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
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-06-330
* Results in Brief
* Background
* Early Compromises in Program Structure and Widely Diffused M
* The Oil for Food Program Included Compromises that Limited U
* Numerous Entities Shared Key Responsibilities, but Authority
* Oil for Food Program Fell Short of Additional Internal Contr
* Key Weaknesses and Challenges Were Not Addressed Due to Abse
* Control Activities Mitigated Questionable Oil Pricing and th
* Inadequate Control of Oil Shipments and Oil Export Contracts
* Retroactive Pricing Helped Limit Illicit Oil Surcharges
* Contract Examination Procedures Emphasized Dual-Use Items-No
* Earlier Proposal for Price and Quality Review Was Not Includ
* Program in Northern Iraq Had Inadequate Asset and Cash Manag
* Poor Information and Communication Compromised Disclosure of
* Monitoring Activities Did Not Ensure Adequate Internal Overs
* Limitations on OIOS Reporting and Resources Compromised Its
* OIOS Found Numerous Problems in UN Management of Program in
* UNCC Has Paid More than $20 Billion in Compensation Claims,
* Almost $32.2 Billion in Unpaid Awards Increases Iraq's Debt
* UNCC Had Controls for Claims Preparation, but OIOS Reported
* UNCC Secretariat Had Controls for Processing Claims
* OIOS Reported Concerns with Award Payments, but UNCC Challen
* Conclusion
* Recommendation for Executive Action
* Agency Comments and Our Evaluation
* Oil Sales
* Humanitarian Assistance to Central and Southern Iraq
* Humanitarian Assistance to Northern Iraq
* Illicit Surcharges on Exported Oil
* Commodity Purchase Kickbacks
* Smuggling and Trade-Related Revenues
* Other Estimates of Illicit Revenue
* UNCC Formation and Organization
* UNCC's Claims Categories and Amounts
* GAO Comments
* GAO Comments
* GAO Contact
* Staff Acknowledgments
* GAO's Mission
* Obtaining Copies of GAO Reports and Testimony
* Order by Mail or Phone
* To Report Fraud, Waste, and Abuse in Federal Programs
* Congressional Relations
* Public Affairs
Contents
Letter 1
Results in Brief 3
Background 6
Early Compromises in Program Structure and Widely Diffused Management
Responsibilities Led to Weak Control Environment 10
Oil for Food Program Fell Short of Additional Internal Control Standards
20
UNCC Has Paid More than $20 Billion in Compensation Claims, but Remaining
Payments of More than $32 Billion May Take until 2020 30
Conclusion 35
Recommendation for Executive Action 36
Agency Comments and Our Evaluation 36
Appendix I Scope and Methodology 40
Appendix II Oil for Food Program Processes 45
Appendix III Estimates and Ranges of Iraq's Illicit Revenues and Payments
during the Oil for Food Program 48
Appendix IV UNCC Organization and Its Claims Categories and Amounts 51
Appendix V Comments from the Department of State 54
GAO Comments 59
Appendix VI Comments from the UN Compensation Commission 62
GAO Comments 67
Appendix VII GAO Contacts and Staff Acknowledgments 69
Related GAO Products 70
Tables
Table 1: Estimates of Iraq's Illicit Revenues during the Period of the Oil
for Food Program, by Source 48
Table 2: Ranges of Iraq's Illicit Revenues during the Oil for Food Program
48
Table 3: UNCC Claims Categories 52
Figures
Figure 1: Programs and Activities Authorized by Security Council
Resolution 986 9
Figure 2: Internal Control Standards Related to UN Sanctions against Iraq
and the Oil for Food Program 12
Figure 3: Multiple Organizations Managed the Oil for Food Program and
Enforced UN Sanctions 16
Figure 4: Claims Received and Awarded by Category 53
Abbreviations
IMF International Monetary Fund OIOS Office of Internal Oversight Services
OIP Office of the Iraq Program SOMO State Oil Marketing Organization UN
United Nations UNCC United Nations Compensation Commission UNOHCI United
Nations Office of the Humanitarian Coordinator for Iraq
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
United States Government Accountability Office
Washington, DC 20548
April 25, 2006 April 25, 2006
Congressional Committees: Congressional Committees:
In 1996, the United Nations (UN) Security Council and Iraq began the Oil
for Food program to address growing concerns about Iraq's humanitarian
situation after international sanctions were imposed in 1990. Authorized
by Security Council resolution 986, the intent of the program was to allow
the Iraq government to use the proceeds of its oil sales to pay for food,
medicine, and infrastructure maintenance and-at the same time-prevent the
regime from obtaining goods for military purposes. Resolution 986 also
provided that a portion of the oil sales be used for a separate program to
pay compensation through the UN Compensation Commission (UNCC) to victims
of Iraq's invasion of Kuwait in 1990. Iraq obtained more than $67 billion
in oil revenues through the program; as of November 2003, about $31
billion in commodities and humanitarian assistance had been delivered to
Iraq. Four key entities were responsible for most of the program's
operations-(1) the Security Council's Iraq sanctions committee, (2) the UN
Secretariat's Office of the Iraq Program, (3) nine UN agencies with
separate programs in northern Iraq, and (4) the Iraqi government under
Saddam Hussein. Allegations of corruption and misconduct within the UN Oil
for Food program and the overall management of the humanitarian program
have prompted a number of investigations. The 2005 Defense Authorization
Act mandated that GAO review the Oil for Food program.1 In 1996, the
United Nations (UN) Security Council and Iraq began the Oil for Food
program to address growing concerns about Iraq's humanitarian situation
after international sanctions were imposed in 1990. Authorized by Security
Council resolution 986, the intent of the program was to allow the Iraq
government to use the proceeds of its oil sales to pay for food, medicine,
and infrastructure maintenance and-at the same time-prevent the regime
from obtaining goods for military purposes. Resolution 986 also provided
that a portion of the oil sales be used for a separate program to pay
compensation through the UN Compensation Commission (UNCC) to victims of
Iraq's invasion of Kuwait in 1990. Iraq obtained more than $67 billion in
oil revenues through the program; as of November 2003, about $31 billion
in commodities and humanitarian assistance had been delivered to Iraq.
Four key entities were responsible for most of the program's
operations-(1) the Security Council's Iraq sanctions committee, (2) the UN
Secretariat's Office of the Iraq Program, (3) nine UN agencies with
separate programs in northern Iraq, and (4) the Iraqi government under
Saddam Hussein. Allegations of corruption and misconduct within the UN Oil
for Food program and the overall management of the humanitarian program
have prompted a number of investigations. The 2005 Defense Authorization
Act mandated that GAO review the Oil for Food program.1
Policymakers and program managers are continually seeking ways to better
achieve agencies' missions and program results and improve accountability
for results. A key factor in helping to achieve such outcomes is to
implement appropriate internal controls. Internal controls, if properly
designed and implemented, provide reasonable assurance that objectives are
being met; they also serve as the first line of defense in safeguarding
assets and preventing fraud, waste, and abuse. A general framework for
internal controls is widely accepted in the international audit community
and has been adopted by leading accountability organizations, including
the International Organization of Supreme Audit Policymakers and program
managers are continually seeking ways to better achieve agencies' missions
and program results and improve accountability for results. A key factor
in helping to achieve such outcomes is to implement appropriate internal
controls. Internal controls, if properly designed and implemented, provide
reasonable assurance that objectives are being met; they also serve as the
first line of defense in safeguarding assets and preventing fraud, waste,
and abuse. A general framework for internal controls is widely accepted in
the international audit community and has been adopted by leading
accountability organizations, including the International Organization of
Supreme Audit Institutions, the U.S. Office of Management and Budget
(OMB), and GAO.2 The first standard within this framework is the control
environment, which provides the structure, discipline, and ethical tone
for implementing an internal control system. Other standards focus on
employing assessments of the external and internal risks an organization
faces; establishing policies and procedures to enforce directives (control
activities); providing relevant, timely, and reliable information and
communication; and monitoring performance and adhering to audit findings.
1Public Law 108-375, Ronald W. Reagan National Defense Authorization Act
for Fiscal Year 2005, October 2004.
Our report uses this internal control framework to identify the key
weaknesses in enforcing sanctions against Iraq and implementing the Oil
for Food program. Specifically, we assessed (1) aspects of the control
environment-the foundation for all internal control standards-that the UN
developed and implemented for the Oil for Food program and (2) key
elements of the remaining internal control standards-risk assessment,
control activities, information and communication, and monitoring. In
addition, we report on the activities and progress of UNCC.
