United States General Accounting Office

GAO Report to Congressional Requesters

January 1996 FOREIGN

ASSISTANCE

Controls Over U.S.

Funds Provided for the

Benefit of the

Palestinian Authority

GAO/NSIAD-96-18

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-265866 

January 8, 1996

The Honorable Jesse A. Helms

Chairman, Committee on Foreign

 Relations

United States Senate

The Honorable Benjamin A. Gilman

Chairman, Committee on International

 Relations

House of Representatives

Your June 6, 1995, letter requested that we analyze a series of letters that

allegedly were prepared by the Palestinian Authority’s Finance Minister

and the Director General of the Palestine Economic Council for

Development and Reconstruction (PECDAR). These letters indicate that

$138 million from an unidentified source(s) was “diverted” in late 1994 to

finance a number of covert transactions, such as purchasing land and

building apartments in Jerusalem, funding a Palestinian journal, and

providing financial support to groups inside Israel sympathetic to the

Palestinian cause.

To address your general concern that U.S. assistance funds may have been

involved in one or more of these transactions, we ascertained (1) what

financial controls were set up by the World Bank and the U.S. Agency for

International Development (USAID) to monitor the use of U.S. funds

provided to Palestinian Authority, PECDAR, or Palestine Liberation

Organization (PLO) officials for budget support purposes and (2) what

controls USAID established over project funds provided to other U.S.

government agencies, private contractors, nongovernmental organizations

(NGO), private voluntary organizations (PVO), and the United Nations for

the benefit of the Palestinian Authority.

We did not examine whether the letters are authentic since you asked the

Central Intelligence Agency to make that determination. We did not have

the authority to review whether the funds spent by other donor nations for

Palestinian Authority police salaries and project assistance were at risk.

Other nation funding accounted for approximately three-quarters of the

estimated $389 million in total donor disbursements in 1994. Our report

focuses on the estimated $51 million the United States disbursed in 1994:

Page 1 GAO/NSIAD-96-18 Foreign Assistance
B-265866 

$10 million to the World Bank’s Holst Fund,1 $5 million to help pay for

Palestinian Authority police salaries, and $36 million for specific

development projects.

Results in Brief Accountability concerns over the use of U.S. funds for budget support

purposes should be mitigated by the extensive financial controls

implemented by the World Bank and USAID. Most notably, donor funds

provided to the World Bank’s Holst Fund in 1994 were audited and

accounted for by a team of Touche Ross, Saba & Co., auditors located in

Israel and the self-rule territories. According to Bank officials, Touche

Ross agents reviewed 10 percent of all salary payments, 25 percent of all

other payments, and all contracts valued in excess of $25,000 in 1994. In

the case of the $5 million the United States spent on Palestinian Authority

police salaries in 1994, USAID hired an Egyptian audit firm to accompany

the PLO’s paymaster to verify individual payment records and to provide an

overall accounting of disbursed funds.

USAID project assistance funds were distributed to a wide variety of

recipients, including other U.S. government agencies, private contractors,

NGOs, PVOs, and the United Nations. No project funds were directly

disbursed to Palestinian Authority, PECDAR, or PLO officials. USAID’s

contracts, grants, cooperative agreements, and memorandums of

understanding with funds recipients incorporated standard U.S. assistance

provisions, such as (1) grant and project officer oversight, (2) incremental

funding, (3) monthly or quarterly financial status reports, (4) progress

reports, and (5) auditing provisions. USAID’s audit provisions call for annual

audits of each contractor’s overhead rate, contract-specific audits on an

as-needed basis, and close-out audits of all contracts valued in excess of

$500,000 (all USAID contracts exceeded this threshhold). Nonprofit

organizations receiving funds through grants and cooperative agreements

are subject to the Office of Management and Budget’s A-133 audit process.

Budget Support

Versus Project

Assistance

The financial assistance pledged by the United States and other nations

after the PLO and Israel signed the Declaration of Principles may be divided

into two broad categories: (1) infrastructure and technical assistance

projects and (2) budget support to help finance the Palestinian Authority’s

1

The World Bank established the Holst Fund as a central repository for donations to help the

Palestinian Authority pay start-up expenses and short-term operating costs. The World Bank is

responsible for overseeing the use of these funds on behalf of the contributing donors. In 1994, the

Holst Fund disbursed approximately $51 million to the Palestinian Authority and PECDAR. This total

includes a $10-million contribution from the United States.

