USAU: FINANCIAL ACCOUNTABILITY AND CAPACITY

C O N F I D E N T I A L SECTION 01 OF 02 ADDIS ABABA 002163 NOFORN SIPDIS STATE FOR AF/FO AND AF/RSA E.O. 12958: DECL: 09/04/2019 TAGS: PREL AU SUBJECT: USAU: FINANCIAL ACCOUNTABILITY AND CAPACITY SHORTFALLS THREATEN EU-AU RELATIONSHIP Classified By: CDA Roger Meece, reasons 1.4 (b) and (d). ¶1. (C/NF) Summary. A long-awaited European Commission (EC) financial audit of the African Union Commission's (AUC) bookkeeping department turned up alarming findings and threatens existing EU-AU partnership efforts. While the auditors found no evidence of fraud, financial irregularities of at least 20 million Euros dating back to 2005 require repayment to the EC or the withholding of future planned installments, either of which may impact negatively on the AU's ability to sustain AMISOM troops. End Summary. ¶2. (C) At a luncheon on August 26 in honor of EU Special Envoy for the Horn of Africa Marika Fahlen, EUAU Ambassador Koen Vervaeke revealed that a team of EC financial experts had just completed an extensive audit in concert with their AUC counterparts. The audit's objective was to account for EC monies granted since circa 2005 in support of the African Union Mission in Sudan (AMIS),the African Union Mission in the Comoros (AMISEC),and the creation of the African Standby Force (ASF). Vervaeke stated that the AU Financial Department had been transparent and helpful to the EC auditors, and that the EC financial experts had found no evidence of fraud. However, up to 60 million Euros could either not be accounted for, or were deemed ineligible (i.e. mistakenly spent on things for which the donor never intended). Consequently, per EC regulations, the AU would either have to repay the amount in question, or that amount would be automatically offset against future EC payments to the AUC. ¶3. (C/NF) Subsequent to the luncheon, a source inside the AU confidentially provided USAU with a copy of the EC's final report which states that "one of the major challenges the AUC has been facing is to strengthen its financial management up to a level which is commensurate with its political role and ambitions." ¶4. (C/NF) The EC memorandum characterizes the outcomes of the recent audit as "alarming." The audit found that among AMIS expenditures, "23.1 million Euros are deemed ineligible, for ASF workshops 50 percent of expenditures are deemed ineligible, and for the AMISEC operation only 10 percent of the expenditures could be verified." ¶5. (C/NF) The memorandum states that "the present situation poses serious issues to both institutions; to the AUC since the launch of recovery orders severely strains its cash flow and therefore its ability to operate, and to the EC since it exposes EDF funds to unacceptable levels of risk and poses a threat to its financial accountability vis-a-vis the control Authorities. De facto, all further EC payments are blocked until the existing recovery orders are cleared." ¶6. (C/NF) The report says that while the EC has been supporting AUC capacity-building for several years, the results are "discouraging." It notes that despite the highly qualified, EC-funded technical advisors seconded to the Commission, "their advice and recommendations have not been thoroughly taken on board by the AUC." Other AUC financial shortcomings highlighted in the EC memorandum include low absorption capacity, lack of strategic vision in programming, delayed reporting, and lack of co-financing. ¶7. (C/NF) On a more positive note, the EC acknowledges that "recovery orders" (i.e. repayments) have already been issued for 6.7 million Euros, and expects that audits underway may lead to another recover order valued at approximately 23.1 million Euros. The EC report cautions, however, that if immediate and effective action is not taken, the "partnership will suffer." Noting the extensive efforts of EC advisors and interlocutors both in Brussels and Addis Ababa, as well as their patience and understanding over the years, the report says the "process has reached its limits. A thorough and quick improvement in the financial management of the AUC is necessary to prevent damage to the image of both the AUC and EC and prevent jeopardizing the substantive partnership between them." ¶8. (C/NF) Given the AUC's "sub-optimal financial performance," the EC has announced its intention to reinforce the monitoring of the projects financed by the EC and ADDIS ABAB 00002163 002 OF 002 implement additional protective measures, namely a "binding, real-time monitoring system organized by the EC." Measures under consideration include embedding a EC technical assistant in the bookkeeping department, more frequent intermediate financial reporting requirements verified by outside experts, and making the release of future installments conditional on independent verification that targets are being met. The EC will codify whatever measures it puts in place, along with a road map including timelines and deliverables. ¶9. (C/NF) Comment: The EC is the AUC's biggest donor, and its long-awaited audit and financial report verifies previous USAU reporting that capacity in the AUC remains weak despite the best efforts of reform-minded leaders like AUC Deputy Chairperson Erastus Mwencha. The damning report, however, and its financial ramifications may be exactly what the AU needs to force real structural change. The downside is that the EC's medicine could negatively impact on AMISOM, as the EC's payments also fund troop allowances and salaries. USAU believes that, for the time being, our practice of engaging African states bilaterally and engaging the AU mostly with expertise and in-kind assistance inoculates the USG from the financial risks associated with the AU's lack of capacity. Missing in all of this is what the AU's likely response will be. End comment. MEECE