To address these objectives, we met with officials from the Departments of
State, Defense, Commerce, and Treasury who were responsible for managing
the U.S. participation in the Iraq sanctions and Oil for Food program; we
also reviewed relevant documents provided by State. We met with UN
officials who had worked in the UN Office of the Iraq program (OIP) (the
key UN organization responsible for administering the program), UN
officials representing several UN specialized agencies, and with UNCC
officials in Geneva, Switzerland. We reviewed and analyzed documents
related to management and oversight, including audits conducted by the UN
Office of Internal Oversight Services (OIOS). We reviewed independent
reports, including publications by the UN Independent Inquiry Committee
and the Iraq Survey Group.
We conducted our review from February 2005 through January 2006 in
accordance with generally accepted government auditing standards. (App. I
provides detailed information on our scope and methodology.)
2Committee of Sponsoring Organizations of the Treadway Commission,
Internal Control-Integrated Framework, September 1992.
Results in Brief
UN sanctions and the Oil for Food program averted a humanitarian crisis
while limiting Iraq's ability to purchase military-related items, but
internal control problems allowed the former Iraqi regime to manipulate
the program and circumvent sanctions to obtain illicit payments ranging
from $7.4 billion to $12.8 billion.3 In particular, weaknesses in the
control environment compromised the oversight of the Oil for Food program
and made it vulnerable to fraud and abuse. First, in the mid-1990s, as
Iraq's humanitarian situation worsened, the Security Council and
Secretariat made concessions to the Iraqi regime that allowed it to
negotiate contracts directly with companies purchasing oil and selling
commodities. In the absence of UN oversight of these contracts, Iraq
manipulated contract terms and obtained kickbacks. In addition, the
Security Council was aware that Iraq smuggled oil to neighboring UN member
states in violation of the sanctions but did little to prevent the
smuggling, thus allowing Iraq to obtain revenues not authorized by the Oil
for Food program. Second, the Oil for Food program had a highly complex
organizational structure with unclear lines of responsibility and
authority, which contributed to an ineffective control environment. The
diffusion of responsibility among numerous entities meant that no single
entity was accountable for the program in its entirety. In addition, each
entity had weaknesses in its fragmented responsibilities that further
undermined management and oversight of the program. Despite this difficult
environment, the Oil for Food program averted a major humanitarian crisis
by raising the food intake of the Iraqi population and decreasing
malnutrition.
The Oil for Food program also had key weaknesses in the key four internal
control standards-risk assessment, control activities, information and
communications, and monitoring-that facilitated Iraq's ability to obtain
illicit revenues.
o Risk assessment identifies the internal and external risks an
organization faces, determines the likelihood of their occurrence,
and forms the basis for a plan to manage those risks. However, the
UN conducted no timely assessments to identify and address
high-risk areas and prevent fraud, even as the Oil for Food
program expanded from the short-term delivery of emergency food
and medicine to a multiyear program that included building and
repairing infrastructure in 24 civilian sectors. Moreover, in
2000, the Office of the Iraq Program rejected a proposal from the
UN's internal audit office to conduct a risk assessment of the
Program Management Division. Timely and comprehensive risk
assessments might have identified the lack of systematic reviews
of the reasonableness of the prices that the Iraqi government had
negotiated with the companies supplying goods and services. Such
assessments may also have exposed the lack of clear responsibility
and reporting lines among the numerous UN entities managing the
program.
o Control activities are the policies and procedures that help
ensure that management's directives are carried out and risks are
addressed. Some control activities were effective and others were
not. For example, an insufficient number of oil experts reviewing
oil contracts, the lack of oil metering equipment, and limited
review of contract prices helped enable Iraq to smuggle oil and
levy surcharges and kickbacks on its contracts. In contrast,
oversight by the Security Council's Iraq sanctions
committee-particularly by U.S. and United Kingdom (U.K.)
members-mitigated Iraq's efforts to obtain military equipment by
preventing Iraq from importing dual-use items. In addition, the
sanctions committee eventually constrained Iraq's ability to
impose up-front surcharges on oil contracts by setting prices for
Iraqi oil after the oil was delivered to the buyer.
o Information and communication that is relevant, reliable, and
timely is needed for an organization to control its operations.
However, the Office of the Iraq Program did not inform the
sanctions committee of suppliers' allegations that Iraq demanded
contract kickbacks and hidden fees and did not disclose
information on Iraq's oil smuggling through Syria. Moreover, none
of the Secretariat's required 90- or 180-day reports to the
Security Council mentioned illicit payment demands in connection
with oil or commodity contracts. In addition, poor communication
and coordination among UN agencies led to delays in completing
housing projects in northern Iraq.
o Monitoring assesses performance over time and ensures that the
findings of audits and other reviews are promptly resolved. OIOS
identified more than 700 problems with the Oil for Food program
and compensation fund.4 However, limitations on the auditors'
reporting scope and resources hindered their effectiveness as an
oversight tool. For example, OIOS only had two to six auditors
assigned to the Oil for Food program and did not review commodity
contracts for central and southern Iraq, which comprised 59
percent of the program. Nonetheless, OIOS audits of the Oil for
Food program in northern Iraq found more than 400 recurring
problems in procurement, cash and asset management, planning and
coordination, and personnel. The recurring nature of these
problems over the course of the program demonstrated that systemic
weaknesses were not fully addressed.
In addition to the Oil for Food program, UN Security Council
resolutions required Iraq to reserve up to 30 percent of its oil
proceeds to compensate victims of its invasion of Kuwait; this
amount was reduced to 5 percent in 2003. UNCC has approved awards
totaling $52.5 billion to more than 1.5 million claimants and paid
about $20.3 billion of this amount to individuals and families
with smaller claims. However, Iraq owes corporations, governments,
and international organizations almost $32.2 billion in unpaid
awards. Depending on the growth of Iraq's oil revenues, it may
take nearly 14 years to pay the remaining compensation awards.
These unpaid awards are in addition to the estimated $51 billion
that Iraq owes to international creditors.5
We are recommending that the Secretary of State and the Permanent
Representative of the United States to the UN work with other
member states to encourage the Secretary General to (1) ensure
that UN programs with considerable financial risks establish,
apply, and enforce the principles of internationally accepted
internal control standards, with particular attention to
comprehensive and timely risk assessments and (2) strengthen
internal controls throughout the UN system, based in part on the
lessons learned from the Oil for Food program.
We provided a draft of this report to the Secretary of State, the
UN Deputy Secretary General, and the UN Compensation Commission
for comment. We received written responses from State and UNCC and
oral comments from the UN. However, State commented that our first
recommendation would apply only to future sanctions programs
similar to the Oil for Food Program. We have modified our
recommendation to clarify that the principles of oversight and
control should apply to future UN programs with considerable
financial risk, not merely programs similar to the Oil for Food
program. The UN concurred with our recommendations and noted that
it is taking steps to strengthen internal control throughout the
organization.
Regarding our findings, State noted that our report (1) does not
clearly distinguish between the responsibilities and actions of
the Secretary General and the Security Council, (2) does not
highlight the Security Council's inaction on corruption in the
sanctions regime, (3) overstates the case that no single entity
was in charge of the program, and (4) overly focuses on internal
controls which would not have corrected the problems without
political will. We disagree. Our report distinguishes between the
responsibilities and actions of the Secretary General and the
Security Council; when both entities are responsible, our report
refers collectively to the UN. We also fully discuss how the
Security Council's inaction facilitated oil smuggling to
neighboring states in violation of UN sanctions. Moreover, the
diffusion of responsibility among multiple UN entities was a major
structural weakness of the program and contributed to unclear
authority, manipulation, and weak oversight. We also believe that
State underestimates the importance of a control framework that,
if in place, would have identified the program's vulnerabilities
and established clear lines of authority for responding to the
program's mismanagement and corruption.
UNCC stated that we should not include it in our report because it
would unfairly taint UNCC with the problems ascribed to the Oil
for Food Program. We have modified the report to distinguish the
roles and responsibilities of UNCC from those of the UN Oil for
Food program. UNCC also commented that our report does not
adequately describe its organization and its relationship with the
internal auditors; we have added more information about these
topics.
In 1990, Security Council resolution 661 imposed economic
sanctions on Iraq in response to its invasion and occupation of
Kuwait, thereby prohibiting all countries from buying Iraqi goods
and selling most commodities to Iraq. In 1995, in response to
growing international concern over the impact that sanctions were
having on the humanitarian situation in Iraq, Security Council
resolution 986 authorized Iraq to sell up to $1 billion worth of
oil every 90 days to pay for food, medicine, and humanitarian
goods. Iraq first exported oil under the Oil for Food program in
December 1996, and the first shipments of humanitarian goods
arrived in March 1997. The Security Council subsequently increased
the amount of oil that Iraq could sell and expanded the types of
humanitarian goods that it could import. In 1999, the Security
Council removed all restrictions on the amount of oil Iraq could
sell to purchase civilian goods. The Security Council implemented
the program in 13 6-month phases. In May 2003, Security Council
resolution 1483 requested the UN Secretary General to transfer the
Oil for Food program to the U.S.-led Coalition Provisional
Authority by November 2003. At that time, the Coalition assumed
responsibility for managing Iraq's oil proceeds and outstanding
commodity contracts.
