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U.N. Procurement Scandal: A 'Culture of Impunity'

How bad is the still expanding scandal in the United Nations' multi-billion-dollar procurement division? Based on a still-secret internal investigation, the answer is: for the U.N., it is just as bad as the gigantic Oil-for-Food debacle — or maybe worse.

The focus of the current scandal is U.N. peacekeeping, a function that consumes 85 percent of the U.N.'s procurement budget — a cost that could reach $2 billion in 2005. Like many of the U.N.'s financial dealings, it is shrouded in secrecy. And like the multi-billion-dollar Oil-for-Food scandal, it is wrapped in what the U.N.'s own investigators now call "systematic abuse," "a pattern of corrupt practices," and "a culture of impunity."

In all, U.N. investigators have charged that nearly one-third of the $1 billion in major U.N. procurement contracts that they examined involved waste, corruption or other irregularities — $298 million in all. And that total covered slightly less than one-third of the $3.2 billion in major supply contracts that the U.N. has signed in the past five years.

These conclusions are contained in a confidential 34-page report by the U.N.'s internal watchdog, the Office of Internal Oversight Services (OIOS), which landed on the desks of top U.N. managers just before Christmas. The document, blandly entitled "Comprehensive Management Review of the Department of Peacekeeping Operations — Procurement" was circulated to various U.N. departments for comments and corrections, as part of the world body's labyrinthine and often ineffectual process of self-criticism.

A "finalized" version of the report, adjusted to take account of internal comments and rebuttals, has now been completed, and could be released to U.N. member states as early as Monday.

In advance of publication, the U.N. last week announced that eight officials from procurement and peacekeeping had been effectively suspended with pay while additional investigation takes place.

Based on the auditors' sampling, this scandal now appears clearly to be heading for the multi-billion dollar ozone layer of kickbacks collected by Saddam Hussein via U.N.-monitored contracts during the seven years of Oil-for-Food.

The big difference is that the Saddam Hussein is now out of business. The U.N. auditors, on the other hand, predict that unless radical changes are made in almost every aspect of U.N. business and internal management, recurrence of the kind of questionable activities discovered so far in UN procurement is "almost certain."

Audit: U.N. Hasn't Tried to Clean Up Procurement Mess

The U.N. has refused to name any individuals involved in the scandal so far, including any of the eight people suspended last week. They are known, however, to include Andrew Toh, the U.N. assistant secretary general for central supply services, who has been in overall charge of procurement. Toh has confirmed that he was relieved of duties and told FOX News that he did nothing wrong. Another of the suspended officials is reportedly Sanjaya Bahel, a Toh subordinate who was named head of the procurement division last July, until the appointment was suddenly rescinded. Bahel has also denied any wrongdoing.

The suspension of eight mostly mid-level officials, however, hardly seems adequate to the problem, based on the OIOS report. OIOS auditors charge that mismanagement and corruption were the order of the day in the U.N.'s procurement process, just as they were in the Oil-for-Food scandal, and that virtually every area of the U.N. that touched on peacekeeping procurement was affected.

The OIOS investigators also declare flatly that there has been little or no attempt by the United Nations to look into internal accusations of mismanagement and fraud, nor any attempt to hold individuals accountable for their actions. "The control environment needs immediate attention," the report says.

Beyond the alarm over procurement, the investigators' questioned the effectiveness of the U.N.'s legal affairs department, and looked skeptically at a top-level U.N. committee known as the Headquarters Committee on Contracts (HCC), which supposedly examined and gave final approval to all contracts worth $200,000 or more. The HCC performed its functions inadequately and was often misinformed and manipulated by peacekeeping and procurement staffers who appeared before it, the report says.

As one result of the oversight weaknesses, the report states, "the U.N. peacekeeping operations were depending on a few main vendors of questionable integrity, which made the missions vulnerable to over-charge."

But the problem extended beyond a few vendors. The report notes that in 2003, the OIOS sampled a list of 211 companies registered to sell goods and services to the United Nations, and which had done nearly $1 billion in business with the organization up to that time. In cases with a total price tag of about $562 million, the auditors discovered that the vending firms were involved in "exceptions to the normal registration procedures."

The OIOIS report further notes that despite the U.N.'s vast purchasing power, only a handful of U.N. personnel in the field procurement section — 10 in all — were responsible for the bulk of the buying done at UN headquarters. As the report notes, in 2005, one official alone "handled $2 billion procurement in fuel and food contracts."

That appears to be an intriguing reference to Alexander Yakovlev, the longtime procurement office who was arrested last August and pled guilty to corruption and wire fraud charges after a FOX News investigation revealed his secret Caribbean bank account. The United Nations has refused to disclose the full extent of Yakovlev's activities in procurement. The reference could also mean that the U.N. audit's sampling methods still underestimate the extent of fraud in the department, since Yakovlev is known to have sought bribes from U.N. contractors as early as 1996.

Among other things, Yakovlev had ties to a mysterious firm named IHC Services, which brokered U.N. procurement contracts for a wide variety of other companies. For a time, from at least 1998 until early 2000, IHC's board chairman was a longtime U.N. diplomat named Giandomenico Picco, who also served for an overlapping period as a part-time special envoy for Secretary General Kofi Annan. (Picco's U.N. contract finally expires this month.)

