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Testimony: 

Before the Subcommittee on National Security, Emerging Threats, and 
International Relations; Committee on Government Reform House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Tuesday, May 2, 2006: 

United Nations: 

Oil for Food Program Provides Lessons for Future Sanctions and Ongoing 
Reform: 

Statement of Joseph A. Christoff, Director: 

International Affairs and Trade: 

GAO-06-711T: 

GAO Highlights: 

Highlights of GAO-06-711T, a testimony before the Subcommittee on 
National Security, Emerging Threats, and International Relations; 
Committee on Government Reform, House of Representatives. 

Why GAO Did This Study: 

In 1996, the United Nations (UN) and Iraq began the Oil for Food 
program after sanctions were imposed in 1990. The program was intended 
to allow the Iraqi government to sell oil to pay for humanitarian goods 
and prevent it from obtaining goods for military purposes. More than 
$67 billion in oil revenue was obtained through the program, with $31 
billion in assistance delivered to Iraq. 

Internal controls serve as the first line of defense in preventing 
fraud, waste, and abuse and in helping agencies achieve desired 
outcomes. 

GAO assesses (1) the control environment the UN established for 
managing the sanctions and Oil for Food program and (2) other key 
internal control elements. In addition, we provide observations on the 
lessons learned from the program. 

What GAO Found: 

The UN—the Security Council, the Secretariat, and member 
states—established a weak control environment for the Oil for Food 
program at the beginning. The UN allowed Iraq to control contract 
negotiations for imported commodities with little oversight, enabling 
the regime to obtain illicit funds through surcharges and kickbacks. 
The UN did not take steps to address the economic impact that the 
sanctions had on countries that depended on Iraqi trade, which 
undermined international support for sanctions and allowed Iraq to 
smuggle oil outside the Oil for Food program. Overall, the sanctions 
were effective in helping to prevent the Iraq regime from obtaining 
military items, but the UN was less rigorous in overseeing economic 
activities such as monitoring the price and value of Iraq’s contracts. 
The UN’s neglect of Iraq’s illicit revenue streams helped support a 
sanctioned regime and undermined the goals of using oil revenues to 
benefit the Iraqi people. 

The UN did not adequately address key internal control elements as it 
implemented the Oil for Food program. First, UN entities lacked clear 
lines of authority. For example, the Office of the Iraq Program lacked 
clear authority for rejecting commodity contracts based on pricing 
concerns. In addition, the customs contractor at Iraq’s border was not 
authorized to evaluate imports for price and quality. Second, the UN 
did not assess emerging risks as the Oil for Food program expanded from 
a 6-month emergency measure to deliver food and medicine to a 6-year 
program providing more than $31 billion to 24 economic sectors. Third, 
some monitoring activities constrained Iraq’s ability to obtain illicit 
oil surcharges, but smuggling continued despite the presence of 
inspectors. In addition, the UN’s internal audit office identified 
hundreds of weaknesses and irregularities in its reports. However, it 
lacked the resources and independence to provide effective oversight of 
this costly and complex UN effort. 

The Oil for Food program offers several lessons for designing future 
sanctions and strengthening existing UN programs: 

* Assess whether the sanctions program gives undue control to the 
sanctioned country. 
* Consider the economic impact that sanctions have on neighboring 
countries.
* Ensure that all aspects of sanctions are equally enforced.
* Establish clear authority and responsibility for management, 
oversight, and monitoring activities. 
* Assess and mitigate risk as programs and funding expand. Assess the 
role of internal oversight units and ensure that they have the 
resources and independence needed for effective oversight. 

What GAO Recommends: 

GAO recommends that the Secretary of State and the Permanent 
Representative of the U.S. to the UN work with member states to (1) 
ensure that UN programs with considerable financial risk apply 
internationally accepted internal control standards and (2) strengthen 
internal controls throughout the UN, based on the lessons from Oil for 
Food program. The Department of State and the UN responded that they 
are taking steps to strengthen internal controls at the UN. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-711T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Joseph Christoff at (202) 
512-8979 or christoffj@gao.gov. 

[End of Section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the lessons learned from the 
United Nations (UN) Oil for Food program and the implications for 
future sanctions programs and ongoing UN reform efforts. 

In 1996, the UN and Iraq began the Oil for Food program to address 
growing concerns about Iraq's humanitarian situation after 
international sanctions were imposed in 1990. The intent of the program 
was to allow the Iraq government to use the proceeds of its oil sales 
to pay for food, medicine, and infrastructure maintenance and, at the 
same time, prevent the regime from obtaining goods for military 
purposes. Iraq obtained more than $67 billion in oil revenues through 
the program; as of November 2003, about $31 billion in commodities and 
humanitarian assistance had been delivered to Iraq.[Footnote 1] Four 
key entities were responsible for most of the program's operations--the 
Security Council's Iraq sanctions committee, the UN Secretariat's 
Office of the Iraq Program, nine UN agencies with separate programs in 
northern Iraq, and the Iraqi government under Saddam Hussein. 