In addition to UN sanctions, the Security Council established UNCC
in 1991 to pay compensation for damages and losses resulting from
Iraq's invasion and occupation of Kuwait.6 Advances from the UN
Working Capital Fund; voluntary contributions from governments;
and proceeds, from Iraqi oil sold after the invasion of Kuwait,
that had been frozen by various governments funded the UNCC for
several years after its establishment. With the adoption of
Security Council resolution 986 in 1995, UNCC received 30 percent
of Iraqi oil proceeds to fund the compensation program. Subsequent
resolutions in 2000 and 2003 reduced the amount of oil proceeds
the UNCC received to 25 and 5 percent, respectively.
At the time UNCC was receiving 25 percent of Iraqi oil proceeds,
the UN allocated 59 percent of proceeds for humanitarian
assistance in the 15 central and southern governorates, 13 percent
for assistance to the three northern Kurdish governorates, and 3
percent for UN administrative costs. Figure 1 illustrates the
programs and activities funded by Iraq's oil proceeds in
accordance with Security Council resolution 986. Iraq's
state-owned marketing company negotiated the oil contracts, and
the Security Council's Iraq sanctions committee approved these
contracts and oil prices, on the basis of advice from independent
oil experts. Once the oil was shipped, the purchasing company
deposited the proceeds into a UN-controlled escrow account. Iraq
negotiated contracts for the commodities it purchased for the
central and southern governorates as well as bulk food and
medicine contracts for the entire country. The suppliers, through
their national governments, sent contracts to OIP and the
sanctions committee for approval. When the items arrived in Iraq,
inspectors verified them against appropriate documentation and
notified the UN treasurer that it could pay the supplier from the
escrow account. In northern Iraq, UN agencies distributed the food
and medicine purchased by the central government and implemented
projects in several sectors. Appendix II contains additional
information on processes related to oil sales, commodity
purchases, and the program in northern Iraq.
3See appendix III for further information on Iraq's illicit revenues
during the Oil for Food program. The ranges given represent estimates
developed by GAO, the Independent Inquiry Committee, and the Iraq Survey
Group for 1997 through about early 2003.
4GAO, United Nations: Oil for Food Program Audits, GAO-05-346T
(Washington, D.C.: Feb. 15, 2005).
5International Monetary Fund, Iraq: Request for Stand-By Arrangement
(Washington, D.C.: Dec. 7, 2005).
Background
6Security Council resolution 687 of April 3, 1991, states that Iraq is
liable, under international law, for any direct loss or damages, including
"environmental damage and the depletion of natural resources, or injury to
foreign Governments, nationals and corporations."
The Committee of Sponsoring Organizations of the Treadway Commission
developed the internationally accepted and widely used framework and
standards for internal control used in this report. These standards were
used as a basis for the internal control standards and guidance issued by
(1) GAO,7 (2) the International Organization of Supreme Audit Institutions
(INTOSAI),8 and (3) OMB Circular A-123, "Management's Responsibility for
Internal Control." According to these standards, internal controls, if
properly designed and implemented, provide reasonable assurance that
objectives are being met and serve as the first line of defense in
safeguarding assets and preventing fraud. Within this framework,
o the control environment establishes and maintains an
environment that sets a positive and supportive attitude toward
internal control,
o risk assessment identifies and analyzes internal and external
risks and forms a basis for determining how these challenges
should be managed,
o control activities are the policies and procedures that help
ensure that management directives are followed,
o information and communication are timely and help enable
managers and others to perform their internal control
responsibilities, and
o monitoring assesses performance over time and helps to ensure
that audit findings and other issues are promptly resolved.
The Oil for Food program suffered from two key weaknesses in the
control environment that led to weak oversight and enabled the
former Iraqi regime to circumvent the sanctions and obtain
billions of dollars in illicit contract revenues. First, the UN
Secretariat negotiated and the Security Council approved an
agreement that allowed the Iraqi government, a country under
international sanctions, to negotiate contracts directly with
purchasers of Iraqi oil and suppliers of commodities and to
control the internal distribution of its imported items. The UN
was under considerable pressure at this time to respond to Iraq's
humanitarian crisis. Nonetheless, this structure was an important
factor in enabling Iraq to manipulate contracts. In addition, the
Security Council was aware that Iraq smuggled oil to neighboring
UN member states in violation of the sanctions but did little to
prevent the smuggling. The Security Council relied on these
neighboring states to enforce the sanctions against Iraq that were
related to military and dual-use items but allowed these countries
to continue illicit trade with Iraq, thus enabling the regime to
obtain illicit funds.
Second, management and oversight of the program were diffused
among more than a dozen UN and international entities, with no
single entity in charge of and accountable for the program. Figure
2 summarizes the internal control weaknesses in the Oil for Food
program, including the control environment. Subsequent sections of
this report will discuss the additional control standards.
Early Compromises in Program Structure and Widely Diffused Management
Responsibilities Led to Weak Control Environment
7GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21 .3.1 (Washington, D.C.: November 1999).
8INTOSAI, Guidelines for Internal Control Standards for the Public Sector
(Vienna, Austria: 2004).
Figure 2: Internal Control Standards Related to UN Sanctions against Iraq
and the Oil for Food Program
The Oil for Food Program Included Compromises that Limited UN Oversight
In establishing the Oil for Food program, the UN made two major
concessions to the former Iraqi regime that allowed it to (1) retain
control over the negotiation of contracts and the distribution of imported
goods and (2) trade with neighboring countries outside the Oil for Food
program.
When the UN first proposed the Oil for Food program in 1991, it recognized
the vulnerability inherent in allowing Iraqi control over the contracting
process. At that time, the Secretary General proposed that the UN, an
independent agent, or the Iraqi government be given the responsibility to
negotiate contracts with oil purchasers and commodity suppliers. However,
the Secretary General subsequently concluded that it would be highly
unusual or impractical for the UN or an independent agent to trade Iraq's
oil or purchase commodities and recommended that Iraq negotiate the
contracts and select the contractors. Nonetheless, he stated that the UN
and Security Council must ensure that Iraq's contracting did not
circumvent the sanctions and was not fraudulent. Accordingly, the Security
Council proposed that UN agents review contracts and compliance at Iraq's
oil ministry. Iraq refused these conditions.
In April 1995, as humanitarian conditions worsened, the Security Council
passed resolution 986 to permit Iraq to use its oil sales to finance
humanitarian assistance. The UN reported that the average Iraqi's food
intake was about 1,275 calories per day, compared with the standard
requirement of 2,100 calories. Against a backdrop of pressure to maintain
sanctions while addressing emergency humanitarian needs, the UN conceded
to Iraq's demand that it retain independent control over contract
negotiations. Accordingly, a May 1996 memorandum of understanding9 between
the UN and Iraq allowed Iraq to directly tender and negotiate contracts
without UN oversight and to distribute imported goods to the intended
recipients.
When the Oil for Food program began, the UN was responsible for confirming
the equitable distribution of commodities, ensuring the effectiveness of
program operations, and determining Iraq's humanitarian needs. According
to the memorandum of understanding, the Iraqi government was to provide UN
observers with full cooperation and access to distribution activities.
However, observers faced intimidation and restrictions from Iraqi regime
officials in carrying out their duties. According to a former UN official,
observers could not conduct random spot checks and had to rely on
distribution information provided by ministry officials, who then steered
them to specific locations. The Independent Inquiry Committee10 reported
that observers were required to have government escorts and cited various
instances of intimidation and interference by Iraqi officials. The
committee concluded that limits placed on the observers' ability to ask
questions and gather information affected the UN Secretariat's ability to
provide full and complete field reports to the sanctions committee.
9Memorandum of Understanding between the Secretariat of the United Nations
and the Government of Iraq on the Implementation of Security Council
Resolution 986 (1995), May 20, 1996.
Concessions to regional trade activity further affected the control
environment and allowed the Iraqi regime to obtain revenues outside the
Oil for Food program. Although oil sales outside the program were
prohibited, the Security Council's Iraq sanctions committee did not
address pre-existing trade between Iraq and other member states. Illicit
oil sales were primarily conducted on the basis of formal trade
agreements. For example, trade agreements with Iraq allowed Jordan-a U.S.
ally dependent on Iraqi trade-to purchase heavily discounted oil in
exchange for up to $300 million in Jordanian goods. Members of the
sanctions committee, including the United States, took note of Iraq's
illicit oil sales to its neighbors, but took no direct action to halt the
sales or punish the states or entities engaged in them. In this regard,
the UN relied on Iraq's neighboring countries to enforce the sanctions
prohibiting Iraq from obtaining military and dual-use items. However,
these states formally protested the economic sanctions, citing commercial
harm to their economies. Successive U.S. administrations also issued
annual waivers to Congress exempting Turkey and Jordan from unilateral
U.S. sanctions for violating the UN sanctions against Iraq.
