Recovering Iraq's Assets: Preliminary Observations on U.S. Efforts and Challenges
Published: 2004-03-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Rebuilding Iraq is a U.S. national security priority. Billions of dollars are needed for Iraq's reconstruction. The U.S. government and the international community have undertaken important efforts to recover the assets of the former regime and return them to the Iraqi people. In this testimony, GAO will present its preliminary observations on the recovery effort. Specifically, GAO (1) updates its estimate of the revenues diverted from the Oil for Food Program, (2) describes the U.S. government agencies working on the asset recovery effort, (3) discusses the results of U.S. efforts, and (4) highlights challenges that the United States faces in recovering Iraqi assets.
section_title: What GAO Found
paragraphs: GAO estimates that from 1997 through 2002, the former Iraqi regime acquired $10.1 billion in illegal revenues related to the Oil for Food program--$5.7 billion in oil smuggled out of Iraq and $4.4 billion in illicit surcharges on oil sales and after-sales charges on suppliers. This estimate is higher than our May 2002 estimate of $6.6 billion because it includes 2002 data from oil revenues and contracts under the Oil for Food Program and newer estimates of illicit commissions from commodity suppliers. The United States has tapped the services of a variety of U.S. agencies and recently developed domestic and international tools in its efforts to recover Iraqi assets worldwide. Led by the Department of the Treasury, about 20 government entities have combined efforts to identify, freeze, and transfer the former regime's assets to Iraq. The United States also used the International Emergency Economic Powers Act, as amended by provisions in the USA PATRIOT Act of 2001, to confiscate the property of the former Iraqi regime under U.S. jurisdiction and vest the assets in the U.S. Treasury. Finally, U.N. Security Council Resolution 1483 required all U.N. members to freeze without delay and immediately transfer assets of the former Iraqi regime to the new Development Fund for Iraq (DFI). U.S. efforts to recover Iraqi assets have had varying results. In March 2003, the U.S. government quickly took control of Iraq's assets in the United States. From May to September 2003, the United States transferred $1.7 billion to Iraq to help pay for the salaries of Iraqi civil servants, ministry operations, and pensions. Within Iraq, U.S. military and coalition forces seized about $926 million of the regime's assets. Other countries froze about $3.7 billion of Iraqi regime assets in compliance with U.N. Security Council resolutions. As of March 2004, Treasury reported that more than 10 countries and the Bank for International Settlements had transferred approximately $751 million to the DFI. Little progress has been made in identifying and freezing additional Iraqi assets that remain hidden. While the amount of hidden assets accumulated by the former Iraqi regime is unknown, estimates range from $10 to $40 billion in illicit earnings. The United States faces key challenges in recovering Iraq's assets. First, recovering the former regime's assets was not initially a high priority in the overall U.S. effort in Iraq. Second, U.S. officials stated that many countries needed to adopt additional legislation to implement the U.N. requirements and transfer the funds to the DFI. U.S. expectations for the quick transfer of funds may have been overly optimistic given the legal capabilities of some countries. Third, the impending transfer of sovereignty to an interim Iraqi government on June 30, 2004, may further complicate U.S. efforts to locate and recover assets of the former regime. It is uncertain whether the new government will allow the United States to continue its hunt for the former regime's assets.

section_title: Letter
paragraphs: We are pleased to be here today to discuss our preliminary observations  on U.S. and international efforts to recover assets of the former Iraqi  regime and transfer them to Iraq for reconstruction.
Rebuilding Iraq is a U.S. national security and foreign policy priority.  Billions of dollars are needed for meeting humanitarian needs, stabilizing  Iraq, and repairing the country’s infrastructure. The U.S. government and  the international community have undertaken important efforts to recover  the assets of the former regime and return them to the Iraqi people.
In May 2003, this committee asked GAO to examine how the U.S.  government works with the international community to recover the assets  of targeted foreign regimes. We will complete this broader report on U.S.  recovery efforts for the committee in May 2004.
Today, we will present our preliminary observations on Iraqi asset  recovery efforts. Specifically, we will (1) update our estimate of the  revenues diverted from the Oil for Food Program by the former Iraqi  regime, (2) describe the U.S. agencies working to recover Iraqi assets, (3)  discuss the results of U.S. efforts, and (4) highlight challenges in asset  recovery.
