Foreign Assistance: U.S. Food Aid Program to Russia Had Weak Internal
Controls (Letter Report, 09/29/2000, GAO/NSIAD/AIMD-00-329).

Pursuant to a congressional request, GAO provided information on the
internal controls used by the Foreign Agricultural Service in its
management of the fiscal year 1999 government-to-government food aid
programs to Russia, focusing on: (1) the adequacy of internal controls
used to monitor the distribution of food aid commodities; (2) the
adequacy of procedures for monitoring collections and deposits of funds
derived from the sale of food aid commodities; and (3) the extent to
which procedures for determining the price to sell U.S. food aid
commodities in Russia were followed.

GAO noted that: (1) the Foreign Agricultural Service did not adequately
implement internal controls designed to direct, track, and verify how
food aid was delivered at the regional level in Russia; (2) as a result,
the Foreign Agricultural Service cannot provide reasonable assurance
that the food aid was delivered in agreed upon amounts to the intended
regions as was designated in commodity distribution plans approved by
both governments; (3) GAO found that for most of the commodity
distribution plans, less than one-quarter of the targeted regions
received a tonnage amount that was equivalent to or near their planned
allotment; (4) the lack of timely reporting on commodity distribution by
the Russian government combined with weaknesses in the Foreign
Agricultural Service's tracking systems for monitoring commodity
deliveries to regional recipients limited the agency's ability to
effectively manage the distribution process, identify discrepancies, and
minimize the potential for fraud and abuse; (5) officials from the
Foreign Agricultural Service told GAO that their ability to effectively
implement internal controls was constrained by limited staff resources
and the need to implement a large and complex program in a short time
period; (6) the Foreign Agricultural Service did not establish adequate
procedures to monitor the collection and deposit of funds derived from
the sale of fiscal year 1999 U.S. food aid commodities in the Russian
regions; (7) the procedures were also inadequate for minimizing the risk
of unintended commodity diversions and shortfalls in deposits to the
Russian Pension Fund; (8) officials from the Foreign Agricultural
Service established and followed a formal procedure for setting
commodity prices for food aid sold in Russia, but they did not
adequately document their analysis or the basis for how the final price
decisions were reached; (9) the prices set were used to calculate the
amount to be deposited into the Russian Pension Fund for a given
commodity shipment; (10) the U.S. and Russian governments attempted to
set commodity prices at a "golden middle" that would facilitate the
quick sale of food aid commodities and help to counteract inflationary
pressures but would not disrupt local markets; and (11) without
documentation of market conditions when making price-related decisions,
the Foreign Agricultural Service was unable to demonstrate the
reasonableness of final food aid commodity prices, which in turn
determines the amount of funds deposited into the Russian Pension Fund.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD/AIMD-00-329
     TITLE:  Foreign Assistance: U.S. Food Aid Program to Russia Had
	     Weak Internal Controls
      DATE:  09/29/2000
   SUBJECT:  International relations
	     Federal aid to foreign countries
	     Foreign aid programs
	     Agricultural assistance
	     International agreements
	     International food programs
	     Prices and pricing
	     Internal controls
IDENTIFIER:  Russian Pension Fund
	     USDA Humanitarian Food Aid Programs
	     Russia

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GAO/NSIAD/AIMD-00-329

A

Report to the Ranking Minority Member, Subcommittee on Agriculture, Rural
Development and Related Agencies, Committee on Appropriations, House of
Representatives

September 2000 FOREIGN ASSISTANCE

U. S. Food Aid Program to Russia Had Weak Internal Controls

GAO/ NSIAD/ AIMD- 00- 329

Letter 3 Appendixes Appendix I: Scope and Methodology 36

Appendix II: Background on Fiscal Year 1999 U. S. Food Aid Program to Russia
39

Appendix III: Key Internal Controls for Monitoring the Distribution of U. S.
Food Aid Commodities in Russia 44

Appendix IV: Comments From the Foreign Agricultural Service 46 Appendix V:
GAO Contacts and Staff Acknowledgments 62

Tables Table 1: Timeliness of Key Logistical Reports on Status of Shipment,
Discharge, and Distribution of U. S. Food Aid

Commodities, as of November 1999 and May 2000 16 Table 2: Statistics on
Fiscal Year 1999 U. S. Food Aid to Russia

by Program and Commodity 41 Table 3: Key Internal Controls for the Bilateral
U. S. Food Aid

Program to Russia 44 Figures Figure 1: Flow Chart of Food Aid Commodity
Distribution and

Beneficiaries, Fiscal Year 1999 Program 9 Figure 2: Percent of Russian
Regions With Differences Between

Planned and Actual Deliveries of Food Aid Commodities, Fiscal Year 1999
Program 14 Figure 3: Financial Status of the Special Accounts, as of

June 27, 2000 25 Figure 4: Arrival of U. S. Food Aid Commodities in Russia
Under

the Fiscal Year 1999 Program 43

Abbreviations

PVO private voluntary organization

National Security and International Affairs Division

Lett er

B- 286196 September 29, 2000 The Honorable Marcy Kaptur Ranking Minority
Member Subcommittee on Rural Development, Agriculture, and Related Agencies
Committee on Appropriations House of Representatives

Dear Madam Kaptur: In December 1998, the United States responded to a
request by the Russian Federation for food aid that was triggered by the
twin effects of one of the lowest Russian grain harvests in decades and a
severe financial crisis. The United States agreed to provide 3. 7 million
metric tons of food aid in fiscal year 1999, 1 at a cost of approximately
$1. 1 billion (including commodity and freight costs). Most of the food aid
was sold by the Russian government to regional mills and processors and is
expected to raise about $353.2 million for the Russian Pension Fund and $2.3
million for agricultural projects in Russia. 2 A small portion of the U. S.
food aid was donated to Russian social institutions to feed some of the most
needy people. The fiscal year 1999 program, which is administered by the
Department of Agriculture's Foreign Agricultural Service, was one of the
largest food aid programs to a single nation in the history of U. S. food
aid.

Out of concern over the size and complexity of the U. S. food aid program,
as well as the well publicized allegations of corruption and
misappropriation of government resources in Russia, you requested us to
evaluate how the Foreign Agricultural Service monitored the distribution of
U. S. food aid commodities and funds generated from their sale. A key factor
in helping managers achieve program objectives and minimize operational
problems and risk of fraud and abuse is the implementation of appropriate
internal controls. This report focuses on the internal controls used by the
Foreign Agricultural Service in its management of the fiscal

1 The U. S. food aid agreements with the Russian government were initiated
in fiscal year 1999. Food aid shipments began arriving in Russia in fiscal
year 1999 and are projected to be completed in fiscal year 2001.

2 Dollar amounts in this report are based on an exchange rate of 28 rubles
per U. S. dollar.

year 1999 government- to- government food aid programs to Russia. 3 We
specifically examined (1) the adequacy of internal controls used to monitor
the distribution of food aid commodities, (2) the adequacy of procedures for
monitoring collections and deposits of funds derived from the sale of food
aid commodities, and (3) the extent to which procedures for determining the
price to sell U. S. food aid commodities in Russia were followed.

To address these issues, we went to Russia for 2 weeks in November and
December 1999 to meet with U. S. and Russian government officials involved
with the implementation of the fiscal year 1999 food aid program. We also
conducted a detailed analysis of 237 reports documenting the results of site
visits to regional food aid recipients by U. S. monitors, reviewed 19 months
of minutes recording decisions made at weekly meetings between U. S. and
Russian officials, reviewed hundreds of key logistical reports, and tested a
database used to track commodity distribution. As the basis for evaluating
the program's internal controls, we used the standards for internal control
in the federal government. 4 Appendix I provides detailed information on our
scope and methodology.

Results in Brief The Foreign Agricultural Service did not adequately
implement internal controls designed to direct, track, and verify how food
aid was delivered at

the regional level in Russia. As a result, the Foreign Agricultural Service
cannot provide reasonable assurance that the food aid was delivered in
agreed upon amounts to the intended regions as was designated in commodity
distribution plans approved by both governments. We found that for most of
the commodity distribution plans, less than one- quarter of the targeted
regions received a tonnage amount that was equivalent to or near their
planned allotment. The lack of timely reporting on commodity distribution by
the Russian government combined with weaknesses in the Foreign Agricultural
Service's tracking systems for monitoring commodity deliveries to regional
recipients limited the agency's ability to effectively manage the
distribution process, identify discrepancies, and minimize the

3 Ninety- seven percent of the total U. S. food aid tonnage provided to
Russia in fiscal year 1999 was provided under a government- to- government
program. The remaining 3 percent of the food aid tonnage was distributed in
Russia through private voluntary organizations.

4 Standards for Internal Control in the Federal Government( GAO/ AIMD- 00-
21. 3. 1, Nov. 1999) provides a foundation for internal controls for federal
entities.

potential for fraud and abuse. U. S. monitors who visited regional sites to
verify commodity deliveries often did not have reliable information
concerning the quantities of commodities expected to be delivered. Thus,
they were unable to make this determination and investigate discrepancies
effectively. Moreover, they made few visits to determine whether wheat
intended to be distributed to needy populations reached social institutions
such as orphanages and hospitals. Officials from the Foreign Agricultural
Service told us that their ability to effectively implement internal
controls was constrained by limited staff resources and the need to
implement a large and complex program in a short time period. In addition,
U. S. and Russian officials told us that while a few cases of alleged abuse
had been reported and investigated, the cases were not substantiated and
were aware of no significant claims of commodity diversion or fraud in the
food aid program.

The Foreign Agricultural Service did not establish adequate procedures to
monitor the collection and deposit of funds derived from the sale of fiscal
year 1999 U. S. food aid commodities in the Russian regions. The procedures
were also inadequate for minimizing the risk of unintended commodity
diversions and shortfalls in deposits to the Russian Pension Fund. The
Foreign Agricultural Service did not begin to systematically track total
payments due and reconcile this information with data from Russian records
on total payments collected until May 2000- 13 months after the first
commodity shipments arrived in Russia. Also, the Foreign Agricultural
Service did not receive information on a regular basis regarding the status
of regional payments and delinquencies. Foreign Agricultural Service
officials generally regarded regional payment data to be unnecessary because
they viewed the Russian government as being ultimately responsible for
making up shortfalls. In June 2000, the Russian government reported that
$293 million had been collected of $309 million that was due at that time.
However, this report also reflected the fact that about half the regions
were delinquent, owing $26 million, while the remaining regions had paid $10
million in advance. Without regular information on the amounts due and paid
by region, the Foreign Agricultural Service was impeded in its ability to
influence Russia to take collection actions, including suspending food aid
distributions to delinquent regions. It also could not effectively use
regional payment information to help confirm regional receipt of the food
aid commodities.

Officials from the Foreign Agricultural Service established and followed a
formal procedure for setting commodity prices for food aid sold in Russia,
but they did not adequately document their analysis or the basis for how

the final price decisions were reached. The prices set were used to
calculate the amount to be deposited into the Russian Pension Fund for a
given commodity shipment. The U. S. and Russian governments attempted to set
commodity prices at a “golden middle” that would facilitate the
quick sale of food aid commodities and help to counteract inflationary
pressures but would not disrupt local markets. Because prices are not always
readily available in Russia's emerging market economy, officials from the
Foreign Agricultural Service and the Russian government consulted a variety
of sources to set program prices. However, Foreign Agricultural Service
officials did not prepare written market analyses or summaries of their
conversations with market experts and trade organizations assessing market
conditions. Moreover, our analysis of several commodities shows that in some
cases U. S. food aid prices were significantly below market prices in
Russia. Without documentation of its independent assessments of market
conditions when making price- related decisions, the Foreign Agricultural
Service was unable to demonstrate the reasonableness of final food aid
commodity prices, which in turn, determines the amount of funds deposited
into the Russian Pension Fund.