According to U.S. government officials and oil industry experts, Iraq
smuggled oil through several routes. Oil entered Syria by pipeline,
crossed the borders of Jordan and Turkey by truck, and was smuggled
through the Persian Gulf by ship. Syria received up to 200,000 barrels of
Iraqi oil a day in violation of the sanctions. Oil smuggling also occurred
through Iran. The Security Council authorized the Multinational
Interception Force in the Persian Gulf; but, according to the Department
of Defense, it interdicted only about 25 percent of the oil smuggled
through the Gulf.11
10In April 2004, the UN established the Independent Inquiry Committee,
headed by Paul Volcker, the former Chairman of the U.S. Federal Reserve,
to investigate the administration and management of Oil for Food program.
Its scope included investigating allegations of fraud and corruption on
the part of UN officials, personnel, and agents that entered into
contracts with the UN or with Iraq under the program.
Numerous Entities Shared Key Responsibilities, but Authority and Accountability
Were Not Clearly Defined
Both OIP, as an office in the UN Secretariat, and the Security Council's
Iraq sanctions committee were responsible for the management and oversight
of the Oil for Food program. The Iraq government, other UN agencies, UN
member states, the interdiction force in the Persian Gulf, inspection
contractors, and internal and external audit offices also played specific
roles. However, no single entity was accountable for the program in its
entirety. (See fig. 3 for an illustration of these entities and their
roles.) In 2005, the Independent Inquiry Committee reported that the
Security Council had failed to clearly define the program's broad
parameters, policies, and administrative responsibilities and that neither
the Security Council nor the Secretariat had control over the entire
program. The absence of clear lines of authority and reporting were
important structural weaknesses in a program that allowed the sanctioned
Iraq regime initiative and control over program design and implementation.
In addition, each entity had weaknesses in their fragmented responsibility
that further undermined oversight and management of the Oil for Food
program.
11GAO, Weapons of Mass Destruction: UN Confronts Significant Challenges in
Implementing Sanctions Against Iraq, GAO-02-625 (Washington, D.C.: May 23,
2002).
Figure 3: Multiple Organizations Managed the Oil for Food Program and
Enforced UN Sanctions
o In October 1997, the UN Secretariat created the Office of the
Iraq Program to administer the Oil for Food program. OIP's
responsibilities included key oversight aspects of the program,
including (1) accounting for the program's finances, (2)
monitoring oil exports under the program, (3) approving Iraq's
plans for distributing imported commodities, (4) reviewing
commodity contracts, (5) monitoring Iraq's purchases of
commodities and delivery of goods, and (6) reporting to the
Security Council every 90 and 180 days. In 2005, the Independent
Inquiry Committee reported that the Secretariat had not clearly
defined OIP's responsibilities and that OIP had lacked clear
authority to reject contracts based on pricing concerns.
o The UN Office of the Humanitarian Coordinator for Iraq (UNOHCI)
administered OIP's field operations in Iraq. The field unit's
functions included monitoring and reporting, ensuring the
efficient and equitable distribution of goods within Iraq, and
overseeing the separate Oil for Food program in northern Iraq.
However, the Independent Inquiry Committee found that OIP had not
clearly defined the responsibilities and reporting lines of
UNOHCI's and OIP's Program Management Division, which served as a
headquarters liaison to the field. The lack of clarity led to
confusion over the division's role in coordinating field
activities and diminished its ability to provide quality control
over the field's observation and reporting mechanisms.
o The Secretariat also contracted inspection companies to inspect
humanitarian supplies imported into Iraq at three entry points.
However, the inspectors' duties were mostly limited to comparing
letters of credit for commodities to the shipping documents
supplied at the border and visually inspecting about 7 to 10
percent of the goods. They only inspected goods presented by the
transporter and did not inspect goods arriving in non-Oil for Food
lanes.
o The UN Security Council shared key oversight responsibilities
through its Iraq sanctions committee, which was comprised of
representatives from the 15 Security Council members. The
sanctions committee was first created in 1990 as part of Security
Council resolution 661 to monitor compliance with UN sanctions
against Iraq. In 1995, resolution 986 directed the sanctions
committee to also monitor the Oil for Food program. The committee
was responsible for (1) monitoring the implementation of
sanctions, (2) screening commodity contracts to prevent the
purchase of items that could have military uses, and (3) approving
Iraq's oil and commodity contracts. The committee's review of
commodity contracts focused on whether the contracts contained
items of potential military use, or so-called dual-use items. It
did not review contracts for price and value. In addition, it
operated by unanimous consensus, which, according to the
Independent Inquiry Committee, weakened its ability to undertake
investigations of illicit activity or take remedial action. The
Independent Inquiry Committee also noted that, although the
sanctions committee was a monitoring body, its rules did not
require it to take action in response to reports of sanctions or
Oil for Food program violations, except for information indicating
illegal arms trafficking.
The Iraq sanctions committee's responsibilities for reviewing
commodity contracts lessened over time. From the beginning of the
program until 1999, the committee was responsible for approving
all contracts. However, in 1999, the Security Council shifted more
approval responsibilities to OIP. Due to concerns about the
humanitarian situation in Iraq and pressure to expedite the review
process, Security Council resolution 1284 in December 1999
directed the sanctions committee to accelerate the review process.
The committee subsequently allowed OIP to approve contracts for
food, medical supplies, and equipment for the agricultural, water
and sanitation, housing, and electricity sectors.
However, political pressure on the UN continued, and U.S.
officials asserted that support for international sanctions
enforcement was collapsing. According to a congressional report,12
the United States proposed targeted sanctions in early 2001 to
reduce criticism by other Security Council members of continuing
the sanctions and to help rebuild consensus on containing Iraq. In
May 2002, OIP began approving contracts if they did not contain
any items on a list of dual-use items known as the goods review
list.13
The rules of the Iraq sanctions committee provided for four oil
experts to assist the committee. The oil overseers were
responsible for ensuring that oil sales contracts complied with
program requirements and helped the committee determine oil
prices. However, for a 14-month period in 1999 and 2000, only one
overseer reported to the sanctions committee. In addition, the
Secretariat contracted with Saybolt Eastern Hemisphere B.V. to
oversee the export of oil and oil products from Iraq through
approved export points. The agents were expected to monitor oil
leaving Iraq under the Oil for Food program and were authorized to
stop shipments if they found irregularities. However, they were
not required to monitor or report on oil smuggled outside the Oil
for Food program in violation of international sanctions.
o Nine UN agencies,14 ran the Oil for Food program in northern
Iraq. They were responsible for distributing food rations and
medicine in the three Kurdish governorates and for other
activities, such as constructing or rehabilitating schools, health
clinics, power generation facilities, and houses. However, the
Independent Inquiry Committee and OIOS reported numerous instances
of poor coordination and communication among the agencies and
UNOHCI as well as problems with procurement and financial and
asset management.
o Other entities involved in the sanctions program included UN
member states and the Multinational Interception Force. UN member
states, particularly those in the region, were responsible for
enforcing the sanctions to ensure that Iraq did not sell oil or
purchase goods outside the Oil for Food program, but oil smuggling
and trade with Iraq's neighbors outside the program occurred. The
U.S.-led Multinational Interception Force, a naval unit that
patrolled the Persian Gulf to prevent illicit oil exports, was
responsible for ensuring that Iraq used only approved export
routes, but it only interdicted about 25 percent of the oil
smuggled through the Persian Gulf.
o The Iraqi government tendered and negotiated contracts for
selling its oil and procuring goods for the 15 central and
southern governorates and also procured bulk food and medical
supplies for all of Iraq, including the three northern
governorates. It was also responsible for developing a
distribution plan every 6 months for the commodities it planned to
procure and for ensuring the distribution of these commodities in
accordance with the plan. Iraqi control over the contracting and
distribution processes allowed it to manipulate contract terms for
illicit revenues and to restrict the efforts of UN observers
responsible for monitoring the distribution of humanitarian goods.
o OIOS, the internal oversight office within the Office of the
Secretariat, conducted audits of the Oil for Food program and the
separate UNCC program and reported the results to OIP's executive
director and the UNCC's executive secretariat, respectively. OIOS
issued 55 audits and two summary reports and have several ongoing
audits at UNCC. Although OIOS identified more than 700 problems in
all these reports, including 430 in more than 20 audits of program
activities in northern Iraq, its effectiveness as an
accountability tool was compromised by lack of resources and its
limited scope. In addition to OIOS, UN external auditors conducted
audits on the condition of the escrow account holding Iraq's oil
proceeds, and the internal auditors of the UN agencies
implementing the program in northern Iraq conducted audits of
their agencies' Oil for Food activities.15 The audit units of
these UN agencies conducted 66 audits of the program. According to
the Independent Inquiry Committee, these reports identified
weaknesses and made several recommendations for improvement.
