             5.7              8.4
    Total                                      7.43             12.8

    Illicit Surcharges on Exported Oil

    Commodity Purchase Kickbacks

    Smuggling and Trade-Related Revenues

    Other Estimates of Illicit Revenue

    Appendix IV: UCl Appendix IV: UNCC Organization and Its Claims Categories
    and Amounts

    UNCC Formation and Organization

    UNCC's Claims Categories and Amounts

    Table 3: UNCC Claims Categories

    Claim category          Claim description
    Small claims categories
    A claims                Submitted by individuals forced to leave Iraq or
                               Kuwait because of the Iraqi invasion of Kuwait.
                               Individuals and families who intended to file
                               claims in other categories were awarded $2,500 and
                               $5,000, respectively. Individuals and families
                               that agreed not to file other claims were entitled
                               to receive $4,000 and $8,000, respectively.
    B claims                Submitted by individuals who suffered serious
                               personal injury by the Iraqi invading force or
                               whose spouse, child, or parent died as a result of
                               the invasion and occupation of Kuwait; individuals
                               were awarded $2,500, and families were awarded up
                               to $10,000.
    C claims                Submitted by individuals for damages up to
                               $100,000 for 21 different types of losses,
                               including those relating to departure from Kuwait
                               or Iraq; personal injury; mental pain and anguish;
                               loss of personal property; loss of bank accounts,
                               stocks, and other securities; loss of income; loss
                               of real property; and individual business losses.
    Large claims categories
    D claims                Submitted by individuals for damages over $100,000
                               for 21 different types of losses, including those
                               relating to departure from Kuwait or Iraq;
                               personal injury; mental pain and anguish; loss of
                               personal property; loss of bank accounts, stocks,
                               and other securities; loss of income; loss of real
                               property; and individual business losses.
    E claims                Submitted by corporations, other private legal
                               entities, and public sector enterprises for
                               construction or other contract losses; losses from
                               the nonpayment for goods or services; losses
                               relating to the destruction or seizure of business
                               assets; loss of profits; and oil sector losses.
    F claims                Submitted by governments and international
                               organizations for losses incurred in evacuating
                               citizens; providing relief to citizens; damage to
                               diplomatic premises; loss and damage to other
                               government property; and damage to the
                               environment.

    Source: GAO analysis based on UNCC data.

    Claimants for the small categories were awarded $8.43 billion-a little
    more than half of the $15 billion in compensation they requested, while
    large category claimants were awarded about $44 billion, or about 13
    percent of the $338 billion they requested. UNCC set the amount of
    compensation that could be requested and awarded for A and B category
    claimants.1 (See fig. 4).

    1At its first meeting, the Governing Council classified A, B, and C claims
    as "urgent claims" and required that their review be expedited. In
    general, expedited procedures meant that the panels spent less time
    reviewing individual claims and depended on methods to effectively process
    claims en masse.

    Figure 4: Claims Received and Awarded by Category

    aClaims in the E category include totals for export guarantee and
    insurance claims submitted to UNCC, which were designated as an E/F
    subcategory. There were 123 E/F claims, seeking $6.1 billion in
    compensation, of which 57 were award $311 million in compensation.

    By late January 2006, the UNCC had paid about $20.3 billion in
    compensation, mostly to individuals and families, leaving about $32.2
    billion in outstanding unpaid awards. Almost all of the amount yet to be
    paid is for claims in the E and F categories; i.e., claims submitted by
    corporations and governments. UNCC officials noted that the small
    outstanding amounts currently in the A and C categories are for
    individuals who have not been located and therefore were unable to receive
    awards. Category B claims have been paid entirely.

    Appendix V: Comments from the Department of State Appendix V: Comments
    from the Department of State

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    See comment 1.

    See comment 4.

    See comment 5.

    See comment 2.

    See comment 3.

    The following are GAO's comments on the Department of State's letter dated
    March 16, 2006.

