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United States Government Accountability Office: 
GAO: 

Report to Congressional Addressees: 

July 2011: 

Afghanistan: 

Actions Needed to Improve Accountability of U.S. Assistance to 
Afghanistan Government: 

GAO-11-710: 

GAO Highlights: 

Highlights of GAO-11-710, a report to congressional addressees. 

Why GAO Did This Study: 

The U.S. Agency for International Development (USAID) and the 
Department of Defense (DOD) award direct assistance to Afghanistan, 
using bilateral agreements and multilateral trust funds that provide 
funds through the Afghan national budget. GAO assessed (1) the extent 
to which the United States, through USAID and DOD, has increased 
direct assistance, (2) USAID and DOD steps to ensure accountability 
for bilateral direct assistance, and (3) USAID and DOD steps to ensure 
accountability for direct assistance via multilateral trust funds for 
Afghanistan. GAO reviewed USAID, DOD, and multilateral documents and 
met with U.S. officials and staffs of multilateral trust funds in 
Washington, D.C., and Afghanistan. 

What GAO Found: 

The United States more than tripled its awards of direct assistance to 
Afghanistan in fiscal year 2010 compared with fiscal year 2009. USAID 
awards of direct assistance grew from over $470 million in fiscal year 
2009 to over $1.4 billion in fiscal year 2010. USAID awarded $1.3 
billion to the World Bank-administered Afghanistan Reconstruction 
Trust Fund (ARTF) in fiscal year 2010, of which the bank has received 
$265 million as of July 2011. DOD direct assistance to two ministries 
grew from about $195 million in fiscal year 2009 to about $576 million 
in fiscal year 2010, including contributions to fund police salaries 
through the United Nations Development Program-administered (UNDP) Law 
and Order Trust Fund for Afghanistan (LOTFA). 

USAID and DOD have taken steps to help ensure the accountability of 
their bilateral direct assistance to Afghan ministries, but USAID has 
not required risk assessments in all cases before awarding these 
funds. For example, USAID did not complete preaward risk assessments 
in two of the eight cases GAO identified. Although current USAID 
policy does not require preaward risk assessments in all cases, these 
two awards were made after the USAID Administrator’s July 2010 
commitment to Congress that USAID would not proceed with direct 
assistance to an Afghan public institution before assessing its 
capabilities. In these two cases, USAID awarded $46 million to 
institutions whose financial management capacity were later assessed 
as “high risk.” USAID has established various financial and other 
controls in its bilateral direct assistance agreements, such as 
requiring separate bank accounts and audits of the funds. USAID has 
generally complied with these controls, but GAO identified instances 
in which it did not. For example, in only 3 of 19 cases did USAID 
document that it had approved one ministry’s prefinancing contract 
documents. DOD personnel in Afghanistan assess the risk of providing 
funds to two security ministries through quarterly reviews of each 
ministry’s capacity. DOD officials also review records of ministry 
expenditures to assess whether ministries have used funds as intended. 
DOD established formal risk assessment procedures in June 2011, 
following GAO discussions with DOD about initial findings. 

USAID and DOD generally rely on the World Bank and UNDP to ensure 
accountability over U.S. direct assistance provided multilaterally 
through ARTF and LOTFA, but USAID has not consistently complied with 
its risk assessment policies in awarding funds to ARTF. For example, 
in March 2010, USAID did not conduct a risk assessment before awarding 
an additional $1.3 billion to ARTF. During GAO’s review, DOD 
established procedures in June 2011 requiring that it assess risks 
before contributing funds to LOTFA. The World Bank and UNDP use ARTF 
and LOTFA monitoring agents to help ensure that ministries use 
contributions as intended. However, security conditions and weaknesses 
in Afghan ministries pose challenges to their oversight. For example, 
the ARTF monitoring agent recently resigned due to security concerns. 
The World Bank is now seeking a new monitoring agent and does not 
anticipate a gap in monitoring. In addition, weaknesses in the 
Ministry of Interior’s systems for paying wages to police challenge 
UNDP efforts to ensure that the ministry is using LOTFA funds as 
intended. 

What GAO Recommends: 

GAO recommends that USAID (1) establish and implement policy requiring 
risk assessments in all cases before awarding bilateral direct 
assistance funds, (2) take additional steps to help ensure it 
implements controls for bilateral direct assistance, and (3) ensure 
adherence to its risk assessment policies for ARTF. In commenting on 
the first recommendation, USAID stated that its existing policies call 
for some form of risk assessment for all awards and that it has taken 
new steps to ensure risk assessment. GAO retained its recommendation 
because existing USAID policies do not require preaward risk 
assessments in all cases. USAID concurred with GAO’s other 
recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-11-710] or key 
components. For more information, contact Charles M. Johnson Jr. at 
(202) 512-7331 or johnsoncm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The United States More Than Tripled Its Awards of Direct Assistance to 
Afghanistan in 2010 through USAID and DOD: 

USAID and DOD Have Taken Steps to Help Ensure Accountability over 
Bilateral Direct Assistance, but USAID Has Not Required Risks to Be 
Assessed in Advance in All Cases: 

USAID Has Not Consistently Assessed Risks of Contributions to ARTF, 
While DOD Has Recently Established Risk Assessment Guidance for LOTFA: 

Conclusion: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the U.S. Agency for International 
Development: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: U.S. Allocations of Funds to Reconstruct Afghanistan, Fiscal 
Years 2002-2010: 

Table 2: USAID Direct Assistance to Afghanistan, Fiscal Years 2009- 
2010: 

Table 3: USAID Preaward Risk Assessments for Bilateral Direct 
Assistance: 

Table 4: USAID Compliance with Selected Controls in Its Bilateral 
Direct Assistance Agreements, as of February 15, 2011: 

Table 5: USAID Documentation of Approvals of Procurement Steps in 
Contracts Awarded under USAID-Financed Programs: 

Figures: 

Figure 1: Changes in the Levels of U.S. Direct Assistance Awards and 
Contributions, Fiscal Years 2009-2010: 

Figure 2: U.S. Direct Assistance Awards and Contributions, Fiscal Year 
2010: 

Abbreviations: 

ADS: Automated Directives System: 

ANA: Afghan National Army: 

ANP: Afghan National Police: 

ARTF: Afghanistan Reconstruction Trust Fund: 

CAO: Control and Audit Office: 

CSTC-A: Combined Security Transition Command--Afghanistan: 

DOD: Department of Defense: 

LOTFA: Law and Order Trust Fund for Afghanistan: 

MAIL: Ministry of Agriculture, Irrigation, and Livestock: 

MOD: Ministry of Defense: 

MOF: Ministry of Finance: 

MOI: Ministry of Interior: 

PIO: Public International Organization: 

SIGAR: Special Inspector General for Afghanistan Reconstruction: 

State: Department of State: 

Treasury: Department of the Treasury: 

UNDP: United Nations Development Program: 

USAID: U.S. Agency for International Development: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

July 20, 2011: 

Congressional Addressees: 

Since 2002, the United States has allocated about $56 billion for 
programs to reconstruct Afghanistan. In January 2010, the Department 
of State (State) announced that the United States would lessen its 
reliance on contractors to implement reconstruction programs by 
providing more funds to the Afghan government itself. The United 
States also joined other donors in 2010 by pledging that within the 
next 2 years it would provide 50 percent or more of its Afghan 
development aid through the Afghan government's national budget. Such 
direct assistance is intended to help develop the capacity of Afghan 
government ministries. Direct assistance is currently being provided 
by two U.S. agencies, according to U.S. officials. The U.S. Agency for 
International Development (USAID) and the Department of Defense (DOD) 
do so (1) through bilateral agreements with individual Afghan 
ministries and (2) by providing funds to multilateral trust funds 
administered by the World Bank and the United Nations Development 
Program (UNDP). The prospect of increasing U.S. direct assistance to 
Afghanistan raises the issue of the accountability for such assistance. 

We performed our work under the authority of the Comptroller General 
to conduct work on GAO's initiative because of broad congressional 
interest in the oversight and accountability of U.S. funds provided to 
Afghanistan. We assessed (1) the extent to which the United States, 
through USAID and DOD, has increased its direct assistance to 
Afghanistan, (2) USAID and DOD steps to ensure accountability for 
bilateral direct assistance, and (3) USAID and DOD steps to ensure 
accountability for direct assistance to multilateral trust funds in 
Afghanistan. 

To address these objectives, we reviewed State, USAID, and DOD 
documents. We interviewed officials from the U.S. Department of the 
Treasury, State, USAID, DOD, and the World Bank in Washington, D.C., 
and Kabul, Afghanistan, as well as UNDP officials in Kabul. To 
identify the extent to which USAID and DOD had increased the level of 
direct assistance from fiscal year 2009 to fiscal year 2010, we 
obtained financial information from (1) USAID's mission in Kabul, 
Afghanistan, and (2) the Office of the Under Secretary of Defense 
(Comptroller). We determined these data to be sufficiently reliable 
for our purposes. We focused on awards or contributions of U.S. funds 
that are channeled through the Afghan government national budget for 
use by Afghan ministries or other government entities, consistent with 
USAID and DOD definitions and practices.[Footnote 1] 

To assess steps taken by USAID and DOD to help ensure the 
accountability of their bilateral and multilateral direct assistance 
to the Afghan government, we reviewed the policies and practices the 
agencies use to assess risks associated with direct assistance and to 
establish control mechanisms over the use of direct assistance funds. 
We applied criteria drawn from GAO's Standards for Internal Control in 
the Federal Government,[Footnote 2] which defines risk assessment and 
control activities as key elements of an internal control framework to 
provide reasonable assurance that agency assets are safeguarded 
against fraud, waste, abuse, and mismanagement. Risk assessment 
includes identifying internal and external risks an organization faces 
and their potential effect. Control activities are the policies and 
procedures (such as approvals, reconciliations, and reviews) agencies 
implement to mitigate identified risks and are essential for 
accountability of government resources. We also used criteria from 
USAID and DOD guidance concerning direct assistance. 

We conducted this performance audit from August 2010 to July 2011 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. Details on our 
objectives, scope, and methodology are contained in appendix I. 

Background: 

Decades of conflict have left Afghanistan a poor nation with high 
illiteracy, weak government institutions, and a high level of 
corruption. According to Transparency International's index of 
perceived corruption, Afghanistan is tied with Burma as the world's 
second most corrupt nation.[Footnote 3] The United States has 
allocated about $56 billion for fiscal years 2002 to 2010 to 
reconstruct Afghanistan, as shown in table 1.[Footnote 4] The United 
States allocated nearly half of these funds--about $27 billion--in 
fiscal years 2009 and 2010 alone. For fiscal year 2011, DOD has 
allocated more than $12.6 billion in additional funds for Afghan 
reconstruction. While the allocation of fiscal year 2011 State and 
USAID funds for Afghanistan had not been finalized as of June 2011, 
State's fiscal year 2011 budget request included more than $5 billion 
for Afghan international affairs programs and operations. 

Table 1: U.S. Allocations of Funds to Reconstruct Afghanistan, Fiscal 
Years 2002-2010: 

Program category: International affairs programs[A]; 
2002: $890.4 million; 
2003: $764.3 million; 
2004: $1.969 billion; 
2005: $2.749 billion; 
2006: $1.061 billion; 
2007: $1.910 billion; 
2008: $2.212 billion; 
2009: $2.771 billion; 
2010: $4.178 billion; 
Total: $18.504 billion. 

Program category: International affairs operations[B]; 
2002: $31.7 million; 
2003: $35.3 million; 
2004: $119.8 million; 
2005: $136.1 million; 
2006: $131.9 million; 
2007: $210.2 million; 
2008: $448.8 million; 
2009: $1.074 billion; 
2010: $1.728 billion; 
Total: $3.916 billion. 

