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UN: Advisory Board Press Conference for Iraq Development Fund

The Board had consistently raised concerns about inadequate controls over Iraqi oil and other aspects of IDF’s operation.

UN Press Centre
December 28th, 2005

At a headquarters press conference today, correspondents were briefed by the Chairman of the International Advisory and Monitoring Board (IAMB) for the Iraq Development Fund (IDF), Jean-Pierre Halbwachs, on the Board’s just-concluded one-day periodic meeting.

He was joined by:  Khalifa Ali-Dau of the Arab Fund for Economic and Social Development; Bert Keuppens of the International Monetary Fund (IMF); and Fayezul Fayezul Choudhury of the World Bank.  The IAMB, authorized by the Security Council under resolution 1483 (2003), had, as its main task, the oversight role of the financial position of the Iraq Development Fund, which is the principal repository for Iraq’s oil-export receipts.  The Board is structured along the lines of international best practice models for audit oversight committees, and it had no authority to require actions arising from its work.


In brief opening remarks, Mr. Halbwachs said that no representative of the Iraqi Government had been able to attend today’s meeting, but he anticipated that those key people would be present at future meetings.  He had understood that there were delays in obtaining visas for entry into the United States, and that it was the first time Iraqis had not attended one of the Board’s meetings.  The IAMB had begun its operation under a Security Council mandate in December 2003, and since its creation, all reports of its meetings and all audit reports and findings had been made public on the Board’s website, and press releases had been issued after each meeting.  He would review some of the Board’s future activities.


He explained that the IAMB’s mandate was due to expire at the end of this month.  However, pursuant to Security Council resolution 1637 (2005), it had been extended for another year.  That resolution had recognized the significant role of the IAMB and its contribution to transparent public accounting in Iraq.  So, it was now set to continue until the end of 2006.  The IDF, itself, had been instituted by the Coalition Provisional Authority (CPA), and had been administered by the Iraqi Government since June 2004, consistent with resolution 1546 (2004).


The Board had consistently raised concerns about inadequate controls over Iraqi oil and other aspects of IDF’s operation, he said.  It was concerned about the state of accounts and controls in place, and had repeatedly raised four issues, initially with the CPA, and more recently, with the Iraqi Government, itself.  The first was the absence of oil metering.  The Board had recommended in March 2004 the expeditious installation of monitoring equipment in accordance with standard oil practices.  A recent agreement had been reached between the Iraqi Government and a United States company to undertake that task.


He said that the second concern related to the use of bartering transactions for certain oil sales, which were not accounted for in the IDF.  The use of barter made it difficult to determine whether favourable revenue had been received for the oil.  Persistent weak control in the spending ministries was the third issue, specifically whether all IDF disbursements had been made for their intended purposes.  The fourth issue was the use of non-competitive bidding procedures for some contracts funded by the IDF.  All contracts in excess of $5 million awarded by the CPA had been subjected to special audit and published by the IAMB.  The Board had requested regular audits of IDF’s financial statements, as well as special audits, which covered the use of IDF resources for sole-source contracts, or those awarded by the CPA without competitive bidding.


Overall, he explained, a total of 24 sole-source contracts were reviewed under special audit, which had been executed by KPMG, except for one contract, valued at $1.4 billion, which had been awarded to Kellogg, Brown and Root (KBR).  The audit of that contract was reviewed by the Inspector General for Iraqi reconstruction because KPMG had recused itself from the audit, owing to a possible conflict of interest.  The special audit by the Special Inspector General for Iraq Reconstruction (SIGIR) focused on the sole-sourced contract awarded to KBR for the procurement and distribution of fuel products and the restoration of the Iraqi oil infrastructure.  The SIGIR had reported that the process to substantiate expenditures by the auditor was ongoing.  He also reported questioned costs under that KBR contract for a total of $208.5 million.


In view of the fact that the amounts questioned by the Defence Contract Audit Agency were significant, and the length of time that the process was taking, as well as the fact that nearly $1.2 billion had already been disbursed from the IDF for that contract, the IAMB had recommended that the United States Government seek resolution with the Iraqi Government concerning the use of resources of the IDF that might be in contradiction with Security Council resolution 1483.  The Board also recommended that amounts disbursed that could not be supposed as fair be reimbursed expeditiously.  The remaining 23 sole-sourced contracts, amounting to $600 million, were reviewed by KPMG, which indicated a number of exceptions to contracting procedures.