                                      GAO Comments

               1. We disagree with State's assertion that the report does not
               clearly distinguish between the responsibilities and actions of
               the Secretary General and the Security Council. For actions
               attributed to both the Security Council and the Secretariat, our
               report collectively refers to the UN. For actions taken by one or
               the other entity, we clearly denote whether it is the Security
               Council or the Secretariat. State commented that the member states
               of the Security Council were responsible for the decisions that
               allowed Iraq to manipulate the program and circumvent sanctions,
               not the Secretariat or the "UN." Although the Security Council was
               responsible for approving the agreement with Iraq, we disagree
               with State's assertion that the Secretariat did not play a part in
               the agreement. We note that the Secretariat negotiated and the
               Secretary General signed the May 1996 memorandum of understanding
               between the UN and Iraq, and the Security Council approved it.
               This agreement allowed Iraq to choose its oil buyers and commodity
               suppliers and directly negotiate contract terms. Therefore, the UN
               was collectively responsible for allowing a control environment
               that enabled Iraq to obtain illicit revenues through surcharges
               and kickbacks.
               2. We disagree with State's comment that the report does not
               highlight the Security Council's inaction in the face of and
               corruption in the sanctions regime. We provide a clear discussion
               on how the Security Council's lack of action failed to prevent
               smuggling to neighboring states. Our report further notes that
               successive U.S. administrations issued annual waivers to Congress
               exempting Turkey and Jordan from unilateral U.S. sanctions for
               violating UN sanctions against Iraq. State commented that
               "smuggling to Jordan and Turkey was conscious and understandable,"
               but noted that other, unspecified tolerance by other Security
               Council members was harder to understand. We do not distinguish
               between "conscious and understandable" smuggling and other
               types-all smuggling violated UN sanctions and allowed a corrupt
               regime to obtain illicit revenues outside the Oil for Food
               program.
               3. We disagree with State's comment that the report overstates the
               diffusion and lack of clarity regarding the program's management
               and oversight. While we agree that the Secretariat, through the
               Office of the Iraq Program, was responsible for the day-to-day
               management of the Oil for Food program, the Security Council's
               Iraq sanctions committee was responsible for key oversight
               functions, including contract and oil pricing reviews and
               sanctions enforcement. As State points out in an earlier comment,
               the Security Council was also responsible for policy decisions
               that affected Iraq's ability to manipulate the sanctions and Oil
               for Food program to its benefit. Moreover, as figure 3 in our
               report demonstrates, numerous other entities were responsible for
               various management and oversight aspects of the Oil for Food
               program and sanctions enforcement, including border inspectors,
               oil overseers, an interception force, nine UN agencies, and
               several audit offices. The Oil for Food program was large and
               complex and required management and oversight by multiple
               entities. However, the absence of clear leadership and lines of
               authority were significant structural weaknesses in the program.
               4. We reported in our section on information and communication
               that OIP failed to fully report to the Security Council's sanction
               committee information on contract surcharges, kickbacks, and
               smuggling and that such disclosure may have mitigated some of
               Iraq's manipulation of the program. State correctly observes that
               the Secretariat should have reported ongoing problems to the
               Security Council. This observation further supports our finding
               that the Secretariat was not the only entity responsible for the
               Oil for Food program and that leadership and accountability were
               diffused.
               5. State emphasized the role of political will in addressing
               noncompliance with sanctions, stating that stronger internal
               controls without political will might not have corrected the Oil
               for Food Programs problems. State further commented that the
               report has little discussion about the global and political
               dynamics that governed international efforts to contain Saddam
               Hussein. State undervalues the importance of an internal control
               framework. Among other elements, internationally accepted
               principles of internal control require that responsible entities
               (1) provide an overall structure of accountability including clear
               lines of authority and responsibility; (2) conduct a comprehensive
               risk assessment, including the external context affecting the
               program; and (3) ensure that timely information be provided to
               decision makers. Although these controls might not have identified
               the oil smuggling, they would have identified and made transparent
               specific program vulnerabilities and established clear
               accountability. This would have helped mitigate the kickbacks on
               commodity contracts by establishing accountability for contract
               pricing. However, we have added additional information to the
               report about the political context of the program.
               6. We disagree with State comments that our report merely restates
               OIOS findings about UNCC without making it clear that they are
               OIOS findings. Our report makes clear that the findings about UNCC
               are OIOS and not GAO findings. In response to State's comment that
               we do not present both OIOS and UNCC sides, we have clarified the
               report to note that UNCC has disputed OIOS findings (see comment
               7).
               7. State commented that we do not present the views of both OIOS
               and UNCC in the discussion of potential overcompensation due to
               the improper use of the exchange rate date. Our report does not
               discuss or refer to the exchange rate issue. We cite more than
               $500 million that OIOS refers to as potential overcompensation due
               to calculation errors, insufficient evidence to support losses,
               and duplicate claims.
               8. In response to State's comment that we do not sufficiently
               discuss the issue of OIOS's proper scope of audit authority, we
               have added additional information to the report about the legal
               challenge to OIOS's audit authority and the UN Office of Legal
               Affair's opinion.
               9. We have clarified and updated information on the amount of the
               UNCC awards that governments and international organizations have
               either not reported or not paid out.

