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95–026 PDF 2004

S. HRG. 108–546

A REVIEW OF THE UNITED NATIONS

OIL-FOR-FOOD PROGRAM

HEARING

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

APRIL 7, 2004

Printed for the use of the Committee on Foreign Relations

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

COMMITTEE ON FOREIGN RELATIONS

RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska

LINCOLN CHAFEE, Rhode Island

GEORGE ALLEN, Virginia

SAM BROWNBACK, Kansas

MICHAEL B. ENZI, Wyoming

GEORGE V. VOINOVICH, Ohio

LAMAR ALEXANDER, Tennessee

NORM COLEMAN, Minnesota

JOHN E. SUNUNU, New Hampshire

JOSEPH R. BIDEN, JR., Delaware

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

RUSSELL D. FEINGOLD, Wisconsin

BARBARA BOXER, California

BILL NELSON, Florida

JOHN D. ROCKEFELLER IV, West Virginia

JON S. CORZINE, New Jersey

KENNETH A. MYERS, JR., Staff Director

ANTONY J. BLINKEN, Democratic Staff Director

(II)

(III)

CONTENTS

Page

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening statement ... 4

Christoff, Mr. Joseph A., Director, International Affairs and Trade, U.S. General Accounting Office, Washington, DC ............................................................ 47

Prepared statement .......................................................................................... 48

Dodd, Hon. Christopher J., U.S. Senator from Connecticut, prepared statement ...................................................................................................................... 31

Lugar, Hon. Richard G., U.S. Senator from Indiana, opening statement ........... 1

Negroponte, Amb. John D., U.S. Permanent Representative to the United

Nations, U.S. Mission to the United Nations; accompanied by: Amb. Patrick

F. Kennedy, U.S. Representative for United Nations Management and Reform, U.S. Mission to the United Nations, New York, NY ............................... 7

Prepared statement of Ambassador Negroponte ........................................... 9

Excerpts from OIOS annual reports providing instances in which findings

from OIOS investigations were referred to national law enforcement

authorities for further investigation and possible prosecutions ................ 38

Raphel, Hon. Robin L., Coordinator, Office of Iraq Reconstruction; accompanied by: Hon. Kim R. Holmes, Assistant Secretary of State for International Organizations, U.S. Department of State, Washington, DC ............. 14

Prepared statement of Ambassador Raphel ................................................... 16

Thibault, Mr. Michael J., Deputy Director, Defense Contract Audit Agency,

U.S. Department of Defense, Washington, DC .................................................. 60

Prepared statement .......................................................................................... 62

APPENDIX

Feingold, Hon. Russell D., U.S. Senator from Wisconsin, statement submitted

for the record ........................................................................................................ 71

Bremer, Amb. L. Paul III, Administrator, Coalition Provisional Authority

(CPA), statement submitted for the record ........................................................ 71

United Nations Children’s Fund (UNICEF), statement submitted for the

record .................................................................................................................... 72

World Health Organization (WHO), statement submitted for the record, ‘‘The

Situation of Health Supplies for Iraq Under the OFFP, 1996-2002’’ ............... 73

Cotecna Inspection S.A., letter to Senators Lugar and Biden submitting two

documents for the record: ‘‘Guide to authentication procedures’’ followed

in Iraq, along with a ‘‘Statement from Cotecna Inspection S.A.’’ ..................... 76

Levitte, Hon. Jean-David, French Ambassador to the United States, op-ed

article from the Los Angeles Times, April 7, 2004 ............................................ 81

Responses of Amb. John D. Negroponte to additional questions for the record

submitted by:

Senator Richard G. Lugar ................................................................................ 82

Senator Joseph R. Biden, Jr. ........................................................................... 86

Senator Christopher J. Dodd ........................................................................... 86

Senator John E. Sununu .................................................................................. 93

Responses of Amb. Patrick F. Kennedy to additional questions for the record

submitted by Senator Richard G. Lugar ............................................................ 93

Responses of Hon. Robin L. Raphel to additional questions for the record

submitted by:

Senator Richard G. Lugar ................................................................................ 98

Senator Joseph R. Biden, Jr. ........................................................................... 99

Senator Chuck Hagel ....................................................................................... 100

Responses of Hon. Kim R. Holmes to additional questions for the record

submitted by Senator Richard G. Lugar ............................................................ 102

Page

IV

Responses of Joseph A. Christoff to additional questions for the record submitted by Senator Richard G. Lugar .................................................................. 103

Response of Michael J. Thibault to an additional question for the record

submitted by Senator Richard G. Lugar ............................................................ 104

Saybolt Eastern Hemisphere B.V., responses of Peter Boks, general counsel,

to additional questions for the record submitted by Senator Lugar ................ 104

Saybolt’s contract with the United Nations and related documents ............ 107

‘‘Report on the Pricing Evaluation of Contracts Awarded Under the Iraq

Oil-for-Food Program,’’ submitted by the Joint Defense Contract Audit

Agency and Defense Contract Management Agency OFF Pricing Evaluation

Team ...................................................................................................................... 157

(1)

A REVIEW OF THE UNITED NATIONS

OIL-FOR-FOOD PROGRAM

WEDNESDAY, APRIL 7, 2004

U.S. SENATE, COMMITTEE ON FOREIGN RELATIONS, Washington, DC.

The committee met, pursuant to notice, at 9:30 a.m. in room SD– 419, Dirksen Senate Office Building, Hon. Richard G. Lugar (chairman of the committee), presiding.

Present: Senators Lugar, Hagel, Chafee, Allen, Coleman,

Sununu, Biden, and Dodd.

OPENING STATEMENT OF SENATOR RICHARD G. LUGAR, CHAIRMAN

The CHAIRMAN. This hearing of the Senate Foreign Relations

Committee is called to order. The Senate Foreign Relations Committee meets today to examine the United Nations Oil-for-Food

Program. Although the precise extent of the corruption and mismanagement in this program is not yet known, there is no doubt

that billions of dollars that should have been spent on humanitarian needs in Iraq were siphoned off by Saddam Hussein’s regime

through a system of surcharges, bribes and kickbacks. This corruption was not solely a product of Saddam Hussein’s machinations.

He required members of the United Nations Security Council, who

were willing to be complicit in his activities, and he required

United Nations officials and contractors who were dishonest, inattentive or were willing to make damaging compromises in pursuit

of a compassionate mission. Now, the costs of this corruption were

multifaceted, and they may continue to be felt for years.

First, although the Oil-for-Food Program delivered food, medicine

and other essentials to millions of people, countless Iraqis may

have died or suffered because billions of dollars were diverted from

the humanitarian effort.

Second, Saddam Hussein used the proceeds of the corruption to

prop up his regime and his army. The coalition forces that invaded

Iraq faced a better equipped Iraqi military than they otherwise

would have faced had the corruption not occurred. According to the

new head of the Iraq Survey Group, Charles Duelfer, these funds

were the, ‘‘primary source,’’ for Saddam’s efforts to procure military

goods and expertise. A portion of these illicit funds may still be accessible to Saddam loyalists who are financing terrorism against

coalition forces and Iraqi citizens.

Third, the corruption in the Oil-for-Food Program almost certainly contributed to the international division over containing and

ultimately ousting Saddam Hussein. By exacerbating the humaniVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1
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tarian problem in Iraq, the corruption weakened the international

consensus for containment. Even more disturbing is the prospect

that governments or individual officials may have opposed the coalition’s decision to use military force against Saddam Hussein in

part because an overthrow of the regime would expose ongoing corruption in the Oil-for-Food Program. Even if we assume that such

calculations were not a part of any government’s deliberative process, we must acknowledge that corruption on this scale carries with

it the potential to skew international decisionmaking.

Finally, the damage to U.N. credibility from corruption in the

Oil-for-Food Program is harmful to United States foreign policy

and to efforts aimed at coordinating a stronger global response to

terrorism. Whatever influence and capabilities that the United Nations possesses come from the credibility associated with countries

acting together in a well-established forum with well-established

rules. Profiteering, mismanagement and bureaucratic stonewalling

squander this precious resource. At a time when the United States

is appealing for greater international help in Iraq, Afghanistan,

and in trouble spots around the world, a diminishment of United

Nations credibility reduces United States’ options and increases

our own burdens. If the United Nations cannot be trusted to run

a humanitarian program, its other activities, including peacekeeping, arms inspection regimes, or development projects, may be

called into question. The United Nations’ ability to organize burden

sharing and take over missions best handled by the international

community is critical to the long-term success of United States foreign policy. As such, the United States must insist on a full investigation of the Oil-for-Food Program and work with the United Nations to prevent corruption on future projects.

The United Nations initiated the Oil-for-Food Program for understandable reasons. The world community felt a humanitarian responsibility to prevent the deaths of innocent Iraqis, who, in essence, were being held hostage by the criminal intransigence of the

Iraqi regime. The United States embraced this program in the

1990s not only because of altruistic impulses, but also because,

without it, our policy of containing Iraq through sanctions may not

have been sustainable within the international community. To provide humanitarian relief, the Security Council voted to allow Iraq

to sell a portion of its domestically produced oil and use the receipts to buy food and medicine. The Security Council made the decision to have the receipts from oil sales deposited with the U.N.,

and have the U.N. oversee the Iraqi Government’s purchase of food

and medicine. The process was to be managed by the United Nations Iraq Sanctions Committee, known as the 661 Committee,

after the Security Council resolution that created it.

Few American or international officials went into this program

with the view that Saddam Hussein could be trusted. Any rational

observer should have admitted that the leader of a brutal regime

who had invaded his neighbors, used weapons of mass destruction,

undercut U.N. resolutions and routinely lied to the international

community would try to game the system. Yet, despite this reality,

the U.N.’s mechanisms for controlling Oil-for-Food contracts were

inadequate, transparency went by the wayside, and effective internal review of the program did not occur. The United Nations alVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1
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lowed Saddam to select not only the suppliers of food and medicine,

but also the buyers of Iraqi oil. Such an arrangement was a recipe

for disaster. The General Accounting Office estimated that Saddam

skimmed some $4.4 billion from transactions involving both sales

and purchases. The GAO also estimated that an additional $5.7 billion of oil was smuggled out of Iraq—separate from the oil sold

through the Oil-for-Food Program. Much of it apparently was

transferred through Syria and Turkey.

The American people, who have borne much of the burden in offering the people of Iraq a better future, need answers to some key

questions. First, why didn’t the U.N. committee set up to oversee

the Oil-for-Food Program discover such egregious irregularities?

Second, who were Iraq’s business partners, and to what degree did

they facilitate and profit from the corruption? Third, was there

complicity on the part of United Nations staff? Fourth, how much

did individual governments know? Fifth, did individual countries

actively aid Saddam, either because they disagreed with the sanctions policy, or because they saw money-making opportunities?

These charges must be fully investigated. Secretary General Kofi

Annan’s recent announcement that he will undertake a high-level

investigation is welcome, but the Secretary General and his staff

must understand that the credibility of this investigation will be

suspect without diligent efforts to ensure its independence and its

effectiveness. He must appoint individuals of the highest caliber,

internationally recognized for their ability and integrity. The U.N.’s

Office of Inspection and Oversight Services is conducting its own

investigation into the possible culpability of U.N. personnel. The

executive branch of the U.S. Government also should undertake its

own investigation.

We now have access to records in Iraq, and we have a long and

highly developed expertise in contract oversight. Today, the Foreign Relations Committee commences its contribution to the examination of the Oil-for-Food Program and we welcome Ambassador

John Negroponte, the United States’ Permanent Representative to

the United Nations. Joining him on our first panel are Ambassador

Patrick Kennedy, the U.S. Representative for U.N. Management

and Reform; Ambassador Robin Raphel, the Coordinator of the Department of State’s Office of Iraq Reconstruction, and Dr. Kim

Holmes, Assistant Secretary of State for International Organizations.

On our second panel, we will hear from Joseph Christoff, the Director of International Affairs and Trade at the General Accounting

Office, and Michael Thibault, the Deputy Director of the Defense

Contract Audit Agency. They will discuss in greater detail their examination of the process and the methodology by which Saddam

Hussein skimmed billions of dollars from the Oil-for-Food Program.

We thank, in advance, our witnesses for joining us. We look forward to their insights. But first of all, it’s my privilege to call upon

the distinguished ranking member, Senator Biden, for his opening

comments.

4

OPENING STATEMENT OF SENATOR JOSEPH R. BIDEN, JR.,

RANKING MEMBER

Senator BIDEN. Thank you, Mr. Chairman, and thank you for

holding this hearing. We welcome all of our distinguished witnesses

today. As you’ve indicated we’re going to hear testimony about the

Oil-for-Food Program in Iraq, one of the largest humanitarian programs ever managed by the United Nations, or any other institution for that matter.

The Oil-for-Food Program has generally been recognized as easing the suffering of the Iraqi people. For example, the daily caloric

intake of the average Iraqi citizen doubled between 1996 when the

program started and 2002. But there also are serious allegations

about mismanagement and corruption that must be addressed, not

simply to hold accountable those who are guilty of corruption but

to make sure that we get it right in the future because we’re going

to lose credibility, the institution will lose credibility and the ability

in the future to act is going to be, I think, seriously damaged.

To that end I welcome your and Secretary General Kofi Annan’s

call for an independent investigation into these allegations because

it’s critically important, as I indicated, for the integrity and efficiency of the United Nations that we get to the bottom of the story.

Without credibility it’s not going to get support. We need to know

to what extent the United Nations Secretariat and its employees

knew about Saddam’s manipulation of the Oil-for-Food Program,

whether they were complicitous and what role, if any, the United

Nations member states played in the process.

Just as important as learning who did what and when is ensuring that the lessons learned from the Oil-for-Food Program can be

applied to future humanitarian assistance programs and sanctions

regimes. Ambassador. So today’s agenda is important. But quite

frankly we can’t ignore the thousand-pound gorilla sitting in the

middle of this room today. The gorilla is, of course, the date of June

30, the deadline for returning sovereignty to Iraq. It gives us 85

days to finally get things right in Iraq and put on a course; that

is, one that increases the prospects for success, success defined as

having a participatory democracy in Iraq that is representative of

the Iraqi people that is able to maintain its own boundaries and

security and over time can do it without the help of the international community.

I’ve been saying for the last year that we have first-rate folks in

Baghdad in the Coalition Provisional Authority, and I believe that

to this day. But even the best folks can’t create order out of chaos

without a plan. Speaking for myself only, I still believe we don’t

have a plan for transferring authority to the Iraqi people, and if

we have one I don’t know what it is. I’m not informed of it; I don’t

know what the deal is and I don’t think I’m alone in that regard.

I doubt whether there’s any single Member of Congress who does.

We still don’t know how the caretaker Iraqi Government will be

chosen or what it will look like. We don’t know who will referee the

disputes that are sure to come along among the Shi’ite, Sunni and

Kurds. We still don’t know what role, if any, the United Nations

will play and whether or not NATO will play. We still don’t know

5

who the American ambassador will be in what is likely to be the

largest and most important American embassy in the world.

We know one thing, that between July 30 and January 31, when

general elections are to be held and a constitution is to be written,

there will be an incredible difficulty. Incredible difficulty. In short,

we still don’t know the answers to the most basic and critical questions we face in Iraq.

Why are these questions and their answers so important? Well,

I would suggest they are important because they go to the fundamental tension we face on June 30 between two contradictory

needs. On the one hand the Iraqis will desperately need a strong

international support to provide security, settle political disputes,

and economic health. Their own security forces and political leaders

will not be up to the task no matter how good they are. On the

other hand, the U.S. desperately needs to take an American face

off the occupation in Iraq, as the President has said. Otherwise

we’ll continue to bear 90 percent of the cost, take nearly 90 percent

of the non-Iraqi casualties and provide 90 percent of the force. And

we’ll remain responsible for everything that goes wrong in Iraq.

Now, how do we square this circle? I believe by seizing the one

last chance that we have to get the United Nations and NATO in

on the deal. A U.N. high commissioner would have more legitimacy

with Iraqis than a U.S. Ambassador to help them decide on a caretaker government, to referee disputes and oversee elections, to referee the disputes that are going to take place in the constitution,

as was the case with the loya jirga in Afghanistan, and the U.N.

would open the door to a more international participation by giving

political coverage of the leaders whose peoples oppose the war. I

have met with all of those leaders, I say to our Ambassador. They

have been very straightforward with me. They need a U.N. resolution to vote for the participation of NATO forces. You and I both

know that will be a relatively small number of forces but enough

according to the Supreme Allied Commander to take care of securing the borders, to take over responsibility in the north and or to

take over the responsibility for the Polish division in the south,

freeing up roughly 20,000 American soldiers that we could badly

use now, General Abizaid could badly use right now.

And the other piece of this is, we talked in this report, the Senator held hearings on the Hamre Commission. We talked about the

window of opportunity closing. Well, the window of opportunity for

the American people is closing. If we don’t get this right soon,

they’ll continue to look at this as if we’re alone in this deal. It’s an

exaggeration, but things appear to be out of hand, and in fact we

may very well lose their support which would be devastating, because we cannot afford to lose Iraq.

I would say to my friend from Nebraska, who is a decorated war

hero from Vietnam; you know what this reminds me of? Only one

similarity to Vietnam. The Tet Offensive. The Tet Offensive took

the mask off, said to the American people, my lord, we don’t have

control there, we don’t have control, we don’t have a plan. I think

it’s exaggerated but the marching that’s taking place, the uprisings

occurring in the triangle as well as that portion of the Shi’ite community, is communicating a similar fear to the American people.

6

That we’re alone, we’re the only ones in on the deal. And we don’t

have a plan.

This is salvageable. NATO cannot take on Iraq tomorrow but it

could quickly generate enough troops to patrol Iraq’s borders like

I said, train its military, take responsibility for the north and or

the Polish sector. And that would take a lot of pressure off our

forces.

We may be a day late and a dollar short in getting the U.N. and

NATO engaged, though. This administration, I think, has squandered so many opportunities, I think this is its one last opportunity. One last opportunity. And the worse the situation gets on

the ground the more reluctant others are going to become to get involved. I read with great interest former CENTCOM commander

General Zinni’s comments today in the Wall Street Journal, basically saying it may be too late. I think he’s wrong, that it’s not too

late. But let me tell you, I think it’s getting close. I still believe we

have a chance to broaden the coalition because many of our friends

and allies have as much at stake in Iraq’s success as we do. And

as much to fear from its failure as we do. I think we have to make

this one last effort to significantly broaden the responsibility.

In short, I believe we can still succeed and ensure a positive outcome on June 30. But to do so the administration needs to get serious now about answering these fundamental questions. And that’s

why I will raise them today, and when the Senator and I will be

having lunch with the Secretary.

So, let me conclude, Mr. Chairman, I realize that’s not the specific subject of our hearing today but I think it’s all so interrelated

here. And I respectfully suggest again to the President of the

United States, he should be either on a plane or on the telephone

with our major European allies saying we’ve got a lot to lose here,

folks, we’re in this together. What do you need to get in the deal?

What do you need? What is it? What is it politically? What political

input do you need? I’m open. Let’s solve this problem.

And that may be going on but if it is, it’s a surprise to me. It

would be a great pleasure to hear that but I don’t know why we’re

not being told if it is, and if it isn’t I don’t understand what’s going

on here. The President has to make a decision. It’s decision time.

What will July 1 look like in Iraq?

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Biden. Let me

just comment for a moment that clearly the hearings that we’ve

scheduled for April 20, 21 and 22, are an advance notice to the administration and to others. We encourage preparation so that the

committee and the general public will be informed. Those are important dates. I mention them now so that those of you who are

representing the administration today, and those of you from the

State Department who are backing you, may convey our concern

back to your colleagues. Senator Biden and I will directly address

Secretary Powell. We will emphasize that we really do need answers to very critical issues. We’re determined to get them. Absent

that, the two of us, supplemented by Senator Allen, Senator Hagel

and others, may write a potential plan and hold our own hearing.

That would be much less satisfying. We’ve been down this trail

once before, in terms of planning prior to hostilities. On that occaVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1
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sion, inexplicably, General Garner was unavailable; so were the

planners. We do not want a repetition of that experience. We have

a very serious issue ahead of us here today. We appreciate very

much your coming to address the U.N. Oil-for-Food Program.

As I understand, you wish to testify first, Ambassador

Negroponte. Then Ms. Raphel, you will testify. Your associates will

be available for questions, as I understand. I will ask you to proceed in the order we introduced you, first of all, Ambassador

Negroponte and then Ms. Raphel. Please take the time that you

need. Your full statements will be made a part of the record. You

need not ask for permission for that. It is granted. Please proceed

in your own way. Ambassador Negroponte.

STATEMENT OF AMB. JOHN D. NEGROPONTE, U.S. PERMANENT REPRESENTATIVE, U.S. MISSION TO THE UNITED NATIONS; ACCOMPANIED BY: AMB. PATRICK F. KENNEDY, U.S.

REPRESENTATIVE FOR UNITED NATIONS MANAGEMENT

AND REFORM, U.S. MISSION TO THE UNITED NATIONS

Mr. NEGROPONTE. Thank you very much, Mr. Chairman, Senator

Biden, distinguished members of the committee. I welcome the opportunity to appear before you today to discuss the U.N. Oil-forFood Program and recent allegations of possible mismanagement

and abuse involving that program. At the outset I want to make

perfectly clear that we share your concerns. We are committed to

ensuring that all allegations are investigated and addressed.

Following the recent specific allegations of corruption by U.N. officials, I was immediately instructed by Secretary Powell to convey

our concerns to United Nations Secretary General Annan. I have

discussed this on several occasions with the Secretary General who

has, on his own initiative, launched an investigation that will be

independent, transparent, and comprehensive. As you know, we

joined our fellow Security Council members on March 31 in welcoming this expanded investigation and pledging our full cooperation. We must not forget that, allegations aside, it is the Iraqi people who would have been most hurt by any wrongdoing. It is for

them most of all that we must take this responsibility very seriously and we will urge all United Nations member states to do the

same.

The Oil-for-Food Program, as you indicated, was created to alleviate the hardships faced by the Iraqi people, hardships caused

by Saddam Hussein’s regime’s refusal to comply with its obligations and the resulting comprehensive, multilateral sanctions regime imposed by the Security Council on Iraq following the invasion of Kuwait in August 1990. The Oil-for-Food Program allowed

for the import of humanitarian goods using the proceeds from authorized Iraqi oil sales while maintaining sanctions on imports

other than food and medicine. It represented the largest humanitarian relief operation ever launched by the international community. The United States supported the program’s general objective

of creating a system to address the humanitarian needs of the Iraqi

civilian population while maintaining strict sanctions enforcement

on items that Saddam Hussein could use to re-arm or reconstitute

his weapons of mass destruction program. We believe the system

the Council devised largely met those objectives. However, the

8

rules and procedures governing implementation of the program

were the product of negotiation among the 15 members of the Security Council and between the United Nations and the former Iraqi

regime. The United States was able to set basic parameters and

monitor the functioning of the program through our participation

in Security Council discussions and as a member of the Iraq Sanctions Committee, also known as the 661 Committee, named for the

Security Council resolution that created it. However, we were not

in a position to exercise exclusive control over the process as the

committee made decisions through consensus.

Although the flow of humanitarian and civilian goods to Iraq was

a matter of strong interest to the U.S. Government, an even greater goal throughout the period of sanctions was to ensure that no

items were imported which could in any way contribute to Iraq’s

weapons of mass destruction programs or capabilities. At the

United States Mission to the United Nations we concentrated our

efforts on this aspect of the sanctions. It is important to note that

no U.S. Government funds, including those that might have been

drawn from U.N. assessments, were involved in the establishment

and functioning of the program. With the exception of voluntary

funds provided by the United States for the U.N. guards contingency in Northern Iraq, whose task was to protect humanitarian

personnel working there, all expenses associated with management

of the program were drawn from Iraqi oil revenue that was deposited into a U.N. escrow account established in 1995 under Resolution 986.

Recent press reports allege that there was corruption and abuse

in the implementation of the program. These allegations fall into

four general categories. First, direct oil smuggling by the former

Iraqi regime; second, the manipulation of pricing on Iraqi oil exports; third, kickbacks on Oil-for-Food humanitarian contracts; and

last, possible abuse by United Nations personnel. At the heart of

these were the determined efforts by Saddam Hussein to obtain

funds illicitly and hide his sanctions-busting activities.

In the written statement that I have submitted for the record, I

have provided greater detail about what we know about the allegations in each category. Where we could identify abuse and fraud in

the implementation of the Oil-for-Food Program, we and the United

Kingdom endeavored to stop them, including through bilateral diplomacy and special briefings to the Security Council and the 661

Committee of the ways in which we observed the Saddam Hussein

regime diverting funds from the program, smuggling, and generally

violating Council resolutions. What we did not have before the fall

of Saddam’s regime was documentation and witnesses who were

willing to step forward to provide evidence of corruption. Documentation is now becoming available in the wake of the Saddam

Hussein regime’s demise. Witnesses are now coming forward who

may be able to shed more light on how Saddam and his supporters

evaded sanctions and on instances of corruption that may have existed in implementing the Oil-for-Food Program.

The independent, high-level inquiry initiated by the Secretary

General will shortly get underway. The terms of reference have

been written and provided to Security Council members. The inquiry will investigate allegations of fraud and corruption in the adVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1
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ministration and management of the Oil-for-Food Program, including those against United Nations personnel, contractors, and entities that entered into contracts with the U.N. or with Iraq under

the program. We and other Security Council members have welcomed the Secretary General’s initiative and called for international cooperation. Both the summary and final report on the

findings of this panel will be made public. We expect announcements soon on the membership of the inquiry panel and have

strongly urged the Secretary General to ensure that members are

of unimpeachable standing. We believe that this inquiry can serve

as an important vehicle in addressing various allegations.

Mr. Chairman, in Baghdad the CPA is also assisting the Iraqi

Board of Supreme Audit to launch an investigation into the allegations of corruption regarding the Oil-for-Food Program. Coalition

Provisional Authority administrator Ambassador Bremer has

issued a directive to the CPA and all Iraqi ministries in early

March, instructing all ministry officials to identify and secure relevant Oil-for-Food documents. Representatives of the Iraqi Board of

Supreme Audit have met with the CPA and Iraqi ministry officials

to ensure cooperation and transparency in this process. We hope

that the inquiries now being launched will identify those who conspired with the Hussein regime and perhaps assist in recouping

lost funds for the Iraqi people.

Mr. Chairman, again I thank you for the opportunity to provide

this information on the Oil-for-Food Program. You have my fullest

support and that of my staff in your efforts to determine the extent

and involvement of wrongdoing associated with the program.

Thank you very much.

[The prepared statement of Ambassador Negroponte follows:]

PREPARED STATEMENT OF AMB. JOHN D. NEGROPONTE

Mr. Chairman, distinguished members of the Committee,

I welcome and thank you for the opportunity to appear before you today to discuss

the UN Oil-for-Food (OFF) program and recent allegations of possible mismanagement and abuse with regard to the implementation of that program.

At the outset, I want to make perfectly clear that we appreciate and share your

concerns. We will do what we can to ensure that all such allegations are investigated and addressed, most importantly for the benefit of the Iraqi people. I can

assure you of Secretary Powell’s strong personal interest and concern regarding this

issue. In reaction to recent specific allegations of corruption by UN officials, I immediately was instructed by Secretary Powell to convey our concerns to UN SecretaryGeneral Annan. I have discussed this on several occasions with the Secretary-General, who has on his own initiative launched an investigation that will be independent, transparent and comprehensive. As you know, we joined our fellow Security Council members on March 31 in welcoming this expanded investigation and

pledging our full cooperation. We must not forget that, corporate and official allegations aside, it is the Iraqi people who would have been most hurt by any wrongdoing. It is for them most of all that we must take this responsibility very seriously,

and we will urge all UN member states to do the same so any and all wrongdoing

is uncovered and addressed.

Mr. Chairman, I think it may be helpful to you to have some background on the

Oil-for-Food program and the Iraq sanctions regime.

The United Nations’ Oil-for-Food (OFF) program was authorized by Security

Council Resolution 986 in April 1995 and became operational in December 1996.

The Security Council had imposed comprehensive multilateral sanctions on Iraq in

August 1990 (UNSCR 661) to convince Saddam Hussein to withdraw from Kuwait

without the use of force. Sanctions on Iraq continued after the Gulf War and were

thought by many in the international community to impose extreme hardship on the

Iraqi people. The Oil-for-Food program was created to alleviate those hardships. It

allowed the import of humanitarian goods using the proceeds from controlled Iraqi

10

oil sales while maintaining sanctions on imports other than food and medicine. The

objective was to continue constraining Saddam Hussein’s ability to use oil revenue

to build a military arsenal.

The Oil-for-Food program represented the largest humanitarian relief operation ever launched by the international community. Iraqi oil exports totaled $64.2 billion

over the life of the program. The proceeds funded $46 billion worth of humanitarian

contracts for Iraq, and $16 billion for the UN Compensation Commission (UNCC),

as well as administrative costs for the Office of the Iraq Program (OIP), the UN

Monitoring, Verification, and Inspection Commission (UNMOVIC), and the UN Special Commission (UNSCOM) totaling $2.65 billion. Of the $46 billion funding for humanitarian contracts, more than $31 billion in humanitarian supplies was delivered

to Iraq from March 1997 until November 21, 2003. An additional $8.2 billion in

prioritized supplies ordered under the program is scheduled to arrive in the coming

months. To date, $7.6 billion in surplus funds have been transferred from the UN

escrow account to the Development Fund for Iraq (DFI), monies that have been extremely useful in the implementation of various programs for the people of Iraq.

The United States Government supported the program’s general objective of creating a system to address the humanitarian needs of the Iraqi civilian population

while maintaining strict sanctions enforcement of items that Saddam Hussein could

use to re-arm or reconstitute his WMD program. We believe the system the Council

devised by and large met those objectives. However, the rules and procedures governing implementation of the program were the product of negotiation among the

fifteen members of the Security Council and between the UN and the former Iraqi

regime. The United States was able to set basic parameters and monitor the functioning of the program through our participation in Security Council discussions and

as a member of the Iraq Sanctions Committee, also known as the ‘‘661 Committee,’’ named for the Security Council resolution that created it. However, we were not in

a position to exercise exclusive control over the process. Although the flow of humanitarian and civilian goods to Iraq was a matter of strong interest to the U.S.

government, it should be emphasized that an even greater preoccupation throughout

the period of sanctions was to ensure that no items be permitted for import which

could in any way contribute to Iraq’s WMD programs or capabilities. Thus, at

USUN we concentrated our efforts on this aspect of the sanctions.

It is important to note that no U.S. Government funds, including those that might

have been drawn from UN assessments, were involved in the establishment and

functioning of the program. With the exception of voluntary funds provided by the

United States for the UN Guards Contingency in Northern Iraq (UNGCI), whose

task was to protect humanitarian personnel working there, all expenses associated

with management and implementation of the program were drawn from Iraqi oil

revenue that was deposited into a UN escrow account established under Resolution

986 (1995).

The sanctions regime and the OFF program constituted the most comprehensive

and intrusive regime ever imposed by the Security Council, short of a complete embargo. At the insistence of many other Security Council members, the program permitted the Government of Iraq to control the sale of oil and the selection and negotiation of contracts with suppliers of humanitarian items destined for Iraq. The

United Nations and its UN Office of the Iraq Program (OIP), which managed implementation of the program, were not a party to the contracts. The contracts were concluded exclusively between the Iraqi government and individual suppliers. These

Council members insisted that Iraq’s national sovereignty and territorial integrity,

and thus the right to execute contracts, be enshrined in the language of Resolution

986 (1995). The 661 Committee reviewed the contracts that had been concluded between the Iraqi government and contractors to ensure that no items could be used

for military purposes.

Much of what the U.S. Government could and could not achieve with regard to

monitoring the program and implementation of the sanctions was directly related

to the political situation surrounding the contentious issue of Iraq in the Security

Council and in the 661 Committee. U.S. efforts to keep the comprehensive sanctions

regime in place repeatedly were challenged by Council members who complained

about the humanitarian impact of sanctions on the Iraqi people, and whose national

firms would derive economic benefit from the lifting of sanctions. Indeed, starting

in the mid-’90s and continuing into 2001, these pressures to lift sanctions grew.

Recent press reports allege there was corruption and abuse in the implementation

of the program, allegations which fall into four general categories:

• direct oil smuggling by the former Iraqi regime;

• manipulation of pricing on Iraqi oil exports;

• kickbacks on OFF humanitarian contracts; and

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• possible abuse by UN personnel.

At the heart of this were the determined efforts by Saddam Hussein to obtain

funds illicitly and his repeated efforts to hide sanctions-busting activities.

Mr. Chairman, we know there was abuse and fraud in the implementation of the

OFF program. Where we could identify it, we and our UK partners stopped it. What

we did not have before the fall of Saddam’s regime was documentation and witnesses who were willing to step forward to provide evidence of corruption. Documentation is now becoming available in the wake of the Saddam Hussein regime’s demise, and witnesses are also now coming forward who may be able to shed light

more precisely on how the previous Government of Iraq and its supporters evaded

sanctions, and on instances of corruption that may have existed in implementing the

Oil-for-Food program.

The Secretary-General of the United Nations has initiated the process for conducting an independent high-level inquiry into the allegations of corruption and

abuse in the administration and management of the OFF program. This inquiry will

look into the allegations of fraud and corruption by UN personnel, contractors, and

entities that entered into contracts with the UN or with Iraq under the program.

Separately, the Iraqi Board of Supreme Audit, with assistance from the CPA, has

launched its own investigation in Baghdad into allegations of misconduct concerning

the OFF program. The United States will fully support these efforts.

OIL SMUGGLING

It was commonly understood that the Saddam regime engaged in multiple, complex efforts to evade the sanctions imposed by the Security Council. In fact, the Saddam Government orchestrated the largest share of non-compliance with the Council’s demands through outright oil smuggling and the procurement of unauthorized

goods completely outside the context of the OFF program.

While it is assumed that Saddam engaged in oil smuggling throughout the life

of the sanctions regime on Iraq, reports suggest that oil smuggling efforts intensified from 2000 onward, reaching a peak annual level of $2 billion in 2002, mostly

through the Persian Gulf and Syria. While it is not possible to confirm the General

Accounting Office’s March 2004 estimate of $5.7 billion in illegal oil smuggling revenue for the period 1997 through 2002, this figure appears realistic given the magnitude of the problem in 2002 alone. Saddam and his fellow ruling authorities then

used these funds to acquire desired items in circumvention of Council oversight and

review.

The Multinational Maritime Interception Force (MIF) operating in the Persian

Gulf enjoyed success from 2000-2001 in significantly reducing the number of small

vessels operating out of Shatt al-Arab that were smuggling Iraqi oil along Iran’s southern coast. An equally noteworthy source of oil smuggling prior to the 2003 Iraq

war was the illegal flow of oil through Iraq’s pipeline with Syria, which restarted

operations in late November 2000. The United States, in coordination with the UK,

repeatedly raised concerns over such blatant noncompliance, only to be told by Syrian representatives that the Iraq-Syria pipeline was ‘‘being tested,’’ but was not

operational.

OIL SURCHARGE

Evidence that the Iraqis were attempting to impose excessive price premiums on

oil exports to exploit differences between oil prices approved by the 661 Committee

and subsequent fluctuations in global oil prices surfaced as early as the fall of 2000,

when the UN oil overseers informed the 661 Committee of instances in which the

GOI was requesting imposition of an additional fee on the sale of Iraqi crude.

Members of the 661 Committee, led by the U.S. and UK, agreed to a statement

issued by the Committee Chairman on December 15, 2000, making clear that additional fees above the oil selling price approved by the 661 Committee were not acceptable, and that all revenue derived from the sale of Iraqi oil was to be deposited

in the authorized UN escrow account. Despite circulation of this message to all companies approved to lift Iraqi oil, evidence of the illicit surcharge continued through

the spring of 2001. In April 2001 the United States and the United Kingdom first

blocked 661 Committee approval of the price of Iraqi oil. The U.S., working in close

coordination with the UK delegation in New York, raised the issue of excessive oil

price premiums in a series of more than 40 formal and informal 661 Committee and

Security Council meetings. An early instance was in December 2000. The U.S. and

UK initially sought in April 2001 to limit the time that oil prices approved by the

Committee at the beginning of each month would remain valid, from 30 days, which

had been the practice up to that point, to 15 days. The U.S. and UK also requested

weekly updates from the UN oil overseers on the status of oil price premiums, which

12

revealed that the Iraqis continued to seek imposition of additional, unauthorized

fees on oil shipments ranging from 5 cents to 50 cents per barrel. We were unable

to secure agreement to deal with this ploy.

Bolstered by such reports from the UN oil overseers, U.S. and UK experts made

creative use of the consensus rule governing decisions in the 661 Committee, and

began to withhold support until the end of each month for oil prices submitted by

the Iraqi State Oil Marketing Organization (SOMO) prior to the beginning of that

month. This retroactive price analysis permitted U.S. and UK experts the opportunity to assess oil prices sought by SOMO compared to the actual market price of

comparable crude oils to determine if SOMO’s prices reflected ‘‘fair market value’’— a requirement under Resolution 986 (1995). Beginning in October 2001 the U.S. and

UK regularly employed the retroactive oil pricing mechanism to evaluate SOMO’s suggested prices until the suspension of the OFF program in March 2003.

Certain 661 Committee members strongly resisted U.S. and UK efforts to deviate

from the previously standard 30-day, pro-active oil pricing scheme. Some Council

members alleged that imposition of retroactive oil pricing caused a decline in the

total volume of Iraqi crude oil exports, thereby reducing available funds to finance

procurement of additional humanitarian supplies to benefit the Iraqi civilian population. However, the retroactive oil pricing we imposed had, its intended effect: by

the spring of 2002, the UN oil overseers reported that oil price premiums had been

reduced from as much as 50 cents per barrel to an accepted industry variation of

3 to 5 cents per barrel. This significant reduction in price premiums made it economically unfeasible for oil traders to pay a kickback and still make a profit. Thus

for at least the final 18 months of the program we were able to save the people of

Iraq significant sums of money in illegal oil surcharges.

KICKBACKS ON HUMANITARIAN CONTRACTS

Allegations of kickbacks related to OFF humanitarian contracts began to surface

in late 2000. No documentary evidence was produced at the time to support these

allegations.

U.S. and UK experts raised this issue with 661 Committee experts and OIP representatives during late 2000 and early 2001 and formally submitted proposals to

address this issue during a 661 Committee meeting in March 2001. Our proposals

received no support: members claimed that absent receipt of evidence indicating

that such kickbacks existed, no action could be taken.

In a few instances a supplier accidentally left surcharge language in a contract,

and in every such case we blocked the contract. As a general rule, though we often

suspected contract overpricing during the latter years of the program, we were hampered by the lack of substantiated evidence—evidence that is now becoming available and which we are intent on pursuing.

The most important measures taken by the United States to address this issue

occurred after the U.S., through CPA, obtained direct access to Iraqis and some

Iraqi ministry documents. With the fall of the Hussein regime in the spring of 2003,

and with the subsequent authorities granted to CPA under UNSC Resolution 1483,

CPA officials (including sanctions experts from USUN staff), in coordination with

UN officials and the Iraqis, took steps to eliminate surcharges in existing Oil-forFood contracts meant evidently for kickbacks.

The CPA and the Iraqis not only identified priority contracts in the OFF pipeline,

but also requested the UN agencies to negotiate a reduction in the overall contract

value at an average rate of 10 percent for those contracts that the Iraqis identified

as containing the kickback. It is estimated that this process saved the Iraqis approximately $600 million—money that is being returned to the Development Fund

for Iraq.

The efforts by the CPA and the Iraqis to uncover the scale and intricacy of the

hidden network created by Saddam Hussein to siphon funds from OFF have produced the first public acknowledgement by Iraqis that a systemic kickback system

for OFF contracts actually existed. As more information comes to light and is evaluated, especially documentary evidence, we hope that the true scope and extent of

this system and associated corruption and wrongdoing can be established.

ALLEGATIONS AGAINST UN PERSONNEL

During the life of the OFF program, to the best of my knowledge the United

States Government was not aware of allegations of abuse, fraud, or corruption

against those UN officials responsible for management and implementation of OFF.

It was with the appearance of press reports in January 2004 about abuse of the

OFF program that allegations of corruption by UN Office of the Iraq Program (OIP)

Executive Director Benon Sevan and possibly other UN officials were made. ThereVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
13

after the UN Office of Internal Oversight Services (OIOS)—the UN’s Inspector general—approached us at USUN to request any substantiating information or evidence

from the CPA and the Iraq Governing Council.

The Independent Inquiry initiated by the Secretary-General is being complemented by an Iraqi Board of Supreme Audit investigation. The provision of documentation and the forthrightness of Iraqis who previously managed the Oil-for-Food

matters will be essential to determine the full scope of the problem. We have informed the Secretary-General that the United States Government endorses and

fully supports these investigations and will assist in whatever way we can.