In order to strengthen the program's internal controls, we recommend that
the Secretary of Agriculture take certain actions to better monitor the
distribution of U. S. food aid commodities as well as the funds generated
from their sale under the existing and any future government- togovernment
food aid programs in Russia. We also recommend that the Secretary of
Agriculture take steps to improve the transparency of key decisions
concerning changes to distribution plans and the establishment of prices for
U. S. food aid commodities sold in Russia. The Foreign Agricultural Service
stated in its agency comments that it appreciated our recommendations to
improve internal controls and will seek to implement them where appropriate.
However, the agency disputes our conclusion that because of these internal
control weaknesses, the Foreign Agricultural Service cannot reasonably
assure that the food aid was delivered in agreed upon amounts to the
intended regions and that the Russian Pension Fund will continue to receive
timely deposits that equal the full value of the food aid sold in Russian
markets. Agency officials stated that the bottom- line objectives for the
program- delivery of commodities to the regions of Russia as planned and
achieving the targeted goal for payments to the Russian Pension Fund- were
achieved as no substantiated reports of fraud or diversion of commodities or
funds have been confirmed. While we agree that conducting a food aid program
in Russia was a difficult challenge, we continue to believe that
implementation of appropriate internal controls is essential to prevent and
detect fraud and abuse. Without adequate controls

and documentation of key decisions the agency cannot provide reasonable
assurance that its objectives are being met.

Background The United States provided the Russian government with 3. 6
million metric tons of food aid commodities, such as wheat, corn, soybeans,
rice, poultry,

and pork under its largest government- to- government food assistance
package in fiscal year 1999. 5 Half of this food aid tonnage was donated to
the Russian government and half was sold on concessional terms. 6 The
Russian government, in turn, sold about 90 percent of the food aid tonnage
to regional processors and donated about 10 percent to social institutions.
In addition to the government- to- government programs, the United States
also donated another 97,000 metric tons in food products that were for
direct distribution to vulnerable groups such as hospitals and orphanages
throughout Russia by five private voluntary organizations. Food aid
commodities began arriving in March 1999, and over 95 percent of the food
aid had arrived via 235 different vessel shipments by June 2000. See
appendix II for detailed information on U. S. food aid programs to Russia
for fiscal year 1999 and the arrival of U. S. food aid commodities.

In addition to the grain shortages and financial crisis, Russia's request
for food assistance came at a time when its Pension Fund was 4 months in
arrears in some regions. 7 There was also a shortfall of government support
for social institutions, and a concern for potential food shortages and
hunger, especially in the Northern and Eastern areas of Russia. The request
also came during a period of surplus U. S. and global agricultural
production and low commodity prices.

The U. S. goals for the fiscal year 1999 U. S. food aid program to Russia
were to help the Russian government stabilize food prices and supply food to
vulnerable groups. To avoid past problems of mismanagement and waste

5 The next largest government- to- government food assistance packages
provided by the United States in fiscal year 1999 were the approximately
790, 000 metric tons of food aid provided to North Korea under a
multilateral assistance program and about 660,000 metric tons of food aid
provided to Indonesia under a bilateral agreement.

6 The concessional terms of the food aid sale were a 5- year grace period,
16 installment payments in approximately equal amounts, and an initial
interest rate of 2 percent. 7 The Russian Pension Fund is a “pay- as-
you- go” Russian government pension system, funded in part by
employers and workers, which serves as the principal social security safety
net for the elderly.

that occurred in U. S. food aid programs to the Former Soviet Union in the
early 1990s, the Foreign Agricultural Service designed a simple program to
expedite the distribution of a large quantity of food aid and minimize the
opportunity for fraud and abuse. By selling most of the food aid within
Russia, the United States hoped to raise substantial funds for the Russian
Pension Fund to reduce pension arrears and alleviate poverty. The highly
visible Pension Fund was also selected to simplify the monitoring
requirements needed to minimize risk of fraud related to the use of the sale
proceeds. The small amount of funds derived from the sale of donated seeds
was provided to five agricultural research institutions and one rural credit
agency. 8

Integral to the food aid program were commodity distribution plans that
allocated quantities of each type of commodity to target regions based on
need. These plans, later implemented through detailed work plans, were
mutually agreed upon by both governments and incorporated into the food aid
agreements. The program relied on former state entities to sell food aid,
capitalizing on the existing food distribution network. U. S. surplus wheat
was also donated on a regional basis and intended to benefit selected
orphanages, hospitals, and other social institutions serving needy segments
of the population. The five private voluntary organizations also directly
distributed donated food to vulnerable groups in Russia. Figure 1 provides a
flow chart of U. S. food aid commodity distribution and beneficiaries.

8 See Foreign Assistance: Donation of U. S. Planting Seed to Russia in 1999
Had Weaknesses (GAO/ NSIAD- 00- 91, Mar. 9, 2000).

Figure 1: Flow Chart of Food Aid Commodity Distribution and Beneficiaries,
Fiscal Year 1999 Program

$353.2 $353.2 million million

$2.3 $2.3 million million

Pension Pension

6 6 agricultural agricultural

Fund Fund

institutions institutions

U. U. S. S.

Russian Russian

Regional Regional

government government

government government recipients

recipients Social

Social institutions/

institutions/ vulnerable

vulnerable groups

groups Sell 5

5 PVOs PVOs Donate

PVOs = Private voluntary organizations

Source: GAO.

In order to minimize the potential for fraud and abuse in the distribution
and sale of commodities, the Foreign Agricultural Service incorporated
internal control provisions into the food aid agreements with Russia.
According to federal standards, internal controls serve as the first line of
defense in safeguarding assets, preventing and detecting errors and fraud,
and providing reasonable assurance that an organization's objectives are
being achieved. In addition to the standard reporting and compliance
requirements usually found in food aid agreements with other countries, the
Foreign Agricultural Service also established weekly Bilateral Working Group
meetings between senior U. S. and Russian government officials to discuss
operational and logistical issues and resolve problems. 9 It also used
commodity distribution plans to direct and account for the distribution of
food aid to targeted regions. In addition, the Russian government was
required to prepare more detailed logistical reports on the movement of

9 Members of the Bilateral Working Group included U. S. officials from the
Foreign Agricultural Service and Russian representatives from the ministries
of Agriculture, Finance, Customs, Trade, and Internal Affairs; and Russian
distribution agents.

food aid commodities. These and other reports were used to create a database
to track commodities from purchase through shipping and arrival at the final
destination. A small number of U. S. monitors also were sent to Russian
regions to verify the arrival of food aid commodities at local facilities.
These procedures were also being used by the Foreign Agricultural Service to
manage the U. S. food aid program to Russia in fiscal year 2000 that is
expected to provide for delivery of 520,000 metric tons of food aid
commodities. 10 See appendix III for a summary of the major internal
controls, their purpose and specific procedures.

Internal Control While the Foreign Agricultural Service established internal
controls to

Weaknesses Impair direct, monitor, and verify food aid delivered to the
regions, it cannot

provide reasonable assurance that the food aid commodities were U. S.
Ability to Ensure

distributed as intended and that wheat intended to be distributed free to
Proper Distribution of

social institutions was donated rather than sold to the regions. We found
Food Aid Commodities

significant differences between planned and actual commodity distributions
to the regions and we were unable to determine whether the differences were
due to intended or unintended re- routings. The commodity distribution plans
were not updated and the minutes of the Bilateral Working Group meetings do
not document reasons for or approval of changes. In addition, key logistical
reports on shipment status were not submitted on a timely basis and
contained inaccurate and incomplete information, which limited the
effectiveness of the commodity tracking system. Moreover, the Foreign
Agricultural Service made improvements to its tracking system too late to
provide useful information to manage the fiscal year 1999 food aid program.
While the Foreign Agricultural Service undertook an extensive effort to
visit regional recipients and verify that commodities had been delivered as
expected, its U. S. monitors often did not have reliable information on the
quantities scheduled to be distributed when they visited the regional sites.
As a result, they could not effectively verify the amounts actually
delivered to the designated recipients. These internal control weaknesses
also affected the Foreign Agricultural Service's ability to provide
reasonable assurance that the regions and social institutions received their
expected share of the wheat intended for

10 For fiscal year 2000, the United States agreed to provide Russia with
300, 000 metric tons of wheat intended for donation to social institutions
and 20, 000 metric tons of seeds for sale in Russia, the latter whose
revenues are to be deposited into a special account designated for a rural
credit agency. The United States also donated 200, 000 metric tons of food
commodities for distribution by eight private voluntary organizations.

donation to vulnerable groups because its tracking system did not
distinguish between wheat intended for sale versus donation and the U. S.
monitors made few site visits to social institutions. Foreign Agricultural
Service officials told us that although their ability to effectively
implement internal controls was hindered by limited staff resources and the
need to quickly implement a large and complex program in a short period of
time, there were not substantiated claims of significant commodity diversion
or fraud in the food aid program.

Inadequate Implementation Although the commodity distribution plans were
designed to help track the

of Commodity Distribution progress of U. S. food aid deliveries to regional
recipients in Russia and

Plans Impeded Ability to trace discrepancies to a particular step or agent,
the Foreign Agricultural

Ensure Food Aid Deliveries Service did not use commodity distribution plans
as a control mechanism

to help ensure that commodities reached their intended regional to Regions
as Intended

destination. U. S. food aid commodities were delivered to 79 of the 89
regions of the Russian Federation under the fiscal year 1999 program. Under
the terms of the bilateral agreements, the Russian Ministry of Agriculture
was required to submit detailed distribution work plans to the Foreign
Agricultural Service prior to its commodity purchases that allocated the
commodities to regions by type and tonnage based on need. Recognizing the
need to respond to changing conditions such as sudden regional food
shortages, the Russian government was permitted to revise these work plans.
However, changes to the distribution work plans had to be approved by the U.
S. Minister Counselor based upon requests of the Bilateral Working Group.

We found that the commodity distribution plans were not implemented in a way
so as to provide reasonable assurance that the commodities were delivered in
agreed upon amounts to the regions as intended. The commodity distribution
plan data were not entered into the database and used as a baseline for
determining whether the commodities reached the intended regions. Moreover,
mutually approved commodity distribution plans covering about 90 percent of
the food aid tonnage were not updated

to reflect changes in planned deliveries. 11 For example, the Russian
government's original plan was to buy and deliver 120,000 metric tons of
beef to 26 regions; however, according to shipment and distribution reports,
it purchased and distributed less than 50, 000 metric tons of beef to 13
regions. We found no records indicating that the Russian government
submitted a revised distribution plan addressing these changes. We also
found little evidence in the minutes of the Bilateral Working Group to
indicate that proposed changes in commodity distribution plans were
presented to and received approval by the U. S. Minister Counselor. Instead,
the U. S. Minister Counselor received and accepted final reports of actual
commodity deliveries made to regional recipients. In this manner, the actual
distribution became the planned distribution. According to officials from
the Foreign Agricultural Service, they did not enforce the requirement that
the Russians submit revised distribution plans when changes were made in
order to expedite the distribution of the food aid commodities. These
officials told us that the European Union experienced problems in
distributing food aid to the regions as well as making timely deliveries. 12
They attributed this in part to the amount of time required to prepare and
approve changes to the commodity distribution plans.

