THREE LETTERS SENT TO AMBASSADOR WALLACE FROM UNDP

S E C R E T USUN NEW YORK 000007

SIPDIS

SIPDIS

FOR ISN, IO, T, EAP

E.O. 12958: DECL: 01/09/2017
TAGS: EAID KFPC KN KNNP KUNR PINR PREL UNDP
SUBJECT: THREE LETTERS SENT TO AMBASSADOR WALLACE FROM UNDP
REGARDING THE UNDP PROGRAM IN THE DPRK.

REF: A.STATE 2744 B.USUN 00004

Classified By: Ambassador Mark D. Wallace per reasons 1.4 (b) and (d)

1.(S) On Friday January 5, 2007, following his letter to UNDP
Administrator Dervis of December 22, Ambassador Wallace,
returning his telephone call, had a telephone conversation
with Mr. Dervis' Chief of Staff, Mr. Tegegnwork Gettu, in
which Mr. Gettu confirmed that USUN would receive late Friday
evening three letters from UNDP (a cover letter from
Administrator Dervis and two letters from Assistant
Administrator Ad Melkert, responding to U.S. requests for
information regarding UNDP's program in the DPRK and the
Office for Audit and Performance Review (OAPR),
respectively),and certain financial information regarding
the UNDP program in the DPRK. In regard to Ambassador
Wallace's request for copies of the UNDP internal audit
reports on the DPRK Country Office (CO),Mr. Gettu suggested
that UNDP may be in a position to allow Ambassador Wallace to
review the reports in UNDP's office and indicated that he
would confirm this understanding. In addition, Mr. Gettu
indicated that he would look into the issue of UNDP sponsored
business class travel for DPRK officials to New York for the
purposes of "lobbying" the Executive Board. In the letter
subsequently received by USUN from Mr. Dervis Friday night
however, UNDP asserted that "internal audits are important
management tools for Executive Heads, and therefore
confidential", but that he would consult with the Executive

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Committee of the United Nations Development Group (UNDG) on
the release of such reports to Member States. The issue
regarding UNDP sponsored air travel for DPRK officials was
not addressed in that letter or the other two letters
received from UNDP that evening (reftel A). See paras 3, 4
and 5 for text of the three letters received by Ambassador
Wallace from UNDP.

2.(S) Late Friday evening, Ambassador Wallace received three
letters from UNDP, one from Administrator Dervis and two from
Assistant Administrator Ad Melkert. Per reftel B, the first
of the two letters from Mr. Melkert attempts to address the
issues raised by Ambassador Wallace during USUN's meeting
with Mr. Dervis and other UNDP officials and the follow-up
letter sent by Ambassador Wallace to Mr. Dervis on December
22, 2006. The second letter from Mr. Melkert addresses the
state of UNDP audit activities, specifically the U.S.
Government concern that UNDP's Office of Audit and
Performance Review (OAPR) has not been allocated sufficient
funding to adequately cover UNDP programs classified at
high-risk of irregularities.

3.(SBU) The following is the text of the letter received by
Ambassador Wallace from Mr. Dervis late in evening on Friday,
January 5th. Begin text:

-Thank you for you letters dated 22 December 2006 and 4
January 2007.

-Please find attached a detailed response to the specific
questions and data requests contained in your letters. The
response has been carefully reviewed by the Associate
Administrator, Mr. Ad Melkert, and other senior staff. It
also includes all the relevant information form our internal
audits.

-With reference to our recent telephone conversation and your
most recent letter dated 4 January 2007, I can confirm that I
will convene a special meeting of the Executive Committee
agencies to discuss the issue of direct access to internal
audit reports of DPRK and others more generally. You should
be aware that, consistent with UN system-wide policies and
practices as articulated in May 2005 by the Chief Executives'
Board's
High Level Committee on Management, internal audit reports
are important management tools for Executive Heads and
therefore, confidential. In this context, I will propose to
the Executive Committee agencies that, on an exceptional
basis, appropriate modalities of examination of internal
audit reports should be considered and evaluated, so that it
may be possible for your Government to examine such internal
audit reported for the purpose stated in your letters.

-I will also propose to my colleagues that we review the
overall policy and practice, and perhaps introduce a clear
distinction between evaluations focusing on internal
management performance, and evaluations that are in the form
of formal audits and could be shared with Board members,
subject to mutually agreed procedures. End letter text.

4.(SBU) The following is the text of the first of two letters


received by Ambassador Wallace from Mr. Melkert late in the
evening on Friday, January 5th. Begin letter text:

-Please find below the response to the issue raised in your
letters to the Administrator dated December 22, 2006 and
January 4, 2007 on the UNDP program in North Korea.