The 2005 Defense Authorization Act mandated that GAO review the Oil for 
Food program[Footnote 2] following allegations of corruption and 
misconduct. In April 2006, we issued a report on the results of our 
work and our recommendations for strengthened internal controls at the 
UN.[Footnote 3] We have also testified numerous times on the Oil for 
Food program and issued a report in May 2002 on the implementation of 
sanctions against Iraq.[Footnote 4] Today, I will discuss (1) the 
control environment established by the UN for managing the sanctions 
and Oil for Food program; (2) other key internal control elements 
addressed by the UN, including lines of authority and responsibility, 
risk assessment, and monitoring and oversight; and (3) our observations 
on the lessons learned from the Oil for Food program. To address these 
objectives, we used the body of work that GAO has completed on Iraq 
sanctions, the Oil for Food program, and UN oversight issues. 

Policymakers and program managers are continually seeking ways to 
better achieve agencies' missions and program results and improve 
accountability for results. A key factor in helping to achieve such 
outcomes is appropriate internal control, which, if properly designed 
and implemented, provide reasonable assurance that objectives are being 
met. Internal controls also serve as the first line of defense in 
safeguarding assets and preventing fraud, waste, and abuse.[Footnote 5] 
Our April 2006 report used this internal control framework to identify 
the key weaknesses in enforcing sanctions against Iraq and implementing 
the Oil for Food program. 

Summary: 

The UN--the Security Council, the Secretariat, and member states-- 
established weak controls over the Oil for Food program from its 
beginning. Specifically, the UN allowed Iraq to control contract 
negotiations for imported commodities with little oversight, enabling 
the regime to obtain illicit funds through contract surcharges and 
kickbacks. The UN also did not take steps to address the economic 
impact that the sanctions had imposed on countries that depended on 
Iraqi trade. This undermined international support for sanctions and 
allowed Iraq to smuggle oil outside the Oil for Food program. Overall, 
the sanctions were effective in helping to prevent the Iraq regime from 
obtaining military or dual-use items, but the UN was less rigorous in 
overseeing economic activities related to the Oil for Food program such 
as monitoring the price and value of Iraq's contracts. The UN's neglect 
of Iraq's illicit revenue streams from smuggling and kickbacks helped 
support a sanctioned regime and undermined the program's goal of using 
oil revenues to benefit the Iraqi people. 

As the program was implemented, sanctions and the Oil for Food program 
were further weakened by inadequate attention to internal controls, 
including (1) establishing clear responsibility and authority, (2) 
identifying and addressing program risks, and (3) ensuring adequate 
monitoring and oversight. UN entities and contractors responsible for 
implementing and monitoring the program lacked clear lines of 
authority. For example, the Office of the Iraq Program lacked clear 
authority to reject commodity contracts based on pricing concerns. In 
addition, the UN contractor at Iraq's border was not authorized to 
evaluate imports for price and quality, and there were no provisions to 
stop imports not purchased through the Oil for Food program. Moreover, 
the UN did not assess emerging risks as the Oil for Food program 
expanded from a 6-month emergency measure to deliver food and medicine 
to a 6-year program that provided more than $31 billion to Iraq's 
agriculture, electricity, oil, housing, and 20 other economic sectors. 
Some monitoring activities curtailed the ability of the regime to 
obtain illicit contract surcharges, but smuggling continued despite the 
presence of inspectors. Finally, the UN's internal audit office audited 
some aspects of the Oil for Food program and identified hundreds of 
weaknesses and irregularities. However, it lacked the resources and 
independence needed to provide full and effective oversight of this 
large, costly, and complex UN effort. 

The Oil for Food program offers several lessons for designing future 
sanctions and strengthening existing UN programs: 

* Assess whether the sanctions program gives undue control to the 
sanctioned country. 

* Consider the economic impact that sanctions have on neighboring 
countries. 

* Ensure that all aspects of sanctions are equally enforced. 

* Establish clear authority and responsibility for key management, 
oversight, and monitoring activities. 

* Continuously assess and mitigate risk as programs and funding expand. 

* Assess the role of internal audit and evaluation units and take steps 
to ensure that these entities have the resources and independence 
needed for effective oversight. 

In our April 2006 report on the Oil for Food Program, we recommended 
that the Secretary of State and the Permanent Representative of the 
United States to the UN work with other member states to encourage the 
Secretary General to (1) ensure that UN programs with considerable 
financial risks establish, apply, and enforce the principles of 
internationally accepted internal control standards, with particular 
attention to comprehensive and timely risk assessments; and (2) 
strengthen internal controls throughout the UN system, based in part on 
the lessons learned from the Oil for Food program. The Department of 
State and the UN responded that they are taking steps to strengthen 
internal controls at the UN. 