To address these issues, we reviewed documents and statements from the  Departments of the Treasury, State, Defense, and Justice on the asset  recovery effort, the Coalition Provisional Authority (CPA) in Iraq on the  funds transferred to Iraq, and the United Nations on the Oil for Food  Program. We met with U.S. officials working on the recovery effort,  including officials from the Treasury’s Office of Foreign Assets Control  (OFAC), analysts from U.S. law enforcement and intelligence agencies,  financial regulators, and representatives from U.S. financial institutions  responsible for implementing U.S. orders to freeze and transfer blocked  Iraqi assets. We have yet to review the reliability of the data provided by  the Department of the Treasury and the CPA.
subsections: section_title: Background
paragraphs: In August 1990, Iraq invaded Kuwait, and the United Nations imposed  sanctions against the regime. Security Council Resolution 661 of 1990,  prohibited all nations from buying Iraqi oil and selling Iraq any  commodities except food or medicines. The resolution also required  member states to block the transfer of Iraqi assets from their countries.  Consistent with this resolution, the President froze all Iraq’s assets held in  the United States. Other nations similarly froze Iraqi government assets in  their countries.
In 1991, the Security Council offered to let Iraq sell oil under a U.N.  program to meet its peoples’ basic needs. The Iraqi government rejected  the offer and, over the next 5 years, food shortages and a general  deterioration in social services were reported.
In December 1996, the United Nations and Iraq agreed on the Oil for Food  Program, which allowed Iraq to sell a set amount of oil to pay for food,  medicine, and infrastructure repairs. The United Nations monitored and  screened contracts that the Iraqi government signed with commodity  suppliers. Iraq’s oil revenue was placed in a U.N.-controlled escrow  account. From 1997 through 2002, Iraq sold more than $67 billion of oil  through the U.N. program and issued $38 billion in letters of credit for  humanitarian goods. In May 2003, the Security Council passed Resolution  1483, which recognized the United States, Great Britain, and coalition  partners as the authority for providing security and provisional  administration in Iraq. The resolution also ended the sanctions, except for  the prohibition on exporting arms to Iraq.
section_title: Estimated Revenue Obtained Illegally by the Former Iraqi Regime from the Oil for Food Program Exceeds $10 Billion
paragraphs: We estimate that, from 1997 through 2002, the former Iraqi regime  acquired $10.1 billion in illegal revenues related to the Oil for Food  Program—$5.7 billion through oil smuggling and $4.4 billion through  surcharges against oil sales and illicit commissions from commodity  suppliers. This estimate is higher than the $6.6 billion we reported in May  2002. We updated this estimate to include (1) oil revenue and contract  amounts for 2002, (2) updated letters of credit from prior years, and (3)  newer estimates of illicit commissions from commodity suppliers.
Oil was smuggled out through several routes, according to U.S.  government officials and oil industry experts. Oil entered Syria by  pipeline, crossed the borders of Jordan and Turkey by truck, and was  smuggled through the Persian Gulf by ship. In addition to revenues from  oil smuggling, the Iraqi government levied surcharges against oil  purchasers and commissions against commodity suppliers participating in  the Oil for Food Program. According to some Security Council members,  the surcharge was up to 50 cents per barrel of oil and the commission was  5 to 10 percent of the commodity contract. The funds were paid directly to  officials connected with the Iraqi government. In addition, according to a  Department of Defense (DOD) official, a DOD report in September 2003  evaluated 759 contracts funded and approved under the Oil for Food  Program. The study found that at least 48 percent of the contracts were  overpriced and that on average the contracts were overpriced by 21  percent.
section_title: U.S. Efforts to Recover Iraqi Assets Involve Many Agencies and Use Recently Developed Domestic and International Authorities
paragraphs: The United States has tapped the services of several U.S. agencies and  used recently developed U.S. and international authorities in its efforts to  recover Iraqi assets worldwide. About 20 entities, including those of the  Departments of the Treasury, Homeland Security, Defense, Justice, State,  intelligence agencies, law enforcement agencies, and the White House  National Security Council, are involved in recovering Iraqi assets.
