MEETING AND DISCUSSION WITH UNDP ON DPRK:UNDP

S E C R E T USUN NEW YORK 000004 SIPDIS SIPDIS E.O. 12958: DECL: 12/29/2016 TAGS: EAID KFPC KN KNNP KUNR PINR PREL UNDP SUBJECT: MEETING AND DISCUSSION WITH UNDP ON DPRK:UNDP DECLINES TO PROVIDE AUDITS ON DPRK/JAPANESE PROPOSAL TO DEFER UNDP PROGRAM IN THE DPRK. REF: A. STATE 183533 B. USUN 2273 C.STATE 2744 Classified By: Ambassador Jackie Wolcott Sanders per reasons 1.4 (b) and (d) ¶1. This message contains an action request. See para. 19. 2.(S) Summary. Per reftels A and B, as a follow-up to the demarche delivered to UNDP Administrator Kemal Dervis by Ambassador Wallace on December 19, Ambassador Wallace and USUN/MR Officers met with Mr. Dervis and a team of UNDP officials on December 22 to provide a preliminary response to the demarche. Ambassador Miller, USUN/ECOSOC, attended the meeting as well. Mr. Dervis had stated his intention earlier to gather information on the UNDP program budget and UNDP internal audit policies. Mr. Dervis and his team claimed that the program budget approved by the Executive Board for the years 2001-2005 was $15 million and that the total number of UNDP staff was 2 International Professional's. Total expenditures for this allocated amount are $11.65 million, or $2.3 million per year. Of this amount, Mr. Dervis claimed that approximately $10 million went towards project implementation while the remaining sums funded the UNDP office. Mr. Dervis stated that internal audits are conducted on a cyclical basis, with the last audit of the office in DPRK occurring in 2004. Ambassador Wallace reiterated the U.S. position that access to these internal audits is essential to allaying U.S. concerns about the UNDP program in the DPRK. Mr. Dervis reiterated the UNDP policy not to disclose internal audits and promised to review UNDP policies to determine if UNDP could share the audit with a Member State. Notably, Mr. Dervis stated his intention to halt hard currency transactions in the DPRK beginning in March 2007 and to cease payment of salaries through the DPRK government and to expand the scope of internal audits to include all accounts administered by UNDP in the DPRK. He noted that the DPRK would almost certainly object to these actions. USUN will have discussions with Mr. Dervis during the first weeks of January to follow-up on the previous meetings and obtain additional responses to Ambassador Wallace's inquiries. Comment: The information provided by Dervis was in certain respects significantly different from information previously supplied by UNDP or others. End Comment. 3.(S) In a follow-up letter sent to Mr. Dervis after the meeting, Ambassador Wallace confirmed his requests for the following information: internal and/or external audits of the UNDP country office in the DPRK from the years 1998, 2001 and 2004; a line-by-line budget for the UNDP/DPRK Office of the Resident Representative; UNDP written rules, procedures and/or policies for waiving UN/UNDP restrictions on the use of hard currency transactions for in-country expenditures; confirmation that UNDP is taking action to preserve any and all documents and materials related in any way to the UNDP program in the DPRK from the last seven years. 4.(S) On January 4, 2007, Mr. Dervis returned Ambassador Wallace's call and declined to provide UNDP internal audits on DPRK, asserting UNDP's managerial prerogatives. End Summary. 5.(S) Attending the meeting for UNDP were Kemal Dervis, Administrator, Hafiz Pasha, Regional Director for the Asia and Pacific Office, Darshak Shah, Finance Officer, Bruce Jenks, Assistant Administrator for UNDP and Director of the Bureau for Resources and Strategic Partnerships (BRSP), Jessie Rose Mabutas, Director for Audit and Performance Review (OAPR) and Douglas Keh, Special Adviser and Senior Management Team Facilitator. There was no one present from UNDP's legal support office or the Treasurer's Office. Comment: Notably, the Assistant Administrator and Director from the Bureau of Management who, as we understand, supervises Mr. Shah and the Treasurer, Ms. Julie-Anne Mejia as well as the legal support office was not present. Since September of last year this position has been occupied by Ms. Akiko Yuges, a Japanese national. End Comment. 6.(S) Mr. Dervis began the meeting by explaining that UNDP as Resident Coordinator (RC),has convening authority, but no line authority; asserting that UNDP has no signature authority over funds of other offices and agencies. Mr. Dervis stated that the total approved budget for the years 2001-2005, core and non-core, was $15 million of which, total expenditures were $11.65 million, or $2.3 million per year. Of this $11.65 million, Dervis claimed that approximately $10 million was used for implementation of projects and approximately $1.35 went to the UNDP office. Comment: The numbers provided during this meeting conflict significantly with the numbers previously provided to USUN. USUN had been told previously that the budget for the years 2001-2005 was $19,009,056 and that the number of UNDP staff consisted of 4 international staff, 15 national staff and 4 project managers. End Comment. Mr. Dervis further explained that of the approximately $10 million used for UNDP projects, some $6.2 million was implemented under National Execution arrangements on behalf of the DPRK. Ambassador Wallace asked if these payments were made directly to the DPRK Government. The Controller, Darshak Shah, replied that in the DPRK, UNDP is engaged in the "full-service" program, which means that UNDP makes all procurements on behalf of the Government. However, when queried by Ambassador Wallace, Mr. Dervis conceded that there could be cases where payments are made directly to DPRK entities. Even where payments in connection with projects are made directly to the DPRK, Mr. Dervis contended that such payments are subject to audit. 