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January 3, 2006
The International Advisory and Monitoring Board (IAMB) on the Development Fund for Iraq (DFI) met in New York on December 28, 2005 and issued the following statement:
"The IAMB met to continue its oversight role of the financial position of the DFI, which is the principal repository for Iraq’s oil-export receipts. The IAMB began operations in December 2003 pursuant to United Nations Security Council Resolution 1483. The IAMB is structured along the lines of international best practice models for audit oversight committees.
"The mandate of the IAMB was due to expire on December 31, 2005. However, the IAMB’s mandate was extended in November 2005 by United Nations Security Council Resolution 1637, which recognized the significant role of the IAMB and its contribution to transparent public accounting in Iraq. The IAMB’s mandate is now set to expire at the end of 2006. Since the dissolution of the Coalition Provisional Authority (CPA) on June 28, 2004, and pursuant to United Nations Security Council Resolution 1546, resources in the DFI are now administered by the Government of Iraq.
"The IAMB has published all audit reports and related documents on its web site (www.iamb.info) and has issued press releases after each meeting. The board has consistently raised concerns about inadequate controls over Iraqi oil and other aspects of the DFI's operations.
"In particular, the IAMB has repeatedly raised four issues with the CPA and more recently with the Government of Iraq:
- The absence of oil metering. The IAMB recommended in March 2004 the expeditious installation of metering equipment in accordance with standard oil industry practices. This is a difficult task, but essential to maintain control over oil revenues; we understand that a recent agreement has been reached between the Government of Iraq and a U.S. company to undertake the task.
- The use of barter transactions for certain oil sales. The IAMB has been concerned that barter transactions are not accounted for in the DFI as required by UNSCR 1483. The IAMB understands that some bartering of oil for electricity with a neighboring country continues. The use of barter transactions, however, makes it difficult to determine whether fair value has been received for Iraq's oil revenues.
- Persistent weak controls in the spending ministries. There are questions whether all DFI disbursements have been made for the purposes intended since the audits continue to criticize the overall financial control framework and contain numerous exceptions to administrative and accounting procedures in the spending ministries, the U.S. agencies in respect of the outstanding commitments using DFI resources, and the Iraqi administration of DFI resources.
- The use of non-competitive bidding procedures for some contracts funded from the DFI. All contracts in excess of $5 million awarded by the CPA have been the subject of a special audit.
"The IAMB has requested regular audits of the financial statements of the DFI and of related accounts. The IAMB has also requested a special audit, since it has the power to do so under its terms of reference. The special audit covers the use of DFI resources for sole-sourced contracts, i.e., contracts awarded by the CPA without competitive bidding procedures. The special audit was required to determine that the resources of the DFI were properly used.
"The purpose of the special audit was: (i) to identify all non-competitively CPA-awarded contracts valued at more than US$5 million that used DFI funds; (ii) to summarize the findings of audits of such contracts that had already been conducted by various audit agencies; and (iii) to conduct limited audit procedures on non-competitively awarded contracts that have not been the subject of audit.
"A total of 24 sole-sourced contracts were reviewed under this special audit. This audit was completed with a delay. This audit was executed by KPMG, except for one contract, for US$1.4 billion awarded to Kellogg, Brown and Root (KBR). The audits on this contract were reviewed by the Special Inspector General for Iraq Reconstruction, or SIGIR, because KPMG recused itself from the KBR-related audit because of a potential conflict of interest. The special audit by 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. SIGIR has reported that the process to substantiate expenditures by the auditor is still ongoing, but also reported that the Defense Contract Audit Agency (DCAA) questioned costs under this KBR contract for a total amount of $208.5 million.
"In view of the fact that (i) the amounts questioned by the DCAA are significant, (ii) the length of time that this process is taking, and (iii) almost US$1.2 billion has already been disbursed from the DFI for this contract, the IAMB has recommended that the U.S. Government seek resolution with the Iraqi Government concerning the use of resources of the DFI which might be in contradiction with the UN Security Council Resolution 1483 and recommends that amounts disbursed that cannot be supported as fair be reimbursed expeditiously.
"The remaining 23 sole-sourced contracts, amounting to US$0.6 billion, were reviewed by KPMG, who indicated a number of exceptions to contracting procedures.
"In addition to this special audit, periodic audits of the finances of the DFI have also been completed. The findings are in line with earlier IAMB observations, which is that all known and reported oil proceeds and frozen assets, and transfers from the Oil for Food Program have been properly and transparently accounted for in the DFI. However, the IAMB cannot be sure that all oil sales or all assets are captured by the system.
"The IAMB has asked the Iraqi Government to inform us of the steps taken to implement the recommendations of earlier audits. The steps reported to us so far include 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 regulations regarding disbursement of allocated funds to be followed by the relevant ministries; and the training of finance personnel.
"The IAMB discussed the scope of the audit to be undertaken for the period ended December 31, 2005 and the follow-up work in regard of the special audit. A further meeting of the IAMB will be held late January 2006 to discuss the remaining issues not covered at this meeting."