Leaked UN Audit Proves Oil-for-Food Shambles

Leaked UN Audit Proves Oil-for-Food Shambles
Tim Wood
'19-MAY-04 03:00'

NEW YORK (Mineweb.com) -- A United Nations internal audit report leaked to Mineweb cracks open the door on hitherto secret details of the disgraced Iraq Oil-for-Food Programme. The report details irregularities that went on for years, with hundreds of millions of dollars not properly accounted for, hinting at disarray in the programme from start to finish. The report was never forwarded to the UN Security Council.

The leaked document is the first audit involving the Office of the Iraq Programme (OIP) to see the light of day. Despite intensifying US Congressional scrutiny, Oil-for-Food remains concealed and the Bush administration appears reluctant to embarrass the UN by pressing for answers.

Since the war in Iraq ended, the murky world of the OIP has been unravelling. The war voided the secrecy and ignorance that insiders and Saddam’s chums relied on to plunder billions of dollars in cash and goods under cover of UN humanitarian missions and even in plain site of the institution's bureaucrats.

Audit No. AF2002/23/1 offers a unique glimpse into the UN’s scandal-ridden “humanitarian” involvement in Iraq where $10 billion – nearly one year’s worth of Iraqi gross domestic product – may have been embezzled. Further exploitation occurred in expired medicines and food shipped to Iraq, or in missiles and other contraband smuggled into the dictatorship camouflaged by phony contracts. In fact, Iraq was even re-exporting OIP goods at times. Most worrying, some of the money may have made its way to terrorists.

The UN Office of Internal Oversight Services (OIOS) addressed the April 2003 report to Benon Sevan, the quasi-retired but still diplomatically-immune Executive Director of the Office of the Iraq Programme. Sevan’s name cropped up in a list of recipients of oil-trading vouchers issued by Saddam Hussein’s regime. The vouchers have been linked directly to kickbacks to Saddam as one aspect of an elaborate sanctions busting and graft scheme tolerated by the UN.

The UN has wavered on coming clean about its corrupt program; initially appointing an internal team to assess allegations, then haltingly acceding to requests for independent scrutiny, only to regress by sending intimidating letters to contractors. Things improved somewhat last week when the UN agreed to sequester OIP documents for outside investigators to examine.

Sevan has steadfastly denied benefiting in any way from Oil-for-Food which he administered. He has also repeatedly insisted that multiple audits gave the OIP a clean bill of health, which seemed to be backed up by a tame reference to "further improvements are still needed in a number of areas" in the OIOS eighth annual report. Similarly, the ninth annual report cited Audit No. AF2002/23/1 indirectly, but made light of the identified problems and did not reference the most serious issues.

The detailed audit report shows something very different and suggests that the OIP barely kept up appearances in fulfilling Security Council resolutions on Iraq.

Shocking revelations

The report is littered with hair-raising irregularities for which there were no serious consequences.

Cotecna Inspection S.A., a privately owned and managed Swiss "global trade facilitation" firm, won UN contract PD/CON/324/98 which was worth $40.9 million dollars between February 1999 and July 2002. Whereas UN Secretary-General, Kofi Annan, whose son, Kojo, worked for Cotecna, is now adopting a constructionist view of the contract disclosure clauses, the OIP was decidedly generous with Cotecna when it came to pecuniary and operating clauses.

For example, the audit report reveals that Cotecna over-billed the UN to the tune of $335,328 in just one year because it deployed less staff than obligated. The OIP shrugged off the loss and told its internal auditors that future invoices would be matched to actual staffing. Similar contracting abuses had been uncovered in audits from prior years involving the OIP, especially involving the oil services contract. Clearly, few of the earlier admonishments were taken seriously.

The most deplorable disclosure highlights why Kurdish leaders have insisted that half of all humanitarian supplies to the region were stolen, and why the OIOS found in a 1999-2000 audit that the UN was overpaying for supplies there by a margin of 61%.

For the first six phases of the Oil-for-Food Programme, the auditors say Cotecna simply never inspected goods under the “13%” programme – humanitarian supplies for Northern Iraq. When Cotecna did start superficial inspections on supplies flowing to Northern Iraq, the result was a cumulative discrepancy of $111.3 million dollars, or 36% of the total value of goods paid for by the UN in that period.

Cotecna was responsible for authenticating the following categories of imports as they arrived in Iraq: food, medicine, water & sanitation, electricity, agriculture, primary and higher education, and settlement & rehabilitation.

If the discrepancy between UN and Cotecna figures is indicative, then $363.4 million may be unaccounted for from prior years though it is probably much higher because controls were non-existent. It is likely that discrepancies in the Northern Iraq programme top $800 million, of which only 20% might be explained away by administrative foul ups. The audit does not detail probable discrepancies in the other regions Cotecna was responsible for.

