United Nations: Observations on the Oil for Food Program and Iraq's Food Security
Published: 2004-06-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Oil for Food program was established by the United Nations and Iraq in 1996 to address concerns about the humanitarian situation after international sanctions were imposed in 1990. The program allowed the Iraqi government to use the proceeds of its oil sales to pay for food, medicine, and infrastructure maintenance. The program appears to have helped the Iraqi people. From 1996 through 2001, the average daily food intake increased from 1,300 to 2,300 calories. From 1997-2002, Iraq sold more than $67 billion of oil through the program and issued $38 billion in letters of credit to purchase commodities. However, over the years numerous allegations have surfaced concerning potential fraud and program mismanagement. GAO (1) reports on its estimates of the illegal revenue acquired by the former Iraqi regime in violation of U.N. sanctions, (2) provides observations on program administration; and (3) describes the current and future challenges in achieving food security.
section_title: What GAO Found
paragraphs: GAO estimates that from 1997- 2002, the former Iraqi regime acquired $10.1 billion in illegal revenues, including $5.7 billion in oil smuggled out of Iraq and $4.4 billion through surcharges on oil sales and illicit commissions from suppliers exporting goods to Iraq through the Oil for Food program. This estimate includes oil revenue and contract amounts for 2002, updated letters of credit from prior years, and newer estimates of illicit commissions from commodity suppliers. The United Nations, through the Office of the Iraq Program (OIP) and the Security Council's Iraq sanctions committee, were both responsible for overseeing the Oil for Food Program. However, the Security Council allowed the Iraq government, as a sovereign entity, to negotiate contracts directly with purchasers of Iraqi oil and suppliers of commodities. This structure was an important factor in allowing Iraq to levy illegal surcharges and commissions. OIP was responsible for examining Iraqi contracts for price and value, but it is unclear how it performed this function. The sanctions committee was responsible for monitoring oil smuggling, screening contracts for items that could have military uses, and approving oil and commodity contracts. The sanctions committee took action to stop illegal oil surcharges, but it is unclear what actions it took on contract commissions. U.N. external audit reports contained no findings of program fraud. Summaries of internal audit reports pointed to some concerns regarding procurement, coordination, monitoring, and oversight and concluded that OIP had generally responded to audit recommendations. Ongoing investigations of the Oil for Food program may wish to further examine how the structure of the program enabled the Iraqi government to obtain illegal revenues, the role of member states in monitoring and enforcing the sanctions, actions taken to reduce oil smuggling, and the responsibilities and procedures for assessing price reasonableness in commodity contracts. Evolving policy and implementation decisions on the food distribution system and the worsening security situation have affected the movement of food commodities within Iraq. As a result, as of June 2004, food warehouse stocks are low and Iraq has less than a month's supply of essential food items, according to U.S. and World Food Program officials. In addition to these current food security challenges, the new government will have to balance the need to reform a costly food subsidy program with the need to maintain food stability and protect the poorest populations. Also, inadequate oversight and corruption in the Oil for Food program raise concerns about the Iraqi government's ability to manage the food distribution system and absorb $32 billion in expected donor funds for reconstruction. The coalition authority has taken steps, such as appointing inspectors general, to build internal controls and accountability measures in Iraq's ministries.

section_title: Letter
paragraphs: I am pleased to be here today to discuss GAO’s review of the United  Nations (U.N.) Oil for Food program and Iraq’s food security.
In 1996, the United Nations and Iraq established the Oil for Food program  to address growing concerns about the humanitarian situation after  international sanctions were imposed in 1990. The program’s intent was to  allow the Iraqi government to use the proceeds of its oil sales to pay for  food, medicine, and infrastructure maintenance and, at the same time,  prevent the regime from obtaining goods for military purposes. From 1997  through 2002, Iraq sold more than $67 billion in oil through the program  and issued $38 billion in letters of credit to purchase commodities.
Today, we will (1) report on our estimates of the illegal revenue acquired  by the former Iraqi regime in violation of U.N. sanctions, (2) provide our  observations on the administration of the program, and (3) describe the  current and future challenges in achieving food security.
To address these objectives, we reviewed documents and statements from  (1) the United Nations on its management and oversight responsibilities  for the Oil for Food program; (2) the Coalition Provisional Authority  (CPA), the Departments of Defense and State, and the United Nations and  its World Food Program (WFP) on the current implementation of the  program and challenges in ensuring a continued food supply; and (3) from  the World Bank and Iraq’s 2004 budget regarding the effect of food  subsidies on the Iraqi economy. We also reviewed all external audits to  determine the use of Oil for Food funds prior to the transfer of the  program to the CPA in November 2003. We did not have full access to the  U.N. internal audits of the Oil for Food program, but we reviewed the  summaries of 7 annual internal audits from 1996 to 2003 and had access to  one report made publicly available in May 2004. We met with U.N. officials  following the transfer of the program to the CPA and with numerous U.S.  officials representing the CPA, the Departments of Defense and State, and  the U.S. Agency for International Development, to examine current  program management, the status of the food distribution system, and  current and future food security challenges.
We conducted our review from November 2003 through June 2004 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: In August 1990, Iraq invaded Kuwait, and the United Nations imposed  sanctions against Iraq. Security Council resolution 661 of 1990 prohibited  all nations from buying and selling Iraqi commodities, except for food and  medicine. Security Council resolution 661 also prohibited all nations from  exporting weapons or military equipment to Iraq and established a  sanctions committee to monitor compliance and progress in implementing  the sanctions. The members of the sanctions committee were members of  the Security Council. Subsequent Security Council resolutions specifically  prohibited nations from exporting to Iraq items that could be used to build  chemical, biological, or nuclear weapons. In 1991, the Security Council  offered to let Iraq sell oil under a U.N. program to meet its peoples’ basic  needs. The Iraqi government rejected the offer, and over the next 5 years,  the United Nations reported food shortages and a general deterioration in  social services.
