United Nations: Observations on the Oil for Food Program
Published: 2004-04-07T00:00:00

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. GAO (1) reports on its estimates of the revenue diverted from the program, (2) provides preliminary observations on the program's administration, (3) describes some challenges in its transfer to the CPA, and (4) discusses the challenges Iraq faces as it assumes program responsibility.
section_title: What GAO Found
paragraphs: GAO estimates that from 1997-2002, the former Iraqi regime attained $10.1 billion in illegal revenues from the Oil for Food program, 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. 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. Both the U.N. Secretary General, through the Office of the Iraq Program (OIP) and the Security Council, through its sanctions committee for Iraq, were responsible for overseeing the Oil for Food Program. However, the Iraq government negotiated contracts directly with purchasers of Iraqi oil and suppliers of commodities, which may have been one important factor that allowed Iraq to levy illegal surcharges and commissions. While OIP was responsible for examining Iraqi contracts 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. While the sanctions committee responded to illegal surcharges on oil, it is unclear what actions it took to respond to illicit commissions on commodity contracts. OIP transferred 3,059 Oil for Food contracts--with pending shipments valued at $6.2 billion--to the CPA on November 22, 2003. However, the CPA stated that it has not received all the original contracts, amendments, and letters of credit it needs to manage the program. These problems, along with inadequate CPA staffing during the transfer, hampered the efforts of CPA's Oil for Food coordination center in Baghdad to ensure continued delivery of commodities. Poor planning, coordination, and the security environment in Iraq continue to affect the execution of these contracts. Inadequate oversight and corruption in the Oil for Food program raise concerns about the Iraqi government's ability to import and distribute Oil for Food commodities and manage at least $32 billion in expected donor reconstruction funds. The CPA has taken steps, such as appointing inspectors general, to build internal control and accountability measures at Iraq's ministries. The CPA and the World Food Program (WFP) are also training ministry staff to help them assume responsibility for Oil for Food contracts in July 2004. The new government will have to balance the reform of its costly food subsidy program with the need to maintain food stability and protect the poorest populations.

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 allowed the  Iraqi government to use the proceeds of its oil sales to pay for food,  medicine, and infrastructure maintenance. 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  revenue diverted from the program by the former Iraqi regime; (2) provide  some preliminary observations on the administration of the program; (3)  describe the challenges the CPA faced when it assumed responsibility for  the program; and (4) discuss the challenges Iraq faces as it assumes  responsibility for the program.
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 ongoing management by the CPA. Our  review is ongoing because we have not yet received all the CPA and Iraqi  ministry documentation that we have requested from the CPA and the  Department of State. We have also requested certain U.N. documents,  including internal audits, to determine the use of Oil for Food funds prior  to the transfer to the CPA and the current disposition of funds. 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 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 the information that would have allowed us to confirm the  dollar amounts reviewed and transferred.
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.
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. 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.
The Public Distribution System run by Iraq’s Ministry of Trade is the food  portion of the Oil for Food program. 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.
section_title: Former Iraqi Regime Diverted an Estimated $10.1 Billion from the Oil for Food Program
paragraphs: We estimate that, from 1997 through 2002, the former Iraqi regime  acquired $10.1 billion in illegal revenues related to the Oil for Food  program—$5.7 billion through oil smuggling and $4.4 billion through  surcharges against oil sales and illicit commissions from commodity  suppliers. This estimate is higher than the $6.6 billion 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.
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 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 Iraq regime officials, including the  former oil and finance ministers, confirmed that the former regime  received a 10-percent commission from commodity suppliers.
section_title: United Nations and Security Council Had Responsibility for Oversight of Program, but Iraq Contracted Directly with Purchasers and Suppliers
paragraphs: Both OIP and the 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, 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 may have been one important factor in  allowing Iraq to levy illegal surcharges and commissions.  Appendix I  contains a chronology of major events related to sanctions against Iraq  and the administration of the Oil for Food program.
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 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 U.N. independent inspection agents were responsible for  monitoring the quality and quantity of oil being shipped and were  authorized to stop shipments if they found irregularities. To do this, OIP  employed 14 contract workers to monitor Iraqi oil sales at 3 exit points in  Iraq. However, the Iraqi government bypassed the official exit points by  smuggling oil through an illegal Syrian pipeline and by trucks through  Jordan and Turkey. According to OIP, member states were responsible for  ensuring that their nationals and corporations complied with the  sanctions.
OIP was also 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 sanction 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. It is unclear whether the office performed this function.  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.
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.
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. In this  regard, the Secretary General established an escrow account at BNP  Paribas into which Iraqi oil revenues were deposited and letters of credit  were issued to suppliers having approved contracts. The U.N. Board of  Audit, a body of external public auditors, audited the account. According  to OIP, there were also numerous internal audits of the program. We are  trying to obtain these audits.
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 directs all states to prevent  Iraq from exporting petroleum products 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 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. It is unclear what recommended actions the  sanctions committee made to the Security Council to address the  continued smuggling.
