GAO

United States General Accounting Office

Report to the Ranking Minority Member,

Subcommittee on Agriculture, Rural

Development and Related Agencies,

Committee on Appropriations, House of

Representatives

September 2000 FOREIGN

ASSISTANCE

U.S. Food Aid

Program to Russia

Had Weak Internal

Controls

GAO/NSIAD/AIMD-00-329

Page 1 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Contents

Letter 3

Appendixes Appendix I: Scope and Methodology 36

Appendix II: Background on Fiscal Year 1999 U.S. Food Aid

Program to Russia 39

Appendix III: Key Internal Controls for Monitoring the Distribution

of U.S. Food Aid Commodities in Russia 44

Appendix IV: Comments From the Foreign Agricultural Service 46

Appendix V: GAO Contacts and Staff Acknowledgments 62

Tables Table 1: Timeliness of Key Logistical Reports on Status of

Shipment, Discharge, and Distribution of U.S. Food Aid

Commodities, as of November 1999 and May 2000 16

Table 2: Statistics on Fiscal Year 1999 U.S. Food Aid to Russia

by Program and Commodity 41

Table 3: Key Internal Controls for the Bilateral U.S. Food Aid

Program to Russia 44

Figures Figure 1: Flow Chart of Food Aid Commodity Distribution and

Beneficiaries, Fiscal Year 1999 Program 9

Figure 2: Percent of Russian Regions With Differences Between

Planned and Actual Deliveries of Food Aid Commodities,

Fiscal Year 1999 Program 14

Figure 3: Financial Status of the Special Accounts, as of

June 27, 2000 25

Figure 4: Arrival of U.S. Food Aid Commodities in Russia Under

the Fiscal Year 1999 Program 43

Abbreviations

PVO private voluntary organization
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United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-286196 Letr

September 29, 2000

The Honorable Marcy Kaptur

Ranking Minority Member

Subcommittee on Rural Development,

Agriculture, and Related Agencies

Committee on Appropriations

House of Representatives

Dear Madam Kaptur:

In December 1998, the United States responded to a request by the Russian

Federation for food aid that was triggered by the twin effects of one of the

lowest Russian grain harvests in decades and a severe financial crisis. The

United States agreed to provide 3.7 million metric tons of food aid in fiscal

year 1999,1 at a cost of approximately $1.1 billion (including commodity

and freight costs). Most of the food aid was sold by the Russian

government to regional mills and processors and is expected to raise about

$353.2 million for the Russian Pension Fund and $2.3 million for

agricultural projects in Russia.2 A small portion of the U.S. food aid was

donated to Russian social institutions to feed some of the most needy

people. The fiscal year 1999 program, which is administered by the

Department of Agriculture’s Foreign Agricultural Service, was one of the

largest food aid programs to a single nation in the history of U.S. food aid.

Out of concern over the size and complexity of the U.S. food aid program,

as well as the well publicized allegations of corruption and

misappropriation of government resources in Russia, you requested us to

evaluate how the Foreign Agricultural Service monitored the distribution of

U.S. food aid commodities and funds generated from their sale. A key

factor in helping managers achieve program objectives and minimize

operational problems and risk of fraud and abuse is the implementation of

appropriate internal controls. This report focuses on the internal controls

used by the Foreign Agricultural Service in its management of the fiscal

1

The U.S. food aid agreements with the Russian government were initiated in fiscal year

1999. Food aid shipments began arriving in Russia in fiscal year 1999 and are projected to be

completed in fiscal year 2001.

2

Dollar amounts in this report are based on an exchange rate of 28 rubles per U.S. dollar.
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year 1999 government-to-government food aid programs to Russia.3 We

specifically examined (1) the adequacy of internal controls used to monitor

the distribution of food aid commodities, (2) the adequacy of procedures

for monitoring collections and deposits of funds derived from the sale of

food aid commodities, and (3) the extent to which procedures for

determining the price to sell U.S. food aid commodities in Russia were

followed.

To address these issues, we went to Russia for 2 weeks in November and

December 1999 to meet with U.S. and Russian government officials

involved with the implementation of the fiscal year 1999 food aid program.

We also conducted a detailed analysis of 237 reports documenting the

results of site visits to regional food aid recipients by U.S. monitors,

reviewed 19 months of minutes recording decisions made at weekly

meetings between U.S. and Russian officials, reviewed hundreds of key

logistical reports, and tested a database used to track commodity

distribution. As the basis for evaluating the program’s internal controls, we

used the standards for internal control in the federal government.4

Appendix I provides detailed information on our scope and methodology.

Results in Brief The Foreign Agricultural Service did not adequately implement internal

controls designed to direct, track, and verify how food aid was delivered at

the regional level in Russia. As a result, the Foreign Agricultural Service

cannot provide reasonable assurance that the food aid was delivered in

agreed upon amounts to the intended regions as was designated in

commodity distribution plans approved by both governments. We found

that for most of the commodity distribution plans, less than one-quarter of

the targeted regions received a tonnage amount that was equivalent to or

near their planned allotment. The lack of timely reporting on commodity

distribution by the Russian government combined with weaknesses in the

Foreign Agricultural Service’s tracking systems for monitoring commodity

deliveries to regional recipients limited the agency’s ability to effectively

manage the distribution process, identify discrepancies, and minimize the

3

Ninety-seven percent of the total U.S. food aid tonnage provided to Russia in fiscal year

1999 was provided under a government-to-government program. The remaining 3 percent of

the food aid tonnage was distributed in Russia through private voluntary organizations.

4

Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, Nov. 1999)

provides a foundation for internal controls for federal entities.
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potential for fraud and abuse. U.S. monitors who visited regional sites to

verify commodity deliveries often did not have reliable information

concerning the quantities of commodities expected to be delivered. Thus,

they were unable to make this determination and investigate discrepancies

effectively. Moreover, they made few visits to determine whether wheat

intended to be distributed to needy populations reached social institutions

such as orphanages and hospitals. Officials from the Foreign Agricultural

Service told us that their ability to effectively implement internal controls

was constrained by limited staff resources and the need to implement a

large and complex program in a short time period. In addition, U.S. and

Russian officials told us that while a few cases of alleged abuse had been

reported and investigated, the cases were not substantiated and were

aware of no significant claims of commodity diversion or fraud in the food

aid program.

The Foreign Agricultural Service did not establish adequate procedures to

monitor the collection and deposit of funds derived from the sale of fiscal

year 1999 U.S. food aid commodities in the Russian regions. The

procedures were also inadequate for minimizing the risk of unintended

commodity diversions and shortfalls in deposits to the Russian Pension

Fund. The Foreign Agricultural Service did not begin to systematically

track total payments due and reconcile this information with data from

Russian records on total payments collected until May 2000—13 months

after the first commodity shipments arrived in Russia. Also, the Foreign

Agricultural Service did not receive information on a regular basis

regarding the status of regional payments and delinquencies. Foreign

Agricultural Service officials generally regarded regional payment data to

be unnecessary because they viewed the Russian government as being

ultimately responsible for making up shortfalls. In June 2000, the Russian

government reported that $293 million had been collected of $309 million

that was due at that time. However, this report also reflected the fact that

about half the regions were delinquent, owing $26 million, while the

remaining regions had paid $10 million in advance. Without regular

information on the amounts due and paid by region, the Foreign

Agricultural Service was impeded in its ability to influence Russia to take

collection actions, including suspending food aid distributions to

delinquent regions. It also could not effectively use regional payment

information to help confirm regional receipt of the food aid commodities.

Officials from the Foreign Agricultural Service established and followed a

formal procedure for setting commodity prices for food aid sold in Russia,

but they did not adequately document their analysis or the basis for how
B-286196

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the final price decisions were reached. The prices set were used to

calculate the amount to be deposited into the Russian Pension Fund for a

given commodity shipment. The U.S. and Russian governments attempted

to set commodity prices at a “golden middle” that would facilitate the quick

sale of food aid commodities and help to counteract inflationary pressures

but would not disrupt local markets. Because prices are not always readily

available in Russia’s emerging market economy, officials from the Foreign

Agricultural Service and the Russian government consulted a variety of

sources to set program prices. However, Foreign Agricultural Service

officials did not prepare written market analyses or summaries of their

conversations with market experts and trade organizations assessing

market conditions. Moreover, our analysis of several commodities shows

that in some cases U.S. food aid prices were significantly below market

prices in Russia. Without documentation of its independent assessments of

market conditions when making price-related decisions, the Foreign

Agricultural Service was unable to demonstrate the reasonableness of final

food aid commodity prices, which in turn, determines the amount of funds

deposited into the Russian Pension Fund.

In order to strengthen the program’s internal controls, we recommend that

the Secretary of Agriculture take certain actions to better monitor the

distribution of U.S. food aid commodities as well as the funds generated

from their sale under the existing and any future government-togovernment food aid programs in Russia. We also recommend that the

Secretary of Agriculture take steps to improve the transparency of key

decisions concerning changes to distribution plans and the establishment

of prices for U.S. food aid commodities sold in Russia. The Foreign

Agricultural Service stated in its agency comments that it appreciated our

recommendations to improve internal controls and will seek to implement

them where appropriate. However, the agency disputes our conclusion that

because of these internal control weaknesses, the Foreign Agricultural

Service cannot reasonably assure that the food aid was delivered in agreed

upon amounts to the intended regions and that the Russian Pension Fund

will continue to receive timely deposits that equal the full value of the food

aid sold in Russian markets. Agency officials stated that the bottom-line

objectives for the program—delivery of commodities to the regions of

Russia as planned and achieving the targeted goal for payments to the

Russian Pension Fund—were achieved as no substantiated reports of fraud

or diversion of commodities or funds have been confirmed. While we agree

that conducting a food aid program in Russia was a difficult challenge, we

continue to believe that implementation of appropriate internal controls is

essential to prevent and detect fraud and abuse. Without adequate controls
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and documentation of key decisions the agency cannot provide reasonable

assurance that its objectives are being met.

Background The United States provided the Russian government with 3.6 million metric

tons of food aid commodities, such as wheat, corn, soybeans, rice, poultry,

and pork under its largest government-to-government food assistance

package in fiscal year 1999.5 Half of this food aid tonnage was donated to

the Russian government and half was sold on concessional terms.6 The

Russian government, in turn, sold about 90 percent of the food aid tonnage

to regional processors and donated about 10 percent to social institutions.

In addition to the government-to-government programs, the United States

also donated another 97,000 metric tons in food products that were for

direct distribution to vulnerable groups such as hospitals and orphanages

throughout Russia by five private voluntary organizations. Food aid

commodities began arriving in March 1999, and over 95 percent of the food

aid had arrived via 235 different vessel shipments by June 2000. See

appendix II for detailed information on U.S. food aid programs to Russia

for fiscal year 1999 and the arrival of U.S. food aid commodities.

In addition to the grain shortages and financial crisis, Russia’s request for

food assistance came at a time when its Pension Fund was 4 months in

arrears in some regions.7 There was also a shortfall of government support

for social institutions, and a concern for potential food shortages and

hunger, especially in the Northern and Eastern areas of Russia. The request

also came during a period of surplus U.S. and global agricultural

production and low commodity prices.