In December 1996, the United Nations and Iraq agreed on the Oil for Food  program, which permitted Iraq to sell up to $1 billion worth of oil every 90  days to pay for food, medicine, and humanitarian goods. Subsequent U.N.  resolutions increased the amount of oil that could be sold and expanded  the humanitarian goods that could be imported. In 1999, the Security  Council removed all restrictions on the amount of oil Iraq could sell to  purchase civilian goods. The United Nations and the Security Council  monitored and screened contracts that the Iraqi government signed with  commodity suppliers and oil purchasers, and Iraq’s oil revenue was placed  in a U.N.-controlled escrow account. In May 2003, U.N. resolution 1483  requested the U.N. Secretary General to transfer the Oil for Food program  to the CPA by November 2003. (Appendix I contains a detailed chronology  of Oil for Food program and sanctions events.) The United Nations  allocated 59 percent of the oil revenue for the 15 central and southern  governorates, which were controlled by the central government; 13  percent for the 3 northern Kurdish governorates; 25 percent for a war  reparations fund for victims of the Iraq invasion of Kuwait in 1990; and 3  percent for U.N. administrative costs, including the costs of weapons  inspectors.
From 1997 to 2003, the Oil for Food program was responsible for more  than $67 billion of Iraq's oil revenue. Through a large portion of this  revenue, the United Nations provided food, medicine, and services to 24  million people and helped the Iraqi government supply goods to 24  economic sectors. Despite concerns that sanctions may have worsened the  humanitarian situation, the Oil for Food program appears to have helped  the Iraqi people. According to the United Nations, the average daily food  intake increased from around 1,275 calories per person per day in 1996 to  about 2,229 calories at the end of 2001. Malnutrition rates for children  under 5 fell by more than half. In February 2002, the United Nations  reported that the Oil for Food program had considerable success in  several sectors such as agriculture, food, health, and nutrition by arresting  the decline in living conditions and improving the nutritional status of the  average Iraqi citizen.
Since 1997, Iraq has imported almost 2.7 million metric tons of wheat  annually. During the 1980s, Australia was Iraq’s primary wheat supplier  with 38 percent of the market, and the United States was the second major  supplier at 29 percent. By 1989, Iraq was the twelfth largest market for U.S.  agricultural exports, including rice. Since 1997, however, Australia has  dominated Iraq’s Oil for Food wheat trade with a 73 percent market share,  and Vietnam has become a major supplier of rice to Iraq.  The U.S. market  share for wheat dropped to 6 percent during that time.  U.S. wheat exports  during the sanctions only occurred in 1997 and 1998.
section_title: Former Iraqi Regime Acquired an Estimated $10.1 Billion in Illicit Revenue
paragraphs: We estimate that, from 1997 through 2002, the former Iraqi regime  acquired $10.1 billion in illegal revenues—$5.7 billion through oil smuggled  out of Iraq and $4.4 billion through surcharges against oil sales and illicit  commissions from commodity suppliers. This estimate is higher than the  $6.6 billion in illegal revenues we reported in May 2002. We updated our  estimate to include (1) oil revenue and contract amounts for 2002, (2)  updated letters of credit from prior years, and (3) newer estimates of illicit  commissions from commodity suppliers. Appendix II describes our  methodology for determining illegal revenues gained by the former Iraqi  regime.
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.  Jordan maintained trade  protocols with Iraq that allowed it to purchase heavily discounted oil in  exchange for up to $300 million in Jordanian goods.  Syria received up to  200,000 barrels of Iraqi oil a day in violation of the sanctions.  Oil  smuggling also occurred through Turkey and Iran.
In addition to revenues from oil smuggling, the Iraqi government levied  surcharges against oil purchasers and commissions against commodity  suppliers participating in the Oil for Food program. According to some  Security Council members, the surcharge was up to 50 cents per barrel of  oil and the commission was 5 to 15 percent of the commodity contract.
In our 2002 report, we estimated that the Iraqi regime received a 5-percent  illicit commission on commodity contracts. However, a September 2003  Department of Defense review found that at least 48 percent of 759 Oil for  Food contracts that it reviewed were potentially overpriced by an average  of 21 percent. Food commodity contracts were the most consistently  overpriced, with potential overpricing identified in 87 percent of the  contracts by an average of 22 percent. The review also found that the use  of middlemen companies potentially increased contract prices by 20  percent or more. Defense officials found 5 contracts that included “after- sales service charges” of between 10 and 20 percent.
In addition, interviews by U.S. investigators with high-ranking Iraqi regime  officials, including the former oil and finance ministers, confirmed that the  former regime received a 10-percent commission from commodity  suppliers. According to the former oil minister, the regime instituted a  fixed 10-percent commission in early 2001 to address a prior “compliance”  problem with junior officials. These junior officials had been reporting  lower commissions than what they had negotiated with suppliers and  pocketing the difference.
section_title: United Nations and Security Council Had Responsibility for Oversight of Program, but Iraq Contracted Directly with Purchasers and Suppliers
paragraphs: Both OIP, as an office within the U.N. Secretariat, and the Security  Council’s sanctions committee were responsible for overseeing the Oil for  Food Program. However, the Iraqi government negotiated contracts  directly with purchasers of Iraqi oil and suppliers of commodities. While  OIP was to examine each contract for price and value, it is unclear how it  performed this function. The sanctions committee was responsible for  monitoring oil smuggling, screening contracts for items that could have  military uses, and approving oil and commodity contracts. The sanctions  committee responded to illegal surcharges on oil purchases, but it is  unclear what actions it took to respond to commissions on commodity  contracts.  Ongoing investigations of the Oil for Food program may wish to  consider further examining how the structure of the program enabled the  Iraqi government to obtain illegal revenues, the role of member states in  monitoring and enforcing the sanctions, actions taken to reduce oil  smuggling, and the responsibilities and procedures for assessing price  reasonableness in commodity contracts.
