Foreign Assistance: U.S. Programs Involving the Palestine Investment Fund
Published: 2013-07-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: According to the State Department (State), the U.S. government is one of the largest donors to the Palestinian Authority. According to State, the U.S. government provided about $3 billion in total bilateral assistance for fiscal years 2008 through 2012. PIF was established by Palestinian Authority presidential decree in 2002 and became operational in 2003 as an investment company aimed at strengthening the Palestinian economy through strategic investments.
GAO was asked to provide information on U.S. involvement with the Palestine Investment Fund. This report describes (1) the nature and scope of U.S. government involvement with PIF, and (2) OPIC's and USAID's processes for vetting PIF and other non-U.S entities and individuals participating in programs involving PIF and PIF-owned entities. GAO reviewed documents and interviewed officials from U.S. agencies, PIF, and implementing partners.
section_title: What GAO Found
paragraphs: U.S. agencies and implementing partners participate in various programs with the Palestine Investment Fund (PIF) or PIF-owned entities that include home mortgage financing, loan guarantees, and educational initiatives. First, the Overseas Private Investment Corporation (OPIC) along with PIF and other entities have committed to lend $485 million to the Affordable Mortgage and Loan Company (AMAL) to support mortgages for low- and medium-income borrowers in the West Bank. OPIC has committed to lend about $313 million; PIF has committed about $72 million, and two banks account for the balance of the committed lending. However, as of April 2013, OPIC and PIF had not yet disbursed any funds. Second, OPIC and PIF are co-guarantors in a Loan Guarantee Facility (LGF) program in the West Bank, guaranteeing up to $110 million and $50 million in loans, respectively, to nine regional banks to support lending to small- and medium-sized enterprises. Third, USAID officials stated that, in 2009, USAID provided a U.S. implementing partner $2.1 million for technical assistance and training to enhance the lending practices of participating banks in support of the LGF. Finally, according to USAID, it provided about $1.3 million from 2010 to 2013 to three U.S. implementing partners to provide technical, in-kind, and scholarship assistance to the American International School in Gaza (AISG), which is owned by the Palestine Technology and Education Complex, a PIF-owned entity. According to USAID, its involvement with AISG ended in June 2013.
OPIC's and USAID's processes for vetting PIF and other non-U.S. entities and individuals in programs involving PIF and PIF-owned entities rely on various information sources. For the AMAL program, the two banks that issue mortgages are required under the AMAL agreements to vet potential borrowers for terrorist financing against such information sources as Treasury's Office of Foreign Asset Control Specially Designated Nationals and Blocked Persons List (OFAC) and the Compendium of United Nations Security Council Sanctions Lists; AMAL and OPIC are to conduct additional vetting. OPIC officials stated that OPIC has vetted PIF's board of directors and senior executives, the non-U.S. board members and shareholders of AMAL, and key officials of the banks against information sources such as the FBI Terrorist Screening Center database, OFAC list, and OPIC's Information Center databases. For the LGF program, OPIC said that, based on OPIC's procedures and the LGF agreements, it has vetted all the participating banks and has vetted key officials of each borrower and guarantor before loans are approved using information sources such as Treasury's Office of Terrorist Financing and Financial Crimes and FBI's Terrorist Screening Center databases. According to USAID officials, its process for vetting key participants of the Technical Assistance and Training program and the AISG program was based on documented vetting procedures for the West Bank and Gaza Mission. USAID officials said that all banks that participated in the LGF program that received training and technical assistance from USAID were subject to USAID's formal vetting process. USAID said it vetted information about AISG's owners and management against law enforcement and intelligence community systems accessed by USAID's Office of Security and through discussions with the U.S. Consulate General in Jerusalem, as applicable.
section_title: What GAO Recommends
paragraphs: This report does not contain any recommendations.

section_title: Letter
paragraphs: The Palestine Investment Fund (PIF) was created by the Palestinian  Authority to strengthen the Palestinian economy and assist with the  economic development of the West Bank and Gaza. Both the Overseas  Private Investment Corporation (OPIC) and U.S. Agency for International  Development (USAID) are participating in programs involving PIF and a  PIF-owned entity in the West Bank and Gaza. You asked us for  information on the nature and extent of U.S. assistance for PIF and how  U.S. agencies help ensure that U.S. assistance does not support terrorist  activities.
This report describes (1) the nature and scope of U.S. government  involvement with PIF, and (2) OPIC’s and USAID’s processes for vetting  PIF and other non-U.S. entities and individuals participating in programs  involving PIF and PIF-owned entities.
To address these objectives, we reviewed and analyzed annual reports,  U.S. antiterrorism policies, agency-specific vetting policies and  procedures, and applicable program agreements obtained from PIF and  relevant U.S. agencies and their implementing partners. We also interviewed officials of OPIC, USAID, the Departments of State (State)  and Treasury, as well as various U.S. agencies’ implementing partners.  We also interviewed a high-level PIF official. We did not review PIF or its  programs in which U.S. agencies are not participants. We described the  vetting process represented to us by OPIC, USAID, and their  implementing partners, based on agencies’ applicable policies,  procedures, and program agreements. We did not determine the extent to  which OPIC and USAID implemented or complied with their vetting  policies and procedures or assessed the effectiveness of OPIC’s and  USAID’s vetting. See appendix I for a detailed discussion of our  objectives, scope, and methodology.
We conducted this performance audit from October 2012 to July 2013 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The West Bank and Gaza are comprised of about 2,400 square miles and  have a combined population of 4.3 million people. The Palestinian  Authority and Israel administer areas within the West Bank, and the  Hamas-controlled de facto authorities operate in Gaza.
A negotiated two-state solution to the Israeli-Palestinian conflict is a core  U.S. national security objective, according to State. The U.S.  government’s foreign assistance program in the West Bank and Gaza is  designed to advance progress toward the two-state solution by helping  the Palestinian Authority build the institutions of a future Palestinian state,  creating an atmosphere that supports negotiations, and improving the  everyday lives of Palestinians, thereby contributing to the overall stability  and security of the region.