The U.S. goals for the fiscal year 1999 U.S. food aid program to Russia were

to help the Russian government stabilize food prices and supply food to

vulnerable groups. To avoid past problems of mismanagement and waste

5

The next largest government-to-government food assistance packages provided by the

United States in fiscal year 1999 were the approximately 790,000 metric tons of food aid

provided to North Korea under a multilateral assistance program and about 660,000 metric

tons of food aid provided to Indonesia under a bilateral agreement.

6

The concessional terms of the food aid sale were a 5-year grace period, 16 installment

payments in approximately equal amounts, and an initial interest rate of 2 percent.

7

The Russian Pension Fund is a “pay-as-you-go” Russian government pension system,

funded in part by employers and workers, which serves as the principal social security

safety net for the elderly.
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that occurred in U.S. food aid programs to the Former Soviet Union in the

early 1990s, the Foreign Agricultural Service designed a simple program to

expedite the distribution of a large quantity of food aid and minimize the

opportunity for fraud and abuse. By selling most of the food aid within

Russia, the United States hoped to raise substantial funds for the Russian

Pension Fund to reduce pension arrears and alleviate poverty. The highly

visible Pension Fund was also selected to simplify the monitoring

requirements needed to minimize risk of fraud related to the use of the sale

proceeds. The small amount of funds derived from the sale of donated

seeds was provided to five agricultural research institutions and one rural

credit agency.8

Integral to the food aid program were commodity distribution plans that

allocated quantities of each type of commodity to target regions based on

need. These plans, later implemented through detailed work plans, were

mutually agreed upon by both governments and incorporated into the food

aid agreements. The program relied on former state entities to sell food aid,

capitalizing on the existing food distribution network. U.S. surplus wheat

was also donated on a regional basis and intended to benefit selected

orphanages, hospitals, and other social institutions serving needy segments

of the population. The five private voluntary organizations also directly

distributed donated food to vulnerable groups in Russia. Figure 1 provides

a flow chart of U.S. food aid commodity distribution and beneficiaries.

8

See Foreign Assistance: Donation of U.S. Planting Seed to Russia in 1999 Had Weaknesses

(GAO/NSIAD-00-91, Mar. 9, 2000).
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Figure 1: Flow Chart of Food Aid Commodity Distribution and Beneficiaries, Fiscal Year 1999 Program

Source: GAO.

In order to minimize the potential for fraud and abuse in the distribution

and sale of commodities, the Foreign Agricultural Service incorporated

internal control provisions into the food aid agreements with Russia.

According to federal standards, internal controls serve as the first line of

defense in safeguarding assets, preventing and detecting errors and fraud,

and providing reasonable assurance that an organization’s objectives are

being achieved. In addition to the standard reporting and compliance

requirements usually found in food aid agreements with other countries,

the Foreign Agricultural Service also established weekly Bilateral Working

Group meetings between senior U.S. and Russian government officials to

discuss operational and logistical issues and resolve problems.9 It also used

commodity distribution plans to direct and account for the distribution of

food aid to targeted regions. In addition, the Russian government was

required to prepare more detailed logistical reports on the movement of

Regional 

recipients

Regional 

recipients

Social

institutions/

vulnerable

groups

Social

institutions/

vulnerable

groups

$353.2 million

Pension

 Fund

$353.2 million

Pension

 Fund

$2.3 million

6 agricultural

institutions

$2.3 million

6 agricultural

institutions

Sell 5

PVOs

5

PVOs

Donate

Russian

government

Russian

government

U.S.

government

U.S.

government

PVOs = Private voluntary organizations

9

Members of the Bilateral Working Group included U.S. officials from the Foreign

Agricultural Service and Russian representatives from the ministries of Agriculture,

Finance, Customs, Trade, and Internal Affairs; and Russian distribution agents.
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food aid commodities. These and other reports were used to create a

database to track commodities from purchase through shipping and arrival

at the final destination. A small number of U.S. monitors also were sent to

Russian regions to verify the arrival of food aid commodities at local

facilities. These procedures were also being used by the Foreign

Agricultural Service to manage the U.S. food aid program to Russia in fiscal

year 2000 that is expected to provide for delivery of 520,000 metric tons of

food aid commodities.10 See appendix III for a summary of the major

internal controls, their purpose and specific procedures.

Internal Control

Weaknesses Impair

U.S. Ability to Ensure

Proper Distribution of

Food Aid Commodities

While the Foreign Agricultural Service established internal controls to

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

provide reasonable assurance that the food aid commodities were

distributed as intended and that wheat intended to be distributed free to

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

significant differences between planned and actual commodity

distributions to the regions and we were unable to determine whether the

differences were due to intended or unintended re-routings. The

commodity distribution plans were not updated and the minutes of the

Bilateral Working Group meetings do not document reasons for or approval

of changes. In addition, key logistical reports on shipment status were not

submitted on a timely basis and contained inaccurate and incomplete

information, which limited the effectiveness of the commodity tracking

system. Moreover, the Foreign Agricultural Service made improvements to

its tracking system too late to provide useful information to manage the

fiscal year 1999 food aid program. While the Foreign Agricultural Service

undertook an extensive effort to visit regional recipients and verify that

commodities had been delivered as expected, its U.S. monitors often did

not have reliable information on the quantities scheduled to be distributed

when they visited the regional sites. As a result, they could not effectively

verify the amounts actually delivered to the designated recipients. These

internal control weaknesses also affected the Foreign Agricultural Service’s

ability to provide reasonable assurance that the regions and social

institutions received their expected share of the wheat intended for

10For fiscal year 2000, the United States agreed to provide Russia with 300,000 metric tons of

wheat intended for donation to social institutions and 20,000 metric tons of seeds for sale in

Russia, the latter whose revenues are to be deposited into a special account designated for a

rural credit agency. The United States also donated 200,000 metric tons of food commodities

for distribution by eight private voluntary organizations.
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donation to vulnerable groups because its tracking system did not

distinguish between wheat intended for sale versus donation and the U.S.

monitors made few site visits to social institutions. Foreign Agricultural

Service officials told us that although their ability to effectively implement

internal controls was hindered by limited staff resources and the need to

quickly implement a large and complex program in a short period of time,

there were not substantiated claims of significant commodity diversion or

fraud in the food aid program.

Inadequate Implementation

of Commodity Distribution

Plans Impeded Ability to

Ensure Food Aid Deliveries

to Regions as Intended

Although the commodity distribution plans were designed to help track the

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

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

Service did not use commodity distribution plans as a control mechanism

to help ensure that commodities reached their intended regional

destination. U.S. food aid commodities were delivered to 79 of the 89

regions of the Russian Federation under the fiscal year 1999 program.

Under the terms of the bilateral agreements, the Russian Ministry of

Agriculture was required to submit detailed distribution work plans to the

Foreign Agricultural Service prior to its commodity purchases that

allocated the commodities to regions by type and tonnage based on need.

Recognizing the need to respond to changing conditions such as sudden

regional food shortages, the Russian government was permitted to revise

these work plans. However, changes to the distribution work plans had to

be approved by the U.S. Minister Counselor based upon requests of the

Bilateral Working Group.

We found that the commodity distribution plans were not implemented in a

way so as to provide reasonable assurance that the commodities were

delivered in agreed upon amounts to the regions as intended. The

commodity distribution plan data were not entered into the database and

used as a baseline for determining whether the commodities reached the

intended regions. Moreover, mutually approved commodity distribution

plans covering about 90 percent of the food aid tonnage were not updated
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to reflect changes in planned deliveries.11 For example, the Russian

government’s original plan was to buy and deliver 120,000 metric tons of

beef to 26 regions; however, according to shipment and distribution

reports, it purchased and distributed less than 50,000 metric tons of beef to

13 regions. We found no records indicating that the Russian government

submitted a revised distribution plan addressing these changes. We also

found little evidence in the minutes of the Bilateral Working Group to

indicate that proposed changes in commodity distribution plans were

presented to and received approval by the U.S. Minister Counselor. Instead,

the U.S. Minister Counselor received and accepted final reports of actual

commodity deliveries made to regional recipients. In this manner, the

actual distribution became the planned distribution. According to officials

from the Foreign Agricultural Service, they did not enforce the requirement

that the Russians submit revised distribution plans when changes were

made in order to expedite the distribution of the food aid commodities.

These officials told us that the European Union experienced problems in

distributing food aid to the regions as well as making timely deliveries.12

They attributed this in part to the amount of time required to prepare and

approve changes to the commodity distribution plans.

Although the Foreign Agricultural Service reported to the House

Agriculture Committee in April 2000 that its monitoring system had

confirmed that commodities reached the intended regions according to the

distribution plans, our analysis of the distribution records for the 10

commodities provided under the government-to-government food aid

program showed that significant differences occurred between planned

and actual deliveries at the regional level. For seven commodities whose

distribution plans represent about 71 percent of the food aid tonnage

provided in this program, less than one-quarter of the targeted regions

received an amount that was equivalent to or near their planned allotment,

that is, within 10 percent of their planned deliveries (see figure 2). Corn

was distributed to targeted regions somewhat more in line with planned

deliveries though less than one-half of them received an amount that was

11We found an update of distribution plans for wheat that was to be donated to regions

rather than sold. This wheat represented about 10 percent of the food aid tonnage.

12The European Union provided 1.85 million metric tons of agricultural products (including

1 million metric tons of wheat) valued at approximately $478 million (.9834 euros per U.S.

dollar). The European Union food aid was to be sold in Russia with 80 percent of the funds

going to the Russian Pension Fund and the remaining 20 percent going to support selected

social causes.
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equivalent to or near their planned allotment.13 Corn represented about

28 percent of the food aid tonnage.

We found also that numerous instances of regions receiving commodities

even though they were not listed as intended recipients in the commodity’s

distribution plans. We did not analyze the difference between planned and

actual deliveries of beef because a revised distribution plan for this

commodity did not exist. We recently reported on seeds deliveries under

the food aid program to Russia and our separate review also showed that

seed distribution in Russia did not follow the original distribution plans and

the reasons for changes were not fully documented.14

13Distribution data for corn was not available at the time of our review for an estimated

426,000 metric tons of corn shipped to Russia in April-May 2000, comprising 45 percent of

the total shipments for this commodity.

14See Foreign Assistance: Donation of U.S. Planting Seed to Russia in 1999 Had Weaknesses

(GAO/NSIAD-00-91, Mar. 9, 2000).
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Figure 2: Percent of Russian Regions With Differences Between Planned and Actual Deliveries of Food Aid Commodities, Fiscal

Year 1999 Program

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

Weaknesses in Reporting

and Tracking Systems

Impeded Management of

Commodity Deliveries

The Foreign Agricultural Service did not effectively track commodity

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

because of significant weaknesses in its reporting and management

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

of shipments from point of departure in the United States to distribution in

the Russian regions were not submitted on a timely basis. The delinquent

Percent of regions

Corn Rice Soybean Soybean

meal

Wheat Nonfat dry

milk

Pork Poultry

Type of commodity distribution plan

Minimal variance (less than 10 percent from what was planned)

 Moderate variance (between 10-50 percent from what was planned)

Substantial variance (more than 50 percent from what was planned)

No delivery of planned amount

0

10

20

30

40

50

60

70

80

90

100

Legend
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reporting hindered the ability of the Foreign Agricultural Service to

monitor the progress of commodity deliveries and to conduct timely

monitoring visits. The logistical reports also contained inaccurate and

incomplete information.