The UN Established a Weak Control Environment for Enforcing Sanctions 
and Managing the Oil for Food Program: 

Although the sanctions curbed the Iraq regime's ability to advance its 
military and weapons of mass destruction programs, the UN established a 
weak control environment for the Oil for Food program at its beginning 
due to compromises it made with the Iraq government and neighboring 
states. For example, the UN allowed Iraq to control contract 
negotiations for imported commodities with little oversight, allowing 
the regime to obtain illicit funds through contract surcharges and 
kickbacks. Several countries in the region depended on Iraqi trade, but 
no provisions were made to address the economic impact of the sanctions 
on these countries. This undermined international support for sanctions 
and allowed Iraq to smuggle oil outside the Oil for Food program. The 
sanctions helped prevent the Iraq regime from obtaining prohibited 
military and dual-use items, but little attention was given to 
oversight of the economic activities related to the Oil for Food 
program, such as monitoring the price and value of Iraq's contracts. 
Allowing Iraq to obtain revenues outside the Oil for Food program 
undermined the goals of containing the regime and using its oil 
revenues for UN-managed assistance to benefit the Iraqi people. 

Early Compromises Allowed Iraq to Set the Terms for Contracting and 
Monitoring: 

When the UN first proposed the Oil for Food program in 1991, it 
recognized the vulnerability inherent in allowing Iraq control over the 
contracting process. At that time, the Secretary General proposed that 
the UN, an independent agent, or the Iraqi government be given the 
responsibility to negotiate contracts with oil purchasers and commodity 
suppliers. However, the Secretary General subsequently concluded that 
it would be highly unusual or impractical for the UN or an independent 
agent to trade Iraq's oil or purchase commodities and recommended that 
Iraq negotiate the contracts and select the contractors. Nonetheless, 
he stated that the UN and Security Council must ensure that Iraq's 
contracting did not circumvent the sanctions and was not fraudulent. 
Accordingly, the Security Council proposed that UN agents review the 
contracts and compliance at the oil ministry. Iraq refused these 
conditions. 

By the mid-1990s, the humanitarian conditions had worsened. The UN 
reported that the average Iraqi's food intake was about 1,275 calories 
per day, compared with the standard requirement of 2,100 calories. In 
April 1995, the Security Council passed resolution 986 to permit Iraq 
to use its oil sales to finance humanitarian assistance. Against a 
backdrop of pressure to maintain sanctions while addressing emergency 
humanitarian needs, the UN conceded to Iraq's demand that it retain 
independent control over contract negotiations. Accordingly, a May 1996 
memorandum of understanding[Footnote 6] between the UN and Iraq allowed 
Iraq to directly tender and negotiate contracts without UN oversight 
and to distribute imported goods to the intended recipients. 

When the Oil for Food program began, the UN was responsible for 
confirming the equitable distribution of commodities, ensuring the 
effectiveness of program operations, and determining Iraq's 
humanitarian needs. According to the memorandum of understanding, the 
Iraqi government was to provide UN observers with full cooperation and 
access to distribution activities. However, observers faced 
intimidation and restrictions from Iraqi regime officials in carrying 
out their duties. According to a former UN official, observers could 
not conduct random spot checks and had to rely on distribution 
information provided by ministry officials, who then steered them to 
specific locations. The Independent Inquiry Committee[Footnote 7] 
reported that observers were required to have government escorts and 
cited various instances of intimidation and interference by Iraqi 
officials. The committee concluded that the limits placed on the 
observers' ability to ask questions and gather information affected the 
UN Secretariat's ability to provide complete field reports to the 
sanctions committee. 

UN Did Not Address the Economic Impact of Sanctions on Member 
Countries: 

Under Security Council resolutions, all member states had the 
responsibility for enforcing sanctions. For Iraq, the UN depended on 
neighboring countries to deter the importation of illicit commodities 
and smuggling. However, concessions to regional trade activity affected 
the sanctions environment and allowed the Iraqi regime to obtain 
revenues outside the Oil for Food program. Although oil sales outside 
the program were prohibited, the Security Council's Iraq sanctions 
committee did not address pre-existing trade between Iraq and other 
member states, and no provisions were made for countries that relied 
heavily on trade with Iraq. Illicit oil sales were primarily conducted 
on the basis of formal trade agreements. For example, trade agreements 
with Iraq allowed Jordan--a U.S. ally dependent on Iraqi trade--to 
purchase heavily discounted oil in exchange for up to $300 million in 
Jordanian goods. Members of the sanctions committee, including the 
United States, took note of Iraq's illicit oil sales to its neighbors, 
but took no direct action to halt the sales or take steps against the 
states or entities engaged in them. In addition, successive U.S. 
administrations issued annual waivers to Congress exempting Turkey and 
Jordan from unilateral U.S. sanctions for violating the UN sanctions 
against Iraq. 

