United Nations: Oil for Food Program Provides Lessons for Future 
Sanctions and Ongoing Reform (02-MAY-06, GAO-06-711T).		 
                                                                 
In 1996, the United Nations (UN) and Iraq began the Oil for Food 
program after sanctions were imposed in 1990. The program was	 
intended to allow the Iraqi government to sell oil to pay for	 
humanitarian goods and prevent it from obtaining goods for	 
military purposes. More than $67 billion in oil revenue was	 
obtained through the program, with $31 billion in assistance	 
delivered to Iraq. Internal controls serve as the first line of  
defense in preventing fraud, waste, and abuse and in helping	 
agencies achieve desired outcomes. GAO assesses (1) the control  
environment the UN established for managing the sanctions and Oil
for Food program and (2) other key internal control elements. In 
addition, we provide observations on the lessons learned from the
program.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-711T					        
    ACCNO:   A52979						        
  TITLE:     United Nations: Oil for Food Program Provides Lessons for
Future Sanctions and Ongoing Reform				 
     DATE:   05/02/2006 
  SUBJECT:   Food relief programs				 
	     Foreign aid programs				 
	     Foreign governments				 
	     Internal controls					 
	     International food programs			 
	     International organizations			 
	     International relations				 
	     Lessons learned					 
	     Monitoring 					 
	     Program abuses					 
	     Program management 				 
	     Reparations					 
	     Risk assessment					 
	     Sanctions						 
	     International trade restriction			 
	     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-06-711T

     

     * Summary
     * The UN Established a Weak Control Environment for Enforcing
          * Early Compromises Allowed Iraq to Set the Terms for Contract
          * UN Did Not Address the Economic Impact of Sanctions on Membe
          * Sanctions Enforcement Focused on Military Items, but Less Ri
     * Unclear Authority, Lack of Risk Assessment, and Inadequate M
          * Oil for Food Program Lacked Clear Lines of Responsibility an
          * Program Risk Was Not Continuously Identified and Addressed
          * Oil Export Monitoring Activities Did Not Deter Smuggling but
          * UN Internal Audit Office Lacked Sufficient Resources and Ind
     * Concluding Observations: Lessons Learned from the Oil for Fo
     * Recommendation
     * Contacts and 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

Testimony

Before the Subcommittee on National Security, Emerging Threats, and
International Relations; Committee on Government Reform House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Tuesday, May 2, 2006

UNITED NATIONS

Oil for Food Program Provides Lessons for Future Sanctions and Ongoing
Reform

Statement of Joseph A. Christoff, Director

International Affairs and Trade

GAO-06-711T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the lessons learned from the
United Nations (UN) Oil for Food program and the implications for future
sanctions programs and ongoing UN reform efforts.

In 1996, the UN and Iraq began the Oil for Food program to address growing
concerns about Iraq's humanitarian situation after international sanctions
were imposed in 1990. 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. 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.1 Four key entities were responsible for most of the program's
operations-the Security Council's Iraq sanctions committee, the UN
Secretariat's Office of the Iraq Program, nine UN agencies with separate
programs in northern Iraq, and the Iraqi government under Saddam Hussein.

The 2005 Defense Authorization Act mandated that GAO review the Oil for
Food program2 following allegations of corruption and misconduct. In April
2006, we issued a report on the results of our work and our
recommendations for strengthened internal controls at the UN.3 We have
also testified numerous times on the Oil for Food program and issued a
report in May 2002 on the implementation of sanctions against Iraq.4
Today, I will discuss (1) the control environment established by the UN
for managing the sanctions and Oil for Food program; (2) other key
internal control elements addressed by the UN, including lines of
authority and responsibility, risk assessment, and monitoring and
oversight; and (3) our observations on the lessons learned from the Oil
for Food program. To address these objectives, we used the body of work
that GAO has completed on Iraq sanctions, the Oil for Food program, and UN
oversight issues.

1The UN allocated 72 percent of Iraq's oil proceeds to humanitarian
assistance for Iraq; it also allocated a portion of these proceeds to a
compensation fund for paying reparations to victims of Iraq's 1990
invasion of Kuwait and to UN administrative expenses for administering the
Oil for Food program and international sanctions.