subsections: section_title: Iraq Negotiated Directly with Oil Purchasers and Suppliers
paragraphs: U.N. Security Council resolutions and procedures recognized the  sovereignty of Iraq and gave the Iraqi government authority to negotiate  contracts and decide on contractors. Security Council resolution 986 of  1995 authorized states to import petroleum products from Iraq, subject to  the Iraqi government’s endorsement of transactions. Resolution 986 also  stated that each export of goods would be at the request of the  government of Iraq. Security Council procedures for implementing  resolution 986 further stated that the Iraqi government or the United  Nations Inter-Agency Humanitarian Program would contract directly with  suppliers and conclude the appropriate contractual arrangements. Iraqi  control over contract negotiations was an important factor in allowing Iraq  to levy illegal surcharges and commissions.
When the United Nations first proposed the Oil for Food program in 1991,  it recognized this vulnerability. At that time, the Secretary General  proposed that the United Nations, an independent agent, or the  government of Iraq be given the responsibility to negotiate contracts with  oil purchasers and commodity suppliers. The Secretary General concluded  that it would be highly unusual or impractical for the United Nations or an  independent agent to trade Iraq’s oil or purchase commodities. He  recommended that Iraq negotiate the contracts and select the contractors.  However, he stated that the United Nations and Security Council would  have to ensure that Iraq’s contracting did not circumvent the sanctions and  was not fraudulent.  The Security Council further proposed that U.N.  agents review contracts and compliance at Iraq’s oil ministry, but Iraq  refused these conditions.
section_title: OIP Was Responsible for Key Oversight Aspects of the Program
paragraphs: OIP administered the Oil for Food program from December 1996 to  November 2003. Under Security Council resolution 986 of 1995 and a  memorandum of understanding between the United Nations and the Iraqi  government, OIP monitored the sale of Iraq’s oil, monitoring Iraq’s  purchase of commodities and the delivery of goods, and accounting for the  program’s finances. The United Nations received 3 percent of Iraq’s oil  export proceeds for its administrative and operational costs, which  included the cost of U.N. weapons inspections.
The sanctions committee’s procedures for implementing resolution 986  stated that independent U.N. inspection agents were responsible for  monitoring the quality and quantity of the oil shipped. The agents were  authorized to stop shipments if they found irregularities. OIP hired a  private firm to monitor Iraqi oil sales at exit points. However, the  monitoring measures contained weaknesses. According to U.N. reports  and a statement from the monitoring firm, the major offshore terminal at  Mina al-Basra did not have a meter to measure the oil pumped nor could  onshore storage capacity be measured. Therefore, the U.N. monitors could  not confirm the volume of oil loaded onto vessels. Also, in 2001, the oil  tanker Essex took a large quantity of unauthorized oil from the platform  when the monitors were off duty.  In December 2001, the Security Council  required OIP to improve the monitoring at the offshore terminal.  As part  of its strategy to repair Iraq’s oil infrastructure, the CPA plans to install  reliable metering at Mina al-Basra and other terminals, but no contracts  have been let.
OIP also was responsible for monitoring Iraq’s purchase of commodities  and the delivery of goods. Security Council resolution 986, paragraph  8a(ii) required Iraq to submit a plan, approved by the Secretary General, to  ensure equitable distribution of Iraq’s commodity purchases. The initial  distribution plans focused on food and medicines while subsequent plans  were expansive and covered 24 economic sectors, including electricity, oil,  and telecommunications.
The sanctions committee’s procedures for implementing Security Council  resolution 986 stated that experts in the Secretariat were to examine each  proposed Iraqi commodity contract, in particular the details of price and  value, and to determine whether the contract items were on the  distribution plan. OIP officials told the Defense Contract Audit Agency  they performed very limited, if any, pricing review. They stated that no  U.N. resolution tasked them with assessing the price reasonableness of the  contracts and no contracts were rejected solely on the basis of price.   However, OIP officials stated that, in a number of instances, they reported  to the sanctions committee that commodity prices appeared high, but the  committee did not cite pricing as a reason to place holds on the contracts.  For example, in October 2001, OIP experts reported to the sanctions  committee that the prices in a proposed contract between Iraq and the Al- Wasel and Babel Trading Company appeared high. However, the sanctions  committee reviewed the data and approved the contract.  Subsequently,  the Treasury Department identified this company as a front company for  the former regime in April 2004. The United Nations also required all  countries to freeze the assets of this company and transfer them to the  Development Fund for Iraq in accordance with Security Council resolution  1483.
The sanctions committee’s procedures for implementing resolution 986  stated that independent inspection agents will confirm the arrival of  supplies in Iraq. OIP deployed about 78 U.N. contract monitors to verify  shipments and authenticate the supplies for payment. OIP employees were  able to visually inspect 7 to 10 percent of the approved deliveries.
section_title: Audits Identified Some Operational Concerns but No Fraud
paragraphs: Security Council resolution 986 also requested the Secretary General to  establish an escrow account for the Oil for Food Program and to appoint  independent and certified public accountants to audit the account. The  Secretary General established an escrow account at BNP Paribas for the  deposit of Iraqi oil revenues and the issue of letters of credit to suppliers  with approved contracts. The U.N. Board of Audit, a body of external  public auditors, audited the account. The external audits focused on  management issues related to the Oil for Food program and the financial  condition of the Iraq account. U.N. auditors generally concluded that the  Iraq account was fairly presented in accordance with U.N. financial  standards. The reports stated that OIP was generally responsive to  external audit recommendations. The external audits determined that oil  prices were mostly in accordance with the fair market value of oil  products to be shipped and checked to confirm that pricing was properly  and consistently applied. They also determined that humanitarian and  essential services supplies procured with oil funds generally met contract  terms with some exceptions.  U.N. external audit reports contained no  findings of fraud during the program.
