United Nations: Observations on the Oil for Food Program and Areas for Further Investigation
Released: 2004-07-08T00:00:00

Letter

Background

In August 1990, Iraq invaded Kuwait, and the United Nations imposed sanctions against Iraq. Security Council resolution 661 of 1990 prohibited all nations from buying and selling Iraqi commodities, except for food and medicine. Security Council resolution 661 also prohibited all nations from exporting weapons or military equipment to Iraq and established a sanctions committee to monitor compliance and progress in implementing the sanctions. The members of the sanctions committee were members of the Security Council. Subsequent Security Council resolutions specifically prohibited nations from exporting to Iraq items that could be used to build chemical, biological, or nuclear weapons. In 1991, the Security Council offered to let Iraq sell oil under a U.N. program to meet its peoples’ basic needs. The Iraqi government rejected the offer, and over the next 5 years, the United Nations reported food shortages and a general deterioration in social services.

In December 1996, the United Nations and Iraq agreed on the Oil for Food program, which permitted Iraq to sell up to $1 billion worth of oil every 90 days to pay for food, medicine, and humanitarian goods. Subsequent U.N. resolutions increased the amount of oil that could be sold and expanded the humanitarian goods that could be imported. In 1999, the Security Council removed all restrictions on the amount of oil Iraq could sell to purchase civilian goods. The United Nations and the Security Council monitored and screened contracts that the Iraqi government signed with commodity suppliers and oil purchasers, and Iraq’s oil revenue was placed in a U.N.-controlled escrow account. In May 2003, U.N. resolution 1483 requested the U.N. Secretary General to transfer the Oil for Food program to the CPA by November 2003. (Appendix II contains a detailed chronology of Oil for Food program and sanctions events.) The United Nations allocated 59 percent of the oil revenue for the 15 central and southern governorates, which were controlled by the central government; 13 percent for the 3 northern Kurdish governorates; 25 percent for a war reparations fund for victims of the Iraq invasion of Kuwait in 1990; and 3 percent for U.N. administrative costs, including the costs of weapons inspectors.

From 1997 to 2002, the Oil for Food program was responsible for more than $67 billion of Iraq's oil revenue. Through a large portion of this revenue, the United Nations provided food, medicine, and services to 24 million people and helped the Iraqi government supply goods to 24 economic sectors. Despite concerns that sanctions may have worsened the humanitarian situation, the Oil for Food program appears to have helped the Iraqi people. According to the United Nations, the average daily food intake increased from around 1,275 calories per person per day in 1996 to about 2,229 calories at the end of 2001. Malnutrition rates for children under 5 fell by more than half. In February 2002, the United Nations reported that the Oil for Food program had considerable success in several sectors such as agriculture, food, health, and nutrition by arresting the decline in living conditions and improving the nutritional status of the average Iraqi citizen.

Illicit Revenues by Former Regime Due to Iraqi Control over Contracts and Uncertain U.N. Oversight Role

From 1997 through 2002, we estimate that the former Iraqi regime acquired $10.1 billion in illegal revenues—$5.7 billion in oil smuggled out of Iraq and $4.4 billion in surcharges on oil sales and illicit charges from suppliers exporting goods to Iraq through the Oil for Food program. The United Nations, through OIP and the Security Council’s Iraq sanctions committee, was responsible for overseeing the Oil for Food program. However, the Security Council allowed the Iraqi government, as a sovereign entity, to negotiate contracts directly with purchasers of Iraqi oil and suppliers of commodities. This structure, in addition to the uncertain oversight roles of OIP and the sanctions committee, was an important factor in enabling Iraq to levy illegal surcharges and illicit commissions. U.N. external audit reports contained no findings of program fraud. Summaries of internal audit reports provided to GAO pointed to some operational concerns in procurement, coordination, monitoring, and oversight.

Former Iraqi Regime Acquired an Estimated $10.1 Billion in Illicit Revenue

We estimate that, from 1997 through 2002, the former Iraqi regime acquired $10.1 billion in illegal revenues—$5.7 billion through oil smuggled out of Iraq and $4.4 billion through surcharges against oil sales and illicit commissions from commodity suppliers. This estimate is higher than the $6.6 billion in illegal revenues we reported in May 2002. We updated our estimate to include (1) oil revenue and contract amounts for 2002, (2) updated letters of credit from prior years, and (3) newer estimates of illicit commissions from commodity suppliers. Appendix I describes our methodology for determining illegal revenues gained by the former Iraqi regime.