The U.S. government has provided assistance to the West Bank and  Gaza both bilaterally and multilaterally for several decades. According to  the State Department, the U.S. government is one of the largest donors to  the Palestinian Authority. According to State and USAID, the U.S.  government provided about $3 billion in bilateral assistance for fiscal  years 2008 through 2012 to support education and social services,  economic development, and humanitarian assistance, among other  sectors. According to USAID, the U.S. government plans to provide $427  million in fiscal year 2013. USAID is the agency that is primarily  responsible for implementing bilateral development and economic  assistance, while State oversees annual contributions for multilateral  programs. In support of the educational and financial sectors, USAID has  provided awards to implementing partners to carry out programs and  initiatives in the West Bank and Gaza. OPIC has supported the financial  sector by providing loans and loan guarantees to eligible entities.
PIF was established by Palestinian Authority presidential decree in 2002  and became operational in 2003 as an investment company aimed at  strengthening the Palestinian economy through strategic investments. As  of 2012, the year of the most recent annual report available, PIF  managed about $780 million in assets through multiple wholly owned  subsidiaries, as well as minority ownership investments, with Palestinian  investments accounting for 84 percent of its total investments. PIF is  governed by a board of directors and a general assembly appointed by  the Palestinian Authority President, and manages investments throughout  a number of sectors, including real estate and hospitality, infrastructure,  finance, capital markets, small-and-medium-sized enterprises (SMEs),  and manufacturing. Appendix II provides a time line of key events in the  development of PIF.
U.S. agencies must comply with certain restrictions under U.S. law when  providing funds for Palestinian assistance programs, including restrictions  reflecting U.S. policy to deny U.S. funds and other support to individuals  or organizations that engage in or otherwise support terrorist activity. This  policy is established in laws, executive orders, and regulations that,  according to USAID and OPIC officials, provide the basis for USAID and  OPIC terrorism vetting policies and procedures used to vet PIF and other  entities and individuals associated with PIF-related programs in which  USAID and OPIC are involved. Appendix III of this report outlines the  legal framework for U.S. antiterrorism policy and describes applicable  USAID and OPIC vetting policies and procedures.
section_title: U.S. Agencies Participate in Various Programs with PIF or PIF-owned Entities
paragraphs: Two U.S. agencies—OPIC and USAID—are involved in programs with  PIF and a PIF-owned entity. OPIC participates in home mortgage  financing and small business loan guarantee programs along with PIF.   USAID provided technical assistance and training to benefit participating  banks in the Loan Guarantee Facility (LGF) program and has  participated in educational programs at the American International School  in Gaza, which is owned by PIF through a special purpose vehicle.
subsections: section_title: OPIC, PIF, and Commercial Banks Are Co-Lenders to the Affordable Mortgage and Loan Program in the West Bank
paragraphs: OPIC, PIF, and local and regional commercial banks are co-lenders to the  for-profit Affordable Mortgage and Loan Company (AMAL) in the West  Bank, which is aimed at encouraging mortgage lending to low- and  medium-income borrowers. AMAL was established in 2010, and OPIC  officials told us that the purpose of the program is to purchase home  mortgage loans from participating banks, as a means to reduce the  banks’ risk in mortgage lending. According to OPIC, as of April 2013, the  two participating banks—the Cairo-Amman Bank and the Bank of  Palestine—have agreed to issue mortgages under the AMAL program.  OPIC officials told us that when fully operational, AMAL will purchase and  refinance mortgages from the participating banks with combined financing  from all of the co-lenders, including OPIC and PIF. AMAL will oversee  and administer the mortgage financing, while the originating banks will  continue to service the mortgages and interface with the borrowers.  According to OPIC, as of April 2013, AMAL is partially operational and  has originated and disbursed approximately four mortgages, all of which  are directly funded by the participating banks. OPIC officials stated that  OPIC and PIF have not yet financed any mortgage purchases under the  AMAL program.
Under the AMAL Common Agreement, OPIC has committed to lend $313  million to AMAL (about 65 percent of the total debt commitment), while  PIF has committed to lend $72 million (about 15 percent of AMAL’s total  debt commitment). According to the Common Agreement, when the  Cairo-Amman Bank and the Bank of Palestine cumulatively originate up  to $10 million in eligible mortgage loans, the funding of the OPIC and PIF  financial commitments to AMAL will take effect. Figure 1 shows a  graphical representation of the complex relationship of AMAL’s financial  structure and U.S. involvement in the program.
In the event of a default, the United Kingdom Department for International  Development has committed £13.33 million (about $20 million, based on  the exchange rate as of July 10, 2013) in first loss coverage to AMAL’s  co-lenders; and according to OPIC, additional losses will be incurred by  all lenders on a pro-rata basis, determined by each co-lender’s principal  proportion at risk. Under the AMAL Shareholders Agreement, AMAL is  owned by five shareholders that have provided a total investment of $3.5  million and, according to OPIC, will be paid dividends based on AMAL’s  performance. The Palestinian Affordable Housing Association (SAKAN), a  Palestinian non-governmental organization, received assistance from PIF  and the United Nations Human Settlements Program (UN Habitat) to fund  its investment in AMAL. Under this agreement, SAKAN holds 50 percent  of AMAL’s shares, while two U.S. non-profit organizations—Global  Communities (formerly CHF International) and the Middle East  Investment Initiative (MEII), a non-profit U.S. entity created by the Aspen  Institute —account for 30 percent of AMAL’s ownership, with the  participating banks holding the remainder of AMAL’s shares.
section_title: OPIC and PIF Are Co-Guarantors to the Loan Guarantee Facility in the West Bank
paragraphs: In 2007, OPIC, along with PIF and MEII, launched a $160 million loan  guarantee facility (LGF), which OPIC officials told us is aimed at  encouraging commercial banks to provide loans to SMEs in the West  Bank. According to the LGF Framework Agreement, participating banks  receive assurance that OPIC and PIF will together cover 70 percent of  each loan in the event of a default.
Under the LGF Framework Agreement, OPIC has committed $110 million  to guarantee 48 percent of each eligible bank loan, through MEII, while  PIF, as co-guarantor, has committed $50 million to guarantee 22 percent  of each loan, in the event a borrower defaults on a LGF loan. According  to OPIC officials, as of February 2013, OPIC has issued guarantees on  about $85 million in LGF loans (about 77 percent of its total commitment)  to MEII, which manages the LGF and serves as a coordinating agent  between the loan guarantors and the banks. Figure 2 provides a detailed  graphical depiction of the complexities of the U.S.’s involvement with the  LGF program and a potential default scenario.
