10 November 2010
Security Council
SC/10080

Department of Public Information • News and Media Division • New York

Security Council

6418th Meeting (AM)


Security Council Briefed on Legal Issues, Options to Follow Expiration,

 

on 31 December, of Development Fund to Meet Needs of Iraqi People

 


Audit Firm Suggests Independent Party to Verify Implementation

Of Plan, Based on Best Practices for Completeness, Effectiveness, Efficiency


The Security Council today was briefed on legal issues and options regarding implementation of successor arrangements for the Development Fund for Iraq — due to expire by 31 December — by the United Nations Controller and the Head of the Committee of Financial Experts of the Government of Iraq.


The Development Fund for Iraq receives deposits from proceeds from oil and gas export sales.  The Fund, as well as its auditing mechanism — the International Advisory and Monitoring Board — were noted in Security Council resolution 1483 adopted on 22 May 2003, in the wake of the onset of military conflict in Iraq.  The Council underlined that the “Development Fund for Iraq shall be used in a transparent manner to meet the humanitarian needs of the Iraqi people, for the economic reconstruction and repair of Iraq’s infrastructure, for the continued disarmament of Iraq, and for the costs of Iraqi civilian administration, and for other purposes benefiting the people of Iraq”.


Briefing the Council on the Secretary-General’s third report of the Secretary-General on the matter, submitted in accord with Council resolution 1904 (2009), Jun Yamazaki, Controller of the United Nations, said that the interim audit over the first half of 2010 by the newly appointed external audit firm PricewaterhouseCoopers had included a review of the installation of oil metering in Iraqi oil export ports, which had identified further steps to fully implement the Ministry of Oil’s schedule for installation through the end of 2011.  He said some 51 per cent of the intended oil meters had been installed.


He said the newly appointed audit firm had recommended the appointment of a technically qualified independent party to verify the implementation of the plan, as to its completeness, effectiveness and efficiency based on the best practices of the petroleum industry.  He said he noted with concern, however, that the implementation of the metering plan was already behind schedule, and he would encourage the Government of Iraq to make every effort to implement it on schedule and address the further steps recommended by PricewaterhouseCoopers.


He said representatives of the Office of the Special Inspector General for Iraq Reconstruction of the United States had been invited to the International Advisory and Monitoring Board meeting in Amman, Jordan, on 14 and 15 October.  The representatives informed the Board that the July 2010 audit report of the Special Inspector General on the accounting by the United States Department of Defense had found weaknesses in the financial and management controls over the funds that Department received from reconstruction activities in Iraq.  During that meeting, the International Advisory and Monitoring Board had also been briefed by the Government of Iraq on progress in developing the action plan to ensure timely and effective transition to a post-Development Fund mechanism by 31 December.


Once all outstanding activities under the “oil-for-food” programme were concluded, he said, uncommitted remaining funds in the Iraq Escrow Account needed to be transferred to the Development Fund.  Noting that the Government of Iraq was willing to pay 32 outstanding letters of credit under the Programme, he said that, absent the receipt by the Secretariat of the requisite Confirmation of Arrival documents for the remaining outstanding letters of credit, the Council had the option to cancel those letters of credit.  This would be subject to the provision by the Government of Iraq of a comprehensive indemnity with regard to all activities of the Organization, its representatives and agents in connection with the oil-for-food programme since its inception.


Abdul Basit Turky Saed, Head of the Committee of Financial Experts of the Government of Iraq, briefed Council members on his Government’s third quarterly report on the matter.  He said the Central Bank of Iraq had contacted the Federal Reserve Bank of New York regarding special accounts to deposit Central Bank funds and oil revenues, with emphasis on opening a separate sub-account for compensations to which 5 per cent (or any percentage later agreed to) of oil revenues would be transferred automatically, pursuant to resolution 1483 (2003).