Although the Foreign Agricultural Service reported to the House Agriculture
Committee in April 2000 that its monitoring system had confirmed that
commodities reached the intended regions according to the distribution
plans, our analysis of the distribution records for the 10 commodities
provided under the government- to- government food aid program showed that
significant differences occurred between planned and actual deliveries at
the regional level. For seven commodities whose distribution plans represent
about 71 percent of the food aid tonnage provided in this program, less than
one- quarter of the targeted regions received an amount that was equivalent
to or near their planned allotment, that is, within 10 percent of their
planned deliveries (see figure 2). Corn was distributed to targeted regions
somewhat more in line with planned deliveries though less than one- half of
them received an amount that was

11 We found an update of distribution plans for wheat that was to be donated
to regions rather than sold. This wheat represented about 10 percent of the
food aid tonnage. 12 The European Union provided 1.85 million metric tons of
agricultural products (including 1 million metric tons of wheat) valued at
approximately $478 million (. 9834 euros per U. S. dollar). The European
Union food aid was to be sold in Russia with 80 percent of the funds going
to the Russian Pension Fund and the remaining 20 percent going to support
selected social causes.

equivalent to or near their planned allotment. 13 Corn represented about 28
percent of the food aid tonnage.

We found also that numerous instances of regions receiving commodities even
though they were not listed as intended recipients in the commodity's
distribution plans. We did not analyze the difference between planned and
actual deliveries of beef because a revised distribution plan for this
commodity did not exist. We recently reported on seeds deliveries under the
food aid program to Russia and our separate review also showed that seed
distribution in Russia did not follow the original distribution plans and
the reasons for changes were not fully documented. 14

13 Distribution data for corn was not available at the time of our review
for an estimated 426, 000 metric tons of corn shipped to Russia in April-
May 2000, comprising 45 percent of the total shipments for this commodity.

14 See Foreign Assistance: Donation of U. S. Planting Seed to Russia in 1999
Had Weaknesses (GAO/ NSIAD- 00- 91, Mar. 9, 2000).

Figure 2: Percent of Russian Regions With Differences Between Planned and
Actual Deliveries of Food Aid Commodities, Fiscal Year 1999 Program

Percent of regions 100

90 80 70 60 50 40 30 20 10

0 Corn Wheat Rice Soybean Soybean

Pork Poultry Nonfat dry

Type of commodity distribution plan meal

milk Legend

Minimal variance (less than 10 percent from what was planned) Moderate
variance (between 10- 50 percent from what was planned) Substantial variance
(more than 50 percent from what was planned) No delivery of planned amount

Source: GAO- generated based on Foreign Agricultural Service data.

Weaknesses in Reporting The Foreign Agricultural Service did not effectively
track commodity

and Tracking Systems shipments made under the fiscal year 1999 food aid
program to Russia

Impeded Management of because of significant weaknesses in its reporting and
management

Commodity Deliveries systems. Key logistical reports that were intended to
provide an audit trail

of shipments from point of departure in the United States to distribution in
the Russian regions were not submitted on a timely basis. The delinquent

reporting hindered the ability of the Foreign Agricultural Service to
monitor the progress of commodity deliveries and to conduct timely
monitoring visits. The logistical reports also contained inaccurate and
incomplete information.

A key logistical report was designed by the Foreign Agricultural Service to
provide a full accounting of each vessel shipment from point of departure in
the United States to final commodity sale or distribution in Russia. 15 The
Foreign Agricultural Service prepares the first version of the logistical
report providing basic control data for each shipment and the Russian
government submits two follow- on versions of the report for each shipment
at the points of discharge and distribution. Our review of these reports in
November 1999 and later in May 2000, however, found that they were
chronically late- less than 10 percent of these reports were submitted on
time (see table 1 below). We also noted that the percentage of reports over
60 days late doubled from 20 percent in November 1999 to 40 percent by May
2000.

15 These key logistical reports are officially called Shipment, Arrival,
Distribution, and Status of Funds reports.

Table 1: Timeliness of Key Logistical Reports on Status of Shipment,
Discharge, and Distribution of U. S. Food Aid Commodities, as of November
1999 and May 2000

Percent of reports Percent of reports

Percent of reports submitted 60 days

Total number of meeting reporting

submitted up to 60 or more past

reports received deadline

days past deadline deadline

as of as of

as of as of

Version of Key Logistical Report 11/ 99 5/ 00 11/ 99 5/ 00 11/ 99 5/ 00 11/
99 5/ 00

Shipment data: departure date, commodity type, and tonnage by

94 207 7 5 86 74 7 21 vessel a Discharge data: date, commodity

type, tonnage, and condition by 82 149 5 3 89 67 6 30

vessel b Distribution data: commodity type and tonnage by regional recipient
c 76 145 5 3 75 57 20 40

a The number of days within which the Foreign Agricultural Service must
provide the Russian government with this report is not specified in the
bilateral agreements. For purposes of our analysis, we used 14 days after
the vessel's departure date as a reasonable notification period. b The
Russian government must provide the Foreign Agricultural Service with this
report within 2 days

of the vessel's port discharge. c The Russian government must provide the
Foreign Agricultural Service with this report within 14 days

of the vessel's port discharge. Source: GAO- generated based on Foreign
Agricultural Service data.

We also found many logistical reports that did not fully account for the
quantities of commodities that were shipped, discharged, or damaged. In
addition, the reports did not distinguish between wheat that was to be sold
in Russia versus that which was to be donated to social institutions. This
reduced the Foreign Agricultural Service's ability to more closely monitor
deliveries of 411,400 metric tons of donated wheat to help ensure that (1)
it went to the intended regions, (2) mills did not pay for the donated
wheat, and (3) social institutions actually received the donation.

The Foreign Agricultural Service in Moscow used the reports and other vessel
shipment data to build and maintain a computerized database and a separate
spreadsheet called the Master Travel Matrix. Both systems were used to
generate management reports and plan monitoring visits. We found, however,
they contained erroneous data and lacked important information. For example,
in December 1999, we reviewed the information systems and found numerous
input errors in quantities shipped, discharged, and distributed, and formula
errors that caused totals of columns and rows not to add up correctly. We
also noted the omission of two vessels carrying

about 27,000 metric tons of corn and 35,000 metric tons of wheat. 16 In
addition, the systems did not contain information on the commodity
distribution plans by region, impairing the ability of the Foreign
Agricultural Service to determine whether commodities were delivered to the
regions as expected. Nor did the systems track when shipments reached their
final destination in the regions, which is supposed to be one of the
measures used to trigger when payments from commodity sales are to be paid
to special accounts of the Russian government. Further, the Master Travel
Matrix did not provide individual columns to track estimated deliveries
separately from actual deliveries. Mingling the data on estimated deliveries
with actual deliveries impeded the ability to verify actual deliveries and
destroyed the audit trail it was designed to create.

In December 1999, the Foreign Agricultural Service, with the aid of a
private contractor, developed a new database in response to increased
problems with accounting for meat shipments and, in part, as a result of our
review. The new database, called the Food Aid to Russia Monitoring System,
became operational in May 2000 after virtually all of the fiscal year 1999
food aid commodities had been discharged in Russia. Our review of the new
database in May 2000 found considerable improvement over prior systems and
enhancement of the Foreign Agricultural Service's ability to track commodity
shipments, deliveries, and payments. 17 While we noted that many past data
entry errors had been corrected, the reliability of the management reports
generated from the new database was still hampered by the quality and
timeliness of the key logistical reports. In addition, the new system still
does not compare actual deliveries to commodity distribution plans or track
dates when the food aid reached regional recipients. Also, the new system
continues to mingle actual deliveries with estimates of expected deliveries.
Although notable improvements have

16 The corn shipment was a data entry error and was later added to the
database after we brought it to the attention of the Foreign Agricultural
Service. We learned that the wheat shipment was purposely omitted; however,
this omission was not indicated in any form of an audit trail. The wheat
shipment was originally destined for Russia, but due to unloading problems
in Novorossysk, it was re- routed to the Newly Independent State of Georgia
for use under another U. S. food aid program. The food aid wheat shipment to
Russia was later replaced.

17 In May 2000, we reviewed information and reports generated by the new
database, but we did not review supporting documents in Russia. Database
improvements included more complete tracking of commodity shipments and more
useful management reporting on the status of individual commodities,
shipments, pricing data, amounts due and collected on commodities sold,
regions visited and monitored, results of monitoring visits, and overall
program statistics.

been made, the new system was established too late to provide much useful
information to manage the fiscal year 1999 food aid program.

U. S. Monitoring Visits According to the Foreign Agricultural Service, one
of the primary purposes

Inadequate to Detect of the monitoring visits was to ascertain whether food
aid recipients

Variances From Intended received all the commodities expected. However, the
Foreign Agricultural

Distribution Service did not effectively verify the amounts actually
delivered and detect

discrepancies. About six officials from the Department of Agriculture were
detailed to Russia at any one time throughout the program to serve as U. S.
monitors responsible for visiting ports and regional food aid recipients,
among other duties. According to a June 30, 2000, program report, U. S.
monitors had prepared 288 site visit reports, covering 879 recipients such
as mills, processors, and storage facilities. Recipients in 11 of the 79
regions that received food aid in fiscal year 1999 were not visited because
of safety- related travel restrictions imposed by the U. S. government.
Program reports show that as of June 30, 2000, the monitors reported that 67
percent of the total tonnage was monitored. At each visit, the monitors
collected pertinent documents and later completed a site visit report that
contained information on the facility visited, the quantities received based
on documents, and the prices paid. 18

While the U. S. monitors made numerous site visits, they often conducted
these visits without reliable data on how much of a commodity they were
expected to find, thus they were unable to verify the delivery amounts or
identify and investigate discrepancies at the time of the visit. For
example, several site visit reports mentioned that the recipient had
expected more food aid than had arrived, but, at the time, the monitors
could not tell if the discrepancies were due to changes in distribution
plans or unintended re- routings. In most cases, the monitors' site visit
reports and database reports provided no indication of follow- up or attempt
to reconcile the differences. U. S. officials reported that only a few cases
were referred to Russian authorities for further investigation based on
indication of potential abuse, but that upon investigation the allegations
were not substantiated. In addition, our contacts with U. S. and Russian
officials told us they were aware of no significant claims of commodity
diversion or fraud.

18 Site visit reports are officially called Compliance Review Reports.

The monitoring program was also limited in its ability to independently
gather and assess information on program performance. Monitors relied
primarily on documents supplied by regional recipients to determine the
quantity and quality of the commodity received. Only in a few cases did
monitors report seeing the commodities at the regional facility. Because it
was difficult to time for logistical reasons, few monitors made site visits
to actually observe the vessel discharge or transfer of food aid commodities
to regional recipients. Occasionally, the monitors did not make actual site
visits but relied on documents sent to them- a distinction that was not
captured in the management reports. The independence and deterrent value of
the visits was further limited by the fact that they were not conducted on a
surprise basis, but pre- arranged with the assistance of the Russian
distribution agents and local officials. However, security officials from
the U. S. and Russian governments told us that the extensive presence of the
U. S. monitors in the regions probably served as a deterrent to fraud and
abuse, although they also believed that at least some surprise visits would
have improved the effectiveness of the monitoring program.

The Foreign Agricultural Service did not prepare a comprehensive report
comparing results of monitoring visits to reported deliveries by region and
regional recipient until May 2000, when the contractor had implemented the
new database. According to the database, the U. S. monitors found that most
regional recipients received the exact quantities that were reported as
delivered in reports prepared by the Russians. However, our analysis of 237
site visit reports questions the accuracy of the database. We found that
about one- third of the site visit reports recorded types and/ or quantities
of commodities that were significantly different from the types and/ or
quantities reported as monitored in the database. 19

For example, one site visit report indicated that 4,400 metric tons of corn
and 4, 200 metric tons of soybean meal were delivered to a region. However,
the database does not list corn as one of the commodities verified by the U.
S. monitors, but instead lists 11,250 metric tons of soybean meal as
verified by the monitors as well as 6,748 metric tons of wheat as verified
(although this commodity was never mentioned in the site visit report). In
other cases, we found that the site visit reports did not include
information on entire vessel shipments that, according to the database, were

19 We reviewed 237 site visit reports prepared during the period April 1999
through May 2000. We did not verify the amounts that the monitors reported
they found during their site visits to the underlying documents and receipts
they collected from recipients.

supposedly verified. For example, one site visit report verified that 7,500
metric tons of wheat had been delivered via two vessel shipments, yet the
management report also includes an additional 1, 370 metric tons of wheat
delivered via a third vessel shipment- this shipment was never mentioned in
the site visit report.

