[Senate Hearing 108-546]
[From the U.S. Government Publishing Office]


                                                        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




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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio            BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West 
JOHN E. SUNUNU, New Hampshire            Virginia
                                     JON S. CORZINE, New Jersey

                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)




                            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. General Accounting Office, Washington, DC..........    47
    Prepared statement...........................................    48
Dodd, Hon. Christopher J., U.S. Senator from Connecticut, 
  prepared statement.............................................    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 Reform, 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; accompanied by: Hon. Kim R. Holmes, Assistant 
  Secretary of State for International Organizations, U.S. 
  Department of State, Washington, DC............................    14
    Prepared statement of Ambassador Raphel......................    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.....................................    82
    Senator Joseph R. Biden, Jr..................................    86
    Senator Christopher J. Dodd..................................    86
    Senator John E. Sununu.......................................    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
Responses of Joseph A. Christoff to additional questions for the 
  record submitted 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..................................................   104
    Saybolt's contract with the United Nations and related 
      documents..................................................   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


                     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 
(chairman 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 
Committee meets today to examine the United Nations Oil-for-
Food Program. Although the precise extent of the corruption and 
mismanagement in this program is not yet known, there is no 
doubt that billions of dollars that should have been spent on 
humanitarian needs in Iraq were siphoned off by Saddam 
Hussein's regime through a system of surcharges, bribes and 
kickbacks. This corruption 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, inattentive 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 accessible to Saddam loyalists 
who are financing terrorism against coalition forces and Iraqi 
citizens.
    Third, the corruption in the Oil-for-Food Program almost 
certainly contributed to the international division over 
containing and ultimately ousting Saddam Hussein. By 
exacerbating the humanitarian 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 coalition's decision to use 
military force against Saddam Hussein in part because an 
overthrow of the regime would expose ongoing corruption in the 
Oil-for-Food Program. Even if we assume that such calculations 
were not a part of any government's deliberative process, 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 Nations 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 peacekeeping, 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 foreign policy. As such, the United States must 
insist on a full investigation of the Oil-for-Food Program and 
work with the United Nations to prevent corruption on future 
projects.
    The United Nations initiated the Oil-for-Food Program for 
understandable reasons. The world community felt a humanitarian 
responsibility to prevent the deaths of innocent Iraqis, who, 
in essence, 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 provide humanitarian 
relief, the Security Council voted to allow Iraq to sell a 
portion of its domestically produced oil and use the receipts 
to buy food and medicine. The Security Council made the 
decision 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 Nations 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 internal review 
of the program did not occur. The United Nations allowed 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 billion 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 
offering 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 sanctions 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 Foreign Relations Committee commences its contribution to 
the examination 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 Department of State's Office of Iraq 
Reconstruction, and Dr. Kim Holmes, Assistant Secretary of 
State for International Organizations.
    On our second panel, we will hear from Joseph Christoff, 
the Director 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 examination 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 
forward to their insights. But first of all, it's my privilege 
to call upon the distinguished ranking member, Senator Biden, 
for his opening comments.


           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 programs ever managed by the United 
Nations, or any other institution for that matter.
    The Oil-for-Food Program has generally been recognized as 
easing 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 efficiency 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 
ensuring 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 
international 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 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 questions 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 
fundamental 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 caretaker government, to referee disputes and 
oversee elections, to referee 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. resolution 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 
securing 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 Senator 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, because 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 community, is communicating a similar 
fear to the American people. 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 
squandered so many opportunities, I think this is its one last 
opportunity. One last opportunity. And the worse the situation 
gets on the ground the more reluctant others are going to 
become to get involved. I read with great interest former 
CENTCOM commander General Zinni's comments today in the Wall 
Street Journal, basically 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 outcome on June 30. But to do so the administration 
needs to get serious 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 
specific 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 
administration and to others. We encourage preparation so that 
the committee and the general public will be informed. Those 
are important 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 answers 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 occasion, 
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 proceed 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. PERMANENT 
REPRESENTATIVE, U.S. MISSION TO THE UNITED NATIONS; 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 
opportunity 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. officials, 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 welcoming this expanded 
investigation and pledging our full cooperation. We must not 
forget that, allegations aside, it is the Iraqi people who 
would have been most hurt by any wrongdoing. It is for them 
most of all that we must take this responsibility very 
seriously and we will urge all United Nations member states to 
do the same.
    The Oil-for-Food Program, as you indicated, was created to 
alleviate the hardships faced by the Iraqi people, hardships 
caused by Saddam Hussein's regime's refusal to comply with its 
obligations and the resulting comprehensive, multilateral 
sanctions regime imposed by the Security Council on Iraq 
following the invasion of Kuwait in August 1990. The Oil-for-
Food Program allowed for the import of humanitarian goods using 
the proceeds from authorized Iraqi oil sales while maintaining 
sanctions on imports other than food and medicine. It 
represented the largest humanitarian relief operation ever 
launched by the international community. 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 
rules and procedures governing implementation of the program 
were the product of negotiation among the 15 members of the 
Security 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 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 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 greater 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 contingency 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 deposited 
into a U.N. escrow account established in 1995 under Resolution 
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 exports; 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 allegations 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 diplomacy 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. Documentation 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 existed 
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 inquiry will investigate allegations of fraud and 
corruption in the administration and management of the Oil-for-
Food Program, including those against United Nations personnel, 
contractors, and entities that entered into contracts with the 
U.N. or with Iraq under the program. We and other Security 
Council members have welcomed the Secretary General's 
initiative and called for international cooperation. Both the 
summary and final report on the findings of this panel will be 
made public. We expect announcements 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 allegations 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 relevant 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 conspired 
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 mismanagement 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 investigated 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 
immediately was instructed by Secretary Powell to convey our concerns 
to UN 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 welcoming this expanded investigation and 
pledging our full cooperation. We must not forget that, corporate and 
official allegations aside, it is the Iraqi people who would have been 
most hurt by any wrongdoing. 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 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 Special Commission (UNSCOM) totaling $2.65 billion. Of the $46 
billion funding for humanitarian 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 extremely useful in the implementation of various programs 
for the people of Iraq.
    The United States Government 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 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 
governing 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 functioning 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 humanitarian 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 embargo. At the insistence of many other 
Security Council members, the program permitted the Government of Iraq 
to control the sale of oil and the selection and negotiation of 
contracts with suppliers of humanitarian items destined for Iraq. The 
United Nations and its UN Office of the Iraq Program (OIP), which 
managed implementation of the program, were not a party to the 
contracts. The contracts were concluded 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 between 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

   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 witnesses who were willing to 
step forward to provide evidence of corruption. Documentation 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 conducting 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, complex efforts to evade the sanctions imposed by the 
Security Council. In fact, the Saddam Government orchestrated the 
largest share of non-compliance with the Council'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 intensified 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 revenue 
for the period 1997 through 2002, this figure appears realistic given 
the magnitude 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 Syrian 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 additional fees above the oil selling price approved by the 
661 Committee were not acceptable, 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 companies 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 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 
opportunity 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 
population. 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 economically 
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 representatives 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 hampered by the lack of 
substantiated evidence--evidence that is now becoming available 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 
approximately $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 produced the first public acknowledgement by Iraqis 
that a systemic kickback system for OFF contracts actually existed. As 
more information comes to light and is evaluated, 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. Thereafter the 
UN Office of Internal Oversight Services (OIOS)--the UN's Inspector 
general--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 
complemented by an Iraqi Board of Supreme Audit investigation. The 
provision of documentation 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 informed 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 members 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 diverting 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 
diversion 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 Committee 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 requested they be provided original copies of 
the complete final report. Both the summary and the final report on the 
findings of this Panel will be made public. We expect 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 
members of the panel are of unimpeachable standing and have the 
capacity and experience 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 documents. 
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 humanitarian 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 deterioration 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 fullest support and that of my staff in your efforts 
to determine the extent and involvement of wrongdoing associated with 
the program.

    The Chairman. Thank you very much, Ambassador Negroponte.
    Coordinator Raphel.

STATEMENT OF HON. ROBIN L. RAPHEL, COORDINATOR, OFFICE 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 
Baghdad between April and August of last year, which gave me a 
particular on the ground perspective of the program during that 
period. The Ministry of Trade was responsible for Iraq's public 
distribution 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 commodities 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 reestablished, 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 emergency 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 apparent.
    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 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 Humanitarian 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 humanitarian 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 
Office 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 regarding 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 percentage 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 infrastructure projects. Since many of these key 
contracts, we understood, 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 contract. And we 
developed a blanket instruction that in the absence of any 
specific information, and we didn't always have specific 
information, 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 submitted to our OFF team for final CPA review. 
This list of contracts was then signed off on by the 
appropriate CPA ministry senior advisor 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 
prioritized and send the relevant information on to the 
appropriate U.N. agency with instructions to renegotiate 
delivery times and locations and to negotiate the removal of 
these extra fees or kickbacks. These renegotiations were 
presided over by the U.N. agencies 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 
members of the committee for your continuing support to Foreign 
Service 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 appreciate their service. So thank you very 
much for that, Mr. Chairman.
    [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 Provisional 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 population was totally dependent upon the ration basket. 
Others would use it to supplement 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 (WFP) was responsible for monitoring the 
arrival and distribution of OFF food shipments 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 disappeared, 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 ``kickback'' 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 ministries 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 Humanitarian Coordinator for Iraq (UNOHCI). The 
general procedures governing the process 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 concerns 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 
outstanding 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 government 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. Officials 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 utility. 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 appropriate Iraqi ministry official was submitted to the 
OFF Team for final CPA review. 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 delivery 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 renegotiate 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 
involve 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 ensure that the prioritized contracts are delivered on a 
timely basis. They have focused 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 Committee 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 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 
period 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 sanctions 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 regards the question of 
the responsibility of members versus particular individuals in 
the United Nations who may have been carrying 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. investigation 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 perceived as 
some of the important abuses of the management of the Oil-for-
Food Program and to that extent I would fault those member 
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 
impose sanction guidelines on the Iraq sanctions that would 
have prevented 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 
mentioned. 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 various regime officials 
and other middlemen. We ultimately succeeded in correcting that 
problem in 2001, ourselves and the British, by insisting in the 
661 Committee on a retroactive pricing system whereby the oil 
would be exported first and then the price would be set later, 
and that could be set in a manner more consistent with market 
realities and therefore the opportunity for corruption and 
kickbacks would be substantially reduced, and was in fact 
substantially reduced. Had we had the cooperation of the 
countries that you mentioned earlier we could have probably 
corrected that problem sooner.
    The Chairman. In your judgment, why did we not have that 
cooperation from those countries, specifically China, France 
and Russia?
    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 countries. 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 sanctions 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 consideration. 
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 
degree?
    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 consensus 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 prospective 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. But these renegotiations will soon be 
completed so these old contracts 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 suppliers. 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 happens 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 ministries. 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 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 complicated and complex matter, as 
I'm sure you can appreciate, of how to put the right kinds of 
checks and balances in and decisionmaking 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 respectfully 
request within a week to get an answer to that specific 
question. 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 
Secretariat, as a practical matter has policing power or 
policing authority over its own personnel. And Kofi Annan as 
the chief administrative officer of the United Nations has that 
authority and that is one of the aspects that he is going to be 
looking into in this independent 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 discretion? 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 either 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 Governing 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 
member 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 questions, 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 
Secretary 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 Secretary General also has the 
right to accept or reject that administrative tribunal. So the 
Secretary General may terminate U.N. employees 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 
undertaken 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 depend 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 occurred, 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 nation 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, including 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 personnel are concerned, they only surfaced in 
late January of this year when a newspaper in the region, in 
the Middle East, published an article listing various 
individuals and entities that had received oil vouchers from 
the Iraqis during the Oil-for-Food Program. But no allegations 
of corruption or allegations of misconduct by United Nations 
personnel had been brought to our attention before 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 evidence available until the CPA, in 
coordination with Iraqi representatives, 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 involved 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 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 renegotiation of old contracts and getting the 
goods shipped into the country. 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 expect 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 
economists 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 production 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 security 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 needed to 
leave to the next Iraqi Government. It's a highly political 
issue; as I mentioned early on, the Iraqis consider this an 
entitlement and with so many other issues on our plate, both on 
the economic 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 needs to be accomplished, as you noted, socially, 
economically, diplomatically?
    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 procuring; 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 sophisticated computer data base. The difficulty for 
them, after hostilities ceased, was really that they had 
problems with their trucking 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 Governor 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 disappeared 
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 
warehouses, making sure none of the food that came in under 
this program 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 people 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 Ministry 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?
    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 desperate 
circumstances had this program not been created. At least 
that's my observation. So, while I'm not excusing it, all the 
$10 billion 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 countries. We were certainly aware of it at the 
time; they were getting it at below world prices. So this idea 
that we're somehow discovering 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 
partner before the gulf war and from 1980 to 1990, 19 percent 
of Jordan's exports were shipped to Iraq while 12 percent of 
Jordan's imports 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 Nations sanctions on 
Iraq.
    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 complaints 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 
statement, I think the program by and large----
    Senator Dodd. Worked.
    Mr. Negroponte. Achieved its purposes. I think what we're 
talking about is the elements of corruption that were involved 
here. And I might just add that, you know, any sanctioned 
regime, inherently 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 
investigation that's ongoing. Will we require U.S. companies, 
oil companies, that participated in the Oil-for-Food Program to 
participate, to testify? What is the administration saying 
about those companies that were directly involved in the 
program and their willingness 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 pursuant to Security Council Resolution 1483. As 
part of that resolution, it was to establish and take the 
responsibility for improving independent 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 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. Ambassador, 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. military and coalition forces seized 
another $926 million, as I understand 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 selection 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 frozen assets from both 
the United States and other countries plus transfers, as 
Ambassador Negroponte said, from the residual balances 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 
questions 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 looking 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 European 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 crafted 
a resolution, I'd say, Mr. Chairman, sort of calling on that, 
and there were some suggestions, Senator Biden made some strong 
suggestions there about the role of NATO, I raised the issue of 
whether 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 necessary. Can you share with us what steps you've taken, 
what conversations 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 partners can support that we're going to find 
a fractured relationship 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 security?
    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 Security 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 outcome of these discussions on the transitional 
governmental arrangements 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 
whatsoever 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:]

           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 humanitarian aid for the Iraqi people during almost a 
decade under Saddam Hussein's regime. 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 profitable 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 purchase 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 
conclusion 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 officials, 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 prevent 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 
understand that international sanctions will never be airtight.
    Even in the best of times, this is a certainty. And especially when 
we are presented with a situation such as this--the coupling of a 
corrupt dictatorship and billions 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 established 
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 reconstruction of Iraq, than I am about problems associated 
with a program that is 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 Program.
    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 proposing in lieu of not supporting 
economic sanctions?
    Mr. Negroponte. Well, I think in many instances they were 
proposing that there not be sanctions at all and that the 
regime be free to export and import entirely freely without any 
kind of restrictions 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 acquiesced 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 having invaded and occupied Kuwait and this is all 
entirely a consequence 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 international 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--
Resolution 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 recognize 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.
    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 advantage 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 dollars 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 estimates of $2 billion that was used 
for palaces. Who knows what they were buying from other 
countries. Three-quarters of this revenue 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, 2\1/2\ 
billion barrels of oil. The French were the second largest 
beneficiary 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 certainly 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 dictators 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 affect the taxpayers of the United States. Ambassador 
Negroponte 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 mentioned earlier we did and we were gratified that $7.6 
billion of unspent Oil-for-Food moneys was made available for 
use in the Development Fund for Iraq. So we're pleased to have 
those funds.
    Senator Allen. Well that's nice, however we also did have 
an appropriation of $20 billion, some of which was for water, 
for sewer, for electricity; some for hospitals and police 
stations and other security-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 governance group will make that determination. But to the 
extent that you hear assignations that we ought to get the 
United Nations involved, primarily as far as the security 
aspects, I think to get NATO forces who actually can have a 
positive impact as far as security, 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 resolutions that might be 
coming forth because of a concern of our investigation 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, including 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 investigation. 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 
General 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 future.
    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 
concerns 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 Clinton 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 regime 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 
pricing 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. 
officials 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 kilogram 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 contracts 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 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 
Ambassador Raphel and I were both in Iraq at that point and saw 
the evidence coming forward from the Iraqis that we saw the 
magnitude 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 accidentally 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 surcharge or what that surcharge should have 
been used for?
    Mr. Kennedy. Basically, the earlier holes were almost 
exclusively 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 refrigerator 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 another 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 
before 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?
    Mr. Negroponte. We thought it was a reasonable report 
although 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 Auditors?
    Mr. Kennedy. Yes sir.
    Senator Sununu. In other words, let me lead you a little 
bit. Were they constantly performing audits? Were there simply 
periodic 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 
established. It is a rotating board comprised essentially of 
the equivalent of the General Accounting Offices of three 
member states. It is currently France, the Philippines, and 
South Africa. Over the course of this it included at times the 
United Kingdom, Ghana, and others. 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 Program 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 contemporaneously?
    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 organization.
    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 findings 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 criminal 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, evidence of theft of United 
        Nations-owned equipment by a United Nations contractor 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 equipment had been stolen, that equipment 
        has apparently been retained by the company'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 officials 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: Evidence 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 procurement irregularities identified by the 
        UNDP in the reserve for field accommodation expenditures made 
        for a $50 million building programme. . . . The value of the 
        loss to the Organization by the fraud is conservatively 
        estimated at approximately two million dollars. As a result of 
        this investigation, the Administrator fully supported the 
        recommendation that the case be referred to the relevant United 
        States authorities. In addition, he dismissed the UNDP official 
        involved. An indictment was issued by the U.S. authorities, and 
        the former staff member was arrested. Efforts to extradite the 
        consultant have been unsuccessful. 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 disciplinary 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 Section is a recommendatory body 
        and cannot prosecute a case before national law-enforcement 
        authorities, institute disciplinary proceedings or take 
        administrative 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 investigators assisted United States law 
        enforcement authorities in the preparation 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 District Court, in April 2001, the 
        United States Court of Appeals upheld the conviction 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 Organization. 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 serving his two-year prison sentence.
   United Nations Interim Administration in Kosovo: OIOS 
        investigated, in cooperation 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 
        revealed 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 fraudulent 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 Development concerning attempted fraud 
        involving an advance fee of $4.7 million as a payment towards a 
        fake air transport contract for the delivery of humanitarian 
        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 
themselves, 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 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 
overall 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 purchasers 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 Committee 
procedures governing the size and nature of those entities authorized 
to purchase Iraqi oil. We have provided under separate cover to the 
Senate Foreign Relations Committee a copy of the UN List, as of March 
11, 2003, of Authorized Oil Purchasers. 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 constantly fluctuating 
global prices for other comparable oils, that produced alleged oil 
surcharges. Because the OSP remained fixed, typically for a 30-day 
period, price differences 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. 
Chairman.
    The Chairman. Thank you very much, Senator Sununu. Let me 
ask more about the United States' participation. We were the 
eleventh largest purchaser of Iraqi oil. As Senator Sununu has 
mentioned, 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 about Saddam and his role in fashioning 
contracts. Were some of these contracts directly with American 
oil firms? Were they observant 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 important direct buyers. But after that our direct 
purchases from Iraq fell off to the point that, in terms of 
direct purchases, we represented 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 
suggesting 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 sellers? 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 
Saddam 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 listed merely what we call the COM number, 
the identification number, 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 
General'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 insisted 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 names might be redacted. But I 
believe that the fundamental motivation of the Secretary 
General is to have maximum transparency.
    The Chairman. Well, I hope so. Clearly, the credibility of 
this entire 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 authority? 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 involved 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 Program, which were held in two banks, principally, were 
there. It would be entirely speculation on my part to say one 
thing or another 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 information 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 letter 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 accounts 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 Congress? Why, Elliot Spitzer might take a 
look at it, or perhaps Morgenthau, 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 
transparency. 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, completely 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 participation. I started my statement today by saying 
that this is integral 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. emissary. 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 credibility 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 abilities 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 corruption 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 without 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 
compromise 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 participation 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 responsibility 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 colleague.
    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 Government did, i.e., Saddam Hussein, purchase, 
what services were purchased 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 have that; you don't need 
the U.N. to figure that out, you can figure 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 
Security 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 information. 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\
---------------------------------------------------------------------------
    \1\ See Appendix page 157.
---------------------------------------------------------------------------
    [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 representatives in 
response to your request.
    Your request, made during my April 7, 2004, appearance before the 
Senate Foreign Relations Committee, raises the more fundamental issue 
of why the UN did not make public the specific information associated 
with Iraqi oil and OFF humanitarian 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 indication 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 exporting 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. Beyond 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 published in the St. Petersburg Times, December 20 of 
last year, there is the following paragraph, quote, ``But the 
council''--referring to the governing council--``has been 
dogged by allegations of nepotism, 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 council 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 purpose of my question, so you understand. You're 
welcome to comment if you'd like.
    Ms. Raphel. Let me just say a couple of things. Thank you, 
Senator. 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 investigate them. We, the CPA, the Defense Department, 
the State Department. 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. taxpayers' 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 Development 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 sovereign, 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 
consideration, to have some sort of international stamp of 
approval to improve the kind of international confidence that 
you're speaking about in the procedures of the budgeting, 
revenue, and expenditures 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 rocket 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 conditions 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 
international 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 talking 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 connected. And so the 
first question is, how about just plain U.S. dollars? 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 already 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, 
obviously.
    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 opportunity to ask questions in person. 
We will request the cooperation of the witnesses in responding 
as rapidly as possible for the fullness 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 
General 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 testimony. 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.

