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

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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 [email protected] . 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.

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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. ***