Internal Controls Do Not The Foreign Agricultural Service did not
effectively monitor the progress of

Ensure Distribution of Free the free wheat distribution to obtain reasonable
assurance that each region

Wheat to Intended Regions received the expected amounts and that the free
wheat was not sold. Under

and Social Institutions the fiscal year 1999 food aid agreements, the
Russian government was

obligated to donate 411, 400 metric tons of the overall 1. 7 million metric
tons of food aid wheat to needy segments of the Russian population. This
portion of the food aid wheat was called “free wheat” because it
was distributed without charge rather than being sold to regional
recipients. A distribution plan, attached to the food aid agreement,
allocated specific quantities of free wheat to 49 regions. The free wheat
was processed at regional facilities and then distributed in the form of
flour or bread to hundreds of social institutions such as orphanages,
shelters, and hospitals. For each region, the Russian government was
expected to provide a list of the individual social institutions expecting
to receive free wheat. Since the wheat was not sold to recipients, there
were no sale receipts to verify delivery to the intended regional
recipients. The distribution of free wheat was, thus, more vulnerable to
fraud and abuse.

Although the shipments of free wheat began arriving in April 1999, the
Foreign Agricultural Service did not know which shipments included free
wheat because its key logistical report to track commodity shipments did not
specify whether the wheat was intended for sale or donation. While the
Russian government announced at a November 1999 meeting of the Bilateral
Working Group that all the free wheat had arrived in- country and been
delivered to its regions, it did not provide a comprehensive report with
information on the arrival, regional destinations, mills, and quantities of
free wheat provided until February 2000. Our review of the 115 monitoring
reports covering the delivery of wheat to regional recipients from April
1999 through May 2000 found only 10 instances where the reports mention that
free wheat was delivered to the mills they had visited.

The Foreign Agricultural Service also had limited knowledge regarding the
delivery of free wheat to social institutions. It did not receive a complete
listing of social institutions receiving free wheat from the Russian
government until February 2000. Based on our review of the monitoring

reports, we could find evidence of monitoring visits to 10 social
institutions receiving free wheat. In December 1999, the Foreign
Agricultural Service's contractor conducted a telephone survey to determine
if the social institutions had received their expected quantities of free
wheat. The consultant contacted 62 social institutions in 10 of 59 regions
that received free wheat and concluded that 41 of these social institutions
“had benefited” from the free wheat. However, the survey
provided little assurance that the designated social institutions received
the quantity of free wheat or other commodities and/ or cash of commensurate
value. For example, there were many cases where the institution reported
receiving food products and/ or cash in lieu of free wheat, but the survey
did not attempt to reconcile the estimated value of these benefits with the
estimated value of the free wheat. Twenty- one institutions reported that
they received no free wheat or commensurate benefit at all.

Inadequate Internal About $353.2 million is expected to be deposited into
the Pension Fund and

Controls to Monitor $2. 3 million for six agricultural projects by the time
the fiscal year 1999

program is expected to end in fiscal year 2001. The Russian government
Collections of Sale

provided the Foreign Agricultural Service with information on the total
Proceeds

amount deposited into Special Accounts and disbursement to intended
beneficiaries as required by the food aid agreements. However, the Foreign
Agricultural Service did not systematically track total amounts due and
reconcile this information with data from Russian reports until May 2000
even though the first payments were collected in May 1999. Without regular
reconciliation, it could not verify that the proper amounts were disbursed
to the Russian Pension Fund on a timely basis. Additionally, the Foreign
Agricultural Service did not receive regular information from the Russian
government on the status of regional payments due. Foreign Agricultural
Service officials generally regarded regional payment data to be unnecessary
because they viewed the Russian government as being ultimately responsible
for making up shortfalls. In June 2000, the Russian government reported that
$293 million had been collected of the $309 million that was due at that
time. However, the true financial position of the Russian Pension Fund was
not clear because the Russian government also reported that about one- half
of the regions were delinquent, owing $26 million, while the remaining
regions had paid $10 million in advance. Without regular information on the
amounts due and amounts paid by region, the Foreign Agricultural Service
could not track the distribution of food aid commodities to the intended
regions using payment as proof of receipt, nor could it influence the
Russians to

take collection action against delinquent regions, including suspending
commodity distributions.

Procedures for Monitoring The food aid agreements and procedures issued by
the Foreign Agricultural

the Collection and Service established financial controls designed to ensure
that the proceeds

Disbursement of Sale from the sale of U. S. food aid commodities in Russia
would be collected in

Proceeds a timely manner and used for their intended purposes. The controls
include

the creation of Special Accounts in the Russian Ministry of Finance for the
sole purpose of receiving payments from the sale of U. S. food aid
commodities. The food aid agreements also required that deposits into the
Special Accounts be made within 120 days of the arrival of the shipment at
the Russian border. 20 The Russian government was required to submit to the
Bilateral Working Group a bi- weekly financial report accounting for total
payments into, and total disbursements from, the Special Accounts for
transfer to the Russian Pension Fund and six agricultural projects. The
Bilateral Working Group must approve disbursements from the Special
Accounts. Although not required to do so, officials from the Russian Pension
Fund reported at the meetings the total amount of funds received from the
Special Accounts and the total amount disbursed to pay pensions. The
agreements do not require the Foreign Agricultural Service to track the
funds beyond the disbursement from the Special Accounts to the intended
institutions. For example, the Foreign Agricultural Service was not expected
to track disbursements of funds from the Russian Pension Fund to individual
pensioners.

The food aid agreements permit the United States access to all documents
regarding the receipt, deposit, and disbursement of sale proceeds. The
agreements also called for the two governments to conduct a joint audit of
the sales proceeds during the fourth quarter of calendar year 1999. However,
the joint audit was postponed until the fourth quarter of calendar 2000,
when it is expected that most of the U. S. food aid commodities to Russia
will have been sold and distributed. The fiscal year 1999 food aid
agreements place ultimate responsibility on the Russian government to make
full payment into the Special Accounts for the total value of the food aid
tonnage sold in Russia. In practice, the Russian Federation holds the

20 The agreements also required deposits to be made within 30 days of the
commodity's arrival at the point of destination in the region if this date
came before the 120- day criteria. However, the Foreign Agricultural Service
did not track when the regional recipients received the commodities.

regional governments responsible for the amount due to the Special Accounts
if the regional recipients (e. g., mills and processing plants) fail to make
payments for the food aid commodities they purchased. However, at the end of
the fiscal year 1999 program, the Russian government is eventually obligated
to make up any shortfalls. To ensure implementation of the food aid
agreements' 120- day criteria, the Russian government decreed that regions
must make payments within 70 days of receiving wheat and rice and within 90
days for other food aid commodities. 21

Lack of Systematic Reports Food aid commodities for sale in Russia began
arriving in March 1999 and

Impaired Ability to Assess deposits to the Special Accounts were first made
in May 1999. However,

the Financial Position of during our visit to Moscow in December 1999, we
found that the Foreign

Accounts Agricultural Service did not systematically track or report on the
total

amounts due for deposit into the Special Accounts and reconcile the
information with Russian reports on the amount of funds deposited. Instead,
the Foreign Agricultural Service made calculations and comparisons of the
data on a sporadic basis, and it did not maintain any records or reports
that would provide a history of amounts due and paid. Without regular
reconciliation, it could not verify that the proper amounts were disbursed
to the Russian Pension Fund on a timely basis. We discussed this internal
control weakness with officials from the Foreign Agricultural Service and
its contractor during our site visit and they reported in May 2000 that the
new Food Aid to Russia Monitoring System database was correcting this
weakness. However, this correction occurred after the bulk (about 85
percent) of the tonnage shipped had been discharged in Russia. Reports
issued by the new database in June 2000 indicate that the Foreign
Agricultural Service was now systematically tracking and reporting on
amounts due and comparing them with Russian reports on amounts deposited
based on quantities of commodities discharged by vessel. 22

21 Resolution of the Russian Federation No. 130, Feb. 5, 1999. 22 The new
database tracks the payment due dates using the criteria that payments will
be made within 120 days of the date of a shipment's final discharge at
Russia's border.

Information on Regional The Foreign Agricultural Service did not receive
regular information on the

Payments Was Inadequate status of payments by each region that received food
aid, nor did it require

to Provide a Complete such information from the Russian government.
Officials from the Foreign

Account of Financial Status Agricultural Service told us that they were less
concerned about the status

of regional than with aggregate payments because ultimately the Russian
government is obligated to make up any shortfall between the total amount
due and total deposits made to the Special Accounts. Although it was not
required to do so under the terms of the food aid agreements, the Russian
government provided a few reports on the status of regional payments.
However, without regular reports, the Foreign Agricultural Service cannot
accurately assess the financial position of the Special Accounts since
advance payments by some regions do not reflect the fact that others are
delinquent. Regular reports of payments by region would provide additional
assurance that individual regions received the food aid, whereas reports of
nonpayment could indicate the possibility of unintended diversions.
Inadequate information on regional payments impeded the Foreign Agricultural
Service's ability to effectively influence the Russian government to take
early action to limit or suspend shipments to delinquent regions.

According to a new report produced by the new monitoring system database,
the total amount of payments deposited into the Special Accounts exceeded
total amounts due until the end of February 2000, when amounts due began to
exceed payments collected as indicated in figure 3.

Figure 3: Financial Status of the Special Accounts, as of June 27, 2000

350 Dollars in millions 300 250 200 150 100

50 0

1999 1999

1999 1999

1999 1999

1999 1999

2000 2000

2000 2000

2000 2000

May June July August September October November December January February
March April May June Total due Total collected

Source: GAO- generated from Foreign Agricultural Service data.

While the aggregate statistics appear reassuring, our analysis of two
Russian reports on the status of regional payments showed that about half of
the regions were past due on payments based on the Russian criteria. A
Russian report dated June 23, 2000, showed that about $309 million was due
from the regions and about $293 million had been paid into the Special

Accounts for the benefit of the Pension Fund and six agricultural projects.
23 According to this report, about half of the regions that had received
food aid commodities were past due on their payments, owing about $26
million. However, the remaining half of the regions had paid in advance
about $10 million, resulting in a net delinquency of about $16 million. Many
of these delinquent regions had continued to receive food aid commodities
even after they had been identified as delinquent in an earlier report. 24

At the December 9, 1999, Bilateral Working Group meeting we attended, the
Russian government was considering several actions to obtain payments from
delinquent regions, including:

sending the region a warning letter from the Prime Minister, cutting off
future commodity shipments until payments were current, redirecting
commodities to other regions able to provide advances or

guarantees, withholding other Russian government payments to the region, or
assessing fines.

The Bilateral Working Group minutes indicate that the Russian government
required several delinquent regions to report to the Deputy Prime Minister
for Agriculture and account for their financial status, but the minutes do
not indicate that any of the proposed actions listed above were implemented.
An audit of the food aid program by the Russian Chamber of Accounts dated
December 24, 1999, reported that no sanctions were applied against
delinquent regions. 25

23 The Russian government further reported that as of that date the Russian
Pension Fund had received regular disbursements from the Special Accounts
totaling $291 million. 24 A Russian report dated November 10, 1999,
indicated that about $76 million was due and about $78 million had been paid
into the Special Accounts. According to this report, about half of the
regions that had received food aid commodities were past due on their
payments, owing about $10 million. However, the remaining half of the
regions made payments in advance totaling about $12 million, resulting in a
net advance of about $2 million.