Under the Guaranty Facility Agreement, MEII serves as the coordinating  agent and, according to OPIC and MEII officials, only disburses OPIC  funds in the event of a default by a borrower of an LGF loan. According to  OPIC, as of February 2013, it has paid out about $1.2 million in default  claims for LGF loans, while its share of outstanding loans in default was  about $660,000 (48 percent of the total outstanding amount of about $1.4  million). PIF’s share of outstanding loans in default was about $300,000  (22 percent), while the banks’ share was about $410,000 (30 percent),  according to OPIC. As shown in the lower panel of figure 2, the  commercial bank that originates a loan is responsible for 30 percent of  the defaulted loan amount. The remaining 70 percent is covered by OPIC  (48 percent) and PIF (22 percent). Under the Guaranty Facility  Agreement, the participating banks are required to pay a 1.375 percent  guarantee fee, which is applied to the outstanding principal amount of all  LGF loans, with payments divided between OPIC and PIF in proportion to  their guaranty commitment. According to OPIC officials, as of March  2013, OPIC has collected about $1.4 million in guarantee fees, which has  covered the amount the agency has expended due to defaults.
According to USAID and Global Communities officials, USAID has  provided assistance to banks participating in the LGF program through a  grant that ended in 2011. They stated that USAID provided $2.1 million to  Global Communities, formerly CHF International, through a prime  awardee, for a 3-year program to provide technical assistance and  training to banks participating in LGF to enhance these banks’ lending  practices.Training program complemented the LGF program, it was an independent  program with the goal of improving the capacity of Palestinian financial  sector institutions.
section_title: USAID Has Funded Two Assistance Programs at the American International School in Gaza, a PIF-Owned Entity
paragraphs: Beginning in 2010, USAID provided assistance to the American  International School in Gaza (AISG), a private school that offers a  Western-style curriculum, as part of the agency’s educational initiatives in  the West Bank and Gaza. According to USAID and a PIF official, AISG is  legally owned by the Palestine Technology and Education Complex  (PTEC),as a “special purpose vehicle” through which PIF owns AISG. According  to the PIF official, AISG operates at a loss and PIF funds the school to  close the school’s deficit, as part of PIF’s social corporate responsibility  program. Over the past 6 academic years, PIF’s funding of AISG has  ranged from about $255,000 to about $465,000 annually.   a PIF-owned entity. PTEC was described to us by a PIF official  According to USAID, it has granted awards to three implementing  partners in support of AISG, providing an estimated $1.3 million in  assistance from 2010 to 2013. These awards funded two projects  providing need-based scholarships, technical assistance, supplies, and  capacity building initiatives at AISG. According to USAID officials,  USAID’s primary AISG assistance program, originally implemented by the  Democracy Council—a U.S. non-profit entity— was a 2 ½ -year, about $2  million award that focused on building the operational capacity,  management efficiency, and academic levels of AISG.stated that the bulk of the project funds were used for technical and in- kind assistance to AISG with no money directly transferred to the school;  however, they stated that the Democracy Council provided 21 need- based scholarships ($63,000 total) for students to attend AISG, with  funding deposited into AISG’s bank account. USAID cancelled the  Democracy Council award early because, according to USAID officials,  the Democracy Council was unable to achieve programmatic goals and  comply with the terms of the award. According to USAID officials,  because USAID funds awards incrementally, about $1 million of the  award had been funded and spent at the time of cancellation. After  cancellation, USAID continued the need-based scholarship component of  the award through the 2012-2013 academic year for 15 students ($45,000  total), implemented under the Mercy Corps’ Palestinian Community  Assistance Program. According to USAID, the scholarships will not be  continued beyond the 2012-2013 academic year and the agency does not  have any additional planned involvement at AISG.
According to USAID officials, while this award was for $22.1 million, $21.1 million was  obligated.
June 2013. Figure 3 depicts the complex structure of U.S. involvement  with AISG.
According to USAID officials, USAID provided implementing partners in  support of AISG an estimated total of about $1.3 million in assistance  from 2010 to 2013.  Table 1 shows the amount provided.
section_title: OPIC’s and USAID’s Processes for Vetting PIF or Entities and Individuals in Programs Involving PIF Rely on Various Information Sources
paragraphs: OPIC’s and USAID’s processes for vetting PIF, a PIF-owned entity, or  other entities and individuals in the AMAL, LGF, and AISG assistance  programs rely on various information sources, including information  provided by their implementing partners. Our description of the vetting  processes and information sources is based on OPIC and USAID vetting  policies and procedures; interviews with OPIC and USAID officials as well  as officials of their implementing partners; and information in each  program’s agreements.
subsections: section_title: OPIC and Other Relevant Entities’ Processes for Vetting the AMAL and LGF Programs Rely on Various Information Sources
paragraphs: According to OPIC officials, OPIC’s vetting of PIF and other non-U.S.  entities and key individuals involved in the AMAL and LGF programs is  based primarily on the agency’s Character Risk Due Diligence policies  and procedures and the applicable program’s agreements. The purpose  of Character Risk Due Diligence is to uncover any derogatory  information—including risks for terrorist financing and money  laundering—about projects in which OPIC is involved, the project  sponsors, investors, or key personnel. In performing due diligence, a  project team is to make use of information sources that may include (1)  OPIC’s Information Center databases, (2) the FBI’s Terrorist Screening  Center database and Treasury’s Financial Crimes Enforcement  Network, (3) the U.S. Embassy, any local counsel, and when required,  Outsourced Foreign Searches through the Information Center, (4) the  State Department Bureau of Intelligence and Research, and (5) Office  of Investment Policy, with respect to derogatory information regarding  social responsibility, corporate image, and environmental accountability.
The banks, AMAL, and OPIC conduct vetting to help ensure that there is  no unacceptable derogatory information regarding non-U.S. entities and  individuals participating in the AMAL program that might prevent OPIC  support, according to OPIC.
