Afghanistan: Actions Needed to Improve Accountability of U.S. Assistance to Afghanistan Government
Published: 2011-07-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Agency for International Development (USAID) and the Department of Defense (DOD) award direct assistance to Afghanistan, using bilateral agreements and multilateral trust funds that provide funds through the Afghan national budget. GAO assessed (1) the extent to which the United States, through USAID and DOD, has increased direct assistance, (2) USAID and DOD steps to ensure accountability for bilateral direct assistance, and (3) USAID and DOD steps to ensure accountability for direct assistance via multilateral trust funds for Afghanistan. GAO reviewed USAID, DOD, and multilateral documents and met with U.S. officials and staffs of multilateral trust funds in Washington, D.C., and Afghanistan.
section_title: What GAO Found
paragraphs: The United States more than tripled its awards of direct assistance to Afghanistan in fiscal year 2010 compared with fiscal year 2009. USAID awards of direct assistance grew from over $470 million in fiscal year 2009 to over $1.4 billion in fiscal year 2010. USAID awarded $1.3 billion to the World Bank-administered Afghanistan Reconstruction Trust Fund (ARTF) in fiscal year 2010, of which the bank has received $265 million as of July 2011. DOD direct assistance to two ministries grew from about $195 million in fiscal year 2009 to about $576 million in fiscal year 2010, including contributions to fund police salaries through the United Nations Development Program-administered (UNDP) Law and Order Trust Fund for Afghanistan (LOTFA). USAID and DOD have taken steps to help ensure the accountability of their bilateral direct assistance to Afghan ministries, but USAID has not required risk assessments in all cases before awarding these funds. For example, USAID did not complete preaward risk assessments in two of the eight cases GAO identified. Although current USAID policy does not require preaward risk assessments in all cases, these two awards were made after the USAID Administrator's July 2010 commitment to Congress that USAID would not proceed with direct assistance to an Afghan public institution before assessing its capabilities. In these two cases, USAID awarded $46 million to institutions whose financial management capacity were later assessed as "high risk." USAID has established various financial and other controls in its bilateral direct assistance agreements, such as requiring separate bank accounts and audits of the funds. USAID has generally complied with these controls, but GAO identified instances in which it did not. For example, in only 3 of 19 cases did USAID document that it had approved one ministry's prefinancing contract documents. DOD personnel in Afghanistan assess the risk of providing funds to two security ministries through quarterly reviews of each ministry's capacity. DOD officials also review records of ministry expenditures to assess whether ministries have used funds as intended. DOD established formal risk assessment procedures in June 2011, following GAO discussions with DOD about initial findings. USAID and DOD generally rely on the World Bank and UNDP to ensure accountability over U.S. direct assistance provided multilaterally through ARTF and LOTFA, but USAID has not consistently complied with its risk assessment policies in awarding funds to ARTF. During GAO's review, DOD established procedures in June 2011 requiring that it assess risks before contributing funds to LOTFA. The World Bank and UNDP use ARTF and LOTFA monitoring agents to help ensure that ministries use contributions as intended. However, security conditions and weaknesses in Afghan ministries pose challenges to their oversight. For example, the ARTF monitoring agent recently resigned due to security concerns. The World Bank is now seeking a new monitoring agent and does not anticipate a gap in monitoring. In addition, weaknesses in the Ministry of Interior's systems for paying wages to police challenge UNDP efforts to ensure that the ministry is using LOTFA funds as intended.
section_title: What GAO Recommends
paragraphs: GAO recommends that USAID (1) establish and implement policy requiring risk assessments in all cases before awarding bilateral direct assistance funds, (2) take additional steps to help ensure it implements controls for bilateral direct assistance, and (3) ensure adherence to its risk assessment policies for ARTF. In commenting on the first recommendation, USAID stated that its existing policies call for some form of risk assessment for all awards and that it has taken new steps to ensure risk assessment. GAO retained its recommendation because existing USAID policies do not require preaward risk assessments in all cases. USAID concurred with GAO's other recommendations.

section_title: Letter
paragraphs: Since 2002, the United States has allocated about $56 billion for  programs to reconstruct Afghanistan. In January 2010, the Department of  State (State) announced that the United States would lessen its reliance  on contractors to implement reconstruction programs by providing more  funds to the Afghan government itself. The United States also joined  other donors in 2010 by pledging that within the next 2 years it would  provide 50 percent or more of its Afghan development aid through the  Afghan government’s national budget. Such direct assistance is intended  to help develop the capacity of Afghan government ministries. Direct  assistance is currently being provided by two U.S. agencies, according to  U.S. officials. The U.S. Agency for International Development (USAID)  and the Department of Defense (DOD) do so (1) through bilateral  agreements with individual Afghan ministries and (2) by providing funds to  multilateral trust funds administered by the World Bank and the United  Nations Development Program (UNDP). The prospect of increasing U.S.  direct assistance to Afghanistan raises the issue of the accountability for  such assistance.
We performed our work under the authority of the Comptroller General to  conduct work on GAO’s initiative because of broad congressional interest  in the oversight and accountability of U.S. funds provided to Afghanistan.  We assessed (1) the extent to which the United States, through USAID  and DOD, has increased its direct assistance to Afghanistan, (2) USAID  and DOD steps to ensure accountability for bilateral direct assistance,  and (3) USAID and DOD steps to ensure accountability for direct  assistance to multilateral trust funds in Afghanistan.
To address these objectives, we reviewed State, USAID, and DOD  documents. We interviewed officials from the U.S. Department of the  Treasury, State, USAID, DOD, and the World Bank in Washington, D.C., and  Kabul, Afghanistan, as well as UNDP officials in Kabul. To identify the extent  to which USAID and DOD had increased the level of direct assistance from  fiscal year 2009 to fiscal year 2010, we obtained financial information from  (1) USAID’s mission in Kabul, Afghanistan, and (2) the Office of the Under  Secretary of Defense (Comptroller). We determined these data to be  sufficiently reliable for our purposes. We focused on awards or contributions  of U.S. funds that are channeled through the Afghan government national  budget for use by Afghan ministries or other government entities, consistent  with USAID and DOD definitions and practices.