In addition to that special audit, he said that periodic audits of IDF’s finances had also been completed.  The findings were in line with earlier observations, namely that all known and reported oil proceeds and frozen assets, and transfers from the “oil-for-food” programme had been “properly and transparently” accounted for in the IDF.  As already mentioned, however, the IAMB “cannot be sure that all oil sales or all assets are captured by the system”.


He said that the Board had asked the Iraqi Government to inform it of the steps taken to implement the recommendations of earlier audits.  The steps reported to the Board so far had included:  the enactment of a financial management law to establish a comprehensive framework for the conduct of fiscal and budgetary policy; establishment of a specialized directorate within each ministry, headed by an inspector general reporting directly to the minister; steps to strengthen controls at the Ministry of Oil and the spending ministries; the adoption of rules and regulation regarding disbursement of allocated funds to be followed by the relevant ministries; and the training of finance personnel.


Also at today’s meeting, the IAMB discussed the scope of the audit to be undertaken for the period ended 31 December 2005, and the follow-up work with regard to the special audit, he noted.  A further meeting of the IAMB would be held in late January, 2006 to discuss remaining issues.


A correspondent, noting the IAMB’s recommendation in early November that the United States repay as much as $208 million to the Iraqi Government for contracts in 2003 and 2004, asked if any such recommendation emerged from today’s meeting, and also, how happy or unhappy the Board was with the level of cooperation, both from the Iraqi Government and the Pentagon audits.


Mr. Halbwachs said there had been no recommendations from today’s meeting, which was originally planned as a mandate wrap-up until it was extended in the middle of November.  Basically, the Board was just taking stock after two years.  Regarding cooperation, the Iraqis had always attended the meetings, and he had not seen any problem with their cooperation.  As for the Pentagon, it had taken a bit of time for the United States authorities to return an agreement on the statement of work, following the Board’s decision in April 2004 to have a special audit.


Elaborating on that answer in response to the follow-up questions, Mr. Choudhury of the World Bank said that no one questioned either the Iraqi or United States will to cooperate, but the process had involved various bureaucratic structures.  The special audit had been a victim to that, and it took an extraordinarily long time.  In terms of the independence under which the $1.2 billion was audited, the Board faced a choice, once it became aware that KPMG had recused itself -- to hold up the whole thing or review what had been done.  The amount of $208 million was not insignificant, which indicated, on the face of it, that that was not a whitewash, and the Iraqis were urging the United States to reimburse whatever was necessary.  The Board would meet in January to discuss its next status report on those issues.  As things presently stood, on the face of it, an objective and professional piece of work had been carried out.


Asked whether the IAMB had contacted law enforcement authorities on possible criminal misconduct, he said he did not think so, and reiterated that the IAMB was an oversight board, whose job was to shed light, and not to detect.  It was looking at systemic issues of control, and then recommending improvements.  If its work came across something fraudulent, the process of shedding light would put the right parties in the know so that appropriate action could be taken, but it was not within its mandate to initiate such action, and that had not happened to date.


Pressed further on the KPMG decision to recuse itself, Mr. Choudhury said the sequence of events had been unfortunate, as the Board had been notified late that KPMG had recused itself, and that the audit had commenced.  But, it had to make a judgement at that time, so it decided to look at all available information, while keeping its options open.  If there were gaps in the work done, everyone agreed that the Board had the option of reopening the issue.  At the moment, however, it believed that there were areas of interest that were not properly pursued, or about which there was more to pursue, and the IAMB would keep its options open.


He replied to a follow-up that the IAMB was “still in dialogue with DOD (United States Department of Defense)”, and if it believed that further work was warranted, it would require that it be undertaken.  The work done by some groups had been “pretty scathing” in its assessment, so it was not fair to say that the independent oversight of the United States Government was “marching to any particular drummer”.  So far, the Board felt it had received “some pretty robust analyses”, but if discussions should warrant, it would request something more.


Asked what percentage or total amount of the oil receipts and other income sources had been spent with fair, transparent and clear procedures and what amount the IAMB had serious questions about, Mr. Keuppens of the IMF said that, early on, the Board had noticed that IDF money had been used to pay sole-source contracts to Haliburton.  That was early in 2004, at which time, the Board asked the CPA for details of that.  The CPA was forthcoming with details and had informed IAMB that audits were ongoing by its own Department of Defense contract auditors.