Under the AMAL agreements, when borrowers and guarantors request  loans from the Bank of Palestine and Cairo-Amman Bank, they are to  provide specific information, such as their national identity card, passport,  or similar identification to the banks, which are to conduct security and  character vetting. Using this information, the Bank of Palestine and Cairo- Amman Bank are required to check borrowers and guarantors in  accordance with specified internationally accepted Know-Your-Customer  Check standards.
Specifically, the banks must verify at the time the  mortgage loan is approved that each borrower and guarantor does not  appear on the Palestine Monetary Authority Central Bank Blacklist,  Treasury’s Office of Foreign Asset Control Specially Designated Nationals  and Blocked Persons List (OFAC’s list), and the Compendium of United  Nations Security Council Sanctions Lists. Under the AMAL mortgage  origination guidelines, the banks must certify completion of satisfactory  vetting before a mortgage application can be approved for a loan under  the AMAL program.
Under AMAL agreements, AMAL is to verify that the banks’ origination  criteria, including Know-Your-Customer Checks, were met for at least the  first 100 mortgage loans to assess compliance with the origination  guidelines. In addition, AMAL has the right to sample or audit subsequent  mortgage loans.
According to OPIC, it vetted the participants in the AMAL program— including PIF’s board of directors and senior executives, non-U.S. board  members of AMAL, non-U.S. AMAL shareholders, and key individuals of  the banks—against the OFAC list, the FBI Terrorist Screening Center  database, and other relevant databases. Also, officials of Global  Communities, a U.S. NGO contracted by AMAL for vetting assistance,  said that PIF and other co-lenders follow OPIC’s lead in determining  which loans are eligible for the program. OPIC officials said that OPIC  has conducted extensive vetting of PIF, including its board of directors  and senior executives through discussions with the U.S. Consulate  General in Jerusalem, which represents the United States in Jerusalem,  the West Bank, and the Gaza Strip. In addition, OPIC officials said that  OPIC vetted the board of directors, senior executives, and major  shareholders with greater than 5 percent ownership of the Bank of  Palestine and Cairo-Amman Bank. OPIC stated that it has vetted both the  Bank of Palestine and Cairo-Amman Bank through Treasury’s Office of  Terrorist Financing and Financial Crimes and discussed the banks with  the Palestine Monetary Authority, clearing the banks before OPIC entered  into an agreement with them. Further, OPIC stated it has vetted the non- U.S. board members of AMAL, as well as AMAL shareholders, including  the Palestinian Affordable Housing Association. Individual borrowers who  have applied for loans should have been vetted by the banks subject to  AMAL’s origination guidelines, according to OPIC.
The private banks and microfinance institutions (lenders), the  coordinating agent (MEII), and OPIC conduct vetting to help ensure that  there is no unacceptable derogatory information regarding entities and  individuals participating in the LGF program that might prevent OPIC  support, according to OPIC.
Under the LGF Guaranty Facility agreements, prior to concluding loan  agreements with SMEs, the LGF participating banks and microfinance  institutions are to check the SMEs for potential terrorist connections  against OFAC and the Compendium of United Nations Security Council  Sanctions Lists and provide the vetting results to MEII. The agreements  state that if a borrower is found to be on a screening list, the guarantee  would not be approved; and if a borrower is found to be on a screening  list after the guarantee has been allowed, the guarantee would no longer  be in effect.
As the coordinating agent for the LGF program, MEII is to vet all  borrowers and lenders. MEII contracted with Global Communities to  assist in reviewing loan applications and vetting the participants. Global  Communities officials informed us that they checked the borrowers  against the OFAC list to help ensure that borrowers were not blocked by  Treasury’s sanctions. According to OPIC, MEII took over this function  directly in June 2010.
Based on the LGF operational manual, once a lender has indicated  interest in participating in the LGF program, MEII is to confirm whether  the lender is licensed to operate in the West Bank and Gaza under the  Palestine Monetary Authority and whether it meets the minimum  requirement of a 51 percent private sector ownership of the lending  institution. MEII is to obtain a written affirmation from the authority that the  lender is in good standing with the authority, has government consent to  operate, and complies with best banking practices, corrupt practices laws,  and other standards.
MEII is to collect the necessary information from the lender to begin the  U.S. government security and character vetting process, which includes  vetting the lender as an institution, vetting all owners having more than 5  percent ownership, and vetting executive management. MEII is then to  present the lender nomination proposal to OPIC and PIF officials who,  according to OPIC, approve or reject the participation of the lenders.
According to OPIC officials and as provided in the LGF guaranty facility  agreement, MEII is to provide the vetting results on the borrowers and  lenders with other identifying information to OPIC. In addition, for all loans  less than $500,000, MEII makes the loan decision based on credit  eligibility requirements and subject to OPIC’s ultimate decision pertaining  to security and character vetting.
According to OPIC, it vets participants (lenders, borrowers, and  guarantors) under the LGF program. OPIC said it provides information  about each proposed participating bank to Treasury’s Office of Terrorist  Financing and Financial Crimes and inquires whether there is any  unacceptable derogatory information in Treasury’s databases that might  prevent OPIC from supporting a particular lender. OPIC said that it has  vetted and cleared all nine participating banks in the LGF program.
According to OPIC, for all loans, regardless of size, when an LGF  participating bank submits loan proposals to LGF management, it checks  the names and identification information on individual owners, directors,  and senior executive management of each borrower and guarantor  through the FBI’s Terrorist Screening Center database before loans are  approved. According to OPIC, from a credit standpoint, in cases where  borrowers were seeking loans greater than $500,000, or if loans are  provided to companies in Gaza, the loan application is sent to the three- person decisional committee representatives (from OPIC, MEII, and PIF).  The officials stated that the loan is approved only if the decisional  committee unanimously agrees, which means that any committee  representative can veto a loan for any reason. However, OPIC stated that  it ultimately approves each loan with regard to character vetting, and that  it has denied loans proposed by LGF management when the borrower did  not pass the Terrorist Screening Center database review.
