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Testimony:

Before the Subcommittee on Oversight and Investigations, Committee on 
Financial Services, House of Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 10:00 a.m. EST:

Thursday, March 18, 2004:

Recovering Iraq's Assets:

Preliminary Observations on U.S. Efforts and Challenges:

Statement of Joseph A. Christoff, Director: 
International Affairs and Trade:

and Davi M. D'Agostino, Director: 
Financial Markets and Community Investment:

GAO-04-579T:

GAO Highlights:

Highlights of GAO-04-579T, a testimony to Subcommittee on Oversight and 
Investigations, House Committee on Financial Services:

Why GAO Did This Study:

Rebuilding Iraq is a U.S. national security priority. Billions of 
dollars are needed for Iraq's reconstruction. The U.S. government and 
the international community have undertaken important efforts to 
recover the assets of the former regime and return them to the Iraqi 
people. In this testimony, GAO will present its preliminary 
observations on the recovery effort. Specifically, GAO (1) updates its 
estimate of the revenues diverted from the Oil for Food Program, (2) 
describes the U.S. government agencies working on the asset recovery 
effort, (3) discusses the results of U.S. efforts, and (4) highlights 
challenges that the United States faces in recovering Iraqi assets. As 
this testimony reflects GAO's preliminary observations, GAO is making 
no recommendations.

What GAO Found:

GAO estimates that from 1997 through 2002, the former Iraqi regime 
acquired $10.1 billion in illegal revenues related to the Oil for Food 
program--$5.7 billion in oil smuggled out of Iraq and $4.4 billion in 
illicit surcharges on oil sales and after-sales charges on suppliers. 
This estimate is higher than our May 2002 estimate of $6.6 billion 
because it includes 2002 data from oil revenues and contracts under the 
Oil for Food Program and newer estimates of illicit commissions from 
commodity suppliers. The United States has tapped the services of a 
variety of U.S. agencies and recently developed domestic and 
international tools in its efforts to recover Iraqi assets worldwide. 
Led by the Department of the Treasury, about 20 government entities 
have combined efforts to identify, freeze, and transfer the former 
regime's assets to Iraq. The United States also used the International 
Emergency Economic Powers Act, as amended by provisions in the USA 
PATRIOT Act of 2001, to confiscate the property of the former Iraqi 
regime under U.S. jurisdiction and vest the assets in the U.S. 
Treasury. Finally, U.N. Security Council Resolution 1483 required all 
U.N. members to freeze without delay and immediately transfer assets of 
the former Iraqi regime to the new Development Fund for Iraq (DFI). 
U.S. efforts to recover Iraqi assets have had varying results. In March 
2003, the U.S. government quickly took control of Iraq's assets in the 
United States. From May to September 2003, the United States 
transferred $1.7 billion to Iraq to help pay for the salaries of Iraqi 
civil servants, ministry operations, and pensions. Within Iraq, U.S. 
military and coalition forces seized about $926 million of the regime's 
assets. Other countries froze about $3.7 billion of Iraqi regime assets 
in compliance with U.N. Security Council resolutions. As of March 2004, 
Treasury reported that more than 10 countries and the Bank for 
International Settlements had transferred approximately $751 million to 
the DFI. Little progress has been made in identifying and freezing 
additional Iraqi assets that remain hidden. While the amount of hidden 
assets accumulated by the former Iraqi regime is unknown, estimates 
range from $10 to $40 billion in illicit earnings. The United States 
faces key challenges in recovering Iraq's assets. First, recovering the 
former regime's assets was not initially a high priority in the overall 
U.S. effort in Iraq. Second, U.S. officials stated that many countries 
needed to adopt additional legislation to implement the U.N. 
requirements and transfer the funds to the DFI. U.S. expectations for 
the quick transfer of funds may have been overly optimistic given the 
legal capabilities of some countries. Third, the impending transfer of 
sovereignty to an interim Iraqi government on June 30, 2004, may 
further complicate U.S. efforts to locate and recover assets of the 
former regime. It is uncertain whether the new government will allow 
the United States to continue its hunt for the former regime's assets.