The U.N. Office of Internal Oversight Services (OIOS) conducted internal  audits of the Oil for Food program and reported the results to OIP’s  executive director. OIOS officials stated that they have completed 55  audits and have 4 ongoing audits of the Oil for Food program. Overall,  OIOS reported that OIP had made satisfactory progress in implementing  most of its recommendations. We did not have access to individual OIOS  audit reports except for an April 2003 report made publicly available in  May 2004 that assessed the activities of the company contracted by the  United Nations to authenticate goods coming into Iraq. It found that the  contractor did not perform all required duties and did not adequately  monitor goods coming into the northern areas of Iraq. We also reviewed  7 brief summaries of OIOS reports covering the Oil for Food program from  July 1, 1996, through June 30, 2003. These summaries identified a variety of  operational concerns involving procurement, inflated pricing and  inventory controls, coordination, monitoring, and oversight. In one case,  OIOS cited purchase prices for winter items for displaced persons in  northern Iraq that were on average 61 percent higher than local vendor  quotes obtained by OIOS. In another case, an OIOS review found that there  was only limited coordination of program planning and insufficient review  and independent assessment of project implementation activities.
section_title: The Sanctions Committee Had a Key Role in Enforcing Sanctions and Approving Contracts
paragraphs: The sanctions committee was responsible for three key elements of the Oil  for Food Program: (1) monitoring implementation of the sanctions,  (2) screening contracts to prevent the purchase of items that could have  military uses, and (3) approving Iraq’s oil and commodity contracts.
U.N. Security Council resolution 661 of 1990 directed all states to prevent  Iraq from exporting products, including petroleum, into their territories.  Paragraph 6 of resolution 661 established a sanctions committee to report  to the Security Council on states’ compliance with the sanctions and to  recommend actions regarding effective implementation. As early as June  1996, the Maritime Interception Force, a naval force of coalition partners  including the United States and Great Britain, informed the sanctions  committee that oil was being smuggled out of Iraq through Iranian  territorial waters. In December 1996, Iran acknowledged the smuggling  and reported that it had taken action. In October 1997, the sanctions  committee was again informed about smuggling through Iranian waters.  According to multiple sources, oil smuggling also occurred through  Jordan, Turkey, Syria, and the Gulf. Smuggling was a major source of illicit  revenue for the former Iraqi regime through 2002.
A primary function of the members of the sanctions committee was to  review and approve contracts for items that could be used for military  purposes. The United States conducted the most thorough review; about  60 U.S. government technical experts assessed each item in a contract to  determine its potential military application. According to U.N. Secretariat  data in 2002, the United States was responsible for about 90 percent of the  holds placed on goods to be exported to Iraq. As of April 2002, about $5.1  billion worth of goods were being held for shipment to Iraq. According to  OIP, no contracts were held solely on the basis of price.
Under Security Council resolution 986 of 1995 and its implementing  procedures, the sanctions committee was responsible for approving Iraq’s  oil contracts, particularly to ensure that the contract price was fair, and for  approving Iraq’s commodity contracts. The U.N.’s oil overseers reported in  November 2000 that the oil prices proposed by Iraq appeared low and did  not reflect the fair market value. According to a senior OIP official, the  independent oil overseers also reported in December 2000 that purchasers  of Iraqi oil had been asked to pay surcharges. In March 2001, the United  States informed the sanctions committee about allegations that Iraqi  government officials were receiving illegal surcharges on oil contracts and  illicit commissions on commodity contracts. The sanctions committee  attempted to address these allegations by implementing retroactive pricing  for oil contracts in 2001.
It is unclear what actions the sanctions committee took to respond to  illicit commissions on commodity contracts. Due to increasing concern  about the humanitarian situation in Iraq and pressure to expedite the  review process, the Security Council passed resolution 1284 in December  1999 to direct the sanctions committee to accelerate the review process.  Under fast-track procedures, the sanctions committee allowed OIP to  approve contracts for food, medical supplies, and agricultural equipment  (beginning in March 2000), water treatment and sanitation (August 2000),  housing (February 2001), and electricity supplies (May 2001).
section_title: Issues for Further Investigation
paragraphs: Several investigations into the Oil for Food program are planned or under  way. A U.N. inquiry officially began on April 21, 2004, with a Security  Council resolution supporting the inquiry and the appointment of three  high-level officials to oversee the investigation. This investigation will  examine allegations of corruption and misconduct within the United  Nations Oil for Food program and its overall management of the  humanitarian program. In addition, Iraq’s Board of Supreme Audit  contracted with the accounting firm Ernst and Young to conduct an  investigation of the program.  Several U.S. congressional committees have  also begun inquiries into U.N. management of the Oil for Food program  and U.S. oversight through its role on the sanctions committee.
These investigations of the Oil for Food program provide an opportunity to  better quantify the extent of corruption, determine the adequacy of  internal controls, and identify ways to improve future humanitarian  assistance programs conducted within an economic sanctions framework.  Based on our work, we have identified several questions that should be  addressed:
How did the size and structure of the Oil for Food program enable the  Iraqi government to obtain illegal revenues through illicit surcharges  and commissions?