    Appendix VI: Comments from the UN Compensation Commission Appendix VI:
    Comments from the UN Compensation Commission

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    See comment 2.

    See comment 1.

    See comment 1.

    See comment 4.

    See comment 3.

    See comment 5.

    See comment 6.

    See comment 4.

    See comment 9.

    See comment 10.

    See comment 8.

    See comment 7.

    See comment 11.

    The following are GAO's comments on the UN Compensation Commission's
    letter dated April 10, 2006.

                                      GAO Comments

               1. In response to the UNCC's concern that we are including UNCC in
               a report on Oil for Food, we have further clarified the report to
               note that UNCC is a separate entity. Our draft report made a clear
               delineation of UNCC and Oil for Food in the structure of the
               report. We included UNCC in the report because, under the terms of
               UN resolution 986, Iraq's oil revenues funded both the
               humanitarian program and the reparations. Because the reparations
               amounted to 25 to 30 percent of Iraq's oil revenues and about $20
               billion, we could not responsibly omit this important element of
               the sanctions in reporting to Congress.
               2. In comments on our report, UNCC noted that a separate chapter
               on its activities would facilitate a more expansive description of
               its organization and the claims process. We have added information
               about the organization of UNCC in the body of the report and in
               appendix IV.
               3. UNCC noted that our draft did not include adequate information
               about its detailed responses to the OIOS audit reports and
               findings and that UNCC disagreed with most OIOS findings. We have
               added information to the body of the report that describes the
               UNCC responses to OIOS audit reports. We note that our report does
               not analyze either OIOS findings or the UNCC responses.
               4. UNCC commented that brief mention is made of UNCC's challenges
               to OIOS's audit authority as well as the UNCC position on this
               matter. Furthermore, UNCC stated that the view of the UN Office of
               Legal Affairs was not sufficiently presented. We have provided
               additional explanation and context on the UNCC-OIOS legal
               relationship and have expanded on the UN Office of Legal Affairs
               opinion.
               5. With regard to our description of the OIOS report identifying
               $419 million in potential overcompensation, UNCC noted that we did
               not describe its detailed response to the OIOS report, which
               disputed the findings. We have added information to the report on
               the UNCC response to the OIOS report.
               6. UNCC commented that a large majority of the claimed
               overpayments are based on the date of the currency exchange rate
               and that the correct date should be the date of the loss,
               consistent with international norms. We did not and do not report
               or comment on this issue in our report.
               7. We have updated our report to reflect the current amount of
               unclaimed payments.
               8. UNCC commented that it disputed the OIOS assertions that its
               oversight of governments' unpaid claims was inadequate and that it
               provided oversight of all reports on the distribution of payments
               and refunds. We have added more information from the UNCC June 16,
               2005, response to the OIOS audit dated May 27, 2005.
               9. We have updated our report to reflect the current amount of
               payments not supported by audit certificates.
               10. We have updated the information provided by the Department of
               State about the phasing out of UNCC, according to documentation
               UNCC provided to us in April 2006.
               11. We have revised the table, inserting the additional award
               information for category "A" and inserting the words "up to"
               before $10,000 in category "B."

    Appendix VII: A Appendix VII: GAO Contacts and Staff Acknowledgments

                                      GAO Contact

    Joseph A. Christoff, Director (202) 512-8979

                                 Staff Acknowledgments

    In addition to the individual named above, Mona Nichols Blake, Jeanette
    Espinola, Tetsuo Miyabara, and Audrey Solis made key contributions to this
    report. Richard Boudreau, Lynn Cothern, Bonnie Derby, Hynek Kalkus, Bruce
    Kutnick, Don Morrison, Valerie Nowak, George Taylor, Ann Ulrich, and
    Judith Williams provided technical assistance; Etana Finkler provided
    graphics assistance; and Mary Moutsos provided legal assistance.

    Related GAO Products

    United Nations: Preliminary Observations on Internal Oversight and
    Procurement Practices. GAO-06-226T . Washington, D.C.: October 31, 2005.

