U.S. Asked U.N. About Exchange Rate Issues in Burma Year Before Latest Scandal

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How bad is the rip-off of United Nations relief funds in Burma?

More than a year before the United Nations discovered "very serious losses" of at least $10 million on foreign exchange transactions involving relief money sent to cyclone-battered Burma, U.S. diplomats raised similar concerns about spending in that country by the United Nations Development Programme (UNDP).

The concerns were not directly addressed. Neither was a U.S. request for copies of UNDP audits of the expenditures — even as UNDP revealed that its spending in Burma, which the country's military regime renamed Myanmar, had soared spectacularly, totaling more than $74 million between 2002 and 2006.

The requests for information about Burma came on May 9, 2007, from then U.S. Ambassador to the U.N. Mark Wallace, who had already ignited a firestorm of controversy earlier that year over UNDP's funneling of forbidden hard currency flows to the Kim Jong Il regime in North Korea.

In his letter to UNDP's No. 2 chief, Ad Melkert, Wallace declared that "urgent steps are needed to prevent serious abuse" in UN programs around the world, and expressed U.S. "concerns" about Burma's restrictions on UNDP operations in that country, which were imposed in February 2006.

Among those restrictions, Wallace said, was the demand that all UNDP hard currency deposits in the country be exchanged through a system of foreign exchange credits, or FECs, before being converted into local currency. The exchange rates were arbitrarily set by the Burmese regime.

Earlier this week, the U.N.'s Under Secretary General for Humanitarian Affairs, John Holmes, admitted after earlier U.N. denials that "significant" foreign exchange losses had occurred in some $200 million in relief funds sent to Burma after Cyclone Nargis battered the country in May, leaving an estimated 140,000 people dead. While saying that U.N. officials were still digging into the issue, Holmes set the estimated losses at $10 million and indicated that they involved manipulation of the same FEC system.

So far, the U.N. has asked the international community for some $480 million in relief funding for Burma, and received only about a third of that.

The losses occurred after the regime arbitrarily widened the difference between the official and local market exchange rates in June, in effect making the local currency, the kyat, more expensive for users of the FECs. Just who got the profits arising from the new differential remains unclear.

Holmes termed the losses "unacceptable," but said that U.N. officials "were not aware of the extent of the loss" before the scam was exposed by an investigative blogger at the U.N., Matthew Russell Lee.

The question remains whether this is the only time the FEC system was manipulated by Burma's secretive military rulers, who are subject to targeted financial sanctions from the U.S. and Europe, including a freeze on their overseas assets and an arms sales ban, leaving the country's rulers in a foreign exchange crisis similar to North Korea. Last week, President Bush extended the sanctions by renewing an import ban on Burmese goods and penalizing the importation of Burmese gems via third coutries.

As a result of the squeeze, the biggest new source of hard currency within Burma has undoubtedly been United Nations relief funding. But prior to Cyclone Nargis, the bulk of U.N. funding in Burma was channeled through UNDP, which has acknowledged that it used the same FEC system of exchange as the cyclone relief effort, and told blogger Lee that "the exchange rate is based on the prevailing [most competitive] rate in the market, which can fluctuate."

Ambassador Wallace's concerns about foreign exchange and other issues in Burma last year were part of an escalating battle between U.S. diplomats and UNDP over the behavior of the U.N.'s flagship anti-poverty agency in North Korea, at a time when U.S.-led financial and other pressure was rising on the Kim regime to limit its nuclear weapons program.

Wallace charged, and a nine-month UNDP-sponsored investigation subsequently confirmed, that the development agency had funneled millions of dollars in forbidden hard currency to the Kim regime against its own regulations, hired regime personnel to fill key UNDP posts, and ignored U.S. and other international rules about handing on sensitive "dual-use" technology to the Kim regime.

Wallace's May 9 letter to Melkert raised many of the same issues in terms of the Burmese regime's restrictions on UNDP operations as he raised in North Korea.

Along with the foreign currency issue, Wallace expressed concern about Burma government restrictions on travel by UNDP staff, and government pre-selection of local staffers hired by UNDP in the country, noting that U.N. Secretary General Ban Ki-moon, had called for an inquiry "into all activities done around the globe" by U.N. organizations as a result of the North Korean furor. Among other things, Wallace asked to see all UNDP audits of its Burmese operations since 1998.

Contacted by FOX News regarding his letter, Wallace declined to comment.

• Click here to see Ambassador Wallace's letter to UNDP.

Melkert did not reply to the letter until a month later. When he did, he argued that UNDP withdrawals from its Burma bank accounts were not limited to FECs, but could also include "bank transfers" or "cash withdrawals," and offered no further enlightenment on the FEC issue. Melkert also did not supply the audits requested by Wallace to ensure "transparency" in UNDP's dealings.

Instead he totaled up the number of audit recommendations that UNDP had followed or was still in the process of obeying, without specifying their content.

• Click here to see Melkert's letter.

In accompanying budget tables, however, he showed that UNDP spending in Burma had skyrocketed, from roughly $7 million in 2002 to roughly $33.3 million in 2006. Much of the difference came from tens of millions of dollars in "non-core" resources — meaning money donated by other nations through UNDP — in support of unspecified programs. (On its website, UNDP Myanmar takes note, for example, of a $2 million British donation on June 6.)

In response to questions from FOX News, UNDP declared that it was not able to compile additional figures on its more recent spending in Burma in time for publication of this article. The organization stressed, however, that "only a portion of these funds are converted into the local currency," and that it does not have a "regular country program in Myanmar."

All UNDP assistance in the country, a UNDP spokesperson said, is governed by strictures of its ruling executive board that is must be focused at the grass-roots level "particularly in the areas of primary health care, environment, HIV/AIDS, training and education and food security."

Despite all those caveats, UNDP is apparently still heavily engaged in Burma. The UNDP spokesperson declared that the organization has six national projects focusing on the areas outlined by its board, but also including micro-finance, the practice, rapidly gaining fashion in anti-poverty circles, of providing small loans directly to small-scale entrepreneurs to fund their own enterprises.

UNDP's micro-finance and community development projects now cover 57 Burma townships, in an expansion that began in 2005.

The projects are monitored by international staffers as well as Burmese local staff who are allowed to travel without government permissions or escorts, according to the spokesperson.

UNDP insists that its operations are fully approved by its executive board and that it has kept the U.S. State Department informed on an annual basis of its compliance with State Department restrictions on the country.

All of those assurances, however, do not speak to the question of whether exchange rate manipulation may also have affected UNDP funds.

FOX has been able to glean some insight into UNDP's programming through an internal U.N. memo dated June 19, 2008, discussing U.N. emergency relief operations in Burma after Cyclone Nargis. The three-page memo records the minutes of an international teleconference on a wide variety of relief issues, but its second page includes a heading entitled "Cash Project."

That section includes an observation that "UNDP is concerned that their small grant programme will be shut down, which would mean the end of their work in Myanmar as it is all based on microfinancing."

• Click here to see the memo.

The sentence in the June 19 memo therefore seems to indicate that all UNDP program funding in Burma must be converted into local currency as part of its strategy in the country.

How much cash is involved, and the exchange rates at which it is converted, are still unknown.