Oil was smuggled out through several routes, according to U.S. government officials and oil industry experts. Oil entered Syria by pipeline, crossed the borders of Jordan and Turkey by truck, and was smuggled through the Persian Gulf by ship. Jordan maintained trade protocols with Iraq that allowed it to purchase heavily discounted oil in exchange for up to $300 million in Jordanian goods. Syria received up to 200,000 barrels of Iraqi oil a day in violation of the sanctions. Oil smuggling also occurred through Turkey and Iran.

In addition to revenues from oil smuggling, the Iraqi government levied surcharges against oil purchasers and commissions against commodity suppliers participating in the Oil for Food program. According to some Security Council members, the surcharge was up to 50 cents per barrel of oil and the commission was 5 to 15 percent of the commodity contract.

In our 2002 report, we estimated that the Iraqi regime received a 5-percent illicit commission on commodity contracts. However, a September 2003 Department of Defense review found that at least 48 percent of 759 Oil for Food contracts that it reviewed were potentially overpriced by an average of 21 percent. Food commodity contracts were the most consistently overpriced, with potential overpricing identified in 87 percent of the contracts by an average of 22 percent. The review also found that the use of middlemen companies potentially increased contract prices by 20 percent or more. Defense officials found 5 contracts that included “after- sales service charges” of between 10 and 20 percent.

In addition, interviews by U.S. investigators with high-ranking Iraqi regime officials, including the former oil and finance ministers, confirmed that the former regime received a 10-percent commission from commodity suppliers. According to the former oil minister, the regime instituted a fixed 10-percent commission in early 2001 to address a prior “compliance” problem with junior officials. These junior officials had been reporting lower commissions than what they had negotiated with suppliers and pocketing the difference.

United Nations and Security Council Had Responsibility for Oversight of Program, but Iraq Contracted Directly with Purchasers and Suppliers

Both OIP, as an office within the U.N. Secretariat, and the Security Council’s sanctions committee were responsible for overseeing the Oil for Food Program. However, the Iraqi government negotiated contracts directly with purchasers of Iraqi oil and suppliers of commodities. While OIP was to examine each contract for price and value, it is unclear how it performed this function. The sanctions committee was responsible for monitoring oil smuggling, screening contracts for items that could have military uses, and approving oil and commodity contracts. The sanctions committee responded to illegal surcharges on oil purchases, but it is unclear what actions it took to respond to commissions on commodity contracts.

Iraq Negotiated Directly with Oil Purchasers and Suppliers

U.N. Security Council resolutions and procedures recognized the sovereignty of Iraq and gave the Iraqi government authority to negotiate contracts and decide on contractors. Security Council resolution 986 of 1995 authorized states to import petroleum products from Iraq, subject to the Iraqi government’s endorsement of transactions. Resolution 986 also stated that each export of goods would be at the request of the government of Iraq. Security Council procedures for implementing resolution 986 further stated that the Iraqi government or the United Nations Inter-Agency Humanitarian Program would contract directly with suppliers and conclude the appropriate contractual arrangements. Iraqi control over contract negotiations was an important factor in allowing Iraq to levy illegal surcharges and illicit commissions.

When the United Nations first proposed the Oil for Food program in 1991, it recognized this vulnerability. At that time, the Secretary General proposed that the United Nations, an independent agent, or the government of Iraq be given the responsibility to negotiate contracts with oil purchasers and commodity suppliers. The Secretary General concluded that it would be highly unusual or impractical for the United Nations or an independent agent to trade Iraq’s oil or purchase commodities. He recommended that Iraq negotiate the contracts and select the contractors. However, he stated that the United Nations and Security Council would have to ensure that Iraq’s contracting did not circumvent the sanctions and was not fraudulent. The Security Council further proposed that U.N. agents review contracts and compliance at Iraq’s oil ministry, but Iraq refused these conditions.

Iraqi government control over contracts applied to oil purchases, all commodities purchased for the 15 central and southern governorates, and food and medical supplies purchased in bulk by the central government for the three autonomous Kurdish governorates in the north. The rest of the program in the north was run by nine specialized U.N. agencies and included activities such as distributing food rations and constructing or rehabilitating schools, health clinics, power generation facilities, and houses.

OIP Was Responsible for Key Oversight Aspects of the Program

OIP administered the Oil for Food program from December 1996 to November 2003. Under Security Council resolution 986 of 1995 and a memorandum of understanding between the United Nations and the Iraqi government, OIP monitored the sale of Iraq’s oil and its purchase of commodities and the delivery of goods, and accounted for the program’s finances. The United Nations received 3 percent of Iraq’s oil export proceeds for its administrative and operational costs, which included the cost of U.N. weapons inspections.

