EFFORTS TO RECOVER IRAQ'S STOLEN MONEY

Hearing of the
House Committee on Financial Services

Panel II

House Financial Services/Oversight
and Investigations Subcommittee

March 18, 2004

OPENING STATEMENT OF

SUE KELLY
A Representative from New York
and
Chair, House Financial Services/Oversight and
Investigations Subcommittee

REP. KELLY: On our second panel, the subcommittee will hear from two witnesses from the General Accounting Office, as a follow-up to a request that the committee made to the agency last May.

With us from the General Accounting Office are Mr. Joseph Christoff, the director of the International Affairs and Trade, and Ms. D'Agostino, the director of GAO's Financial Markets and Community Investment.

Mr. Christoff spearheads the GAO's work related to the U.S. agencies responsible for nonproliferation, export control and international security issues, as well as issues related to the United Nations and multilateral institutions.

Ms. D'Agostino directs the GAO's work on a number of issues, including anti-money-laundering programs, the SEC's technology and security oversight of the market, and prior to this position, she led and managed GAO reviews of counterterrorism and government-wide terrorism initiatives and defense, trade and technology-transfer issues.

Without objection your full written statements will be made part of the record. You will each be recognized for five-minute summary of your testimony. And we will begin with you, Mr. Christoff.

STATEMENT OF

JOSEPH CHRISTOFF
General Accounting Office
Director, International Affairs and Trade

MR. CHRISTOFF: Madame Chairwoman, members of the subcommittee, thank you for inviting GAO to this important hearing.

Last year you asked GAO to examine how the United States worked with other nations to recover the assets of foreign regimes, and today I will present our preliminary observations on U.S. efforts in Iraq.

First, I will update GAO's previous estimate of the illegal revenues the former regime acquired through the oil-for-food program. Next, I will describe the efforts of U.S. agencies to recover Iraqi assets. And finally, I will provide some observations on the challenges that the United States faces in recovering these assets.

And let me first begin with the oil-for-food program. Under U.N. sanctions the former Iraqi regime was allowed to sell oil to purchase food and other humanitarian goods. From 1997 to 2002 the United Nations controlled over $67 billion in Iraqi oil revenues. However, the sanctions did not prevent Iraq from acquiring billions in illegal revenues from these proceeds. Oil was smuggled through Syria, Jordan and the Persian Gulf. The government levied surcharges of up to 50 cents a barrel against oil purchasers. It extracted commissions of 5 to 10 percent against commodity suppliers. Based on this information we estimate that the former regime acquired $10.1 billion in illegal revenues.

I would now like to describe the efforts the U.S. has made to recover the regime's assets. Led by the departments of Treasury and State, more than 20 government entities are working to locate, freeze and transfer the former regime's assets to Iraq. The United States created a new interagency coordinating body called the Iraqi Assets Working Group. This group is responsible for exploiting financial documents in Iraq and engaging the financial community in the hunt for illicit assets. In addition, the United States has used recently developed domestic and international authority to recover assets.

Provisions in IEEPA and the Patriot Act allowed the Treasury Department to to confiscate and vest Iraqi assets. U.N. Security Council Resolution 1483 required all members to immediately transfer the regime's assets to the Development Fund for Iraq.

Now, the results of those efforts:

And let me caution that we have yet to review the reliability of the data that has been provided to us by the Department of Treasury and the Coalition Provisional Authority.

But first, in March 2003, the U.S. government took control or vested $1.9 billion in Iraqi assets held in the United States. This process moved quickly, because the U.S. had in place the necessary legal authorities to vest and transfer the Iraqi assets. The CPA has spent the vested assets on salaries for former Iraqi military personnel, civil servants and pensioners, and to pay for the operations of Iraqi ministries.

Second, coalition forces and investigators quickly seized over $900 million in Iraq between April and May 2003. These assets included hard currency, gold and jewelry. The CPA has used $752 million of these assets to fund reconstruction projects and purchase liquefied petroleum gas.

Third, other countries froze $3.7 billion of Iraqi assets, in compliance with U.N. Security Council resolutions. As of March 2004, over 10 countries have transferred $751 million to the DFI.

And finally, little progress has been made in identifying and recovering assets hidden worldwide. While the total amount accumulated by the former Iraqi regime is unknown, estimates range from $10 (billion) to $40 billion.

The United States has faced several challenges in its efforts to recover Iraq's assets. First, recovering the former regime's assets initially was not a high priority in the overall U.S. effort in Iraq. By September 2003, as the need for additional resources to rebuild Iraq became apparent, the United States placed a higher priority upon recovering the former regime's assets.