U.S. INITIATIVES: SPECIAL BRIEFINGS

In addition to efforts to eliminate or counter surcharges, kickbacks, smuggling or

sanctions-busting activities, the United States also took initiatives to provide members of the 661 Committee and the Council information and evidence of violations

by the former regime through various briefings. To counter charges that the U.S.

was responsible for the continued suffering of Iraqi children, the United States

briefed Council members in 2000 on the various ways the Saddam regime was diverting funds to benefit Iraq’s elite, including through the use of diverted funds to

build and furnish Saddam’s palaces. The U.S. again briefed Council ambassadors in

the spring of 2002 on Saddam Hussein’s non-compliance with UN Security Council

resolutions, and Saddam’s attempts to procure WMD-related materials. In March

2002 a U.S. interagency team briefed the 661 Committee on the former regime’s diversion of trucks.

Starting in 1996, U.S. Commanders of the Multinational Maritime Interception

Force (MIF) in the Gulf briefed the Committee each year on the MIF’s activities in

combating the illegal smuggling of Iraqi crude. Most recently, MIF Commanders

Vice Admiral Moore in 2001 and Vice Admiral Keating in 2002 briefed the 661 Committee and highlighted the continued attempts by Saddam Hussein to circumvent

sanctions by illegally exporting oil and illicitly importing material into Iraq through

the unauthorized use of ferry services from neighboring states.

STATUS OF INVESTIGATIONS

The independent high-level inquiry initiated by the Secretary-General will shortly

get underway. The Terms of Reference have been written and provided to Security

Council members for their information. The inquiry will investigate allegations of

fraud and corruption in the administration and management of the OFF program,

including those against UN personnel, contractors and entities that entered into

contracts with the UN or with Iraq under the program.

We and other Security Council members have welcomed the Secretary-General’s

initiative, including by calling for international cooperation. Members have requested they be provided original copies of the complete final report. Both the summary and the final report on the findings of this Panel will be made public. We expect announcements will be made soon on the composition of the members of the

inquiry panel, and have strongly urged the Secretary-General to ensure that members of the panel are of unimpeachable standing and have the capacity and experience to make this process as thorough, viable, and transparent as possible. We

would hope that an American will be a member of the panel. We believe that this

inquiry will serve as an important vehicle in addressing allegations against the UN

and the OFF program. The U.S. and CPA have pledged their support and assistance

for the UN investigation.

In Baghdad, the CPA is assisting the Iraqi Board of Supreme Audit to launch a

Baghdad-based investigation into the allegations of corruption regarding OFF. CPA

Administrator Bremer issued a directive to all CPA and Iraqi Ministries in early

March instructing all Ministry officials to identify and secure relevant OFF documents. Representatives of the Iraqi Board of Supreme Audit have met with CPA

and Iraqi Ministry officials to ensure cooperation and transparency in this process.

Mr. Chairman, the UN Oil-for-Food program was established to address the humanitarian needs of the people of Iraq in the face of callous disregard by Saddam

Hussein for their welfare. Failure to do so would have prompted an accelerated deterioration in international support for the sanctions regime. We met with fairly

good success in limiting Saddam’s access to prohibited items under the program,

and in exercising control over most of the revenue derived from the export of Iraqi

oil. However, this program was abused by Saddam Hussein in nefarious and clever

ways. The inquiries now being launched will, we hope, identify those who may have

conspired with him, and perhaps assist in recouping lost funds for the Iraqi people.

Mr. Chairman, again I thank you for the opportunity to provide this information

on the Oil-for-Food program, and would close by emphasizing that you have my fullVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
14

est support and that of my staff in your efforts to determine the extent and involvement of wrongdoing associated with the program.

The CHAIRMAN. Thank you very much, Ambassador Negroponte.

Coordinator Raphel.

STATEMENT OF HON. ROBIN L. RAPHEL, COORDINATOR, OFFICE OF IRAQ RECONSTRUCTION; ACCOMPANIED BY: HON.

KIM R. HOLMES, ASSISTANT SECRETARY OF STATE FOR

INTERNATIONAL ORGANIZATIONS, U.S. DEPARTMENT OF

STATE

Ms. RAPHEL. Thank you, Mr. Chairman, and Senator Biden. Mr.

Chairman and distinguished members of the committee, I also

want to thank you for the opportunity to appear before you here

today to share my particular experience with the U.N. Oil-for-Food

Program.

I was the CPA’s senior advisor to the Ministry of Trade in Baghdad between April and August of last year, which gave me a particular on the ground perspective of the program during that period. The Ministry of Trade was responsible for Iraq’s public distribution system, which rationed basic goods, most importantly

food, made scarce by international sanctions after the first gulf

war. After the Oil-for-Food Program was established in 1996 the

public distribution system was supplied largely by OFF-procured

commodities. The public distribution system used a Ministry of

Trade data base, which was designed to list every Iraqi family.

Families would pick up their rations each month from one of close

to 45,000 local food agents. Trade Ministry trucks moved commodities from ports of entry to warehouses throughout Iraq and the

food agents took smaller trucks and picked up their share of these

rations and took them back to their shops.

We were told that about 60 percent of the population was totally

dependent upon these food rations and most Iraqis considered them

an entitlement. So when the coalition arrived in Baghdad in April,

one of our goals was to ensure that the ration system was reestablished, both to ensure that the people had enough to eat but also

to provide a sense of stability and continuity for the Iraqi people.

The World Food Program was already hard at work ensuring that

food was delivered and distributed throughout Iraq. Between April

and October of 2003 the World Food Program delivered over two

million tons of food, the largest amount ever delivered anywhere so

quickly by the WFP.

Through May my colleagues and I concentrated on what I would

call the infrastructure supporting the public distribution system.

We reconstituted the Ministry of Trade leadership, made emergency salary payments and cataloged looted warehouses and silos.

We also planned for local crop purchases, security of the various

warehouses and silos, ministry building repairs and helped to forge

new relationships between Baghdad and the Governorate offices of

the Ministry of Trade so that they could communicate and move

various food items among warehouses where shortages became apparent.

In late May the U.N. Security Council Resolution 1483 gave the

Secretary General the authority to prioritize Oil-for-Food contracts

in coordination with the CPA and the interim Iraqi administration

15

and according to the needs of the Iraqi people. This precipitated

CPA’s involvement with the Oil-for-Food contracts. In Baghdad we

worked out a tripartite process with the U.N. Office of the Humanitarian Coordinator for Iraq—that’s a long name, the acronym is

UNOHCI—with visiting U.N. Office of Iraqi Program staff and

Iraqi ministry officials. We agreed that we would jointly decide

which contracts were of, what the U.N. resolution referred to as

‘‘relative utility,’’ contracts that should be brought forward. The key

criterion was whether the goods were needed to meet the humanitarian and reconstruction needs of the Iraqi people. The supplier’s

ability to deliver on time and the reasonableness of price were also

considered. This work was managed by what we called the OFF

team in the CPA. This is a team which I led during my time in

Baghdad. Eligible contracts numbered roughly 5,000 approved and

funded contracts, which had been approved and funded by the Office of Iraqi Programs in New York, worth over $8 billion. The CPA

decided that it would not agree to the prioritization of contracts

from companies about which there were outstanding questions regarding their relationship to the former regime. So we made it

clear that we would not sign off on prioritization of those contracts.

Now, early in the process we learned that many Iraqi ministries

had detailed knowledge of this so-called kickback system, under

which suppliers had agreed to inflated prices and to pay a percentage of the inflated contract value into regime officials’ accounts in

foreign banks. The CPA was very determined to avoid any kind of

perpetuation of this kind of corruption related to these contracts.

At the same time, however, we believed that the Iraqis themselves

were best placed to determine which of these Oil-for-Food goods

were needed for their reconstruction; not only food items but also

goods and spare parts related to oil, electrical, and public works infrastructure projects. Since many of these key contracts, we understood, included extra fees or kickbacks, it was agreed that the way

to handle this was to have the appropriate U.N. agency, which

would be talking to supplier to change delivery dates and times

and so on, that those agencies in that process would negotiate the

removal of these fees with the suppliers. So each ministry would

identify the amount of any fee or kickback associated with a contract. And we developed a blanket instruction that in the absence

of any specific information, and we didn’t always have specific information, the level of the fee was to be 10 percent of the contract

value for all contracts from June 2000 forward. Because it was in

June 2000 we understood that the regime began to insist and turn

the screws and put the pressure on to get more out of this kickback

arrangement from the suppliers.

Once the tripartite review was complete a schedule of contracts

signed off on by the appropriate Iraqi ministry official was submitted to our OFF team for final CPA review. This list of contracts

was then signed off on by the appropriate CPA ministry senior advisor once the OFF team had made sure that all the appropriate

information for each contract was included on the list. And then we

sent this package of contracts with the signatures onto the

UNOHCI office in Baghdad and they forwarded it to the Office of

Iraqi Programs in New York. Then the Office of Iraqi Programs

would notify the suppliers that their particular contract had been

16

prioritized and send the relevant information on to the appropriate

U.N. agency with instructions to renegotiate delivery times and locations and to negotiate the removal of these extra fees or kickbacks. These renegotiations were presided over by the U.N. agencies and did not involve either Iraqis or CPA officials. U.N. agency

officials made no formal reference to allegations of corruption when

they were talking to suppliers in order to avoid prejudicing any

possible future legal action.

The prioritization and renegotiations of these contracts turned

out to be an enormous task. I think no one really realized, when

we began, how much time it would take, how labor-intensive it

would be. And of course it was complicated by the tragic August

19 bombing of U.N. headquarters in Baghdad, where many of our

colleagues were injured and they were all finally evacuated.

So by late 2003 we began to worry a bit about the food pipeline.

As a result of this, in January we decided to approach the WFP for

some assistance in this regard. The CPA, the Iraqi Ministry of

Trade and the WFP agreed that WFP would procure and transport

to warehouses throughout Iraq more than $900 million worth of

food to ensure that food pipeline gaps would be filled and that a

buffer stock would begin to be built. The stocks are now rising in

Iraqi warehouses, I’m pleased to say, and the Ministry of Trade has

again taken over all new procurement.

Mr. Chairman, in closing I would like to thank you and all members of the committee for your continuing support to Foreign Service officers, especially my colleagues in Iraq, and for your support

for the Diplomatic Readiness Initiative. It makes a great deal of

difference to our people who are working 16 to 18 hours a day in

dangerous conditions to know that you are interested in and appreciate their service. So thank you very much for that, Mr. Chairman.

[Prepared statement of Ambassador Raphel follows:]

PREPARED STATEMENT OF HON. ROBIN L. RAPHEL

Mr. Chairman and distinguished members of the Committee,

Thank you for the opportunity to appear before you today to share my experience

with the UN Oil-for-Food (OFF) program in Baghdad. I was the Coalition Provisional Authority’s (CPA) Senior Advisor to the Ministry of Trade (MoT) in Baghdad

from April through mid-August last year.

The Ministry of Trade was responsible for Iraq’s Public Distribution System

(PDS), a system developed after the first Gulf War, essentially to ration the scarcity

of basic goods resulting from international sanctions and ensure that all Iraqis had

a minimum amount of food to eat. After the OFF program was established in 1995

under Security Council Resolution 986 and implemented in 1996, the PDS system

was supplied largely by commodities procured under OFF. The PDS system was

based on a computerized database maintained by the Ministry of Trade that was

designed to list every family in Iraq. Each family had a ration card that they would

use to pick up their rations each month from one of the roughly 45,000 food agents

based in neighborhood shops. The food agents collected these commodities from a

series of Trade Ministry warehouses distributed throughout the governorates. A

fleet of Trade Ministry trucks moved the commodities from the ports of entry to

these warehouses.

It was estimated that before the 2003 war, roughly 60 percent of the Iraqi population was totally dependent upon the ration basket. Others would use it to supplement other food sources or to pass on to poorer relatives. In any case, most Iraqis

considered their rations a basic entitlement. At least 90 percent of Iraqis picked up

their rations each month. Maintaining the ration system was important to the sense

of stability and continuity the Coalition was trying to provide in the immediate

aftermath of hostilities. While the MoT ran the PDS, the UN’s World Food Program

17

(WFP) was responsible for monitoring the arrival and distribution of OFF food shipments to ensure they were fairly distributed and not diverted.

By the time the coalition arrived in Baghdad, the UN had been authorized by the

Security Council initially under UNSC Resolution 986, and modified under UNSC

Resolution 1472 (and later extended under UNSC Resolution 1476), to oversee the

procurement of new foodstuffs and medicines on behalf of the government of Iraq,

a function previously managed by the individual Iraqi ministries. These ministries

could no longer enter into new contracts under the program. UN agencies were also

authorized to decide which existing contracts for food and medicine should be

prioritized and implemented.

The WFP began an Emergency Operation on April 1, 2003, issuing a multilateral

appeal to donors, and managing the logistics of delivering this food to warehouses

in Iraq. At the same time, WFP was given responsibility for implementing OFF food

contracts and managing the movement of this food into Iraq. Under these combined

operations, the WFP delivered over two million tons of food between April 1 and the

end of the Emergency Operation in October 2003. It was the largest amount of food

aid ever delivered in a single WFP program over such a short a period of time.

In January 2004, the CPA, Iraqi Ministry of Trade, and WFP agreed that WFP would procure and transport to Iraqi warehouses more than $900 million in food

items for the PDS using Iraqi money from the Development Fund for Iraq (DFI).

This was necessary to help ensure that food pipeline gaps were filled and a buffer

stock began to be built. The MoT is now poised to take over all future procurement

for the PDS.

During the period before the passage of UNSC Resolution 1483 on May 22, 2003

which provided for the termination of the OFF program and the transition of any

remaining activities to CPA, my colleagues and I concentrated on other matters

such as reconstituting Ministry of Trade leadership, providing emergency salary

payments, determining the status of warehouses and silos—many of which had been

looted—and planning for security for these facilities, repairing ministry facilities,

sorting out relationships between Baghdad and MoT offices in the governorates

which were under new management since senior Ba’athists officials had disappeared, developing a budget, and purchasing the local wheat crop.

Once UNSC resolution 1483 had given the Secretary General the authority to

prioritize contracts, in accordance with the needs of the Iraqi people, in coordination

with the CPA and the Interim Iraqi administration, the UN Office of Iraq Programs

(OIP) staff came to Iraq to work out the procedures for this prioritization process.

A tripartite process was agreed to under which the relevant UN agency, the CPA

ministry advisor, and Iraqi ministry officials would jointly decide which contracts

were of ‘‘relative utility.’’ By June 2003, we had learned from Iraqi officials that many of the ministries had

both records that documented and personnel with detailed knowledge of the ‘‘kickback’’ system under Saddam Hussein’s regime, under which many suppliers had

agreed to inflated prices and to pay a certain percentage of the inflated contract

value into foreign bank accounts of regime officials. While the CPA was determined

to avoid perpetuating any corruption related to these contracts wherever possible,

the UN and CPA believed the Iraqis were best placed to determine what OFF goods

they needed to rebuild their country—including its oil, electrical, and public works

infrastructure. Many of the contracts they selected included ‘‘kickbacks.’’ It was

agreed that the best way to deal with these ‘‘kickbacks’’ in the prioritized contracts

was for the responsible UN agency to negotiate the removal of the ‘‘kickback.’’

In early June 2003 the CPA began to work with the UN agencies and Iraqi ministries on the OFF contracts. This work was managed by the ‘‘OFF Team’’ in the

CPA Ministry of Trade, and coordinated with OIP and the UN Office of the Humanitarian Coordinator for Iraq (UNOHCI). The general procedures governing the process are described below.

Eligible contracts were those that had been approved and funded by OIP prior to

April 14, 2003 when OIP declared a pause in processing of contracts because of concerns about future oil revenues. This comprised roughly 5,000 contracts worth over

$8 billion. (An additional $1 billion worth of funded contracts had already been

prioritized for emergency distribution by UN relief agencies under UNSC Resolution

1472.) Contracts which had been registered with OIP but not approved, or which

had not yet been funded, were generally not considered eligible at that time. [Note:

A few unfunded contracts for very urgent items such as food, emergency vehicles

and fertilizer were later prioritized.] CPA also took the decision that it would not

agree to the prioritization of contracts from entities about which there were outstanding questions concerning their relationship to the former regime. Action on

contracts not considered eligible, or on contracts determined to be of questionable

utility, was to be postponed until an internationally recognized, representative govVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
18

ernment of Iraq was in a position to make its own determination as to whether such

contracts should be fulfilled.

By late June 2003, the tripartite review process began to gather momentum. Officials from the relevant Iraqi ministry, the CPA ministry advisors and the relevant

UN agency sat together to examine the contracts in order to determine relative utility. This ensured that the historical knowledge of the Iraqis would be captured in

the process, and that the UN and CPA would be a party to all decisions. The key

criterion was whether the particular goods were needed to meet the humanitarian

and reconstruction needs of the Iraqi people. The supplier’s ability to deliver on a

timely basis, and overall reasonableness of price were also considered. Each contract

was assigned a priority of one through four, with one being the most urgent, and

four indicating that a contract was of no relative utility.

Each ministry was responsible for identifying the amount of any extra fee or

‘‘kickback’’ associated with the contract. We were told that the regime first began

to insist on ‘‘kickbacks’’ beginning with phase 8 of OFF in June 2000. Therefore, in

our review of contracts, the blanket instruction was that, in the absence of specific

information, the level of the fee was 10 percent of the contract value for all contracts

in and after Phase 8. In some cases ministries had more specific information as to

the exact level of the fee, or that there was no fee assessed.

Weekly meetings of these tripartite groups were established (many ministries met

more frequently), with progress reported at a separate weekly meeting co-chaired

by UNOHCI and CPA. These meetings continued from July 2003 until the UN

bombing on August 19, 2003, after which all UN staff vacated Baghdad. After the

bombing, CPA and Iraqi ministries continued the prioritization with deferred UN

agency input via email or telephone, though some ministries made periodic trips to

Amman, Jordan, to meet with their UN counterparts to obtain their direct input

into the process.

Once the tripartite review was complete, a schedule of contracts signed by the appropriate Iraqi ministry official was submitted to the OFF Team for final CPA review. Once the OFF team had determined that each contract had been assigned a

priority, the percentage ‘‘kickback’’ fee to be removed, and the delivery date and delivery location, the list of contracts was signed off by the appropriate CPA ministry

Senior Advisor. This information was then faxed and emailed to UNOHCI, who

would countersign the document and send it to OIP.

Once OIP received the document, they would notify suppliers by posting those

contracts deemed to have relative utility on the OIP Web site. OIP would also send

the contract information to the appropriate UN agency, with instructions to renegotiate the following terms: delivery costs, delivery location and removal of any ‘‘extra

fees.’’ These renegotiations were presided over by the UN agencies and did not involve the Iraqis or the CPA ministries. We were told by UNOHCI officials that in

their dealings with suppliers, UN agencies made no formal reference to allegations

of corruption or improprieties, and did not refer to the extra fees as ‘‘kickbacks’’.

UNOHCI and OIP believed this was the best way to handle this matter so as not

to prejudice any possible legal action in the future.

There were approximately 300 cases in which suppliers refused to take out the

extra fees, asserting they had never paid anything beyond the value of the contract.

Such cases were resolved by CPA querying the Iraqi ministry to confirm—and,

where possible, to document—the presence or absence of the extra fee.

The pace of contract renegotiations picked up considerably in September as OIP

completed its processing of contracts and passed them on to UN agencies. Some

agencies hired extra staff in an effort to complete the task by the November 21

deadline. Still, 251 contracts had not been renegotiated by November 21. These were

turned over to the Defense Contract Management Agency (DCMA), which is still

working on the last of the renegotiations.

Since November 21, CPA has also been working with the Iraqi ministries to ensure that the prioritized contracts are delivered on a timely basis. They have focused particularly on food contracts to ensure that the food pipeline for the Public

Distribution System is maintained. It is expected that delivery of the remaining

OFF contracts will continue beyond June 30, 2004.

Mr. Chairman, in closing I would like to thank you and all members of the Committee for your continuing support for Foreign Service officers, especially those in

Iraq, and for your support for the Diplomatic Readiness Initiative. It makes a great

deal of difference to people working 16-18 hours per day in dangerous conditions to

know that you are interested in and appreciate their service.

The CHAIRMAN. Thank you very much, Coordinator Raphel. Let

me just pick up on your last point. We do, indeed, think often of

19

our dedicated Foreign Service officers. They are in harm’s way,

doing remarkable work for our country and for the Iraqi people. We

appreciate that. We appreciate your service there.

The Chair would suggest that we have a 10-minute question period as this is an important subject and we want to make certain

members have an opportunity to ask their questions.

I’d like to begin, Ambassador Negroponte, with this question,

which I’ve carefully worded so that there will not be a violation of

security. I ask you, in your opinion, does the fault for the abuses

we have discussed today lie more at the feet of individual United

Nations officials, or with individual member states?

Mr. NEGROPONTE. I think, first of all, Mr. Chairman, we have to

lay the major share of the responsibility on the regime of Saddam

Hussein itself, I think. Since 1990, since the time that sanctions

were imposed, the Saddam regime made efforts to evade the sanctions and I think when you mentioned that figure of $4.4 billion

on the one hand with respect to contracts and the $5.7 billion with

respect to oil smuggling, I believe that the oil smuggling activities

was virtually entirely the responsibility of the regime itself. As regards the question of the responsibility of members versus particular individuals in the United Nations who may have been carrying out the programs, I think in part we’re going to have to wait

and see how these investigations turn out, both the U.N. investigation ordered by the Secretary General and the CPA. I do think that

there were member states who at times frustrated efforts by the

United States and the United Kingdom to correct what we perceived as some of the important abuses of the management of the

Oil-for-Food Program and to that extent I would fault those member countries. I’m not sure I know what percentage of the blame

I would apart to them for that.

The CHAIRMAN. Let me followup. Is it fairer to say that in the

661 Committee, China, France and Russia were unwilling to impose sanction guidelines on the Iraq sanctions that would have prevented these abuses? What other nations obstructed reforms?

Mr. NEGROPONTE. Well, I think with respect, for example, to oil

pricing, we’ve met resistance from the countries that you mentioned. With respect to correcting improprieties and inadequacies

in the oil pricing they had a system of forward pricing of oil where

the price would be set artificially low and then the oil would be

sold at market prices and then the regime was able to share the

discrepancy between the artificially low price and the price at

which it had been sold on the international market between various regime officials and other middlemen. We ultimately succeeded in correcting that problem in 2001, ourselves and the British, by insisting in the 661 Committee on a retroactive pricing system whereby the oil would be exported first and then the price

would be set later, and that could be set in a manner more consistent with market realities and therefore the opportunity for corruption and kickbacks would be substantially reduced, and was in

fact substantially reduced. Had we had the cooperation of the countries that you mentioned earlier we could have probably corrected

that problem sooner.

20

The CHAIRMAN. In your judgment, why did we not have that cooperation from those countries, specifically China, France and Russia?

Mr. KENNEDY. Well, I’m not sure I can ascribe all of the motives

that these countries might have had. I think in one instance, to

some extent it must have been driven by commercial considerations

of various companies that were of the nationality of those countries. I think another aspect may have been the fact that these

countries, Russia for example, didn’t like the sanctions regime in

the first place. They had been strong advocates of removing sanctions for a very, very long time. Resolution 1284 was adopted in

1999 and was the last major resolution affecting the Oil-for-Food

Program. France, China and Russia abstained in that resolution,

really because they objected to it. So that could be another consideration. But I think as we delve into this perhaps we’ll get even

further insights into their motives. And I would, as a last point,

hasten to add that I think these countries all accept the fact that

these allegations must be investigated and they have all supported

the Secretary General’s initiative to conduct an investigation.

The CHAIRMAN. Ambassador Kennedy, let me ask this question

of you. What were the most basic weaknesses in the Oil-for-Food

Program that allowed Saddam to exploit it to such a staggering degree?

Mr. KENNEDY. Mr. Chairman, I believe that the basic weakness

is that the original decision made, which as Ambassador

Negroponte pointed in his statement, was the result of the consensus process that is necessary to get such a major resolution

passed at the United Nations was that it left sovereignty in the

hands of the Iraqis, that it was the insistence by the Iraqis and by

others in the United Nations that the Iraqis had to have the right

to select the suppliers and the Iraqis had to have the right to select

the purchasers. Once that basic decision was made, if you have a

regime that was so inherently corrupt, brutal, evil and, if I might

say, with quotes around it, ‘‘clever,’’ as Saddam Hussein, they were

then able to take steps to manipulate the system and, as he moved

to manipulate the system as Ambassador Negroponte has also

pointed out, the United States and the United Kingdom worked in

the 661 Committee to counter every step and every manipulation

he made and I think the excellent example was the question of prospective versus retroactive pricing. When it became clear that he

was manipulating the pricing that way the United States and the

United Kingdom moved quickly to counter that.

The CHAIRMAN. Let me ask this question of you, Coordinator

Raphel, apropos of what has been suggested about the sovereignty

that Iraq will have after June 30. Should we worry that kickbacks

and payoffs could resume when the Oil-for-Food Program is turned

to the Iraqis? If, we should not worry, why so?

Ms. RAPHEL. Mr. Chairman, with respect to the contracts that

were arrived at under the Oil-for-Food Program, they will shortly

all have been renegotiated with the kickbacks taken out. I say

shortly because when the U.N.—when the clock stopped on the

21st of November U.N. agencies hadn’t quite finished and they

handed over to the CPA about 250 contracts which are being

worked on now by the Defense Contracting Management Agency.

21

But these renegotiations will soon be completed so these old contracts will be kickback-free, shall we say. They will continue to be

delivered on past the 30th of June but I don’t think there’s reason

to be concerned about those contracts. The larger question is the

issue of procurement throughout the Iraqi Government. And I

know that Ambassador Bremer and everyone at CPA has been

working hard, Ambassador Kennedy as well, over the last some

months to develop a system of procurement that is transparent and

fair and as far as possible does not allow for this kind of thing to

happen. Ambassador Bremer has also established the position of

Inspector General in each one of the ministries, or at least they are

working on a code of conduct for all Iraqi civil servants and in our

own dealings with Oil-for-Food suppliers. It’s now explicitly on the

CPA Web site that there are to be no commissions paid by the suppliers. So there are a number of steps which have been taken

which we hope collectively will establish a new ethic among the

Iraqi civil servants and the Iraqi Government and the Iraqi people

with respect to this kind of procurement.

The CHAIRMAN. Post-June 30, will we be monitoring that? Right

now, Ambassador Bremer and other Americans, as you say, are

providing a code of ethics and procedures which hopefully would be

followed. Once again, as we try to delve into what happens postJune 30, who are the watchdogs? Or are there any? Or are the

Iraqis on their? Would this be a situation in which whoever happens to be the minister of a particular department deals with this

in his or her own way?

Ms. RAPHEL. Well, two points with regard to your question, Mr.

Chairman. First of all, it is our hope and I think our expectation

that these new offices, the Inspectors General, the new Board of

Supreme Audit, which is undertaking the investigation in Iraq,

that these institutions will begin to put down roots. And I think we

have some reason to believe that that will be true within the ministries. After all, in the instant case of the Oil-for-Food issue it was

the ministry officials themselves who came to us and said, you

know, here’s what’s been going on, here’s the system, here are the

percentages and so on. So I think there is a desire there.

And second, we expect that we will retain a certain number of

technical advisors to help the Iraqi ministries continue with their

reform and transition. We know that many of the Iraqis want that

and that is what we hope to arrange.

The CHAIRMAN. Thank you very much.

Senator Biden.

Senator BIDEN. Just like to followup on that, if I may. I’m deadly

earnest when I ask, why do you at this point only hope? Why don’t

you know? I mean, hasn’t anybody said how—we’re 12 weeks away.

We’re going to be coming back, this President is going to have to,

or the next President, if it’s not this President either. Kerry or

Bush are going to have to come back to this committee and ask for

billions more dollars. We all know it, you know it. No one wants

to say that but everybody knows that. And do we not know who

will be the authority, like Bremer now, that says, hey, wait a

minute. We think you’ve changed the Inspector Generals in a way

because you cut a deal. There are going to be six million deals cut

in this new emerging government. Who gets to say no? Who is

22

going to be the person—is it going to be the U.S. Ambassador of

this new super embassy? Do we know that? I mean, do you have

any idea other than a hope? You’ve expressed a great hope and I

think you’ve done a heck of a job, personally; you personally have

done a heck of a job. But why don’t we know now? Who do you get

the answer from? I mean, if we tasked you now, would you please

go back to the administration and within 24 hours come back and

tell us who, not a name, what office, is going to be responsible for

and able to say no, you’re not doing it the right way? Who would

you go talk to? Would you go talk to the Secretary of State? Who

do you go to to find out the answer to that question?

Ms. RAPHEL. Senator, I’m sure you’re aware that we have an

Iraq Transition Team in the Department of State married up with

a counterpart in the Department of Defense.

Senator BIDEN. No, I’m not aware of that. I don’t know the

names of those people.

Ms. RAPHEL. Ambassador Ricciardone and General Kicklighter,

retired general.

Senator BIDEN. So they’d be the ones to give you the answer?

Ms. RAPHEL. They are working very hard on the whole question

of the structure of the new embassy and new mission, how it will

relate to the Iraqis, how we will oversee this unprecedented

amount of assistance, the $18.4 billion. These are questions which

the administration takes extremely seriously and it is a very complicated and complex matter, as I’m sure you can appreciate, of

how to put the right kinds of checks and balances in and decisionmaking processes and so on. But that planning process is quite far

advanced.

Senator BIDEN. Well, I’d like to formally request that you let us

know exactly what stage it’s at now. This is above your pay grade,

I acknowledge, and above mine, in a sense, but you’ve had 16

weeks since the decision was made as to how we were going to

transition on June 30. You’ve got 12 weeks left, 12 weeks left. And

we all know that billions of additional American taxpayers’ dollars

are going to be heading to Iraq. I’d like to know specifically, not

generically, an answer to the following question: at what stage is

the planning? What alternatives are being considered? And what

decision, if any, has been made as to how we’re going to track these

dollars in the pipeline now and the ones in the future? I’d respectfully request within a week to get an answer to that specific question. I’d appreciate that very much.

The second question I have, and there’s a thousand questions but

Ambassador Negroponte, how does the U.N. police itself? Are there

mechanisms within the U.N. to try member states or individuals

or companies for breaking resolutions or engaging in corruption,

and is there a means to otherwise hold them accountable? Is there

a mechanism that allows whistle blowers to come forward without

fear of reprisal? How does it work? Talk to us about how it actually

functions, the policing function.

Mr. NEGROPONTE. I think that the U.N. organization, the Secretariat, as a practical matter has policing power or policing authority over its own personnel. And Kofi Annan as the chief administrative officer of the United Nations has that authority and that is

23

one of the aspects that he is going to be looking into in this independent inquiry.

Senator BIDEN. Is there a due process mechanism for him to be

able to make those judgments or is it a matter totally at his discretion? He concludes by an internal investigation that John Brown

engaged in corruption or turned his back to corruption taking place

and he’s fired. Or is there a mechanism he’s required to go through

like we would have to in this country? And what are the sanctions

available to him other than dismissing someone who is guilty of either directly benefiting themselves and or turning a blind eye to

corruption as it exists or an absolute violation of a U.N. resolution

that they are responsible for implementing?

Mr. NEGROPONTE. Well, I don’t think he has. He obviously

doesn’t have the authority to impose any kind of criminal penalties.

It seems to me that if wrongdoing of that kind were found and if

there was a desire to pursue a judicial recourse of some kind then

that would have to go to some particular jurisdiction other than the

United Nations itself. But I think his powers, his own powers, are

confined to taking disciplinary action within the organization, I

suppose up to and including dismissal. Ambassador Kennedy has

also given me a note here which relates to whether or not we have

jurisdiction to prosecute those involved.

Senator BIDEN. Do we, Ambassador Kennedy?

Mr. KENNEDY. Senator——

Senator BIDEN. The reason I ask the question, these are the

questions that informed constituents ask us. They’re sitting there

and wondering how the investigation is taking place, the Iraqi Governing Council’s looking at this, we, our administration is looking

at this, we’re talking about billions of dollars being involved here

and so I get asked the question, as a matter of fact, getting on the

train I got the following question: is this going to be like the way

we deal with corporate scandal here? No one’s held responsible? I

said no, no, we’re holding people responsible here. Well, you know,

how? I mean, in terms of what is it we say to our constituents as

to what sanction is available if it is shown that an individual member was negligent. The Wall Street Journal had an editorial today

indicating what in fact they thought about had happened and what

we should be looking at and raising some questions about specific

individuals and whether or not the investigation is capable of being

conducted fairly, et cetera. And it prompts questions, logical questions, from our constituency. So that’s the reason I’m asking, not

that I’m not suggesting that somehow we’re deficient if there is no

such mechanism at the United Nations; I just want to know, and

as a matter of fact you can help me write my answers to my mail.

Do we have jurisdiction to criminally prosecute?

Mr. KENNEDY. If I could answer in two parts, Senator. The Secretary General has the right to fire United Nations employees who

he believes are guilty of misfeasance, malfeasance. They have the

right to an appeal to a U.N. administrative tribunal but the Secretary General also has the right to accept or reject that administrative tribunal. So the Secretary General may terminate U.N. employees for wrongful acts. Should this independent investigation

that he has commissioned find that there was wrongdoing in the

implementation, there may well be criminal investigations underVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1
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taken that would follow on. The Department of State has been in

contact with the U.S. Department of Justice after these allegations

have appeared in the media and whether or not the United States

would have jurisdiction to prosecute individuals or corporations

who might have been involved in any kind of wrongdoing would depend on the individual facts of an individual case and where the

actual criminal act had taken place. This would be a matter that

would be referred to the Justice Department. Of course, even if the

United States did not have jurisdiction because of where the act occurred, the act could theoretically be prosecuted by the Iraqis in

their criminal court system because the crime had been committed

against them, or it might be prosecuted in the courts of another nation because the wrongful act had been created there.

Senator BIDEN. I thank you all very much.

The CHAIRMAN. Thank you, Senator Biden.

Senator Hagel.

Senator HAGEL. Mr. Chairman, thank you, and thank you each

for appearing before the committee this morning.

Ambassador Negroponte, in your sense of this, your recollection,

were any of these irregularities ever reported to the U.N. Mission

of the United States?

Mr. NEGROPONTE. Well, first of all, with respect to oil smuggling,

we’ve known for a long time that there was oil smuggling and we

even undertook measures to try and prevent or minimize that, including a multi-national interdiction force in the Persian Gulf.

With respect to oil pricing, we were also aware of this forward

underpricing scheme that I described earlier and we took measures

to deal with that. As far as allegations against United Nations personnel are concerned, they only surfaced in late January of this

year when a newspaper in the region, in the Middle East, published an article listing various individuals and entities that had

received oil vouchers from the Iraqis during the Oil-for-Food Program. But no allegations of corruption or allegations of misconduct

by United Nations personnel had been brought to our attention before then.

And then last, Senator Hagel, on the humanitarian contracts,

there had been allegations of kickbacks on humanitarian contracts

as far back as the year 2000. But there was no substantiating evidence available until the CPA, in coordination with Iraqi representatives, uncovered indications of this in the summer of the year

2003.

Senator HAGEL. So to summarize, as far as you know, and those

at the U.S. Mission at the U.N. specifically focused on the Oil-forFood Program, no one brought forward any allegation that U.N.

representatives administering that program may have been involved in criminal acts or any acts of corruption?

Mr. NEGROPONTE. That is correct, until the allegations that were

made in January of this year, yes sir.

Senator HAGEL. Thank you. Coordinator Raphel, how soon do you

believe that the Oil-for-Food Program will be totally, can be totally

phased out?

Ms. RAPHEL. Well, as you know Senator, the program was ended

on the 21st of November, 2003, in the sense that there were no

more contracts allowed to be made against the U.N. escrow account

25

which had the Iraqi oil revenues in it from the past. There are no

new contracts. It’s now just a matter of finishing up the renegotiation of old contracts and getting the goods shipped into the country. So now, if the Ministry of Trade wishes to order wheat, they

do it using the funds from the development fund of Iraq, which is

where all the Iraqi oil revenues are now going. They used to go into

the U.N. escrow account; now they go into the development fund

for Iraq.

Senator HAGEL. Well, what I’m really referring to is when do you

believe the Iraqi people will be in a position to purchase their own

food and all remnants?

Ms. RAPHEL. Sorry.

Senator HAGEL. Maybe I should have qualified that, remnants of

the Oil-for-Food Program will be complete? And as you noted the

Ministry of Trade, which I want to ask you a question about in a

moment, but we know the transitional process there, but if you

could stay focused on that question.

Ms. RAPHEL. OK. First of all, in terms of the old contracts we expect by autumn of this year that all of the goods that are coming

in under those contracts should be in Iraq and distributed. If you’re

speaking more generally to the public distribution system——

Senator HAGEL. Yes.

Ms. RAPHEL [continuing]. The food ration system.

Senator HAGEL. Yes.

Ms. RAPHEL. OK, that is another question altogether. The view

of CPA is definitely, and other international experts and economists and the World Bank and the IMF and so on, is that Iraq

must take a serious look at the food ration system and in fact other

subsidies that pervade their whole economic structure to find a way

to bring this more in line with a market system to stimulate production of their own agricultural sector and so on. There’s been a

lot of thought given to this and to the whole question of food security and identifying who the really vulnerable groups are who need

what would be in our terms say, food stamps, need some support,

some subsidies to get basic food items for their family and so on.

But the decision was made that this was something we really needed to leave to the next Iraqi Government. It’s a highly political

issue; as I mentioned early on, the Iraqis consider this an entitlement and with so many other issues on our plate, both on the economic and clearly on the security and political side, we thought

this was best to leave to the Iraqis for a later date. But they are

also aware that they need to change this system.

Senator HAGEL. So we don’t have a general framework of a date

as to when this would be phased out?

Ms. RAPHEL. No. I suspect that it will certainly continue at least

to the end of this calendar year and on into 2005. But we have and

will continue to work on various proposals to discuss with the

Iraqis to give them some ideas on what other countries have done

to reduce food subsidies and so on. So we’re actively engaged with

them on this subject.

Senator HAGEL. You mentioned in your testimony the Ministry

of Trade picking this up and now the implementing agency will be,

especially after June 30. In your opinion are they prepared to do

this? And they are doing it in a way that will in fact affect what

26

needs to be accomplished, as you noted, socially, economically, diplomatically?

Ms. RAPHEL. Right. There are a couple of elements to the public

distribution system. One of them is procurement. And in fact, as

we’ve noted from this whole system, the Iraqis did their own procuring; that was part of the problem, in fact. But the Ministry of

Trade has procured food stuffs before, they’ve done a lot of capacity

building in Rome with the World Food Program, our people in CPA

have worked with them to expand the list of suppliers that they

consider and to develop a more transparent system altogether. So

that capacity building is ongoing and in fact the Ministry is now

doing its own procuring with oversight from CPA officials. So that’s

one element of it.

The distribution, again, is something that the Ministry of Trade

was responsible for all along. They developed this system right

after the first gulf war; it’s elaborate, as I say, it’s based on a sophisticated computer data base. The difficulty for them, after hostilities ceased, was really that they had problems with their trucking system, they had problems with communications as we all did,

and the discipline and authority relationships between the center

and the governorates upon which this system depended, if you were

in the center watching the whole structure you had to call the Governor of Al Anbar and say, you know, we need to release a certain

amount of tea to go from there down to Basra. That capability disappeared overnight and so we’ve had to rebuild this. But the fact

is they used to do it, they’re capable of doing it quite effectively.

Senator HAGEL. Thank you. I’ve got limited time and if you could

give me a very short answer on one question and then I wanted

to get one more—that is, NGOs. Are they going to play a role? Are

they playing a role in this distribution process?

Ms. RAPHEL. The WFP was charged with monitoring the system

in the south and central governorates, checking in on the warehouses, making sure none of the food that came in under this program disappeared and so on. It was a monitoring role.

Senator HAGEL. Thank you. And last question, you mentioned

this, the Ambassador mentioned it, on CPA’s involvement, your

particular involvement over the last few months and looking at the

specific charges, analyzing contracts, the issues that are part of, or

at the core, actually of this hearing; my question is, do you believe

the CPA has access to all the relevant U.N. documentation that

they need to review to get to some of these issues that we all are

going to be looking at, specifically what CPA’s responsibilities are

now, aside from what the Secretary General’s charge is to his people at the U.N. for investigation? Do you have everything you need?

