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Findings of the February 2005 Interim Report of the Independent Inquiry Committee

The Independent Inquiry Committee (IIC) examining the allegations against the UN Oil-for-Food Program (OFFP) issued an interim report on February 3, 2005 which focused on three areas of the Oil-for-Food program:

  1. The procurement process for three United Nations contractors tasked with inspecting oil exports under the program, inspecting humanitarian goods, and administering the escrow account where the oil revenue funds were held;
  2. An evaluation of the program's internal audit program; and,
  3. The disposition of the administrative expenses of the program which were funded from 2.2% of oil sales under the program.

The release of the 219-page document is the fourth in a series of reports that the IIC has issued detailing its progress of its inquiry. This report follows a briefing paper issued in January 2005, which accompanied the release by the IIC of 58 audits conducted by the United Nations' Internal Audit Division during the life of OFFP from 1996 through 2003. An additional interim report is expected in July and comprehensive report is due in August. There may also be one in late September 2005 that deals with companies that received contracts under the Program.

Upon the release of the February report, the Chair of the IIC, former Federal Reserve Chairman Paul Volcker, commended the UN for its cooperation with the investigation saying that "few institutions have freely subjected themselves to the intensity of scrutiny entailed in the Committee's work…I don't know of any other institution that has been scrubbed quite as hard as this one."

Highlights of the IIC's most recent report include:

OFFP ADMINISTRATIVE FUNDS SPENT PROPERLY

At OFFP's inception, 2.2% of oil sales under the program was set aside to cover the significant expenses associated with administering the largest humanitarian program in the UN's history. The IIC examined allegations that the account's funds were misused. The IIC found that the "ESD account was not treated by the United Nations as a commission, either by design or practice, but rather as a necessary pool of funds dedicated to covering the significant administrative expenses associated with the Programme."

The IIC added that, "The budgets and actual expenditures were always significantly less than the amount of funds available, so much so, that $372 million, or twenty-seven percent of the total oil proceeds allocated to ESD and available for the United Nations to spend, was not used, but rather was transferred out of the account to be used directly for the benefit of the Iraqi people."

Moreover, Mr. Volcker remarked following the release of the report that, "I emphasize, we have not found systematic misuse of funds dedicated to the administration of the Oil-for-Food Programme. It was, in fact, careful budgeting, not all the funds budgeted were spent, and the accounting trail is adequate."

OIL SMUGGLING THE MAIN SOURCE OF ILLICIT REVENUE

The IIC found that while the Hussein regime successfully circumvented the OFFP to obtain illicit revenue, illegal oil smuggling with its neighbors was by far the largest source of illicit revenue for the regime during the UN sanctions period. The UN did not have oversight or monitoring responsibilities over oil smuggling. The Committee wrote:

"What does appear clear is that the major source of external financial resources to the Iraqi Regime resulted from sanctions violations outside the Programme's framework. These illicit sales, usually referred to as 'smuggling,' began years before the Program started. Exports of Iraqi oil to both Jordan and Turkey and imports form those countries generally took place within the terms of trade agreements ('protocols') negotiated with Iraq. The existence, but not necessarily the amounts, of sales and purchases under these protocols was brought to the attention of the 661 Committee and at least in the case of Jordan, it was 'noted.' United States law requires that assistance programs to countries in violation of United Nations sanctions be ended unless continuation is determined to be in the national interest. Such determinations were provided by successive United States administrations for both Jordan and Turkey. In the later stages of the Programme, substantial Iraqi sales of oil were made to Syria and small sales to Egypt under similar 'protocols.'"

There are various estimates comparing the amount of illicit revenue obtained by the Hussein regime from oil smuggling and circumventing OFFP, which are detailed in the IIC report:

  • According to the Iraq Survey Group (the "Duelfer Report"), $9.2 billion in illicit revenue obtained by the Hussein regime during the sanctions period came from Iraq's illegal trade compared with $1.7 billion from OFFP.
  • According to the U.S. Government Accountability Office, $5.7 billion of the illicit revenue came from oil smuggling compared with $4.4 connected to the Oil-For-Food Program.
  • According to the U.S. Senate Permanent Subcommittee on Investigations, $13.6 billion of the illicit revenue came from oil smuggling compared to $7.5 billion from OFFP.

UN OFFICIAL WHO MANAGED PROGRAM ACCUSED OF CONFLICT OF INTEREST

Allegations have been made that Benon Sevan, the UN official who managed OFFP as Executive Director of the Office of the Iraq Program, acted improperly and in a corrupt fashion. The IIC report found that Mr. Sevan solicited and received oil allocations for the African Middle East Petroleum Company from the Hussein regime. The IIC concluded that, in making these solicitations, Mr. Sevan's actions "… presented a grave conflict of interest, were ethically improper, and seriously undermined the integrity of the United Nations." The IIC says it will continue its investigation into Mr. Sevan. Based on the findings of the IIC interim report, the UN Secretary-General took disciplinary action against Mr. Sevan by suspending him from his duties. It should be noted that despite the findings regarding Mr. Sevan, Mr. Volcker told the Lehrer Newshour that "This is definitely not the case" in response to suggestions that the report signaled systematic corruption in the UN.

PROCUREMENT PROCESS NOT FOLLOWED

The IIC found that there was "convincing and uncontested evidence that the selection process of the three United Nations contractors selected in 1996 did not conform to established financial and competitive bidding rules." The report found that one UN official in particular, Joseph Stephanides, acted improperly in favoring one contracting firm during the procurement process. Secretary-General Annan has fired Mr. Stephanides following the findings of the IIC report.

AUDIT RESOURCES INADEQUATE

Though Paul Volcker complemented the "skill and dedication of the auditing professionals" who audited OFFP, the report found that "…the resources committed to audit the Programme were inadequate," thus limiting the Internal Audit Division's audit coverage of the program. As a result, the IIC noted that many important aspects of the program were not audited by the audit division.