   STATEMENT OF JOSEPH A. CHRISTOFF, DIRECTOR, INTERNATIONAL 
       AFFAIRS AND TRADE, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Christoff. Thank you, Mr. Chairman. Mr. Chairman, 
members of the committee, thank you for inviting GAO to this 
very important 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 Security Council members this surcharge was up to 
50 cents per barrel 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 authority to negotiate contracts directly with companies 
that purchased oil or supplied commodities. This control over 
contract negotiations 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 whether the Office performed 
that function. Third, the Office of Iraq Program 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 
retroactive 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 shipment 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 renegotiated to remove the illicit 
commissions. The remaining 2,200 contracts were not continued 
because the Iraqi ministries no longer needed the commodities, 
suppliers were concerned about security, or suppliers did not 
exist. Nearly one-half of the renegotiated contracts 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 contracts. CPA also did not have enough staff to 
administer the contracts. The CPA intended to have 48 coalition 
staff but as of today has 16. In addition, CPA's failed plans 
to privatize the food distribution system and delayed 
negotiations with the World Food Program resulted in diminished 
food stocks and localized shortages.
    And finally, Iraq faces two key challenges in assuming 
responsibility for the Oil-for-Food Program. First, Iraq must 
ensure that the remaining contracts are managed with 
transparent and accountable 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 system. Although 60 percent of the population 
relies on food subsidies, the system is expensive and accounts 
for 25 percent of Iraq's budget.
    Mr. Chairman, that concludes my statement. I'm pleased to 
answer 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 billion 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 commissions 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 responsible for monitoring oil 
smuggling, screening contracts for items that could have military uses, 
and approving oil and commodity contracts. While the sanctions 
committee 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, coordination, 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 commodities and manage at least $32 billion in 
expected donor reconstruction funds. The CPA has taken steps, such as 
appointing inspectors general, to build internal control 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 stability 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 address growing concerns about the humanitarian situation 
after international sanctions 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\
---------------------------------------------------------------------------
    \1\ All references to Oil for Food estimates are in 2003 constant 
U.S. dollars.
---------------------------------------------------------------------------
    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). Specifically, we will (1) report on our 
estimates of the revenue diverted from the program 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. officials 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 requested 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 transferred 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 contract 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 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 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, screening contracts for items that 
        could have military uses, and approving oil and commodity 
        contracts. While the sanctions committee responded to illegal 
        surcharges on oil, it is unclear what actions it took to 
        respond to illicit commissions on commodity contracts.

   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, amendments, and letters of credit associated with 
        the 3,000 contracts. These problems, along with inadequate CPA 
        staffing at the time of the transfer, hampered efforts 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 remaining 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 subsidy 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 equipment to 
Iraq and established a sanctions committee to monitor compliance and 
progress in implementing the sanctions. The members of the sanctions 
committee were members of the Security Council. Subsequent Security 
Council resolutions specifically prohibited nations from exporting to 
Iraq items that could be used to build chemical, biological, or nuclear 
weapons. In 1991, the Security Council offered to let Iraq sell oil 
under a U.N. program to meet its peoples' basic needs. The Iraqi 
government rejected the offer, and over the next 5 years, the United 
Nations reported food shortages and a general deterioration in social 
services.
    In December 1996, the United Nations and Iraq agreed on the Oil for 
Food program, which permitted Iraq to sell up to $1 billion worth of 
oil every 90 days to pay for food, medicine, and humanitarian goods. 
Subsequent U.N. resolutions increased the amount of oil that could be 
sold and expanded the humanitarian goods that could be imported. In 
1999, the Security Council removed all restrictions on the amount of 
oil Iraq could sell to purchase civilian goods. The United Nations and 
the Security Council monitored and screened contracts that the Iraqi 
government signed with commodity suppliers and oil purchasers, and 
Iraq's oil revenue was placed in a U.N.-controlled escrow account. In 
May 2003, U.N. resolution 1483 requested the U.N. Secretary General to, 
transfer the Oil for Food program to the CPA by November 2003.
    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 
arresting the decline in living conditions and improving the 
nutritional status of the average 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
 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 illicit 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 suppliers.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    Oil was smuggled out through several routes, according to U.S. 
government officials and oil industry experts. Oil entered Syria by 
pipeline, crossed the borders of Jordan and Turkey by truck, and was 
smuggled through the Persian Gulf by ship. In addition to revenues from 
oil smuggling, the Iraqi government levied surcharges against oil 
purchasers and commissions against commodity suppliers participating in 
the Oil for Food program. According to some Security Council members, 
the surcharge was up to 50 cents per barrel of oil and the commission 
was 5 to 15 percent of the commodity contract.
    In our 2002 report, we estimated that the Iraqi regime received a 
5-percent illicit commission on commodity contracts. However, a 
September 2003 Department of Defense review found that at least 48 
percent of 759 Oil for Food contracts that it reviewed were overpriced 
by an average of 21 percent.\4\ Defense officials found 5 contracts 
that included ``after-sales service charges'' of between 10 and 20 
percent. In addition, interviews by U.S. investigators with high-
ranking Iraq regime officials, including the former oil and finance 
ministers, confirmed that the former regime received a 10-percent 
commission from commodity suppliers.
---------------------------------------------------------------------------
    \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 (Washington, D.C.: Sept. 
12, 2003).
---------------------------------------------------------------------------
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 contracts for items that could have military uses, and 
approving oil and commodity contracts. The sanctions committee 
responded to illegal surcharges on oil, but it is unclear what actions 
it took to respond to commissions on commodity contracts.
Iraq Negotiated Directly with Oil Purchasers and Suppliers
    U.N. Security Council resolutions and procedures recognized the 
sovereignty of Iraq and gave the Iraqi government authority to 
negotiate contracts and decide on contractors. Security Council 
resolution 986 of 1995 authorized states to import petroleum products 
from Iraq, subject to the Iraqi government's endorsement of 
transactions. Resolution 986 also stated that each export of goods 
would be at the request of the government of Iraq. Security Council 
procedures for implementing resolution 986 further stated that the 
Iraqi government or the United Nations Inter-Agency Humanitarian 
Program would contract directly with suppliers and conclude the 
appropriate contractual arrangements. Iraqi control over contract 
negotiations may have been one important factor in allowing Iraq to 
levy illegal surcharges and commissions. 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 commodities 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 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 distribution of Iraq's commodity 
purchases. The initial distribution plans focused on food and medicines 
while subsequent plans were expansive and covered 24 economic sectors, 
including electricity, oil, and telecommunications.
    The sanction committee's procedures for implementing Security 
Council resolution 986 stated that experts in the Secretariat were to 
examine each proposed Iraqi commodity contract, in particular the 
details of price and value, and to determine whether the contract items 
were on the distribution plan. 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. resolution 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 deployed about 78 U.N. contract monitors to 
verify shipments and authenticate the supplies for payment. OIP 
employees were able to visually inspect 7 to 10 percent of the approved 
deliveries.
    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 General established an 
escrow account at BNP Paribas into which Iraqi oil revenues were 
deposited and letters of credit were issued to suppliers having 
approved contracts. The U.N. Board of Audit, a body of external public 
auditors, audited the account. 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 contracts to prevent the purchase of items 
that could have military uses, and (3) approving Iraq's oil and 
commodity contracts.
    U.N. Security Council resolution 661 of 1990 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 implementation. As early as 
June 1996, the Maritime Interception Force, a naval force of coalition 
partners including the United States and Great Britain, informed the 
sanctions committee that oil was being smuggled out of Iraq through 
Iranian territorial waters. In December 1996, Iran acknowledged the 
smuggling and reported that it had taken action. In October 1997, the 
sanctions committee was again informed about smuggling through Iranian 
waters. According to multiple sources, oil smuggling also occurred 
through Jordan, Turkey, Syria, and the Gulf. Smuggling was a major 
source of illicit revenue for the former Iraqi regime through 2002. It 
is unclear 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 
responsible for about 90 percent of the holds placed on goods to be 
exported to Iraq. As of April 2002, about $5.1 billion worth of goods 
were being held for shipment to Iraq.
    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 contracts.\5\ In March 2001, the 
United States informed the Security Council about allegations that 
Iraqi government officials were receiving illegal surcharges on oil 
contracts, and illicit commissions on commodity contracts.\6\ According 
to OIP officials, the Security Council took action on the allegations 
of surcharges in 2001 by implementing retroactive pricing for oil 
contracts.\7\ However, it is unclear what actions the sanctions 
committee took to respond to illicit commissions on commodity 
contracts. At that time, there was increasing concern about the 
humanitarian situation in Iraq and pressure on the United States to 
expedite its review process.
---------------------------------------------------------------------------
    \5\ Under fast-track procedures established by Security Council 
resolution 1383 of 1999, OIP could approve contracts that contained 
only humanitarian goods.
    \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 process.
    \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.
---------------------------------------------------------------------------
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 database errors and did not include all contracts, 
amendments, and letters of credit associated with the 3,000 contracts. 
These data problems, coupled with inadequate staffing 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 planning 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 transfer, 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 ministries--and to 
change delivery dates and locations. These fees were either calculated 
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 Defense 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 negotiated the contracts. For example:

   The review did not recommend continuing 762 contracts, worth 
        almost $1.2 billion, 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 reductions or specification changes. Another 180 
        contracts were considered fully delivered. 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 additional 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, Turkey, 
the United Arab Emirates, and France.
Inadequate Information and Staffing Affected Transfer and 
        Implementation of Contracts
    According to CPA officials and documents, the incomplete and 
unreliable contract information the CPA received from the United 
Nations has hindered CPA's ability 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 
November 24, 2003, they stated that they had transferred all contract 
information to the CPA.
---------------------------------------------------------------------------
    \8\ U.N. Resolution 1483, para. 16(f) (May 2003).
---------------------------------------------------------------------------
    CPA officials and documents report that the CPA has not received 
complete information, 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 addition, 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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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 oversee the receipt and delivery of Oil for Food 
commodities. The CPA authorized 48 coalition positions, to be assisted 
by Iraqis from various ministries. However, according 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 coalition staff, including 18 staff whose tours ended in January 
2004. U.S. and WFP officials 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 official stated that the Oil 
for Food program had been thrust upon an already overburdened 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 Management 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 government.
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 resulted 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 December 2003, as the security 
environment worsened, the CPA administrator reversed his decision to 
reform the food ration system and left the decision to the provisional 
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 emergency 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 procurement 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 timely 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 affected 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 distribution of Oil for Food commodities and the 
billions in international assistance expected 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 program to help ensure that the remaining contracts are managed 
with transparent and accountable controls. Building these internal 
control and accountability measures into the operations of Iraqi 
ministries will also help safeguard the $18.4 billion in fiscal year 
2004 U.S. reconstruction funds and at least $13.8 billion pledged by 
other countries.
    To address these concerns and oversee government operations, the 
CPA administrator 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 establishment of two independent agencies 
to work with the inspectors general--the Commission 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 ministries.
    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. Coalition 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 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 capital projects. According to a September 2003 joint 
U.N. and World Bank needs assessment of Iraq,\10\ the food subsidy, 
given out as a monthly ration to the entire population, 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 distribution 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.
---------------------------------------------------------------------------
    \10\ United Nations/World Bank, Joint Iraq Needs Assessment: 
Agriculture, Water Resources, and Food Security (New York: October 
2003).
---------------------------------------------------------------------------
    Mr. Chairman and Members of the Committee, this concludes my 
prepared statement. I will be happy to answer any questions you may 
have.
    Mr. Chairman and Members of the Committee, this concludes my 
prepared statement. 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
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Aug. 2, 1990             U.N. Security Council        Iraqi forces invaded Kuwait. Resolution 660 condemned the
                          Resolution 660               invasion and demands immediate withdrawal from Kuwait.
----------------------------------------------------------------------------------------------------------------
Aug. 6, 1990             U.N. Security Council        Imposed economic sanctions against the Republic of Iraq.
                          Resolution 661               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        Mandated that Iraq must respect the sovereignty of Kuwait
                          Resolution 687 (Cease-Fire   and declare and destroy all ballistic missiles with a
                          Resolution)                  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     The U.N. Special Commission (UNSCOM) was charged with
                          Commission                   monitoring Iraqi disarmament as mandated by U.N.
                                                       resolutions and to assist the International Atomic Energy
                                                       Agency in nuclear monitoring efforts.
----------------------------------------------------------------------------------------------------------------
Aug. 15, 1991            U.N. Security Council        Proposed the creation of an Oil for Food program and
                          Resolution 706               authorized an escrow account to be established by the
                                                       Secretary General. Iraq rejected the terms of this
                                                       resolution.
----------------------------------------------------------------------------------------------------------------
Sep. 19, 1991            U.N. Security Council        Second attempt to create an Oil for Food program. Iraq
                          Resolution 712               rejected the terms of this resolution.
----------------------------------------------------------------------------------------------------------------
Oct. 2, 1992             U.N. Security Council        Authorized transferring money produced by any Iraqi oil
                          Resolution 778               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        Allowed Iraq to sell $1 billion worth of oil every 90
                          Resolution 986               days. Proceeds were to be used to procure foodstuffs,
                                                       medicine, and material and supplies for essential
                                                       civilian needs. Resolution 986 was supplemented by
                                                       several U.N. resolutions over the next 7 years that
                                                       extended the Oil for Food program for different periods
                                                       of time and increased the amount of exported oil and
                                                       imported humanitarian goods.
----------------------------------------------------------------------------------------------------------------
Mar. 27, 1996            U.N. Security Council        Established the export and import monitoring system for
                          Resolution 1051              Iraq.
----------------------------------------------------------------------------------------------------------------
May 20, 1996             Government of Iraq and the   Signed a memorandum of understanding allowing Iraq's
                          United Nations               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 products through
                                                       Iranian territorial waters in violation of resolution 661
                                                       to the Security Council sanctions committee.
----------------------------------------------------------------------------------------------------------------
Jul. 9, 1996             U.N. Security Council        Committee members asked the United States for more factual
                          Sanctions Committee          information about smuggling allegations, including the
                                                       final destination and the nationality of the vessels
                                                       involved.
----------------------------------------------------------------------------------------------------------------
Aug. 28, 1996            U.S. delegation to the U.N.  Provided briefing on the Iraqi oil smuggling allegations
                          Security Council Sanctions   to the sanctions committee.
                          Committee
----------------------------------------------------------------------------------------------------------------
Dec. 3, 1996             Islamic Republic of Iran     Acknowledged that some vessels carrying illegal goods and
                          Permanent Representative     oil to and from Iraq had been using the Iranian flag and
                          to the United Nations        territorial waters without authorization and that Iranian
                                                       authorities had confiscated forged documents and
                                                       manifests. Representative agreed to provide the results
                                                       of the investigations to the sanctions committee once
                                                       they were available.
----------------------------------------------------------------------------------------------------------------
Dec. 10, 1996            Iraq and the United Nations  Phase I of the Oil for Food program began.
----------------------------------------------------------------------------------------------------------------
Jun. 4, 1997             U.N. Security Council        Extended the term of resolution 986 another 180 days
                          Resolution 1111              (phase II).
----------------------------------------------------------------------------------------------------------------
Sep. 12, 1997            U.N. Security Council        Authorized special provision to allow Iraq to sell
                          Resolution 1129              petroleum in a more favorable time frame.
----------------------------------------------------------------------------------------------------------------
Oct. 8, 1997             Representatives of the       Brought the issue of Iraqi smuggling petroleum products
                          United Kingdom of Great      through Iranian territorial waters to the attention of
                          Britain and Northern         the U.N. Security Council sanctions committee.
                          Ireland to the United
                          Nations
----------------------------------------------------------------------------------------------------------------
Nov. 18, 1997            Coordinator of the           Reported to the U.N. Security Council sanctions committee
                          Multinational Interception   that since February 1997 there had been a dramatic
                          Force (MIF)                  increase in the number of ships smuggling petroleum from
                                                       Iraq inside Iranian territorial waters.
----------------------------------------------------------------------------------------------------------------
Dec. 4, 1997             U.N. Security Council        Extended the Oil for Food program another 180 days (phase
                          Resolution 1143              Ill).
----------------------------------------------------------------------------------------------------------------
Feb. 20, 1998            U.N. Security Council        Raised Iraq's export ceiling of oil to about $5.3 billion
                          Resolution 1153              per 6-month phase (phase IV).
----------------------------------------------------------------------------------------------------------------
Mar. 25, 1998            U.N. Security Council        Permitted Iraq to export additional oil in the 90 days
                          Resolution 1158              from March 5, 1998, to compensate for delayed resumption
                                                       of oil production and reduced oil price.
----------------------------------------------------------------------------------------------------------------
Jun. 19, 1998            U.N. Security Council        Authorized Iraq to buy $300 million worth of oil spare
                          Resolution 1175              parts to reach the export 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       Public Law 105-338 Sec. 4 authorized the president to
                          Liberation Act               provide assistance to Iraqi democratic opposition
                                                       organizations.
----------------------------------------------------------------------------------------------------------------
Oct. 31, 1998            Iraqi termination of U.N.    Iraq announced it would terminate all forms of interaction
                          Special Commission           with UNSCOM and that it would halt all UNSCOM activity
                          (UNSCOM) Activity            inside Iraq.
----------------------------------------------------------------------------------------------------------------
Nov. 24, 1998            U.N. Security Council        Renewed the Oil for Food program for 6 months beyond
                          Resolution 1210              November 26 at the higher levels established by
                                                       resolution 1153. The resolution included additional 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 weapons of mass destruction and potential
                                                       delivery systems.
----------------------------------------------------------------------------------------------------------------
Mar. 3, 1999             President Clinton Report to  President Clinton provided the status of efforts to obtain
                          Congress                     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        Renewed the Oil for Food program another 6 months (phase
                          Resolution 1242              VI).
----------------------------------------------------------------------------------------------------------------
Oct. 4, 1999             U.N. Security Council        Permitted Iraq to export an additional amount of $3.04
                          Resolution 1266              billion of oil to make up for revenue deficits in phases
                                                       IV and V.
----------------------------------------------------------------------------------------------------------------
Nov. 19, 1999            U.N. Security Council        Extended phase VI of the Oil for Food program for 2 weeks
                          Resolution 1275              until December 4, 1999.
----------------------------------------------------------------------------------------------------------------
Dec. 3, 1999             U.N. Security Council        Extended phase VI of the Oil for Food program for 1 week
                          Resolution 1280              until December 11, 1999.
----------------------------------------------------------------------------------------------------------------
Dec. 10, 1999            U.N. Security Council        Renewed the Oil for Food program another 6 months (phase
                          Resolution 1281              VII).
----------------------------------------------------------------------------------------------------------------
Dec. 17, 1999            U.N. Security Council        Abolished Iraq's export ceiling to purchase civilian
                          Resolution 1284              goods. Eased restrictions on the flow of civilian goods
                                                       to Iraq and streamlined the approval process for some oil
                                                       industry spare parts. Also established the United Nations
                                                       Monitoring, Verification and Inspection Commission
                                                       (UNMOVIC).
----------------------------------------------------------------------------------------------------------------
Mar. 31, 2000            U.N. Security Council        Increased oil spare parts allocation from $300 million to
                          Resolution 1293              $600 million under phases VI and VII.
----------------------------------------------------------------------------------------------------------------
Jun. 8, 2000             U.N. Security Council        Renewed the Oil for Food program another 180 days until
                          Resolution 1302              December 5, 2000 (phase VIII).
----------------------------------------------------------------------------------------------------------------
Dec. 5, 2000             U.N. Security Council        Extended the Oil for Food program another 180 days (phase
                          Resolution 1330              IX).
----------------------------------------------------------------------------------------------------------------
Mar. 8, 2001             Deputy U.S. Representative   Ambassador Cunningham acknowledged Iraq's illegal re-
                          to the United Nations        export of humanitarian supplies, oil smuggling,
                          Remarks to the Security      establishment of front companies, and payment of
                          Council                      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. Representative   Ambassador Cunningham addressed questions regarding
                          to the United Nations        allegations of surcharges on oil and smuggling.
                          Remarks to the Security      Acknowledged that oil industry representatives and other
                          Council                      Security Council members provided the United States
                                                       anecdotal information about Iraqi surcharges on oil
                                                       sales. Also acknowledged companies claiming they were
                                                       asked to pay commissions on contracts.
----------------------------------------------------------------------------------------------------------------
Jun. 1, 2001             U.N. Security Council        Extended the terms of resolution 1330 (phase IX) another
                          Resolution 1352              30 days.
----------------------------------------------------------------------------------------------------------------
Jul. 3, 2001             U.N. Security Council        Renewed the Oil for Food program an additional 150 days
                          Resolution 1360              until November 30, 2001 (phase X).
----------------------------------------------------------------------------------------------------------------
Nov. 29, 2001            U.N. Security Council        The resolution stipulated that a new Goods Review List
                          Resolution 1382              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        UNMOVIC reviewed export contracts to ensure that they
                          Resolution 1409              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        MIF reported that there had been a significant reduction
                          Sanctions Committee          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        Extended phase XII of the Oil for Food program another 9
                          Resolution 1443              days.
----------------------------------------------------------------------------------------------------------------
Dec. 4, 2002             U.N. Security Council        Renewed the Oil for Food program another 180 days until
                          Resolution 1447              June 3, 2003 (phase XIII).
----------------------------------------------------------------------------------------------------------------
Dec. 30,2002             U.N. Security Council        Approved changes to the list of goods subject to review
                          Resolution 1454              and the sanctions committee.
----------------------------------------------------------------------------------------------------------------
Mar. 12, 2003            U.N. Security Council        Chairman reported on a number of alleged sanctions
                          Sanctions Committee          violations noted by letters from several countries and
                                                       the media from February to November 2002. Alleged
                                                       incidents involved Syria, India, Liberia, Jordan,
                                                       Belarus, Switzerland, Lebanon, Ukraine, and the United
                                                       Arab Emirates.
----------------------------------------------------------------------------------------------------------------
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        Adjusted the Oil for Food program and gave the Secretary
                          Resolution 1472              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 application of any provision of the Iraq
                                                       Sanctions Act of 1990.
----------------------------------------------------------------------------------------------------------------
Apr. 24, 2003            U.N. Security Council        Extended provision of resolution 1472 until June 3, 2003.
                          Resolution 1476
----------------------------------------------------------------------------------------------------------------
May 1, 2003              Operation Iraqi Freedom      End of major combat operations and beginning of post-war
                                                       rebuilding efforts.
----------------------------------------------------------------------------------------------------------------
May 22, 2003             U.N. Security Council        Lifted civilian sanctions on Iraq and provided for the end
                          Resolution 1483              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 
identified 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 evaluation 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 
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 valued at $6.9 billion. Approximately 80 
percent of these contracts 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 understanding 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 contracts submitted 
for approval, validating pricing was not part of their mission 
since no U.N. resolution had tasked them with assessing the 
price reasonableness of the contracts. Therefore the Office of 
Iraqi Programs performed very limited, if any, pricing reviews 
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 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 purchased 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 expired 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 themselves since the contract terms and conditions 
often do not specifically identify these surcharges. However, 
the evaluation did identify several examples of after-sales 
service charges that were included, 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 Program to the CPA in northern Iraq. We've been 
providing recommendations. We have not been issuing audit 
reports but we have been providing advisory recommendations 
related to inventory controls to the CPA; related to cash 
management controls; related 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 
recently 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 warehouses 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; inventory stored in the open air 
without roofs or ceilings or protection or even tarps; 
furniture being damaged by being piled into large heaps in an 
open environment in the warehouses, and a couple 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 
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 controls, 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 advisory 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, Senator.
    [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 requirement 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 understanding 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 purchased from a legal (United Nations 
Resolutions) perspective. Although OIP informed us that they did, on 
occasion, raise pricing issues during its review of contracts submitted 
for approval, validating pricing was not part of their mission since no 
UN resolution had tasked OIP with assessing the price reasonableness of 
contracts. 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:

   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. Department 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 
contracts. 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 contracts evaluated. The team was unable to form a 
definitive conclusion on 44 contracts, 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:


    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 identify contracts with 
illicit surcharges (``after sales service charges''). The team found 
that identifying the existence of surcharges is generally not possible 
from an examination of the contract documents alone since the contract 
terms and conditions do not specifically identify the surcharges. 
However the evaluation did identify five examples 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 Coordination (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 observations 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 appear environmentally 
appropriate for such items; inventory stored in the open air; furniture 
damaged by being piled into large heaps in an open environment; 
computers, printers, scanners, copiers, and other office equipment 
damaged by pigeon droppings. In this example, we believe these obvious 
inventory control issues are ongoing 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.
   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 administration 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 independent 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 compliance 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 
committee 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\
---------------------------------------------------------------------------
    \2\ See Appendix page 157.
---------------------------------------------------------------------------
    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 
provision of the report.
    Mr. Christoff, was the Oil-for-Food Program structured 
differently 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 reasonableness 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 aspects of the contracts.
    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 purchasers 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 concerns. 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 example of an item that was placed on hold 
was chemical fertilizers. It was placed on hold because of the 
concern about the reconstitution 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 require 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 picture 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 received 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 example, 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.
    The Chairman. There have been allegations that Saddam 
Hussein infiltrated the United Nations organization with his 
own intelligence officials. Is there any evidence that you have 
found of that?
    Mr. Christoff. No sir, that would have been an excellent 
question 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 
kickbacks? 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 handle 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 suppliers of commodities were 
Russia, Egypt, France, China, and Jordan. 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 identified what we saw--we built a data base of 
each and every contract, 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 alphabetically 
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 missions that amounted to--and we looked at a total of 
about 400 companies, 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 business, 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 alternated 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, entities were doing well in this situation, 
and that there was reticence on the part of the Security 
Council or the U.N. administration, either through ignorance of 
all of it or through reluctance to know much more. Perhaps we 
would not know what we know now without the United States 
having been in a position to finally seize the records and to 
begin to read what is there. No other nation, perhaps, 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 therefore 
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 
proceed. 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 country, 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?
    Mr. Thibault. Senator, we saw no instances, and you're 
exactly right about the spare parts. To use my automobile 
example, the vehicles, 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 
disapprovals based on cost.
    The Chairman. Let me ask both of you, as I did of our first 
witnesses, 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 appreciate 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 
Foreign 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 hearing, 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 
reconvene subject to the call of the Chair.]
                                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. Getting 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. relations.
    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 involving the Oil for Food (OFF) Program, 
which was established by the United Nations (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 inventoried, 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 Ministry of Oil, that 
certain individuals, including U.N. staff members, purportedly received 
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 advisors, and Regional Governance Coordinators to identify 
and safeguard all OFF-related information, including contracts, 
amendments and annexes to contracts, and supporting materials. My 
directive states that documents should be inventoried and recorded, 
with notations of all irregularities--including any evidence of bribes, 
kickbacks 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 officials and Iraqi, nationals 
in safeguarding and inventorying records at key ministries.
    At CPA's request, the Iraqi Board of Supreme Audit (BSA) has agreed 
to participate fully in the process to safeguard and inventory records. 
This Board, now comprising some 1,200 employees, will provide impartial 
oversight. The BSA has assigned 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 purpose. In each ministry, 
the CPA-BSA teams seek meetings with the Minister or Inspector 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 
information 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 administering 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 audits 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 following the imposition of sanctions. All families in Iraq 
received a monthly food ration 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 resolution 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 status of children.
    According to the UN Food and Agriculture Organization and The 
American Journal 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.

 
------------------------------------------------------------------------
 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 conducted 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 Government 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 reflected deterioration in the nutritional status of 
children, when compared to the results reported by the Harvard Study 
Team in 1991. The Harvard Team had observed 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 instance, showed that 
nutrition rates were improving, with chronic malnutrition measured at 
30%, underweight at 19.5% and acute malnutrition at 7.8%. This 
improvement continued and was confirmed through a 2002 UNICEF-GOI 
survey. Chronic malnutrition was measured at 23.1%, underweight at 9.4% 
and acute malnutrition at 4%.

 
------------------------------------------------------------------------
                                       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.)



 
------------------------------------------------------------------------
                                       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 Medicine 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 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 network 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 heavily 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 vaccines, syringes and cold chain equipment. The TB 
control programme, blood transfusions, and water quality control 
services could not function due to lack of laboratory reagents and 
kits. Emergency and ambulance services for the referral of patients 
could not carry out their functions, due to lack of or inadequate 
provision of equipment and supplies. A declining number of laboratory 
investigations and surgeries could be performed, as seen in the 
following tables.

 
------------------------------------------------------------------------
                                     Laboratory Investigation
                        ------------------------------------------------
                                  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.



 
------------------------------------------------------------------------
                                       Surgical Operations
                        ------------------------------------------------
                                  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 purchase 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 contracts involving many actors before contracts reached 
the Office of the Iraq Programme 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 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 nevertheless 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 essential drugs--e.g. anti-tuberculosis drugs--and of 
medical supplies such as test tubes, syringes, needles and sutures. 
Shortage of disposable syringes adversely affected immunization 
programmes and the safety of injections. Medical equipment such as 
infant incubators, dialysis machines, ultrasonic and x-ray equipment, 
electrocardiograph 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 medicines, 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.

 
------------------------------------------------------------------------
            Year                            Cases Reported
------------------------------------------------------------------------
1997                         13,959
1998                          9,684
1999                          4,134
2000                          3,859
2001                          1,120
------------------------------------------------------------------------


 
------------------------------------------------------------------------
            Year                     Total Confirmed Polio Cases
------------------------------------------------------------------------
1996                         21
1997                         28
1998                         37
1999                          8
2000                          4
2001                          0
------------------------------------------------------------------------


 
------------------------------------------------------------------------
            Year             Cases Reported (incidence rate per 100,000)
------------------------------------------------------------------------
1989                          96 cases (0.53)
1990                         168 cases (0.89)
1991                         511 cases (2.61)
1992                         369 cases (1.91)
1993                         239 cases (1.20)
1994                         132 cases (0.66)
1995                         119 cases (0.58)
1996                         258 cases (1.18)
1997                         290 cases (1.29)
1998                         160 cases (0.67)
1999                         142 cases (0.59)
2000                          34 cases (0.14)
2001                          32 cases (0.12)
------------------------------------------------------------------------


    By 2002 the OFFP inputs to the health system--from sutures to 
laboratory equipment--had translated into improved health services. 
Compared to 1997, major surgeries had increased by 40 percent and 
laboratory investigations by 25 percent in the center and south. 
Throughout the country there had been a substantial reduction 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: approximately 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 medicines, 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 limitations 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 situation 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

 
------------------------------------------------------------------------
                                                   Average annual value
                        Health supplies received   per capita of health
                          (Pharmaceuticals and       supplies received
                             Equipment) \1\         (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 include 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 Laboratories 
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 Terrassiere,
                                       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:

    It is my understanding that the Senate Foreign Relations Committee 
will be conducting 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 company was authenticating goods 
imported into Iraq under the UN Oil-for-Food Program.
    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 unfairly 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 humanitarian 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 escrow 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 appointed 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 respective 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 
authentication at this entry point.
    During the course of the Oil for Food Programme, the Office of the 
Iraq Programme (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 contracted 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 required to select a single point of entry to Iraq. Once an 
application had been approved 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 reflecting 
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 expired. In such cases suppliers 
were required to submit an extension request and OIP issued an extended 
approval letter.
    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 employed by customs organizations which typically 
carry out physical inspection of 3 per cent of imported goods. 
Authentication for the remaining 90 per cent of contracts 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 
designed to be independent and deferral of authentication was not 
mandated by the Security Council. In cases where the Government was not 
satisfied with the delivered 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 standardized 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 dispatched 
electronically to the United Nations Treasury whereupon an instruction 
was issued by Treasury to BNP Paribas to effect payment against the 
letter of credit.
                              agency goods
    The payment system for agency goods operated under different 
procedures. Agencies 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 agencies present their 
goods to the independent Inspection Agent for authentication purposes 
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 border 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 locations within the region agreed, in advance, 
with the UN agencies. The UN agencies and programmes were assigned 
responsibility for the storage and onward distribution 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 agencies were 
advised to request that the goods be authenticated only once they had 
assumed full control of the consignments. Such requests were submitted, 
by the agencies, to OIP. Once OIP had ascertained that the contracts 
had been prioritized pursuant to resolution 1472 and the contract 
amended accordingly, Cotecna was advised to inspect and authenticate 
the goods. In certain, exceptional, cases OIP agreed, with agencies 
such as WFP or WHO, to carry out the inspection of the goods but defer 
authentication until the agency had confirmed that the goods had been 
delivered to Iraq or that quality control tests had been successfully 
concluded.
      implementation of security council resolution 1483--revised 
                        authentication mechanism
    On 22 May 2003 the Security Council adopted resolution 1483 which, 
in addition to terminating the Oil for Food Programme, required the UN 
agencies and programmes, in coordination with CPA, to establish the 
relative utility of each approved and funded contract for delivery to 
Iraq.
    This presented a requirement to create a revised authentication 
mechanism based upon authentication within Iraq rather than the 
alternative delivery locations established under resolution 1472.
    In July 2003 OIP staff met with representatives of the CPA in 
Baghdad to negotiate an authentication mechanism based upon inspection 
of goods within Iraq. It was agreed that Cotecna would establish bases 
in Kirkuk, Baghdad, Basrah and Umm Qasr, from which inspectors would be 
deployed to inspect goods at delivery locations nominated by each Iraqi 
Ministry. This plan was abandoned, one week prior to its 
implementation, following the evacuation of UN staff and contractors 
from Iraq after the bombing of the UN headquarters on 19 August 2003.
    A variety of alternative options were discussed by OIP, CPA and 
Cotecna. Discussions were limited by the fact that the UN Security 
Coordinator would not approve any return of Cotecna inspectors to the 
former sites or any other location within Iraq.
    As an emergency measure an ad hoc authentication mechanism was 
agreed and suppliers were advised that the small volume of contracts 
already renegotiated for delivery to Iraq under resolution 1483 could 
proceed and that CPA would advise Cotecna to authenticate based upon 
confirmation of the receipt of the goods by the Iraqi Ministries.
    In September 2003 further discussions took place in Amman, Jordan 
between CPA, Cotecna and OIP. As a result of these discussions the 
agreement of the Governments of Turkey, Syria and Jordan was obtained 
to co-locate Cotecna inspectors at Silopi, At Tanf and Al Karama. These 
are the Turkish, Syrian and Jordanian customs stations respectively 
adjacent to Zakho, Al Walid and Trebil--the former Cotecna sites in 
Iraq.
    Due to the absence of a corresponding land boundary, Umm Qasr 
presented greater challenges. It was eventually agreed that 
containerized traffic would discharge at Dubai (Port Rasheed, Port 
Jebel Ali), Abu Dhabi and Khorfakkan where it would be inspected by 
Cotecna. Authentication would, however, be deferred until CPA 
representatives had confirmed the arrival of the goods at Umm Qasr. 
With regard to foodstuffs and agricultural supplies shipped in bulk, a 
rendez vous point was established 5-7 miles off the coast of Dubai. 
Cotecna inspectors leased launches and boarded and inspected the 
vessels at sea, drawing samples for laboratory analysis, when required. 
The revised authentication mechanism was implemented and superceded the 
ad hoc mechanism in October 2003.
    Up to the termination of the Oil for Food Programme in November 
2003 Cotecna inspectors also continued to travel throughout the region 
authenticating goods prioritized under resolution 1472 which were 
delivered after the deadline imposed by resolution 1476.
      transfer of cotecna contract to cpa and further discussions
    The contract for the inspection of goods destined to Iraq by 
Cotecna was officially transferred from the United Nations to the 
Coalition Provisional Authority on 20 November 2003.
                  period 21.november--31.december 2003
    Tripartite assignment of the contract: UNOIP-CPA-Cotecna was signed 
as the Amendment No. 5 to the main contract, covering period from 
21.November until 31.December 2003 with no changes to the 
authentication procedures, described above.
   current contract: amendment no. 6, period 01.january-30.june 2004
    Main changes until now:

   deferred authentication for 15 days at land borders only, 
        effective 01.January 2004

   deployment of small group of 4 Cotecna inspectors in Umm 
        Qasr to report the arrival of containerized and bulk cargo in 
        Umm Qasr to the Dubai team for authentication.