To assess steps taken by USAID and DOD to help ensure the  accountability of their bilateral and multilateral direct assistance to the  Afghan government, we reviewed the policies and practices the agencies  use to assess risks associated with direct assistance and to establish  control mechanisms over the use of direct assistance funds. We applied  criteria drawn from GAO’s Standards for Internal Control in the Federal  Government, which defines risk assessment and control activities as key  elements of an internal control framework to provide reasonable assurance  that agency assets are safeguarded against fraud, waste, abuse, and  mismanagement. Risk assessment includes identifying internal and  external risks an organization faces and their potential effect. Control  activities are the policies and procedures (such as approvals,  reconciliations, and reviews) agencies implement to mitigate identified risks  and are essential for accountability of government resources. We also used  criteria from USAID and DOD guidance concerning direct assistance.
We conducted this performance audit from August 2010 to July 2011 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. Details on our objectives,  scope, and methodology are contained in appendix I.
subsections: section_title: Background
paragraphs: Decades of conflict have left Afghanistan a poor nation with high illiteracy,  weak government institutions, and a high level of corruption. According to  Transparency International’s index of perceived corruption, Afghanistan is  tied with Burma as the world’s second most corrupt nation. The United  States has allocated about $56 billion for fiscal years 2002 to 2010 to  reconstruct Afghanistan, as shown in table 1. The United States  allocated nearly half of these funds—about $27 billion—in fiscal years  2009 and 2010 alone. For fiscal year 2011, DOD has allocated more than  $12.6 billion in additional funds for Afghan reconstruction. While the  allocation of fiscal year 2011 State and USAID funds for Afghanistan had  not been finalized as of June 2011, State’s fiscal year 2011 budget  request included more than $5 billion for Afghan international affairs  programs and operations.
In 2009, the executive branch adopted the Integrated Civilian-Military  Campaign Plan to guide U.S. reconstruction activities in Afghanistan.  The plan, which is currently being updated, categorizes reconstruction  activities in terms of three overarching lines of effort—development,  governance, and security. State officials have informed us that U.S.  agencies do not track Afghan reconstruction funds by the lines of effort.
U.S. agencies have used various means to implement Afghan  reconstruction projects with these funds. In some cases, they have hired  contractors and nongovernment organizations. In other cases, U.S.  reconstruction funds have been provided directly to the Afghan  government’s national budget to be used by Afghan ministries and other  government entities.
In 2010, the United States announced plans to increase direct assistance  to Afghanistan. In January 2010, the Secretary of State announced that  the United States would increase direct assistance to the Afghan  government to help Afghan ministries and other government entities build  their capacity to manage funds. At two international conferences in 2010,  the United States and other donors pledged to provide half or more of  their development aid in the form of direct assistance to the Afghan  government within 2 years, contingent on Afghan actions to reduce  corruption and strengthen public financial management capacity. In  February 2011, DOD formally authorized direct contributions of DOD  funds to two Afghan security ministries to build their capacity and support  Afghan security forces.
USAID awards direct assistance to Afghanistan through two means. It  awards direct assistance to several Afghan government entities through  bilateral agreements overseen by its mission in Afghanistan. These  entities include the Independent Directorate for Local Governance and  the ministries of Agriculture, Irrigation, and Livestock; Communications  and Information Technology; Finance; Public Health; and Transport and  Civil Aviation. Some of the bilateral agreements finance Afghan  government procurement of goods and services, while others fund a  range of other government expenses and activities, including operating  costs, salaries, agricultural development programs, and infrastructure  projects. USAID also provides direct assistance by awarding funds to the  multilateral World Bank-administered Afghanistan Reconstruction Trust  Fund (ARTF). ARTF was established in 2002 as a vehicle for donors to  pool resources and coordinate support for Afghanistan’s reconstruction.  As of April 2011, 32 donors had contributed about $4.3 billion to ARTF.  ARTF provides these funds through the Afghan government national  budget to finance the government’s recurrent operating costs (e.g., wages  for civil servants, operations and maintenance costs) and national  development programs.
DOD provides direct assistance bilaterally to Afghanistan’s Ministry of  Defense (MOD) and Ministry of Interior (MOI) through contributions of  funds overseen by DOD’s Combined Security Transition Command– Afghanistan (CSTC-A). According to DOD guidance, these contributions  are used to procure food, salaries, goods, services, and minor  construction in direct support of the Afghan National Army (ANA) and the  Afghan National Police (ANP). CSTC-A also contributes funds to the  multilateral UNDP-administered Law and Order Trust Fund for  Afghanistan (LOTFA), which receives contributions from several donor  nations. Most LOTFA funds are used to provide salaries to ANP  personnel.
section_title: The United States More Than Tripled Its Awards of Direct Assistance to Afghanistan in 2010 through USAID and DOD
paragraphs: The United States more than tripled its awards and contributions of  USAID and DOD direct assistance funds to the Afghan government in  fiscal year 2010 compared with fiscal year 2009 (see fig. 1).
In fiscal year 2010, most of the direct assistance funds (about 71 percent)  were awarded by USAID for activities related to development and  governance, either bilaterally (about 6 percent) or through preferenced  contributions to ARTF (about 65 percent), as shown in figure 2. For  example, USAID has contributed funding to a community development  and local governance program that is being implemented in all of  Afghanistan’s 34 provinces through ARTF. The remainder was  contributed by DOD for security assistance, either bilaterally to MOD and  MOI or through LOTFA.
As shown in table 2, USAID awards of direct assistance to Afghanistan  increased from over $470 million in fiscal year 2009 to more than $1.4  billion in fiscal year 2010. These awards included a $1.3 billion grant to  ARTF, more than triple what it awarded to ARTF in 2009. USAID may  obligate and disburse funds awarded to an Afghan entity or trust fund  over multiple years, depending on the agreement’s terms.