Page 2 GAO/NSIAD-96-18 Foreign Assistance
B-265866 

operating expenses. Individual donor projects cover a wide range of

infrastructure and technical assistance needs. These needs include

housing construction; wastewater plants; health services; jobs programs;

and technical assistance in such areas as establishment of a legal system;

studies to modernize and strengthen the financial sector; and training for

Palestinian staff in the electric, water, highway, and sanitation sectors.

The budget support category was established to help the Palestinian

Authority meet its operating expenses while it established its own revenue

collection system and revenue clearance arrangements with Israel. It

includes three components: (1) the World Bank’s Holst Fund; (2) police

salaries funneled through the U.N. Relief and Works Agency; and

(3) transitional costs funded by individual donor nations to help support a

number of activities.2

Table 1 shows total donor disbursements in 1994 by assistance category

and major distribution channels. As indicated, the budget support category

accounted for 38 percent of total donor disbursements.

2

These transitional costs include (1) central administration costs not covered by the Holst Fund;

(2) resettlement of prisoners released by Israel; (3) job creation efforts in Gaza—principally organized

through the U.N. Development Program; and (4) temporary NGO support services in the health,

education, and agriculture sectors and in youth and women’s programs.

Page 3 GAO/NSIAD-96-18 Foreign Assistance
B-265866 

Table 1: Donor Disbursements by

Assistance Category and Major

Distribution Channels for 1994

Dollars in millions

Assistance category Disbursements Major distribution channels

Infrastructure and technical

assistance projects total

$240.8

(62 percent)

Bilateral aid projects, U.N.

Relief and Works Agency,

U.N. Development Program,

and the World Bank

Budget support

Holst Fund 50.9 World Bank

Police recurrent costs 40.9 U.N. Relief and Works

Agencya

Transitional projects

Central administration 16.8 European Union, U.N.

Development Program

Ex-detainees 8.4 European Union

Gaza employment

creation

8.6 U.N. Development Program

NGO financing 22.4 European Union

Total $148.0

(38 percent)

Total $388.8

aInitially, the United States and several other donors provided funds directly to the PLO or

Palestinian Authority to cover police salaries and equipment needs. Later, the U.N. Relief and

Works Agency was selected to centrally manage and oversee donor donations to the police

force.

Table 2 shows total U.S. fiscal year 1994 disbursements by assistance

category and major distribution channels.

Page 4 GAO/NSIAD-96-18 Foreign Assistance
B-265866 

Table 2: U.S. Disbursements by

Assistance Category and Major

Distribution Channels for Fiscal Year

1994

Dollars in millions

Assistance category Disbursements Major distribution channels

Infrastructure and technical

assistance projects total

$27.8a

(65 percent)

USAID grantees (i.e., PVOs,

NGOs, other federal agencies,

World Bank, U.N. Relief and

Works Agency) and for-profit

contractors

Budget support

Holst Fund 10.0 USAID grant to the World Bank

Police recurrent costs 5.0 USAID grant to the PLOb

Transitional projects

NGO financing 0.2 USAID grant to the Palestinian

Housing Council

Total $15.2

(35 percent)

Total $43.0

Note: We used fiscal year data since USAID officials could not provide us with detailed

expenditure data for calendar year 1994. The calendar year data used earlier in this report was

based on a global estimate by USAID officials that the United States spent a total of $51 million in

calendar year 1994 on budget support and project assistance.

aFigure includes an estimated $3.3 million in political risk insurance issued by the Overseas

Private Investment Corporation. It also includes $3.2 million in other agency funding attributed to

U.S. assistance efforts.

bGrant awarded prior to the U.N. Relief and Works Agency’s involvement in disbursing and

monitoring police salaries. Grant was made to the PLO for the benefit of the Palestinian Authority.

Controls Over Budget

Support Funds

As indicated in table 2, U.S. assistance funds were distributed through

bilateral aid recipients, the United Nations, World Bank, and other U.S.

agencies. Most U.S. assistance funds could not be directly accessed by

Palestinian Authority or PECDAR officials. Two major exceptions were in

the budget support category. First, the United States provided a

$10-million grant to the World Bank’s Holst Fund to help cover the

Palestinian Authority’s start-up and short-term operating expenses.

Second, the United States provided a $5-million grant to the PLO on behalf

of the Palestinian Authority to cover police salaries. In each case,

Palestinian Authority, PECDAR, or PLO officials did have direct access to

these funds through special accounts set up by the World Bank and USAID.

However, in each instance, extensive controls were established to oversee

disbursed funds.