                 Statement from Cotecna Inspection S.A.

    This statement is being made in response to questions raised about 
the work carried out by Cotecna under contract with the UN's Oil For 
Food programme in Iraq. It seeks to set the record straight on the 
mission of Cotecna, whose thirty year record of professionalism as a 
world leader in innovative inspection services, has created an industry 
leader with 4,000 employees in 150 offices in 100 countries worldwide.
    The Oil For Food Programme, established under resolution 986 of the 
UN Security Council in April 1995, allowed Iraq to use 53% (later 
increased to 59%) of oil sales revenues for the purchase of 
humanitarian goods. The resolution also requested the UN Secretary 
General to receive authenticated confirmation that exported goods had 
arrived in Iraq and, for this purpose, the UN contracted for the 
services of an agency internationally recognized as an expert in that 
field.
    Cotecna Inspection S.A. Geneva, one of the international leaders in 
commercial authenticating services, participated in a UN call for 
tender for this programme in the fall of 1998 and was selected on 
December 31, 1998 for its efficiency, cost-effectiveness, and 
technologically advanced solutions. Indeed, Cotecna's quality 
performance led to an extension of the initial contract on a six-month 
basis and, then, to an extension of one year in 2002. In November 2003, 
this contract was renewed with the Coalition Provisional Authority in 
Iraq under identical terms.
    Cotecna's limited, technical role in the Oil for Food programme was 
carried out in full compliance with contract requirements, with its own 
strict code of ethical conduct, and according to the best practices in 
the industry, as codified by the International Federation of Inspection 
Agencies.
    A specific question has been raised in the media about the 
employment by Cotecna of Kojo Annan, the son of UN Secretary General 
Kofi Annan. It should be noted that Mr. Annan's full-time employment by 
Cotecna ended well before the selection of Cotecna for the UN mission; 
Mr. Annan's full-time employment began in December 1995 and ended in 
December 1997, after which Kojo Annan was retained as a consultant 
until the end of 1998. His activities concerned exclusively Cotecna's 
separate actitivies in Nigeria and Ghana, and he was not involved in 
any of Cotecna's operations involving the United Nations or Iraq.
    The Cotecna mission in Iraq began in February 1999. It consisted of 
a comparative authentication between the goods entering the country and 
the list of goods to be imported. Authenticating meant confirming that 
imported goods effectively corresponded to their description on 
shipment documents presented to the agent and the copies of documents 
provided to the agent by UN-Office of Iraq Programme. 
``Authenticating'' is a role that is different from ``inspecting'', as 
the latter could imply an assessment of the quality and/or value of the 
goods.
    To perform this task, Cotecna employed 85 inspectors on four border 
posts between Iraq and Turkey, Syria, Jordan and at the port of Umm 
Qasr in the Persian Gulf. A fifth post on the frontier with Saudi 
Arabia was later added for a limited period of time. Approval of the 
UN-OIP was required for the recruitment of each of the professional 
inspectors from 30 different nationalities. Once imported goods were 
authenticated by Cotecna inspectors, they notified the UN-OIP-NYC in 
reports transmitted electronically.
    It is important to understand that Cotecna's duties under its 
contract were limited to verifying that goods which were entering Iraq 
matched the list of goods authorized to be imported, and in a limited 
number of cases assessing the quality of the goods. Cotecna was not 
involved in selecting the goods which were to be imported, establishing 
the specifications of such products, selecting the parties who would 
supply such products, negotiating the prices to be paid or designating 
any sales intermediaries or sales commissions. In addition, Cotecna was 
not involved in handling any funds for the payment for any goods, other 
than verifying that items which had been approved for import had 
actually been delivered.
    Contrary to some press reports, there were no ``commission on 
fees.'' Rather, Cotecna's fees for this mission were contractually 
calculated on the basis of days worked by a maximum of 67 inspectors on 
4 Iraqi sites.
    Cotecna's contract for authentication of goods imported by Iraq 
under the Oil For Food programme was awarded in full compliance with 
United Nations' financial regulations and procurement policies.
    Cotecna has accomplished its limited and technical mission in full 
accordance with its contract with the UN, with its own strict code of 
ethical conduct, and with the best practices in the industry, as 
codified by the International Federation of Inspection Agencies (IFIA). 
Any accusations or inferences otherwise are false and defamatory.

                                 ______
                                 

              [From the Los Angeles Times, April 7, 2004]

           Op Ed Article by Ambassador Jean-David Levitte \1\
---------------------------------------------------------------------------

    \1\ Jean-David Levitte is the French Ambassador to the United 
States. He previously served as the French Ambassador to the United 
Nations.
---------------------------------------------------------------------------
    A year ago, when the question of military intervention to disarm 
Iraq was raised, my country strongly opposed such a step, convinced 
that Iraq was not an imminent threat to world peace, had no link with 
Al Qaeda and that the consequences of a war in Iraq needed to be 
seriously weighed.
    At that time, as everyone will remember, France's position, which 
was shared by many countries and a number of Americans, was bitterly 
criticized and widely disparaged. Although there were many signs of 
friendship extended to me from individual Americans, for which I am 
very grateflul, there were also lot of false accusations spread in 
public to discredit France.
    Since then, time has passed, and the diplomatic hurricane has 
abated. Today, we all understand the importance of what unites us, from 
our common fight against terrorism to our presence side by side in 
regional conflicts, in Afghanistan, Haiti, Kosovo and elsewhere.
    Consequently I have been deeply surprised in the last few days to 
see a new campaign of unfounded accusations against my country flourish 
again in the press. These allegations, which are being spread by a 
handfull of influential conservative journalists in the United States, 
have arisen in connection with a newly initiated inquiry into the 
``oil-for-food'' program that was run by the United Nations in Iraq 
during the final years of Saddam Hussein's government. These 
allegations suggest that the government of France condoned kickbacks--
bribes, in effect--from French companies to the Iraqi government of 
Saddam Hussein in return for further contracts. They say that the 
French government turned a blind eye to these activities.
    Let me be absolutely clear. These aspersions are completely false 
and can only have been made to try to discredit France, a longtime 
friend and an ally of the United States.
    As the former French Ambassador to the United Nations, let me 
explain bow the oil-for-food program worked. Created in 1996, the 
program was intended to provide the Iraqi people with essential goods 
so as to alleviate the humanitarian impact of the international 
sanctions which remained in place. The program authorized Iraq to 
export agreed quantities of oil, and allowed the money from the sales 
to be used for food and other necessities. The program was managed by 
the United Nations and closely monitored by the Security Council 
members. Between 1996 and the end of the program in 2003, every single 
contract for every humanitarian purchase had to be formally and 
unanimously approved by the 15 members of the Security Council, 
including France, the United Kingdom and the U.S. The complete 
contracts were not circulated to Security Council members other than to 
the U.S. and U.K. which had expressly asked to see them and would have 
been in the best position to have known if anything improper was going 
on. While a number of contracts were put on hold by the American and 
British delegations on security-related grounds, no contract was ever 
held up because malfeasance, such as illegal kickbacks, had been 
detected.
    Was there corruption and bribery inside the program? Frankly, I 
don't know; Iraq was not a market economy; it was under sanctions at 
the time. Customs experts had little choice but to assume that the 
prices set by outside companies were ``reasonable and acceptable,'' a 
criterion of acceptance used by the UN secretariat, and had no way of 
checking whether some contracts were overpriced. That is why France 
fully supports the independent inquiry set up by the U.N. The truth 
must come out. But the notion that our government was somehow complicit 
is absurd.
    Was France a major beneficiary of ``oil-for-food'' contracts, as 
several conservative columnists have claimed recently? Definitely not. 
From the beginning of the program (1996) to its end (2003), French 
contracts accounted for 8% of the total. We were Iraq's eighth largest 
supplier.
    In addition, throughout the program a sizable proportion of the 
contracts dubbed ``French'' were in fact contracts from foreign 
companies using their French branches, subsidiaries and agents. Among 
them were American companies providing spare parts for the oil industry 
(including several subsidiaries of Halliburton). They submitted 
contracts through French subsidiaries for more than S200 million.
    It is also suggested that the money from the ``oil-for-food'' 
contracts passed exclusively through a French bank, BNP-Paribas. Wrong 
again: 41% of the money passed through J.P. Morgan Chase Bank which 
like BNP, was contracted by the UN with the approval of Security 
Council members.
    This leaves us with one remaining accusation: that the French 
position on the oil-for-food program and Iraq in general was driven by 
the lure of oil. But France was never a major destination for Iraqi oil 
during the program. In 2001, 8% of Iraqi oil was imported by France, 
compared with 44.5% imported by the U.S., which was the number one 
importer all along.
    So why do some people feel such a compelling need to blame my 
country for something it has not done?
    At a time when the United Nations is considering a return to Iraq 
and we all agree on the need for close international cooperation to 
help a sovereign, stable Iraq emerge, I don't understand this campaign. 
Or the hidden agenda behind it.

                                 ______
                                 

 Responses of Amb. John D. Negroponte to Additional Questions for the 
                                 Record

            Questions Submitted by Senator Richard G. Lugar

    Question 1. Various nations began to send chartered flights to 
Baghdad in the mid-1990's. Which countries sent such flights in? Were 
these flights authorized by the 661 Committee? Did any member of the 
661 Committee propose that the UN monitor the cargo brought in on such 
flights, if so name them? Did any nations object to such monitoring, if 
so who were they?

    Answer. Countries that regularly sent chartered flights into Iraq 
included Jordan, Egypt, Lebanon and Russia. Anywhere between 5-15 
flight requests typically were received by the Committee within a one-
week period. Flights were authorized by the 661 Committee if they were 
for humanitarian purposes. Flight details, including cargo lists and 
flight manifests, were required to be approved by the Committee. It was 
the responsibility of the member state from which the flight departed 
to ensure that the contents of the aircraft had been approved by the 
Committee. The French repeatedly took the position in 661 Committee 
discussions that flights to Iraq only had to be notified to 661 
Committee members; we and the British, however, insisted that all 
flights required 661 Committee approval before they could proceed, 
based on the clearly defined language in operative paragraph 4(b) of UN 
Security Council resolution 670 (1990). Our view prevailed.

    Question 2. Kofi Annan has announced he will appoint a team of 
notables to conduct an investigation into this matter. Would an 
investigation authorized by the Security Council have more clout?

    Answer. On 21 April, the Security Council unanimously adopted 
resolution 1538, expressing the Security Council's full support for the 
independent, high-level inquiry established by UN Secretary-General 
Annan. The Panel will be led by Mr. Paul Volcker, former Chairman of 
the Federal Reserve Bank. Resolution 1538 underscores the importance of 
full cooperation with the independent high-level inquiry by all United 
Nations officials and personnel, the Coalition Provisional Authority, 
Iraq, and all other Member States.
    The Coalition Provisional Authority, Iraq, and all other Member 
States, including their national regulatory authorities, are asked ``to 
cooperate fully by all appropriate means with the inquiry.'' We already 
publicly have expressed full support for the work of the inquiry, and 
we have encouraged other UN Member States to act in a similar fashion. 
Mr. Volcker noted in his April 21 remarks to the media that he believed 
the Panel would receive cooperation from all governments.

    Question 3. The UN implemented a surcharge on the proceeds of Iraqi 
oil in order to cover the costs of managing the Oil-for-Food Program. 
Who audits those funds, and did the U.S. ever review those audits? How 
much money was left in the UN account at the termination of the 
program, and where did it go?

    Answer. UN costs associated with the administration and management 
of the OFF program came from revenue derived from the sale of Iraq's 
oil, as called for in UN Security Council resolution 986 (1995). In 
this regard, the program was self-financing, and did not rely on UN-
assessed funds.
    Proceeds from Iraqi oil sales were divided as follows:
          59 percent used to procure humanitarian supplies for central/
        southern Iraq;
          13 percent used to procure humanitarian supplies for 3 
        northern governorates;
          25 percent used to fund UN Compensation Commission (UNCC);
          2.2 percent reserved for UN administrative costs, including 
        the activities of OIP;
          0.8 percent reserved for UNSCOM, and later UNMOVIC.
    The UN Board of Auditors conducted routine audits of all these 
accounts--copies of such audits were provided to 661 Committee members, 
including the U.S., for their review.
    When the Oil-for-Food Program terminated on November 21, 2003, as 
mandated by UN Security Council resolution 1483 (2003), approximately 
$14 billion was left in the UN escrow accounts--most of these funds 
were attached to letters of credit that had yet to expire for 
outstanding OFF contracts. The UN thus far has transferred $8.1 billion 
from the escrow account to the Development Fund for Iraq as letters of 
credit associated with non-prioritized OFF contracts have expired.

    Question 4. What recommendations would you make to ensure that any 
future UN humanitarian operations do not suffer similar problems?

    Answer. The Oil-for-Food Program was unprecedented in its size as 
well as in the use of revenue derived from the sale of Iraqi oil to 
sustain the operation. It was former Iraqi leader Saddam Hussein's 
repeated defiance of the demands placed upon him and his government by 
the Security Council, and his calculated failure to provide for the 
basic needs of the Iraqi people, that prompted creation and 
implementation of the Oil-for-Food Program in the first place. We agree 
that lessons need to be drawn and incorporated into any similar, future 
operations.
    There are a number of investigations currently underway designed to 
look at the management and implementation of the Oil-for-Food Program--
the UN inquiry led by Mr. Paul Volcker and the Baghdad-based audit led 
by the Iraqi Board of Supreme Audit. The Coalition Provisional 
Authority is co-operating with the Board of Supreme Audit by helping 
individual Iraqi ministries to secure potentially relevant 
documentation and to identify key personnel with knowledge of the 
former Iraqi regime's illicit schemes. We stand ready to review and 
assess any future reports and conclusions that may arise from these 
investigations.
    Mr. Volcker already has commented that he interprets his job as not 
only to determine what had happened in the past, but also to draw 
lessons on what could be done in the future to avoid similar potential 
problems. This is certainly the right approach, one which the U.S. 
Government supports. In that regard, it therefore would be premature to 
offer any firm conclusions at this moment as to what modifications 
might be necessary to ensure future humanitarian operations do not 
suffer similar problems to those already identified. As we move forward 
in this process, we will be in a better position to understand the 
flaws and weaknesses that may have been inherent in the system, and to 
take such inadequacies into account for future humanitarian operations.

    Question 5. There have been charges that Saddam infiltrated the UN 
organization with his own intelligence officials. Can that be verified? 
Would you expand on that?

    Answer. To my knowledge, there has been no evidence provided to the 
U.S. Mission concerning this issue. I am not aware of any information 
that would indicate such infiltration occurred.

    Question 6. Before it adopted ``retroactive pricing'' in 2001, 
which cut back much of the surcharges on oil being sold by the regime, 
the Sanctions Committee evaluated but rejected limiting Iraq's oil 
buyers to major international oil firms, rather than smaller oil 
traders that were willing to pay the Iraq surcharge. Why did the 
Sanctions Committee reject this idea?

    Answer. Under Resolution 986 (1995), the former Government of Iraq 
was granted the authority to sell its oil to whomever it designated, 
thereby reflecting the insistence of most other Security Council 
members that Iraq's sovereignty be respected and guaranteed under the 
Oil-for-Food (OFF) Program. These other states argued that having the 
Security Council dictate to whom Iraq could sell oil would have 
compromised and undermined Iraq's national authority in an unacceptable 
fashion.
    661 Committee procedures did, however, require member states to 
register companies established within their jurisdiction with the UN 
Office of Iraq Program (OIP) and with the UN Oil Overseers before being 
permitted to export oil from Iraq under the OFF program. It was the 
responsibility of member states to ensure that these firms were 
reputable. .

    Question 7. What was the role of individual Mission offices in the 
contracting process? Did they have review responsibilities? Which 
states benefited most from the OFF kickbacks? What do their Mission 
offices say when confronted with this information?

    Answer. Individual UN Mission offices were responsible for 
providing the UN Office of the Iraq Program (OIP), on behalf of 
suppliers operating in their jurisdiction, with copies of proposed 986 
humanitarian contracts signed between the supplier and the Government 
of Iraq. They often served as the intermediary between these companies 
and OIP.
    It is unclear who, other than the Saddam Hussein regime, benefited 
from the alleged kickbacks on UN Oil-for-Food (OFF) contracts. However, 
major suppliers of OFF contracts under the program included firms 
operating within their jurisdiction of some Council members and several 
of Iraq's neighboring states.

    Question 8. How does the UN police itself? Are there mechanisms 
within the UN to try member states, individuals or companies for 
breaking resolution, in this case sanctions? Is there a means to 
otherwise hold them accountable? (As Senator Sununu asked in the 
hearing, can you provide a list of UN officials who have been 
disciplined for such instances.)

    Answer. The UN monitors its activities through two avenues--the UN 
Board of Audit and the UN Office of Internal Oversight Services (OIOS). 
The three-nation UN Board of Auditors is charged with ensuring that UN 
programs and operations are implemented in a fiscally responsible 
manner, and that all funds are appropriately spent. The UN Office of 
Internal Oversight Services (OIOS) monitors, investigates and reports 
on the activities of UN personnel. The Secretary-General has the right 
to fire United Nations employees whom he believes are guilty of 
malfeasance. They have the right to an appeal, through a UN 
administrative tribunal, but the Secretary-General also has a right to 
accept or reject that administrative tribunal. So the Secretary-General 
may terminate UN employees for wrongful acts.
    As recently as 2003, the Secretary-General, through the OIOS, has 
investigated and reprimanded UN personnel and/or contractors for 
misconduct or criminal behavior. In relevant instances, the UN has 
turned cases over to national authorities--whether here in the U.S. or 
abroad--for potential criminal investigation.

    Question 9. Compensation claims make up 25 percent of OFF outlays. 
How were these claims resolved? Can you provide details of reviewed, 
paid and pending claims?

    Answer. At the outset of OFF, 30 percent of oil sales proceeds went 
to the UN Compensation Commission (UNCC). This was reduced to 25 
percent in December 2000 under UNSCR 1330 and further reduced to 5 
percent in May 2003 under UNSCR 1483.
    The United Nations Compensation Commission has paid out some $18 
billion to victims of Iraq's invasion of Kuwait. An additional $29 
billion is needed to complete payment of compensation awarded by the 
UNCC to individuals and companies.