DOD direct assistance to MOD and MOI, including contributions to  LOTFA, grew from about $195 million in fiscal year 2009 to about $576  million in fiscal year 2010. DOD contributions to LOTFA more than  doubled from about $68 million in fiscal year 2009 to about $149 million in  fiscal year 2010.
section_title: USAID and DOD Have Taken Steps to Help Ensure Accountability over Bilateral Direct Assistance, but USAID Has Not Required Risks to Be Assessed in Advance in All Cases
paragraphs: Risk assessments and internal controls to mitigate identified risks are key  elements of an internal control framework to provide reasonable assurance  that agency assets are safeguarded against fraud, waste, abuse, and  mismanagement. USAID conducted preaward risk assessments in most  cases. However, we found that USAID’s policies for assessing direct  assistance risks do not require preaward risk assessments in all cases.  USAID has not updated its policies to reflect the USAID Administrator’s July  2010 commitment to Congress that USAID would assess all Afghan public  institutions before providing them with direct assistance. We found that in  August 2010 and January 2011, USAID did not complete preaward risk  assessments before awarding funds to two Afghan government entities.  USAID has established various financial and other controls in its bilateral  direct assistance agreements with ministries that go beyond what is required  by its policies. However, it has not always ensured compliance with those  controls. DOD personnel in Afghanistan have assessed the risk of providing  funds to MOD and MOI through quarterly reviews of each ministry’s capacity.  DOD established formal procedures on risk assessment for Afghan direct  assistance in June 2011 after we informed DOD officials that DOD lacked  such procedures. DOD officials also stated that they review records of MOD  and MOI expenditures to assess whether funds have been used as intended,  as required by DOD policies established in February 2011.
subsections: section_title: USAID Has Conducted Preaward Risk Assessments in Most Cases
paragraphs: USAID mission staff have complied with USAID risk assessment policies  for awarding bilateral direct assistance funds to finance Afghan  procurement activities under what USAID refers to as a host country  contract. USAID policies, as outlined in its Automated Directives System  (ADS), require USAID staff to conduct a preaward risk assessment for a  host government entity if the entity is to use the award to procure goods  and services. Specifically, staff are required under ADS to (1) assess  the entity’s procurement system and (2) obtain the Mission Director’s  certification of the entity’s capability to undertake the procurement. Of  USAID’s eight bilateral direct assistance agreements, we identified two  involving the financing of Afghan procurement activities. In both cases,  we found that USAID mission staff, in compliance with ADS, had (1)  assessed the financial and procurement management capabilities of the  Afghan recipients (the Ministry of Communications and Information  Technology and the Ministry of Public Health) before awarding funds (see  table 3) and (2) obtained the required certifications.
Of six bilateral direct assistance agreements that did not involve financing  Afghan government procurement activities, we found that USAID had  completed such assessments before awarding funds in four cases (see  table 3). Although USAID did not conduct preaward assessments in two  cases, it was in compliance with its risk assessment policies. Those  policies state that USAID staff “should” assess the capacity (e.g., financial  management, procurement, and personnel management capacity) of  prospective recipients in cases that do not involve financing Afghan  government procurement activities.
USAID has not updated its risk assessment policies to reflect its  Administrator’s commitment that USAID would assess the capabilities of  Afghan government recipients in all cases before awarding them direct  assistance funds. On July 28, 2010, USAID’s Administrator responded to  concerns expressed by Members of the House Appropriations  Committee’s Subcommittee on State, Foreign Operations, and Related  Programs regarding corruption and weak government capacity in  Afghanistan by committing that USAID would not proceed with direct  assistance to an Afghan public institution until USAID had ensured that  the institution had an accountable organizational structure and sound  financial management capabilities and met USAID standards. State’s  Office of the Special Representative for Afghanistan and Pakistan made a  similar commitment in January 2010, when it stated that “to receive direct  assistance, Afghan ministries must be certified as having improved  accountability and transparency.” However, we found that current  USAID policy for direct assistance not involving the financing of Afghan  government procurement activities does not require USAID to assess a  prospective recipient’s capacity to implement a proposed activity.
We also found that following the Administrator’s July 2010 commitment,  USAID awarded direct assistance funds to two Afghan government  recipients before completing risk assessments. As shown in table 3,  USAID signed a $40 million agreement with the Independent Directorate  for Local Governance in August 2010, 5 months before completing an  assessment of that entity. It also signed a $6 million bilateral direct  assistance agreement with the Ministry of Transport and Civil Aviation in  January 2011, 2 months before completing an assessment of the  ministry. The completed risk assessments identified areas of high risk in  both entities. For example, the Ministry of Transport and Civil Aviation  was assessed as “high risk” in the four core function areas covered by the  assessment—control environment, financial management and  accounting, compliance with applicable laws and regulations, and  accountability environment. Similarly, the Independent Directorate for  Local Governance was assessed as “high risk” in 5 of 14 areas covered,  including financial management and procurement. USAID officials told us  that USAID awarded these funds before completing the risk assessments  because the projects were urgently needed.
section_title: USAID Has Established Controls in Its Bilateral Direct Assistance Agreements but Has Not Always Ensured Compliance
paragraphs: USAID has established various financial and other controls in its bilateral  direct assistance agreements, although USAID policies do not establish  minimum standard conditions for such agreements, according to USAID  officials. Shown in table 4 are selected examples of financial controls  USAID has established within its bilateral direct assistance agreements.  USAID also required Afghan government recipients to provide  documentation demonstrating their compliance with the selected controls.  As shown in table 4, in each applicable case, USAID ensured compliance  with the selected controls.
In two cases, USAID also hired contractors to help control risks identified  in preaward assessments. For example, USAID’s assessment of the  Ministry of Agriculture, Irrigation, and Livestock (MAIL) determined that  MAIL would not be able to independently manage and account for direct  assistance funds. As a result, USAID awarded a $49.1 million contract to  a U.S.-based firm to establish a unit to manage a USAID-funded  agriculture development fund, to transition that unit to local control within  4 years, and to provide technical assistance. Similarly, USAID’s October  2007 assessment of the Ministry of Public Health noted concerns that the  ministry would continue needing technical assistance to effectively and  efficiently manage donor funds. As a result, USAID amended an existing  contract to an international nonprofit organization to improve the capacity  of the ministry at the central level and in target provinces.