Second, U.S. expectations for the quick transfer of funds may have been overly optimistic, given the legal capabilities of some countries. U.S. officials believe that the U.N. resolution would require other countries to quickly transfer Iraqi assets. However, many countries needed to adopt legislation to implement the U.N. requirement.

Furthermore, U.S. officials assumed that frozen assets were immune from new claims. However, some countries have delayed transferring assets until all claims are settled.

And finally, the transfer of sovereignty to an interim Iraqi government could complicate U.S. efforts to recover the regime's assets. The transitional government has yet to conclude an agreement on the activities of the multinational force, which may include rights to continue to interview Iraqi officials and exploit financial documents.

And Madame Chairwoman, that completes my statement. Ms. D'Agostino and I would be happy to answer your questions.

REP. KELLY: Thank you very much.

The committee heard testimony -- Ms. D'Agostino, I'm sorry -- I assumed, yes, from what Mr. Christoff said that -- that was your statement as well. Is that correct?

MS. D'AGOSTINO: Yes. We worked on this together. So --

REP. KELLY: All right. (Laughs.)

The committee heard testimony last year that the most effective way to recover non-government assets -- that is to say, the plundered assets that are converted to personal use, but held outside the plundered country -- might be private lawyers acting on behalf of a country pursuing civil remedies and not necessarily a government-led criminal effort. Do you have an opinion on that effort? It was carried on on a trial basis for the U.N. to recover plundered Nigerian assets, and I'd be interested in what your feelings are, whether or not you think that that might be more effective, or as effective, or is it good to have the two things running in conjunction with each other?

MR. CHRISTOFF: Madame Chairwoman, we haven't looked into that particular option. Certainly, I would say that all options are important in trying to recover assets, whether it is an option working directly with the country on an official basis, or even working with financial institutions to try to get the assets back.

REP. KELLY: I think maybe we should explore that a bit, if that's -- if you're willing to do that, would you look -- do you mind looking into that and getting back to us

MR. CHRISTOFF: Yeah. Sure.

REP. KELLY: -- and talking with us about it? It might be something that will point up places where we can amplify private efforts that are going on out there.

Ms. D'Agostino, did you have something you wanted to say on that?

MS. D'AGOSTINO: I'm aware that we have interviewed a few of the private sector entities that have been involved in hunting out the -- for remuneration. And we have information about their views. But we haven't formed any position of our own with respect to that.

MR. CHRISTOFF: But let's add it to our list. We're completing our work for you by May, so we'll do that.

REP. KELLY: (Chuckles.) If you would add that to your list, I'd appreciate it.

It's an accepted fact now that the Saddam Hussein regime was demanding kickbacks and deliberately mispricing oil sales and really manipulated the Oil-for-Food Program by engaging in a lot of illegal sales of oil. Can you tell me what efforts were made, if any, by the United Nations to make sure that the Oil-for-Food sales contracts were actually properly priced, and that there were no bribes and kickbacks? What did the U.N. do about that?

MR. CHRISTOFF: Well, let's perhaps put some perspective on what the U.N. was required to do.

The contracts that we're talking about, that involved commissions, that involved kickbacks, were contracts that, under the U.N. Oil-for-Food Program, the Iraqi government was allowed to negotiate directly to -- with the purchasers and with the suppliers of the commodities. So, any types of kickbacks or commissions obviously would not have been listed in the specific contract. We do know that those type of kickbacks occurred, because, foolishly, some of the contracts had line items that said "after sales service charges", which were, in effect, kickbacks.

The Sanctions Committee -- any information that the oil-for-food program might have had about some of these problems were referred to the United Nations Sanctions Committee. That Sanctions Committee is the members on the Security Council. So according to the U.N., it was incumbent upon the Sanctions Committee to take any action on allegations of kickbacks or commissions that they may have uncovered.

REP. KELLY: And they did not; is that correct?

MR. CHRISTOFF: One interesting point is that some of the smuggling that occurred, for example to Jordan, the Sanctions Committee noted the occurrence of the smuggling, but nothing was done beyond that.

REP. KELLY: What about countries in this regard, what have any other countries done to report, to stop the kickbacks that were going on, the bribes, the kickbacks, the money manipulation? Have you uncovered any attempt by countries to try to stop this or report it or do anything to stop Saddam Hussein from that sort of evil behavior?

MR. CHRISTOFF: It was a bit of a double-edged sword because many of those countries obviously were the recipients of the contracts. You know, the key countries that received the majority of the contracts were recipients in Russia and France.

So I don't think we have any specific information about which of the countries on the Security Council did report information. We do know that the United States and Great Britain were the countries that placed the greatest number of holds on contracts. The U.S. placed about $5 billion of holds on contracts, mostly concerned about the possibility of dual-use goods being a part of those contracts.