Page 5 GAO/NSIAD-96-18 Foreign Assistance
B-265866 

World Bank Controls The World Bank implemented several controls over the use of Holst Fund

donations. First, the Bank established a grant agreement with PECDAR

stipulating certain categories of eligible expenditures and expectations

regarding funds accountability and oversight procedures. Second, Holst

Fund accounts accessible to Palestinian Authority and PECDAR officials

were capped to make the level of monthly expenditures consistent with

the Palestinian Authority’s budget needs. Third, the firm of Touche, Ross,

Saba & Co., was hired to act as the Bank’s auditor in the field. According

to a senior World Bank official, the firm reviewed 10 percent of salary

payments and 25 percent of all other payments to ensure that expenses

were properly documented and that funds were only used for approved

purposes. In addition, Touche Ross individually examined all contracts

valued in excess of $25,000. The same official noted that the auditors also

performed spot checks of individuals receiving salary checks and goods or

services received.3

 Fourth, the Bank only released additional funds to the

Holst Fund accounts after the auditors approved the replenishment

requests filed by the Palestinian Authority and PECDAR. According to a

senior World Bank official, this process had accounted for all Holst Fund

disbursements through June 1995.4

USAID Controls The U.S. contribution of $5 million toward police salaries was made

directly to the PLO on behalf of the Palestinian Authority because the

disbursement system managed by the U.N. Relief and Works Agency was

not in place when these funds were made available. The United States did,

however, contract with the Egyptian audit firm of Farid S. Mansour & Co.,

to monitor the disbursement of these funds. The auditor reported that the

$5 million was appropriately disbursed and used only for the intended

purposes. The United States does not plan to provide any further funding

for police salaries.

3

Both USAID and the World Bank indicated that they intend to review Touche Ross’ compliance with

its contract terms. The USAID Inspector General plans to review the auditor’s oversight activities in

connection with a broad review of World Bank financial controls related to the disbursement of U.S.

assistance. USAID is currently seeking approval for this audit. Per its grant agreement with USAID, the

World Bank must arrange for an external audit of the records and accounts maintained by Touche

Ross with respect to approved expenditures. A Bank official stated that this audit is tentatively

planned for early 1996.

4

The Holst Fund did encounter certain problems in early 1995 that appear to have been satisfactorily

resolved. These problems related to the use of bank overdrafts by the Palestinian Authority to help

cover operating expenses that exceeded the monthly funding levels provided by the Holst Fund. This

led to a commingling of donor and Palestinian Authority funds. To resolve this situation, the Bank

closed the Palestinian Authority’s accounts in June 1995 after receiving certified replenishment

requests that met or exceeded the total amount advanced into each account. New accounts were

subsequently opened that explicitly forbid the use of overdrafts and the commingling of funds.

Page 6 GAO/NSIAD-96-18 Foreign Assistance
B-265866 

Controls Over Project

Funds

As noted in table 2, USAID funds for infrastructure and technical assistance

projects were disbursed through four main vehicles: (1) direct contracts

with for-profit organizations, (2) grants and cooperative agreements with

PVOs and NGOs, (3) grant agreements with the World Bank and United

Nations, and (4) USAID project funds provided to other U.S. government

agencies. In all these instances, Palestinian Authority, PECDAR, and PLO

officials did not have direct access to U.S. assistance funds.

As a standard practice, USAID dispenses funds through contracts, grants,

cooperative agreements, or memorandums of understanding. These

documents stipulate the funded amount; the purpose and scope of the

funded activity; procedures for requesting and receiving incremental

funding; and provisions relating to project oversight, funds accountability,

and audit requirements.5

 These standard oversight mechanisms also apply

to grants to international organizations such as the World Bank and the

United Nations, although the active involvement of USAID project and grant

officers is reduced since each of these organizations has its own field staff

and project monitoring structure. In the case of agreements between USAID

and another U.S. agency, the receiving agency is responsible for the use,

management, and audit of transferred funds.

As a general rule, USAID grantees and contractors are paid after the

cognizant project officer has reviewed the recipient’s monthly or quarterly

expenditure claim.6

 Although these expenditure vouchers show only

line-item totals, project officers must certify that the claimed amounts

look reasonable based on project reports and their on-site visits.

USAID contractors are audited by the U.S. government agency that has the

most business with that contractor. The three types of audits commonly

performed on all USAID-funded contracts are annual audits of the

contractor’s overhead rate, contract-specific audits on an as-needed-basis,

and close-out audits for contracts valued in excess of $500,000.