A key logistical report was designed by the Foreign Agricultural Service to

provide a full accounting of each vessel shipment from point of departure

in the United States to final commodity sale or distribution in Russia.15 The

Foreign Agricultural Service prepares the first version of the logistical

report providing basic control data for each shipment and the Russian

government submits two follow-on versions of the report for each

shipment at the points of discharge and distribution. Our review of these

reports in November 1999 and later in May 2000, however, found that they

were chronically late—less than 10 percent of these reports were

submitted on time (see table 1 below). We also noted that the percentage of

reports over 60 days late doubled from 20 percent in November 1999 to

40 percent by May 2000.

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

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

as of November 1999 and May 2000

a

The number of days within which the Foreign Agricultural Service must provide the Russian

government with this report is not specified in the bilateral agreements. For purposes of our analysis,

we used 14 days after the vessel’s departure date as a reasonable notification period.

b

The Russian government must provide the Foreign Agricultural Service with this report within 2 days

of the vessel’s port discharge.

c

The Russian government must provide the Foreign Agricultural Service with this report within 14 days

of the vessel’s port discharge.

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

We also found many logistical reports that did not fully account for the

quantities of commodities that were shipped, discharged, or damaged. In

addition, the reports did not distinguish between wheat that was to be sold

in Russia versus that which was to be donated to social institutions. This

reduced the Foreign Agricultural Service’s ability to more closely monitor

deliveries of 411,400 metric tons of donated wheat to help ensure that (1) it

went to the intended regions, (2) mills did not pay for the donated wheat,

and (3) social institutions actually received the donation.

The Foreign Agricultural Service in Moscow used the reports and other

vessel shipment data to build and maintain a computerized database and a

separate spreadsheet called the Master Travel Matrix. Both systems were

used to generate management reports and plan monitoring visits. We found,

however, they contained erroneous data and lacked important information.

For example, in December 1999, we reviewed the information systems and

found numerous input errors in quantities shipped, discharged, and

distributed, and formula errors that caused totals of columns and rows not

to add up correctly. We also noted the omission of two vessels carrying

Total number of

reports received

as of

Percent of reports

meeting reporting

deadline

as of

Percent of reports

submitted up to 60

days past deadline

as of

Percent of reports

submitted 60 days

or more past

deadline

as of

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

Shipment data: departure date,

commodity type, and tonnage by

vessela

94 207 7 5 86 74 7 21

Discharge data: date, commodity

type, tonnage, and condition by

vesselb

82 149 5 3 89 67 6 30

Distribution data: commodity type and

tonnage by regional recipientc 76 145 5 3 75 57 20 40
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about 27,000 metric tons of corn and 35,000 metric tons of wheat.16 In

addition, the systems did not contain information on the commodity

distribution plans by region, impairing the ability of the Foreign

Agricultural Service to determine whether commodities were delivered to

the regions as expected. Nor did the systems track when shipments

reached their final destination in the regions, which is supposed to be one

of the measures used to trigger when payments from commodity sales are

to be paid to special accounts of the Russian government. Further, the

Master Travel Matrix did not provide individual columns to track estimated

deliveries separately from actual deliveries. Mingling the data on estimated

deliveries with actual deliveries impeded the ability to verify actual

deliveries and destroyed the audit trail it was designed to create.

In December 1999, the Foreign Agricultural Service, with the aid of a

private contractor, developed a new database in response to increased

problems with accounting for meat shipments and, in part, as a result of

our review. The new database, called the Food Aid to Russia Monitoring

System, became operational in May 2000 after virtually all of the fiscal

year 1999 food aid commodities had been discharged in Russia. Our review

of the new database in May 2000 found considerable improvement over

prior systems and enhancement of the Foreign Agricultural Service’s ability

to track commodity shipments, deliveries, and payments.17 While we noted

that many past data entry errors had been corrected, the reliability of the

management reports generated from the new database was still hampered

by the quality and timeliness of the key logistical reports. In addition, the

new system still does not compare actual deliveries to commodity

distribution plans or track dates when the food aid reached regional

recipients. Also, the new system continues to mingle actual deliveries with

estimates of expected deliveries. Although notable improvements have

16The corn shipment was a data entry error and was later added to the database after we

brought it to the attention of the Foreign Agricultural Service. We learned that the wheat

shipment was purposely omitted; however, this omission was not indicated in any form of

an audit trail. The wheat shipment was originally destined for Russia, but due to unloading

problems in Novorossysk, it was re-routed to the Newly Independent State of Georgia for

use under another U.S. food aid program. The food aid wheat shipment to Russia was later

replaced.

17In May 2000, we reviewed information and reports generated by the new database, but we

did not review supporting documents in Russia. Database improvements included more

complete tracking of commodity shipments and more useful management reporting on the

status of individual commodities, shipments, pricing data, amounts due and collected on

commodities sold, regions visited and monitored, results of monitoring visits, and overall

program statistics.
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been made, the new system was established too late to provide much

useful information to manage the fiscal year 1999 food aid program.

U.S. Monitoring Visits

Inadequate to Detect

Variances From Intended

Distribution

According to the Foreign Agricultural Service, one of the primary purposes

of the monitoring visits was to ascertain whether food aid recipients

received all the commodities expected. However, the Foreign Agricultural

Service did not effectively verify the amounts actually delivered and detect

discrepancies. About six officials from the Department of Agriculture were

detailed to Russia at any one time throughout the program to serve as U.S.

monitors responsible for visiting ports and regional food aid recipients,

among other duties. According to a June 30, 2000, program report, U.S.

monitors had prepared 288 site visit reports, covering 879 recipients such

as mills, processors, and storage facilities. Recipients in 11 of the 79

regions that received food aid in fiscal year 1999 were not visited because

of safety-related travel restrictions imposed by the U.S. government.

Program reports show that as of June 30, 2000, the monitors reported that

67 percent of the total tonnage was monitored. At each visit, the monitors

collected pertinent documents and later completed a site visit report that

contained information on the facility visited, the quantities received based

on documents, and the prices paid.18

While the U.S. monitors made numerous site visits, they often conducted

these visits without reliable data on how much of a commodity they were

expected to find, thus they were unable to verify the delivery amounts or

identify and investigate discrepancies at the time of the visit. For example,

several site visit reports mentioned that the recipient had expected more

food aid than had arrived, but, at the time, the monitors could not tell if the

discrepancies were due to changes in distribution plans or unintended

re-routings. In most cases, the monitors’ site visit reports and database

reports provided no indication of follow-up or attempt to reconcile the

differences. U.S. officials reported that only a few cases were referred to

Russian authorities for further investigation based on indication of

potential abuse, but that upon investigation the allegations were not

substantiated. In addition, our contacts with U.S. and Russian officials told

us they were aware of no significant claims of commodity diversion or

fraud.

18Site visit reports are officially called Compliance Review Reports.
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The monitoring program was also limited in its ability to independently

gather and assess information on program performance. Monitors relied

primarily on documents supplied by regional recipients to determine the

quantity and quality of the commodity received. Only in a few cases did

monitors report seeing the commodities at the regional facility. Because it

was difficult to time for logistical reasons, few monitors made site visits to

actually observe the vessel discharge or transfer of food aid commodities

to regional recipients. Occasionally, the monitors did not make actual site

visits but relied on documents sent to them—a distinction that was not

captured in the management reports. The independence and deterrent

value of the visits was further limited by the fact that they were not

conducted on a surprise basis, but pre-arranged with the assistance of the

Russian distribution agents and local officials. However, security officials

from the U.S. and Russian governments told us that the extensive presence

of the U.S. monitors in the regions probably served as a deterrent to fraud

and abuse, although they also believed that at least some surprise visits

would have improved the effectiveness of the monitoring program.

The Foreign Agricultural Service did not prepare a comprehensive report

comparing results of monitoring visits to reported deliveries by region and

regional recipient until May 2000, when the contractor had implemented

the new database. According to the database, the U.S. monitors found that

most regional recipients received the exact quantities that were reported as

delivered in reports prepared by the Russians. However, our analysis of 237

site visit reports questions the accuracy of the database. We found that

about one-third of the site visit reports recorded types and/or quantities of

commodities that were significantly different from the types and/or

quantities reported as monitored in the database.19

For example, one site visit report indicated that 4,400 metric tons of corn

and 4,200 metric tons of soybean meal were delivered to a region. However,

the database does not list corn as one of the commodities verified by the

U.S. monitors, but instead lists 11,250 metric tons of soybean meal as

verified by the monitors as well as 6,748 metric tons of wheat as verified

(although this commodity was never mentioned in the site visit report). In

other cases, we found that the site visit reports did not include information

on entire vessel shipments that, according to the database, were

19We reviewed 237 site visit reports prepared during the period April 1999 through May 2000.

We did not verify the amounts that the monitors reported they found during their site visits

to the underlying documents and receipts they collected from recipients.
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supposedly verified. For example, one site visit report verified that

7,500 metric tons of wheat had been delivered via two vessel shipments, yet

the management report also includes an additional 1,370 metric tons of

wheat delivered via a third vessel shipment—this shipment was never

mentioned in the site visit report.

Internal Controls Do Not

Ensure Distribution of Free

Wheat to Intended Regions

and Social Institutions

The Foreign Agricultural Service did not effectively monitor the progress of

the free wheat distribution to obtain reasonable assurance that each region

received the expected amounts and that the free wheat was not sold. Under

the fiscal year 1999 food aid agreements, the Russian government was

obligated to donate 411,400 metric tons of the overall 1.7 million metric

tons of food aid wheat to needy segments of the Russian population. This

portion of the food aid wheat was called “free wheat” because it was

distributed without charge rather than being sold to regional recipients. A

distribution plan, attached to the food aid agreement, allocated specific

quantities of free wheat to 49 regions. The free wheat was processed at

regional facilities and then distributed in the form of flour or bread to

hundreds of social institutions such as orphanages, shelters, and hospitals.

For each region, the Russian government was expected to provide a list of

the individual social institutions expecting to receive free wheat. Since the

wheat was not sold to recipients, there were no sale receipts to verify

delivery to the intended regional recipients. The distribution of free wheat

was, thus, more vulnerable to fraud and abuse.

Although the shipments of free wheat began arriving in April 1999, the

Foreign Agricultural Service did not know which shipments included free

wheat because its key logistical report to track commodity shipments did

not specify whether the wheat was intended for sale or donation. While the

Russian government announced at a November 1999 meeting of the

Bilateral Working Group that all the free wheat had arrived in-country and

been delivered to its regions, it did not provide a comprehensive report

with information on the arrival, regional destinations, mills, and quantities

of free wheat provided until February 2000. Our review of the 115

monitoring reports covering the delivery of wheat to regional recipients

from April 1999 through May 2000 found only 10 instances where the

reports mention that free wheat was delivered to the mills they had visited.