According to U.S. government officials and oil industry experts, Iraq 
smuggled oil through several routes. Oil entered Syria by pipeline, 
crossed the borders of Jordan and Turkey by truck, and was smuggled 
through the Persian Gulf by ship. Syria received up to 200,000 barrels 
of Iraqi oil a day in violation of the sanctions. Oil smuggling also 
occurred through Iran. The Security Council authorized the 
Multinational Interception Force in the Persian Gulf, but, according to 
the Department of Defense, it interdicted only about 25 percent of the 
oil smuggled through the Gulf.[Footnote 8] 

Sanctions Enforcement Focused on Military Items, but Less Rigorous 
Oversight for Economic Activities Facilitated Iraq's Ability to Obtain 
Illicit Revenues: 

The UN's focus on screening military and dual-use items was largely 
effective in constraining Iraq's ability to import these goods through 
the Oil for Food program. Each member of the Security Council's Iraq 
sanctions committee had authority to approve, hold, or block any 
contract for goods exported to Iraq. The United States, as a member of 
the committee, devoted resources to conducting a review of each 
commodity contract. As a result, the United States was the Security 
Council member that most frequently placed holds on proposed sales to 
Iraq; as of May 2002, it was responsible for about 90 percent of the 
holds placed by the Security Council. U.S. technical experts assessed 
each item in a contract to determine its potential military application 
and whether the item was appropriate for the intended end user. These 
experts also examined the end user's track record with such 
commodities. An estimated 60 U.S. government personnel within the 
Departments of State, Defense, Energy, and other agencies examined all 
proposed sales of items that could be used to assist the Iraqi military 
or develop weapons of mass destruction. In addition, the Department of 
the Treasury was responsible for issuing U.S. export licenses to Iraq. 
It compiled the results of the review by U.S. agencies under the UN 
approval process and obtained input from the Department of Commerce on 
whether a contract included any items found on a list of goods 
prohibited for export to Iraq for reasons of national security or 
nuclear, chemical, and biological weapons proliferation. 

In addition to screening items imported by Iraq, the UN conducted 
weapons inspections inside Iraq until 1998, when international 
inspectors were forced to withdraw. Sanctions also may have constrained 
Iraq's purchases of conventional weapons, as we reported in 
2002.[Footnote 9] In 2004, the Iraq Survey Group reported that 
sanctions had curbed Iraq's ability to import weapons and finance its 
military, intelligence, and security forces. 

The UN's neglect of Iraq's illicit revenue streams from smuggling and 
kickbacks facilitated unauthorized revenue for a sanctioned regime and 
undermined the program's goal of using Iraqi oil revenues to benefit 
the Iraqi people. According to a report by Department of Defense 
contract experts, in a typical contract pricing environment, fair and 
reasonable commodity prices are generally based on prevailing world 
market conditions or competitive bids among multiple 
suppliers.[Footnote 10] Ensuring a fair and reasonable price for goods 
can mitigate the possibility of overpricing and kickbacks. The Security 
Council's Iraq sanctions committee and the Secretariat's Office of the 
Iraq Program (OIP) were responsible for reviewing commodity contracts 
under the Oil for Food program, but neither entity conducted sufficient 
reviews of commodity pricing and value. As a result, Iraq was able to 
levy illicit contract commissions and kickbacks ranging from about $1.5 
billion to about $3.5 billion. 

Unclear Authority, Lack of Risk Assessment, and Inadequate Monitoring 
and Oversight Further Undermined the Sanctions and Oil for Food 
Program: 

The UN did not adequately address other key internal control elements 
as it implemented the Oil for Food program: (1) establishing clear 
authorities, (2) identifying and addressing program risks, and (3) 
ensuring adequate monitoring and oversight. UN entities and contractors 
responsible for implementing and monitoring the program lacked clear 
lines of authority. For example, the Office of the Iraq Program lacked 
clear authority to reject commodity contracts based on pricing 
concerns. In addition, the UN contractor at Iraq's border did not have 
the authority to evaluate imports for price and quality, and no 
provisions were made to stop imports that were not purchased through 
the Oil for Food program. Moreover, the UN did not assess emerging 
risks as the Oil for Food program expanded from a 6-month emergency 
measure to deliver food and medicine to a 6-year program that provided 
more than $31 billion to 24 economic sectors. Some monitoring 
activities constrained the ability of the regime to obtain illicit 
contract surcharges, but smuggling continued despite the presence of 
inspectors. Finally, the UN's internal audit office examined some 
aspects of the Oil for Food program and identified hundreds of 
weaknesses and irregularities. However, it lacked the resources and 
independence to provide effective oversight of this ambitious and 
complex UN effort. 