25 The Russian Chamber of Accounts is an audit organization of the Russian
government.

Little Documentation The U. S. and Russian governments agreed to a formal
methodology and

to Support procedure for jointly determining the selling prices for the U.
S. food aid

commodities in Russia based on Russian and international prices. Officials
Reasonableness of

from the Foreign Agricultural Service told us that they followed this Food
Aid Pricing

methodology using data and analysis provided by Russian authorities as
Decisions

well as information gathered through frequent verbal contact with Russian
government and private sector officials. However, the Foreign Agricultural
Service provided little documentation demonstrating how the methodology was
applied and how it supported the pricing decisions. Our review of seven
commodity pricing decisions found that in four of the five cases where
pricing data was available, the prices for U. S. food aid commodities were
substantially below reported wholesale prices in Russia. 26 Without
documentation to support its assessments and final pricing decisions, the
Foreign Agricultural Service cannot support the reasonableness of its
pricing decisions, which in turn, determine the amount of funds made
available to the Russian Pension Fund and other beneficiaries of the sales
proceeds.

Methodology for Setting Under the terms of the food aid agreements, the
Bilateral Working Group

Sale Price of U. S. Food Aid was to recommend to the U. S. Minister
Counselor for Agricultural Affairs in

Commodities in Russia Moscow the ruble value for each food aid commodity
sold in Russia. Once

approved, the price was to be used to calculate how many rubles were to be
made available to the Russian Pension Fund and other beneficiaries for a
given commodity shipment. According to the methodology, the Bilateral
Working Group was to set the value for each commodity shipment by examining
price information gathered by the Russian Ministry of Agriculture and Food,
including domestic and international wholesale prices. In addition, the
methodology required that the Bilateral Working Group take into account
information from in- country private sector sources on wholesale and import
prices as well as market conditions. The commodity selling price was to
represent an average, fair, wholesale market price for a given commodity
when normal, domestic, and

26 The total tonnage of the seven cases represented 20 percent of the total
food aid tonnage in fiscal year 1999 and 35 percent of the total sales
proceeds expected to be generated from the sale of U. S. food aid (note:
this excludes 411, 400 metric tons of free wheat).

commercial charges were added to this value. 27 The value of a particular
food aid commodity could change with each shipment depending on the
conditions of the internal market in Russia.

According to officials from both the Foreign Agricultural Service and the
Russian government, the goal of the Bilateral Working Group was to set
selling prices somewhat below market prices. Officials told us that,
ideally, prices for U. S. commodities were to fall within a “golden
middle” range- prices that, once transportation and other costs were
included, were not so low as to severely undercut local producers or
importers, but sufficiently low so as to facilitate the quick sale of
commodities and help to counteract inflationary trends in Russian food
prices.

According to Foreign Agricultural Service officials, the Russian Ministry of
Agriculture and Food, in cooperation with the former Ministry of Trade,
suggested a value for a given commodity and provided wholesale price
information as required, including high, low, average, national, and
regional prices along with price information for commercial imports of
commodities. Because prices are not always readily available in Russia's
emerging market system, the Foreign Agricultural Service then reviewed the
suggested prices with in- house staff, private traders, retail price
surveys, and discussions with U. S. trade associations. It also took into
account the prices at which food aid commodities provided by the European
Union were sold in Russia. Based on this review, the Foreign Agricultural
Service either concurred with the Russian's suggested price or requested an
adjustment at the Bilateral Working Group meetings.

Inadequate Documentation Foreign Agricultural Service officials reported
that they followed the

to Support U. S. Food Aid agreed methodology used to determine commodity
prices, but they

Pricing Decisions provided little documentation of their analysis in support
of their pricing

decisions. We asked for the documents these officials used to make their
pricing decision as well as for any documentation of their analysis
justifying the pricing decision for seven different commodity shipments
(wheat, corn, rice, soybean meal, seeds, pork, and poultry). The officials
from the Foreign Agricultural Service provided us with the wholesale price
information for five of the seven commodities (the prices of soybean meal

27 The food aid commodity price does not include, but takes into account,
customs' duties, value- added tax, or any other taxes or costs associated
with transportation to the final region.

and planting seed were the exceptions) collected by the Russian government.
They also provided some analyses carried out by the Russian Ministry of
Agriculture for particular markets at select periods, but this was not
provided for all seven of the pricing decisions. 28 The Foreign Agricultural
Service, however, did not provide us with documentation of its in- house
reviews, external consultations, or independent assessments. Instead,
through interviews these officials provided us with verbal recollections of
the rationale for their pricing decisions. In some cases, they recalled
discussions they had with experts regarding the pricing decisions. The
discussion and approval of pricing decisions were not well documented in the
minutes of the Bilateral Working Group.

For example, we requested documents used by Foreign Agricultural Service to
support the decision made in April 2000 to sell the third shipment of
soybean meal at 2,800 rubles per metric ton, a price lower than the previous
shipment of U. S. food aid soybean meal. The Foreign Agricultural Service
provided us with (1) Russian data of the average monthly wholesale price of
soybeans (but not soybean meal) during the first quarter of 2000 and (2) a
Russian analysis that described factors in the animal feed markets and price
trends that supported the Russian request to reduce the price of U. S. food
aid soybean meal from 3,400 to 2, 800 rubles per metric ton. While the
Russian analysis contained some price information for soybean meal, the
document date is December 1999- 4 months before the decision was made to
lower the price of the U. S. food aid soybean meal. Officials from the
Foreign Agricultural Service told us that they corroborated the findings of
the Russian document with internal and external experts. However, we were
not given any documents that indicated that the Foreign Agricultural Service
conducted an independent review and assessment of the Russian price
information and analysis in the months between the date of the report and
the decision to lower the price of U. S. soybean meal.

Similarly, the Foreign Agricultural Service provided little documentation to
support its decision to change the price of U. S. food aid pork after it had
already arrived in Russia and was partially distributed. Originally, the U.
S.

28 At the time of the pricing decisions, the information on the wholesale
prices of agricultural commodities supplied by the Russian government was
typically 2 to 4 weeks old because current data were not available due to
the standard lag in collecting market data. The Russian analysis of
particular markets includes information on trends in prices and anticipated
impact of factors such as domestic harvest, food aid from the European
Union, etc.

and Russian governments set the price of the U. S. shipment of bone- in
picnic ham at 29,000 rubles per metric ton in September 1999. By the
beginning of the year 2000, 25, 000 metric tons of U. S. food aid pork had
arrived in Russia, and our review of the Bilateral Working Group minutes
shows that the price of bone- in picnic ham was the subject of discussion
from February through April 2000. The Foreign Agricultural Service argued
that the price suggested by the Russians for a metric ton of bone- in picnic
ham needed to be reduced to 25,000 rubles to avoid storage costs and to move
the pork quickly. When asked to provide information and analysis behind
their request to lower the price of bone- in picnic hams in the Spring of
2000, officials from the Foreign Agricultural Service referred us to Russian
price information from 1999 that shows an increasing rather than a
decreasing trend in pork prices. 29

In our earlier review of the donation of U. S. planting seed under the
fiscal year 1999 food aid program, we also found inadequate documentation of
the price determination process for seeds. 30 The Department of Agriculture
did not provide us with data on the prices of planting seed in Russia, nor
any analyses of price trends or documentation of conversations with seed
importers or local producers confirming selling prices. Officials from the
Department of Agriculture also did not provide documentation of their
analysis of the effect of market conditions nor of how they applied the
methodology used to determine the selling prices for U. S. corn and
vegetable seed. 31

29 We note that the European Union and Russia also disagreed over the
selling price of European Union food aid pork. A review of the price
determination for European Union food aid pork revealed that when the
Russians proposed a decrease in the price of this pork, European Union
analysts documented evidence from independent sources that the price of pork
was increasing in Russian and international markets.

30 Foreign Assistance: Donation of U. S. Planting Seed to Russia in 1999 Had
Weaknesses (GAO/ NSIAD- 00- 91, Mar. 9, 2000). 31 In the fiscal year 2000
program, the Foreign Agricultural Service initially used an auction to try
to sell U. S. planting seed donated under a food aid agreement. The
documentation provided by the Foreign Agricultural Service shows that its
calculations of base prices based on local average market prices were too
high, but that the seed auction was beneficial in that it allowed market
forces to test the price levels. Using the information gleaned from the
auction process, the Foreign Agricultural Service adjusted the selling
prices for U. S. planting seed in the fiscal year 2000 program.

Lack of Documentation Our review of seven commodity pricing decisions found
that in four of the

Precludes Assessment of five cases where pricing data was available, the
prices for U. S. food aid

the Reasonableness of Food commodities were substantially below reported
wholesale prices in Russia.

Aid Prices When we compared the average wholesale price reported in Russia
for the

month prior to the pricing decisions for these shipments, we found that the
sale price of U. S. food aid rice was approximately 50 percent less than the
average wholesale price reported. The prices of U. S. food aid corn and
wheat were set at approximately 60 percent of Russian wholesale prices of
these products reported in the month prior to the price setting decision.
The Foreign Agricultural Service did not provide us with wholesale price
information for soybean meal or for planting seed for the month prior to the
pricing decision for the shipments we reviewed. Similarly, we had
insufficient information to judge whether the prices charged for U. S. food
aid pork cuts were similar to average producer prices. In interviews in
Russia, private sector traders, food processors, and government officials
provided examples of cases where U. S. food aid wheat, soybeans, corn, and
planting seed were sold at prices substantially below market. Some program
participants reported that the U. S. food aid program had a detrimental
impact on local Russian producers.

In response to our query about how they assessed the reasonableness of food
aid prices, officials from the Foreign Agricultural Service said they were
confident that U. S. food aid commodities were not priced too low because
they had received few complaints from importers or Russian producers. They
also believe that because the commodities sold quickly for the most part
(avoiding expensive storage and risk of spoilage), there is sufficient
evidence that the prices were not too high. Also, officials from the Foreign
Agricultural Service said the European Union experienced delays in the
distribution of some of its food aid, in part because it set prices too
high. Moreover, they relied on their expertise and knowledge of the Russian
agricultural markets to set prices.

Given that Russian food and commodity markets are not transparent or
efficient, price information does not always fully reflect changing market
conditions in Russia, particularly in different regions of the country.
Thus, verifying and assessing the Russian price information through
alternative, independent sources was included as part of the methodology
adopted by the Foreign Agricultural Service to determine the selling prices
of the U. S. food aid commodities. However, because the Foreign Agricultural
Service did not sufficiently document its assessment process, it cannot
demonstrate the reasonableness of food aid commodity prices. Prices that are
set too low, in turn, reduce the amount of funds that are made available

to the Russian Pension Fund and other beneficiaries of the sales proceeds.
Moreover, low food aid prices create opportunity for windfall profits.