Program category: Department of Defense and other[C]; 
2002: $0.6 million; 
2003: $167.9 million; 
2004: $401.7 million; 
2005: $1.946 billion; 
2006: $2.311 billion; 
2007: $8.008 billion; 
2008: $3.476 billion; 
2009: $6.453 billion; 
2010: $10.756 billion; 
Total: $33.521 billion. 

Program category: Total; 
2002: $922.7 million; 
2003: $967.5 million; 
2004: $2.491 billion; 
2005: $4.831 billion; 
2006: $3.504 billion; 
2007: $10.128 billion; 
2008: $6.137 billion; 
2009: $10.298 billion; 
2010: $16.662 billion; 
Total: $55.940 billion. 

Source: GAO analysis of Office of Management and Budget financial data. 

[A] The category "international affairs programs" includes funds for 
economic support; foreign military financing; law enforcement; global 
health/child survival; anti-terrorism activities; and development, 
migration, and disaster assistance. 

[B] The category "international affairs operations" includes funds for 
diplomatic and consulate operations, building operations, and 
inspectors general operations. 

[C] "Other" includes funding for training and equipping Afghan 
security forces and counternarcotics activities. 

[End of table] 

In 2009, the executive branch adopted the Integrated Civilian-Military 
Campaign Plan to guide U.S. reconstruction activities in Afghanistan. 
[Footnote 5] The plan, which is currently being updated, categorizes 
reconstruction activities in terms of three overarching lines of 
effort--development, governance, and security. State officials have 
informed us that U.S. agencies do not track Afghan reconstruction 
funds by the lines of effort.[Footnote 6] 

U.S. agencies have used various means to implement Afghan 
reconstruction projects with these funds. In some cases, they have 
hired contractors and nongovernment organizations. In other cases, 
U.S. reconstruction funds have been provided directly to the Afghan 
government's national budget to be used by Afghan ministries and other 
government entities. 

In 2010, the United States announced plans to increase direct 
assistance to Afghanistan. In January 2010, the Secretary of State 
announced that the United States would increase direct assistance to 
the Afghan government to help Afghan ministries and other government 
entities build their capacity to manage funds. At two international 
conferences in 2010, the United States and other donors pledged to 
provide half or more of their development aid in the form of direct 
assistance to the Afghan government within 2 years, contingent on 
Afghan actions to reduce corruption and strengthen public financial 
management capacity.[Footnote 7] In February 2011, DOD formally 
authorized direct contributions of DOD funds to two Afghan security 
ministries to build their capacity and support Afghan security forces. 

USAID awards direct assistance to Afghanistan through two means. It 
awards direct assistance to several Afghan government entities through 
bilateral agreements overseen by its mission in Afghanistan. These 
entities include the Independent Directorate for Local Governance and 
the ministries of Agriculture, Irrigation, and Livestock; 
Communications and Information Technology; Finance; Public Health; and 
Transport and Civil Aviation. Some of the bilateral agreements finance 
Afghan government procurement of goods and services, while others fund 
a range of other government expenses and activities, including 
operating costs, salaries, agricultural development programs, and 
infrastructure projects. USAID also provides direct assistance by 
awarding funds to the multilateral World Bank-administered Afghanistan 
Reconstruction Trust Fund (ARTF). ARTF was established in 2002 as a 
vehicle for donors to pool resources and coordinate support for 
Afghanistan's reconstruction. As of April 2011, 32 donors had 
contributed about $4.3 billion to ARTF. ARTF provides these funds 
through the Afghan government national budget to finance the 
government's recurrent operating costs (e.g., wages for civil 
servants, operations and maintenance costs) and national development 
programs. 

DOD provides direct assistance bilaterally to Afghanistan's Ministry 
of Defense (MOD) and Ministry of Interior (MOI) through contributions 
of funds overseen by DOD's Combined Security Transition Command- 
Afghanistan (CSTC-A).[Footnote 8] According to DOD guidance, these 
contributions are used to procure food, salaries, goods, services, and 
minor construction in direct support of the Afghan National Army (ANA) 
and the Afghan National Police (ANP). CSTC-A also contributes funds to 
the multilateral UNDP-administered Law and Order Trust Fund for 
Afghanistan (LOTFA), which receives contributions from several donor 
nations. Most LOTFA funds are used to provide salaries to ANP 
personnel. 

The United States More Than Tripled Its Awards of Direct Assistance to 
Afghanistan in 2010 through USAID and DOD: 

The United States more than tripled its awards and contributions of 
USAID and DOD direct assistance funds to the Afghan government in 
fiscal year 2010 compared with fiscal year 2009 (see figure 1). 

Figure 1: Changes in the Levels of U.S. Direct Assistance Awards and 
Contributions, Fiscal Years 2009-2010: 

[Refer to PDF for image: stacked vertical bar graph] 

Fiscal year: 2009; 
DOD: $194.8 million; 
USAID: $470.7 million; 
Total: $665.5 million. 

Fiscal year: 2010; 
DOD: $576.2 million; 
USAID: $1.427 billion; 
Total: $2.003 billion. 

Source: GAO analysis of USAID and DOD data. 

[End of figure] 

In fiscal year 2010, most of the direct assistance funds (about 71 
percent) were awarded by USAID for activities related to development 
and governance, either bilaterally (about 6 percent) or through 
preferenced contributions to ARTF (about 65 percent), as shown in 
figure 2. For example, USAID has contributed funding to a community 
development and local governance program that is being implemented in 
all of Afghanistan's 34 provinces through ARTF. The remainder was 
contributed by DOD for security assistance, either bilaterally to MOD 
and MOI or through LOTFA. 

Figure 2: U.S. Direct Assistance Awards and Contributions, Fiscal Year 
2010: 

[Refer to PDF for image: pie-chart] 

USAID Funding for Development and Governance - ARTF, $1.3006 billion: 
65%; 
DOD Funding for Security (Army) - Bilateral, $259 million: 13%; 
DOD Funding for Security (Police) - Bilateral, $168 million: 8%; 
DOD Funding for Security (Police) - LOTFA, $149 million: 7%; 
USAID Funding for Development and Governance - Bilateral, $127 
million: 6%. 

Source: GAO analysis of USAID and DOD data. 

Note: Percentages may not add to 100 percent due to rounding. 

[End of figure] 

As shown in table 2, USAID awards of direct assistance to Afghanistan 
increased from over $470 million in fiscal year 2009 to more than $1.4 
billion in fiscal year 2010. These awards included a $1.3 billion 
grant to ARTF, more than triple what it awarded to ARTF in 2009. 
[Footnote 9] USAID may obligate and disburse funds awarded to an 
Afghan entity or trust fund over multiple years, depending on the 
agreement's terms.[Footnote 10] 

Table 2: USAID Direct Assistance to Afghanistan, Fiscal Years 2009- 
2010: 

Recipient: Independent Directorate for Local Governance; 
Program/project: District Delivery Program; 
Fiscal year 2009 awards: $0; 
Fiscal year 2010 awards: $40 million. 

Recipient: Ministry of Agriculture, Irrigation, and Livestock; 
Program/project: Agricultural Development Fund; 
Fiscal year 2009 awards: $0; 
Fiscal year 2010 awards: $85 million. 

Recipient: Ministry of Finance; 
Program/project: Salary Support Program; 
Fiscal year 2009 awards: $0; 
Fiscal year 2010 awards: $2 million. 

Recipient: Ministry of Finance; 
Program/project: Civilian Technical Assistance Plan; 
Fiscal year 2009 awards: $30 million; 
Fiscal year 2010 awards: $0. 

Recipient: Ministry of Communications and Information Technology; 
Program/project: Policy Capacity Initiative; 
Fiscal year 2009 awards: $1 million; 
Fiscal year 2010 awards: $0. 

Recipient: Ministry of Public Health; 
Program/project: Partnership Contracts for Health Services; 
Fiscal year 2009 awards: $18.2 million; 
Fiscal year 2010 awards: $0. 

Recipient: World Bank; 
Program/project: Afghanistan Reconstruction Trust Fund; 
Fiscal year 2009 awards: $421.5 million; 
Fiscal year 2010 awards: $1.300 billion. 

Recipient: Total; 
Fiscal year 2009 awards: $470.7 million; 
Fiscal year 2010 awards: $1.427 billion. 

Source: GAO analysis of USAID data. 

[End of table] 

DOD direct assistance to MOD and MOI, including contributions to 
LOTFA, grew from about $195 million in fiscal year 2009 to about $576 
million in fiscal year 2010. DOD contributions to LOTFA more than 
doubled from about $68 million in fiscal year 2009 to about $149 
million in fiscal year 2010.[Footnote 11] 

USAID and DOD Have Taken Steps to Help Ensure Accountability over 
Bilateral Direct Assistance, but USAID Has Not Required Risks to Be 
Assessed in Advance in All Cases: 

Risk assessments and internal controls to mitigate identified risks 
are key elements of an internal control framework to provide 
reasonable assurance that agency assets are safeguarded against fraud, 
waste, abuse, and mismanagement.[Footnote 12] USAID conducted preaward 
risk assessments in most cases. However, we found that USAID's 
policies for assessing direct assistance risks do not require preaward 
risk assessments in all cases. USAID has not updated its policies to 
reflect the USAID Administrator's July 2010 commitment to Congress 
that USAID would assess all Afghan public institutions before 
providing them with direct assistance. We found that in August 2010 
and January 2011, USAID did not complete preaward risk assessments 
before awarding funds to two Afghan government entities. USAID has 
established various financial and other controls in its bilateral 
direct assistance agreements with ministries that go beyond what is 
required by its policies. However, it has not always ensured 
compliance with those controls. DOD personnel in Afghanistan have 
assessed the risk of providing funds to MOD and MOI through quarterly 
reviews of each ministry's capacity. DOD established formal procedures 
on risk assessment for Afghan direct assistance in June 2011 after we 
informed DOD officials that DOD lacked such procedures. DOD officials 
also stated that they review records of MOD and MOI expenditures to 
assess whether funds have been used as intended, as required by DOD 
policies established in February 2011. 

USAID Has Conducted Preaward Risk Assessments in Most Cases: 

USAID mission staff have complied with USAID risk assessment policies 
for awarding bilateral direct assistance funds to finance Afghan 
procurement activities under what USAID refers to as a host country 
contract. USAID policies, as outlined in its Automated Directives 
System (ADS), require USAID staff to conduct a preaward risk 
assessment for a host government entity if the entity is to use the 
award to procure goods and services.[Footnote 13] Specifically, staff 
are required under ADS to (1) assess the entity's procurement system 
and (2) obtain the Mission Director's certification of the entity's 
capability to undertake the procurement. Of USAID's eight bilateral 
direct assistance agreements, we identified two involving the 
financing of Afghan procurement activities. In both cases, we found 
that USAID mission staff, in compliance with ADS, had (1) assessed the 
financial and procurement management capabilities of the Afghan 
recipients (the Ministry of Communications and Information Technology 
and the Ministry of Public Health) before awarding funds (see table 3) 
and (2) obtained the required certifications. 

Of six bilateral direct assistance agreements that did not involve 
financing Afghan government procurement activities, we found that 
USAID had completed such assessments before awarding funds in four 
cases (see table 3). Although USAID did not conduct preaward 
assessments in two cases, it was in compliance with its risk 
assessment policies. Those policies state that USAID staff "should" 
assess the capacity (e.g., financial management, procurement, and 
personnel management capacity) of prospective recipients in cases that 
do not involve financing Afghan government procurement activities. 