What GAO Recommends:

www.gao.gov/cgi-bin/getrpt?GAO-04-579T. To view the full product, 
including the scope and methodology, click on the link above. For more 
information, contact Joseph Christoff at (202) 512-8789 or 
christoffj@gao.gov or Davi M. D'Agostino at (202) 512-5431 or 
dagostinod@gao.gov.

[End of section]

Madam Chairwoman and Members of the Subcommittee:

We are pleased to be here today to discuss our preliminary observations 
on U.S. and international efforts to recover assets of the former Iraqi 
regime and transfer them to Iraq for reconstruction.

Rebuilding Iraq is a U.S. national security and foreign policy 
priority. Billions of dollars are needed for meeting humanitarian 
needs, stabilizing Iraq, and repairing the country's infrastructure. 
The U.S. government and the international community have undertaken 
important efforts to recover the assets of the former regime and return 
them to the Iraqi people.

In May 2003, this committee asked GAO to examine how the U.S. 
government works with the international community to recover the assets 
of targeted foreign regimes. We will complete this broader report on 
U.S. recovery efforts for the committee in May 2004.

Today, we will present our preliminary observations on Iraqi asset 
recovery efforts. Specifically, we will (1) update our estimate of the 
revenues diverted from the Oil for Food Program by the former Iraqi 
regime, (2) describe the U.S. agencies working to recover Iraqi assets, 
(3) discuss the results of U.S. efforts, and (4) highlight challenges 
in asset recovery.

To address these issues, we reviewed documents and statements from the 
Departments of the Treasury, State, Defense, and Justice on the asset 
recovery effort, the Coalition Provisional Authority (CPA)[Footnote 1] 
in Iraq on the funds transferred to Iraq, and the United Nations on the 
Oil for Food Program. We met with U.S. officials working on the 
recovery effort, including officials from the Treasury's Office of 
Foreign Assets Control (OFAC), analysts from U.S. law enforcement and 
intelligence agencies, financial regulators, and representatives from 
U.S. financial institutions responsible for implementing U.S. orders to 
freeze and transfer blocked Iraqi assets. We have yet to review the 
reliability of the data provided by the Department of the Treasury and 
the CPA.

Summary:

* We estimate that from 1997 through 2002, the former Iraqi regime 
acquired $10.1 billion in illegal revenues related to the Oil for Food 
Program--$5.7 billion in oil smuggled out of Iraq and $4.4 billion in 
illicit surcharges on oil sales and commissions from suppliers. This 
estimate is higher than our reported May 2002 estimate of $6.6 billion 
because it includes 2002 data from oil revenues and contracts under the 
Oil for Food Program, newer estimates of illicit commissions from 
commodity suppliers.[Footnote 2]

* The United States has tapped the services of several U.S. agencies 
and used recently developed domestic and international tools in its 
efforts to recover Iraqi assets worldwide. Led by the Department of the 
Treasury, about 20 government entities have combined efforts to 
identify, freeze, and transfer the former regime's assets to Iraq. The 
United States also used the International Emergency Economic Powers Act 
(IEEPA), as amended by provisions in the USA PATRIOT Act of 2001, to 
confiscate the property of the former Iraqi regime under U.S. 
jurisdiction and vest the assets in the U.S. Treasury. Finally, U.N. 
Security Council Resolution 1483 required all U.N. members to freeze 
without delay and immediately transfer assets of the former Iraqi 
regime to the new Development Fund for Iraq (DFI).

* U.S. efforts to recover Iraqi assets have had varying results.

* In March 2003, the U.S. government quickly took control of Iraq's 
assets in the United States. From May to September 2003, the United 
States transferred $1.7 billion to Iraq to help pay for the salaries of 
Iraqi civil servants, ministry operations, and pensions. The United 
States also transferred $192 million to the DFI in July 2003. Most of 
the vested funds have been spent on reconstruction.

* Within Iraq, U.S. military and coalition forces seized about $926 
million of the regime's assets. The CPA used these funds for Iraqi 
projects, ministry operations, and liquefied petroleum gas purchases.