Oil for Food Program Lacked Clear Lines of Responsibility and 
Authority: 

A good internal control environment requires that the agency clearly 
define and delegate key areas of authority and responsibility. Both 
OIP, as an office in the UN Secretariat, and the Security Council's 
Iraq sanctions committee were responsible for the management and 
oversight of the Iraq sanctions and Oil for Food program. The Iraq 
government, other UN agencies, UN member states, the interdiction force 
in the Persian Gulf, inspection contractors, and internal and external 
audit offices also played specific roles (see figure 1). However, no 
single entity was accountable for the program in its entirety. In 2005, 
the Independent Inquiry Committee reported that the Security Council 
had failed to clearly define the program's broad parameters, policies, 
and administrative responsibilities and that neither the Security 
Council nor the Secretariat had control over the entire program. 

Figure 1: Multiple Organizations Managed the Oil for Food Program and 
Enforced UN Sanctions: 

[See PDF for image] 

[End of figure] 

The absence of clear lines of authority and responsibility were 
important structural weaknesses that further undermined the management 
and oversight of the Oil for Food program. For example, OIP was to 
examine each commodity contract for price and value before submitting 
it to the sanctions committee for approval. However, the Independent 
Inquiry Committee found that OIP lacked clear authority to reject 
contracts on pricing grounds and did not hire customs experts with the 
requisite expertise to conduct thorough pricing evaluations. In 
addition, UN inspectors did not have the authority to inspect goods 
imported into Iraq to verify price and quality. These inspectors mostly 
verified the arrival of goods in the country for the purpose of paying 
the contractor. 

The Secretariat's contract for inspecting imports at three entry points 
in Iraq required inspection agents to "authenticate" goods, but the 
agents' responsibilities fell short of a more rigorous review of the 
imports' price and quality. Under the Oil for Food program, inspection 
agents compared appropriate documentation, including UN approval 
letters, with the commodities arriving in Iraq; visually inspected 
about 7 to 10 percent of the goods; and tested food items to ensure 
that they were "fit for human consumption." However, inspection agents 
were not required to (1) verify that food items were of the quality 
contracted, (2) assess the value of goods shipped, (3) inspect goods 
that were not voluntarily presented by transporters, or (4) select the 
items and suppliers or negotiate contracts. In addition, no provisions 
were made to interdict prohibited goods arriving at the border. 
According to Cotecna, the inspections contractor from 1999 to 
2004,[Footnote 11] "authentication" is not a standard customs term or 
function. The UN created the term for the Oil for Food program and did 
not include traditional customs inspection activities, such as price 
verification and quality inspection. In anticipation of an oil for food 
program, the UN selected Cotecna in 1992 for a program that was never 
implemented. Under that proposal, Cotecna would have verified fair 
pricing and inspected the quality of the items to help ensure that they 
conformed to contract requirements. 

Finally, limited authority for contractors overseeing oil exports 
facilitated Iraq's ability to obtain illicit revenues from smuggling 
that ranged from $5.7 billion to $8.4 billion over the course of the 
Oil for Food program. In 1996, the Secretariat contracted with Saybolt 
to oversee the export of oil from Iraq through selected export points. 
The inspectors were to monitor the amount of oil leaving Iraq under the 
Oil for Food program at these locations and to stop shipments if they 
found irregularities. The inspectors worked at two locations--the 
Ceyhan-Zakho pipeline between Iraq and Turkey and the Mina al-Bakr 
loading platform in southern Iraq. In 2005, a Saybolt official 
testified that its mandate did not include monitoring all oil exports 
leaving Iraq from other locations or acting as a police force.[Footnote 
12] As a result, the contractors did not monitor oil that was exported 
outside the Oil for Food program. 

Program Risk Was Not Continuously Identified and Addressed: 

Risk assessments can identify and manage the internal and external 
challenges affecting a program's outcomes and accountability, including 
those risks that emerge as conditions change. The Oil for Food program 
expanded rapidly as it evolved from an emergency 6-month measure to 
provide humanitarian needs to a 6-year program that delivered about $31 
billion in commodities and services in 24 sectors. Beginning in 1998, 
when the international community was not satisfied with Iraq's 
compliance with weapons inspections, the Security Council continued the 
sanctions and expanded its initial emphasis on food and medicines to 
include infrastructure rehabilitation and activities in 14 sectors. 
These sectors included food, food handling, health, nutrition, 
electricity, agriculture and irrigation, education, transport and 
telecommunications, water and sanitation, housing, settlement 
rehabilitation for internally displaced persons, demining, a special 
allocation for vulnerable groups, and oil industry spare parts and 
equipment. In June 2002, the Iraqi government introduced another 10 
sectors, including construction, industry, labor and social affairs, 
youth and sports, information, culture, religious affairs, justice, 
finance, and the Central Bank of Iraq. 

