IAMB RECEIVES KPMG UPDATE ON DFI AUDIT, EXPRESSES

C O N F I D E N T I A L SECTION 01 OF 05 KUWAIT 003063

SIPDIS

STATE FOR EB/IFD/OMA DANIEL PETERS, THOMAS ENGLE
STATE FOR NEA/ARP
STATE FOR NEA/NGA BOB SILVERMAN
STATE FOR IO/UNP BROOK MILTON
BAGHDAD FOR ANNE DERSE
TREASURY FOR LARRY MCDONALD

E.O. 12958: DECL: 09/12/2014
TAGS: EFIN IZ UN KW
SUBJECT: IAMB RECEIVES KPMG UPDATE ON DFI AUDIT, EXPRESSES
'STRONG CONCERN' WITH DELAYS

REF: A. USUN NY 1723

B. STATE 151993

C. 03 STATE 138585

Classified By: Charge d'Affaires Matthew H. Tueller for Reason 1.4(d)


1. (SBU) Summary: The International Advisory and Monitoring
Board (IAMB) on Iraq met in Kuwait on 7-8 September to
receive a briefing from KPMG on the status of the second
stage of the external audit work on the Development Fund for
Iraq (DFI). In its press release after the meeting, the IAMB
noted that it had not yet received reports on audits of
sole-source contracts, despite repeated requests, and it
expressed its "strong concern with these delays that hamper
fulfillment of its mandate." Permanent members of the board
representing the Interim Government of Iraq (IIG) attended an
IAMB meeting for the first time. KPMG pointed out
difficulties in getting information from the now-dissolved
CPA, and the IAMB asked for continuity of DOS representation
for the remainder of the Board's mandate. End Summary.


2. (U) On 7-8 September, the IAMB held its monthly meeting
at the Arab Fund for Economic and Social Development (AFESD)
in Kuwait. Per UNSCR 1483 (2003),the IAMB is an audit
oversight body for the Development Fund for Iraq (DFI) and
functions akin to an audit oversight board (Refs A and B).
The IAMB's mandate was continued through 2005 per UNSCR 1546.
This meeting was held at the AFESD in Kuwait, per the
AFESD's membership on the board (Ref C). The Iraqi IAMB
member and his advisor attended only the second day of the
meeting. (List of attendees in para 20).


--------------
(U) KPMG Presentation
--------------

(U) Overview
--------------


3. (C) On 7 September, KPMG representatives presented an
interim update of its external audit of the Development Fund
for Iraq (DFI). KPMG is in the process of completing its
audit of the DFI for the period 1 January to 28 June 2004.
The current process includes: completing an audit of the DFI
statement of cash receipts and payments; and agreeing upon
procedures for auditing the oil proceeds receipt account,
export sales of petroleum and petroleum products, and
disbursements from the CPA and Iraqi ministries. Pending
matters include: obtaining further information from Iraqi
ministries, including the Kurdish Regional Government (KRG);
and receiving audit material and information from the US Army
Corps of Engineers (USACE) and the US Defense Energy Support
Center (DESC).


4. (C) In its presentation, KPMG noted the following
challenges to the completion of its audit:
- KPMG did not have access to the Iraqi ministries until 16
August.
- The CPA Contracting Officer Representative (COR) left
Baghdad in July and replacement has not yet arrived.
- DOD PCO just arrived and is scheduled to rotate out in
November.
- Most CPA Senior Advisors and staff have left Baghdad.
- Numerous CPA documents were shipped to Washington for
storage.
- Security continues to be a critical issue for the KPMG
staff.

(U) Program Descriptions and Audit Findings
--------------


5. (C) KPMG discussed preliminary findings of its audit of
CPA-administered projects accounting for $4.791 billion in
DFI money. This total consists of $4.1 billion for projects
approved by the Program Review Board (PRB),$355 million
under the Commander's Emergency Response Program (CERP),$227
million under the Regional Rapid Response Program (RRRP),and
$88 million spent by the Program Management Office (PMO).