* Other countries froze about $3.7 billion of Iraqi regime assets in 
compliance with U.N. Security Council resolutions. As of March 2004, 
Treasury reported that more than 10 countries and the Bank for 
International Settlements had transferred approximately $751 million to 
the DFI. State Department and Treasury officials continue to work 
diplomatically with other countries to expedite the transfer of 
remaining Iraqi assets.

* Little progress has been made in identifying and freezing additional 
Iraqi assets that remain hidden. While the amount of hidden assets 
accumulated by the former Iraqi regime is unknown, estimates range from 
$10 billion to $40 billion in illicit earnings.

* The United States faces key challenges in recovering Iraq's assets. 
First, recovering the former regime's assets was not initially a high 
priority in the overall U.S. effort in Iraq. Second, U.S. expectations 
for the quick transfer of funds may have been overly optimistic given 
the legal capabilities of some countries. Third, the impending transfer 
of sovereignty to an interim Iraqi government may further complicate 
U.S. efforts to locate and recover assets of the former regime.

Background:

In August 1990, Iraq invaded Kuwait, and the United Nations imposed 
sanctions against the regime. Security Council Resolution 661 of 1990, 
prohibited all nations from buying Iraqi oil and selling Iraq any 
commodities except food or medicines. The resolution also required 
member states to block the transfer of Iraqi assets from their 
countries. Consistent with this resolution, the President froze all 
Iraq's assets held in the United States. Other nations similarly froze 
Iraqi government assets in their countries.

In 1991, the Security Council offered to let Iraq sell oil under a U.N. 
program to meet its peoples' basic needs. The Iraqi government rejected 
the offer and, over the next 5 years, food shortages and a general 
deterioration in social services were reported.

In December 1996, the United Nations and Iraq agreed on the Oil for 
Food Program, which allowed Iraq to sell a set amount of oil to pay for 
food, medicine, and infrastructure repairs. The United Nations 
monitored and screened contracts that the Iraqi government signed with 
commodity suppliers. Iraq's oil revenue was placed in a U.N.-controlled 
escrow account. From 1997 through 2002, Iraq sold more than $67 billion 
of oil through the U.N. program and issued $38 billion in letters of 
credit for humanitarian goods. In May 2003, the Security Council passed 
Resolution 1483, which recognized the United States, Great Britain, and 
coalition partners as the authority for providing security and 
provisional administration in Iraq. The resolution also ended the 
sanctions, except for the prohibition on exporting arms to Iraq.

Estimated Revenue Obtained Illegally by the Former Iraqi Regime from 
the Oil for Food Program Exceeds $10 Billion:

We estimate that, from 1997 through 2002, the former Iraqi regime 
acquired $10.1 billion in illegal revenues related to the Oil for Food 
Program--$5.7 billion through oil smuggling and $4.4 billion through 
surcharges against oil sales and illicit commissions from commodity 
suppliers.[Footnote 3] This estimate is higher than the $6.6 billion we 
reported in May 2002.[Footnote 4] We updated this estimate to include 
(1) oil revenue and contract amounts for 2002, (2) updated letters of 
credit from prior years, and (3) newer estimates of illicit commissions 
from commodity suppliers.

Oil was smuggled out through several routes, according to U.S. 
government officials and oil industry experts. Oil entered Syria by 
pipeline, crossed the borders of Jordan and Turkey by truck, and was 
smuggled through the Persian Gulf by ship. In addition to revenues from 
oil smuggling, the Iraqi government levied surcharges against oil 
purchasers and commissions against commodity suppliers participating in 
the Oil for Food Program. According to some Security Council members, 
the surcharge was up to 50 cents per barrel of oil and the commission 
was 5 to 10 percent of the commodity contract. The funds were paid 
directly to officials connected with the Iraqi government. In addition, 
according to a Department of Defense (DOD) official, a DOD report in 
September 2003 evaluated 759 contracts funded and approved under the 
Oil for Food Program. The study found that at least 48 percent of the 
contracts were overpriced and that on average the contracts were 
overpriced by 21 percent.