Ms. RAPHEL. Just speaking to things in Baghdad, Ambassador

Bremer has ordered that the Board of Supreme Audit go through

the files of each ministry and collect all relevant documentation

that will help get at the bottom of the whole kickback scheme. As

you know, many of the ministries were burned. Certainly the Ministry of Trade was and others were, so that documentation will not

be complete but it is now being sequestered and gone through by

the Iraqis in conjunction with CPA authorities.

Senator HAGEL. And you believe you have everything you need?

27

Ms. RAPHEL. Well, again, we don’t know what a complete set of

records would be and we assume that at least some of them were

lost in the immediate aftermath of hostilities through the looting

and burning and so on.

Senator HAGEL. Thank you.

The CHAIRMAN. Thank you, Senator Hagel.

Senator Dodd.

Senator DODD. Well, first of all, Mr. Chairman, thank you very

much. This is a very important hearing and I’m very pleased that

you’re holding it. And I thank our witnesses as well for being here.

And Mr. Chairman, I’m just going to ask, if I may, at the outset

that some opening comments be included in the record, if I could.

The CHAIRMAN. They will be included in the record.

Senator DODD. And let me just summarize some of the comments

I made in my written statement, very briefly.

Obviously, looking at the Food-for-Oil Program it is tremendously

important and we can learn valuable lessons from it, but as has

been pointed out it basically has ceased to function, except for what

remains to be done back in November. But certainly, while we’re

very worried, and rightly so, about the corruption that went on, as

I understand it about 72 percent of the funds that were secured as

a result of the program actually went to serve the people of Iraq,

innocent people in Iraq, who would have been, I think, under desperate circumstances had this program not been created. At least

that’s my observation. So, while I’m not excusing it, all the $10 billion plus that may have been stolen as a result of the program, the

fact that 72 percent of the funds, roughly $63 billion, one way or

the other got to people in Iraq, may have saved them from just a

human tragedy of significant proportions. So, I just wanted to

make that point.

And second, I’m actually, as I’m interested in this, I’m really

more interested in the way in how the reconstruction funds are

going to work. Let me just raise two or three quick questions, if I

can, and get your responses, if I may.

First, this isn’t something new. In 2002, weren’t we aware—and

I don’t know who I should address this to, whether it’s to you, Ms.

Raphel or to John Negroponte—but in 2002, you had Turkey and

Jordan that there was oil flowing out of Iraq to both of these countries. We were certainly aware of it at the time; they were getting

it at below world prices. So this idea that we’re somehow discovering this corruption at this hour, I think, is not borne out by facts.

Weren’t we aware of the Jordanian/Turkey use of Iraqi oil supplies

2 years ago?

Mr. NEGROPONTE. Yes sir. Iraq was Jordan’s main trading partner before the gulf war and from 1980 to 1990, 19 percent of Jordan’s exports were shipped to Iraq while 12 percent of Jordan’s imports came from Iraq. And in recognition, this was a bit of a special

arrangement here, of this unique relationship and wishing not to

unnecessarily and unfairly penalize the people of Jordan from the

negative economic consequences of sanctions on Iraq, the Security

Council permitted Jordan to import oil from Iraq as compensation

for the burden it was experiencing as a result of the United Nations sanctions on Iraq.

28

Senator DODD. Do we know what happened to the revenues that

went for that? When they came in—the revenues that came back

into Iraq?

Mr. NEGROPONTE. I don’t know the answer to that question.

Senator DODD. Wouldn’t it be a pretty good guess they probably

ended up in the pockets of Saddam Hussein and his cronies?

Mr. NEGROPONTE. I just don’t know, sir.

Senator DODD. Yes. Well would you generally agree that overall,

despite the obvious, the clear evidence of corruption that the bulk

of the resource that came into the program did serve and—we were

told at the time that whatever other complaints, legitimate complaints about a terrorist regime, or certainly a brutal regime, that

the bureaucracy of Iraq was such that in many cases they actually

could serve people by getting resources to people who needed them.

Is that a fair characterization?

Mr. NEGROPONTE. Yes sir. And, as I said in my prepared statement, I think the program by and large——

Senator DODD. Worked.

Mr. NEGROPONTE. Achieved its purposes. I think what we’re talking about is the elements of corruption that were involved here.

And I might just add that, you know, any sanctioned regime, inherently and particularly if it’s been going on for a period of 12 years

starts to get pretty seriously frayed at the edges. Because anybody

who’s under sanctions is going to try to find ways to get around it.

But that notwithstanding, we managed to capture, in that Oil-forFood escrow account, some $64 billion, as you mentioned, during

the life of the program. And I think that’s important.

Senator DODD. Well, I presume, based on the comments made by

Mr. Kennedy, that the United States strongly supports this investigation that’s ongoing. Will we require U.S. companies, oil companies, that participated in the Oil-for-Food Program to participate,

to testify? What is the administration saying about those companies that were directly involved in the program and their willingness or unwillingness to participate in the investigation?

Mr. NEGROPONTE. Well, we’ve pledged, as a general, political

matter, our full cooperation with the investigation. I think we’ll

have to see where that leads and we would have to deal with that

particular bridge when we have to cross it.

Senator DODD. Let me ask, if I may, about this newly established

fund for Iraq, as it’s called, the DFI, which was established pursuant to Security Council Resolution 1483. As part of that resolution,

it was to establish and take the responsibility for improving independent public audits of expenditures from this development fund.

First, has the International Advisory and Monitoring Board

called for in the resolution ever been established?

Mr. NEGROPONTE. It’s been established. It’s functioning and it’s

had a couple of meetings.

Senator DODD. And have moneys been spent from the DFI?

Mr. NEGROPONTE. Absolutely. And I might add—— Senator DODD. I’d like to know how much and on what, if you

could speak to that.

Mr. NEGROPONTE. First point I would make, Senator, is that of

the unobligated moneys from the Oil-for-Food Program that were

in the escrow account, $7.6 billion have been transferred from the

29

Oil-for-Food escrow account to the Development Fund for Iraq. So

that money has been indispensable in terms of helping pay Iraqi

civil service salaries and helping the Iraq Government continue to

function.

If I could invite Ambassador Kennedy to address the other part

of your question in a bit more detail, if that’s all right.

Senator DODD. Let me spell out, just so people know what I’m

talking about here, and they have referenced it already, Mr. Ambassador, and that is that you’re talking about we transferred $1.7

billion of Iraq frozen assets to help pay for salaries of Iraqi civil

servants, ministry operations, and expenses within Iraq; U.S. military and coalition forces seized another $926 million, as I understand it, of the regime assets. Other countries have transferred

$751 million of assets they’ve identified as belonging to the regime

of Saddam Hussein. And my question is, has the advisory body

identified an independent auditor for these funds?

Mr. KENNEDY. Yes, Senator. The International Monitoring Board

has been set up; it has already had two meetings; there is one U.S.

representative, a Department of Defense official who is a member

of that board. The board has named an external auditor; that selection has been made. There is also an internal auditor, an American

company that is employed by the CPA to monitor that. The balance

sheet of the Development Fund for Iraq is posted daily on the CPA

Web site that shows the income, which consists of transfers of frozen assets from both the United States and other countries plus

transfers, as Ambassador Negroponte said, from the residual balances in the Oil-for-Food, plus all the receipts of Iraqi oil sales in

recent times. So all those sales are posted and then the categories

of disbursement from the Development Fund for Iraq are posted

there as well.

Senator DODD. OK, very good. I may have some followup questions for you but that’s a thorough answer and I appreciate it.

We had a very good hearing under the leadership of Senator

Allen a week or so ago focusing on the terrorist attacks in Madrid.

But obviously the questions went beyond Madrid and we were looking ahead as to how things may work after June 30. And one of

the issues, obviously, that’s been raised, is to what extent the European countries are still going to be willing to participate, obviously

given the statements of the Prime Minister-elect in Spain about

their willingness to continue participation in the Iraqi theatre, and

to what extent we’re willing to pursue a new U.N. resolution giving

the U.N. a clear mandate to manage the administrative activities

in Iraq in cooperation with the interim Iraqi regime until elections

are held. And I wonder, Mr. Ambassador, if you might, we’ve crafted a resolution, I’d say, Mr. Chairman, sort of calling on that, and

there were some suggestions, Senator Biden made some strong suggestions there about the role of NATO, I raised the issue of whether or not we might overtly ask the Spanish and the French and

others to help craft a resolution here, if that’s what they felt necessary. Can you share with us what steps you’ve taken, what conversations you’ve had that you can talk about publicly that would

pursue a new U.N. resolution. We’re getting very late here, the

June 30 date is closing in on us, and it seems to many of us here

that in the absence of a new U.N. resolution that our European

30

partners can support that we’re going to find a fractured relationship after the new interim government is established.

Mr. NEGROPONTE. Yes sir. Thank you for your question. First of

all, I’d like to make a point that under existing resolutions, 1483

and 1511, the United Nations has a lot of authorities. If one takes

a close look at those resolutions a number of different authorities

are enumerated that enable them to act in Iraq and give them a

lot of scope. I think what has been limiting the United Nations’

ability to operate in Iraq up until now has really been the security

situation in the wake of the August 19 bombing last year. And we

are taking measures and working with the U.N. to try to give them

a comfort level and assurances that if and when they go back into

Iraq in any significant way that they will have the requisite security?

Second, and this goes a bit to a question that Senator Biden

asked earlier, what’s going to happen on the 1st of July and what

is being done about that now? Well, as we speak the Secretary

General’s Special Envoy, Ambassador Lakhdar Brahimi, is in Iraq

talking to various political players there in an effort to work with

the Iraqis and with the Coalition Provisional Authority and also

with Ambassador Robert Blackwell, who is the Deputy National Security Advisor and Special Envoy for Iraq, to talk about what the

shape of this new transitional entity might be on the 1st of July.

It’s not that we’re not working on that issue; that issue is being

worked at the moment. I don’t think we have the kind of detail

that Senator Biden asked for.

As far as a future resolution, a Security Council resolution——

Senator DODD. Yes, where are we on that? Are we going to get

one?

Mr. NEGROPONTE. We don’t have anything specific in mind at the

moment because I think we’ve been really waiting more for the outcome of these discussions on the transitional governmental arrangements on the 1st of July. We’d like to see that process develop

a bit further. But I have no doubt in my mind——

Senator DODD. A dual track that, can’t you just——

Mr. NEGROPONTE. We’re already thinking about it, Senator. We

just haven’t yet fashioned a resolution. I’m sure that there’s going

to have to be some kind of resolution before the transition actually

takes place that deals with the kinds of issues that you’ve raised.

Senator DODD. Well, does the administration accept the notion

that we ought to have a, given the statements and positions taken

by our European allies who are so critical in all this, that giving

the U.N. a significant management role, working with the interim

government until elections are held?

Mr. NEGROPONTE. I don’t think we have any reservation whatsoever about giving the United Nations the primary role when it

comes to facilitating the political transition and helping the Iraqis

organize their elections if that’s what the Iraqi Government and

people would like. I don’t think we have any difficulty at all giving

them the central role in that process.

Senator DODD. Thank you, Mr. Chairman.

[The prepared statement of Senator Dodd follows:]

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PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD

The Foreign Relations Committee has convened this morning to take a closer look

at the United Nations’ Oil-for-Food Program, which helped provide vital humanitarian aid for the Iraqi people during almost a decade under Saddam Hussein’s re- gime. I know we all agree that recent allegations of improprieties by U.N. staff with

respect to this program are very troubling. And the problems of the Oil-for-Food

Program did not begin or end with these allegations. This hearing is an opportunity

to examine both the strengths and weaknesses of this program, and I commend the

chairman for holding it today.

In 1990, only one week after Saddam Hussein ordered the Iraqi army to invade

Kuwait, the U.N. Security Council passed Resolution 661, imposing an international

trade embargo on Iraq. Those sanctions extended to Iraq’s oil exports—its most profitable industry. Nonetheless, they were an important, necessary, and internationally

accepted tool used to cripple the tyrannical regime led by Saddam Hussein.

However, the lack of oil export revenues also crippled that regime’s ability to purchase food and medical supplies for its people. And out of a shared desire among

the members of the international community for the welfare of the Iraqi people, in

1995, the U.N. Security Council passed Resolution 986, which established the Oilfor-Food Program.

The Oil-for-Food Program certainly deserves its share of criticism. And I will get

to that. But before I do, I believe that it is important for us to keep in mind that

with all its faults—and despite the corruption of the Hussein regime—this program

helped millions of innocent Iraqis survive the violent rule of a merciless dictator.

Indeed, from December 1996 through March 2003, it generated approximately $63

billion dollars—72 percent of which was devoted to humanitarian efforts. Certainly

this money was not a cure-all for the ills of Iraq or its citizens. But I shudder to

think of the humanitarian catastrophe that would have occurred had the Oil-forFood Program not existed.

Having said that, there were obvious problems with the Oil-for-Food Program.

One was based on concerns that Saddam Hussein had found ways to bypass the

international sanctions imposed on Iraq. To that end, a March 2004 report by the

General Accounting Office (GAO) suggests that from 1997-2002, Iraq earned $10.1

billion through oil smuggling, surcharges against oil sales, and illicit commissions

from commodity suppliers. And it doesn’t take an in-depth study to come to the conclusion that a great deal of this money was likely used for the personal enrichment

of Saddam Hussein and his murderous cronies.

In January 2004, allegations surfaced that an array of foreign government officials, businessmen, journalists, and even the chief U.N. administrator of the Oil-forFood Program, Benon Sevan, might have received oil ‘‘kickbacks.’’

I know that we all take these charges very seriously, and I am pleased that on

March 26, U.N. Secretary General Kofi Annan called for an independent, high-level

investigation into these allegations. I am hopeful that this investigation will soon

proceed.

I also commend the Secretary General for having back in February directed the

U.N. Office of Internal Oversight Services (OIOS) to investigate this matter, as well

as for making all relevant transactions and documents in the U.N.’s possession

available to members of the Security Council.

And while we wait for the conclusions of the independent investigation, we must

not sit idly by. It is now our responsibility to look to the future so that we can prevent a situation like this from recurring. However, in order to do this, I believe we

must first understand the nature of what it is we are dealing with. We must understand that international sanctions will never be airtight.

Even in the best of times, this is a certainty. And especially when we are presented with a situation such as this—the coupling of a corrupt dictatorship and billions of dollars in potential oil profits—it is inevitable that attempts will be made

to circumvent sanctions.

In addition, we must become more adept at identifying potential problems and

preventing them from coming to pass, particularly in light of the fact that the

United States has been the steward of Iraq’s wealth and resources for the last

twelve months. We need to account for how all Iraqi frozen and seized assets have

been spent by the Coalition Provisional Authority. We need to insure that there is

accountability with respect to the Development Fund for Iraq, which was established pursuant to U.N. Resolution 1483. We need to understand why it does not

appear that Iraqi oil production is currently being metered—a common practice in

the oil business to keep track of production rates.

I am frankly more concerned about preventing problems associated with the reconstruction of Iraq, than I am about problems associated with a program that is

32

no longer operational, although I agree that there are important lessons we can

learn by understanding any irregularities that occurred with the Oil-for-Food Program.

Again, I thank the chairman for holding this hearing today and I look forward

to asking some questions of our expert witnesses.

The CHAIRMAN. Thank you very much, Senator Dodd.

Senator Chafee.

Senator CHAFEE. Thank you, Mr. Chairman. As we look back at

the overall economic sanctions program, it seems from the outside

that the palaces continue to be built but the people suffer. And you

wonder if their counterproductive behavior does really change. And

Ambassador, you said that, going back, in answer to Chairman

Lugar’s question, China, France and Russia were opposing some of

these sanctions; I think you mentioned Resolution 1284, if I have

it right. Is there a better way? What were these countries proposing in lieu of not supporting economic sanctions?

Mr. NEGROPONTE. Well, I think in many instances they were proposing that there not be sanctions at all and that the regime be

free to export and import entirely freely without any kind of restrictions whatsoever. We did not agree with that because we did

not believe that Iraq had come into compliance with the various

U.N. Security Council resolutions that had been passed since 1990.

So we had a different point of view. But we were ultimately able

to come to this accommodation in Resolution 1284, where they acquiesced but with abstentions rather than voting affirmatively in

favor of those resolutions.

Senator CHAFEE. And as you look back, it’s easy to look back, 20/

20 hindsight, but is economic sanctions a good policy or are they

counterproductive?

Mr. NEGROPONTE. I would hate to make a general statement

with regard to economic sanctions based on the particular instance

of Iraq. Let’s not forget that this all comes in the wake of Iraq having invaded and occupied Kuwait and this is all entirely a consequence of the first gulf war. So it’s a very particular situation so

I’d be reluctant to generalize about sanctions.

Senator CHAFEE. Great. And I’d like to just change the subject

a little bit. You’re our Ambassador to the United Nations and I’m

just curious what the mood is, particularly on the Security Council

now as we face enormous challenges in trying to bring the international community together on these challenges. What’s the mood

of, particularly on the Security Council, is there a sense of, hey,

you guys went it alone, you’re on your own? Or is there a coming

together with your colleagues and saying we want to do our best

to help?

Mr. NEGROPONTE. Well, I’ve been impressed by the fact that

we’ve been able to pass resolutions since May of last year—Resolution 1483 was mentioned—by consensus in the Security Council. I

think that a number of these countries, the ones that have been

mentioned plus Germany certainly didn’t favor our military action

but they say all right, that’s in the past. And I think they all recognize that they have an important stake in Iraq being a success, and

I don’t think they want our policies to fail. So I think they want

to find ways to work with us to make things move in a constructive

and positive direction going forward.

33

Senator CHAFEE. Well, you have a difficult job and I support

what you’re doing.

Mr. NEGROPONTE. Thank you.

Senator CHAFEE. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Chafee.

Senator Allen.

Senator ALLEN. Thank you, Mr. Chairman. I want to thank you

for holding this hearing on this important issue, as well as for your

opening statement and probative questions. This conspiracy to

skim billions of dollars from the Iraqi Oil-for-Food Program is of

great importance, and this committee determine what the truth is

in all of it. Although listening to all of this, I don’t think it should

be any surprise that Saddam Hussein would seek to take advantage of a humanitarian program that the world community offered

to the people of Iraq. His people were not only suffering from his

dictatorial policies and his state police, that used rape and murder

and torture to govern, they also, in effect, denied food and medicine

and health facilities to the people of Iraq while he and his thugs

lined their pockets with these illegal surcharges and kickbacks in

the Oil-for-Food Program. It’s been called actually a conversion to

an oil-for-palaces program. And to the extent those billions of dollars were going for palaces it meant it was not going for hospitals

or schools or medicine or food. There’s also, from reports, that some

of the food and the medicines were outdated anyway. So this whole

scheme is one that is very troublesome. Now, the evidence is at

least $10 billion was siphoned off in a 5-year period from revenues

generated from this Oil-for-Food Program. We have to look at this

complete ineptitude involved here with a lack of transparency, any

sort of scrutiny, not just for the past but also for the future. But

also recognize how this helped prop up this regime, this was the

way for Saddam Hussein and those in power in Iraq to stay in

power. Who knows what they did with all the money. There’s estimates of $2 billion that was used for palaces. Who knows what

they were buying from other countries. Three-quarters of this revenue and the purchases were from those three countries who were

opposed to sanctions, China, Russia and France. You look at some

of the figures that I’ve seen, Russia by far received the most in oil,

21⁄2 billion barrels of oil. The French were the second largest beneficiary at 165 million barrels.

Regardless, we have Senators here and others around the world

saying we need to get the United Nations involved in this, that

they were important in the Oil-for-Food Program, but this is certainly a sad and very scandalous implementation of this program.

I think that we need to go forward with this very cautiously but

also we must do so fully. As a member of the United Nations the

United States has an interest in making sure that what the United

Nations does is ethical, proper and does nothing to further dictators and despots to stay in power. The United States taxpayers

fund approximately one-fifth, maybe a little more than one-fifth, of

the budget of the United Nations.

Let me ask some questions now on behalf of the taxpayers of the

United States. The evidence I’ve seen is this would not directly affect the taxpayers of the United States. Ambassador Negroponte

34

would you want to respond if U.S. taxpayers’ money was at all

wasted in this scandalous oil-for-palaces scheme?

Mr. NEGROPONTE. As I said in my statement, Senator Allen, no

appropriated funds were involved in the administration of the—— Senator ALLEN. All right. Let me ask you this as a followup.

Would we have to be spending as much in Iraq today if this money

had been properly handled? Are we building schools? Are building

hospitals in Iraq? And if that money had been properly utilized for

hospitals would that have saved U.S. taxpayers money presently?

Mr. NEGROPONTE. I think certainly that sounds like a logical

proposition. I wouldn’t want to put a number on it and as I mentioned earlier we did and we were gratified that $7.6 billion of

unspent Oil-for-Food moneys was made available for use in the Development Fund for Iraq. So we’re pleased to have those funds.

Senator ALLEN. Well that’s nice, however we also did have an appropriation of $20 billion, some of which was for water, for sewer,

for electricity; some for hospitals and police stations and other security-type matters that, particularly in the hospital and the health

care areas this money could have gone toward that rather than the

United States taxpayers providing those gratis.

Now, the United Nations is being invited to get involved in Iraq

presently and in the future maybe as, again, the interim Iraqi governance group will make that determination. But to the extent that

you hear assignations that we ought to get the United Nations involved, primarily as far as the security aspects, I think to get

NATO forces who actually can have a positive impact as far as security, as you go forward in this investigation as to the truth of

this Oil-for-Food scandal, if you can say, are the French and the

Germans, not the Germans so much, the French and the Russians

and the Chinese holding back on certain participation or any resolutions that might be coming forth because of a concern of our investigation or concern about this siphoning off, these kickbacks and

scandal involving Oil-for-Food Program, which implicates their

countries or companies in their countries? In fact, the Communist

Party in Russia alone got 137 million barrels according to a report

I’ve received.

Mr. NEGROPONTE. It’s not my impression that they’re holding

back. Also, as I said earlier, as compared to last year I think the

atmosphere in the Council has improved and I think countries, including the countries you mention, want to work with us to make

things a success. And they also, my last point would be, they have

pledged their cooperation with the Secretary General’s investigation. I think now we want to be sure to hold them to that if we

think that in some way or another they’re not living up to that

pledge.

Senator ALLEN. Well, I understand because of your role you have

to be a diplomat as well. Do you have a great deal of confidence

that this investigation will get to the truth?

Mr. NEGROPONTE. Well, I certainly hope so. The Secretary General has said it’s his intention. I think the first indication is going

to be to see, and I think it’s important, that he choose very high

caliber people of outstanding reputation to lead this panel, and I

understand he intends to name the panel members in the near future.

35

Senator ALLEN. I think the key will to be to see how independent

those panel members are.

A lot of these concerns—were concerns early on. These were concerns in the mid- to late-1990s insofar as questions about kickbacks

and padded contracts and so forth. There were objections from the

Russians, the Chinese and the French involved in this, and again,

as I said earlier, three-quarters of these contracts were deals or

products, products from these countries. Do you know, and I know

you were not of that administration, but do you know why the Clinton administration did not push harder, rather than giving in to

the Chinese and the Russians and the French?

Mr. NEGROPONTE. Well, I think we had different degrees of

knowledge about different categories of malfeasance. Again, in the

area of oil smuggling or of oil pricing I think we were aware of

those problems earlier than we were with respect to some of these

other issues. And again I think it’s important to stress, Senator,

that these contracts were signed directly between the Saddam regime and the suppliers so that that information and what may

have been hidden in those contracts was not necessarily that easy

to find out. And it’s only in the wake of our military action that

some of this evidence is starting to come more to light.

Senator ALLEN. Well, isn’t it true that the British and the United

States were objecting to some of these and then they’d be criticized

for not caring about the feeding and the health of the Iraqi people

whenever they’d try to get some transparency and honesty in this

Oil-for-Food Program?

Mr. NEGROPONTE. Yes, and particularly with respect to oil pricing and with respect to smuggling. And it is also true that we very

often put contracts on hold at different times in the carrying out

of this program because of various objections. But in terms of good

evidence of kickbacks or of any possible corruption by U.N. officials,

I don’t think there was that much information to go on in the time

period you’re talking about.

Senator ALLEN. Well, regardless of the corruption of U.N. officials I think there was sufficient evidence, at least in the late

1990s, of corruption by some of these companies that are from

those particular countries.

All right, my time has expired.

Mr. NEGROPONTE. Can I ask Ambassador Kennedy if he wants

to?

Mr. KENNEDY. Senator, I think the problem we face here is that

once the allegations have come out, it appears clear. But as the

contracts were negotiated between the Saddam regime directly

with suppliers, the Saddam regime was essentially very clever.

They buried things in the contract. If you’re buying enough food to

feed a nation of 24 million people, all you have to do is add a very,

very small amount to every bushel of wheat you buy or every kilogram of baby milk. And if the contract itself on the face of it does

not seem excessive, when we did see excessive contracts, you know,

that the price of wheat was wildly out of the scope of the market,

we held on those contracts. And the United States and the United

Kingdom, as you rightly pointed out put holds on over 2,100 contracts valued at about $5.1 billion during the course of the effort.

But what Saddam Hussein did was clever, it was to add a little bit

36

on a lot and make it up in volume. And so he worked the system

so there was not evidence. It wasn’t until the CPA and as Ambassador Raphel and I were both in Iraq at that point and saw the

evidence coming forward from the Iraqis that we saw the magnitude of it. But he was very clever and, like I said, got a little bit

on each contract, not enough to ring any alarm bell when you read

the contract.

Senator ALLEN. Thank you all. Thanks for your testimony.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Allen.

Senator Sununu.

Senator SUNUNU. Thank you Mr. Chairman. Let me ask about

the specifics of the language that might have alerted you in these

supplier contracts. Ambassador Negroponte, in your testimony you

note that there were a couple of instances where suppliers had accidentally left surcharge language in the contract and those were

blocked. Could you describe a little bit more specifically what kind

of language you’re talking about? I think that’s your testimony; is

that Ambassador Kennedy’s testimony? Did I misread the package?

No, I think that’s your written testimony.

Mr. KENNEDY. It is. You’re correct, Senator, it is Ambassador

Negroponte’s testimony.

Senator SUNUNU. I apologize for having read it. But if either of

you could address, just describe in a little bit of detail, what kind

of language would that be? How specific was the reference to a surcharge or what that surcharge should have been used for?

Mr. KENNEDY. Basically, the earlier holes were almost exclusively based on the market pricing being wildly divergent from

what the contract said in itself. Every once in a while, but more

particularly when Ambassador Raphel did her work in Baghdad,

we saw what was called ‘‘after sale service.’’ You bought something

and the contract provided that they would come and fix your refrigerator at your house afterwards. The Iraqi employees pointed out

that there was no after sale service. But on the face of it in the

contract, it would seem perfectly reasonable when you bought a

large piece of equipment. We also did see, from time to time,

clauses that contained indication that spare parts were included

and it was evident that there weren’t really that amount of spare

parts and even no spare parts required in one contract. And in another one, again, 10 percent of the value of the contract for after

sales service, again not things that would be normally for that kind

of material in that kind of contract. Those just sort of leapt out at

you.

Senator SUNUNU. And these are problems that were noticed before the contracts were let.

Mr. KENNEDY. Yes, sir. All the contracts required the approval

of the 661 Committee before they could be executed because the

U.N. had control of the bank account and the supplier would not

get his, her, or its money without that U.N. sign-off and the U.N.

sign-off was derivative of the 661 Committee’s approval.

Senator SUNUNU. Ambassador, did you want to add anything to

that? The GAO evaluation of the program, Ambassador, do you

agree with the general findings of the GAO evaluation?

37

Mr. NEGROPONTE. We thought it was a reasonable report although we’re not sure of those figures, the estimates that they have

made. They seem to be in the ballpark and it’s the same figures

I believe that appeared in that Wall Street Journal article.

Senator SUNUNU. But was there any information in the GAO

study that you found to be surprising or new?

Mr. NEGROPONTE. I’m not aware of any, Senator.

Senator SUNUNU. Mr. Kennedy, could you describe the activities,

again in a little bit more detail, the activities of the Board of Auditors?

Mr. KENNEDY. Yes sir.

Senator SUNUNU. In other words, let me lead you a little bit.

Were they constantly performing audits? Were there simply periodic audits? And how comprehensive were they?

Mr. KENNEDY. There, if I might—there is under the Charter of

the United Nations a United Nations Board of Auditors established. It is a rotating board comprised essentially of the equivalent

of the General Accounting Offices of three member states. It is currently France, the Philippines, and South Africa. Over the course

of this it included at times the United Kingdom, Ghana, and others. Under the Oil-for-Food Program, they audited the program

every 6 months.

Senator SUNUNU. They were not set up specifically to audit the

Oil-for-Food Program. Isn’t that correct? This is a normal auditing

board that has existed for some years at the United Nations, as

part of the charter.

Mr. KENNEDY. It has existed since the beginning of the Charter.

And they were engaged, so to speak, to audit the Oil-for-Food Program every 6 months. They did that and rendered reports on that,

on their findings.

Senator SUNUNU. OK, it still isn’t quite clear to me, Ambassador

Negroponte, whether or not their audits were made fully available

to the 661 Committee.

Mr. NEGROPONTE. Yes they were, sir.

Senator SUNUNU. They were, all of them were. Were they found

to be lacking or were any concerns about their quality raised contemporaneously?

Mr. NEGROPONTE. I’m not aware, Senator, of the answer to that

question. I really am not aware that we’ve ever made a judgment

about the adequacy of those audits.

Senator SUNUNU. Mr. Kennedy, what in your estimation is the

track record of previous U.N. investigations of the type that we’re

now seeing on the Oil-for-Food Program? Ambassador, please.

Mr. NEGROPONTE. I think what I would respond to that is that

we have a recent example with respect to Iraq, Senator Sununu,

which is when the Secretary General named a panel to investigate

the bombing and the security precautions that were being taken by

the United Nations in the wake of the August 19 bombing; he

named the former President of Finland, Mr. Martti Ahtisaari, to

conduct an inquiry. And they came out with a scathing report. So

I’d say that there are examples and that would be the most recent

one of the Secretary General of the United Nations being willing

to have a hard look taken at the operations of his own organization.

38

Senator SUNUNU. With regard to corruption, bribery or other

crimes that might have been unearthed by past U.N. investigative

bodies, have there ever been U.N. officials prosecuted or convicted

as a result of the U.N. investigations?

Mr. NEGROPONTE. I would have to submit a response to that for

the record.

Senator SUNUNU. If you could I would appreciate it very much.

[The following response was subsequently received.]

The following excerpts from OIOS annual reports provide instances in which findings from OIOS investigations were referred to national law enforcement authorities

for further investigation and possible prosecutions.

From OIOS 1998 Annual Report (A/53/428)

General Developments: These decisions by programme managers to seek criminal

prosecutions, in order to send a message that criminal conduct can result in criminal prosecution, were supported by both human and financial resources, and they

represent hard evidence of the realization of the Secretary-General’s determination

to increase accountability as part of his reform programme.

• Theft of United Nations-owned equipment: As a result of an inquiry conducted

from 1996 to 1997 by the Investigations Section with the support of DPKO, evidence of theft of United Nations-owned equipment by a United Nations contractor was obtained. This contractor had supplied catering services to two

peacekeeping missions, the UN Transitional Authority in Cambodia and the UN

Operation in Somalia. The United Nations filed a formal complaint in 1996 with

the Government of Kenya because the UN equipment was ultimately located in

Mombasa. The items that have been recovered were found in early 1997 in a

search by the Kenyan Police, with the assistance of staff from OIOS and DPKO,

of several vessels which were owned or operated by the caterer in Mombasa

harbour. The investigation yielded evidence that the firm’s owners and officials

had stolen a total of approximately $400,000 in United Nations equipment from

both missions. Although there is evidence that substantially more UN equipment had been stolen, that equipment has apparently been retained by the company’s interests in Somalia and is not retrievable at this time. For the first

time, the United Nations has sought criminal penalties against owners and officials of a contractor accused of theft and possession of United Nations-owned

equipment. The trial in Kenya has been suspended because one of the accused

had become a fugitive.

• UN Conference on Trade and Development—theft of $600,000 by manager: Evidence adduced by the investigation proved that, over a period of more than 10

years, a manager in UNCTAD stole nearly $600,000 from the UN by submitting

false documents for daily subsistence allowance payments to fictitious ‘‘experts’’

attending non-existent UN conferences. When confronted with the evidence of

his scheme, the staff member acknowledged his misconduct. The findings were

provided to a Swiss court, which convicted the staff member of the crimes

charged and directed that, in addition to the $350,000 repaid, the now former

staff member was obliged to repay the balance.

From OIOS 1999 Annual Report (A/54/393)

• Investigation of UNDP’s Reserve for Field Accommodation: The Investigations

Section was requested by UNDP to undertake an investigation into procurement irregularities identified by the UNDP in the reserve for field accommodation expenditures made for a $50 million building programme.... The value

of the loss to the Organization by the fraud is conservatively estimated at approximately two million dollars. As a result of this investigation, the Administrator fully supported the recommendation that the case be referred to the relevant United States authorities. In addition, he dismissed the UNDP official involved. An indictment was issued by the U.S. authorities, and the former staff

member was arrested. Efforts to extradite the consultant have been unsuccessful. In cooperation with UNDP and the Office of Legal Affairs, the Section has

been assisting the United States authorities and pursuing options to recover the

lost funds. The case is pending.

From OIOS 2000 Annual Report (A/55/436)

• Cases presented to national law enforcement authorities: The Investigations

Section investigated 38 cases which were presented for administrative or disVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
39

ciplinary action; 22 of those cases were recommended for criminal prosecution

by national law enforcement authorities. It can take years for these cases to be

finalized, since such proceedings are time-consuming and they require the Office

to allocate significant resources to assist in their resolution.

From OIOS 2001 Annual Report (A/56/381)

• At the conclusion of an investigation, the Section evaluates the evidence and

provides a report to the concerned programme manager. The Investigations Section is a recommendatory body and cannot prosecute a case before national lawenforcement authorities, institute disciplinary proceedings or take administrative measures. Then the Organization refers a case to national law-enforcement

authorities for criminal investigation and possible prosecution; based on the

Section’s recommendations, the Section, in consultation with the Office of Legal

Affairs and the programme manager concerned, assumes its designated role of

liaison between the United Nations and the national authorities.

• Misdirection of funds at the United Nations Environment Programme: OIOS investigators assisted United States law enforcement authorities in the preparation of the criminal proceedings against a Chase Manhattan Bank customer

who had been the erroneous recipient of over $700,000 in contributions made

by several Member States for deposit in the UNEP Trust Fund account at the

bank. The customer had refused to comply with the bank’s request to have the

money placed in the correct account, claiming that the money belonged to her.

She was arrested in March 2000 and found guilty by a United States jury in

October 2000 on charges of bank fraud and bank larceny. She was sentenced

in April 2001 to 24 months in prison and was required to make restitution of

the misdirected funds to the bank. The bank had previously credited the UNEP

account with the entire amount.

• Investigation at the United Nations Mission in Bosnia and Herzegovina

(UNMIBH): Following an OIOS investigation and a trial in a United States District Court, in April 2001, the United States Court of Appeals upheld the conviction of a former UNMIBH staff member who had been convicted of wire fraud

and conspiring with a local travel agent and an airline employee to submit

fraudulent invoices for excess baggage, resulting in a loss of $800,000 to the Organization. The individual is currently serving a 41-month prison sentence.

From OIOS 2003 Annual Report (A/58/364)

• Refugee smuggling in East Africa: OIOS continued to provide assistance to the

Kenyan authorities during the ongoing criminal trials of the four UNHCR staff

members, two members of an affiliated non-governmental organization and four

others who operated the criminal enterprise of refugee smuggling at the Nairobi

branch. To date, one of these offenders has been convicted and has begun serving his two-year prison sentence.

• United Nations Interim Administration in Kosovo: OIOS investigated, in cooperation with the EU Anti-Fraud Office, significant acts of fraud alleged to

have been committed by an UNMIK senior staff member, who was assigned to

the UNMIK reconstruction pillar, managed by the EU. The investigation revealed that the staff member had caused a public electricity provider in a

neighbouring Member State to transfer more than $4 million, derived from

UNMIK funds for the purchase and sale of electricity on the power grid of the

former Yugoslavia, to his private Gibraltar bank account and later to another

account in Belize. The transfer was stopped and the funds were returned. The

investigation also confirmed that the staff member had engaged in other fraudulent acts of lesser significance. The former staff member was convicted in his

home country on three charges and sentenced to a prison term of three years

and six months.

• Investigation at the UN Conference on Trade and Development: In the context

of a previous investigation by OIOS at the UN Conference on Trade and Development concerning attempted fraud involving an advance fee of $4.7 million as

a payment towards a fake air transport contract for the delivery of humanitarian goods, OIOS provided investigative services and testimony to national

law enforcement authorities. The perpetrator, now a fugitive, is being sought by

the Member State concerned.

Senator SUNUNU. And finally, with regard to the oil sales themselves, do you believe it would have helped limit corruption if sales

had not been limited for larger U.S. firms or larger U.S. firms had

not been restricted in their participation? There’s some discussion

40

about the degree to which corruption may have been exacerbated

by the very large number of small firms, not just in the United

States but around the world, and a certain limitation placed on

larger firms.

Mr. NEGROPONTE. Of course, first of all, I’d like to say that the

overall share of purchases from the United States, or by the U.S.

firms or entry in the contracts—— Senator SUNUNU. About one-third.

Mr. NEGROPONTE [continuing]. Was quite—well, that’s the overall quantity of oil but I think bought in the secondary market, if

you will, they were not direct contractors. I think in the overall

program, I see here, we were the eleventh largest purchaser of oil

from Iraq. The question of whether it might have been helpful to

have larger firms I think is a good one. I think what happened

with the forward pricing scheme was that it caused a proliferation

of a number of smaller companies to want to get into this business.

It might have been a factor, I’m not sure.

[The following response was subsequently received.]

A fundamental principle underlying UN Security Council Resolution 986 (1995),

which established the UN Oil-for-Food Program, was the preservation of the former

Government of Iraq’s sovereignty and territorial integrity. Consequently, the former

Iraqi regime was permitted to sell its petroleum and petroleum products to purchasers of its choosing, as long as the oil price sought reflected ‘‘fair market value’’ and that price was approved by the Iraq Sanctions 661 Committee.

Under the Committee’s Procedures, approved August 8, 1996, UN member states

were instructed to submit a list of ‘‘national oil purchasers (private companies,

State-owned companies, State agencies, ministries, etc.),’’ who would be authorized

to communicate with the UN oil overseers and to conclude oil purchase agreements

with the Iraqis. There were no stipulations either in the resolution or the Committee procedures governing the size and nature of those entities authorized to purchase Iraqi oil. We have provided under separate cover to the Senate Foreign Relations Committee a copy of the UN List, as of March 11, 2003, of Authorized Oil Purchasers. A total of 86 countries and 1,129 companies, of varying size, are listed.

You pose the hypothetical question of whether the alleged corruption involving

Iraqi oil sales might have been reduced if there had been rules mandating that the

former Iraqi regime could only sell its oil to large firms. While the answer to that

question is best left to economists, I note that such a proposal likely would have

elicited extensive debate among, and possible opposition from, certain Security

Council members who sought to preserve the former Iraqi government’s sovereign

right to choose with whom to transact oil sales. I also note that it was the result

of the former regime’s concerted efforts to exploit differences between the Official

Selling Price (OSP) of Iraqi crude oil, as approved by the 661 Committee, and constantly fluctuating global prices for other comparable oils, that produced alleged oil

surcharges. Because the OSP remained fixed, typically for a 30-day period, price differences with other comparable crude oils necessarily emerged. Had purchasers of

Iraqi crude oil been mandated to sign oil contracts in advance, at the fixed OSP,

obligating them to lift the oil on a specific date, no matter what the price might

have been for other comparable crudes, the room to exploit price differentials likely

would have been significantly reduced.

Senator SUNUNU. Thank you very much. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Sununu. Let me

ask more about the United States’ participation. We were the eleventh largest purchaser of Iraqi oil. As Senator Sununu has mentioned, some have suggested about a third of the oil, maybe

through secondary sources, came to the United States. First of all,

I just wanted to check the accuracy of the volume. Beyond that, did

the U.S. companies that purchased oil purchase it directly from

Iraq or through broker middlemen? I ask this because we’ve talked

41

about Saddam and his role in fashioning contracts. Were some of

these contracts directly with American oil firms? Were they observant of the items in these contracts that we have been unearthing

today?

Mr. NEGROPONTE. Well, early in the program, Senator, we were

a major buyer. The program had twelve 6-month phases over its

life. And in the first two or three tranches, if you will, we were important direct buyers. But after that our direct purchases from Iraq

fell off to the point that, in terms of direct purchases, we represented only about 2 percent of the market. So you’re correct to

say that we then bought in the secondary market from whomever

but it was not from the regime itself.