The Foreign Agricultural Service also had limited knowledge regarding the

delivery of free wheat to social institutions. It did not receive a complete

listing of social institutions receiving free wheat from the Russian

government until February 2000. Based on our review of the monitoring
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reports, we could find evidence of monitoring visits to 10 social institutions

receiving free wheat. In December 1999, the Foreign Agricultural Service’s

contractor conducted a telephone survey to determine if the social

institutions had received their expected quantities of free wheat. The

consultant contacted 62 social institutions in 10 of 59 regions that received

free wheat and concluded that 41 of these social institutions “had

benefited” from the free wheat. However, the survey provided little

assurance that the designated social institutions received the quantity of

free wheat or other commodities and/or cash of commensurate value. For

example, there were many cases where the institution reported receiving

food products and/or cash in lieu of free wheat, but the survey did not

attempt to reconcile the estimated value of these benefits with the

estimated value of the free wheat. Twenty-one institutions reported that

they received no free wheat or commensurate benefit at all.

Inadequate Internal

Controls to Monitor

Collections of Sale

Proceeds

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

$2.3 million for six agricultural projects by the time the fiscal year 1999

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

provided the Foreign Agricultural Service with information on the total

amount deposited into Special Accounts and disbursement to intended

beneficiaries as required by the food aid agreements. However, the Foreign

Agricultural Service did not systematically track total amounts due and

reconcile this information with data from Russian reports until May 2000

even though the first payments were collected in May 1999. Without regular

reconciliation, it could not verify that the proper amounts were disbursed

to the Russian Pension Fund on a timely basis. Additionally, the Foreign

Agricultural Service did not receive regular information from the Russian

government on the status of regional payments due. Foreign Agricultural

Service officials generally regarded regional payment data to be

unnecessary because they viewed the Russian government as being

ultimately responsible for making up shortfalls. In June 2000, the Russian

government reported that $293 million had been collected of the

$309 million that was due at that time. However, the true financial position

of the Russian Pension Fund was not clear because the Russian

government also reported that about one-half of the regions were

delinquent, owing $26 million, while the remaining regions had paid

$10 million in advance. Without regular information on the amounts due

and amounts paid by region, the Foreign Agricultural Service could not

track the distribution of food aid commodities to the intended regions

using payment as proof of receipt, nor could it influence the Russians to
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take collection action against delinquent regions, including suspending

commodity distributions.

Procedures for Monitoring

the Collection and

Disbursement of Sale

Proceeds

The food aid agreements and procedures issued by the Foreign Agricultural

Service established financial controls designed to ensure that the proceeds

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

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

the creation of Special Accounts in the Russian Ministry of Finance for the

sole purpose of receiving payments from the sale of U.S. food aid

commodities. The food aid agreements also required that deposits into the

Special Accounts be made within 120 days of the arrival of the shipment at

the Russian border.20 The Russian government was required to submit to

the Bilateral Working Group a bi-weekly financial report accounting for

total payments into, and total disbursements from, the Special Accounts for

transfer to the Russian Pension Fund and six agricultural projects. The

Bilateral Working Group must approve disbursements from the Special

Accounts. Although not required to do so, officials from the Russian

Pension Fund reported at the meetings the total amount of funds received

from the Special Accounts and the total amount disbursed to pay pensions.

The agreements do not require the Foreign Agricultural Service to track the

funds beyond the disbursement from the Special Accounts to the intended

institutions. For example, the Foreign Agricultural Service was not

expected to track disbursements of funds from the Russian Pension Fund

to individual pensioners.

The food aid agreements permit the United States access to all documents

regarding the receipt, deposit, and disbursement of sale proceeds. The

agreements also called for the two governments to conduct a joint audit of

the sales proceeds during the fourth quarter of calendar year 1999.

However, the joint audit was postponed until the fourth quarter of calendar

2000, when it is expected that most of the U.S. food aid commodities to

Russia will have been sold and distributed. The fiscal year 1999 food aid

agreements place ultimate responsibility on the Russian government to

make full payment into the Special Accounts for the total value of the food

aid tonnage sold in Russia. In practice, the Russian Federation holds the

20The agreements also required deposits to be made within 30 days of the commodity’s

arrival at the point of destination in the region if this date came before the 120-day criteria.

However, the Foreign Agricultural Service did not track when the regional recipients

received the commodities.
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regional governments responsible for the amount due to the Special

Accounts if the regional recipients (e.g., mills and processing plants) fail to

make payments for the food aid commodities they purchased. However, at

the end of the fiscal year 1999 program, the Russian government is

eventually obligated to make up any shortfalls. To ensure implementation

of the food aid agreements’ 120-day criteria, the Russian government

decreed that regions must make payments within 70 days of receiving

wheat and rice and within 90 days for other food aid commodities.21

Lack of Systematic Reports

Impaired Ability to Assess

the Financial Position of

Accounts

Food aid commodities for sale in Russia began arriving in March 1999 and

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

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

Agricultural Service did not systematically track or report on the total

amounts due for deposit into the Special Accounts and reconcile the

information with Russian reports on the amount of funds deposited.

Instead, the Foreign Agricultural Service made calculations and

comparisons of the data on a sporadic basis, and it did not maintain any

records or reports that would provide a history of amounts due and paid.

Without regular reconciliation, it could not verify that the proper amounts

were disbursed to the Russian Pension Fund on a timely basis. We

discussed this internal control weakness with officials from the Foreign

Agricultural Service and its contractor during our site visit and they

reported in May 2000 that the new Food Aid to Russia Monitoring System

database was correcting this weakness. However, this correction occurred

after the bulk (about 85 percent) of the tonnage shipped had been

discharged in Russia. Reports issued by the new database in June 2000

indicate that the Foreign Agricultural Service was now systematically

tracking and reporting on amounts due and comparing them with Russian

reports on amounts deposited based on quantities of commodities

discharged by vessel.22

21Resolution of the Russian Federation No. 130, Feb. 5, 1999.

22The new database tracks the payment due dates using the criteria that payments will be

made within 120 days of the date of a shipment’s final discharge at Russia’s border.
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Information on Regional

Payments Was Inadequate

to Provide a Complete

Account of Financial Status

The Foreign Agricultural Service did not receive regular information on the

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

such information from the Russian government. Officials from the Foreign

Agricultural Service told us that they were less concerned about the status

of regional than with aggregate payments because ultimately the Russian

government is obligated to make up any shortfall between the total amount

due and total deposits made to the Special Accounts. Although it was not

required to do so under the terms of the food aid agreements, the Russian

government provided a few reports on the status of regional payments.

However, without regular reports, the Foreign Agricultural Service cannot

accurately assess the financial position of the Special Accounts since

advance payments by some regions do not reflect the fact that others are

delinquent. Regular reports of payments by region would provide

additional assurance that individual regions received the food aid, whereas

reports of nonpayment could indicate the possibility of unintended

diversions. Inadequate information on regional payments impeded the

Foreign Agricultural Service’s ability to effectively influence the Russian

government to take early action to limit or suspend shipments to

delinquent regions.

According to a new report produced by the new monitoring system

database, the total amount of payments deposited into the Special

Accounts exceeded total amounts due until the end of February 2000, when

amounts due began to exceed payments collected as indicated in figure 3.
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Figure 3: Financial Status of the Special Accounts, as of June 27, 2000

Source: GAO-generated from Foreign Agricultural Service data.

While the aggregate statistics appear reassuring, our analysis of two

Russian reports on the status of regional payments showed that about half

of the regions were past due on payments based on the Russian criteria. A

Russian report dated June 23, 2000, showed that about $309 million was

due from the regions and about $293 million had been paid into the Special

0

50

100

150

200

250

300

350 Dollars in millions

Total due

Total collected

May 1999

June 1999

July 1999

August 1999

September 1999

October 1999

November 1999

December 1999

January 2000

February 2000

March 2000

April 2000

May 2000 

June 2000
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Accounts for the benefit of the Pension Fund and six agricultural projects.23

According to this report, about half of the regions that had received food

aid commodities were past due on their payments, owing about $26 million.

However, the remaining half of the regions had paid in advance about

$10 million, resulting in a net delinquency of about $16 million. Many of

these delinquent regions had continued to receive food aid commodities

even after they had been identified as delinquent in an earlier report.24

At the December 9, 1999, Bilateral Working Group meeting we attended,

the Russian government was considering several actions to obtain

payments from delinquent regions, including:

• sending the region a warning letter from the Prime Minister,

• cutting off future commodity shipments until payments were current,

• redirecting commodities to other regions able to provide advances or

guarantees,

• withholding other Russian government payments to the region, or

• assessing fines.

The Bilateral Working Group minutes indicate that the Russian government

required several delinquent regions to report to the Deputy Prime Minister

for Agriculture and account for their financial status, but the minutes do

not indicate that any of the proposed actions listed above were

implemented. An audit of the food aid program by the Russian Chamber of

Accounts dated December 24, 1999, reported that no sanctions were

applied against delinquent regions.25

23The Russian government further reported that as of that date the Russian Pension Fund

had received regular disbursements from the Special Accounts totaling $291 million.

24A Russian report dated November 10, 1999, indicated that about $76 million was due and

about $78 million had been paid into the Special Accounts. According to this report, about

half of the regions that had received food aid commodities were past due on their payments,

owing about $10 million. However, the remaining half of the regions made payments in

advance totaling about $12 million, resulting in a net advance of about $2 million.

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

to Support

Reasonableness of

Food Aid Pricing

Decisions

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

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

commodities in Russia based on Russian and international prices. Officials

from the Foreign Agricultural Service told us that they followed this

methodology using data and analysis provided by Russian authorities as

well as information gathered through frequent verbal contact with Russian

government and private sector officials. However, the Foreign Agricultural

Service provided little documentation demonstrating how the methodology

was applied and how it supported the pricing decisions. Our review of

seven commodity pricing decisions found that in four of the five cases

where pricing data was available, the prices for U.S. food aid commodities

were substantially below reported wholesale prices in Russia.26 Without

documentation to support its assessments and final pricing decisions, the

Foreign Agricultural Service cannot support the reasonableness of its

pricing decisions, which in turn, determine the amount of funds made

available to the Russian Pension Fund and other beneficiaries of the sales

proceeds.

Methodology for Setting

Sale Price of U.S. Food Aid

Commodities in Russia

Under the terms of the food aid agreements, the Bilateral Working Group

was to recommend to the U.S. Minister Counselor for Agricultural Affairs in

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

approved, the price was to be used to calculate how many rubles were to

be made available to the Russian Pension Fund and other beneficiaries for

a given commodity shipment. According to the methodology, the Bilateral

Working Group was to set the value for each commodity shipment by

examining price information gathered by the Russian Ministry of

Agriculture and Food, including domestic and international wholesale

prices. In addition, the methodology required that the Bilateral Working

Group take into account information from in-country private sector

sources on wholesale and import prices as well as market conditions. The

commodity selling price was to represent an average, fair, wholesale

market price for a given commodity when normal, domestic, and

26The total tonnage of the seven cases represented 20 percent of the total food aid tonnage in

fiscal year 1999 and 35 percent of the total sales proceeds expected to be generated from the

sale of U.S. food aid (note: this excludes 411,400 metric tons of free wheat).
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commercial charges were added to this value.27 The value of a particular

food aid commodity could change with each shipment depending on the

conditions of the internal market in Russia.