Conclusions Internal controls provide an important means for the Foreign
Agricultural Service to reasonably ensure that U. S. food aid objectives in
Russia are

being achieved. However, we found that the internal controls designed and
implemented by the Foreign Agricultural Service to monitor the distribution
of U. S. food aid and the deposit of sale proceeds in the Russian Pension
Fund were inadequate. Commodity distribution plans were not updated and
compared with actual distribution; the databases did not separately track
estimated and actual deliveries; the databases and key logistical reports
did not distinguish between wheat that was intended for sale versus
donation; U. S. monitors had unreliable information on the types and
quantities of commodities they were expected to find; and information on the
status of regional payments was not collected on a regular basis. Officials
from the Foreign Agricultural Service told us that limited staff resources
and the need to quickly carry out a large and complex program in a short
time period impeded their ability to effectively implement the internal
controls. Nevertheless, the implementation of appropriate internal controls
is essential to help achieve program objectives and minimize fraud and
abuse. Because of weaknesses in the Foreign Agricultural Service's
implementation of its internal controls, the agency cannot provide
reasonable assurance or documentation that the Russian regions received the
appropriate amounts of food aid, that social institutions received the
benefits of the donated wheat, and that the Pension Fund will continue to
receive timely deposits that are equal to the full value of the food aid
sold in Russian markets.

Support for key decisions and actions concerning the distribution and sale
of food aid commodities in Russia was not transparent. The Foreign
Agricultural Service provided little documentation of its analysis in
support of its pricing decisions. The minutes of the Bilateral Working Group
did not adequately document the basis for and approval of its pricing
decisions and changes to the commodity distribution plans. Without better
documentation of key decisions, it is difficult to determine if prices
charged were reasonable, whether the sale of U. S. food aid commodities
could have generated more proceeds for the Russian Pension Fund, or whether
changes to the commodity distribution plans served to reach needy
populations.

Recommendations To help ensure that remaining shipments of U. S. food aid
commodities are delivered as intended under existing programs, as well as
shipments under

any future government- to- government program in Russia, the Secretary of
Agriculture should undertake efforts to improve the internal controls used
to monitor the distribution of food aid as well as the collection of sale
proceeds. We recommend that the Secretary of Agriculture direct the Foreign
Agricultural Service to take the following actions:

Improve the effectiveness of its management information system by (1)
incorporating information from commodity distribution plans on quantities
expected to be delivered to regions, updating the plans as changes are made,
and preparing progress reports on a regular basis that compare updated plans
with records of actual distribution for each region and commodity as well as
quantities found by U. S. monitors; (2) keeping separate track of estimated
and actual shipment/ delivery data as commodities move through the
distribution cycle to recipients providing an audit trail and a better basis
for verification by monitors; and (3) tracking separately in key logistical
reports those commodities that will be sold versus commodities that will be
given free to social institutions. Conduct fewer, but higher quality
monitoring visits by (1) undertaking

more physical inspections at regional sites and at times of discharge,
transfers, or deliveries; (2) performing some unannounced visits in addition
to prearranged visits; (3) recording the type and amount of commodities
expected to be found and the actual amount monitored as well as the date the
commodities were received; and (4) distinguishing between U. S. food aid
commodities that will be sold versus donated to social institutions when
assessing the types and quantities of commodities delivered. Collect on a
regular basis information on funds due by region, amounts

paid, and status of delinquencies by requesting the Russian government to
provide the United States with its reports on the status of regional
payments for U. S. food aid commodities.

To provide transparency behind actions taken and key decisions made
regarding the management of the U. S. food aid program in Russia, we
recommend that the Secretary of Agriculture direct the Foreign Agricultural
Service to take these actions.

Fully document the information and analysis used by both the U. S. and
Russian governments in determining the prices for U. S. food aid commodities
sold in Russia and any subsequent price adjustments. Record in the minutes
of the Bilateral Working Group, the results and

rationale behind key decisions involving changes to distribution plans and
price setting of U. S. food aid commodities sold in Russia as well as how
issues raised by the monitoring visits are resolved.

Agency Comments and We received comments from the Department of
Agriculture's Foreign

Our Evaluation Agricultural Service. The Foreign Agricultural Service stated
that it

appreciated our recommendations to improve internal controls and will seek
to implement them where appropriate. However, the agency disputes our
principal conclusion that it cannot provide reasonable assurance that the
food aid was delivered in agreed upon amounts to the intended regions and
that the Russian Pension Fund will continue to receive timely deposits that
equal the full value of the food aid sold in Russian markets because of
weaknesses in the agency's implementation of its internal controls. The
agency did not provide information to refute our finding that, at times, the
Foreign Agricultural Service did not follow its own internal controls. The
comments instead explain the challenges the agency faced in implementing its
internal controls and highlight improvements made to the food aid program
during the course of our review.

The Foreign Agricultural Service states that it has delivered food aid
commodities to the regions as planned and is achieving the targeted goal for
payments to the Russian Pension Fund based on the fact that there were no
substantiated reports of fraud or confirmed diversions of commodities or
funds. However, without adequate implementation of internal controls, the
agency cannot provide reasonable assurance that the objectives are being
met. For example, the internal controls designed by the Foreign Agricultural
Service require changes in planned commodity distribution to be documented
in revised distribution plans and submitted by the Bilateral Working Group
to the U. S. Minister Counselor for approval. Except for an update on free
wheat distribution, our review found no revisions to plans or record of U.
S. approval. We found that less than one- quarter of the targeted regions
received a tonnage amount that was equivalent or near their planned
distributions. Because the Foreign Agricultural Service did not document
revisions and approval for changes to the commodity distribution plans, it
cannot demonstrate that changes in the distribution plans were planned and
approved or whether any of the changes were the result of unintended
diversions. In addition, internal

controls required U. S. monitors to visit regional recipients of food aid to
verify that they had received the expected amounts. However, U. S. monitors
did not have reliable information on the amount and types of commodities
that they were expected to find, thus they were not in a position to know if
any discrepancies found were due to changes in plans or possible unintended
diversions. While we agree that conducting a food aid program in Russia was
a difficult challenge, we continue to believe that implementation of
appropriate internal controls is very important to preventing and detecting
fraud and abuse. Without adequate controls and documentation of key
decisions the agency cannot provide reasonable assurance that its objectives
are being met. The comments of the Foreign Agricultural Service appear in
full, along with our evaluation of them, in appendix IV.

As arranged with your office, unless you publicly announce the contents
earlier, we plan no further distribution of this report until 30 days after
its issue date. At that time, we will send copies to interested
congressional committees and the Honorable Dan Glickman, Secretary of
Agriculture; the Honorable J. Brady Anderson, Administrator of the U. S.
Agency for International Development; and the Honorable Madeleine K.
Albright, Secretary of State. Copies will also be made available to others
upon request.

If you or your staff have any questions about this report, please contact me
on (202) 512- 4128. Other GAO contacts and staff acknowledgments are listed
in appendix V.

Sincerely yours, Susan S. Westin, Associate Director International Relations
and Trade Issues

Appendi Appendi xes xI

Scope and Methodology We obtained information on the fiscal year 1999 U. S.
food aid program to Russia from U. S. government officials at the
Departments of Agriculture, State, Transportation, and Treasury, as well as
officials from the Agency for International Development, the National
Security Council, and the Office of Management and Budget. In addition, we
met with officials of a private U. S. government contractor responsible for
the development and implementation of a food aid commodity distribution
reporting and tracking system. We also gathered information from Russian
government officials, including representatives of the Agriculture, Finance,
Trade, and Internal Affairs ministries, the Pension Fund, and the Russian
Chamber of Accounts. We interviewed officials of the European Union, the
World Bank, and U. S. and Russian trade associations, and we met with
representatives of the five private voluntary organizations engaged in
humanitarian food aid distribution in Russia. We also interviewed Russian
officials representing processing plants, social organizations, and seed
research institutions. We conducted our review in Washington, D. C., and in
the Russian cities of Moscow, St. Petersburg, and Voronezh.

Our review addressed the general internal controls governing the
distribution of all the food aid commodities distributed under the
government- to- government fiscal year 1999 programs. As the basis for
evaluating the program's internal controls, we used the standards for
internal control in the federal government. We did not examine internal
controls designed for tracking the distribution of meat because we did not
receive the distribution reports for these commodities. We did not examine
the internal controls governing the distribution of food aid in Russia
managed by private voluntary organizations. Nor did we review the efforts
made by the Russian government to monitor the distribution of U. S. food aid
because the Foreign Agricultural Service (not the Russian government) has
primary responsibility to safeguard the use of U. S. assets and provide
reasonable assurance that the food aid reached intended recipients. However,
despite these limitations and others as noted in the following paragraphs,
we were able to perform sufficient audit work based on information and data
gathered to evaluate the implementation of the program's internal controls.

To examine the adequacy of internal controls to ensure that food aid
commodities were properly distributed to the regions and its recipients
according to distribution plans, we reviewed the bilateral food aid
agreements, work plans on tonnage and distribution to regional recipients,
commodity purchase information, and minutes of the Bilateral Working Group.
We also examined and tested available Shipment, Arrival,

Distribution, and Status of Funds reports, databases based on these reports,
Shipment Status reports, and the Master Travel Matrix spreadsheet as of
December 6, 1999, during our visit to Russia. We obtained the Food Aid to
Russia Monitoring System database electronically as of May 31, June 15, and
June 30, 2000, and performed an analysis of information and various reports
for accuracy and completeness. However, we did not perform detailed tests of
this database and its supporting data located in Moscow. We attended the
December 1 and December 9, 1999, meetings of the Bilateral Working Group to
observe its activities and met with the U. S. Ambassador to Russia. We
reviewed 237 site visit reports prepared by U. S. monitors for visits made
between April 1999 and May 2000. We did not examine the documents collected
during these U. S. monitoring visits (they were prepared mainly in Russian)
and compare them with information contained in the site visit reports. We
interviewed Foreign Agricultural Service officials, staff, and monitors in
Moscow and Washington, D. C., and officials from the agency's database
contractor. We met with the Deputy Prime Minister of Agriculture of the
Government of the Russian Federation and interviewed senior Russian
officials from the Ministries of Agriculture, Finance, Trade, and Internal
Affairs and from the Russian Chamber of Accounts. We also interviewed senior
officials of the two Russian distribution agents who were responsible for
the movement of food aid commodities within Russia from the port of
discharge to the regional recipients.

Our assessment of the financial status of the Special Accounts and transfers
to the Russian Pension Fund and six agricultural projects was based on
Russian government reports. We did not conduct an independent audit of the
Russian government financial reports. To examine the adequacy of procedures
for monitoring the collection and deposits of funds derived from the sale of
food aid commodities, we interviewed senior officials of the Russian
Ministry of Finance, the Russian Pension Fund, and two agricultural projects
and the rural credit agency that received funds from the sale of U. S. food
aid. We reviewed an audit report prepared by the Russian Chamber of Accounts
on the 1999 food aid program. We also reviewed reports on amounts due, paid,
and delinquent from regional recipients, and disbursements to the Special
Accounts, and amounts received by the Russian Pension Fund. We reviewed a
Food Aid to Russia Monitoring System database status report on commodity
shipments and payments due and paid as of June 30, 2000, and a report on the
current value of fiscal year 1999 food aid shipments to Russia. However, we
did not perform detailed tests of the database and its supporting data
located in Moscow.

To examine the process for determining the price to sell U. S. food aid
commodities in Russia and the extent that the procedures were followed, we
reviewed documents that described the price determination methodology and
interviewed senior officials of the Foreign Agricultural Service and Russian
Federation who participated in the food aid agreement negotiation process
and established the price determination methodology. We interviewed Russian
and U. S. participants of the Bilateral Working Group meetings and reviewed
the minutes of these meetings to document the procedures followed to
establish prices for commodities. We also used these interviews and
documentation to investigate how disagreements over prices were resolved. To
assess the adequacy of documentation supporting pricing decisions, we
selected seven commodity shipments (including planting seed) for different
products that were distributed at different times. These shipments
represented 20 percent of total tonnage and the proceeds generated from the
sale of these seven commodity shipments represent 35 percent of total funds
expected to be deposited in the Special Accounts. To facilitate our effort,
we requested that the Foreign Agricultural Service provide us with the
information used to make price suggestions and decisions. We also
interviewed and obtained pricing related information from officials of the
World Bank and the European Union as well as from U. S. and Russian trade
associations in Moscow and Washington, D. C.