The Security Council and UN Secretariat did not assess the risks posed 
by this expansion, particularly in light of the fact that they had 
allowed the Iraqi government to tender and negotiate its contracts. The 
UN Office of Internal Oversight Services (OIOS) was the only entity 
that attempted to assess the enormous risks in the Oil for Food 
program, but OIP blocked that attempt. In August 2000, the Under 
Secretary General for OIOS proposed an overall risk assessment to the 
Deputy Secretary General to improve the program by identifying the 
factors that could prevent management from fulfilling the program's 
objectives. The proposal noted that this assessment could be a model 
for other UN departments and activities. OIOS considered the Oil for 
Food program a high-risk activity and decided to focus on an assessment 
of OIP's Program Management Division. This unit was responsible for 
providing policy and management advice to OIP's executive director and 
for supporting OIP's field implementation and observation duties. In 
May 2001, OIP's executive director refused to fund the risk assessment, 
citing financial reasons and uncertainty over the program's future. 

In July 2003, OIOS issued an assessment of OIP's Program Analysis, 
Monitoring, and Support Division--formerly the Program Management 
Division--that identified a number of organizational, management, and 
administrative problems, including poor communication and coordination, 
unclear reporting lines among OIP headquarters units and the field, and 
the lack of approved work plans. However, by this date, the UN was 
preparing for the November 2003 transfer of the program to the 
Coalition Provisional Authority in Iraq, and the report was of limited 
usefulness for addressing high-risk areas. Comprehensive and timely 
risk assessments might have identified the internal control weaknesses--
such as inadequate contract pricing reviews--that facilitated Iraq's 
ability to levy illicit contract revenues. These assessments also might 
have identified the structural management weaknesses that led to 
ineffective communication and coordination within the program. 

Oil Export Monitoring Activities Did Not Deter Smuggling but Did 
Mitigate Contract Surcharges: 

Ongoing monitoring and specific control activities should meet the 
management and oversight needs of the agency or program. However, 
during the Oil for Food program, the lack of functioning oil meters 
enabled the Iraqi government to smuggle oil undetected by inspectors. A 
Saybolt employee testified that the company notified UN officials of 
the problems posed by the lack of functioning meters at the beginning 
of the program.[Footnote 13] He also testified that the lack of 
metering equipment allowed the two "topping off" incidents involving 
the oil tanker Essex, in which the tanker loaded additional oil after 
the inspectors had certified the loading and left the vessel. In 
November 2001, a Saybolt representative noted that Iraq's distribution 
plans for that period provided for the installation of a meter at the 
Mina al-Bakr port. A U.S. official called for OIP to develop a plan to 
prevent unauthorized oil sales that would include installing a meter at 
the port. However, Iraq did not tender a contract for the meter. As of 
March 2006, the Iraqi government has not yet installed oil meters at 
Mina al-Bakr. 

In addition, the sanctions committee relied on the advice of 
independent oil overseers to approve oil sales contracts. The overseers 
reviewed Iraq's oil sales contracts to determine compliance with 
program requirements and whether the prices that Iraq negotiated for 
its oil were fair and reflected market pricing. However, the inadequate 
number of overseers monitoring Iraq's oil pricing over a 14-month 
period may have been a factor in Iraq's ability to levy illicit 
surcharges on oil contracts. From June 1999 to August 2000, only one 
oil overseer was responsible for monitoring billions in Iraq's oil 
transactions, contrary to the sanctions committee's requirements for at 
least four overseers. Four overseers were hired at the beginning of the 
program but three resigned by June 1999. Political disputes among 
sanctions committee members prevented the committee from agreeing on 
replacements. According to the Independent Inquiry Committee, the 
sanctions committee demonstrated weak program oversight in its 
inability to fill the vacant positions. 

In contrast, in October 2001, the Security Council's sanctions 
committee imposed a positive control activity--retroactive oil pricing-
-to prevent Iraqi officials from adding illegal oil surcharges to 
contracts. In November 2000, UN oil overseers reported that Iraq's oil 
prices were low and did not reflect the fair market value. The 
overseers also reported in December 2000 that Iraq had asked oil 
purchasers to pay surcharges. In early 2001, the United States informed 
the sanctions committee about its concerns regarding allegations that 
Iraqi government officials were receiving illegal surcharges on oil 
contracts. The United States delayed oil pricing until after the Iraq 
government signed contracts with oil purchasers but without knowing the 
price it would have to pay until delivery. Setting the price at the 
time the oil was delivered helped to ensure a fair market price. This 
practice, known as retroactive pricing, curbed the ability of the Iraqi 
government to levy illicit surcharges on its oil sales contracts. Prior 
to retroactive pricing, estimates of Iraq's illicit revenues from 
surcharges on exported oil ranged from about $230 million to almost 
$900 million. 