According to officials from both the Foreign Agricultural Service and the

Russian government, the goal of the Bilateral Working Group was to set

selling prices somewhat below market prices. Officials told us that, ideally,

prices for U.S. commodities were to fall within a “golden middle” range—

prices that, once transportation and other costs were included, were not so

low as to severely undercut local producers or importers, but sufficiently

low so as to facilitate the quick sale of commodities and help to counteract

inflationary trends in Russian food prices.

According to Foreign Agricultural Service officials, the Russian Ministry of

Agriculture and Food, in cooperation with the former Ministry of Trade,

suggested a value for a given commodity and provided wholesale price

information as required, including high, low, average, national, and regional

prices along with price information for commercial imports of

commodities. Because prices are not always readily available in Russia’s

emerging market system, the Foreign Agricultural Service then reviewed

the suggested prices with in-house staff, private traders, retail price

surveys, and discussions with U.S. trade associations. It also took into

account the prices at which food aid commodities provided by the

European Union were sold in Russia. Based on this review, the Foreign

Agricultural Service either concurred with the Russian’s suggested price or

requested an adjustment at the Bilateral Working Group meetings.

Inadequate Documentation

to Support U.S. Food Aid

Pricing Decisions

Foreign Agricultural Service officials reported that they followed the

agreed methodology used to determine commodity prices, but they

provided little documentation of their analysis in support of their pricing

decisions. We asked for the documents these officials used to make their

pricing decision as well as for any documentation of their analysis

justifying the pricing decision for seven different commodity shipments

(wheat, corn, rice, soybean meal, seeds, pork, and poultry). The officials

from the Foreign Agricultural Service provided us with the wholesale price

information for five of the seven commodities (the prices of soybean meal

27The food aid commodity price does not include, but takes into account, customs’ duties,

value-added tax, or any other taxes or costs associated with transportation to the final

region.
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and planting seed were the exceptions) collected by the Russian

government. They also provided some analyses carried out by the Russian

Ministry of Agriculture for particular markets at select periods, but this was

not provided for all seven of the pricing decisions.28 The Foreign

Agricultural Service, however, did not provide us with documentation of its

in-house reviews, external consultations, or independent assessments.

Instead, through interviews these officials provided us with verbal

recollections of the rationale for their pricing decisions. In some cases,

they recalled discussions they had with experts regarding the pricing

decisions. The discussion and approval of pricing decisions were not well

documented in the minutes of the Bilateral Working Group.

For example, we requested documents used by Foreign Agricultural

Service to support the decision made in April 2000 to sell the third

shipment of soybean meal at 2,800 rubles per metric ton, a price lower than

the previous shipment of U.S. food aid soybean meal. The Foreign

Agricultural Service provided us with (1) Russian data of the average

monthly wholesale price of soybeans (but not soybean meal) during the

first quarter of 2000 and (2) a Russian analysis that described factors in the

animal feed markets and price trends that supported the Russian request to

reduce the price of U.S. food aid soybean meal from 3,400 to 2,800 rubles

per metric ton. While the Russian analysis contained some price

information for soybean meal, the document date is December 1999—

4 months before the decision was made to lower the price of the U.S. food

aid soybean meal. Officials from the Foreign Agricultural Service told us

that they corroborated the findings of the Russian document with internal

and external experts. However, we were not given any documents that

indicated that the Foreign Agricultural Service conducted an independent

review and assessment of the Russian price information and analysis in the

months between the date of the report and the decision to lower the price

of U.S. soybean meal.

Similarly, the Foreign Agricultural Service provided little documentation to

support its decision to change the price of U.S. food aid pork after it had

already arrived in Russia and was partially distributed. Originally, the U.S.

28At the time of the pricing decisions, the information on the wholesale prices of agricultural

commodities supplied by the Russian government was typically 2 to 4 weeks old because

current data were not available due to the standard lag in collecting market data. The

Russian analysis of particular markets includes information on trends in prices and

anticipated impact of factors such as domestic harvest, food aid from the European Union,

etc.
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and Russian governments set the price of the U.S. shipment of bone-in

picnic ham at 29,000 rubles per metric ton in September 1999. By the

beginning of the year 2000, 25,000 metric tons of U.S. food aid pork had

arrived in Russia, and our review of the Bilateral Working Group minutes

shows that the price of bone-in picnic ham was the subject of discussion

from February through April 2000. The Foreign Agricultural Service argued

that the price suggested by the Russians for a metric ton of bone-in picnic

ham needed to be reduced to 25,000 rubles to avoid storage costs and to

move the pork quickly. When asked to provide information and analysis

behind their request to lower the price of bone-in picnic hams in the Spring

of 2000, officials from the Foreign Agricultural Service referred us to

Russian price information from 1999 that shows an increasing rather than a

decreasing trend in pork prices.29

In our earlier review of the donation of U.S. planting seed under the fiscal

year 1999 food aid program, we also found inadequate documentation of

the price determination process for seeds.30 The Department of Agriculture

did not provide us with data on the prices of planting seed in Russia, nor

any analyses of price trends or documentation of conversations with seed

importers or local producers confirming selling prices. Officials from the

Department of Agriculture also did not provide documentation of their

analysis of the effect of market conditions nor of how they applied the

methodology used to determine the selling prices for U.S. corn and

vegetable seed.31

29We note that the European Union and Russia also disagreed over the selling price of

European Union food aid pork. A review of the price determination for European Union

food aid pork revealed that when the Russians proposed a decrease in the price of this pork,

European Union analysts documented evidence from independent sources that the price of

pork was increasing in Russian and international markets.

30Foreign Assistance: Donation of U.S. Planting Seed to Russia in 1999 Had Weaknesses

(GAO/NSIAD-00-91, Mar. 9, 2000).

31In the fiscal year 2000 program, the Foreign Agricultural Service initially used an auction to

try to sell U.S. planting seed donated under a food aid agreement. The documentation

provided by the Foreign Agricultural Service shows that its calculations of base prices based

on local average market prices were too high, but that the seed auction was beneficial in

that it allowed market forces to test the price levels. Using the information gleaned from the

auction process, the Foreign Agricultural Service adjusted the selling prices for U.S.

planting seed in the fiscal year 2000 program.
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Lack of Documentation

Precludes Assessment of

the Reasonableness of Food

Aid Prices

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

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

commodities were substantially below reported wholesale prices in Russia.

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

month prior to the pricing decisions for these shipments, we found that the

sale price of U.S. food aid rice was approximately 50 percent less than the

average wholesale price reported. The prices of U.S. food aid corn and

wheat were set at approximately 60 percent of Russian wholesale prices of

these products reported in the month prior to the price setting decision.

The Foreign Agricultural Service did not provide us with wholesale price

information for soybean meal or for planting seed for the month prior to

the pricing decision for the shipments we reviewed. Similarly, we had

insufficient information to judge whether the prices charged for U.S. food

aid pork cuts were similar to average producer prices. In interviews in

Russia, private sector traders, food processors, and government officials

provided examples of cases where U.S. food aid wheat, soybeans, corn, and

planting seed were sold at prices substantially below market. Some

program participants reported that the U.S. food aid program had a

detrimental impact on local Russian producers.

In response to our query about how they assessed the reasonableness of

food aid prices, officials from the Foreign Agricultural Service said they

were confident that U.S. food aid commodities were not priced too low

because they had received few complaints from importers or Russian

producers. They also believe that because the commodities sold quickly for

the most part (avoiding expensive storage and risk of spoilage), there is

sufficient evidence that the prices were not too high. Also, officials from

the Foreign Agricultural Service said the European Union experienced

delays in the distribution of some of its food aid, in part because it set

prices too high. Moreover, they relied on their expertise and knowledge of

the Russian agricultural markets to set prices.

Given that Russian food and commodity markets are not transparent or

efficient, price information does not always fully reflect changing market

conditions in Russia, particularly in different regions of the country. Thus,

verifying and assessing the Russian price information through alternative,

independent sources was included as part of the methodology adopted by

the Foreign Agricultural Service to determine the selling prices of the U.S.

food aid commodities. However, because the Foreign Agricultural Service

did not sufficiently document its assessment process, it cannot

demonstrate the reasonableness of food aid commodity prices. Prices that

are set too low, in turn, reduce the amount of funds that are made available
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to the Russian Pension Fund and other beneficiaries of the sales proceeds.

Moreover, low food aid prices create opportunity for windfall profits.

Conclusions Internal controls provide an important means for the Foreign Agricultural

Service to reasonably ensure that U.S. food aid objectives in Russia are

being achieved. However, we found that the internal controls designed and

implemented by the Foreign Agricultural Service to monitor the

distribution of U.S. food aid and the deposit of sale proceeds in the Russian

Pension Fund were inadequate. Commodity distribution plans were not

updated and compared with actual distribution; the databases did not

separately track estimated and actual deliveries; the databases and key

logistical reports did not distinguish between wheat that was intended for

sale versus donation; U.S. monitors had unreliable information on the types

and quantities of commodities they were expected to find; and information

on the status of regional payments was not collected on a regular basis.

Officials from the Foreign Agricultural Service told us that limited staff

resources and the need to quickly carry out a large and complex program in

a short time period impeded their ability to effectively implement the

internal controls. Nevertheless, the implementation of appropriate internal

controls is essential to help achieve program objectives and minimize fraud

and abuse. Because of weaknesses in the Foreign Agricultural Service’s

implementation of its internal controls, the agency cannot provide

reasonable assurance or documentation that the Russian regions received

the appropriate amounts of food aid, that social institutions received the

benefits of the donated wheat, and that the Pension Fund will continue to

receive timely deposits that are equal to the full value of the food aid sold in

Russian markets.

Support for key decisions and actions concerning the distribution and sale

of food aid commodities in Russia was not transparent. The Foreign

Agricultural Service provided little documentation of its analysis in support

of its pricing decisions. The minutes of the Bilateral Working Group did not

adequately document the basis for and approval of its pricing decisions and

changes to the commodity distribution plans. Without better

documentation of key decisions, it is difficult to determine if prices

charged were reasonable, whether the sale of U.S. food aid commodities

could have generated more proceeds for the Russian Pension Fund, or

whether changes to the commodity distribution plans served to reach

needy populations.
B-286196

Page 33 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Recommendations To help ensure that remaining shipments of U.S. food aid commodities are

delivered as intended under existing programs, as well as shipments under

any future government-to-government program in Russia, the Secretary of

Agriculture should undertake efforts to improve the internal controls used

to monitor the distribution of food aid as well as the collection of sale

proceeds. We recommend that the Secretary of Agriculture direct the

Foreign Agricultural Service to take the following actions:

• Improve the effectiveness of its management information system by

(1) incorporating information from commodity distribution plans on

quantities expected to be delivered to regions, updating the plans as

changes are made, and preparing progress reports on a regular basis

that compare updated plans with records of actual distribution for each

region and commodity as well as quantities found by U.S. monitors;

(2) keeping separate track of estimated and actual shipment/delivery

data as commodities move through the distribution cycle to recipients

providing an audit trail and a better basis for verification by monitors;

and (3) tracking separately in key logistical reports those commodities

that will be sold versus commodities that will be given free to social

institutions.