PRB: Programs managed and administered by the CPA. Over 50
programs at a cost of $4.121 billion.

Findings:
- Monitoring of projects not consistent with CPA regulations
- Lack of access to supporting documentation
CERP: Coalition Forces projects such as road construction,
school and hospital repairs, waste disposal and water
treatment. Over 7,000 payments with 11 military divisions of
$355 million.

Findings:
- Incomplete list of disbursements
- Inadequate or missing supporting documentation
- Disbursements not in accordance with written guidelines
- Payments "split" to meet authorization levels
- Vouchers not returned / ongoing projects ($93 million as of
13 August)

RRRP: Local government assistance program monitored by CPA
Ministry of Finance and PMO. Payments of $227 million with 4
governates, coordinated by military and civilian groups.

Findings:
- No list of disbursements; only boxes of receipts
- Inadequate or missing supporting documentation
- Inadequate written guidelines
- Disbursements not in accordance with written guidelines
- Over $10 million of grants with inadequate
monitoring/documentation
- US Army Corps of Engineers received $48 million
- Vouchers not returned / ongoing projects ($65 million as of
13 August)

PMO: Local government assistance program managed by the PMO.
Payments of $88 million coordinated by military and civilian
groups.

Findings:
- $6 million in clinics for Fallujah
- Vouchers not returned / ongoing projects ($61 million as of
13 August)

(U) Iraqi Ministries
--------------


6. (C) Under the CPA Ministry of Finance, a payment of
$1.635 billion was made to the Kurdish Regional Government
(KRG) without adequate monitoring of disbursements. KPMG has
not been able to gain access to the KRG to complete a proper
audit. KPMG only gained access to the Iraqi Ministry of
Finance on 16 August. KPMG has performed audit procedures on
six ministries (Finance, Oil, Housing and Construction,
Health, Transport, and Electricity.) Regarding payments made
by the CPA on behalf of Iraqi ministries, KPMG was unable to
assess how the CPA monitored the contracts. KPMG also
reported that the CPA did not reconcile receipts with
payments, and that contracts and Letters of Credit (LoCs)
were not available at the CPA.

(U) USACE and DESC
--------------


7. (C) KPMG reported that the CPA contracted with the US
Army Corps of Engineers (USACE) for a variety of programs.
Value of payments to the USACE utilizing DFI funding is more
than $1.985 billion, with a Memorandum of Understanding
serving as the contract between the parties. KPMG noted that
various audits and investigations of the USACE projects in
Iraq are ongoing by the US Department of Justice, Inspector
General and other agencies. KPMG also reported that
responsibility for fuel imports was transferred to the
Defense Energy Support Center (DESC) in 2004. The value of
the DFI-funded fuel imports is $645 million, KPMG reported,
with a Memorandum of Understanding serving as the contract
between CPA and DESC. KPMG said that it understood that fuel
imports were coordinated with approximately 10 suppliers from
the Middle East.

(U) Completion of 2004 Procedures
--------------


8. (C) KPMG Managing Partner Michel Picard said that he
planned on closing down the books on September 30 and
bringing his team back to Bahrain to write the report. He
asked the IAMB to help with access to Iraqi officials and
ministries, and he asked DOD PCO Col. Heetland to help with
access to former CPA officials and information about the
USACE and DESC contracts. KPMG finished its presentation by
listing the following actions needed for it to complete the
audit for the January - June 2004 period:

- Completing its test-work and follow-up on outstanding
information
- Receiving outstanding confirmation letters from the UN, the
Central Bank of Iraq (CBI),JP Morgan and the Iraqi ministries
- Discussing the approach to the USACE and DESC transactions
- Accessing the July DFI bank statements to test June crude
oil sales
- Accessing the SOMO accounting records for export of oil
products
- Determining the authorized officials from the former CPA to
sign the financial statements and lawyer and representation
letters to be submitted by KPMG to the IAMB
- Finalizing the financial statement, AUP reports, audit
opinion and management letter.