The sanctions committee’s procedures for implementing resolution 986 stated that independent U.N. inspection agents were responsible for monitoring the quality and quantity of the oil shipped. The agents were authorized to stop shipments if they found irregularities. OIP hired a private firm to monitor Iraqi oil sales at exit points. However, the monitoring measures contained weaknesses. According to U.N. reports and a statement from the monitoring firm, the major offshore terminal at Mina al-Basra did not have a meter to measure the oil pumped nor could onshore storage capacity be measured. Therefore, the U.N. monitors could not confirm the volume of oil loaded onto vessels. Also, in 2001, the oil tanker Essex took a large quantity of unauthorized oil from the platform when the monitors were off duty. In December 2001, the Security Council required OIP to improve the monitoring at the offshore terminal. It is unclear what actions OIP took. As part of its strategy to repair Iraq’s oil infrastructure, the CPA had planned to install reliable metering at Mina al- Basra and other terminals, but no contracts have been let.

OIP also was responsible for monitoring Iraq’s purchase of commodities and the delivery of goods. Security Council resolution 986, paragraph 8a(ii) required Iraq to submit a plan, approved by the Secretary General, to ensure equitable distribution of Iraq’s commodity purchases. The initial distribution plans focused on food and medicines while subsequent plans were expansive and covered 24 economic sectors, including electricity, oil, and telecommunications.

The sanctions committee’s procedures for implementing Security Council resolution 986 stated that experts in the Secretariat were to examine each proposed Iraqi commodity contract, in particular the details of price and value, and to determine whether the contract items were on the distribution plan. OIP officials told the Defense Contract Audit Agency they performed very limited, if any, pricing review. They stated that no U.N. resolution tasked them with assessing the price reasonableness of the contracts and no contracts were rejected solely on the basis of price. However, OIP officials stated that, in a number of instances, they reported to the sanctions committee that commodity prices appeared high, but the committee did not cite pricing as a reason to place holds on the contracts. For example, in October 2001, OIP experts reported to the sanctions committee that the prices in a proposed contract between Iraq and the Al- Wasel and Babel Trading Company appeared high. However, the sanctions committee reviewed the data and approved the contract. In April 2004, the Treasury Department identified this company as a front company for the former regime. The United Nations also required all countries to freeze the assets of this company and transfer them to the Development Fund for Iraq in accordance with Security Council resolution 1483.

The sanctions committee’s procedures for implementing resolution 986 stated that independent inspection agents will confirm the arrival of supplies in Iraq. OIP deployed about 78 U.N. contract monitors to verify shipments and authenticate the supplies for payment. OIP employees were able to visually inspect 7 to 10 percent of the approved deliveries.

Audits Identified Some Operational Concerns but No Fraud

Security Council resolution 986 also requested the Secretary General to establish an escrow account for the Oil for Food program and to appoint independent and certified public accountants to audit the account. The Secretary General established an escrow account at BNP Paribas for the deposit of Iraqi oil revenues. The U.N. Board of Audit, a body of external public auditors, audited the account. The external audits focused on management issues related to the Oil for Food program and the financial condition of the Iraq account. U.N. auditors generally concluded that the Iraq account was fairly presented in accordance with U.N. financial standards. The reports stated that OIP was generally responsive to external audit recommendations. The external audits determined that oil prices were mostly in accordance with the fair market value of oil products to be shipped and checked to confirm that pricing was properly and consistently applied. They also determined that humanitarian and essential services supplies procured with oil funds generally met contract terms with some exceptions. U.N. external audit reports contained no findings of fraud during the program.

The U.N. Office of Internal Oversight Services (OIOS) conducted internal audits of the Oil for Food program and reported the results to OIP’s executive director. OIOS officials stated that they have completed 55 audits and have 4 ongoing audits of the Oil for Food program. Overall, OIOS reported that OIP had made satisfactory progress in implementing most of its recommendations. We did not have access to individual OIOS audit reports except for an April 2003 report made publicly available in May 2004 that assessed the activities of the company contracted by the United Nations to authenticate goods coming into Iraq. It found that the contractor did not perform all required duties and did not adequately monitor goods coming into the northern areas of Iraq. We also reviewed 7 brief summaries of OIOS reports covering the Oil for Food program from July 1, 1996, through June 30, 2003. These summaries identified a variety of operational concerns involving procurement, inflated pricing and inventory controls, coordination, monitoring, and oversight. In one case, OIOS cited purchase prices for winter items for displaced persons in northern Iraq that were on average 61 percent higher than local vendor quotes obtained by OIOS. In another case, an OIOS review found that there was only limited coordination of program planning and insufficient review and independent assessment of project implementation activities.

The Sanctions Committee Had a Key Role in Enforcing Sanctions and Approving Contracts

The sanctions committee was responsible for three key elements of the Oil for Food program: (1) monitoring implementation of the sanctions, (2) screening contracts to prevent the purchase of items that could have military uses, and (3) approving Iraq’s oil and commodity contracts.