UN Internal Audit Office Lacked Sufficient Resources and Independence 
to Provide Effective Oversight: 

Ongoing monitoring of internal control should include activities to 
help ensure that the findings of audits and other evaluations are 
promptly resolved. Although OIOS conducted dozens of audits of the Oil 
for Food program, the office did not review key aspects of the Oil for 
Food program and had insufficient staff. OIOS did not review whether 
OIP was adequately monitoring and coordinating the Oil for Food 
program, including OIP's role in assessing commodity pricing. OIOS did 
not examine OIP's oversight of the commodity contracts for central and 
southern Iraq, which accounted for 59 percent of Oil for Food proceeds. 
According to the Independent Inquiry Committee, the internal auditors 
believed that they did not have the authority to audit humanitarian 
contracts because the sanctions committee was responsible for contract 
approval. 

OIP management mostly supported OIOS audits for program activities in 
northern Iraq managed by other UN agencies; however, these northern 
programs constituted only 13 percent of the Oil for Food program. 
Because OIOS did not review commodity contracts, it was difficult to 
quantify the extent to which the Iraqi people received the humanitarian 
assistance funded by its government's oil sales. The Independent 
Inquiry Commission noted that the practice of allowing the heads of 
programs the right to fund internal audit activities led to excluding 
high-risk areas from internal audit examination. We also found that UN 
funding arrangements constrain OIOS's ability to operate independently 
as mandated by the General Assembly and as required by the 
international auditing standards to which OIOS subscribes.[Footnote 14] 
The UN must support budgetary independence for the internal auditors. 

In addition, the number of OIOS staff assigned to the Oil for Food 
program was low. OIOS had only 2 to 6 auditors assigned to cover the 
Oil for Food program. The UN Board of Auditors indicated that the UN 
needed 12 auditors for every $1 billion in expenditures. The 
Independent Inquiry Committee concluded that the Oil for Food program 
should have had more than 160 auditors at its height in 2000. However, 
the committee found no instances in which OIOS communicated broad 
concerns about insufficient staff to UN management. 

OIOS also encountered problems in its efforts to widen the distribution 
of its reporting beyond the head of the agency audited. In August 2000, 
OIOS proposed sending its reports to the Security Council. However, the 
OIP director opposed this proposal, stating that it would compromise 
the division of responsibility between internal and external audit. In 
addition, the UN Deputy Secretary General denied the request, and OIOS 
subsequently abandoned any efforts to report directly to the Security 
Council. Timely reporting on audit findings would have assisted the 
Security Council in its oversight of Iraq sanctions and the Oil for 
Food program. 

Concluding Observations: Lessons Learned from the Oil for Food Program: 

Our findings on UN management of Iraq sanctions and the Oil for Food 
program reveal a number of lessons that can apply to future sanctions 
and should be considered during the ongoing debate on UN reform. These 
lessons demonstrate the importance of establishing a good control 
environment at the outset. In addition, fundamental internal control 
activities must be applied throughout the life of UN programs. 
Specifically, 

* When establishing the program, assess the roles and authorities of 
the sanctioned country. If political pressures and emergency conditions 
dictate significant authority and responsibilities for the sanctioned 
country, assess the risks posed by these authorities and take steps to 
mitigate potential problems. A comprehensive risk assessment following 
the decision to allow Iraqi control over contracting and monitoring 
might have revealed the need for more rigorous activities to review the 
prices the regime charged and the quality of goods it contracted to 
prevent or help lessen the opportunity for illicit charges. 

* Consider the impact that the loss of trade might have on surrounding 
countries. For example, Jordan, a U.S. ally, was allowed to continue 
buying Iraqi oil outside the Oil for Food program, which facilitated 
the revenue that Iraq could obtain beyond UN control. Other provisions 
for obtaining discounted oil might have prevented this trade. 

* Ensure that monitoring and oversight equally address all program 
goals. Although the UN focus on screening military and dual-use items 
was largely effective in constraining Iraq's ability to import these 
goods through the Oil for Food program, the UN's neglect of Iraq's 
illicit revenue streams from smuggling and kickbacks undermined the 
program's goal of using Iraqi oil revenues to benefit the Iraqi people. 

* Establish clear authorities for key management, oversight, and 
monitoring activities. The Oil for Food program had unclear lines of 
authority for rejecting contracts based on price and value concerns and 
for inspecting imported goods and exported oil. These important 
structural weaknesses allowed the sanctioned Iraq regime significant 
control over program activities. 