USAID has also established procurement-specific controls in its bilateral  direct assistance agreements with the Ministry of Communications and  Information Technology and the Ministry of Public Health. These  agreements provide funds to Afghan ministries to enter into contracts for  goods and services and require USAID to monitor and approve certain  steps of the procurement process for contracts over $250,000, as  applicable.
While USAID generally complied with this requirement, USAID mission  officials could not provide us with documentation showing that USAID had  done so in all cases, as shown in table 5. Specifically, USAID mission  officials either did not approve or document that they had approved prior  to execution any of 6 contracts that the Ministry of Communications and  Information Technology entered into (in table 5, see step 7 of the  procurement process). In addition, USAID mission officials told us that  USAID did not approve any of the ministry’s 6 prefinancing contract  documents (step 8 of the procurement process). USAID stated that no  clearance or approval was provided because the final signed documents  did not need concurrence. Similarly, USAID documented only three  instances in which it had approved any of the Ministry of Public Health’s  19 prefinancing contract documents. USAID also did not conduct follow- up reviews of the ministry to ensure its compliance with USAID  contracting and financial management requirements, as called for in the  assistance agreement.
USAID has taken steps to ensure that bilateral direct assistance awards  are audited. USAID policy requires audits of recipients, including host  government entities, that expend $300,000 or more in USAID awards  during a fiscal year. USAID has asserted its right to audit Afghan recipient  use of funds in all of its bilateral direct assistance agreements, including  those involving procurement. According to USAID mission officials,  USAID has contracted with audit firms to initiate audits of three Afghan  ministries (the Ministries of Finance, Communications and Information  Technology, and Public Health) that disbursed a total of $28.8 million in  USAID awards in fiscal year 2010.
section_title: DOD Has Taken Steps to Help Ensure Accountability and Recently Established Procedures Requiring Risk Assessments
paragraphs: CSTC-A has recently established procedures that require CSTC-A  personnel to assess the risks of direct assistance in advance of providing  funds to Afghan ministries. On June 12, 2011, CSTC-A established  standard operating procedures for direct assistance, as required under  DOD guidance issued on February 4, 2011. The CSTC-A procedures  identify risk assessment as the first of four steps CSTC-A personnel must  take before the direct contribution of the funds. CSTC-A adopted these  procedures after we informed DOD officials that DOD lacked risk  assessment guidance for bilateral direct assistance.
The CSTC-A procedures specify that the primary method CSTC-A is to  use to assess risks is the Ministerial Development Board. The board  oversees CSTC-A efforts to develop the capacity of MOD and MOI.  CSTC-A officials informed us in January and February 2011 that CSTC-A  has been using this method to assess the capacity of MOD and MOI in  connection with direct assistance. They stated that CSTC-A advisers  embedded in MOD and MOI participate in quarterly assessments of MOD  and MOI progress toward meeting defined capability objectives. For  example, CSTC-A assesses MOI development in 26 different areas,  including finance and budget, procurement, and personnel management.  The assessments focus on the extent to which the ministries are capable  of achieving the objectives and identify specific strengths and  weaknesses. For example, in April 2011, CSTC-A assessed the MOD  budget and finance section responsible for ANA pay support operations.  CSTC-A determined that its strengths included experienced staff and a  willingness to tackle corruption and its weakness was a lack of budget  authority.
DOD’s February 4, 2011, guidance requires CSTC-A to establish  financial controls for its contributions to MOD and MOI.    The guidance specifically requires CSTC-A to conduct quarterly  reconciliations of CSTC-A advance payments to MOD and MOI  against records of MOD and MOI expenditures. CSTC-A officials  informed us that CSTC-A reconciles CSTC-A advance contributions  against MOD and MOI expenditure data drawn from the Ministry of  Finance (MOF) Afghan Financial Management Information System  and has adjusted future contributions accordingly. DOD officials  acknowledged the reconciliation process does not address the extent  to which aggregated line items from the system may contain  inaccurate ANA and ANP payroll data.    The guidance also requires CSTC-A to monitor MOD and MOI use of  the contributed funds down to the subcontractor level. CSTC-A  officials informed us that they would be unable to monitor MOD and  MOI subcontractors, as called for in the DOD guidance. They stated  that the risk of sending personnel to vet MOD and MOI subcontractors  in certain regions of Afghanistan was too great.
In addition, CSTC-A advisers monitor MOD and MOI use of U.S. funds,  according to CSTC-A officials. CSTC-A informed us that it has embedded  about 500 advisers in MOD and MOI, including 6 in MOD financial offices  and 13 in MOI finance and budget offices. Also, CSTC-A personnel  participate in internal control teams that review ANA pay processes in a  different ANA corps every month.
section_title: USAID Has Not Consistently Assessed Risks of Contributions to ARTF, While DOD Has Recently Established Risk Assessment Guidance for LOTFA
paragraphs: USAID and DOD generally rely on the World Bank and UNDP to ensure  accountability over U.S. direct assistance provided multilaterally through  ARTF and LOTFA. USAID, however, has not consistently complied with  its multilateral trust fund risk assessment policies in awarding funds to  ARTF. For example, in March 2010, USAID did not conduct a risk  assessment before awarding an additional $1.3 billion to the World Bank  for ARTF. During our review, DOD established procedures in June 2011  requiring that it assess risks before contributing funds to LOTFA. World  Bank and UNDP controls over ARTF and LOTFA funds include the use of  hired monitoring agents to help ensure that ministries use donor  contributions as intended. However, these controls face challenges posed  by security conditions and by weaknesses in Afghan ministries. For  example, the ARTF monitoring agent resigned in June 2011 due to  security concerns, while weaknesses in MOI’s systems for paying wages  to Afghan police challenge UNDP efforts to ensure that MOI is using  LOTFA funds as intended.
subsections: section_title: USAID Has Not Consistently Assessed the Risk of Relying on the World Bank for Ensuring the Accountability of Its ARTF Contributions
paragraphs: USAID has not consistently followed its own policies for assessing the  risk associated with its awards to the World Bank for ARTF, which have  increased from $5 million in 2002 to a total of more than $2 billion. When  the grant agreement and subsequent modifications between the World  Bank and USAID were signed, USAID policies on grants to public  international organizations (PIO), such as the World Bank, called for  preaward determinations that the PIO was a responsible grantee. This  requirement applied to both the original grant and to any subsequent  modification of the grant that significantly increased the amount of the  award. Under USAID policy, the preaward determination should have  addressed factors such as whether the grantee’s program was an  effective and efficient way to achieve a USAID objective and whether  there were any reasons to consider the grantee to be “not responsible.”