U.N. Security Council resolution 661 of 1990 directed all states to prevent Iraq from exporting products, including petroleum, into their territories. Paragraph 6 of resolution 661 established a sanctions committee to report to the Security Council on states’ compliance with the sanctions and to recommend actions regarding effective implementation. As early as June 1996, the Maritime Interception Force, a naval force of coalition partners including the United States and Great Britain, informed the sanctions committee that oil was being smuggled out of Iraq through Iranian territorial waters. In December 1996, Iran acknowledged the smuggling and reported that it had taken action. In October 1997, the sanctions committee was again informed about smuggling through Iranian waters. According to multiple sources, oil smuggling also occurred through Jordan, Turkey, Syria, and the Gulf. Smuggling was a major source of illicit revenue for the former Iraqi regime through 2002.

A primary function of the sanctions committee was to review and approve contracts for items that could be used for military purposes. The United States conducted the most thorough review; about 60 U.S. government technical experts assessed each item in a contract to determine its potential military application. According to U.N. Secretariat data in 2002, the United States was responsible for about 90 percent of the holds placed on goods to be exported to Iraq. As of April 2002, about $5.1 billion worth of goods were being held for shipment to Iraq. According to OIP, no contracts were held solely on the basis of price.

Under Security Council resolution 986 of 1995, and its implementing procedures, the sanctions committee was responsible for approving Iraq’s oil contracts, particularly to ensure that the contract price was fair, and for approving Iraq’s commodity contracts. The U.N.’s oil overseers reported in November 2000 that the oil prices proposed by Iraq appeared low and did not reflect the fair market value. According to a senior OIP official, the independent oil overseers also reported in December 2000 that purchasers of Iraqi oil had been asked to pay surcharges. In March 2001, the United States informed the sanctions committee about allegations that Iraqi government officials were receiving illegal surcharges on oil contracts and illicit commissions on commodity contracts. The sanctions committee attempted to address these allegations by implementing retroactive pricing for oil contracts in 2001.

It is unclear what actions the sanctions committee took to respond to illicit commissions on commodity contracts. Due to increasing concern about the humanitarian situation in Iraq and pressure to expedite the review process, the Security Council passed resolution 1284 in December 1999 to direct the sanctions committee to accelerate the review process. Under fast-track procedures, the sanctions committee allowed OIP to approve contracts for food, medical supplies, and agricultural equipment (beginning in March 2000), water treatment and sanitation (August 2000), housing (February 2001), and electricity supplies (May 2001).

Issues for Further Investigation and the Status of Current Efforts

A number of investigations and audits of the Oil for Food program are under way. These efforts may wish to further examine how the structure of the program enabled the Iraqi government to obtain illegal revenues, the role of member states in monitoring and enforcing the sanctions, actions taken to reduce oil smuggling, and the responsibilities and procedures for assessing price reasonableness in commodity contracts. Current or planned efforts include an inquiry initiated by the United Nations, an investigation and audit overseen by the Iraqi Board of Supreme Audit, and efforts undertaken by several U.S. congressional committees.

Issues for Further Investigation and Analysis

Ongoing and planned investigations of the Oil for Food program provide an opportunity to better quantify the extent of corruption, determine the adequacy of internal controls, and identify ways to improve future humanitarian assistance programs conducted within an economic sanctions framework. Based on our work, we identified several areas that warrant further analysis.

Size and Structure of the Oil for Food Program

The scope of the Oil for Food program was extensive. The United Nations attempted to oversee a $67 billion program providing humanitarian and other assistance in 24 sectors to a country with 24 million people and borders 3,500 kilometers long.

When the program was first proposed in 1991, the Secretary General considered having either the United Nations, an independent agent, or the Iraqi government negotiate oil and commodity contracts. The Secretary General concluded that the first two options were impractical and proposed that Iraq would negotiate the contracts and U.N. staff would work at Iraq’s oil ministry to ensure compliance. The final MOU between the Iraqi government and the United Nations granted control of contract negotiations to Iraq in recognition of its sovereignty.

Investigations of the Oil for Food program should consider examining how the size and structure of the Oil for Food program enabled the Iraqi government to obtain illegal revenues through illicit surcharges and commissions.

Role of Member States in Oversight

Under Security Council resolutions, all member states were responsible for enforcing the sanctions and the United Nations depended on states bordering Iraq to deter smuggling. National companies were required to register with their respective permanent missions to the United Nations prior to direct negotiations with the Iraqi government, but it is unclear what criteria the missions used to assess the qualifications of their companies. Issues that warrant further analysis include the role of member states in monitoring and enforcing the sanctions and the criteria countries used in registering national oil purchasers and commodity suppliers.