What was the role of U.N. member states in monitoring and enforcing  the sanctions? What were the criteria used to certify national  purchasers of oil and suppliers of commodities?
What actions, if any, were taken to reduce the smuggling of Iraqi oil?
What precluded the sanctions committee from taking action?
Who assessed the reasonableness of prices for commodity contracts  negotiated between the Iraqi government and suppliers and what  actions were taken? How were prices for commodities assessed for  reasonableness under fast-track procedures?
Much of the information on surcharges on oil sales and illicit commissions  on commodity contracts is with the Iraqi ministries in Baghdad and  national purchasers and suppliers. We did not have access to this data to  verify the various allegations of corruption associated with these  transactions.  Subsequent investigations of the Oil for Food program  should include a statistical sampling of these transactions to more  accurately document the extent of corruption and the identities of  companies and countries that engaged in illicit transactions. This  information would provide a basis for restoring those assets to the Iraqi  government.
Subsequent evaluations and audits should also consider an analysis of the  lessons learned from the Oil for Food program and how future  humanitarian programs of this nature should be structured to ensure that  funds are spent on intended beneficiaries and projects. For example,  analysts may wish to review the codes of conduct developed for the CPA’s  Oil for Food coordination center and suppliers. In addition, U.N.  specialized agencies implemented the program in the northern  governorates while the program in central and southern Iraq was run by  the central government in Baghdad.  A comparison of these two  approaches could provide insight on the extent to which the operations  were transparent and the program delivered goods and services to the  Iraqi people.
section_title: Challenges in Addressing Iraq’s Food Security
paragraphs: Evolving policy and implementation decisions on the food distribution  system and the worsening security situation have affected the movement  of food commodities within Iraq.  As a result, warehouse stocks are low,  and Iraq has less than a month’s supply of several food items, including  staple grains, and no buffer stock.  The food distribution system created a  dependency on food subsidies that disrupted private food markets. The  government will have to decide whether to continue, reform, or eliminate  the current system. In addition, inadequate oversight and corruption in the  Oil for Food program raise concerns about the Iraqi government’s ability  to manage the food distribution system and absorb donor reconstruction  funds under existing structures.  The CPA has taken steps, such as  appointing inspectors general, to strengthen accountability measures in  Iraq’s ministries.
subsections: section_title: Inadequate Planning, Coordination, and Security Have Resulted in Tenuous Food Supplies
paragraphs: The CPA’s failed plans to privatize the food ration system and delayed  negotiations with WFP on food procurement and distribution resulted in  diminished stocks of food commodities and localized shortages in early  2004. The CPA administrator discussed eliminating Iraq’s food distribution  system and providing recipients with cash payments based on plans  submitted to the CPA in summer 2003 that asserted that the system was  expensive and depressed the agricultural sector.  As a result, the Ministry  of Trade began drawing down existing inventories of food. In December  2003, as the security environment worsened, the administrator decided not  to reform the ration system. In January 2004, the CPA negotiated a  memorandum of understanding (MOU) with WFP and the Ministry of  Trade that committed WFP to procuring a 3-month buffer food stock by  March 31, 2004, and assuming the delivery of food to hub warehouses  inside Iraq through June 2004. The MOU was delayed due to disagreements  about emergency food procurement, contract terms, and the terms of  WFP’s involvement. No additional food was procured during the  negotiations, and food stocks diminished and localized shortages  occurred in early 2004. WFP completed its buffer stock procurement by  March 31, 2004. The Ministry of Trade assumed responsibility for food  procurement on April 1, 2004, and will implement the distribution system  after June 30, 2004.
A U.S. official stated in early March 2004 that coordination between WFP  and the Ministry of Trade had been deteriorating. The Ministry had not  provided WFP with complete and timely information on monthly food  allocation plans, weekly stock reports, or information on cargo arrivals, as  the MOU required. WFP staff reported that the Ministry’s data were  subject to sudden, large, and unexplained stock adjustments, thereby  making it difficult to plan deliveries. A State Department official noted in  April 2004 that coordination between WFP and the Ministry was  improving.  However, according to early June 2004 discussions with other  U.S. officials, these coordination problems are continuing.
The security environment in Iraq has affected the movement of Oil for  Food goods since the fall of 2003. A September 2003 U.N. report found that  the evacuation of U.N. personnel from Baghdad, following the bombing of  the U.N. office in August 2003, affected the timetable and procedures for  the transfer of the Oil for Food program to the CPA and contributed to  delays in prioritizing and renegotiating contracts. The August bombing of  the U.N. office also resulted in the temporary suspension of the border  inspection process and shipments of humanitarian supplies and  equipment. A March 2004 CPA report noted that stability of the food  supply would be affected if security conditions worsened.
According to an Oil for Food coordination center official, the worsening  security situation during April 2004 affected food supplies. As of early  June, major food transport corridors from Jordan and the port of Umm  Qasr are restricted due to security concerns, and border crossings from  Jordan, Syria, and Turkey are congested. Also, fewer drivers are willing to  work in this environment, thereby reducing the movement of food from  the borders and ports to the food warehouses.  This situation is  exacerbated by congestion at the major port of Umm Qasr, which is  operating at 50 percent of its capacity due to inadequate fuel and power  supply, off-loading delays, dredging activity, inadequate storage capacity,  and security concerns.
Initial planning and management problems, combined with security and  port congestion issues limiting the movement of food, have resulted in the  drawing down of warehouse food stocks. The food supply situation was  described as tenuous by several U.S. and WFP sources in early June. At  that time, Iraq had less than a 1-month food supply for several items in the  food basket, including grains. About 360,000 metric tons of the 1.6 million  metric tons procured for the buffer stock had arrived as of June 10, but the  full amount will not be delivered until September, according to a WFP  official.  Moreover, these commodities are not being reserved as a buffer  stock, but are immediately used as operating stocks.