U.S. Efforts to Recover Iraqi Assets Involve Many Agencies and Use 
Recently Developed Domestic and International Authorities:

The United States has tapped the services of several U.S. agencies and 
used recently developed U.S. and international authorities in its 
efforts to recover Iraqi assets worldwide. About 20 entities, including 
those of the Departments of the Treasury, Homeland Security, Defense, 
Justice, State, intelligence agencies, law enforcement agencies, and 
the White House National Security Council, are involved in recovering 
Iraqi assets.

To lead the asset recovery efforts, the United States created an 
interagency coordinating body headed by the Department of the Treasury. 
The Iraqi Assets Working Group has developed a strategy to identify, 
freeze, seize, and transfer former regime assets to Iraq. The working 
group's goals are to:

* Exploit documents and key financial figures in Iraq to better 
understand fund flows;

* Secure the cooperation of jurisdictions through which illicit funds 
have flowed so that working group members may exploit financial records 
and uncover the money trail;

* Secure the cooperation of jurisdictions in which illicit assets may 
reside to locate, freeze, and repatriate the assets;

* Engage the financial community in the hunt for illicit assets 
generally, and specifically secure the cooperation of the financial 
institutions through which illicit funds have flowed or may still 
reside;

* Develop a system to facilitate the fluid repatriation of funds; and:

* Prepare for potential sanctions against uncooperative jurisdictions 
and financial institutions.

The working group is leveraging the expertise of U.S. officials 
involved in efforts to recover assets of terrorists and money 
launderers.

The U.S. Congress recently passed legislation containing provisions 
that allowed the President to confiscate foreign funds frozen in U.S. 
financial institutions. Specifically, provisions in the USA PATRIOT Act 
of 2001 amended IEEPA to allow the President to confiscate foreign 
property subject to U.S. jurisdiction in times of "on-going 
hostilities" or if the United States is attacked. These provisions gave 
the President the necessary authority, through an Executive Order, to 
confiscate the property of the former Iraqi regime and to vest these 
assets in the U.S. Treasury.

In addition, the State Department cited U.N. Security Council 
Resolution 1483 as an important vehicle for requiring other countries 
to transfer assets to Iraq. On May 22, 2003, the U.N. Security Council 
adopted Resolution 1483, which (1) noted the establishment of the DFI, 
a special account in the name of the Central Bank of Iraq; and (2) 
required member states to freeze and immediately transfer to the DFI 
all assets of the former Iraqi government and of Saddam Hussein, senior 
officials of his regime and their family members. The resolution also 
included a unique immunity provision to protect the assets from new 
claims.

U.S. Efforts to Recover the Former Iraqi Regime's Assets Have Had 
Varying Results:

In 2003, the U.S. government quickly vested Iraq's assets held in the 
United States and transferred them to Iraq. Similarly, the U.S. 
military, in coordination with U.S. law enforcement agencies, seized 
assets of the former regime in Iraq. The CPA has used most of the 
vested and seized assets for reconstruction projects and ministry 
operations. U.S. officials noted that some other countries' efforts to 
transfer Iraqi funds have been slowed by their lack of implementing 
legislation. There has been little progress in recovering the regime's 
hidden assets.

The United States Transferred Nearly $1.9 Billion in Vested Assets to 
Iraq:

In 2003, the United States vested about $1.9 billion of the former 
regime's assets in the U.S. Treasury. Between May and December, the 
United States transferred more than $1.7 billion to Iraq and $192 
million to the DFI. The United States had the necessary legal 
authorities to make the transfers quickly.

On August 2, 1990, in compliance with a Presidential Executive Order, 
the Treasury Office of Foreign Assets Control (OFAC) issued regulations 
to financial institutions requiring them to freeze Iraqi assets in the 
United States. More than 30 banks in the United States identified and 
froze accounts with $1.4 billion in Iraqi assets.[Footnote 5] These 
institutions held assets in accounts that accumulated interest.