Despite the difficulties posed by fragmented implementation and
unclear oversight, the Oil for Food program did provide emergency
humanitarian relief to the Iraqi people. The Independent Inquiry
Committee reported that the food provided through the Oil for Food
program reversed a serious and deteriorating food crisis,
preventing widespread hunger and probably reducing deaths in which
malnutrition was a factor. The UN also reported that average daily
caloric intake almost doubled, and malnutrition rates for children
under age 5 fell by more than half during the program.
The Oil for Food program and the Iraq sanctions fell short in the
remaining four key internationally accepted standards for internal
control-conducting risk assessments, implementing control
activities, ensuring adequate information and communication, and
monitoring. The lack of fundamental controls-particularly in light
of the vulnerabilities inherent in the control
environment-facilitated the regime's ability to obtain illicit
payments ranging from $7.4 billion to $12.8 billion. Figure 2
summarizes some of our key findings about the UN's internal
controls within these standards.
Risk assessment is used to identify and manage internal and
external risks that can affect a program's outcomes and
accountability, including those risks that emerge as conditions
change. The Oil for Food program expanded rapidly as it evolved
from an emergency 6-month measure to provide humanitarian needs to
a program that delivered about $31 billion in commodities and
services in 24 sectors for more than 6 years. When the
international community was not satisfied with Iraq's compliance
with weapons inspections, the Security Council continued the
sanctions and expanded its initial emphasis on food and medicines
to include infrastructure rehabilitation and activities in 14
sectors. These sectors included food, food handling, health,
nutrition, electricity, agriculture and irrigation, education,
transport and telecommunications, water and sanitation, housing,
settlement rehabilitation for internally displaced persons,
demining, a special allocation for vulnerable groups, and oil
industry spare parts and equipment. In June 2002, the Iraqi
government introduced another 10 sectors, including construction,
industry, labor and social affairs, youth and sports, information,
culture, religious affairs, justice, finance, and the Central Bank
of Iraq.
The Security Council and UN Secretariat did not assess the risks
posed by this expansion, particularly in light of the fact that
they had relegated responsibility for the contracting process to
Iraq. OIOS was the only entity that attempted to assess the
enormous risks in the Oil for Food program, but OIP blocked that
attempt. In August 2000, the Under Secretary General for OIOS
proposed an overall risk assessment to the Deputy Secretary
General to improve the program by identifying the factors that
could prevent management from fulfilling the program's objectives.
The proposal noted that this assessment could be a model for other
UN departments and activities. OIOS considered the Oil for Food
program a high-risk activity and decided to focus on an assessment
of OIP's Program Management Division. This unit was responsible
for providing policy and management advice to OIP's executive
director and for supporting UNOHCI in its field implementation and
observation duties. In May 2001, OIP's executive director refused
to fund the risk assessment, citing financial reasons and
uncertainty over the program's future. However, the Independent
Inquiry found that, about the same time, OIP moved to a new office
in New York with increased rental costs and refurbishments
totaling about $3 million.
In July 2003, OIOS issued an assessment of OIP's Program Analysis,
Monitoring, and Support Division-formerly the Program Management
Division-that identified a number of organizational, management,
and administrative problems, including poor communication and
coordination, unclear reporting lines among OIP headquarters units
and the field, and the lack of approved work plans. However, by
this date, the UN was preparing for the November 2003 transfer of
the program to the Coalition Provisional Authority, and the report
was of limited usefulness for addressing high-risk areas. Timely
risk assessments might have identified the internal control
weaknesses-such as inadequate contract pricing reviews-that
facilitated Iraq's ability to levy illicit contract revenues and
the structural management weaknesses that led to ineffective
communication and coordination within the program.
Control activities are those activities that help provide
assurance that management's directives are carried out and that
risks are addressed and include the policies and procedures
established to ensure accountability. The Security Council's
sanctions committee established some control activities, such as
retroactive pricing and review of contracts for items having
potential military use, which helped address problems resulting
from Iraq's control over the contracting and distribution
processes. However, other important control activities for
monitoring oil exports and assessing the reasonableness of the
prices that Iraq was negotiating were limited or nonexistent,
which helped enable Iraq to smuggle oil and levy surcharges and
kickbacks on its contracts. In addition, physical control over
vulnerable assets is a key control activity, particularly in
environments lacking adequate security. However, in northern Iraq,
cash and asset management policies were compromised due to the
failure to maintain inventory systems or secure cash in UN offices
and during transport.
A limited role for contractors overseeing oil exports and the lack
of oil meters facilitated Iraq's ability to obtain revenues from
smuggling that ranged from $5.7 billion to $8.4 billion during the
course of the Oil for Food program. In 1996, the Secretariat
contracted with Saybolt to oversee the export of oil from Iraq
through selected export points. The inspectors were to monitor the
amount of oil leaving Iraq under the Oil for Food program at these
locations and to stop shipments if they found irregularities. The
inspectors worked at two locations-the Ceyhan-Zakho pipeline
between Iraq and Turkey and the Mina al-Bakr loading platform in
southern Iraq. In 2005, a Saybolt official testified that
Saybolt's mandate did not include monitoring all oil exports
leaving Iraq from other locations or acting as a police force.16
As a result, the contractors did not monitor oil that was smuggled
outside the Oil for Food program.
Further, because the Iraqi government did not install functioning
oil meters at the port, inspectors could not accurately confirm
the volume of oil loaded onto vessels. The lack of functioning
meters enabled the Iraqi government to smuggle oil undetected by
inspectors. A Saybolt employee testified that the company notified
UN officials of the problems posed by the lack of functioning
meters at the beginning of the program.17 He also testified that
the lack of metering equipment allowed the two "topping off"
incidents involving the oil tanker Essex, in which the tanker
loaded additional oil after the inspectors had certified the
loading and left the vessel. In November 2001, a Saybolt
representative noted that Iraq's distribution plans18 provided for
the installation of a meter at the Mina al-Bakr port, and a U.S.
official called for OIP to develop a plan to prevent unauthorized
oil sales that would include installing a meter at the port.
However, Iraq did not tender a contract for the meter. As of March
2006, the Iraqi government had not yet installed oil meters at
Mina al-Bakr.
In the absence of metering, Saybolt measured the onboard quantity
of the vessel before loading. After loading, an inspector measured
the amount by which the vessel tank fell short of being full and
the oil temperature. Inspectors analyzed these data using the
vessel's calibration chart to determine how much oil had been
loaded onto the vessel. While this is an alternative method
accepted in the inspection industry for situations in which
reliable metering equipment is not available, a U.S. official
noted that meters are a more consistent method for measuring oil
loading and encouraged their incorporation into a plan for
preventing unauthorized oil sales. The Saybolt representative also
testified that this method was not as accurate or foolproof as
using a meter.
In addition, the sanctions committee relied on the advice of
independent oil overseers to approve oil sales contracts. The
overseers reviewed Iraq's oil sales contracts to determine
compliance with program requirements and whether the prices that
Iraq negotiated for its oil were fair and reflected market
pricing. However, the inadequate number of overseers monitoring
Iraq's oil pricing over a 14-month period may have been a factor
in Iraq's ability to levy illicit surcharges on oil contracts.
From June 1999 to August 2000, only one oil overseer was
responsible for monitoring billions in Iraq's oil transactions,
contrary to the sanctions committee's requirements for at least
four overseers. Four overseers were hired at the beginning of the
program but three had resigned by June 1999. Political disputes
among sanctions committee members prevented the committee from
agreeing on replacements. According to the Independent Inquiry
Committee, the sanctions committee demonstrated weak program
oversight in its inability to fill the vacant positions.
In October 2001, the Security Council's sanctions committee
imposed a positive control activity-retroactive oil pricing-to
prevent Iraqi officials from adding illegal oil surcharges to
contracts. In November 2000, UN oil overseers reported that Iraq's
oil prices were low and did not reflect the fair market value. The
overseers also reported in December 2000 that Iraq had asked oil
purchasers to pay surcharges. In early 2001, the United States
informed the sanctions committee about its concerns regarding
allegations that Iraqi government officials were receiving illegal
surcharges on oil contracts. Because the committee operated by
consensus, the United States could delay oil pricing by not
approving a specific price per barrel until the oil was delivered
to the refinery. The Iraq government thus signed contracts with
suppliers without knowing the price it would have to pay until
delivery. This practice, known as retroactive pricing, curbed the
ability of the Iraqi government to levy illicit surcharges on its
oil sales contracts. Prior to retroactive pricing, estimates of
Iraq's illicit revenues from surcharges on exported oil ranged
from about $230 million to almost $900 million.