U.S. officials are concerned that, as the Iraqi government assumes full  responsibility for food distribution on July 1, 2004, it will find it difficult to  manage the food distribution system given low food supplies. According to  U.S. and WFP officials, the Ministry of Trade implemented the food  distribution system during the Oil for Food program under more favorable  conditions.  For example, the Ministry was able to maintain at least a 6- month food inventory and operate in a more secure environment.
section_title: Food Distribution System Essential for Current Food Security But May Not Be Sustainable
paragraphs: The Oil for Food program facilitated the operation of the Public  Distribution System run by Iraq’s Ministry of Trade. Under this system,  each Iraqi is eligible to receive a monthly “food basket” that normally  consists of a dozen items.
After the CPA transfers responsibility for the food distribution system to  the Iraqi provisional government in July 2004, the government will have to  decide whether to continue, reform, or eliminate the current system.  Documents from the Ministries of Finance and Planning indicate that the  annual cost of maintaining the system is as high as $5 billion, or about 25  percent of total government expenditures. In 2005 and 2006, expenditures  for food will be almost as much as all expenditures for capital projects.  According to a September 2003 joint U.N. and World Bank needs  assessment of Iraq, the food subsidy, given out as a monthly ration to the  entire population, staved off mass starvation during the time of the  sanctions, but disrupted the market for food grains produced locally. The  agricultural sector had little incentive to produce crops in the absence of a  promising market.
However, the Iraqi government may find it politically difficult to scale back  the food distribution system with an estimated 60 percent of the  population relying on monthly rations as their primary source of nutrition.  WFP is completing a vulnerability assessment that Iraq could use to make  future decisions on food security programs and better target food items to  those most in need.  WFP’s preliminary assessment results found that 10  percent of the population was extremely poor and needed food aid in  addition to the Public Distribution System.  WFP is also developing an  emergency operation plan to meet the needs of vulnerable populations.  In  addition, in April 2004, a USAID contractor submitted a strategy for a  short-term plan to stabilize the agricultural sector by providing agricultural  supplies, re-establishing domestic wheat markets, rehabilitating irrigation  systems, and rehabilitating Ministry of Agriculture facilities.  The strategy  also includes a medium-term plan to create appropriate agricultural  policies, provide capacity building for market-led agriculture, and  strengthen the agricultural sector through national programs.
section_title: Addressing Corruption
paragraphs: In the absence of significant reforms, the history of inadequate oversight  and corruption in the Oil for Food program raises questions about the Iraqi  government’s ability to manage the import and distribution of food  commodities and the billions in international assistance expected to flow  into the country. The CPA and Iraqi ministries must address corruption to  help ensure that the food distribution system is managed with transparent  and accountable controls. Building these internal control and  accountability measures into the operations of Iraqi ministries will also  help safeguard the $18.4 billion in fiscal year 2004 U.S. reconstruction  funds and $13.8 billion pledged by other countries.
To address these concerns and oversee government operations, the CPA  administrator appointed inspectors general for Iraq’s 26 national  ministries. At the same time, the CPA announced the establishment of two  independent agencies to work with the inspectors general—the  Commission on Public Integrity and a Board of Supreme Audit. Finally, the  United States will spend about $1.63 billion on governance-related  activities in Iraq, which will include building an effective financial  management system in Iraq’s ministries.
The CPA’s coordination center continues to provide on-the-job training for  ministry staff who will assume responsibility for food contracts after July  2004. Coalition personnel have provided Iraqi staff with guidance on  working with suppliers in a fair and open manner and determining when  changes to letters of credit are appropriate. In addition, according to  center staff, coalition and Iraqi staff signed a code of conduct, which  outlined proper job behavior. Among other provisions, the code of  conduct prohibited kickbacks and secret commissions from suppliers. The  center also developed a code of conduct for suppliers. In addition, the  center has begun implementing the steps needed for the transition of full  authority to the Iraqi ministries. These steps include transferring contract- related documents, contacting suppliers, and providing authority to amend  contracts. In addition, the January 2004 MOU agreement commits WFP to  training ministry staff in procurement and transport functions through  June 30, 2004. Ten ministry staff are being trained at WFP headquarters in  Rome, Italy.
Mr. Chairman and Members of the Committee, this concludes my prepared  statement. I 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. Other key contributors to this statement were Pamela  Briggs, Mark Connelly, Lynn Cothern, Zina Merritt, Tetsuo Miyabara,  Valerie Nowak, Stephanie Robinson, Jonathan Rose, Richard Seldin,  Audrey Solis, Roger Stoltz, and Phillip Thomas.
section_title: Appendix I: Scope and Methodology
paragraphs: We used the following methodology to estimate the former Iraqi  regime’s illicit revenues from oil smuggling, surcharges on oil, and  commissions from commodity contracts from 1997 through 2002:
To estimate the amount of oil the Iraqi regime smuggled, we used  Energy Information Administration (EIA) estimates of Iraqi oil  production and subtracted oil sold under the Oil for Food program and  domestic consumption. The remaining oil was smuggled through  Turkey, the Persian Gulf, Jordan, and Syria (oil smuggling to Syria  began late 2000).  We estimated the amount of oil to each destination  based on information from and discussions with officials of EIA,  Cambridge Energy Research Associates, the Middle East Economic  Survey, and the private consulting firm Petroleum Finance.
