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Weapons of Mass Destruction (WMD)

10 January 2005

U.N. Audits Reveal Oil-for-Food Program Mismanagement

Independent Inquiry Committee releases first set of documents

By Judy Aita
Washington File United Nations Correspondent

United Nations--The independent inquiry into the Oil-for-Food Program (OFFP) released internal U.N. audit documents January 10 showing the humanitarian aid program losing more than $5 million due to mismanagement and violations of U.N. procedures.

The documents also show that U.N. auditors’ failure to scrutinize contracts allowed Saddam Hussein to skim billions of dollars from a program meant to ease the effects of sanctions on Iraqi civilians.

The Independent Inquiry Committee (IIC), headed by former U.S. Federal Reserve Chairman Paul Volcker, made public 55 U.N. internal audit documents and three summary reports on various aspects of the OFFP. The committee plans to release its first interim report, which will include an evaluation and critique of those audits, by the end of January.  U.S. congressional committees also investigating the program have sought the audits.

A spokesman for U.N. Secretary-General Kofi Annan said that the briefing paper "is just one step in the progress of an inquiry that the secretary-general initiated, and which continues to enjoy his full support and cooperation."

"We are going to study the IIC's briefing paper carefully and we look forward to the broader findings that will be contained in the interim report due in the next few weeks. What this initial briefing from the committee does show is that there was a dynamic auditing process generated by the U.N. itself," the spokesman said.

In its briefing paper, the Volcker panel said "there was no examination of the oil and humanitarian contracts by the Internal Audit Division during the Oil-for-Food Program. The potential use of oil and humanitarian contracts by the former regime to gather illicit payments was a major concern."

At minimum, U.N. internal auditors should have evaluated processing of humanitarian goods contracts, oil overseers’ procedures for approving oil contracts and setting oil prices, and project management procedures in the OFFP executive offices at U.N. headquarters, the Volcker panel said.

"It is possible that more comprehensive monitoring and a greater emphasis on fidelity to contract requirements would have deterred the surcharge scheme that resulted in decreased oil prices and lost revenues to the program," it said.

Humanitarian contracts were not scrutinized to ensure consistency of the goods in the distribution plan or on the fairness of the process or quality and quantity of goods purchased, the Volcker panel said. "Testing the humanitarian contracts for price fairness could have revealed irregularities and undercut the Iraqi government's kickback scheme that resulted in lost revenue and significant sanctions violations."

The internal audits revealed $1.4 million in losses to the OFFP due to the failure of Saybolt, Cotecna and Lloyd's Register inspectors to review humanitarian aid imports, the panel said.

U.N. auditors told the Volcker panel that the contracts were not reviewed because they fell under the purview of the Security Council's Sanctions Committee and the contracts may not have been "auditable."

The reports, the panel said, "provide a complex, although not comprehensive, view of the work of the Oil-for-Food Program and related undertakings" and "raise a variety of serious issues concerning the operation" of the program.

U.N. auditors "capably reviewed" many OFFP operations and reported on many management and control problems, violations of U.N. procedures, and money losses, and they "raised significant issues" about processing the claims of the U.N. Compensation Commission, the panel said, but it also said the scope of the audits was limited and did not include management operations at U.N. headquarters, which accounted for 40 percent of the administrative costs or the major inspections contractors -- Saybolt Eastern Hemisphere, Cotecna and Lloyd's Register.

U.N. auditors found that the three firms overcharged the United Nations by about $5 million. In addition, Lloyd's might have overcharged the program $1.38 million for 1,800 days inspectors were not at their designated sites, and $1.9 million in fees could have been avoided had Lloyd's deployed its agents in stages rather than all at once. Saybolt was accused of charging for more staff members than actually were working, and for housing and transportation that was being supplied by Iraq, according to the documents released.

The audits "fail to examine and test execution of the oil purchase and humanitarian aid contracts, particularly as they related to price and quality," the Volcker panel said. "Such testing could have been helpful in limiting the success of Iraqi government entities in generating income from the contracts in violation of U.N. sanctions."

"The lack of focus on headquarters functions, oil purchase and humanitarian aid contracts and bank letter of credit operations in combination with the slow pace of audit performance appear to have deprived the U.N. of a potentially powerful agent in helping to ensure accountability, particularly in the early years" of the program, the Volcker panel said.

The audit reports describe "inadequate procedures, policy, planning, controls and coordination" in numerous areas. The reports show some organizations, such as the Department of Economic and Social Affairs, "present a wholesale failure of normal management and controls," according to the panel.

The reports also show that some organizations were "debilitated by stress and insufficient resources that too frequently operated in an ineffective, wasteful, and unsatisfactory manner," the panel said.

A tracking system set up by the U.N.'s Internal Audit Division revealed that OFFP managers did not implement 22 of the auditors’ critical recommendations, the panel noted.

The audit reports show an Oil-for-Food Program management that was "not quick to react to criticism and was either unable or unwilling to address issues" raised by the internal auditors, the Volcker panel said.

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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