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U.N. oil-for-food audits reveal 'mismanagement'

From Phil Hirschkorn

Paul Volcker, former chairman of the U.S. Federal Reserve, is heading up a committee looking into the oil-for-food program.
• Interactive: Who's who in Iraq
• Interactive: Sectarian divide
United Nations
Paul Volcker

NEW YORK (CNN) -- U.N. documents released Monday detail alleged mismanagement in Iraq's U.N.-run oil-for-food program, but a U.S. senator said they fail to answer "a fraction of the questions" about how the program was run.

An independent committee investigating the program has made public 58 financial audits conducted by the United Nations, which documented numerous instances of overpayments to contractors, including the firms hired to monitor Iraq's oil exports and its imports of food, medicine, and supplies.

One of those firms, Cotecna, once employed Kojo Annan, son of U.N. Secretary-General Kofi Annan.

One of the scandal's sharpest critics, Sen. Norm Coleman, R-Minnesota, said the documents confirm the need for more investigation.

"Our preliminary review of these audits only underscores my long held concern about the fraud, mismanagement and lack of adequate oversight at the U.N.'s oil for food program," Coleman said.

"I also continue to have concerns with the ability of the ... investigation to be thorough and conclusive. These audits do not answer even a fraction of the questions we have been asking or will be continuing to ask as our investigation moves ahead in the months to come."

The committee, led by former U.S. Federal Reserve Chairman Paul Volcker and appointed by Annan last year to conduct an inquiry, highlights "inadequate procedures, policy, planning, controls, and coordination process across numerous areas of activity" described in the audits.

Annan, who was surveying tsunami damage in the Maldives on Monday, said he was pleased that the documents had been released but also noted that more analysis was needed.

"I think it does show that the program was being audited, and that attempts were made to get a manager to try to correct whatever weakness there is in the system, and I'm happy that we have now been able to release the documents," Annan said.

"I hope when those who have it, governments and others who are interested in it, analyze the reports, they will realize we did audit, we did attempt to correct things, and after all it was the U.N. auditors who did that work."

Volcker's committee concludes the audits show management of the Iraq program "was not quick to react to criticism and was either unwilling or unable to address issues raised," such as the "underpricing of oil and the overpricing of humanitarian goods."

Those pricing problems enabled the regime of deposed Iraqi dictator Saddam Hussein to extort illegal surcharges on the oil sold and kickbacks on the goods purchased -- an estimated $1.7 billion to $4.4 billion in previous reports from the CIA and the U.S. Government Accountability Office.

"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," the committee finds. "Testing the humanitarian contracts for price fairness could have revealed irregularities and undercut the Iraqi government's kickback scheme."

While the misspent money detailed in the audits amounts to millions of dollars, that was only a fraction of the program's cash flow.

Over seven years, Iraq sold $64 billion of crude oil to buyers of its own choosing incorporated in 61 countries, including the United States. American firms directly purchased only 1 percent of the oil, but industry experts estimate most of the Iraqi oil was consumed in the United States.

Two-thirds of the Iraqi oil revenues, which were held in a U.N.-controlled bank account, went to buy goods approved by the U.N. Security Council committee overseeing sanctions stemming from Iraq's invasion of Kuwait in 1990 and continuing after the Gulf War.

The balance of revenues was allocated mainly to war reparations for Kuwait but also to ongoing weapons inspections in Iraq and administrative costs.

The audits reveal that Lloyds Register, a British firm initially hired to inspect humanitarian goods arriving at three Iraqi ports, overcharged the United Nations by $1.38 million over a 19-month period, billing the world body for 1,800 inspector days -- at $770 per day -- when agents were not on site.

The United Nations would have saved an additional $1.97 million if Lloyds had deployed its 32 agents in stages, as it recommended, instead of all at once, a July 1999 audit found.

The Swiss-based Cotecna, which replaced Lloyds, underperformed on its contract, worth roughly $1 million a month, according to an April 2003 audit. The firm did not verify its agents' attendance records and "sometimes maintained lower staff strengths than those required by the contract," the audit said.

Cotecna's inspector fee was a low bid of $499 per day, but after one year the United Nations "inappropriately increased" the rate to $600, the audit said, leading to "an avoidable expenditure of approximately $700,000."

The $600 a day per inspector fee was the same as runner-up bidder Interntrek Testing, a British company. "The basic reasons for awarding the contract ... were no longer valid," the audit said.

Cotecna employed Kojo Annan in West Africa and kept him on the payroll as a consultant until the year it secured the U.N. contract, but both Cotecna and Kojo Annan deny any connection to U.N. business or the firm's activities in Iraq.

The oil-for-food program overspent on computers, vehicles, and office furniture; an April 1999 audit notes $237,000 in unacceptable phone and fax charges.

There were "serious breaches" in procurement procedures; a May 2000 audit notes the improper expenditure of $500,000 on "winter items" and no formal bidding, as required, for contracts above $20,000.

Saybolt, a Dutch company hired to monitor Iraq's oil exports at three stations, was overpaid hundreds of thousands of dollars, a July 2002 audit found, for communication and transportation costs and was paid an "excessive" $1.2 million for equipment.

In one example of overpayment, the oil inspectors' attendance in June is listed for 31 days, though there are only 30 days in the month.

"This was a highly audited and supervised program, but these reports should not be seen as a final conclusion on how the program was run -- a highly complex program done in difficult circumstances," said Stephane Dujarric, a spokesman for the United Nations.

"We are pleased that these documents are out now," Dujarric said. "This is one part of the program, this is one part of the story."

The Volcker committee plans to issue an interim report in its investigation later this month and a final report in June.

Volcker has bristled at charges that his probe has been handicapped by his committee's lack of subpoena power to compel testimony or produce of documents.

In a statement issued during the weekend, Volcker said, "I am confident that we have adequate tools -- as good as anyone, considering the international nature of the investigation, and our access to internal U.N. documents -- for getting the job done."

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