In vetting PIF as a co-guarantor, OPIC stated that it also checked  individual directors and senior executive management of PIF through the  FBI’s Terrorist Screening Center database. OPIC officials said that it also  performed Character Risk Due Diligence through its own Information  Center, consulted with the U.S. Consulate General in Jerusalem and the  State Department, and had discussions with officials of the Palestinian  Authority and Israeli Ministry of Defense. OPIC and MEII officials said that  PIF would recuse itself if any of its subsidiaries applies for a loan, and  that PIF does not have control over the lenders.
Further, OPIC said it checks information relating to the banks and  microfinance institutions against other databases through OPIC  Information Center databases (including the Compendium of United  Nations Security Council Sanctions Lists and “Do Not Pay” list, as  applicable), as well as with the U.S. Consulate General in Jerusalem and  other sources.
Treasury officials also informed us that, based on OPIC’s request,  Treasury has vetted PIF for the two projects PIF is involved in with OPIC.  In addition, Treasury officials told us that its policy office made inquiries  regarding how PIF’s money is managed to help ensure it is not directly or  indirectly being funneled to terrorists or terrorist organizations. According  to Treasury officials, in both instances, Treasury did not find any  derogatory information on PIF or any linkage to terrorist financing.
section_title: USAID’s Process for Vetting the Technical Assistance and Training and AISG Programs Was Based on Its Mission Order 21 and Relied on Various Information Sources
paragraphs: According to USAID officials, USAID’s process for vetting key participants  of the Technical Assistance and Training program for Palestinian banks  and the AISG program was based on the U.S. Mission to the West Bank  and Gaza’s Mission Order 21. Mission Order 21 establishes USAID’s  policies and procedures to help ensure that its assistance does not  inadvertently provide support to entities or individuals associated with  terrorism, including guidance on vetting and antiterrorism certification by  USAID awardees.
USAID stated that as part of USAID’s broader program to support  Palestinian financial institutions, Global Communities, a U.S. sub- awardee, provided technical assistance and training to senior staff of  participating banks in the LGF program, for which OPIC and PIF are co- guarantors. Based on Mission Order 21, if vetting was required, Global  Communities was to obtain information on the banks and microfinance  institutions’ key individuals before they participate in training and provide  the information to USAID.  According to USAID, USAID’s Vetting Center  in Washington, D.C. would check the names of key individuals through  law enforcement and intelligence community systems accessed by  USAID’s Office of Security. In addition, USAID stated that for sub-grants  and certain in-kind assistance, such as technical assistance, USAID  submits the information to the U.S. Consulate General in Jerusalem for  additional review. According to USAID, each of the banks participating in  the Technical Assistance and Training program was subject to USAID’s  formal vetting procedures.
According to USAID, Mission Order 21 vetting procedures also apply to  vetting for the AISG program. As described previously, AMIDEAST and  Democracy Council were U.S. implementing partners through whom  USAID implemented scholarships and in-kind assistance at AISG (a non- U.S. entity).
USAID officials told us that AED/FHI 360, the prime awardee (implementing partner), is  responsible for providing USAID with the names of key individuals and organizations that  require vetting.
AMIDEAST and Democracy Council officials said that they provided  information about AISG owners and key personnel to USAID, as required  by the terms of their contracts. Specifically, AMIDEAST and Democracy  Council officials said they provided information such as name, date and  place of birth, occupation, and copies of passport or national identification  cards for AISG owners and employees to USAID for vetting of AISG.
According to USAID and based on Mission Order 21, it vetted key  individuals of PTEC, such as members of the board of directors, as well  as AISG’s management, such as the principal and vice-principal of the  school, against law enforcement and intelligence community systems  accessed by USAID’s Office of Security and through discussions with  U.S. Consulate General in Jerusalem, as applicable. USAID officials  stated that it was not necessary to vet PIF, the parent company of PTEC,  because PTEC is legally responsible for AISG. USAID stated that the  students who received scholarships and their parents were not vetted,  consistent with Mission Order 21, because the students, who were the  beneficiaries, were under the age of 16.
section_title: Agency and Third Party Comments and Our Evaluation
paragraphs: We provided a draft of this report to OPIC and USAID for their review and  comment.  OPIC and USAID provided technical comments, which we  incorporated in this report as appropriate.  We also provided portions of a  draft of this report to PIF for review.  PIF provided technical comments,  which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution of this report until 30  days from the report date.  At that time, we will send copies of this report  to interested congressional committees, the Secretary of State, the  Administrator of USAID, the President and Chief Executive Officer of the  Overseas Private Investment Corporation, the appropriate congressional  committees and other interested parties. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our  Office of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made major contributions to this  report are listed in appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to describe (1) the nature and scope of U.S.  government involvement with the Palestine Investment Fund (PIF), and  (2) OPIC’s and USAID’s processes for vetting PIF and other non-U.S.  entities and individuals participating in programs involving PIF and PIF- owned entities.
To address our first objective, we reviewed and analyzed program  agreements, annual reports, and other documents from OPIC, USAID,  PIF, and OPIC’s and USAID’s implementing partners (AMIDEAST, CHF  International/Global Communities, Democracy Council, Middle East  Investment Initiative (MEII), and Mercy Corp). To describe the Affordable  Mortgage and Loan (AMAL) and the Loan Guarantee Facility (LGF)  programs in which OPIC is involved with PIF, we reviewed various  documents, including the AMAL Common Agreement, AMAL’s Mortgage  Loan Origination and Purchase Agreement, OPIC’s press release  regarding its involvement with PIF in the AMAL program, PIF’s description  of the AMAL program, AMAL organization structure, the LGF Guaranty  Facility Agreement, OPIC’s signed LGF agreement, LGF Operational  Manual, LGF organizational structure, as well as various documents  containing responses to our questions from OPIC. To describe USAID’s  Technical Assistance and Training (TAT) and the American International  School in Gaza (AISG) programs in which USAID is involved with a PIF- owned entity, we reviewed CHF International/Global Communities LGF- TAT quarterly, annual, and final reports for 2009-2011, USAID’s West  Bank/Gaza fact sheet on the Expanded and Sustained Access to  Financial Services program (ESAF) under which USAID provides TAT,  USAID’s AISG project fact sheet, USAID’s fact sheet on the Model School  Network, Democracy Council’s brochure on AISG, the AMIDEAST Model  School Network Final Report, as well as various documents containing  responses to our questions from USAID. We interviewed USAID officials  about funds spent in support of programs at AISG and determined that  the data were sufficiently reliable for our purposes. Further, we reviewed  PIF’s 2006 to 2012 annual reports to determine the involvement of U.S.  agencies with PIF.