    Question 10, My understanding is that United States became a major 
purchaser of Iraqi oil once the Oil-for-Food Program started. Is that 
correct; which were the top five nations that purchased oil from Iraq? 
Did U.S. oil companies purchase the oil directly from Iraq or through 
brokers/middleman?

    Answer. During Phases I through XI of the Program (December 1996-
May 29, 2002), the U.S. purchased $942 million in Iraqi oil, while 
during the same comparable period, Russian firms entered into oil 
contracts with SOMO valued at $ 16.4 billion. France ($3.28 billion), 
Switzerland ($2.5 billion), Turkey ($2.4 billion), and China ($2.35 
billion) were the next largest purchasers of Iraqi oil. We have 
requested from the UN Office of the Iraq Program figures concerning 
Iraqi oil sales during Phases XII and XIII to complete our records for 
the lifespan of the OFF Program. Those who entered into contracts with 
the Iraqi State Oil Marketing Organization (SOMO) to purchase Iraqi oil 
were not always the end-users. Between Phases 1 and 12 of the Program 
(10 December 1996-4 December 2002), Russian traders contracted for 979 
million barrels of Iraqi oil, representing 31 percent of the total 
shipped by Iraq under the Program during this period.

    Question 11. Do we have any reason to believe that U.S. oil 
companies participated in these same kickback and surcharges that we've 
discussed today?

    Answer. I am unaware of any specific allegations or evidence 
involving U.S. oil firms or UN Oil-for-Food contract suppliers with 
regard to their possible participation in kickbacks or surcharges to 
the former Iraqi regime.

    Question 12. Did U.S. companies sell goods to Saddam, and do we 
have any reason to believe that U.S. companies provided him with 
illicit profits?

    Answer. The only U.S. companies that were permitted to sell goods 
to Saddam were those that received a license from the U.S. Treasury 
Department's Office of Foreign Assets Control (OFAC) to do business 
with Iraq under the Oil-for-Food Program. Twenty-four (24) U.S. 
companies submitted a total of 47 contracts (out of a total of more 
than 30,000 contracts) under the Oil-for-Food Program.
    I am unaware of any specific allegations or evidence involving U.S. 
companies and the provision of illicit funds to Saddam Hussein.

    Question 13. Who conducted the audits of BNP--the bank holding the 
UN's Iraqi oil escrow account? Do we know if BNP was involved in 
passing illegal money to Saddam? Who in the U.S. Government has 
reviewed BNP accounts? Do we have access to the account numbers into 
which BNP deposited money, in order to check the legitimacy of those 
companies? To whom has BNP turned over its documents on the OFF 
program?

    Answer. The UN Oil-for-Food Program, in particular the escrow 
accounts held at both BNP and JP Morgan/Chase, were audited every six 
months by the UN Board of Auditors. BNP had no independent authority to 
make payments to suppliers--it was instructed by the UN Treasury to 
make specific payments to suppliers once the goods for a particular 
contract had been authenticated upon their arrival in Iraq.
    Once BNP/Paribas was selected by the UN through a competitive 
bidding process to handle funds associated with the 59 percent account 
for procurement of goods destined for central and southern Iraq, OFAC 
issued them a license, limiting BNP/Paribas' work with Iraq solely to 
the Oil-for-Food Program. The U.S. Federal Reserve has oversight 
responsibility over all wire transfer systems in operation in the U.S., 
including over BNP/Paribas-New York.
    I am unaware of any specific evidence that would indicate that BNP 
passed illegal money to Saddam. The OFF Program provided written 
instructions to BNP for the actions it was to take. BNP is still 
holding valid letters of credit for outstanding OFF contracts, and 
therefore maintains its own files of documents concerning OFF.

    Question 14. What was the role of the individual UN Missions in New 
York as far as vetting the Oil-for-Food contracts were concerned? Were 
they expected to verify the legitimacy of the goods and the pricing 
involved?

    Answer. Individual UN Mission offices were responsible for 
providing the UN Office of Iraq Program (OIP), on behalf of their 
suppliers established within their jurisdiction, copies of proposed 986 
humanitarian contracts signed between the supplier and the Government 
of Iraq.
    Each member state, including the U.S., was responsible for ensuring 
that their companies established within their jurisdiction adhered to 
the rules and restrictions under the Program and the ongoing 
multilateral sanctions regime on Iraq. The vetting process for each UN 
Mission varied. Although all 661 Committee members were given copies of 
each OFF contract, only the U.S. and UK governments actually reviewed 
such contracts in detail, with particular emphasis on preventing access 
by the former Iraqi regime to WMD and certain dual-use items that could 
be used to enhance Iraq's military capabilities.

    Question 15. Regarding the OFF program in the north of Iraq, is it 
true that some $4 billion in funds has not been accounted for? If this 
is not true, who in the U.S. Government reviewed this program?

    Answer. When the UN program responsibilities in the North were 
transferred to the CPA on November 21, 2003, financial liabilities for 
those programs transferred as well. Funding comes from the UN OFF 
escrow account, which contained a balance of roughly $14 billion as of 
the November 21 transfer date. Since that time, the UN treasurer has 
transferred $8.1 billion to the Development Fund for Iraq. The DFI is 
funding the former UN programs in the North. The balance in the OFF 
escrow account will pay for the remaining humanitarian supplies for all 
of Iraq that are still in the pipeline. Thereafter, the remaining 
surplus in the OFF escrow account will be transferred to the DFI. The 
final accounting will be audited.
    The U.S. Government reviewed the implementation of the Oil-for-Food 
Program in northern Iraq on a regular basis, as a member of the 
Security Council, and as a member of the Security Council's Iraq 
Sanctions Committee. UN personnel working in the three northern 
governorates routinely briefed members of the Iraq Sanctions 661 
Committee.

    Question 16. The World Food Program used a considerable number of 
vehicles to distribute food throughout the North. Where are they now?

    Answer. The World Food Program transferred these vehicles to the 
Coalition Provisional Authority (CPA) and Iraqi representatives through 
a tri-partite transfer process during the phasing out period of the 
Oil-for-Food Program in November 2003.

           Question Submitted by Senator Joseph R. Biden, Jr.

    Question 17. Ambassador Negroponte, you acknowledged during your 
testimony that the State Department is in a position to assemble a list 
of Oil-for-Food participants.
   For the public record, can you provide the Committee with a 
        comprehensive list of purchasers of Iraqi oil and suppliers of 
        civilian products under the Oil-for-Food Program?
   If such a list can not be publicly released, could you 
        provide the Committee with a classified list and a detailed 
        explanation as to the legal and/or security rationale keeping 
        the information classified?

    Answer. We have compiled a list of companies that purchased oil 
from Iraq under the Program. Separately, we have compiled a list of 
those firms that supplied civilian goods to Iraq under the program. We 
stand ready to make these lists available to the Committee.

           Questions Submitted by Senator Christopher J. Dodd

    Question 18. How many meetings have been held by the International 
Advisory and Monitoring Board?

    Answer. The International Advisory and Monitoring Board has met 
five times, most recently on April 22-23 in New York City. The first 
formal meeting was December 5.
    However, representatives of the member institutions of the Advisory 
Board--the UN, the Arab Fund for Social and Economic Development, the 
IMF and the World Bank--met informally many times with the CPA during 
the process leading to the establishment of the IAMB. These talks led 
to the October 24 announcement that the Board had been established in 
accord with a Terms of Reference that governs the relationship between 
the IAMB and the CPA.
    The creation of the Board broke new ground in international 
relations, as a mechanism to ensure transparency in the financial 
affairs of an occupied country. Both CPA and the Advisory Board members 
continue to work very hard with the Iraqi people to realize this 
commitment to transparency.

    Question 19. What are the names, affiliations, and positions of 
those serving on this Advisory and Monitoring Board?

    Answer. The chairman of the International Advisory and Monitoring 
Board, selected by the members themselves, is Mr. Jean-Pierre 
Halbwachs, Assistant Secretary General and Controller of the UN. He 
represents Secretary General Annan.
    The other members are Mr. Khalifa Ali Dau, a senior financial 
adviser in the Arab Fund for Economic and Social Development; Mr. Bert 
Keuppens, a senior advisor in the IMFs Finance Department, and Mr. 
Fayezul Choudhury, Vice President and Controller at the World Bank. 
Each of these representatives was appointed to represent the chief 
executive officer of their respective institutions.

    Question 20. On what dates have these meetings been held? 
Locations?

    Answer. I would like to take this opportunity to mention that the 
International Advisory and Monitoring Board established a very good Web 
site, www.iamb.info, which provides such information. The Board also 
posts minutes of the Board's meetings.
    Meetings have been held:
        December 5, 2003--New York
        December 22, 2003-Washington, D.C.
        February 12-13, 2004--Washington, D.C.
        March 17-18, 2004--Kuwait
        April 22-23, 2004--New York

    Question 21. Were there agendas and/or minutes of these meetings? 
Please provide copies of these agendas and minutes.

    Answer. The Advisory Board prepares minutes for each meeting and 
posts these on its Web site. Copies of the minutes are attached.
              international advisory and monitoring board
    Minutes of the organizational meeting held at United Nations 
Headquarters, New York on Friday 5 December 2003.

    The following members of the Board were present:
        Arab Fund for Economic and Social Development: Ms. Mervat 
        Badawi, Director
        Technical Department (acting representative).
        International Monetary Fund: Mr. Bert E. Keuppens, Senior 
        Advisor.
        United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-
        General,
          Controller.
        World Bank: Mr. Fayezul Choudhury, Vice-President and 
        Controller.

    Also in attendance were the following:
        International Monetary Fund:
          Mr. Chris Hemus, Deputy Chief, Finance Department
          Ms. Mary Hoare, Officer

        United Nations:
          Mr. Jayantilal Karia, Director, Accounts Division,
          Ms. Arpana Mehrotra, Adviser/Coordinator on IAMB matters
          Mr. Moses Bamuwamye, Finance Officer

        World Bank:
          Mr. Charles McDonough, Director, Accounting Department,
          Mr. W. Ofosu Amaah, Vice President and Corporate Secretary

    1. The meeting was opened at 11:00 a.m. by the Secretary General, 
of the United Nations.
    In his opening remarks, the Secretary-General stressed that the 
IAMB had an important responsibility as an independent oversight body. 
He added that its independence could not be stressed enough and that it 
was fundamental to honoring the trust that the international community 
had placed in it. He noted that the Security Council had referred to it 
as the ``eyes and ears of the international community'', and that in 
view of privileges and immunities conferred on the funds of the DFI by 
the Security Council, this responsibility was even heavier.
    2. The member from the United Nations, Mr. Jean-Pierre Halbwachs 
was chosen as the Chair of the Board for the first year.
Rules of Procedure
    3. The members discussed the rules of procedure to govern the 
Board. The members agreed that it was important that the rules be 
adopted as soon as possible and that they be kept simple. It was agreed 
that the member from the IMF would circulate a working document to the 
members of the Board.
    4. Two issues were considered critical in addressing the rules of 
procedure: confidentiality and transparency. Since the Board would make 
public the documents of the IAMB, there was a need to set guidelines in 
addition to the provisions of the rules of procedure, to ensure that 
appropriate information concerning the Board's work was made publicly 
available while ensuring the protection of sensitive and confidential 
information.
Observers
    5. The appointment of observers was discussed. It was agreed that, 
consistent with its terms of reference, the Board should determine the 
number and qualifications of the observers. It was also agreed that 
among the observers would be one selected from nominations by the 
Coalition Provisional Authority (CPA), and two selected from 
nominations by the Iraqi Governing Council, preferably including, in 
respect to the latter, someone from the Iraq Supreme Audit Authority.
    6. It was agreed that the Chairman, after consultation with other 
members, would request the CPA to submit a list of three names, and the 
Iraqi Governing Council to submit a list of five names for 
consideration by the Board. The IMF representative agreed to look into 
the status of the Iraqi Supreme Audit Authority and report to the board 
accordingly.
Secretariat
    7. It was agreed that prevailing circumstances did not allow for 
the Secretariat to be established in Baghdad at this point in time.
    8. It was decided that the Secretariat would be small, drawn as 
appropriate from member organizations, with one local professional 
staff in Baghdad. It was also decided that the experience and 
qualification of the staff would be determined by the Board. As for the 
local staff, it was agreed that the candidate would be an Iraqi 
national seconded from the Iraq Supreme Audit Authority. The 
representative of the IMF is to look into this matter further. The 
Chair agreed to circulate a draft on the qualifications and duties of 
the Secretariat staff.
    9. It was agreed, as specified in the Terms of Reference that the 
costs associated with the running of the secretariat would be shared 
equally among the member institutions. This would continue to reinforce 
the spirit of independence with which the Board is expected to operate. 
It was also decided that incidental costs that are not material would 
be absorbed by the member institution providing the services.
External Auditors
    10. The ``Draft Statement of Work'' for the external auditors was 
received from the CPA. It was agreed that the Board will undertake an 
expeditious review of the scope of work, in order that it may respond 
to the CPA as soon as possible.
    11. Members agreed to share with each their comments and 
suggestions on the draft before the next meeting.
Briefings to the Board
    12. The Board agreed on the necessity of requesting briefings from 
the CPA to improve their understanding in a few areas of special 
relevance to an evaluation of the Statement of Work. The initial areas 
suggested, with others to be identified, included:
        DFI in general
        Link of Programme Review Board (PRB) disbursements to actual 
        programs
          delivered
        Procurement process of CPA
        How CPA undertakes oil and gas sales
        Role of CPA's internal audit.
    13. It was agreed that the Chair, in consultation with the Board, 
would contact the CPA in this regard.
IAMB Documentation
    14. It was noted that transparency was critical to the smooth 
operation of the Board. Creation of an IAMB website therefore, would be 
explored. The IMF representative agreed to examine the feasibility of 
such a website and to report to the Board.
Communication
    15. The Board agreed that the IAMB should speak with one voice, and 
that all communications from the Board will be made by the Chair 
following consultation with the members. This however, would not 
prevent the other Board members from providing routine information on 
the IAMB and its work.
Other Matters
    16. The Board decided that its next meeting would be held on Monday 
22 December 2003 at the World Bank in Washington DC.
    17. The Board agreed to issue a press release on its meeting.
    18. The Board also agreed that a draft agenda would be circulated 
among the members for their review before the next meeting.
    19. The meeting was adjourned at 4.30 P.M.
                               * * * * *
              international advisory and monitoring board
    Minutes of the organizational meeting held at the World Bank 
Headquarters in Washington DC on Monday 22 December 2003.

    The following members of the Board were present:
        International Monetary Fund: Mr. Bert E. Keuppens, Senior 
        Advisor.
        United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-
        General,
          Controller.
        World Bank: Mr. Fayezul Choudhury, Vice-President and 
        Controller.

    Absent with apologies:
        Arab Fund for Economic and Social Development: Mr. Khalifa Au 
        Dau,
          Senior Financial Advisor

    Also in attendance were the following:
        International Monetary Fund:
          Mr. Chris Hemus, Deputy Chief;, Finance Department
          Mr. Ramanand Mundkur, Counsel, Legal Department

        United Nations:
          Mr. Jayantilal Karia, Director, Accounts Division,
          Mr. Moses Bamuwainye, Finance Officer

        World Bank:
          Mr. Charles McDonough, Director; Accounting Department,
          Mr. W. Ofosu Amaah, Vice President and Corporate Secretary

    2. The meeting was opened at 10:00 a.m. by the Chair who informed 
the other members that the member from the Arab Fund could not attend 
the meeting due to factors beyond his control.
    3. The agenda was unanimously adopted.
    4. Certain revisions in the Minutes for the meeting of the 5/12/
2003 were discussed.
Statement of Work
    4. The main focus of the meeting was the Statement of Work (SOW) 
for the external audit of the Development Fund for Iraq (DFI). Members 
made a number of comments on the draft SOW pointing, among other 
things, to the need to:
   make the heading more descriptive;
   clarify the issue of designated recipient;
   elaborate on the four deliverables;
   adjust the audit option periods;
   clarify the role of IAMB with External Auditors.
    5. The Chair undertook to revise the SOW on the basis of comments 
made during the meeting and to circulate the revised draft to the 
members for final review and comments. The Chair would subsequently 
complete the draft and submit it to the CPA before the end of the year. 
The Chair would also request the CPA to provide briefings on accounting 
and reporting issues relating to the DFI. The following were identified 
as areas of interest to the Board:
   The DFI in general;
   The link between the Program Review Board (PRB) 
        disbursements to actual programs delivered;
   The procurement process of the CPA;
   The manner in which the CPA undertakes oil and gas sales;
   The role of the CPA's internal audit.
    6. The timing of the briefing was also discussed and it was agreed 
that the briefing should take place at the earliest opportunity, 
preferably to coincide with the Board's next meeting.
Secretariat Functions
    7. It was agreed that for the time being an ad hoc Secretary to the 
Board be established instead of maintaining a full time staff. To that 
end, each of the member institutions could have one of their staff to 
perform secretariat functions; It was however decided that all records 
would be kept in one central place--with the Chair.
    8. On the issue of the local professional staff, it was recognized 
that further action needed to be undertaken to identify a suitable 
candidate.
Rules of Procedure
    9. The Board reiterated the need to set clear rules for dealing 
with press queries. It was also reiterated that, as a rule, the Chair 
would speak for the Board. At the same time, it would be left to 
individual members to use their judgment in answering routine factual 
queries.
    10. The drafting of Paragraph 3B (Public Disclosure) of the draft 
rules of procedure would be reviewed by the members from the World Bank 
and IMF.
    11. It was agreed that comments on the draft rules of procedure 
should be submitted as soon as possible.
Press Release
    12. The members agreed to issue a press release highlighting the 
results of the meeting.
Other Business
    13. The venue and date of the next meeting was to be determined at 
a later date, in the light of the briefing material to be provided by 
the CPA.
    14. An updated mailing list was requested by the Chair, and the 
issue of a logo for the IAMB was briefly discussed.
    15. The meeting was adjourned at 4:30 p.m.
                               * * * * *
              international advisory and monitoring board
    Minutes of the meeting held at the IMF Headquarters in Washington 
DC on 12 and 13 February 2004.

    The following members of the Board were present:
        Arab Fund for Economic and Social Development: Mr. Khalifa All 
        Dau,
          Senior Financial Advisor
        International Monetary Fund: Mr. Bert E. Keuppens, Senior 
        Advisor.
        United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-
        General,
          Controller.
        World Bank: Mr. Fayezul Choudhury, Vice-President and 
        Controller.