The auditors say they have no idea how the OIP reconciled its regular reports to the Secretary General, especially early on when there were no records of inspections. The suggestion is that the Security Council and General Assembly were being fed fictitious information. According to the US Defense Contract Audit Agency, OIP contractors like Cotecna were able to inspect just 7-10 per cent of approved deliveries.

Even when Cotecna did inspect goods, the results are doubtful because the auditors found the company did not have the necessary equipment on site to do the work. Instead of offloading trucks, unpacking boxes and professionally sampling goods as contracted, Cotecna staff accepted truck cargo manifests at face value. The contract required thorough verification.

Incredibly, the OIP defended the lack of inspections by claiming compliance would have caused “delays” that might “bring the organization into disrepute.” What then was Cotecna hired for if the primary objective was delivery rather than verification?

In fact, the OIP persistently defends Cotecna which had also had improper free use of UN facilities such as offices and medical services. The OIP, responding to audit recommendations, goes to incredible lengths to get Cotecna off the hook, especially when it comes to financial clawbacks.

It is clear that there was little, if any, sincere verification of goods entering Iraq under the OIP as required by several Security Council Resolutions. Sanctions busting started in Turtle Bay, New York.

Nice work if you can get it

The audit reveals a contract that was fluid to the unfailing benefit of Cotecna.

The company was reprimanded, not sent packing, when it committed serious breaches. One of those was an inexcusable conflict of interest where Cotecna attempted to be accredited as a supplier to Iraq. It also appointed a sub-contractor, even before the contract with the UN was signed, in clear violation of the organisation’s rules on sub-contracting.

Independent investigators will undoubtedly focus on the curious circumstances of Cotecna’s remuneration.

The firm won the contract by being the lowest bidder at $400 per-man-per-day. Within a year, Sevan’s office had approved an increase in the price to $600pmpd – exactly matching the next lowest bidder, InterTrek Testing of the UK. Cotecna also scored with the addition of 8 more staff, costing the UN another $4,800 per day.

The increase should automatically have triggered a rebid. Suspicions were further aroused by a subsequent contract rebid where Cotecna lowered its price to $520pmpd and won again.

Cotecna’s $600pmpd price was a result of blending operating costs with the per man per day fee structure. It was not the only time the OIP bent over backwards to accommodate operating cost issues.

In violation of the contract and even before a single service had been provided, Cotecna received $356,000 to cover communications equipment and associated operating costs. A further $150,000 was provided for the communications operating costs later on, for total excess spending of $506,000.

In one of the most bizarre exposures, the OIP agreed that Cotecna could own the communications equipment within 6 months in exchange for a “residual” payment of $95,000. The payment was never made, and the OIP could not explain how the residual payment was calculated although it promised to collect the debt.

These are just some irregularities among dozens in the audit.

Modus operandi

A Mineweb source says the UN’s internal auditing capacity and authority is pitiful. When the auditors do try to dig in their heels, they are easily railroaded because they are on 6-month contracts and there is a history of recalls and firings.

The OIP’s power surfaces in its response to the audit recommendations which have a formulaic quality to them. Where the OIP agreed, there was usually a pledge to implement reforms in future with no concern to address past problems, especially when money is involved. Promises to recover funds are undermined by the lack of an independent collections authority or accountability to an investigative staff. The glib OIOS annual reporting is a further concern.

Where the OIP disagreed, it simply resorted to steamrolling the auditors with circumlocutions and outright rejections.

For example, even though the contract with Cotecna was clearly all inclusive, the OIP implies that there was a fixed margin in effect. The OIP consistently refused to make Cotecna comply with its obligations on staffing and equipment because it would “incur costs for the organization [the UN].” In other words, the only way the OIP would make Cotecna perform according to the contract was by passing on costs to the UN.

The leaked audit has implications not only for Benon Sevan and his office, but the OIOS and the UN Board of Auditors and, perhaps, the Secretary General himself. The Board, which is made up of General Assembly members South Africa, the Philippines, and France, was supposed to keep an eye on things on behalf of the member states and shares the responsibility for auditing UN operations with the OIOS.

There will be questions about why the OIOS did not investigate the audit findings given the hints of fraud, especially since Sevan previously indicated that the OIOS and Security Council were aware of a Saddam Hussein surcharge on contracts. Indeed, Saddam was openly boasting that sanctions were being violated. The SC delegated the administration of the OIP funds to the Secretary-General and with that the oversight functions.