USAID could not provide us with a preaward responsibility determination  of the World Bank prior to awarding ARTF an initial grant of $5 million in  2002. While USAID did not follow its policies to complete a preaward  determination for its initial $5 million grant, it determined, after it signed  the agreement, that (1) ARTF had a comprehensive system in place for  managing the funds and (2) the World Bank had a long history in  managing multidonor pooled funding mechanisms, in an approved 2002  memorandum requesting a deviation from incorporating its then- mandatory standard provisions into its ARTF grant agreement. However,  USAID did not conduct preaward determinations for 16 of the 21  subsequent modifications to the grant. For the instance in which USAID  increased the value of the award by $1.3 billion in March 2010, USAID  provided us with an unsigned and undated memorandum that applied to a  $15 million obligation. For the 5 preaward responsibility determinations  that were conducted, USAID documentation stated that the World Bank  was a responsible grantee but did not document the analysis used to  support the determinations.
In April 2011, in response to GAO recommendations and our follow-up  meetings, USAID revised and expanded its guidance on how to conduct  preaward determinations for all PIOs. The revised guidance continues to  require the USAID officer in charge of the agreement to document  preaward responsibility determinations for PIOs. Under the new  guidance, a group of USAID headquarters officials will first place the  PIO, such as the World Bank, into one of three categories, based on  USAID’s experience with the PIO and its determination of the PIO’s level  of responsibility. The revised guidance requires USAID to consider  several factors in determining a PIO’s level of responsibility, including the  quality of its past performance, its most recent audited financial  statements, and any other information to fully assess whether it has the  necessary management competence to plan and carry out the intended  activity. After a responsibility determination has been made, the USAID  officer in charge of the agreement must still document the determination  before making an award.
USAID’s policy is to generally rely on a PIO’s financial management,  procurement, and audit policies and procedures. The World Bank has  established financial controls over donor contributions to ARTF. For  example, the World Bank hired a monitoring agent responsible for  monitoring the eligibility of salaries and other recurrent expenditures that  the Afghan government submits for reimbursement against ARTF  criteria. According to the World Bank, it conducts advance reviews of  ARTF development procurement contracts. The amount of prior review of  Afghan government procurement by the bank varies according to the  method of selection or procurement, the type of good or service being  procured, and the bank’s assessment of project risk, according to the  bank. The World Bank also reports that it assesses projects semi- annually as part of regular World Bank supervision as per World Bank  policies, procedures and guidelines based in part on project visits. Also,  the bank informed us that it manages and administers ARTF according to  a set of World Bank global policies and procedures. ARTF is part of a  single audit of all trust funds administered by the bank, and includes both  an annual management assertion over internal controls surrounding the  preparation of trust fund financial reports and a combined financial  statement for all modified cash basis trust funds.
Also, the Afghan government’s external audit agency, the Control and  Audit Office (CAO), conducts annual audits of ARTF-financed projects  with the technical assistance of a firm of international accountants that  are funded by the World Bank. As part of its supervision of ARTF- financed activities, a World Bank financial management team reviews the  CAO audit reports, discusses its observations with government  counterparts, and follows up to ensure resolution of any outstanding  issues. Following the government’s annual submission of CAO audit  reports to the World Bank, the bank sends a letter to the donors  summarizing the timeliness and results of the CAO’s annual audits. The  CAO’s audits of 16 ARTF development projects for the Afghan fiscal year  that began in March 2009 had 16 unqualified (or “clean”) results. The  World Bank shares CAO audit and monitoring agent reports with donors  when requested.
World Bank financial controls over ARTF face challenges posed by  oversight entities’ limited movement in Afghanistan’s high-threat  environment and the limited capacity of Afghan ministries to meet agreed- upon procurement and financial management standards, as shown in  these examples.    Security conditions prevented CAO auditors from visiting most of the  provinces where ARTF funds were being spent. They were able to  conduct audit tests in 10 of Afghanistan’s 34 provinces from March  2009 to March 2010 and issued a qualified opinion of the financial  statements of ARTF’s salary and other recurrent expenditures as a  result.    According to the Department of the Treasury (Treasury), the ARTF  monitoring agent recently resigned from its contract with the World  Bank due to security concerns. USAID stated in July 2011 that the  monitoring agent informed the bank in May 2011 that its contract  should not be extended due to security concerns. The World Bank  reports that it is seeking a new monitoring agent, has received many  expressions of interest, and does not anticipate a gap in monitoring.      Previously, security concerns prevented the ARTF monitoring agent  from physically verifying ARTF salary and other recurrent  expenditures outside of Kabul province from March 2009 through  March 2010. The World Bank had required the monitoring agent or  its subcontractor to visit sites in at least 12 provinces to verify  expenditures made during the Afghan fiscal year that began in March  2010.    The CAO lacks qualified auditors and faces other capacity restraints,  according to the Special Inspector General for Afghanistan  Reconstruction (SIGAR) and USAID. However, it uses international  advisers and contracted auditors, funded by the World Bank, to help  ensure that its audits of ARTF comply with international auditing  standards. The World Bank recently reported that the overall  timeliness of the CAO audits have been improving since 2006.    The World Bank and donors have expressed concern over the level of  ineligible expenditures submitted by the Afghan government for  reimbursement. While ineligible expenditures are not reimbursed,  the bank considers the level of ineligible expenditures to be an  indicator of weaknesses in the Afghan government’s ability to meet  agreed-upon procurement and financial management standards. The  ARTF monitoring agent has questioned whether Afghan government  civil servants have the experience and knowledge necessary to  perform transactions in a manner eligible for reimbursement and  whether ministries’ internal procedures fully reflect Afghan  government laws and regulations.