2Public Law 108-375, Ronald W. Reagan National Defense Authorization Act
for Fiscal Year 2005, October 2004.

3GAO, United Nations: Lessons Learned from Oil for Food Program Indicate
the Need to Strengthen UN Internal Controls and Oversight, GAO-06-330
(Washington, D.C.: Apr. 25, 2006).

4GAO, Weapons of Mass Destruction: U.N. Confronts Significant Challenges
in Implementing Sanctions Against Iraq, GAO-02-625 (Washington, D.C.: May
23, 2002).

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
appropriate internal control, which, if properly designed and implemented,
provide reasonable assurance that objectives are being met. Internal
controls also serve as the first line of defense in safeguarding assets
and preventing fraud, waste, and abuse.5 Our April 2006 report used this
internal control framework to identify the key weaknesses in enforcing
sanctions against Iraq and implementing the Oil for Food program.

                                    Summary

The UN-the Security Council, the Secretariat, and member
states-established weak controls over the Oil for Food program from its
beginning. Specifically, the UN allowed Iraq to control contract
negotiations for imported commodities with little oversight, enabling the
regime to obtain illicit funds through contract surcharges and kickbacks.
The UN also did not take steps to address the economic impact that the
sanctions had imposed on countries that depended on Iraqi trade. This
undermined international support for sanctions and allowed Iraq to smuggle
oil outside the Oil for Food program. Overall, the sanctions were
effective in helping to prevent the Iraq regime from obtaining military or
dual-use items, but the UN was less rigorous in overseeing economic
activities related to the Oil for Food program such as monitoring the
price and value of Iraq's contracts. The UN's neglect of Iraq's illicit
revenue streams from smuggling and kickbacks helped support a sanctioned
regime and undermined the program's goal of using oil revenues to benefit
the Iraqi people.

5A 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, and
GAO. These standards use the internationally accepted Internal
Control-Integrated Framework (September 1992) by the Committee of
Sponsoring Organizations of the Treadway Commission. 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.

As the program was implemented, sanctions and the Oil for Food program
were further weakened by inadequate attention to internal controls,
including (1) establishing clear responsibility and authority, (2)
identifying and addressing program risks, and (3) ensuring adequate
monitoring and oversight. UN entities and contractors responsible for
implementing and monitoring the program lacked clear lines of authority.
For example, the Office of the Iraq Program lacked clear authority to
reject commodity contracts based on pricing concerns. In addition, the UN
contractor at Iraq's border was not authorized to evaluate imports for
price and quality, and there were no provisions to stop imports not
purchased through the Oil for Food program. Moreover, the UN did not
assess emerging risks as the Oil for Food program expanded from a 6-month
emergency measure to deliver food and medicine to a 6-year program that
provided more than $31 billion to Iraq's agriculture, electricity, oil,
housing, and 20 other economic sectors. Some monitoring activities
curtailed the ability of the regime to obtain illicit contract surcharges,
but smuggling continued despite the presence of inspectors. Finally, the
UN's internal audit office audited some aspects of the Oil for Food
program and identified hundreds of weaknesses and irregularities. However,
it lacked the resources and independence needed to provide full and
effective oversight of this large, costly, and complex UN effort.

The Oil for Food program offers several lessons for designing future
sanctions and strengthening existing UN programs:

           o  Assess whether the sanctions program gives undue control to the
           sanctioned country.
           o  Consider the economic impact that sanctions have on neighboring
           countries.
           o  Ensure that all aspects of sanctions are equally enforced.
           o  Establish clear authority and responsibility for key
           management, oversight, and monitoring activities.
           o  Continuously assess and mitigate risk as programs and funding
           expand.
           o  Assess the role of internal audit and evaluation units and take
           steps to ensure that these entities have the resources and
           independence needed for effective oversight.

           In our April 2006 report on the Oil for Food Program, we
           recommended 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. The Department of
           State and the UN responded that they are taking steps to
           strengthen internal controls at the UN.