To lead the asset recovery efforts, the United States created an  interagency coordinating body headed by the Department of the Treasury.  The Iraqi Assets Working Group has developed a strategy to identify,  freeze, seize, and transfer former regime assets to Iraq. The working  group’s goals are to:    Exploit documents and key financial figures in Iraq to better    Secure the cooperation of jurisdictions through which illicit funds have  flowed so that working group members may exploit financial records  and uncover the money trail;   Secure the cooperation of jurisdictions in which illicit assets may  reside to locate, freeze, and repatriate the assets;   Engage the financial community in the hunt for illicit assets generally,  and specifically secure the cooperation of the financial institutions  through which illicit funds have flowed or may still reside;   Develop a system to facilitate the fluid repatriation of funds; and    Prepare for potential sanctions against uncooperative jurisdictions and  financial institutions.
The working group is leveraging the expertise of U.S. officials involved in  efforts to recover assets of terrorists and money launderers.
The U.S. Congress recently passed legislation containing provisions that  allowed the President to confiscate foreign funds frozen in U.S. financial  institutions. Specifically, provisions in the USA PATRIOT Act of 2001  amended IEEPA to allow the President to confiscate foreign property  subject to U.S. jurisdiction in times of “on-going hostilities” or if the United  States is attacked. These provisions gave the President the necessary  authority, through an Executive Order, to confiscate the property of the  former Iraqi regime and to vest these assets in the U.S. Treasury.
In addition, the State Department cited U.N. Security Council Resolution  1483 as an important vehicle for requiring other countries to transfer  assets to Iraq. On May 22, 2003, the U.N. Security Council adopted  Resolution 1483, which (1) noted the establishment of the DFI, a special  account in the name of the Central Bank of Iraq; and (2) required member  states to freeze and immediately transfer to the DFI all assets of the  former Iraqi government and of Saddam Hussein, senior officials of his  regime and their family members. The resolution also included a unique  immunity provision to protect the assets from new claims.
section_title: U.S. Efforts to Recover the Former Iraqi Regime’s Assets Have Had Varying Results
paragraphs: In 2003, the U.S. government quickly vested Iraq’s assets held in the United  States and transferred them to Iraq. Similarly, the U.S. military, in  coordination with U.S. law enforcement agencies, seized assets of the  former regime in Iraq. The CPA has used most of the vested and seized  assets for reconstruction projects and ministry operations. U.S. officials  noted that some other countries’ efforts to transfer Iraqi funds have been  slowed by their lack of implementing legislation. There has been little  progress in recovering the regime’s hidden assets.
subsections: section_title: The United States Transferred Nearly $1.9 Billion in Vested Assets to Iraq
paragraphs: In 2003, the United States vested about $1.9 billion of the former regime’s  assets in the U.S. Treasury. Between May and December, the United States  transferred more than $1.7 billion to Iraq and $192 million to the DFI. The  United States had the necessary legal authorities to make the transfers  quickly.
On August 2, 1990, in compliance with a Presidential Executive Order, the  Treasury Office of Foreign Assets Control (OFAC) issued regulations to  financial institutions requiring them to freeze Iraqi assets in the United  States. More than 30 banks in the United States identified and froze  accounts with $1.4 billion in Iraqi assets. These institutions held assets in  accounts that accumulated interest.
In March 2003, the President used authorities, including the enhanced  authority in IEEPA, as amended by provisions in the USA PATRIOT Act, to  issue a new executive order to confiscate or take ownership of Iraqi assets  held by U.S. financial institutions and vest them in the U.S. Treasury.
According to Treasury and Federal Reserve officials, Treasury instructed  the Federal Reserve Bank to release portions of the funds to DOD upon  the Office of Management and Budget’s approval of DOD’s spending plans.  As of March 2004, the CPA had spent about $1.67 billion of the $1.9 billion  for emergency needs, including salaries for civil servants and pensions,  and for ministry operations.
section_title: The United States Seized More Than $900 Million in Iraq
paragraphs: CPA informed us in March 2004 that the U.S. military, in coordination with  U.S. law enforcement agencies had seized about $926 million of the  regime’s assets in Iraq. The U.S. military seized about $894 million in Iraqi  bonds, U.S. dollars, euros, and Iraqi dinars, as well as quantities of gold  and jewelry. This amount included $750,000 found with Saddam Hussein  when he was captured. Department of Homeland Security agents seized an  additional $32 million.