Partly as a result of recommendations from a 2008 independent  evaluation of ARTF by a Norwegian-based firm and discussions with  donors, the World Bank is currently seeking to revise its 2002 grant  agreements with donors to reflect its efforts to strengthen ARTF  governance. According to the World Bank, the recommended changes  include clarifying and strengthening donors’ oversight roles and  responsibilities over ARTF. In response to our inquiries, the World Bank  stated in April 2011 that it is considering incorporating its current standard  provisions, applicable to multidonor trust funds, in the amended grant  agreements with donors. These provisions would allow donor countries  greater access to accounting and financial records and information.  Under the current agreement with all donors, the World Bank provides  donors with periodic reports, such as quarterly status reports, and an  annual management assertion together with an attestation from the  bank’s external auditors on the satisfactory performance of the bank’s  procedures and controls.
section_title: CSTC-A Has Recently Established Procedures Requiring That It Assess Risks Associated with Contributions to LOTFA
paragraphs: During our review on June 12, 2011, CSTC-A issued new procedures for  direct assistance that require CSTC-A to conduct precontribution risk  assessments before contributing funds to LOTFA. CSTC-A staff had  previously informed us in February 2011 that CSTC-A had not assessed  the risks of providing funds to LOTFA. Instead, CSTC-A had regularly  assessed the capabilities and weaknesses of MOI. For example, CSTC-A  assessed MOI’s finance and budget section in March 2011 and  determined that while the section’s strengths included a responsiveness  to pay issues, its weaknesses included a lack of well-trained staff and an  unwillingness to change.
CSTC-A generally relies on UNDP’s financial controls to ensure the  accountability of funds it has contributed to LOTFA. CSTC-A contribution  letters to LOTFA request that UNDP provide CSTC-A with quarterly  reports, which UNDP posts on its Web site. CSTC-A officials informed  us that CSTC-A reconciles its contributions to LOTFA annually. UNDP’s  LOTFA project manager in Kabul informed us that UNDP makes copies of  audits of LOTFA available upon request. CSTC-A officials told us they  have not requested LOTFA audits.
UNDP has established financial controls over the funds it provides to MOI  for ANP expenses. It has stated that it reconciles its contributions with  MOF records of MOI expenses on a quarterly and annual basis. UNDP  recently reported that it deducted $17.6 million from its contribution to  MOI as a result of ineligible expenses identified during its annual  reconciliation for March 2009 through March 2010. UNDP has also hired  a monitoring agent to review and monitor ANP remunerations and  generate independent reports. UNDP staff told us that the LOTFA  monitoring agent has offices in all regional police zones, which cover all  of Afghanistan’s provinces. UNDP has reported that the monitoring agent  operates in all ANP zones and conducts sample verifications of 30  percent of the total number of police.
Similar to the World Bank’s controls over ARTF, UNDP’s financial  controls over LOTFA face challenges stemming from Afghanistan’s  security environment. SIGAR reported in April 2011 that security issues  had impaired efforts by LOTFA’s monitoring agent to (1) recruit staff in a  high-threat province and (2) travel in 7 of Afghanistan’s 34 provinces for  half of 2010. SIGAR also reported that security concerns had delayed  LOTFA’s reconciliation of 2009 salaries. UNDP officials also told us that  security concerns had restricted UNDP movements in Afghanistan.
UNDP’s financial controls also face challenges stemming from MOI’s  institutional weaknesses. UNDP has reported that MOI’s “insufficient  ownership and capacity development” remains one of LOTFA’s risks and  that it has taken steps to mitigate this risk. Some problems that have  been identified with MOI include the following:  In 2009, we reported that MOI did not have an accurate staffing  roster, according to CSTC-A, and that the number of ANP personnel  was unclear. We found that uncooperative ANP commanders were  impeding State and MOI efforts to implement a new ANP identification  card system to positively identify all police for pay purposes,  according to State officials. According to State officials, these  commanders were preventing State and MOI from determining the  status of nearly 30,000 individuals whose names had been submitted  to receive ANP identification cards. We recommended that DOD and  State consider provisioning future U.S. contributions to LOTFA to  reflect the extent to which U.S. agencies had validated the status of  MOI and ANP personnel to help ensure that the United States was not  funding salaries of unverified personnel.
In 2011, SIGAR reported that MOI’s payroll system provides little  assurance that MOI is paying only working ANP personnel or that  LOTFA funds are reimbursing only eligible ANP costs. MOI is also  unable to pay all police through relatively secure systems. We have  previously reported concerns regarding MOI pay systems. UNDP  and CSTC-A have worked with MOI to develop electronic systems to  reduce opportunities for skimming and corruption. One such system  transfers funds directly into individual bank accounts established by  individual Afghan police. Although progress has been made in  establishing these systems, more than 20 percent of ANP staff are still  paid using manual cash systems that are more vulnerable to abuse.