REP. KELLY: Were there any holds placed by Russia?

MR. CHRISTOFF: No.

REP. KELLY: No holds placed by France, Germany?

MR. CHRISTOFF: None that I'm aware of. Again, 90 percent were U.S. The remainder I believe were British.

REP. KELLY: Thank you.

I'm going to turn now to Ms. Maloney.

REP. CAROLYN B. MALONEY (D-NY): Thank you, Chairwoman Kelly.

And actually, one of our bills is on the floor right now on regulatory relief, where we worked on the business interest accounts. And I'm going to go down there shortly on that.

But I want to thank you for holding this hearing. And I'm deeply disturbed by the scandal that has been in the papers involving bribes to U.N. officials involved in the oil-for-food program with Saddam Hussein.

But my question to GAO is, are you getting all the access you need to information? Are the Departments of Treasury and State cooperating with you? Are they imposing limits on your ability to complete this study? Do you have access to everything you need to do to do a good study?

MS. D'AGOSTINO: Representative Maloney, we've been working very closely with Departments of Treasury and State to get all the information that we need. We have recently, over the past several weeks, achieved accommodation with the departments, and are going to continue to try to obtain some follow-on information after the hearing so that we can finalize our report to you, hopefully by the end of May.

REP. MALONEY: But you do have access to all the information you need?

MS. D'AGOSTINO: So far we believe that we are getting the access that we need.

MR. CHRISTOFF: I'm really happy with the cooperation that we got over the past two weeks, and I want that to continue until the -- our report is issued in May. And that's an expectation that I hope we all have.

REP. MALONEY: There was an article yesterday in one of the papers about Saddam Hussein accounts in Jordan and that they were not cooperating in telling our government, or anyone, who was making withdrawals from those accounts. Are you familiar with that allegation, with that story? Are you familiar with trying to get information on these Jordanian accounts? And have they cooperated -- the paper said they're not cooperating. Can you comment on this?

MR. CHRISTOFF: I'm familiar with it, but I think the information that you'll get will be in the closed-door session.

REP. MALONEY: Okay, thank you.

And do you have any idea of the scope of the amount of money involved in these bribes that were reported in the bribes for the oil- for-food program?

MR. CHRISTOFF: Sure, the estimate that we just updated -- two years ago we said there was $6.6 billion; it's now $10.1 billion. It's broken down into two parts: About $4.4 billion of that total amount is related to what was referred to as surcharges, commissions -- in effect, kickbacks -- that was imposed on purchasers or asked from suppliers. The remaining amount, that $5.7 billion, was the smuggling that went through the Persian Gulf, Jordan, Syria, Turkey.

REP. MALONEY: Do you believe that money from Saddam Hussein, that he took from the oil-for-food program, is going to insurgents who target U.S. troops in Iraq today?

MR. CHRISTOFF: No idea.

REP. MALONEY: You do not. You do not.

Well, I look forward to the closed-door session on the Jordanian account. Thank you.

REP. KELLY: Thank you, Ms. Maloney.

Mr. Ose.

REP. OSE: Thank you, Madam Chair.

I want to go back over a couple things to make sure I understand correctly. It's GAO's conclusions that about $10.1 billion in oil- sale revenue was skimmed off the top?

MR. CHRISTOFF: Ten-point-one billion dollars that was either skimmed or it was the result of illegal smuggling of oil.

REP. OSE: Okay, more accurately, 4.4 billion of skimming and 5.7 of smuggling. And that's comprised based on surcharges of up to 50 cents per barrel or commissions ranging from 5 to 10 percent in the form of surcharges and the like?

MR. CHRISTOFF: Correct. In our analysis, actually, we used 25 cents per barrel, trying to be a bit more conservative.

REP. OSE: Okay. Now, you highlighted Syria, Jordan and generically the Persian Gulf as the source or the end countries for this oil --

MR. CHRISTOFF: Smuggling.

REP. OSE: -- for the smuggling portion of that.

MR. CHRISTOFF: Correct.

REP. OSE: And then we also -- were there countries beyond Syria, Jordan, or the Persian Gulf to which this oil was sent?

MR. CHRISTOFF: Well, the oil ultimately ended up in the international market. The conduits for actually getting it out of Iraq were through pipeline via Syria, truck over towards Jordan and Turkey, and then through the Persian Gulf by ship.

REP. OSE: Okay. GAO's position, then, is that the conduits for the oil departing Iraq were Syria, Jordan and the Persian Gulf.

MR. CHRISTOFF: Correct.