--------------
(U) Board Discussion, Comments, and Questions
--------------


9. (SBU) When KPMG reported its difficulties in getting
information about the USACE and DESC contracts, Bert
Keuppens, Senior Advisor of the IMF's Finance Department,
said that the IAMB "must have progress on the sole-source
contract audit," and that the Board had "requested access to
special audit reports but had not yet received them."
Kueppens added that the IAMB was trying to operate under its
terms of agreement but its "demands are not being met." He
said that the Board "will go on record noting a lack of
cooperation from the US side."


10. (SBU) On the MOU between CPA and the USACE and DESC
asking for fuel deliveries, Deputy Finance Department Chief
Chris Hemus of the IMF said that these MOUs could be used "as
a front for sole-source contracts," and that the IAMB "will
assume this has taken place unless we hear otherwise." Hemus
also inquired as to whether any of the fuel contracts were
dated prior to May 22, 2003, and noted that, if they were,
"someone was spending Iraq's money without a proper
contract." Col. Heetland responded that the USACE may have
been contracting with some companies prior to May 2003 and
that new "task orders" were then added on to these contracts.
The IAMB asked for further clarification on this point in
the future.


11. (SBU) On PRBs, Hemus inquired about $96 million in PRB
"Other Programs" that had been identified by KPMG as being
funded by the DFI but should have been funded by the U.S. A
"media network" contract was discussed in this context. UN
Assistant Secretary-General Jean-Pierre Halbwachs said that
the U.S. went overbudget on this program and shifted the cost
to the DFI. On CERPs, the IAMB wanted to know why there was
no third-party verification of delivery of goods or services
on the contracts. Keuppens said that "if the public were to
see this system (of accounting),they would say that this is
a total breakdown of control." On RRRPs, the IAMB had many
questions about who the entities reported to and who had
oversight. Keuppens said that he was surprised that "the
smoothest running military in the world appears to have had a
total breakdown of financial controls." Col. Heetland
identified specific cases that he was tracking for more
information, but assured the IAMB that any discrepancies were
"the exception, not the rule."


12. (SBU) Members of the Board asked KPMG if now or at some
point in the future it could be said definitively that a
specific number or percentage of payments were not accounted
for properly. KPMG responded that it was possible to say
that a specific number of transactions were not properly
documented, but that KPMG would not be able to then
extrapolate and say that any of the transactions were
fraudulent. Board members asked for an exact quantification
of the dollar amount of transactions that were not properly
documented.


13. (SBU) On the transfer of $1.6 billion to the KRG, the
Board asked why the money was transferred directly to this
entity rather than going through the Ministry of Finance.
Col. Heetland explained that the transfer was made based on
security needs and the need to secure the money in place in
the north before the transfer of authority in June. The
Board told KPMG that this money was from DFI money and that
KPMG would have to include it in the audit. Col. Heetland
said that he would ask Ambassador Negroponte to facilitate
access to the Kurdish area for the KPMG team in order for
them to complete the audit.


14. (SBU) On the second day of the meeting, the IAMB asked
more questions about the sole-source contracts and about
audit information from USACE and DESC. The Board inquired
about an audit of a KBR contract, saying that "this is the
one we are specifically interested in." The Board said that
they had requested this material earlier and wanted to know
why the DCAA audits of single-source contracts had not yet
been completed. Col. Heetland explained that one had been
completed and a redacted summary would be provided soon, and
that the others would be completed by the end of September.


15. (SBU) Keuppens of the IMF closed the meeting on the
second day by saying that "the Board understands that there
will be some delays in the special audits," and that the
Board has "accepted the regrets of the CPA and other agencies
in the past," but added that the Board "needs assurances that
(the audits) will proceed." "We're willing to be patient
with changes in personnel," he added, "but delaying (the
production of information about audits of sole-source
contracts) past one more meeting would be unacceptable."

