United Nations: Observations on the Management and Oversight of the Oil for Food Program
Published: 2004-04-28T00:00:00

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 to 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; (3) describes the challenges facing the CPA and the Iraqi government in administering remaining contracts, and (4) discusses potential issues for further investigation.
section_title: What GAO Found
paragraphs: GAO estimates that from 1997 to 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 U.N. Secretary General, through the Office of the Iraq Program (OIP) and the Security Council, through its 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. OIP transferred responsibility for 3,059 Oil for Food contracts--with pending shipments valued at $6.2 billion--to the CPA on November 22, 2003. Poor communication and coordination on contracting documents and inadequate staffing hampered efforts by the CPA's Oil for Food coordination center in Baghdad to ensure that commodities continued to be delivered. The execution of food contracts was also affected by evolving decisions about food distribution, inadequate coordination, and security issues. Challenges face the interim Iraqi government as it balances 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 alleged corruption in the program raise concerns about the Iraqi government's ability to manage the remaining Oil for Food commodities, continue the food distribution system, and absorb $32 billion in expected donor funds for reconstruction. The CPA has taken steps to build internal controls and accountability measures in Iraq's ministries. Several investigations of the Oil for Food program will soon be under way. These efforts may wish to consider several areas for further analysis to better determine the extent of corruption in the program, the adequacy of internal controls, and the lessons learned in implementing a large-scale humanitarian aid program within a sanctions framework.

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.
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, while at the same time  preventing 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 present our findings and observations on the operation of  the Oil for Food program and its transfer to the Coalition Provisional  Authority (CPA). Specifically, 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; (3) describe the challenges the CPA and Iraqi government face in  administering remaining contracts, and (4) discuss potential issues for  further investigation.
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 CPA, the Departments of Defense and  State, and the United Nations and its World Food Program (WFP) on the  transfer of the program to the CPA and its implementation; and (3) from  the World Bank and Iraq’s 2004 budget regarding the effect of food  subsidies on the Iraqi economy. We met with U.N. officials immediately  following the transfer of the program to the CPA in November 2003 and  with numerous U.S. officials representing the CPA, the Departments of  Defense and State, and the U.S. Agency for International Development to  discuss the program’s transfer and its ongoing management by the CPA.  We also reviewed 12 external audits to determine the use of Oil for Food  funds prior to the transfer to the CPA. We assessed the reliability of the  data on the number of contracts reviewed for priority by the United  Nations, the CPA, and Iraqi ministries, and those transferred to the CPA in  November 2003 by corroborating OIP information with CPA data. We were  unable to assess the reliability of the dollar amounts of contracts reviewed  and pending shipment because we did not have access to information that  would have allowed us to confirm the dollar amounts reviewed and  transferred.  We also 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.
We conducted our review from November 2003 through April 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  governates, which were controlled by the central government; 13 percent  for the 3 northern Kurdish governates; 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 2002, 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. The Oil for Food program facilitated the operation of the  Public Distribution System run by Iraq’s Ministry of Trade. The system  distributes a monthly “food basket” that normally consists of a dozen  items to all Iraqis. About 60 percent of Iraqis rely on this basket as their  main source of food. 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.
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. 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. 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.
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 either 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 terms.
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. As provided in Security Council resolution 986 of 1995  and a memorandum of understanding between the United Nations and the  Iraqi government, OIP was responsible for monitoring the legal 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-Bakar 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  called upon OIP to improve the monitoring at the offshore terminal.
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 and social sectors, including  electricity, oil, and telecommunications.
The sanction committee’s procedures for implementing Security Council  resolution 986 stated that experts in the U.N. 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 also 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.
The sanction committee’s procedures for implementing resolution 986  state 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. However, because we do not have audit  authority at the United Nations, we do not have access to individual OIOS  audit reports. However, we were able to obtain 7 very brief summaries of  OIOS reports covering the Oil for Food program from July 1, 1996, through  June 30, 2003. These summaries identify 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 all products, including petroleum, into their  territories. Paragraph 6 of resolution 661 establishes 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 Security Council  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  took action on the allegations of surcharges in 2001 by implementing  retroactive pricing for oil contracts.