According to a report by defense contract experts, in a typical
contract pricing environment, fair and reasonable commodity prices
are generally based on prevailing world market conditions or
competitive bids among multiple suppliers.19 Ensuring a fair and
reasonable price for goods can mitigate the possibility of
overpricing and kickbacks. The sanctions committee and OIP were
responsible for reviewing commodity contracts under the Oil for
Food program, but neither entity conducted sufficient reviews of
commodity pricing and value. As a result, Iraq was able to levy
illicit commissions and kickbacks ranging from about $1.5 billion
to about $3.5 billion.
The sanctions committee was responsible for screening contracts
for items that could have military uses and for approving
commodity contracts; any member had the authority to block or hold
specific items. The committee focused on limiting Iraq's ability
to import dual-use items rather than examining contracts for price
and value. The United States, as a member of the sanctions
committee, devoted resources to this contract oversight-about 60
staff from several U.S. government agencies reviewed the contracts
for compliance with dual-use restrictions and made their
recommendations to the U.S. mission to the UN. However, although
the United States accounted for about 90 percent of the sanctions
committee's holds, few contracts were held based solely on price
and value concerns.
While OIP was to examine each contract for price and value before
submitting it to the sanctions committee, the Independent Inquiry
Committee found that OIP lacked clear authority to reject
contracts on pricing grounds and did not hire customs experts with
the requisite expertise to conduct thorough pricing evaluations.
OIP stated that it informed the sanctions committee if it found
pricing irregularities and that it was up to the sanctions
committee to approve or hold contracts. However, the Independent
Inquiry Committee found that few of the customs reports submitted
to the sanctions committee included any quantitative or
qualitative assessment beyond a general notation that pricing
appeared high or was higher than in previous applications for
similar goods. An OIP official also stated that OIP found that
about 70 out of a total of approximately 30,000 contracts in the
OIP database had specific price and value issues. OIP directly
approved more than half of these 70 contracts as a result of
Security Council decisions in 1999 and 2002 that shifted
additional approval responsibilities to OIP. We did not have
access to OIP's decisions to determine the extent to which OIP may
have held contracts for price and value concerns.
The Secretariat's contract for inspecting humanitarian supplies at
three entry points in Iraq required inspection agents to
"authenticate" goods, but the agents' responsibilities fell short
of a previous proposal to include more rigorous reviews of
commodity price and quality. Under the Oil for Food program,
inspection agents compared appropriate documentation, including UN
approval letters, with the commodities arriving in Iraq; visually
inspected about 7 to 10 percent of the goods; and tested food
items to ensure that they were "fit for human consumption."
However, inspection agents were not required to (1) verify that
food items were of the quality contracted, (2) assess the value of
goods shipped, (3) interdict prohibited goods, (4) inspect goods
that were not voluntarily presented by transporters, or (5) select
the items and suppliers or negotiate contracts. According to
Cotecna, the inspections contractor from 1999 to 2004,20
"authentication" is not a standard customs term or function. The
UN created the term for the Oil for Food program and did not
include traditional customs inspection activities, such as price
verification and quality inspection. In 1992, the UN selected
Cotecna for a proposed program, which was not implemented, that
would have been similar to the Oil for Food program. Under that
proposal, Cotecna would have verified fair pricing and inspected
whether the quality of the items conformed to contract
requirements.
Control activities that ensure accountability include cash
management policies and procedures that provide for physical
control over vulnerable assets and other resources. OIOS and the
Independent Inquiry Committee reported specific instances in which
the UN offices involved in administering the Oil for Food program
in northern Iraq lacked such controls. For example, in 2002, OIOS
found that UN-Habitat lacked a proper asset inventory system and
that no policies and procedures governing asset management were
evident. In one case, $1.6 million in excess construction material
remained after most projects were complete.
OIOS also reported that some funds were not used for the purpose
intended, thus subjecting project funds misuse. In a March 2000
audit, OIOS reported that the UN Development Program country
office used $500,000 in project funds for office expenses without
authorization or proper documentation. A February 2002 audit found
that the UN-Habitat office in Erbil put at risk $600,000 to
$800,000 in cash due to a lack of cash management policies. In
addition, the Independent Inquiry Committee reported thefts from
several UN offices or persons, including $300,000 from the UN
Educational, Scientific, and Cultural Organization's Erbil office;
$64,000 from a World Health Organization suboffice; and $40,000
from the Food and Agricultural Organization when an automobile
carrying more than $100,000 from Baghdad to Erbil was involved in
an accident.
Information should be communicated to those who need it within
time frames that allow them to carry out their oversight
responsibilities; however, OIP did not disclose to the sanctions
committee all appropriate information that may have mitigated
Iraq's ability to obtain illicit revenues, according to the
Independent Inquiry Committee. For example, in December 2000,
OIP's Program Management Division director informed the OIP
director of alleged contract kickback schemes by the Iraqi
government and recommended that OIP inform the sanctions committee
of these allegations. The U.K. member of the sanctions committee
asked for a written report of these allegations, but the
Independent Inquiry Committee found no evidence that the report
was submitted. In October 2001, OIP's customs chief-the person
responsible for OIP's price and value reviews-prepared a written
summary of the kickback incidents, including documentation of
illicit side agreements with the Iraqi regime, and presented it to
OIP senior management. However, the Independent Inquiry Committee
found no evidence that this information was provided to the
sanctions committee. Moreover, none of the Secretariat's 90-day or
180-day reports to the Security Council mentioned illicit payment
demands in connection with oil or commodity contracts. Further,
while both the Security Council and Secretariat were aware of
smuggling activities outside of the program, OIP and the
Secretariat had specific information from the Saybolt oil
inspectors about the Syrian pipeline that was not disclosed to the
sanctions committee.
In addition, poor communication and coordination among UN agencies
in northern Iraq had a negative impact on some projects. In one
instance, in 2004, OIOS reported that UN-Habitat had not
adequately coordinated with other UN agencies in providing
essential services for its housing projects. UN-Habitat provided
high-capacity generators but had not contacted the UN Development
Program-the entity responsible for the power sector-to provide
electric power connections. In another instance, OIOS found that
about 3,200 houses were unoccupied for extended periods due to a
lack of coordination among agencies providing complementary
services. The Independent Inquiry Committee's investigation also
revealed problems with coordination among UN agencies, which was
exacerbated by poorly defined relationships among those agencies,
the Iraqi government, and the local authorities in the three
northern governorates.
Monitoring is an internal control standard that assesses program
performance on an ongoing basis and helps provide assurance that
the findings of audits and other reviews are resolved. We
identified monitoring weaknesses that compromised the
Secretariat's internal oversight of the program. While OIOS
conducted numerous audits and identified hundreds of problems, it
did not review OIP's oversight of the commodity contracts for
central and southern Iraq. Nonetheless, its review of UN
activities in northern Iraq led to more than 400 findings.
Although OIP attempted to implement OIOS' recommendations, OIOS
and the Independent Inquiry Committee reported that some systemic
issues remained unresolved.
Although OIOS conducted more than 50 audits of the Oil for Food
program and the separate compensation fund and identified more
than 700 problems, the office did not review key aspects of the
Oil for Food program and operated with low numbers of staff, given
the program's size. Except for audits of OIP's inspection
contracts, OIOS did not review whether OIP was adequately
monitoring and coordinating the Oil for Food program, including
OIP's role in assessing commodity pricing. OIOS did not examine
certain headquarters functions, particularly OIP's oversight of
the commodity contracts for central and southern Iraq, which
accounted for 59 percent or almost $40 billion in Oil for Food
proceeds. According to the Independent Inquiry Committee, OIOS
believed that it did not have the authority to audit humanitarian
contracts because the sanctions committee was responsible for
their approval, and OIOS did not review OIP's relationship with
the sanctions committee. In contrast, OIOS took an aggressive
stance in reviewing UNCC decisions on compensation awards, despite
the challenges to its authority from UNCC and the UN Office of
Legal Affairs.
OIP management also steered OIOS toward program activities in
northern Iraq rather than headquarters functions where OIP
reviewed the humanitarian contracts. The Independent Inquiry
Commission further noted that the practice of allowing the heads
of programs the right to fund internal audit activities led to
excluding high-risk areas from internal audit examination. We also
found that UN funding arrangements constrain OIOS's ability to
operate independently as mandated by the General Assembly and
required the international auditing standards to which OIOS
subscribes. 21 Because OIOS did not review commodity contracts, it
was difficult to quantify the extent to which the Iraqi people
received the humanitarian assistance funded by its government's
oil sales.