Table 3: USAID Preaward Risk Assessments for Bilateral Direct 
Assistance: 

Afghan government recipient: Ministry of Transport and Civil Aviation; 
Program/project: Regional Airports Project; 
Preaward risk assessment report date: March 2011; 
Award date: January 2011; 
Total award: $6 million; 
Risk assessment completed before USAID awarded funds: No. 

Afghan government recipient: Independent Directorate for Local 
Governance; 
Program/project: District Delivery Program; 
Preaward risk assessment report date: January 2011; 
Award date: August 2010; 
Total award: $40 million; 
Risk assessment completed before USAID awarded funds: No. 

Afghan government recipient: Ministry of Agriculture, Irrigation, and 
Livestock; 
Program/project: Agricultural Development Fund; 
Preaward risk assessment report date: June 2010; 
Award date: July 2010; 
Total award: $85 million; 
Risk assessment completed before USAID awarded funds: Yes. 

Afghan government recipient: Ministry of Finance; 
Program/project: Transition Coordination Commission; 
Preaward risk assessment report date: July 2009; 
Award date: January 2011; 
Total award: $0.45 million; 
Risk assessment completed before USAID awarded funds: Yes. 

Afghan government recipient: Ministry of Finance; 
Program/project: Salary Support Program; 
Preaward risk assessment report date: July 2009; 
Award date: June 2010; 
Total award: $2 million; 
Risk assessment completed before USAID awarded funds: Yes. 

Afghan government recipient: Ministry of Finance; 
Program/project: Civilian Technical Assistance Plan; 
Preaward risk assessment report date: July 2009; 
Award date: September 2009; 
Total award: $30 million; 
Risk assessment completed before USAID awarded funds: Yes. 

Afghan government recipient: Ministry of Communications and 
Information Technology; 
Program/project: Policy Capacity Initiative; 
Preaward risk assessment report date: May 2007[A]; 
Award date: April 2009; 
Total award: $1 million; 
Risk assessment completed before USAID awarded funds: Yes. 

Afghan government recipient: Ministry of Public Health; 
Program/project: Partnership Contracts for Health Services; 
Preaward risk assessment report date: July 2007[B]; 
Award date: July 2008; 
Total award: $18.2 million[C]; 
Risk assessment completed before USAID awarded funds: Yes. 

Source: GAO analysis of USAID bilateral direct assistance agreements 
and pre-award assessments. 

[A] USAID completed a follow-up assessment of the procurement 
management capabilities of the Ministry of Communications and 
Information Technology in March 2008. 

[B] USAID also assessed the ministry's financial management 
capabilities in October 2007 and revised it in May 2008. 

[C] The total amount does not include a previous fiscal year 2008 
award. 

[End of table] 

USAID Has Not Updated Its Risk Assessment Policies to Reflect the 
Administrator's Commitment to Assess All Afghan Government Recipients 
in Advance: 

USAID has not updated its risk assessment policies to reflect its 
Administrator's commitment that USAID would assess the capabilities of 
Afghan government recipients in all cases before awarding them direct 
assistance funds. On July 28, 2010, USAID's Administrator responded to 
concerns expressed by Members of the House Appropriations Committee's 
Subcommittee on State, Foreign Operations, and Related Programs 
regarding corruption and weak government capacity in Afghanistan by 
committing that USAID would not proceed with direct assistance to an 
Afghan public institution until USAID had ensured that the institution 
had an accountable organizational structure and sound financial 
management capabilities and met USAID standards. State's Office of the 
Special Representative for Afghanistan and Pakistan made a similar 
commitment in January 2010, when it stated that "to receive direct 
assistance, Afghan ministries must be certified as having improved 
accountability and transparency."[Footnote 14] However, we found that 
current USAID policy for direct assistance not involving the financing 
of Afghan government procurement activities does not require USAID to 
assess a prospective recipient's capacity to implement a proposed 
activity.[Footnote 15] 

We also found that following the Administrator's July 2010 commitment, 
USAID awarded direct assistance funds to two Afghan government 
recipients before completing risk assessments. As shown in table 3, 
USAID signed a $40 million agreement with the Independent Directorate 
for Local Governance in August 2010, 5 months before completing an 
assessment of that entity.[Footnote 16] It also signed a $6 million 
bilateral direct assistance agreement with the Ministry of Transport 
and Civil Aviation in January 2011, 2 months before completing an 
assessment of the ministry.[Footnote 17] The completed risk 
assessments identified areas of high risk in both entities. For 
example, the Ministry of Transport and Civil Aviation was assessed as 
"high risk" in the four core function areas covered by the assessment--
control environment, financial management and accounting, compliance 
with applicable laws and regulations, and accountability environment. 
Similarly, the Independent Directorate for Local Governance was 
assessed as "high risk" in 5 of 14 areas covered, including financial 
management and procurement. USAID officials told us that USAID awarded 
these funds before completing the risk assessments because the 
projects were urgently needed. 

USAID Has Established Controls in Its Bilateral Direct Assistance 
Agreements but Has Not Always Ensured Compliance: 

USAID has established various financial and other controls in its 
bilateral direct assistance agreements, although USAID policies do not 
establish minimum standard conditions for such agreements, according 
to USAID officials. Shown in table 4 are selected examples of 
financial controls USAID has established within its bilateral direct 
assistance agreements. USAID also required Afghan government 
recipients to provide documentation demonstrating their compliance 
with the selected controls. As shown in table 4, in each applicable 
case, USAID ensured compliance with the selected controls. 

Table 4: USAID Compliance with Selected Controls in Its Bilateral 
Direct Assistance Agreements, as of February 15, 2011: 

Afghan government recipient/program: Ministry of Transport and Civil 
Aviation--Regional Airports Project; 
Recipient must establish a separate, noncommingled bank account: 
Control specified in agreement; USAID ensured compliance; 
Recipient must grant USAID access rights to the bank account: Control 
specified in agreement; USAID ensured compliance; 
Recipient must have monitoring and evaluation plan: Control specified 
in agreement; USAID ensured compliance; 
Recipient must comply with periodic reporting requirement: Control 
specified in agreement; USAID ensured compliance; 
Recipient must maintain accounting books and records subject to audit: 
Control specified in agreement; USAID ensured compliance[B]. 

Afghan government recipient/program: Independent Directorate for Local 
Governance--District Delivery Program; 
Recipient must establish a separate, noncommingled bank account: 
Control specified in agreement; USAID ensured compliance; 
Recipient must grant USAID access rights to the bank account: Control 
specified in agreement; USAID ensured compliance; 
Recipient must have monitoring and evaluation plan: Control specified 
in agreement; USAID ensured compliance; 
Recipient must comply with periodic reporting requirement: Control 
specified in agreement; USAID ensured compliance[A]; 
Recipient must maintain accounting books and records subject to audit: 
Control specified in agreement; USAID ensured compliance[B]. 

Afghan government recipient/program: Ministry of Agriculture, 
Irrigation, and Livestock--Agricultural Development Fund; 
Recipient must establish a separate, noncommingled bank account: 
Control specified in agreement; USAID ensured compliance; 
Recipient must grant USAID access rights to the bank account: Control 
specified in agreement; USAID ensured compliance; 
Recipient must have monitoring and evaluation plan: Control specified 
in agreement; USAID ensured compliance; 
Recipient must comply with periodic reporting requirement: Control 
specified in agreement; USAID ensured compliance[A]; 
Recipient must maintain accounting books and records subject to audit: 
Control specified in agreement; USAID ensured compliance[B]. 

Afghan government recipient/program: Ministry of Finance--Transition 
Coordination Commission; 
Recipient must establish a separate, noncommingled bank account: 
Control specified in agreement; USAID ensured compliance; 
Recipient must grant USAID access rights to the bank account: Control 
specified in agreement; USAID ensured compliance; 
Recipient must have monitoring and evaluation plan: Not specified in 
agreement; 
Recipient must comply with periodic reporting requirement: Not 
specified in agreement; 
Recipient must maintain accounting books and records subject to audit: 
Not specified in agreement. 

Afghan government recipient/program: Ministry of Finance--Salary 
Support Program; 
Recipient must establish a separate, noncommingled bank account: 
Control specified in agreement; USAID ensured compliance; 
Recipient must grant USAID access rights to the bank account: Control 
specified in agreement; USAID ensured compliance; 
Recipient must have monitoring and evaluation plan: Control specified 
in agreement; USAID ensured compliance; 
Recipient must comply with periodic reporting requirement: Control 
specified in agreement; USAID ensured compliance; 
Recipient must maintain accounting books and records subject to audit: 
Control specified in agreement; USAID ensured compliance[B]. 

Afghan government recipient/program: Ministry of Finance--Civilian 
Technical Assistance Plan; 
Recipient must establish a separate, noncommingled bank account: 
Control specified in agreement; USAID ensured compliance; 
Recipient must grant USAID access rights to the bank account: Control 
specified in agreement; USAID ensured compliance; 
Recipient must have monitoring and evaluation plan: Control specified 
in agreement; USAID ensured compliance; 
Recipient must comply with periodic reporting requirement: Control 
specified in agreement; USAID ensured compliance; 
Recipient must maintain accounting books and records subject to audit: 
Control specified in agreement; USAID ensured compliance[B]. 

Afghan government recipient/program: Ministry of Communications and 
Information Technology--Policy Capacity Initiative; 
Recipient must establish a separate, noncommingled bank account: 
Control specified in agreement; USAID ensured compliance; 
Recipient must grant USAID access rights to the bank account: Not 
specified in agreement; 
Recipient must have monitoring and evaluation plan: Not specified in 
agreement; 
Recipient must comply with periodic reporting requirement: Not 
specified in agreement; 
Recipient must maintain accounting books and records subject to audit: 
Not specified in agreement. 

Afghan government recipient/program: Ministry of Public Health--
Partnership Contracts for Health Services; 
Recipient must establish a separate, noncommingled bank account: 
Control specified in agreement; USAID ensured compliance; 
Recipient must grant USAID access rights to the bank account: Not 
specified in agreement; 
Recipient must have monitoring and evaluation plan: Control specified 
in agreement; USAID ensured compliance; 
Recipient must comply with periodic reporting requirement: Control 
specified in agreement; USAID ensured compliance; 
Recipient must maintain accounting books and records subject to audit: 
Not specified in agreement. 

Source: GAO analysis of USAID bilateral direct assistance agreements 
and compliance documentation. 

Notes: The five controls shown in table 4 were selected based on their 
reoccurrence across USAID bilateral direct assistance agreements. For 
GAO's methodology, see appendix I. 

[A] Control specified in agreement; USAID not able to ensure 
compliance pending disbursement of funds under the agreement 
(reporting is not required until after USAID has disbursed funds). 

[B] Compliance with this requirement could not be verified because 
USAID was in the process of conducting audits of Afghan entities' 
accounting books and records at the time of our review. 