The CHAIRMAN. What I’m driving at is that clearly we’re suggesting that the United States and Great Britain were vigilant, and

that the Security Council and other countries were not. I just want

to make certain, in terms of our own United States participation,

that everybody was above-board, that is, the American firms. Were

there direct contracts between U.S. oil companies and Iraqi oil sellers? Were cognizant of these pricing changes, the kickbacks, and

the developments that we’ve been describing today?

Mr. NEGROPONTE. Well, I think we’ll have to see if any of that

kind of information develops in the inquiry, Mr. Chairman.

The CHAIRMAN. Is the list of companies that sold goods to Saddam Hussein under the Oil-for-Food Program a public document at

this point? Do we have documentation of all who were involved?

Mr. NEGROPONTE. I’m advised that we do not, Mr. Chairman,

have a public list available.

The CHAIRMAN. Does it exist? I mean, is it likely that it will come

to the fore in this investigation?

Mr. NEGROPONTE. Well, I would have thought that it would exist

because the contracts had to be approved so any contract that was

approved under the Oil-for-Food Program would, of course, list the

companies. You wanted to say something, Ambassador?

Ms. RAPHEL. Yes, just to confirm that, the lists do exist, which

include the name of the company, the country of origin, the type

of product, and so on. These were given to the CPA as we worked

on these contracts from the Office of Iraqi Programs. But these

lists at this point are not public lists. On the U.N. Web site, when

they notified suppliers on the prioritization of their contracts it listed merely what we call the COM number, the identification number, and the name of the mission in New York which had been

working the particular contract.

The CHAIRMAN. Is all of this coming to the fore? I appreciate why

things may not have been public, but are they going to be? Will the

rest of the world have an item-by-item accounting of what occurred

here?

Mr. NEGROPONTE. We have been assured that the Secretary General’s report, both its summary and the body of its report, will be

made public. We have been told that there may be instances where

either for the protection of whistle blowers, and we actually insisted on a whistle blower clause in the terms of reference, and in

the case of perhaps naming certain entities for either reasons of

proprietary information of some other legal consideration, those

42

names might be redacted. But I believe that the fundamental motivation of the Secretary General is to have maximum transparency.

The CHAIRMAN. Well, I hope so. Clearly, the credibility of this entire thing is at stake. That includes who the Secretary General is

appointing, or who finally is appointed by the Security Council, if

that happens. The thoroughness of this redacting of situations

raises questions right off the bat. By whom? Under whose authority? We’re back once again to the situation of countries that didn’t

really want to get into this all that much to begin with suggesting

bargaining over what is to be found. I think you understand that.

That’s why I’m asking the question. It’s a critical question.

Let me ask, who conducted the audits of BNP, the bank holding

the U.N.’s Iraq oil escrow account? Do we know if BNP was involved in passing illegal money to Saddam?

Mr. KENNEDY. If I might take that question, Mr. Chairman. The

Board of Auditors, when it audited the Oil-for-Food Program every

6 months validated that the amounts held for the Oil-for-Food Program, which were held in two banks, principally, were there. It

would be entirely speculation on my part to say one thing or another about the bank holdings other than the fact that the United

Nations, once the goods arrived in Iraq the U.N. would be notified

that the goods arrived under contract number 1–2–3; that information would be passed to Washington and all that would happen

then would be that the bank holding the funds were simply told to

pay the amount of money that’s specifically allocated under the letter of credit for account 1–2–3. So the kickbacks came not from the

banking institutions but from the company that held the contract.

The CHAIRMAN. Well, let me just follow that. The BNP bank I’m

talking about is BNP Paribas. It’s a French bank, and it has accounts in New York City. The Wall Street Journal, for the sake of

argument this morning, says that another type of investigation

might occur. It might explore wrongdoing that occurred in the

state’s banking department involving this bank. The question is

what if we’re not able to find out either via the U.N. investigation

or through the fledgling attempts that we’re attempting in Congress? Why, Elliot Spitzer might take a look at it, or perhaps Morgenthau, or somebody else. They might get to the heart of it. This

is why I’m wondering how rigorous the banking audits of BNP

were. Both BNP and the United Nations are located in New York.

It appears that there are ways of finding out what happened, day

by day, currency by currency. Do you have any comment about

that?

Mr. KENNEDY. Mr. Chairman, we’re in favor of complete transparency. My understanding from talking to officials at the United

Nations is that the bank simply disbursed the funds as they were

instructed. They held the funds that the U.N. gave them and then

they disbursed the funds when the U.N. gave them a piece of paper

and said, ‘‘pay this bill.’’ But I believe that this will be one of the

subjects of the inquiry, to make sure that all funds are totally, completely accounted for and that should be done.

The CHAIRMAN. I think it’s fair to say that Senator Biden and I

and clearly most of the members of this committee are strongly in

favor of a strong United Nations and strong United States participation. I started my statement today by saying that this is integral

43

to our foreign policy. We’ve also discussed today the importance of

the U.N. in Iraq. Mention has been made of the current U.N. emissary. As he goes back and forth through various persons and Iraq.

He may offer leadership as he tries to find a new formula. We are

praying for this during the countdown toward June 30. The credibility of the United Nations in attempting to referee, supervise or

help to transform Iraq in this situation is at stake. It’s important

to the United States, given the sacrifices we have made, that the

institution be sound. This is why this emphasis on the oil-for-food

situation arises. The United Nations must vigorously show its abilities to unearth the scandal and to clarify what the situation is.

After sovereignty is transferred, Iraqis will be running their own

affairs. We all pray for a democratic government with human

rights, a visible symbol to the world. In the meanwhile, who will

supervise the situation that had previously led to the graft and corruption that we’re discussing? You can say, well, we’re doing our

best, and we’re sort of coaching people on why graft is not a good

idea and why corruption shouldn’t happen in this world. But without going into hyperbole about the situation, the fact is that we are

also dealing with the U.N. Security Council. I specifically named

names of countries that I believe obstructed justice. Now, one can

say, well, you must have been born in a different era; after all, this

is realpolitik, this is the way things really work. Yet this is not

only a fastidious American government taking a look at this; there

are other players. For the U.N. to be successful, and for food to be

properly distributed to these people, even if only 72 percent got to

them and somewhere else, that’s the way the world works. We’re

saying, that isn’t the way we want the world to work. To compromise that with a U.N. administration that is just as suspect

after June 30 as it was before, with regards to Iraq, would be a

travesty. That is why we’re having the hearing, and that is why a

number of people will have hearings. I think that you understand

the gravity, because your responsibilities as public servants have

been as advocates of the United Nations and United States participation in it, as ours has.

I appreciate your participation today, and the answers that

you’ve given, and the work that you’re doing. But I think it’s a responsibility all of us have. The administration, Congress, those in

the Foreign Service still have an opportunity to make a difference.

Having said this, I pass the baton on to my distinguished colleague.

Senator BIDEN. Thank you, Mr. President—Mr. Chairman, and I

would like to just ask two questions. That was a Freudian slip, Mr.

President; I feel much better. By admiring him I realize I hurt his

reputation but——

Let me say two things, or ask two questions. One, so that people

listening to this hearing understand, there are two pieces to this.

One is the oil that Iraq sold, and the money from these sales,

where it went; to whom it went, what portions were skimmed off,

et cetera. And the second piece of this is what the Iraqi Government did, i.e., Saddam Hussein, purchase, what services were purchased with the money? And what I’m a little confused about is

why the list of those countries, companies or individuals for whom

Saddam purchased something with this money, is not available. We

44

1See Appendix page 157.

have that; you don’t need the U.N. to figure that out, you can figure it out. I’d like a copy of it or an explanation of why you can’t

give us a copy. I don’t quite get it. And so, I realize that might take

time but the way you answered, unless I misunderstood you, you

guys implied, well the investigation will uncover that and the Security Council make a judgment as to whether or not they’ll release

it. You have all that. The United States of America has all that information. Release it or give us an explanation why you shouldn’t

release it to this committee. Any problem with that?

Mr. NEGROPONTE. I think the point is it’s not available publicly.

I think you’re right, I think—— Senator BIDEN. Well publicly, what the heck does that mean?

Publicly? It just means no one’s compiled it. No one’s compiled it.

It’s public, it has numbers attached to it, not names. You know the

names attached to the numbers on the Web site. Is there a reason

why that shouldn’t be part of a report that we file? These are all

the companies in the United States, outside the United States that

benefited by acquiring a contract with the Iraqi Government for the

sale of something to Iraq from the money that Iraq got for the sale

of their oil. That’s not hard, is it?

Mr. NEGROPONTE. It’s certainly not hard to compile and we will

give you a forthright answer—— Senator BIDEN. OK, good.

Mr. NEGROPONTE [continuing]. As to the basis on which it can be

provided to the committee.1

[The following response was subsequently received.]

On April 30, 2004, copies of the UN’s List of Approved National Oil Purchasers

in Accordance with Security Council Resolution 986 (1995), dated March 11, 2004,

and a separate list of all UN Oil-for-Food (OFF) contracts for humanitarian goods

submitted to the UN 661 Committee during the life of the program, were made

available to Senate Foreign Relations Committee staffers by State Department representatives in response to your request.

Your request, made during my April 7, 2004, appearance before the Senate Foreign Relations Committee, raises the more fundamental issue of why the UN did

not make public the specific information associated with Iraqi oil and OFF humanitarian supply contracts.

The UN Office of the Iraq Program (OIP) was guided on this issue by the views

of the UN Office of Legal Affairs (OLA), who advised that in the absence of any indication to the contrary either in the contract itself or by the parties to the contract,

that contracts and their contents should be considered ‘‘confidential’’ to the parties

and to their advisers. However, OLA was of the view that the parties to the contract

necessarily gave their consent for the communication of that contract to the exporting state and for circulation of that contract to members of the 661 Committee so

that Committee members could decide whether to approve the intended export. Beyond these provisions, OLA believed that parties to a contract could not be assumed

to have given their consent to a wider or more general circulation of the contract

or to the information contained in such contracts.

Senator BIDEN. Good. All right. Because I see no rationale for it

being classified. None. Zero. Nothing in the law, nothing in terms

of U.S. security. Nothing. And if there is any I would love to hear

the explanation.

Second point is to Ms. Raphel, just so she understands why I ask

for the report, the first question I asked her. In an article published in the St. Petersburg Times, December 20 of last year, there

is the following paragraph, quote, ‘‘But the council’’—referring to

45

the governing council—‘‘has been dogged by allegations of nepotism, cronyism, self-dealing, outright corruption. The Pentagon is

investigating alleged improprieties in the awarding of a coveted

mobile phone license to a consortium linked to Ahmed Chalabi, the

council’s best known and most controversial member. Questions

have been raised about other contracts amid complaints that council members are more interested in promoting their own agendas

than working for the good of the country.’’ End of quote. That’s the

reason I asked you to compile for me what I requested. Who is

going to be the one? Let’s assume that we find out that there is,

you know, cronyism, nepotism, self-dealing-I don’t mean Mr.

Chalabi, I have no idea whether that’s true or not about Mr.

Chalabi—but among council members. Who do we rely on? Do we

rely on the council to say by the way, there’s cronyism, nepotism?

Do we rely on the auditors we’ve trained for them? That’s the purpose of my question, so you understand. You’re welcome to comment if you’d like.

Ms. RAPHEL. Let me just say a couple of things. Thank you, Senator. The specific answer to your question, in today’s Iraq in terms

of who’s responsible for investigating allegations such as the ones

that you read about and also the Oil-for-Food Program and so on

is the Iraqi Supreme Audit Board, which has been reconstituted

from scratch by the CPA and is working in conjunction right now

with CPA advisors.

Senator BIDEN. That’s the point. The CPA oversees it. We don’t

accept what they say. We don’t accept what they say. We take what

they say, we hope they’re actually auditing it, and then we investigate them. We, the CPA, the Defense Department, the State Department. We are spending American taxpayers’ dollars. We do not,

and if we do we should not, trust an auditing organization we set

up under the control of an interim government. We should not take

it on faith that what they’re asserting to us is true. If we are we

are incredibly naive and possibly derelict. And I know we’re not.

We’re not doing that. So who will perform the same function that

the CPA now performs? This auditing outfit we set up for them?

They come back with a report. Somebody at the CPA sits down now

and looks at that report. If it appears not to be kosher then in fact

somebody at the CPA says hey, Ambassador Bremer, we think

these guys ain’t on the square. Right? Isn’t that how it works now?

I’m not using diplospeak here but that’s how it works, right?

Ms. RAPHEL. Well, if I might just make a couple of comments.

Senator BIDEN. Please.

Ms. RAPHEL. First of all, with regard, of course, to the U.S. taxpayers’ money, appropriated moneys, we have our own systems, as

you well know, of keeping track of that money and what it’s spent

for. There’s another element in this. In speaking about the Development Fund of Iraq, which is where the Iraqi oil revenues and

their other revenues are deposited, one of the things we’ve been

discussing with the Governing Council for the post-June 30 period

is the possibility of having some international monitoring function

of that account. Now, this sounds at first blush like a real affront

to sovereignty, saying how could the Iraqis, when they become sovereign, wish to have somebody looking at their books? But the idea

is, and many of the Iraqis we’ve talked to have taken this under

46

consideration, to have some sort of international stamp of approval

to improve the kind of international confidence that you’re speaking about in the procedures of the budgeting, revenue, and expenditures of the Iraqi system for a finite period of time.

Senator BIDEN. It’s not an affront to sovereignty. The World

Bank does this now. Other international organizations do this now.

When we in fact say to the State of Delaware, federally we’re going

to provide x amount of dollars on condition that you show us how

you’re spending the rest of the money in your account. You know,

this is not rocket science. This is difficult, more difficult than rocket science, but this is not rocket science. We’re not setting down

any new onerous standard on an independent sovereign state. And

it’s kind of basic, you know. You want our help, this is the conditions upon which you get our help. You don’t want our help, no

problem. No problem. And so I wonder who is the one, what entity

it is going to be? Now, you’re telling me we’re considering an international organization of which I guess we’d be part, I don’t know,

but you know, there’s got to be something. And I realize we’re talking two different things. One, American taxpayers’ dollars. And the

second is the use of their own revenues that is taking advantage

of fungible dollars that come from a lot of other places, not just

within Iraq. And I realize that they are different but they are connected. And so the first question is, how about just plain U.S. dollars? What is the means by which we follow the dollar? And the

second is this larger question but I’m anxious to hear what has already been decided, is being contemplated or is in the offing. And

again, I’m serious when I say I realize these are tough questions

but I also realize time’s running out. Time is running out. And so,

anyway, thank you very much, Mr. Chairman, my time is up, obviously.

The CHAIRMAN. Thank you, Senator Biden. I thank the witnesses

for their very helpful answers. I will leave the committee record

open today for additional questions that may come from Senators

who are here and may have additional questions as well as other

Senators who have not been here and therefore not had the opportunity to ask questions in person. We will request the cooperation

of the witnesses in responding as rapidly as possible for the fullness of the record. Thank you, each of you, for your public service,

and for the help that you’ve given us today.

The Chair now calls a second panel composed of Mr. Joseph

Christoff, Director of International Affairs and Trade of the General Accounting Office, and Mr. Michael Thibault, Deputy Director,

Defense Contract Audit Agency. Gentlemen, thank you very much

for coming to the committee today. We look forward to your testimony. As I mentioned to the first panel of witnesses, your full

statements will be made a part of the record, in full. We will ask

you to proceed, either in summary form, or with a full presentation

of your statement, whichever way you feel will be most effective.

I will ask you to testify in the order that I introduced you, and that

would mean first of all, Mr. Christoff.

47

STATEMENT OF JOSEPH A. CHRISTOFF, DIRECTOR, INTERNATIONAL AFFAIRS AND TRADE, U.S. GENERAL ACCOUNTING OFFICE

Mr. CHRISTOFF. Thank you, Mr. Chairman. Mr. Chairman, members of the committee, thank you for inviting GAO to this very important hearing. Last year this committee asked GAO to monitor

reconstruction efforts in Iraq. As part of that effort we looked at

the operations of the U.N. Oil-for-Food Program, its transfer to the

Coalition Provisional Authority, and the challenges Iraq faces as it

assumes responsibility for the program.

Let me first discuss the U.N.’s Oil-for-Food Program. Under U.N.

sanctions Iraq was allowed to sell oil to purchase food and other

humanitarian goods. From 1997 to 2002 the U.N. controlled over

$67 billion in Iraqi oil revenues and issued $38 billion in letters of

credit to purchase commodities. However, GAO estimates that the

former Iraqi regime acquired $10.1 billion in illegal revenues from

the Oil-for-Food Program. This included $5.7 billion in oil smuggled

out of Iraq and $4.4 billion in surcharges on oil sales and illicit

commissions on imported commodities.

Oil was smuggled through Syria by pipeline, across the borders

of Jordan and Turkey by truck and through the Persian Gulf by

ship. The government also levied surcharges against oil purchasers

and commissions against suppliers of commodities. According to Security Council members this surcharge was up to 50 cents per barrel of oil and the commission was 5 to 10 percent of the commodity

contract.

Let me make some observations on the U.N.’s administration of

the Oil-for-Food Program. First, the Iraqi Government had the authority to negotiate contracts directly with companies that purchased oil or supplied commodities. This control over contract negotiations may have been one important factor in allowing Iraq to

levy illegal surcharges and commissions. Second, according to U.N.

procedures the Office of the Iraq Program was to examine the price

and value of all commodity contracts. However, it is unclear whether the Office performed that function. Third, the Office of Iraq Program monitored oil sales at three exit points to ensure that Iraq

sold only the amount of oil approved by the sanctions committee.

However, the Iraqi Government bypassed the official checkpoints

by smuggling oil through Syria, Jordan, and Turkey. The sanctions

committee was able to reduce the illegal oil surcharges and to

screen contracts for dual-use items. In 2001 it implemented retroactive pricing on oil contracts to prevent Iraq from discounting oil

prices in return for surcharges. In addition, the members of the

committee placed holds on contracts containing dual-use items. As

of April 2002 about $5.1 billion in goods were being held for shipment to Iraq.

Now let’s discuss the challenges that the CPA faced when it took

over the program. Last year U.N. agencies, Iraqi ministries, and

the CPA prioritized nearly 5,200 contracts pending shipment to

Iraq. In November the U.N. transferred over 3,000 contracts worth

$6.2 billion to the CPA. Most of these contracts had been renegotiated to remove the illicit commissions. The remaining 2,200 contracts were not continued because the Iraqi ministries no longer

needed the commodities, suppliers were concerned about security,

48

or suppliers did not exist. Nearly one-half of the renegotiated contracts were with suppliers in Russia, Jordan, Turkey, the UAE,

and France.

The transfer has not gone smoothly. CPA did not receive all of

the original contracts, amendments and letters of credit. According

to DOD officials some suppliers have not received payment for

goods delivered in Iraq because CPA had no record of their contracts. CPA also did not have enough staff to administer the contracts. The CPA intended to have 48 coalition staff but as of today

has 16. In addition, CPA’s failed plans to privatize the food distribution system and delayed negotiations with the World Food

Program resulted in diminished food stocks and localized shortages.

And finally, Iraq faces two key challenges in assuming responsibility for the Oil-for-Food Program. First, Iraq must ensure that

the remaining contracts are managed with transparent and accountable controls. Building these controls and the operations of

Iraqi ministries will help address corruption and safeguard the $32

billion expected from donors.

And second, the Iraqi Government will have to decide whether

to continue, reform, or eliminate the current food distribution system. Although 60 percent of the population relies on food subsidies,

the system is expensive and accounts for 25 percent of Iraq’s budget.

Mr. Chairman, that concludes my statement. I’m pleased to answer any of your questions.

[The prepared statement of Mr. Christoff follows:]

PREPARED STATEMENT OF JOSEPH A. CHRISTOFF

OBSERVATIONS ON THE OIL FOR FOOD PROGRAM

WHAT GAO FOUND

GAO estimates that from 1997-2002, the former Iraqi regime attained $10.1 bil- lion in illegal revenues from the Oil for Food program, including $5.7 billion in oil

smuggled out of Iraq and $4.4 billion through surcharges on oil sales and illicit commissions from suppliers exporting goods to Iraq. This estimate includes oil revenue

and contract amounts for 2002, updated letters of credit from prior years, and newer

estimates of illicit commissions from commodity suppliers.

Both the U.N. Secretary General, through the Office of the Iraq Program (OIP)

and the Security Council, through its sanctions committee for Iraq, were responsible

for overseeing the Oil for Food Program. However, the Iraq government negotiated

contracts directly with purchasers of Iraqi oil and suppliers of commodities, which

may have been one important factor that allowed Iraq to levy illegal surcharges and

commissions. While OIP was responsible for examining Iraqi contracts for price and

value, it is unclear how it performed this function. The sanctions committee was responsible for monitoring oil smuggling, screening contracts for items that could have

military uses, and approving oil and commodity contracts. While the sanctions committee responded to illegal surcharges on oil, it is unclear what actions it took to

respond to illicit commissions on commodity contracts.

OIP transferred 3,059 Oil for Food contracts—with pending shipments valued at $6.2 billion—to the CPA on November 22, 2003. However, the CPA stated that it

has not received all the original contracts, amendments, and letters of credit it

needs to manage the program. These problems, along with inadequate CPA staffing

during the transfer, hampered the efforts of CPA’s Oil for Food coordination center

in Baghdad to ensure continued delivery of commodities. Poor planning, coordination, and the security environment in Iraq continue to affect the execution of these

contracts.

Inadequate oversight and corruption in the Oil for Food program raise concerns

about the Iraqi government’s ability to import and distribute Oil for Food commodities and manage at least $32 billion in expected donor reconstruction funds. The

49

1 All references to Oil for Food estimates are in 2003 constant U.S. dollars.

CPA has taken steps, such as appointing inspectors general, to build internal control and accountability measures at Iraq’s ministries. The CPA and the World Food

Program (WFP) are also training ministry staff to help them assume responsibility

for Oil for Food contracts in July 2004. The new government will have to balance

the reform of its costly food subsidy program with the need to maintain food stability and protect the poorest populations.

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss GAO’s review of the United Nations

(U.N.) Oil for Food program.

In 1996, the United Nations and Iraq established the Oil for Food program to address growing concerns about the humanitarian situation after international sanctions were imposed in 1990. The program allowed the Iraqi government to use the

proceeds of its oil sales to pay for food, medicine, and infrastructure maintenance.

From 1997 through 2002, Iraq sold more than $67 billion in oil through the program

and issued $38 billion in letters of credit to purchase commodities.1

Today, we will present our findings and observations on the operation of the Oil

for Food program and its transfer to the Coalition Provisional Authority (CPA). Specifically, we will (1) report on our estimates of the revenue diverted from the program by the former Iraqi regime; (2) provide some preliminary observations on the

administration of the program; (3) describe the challenges the CPA faced when it

assumed responsibility for the program; and (4) discuss the challenges Iraq faces as

it assumes responsibility for the program.

To address these objectives, we reviewed documents and statements from (1) the

United Nations on its management and oversight responsibilities for the Oil for

Food program; (2) the CPA, the Departments of Defense and State, and the United

Nations and its World Food Program (WFP) on the transfer of the program to the

CPA and its implementation; and (3) from the World Bank and Iraq’s 2004 budget

regarding the effect of food subsidies on the Iraqi economy. We met with U.N. officials immediately following the transfer of the program to the CPA in November

2003 and with numerous U.S. officials representing the CPA, the Departments of

Defense and State, and the U.S. Agency for International Development to discuss

the program’s transfer and ongoing management by the CPA. Our review is ongoing

because we have not yet received all the CPA and Iraqi ministry documentation that

we have requested from the CPA and the Department of State. We have also requested certain U.N. documents, including internal audits, to determine the use of

Oil for Food funds prior to the transfer to the CPA and the current disposition of

funds. We assessed the reliability of the data on the number of contracts reviewed

for priority by the United Nations, the CPA, and Iraqi ministries and those transferred to the CPA November 2003 by corroborating OIP information with CPA data.

We were unable to assess the reliability of the dollar amounts of contracts reviewed

and pending shipment because we did not have access to the information that would

have allowed us to confirm the dollar amounts reviewed and transferred.

We conducted our review from November 2003 through April 2004 in accordance

with generally accepted government auditing standards.

SUMMARY

• From 1997 through 2002, we estimate that the former Iraqi regime acquired

$10.1 billion in illegal revenues related to the Oil for Food program—$5.7 billion

in oil smuggled out of Iraq and $4.4 billion in surcharges on oil sales and illicit

charges from suppliers exporting goods to Iraq. This estimate is higher than our

May 2002 estimate of $6.6 billion because it includes (1) oil revenue and contract amounts for 2002, (2) updated letters of credit from prior years, and (3)

newer estimates of illicit commissions from commodity suppliers.

• Both the U.N. Secretary General, through the Office of the Iraq Program (OIP)

and the Security Council, through its sanctions committee for Iraq, were responsible for overseeing the Oil for Food Program. However, the Iraq government

negotiated contracts directly with purchasers of Iraqi oil and suppliers of commodities, which may have been one important factor in allowing Iraq to levy

illegal surcharges and commissions. While OIP was responsible for examining

Iraqi contracts for price and value, it is unclear how it performed this function.

The sanctions committee was responsible for monitoring oil smuggling, screening contracts for items that could have military uses, and approving oil and

commodity contracts. While the sanctions committee responded to illegal surcharges on oil, it is unclear what actions it took to respond to illicit commissions

on commodity contracts.

50

2Wheat flour, rice, vegetable ghee (semifluid clarified butter used for cooking), pulses (edible

seeds of various leguminous crops, such as peas, beans, or lentils), sugar, tea, salt, milk, infant

formula, weaning cereal, soap, and detergent.

• OIP turned over responsibility for 3,059 Oil for Food contracts—with pending shipments valued at $6.2 billion—to the CPA on November 22, 2003. However,

the information the United Nations supplied to the CPA on the renegotiated

contracts contained database errors and did not include all contracts, amendments, and letters of credit associated with the 3,000 contracts. These problems,

along with inadequate CPA staffing at the time of the transfer, hampered efforts by the CPA’s Oil for Food coordination center in Baghdad to ensure that

commodities continued to be delivered. Also, the execution of these contracts

continues to be affected by poor planning, coordination, and security.

• The history of inadequate oversight and corruption in the Oil for Food program

raises concerns about the Iraqi government’s ability to manage the remaining Oil for Food commodities and about $32 billion in expected donor reconstruction

funds. The CPA has taken steps, such as appointing inspectors general, to build

internal controls and accountability measures in Iraq’s ministries. The CPA and

the World Food Program (WFP) are also training ministry staff on procurement

and distribution functions to help them fully assume responsibility for remaining contracts and a continued food distribution system in July 2004. In addition,

the new government will have to balance the need to reform a costly food subsidy program with the need to maintain food stability and protect the poorest

populations.

BACKGROUND

In August 1990, Iraq invaded Kuwait, and the United Nations imposed sanctions

against Iraq. Security Council Resolution 661 of 1990 prohibited all nations from

buying and selling Iraqi commodities, except for food and medicine. Security Council

Resolution 661 also prohibited all nations from exporting weapons or military equipment to Iraq and established a sanctions committee to monitor compliance and

progress in implementing the sanctions. The members of the sanctions committee

were members of the Security Council. Subsequent Security Council resolutions specifically prohibited nations from exporting to Iraq items that could be used to build

chemical, biological, or nuclear weapons. In 1991, the Security Council offered to let

Iraq sell oil under a U.N. program to meet its peoples’ basic needs. The Iraqi government rejected the offer, and over the next 5 years, the United Nations reported

food shortages and a general deterioration in social services.

In December 1996, the United Nations and Iraq agreed on the Oil for Food pro- gram, which permitted Iraq to sell up to $1 billion worth of oil every 90 days to

pay for food, medicine, and humanitarian goods. Subsequent U.N. resolutions increased the amount of oil that could be sold and expanded the humanitarian goods

that could be imported. In 1999, the Security Council removed all restrictions on

the amount of oil Iraq could sell to purchase civilian goods. The United Nations and

the Security Council monitored and screened contracts that the Iraqi government

signed with commodity suppliers and oil purchasers, and Iraq’s oil revenue was

placed in a U.N.-controlled escrow account. In May 2003, U.N. resolution 1483 requested the U.N. Secretary General to, transfer the Oil for Food program to the

CPA by November 2003.

Despite concerns that sanctions may have worsened the humanitarian situation,

the Oil for Food program appears to have helped the Iraqi people. According to the

United Nations, the average daily food intake increased from around 1,275 calories

per person per day in 1996 to about 2,229 calories at the end of 2001. In February

2002, the United Nations reported that the Oil for Food program had considerable

success in several sectors such as agriculture, food, health, and nutrition by arresting the decline in living conditions and improving the nutritional status of the average Iraqi citizen.

The Public Distribution System run by Iraq’s Ministry of Trade is the food portion

of the Oil for Food program. The system distributes a monthly ‘‘food basket’’ that

normally consists of a dozen items 2 to all Iraqis. About 60 percent of Iraqis rely

on this basket as their main source of food.

FORMER IRAQI REGIME DIVERTED AN ESTIMATED $10.1 BILLION FROM THE OIL FOR FOOD

PROGRAM

We estimate that, from 1997 through 2002, the former Iraqi regime acquired

$10.1 billion in illegal revenues related to the Oil for Food program—$5.7 billion

through oil smuggling and $4.4 billion through surcharges against oil sales and ilVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
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3 U.S. General Accounting Office, Weapons of Mass Destruction: U.N. Confronts Significant

Challenges in Implementing Sanctions Against Iraq, GAO-02-625 (Washington, D.C.: May 23,

2002). 4The Defense Contract Audit Agency and the Defense Contract Management Agency, Report

on the Pricing Evaluation of Contracts Awarded Under the Iraq Oil for Food Program (Washington, D.C.: Sept. 12, 2003).

licit commissions from commodity suppliers. This estimate is higher than the $6.6

billion in illegal revenues we reported in May 2002.3 We updated our estimate to

include (1) oil revenue and contract amounts for 2002, (2) updated letters of credit

from prior years, and (3) newer estimates of illicit commissions from commodity suppliers.

Oil was smuggled out through several routes, according to U.S. government officials and oil industry experts. Oil entered Syria by pipeline, crossed the borders of

Jordan and Turkey by truck, and was smuggled through the Persian Gulf by ship.

In addition to revenues from oil smuggling, the Iraqi government levied surcharges

against oil purchasers and commissions against commodity suppliers participating

in the Oil for Food program. According to some Security Council members, the surcharge was up to 50 cents per barrel of oil and the commission was 5 to 15 percent

of the commodity contract.

In our 2002 report, we estimated that the Iraqi regime received a 5-percent illicit

commission on commodity contracts. However, a September 2003 Department of Defense review found that at least 48 percent of 759 Oil for Food contracts that it reviewed were overpriced by an average of 21 percent.4 Defense officials found 5 contracts that included ‘‘after-sales service charges’’ of between 10 and 20 percent. In

addition, interviews by U.S. investigators with high-ranking Iraq regime officials,

including the former oil and finance ministers, confirmed that the former regime received a 10-percent commission from commodity suppliers.

UNITED NATIONS AND SECURITY COUNCIL HAD RESPONSIBILITY FOR OVERSIGHT OF

PROGRAM, BUT IRAQ CONTRACTED DIRECTLY WITH PURCHASERS AND SUPPLIERS

Both OIP and the sanctions committee were responsible for overseeing the Oil for

Food Program. However, the Iraqi government negotiated contracts directly with

purchasers of Iraqi oil and suppliers of commodities. While OIP was to examine

each contract for price and value, it is unclear how it performed this function. The

sanctions committee was responsible for monitoring oil smuggling, screening contracts for items that could have military uses, and approving oil and commodity contracts. The sanctions committee responded to illegal surcharges on oil, but it is unclear what actions it took to respond to commissions on commodity contracts.

Iraq Negotiated Directly with Oil Purchasers and Suppliers

U.N. Security Council resolutions and procedures recognized the sovereignty of

Iraq and gave the Iraqi government authority to negotiate contracts and decide on

contractors. Security Council resolution 986 of 1995 authorized states to import petroleum products from Iraq, subject to the Iraqi government’s endorsement of transactions. Resolution 986 also stated that each export of goods would be at the request

of the government of Iraq. Security Council procedures for implementing resolution

986 further stated that the Iraqi government or the United Nations Inter-Agency

Humanitarian Program would contract directly with suppliers and conclude the appropriate contractual arrangements. Iraqi control over contract negotiations may

have been one important factor in allowing Iraq to levy illegal surcharges and commissions. Appendix I contains a chronology of major events related to sanctions

against Iraq and the administration of the Oil for Food program.

OIP Was Responsible for Key Oversight Aspects of the Program

OIP administered the Oil for Food program from December 1996 to November

2003. As provided in Security Council resolution 986 of 1995 and a memorandum

of understanding between the United Nations and the Iraqi government, OIP was

responsible for monitoring the sale of Iraq’s oil, monitoring Iraq’s purchase of commodities and the delivery of goods, and accounting for the program’s finances. The

United Nations received 3 percent of Iraq’s oil export proceeds for its administrative

and operational costs, which included the cost of U.N. weapons inspections.

The sanctions committee’s procedures for implementing resolution 986 stated that

U.N. independent inspection agents were responsible for monitoring the quality and

quantity of oil being shipped and were authorized to stop shipments if they found

irregularities. To do this, OIP employed 14 contract workers to monitor Iraqi oil

sales at 3 exit points in Iraq. However, the Iraqi government bypassed the official

exit points by smuggling oil through an illegal Syrian pipeline and by trucks

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5 Under fast-track procedures established by Security Council resolution 1383 of 1999, OIP

could approve contracts that contained only humanitarian goods.

through Jordan and Turkey. According to OIP, member states were responsible for

ensuring that their nationals and corporations complied with the sanctions.

OIP was also responsible for monitoring Iraq’s purchase of commodities and the

delivery of goods. Security Council Resolution 986, paragraph 8a(ii) required Iraq

to submit a plan, approved by the Secretary General, to ensure equitable distribution of Iraq’s commodity purchases. The initial distribution plans focused on food

and medicines while subsequent plans were expansive and covered 24 economic sectors, including electricity, oil, and telecommunications.

The sanction committee’s procedures for implementing Security Council resolution

986 stated that experts in the Secretariat were to examine each proposed Iraqi commodity contract, in particular the details of price and value, and to determine

whether the contract items were on the distribution plan. It is unclear whether the

office performed this function. OIP officials told the Defense Contract Audit Agency

they performed very limited, if any, pricing review. They stated that no U.N. resolution tasked them with assessing the price reasonableness of the contracts and no

contracts were rejected solely on the basis of price.

The sanction committee’s procedures for implementing resolution 986 state that

independent inspection agents will confirm the arrival of supplies in Iraq. OIP deployed about 78 U.N. contract monitors to verify shipments and authenticate the

supplies for payment. OIP employees were able to visually inspect 7 to 10 percent

of the approved deliveries.

Security Council resolution 986 also requested the Secretary General to establish

an escrow account for the Oil for Food Program, and to appoint independent and

certified public accountants to audit the account. In this regard, the Secretary General established an escrow account at BNP Paribas into which Iraqi oil revenues

were deposited and letters of credit were issued to suppliers having approved contracts. The U.N. Board of Audit, a body of external public auditors, audited the account. According to OIP, there were also numerous internal audits of the program.

We are trying to obtain these audits.

The Sanctions Committee Had a Key Role in Enforcing Sanctions and Approving

Contracts

The sanctions committee was responsible for three key elements of the Oil for

Food Program: (1) monitoring implementation of the sanctions, (2) screening contracts to prevent the purchase of items that could have military uses, and (3) approving Iraq’s oil and commodity contracts.

U.N. Security Council resolution 661 of 1990 directs all states to prevent Iraq

from exporting petroleum products into their territories. Paragraph 6 of Resolution

661 establishes a sanctions committee to report to the Security Council on states’

compliance with the sanctions and recommend actions regarding effective implementation. As early as June 1996, the Maritime Interception Force, a naval force of coalition partners including the United States and Great Britain, informed the sanctions committee that oil was being smuggled out of Iraq through Iranian territorial

waters. In December 1996, Iran acknowledged the smuggling and reported that it

had taken action. In October 1997, the sanctions committee was again informed

about smuggling through Iranian waters. According to multiple sources, oil smuggling also occurred through Jordan, Turkey, Syria, and the Gulf. Smuggling was a

major source of illicit revenue for the former Iraqi regime through 2002. It is unclear what recommended actions the sanctions committee made to the Security

Council to address the continued smuggling.

A primary function of the members of the sanctions committee was to review and

approve contracts for items that could be used for military purposes. For example,

the United States conducted the most thorough review; about 60 U.S. government

technical experts assessed each item in a contract to determine its potential military

application. According to U.N. Secretariat data in 2002, the United States was responsible for about 90 percent of the holds placed on goods to be exported to Iraq.

As of April 2002, about $5.1 billion worth of goods were being held for shipment

to Iraq.

Under Security Council resolution 986 of 1995, paragraphs 1 and 8, the sanctions

committee was responsible for approving Iraq’s oil contracts; particularly to ensure

that the contract price is fair, and for approving most of Iraq’s commodity contracts.5 In March 2001, the United States informed the Security Council about allegations that Iraqi government officials were receiving illegal surcharges on oil conVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
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6The sanctions committee received reports from the independent oil experts appointed by the

Secretary General to determine whether there was fraud or deception in the oil contracting process. 7 Under retroactive pricing, the Security Council did not approve a price per barrel until the

oil was delivered to the refinery. The Iraq government signed contracts with suppliers without

knowing the price it would have to pay until delivery. This allowed a fair market price to be

set.

tracts, and illicit commissions on commodity contracts.6 According to OIP officials,

the Security Council took action on the allegations of surcharges in 2001 by implementing retroactive pricing for oil contracts.7 However, it is unclear what actions

the sanctions committee took to respond to illicit commissions on commodity contracts. At that time, there was increasing concern about the humanitarian situation

in Iraq and pressure on the United States to expedite its review process.

CPA’s Administration of the Oil for Food Program

In November 2003, the United Nations transferred to the CPA responsibility for

3,059 Oil for Food contracts totaling about $6.2 billion and decided not to transfer

a remaining 2,199 contracts for a variety of reasons. U.N. agencies had renegotiated

most of the contracts turned over to the CPA with the suppliers to remove illicit

charges and amend delivery and location terms. However, the information the

United Nations supplied to the CPA on the renegotiated contracts contained database errors and did not include all contracts, amendments, and letters of credit associated with the 3,000 contracts. These data problems, coupled with inadequate staffing at the CPA, hampered the ability of the CPA’s Oil for Food coordination center

to ensure that suppliers complied with commodity deliveries. In addition, poor planning and coordination are affecting the execution of food contracts.

Program Transferred to the CPA in November 2003

On November 22, 2003, OIP transferred 3,059 contracts worth about $6.2 billion

in pending commodity shipments to the CPA, according to OIP. Prior to the transfer, U.N. agencies had renegotiated the contracts with the suppliers to remove

‘‘after-sales service fees’’—based on information provided by the CPA and Iraqi ministries—and to change delivery dates and locations. These fees were either calculated separately or were part of the unit price of the goods. At the time of the

transfer, all but 251 contracts had been renegotiated with the suppliers. The Defense Contract Management Agency is renegotiating the remaining contracts for the

CPA to remove additional fees averaging 10 percent. The criteria for renegotiating

contracts and the amount of the reductions were based on information from the CPA

in Baghdad and the ministries that originally negotiated the contracts.

An additional 2,199 contracts worth almost $2 billion were not transferred as a

result of a review by U.N. agencies, the CPA, and the Iraqi ministries that negotiated the contracts. For example:

• The review did not recommend continuing 762 contracts, worth almost $1.2 billion, because it determined that the commodities associated with the contracts

were no longer needed.

• Another 728 contracts, worth about $750 million, had been classified as priority

contracts, but were not transferred to the CPA for several reasons. About half—

351 contracts—were not transferred because suppliers were concerned about the

adequacy of security within Iraq or could not reach agreement on price reductions or specification changes. Another 180 contracts were considered fully delivered. Another 136 suppliers had either declared bankruptcy, did not exist, or

did not respond to U.N. requests. It is unclear why the remaining 61 contracts

were removed from the priority list; the OIP document lists them as ‘‘other.’’

• Suppliers did not want to ship the outstanding small balances for an additional

709 contracts totaling about $28 million.

The largest portion of the $6.2 billion in Oil for Food contracts pending shipment

in November 2003—about 23 percent—was designated for food procurement. An additional 9 percent was for food handling and transport. The oil infrastructure,

power, and agriculture sectors also benefited from the remaining contracts. Nearly

one half of the renegotiated contracts were with suppliers in Russia, Jordan, Turkey, the United Arab Emirates, and France.