In addition, the number of OIOS staff assigned to the Oil for Food
program was low compared with the level of staff providing
oversight of peacekeeping operations, according to the Independent
Inquiry Committee. Although OIOS had only 2 to 6 auditors assigned
to cover the Oil for Food program. The UN Board of Auditors
indicated that the UN needed 12 auditors for every $1 billion in
expenditures. The committee concluded that the Oil for Food
program should have had more than 160 auditors at its height in
2000. However, the committee found no instances in which OIOS
communicated broad concerns about insufficient staff to UN
management.
OIOS also encountered problems in its efforts to widen the
distribution of its reporting beyond the head of the agency
audited. In August 2000, OIOS proposed to send its reports to the
Security Council. However, the OIP director opposed this proposal,
stating that it would compromise the division of responsibility
between internal and external audit. In addition, the UN Deputy
Secretary General denied the request, and OIOS subsequently
abandoned any efforts to report directly to the Security Council.
We did not have access to the internal audit reports conducted by
eight of the nine agencies managing the program in northern Iraq.
However, our February 2005 analysis of 25 OIOS audits on Oil for
Food activities in northern Iraq identified about 430 problems in
program management and monitoring and about 420 recommendations to
correct these deficiencies.22 In one instance, OIOS reported in
2004 that UN-Habitat had not adequately coordinated with other UN
agencies in providing essential services for its housing projects.
An August 2000 report noted a lack of planning that resulted in
the questionable viability of some projects, including a health
facility subject to flooding and diesel generators procured for an
area in which diesel fuel was not readily available. In November
2002, OIOS reported that almost $38 million in equipment
procurement was not based on a needs assessment-resulting in 51
generators not being used from September 2000 to March 2002-and
that 11 purchase orders totaling almost $14 million showed no
documentary evidence supporting the requisitions. In April 2002,
OIOS reported that OIP and UNOHCI had made serious efforts to
implement audit recommendations. However, it also noted that a
number of issues had not been resolved, including efforts to
improve the procurement, planning, coordination, and monitoring of
projects in northern Iraq. The Independent Inquiry Committee also
found that a lack of attention to addressing systemic problems
hindered the effectiveness of the Oil for Food program in the
north. The recurring nature of these problems over the course of
the program demonstrated that systemic weaknesses were not fully
addressed.
The UN Security Council established UNCC in 1991 under Security
Council Resolution 692 to process claims and pay compensation for
damages and losses resulting from Iraq's invasion and subsequent
occupation of Kuwait. UNCC is a subsidiary organ of the UN
Security Council, with its Governing Council acting as the
policy-making body. With the adoption of Security Council
resolution 986, UNCC, along with UN-sponsored humanitarian
programs in Iraq, received funding from the profits from Iraqi oil
sales. (App. IV provides more information on the organization of
UNCC and its claims process.)
UNCC approved awards of almost $52.5 billion to more than 1.5
million claimants and, as of January 2006, had paid about $20.3
billion of this amount. However, how and when the remaining
approximately $32.2 billion in approved claims will be paid is
uncertain. Depending on the growth of Iraq's oil export revenues,
award payments may be completed sometime between 2017 and 2020.
These unpaid claims are in addition to Iraq's external debt to
international creditors, which the International Monetary Fund
(IMF) estimated at $51 billion at the end of 2005. UNCC's
Secretariat had controls for preparing claims for presentation to
the expert panels, who then recommended which claims should be
paid and the amounts to be compensated. However, OIOS found some
weaknesses in UNCC's oversight of procedures for returning
unclaimed payments and instances of claims overpayments by the
panels recommending the awards. For example, in May 2005, OIOS
reported that governments and international organizations owed
UNCC about $38.8 million in claims that it was unable to pay
because claimants could not be located. According to UNCC, the
total amount owed to the UNCC as of March 2006 was $11.7 million.
From 1991 to 1997-its deadline for accepting claims-UNCC received
almost 2.7 million claims seeking almost $353 billion in
compensation for damages and losses.23 UNCC required that
claimants submit claims through their governments and also allowed
international organizations to submit claims on their behalf or on
behalf of individuals who were not in a position to have a
government file their claims. Individual claims came from Kuwaitis
and also from many of the roughly two and a half million
expatriate workers and their dependents living in Kuwait and Iraq
at the time of the invasion, 90 percent of whom fled the region
due to the war. As a result, UNCC received claims from 100
countries on behalf of the country submitting the claim, its
nationals, or its corporations. Upon completing its work in 2005,
UNCC had awarded more than 1.5 million claimants almost $52.5
billion in compensation, almost 15 percent of the total amount
sought. OIOS auditors stated that an award rate of 15 percent is
low and is evidence of the UNCC's conservative approach to making
awards. Appendix IV provides greater detail on the categories and
amounts of claims.
As of late January 2006, UNCC had paid about $20.3 billion in
compensation of the $52.5 billion awarded, mostly to individuals
and families. About $32.2 billion in outstanding awards remains to
be paid. Depending on the growth of Iraq's oil revenue, payments
could extend through around 2020. In 2003, Security Council
resolution 1483 reduced the portion of Iraqi oil revenues allotted
to UNCC from 25 percent to 5 percent.24 Using projections made by
the International Monetary Fund, we estimate that the remaining
compensation awards could be paid between 2017 and 2020, assuming
that oil export revenues grow at an annual average rate of about 5
percent and are about 57 percent of gross domestic product. With
an average growth rate of 1 percent, the remaining compensation
awards would be paid by 2020. At 10 percent, these awards would be
paid by 2017.25 These unpaid claims are in addition to Iraq's
substantial external debt. In January 2006, the IMF estimated
Iraq's debt at the end of 2005 at about $51 billion.
With the conclusion of the award process in 2005, UNCC's
Secretariat completed its claims preparation duties and began
reducing its staff. The UNCC secretariat expects that by mid-2007
the payment of all individual awards will be completed. As an
interim measure after that time, the Governing Council will
oversee the Compensation Fund with assistance from a smaller
secretariat. The Governing Council will consider a future date for
transferring responsibility for remaining payments to the Iraqi
government under the supervision of the Security Council.
The UNCC secretariat employed controls in its administrative
procedures for preparing claims for the expert panels, but OIOS
found some weaknesses in the procedures for ensuring that unpaid
claims are returned to UNCC and instances of claims overpayments.
OIOS found that inadequate oversight of the procedures for paying
awarded amounts to claimants resulted in governments and
international organizations owing UNCC about $38.8 million in
unclaimed payments. In its response to a draft of this report,
UNCC noted that this amount totaled $11.7 million as of March
2006. Further, OIOS noted that only about half of these entities
had submitted required audit documents certifying their payments
to claimants. UNCC responded that the overwhelming majority of
awards had been successfully paid and that it was working with
five of these governments to improve their reporting obligations.
UNCC questioned OIOS' authority to audit certain aspects of its
work, and a UN legal opinion agreed with UNCC, stating that the
scope of OIOS' audit authority did not extend to those parts of
UNCC's work that constituted a legal process. Nonetheless, OIOS
identified more than $500 million in potential overpayments to
claimants.
The claims award process was handled by three UNCC entities: the
Secretariat, the Governing Council, and the Commissioner panels.
The Secretariat organized the claims, prepared them for review by
the Commissioner panels, and administered the award payments to
governments and international organizations submitting the claims
on behalf of claimants. The Commissioner panels reviewed the
claims, made recommendations to reject or accept the claims, and
recommended award amounts. The Governing Council made final award
decisions based on the panels' recommendations. The council could
disagree with the recommendations and return the decisions to the
panels for further review; it could also increase or reduce the
award amounts. After award decisions were final, payments were
made to governments and international organizations submitting
claims, and these entities distributed award payments to
individual claimants.
In managing the steps required to prepare claims for presentation
to the Commissioner panels, the Secretariat put in place various
measures to mitigate administrative errors and fraud, including
efforts to ensure the integrity of claims data, identify duplicate
claims, and deliver preliminary claims valuations to the
Commissioner panels. For example, the Secretariat's process
included assigning all incoming claims a unique number, running
quality control checks, and cleaning up queries to ensure the
integrity of the data entered under each number. A 2002 assessment
conducted by OIOS stated that certain controls for processing
claims and the claims database were generally adequate at that
time.
OIOS concluded in May 2005 that UNCC did not exercise adequate
oversight over the distribution of award payments by governments
and international organizations. UNCC requires governments and
organizations to report on the amount of payments distributed and
the reasons for nonpayment of claims 12 months following the
release of award payments. All funds not located and paid are to
be returned to UNCC within this 12-month period.26 OIOS reported
that the Secretariat did not properly review reports from
governments detailing which awardees could not be located. The
auditors also reported that governments and international
organizations owed UNCC about $38.8 million in compensation
intended for claimants they were unable to locate (governments and
organizations did refund about $99 million to UNCC). Of this
amount, more than $4 million had been outstanding for more than 2
years.27 In addition, OIOS found that 14 of the 32 governments and
international organizations receiving a total of about $197
million in an October 2003 disbursement of award payments had not
submitted an audit certificate documenting that payments had been
distributed. The uncertified amount totaled about $156 million.