[End of table] 

In two cases, USAID also hired contractors to help control risks 
identified in preaward assessments. For example, USAID's assessment of 
the Ministry of Agriculture, Irrigation, and Livestock (MAIL) 
determined that MAIL would not be able to independently manage and 
account for direct assistance funds. As a result, USAID awarded a 
$49.1 million contract to a U.S.-based firm to establish a unit to 
manage a USAID-funded agriculture development fund, to transition that 
unit to local control within 4 years, and to provide technical 
assistance. Similarly, USAID's October 2007 assessment of the Ministry 
of Public Health noted concerns that the ministry would continue 
needing technical assistance to effectively and efficiently manage 
donor funds. As a result, USAID amended an existing contract to an 
international nonprofit organization to improve the capacity of the 
ministry at the central level and in target provinces.[Footnote 18] 

USAID has also established procurement-specific controls in its 
bilateral direct assistance agreements with the Ministry of 
Communications and Information Technology and the Ministry of Public 
Health. These agreements provide funds to Afghan ministries to enter 
into contracts for goods and services and require USAID to monitor and 
approve certain steps of the procurement process for contracts over 
$250,000, as applicable.[Footnote 19] 

While USAID generally complied with this requirement, USAID mission 
officials could not provide us with documentation showing that USAID 
had done so in all cases, as shown in table 5. Specifically, USAID 
mission officials either did not approve or document that they had 
approved prior to execution any of 6 contracts that the Ministry of 
Communications and Information Technology entered into (in table 5, 
see step 7 of the procurement process). In addition, USAID mission 
officials told us that USAID did not approve any of the ministry's 6 
prefinancing contract documents (step 8 of the procurement process). 
USAID stated that no clearance or approval was provided because the 
final signed documents did not need concurrence. Similarly, USAID 
documented only three instances in which it had approved any of the 
Ministry of Public Health's 19 prefinancing contract documents. USAID 
also did not conduct follow-up reviews of the ministry to ensure its 
compliance with USAID contracting and financial management 
requirements, as called for in the assistance agreement. 

Table 5: USAID Documentation of Approvals of Procurement Steps in 
Contracts Awarded under USAID-Financed Programs: 

Procurement steps: Step 1: notice to prospective offerors; 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: 4 of 4; 
Ministry of Public Health--Partnership Contracts for Health Services: 
19 of 19. 

Procurement steps: Step 2: lists of prequalified offerors, if any, 
prior to issuance of the solicitation document; 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: Not applicable; 
Ministry of Public Health--Partnership Contracts for Health Services: 
19 of 19. 

Procurement steps: Step 3: complete solicitation document, prior to 
issuance; 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: 6 of 6; 
Ministry of Public Health--Partnership Contracts for Health Services: 
19 of 19. 

Procurement steps: Step 4: the contractor selection method (may be 
part of the solicitation document); 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: 6 of 6; 
Ministry of Public Health--Partnership Contracts for Health Services: 
19 of 19. 

Procurement steps: Step 5: the selected contractor; 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: 6 of 6; 
Ministry of Public Health--Partnership Contracts for Health Services: 
19 of 19. 

Procurement steps: Step 6: any decision to terminate negotiations with 
the highest ranked offeror and to initiate negotiations with the next 
ranked offeror or to reject all offers; 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: Not applicable; 
Ministry of Public Health--Partnership Contracts for Health Services: 
2 of 2. 

Procurement steps: Step 7: the contract, prior to execution; 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: 0 of 6; 
Ministry of Public Health--Partnership Contracts for Health Services: 
19 of 19. 

Procurement steps: Step 8: signed contract documents, before financing; 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: 0 of 6; 
Ministry of Public Health--Partnership Contracts for Health Services: 
3 of 19. 

Procurement steps: Step 9: contract administrative actions such as 
subcontracts, amendments, and change orders as determined by USAID; 
Ministry of Communications and Information Technology--Policy Capacity 
Initiative: 6 of 6; 
Ministry of Public Health--Partnership Contracts for Health Services: 
Not applicable. 

Source: GAO analysis of USAID documents. 

[End of table] 

USAID has taken steps to ensure that bilateral direct assistance 
awards are audited. USAID policy requires audits of recipients, 
including host government entities, that expend $300,000 or more in 
USAID awards during a fiscal year. USAID has asserted its right to 
audit Afghan recipient use of funds in all of its bilateral direct 
assistance agreements, including those involving procurement. 
According to USAID mission officials, USAID has contracted with audit 
firms to initiate audits of three Afghan ministries (the Ministries of 
Finance, Communications and Information Technology, and Public Health) 
that disbursed a total of $28.8 million in USAID awards in fiscal year 
2010. 

DOD Has Taken Steps to Help Ensure Accountability and Recently 
Established Procedures Requiring Risk Assessments: 

CSTC-A has recently established procedures that require CSTC-A 
personnel to assess the risks of direct assistance in advance of 
providing funds to Afghan ministries. On June 12, 2011, CSTC-A 
established standard operating procedures for direct assistance, as 
required under DOD guidance issued on February 4, 2011.[Footnote 20] 
The CSTC-A procedures identify risk assessment as the first of four 
steps CSTC-A personnel must take before the direct contribution of the 
funds. CSTC-A adopted these procedures after we informed DOD officials 
that DOD lacked risk assessment guidance for bilateral direct 
assistance. 

The CSTC-A procedures specify that the primary method CSTC-A is to use 
to assess risks is the Ministerial Development Board. The board 
oversees CSTC-A efforts to develop the capacity of MOD and MOI. CSTC-A 
officials informed us in January and February 2011 that CSTC-A has 
been using this method to assess the capacity of MOD and MOI in 
connection with direct assistance. They stated that CSTC-A advisers 
embedded in MOD and MOI participate in quarterly assessments of MOD 
and MOI progress toward meeting defined capability objectives. For 
example, CSTC-A assesses MOI development in 26 different areas, 
including finance and budget, procurement, and personnel management. 
The assessments focus on the extent to which the ministries are 
capable of achieving the objectives and identify specific strengths 
and weaknesses. For example, in April 2011, CSTC-A assessed the MOD 
budget and finance section responsible for ANA pay support operations. 
CSTC-A determined that its strengths included experienced staff and a 
willingness to tackle corruption and its weakness was a lack of budget 
authority. 

DOD's February 4, 2011, guidance[Footnote 21] requires CSTC-A to 
establish financial controls for its contributions to MOD and MOI. 

* The guidance specifically requires CSTC-A to conduct quarterly 
reconciliations of CSTC-A advance payments to MOD and MOI against 
records of MOD and MOI expenditures. CSTC-A officials informed us that 
CSTC-A reconciles CSTC-A advance contributions against MOD and MOI 
expenditure data drawn from the Ministry of Finance (MOF) Afghan 
Financial Management Information System and has adjusted future 
contributions accordingly. DOD officials acknowledged the 
reconciliation process does not address the extent to which aggregated 
line items from the system may contain inaccurate ANA and ANP payroll 
data.[Footnote 22] 

* The guidance also requires CSTC-A to monitor MOD and MOI use of the 
contributed funds down to the subcontractor level. CSTC-A officials 
informed us that they would be unable to monitor MOD and MOI 
subcontractors, as called for in the DOD guidance. They stated that 
the risk of sending personnel to vet MOD and MOI subcontractors in 
certain regions of Afghanistan was too great. 

In addition, CSTC-A advisers monitor MOD and MOI use of U.S. funds, 
according to CSTC-A officials. CSTC-A informed us that it has embedded 
about 500 advisers in MOD and MOI, including 6 in MOD financial 
offices and 13 in MOI finance and budget offices. Also, CSTC-A 
personnel participate in internal control teams that review ANA pay 
processes in a different ANA corps every month.[Footnote 23] 

USAID Has Not Consistently Assessed Risks of Contributions to ARTF, 
While DOD Has Recently Established Risk Assessment Guidance for LOTFA: 

USAID and DOD generally rely on the World Bank and UNDP to ensure 
accountability over U.S. direct assistance provided multilaterally 
through ARTF and LOTFA. USAID, however, has not consistently complied 
with its multilateral trust fund risk assessment policies in awarding 
funds to ARTF. For example, in March 2010, USAID did not conduct a 
risk assessment before awarding an additional $1.3 billion to the 
World Bank for ARTF. During our review, DOD established procedures in 
June 2011 requiring that it assess risks before contributing funds to 
LOTFA. World Bank and UNDP controls over ARTF and LOTFA funds include 
the use of hired monitoring agents to help ensure that ministries use 
donor contributions as intended. However, these controls face 
challenges posed by security conditions and by weaknesses in Afghan 
ministries. For example, the ARTF monitoring agent resigned in June 
2011 due to security concerns, while weaknesses in MOI's systems for 
paying wages to Afghan police challenge UNDP efforts to ensure that 
MOI is using LOTFA funds as intended. 

USAID Has Not Consistently Assessed the Risk of Relying on the World 
Bank for Ensuring the Accountability of Its ARTF Contributions: 

USAID has not consistently followed its own policies for assessing the 
risk associated with its awards to the World Bank for ARTF, which have 
increased from $5 million in 2002 to a total of more than $2 billion. 
When the grant agreement and subsequent modifications between the 
World Bank and USAID were signed, USAID policies on grants to public 
international organizations (PIO), such as the World Bank, called for 
preaward determinations that the PIO was a responsible 
grantee.[Footnote 24] This requirement applied to both the original 
grant and to any subsequent modification of the grant that 
significantly increased the amount of the award. Under USAID policy, 
the preaward determination should have addressed factors such as 
whether the grantee's program was an effective and efficient way to 
achieve a USAID objective and whether there were any reasons to 
consider the grantee to be "not responsible." 

USAID could not provide us with a preaward responsibility 
determination of the World Bank prior to awarding ARTF an initial 
grant of $5 million in 2002. While USAID did not follow its policies 
to complete a preaward determination for its initial $5 million grant, 
it determined, after it signed the agreement, that (1) ARTF had a 
comprehensive system in place for managing the funds and (2) the World 
Bank had a long history in managing multidonor pooled funding 
mechanisms, in an approved 2002 memorandum requesting a deviation from 
incorporating its then-mandatory standard provisions into its ARTF 
grant agreement. However, USAID did not conduct preaward 
determinations for 16 of the 21 subsequent modifications to the grant. 
For the instance in which USAID increased the value of the award by 
$1.3 billion in March 2010, USAID provided us with an unsigned and 
undated memorandum that applied to a $15 million obligation.[Footnote 
25] For the 5 preaward responsibility determinations that were 
conducted, USAID documentation stated that the World Bank was a 
responsible grantee but did not document the analysis used to support 
the determinations. 

In April 2011, in response to GAO recommendations and our follow-up 
meetings, USAID revised and expanded its guidance on how to conduct 
preaward determinations for all PIOs.[Footnote 26] The revised 
guidance continues to require the USAID officer in charge of the 
agreement to document preaward responsibility determinations for PIOs. 
[Footnote 27] Under the new guidance, a group of USAID headquarters 
officials[Footnote 28] will first place the PIO, such as the World 
Bank, into one of three categories, based on USAID's experience with 
the PIO and its determination of the PIO's level of responsibility. 
[Footnote 29] The revised guidance requires USAID to consider several 
factors in determining a PIO's level of responsibility, including the 
quality of its past performance, its most recent audited financial 
statements, and any other information to fully assess whether it has 
the necessary management competence to plan and carry out the intended 
activity. After a responsibility determination has been made, the 
USAID officer in charge of the agreement must still document the 
determination before making an award. 

USAID's policy is to generally rely on a PIO's financial management, 
procurement, and audit policies and procedures. The World Bank has 
established financial controls over donor contributions to ARTF. For 
example, the World Bank hired a monitoring agent responsible for 
monitoring the eligibility of salaries and other recurrent 
expenditures that the Afghan government submits for reimbursement 
against ARTF criteria.[Footnote 30] According to the World Bank, it 
conducts advance reviews of ARTF development procurement contracts. 
The amount of prior review of Afghan government procurement by the 
bank varies according to the method of selection or procurement, the 
type of good or service being procured, and the bank's assessment of 
project risk, according to the bank. The World Bank also reports that 
it assesses projects semi-annually as part of regular World Bank 
supervision as per World Bank policies, procedures and guidelines 
based in part on project visits. Also, the bank informed us that it 
manages and administers ARTF according to a set of World Bank global 
policies and procedures. ARTF is part of a single audit of all trust 
funds administered by the bank, and includes both an annual management 
assertion over internal controls surrounding the preparation of trust 
fund financial reports and a combined financial statement for all 
modified cash basis trust funds. 