Inadequate Information and Staffing Affected Transfer and Implementation of Contracts

According to CPA officials and documents, the incomplete and unreliable contract

information the CPA received from the United Nations has hindered CPA’s ability

54

8 U.N. Resolution 1483, ¶ 16(f) (May 2003). 9 As of March 31, 2004, the United Nations had transferred $7.6 billion in Oil for Food funds

to the Development Fund for Iraq.

to execute and accurately report on the remaining contracts. U.N. resolution 1483

requested the Secretary General, through OIP, to transfer to the CPA all relevant

documentation on Oil for Food contracts.8 When we met with OIP officials on November 24, 2003, they stated that they had transferred all contract information to

the CPA.

CPA officials and documents report that the CPA has not received complete information, including copies of all contracts. The CPA received several compact disks

in November and January that were to contain detailed contract and delivery data,

but the information was incomplete. The CPA received few source documents such

as the original contracts, amendments, and letters of credit needed to identify the

status of commodities, prepare shipment schedules, and contact suppliers. In addition, the CPA received little information on letters of credit that had expired or were

canceled. Funds for the Oil for Food program are obligated by letters of credit to

the bank holding the U.N. escrow account. When these commitments are canceled,

the remaining funds are available for transfer to the Development Fund for Iraq.

Without this information, the CPA cannot determine the disposition of Oil for Food

funds and whether the proper amounts were deposited into the Development Fund

for Iraq.9

In addition, the CPA received an OIP contract database but found it unreliable.

For example, CPA staff found mathematical and currency errors in the calculation

of contract cost. The inadequate data and documentation have made it difficult for

CPA to prepare accurate reports on the status of inbound goods and closeouts of

completed contracts.

According to a Department of Defense contracting official, some contractors have

not received payment for goods delivered in Iraq because the CPA had no record

of their contracts.

In November 2003, the CPA established a coordination center in Baghdad to oversee the receipt and delivery of Oil for Food commodities. The CPA authorized 48

coalition positions, to be assisted by Iraqis from various ministries. However, according to several U.S. and U.N. officials, the CPA had insufficient staff to manage the

program and high staff turnover. As of mid-December 2003, the center had 19 coalition staff, including 18 staff whose tours ended in January 2004. U.S. and WFP officials stated that the staff assigned at the time of the transfer lacked experience in

managing and monitoring the import and distribution of goods. A former CPA official stated that the Oil for Food program had been thrust upon an already overburdened and understaffed CPA. As a result, 251 contracts had not been renegotiated

prior to the time of the transfer and the CPA asked the Defense Contract Management Agency to continue the renegotiation process. A November 2003 WFP report

placed part of the blame in food shortfalls during the fall of 2003 on OIP delays

in releasing guidelines for the contract prioritization and renegotiation process. A

September 2003 U.N. report also noted that the transfer process in the northern

governorates was slowing due to an insufficient number of CPA counterparts to

work with U.N. staff on transition issues.

The center’s capacity improved in March 2004 when its coalition staff totaled 37.

By April 2004, the coordination center had 16 coalition staff. Up to 40 Iraqi ministry

staff are currently working on Oil for Food contracts. As of April 1, the coordination

center’s seven ministry advisors have begun working with staff at their respective

ministries as the first step in moving control of the program to the Iraqi government.

Inadequate Planning, Coordination, and Security Affect the Management of Food

Contracts

According to U.S. officials and documents, CPA’s failed plans to privatize the food

distribution system and delayed negotiations with WFP to administer the system resulted in diminished stocks of food commodities and localized shortages. Before the

transfer of the Oil for Food program, the CPA administrator proposed to eliminate

Iraq’s food distribution system and to provide former recipients with cash payments.

He asserted that the system was expensive and depressed the agricultural sector,

and the Ministry of Trade began drawing down existing inventories of food. In December 2003, as the security environment worsened, the CPA administrator reversed his decision to reform the food ration system and left the decision to the provisional Iraqi government.

In January 2004, CPA negotiated a memorandum of understanding (MOU) with

WFP and the Ministry of Trade that committed WFP to procuring a 3-month emerVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
55

gency food stock by March 31, 2004 and providing technical support to the CPA and

Ministry of Trade. Delays in signing the MOU were due to disagreements about the

procurement of emergency food stocks, contract delivery terms, and the terms of

WFP’s involvement. No additional food was procured during the negotiations, and

food stocks diminished and localized shortages occurred in February and March

2004. The CPA and WFP addressed these problems with emergency procurements

from nearby countries.

An April WFP report projected a continued supply of food items through May

2004 except for a 12-percent shortage in milk. Only 55 percent of required domestic

wheat has been procured for July 2004 and no domestic wheat has been procured

for August. Under the terms of MOU, WFP’s commitment to procuring food stock

ended March 31, 2004. The Ministry of Trade assumed responsibility for food procurement on April 1, 2004.

According to a U.S. official, coordination between WFP and the Ministry of Trade

has been deteriorating. The Ministry has not provided WFP with complete and timely information on monthly food allocation plans, weekly stock reports, or information

on cargo arrivals, as the MOU required. WFP staff reported that the Ministry’s data

are subject to sudden, large, and unexplained stock adjustments, thereby making it

difficult to plan deliveries.

The security environment in Iraq has also affected planning for the transfer and

movement of Oil for Food goods in fall 2003. The transfer occurred during a period

of deteriorating security conditions and growing violence in Iraq. A September 2003

U.N. report found that the evacuation of U.N. personnel from Baghdad affected the

timetable and procedures for the transfer of the Oil for Food program to the CPA

and contributed to delays in the contract prioritization and renegotiation processes.

Most WFP staff remained in Amman and other regional offices and continued to

manage the Oil for Food program from those locations. The August bombing of the

U.N. Baghdad headquarters also resulted in the temporary suspension of the border

inspection process and shipments of humanitarian supplies and equipment. A

March 2004 CPA report also noted that stability of the food supply would be affected if security conditions worsened.

CPA AND TRANSITIONAL GOVERNMENT FACE CHALLENGES IN PREVENTING CORRUPTION

AND REFORMING THE FOOD DISTRIBUTION SYSTEM

The history of inadequate oversight and corruption in the Oil for Food program

raises questions about the Iraqi government’s ability to manage the import and distribution of Oil for Food commodities and the billions in international assistance expected to flow into the country. In addition, the food distribution system created a

dependency on food subsidies that disrupted private food markets. The government

will have to decide whether to continue, reform, or eliminate the current system.

Addressing Corruption

The CPA and Iraqi ministries must address corruption in the Oil for Food program to help ensure that the remaining contracts are managed with transparent

and accountable controls. Building these internal control and accountability measures into the operations of Iraqi ministries will also help safeguard the $18.4 billion

in fiscal year 2004 U.S. reconstruction funds and at least $13.8 billion pledged by

other countries.

To address these concerns and oversee government operations, the CPA administrator announced the appointment of inspectors general for 21 of Iraq’s 25 national

ministries on March 30, 2004. At the same time, the CPA announced the establishment of two independent agencies to work with the inspectors general—the Commission on Public Integrity and a Board of Supreme Audit. Finally, the United

States will spend about $1.63 billion on governance-related activities in Iraq, which

will include building a transparent financial management system in Iraq’s ministries.

CPA’s coordination center continues to provide on-the-job training for ministry

staff who will assume responsibility for Oil for Food contracts. after July 2004. Coalition personnel have provided Iraqi staff with guidance on working with suppliers

in a fair and open manner and determining when changes to letters of credit are

appropriate. In addition, according to center staff, coalition and Iraqi staff signed

a code of conduct, which outlined proper job behavior. Among other provisions, the

code of conduct prohibited kickbacks and secret commissions from suppliers. The

center also developed a code of conduct for suppliers. In addition, the center has

begun identifying the steps needed for the transition of full authority to the Iraqi

ministries. These steps include transferring contract related documents, contacting

suppliers, and providing authority to amend contracts. In addition, the January

2004 MOU agreement commits WFP to training ministry staff in the procurement

56

10 United Nations/World Bank, Joint Iraq Needs Assessment: Agriculture, Water Resources,

and Food Security (New York: October 2003).

and transport functions currently conducted by WFP. Training is taking place at

WFP headquarters in Rome, Italy.

Reforming the Food Distribution System

After the CPA transfers responsibility for the food distribution system to the Iraqi

provisional government in July 2004, the government will have to decide whether

to continue, reform, or eliminate the current system. Documents from the Ministries

of Trade and Finance indicate that the annual cost of maintaining the system is as

high as $5 billion, or about 25 percent of total government expenditures. In 2005

and 2006, expenditures for food will be almost as much as all expenditures for capital projects. According to a September 2003 joint U.N. and World Bank needs assessment of Iraq,10 the food subsidy, given out as a monthly ration to the entire population, staved off mass starvation during the time of the sanctions, but at the same

time it disrupted the market for food grains produced locally. The agricultural sector

had little incentive to produce crops in the absence of a promising market. However,

the Iraqi government may find it politically difficult to scale back the food distribution system with 60 percent of the population relying on monthly rations as their

primary source of nutrition. WFP is completing a vulnerability assessment that Iraq

could use to make future decisions on food security programs and better target food

items to those most in need.

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

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

Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration

of the Oil for Food Program

Date Event/Action Summary

Aug. 2, 1990 U.N. Security Council

Resolution 660

Iraqi forces invaded Kuwait. Resolution 660 condemned the invasion and demands immediate withdrawal from Kuwait.

Aug. 6, 1990 U.N. Security Council

Resolution 661

Imposed economic sanctions against the Republic of Iraq. The resolution

called for member states to prevent all commodity imports from Iraq and

exports to Iraq, with the exception of supplies intended strictly for medical

purposes and, in humanitarian circumstances, foodstuffs.

Aug. 6, 1990 Operation Desert Shield President Bush ordered the deployment of thousands of U.S. forces to Saudi

Arabia.

Nov. 5, 1990 U.S. legislation Public Law 101–513 prohibited the import of products from Iraq into the

United States and export of U.S. products to Iraq.

Jan. 12, 1991 U.S. legislation Iraq War Powers Resolution authorized the president to use ‘‘all necessary

means’’ to compel Iraq to withdraw military forces from Kuwait.

Jan. 16, 1991 Operation Desert Storm Operation Desert Storm was launched: Coalition operation, was targeted to

force Iraq to withdraw from Kuwait.

Feb. 28, 1991 Gulf War cease-fire Iraq announced acceptance of all relevant U.N. Security Council resolutions.

Apr. 3, 1991 U.N. Security Council

Resolution 687 (CeaseFire Resolution)

Mandated that Iraq must respect the sovereignty of Kuwait and declare and

destroy all ballistic missiles with a range of more than 150 kilometers as

well as all weapons of mass destruction and production facilities.

Jun. 17, 1991 Creation of U.N. Special

Commission

The U.N. Special Commission (UNSCOM) was charged with monitoring Iraqi

disarmament as mandated by U.N. resolutions and to assist the International Atomic Energy Agency in nuclear monitoring efforts.

Aug. 15, 1991 U.N. Security Council

Resolution 706

Proposed the creation of an Oil for Food program and authorized an escrow

account to be established by the Secretary General. Iraq rejected the terms

of this resolution.

57

Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration

of the Oil for Food Program—Continued

Date Event/Action Summary

Sep. 19, 1991 U.N. Security Council

Resolution 712

Second attempt to create an Oil for Food program. Iraq rejected the terms of

this resolution.

Oct. 2, 1992 U.N. Security Council

Resolution 778

Authorized transferring money produced by any Iraqi oil transaction on or

after August 6, 1990, which had been deposited into the escrow account, to

the states or accounts concerned as long as the oil exports took place or

until sanctions were lifted.

Apr. 14, 1995 U.N. Security Council

Resolution 986

Allowed Iraq to sell $1 billion worth of oil every 90 days. Proceeds were to

be used to procure foodstuffs, medicine, and material and supplies for essential civilian needs. Resolution 986 was supplemented by several U.N. resolutions over the next 7 years that extended the Oil for Food program for different periods of time and increased the amount of exported oil and imported humanitarian goods.

Mar. 27, 1996 U.N. Security Council

Resolution 1051

Established the export and import monitoring system for Iraq.

May 20, 1996 Government of Iraq and

the United Nations

Signed a memorandum of understanding allowing Iraq’s export of oil to pay

for food, medicine, and essential civilian supplies.

Jun. 17, 1996 United States Based on information provided by the Multinational Interception Force (MIF),

communicated concerns about alleged smuggling of Iraqi petroleum products through Iranian territorial waters in violation of resolution 661 to the

Security Council sanctions committee.

Jul. 9, 1996 U.N. Security Council

Sanctions Committee

Committee members asked the United States for more factual information

about smuggling allegations, including the final destination and the nationality of the vessels involved.

Aug. 28, 1996 U.S. delegation to the

U.N. Security Council

Sanctions Committee

Provided briefing on the Iraqi oil smuggling allegations to the sanctions

committee.

Dec. 3, 1996 Islamic Republic of Iran

Permanent Representative to the United Nations

Acknowledged that some vessels carrying illegal goods and oil to and from

Iraq had been using the Iranian flag and territorial waters without authorization and that Iranian authorities had confiscated forged documents and

manifests. Representative agreed to provide the results of the investigations

to the sanctions committee once they were available.

Dec. 10, 1996 Iraq and the United NationsPhase I of the Oil for Food program began.

Jun. 4, 1997 U.N. Security Council

Resolution 1111

Extended the term of resolution 986 another 180 days (phase II).

Sep. 12, 1997 U.N. Security Council

Resolution 1129

Authorized special provision to allow Iraq to sell petroleum in a more favorable time frame.

Oct. 8, 1997 Representatives of the

United Kingdom of Great

Britain and Northern Ireland to the United Nations

Brought the issue of Iraqi smuggling petroleum products through Iranian

territorial waters to the attention of the U.N. Security Council sanctions committee.

Nov. 18, 1997 Coordinator of the Multinational Interception

Force (MIF)

Reported to the U.N. Security Council sanctions committee that since February 1997 there had been a dramatic increase in the number of ships

smuggling petroleum from Iraq inside Iranian territorial waters.

Dec. 4, 1997 U.N. Security Council

Resolution 1143

Extended the Oil for Food program another 180 days (phase Ill).

58

Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration

of the Oil for Food Program—Continued

Date Event/Action Summary

Feb. 20, 1998 U.N. Security Council

Resolution 1153

Raised Iraq’s export ceiling of oil to about $5.3 billion per 6-month phase

(phase IV).

Mar. 25, 1998 U.N. Security Council

Resolution 1158

Permitted Iraq to export additional oil in the 90 days from March 5, 1998, to

compensate for delayed resumption of oil production and reduced oil price.

Jun. 19, 1998 U.N. Security Council

Resolution 1175

Authorized Iraq to buy $300 million worth of oil spare parts to reach the export ceiling of about $5.3 billion.

Aug. 14, 1998 U.S. legislation Public Law 105–235, a joint resolution finding Iraq in unacceptable and

material breach of its international obligations.

Oct. 31, 1998 U.S. legislation: Iraq

Liberation Act

Public Law 105–338 Sec. 4 authorized the president to provide assistance to

Iraqi democratic opposition organizations.

Oct. 31, 1998 Iraqi termination of U.N.

Special Commission

(UNSCOM) Activity

Iraq announced it would terminate all forms of interaction with UNSCOM

and that it would halt all UNSCOM activity inside Iraq.

Nov. 24, 1998 U.N. Security Council

Resolution 1210

Renewed the Oil for Food program for 6 months beyond November 26 at the

higher levels established by resolution 1153. The resolution included additional oil spare parts (phase V).

Dec. 16, 1998 Operation Desert Fox Following Iraq’s recurrent blocking of U.N. weapons inspectors, President

Clinton ordered 4 days of air strikes against military and security targets in

Iraq that contribute to Iraq’s ability to produce, store, and maintain weapons of mass destruction and potential delivery systems.

Mar. 3, 1999 President Clinton Report

to Congress

President Clinton provided the status of efforts to obtain Iraq’s compliance

with U.N. Security Council resolutions. He discussed the MIF report of oil

smuggling out of Iraq and smuggling of other prohibited items into Iraq.

May 21, 1999 U.N. Security Council

Resolution 1242

Renewed the Oil for Food program another 6 months (phase VI).

Oct. 4, 1999 U.N. Security Council

Resolution 1266

Permitted Iraq to export an additional amount of $3.04 billion of oil to make

up for revenue deficits in phases IV and V.

Nov. 19, 1999 U.N. Security Council

Resolution 1275

Extended phase VI of the Oil for Food program for 2 weeks until December

4, 1999.

Dec. 3, 1999 U.N. Security Council

Resolution 1280

Extended phase VI of the Oil for Food program for 1 week until December

11, 1999.

Dec. 10, 1999 U.N. Security Council

Resolution 1281

Renewed the Oil for Food program another 6 months (phase VII).

Dec. 17, 1999 U.N. Security Council

Resolution 1284

Abolished Iraq’s export ceiling to purchase civilian goods. Eased restrictions

on the flow of civilian goods to Iraq and streamlined the approval process

for some oil industry spare parts. Also established the United Nations Monitoring, Verification and Inspection Commission (UNMOVIC).

Mar. 31, 2000 U.N. Security Council

Resolution 1293

Increased oil spare parts allocation from $300 million to $600 million under

phases VI and VII.

Jun. 8, 2000 U.N. Security Council

Resolution 1302

Renewed the Oil for Food program another 180 days until December 5, 2000

(phase VIII).

Dec. 5, 2000 U.N. Security Council

Resolution 1330

Extended the Oil for Food program another 180 days (phase IX).

59

Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration

of the Oil for Food Program—Continued

Date Event/Action Summary

Mar. 8, 2001 Deputy U.S. Representative to the United Nations Remarks to the

Security Council

Ambassador Cunningham acknowledged Iraq’s illegal re-export of humanitarian supplies, oil smuggling, establishment of front companies, and payment of kickbacks to manipulate and gain from Oil for Food contracts. Also

acknowledged that the United States had put holds on hundreds of Oil for

Food contracts that posed dual-use concerns.

Mar. 8, 2001 Acting U.S. Representative to the United Nations Remarks to the

Security Council

Ambassador Cunningham addressed questions regarding allegations of surcharges on oil and smuggling. Acknowledged that oil industry representatives and other Security Council members provided the United States anecdotal information about Iraqi surcharges on oil sales. Also acknowledged

companies claiming they were asked to pay commissions on contracts.

Jun. 1, 2001 U.N. Security Council

Resolution 1352

Extended the terms of resolution 1330 (phase IX) another 30 days.

Jul. 3, 2001 U.N. Security Council

Resolution 1360

Renewed the Oil for Food program an additional 150 days until November

30, 2001 (phase X).

Nov. 29, 2001 U.N. Security Council

Resolution 1382

The resolution stipulated that a new Goods Review List would be adopted

and that relevant procedures would be subject to refinement. Renewed the

Oil for Food program another 180 days (phase XI).

May 14, 2002 U.N. Security Council

Resolution 1409

UNMOVIC reviewed export contracts to ensure that they contain no items on

a designated list of dual-use items known as the Goods Review List. The

resolution also extended the program another 180 days (phase XII).

Nov. 6, 2002 U.N. Security Council

Sanctions Committee

MIF reported that there had been a significant reduction in illegal oil exports

from Iraq by sea over the past year but noted oil smuggling was continuing.

Nov. 25, 2002 U.N. Security Council

Resolution 1443

Extended phase XII of the Oil for Food program another 9 days.

Dec. 4, 2002 U.N. Security Council

Resolution 1447

Renewed the Oil for Food program another 180 days until June 3, 2003

(phase XIII).

Dec. 30,2002 U.N. Security Council

Resolution 1454

Approved changes to the list of goods subject to review and the sanctions

committee.

Mar. 12, 2003 U.N. Security Council

Sanctions Committee

Chairman reported on a number of alleged sanctions violations noted by letters from several countries and the media from February to November 2002.

Alleged incidents involved Syria, India, Liberia, Jordan, Belarus, Switzerland,

Lebanon, Ukraine, and the United Arab Emirates.

Mar. 19, 2003 Operation Iraqi Freedom Operation lraqi Freedom is launched. Coalition operation led by the United

States initiated hostilities in Iraq.

Mar. 28, 2003 U.N. Security Council

Resolution 1472

Adjusted the Oil for Food program and gave the Secretary General authority

for 45 days to facilitate the delivery and receipt of goods contracted by the

Government of Iraq for the humanitarian needs of its people.

Apr. 16, 2003 U.S. legislation Public Law 108–11 Sec. 1503 authorized the President to suspend the application of any provision of the Iraq Sanctions Act of 1990.

Apr. 24, 2003 U.N. Security Council

Resolution 1476

Extended provision of resolution 1472 until June 3, 2003.

May 1, 2003 Operation Iraqi Freedom End of major combat operations and beginning of post-war rebuilding efforts.

60

Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration

of the Oil for Food Program—Continued

Date Event/Action Summary

May 22, 2003 U.N. Security Council

Resolution 1483

Lifted civilian sanctions on Iraq and provided for the end of the Oil for Food

program within 6 months, transferring responsibility for the administration

of any remaining program activities to the Coalition Provisional Authority

(CPA).

Nov. 21, 2003 U.N. Secretary General Transferred administration of the Oil for Food program to the CPA.

Mar. 19, 2004 U.N. Secretary General Responded to allegations of fraud by U.N. officials that were involved in the

administration of the Oil for Food program.

Mar. 25, 2004 U.N. Secretary General Proposed that a special investigation be conducted by an independent

panel.

The CHAIRMAN. Thank you very much, Mr. Christoff.

Mr. Thibault.

STATEMENT OF MICHAEL J. THIBAULT, DEPUTY DIRECTOR,

DEFENSE CONTRACT AUDIT AGENCY, U.S. DEPARTMENT OF

DEFENSE

Mr. THIBAULT. Thank you, Mr. Chairman.

In May of 2003 the Under Secretary of Defense for Policy identified a requirement for an evaluation of approved and funded Oilfor-Food contracts before transition to the CPA. A team of DCAA

auditors, Defense Contract Audit Agency, and Defense Contract

Management Agency Contract Specialists began work on this evaluation from mid-May until the end of August 2003. A final report

was issued on September 12 of last year.

The primary objectives of the evaluation were to review Oil-forFood contracts for price reasonableness and develop recommendations and lessons learned that may be applied to the transition of

the Oil-for-Food Program to the CPA. The team reviewed 759 contracts valued at $6.9 billion. Approximately 80 percent of these contracts were from Phase 8 or forward, or that is, from the year 2000

to the present. The review team met with representatives from the

United Nations Office of Iraqi Program in order to gain an understanding of the review and approval process for the Oil-for-Food

contracts. Although the Office of Iraqi Programs informed us that

they did on occasion raise pricing issues during their review of contracts submitted for approval, validating pricing was not part of

their mission since no U.N. resolution had tasked them with assessing the price reasonableness of the contracts. Therefore the Office of Iraqi Programs performed very limited, if any, pricing reviews or cost audits on individual contracts. The DCAA review

team was further advised by U.N. officials that no contracts were

disapproved based solely on pricing.

The results of the joint team review have been provided in the

testimony. The team noted potential overpricing for the $6.9 billion

that the team reviewed, totaling $656 million or 48 percent of the

contracts evaluated. The team was unable, additionally, to reach a

definitive conclusion on 44 added contracts valued at $1.1 billion

simply because the contracts lacked sufficient detail to make the

61

kind of price comparisons needed to similar goods, or the team was

unable to obtain independent pricing data.

Food commodity contracts were the most consistently overpriced,

with overpricing identified in 87 percent of the contracts in this

category. The potential overpricing by sector has also been provided

within the testimony. The evaluation team also noted that many of

the equipment and vehicle contracts contained unusually large

quantities of spares. The team was advised that Iraq often purchased and warehoused large quantities of spares because it was

uncertain if they would be able to obtain them in the future in the

Oil-for-Food Program, specifically if the Oil-for-Food Program expired or if Iraq was otherwise unable to obtain or import these

spares.

The team also attempted to identify contracts with illicit charges

or what’s been referred to already today as after-sales service

charge. The team found that identifying the existence of surcharges

is difficult from an examination of the contract documents themselves since the contract terms and conditions often do not specifically identify these surcharges. However, the evaluation did identify several examples of after-sales service charges that were included, ranging from 10 to 15 percent.

Finally, the team also identified items of questionable utility for

use by the Iraqi people. For example, among the contracts reviewed

by the team were two contracts valued at more than $16 million

for high-end Mercedes Benz touring sedans, or a total of 300 cars.

There were numerous other similar types of automobile purchases

and other types of goods and services that in the view of the team

was not beneficial for the health and benefits of the Iraqi people.

More recently DCAA has been involved with providing financial

advisory services to support the transition of the Oil-for-Food Program to the CPA in northern Iraq. We’ve been providing recommendations. We have not been issuing audit reports but we

have been providing advisory recommendations related to inventory controls to the CPA; related to cash management controls; related to management controls in the hiring of key staff positions,

which is a critical need as has been mentioned at this testimony,

and establishing procedures to perform bank reconciliations and

initial balance sheets for the banking system which was somewhat

limited in their capabilities.

As an example of the service we’ve provided, DCA auditors recently conducted physical perambulations and observations of Oilfor-Food warehouses in northern Iraq, a total of 17 out of 53 such

warehouses. The auditors found a range of issues including warehouses without electricity or running water; guards complaining of

not being paid; medicine and drugs being stored in warehouses

that do not appear environmentally appropriate for such items; inventory stored in the open air without roofs or ceilings or protection or even tarps; furniture being damaged by being piled into

large heaps in an open environment in the warehouses, and a couple of warehouses with computers, printers, scanners, copiers and

other office equipment that had basically been set up as homes to

very large numbers of pigeons where the droppings had basically

or essentially gone into this various computer and high technology

equipment which may well have rendered it of minimal value. All

62

DCA recommendations of this nature have been provided in writing

to the Director of CPA Office of Project Coordination.

Our last activity of support has been based on a request from

Ambassador Bremer dated February 4 of this year, that an audit,

either by the Inspector General or by the DCAA be performed as

part of the transition to look at the kinds of items, inventory controls, cash management controls, that I previously mentioned. The

decision was made by the new CPA Inspector General that they

would manage that audit and that DCAA would provide an advisory role, that of a contract and offer technical representative and

that the CPA IG would hire a CPA firm so that these issues could

be properly addressed prior to the transition. DCAA continues to

support that.

So in closing I would like to underscore the DCAA is absolutely

committee to supporting CPA and the CPA IG in transitioning this

important program to the Iraqi people. I look forward to addressing

whatever questions or comments that you have. Thank you, Senator.

[The prepared statement of Mr. Thibault follows:]

PREPARED STATEMENT OF MICHAEL J. THIBAULT

Mr. Chairman, members of the committee, my statement for this hearing will

focus on the Defense Contract Audit Agency’s (DCAA) evaluation of contracts

awarded under the Iraq Oil for Food program and the financial assistance we have

provided in the transition of the Oil for Food program to the Coalition Provisional

Authority (CPA).

JOINT DCAA/DCMA EVALUATION

In May 2003, the Under Secretary of Defense (USD) for Policy identified a requirement for an evaluation of approved and funded Oil for Food contracts before

transition to the CPA. The Under Secretary of Defense (Comptroller) requested that

DCAA support the USD Policy by forming a joint review team led by DCAA and

the Defense Contract Management Agency (DCMA). A team of DCAA auditors and

DCMA contract specialists began work on the evaluation from mid-May until the

end of August 2003. A final report was issued on September 12, 2003.

The primary objectives of the evaluation were to review Oil for Food contracts for

price reasonableness and develop recommendations and lessons learned that may be

applied to the transition of the Oil for Food program to the CPA. The team reviewed

759 contracts (10 percent of the total 7,591 approved and funded contracts). The 759

contracts were valued at $6.9 billion, or about 60 percent of the total approved and

funded amount of $11.5 billion. Approximately 80 percent of the contracts reviewed

are from Phase 8 or later (from June 2000 or later). Contracts were selected for

evaluation to represent the broadest possible range of commodities across all sectors

of the Iraq economy. Selections within the different sectors were based on dollar

value, priority of goods, past issues with certain suppliers, and the description of

the goods to be provided. The State Department worked with the United Nations

Office of Iraq Programme (OIP) to provide the review team copies of the selected

contracts.

The review team met with representatives from OIP in order to gain an understanding of the review and approval process for the Oil for Food contracts. OIP’s

primary focus was an administrative/contractual review of the items being purchased from a legal (United Nations Resolutions) perspective. Although OIP informed us that they did, on occasion, raise pricing issues during its review of contracts submitted for approval, validating pricing was not part of their mission since

no UN resolution had tasked OIP with assessing the price reasonableness of contracts. Therefore, OIP performed very limited, if any, pricing reviews or cost audits

on individual contracts. The DCAA review team was further advised by UN officials

that no contracts were disapproved solely based on pricing.

To evaluate the pricing of the selected contracts, the team reviewed the terms of

the contract and searched for available pricing information for the goods provided.

The type of pricing information the team utilized included:

63

• World Market prices for food commodities (based primarily on data from the

U.S. Department of Agriculture)

• Published Price Lists for the same or similar items

• Vendor quotes for the same or similar items

• Third-party pricing guides, such as Kelly Blue Book

• U.S. Government purchases for the same or similar items

• Published Industry Statistics and Standards

• Internet research for similar private or public sector projects and items

For example, our analysis of food contracts was based on world market prices for

the individual commodities (wheat, rice, sugar, etc.). Data, including market prices

and transportation costs for most food commodities, is maintained by the U.S. Department of Agriculture. For most of the food commodities, the team was able to

obtain market prices specific to the countries and time periods specified in the contracts. The analysis of food commodities also included estimated shipping (including

typical insurance costs) to a nearby port and inland trucking costs to points within

Iraq. The analysis did not include costs for any potential transportation delay and

disruption (demurrage).

The results of the joint team review are shown below:

The team noted potential overpricing totaling $656 million in 48 percent of the contracts evaluated. The team was unable to form a definitive conclusion on 44 contracts, valued at $1.1 billion because the contracts lacked sufficient detail to make

price comparisons to similar goods or the team was unable to obtain independent

pricing data for comparable goods.

The review team considered a contract to be overpriced if the overpricing in total

exceeded 5 percent of the contract value. The 5 percent reasonableness threshold

was selected to assure that any reported potential overpricing was conservatively

presented and did not overstate the issue (normally DCAA would take exception to

all costs over an estimated reasonable price). A further breakdown of the overpriced

contracts is shown below:

Food commodity contracts were the most consistently overpriced, with overpricing

identified in 87 percent of the contracts in this category. The potential overpricing

by sector is detailed in the following chart:

64

The evaluation team also noted that many of the equipment and vehicle contracts

contained unusually large quantities of spares. The team was advised that Iraq

often purchased and warehoused large quantities of spares because it was uncertain

that they would be able to obtain them in the future if the Oil for Food program

expired or if Iraq was otherwise unable to import goods. The team also evaluated

64 contracts that required the sellers to provide, at their own expense, training to

Iraqi personnel. The contracts almost always stipulated the duration and location

of the training. Generally, the training was to be offered in the supplier’s country.

In all cases the training was not separately priced. The team also attempted to identify contracts with illicit surcharges (‘‘after sales service charges’’). The team found

that identifying the existence of surcharges is generally not possible from an examination of the contract documents alone since the contract terms and conditions do

not specifically identify the surcharges. However the evaluation did identify five examples of after sales service charges ranging from 10 to 15 percent.

Finally, the team also identified items of questionable utility for use by the Iraqi

people. For example, among the contracts reviewed by the team were two contracts

valued at more than $16 million for high-end Mercedes Benz touring sedans (a total

of 300 cars).

DCAA FINANCIAL SUPPORT TO THE OIL FOR FOOD PROGRAM TRANSITION

More recently DCAA has been involved with providing financial advisory services

to support the transition of the Oil for Food program to the CPA in Northern Iraq.

While DCAA has not performed any audits of the Oil for Food program, the Agency

has provided recommendations on strengthening the CPA’s Office of Project Coordination (OPC) internal and financial controls. These controls include:

• Recommendations related to inventory controls

• Recommendations related to cash management controls

• Recommendations on management controls and the hiring of key staff positions

• Established procedures to perform bank reconciliations and initial balance

sheets

For example, DCAA auditors recently conducted physical perambulations and observations of Oil for Food warehouses in Northern Iraq. The auditors found a range

of issues including warehouses without electricity or running water; guards not

being paid on time; medicine and drugs being stored in warehouses that do not appear environmentally appropriate for such items; inventory stored in the open air;

furniture damaged by being piled into large heaps in an open environment; computers, printers, scanners, copiers, and other office equipment damaged by pigeon

droppings. In this example, we believe these obvious inventory control issues are ongoing and need to be addressed by the CPA before the planned transition to the

Iraqi Governing Council on July 1, 2004. All DCAA recommendations of this nature

have been provided in writing to the Director, CPA Office of Project Coordination.

65

2See Appendix page 157.

PLANNED REVIEW OF OIL FOR FOOD ACTIVITIES BY CPA INSPECTOR GENERAL

Based on a request from Ambassador Bremer, the CPA 10 is working to engage

an independent accounting firm to review Oil for Food field activities in Iraq. The

objectives of the review will center on documenting the internal controls associated

with the Oil for Food program, assist CPA officials in effective discharge of their

duties, and ensure that CPA oversight promotes effective control at a reasonable

price.

The evaluation will be conducted in accordance with International Standards on

Assurance Engagements (ISAEs). The review will focus on the key internal control

points of the program as requested by Ambassador Bremer:

• Oil for Food Contract Authentication and Payment Process

• Contract Amendment Process

• Potential financial liabilities of the Oil for Food Contracts

• For the OFF North Program—the funding, selection, oversight and administration of the Oil for Food projects

• Safeguarding of all Oil for Food Assets (inventory and cash)

• Identify risk for fraud, waste and abuse

DCAA has worked with the CPA 10 to refine the statement of work for the independent accounting firm. The CPA 10 wants the work to commence by April 15,

2004. DCAA will act as the Contracting Officer’s Technical Representative (COTR).

As the COTR, DCAA will monitor the independent accountant’s work to ensure compliance with contract terms and the quality of the final work product.

CLOSING

In closing I want to underscore that DCAA is committed to supporting the CPA

and the CPA 10 in transitioning this important program to the Iraqi people. I look

forward to addressing whatever questions or comments that you have. Thank you.

The CHAIRMAN. Thank you very much, Mr. Thibault. The committee has a copy of the Defense Contract Audit Agency Report

that you completed in September. Can the report be made part of

the official record of this hearing? 2

Mr. THIBAULT. Yes sir, we have provided that to you and we

have obtained the appropriate clearances within the Pentagon. Yes

it can.

The CHAIRMAN. I thank you for that response, as well as for provision of the report.

Mr. Christoff, was the Oil-for-Food Program structured differently in the north? If so, can we determine whether it was run

with any greater degree of efficiency there?

Mr. CHRISTOFF. One of the key differences is that in the north

the United Nations was responsible for management of the Oil-forFood Program. That was in the three northern governorates versus

the 15 southern and central governorates where the Ministry of

Trade was responsible. We have not looked at whether or not there

may have been any differences in terms of let’s say, the price reasonableness of the contracts. But I think it’s a very fair comparison

that should be made in any kind of future investigations.

The CHAIRMAN. By raising it in this hearing, we ask those who

are vested with that responsibility to do just that. It would appear

that there was a difference in administration. As you say, we will

have to see what the facts are with regards to pricing or other aspects of the contracts.

66

Can you comment on the reported SOMO document, published in

Iraqi media in January? It lists 270 individuals, companies and

states that received oil vouchers from Saddam Hussein.

Mr. CHRISTOFF. Senator, I know just about as much as you know

in terms of seeing that list on their Web site and the list of purchasers of the oil vouchers. But we haven’t looked into any of that

in detail.

The CHAIRMAN. Who published that document, and how did it

come into the hands of the Iraqi media?

Mr. CHRISTOFF. I don’t know.

The CHAIRMAN. What percentage of contract holds within the

UNOIP or the 661 Committee were made by U.S. officials?

Mr. CHRISTOFF. When we did our report 2 years ago, I believe as

of April 2002 there were $5.1 billion in holds. Those were holds on

dual-use contracts. They were not holds related to any pricing concerns. And 90 percent of the holds were placed by the United

States, I think about 10 percent by the U.K.

The CHAIRMAN. For the record, please define what a dual-use

contract would be.

Mr. CHRISTOFF. Sure. A dual-use item, first of all, is an item that

can be used for either commercial or military applications. One example of an item that was placed on hold was chemical fertilizers.

It was placed on hold because of the concern about the reconstitution of chemical weapons productions within Iraq.

The CHAIRMAN. How did such items as fertilizer or other items

of this variety get to be included as goods purchased under the Oilfor-Food Program? How common was that?

Mr. CHRISTOFF. Well, in terms of the restricted items, if that’s

what you’re referring to, Senator, when the United Nations moved

to what was called smart sanctions in May of 2002 there was a

general goods review list which specifically listed hundreds of items

that were prohibited from being sent into Iraq or which would require greater scrutiny, very much like the control list that our

Commerce Department uses.

The CHAIRMAN. Mr. Thibault, you mentioned the Mercedes Benz

touring sedans and other vehicles. How did this ever get into the

picture, in your judgment?

Mr. THIBAULT. I can’t describe specifically how it got into the picture other than to state that when we were visiting with United

Nations officials, when our auditors were visiting with them they

described that, and they were candid about it, that they had received allegations that many of the items of questionable utility

such as the Mercedes Benz sedans or some of the equipment, in

one case, or several cases there were private gymnasiums, for example, that these were used as either rewards for people in the

prior regime or were set up for resale. For example, in the period

we looked at there were 37,000 automobiles——

The CHAIRMAN. Thirty-seven thousand automobiles?

Mr. THIBAULT [continuing]. That were approved and what we

were told is it was likely, and that was the allegation, that these

were being resold as a way of generating cash for officials in the

prior regime.

67

The CHAIRMAN. There have been allegations that Saddam Hussein infiltrated the United Nations organization with his own intelligence officials. Is there any evidence that you have found of that?

Mr. CHRISTOFF. No sir, that would have been an excellent question for the first panel.

Mr. THIBAULT. We saw no indication of that also, sir.

The CHAIRMAN. Well, we’ll take a second try. We will ask that

of the first panel under the reservation that the Chair suggested,

stipulating that the hearing record remain open for questions

throughout the day.

Mr. CHRISTOFF. Excellent.

The CHAIRMAN. Which states benefited most from the OFF kickbacks? What do their mission officers say when confronted with

this information?

Mr. CHRISTOFF. You know Senator, that’s the question that you

posed to the first panel as well and that we’re trying to get a handle on, the totality of the contracts. I have some information that’s

just referring to 1998 to 2001—I’m not necessarily referring about

kickbacks but in terms of the countries that were the chief suppliers of commodities were Russia, Egypt, France, China, and Jordan. And I think getting the totality of the information and making

it public is important to have a complete understanding of who

were the chief suppliers of the commodities, who were the chief

purchasers of the oil as well.

The CHAIRMAN. Has there been any reaction from their missions

to the U.N., their embassies with regard to these reports?

Mr. CHRISTOFF. I haven’t chatted with them, no.

Mr. THIBAULT. Mr. Chairman, if I might?

The CHAIRMAN. Yes, sir.

Mr. THIBAULT. While we looked at a small snapshot, it was still

$6.9 billion worth of costs. And in answer to your question we identified what we saw—we built a data base of each and every contract, each and every company that we reviewed and we provided

that to CPA officials and State Department officials. And in our

data that we evaluated there were eight countries that represented

almost 70 percent of the potential overpricing that we identified

and those countries alphabetically, and we used a criteria of $30

million or more and at the ninth country it fell down to like $14

million. So there was a clear break that amounted to 70 percent

for eight countries out of about 50. And those countries alphabetically were Egypt, Jordan, Russian, Syria, Thailand, Turkey, United

Arab Emerates, and Vietnam. And we also, again because we have

a data base, we cut the list where there are 34—and this question

came up earlier—there were 34 specific companies for country missions that amounted to—and we looked at a total of about 400 companies, so less than 10 percent amounted to exactly two-thirds of

the potential contract overpricing. So it’s interesting that within

the data you can actually narrow it down to a fairly specific focus.