He said his Government could not secure the necessary guarantees from foreign banks and financial institutions to protect Iraq’s assets at the level of protection provided by the Security Council acting under Chapter VII of the Charter of the United Nations.  In view of the difficult circumstances Iraq was going through and the delay in forming a Government, he hoped the Council would extend those guarantees for one year in order to enable the Government to address all outstanding problems.


The Government, he went on, had continued its contacts with creditor countries outside the Paris Club — in particular with Pakistan, Poland, Turkey and Brazil — in order to assist in expediting settlement of debts.  The Government’s offer — to buy commercial debts at the rate of 10.25 per cent of their total value — was still valid.  The problem in settling debt problems were the unknown and unregistered claims.  He said he would, therefore, ask the Council to include in a new resolution a deadline for the acceptance of commercial creditors’ claims by the Government by the end of June 2011.


As for claims inherited from the previous regime, he said the Government and the Security Council had signed an agreement to establish a compensation fund for United States citizens’ claims, which had been ratified by the Council of Ministers and been referred to Parliament.  The Central Bank and the Office of the United Nations Comptroller had settled outstanding letters of credit under the oil-for-food programme, for which the required documentation had been provided.  The Security Council might wish to consider closing the remaining letters of credit where required documentation was not provided, in order to close the Programme by the end of 2010.


He went on to explain steps taken to improve the financial and administrative control over the current Development Fund for Iraq, including adoption of valid job descriptions and the issuance to various ministries of unified financial instructions by the Ministry of Finance.  The Ministry had also tried to establish a data base of Iraqi funds abroad, including €83 million and $118 million.


The report of PricewaterhouseCoopers on its assessment of oil metering stated that, in general, good progress had been made in meter installation and calibration in export ports.  However, a negative deviation had appeared in the internal distribution network.  He said he hoped that establishment of the metering system would be finalized by the end of 2011, except for the newly established Maisan Oil Company, where installation would be finalized by the end of 2012.


The meeting began at 10:50 a.m. and adjourned at 11:10 a.m., after which a private meeting of the Council was called on the subject.


Background


As the Security Council this morning considered the situation in Iraq, it had before it the third report of the Secretary-General pursuant to paragraph 3 of resolution 1904 (2009) (document S/2010/563) which includes details on progress made in strengthening financial and administrative oversight of the current Development Fund for Iraq, as well as on legal issues and options with respect to successor arrangements for the Fund, due to expire on 31 December.  It deals also with the Iraq’s Government’s progress in preparing for such arrangements.


The Development Fund for Iraq receives deposits from proceeds from oil and gas export sales.  The Fund, as well as its auditing mechanism — the International Advisory and Monitoring Board — was referred to by resolution 1483 adopted on 22 May 2003 in the wake of the onset of military conflict in Iraq, when the Council underlined that the “Development Fund for Iraq shall be used in a transparent manner to meet the humanitarian needs of the Iraqi people, for the economic reconstruction and repair of Iraq’s infrastructure, for the continued disarmament of Iraq, and for the costs of Iraqi civilian administration, and for other purposes benefiting the people of Iraq”.  (See Press Release SC/7765.)


According to the Secretary-General’s report, during a meeting in October of the International Advisory and Monitoring Board in Amman, Jordan, the external audit firm KPMG briefed on the results of the 2009 audit.  The Board concurred with the recommendation of the Iraqi Government that PricewaterhouseCoopers be appointed to conduct the 2010 audit.  Results of the 2009 and a preliminary 2010 audit are available on the Board’s website:  www.iamb.info.  The Board was also briefed by the representative of the Committee of Financial Experts on actions taken to enhance the transparency and accountability of the Development Fund.  A number of audit recommendations have been implemented while outstanding findings are being followed up.  During the meeting, the Board also concluded that there was an urgent need for expeditious implementation of the recommendations of the Special Inspector General for Iraq Reconstruction of the United States.


The report states that it is for the Council to assess the proposal of the Iraqi Government in its third quarterly report (document S/20110/567) that immunity for the Development Fund should be extended for a further year, taking into consideration current conditions in Iraq and the lack of an agreement on the formation of a new Government.