7.(S) USUN asked Mr. Dervis if there was any other funds of other UN offices or agencies going through, managed or facilitated by the UNDP Resident Coordinator. Mr. Dervis stated that UNDP did not handle the funds of other UN entities, except in regard to UNFPA. However, even in regard to UNFPA, the Resident Coordinator reports directly to UNFPA-not to UNDP. 8.(S) USUN was told that there are essentially two kinds of transactions occurring in the DPRK. The first is the electronic transfer of euros from a UNDP account outside of the DPRK into the DPRK and the second is the disbursement of hard currency in the form of cash or check within the DPRK. The Controller maintained that it is UNDP's prerogative to conduct hard currency transactions in euros within the DPRK. When asked by Ambassador Wallace how electronic transfers to the government and hard currency payments are monitored, the Controller contended that any transfer of funds for the implementation of projects are monitored by periodic internal audits, however the hard currency that is given to the government ministry to be distributed among staff for salaries is unmonitored. Ambassador Wallace reiterated U.S. concerns that hard currency funds should not be transferred directly from UN programs to the DPRK government. Mr. Dervis responded that this is why UNDP is ending hard currency transactions in euros, even though it could result in shutting down the UNDP office in the DPRK. In this respect, Mr. Dervis stated his intention to halt hard currency transactions in the DPRK beginning in March 2007. He added that UNDP will cease to pay salaries through the DPRK government; something that has already been done in China and Vietnam. 9.(S) During the course of discussion, Mr. Dervis acknowledged that UN policy dictates that hard currency should not be used for local transactions. However, Mr. Dervis stated that these restrictions can be waived by the Administrator to allow the use of hard currency. Ambassador Wallace asked if there was an administrative process whereby this issue was determined. The Controller only stated that the Executive Board "discussed the situation" in each Country Office. Ambassador Wallace reiterated the importance of understanding the process for waiving restrictions governing hard currency transactions and requested that the written rules, procedures and policies governing such a waiver generally, as well as the documents reflecting the decision to waive in regard to the DPRK, be provided to USUN as soon as possible. 10.(S) In response to Ambassador Wallace's inquiries regarding the counterfeiting of U.S. dollars, Mr. Shah and Mr. Dervis replied that UNDP officers and officials had no knowledge nor understanding of any counterfeiting of U.S. dollars in the DPRK and denied that UNDP had received any counterfeit U.S. dollars. They emphasized that they could not vouch for individual UNDP personnel in the DPRK who may in their personnel capacity possess dollars or counterfeit dollars. 11.(S) Regarding counterfeiting, UNDP stated that it shifted from dollars to euros in 2001 and closed its U.S. dollar account in the DPRK in 2002. However, UNDP informed USUN that dollars are still used to pay some UNDP employees (international contractors) through the ATLAS system, which enables UNDP to transfer dollars from UNDP dollar accounts outside of the DPRK to private accounts also outside of DPRK. UNDP stressed that these payments in U.S. dollars never occur in-country in the DPRK, as there are no dollars available. Mr. Dervis acknowledged that UNDP had no controls in place to ensure that these dollar payments outside the DPRK were not being made to agents of the DPRK. 12.(S) Regarding audits, USUN was told the Malaysia UNDP regional office conducted the last internal audit of the DPRK country office in 2004 and that this was a financial and management audit. USUN was also informed that UNDP employed Ernst and Young to assist in the audit, which gave a rating of "partially satisfactory". In addition, there have been no external audits of the UNDP program or country office in the DPRK in 4 years. Mr. Dervis mentioned that he could have the scope of the internal audits expanded to include all UN program accounts administered by UNDP in the DPRK. However, Mr. Dervis maintained that these actions require approval of the DPRK government, which is unlikely. Mr. Dervis added that UNDP on the other hand, could switch its method of implementation entirely to direct implementation rather than national execution to avoid any cooperation with the DPRK government. Mr. Dervis maintained that if the DPRK government failed to accept either of these changes, then the UNDP program would cease. The representative from the Asia Office stated that the subject of halting hard currency payments for all local services has already been broached with the DPRK Government and other UN agencies. 