Prior to the imposition of sanctions, Turkey was one of Iraq’s major trading partners. Total trade between the two countries was valued at $3 billion per year, and Turkey received about $1 billion each year by trucking goods to Iraq from Turkish ports. Jordan had also been a top trading partner; in 2001, it was the fifth largest exporter to Iraq and was the ninth largest importer of Iraqi commodities.

Jordan and Iraq had annual trade protocols during the U.N. sanctions that allowed Iraq to sell heavily discounted oil to Jordan in exchange for up to $300 million in Jordanian goods. The sanctions committee noted the existence of the protocol but took no action. From November 2000 to March 2003, Iraq exported up to 200,000 barrels per day of oil through a Syrian pipeline in violation of UN sanctions. It is unclear what actions the sanctions committee or the United States took to stop the illegal exporting of Iraqi oil to Syria.

Investigations should considering examining any actions that were taken to reduce Iraqi oil smuggling as well as the factors that may have precluded the sanctions committee from taking action.

Assessing the Reasonableness of Contract Pricing

While sanctions committee procedures stated that the Secretariat was to examine each contract for price and value, OIP officials stated that no U.N. resolution tasked them with assessing the price reasonableness of the contracts. Although the sanctions committee was responsible for approving commodity contracts, it primarily screened contracts to prevent the purchases of items with potential military uses.

In December 1999, U.N. Security Council resolution 1284 directed the sanctions committee to accelerate approval procedures for goods no longer subject to sanctions committee review, including food and equipment and supplies to support the health, agricultural, water treatment and sanitation, housing, and electricity sectors.

It is unclear where the roles and responsibilities for assessing price reasonableness rested. Audits and other inquiries should determine which entities assessed the reasonableness of prices for commodity contracts that were negotiated between the Iraqi government and suppliers and what actions were taken on contracts with questionable pricing. These efforts should also examine how prices for commodities were assessed for reasonableness under fast-track procedures.

Other Issues for Consideration

Much of the information on surcharges on oil sales and illicit commissions on commodity contracts is with the ministries in Baghdad and national purchasers and suppliers. We did not have access to this data to verify the various allegations of corruption associated with these transactions. Subsequent investigations of the Oil for Food program should include a statistical sampling of these transactions to more accurately document the extent of corruption and the identities of companies and countries that engaged in illicit transactions. This information would provide a basis for restoring those assets to the Iraqi government.

Subsequent evaluations and audits should also consider an analysis of the lessons learned from the Oil for Food program and how future humanitarian programs of this nature should be structured to ensure that funds are spent on intended beneficiaries and projects. For example, analysts may wish to review the codes of conduct developed for the CPA’s Oil for Food former coordination center and suppliers. In addition, U.N. specialized agencies implemented the program in the northern governorates while the program in central and southern Iraq was run by the central government in Baghdad. A comparison of these two approaches could provide insight on the extent to which the operations were transparent and the program delivered goods and services to the Iraqi people.

The history of inadequate oversight and corruption in the Oil for Food program also 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. 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 the nearly $14 billion pledged by other countries.

Status of Investigations

Several investigations into the Oil for Food program are under way. In April 2004, a U.N. inquiry was announced to examine allegations of corruption and misconduct within the United Nations Oil for Food program and its overall management of the humanitarian program. In addition, Iraq’s Board of Supreme Audit contracted with the accounting firm Ernst and Young to conduct an investigation of the program. Several U.S. congressional committees have also begun inquiries into U.N. management of the Oil for Food program and U.S. oversight through its role on the sanctions committee.

Independent Inquiry Committee

The Independent Inquiry Committee, under the direction of former Federal Reserve Chairman Paul Volcker, began on April 21, 2004, with a U.N. Security Council resolution supporting the inquiry and the appointment of two additional high-level officials to oversee the investigation. On June 15, 2004, the Committee announced the appointment of its senior staff and the recruitment of additional staff, including attorneys, investigators, and accountants. The Committee plans to issue an interim report in the summer of 2004, followed by a final report in early 2005.

According to the terms of reference, this investigation will collect and examine information relating to the administration and management of the Oil for Food program, including allegations of fraud and corruption on the part of U.N. staff and those entities that had contracts with the United Nations or the Iraqi government. The Committee intends to determine whether (1) procedures for processing and approving contracts, monitoring oil sales and deliveries, and purchasing and delivering humanitarian goods were violated; (2) U.N. officials, staff, or contractors engaged in illicit or corrupt activities; and (3) program accounts were maintained in accordance with U.N. financial regulations.