However, 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: Challenges Facing the CPA and Interim Iraqi Government in Administering Oil for Food Contracts
paragraphs: In November 2003, the United Nations transferred to the CPA  responsibility for 3,059 Oil for Food contracts totaling about $6.2 billion;  the remaining 2,199 contracts were not continued for a variety of reasons.  U.N. agencies had renegotiated most of the contracts transferred to the  CPA with the suppliers to remove illicit charges and amend delivery and  location terms. A lack of coordination and communication about contract  documentation and inadequate staffing affected the transfer process and  hampered the ability of the CPA’s Oil for Food coordination center to  ensure commodity deliveries continued without disruption. Evolving  policy and implementation decisions on the food distribution system,  coordination, and the security situation affected the execution of food  contracts. 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 alleged corruption in the Oil for Food  program raise concerns about the Iraqi government’s ability to manage the  remaining contracts and absorb donor reconstruction funds.  The CPA has  taken steps, such as appointing inspectors general, to strengthen  accountability measures in Iraq’s ministries.
subsections: section_title: Program Transferred to the CPA in November 2003
paragraphs: According to OIP, it transferred 3,059 contracts worth about $6.2 billion in  pending commodity shipments to the CPA on November 22, 2003. Prior to  the transfer, U.N. agencies had renegotiated the contracts with the  suppliers to remove “after-sales service fees”—based on information  provided by the CPA and Iraqi ministries—and to change delivery dates  and locations. These fees were either calculated separately or were part of  the unit price of the goods. At the time of the transfer, all but 251 contracts  had been renegotiated with the suppliers. The Defense Contract  Management Agency is renegotiating the remaining contracts for the CPA  to remove additional fees averaging 10 percent. The criteria for  renegotiating contracts and the amount of the reductions were based on  information from the CPA in Baghdad and the ministries that originally  negotiated the contracts.
An additional 2,199 contracts worth almost $2 billion were not continued  as a result of a review by U.N. agencies, the CPA, and the Iraqi ministries  that negotiated the contracts. For example:    The review did not recommend continuing 762 contracts, worth almost  $1.2 billion, because it determined that the commodities associated  with the contracts were no longer needed.
Another 728 contracts, worth about $750 million, had been classified as  priority contracts, but were not continued for several reasons. About  half—351 contracts—were not transferred because suppliers were  concerned about the adequacy of security within Iraq or could not  reach agreement on price reductions or specification changes. Another  180 contracts were considered fully delivered. Another 136 suppliers  had either declared bankruptcy, did not exist, or did not respond to  U.N. requests. It is unclear why the remaining 61 contracts were  removed from the priority list.
Suppliers did not want to ship the outstanding small balances for an  additional 709 contracts totaling about $28 million.
The largest portion of the $6.2 billion in Oil for Food contracts pending  shipment in November 2003—about 23 percent—was designated for food  procurement. An additional 9 percent was for food handling and transport.  The oil infrastructure, power, and agriculture sectors also benefited from  the remaining contracts. Nearly one half of the renegotiated contracts  were with suppliers in Russia, Jordan, Turkey, the United Arab Emirates,  and France.
section_title: Inadequate Communication, Coordination, and Staffing Affected the Transfer and Implementation of Contracts
paragraphs: U.N. resolution 1483 requested the Secretary General, through OIP, to  transfer to the CPA all relevant documentation on Oil for Food contracts.  However, CPA officials reported that they did not receive complete  information, including copies of all contracts. The CPA stated that it  received several compact disks in November and January that were to  contain detailed contract and delivery data but that the information was  incomplete. The CPA further stated that it received incomplete source  documents such as the original contracts, amendments, and letters of  credit needed to identify the status of commodities, prepare shipment  schedules, and contact suppliers. A CPA official stated that, as of April 26,  2004, the center had only 20 percent of the contracts it needed. In addition,  the CPA received little information on letters of credit that had expired.  Funds for the Oil for Food program are obligated by letters of credit to the  bank holding the U.N. escrow account. When these commitments are  cancelled, the remaining funds are available for transfer to the  Development Fund for Iraq. Without this information, the CPA could not  determine the disposition of Oil for Food funds and whether the proper  amounts were deposited into the Development Fund for Iraq.  The CPA  also reported that the database it received was unreliable because it  contained mathematical and currency errors in the calculations of  contract cost. According to CPA officials, the inadequate data and  documentation have made it difficult to prepare accurate reports on the  status of inbound goods and closeouts of completed contracts.
OIP officials stated that they had transferred all relevant contract  information requested by the CPA prior to the transfer date of November  21, 2003. According to a senior OIP official, OIP and U.N. agencies  continued to provide relevant information on revised contract  amendments and letters of credit within 2 weeks beyond the transfer date.  This official stated that the CPA lost some compact disks and some CPA  offices were unaware that other CPA offices had the disks. OIP stated that,  on several occasions, it clarified for the CPA the locations of the  misplaced disks and issued duplicates for lost disks. OIP further noted that  it transferred an operational database to the CPA on November 21, 2003.  According to a senior OIP official, the CPA sent one junior staff to be  trained, in 3 or 4 days, in managing a very large and complex database.  This official noted that a database of this size would inevitably contain  some errors, but the errors on this database were not of the magnitude to  significantly hamper operations.