Also, the Afghan government's external audit agency, the Control and 
Audit Office (CAO),[Footnote 31] conducts annual audits of ARTF- 
financed projects with the technical assistance of a firm of 
international accountants that are funded by the World Bank. As part 
of its supervision of ARTF-financed activities, a World Bank financial 
management team reviews the CAO audit reports, discusses its 
observations with government counterparts, and follows up to ensure 
resolution of any outstanding issues. Following the government's 
annual submission of CAO audit reports to the World Bank, the bank 
sends a letter to the donors summarizing the timeliness and results of 
the CAO's annual audits. The CAO's audits of 16 ARTF development 
projects for the Afghan fiscal year that began in March 2009 had 16 
unqualified (or "clean") results. The World Bank shares CAO audit and 
monitoring agent reports with donors when requested.[Footnote 32] 

World Bank financial controls over ARTF face challenges posed by 
oversight entities' limited movement in Afghanistan's high-threat 
environment and the limited capacity of Afghan ministries to meet 
agreed-upon procurement and financial management standards, as shown 
in these examples. 

* Security conditions prevented CAO auditors from visiting most of the 
provinces where ARTF funds were being spent.[Footnote 33] They were 
able to conduct audit tests in 10 of Afghanistan's 34 provinces from 
March 2009 to March 2010 and issued a qualified opinion of the 
financial statements of ARTF's salary and other recurrent expenditures 
as a result.[Footnote 34] 

* According to the Department of the Treasury (Treasury), the ARTF 
monitoring agent recently resigned from its contract with the World 
Bank due to security concerns. USAID stated in July 2011 that the 
monitoring agent informed the bank in May 2011 that its contract 
should not be extended due to security concerns. The World Bank 
reports that it is seeking a new monitoring agent, has received many 
expressions of interest, and does not anticipate a gap in monitoring. 

* Previously, security concerns prevented the ARTF monitoring agent 
from physically verifying ARTF salary and other recurrent expenditures 
outside of Kabul province from March 2009 through March 2010.[Footnote 
35] The World Bank had required the monitoring agent or its 
subcontractor to visit sites in at least 12 provinces to verify 
expenditures made during the Afghan fiscal year that began in March 
2010. 

* The CAO lacks qualified auditors and faces other capacity 
restraints, according to the Special Inspector General for Afghanistan 
Reconstruction (SIGAR) and USAID.[Footnote 36] However, it uses 
international advisers and contracted auditors, funded by the World 
Bank, to help ensure that its audits of ARTF comply with international 
auditing standards. The World Bank recently reported that the overall 
timeliness of the CAO audits have been improving since 2006. 

* The World Bank and donors have expressed concern over the level of 
ineligible expenditures submitted by the Afghan government for 
reimbursement.[Footnote 37] While ineligible expenditures are not 
reimbursed, the bank considers the level of ineligible expenditures to 
be an indicator of weaknesses in the Afghan government's ability to 
meet agreed-upon procurement and financial management standards. The 
ARTF monitoring agent has questioned whether Afghan government civil 
servants have the experience and knowledge necessary to perform 
transactions in a manner eligible for reimbursement and whether 
ministries' internal procedures fully reflect Afghan government laws 
and regulations.[Footnote 38] 

Partly as a result of recommendations from a 2008 independent 
evaluation of ARTF by a Norwegian-based firm and discussions with 
donors,[Footnote 39] the World Bank is currently seeking to revise its 
2002 grant agreements with donors to reflect its efforts to strengthen 
ARTF governance. According to the World Bank, the recommended changes 
include clarifying and strengthening donors' oversight roles and 
responsibilities over ARTF. In response to our inquiries, the World 
Bank stated in April 2011 that it is considering incorporating its 
current standard provisions, applicable to multidonor trust funds, in 
the amended grant agreements with donors. These provisions would allow 
donor countries greater access to accounting and financial records and 
information. Under the current agreement with all donors, the World 
Bank provides donors with periodic reports, such as quarterly status 
reports, and an annual management assertion together with an 
attestation from the bank's external auditors on the satisfactory 
performance of the bank's procedures and controls. 

CSTC-A Has Recently Established Procedures Requiring That It Assess 
Risks Associated with Contributions to LOTFA: 

During our review on June 12, 2011, CSTC-A issued new procedures for 
direct assistance that require CSTC-A to conduct precontribution risk 
assessments before contributing funds to LOTFA.[Footnote 40] CSTC-A 
staff had previously informed us in February 2011 that CSTC-A had not 
assessed the risks of providing funds to LOTFA. Instead, CSTC-A had 
regularly assessed the capabilities and weaknesses of MOI. For 
example, CSTC-A assessed MOI's finance and budget section in March 
2011 and determined that while the section's strengths included a 
responsiveness to pay issues, its weaknesses included a lack of well-
trained staff and an unwillingness to change. 

CSTC-A generally relies on UNDP's financial controls to ensure the 
accountability of funds it has contributed to LOTFA. CSTC-A 
contribution letters to LOTFA request that UNDP provide CSTC-A with 
quarterly reports, which UNDP posts on its Web site.[Footnote 41] CSTC-
A officials informed us that CSTC-A reconciles its contributions to 
LOTFA annually. UNDP's LOTFA project manager in Kabul informed us that 
UNDP makes copies of audits of LOTFA available upon request. CSTC-A 
officials told us they have not requested LOTFA audits. 

UNDP has established financial controls over the funds it provides to 
MOI for ANP expenses. It has stated that it reconciles its 
contributions with MOF records of MOI expenses on a quarterly and 
annual basis. UNDP recently reported that it deducted $17.6 million 
from its contribution to MOI as a result of ineligible expenses 
identified during its annual reconciliation for March 2009 through 
March 2010. UNDP has also hired a monitoring agent to review and 
monitor ANP remunerations and generate independent reports. UNDP staff 
told us that the LOTFA monitoring agent has offices in all regional 
police zones, which cover all of Afghanistan's provinces. UNDP has 
reported that the monitoring agent operates in all ANP zones and 
conducts sample verifications of 30 percent of the total number of 
police. 

Similar to the World Bank's controls over ARTF, UNDP's financial 
controls over LOTFA face challenges stemming from Afghanistan's 
security environment. SIGAR reported in April 2011 that security 
issues had impaired efforts by LOTFA's monitoring agent to (1) recruit 
staff in a high-threat province and (2) travel in 7 of Afghanistan's 
34 provinces for half of 2010. SIGAR also reported that security 
concerns had delayed LOTFA's reconciliation of 2009 salaries.[Footnote 
42] UNDP officials also told us that security concerns had restricted 
UNDP movements in Afghanistan. 

UNDP's financial controls also face challenges stemming from MOI's 
institutional weaknesses. UNDP has reported that MOI's "insufficient 
ownership and capacity development" remains one of LOTFA's risks and 
that it has taken steps to mitigate this risk. Some problems that have 
been identified with MOI include the following: 

* In 2009, we reported that MOI did not have an accurate staffing 
roster, according to CSTC-A, and that the number of ANP personnel was 
unclear.[Footnote 43] We found that uncooperative ANP commanders were 
impeding State and MOI efforts to implement a new ANP identification 
card system to positively identify all police for pay purposes, 
according to State officials. According to State officials, these 
commanders were preventing State and MOI from determining the status 
of nearly 30,000 individuals whose names had been submitted to receive 
ANP identification cards[Footnote 44]. We recommended that DOD and 
State consider provisioning future U.S. contributions to LOTFA to 
reflect the extent to which U.S. agencies had validated the status of 
MOI and ANP personnel to help ensure that the United States was not 
funding salaries of unverified personnel.[Footnote 45] 

* In 2011, SIGAR reported that MOI's payroll system provides little 
assurance that MOI is paying only working ANP personnel or that LOTFA 
funds are reimbursing only eligible ANP costs. MOI is also unable to 
pay all police through relatively secure systems. We have previously 
reported concerns regarding MOI pay systems.[Footnote 46] UNDP and 
CSTC-A have worked with MOI to develop electronic systems to reduce 
opportunities for skimming and corruption. One such system transfers 
funds directly into individual bank accounts established by individual 
Afghan police. Although progress has been made in establishing these 
systems, more than 20 percent of ANP staff are still paid using manual 
cash systems that are more vulnerable to abuse. 

Conclusion: 

The recent tripling of U.S. direct assistance awards to Afghan 
government entities, coupled with the vulnerability of this assistance 
to waste, fraud, and abuse in the uncertain Afghan environment, makes 
it essential that U.S. agencies assess risks before awarding funds and 
implement controls to safeguard those funds. Direct assistance to the 
Afghan government involves considerable risk given the extent of 
corruption, the weak institutional capacity of the Afghan government 
to manage finances, the volatile and high-threat security environment, 
and that the U.S. funds may be obligated months or years after they 
are awarded. Because conflict in many parts of Afghanistan poses 
significant challenges to efforts to ensure that funds are used as 
intended, the level of risk in Afghanistan warrants, to the extent 
feasible, sound internal controls and oversight over the billions of 
dollars that the U.S. government has invested in Afghanistan. Although 
risk assessment is a key component of internal controls, current USAID 
policy does not require preaward risk assessments of all Afghan 
government recipients of U.S. direct assistance funds. To safeguard 
U.S. direct assistance funds, it is important that (1) the USAID 
Administrator follow through on his July 2010 commitment to Congress 
to assess risks associated with each Afghan government entity before 
awarding funds, (2) USAID consistently implement controls it 
establishes in bilateral direct assistance agreements, and (3) USAID 
consistently adhere to its risk assessment policies for multilateral 
trust funds in awarding funds to ARTF. 

Recommendations for Executive Action: 

We recommend that the Administrator of USAID take the following three 
actions: 

* Establish and implement policy requiring USAID to complete risk 
assessments before awarding bilateral direct assistance funds to 
Afghan government entities in all cases. 

* Take additional steps to help ensure that USAID consistently 
implements controls established in its bilateral direct assistance 
agreements with Afghan government entities, such as requiring the 
retention of documentation of actions taken. 

* Ensure USAID adherence with its policies for assessing risks 
associated with multilateral trust funds in awarding funds to ARTF. 

Agency Comments and Our Evaluation: 

We provided a draft of this report for comment to the Administrator of 
USAID, and to the Secretaries of Defense, State, and the Treasury. 
Defense, State, and the Treasury declined to provide comments. 
Treasury provided us with technical comments, which we incorporated in 
this report as appropriate. The World Bank and UNDP provided us with 
technical comments on the portions of the draft report that we 
provided them describing ARTF and LOTFA. We have incorporated these 
technical comments in this report as appropriate. 

USAID provided written comments on a draft of our report, which are 
reprinted in appendix II. 

With regard to our recommendation that USAID establish and implement 
policies requiring USAID staff to complete risk assessments before 
awarding bilateral direct assistance funds to Afghan government 
entities in all cases, USAID stated that its existing policies and 
procedures in ADS already include requirements for risk assessment for 
each form of government-to-government assistance mechanism. USAID 
noted that for host country contracts, ADS requires an advance 
assessment of a host government's procurement systems (ADS 305). USAID 
also stated that for cash transfer agreements, ADS requires an 
analysis of a host government's ability to comply with the agreements. 
USAID further stated that its general activity planning guidance 
contains a recommendation that USAID offices should consider the 
capacity of potential partners to implement planned functions (ADS 
201). 