In March 2003, the President used authorities, including the enhanced 
authority in IEEPA, as amended by provisions in the USA PATRIOT Act, to 
issue a new executive order to confiscate or take ownership of Iraqi 
assets held by U.S. financial institutions and vest them in the U.S. 
Treasury. According to Treasury and Federal Reserve officials, Treasury 
instructed the Federal Reserve Bank to release portions of the funds to 
DOD upon the Office of Management and Budget's approval of DOD's 
spending plans. As of March 2004, the CPA had spent about $1.67 billion 
of the $1.9 billion for emergency needs, including salaries for civil 
servants and pensions, and for ministry operations.

The United States Seized More Than $900 Million in Iraq:

CPA informed us in March 2004 that the U.S. military, in coordination 
with U.S. law enforcement agencies had seized about $926 million of the 
regime's assets in Iraq. The U.S. military seized about $894 million in 
Iraqi bonds, U.S. dollars, euros, and Iraqi dinars, as well as 
quantities of gold and jewelry. This amount included $750,000 found 
with Saddam Hussein when he was captured. Department of Homeland 
Security agents seized an additional $32 million.

The CPA is authorized to use these seized funds for humanitarian and 
reconstruction efforts. As of March 2004, the CPA had used $752 million 
for reconstruction activities, including projects, ministry 
operations, and liquefied petroleum gas purchases.

Other Countries Have Transferred $751 Million to the DFI:

According to Treasury, other countries have frozen about $3.7 billion 
in Iraqi assets. Treasury officials reported that, as of March 2004, 
more than 10 countries and the Bank for International Settlements have 
transferred $751 million to the DFI. Treasury officials noted that the 
remaining assets have not been transferred to the DFI because some 
countries do not have the necessary legislation to affect the transfer 
or are holding about $1 billion to adjudicate claims. U.N. Security 
Council Resolution 1483 requires the immediate transfer of Iraqi funds 
identified and frozen in these accounts to the DFI.

To encourage other countries to transfer the funds to Iraq, the 
Secretary of the Treasury requested that the international community 
identify and freeze all assets of the former regime. Additionally, 
Treasury and State officials said that they have engaged in diplomatic 
efforts to encourage countries to report and transfer the amounts of 
Iraqi assets that they had frozen. For example, since March 2003, State 
officials told us that they have sent more than 400 cables to other 
countries requesting that they transfer funds to the DFI.

According to U.S. officials, Treasury and State continue to leverage 
the U.S. government's diplomatic relations with finance ministries and 
central banks to encourage the transfer of Iraqi assets to the DFI, 
according to Treasury officials. Some of the remaining frozen funds are 
located in financial institutions in Iraq's neighboring countries or 
Europe.

Little Progress Has Been Made in Recovering Hidden Assets of the Former 
Iraqi Regime:

Little progress has been made in recovering the former Iraqi regime's 
hidden assets. Because the former Iraqi regime used a network of front 
companies, trusts, and cash accounts in the names of the regime family 
members and associates, it has been difficult to identify how much 
remains hidden in the international financial system. U.S. government 
officials have cited estimates ranging from $10 billion to $40 billion 
in illicit earnings.

According to U.S. government officials, U.S. government asset recovery 
efforts have focused on exploiting documents in Iraq, interviewing key 
financial figures, and convincing other countries to cooperate in 
identifying and freezing illicit funds that have flowed through or 
still reside in their countries. For example, Department of Homeland 
Security agents have exploited Central Bank of Iraq records for leads 
regarding Saddam Hussein's procurement network. Internal Revenue 
Service criminal investigators have conducted interviews of former 
finance ministry individuals and exploited financial documents of the 
regime to obtain leads on the location of targeted assets. The Defense 
Intelligence Agency provides some of the research and analysis used to 
identify assets of the former Iraqi regime.

In addition, according to Treasury and State officials, they are 
coordinating efforts to gain the cooperation of other countries. For 
example, State officials said that U.S. investigators have identified 
500 accounts that potentially belonged to the former regime in other 
countries. State is working through their overseas embassies to get the 
cooperation of these countries to return the funds to the DFI.