The Independent Inquiry Committee, the Iraqi Board of Supreme Audit, and the CPA signed a memorandum of understanding to facilitate the Committee’s access to Oil for Food documents in Iraq. As part of its contract with the Iraqi Board of Supreme Audit to audit the Oil for Food program, the international accounting firm Ernst & Young is to identify and organize Iraqi records related to the Oil for Food program.

Iraqi Board of Supreme Audit

In March 2004, the CPA authorized the Iraqi Board of Supreme Audit to conduct a full and independent audit, investigation, and accounting of the Oil for Food program and the disposition of Iraqi assets associated with the program. As of May 19, 2004, the CPA had authorized the expenditure of $20 million for this purpose, and the Board contracted with Ernst & Young to carry out the investigation. The Board is to release a final report to the interim Iraqi government and to the public with specific findings and recommendations. The CPA expected the report to address (1) the manner in which the program may or may not have been mismanaged, (2) the disposition of Iraqi contracts and assets on the program, (3) identification of individuals who may have benefited through improper disposition of program contracts and assets, (4) the current location and status of Iraqi assets that may have been diverted and recommendations on recovering these assets, and (5) possible criminal offenses.

Congressional Investigations

Several U.S. congressional committees and subcommittees are also in various stages of examining the Oil for Food program. In May 2004, the Senate Committee on Governmental Affairs, Permanent Subcommittee on Investigations, announced an investigation to examine allegations of improper conduct and whether such conduct may have negatively affected U.S. interests. The Subcommittee is particularly interested in the extent to which any misconduct took place within the United States and the involvement of U.S. citizens, residents, or businesses. In addition, the House International Relations Committee and the Subcommittee on National Security, Emerging Threats, and International Relations, House Committee on Government Reform, are investigating allegations of misconduct. Along with the Senate Permanent Subcommittee on Investigations and the Senate Committee on Foreign Relations, they have requested program documents from the State Department and United Nations.

Mr. Chairman and Members of the Committee, this concludes my prepared statement. I will be happy to answer any questions you may have.

Contacts and Acknowledgments

For questions regarding this testimony, please call Joseph Christoff at (202) 512-8979. Other key contributors to this statement were Monica Brym, Tetsuo Miyabara, Audrey Solis, and Phillip Thomas.

Appendix I: Scope and Methodology

We used the following methodology to estimate the former Iraqi regime’s illicit revenues from oil smuggling, surcharges on oil, and commissions from commodity contracts from 1997 through 2002:

To estimate the amount of oil the Iraqi regime smuggled, we used Energy Information Administration (EIA) estimates of Iraqi oil production and subtracted oil sold under the Oil for Food program and domestic consumption. The remaining oil was smuggled through Turkey, the Persian Gulf, Jordan, and Syria (oil smuggling to Syria began late 2000). We estimated the amount of oil to each destination based on information from and discussions with officials of EIA, Cambridge Energy Research Associates, the Middle East Economic Survey, and the private consulting firm Petroleum Finance.

We used the price of oil sold to estimate the proceeds from smuggled oil. We discounted the price by 9 percent for the difference in quality. We discounted this price by 67 percent for smuggling to Jordan and by 33 percent for smuggling through Turkey, the Persian Gulf, and Syria. According to oil industry experts, this is representative of the prices paid for smuggled oil.

To estimate the amount Iraq earned from surcharges on oil, we multiplied the barrels of oil sold under the Oil for Food program from 1997 through 2002 by 25 cents per barrel. According to Security Council members, the surcharge varied, but Iraq tried to get as much as 50 cents per barrel. Industry experts also stated the surcharge varied.

To estimate the commission from commodities, we multiplied Iraq’s letters of credit for commodity purchases by 5 percent for 1997 through 1998 and 10 percent for 1999 through 2002. According to Security Council members, the commission varied from 5 percent to 10 percent. This percentage was also confirmed in interviews conducted by U.S. officials with former Iraqi regime ministers of oil, finance, and trade and with Sadaam Hussein’s presidential advisors.

GAO did not obtain source documents and records from the former regime about its smuggling, surcharges, and commissions. Our estimate of illicit revenues is therefore not a precise accounting number. Areas of uncertainty in our estimate include:

GAO’s estimate of the revenue from smuggled oil is less than the estimates of U.S. intelligence agencies. We used estimates of Iraqi oil production and domestic consumption for our calculations. U.S. intelligence agencies used other methods to estimate smuggling.

GAO’s estimate of revenue from oil surcharges is based on a surcharge of 25 cents per barrel from 1997 through 2002. However, the average surcharge could be lower. U.N. Security Council members and oil industry sources do not know when the surcharge began or ended or the precise amount of the surcharge. One oil industry expert stated that the surcharge was imposed at the beginning of the program but that the amount varied. Security Council members and the U.S. Treasury Department reported that surcharges ranged from 10 cents to 50 cents per barrel. As a test of reasonableness, GAO compared the price paid for oil under the Oil for Food program with a proxy oil price for the period 1997 through 2002. We found that for the entire period, the price of Iraqi oil was considerably below the proxy price. Oil purchasers would have to pay below market price to have a margin to pay the surcharge.