    Also in attendance were the following:
        International Monetary Fund:
          Mr. Chris Hemus, Deputy Chief, Finance Department
          Mr. Ramanarid Mundkur, Counsel, Legal Department
          Ms. Mary Hoare, Officer

    United Nations:
          Mr. Jayantilal Karia, Director, Accounts Division,
          Mr. Moses Bamuwamye, Finance Officer World Bank:
          Mr. Charles McDonough, Director, Accounting Department,
          Mr. W. Ofosu Amaah, Vice President and Corporate Secretary
          Ms. Caroline Harper, Lead Operations Officer

    5. The meeting was opened on 12th February 2004 at 1:00 p.m. by the 
Chair.
    6. The agenda for the two day meeting was unanimously adopted.
Briefing by the CPA
    3. Responding to the Board's request, the CPA provided a useful 
briefing about the financial functions and the operations of the DFI. 
The following topics were covered during the briefing.
   DFI Account Status
   Oil Proceeds
   Budget Process
   Program Review Board
   Contracting
   Financial Operation
   Extemal Audit Update
    4. Following a recap of the briefing, the Chair was requested to 
send a letter to the CPA seeking clarification on a number of issues 
including:
   The controls with regards to the extraction of crude oil
   Contracting process by the CPA, including circumstances 
        relating to single source contracts
   Oil product barter sales, not currently reflected in the DFI 
        accounts.
External Audit of the DFI
    5. It was noted that progress had been made in the appointment of 
external auditors for the DFI. The CPA had started the solicitation 
process for the external auditors and proposals were due by February 
18, 2004. Board members noted that finalization of the appointment 
process was a priority and requested that the Chair ask the CPA to 
provide the evaluation and selection criteria that would be used to 
select the external auditor.
The IAMB Website
    6. The IAMB website was officially launched on 13th February 2004. 
In the press release issued on 13 February 2004, the public was 
notified of the availability of the site which would serve as the 
informational platform for the Board.
Observers
    13. It was noted that the CPA had nominated a candidate to serve as 
an observer.
    14. Noting that the Governing Council of Iraq had not responded to 
the invitation to nominate candidates to serve as observers to the 
IAMB, it was agreed that the Chair would send a letter to the Governing 
Council of Iraq, with a copy to the CPA, urging the council for its 
nominations.
Rules of Procedure
    9. The Board adopted the draft Rules of Procedure after minor 
amendments were made. It was also decided that the Rules of Procedure 
would be posted on the website.
Press Release
    10. The members agreed to issue a press release highlighting the 
results of this meeting and to post this press release on the IAMB 
website.
Other Business
    11. The Minutes for the 5th and 22nd December meetings of the IAMB 
were adopted and posted on the website.
    12. The members agreed that the venue of the next meeting will be 
at the Arab Fund Headquarters in Kuwait at a date to be determined, 
preferably to coincide with the selection process of the External 
Auditors.
    13. The meeting was adjourned on Friday at 2:30 PM.
                               * * * * *
              international advisory and monitoring board
    Minutes of the meeting held at the Arab Fund Offices in Kuwait on 
17 and 18 March 2004.

    The following members of the IAMB were present:
        Arab Fund for Economic and Social Development: Mr. Khalifa Mi 
        Dau,
          Senior Financial Advisor
        International Monetary Fund: Mr. Bert E. Keuppens, Senior 
        Advisor
        United Nations: Mr. Jean-Pierre Halbwachs, Assistant Secretary-
        General,
          Controller
        World Bank: Mr. Fayezul Choudhuzy, Vice-President and 
        Controller
        Observer's Representative: Mr. Faik Ali Abdul-Rasool, Deputy 
        Minister,
          Ministry of Planning and Development Cooperation 
        (representing Dr. Mehdi
            Hafedh, Minister of Planning and Development Cooperation 
        and Chairman
            of the Iraqi Strategic Review board for the Reconstruction 
        of Iraq)

    Also in attendance were the following:
        The Arab Fund for Economic and Social Development:
          Mr. Hassab El Rasoul El Obeid, Legal Advisor, Arab Fund for 
        Economic
            and Social Development
          Mr. Shehab Bayoumi, Financial Advisor. Legal Advisor, Arab 
        Fund
            for Economic and Social Development

    International Monetary Fund:
        Mr. Chris Hemus, Deputy Chief, Finance Department
        Mr. Ramanand Mundkur, Counsel, Legal Department

    United Nations:
        Mr. Bisrat Aklilu, Executive Coordinator, Iraq Trust Fund
        Mr. Moses Bamuwamye, Finance Officer

    World Bank:
        Mr. Charles McDonough, Director, Accounting Department
        Ms. Caroline Harper, Lead Operations Officer

    Iraq Board of Supreme Audit
        Mr. Ihsan Ghanim
        Dr. Ala'a Alani

    7. The meeting was opened by the Chair
    8. The agenda for the meeting was unanimously adopted.
Executive Session
    5. The members undertook a preliminary review of the information 
provided by the Coalition Provisional Authority regarding the selection 
process for the external auditor.
Briefing by the CPA
    4. As part of its responsibility for monitoring the financial 
reporting and internal control systems established by the CPA, the IAMB 
received from the CPA further briefing on the issues covered by the CPA 
at the IAMB previous meeting. The issues related to metering of crude 
oil, barter transactions, the use of non-competitive bidding procedures 
and the preparation of DFI financial statements in line with 
appropriate international standards on financial reporting.
Metering
    7. The IAMB was informed that crude oil extraction is currently not 
metered. This precludes a reconciliation of all crude oil extracted 
with its eventual utilization and represents an internal control 
weakness which needs to be addressed urgently. The IAMB was informed of 
the steps taken by the CPA to mitigate the consequences of such 
weakness and to curtail smuggling. The IAMB welcomed these interim 
steps and recommended the expeditious installation of metering 
equipment in accordance with standard oil industry practices.
    8. The IAMB was also informed that oil products were being metered 
at depots and service stations.
Bartering
    15. The IAMB was informed that the bartering of residual fuel oil 
for light products had been discontinued. There is however bartering of 
residual fuel and crude oil for electricity and other products with 
neighbouring countries. The IAMB was concerned that such barter 
transactions are not reflected in the DFI as required by UN SCR 1483 
(2003). The CPA indicated that it is investigating possible ways to 
ensure that the equivalent proceeds from such transactions are placed 
into the DFI and the IAMB looks forward to an early resolution of this 
issue.
Sole Source Contracts
    8. Upon inquiry, the IAMB was informed that some contracts using 
DFI funds were awarded to Halliburton without competitive bidding. The 
CPA indicated that as a general rule, effective January 2004 contracts 
were no longer awarded without competitive bidding. The IAMB 
acknowledged that special circumstances may have warranted sole-sourced 
contracts and welcomed steps taken by the CPA to limit future such 
contracts to exceptional circumstances. At the same time the IAMB 
decided to consider further steps, such as the conduct of a special 
audit of some of the sole-sourced contracts.
    9. The IAMB decided that it will continue to monitor closely these 
issues, and will direct the DFI external auditor to pay special 
attention, as appropriate.
    10. The IAMB also expressed its thanks to the representatives of 
the CPA for the useful briefings provided.
Financial Information
    11. The IAMB reiterated its view that the financial statements of 
the DFI need to be prepared in line with the appropriate international 
standards on financial reporting. The IAMB, following discussion with 
the CPA, believes such information is available to the CPA.
    12. In addition, it was agreed that the DFTs weekly statements 
issued by the CPA would be linked to the IAMB website to ensure wider 
availability
External Audit of the DFI
    14. Since the nomination and appointment by the CPA Administrator 
of the DFI external auditor is subject to approval by the IAMB, the CPA 
briefed the IAMB on the evaluation process of the solicitations 
received from external audit firms. Based on the information obtained 
by the IAMB, which was not available to the CPA's selection committee 
at the time the evaluations were made, the IAMB concluded that one 
candidate nominee firm did not meet the criteria. The IAMB sought 
supplemental infomiation from the CPA regarding the other nominee firm. 
Following receipt of such information after the meeting, the IAMB on 
March 24, 2004 approved the CPA's nomination for the external auditor 
noting the international competency and international composition of 
the audit team including the commitment by the firm to include in its 
team internationally experienced and specialized audit partners.
Observers
    15. Deputy Minister Faik Ali Abdul-Rasool, representing the 
Observer, Minister Mehdi Hafedh, requested that persons representing 
the Iraqi Governing Council be given the right to vote. The IAMB stated 
that it welcomed the presence of Iraqi nationals at its meeting and 
that it looked forward to attendance by Iraqi nationals at future 
meetings. However, the IAMB indicated that acceding to this specific 
request would require amendments to the IAMB's Terms of Reference. 
Further, such Iraqi participation raises a number of complex legal 
issues, including under UN SCR 1483 (2003). In light of these 
constraints, the IAMB strongly encouraged the presence of Iraqi 
nationals at its future meetings, stating that such participation would 
allow them to communicate their views to the IAMB and that the IAMB, 
for its part, would give the fullest consideration to these views.
Post June 2004
    16. The IAMB began a review of ways in which the functions of the 
IAMB could be transferred to an Iraqi entity at a suitable time, in 
view of the envisaged handover of power to an interim Iraqi 
administration on June 30, 2004. In this context, the IAMB welcomed the 
opportunity to exchange views with representatives of the Iraq Board of 
Supreme Audit and expressed its thanks to the representatives of the 
Board of Supreme Audit for providing the IAMB with information on the 
Board of Supreme Audit's operations in Iraq. The IAMB also decided that 
it would further examine ways to involve the Board of Supreme Audit 
more actively in the IAMB's work.
Press Release
    20. The members agreed to issue a press release highlighting the 
results of this meeting and to post this press release on the IAMB 
website.
Other Business
    17. The minutes for the 12th-13th February meeting of the IAMB were 
adopted and posted on the website.
    18. The venue and date of the next meeting would be determined at a 
later date, and will be announced on the website.
    19. The meeting was adjourned on Thursday 18 March 2004.
                               * * * * *
    Question 22. What are the name(s) of the independent public 
accounting firm(s) that have been tasked with auditing responsibility 
for the DFI? How many audits of the DFI, if any, have been conducted by 
these independent accountants. Please provide copies of these audits.

    Answer. KPMG Audit & Risk Advisory Services won the contract to 
audit the Development Fund for Iraq and Iraq's export oil sales. CPA 
nominated this firm, and the Advisory Board approved the selection.
    The contract for audit services was signed only in early April 
2004, so the first audit is just getting underway. We would hope it 
will be available by late summer. It is part of the Board's Terms of 
References that all audits will be made public.

              Question Submitted by Senator John E. Sununu

    Question 23. In the event UN officials are found to have engaged in 
corrupt practices, would they be able to claim diplomatic immunity in 
the United States or elsewhere and thus escape prosecution and 
punishment?

    Answer. The Secretary-General has the authority to waive the 
diplomatic immunity of any UN personnel found to have engaged in 
corrupt practices or misconduct under the program.
    The Secretary-General has used this authority on several occasions, 
including as recently as 2003, when the Secretary-General, through the 
UN Office for Internal Oversight (OIOS), investigated and reprimanded 
UN personnel and/or contractors for misconduct or criminal behavior. In 
relevant instances, the UN has turned cases over to national 
authorities--both here in the U.S. or abroad--for judicial action.

                                 ______
                                 

 Responses of Amb. Patrick F. Kennedy to Additional Questions for the 
              Record Submitted by Senator Richard G. Lugar

    Question 1. The UN apparently conducted numerous audits of the Oil-
for-Food Program--how many audits were conducted and what was 
uncovered?

    Answer. A three-nation UN Board of Auditors audited the operations 
of the Oil-for-Food Program, including the operations of UN offices in 
Iraq, and the UN Office of the Iraq Program (OIP) in New York. The 
Board audited the Oil-for-Food Program every six months, following the 
conclusion of each phase of the Program. There were thirteen 6-month 
phases of the OFF Program.
    Separately, the UN Office of Internal Oversight Services (OIOS) 
conducted 55 reviews of various aspects of the UN Oil-for-Food (OFF) 
Program, including an assessment of the UN escrow accounts, analysis of 
UN Treasury's role in the OFF Program, and ongoing, on-the-ground 
evaluation by two OIOS auditors in Iraq of the functions performed by 
the UN Humanitarian Coordinator in Iraq (UNOCHI). OIOS reports are 
internal UN Secretariat records which have never been shared with the 
Security Council or any member state.

    Question 2. Were all the trucks carrying goods into Iraq inspected 
by the UN contractors; how did they report irregularities, and were 
they stationed at all the border crossings into Iraq? Were they 
inspected on the way out?

    Answer. Cotecna's mandate was to oversee the arrival in Iraq of OFF 
merchandise. Cotecna, and its predecessor, Lloyd's Registry, were not 
authorized by the Security Council to inspect goods shipped to Iraq 
outside the Oil-for-Food Program. They were not authorized to function 
as Iraq's customs agent. Cotecna verified the arrival of Oil-for-Food 
goods in country. Suppliers were required to obtain Cotecna's stamp of 
authentication as a prerequisite for disbursement of funds from the UN 
escrow account.
    Under Resolution 661 and subsequent resolutions, member states, 
including Iraq's frontline neighbors, were obligated to adhere to the 
sanctions imposed by the Security Council. In May 2001, the U.S. and UK 
delegations circulated a draft resolution to other Security Council 
members that would have tightened border monitoring by neighboring 
states. As part of this ``smart sanctions'' package that also included 
creation of a ``Goods Review List'' (subsequently supported by the 
Council under UNSCR 1409-05/14/02), the U.S.-UK draft resolution called 
for improving and strengthening land-based monitoring of Iraq's 
borders. Certain other Council members, as well as representatives of 
Iraq's neighbors, strongly opposed the U.S.-UK text, and the draft 
resolution was never adopted.

    Question 3. There are numerous reports regarding passenger ferries 
being used to smuggle goods into Iraq. Where did these ships originate? 
Did any member of the 661 Committee suggest that the passengers and 
goods transported on these ships be scrutinized--either in Iraq or at 
the ports of embarkation--if so, which members? Which members opposed 
these checks?

    Answer. In 1997, the 661 Committee authorized ferry service 
intended for religious pilgrims traveling between the United Arab 
Emirates (UAE) and Iraq. Ferries were authorized to carry passengers 
and their personal belongings, including their personal automobile. The 
UAE accepted the primary responsibility for ensuring sanctions 
compliance by the ferry operators, including by inspecting cargo for 
violations. When concerns were brought to light on UAE non-compliance 
with the procedures, the 661 Iraq Sanctions Committee, at the urging of 
the U.S. and UK, raised this issue with UAE authorities through written 
communications.
    Because of ongoing concerns over non-compliance with the rules 
governing the UAE ferry service, the U.S. and UK, through the 
Committee, subsequently blocked requests from Oman, Bahrain and Qatar 
to open ferry services to Iraq.

    Question 4. Why didn't the 661 Committee create a group of market 
sector experts to examine contracts for prices? We know that some 
contracts were rejected by the 661 Committee because they contained 
prohibited items; were any contracts rejected because they were either 
over- or under-priced?

    Answer. Customs experts at OIP reviewed the value of each OFF 
contract to ensure that the price was within a credible range. These 
experts, on occasion, did identify overpriced contracts, and informed 
the 661 Committee thereafter. That said, we should remember that the 
GOI did not overtly charge the kickback--they increased the price of 
some contracts only marginally, in order to keep it under the radar of 
those who would check for price fluctuations. Secondly, prices on OFF 
contracts were for delivered goods. Port fees, internal Iraqi 
distribution costs, warehousing fees, and related expenses controlled 
by the former Iraqi regime were included in the overall contract costs, 
making it difficult to isolate the prices being charged for each 
requested commodity.

    Question 5. What role did the three-nation Board of Auditors play 
in the UN's oversight process of the Oil-for-Food Program? Which 
nations were members of the Board?

    Answer. The three-nation UN Board of Auditors acts much like the 
United States' General Accounting Office to ensure UN programs and 
operations are operated in a fiscally responsible manner, and that all 
funds are appropriately spent. The current UN Board comprises 
representatives of France, the Philippines, and South Africa. 
Previously during this period, members included the United Kingdom, 
India, and Ghana. The Board audited the financial statements of the UN 
Iraq escrow account in accordance with Resolution 986 (1995) and the 
May 1996 MOU signed between the former Iraqi Government and the UN.
    Such audits were conducted to ensure that expenditures were 
incurred for purposes approved by the 661 Committee and to ascertain 
whether income and expenditures were properly classified and recorded 
according to UN financial rules and regulations. Board members also 
verified that the financial statements of the UN escrow account were 
presented fairly and accurately.
    The Board audited the Oil-for-Food Program every six months, 
following the conclusion of each phase of the Program. There were 
thirteen 6-month phases of the OFF Program. The UN also conducted 
special, focused, audits such as an audit of UN Treasury operations, 
and an audit of UN agency operations in Northern Iraq.
    These reports were circulated to 661 Committee members. USUN sent 
copies of such reports to the State Department.
    The UN Board audited the operations of the Oil-for-Food Program, 
including the operations of UN offices in Iraq, and the UN Office of 
the Iraq Program (OIP) in New York.

    Question 6. Were audits conducted of the companies who monitored 
the arrival of goods into Iraq, first by Lloyds of London and then by 
Cotecna? Did the U.S. see these audits? Were any irregularities noted?

    Answer. The UN Board audited the contracts concluded between the UN 
and the firms Lloyds Registry, Cotecna, and Saybolt. Lloyds (British) 
and Cotecna (Swiss) furnished independent inspection agents who 
authenticated the arrival in Iraq of humanitarian supplies shipped 
under the Oil-for-Food Program. Saybolt (Dutch) provided independent 
agents who monitored oil exports from Iraq. This information was 
included in the reports circulated to all 661 Committee members. This 
information was included in the audit reports of the UN Board of 
Auditors that were circulated to all Committee members.
    Separately, the UN Office of Internal Oversight Services (OIOS) 
conducted 55 separate reviews of various aspects of the UN Oil-for-Food 
(OFF) Program, including an assessment of Saybolt's and Cotecna's 
operations. OIOS reports are intended for internal UN use only and are 
not circulated to UN member states.

    Question 7. What was the role of the Oil Observers on the 661 
Committee, who were they, and how impartial were they?

    Answer. The UN Oil Overseers were mandated by the 661 Committee, 
per the Committee's guidelines, to provide the Committee an independent 
analysis of oil pricing from the Iraqi State Oil Marketing Organization 
(SOMO). There were 6 Oil Overseers during the life of the program--
their nationalities were U.S., French, Russian, Norwegian, Belgian and 
Netherlands. We found the analysis provided by the UN Oil Overseers to 
have been accurate, and, on occasion, helpful to U.S. and UK efforts to 
address allegations that the former Iraqi regime was illicitly imposing 
price premiums on its oil sales.

    Question 8. Some states complained that UN sanctions were hampering 
Iraqi oil exports. Can you provide the Committee with the level of 
these exports relative to both the beginning of the Oil-for-Food 
program and the imposition of retroactive pricing in 2001?