Mineweb shared the documents with Claudia Rosett who has written about them for the Wall Street Journal. Fred Eckhard, Spokesman for the UN Secretary-General, told her that the UN will no longer comment on Oil-for-Food now that it is being investigated by the Volcker panel. The office of Cotecna Chief Executive, Robert Massey, said the firm was in full compliance with its UN contract.

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The following documents are available to download / view:

· Office of Internal Oversight Services Audit No. AF2002/23/1
(4.4MB, PDF)

· Mineweb summary of AF2002/23/1
(218kb, PDF)

· Distribution of proceeds from oil sales as of 23 October 1998
(2.5MB, PDF)

· Cartoon illustrating how the oil voucher scam worked
(139kb, PDF)

· Excel Spreadsheet of Al-Mada oil vouchers list
[External Web site - Friends of Saddam]

A Leaked Audit Gives Hints of the Oil-for-Food Corruption

Very U.N.-Attractive

A Leaked Audit Gives Hints of the Oil-for-Food Corruption.
BY CLAUDIA ROSETT
Wednesday, May 19, 2004 12:01 a.m.

In the scandal over the U.N. Oil-for-Food program in Iraq, Kofi Annan's main line of defense has been that he didn't know. Perhaps he should take a closer look at internal U.N. Oil-for-Food audit reports, more than 50 in all, produced by his own Office of Internal Oversight Services--the same reports he's declined to share with the Security Council, or release to Congress.

One of these reports has now leaked. It concerns the U.N. Secretariat's mishandling of the hiring of inspectors to authenticate the contents of relief shipments into sanctions-bound Iraq. (Obtained by a journalist specializing in the mining industry, Timothy Wood, a copy of this report can be found at www.mineweb.com.)

Reflecting the findings of a U.N. internal audit conducted during the sixth year of the seven-year Oil-for-Food program, the report focuses on one contractor hired directly by the U.N. Secretariat: Swiss-based Cotecna Inspection SA. This is the same company that, while bidding against several rivals for its initial Oil-for-Food contract in 1998, had Mr. Annan's son, Kojo, on its payroll as a consultant. Both Mr. Annan and Cotecna's CEO, Robert Massey, have insisted that the contract was strictly in accordance with U.N. rules.

Although this report doesn't mention Kojo, it does go on for 20 pages about inadequacies and violations in the U.N.'s handling of the Cotecna contract. The report explains that "the Contract had been amended prior to its commencement, which was inappropriate" and recounts that within four days of Cotecna signing its initial lowball contract for $4.87 million, both Oil-for-Food and the U.N. Procurement Division had authorized "additional costs" totaling $356,000 worth of equipment.

The U.N. auditors say this "contravened the provisions of the Contract," and that Cotecna (not the U.N., which was using the Iraqi people's money) should have paid the extra costs. Within a year of the start of Cotecna's services, its contract was further amended to add charges above those initially agreed to, including a hike in the "per man day fee" to $600 from an initial $499. This higher fee "was exactly equal to the offer of the second lowest bidder," say the auditors, adding that the Procurement Division and Oil-for-Food "should have gone for a fresh bid."

The report also describes understaffing of inspection agents at entry points and a lack of procedures to verify actual attendance by inspectors. Protesting that lax staffing "violates not only the Contract, but also affects the performance of the services," the auditors note that the Oil-for-Food office had "been aware" of this problem for some years, but hadn't fixed it. Despite the $1.4 billion in commissions collected by the U.N. to run Oil-for-Food, there was no one from the U.N. to keep an eye on Cotecna agents in Iraq. The report warns that "in absence of a contract manager, there can be no assurance that the services provided were in consonance with the spirit and letter of the Contract." The report adds that in north Iraq, where at some hours there were no inspectors on the job, the result was "huge differences between the figures for goods reported to have arrived by the U.N. agencies and the Contractor."

There are further critiques, such as "Inadequate understanding" and "Unprofessional conduct" by Cotecna, and "Inadequate coordination" by the U.N. Yet after the report's April 2003 submission--and three months before handing over the reins of Oil-for-Food to the Coalition Provisional Authority--the U.N. Secretariat signed a new $9.79 million contract for Cotecna.

A U.N. spokesman says all the internal audit reports on Oil-for-Food have now been turned over to the U.N.-authorized inquiry headed by former Fed Chairman Paul Volcker. But under terms drawn up by Mr. Annan, Mr. Volcker not only lacks the power of subpoena, but must submit his own report directly to Mr. Annan. And guess who has the final say over what we get to see--or not see. Why, Mr. Annan, of course.

Ms. Rosett is a fellow at the Foundation for the Defense of Democracies and the Hudson Institute. Her column appears here and in The Wall Street Journal Europe on alternate Wednesdays.