• Conduct fewer, but higher quality monitoring visits by (1) undertaking

more physical inspections at regional sites and at times of discharge,

transfers, or deliveries; (2) performing some unannounced visits in

addition to prearranged visits; (3) recording the type and amount of

commodities expected to be found and the actual amount monitored as

well as the date the commodities were received; and (4) distinguishing

between U.S. food aid commodities that will be sold versus donated to

social institutions when assessing the types and quantities of

commodities delivered.

• Collect on a regular basis information on funds due by region, amounts

paid, and status of delinquencies by requesting the Russian government

to provide the United States with its reports on the status of regional

payments for U.S. food aid commodities.

To provide transparency behind actions taken and key decisions made

regarding the management of the U.S. food aid program in Russia, we

recommend that the Secretary of Agriculture direct the Foreign

Agricultural Service to take these actions.
B-286196

Page 34 GAO/NSIAD/AIMD-00-329 Foreign Assistance

• Fully document the information and analysis used by both the U.S. and

Russian governments in determining the prices for U.S. food aid

commodities sold in Russia and any subsequent price adjustments.

• Record in the minutes of the Bilateral Working Group, the results and

rationale behind key decisions involving changes to distribution plans

and price setting of U.S. food aid commodities sold in Russia as well as

how issues raised by the monitoring visits are resolved.

Agency Comments and

Our Evaluation

We received comments from the Department of Agriculture’s Foreign

Agricultural Service. The Foreign Agricultural Service stated that it

appreciated our recommendations to improve internal controls and will

seek to implement them where appropriate. However, the agency disputes

our principal conclusion that it cannot provide reasonable assurance that

the food aid was delivered in agreed upon amounts to the intended regions

and that the Russian Pension Fund will continue to receive timely deposits

that equal the full value of the food aid sold in Russian markets because of

weaknesses in the agency’s implementation of its internal controls. The

agency did not provide information to refute our finding that, at times, the

Foreign Agricultural Service did not follow its own internal controls. The

comments instead explain the challenges the agency faced in implementing

its internal controls and highlight improvements made to the food aid

program during the course of our review.

The Foreign Agricultural Service states that it has delivered food aid

commodities to the regions as planned and is achieving the targeted goal

for payments to the Russian Pension Fund based on the fact that there

were no substantiated reports of fraud or confirmed diversions of

commodities or funds. However, without adequate implementation of

internal controls, the agency cannot provide reasonable assurance that the

objectives are being met. For example, the internal controls designed by

the Foreign Agricultural Service require changes in planned commodity

distribution to be documented in revised distribution plans and submitted

by the Bilateral Working Group to the U.S. Minister Counselor for approval.

Except for an update on free wheat distribution, our review found no

revisions to plans or record of U.S. approval. We found that less than

one-quarter of the targeted regions received a tonnage amount that was

equivalent or near their planned distributions. Because the Foreign

Agricultural Service did not document revisions and approval for changes

to the commodity distribution plans, it cannot demonstrate that changes in

the distribution plans were planned and approved or whether any of the

changes were the result of unintended diversions. In addition, internal
B-286196

Page 35 GAO/NSIAD/AIMD-00-329 Foreign Assistance

controls required U.S. monitors to visit regional recipients of food aid to

verify that they had received the expected amounts. However, U.S.

monitors did not have reliable information on the amount and types of

commodities that they were expected to find, thus they were not in a

position to know if any discrepancies found were due to changes in plans

or possible unintended diversions. While we agree that conducting a food

aid program in Russia was a difficult challenge, we continue to believe that

implementation of appropriate internal controls is very important to

preventing and detecting fraud and abuse. Without adequate controls and

documentation of key decisions the agency cannot provide reasonable

assurance that its objectives are being met. The comments of the Foreign

Agricultural Service appear in full, along with our evaluation of them, in

appendix IV.

As arranged with your office, unless you publicly announce the contents

earlier, we plan no further distribution of this report until 30 days after its

issue date. At that time, we will send copies to interested congressional

committees and the Honorable Dan Glickman, Secretary of Agriculture; the

Honorable J. Brady Anderson, Administrator of the U.S. Agency for

International Development; and the Honorable Madeleine K. Albright,

Secretary of State. Copies will also be made available to others upon

request.

If you or your staff have any questions about this report, please contact me

on (202) 512-4128. Other GAO contacts and staff acknowledgments are

listed in appendix V.

Sincerely yours,

Susan S. Westin, Associate Director

International Relations and Trade Issues
Page 36 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Appendix I

Scope and Methodology ApApenednxidexiIs

We obtained information on the fiscal year 1999 U.S. food aid program to

Russia from U.S. government officials at the Departments of Agriculture,

State, Transportation, and Treasury, as well as officials from the Agency for

International Development, the National Security Council, and the Office of

Management and Budget. In addition, we met with officials of a private U.S.

government contractor responsible for the development and

implementation of a food aid commodity distribution reporting and

tracking system. We also gathered information from Russian government

officials, including representatives of the Agriculture, Finance, Trade, and

Internal Affairs ministries, the Pension Fund, and the Russian Chamber of

Accounts. We interviewed officials of the European Union, the World Bank,

and U.S. and Russian trade associations, and we met with representatives

of the five private voluntary organizations engaged in humanitarian food

aid distribution in Russia. We also interviewed Russian officials

representing processing plants, social organizations, and seed research

institutions. We conducted our review in Washington, D.C., and in the

Russian cities of Moscow, St. Petersburg, and Voronezh.

Our review addressed the general internal controls governing the

distribution of all the food aid commodities distributed under the

government-to-government fiscal year 1999 programs. As the basis for

evaluating the program’s internal controls, we used the standards for

internal control in the federal government. We did not examine internal

controls designed for tracking the distribution of meat because we did not

receive the distribution reports for these commodities. We did not examine

the internal controls governing the distribution of food aid in Russia

managed by private voluntary organizations. Nor did we review the efforts

made by the Russian government to monitor the distribution of U.S. food

aid because the Foreign Agricultural Service (not the Russian government)

has primary responsibility to safeguard the use of U.S. assets and provide

reasonable assurance that the food aid reached intended recipients.

However, despite these limitations and others as noted in the following

paragraphs, we were able to perform sufficient audit work based on

information and data gathered to evaluate the implementation of the

program’s internal controls.

To examine the adequacy of internal controls to ensure that food aid

commodities were properly distributed to the regions and its recipients

according to distribution plans, we reviewed the bilateral food aid

agreements, work plans on tonnage and distribution to regional recipients,

commodity purchase information, and minutes of the Bilateral Working

Group. We also examined and tested available Shipment, Arrival,
Appendix I

Scope and Methodology

Page 37 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Distribution, and Status of Funds reports, databases based on these

reports, Shipment Status reports, and the Master Travel Matrix spreadsheet

as of December 6, 1999, during our visit to Russia. We obtained the Food

Aid to Russia Monitoring System database electronically as of May 31, June

15, and June 30, 2000, and performed an analysis of information and

various reports for accuracy and completeness. However, we did not

perform detailed tests of this database and its supporting data located in

Moscow. We attended the December 1 and December 9, 1999, meetings of

the Bilateral Working Group to observe its activities and met with the U.S.

Ambassador to Russia. We reviewed 237 site visit reports prepared by U.S.

monitors for visits made between April 1999 and May 2000. We did not

examine the documents collected during these U.S. monitoring visits (they

were prepared mainly in Russian) and compare them with information

contained in the site visit reports. We interviewed Foreign Agricultural

Service officials, staff, and monitors in Moscow and Washington, D.C., and

officials from the agency’s database contractor. We met with the Deputy

Prime Minister of Agriculture of the Government of the Russian Federation

and interviewed senior Russian officials from the Ministries of Agriculture,

Finance, Trade, and Internal Affairs and from the Russian Chamber of

Accounts. We also interviewed senior officials of the two Russian

distribution agents who were responsible for the movement of food aid

commodities within Russia from the port of discharge to the regional

recipients.

Our assessment of the financial status of the Special Accounts and

transfers to the Russian Pension Fund and six agricultural projects was

based on Russian government reports. We did not conduct an independent

audit of the Russian government financial reports. To examine the

adequacy of procedures for monitoring the collection and deposits of funds

derived from the sale of food aid commodities, we interviewed senior

officials of the Russian Ministry of Finance, the Russian Pension Fund, and

two agricultural projects and the rural credit agency that received funds

from the sale of U.S. food aid. We reviewed an audit report prepared by the

Russian Chamber of Accounts on the 1999 food aid program. We also

reviewed reports on amounts due, paid, and delinquent from regional

recipients, and disbursements to the Special Accounts, and amounts

received by the Russian Pension Fund. We reviewed a Food Aid to Russia

Monitoring System database status report on commodity shipments and

payments due and paid as of June 30, 2000, and a report on the current

value of fiscal year 1999 food aid shipments to Russia. However, we did not

perform detailed tests of the database and its supporting data located in

Moscow.
Appendix I

Scope and Methodology

Page 38 GAO/NSIAD/AIMD-00-329 Foreign Assistance

To examine the process for determining the price to sell U.S. food aid

commodities in Russia and the extent that the procedures were followed,

we reviewed documents that described the price determination

methodology and interviewed senior officials of the Foreign Agricultural

Service and Russian Federation who participated in the food aid agreement

negotiation process and established the price determination methodology.

We interviewed Russian and U.S. participants of the Bilateral Working

Group meetings and reviewed the minutes of these meetings to document

the procedures followed to establish prices for commodities. We also used

these interviews and documentation to investigate how disagreements over

prices were resolved. To assess the adequacy of documentation supporting

pricing decisions, we selected seven commodity shipments (including

planting seed) for different products that were distributed at different

times. These shipments represented 20 percent of total tonnage and the

proceeds generated from the sale of these seven commodity shipments

represent 35 percent of total funds expected to be deposited in the Special

Accounts. To facilitate our effort, we requested that the Foreign

Agricultural Service provide us with the information used to make price

suggestions and decisions. We also interviewed and obtained pricing

related information from officials of the World Bank and the European

Union as well as from U.S. and Russian trade associations in Moscow and

Washington, D.C.

We conducted our review from October 1999 through August 2000 in

accordance with generally accepted government auditing standards.
Page 39 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Appendix II

Background on Fiscal Year 1999 U.S. Food Aid

Program to Russia ApendxiI

The fiscal year 1999 U.S. food assistance package to Russia consisted of a

combination of food aid provided on a government-to-government basis

and food aid provided through private voluntary agencies in Russia.

Commodities and funding for the food assistance package to Russia were

provided under three U.S. food aid programs:

1. Public Law 480, title I, provides U.S. financing for sales of U.S.

agricultural commodities available through long-term credit at low

interest rates.

2. Section 416(b) of the Agricultural Act of 1949, as amended, provides

humanitarian assistance overseas by donating surplus commodities

owned by the Department of Agriculture’s Commodity Credit

Corporation.

3. Food For Progress Act of 1985, as amended, provides agricultural

commodities on credit terms or on a donation basis to countries that

are emerging market-oriented economies and have made commitments

to introduce or expand free enterprise elements into their agricultural

economies.