           Although the sanctions curbed the Iraq regime's ability to advance
           its military and weapons of mass destruction programs, the UN
           established a weak control environment for the Oil for Food
           program at its beginning due to compromises it made with the Iraq
           government and neighboring states. For example, the UN allowed
           Iraq to control contract negotiations for imported commodities
           with little oversight, allowing the regime to obtain illicit funds
           through contract surcharges and kickbacks. Several countries in
           the region depended on Iraqi trade, but no provisions were made to
           address the economic impact of the sanctions on these countries.
           This undermined international support for sanctions and allowed
           Iraq to smuggle oil outside the Oil for Food program. The
           sanctions helped prevent the Iraq regime from obtaining prohibited
           military and dual-use items, but little attention was given to
           oversight of the economic activities related to the Oil for Food
           program, such as monitoring the price and value of Iraq's
           contracts. Allowing Iraq to obtain revenues outside the Oil for
           Food program undermined the goals of containing the regime and
           using its oil revenues for UN-managed assistance to benefit the
           Iraqi people.

           When the UN first proposed the Oil for Food program in 1991, it
           recognized the vulnerability inherent in allowing Iraq 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
           the contracts and compliance at the oil ministry. Iraq refused
           these conditions.

           By the mid-1990s, the humanitarian conditions had worsened. 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. In April 1995, the Security Council passed resolution
           986 to permit Iraq to use its oil sales to finance humanitarian
           assistance. 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 understanding6
           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 Committee7 reported that observers were
           required to have government escorts and cited various instances of
           intimidation and interference by Iraqi officials. The committee
           concluded that the limits placed on the observers' ability to ask
           questions and gather information affected the UN Secretariat's
           ability to provide complete field reports to the sanctions
           committee.

           Under Security Council resolutions, all member states had the
           responsibility for enforcing sanctions. For Iraq, the UN depended
           on neighboring countries to deter the importation of illicit
           commodities and smuggling. However, concessions to regional trade
           activity affected the sanctions 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, and no
           provisions were made for countries that relied heavily on trade
           with Iraq. 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 take
           steps against the states or entities engaged in them. In addition,
           successive U.S. administrations 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.8

           The UN's focus on screening military and dual-use items was
           largely effective in constraining Iraq's ability to import these
           goods through the Oil for Food program. Each member of the
           Security Council's Iraq sanctions committee had authority to
           approve, hold, or block any contract for goods exported to Iraq.
           The United States, as a member of the committee, devoted resources
           to conducting a review of each commodity contract. As a result,
           the United States was the Security Council member that most
           frequently placed holds on proposed sales to Iraq; as of May 2002,
           it was responsible for about 90 percent of the holds placed by the
           Security Council. 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.

           In addition to screening items imported by Iraq, the UN conducted
           weapons inspections inside Iraq until 1998, when international
           inspectors were forced to withdraw. Sanctions also may have
           constrained Iraq's purchases of conventional weapons, as we
           reported in 2002.9 In 2004, the Iraq Survey Group reported that
           sanctions had curbed Iraq's ability to import weapons and finance
           its military, intelligence, and security forces.

           The UN's neglect of Iraq's illicit revenue streams from smuggling
           and kickbacks facilitated unauthorized revenue for a sanctioned
           regime and undermined the program's goal of using Iraqi oil
           revenues to benefit the Iraqi people. According to a report by
           Department of 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.10 Ensuring a fair and
           reasonable price for goods can mitigate the possibility of
           overpricing and kickbacks. The Security Council's Iraq sanctions
           committee and the Secretariat's Office of the Iraq Program (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 contract commissions and kickbacks ranging from about $1.5
           billion to about $3.5 billion.

           The UN did not adequately address other key internal control
           elements as it implemented the Oil for Food program: (1)
           establishing clear authorities, (2) identifying and addressing
           program risks, and (3) ensuring adequate monitoring and oversight.
           UN entities and contractors responsible for implementing and
           monitoring the program lacked clear lines of authority. For
           example, the Office of the Iraq Program lacked clear authority to
           reject commodity contracts based on pricing concerns. In addition,
           the UN contractor at Iraq's border did not have the authority to
           evaluate imports for price and quality, and no provisions were
           made to stop imports that were not purchased through the Oil for
           Food program. Moreover, the UN did not assess emerging risks as
           the Oil for Food program expanded from a 6-month emergency measure
           to deliver food and medicine to a 6-year program that provided
           more than $31 billion to 24 economic sectors. Some monitoring
           activities constrained the ability of the regime to obtain illicit
           contract surcharges, but smuggling continued despite the presence
           of inspectors. Finally, the UN's internal audit office examined
           some aspects of the Oil for Food program and identified hundreds
           of weaknesses and irregularities. However, it lacked the resources
           and independence to provide effective oversight of this ambitious
           and complex UN effort.