We used the price of oil sold to estimate the proceeds from smuggled  oil.  We discounted the price by 9 percent for the difference in quality.  We discounted this price by 67 percent for smuggling to Jordan and by  33 percent for smuggling through Turkey, the Persian Gulf, and Syria.  According to oil industry experts, this is representative of the prices  paid for smuggled oil.
To estimate the amount Iraq earned from surcharges on oil, we  multiplied the barrels of oil sold under the Oil for Food program from  1997 through 2002 by 25 cents per barrel. According to Security  Council members, the surcharge varied, but Iraq tried to get as much  as 50 cents per barrel. Industry experts also stated the surcharge  varied.
To estimate the commission from commodities, we multiplied Iraq’s  letters of credit for commodity purchases by 5 percent for 1997  through 1998 and 10 percent for 1999 through 2002.  According to  Security Council members, the commission varied from 5 percent to 10  percent.  This percentage was also confirmed in interviews conducted  by U.S. officials with former Iraqi regime ministers of oil, finance, and  trade and with Saddam Hussein’s presidential advisors.
GAO did not obtain source documents and records from the former regime  about its smuggling, surcharges, and commissions.  Our estimate of illicit  revenues is therefore not a precise accounting number. Areas of  uncertainty in our estimate include:
GAO’s estimate of the revenue from smuggled oil is less than the  estimates of U.S. intelligence agencies.  We used estimates of Iraqi oil  production and domestic consumption for our calculations.  U.S.  intelligence agencies used other methods to estimate smuggling.
GAO’s estimate of revenue from oil surcharges is based on a surcharge  of 25 cents per barrel from 1997 through 2002. However, the average  surcharge could be lower. U.N. Security Council members and oil  industry sources do not know when the surcharge began or ended or  the precise amount of the surcharge.  One oil industry expert stated  that the surcharge was imposed at the beginning of the program but  that the amount varied. Security Council members and the U.S.  Treasury Department reported that surcharges ranged from 10 cents to  50 cents per barrel.  As a test of reasonableness, GAO compared the  price paid for oil under the Oil for Food program with a proxy oil price  for the period 1997 through 2002.  We found that for the entire period,  the price of Iraqi oil was considerably below the proxy price. Oil  purchasers would have to pay below market price to have a margin to  pay the surcharge.
GAO’s estimate of the commission on commodities could be understated.   We calculated commissions based on the commodity contracts for the 15  governorates in central and southern Iraq (known as the “59-percent  account” because these governorates received this percentage of Oil for  Food revenues).  We excluded contracts for the three northern  governorates (known as the “13-percent account”). However, the former  Iraqi regime negotiated the food and medical contracts for the northern  governorates, and the Defense Contract Audit Agency found that some of  these contracts were potentially overpriced.  The Defense Contract Audit  Agency also found extra fees of between 10 and 20 percent on some  contracts.
section_title: Appendix II: Timeline of Major Events Related to Sanctions Against Iraq and the Administration of the Oil for Food Program
paragraphs: Iraqi forces invaded Kuwait. Resolution 660 condemned the invasion and  demands immediate withdrawal from Kuwait.
Imposed economic sanctions against the Republic of Iraq. The resolution called  for member states to prevent all commodity imports from Iraq and exports to  Iraq, with the exception of supplies intended strictly for medical purposes and, in  humanitarian circumstances, foodstuffs.
President Bush ordered the deployment of thousands of U.S. forces to Saudi  Arabia.
Public Law 101-513, § 586C, prohibited the import of products from Iraq into the  United States and the export of U.S. products to Iraq.
Iraq War Powers Resolution authorized the president to use “all necessary  means” to compel Iraq to withdraw military forces from Kuwait.
Operation Desert Storm was launched: coalition operation was targeted to force  Iraq to withdraw from Kuwait.
Iraq announced acceptance of all relevant U.N. Security Council resolutions.
U.N. Security Council  Resolution 687  (Cease-Fire Resolution)
Mandated that Iraq must respect the sovereignty of Kuwait and declare and  destroy all ballistic missiles with a range of more than 150 kilometers as well as  all weapons of mass destruction and production facilities.
The U.N. Special Commission (UNSCOM) was charged with monitoring Iraqi  disarmament as mandated by U.N. resolutions and to assist the International  Atomic Energy Agency in nuclear monitoring efforts.
Proposed the creation of an Oil for Food program and authorized an escrow  account to be established by the Secretary General. Iraq rejected the terms of  this resolution.
Second attempt to create an Oil for Food program.  Iraq rejected the terms of  this resolution.
Authorized transferring money produced by any Iraqi oil transaction on or after  August 6, 1990, which had been deposited into the escrow account, to the  states or accounts concerned as long as the oil exports took place or until  sanctions were lifted.
Allowed Iraq to sell $1 billion worth of oil every 90 days. Proceeds were to be  used to procure foodstuffs, medicine, and material and supplies for essential  civilian needs. Resolution 986 was supplemented by several U.N. resolutions  over the next 7 years that extended the Oil for Food program for different  periods of time and increased the amount of exported oil and imported  humanitarian goods.
Established the export and import monitoring system for Iraq.
Signed a memorandum of understanding allowing Iraq’s export of oil to pay for  food, medicine, and essential civilian supplies.
Based on information provided by the Multinational Interception Force (MIF),  communicated concerns about alleged smuggling of Iraqi petroleum products  through Iranian territorial waters in violation of resolution 661 to the Security  Council sanctions committee.
Committee members asked the United States for more factual information about  smuggling allegations, including the final destination and the nationality of the  vessels involved.
Provided briefing on the Iraqi oil smuggling allegations to the sanctions  committee.
Acknowledged that some vessels carrying illegal goods and oil to and from Iraq  had been using the Iranian flag and territorial waters without authorization and  that Iranian authorities had confiscated forged documents and manifests.  Representative agreed to provide the results of the investigations to the  sanctions committee once they were available.