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. For example, 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 of worth of goods were being held for shipment to  Iraq.
Under Security Council resolution 986 of 1995, paragraphs 1 and 8, the  sanctions committee was responsible for approving Iraq’s oil contracts,  particularly to ensure that the contract price is fair, and for approving  most of Iraq’s commodity contracts. In March 2001, the United States  informed the Security Council about allegations that Iraqi government  officials were receiving illegal surcharges on oil contracts and illicit  commissions on commodity contracts. According to OIP officials, the  Security Council 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. At that time, there was increasing  concern about the humanitarian situation in Iraq and pressure on the  United States to expedite its review process.
section_title: CPA’s Administration of the Oil for Food Program
paragraphs: In November 2003, the United Nations transferred to the CPA  responsibility for 3,059 Oil for Food contracts totaling about $6.2 billion  and decided not to transfer a remaining 2,199 contracts for a variety of  reasons. U.N. agencies had renegotiated most of the contracts turned over  to the CPA with the suppliers to remove illicit charges and amend delivery  and location terms. However, the information the United Nations supplied  to the CPA on the renegotiated contracts contained database errors and  did not include all contracts, amendments, and letters of credit associated  with the 3,000 contracts. These data problems, coupled with inadequate  staffing at the CPA, hampered the ability of the CPA’s Oil for Food  coordination center to ensure that suppliers complied with commodity  deliveries. In addition, poor planning and coordination are affecting the  execution of food contracts.
subsections: section_title: Program Transferred to the CPA in November 2003
paragraphs: On November 22, 2003, OIP transferred 3,059 contracts worth about $6.2  billion in pending commodity shipments to the CPA, according to OIP.  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 transferred  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 transferred to the CPA 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; the OIP document lists  them as “other.”
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 Information and Staffing Affected Transfer and Implementation of Contracts
paragraphs: According to CPA officials and documents, the incomplete and unreliable  contract information the CPA received from the United Nations has  hindered CPA’s ability to execute and accurately report on the remaining  contracts. U.N. resolution 1483 requested the Secretary General, through  OIP, to transfer to the CPA all relevant documentation on Oil for Food  contracts. When we met with OIP officials on November 24, 2003, they  stated that they had transferred all contract information to the CPA.
CPA officials and documents report that the CPA has not received  complete information, including copies of all contracts. The CPA received  several compact disks in November and January that were to contain  detailed contract and delivery data, but the information was incomplete.  The CPA received few 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. In  addition, the CPA received little information on letters of credit that had  expired or were cancelled. 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 cannot determine the disposition of Oil for Food funds and  whether the proper amounts were deposited into the Development Fund  for Iraq.
In addition, the CPA received an OIP contract database but found it  unreliable. For example, CPA staff found mathematical and currency  errors in the calculation of contract cost. The inadequate data and  documentation have made it difficult for CPA to prepare accurate reports  on the status of inbound goods and closeouts of completed contracts.
According to a Department of Defense contracting official, some  contractors have not received payment for goods delivered in Iraq because  the CPA had no record of their contracts.
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. As a result, 251 contracts had not  been renegotiated prior to the time of the transfer and the CPA asked the  Defense Contract Management Agency to continue the renegotiation  process. 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. A September 2003  U.N. report also noted that the transfer process in the northern governates  was slowing 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.
section_title: Inadequate Planning, 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. 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, and  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 the 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 emergency food stock by March 31, 2004 and providing technical  support to the CPA and Ministry of Trade. 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. Under the terms of MOU, WFP’s  commitment to procuring food stock ended March 31, 2004. The Ministry  of Trade assumed responsibility for food procurement on April 1, 2004.
According to a U.S. official, coordination between WFP and the Ministry of  Trade has been deteriorating. The Ministry has 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 are subject to sudden, large, and  unexplained stock adjustments, thereby making it difficult to plan  deliveries.
The security environment in Iraq has also affected planning for the  transfer and movement of Oil for Food goods in fall 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 affected the timetable and procedures for  the transfer of the Oil for Food program to the CPA and contributed to  delays in the contract prioritization and renegotiation processes. 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 headquarters 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.
section_title: CPA and Transitional Government Face Challenges in Preventing Corruption and Reforming the Food Distribution System
paragraphs: 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 Oil for Food commodities and the billions in  international assistance expected to flow into the country. In addition, 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.
subsections: section_title: Addressing Corruption
paragraphs: 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 at least $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 a  transparent 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 the procurement and transport functions  currently conducted by WFP. Training is taking place at WFP headquarters  in Rome, Italy.
section_title: Reforming the Food Distribution System
paragraphs: 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 Trade and Finance 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 at the same time it 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.
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, Lyric Clark, Lynn Cothern, Jeanette Espinola, Zina Merritt, Tetsuo  Miyabara, José M. Peña, III, Stephanie Robinson, Jonathan Rose, Richard  Seldin, Audrey Solis, and Phillip Thomas.
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  demanded 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 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.
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