In November 2003, the CPA established a coordination center in Baghdad  to oversee the receipt and delivery of Oil for Food commodities. The CPA  authorized 48 coalition positions, to be assisted by Iraqis from various  ministries. However, according to several U.S. and U.N. officials, the CPA  had insufficient staff to manage the program and high staff turnover. As of  mid-December 2003, the center had 19 coalition staff, including 18 staff  whose tours ended in January 2004. U.S. and WFP officials stated that the  staff assigned at the time of the transfer lacked experience in managing  and monitoring the import and distribution of goods. A former CPA official  stated that the Oil for Food program had been thrust upon an already  overburdened and understaffed CPA. A November 2003 WFP report placed  part of the blame in food shortfalls during the fall of 2003 on OIP delays in  releasing guidelines for the contract prioritization and renegotiation  process; OIP stated that this was due to the lack of complete information  from the CPA on how deliveries were to be authenticated. A September  2003 U.N. report also noted that the transfer process in the northern  governates was slowing down due to an insufficient number of CPA  counterparts to work with U.N. staff on transition issues.
The center’s capacity improved in March 2004 when its coalition staff  totaled 37. By April 2004, the coordination center had 16 coalition staff. Up  to 40 Iraqi ministry staff are currently working on Oil for Food contracts.  As of April 1, the coordination center’s seven ministry advisors have begun  working with staff at their respective ministries as the first step in moving  control of the program to the Iraqi government. However, according to a  coordination center official, as of April 26, 2004, inadequate staffing  continued to hamper the CPA’s ability to ensure that Oil for Food  deliveries continue without disruption.
section_title: Changing Policy and Implementation Decisions, Coordination, and Security Affect the Management of Food Contracts
paragraphs: According to U.S. officials and documents, CPA’s failed plans to privatize  the food distribution system and delayed negotiations with WFP to  administer the system resulted in diminished stocks of food commodities  and localized shortages. In addition, problems in transportation and  communications and general confusion after major combat operations  delayed contracts that had been prioritized.
Before the transfer of the Oil for Food program, the CPA administrator  proposed to eliminate Iraq’s food distribution system and to provide  former recipients with cash payments. He 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 CPA administrator  reversed his decision to reform the food ration system and left the  decision to a provisional Iraqi government.
In January 2004, CPA negotiated a memorandum of understanding (MOU)  with WFP and the Ministry of Trade that committed WFP to procuring a 3- month, $900 million emergency food stock by March 31, 2004, and  assuming the delivery of remaining food basket items to hub warehouses  inside Iraq through June 2004. Delays in signing the MOU were due to  disagreements about the procurement of emergency food stocks, contract  delivery 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 February and March 2004. The CPA and  WFP addressed these problems with emergency procurements from  nearby countries.
An April WFP report projected a continued supply of food items through  May 2004 except for a 12-percent shortage in milk. Only 55 percent of  required domestic wheat has been procured for July 2004 and no domestic  wheat has been procured for August. In accordance with the MOU, WFP  completed its procurement of emergency food stocks by March 31, 2004.  The Ministry of Trade assumed responsibility for food procurement on  April 1, 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. However, a State Department official  noted in April 2004 that coordination between WFP and the Ministry was  improving.
The security environment in Iraq also affected planning for the transfer  and the movement of Oil for Food goods in the fall of 2003. The transfer  occurred during a period of deteriorating security conditions and growing  violence in Iraq. 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. Most WFP staff remained in  Amman and other regional offices and continued to manage the Oil for  Food program from those locations. The August bombing of the U.N.  Baghdad office also resulted in the temporary suspension of the border  inspection process and shipments of humanitarian supplies and  equipment. A March 2004 CPA report also noted that stability of the food  supply would be affected if security conditions worsened. According to a  coordination center official in Baghdad, the worsening security situation  during April 2004 has affected the food supply due to (1) the withdrawal of  insurance by a major Arab insurance company, which is making it more  difficult to find shippers to carry goods into Iraq; (2) a shortage of truck  drivers willing to drive in Iraq; and (3) continuing and shifting route  closures and generally high-risk conditions.
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 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.
section_title: Addressing Corruption
paragraphs: The history of inadequate oversight and alleged corruption in the Oil for  Food program raises questions about the Iraqi government’s ability to  manage the import and distribution of Oil for Food commodities and the  billions in international assistance expected to flow into the country. The  CPA and Iraqi ministries must address corruption in the Oil for Food  program to help ensure that the remaining contracts are 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 announced the appointment of inspectors general for 21 of  Iraq’s 25 national ministries on March 30, 2004. 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.