We conducted our review from October 1999 through August 2000 in accordance
with generally accepted government auditing standards.

Background on Fiscal Year 1999 U. S. Food Aid

Appendi xII

Program to Russia The fiscal year 1999 U. S. food assistance package to
Russia consisted of a combination of food aid provided on a government- to-
government basis and food aid provided through private voluntary agencies in
Russia. Commodities and funding for the food assistance package to Russia
were provided under three U. S. food aid programs:

1. Public Law 480, title I, provides U. S. financing for sales of U. S.
agricultural commodities available through long- term credit at low interest
rates.

2. Section 416( b) of the Agricultural Act of 1949, as amended, provides
humanitarian assistance overseas by donating surplus commodities owned by
the Department of Agriculture's Commodity Credit Corporation.

3. Food For Progress Act of 1985, as amended, provides agricultural
commodities on credit terms or on a donation basis to countries that are
emerging market- oriented economies and have made commitments to introduce
or expand free enterprise elements into their agricultural economies.

The Department of Agriculture's Foreign Agricultural Service administered
and negotiated agreements under these programs. 1 Under the title I
agreement, signed in December 1998 and later amended, the United States
provided about 1. 8 million metric tons of various commodities that were
sold to the Russian government on concessional loan terms. The section 416(
b) program agreement, also signed in December 1998 and amended in March
1999, provided 1.7 million metric tons of wheat to the Russian government on
a donation basis. A Food For Progress agreement was added in February 1999
that shifted 80, 000 metric tons of two commodities (non- fat dry milk and
pork) from the Public Law 480 title I sales program to the donation program
and also donated 15,000 metric tons of seeds.

All of the commodities were to be sold to raise funds for the Russian
Pension Fund and six designated agricultural projects, except for 411,400
metric tons of wheat, which were to be donated to Russian social

1 Consistent with U. S. food aid law provisions, actions taken under the
agreements must avoid disrupting international markets, hindering the
development of agricultural markets inside Russia, or reducing incentives
for Russian farmers. Food aid agreements must also be consistent with U. S.
policy promoting sustainable economic and agricultural development and
privatization of agriculture.

institutions to feed the most needy. In addition, the Foreign Agricultural
Service selected five private voluntary organizations to distribute about
97, 000 tons of various donated ready- to- eat commodities throughout Russia
under the Food For Progress and section 416( b) programs. A summary of the
tonnage, U. S. cost, and value of the proceeds expected to be generated by
the sale of commodities distributed under these programs is presented in
table 2.

Table 2: Statistics on Fiscal Year 1999 U. S. Food Aid to Russia by Program
and Commodity

Dollars in millions

U. S. cost Tonnage being

Russian sale Program/ commodity distributed (000) Commodity Freight a Total
a proceeds

Government- to- government:

Public Law 480, title I sales: Corn 1,009.5 $96.4 $54.6 $151.0 $50. 7 d
Soybean meal 422.6 71.6 24.3 95.9 48.5 Soybeans 191.9 35.3 14.1 49.4 17.2
Beef 44.1 83.7 9. 4 93. 1 39. 3 Rice 100.6 32.5 12.2 44.7 22.6 Poultry 74.0
39.5 17.3 56.8 47.9

Subtotal 1,842.7 $359.0 $131.9 $490.9 $226.1

Section 416( b) donation: Wheat (for sale) 1,281.2 $157.7 $88.4 $246.1 $63.
8 Wheat (for social institutions) 411.4 50.6 28.4 79.0 0

Subtotal 1,692.6 $208.3 $116.8 $325.1 $63. 8

Food For Progress donation: Nonfat dry milk 29.9 $68.3 $5.2 $73. 5 $19.7
Pork 49.2 88.5 19.5 108. 0 43. 6 Seeds 15.0 17.9 3. 8 21. 7 2.3

Subtotal 94.1 $174.7 $28.5 $203.2 $65. 6 Total 3, 629.4 $742.0 $277.2 $1,
019.2 $355.5 Private voluntary organizations (PVOs):

Food For Progress donation b : Rice 14.3 $5.5 $3.2 $8.7 $0 Salmon 3.0 6. 9
1.2 8. 1 0 Lentils and peas 15.5 6. 7 4.3 11.0 0 Navy beans 3.0 1. 6 0.8 2.
4 0 Soybeans 8.0 1. 5 0.5 2. 0 0 Vegetable oil 17.5 12.4 4. 3 16. 7 0

Subtotal 61.3 $34.7 $14.1 $48. 8 $0. 0

(Continued From Previous Page) Dollars in millions

U. S. cost Tonnage being

Russian sale Program/ commodity distributed (000) Commodity Freight a Total
a proceeds

Section 416( b) donation c : Wheat flour 27.0 $5.3 $7.7 $13. 0 $0 Nonfat dry
milk 8.5 20.3 2. 7 23. 0 0

Subtotal 35.5 $25.6 $10.4 $36. 0 0 Total 96.8 $60.3 $24.5 $84. 8 $0

Administrative cost d $2. 5

Program totals 3,726.2 $802.2 $301.8 $1, 106.5 $355.5

Note: Totals may not add due to rounding. a Includes ocean freight
differential totaling $122. 1 million for shipments made under cargo
preference

requirements of the Merchant Marine Act of 1936, as amended, and the Food
Security Act of 1985, as amended. This cost, borne by the United States for
all food aid programs. b Participating agencies are Feed the Children;
American Red Cross; Project Aid Siberia, International

Orthodox Christian Charities; and Global Jewish Assistance and Relief
Network. c Includes the same participating agencies as listed above except
for Feed the Children.

d Estimated. Source: GAO- generated based on Foreign Agricultural Service
data.

Most of the commodities arrived in Russia during mid- 1999, with the seeds
arriving first in March- April 1999, followed by the bulk grains during the
summer and early fall months and subsequently by the meats during the late
fall and winter months into early 2000. Corn that was substituted for
earlier planned beef purchases arrived in late spring 2000. Figure 4 depicts
the monthly arrival of U. S. food aid commodities in Russia by tonnage until
May 2000.

Figure 4: Arrival of U. S. Food Aid Commodities in Russia Under the Fiscal
Year 1999 Program

Metric tons 700

600 500 400 300 200 100

0 1999

1999 1999

1999 1999

1999 1999

1999 1999

1999 2000

2000 2000

2000 2000

March April May June July August September October November December January
February March April May Source: Foreign Agricultural Service.

Key Internal Controls for Monitoring the Distribution of U. S. Food Aid
Commodities in

Appendi xI II

Russia Internal controls help to ensure that program operations are
conducted effectively and efficiently. They also have a vital role in
safeguarding assets and preventing and detecting errors and fraud. In table
3, we describe the internal controls for the fiscal year 1999 Russian food
aid program. They are set out in the bilateral agreements as well as in
procedures issued by the Foreign Agricultural Service specifically for this
program.

Table 3: Key Internal Controls for the Bilateral U. S. Food Aid Program to
Russia Key internal control Purpose Procedures

Bilateral Working To provide the U. S. and

The Bilateral Working Group was to meet weekly in Moscow to deal with issues
Group Russian governments with a

concerning the purchase, shipment, and distribution of commodities. U. S.
officials forum to discuss operational

were to take minutes of the meetings, which were translated into Russian and
and logistical issues and

became the record for decisions and outstanding issues. The Foreign
Agricultural resolve problems.

Service was to review the minutes to ensure that all issues are resolved.
Members included the U. S. Minister Counselor for Agricultural Affairs; U.
S. embassy officials and monitors; and Russian officials from the Ministries
of Agriculture, Finance, Trade, Customs, and Internal Affairs; Russian
internal security agencies; and the Russian Pension Fund and distribution
agents.

Commodity To create a system of

Initial distribution plans were to set out the commodities and quantities
intended for distribution plans accountability that tracks by

each region over the course of the program and are to be attached to the
food aid region the types and tonnage

agreements. Prior to purchase and shipment of the commodities from the
United of commodities to be

States, the Russian government was to submit to the U. S. Minister Counselor
for delivered so that any

Agricultural Affairs, for his approval, detailed commodity distribution
plans (work discrepancies can be traced

plans) within each region. The U. S. Minister Counselor was to approve any
changes, to a particular step or agent.

based upon the request by the Bilateral Working Group. Shipment, Arrival,

To collect distribution data by For each vessel shipment, the Foreign
Agricultural Service was to provide the

Distribution, and vessel on the type and

Russian Ministry of Agriculture with an initial version of a Shipment,
Arrival, Status of Funds

quantity of commodities Distribution, and Status of Funds report that
includes a vessel control number and

reports loaded and discharged, their

information on the types and quantities of commodities on board, although no
time condition at arrival, and their

limits were specified. Prior to the vessel's arrival, Russian distribution
agents were to final destination.

prepare a vessel spreadsheet indicating the intended regional recipients and
their expected quantities based on the commodity distribution plan. Within 2
days of the vessel's discharge at the Russian port of entry, the Russian
government was to update the initial shipment report with information on the
types, quantities, and condition of commodities received. Finally, within 14
days after the vessel's discharge, the Russian government was to further
update the report with information on the recipients of the vessel's
commodities. These updates were to be provided to the U. S. Minister
Counselor as the definitive Russian accounting for the distribution of
commodities by destination, type, and quantity.

(Continued From Previous Page) Commodity

To establish a management Information from reports such as the Shipment,
Arrival, Distribution, and Status of

tracking systems information system and audit Funds report, their updates,
and the vessel spreadsheets were initially compiled into

trail that tracks details of a single spreadsheet called the Master Travel
Matrix. This matrix became the primary

commodity distribution document used to track commodities through the
various phases of distribution and to

through all stages of the plan travel to the regions by the U. S. monitors.
In May 2000, the Foreign Agricultural

delivery process and Service brought online a new database (the Food Aid to
Russia Monitoring System),

quantities monitored. which expanded the reporting capacity that was
previously available under the initial

Master Travel Matrix. U. S. monitoring

To verify deliveries of U. S. monitors were to travel to ports, storage
facilities, processors, and social

visits to Russian commodities at Russian

institutions in the regions to ascertain whether the site had received the
expected regions

ports and regional sites, quantities and types of commodities and whether
the price paid was the same as that

investigate allegations of agreed to by the Bilateral Working Group. Upon
arrival at the site, the monitors were

fraud or mishandling of the to inquire whether all the expected commodities
had arrived, review documents

commodities, and visit with provided by the recipients and, whenever
possible, copy these documents. Upon

press and local officials to completion of the site visit, the monitors were
to record their findings in a Compliance

promote the program. Review Report. Issues identified by the monitors were
to be brought to the U. S.

Minister Counselor for Agricultural Affairs. Additionally, any suspicious
circumstances discovered during a site visit were to be immediately brought
to the attention of the Ministry of Internal Affairs.

Source: GAO- generated based on Foreign Agricultural Service data.

Comments From the Foreign Agricultural

Appendi xI V

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

See comment 1.

See comment 2. See comment 1.

See comment 3. See comments 3 and 4.

See comments 3 and 4. See comments 3 and 4. See comment 5.

See comment 6.

See comment 7. See comment 8.

Now on p. 25.

See comment 9. See comment 10.

Now on p. 19.

See comment 11.

See comment 12.

See comment 13. See comment 14.

See comment 15.

The following are GAO's comments on the letter from the Foreign Agricultural
Service, dated September 26, 2000.