Although USAID policy in ADS includes some form of risk assessment for 
the funding mechanisms in use in Afghanistan, it does not require that 
a risk assessment be conducted in all cases. Specifically, ADS 305's 
requirement for preaward assessment of host country contracts did not 
apply to six of the eight bilateral direct assistance cases we 
identified, because these six cases do not involve procurement. 
Further, according to the USAID comptroller, these six cases were not 
cash transfer agreements. As a result, these six cases fall under 
USAID's general activity planning guidance (ADS 201), which recommends-
-but does not require--that USAID offices assess the capacity of 
potential partners in advance. As noted in this report, the lack of 
specific requirement resulted in USAID making awards in two cases 
prior to completing a risk assessment. Therefore, we retained our 
recommendation that USAID establish and implement policies requiring 
preaward risk assessments in all cases in Afghanistan. 

USAID also commented that it has taken additional steps to ensure 
that, going forward, risk assessments are completed in advance for 
each type of funding mechanism, in line with the Administrator's July 
2010 statement to Congress. Further, these steps are being undertaken 
"in light of" the Department of State's July 14, 2011, certification 
to Congress that the U.S. and Afghan governments have established 
mechanisms within each implementing agency to ensure that certain 
fiscal year 2010 funds will be used as intended[Footnote 47]. On July 
14, 2011, State did make this certification to Congress. However, the 
certification applies only to certain fiscal year 2010 funds, 
underscoring the need for USAID to establish a requirement for 
preaward assessments in Afghanistan in all cases in its policies and 
procedures. 

With regard to our recommendation that USAID take additional steps to 
help ensure that it consistently implements controls established in 
its bilateral direct assistance agreements with Afghan government 
entities, USAID agreed to take such steps concerning its host country 
agreements with Afghan government entities. In doing so, USAID noted 
that USAID policy is to be as sparing in exercising its prior approval 
rights as sound management permits. 

With regard to our recommendation that it adhere to its policies for 
assessing risks associated with multilateral trust funds in awarding 
funds to ARTF, USAID acknowledged that it had not always prepared or 
adequately documented its determinations for several ARTF grant 
amendments. USAID stated that it will follow its new procedures for 
such determinations, which it revised in April 2011. 

USAID also provided us with technical comments, which we have 
incorporated as appropriate. 

We are sending copies of this report to the appropriate congressional 
committees; the Secretaries of Defense, State, and the Treasury; the 
Administrator of USAID; and other interested parties. The report also 
is available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-7331 or johnsoncm@gao.gov. Contact points for 
our Offices of Public Affairs and Congressional Relations may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix III. 

Signed by: 

Charles Michael Johnson Jr. 
Director: 
International Affairs and Trade: 

List of Congressional Addressees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable John McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable John Kerry: 
Chairman: 
The Honorable Richard Lugar: 
Ranking Member: 
Committee on Foreign Relations: 
United States Senate: 

The Honorable Joseph I. Lieberman: 
Chairman: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Buck McKeon: 
Chairman: 
The Honorable Adam Smith: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable Ileana Ros-Lehtinen: 
Chairman: 
The Honorable Howard L. Berman: 
Ranking Member: 
Committee on Foreign Affairs: 
House of Representatives: 

The Honorable Kay Granger: 
Chairwoman: 
The Honorable Nita M. Lowey: 
Ranking Member: 
Subcommittee on State, Foreign Operations, and Related Programs 
Committee on Appropriations: 
House of Representatives: 

The Honorable John F. Tierney: 
Ranking Member: 
Subcommittee on National Security, Homeland Defense and Foreign 
Operations: 
Committee on Oversight and Government Reform: 
House of Representatives: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report assesses (1) the extent to which the U.S. Agency for 
International Development (USAID) and the Department of Defense (DOD) 
have increased direct assistance, (2) USAID's and DOD's steps to 
ensure accountability for bilateral direct assistance, and (3) USAID's 
and DOD's steps to ensure accountability for multilateral direct 
assistance. 

To identify the extent to which USAID and DOD had increased their 
direct assistance, we first met with officials from the Department of 
State and USAID to define the scope of the term "direct assistance" 
for the purpose of this review.[Footnote 48] We then adopted USAID's 
definition of direct assistance (or "on-budget" assistance) as U.S. 
funds provided through the Afghan government national budget for use 
by Afghan ministries or other government entities. This definition is 
consistent with guidance and procedures developed by the Office of the 
Under Secretary of Defense (Comptroller) and DOD's Combined Security 
Transition Command-Afghanistan (CSTC-A).[Footnote 49] We focused on 
fiscal year 2009 and fiscal year 2010 to identify funding developments 
tied to the President's 2009 announcement of a new U.S. strategy for 
Afghanistan and subsequent pledges concerning direct assistance to the 
Afghan government. 

* To identify the extent to which USAID had increased its direct 
assistance, we obtained financial information from USAID's mission in 
Kabul, Afghanistan. This information included USAID quarterly 
financial reports and USAID direct assistance agreements with Afghan 
government entities and the World Bank (including any modifications to 
the agreements). We used this information to identify the value of the 
direct assistance USAID awarded in fiscal years 2009 and 2010. For the 
value of each award, we used what USAID refers to as the "total 
estimated contribution" that it has committed to provide, subject to 
the availability of funds, in signing a direct assistance agreement. 
For the date, we used each agreement's signature date, in keeping with 
USAID's use of the signature date as the effective date of the funded 
activity. We used the signature dates to allocate each award's value 
to either fiscal year 2009 or fiscal year 2010. In using this data in 
the report, we noted that once it has awarded funds on a specific 
date, USAID may obligate and disburse those funds over multiple years, 
depending on the terms of the agreement. We assessed these data to be 
sufficiently reliable for our purposes. 

* To identify the extent to which DOD had increased its direct 
assistance, we obtained financial information from DOD's Office of the 
Under Secretary of Defense (Comptroller). This information included 
funds contributed to the Afghan Ministry of Defense (MOD) and the 
Afghan Ministry of Interior (MOI) by CSTC-A and the Defense Security 
Cooperation Agency. According to the Office of the Under Secretary of 
Defense (Comptroller), each DOD contribution to MOD, MOI, and the Law 
and Order Trust Fund for Afghanistan (LOTFA) was awarded, obligated, 
and disbursed in close succession. We allocated each contribution's 
value to the fiscal year in which the contribution was made. We 
assessed these data to be sufficiently reliable for our purposes. 

To assess steps taken by USAID and DOD to help ensure the 
accountability of their bilateral direct assistance to Afghan 
ministries and other government entities, we reviewed the policies and 
practices the agencies use to assess risks associated with direct 
assistance and to establish control mechanisms over the use of direct 
assistance funds. 

* Our assessments were based on criteria drawn from GAO's Standards 
for Internal Control in the Federal Government.[Footnote 50] Standards 
for Internal Control in the Federal Government, issued pursuant to the 
requirements of the Federal Managers' Financial Integrity Act of 1982, 
provides the overall framework for establishing and implementing 
internal control in the federal government. Minimum internal control 
standards for providing reasonable assurance that agency assets will 
be safeguarded against fraud, waste, abuse, and mismanagement include 
risk assessment and control activities. Standards for Internal Control 
in the Federal Government defines risk assessment and control 
activities as key elements of an internal control framework. Risk 
assessment includes identifying internal and external risks an 
organization faces and their potential effect. Control activities are 
the policies and procedures (such as approvals, reconciliations, and 
reviews) agencies implement to mitigate identified risks and are 
essential for accountability of government resources. 

* To evaluate relevant USAID policies and practices against these 
criteria, we reviewed information from both headquarters and the USAID 
mission in Afghanistan. We reviewed USAID agencywide policies for 
awarding bilateral direct assistance funds to host government 
entities, as outlined in (1) USAID's Automated Directives System 
(ADS)[Footnote 51] and (2) interim guidance USAID provided to its 
mission on the use of direct assistance. We reviewed bilateral direct 
assistance program information from the USAID mission in Afghanistan, 
including preaward assessment procedures and reports, training 
material, direct assistance agreements, compliance documentation, 
approval memorandums, memorandums of understanding, and mission 
orders. To identify USAID controls established over the use of direct 
assistance funds and determine whether USAID ensured compliance with 
its controls, we (1) reviewed all USAID bilateral direct assistance 
agreements, (2) identified the controls USAID established in each 
agreement, and (3) reviewed documentation USAID provided to us to 
demonstrate it had ensured compliance with its controls. We limited 
our analysis to controls triggered per the terms of each agreement 
before February 15, 2011. We also reviewed information from the USAID 
Office of Inspector General in Afghanistan regarding the mission's 
preaward assessment process. We interviewed USAID officials in 
Washington, D.C., and in Kabul, Afghanistan. 

* To assess DOD policies and practices, we reviewed information from 
the Office of the Undersecretary of Defense (Comptroller) and CSTC-A. 
This information included the Under Secretary's February 4, 2011, 
Interim Guidance on Afghanistan Security Forces Fund (ASFF) 
Contributions to the Government of the Islamic Republic of Afghanistan 
(GIRoA), CSTC-A's standard operating procedures for direct 
contributions, DOD contribution letters to MOD and MOI, and DOD 
assessments of the strengths and weaknesses of these ministries. We 
also interviewed DOD officials in Washington, D.C., and Kabul. 

To assess steps taken by USAID and DOD to help ensure the 
accountability of their direct assistance to Afghan ministries through 
multilateral trust funds, we reviewed the policies and practices the 
agencies use to assess risks associated with direct assistance and to 
establish control mechanisms over the use of direct assistance funds. 

* Our assessments were again based on criteria drawn from GAO's 
Standards for Internal Control in the Federal Government,[Footnote 52] 
which defines risk assessment and control activities as key elements 
of an internal control framework. 

* To evaluate relevant USAID policies and practices regarding 
multilateral trust funds against these criteria, we reviewed USAID 
agencywide policies for awarding direct assistance to multilateral 
trust funds such as the World Bank-administered Afghanistan 
Reconstruction Trust Fund (ARTF), as outlined in USAID's Automated 
Directives System.[Footnote 53] We also reviewed ARTF-related program 
and budget documents from the USAID mission in Afghanistan, including 
USAID's 2002 grant agreement with ARTF and modifications to the 
agreement. We also met with officials of the Department of the 
Treasury to coordinate our work regarding the World Bank. We reviewed 
World Bank documents concerning ARTF and interviewed USAID and World 
Bank officials in Washington, D.C., and in Kabul. 

* To assess DOD policies and practices regarding multilateral trust 
funds against these criteria, we reviewed information from the Office 
of the Undersecretary of Defense (Comptroller) and CSTC-A. This 
information included the Under Secretary's February 4, 2011, Interim 
Guidance on Afghanistan Security Forces Fund (ASFF) Contributions to 
the Government of the Islamic Republic of Afghanistan (GIRoA) and CSTC-
A's standard operating procedures for direct contributions. We also 
reviewed United Nations Development Program (UNDP) documents and 
reports concerning the Law and Order Trust Fund for Afghanistan and 
interviewed DOD officials in Washington, D.C., and in Kabul, as well 
as UNDP officials in Kabul. 

[End of section] 

Appendix II: Comments from the U.S. Agency for International 
Development: 

The U.S. Agency for International Development letter was signed 
electronically by Sean C. Carroll, Chief Operating Officer. 

USAID: 
From The American People: 

July 14, 2011:  

Charles M. Johnson, Jr. 
Director, International Affairs and Trade: 
U.S. Government Accountability Office: 
Washington, DC 20548:  

Dear Mr. Johnson:  

I am pleased to provide the U.S. Agency for International Development's 
formal response to the GAO draft report entitled "Afghanistan: Actions 
Needed To Improve Accountability of U.S. Assistance To Afghanistan 
Government" (GA0-11-710).  

The enclosed USAID comments are provided for incorporation with this 
letter as an appendix to the final report.  

Thank you for the opportunity to respond to the GAO draft report and 
for the courtesies extended by your staff in the conduct of this audit 
review.  