    United Nations: Sustained Oversight Is Needed for Reforms to Achieve
    Lasting Results. GAO-05-392T . Washington, D.C.: March 2, 2005.

    United Nations: Oil for Food Program Audits. GAO-05-346T . Washington,
    D.C.: February 15, 2005.

    United Nations: Observations on the Oil for Food Program and Areas for
    Further Investigation. GAO-04-953T . Washington, D.C.: July 8, 2004.

    United Nations: Observations on the Oil for Food Program and Iraq's Food
    Security. GAO-04-880T . Washington, D.C.: June 16, 2004.

    United Nations: Observations on the Management and Oversight of the Oil
    for Food Program. GAO-04-730T . Washington, D.C.: April 28, 2004.

    United Nations: Observations on the Oil for Food Program. GAO-04-651T .
    Washington, D.C.: April 7, 2004.

    Recovering Iraq's Assets: Preliminary Observations on U.S. Efforts and
    Challenges. GAO-04-579T . Washington, D.C.: March 18, 2004.

    Weapons of Mass Destruction: U.N. Confronts Significant Challenges in
    Implementing Sanctions against Iraq. GAO-02-625 . Washington, D.C.: May
    23, 2002.

    (320320)

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    Highlights of GAO-06-330 , a report to congressional committees

    April 2006

    UNITED NATIONS

    Lessons Learned from Oil for Food Program Indicate the Need to Strengthen
    UN Internal Controls and Oversight Activities

    In 1996, the United Nations (UN) Security Council and Iraq began the Oil
    for Food program to address Iraq's humanitarian situation after sanctions
    were imposed in 1990. More than $67 billion in oil revenue was obtained
    through the program, with $31 billion in humanitarian assistance delivered
    to Iraq.

    The 2005 Defense Authorization Act mandated that GAO review the Oil for
    Food program. GAO reviewed how the UN adhered to five key internal control
    standards in its stewardship of the program. GAO assessed (1) the
    program's control environment and (2) key elements of the other internal
    control standards. GAO also reported on the UN Compensation Commission's
    progress in paying reparations from Iraq's invasion of Kuwait.

    What GAO Recommends

    GAO recommends that the Secretary of State and the Permanent
    Representative of the U.S. to the UN work with member states to encourage
    the Secretary General to (1) ensure that UN programs with considerable
    financial risk apply internationally accepted internal control standards
    and (2) strengthen internal controls throughout the UN, based on lessons
    from the Oil for Food program. State and the UN responded that they are
    taking steps to strengthen internal controls at the UN.

    The UN Oil for Food program would have benefited from an internationally
    accepted internal control framework to provide reasonable assurance in
    safeguarding assets and meeting program objectives. Although the program
    averted a humanitarian crisis while limiting Iraq's ability to purchase
    military-related items, internal control problems allowed the former Iraqi
    regime to manipulate the program and circumvent sanctions to obtain
    billions of dollars in illicit payments. In particular, weaknesses in the
    control environment of the Oil for Food program compromised oversight and
    made it vulnerable to fraud and abuse. For example, Iraq negotiated
    contracts directly with companies purchasing its oil and selling
    commodities. In the absence of UN oversight, Iraq manipulated contract
    terms and obtained kickbacks. Moreover, the program had a complex
    structure with unclear lines of responsibility and authority. This
    diffusion among various entities meant that no single entity was
    accountable for the program in its entirety.

    The Oil for Food program also had weaknesses in the four key internal
    control standards-risk assessment, control activities, information and
    communication, and monitoring-that facilitated Iraq's ability to obtain
    illicit revenues ranging from $7.4 billion to $12.8 billion. In
    particular, the UN did not provide for timely assessments to address the
    risks posed by Iraq's control over contracting and the program's expansion
    from emergency assistance to commodities for 24 sectors.

    Internal Controls Framework in the Oil for Food Program

    The UN Security Council established the UN Compensation Commission (UNCC)
    in 1991 to process claims and pay victims of Iraq's invasion of Kuwait.
    Security Council resolution 986 provided that a portion of proceeds from
    Iraq oil sales would go to the compensation fund. The commission approved
    awards of $52.5 billion to more than 1.5 million claimants and has paid
    more than $20 billion of this amount; however, Iraq still owes almost
    $32.2 billion in unpaid awards. Future payments for these awards could
    extend through 2020. These unpaid awards are in addition to the $51
    billion that Iraq owes to international creditors.
    *** End of document. ***