-Allow me first to provide you with some general context that
defines our operations in the specific situation of DPRK.

-Our mandate to operate is derived entirely from the decision
of the Executive Board on the design and approval of Country
Programs, including their implementation. This work by
definition requires cooperation with the government of the UN
Members States in which UNDP operates. As long as the Board
expects us to remain active in any country (in this case
DPRK) a flow/exchange of hard currency is inevitable. This is
in accordance with UNDP's Financial Regulation and Rules.
Permit me therefore to say that you unqualified statement (in
the January 4 letter) that UNDP would "transfer hard currency
directly to the KIM regime" seems to disregard the general
conditions for our operation in the country as described,
i.e. allowing for a flow of hard currency exclusively made
available for the defined Programme, as mandated by the Board
for implementation in cooperation with the government
concerned.

-Over the years 2001 to 2005, UNDP expended an average of
(the equivalent of) $2.3 million per year in both program and
administration, including approximately (the equivalent of)
$100,000 each year for local salaries.

-Furthermore, in terms of the transparency of our reporting,
I would like to refer to standing procedures that have been
agreed upon with and by the executive Board. At any time we
would be ready to reconsider these as necessary and we fully
respect that wish by Member States to receive additional
information in specific circumstances. I trust that you would
agree with me that the provision of such information in
principle should be part of generally established procedures.
On the basis of what is currently define as reporting duties
for UNDP, I would appreciate your reconsideration of
references to "inconsistent information" and "lack of
transparency" (in the January 4 letter). I hope that the
extensive additional information that we are providing as
part of this response as to your specific request will assist
in alleviating further concerns.

-Turning now to your specific questions in the December 22
letter, I would like to state the following.

Ad 1) Please find enclosed an overview of the
recommendations from all audits conducted (from the years
1999, 2001 and 2004),along with the current status of their
implementation.

Ad 2) Please find enclosed the line-by-line budgets for
both the office of the Resident Representative and the UNDP
Programme for the last three years.

AD 3) As to your question concerning UNDP's written
regulations, rules, procedures and/or policies on the use of
hard currency in the particular case of the DPRK, I would
first like to refer to what has been stated in the general
introduction above. For countries in which the local currency
is locally convertible-as is the case in DPRK-it is a matter
of practical consideration to define options and limitations
concerning hard currency transactions, as is included in the
internal manual on administration and management that guides
the Res Reps in their implementation. This takes into
consideration the requirement to limit the devaluation of
accumulated local currency, and utilizing local currency
where applicable. However the decision regarding the choice
of currencies utilized is delegated to the Resident
Representative. As a consequence no waiver procedure needs to
be in place for DPRK.

-As stated by the Administrator in our meeting on December
22, 2006 we have informed the government earlier that
salaries of seconded national staff, local purchase of goods
and services, local travel allowances and other similar
expenses will in future be paid in convertible won. This can
only be obtained by converting hard currency in the state
bank of DPRK.

Ad 4) As stated during our meeting on December 22, 2006
UNDP has a retention policy that requires accounting
documents to be retained for a period of seven years after
the finalization/approval of the document. We are informed


that UNDP Country Office in DPRK that hard copies of
accounting documents that exist at this point in time, as
well as information stored electronically should not be
destroyed until further notice.

-Finally, on the point made in the January 4 letter
concerning access to internal audit reports I would like to
refer to Administrator's response in the cover letter to the
information provided in my note.

-Please don't hesitate to ask for further clarification if
needed, which I would be happy to provide. End letter text.

5.(SBU) The following is the text of the second letter
received by Ambassador Wallace from Mr. Melkert late in the
evening on Friday, January 5th. The letter addresses the
state of UNDP audit activities. Begin letter text:

-Thank you for your letter dated 17 November 2006 and for the
interest expressed by the US Government to better understand
the state of UNDP's audit activities in order to exercise
your responsibilities as member of the Executive Board.

-I take note of your concern, specifically, that "OAPR has
not been allocated sufficient funding in 2006 to adequately
cover auditing of UNDP programs classified at high risk of
irregularities. As such, this has left OAPR unable to
complete its program of work for the year."

-Let me first elaborate on the facts with regard to the
funding and coverage of audits before concluding on OAPR's
facilitation and achievements.