Sincerely,  

Sean C. Carroll /s/: 
Chief Operating Officer: 
U.S. Agency for International Development:  

Enclosure: a/s:  

[End of letter] 

USAID Comments On GAO Draft Report No. GA0-11-710: 

General Comments: 

Recommendation 1: We recommend that the Administrator of USAID 
"establish and implement policy requiring USAID to complete risk 
assessments before awarding bilateral direct assistance funds to 
Afghan government entities in all cases." (emphasis added) 

Management Comments: Consistent with the definition used by GAO, USAID 
defines "risk assessment" as an internal management process for 
identifying, analyzing and managing risks relevant to achieving the 
objectives of safeguarding assets, compliance with relevant laws and 
regulations and reliable financial reporting. 

It should be noted that existing USAID policies and procedures, as 
described below, set forth in our Automated Directive System (ADS) 
already include requirements for risk assessments that are targeted, 
in large part, to the type of direct government-to-government 
assistance mechanism proposed. As explained below, each type of USAID 
direct government-to-government assistance mechanism includes some 
form of risk assessment. Consistent with USAID's Implementation and 
Procurement Reform objective of strengthening host country capacity to 
improve aid effectiveness and sustainability by increasing use of 
reliable host country systems and institutions to provide support to 
host countries, USAID has taken additional steps to ensure that, going 
forward, risk assessments are completed in advance not just for each 
type of funding mechanism as described above, but also for each and 
every GIRoA institution proposed as an implementing agency for a 
direct government-to-government assistance mechanism. 

These additional steps being taken by USAID are in line with the 
Administrator's July 2010 statement to Congress. Furthermore, with 
respect to Afghanistan, these measures are being undertaken in light 
of the certification required under the Economic Support Fund header 
of the Department of State, Foreign Operations, and Related Programs 
Appropriations Act, 2010 (Division F of P.L. 111-117) which includes, 
inter alia, a requirement that the United States Government and the
Government of the Islamic Republic of Afghanistan (GIRoA) have 
established mechanisms within each GIRoA implementing agency to ensure 
that ESF funds used for the purposes for which they were intended 
prior to the provision of direct government-to-government assistance. 

As referenced above, USAID has several different types of direct 
government-to-government assistance mechanisms. Among those most 
widely used are host country contracts, fixed amount reimbursement 
agreements, implementation letter financing, general budget and 
balance of payment support, sector program assistance, and multi-donor 
pooled funding in a segregated host government account. All include 
some form of risk assessment of the host government systems or 
institutions. Below is a brief description of the USAID policies and 
procedures that include some form of assessment of host government 
systems or institutions for the direct government-to-government 
assistance mechanisms used or proposed for use in Afghanistan: 

1) Host Country Contracts and Fixed Amount Reimbursements: a 
requirement to assess, in advance, a host government's procurement 
system under host country contracts (ADS 305), as noted in GAO's draft 
report, as well as fixed amount reimbursement agreements (FARAs) (ADS 
317). It is important to note that USAID's assessment of host 
government procurement system is not simply a review and assessment of 
its procurement functions, but it also includes a review to determine 
if associated host government accounting system and internal controls 
are adequate. In addition, before a host country procurement authority 
is assigned a procurement action in excess of $250,000 in USAID's host 
country contracting process, the USAID Mission Director must certify, 
in writing, that the Contracting Agency has the capability to 
undertake the specific procurement action. ADS E301.5.2b. 

2) Cash Transfer Agreements: a requirement in ADS 350.3.4.2 to conduct 
and document an analysis to assess a host government grantee's ability 
to comply with the requirements set forth in cash transfer agreements, 
including the preparation of a decision memorandum summarizing the 
findings of the assessment and recommendations on the need for any 
third party authorizations that may be necessary to monitor the grant 
award. This written analysis should take into account the following: 
a) the purpose (balance of payments support, debt buy-down, etc.) and 
structure (direct payment to creditors, direct transfer to central 
government bank account, etc.) of the cash transfer; b) the existence, 
or lack thereof, of adequate provisions for auditing the agreement by 
USAID's Office of the Inspector General or other U.S. Government 
auditors; c) the host government grantee's prior history, or lack 
thereof, with USAID cash transfer grant agreements; and d) the 
political context and U.S. foreign policy considerations. 

3) Sector Program Assistance: a requirement to undertake detailed 
analysis as part of the special planning requirement for sector 
program assistance under USAID's February 1996 Program Assistance 
Policy Paper. This document specifies that "rigorous analysis is 
crucial to a successful sector program assistance effort. Planners 
must be concerned with cost/benefit, feasibility, and sustainability 
questions from six analytical perspectives, including, inter alia: 
"institutional, which frankly examines the capacity within the host 
government and other involved organizations to develop, agree upon, 
and implement all aspects of the assistance (including sectoral reform 
measures, ... cash disbursements, programming and accounting for [host 
country owned local currency])." 
This policy document further specifies that USAID "planners must have 
a clear understanding of ... any risks associated with the activity 
either in terms of implementation or sustainable development impact. 

4) General Activity Planning Guidance: a recommendation, as part of the
USAID activity planning processes set forth at ADS 201.3.11.9 to 
assess the capacity of potential implementing partners, including host 
government ministries and agencies. This policy guidance states that
USAID "offices should consider the capacity of potential partners to 
implement planned functions, including, but not limited to, their 
capacity for financial management, procurement, and personnel 
management. Two related but different capacities are important: the 
ability to produce the desired outputs and the ability to meet USAID 
financial accountability requirements." 

In addition to the above, Article 6 (Special Covenants) of all current 
USAID Strategic Objective Agreements with GIRoA, includes the 
following: 

* Results Orientation. The Parties agree to work together to use
systems and structures that help staff and partners manage programs 
effectively and efficiently. An ability to adjust systems and 
structures when appropriate will enable the Parties to achieve results 
within agreed-upon schedules. 

* Transparency and Accountability. The Parties agree to follow
standards and regulations that ensure transparency and accountability. 
The Parties will endeavor to work in an honest, open and direct manner 
with all partners. 

In addition to these existing safeguards, as part of our 
Implementation and Procurement Reform objective to strengthen host 
country capacity to improve aid effectiveness and sustainability by 
increasing use of reliable host country systems and institutions to 
provide support to host countries, USAID, led by the Office of the 
Chief Financial Officer, is leading the development of a Public 
Financial Management Risk Assessment Framework tool, which has been 
applied in several countries. 

This tool includes several steps or stages in assessing the risk 
associated with using a host government system, including a Stage 1 
Rapid Appraisal of Public Financial Management (PFM) Risk; a Stage 2 
Questionnaire for the Public Financial Management Risk Assessment, 
negotiation with the host government at Stage 3 and implementation at 
Stage 4. Preparation of final guidance on each stage is underway, 
including a revision to the Agency's Automated Directives System.
The Stage 1 guidance is attached. 

Recommendation 2: We recommend that the Administrator of USAID take 
additional steps to help ensure that USAID consistently implements 
controls established in its bilateral direct assistance agreements 
with Afghan government entities, such as requiring the retention of 
documentation of actions taken. 

Management Comments: USAID agrees to take additional steps to ensure 
compliance with the requirements set forth in our host government 
grant agreements with GIRoA. However, with respect to consistently 
implementing controls, USAID would like to draw GAO's attention to ADS 
305.5.1 with respect to USAID approvals of contracting steps. That 
provision states that "As financier of host country procurement 
transactions, USAID reserves in its grant agreements and 
Implementation Letters the right to prior approval of most critical 
steps ... It is, however, USAID policy to be as sparing in its 
exercise of its rights of prior approval as sound management of its 
interests permits. The exercise of USAID approval rights is not to be 
construed in any case as making USAID a party to a contract." 

As to additional steps that USAID will take with respect to Afghanistan,
USAID/Afghanistan is reviewing all host government grant agreements 
with the GIRoA to assess GIRoA's compliance with the terms and 
conditions set forth in these agreements and will issue implementation 
letters under these agreements to remind GIRoA of its specific, 
affirmative obligations under the agreements which we determine have 
not been met. 

In addition, USAID/Afghanistan is developing a Mission Order that, 
among other things reminds USAID staff of the obligation to monitor 
our own and GIRoA's compliance with the terms and conditions in our 
host government grant agreements with GIRoA, designating this 
responsibility to the Mission Program Office. As part of the same or a 
separate Mission Order, and as a supplement to, but not a substitute 
for, the policy and procedures set forth in USAID's ADS, we plan to 
outline the general requirements, roles and responsibilities that 
apply to each form of direct government-to-government assistance 
mechanism. These responsibilities include the obligation of the 
technical office staff in managing the direct government-to-government 
assistance mechanism in partnership with a GIRoA institution, as well 
as the roles and responsibilities of USAID's program, financial 
management, procurement and legal staffs. 

Recommendation 3: We recommend that the Administrator of USAID ensure
USAID's adherence with its policies for assessing risks associated 
with multilateral trust funds in awarding funds to ARTF. 

Management Comments: USAID acknowledges that, in the past, 
determinations were not prepared or adequately documented for several 
of the amendments to the USAID public international organization (PIO) 
grant agreement with the World Bank for ARTF. In response to GAO 
recommendations and follow up meetings and USAID's Implementation and 
Procurement Reform, USAID issued revised ADS 308 in April 2011, which 
lays out detailed procedures on responsibility determinations for 
PIOs. USAID will follow such new procedures for all future PIO grants, 
including grants to the World Bank and the ARTF, which may be 
conducted centrally by the Agency's new Delegated Cooperation 
Secretariat (DCS). 

Additionally, as part of Implementation and Procurement Reform, USAID 
will also require not just an initial assessment using the PFMRAF of 
any host country system that may be used for direct USAID funded 
project implementation, but also periodic reassessments of those 
systems, as well as a new assessment in the event of a significant 
increase of funding (and thus associated risk) for implementation
using those systems. This requirement will extend to 3rd party 
agreements, such as the PIO grant at issue, that will make use of host 
country systems for project implementation. 

[End of section] 

Appendix III GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Charles Michael Johnson Jr., (202) 512-7331 or johnsoncm@gao.gov: 

Staff Acknowledgments: 

Major contributors to this report were Tetsuo Miyabara, Assistant 
Director; Emily Gupta; Bruce Kutnick; Esther Toledo; and Pierre 
Toureille. Ashley Alley, Pedro Almoguera, Diana Blumenfeld, Jeffrey 
Baldwin-Bott, Gergana Danailova-Trainor, Martin De Alteriis, Karen 
Deans, Christopher Mulkins, Mona Sehgal, and Eddie Uyekawa also 
provided technical assistance. 

[End of section] 

Footnotes: 

[1] DOD currently uses the term "direct contributions" to describe its 
direct assistance programs. For the purposes of this report, we are 
using the term "direct assistance" to describe both USAID and DOD 
programs that provide funds to Afghan government entities through the 
national budget. We did not include the State-funded Good Performer's 
Initiative because State officials informed us that State has not 
provided funds for this program through the Afghan government's 
national budget. 

[2] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[3] Transparency International's corruption perceptions index included 
178 nations and can be viewed at [hyetlink, 
http://www.transparency.org/policy_research/surveys_indices/cpi/2010/res
ults]. 

[4] For the purposes of this report, the term "allocations" includes 
funds that Congress has specifically appropriated for Afghan 
reconstruction, as well as additional funds that executive branch 
agencies have allocated for Afghan reconstruction from other 
appropriations. 

[5] See GAO, The Strategic Framework for U.S. Efforts in Afghanistan, 
[hyperlink, http://www.gao.gov/products/GAO-10-655R] (Washington, 
D.C.: June 15, 2010). 