GAO’s estimate of the commission on commodities could be understated. We calculated commissions based on the commodity contracts for the 15 governorates in central and southern Iraq (known as the “59-percent account” because these governorates received this percentage of Oil for Food revenues). We excluded contracts for the three northern governorates (known as the “13-percent account”). However, the former Iraqi regime negotiated the food and medical contracts for the northern governorates, and the Defense Contract Audit Agency found that some of these contracts were potentially overpriced. The Defense Contract Audit Agency also found extra fees of between 10 and 20 percent on some contracts.

Appendix II: Timeline of Major Events Related to Sanctions Against Iraq and the Administration of the Oil for Food Program

Iraqi forces invaded Kuwait. Resolution 660 condemned the invasion and demands immediate withdrawal from Kuwait.

Imposed economic sanctions against the Republic of Iraq. The resolution called for member states to prevent all commodity imports from Iraq and exports to Iraq, with the exception of supplies intended strictly for medical purposes and, in humanitarian circumstances, foodstuffs.

President Bush ordered the deployment of thousands of U.S. forces to Saudi Arabia.

Public Law 101-513, § 586C, prohibited the import of products from Iraq into the United States and the export of U.S. products to Iraq.

Iraq War Powers Resolution authorized the president to use “all necessary means” to compel Iraq to withdraw military forces from Kuwait.

Operation Desert Storm was launched: coalition operation was targeted to force Iraq to withdraw from Kuwait.

Iraq announced acceptance of all relevant U.N. Security Council resolutions.

U.N. Security Council Resolution 687 (Cease-Fire Resolution)

Mandated that Iraq must respect the sovereignty of Kuwait and declare and destroy all ballistic missiles with a range of more than 150 kilometers as well as all weapons of mass destruction and production facilities.

The U.N. Special Commission (UNSCOM) was charged with monitoring Iraqi disarmament as mandated by U.N. resolutions and to assist the International Atomic Energy Agency in nuclear monitoring efforts.

Proposed the creation of an Oil for Food program and authorized an escrow account to be established by the Secretary General. Iraq rejected the terms of this resolution.

Second attempt to create an Oil for Food program. Iraq rejected the terms of this resolution.

Authorized transferring money produced by any Iraqi oil transaction on or after August 6, 1990, which had been deposited into the escrow account, to the states or accounts concerned as long as the oil exports took place or until sanctions were lifted.

Allowed Iraq to sell $1 billion worth of oil every 90 days. Proceeds were to be used to procure foodstuffs, medicine, and material and supplies for essential civilian needs. Resolution 986 was supplemented by several U.N. resolutions over the next 7 years that extended the Oil for Food program for different periods of time and increased the amount of exported oil and imported humanitarian goods.

Established the export and import monitoring system for Iraq.

Signed a memorandum of understanding allowing Iraq’s export of oil to pay for food, medicine, and essential civilian supplies.

Based on information provided by the Multinational Interception Force (MIF), communicated concerns about alleged smuggling of Iraqi petroleum products through Iranian territorial waters in violation of resolution 661 to the Security Council sanctions committee.

Committee members asked the United States for more factual information about smuggling allegations, including the final destination and the nationality of the vessels involved.

Provided briefing on the Iraqi oil smuggling allegations to the sanctions committee.

Acknowledged that some vessels carrying illegal goods and oil to and from Iraq had been using the Iranian flag and territorial waters without authorization and that Iranian authorities had confiscated forged documents and manifests. Representative agreed to provide the results of the investigations to the sanctions committee once they were available.

Phase I of the Oil for Food program began.

Extended the term of resolution 986 another 180 days (phase II).

Authorized special provision to allow Iraq to sell petroleum in a more favorable time frame.

Brought the issue of Iraqi smuggling petroleum products through Iranian territorial waters to the attention of the U.N. Security Council sanctions committee.

Coordinator of the Multinational Interception Force (MIF)

Reported to the U.N. Security Council sanctions committee that since February 1997 there had been a dramatic increase in the number of ships smuggling petroleum from Iraq inside Iranian territorial waters.

Extended the Oil for Food program another 180 days (phase III).

Raised Iraq’s export ceiling of oil to about $5.3 billion per 6-month phase (phase IV).

Permitted Iraq to export additional oil in the 90 days from March 5, 1998, to compensate for delayed resumption of oil production and reduced oil price.