To address our second objective, we reviewed U.S. government-wide  antiterrorism laws, executive orders, and regulations that provide the  basis for USAID’s and OPIC’s terrorism policies and procedures for  vetting PIF and other entities and individuals participating in programs  involving PIF. (Appendix III provides the general legal framework for the  U.S. antiterrorism policy and OPIC’s and USAID’s terrorist vetting policies  and procedures.) For the AMAL and LGF programs in which OPIC is  involved, we reviewed OPIC’s Character Risk Due Diligence Policies and  Procedures, the AMAL program’s common agreement, AMAL’s Fixed  Rate Financing and Floating Rate Financing Agreements, AMAL  Shareholders Agreements, excerpts from the LGF Operational Manual,  and the LGF agreements. For the USAID TAT and AISG programs, we  reviewed CHF International/Global Communities’ LGF-TAT quarterly,  annual, and final reports for 2009 to 2011, as well as various documents  containing responses to our questions from USAID. In addition, we  reviewed USAID’s Mission Order No. 21, which establishes USAID’s  vetting policies and procedures for its programs in the West Bank and  Gaza. We also reviewed Treasury’s Licensure No. 7, which allows U.S.  entities to engage with Palestinian entities in the West Bank and Gaza.  Further, we reviewed prior GAO reports that discuss USAID’s vetting  procedures for programs in which it is involved in the West Bank and  Gaza. We described the information sources represented to us as being  used by OPIC, USAID, and other entities to vet PIF and program  recipients; however, we did not determine the extent to which OPIC and  USAID implemented or complied with their vetting policies and  procedures or assessed the effectiveness of OPIC’s and USAID’s vetting  because it is beyond the scope of this review. In addition, we did not  travel to the region to assess these programs or the agencies’ vetting  procedures.
For both objectives, we interviewed officials from OPIC, State, Treasury,  USAID, PIF, CHF International/Global Communities, Middle East  Investment Initiative, AMIDEAST, and Democracy Council and received  written responses to our questions from Mercy Corps.
We conducted this performance audit from October 2012 to July 2013 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Time Line of Key Events in the Development of the Palestine Investment Fund
paragraphs: 1993-1994: The Palestinian Authority Granted Control over Parts of the  West Bank and Gaza. The government of Israel and the Palestine  Liberation Organization signed the Oslo Peace Accords, which called for  the withdrawal of Israeli forces from parts of the West Bank and Gaza and  affirmed the Palestinian right to self-government within those areas, under  the Palestinian Authority. The Palestinian Authority was established in  May 1994 to begin assuming self-governing responsibilities in the West  Bank and Gaza Strip.  1994: PCSC, Forerunner of the Palestine Investment Fund (PIF),  Established as a Holding Company. The Palestinian Authority began  acquiring shareholdings in a number of companies across various sectors  of the economy. According to a report by the World Bank,commercial undertakings were placed under the umbrella of a holding  company, the Palestine Commercial Services Company (PCSC),  managed by the economic advisor to the Palestinian Authority’s then- president, Yasser Arafat. According to the World Bank Report, the PCSC  had full equity ownership of the Cement Company, which held an  exclusive contract for the import of cement from Israel. In addition, the  report stated that PCSC had partnerships with private investors in  numerous businesses, including hotels, casinos, cigarettes, telecoms,  real estate, flour milling, and other sectors.  1997: Inquiry Finds PCSC Profits Diverted Outside of Palestinian  Authority Budget. According to the World Bank report, following a public  inquiry, the Palestinian Legislative Council found that PCSC was not  monitored by the external audit body of the Palestinian Authority, known  as the General Audit Institute, and that PCSC generated significant  profits, which were diverted outside of the Palestinian Authority budget.  Additionally, the report stated that the finances of the PCSC were not  released to Palestinian Legislative Council members or the public.  2000: Initiative Calls for PIF Creation. The International Monetary Fund  (IMF) and President Arafat initiated the Economic Policy Framework  reform which, among other reforms, called for the creation of a Palestine  Investment Fund, although no action was taken to establish such a fund  at that time. According to a report by the IMF,Framework initiative resulted in two achievements: the consolidation of  excise tax revenue within the Minister of Finance’s office, and the auditing  of the assets of the PCSC.  2000: External Audit Values PCSC’s Asset at $345 million. An external  audit of PCSC’s 1999 operations found that the PCSC had net profits of  $77 million and assets valued at $345 million. In addition to this audit, an  IMF report found that many of PCSC’s commercial operations were  funded from diverted tax revenue. These commercial activities generated  profits which, according to the IMF report, were also being diverted away  from the Palestinian Authority budget. Because PCSC did not publish  balance sheets or annuals reports, the IMF reported that it was difficult to  determine PCSC’s profits between 1995 and 2000; however, the IMF  estimated that about $300 million in profits from PCSC were channeled  outside of the Palestinian Authority budget from 1995 to 2000.  2002 (June): Reform Plan Prepared. A new Palestinian Authority cabinet  was appointed and a ministerial committee prepared a 100-day reform  plan, which, according to an IMF report, began addressing revenue  consolidation, budget reform, and monopolies, among other reforms.  2002 (October): PIF Formally Established. According to the World Bank  report, as part of broader reforms the Palestinian Authority was  undertaking under the 100-day plan, PIF was formally established by  presidential decree, to consolidate all Palestinian Authority commercial  activities and asset ownership. According to the report, it became illegal  for the Palestinian Authority to conduct any commercial activity or hold  any assets outside of PIF.
According to a PIF official, the President appointed a board of  directors, which included the Minister of National Economy and was  chaired by the Minister of Finance.
The report noted that the board of directors ordered a full valuation  and transparency assessment of Palestinian Authority assets— previously held under PCSC—to be transferred to PIF.  2003: External Assessment Values PIF Assets at $633 million. The  Democracy Council and Standard and Poor’s published the valuation and  transparency assessment of Palestinian Authority assets, as ordered by  the board of directors.