5

Project oversight is mainly provided by a cognizant USAID project officer who is responsible for all

programmatic aspects of the project and a USAID grant officer who is responsible for monitoring

pre-award activities and post-award financial data. Project officer duties include reviewing periodic

financial and progress reports from the aid recipient as well as conducting site visits to confirm that

funded activities are performing as expected. USAID has offices in Tel Aviv and Jerusalem to monitor

project activities in the area. USAID grant officers are stationed in Amman, Jordan.

6

The U.S. contribution to the World Bank’s Holst Fund was an exception to this rule since the funded

amount was disbursed in two lump sums of $5 million. This was done because the Holst Fund was

established to serve as a repository for donor contributions that could not be earmarked for specific

project activities.

Page 7 GAO/NSIAD-96-18 Foreign Assistance
B-265866 

Nonprofit organizations receiving U.S. funding are also periodically

audited under the Office of Management and Budget’s A-133 audit process.

International organizations use their own audit procedures and provide

copies of final audit reports to cognizant USAID officials. A-133 audits

include a review of the recipient’s internal controls and a sample of

contracts and line-item expenses. A-133 and direct contract audits are

performed either by Inspector General staff from the cognizant audit

agency or by approved U.S. or foreign audit firms with a review by

Inspector General staff. In addition to the A-133 and contract audit, the

Inspector General periodically performs program audits that supplement

the standard audits performed for individual recipients of U.S. assistance.7

Agency Comments USAID officials provided us with oral comments on a draft of this report.

These officials agreed with the report’s presentation, but they did note a

limited number of technical points, which they believed needed to be

corrected or clarified. We incorporated these technical changes where

appropriate.

Scope and

Methodology

To obtain information for this report, we met with officials at the State

Department and USAID to discuss their analyses of the same letters you

sent us. We also met with USAID officials to discuss the types of controls in

place to ensure that U.S. assistance funds were used only for their

intended purposes. We obtained copies of a number of contracts, grants,

cooperative agreements, and memorandums of understanding to see

whether standard financial controls were incorporated into these

documents.

We did not review USAID project records and field activities to determine

whether described controls were effectively implemented. However, we

did ask USAID officials to provide data on the implementation of oversight

controls for 10 projects funded by USAID in the West Bank and Gaza in

1994. Citing end-of-fiscal year work demands and the absence of key staff,

USAID indicated that it could not provide us with the requested data in a

timely manner. In commenting on a draft of this report, USAID officials

indicated that had they been given additional time, they could have

7

For example, the USAID Inspector General recently issued a report on whether (1) USAID’s offices in

the West Bank and Gaza are capable of monitoring USAID’s programs in the area and (2) PVOs

receiving U.S. assistance have the capability to implement USAID programs. On the whole, the

Inspector General’s report concluded that adequate capabilities exist in each case. USAID staff also

indicated that the Regional Inspector General in Cairo plans to examine the controls the Palestinian

Authority has put in place and its ability to ensure accountability of funds it receives and manages.

Page 8 GAO/NSIAD-96-18 Foreign Assistance
B-265866 

responded to our data request. Based on discussions with the Senate

Committee on Foreign Relations staff, we intend to follow up with USAID

officials to obtain this data. We will report the results of this effort in a

separate report.

We met with World Bank officials to review the financial controls used to

ensure that donor funds provided to the Palestinian Authority and PECDAR

were appropriately used. Planned audits by the World Bank and USAID’s

Inspector General should document whether the Bank’s auditors properly

implemented applicable control procedures.

We did not review the financial controls used by the U.N. Relief and Works

Agency to monitor the disbursement of donor support for police salaries.

We also did not review the controls developed by other nations to account

for the use of their project funds.

We conducted our review from July through August 1995 in accordance

with generally accepted government auditing standards.

We are sending copies of this report to the Administrator, U.S. Agency for

International Development; the Director, Office of Management and

Budget; and other interested congressional committees and members.

Copies will also be made available to others upon request.

This report was prepared under the direction of Benjamin F. Nelson,

Director, International Relations and Trade Issues. Other major

contributors to this report were Diana Glod, Assistant Director and

Michael ten Kate, Evaluator-in-Charge. Please contact Ms. Glod at

(202) 647-1588 if you or your staff have any questions about this report.

Henry L. Hinton, Jr.

Assistant Comptroller General

(711152) Page 9 GAO/NSIAD-96-18 Foreign Assistance
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