Challenges to Transferring Frozen Assets and Locating the Hidden 
Assets:

The U.S. government has faced key challenges to recovering the assets 
of the former Iraqi regime.

First, recovering the former regime's assets was not initially a high 
priority in the overall U.S. effort in Iraq. As the need for additional 
resources to rebuild Iraq became apparent, the United States placed a 
higher priority on recovering the former regime's assets. According to 
U.S. government officials, recovering the former Iraqi regime's assets 
became the U.S. government's third priority behind the hunt for weapons 
of mass destruction and security in September 2003. In addition, 
Internal Revenue Service agents stated that DOD's post-war plans and 
priorities did not include protection of financial documents or other 
information that could have provided leads on the location of the 
former regime's assets.

Second, U.S. expectations for the quick transfer of funds under U.N. 
Security Council Resolution 1483 may have been overly optimistic given 
the lack of legal capabilities of some countries to do so. In June 
2003, State and Treasury officials said that the U.N. resolution 
included unique provisions that afforded the United States and the 
international community with an opportunity to quickly recover Iraqi 
assets worldwide. The resolution required all U.N. members to freeze 
without delay assets of the former Iraqi regime and immediately 
transfer them to the DFI. Many of the member states that had frozen 
Iraqi government assets in 1991 did not immediately transfer the assets 
to the DFI.

U.S. officials stated that many countries needed to adopt additional 
legislation to implement the U.N. requirements and transfer the funds 
to the DFI. According to U.S. government officials, some U.N. member 
countries have developed the authorities, institutions, and mechanisms 
to freeze assets of targeted terrorists, but others had not developed 
similar mechanisms for targeted regimes. U.S. government officials also 
stated that some countries did not have the administrative capabilities 
and financial mechanisms to transfer the frozen assets. U.S. officials 
did not have a central repository of other countries' laws and 
regulations related to transferring Iraqi assets. Furthermore, 
according to U.S. officials, despite the immunity provision included in 
the U.N. resolution, some countries are delaying transfer of funds 
until all claims have been settled.

Third, the impending transfer of sovereignty to an interim Iraqi 
government on June 30, 2004, may further complicate U.S. efforts to 
locate and recover assets of the former regime. It is uncertain whether 
the new government will allow the United States to continue its hunt 
for the former regime's assets. The future transitional government has 
yet to conclude agreements regarding the activities of the multi-
national force, which may include the right to interview Iraqi 
officials and exploit documents. In addition, it is also uncertain 
whether other countries will transfer their remaining funds to the DFI 
when the interim government assumes authority over it.

Madam Chairwoman and Members of the Subcommittee, this concludes our 
prepared statement. We will be happy to answer any questions you may 
have.

Contacts and Acknowledgments:

For questions regarding this testimony, please call Joseph Christoff at 
(202) 512-8979 or Davi M. D'Agostino at (202) 512-5431. Other key 
contributors to this statement were Thomas Conahan, Lynn Cothern, 
Philip Farah, Rachel DeMarcus, Ronald Ito, Barbara Keller, Sarah Lynch, 
Zina Merritt, Tetsuo Miyabara, Marc Molino, and Mark Speight.

[End of section]

Appendix I: Roles of U.S. Entities In Recovering Iraqi Assets:

[See PDF for image]

[End of figure]

FOOTNOTES

[1] The CPA is the U.N.-recognized coalition authority, led by the 
United States and the United Kingdom, responsible for the temporary 
governance of Iraq.

[2] U.S. General Accounting Office, Weapons of Mass Destruction: U.N. 
Confronts Significant Challenges in implementing Sanctions Against 
Iraq, GAO-02-625 (Washington, DC.: May 23, 2002).

[3] This estimate is in 2003 U.S. constant dollars. 

[4] U.S. General Accounting Office, Weapons of Mass Destruction: U.N. 
Confronts Significant Challenges in implementing Sanctions Against 
Iraq, GAO-02-625 (Washington, DC.: May 23, 2002).

[5] In addition, according to OFAC, more than $480 million was frozen 
in U.S. financial institutions abroad.