--------------
(U) Other Business Discussed
--------------


16. (U) The Board decided on a timetable for awarding a new
contract for an audit of the DFI, per the expiration of
KPMG's contract. The Statement of Work will be submitted to
the IIG by 21 September; a tender will be issued on 6
October; 26 October will be the deadline for receiving bids;
and the contract will be awarded at the 6-7 December meeting
of the Board. The Board handed out a draft Statement of Work
for the new contract.


17. (U) The Board also was given copies of a presentation
titled "CPA Inspector General Report to Congress - July
2004". The Iraqi member of the IAMB and his advisor assured
KPMG that they would do everything they could to ensure KPMG
had quick and easy access to the Iraqi ministries necessary
to complete KPMG's audit procedures. The next meeting of the
IAMB was set for October 11-12 at the United Nations in New
York.


18. (U) The Board asked for continuity of Department of
State representation at future Board meetings, and asked for
Embassy Baghdad assistance in securing visas for Mr. Bahrani
and Mr. Hasson to attend the October meeting in NY. Embassy
Kuwait Econoff told the Board that both requests would be
relayed to the appropriate officials.

-------------- --------------
(U) Text of IAMB Press Release, September 8, 2004
-------------- --------------


19. (U) Begin Press Release. "In connection with its work
related to UN Security Council resolution 1483 (2003) the
IAMB received a briefing from KPMG on the status of the
second stage of the external audit work, i.e., the export
sales of Iraqi oil, petroleum products and natural gas, and
the DFI operations for the period January 1 through June 28,

2004. The audit work is largely complete and KPMG expects to
issue the final audit reports in early October 2004. Similar
to the process for the first stage audit reports (for the
period May 22, 2003 through December 31, 2003),the IAMB will
ensure that the audit reports are made public (see
http://www.iamb.info/dfiaudit.htm)

"The special audit requested by the IAMB to determine the
extent of sole-sourced contracts funded by the DFI has yet to
be commissioned. Also, the IAMB has not received reports on
audits undertaken by various US agencies on sole-sourced
contracts, despite repeated requests. The IAMB expressed its
strong concern with these delays that hamper fulfillment of
its mandate.

"In connection with its work related to UN Security Council
resolution 1546 (2004) the IAMB discussed the revised terms
of reference and rules of procedures for its work, which it
expects to finalize shortly. The IAMB reviewed the scope of
work for the external auditors to be appointed by the
Government of Iraq to audit the oil export sales and DFI
operations since June 28, 2004 in accordance with resolution

1546. The IAMB, in particular the Iraqi member, will work
with the Government of Iraq to ensure the expeditious
approval and appointment of duly qualified external auditors.

"The next meetings of the IAMB are tentatively scheduled for
October 11-12 and December 6-7." End Press Release.

--------------
(U) List of IAMB Meeting Attendees
--------------


20. (U) Attending the 7-8 September Board meeting were:

BOARD MEMBERS:

Jean-Pierre Halbwachs, Assistant Secretary-General,
Controller of the UN
Moses Bamuwamye, Finance Officer, UN
Teklay Afeworki, Finance Officer, UN
Bert Keuppens, Senior Advisor, Finance Department, IMF
Chris Hemus, Deputy Chief, Finance Department, IMF
Fayezul Choudhury, Vice-President and Controller, World Bank
Caroline Harper, Lead Operations Officer, World Bank
Dr. Khalifa Ali Dao, Senior Financial Advisor, AFESD
Maysoun Abusitta, Assistant Researcher, AFESD
Adel Al-Hasson, Representing the IIG
Izziddin Al-Bahrani, Representing the IIG

KPMG:

Michel Picard, Managing Partner, KPMG Fakhro
Robert Fraher, KPMG Fakhro

OBSERVERS:

Cameron Leuthy, Foreign Assistance & International Financing,
OSD
Colonel Sidney Heetland, DOD PCO, Embassy Baghdad
Embassy Kuwait EconOff Sam Werberg (Acting DoS representative
and notetaker)
TUELLER