GAO Comments 1. The Foreign Agricultural Service disputes our principal
conclusion that it cannot provide reasonable assurance that the food aid was
delivered

in agreed upon amounts to the intended regions and that the Russian Pension
Fund will continue to receive timely deposits that equal the full value of
the food aid sold in Russian markets because of weaknesses in the agency's
implementation of its internal controls. These controls were designed to
direct, track, and verify how the food aid was delivered at the regional
level. Agency officials stated that the bottom- line objectives for the
program- delivery of commodities to the regions of Russia as planned and
achieving the targeted goal for payments to the Russian Pension Fund- were
achieved since no substantiated reports of fraud or diversion of commodities
or funds have been made. While we agree that conducting a food aid program
in Russia was a difficult challenge, we continue to believe that
implementation of appropriate internal controls is very important to
preventing and detecting fraud and abuse. Without adequate controls and
documentation of key decisions, the agency cannot provide reasonable
assurance that its objectives are being met.

2. As described in the Scope and Methodology section of our report, we
focused our review on the Foreign Agricultural Service's implementation of
internal controls it designed to manage the government- to- government
fiscal year 1999 food aid program to Russia. Internal controls are a
governmentwide requirement intended to serve as the first line of defense in
safeguarding assets, preventing and detecting errors and fraud, and
providing reasonable assurance that an organization's objectives are being
met. As we noted in our Scope and Methodology section, we made no assessment
of the Russian government's effort to implement and monitor the food aid
program because the Foreign Agricultural Service (not the Russian
government) has primary responsibility to safeguard the use of U. S. assets
and provide reasonable assurance that the food aid reached intended
recipients.

3. Commodity distribution plans were one of the key internal controls
established by the Foreign Agricultural Service to track the progress of U.
S. food aid deliveries to regional recipients in Russia. As our report
states, this internal control allowed for the revision of commodity

distribution plans, recognizing the need to respond to changing conditions
such as sudden regional food shortages. According to the internal controls,
changes in planned commodity distribution were supposed to be documented in
revised distribution plans and submitted by the Bilateral Working Group to
the U. S. Minister Counselor for approval. Except for an update on free
wheat distribution, our review found no revisions to plans or record of U.
S. approval. Rather than implement its internal controls and complete the
process of updating and approving changes in commodity distribution plans,
the Foreign Agricultural Service accepted the Russian government's record of
actual deliveries as commodity distribution plans. It is by this acceptance
that the Foreign Agricultural Service can state with full assurance that
commodities were delivered according to plan. However, we found that less
than one- quarter of the targeted regions received a tonnage amount that was
equivalent or near their planned distributions. Because the Foreign
Agricultural Service did not document revisions and approval for changes to
the commodity distribution plans, it cannot demonstrate that changes in the
distribution plans were planned and approved or whether they were the result
of unintended re- routings.

4. As we stated in our report, the U. S. monitors made numerous site visits,
often without reliable data on the amount and types of commodities that they
were expected to find. If monitors found differences between expected and
actual amounts, they were not in a position to know if it was due to changes
in plans or possible diversion. According to the agency's comments, its
response to these discrepancies was to modify the database using documents
collected by U. S. monitors rather than reconcile the differences identified
in the monitor's site visit report. We believe that the procedure of
modifying the database rather than reconciling the differences means that
the Foreign Agricultural Service does not have an adequate basis for its
claim of “absolute assurance” that it has accurately tracked the
food aid distribution.

5. During the time period that free wheat was being delivered to regional
recipients, the database only captured information on total wheat delivered
(and did not distinguish between wheat to be sold to processors or
distributed free to social institutions). The new database, operational in
May 2000, incorporated historical information provided by the Russians on
the distribution of free wheat. However, the database still is incapable of
tracking the distribution of free wheat on a real- time basis because
Foreign Agricultural Service's key logistical

report that tracks the distribution of commodities from point of discharge
to final delivery does not distinguish between commodities that are to be
sold versus commodities that will be given to social institutions. Our
analysis of 115 monitoring reports covering the delivery of wheat did not
indicate that free wheat was a factor in selecting site visits. We found
only 10 instances where the reports mention that free wheat was delivered to
the mills that the monitor had visited and we could find evidence of
monitoring visits to only 10 social institutions receiving free wheat.

6. While we found that the Foreign Agricultural Service did post useful
program information on its web site, it was by no means complete or always
current. For example, we found that only two- thirds of the commodity work
plans (showing recipient data) were ever presented on its web site; updates
of meat distribution plans were discontinued in December 1999 even though
much of the meat had still not arrived in Russia; and shipment status
reports were issued irregularly and did not cover meat commodities.

7. The agency's comments describe what transpires in preparation for a
planned site visit and illustrate the need for unannounced monitoring
visits. To overcome some of the described difficulties in arranging surprise
visits, the Foreign Agricultural Service could coordinate with Russian
government counterparts responsible for monitoring the food aid program. A
Foreign Agricultural Service contractor, in response to a request to assess
the agency's monitoring plan, stated in a draft report that “surprise,
unannounced visits, even if relatively few in number, would add
significantly to the deterrence value inherent in site visits and would
significantly increase the quality and effectiveness of this aspect of the
program.” The Foreign Agricultural Service deleted this conclusion
from the draft version of the contractor's report.

8. The Foreign Agricultural Service's comment that the SADS Status Report
tracked amounts due to the Special Account does not refute our finding that
the Foreign Agricultural Service did not systematically track payments with
amounts that were due until May 2000. The SADS Status Report tracked amounts
and dates due for individual shipments but did not produce a consolidated
report that provided managers with information to track the total amounts
due at any point in time. As stated in our report, officials from the
Foreign Agricultural Service told us that it prepared financial status
reports on an as needed basis. But until the new database became
operational, the limited documentation

that the agency provided us regarding payment information did not
demonstrate a history that payments regularly exceeded amounts due.
Therefore, we do not conclude, as the Foreign Agricultural Service states in
its comments, that there was little reason to systematically account for
total payments due prior to February 2000.

9. While we believe, as stated in our report, that the new database (FARMS)
represents significant improvements over the earlier database, it was
implemented too late to significantly enhance the Foreign Agricultural
Service's ability to track commodity shipments, deliveries, and payments
under the fiscal year 1999 program. In May 2000, when the new database
became operational, virtually all of the food aid tonnage shipped under this
program had been discharged in Russia.

10. This is the first time that the Foreign Agricultural Service has
informed us about an internal audit of its monitoring report documents and,
in its comments, the agency did not provide a date as to when this was
performed. We cannot comment on the audit's scope and methodology; however,
based on the Foreign Agricultural Service's description of its audit, there
does not appear to be any effort to reconcile the differences between
documents collected during the site visit with amounts reported as verified
by U. S. monitors in their individual monitoring reports.

11. We requested the Foreign Agricultural Service to provide us with
contemporaneous documentation used by the Bilateral Working Group to
establish prices and Foreign Agricultural Service documents that reflected
the Foreign Agricultural Service's analysis of proposed commodity prices.
The Foreign Agricultural Service did not provide us with the tables used for
making price decisions referred to in its comment on our draft report even
though they are precisely what we requested. Rather, the Foreign
Agricultural Service primarily referred us to monthly regional and national
price information for agricultural commodities published after the decisions
were made. We cannot know from the documentation provided what price
information was available and used when the Bilateral Working Group made
pricing decisions. Ex- post price documentation contributes little to show
how decisions were made or what analysis the Foreign Agricultural Service
undertook regarding proposed prices. This lack of documentation is not
surprising as the U. S. Minister Counselor told us that there was a
“paucity” of

documentation prepared by the Foreign Agricultural Service related to
establishing program prices.

12. Establishing prices was an important part of administering the food aid
program. If the price was set too high, the U. S. product would sell slowly,
storage costs would be incurred, and the U. S. food aid would not contribute
to controlling food price inflation in Russia. If prices were set too low,
domestic Russian producers would face reduced income due to the lower
prices, competing imports would be crowded out, and revenue to the Russian
Pension Fund would not be maximized. In addition, low prices would create
opportunities for windfall profits by the government- selected recipients of
the food aid. For example, if a mill buys U. S. food aid corn at prices
significantly below market prices, the buyer could realize windfall profits
when it sells the processed corn. Representatives of a Russian agricultural
association told us that the lack of price adjustment in the program created
such profit opportunities. According to the World Bank, incomes of
distribution agents and other intermediaries grew at the expense of Russian
government revenue. Because Russian government officials and distribution
agents determined the distribution of the food aid product, they also
controlled the distribution of potential windfall profit opportunities.
According to a U. S. trade association representative, the low prices made
the food aid distributor very powerful, even if the distributor was not
corrupt. Another association representative explained that government
control of distribution with low prices created opportunities for
corruption.

13. The issue under review is not simply whether the Foreign Agricultural
Service had adequate documentation (it did not), but whether it can
demonstrate the reasonableness of its decisions. While our report does not
contain an evaluation of whether the program's prices had a negative impact
on commercial trade and domestic productions in Russia, we do report that U.
S. program prices were substantially below Russian wholesale prices for the
cases we could review. We report that the U. S. program price for food aid
rice was about half of the average domestic prices at the time it was set.
Similarly, the prices of U. S. food aid corn and wheat were set at about 60
percent of Russian wholesale prices. These price differences raise questions
about the level of proceeds that could have been generated by the food aid
program for the Russian Pension Fund. For example, the three shipments of
these commodities we examined generated sales of $36 million. If, for
example, sales had taken place at prices 20 percent higher, the sales

would have generated $7. 2 million more for the Russian Pension Fund. A U.
S. trade association pointed out that low prices for food aid resulted in
the Russian Pension Fund receiving less money than it should have. While we
are not in a position to know whether sales at higher prices were desirable
or feasible, the Foreign Agricultural Service provided no documentation or
analysis that demonstrated that they considered these issues.

14. During our trip to Moscow in December 1999, we requested and received
copies of the final commodity distribution plans for all commodities. The
distribution plan we were given for U. S. beef did not reflect the reduced
amount of U. S. beef purchased by Russia under the food aid program from
120,000 metric tons to less than 50,000 metric tons. As recently as June
2000, we have requested an updated distribution plan for U. S. beef and have
been told by agency officials that the original distribution plan
represented the final plan.

15. The term “reasonable assurance” that we used throughout our
report is a fundamental concept found in Standards for Internal Control in
the Federal Government. This concept recognizes that internal controls, once
in place, provide reasonable, not absolute, assurance of meeting agency
objectives. This term is also part of the Office of Management and Budget
Circular No. A- 123 guidance regarding management accountability and control
of federal government program and operations. This circular applies to the
Department of Agriculture and the Foreign Agricultural Service.

Appendi xV

GAO Contacts and Staff Acknowledgments GAO Contacts Phillip Thomas (202)
512- 9892 Christine Broderick (415) 904- 2240 Acknowledgments In addition to
those named above, Rolf Nilsson, Roger Stoltz, Emil Friberg,

Samantha Roberts, Mark Dowling, and Richard Boudreau made key contributions
to this report.

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GAO United States General Accounting Office

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Appendix I

Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix II

Appendix II Background on Fiscal Year 1999 U. S. Food Aid Program to Russia

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Appendix II Background on Fiscal Year 1999 U. S. Food Aid Program to Russia

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Appendix II Background on Fiscal Year 1999 U. S. Food Aid Program to Russia

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Appendix II Background on Fiscal Year 1999 U. S. Food Aid Program to Russia

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Appendix III

Appendix III Key Internal Controls for Monitoring the Distribution of U. S.
Food Aid Commodities in Russia

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Appendix IV

Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix IV Comments From the Foreign Agricultural Service

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Appendix V

United States General Accounting Office Washington, D. C. 20548- 0001

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