As of January 1, 2003, PIF assets were valued at $633 million,  including 67 commercial entities and liquid assets.  2006-2007: PIF Governance Structure Changed Following Hamas  Legislative Election Victory. According to PIF and U.S. officials, following  the Hamas victory in the Palestinian legislative elections, President Abbas  initiated major changes in the governance structure of PIF. According to a  PIF official, the changes to the governance structure were initiated to  insulate PIF’s assets from Hamas interference. By Presidential decree,  both the Minister of National Economy and the Minister of Finance were  removed from the board and replaced by external appointees.  2008: President Appointed 30-member General Assembly. According to  its annual report, PIF added a 30-member general assembly to its  governance structure to provide strategic guidance to the board of  directors, with the Palestinian Authority President appointing each  assembly member to serve a 3-year term. According to a PIF official, this  change was made in accordance with existing Palestinian corporate law  and to enhance accountability, transparency, and good governance.   2011: Hamas Seized PIF Assets in Gaza. Hamas seized a number of PIF  assets in Gaza, including PIF’s branch office, a commercial building, and  a juice factory. Following the seizure of assets, PIF officials released a  statement denouncing the seizures as illegal and in violation of  Palestinian law. A PIF official estimated the value of these assets at  around $10 million, which PIF had to write off. According to this official, as  of February 2013, PIF’s only remaining asset in Gaza is vacant land,  valued at about $5 million. The official also told us that PIF has no control  over or access to the vacant land, which Hamas has publicly stated it has  seized. However, the official noted that PIF continues to keep the land on  its books because Hamas has not taken physical control of the land.   2013 (June): PIF currently governed by Board of Directors and Generally  Assembly. According to PIF’s audited financial statements and a PIF  official, PIF is governed by a board of directors and a general assembly,  both appointed by the Palestinian Authority President. The board of  directors is comprised of 11 members responsible for setting and  overseeing PIF’s goals and objectives, while the general assembly,  comprised of 30 members, provides strategic guidance to the board.  According to PIF’s publicly available annual financial statements, Ernst  and Young was PIF’s external auditor from 2006 to 2012. According to a  PIF official, internal auditing functions at PIF are performed by Deloitte, to  help ensure there are adequate internal controls and that management  complies with the law and standards governing administrative and  investment operations. This official also noted that PIF is audited by the  Palestinian State Audit and Administrative Control Bureau.
section_title: Appendix III: Legal Framework for Terrorist Vetting by USAID and OPIC
paragraphs: U.S. agencies must comply with restrictions under U.S. law when  providing funds for Palestinian assistance programs, including restrictions  reflecting U.S. policy to deny U.S. funds and other support to individuals  or organizations that engage in or otherwise support terrorist activity. This  policy is established in laws, executive orders, and regulations that  provide the basis for USAID and OPIC terrorism vetting policies and  procedures used to vet PIF and other entities and individuals associated  with PIF-related programs in which USAID and OPIC are involved.
subsections: section_title: Government-Wide Antiterrorism Laws and Executive Orders
paragraphs: Various federal laws and executive orders dealing with terrorism allow the  blocking or “freezing” of targeted assets located in the United States or  under the control of a U.S. person outside of the United States. The  International Emergency Economic Powers Act (IEEPA) (50 USC §§  1701-1706) grants the president authority in times of emergency to block  assets in the United States in which any foreign nation or national has an  interest. Executive Order 12947 (Jan. 23, 1995, amended Aug. 20, 1998),  issued pursuant to the IEEPA, declared an emergency with respect to  “grave acts of terrorism committed by foreign terrorists that disrupt the  Middle East peace process,” and blocked all property subject to U.S.  jurisdiction in which there is any interest of certain Middle East terrorist  organizations included in an annex to that executive order.
The Antiterrorism and Effective Death Penalty Act of 1996 (the  Antiterrorism Act) contains several relevant provisions. Section 302 of the  Antiterrorism Act (18 USC § 2339A) makes it a criminal offense to, among  other things, provide material support or resources to or conceal or  disguise material support or resources with knowledge that such support  or resources are to be used in the commission of a terrorist act. Section  303 of the Antiterrorism Act (18 USC § 2339B) makes it a criminal offense  to provide material support or resources to such foreign organizations and  requires financial institutions to block all funds in which foreign terrorists  organizations or their agents have an interest. Under 8 USC § 1189, the  Secretary of State is authorized to designate organizations as “foreign  terrorist organizations” for purposes of Section 303 of the Antiterrorism  Act. Section 321 of the Antiterrorism Act (18 USC § 2332d) makes it a  criminal offense for U.S. persons, except as provided in regulations  issued by the Secretary of the Treasury in consultation with the Secretary  of State and the Attorney General, to engage in financial transactions with  the governments of countries designated under section 6(j) of the Export  Administration Act of 1979 (50 USC App. § 2405) as supporting  international terrorism.
The USA Patriot Act broadened the president’s authority under the IEEPA  by allowing the blocking of assets during the pendency of an  investigation. Executive Order 13224 (Sept. 23, 2001), was issued  pursuant to the IEEPA and the USA Patriot Act. This executive order  prohibits all U.S. persons from engaging in any kind of transactions with  persons, groups, or entities, or their supporters or associates, who  commit, threaten to commit, or support terrorism and authorizes the  Department of the Treasury to block all U.S. assets of certain individuals  and entities listed in the executive order as “Specially Designated Global  Terrorists” (SDGTs) and to list additional SDGTs.
In addition, since fiscal year 2003, annual foreign operations  appropriations laws have included provisions requiring the Secretary of  State, prior to obligation of Economic Support Funds (ESF) for assistance  for the West Bank and Gaza, to take “appropriate steps to ensure that  assistance is not provided to or through any individual, private or  government entity, or education institution, that the Secretary knows or  has reason to believe advocates, plans, sponsors, engages in, or has  engaged in, terrorist activity.” Since fiscal year 2005, annual foreign  operations appropriations laws have also included provisions prohibiting  provision of any funds appropriated under those laws for purposes of  recognizing or otherwise honoring individuals who commit or have  committed terrorist acts.
section_title: Government-Wide Implementing Regulations
paragraphs: The Department of the Treasury’s Office of Foreign Asset Control (OFAC)  administers various U.S. sanctions programs, including the terrorism  sanctions programs in 31 CFR Parts 595, 596 and 597 which implement  the above-cited laws and executive orders government-wide. The  Terrorism Sanctions Regulations at 31 CFR Part 595, which implement  Executive Order 12947, were issued pursuant to the IEEPA. The  Terrorism List Governments Sanctions Regulations at 31 CFR Part 596  implement section 321 of the Antiterrorism Act. The Foreign Terrorism  Organizations Sanctions Regulations at 31 CFR Part 597 implement  sections 302 and 303 of the Antiterrorism Act and 8 USC § 1189.
