A Review of the United Nations Oil-For-Food Program

S. HRG. 108–546 A REVIEW OF THE UNITED NATIONS OIL-FOR-FOOD PROGRAM HEARING BEFORE THE COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE ONE HUNDRED EIGHTH CONGRESS SECOND SESSION APRIL 7, 2004 Printed for the use of the Committee on Foreign Relations ( Available via the World Wide Web: http://www.access.gpo.gov/congress/senate U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 95–026 PDF 2004 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 95026.TXT SFORELA1 PsN: SFORELA1 COMMITTEE ON FOREIGN RELATIONS CHUCK HAGEL, Nebraska LINCOLN CHAFEE, Rhode Island GEORGE ALLEN, Virginia SAM BROWNBACK, Kansas MICHAEL B. ENZI, Wyoming GEORGE V. VOINOVICH, Ohio LAMAR ALEXANDER, Tennessee NORM COLEMAN, Minnesota JOHN E. SUNUNU, New Hampshire RICHARD G. LUGAR, Indiana, Chairman JOSEPH R. BIDEN, JR., Delaware PAUL S. SARBANES, Maryland CHRISTOPHER J. DODD, Connecticut JOHN F. KERRY, Massachusetts RUSSELL D. FEINGOLD, Wisconsin BARBARA BOXER, California BILL NELSON, Florida JOHN D. ROCKEFELLER IV, West Virginia JON S. CORZINE, New Jersey KENNETH A. MYERS, JR., Staff Director ANTONY J. BLINKEN, Democratic Staff Director (II) VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 95026.TXT SFORELA1 PsN: SFORELA1 C O N T E N T S Page Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening statement ... 4 Christoff, Mr. Joseph A., Director, International Affairs and Trade, U.S. Gen- eral Accounting Office, Washington, DC ............................................................ 47 Prepared statement .......................................................................................... 48 Dodd, Hon. Christopher J., U.S. Senator from Connecticut, prepared state- ment ...................................................................................................................... 31 Lugar, Hon. Richard G., U.S. Senator from Indiana, opening statement ........... 1 Negroponte, Amb. John D., U.S. Permanent Representative to the United Nations, U.S. Mission to the United Nations; accompanied by: Amb. Patrick F. Kennedy, U.S. Representative for United Nations Management and Re- form, U.S. Mission to the United Nations, New York, NY ............................... 7 Prepared statement of Ambassador Negroponte ........................................... 9 Excerpts from OIOS annual reports providing instances in which findings from OIOS investigations were referred to national law enforcement authorities for further investigation and possible prosecutions ................ 38 Raphel, Hon. Robin L., Coordinator, Office of Iraq Reconstruction; accom- panied by: Hon. Kim R. Holmes, Assistant Secretary of State for Inter- national Organizations, U.S. Department of State, Washington, DC ............. Prepared statement of Ambassador Raphel ................................................... 14 16 Thibault, Mr. Michael J., Deputy Director, Defense Contract Audit Agency, U.S. Department of Defense, Washington, DC .................................................. 60 Prepared statement .......................................................................................... 62 APPENDIX Feingold, Hon. Russell D., U.S. Senator from Wisconsin, statement submitted for the record ........................................................................................................ 71 Bremer, Amb. L. Paul III, Administrator, Coalition Provisional Authority (CPA), statement submitted for the record ........................................................ 71 United Nations Children’s Fund (UNICEF), statement submitted for the record .................................................................................................................... 72 World Health Organization (WHO), statement submitted for the record, ‘‘The Situation of Health Supplies for Iraq Under the OFFP, 1996-2002’’ ............... 73 Cotecna Inspection S.A., letter to Senators Lugar and Biden submitting two documents for the record: ‘‘Guide to authentication procedures’’ followed in Iraq, along with a ‘‘Statement from Cotecna Inspection S.A.’’ ..................... 76 Levitte, Hon. Jean-David, French Ambassador to the United States, op-ed article from the Los Angeles Times, April 7, 2004 ............................................ 81 Responses of Amb. John D. Negroponte to additional questions for the record submitted by: Senator Richard G. Lugar ................................................................................ Senator Joseph R. Biden, Jr. ........................................................................... Senator Christopher J. Dodd ........................................................................... Senator John E. Sununu .................................................................................. 82 86 86 93 Responses of Amb. Patrick F. Kennedy to additional questions for the record submitted by Senator Richard G. Lugar ............................................................ 93 Responses of Hon. Robin L. Raphel to additional questions for the record submitted by: Senator Richard G. Lugar ................................................................................ 98 Senator Joseph R. Biden, Jr. ........................................................................... 99 Senator Chuck Hagel ....................................................................................... 100 Responses of Hon. Kim R. Holmes to additional questions for the record submitted by Senator Richard G. Lugar ............................................................ 102 (III) VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 95026.TXT SFORELA1 PsN: SFORELA1 IV Page Responses of Joseph A. Christoff to additional questions for the record sub- mitted by Senator Richard G. Lugar .................................................................. 103 Response of Michael J. Thibault to an additional question for the record submitted by Senator Richard G. Lugar ............................................................ 104 Saybolt Eastern Hemisphere B.V., responses of Peter Boks, general counsel, to additional questions for the record submitted by Senator Lugar ................ Saybolt’s contract with the United Nations and related documents ............ 104 107 ‘‘Report on the Pricing Evaluation of Contracts Awarded Under the Iraq Oil-for-Food Program,’’ submitted by the Joint Defense Contract Audit Agency and Defense Contract Management Agency OFF Pricing Evaluation Team ...................................................................................................................... 157 VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 95026.TXT SFORELA1 PsN: SFORELA1 A REVIEW OF THE UNITED NATIONS OIL-FOR-FOOD PROGRAM WEDNESDAY, APRIL 7, 2004 U.S. SENATE, COMMITTEE ON FOREIGN RELATIONS, Washington, DC. The committee met, pursuant to notice, at 9:30 a.m. in room SD– 419, Dirksen Senate Office Building, Hon. Richard G. Lugar (chair- man of the committee), presiding. Present: Senators Lugar, Hagel, Chafee, Allen, Coleman, Sununu, Biden, and Dodd. OPENING STATEMENT OF SENATOR RICHARD G. LUGAR, CHAIRMAN The CHAIRMAN. This hearing of the Senate Foreign Relations Committee is called to order. The Senate Foreign Relations Com- mittee meets today to examine the United Nations Oil-for-Food Program. Although the precise extent of the corruption and mis- management in this program is not yet known, there is no doubt that billions of dollars that should have been spent on humani- tarian needs in Iraq were siphoned off by Saddam Hussein’s regime through a system of surcharges, bribes and kickbacks. This corrup- tion was not solely a product of Saddam Hussein’s machinations. He required members of the United Nations Security Council, who were willing to be complicit in his activities, and he required United Nations officials and contractors who were dishonest, inat- tentive or were willing to make damaging compromises in pursuit of a compassionate mission. Now, the costs of this corruption were multifaceted, and they may continue to be felt for years. First, although the Oil-for-Food Program delivered food, medicine and other essentials to millions of people, countless Iraqis may have died or suffered because billions of dollars were diverted from the humanitarian effort. Second, Saddam Hussein used the proceeds of the corruption to prop up his regime and his army. The coalition forces that invaded Iraq faced a better equipped Iraqi military than they otherwise would have faced had the corruption not occurred. According to the new head of the Iraq Survey Group, Charles Duelfer, these funds were the, ‘‘primary source,’’ for Saddam’s efforts to procure military goods and expertise. A portion of these illicit funds may still be ac- cessible to Saddam loyalists who are financing terrorism against coalition forces and Iraqi citizens. Third, the corruption in the Oil-for-Food Program almost cer- tainly contributed to the international division over containing and ultimately ousting Saddam Hussein. By exacerbating the humani- (1) VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1 2 tarian problem in Iraq, the corruption weakened the international consensus for containment. Even more disturbing is the prospect that governments or individual officials may have opposed the coa- lition’s decision to use military force against Saddam Hussein in part because an overthrow of the regime would expose ongoing cor- ruption in the Oil-for-Food Program. Even if we assume that such calculations were not a part of any government’s deliberative proc- ess, we must acknowledge that corruption on this scale carries with it the potential to skew international decisionmaking. Finally, the damage to U.N. credibility from corruption in the Oil-for-Food Program is harmful to United States foreign policy and to efforts aimed at coordinating a stronger global response to terrorism. Whatever influence and capabilities that the United Na- tions possesses come from the credibility associated with countries acting together in a well-established forum with well-established rules. Profiteering, mismanagement and bureaucratic stonewalling squander this precious resource. At a time when the United States is appealing for greater international help in Iraq, Afghanistan, and in trouble spots around the world, a diminishment of United Nations credibility reduces United States’ options and increases our own burdens. If the United Nations cannot be trusted to run a humanitarian program, its other activities, including peace- keeping, arms inspection regimes, or development projects, may be called into question. The United Nations’ ability to organize burden sharing and take over missions best handled by the international community is critical to the long-term success of United States for- eign policy. As such, the United States must insist on a full inves- tigation of the Oil-for-Food Program and work with the United Na- tions to prevent corruption on future projects. The United Nations initiated the Oil-for-Food Program for under- standable reasons. The world community felt a humanitarian re- sponsibility to prevent the deaths of innocent Iraqis, who, in es- sence, were being held hostage by the criminal intransigence of the Iraqi regime. The United States embraced this program in the 1990s not only because of altruistic impulses, but also because, without it, our policy of containing Iraq through sanctions may not have been sustainable within the international community. To pro- vide humanitarian relief, the Security Council voted to allow Iraq to sell a portion of its domestically produced oil and use the re- ceipts to buy food and medicine. The Security Council made the de- cision to have the receipts from oil sales deposited with the U.N., and have the U.N. oversee the Iraqi Government’s purchase of food and medicine. The process was to be managed by the United Na- tions Iraq Sanctions Committee, known as the 661 Committee, after the Security Council resolution that created it. Few American or international officials went into this program with the view that Saddam Hussein could be trusted. Any rational observer should have admitted that the leader of a brutal regime who had invaded his neighbors, used weapons of mass destruction, undercut U.N. resolutions and routinely lied to the international community would try to game the system. Yet, despite this reality, the U.N.’s mechanisms for controlling Oil-for-Food contracts were inadequate, transparency went by the wayside, and effective inter- nal review of the program did not occur. The United Nations al- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1 3 lowed Saddam to select not only the suppliers of food and medicine, but also the buyers of Iraqi oil. Such an arrangement was a recipe for disaster. The General Accounting Office estimated that Saddam skimmed some $4.4 billion from transactions involving both sales and purchases. The GAO also estimated that an additional $5.7 bil- lion of oil was smuggled out of Iraq—separate from the oil sold through the Oil-for-Food Program. Much of it apparently was transferred through Syria and Turkey. The American people, who have borne much of the burden in of- fering the people of Iraq a better future, need answers to some key questions. First, why didn’t the U.N. committee set up to oversee the Oil-for-Food Program discover such egregious irregularities? Second, who were Iraq’s business partners, and to what degree did they facilitate and profit from the corruption? Third, was there complicity on the part of United Nations staff? Fourth, how much did individual governments know? Fifth, did individual countries actively aid Saddam, either because they disagreed with the sanc- tions policy, or because they saw money-making opportunities? These charges must be fully investigated. Secretary General Kofi Annan’s recent announcement that he will undertake a high-level investigation is welcome, but the Secretary General and his staff must understand that the credibility of this investigation will be suspect without diligent efforts to ensure its independence and its effectiveness. He must appoint individuals of the highest caliber, internationally recognized for their ability and integrity. The U.N.’s Office of Inspection and Oversight Services is conducting its own investigation into the possible culpability of U.N. personnel. The executive branch of the U.S. Government also should undertake its own investigation. We now have access to records in Iraq, and we have a long and highly developed expertise in contract oversight. Today, the For- eign Relations Committee commences its contribution to the exam- ination of the Oil-for-Food Program and we welcome Ambassador John Negroponte, the United States’ Permanent Representative to the United Nations. Joining him on our first panel are Ambassador Patrick Kennedy, the U.S. Representative for U.N. Management and Reform; Ambassador Robin Raphel, the Coordinator of the De- partment of State’s Office of Iraq Reconstruction, and Dr. Kim Holmes, Assistant Secretary of State for International Organiza- tions. On our second panel, we will hear from Joseph Christoff, the Di- rector of International Affairs and Trade at the General Accounting Office, and Michael Thibault, the Deputy Director of the Defense Contract Audit Agency. They will discuss in greater detail their ex- amination of the process and the methodology by which Saddam Hussein skimmed billions of dollars from the Oil-for-Food Program. We thank, in advance, our witnesses for joining us. We look for- ward to their insights. But first of all, it’s my privilege to call upon the distinguished ranking member, Senator Biden, for his opening comments. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1 4 OPENING STATEMENT OF SENATOR JOSEPH R. BIDEN, JR., RANKING MEMBER Senator BIDEN. Thank you, Mr. Chairman, and thank you for holding this hearing. We welcome all of our distinguished witnesses today. As you’ve indicated we’re going to hear testimony about the Oil-for-Food Program in Iraq, one of the largest humanitarian pro- grams ever managed by the United Nations, or any other institu- tion for that matter. The Oil-for-Food Program has generally been recognized as eas- ing the suffering of the Iraqi people. For example, the daily caloric intake of the average Iraqi citizen doubled between 1996 when the program started and 2002. But there also are serious allegations about mismanagement and corruption that must be addressed, not simply to hold accountable those who are guilty of corruption but to make sure that we get it right in the future because we’re going to lose credibility, the institution will lose credibility and the ability in the future to act is going to be, I think, seriously damaged. To that end I welcome your and Secretary General Kofi Annan’s call for an independent investigation into these allegations because it’s critically important, as I indicated, for the integrity and effi- ciency of the United Nations that we get to the bottom of the story. Without credibility it’s not going to get support. We need to know to what extent the United Nations Secretariat and its employees knew about Saddam’s manipulation of the Oil-for-Food Program, whether they were complicitous and what role, if any, the United Nations member states played in the process. Just as important as learning who did what and when is ensur- ing that the lessons learned from the Oil-for-Food Program can be applied to future humanitarian assistance programs and sanctions regimes. Ambassador. So today’s agenda is important. But quite frankly we can’t ignore the thousand-pound gorilla sitting in the middle of this room today. The gorilla is, of course, the date of June 30, the deadline for returning sovereignty to Iraq. It gives us 85 days to finally get things right in Iraq and put on a course; that is, one that increases the prospects for success, success defined as having a participatory democracy in Iraq that is representative of the Iraqi people that is able to maintain its own boundaries and security and over time can do it without the help of the inter- national community. I’ve been saying for the last year that we have first-rate folks in Baghdad in the Coalition Provisional Authority, and I believe that to this day. But even the best folks can’t create order out of chaos without a plan. Speaking for myself only, I still believe we don’t have a plan for transferring authority to the Iraqi people, and if we have one I don’t know what it is. I’m not informed of it; I don’t know what the deal is and I don’t think I’m alone in that regard. I doubt whether there’s any single Member of Congress who does. We still don’t know how the caretaker Iraqi Government will be chosen or what it will look like. We don’t know who will referee the disputes that are sure to come along among the Shi’ite, Sunni and Kurds. We still don’t know what role, if any, the United Nations will play and whether or not NATO will play. We still don’t know VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1 5 who the American ambassador will be in what is likely to be the largest and most important American embassy in the world. We know one thing, that between July 30 and January 31, when general elections are to be held and a constitution is to be written, there will be an incredible difficulty. Incredible difficulty. In short, we still don’t know the answers to the most basic and critical ques- tions we face in Iraq. Why are these questions and their answers so important? Well, I would suggest they are important because they go to the funda- mental tension we face on June 30 between two contradictory needs. On the one hand the Iraqis will desperately need a strong international support to provide security, settle political disputes, and economic health. Their own security forces and political leaders will not be up to the task no matter how good they are. On the other hand, the U.S. desperately needs to take an American face off the occupation in Iraq, as the President has said. Otherwise we’ll continue to bear 90 percent of the cost, take nearly 90 percent of the non-Iraqi casualties and provide 90 percent of the force. And we’ll remain responsible for everything that goes wrong in Iraq. Now, how do we square this circle? I believe by seizing the one last chance that we have to get the United Nations and NATO in on the deal. A U.N. high commissioner would have more legitimacy with Iraqis than a U.S. Ambassador to help them decide on a care- taker government, to referee disputes and oversee elections, to ref- eree the disputes that are going to take place in the constitution, as was the case with the loya jirga in Afghanistan, and the U.N. would open the door to a more international participation by giving political coverage of the leaders whose peoples oppose the war. I have met with all of those leaders, I say to our Ambassador. They have been very straightforward with me. They need a U.N. resolu- tion to vote for the participation of NATO forces. You and I both know that will be a relatively small number of forces but enough according to the Supreme Allied Commander to take care of secur- ing the borders, to take over responsibility in the north and or to take over the responsibility for the Polish division in the south, freeing up roughly 20,000 American soldiers that we could badly use now, General Abizaid could badly use right now. And the other piece of this is, we talked in this report, the Sen- ator held hearings on the Hamre Commission. We talked about the window of opportunity closing. Well, the window of opportunity for the American people is closing. If we don’t get this right soon, they’ll continue to look at this as if we’re alone in this deal. It’s an exaggeration, but things appear to be out of hand, and in fact we may very well lose their support which would be devastating, be- cause we cannot afford to lose Iraq. I would say to my friend from Nebraska, who is a decorated war hero from Vietnam; you know what this reminds me of? Only one similarity to Vietnam. The Tet Offensive. The Tet Offensive took the mask off, said to the American people, my lord, we don’t have control there, we don’t have control, we don’t have a plan. I think it’s exaggerated but the marching that’s taking place, the uprisings occurring in the triangle as well as that portion of the Shi’ite com- munity, is communicating a similar fear to the American people. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1 6 That we’re alone, we’re the only ones in on the deal. And we don’t have a plan. This is salvageable. NATO cannot take on Iraq tomorrow but it could quickly generate enough troops to patrol Iraq’s borders like I said, train its military, take responsibility for the north and or the Polish sector. And that would take a lot of pressure off our forces. We may be a day late and a dollar short in getting the U.N. and NATO engaged, though. This administration, I think, has squan- dered so many opportunities, I think this is its one last oppor- tunity. One last opportunity. And the worse the situation gets on the ground the more reluctant others are going to become to get in- volved. I read with great interest former CENTCOM commander General Zinni’s comments today in the Wall Street Journal, basi- cally saying it may be too late. I think he’s wrong, that it’s not too late. But let me tell you, I think it’s getting close. I still believe we have a chance to broaden the coalition because many of our friends and allies have as much at stake in Iraq’s success as we do. And as much to fear from its failure as we do. I think we have to make this one last effort to significantly broaden the responsibility. In short, I believe we can still succeed and ensure a positive out- come on June 30. But to do so the administration needs to get seri- ous now about answering these fundamental questions. And that’s why I will raise them today, and when the Senator and I will be having lunch with the Secretary. So, let me conclude, Mr. Chairman, I realize that’s not the spe- cific subject of our hearing today but I think it’s all so interrelated here. And I respectfully suggest again to the President of the United States, he should be either on a plane or on the telephone with our major European allies saying we’ve got a lot to lose here, folks, we’re in this together. What do you need to get in the deal? What do you need? What is it? What is it politically? What political input do you need? I’m open. Let’s solve this problem. And that may be going on but if it is, it’s a surprise to me. It would be a great pleasure to hear that but I don’t know why we’re not being told if it is, and if it isn’t I don’t understand what’s going on here. The President has to make a decision. It’s decision time. What will July 1 look like in Iraq? Thank you, Mr. Chairman. The CHAIRMAN. Thank you very much, Senator Biden. Let me just comment for a moment that clearly the hearings that we’ve scheduled for April 20, 21 and 22, are an advance notice to the ad- ministration and to others. We encourage preparation so that the committee and the general public will be informed. Those are im- portant dates. I mention them now so that those of you who are representing the administration today, and those of you from the State Department who are backing you, may convey our concern back to your colleagues. Senator Biden and I will directly address Secretary Powell. We will emphasize that we really do need an- swers to very critical issues. We’re determined to get them. Absent that, the two of us, supplemented by Senator Allen, Senator Hagel and others, may write a potential plan and hold our own hearing. That would be much less satisfying. We’ve been down this trail once before, in terms of planning prior to hostilities. On that occa- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1 7 sion, inexplicably, General Garner was unavailable; so were the planners. We do not want a repetition of that experience. We have a very serious issue ahead of us here today. We appreciate very much your coming to address the U.N. Oil-for-Food Program. As I understand, you wish to testify first, Ambassador Negroponte. Then Ms. Raphel, you will testify. Your associates will be available for questions, as I understand. I will ask you to pro- ceed in the order we introduced you, first of all, Ambassador Negroponte and then Ms. Raphel. Please take the time that you need. Your full statements will be made a part of the record. You need not ask for permission for that. It is granted. Please proceed in your own way. Ambassador Negroponte. STATEMENT OF AMB. JOHN D. NEGROPONTE, U.S. PERMA- NENT REPRESENTATIVE, U.S. MISSION TO THE UNITED NA- TIONS; ACCOMPANIED BY: AMB. PATRICK F. KENNEDY, U.S. REPRESENTATIVE FOR UNITED NATIONS MANAGEMENT AND REFORM, U.S. MISSION TO THE UNITED NATIONS Mr. NEGROPONTE. Thank you very much, Mr. Chairman, Senator Biden, distinguished members of the committee. I welcome the op- portunity to appear before you today to discuss the U.N. Oil-for- Food Program and recent allegations of possible mismanagement and abuse involving that program. At the outset I want to make perfectly clear that we share your concerns. We are committed to ensuring that all allegations are investigated and addressed. Following the recent specific allegations of corruption by U.N. of- ficials, I was immediately instructed by Secretary Powell to convey our concerns to United Nations Secretary General Annan. I have discussed this on several occasions with the Secretary General who has, on his own initiative, launched an investigation that will be independent, transparent, and comprehensive. As you know, we joined our fellow Security Council members on March 31 in wel- coming this expanded investigation and pledging our full coopera- tion. We must not forget that, allegations aside, it is the Iraqi peo- ple who would have been most hurt by any wrongdoing. It is for them most of all that we must take this responsibility very seri- ously and we will urge all United Nations member states to do the same. The Oil-for-Food Program, as you indicated, was created to al- leviate the hardships faced by the Iraqi people, hardships caused by Saddam Hussein’s regime’s refusal to comply with its obliga- tions and the resulting comprehensive, multilateral sanctions re- gime imposed by the Security Council on Iraq following the inva- sion of Kuwait in August 1990. The Oil-for-Food Program allowed for the import of humanitarian goods using the proceeds from au- thorized Iraqi oil sales while maintaining sanctions on imports other than food and medicine. It represented the largest humani- tarian relief operation ever launched by the international commu- nity. The United States supported the program’s general objective of creating a system to address the humanitarian needs of the Iraqi civilian population while maintaining strict sanctions enforcement on items that Saddam Hussein could use to re-arm or reconstitute his weapons of mass destruction program. We believe the system the Council devised largely met those objectives. However, the VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1 8 rules and procedures governing implementation of the program were the product of negotiation among the 15 members of the Secu- rity Council and between the United Nations and the former Iraqi regime. The United States was able to set basic parameters and monitor the functioning of the program through our participation in Security Council discussions and as a member of the Iraq Sanc- tions Committee, also known as the 661 Committee, named for the Security Council resolution that created it. However, we were not in a position to exercise exclusive control over the process as the committee made decisions through consensus. Although the flow of humanitarian and civilian goods to Iraq was a matter of strong interest to the U.S. Government, an even great- er goal throughout the period of sanctions was to ensure that no items were imported which could in any way contribute to Iraq’s weapons of mass destruction programs or capabilities. At the United States Mission to the United Nations we concentrated our efforts on this aspect of the sanctions. It is important to note that no U.S. Government funds, including those that might have been drawn from U.N. assessments, were involved in the establishment and functioning of the program. With the exception of voluntary funds provided by the United States for the U.N. guards contin- gency in Northern Iraq, whose task was to protect humanitarian personnel working there, all expenses associated with management of the program were drawn from Iraqi oil revenue that was depos- ited into a U.N. escrow account established in 1995 under Resolu- tion 986. Recent press reports allege that there was corruption and abuse in the implementation of the program. These allegations fall into four general categories. First, direct oil smuggling by the former Iraqi regime; second, the manipulation of pricing on Iraqi oil ex- ports; third, kickbacks on Oil-for-Food humanitarian contracts; and last, possible abuse by United Nations personnel. At the heart of these were the determined efforts by Saddam Hussein to obtain funds illicitly and hide his sanctions-busting activities. In the written statement that I have submitted for the record, I have provided greater detail about what we know about the allega- tions in each category. Where we could identify abuse and fraud in the implementation of the Oil-for-Food Program, we and the United Kingdom endeavored to stop them, including through bilateral di- plomacy and special briefings to the Security Council and the 661 Committee of the ways in which we observed the Saddam Hussein regime diverting funds from the program, smuggling, and generally violating Council resolutions. What we did not have before the fall of Saddam’s regime was documentation and witnesses who were willing to step forward to provide evidence of corruption. Docu- mentation is now becoming available in the wake of the Saddam Hussein regime’s demise. Witnesses are now coming forward who may be able to shed more light on how Saddam and his supporters evaded sanctions and on instances of corruption that may have ex- isted in implementing the Oil-for-Food Program. The independent, high-level inquiry initiated by the Secretary General will shortly get underway. The terms of reference have been written and provided to Security Council members. The in- quiry will investigate allegations of fraud and corruption in the ad- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 95026.TXT SFORELA1 PsN: SFORELA1 9 ministration and management of the Oil-for-Food Program, includ- ing those against United Nations personnel, contractors, and enti- ties that entered into contracts with the U.N. or with Iraq under the program. We and other Security Council members have wel- comed the Secretary General’s initiative and called for inter- national cooperation. Both the summary and final report on the findings of this panel will be made public. We expect announce- ments soon on the membership of the inquiry panel and have strongly urged the Secretary General to ensure that members are of unimpeachable standing. We believe that this inquiry can serve as an important vehicle in addressing various allegations. Mr. Chairman, in Baghdad the CPA is also assisting the Iraqi Board of Supreme Audit to launch an investigation into the allega- tions of corruption regarding the Oil-for-Food Program. Coalition Provisional Authority administrator Ambassador Bremer has issued a directive to the CPA and all Iraqi ministries in early March, instructing all ministry officials to identify and secure rel- evant Oil-for-Food documents. Representatives of the Iraqi Board of Supreme Audit have met with the CPA and Iraqi ministry officials to ensure cooperation and transparency in this process. We hope that the inquiries now being launched will identify those who con- spired with the Hussein regime and perhaps assist in recouping lost funds for the Iraqi people. Mr. Chairman, again I thank you for the opportunity to provide this information on the Oil-for-Food Program. You have my fullest support and that of my staff in your efforts to determine the extent and involvement of wrongdoing associated with the program. Thank you very much. [The prepared statement of Ambassador Negroponte follows:] PREPARED STATEMENT OF AMB. JOHN D. NEGROPONTE Mr. Chairman, distinguished members of the Committee, I welcome and thank you for the opportunity to appear before you today to discuss the UN Oil-for-Food (OFF) program and recent allegations of possible mismanage- ment and abuse with regard to the implementation of that program. At the outset, I want to make perfectly clear that we appreciate and share your concerns. We will do what we can to ensure that all such allegations are inves- tigated and addressed, most importantly for the benefit of the Iraqi people. I can assure you of Secretary Powell’s strong personal interest and concern regarding this issue. In reaction to recent specific allegations of corruption by UN officials, I imme- diately was instructed by Secretary Powell to convey our concerns to UN Secretary- General Annan. I have discussed this on several occasions with the Secretary-Gen- eral, who has on his own initiative launched an investigation that will be inde- pendent, transparent and comprehensive. As you know, we joined our fellow Secu- rity Council members on March 31 in welcoming this expanded investigation and pledging our full cooperation. We must not forget that, corporate and official allega- tions aside, it is the Iraqi people who would have been most hurt by any wrong- doing. It is for them most of all that we must take this responsibility very seriously, and we will urge all UN member states to do the same so any and all