In comments to OIOS dated June 2005, UNCC responded that the
overwhelming majority of the awards were successfully paid and
that UNCC strongly pursued the submission of audit certificates by
governments and international organizations. UNCC also commented
that it had visited five countries to assist governments with
their reporting obligations and payment distribution. UNCC further
noted that it is the responsibility of the governments and
organizations to locate claimants for payment but added that it
would review the actions necessary to obtain a full accounting
from governments that failed to meet prescribed deadlines. In
addition, in commenting on a draft of this report, UNCC noted that
the amount owed to UNCC can fluctuate almost daily as governments
and international organizations locate previously unreachable
claimants and ask for funds for repayment. UNCC further noted that
audit certificates were required for payments beginning in October
2003. In responding to our draft report, UNCC provided updated
documentation demonstrating that, as of March 2006, the amount
owed to UNCC had decreased to $11.7 million, and only $1.5
million-or 0.8 percent of the $197 million for which certificates
were due-had not been supported by audit certificates.
UNCC challenged OIOS's authority to review specific aspects of
UNCC's work and requested guidance from the UN Office of Legal
Affairs. Specifically, UNCC questioned whether OIOS had the
authority to review (1) the Panel's work in identifying applicable
law and the Panel's application of that law to claims pursuant to
the UNCC's Provisional Rules for Claims Procedure; (2) the manner
in which the Panel organized its work pursuant to those Rules; and
(3) the Panel's determinations regarding the sufficiency of
evidence, including its determinations relating to the relevance,
materiality, and weight of evidence pursuant to UNCC's rules. In
2002, UN legal counsel rendered an opinion, stating that the audit
authority of OIOS included reviewing the panels' computations of
its recommended compensation amounts but did not extend to
reviewing those aspects of the panels' work that were part of the
legal process. The UN legal counsel concluded that all three
aspects of the Panel's work in question were beyond the proper
scope of OIOS's audit authority. Both UNCC and the Department of
State agreed with the UN legal opinion. OIOS disputed it, however,
noting its general mandate to review and appraise the use of UN
financial resources. In response, UNCC argued that the
compensation fund does not constitute UN financial resources. As a
result, UNCC only acted on those OIOS recommendations that it
determined, consistent with the UN legal counsel's opinion, were
within the scope of its audit authority.
OIOS continued to report on claims amounts and identified more
than $500 million in recommended claims reductions. For example,
in a September 2002 audit, OIOS found potential overpayments of
$419 million in compensation awarded to Kuwait due to duplicate
payments, calculation errors, insufficient evidence to support
losses, and inconsistent claims methodologies. In April 2003, UNCC
provided a detailed response to OIOS. In its response, UNCC cited
documentation which they said showed that there were no duplicate
payments and provided additional evidence of the losses-consultant
reports, additional documentation, and testimony. UNCC also stated
that it and not OIOS had authority to determine the sufficiency of
evidence-for example, using testimonial evidence with other
support when documentary evidence was destroyed during Iraq's
invasion of Kuwait. As of February 2005, UNCC had agreed to reduce
total claims overpayments by about $3.3 million.
The Oil for Food program was flawed from the outset because it did
not have sufficient controls to prevent the former Iraqi regime
from manipulating the program. Internal controls, if properly
designed and implemented, can provide reasonable-although never
absolute-assurance that program goals will be met and fraud will
be minimized. Despite the risks inherent in allowing Iraqi
government control over the contracting process and expanding the
program beyond its initial emergency mandate, the Security Council
and the Secretariat did not establish a system of internal
controls, including timely and comprehensive risk assessment and
effective control activities and monitoring. Moreover,
fragmentation of responsibilities led to an environment in which
no single unit or person was accountable for program management,
monitoring, and oversight. The Oil for Food program was arguably
the largest sanctions and humanitarian program in its scope,
complexity, and structure that the UN had undertaken. Given the
enormity of the undertaking, internationally accepted internal
control standards should have been applied throughout the course
of the program. Such standards would have helped ensure that the
program was effectively and efficiently managed and that the Iraqi
people received the intended benefits from the proceeds of its
government's oil sales.
U.S. oversight of the Oil for Food program focused on preventing
Iraq from obtaining dual-use items that could be used for military
and weapons of mass destruction programs while meeting the
humanitarian needs of those suffering from sanctions. However, the
United States and other Security Council members did not apply the
same rigor to preventing Iraq from obtaining illicit funds through
smuggling and contract kickbacks. Over the past several years, the
United States has taken the lead in promoting management and
oversight reform at the UN. The lessons learned from the internal
control weaknesses in the Oil for Food program could prove useful
as the United States continues to press the UN to undertake
fundamental reforms to address its key efficiency, management, and
accountability challenges.
We recommend that the Secretary of State and the Permanent
Representative of the United States to the UN work with other
member states to encourage the Secretary General to take the
following two actions:
o ensure that UN programs with considerable financial risk
establish, apply, and enforce the principles of internationally
accepted internal control standards, with particular attention to
comprehensive and timely risk assessments and
o strengthen internal controls throughout the UN system based in
part on the lessons learned from the Oil for Food program.
We provided a draft of this report to the Secretary of State, the
UN Deputy Secretary General, and the UN Compensation Commission
for comment. We received written responses from State and UNCC
(see apps. V and VI for the comments and our complete response).
State did not agree or disagree with our recommendation but
commented that, although no sanctions regime similar to Oil for
Food is in place, tighter internal controls would be appropriate
for a future program similar to Oil for Food. We have modified our
recommendation to clarify that the principals of oversight and
control should apply not just to programs with the unique
characteristics of Oil for Food. The UN concurred with our
recommendations and noted that it is taking steps to strengthen
internal control in the organization. The UN also provided
technical comments, which we have incorporated into the report as
appropriate.
State commented that our report does not (1) clearly distinguish
between the responsibilities and actions of the Secretary General
and the Security Council, (2) overstates the case that diffusion
of responsibility for the program meant that no single entity was
in charge and accountable for the program, (3) does not highlight
the Security Council's inaction in the face of corruption in the
sanctions regime, and (4) overstates the importance of internal
control.
We disagree. First, our report clearly distinguishes between the
responsibilities and actions of the Secretary General and the
Security Council. We note that both had a role in the decision to
give Iraq contract authority; the Secretary General negotiated the
agreement and the Security Council approved it. Second, the
diffusion of program responsibilities was a major structural
weakness of the program. Although the Secretary General was
responsible for program management, the Security Council made key
decisions about commodity contracts and oil pricing, and nine UN
agencies administered the program in the North. Third, our report
highlights inaction by the Security Council by fully discussing,
for example, its inaction on oil smuggling to neighboring states.
Finally, we believe that State does not sufficiently emphasize the
importance of internal controls for a vulnerable program.
Internationally accepted controls require an overall structure of
accountability with clear lines of authority and a comprehensive
risk assessment. Taking these actions could have mitigated some of
the corruption in the Oil for Food program.
UNCC commented that we should not include UNCC as part of a report
that deals with lessons learned from the Oil for Food program.
UNCC requested that we issue a separate report or distinct chapter
on its organization with additional information about its
organization. We included UNCC in this report because it received
more than $20 billion in Iraqi oil revenues under resolution 986;
our intent is to report fully on the entities entrusted with
management of this revenue. We have modified the report to further
make it clear that UNCC is not part of the Oil for Food program
and that it is a separate entity funded by Iraqi oil revenues.
UNCC further commented that it provided OIOS with comprehensive
responses to audit findings of potential overpayments of
compensation but that our draft report did not adequately discuss
these formal responses. In addition, UNCC stated that our
discussion of OIOS's legal authority to audit UNCC awards does not
adequately describe the position of UNCC or the UN General
Counsel's legal opinion. We added information to the report to
describe UNCC responses to OIOS recommendations and its position
regarding OIOS's legal authority to audit its activities.
We are providing copies of this report to the Secretary of State
and interested congressional committees. We will also make copies
available to others upon request. In addition, the report will be
available on the GAO Web site at http://www.gao.gov .
If you or your staff have any questions about this report, please
contact me at (202) 512-8970 or [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.
(320320)
GAO's Mission
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony
The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts newly
released reports, testimony, and correspondence on its Web site. To have
GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."
Order by Mail or Phone
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061
To Report Fraud, Waste, and Abuse in Federal Programs
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: [email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470
Congressional Relations
Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548
Public Affairs
Paul Anderson, Managing Director, [email protected] (202) 512-4800 U.S.
Government Accountability Office, 441 G Street NW, Room 7149 Washington,
D.C. 20548
www.gao.gov/cgi-bin/getrpt? GAO-06-330 .
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Joseph Christoff at (202) 512-8979 or
[email protected].
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. ***