REP. OSE: And the end users, do you have any evidence as to who the end users of this oil, other than just the generic international markets --

MR. CHRISTOFF: No. Not the smugglers.

REP. OSE: Okay. Do you have any evidence as to the payor on the $4.4 billion worth of revenue that was -- is estimated to be in the form of surcharges or commissions?

MR. CHRISTOFF: Well, the United Nations has all of the contracts. They were -- at the end of March there were over 6,000 contracts that were pending. All of this information has been turned over to the Coalition Provisional Authority. So that will list all of the pending contracts in terms of the purchasers as well as the suppliers of commodities: who they were, which countries they were coming from, and the total amount.

REP. OSE: Some of the press reports I've read indicate that certain individuals who are actually associated or affiliated directly with the United Nations in one form or another were the beneficiaries, either directly or by virtue of relationships with corporate entities, of having received some of these oil shipments. Does GAO have any such information?

MR. CHRISTOFF: No.

REP. OSE: Now, you -- you also talked a little bit about holds on contracts, and Ms. Kelly touched on this. I just want to make sure I go back on this. There were any number of countries with whom there were contracts for provision of service to the same regime in Iraq. Just --

MR. CHRISTOFF: Mm-hmm.

REP. OSE: -- the United States, Germany, France, Russia. Were there others?

MR. CHRISTOFF: Your question again?

REP. OSE: You talked about -- we talked earlier about holds on contracts --

MR. CHRISTOFF: Correct. That the Security --

REP. OSE: -- and that the United States had placed holds on up to $5 billion worth of contracts --

MR. CHRISTOFF: Correct.

REP. OSE: -- and your earlier testimony was -- in answer to Ms. Kelly's question, was that no holds had been placed on any contracts that you were aware of for -- from Russia, France or Germany.

MR. CHRISTOFF: We'll certainly go back and check on that. Two years ago, when we did this work, 90 percent of the holds were U.S., the remainder were British.

REP. OSE: Okay. In terms of the accounts into which money from the sale of oil under the Oil-for-Food Program occurred, the funds were placed in custodial accounts in U.S. banks or other banks?

MR. CHRISTOFF: A U.N. escrow account held in Paris.

REP. OSE: What bank in Paris controlled the funds?

MR. CHRISTOFF: (To staff.) BNP?

Banque Nationale de Paribas.

REP. OSE: Paribas?

MR. CHRISTOFF: Yes.

REP. OSE: Okay. Do you have any information as to what sort of fees or assessments or rates of return were paid on the monies deposited into that account?

MR. CHRISTOFF: I don't know. As part of the oil-for-food program, however, the United Nations was given approximately 3 percent of the total oil proceeds. That would be for their administrative expenses to administer the oil-for-food program.

REP. OSE: My question is, in their custodial nature the U.N. was acting as an escrow or a fiduciary and they were placing funds into BNP Paribas in Paris. Was that an interest-bearing account?

MR. CHRISTOFF: I don't know.

(To staff.) Do you know?

We can check on that.

REP. OSE: I see my time's expired. Madame Chair, thank you.

REP. KELLY: Thank you. That was an interesting line of questioning and I hope we can get some answers.

I want to just -- you just kind of blew me away there when you said 3 percent --

MR. CHRISTOFF: Mm-mmm. (Affirmation.)

REP. KELLY: -- of the oil-for-food program monies were siphoned off by the United Nations?

MR. CHRISTOFF: No, no, no. Not siphoned off.

REP. KELLY: (Laughs.)

MR. CHRISTOFF: That was part --

REP. KELLY: Let me understand this.

MR. CHRISTOFF: Yes, please. That was part of the arrangement in establishing the oil-for-food program. To administer the program, as part of the agreement, 72 percent of the oil sales went to Iraq to be used for purchases, 3 percent was overhead to allow the United Nations to administer the program, and 25 percent was returned to Kuwait as part of war reparations.

REP. KELLY: Thank you. I appreciate that clarity. I also appreciate the very direct manner in which you've answered our questions with facts. It's nice -- refreshing to have someone here that doesn't dissemble what -- just says what it is. I appreciate that. (Chuckles.)

The chair notes that some members may have additional questions for this panel which they may wish to submit in writing, so without objection the hearing record will remain open for 30 days so that members --

REP. OSE: Madame Chair?

REP. KELLY: -- can submit written questions to these witnesses and to place their responses in the record. This hearing -- I'm sorry?

REP. OSE: If I may, I want to follow up on the line of questioning you just brought up for a moment.

REP. KELLY: Could you do that, please, in the closed session?

REP. OSE: Certainly.

REP. KELLY: Thank you. This hearing is adjourned.