Authorized Iraq to buy $300 million worth of oil spare parts to reach the export ceiling of about $5.3 billion.

Public Law 105-235, a joint resolution finding Iraq in unacceptable and material breach of its international obligations.

Oct. 31, 1998 U.S. legislation: Iraq Liberation Act Public Law 105-338, § 4, authorized the president to provide assistance to Iraqi democratic opposition organizations.

Iraq announced it would terminate all forms of interaction with UNSCOM and that it would halt all UNSCOM activity inside Iraq.

Renewed the Oil for Food program for 6 months beyond November 26 at the higher levels established by resolution 1153. The resolution included additional oil spare parts (phase V).

Following Iraq’s recurrent blocking of U.N. weapons inspectors, President Clinton ordered 4 days of air strikes against military and security targets in Iraq that contribute to Iraq’s ability to produce, store, and maintain weapons of mass destruction and potential delivery systems.

President Clinton provided the status of efforts to obtain Iraq’s compliance with U.N. Security Council resolutions. He discussed the MIF report of oil smuggling out of Iraq and smuggling of other prohibited items into Iraq.

Renewed the Oil for Food program another 6 months (phase VI).

Permitted Iraq to export an additional amount of $3.04 billion of oil to make up for revenue deficits in phases IV and V.

Extended phase VI of the Oil for Food program for 2 weeks until December 4, 1999.

Extended phase VI of the Oil for Food program for 1 week until December 11, 1999.

Renewed the Oil for Food program another 6 months (phase VII).

Abolished Iraq’s export ceiling to purchase civilian goods. Eased restrictions on the flow of civilian goods to Iraq and streamlined the approval process for some oil industry spare parts. Also established the United Nations Monitoring, Verification and Inspection Commission (UNMOVIC).

Increased oil spare parts allocation from $300 million to $600 million under phases VI and VII.

Renewed the Oil for Food program another 180 days until December 5, 2000 (phase VIII).

Extended the Oil for Food program another 180 days (phase IX).

Ambassador Cunningham acknowledged Iraq’s illegal re-export of humanitarian supplies, oil smuggling, establishment of front companies, and payment of kickbacks to manipulate and gain from Oil for Food contracts. Also acknowledged that the United States had put holds on hundreds of Oil for Food contracts that posed dual-use concerns.

Ambassador Cunningham addressed questions regarding allegations of surcharges on oil and smuggling. Acknowledged that oil industry representatives and other Security Council members provided the United States anecdotal information about Iraqi surcharges on oil sales. Also acknowledged companies claiming they were asked to pay commissions on contracts.

Extended the terms of resolution 1330 (phase IX) another 30 days.

Renewed the Oil for Food program an additional 150 days until November 30, 2001 (phase X).

The resolution stipulated that a new Goods Review List would be adopted and that relevant procedures would be subject to refinement. Renewed the Oil for Food program another 180 days (phase XI).

UNMOVIC reviewed export contracts to ensure that they contain no items on a designated list of dual-use items known as the Goods Review List. The resolution also extended the program another 180 days (phase XII).

MIF reported that there had been a significant reduction in illegal oil exports from Iraq by sea over the past year but noted oil smuggling was continuing.

Extended phase XII of the Oil for Food program another 9 days.

Renewed the Oil for Food program another 180 days until June 3, 2003 (phase XIII).

Approved changes to the list of goods subject to review by the sanctions committee.

Chairman reported on a number of alleged sanctions violations noted by letters from several countries and the media from February to November 2002. Alleged incidents involved Syria, India, Liberia, Jordan, Belarus, Switzerland, Lebanon, Ukraine, and the United Arab Emirates.

Operation Iraqi Freedom is launched. Coalition operation led by the United States initiated hostilities in Iraq.

Adjusted the Oil for Food program and gave the Secretary General authority for 45 days to facilitate the delivery and receipt of goods contracted by the Government of Iraq for the humanitarian needs of its people.

Public Law 108-11, § 1503, authorized the President to suspend the application of any provision of the Iraq Sanctions Act of 1990.

Extended provisions of resolution 1472 until June 3, 2003.

End of major combat operations and beginning of post-war rebuilding efforts.

Lifted civilian sanctions on Iraq and provided for the end of the Oil for Food program within 6 months, transferring responsibility for the administration of any remaining program activities to the Coalition Provisional Authority (CPA).

Transferred administration of the Oil for Food program to the CPA.

Responded to allegations of fraud by U.N. officials that were involved in the administration of the Oil for Food program.

Proposed that a special investigation be conducted by an independent panel.

Supported the appointment of the independent high-level inquiry and called upon the CPA, Iraq, and member states to cooperated fully with the inquiry.

The CPA transferred power to the interim Iraqi government.

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