           A good internal control environment requires that the agency
           clearly define and delegate key areas of authority and
           responsibility. 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 Iraq sanctions and 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 (see figure 1). However, no single entity was
           accountable for the program in its entirety. 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 UN Established a Weak Control Environment for Enforcing Sanctions and
                       Managing the Oil for Food Program

Early Compromises Allowed Iraq to Set the Terms for Contracting and Monitoring

6Memorandum 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.

7In 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.

UN Did Not Address the Economic Impact of Sanctions on Member Countries

Sanctions Enforcement Focused on Military Items, but Less Rigorous Oversight for
Economic Activities Facilitated Iraq's Ability to Obtain Illicit Revenues

8 GAO-02-625 .

9Ibid.

10Report 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).

Unclear Authority, Lack of Risk Assessment, and Inadequate Monitoring and
      Oversight Further Undermined the Sanctions and Oil for Food Program

Oil for Food Program Lacked Clear Lines of Responsibility and Authority

Figure 1: Multiple Organizations Managed the Oil for Food Program and
Enforced UN Sanctions

The absence of clear lines of authority and responsibility were important
structural weaknesses that further undermined the management and oversight
of the Oil for Food program. For example, OIP was to examine each
commodity contract for price and value before submitting it to the
sanctions committee for approval. However, 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. In addition, UN
inspectors did not have the authority to inspect goods imported into Iraq
to verify price and quality. These inspectors mostly verified the arrival
of goods in the country for the purpose of paying the contractor.

The Secretariat's contract for inspecting imports at three entry points in
Iraq required inspection agents to "authenticate" goods, but the agents'
responsibilities fell short of a more rigorous review of the imports'
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) inspect goods that were not voluntarily
presented by transporters, or (4) select the items and suppliers or
negotiate contracts. In addition, no provisions were made to interdict
prohibited goods arriving at the border. According to Cotecna, the
inspections contractor from 1999 to 2004,11 "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
anticipation of an oil for food program, the UN selected Cotecna in 1992
for a program that was never implemented. Under that proposal, Cotecna
would have verified fair pricing and inspected the quality of the items to
help ensure that they conformed to contract requirements.

Finally, limited authority for contractors overseeing oil exports
facilitated Iraq's ability to obtain illicit revenues from smuggling that
ranged from $5.7 billion to $8.4 billion over 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 its mandate did
not include monitoring all oil exports leaving Iraq from other locations
or acting as a police force.12 As a result, the contractors did not
monitor oil that was exported outside the Oil for Food program.

11The 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.

Program Risk Was Not Continuously Identified and Addressed

Risk assessments can identify and manage the internal and external
challenges affecting 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 6-year program that delivered about $31
billion in commodities and services in 24 sectors. Beginning in 1998, 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 allowed
the Iraqi government to tender and negotiate its contracts. The UN Office
of Internal Oversight Services (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 OIP's 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.

12Testimony 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).

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 in Iraq, and the report was of limited usefulness
for addressing high-risk areas. Comprehensive and 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. These assessments also might have identified the
structural management weaknesses that led to ineffective communication and
coordination within the program.

Oil Export Monitoring Activities Did Not Deter Smuggling but Did Mitigate
Contract Surcharges

Ongoing monitoring and specific control activities should meet the
management and oversight needs of the agency or program. However, during
the Oil for Food program, the lack of functioning oil 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.13
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 plans for that period provided for the
installation of a meter at the Mina al-Bakr port. 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 has not yet
installed oil meters at Mina al-Bakr.

13Testimony 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).

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
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 contrast, 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. The United States delayed
oil pricing until after the Iraq government signed contracts with oil
purchasers but without knowing the price it would have to pay until
delivery. Setting the price at the time the oil was delivered helped to
ensure a fair market price. 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.