Last October, FOX News revealed that IHC President Ezio Testa had leaked confidential U.N. procurement bid information to another firm, Eurest Support Services (ESS), five days before the United Nations gave ESS a $62 million contract to feed peacekeepers in Liberia. At the time, U.N. officials estimated the total value of ESS food contracts with the United Nations at $237 million, with renewals and add-ons that could reach $351 million. Since the FOX News report, three ESS executives have been fired, and both ESS and its parent, British-based Compass Group, are under investigation by U.N. and U.S. federal authorities.

The current OIOS report makes specific note of at least one other transaction between Yakovlev and ESS, in connection with performance bonds that the U.N. requires to be posted by suppliers until contracts are fulfilled. Yakovlev allegedly returned a $3.7 million performance bond from ESS eight months in advance of the required date, in contravention of U.N. regulations.

The report noted that the bonds represented cash, and "lack of controls over performance bonds created risks that [procurement] staff may…return them before contract expiration periods in exchange for cash or favours." In a limited sample, the auditors found "fraud indicators" in connection with payments and performance bonds totaling $41 million.

Until late last year, U.N. rules and regulations did not require staff members "to disclose conflicts of interest that could affect procurement," the OIOS report notes. There is still no requirement for companies doing business with the United Nations to disclose when they have recruited former U.N. staffers as employees.

As a case in point, the report cites the staffing of one aviation supply company, Skylink Aviation, a global air transport firm based in Toronto. The OIOS auditors note that former senior U.N. contract negotiators from the management and peacekeeping operations departments are currently listed as a Skylink vice president and a corporate managing director. The report makes no allegations that the hirings led to wrongdoing.

In fact, only one of the former U.N. officials now appears to be working for Skylink, according to the company Web site. That official, Skylink told FOX News, "is not involved in U.N. procurement issues."

Peacekeeping Contracts Under Scrutiny

In another section of the report, however, OIOS auditors recommend that the U.N. investigate possible collusion among U.N. officials to award Skylink an $85.9 million fuel contract for peacekeeping in Sudan. According to the report, one of the officials who was directly responsible for overseeing implementation of the Skylink contract abruptly resigned in December, 2005-about the time the OIOS investigation entered its final stages. No reason was given for the departure.

Another area of suspicion for the auditors is direct transactions between the peacekeeping department and national governments, known as "letters of assist." The investigators mention Toh specifically in a procurement case dating back to 2000, at a time when he was chief of the procurement division. The case involved rental by the U.N. of a Russian-made, heavy-duty MI-26 helicopter from the government of Peru for use by U.N. peacekeepers in East Timor. The cost: nearly $10.5 million, with the money to be paid into a Swiss bank account.

There was no request from East Timor peacekeepers for such a helicopter, the OIOS investigators conclude, and they say there is evidence the United Nations was overcharged as much as $8.8 million on the deal. There is also evidence of bid-rigging in the case, the auditors conclude.

OIOS auditors declare that a Peruvian government investigation found that the country's former president, Alberto Fujimori, who suddenly resigned in November, 2000, amid a corruption scandal, illegally made the helicopter deal with the United Nations with the involvement of Peru's then-ambassador to the U.N. and a Peruvian general. (Fujimori, who is also charged with an array of human rights abuses, was arrested earlier this month in Chile.)

A note in U.N. files from a U.N. peacekeeping official, the OIOS investigators say, indicates that Toh was the person who first informed the peacekeeping department of Peru's interest in providing the helicopter.

Contacted by FOX News, Toh said he was aware of the citation, did not recall being involved, and had not been interviewed by OIOS in connection with the secret report.

"In my job, I get a lot of calls," he commented, adding that "all I do is refer them to the Department of Peacekeeping Operations. My office was not involved in any negotiations in respect of the government of Peru issue."

The OIOS report offers up a welter of recommendations for U.N. actions to drain the swamp of incompetence, bad procedure and wrongdoing. They range from the obvious (reviewing staff appointments "to ensure that these staff members meet the requisite qualifications and experience to carry out the functions assigned to them") to repeated requests to determine personal accountability for the irregularities that investigators have uncovered.

But the report is by no means a comprehensive look at the procurement department, or at peacekeeping, and leaves many questions unanswered.

The first is the true size of the problem.

U.N. peacekeeping costs, the auditors say, have averaged about $750 million annually over the past five years, but the average is misleading. Peacekeeping costs have been rising dramatically of late. From 2002-2004, peacekeeping purchases totaled $2.5 billion (another $500 million was spent for regular U.N. use.) The $2 billion bill for 2005 means that the amounts have now almost doubled. This means the potential losses and irregularities could prove to be far higher than even the U.N. report indicates.

Another question is why the top managers of the Department of Peacekeeping Operations appear to have emerged unscathed from the critique, though four middle-level officers are among those relieved of duties.

But the biggest question of all is how much determination the United Nations will muster to clean house when the "finalized" OIOS report finally sees daylight — and whether it will discover how far the "culture of impunity" might extend beyond procurement and peacekeeping operations.

George Russell is executive editor of FOX News. Claudia Rosett is journalist-in-resident with the Foundation For Defense of Democracies.