section_title: Conclusion
paragraphs: The recent tripling of U.S. direct assistance awards to Afghan government  entities, coupled with the vulnerability of this assistance to waste, fraud,  and abuse in the uncertain Afghan environment, makes it essential that  U.S. agencies assess risks before awarding funds and implement  controls to safeguard those funds. Direct assistance to the Afghan  government involves considerable risk given the extent of corruption, the  weak institutional capacity of the Afghan government to manage finances,  the volatile and high-threat security environment, and that the U.S. funds  may be obligated months or years after they are awarded. Because  conflict in many parts of Afghanistan poses significant challenges to  efforts to ensure that funds are used as intended, the level of risk in  Afghanistan warrants, to the extent feasible, sound internal controls and  oversight over the billions of dollars that the U.S. government has  invested in Afghanistan. Although risk assessment is a key component of  internal controls, current USAID policy does not require preaward risk  assessments of all Afghan government recipients of U.S. direct  assistance funds. To safeguard U.S. direct assistance funds, it is  important that (1) the USAID Administrator follow through on his July  2010 commitment to Congress to assess risks associated with each  Afghan government entity before awarding funds, (2) USAID consistently  implement controls it establishes in bilateral direct assistance  agreements, and (3) USAID consistently adhere to its risk assessment  policies for multilateral trust funds in awarding funds to ARTF.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Administrator of USAID take the following three  actions:    Establish and implement policy requiring USAID to complete risk  assessments before awarding bilateral direct assistance funds to  Afghan government entities in all cases.    Take additional steps to help ensure that USAID consistently  implements controls established in its bilateral direct assistance  agreements with Afghan government entities, such as requiring the  retention of documentation of actions taken.    Ensure USAID adherence with its policies for assessing risks  associated with multilateral trust funds in awarding funds to ARTF.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report for comment to the Administrator of  USAID, and to the Secretaries of Defense, State, and the Treasury.  Defense, State, and the Treasury declined to provide comments.  Treasury provided us with technical comments, which we incorporated in  this report as appropriate. The World Bank and UNDP provided us with  technical comments on the portions of the draft report that we provided  them describing ARTF and LOTFA. We have incorporated these technical  comments in this report as appropriate.
USAID provided written comments on a draft of our report, which are  reprinted in appendix II.
With regard to our recommendation that USAID establish and implement  policies requiring USAID staff to complete risk assessments before  awarding bilateral direct assistance funds to Afghan government entities  in all cases, USAID stated that its existing policies and procedures in ADS  already include requirements for risk assessment for each form of  government-to-government assistance mechanism. USAID noted that for  host country contracts, ADS requires an advance assessment of a host  government’s procurement systems (ADS 305). USAID also stated that  for cash transfer agreements, ADS requires an analysis of a host  government’s ability to comply with the agreements. USAID further stated  that its general activity planning guidance contains a recommendation  that USAID offices should consider the capacity of potential partners to  implement planned functions (ADS 201).
Although USAID policy in ADS includes some form of risk assessment for  the funding mechanisms in use in Afghanistan, it does not require that a  risk assessment be conducted in all cases. Specifically, ADS 305’s  requirement for preaward assessment of host country contracts did not  apply to six of the eight bilateral direct assistance cases we identified,  because these six cases do not involve procurement. Further, according  to the USAID comptroller, these six cases were not cash transfer  agreements. As a result, these six cases fall under USAID’s general  activity planning guidance (ADS 201), which recommends—but does not  require--that USAID offices assess the capacity of potential partners in  advance. As noted in this report, the lack of specific requirement resulted  in USAID making awards in two cases prior to completing a risk  assessment. Therefore, we retained our recommendation that USAID  establish and implement policies requiring preaward risk assessments in  all cases in Afghanistan.
USAID also commented that it has taken additional steps to ensure that,  going forward, risk assessments are completed in advance for each type  of funding mechanism, in line with the Administrator’s July 2010  statement to Congress. Further, these steps are being undertaken “in  light of” the Department of State’s July 14, 2011, certification to Congress  that the U.S. and Afghan governments have established mechanisms  within each implementing agency to ensure that certain fiscal year 2010  funds will be used as intended. On July 14, 2011, State did make this  certification to Congress. However, the certification applies only to certain  fiscal year 2010 funds, underscoring the need for USAID to establish a  requirement for preaward assessments in Afghanistan in all cases in its  policies and procedures.
With regard to our recommendation that USAID take additional steps to  help ensure that it consistently implements controls established in its  bilateral direct assistance agreements with Afghan government entities,  USAID agreed to take such steps concerning its host country agreements  with Afghan government entities. In doing so, USAID noted that USAID  policy is to be as sparing in exercising its prior approval rights as sound  management permits.
With regard to our recommendation that it adhere to its policies for  assessing risks associated with multilateral trust funds in awarding funds  to ARTF, USAID acknowledged that it had not always prepared or  adequately documented its determinations for several ARTF grant  amendments. USAID stated that it will follow its new procedures for such  determinations, which it revised in April 2011.
USAID also provided us with technical comments, which we have  incorporated as appropriate.
We are sending copies of this report to the appropriate congressional  committees; the Secretaries of Defense, State, and the Treasury; the  Administrator of USAID; and other interested parties. The report also is  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-7331 or johnsoncm@gao.gov. Contact points for our  Offices of Public Affairs and Congressional Relations may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report assesses (1) the extent to which the U.S. Agency for  International Development (USAID) and the Department of Defense  (DOD) have increased direct assistance, (2) USAID’s and DOD’s steps to  ensure accountability for bilateral direct assistance, and (3) USAID’s and  DOD’s steps to ensure accountability for multilateral direct assistance.
To identify the extent to which USAID and DOD had increased their direct  assistance, we first met with officials from the Department of State and  USAID to define the scope of the term “direct assistance” for the purpose  of this review. We then adopted USAID’s definition of direct assistance  (or “on-budget” assistance) as U.S. funds provided through the Afghan  government national budget for use by Afghan ministries or other  government entities. This definition is consistent with guidance and  procedures developed by the Office of the Under Secretary of Defense  (Comptroller) and DOD’s Combined Security Transition Command- Afghanistan (CSTC-A). We focused on fiscal year 2009 and fiscal year  2010 to identify funding developments tied to the President’s 2009  announcement of a new U.S. strategy for Afghanistan and subsequent  pledges concerning direct assistance to the Afghan government.    To identify the extent to which USAID had increased its direct  assistance, we obtained financial information from USAID’s mission in  Kabul, Afghanistan. This information included USAID quarterly  financial reports and USAID direct assistance agreements with  Afghan government entities and the World Bank (including any  modifications to the agreements). We used this information to identify  the value of the direct assistance USAID awarded in fiscal years 2009  and 2010. For the value of each award, we used what USAID refers to  as the “total estimated contribution” that it has committed to provide,  subject to the availability of funds, in signing a direct assistance  agreement. For the date, we used each agreement’s signature date,  in keeping with USAID’s use of the signature date as the effective  date of the funded activity. We used the signature dates to allocate  each award’s value to either fiscal year 2009 or fiscal year 2010. In  using this data in the report, we noted that once it has awarded funds  on a specific date, USAID may obligate and disburse those funds over  multiple years, depending on the terms of the agreement. We  assessed these data to be sufficiently reliable for our purposes.    To identify the extent to which DOD had increased its direct  assistance, we obtained financial information from DOD’s Office of the  Under Secretary of Defense (Comptroller). This information included  funds contributed to the Afghan Ministry of Defense (MOD) and the  Afghan Ministry of Interior (MOI) by CSTC-A and the Defense Security  Cooperation Agency. According to the Office of the Under Secretary  of Defense (Comptroller), each DOD contribution to MOD, MOI, and  the Law and Order Trust Fund for Afghanistan (LOTFA) was awarded,  obligated, and disbursed in close succession. We allocated each  contribution’s value to the fiscal year in which the contribution was  made. We assessed these data to be sufficiently reliable for our  purposes.
