From 1997 to 2002, the Oil for Food program was responsible for more  than $67 billion of Iraq's oil revenue. Despite concerns that sanctions may have worsened the  humanitarian situation, the Oil for Food program appears to have helped  the Iraqi people. Former Iraqi Regime Acquired an Estimated $10.1 Billion in Illicit Revenue

We estimate that, from 1997 through 2002, the former Iraqi regime  acquired $10.1 billion in illegal revenues—$5.7 billion through oil smuggled  out of Iraq and $4.4 billion through surcharges against oil sales and illicit  commissions from commodity suppliers. We updated our  estimate to include (1) oil revenue and contract amounts for 2002, (2)  updated letters of credit from prior years, and (3) newer estimates of illicit  commissions from commodity suppliers. United Nations and Security Council Had Responsibility for Oversight of Program, but Iraq Contracted Directly with Purchasers and Suppliers

Both OIP, as an office within the U.N. Secretariat, and the Security  Council’s sanctions committee were responsible for overseeing the Oil for  Food Program. While  OIP was to examine each contract for price and value, it is unclear how it  performed this function. The sanctions  committee responded to illegal surcharges on oil purchases, but it is  unclear what actions it took to respond to commissions on commodity  contracts. Iraqi  control over contract negotiations was an important factor in allowing Iraq  to levy illegal surcharges and commissions. OIP hired a  private firm to monitor Iraqi oil sales at exit points. The reports stated that OIP was generally responsive to  external audit recommendations. U.N. external audit reports contained no  findings of fraud during the program. The Sanctions Committee Had a Key Role in Enforcing Sanctions and Approving Contracts

The sanctions committee was responsible for three key elements of the Oil  for Food Program: (1) monitoring implementation of the sanctions, (2)  screening contracts to prevent the purchase of items that could have  military uses, and (3) approving Iraq’s oil and commodity contracts. Challenges Facing the CPA and Interim Iraqi Government in Administering Oil for Food Contracts

In November 2003, the United Nations transferred to the CPA  responsibility for 3,059 Oil for Food contracts totaling about $6.2 billion;  the remaining 2,199 contracts were not continued for a variety of reasons. A lack of coordination and communication about contract  documentation and inadequate staffing affected the transfer process and  hampered the ability of the CPA’s Oil for Food coordination center to  ensure commodity deliveries continued without disruption. Evolving  policy and implementation decisions on the food distribution system,  coordination, and the security situation affected the execution of food  contracts. In  addition, inadequate oversight and alleged corruption in the Oil for Food  program raise concerns about the Iraqi government’s ability to manage the  remaining contracts and absorb donor reconstruction funds. The CPA has  taken steps, such as appointing inspectors general, to strengthen  accountability measures in Iraq’s ministries. Addressing Corruption

The history of inadequate oversight and alleged corruption in the Oil for  Food program raises questions about the Iraqi government’s ability to  manage the import and distribution of Oil for Food commodities and the  billions in international assistance expected to flow into the country. Potential Issues for Further Investigation

Several investigations into the Oil for Food program are planned or under  way. In addition, U.N.  specialized agencies implemented the program in the northern governates  while the program in central and southern Iraq was run by the central  government in Baghdad. Appendix II: Scope and Methodology

We used the following methodology to estimate the former Iraqi  regime’s illicit revenues from oil smuggling, surcharges on oil, and  commissions from commodity contracts from 1997 through 2002:
To estimate the amount of oil the Iraqi regime smuggled, we used  Energy Information Administration (EIA) estimates of Iraqi oil  production and subtracted oil sold under the Oil for Food program and  domestic consumption. However, the average  surcharge could be lower.
Why GAO Did This Study

The Oil for Food program was established by the United Nations and Iraq in 1996 to address concerns about the humanitarian situation after international sanctions were imposed in 1990. The program allowed the Iraqi government to use the proceeds of its oil sales to pay for food, medicine, and infrastructure maintenance. The program appears to have helped the Iraqi people. From 1996 through 2001, the average daily food intake increased from 1,300 to 2,300 calories. From 1997 to 2002, Iraq sold more than $67 billion of oil through the program and issued $38 billion in letters of credit to purchase commodities. However, over the years numerous allegations have surfaced concerning potential fraud and program mismanagement. GAO (1) reports on its estimates of the illegal revenue acquired by the former Iraqi regime in violation of U.N. sanctions, (2) provides observations on program administration; (3) describes the challenges facing the CPA and the Iraqi government in administering remaining contracts, and (4) discusses potential issues for further investigation.

What GAO Found

GAO estimates that from 1997 to 2002, the former Iraqi regime acquired $10.1 billion in illegal revenues, including $5.7 billion in oil smuggled out of Iraq and $4.4 billion through surcharges on oil sales and illicit commissions from suppliers exporting goods to Iraq through the Oil for Food program. This estimate includes oil revenue and contract amounts for 2002, updated letters of credit from prior years, and newer estimates of illicit commissions from commodity suppliers. The U.N. Secretary General, through the Office of the Iraq Program (OIP) and the Security Council, through its Iraq sanctions committee, were both responsible for overseeing the Oil for Food Program. However, the Security Council allowed the Iraq government, as a sovereign entity, to negotiate contracts directly with purchasers of Iraqi oil and suppliers of commodities. This structure was an important factor in allowing Iraq to levy illegal surcharges and commissions. OIP was responsible for examining Iraqi contracts for price and value, but it is unclear how it performed this function. The sanctions committee was responsible for monitoring oil smuggling, screening contracts for items that could have military uses, and approving oil and commodity contracts. The sanctions committee took action to stop illegal oil surcharges, but it is unclear what actions it took on contract commissions. U.N. external audit reports contained no findings of program fraud. Summaries of internal audit reports pointed to some concerns regarding procurement, coordination, monitoring, and oversight and concluded that OIP had generally responded to audit recommendations. OIP transferred responsibility for 3,059 Oil for Food contracts--with pending shipments valued at $6.2 billion--to the CPA on November 22, 2003. Poor communication and coordination on contracting documents and inadequate staffing hampered efforts by the CPA's Oil for Food coordination center in Baghdad to ensure that commodities continued to be delivered. The execution of food contracts was also affected by evolving decisions about food distribution, inadequate coordination, and security issues. Challenges face the interim Iraqi government as it balances the need to reform a costly food subsidy program with the need to maintain food stability and protect the poorest populations. Also, inadequate oversight and alleged corruption in the program raise concerns about the Iraqi government's ability to manage the remaining Oil for Food commodities, continue the food distribution system, and absorb $32 billion in expected donor funds for reconstruction. The CPA has taken steps to build internal controls and accountability measures in Iraq's ministries. Several investigations of the Oil for Food program will soon be under way. These efforts may wish to consider several areas for further analysis to better determine the extent of corruption in the program, the adequacy of internal controls, and the lessons learned in implementing a large-scale humanitarian aid program within a sanctions framework.