The CHAIRMAN. Clearly a lot of countries were doing a lot of business, not only with dual-use items, but with many other goods as

well, some of which have been retraded for the benefit of the Iraqi

Government. This obviously leads to questions with regard to the

Saddam regime itself, and as to why other governments might have

been reticent to see all of this come to an end. World rhetoric alterVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1
68

nated between lamentations about cruelty to Iraqis, the potential

for aggression by Iraq against its neighbors, and attempts to build

weapons of mass destruction, on the one hand; and business as

usual, with billions of dollars of business being transacted on the

other hand. This was of great benefit to a number of countries that

may have been looking for a jobless program. That might have led

some countries to say, let’s don’t be so fastidious about whatever

is occurring in Iraq, we have really a good thing going. There’s an

overall impression that a great number of people, countries, entities were doing well in this situation, and that there was reticence

on the part of the Security Council or the U.N. administration, either through ignorance of all of it or through reluctance to know

much more. Perhaps we would not know what we know now without the United States having been in a position to finally seize the

records and to begin to read what is there. No other nation, perhaps, had that much volition or interest. That’s the basic question

of the hearing. How do we get a change in culture with regards to

the United Nations? Other nations may also be involved in this as

we proceed toward international regimes that are very necessary,

whether it be U.N. responsibilities in Iraq, or U.N. responsibilities

in many other countries that may come along.

Yes.

Mr. CHRISTOFF. Senator, I would extend your point and also talk

about how do you change the culture within the ministries within

Iraq as well.

The CHAIRMAN. Yes.

Mr. CHRISTOFF. Since if you’ve had a legacy of corruption, how

do you build the capacity to ensure that they are going to be using

resources, not only our resources but their own resources, in a very

fair and accountable and transparent manner.

The CHAIRMAN. Well, that clearly is the theme of this hearing.

Senator Biden has illuminated those issues so well, but I would

second the motion. I suspect that this is why we are very intensely

interested in the planning that our government is doing now, and

what it means to transfer sovereignty. The first witness of the day,

Ambassador Negroponte, said that Iraq had sovereignty, and therefore Saddam Hussein was making the decisions as to what was

bought and sold there. Now, another Iraqi Government, hopefully

a democratic one, one with very good intentions, is about to proceed. What will its checks and balances be? Will there be any? We

want to hear a lot more, very soon, because this is not an academic

issue for State and Defense. What we’re talking about today gets

fundamentally to a question of, what can we anticipate, as a country, as a world, with regard to Iraqi sovereignty? Who will make

decisions then? Who will make the audits? Might we find ourselves

once again confronting a culture that might consider it naive to

even raise these questions that we’re raising today?

Mr. CHRISTOFF. Almost calls for an amen, Senator.

The CHAIRMAN. Thank you. Let me just ask, finally, how many

contracts that you reviewed, Mr. Thibault, were refused for content

of the goods? You mentioned dual-use. That’s one reason why that

might have occurred. Huge amounts of spare parts, for example,

might also be of suspicion. Would that be a reason why somebody

might take a look at such a contract?

69

Mr. THIBAULT. Senator, we saw no instances, and you’re exactly

right about the spare parts. To use my automobile example, the vehicles, which is just one sector, transportation, the 37,000 vehicles

actually averaged about $1,200 spare parts for each vehicle when

they were shipped in. There were no disapprovals for goods, either

based on the fact that they were—at the time, by the prior regime

and by the United Nations auditors’ screening process, either based

on the content, other than weapons of mass destruction or dual-use

or potential weapons of mass destruction. And that was explained

to us by the United Nations, and there were no refusals or disapprovals based on cost.

The CHAIRMAN. Let me ask both of you, as I did of our first witnesses, please, if you will, respond to questions that may be raised

additionally by other Senators during the course of the day, as soon

as you can, for the completeness of the record. We very much appreciate your public service. Staff has given to me other documents

that should be a part of this record. Therefore I ask unanimous

consent, and being the only Senator here, will grant that, that a

statement by Ambassador Bremer regarding CPA’s cooperation in

the OFF investigation be placed in the record; and also a statement

from UNICEF regarding nutrition trends in Iraq; a statement from

WHO; a copy of the United Nations-Saybolt Contract and questions

answered by their general counsel via e-mail with the Senate Foreign Relation Committee’s staff, and a statement from Cotecna.

I further ask unanimous consent that the record of this hearing

remain open until the close of business, Thursday, April 8. That

will give opportunities for those senators who have heard this hearing, or their staffs to prompt Senators to get their questions in. So

we will grant permission that all of this be made a part of the

record, including the excellent statement you have submitted, Mr.

Thibault. We thank you for that.

I thank both of you individually for your forthcoming answers

and for your service.

Mr. CHRISTOFF. Thank you sir.

Mr. THIBAULT. Thank you sir.

The CHAIRMAN. The hearing is adjourned.

[Whereupon, at 12:21 p.m. the committee adjourned, to reconvene subject to the call of the Chair.]

(71)

APPENDIX

PREPARED STATEMENT OF SENATOR RUSSELL D. FEINGOLD

I thank the chairman and ranking member for holding this important hearing,

and I thank all of the witnesses for their testimony.

Since late last year, we have gathered more and more information regarding

abuses of the Oil-for-Food Program that was intended to ease the burden borne by

the Iraqi people under Saddam Hussein’s regime. What we know thus far suggests

behavior that was simply unacceptable and in some cases quite likely criminal. Getting to the bottom of who was involved in abuse and why oversight mechanisms

failed to expose and stop abuse sooner is critically important—not only for the Iraqi

people, who have suffered for so many years, but also for the American people and

people around the world who hear of these revelations and ask themselves why they

should have confidence in the basic competence and integrity of the United Nations.

Transparency and accountability are absolutely crucial to the future of U.S.-U.N. relations.

At the same time, we cannot allow those countries and corporations involved in

corrupt practices that undermined a system established to bring some humanitarian

relief to Iraq to avoid scrutiny by focusing on United Nations officials alone. We

need a thorough accounting for the past that examines the roles played by everyone

involved; we need to ensure that those involved in this scandal are held accountable

for their actions; and we need to ensure that appropriate reforms are implemented

to ensure that this kind of corruption cannot take root again.

PREPARED STATEMENT OF AMBASSADOR L. PAUL BREMER, III, ADMINISTRATOR,

COALITION PROVISIONAL AUTHORITY (CPA)

Mr. Chairman and Members of the Senate Foreign Relations Committee:

I welcome this opportunity to provide a statement for the record concerning the

Coalition Provisional Authority’s (CPA’s) response to allegations of misconduct involving the Oil for Food (OFF) Program, which was established by the United Nations (U.N.) in April 1995 in U.N. Security Council resolution no. 986.

The CPA intends to cooperate fully with the numerous investigative and oversight

efforts currently underway regarding the former U.N. OFF Program. The CPA will

not conduct its own investigation into this matter, and instead is taking immediate

steps to ensure that potentially relevant documents are safeguarded and inventoried, and that witnesses who may know of misconduct are identified, in order to

facilitate full and prompt access to this evidence by authorized investigative bodies.

In a letter to the CPA dated March 11, 2004, the U.N. Under-Secretary-General

for Internal Oversight Services inquired into the status of his request for access to

information concerning allegations, arising from records from the former Iraqi Ministry of Oil, that certain individuals, including U.N. staff members, purportedly received bribes in the form of oil and/or money, in connection with the administration

of the OFF Program. The U.N. Under-Secretary General for Internal Oversight

Services requested that the CPA provide direct access to individuals within the Iraqi

Governing Council and interim ministries who had raised allegations of misconduct,

and to Ministry of Oil documents relevant to these allegations. On March 13, the

CPA responded to the Under-Secretary General for Internal Oversight Services by

describing various CPA measures to facilitate investigations of this matter by the

U.N. and other bodies.

Specifically, on March 14, I directed all interim Iraqi ministers, CPA senior advisors, and Regional Governance Coordinators to identify and safeguard all OFF-related information, including contracts, amendments and annexes to contracts, and

supporting materials. My directive states that documents should be inventoried and

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recorded, with notations of all irregularities—including any evidence of bribes, kickbacks or corruption.

My directive also requires interim Iraqi ministers to identify and make available

any current ministry officials who may have knowledge of misconduct arising from

the administration of the OFF Program. I directed the ministers to provide the

names of such officials, and their contact information, to a designated CPA official

who is serving as a point of contact on this matter, no later than March 21. We

have begun to receive those names.

A U.N. team from New York is expected to come to Baghdad soon, and we will

cooperate fully with its members and facilitate their full and immediate access to

relevant documents and witnesses. We welcome U.N. involvement in this matter,

and have recommended that the U.N. designate individuals to join with CPA officials and Iraqi, nationals in safeguarding and inventorying records at key ministries.

At CPA’s request, the Iraqi Board of Supreme Audit (BSA) has agreed to participate fully in the process to safeguard and inventory records. This Board, now comprising some 1,200 employees, will provide impartial oversight. The BSA has assigned personnel on a full-time basis to each ministry to confirm that records are

safeguarded. We have identified a secure central evidence repository for this purpose. In each ministry, the CPA-BSA teams seek meetings with the Minister or Inspector General to directly and personally request that they identify individuals

with knowledge of abuses. The BSA teams will remain at each ministry to assist

in completing inventories.

An external audit, which will be overseen by the BSA, will be undertaken as soon

as possible by a firm chosen in a full, open and competitive process to investigate

thoroughly alleged abuses under the OFF program that may have occurred prior to

November 21. The CPA is making $5 million available from the DFI for this audit.

We will work with the BSA to ensure that the auditors have complete access to information and individuals who may have knowledge of OFF Program abuses. The

CPA is also in the process of identifying an external firm to audit its role in administering the OFF Program since November 21.

The OFF Program now administered by the CPA works with Iraqi partners to

build Iraqi capability to distribute food and other essential needs to Iraqi people.

If allegations of bribery and kickbacks in the OFF Program are proven, it will be

yet another example of the former regime’s utter disregard of the humanitarian

needs of the Iraqi people. As stewards acting on behalf of the Iraqi people and for

their benefit, the CPA will continue to support all authorized investigations and audits of the OFF Program, in order to ensure that those who may have profited at

their expense are held accountable, and to recover, if possible, Iraqi assets that may

have been improperly diverted for private gain.

Thank you for allowing me to share my observations.

PREPARED STATEMENT OF UNITED NATIONS CHILDREN’S FUND (UNICEF)

INTRODUCTION

After the Gulf war, a nation wide rationing system was introduced in Iraq following the imposition of sanctions. All families in Iraq received a monthly food ration distributed each month by the government, and approximately 60 percent of the

population was fully dependent on it to meet all household needs. Since households’

income dropped significantly after the war, the poorest families often sold part of

the food ration to purchase other necessary items such as medicines and clothing.

The calorie intake per capita dropped from an estimated 3,315 kcal pre-1990 to

1,093 kcal in 1995.

Acting under Chapter VII of the UN Charter, the Security Council adopted resolution 986, establishing the Oil for Food program (OFFP), providing Iraq with the

ability to sell oil to purchase humanitarian goods. Oil was first exported under the

program in December 1996 and the first shipment of supplies arrived in March

1997. UNICEF, WFP, FAO and WHO were directed to work on the nutritional status of children.

According to the UN Food and Agriculture Organization and The American Journal of Public Health (2000), the calorie intake per capita began to steadily increase

in 1996. Although the caloric content of the ration increased to 2,215 kcal in 2002

through the implementation of the OFFP Targeted Nutrition Program, it did not

meet the minimum level of 2,472 kcal set by the UN Secretary General under the

OFFP.

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CALORIES PER CAPITA 1990-2002

Pre-1990 1991 1992 1993 1995 1996 1997 1999 2002

3,315 1,300 1,770 1,654 1,093 1,295 2,030 2,150 2,215

(Source: Daponte, BO, Garfield, RM. ‘‘The Effect of Economic Sanctions on the Mortality of Iraqi Children

prior to the 1991 Persian Gulf War.’’ American Journal of Public Health 2000, FAO/WFP Food Supply and

Nutrition Assessment Mission to Iraq, 1997; FAQ/GOI, Evaluation of the Food and Nutrition Situation in

Iraq, 1995.)

NUTRITIONAL STATUS OF CHILDREN

While data was not easily attained in Iraq, there were a number of studies conducted that measured the rate of malnutrition among Iraqi children. In 1991, for

instance, a study conducted by a team from Harvard University and in 1996 a series

of Multiple Indicator Cluster Surveys (MICS) undertaken by UNICEF and the Government of Iraq in Northern and South/Central Iraq revealed an increase in the

rates of child malnutrition between the years of 1991 and 1996.

The 1996 UNICEF-GOI MICS confirmed that chronic malnutrition (stunting) was

31%, underweight 23% and acute malnutrition (wasting) 10%. These figures reflected deterioration in the nutritional status of children, when compared to the results reported by the Harvard Study Team in 1991. The Harvard Team had observed rates of 22%, 12% and 3% respectively.

The national data available shows a decline in rates of child malnutrition from

1996 to 2000. Additional data is available for south/central Iraq and extend the

trend to 2002 showing a sustained decline in malnutrition among children under

five years old. The 2000 UNICEF-GOI MICS data for south/central Iraq, for instance, showed that nutrition rates were improving, with chronic malnutrition

measured at 30%, underweight at 19.5% and acute malnutrition at 7.8%. This improvement continued and was confirmed through a 2002 UNICEF-GOI survey.

Chronic malnutrition was measured at 23.1%, underweight at 9.4% and acute malnutrition at 4%.

RATES OF UNDER-NUTRITION AMONG UNDER FIVE YEAR OLDS IN SOUTH/CENTRAL

IRAQ 1996-2002

1996 2000 2002

Chronic Malnutrition 32 30 23.1

Underweight 12 23 16

Acute Malnutrition 11 7.8 4

(MICS-UNICEF/GOI 1996 Report with results from South/Central Governorates; MICS-UNICEF-GOI 1996

Report with results from Northern Governorates; UNICEF 2002 Nutritional Survey overview of under-fives

in South/Central Governorates; UNICEF State of the Arab Child, 2002; Arab Human Development Report,

2002, UNICEF and Central Statistical Organization, Republic of Iraq.)

NATIONAL RATES OF UNDER-NUTRITION AMONG UNDER FIVE YEAR OLDS

1991 1996 2000

Chronic Malnutrition 22 31 22

Underweight 12 23 16

Acute Malnutrition 3 10 6

(Harvard Study Team, ‘‘Effects of the Gulf Crisis on the Children of Iraq,’’ New England Journal of Medicine 325, no. 13 (1991,); MICS 1996 Report with results from South/Central Governorates; MICS-UNICEFGOI 1996 Report with results from Northern Governorates; MICS-UNICEF-GOI 2000 South/Central and

Northern Governorates).

PREPARED STATEMENT OF THE WORLD HEALTH ORGANIZATION

‘‘THE SITUATION OF HEALTH SUPPLIES FOR IRAQ UNDER THE OFFP, 1996-2002’’

Pre-1991 Situation

Before 1990, Iraq had a GNP per capita of US$ 2,800 and belonged to the group

of middle-income countries. Extensive investment in infrastructure and in human

resources development during the 1960s and 1970s contributed to the development

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of an efficient hospital-based health system that was considered one of the best in

the Middle East region.

Malnutrition was rarely seen since households had easy and affordable access to

a balanced dietary intake. Health care services were delivered by an extensive network of well-equipped, well-supplied and well-staffed health facilities, supported by

a distributed network of secondary and tertiary hospitals/institutions accessible to

all. Ambulances and emergency services were well developed and benefited from a

properly maintained network of roads and telecommunications.

1991-1996 Situation

The sanctions imposed on Iraq in 1991 unintentionally had a damaging effect on

health facilities and programmes upon which the health of the population was heavily dependent. In particular, owing to the impossibility of obtaining foreign exchange

from the sale of oil, the importation of medicines and other health supplies was

drastically restricted. Although the United Nations sanctions did not apply to food

and medicine, the absence of revenues from oil sales left Iraq with virtually no

money to spend for imported food and medicines.

As a result, many essential public health services dependent on imported items

were severely compromised. Vaccination programmes were hampered by lack of vaccines, syringes and cold chain equipment. The TB control programme, blood transfusions, and water quality control services could not function due to lack of laboratory reagents and kits. Emergency and ambulance services for the referral of patients could not carry out their functions, due to lack of or inadequate provision of

equipment and supplies. A declining number of laboratory investigations and surgeries could be performed, as seen in the following tables.

YEAR LABORATORY INVESTIGATIONS IN IRAQ (1990-1994) (BASE YEAR 1990)

Year

Laboratory Investigation

Number %, as % of 1990

1990 11,370,183 100

1991 7,625,355 67

1992 7,079,420 62

1993 6,914,706 61

1994 6,316,611 54

Source: Ministry of Health, Government of Iraq.

Note: 3 Northern Governorates excluded.

MAJOR SURGICAL OPERATIONS IN IRAQ (1990-1994) (BASE YEAR 1990)

Year

Surgical Operations

Number %, as % of 1990

1990 90,318 100

1991 78,089 87

1992 65,372 73

1993 62,463 69

1994 56,153 62

Source: Ministry of Health, Government of Iraq.

Note: 3 Northern Governorates excluded.

This was the situation in 1995 when the Security Council adopted SCR 986 which

established the Oil for Food Programme (OFFP) to allow for the sale of oil to purchase food and essential health supplies.

Situation under the Oil for Food Programme 1997-2002

In 1997 the first health supplies financed under the Oil for Food Programme

(OFFP) arrived in Iraq.

The contracting process for health supplies under OFFP was complex and time

consuming, requiring identification of suppliers, bidding, and submission of contracts involving many actors before contracts reached the Office of the Iraq Programme for final approval. After final approval, long lead times for shipping and

delivery of health supplies to Iraq—eight months on average—delayed further the

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deployment of vital health supplies. Hospital equipment, in particular, was affected

by ‘‘holds’’ placed by the 661 Committee.

In 1999 WHO reported that ‘‘40 percent of key basic drugs available at almost

all of the health facilities observed were financed under Security Council resolution

986 (1995) while the remainder were from other sources.’’ Shortages were nevertheless still prevalent. A study carried out the same year on 239,051 patients for whom

antibacterial drugs were prescribed revealed that only 35 percent received the full

course of treatment. Most drugs were rationed; there were still shortages of essential drugs—e.g. anti-tuberculosis drugs—and of medical supplies such as test tubes,

syringes, needles and sutures. Shortage of disposable syringes adversely affected immunization programmes and the safety of injections. Medical equipment such as infant incubators, dialysis machines, ultrasonic and x-ray equipment, electrocardiograph machines, general laboratory equipment and patient monitors remained in

short supply.

By 2001, health services had started benefiting from the inputs of the OFFP, and

improvements in the health status of the population started becoming apparent.

Cases of malaria, polio and diphtheria declined. Shortages of drugs and hospital

equipment were, however, still being reported: only 30 percent of the essential drugs

at hospitals were received in adequate quantities, and the stock of human vaccines

in the country was still falling short of annual requirements. Some essential medicines, basic medical equipment, laboratory reagents and hospital supplies were in

short supply due to late submission of contracts by the GOI, holds on applications,

or erratic arrivals.

MALARIA

Year Cases Reported

1997 13,959

1998 9,684

1999 4,134

2000 3,859

2001 1,120

POLIO

Year Total Confirmed Polio Cases

1996 21

1997 28

1998 37

1999 8

2000 4

2001 0

DIPHTHERIA

Year Cases Reported (incidence

rate per 100,000)

1989 96 cases (0.53)

1990 168 cases (0.89)

1991 511 cases (2.61)

1992 369 cases (1.91)

1993 239 cases (1.20)

1994 132 cases (0.66)

1995 119 cases (0.58)

1996 258 cases (1.18)

1997 290 cases (1.29)

1998 160 cases (0.67)

1999 142 cases (0.59)

2000 34 cases (0.14)

2001 32 cases (0.12)

76

By 2002 the OFFP inputs to the health system—from sutures to laboratory equipment—had translated into improved health services. Compared to 1997, major surgeries had increased by 40 percent and laboratory investigations by 25 percent in

the center and south. Throughout the country there had been a substantial reduction in vaccine preventable diseases because of improved quality of immunization

campaigns including increased availability of vaccines.

In the last quarter of 2002 the health supply situation had further improved: approximately 80 percent of the essential drugs tracked in the hospitals and chronic

illness pharmacies were adequate. In other peripheral health facilities, however,

drugs continued to be available only in limited quantities. Daily rationing of medicines, except for in-patient services, was still the norm.

By the end of 2002, a cumulative total of US$ 2,074 million of health supplies

had reached Iraq through the OFFP with absolute and per capita quantities having

steadily increased over time. At that point in time about half the cumulative total

of pharmaceuticals and medical items approved by the UN had been delivered to

Iraq, with others still en route. The relatively high number of contracts on hold and

the overall modest level of GOI funding for health supplies contributed to the limitations in health services for final users but the situation had improved measurably

since 1995. The table below shows the increasing value of health supplies received

in Iraq from 1997 to end of 2002, resulting in a gradually improving health situation due to increasing level of material inputs but a still inadequate level of supplies

available on a per capita basis for essential health needs. For comparison purposes,

in 1996 per capita pharmaceutical consumption alone was US$ 36 in Jordan and

about US$ 15 per capita in Egypt.

Health supplies received in Iraq under OFFP in the period 1997-2002

Period

Health supplies

received

(Pharmaceuticals and

Equipment) 1

Average annual value

per capita of health

supplies received

(estimated pop.

25 million)

1997-1999 US $ 751,439,966 US $ 10.02

2000 US $ 318,070,519 US $ 12.72

2001 US $466,464,318 US $ 18.66

2002 US $ 538,041,811 US $ 21.52

1Figures do not include Medical Equipment procured by WHO for the 3 Northern

Governorates.

Throughout the OFFP, the overall quality of drugs and medical supplies to Iraq

was not particularly worrisome despite the fact that Iraq was never allowed to include commercial protection clauses in OFFP contracts. By the end of 2002 only

0.69% of drugs, vaccines and insecticides received in Iraq under the OFFP had

failed quality control tests. While technical limitations of the Quality Control Laboratories in Baghdad might imply that this low level of reported failures could be

questioned, nevertheless QC failure rates observed in GOI contracts received by

WHO under SCR 1472 and independently tested in Jordan highlighted comparable

results: out of US $ 127 million value of drugs received in Amman, failure rates

were around 0.25% of the total value.

COTECNA INSPECTION S.A.

58 RUE DE LA TERRASSIE` RE,

PO BOX 6155, CH-1211

Geneva 6, Switzerland, April 7, 2004.

Senator RICHARD G. LUGAR, Chairman

Senator JOSEPH R. BIDEN, JR., Ranking Member

U.S. Senate Committee on Foreign Relations,

Dirksen Senate Office Building,

Washington, DC 20510

USA

DEAR SENATORS LUGAR AND BIDEN:

77

It is my understanding that the Senate Foreign Relations Committee will be conducting a hearing on Wednesday, April 7, 2004 reviewing the United Nations Oilfor-Food Program. In recent weeks, there have been several articles in the media

regarding this program mentioning Cotecna Inspection S.A. (‘‘Cotecna’’), as our company was authenticating goods imported into Iraq under the UN Oil-for-Food Program.

Recognizing the scope of your hearing and future deliberations, Cotecna would

like to have the opportunity to submit for the record two documents:

1.) a ‘‘Guide to authentication procedures’’ we followed in Iraq, along with

2.) a statement issued by the company which clarifies a number of issues

raised in op-eds and articles regarding Cotecna’s technical and limited mission

in Iraq.

Cotecna has a record of professionalism in the industry which we feel is being unfairly called into question and we want you to know Senator Lugar as Chairman

and Senator Joseph Biden as Ranking Minority Member that we are prepared to

provide the Committee with any further information you may require.

Respectfully,

ROBERT M. MASSEY,

Chief Executive Officer.

THE ROLE OF OIP AND COTECNA—PRIOR TO MARCH 2003

In April 1995 the Security Council adopted Security Council resolution 986 which

established the Oil for Food Programme and permitted the former Government of

Iraq to utilize 53 per cent of the revenue from oil sales for the purchase of humanitarian goods in the South and center of Iraq. The share of the oil revenue allocated

to the former Government of Iraq was later increased to 59 per cent. The United

Nations agencies were allocated 13 per cent of the oil sales revenue to implement

the programme in the North of Iraq. The revenue from oil sales was held in an escrow account referred to as the United Nations Iraq account administered by BNP

Paribas under the supervision of the United Nations Treasury.

Paragraph 8.a.(iii) of resolution 986 requested the Secretary-General of the United

Nations to receive authenticated confirmation that exported goods had arrived in

Iraq and for this purpose the United Nations contracted an Independent Inspection

Agent.

Cotecna S.A., an international inspection company, based in Switzerland, was appointed as the United Nations Independent Inspection Agent from February 1999

until the termination of the Oil for Food Programme on 21 November 2003.

Cotecna established teams of inspectors at 5 inspection sites referred to as entry

points to Iraq. These were located at Zakho, Al Walid, Trebil and Ar’ar on the respective land boundaries with Turkey, Syria, Jordan and Saudi Arabia. A fifth entry

point was located at Umm Qasr, the sea port in the South of Iraq. The inspection

site at Ar’ar only became operational in November 2002, at the request of the

former Government of Iraq and no consignments were ever presented for authentication at this entry point.

During the course of the Oil for Food Programme, the Office of the Iraq Programme (OIP) assigned a unique Comm. (communication) number to each contract

processed and suppliers were required to list every item, however small, destined

for shipment to Iraq. This necessitated the submission of a detailed list of the contracted items, each line item consisting of a description of the goods (including part

numbers), the quantity and the unit values. Information concerning each line item

was transferred by, OIP, to the Oil for Food database. The supplier was also required to select a single point of entry to Iraq. Once an application had been approved and funded, OIP issued an approval/O.C. (official communication) letter to

the supplier authorizing the export of the contracted goods and specifying the point

of entry to Iraq.

Information concerning approved and funded contracts was replicated by OIP to

the relevant Cotecna site through which the goods were destined for delivery. For

security reasons other sites could not access the data. Suppliers were permitted to

change the points of entry, as required, at which point a revised approval letter reflecting the change was issued, by OIP, and the database information was replicated

to the alternative Cotecna site.

Approval letters issued by OIP were generally issued with a validity period of one

year. Goods could not be authenticated if the validity of the approval letter had expired. In such cases suppliers were required to submit an extension request and OIP

issued an extended approval letter.

78

OIP advised the UN Treasury and former Government of Iraq upon the issuance

of each approval letter which served as the trigger for the submission of letters of

credit (LCs) to Treasury by the Central Bank of Iraq. Treasury reviewed each LC

received before instructing BNP Paribas to open the letter of credit.

It was agreed that Cotecna would physically inspect approximately 10 per cent

of the delivered goods. This sampling ratio is considerably higher than that employed by customs organizations which typically carry out physical inspection of 3

per cent of imported goods. Authentication for the remaining 90 per cent of contracts was based upon documentary inspection procedures. In addition, Cotecna

drew samples of all food stuffs entering Iraq and authentication was deferred until

laboratory analysis had confirmed the goods to be fit for human consumption. The

Government of Iraq lobbied strongly and repeatedly for deferred authentication to

permit internal quality control tests which might facilitate the rejection of substandard goods. The United Nations resisted these requests as the process was designed to be independent and deferral of authentication was not mandated by the

Security Council. In cases where the Government was not satisfied with the delivered goods the United Nations advised that normal commercial dispute resolution

procedures, to include arbitration if required, should go forth.

At the conclusion of the inspection process Cotecna inspectors prepared a standardized confirmation often referred to as authentication sheet(s), extracted from the

shipment inspection report. The shipment inspection reports and authentication

sheets were issued by either team leader or deputy team leader at each site and

were replicated to OIP via Oil for Food database (shipment inspection reports) and

via e-mail (authentication sheets) respectively. Upon receipt of the authentication

sheets, OIP staff verified that the information was accurate and consistent with line

items entered on the database. The standardized confirmations were then dispatched electronically to the United Nations Treasury whereupon an instruction

was issued by Treasury to BNP Paribas to effect payment against the letter of credit.

AGENCY GOODS

The payment system for agency goods operated under different procedures. Agencies were allocated tranches of revenue to implement activities in their respective

sectors and payments were made directly by the agencies to suppliers.

In the early days of the Programme goods contracted by the UN agencies were

not presented for authentication and data concerning the quantity and value of

goods delivered to the North of Iraq was compiled from reports presented to OIP

by the agencies. In late 1998 the Executive Director, OIP, requested that all agencies present their goods to the independent Inspection Agent for authentication purposes in order that reliable, immediate data concerning deliveries under the 13 per

cent account be available instantaneously from the Oil for Food database. To this

effect the UN agencies arranged daily convoys of agency goods from the Turkish border to the inspection site in Zakho.

INTERIM AUTHENTICATION MECHANISM—POST MARCH 2003

On 28 March 2003 the Security Council adopted resolution 1472 which authorized

the Secretary-General to establish alternative locations, both inside and outside

Iraq, in consultation with the respective governments, for the delivery, inspection

and authenticated confirmation of humanitarian supplies and equipment provided

under the Programme, as well as to re-direct shipments of goods to these locations,

as necessary. Security Council resolution 1472 also required the United Nations

agencies and Programmes to identify essential humanitarian goods which could be

shipped within the period mandated by the resolution. The mandate established by

resolution 1472 and extended by resolution 1476 was valid to 3 June 2003.

Under the interim revised authentication mechanism established by resolution

1472, rather than delivering goods to Iraq, suppliers were required to deliver to locations within the region agreed, in advance, with the UN agencies. The UN agencies and programmes were assigned responsibility for the storage and onward distribution of the goods following delivery to the agreed destinations.

In consultation with OIP, Cotecna established alternative delivery locations in

Iskenderun (Turkey), Latakia (Syria), Aqaba (Jordan), Kuwait city and Dubai

(UAE). From these locations Cotecna inspectors traveled to warehouses and ports

in countries located across the region to inspect and authenticate goods prioritized

by the UN agencies for delivery to Iraq pursuant to resolution 1472. The UN agencies were advised to request that the goods be authenticated only once they had assumed full control of the consignments. Such requests were submitted, by the agencies, to OIP. Once OIP had ascertained that the contracts had been prioritized purVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00082 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
79

suant to resolution 1472 and the contract amended accordingly, Cotecna was advised to inspect and authenticate the goods. In certain, exceptional, cases OIP

agreed, with agencies such as WFP or WHO, to carry out the inspection of the goods

but defer authentication until the agency had confirmed that the goods had been

delivered to Iraq or that quality control tests had been successfully concluded.

IMPLEMENTATION OF SECURITY COUNCIL RESOLUTION 1483—REVISED AUTHENTICATION

MECHANISM

On 22 May 2003 the Security Council adopted resolution 1483 which, in addition

to terminating the Oil for Food Programme, required the UN agencies and programmes, in coordination with CPA, to establish the relative utility of each approved and funded contract for delivery to Iraq.

This presented a requirement to create a revised authentication mechanism based

upon authentication within Iraq rather than the alternative delivery locations established under resolution 1472.

In July 2003 OIP staff met with representatives of the CPA in Baghdad to negotiate an authentication mechanism based upon inspection of goods within Iraq. It

was agreed that Cotecna would establish bases in Kirkuk, Baghdad, Basrah and

Umm Qasr, from which inspectors would be deployed to inspect goods at delivery

locations nominated by each Iraqi Ministry. This plan was abandoned, one week

prior to its implementation, following the evacuation of UN staff and contractors

from Iraq after the bombing of the UN headquarters on 19 August 2003.

A variety of alternative options were discussed by OIP, CPA and Cotecna. Discussions were limited by the fact that the UN Security Coordinator would not approve

any return of Cotecna inspectors to the former sites or any other location within

Iraq.

As an emergency measure an ad hoc authentication mechanism was agreed and

suppliers were advised that the small volume of contracts already renegotiated for

delivery to Iraq under resolution 1483 could proceed and that CPA would advise

Cotecna to authenticate based upon confirmation of the receipt of the goods by the

Iraqi Ministries.

In September 2003 further discussions took place in Amman, Jordan between

CPA, Cotecna and OIP. As a result of these discussions the agreement of the Governments of Turkey, Syria and Jordan was obtained to co-locate Cotecna inspectors

at Silopi, At Tanf and Al Karama. These are the Turkish, Syrian and Jordanian customs stations respectively adjacent to Zakho, Al Walid and Trebil—the former

Cotecna sites in Iraq.

Due to the absence of a corresponding land boundary, Umm Qasr presented greater challenges. It was eventually agreed that containerized traffic would discharge

at Dubai (Port Rasheed, Port Jebel Ali), Abu Dhabi and Khorfakkan where it would

be inspected by Cotecna. Authentication would, however, be deferred until CPA representatives had confirmed the arrival of the goods at Umm Qasr. With regard to

foodstuffs and agricultural supplies shipped in bulk, a rendez vous point was established 5-7 miles off the coast of Dubai. Cotecna inspectors leased launches and

boarded and inspected the vessels at sea, drawing samples for laboratory analysis,

when required. The revised authentication mechanism was implemented and

superceded the ad hoc mechanism in October 2003.

Up to the termination of the Oil for Food Programme in November 2003 Cotecna

inspectors also continued to travel throughout the region authenticating goods

prioritized under resolution 1472 which were delivered after the deadline imposed

by resolution 1476.

TRANSFER OF COTECNA CONTRACT TO CPA AND FURTHER DISCUSSIONS

The contract for the inspection of goods destined to Iraq by Cotecna was officially

transferred from the United Nations to the Coalition Provisional Authority on 20

November 2003.

PERIOD 21.NOVEMBER—31.DECEMBER 2003

Tripartite assignment of the contract: UNOIP-CPA-Cotecna was signed as the

Amendment No. 5 to the main contract, covering period from 21.November until

31.December 2003 with no changes to the authentication procedures, described

above.

CURRENT CONTRACT: AMENDMENT NO. 6, PERIOD 01.JANUARY-30.JUNE 2004

Main changes until now:

80

• deferred authentication for 15 days at land borders only, effective 01.January

2004

• deployment of small group of 4 Cotecna inspectors in Umm Qasr to report the

arrival of containerized and bulk cargo in Umm Qasr to the Dubai team for authentication.

STATEMENT FROM COTECNA INSPECTION S.A.

This statement is being made in response to questions raised about the work carried out by Cotecna under contract with the UN’s Oil For Food programme in Iraq.

It seeks to set the record straight on the mission of Cotecna, whose thirty year

record of professionalism as a world leader in innovative inspection services, has

created an industry leader with 4,000 employees in 150 offices in 100 countries

worldwide.

The Oil For Food Programme, established under resolution 986 of the UN Security Council in April 1995, allowed Iraq to use 53% (later increased to 59%) of oil

sales revenues for the purchase of humanitarian goods. The resolution also requested the UN Secretary General to receive authenticated confirmation that exported goods had arrived in Iraq and, for this purpose, the UN contracted for the

services of an agency internationally recognized as an expert in that field.

Cotecna Inspection S.A. Geneva, one of the international leaders in commercial

authenticating services, participated in a UN call for tender for this programme in

the fall of 1998 and was selected on December 31, 1998 for its efficiency, cost-effectiveness, and technologically advanced solutions. Indeed, Cotecna’s quality performance led to an extension of the initial contract on a six-month basis and, then, to

an extension of one year in 2002. In November 2003, this contract was renewed with

the Coalition Provisional Authority in Iraq under identical terms.

Cotecna’s limited, technical role in the Oil for Food programme was carried out

in full compliance with contract requirements, with its own strict code of ethical

conduct, and according to the best practices in the industry, as codified by the International Federation of Inspection Agencies.

A specific question has been raised in the media about the employment by

Cotecna of Kojo Annan, the son of UN Secretary General Kofi Annan. It should be

noted that Mr. Annan’s full-time employment by Cotecna ended well before the selection of Cotecna for the UN mission; Mr. Annan’s full-time employment began in

December 1995 and ended in December 1997, after which Kojo Annan was retained

as a consultant until the end of 1998. His activities concerned exclusively Cotecna’s

separate actitivies in Nigeria and Ghana, and he was not involved in any of

Cotecna’s operations involving the United Nations or Iraq.

The Cotecna mission in Iraq began in February 1999. It consisted of a comparative authentication between the goods entering the country and the list of goods to

be imported. Authenticating meant confirming that imported goods effectively corresponded to their description on shipment documents presented to the agent and

the copies of documents provided to the agent by UN-Office of Iraq Programme. ‘‘Authenticating’’ is a role that is different from ‘‘inspecting’’, as the latter could imply

an assessment of the quality and/or value of the goods.

To perform this task, Cotecna employed 85 inspectors on four border posts between Iraq and Turkey, Syria, Jordan and at the port of Umm Qasr in the Persian

Gulf. A fifth post on the frontier with Saudi Arabia was later added for a limited

period of time. Approval of the UN-OIP was required for the recruitment of each

of the professional inspectors from 30 different nationalities. Once imported goods

were authenticated by Cotecna inspectors, they notified the UN-OIP-NYC in reports

transmitted electronically.

It is important to understand that Cotecna’s duties under its contract were limited to verifying that goods which were entering Iraq matched the list of goods authorized to be imported, and in a limited number of cases assessing the quality of

the goods. Cotecna was not involved in selecting the goods which were to be imported, establishing the specifications of such products, selecting the parties who

would supply such products, negotiating the prices to be paid or designating any

sales intermediaries or sales commissions. In addition, Cotecna was not involved in

handling any funds for the payment for any goods, other than verifying that items

which had been approved for import had actually been delivered.

Contrary to some press reports, there were no ‘‘commission on fees.’’ Rather,

Cotecna’s fees for this mission were contractually calculated on the basis of days

worked by a maximum of 67 inspectors on 4 Iraqi sites.

81

1 Jean-David Levitte is the French Ambassador to the United States. He previously served as

the French Ambassador to the United Nations.

Cotecna’s contract for authentication of goods imported by Iraq under the Oil For

Food programme was awarded in full compliance with United Nations’ financial regulations and procurement policies.

Cotecna has accomplished its limited and technical mission in full accordance

with its contract with the UN, with its own strict code of ethical conduct, and with

the best practices in the industry, as codified by the International Federation of Inspection Agencies (IFIA). Any accusations or inferences otherwise are false and defamatory.

[From the Los Angeles Times, April 7, 2004]

OP ED ARTICLE BY AMBASSADOR JEAN-DAVID LEVITTE 1

A year ago, when the question of military intervention to disarm Iraq was raised,

my country strongly opposed such a step, convinced that Iraq was not an imminent

threat to world peace, had no link with Al Qaeda and that the consequences of a

war in Iraq needed to be seriously weighed.

At that time, as everyone will remember, France’s position, which was shared by

many countries and a number of Americans, was bitterly criticized and widely disparaged. Although there were many signs of friendship extended to me from individual Americans, for which I am very grateflul, there were also lot of false accusations spread in public to discredit France.

Since then, time has passed, and the diplomatic hurricane has abated. Today, we

all understand the importance of what unites us, from our common fight against

terrorism to our presence side by side in regional conflicts, in Afghanistan, Haiti,

Kosovo and elsewhere.

Consequently I have been deeply surprised in the last few days to see a new campaign of unfounded accusations against my country flourish again in the press.

These allegations, which are being spread by a handfull of influential conservative

journalists in the United States, have arisen in connection with a newly initiated

inquiry into the ‘‘oil-for-food’’ program that was run by the United Nations in Iraq

during the final years of Saddam Hussein’s government. These allegations suggest

that the government of France condoned kickbacks—bribes, in effect—from French

companies to the Iraqi government of Saddam Hussein in return for further contracts. They say that the French government turned a blind eye to these activities.

Let me be absolutely clear. These aspersions are completely false and can only

have been made to try to discredit France, a longtime friend and an ally of the

United States.

As the former French Ambassador to the United Nations, let me explain bow the

oil-for-food program worked. Created in 1996, the program was intended to provide

the Iraqi people with essential goods so as to alleviate the humanitarian impact of

the international sanctions which remained in place. The program authorized Iraq

to export agreed quantities of oil, and allowed the money from the sales to be used

for food and other necessities. The program was managed by the United Nations

and closely monitored by the Security Council members. Between 1996 and the end

of the program in 2003, every single contract for every humanitarian purchase had

to be formally and unanimously approved by the 15 members of the Security Council, including France, the United Kingdom and the U.S. The complete contracts were

not circulated to Security Council members other than to the U.S. and U.K. which

had expressly asked to see them and would have been in the best position to have

known if anything improper was going on. While a number of contracts were put

on hold by the American and British delegations on security-related grounds, no

contract was ever held up because malfeasance, such as illegal kickbacks, had been

detected.

Was there corruption and bribery inside the program? Frankly, I don’t know; Iraq

was not a market economy; it was under sanctions at the time. Customs experts

had little choice but to assume that the prices set by outside companies were ‘‘reasonable and acceptable,’’ a criterion of acceptance used by the UN secretariat, and

had no way of checking whether some contracts were overpriced. That is why

France fully supports the independent inquiry set up by the U.N. The truth must

come out. But the notion that our government was somehow complicit is absurd.