UN Internal Audit Office Lacked Sufficient Resources and Independence to Provide
Effective Oversight

Ongoing monitoring of internal control should include activities to help
ensure that the findings of audits and other evaluations are promptly
resolved. Although OIOS conducted dozens of audits of the Oil for Food
program, the office did not review key aspects of the Oil for Food program
and had insufficient staff. 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 OIP's oversight of
the commodity contracts for central and southern Iraq, which accounted for
59 percent of Oil for Food proceeds. According to the Independent Inquiry
Committee, the internal auditors believed that they did not have the
authority to audit humanitarian contracts because the sanctions committee
was responsible for contract approval.

OIP management mostly supported OIOS audits for program activities in
northern Iraq managed by other UN agencies; however, these northern
programs constituted only 13 percent of the Oil for Food program. 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. The Independent Inquiry Commission
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 as required by the international auditing standards
to which OIOS subscribes.14 The UN must support budgetary independence for
the internal auditors.

In addition, the number of OIOS staff assigned to the Oil for Food program
was low. 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 Independent Inquiry 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 sending 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. Timely reporting on audit findings would have assisted the
Security Council in its oversight of Iraq sanctions and the Oil for Food
program.

14GAO, United Nations: Funding Arrangements Impede Independence of
Internal Auditors, GAO-06-575 (Washington, D.C.: Apr. 25, 2006).

     Concluding Observations: Lessons Learned from the Oil for Food Program

Our findings on UN management of Iraq sanctions and the Oil for Food
program reveal a number of lessons that can apply to future sanctions and
should be considered during the ongoing debate on UN reform. These lessons
demonstrate the importance of establishing a good control environment at
the outset. In addition, fundamental internal control activities must be
applied throughout the life of UN programs. Specifically,

           o  When establishing the program, assess the roles and authorities
           of the sanctioned country. If political pressures and emergency
           conditions dictate significant authority and responsibilities for
           the sanctioned country, assess the risks posed by these
           authorities and take steps to mitigate potential problems. A
           comprehensive risk assessment following the decision to allow
           Iraqi control over contracting and monitoring might have revealed
           the need for more rigorous activities to review the prices the
           regime charged and the quality of goods it contracted to prevent
           or help lessen the opportunity for illicit charges.
           o  Consider the impact that the loss of trade might have on
           surrounding countries. For example, Jordan, a U.S. ally, was
           allowed to continue buying Iraqi oil outside the Oil for Food
           program, which facilitated the revenue that Iraq could obtain
           beyond UN control. Other provisions for obtaining discounted oil
           might have prevented this trade.
           o  Ensure that monitoring and oversight equally address all
           program goals. Although the UN focus on screening military and
           dual-use items was largely effective in constraining Iraq's
           ability to import these goods through the Oil for Food program,
           the UN's neglect of Iraq's illicit revenue streams from smuggling
           and kickbacks undermined the program's goal of using Iraqi oil
           revenues to benefit the Iraqi people.
           o  Establish clear authorities for key management, oversight, and
           monitoring activities. The Oil for Food program had unclear lines
           of authority for rejecting contracts based on price and value
           concerns and for inspecting imported goods and exported oil. These
           important structural weaknesses allowed the sanctioned Iraq regime
           significant control over program activities.
           o  As programs and funding expand, continuously assess the risks
           caused by this expansion and take steps to ensure that resources
           are safeguarded. The UN did not assess risks as the Oil for Food
           program grew in size and complexity, particularly in light of the
           fact that it had relegated responsibility for the contracting
           process to Iraq. Timely risk assessments might have identified the
           internal control weaknesses that facilitated Iraq's ability to
           levy illicit contract revenues and thereby undermine the UN's goal
           of using Iraq's oil proceeds for humanitarian assistance to the
           Iraqi people.
           o  Assess the role of internal audit and evaluation units and take
           steps to ensure that these entities have the resources and
           independence needed for effective oversight. Although the UN's
           internal audit office audited some aspects of the Oil for Food
           program and identified hundreds of irregularities, it lacked the
           resources and independence to provide effective oversight of this
           costly and complex UN effort.