With regard to the outstanding activities under the oil-for-food programme, the report notes that of the 3,009 letters of credit with an approximate value of $8 billion, as referenced in document S/2009/230, only 63 letters of credit are still outstanding as at 30 September, worth some $112 million.  The Secretariat, however, had identified certain beneficiaries who had made claims of delivery prior to the expiry of the letter of credit and whose letters of credit had been cancelled.  The Secretary-General is of the opinion that, whatever option the Council may select for concluding all outstanding issues under the oil-for-food programme, those letters of credit should be treated in the same manner as the 63 letters of credit still outstanding.  There would thus be 66 letters of credit with outstanding claims of delivery as at 30 September.


The Government of Iraq had expressed its willingness to pay 32 outstanding letters for credit under the oil-for-food programme, the report states.  The processing of 6 out of the 32 letters has been completed as at 30 September.  As for the remaining 26 letters of credit, the Government has provided the Secretariat with the requisite authentication documents for 23 of them.  Absent the receipt by the Secretariat of the requisite confirmations of arrival of the remaining letters of credit, outside the 32 mentioned before, the Secretary-General suggests that the Council may wish to consider cancelling those remaining letters of credit that have outstanding claims of delivery.


In conclusion, the Secretary-General writes that, irrespective of the manner selected by the Council for the closing of the oil-for-food programme, the conclusion of all outstanding issues should be subject to the provision by the Government of Iraq of a comprehensive indemnity with regard to all activities of the Organization, its representatives and agents in connection with the programme since its inception, and also with regard to the funds that have been transferred and will be transferred to the Development Fund.  The conclusion of outstanding activities under the programme should be subject to the availability of sufficient funds for the Organization to meet the costs and expenses that have been incurred or may be incurred in future in connection with the programme.


The Council had also before it a note verbale dated 28 October from the Permanent Mission of Iraq to the United Nations (document S/2010/567) containing the Third quarterly report of the Government of Iraq as required by resolution 1905 (2009).


The report describes progress achieved in implementing the action plan submitted in its first quarterly report to ensure the timely and effective transition to a post-Development Fund mechanism by 31 December 2010.  According to the report, significant steps have been taken with regard to the settlement of sovereign debt, commercial claims and the claims inherited from the previous regime; contracts outstanding from the oil-for-food programme; and improved financial and administrative oversight.  The report also describes progress achieved in implementing a comprehensive oil metering and calibration system, among others in Basra Oil Port, Khawr Al Amaya Oil Port and the Turkish port of Jihan.


The report further states that the Government wants to close the oil-for-food programme at the end of 2010 by paying the amounts due for contracts where receipt is documented and annulling contracts for which no such documentation is available, as the Council deems appropriate.


According to the report, Iraq is apprehensive that commercial creditors who were not involved in the settlement offers put forward since 2004 by the Government may seize Iraqi funds and assets abroad, once immunity for the Development Fund has been lifted.  A future Council resolution concerning the immunity of that Fund should, therefore, include a paragraph to the effect that Iraq will not be liable for such claims after June 2011.  Such a statement will, according to the report, considerably facilitate the process of lifting immunity from the Development Fund.


The Government, according to the report, has continued its endeavours to determine the immunities to be granted to Central Bank of Iraq reserves and Iraqi Government assets, in accordance with the jurisdiction of the States in which Iraq intends to open accounts.  The proposed immunities offered by contacted foreign banks and institutions, however, did not match those provided by Chapter VII Council resolution 1483 (2003).  As the Government has not obtained the necessary guarantees to ensure the protection of Iraqi assets regarding claims inherited by Iraq from the former regime, the Government requests a one-year extension of the protection afforded to the Development Fund, the more so if current conditions in Iraq, among other things the lack of agreement over the formation of a new Government, are taken into consideration.


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For information media • not an official record