The Department of Agriculture’s Foreign Agricultural Service administered

and negotiated agreements under these programs.1 Under the title I

agreement, signed in December 1998 and later amended, the United States

provided about 1.8 million metric tons of various commodities that were

sold to the Russian government on concessional loan terms. The section

416(b) program agreement, also signed in December 1998 and amended in

March 1999, provided 1.7 million metric tons of wheat to the Russian

government on a donation basis. A Food For Progress agreement was

added in February 1999 that shifted 80,000 metric tons of two commodities

(non-fat dry milk and pork) from the Public Law 480 title I sales program to

the donation program and also donated 15,000 metric tons of seeds.

All of the commodities were to be sold to raise funds for the Russian

Pension Fund and six designated agricultural projects, except for

411,400 metric tons of wheat, which were to be donated to Russian social

1

Consistent with U.S. food aid law provisions, actions taken under the agreements must

avoid disrupting international markets, hindering the development of agricultural markets

inside Russia, or reducing incentives for Russian farmers. Food aid agreements must also be

consistent with U.S. policy promoting sustainable economic and agricultural development

and privatization of agriculture.
Appendix II

Background on Fiscal Year 1999 U.S. Food

Aid Program to Russia

Page 40 GAO/NSIAD/AIMD-00-329 Foreign Assistance

institutions to feed the most needy. In addition, the Foreign Agricultural

Service selected five private voluntary organizations to distribute about

97,000 tons of various donated ready-to-eat commodities throughout

Russia under the Food For Progress and section 416(b) programs. A

summary of the tonnage, U.S. cost, and value of the proceeds expected to

be generated by the sale of commodities distributed under these programs

is presented in table 2.
Appendix II

Background on Fiscal Year 1999 U.S. Food

Aid Program to Russia

Page 41 GAO/NSIAD/AIMD-00-329 Foreign Assistance

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

Dollars in millions

U.S. cost

Program/commodity

Tonnage being

distributed (000) Commodity Freighta Totala

Russian sale

proceeds

Government-to-government:

Public Law 480, title I sales:

Corn 1,009.5 $96.4 $54.6 $151.0 $50.7d

Soybean meal 422.6 71.6 24.3 95.9 48.5

Soybeans 191.9 35.3 14.1 49.4 17.2

Beef 44.1 83.7 9.4 93.1 39.3

Rice 100.6 32.5 12.2 44.7 22.6

Poultry 74.0 39.5 17.3 56.8 47.9

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

Section 416(b) donation:

Wheat (for sale) 1,281.2 $157.7 $88.4 $246.1 $63.8

Wheat (for social institutions) 411.4 50.6 28.4 79.0 0

Subtotal 1,692.6 $208.3 $116.8 $325.1 $63.8

Food For Progress donation:

Nonfat dry milk 29.9 $68.3 $5.2 $73.5 $19.7

Pork 49.2 88.5 19.5 108.0 43.6

Seeds 15.0 17.9 3.8 21.7 2.3

Subtotal 94.1 $174.7 $28.5 $203.2 $65.6

Total 3,629.4 $742.0 $277.2 $1,019.2 $355.5

Private voluntary organizations (PVOs):

Food For Progress donationb

:

Rice 14.3 $5.5 $3.2 $8.7 $0

Salmon 3.0 6.9 1.2 8.1 0

Lentils and peas 15.5 6.7 4.3 11.0 0

Navy beans 3.0 1.6 0.8 2.4 0

Soybeans 8.0 1.5 0.5 2.0 0

Vegetable oil 17.5 12.4 4.3 16.7 0

Subtotal 61.3 $34.7 $14.1 $48.8 $0.0
Appendix II

Background on Fiscal Year 1999 U.S. Food

Aid Program to Russia

Page 42 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Note: Totals may not add due to rounding.

a

Includes ocean freight differential totaling $122.1 million for shipments made under cargo preference

requirements of the Merchant Marine Act of 1936, as amended, and the Food Security Act of 1985, as

amended. This cost, borne by the United States for all food aid programs.

b

Participating agencies are Feed the Children; American Red Cross; Project Aid Siberia, International

Orthodox Christian Charities; and Global Jewish Assistance and Relief Network.

c

Includes the same participating agencies as listed above except for Feed the Children.

d

Estimated.

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

Most of the commodities arrived in Russia during mid-1999, with the seeds

arriving first in March-April 1999, followed by the bulk grains during the

summer and early fall months and subsequently by the meats during the

late fall and winter months into early 2000. Corn that was substituted for

earlier planned beef purchases arrived in late spring 2000. Figure 4 depicts

the monthly arrival of U.S. food aid commodities in Russia by tonnage until

May 2000.

Section 416(b) donationc:

Wheat flour 27.0 $5.3 $7.7 $13.0 $0

Nonfat dry milk 8.5 20.3 2.7 23.0 0

Subtotal 35.5 $25.6 $10.4 $36.0 0

Total 96.8 $60.3 $24.5 $84.8 $0

Administrative costd $2.5

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

(Continued From Previous Page)

Dollars in millions

U.S. cost

Program/commodity

Tonnage being

distributed (000) Commodity Freighta Totala

Russian sale

proceeds
Appendix II

Background on Fiscal Year 1999 U.S. Food

Aid Program to Russia

Page 43 GAO/NSIAD/AIMD-00-329 Foreign Assistance

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

Source: Foreign Agricultural Service.

0

100

200

300

400

500

600

700

Metric tons

March 1999

April 1999

May 1999

June 1999

July 1999

August 1999

September 1999

October 1999

November 1999

December 1999

January 2000

February 2000

March 2000

April 2000

May 2000 
Page 44 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Appendix III

Key Internal Controls for Monitoring the

Distribution of U.S. Food Aid Commodities in

Russia ApendxiI

Internal controls help to ensure that program operations are conducted

effectively and efficiently. They also have a vital role in safeguarding assets

and preventing and detecting errors and fraud. In table 3, we describe the

internal controls for the fiscal year 1999 Russian food aid program. They

are set out in the bilateral agreements as well as in procedures issued by

the Foreign Agricultural Service specifically for this program.

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

Key internal

control Purpose Procedures

Bilateral Working

Group

To provide the U.S. and

Russian governments with a

forum to discuss operational

and logistical issues and

resolve problems.

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

concerning the purchase, shipment, and distribution of commodities. U.S. officials

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

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

Service was to review the minutes to ensure that all issues are resolved. Members

included the U.S. Minister Counselor for Agricultural Affairs; U.S. embassy officials

and monitors; and Russian officials from the Ministries of Agriculture, Finance, Trade,

Customs, and Internal Affairs; Russian internal security agencies; and the Russian

Pension Fund and distribution agents.

Commodity

distribution plans

To create a system of

accountability that tracks by

region the types and tonnage

of commodities to be

delivered so that any

discrepancies can be traced

to a particular step or agent.

Initial distribution plans were to set out the commodities and quantities intended for

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

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

States, the Russian government was to submit to the U.S. Minister Counselor for

Agricultural Affairs, for his approval, detailed commodity distribution plans (work

plans) within each region. The U.S. Minister Counselor was to approve any changes,

based upon the request by the Bilateral Working Group.

Shipment, Arrival,

Distribution, and

Status of Funds

reports

To collect distribution data by

vessel on the type and

quantity of commodities

loaded and discharged, their

condition at arrival, and their

final destination.

For each vessel shipment, the Foreign Agricultural Service was to provide the

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

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

information on the types and quantities of commodities on board, although no time

limits were specified. Prior to the vessel’s arrival, Russian distribution agents were to

prepare a vessel spreadsheet indicating the intended regional recipients and their

expected quantities based on the commodity distribution plan. Within 2 days of the

vessel’s discharge at the Russian port of entry, the Russian government was to

update the initial shipment report with information on the types, quantities, and

condition of commodities received. Finally, within 14 days after the vessel’s discharge,

the Russian government was to further update the report with information on the

recipients of the vessel’s commodities. These updates were to be provided to the U.S.

Minister Counselor as the definitive Russian accounting for the distribution of

commodities by destination, type, and quantity.
Appendix III

Key Internal Controls for Monitoring the

Distribution of U.S. Food Aid Commodities in

Russia

Page 45 GAO/NSIAD/AIMD-00-329 Foreign Assistance

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

Commodity

tracking systems

To establish a management

information system and audit

trail that tracks details of

commodity distribution

through all stages of the

delivery process and

quantities monitored.

Information from reports such as the Shipment, Arrival, Distribution, and Status of

Funds report, their updates, and the vessel spreadsheets were initially compiled into

a single spreadsheet called the Master Travel Matrix. This matrix became the primary

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

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

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

which expanded the reporting capacity that was previously available under the initial

Master Travel Matrix.

U.S. monitoring

visits to Russian

regions

To verify deliveries of

commodities at Russian

ports and regional sites,

investigate allegations of

fraud or mishandling of the

commodities, and visit with

press and local officials to

promote the program.

U.S. monitors were to travel to ports, storage facilities, processors, and social

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

quantities and types of commodities and whether the price paid was the same as that

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

to inquire whether all the expected commodities had arrived, review documents

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

completion of the site visit, the monitors were to record their findings in a Compliance

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

Minister Counselor for Agricultural Affairs. Additionally, any suspicious circumstances

discovered during a site visit were to be immediately brought to the attention of the

Ministry of Internal Affairs.

(Continued From Previous Page)
Page 46 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Appendix IV

Comments From the Foreign Agricultural

Service ApendxiIV

Note: GAO comments

supplementing those in the

report text appear at the end

of this appendix.

See comment 1.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 47 GAO/NSIAD/AIMD-00-329 Foreign Assistance

See comment 2.

See comment 1.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 48 GAO/NSIAD/AIMD-00-329 Foreign Assistance

See comment 3.

See comments 3 and 4.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 49 GAO/NSIAD/AIMD-00-329 Foreign Assistance

See comments 3 and 4.

See comments 3 and 4.

See comment 5.

See comment 6.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 50 GAO/NSIAD/AIMD-00-329 Foreign Assistance

See comment 7.

See comment 8.

Now on p. 25.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 51 GAO/NSIAD/AIMD-00-329 Foreign Assistance

See comment 9.

See comment 10.

Now on p. 19.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 52 GAO/NSIAD/AIMD-00-329 Foreign Assistance

See comment 11.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 53 GAO/NSIAD/AIMD-00-329 Foreign Assistance

See comment 12.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 54 GAO/NSIAD/AIMD-00-329 Foreign Assistance

See comment 13.

See comment 14.

See comment 15.
Appendix IV

Comments From the Foreign Agricultural

Service

Page 55 GAO/NSIAD/AIMD-00-329 Foreign Assistance
Appendix IV

Comments From the Foreign Agricultural

Service

Page 56 GAO/NSIAD/AIMD-00-329 Foreign Assistance

The following are GAO’s comments on the letter from the Foreign

Agricultural Service, dated September 26, 2000.