Was France a major beneficiary of ‘‘oil-for-food’’ contracts, as several conservative

columnists have claimed recently? Definitely not. From the beginning of the proVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
82

gram (1996) to its end (2003), French contracts accounted for 8% of the total. We

were Iraq’s eighth largest supplier.

In addition, throughout the program a sizable proportion of the contracts dubbed

‘‘French’’ were in fact contracts from foreign companies using their French branches,

subsidiaries and agents. Among them were American companies providing spare

parts for the oil industry (including several subsidiaries of Halliburton). They submitted contracts through French subsidiaries for more than S200 million.

It is also suggested that the money from the ‘‘oil-for-food’’ contracts passed exclusively through a French bank, BNP-Paribas. Wrong again: 41% of the money passed

through J.P. Morgan Chase Bank which like BNP, was contracted by the UN with

the approval of Security Council members.

This leaves us with one remaining accusation: that the French position on the oilfor-food program and Iraq in general was driven by the lure of oil. But France was

never a major destination for Iraqi oil during the program. In 2001, 8% of Iraqi oil

was imported by France, compared with 44.5% imported by the U.S., which was the

number one importer all along.

So why do some people feel such a compelling need to blame my country for something it has not done?

At a time when the United Nations is considering a return to Iraq and we all

agree on the need for close international cooperation to help a sovereign, stable Iraq

emerge, I don’t understand this campaign. Or the hidden agenda behind it.

RESPONSES OF AMB. JOHN D. NEGROPONTE TO ADDITIONAL QUESTIONS FOR THE

RECORD

QUESTIONS SUBMITTED BY SENATOR RICHARD G. LUGAR

Question 1. Various nations began to send chartered flights to Baghdad in the

mid-1990’s. Which countries sent such flights in? Were these flights authorized by

the 661 Committee? Did any member of the 661 Committee propose that the UN

monitor the cargo brought in on such flights, if so name them? Did any nations object to such monitoring, if so who were they?

Answer. Countries that regularly sent chartered flights into Iraq included Jordan,

Egypt, Lebanon and Russia. Anywhere between 5-15 flight requests typically were

received by the Committee within a one-week period. Flights were authorized by the

661 Committee if they were for humanitarian purposes. Flight details, including

cargo lists and flight manifests, were required to be approved by the Committee. It

was the responsibility of the member state from which the flight departed to ensure

that the contents of the aircraft had been approved by the Committee. The French

repeatedly took the position in 661 Committee discussions that flights to Iraq only

had to be notified to 661 Committee members; we and the British, however, insisted

that all flights required 661 Committee approval before they could proceed, based

on the clearly defined language in operative paragraph 4(b) of UN Security Council

resolution 670 (1990). Our view prevailed.

Question 2. Kofi Annan has announced he will appoint a team of notables to conduct an investigation into this matter. Would an investigation authorized by the Security Council have more clout?

Answer. On 21 April, the Security Council unanimously adopted resolution 1538,

expressing the Security Council’s full support for the independent, high-level inquiry

established by UN Secretary-General Annan. The Panel will be led by Mr. Paul

Volcker, former Chairman of the Federal Reserve Bank. Resolution 1538 underscores the importance of full cooperation with the independent high-level inquiry by

all United Nations officials and personnel, the Coalition Provisional Authority, Iraq,

and all other Member States.

The Coalition Provisional Authority, Iraq, and all other Member States, including

their national regulatory authorities, are asked ‘‘to cooperate fully by all appropriate

means with the inquiry.’’ We already publicly have expressed full support for the

work of the inquiry, and we have encouraged other UN Member States to act in

a similar fashion. Mr. Volcker noted in his April 21 remarks to the media that he

believed the Panel would receive cooperation from all governments.

Question 3. The UN implemented a surcharge on the proceeds of Iraqi oil in order

to cover the costs of managing the Oil-for-Food Program. Who audits those funds,

and did the U.S. ever review those audits? How much money was left in the UN

account at the termination of the program, and where did it go?

83

Answer. UN costs associated with the administration and management of the

OFF program came from revenue derived from the sale of Iraq’s oil, as called for

in UN Security Council resolution 986 (1995). In this regard, the program was selffinancing, and did not rely on UN-assessed funds.

Proceeds from Iraqi oil sales were divided as follows:

59 percent used to procure humanitarian supplies for central/southern Iraq;

13 percent used to procure humanitarian supplies for 3 northern

governorates;

25 percent used to fund UN Compensation Commission (UNCC);

2.2 percent reserved for UN administrative costs, including the activities of

OIP;

0.8 percent reserved for UNSCOM, and later UNMOVIC.

The UN Board of Auditors conducted routine audits of all these accounts—copies

of such audits were provided to 661 Committee members, including the U.S., for

their review.

When the Oil-for-Food Program terminated on November 21, 2003, as mandated

by UN Security Council resolution 1483 (2003), approximately $14 billion was left

in the UN escrow accounts—most of these funds were attached to letters of credit

that had yet to expire for outstanding OFF contracts. The UN thus far has transferred $8.1 billion from the escrow account to the Development Fund for Iraq as letters of credit associated with non-prioritized OFF contracts have expired.

Question 4. What recommendations would you make to ensure that any future UN

humanitarian operations do not suffer similar problems?

Answer. The Oil-for-Food Program was unprecedented in its size as well as in the

use of revenue derived from the sale of Iraqi oil to sustain the operation. It was

former Iraqi leader Saddam Hussein’s repeated defiance of the demands placed

upon him and his government by the Security Council, and his calculated failure

to provide for the basic needs of the Iraqi people, that prompted creation and implementation of the Oil-for-Food Program in the first place. We agree that lessons need

to be drawn and incorporated into any similar, future operations.

There are a number of investigations currently underway designed to look at the

management and implementation of the Oil-for-Food Program—the UN inquiry led

by Mr. Paul Volcker and the Baghdad-based audit led by the Iraqi Board of Supreme Audit. The Coalition Provisional Authority is co-operating with the Board of

Supreme Audit by helping individual Iraqi ministries to secure potentially relevant

documentation and to identify key personnel with knowledge of the former Iraqi regime’s illicit schemes. We stand ready to review and assess any future reports and

conclusions that may arise from these investigations.

Mr. Volcker already has commented that he interprets his job as not only to determine what had happened in the past, but also to draw lessons on what could be

done in the future to avoid similar potential problems. This is certainly the right

approach, one which the U.S. Government supports. In that regard, it therefore

would be premature to offer any firm conclusions at this moment as to what modifications might be necessary to ensure future humanitarian operations do not suffer

similar problems to those already identified. As we move forward in this process,

we will be in a better position to understand the flaws and weaknesses that may

have been inherent in the system, and to take such inadequacies into account for

future humanitarian operations.

Question 5. There have been charges that Saddam infiltrated the UN organization

with his own intelligence officials. Can that be verified? Would you expand on that?

Answer. To my knowledge, there has been no evidence provided to the U.S. Mission concerning this issue. I am not aware of any information that would indicate

such infiltration occurred.

Question 6. Before it adopted ‘‘retroactive pricing’’ in 2001, which cut back much

of the surcharges on oil being sold by the regime, the Sanctions Committee evaluated but rejected limiting Iraq’s oil buyers to major international oil firms, rather

than smaller oil traders that were willing to pay the Iraq surcharge. Why did the

Sanctions Committee reject this idea?

Answer. Under Resolution 986 (1995), the former Government of Iraq was granted

the authority to sell its oil to whomever it designated, thereby reflecting the insistence of most other Security Council members that Iraq’s sovereignty be respected

and guaranteed under the Oil-for-Food (OFF) Program. These other states argued

that having the Security Council dictate to whom Iraq could sell oil would have compromised and undermined Iraq’s national authority in an unacceptable fashion.

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661 Committee procedures did, however, require member states to register companies established within their jurisdiction with the UN Office of Iraq Program (OIP)

and with the UN Oil Overseers before being permitted to export oil from Iraq under

the OFF program. It was the responsibility of member states to ensure that these

firms were reputable. .

Question 7. What was the role of individual Mission offices in the contracting

process? Did they have review responsibilities? Which states benefited most from

the OFF kickbacks? What do their Mission offices say when confronted with this information?

Answer. Individual UN Mission offices were responsible for providing the UN Office of the Iraq Program (OIP), on behalf of suppliers operating in their jurisdiction,

with copies of proposed 986 humanitarian contracts signed between the supplier and

the Government of Iraq. They often served as the intermediary between these companies and OIP.

It is unclear who, other than the Saddam Hussein regime, benefited from the alleged kickbacks on UN Oil-for-Food (OFF) contracts. However, major suppliers of

OFF contracts under the program included firms operating within their jurisdiction

of some Council members and several of Iraq’s neighboring states.

Question 8. How does the UN police itself? Are there mechanisms within the UN

to try member states, individuals or companies for breaking resolution, in this case

sanctions? Is there a means to otherwise hold them accountable? (As Senator

Sununu asked in the hearing, can you provide a list of UN officials who have been

disciplined for such instances.)

Answer. The UN monitors its activities through two avenues—the UN Board of

Audit and the UN Office of Internal Oversight Services (OIOS). The three-nation

UN Board of Auditors is charged with ensuring that UN programs and operations

are implemented in a fiscally responsible manner, and that all funds are appropriately spent. The UN Office of Internal Oversight Services (OIOS) monitors, investigates and reports on the activities of UN personnel. The Secretary-General has the

right to fire United Nations employees whom he believes are guilty of malfeasance.

They have the right to an appeal, through a UN administrative tribunal, but the

Secretary-General also has a right to accept or reject that administrative tribunal.

So the Secretary-General may terminate UN employees for wrongful acts.

As recently as 2003, the Secretary-General, through the OIOS, has investigated

and reprimanded UN personnel and/or contractors for misconduct or criminal behavior. In relevant instances, the UN has turned cases over to national authorities—

whether here in the U.S. or abroad—for potential criminal investigation.

Question 9. Compensation claims make up 25 percent of OFF outlays. How were

these claims resolved? Can you provide details of reviewed, paid and pending

claims?

Answer. At the outset of OFF, 30 percent of oil sales proceeds went to the UN

Compensation Commission (UNCC). This was reduced to 25 percent in December

2000 under UNSCR 1330 and further reduced to 5 percent in May 2003 under

UNSCR 1483.

The United Nations Compensation Commission has paid out some $18 billion to

victims of Iraq’s invasion of Kuwait. An additional $29 billion is needed to complete

payment of compensation awarded by the UNCC to individuals and companies.

Question 10, My understanding is that United States became a major purchaser

of Iraqi oil once the Oil-for-Food Program started. Is that correct; which were the

top five nations that purchased oil from Iraq? Did U.S. oil companies purchase the

oil directly from Iraq or through brokers/middleman?

Answer. During Phases I through XI of the Program (December 1996-May 29,

2002), the U.S. purchased $942 million in Iraqi oil, while during the same comparable period, Russian firms entered into oil contracts with SOMO valued at $ 16.4

billion. France ($3.28 billion), Switzerland ($2.5 billion), Turkey ($2.4 billion), and

China ($2.35 billion) were the next largest purchasers of Iraqi oil. We have requested from the UN Office of the Iraq Program figures concerning Iraqi oil sales

during Phases XII and XIII to complete our records for the lifespan of the OFF Program. Those who entered into contracts with the Iraqi State Oil Marketing Organization (SOMO) to purchase Iraqi oil were not always the end-users. Between Phases

1 and 12 of the Program (10 December 1996-4 December 2002), Russian traders contracted for 979 million barrels of Iraqi oil, representing 31 percent of the total

shipped by Iraq under the Program during this period.

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Question 11. Do we have any reason to believe that U.S. oil companies participated in these same kickback and surcharges that we’ve discussed today?

Answer. I am unaware of any specific allegations or evidence involving U.S. oil

firms or UN Oil-for-Food contract suppliers with regard to their possible participation in kickbacks or surcharges to the former Iraqi regime.

Question 12. Did U.S. companies sell goods to Saddam, and do we have any reason to believe that U.S. companies provided him with illicit profits?

Answer. The only U.S. companies that were permitted to sell goods to Saddam

were those that received a license from the U.S. Treasury Department’s Office of

Foreign Assets Control (OFAC) to do business with Iraq under the Oil-for-Food Program. Twenty-four (24) U.S. companies submitted a total of 47 contracts (out of a

total of more than 30,000 contracts) under the Oil-for-Food Program.

I am unaware of any specific allegations or evidence involving U.S. companies and

the provision of illicit funds to Saddam Hussein.

Question 13. Who conducted the audits of BNP—the bank holding the UN’s Iraqi

oil escrow account? Do we know if BNP was involved in passing illegal money to

Saddam? Who in the U.S. Government has reviewed BNP accounts? Do we have access to the account numbers into which BNP deposited money, in order to check the

legitimacy of those companies? To whom has BNP turned over its documents on the

OFF program?

Answer. The UN Oil-for-Food Program, in particular the escrow accounts held at

both BNP and JP Morgan/Chase, were audited every six months by the UN Board

of Auditors. BNP had no independent authority to make payments to suppliers—

it was instructed by the UN Treasury to make specific payments to suppliers once

the goods for a particular contract had been authenticated upon their arrival in

Iraq.

Once BNP/Paribas was selected by the UN through a competitive bidding process

to handle funds associated with the 59 percent account for procurement of goods

destined for central and southern Iraq, OFAC issued them a license, limiting BNP/

Paribas’ work with Iraq solely to the Oil-for-Food Program. The U.S. Federal Reserve has oversight responsibility over all wire transfer systems in operation in the

U.S., including over BNP/Paribas-New York.

I am unaware of any specific evidence that would indicate that BNP passed illegal

money to Saddam. The OFF Program provided written instructions to BNP for the

actions it was to take. BNP is still holding valid letters of credit for outstanding

OFF contracts, and therefore maintains its own files of documents concerning OFF.

Question 14. What was the role of the individual UN Missions in New York as

far as vetting the Oil-for-Food contracts were concerned? Were they expected to

verify the legitimacy of the goods and the pricing involved?

Answer. Individual UN Mission offices were responsible for providing the UN Office of Iraq Program (OIP), on behalf of their suppliers established within their jurisdiction, copies of proposed 986 humanitarian contracts signed between the supplier and the Government of Iraq.

Each member state, including the U.S., was responsible for ensuring that their

companies established within their jurisdiction adhered to the rules and restrictions

under the Program and the ongoing multilateral sanctions regime on Iraq. The vetting process for each UN Mission varied. Although all 661 Committee members were

given copies of each OFF contract, only the U.S. and UK governments actually reviewed such contracts in detail, with particular emphasis on preventing access by

the former Iraqi regime to WMD and certain dual-use items that could be used to

enhance Iraq’s military capabilities.

Question 15. Regarding the OFF program in the north of Iraq, is it true that some

$4 billion in funds has not been accounted for? If this is not true, who in the U.S.

Government reviewed this program?

Answer. When the UN program responsibilities in the North were transferred to

the CPA on November 21, 2003, financial liabilities for those programs transferred

as well. Funding comes from the UN OFF escrow account, which contained a balance of roughly $14 billion as of the November 21 transfer date. Since that time,

the UN treasurer has transferred $8.1 billion to the Development Fund for Iraq.

The DFI is funding the former UN programs in the North. The balance in the OFF

escrow account will pay for the remaining humanitarian supplies for all of Iraq that

are still in the pipeline. Thereafter, the remaining surplus in the OFF escrow account will be transferred to the DFI. The final accounting will be audited.

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The U.S. Government reviewed the implementation of the Oil-for-Food Program

in northern Iraq on a regular basis, as a member of the Security Council, and as

a member of the Security Council’s Iraq Sanctions Committee. UN personnel working in the three northern governorates routinely briefed members of the Iraq Sanctions 661 Committee.

Question 16. The World Food Program used a considerable number of vehicles to

distribute food throughout the North. Where are they now?

Answer. The World Food Program transferred these vehicles to the Coalition Provisional Authority (CPA) and Iraqi representatives through a tri-partite transfer

process during the phasing out period of the Oil-for-Food Program in November

2003.

QUESTION SUBMITTED BY SENATOR JOSEPH R. BIDEN, JR.

Question 17. Ambassador Negroponte, you acknowledged during your testimony

that the State Department is in a position to assemble a list of Oil-for-Food participants. • For the public record, can you provide the Committee with a comprehensive list

of purchasers of Iraqi oil and suppliers of civilian products under the Oil-forFood Program? • If such a list can not be publicly released, could you provide the Committee with

a classified list and a detailed explanation as to the legal and/or security rationale keeping the information classified?

Answer. We have compiled a list of companies that purchased oil from Iraq under

the Program. Separately, we have compiled a list of those firms that supplied civilian goods to Iraq under the program. We stand ready to make these lists available

to the Committee.

QUESTIONS SUBMITTED BY SENATOR CHRISTOPHER J. DODD

Question 18. How many meetings have been held by the International Advisory

and Monitoring Board?

Answer. The International Advisory and Monitoring Board has met five times,

most recently on April 22-23 in New York City. The first formal meeting was December 5.

However, representatives of the member institutions of the Advisory Board—the

UN, the Arab Fund for Social and Economic Development, the IMF and the World

Bank—met informally many times with the CPA during the process leading to the

establishment of the IAMB. These talks led to the October 24 announcement that

the Board had been established in accord with a Terms of Reference that governs

the relationship between the IAMB and the CPA.

The creation of the Board broke new ground in international relations, as a mechanism to ensure transparency in the financial affairs of an occupied country. Both

CPA and the Advisory Board members continue to work very hard with the Iraqi

people to realize this commitment to transparency.

Question 19. What are the names, affiliations, and positions of those serving on

this Advisory and Monitoring Board?

Answer. The chairman of the International Advisory and Monitoring Board, selected by the members themselves, is Mr. Jean-Pierre Halbwachs, Assistant Secretary General and Controller of the UN. He represents Secretary General Annan.

The other members are Mr. Khalifa Ali Dau, a senior financial adviser in the

Arab Fund for Economic and Social Development; Mr. Bert Keuppens, a senior advisor in the IMFs Finance Department, and Mr. Fayezul Choudhury, Vice President

and Controller at the World Bank. Each of these representatives was appointed to

represent the chief executive officer of their respective institutions.

Question 20. On what dates have these meetings been held? Locations?

Answer. I would like to take this opportunity to mention that the International

Advisory and Monitoring Board established a very good Web site, www.iamb.info,

which provides such information. The Board also posts minutes of the Board’s meetings.

Meetings have been held:

December 5, 2003—New York

December 22, 2003-Washington, D.C.

February 12-13, 2004—Washington, D.C.

March 17-18, 2004—Kuwait

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April 22-23, 2004—New York

Question 21. Were there agendas and/or minutes of these meetings? Please provide copies of these agendas and minutes.

Answer. The Advisory Board prepares minutes for each meeting and posts these

on its Web site. Copies of the minutes are attached.

INTERNATIONAL ADVISORY AND MONITORING BOARD

Minutes of the organizational meeting held at United Nations Headquarters, New

York on Friday 5 December 2003.

The following members of the Board were present:

Arab Fund for Economic and Social Development: Ms. Mervat Badawi, Director

Technical Department (acting representative).

International Monetary Fund: Mr. Bert E. Keuppens, Senior Advisor.

United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-General,

Controller.

World Bank: Mr. Fayezul Choudhury, Vice-President and Controller.

Also in attendance were the following:

International Monetary Fund:

Mr. Chris Hemus, Deputy Chief, Finance Department

Ms. Mary Hoare, Officer

United Nations:

Mr. Jayantilal Karia, Director, Accounts Division,

Ms. Arpana Mehrotra, Adviser/Coordinator on IAMB matters

Mr. Moses Bamuwamye, Finance Officer

World Bank:

Mr. Charles McDonough, Director, Accounting Department,

Mr. W. Ofosu Amaah, Vice President and Corporate Secretary

1. The meeting was opened at 11:00 a.m. by the Secretary General, of the United

Nations.

In his opening remarks, the Secretary-General stressed that the IAMB had an important responsibility as an independent oversight body. He added that its independence could not be stressed enough and that it was fundamental to honoring the

trust that the international community had placed in it. He noted that the Security

Council had referred to it as the ‘‘eyes and ears of the international community’’,

and that in view of privileges and immunities conferred on the funds of the DFI

by the Security Council, this responsibility was even heavier.

2. The member from the United Nations, Mr. Jean-Pierre Halbwachs was chosen

as the Chair of the Board for the first year.

Rules of Procedure

3. The members discussed the rules of procedure to govern the Board. The members agreed that it was important that the rules be adopted as soon as possible and

that they be kept simple. It was agreed that the member from the IMF would circulate a working document to the members of the Board.

4. Two issues were considered critical in addressing the rules of procedure: confidentiality and transparency. Since the Board would make public the documents of

the IAMB, there was a need to set guidelines in addition to the provisions of the

rules of procedure, to ensure that appropriate information concerning the Board’s

work was made publicly available while ensuring the protection of sensitive and

confidential information.

Observers

5. The appointment of observers was discussed. It was agreed that, consistent

with its terms of reference, the Board should determine the number and qualifications of the observers. It was also agreed that among the observers would be one

selected from nominations by the Coalition Provisional Authority (CPA), and two selected from nominations by the Iraqi Governing Council, preferably including, in respect to the latter, someone from the Iraq Supreme Audit Authority.

6. It was agreed that the Chairman, after consultation with other members, would

request the CPA to submit a list of three names, and the Iraqi Governing Council

to submit a list of five names for consideration by the Board. The IMF representative agreed to look into the status of the Iraqi Supreme Audit Authority and report

to the board accordingly.

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Secretariat

7. It was agreed that prevailing circumstances did not allow for the Secretariat

to be established in Baghdad at this point in time.

8. It was decided that the Secretariat would be small, drawn as appropriate from

member organizations, with one local professional staff in Baghdad. It was also decided that the experience and qualification of the staff would be determined by the

Board. As for the local staff, it was agreed that the candidate would be an Iraqi

national seconded from the Iraq Supreme Audit Authority. The representative of the

IMF is to look into this matter further. The Chair agreed to circulate a draft on

the qualifications and duties of the Secretariat staff.

9. It was agreed, as specified in the Terms of Reference that the costs associated

with the running of the secretariat would be shared equally among the member institutions. This would continue to reinforce the spirit of independence with which

the Board is expected to operate. It was also decided that incidental costs that are

not material would be absorbed by the member institution providing the services.

External Auditors

10. The ‘‘Draft Statement of Work’’ for the external auditors was received from

the CPA. It was agreed that the Board will undertake an expeditious review of the

scope of work, in order that it may respond to the CPA as soon as possible.

11. Members agreed to share with each their comments and suggestions on the

draft before the next meeting.

Briefings to the Board

12. The Board agreed on the necessity of requesting briefings from the CPA to

improve their understanding in a few areas of special relevance to an evaluation of

the Statement of Work. The initial areas suggested, with others to be identified, included:

DFI in general

Link of Programme Review Board (PRB) disbursements to actual programs

delivered

Procurement process of CPA

How CPA undertakes oil and gas sales

Role of CPA’s internal audit.

13. It was agreed that the Chair, in consultation with the Board, would contact

the CPA in this regard.

IAMB Documentation

14. It was noted that transparency was critical to the smooth operation of the

Board. Creation of an IAMB website therefore, would be explored. The IMF representative agreed to examine the feasibility of such a website and to report to the

Board.

Communication

15. The Board agreed that the IAMB should speak with one voice, and that all

communications from the Board will be made by the Chair following consultation

with the members. This however, would not prevent the other Board members from

providing routine information on the IAMB and its work.

Other Matters

16. The Board decided that its next meeting would be held on Monday 22 December 2003 at the World Bank in Washington DC.

17. The Board agreed to issue a press release on its meeting.

18. The Board also agreed that a draft agenda would be circulated among the

members for their review before the next meeting.

19. The meeting was adjourned at 4.30 P.M.

*****

INTERNATIONAL ADVISORY AND MONITORING BOARD

Minutes of the organizational meeting held at the World Bank Headquarters in

Washington DC on Monday 22 December 2003.

The following members of the Board were present:

International Monetary Fund: Mr. Bert E. Keuppens, Senior Advisor.

United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-General,

Controller.

World Bank: Mr. Fayezul Choudhury, Vice-President and Controller.

Absent with apologies:

89

Arab Fund for Economic and Social Development: Mr. Khalifa Au Dau,

Senior Financial Advisor

Also in attendance were the following:

International Monetary Fund:

Mr. Chris Hemus, Deputy Chief;, Finance Department

Mr. Ramanand Mundkur, Counsel, Legal Department

United Nations:

Mr. Jayantilal Karia, Director, Accounts Division,

Mr. Moses Bamuwainye, Finance Officer

World Bank:

Mr. Charles McDonough, Director; Accounting Department,

Mr. W. Ofosu Amaah, Vice President and Corporate Secretary

2. The meeting was opened at 10:00 a.m. by the Chair who informed the other

members that the member from the Arab Fund could not attend the meeting due

to factors beyond his control.

3. The agenda was unanimously adopted.

4. Certain revisions in the Minutes for the meeting of the 5/12/2003 were discussed.

Statement of Work

4. The main focus of the meeting was the Statement of Work (SOW) for the external audit of the Development Fund for Iraq (DFI). Members made a number of comments on the draft SOW pointing, among other things, to the need to:

• make the heading more descriptive;

• clarify the issue of designated recipient;

• elaborate on the four deliverables;

• adjust the audit option periods;

• clarify the role of IAMB with External Auditors.

5. The Chair undertook to revise the SOW on the basis of comments made during

the meeting and to circulate the revised draft to the members for final review and

comments. The Chair would subsequently complete the draft and submit it to the

CPA before the end of the year. The Chair would also request the CPA to provide

briefings on accounting and reporting issues relating to the DFI. The following were

identified as areas of interest to the Board:

• The DFI in general;

• The link between the Program Review Board (PRB) disbursements to actual

programs delivered;

• The procurement process of the CPA;

• The manner in which the CPA undertakes oil and gas sales;

• The role of the CPA’s internal audit.

6. The timing of the briefing was also discussed and it was agreed that the briefing should take place at the earliest opportunity, preferably to coincide with the

Board’s next meeting.

Secretariat Functions

7. It was agreed that for the time being an ad hoc Secretary to the Board be established instead of maintaining a full time staff. To that end, each of the member

institutions could have one of their staff to perform secretariat functions; It was

however decided that all records would be kept in one central place—with the Chair.

8. On the issue of the local professional staff, it was recognized that further action

needed to be undertaken to identify a suitable candidate.

Rules of Procedure

9. The Board reiterated the need to set clear rules for dealing with press queries.

It was also reiterated that, as a rule, the Chair would speak for the Board. At the

same time, it would be left to individual members to use their judgment in answering routine factual queries.

10. The drafting of Paragraph 3B (Public Disclosure) of the draft rules of procedure would be reviewed by the members from the World Bank and IMF.

11. It was agreed that comments on the draft rules of procedure should be submitted as soon as possible.

Press Release

12. The members agreed to issue a press release highlighting the results of the

meeting.

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Other Business

13. The venue and date of the next meeting was to be determined at a later date,

in the light of the briefing material to be provided by the CPA.

14. An updated mailing list was requested by the Chair, and the issue of a logo

for the IAMB was briefly discussed.

15. The meeting was adjourned at 4:30 p.m.

*****

INTERNATIONAL ADVISORY AND MONITORING BOARD

Minutes of the meeting held at the IMF Headquarters in Washington DC on 12

and 13 February 2004.

The following members of the Board were present:

Arab Fund for Economic and Social Development: Mr. Khalifa All Dau,

Senior Financial Advisor

International Monetary Fund: Mr. Bert E. Keuppens, Senior Advisor.

United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-General,

Controller.

World Bank: Mr. Fayezul Choudhury, Vice-President and Controller.

Also in attendance were the following:

International Monetary Fund:

Mr. Chris Hemus, Deputy Chief, Finance Department

Mr. Ramanarid Mundkur, Counsel, Legal Department

Ms. Mary Hoare, Officer

United Nations:

Mr. Jayantilal Karia, Director, Accounts Division,

Mr. Moses Bamuwamye, Finance Officer World Bank:

Mr. Charles McDonough, Director, Accounting Department,

Mr. W. Ofosu Amaah, Vice President and Corporate Secretary

Ms. Caroline Harper, Lead Operations Officer

5. The meeting was opened on 12th February 2004 at 1:00 p.m. by the Chair.

6. The agenda for the two day meeting was unanimously adopted.

Briefing by the CPA

3. Responding to the Board’s request, the CPA provided a useful briefing about

the financial functions and the operations of the DFI. The following topics were covered during the briefing.

• DFI Account Status

• Oil Proceeds

• Budget Process

• Program Review Board

• Contracting

• Financial Operation

• Extemal Audit Update

4. Following a recap of the briefing, the Chair was requested to send a letter to

the CPA seeking clarification on a number of issues including:

• The controls with regards to the extraction of crude oil

• Contracting process by the CPA, including circumstances relating to single

source contracts

• Oil product barter sales, not currently reflected in the DFI accounts.

External Audit of the DFI

5. It was noted that progress had been made in the appointment of external auditors for the DFI. The CPA had started the solicitation process for the external auditors and proposals were due by February 18, 2004. Board members noted that finalization of the appointment process was a priority and requested that the Chair ask

the CPA to provide the evaluation and selection criteria that would be used to select

the external auditor.

The IAMB Website

6. The IAMB website was officially launched on 13th February 2004. In the press

release issued on 13 February 2004, the public was notified of the availability of the

site which would serve as the informational platform for the Board.

Observers

13. It was noted that the CPA had nominated a candidate to serve as an observer.

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14. Noting that the Governing Council of Iraq had not responded to the invitation

to nominate candidates to serve as observers to the IAMB, it was agreed that the

Chair would send a letter to the Governing Council of Iraq, with a copy to the CPA,

urging the council for its nominations.

Rules of Procedure

9. The Board adopted the draft Rules of Procedure after minor amendments were

made. It was also decided that the Rules of Procedure would be posted on the

website.

Press Release

10. The members agreed to issue a press release highlighting the results of this

meeting and to post this press release on the IAMB website.

Other Business

11. The Minutes for the 5th and 22nd December meetings of the IAMB were

adopted and posted on the website.

12. The members agreed that the venue of the next meeting will be at the Arab

Fund Headquarters in Kuwait at a date to be determined, preferably to coincide

with the selection process of the External Auditors.

13. The meeting was adjourned on Friday at 2:30 PM.

*****

INTERNATIONAL ADVISORY AND MONITORING BOARD

Minutes of the meeting held at the Arab Fund Offices in Kuwait on 17 and 18

March 2004.

The following members of the IAMB were present:

Arab Fund for Economic and Social Development: Mr. Khalifa Mi Dau,

Senior Financial Advisor

International Monetary Fund: Mr. Bert E. Keuppens, Senior Advisor

United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-General,

Controller

World Bank: Mr. Fayezul Choudhuzy, Vice-President and Controller

Observer’s Representative: Mr. Faik Ali Abdul-Rasool, Deputy Minister,

Ministry of Planning and Development Cooperation (representing Dr. Mehdi

Hafedh, Minister of Planning and Development Cooperation and Chairman

of the Iraqi Strategic Review board for the Reconstruction of Iraq)

Also in attendance were the following:

The Arab Fund for Economic and Social Development:

Mr. Hassab El Rasoul El Obeid, Legal Advisor, Arab Fund for Economic

and Social Development

Mr. Shehab Bayoumi, Financial Advisor. Legal Advisor, Arab Fund

for Economic and Social Development

International Monetary Fund:

Mr. Chris Hemus, Deputy Chief, Finance Department

Mr. Ramanand Mundkur, Counsel, Legal Department

United Nations:

Mr. Bisrat Aklilu, Executive Coordinator, Iraq Trust Fund

Mr. Moses Bamuwamye, Finance Officer

World Bank:

Mr. Charles McDonough, Director, Accounting Department

Ms. Caroline Harper, Lead Operations Officer

Iraq Board of Supreme Audit

Mr. Ihsan Ghanim

Dr. Ala’a Alani

7. The meeting was opened by the Chair

8. The agenda for the meeting was unanimously adopted.

Executive Session

5. The members undertook a preliminary review of the information provided by

the Coalition Provisional Authority regarding the selection process for the external

auditor.

Briefing by the CPA

4. As part of its responsibility for monitoring the financial reporting and internal

control systems established by the CPA, the IAMB received from the CPA further

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briefing on the issues covered by the CPA at the IAMB previous meeting. The issues

related to metering of crude oil, barter transactions, the use of non-competitive bidding procedures and the preparation of DFI financial statements in line with appropriate international standards on financial reporting.

Metering

7. The IAMB was informed that crude oil extraction is currently not metered. This

precludes a reconciliation of all crude oil extracted with its eventual utilization and

represents an internal control weakness which needs to be addressed urgently. The

IAMB was informed of the steps taken by the CPA to mitigate the consequences of

such weakness and to curtail smuggling. The IAMB welcomed these interim steps

and recommended the expeditious installation of metering equipment in accordance

with standard oil industry practices.

8. The IAMB was also informed that oil products were being metered at depots

and service stations.

Bartering

15. The IAMB was informed that the bartering of residual fuel oil for light products had been discontinued. There is however bartering of residual fuel and crude

oil for electricity and other products with neighbouring countries. The IAMB was

concerned that such barter transactions are not reflected in the DFI as required by

UN SCR 1483 (2003). The CPA indicated that it is investigating possible ways to

ensure that the equivalent proceeds from such transactions are placed into the DFI

and the IAMB looks forward to an early resolution of this issue.

Sole Source Contracts

8. Upon inquiry, the IAMB was informed that some contracts using DFI funds

were awarded to Halliburton without competitive bidding. The CPA indicated that

as a general rule, effective January 2004 contracts were no longer awarded without

competitive bidding. The IAMB acknowledged that special circumstances may have

warranted sole-sourced contracts and welcomed steps taken by the CPA to limit future such contracts to exceptional circumstances. At the same time the IAMB decided to consider further steps, such as the conduct of a special audit of some of

the sole-sourced contracts.

9. The IAMB decided that it will continue to monitor closely these issues, and will

direct the DFI external auditor to pay special attention, as appropriate.

10. The IAMB also expressed its thanks to the representatives of the CPA for the

useful briefings provided.

Financial Information

11. The IAMB reiterated its view that the financial statements of the DFI need

to be prepared in line with the appropriate international standards on financial reporting. The IAMB, following discussion with the CPA, believes such information is

available to the CPA.

12. In addition, it was agreed that the DFTs weekly statements issued by the

CPA would be linked to the IAMB website to ensure wider availability

External Audit of the DFI

14. Since the nomination and appointment by the CPA Administrator of the DFI

external auditor is subject to approval by the IAMB, the CPA briefed the IAMB on

the evaluation process of the solicitations received from external audit firms. Based

on the information obtained by the IAMB, which was not available to the CPA’s selection committee at the time the evaluations were made, the IAMB concluded that

one candidate nominee firm did not meet the criteria. The IAMB sought supplemental infomiation from the CPA regarding the other nominee firm. Following receipt of such information after the meeting, the IAMB on March 24, 2004 approved

the CPA’s nomination for the external auditor noting the international competency

and international composition of the audit team including the commitment by the

firm to include in its team internationally experienced and specialized audit partners.

Observers

15. Deputy Minister Faik Ali Abdul-Rasool, representing the Observer, Minister

Mehdi Hafedh, requested that persons representing the Iraqi Governing Council be

given the right to vote. The IAMB stated that it welcomed the presence of Iraqi nationals at its meeting and that it looked forward to attendance by Iraqi nationals

at future meetings. However, the IAMB indicated that acceding to this specific request would require amendments to the IAMB’s Terms of Reference. Further, such

Iraqi participation raises a number of complex legal issues, including under UN

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SCR 1483 (2003). In light of these constraints, the IAMB strongly encouraged the

presence of Iraqi nationals at its future meetings, stating that such participation

would allow them to communicate their views to the IAMB and that the IAMB, for

its part, would give the fullest consideration to these views.

Post June 2004

16. The IAMB began a review of ways in which the functions of the IAMB could

be transferred to an Iraqi entity at a suitable time, in view of the envisaged

handover of power to an interim Iraqi administration on June 30, 2004. In this context, the IAMB welcomed the opportunity to exchange views with representatives

of the Iraq Board of Supreme Audit and expressed its thanks to the representatives

of the Board of Supreme Audit for providing the IAMB with information on the

Board of Supreme Audit’s operations in Iraq. The IAMB also decided that it would

further examine ways to involve the Board of Supreme Audit more actively in the

IAMB’s work.

Press Release

20. The members agreed to issue a press release highlighting the results of this

meeting and to post this press release on the IAMB website.

Other Business

17. The minutes for the 12th-13th February meeting of the IAMB were adopted

and posted on the website.

18. The venue and date of the next meeting would be determined at a later date,

and will be announced on the website.

19. The meeting was adjourned on Thursday 18 March 2004.

*****

Question 22. What are the name(s) of the independent public accounting firm(s)

that have been tasked with auditing responsibility for the DFI? How many audits

of the DFI, if any, have been conducted by these independent accountants. Please

provide copies of these audits.

Answer. KPMG Audit & Risk Advisory Services won the contract to audit the Development Fund for Iraq and Iraq’s export oil sales. CPA nominated this firm, and

the Advisory Board approved the selection.

The contract for audit services was signed only in early April 2004, so the first

audit is just getting underway. We would hope it will be available by late summer.

It is part of the Board’s Terms of References that all audits will be made public.

QUESTION SUBMITTED BY SENATOR JOHN E. SUNUNU

Question 23. In the event UN officials are found to have engaged in corrupt practices, would they be able to claim diplomatic immunity in the United States or elsewhere and thus escape prosecution and punishment?

Answer. The Secretary-General has the authority to waive the diplomatic immunity of any UN personnel found to have engaged in corrupt practices or misconduct

under the program.

The Secretary-General has used this authority on several occasions, including as

recently as 2003, when the Secretary-General, through the UN Office for Internal

Oversight (OIOS), investigated and reprimanded UN personnel and/or contractors

for misconduct or criminal behavior. In relevant instances, the UN has turned cases

over to national authorities—both here in the U.S. or abroad—for judicial action.

RESPONSES OF AMB. PATRICK F. KENNEDY TO ADDITIONAL QUESTIONS FOR THE

RECORD SUBMITTED BY SENATOR RICHARD G. LUGAR

Question 1. The UN apparently conducted numerous audits of the Oil-for-Food

Program—how many audits were conducted and what was uncovered?

Answer. A three-nation UN Board of Auditors audited the operations of the Oilfor-Food Program, including the operations of UN offices in Iraq, and the UN Office

of the Iraq Program (OIP) in New York. The Board audited the Oil-for-Food Program every six months, following the conclusion of each phase of the Program.

There were thirteen 6-month phases of the OFF Program.

Separately, the UN Office of Internal Oversight Services (OIOS) conducted 55 reviews of various aspects of the UN Oil-for-Food (OFF) Program, including an assessment of the UN escrow accounts, analysis of UN Treasury’s role in the OFF ProVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00097 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
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gram, and ongoing, on-the-ground evaluation by two OIOS auditors in Iraq of the

functions performed by the UN Humanitarian Coordinator in Iraq (UNOCHI). OIOS

reports are internal UN Secretariat records which have never been shared with the

Security Council or any member state.

Question 2. Were all the trucks carrying goods into Iraq inspected by the UN contractors; how did they report irregularities, and were they stationed at all the border crossings into Iraq? Were they inspected on the way out?

Answer. Cotecna’s mandate was to oversee the arrival in Iraq of OFF merchandise. Cotecna, and its predecessor, Lloyd’s Registry, were not authorized by the Security Council to inspect goods shipped to Iraq outside the Oil-for-Food Program.

They were not authorized to function as Iraq’s customs agent. Cotecna verified the

arrival of Oil-for-Food goods in country. Suppliers were required to obtain Cotecna’s

stamp of authentication as a prerequisite for disbursement of funds from the UN

escrow account.

Under Resolution 661 and subsequent resolutions, member states, including Iraq’s

frontline neighbors, were obligated to adhere to the sanctions imposed by the Security Council. In May 2001, the U.S. and UK delegations circulated a draft resolution

to other Security Council members that would have tightened border monitoring by

neighboring states. As part of this ‘‘smart sanctions’’ package that also included creation of a ‘‘Goods Review List’’ (subsequently supported by the Council under

UNSCR 1409-05/14/02), the U.S.-UK draft resolution called for improving and

strengthening land-based monitoring of Iraq’s borders. Certain other Council members, as well as representatives of Iraq’s neighbors, strongly opposed the U.S.-UK

text, and the draft resolution was never adopted.

Question 3. There are numerous reports regarding passenger ferries being used

to smuggle goods into Iraq. Where did these ships originate? Did any member of

the 661 Committee suggest that the passengers and goods transported on these

ships be scrutinized—either in Iraq or at the ports of embarkation—if so, which

members? Which members opposed these checks?