[6] We requested a breakout of Afghan reconstruction funds in terms of 
the Integrated Civilian-Military Campaign Plan's lines of effort from 
State officials in August 2010. In February 2011, officials at the 
U.S. embassy in Kabul, Afghanistan, told us that they planned to 
develop such a presentation. We intend to pursue this matter as part 
of our upcoming review of the revised campaign plan (Public Law 111-
84, National Defense Authorization Act for Fiscal Year 2010, Sec. 
1226 - Reports on Campaign Plans for Iraq and Afghanistan). 

[7] GAO is currently reviewing U.S. government efforts to build the 
capacity of the Afghan government's public financial management system 
and expects to issue a report on this subject in late 2011. 

[8] CSTC-A oversees the U.S. role in developing the Afghan National 
Security Forces. MOD is responsible for the Afghan National Army, 
while MOI is responsible for the Afghan National Police. 

[9] According to USAID, the $1.3 billion award represented an increase 
in the ceiling of the grant to streamline the process for future 
contributions. 

[10] For example, the World Bank informed us that as of July 2011 it 
had received $265 million of the $1.3 billion award. It also stated 
that it had received $972 million in all from USAID from 2002 through 
July 2011. The total estimated value of USAID awards to the ARTF 
during that period was greater than $2 billion. In contrast, DOD 
direct assistance contributions are awarded, obligated, and disbursed 
in close succession, according to the Office of the Under Secretary of 
Defense (Comptroller). For the value of each USAID award, we used what 
USAID refers to as the "total estimated contribution" that it has 
committed to provide, subject to the availability of funds in signing 
a direct assistance agreement. For the date, we used each agreement's 
signature date as the effective date of the award. 

[11] During 2009 and 2010, State's Bureau for International Narcotics 
and Law Enforcement Affairs contributed about $12 million to LOTFA to 
support Afghan prison guards. 

[12] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[13] ADS 301.5.2 and 305.3. The preaward assessment requirement 
applies to cases in which USAID anticipates assigning a host 
government entity a procurement action to exceed $250,000. 

[14] Department of State, Office of the Special Representative for 
Afghanistan and Pakistan, Afghanistan and Pakistan Regional 
Stabilization Strategy (January 2010 and updated February 2010). 

[15] ADS 201.3.11.9. 

[16] USAID also prepared a July 2010 memo to justify the provision of 
cash advances to the directorate, in which it identified potential 
risks and risk mitigation steps. With regard to the risk assessment 
report completed after USAID awarded funds to the directorate, the 
report did not focus on the directorate's capability to implement the 
funded project. It instead addressed a possible future directorate 
program. In November 2010, the USAID Office of Inspector General 
recommended to the mission that future reviews focus on the ministry's 
capacity to implement a specific proposed program (USAID, Office of 
Inspector General, Review of USAID/Afghanistan's Ministerial 
Assessment Process (Kabul, Afghanistan, Nov. 6, 2010)). In response, 
USAID mission officials stated that they had begun to assess 
ministries based upon specific programs and that assessments would be 
undertaken once host government entities were identified as 
appropriate partners and programs had been conceptualized. 

[17] USAID informed us in July 2011 that it did not disburse funds to 
the ministry until March 2011, the same month that the assessment 
report was completed. 

[18] These contracts are not considered to be direct assistance and 
their costs are therefore not included in our totals of USAID's 
bilateral direct assistance. 

[19] USAID ADS E305.5.1a, which applies when USAID finances 
contractual arrangements between another country and the supplier of 
goods or services, requires written USAID approval for certain steps 
in the contracting process for contracts over $250,000. USAID's 
bilateral direct assistance agreements with the Ministry of 
Communications and Information Technology and the Ministry of Public 
Health contain the same requirement found in this ADS provision 
without mention of any financial threshold. 

[20] Under Secretary of Defense (Comptroller), Interim Guidance on 
Afghanistan Security Forces Fund (ASFF) Contributions to the 
Government of the Islamic Republic of Afghanistan (GIRoA) (Feb. 4, 
2011). 

[21] Under Secretary of Defense (Comptroller), Interim Guidance on 
Afghanistan Security Forces Fund (ASFF) Contributions to the 
Government of the Islamic Republic of Afghanistan (GIRoA) (Feb. 4, 
2011). 

[22] The Office of the Defense Inspector General is now reviewing ANA 
pay systems. 

[23] We reviewed reports prepared by three of these teams in December 
2010, January 2011, and February 2011. In them, CSTC-A personnel 
identified problems with pay systems. These problems included poor 
collaboration between levels in the ANA, the lack of finance mentors 
at the corps level, inadequate training and promotion possibilities 
for finance officers, a manual payroll system that does not allow 
finance officers to check the accuracy of payroll data, and a shortage 
of bank branches where ANA soldiers may obtain their salaries. The 
reports included recommendations to address some of these issues. 

[24] Prior USAID ADS 308.3.2 (effective Feb. 5, 2004). 

[25] USAID also provided us with an August 2009 unsigned memorandum 
that stated that ARTF had sufficient safeguards in place to minimize 
the diversion or misuse of cash, goods, and services provided to 
Afghanistan and assessed the risk of financing terrorist activity 
through ARTF as being low in response to a mission requirement to 
conduct a terrorist financing risk assessment. 

[26] We recommended that USAID develop and document its approach for 
assessing the eligibility of potential PIO grantees to help ensure 
accountability. See GAO, UN Office for Project Services: Management 
Reforms Proceeding but Effectiveness not Assessed, and USAID's 
Oversight of Grants Has Weaknesses, [hyperlink, 
http://www.gao.gov/products/GAO-10-168] (Washington, D.C.: November 
19, 2009). 

[27] USAID ADS 308.3.2.1, 308.3.2.2 (effective Apr. 19, 2011). 

[28] The group, called the Delegated Cooperation Secretariat, will be 
coordinated by USAID's Bureau for Policy, Planning, and Learning and 
would include the offices of Acquisition and Assistance, General 
Counsel, Chief Financial Officer, and Legislative and Public Affairs. 

[29] The categories designate PIOs as (1) generally major 
international PIOs or certain regional PIOs; (2) generally smaller, 
regional PIOs, and international organizations that are not frequent 
recipients of USAID assistance; or (3) PIOs that USAID headquarters 
officials have subjected to special restrictions or that are not 
currently eligible for USAID funding based on their financial or 
management performance. 

[30] ARTF criteria for eligibility include the following: Eligible 
expenditures must be included in the Afghan government yearly budget; 
all goods and services must be procured and accounted for in 
accordance with Afghan government law and regulations; capitalized 
goods and works need to be procured in accordance with the World Bank 
procurement guidelines; and all military expenditures are not 
qualified for financing. In addition to the Afghan laws and 
regulations, the World Bank and the Afghan government have agreed on a 
set of additional requirements on the eligibility of expenditures. 

[31] The CAO is responsible for auditing the financial matters of the 
Afghan government. It focuses on assessing the financial reporting of 
Afghan government ministries and compliance with laws and regulations. 
The CAO reports directly to the President of Afghanistan. We did not 
assess the quality of the CAO's audits of ARTF. 

[32] In addition, the Special Inspector General for Afghanistan 
Reconstruction (SIGAR) is currently auditing the extent of ARTF 
controls to ensure accountability over donor contributions. 

[33] We have previously reported on the challenges U.S. agencies face 
due to the high-threat security environment in Afghanistan. See GAO, 
Afghanistan's Security Environment, GAO-10-178R (Washington, D.C.: 
Nov. 5, 2009); and Afghan Army Growing, but Additional Trainers 
Needed; Long-term Costs Not Determined, GAO-11-66 (Washington, D.C.: 
Jan. 27, 2011). 

[34] The World Bank informed us that this qualification referred to a 
limitation in scope in the review of the entire civilian recurrent 
costs. The CAO reviewed and gave positive assurance of $425 million 
for that one year period against an ARTF ceiling of $290 million. 

[35] From March 2009 to March 2010, the ARTF monitoring agent 
conducted monitoring through the review of documents submitted from 
eight provinces for operations and maintenance expenditures and 
carried out analytical procedures for the rest of the provincial 
expenditure. The monitoring agent used an audit sampling approach 
intended to ensure that it monitored enough expenditure to establish 
that ARTF recurrent cost funds were being used in line with 
eligibility criteria, according to the bank. 

[36] SIGAR, Afghanistan's Control and Audit Office Requires 
Operational and Budgetary Independence, Enhanced Authority, and 
Focused International Assistance to Effectively Prevent and Detect 
Corruption (Apr. 9, 2010); USAID, Report on the Assessment of the 
Capability of the Ministry of Finance (MoF), Da Afghanistan Bank 
(DAB), and the Control and Audit Office (CAO) in regard to Managing 
Direct Donor Assistance (July 27, 2009). 

[37] The ratio of ineligible recurring expenditures was 11.6 percent 
in the Afghan fiscal year beginning in March 2002. In the Afghan 
fiscal year beginning in March 2009, the level of ineligible 
expenditures was 20.1 percent. 

[38] The bank informed us that procurement of civilian goods and 
services over $200,000 and works contracts of more than $500,000 are 
centrally reviewed for compliance with agreed-upon procedures. 

[39] Scanteam, Afghanistan Reconstruction Trust Fund: External 
Evaluation (Oslo: August 2008). 

[40] CSTC-A adopted these procedures after we discussed the lack of 
such guidance with officials from CSTC-A and the office of the Under 
Secretary of Defense (Comptroller) in February 2011. 

[41] These reports can be found at [hyperlink, 
http://www.undp.org.af/whoweare/undpinafghanistan/Projects/sbgs/prj_lotf
a.htm]. 

[42] SIGAR, Despite Improvements in MOI's Personnel Systems, 
Additional Actions Are Needed to Completely Verify ANP Payroll Costs 
and Workforce Strengths (Apr. 25, 2011). The SIGAR report can be found 
at [hyperlink, http://www.sigar.mil/pdf/audits/SIGAR%20Audit-11-
10.pdf]. UNDP did not agree with all of SIGAR's findings regarding 
LOTFA. Its comments on the SIGAR report are contained in appendix IV 
of that report. 

[43] GAO, Afghanistan Security: U.S. Programs to Further Reform 
Ministry of Interior and National Police Challenged by Lack of 
Military Personnel and Afghan Cooperation, [hyperlink, 
http://www.gao.gov/products/GAO-09-280] (Washington, D.C.: Mar. 9, 
2009). 

[44] GAO noted that, in all, more than 103,000 names had been 
submitted for the identification cards, although the ANP at that time 
had an authorized strength of less than 79,000. 

[45] DOD did not concur with our recommendation. State concurred with 
our recommendation. 

[46] GAO, Afghanistan Security: U.S. Programs to Further Reform 
Ministry of Interior and National Police Challenged by Lack of 
Military Personnel and Afghan Cooperation, [hyperlink, 
http://www.gao.gov/products/GAO-09-280] (Washington, D.C.: Mar. 9, 
2009). 

[47] State provided the certification in response to provisions of the 
Department of State, Foreign Operations, and Related Programs 
Appropriations Act, 2010, (Div. F., P.L. 111-117). 

[48] We also met with State officials to obtain Office of Management 
and Budget data regarding U.S. government funding for Afghan 
reconstruction. 

[49] Under Secretary of Defense (Comptroller), Interim Guidance on 
Afghanistan Security Forces Fund (ASFF) Contributions to the 
Government of the Islamic Republic of Afghanistan (GIRoA) (Feb. 4, 
2011); and CSTC-A, Standard Operating Procedure (SOP) for Direct 
Contributions (June 12, 2011). 

[50] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[51] USAID ADS 201, 301, 305, and 591. 

[52] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[53] USAID ADS 308. 

[End of section] 

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