To assess steps taken by USAID and DOD to help ensure the  accountability of their bilateral direct assistance to Afghan ministries and  other government entities, we reviewed the policies and practices the  agencies use to assess risks associated with direct assistance and to  establish control mechanisms over the use of direct assistance funds.    Our assessments were based on criteria drawn from GAO’s  Standards for Internal Control in the Federal Government. Standards  for Internal Control in the Federal Government, issued pursuant to the  requirements of the Federal Managers’ Financial Integrity Act of 1982,  provides the overall framework for establishing and implementing  internal control in the federal government. Minimum internal control  standards for providing reasonable assurance that agency assets will  be safeguarded against fraud, waste, abuse, and mismanagement  include risk assessment and control activities. Standards for Internal  Control in the Federal Government defines risk assessment and  control activities as key elements of an internal control framework.  Risk assessment includes identifying internal and external risks an  organization faces and their potential effect. Control activities are the  policies and procedures (such as approvals, reconciliations, and  reviews) agencies implement to mitigate identified risks and are  essential for accountability of government resources.    To evaluate relevant USAID policies and practices against these  criteria, we reviewed information from both headquarters and the  USAID mission in Afghanistan. We reviewed USAID agencywide  policies for awarding bilateral direct assistance funds to host  government entities, as outlined in (1) USAID’s Automated Directives  System (ADS) and (2) interim guidance USAID provided to its  mission on the use of direct assistance. We reviewed bilateral direct  assistance program information from the USAID mission in  Afghanistan, including preaward assessment procedures and reports,  training material, direct assistance agreements, compliance  documentation, approval memorandums, memorandums of  understanding, and mission orders. To identify USAID controls  established over the use of direct assistance funds and determine  whether USAID ensured compliance with its controls, we (1) reviewed  all USAID bilateral direct assistance agreements, (2) identified the  controls USAID established in each agreement, and (3) reviewed  documentation USAID provided to us to demonstrate it had ensured  compliance with its controls. We limited our analysis to controls  triggered per the terms of each agreement before February 15, 2011.  We also reviewed information from the USAID Office of Inspector  General in Afghanistan regarding the mission’s preaward assessment  process. We interviewed USAID officials in Washington, D.C., and in  Kabul, Afghanistan.    To assess DOD policies and practices, we reviewed information from  the Office of the Undersecretary of Defense (Comptroller) and CSTC- A. This information included the Under Secretary’s February 4, 2011,  Interim Guidance on Afghanistan Security Forces Fund (ASFF)  Contributions to the Government of the Islamic Republic of  Afghanistan (GIRoA), CSTC-A’s standard operating procedures for  direct contributions, DOD contribution letters to MOD and MOI, and  DOD assessments of the strengths and weaknesses of these  ministries. We also interviewed DOD officials in Washington, D.C.,  and Kabul.
To assess steps taken by USAID and DOD to help ensure the  accountability of their direct assistance to Afghan ministries through  multilateral trust funds, we reviewed the policies and practices the  agencies use to assess risks associated with direct assistance and to  establish control mechanisms over the use of direct assistance funds.    Our assessments were again based on criteria drawn from GAO’s  Standards for Internal Control in the Federal Government, which  defines risk assessment and control activities as key elements of an  internal control framework.    To evaluate relevant USAID policies and practices regarding  multilateral trust funds against these criteria, we reviewed USAID  agencywide policies for awarding direct assistance to multilateral trust  funds such as the World Bank-administered Afghanistan  Reconstruction Trust Fund (ARTF), as outlined in USAID’s Automated  Directives System. We also reviewed ARTF-related program and  budget documents from the USAID mission in Afghanistan, including  USAID’s 2002 grant agreement with ARTF and modifications to the  agreement. We also met with officials of the Department of the  Treasury to coordinate our work regarding the World Bank. We  reviewed World Bank documents concerning ARTF and interviewed  USAID and World Bank officials in Washington, D.C., and in Kabul.    To assess DOD policies and practices regarding multilateral trust  funds against these criteria, we reviewed information from the Office  of the Undersecretary of Defense (Comptroller) and CSTC-A. This  information included the Under Secretary’s February 4, 2011, Interim  Guidance on Afghanistan Security Forces Fund (ASFF) Contributions  to the Government of the Islamic Republic of Afghanistan (GIRoA)  and CSTC-A’s standard operating procedures for direct contributions.  We also reviewed United Nations Development Program (UNDP)  documents and reports concerning the Law and Order Trust Fund for  Afghanistan and interviewed DOD officials in Washington, D.C., and  in Kabul, as well as UNDP officials in Kabul.
section_title: Appendix II: Comments from the U.S. Agency for International Development
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: Major contributors to this report were Tetsuo Miyabara, Assistant Director;  Emily Gupta; Bruce Kutnick; Esther Toledo; and Pierre Toureille. Ashley  Alley, Pedro Almoguera, Diana Blumenfeld, Jeffrey Baldwin-Bott,  Gergana Danailova-Trainor, Martin De Alteriis, Karen Deans, Christopher  Mulkins, Mona Sehgal, and Eddie Uyekawa also provided technical  assistance.