UN official says financial controls on Iraqi oil proceeds ‘deficient’

June 2008

–The United Nations representative on the international body monitoring the handling of more than $100 billion in proceeds from sales of Iraqi oil says financial controls are “deficient” although progress has been made in some areas.

Warren Sach, the Secretary-General’s representative on the International Advisory and Monitoring Board (IAMB) for Iraq, reported to the Security Council today on independent audits that were carried out on the Development Fund for Iraq (DFI) in 2007.

Under Security Council Resolution 1483, $106 billion was deposited with DFI from petroleum sales between 2003 and 2007. A further $10.4 billion from the balance of the UN oil-for-food programme was deposited with DFI as well as $1.5 billion from Iraq’s frozen assets.

“The results of the audits in 2007 indicate that, while many efforts are being made, sometimes at great personal sacrifice, the overall financial system of controls in place in the [Iraqi] spending ministries, the US agencies handling of outstanding commitments using DFI resources and the Iraqi administration of DFI resources remain deficient and financial management reforms need to be pursued further,” Mr. Sach said in his report.

Mr. Sach said that the IAMB aims to ensure that the IDF is used in a transparent manner for the benefit of the Iraqi people and that export sales of petroleum were consistent with international market best practices.

He said that audit reports on DFI have highlighted weaknesses in internal financial controls, including incomplete record keeping at the Iraqi Ministry of Finance, lack of a comprehensive oil metering system, sale of oil and oil products outside of the DFI, incomplete contract information associated with US agencies’ contracts and bartering.

The UN comptroller also reported that fewer than 15 per cent of previous recommendations to Iraqi spending ministries had been implemented. While noting that some progress had been made, “further measures to strengthen the internal control framework are necessary,” Mr. Sach added.

On oil metering, Mr. Sach said it was a key factor to achieve financial transparency and accountability and was in accordance with standard oil industry practices, but he noted that while some metering had been installed at oil terminals, there continued to be no metering in oil fields.

“The IAMB continues to view this matter as urgent, especially in light of the auditor’s report that showed unreconciled differences related to production, export sales and internal consumption,” he said.

Mr. Sach added that the Iraqi State Oil Marketing Organization continued to use barter transactions, which made it difficult to establish whether fair value had been received for the country’s oil exports, although a barter arrangement with a neighbouring country ceased as of 31 December 2007.

In a related development, the Security Council released a press statement noting “continued political, security and humanitarian challenges facing Iraq,” but also recognizing “the important efforts made by the Iraqi Government to improve security, national reconciliation, budget execution, reconstruction, and economic progress, as well as combat terrorism and sectarian violence across Iraq.”

Also today, the UN Special Adviser on Iraq, Ibrahim Gambari, in a briefing to the Council, said “there is indeed new hope that the people and Government of Iraq have started to overcome daunting challenges and to work together at rebuilding their country.”

Mr. Gambari noted that there had been security improvements in many parts of the country and that there had been steady progress in improving the capacity of Iraqi security forces, as well as the curbing of militias and other armed groups.

“The situation still remains fragile,” Mr. Gambari reported. “Ordinary Iraqis continue to face the threat of violence in the form of terrorist attacks, sectarianism or criminal acts and violations of human rights continue to occur.”

However, the Special Adviser said that there had been indications of progress on political dialogue in the country. He cited reports that talks on the return of the leading Sunni bloc, Tawafuq, to the Government were apparently progressing well, and added that Turkoman representatives had ended their 18-month boycott of the Kirkuk Provincial Council.