The CPA is authorized to use these seized funds for humanitarian and  reconstruction efforts. As of March 2004, the CPA had used $752 million  for reconstruction activities, including projects, ministry operations, and  liquefied petroleum gas purchases.
section_title: Other Countries Have Transferred $751 Million to the DFI
paragraphs: According to Treasury, other countries have frozen about $3.7 billion in  Iraqi assets. Treasury officials reported that, as of March 2004, more than  10 countries and the Bank for International Settlements have transferred  $751 million to the DFI. Treasury officials noted that the remaining assets  have not been transferred to the DFI because some countries do not have  the necessary legislation to affect the transfer or are holding about $1  billion to adjudicate claims. U.N. Security Council Resolution 1483  requires the immediate transfer of Iraqi funds identified and frozen in  these accounts to the DFI.
To encourage other countries to transfer the funds to Iraq, the Secretary of  the Treasury requested that the international community identify and  freeze all assets of the former regime. Additionally, Treasury and State  officials said that they have engaged in diplomatic efforts to encourage  countries to report and transfer the amounts of Iraqi assets that they had  frozen. For example, since March 2003, State officials told us that they  have sent more than 400 cables to other countries requesting that they  transfer funds to the DFI.
According to U.S. officials, Treasury and State continue to leverage the  U.S. government’s diplomatic relations with finance ministries and central  banks to encourage the transfer of Iraqi assets to the DFI, according to  Treasury officials. Some of the remaining frozen funds are located in  financial institutions in Iraq’s neighboring countries or Europe.
section_title: Little Progress Has Been Made in Recovering Hidden Assets of the Former Iraqi Regime
paragraphs: Little progress has been made in recovering the former Iraqi regime’s  hidden assets. Because the former Iraqi regime used a network of front  companies, trusts, and cash accounts in the names of the regime family  members and associates, it has been difficult to identify how much  remains hidden in the international financial system. U.S. government  officials have cited estimates ranging from $10 billion to $40 billion in  illicit earnings.
According to U.S. government officials, U.S. government asset recovery  efforts have focused on exploiting documents in Iraq, interviewing key  financial figures, and convincing other countries to cooperate in  identifying and freezing illicit funds that have flowed through or still reside  in their countries. For example, Department of Homeland Security agents  have exploited Central Bank of Iraq records for leads regarding Saddam  Hussein’s procurement network. Internal Revenue Service criminal  investigators have conducted interviews of former finance ministry  individuals and exploited financial documents of the regime to obtain  leads on the location of targeted assets. The Defense Intelligence Agency  provides some of the research and analysis used to identify assets of the  former Iraqi regime.
In addition, according to Treasury and State officials, they are  coordinating efforts to gain the cooperation of other countries. For  example, State officials said that U.S. investigators have identified 500  accounts that potentially belonged to the former regime in other countries.  State is working through their overseas embassies to get the cooperation  of these countries to return the funds to the DFI.
section_title: Challenges to Transferring Frozen Assets and Locating the Hidden Assets
paragraphs: The U.S. government has faced key challenges to recovering the assets of  the former Iraqi regime.
First, recovering the former regime’s assets was not initially a high priority  in the overall U.S. effort in Iraq. As the need for additional resources to  rebuild Iraq became apparent, the United States placed a higher priority on  recovering the former regime’s assets. According to U.S. government  officials, recovering the former Iraqi regime’s assets became the U.S.  government’s third priority behind the hunt for weapons of mass  destruction and security in September 2003. In addition, Internal Revenue  Service agents stated that DOD’s post-war plans and priorities did not  include protection of financial documents or other information that could  have provided leads on the location of the former regime’s assets.