* As programs and funding expand, continuously assess the risks caused 
by this expansion and take steps to ensure that resources are 
safeguarded. The UN did not assess risks as the Oil for Food program 
grew in size and complexity, particularly in light of the fact that it 
had relegated responsibility for the contracting process to Iraq. 
Timely risk assessments might have identified the internal control 
weaknesses that facilitated Iraq's ability to levy illicit contract 
revenues and thereby undermine the UN's goal of using Iraq's oil 
proceeds for humanitarian assistance to the Iraqi people. 

* Assess the role of internal audit and evaluation units and take steps 
to ensure that these entities have the resources and independence 
needed for effective oversight. Although the UN's internal audit office 
audited some aspects of the Oil for Food program and identified 
hundreds of irregularities, it lacked the resources and independence to 
provide effective oversight of this costly and complex UN effort. 

Recommendation: 

In our report on the Oil for Food program's internal controls,[Footnote 
15] we recommend that the Secretary of State and the Permanent 
Representative of the United States to the UN work with other member 
states to encourage the Secretary General to: 

* ensure that UN programs with considerable financial risks establish, 
apply, and enforce the principles of internationally accepted internal 
control standards, with particular attention to comprehensive and 
timely risk assessments; and: 

* strengthen internal controls throughout the UN system, based in part 
on the lessons learned from the Oil for Food program. 

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

Contacts and Acknowledgments: 

For questions regarding this testimony, please call Joseph Christoff at 
(202) 512-8979. Other key contributors to this statement were Lynn 
Cothern, Jeanette Espinola, Tetsuo Miyabara, Valérie Nowak, and Audrey 
Solis. 

FOOTNOTES 

[1] The UN allocated 72 percent of Iraq's oil proceeds to humanitarian 
assistance for Iraq; it also allocated a portion of these proceeds to a 
compensation fund for paying reparations to victims of Iraq's 1990 
invasion of Kuwait and to UN administrative expenses for administering 
the Oil for Food program and international sanctions. 

[2] Public Law 108-375, Ronald W. Reagan National Defense Authorization 
Act for Fiscal Year 2005, October 2004. 

[3] GAO, United Nations: Lessons Learned from Oil for Food Program 
Indicate the Need to Strengthen UN Internal Controls and Oversight, GAO-
06-330 (Washington, D.C.: Apr. 25, 2006). 

[4] GAO, Weapons of Mass Destruction: U.N. Confronts Significant 
Challenges in Implementing Sanctions Against Iraq, GAO-02-625 
(Washington, D.C.: May 23, 2002). 

[5] A general framework for internal controls is widely accepted in the 
international audit community and has been adopted by leading 
accountability organizations, including the International Organization 
of Supreme Audit Institutions, the U.S. Office of Management and 
Budget, and GAO. These standards use the internationally accepted 
Internal Control-Integrated Framework (September 1992) by the Committee 
of Sponsoring Organizations of the Treadway Commission. The first 
standard within this framework is the control environment, which 
provides the structure, discipline, and ethical tone for implementing 
an internal control system. Other standards focus on employing 
assessments of the external and internal risks an organization faces; 
establishing policies and procedures to enforce directives (control 
activities); providing relevant, timely, and reliable information and 
communication; and monitoring performance and adhering to audit 
findings. 

[6] Memorandum of Understanding between the Secretariat of the United 
Nations and the Government of Iraq on the Implementation of Security 
Council Resolution 986 (1995), May 20, 1996. 

[7] In April 2004, the UN established the Independent Inquiry 
Committee, headed by Paul Volcker, the former Chairman of the U.S. 
Federal Reserve, to investigate the administration and management of 
Oil for Food program. Its scope included investigating allegations of 
fraud and corruption on the part of UN officials, personnel, and agents 
that entered into contracts with the UN or with Iraq under the program. 


[8] GAO-02-625.

[9] Ibid. 

[10] 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 (Washington, D.C.: Sept. 12, 2003). 

[11] The Coalition Provisional Authority used Cotecna from November 
2003, when it assumed responsibility from the UN for remaining Oil for 
Food contracts, until October 2004, when the Iraqis no longer used 
independent inspection agents. 

[12] Testimony of John Denson, General Counsel, Saybolt Group, before 
the Permanent Subcommittee on Investigations, Committee on Governmental 
Affairs, U.S. Senate (Washington, D.C.: Feb. 15, 2005). 

[13] Testimony of John Denson, General Counsel, Saybolt Group, before 
the Permanent Subcommittee on Investigations, Committee on Governmental 
Affairs, U.S. Senate (Washington, D.C.: Feb. 15, 2005). 

[14] GAO, United Nations: Funding Arrangements Impede Independence of 
Internal Auditors, GAO-06-575 (Washington, D.C.: Apr. 25, 2006). 

[15] GAO-06-330. 

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