Phase I of the Oil for Food program began.
Extended the term of resolution 986 another 180 days (phase II).
Authorized special provision to allow Iraq to sell petroleum in a more favorable  time frame.
Brought the issue of Iraqi smuggling petroleum products through Iranian  territorial waters to the attention of the U.N. Security Council sanctions  committee.
Coordinator of the Multinational  Interception Force (MIF)
Reported to the U.N. Security Council sanctions committee that since February  1997 there had been a dramatic increase in the number of ships smuggling  petroleum from Iraq inside Iranian territorial waters.
Extended the Oil for Food program another 180 days (phase III).
Raised Iraq’s export ceiling of oil to about $5.3 billion per 6-month phase (phase  IV).
Permitted Iraq to export additional oil in the 90 days from March 5, 1998, to  compensate for delayed resumption of oil production and reduced oil price.
Authorized Iraq to buy $300 million worth of oil spare parts to reach the export  ceiling of about $5.3 billion.
Public Law 105-235, a joint resolution finding Iraq in unacceptable and material  breach of its international obligations.
Oct. 31, 1998  U.S. legislation: Iraq Liberation Act  Public Law 105-338, § 4, authorized the president to provide assistance to Iraqi  democratic opposition organizations.
Iraq announced it would terminate all forms of interaction with UNSCOM and  that it would halt all UNSCOM activity inside Iraq.
Renewed the Oil for Food program for 6 months beyond November 26 at the  higher levels established by resolution 1153. The resolution included additional  oil spare parts (phase V).
Following Iraq’s recurrent blocking of U.N. weapons inspectors, President  Clinton ordered 4 days of air strikes against military and security targets in Iraq  that contribute to Iraq’s ability to produce, store, and maintain weapons of mass  destruction and potential delivery systems.
President Clinton provided the status of efforts to obtain Iraq’s compliance with  U.N. Security Council resolutions. He discussed the MIF report of oil smuggling  out of Iraq and smuggling of other prohibited items into Iraq.
Renewed the Oil for Food program another 6 months (phase VI).
Permitted Iraq to export an additional amount of $3.04 billion of oil to make up  for revenue deficits in phases IV and V.
Extended phase VI of the Oil for Food program for 2 weeks until December 4,  1999.
Extended phase VI of the Oil for Food program for 1 week until December 11,  1999.
Renewed the Oil for Food program another 6 months (phase VII).
Abolished Iraq’s export ceiling to purchase civilian goods. Eased restrictions on  the flow of civilian goods to Iraq and streamlined the approval process for some  oil industry spare parts. Also established the United Nations Monitoring,  Verification and Inspection Commission (UNMOVIC).
Increased oil spare parts allocation from $300 million to $600 million under  phases VI and VII.
Renewed the Oil for Food program another 180 days until December 5, 2000  (phase VIII).
Extended the Oil for Food program another 180 days (phase IX).
Ambassador Cunningham acknowledged Iraq’s illegal re-export of humanitarian  supplies, oil smuggling, establishment of front companies, and payment of  kickbacks to manipulate and gain from Oil for Food contracts. Also  acknowledged that the United States had put holds on hundreds of Oil for Food  contracts that posed dual-use concerns.
Ambassador Cunningham addressed questions regarding allegations of  surcharges on oil and smuggling. Acknowledged that oil industry  representatives and other Security Council members provided the United States  anecdotal information about Iraqi surcharges on oil sales. Also acknowledged  companies claiming they were asked to pay commissions on contracts.
Extended the terms of resolution 1330 (phase IX) another 30 days.
Renewed the Oil for Food program an additional 150 days until November 30,  2001 (phase X).
The resolution stipulated that a new Goods Review List would be adopted and  that relevant procedures would be subject to refinement. Renewed the Oil for  Food program another 180 days (phase XI).
UNMOVIC reviewed export contracts to ensure that they contain no items on a  designated list of dual-use items known as the Goods Review List. The  resolution also extended the program another 180 days (phase XII).
MIF reported that there had been a significant reduction in illegal oil exports  from Iraq by sea over the past year but noted oil smuggling was continuing.
Extended phase XII of the Oil for Food program another 9 days.
Renewed the Oil for Food program another 180 days until June 3, 2003 (phase  XIII).
Approved changes to the list of goods subject to review by the sanctions  committee.
Chairman reported on a number of alleged sanctions violations noted by letters  from several countries and the media from February to November 2002.   Alleged incidents involved Syria, India, Liberia, Jordan, Belarus, Switzerland,  Lebanon, Ukraine, and the United Arab Emirates.
Operation Iraqi Freedom is launched. Coalition operation led by the United  States initiated hostilities in Iraq.
Adjusted the Oil for Food program and gave the Secretary General authority for  45 days to facilitate the delivery and receipt of goods contracted by the  Government of Iraq for the humanitarian needs of its people.
Public Law 108-11, § 1503, authorized the President to suspend the application  of any provision of the Iraq Sanctions Act of 1990.
Extended provisions of resolution 1472 until June 3, 2003.
End of major combat operations and beginning of post-war rebuilding efforts.
Lifted civilian sanctions on Iraq and provided for the end of the Oil for Food  program within 6 months, transferring responsibility for the administration of any  remaining program activities to the Coalition Provisional Authority (CPA).
Transferred administration of the Oil for Food program to the CPA.
Responded to allegations of fraud by U.N. officials that were involved in the  administration of the Oil for Food program.
Proposed that a special investigation be conducted by an independent panel.
Supported the appointment of the independent high-level inquiry and called  upon the CPA, Iraq, and member states to cooperated fully with the inquiry.
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