wrongdoing is uncovered and addressed. Mr. Chairman, I think it may be helpful to you to have some background on the Oil-for-Food program and the Iraq sanctions regime. The United Nations’ Oil-for-Food (OFF) program was authorized by Security Council Resolution 986 in April 1995 and became operational in December 1996. The Security Council had imposed comprehensive multilateral sanctions on Iraq in August 1990 (UNSCR 661) to convince Saddam Hussein to withdraw from Kuwait without the use of force. Sanctions on Iraq continued after the Gulf War and were thought by many in the international community to impose extreme hardship on the Iraqi people. The Oil-for-Food program was created to alleviate those hardships. It allowed the import of humanitarian goods using the proceeds from controlled Iraqi VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 10 oil sales while maintaining sanctions on imports other than food and medicine. The objective was to continue constraining Saddam Hussein’s ability to use oil revenue to build a military arsenal. The Oil-for-Food program represented the largest humanitarian relief operation ever launched by the international community. Iraqi oil exports totaled $64.2 billion over the life of the program. The proceeds funded $46 billion worth of humanitarian contracts for Iraq, and $16 billion for the UN Compensation Commission (UNCC), as well as administrative costs for the Office of the Iraq Program (OIP), the UN Monitoring, Verification, and Inspection Commission (UNMOVIC), and the UN Spe- cial Commission (UNSCOM) totaling $2.65 billion. Of the $46 billion funding for hu- manitarian contracts, more than $31 billion in humanitarian supplies was delivered to Iraq from March 1997 until November 21, 2003. An additional $8.2 billion in prioritized supplies ordered under the program is scheduled to arrive in the coming months. To date, $7.6 billion in surplus funds have been transferred from the UN escrow account to the Development Fund for Iraq (DFI), monies that have been ex- tremely useful in the implementation of various programs for the people of Iraq. The United States Government supported the program’s general objective of cre- ating a system to address the humanitarian needs of the Iraqi civilian population while maintaining strict sanctions enforcement of items that Saddam Hussein could use to re-arm or reconstitute his WMD program. We believe the system the Council devised by and large met those objectives. However, the rules and procedures gov- erning implementation of the program were the product of negotiation among the fifteen members of the Security Council and between the UN and the former Iraqi regime. The United States was able to set basic parameters and monitor the func- tioning of the program through our participation in Security Council discussions and as a member of the Iraq Sanctions Committee, also known as the ‘‘661 Committee,’’ named for the Security Council resolution that created it. However, we were not in a position to exercise exclusive control over the process. Although the flow of hu- manitarian and civilian goods to Iraq was a matter of strong interest to the U.S. government, it should be emphasized that an even greater preoccupation throughout the period of sanctions was to ensure that no items be permitted for import which could in any way contribute to Iraq’s WMD programs or capabilities. Thus, at USUN we concentrated our efforts on this aspect of the sanctions. It is important to note that no U.S. Government funds, including those that might have been drawn from UN assessments, were involved in the establishment and functioning of the program. With the exception of voluntary funds provided by the United States for the UN Guards Contingency in Northern Iraq (UNGCI), whose task was to protect humanitarian personnel working there, all expenses associated with management and implementation of the program were drawn from Iraqi oil revenue that was deposited into a UN escrow account established under Resolution 986 (1995). The sanctions regime and the OFF program constituted the most comprehensive and intrusive regime ever imposed by the Security Council, short of a complete em- bargo. At the insistence of many other Security Council members, the program per- mitted the Government of Iraq to control the sale of oil and the selection and nego- tiation of contracts with suppliers of humanitarian items destined for Iraq. The United Nations and its UN Office of the Iraq Program (OIP), which managed imple- mentation of the program, were not a party to the contracts. The contracts were con- cluded exclusively between the Iraqi government and individual suppliers. These Council members insisted that Iraq’s national sovereignty and territorial integrity, and thus the right to execute contracts, be enshrined in the language of Resolution 986 (1995). The 661 Committee reviewed the contracts that had been concluded be- tween the Iraqi government and contractors to ensure that no items could be used for military purposes. Much of what the U.S. Government could and could not achieve with regard to monitoring the program and implementation of the sanctions was directly related to the political situation surrounding the contentious issue of Iraq in the Security Council and in the 661 Committee. U.S. efforts to keep the comprehensive sanctions regime in place repeatedly were challenged by Council members who complained about the humanitarian impact of sanctions on the Iraqi people, and whose national firms would derive economic benefit from the lifting of sanctions. Indeed, starting in the mid-’90s and continuing into 2001, these pressures to lift sanctions grew. Recent press reports allege there was corruption and abuse in the implementation of the program, allegations which fall into four general categories: • direct oil smuggling by the former Iraqi regime; • manipulation of pricing on Iraqi oil exports; • kickbacks on OFF humanitarian contracts; and VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 11 • possible abuse by UN personnel. At the heart of this were the determined efforts by Saddam Hussein to obtain funds illicitly and his repeated efforts to hide sanctions-busting activities. Mr. Chairman, we know there was abuse and fraud in the implementation of the OFF program. Where we could identify it, we and our UK partners stopped it. What we did not have before the fall of Saddam’s regime was documentation and wit- nesses who were willing to step forward to provide evidence of corruption. Docu- mentation is now becoming available in the wake of the Saddam Hussein regime’s demise, and witnesses are also now coming forward who may be able to shed light more precisely on how the previous Government of Iraq and its supporters evaded sanctions, and on instances of corruption that may have existed in implementing the Oil-for-Food program. The Secretary-General of the United Nations has initiated the process for con- ducting an independent high-level inquiry into the allegations of corruption and abuse in the administration and management of the OFF program. This inquiry will look into the allegations of fraud and corruption by UN personnel, contractors, and entities that entered into contracts with the UN or with Iraq under the program. Separately, the Iraqi Board of Supreme Audit, with assistance from the CPA, has launched its own investigation in Baghdad into allegations of misconduct concerning the OFF program. The United States will fully support these efforts. OIL SMUGGLING It was commonly understood that the Saddam regime engaged in multiple, com- plex efforts to evade the sanctions imposed by the Security Council. In fact, the Sad- dam Government orchestrated the largest share of non-compliance with the Coun- cil’s demands through outright oil smuggling and the procurement of unauthorized goods completely outside the context of the OFF program. While it is assumed that Saddam engaged in oil smuggling throughout the life of the sanctions regime on Iraq, reports suggest that oil smuggling efforts intensi- fied from 2000 onward, reaching a peak annual level of $2 billion in 2002, mostly through the Persian Gulf and Syria. While it is not possible to confirm the General Accounting Office’s March 2004 estimate of $5.7 billion in illegal oil smuggling rev- enue for the period 1997 through 2002, this figure appears realistic given the mag- nitude of the problem in 2002 alone. Saddam and his fellow ruling authorities then used these funds to acquire desired items in circumvention of Council oversight and review. The Multinational Maritime Interception Force (MIF) operating in the Persian Gulf enjoyed success from 2000-2001 in significantly reducing the number of small vessels operating out of Shatt al-Arab that were smuggling Iraqi oil along Iran’s southern coast. An equally noteworthy source of oil smuggling prior to the 2003 Iraq war was the illegal flow of oil through Iraq’s pipeline with Syria, which restarted operations in late November 2000. The United States, in coordination with the UK, repeatedly raised concerns over such blatant noncompliance, only to be told by Syr- ian representatives that the Iraq-Syria pipeline was ‘‘being tested,’’ but was not operational. OIL SURCHARGE Evidence that the Iraqis were attempting to impose excessive price premiums on oil exports to exploit differences between oil prices approved by the 661 Committee and subsequent fluctuations in global oil prices surfaced as early as the fall of 2000, when the UN oil overseers informed the 661 Committee of instances in which the GOI was requesting imposition of an additional fee on the sale of Iraqi crude. Members of the 661 Committee, led by the U.S. and UK, agreed to a statement issued by the Committee Chairman on December 15, 2000, making clear that addi- tional fees above the oil selling price approved by the 661 Committee were not ac- ceptable, and that all revenue derived from the sale of Iraqi oil was to be deposited in the authorized UN escrow account. Despite circulation of this message to all com- panies approved to lift Iraqi oil, evidence of the illicit surcharge continued through the spring of 2001. In April 2001 the United States and the United Kingdom first blocked 661 Committee approval of the price of Iraqi oil. The U.S., working in close coordination with the UK delegation in New York, raised the issue of excessive oil price premiums in a series of more than 40 formal and informal 661 Committee and Security Council meetings. An early instance was in December 2000. The U.S. and UK initially sought in April 2001 to limit the time that oil prices approved by the Committee at the beginning of each month would remain valid, from 30 days, which had been the practice up to that point, to 15 days. The U.S. and UK also requested weekly updates from the UN oil overseers on the status of oil price premiums, which VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 12 revealed that the Iraqis continued to seek imposition of additional, unauthorized fees on oil shipments ranging from 5 cents to 50 cents per barrel. We were unable to secure agreement to deal with this ploy. Bolstered by such reports from the UN oil overseers, U.S. and UK experts made creative use of the consensus rule governing decisions in the 661 Committee, and began to withhold support until the end of each month for oil prices submitted by the Iraqi State Oil Marketing Organization (SOMO) prior to the beginning of that month. This retroactive price analysis permitted U.S. and UK experts the oppor- tunity to assess oil prices sought by SOMO compared to the actual market price of comparable crude oils to determine if SOMO’s prices reflected ‘‘fair market value’’— a requirement under Resolution 986 (1995). Beginning in October 2001 the U.S. and UK regularly employed the retroactive oil pricing mechanism to evaluate SOMO’s suggested prices until the suspension of the OFF program in March 2003. Certain 661 Committee members strongly resisted U.S. and UK efforts to deviate from the previously standard 30-day, pro-active oil pricing scheme. Some Council members alleged that imposition of retroactive oil pricing caused a decline in the total volume of Iraqi crude oil exports, thereby reducing available funds to finance procurement of additional humanitarian supplies to benefit the Iraqi civilian popu- lation. However, the retroactive oil pricing we imposed had, its intended effect: by the spring of 2002, the UN oil overseers reported that oil price premiums had been reduced from as much as 50 cents per barrel to an accepted industry variation of 3 to 5 cents per barrel. This significant reduction in price premiums made it eco- nomically unfeasible for oil traders to pay a kickback and still make a profit. Thus for at least the final 18 months of the program we were able to save the people of Iraq significant sums of money in illegal oil surcharges. KICKBACKS ON HUMANITARIAN CONTRACTS Allegations of kickbacks related to OFF humanitarian contracts began to surface in late 2000. No documentary evidence was produced at the time to support these allegations. U.S. and UK experts raised this issue with 661 Committee experts and OIP rep- resentatives during late 2000 and early 2001 and formally submitted proposals to address this issue during a 661 Committee meeting in March 2001. Our proposals received no support: members claimed that absent receipt of evidence indicating that such kickbacks existed, no action could be taken. In a few instances a supplier accidentally left surcharge language in a contract, and in every such case we blocked the contract. As a general rule, though we often suspected contract overpricing during the latter years of the program, we were ham- pered by the lack of substantiated evidence—evidence that is now becoming avail- able and which we are intent on pursuing. The most important measures taken by the United States to address this issue occurred after the U.S., through CPA, obtained direct access to Iraqis and some Iraqi ministry documents. With the fall of the Hussein regime in the spring of 2003, and with the subsequent authorities granted to CPA under UNSC Resolution 1483, CPA officials (including sanctions experts from USUN staff), in coordination with UN officials and the Iraqis, took steps to eliminate surcharges in existing Oil-for- Food contracts meant evidently for kickbacks. The CPA and the Iraqis not only identified priority contracts in the OFF pipeline, but also requested the UN agencies to negotiate a reduction in the overall contract value at an average rate of 10 percent for those contracts that the Iraqis identified as containing the kickback. It is estimated that this process saved the Iraqis ap- proximately $600 million—money that is being returned to the Development Fund for Iraq. The efforts by the CPA and the Iraqis to uncover the scale and intricacy of the hidden network created by Saddam Hussein to siphon funds from OFF have pro- duced the first public acknowledgement by Iraqis that a systemic kickback system for OFF contracts actually existed. As more information comes to light and is evalu- ated, especially documentary evidence, we hope that the true scope and extent of this system and associated corruption and wrongdoing can be established. ALLEGATIONS AGAINST UN PERSONNEL During the life of the OFF program, to the best of my knowledge the United States Government was not aware of allegations of abuse, fraud, or corruption against those UN officials responsible for management and implementation of OFF. It was with the appearance of press reports in January 2004 about abuse of the OFF program that allegations of corruption by UN Office of the Iraq Program (OIP) Executive Director Benon Sevan and possibly other UN officials were made. There- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 13 after the UN Office of Internal Oversight Services (OIOS)—the UN’s Inspector gen- eral—approached us at USUN to request any substantiating information or evidence from the CPA and the Iraq Governing Council. The Independent Inquiry initiated by the Secretary-General is being com- plemented by an Iraqi Board of Supreme Audit investigation. The provision of docu- mentation and the forthrightness of Iraqis who previously managed the Oil-for-Food matters will be essential to determine the full scope of the problem. We have in- formed the Secretary-General that the United States Government endorses and fully supports these investigations and will assist in whatever way we can. U.S. INITIATIVES: SPECIAL BRIEFINGS In addition to efforts to eliminate or counter surcharges, kickbacks, smuggling or sanctions-busting activities, the United States also took initiatives to provide mem- bers of the 661 Committee and the Council information and evidence of violations by the former regime through various briefings. To counter charges that the U.S. was responsible for the continued suffering of Iraqi children, the United States briefed Council members in 2000 on the various ways the Saddam regime was di- verting funds to benefit Iraq’s elite, including through the use of diverted funds to build and furnish Saddam’s palaces. The U.S. again briefed Council ambassadors in the spring of 2002 on Saddam Hussein’s non-compliance with UN Security Council resolutions, and Saddam’s attempts to procure WMD-related materials. In March 2002 a U.S. interagency team briefed the 661 Committee on the former regime’s di- version of trucks. Starting in 1996, U.S. Commanders of the Multinational Maritime Interception Force (MIF) in the Gulf briefed the Committee each year on the MIF’s activities in combating the illegal smuggling of Iraqi crude. Most recently, MIF Commanders Vice Admiral Moore in 2001 and Vice Admiral Keating in 2002 briefed the 661 Com- mittee and highlighted the continued attempts by Saddam Hussein to circumvent sanctions by illegally exporting oil and illicitly importing material into Iraq through the unauthorized use of ferry services from neighboring states. STATUS OF INVESTIGATIONS The independent high-level inquiry initiated by the Secretary-General will shortly get underway. The Terms of Reference have been written and provided to Security Council members for their information. The inquiry will investigate allegations of fraud and corruption in the administration and management of the OFF program, including those against UN personnel, contractors and entities that entered into contracts with the UN or with Iraq under the program. We and other Security Council members have welcomed the Secretary-General’s initiative, including by calling for international cooperation. Members have re- quested they be provided original copies of the complete final report. Both the sum- mary and the final report on the findings of this Panel will be made public. We ex- pect announcements will be made soon on the composition of the members of the inquiry panel, and have strongly urged the Secretary-General to ensure that mem- bers of the panel are of unimpeachable standing and have the capacity and experi- ence to make this process as thorough, viable, and transparent as possible. We would hope that an American will be a member of the panel. We believe that this inquiry will serve as an important vehicle in addressing allegations against the UN and the OFF program. The U.S. and CPA have pledged their support and assistance for the UN investigation. In Baghdad, the CPA is assisting the Iraqi Board of Supreme Audit to launch a Baghdad-based investigation into the allegations of corruption regarding OFF. CPA Administrator Bremer issued a directive to all CPA and Iraqi Ministries in early March instructing all Ministry officials to identify and secure relevant OFF docu- ments. Representatives of the Iraqi Board of Supreme Audit have met with CPA and Iraqi Ministry officials to ensure cooperation and transparency in this process. Mr. Chairman, the UN Oil-for-Food program was established to address the hu- manitarian needs of the people of Iraq in the face of callous disregard by Saddam Hussein for their welfare. Failure to do so would have prompted an accelerated de- terioration in international support for the sanctions regime. We met with fairly good success in limiting Saddam’s access to prohibited items under the program, and in exercising control over most of the revenue derived from the export of Iraqi oil. However, this program was abused by Saddam Hussein in nefarious and clever ways. The inquiries now being launched will, we hope, identify those who may have conspired with him, and perhaps assist in recouping lost funds for the Iraqi people. Mr. Chairman, again I thank you for the opportunity to provide this information on the Oil-for-Food program, and would close by emphasizing that you have my full- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 14 est support and that of my staff in your efforts to determine the extent and involve- ment of wrongdoing associated with the program. The CHAIRMAN. Thank you very much, Ambassador Negroponte. Coordinator Raphel. STATEMENT OF HON. ROBIN L. RAPHEL, COORDINATOR, OF- FICE OF IRAQ RECONSTRUCTION; ACCOMPANIED BY: HON. KIM R. HOLMES, ASSISTANT SECRETARY OF STATE FOR INTERNATIONAL ORGANIZATIONS, U.S. DEPARTMENT OF STATE Ms. RAPHEL. Thank you, Mr. Chairman, and Senator Biden. Mr. Chairman and distinguished members of the committee, I also want to thank you for the opportunity to appear before you here today to share my particular experience with the U.N. Oil-for-Food Program. I was the CPA’s senior advisor to the Ministry of Trade in Bagh- dad between April and August of last year, which gave me a par- ticular on the ground perspective of the program during that pe- riod. The Ministry of Trade was responsible for Iraq’s public dis- tribution system, which rationed basic goods, most importantly food, made scarce by international sanctions after the first gulf war. After the Oil-for-Food Program was established in 1996 the public distribution system was supplied largely by OFF-procured commodities. The public distribution system used a Ministry of Trade data base, which was designed to list every Iraqi family. Families would pick up their rations each month from one of close to 45,000 local food agents. Trade Ministry trucks moved commod- ities from ports of entry to warehouses throughout Iraq and the food agents took smaller trucks and picked up their share of these rations and took them back to their shops. We were told that about 60 percent of the population was totally dependent upon these food rations and most Iraqis considered them an entitlement. So when the coalition arrived in Baghdad in April, one of our goals was to ensure that the ration system was reestab- lished, both to ensure that the people had enough to eat but also to provide a sense of stability and continuity for the Iraqi people. The World Food Program was already hard at work ensuring that food was delivered and distributed throughout Iraq. Between April and October of 2003 the World Food Program delivered over two million tons of food, the largest amount ever delivered anywhere so quickly by the WFP. Through May my colleagues and I concentrated on what I would call the infrastructure supporting the public distribution system. We reconstituted the Ministry of Trade leadership, made emer- gency salary payments and cataloged looted warehouses and silos. We also planned for local crop purchases, security of the various warehouses and silos, ministry building repairs and helped to forge new relationships between Baghdad and the Governorate offices of the Ministry of Trade so that they could communicate and move various food items among warehouses where shortages became ap- parent. In late May the U.N. Security Council Resolution 1483 gave the Secretary General the authority to prioritize Oil-for-Food contracts in coordination with the CPA and the interim Iraqi administration VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 15 and according to the needs of the Iraqi people. This precipitated CPA’s involvement with the Oil-for-Food contracts. In Baghdad we worked out a tripartite process with the U.N. Office of the Humani- tarian Coordinator for Iraq—that’s a long name, the acronym is UNOHCI—with visiting U.N. Office of Iraqi Program staff and Iraqi ministry officials. We agreed that we would jointly decide which contracts were of, what the U.N. resolution referred to as ‘‘relative utility,’’ contracts that should be brought forward. The key criterion was whether the goods were needed to meet the humani- tarian and reconstruction needs of the Iraqi people. The supplier’s ability to deliver on time and the reasonableness of price were also considered. This work was managed by what we called the OFF team in the CPA. This is a team which I led during my time in Baghdad. Eligible contracts numbered roughly 5,000 approved and funded contracts, which had been approved and funded by the Of- fice of Iraqi Programs in New York, worth over $8 billion. The CPA decided that it would not agree to the prioritization of contracts from companies about which there were outstanding questions re- garding their relationship to the former regime. So we made it clear that we would not sign off on prioritization of those contracts. Now, early in the process we learned that many Iraqi ministries had detailed knowledge of this so-called kickback system, under which suppliers had agreed to inflated prices and to pay a percent- age of the inflated contract value into regime officials’ accounts in foreign banks. The CPA was very determined to avoid any kind of perpetuation of this kind of corruption related to these contracts. At the same time, however, we believed that the Iraqis themselves were best placed to determine which of these Oil-for-Food goods were needed for their reconstruction; not only food items but also goods and spare parts related to oil, electrical, and public works in- frastructure projects. Since many of these key contracts, we under- stood, included extra fees or kickbacks, it was agreed that the way to handle this was to have the appropriate U.N. agency, which would be talking to supplier to change delivery dates and times and so on, that those agencies in that process would negotiate the removal of these fees with the suppliers. So each ministry would identify the amount of any fee or kickback associated with a con- tract. And we developed a blanket instruction that in the absence of any specific information, and we didn’t always have specific in- formation, the level of the fee was to be 10 percent of the contract value for all contracts from June 2000 forward. Because it was in June 2000 we understood that the regime began to insist and turn the screws and put the pressure on to get more out of this kickback arrangement from the suppliers. Once the tripartite review was complete a schedule of contracts signed off on by the appropriate Iraqi ministry official was sub- mitted to our OFF team for final CPA review. This list of contracts was then signed off on by the appropriate CPA ministry senior ad- visor once the OFF team had made sure that all the appropriate information for each contract was included on the list. And then we sent this package of contracts with the signatures onto the UNOHCI office in Baghdad and they forwarded it to the Office of Iraqi Programs in New York. Then the Office of Iraqi Programs would notify the suppliers that their particular contract had been VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 16 prioritized and send the relevant information on to the appropriate U.N. agency with instructions to renegotiate delivery times and lo- cations and to negotiate the removal of these extra fees or kick- backs. These renegotiations were presided over by the U.N. agen- cies and did not involve either Iraqis or CPA officials. U.N. agency officials made no formal reference to allegations of corruption when they were talking to suppliers in order to avoid prejudicing any possible future legal action. The prioritization and renegotiations of these contracts turned out to be an enormous task. I think no one really realized, when we began, how much time it would take, how labor-intensive it would be. And of course it was complicated by the tragic August 19 bombing of U.N. headquarters in Baghdad, where many of our colleagues were injured and they were all finally evacuated. So by late 2003 we began to worry a bit about the food pipeline. As a result of this, in January we decided to approach the WFP for some assistance in this regard. The CPA, the Iraqi Ministry of Trade and the WFP agreed that WFP would procure and transport to warehouses throughout Iraq more than $900 million worth of food to ensure that food pipeline gaps would be filled and that a buffer stock would begin to be built. The stocks are now rising in Iraqi warehouses, I’m pleased to say, and the Ministry of Trade has again taken over all new procurement. Mr. Chairman, in closing I would like to thank you and all mem- bers of the committee for your continuing support to Foreign Serv- ice officers, especially my colleagues in Iraq, and for your support for the Diplomatic Readiness Initiative. It makes a great deal of difference to our people who are working 16 to 18 hours a day in dangerous conditions to know that you are interested in and appre- ciate their service. So thank you very much for that, Mr. Chair- man. [Prepared statement of Ambassador Raphel follows:] PREPARED STATEMENT OF HON. ROBIN L. RAPHEL Mr. Chairman and distinguished members of the Committee, Thank you for the opportunity to appear before you today to share my experience with the UN Oil-for-Food (OFF) program in Baghdad. I was the Coalition Provi- sional Authority’s (CPA) Senior Advisor to the Ministry of Trade (MoT) in Baghdad from April through mid-August last year. The Ministry of Trade was responsible for Iraq’s Public Distribution System (PDS), a system developed after the first Gulf War, essentially to ration the scarcity of basic goods resulting from international sanctions and ensure that all Iraqis had a minimum amount of food to eat. After the OFF program was established in 1995 under Security Council Resolution 986 and implemented in 1996, the PDS system was supplied largely by commodities procured under OFF. The PDS system was based on a computerized database maintained by the Ministry of Trade that was designed to list every family in Iraq. Each family had a ration card that they would use to pick up their rations each month from one of the roughly 45,000 food agents based in neighborhood shops. The food agents collected these commodities from a series of Trade Ministry warehouses distributed throughout the governorates. A fleet of Trade Ministry trucks moved the commodities from the ports of entry to these warehouses. It was estimated that before the 2003 war, roughly 60 percent of the Iraqi popu- lation was totally dependent upon the ration basket. Others would use it to supple- ment other food sources or to pass on to poorer relatives. In any case, most Iraqis considered their rations a basic entitlement. At least 90 percent of Iraqis picked up their rations each month. Maintaining the ration system was important to the sense of stability and continuity the Coalition was trying to provide in the immediate aftermath of hostilities. While the MoT ran the PDS, the UN’s World Food Program VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 17 (WFP) was responsible for monitoring the arrival and distribution of OFF food ship- ments to ensure they were fairly distributed and not diverted. By the time the coalition arrived in Baghdad, the UN had been authorized by the Security Council initially under UNSC Resolution 986, and modified under UNSC Resolution 1472 (and later extended under UNSC Resolution 1476), to oversee the procurement of new foodstuffs and medicines on behalf of the government of Iraq, a function previously managed by the individual Iraqi ministries. These ministries could no longer enter into new contracts under the program. UN agencies were also authorized to decide which existing contracts for food and medicine should be prioritized and implemented. The WFP began an Emergency Operation on April 1, 2003, issuing a multilateral appeal to donors, and managing the logistics of delivering this food to warehouses in Iraq. At the same time, WFP was given responsibility for implementing OFF food contracts and managing the movement of this food into Iraq. Under these combined operations, the WFP delivered over two million tons of food between April 1 and the end of the Emergency Operation in October 2003. It was the largest amount of food aid ever delivered in a single WFP program over such a short a period of time. In January 2004, the CPA, Iraqi Ministry of Trade, and WFP agreed that WFP would procure and transport to Iraqi warehouses more than $900 million in food items for the PDS using Iraqi money from the Development Fund for Iraq (DFI). This was necessary to help ensure that food pipeline gaps were filled and a buffer stock began to be built. The MoT is now poised to take over all future procurement for the PDS. During the period before the passage of UNSC Resolution 1483 on May 22, 2003 which provided for the termination of the OFF program and the transition of any remaining activities to CPA, my colleagues and I concentrated on other matters such as reconstituting Ministry of Trade leadership, providing emergency salary payments, determining the status of warehouses and silos—many of which had been looted—and planning for security for these facilities, repairing ministry facilities, sorting out relationships between Baghdad and MoT offices in the governorates which were under new management since senior Ba’athists officials had dis- appeared, developing a budget, and purchasing the local wheat crop. Once UNSC resolution 1483 had given the Secretary General the authority to prioritize contracts, in accordance with the needs of the Iraqi people, in coordination with the CPA and the Interim Iraqi administration, the UN Office of Iraq Programs (OIP) staff came to Iraq to work out the procedures for this prioritization process. A tripartite process was agreed to under which the relevant UN agency, the CPA ministry advisor, and Iraqi ministry officials would jointly decide which contracts were of ‘‘relative utility.’’ By June 2003, we had learned from Iraqi officials that many of the ministries had both records that documented and personnel with detailed knowledge of the ‘‘kick- back’’ system under Saddam Hussein’s regime, under which many suppliers had agreed to inflated prices and to pay a certain percentage of the inflated contract value into foreign bank accounts of regime officials. While the CPA was determined to avoid perpetuating any corruption related to these contracts wherever possible, the UN and CPA believed the Iraqis were best placed to determine what OFF goods they needed to rebuild their country—including its oil, electrical, and public works infrastructure. Many of the contracts they selected included ‘‘kickbacks.’’ It was agreed that the best way to deal with these ‘‘kickbacks’’ in the prioritized contracts was for the responsible UN agency to negotiate the removal of the ‘‘kickback.’’ In early June 2003 the CPA began to work with the UN agencies and Iraqi min- istries on the OFF contracts. This work was managed by the ‘‘OFF Team’’ in the CPA Ministry of Trade, and coordinated with OIP and the UN Office of the Humani- tarian Coordinator for Iraq (UNOHCI). The general procedures governing the proc- ess are described below. Eligible contracts were those that had been approved and funded by OIP prior to April 14, 2003 when OIP declared a pause in processing of contracts because of con- cerns about future oil revenues. This comprised roughly 5,000 contracts worth over $8 billion. (An additional $1 billion worth of funded contracts had already been prioritized for emergency distribution by UN relief agencies under UNSC Resolution 1472.) Contracts which had been registered with OIP but not approved, or which had not yet been funded, were generally not considered eligible at that time. [Note: A few unfunded contracts for very urgent items such as food, emergency vehicles and fertilizer were later prioritized.] CPA also took the decision that it would not agree to the prioritization of contracts from entities about which there were out- standing questions concerning their relationship to the former regime. Action on contracts not considered eligible, or on contracts determined to be of questionable utility, was to be postponed until an internationally recognized, representative gov- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 18 ernment of Iraq was in a position to make its own determination as to whether such contracts should be fulfilled. By late June 2003, the tripartite review process began to gather momentum. Offi- cials from the relevant Iraqi ministry, the CPA ministry advisors and the relevant UN agency sat together to examine the contracts in order to determine relative util- ity. This ensured that the historical knowledge of the Iraqis would be captured in the process, and that the UN and CPA would be a party to all decisions. The key criterion was whether the particular goods were needed to meet the humanitarian and reconstruction needs of the Iraqi people. The supplier’s ability to deliver on a timely basis, and overall reasonableness of price were also considered. Each contract was assigned a priority of one through four, with one being the most urgent, and four indicating that a contract was of no relative utility. Each ministry was responsible for identifying the amount of any extra fee or ‘‘kickback’’ associated with the contract. We were told that the regime first began to insist on ‘‘kickbacks’’ beginning with phase 8 of OFF in June 2000. Therefore, in our review of contracts, the blanket instruction was that, in the absence of specific information, the level of the fee was 10 percent of the contract value for all contracts in and after Phase 8. In some cases ministries had more specific information as to the exact level of the fee, or that there was no fee assessed. Weekly meetings of these tripartite groups were established (many ministries met more frequently), with progress reported at a separate weekly meeting co-chaired by UNOHCI and CPA. These meetings continued from July 2003 until the UN bombing on August 19, 2003, after which all UN staff vacated Baghdad. After the bombing, CPA and Iraqi ministries continued the prioritization with deferred UN agency input via email or telephone, though some ministries made periodic trips to Amman, Jordan, to meet with their UN counterparts to obtain their direct input into the process. Once the tripartite review was complete, a schedule of contracts signed by the ap- propriate Iraqi ministry official was submitted to the OFF Team for final CPA re- view. Once the OFF team had determined that each contract had been assigned a priority, the percentage ‘‘kickback’’ fee to be removed, and the delivery date and de- livery location, the list of contracts was signed off by the appropriate CPA ministry Senior Advisor. This information was then faxed and emailed to UNOHCI, who would countersign the document and send it to OIP. Once OIP received the document, they would notify suppliers by posting those contracts deemed to have relative utility on the OIP Web site. OIP would also send the contract information to the appropriate UN agency, with instructions to renego- tiate the following terms: delivery costs, delivery location and removal of any ‘‘extra fees.’’ These renegotiations were presided over by the UN agencies and did not in- volve the Iraqis or the CPA ministries. We were told by UNOHCI officials that in their dealings with suppliers, UN agencies made no formal reference to allegations of corruption or improprieties, and did not refer to the extra fees as ‘‘kickbacks’’ . UNOHCI and OIP believed this was the best way to handle this matter so as not to prejudice any possible legal action in the future. There were approximately 300 cases in which suppliers refused to take out the extra fees, asserting they had never paid anything beyond the value of the contract. Such cases were resolved by CPA querying the Iraqi ministry to confirm—and, where possible, to document—the presence or absence of the extra fee. The pace of contract renegotiations picked up considerably in September as OIP completed its processing of contracts and passed them on to UN agencies. Some agencies hired extra staff in an effort to complete the task by the November 21 deadline. Still, 251 contracts had not been renegotiated by November 21. These were turned over to the Defense Contract Management Agency (DCMA), which is still working on the last of the renegotiations. Since November 21, CPA has also been working with the Iraqi ministries to en- sure that the prioritized contracts are delivered on a timely basis. They have fo- cused particularly on food contracts to ensure that the food pipeline for the Public Distribution System is maintained. It is expected that delivery of the remaining OFF contracts will continue beyond June 30, 2004. Mr. Chairman, in closing I would like to thank you and all members of the Com- mittee for your continuing support for Foreign Service officers, especially those in Iraq, and for your support for the Diplomatic Readiness Initiative. It makes a great deal of difference to people working 16-18 hours per day in dangerous conditions to know that you are interested in and appreciate their service. The CHAIRMAN. Thank you very much, Coordinator Raphel. Let me just pick up on your last point. We do, indeed, think often of VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 19 our dedicated Foreign Service officers. They are in harm’s way, doing remarkable work for our country and for the Iraqi people. We appreciate that. We appreciate your service there. The Chair would suggest that we have a 10-minute question pe- riod as this is an important subject and we want to make certain members have an opportunity to ask their questions. I’d like to begin, Ambassador Negroponte, with this question, which I’ve carefully worded so that there will not be a violation of security. I ask you, in your opinion, does the fault for the abuses we have discussed today lie more at the feet of individual United Nations officials, or with individual member states? Mr. NEGROPONTE. I think, first of all, Mr. Chairman, we have to lay the major share of the responsibility on the regime of Saddam Hussein itself, I think. Since 1990, since the time that sanctions were imposed, the Saddam regime made efforts to evade the sanc- tions and I think when you mentioned that figure of $4.4 billion on the one hand with respect to contracts and the $5.7 billion with respect to oil smuggling, I believe that the oil smuggling activities was virtually entirely the responsibility of the regime itself. As re- gards the question of the responsibility of members versus par- ticular individuals in the United Nations who may have been car- rying out the programs, I think in part we’re going to have to wait and see how these investigations turn out, both the U.N. investiga- tion ordered by the Secretary General and the CPA. I do think that there were member states who at times frustrated efforts by the United States and the United Kingdom to correct what we per- ceived as some of the important abuses of the management of the Oil-for-Food Program and to that extent I would fault those mem- ber countries. I’m not sure I know what percentage of the blame I would apart to them for that. The CHAIRMAN. Let me followup. Is it fairer to say that in the 661 Committee, China, France and Russia were unwilling to im- pose sanction guidelines on the Iraq sanctions that would have pre- vented these abuses? What other nations obstructed reforms? Mr. NEGROPONTE. Well, I think with respect, for example, to oil pricing, we’ve met resistance from the countries that you men- tioned. With respect to correcting improprieties and inadequacies in the oil pricing they had a system of forward pricing of oil where the price would be set artificially low and then the oil would be sold at market prices and then the regime was able to share the discrepancy between the artificially low price and the price at which it had been sold on the international market between var- ious regime officials and other middlemen. We ultimately suc- ceeded in correcting that problem in 2001, ourselves and the Brit- ish, by insisting in the 661 Committee on a retroactive pricing sys- tem whereby the oil would be exported first and then the price would be set later, and that could be set in a manner more con- sistent with market realities and therefore the opportunity for cor- ruption and kickbacks would be substantially reduced, and was in fact substantially reduced. Had we had the cooperation of the coun- tries that you mentioned earlier we could have probably corrected that problem sooner. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 20 The CHAIRMAN. In your judgment, why did we not have that co- operation from those countries, specifically China, France and Rus- sia? Mr. KENNEDY. Well, I’m not sure I can ascribe all of the motives that these countries might have had. I think in one instance, to some extent it must have been driven by commercial considerations of various companies that were of the nationality of those coun- tries. I think another aspect may have been the fact that these countries, Russia for example, didn’t like the sanctions regime in the first place. They had been strong advocates of removing sanc- tions for a very, very long time. Resolution 1284 was adopted in 1999 and was the last major resolution affecting the Oil-for-Food Program. France, China and Russia abstained in that resolution, really because they objected to it. So that could be another consid- eration. But I think as we delve into this perhaps we’ll get even further insights into their motives. And I would, as a last point, hasten to add that I think these countries all accept the fact that these allegations must be investigated and they have all supported the Secretary General’s initiative to conduct an investigation. The CHAIRMAN. Ambassador Kennedy, let me ask this question of you. What were the most basic weaknesses in the Oil-for-Food Program that allowed Saddam to exploit it to such a staggering de- gree? Mr. KENNEDY. Mr. Chairman, I believe that the basic weakness is that the original decision made, which as Ambassador Negroponte pointed in his statement, was the result of the con- sensus process that is necessary to get such a major resolution passed at the United Nations was that it left sovereignty in the hands of the Iraqis, that it was the insistence by the Iraqis and by others in the United Nations that the Iraqis had to have the right to select the suppliers and the Iraqis had to have the right to select the purchasers. Once that basic decision was made, if you have a regime that was so inherently corrupt, brutal, evil and, if I might say, with quotes around it, ‘‘clever,’’ as Saddam Hussein, they were then able to take steps to manipulate the system and, as he moved to manipulate the system as Ambassador Negroponte has also pointed out, the United States and the United Kingdom worked in the 661 Committee to counter every step and every manipulation he made and I think the excellent example was the question of pro- spective versus retroactive pricing. When it became clear that he was manipulating the pricing that way the United States and the United Kingdom moved quickly to counter that. The CHAIRMAN. Let me ask this question of you, Coordinator Raphel, apropos of what has been suggested about the sovereignty that Iraq will have after June 30. Should we worry that kickbacks and payoffs could resume when the Oil-for-Food Program is turned to the Iraqis? If, we should not worry, why so? Ms. RAPHEL. Mr. Chairman, with respect to the contracts that were arrived at under the Oil-for-Food Program, they will shortly all have been renegotiated with the kickbacks taken out. I say shortly because when the U.N.—when the clock stopped on the 21st of November U.N. agencies hadn’t quite finished and they handed over to the CPA about 250 contracts which are being worked on now by the Defense Contracting Management Agency. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 21 But these renegotiations will soon be completed so these old con- tracts will be kickback-free, shall we say. They will continue to be delivered on past the 30th of June but I don’t think there’s reason to be concerned about those contracts. The larger question is the issue of procurement throughout the Iraqi Government. And I know that Ambassador Bremer and everyone at CPA has been working hard, Ambassador Kennedy as well, over the last some months to develop a system of procurement that is transparent and fair and as far as possible does not allow for this kind of thing to happen. Ambassador Bremer has also established the position of Inspector General in each one of the ministries, or at least they are working on a code of conduct for all Iraqi civil servants and in our own dealings with Oil-for-Food suppliers. It’s now explicitly on the CPA Web site that there are to be no commissions paid by the sup- pliers. So there are a number of steps which have been taken which we hope collectively will establish a new ethic among the Iraqi civil servants and the Iraqi Government and the Iraqi people with respect to this kind of procurement. The CHAIRMAN. Post-June 30, will we be monitoring that? Right now, Ambassador Bremer and other Americans, as you say, are providing a code of ethics and procedures which hopefully would be followed. Once again, as we try to delve into what happens post- June 30, who are the watchdogs? Or are there any? Or are the Iraqis on their? Would this be a situation in which whoever hap- pens to be the minister of a particular department deals with this in his or her own way? Ms. RAPHEL. Well, two points with regard to your question, Mr. Chairman. First of all, it is our hope and I think our expectation that these new offices, the Inspectors General, the new Board of Supreme Audit, which is undertaking the investigation in Iraq, that these institutions will begin to put down roots. And I think we have some reason to believe that that will be true within the min- istries. After all, in the instant case of the Oil-for-Food issue it was the ministry officials themselves who came to us and said, you know, here’s what’s been going on, here’s the system, here are the percentages and so on. So I think there is a desire there. And second, we expect that we will retain a certain number of technical advisors to help the Iraqi ministries continue with their reform and transition. We know that many of the Iraqis want that and that is what we hope to arrange. The CHAIRMAN. Thank you very much. Senator Biden. Senator BIDEN. Just like to followup on that, if I may. I’m deadly earnest when I ask, why do you at this point only hope? Why don’t you know? I mean, hasn’t anybody said how—we’re 12 weeks away. We’re going to be coming back, this President is going to have to, or the next President, if it’s not this President either. Kerry or Bush are going to have to come back to this committee and ask for billions more dollars. We all know it, you know it. No one wants to say that but everybody knows that. And do we not know who will be the authority, like Bremer now, that says, hey, wait a minute. We think you’ve changed the Inspector Generals in a way because you cut a deal. There are going to be six million deals cut in this new emerging government. Who gets to say no? Who is VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 22 going to be the person—is it going to be the U.S. Ambassador of this new super embassy? Do we know that? I mean, do you have any idea other than a hope? You’ve expressed a great hope and I think you’ve done a heck of a job, personally; you personally have done a heck of a job. But why don’t we know now? Who do you get the answer from? I mean, if we tasked you now, would you please go back to the administration and within 24 hours come back and tell us who, not a name, what office, is going to be responsible for and able to say no, you’re not doing it the right way? Who would you go talk to? Would you go talk to the Secretary of State? Who do you go to to find out the answer to that question? Ms. RAPHEL. Senator, I’m sure you’re aware that we have an Iraq Transition Team in the Department of State married up with a counterpart in the Department of Defense. Senator BIDEN. No, I’m not aware of that. I don’t know the names of those people. Ms. RAPHEL. Ambassador Ricciardone and General Kicklighter, retired general. Senator BIDEN. So they’d be the ones to give you the answer? Ms. RAPHEL. They are working very hard on the whole question of the structure of the new embassy and new mission, how it will relate to the Iraqis, how we will oversee this unprecedented amount of assistance, the $18.4 billion. These are questions which the administration takes extremely seriously and it is a very com- plicated and complex matter, as I’m sure you can appreciate, of how to put the right kinds of checks and balances in and decision- making processes and so on. But that planning process is quite far advanced. Senator BIDEN. Well, I’d like to formally request that you let us know exactly what stage it’s at now. This is above your pay grade, I acknowledge, and above mine, in a sense, but you’ve had 16 weeks since the decision was made as to how we were going to transition on June 30. You’ve got 12 weeks left, 12 weeks left. And we all know that billions of additional American taxpayers’ dollars are going to be heading to Iraq. I’d like to know specifically, not generically, an answer to the following question: at what stage is the planning? What alternatives are being considered? And what decision, if any, has been made as to how we’re going to track these dollars in the pipeline now and the ones in the future? I’d respect- fully request within a week to get an answer to that specific ques- tion. I’d appreciate that very much. The second question I have, and there’s a thousand questions but Ambassador Negroponte, how does the U.N. police itself? Are there mechanisms within the U.N. to try member states or individuals or companies for breaking resolutions or engaging in corruption, and is there a means to otherwise hold them accountable? Is there a mechanism that allows whistle blowers to come forward without fear of reprisal? How does it work? Talk to us about how it actually functions, the policing function. Mr. NEGROPONTE. I think that the U.N. organization, the Secre- tariat, as a practical matter has policing power or policing author- ity over its own personnel. And Kofi Annan as the chief adminis- trative officer of the United Nations has that authority and that is VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 23 one of the aspects that he is going to be looking into in this inde- pendent inquiry. Senator BIDEN. Is there a due process mechanism for him to be able to make those judgments or is it a matter totally at his discre- tion? He concludes by an internal investigation that John Brown engaged in corruption or turned his back to corruption taking place and he’s fired. Or is there a mechanism he’s required to go through like we would have to in this country? And what are the sanctions available to him other than dismissing someone who is guilty of ei- ther directly benefiting themselves and or turning a blind eye to corruption as it exists or an absolute violation of a U.N. resolution that they are responsible for implementing? Mr. NEGROPONTE. Well, I don’t think he has. He obviously doesn’t have the authority to impose any kind of criminal penalties. It seems to me that if wrongdoing of that kind were found and if there was a desire to pursue a judicial recourse of some kind then that would have to go to some particular jurisdiction other than the United Nations itself. But I think his powers, his own powers, are confined to taking disciplinary action within the organization, I suppose up to and including dismissal. Ambassador Kennedy has also given me a note here which relates to whether or not we have jurisdiction to prosecute those involved. Senator BIDEN. Do we, Ambassador Kennedy? Mr. KENNEDY. Senator—— Senator BIDEN. The reason I ask the question, these are the questions that informed constituents ask us. They’re sitting there and wondering how the investigation is taking place, the Iraqi Gov- erning Council’s looking at this, we, our administration is looking at this, we’re talking about billions of dollars being involved here and so I get asked the question, as a matter of fact, getting on the train I got the following question: is this going to be like the way we deal with corporate scandal here? No one’s held responsible? I said no, no, we’re holding people responsible here. Well, you know, how? I mean, in terms of what is it we say to our constituents as to what sanction is available if it is shown that an individual mem- ber was negligent. The Wall Street Journal had an editorial today indicating what in fact they thought about had happened and what we should be looking at and raising some questions about specific individuals and whether or not the investigation is capable of being conducted fairly, et cetera. And it prompts questions, logical ques- tions, from our constituency. So that’s the reason I’m asking, not that I’m not suggesting that somehow we’re deficient if there is no such mechanism at the United Nations; I just want to know, and as a matter of fact you can help me write my answers to my mail. Do we have jurisdiction to criminally prosecute? Mr. KENNEDY. If I could answer in two parts, Senator. The Sec- retary General has the right to fire United Nations employees who he believes are guilty of misfeasance, malfeasance. They have the right to an appeal to a U.N. administrative tribunal but the Sec- retary General also has the right to accept or reject that adminis- trative tribunal. So the Secretary General may terminate U.N. em- ployees for wrongful acts. Should this independent investigation that he has commissioned find that there was wrongdoing in the implementation, there may well be criminal investigations under- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 24 taken that would follow on. The Department of State has been in contact with the U.S. Department of Justice after these allegations have appeared in the media and whether or not the United States would have jurisdiction to prosecute individuals or corporations who might have been involved in any kind of wrongdoing would de- pend on the individual facts of an individual case and where the actual criminal act had taken place. This would be a matter that would be referred to the Justice Department. Of course, even if the United States did not have jurisdiction because of where the act oc- curred, the act could theoretically be prosecuted by the Iraqis in their criminal court system because the crime had been committed against them, or it might be prosecuted in the courts of another na- tion because the wrongful act had been created there. Senator BIDEN. I thank you all very much. The CHAIRMAN. Thank you, Senator Biden. Senator Hagel. Senator HAGEL. Mr. Chairman, thank you, and thank you each for appearing before the committee this morning. Ambassador Negroponte, in your sense of this, your recollection, were any of these irregularities ever reported to the U.N. Mission of the United States? Mr. NEGROPONTE. Well, first of all, with respect to oil smuggling, we’ve known for a long time that there was oil smuggling and we even undertook measures to try and prevent or minimize that, in- cluding a multi-national interdiction force in the Persian Gulf. With respect to oil pricing, we were also aware of this forward underpricing scheme that I described earlier and we took measures to deal with that. As far as allegations against United Nations per- sonnel are concerned, they only surfaced in late January of this year when a newspaper in the region, in the Middle East, pub- lished an article listing various individuals and entities that had received oil vouchers from the Iraqis during the Oil-for-Food Pro- gram. But no allegations of corruption or allegations of misconduct by United Nations personnel had been brought to our attention be- fore then. And then last, Senator Hagel, on the humanitarian contracts, there had been allegations of kickbacks on humanitarian contracts as far back as the year 2000. But there was no substantiating evi- dence available until the CPA, in coordination with Iraqi represent- atives, uncovered indications of this in the summer of the year 2003. Senator HAGEL. So to summarize, as far as you know, and those at the U.S. Mission at the U.N. specifically focused on the Oil-for- Food Program, no one brought forward any allegation that U.N. representatives administering that program may have been in- volved in criminal acts or any acts of corruption? Mr. NEGROPONTE. That is correct, until the allegations that were made in January of this year, yes sir. Senator HAGEL. Thank you. Coordinator Raphel, how soon do you believe that the Oil-for-Food Program will be totally, can be totally phased out? Ms. RAPHEL. Well, as you know Senator, the program was ended on the 21st of November, 2003, in the sense that there were no more contracts allowed to be made against the U.N. escrow account VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 25 which had the Iraqi oil revenues in it from the past. There are no new contracts. It’s now just a matter of finishing up the renegoti- ation of old contracts and getting the goods shipped into the coun- try. So now, if the Ministry of Trade wishes to order wheat, they do it using the funds from the development fund of Iraq, which is where all the Iraqi oil revenues are now going. They used to go into the U.N. escrow account; now they go into the development fund for Iraq. Senator HAGEL. Well, what I’m really referring to is when do you believe the Iraqi people will be in a position to purchase their own food and all remnants? Ms. RAPHEL. Sorry. Senator HAGEL. Maybe I should have qualified that, remnants of the Oil-for-Food Program will be complete? And as you noted the Ministry of Trade, which I want to ask you a question about in a moment, but we know the transitional process there, but if you could stay focused on that question. Ms. RAPHEL. OK. First of all, in terms of the old contracts we ex- pect by autumn of this year that all of the goods that are coming in under those contracts should be in Iraq and distributed. If you’re speaking more generally to the public distribution system—— Senator HAGEL. Yes. Ms. RAPHEL [continuing]. The food ration system. Senator HAGEL. Yes. Ms. RAPHEL. OK, that is another question altogether. The view of CPA is definitely, and other international experts and econo- mists and the World Bank and the IMF and so on, is that Iraq must take a serious look at the food ration system and in fact other subsidies that pervade their whole economic structure to find a way to bring this more in line with a market system to stimulate pro- duction of their own agricultural sector and so on. There’s been a lot of thought given to this and to the whole question of food secu- rity and identifying who the really vulnerable groups are who need what would be in our terms say, food stamps, need some support, some subsidies to get basic food items for their family and so on. But the decision was made that this was something we really need- ed to leave to the next Iraqi Government. It’s a highly political issue; as I mentioned early on, the Iraqis consider this an entitle- ment and with so many other issues on our plate, both on the eco- nomic and clearly on the security and political side, we thought this was best to leave to the Iraqis for a later date. But they are also aware that they need to change this system. Senator HAGEL. So we don’t have a general framework of a date as to when this would be phased out? Ms. RAPHEL. No. I suspect that it will certainly continue at least to the end of this calendar year and on into 2005. But we have and will continue to work on various proposals to discuss with the Iraqis to give them some ideas on what other countries have done to reduce food subsidies and so on. So we’re actively engaged with them on this subject. Senator HAGEL. You mentioned in your testimony the Ministry of Trade picking this up and now the implementing agency will be, especially after June 30. In your opinion are they prepared to do this? And they are doing it in a way that will in fact affect what VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 26 needs to be accomplished, as you noted, socially, economically, dip- lomatically? Ms. RAPHEL. Right. There are a couple of elements to the public distribution system. One of them is procurement. And in fact, as we’ve noted from this whole system, the Iraqis did their own pro- curing; that was part of the problem, in fact. But the Ministry of Trade has procured food stuffs before, they’ve done a lot of capacity building in Rome with the World Food Program, our people in CPA have worked with them to expand the list of suppliers that they consider and to develop a more transparent system altogether. So that capacity building is ongoing and in fact the Ministry is now doing its own procuring with oversight from CPA officials. So that’s one element of it. The distribution, again, is something that the Ministry of Trade was responsible for all along. They developed this system right after the first gulf war; it’s elaborate, as I say, it’s based on a so- phisticated computer data base. The difficulty for them, after hos- tilities ceased, was really that they had problems with their truck- ing system, they had problems with communications as we all did, and the discipline and authority relationships between the center and the governorates upon which this system depended, if you were in the center watching the whole structure you had to call the Gov- ernor of Al Anbar and say, you know, we need to release a certain amount of tea to go from there down to Basra. That capability dis- appeared overnight and so we’ve had to rebuild this. But the fact is they used to do it, they’re capable of doing it quite effectively. Senator HAGEL. Thank you. I’ve got limited time and if you could give me a very short answer on one question and then I wanted to get one more—that is, NGOs. Are they going to play a role? Are they playing a role in this distribution process? Ms. RAPHEL. The WFP was charged with monitoring the system in the south and central governorates, checking in on the ware- houses, making sure none of the food that came in under this pro- gram disappeared and so on. It was a monitoring role. Senator HAGEL. Thank you. And last question, you mentioned this, the Ambassador mentioned it, on CPA’s involvement, your particular involvement over the last few months and looking at the specific charges, analyzing contracts, the issues that are part of, or at the core, actually of this hearing; my question is, do you believe the CPA has access to all the relevant U.N. documentation that they need to review to get to some of these issues that we all are going to be looking at, specifically what CPA’s responsibilities are now, aside from what the Secretary General’s charge is to his peo- ple at the U.N. for investigation? Do you have everything you need? Ms. RAPHEL. Just speaking to things in Baghdad, Ambassador Bremer has ordered that the Board of Supreme Audit go through the files of each ministry and collect all relevant documentation that will help get at the bottom of the whole kickback scheme. As you know, many of the ministries were burned. Certainly the Min- istry of Trade was and others were, so that documentation will not be complete but it is now being sequestered and gone through by the Iraqis in conjunction with CPA authorities. Senator HAGEL. And you believe you have everything you need? VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 27 Ms. RAPHEL. Well, again, we don’t know what a complete set of records would be and we assume that at least some of them were lost in the immediate aftermath of hostilities through the looting and burning and so on. Senator HAGEL. Thank you. The CHAIRMAN. Thank you, Senator Hagel. Senator Dodd. Senator DODD. Well, first of all, Mr. Chairman, thank you very much. This is a very important hearing and I’m very pleased that you’re holding it. And I thank our witnesses as well for being here. And Mr. Chairman, I’m just going to ask, if I may, at the outset that some opening comments be included in the record, if I could. The CHAIRMAN. They will be included in the record. Senator DODD. And let me just summarize some of the comments I made in my written statement, very briefly. Obviously, looking at the Food-for-Oil Program it is tremendously important and we can learn valuable lessons from it, but as has been pointed out it basically has ceased to function, except for what remains to be done back in November. But certainly, while we’re very worried, and rightly so, about the corruption that went on, as I understand it about 72 percent of the funds that were secured as a result of the program actually went to serve the people of Iraq, innocent people in Iraq, who would have been, I think, under des- perate circumstances had this program not been created. At least that’s my observation. So, while I’m not excusing it, all the $10 bil- lion plus that may have been stolen as a result of the program, the fact that 72 percent of the funds, roughly $63 billion, one way or the other got to people in Iraq, may have saved them from just a human tragedy of significant proportions. So, I just wanted to make that point. And second, I’m actually, as I’m interested in this, I’m really more interested in the way in how the reconstruction funds are going to work. Let me just raise two or three quick questions, if I can, and get your responses, if I may. First, this isn’t something new. In 2002, weren’t we aware—and I don’t know who I should address this to, whether it’s to you, Ms. Raphel or to John Negroponte—but in 2002, you had Turkey and Jordan that there was oil flowing out of Iraq to both of these coun- tries. We were certainly aware of it at the time; they were getting it at below world prices. So this idea that we’re somehow discov- ering this corruption at this hour, I think, is not borne out by facts. Weren’t we aware of the Jordanian/Turkey use of Iraqi oil supplies 2 years ago? Mr. NEGROPONTE. Yes sir. Iraq was Jordan’s main trading part- ner before the gulf war and from 1980 to 1990, 19 percent of Jor- dan’s exports were shipped to Iraq while 12 percent of Jordan’s im- ports came from Iraq. And in recognition, this was a bit of a special arrangement here, of this unique relationship and wishing not to unnecessarily and unfairly penalize the people of Jordan from the negative economic consequences of sanctions on Iraq, the Security Council permitted Jordan to import oil from Iraq as compensation for the burden it was experiencing as a result of the United Na- tions sanctions on Iraq. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 28 Senator DODD. Do we know what happened to the revenues that went for that? When they came in—the revenues that came back into Iraq? Mr. NEGROPONTE. I don’t know the answer to that question. Senator DODD. Wouldn’t it be a pretty good guess they probably ended up in the pockets of Saddam Hussein and his cronies? Mr. NEGROPONTE. I just don’t know, sir. Senator DODD. Yes. Well would you generally agree that overall, despite the obvious, the clear evidence of corruption that the bulk of the resource that came into the program did serve and—we were told at the time that whatever other complaints, legitimate com- plaints about a terrorist regime, or certainly a brutal regime, that the bureaucracy of Iraq was such that in many cases they actually could serve people by getting resources to people who needed them. Is that a fair characterization? Mr. NEGROPONTE. Yes sir. And, as I said in my prepared state- ment, I think the program by and large—— Senator DODD. Worked. Mr. NEGROPONTE. Achieved its purposes. I think what we’re talk- ing about is the elements of corruption that were involved here. And I might just add that, you know, any sanctioned regime, inher- ently and particularly if it’s been going on for a period of 12 years starts to get pretty seriously frayed at the edges. Because anybody who’s under sanctions is going to try to find ways to get around it. But that notwithstanding, we managed to capture, in that Oil-for- Food escrow account, some $64 billion, as you mentioned, during the life of the program. And I think that’s important. Senator DODD. Well, I presume, based on the comments made by Mr. Kennedy, that the United States strongly supports this inves- tigation that’s ongoing. Will we require U.S. companies, oil compa- nies, that participated in the Oil-for-Food Program to participate, to testify? What is the administration saying about those compa- nies that were directly involved in the program and their willing- ness or unwillingness to participate in the investigation? Mr. NEGROPONTE. Well, we’ve pledged, as a general, political matter, our full cooperation with the investigation. I think we’ll have to see where that leads and we would have to deal with that particular bridge when we have to cross it. Senator DODD. Let me ask, if I may, about this newly established fund for Iraq, as it’s called, the DFI, which was established pursu- ant to Security Council Resolution 1483. As part of that resolution, it was to establish and take the responsibility for improving inde- pendent public audits of expenditures from this development fund. First, has the International Advisory and Monitoring Board called for in the resolution ever been established? Mr. NEGROPONTE. It’s been established. It’s functioning and it’s had a couple of meetings. Senator DODD. And have moneys been spent from the DFI? Mr. NEGROPONTE. Absolutely. And I might add—— Senator DODD. I’d like to know how much and on what, if you could speak to that. Mr. NEGROPONTE. First point I would make, Senator, is that of the unobligated moneys from the Oil-for-Food Program that were in the escrow account, $7.6 billion have been transferred from the VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 29 Oil-for-Food escrow account to the Development Fund for Iraq. So that money has been indispensable in terms of helping pay Iraqi civil service salaries and helping the Iraq Government continue to function. If I could invite Ambassador Kennedy to address the other part of your question in a bit more detail, if that’s all right. Senator DODD. Let me spell out, just so people know what I’m talking about here, and they have referenced it already, Mr. Am- bassador, and that is that you’re talking about we transferred $1.7 billion of Iraq frozen assets to help pay for salaries of Iraqi civil servants, ministry operations, and expenses within Iraq; U.S. mili- tary and coalition forces seized another $926 million, as I under- stand it, of the regime assets. Other countries have transferred $751 million of assets they’ve identified as belonging to the regime of Saddam Hussein. And my question is, has the advisory body identified an independent auditor for these funds? Mr. KENNEDY. Yes, Senator. The International Monitoring Board has been set up; it has already had two meetings; there is one U.S. representative, a Department of Defense official who is a member of that board. The board has named an external auditor; that selec- tion has been made. There is also an internal auditor, an American company that is employed by the CPA to monitor that. The balance sheet of the Development Fund for Iraq is posted daily on the CPA Web site that shows the income, which consists of transfers of fro- zen assets from both the United States and other countries plus transfers, as Ambassador Negroponte said, from the residual bal- ances in the Oil-for-Food, plus all the receipts of Iraqi oil sales in recent times. So all those sales are posted and then the categories of disbursement from the Development Fund for Iraq are posted there as well. Senator DODD. OK, very good. I may have some followup ques- tions for you but that’s a thorough answer and I appreciate it. We had a very good hearing under the leadership of Senator Allen a week or so ago focusing on the terrorist attacks in Madrid. But obviously the questions went beyond Madrid and we were look- ing ahead as to how things may work after June 30. And one of the issues, obviously, that’s been raised, is to what extent the Euro- pean countries are still going to be willing to participate, obviously given the statements of the Prime Minister-elect in Spain about their willingness to continue participation in the Iraqi theatre, and to what extent we’re willing to pursue a new U.N. resolution giving the U.N. a clear mandate to manage the administrative activities in Iraq in cooperation with the interim Iraqi regime until elections are held. And I wonder, Mr. Ambassador, if you might, we’ve craft- ed a resolution, I’d say, Mr. Chairman, sort of calling on that, and there were some suggestions, Senator Biden made some strong sug- gestions there about the role of NATO, I raised the issue of wheth- er or not we might overtly ask the Spanish and the French and others to help craft a resolution here, if that’s what they felt nec- essary. Can you share with us what steps you’ve taken, what con- versations you’ve had that you can talk about publicly that would pursue a new U.N. resolution. We’re getting very late here, the June 30 date is closing in on us, and it seems to many of us here that in the absence of a new U.N. resolution that our European VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 30 partners can support that we’re going to find a fractured relation- ship after the new interim government is established. Mr. NEGROPONTE. Yes sir. Thank you for your question. First of all, I’d like to make a point that under existing resolutions, 1483 and 1511, the United Nations has a lot of authorities. If one takes a close look at those resolutions a number of different authorities are enumerated that enable them to act in Iraq and give them a lot of scope. I think what has been limiting the United Nations’ ability to operate in Iraq up until now has really been the security situation in the wake of the August 19 bombing last year. And we are taking measures and working with the U.N. to try to give them a comfort level and assurances that if and when they go back into Iraq in any significant way that they will have the requisite secu- rity? Second, and this goes a bit to a question that Senator Biden asked earlier, what’s going to happen on the 1st of July and what is being done about that now? Well, as we speak the Secretary General’s Special Envoy, Ambassador Lakhdar Brahimi, is in Iraq talking to various political players there in an effort to work with the Iraqis and with the Coalition Provisional Authority and also with Ambassador Robert Blackwell, who is the Deputy National Se- curity Advisor and Special Envoy for Iraq, to talk about what the shape of this new transitional entity might be on the 1st of July. It’s not that we’re not working on that issue; that issue is being worked at the moment. I don’t think we have the kind of detail that Senator Biden asked for. As far as a future resolution, a Security Council resolution—— Senator DODD. Yes, where are we on that? Are we going to get one? Mr. NEGROPONTE. We don’t have anything specific in mind at the moment because I think we’ve been really waiting more for the out- come of these discussions on the transitional governmental ar- rangements on the 1st of July. We’d like to see that process develop a bit further. But I have no doubt in my mind—— Senator DODD. A dual track that, can’t you just—— Mr. NEGROPONTE. We’re already thinking about it, Senator. We just haven’t yet fashioned a resolution. I’m sure that there’s going to have to be some kind of resolution before the transition actually takes place that deals with the kinds of issues that you’ve raised. Senator DODD. Well, does the administration accept the notion that we ought to have a, given the statements and positions taken by our European allies who are so critical in all this, that giving the U.N. a significant management role, working with the interim government until elections are held? Mr. NEGROPONTE. I don’t think we have any reservation whatso- ever about giving the United Nations the primary role when it comes to facilitating the political transition and helping the Iraqis organize their elections if that’s what the Iraqi Government and people would like. I don’t think we have any difficulty at all giving them the central role in that process. Senator DODD. Thank you, Mr. Chairman. [The prepared statement of Senator Dodd follows:] VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 31 PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD The Foreign Relations Committee has convened this morning to take a closer look at the United Nations’ Oil-for-Food Program, which helped provide vital humani- tarian aid for the Iraqi people during almost a decade under Saddam Hussein’s re- gime. I know we all agree that recent allegations of improprieties by U.N. staff with respect to this program are very troubling. And the problems of the Oil-for-Food Program did not begin or end with these allegations. This hearing is an opportunity to examine both the strengths and weaknesses of this program, and I commend the chairman for holding it today. In 1990, only one week after Saddam Hussein ordered the Iraqi army to invade Kuwait, the U.N. Security Council passed Resolution 661, imposing an international trade embargo on Iraq. Those sanctions extended to Iraq’s oil exports—its most prof- itable industry. Nonetheless, they were an important, necessary, and internationally accepted tool used to cripple the tyrannical regime led by Saddam Hussein. However, the lack of oil export revenues also crippled that regime’s ability to pur- chase food and medical supplies for its people. And out of a shared desire among the members of the international community for the welfare of the Iraqi people, in 1995, the U.N. Security Council passed Resolution 986, which established the Oil- for-Food Program. The Oil-for-Food Program certainly deserves its share of criticism. And I will get to that. But before I do, I believe that it is important for us to keep in mind that with all its faults—and despite the corruption of the Hussein regime—this program helped millions of innocent Iraqis survive the violent rule of a merciless dictator. Indeed, from December 1996 through March 2003, it generated approximately $63 billion dollars—72 percent of which was devoted to humanitarian efforts. Certainly this money was not a cure-all for the ills of Iraq or its citizens. But I shudder to think of the humanitarian catastrophe that would have occurred had the Oil-for- Food Program not existed. Having said that, there were obvious problems with the Oil-for-Food Program. One was based on concerns that Saddam Hussein had found ways to bypass the international sanctions imposed on Iraq. To that end, a March 2004 report by the General Accounting Office (GAO) suggests that from 1997-2002, Iraq earned $10.1 billion through oil smuggling, surcharges against oil sales, and illicit commissions from commodity suppliers. And it doesn’t take an in-depth study to come to the con- clusion that a great deal of this money was likely used for the personal enrichment of Saddam Hussein and his murderous cronies. In January 2004, allegations surfaced that an array of foreign government offi- cials, businessmen, journalists, and even the chief U.N. administrator of the Oil-for- Food Program, Benon Sevan, might have received oil ‘‘kickbacks.’’ I know that we all take these charges very seriously, and I am pleased that on March 26, U.N. Secretary General Kofi Annan called for an independent, high-level investigation into these allegations. I am hopeful that this investigation will soon proceed. I also commend the Secretary General for having back in February directed the U.N. Office of Internal Oversight Services (OIOS) to investigate this matter, as well as for making all relevant transactions and documents in the U.N.’s possession available to members of the Security Council. And while we wait for the conclusions of the independent investigation, we must not sit idly by. It is now our responsibility to look to the future so that we can pre- vent a situation like this from recurring. However, in order to do this, I believe we must first understand the nature of what it is we are dealing with. We must under- stand that international sanctions will never be airtight. Even in the best of times, this is a certainty. And especially when we are pre- sented with a situation such as this—the coupling of a corrupt dictatorship and bil- lions of dollars in potential oil profits—it is inevitable that attempts will be made to circumvent sanctions. In addition, we must become more adept at identifying potential problems and preventing them from coming to pass, particularly in light of the fact that the United States has been the steward of Iraq’s wealth and resources for the last twelve months. We need to account for how all Iraqi frozen and seized assets have been spent by the Coalition Provisional Authority. We need to insure that there is accountability with respect to the Development Fund for Iraq, which was estab- lished pursuant to U.N. Resolution 1483. We need to understand why it does not appear that Iraqi oil production is currently being metered—a common practice in the oil business to keep track of production rates. I am frankly more concerned about preventing problems associated with the re- construction of Iraq, than I am about problems associated with a program that is VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 32 no longer operational, although I agree that there are important lessons we can learn by understanding any irregularities that occurred with the Oil-for-Food Pro- gram. Again, I thank the chairman for holding this hearing today and I look forward to asking some questions of our expert witnesses. The CHAIRMAN. Thank you very much, Senator Dodd. Senator Chafee. Senator CHAFEE. Thank you, Mr. Chairman. As we look back at the overall economic sanctions program, it seems from the outside that the palaces continue to be built but the people suffer. And you wonder if their counterproductive behavior does really change. And Ambassador, you said that, going back, in answer to Chairman Lugar’s question, China, France and Russia were opposing some of these sanctions; I think you mentioned Resolution 1284, if I have it right. Is there a better way? What were these countries pro- posing in lieu of not supporting economic sanctions? Mr. NEGROPONTE. Well, I think in many instances they were pro- posing that there not be sanctions at all and that the regime be free to export and import entirely freely without any kind of re- strictions whatsoever. We did not agree with that because we did not believe that Iraq had come into compliance with the various U.N. Security Council resolutions that had been passed since 1990. So we had a different point of view. But we were ultimately able to come to this accommodation in Resolution 1284, where they ac- quiesced but with abstentions rather than voting affirmatively in favor of those resolutions. Senator CHAFEE. And as you look back, it’s easy to look back, 20/ 20 hindsight, but is economic sanctions a good policy or are they counterproductive? Mr. NEGROPONTE. I would hate to make a general statement with regard to economic sanctions based on the particular instance of Iraq. Let’s not forget that this all comes in the wake of Iraq hav- ing invaded and occupied Kuwait and this is all entirely a con- sequence of the first gulf war. So it’s a very particular situation so I’d be reluctant to generalize about sanctions. Senator CHAFEE. Great. And I’d like to just change the subject a little bit. You’re our Ambassador to the United Nations and I’m just curious what the mood is, particularly on the Security Council now as we face enormous challenges in trying to bring the inter- national community together on these challenges. What’s the mood of, particularly on the Security Council, is there a sense of, hey, you guys went it alone, you’re on your own? Or is there a coming together with your colleagues and saying we want to do our best to help? Mr. NEGROPONTE. Well, I’ve been impressed by the fact that we’ve been able to pass resolutions since May of last year—Resolu- tion 1483 was mentioned—by consensus in the Security Council. I think that a number of these countries, the ones that have been mentioned plus Germany certainly didn’t favor our military action but they say all right, that’s in the past. And I think they all recog- nize that they have an important stake in Iraq being a success, and I don’t think they want our policies to fail. So I think they want to find ways to work with us to make things move in a constructive and positive direction going forward. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 33 Senator CHAFEE. Well, you have a difficult job and I support what you’re doing. Mr. NEGROPONTE. Thank you. Senator CHAFEE. Thank you, Mr. Chairman. The CHAIRMAN. Thank you very much, Senator Chafee. Senator Allen. Senator ALLEN. Thank you, Mr. Chairman. I want to thank you for holding this hearing on this important issue, as well as for your opening statement and probative questions. This conspiracy to skim billions of dollars from the Iraqi Oil-for-Food Program is of great importance, and this committee determine what the truth is in all of it. Although listening to all of this, I don’t think it should be any surprise that Saddam Hussein would seek to take advan- tage of a humanitarian program that the world community offered to the people of Iraq. His people were not only suffering from his dictatorial policies and his state police, that used rape and murder and torture to govern, they also, in effect, denied food and medicine and health facilities to the people of Iraq while he and his thugs lined their pockets with these illegal surcharges and kickbacks in the Oil-for-Food Program. It’s been called actually a conversion to an oil-for-palaces program. And to the extent those billions of dol- lars were going for palaces it meant it was not going for hospitals or schools or medicine or food. There’s also, from reports, that some of the food and the medicines were outdated anyway. So this whole scheme is one that is very troublesome. Now, the evidence is at least $10 billion was siphoned off in a 5-year period from revenues generated from this Oil-for-Food Program. We have to look at this complete ineptitude involved here with a lack of transparency, any sort of scrutiny, not just for the past but also for the future. But also recognize how this helped prop up this regime, this was the way for Saddam Hussein and those in power in Iraq to stay in power. Who knows what they did with all the money. There’s esti- mates of $2 billion that was used for palaces. Who knows what they were buying from other countries. Three-quarters of this rev- enue and the purchases were from those three countries who were opposed to sanctions, China, Russia and France. You look at some of the figures that I’ve seen, Russia by far received the most in oil, 21⁄2 billion barrels of oil. The French were the second largest bene- ficiary at 165 million barrels. Regardless, we have Senators here and others around the world saying we need to get the United Nations involved in this, that they were important in the Oil-for-Food Program, but this is cer- tainly a sad and very scandalous implementation of this program. I think that we need to go forward with this very cautiously but also we must do so fully. As a member of the United Nations the United States has an interest in making sure that what the United Nations does is ethical, proper and does nothing to further dic- tators and despots to stay in power. The United States taxpayers fund approximately one-fifth, maybe a little more than one-fifth, of the budget of the United Nations. Let me ask some questions now on behalf of the taxpayers of the United States. The evidence I’ve seen is this would not directly af- fect the taxpayers of the United States. Ambassador Negroponte VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 34 would you want to respond if U.S. taxpayers’ money was at all wasted in this scandalous oil-for-palaces scheme? Mr. NEGROPONTE. As I said in my statement, Senator Allen, no appropriated funds were involved in the administration of the—— Senator ALLEN. All right. Let me ask you this as a followup. Would we have to be spending as much in Iraq today if this money had been properly handled? Are we building schools? Are building hospitals in Iraq? And if that money had been properly utilized for hospitals would that have saved U.S. taxpayers money presently? Mr. NEGROPONTE. I think certainly that sounds like a logical proposition. I wouldn’t want to put a number on it and as I men- tioned earlier we did and we were gratified that $7.6 billion of unspent Oil-for-Food moneys was made available for use in the De- velopment Fund for Iraq. So we’re pleased to have those funds. Senator ALLEN. Well that’s nice, however we also did have an ap- propriation of $20 billion, some of which was for water, for sewer, for electricity; some for hospitals and police stations and other se- curity-type matters that, particularly in the hospital and the health care areas this money could have gone toward that rather than the United States taxpayers providing those gratis. Now, the United Nations is being invited to get involved in Iraq presently and in the future maybe as, again, the interim Iraqi gov- ernance group will make that determination. But to the extent that you hear assignations that we ought to get the United Nations in- volved, primarily as far as the security aspects, I think to get NATO forces who actually can have a positive impact as far as se- curity, as you go forward in this investigation as to the truth of this Oil-for-Food scandal, if you can say, are the French and the Germans, not the Germans so much, the French and the Russians and the Chinese holding back on certain participation or any reso- lutions that might be coming forth because of a concern of our in- vestigation or concern about this siphoning off, these kickbacks and scandal involving Oil-for-Food Program, which implicates their countries or companies in their countries? In fact, the Communist Party in Russia alone got 137 million barrels according to a report I’ve received. Mr. NEGROPONTE. It’s not my impression that they’re holding back. Also, as I said earlier, as compared to last year I think the atmosphere in the Council has improved and I think countries, in- cluding the countries you mention, want to work with us to make things a success. And they also, my last point would be, they have pledged their cooperation with the Secretary General’s investiga- tion. I think now we want to be sure to hold them to that if we think that in some way or another they’re not living up to that pledge. Senator ALLEN. Well, I understand because of your role you have to be a diplomat as well. Do you have a great deal of confidence that this investigation will get to the truth? Mr. NEGROPONTE. Well, I certainly hope so. The Secretary Gen- eral has said it’s his intention. I think the first indication is going to be to see, and I think it’s important, that he choose very high caliber people of outstanding reputation to lead this panel, and I understand he intends to name the panel members in the near fu- ture. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 35 Senator ALLEN. I think the key will to be to see how independent those panel members are. A lot of these concerns—were concerns early on. These were con- cerns in the mid- to late-1990s insofar as questions about kickbacks and padded contracts and so forth. There were objections from the Russians, the Chinese and the French involved in this, and again, as I said earlier, three-quarters of these contracts were deals or products, products from these countries. Do you know, and I know you were not of that administration, but do you know why the Clin- ton administration did not push harder, rather than giving in to the Chinese and the Russians and the French? Mr. NEGROPONTE. Well, I think we had different degrees of knowledge about different categories of malfeasance. Again, in the area of oil smuggling or of oil pricing I think we were aware of those problems earlier than we were with respect to some of these other issues. And again I think it’s important to stress, Senator, that these contracts were signed directly between the Saddam re- gime and the suppliers so that that information and what may have been hidden in those contracts was not necessarily that easy to find out. And it’s only in the wake of our military action that some of this evidence is starting to come more to light. Senator ALLEN. Well, isn’t it true that the British and the United States were objecting to some of these and then they’d be criticized for not caring about the feeding and the health of the Iraqi people whenever they’d try to get some transparency and honesty in this Oil-for-Food Program? Mr. NEGROPONTE. Yes, and particularly with respect to oil pric- ing and with respect to smuggling. And it is also true that we very often put contracts on hold at different times in the carrying out of this program because of various objections. But in terms of good evidence of kickbacks or of any possible corruption by U.N. officials, I don’t think there was that much information to go on in the time period you’re talking about. Senator ALLEN. Well, regardless of the corruption of U.N. offi- cials I think there was sufficient evidence, at least in the late 1990s, of corruption by some of these companies that are from those particular countries. All right, my time has expired. Mr. NEGROPONTE. Can I ask Ambassador Kennedy if he wants to? Mr. KENNEDY. Senator, I think the problem we face here is that once the allegations have come out, it appears clear. But as the contracts were negotiated between the Saddam regime directly with suppliers, the Saddam regime was essentially very clever. They buried things in the contract. If you’re buying enough food to feed a nation of 24 million people, all you have to do is add a very, very small amount to every bushel of wheat you buy or every kilo- gram of baby milk. And if the contract itself on the face of it does not seem excessive, when we did see excessive contracts, you know, that the price of wheat was wildly out of the scope of the market, we held on those contracts. And the United States and the United Kingdom, as you rightly pointed out put holds on over 2,100 con- tracts valued at about $5.1 billion during the course of the effort. But what Saddam Hussein did was clever, it was to add a little bit VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 36 on a lot and make it up in volume. And so he worked the system so there was not evidence. It wasn’t until the CPA and as Ambas- sador Raphel and I were both in Iraq at that point and saw the evidence coming forward from the Iraqis that we saw the mag- nitude of it. But he was very clever and, like I said, got a little bit on each contract, not enough to ring any alarm bell when you read the contract. Senator ALLEN. Thank you all. Thanks for your testimony. Thank you, Mr. Chairman. The CHAIRMAN. Thank you very much, Senator Allen. Senator Sununu. Senator SUNUNU. Thank you Mr. Chairman. Let me ask about the specifics of the language that might have alerted you in these supplier contracts. Ambassador Negroponte, in your testimony you note that there were a couple of instances where suppliers had ac- cidentally left surcharge language in the contract and those were blocked. Could you describe a little bit more specifically what kind of language you’re talking about? I think that’s your testimony; is that Ambassador Kennedy’s testimony? Did I misread the package? No, I think that’s your written testimony. Mr. KENNEDY. It is. You’re correct, Senator, it is Ambassador Negroponte’s testimony. Senator SUNUNU. I apologize for having read it. But if either of you could address, just describe in a little bit of detail, what kind of language would that be? How specific was the reference to a sur- charge or what that surcharge should have been used for? Mr. KENNEDY. Basically, the earlier holes were almost exclu- sively based on the market pricing being wildly divergent from what the contract said in itself. Every once in a while, but more particularly when Ambassador Raphel did her work in Baghdad, we saw what was called ‘‘after sale service.’’ You bought something and the contract provided that they would come and fix your refrig- erator at your house afterwards. The Iraqi employees pointed out that there was no after sale service. But on the face of it in the contract, it would seem perfectly reasonable when you bought a large piece of equipment. We also did see, from time to time, clauses that contained indication that spare parts were included and it was evident that there weren’t really that amount of spare parts and even no spare parts required in one contract. And in an- other one, again, 10 percent of the value of the contract for after sales service, again not things that would be normally for that kind of material in that kind of contract. Those just sort of leapt out at you. Senator SUNUNU. And these are problems that were noticed be- fore the contracts were let. Mr. KENNEDY. Yes, sir. All the contracts required the approval of the 661 Committee before they could be executed because the U.N. had control of the bank account and the supplier would not get his, her, or its money without that U.N. sign-off and the U.N. sign-off was derivative of the 661 Committee’s approval. Senator SUNUNU. Ambassador, did you want to add anything to that? The GAO evaluation of the program, Ambassador, do you agree with the general findings of the GAO evaluation? VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 37 Mr. NEGROPONTE. We thought it was a reasonable report al- though we’re not sure of those figures, the estimates that they have made. They seem to be in the ballpark and it’s the same figures I believe that appeared in that Wall Street Journal article. Senator SUNUNU. But was there any information in the GAO study that you found to be surprising or new? Mr. NEGROPONTE. I’m not aware of any, Senator. Senator SUNUNU. Mr. Kennedy, could you describe the activities, again in a little bit more detail, the activities of the Board of Audi- tors? Mr. KENNEDY. Yes sir. Senator SUNUNU. In other words, let me lead you a little bit. Were they constantly performing audits? Were there simply peri- odic audits? And how comprehensive were they? Mr. KENNEDY. There, if I might—there is under the Charter of the United Nations a United Nations Board of Auditors estab- lished. It is a rotating board comprised essentially of the equivalent of the General Accounting Offices of three member states. It is cur- rently France, the Philippines, and South Africa. Over the course of this it included at times the United Kingdom, Ghana, and oth- ers. Under the Oil-for-Food Program, they audited the program every 6 months. Senator SUNUNU. They were not set up specifically to audit the Oil-for-Food Program. Isn’t that correct? This is a normal auditing board that has existed for some years at the United Nations, as part of the charter. Mr. KENNEDY. It has existed since the beginning of the Charter. And they were engaged, so to speak, to audit the Oil-for-Food Pro- gram every 6 months. They did that and rendered reports on that, on their findings. Senator SUNUNU. OK, it still isn’t quite clear to me, Ambassador Negroponte, whether or not their audits were made fully available to the 661 Committee. Mr. NEGROPONTE. Yes they were, sir. Senator SUNUNU. They were, all of them were. Were they found to be lacking or were any concerns about their quality raised con- temporaneously? Mr. NEGROPONTE. I’m not aware, Senator, of the answer to that question. I really am not aware that we’ve ever made a judgment about the adequacy of those audits. Senator SUNUNU. Mr. Kennedy, what in your estimation is the track record of previous U.N. investigations of the type that we’re now seeing on the Oil-for-Food Program? Ambassador, please. Mr. NEGROPONTE. I think what I would respond to that is that we have a recent example with respect to Iraq, Senator Sununu, which is when the Secretary General named a panel to investigate the bombing and the security precautions that were being taken by the United Nations in the wake of the August 19 bombing; he named the former President of Finland, Mr. Martti Ahtisaari, to conduct an inquiry. And they came out with a scathing report. So I’d say that there are examples and that would be the most recent one of the Secretary General of the United Nations being willing to have a hard look taken at the operations of his own organiza- tion. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 38 Senator SUNUNU. With regard to corruption, bribery or other crimes that might have been unearthed by past U.N. investigative bodies, have there ever been U.N. officials prosecuted or convicted as a result of the U.N. investigations? Mr. NEGROPONTE. I would have to submit a response to that for the record. Senator SUNUNU. If you could I would appreciate it very much. [The following response was subsequently received.] The following excerpts from OIOS annual reports provide instances in which find- ings from OIOS investigations were referred to national law enforcement authorities for further investigation and possible prosecutions. From OIOS 1998 Annual Report (A/53/428) General Developments: These decisions by programme managers to seek criminal prosecutions, in order to send a message that criminal conduct can result in crimi- nal prosecution, were supported by both human and financial resources, and they represent hard evidence of the realization of the Secretary-General’s determination to increase accountability as part of his reform programme. • Theft of United Nations-owned equipment: As a result of an inquiry conducted from 1996 to 1997 by the Investigations Section with the support of DPKO, evi- dence of theft of United Nations-owned equipment by a United Nations con- tractor was obtained. This contractor had supplied catering services to two peacekeeping missions, the UN Transitional Authority in Cambodia and the UN Operation in Somalia. The United Nations filed a formal complaint in 1996 with the Government of Kenya because the UN equipment was ultimately located in Mombasa. The items that have been recovered were found in early 1997 in a search by the Kenyan Police, with the assistance of staff from OIOS and DPKO, of several vessels which were owned or operated by the caterer in Mombasa harbour. The investigation yielded evidence that the firm’s owners and officials had stolen a total of approximately $400,000 in United Nations equipment from both missions. Although there is evidence that substantially more UN equip- ment had been stolen, that equipment has apparently been retained by the com- pany’s interests in Somalia and is not retrievable at this time. For the first time, the United Nations has sought criminal penalties against owners and offi- cials of a contractor accused of theft and possession of United Nations-owned equipment. The trial in Kenya has been suspended because one of the accused had become a fugitive. • UN Conference on Trade and Development—theft of $600,000 by manager: Evi- dence adduced by the investigation proved that, over a period of more than 10 years, a manager in UNCTAD stole nearly $600,000 from the UN by submitting false documents for daily subsistence allowance payments to fictitious ‘‘experts’’ attending non-existent UN conferences. When confronted with the evidence of his scheme, the staff member acknowledged his misconduct. The findings were provided to a Swiss court, which convicted the staff member of the crimes charged and directed that, in addition to the $350,000 repaid, the now former staff member was obliged to repay the balance. From OIOS 1999 Annual Report (A/54/393) • Investigation of UNDP’s Reserve for Field Accommodation: The Investigations Section was requested by UNDP to undertake an investigation into procure- ment irregularities identified by the UNDP in the reserve for field accommoda- tion expenditures made for a $50 million building programme. . . . The value of the loss to the Organization by the fraud is conservatively estimated at ap- proximately two million dollars. As a result of this investigation, the Adminis- trator fully supported the recommendation that the case be referred to the rel- evant United States authorities. In addition, he dismissed the UNDP official in- volved. An indictment was issued by the U.S. authorities, and the former staff member was arrested. Efforts to extradite the consultant have been unsuccess- ful. In cooperation with UNDP and the Office of Legal Affairs, the Section has been assisting the United States authorities and pursuing options to recover the lost funds. The case is pending. From OIOS 2000 Annual Report (A/55/436) • Cases presented to national law enforcement authorities: The Investigations Section investigated 38 cases which were presented for administrative or dis- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 39 ciplinary action; 22 of those cases were recommended for criminal prosecution by national law enforcement authorities. It can take years for these cases to be finalized, since such proceedings are time-consuming and they require the Office to allocate significant resources to assist in their resolution. From OIOS 2001 Annual Report (A/56/381) • At the conclusion of an investigation, the Section evaluates the evidence and provides a report to the concerned programme manager. The Investigations Sec- tion is a recommendatory body and cannot prosecute a case before national law- enforcement authorities, institute disciplinary proceedings or take administra- tive measures. Then the Organization refers a case to national law-enforcement authorities for criminal investigation and possible prosecution; based on the Section’s recommendations, the Section, in consultation with the Office of Legal Affairs and the programme manager concerned, assumes its designated role of liaison between the United Nations and the national authorities. • Misdirection of funds at the United Nations Environment Programme: OIOS in- vestigators assisted United States law enforcement authorities in the prepara- tion of the criminal proceedings against a Chase Manhattan Bank customer who had been the erroneous recipient of over $700,000 in contributions made by several Member States for deposit in the UNEP Trust Fund account at the bank. The customer had refused to comply with the bank’s request to have the money placed in the correct account, claiming that the money belonged to her. She was arrested in March 2000 and found guilty by a United States jury in October 2000 on charges of bank fraud and bank larceny. She was sentenced in April 2001 to 24 months in prison and was required to make restitution of the misdirected funds to the bank. The bank had previously credited the UNEP account with the entire amount. • Investigation at the United Nations Mission in Bosnia and Herzegovina (UNMIBH): Following an OIOS investigation and a trial in a United States Dis- trict Court, in April 2001, the United States Court of Appeals upheld the convic- tion of a former UNMIBH staff member who had been convicted of wire fraud and conspiring with a local travel agent and an airline employee to submit fraudulent invoices for excess baggage, resulting in a loss of $800,000 to the Or- ganization. The individual is currently serving a 41-month prison sentence. From OIOS 2003 Annual Report (A/58/364) • Refugee smuggling in East Africa: OIOS continued to provide assistance to the Kenyan authorities during the ongoing criminal trials of the four UNHCR staff members, two members of an affiliated non-governmental organization and four others who operated the criminal enterprise of refugee smuggling at the Nairobi branch. To date, one of these offenders has been convicted and has begun serv- ing his two-year prison sentence. • United Nations Interim Administration in Kosovo: OIOS investigated, in co- operation with the EU Anti-Fraud Office, significant acts of fraud alleged to have been committed by an UNMIK senior staff member, who was assigned to the UNMIK reconstruction pillar, managed by the EU. The investigation re- vealed that the staff member had caused a public electricity provider in a neighbouring Member State to transfer more than $4 million, derived from UNMIK funds for the purchase and sale of electricity on the power grid of the former Yugoslavia, to his private Gibraltar bank account and later to another account in Belize. The transfer was stopped and the funds were returned. The investigation also confirmed that the staff member had engaged in other fraud- ulent acts of lesser significance. The former staff member was convicted in his home country on three charges and sentenced to a prison term of three years and six months. • Investigation at the UN Conference on Trade and Development: In the context of a previous investigation by OIOS at the UN Conference on Trade and Devel- opment concerning attempted fraud involving an advance fee of $4.7 million as a payment towards a fake air transport contract for the delivery of humani- tarian goods, OIOS provided investigative services and testimony to national law enforcement authorities. The perpetrator, now a fugitive, is being sought by the Member State concerned. Senator SUNUNU. And finally, with regard to the oil sales them- selves, do you believe it would have helped limit corruption if sales had not been limited for larger U.S. firms or larger U.S. firms had not been restricted in their participation? There’s some discussion VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 40 about the degree to which corruption may have been exacerbated by the very large number of small firms, not just in the United States but around the world, and a certain limitation placed on larger firms. Mr. NEGROPONTE. Of course, first of all, I’d like to say that the overall share of purchases from the United States, or by the U.S. firms or entry in the contracts—— Senator SUNUNU. About one-third. Mr. NEGROPONTE [continuing]. Was quite—well, that’s the over- all quantity of oil but I think bought in the secondary market, if you will, they were not direct contractors. I think in the overall program, I see here, we were the eleventh largest purchaser of oil from Iraq. The question of whether it might have been helpful to have larger firms I think is a good one. I think what happened with the forward pricing scheme was that it caused a proliferation of a number of smaller companies to want to get into this business. It might have been a factor, I’m not sure. [The following response was subsequently received.] A fundamental principle underlying UN Security Council Resolution 986 (1995), which established the UN Oil-for-Food Program, was the preservation of the former Government of Iraq’s sovereignty and territorial integrity. Consequently, the former Iraqi regime was permitted to sell its petroleum and petroleum products to pur- chasers of its choosing, as long as the oil price sought reflected ‘‘fair market value’’ and that price was approved by the Iraq Sanctions 661 Committee. Under the Committee’s Procedures, approved August 8, 1996, UN member states were instructed to submit a list of ‘‘national oil purchasers (private companies, State-owned companies, State agencies, ministries, etc.),’’ who would be authorized to communicate with the UN oil overseers and to conclude oil purchase agreements with the Iraqis. There were no stipulations either in the resolution or the Com- mittee procedures governing the size and nature of those entities authorized to pur- chase Iraqi oil. We have provided under separate cover to the Senate Foreign Rela- tions Committee a copy of the UN List, as of March 11, 2003, of Authorized Oil Pur- chasers. A total of 86 countries and 1,129 companies, of varying size, are listed. You pose the hypothetical question of whether the alleged corruption involving Iraqi oil sales might have been reduced if there had been rules mandating that the former Iraqi regime could only sell its oil to large firms. While the answer to that question is best left to economists, I note that such a proposal likely would have elicited extensive debate among, and possible opposition from, certain Security Council members who sought to preserve the former Iraqi government’s sovereign right to choose with whom to transact oil sales. I also note that it was the result of the former regime’s concerted efforts to exploit differences between the Official Selling Price (OSP) of Iraqi crude oil, as approved by the 661 Committee, and con- stantly fluctuating global prices for other comparable oils, that produced alleged oil surcharges. Because the OSP remained fixed, typically for a 30-day period, price dif- ferences with other comparable crude oils necessarily emerged. Had purchasers of Iraqi crude oil been mandated to sign oil contracts in advance, at the fixed OSP, obligating them to lift the oil on a specific date, no matter what the price might have been for other comparable crudes, the room to exploit price differentials likely would have been significantly reduced. Senator SUNUNU. Thank you very much. Thank you, Mr. Chair- man. The CHAIRMAN. Thank you very much, Senator Sununu. Let me ask more about the United States’ participation. We were the elev- enth largest purchaser of Iraqi oil. As Senator Sununu has men- tioned, some have suggested about a third of the oil, maybe through secondary sources, came to the United States. First of all, I just wanted to check the accuracy of the volume. Beyond that, did the U.S. companies that purchased oil purchase it directly from Iraq or through broker middlemen? I ask this because we’ve talked VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 41 about Saddam and his role in fashioning contracts. Were some of these contracts directly with American oil firms? Were they observ- ant of the items in these contracts that we have been unearthing today? Mr. NEGROPONTE. Well, early in the program, Senator, we were a major buyer. The program had twelve 6-month phases over its life. And in the first two or three tranches, if you will, we were im- portant direct buyers. But after that our direct purchases from Iraq fell off to the point that, in terms of direct purchases, we rep- resented only about 2 percent of the market. So you’re correct to say that we then bought in the secondary market from whomever but it was not from the regime itself. The CHAIRMAN. What I’m driving at is that clearly we’re sug- gesting that the United States and Great Britain were vigilant, and that the Security Council and other countries were not. I just want to make certain, in terms of our own United States participation, that everybody was above-board, that is, the American firms. Were there direct contracts between U.S. oil companies and Iraqi oil sell- ers? Were cognizant of these pricing changes, the kickbacks, and the developments that we’ve been describing today? Mr. NEGROPONTE. Well, I think we’ll have to see if any of that kind of information develops in the inquiry, Mr. Chairman. The CHAIRMAN. Is the list of companies that sold goods to Sad- dam Hussein under the Oil-for-Food Program a public document at this point? Do we have documentation of all who were involved? Mr. NEGROPONTE. I’m advised that we do not, Mr. Chairman, have a public list available. The CHAIRMAN. Does it exist? I mean, is it likely that it will come to the fore in this investigation? Mr. NEGROPONTE. Well, I would have thought that it would exist because the contracts had to be approved so any contract that was approved under the Oil-for-Food Program would, of course, list the companies. You wanted to say something, Ambassador? Ms. RAPHEL. Yes, just to confirm that, the lists do exist, which include the name of the company, the country of origin, the type of product, and so on. These were given to the CPA as we worked on these contracts from the Office of Iraqi Programs. But these lists at this point are not public lists. On the U.N. Web site, when they notified suppliers on the prioritization of their contracts it list- ed merely what we call the COM number, the identification num- ber, and the name of the mission in New York which had been working the particular contract. The CHAIRMAN. Is all of this coming to the fore? I appreciate why things may not have been public, but are they going to be? Will the rest of the world have an item-by-item accounting of what occurred here? Mr. NEGROPONTE. We have been assured that the Secretary Gen- eral’s report, both its summary and the body of its report, will be made public. We have been told that there may be instances where either for the protection of whistle blowers, and we actually in- sisted on a whistle blower clause in the terms of reference, and in the case of perhaps naming certain entities for either reasons of proprietary information of some other legal consideration, those VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 42 names might be redacted. But I believe that the fundamental moti- vation of the Secretary General is to have maximum transparency. The CHAIRMAN. Well, I hope so. Clearly, the credibility of this en- tire thing is at stake. That includes who the Secretary General is appointing, or who finally is appointed by the Security Council, if that happens. The thoroughness of this redacting of situations raises questions right off the bat. By whom? Under whose author- ity? We’re back once again to the situation of countries that didn’t really want to get into this all that much to begin with suggesting bargaining over what is to be found. I think you understand that. That’s why I’m asking the question. It’s a critical question. Let me ask, who conducted the audits of BNP, the bank holding the U.N.’s Iraq oil escrow account? Do we know if BNP was in- volved in passing illegal money to Saddam? Mr. KENNEDY. If I might take that question, Mr. Chairman. The Board of Auditors, when it audited the Oil-for-Food Program every 6 months validated that the amounts held for the Oil-for-Food Pro- gram, which were held in two banks, principally, were there. It would be entirely speculation on my part to say one thing or an- other about the bank holdings other than the fact that the United Nations, once the goods arrived in Iraq the U.N. would be notified that the goods arrived under contract number 1–2–3; that informa- tion would be passed to Washington and all that would happen then would be that the bank holding the funds were simply told to pay the amount of money that’s specifically allocated under the let- ter of credit for account 1–2–3. So the kickbacks came not from the banking institutions but from the company that held the contract. The CHAIRMAN. Well, let me just follow that. The BNP bank I’m talking about is BNP Paribas. It’s a French bank, and it has ac- counts in New York City. The Wall Street Journal, for the sake of argument this morning, says that another type of investigation might occur. It might explore wrongdoing that occurred in the state’s banking department involving this bank. The question is what if we’re not able to find out either via the U.N. investigation or through the fledgling attempts that we’re attempting in Con- gress? Why, Elliot Spitzer might take a look at it, or perhaps Mor- genthau, or somebody else. They might get to the heart of it. This is why I’m wondering how rigorous the banking audits of BNP were. Both BNP and the United Nations are located in New York. It appears that there are ways of finding out what happened, day by day, currency by currency. Do you have any comment about that? Mr. KENNEDY. Mr. Chairman, we’re in favor of complete trans- parency. My understanding from talking to officials at the United Nations is that the bank simply disbursed the funds as they were instructed. They held the funds that the U.N. gave them and then they disbursed the funds when the U.N. gave them a piece of paper and said, ‘‘pay this bill.’’ But I believe that this will be one of the subjects of the inquiry, to make sure that all funds are totally, com- pletely accounted for and that should be done. The CHAIRMAN. I think it’s fair to say that Senator Biden and I and clearly most of the members of this committee are strongly in favor of a strong United Nations and strong United States partici- pation. I started my statement today by saying that this is integral VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 43 to our foreign policy. We’ve also discussed today the importance of the U.N. in Iraq. Mention has been made of the current U.N. emis- sary. As he goes back and forth through various persons and Iraq. He may offer leadership as he tries to find a new formula. We are praying for this during the countdown toward June 30. The credi- bility of the United Nations in attempting to referee, supervise or help to transform Iraq in this situation is at stake. It’s important to the United States, given the sacrifices we have made, that the institution be sound. This is why this emphasis on the oil-for-food situation arises. The United Nations must vigorously show its abili- ties to unearth the scandal and to clarify what the situation is. After sovereignty is transferred, Iraqis will be running their own affairs. We all pray for a democratic government with human rights, a visible symbol to the world. In the meanwhile, who will supervise the situation that had previously led to the graft and cor- ruption that we’re discussing? You can say, well, we’re doing our best, and we’re sort of coaching people on why graft is not a good idea and why corruption shouldn’t happen in this world. But with- out going into hyperbole about the situation, the fact is that we are also dealing with the U.N. Security Council. I specifically named names of countries that I believe obstructed justice. Now, one can say, well, you must have been born in a different era; after all, this is realpolitik, this is the way things really work. Yet this is not only a fastidious American government taking a look at this; there are other players. For the U.N. to be successful, and for food to be properly distributed to these people, even if only 72 percent got to them and somewhere else, that’s the way the world works. We’re saying, that isn’t the way we want the world to work. To com- promise that with a U.N. administration that is just as suspect after June 30 as it was before, with regards to Iraq, would be a travesty. That is why we’re having the hearing, and that is why a number of people will have hearings. I think that you understand the gravity, because your responsibilities as public servants have been as advocates of the United Nations and United States partici- pation in it, as ours has. I appreciate your participation today, and the answers that you’ve given, and the work that you’re doing. But I think it’s a re- sponsibility all of us have. The administration, Congress, those in the Foreign Service still have an opportunity to make a difference. Having said this, I pass the baton on to my distinguished col- league. Senator BIDEN. Thank you, Mr. President—Mr. Chairman, and I would like to just ask two questions. That was a Freudian slip, Mr. President; I feel much better. By admiring him I realize I hurt his reputation but—— Let me say two things, or ask two questions. One, so that people listening to this hearing understand, there are two pieces to this. One is the oil that Iraq sold, and the money from these sales, where it went; to whom it went, what portions were skimmed off, et cetera. And the second piece of this is what the Iraqi Govern- ment did, i.e., Saddam Hussein, purchase, what services were pur- chased with the money? And what I’m a little confused about is why the list of those countries, companies or individuals for whom Saddam purchased something with this money, is not available. We VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 44 have that; you don’t need the U.N. to figure that out, you can fig- ure it out. I’d like a copy of it or an explanation of why you can’t give us a copy. I don’t quite get it. And so, I realize that might take time but the way you answered, unless I misunderstood you, you guys implied, well the investigation will uncover that and the Secu- rity Council make a judgment as to whether or not they’ll release it. You have all that. The United States of America has all that in- formation. Release it or give us an explanation why you shouldn’t release it to this committee. Any problem with that? Mr. NEGROPONTE. I think the point is it’s not available publicly. I think you’re right, I think—— Senator BIDEN. Well publicly, what the heck does that mean? Publicly? It just means no one’s compiled it. No one’s compiled it. It’s public, it has numbers attached to it, not names. You know the names attached to the numbers on the Web site. Is there a reason why that shouldn’t be part of a report that we file? These are all the companies in the United States, outside the United States that benefited by acquiring a contract with the Iraqi Government for the sale of something to Iraq from the money that Iraq got for the sale of their oil. That’s not hard, is it? Mr. NEGROPONTE. It’s certainly not hard to compile and we will give you a forthright answer—— Senator BIDEN. OK, good. Mr. NEGROPONTE [continuing]. As to the basis on which it can be provided to the committee.1 [The following response was subsequently received.] On April 30, 2004, copies of the UN’s List of Approved National Oil Purchasers in Accordance with Security Council Resolution 986 (1995), dated March 11, 2004, and a separate list of all UN Oil-for-Food (OFF) contracts for humanitarian goods submitted to the UN 661 Committee during the life of the program, were made available to Senate Foreign Relations Committee staffers by State Department rep- resentatives in response to your request. Your request, made during my April 7, 2004, appearance before the Senate For- eign Relations Committee, raises the more fundamental issue of why the UN did not make public the specific information associated with Iraqi oil and OFF humani- tarian supply contracts. The UN Office of the Iraq Program (OIP) was guided on this issue by the views of the UN Office of Legal Affairs (OLA), who advised that in the absence of any indi- cation to the contrary either in the contract itself or by the parties to the contract, that contracts and their contents should be considered ‘‘confidential’’ to the parties and to their advisers. However, OLA was of the view that the parties to the contract necessarily gave their consent for the communication of that contract to the export- ing state and for circulation of that contract to members of the 661 Committee so that Committee members could decide whether to approve the intended export. Be- yond these provisions, OLA believed that parties to a contract could not be assumed to have given their consent to a wider or more general circulation of the contract or to the information contained in such contracts. Senator BIDEN. Good. All right. Because I see no rationale for it being classified. None. Zero. Nothing in the law, nothing in terms of U.S. security. Nothing. And if there is any I would love to hear the explanation. Second point is to Ms. Raphel, just so she understands why I ask for the report, the first question I asked her. In an article pub- lished in the St. Petersburg Times, December 20 of last year, there is the following paragraph, quote, ‘‘But the council’’—referring to 1 See Appendix page 157. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 45 the governing council—‘‘has been dogged by allegations of nepo- tism, cronyism, self-dealing, outright corruption. The Pentagon is investigating alleged improprieties in the awarding of a coveted mobile phone license to a consortium linked to Ahmed Chalabi, the council’s best known and most controversial member. Questions have been raised about other contracts amid complaints that coun- cil members are more interested in promoting their own agendas than working for the good of the country.’’ End of quote. That’s the reason I asked you to compile for me what I requested. Who is going to be the one? Let’s assume that we find out that there is, you know, cronyism, nepotism, self-dealing-I don’t mean Mr. Chalabi, I have no idea whether that’s true or not about Mr. Chalabi—but among council members. Who do we rely on? Do we rely on the council to say by the way, there’s cronyism, nepotism? Do we rely on the auditors we’ve trained for them? That’s the pur- pose of my question, so you understand. You’re welcome to com- ment if you’d like. Ms. RAPHEL. Let me just say a couple of things. Thank you, Sen- ator. The specific answer to your question, in today’s Iraq in terms of who’s responsible for investigating allegations such as the ones that you read about and also the Oil-for-Food Program and so on is the Iraqi Supreme Audit Board, which has been reconstituted from scratch by the CPA and is working in conjunction right now with CPA advisors. Senator BIDEN. That’s the point. The CPA oversees it. We don’t accept what they say. We don’t accept what they say. We take what they say, we hope they’re actually auditing it, and then we inves- tigate them. We, the CPA, the Defense Department, the State De- partment. We are spending American taxpayers’ dollars. We do not, and if we do we should not, trust an auditing organization we set up under the control of an interim government. We should not take it on faith that what they’re asserting to us is true. If we are we are incredibly naive and possibly derelict. And I know we’re not. We’re not doing that. So who will perform the same function that the CPA now performs? This auditing outfit we set up for them? They come back with a report. Somebody at the CPA sits down now and looks at that report. If it appears not to be kosher then in fact somebody at the CPA says hey, Ambassador Bremer, we think these guys ain’t on the square. Right? Isn’t that how it works now? I’m not using diplospeak here but that’s how it works, right? Ms. RAPHEL. Well, if I might just make a couple of comments. Senator BIDEN. Please. Ms. RAPHEL. First of all, with regard, of course, to the U.S. tax- payers’ money, appropriated moneys, we have our own systems, as you well know, of keeping track of that money and what it’s spent for. There’s another element in this. In speaking about the Devel- opment Fund of Iraq, which is where the Iraqi oil revenues and their other revenues are deposited, one of the things we’ve been discussing with the Governing Council for the post-June 30 period is the possibility of having some international monitoring function of that account. Now, this sounds at first blush like a real affront to sovereignty, saying how could the Iraqis, when they become sov- ereign, wish to have somebody looking at their books? But the idea is, and many of the Iraqis we’ve talked to have taken this under VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 46 consideration, to have some sort of international stamp of approval to improve the kind of international confidence that you’re speak- ing about in the procedures of the budgeting, revenue, and expendi- tures of the Iraqi system for a finite period of time. Senator BIDEN. It’s not an affront to sovereignty. The World Bank does this now. Other international organizations do this now. When we in fact say to the State of Delaware, federally we’re going to provide x amount of dollars on condition that you show us how you’re spending the rest of the money in your account. You know, this is not rocket science. This is difficult, more difficult than rock- et science, but this is not rocket science. We’re not setting down any new onerous standard on an independent sovereign state. And it’s kind of basic, you know. You want our help, this is the condi- tions upon which you get our help. You don’t want our help, no problem. No problem. And so I wonder who is the one, what entity it is going to be? Now, you’re telling me we’re considering an inter- national organization of which I guess we’d be part, I don’t know, but you know, there’s got to be something. And I realize we’re talk- ing two different things. One, American taxpayers’ dollars. And the second is the use of their own revenues that is taking advantage of fungible dollars that come from a lot of other places, not just within Iraq. And I realize that they are different but they are con- nected. And so the first question is, how about just plain U.S. dol- lars? What is the means by which we follow the dollar? And the second is this larger question but I’m anxious to hear what has al- ready been decided, is being contemplated or is in the offing. And again, I’m serious when I say I realize these are tough questions but I also realize time’s running out. Time is running out. And so, anyway, thank you very much, Mr. Chairman, my time is up, obvi- ously. The CHAIRMAN. Thank you, Senator Biden. I thank the witnesses for their very helpful answers. I will leave the committee record open today for additional questions that may come from Senators who are here and may have additional questions as well as other Senators who have not been here and therefore not had the oppor- tunity to ask questions in person. We will request the cooperation of the witnesses in responding as rapidly as possible for the full- ness of the record. Thank you, each of you, for your public service, and for the help that you’ve given us today. The Chair now calls a second panel composed of Mr. Joseph Christoff, Director of International Affairs and Trade of the Gen- eral Accounting Office, and Mr. Michael Thibault, Deputy Director, Defense Contract Audit Agency. Gentlemen, thank you very much for coming to the committee today. We look forward to your testi- mony. As I mentioned to the first panel of witnesses, your full statements will be made a part of the record, in full. We will ask you to proceed, either in summary form, or with a full presentation of your statement, whichever way you feel will be most effective. I will ask you to testify in the order that I introduced you, and that would mean first of all, Mr. Christoff. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 47 STATEMENT OF JOSEPH A. CHRISTOFF, DIRECTOR, INTER- NATIONAL AFFAIRS AND TRADE, U.S. GENERAL ACCOUNT- ING OFFICE Mr. CHRISTOFF. Thank you, Mr. Chairman. Mr. Chairman, mem- bers of the committee, thank you for inviting GAO to this very im- portant hearing. Last year this committee asked GAO to monitor reconstruction efforts in Iraq. As part of that effort we looked at the operations of the U.N. Oil-for-Food Program, its transfer to the Coalition Provisional Authority, and the challenges Iraq faces as it assumes responsibility for the program. Let me first discuss the U.N.’s Oil-for-Food Program. Under U.N. sanctions Iraq was allowed to sell oil to purchase food and other humanitarian goods. From 1997 to 2002 the U.N. controlled over $67 billion in Iraqi oil revenues and issued $38 billion in letters of credit to purchase commodities. However, GAO estimates that the former Iraqi regime acquired $10.1 billion in illegal revenues from the Oil-for-Food Program. This included $5.7 billion in oil smuggled out of Iraq and $4.4 billion in surcharges on oil sales and illicit commissions on imported commodities. Oil was smuggled through Syria by pipeline, across the borders of Jordan and Turkey by truck and through the Persian Gulf by ship. The government also levied surcharges against oil purchasers and commissions against suppliers of commodities. According to Se- curity Council members this surcharge was up to 50 cents per bar- rel of oil and the commission was 5 to 10 percent of the commodity contract. Let me make some observations on the U.N.’s administration of the Oil-for-Food Program. First, the Iraqi Government had the au- thority to negotiate contracts directly with companies that pur- chased oil or supplied commodities. This control over contract nego- tiations may have been one important factor in allowing Iraq to levy illegal surcharges and commissions. Second, according to U.N. procedures the Office of the Iraq Program was to examine the price and value of all commodity contracts. However, it is unclear wheth- er the Office performed that function. Third, the Office of Iraq Pro- gram monitored oil sales at three exit points to ensure that Iraq sold only the amount of oil approved by the sanctions committee. However, the Iraqi Government bypassed the official checkpoints by smuggling oil through Syria, Jordan, and Turkey. The sanctions committee was able to reduce the illegal oil surcharges and to screen contracts for dual-use items. In 2001 it implemented retro- active pricing on oil contracts to prevent Iraq from discounting oil prices in return for surcharges. In addition, the members of the committee placed holds on contracts containing dual-use items. As of April 2002 about $5.1 billion in goods were being held for ship- ment to Iraq. Now let’s discuss the challenges that the CPA faced when it took over the program. Last year U.N. agencies, Iraqi ministries, and the CPA prioritized nearly 5,200 contracts pending shipment to Iraq. In November the U.N. transferred over 3,000 contracts worth $6.2 billion to the CPA. Most of these contracts had been renegoti- ated to remove the illicit commissions. The remaining 2,200 con- tracts were not continued because the Iraqi ministries no longer needed the commodities, suppliers were concerned about security, VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 48 or suppliers did not exist. Nearly one-half of the renegotiated con- tracts were with suppliers in Russia, Jordan, Turkey, the UAE, and France. The transfer has not gone smoothly. CPA did not receive all of the original contracts, amendments and letters of credit. According to DOD officials some suppliers have not received payment for goods delivered in Iraq because CPA had no record of their con- tracts. CPA also did not have enough staff to administer the con- tracts. The CPA intended to have 48 coalition staff but as of today has 16. In addition, CPA’s failed plans to privatize the food dis- tribution system and delayed negotiations with the World Food Program resulted in diminished food stocks and localized short- ages. And finally, Iraq faces two key challenges in assuming responsi- bility for the Oil-for-Food Program. First, Iraq must ensure that the remaining contracts are managed with transparent and ac- countable controls. Building these controls and the operations of Iraqi ministries will help address corruption and safeguard the $32 billion expected from donors. And second, the Iraqi Government will have to decide whether to continue, reform, or eliminate the current food distribution sys- tem. Although 60 percent of the population relies on food subsidies, the system is expensive and accounts for 25 percent of Iraq’s budg- et. Mr. Chairman, that concludes my statement. I’m pleased to an- swer any of your questions. [The prepared statement of Mr. Christoff follows:] PREPARED STATEMENT OF JOSEPH A. CHRISTOFF OBSERVATIONS ON THE OIL FOR FOOD PROGRAM WHAT GAO FOUND GAO estimates that from 1997-2002, the former Iraqi regime attained $10.1 bil- lion in illegal revenues from the Oil for Food program, including $5.7 billion in oil smuggled out of Iraq and $4.4 billion through surcharges on oil sales and illicit com- missions from suppliers exporting goods to Iraq. This estimate includes oil revenue and contract amounts for 2002, updated letters of credit from prior years, and newer estimates of illicit commissions from commodity suppliers. Both the U.N. Secretary General, through the Office of the Iraq Program (OIP) and the Security Council, through its sanctions committee for Iraq, were responsible for overseeing the Oil for Food Program. However, the Iraq government negotiated contracts directly with purchasers of Iraqi oil and suppliers of commodities, which may have been one important factor that allowed Iraq to levy illegal surcharges and commissions. While OIP was responsible for examining Iraqi contracts for price and value, it is unclear how it performed this function. The sanctions committee was re- sponsible for monitoring oil smuggling, screening contracts for items that could have military uses, and approving oil and commodity contracts. While the sanctions com- mittee responded to illegal surcharges on oil, it is unclear what actions it took to respond to illicit commissions on commodity contracts. OIP transferred 3,059 Oil for Food contracts—with pending shipments valued at $6.2 billion—to the CPA on November 22, 2003. However, the CPA stated that it has not received all the original contracts, amendments, and letters of credit it needs to manage the program. These problems, along with inadequate CPA staffing during the transfer, hampered the efforts of CPA’s Oil for Food coordination center in Baghdad to ensure continued delivery of commodities. Poor planning, coordina- tion, and the security environment in Iraq continue to affect the execution of these contracts. Inadequate oversight and corruption in the Oil for Food program raise concerns about the Iraqi government’s ability to import and distribute Oil for Food commod- ities and manage at least $32 billion in expected donor reconstruction funds. The VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 49 CPA has taken steps, such as appointing inspectors general, to build internal con- trol and accountability measures at Iraq’s ministries. The CPA and the World Food Program (WFP) are also training ministry staff to help them assume responsibility for Oil for Food contracts in July 2004. The new government will have to balance the reform of its costly food subsidy program with the need to maintain food sta- bility and protect the poorest populations. Mr. Chairman and Members of the Committee: I am pleased to be here today to discuss GAO’s review of the United Nations (U.N.) Oil for Food program. In 1996, the United Nations and Iraq established the Oil for Food program to ad- dress growing concerns about the humanitarian situation after international sanc- tions were imposed in 1990. The program allowed the Iraqi government to use the proceeds of its oil sales to pay for food, medicine, and infrastructure maintenance. From 1997 through 2002, Iraq sold more than $67 billion in oil through the program and issued $38 billion in letters of credit to purchase commodities.1 Today, we will present our findings and observations on the operation of the Oil for Food program and its transfer to the Coalition Provisional Authority (CPA). Spe- cifically, we will (1) report on our estimates of the revenue diverted from the pro- gram by the former Iraqi regime; (2) provide some preliminary observations on the administration of the program; (3) describe the challenges the CPA faced when it assumed responsibility for the program; and (4) discuss the challenges Iraq faces as it assumes responsibility for the program. To address these objectives, we reviewed documents and statements from (1) the United Nations on its management and oversight responsibilities for the Oil for Food program; (2) the CPA, the Departments of Defense and State, and the United Nations and its World Food Program (WFP) on the transfer of the program to the CPA and its implementation; and (3) from the World Bank and Iraq’s 2004 budget regarding the effect of food subsidies on the Iraqi economy. We met with U.N. offi- cials immediately following the transfer of the program to the CPA in November 2003 and with numerous U.S. officials representing the CPA, the Departments of Defense and State, and the U.S. Agency for International Development to discuss the program’s transfer and ongoing management by the CPA. Our review is ongoing because we have not yet received all the CPA and Iraqi ministry documentation that we have requested from the CPA and the Department of State. We have also re- quested certain U.N. documents, including internal audits, to determine the use of Oil for Food funds prior to the transfer to the CPA and the current disposition of funds. We assessed the reliability of the data on the number of contracts reviewed for priority by the United Nations, the CPA, and Iraqi ministries and those trans- ferred to the CPA November 2003 by corroborating OIP information with CPA data. We were unable to assess the reliability of the dollar amounts of contracts reviewed and pending shipment because we did not have access to the information that would have allowed us to confirm the dollar amounts reviewed and transferred. We conducted our review from November 2003 through April 2004 in accordance with generally accepted government auditing standards. SUMMARY • From 1997 through 2002, we estimate that the former Iraqi regime acquired $10.1 billion in illegal revenues related to the Oil for Food program—$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. This estimate is higher than our May 2002 estimate of $6.6 billion because it includes (1) oil revenue and con- tract amounts for 2002, (2) updated letters of credit from prior years, and (3) newer estimates of illicit commissions from commodity suppliers. • Both the U.N. Secretary General, through the Office of the Iraq Program (OIP) and the Security Council, through its sanctions committee for Iraq, were respon- sible for overseeing the Oil for Food Program. However, the Iraq government negotiated contracts directly with purchasers of Iraqi oil and suppliers of com- modities, which may have been one important factor in allowing Iraq to levy illegal surcharges and commissions. While OIP was responsible for examining Iraqi contracts for price and value, it is unclear how it performed this function. The sanctions committee was responsible for monitoring oil smuggling, screen- ing contracts for items that could have military uses, and approving oil and commodity contracts. While the sanctions committee responded to illegal sur- charges on oil, it is unclear what actions it took to respond to illicit commissions on commodity contracts. 1 All references to Oil for Food estimates are in 2003 constant U.S. dollars. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 50 • OIP turned over responsibility for 3,059 Oil for Food contracts—with pending shipments valued at $6.2 billion—to the CPA on November 22, 2003. However, the information the United Nations supplied to the CPA on the renegotiated contracts contained database errors and did not include all contracts, amend- ments, and letters of credit associated with the 3,000 contracts. These problems, along with inadequate CPA staffing at the time of the transfer, hampered ef- forts by the CPA’s Oil for Food coordination center in Baghdad to ensure that commodities continued to be delivered. Also, the execution of these contracts continues to be affected by poor planning, coordination, and security. • The history of inadequate oversight and corruption in the Oil for Food program raises concerns about the Iraqi government’s ability to manage the remaining Oil for Food commodities and about $32 billion in expected donor reconstruction funds. The CPA has taken steps, such as appointing inspectors general, to build internal controls and accountability measures in Iraq’s ministries. The CPA and the World Food Program (WFP) are also training ministry staff on procurement and distribution functions to help them fully assume responsibility for remain- ing contracts and a continued food distribution system in July 2004. In addition, the new government will have to balance the need to reform a costly food sub- sidy program with the need to maintain food stability and protect the poorest populations. 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 equip- ment 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 spe- cifically 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 gov- ernment 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 pro- gram, 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 in- creased 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 re- quested the U.N. Secretary General to, transfer the Oil for Food program to the CPA by November 2003. Despite concerns that sanctions may have worsened the humanitarian situation, the Oil for Food program appears to have helped the Iraqi people. According to the United Nations, the average daily food intake increased from around 1,275 calories per person per day in 1996 to about 2,229 calories at the end of 2001. In February 2002, the United Nations reported that the Oil for Food program had considerable success in several sectors such as agriculture, food, health, and nutrition by arrest- ing the decline in living conditions and improving the nutritional status of the aver- age Iraqi citizen. The Public Distribution System run by Iraq’s Ministry of Trade is the food portion of the Oil for Food program. The system distributes a monthly ‘‘food basket’’ that normally consists of a dozen items 2 to all Iraqis. About 60 percent of Iraqis rely on this basket as their main source of food. FORMER IRAQI REGIME DIVERTED AN ESTIMATED $10.1 BILLION FROM THE OIL FOR FOOD PROGRAM We estimate that, from 1997 through 2002, the former Iraqi regime acquired $10.1 billion in illegal revenues related to the Oil for Food program—$5.7 billion through oil smuggling and $4.4 billion through surcharges against oil sales and il- 2 Wheat flour, rice, vegetable ghee (semifluid clarified butter used for cooking), pulses (edible seeds of various leguminous crops, such as peas, beans, or lentils), sugar, tea, salt, milk, infant formula, weaning cereal, soap, and detergent. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 51 licit commissions from commodity suppliers. This estimate is higher than the $6.6 billion in illegal revenues we reported in May 2002.3 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 sup- pliers. Oil was smuggled out through several routes, according to U.S. government offi- cials and oil industry experts. Oil entered Syria by pipeline, crossed the borders of Jordan and Turkey by truck, and was smuggled through the Persian Gulf by ship. In addition to revenues from oil smuggling, the Iraqi government levied surcharges against oil purchasers and commissions against commodity suppliers participating in the Oil for Food program. According to some Security Council members, the sur- charge 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 De- fense review found that at least 48 percent of 759 Oil for Food contracts that it re- viewed were overpriced by an average of 21 percent.4 Defense officials found 5 con- tracts that included ‘‘after-sales service charges’’ of between 10 and 20 percent. In addition, interviews by U.S. investigators with high-ranking Iraq regime officials, including the former oil and finance ministers, confirmed that the former regime re- ceived a 10-percent commission from commodity suppliers. UNITED NATIONS AND SECURITY COUNCIL HAD RESPONSIBILITY FOR OVERSIGHT OF PROGRAM, BUT IRAQ CONTRACTED DIRECTLY WITH PURCHASERS AND SUPPLIERS Both OIP and the sanctions committee were responsible for overseeing the Oil for Food Program. However, the Iraqi government negotiated contracts directly with purchasers of Iraqi oil and suppliers of commodities. While OIP was to examine each contract for price and value, it is unclear how it performed this function. The sanctions committee was responsible for monitoring oil smuggling, screening con- tracts for items that could have military uses, and approving oil and commodity con- tracts. The sanctions committee responded to illegal surcharges on oil, but it is un- clear 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 pe- troleum products from Iraq, subject to the Iraqi government’s endorsement of trans- actions. 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 ap- propriate contractual arrangements. Iraqi control over contract negotiations may have been one important factor in allowing Iraq to levy illegal surcharges and com- missions. Appendix I contains a chronology of major events related to sanctions against Iraq and the administration of the Oil for Food program. OIP Was Responsible for Key Oversight Aspects of the Program OIP administered the Oil for Food program from December 1996 to November 2003. As provided in Security Council resolution 986 of 1995 and a memorandum of understanding between the United Nations and the Iraqi government, OIP was responsible for monitoring the sale of Iraq’s oil, monitoring Iraq’s purchase of com- modities and the delivery of goods, and accounting for the program’s finances. The United Nations received 3 percent of Iraq’s oil export proceeds for its administrative and operational costs, which included the cost of U.N. weapons inspections. The sanctions committee’s procedures for implementing resolution 986 stated that U.N. independent inspection agents were responsible for monitoring the quality and quantity of oil being shipped and were authorized to stop shipments if they found irregularities. To do this, OIP employed 14 contract workers to monitor Iraqi oil sales at 3 exit points in Iraq. However, the Iraqi government bypassed the official exit points by smuggling oil through an illegal Syrian pipeline and by trucks 3 U.S. General Accounting Office, Weapons of Mass Destruction: U.N. Confronts Significant Challenges in Implementing Sanctions Against Iraq, GAO-02-625 (Washington, D.C.: May 23, 2002). 4 The Defense Contract Audit Agency and the Defense Contract Management Agency, Report on the Pricing Evaluation of Contracts Awarded Under the Iraq Oil for Food Program (Wash- ington, D.C.: Sept. 12, 2003). VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 52 through Jordan and Turkey. According to OIP, member states were responsible for ensuring that their nationals and corporations complied with the sanctions. OIP was also responsible for monitoring Iraq’s purchase of commodities and the delivery of goods. Security Council Resolution 986, paragraph 8a(ii) required Iraq to submit a plan, approved by the Secretary General, to ensure equitable distribu- tion of Iraq’s commodity purchases. The initial distribution plans focused on food and medicines while subsequent plans were expansive and covered 24 economic sec- tors, including electricity, oil, and telecommunications. The sanction committee’s procedures for implementing Security Council resolution 986 stated that experts in the Secretariat were to examine each proposed Iraqi com- modity contract, in particular the details of price and value, and to determine whether the contract items were on the distribution plan. It is unclear whether the office performed this function. OIP officials told the Defense Contract Audit Agency they performed very limited, if any, pricing review. They stated that no U.N. resolu- tion tasked them with assessing the price reasonableness of the contracts and no contracts were rejected solely on the basis of price. The sanction committee’s procedures for implementing resolution 986 state that independent inspection agents will confirm the arrival of supplies in Iraq. OIP de- ployed about 78 U.N. contract monitors to verify shipments and authenticate the supplies for payment. OIP employees were able to visually inspect 7 to 10 percent of the approved deliveries. Security Council resolution 986 also requested the Secretary General to establish an escrow account for the Oil for Food Program, and to appoint independent and certified public accountants to audit the account. In this regard, the Secretary Gen- eral established an escrow account at BNP Paribas into which Iraqi oil revenues were deposited and letters of credit were issued to suppliers having approved con- tracts. The U.N. Board of Audit, a body of external public auditors, audited the ac- count. According to OIP, there were also numerous internal audits of the program. We are trying to obtain these audits. 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 con- tracts to prevent the purchase of items that could have military uses, and (3) ap- proving Iraq’s oil and commodity contracts. U.N. Security Council resolution 661 of 1990 directs all states to prevent Iraq from exporting petroleum products into their territories. Paragraph 6 of Resolution 661 establishes a sanctions committee to report to the Security Council on states’ compliance with the sanctions and recommend actions regarding effective implemen- tation. As early as June 1996, the Maritime Interception Force, a naval force of coa- lition partners including the United States and Great Britain, informed the sanc- tions 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 smug- gling also occurred through Jordan, Turkey, Syria, and the Gulf. Smuggling was a major source of illicit revenue for the former Iraqi regime through 2002. It is un- clear what recommended actions the sanctions committee made to the Security Council to address the continued smuggling. A primary function of the members of the sanctions committee was to review and approve contracts for items that could be used for military purposes. For example, the United States conducted the most thorough review; about 60 U.S. government technical experts assessed each item in a contract to determine its potential military application. According to U.N. Secretariat data in 2002, the United States was re- sponsible 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. Under Security Council resolution 986 of 1995, paragraphs 1 and 8, the sanctions committee was responsible for approving Iraq’s oil contracts; particularly to ensure that the contract price is fair, and for approving most of Iraq’s commodity con- tracts.5 In March 2001, the United States informed the Security Council about alle- gations that Iraqi government officials were receiving illegal surcharges on oil con- 5 Under fast-track procedures established by Security Council resolution 1383 of 1999, OIP could approve contracts that contained only humanitarian goods. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 53 tracts, and illicit commissions on commodity contracts.6 According to OIP officials, the Security Council took action on the allegations of surcharges in 2001 by imple- menting retroactive pricing for oil contracts.7 However, it is unclear what actions the sanctions committee took to respond to illicit commissions on commodity con- tracts. At that time, there was increasing concern about the humanitarian situation in Iraq and pressure on the United States to expedite its review process. CPA’s Administration of the Oil for Food Program In November 2003, the United Nations transferred to the CPA responsibility for 3,059 Oil for Food contracts totaling about $6.2 billion and decided not to transfer a remaining 2,199 contracts for a variety of reasons. U.N. agencies had renegotiated most of the contracts turned over to the CPA with the suppliers to remove illicit charges and amend delivery and location terms. However, the information the United Nations supplied to the CPA on the renegotiated contracts contained data- base errors and did not include all contracts, amendments, and letters of credit asso- ciated with the 3,000 contracts. These data problems, coupled with inadequate staff- ing at the CPA, hampered the ability of the CPA’s Oil for Food coordination center to ensure that suppliers complied with commodity deliveries. In addition, poor plan- ning and coordination are affecting the execution of food contracts. Program Transferred to the CPA in November 2003 On November 22, 2003, OIP transferred 3,059 contracts worth about $6.2 billion in pending commodity shipments to the CPA, according to OIP. Prior to the trans- fer, U.N. agencies had renegotiated the contracts with the suppliers to remove ‘‘after-sales service fees’’—based on information provided by the CPA and Iraqi min- istries—and to change delivery dates and locations. These fees were either cal- culated separately or were part of the unit price of the goods. At the time of the transfer, all but 251 contracts had been renegotiated with the suppliers. The De- fense Contract Management Agency is renegotiating the remaining contracts for the CPA to remove additional fees averaging 10 percent. The criteria for renegotiating contracts and the amount of the reductions were based on information from the CPA in Baghdad and the ministries that originally negotiated the contracts. An additional 2,199 contracts worth almost $2 billion were not transferred as a result of a review by U.N. agencies, the CPA, and the Iraqi ministries that nego- tiated the contracts. For example: • The review did not recommend continuing 762 contracts, worth almost $1.2 bil- lion, because it determined that the commodities associated with the contracts were no longer needed. • Another 728 contracts, worth about $750 million, had been classified as priority contracts, but were not transferred to the CPA for several reasons. About half— 351 contracts—were not transferred because suppliers were concerned about the adequacy of security within Iraq or could not reach agreement on price reduc- tions or specification changes. Another 180 contracts were considered fully de- livered. Another 136 suppliers had either declared bankruptcy, did not exist, or did not respond to U.N. requests. It is unclear why the remaining 61 contracts were removed from the priority list; the OIP document lists them as ‘‘other.’’ • Suppliers did not want to ship the outstanding small balances for an additional 709 contracts totaling about $28 million. The largest portion of the $6.2 billion in Oil for Food contracts pending shipment in November 2003—about 23 percent—was designated for food procurement. An ad- ditional 9 percent was for food handling and transport. The oil infrastructure, power, and agriculture sectors also benefited from the remaining contracts. Nearly one half of the renegotiated contracts were with suppliers in Russia, Jordan, Tur- key, the United Arab Emirates, and France. Inadequate Information and Staffing Affected Transfer and Implementation of Con- tracts According to CPA officials and documents, the incomplete and unreliable contract information the CPA received from the United Nations has hindered CPA’s ability 6 The sanctions committee received reports from the independent oil experts appointed by the Secretary General to determine whether there was fraud or deception in the oil contracting proc- ess. 7 Under retroactive pricing, the Security Council did not approve a price per barrel until the oil was delivered to the refinery. The Iraq government signed contracts with suppliers without knowing the price it would have to pay until delivery. This allowed a fair market price to be set. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 54 to execute and accurately report on the remaining contracts. U.N. resolution 1483 requested the Secretary General, through OIP, to transfer to the CPA all relevant documentation on Oil for Food contracts.8 When we met with OIP officials on No- vember 24, 2003, they stated that they had transferred all contract information to the CPA. CPA officials and documents report that the CPA has not received complete infor- mation, including copies of all contracts. The CPA received several compact disks in November and January that were to contain detailed contract and delivery data, but the information was incomplete. The CPA received few source documents such as the original contracts, amendments, and letters of credit needed to identify the status of commodities, prepare shipment schedules, and contact suppliers. In addi- tion, the CPA received little information on letters of credit that had expired or were canceled. Funds for the Oil for Food program are obligated by letters of credit to the bank holding the U.N. escrow account. When these commitments are canceled, the remaining funds are available for transfer to the Development Fund for Iraq. Without this information, the CPA cannot determine the disposition of Oil for Food funds and whether the proper amounts were deposited into the Development Fund for Iraq.9 In addition, the CPA received an OIP contract database but found it unreliable. For example, CPA staff found mathematical and currency errors in the calculation of contract cost. The inadequate data and documentation have made it difficult for CPA to prepare accurate reports on the status of inbound goods and closeouts of completed contracts. According to a Department of Defense contracting official, some contractors have not received payment for goods delivered in Iraq because the CPA had no record of their contracts. In November 2003, the CPA established a coordination center in Baghdad to over- see the receipt and delivery of Oil for Food commodities. The CPA authorized 48 coalition positions, to be assisted by Iraqis from various ministries. However, accord- ing to several U.S. and U.N. officials, the CPA had insufficient staff to manage the program and high staff turnover. As of mid-December 2003, the center had 19 coali- tion staff, including 18 staff whose tours ended in January 2004. U.S. and WFP offi- cials stated that the staff assigned at the time of the transfer lacked experience in managing and monitoring the import and distribution of goods. A former CPA offi- cial stated that the Oil for Food program had been thrust upon an already overbur- dened and understaffed CPA. As a result, 251 contracts had not been renegotiated prior to the time of the transfer and the CPA asked the Defense Contract Manage- ment Agency to continue the renegotiation process. A November 2003 WFP report placed part of the blame in food shortfalls during the fall of 2003 on OIP delays in releasing guidelines for the contract prioritization and renegotiation process. A September 2003 U.N. report also noted that the transfer process in the northern governorates was slowing due to an insufficient number of CPA counterparts to work with U.N. staff on transition issues. The center’s capacity improved in March 2004 when its coalition staff totaled 37. By April 2004, the coordination center had 16 coalition staff. Up to 40 Iraqi ministry staff are currently working on Oil for Food contracts. As of April 1, the coordination center’s seven ministry advisors have begun working with staff at their respective ministries as the first step in moving control of the program to the Iraqi govern- ment. Inadequate Planning, Coordination, and Security Affect the Management of Food Contracts According to U.S. officials and documents, CPA’s failed plans to privatize the food distribution system and delayed negotiations with WFP to administer the system re- sulted in diminished stocks of food commodities and localized shortages. Before the transfer of the Oil for Food program, the CPA administrator proposed to eliminate Iraq’s food distribution system and to provide former recipients with cash payments. He asserted that the system was expensive and depressed the agricultural sector, and the Ministry of Trade began drawing down existing inventories of food. In De- cember 2003, as the security environment worsened, the CPA administrator re- versed his decision to reform the food ration system and left the decision to the pro- visional Iraqi government. In January 2004, CPA negotiated a memorandum of understanding (MOU) with WFP and the Ministry of Trade that committed WFP to procuring a 3-month emer- 8 U.N. Resolution 1483, ¶ 16(f) (May 2003). 9 As of March 31, 2004, the United Nations had transferred $7.6 billion in Oil for Food funds to the Development Fund for Iraq. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 55 gency food stock by March 31, 2004 and providing technical support to the CPA and Ministry of Trade. Delays in signing the MOU were due to disagreements about the procurement of emergency food stocks, contract delivery terms, and the terms of WFP’s involvement. No additional food was procured during the negotiations, and food stocks diminished and localized shortages occurred in February and March 2004. The CPA and WFP addressed these problems with emergency procurements from nearby countries. An April WFP report projected a continued supply of food items through May 2004 except for a 12-percent shortage in milk. Only 55 percent of required domestic wheat has been procured for July 2004 and no domestic wheat has been procured for August. Under the terms of MOU, WFP’s commitment to procuring food stock ended March 31, 2004. The Ministry of Trade assumed responsibility for food pro- curement on April 1, 2004. According to a U.S. official, coordination between WFP and the Ministry of Trade has been deteriorating. The Ministry has not provided WFP with complete and time- ly information on monthly food allocation plans, weekly stock reports, or information on cargo arrivals, as the MOU required. WFP staff reported that the Ministry’s data are subject to sudden, large, and unexplained stock adjustments, thereby making it difficult to plan deliveries. The security environment in Iraq has also affected planning for the transfer and movement of Oil for Food goods in fall 2003. The transfer occurred during a period of deteriorating security conditions and growing violence in Iraq. A September 2003 U.N. report found that the evacuation of U.N. personnel from Baghdad affected the timetable and procedures for the transfer of the Oil for Food program to the CPA and contributed to delays in the contract prioritization and renegotiation processes. Most WFP staff remained in Amman and other regional offices and continued to manage the Oil for Food program from those locations. The August bombing of the U.N. Baghdad headquarters also resulted in the temporary suspension of the border inspection process and shipments of humanitarian supplies and equipment. A March 2004 CPA report also noted that stability of the food supply would be af- fected if security conditions worsened. CPA AND TRANSITIONAL GOVERNMENT FACE CHALLENGES IN PREVENTING CORRUPTION AND REFORMING THE FOOD DISTRIBUTION SYSTEM The history of inadequate oversight and corruption in the Oil for Food program raises questions about the Iraqi government’s ability to manage the import and dis- tribution of Oil for Food commodities and the billions in international assistance ex- pected to flow into the country. In addition, the food distribution system created a dependency on food subsidies that disrupted private food markets. The government will have to decide whether to continue, reform, or eliminate the current system. Addressing Corruption The CPA and Iraqi ministries must address corruption in the Oil for Food pro- gram to help ensure that the remaining contracts are managed with transparent and accountable controls. Building these internal control and accountability meas- ures into the operations of Iraqi ministries will also help safeguard the $18.4 billion in fiscal year 2004 U.S. reconstruction funds and at least $13.8 billion pledged by other countries. To address these concerns and oversee government operations, the CPA adminis- trator announced the appointment of inspectors general for 21 of Iraq’s 25 national ministries on March 30, 2004. At the same time, the CPA announced the establish- ment of two independent agencies to work with the inspectors general—the Com- mission on Public Integrity and a Board of Supreme Audit. Finally, the United States will spend about $1.63 billion on governance-related activities in Iraq, which will include building a transparent financial management system in Iraq’s min- istries. CPA’s coordination center continues to provide on-the-job training for ministry staff who will assume responsibility for Oil for Food contracts. after July 2004. Coa- lition personnel have provided Iraqi staff with guidance on working with suppliers in a fair and open manner and determining when changes to letters of credit are appropriate. In addition, according to center staff, coalition and Iraqi staff signed a code of conduct, which outlined proper job behavior. Among other provisions, the code of conduct prohibited kickbacks and secret commissions from suppliers. The center also developed a code of conduct for suppliers. In addition, the center has begun identifying the steps needed for the transition of full authority to the Iraqi ministries. These steps include transferring contract related documents, contacting suppliers, and providing authority to amend contracts. In addition, the January 2004 MOU agreement commits WFP to training ministry staff in the procurement VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 56 and transport functions currently conducted by WFP. Training is taking place at WFP headquarters in Rome, Italy. Reforming the Food Distribution System After the CPA transfers responsibility for the food distribution system to the Iraqi provisional government in July 2004, the government will have to decide whether to continue, reform, or eliminate the current system. Documents from the Ministries of Trade and Finance indicate that the annual cost of maintaining the system is as high as $5 billion, or about 25 percent of total government expenditures. In 2005 and 2006, expenditures for food will be almost as much as all expenditures for cap- ital projects. According to a September 2003 joint U.N. and World Bank needs as- sessment of Iraq,10 the food subsidy, given out as a monthly ration to the entire pop- ulation, staved off mass starvation during the time of the sanctions, but at the same time it disrupted the market for food grains produced locally. The agricultural sector had little incentive to produce crops in the absence of a promising market. However, the Iraqi government may find it politically difficult to scale back the food distribu- tion system with 60 percent of the population relying on monthly rations as their primary source of nutrition. WFP is completing a vulnerability assessment that Iraq could use to make future decisions on food security programs and better target food items to those most in need. Mr. Chairman and Members of the Committee, this concludes my prepared state- ment. I will be happy to answer any questions you may have. Mr. Chairman and Members of the Committee, this concludes my prepared state- ment. I will be happy to answer any questions you may have. Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration of the Oil for Food Program Date Event/Action Summary Aug. 2, 1990 U.N. Security Council Resolution 660 Iraqi forces invaded Kuwait. Resolution 660 condemned the invasion and de- mands immediate withdrawal from Kuwait. Aug. 6, 1990 U.N. Security Council Resolution 661 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. Aug. 6, 1990 Operation Desert Shield President Bush ordered the deployment of thousands of U.S. forces to Saudi Arabia. Nov. 5, 1990 U.S. legislation Public Law 101–513 prohibited the import of products from Iraq into the United States and export of U.S. products to Iraq. Jan. 12, 1991 U.S. legislation Iraq War Powers Resolution authorized the president to use ‘‘all necessary means’’ to compel Iraq to withdraw military forces from Kuwait. Jan. 16, 1991 Operation Desert Storm Operation Desert Storm was launched: Coalition operation, was targeted to force Iraq to withdraw from Kuwait. Feb. 28, 1991 Gulf War cease-fire Iraq announced acceptance of all relevant U.N. Security Council resolutions. Apr. 3, 1991 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. Jun. 17, 1991 Creation of U.N. Special Commission The U.N. Special Commission (UNSCOM) was charged with monitoring Iraqi disarmament as mandated by U.N. resolutions and to assist the Inter- national Atomic Energy Agency in nuclear monitoring efforts. Aug. 15, 1991 U.N. Security Council Resolution 706 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. 10 United Nations/World Bank, Joint Iraq Needs Assessment: Agriculture, Water Resources, and Food Security (New York: October 2003). VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 57 Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration of the Oil for Food Program—Continued Date Event/Action Summary Sep. 19, 1991 U.N. Security Council Resolution 712 Second attempt to create an Oil for Food program. Iraq rejected the terms of this resolution. Oct. 2, 1992 U.N. Security Council Resolution 778 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. Apr. 14, 1995 U.N. Security Council Resolution 986 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 es- sential civilian needs. Resolution 986 was supplemented by several U.N. res- olutions over the next 7 years that extended the Oil for Food program for dif- ferent periods of time and increased the amount of exported oil and im- ported humanitarian goods. Mar. 27, 1996 U.N. Security Council Resolution 1051 Established the export and import monitoring system for Iraq. May 20, 1996 Government of Iraq and the United Nations Signed a memorandum of understanding allowing Iraq’s export of oil to pay for food, medicine, and essential civilian supplies. Jun. 17, 1996 United States Based on information provided by the Multinational Interception Force (MIF), communicated concerns about alleged smuggling of Iraqi petroleum prod- ucts through Iranian territorial waters in violation of resolution 661 to the Security Council sanctions committee. Jul. 9, 1996 U.N. Security Council Sanctions Committee Committee members asked the United States for more factual information about smuggling allegations, including the final destination and the nation- ality of the vessels involved. Aug. 28, 1996 U.S. delegation to the U.N. Security Council Sanctions Committee Provided briefing on the Iraqi oil smuggling allegations to the sanctions committee. Dec. 3, 1996 Islamic Republic of Iran Permanent Representa- tive to the United Na- tions Acknowledged that some vessels carrying illegal goods and oil to and from Iraq had been using the Iranian flag and territorial waters without author- ization 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. Dec. 10, 1996 Iraq and the United Na- tions Phase I of the Oil for Food program began. Jun. 4, 1997 U.N. Security Council Resolution 1111 Extended the term of resolution 986 another 180 days (phase II). Sep. 12, 1997 U.N. Security Council Resolution 1129 Authorized special provision to allow Iraq to sell petroleum in a more favor- able time frame. Oct. 8, 1997 Representatives of the United Kingdom of Great Britain and Northern Ire- land to the United Na- tions Brought the issue of Iraqi smuggling petroleum products through Iranian territorial waters to the attention of the U.N. Security Council sanctions com- mittee. Nov. 18, 1997 Coordinator of the Multi- national Interception Force (MIF) Reported to the U.N. Security Council sanctions committee that since Feb- ruary 1997 there had been a dramatic increase in the number of ships smuggling petroleum from Iraq inside Iranian territorial waters. Dec. 4, 1997 U.N. Security Council Resolution 1143 Extended the Oil for Food program another 180 days (phase Ill). VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 58 Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration of the Oil for Food Program—Continued Date Event/Action Summary Feb. 20, 1998 U.N. Security Council Resolution 1153 Raised Iraq’s export ceiling of oil to about $5.3 billion per 6-month phase (phase IV). Mar. 25, 1998 U.N. Security Council Resolution 1158 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. Jun. 19, 1998 U.N. Security Council Resolution 1175 Authorized Iraq to buy $300 million worth of oil spare parts to reach the ex- port ceiling of about $5.3 billion. Aug. 14, 1998 U.S. legislation 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 Sec. 4 authorized the president to provide assistance to Iraqi democratic opposition organizations. Oct. 31, 1998 Iraqi termination of U.N. Special Commission (UNSCOM) Activity Iraq announced it would terminate all forms of interaction with UNSCOM and that it would halt all UNSCOM activity inside Iraq. Nov. 24, 1998 U.N. Security Council Resolution 1210 Renewed the Oil for Food program for 6 months beyond November 26 at the higher levels established by resolution 1153. The resolution included addi- tional oil spare parts (phase V). Dec. 16, 1998 Operation Desert Fox 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 weap- ons of mass destruction and potential delivery systems. Mar. 3, 1999 President Clinton Report to Congress 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. May 21, 1999 U.N. Security Council Resolution 1242 Renewed the Oil for Food program another 6 months (phase VI). Oct. 4, 1999 U.N. Security Council Resolution 1266 Permitted Iraq to export an additional amount of $3.04 billion of oil to make up for revenue deficits in phases IV and V. Nov. 19, 1999 U.N. Security Council Resolution 1275 Extended phase VI of the Oil for Food program for 2 weeks until December 4, 1999. Dec. 3, 1999 U.N. Security Council Resolution 1280 Extended phase VI of the Oil for Food program for 1 week until December 11, 1999. Dec. 10, 1999 U.N. Security Council Resolution 1281 Renewed the Oil for Food program another 6 months (phase VII). Dec. 17, 1999 U.N. Security Council Resolution 1284 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 Moni- toring, Verification and Inspection Commission (UNMOVIC). Mar. 31, 2000 U.N. Security Council Resolution 1293 Increased oil spare parts allocation from $300 million to $600 million under phases VI and VII. Jun. 8, 2000 U.N. Security Council Resolution 1302 Renewed the Oil for Food program another 180 days until December 5, 2000 (phase VIII). Dec. 5, 2000 U.N. Security Council Resolution 1330 Extended the Oil for Food program another 180 days (phase IX). VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 59 Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration of the Oil for Food Program—Continued Date Event/Action Summary Mar. 8, 2001 Deputy U.S. Representa- tive to the United Na- tions Remarks to the Security Council Ambassador Cunningham acknowledged Iraq’s illegal re-export of humani- tarian supplies, oil smuggling, establishment of front companies, and pay- ment 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. Mar. 8, 2001 Acting U.S. Representa- tive to the United Na- tions Remarks to the Security Council Ambassador Cunningham addressed questions regarding allegations of sur- charges on oil and smuggling. Acknowledged that oil industry representa- tives and other Security Council members provided the United States anec- dotal information about Iraqi surcharges on oil sales. Also acknowledged companies claiming they were asked to pay commissions on contracts. Jun. 1, 2001 U.N. Security Council Resolution 1352 Extended the terms of resolution 1330 (phase IX) another 30 days. Jul. 3, 2001 U.N. Security Council Resolution 1360 Renewed the Oil for Food program an additional 150 days until November 30, 2001 (phase X). Nov. 29, 2001 U.N. Security Council Resolution 1382 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). May 14, 2002 U.N. Security Council Resolution 1409 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). Nov. 6, 2002 U.N. Security Council Sanctions Committee 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. Nov. 25, 2002 U.N. Security Council Resolution 1443 Extended phase XII of the Oil for Food program another 9 days. Dec. 4, 2002 U.N. Security Council Resolution 1447 Renewed the Oil for Food program another 180 days until June 3, 2003 (phase XIII). Dec. 30,2002 U.N. Security Council Resolution 1454 Approved changes to the list of goods subject to review and the sanctions committee. Mar. 12, 2003 U.N. Security Council Sanctions Committee Chairman reported on a number of alleged sanctions violations noted by let- ters 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. Mar. 19, 2003 Operation Iraqi Freedom Operation lraqi Freedom is launched. Coalition operation led by the United States initiated hostilities in Iraq. Mar. 28, 2003 U.N. Security Council Resolution 1472 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. Apr. 16, 2003 U.S. legislation Public Law 108–11 Sec. 1503 authorized the President to suspend the appli- cation of any provision of the Iraq Sanctions Act of 1990. Apr. 24, 2003 U.N. Security Council Resolution 1476 Extended provision of resolution 1472 until June 3, 2003. May 1, 2003 Operation Iraqi Freedom End of major combat operations and beginning of post-war rebuilding ef- forts. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 60 Appendix I:—Timeline of Major Events Related to Sanctions Against Iraq and the Administration of the Oil for Food Program—Continued Date Event/Action Summary May 22, 2003 U.N. Security Council Resolution 1483 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). Nov. 21, 2003 U.N. Secretary General Transferred administration of the Oil for Food program to the CPA. Mar. 19, 2004 U.N. Secretary General Responded to allegations of fraud by U.N. officials that were involved in the administration of the Oil for Food program. Mar. 25, 2004 U.N. Secretary General Proposed that a special investigation be conducted by an independent panel. The CHAIRMAN. Thank you very much, Mr. Christoff. Mr. Thibault. STATEMENT OF MICHAEL J. THIBAULT, DEPUTY DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE Mr. THIBAULT. Thank you, Mr. Chairman. In May of 2003 the Under Secretary of Defense for Policy identi- fied a requirement for an evaluation of approved and funded Oil- for-Food contracts before transition to the CPA. A team of DCAA auditors, Defense Contract Audit Agency, and Defense Contract Management Agency Contract Specialists began work on this eval- uation from mid-May until the end of August 2003. A final report was issued on September 12 of last year. The primary objectives of the evaluation were to review Oil-for- Food contracts for price reasonableness and develop recommenda- tions and lessons learned that may be applied to the transition of the Oil-for-Food Program to the CPA. The team reviewed 759 con- tracts valued at $6.9 billion. Approximately 80 percent of these con- tracts were from Phase 8 or forward, or that is, from the year 2000 to the present. The review team met with representatives from the United Nations Office of Iraqi Program in order to gain an under- standing of the review and approval process for the Oil-for-Food contracts. Although the Office of Iraqi Programs informed us that they did on occasion raise pricing issues during their review of con- tracts submitted for approval, validating pricing was not part of their mission since no U.N. resolution had tasked them with as- sessing the price reasonableness of the contracts. Therefore the Of- fice of Iraqi Programs performed very limited, if any, pricing re- views or cost audits on individual contracts. The DCAA review team was further advised by U.N. officials that no contracts were disapproved based solely on pricing. The results of the joint team review have been provided in the testimony. The team noted potential overpricing for the $6.9 billion that the team reviewed, totaling $656 million or 48 percent of the contracts evaluated. The team was unable, additionally, to reach a definitive conclusion on 44 added contracts valued at $1.1 billion simply because the contracts lacked sufficient detail to make the VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 61 kind of price comparisons needed to similar goods, or the team was unable to obtain independent pricing data. Food commodity contracts were the most consistently overpriced, with overpricing identified in 87 percent of the contracts in this category. The potential overpricing by sector has also been provided within the testimony. The evaluation team also noted that many of the equipment and vehicle contracts contained unusually large quantities of spares. The team was advised that Iraq often pur- chased and warehoused large quantities of spares because it was uncertain if they would be able to obtain them in the future in the Oil-for-Food Program, specifically if the Oil-for-Food Program ex- pired or if Iraq was otherwise unable to obtain or import these spares. The team also attempted to identify contracts with illicit charges or what’s been referred to already today as after-sales service charge. The team found that identifying the existence of surcharges is difficult from an examination of the contract documents them- selves since the contract terms and conditions often do not specifi- cally identify these surcharges. However, the evaluation did iden- tify several examples of after-sales service charges that were in- cluded, ranging from 10 to 15 percent. Finally, the team also identified items of questionable utility for use by the Iraqi people. For example, among the contracts reviewed by the team were two contracts valued at more than $16 million for high-end Mercedes Benz touring sedans, or a total of 300 cars. There were numerous other similar types of automobile purchases and other types of goods and services that in the view of the team was not beneficial for the health and benefits of the Iraqi people. More recently DCAA has been involved with providing financial advisory services to support the transition of the Oil-for-Food Pro- gram to the CPA in northern Iraq. We’ve been providing rec- ommendations. We have not been issuing audit reports but we have been providing advisory recommendations related to inven- tory controls to the CPA; related to cash management controls; re- lated to management controls in the hiring of key staff positions, which is a critical need as has been mentioned at this testimony, and establishing procedures to perform bank reconciliations and initial balance sheets for the banking system which was somewhat limited in their capabilities. As an example of the service we’ve provided, DCA auditors re- cently conducted physical perambulations and observations of Oil- for-Food warehouses in northern Iraq, a total of 17 out of 53 such warehouses. The auditors found a range of issues including ware- houses without electricity or running water; guards complaining of not being paid; medicine and drugs being stored in warehouses that do not appear environmentally appropriate for such items; in- ventory stored in the open air without roofs or ceilings or protec- tion or even tarps; furniture being damaged by being piled into large heaps in an open environment in the warehouses, and a cou- ple of warehouses with computers, printers, scanners, copiers and other office equipment that had basically been set up as homes to very large numbers of pigeons where the droppings had basically or essentially gone into this various computer and high technology equipment which may well have rendered it of minimal value. All VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 62 DCA recommendations of this nature have been provided in writing to the Director of CPA Office of Project Coordination. Our last activity of support has been based on a request from Ambassador Bremer dated February 4 of this year, that an audit, either by the Inspector General or by the DCAA be performed as part of the transition to look at the kinds of items, inventory con- trols, cash management controls, that I previously mentioned. The decision was made by the new CPA Inspector General that they would manage that audit and that DCAA would provide an advi- sory role, that of a contract and offer technical representative and that the CPA IG would hire a CPA firm so that these issues could be properly addressed prior to the transition. DCAA continues to support that. So in closing I would like to underscore the DCAA is absolutely committee to supporting CPA and the CPA IG in transitioning this important program to the Iraqi people. I look forward to addressing whatever questions or comments that you have. Thank you, Sen- ator. [The prepared statement of Mr. Thibault follows:] PREPARED STATEMENT OF MICHAEL J. THIBAULT Mr. Chairman, members of the committee, my statement for this hearing will focus on the Defense Contract Audit Agency’s (DCAA) evaluation of contracts awarded under the Iraq Oil for Food program and the financial assistance we have provided in the transition of the Oil for Food program to the Coalition Provisional Authority (CPA). JOINT DCAA/DCMA EVALUATION In May 2003, the Under Secretary of Defense (USD) for Policy identified a re- quirement for an evaluation of approved and funded Oil for Food contracts before transition to the CPA. The Under Secretary of Defense (Comptroller) requested that DCAA support the USD Policy by forming a joint review team led by DCAA and the Defense Contract Management Agency (DCMA). A team of DCAA auditors and DCMA contract specialists began work on the evaluation from mid-May until the end of August 2003. A final report was issued on September 12, 2003. The primary objectives of the evaluation were to review Oil for Food contracts for price reasonableness and develop recommendations and lessons learned that may be applied to the transition of the Oil for Food program to the CPA. The team reviewed 759 contracts (10 percent of the total 7,591 approved and funded contracts). The 759 contracts were valued at $6.9 billion, or about 60 percent of the total approved and funded amount of $11.5 billion. Approximately 80 percent of the contracts reviewed are from Phase 8 or later (from June 2000 or later). Contracts were selected for evaluation to represent the broadest possible range of commodities across all sectors of the Iraq economy. Selections within the different sectors were based on dollar value, priority of goods, past issues with certain suppliers, and the description of the goods to be provided. The State Department worked with the United Nations Office of Iraq Programme (OIP) to provide the review team copies of the selected contracts. The review team met with representatives from OIP in order to gain an under- standing of the review and approval process for the Oil for Food contracts. OIP’s primary focus was an administrative/contractual review of the items being pur- chased from a legal (United Nations Resolutions) perspective. Although OIP in- formed us that they did, on occasion, raise pricing issues during its review of con- tracts submitted for approval, validating pricing was not part of their mission since no UN resolution had tasked OIP with assessing the price reasonableness of con- tracts. Therefore, OIP performed very limited, if any, pricing reviews or cost audits on individual contracts. The DCAA review team was further advised by UN officials that no contracts were disapproved solely based on pricing. To evaluate the pricing of the selected contracts, the team reviewed the terms of the contract and searched for available pricing information for the goods provided. The type of pricing information the team utilized included: VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 63 • World Market prices for food commodities (based primarily on data from the U.S. Department of Agriculture) • Published Price Lists for the same or similar items • Vendor quotes for the same or similar items • Third-party pricing guides, such as Kelly Blue Book • U.S. Government purchases for the same or similar items • Published Industry Statistics and Standards • Internet research for similar private or public sector projects and items For example, our analysis of food contracts was based on world market prices for the individual commodities (wheat, rice, sugar, etc.). Data, including market prices and transportation costs for most food commodities, is maintained by the U.S. De- partment of Agriculture. For most of the food commodities, the team was able to obtain market prices specific to the countries and time periods specified in the con- tracts. The analysis of food commodities also included estimated shipping (including typical insurance costs) to a nearby port and inland trucking costs to points within Iraq. The analysis did not include costs for any potential transportation delay and disruption (demurrage). The results of the joint team review are shown below: The team noted potential overpricing totaling $656 million in 48 percent of the con- tracts evaluated. The team was unable to form a definitive conclusion on 44 con- tracts, valued at $1.1 billion because the contracts lacked sufficient detail to make price comparisons to similar goods or the team was unable to obtain independent pricing data for comparable goods. The review team considered a contract to be overpriced if the overpricing in total exceeded 5 percent of the contract value. The 5 percent reasonableness threshold was selected to assure that any reported potential overpricing was conservatively presented and did not overstate the issue (normally DCAA would take exception to all costs over an estimated reasonable price). A further breakdown of the overpriced contracts is shown below: Food commodity contracts were the most consistently overpriced, with overpricing identified in 87 percent of the contracts in this category. The potential overpricing by sector is detailed in the following chart: VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 64 The evaluation team also noted that many of the equipment and vehicle contracts contained unusually large quantities of spares. The team was advised that Iraq often purchased and warehoused large quantities of spares because it was uncertain that they would be able to obtain them in the future if the Oil for Food program expired or if Iraq was otherwise unable to import goods. The team also evaluated 64 contracts that required the sellers to provide, at their own expense, training to Iraqi personnel. The contracts almost always stipulated the duration and location of the training. Generally, the training was to be offered in the supplier’s country. In all cases the training was not separately priced. The team also attempted to iden- tify contracts with illicit surcharges (‘‘after sales service charges’’). The team found that identifying the existence of surcharges is generally not possible from an exam- ination of the contract documents alone since the contract terms and conditions do not specifically identify the surcharges. However the evaluation did identify five ex- amples of after sales service charges ranging from 10 to 15 percent. Finally, the team also identified items of questionable utility for use by the Iraqi people. For example, among the contracts reviewed by the team were two contracts valued at more than $16 million for high-end Mercedes Benz touring sedans (a total of 300 cars). DCAA FINANCIAL SUPPORT TO THE OIL FOR FOOD PROGRAM TRANSITION More recently DCAA has been involved with providing financial advisory services to support the transition of the Oil for Food program to the CPA in Northern Iraq. While DCAA has not performed any audits of the Oil for Food program, the Agency has provided recommendations on strengthening the CPA’s Office of Project Coordi- nation (OPC) internal and financial controls. These controls include: • Recommendations related to inventory controls • Recommendations related to cash management controls • Recommendations on management controls and the hiring of key staff positions • Established procedures to perform bank reconciliations and initial balance sheets For example, DCAA auditors recently conducted physical perambulations and ob- servations of Oil for Food warehouses in Northern Iraq. The auditors found a range of issues including warehouses without electricity or running water; guards not being paid on time; medicine and drugs being stored in warehouses that do not ap- pear environmentally appropriate for such items; inventory stored in the open air; furniture damaged by being piled into large heaps in an open environment; com- puters, printers, scanners, copiers, and other office equipment damaged by pigeon droppings. In this example, we believe these obvious inventory control issues are on- going and need to be addressed by the CPA before the planned transition to the Iraqi Governing Council on July 1, 2004. All DCAA recommendations of this nature have been provided in writing to the Director, CPA Office of Project Coordination. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 65 PLANNED REVIEW OF OIL FOR FOOD ACTIVITIES BY CPA INSPECTOR GENERAL Based on a request from Ambassador Bremer, the CPA 10 is working to engage an independent accounting firm to review Oil for Food field activities in Iraq. The objectives of the review will center on documenting the internal controls associated with the Oil for Food program, assist CPA officials in effective discharge of their duties, and ensure that CPA oversight promotes effective control at a reasonable price. The evaluation will be conducted in accordance with International Standards on Assurance Engagements (ISAEs). The review will focus on the key internal control points of the program as requested by Ambassador Bremer: • Oil for Food Contract Authentication and Payment Process • Contract Amendment Process • Potential financial liabilities of the Oil for Food Contracts • For the OFF North Program—the funding, selection, oversight and administra- tion of the Oil for Food projects • Safeguarding of all Oil for Food Assets (inventory and cash) • Identify risk for fraud, waste and abuse DCAA has worked with the CPA 10 to refine the statement of work for the inde- pendent accounting firm. The CPA 10 wants the work to commence by April 15, 2004. DCAA will act as the Contracting Officer’s Technical Representative (COTR). As the COTR, DCAA will monitor the independent accountant’s work to ensure com- pliance with contract terms and the quality of the final work product. CLOSING In closing I want to underscore that DCAA is committed to supporting the CPA and the CPA 10 in transitioning this important program to the Iraqi people. I look forward to addressing whatever questions or comments that you have. Thank you. The CHAIRMAN. Thank you very much, Mr. Thibault. The com- mittee has a copy of the Defense Contract Audit Agency Report that you completed in September. Can the report be made part of the official record of this hearing? 2 Mr. THIBAULT. Yes sir, we have provided that to you and we have obtained the appropriate clearances within the Pentagon. Yes it can. The CHAIRMAN. I thank you for that response, as well as for pro- vision of the report. Mr. Christoff, was the Oil-for-Food Program structured dif- ferently in the north? If so, can we determine whether it was run with any greater degree of efficiency there? Mr. CHRISTOFF. One of the key differences is that in the north the United Nations was responsible for management of the Oil-for- Food Program. That was in the three northern governorates versus the 15 southern and central governorates where the Ministry of Trade was responsible. We have not looked at whether or not there may have been any differences in terms of let’s say, the price rea- sonableness of the contracts. But I think it’s a very fair comparison that should be made in any kind of future investigations. The CHAIRMAN. By raising it in this hearing, we ask those who are vested with that responsibility to do just that. It would appear that there was a difference in administration. As you say, we will have to see what the facts are with regards to pricing or other as- pects of the contracts. 2 See Appendix page 157. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 66 Can you comment on the reported SOMO document, published in Iraqi media in January? It lists 270 individuals, companies and states that received oil vouchers from Saddam Hussein. Mr. CHRISTOFF. Senator, I know just about as much as you know in terms of seeing that list on their Web site and the list of pur- chasers of the oil vouchers. But we haven’t looked into any of that in detail. The CHAIRMAN. Who published that document, and how did it come into the hands of the Iraqi media? Mr. CHRISTOFF. I don’t know. The CHAIRMAN. What percentage of contract holds within the UNOIP or the 661 Committee were made by U.S. officials? Mr. CHRISTOFF. When we did our report 2 years ago, I believe as of April 2002 there were $5.1 billion in holds. Those were holds on dual-use contracts. They were not holds related to any pricing con- cerns. And 90 percent of the holds were placed by the United States, I think about 10 percent by the U.K. The CHAIRMAN. For the record, please define what a dual-use contract would be. Mr. CHRISTOFF. Sure. A dual-use item, first of all, is an item that can be used for either commercial or military applications. One ex- ample of an item that was placed on hold was chemical fertilizers. It was placed on hold because of the concern about the reconstitu- tion of chemical weapons productions within Iraq. The CHAIRMAN. How did such items as fertilizer or other items of this variety get to be included as goods purchased under the Oil- for-Food Program? How common was that? Mr. CHRISTOFF. Well, in terms of the restricted items, if that’s what you’re referring to, Senator, when the United Nations moved to what was called smart sanctions in May of 2002 there was a general goods review list which specifically listed hundreds of items that were prohibited from being sent into Iraq or which would re- quire greater scrutiny, very much like the control list that our Commerce Department uses. The CHAIRMAN. Mr. Thibault, you mentioned the Mercedes Benz touring sedans and other vehicles. How did this ever get into the picture, in your judgment? Mr. THIBAULT. I can’t describe specifically how it got into the pic- ture other than to state that when we were visiting with United Nations officials, when our auditors were visiting with them they described that, and they were candid about it, that they had re- ceived allegations that many of the items of questionable utility such as the Mercedes Benz sedans or some of the equipment, in one case, or several cases there were private gymnasiums, for ex- ample, that these were used as either rewards for people in the prior regime or were set up for resale. For example, in the period we looked at there were 37,000 automobiles—— The CHAIRMAN. Thirty-seven thousand automobiles? Mr. THIBAULT [continuing]. That were approved and what we were told is it was likely, and that was the allegation, that these were being resold as a way of generating cash for officials in the prior regime. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 67 The CHAIRMAN. There have been allegations that Saddam Hus- sein infiltrated the United Nations organization with his own intel- ligence officials. Is there any evidence that you have found of that? Mr. CHRISTOFF. No sir, that would have been an excellent ques- tion for the first panel. Mr. THIBAULT. We saw no indication of that also, sir. The CHAIRMAN. Well, we’ll take a second try. We will ask that of the first panel under the reservation that the Chair suggested, stipulating that the hearing record remain open for questions throughout the day. Mr. CHRISTOFF. Excellent. The CHAIRMAN. Which states benefited most from the OFF kick- backs? What do their mission officers say when confronted with this information? Mr. CHRISTOFF. You know Senator, that’s the question that you posed to the first panel as well and that we’re trying to get a han- dle on, the totality of the contracts. I have some information that’s just referring to 1998 to 2001—I’m not necessarily referring about kickbacks but in terms of the countries that were the chief sup- pliers of commodities were Russia, Egypt, France, China, and Jor- dan. And I think getting the totality of the information and making it public is important to have a complete understanding of who were the chief suppliers of the commodities, who were the chief purchasers of the oil as well. The CHAIRMAN. Has there been any reaction from their missions to the U.N., their embassies with regard to these reports? Mr. CHRISTOFF. I haven’t chatted with them, no. Mr. THIBAULT. Mr. Chairman, if I might? The CHAIRMAN. Yes, sir. Mr. THIBAULT. While we looked at a small snapshot, it was still $6.9 billion worth of costs. And in answer to your question we iden- tified what we saw—we built a data base of each and every con- tract, each and every company that we reviewed and we provided that to CPA officials and State Department officials. And in our data that we evaluated there were eight countries that represented almost 70 percent of the potential overpricing that we identified and those countries alphabetically, and we used a criteria of $30 million or more and at the ninth country it fell down to like $14 million. So there was a clear break that amounted to 70 percent for eight countries out of about 50. And those countries alphabeti- cally were Egypt, Jordan, Russian, Syria, Thailand, Turkey, United Arab Emerates, and Vietnam. And we also, again because we have a data base, we cut the list where there are 34—and this question came up earlier—there were 34 specific companies for country mis- sions that amounted to—and we looked at a total of about 400 com- panies, so less than 10 percent amounted to exactly two-thirds of the potential contract overpricing. So it’s interesting that within the data you can actually narrow it down to a fairly specific focus. The CHAIRMAN. Clearly a lot of countries were doing a lot of busi- ness, not only with dual-use items, but with many other goods as well, some of which have been retraded for the benefit of the Iraqi Government. This obviously leads to questions with regard to the Saddam regime itself, and as to why other governments might have been reticent to see all of this come to an end. World rhetoric alter- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 68 nated between lamentations about cruelty to Iraqis, the potential for aggression by Iraq against its neighbors, and attempts to build weapons of mass destruction, on the one hand; and business as usual, with billions of dollars of business being transacted on the other hand. This was of great benefit to a number of countries that may have been looking for a jobless program. That might have led some countries to say, let’s don’t be so fastidious about whatever is occurring in Iraq, we have really a good thing going. There’s an overall impression that a great number of people, countries, enti- ties were doing well in this situation, and that there was reticence on the part of the Security Council or the U.N. administration, ei- ther through ignorance of all of it or through reluctance to know much more. Perhaps we would not know what we know now with- out the United States having been in a position to finally seize the records and to begin to read what is there. No other nation, per- haps, had that much volition or interest. That’s the basic question of the hearing. How do we get a change in culture with regards to the United Nations? Other nations may also be involved in this as we proceed toward international regimes that are very necessary, whether it be U.N. responsibilities in Iraq, or U.N. responsibilities in many other countries that may come along. Yes. Mr. CHRISTOFF. Senator, I would extend your point and also talk about how do you change the culture within the ministries within Iraq as well. The CHAIRMAN. Yes. Mr. CHRISTOFF. Since if you’ve had a legacy of corruption, how do you build the capacity to ensure that they are going to be using resources, not only our resources but their own resources, in a very fair and accountable and transparent manner. The CHAIRMAN. Well, that clearly is the theme of this hearing. Senator Biden has illuminated those issues so well, but I would second the motion. I suspect that this is why we are very intensely interested in the planning that our government is doing now, and what it means to transfer sovereignty. The first witness of the day, Ambassador Negroponte, said that Iraq had sovereignty, and there- fore Saddam Hussein was making the decisions as to what was bought and sold there. Now, another Iraqi Government, hopefully a democratic one, one with very good intentions, is about to pro- ceed. What will its checks and balances be? Will there be any? We want to hear a lot more, very soon, because this is not an academic issue for State and Defense. What we’re talking about today gets fundamentally to a question of, what can we anticipate, as a coun- try, as a world, with regard to Iraqi sovereignty? Who will make decisions then? Who will make the audits? Might we find ourselves once again confronting a culture that might consider it naive to even raise these questions that we’re raising today? Mr. CHRISTOFF. Almost calls for an amen, Senator. The CHAIRMAN. Thank you. Let me just ask, finally, how many contracts that you reviewed, Mr. Thibault, were refused for content of the goods? You mentioned dual-use. That’s one reason why that might have occurred. Huge amounts of spare parts, for example, might also be of suspicion. Would that be a reason why somebody might take a look at such a contract? VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 69 Mr. THIBAULT. Senator, we saw no instances, and you’re exactly right about the spare parts. To use my automobile example, the ve- hicles, which is just one sector, transportation, the 37,000 vehicles actually averaged about $1,200 spare parts for each vehicle when they were shipped in. There were no disapprovals for goods, either based on the fact that they were—at the time, by the prior regime and by the United Nations auditors’ screening process, either based on the content, other than weapons of mass destruction or dual-use or potential weapons of mass destruction. And that was explained to us by the United Nations, and there were no refusals or dis- approvals based on cost. The CHAIRMAN. Let me ask both of you, as I did of our first wit- nesses, please, if you will, respond to questions that may be raised additionally by other Senators during the course of the day, as soon as you can, for the completeness of the record. We very much ap- preciate your public service. Staff has given to me other documents that should be a part of this record. Therefore I ask unanimous consent, and being the only Senator here, will grant that, that a statement by Ambassador Bremer regarding CPA’s cooperation in the OFF investigation be placed in the record; and also a statement from UNICEF regarding nutrition trends in Iraq; a statement from WHO; a copy of the United Nations-Saybolt Contract and questions answered by their general counsel via e-mail with the Senate For- eign Relation Committee’s staff, and a statement from Cotecna. I further ask unanimous consent that the record of this hearing remain open until the close of business, Thursday, April 8. That will give opportunities for those senators who have heard this hear- ing, or their staffs to prompt Senators to get their questions in. So we will grant permission that all of this be made a part of the record, including the excellent statement you have submitted, Mr. Thibault. We thank you for that. I thank both of you individually for your forthcoming answers and for your service. Mr. CHRISTOFF. Thank you sir. Mr. THIBAULT. Thank you sir. The CHAIRMAN. The hearing is adjourned. [Whereupon, at 12:21 p.m. the committee adjourned, to recon- vene subject to the call of the Chair.] VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 95026.TXT SFORELA1 PsN: SFORELA1 APPENDIX PREPARED STATEMENT OF SENATOR RUSSELL D. FEINGOLD I thank the chairman and ranking member for holding this important hearing, and I thank all of the witnesses for their testimony. Since late last year, we have gathered more and more information regarding abuses of the Oil-for-Food Program that was intended to ease the burden borne by the Iraqi people under Saddam Hussein’s regime. What we know thus far suggests behavior that was simply unacceptable and in some cases quite likely criminal. Get- ting to the bottom of who was involved in abuse and why oversight mechanisms failed to expose and stop abuse sooner is critically important—not only for the Iraqi people, who have suffered for so many years, but also for the American people and people around the world who hear of these revelations and ask themselves why they should have confidence in the basic competence and integrity of the United Nations. Transparency and accountability are absolutely crucial to the future of U.S.-U.N. re- lations. At the same time, we cannot allow those countries and corporations involved in corrupt practices that undermined a system established to bring some humanitarian relief to Iraq to avoid scrutiny by focusing on United Nations officials alone. We need a thorough accounting for the past that examines the roles played by everyone involved; we need to ensure that those involved in this scandal are held accountable for their actions; and we need to ensure that appropriate reforms are implemented to ensure that this kind of corruption cannot take root again. PREPARED STATEMENT OF AMBASSADOR L. PAUL BREMER, III, ADMINISTRATOR, COALITION PROVISIONAL AUTHORITY (CPA) Mr. Chairman and Members of the Senate Foreign Relations Committee: I welcome this opportunity to provide a statement for the record concerning the Coalition Provisional Authority’s (CPA’s) response to allegations of misconduct in- volving the Oil for Food (OFF) Program, which was established by the United Na- tions (U.N.) in April 1995 in U.N. Security Council resolution no. 986. The CPA intends to cooperate fully with the numerous investigative and oversight efforts currently underway regarding the former U.N. OFF Program. The CPA will not conduct its own investigation into this matter, and instead is taking immediate steps to ensure that potentially relevant documents are safeguarded and inven- toried, and that witnesses who may know of misconduct are identified, in order to facilitate full and prompt access to this evidence by authorized investigative bodies. In a letter to the CPA dated March 11, 2004, the U.N. Under-Secretary-General for Internal Oversight Services inquired into the status of his request for access to information concerning allegations, arising from records from the former Iraqi Min- istry of Oil, that certain individuals, including U.N. staff members, purportedly re- ceived bribes in the form of oil and/or money, in connection with the administration of the OFF Program. The U.N. Under-Secretary General for Internal Oversight Services requested that the CPA provide direct access to individuals within the Iraqi Governing Council and interim ministries who had raised allegations of misconduct, and to Ministry of Oil documents relevant to these allegations. On March 13, the CPA responded to the Under-Secretary General for Internal Oversight Services by describing various CPA measures to facilitate investigations of this matter by the U.N. and other bodies. Specifically, on March 14, I directed all interim Iraqi ministers, CPA senior advi- sors, and Regional Governance Coordinators to identify and safeguard all OFF-re- lated information, including contracts, amendments and annexes to contracts, and supporting materials. My directive states that documents should be inventoried and (71) VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00075 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 72 recorded, with notations of all irregularities—including any evidence of bribes, kick- backs or corruption. My directive also requires interim Iraqi ministers to identify and make available any current ministry officials who may have knowledge of misconduct arising from the administration of the OFF Program. I directed the ministers to provide the names of such officials, and their contact information, to a designated CPA official who is serving as a point of contact on this matter, no later than March 21. We have begun to receive those names. A U.N. team from New York is expected to come to Baghdad soon, and we will cooperate fully with its members and facilitate their full and immediate access to relevant documents and witnesses. We welcome U.N. involvement in this matter, and have recommended that the U.N. designate individuals to join with CPA offi- cials and Iraqi, nationals in safeguarding and inventorying records at key min- istries. At CPA’s request, the Iraqi Board of Supreme Audit (BSA) has agreed to partici- pate fully in the process to safeguard and inventory records. This Board, now com- prising some 1,200 employees, will provide impartial oversight. The BSA has as- signed personnel on a full-time basis to each ministry to confirm that records are safeguarded. We have identified a secure central evidence repository for this pur- pose. In each ministry, the CPA-BSA teams seek meetings with the Minister or In- spector General to directly and personally request that they identify individuals with knowledge of abuses. The BSA teams will remain at each ministry to assist in completing inventories. An external audit, which will be overseen by the BSA, will be undertaken as soon as possible by a firm chosen in a full, open and competitive process to investigate thoroughly alleged abuses under the OFF program that may have occurred prior to November 21. The CPA is making $5 million available from the DFI for this audit. We will work with the BSA to ensure that the auditors have complete access to in- formation and individuals who may have knowledge of OFF Program abuses. The CPA is also in the process of identifying an external firm to audit its role in admin- istering the OFF Program since November 21. The OFF Program now administered by the CPA works with Iraqi partners to build Iraqi capability to distribute food and other essential needs to Iraqi people. If allegations of bribery and kickbacks in the OFF Program are proven, it will be yet another example of the former regime’s utter disregard of the humanitarian needs of the Iraqi people. As stewards acting on behalf of the Iraqi people and for their benefit, the CPA will continue to support all authorized investigations and au- dits of the OFF Program, in order to ensure that those who may have profited at their expense are held accountable, and to recover, if possible, Iraqi assets that may have been improperly diverted for private gain. Thank you for allowing me to share my observations. PREPARED STATEMENT OF UNITED NATIONS CHILDREN’S FUND (UNICEF) INTRODUCTION After the Gulf war, a nation wide rationing system was introduced in Iraq fol- lowing the imposition of sanctions. All families in Iraq received a monthly food ra- tion distributed each month by the government, and approximately 60 percent of the population was fully dependent on it to meet all household needs. Since households’ income dropped significantly after the war, the poorest families often sold part of the food ration to purchase other necessary items such as medicines and clothing. The calorie intake per capita dropped from an estimated 3,315 kcal pre-1990 to 1,093 kcal in 1995. Acting under Chapter VII of the UN Charter, the Security Council adopted resolu- tion 986, establishing the Oil for Food program (OFFP), providing Iraq with the ability to sell oil to purchase humanitarian goods. Oil was first exported under the program in December 1996 and the first shipment of supplies arrived in March 1997. UNICEF, WFP, FAO and WHO were directed to work on the nutritional sta- tus of children. According to the UN Food and Agriculture Organization and The American Jour- nal of Public Health (2000), the calorie intake per capita began to steadily increase in 1996. Although the caloric content of the ration increased to 2,215 kcal in 2002 through the implementation of the OFFP Targeted Nutrition Program, it did not meet the minimum level of 2,472 kcal set by the UN Secretary General under the OFFP. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00076 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 73 CALORIES PER CAPITA 1990-2002 Pre-1990 1991 1992 1993 1995 1996 1997 1999 2002 3,315 1,300 1,770 1,654 1,093 1,295 2,030 2,150 2,215 (Source: Daponte, BO, Garfield, RM. ‘‘The Effect of Economic Sanctions on the Mortality of Iraqi Children prior to the 1991 Persian Gulf War.’’ American Journal of Public Health 2000, FAO/WFP Food Supply and Nutrition Assessment Mission to Iraq, 1997; FAQ/GOI, Evaluation of the Food and Nutrition Situation in Iraq, 1995.) NUTRITIONAL STATUS OF CHILDREN While data was not easily attained in Iraq, there were a number of studies con- ducted that measured the rate of malnutrition among Iraqi children. In 1991, for instance, a study conducted by a team from Harvard University and in 1996 a series of Multiple Indicator Cluster Surveys (MICS) undertaken by UNICEF and the Gov- ernment of Iraq in Northern and South/Central Iraq revealed an increase in the rates of child malnutrition between the years of 1991 and 1996. The 1996 UNICEF-GOI MICS confirmed that chronic malnutrition (stunting) was 31%, underweight 23% and acute malnutrition (wasting) 10%. These figures re- flected deterioration in the nutritional status of children, when compared to the re- sults reported by the Harvard Study Team in 1991. The Harvard Team had ob- served rates of 22%, 12% and 3% respectively. The national data available shows a decline in rates of child malnutrition from 1996 to 2000. Additional data is available for south/central Iraq and extend the trend to 2002 showing a sustained decline in malnutrition among children under five years old. The 2000 UNICEF-GOI MICS data for south/central Iraq, for in- stance, showed that nutrition rates were improving, with chronic malnutrition measured at 30%, underweight at 19.5% and acute malnutrition at 7.8%. This im- provement continued and was confirmed through a 2002 UNICEF-GOI survey. Chronic malnutrition was measured at 23.1%, underweight at 9.4% and acute mal- nutrition at 4%. RATES OF UNDER-NUTRITION AMONG UNDER FIVE YEAR OLDS IN SOUTH/CENTRAL IRAQ 1996-2002 1996 2000 2002 Chronic Malnutrition 32 30 23.1 Underweight 12 23 16 Acute Malnutrition 11 7.8 4 (MICS-UNICEF/GOI 1996 Report with results from South/Central Governorates; MICS-UNICEF-GOI 1996 Report with results from Northern Governorates; UNICEF 2002 Nutritional Survey overview of under-fives in South/Central Governorates; UNICEF State of the Arab Child, 2002; Arab Human Development Report, 2002, UNICEF and Central Statistical Organization, Republic of Iraq.) NATIONAL RATES OF UNDER-NUTRITION AMONG UNDER FIVE YEAR OLDS 1991 1996 2000 Chronic Malnutrition 22 31 22 Underweight 12 23 16 Acute Malnutrition 3 10 6 (Harvard Study Team, ‘‘Effects of the Gulf Crisis on the Children of Iraq,’’ New England Journal of Medi- cine 325, no. 13 (1991,); MICS 1996 Report with results from South/Central Governorates; MICS-UNICEF- GOI 1996 Report with results from Northern Governorates; MICS-UNICEF-GOI 2000 South/Central and Northern Governorates). PREPARED STATEMENT OF THE WORLD HEALTH ORGANIZATION ‘‘THE SITUATION OF HEALTH SUPPLIES FOR IRAQ UNDER THE OFFP, 1996-2002’’ Pre-1991 Situation Before 1990, Iraq had a GNP per capita of US$ 2,800 and belonged to the group of middle-income countries. Extensive investment in infrastructure and in human resources development during the 1960s and 1970s contributed to the development VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00077 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 74 of an efficient hospital-based health system that was considered one of the best in the Middle East region. Malnutrition was rarely seen since households had easy and affordable access to a balanced dietary intake. Health care services were delivered by an extensive net- work of well-equipped, well-supplied and well-staffed health facilities, supported by a distributed network of secondary and tertiary hospitals/institutions accessible to all. Ambulances and emergency services were well developed and benefited from a properly maintained network of roads and telecommunications. 1991-1996 Situation The sanctions imposed on Iraq in 1991 unintentionally had a damaging effect on health facilities and programmes upon which the health of the population was heav- ily dependent. In particular, owing to the impossibility of obtaining foreign exchange from the sale of oil, the importation of medicines and other health supplies was drastically restricted. Although the United Nations sanctions did not apply to food and medicine, the absence of revenues from oil sales left Iraq with virtually no money to spend for imported food and medicines. As a result, many essential public health services dependent on imported items were severely compromised. Vaccination programmes were hampered by lack of vac- cines, syringes and cold chain equipment. The TB control programme, blood trans- fusions, and water quality control services could not function due to lack of labora- tory reagents and kits. Emergency and ambulance services for the referral of pa- tients could not carry out their functions, due to lack of or inadequate provision of equipment and supplies. A declining number of laboratory investigations and sur- geries could be performed, as seen in the following tables. YEAR LABORATORY INVESTIGATIONS IN IRAQ (1990-1994) (BASE YEAR 1990) Laboratory Investigation Year Number %, as % of 1990 1990 11,370,183 100 1991 7,625,355 67 1992 7,079,420 62 1993 6,914,706 61 1994 6,316,611 54 Source: Ministry of Health, Government of Iraq. Note: 3 Northern Governorates excluded. MAJOR SURGICAL OPERATIONS IN IRAQ (1990-1994) (BASE YEAR 1990) Surgical Operations Year Number %, as % of 1990 1990 90,318 100 1991 78,089 87 1992 65,372 73 1993 62,463 69 1994 56,153 62 Source: Ministry of Health, Government of Iraq. Note: 3 Northern Governorates excluded. This was the situation in 1995 when the Security Council adopted SCR 986 which established the Oil for Food Programme (OFFP) to allow for the sale of oil to pur- chase food and essential health supplies. Situation under the Oil for Food Programme 1997-2002 In 1997 the first health supplies financed under the Oil for Food Programme (OFFP) arrived in Iraq. The contracting process for health supplies under OFFP was complex and time consuming, requiring identification of suppliers, bidding, and submission of con- tracts involving many actors before contracts reached the Office of the Iraq Pro- gramme for final approval. After final approval, long lead times for shipping and delivery of health supplies to Iraq—eight months on average—delayed further the VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00078 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 75 deployment of vital health supplies. Hospital equipment, in particular, was affected by ‘‘holds’’ placed by the 661 Committee. In 1999 WHO reported that ‘‘40 percent of key basic drugs available at almost all of the health facilities observed were financed under Security Council resolution 986 (1995) while the remainder were from other sources.’’ Shortages were neverthe- less still prevalent. A study carried out the same year on 239,051 patients for whom antibacterial drugs were prescribed revealed that only 35 percent received the full course of treatment. Most drugs were rationed; there were still shortages of essen- tial drugs—e.g. anti-tuberculosis drugs—and of medical supplies such as test tubes, syringes, needles and sutures. Shortage of disposable syringes adversely affected im- munization programmes and the safety of injections. Medical equipment such as in- fant incubators, dialysis machines, ultrasonic and x-ray equipment, electrocardio- graph machines, general laboratory equipment and patient monitors remained in short supply. By 2001, health services had started benefiting from the inputs of the OFFP, and improvements in the health status of the population started becoming apparent. Cases of malaria, polio and diphtheria declined. Shortages of drugs and hospital equipment were, however, still being reported: only 30 percent of the essential drugs at hospitals were received in adequate quantities, and the stock of human vaccines in the country was still falling short of annual requirements. Some essential medi- cines, basic medical equipment, laboratory reagents and hospital supplies were in short supply due to late submission of contracts by the GOI, holds on applications, or erratic arrivals. MALARIA Year 1997 1998 1999 2000 2001 Cases Reported 13,959 9,684 4,134 3,859 1,120 Year POLIO Total Confirmed Polio Cases 1996 21 1997 28 1998 37 1999 8 2000 4 2001 0 Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 DIPHTHERIA Cases Reported (incidence rate per 100,000) 96 cases (0.53) 168 cases (0.89) 511 cases (2.61) 369 cases (1.91) 239 cases (1.20) 132 cases (0.66) 119 cases (0.58) 258 cases (1.18) 290 cases (1.29) 160 cases (0.67) 142 cases (0.59) 34 cases (0.14) 32 cases (0.12) VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00079 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 76 By 2002 the OFFP inputs to the health system—from sutures to laboratory equip- ment—had translated into improved health services. Compared to 1997, major sur- geries had increased by 40 percent and laboratory investigations by 25 percent in the center and south. Throughout the country there had been a substantial reduc- tion in vaccine preventable diseases because of improved quality of immunization campaigns including increased availability of vaccines. In the last quarter of 2002 the health supply situation had further improved: ap- proximately 80 percent of the essential drugs tracked in the hospitals and chronic illness pharmacies were adequate. In other peripheral health facilities, however, drugs continued to be available only in limited quantities. Daily rationing of medi- cines, except for in-patient services, was still the norm. By the end of 2002, a cumulative total of US$ 2,074 million of health supplies had reached Iraq through the OFFP with absolute and per capita quantities having steadily increased over time. At that point in time about half the cumulative total of pharmaceuticals and medical items approved by the UN had been delivered to Iraq, with others still en route. The relatively high number of contracts on hold and the overall modest level of GOI funding for health supplies contributed to the limita- tions in health services for final users but the situation had improved measurably since 1995. The table below shows the increasing value of health supplies received in Iraq from 1997 to end of 2002, resulting in a gradually improving health situa- tion due to increasing level of material inputs but a still inadequate level of supplies available on a per capita basis for essential health needs. For comparison purposes, in 1996 per capita pharmaceutical consumption alone was US$ 36 in Jordan and about US$ 15 per capita in Egypt. Health supplies received in Iraq under OFFP in the period 1997-2002 Period Health supplies received (Pharmaceuticals and Equipment) 1 Average annual value per capita of health supplies received (estimated pop. 25 million) 1997-1999 US $ 751,439,966 US $ 10.02 2000 US $ 318,070,519 US $ 12.72 2001 US $466,464,318 US $ 18.66 2002 US $ 538,041,811 US $ 21.52 1 Figures do not include Medical Equipment procured by WHO for the 3 Northern Governorates. Throughout the OFFP, the overall quality of drugs and medical supplies to Iraq was not particularly worrisome despite the fact that Iraq was never allowed to in- clude commercial protection clauses in OFFP contracts. By the end of 2002 only 0.69% of drugs, vaccines and insecticides received in Iraq under the OFFP had failed quality control tests. While technical limitations of the Quality Control Lab- oratories in Baghdad might imply that this low level of reported failures could be questioned, nevertheless QC failure rates observed in GOI contracts received by WHO under SCR 1472 and independently tested in Jordan highlighted comparable results: out of US $ 127 million value of drugs received in Amman, failure rates were around 0.25% of the total value. COTECNA INSPECTION S.A. 58 RUE DE LA TERRASSIE` RE, PO BOX 6155, CH-1211 Geneva 6, Switzerland, April 7, 2004. Senator RICHARD G. LUGAR, Chairman Senator JOSEPH R. BIDEN, JR., Ranking Member U.S. Senate Committee on Foreign Relations, Dirksen Senate Office Building, Washington, DC 20510 USA DEAR SENATORS LUGAR AND BIDEN: VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00080 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 77 It is my understanding that the Senate Foreign Relations Committee will be con- ducting a hearing on Wednesday, April 7, 2004 reviewing the United Nations Oil- for-Food Program. In recent weeks, there have been several articles in the media regarding this program mentioning Cotecna Inspection S.A. (‘‘Cotecna’’), as our com- pany was authenticating goods imported into Iraq under the UN Oil-for-Food Pro- gram. Recognizing the scope of your hearing and future deliberations, Cotecna would like to have the opportunity to submit for the record two documents: 1.) a ‘‘Guide to authentication procedures’’ we followed in Iraq, along with 2.) a statement issued by the company which clarifies a number of issues raised in op-eds and articles regarding Cotecna’s technical and limited mission in Iraq. Cotecna has a record of professionalism in the industry which we feel is being un- fairly called into question and we want you to know Senator Lugar as Chairman and Senator Joseph Biden as Ranking Minority Member that we are prepared to provide the Committee with any further information you may require. Respectfully, ROBERT M. MASSEY, Chief Executive Officer. THE ROLE OF OIP AND COTECNA—PRIOR TO MARCH 2003 In April 1995 the Security Council adopted Security Council resolution 986 which established the Oil for Food Programme and permitted the former Government of Iraq to utilize 53 per cent of the revenue from oil sales for the purchase of humani- tarian goods in the South and center of Iraq. The share of the oil revenue allocated to the former Government of Iraq was later increased to 59 per cent. The United Nations agencies were allocated 13 per cent of the oil sales revenue to implement the programme in the North of Iraq. The revenue from oil sales was held in an es- crow account referred to as the United Nations Iraq account administered by BNP Paribas under the supervision of the United Nations Treasury. Paragraph 8.a.(iii) of resolution 986 requested the Secretary-General of the United Nations to receive authenticated confirmation that exported goods had arrived in Iraq and for this purpose the United Nations contracted an Independent Inspection Agent. Cotecna S.A., an international inspection company, based in Switzerland, was ap- pointed as the United Nations Independent Inspection Agent from February 1999 until the termination of the Oil for Food Programme on 21 November 2003. Cotecna established teams of inspectors at 5 inspection sites referred to as entry points to Iraq. These were located at Zakho, Al Walid, Trebil and Ar’ar on the re- spective land boundaries with Turkey, Syria, Jordan and Saudi Arabia. A fifth entry point was located at Umm Qasr, the sea port in the South of Iraq. The inspection site at Ar’ar only became operational in November 2002, at the request of the former Government of Iraq and no consignments were ever presented for authen- tication at this entry point. During the course of the Oil for Food Programme, the Office of the Iraq Pro- gramme (OIP) assigned a unique Comm. (communication) number to each contract processed and suppliers were required to list every item, however small, destined for shipment to Iraq. This necessitated the submission of a detailed list of the con- tracted items, each line item consisting of a description of the goods (including part numbers), the quantity and the unit values. Information concerning each line item was transferred by, OIP, to the Oil for Food database. The supplier was also re- quired to select a single point of entry to Iraq. Once an application had been ap- proved and funded, OIP issued an approval/O.C. (official communication) letter to the supplier authorizing the export of the contracted goods and specifying the point of entry to Iraq. Information concerning approved and funded contracts was replicated by OIP to the relevant Cotecna site through which the goods were destined for delivery. For security reasons other sites could not access the data. Suppliers were permitted to change the points of entry, as required, at which point a revised approval letter re- flecting the change was issued, by OIP, and the database information was replicated to the alternative Cotecna site. Approval letters issued by OIP were generally issued with a validity period of one year. Goods could not be authenticated if the validity of the approval letter had ex- pired. In such cases suppliers were required to submit an extension request and OIP issued an extended approval letter. VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00081 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 78 OIP advised the UN Treasury and former Government of Iraq upon the issuance of each approval letter which served as the trigger for the submission of letters of credit (LCs) to Treasury by the Central Bank of Iraq. Treasury reviewed each LC received before instructing BNP Paribas to open the letter of credit. It was agreed that Cotecna would physically inspect approximately 10 per cent of the delivered goods. This sampling ratio is considerably higher than that em- ployed by customs organizations which typically carry out physical inspection of 3 per cent of imported goods. Authentication for the remaining 90 per cent of con- tracts was based upon documentary inspection procedures. In addition, Cotecna drew samples of all food stuffs entering Iraq and authentication was deferred until laboratory analysis had confirmed the goods to be fit for human consumption. The Government of Iraq lobbied strongly and repeatedly for deferred authentication to permit internal quality control tests which might facilitate the rejection of sub- standard goods. The United Nations resisted these requests as the process was de- signed to be independent and deferral of authentication was not mandated by the Security Council. In cases where the Government was not satisfied with the deliv- ered goods the United Nations advised that normal commercial dispute resolution procedures, to include arbitration if required, should go forth. At the conclusion of the inspection process Cotecna inspectors prepared a stand- ardized confirmation often referred to as authentication sheet(s), extracted from the shipment inspection report. The shipment inspection reports and authentication sheets were issued by either team leader or deputy team leader at each site and were replicated to OIP via Oil for Food database (shipment inspection reports) and via e-mail (authentication sheets) respectively. Upon receipt of the authentication sheets, OIP staff verified that the information was accurate and consistent with line items entered on the database. The standardized confirmations were then dis- patched electronically to the United Nations Treasury whereupon an instruction was issued by Treasury to BNP Paribas to effect payment against the letter of cred- it. AGENCY GOODS The payment system for agency goods operated under different procedures. Agen- cies were allocated tranches of revenue to implement activities in their respective sectors and payments were made directly by the agencies to suppliers. In the early days of the Programme goods contracted by the UN agencies were not presented for authentication and data concerning the quantity and value of goods delivered to the North of Iraq was compiled from reports presented to OIP by the agencies. In late 1998 the Executive Director, OIP, requested that all agen- cies present their goods to the independent Inspection Agent for authentication pur- poses in order that reliable, immediate data concerning deliveries under the 13 per cent account be available instantaneously from the Oil for Food database. To this effect the UN agencies arranged daily convoys of agency goods from the Turkish bor- der to the inspection site in Zakho. INTERIM AUTHENTICATION MECHANISM—POST MARCH 2003 On 28 March 2003 the Security Council adopted resolution 1472 which authorized the Secretary-General to establish alternative locations, both inside and outside Iraq, in consultation with the respective governments, for the delivery, inspection and authenticated confirmation of humanitarian supplies and equipment provided under the Programme, as well as to re-direct shipments of goods to these locations, as necessary. Security Council resolution 1472 also required the United Nations agencies and Programmes to identify essential humanitarian goods which could be shipped within the period mandated by the resolution. The mandate established by resolution 1472 and extended by resolution 1476 was valid to 3 June 2003. Under the interim revised authentication mechanism established by resolution 1472, rather than delivering goods to Iraq, suppliers were required to deliver to lo- cations within the region agreed, in advance, with the UN agencies. The UN agen- cies and programmes were assigned responsibility for the storage and onward dis- tribution of the goods following delivery to the agreed destinations. In consultation with OIP, Cotecna established alternative delivery locations in Iskenderun (Turkey), Latakia (Syria), Aqaba (Jordan), Kuwait city and Dubai (UAE). From these locations Cotecna inspectors traveled to warehouses and ports in countries located across the region to inspect and authenticate goods prioritized by the UN agencies for delivery to Iraq pursuant to resolution 1472. The UN agen- cies were advised to request that the goods be authenticated only once they had as- sumed full control of the consignments. Such requests were submitted, by the agen- cies, to OIP. Once OIP had ascertained that the contracts had been prioritized pur- VerDate 11-MAY-2000 13:17 Aug 19, 2004 Jkt 000000 PO 00000 Frm 00082 Fmt 6601 Sfmt 6621 95026.TXT SFORELA1 PsN: SFORELA1 79 suant to resolution 1472 and the contract amended accordingly, Cotecna was ad- vised to inspect and authenticate the goods. In certain, exceptional, cases OIP agreed, with agencie […اقتُطع العرض هنا — النص الكامل في ملف التنزيل]