January 12, 2005

January 12, 2005 | WebMemo on International Organizations

The Oil-for-Food Audits: A Damning Indictment of U.N. Operations in Iraq

It is not hard to see why U.N. Secretary-General Kofi Annan strongly resisted the release of internal U.N. documents relating to the Oil-for-Food program. The 55 audits produced by the Internal Audit Division (IAD) of the U.N. Office of Internal Oversight Services (OIOS) paint an ugly tableau of widespread mismanagement and incompetence on the ground in Iraq, which undoubtedly played an important role in allowing Saddam Hussein to skim billions of dollars from a humanitarian program designed to help the Iraqi people. In particular, the United Nations failed to effectively oversee the U.N.-appointed contractors whose role it was to inspect humanitarian goods coming into Iraq and the export of oil from the country. In addition, the U.N. wasted millions of dollars as a result of overpayments to contractors, appalling lack of oversight, and unjustified spending.

 

The U.N. audits were only released after pressure from Congress and the Bush Administration, as well as calls from Capitol Hill for U.N. Secretary-General Kofi Annan's resignation. The failure to release the audits earlier has undoubtedly damaged Annan's reputation and lent the impression of cover-up, as well as reinforcing the general lack of openness and accountability on the part of the U.N. with regard to Oil for Food.

 

The release of the U.N. audits was accompanied by a briefing paper produced by the U.N.-appointed Independent Inquiry Committee into the United Nations  Oil-for-Food Program, headed by Paul Volcker.[1] In reference to the 24 U.N. audits conducted between 1998 and 2002 covering procurement, project management, and contract management at the Office of the Iraq Program and the Iraq-based organizations, the U.N. Office for the Humanitarian Coordinator for Iraq (UNOHCI), the U.N. Center for Human Settlements (UNCHS), and the U.N. Department of Economic and Social Affairs (DESA), the Volcker Committee concluded,

 

[T]he audit reports describe inadequate procedures, policy, planning, controls and coordination across numerous areas of activity. Some reports, most notably those on DESA, present a wholesale failure of normal management and controls. The reports offer a picture of several organizations debilitated by stress and insufficient resources that too frequently operated in an ineffective, wasteful and unsatisfactory manner. Based on the reports, it appears the OFFP management was not quick to react to criticism and was either unable or unwilling to address issues raised by IAD. In cases where monetary losses from inadequate control and poor judgment were calculated by IAD, the results were often significant-approximately $5 million in total.[2]

 

The Volcker briefing paper was similarly scathing in its assessment of the findings of the three audits of the performanceof the U.N. contractors operating in Iraq-Lloyd's Register, Cotecna, and Saybolt:

 

The problems identified by IAD during these audits resulted in approximately $1.4 million in total losses. In all three cases, auditors determined that the initial contract items were not understood or adhered to by the contractors and that OIP (Office of the Iraq Program) subsequently failed to conduct adequate monitoring of contract execution.[3]

 

Key Findings

 

United Nations Center for Human Settlements (Habitat) Settlement Rehabilitation Programme in Northern Iraq

The Office of Internal Oversight Services conducted a series of audits in 2001 and 2002 of the U.N. program assigned to resettle "internally displaced persons" in the Northern Iraqi Governates of Erbil, Dohuk, and Suleimaniyah. The audits uncovered

 

  • Cash payments of approximately $500,000 per year paid to local authority building inspectors "who do not work for or provide any services to Habitat;"[4]
  • A "situation of mismanagement" resulting in "loss of funds in excess of $2 million and (which) could result in additional financial losses in excess of $10 million;"[5] and
  • Unnecessary recruitment of over 100 assistant site engineers resulting in the "unjustified expenditure of approximately $474,000."[6]

Lloyd's Register Inspection, Ltd.

In 1999 the U.N. carried out an audit of Lloyd's Register, the British company hired by the U.N. in 1996 to "monitor, verify, inspect, test, and authenticate humanitarian supplies into Iraq at three entry points" under the Oil-for-Food program. Lloyd's continued in its role until 1998. The contract was eventually worth $25 million. The audit found

 

  • The U.N. made "possible overpayment to Lloyd's of about $1.38 million;" [7]
  • "A substantial portion of the first three months' expenditure (in 1997) amounting to about $1.97 million could have been avoided;"[8] and
  • "No on-site verification was performed to determine that the contractor had delivered the services as contracted or invoiced."[9]

Cotecna Inspection S.A.

The U.N. hired Swiss firm Cotecna to inspect the import of humanitarian goods into Iraq from 1999 to 2003. An audit was conducted in 2002, and it reported the following findings:

 

  • "The Contractor had not fully performed its contractual duties in relation to goods procured by the Inter-Agency Humanitarian Programme in North Iraq. There were huge differences between the figures for goods reported to have arrived by the U.N. agencies and the Contractor." [10]
  • There was no verification of attendance records of Cotecna staff, and the company sometimes maintained lower staff strengths than those required by the contract. Cotecna failed to provide 24-hour services at all specified locations in Iraq.[11]
  • Cotecna "inappropriately increased" its per-man, per-day fee from $499 to $600.[12]

Saybolt Eastern Hemisphere B.V.