GAO Comments 1. The Foreign Agricultural Service disputes our principal conclusion that

it cannot provide reasonable assurance that the food aid was delivered

in agreed upon amounts to the intended regions and that the Russian

Pension Fund will continue to receive timely deposits that equal the full

value of the food aid sold in Russian markets because of weaknesses in

the agency’s implementation of its internal controls. These controls

were designed to direct, track, and verify how the food aid was

delivered at the regional level. Agency officials stated that the

bottom-line objectives for the program—delivery of commodities to the

regions of Russia as planned and achieving the targeted goal for

payments to the Russian Pension Fund—were achieved since no

substantiated reports of fraud or diversion of commodities or funds

have been made. While we agree that conducting a food aid program in

Russia was a difficult challenge, we continue to believe that

implementation of appropriate internal controls is very important to

preventing and detecting fraud and abuse. Without adequate controls

and documentation of key decisions, the agency cannot provide

reasonable assurance that its objectives are being met.

2. As described in the Scope and Methodology section of our report, we

focused our review on the Foreign Agricultural Service’s

implementation of internal controls it designed to manage the

government-to-government fiscal year 1999 food aid program to Russia.

Internal controls are a governmentwide requirement intended to serve

as the first line of defense in safeguarding assets, preventing and

detecting errors and fraud, and providing reasonable assurance that an

organization’s objectives are being met. As we noted in our Scope and

Methodology section, we made no assessment of the Russian

government’s effort to implement and monitor the food aid program

because the Foreign Agricultural Service (not the Russian government)

has primary responsibility to safeguard the use of U.S. assets and

provide reasonable assurance that the food aid reached intended

recipients.

3. Commodity distribution plans were one of the key internal controls

established by the Foreign Agricultural Service to track the progress of

U.S. food aid deliveries to regional recipients in Russia. As our report

states, this internal control allowed for the revision of commodity
Appendix IV

Comments From the Foreign Agricultural

Service

Page 57 GAO/NSIAD/AIMD-00-329 Foreign Assistance

distribution plans, recognizing the need to respond to changing

conditions such as sudden regional food shortages. According to the

internal controls, changes in planned commodity distribution were

supposed to be documented in revised distribution plans and submitted

by the Bilateral Working Group to the U.S. Minister Counselor for

approval. Except for an update on free wheat distribution, our review

found no revisions to plans or record of U.S. approval. Rather than

implement its internal controls and complete the process of updating

and approving changes in commodity distribution plans, the Foreign

Agricultural Service accepted the Russian government’s record of

actual deliveries as commodity distribution plans. It is by this

acceptance that the Foreign Agricultural Service can state with full

assurance that commodities were delivered according to plan.

However, we found that less than one-quarter of the targeted regions

received a tonnage amount that was equivalent or near their planned

distributions. Because the Foreign Agricultural Service did not

document revisions and approval for changes to the commodity

distribution plans, it cannot demonstrate that changes in the

distribution plans were planned and approved or whether they were the

result of unintended re-routings.

4. As we stated in our report, the U.S. monitors made numerous site visits,

often without reliable data on the amount and types of commodities

that they were expected to find. If monitors found differences between

expected and actual amounts, they were not in a position to know if it

was due to changes in plans or possible diversion. According to the

agency’s comments, its response to these discrepancies was to modify

the database using documents collected by U.S. monitors rather than

reconcile the differences identified in the monitor’s site visit report. We

believe that the procedure of modifying the database rather than

reconciling the differences means that the Foreign Agricultural Service

does not have an adequate basis for its claim of “absolute assurance”

that it has accurately tracked the food aid distribution.

5. During the time period that free wheat was being delivered to regional

recipients, the database only captured information on total wheat

delivered (and did not distinguish between wheat to be sold to

processors or distributed free to social institutions). The new database,

operational in May 2000, incorporated historical information provided

by the Russians on the distribution of free wheat. However, the

database still is incapable of tracking the distribution of free wheat on a

real-time basis because Foreign Agricultural Service’s key logistical
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report that tracks the distribution of commodities from point of

discharge to final delivery does not distinguish between commodities

that are to be sold versus commodities that will be given to social

institutions. Our analysis of 115 monitoring reports covering the

delivery of wheat did not indicate that free wheat was a factor in

selecting site visits. We found only 10 instances where the reports

mention that free wheat was delivered to the mills that the monitor had

visited and we could find evidence of monitoring visits to only 10 social

institutions receiving free wheat.

6. While we found that the Foreign Agricultural Service did post useful

program information on its web site, it was by no means complete or

always current. For example, we found that only two-thirds of the

commodity work plans (showing recipient data) were ever presented

on its web site; updates of meat distribution plans were discontinued in

December 1999 even though much of the meat had still not arrived in

Russia; and shipment status reports were issued irregularly and did not

cover meat commodities.

7. The agency’s comments describe what transpires in preparation for a

planned site visit and illustrate the need for unannounced monitoring

visits. To overcome some of the described difficulties in arranging

surprise visits, the Foreign Agricultural Service could coordinate with

Russian government counterparts responsible for monitoring the food

aid program. A Foreign Agricultural Service contractor, in response to a

request to assess the agency’s monitoring plan, stated in a draft report

that “surprise, unannounced visits, even if relatively few in number,

would add significantly to the deterrence value inherent in site visits

and would significantly increase the quality and effectiveness of this

aspect of the program.” The Foreign Agricultural Service deleted this

conclusion from the draft version of the contractor’s report.

8. The Foreign Agricultural Service’s comment that the SADS Status

Report tracked amounts due to the Special Account does not refute our

finding that the Foreign Agricultural Service did not systematically

track payments with amounts that were due until May 2000. The SADS

Status Report tracked amounts and dates due for individual shipments

but did not produce a consolidated report that provided managers with

information to track the total amounts due at any point in time. As

stated in our report, officials from the Foreign Agricultural Service told

us that it prepared financial status reports on an as needed basis. But

until the new database became operational, the limited documentation
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that the agency provided us regarding payment information did not

demonstrate a history that payments regularly exceeded amounts due.

Therefore, we do not conclude, as the Foreign Agricultural Service

states in its comments, that there was little reason to systematically

account for total payments due prior to February 2000.

9. While we believe, as stated in our report, that the new database

(FARMS) represents significant improvements over the earlier

database, it was implemented too late to significantly enhance the

Foreign Agricultural Service’s ability to track commodity shipments,

deliveries, and payments under the fiscal year 1999 program. In May

2000, when the new database became operational, virtually all of the

food aid tonnage shipped under this program had been discharged in

Russia.

10. This is the first time that the Foreign Agricultural Service has informed

us about an internal audit of its monitoring report documents and, in its

comments, the agency did not provide a date as to when this was

performed. We cannot comment on the audit’s scope and methodology;

however, based on the Foreign Agricultural Service’s description of its

audit, there does not appear to be any effort to reconcile the differences

between documents collected during the site visit with amounts

reported as verified by U.S. monitors in their individual monitoring

reports.

11. We requested the Foreign Agricultural Service to provide us with

contemporaneous documentation used by the Bilateral Working Group

to establish prices and Foreign Agricultural Service documents that

reflected the Foreign Agricultural Service’s analysis of proposed

commodity prices. The Foreign Agricultural Service did not provide us

with the tables used for making price decisions referred to in its

comment on our draft report even though they are precisely what we

requested. Rather, the Foreign Agricultural Service primarily referred

us to monthly regional and national price information for agricultural

commodities published after the decisions were made. We cannot know

from the documentation provided what price information was available

and used when the Bilateral Working Group made pricing decisions.

Ex-post price documentation contributes little to show how decisions

were made or what analysis the Foreign Agricultural Service undertook

regarding proposed prices. This lack of documentation is not surprising

as the U.S. Minister Counselor told us that there was a “paucity” of
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documentation prepared by the Foreign Agricultural Service related to

establishing program prices.

12. Establishing prices was an important part of administering the food aid

program. If the price was set too high, the U.S. product would sell

slowly, storage costs would be incurred, and the U.S. food aid would

not contribute to controlling food price inflation in Russia. If prices

were set too low, domestic Russian producers would face reduced

income due to the lower prices, competing imports would be crowded

out, and revenue to the Russian Pension Fund would not be maximized.

In addition, low prices would create opportunities for windfall profits

by the government-selected recipients of the food aid. For example, if a

mill buys U.S. food aid corn at prices significantly below market prices,

the buyer could realize windfall profits when it sells the processed

corn. Representatives of a Russian agricultural association told us that

the lack of price adjustment in the program created such profit

opportunities. According to the World Bank, incomes of distribution

agents and other intermediaries grew at the expense of Russian

government revenue. Because Russian government officials and

distribution agents determined the distribution of the food aid product,

they also controlled the distribution of potential windfall profit

opportunities. According to a U.S. trade association representative, the

low prices made the food aid distributor very powerful, even if the

distributor was not corrupt. Another association representative

explained that government control of distribution with low prices

created opportunities for corruption.

13. The issue under review is not simply whether the Foreign Agricultural

Service had adequate documentation (it did not), but whether it can

demonstrate the reasonableness of its decisions. While our report does

not contain an evaluation of whether the program’s prices had a

negative impact on commercial trade and domestic productions in

Russia, we do report that U.S. program prices were substantially below

Russian wholesale prices for the cases we could review. We report that

the U.S. program price for food aid rice was about half of the average

domestic prices at the time it was set. Similarly, the prices of U.S. food

aid corn and wheat were set at about 60 percent of Russian wholesale

prices. These price differences raise questions about the level of

proceeds that could have been generated by the food aid program for

the Russian Pension Fund. For example, the three shipments of these

commodities we examined generated sales of $36 million. If, for

example, sales had taken place at prices 20 percent higher, the sales
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would have generated $7.2 million more for the Russian Pension Fund.

A U.S. trade association pointed out that low prices for food aid

resulted in the Russian Pension Fund receiving less money than it

should have. While we are not in a position to know whether sales at

higher prices were desirable or feasible, the Foreign Agricultural

Service provided no documentation or analysis that demonstrated that

they considered these issues.

14. During our trip to Moscow in December 1999, we requested and

received copies of the final commodity distribution plans for all

commodities. The distribution plan we were given for U.S. beef did not

reflect the reduced amount of U.S. beef purchased by Russia under the

food aid program from 120,000 metric tons to less than 50,000 metric

tons. As recently as June 2000, we have requested an updated

distribution plan for U.S. beef and have been told by agency officials

that the original distribution plan represented the final plan.

15. The term “reasonable assurance” that we used throughout our report is

a fundamental concept found in Standards for Internal Control in the

Federal Government. This concept recognizes that internal controls,

once in place, provide reasonable, not absolute, assurance of meeting

agency objectives. This term is also part of the Office of Management

and Budget Circular No. A-123 guidance regarding management

accountability and control of federal government program and

operations. This circular applies to the Department of Agriculture and

the Foreign Agricultural Service.
Page 62 GAO/NSIAD/AIMD-00-329 Foreign Assistance

Appendix V

GAO Contacts and Staff Acknowledgments ApendxiV

GAO Contacts Phillip Thomas (202) 512-9892

Christine Broderick (415) 904-2240

Acknowledgments In addition to those named above, Rolf Nilsson, Roger Stoltz, Emil Friberg,

Samantha Roberts, Mark Dowling, and Richard Boudreau made key

contributions to this report.

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