    Answer. Oil Exports Under Oil-for-Food

 
------------------------------------------------------------------------
                                      Volume of oil       Value of oil
Phase I-VIII (Dec. 1996-June 2000)     (millions of         exported
                                         barrels)          ($million)
------------------------------------------------------------------------
One (Dec. 1996-June 1997)           120                $2,150
Two (June 1997-Dec. 1997)           127                2,125
Three (Dec. 1997-May 1998)          182                2,085
Four (May 1998-Nov. 1998)           308                3,027
Five (Nov. 1998-May 1999)           360.8              3,947
Six (May 1999-Dec. 1999)            389.6              7,402
Seven (Dec. 1999-June 2000)         343.4              8,302
Eight (June 2000-Dec. 2000)         375.7              9,564
------------------------------------------------------------------------
    Total                           2,206.5            $38,602
------------------------------------------------------------------------


 
------------------------------------------------------------------------
                                      Volume of oil       Value of oil
   Phase IX-XIII (June 2000-June       (millions of         exported
               2003)                     barrels)          ($million)
------------------------------------------------------------------------
Nine (Dec. 2000-July 2001)          293                $5,638
Ten (July 2001-Nov. 2001) \1\       300.2              5,350
Eleven (Dec. 2001-May 2002)         225.9              4,589
Twelve (May 2002-Dec. 2002)         232.7              5,639
Thirteen (Dec. 2002-June 2003)      169.6              4,413
------------------------------------------------------------------------
  Subtotal Phases IX-XIII           1221.4             $25,629
------------------------------------------------------------------------
    Grand Total:                    3,427.9            $64,231
 
------------------------------------------------------------------------
\1\ Imposition of retroactive pricing begins Oct. 2001


    During the first three phases of the program, Iraq exported between 
120-182 million barrels of oil within a 6-month period. Oil exports hit 
their maximum, under the program in Phases 5 through 8 between November 
1998 and December 2000 when exports were between 343 and 390 million 
barrels during each phase.
    After the imposition of retroactive pricing, oil exports between 
December 2001 and December 2002 were between 225 and 232 million 
barrels per phase. Although some Council members blamed retroactive 
pricing for the decline, the GOI's role in causing uncertainty over 
Iraqi exports by abruptly halting oil exports on three separate 
occasions, including between April and May of 2002, was a contributing 
factor in the decline of oil sales.

    Question 9. What impact did Saddam's arbitrary stoppages of oil 
production have on the program; how many of such stoppages occurred?

    Answer. The former government of Iraq abruptly halted its oil 
exports on three separate occasions:
    (a) December 1-12, 2000: Iraqi oil exports halted to express Iraqi 
government displeasure with the refusal of the U.S. and UK, as members 
of the 661 Committee, to agree to oil prices proposed by the Iraqi 
State Oil Marketing Organization (SOMO) at the beginning of December; 
the U.S. and UK maintained such prices varied significantly from prices 
for comparable crude oils from other markets, and thus did not reflect 
``fair market value'' as mandated under UNSCR 986 (1995); we estimate 
the loss of revenue to the UN Oil-for-Food (OFF) Program of the 
temporary halt in Iraqi oil exports to have been approximately USD 600 
million;
    (b) June 4, 2001-July 10, 2001: Iraq suspended its oil exports for 
a second time to protest the Security Council's adoption of Resolution 
1352 (2001), which presaged the Council's willingness to consider 
future adoption of a Goods Review List of items with potential dual-use 
application; we estimate the loss of revenue to the OFF Program to have 
been approximately USD 933 million;
    (c) April 8, 2002-May 8, 2002: The former Iraqi government 
arbitrarily suspended its oil sales for a third time as an expression 
of support for the Palestinian people; we estimate the loss of revenue 
to the OFF Program to have been approximately USD 750 million.

    Questions 10. What mechanisms were in place to ensure that once the 
UN contract company monitoring Iraq's oil export--Saybolt--stopped work 
for the day, that Iraqis weren't able to continue pumping oil into 
tankers? Did these reports make it to the 661 Committee? What would 
happen?

    Answer. Independent inspection agents from the Dutch firm, Saybolt, 
were contracted by the United Nations to monitor oil loadings at Mina 
al-Bakr oil terminal in the Persian Gulf and to oversee oil flows 
through the Iraq-Turkey pipeline. Saybolt representatives periodically 
briefed members of the 661 Committee on their work in Iraq. Separately, 
the UN Office of the Iraq Program (OIP) provided updates and comments 
on Saybolt's operations in the Secretary-General's regular 90-day and 
180-day reports on the Oil-for-Food Program to the Security Council.
    The issue of ensuring 24-hour Saybolt monitoring at the Mina al-
Bakr oil loading platform was discussed by 661 Committee members on 
November 6, 2001, and again on November 8, 2001, in conjunction with 
the Committee's receipt of information concerning the reported over-
loading of the vessel, Essex, on two separate occasions (May 16, 2001; 
August 27, 2001). The U.S., with UK support, called for 24-hour Saybolt 
monitoring at Mina al-Bakr, as well as the use of seals on oil 
manifolds of vessels, and meters on the oil pumps. The UN Office of the 
Iraq Program (OIP) subsequently reported to the 661 Committee that the 
U.S. proposals were being acted upon in the field.

    Question 11. Are you aware of a second oil platform in the Gulf 
that was not being monitored by the UN that might have been used to 
pump out Iraqi oil? Was the 661 Committee aware of this?

    Answer. A second Iraqi oil-loading terminal in the Persian Gulf at 
Khoar al Amaya was significantly damaged during the 1991 Gulf War. The 
U.S. resisted Iraqi efforts to repair and rebuild the Khoar al Amaya 
facility, including by placing ``holds'' on all contracts for items 
destined for use at Khoar al Amaya, unless and until the former Iraqi 
government would agree to permit independent oil inspection agents 
stationed at any rebuilt Khoar facility. The Iraqis, and several 661 
Committee members, opposed the conditions sought by the United States. 
The U.S. harbored suspicions that the Saddam regime was using the Khoar 
al Amaya facility to smuggle unauthorized oil exports out of Iraq. 
While the Multinational Maritime Interception Force (MIF) kept Khoar 
under regular surveillance, Saybolt, on behalf of the UN, was not 
mandated to monitor oil shipments from Khoar al Amaya.

    Question 12. What can the Oil-for-Food Program tell us about the 
difficulties of maintaining international consensus on sanctions 
regimes for an extended period of time?

    Answer. No sanctions regime, no matter how well targeted or well-
structured, can be expected to ensure full compliance with the 
restrictive measures that have been imposed. Unless the individual, 
group, or state targeted for such measures is willing to comply fully 
with the demands placed upon them to modify a policy or action 
determined to be unacceptable to the international community, that 
targeted actor invariably will seek ways to evade the sanctions and to 
``wait out'' the political will and unity of purpose of those who 
imposed the restrictive measures until such measures are lessened or 
removed. This has been the case with sanctions operations throughout 
history, and that was the case with the multilateral, comprehensive 
sanctions regime imposed by the Security Council on the former Iraqi 
government.
    The effectiveness of most sanctions regimes diminishes over time, 
particularly when non-compliance produces economic gain. The Saddam 
Hussein regime's non-compliance began shortly after comprehensive, 
multilateral sanctions were imposed on Iraq. Hussein effectively used 
economic incentives to his advantage to garner sympathy and support 
from a number of states, including key Security Council members. The 
weakening of Council support for the sanctions regime on Iraq already 
has been well documented.

    Question 13. How can international sanctions regimes be better 
designed to impede the ability of outlaw regimes to proliferate weapons 
of mass destruction, while minimizing the adverse consequences on 
civilian populations?

    Answer. The Security Council's use of sanction measures as a key 
policy tool has evolved significantly over the past 10-12 years, 
spurred on by the divergent reaction among UN member states to the 
impact of the multilateral sanctions imposed in 1990 by the Security 
Council on Iraq. Largely in reaction to the Iraq sanctions, many UN 
members have pressed hard to ensure new sanctions regimes supported by 
the Council are more narrowly focused on those most responsible for 
unacceptable or harmful behavior or policies. This trend toward more 
``targeted'' multilateral sanctions is reflected in the nature of 
sanction measures currently in place on non-state actors in Liberia 
(Resolution 1522), Al-Qaeda and Taliban members (Resolution 1267), and 
those seeking to ship arms into the Democratic Republic of the Congo 
(Resolution 1493). In each case, the sanction measures are designed to 
focus on a small group of individuals, not the general civilian 
population in the targeted state.
    The effectiveness of all sanction measures rests on the willingness 
of states to fulfill their obligations under the UN Charter to 
implement and enforce the restrictive measures imposed by the Security 
Council. When states or other entities are willing to collude with the 
target of the sanctions to evade the measures, the usefulness and 
impact of the sanctions rapidly deteriorates. Short of threatening 
imposition of secondary sanctions on those states that fail to 
implement the original measures, bringing political pressure to bear 
against non-compliant states often produces only limited results.
    International sanctions regimes imposed to impede the ability, of 
outlaw regimes to proliferate weapons of mass destruction will depend 
for their effectiveness on the commitment of states, particularly those 
bordering the target country, to prevent that state's access to 
prohibited goods. Publicly identifying and criticizing (``naming and 
shaming'') non-compliant states is one method for promoting effective 
implementation. Limiting the restrictions to those items and 
individuals most closely associated with WMD, for example, will reduce 
the adverse consequences of such measures on civilian populations in 
the targeted state.

                                 ______
                                 

   Responses of Hon. Robin L. Raphel to Additional Questions for the 
                                 Record

            Questions Submitted by Senator Richard G. Lugar

    Question 1. How are current stocks of food and medicine monitored?

    Answer:

   The Iraqi Ministry of Trade is responsible for keeping 
        records on food stocks. Warehouses and silos throughout the 
        country report on stock levels on a weekly basis.

   The World Food Program is providing the Ministry of Trade 
        with a system of high frequency radios to improve communication 
        between Baghdad and outlying warehouses and silos.

   In preparation for the upcoming transfer of sovereignty, CPA 
        has handed full authority for all health issues, including OFF 
        monitoring, to the Ministry of Health. The Ministry is now 
        responsible for tracking stocks of medicine.

    Question 2. Who currently handles the food ration distribution in 
Iraq at the local level? Are they the same individuals (de-
Baathification aside) that ran it when Saddam was in power? What role 
will the World Food Program play?

    Answer:

   To a large degree, the same local food agents that 
        distributed food rations prior to the conflict are doing so 
        today and were not affected by de-Baathification programs. The 
        vendors tended to be local shopkeepers, many of them women.

   Before the conflict, the World Food Program monitored the 
        Public Distribution System in south and central Iraq, and was 
        responsible for implementing it in the three northern 
        govemorates.

   From June 2003 through November 2003, the World Food Program 
        delivered more than 2.1 million tons into Iraq, the largest 
        amount of food assistance ever delivered in such a short period 
        of time.

   In January 2004 the WFP undertook to procure and deliver 
        $900 million worth of food commodities to help the Ministry of 
        Trade ensure against gaps in the food pipeline.

   The Ministry of Trade took over all procurement of food 
        commodities in April 2004.

   WFP expects to resume its normal programs for vulnerable 
        groups once the UN assistance agencies return to Iraq.

    Question 3. How did the Iraqis view the Oil-for-Food Program?

    Answer:

   It is important to distinguish between the Public 
        Distribution System (PDS), which provided monthly rations to 
        all Iraqis, and the UN mandated OFF program, under which Iraqi 
        oil revenues were used to procure food and other essential 
        goods from international suppliers.

   The Iraqis are by and large very proud of their ability to 
        feed the Iraqi people through years of sanctions under the PDS.

   We are not aware of any systematic analysis or survey that 
        provides reliable data on Iraqi views of the OFF program, but 
        many Iraqis share the general perception that the regime 
        officials enriched themselves under the OFF program during 
        Saddam's rule. Some resented the UN for its association with 
        the sanctions regime and the OFF program. Some believed the UN 
        permitted the program to be manipulated by the regime, and that 
        it interfered unnecessarily with Iraqi management of the PDS.

    Question 4. What has happened to the contracts since the 
transition? Have we ensured that the graft and kickbacks are no longer 
happening?

    Answer:

   CPA currently oversees the ongoing processing and delivery 
        of OFF contracts. After June 30, Iraqi ministries will take 
        full responsibility for the remaining OFF contracts.

   Before the November 21 transition, UN agencies had 
        renegotiated almost all prioritized contracts to ensure excess 
        fees or ``kickbacks'' were removed. It has put systems in place 
        to prevent return to past practices.

   DOD's Defense Contracting Management Agency renegotiated the 
        remaining 250 contracts after November 21. They also negotiated 
        out the ``kickbacks.''

   To help guard against further corruption, there are now 
        Inspectors General in place in each ministry. CPA is training 
        ministry officials in more transparent procurement practices. 
        The CPA Web site explicitly states that there are to be no 
        commissions paid by suppliers.

   The Board of Supreme Audit is charged with investigating 
        corruption charges concerning the OFF program in Iraq.

    Question 5. What mechanisms are in place to ensure that kickbacks 
and payoffs will not resume when the Oil-for-Food Program is turned 
back to the Iraqis?

    Answer:

   CPA has renegotiated all prioritized contracts have been 
        renegotiated to ensure, among other things, that any bribes or 
        kickbacks were removed. Systems are now in place to prevent the 
        return to past practices.

   For example, there are now Inspectors General in place in 
        each ministry, and a Board of Supreme Audit has been appointed 
        and is currently working to secure all OFF-related documents 
        from each ministry. Documents are stored securely in the 
        Ministry of Oil and will be moved to the Iraq Special Tribunal 
        (IST) where they will be under guard by coalition forces.

   A new independent Commission on Public Integrity has been 
        established to develop and implement codes of conduct for 
        government officials in each ministry and develop a new 
        financial disclosure regime.

   The CPA and Governing Council are developing new banking and 
        related rules to prevent money laundering and a revised public 
        procurement law to promote greater transparency.

   We expect to retain, subject to Iraqi agreement, a number of 
        technical advisors to help the Iraqi ministries continue with 
        their reform and transition processes.

    Question 6. How many years will it take for Iraq to be able to feed 
itself? Was it not at one point a net food exporter? Would this again 
be possible?

    Answer:

   Iraq has the potential to feed itself, but the agricultural 
        sector is depressed. With rich agricultural lands--more surface 
        water than any Middle Eastern country--it is possible that Iraq 
        could become a net food exporter. Iraq was a net food exporter 
        in the 1970's, but mismanagement of the agriculture sector 
        under Saddam Hussein contributed to serious decline in 
        production.

   Food subsidies and the importation of many food commodities 
        under the Oil-for-Food Program have also been factors in the 
        lack of robust agricultural activity, because these programs 
        tended to depress local crop prices, and thus incentives for 
        farmers to plant.

   We expect that the Iraqi government will want to take steps 
        to reduce dependency on the Public Distribution System and to 
        increase efficiency in the agricultural sector. Despite poor 
        performance, the agricultural sector is still the leading 
        employer.

   The best outcome is not for Iraq to ``feed itself'' or 
        become self-sufficient in food commodties, but rather to export 
        agricultural projects in the areas where it has a comparative 
        advantage, and import where others have a significant 
        advantage, and ultimately to become a net exporter.

          Questions Submitted by Senator Joseph R. Biden, Jr.

    Question 7. What concrete measures is the Coalition Provisional 
Authority taking to reform the culture of corruption that has long 
existed in Iraq? How effective have these measures been in your 
estimation?

    Answer:

   Corruption has long been a serious problem in Iraq and will 
        require a serious commitment from the Iraqi government.

   The TAL provides for a system of checks and balances and a 
        functioning judicial system that can have a dampening effect on 
        competition.

   Ambassador Bremer has established Inspectors General in each 
        Iraqi Ministry.

   Government-wide, there is a new Commission on Public 
        Integrity and a Board of Supreme Audit that functions much like 
        our General Accounting Office.

   The Coalition Provisional Authority (CPA) has placed 
        emphasis on capacity building in the government to ensure 
        accountability and business practices that meet international 
        standards.

   New government-wide codes of conduct have been written and 
        provided to ministries for implementation. All ministries are 
        expected to implement ethics programs in the next 60 to 90 
        days. USAID is providing ethics instructors to each ministry. 
        At the end of the training period, each employee will be 
        required to sign a statement committing him/herself to the new 
        code.

    Question 8. After the restoration of Iraqi sovereignty,what 
specific mechanisms will the United States and its coalition partners 
have in place to block corruption?

    Answer:

   After June 30, the Iraqi government will play the primary 
        role in preventing corruption. CPA is working hard to help the 
        Iraqis put in place the necessary mechanisms to ensure 
        financial accountability and transparency after the transfer of 
        sovereignty.

   On January 28, the Iraqi Governing Council (IGC) and 
        Ambassador Bremer established the Commission on Public 
        Integrity, an independent body dedicated to enforcing anti-
        corruption laws.

   On February 5, Ambassador Bremer issued an order creating an 
        independent Inspector General in each Iraqi ministry to pursue 
        investigations of waste, fraud, abuse, and illegal acts. These 
        inspectors general will cooperate with the Commission on Public 
        Integrity.

   In addition, the Administration supported the creation of 
        the International Advisory and Monitoring Board (IAMB), an 
        independent body endorsed by UN Security Council resolution 
        1483 to oversee audits of Iraqi oil sales and expenditures from 
        the Development Fund for Iraq (DFI). The IAMB and CPA 
        collaborated on the recent hiring of an independent public 
        accounting firm to audit oil sales and the DFI.

   As we work on next steps in the Security Council, we will 
        discuss with the international community preserving the IAMB 
        during the transition period to provide oversight on the 
        transparent and appropriate handling of Iraq's oil revenues.

   CPA and the IGC, in collaboration with the IMF, World Bank, 
        Washington agencies and our coalition partners, are preparing 
        new laws on financial management and procurement that will 
        provide the Iraqi interim government with guidance on how to 
        develop a budget and disburse government funds in a transparent 
        manner.

   Ambassador Bremer also has empowered the Iraqi Supreme Board 
        of Auditors (BSA) to perform an oversight function, including 
        conducting an investigation of possible past corruption of the 
        UN Oil-for-Food Program. Bremer has committed approximately USD 
        5 million from the Development Fund for Iraq (DFI) to enable 
        the BSA to carry out a thorough investigation.

    Question 9. After the restoration of Iraqi sovereignty, what 
oversight authority will Americans and coalition technical advisors and 
inspectors general have in the various Iraqi ministries?

    Answer:

   American and coalition advisors will continue to assist 
        ministries after June 30 in accordance with the desires of the 
        Iraqi ministries. While the Iraqis will need to make decisions 
        for themselves, we plan to remain in a supportive role to 
        provide technical advice and oversight as requested to 
        strengthen reform and transition efforts.

   U.S. bilateral assistance for Iraq will continue to be 
        audited by U.S. government agencies.

               Questions Submitted by Senator Chuck Hagel

    Question 10. Has the Coalition Provisional Authority received from 
the United Nations full details on contracts negotiated by Saddam 
Hussein's government through the Oil-for-Food Program? If not, what 
steps are you taking to get this information?

    Answer:

   We have asked the UN to provide the Coalition Provisional 
        Authority (CPA) with all contracts associated with Oil for 
        Food, as well as amendments to those contracts, letters of 
        credit and amendments, and supporting documents.

   We have also requested bank statements and financial 
        documents that will allow CPA, and after June 30 the Iraqi 
        government, to administer the contracts fully and in accordance 
        with international legal standards.