Second, U.S. expectations for the quick transfer of funds under U.N.  Security Council Resolution 1483 may have been overly optimistic given  the lack of legal capabilities of some countries to do so. In June 2003, State  and Treasury officials said that the U.N. resolution included unique  provisions that afforded the United States and the international  community with an opportunity to quickly recover Iraqi assets worldwide.  The resolution required all U.N. members to freeze without delay assets of  the former Iraqi regime and immediately transfer them to the DFI. Many of  the member states that had frozen Iraqi government assets in 1991 did not  immediately transfer the assets to the DFI.
U.S. officials stated that many countries needed to adopt additional  legislation to implement the U.N. requirements and transfer the funds to  the DFI. According to U.S. government officials, some U.N. member  countries have developed the authorities, institutions, and mechanisms to  freeze assets of targeted terrorists, but others had not developed similar  mechanisms for targeted regimes. U.S. government officials also stated  that some countries did not have the administrative capabilities and  financial mechanisms to transfer the frozen assets. U.S. officials did not  have a central repository of other countries’ laws and regulations related  to transferring Iraqi assets. Furthermore, according to U.S. officials,  despite the immunity provision included in the U.N. resolution, some  countries are delaying transfer of funds until all claims have been settled.
Third, the impending transfer of sovereignty to an interim Iraqi  government on June 30, 2004, may further complicate U.S. efforts to locate  and recover assets of the former regime. It is uncertain whether the new  government will allow the United States to continue its hunt for the former  regime’s assets. The future transitional government has yet to conclude  agreements regarding the activities of the multi-national force, which may  include the right to interview Iraqi officials and exploit documents. In  addition, it is also uncertain whether other countries will transfer their  remaining funds to the DFI when the interim government assumes  authority over it.
Madam Chairwoman and Members of the Subcommittee, this concludes  our prepared statement. We will be happy to answer any questions you  may have.
section_title: Contacts and Acknowledgments
paragraphs: For questions regarding this testimony, please call Joseph Christoff at  (202) 512-8979 or Davi M. D’Agostino at (202) 512-5431. Other key  contributors to this statement were Thomas Conahan, Lynn Cothern,  Philip Farah, Rachel DeMarcus, Ronald Ito, Barbara Keller, Sarah Lynch,  Zina Merritt, Tetsuo Miyabara, Marc Molino, and Mark Speight.
section_title: Appendix I: Roles of U.S. Entities In Recovering Iraqi Assets
paragraphs: Froze assets in 1990, directed financial institutions to transfer these assets to Treasury account in 2003.
Leads interagency Iraq Task Force Working Group for Tracking and Recovery of Iraqi Assets (Iraqi Assets Working Group, IAWG).
Maintains Treasury's vested account. As directed by Treasury, released the vested funds to the Department of Defense and the Coalition Provisional Authority (CPA).
Approves CPA spending requests of vested funds.
Approves and manages the obligation and expenditure of vested funds.
subsections: section_title: Agency/Office/Subdivision
paragraphs: Military identified and seized assets in U.S. dollar, euro, and dinar currency notes; gold, jewelry, and Iraqi bonds.
Assisted the military in the identification and seizure of assets.  Seized an additional $32 million.
Determined the authenticity of seized assets.
Approves and, with DOD, manages the obligation and expenditure of seized funds.
section_title: Agency/Office/Subdivision
subsections: section_title: Executive Office for Terrorist Financing and Financial Crime
paragraphs: Coordinates with State on outreach to foreign government officials, including finance ministries.
Coordinates with State and Justice on potential asset designations.
Tracks the status of assets frozen in and transferred from other countries.
Undertake diplomatic efforts to encourage other governments to implement UN Resolution 1483.
Negotiated consensus on UN Resolution 1483. Submits potential freezing designations to the United Nations.
Identify, freeze, and transfer assets to the Development Fund for Iraq. ?
Coordinates U.S. efforts to locate additional hidden assets.
Reviews documents and interviews individuals connected to Saddam Hussein's finances, front companies, and account transactions; provides leads to embassies and to other governments and financial institutions.
Undertake diplomatic efforts to encourage other governments to follow up on leads and freeze assets.
Encourages UN members to identify, freeze, and transfer assets.
Identify and track financial assets related to the Central Bank of Iraq.
Provides research and analysis used to identify assets of the former Iraqi regime.
Work with the IAWG to facilitate activities in Iraq, including providing logistical support to Treasury investigators.
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