-Budgetary resource allocation to OAPR increased by $4m or
25.8% (from 15.5m in 2002-2003 to 19.5m in 2006-2007). This
is in addition to the $12m (or $6 annually) funded from
projects and payable to professional audit firms for the
audit of projects that are nationally executed by programme
governments or other national institutions (NEX) and with
more than $100,000 in expenditure. While zero budget growth
was enforced vigorously across UNDP in the last two biennia,
OAPR is one of the few entities in UNDP that continued to
receive additional budgetary allocations while budgets were
reduced in other units. In 2006, the Management Group chaired
by the Administrator gave OAPR exceptional approval of $1m in
funding for 2006-2007. This was to cover funding for a D-1
level Deputy Director Post to strengthen leadership, three
posts at regional audit service centers to strengthen audit
capacity in the regional centers as well as another 2 posts
at the New York office to strengthen its NEX unit and
Investigations Section. As requested by OAPR, exceptional
approval of $748,000 in non-core funding was also provided to
meet unfunded general operating expenses required to meet its
2006 work plan objectives. Throughout 2006 as requested, OAPR
has been granted exceptional budget flexibility to meet its
audit work plan objectives.

-To sum up, for 2006-2007, UNDP has allocated $32.7m for
audits. These included budgetary resources of $19.5m
allocated to OAPR for 2006-2007; $12 m (or $6m annually)
payable to professional audit firms for annual audits of all
NEX projects with expenditure exceeding $100,000 and another
$1.19m payable to UN Board of Auditors (UNBOA) for their
services in the audit of country offices and HQ as part of
the UNDP audit for the biennium 2006-2007.

-On your concerns regarding adequate audit coverage, I would
like to provide the following information. In 2006, OAPR has
completed the audit of 35 country offices or close to 80% of
their planned audit of 44 country offices. Of the 9 audits
that were deferred, 3 were replaced with special audits in
other country offices and one was deferred due to security
situation on the ground. The remaining five audits could not
be completed due to other urgent unplanned priorities at OAPR
and has been rescheduled accordingly. Over and above these
audits all NEX projects (involving more than 130 country
offices) with more than $100,000 in programme expenditure has
been subjected to annual audit by professional audit firms in
accordance with NEX audit guidelines and as part if the audit
assurance programme by OAPR. The results of the audit reports
are reviewed and analyzed by the NEX Unit in OAPR. In
addition, the audit work plans of OAPR and the UNBOA ensure
that either party covers risk offices and thereby achieves
maximum coverage and no duplication of efforts. In 2007, OAPR
is planning to audit 44 country offices and 5 HQ offices as
part of its risk based prioritization. The UNBOA will conduct
operational and financial audits of 17 other country offices
and 2 out posted HQ units as part of their audit of UNDP for
2006-2007.



-To your specific question of programmes with high-risk of
irregularities, as referred to above, the UNDP audit work
plan is based on a Country Office risk assessment in
consultation with Regional Bureau. The risk-based approach to
audit planning (started in 2005 and still being implemented)
enables OAPR to optimize its allocated resources by focusing
on areas most important to UNDP. For 2006, OAPR has achieved
close to 870% of its audit plan, comprising offices wit high
risks and/or offices with special importance to UNDP. The
details of the risk assessment model have already been
presented to the June 2006 Executive Board session (Annex 1
to DP/2006/31). The risk-based approach to audit is part of a
larger effort to formalize ands mainstream management
methodologies and policies in UNDP business processes.


-To facilitate your wish to "more effectively understand the
audit and oversight capacity of UNDP" and in your response to
points 1 to 5 in your letter dated 17 November 2006, I have
provided in the corresponding annexes, summary results of
audits conducted by OAPR at the country offices in the last 5
years (Annex 1 and 2),a summary of audit issues as analyzed
by OAPR (Annex 3),a list of HQ audits conducted in the last
5 years (Annex 4) as well as the internal and external audit
plans for country offices and HQ units in 2007 (Annex 5).

-Concerning the possible release of full audit reports I
would like to refer to the parallel correspondence by the
Administrator, following tour questions on audit data with
regard to the UNDP program in DPRK. I trust that the
information provided in the annexes to this letter will meet
your information needs. Extracts of OAPR audits conducted in
2005 have been presented to the June 2006 Executive Board
(DP/2006/31).

-In conclusion, OAPR can be considered to be by and large on
track in implementing its (recently established) risk-based
audit policy, duly making use of additional budget resources
and currently in the process of strengthening the quantity
and quality of t staff resources.

-I would like to add that UNDP management attaches great
importance to the findings and signals by the UNBOAs' report
that we consider encouraging for our efforts to solidify
UNDP's accountability. Moreover, we now benefit from the
advice of an Audit Advisory Committee with highly qualified,
exclusively external membership.
Naturally, improvements are still possible and will be
pursued, particularly through more focused audit risk
planning and a strengthened OAPR team. Your questions are
highly appreciated as an expression off shared interest
between UNDP's management and its Board Members and other
stakeholders in order to ensure the necessary standards of
cooperation and accountability. End letter text.










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