Answer. In 1997, the 661 Committee authorized ferry service intended for religious pilgrims traveling between the United Arab Emirates (UAE) and Iraq. Ferries

were authorized to carry passengers and their personal belongings, including their

personal automobile. The UAE accepted the primary responsibility for ensuring

sanctions compliance by the ferry operators, including by inspecting cargo for violations. When concerns were brought to light on UAE non-compliance with the procedures, the 661 Iraq Sanctions Committee, at the urging of the U.S. and UK, raised

this issue with UAE authorities through written communications.

Because of ongoing concerns over non-compliance with the rules governing the

UAE ferry service, the U.S. and UK, through the Committee, subsequently blocked

requests from Oman, Bahrain and Qatar to open ferry services to Iraq.

Question 4. Why didn’t the 661 Committee create a group of market sector experts

to examine contracts for prices? We know that some contracts were rejected by the

661 Committee because they contained prohibited items; were any contracts rejected

because they were either over- or under-priced?

Answer. Customs experts at OIP reviewed the value of each OFF contract to ensure that the price was within a credible range. These experts, on occasion, did identify overpriced contracts, and informed the 661 Committee thereafter. That said, we

should remember that the GOI did not overtly charge the kickback—they increased

the price of some contracts only marginally, in order to keep it under the radar of

those who would check for price fluctuations. Secondly, prices on OFF contracts

were for delivered goods. Port fees, internal Iraqi distribution costs, warehousing

fees, and related expenses controlled by the former Iraqi regime were included in

the overall contract costs, making it difficult to isolate the prices being charged for

each requested commodity.

Question 5. What role did the three-nation Board of Auditors play in the UN’s

oversight process of the Oil-for-Food Program? Which nations were members of the

Board?

Answer. The three-nation UN Board of Auditors acts much like the United States’

General Accounting Office to ensure UN programs and operations are operated in

a fiscally responsible manner, and that all funds are appropriately spent. The current UN Board comprises representatives of France, the Philippines, and South Africa. Previously during this period, members included the United Kingdom, India,

and Ghana. The Board audited the financial statements of the UN Iraq escrow acVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00098 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
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count in accordance with Resolution 986 (1995) and the May 1996 MOU signed between the former Iraqi Government and the UN.

Such audits were conducted to ensure that expenditures were incurred for purposes approved by the 661 Committee and to ascertain whether income and expenditures were properly classified and recorded according to UN financial rules and regulations. Board members also verified that the financial statements of the UN escrow account were presented fairly and accurately.

The Board audited the Oil-for-Food Program every six months, following the conclusion of each phase of the Program. There were thirteen 6-month phases of the

OFF Program. The UN also conducted special, focused, audits such as an audit of

UN Treasury operations, and an audit of UN agency operations in Northern Iraq.

These reports were circulated to 661 Committee members. USUN sent copies of

such reports to the State Department.

The UN Board audited the operations of the Oil-for-Food Program, including the

operations of UN offices in Iraq, and the UN Office of the Iraq Program (OIP) in

New York.

Question 6. Were audits conducted of the companies who monitored the arrival

of goods into Iraq, first by Lloyds of London and then by Cotecna? Did the U.S. see

these audits? Were any irregularities noted?

Answer. The UN Board audited the contracts concluded between the UN and the

firms Lloyds Registry, Cotecna, and Saybolt. Lloyds (British) and Cotecna (Swiss)

furnished independent inspection agents who authenticated the arrival in Iraq of

humanitarian supplies shipped under the Oil-for-Food Program. Saybolt (Dutch)

provided independent agents who monitored oil exports from Iraq. This information

was included in the reports circulated to all 661 Committee members. This information was included in the audit reports of the UN Board of Auditors that were circulated to all Committee members.

Separately, the UN Office of Internal Oversight Services (OIOS) conducted 55 separate reviews of various aspects of the UN Oil-for-Food (OFF) Program, including

an assessment of Saybolt’s and Cotecna’s operations. OIOS reports are intended for

internal UN use only and are not circulated to UN member states.

Question 7. What was the role of the Oil Observers on the 661 Committee, who

were they, and how impartial were they?

Answer. The UN Oil Overseers were mandated by the 661 Committee, per the

Committee’s guidelines, to provide the Committee an independent analysis of oil

pricing from the Iraqi State Oil Marketing Organization (SOMO). There were 6 Oil

Overseers during the life of the program—their nationalities were U.S., French,

Russian, Norwegian, Belgian and Netherlands. We found the analysis provided by

the UN Oil Overseers to have been accurate, and, on occasion, helpful to U.S. and

UK efforts to address allegations that the former Iraqi regime was illicitly imposing

price premiums on its oil sales.

Question 8. Some states complained that UN sanctions were hampering Iraqi oil

exports. Can you provide the Committee with the level of these exports relative to

both the beginning of the Oil-for-Food program and the imposition of retroactive

pricing in 2001?

Answer. Oil Exports Under Oil-for-Food

Phase I–VIII

(Dec. 1996-June 2000)

Volume of oil

(millions of barrels)

Value of oil exported ($million)

One (Dec. 1996-June 1997) 120 $2,150

Two (June 1997-Dec. 1997) 127 2,125

Three (Dec. 1997-May 1998) 182 2,085

Four (May 1998-Nov. 1998) 308 3,027

Five (Nov. 1998-May 1999) 360.8 3,947

Six (May 1999-Dec. 1999) 389.6 7,402

Seven (Dec. 1999-June 2000) 343.4 8,302

Eight (June 2000-Dec. 2000) 375.7 9,564

Total 2,206.5 $38,602

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Phase IX–XIII

(June 2000-June 2003)

Volume of oil

(millions of barrels)

Value of oil exported ($million)

Nine (Dec. 2000-July 2001) 293 $5,638

Ten (July 2001-Nov. 2001) 1 300.2 5,350

Eleven (Dec. 2001-May 2002) 225.9 4,589

Twelve (May 2002-Dec. 2002) 232.7 5,639

Thirteen (Dec. 2002-June 2003) 169.6 4,413

Subtotal Phases IX-XIII 1221.4 $25,629

Grand Total: 3,427.9 $64,231

1 Imposition of retroactive pricing begins Oct. 2001

During the first three phases of the program, Iraq exported between 120-182 million barrels of oil within a 6-month period. Oil exports hit their maximum, under

the program in Phases 5 through 8 between November 1998 and December 2000

when exports were between 343 and 390 million barrels during each phase.

After the imposition of retroactive pricing, oil exports between December 2001 and

December 2002 were between 225 and 232 million barrels per phase. Although some

Council members blamed retroactive pricing for the decline, the GOI’s role in causing uncertainty over Iraqi exports by abruptly halting oil exports on three separate

occasions, including between April and May of 2002, was a contributing factor in

the decline of oil sales.

Question 9. What impact did Saddam’s arbitrary stoppages of oil production have

on the program; how many of such stoppages occurred?

Answer. The former government of Iraq abruptly halted its oil exports on three

separate occasions:

(a) December 1-12, 2000: Iraqi oil exports halted to express Iraqi government displeasure with the refusal of the U.S. and UK, as members of the 661 Committee,

to agree to oil prices proposed by the Iraqi State Oil Marketing Organization

(SOMO) at the beginning of December; the U.S. and UK maintained such prices varied significantly from prices for comparable crude oils from other markets, and thus

did not reflect ‘‘fair market value’’ as mandated under UNSCR 986 (1995); we estimate the loss of revenue to the UN Oil-for-Food (OFF) Program of the temporary

halt in Iraqi oil exports to have been approximately USD 600 million;

(b) June 4, 2001-July 10, 2001: Iraq suspended its oil exports for a second time

to protest the Security Council’s adoption of Resolution 1352 (2001), which presaged

the Council’s willingness to consider future adoption of a Goods Review List of items

with potential dual-use application; we estimate the loss of revenue to the OFF Program to have been approximately USD 933 million;

(c) April 8, 2002-May 8, 2002: The former Iraqi government arbitrarily suspended

its oil sales for a third time as an expression of support for the Palestinian people;

we estimate the loss of revenue to the OFF Program to have been approximately

USD 750 million.

Questions 10. What mechanisms were in place to ensure that once the UN contract company monitoring Iraq’s oil export—Saybolt—stopped work for the day, that

Iraqis weren’t able to continue pumping oil into tankers? Did these reports make

it to the 661 Committee? What would happen?

Answer. Independent inspection agents from the Dutch firm, Saybolt, were contracted by the United Nations to monitor oil loadings at Mina al-Bakr oil terminal

in the Persian Gulf and to oversee oil flows through the Iraq-Turkey pipeline.

Saybolt representatives periodically briefed members of the 661 Committee on their

work in Iraq. Separately, the UN Office of the Iraq Program (OIP) provided updates

and comments on Saybolt’s operations in the Secretary-General’s regular 90-day and

180-day reports on the Oil-for-Food Program to the Security Council.

The issue of ensuring 24-hour Saybolt monitoring at the Mina al-Bakr oil loading

platform was discussed by 661 Committee members on November 6, 2001, and again

on November 8, 2001, in conjunction with the Committee’s receipt of information

concerning the reported over-loading of the vessel, Essex, on two separate occasions

(May 16, 2001; August 27, 2001). The U.S., with UK support, called for 24-hour

Saybolt monitoring at Mina al-Bakr, as well as the use of seals on oil manifolds of

vessels, and meters on the oil pumps. The UN Office of the Iraq Program (OIP) subVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00100 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
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sequently reported to the 661 Committee that the U.S. proposals were being acted

upon in the field.

Question 11. Are you aware of a second oil platform in the Gulf that was not being

monitored by the UN that might have been used to pump out Iraqi oil? Was the

661 Committee aware of this?

Answer. A second Iraqi oil-loading terminal in the Persian Gulf at Khoar al

Amaya was significantly damaged during the 1991 Gulf War. The U.S. resisted Iraqi

efforts to repair and rebuild the Khoar al Amaya facility, including by placing

‘‘holds’’ on all contracts for items destined for use at Khoar al Amaya, unless and

until the former Iraqi government would agree to permit independent oil inspection

agents stationed at any rebuilt Khoar facility. The Iraqis, and several 661 Committee members, opposed the conditions sought by the United States. The U.S. harbored suspicions that the Saddam regime was using the Khoar al Amaya facility to

smuggle unauthorized oil exports out of Iraq. While the Multinational Maritime

Interception Force (MIF) kept Khoar under regular surveillance, Saybolt, on behalf

of the UN, was not mandated to monitor oil shipments from Khoar al Amaya.

Question 12. What can the Oil-for-Food Program tell us about the difficulties of

maintaining international consensus on sanctions regimes for an extended period of

time?

Answer. No sanctions regime, no matter how well targeted or well-structured, can

be expected to ensure full compliance with the restrictive measures that have been

imposed. Unless the individual, group, or state targeted for such measures is willing

to comply fully with the demands placed upon them to modify a policy or action determined to be unacceptable to the international community, that targeted actor invariably will seek ways to evade the sanctions and to ‘‘wait out’’ the political will

and unity of purpose of those who imposed the restrictive measures until such

measures are lessened or removed. This has been the case with sanctions operations

throughout history, and that was the case with the multilateral, comprehensive

sanctions regime imposed by the Security Council on the former Iraqi government.

The effectiveness of most sanctions regimes diminishes over time, particularly

when non-compliance produces economic gain. The Saddam Hussein regime’s non- compliance began shortly after comprehensive, multilateral sanctions were imposed

on Iraq. Hussein effectively used economic incentives to his advantage to garner

sympathy and support from a number of states, including key Security Council

members. The weakening of Council support for the sanctions regime on Iraq already has been well documented.

Question 13. How can international sanctions regimes be better designed to impede the ability of outlaw regimes to proliferate weapons of mass destruction, while

minimizing the adverse consequences on civilian populations?

Answer. The Security Council’s use of sanction measures as a key policy tool has

evolved significantly over the past 10-12 years, spurred on by the divergent reaction

among UN member states to the impact of the multilateral sanctions imposed in

1990 by the Security Council on Iraq. Largely in reaction to the Iraq sanctions,

many UN members have pressed hard to ensure new sanctions regimes supported

by the Council are more narrowly focused on those most responsible for unacceptable or harmful behavior or policies. This trend toward more ‘‘targeted’’ multilateral

sanctions is reflected in the nature of sanction measures currently in place on nonstate actors in Liberia (Resolution 1522), Al-Qaeda and Taliban members (Resolution 1267), and those seeking to ship arms into the Democratic Republic of the

Congo (Resolution 1493). In each case, the sanction measures are designed to focus

on a small group of individuals, not the general civilian population in the targeted

state.

The effectiveness of all sanction measures rests on the willingness of states to fulfill their obligations under the UN Charter to implement and enforce the restrictive

measures imposed by the Security Council. When states or other entities are willing

to collude with the target of the sanctions to evade the measures, the usefulness

and impact of the sanctions rapidly deteriorates. Short of threatening imposition of

secondary sanctions on those states that fail to implement the original measures,

bringing political pressure to bear against non-compliant states often produces only

limited results.

International sanctions regimes imposed to impede the ability, of outlaw regimes

to proliferate weapons of mass destruction will depend for their effectiveness on the

commitment of states, particularly those bordering the target country, to prevent

that state’s access to prohibited goods. Publicly identifying and criticizing (‘‘naming

and shaming’’) non-compliant states is one method for promoting effective impleVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
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mentation. Limiting the restrictions to those items and individuals most closely associated with WMD, for example, will reduce the adverse consequences of such

measures on civilian populations in the targeted state.

RESPONSES OF HON. ROBIN L. RAPHEL TO ADDITIONAL QUESTIONS FOR THE RECORD

QUESTIONS SUBMITTED BY SENATOR RICHARD G. LUGAR

Question 1. How are current stocks of food and medicine monitored?

Answer:

• The Iraqi Ministry of Trade is responsible for keeping records on food stocks.

Warehouses and silos throughout the country report on stock levels on a weekly

basis.

• The World Food Program is providing the Ministry of Trade with a system of

high frequency radios to improve communication between Baghdad and outlying

warehouses and silos.

• In preparation for the upcoming transfer of sovereignty, CPA has handed full

authority for all health issues, including OFF monitoring, to the Ministry of

Health. The Ministry is now responsible for tracking stocks of medicine.

Question 2. Who currently handles the food ration distribution in Iraq at the local

level? Are they the same individuals (de-Baathification aside) that ran it when Saddam was in power? What role will the World Food Program play?

Answer:

• To a large degree, the same local food agents that distributed food rations prior

to the conflict are doing so today and were not affected by de-Baathification programs. The vendors tended to be local shopkeepers, many of them women.

• Before the conflict, the World Food Program monitored the Public Distribution

System in south and central Iraq, and was responsible for implementing it in

the three northern govemorates.

• From June 2003 through November 2003, the World Food Program delivered

more than 2.1 million tons into Iraq, the largest amount of food assistance ever

delivered in such a short period of time.

• In January 2004 the WFP undertook to procure and deliver $900 million worth

of food commodities to help the Ministry of Trade ensure against gaps in the

food pipeline.

• The Ministry of Trade took over all procurement of food commodities in April

2004.

• WFP expects to resume its normal programs for vulnerable groups once the UN

assistance agencies return to Iraq.

Question 3. How did the Iraqis view the Oil-for-Food Program?

Answer:

• It is important to distinguish between the Public Distribution System (PDS),

which provided monthly rations to all Iraqis, and the UN mandated OFF program, under which Iraqi oil revenues were used to procure food and other essential goods from international suppliers.

• The Iraqis are by and large very proud of their ability to feed the Iraqi people

through years of sanctions under the PDS.

• We are not aware of any systematic analysis or survey that provides reliable

data on Iraqi views of the OFF program, but many Iraqis share the general perception that the regime officials enriched themselves under the OFF program

during Saddam’s rule. Some resented the UN for its association with the sanctions regime and the OFF program. Some believed the UN permitted the program to be manipulated by the regime, and that it interfered unnecessarily with

Iraqi management of the PDS.

Question 4. What has happened to the contracts since the transition? Have we ensured that the graft and kickbacks are no longer happening?

Answer:

• CPA currently oversees the ongoing processing and delivery of OFF contracts.

After June 30, Iraqi ministries will take full responsibility for the remaining

OFF contracts.

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• Before the November 21 transition, UN agencies had renegotiated almost all

prioritized contracts to ensure excess fees or ‘‘kickbacks’’ were removed. It has

put systems in place to prevent return to past practices.

• DOD’s Defense Contracting Management Agency renegotiated the remaining

250 contracts after November 21. They also negotiated out the ‘‘kickbacks.’’

• To help guard against further corruption, there are now Inspectors General in

place in each ministry. CPA is training ministry officials in more transparent

procurement practices. The CPA Web site explicitly states that there are to be

no commissions paid by suppliers.

• The Board of Supreme Audit is charged with investigating corruption charges

concerning the OFF program in Iraq.

Question 5. What mechanisms are in place to ensure that kickbacks and payoffs

will not resume when the Oil-for-Food Program is turned back to the Iraqis?

Answer:

• CPA has renegotiated all prioritized contracts have been renegotiated to ensure,

among other things, that any bribes or kickbacks were removed. Systems are

now in place to prevent the return to past practices.

• For example, there are now Inspectors General in place in each ministry, and

a Board of Supreme Audit has been appointed and is currently working to secure all OFF-related documents from each ministry. Documents are stored securely in the Ministry of Oil and will be moved to the Iraq Special Tribunal

(IST) where they will be under guard by coalition forces.

• A new independent Commission on Public Integrity has been established to develop and implement codes of conduct for government officials in each ministry

and develop a new financial disclosure regime.

• The CPA and Governing Council are developing new banking and related rules

to prevent money laundering and a revised public procurement law to promote

greater transparency.

• We expect to retain, subject to Iraqi agreement, a number of technical advisors

to help the Iraqi ministries continue with their reform and transition processes.

Question 6. How many years will it take for Iraq to be able to feed itself? Was

it not at one point a net food exporter? Would this again be possible?

Answer:

• Iraq has the potential to feed itself, but the agricultural sector is depressed.

With rich agricultural lands—more surface water than any Middle Eastern

country—it is possible that Iraq could become a net food exporter. Iraq was a

net food exporter in the 1970’s, but mismanagement of the agriculture sector

under Saddam Hussein contributed to serious decline in production.

• Food subsidies and the importation of many food commodities under the Oilfor-Food Program have also been factors in the lack of robust agricultural activity, because these programs tended to depress local crop prices, and thus incentives for farmers to plant.

• We expect that the Iraqi government will want to take steps to reduce dependency on the Public Distribution System and to increase efficiency in the agricultural sector. Despite poor performance, the agricultural sector is still the leading employer.

• The best outcome is not for Iraq to ‘‘feed itself’’ or become self-sufficient in food

commodties, but rather to export agricultural projects in the areas where it has

a comparative advantage, and import where others have a significant advantage, and ultimately to become a net exporter.

QUESTIONS SUBMITTED BY SENATOR JOSEPH R. BIDEN, JR.

Question 7. What concrete measures is the Coalition Provisional Authority taking

to reform the culture of corruption that has long existed in Iraq? How effective have

these measures been in your estimation?

Answer:

• Corruption has long been a serious problem in Iraq and will require a serious

commitment from the Iraqi government.

• The TAL provides for a system of checks and balances and a functioning judicial

system that can have a dampening effect on competition.

• Ambassador Bremer has established Inspectors General in each Iraqi Ministry.

• Government-wide, there is a new Commission on Public Integrity and a Board

of Supreme Audit that functions much like our General Accounting Office.

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• The Coalition Provisional Authority (CPA) has placed emphasis on capacity

building in the government to ensure accountability and business practices that

meet international standards.

• New government-wide codes of conduct have been written and provided to ministries for implementation. All ministries are expected to implement ethics programs in the next 60 to 90 days. USAID is providing ethics instructors to each

ministry. At the end of the training period, each employee will be required to

sign a statement committing him/herself to the new code.

Question 8. After the restoration of Iraqi sovereignty,what specific mechanisms

will the United States and its coalition partners have in place to block corruption?

Answer:

• After June 30, the Iraqi government will play the primary role in preventing

corruption. CPA is working hard to help the Iraqis put in place the necessary

mechanisms to ensure financial accountability and transparency after the transfer of sovereignty.

• On January 28, the Iraqi Governing Council (IGC) and Ambassador Bremer established the Commission on Public Integrity, an independent body dedicated

to enforcing anti-corruption laws.

• On February 5, Ambassador Bremer issued an order creating an independent

Inspector General in each Iraqi ministry to pursue investigations of waste,

fraud, abuse, and illegal acts. These inspectors general will cooperate with the

Commission on Public Integrity.

• In addition, the Administration supported the creation of the International Advisory and Monitoring Board (IAMB), an independent body endorsed by UN Security Council resolution 1483 to oversee audits of Iraqi oil sales and expenditures from the Development Fund for Iraq (DFI). The IAMB and CPA collaborated on the recent hiring of an independent public accounting firm to audit oil

sales and the DFI.

• As we work on next steps in the Security Council, we will discuss with the

international community preserving the IAMB during the transition period to

provide oversight on the transparent and appropriate handling of Iraq’s oil revenues.

• CPA and the IGC, in collaboration with the IMF, World Bank, Washington

agencies and our coalition partners, are preparing new laws on financial management and procurement that will provide the Iraqi interim government with

guidance on how to develop a budget and disburse government funds in a transparent manner.

• Ambassador Bremer also has empowered the Iraqi Supreme Board of Auditors

(BSA) to perform an oversight function, including conducting an investigation

of possible past corruption of the UN Oil-for-Food Program. Bremer has committed approximately USD 5 million from the Development Fund for Iraq (DFI)

to enable the BSA to carry out a thorough investigation.

Question 9. After the restoration of Iraqi sovereignty, what oversight authority

will Americans and coalition technical advisors and inspectors general have in the

various Iraqi ministries?

Answer:

• American and coalition advisors will continue to assist ministries after June 30

in accordance with the desires of the Iraqi ministries. While the Iraqis will need

to make decisions for themselves, we plan to remain in a supportive role to provide technical advice and oversight as requested to strengthen reform and transition efforts.

• U.S. bilateral assistance for Iraq will continue to be audited by U.S. government

agencies.

QUESTIONS SUBMITTED BY SENATOR CHUCK HAGEL

Question 10. Has the Coalition Provisional Authority received from the United

Nations full details on contracts negotiated by Saddam Hussein’s government

through the Oil-for-Food Program? If not, what steps are you taking to get this information?

Answer:

• We have asked the UN to provide the Coalition Provisional Authority (CPA)

with all contracts associated with Oil for Food, as well as amendments to those

contracts, letters of credit and amendments, and supporting documents.

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• We have also requested bank statements and financial documents that will

allow CPA, and after June 30 the Iraqi government, to administer the contracts

fully and in accordance with international legal standards.

• The UN has provided many records, but files are not complete. We continue to

work with the UN to ensure that we have access to needed records.

• CPA is cooperating closely with the newly constituted UN Voicker Commission,

appointed by Secretary General Annan, in its investigation of corruption in the

Oil-for-Food Program.

Question 11. Does the CPA have a list of former Iraqi or other government officials and businessmen who were involved in kickbacks and questionable contracts?

If there is not a list, what steps are being taken to deter future corruption and malfeasance in Iraq by these individuals?

Answer:

• The CPA has the names of the companies which had outstanding contracts with

Iraq under the Oil-for-Food Program in March 2003, and the details of some

30,000 associated contracts.

• It should be emphasized, however, that these contracts were all delivered to the

UN in accordance with OFF procedures. The presence of a company on this list

does not automatically imply wrongdoing.

• CPA does not have an authenticated copy of the list of individual official organizations allegedly bribed by Saddam Hussein. The purpose of the investigation

now underway is to bring to light any wrongdoing that may have occurred.

Should any officials or businessmen be found to be involved in kickbacks, or

questionable contracts emerge, we will take the steps necessary to minimize any

opportunity for these individuals to be involved in corrupt activities in the future.

Question 12. Do we have any information regarding questionable business practices and contracts involving members of the Iraqi Governing Council?

Answer:

• The purpose of the UN investigation now underway is to bring to light any information about any wrongdoing that may have occurred. We intend to continue

to cooperate fully in the effort to bring to the light any corrupt and questionable

practices.

• The staff of the UN Commission investigating alleged abuses in the Oil-for-Food

Program will travel to Baghdad for the first time the week of May 10.

• The UN Commission will look into allegations involving members of the Iraq

Governing Council, as well as other Iraqi officials and other individuals and institutions

Question 13. Please provide full information on a contract for central irrigation

pivots awarded to the Saudi Al-Khorayef Company (Comm. No. A-1200051). What

is the amount of this contract? Who was the Iraqi point of contact for this company

when the contract was negotiated? What is the status of other agricultural contracts

negotiated during Oil-for-Food?

Answer:

• The Department of State does not have independent information on this contract. (The Comm. No. cited above is not accurate, but it is the correct contract).

However, we requested information on this project from the Coalition Provisional Authority (CPA) in Baghdad.

• CPA Baghdad’s Coordination Center has informed us that the value of the contract is $14,784,589. The Coordination Center does not have the information on

who the Iraqi point of contact was for the contract.

• We have also asked our mission at the UN to review its records to determine

if it has this or any other useful information to add going forward.

• There are 145 other agricultural contracts that are currently active (amended,

approved and funded), out of a total of 2,526 approved agricultural contracts

under the Oil-for-Food Program.

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RESPONSES OF HON. KIM R. HOLMES TO ADDITIONAL QUESTIONS FOR THE RECORD

SUBMITTED BY SENATOR RICHARD G. LUGAR

Question 1. A GAO study from May 2002 provided excellent details regarding

Saddam’s violations of both the Oil-for-Food Program and his smuggling operations

in general. What use did the U.S. make of this information in the Committee?

Answer. Information on sanctions violations noted in the 2002 GAO report was

already well known and was obtained largely from U.S. Government and UN reports. In April 2001 the U.S. and UK began experimenting with requiring retroactive oil pricing in the 661 Sanctions Committee. By October 2001 that practice

was institutionalized, resulting in largely eliminating the illegal oil surcharge referenced in the GAO report.

Oil smuggling through bordering states remained a problem that the 661 Committee was unable to agree on how to address. U.S. and UK representatives did

raise concerns about oil smuggling through border states in 661 Sanctions Committee discussions, but such allegations routinely were denied, in particular by

Syria when it was a Committee member.

In March 2001, the U.S. and UK also proposed to the 661 Committee that the

UN Secretariat (Office of the Iraq Program) produce a report on Iraqi efforts to

charge suppliers commissions on their contracts. Our efforts were not successful because the Secretariat indicated that it had only limited, informal information on the

allegations. The detailed information we have now was provided by Iraqi ministry

officials following the fall of the regime.

Question 2. Who was responsible for shipping food and medicine purchased by

Saddam to the Kurdish regions in the North? Were these shipments regularly delayed, if so by how much—weeks or months?

Answer. The former Iraqi regime, in particular its Ministry of Trade, was responsible for ensuring the timely delivery of OFF shipments, including bulk food and

medicine supplies for the three northern governorates. Once these shipments were

sent from central warehouses to Mosul and Kirkuk, World Food Program (WFP)

representatives working in the North then arranged for the distribution of these

supplies to the end user.

World Health Organization (WHO) officials collected medical supplies for use in

northern Iraq from central warehouses in central/southern Iraq. UN officials periodically criticized the Iraqi government in the latter phases of the program for

stockpiling in central and southern Iraq medical supplies originally destined for distribution throughout the country.

The UN concluded that reported delays were a result of operational problems in

the distribution system nationwide. However, to pressure the Iraqi central government to make deliveries of food and medicine to the North, the UN delayed the

transfer of funds from the ‘‘13 percent’’ UN escrow account (set aside for procurement of funds destined for the three northern govemorates) to the ‘‘59 percent’’ account (for procurement of goods for central and southern Iraq) until it was confirmed that such items were actually received in the North.

Question 3. What was the Multilateral Interception Force? Where did it conduct

its inspections—on the high seas or onshore? Who ran it?

Answer. The Multinational Interception Force (MIF) was composed of 21 member

states cooperating under the operational command of the MIF coordinator—the

Commander, U.S. Fifth Fleet. The MIF conducted interceptions of maritime shipping to inspect and verify cargos and destinations and insure strict implementation

of UNSCR 661, focusing especially on cargos of outbound oil but also inbound goods

not approved by the UN 661 Iraq Sanctions Committee. The MIF operated both on

the high seas and in the coastal waters of cooperating states such as the UAE. Over

a more than 12-year period the MIF boarded and inspected over 21,000 vessels and

diverted more than 1,200 to port for investigation of suspected sanctions violations.

Question 4. In 2002, the GAO reported that Syria was illegally exporting Iraqi oil

outside of the Oil-for-Food system. When did the U.S. learn of this smuggling and

what did the administration do to terminate this smuggling?

Answer. The GAO report quoted USG officials. From the time when sanctions

against Iraq were established in 1990, Iraq continued to supply oil to neighboring

states, whose economies depended on Iraqi oil. Syria imported Iraqi oil both for its

domestic use and for export, but denied doing so. The administration refused to accept Syrian denials and repeatedly pressed Syria diplomatically in the Security

Council and the 661 Iraq Sanctions Committee to halt the illegal shipments. Syria

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1 Agriculture, de-mining, education, electricity, health, nutrition, settlement rehabilitation and

emergency assistance to internally displaced persons, telecommunications, and water and sanitation. 2Food, food handling, health, oil spares, electricity, water and sanitation, agriculture, education, communication and transportation, housing, special allocations, construction, industry,

justice, and religious affairs.

earned an estimated $3 billion in illicit trade with Iraq in violation of United Nations sanctions.

Question 5. The 2002 GAO report suggests that certain nations were buying cheap

Iraqi oil during the embargo, and were writing down debt owed them by the Iraqi

regime. Is there any evidence that these nations have done so?

Answer. We are not aware of any evidence that those countries we believed were

importing significant quantities of Iraqi oil during the embargo—Syria, Jordan, and

Turkey—were also writing down debt owed them by the Iraqi regime. With the fall

of the Saddam regime, official Iraqi records can now be inspected. In addition to the

work of the Volcker Inquiry, the Iraqi Board of Supreme Audit is conducting an investigation and has retained an international accounting firm. We await the findings from these investigations.

RESPONSES OF JOSEPH A. CHRISTOFF TO ADDITIONAL QUESTIONS FOR THE RECORD

SUBMITTED BY SENATOR RICHARD G. LUGAR

Question 1. Was OFF structured differently in the north? If so, can we determine

if it was run with any greater degree of efficiency? Can you provide statistics on

this?

Answer. The program in the north, which received 13 percent of Oil for Food revenues and covered the three northern governorates, was administered by nine U.N.

specialized agencies, including the World Food Program, the U.N. Children’s Fund,

the U.N. Development Program, and the World Health Organization. The U.N.

agencies primarily managed development projects in the north. Most of the food and

medicines for the north were procured in bulk by the former regime in Baghdad for

the entire country. The World Food Program implemented and oversaw the food distribution in the north. The terms were established in the 1996 memorandum of understanding between Iraq and the United Nations and in sanctions committee procedures.

The program in the southern and central governorates, which received 59 percent

of Oil for Food revenues, was administered by the former regime. Unlike the north,

the program in the south and central governorates was primarily a commodity import program run by the Ministry of Trade and other relevant ministries.

According to the U.N. Office of the Iraq Program, as of December 31, 2002, approved contracts for the north had totaled about $2.1 billion for projects and goods

in nine sectors.1 This did not include $2.3 billion in food and health sector supplies

purchased by the Iraqi central government and $771 million for oil industry spare

parts and equipment. Approved contracts for commodities in central and southern

Iraq totaled about $36.7 billion in 15 sectors.2

Question 2. Can you comment on the purported SOMO document published in

Iraqi media in January that lists individuals, companies, and states that received

oil vouchers from Saddam?

Answer. We do not have any information on these documents.

Question 3. What were the terms of the contract for the bank—BNP—used by the

UN to hold the escrow account for the funds generated by the Oil for Food program?

Was it fixed fee or competitively bid? What was the length of the contract and was

it ever re-bid?

Answer. We do not have the terms of the contract with BNP. The United Nations

prepared a list of international banks with necessary credit ratings, strong capital

positions, and the capability to handle the magnitude of transactions. The United

Nations consulted with Iraq about the list and several banks were then asked to

submit bids. We do not know how the selection was made.

U.N. external audit reports regularly recommended portfolio diversification in consultation with Iraqi government from the onset of the Oil For Food program. The

Under Secretary-General for Management also stressed the need for bank diversification to Iraq’s Permanent Representative to the United Nations, and he reVerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00107 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1
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quested an early decision from the Iraqi government on the selection of additional

financial institutions. The Iraqi government agreed to execute agreements with

three additional banks in 2000. In its 2001 report, the U.N. Board of External Auditors recommended that the U.N. Office of the Iraq Program continue efforts to diversify its investments and broaden the selection base for acceptable banks. We do not

know which additional banks were chosen.

RESPONSE OF MICHAEL J. THIBAULT TO AN ADDDITIONAL QUESTION FOR THE RECORD

SUBMITTED BY SENATOR RICHARD G. LUGAR

Question. Would it be accurate to say that, with the exception of items on the

Goods Review List, Saddam could choose what he wanted to buy, from whom and

at what price? As auditors, what is your assessment of the potential for fraud in

a system set up like this? Can you make recommendations about the structure of

such a program—if it were done by the United Nations—in the future?

Answer. In light of the fact that the United Nations staff told DCAA audit staff

that there was not a procurement system in place, including a specific requirements

determination process, and that there were no related price or audit evaluations, I

would concur that the prior regime could and did likely choose what they wanted

to buy. There were simply too many items contracted for, funded, and approved that

clearly did not appear to have utility for the Iraqi people. In addition, approximately

half of the contracts were substantially over-priced, indicating that there were minimal to nonexistent controls over the price.

As audit managers, we view situations in light of overall audit risk. In a situation

where there is no apparent audit oversight, and where there are not even the basic

components of a procurement process and related internal controls, the risk for improprieties, including fraud, are extremely high—essentially off of any risk charts,

since no one is looking at critical contract pricing aspects.

If asked, DCAA would recommend that implementation by the United Nations of

a procurement process with a good requirements definition; required proposals by

suppliers; proposal audits by independent auditors, when appropriate; and negotiation by warranted and independent contracting officials is essential to successfully

assure that similar overpricing does not occur in the future.

RESPONSES OF SAYBOLT EASTERN HEMISPHERE B.V., TO ADDITIONAL QUESTIONS FOR

THE RECORD SUBMITTED BY SENATOR RICHARD G. LUGAR

Question 1. Was this contract audited (internally, externally or by the UN)? Were

there IG reports, etc? If so, can you release a copy to the committee in advance of

a hearing we are trying to do on or about 7 April.

Answer. We have been audited by the internal auditors of the United Nations.

However we have only seen once a full audit report. A request for sharing this report will be submitted to the United Nations.

Question 2. Can the Committee get a copy of the Statement of Work or the contract itself?

Answer. Please see attached document on page .

Question 3. What was Saybolt hired to do?

Answer. Saybolt was retained by the United Nations to monitor the exports of

crude oil and refined products exported from Iraq from the two recognised and

authorised export points at Ceyhan, Turkey, and Mina al-Bakr, Persian Gulf, under

the Security Council Resolution 986 (the ‘‘Oil for Food’’ program) from December

1996 until the commencement of hostilities in April 2003.

This task also included the montoring of all crude oil movements via the IraqTurkey pipeline (ITP) from the border crossing in Northern Iraq (Zahko) to the receiving tank farm in Ceyhan, Turkey.

Saybolt was also retained by the United Nations to monitor the delivery of oil

spare parts and equipment approved by the 661 Sanctions Committee, supplied

under the MOU and funded by the escrow account, and, where requested by the 661

Sanctions Committee, to monitor the end-use of same.

Saybolt was also retained to prepare specialised expert reports under Security

Council Resolutions 1153 (1998), 1284 (2000) and 1330 (2000).

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Question 3a. What reporting requirements did you have, to whom did you report,

what did you say?

Answer:

1. OIL CARGOES.

1.1. Reporting was made on a daily basis to the United Nations Oil Overseers.

1.2. The UN Oil overseers received each day an itemised summary of all activities

covering:

• Volume of oil leaving Iraq via the ITP.

• Volume of oil received in Ceyhan from the ITP.

• Time log of all shipping activities at Ceyhan and Mina al-Bakr.

1.3. Each vessel scheduled to load required a current contract approved by SOMO,

and the 661. Sanctions Committee, with sufficient barrels left to cover the loading.

Copies of each contract were sent to Saybolt on approval.

1.4. Each vessel scheduled to load required a Letter of Credit whose terms were

approved by the UN Oil Overseers. Each approved L/C was copied to Saybolt.

1.5. Each vessel scheduled to load was given a unique file number, and all details

regarding this vessel were entered on to the United Nations Oil for Food Lotus

Notes database, live in real-time to the UN Oil Overseers.

1.6. Each crude oil vessel loaded at both Ceyhan and Mina al-Bakr was inspected,

and analysed at our own laboratories on-site, and a full crude oil loading report prepared. The full report was retained at the load port. The summary page of each report (summarising the important points) was faxed to the UN Oil Overseers, and

this page was also appended to the real-time Lotus Notes database operated by the

UN to which Saybolt had reporting access.

1.7. Saybolt was requested by the United Nations to prepare summaries of activities for inclusion in the Office of the Iraq Program’s 90/180 day reports required

under the MOU.

2. SPARE PARTS & EQUIPMENT.

2.1. From Phase 4 onwards, the UN Security Council allowed the Iraqi Oil industry to purchase up to US$300M per phase of oil spare parts subject to the apporval

of the 661 Sanctions Committee, funded from the escrow account. The amount was

later increased to US$600M per phase.

2.2. Approved spare parts were shipped to Iraq against L/C’s triggered by the arrival at one of four entry points into Iraq where the goods were inspected and approved by an independent verification agency, Cotecna.

2.3. Cotecna advised Saybolt of the arrival of these goods, and Saybolt then monitored their arrival into approved warehouses. These activities were reported by fax

on a weekly spare parts activity report to the Office of the Iraq Program (OIP)

whcih was then forwarded to the 661 Sanctions Committee. Monitoring activities

were also recorded electronically on the UN Database against the specific Comm No

for each spare part order.

2.4. In some specialized cases, at the request of the Office of the Iraq Program

Spare Parts Section and/or the 661 Committee, Saybolt were requested to monitor

the ‘‘end-use’’ of equipment.

2.5. Saybolt was also requested to observe and report, on an ‘‘ad-hoc’’ basis, on

contracts such as intelligent pigging where the importation of specialised equipment

was monitored into the country, during use, and then on re-export.

2.6 Saybolt also monitored the packing and shipment from the country of certain

strategic items (gas turbines) which could only be repaired or serviced overseas.

Question 3b. Did Saybolt ever document irregularities and report them to the UN?

Answer. Operational problems do occur in a monitoring exercise of this size, which

were reported and dealt with at the material time.

Question 3c. If so, what happened? Can you share specifics/documents?

Answer. Given sufficient time to locate and retrieve archived documents.

Question 4. What, if any, enforcement role did Saybolt have?

Answer. Saybolt is a professional monitoring, inspection and testing company—

we are not, nor ever have been, involved in ‘‘enforcement’’. Saybolt’s role was merely

to monitor the volumes of exports of crude oil from nominated load ports. We reported only to the UN, with the exception of one document requested by the UN

Oil Overseers regarding destination confirmation, no documents were provided to

any other parties or placed on board vessels.

Question 5. What was the size of the operation?

Answer:

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Mina al-Bakr loading platform—Persian Gulf. 6 monitors

Botas Oil Terminal, Ceyhan, Turkey 5 monitors

Zahko metering station, N Iraq 3 monitors

Baghdad Spare Parts monitors Initial 2—Final 7 to 9

Question 6. How close was the observation or scrutiny of the Saybolt crew to the

lifting of oil?

Answer. (a) Mina al-Bakr is an oil loading platform some 50 kms offshore Southern Iraq. The structure is some 1.5 kms in length and the Saybolt monitors were

housed in accommodation at one end. Owing to a lack of metering on the terminal,

and the limited (and uncalibrated) storage capacity on shore, there was no possibilty

to reconcile the volumes of oil loaded to vessels with a shore based figure.

(b) Botas Terminal in Turkey is a multi-functional shore based terminal with storage tanks dedicated to the storage of crude oil from Iraq via the Iraq-Turkey pipeline. The volumes imported where compared with the volumes leaving the metering

station at Zahko every 24 hours. All loadings to vessels were reconciled with incoming volumes on a monthly basis.

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