Subsequently, he said, the IAMB received those audits, but they were “heavily redacted” because, according to the Defense Department, they contained proprietary information that could not be divulged to the public.  After some discussion, the IAMB received access to those unreducted copies, which had also been posted on the website of Congressman Henry Waxman.


The issue for the Board was then to not re-audit what had already been audited, but to make sure it had a “good grip” on the total population of single source contracts -– how much had been sole sources, and how much of that was for Haliburton, he explained.  The Board received those details, and asked KPMG to confirm to the Board that it had the total population.  That was the purpose of the special audit.  And, the Board asked the auditor to summarize for it the results of other audits.  KPMG did that for 23 sole-source contracts, but it recused itself for that one audit.


Pressed further for a dollar amount of how much money had gone into IDF and how much had gone out, Mr. Keuppens said the main purpose was to determine that all oil sales were deposited in the IDF and to make sure that the money spent was for the benefit of the Iraqi people, meaning that it was spent in accordance with appropriate budgetary appropriations and that it went to the spending ministries.


Mr. Choudhury said that the “indicators were that systems of control were vulnerable for disbursements being made for purposes other than what was intended”.  The IAMB’s scope was to look at the systems and procedures and to opine on whether they were adequate or whether they needed to be strengthened.  That was what the Board was doing, and it was working with the Iraqi authorities to ensure that the problems were getting fixed.  The question about the money was unanswerable for the Board, and for almost every country in the world, except perhaps New Zealand, which got a clean audit.


To a further question about how it was possible for the Board members to have just indicated that the CPA had operated on “good faith” when it had blocked the Board’s operating rules for six to eight months so that the Board could not get an audit out until the Coalition was no longer running Iraq, and since “all the good stuff” had been deleted from the audit, Mr. Choudhury said that the legal processes under which the United States operated before going public was to give the company the right to respond.  As it happened, only one firm responded.  The Board had received excellent cooperation from various parties in Iraq and in the Defense Department and the CPA, but certainly, the delays had been regrettable.  “We have uncovered enough weaknesses and flaws to indicate that, if there was been a systematic attempt at a cover-up, it probably wasn’t very good”, he said.


The metering problem had been there all along, throughout the regime, Mr. Ali Dau of the Arab Fund for Economic and Social Development said in response to another question.  The Board had been stressing that, and apparently everybody was convinced that it had to be done but, for one reason or another, it had not yet been done.  The security factor was probably one important reason why.


Mr. Choudhury added that metering was one of the things the Board had looked at because it wanted to know if all the assets were “being captured”.  But, that was a very difficult task because there were all sorts of calibrations involved.  The Board had been told it was planned for around the time of the CPA transfer, but then, the Coalition withdrew a few days earlier.  The Board was not happy about the metering problem and it had made frequent references to that.


Asked further if it was at all possible to calculate how much money was being lost without a metering capability, Mr. Keuppens said that the short answer was “no”.  The IAMB and the Iraqis and the CPA knew that there were large amounts of smuggling going on, by the shiploads initially, and that the CPA toured the coastline to catch it.  They also knew that some of that oil was smuggled outside the country and then re-imported at different prices.  It was a matter of putting controls in place to reduce that.


The Iraqis now realize that, while getting control over the oil extracts was very important, the country was still in conflict with a very precarious security situation, he explained.  Everyone was doing their best to eliminate the shortcomings, but it was not possible to estimate what was lost.  Given the oil-producing capacity of a country like Iraq, however, it should not be unreasonable for it to produce more than $20 billion in oil per year.  In the first six months, $9 billion had been accounted for, but the Board did not have the capacity to say how much oil was disappearing.


In a series of questions about persistently weak controls in the spending ministries and possible government corruption, Mr. Keuppens said Iraq was a country in conflict and no one could expect perfect conditions.  The CPA had been aware of the issues and was trying to fix them.  Then, the Interim Government and, now, the Government was trying to tackle such problems.  In any post-conflict country, however, there were those kinds of issues, and it took time to fix them.  Sure, there were massive problems -- oil was disappearing and he would not be surprised at corruption in the spending ministries –- but he had no idea what “grade” he would give the Iraqis under the circumstances.





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