           In our report on the Oil for Food program's internal controls,15
           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

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

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

           For questions regarding this testimony, please call Joseph
           Christoff at (202) 512-8979. Other key contributors to this
           statement were Lynn Cothern, Jeanette Espinola, Tetsuo Miyabara,
           Valerie Nowak, and Audrey Solis.

           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.

           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."

           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

           Contact:

           Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
           [email protected] Automated answering system: (800) 424-5454 or
           (202) 512-7470

           Gloria Jarmon, Managing Director, [email protected] (202) 512-4400
           U.S. Government Accountability Office, 441 G Street NW, Room 7125
           Washington, D.C. 20548

           Paul Anderson, Managing Director, [email protected] (202)
           512-4800 U.S. Government Accountability Office, 441 G Street NW,
           Room 7149 Washington, D.C. 20548

                                 Recommendation

                          Contacts and Acknowledgments

(320431)

15 GAO-06-330 .

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.

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

www.gao.gov/cgi-bin/getrpt? GAO-06-711T .

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-06-711T , a testimony before the Subcommittee on
National Security, Emerging Threats, and International Relations;
Committee on Government Reform, House of Representatives

Tuesday, May 2, 2006

UNITED NATIONS

Oil for Food Program Provides Lessons for Future Sanctions and Ongoing
Reform

In 1996, the United Nations (UN) and Iraq began the Oil for Food program
after sanctions were imposed in 1990. The program was intended to allow
the Iraqi government to sell oil to pay for humanitarian goods and prevent
it from obtaining goods for military purposes. More than $67 billion in
oil revenue was obtained through the program, with $31 billion in
assistance delivered to Iraq.

Internal controls serve as the first line of defense in preventing fraud,
waste, and abuse and in helping agencies achieve desired outcomes.

GAO assesses (1) the control environment the UN established for managing
the sanctions and Oil for Food program and (2) other key internal control
elements. In addition, we provide observations on the lessons learned from
the program.

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 (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 the lessons from Oil for Food program. The
Department of State and the UN responded that they are taking steps to
strengthen internal controls at the UN.

The UN-the Security Council, the Secretariat, and member
states-established a weak control environment for the Oil for Food program
at the beginning. The UN allowed Iraq to control contract negotiations for
imported commodities with little oversight, enabling the regime to obtain
illicit funds through surcharges and kickbacks. The UN did not take steps
to address the economic impact that the sanctions had on countries that
depended on Iraqi trade, which undermined international support for
sanctions and allowed Iraq to smuggle oil outside the Oil for Food
program. Overall, the sanctions were effective in helping to prevent the
Iraq regime from obtaining military items, but the UN was less rigorous in
overseeing economic activities such as monitoring the price and value of
Iraq's contracts. The UN's neglect of Iraq's illicit revenue streams
helped support a sanctioned regime and undermined the goals of using oil
revenues to benefit the Iraqi people.

The UN did not adequately address key internal control elements as it
implemented the Oil for Food program. First, UN entities lacked clear
lines of authority. For example, the Office of the Iraq Program lacked
clear authority for rejecting commodity contracts based on pricing
concerns. In addition, the customs contractor at Iraq's border was not
authorized to evaluate imports for price and quality. Second, the UN did
not assess emerging risks as the Oil for Food program expanded from a
6-month emergency measure to deliver food and medicine to a 6-year program
providing more than $31 billion to 24 economic sectors. Third, some
monitoring activities constrained Iraq's ability to obtain illicit oil
surcharges, but smuggling continued despite the presence of inspectors. In
addition, the UN's internal audit office identified hundreds of weaknesses
and irregularities in its reports. However, it lacked the resources and
independence to provide effective oversight of this costly and complex UN
effort.

The Oil for Food program offers several lessons for designing future
sanctions and strengthening existing UN programs:

           o  Assess whether the sanctions program gives undue control to the
           sanctioned country.
           o  Consider the economic impact that sanctions have on neighboring
           countries.
           o  Ensure that all aspects of sanctions are equally enforced.
           o  Establish clear authority and responsibility for management,
           oversight, and monitoring activities.
           o  Assess and mitigate risk as programs and funding expand.
           o  Assess the role of internal oversight units and ensure that
           they have the resources and independence needed for effective
           oversight.
*** End of document. ***