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