   The UN has provided many records, but files are not 
        complete. We continue to work with the UN to ensure that we 
        have access to needed records.

   CPA is cooperating closely with the newly constituted UN 
        Voicker Commission, appointed by Secretary General Annan, in 
        its investigation of corruption in the Oil-for-Food Program.

    Question 11. Does the CPA have a list of former Iraqi or other 
government officials and businessmen who were involved in kickbacks and 
questionable contracts? If there is not a list, what steps are being 
taken to deter future corruption and malfeasance in Iraq by these 
individuals?

    Answer:

   The CPA has the names of the companies which had outstanding 
        contracts with Iraq under the Oil-for-Food Program in March 
        2003, and the details of some 30,000 associated contracts.

   It should be emphasized, however, that these contracts were 
        all delivered to the UN in accordance with OFF procedures. The 
        presence of a company on this list does not automatically imply 
        wrongdoing.

   CPA does not have an authenticated copy of the list of 
        individual official organizations allegedly bribed by Saddam 
        Hussein. The purpose of the investigation now underway is to 
        bring to light any wrongdoing that may have occurred. Should 
        any officials or businessmen be found to be involved in 
        kickbacks, or questionable contracts emerge, we will take the 
        steps necessary to minimize any opportunity for these 
        individuals to be involved in corrupt activities in the future.

    Question 12. Do we have any information regarding questionable 
business practices and contracts involving members of the Iraqi 
Governing Council?

    Answer:

   The purpose of the UN investigation now underway is to bring 
        to light any information about any wrongdoing that may have 
        occurred. We intend to continue to cooperate fully in the 
        effort to bring to the light any corrupt and questionable 
        practices.

   The staff of the UN Commission investigating alleged abuses 
        in the Oil-for-Food Program will travel to Baghdad for the 
        first time the week of May 10.

   The UN Commission will look into allegations involving 
        members of the Iraq Governing Council, as well as other Iraqi 
        officials and other individuals and institutions

    Question 13. Please provide full information on a contract for 
central irrigation pivots awarded to the Saudi Al-Khorayef Company 
(Comm. No. A-1200051). What is the amount of this contract? Who was the 
Iraqi point of contact for this company when the contract was 
negotiated? What is the status of other agricultural contracts 
negotiated during Oil-for-Food?

    Answer:

   The Department of State does not have independent 
        information on this contract. (The Comm. No. cited above is not 
        accurate, but it is the correct contract). However, we 
        requested information on this project from the Coalition 
        Provisional Authority (CPA) in Baghdad.

   CPA Baghdad's Coordination Center has informed us that the 
        value of the contract is $14,784,589. The Coordination Center 
        does not have the information on who the Iraqi point of contact 
        was for the contract.

   We have also asked our mission at the UN to review its 
        records to determine if it has this or any other useful 
        information to add going forward.

   There are 145 other agricultural contracts that are 
        currently active (amended, approved and funded), out of a total 
        of 2,526 approved agricultural contracts under the Oil-for-Food 
        Program.

                                 ______
                                 

Responses of Hon. Kim R. Holmes to Additional Questions for the Record 
                 Submitted by Senator Richard G. Lugar

    Question 1. A GAO study from May 2002 provided excellent details 
regarding Saddam's violations of both the Oil-for-Food Program and his 
smuggling operations in general. What use did the U.S. make of this 
information in the Committee?

    Answer. Information on sanctions violations noted in the 2002 GAO 
report was already well known and was obtained largely from U.S. 
Government and UN reports. In April 2001 the U.S. and UK began 
experimenting with requiring retroactive oil pricing in the 661 
Sanctions Committee. By October 2001 that practice was 
institutionalized, resulting in largely eliminating the illegal oil 
surcharge referenced in the GAO report.
    Oil smuggling through bordering states remained a problem that the 
661 Committee was unable to agree on how to address. U.S. and UK 
representatives did raise concerns about oil smuggling through border 
states in 661 Sanctions Committee discussions, but such allegations 
routinely were denied, in particular by Syria when it was a Committee 
member.
    In March 2001, the U.S. and UK also proposed to the 661 Committee 
that the UN Secretariat (Office of the Iraq Program) produce a report 
on Iraqi efforts to charge suppliers commissions on their contracts. 
Our efforts were not successful because the Secretariat indicated that 
it had only limited, informal information on the allegations. The 
detailed information we have now was provided by Iraqi ministry 
officials following the fall of the regime.

    Question 2. Who was responsible for shipping food and medicine 
purchased by Saddam to the Kurdish regions in the North? Were these 
shipments regularly delayed, if so by how much--weeks or months?

    Answer. The former Iraqi regime, in particular its Ministry of 
Trade, was responsible for ensuring the timely delivery of OFF 
shipments, including bulk food and medicine supplies for the three 
northern governorates. Once these shipments were sent from central 
warehouses to Mosul and Kirkuk, World Food Program (WFP) 
representatives working in the North then arranged for the distribution 
of these supplies to the end user.
    World Health Organization (WHO) officials collected medical 
supplies for use in northern Iraq from central warehouses in central/
southern Iraq. UN officials periodically criticized the Iraqi 
government in the latter phases of the program for stockpiling in 
central and southern Iraq medical supplies originally destined for 
distribution throughout the country.
    The UN concluded that reported delays were a result of operational 
problems in the distribution system nationwide. However, to pressure 
the Iraqi central government to make deliveries of food and medicine to 
the North, the UN delayed the transfer of funds from the ``13 percent'' 
UN escrow account (set aside for procurement of funds destined for the 
three northern govemorates) to the ``59 percent'' account (for 
procurement of goods for central and southern Iraq) until it was 
confirmed that such items were actually received in the North.

    Question 3. What was the Multilateral Interception Force? Where did 
it conduct its inspections--on the high seas or onshore? Who ran it?

    Answer. The Multinational Interception Force (MIF) was composed of 
21 member states cooperating under the operational command of the MIF 
coordinator--the Commander, U.S. Fifth Fleet. The MIF conducted 
interceptions of maritime shipping to inspect and verify cargos and 
destinations and insure strict implementation of UNSCR 661, focusing 
especially on cargos of outbound oil but also inbound goods not 
approved by the UN 661 Iraq Sanctions Committee. The MIF operated both 
on the high seas and in the coastal waters of cooperating states such 
as the UAE. Over a more than 12-year period the MIF boarded and 
inspected over 21,000 vessels and diverted more than 1,200 to port for 
investigation of suspected sanctions violations.

    Question 4. In 2002, the GAO reported that Syria was illegally 
exporting Iraqi oil outside of the Oil-for-Food system. When did the 
U.S. learn of this smuggling and what did the administration do to 
terminate this smuggling?

    Answer. The GAO report quoted USG officials. From the time when 
sanctions against Iraq were established in 1990, Iraq continued to 
supply oil to neighboring states, whose economies depended on Iraqi 
oil. Syria imported Iraqi oil both for its domestic use and for export, 
but denied doing so. The administration refused to accept Syrian 
denials and repeatedly pressed Syria diplomatically in the Security 
Council and the 661 Iraq Sanctions Committee to halt the illegal 
shipments. Syria earned an estimated $3 billion in illicit trade with 
Iraq in violation of United Nations sanctions.

    Question 5. The 2002 GAO report suggests that certain nations were 
buying cheap Iraqi oil during the embargo, and were writing down debt 
owed them by the Iraqi regime. Is there any evidence that these nations 
have done so?

    Answer. We are not aware of any evidence that those countries we 
believed were importing significant quantities of Iraqi oil during the 
embargo--Syria, Jordan, and Turkey--were also writing down debt owed 
them by the Iraqi regime. With the fall of the Saddam regime, official 
Iraqi records can now be inspected. In addition to the work of the 
Volcker Inquiry, the Iraqi Board of Supreme Audit is conducting an 
investigation and has retained an international accounting firm. We 
await the findings from these investigations.

                                 ______
                                 

Responses of Joseph A. Christoff to Additional Questions for the Record 
                 Submitted by Senator Richard G. Lugar

    Question 1. Was OFF structured differently in the north? If so, can 
we determine if it was run with any greater degree of efficiency? Can 
you provide statistics on this?

    Answer. The program in the north, which received 13 percent of Oil 
for Food revenues and covered the three northern governorates, was 
administered by nine U.N. specialized agencies, including the World 
Food Program, the U.N. Children's Fund, the U.N. Development Program, 
and the World Health Organization. The U.N. agencies primarily managed 
development projects in the north. Most of the food and medicines for 
the north were procured in bulk by the former regime in Baghdad for the 
entire country. The World Food Program implemented and oversaw the food 
distribution in the north. The terms were established in the 1996 
memorandum of understanding between Iraq and the United Nations and in 
sanctions committee procedures.
    The program in the southern and central governorates, which 
received 59 percent of Oil for Food revenues, was administered by the 
former regime. Unlike the north, the program in the south and central 
governorates was primarily a commodity import program run by the 
Ministry of Trade and other relevant ministries.
    According to the U.N. Office of the Iraq Program, as of December 
31, 2002, approved contracts for the north had totaled about $2.1 
billion for projects and goods in nine sectors.\1\ This did not include 
$2.3 billion in food and health sector supplies purchased by the Iraqi 
central government and $771 million for oil industry spare parts and 
equipment. Approved contracts for commodities in central and southern 
Iraq totaled about $36.7 billion in 15 sectors.\2\
---------------------------------------------------------------------------
    \1\ Agriculture, de-mining, education, electricity, health, 
nutrition, settlement rehabilitation and emergency assistance to 
internally displaced persons, telecommunications, and water and 
sanitation.
    \2\ Food, food handling, health, oil spares, electricity, water and 
sanitation, agriculture, education, communication and transportation, 
housing, special allocations, construction, industry, justice, and 
religious affairs.

    Question 2. Can you comment on the purported SOMO document 
published in Iraqi media in January that lists individuals, companies, 
---------------------------------------------------------------------------
and states that received oil vouchers from Saddam?

    Answer. We do not have any information on these documents.

    Question 3. What were the terms of the contract for the bank--BNP--
used by the UN to hold the escrow account for the funds generated by 
the Oil for Food program? Was it fixed fee or competitively bid? What 
was the length of the contract and was it ever re-bid?

    Answer. We do not have the terms of the contract with BNP. The 
United Nations prepared a list of international banks with necessary 
credit ratings, strong capital positions, and the capability to handle 
the magnitude of transactions. The United Nations consulted with Iraq 
about the list and several banks were then asked to submit bids. We do 
not know how the selection was made.
    U.N. external audit reports regularly recommended portfolio 
diversification in consultation with Iraqi government from the onset of 
the Oil For Food program. The Under Secretary-General for Management 
also stressed the need for bank diversification to Iraq's Permanent 
Representative to the United Nations, and he requested an early 
decision from the Iraqi government on the selection of additional 
financial institutions. The Iraqi government agreed to execute 
agreements with three additional banks in 2000. In its 2001 report, the 
U.N. Board of External Auditors recommended that the U.N. Office of the 
Iraq Program continue efforts to diversify its investments and broaden 
the selection base for acceptable banks. We do not know which 
additional banks were chosen.

                                 ______
                                 

  Response of Michael J. Thibault to an Addditional Question for the 
              Record Submitted by Senator Richard G. Lugar

    Question. Would it be accurate to say that, with the exception of 
items on the Goods Review List, Saddam could choose what he wanted to 
buy, from whom and at what price? As auditors, what is your assessment 
of the potential for fraud in a system set up like this? Can you make 
recommendations about the structure of such a program--if it were done 
by the United Nations--in the future?

    Answer. In light of the fact that the United Nations staff told 
DCAA audit staff that there was not a procurement system in place, 
including a specific requirements determination process, and that there 
were no related price or audit evaluations, I would concur that the 
prior regime could and did likely choose what they wanted to buy. There 
were simply too many items contracted for, funded, and approved that 
clearly did not appear to have utility for the Iraqi people. In 
addition, approximately half of the contracts were substantially over-
priced, indicating that there were minimal to nonexistent controls over 
the price.
    As audit managers, we view situations in light of overall audit 
risk. In a situation where there is no apparent audit oversight, and 
where there are not even the basic components of a procurement process 
and related internal controls, the risk for improprieties, including 
fraud, are extremely high--essentially off of any risk charts, since no 
one is looking at critical contract pricing aspects.
    If asked, DCAA would recommend that implementation by the United 
Nations of a procurement process with a good requirements definition; 
required proposals by suppliers; proposal audits by independent 
auditors, when appropriate; and negotiation by warranted and 
independent contracting officials is essential to successfully assure 
that similar overpricing does not occur in the future.

                                 ______
                                 

 Responses of Saybolt Eastern Hemisphere B.V., to Additional Questions 
          for the Record Submitted by Senator Richard G. Lugar

    Question 1. Was this contract audited (internally, externally or by 
the UN)? Were there IG reports, etc? If so, can you release a copy to 
the committee in advance of a hearing we are trying to do on or about 7 
April.

    Answer. We have been audited by the internal auditors of the United 
Nations. However we have only seen once a full audit report. A request 
for sharing this report will be submitted to the United Nations.

    Question 2. Can the Committee get a copy of the Statement of Work 
or the contract itself?

    Answer. Please see attached document on page     .

    Question 3. What was Saybolt hired to do?

    Answer. Saybolt was retained by the United Nations to monitor the 
exports of crude oil and refined products exported from Iraq from the 
two recognised and authorised export points at Ceyhan, Turkey, and Mina 
al-Bakr, Persian Gulf, under the Security Council Resolution 986 (the 
``Oil for Food'' program) from December 1996 until the commencement of 
hostilities in April 2003.
    This task also included the montoring of all crude oil movements 
via the Iraq-Turkey pipeline (ITP) from the border crossing in Northern 
Iraq (Zahko) to the receiving tank farm in Ceyhan, Turkey.
    Saybolt was also retained by the United Nations to monitor the 
delivery of oil spare parts and equipment approved by the 661 Sanctions 
Committee, supplied under the MOU and funded by the escrow account, 
and, where requested by the 661 Sanctions Committee, to monitor the 
end-use of same.
    Saybolt was also retained to prepare specialised expert reports 
under Security Council Resolutions 1153 (1998), 1284 (2000) and 1330 
(2000).

    Question 3a. What reporting requirements did you have, to whom did 
you report, what did you say?

    Answer:
    1. OIL CARGOES.
    1.1. Reporting was made on a daily basis to the United Nations Oil 
Overseers.
    1.2. The UN Oil overseers received each day an itemised summary of 
all activities covering:
   Volume of oil leaving Iraq via the ITP.
   Volume of oil received in Ceyhan from the ITP.
   Time log of all shipping activities at Ceyhan and Mina al-
        Bakr.
    1.3. Each vessel scheduled to load required a current contract 
approved by SOMO, and the 661. Sanctions Committee, with sufficient 
barrels left to cover the loading. Copies of each contract were sent to 
Saybolt on approval.
    1.4. Each vessel scheduled to load required a Letter of Credit 
whose terms were approved by the UN Oil Overseers. Each approved L/C 
was copied to Saybolt.
    1.5. Each vessel scheduled to load was given a unique file number, 
and all details regarding this vessel were entered on to the United 
Nations Oil for Food Lotus Notes database, live in real-time to the UN 
Oil Overseers.
    1.6. Each crude oil vessel loaded at both Ceyhan and Mina al-Bakr 
was inspected, and analysed at our own laboratories on-site, and a full 
crude oil loading report prepared. The full report was retained at the 
load port. The summary page of each report (summarising the important 
points) was faxed to the UN Oil Overseers, and this page was also 
appended to the real-time Lotus Notes database operated by the UN to 
which Saybolt had reporting access.
    1.7. Saybolt was requested by the United Nations to prepare 
summaries of activities for inclusion in the Office of the Iraq 
Program's 90/180 day reports required under the MOU.
    2. SPARE PARTS & EQUIPMENT.
    2.1. From Phase 4 onwards, the UN Security Council allowed the 
Iraqi Oil industry to purchase up to US$300M per phase of oil spare 
parts subject to the apporval of the 661 Sanctions Committee, funded 
from the escrow account. The amount was later increased to US$600M per 
phase.
    2.2. Approved spare parts were shipped to Iraq against L/C's 
triggered by the arrival at one of four entry points into Iraq where 
the goods were inspected and approved by an independent verification 
agency, Cotecna.
    2.3. Cotecna advised Saybolt of the arrival of these goods, and 
Saybolt then monitored their arrival into approved warehouses. These 
activities were reported by fax on a weekly spare parts activity report 
to the Office of the Iraq Program (OIP) whcih was then forwarded to the 
661 Sanctions Committee. Monitoring activities were also recorded 
electronically on the UN Database against the specific Comm No for each 
spare part order.
    2.4. In some specialized cases, at the request of the Office of the 
Iraq Program Spare Parts Section and/or the 661 Committee, Saybolt were 
requested to monitor the ``end-use'' of equipment.
    2.5. Saybolt was also requested to observe and report, on an ``ad-
hoc'' basis, on contracts such as intelligent pigging where the 
importation of specialised equipment was monitored into the country, 
during use, and then on re-export.
    2.6 Saybolt also monitored the packing and shipment from the 
country of certain strategic items (gas turbines) which could only be 
repaired or serviced overseas.

    Question 3b. Did Saybolt ever document irregularities and report 
them to the UN?

    Answer. Operational problems do occur in a monitoring exercise of 
this size, which were reported and dealt with at the material time.

    Question 3c. If so, what happened? Can you share specifics/
documents?

    Answer. Given sufficient time to locate and retrieve archived 
documents.

    Question 4. What, if any, enforcement role did Saybolt have?

    Answer. Saybolt is a professional monitoring, inspection and 
testing company--we are not, nor ever have been, involved in 
``enforcement''. Saybolt's role was merely to monitor the volumes of 
exports of crude oil from nominated load ports. We reported only to the 
UN, with the exception of one document requested by the UN Oil 
Overseers regarding destination confirmation, no documents were 
provided to any other parties or placed on board vessels.

    Question 5. What was the size of the operation?

    Answer:
        Mina al-Bakr loading platform--Persian Gulf.    6 monitors
        Botas Oil Terminal, Ceyhan, Turkey    5 monitors
        Zahko metering station, N Iraq    3 monitors
        Baghdad Spare Parts monitors    Initial 2--Final 7 to 9

    Question 6. How close was the observation or scrutiny of the 
Saybolt crew to the lifting of oil?
    Answer. (a) Mina al-Bakr is an oil loading platform some 50 kms 
offshore Southern Iraq. The structure is some 1.5 kms in length and the 
Saybolt monitors were housed in accommodation at one end. Owing to a 
lack of metering on the terminal, and the limited (and uncalibrated) 
storage capacity on shore, there was no possibilty to reconcile the 
volumes of oil loaded to vessels with a shore based figure.
    (b) Botas Terminal in Turkey is a multi-functional shore based 
terminal with storage tanks dedicated to the storage of crude oil from 
Iraq via the Iraq-Turkey pipeline. The volumes imported where compared 
with the volumes leaving the metering station at Zahko every 24 hours. 
All loadings to vessels were reconciled with incoming volumes on a 
monthly basis.

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