A license is an authorization from OFAC to engage in a transaction that otherwise would  be prohibited. There are two types of licenses: general licenses and specific licenses. A  general license authorizes a particular type of transaction for a class of persons without  the need to apply for a license. A specific license is a written document issued by OFAC to  a particular person or entity, authorizing a particular transaction in response to a written  license application. prohibited funding for a power-sharing government of which Hamas is a  member or that results from an agreement with Hamas and over which  Hamas exercises undue influence, though under certain conditions,  assistance may be provided to such a power-sharing government. See  Consolidated Appropriations Act, 2010, Pub. L. No. 111-117, §7040(f),  123 Stat. 3034 at 3367-68, Dec. 16, 2009, and Consolidated  Appropriations Act, 2012, Pub. L. No. 112-74, §7040(f), 125 Stat. 786 at  1222, Dec. 23, 2011.
section_title: USAID Policies and Procedures
paragraphs: The USAID Mission to the West Bank and Gaza developed USAID/West  Bank and Gaza Mission Order 21 to implement E.O. 13224 and the  vetting provisions in annual foreign operations appropriations legislation.  The Mission’s antiterrorism policies and procedures, as provided in  revised Mission Order 21, state that the Mission must vet certain non- U.S. recipients of USAID funding, which involves checking recipients’  names and other identifying information against databases and other  information sources to determine if they are involved with terrorism. In  addition, the order clarifies how its antiterrorism policies and procedures  apply to USAID assistance instruments, by requiring, among other things,  that (1) all solicitations and awards for such assistance instruments  contain an antiterrorism clause that reminds award recipients that they  must comply with U.S. executive orders and laws prohibiting transactions  with terrorists and the provision of resources and support to individuals or  organizations associated with terrorism; (2) all U.S. and non-U.S.  organizations sign an antiterrorism certification before being awarded a  grant or cooperative agreement to certify that the organization does not  provide material support or resources for terrorism; and (3) all assistance  instruments contain a naming clause that states that no assistance shall  be provided under the instrument for any school, community center, or  other facility that is named after any person or group that has advocated,  sponsored, or committed acts of terrorism.
USAID has also issued various policy directives since 2002 that  implement Executive Order 13224 and applicable antiterrorism laws that  require antiterrorism certification and antiterrorism clauses with respect to  all awards. Among other things, those directives require USIAD personnel  to check OFAC’s SDGT list prior to making an award (see AAPD 02-04  , ADS 302.3.5.5 and -.3.6.12 , and PEB  2005-12 ); require all U.S. and non-U.S. organizations to  certify, before being awarded a USAID grant or cooperative agreement,  that the organization does not provide material support or resources for  terrorism, (ADS 303 Jan. 30, 2007) and AAPD 04-14 (Sept. 24, 2004);  and require inclusion of a mandatory clause in all solicitations and awards  for contracts, grants, cooperative agreements, and subcontracts and  subawards that reminds USAID contractors and implementing partners of  their legal duty to comply with applicable antiterrorism laws (AAPD 02-04  and PEB 2005-12).
section_title: OPIC Policies and Procedures
paragraphs: OPIC has developed “Security and Character Reference/Due Diligence  (CRDD) Procedures, contained in the OPIC Operations Manual, which  are intended to uncover any derogatory information—including risks for  terrorist financing and money laundering—about projects in which OPIC  is involved, the project sponsors, investors, and key personnel. According  to OPIC’s CRDD procedures, in performing CRDD for a project, a project  team must make use of necessary information sources that may include  (1) OPIC’s Information Center databases; (2) the FBI’s Terrorist  Screening Center and Treasury’s Financial Crimes Enforcement Network;  (3) relevant U.S. Embassy, any local counsel, and when required,  Outsourced Foreign Searches (OFS) Information Center; (4) State  Department Bureau of Intelligence Research; and (5) OIP, with respect to  derogatory information regarding social responsibility, corporate image,  and environmental accountability.
OPIC’s policies regarding loan guarantees and affordable mortgage  programs relating to PIF and other entities in the West Bank and Gaza  are based on the U.S. government security/ character vetting process,  according to OPIC officials.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Godwin Agbara (Assistant  Director), Barbara Shields, Martin De Alteriis, Karen Deans, Etana  Finkler, Ernie Jackson, and Nicholas Jepson made key contributions to  this report. Other contributors include Shirley Brothwell, Brian Egger, Kay  Halpern, Mathew Scire, and Steven Westley.
section_title: Related GAO Products
paragraphs: Foreign Assistance: U.S. Assistance to the West Bank and Gaza for  Fiscal Years 2010 and 2011. GAO-12-817R. Washington, D.C.:   July 13, 2012.
Foreign Assistance: U.S. Assistance to the West Bank and Gaza for  Fiscal Years 2008 and 2009. GAO-10-623R. Washington, D.C.:   May 14, 2010.
Foreign Assistance: Measures to Prevent Inadvertent Payments to  Terrorists under Palestinian Aid Programs Have Been Strengthened, but  Some Weaknesses Remain. GAO-09-622. Washington, D.C.:   May 19, 2009.
Foreign Assistance: Recent Improvements Made, but USAID Should Do  More to Help Ensure Aid Is Not Provided for Terrorist Activities in West  Bank and Gaza. GAO-06-1062R. Washington, D.C.: September 29, 2006.
Foreign Assistance: Middle East Partnership Initiative Offers Tool for  Supporting Reform, but Project Monitoring Needs Improvement.   GAO-05-711. Washington, D.C.: August 8, 2005.