13.(S) Ambassador Wallace asked particularly given the "partially satisfactory" rating, for a copy of the last internal audit of the DPRK. The representative from the Asia office stated that the rating was not based on a violation of financial rules; it was due entirely to a human resource issue i.e. the lack of competitive recruitment of staff because all national staff in the DPRK are pre-selected and/or directly provided by the DPRK government. Ambassador Wallace indicated that such a circumstance was at least partially the cause of U.S. concerns with the program. In response to the request for access to the internal audits for the DPRK, Mr. Dervis stated that he will ask other UN agencies if they object to UNDP sharing the internal audit with the understanding that it would be a one-time event. Comment: This is a policy decision for UNDP, although they would no doubt like support from such other UN agencies to resist. End Comment. Ambassador Wallace stated that USUN would need the last three audits in order to provide a comparison. Ambassador Wallace added that the U.S. is not sympathetic to UNDP's claims that internal audits should not be shared, at least in this instance, due to the seriousness of the allegations at hand. Mr. Dervis promised to review the request for a copy of the audit and to provide a formal response to Ambassador Wallace in the first week of January. 14.(S) Mr. Dervis indicated he has requested an audit at the beginning of 2007. Ambassador Wallace asked whether the scope of the audit would include all transactions in hard currency. Mr. Dervis agreed to make such a request. 15.(S) Ambassador Wallace requested Mr. Dervis to take action to ensure that all documents related in any way to the UNDP program in the DPRK during the last seven years be preserved, in accordance with UNDP's document retention policy. 16.(S) Mr. Dervis agreed to meet with USUN during the first week of January to follow-up on the previous meetings and obtain additional responses to Ambassador Wallace's inquiries. 17.(S) On January 4, 2007 Ambassador Wallace contacted Mr. Dervis by phone. Mr. Dervis stated he had consulted with other UN programs and that he had concluded UNDP would not share with the U.S. copies of internal audits(s) of the DPRK. Mr. Dervis said that such information was solely for the managerial prerogatives of UNDP. Mr. Dervis also stated that UNDP would attempt to provide other financial information to allay U.S. concerns. Ambassador Wallace indicated that the refusal to provide such audits appeared unsustainable given the seriousness of the matter. Ambassador Wallace stated that the UNDP/DPRK program was opaque at best and that: ¶1. UNDP had been and was continuing, at least in the short term, with providing the DPRK regime with hard currency; ¶2. UNDP had provided inconsistent information to USUN on the scope and nature of the DPRK program; ¶3. There is a lack of transparency of UNDP programmatic activities in the DPRK, and; ¶4. The U.S. was a member of the UNDP Executive Board and it was counter to any fiduciary principle, that a UNDP Executive Board member should be denied a review of any audit of UNDP. Accordingly, Ambassador Wallace requested Mr. Dervis to reconsider his refusal to provide the audit(s). Mr. Dervis stated he would consider the request further. He promised to provide other financial documents by January 5, 2007. 18.(S) Comment: USUN is of the view that considering the apparent duplicity, inconsistent statements and lack of transparency on the part of UNDP regarding the UNDP program in the DPRK, that our delegation to the UNDP Executive Board meeting January 23-26 be authorized to take whatever steps are necessary to bring our concerns about both the UNDP DPRK program and UNDP's lack of transparency and responsiveness to the attention of the Board. End Comment. 19.(S) Action Request. Following Ambassador Wallace's meeting with Mr. Dervis on December 22, Ambassador Wallace was approached by Ambassador Kodera of the Japanese Mission who inquired about the U.S. Government position in regard to a Japanese proposal to defer (end in the interim) action on the DPRK country program for 2007-2009. Ambassador Kodera indicated that Japan sought to defer the program because of serious concern regarding administration of the program and possible violations of Security Council Resolution 1718. In view of the information developed as a result of the demarches to and meetings (reftel C) with UNDP over the last several months, USUN proposes, as a first step, to join the Japanese in seeking co-sponsors for deferral of the DPRK country program. Irrespective of our success in that endeavor, however, we believe that we should raise both the DPRK program and UNDP's lack of transparency with the Board under appropriate agenda items. WOLFF