CPA’s coordination center continues to provide on-the-job training for  ministry staff who will assume responsibility for Oil 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 identifying 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. Training is  taking place at WFP headquarters in Rome, Italy.
section_title: Potential 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. In addition, the CPA’s  Inspector General is planning to contract with an independent accounting  firm to assess the Oil for Food program’s internal controls and to assist the  CPA in its management of the program. The Defense Contract Audit  Agency is working with the CPA Inspector General to refine the scope of  work and will also act as CPA’s contracting representative for the review.  The Iraqi Governing Council also contracted with an international  accounting firm to investigate the extent to which individuals and entities  wrongfully benefited from the Oil for Food program and identify those  assets for recovery to the Iraqi government.
subsections: section_title: Size and Structure of the Oil for Food Program
paragraphs: The scope of the Oil for Food program was extensive. The United Nations  attempted to oversee a $67 billion program providing humanitarian and  other assistance in 24 sectors to a country with 24 million people and  borders 3,500 kilometers long.
When the program was first proposed in 1991, the Secretary General  considered having either the United Nations, an independent agent, or the  Iraqi government negotiate oil and commodity contracts. The Secretary  General concluded that the first two options were impractical and  proposed that Iraq would negotiate the contracts and U.N. staff would  work at Iraq’s oil ministry to ensure compliance. The final MOU between  the Iraqi government and the United Nations granted control of contract  negotiations to Iraq in recognition of its sovereignty.
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?
section_title: Role of Member States in Oversight
paragraphs: Under Security Council resolutions, all member states were responsible  for enforcing the sanctions and the United Nations depended on states  bordering Iraq to deter smuggling. National companies were required to  register with their respective permanent missions to the United Nations  prior to direct negotiations with the Iraqi government, but it is unclear  what criteria the missions used to assess the qualifications of their  companies.
What was the role of member states in monitoring and enforcing the  sanctions? What were the criteria used to certify national purchasers  of oil and suppliers of commodities?
section_title: Role of Neighboring States
paragraphs: Prior to the imposition of sanctions, Turkey was one of Iraq’s major  trading partners. Total trade between the two countries was valued at $3  billion per year, and Turkey received about $1 billion each year by  trucking goods to Iraq from Turkish ports. Jordan has also been a top  trading partner; in 2001, it was the fifth largest exporter to Iraq and was  the ninth largest importer of Iraqi commodities.
Jordan and Iraq had annual trade protocols during the U.N. sanctions that  allowed Iraq to sell heavily discounted oil to Jordan in exchange for up to  $300 million in Jordanian goods. The sanctions committee noted the  existence of the protocol but took no action.
From November 2000 to March 2003, Iraq exported up to 200,000 barrels  per day of oil through a Syrian pipeline in violation of UN sanctions.  It is  unclear what actions the sanctions committee or the United States took to  stop the illegal exporting of Iraqi oil to Syria.
What actions, if any, were taken to reduce smuggling of Iraqi oil? What  precluded the sanctions committee from taking action?
section_title: Assessing the Reasonableness of Contract Pricing
paragraphs: While sanctions committee procedures stated that the Secretariat was to  examine each contract for price and value, OIP officials stated that no  U.N. resolution tasked them with assessing the price reasonableness of the  contracts.  Although the sanctions committee was responsible for  approving commodity contracts, it primarily screened contracts to prevent  the purchases of items with potential military uses.
In December 1999, U.N. Security Council resolution 1284 directed the  sanctions committee to accelerate approval procedures for goods no  longer subject to sanctions committee review, including food and  equipment and supplies to support the health, agricultural, water  treatment and sanitation, housing, and electricity sectors.
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 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 governates  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.
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, Philip Farah, Zina Merritt, Tetsuo  Miyabara, Stephanie Robinson, Jonathan Rose, Richard Seldin, Audrey  Solis, Roger Stoltz, and Phillip Thomas. Lyric Clark, Jeanette Espinola,  José M. Peña, III, and Eve Weisberg also provided technical support.  .
section_title: Appendix I: 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, §358C, prohibited the import of products from Iraq into the  United States and 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 and 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 provision 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 cooperate fully with the inquiry.
section_title: Appendix II: 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).  Our estimate is on information from and discussions  with officials of EIA, Cambridge Energy Research Associates, and 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 Sadaam 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.  Department of Treasury 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  governates in central and southern Iraq (known as the “59-percent  account” because these governates received this percentage of Oil for  Food revenues). However, the former Iraqi regime negotiated the food and  medical contracts for the northern governates, 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.
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