Saybolt, a Dutch-based company, was awarded a contract in 1996 to oversee the export of oil and oil products from Iraq through approved export points at Zakho in Northern Iraq and Umm Qasr on the Persian Gulf. The U.N. conducted an audit of Saybolt's Iraq operations in 2001. The audit reported the following findings:

 

  • "No procedures had been established to monitor the services of the Contractor, in the absence of which it is not clear as to how the Office of the Iraq Program had assessed the quality of services provided." [13]
  • Overpayments to Saybolt in the amount of $186,000 and $270,000.[14]
  • The U.N. paid $235,350 to Saybolt for providing a "Comprehensive Survey of the oil industry in Iraq,' but "No measures were taken to assess the reasonableness of the Contractor's proposal, and payment was made without any supporting documentation being submitted."[15]
  • The U.N. paid $1.2 million for the Contractor's equipment, a cost that "appeared excessive compared to the value of actual equipment in use by the Contractor."[16]

What the Audits Do Not Cover

Significantly, the audits released this week do not cover the critically important oil and humanitarian aid contracts signed by the Saddam Hussein regime under the auspices of the Oil-for-Food program. Not one oil or humanitarian goods contract was directly monitored by the U.N., despite that monitoring was the direct responsibility of U.N. officials. Nor was there any significant audit oversight of the New York headquarters of the Oil-for-Food program.

 

That the audits were limited in scope was the result of a major abdication of responsibility by the senior management of the United Nations. In the words of the Volcker Committee (emphasis added),

 

There were no examinations of the oil and humanitarian contracts by IAD during the OFFP. Oil contracts were not examined with an eye to the enforcement of contract requirements, despite the fact that U.N. officials had contract approval responsibilities. It is possible that more comprehensive monitoring and a greater emphasis on fidelity to contract requirements would have deterred the surcharge scheme that resulted in decreased oil prices and lost revenues to the Escrow account. In the same vein, humanitarian contracts were not scrutinized to ensure consistency of the goods with the distribution plan under which they were purchased. They were also not evaluated on the basis of fairness of the price and quantity of goods purchased. Testing the humanitarian contracts for price fairness could have revealed irregularities and undercut the Iraqi government's kickback scheme that resulted in lost revenues to the Escrow account and significant sanctions violations.[17]

 

In addition, the Volcker Committee also makes clear that the  Oil-for-Food audits virtually ignored the role played by the Office of the Iraq Program, headed by Benon Sevan. This is despite the fact the headquarter's running costs amounted to 40 percent of the nearly $1 billion in total administrative costs of the Oil-for-Food program, a staggering figure. As the Committee's report concludes,

 

[T]he lack of focus on headquarters functions, oil purchase and humanitarian aid contracts, and bank letter of credit operations, in combination with the slow pace of audit performance, appear to have deprived the U.N. of a potentially powerful agent in helping to ensure accountability, particularly in the early years of the OFFP.[18]

 

Conclusion

The newly released U.N. audits further undermine the credibility of the United Nations. They provide a glimpse of the culture of mismanagement and unaccountability within the U.N. regarding the administration of the Oil-for-Food program.

 

The audits also further undermine the standing and reputation of Kofi Annan. They reinforce the impression that Mr. Annan either deliberately turned a blind eye to widespread failings in the  Oil-for-Food program or was staggeringly incompetent. Their release will no doubt add to the mounting pressure for the Secretary General to stand down.

 

The U.N. audits should be considered, however, as just one part of the bigger Oil for Food puzzle, now under investigation by five Congressional committees. While the audits contribute to a broader understanding of the failings behind the administration of the world's biggest humanitarian program, they do not shed light on the role of U.N. officials in the web of bribery and corruption spun by Saddam Hussein's regime. Nor do the audits illustrate how Saddam attempted to influence decision-making in the U.N. Security Council in an effort to lift sanctions against Iraq. The bigger picture of Saddam's manipulation of the  Oil-for-Food program and the part played by U.N. officials will likely only be fully revealed by the Congressional investigations now underway.

 

Nile Gardiner, Ph.D., is Fellow in Anglo-American Security Policy at The Heritage Foundation.



[1] "Internal Audit Reports of the United Nations Oil for Food Program," Briefing Paper prepared by the Independent Inquiry Committee into the United Nations Oil for Food Program, January 9, 2005, at /static/reportimages/55A50704B4714ECD01690F881A5E8F93.pdf.

[2] Ibid.

[3] Ibid.

[4] U.N. Audit of the UNCHS Settlement Rehabilitation Programme in Northern Iraq, January 5, 2001, at /static/reportimages/A66CE2EA8B7157DF9C26712BCE2CEF55.pdf.

This figure actually rose to $625,000 by the end of 2002.

[5] U.N. Audit of the UNCHS Settlement Rehabilitation Programme in Northern Iraq, June 30, 2003, at

/static/reportimages/5440203FDF799C57F6DCE40153658328.pdf.

[6] Ibid.

[7] U.N. Audit of Lloyd's Register Inspection Ltd. Contract, July 21, 1999, at /static/reportimages/4ED0393EF55F33C0D6DC0C7CEE56CF4F.pdf.

[8] Ibid.

[9] Ibid.

[10] U.N. Audit of Cotecna Inspection S.A. Contract, April 8, 203, at /static/reportimages/2A8B31661DC8585A8184D229629B0204.pdf.

[11] Ibid.

[12] Ibid.

[13] U.N. Audit of Saybolt Eastern Hemisphere B.V. Contract, July 3, 2002, at /static/reportimages/AA1B19B498D7F81469A842A9769C968E.pdf.

[14] Ibid.

[15] Ibid.

[16] Ibid.

[17] "Internal Audit Reports of the United Nations Oil for Food Program," Briefing Paper prepared by the Independent Inquiry Committee into the United Nations Oil for Food Program, January 9, 2005, at /static/reportimages/55A50704B4714ECD01690F881A5E8F93.pdf.

[18] Ibid.

About the Author

Nile Gardiner, Ph.D. Director, Margaret Thatcher Center for Freedom
The Margaret Thatcher Center for Freedom